Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-6327-IND

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$398 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR THE

SECOND RURAL ELECTRIFICATION PROJECT

FEBRUARY 3, 1995

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit - Indonesian Rupiah (Rp)(As of December 1994)

US$1 = Rp 2,193Rp 1 billion = US$0.456 million

FISCAL YEAR

April 1 - March 31

WEIGHTS AND MEASURES

1 metric ton = 1,000 kilograms (kg)1 liter (1) = 0.0063 barrels (bbl)I kilometer (klm) = 0.6215 miles (mi)1 kilovolt (kV) = 1,000 volts (V)1 megavolt-ampere (MVA) = 1,000 kilovolt-amperes (kVA)i megawatt (MW) = 1,000 kilowatts (kW)i gigawatt hour (GWh) = 1 million kilowatt hours (kWh)i terrawatt hour (TWh) = 1 billion kilowatt hours (kWh)

ABBREVIATIONS

BAKOREN - National Energy BoardBAPPENAS - National Development Planning AgencyBOO - Build, Own and OperateDGEED - Directorate-General of Electricity and Energy DevelopmentEA - Environmental AssessmentGOI - Government of IndonesiaIERR - Internal Economic Rate of ReturnLNG - Liquefield Natural GasLRMC - Long Run Marginal CostMME - Ministry of Mines and EnergyMOC - Ministry of Cooperatives and Small Enterprises DevelopmentMSA - Management Services AgreementPERTAMINA - National Oil and Gas CompanyPLN - State Electricity CorporationPMIP - Project Management and Implementation PlanPMU - Project Management UnitPPE - Engineering Services Center of PLNPUSDIKLAT - PLN's Center for Education and TrainingRE - Rural ElectrificationREPELITA - Five-Year Development PlanROR - Rate of ReturnTA - Technical Assistance

FOR OFFICIAL USE ONLY

INDONESIA

SECOND RURAL ELECTRIFICATION PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Republic of Indonesia

Beneficiary: State Electricity Corporation ( P.T. PLN (PERSERO))

Amount: US$ 398.0 million equivalent

Terms: Repayable in 20 years, including five years of grace at the standard variable interest rate

Onlending The proceeds of the loan, except for a $2.2 million grant to the Ministry of CooperativesTerms: and Small Enterprises Development (MOC), will be onlent from GOI to PLN for 20

years, including a grace period of 5 years; the subsidiary loan will be denominated inforeign currency withdrawn and the onlending interest rate would be equal to the Bank'sstandard variable interest rate plus 0.5 percent per annum.

Financing Plan:Local Foreign Total------------ (US$ million) -------------

PLN ComponentIBRD 11.4 384.4 395.8GOI/PLN 364.1 78.7 442.8

Subtotal PLN Component 375.5 463.1 838.6

MOC Component

IBRD 0.5 1.7 2.2GOI 0.2 0.3 0.5

Subtotal MOC Component 0.7 2.0 2.7

TOTAL 376.2 465.1 841.3

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

Rate of Return: Distribution network component - 21 percentMini-hydro power projects - 20 to 31 percentMini-geothermal projects - 39 percent

Poverty Category: Not Applicable

Staff AppraisalReport: 12920-IND

Maps: IBRD 25506

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON APROPOSED LOAN TO THE REPUBLIC OF INDONESIA FOR THE

SECOND RURAL ELECTRIFICATION PROJECT

1. The following memorandum and recommendation on a proposed loan to the Republic ofIndonesia for $398.0 million to help finance the Second Rural Electrification Project is submitted forapproval. The proposed Bank loan would be for 20 years, including five years of grace, at the Bank'sstandard variable interest rate. The proceeds of the loan, except for $2.2 million for the Ministry ofCooperatives and Small Enterprises Development (MOC), would be onlent to the State ElectricityCorporation (PLN) for 20 years including a grace period of five years. The subsidiary loan will bedenominated in foreign currency withdrawn and the onlending interest rate would be equal to the Bank'sstandard variable interest rate plus 0.5 percent per annum. PLN will bear the foreign exchange risk.

2. Background. The power sector in Indonesia has been growing at a pace unmatched bymost countries. PLN's sales grew from 1982 to 1993 by about 15 percent per year and are projected togrow at a comparable pace during Repelita VI (1994-1998). The investment requirements for RepelitaVI for expansion of PLN's facilities are estimated to be about $20 billion (in 1993 prices). The primaryissues confronting the sector center around the challenge of providing reliable service at competitiveprices, while rapidly expanding the access of electricity to consumers throughout the country. Increasedresource mobilization -- by implementation of sound tariff policies and promoting private sectorparticipation -- and enhancing efficiency are the twin challenges facing PLN and the sector.

3. Government's Strategy. GOI's strategy for the electricity sector has three main objectives:(i) rapidly increasing the availability of reliable electricity supply to foster socio-economic development,(ii) enhancing efficiency and productivity in the utilization of the country's energy resources andcomplementary inputs in the provision of electricity, and (iii) environmental conservation. The socio-economic objective which is the principal focus of the rural electrification (RE) program, is to supportgeographically balanced development of rural areas by increasing the welfare of the people andstimulating the growth of economic activities. RE is a key and integral part of the Government's ruraldevelopment strategy; its long-term target is to electrify all villages and to enable the people to afford thebasic services provided by energy. However, despite the over seven-fold increase in the number ofvillages electrified between 1980 and 1994, the rural village electrification ratio is currently about 50percent, which is low compared to ratios of 80 to 95 + percent achieved in the many other countries inthe region. In terms of the connected rural household population, Indonesia has even further to go.Indonesia's total population is about 186 million, of which nearly three quarters lives in an estimated62,000 rural villages (23,000 in Java and 39,000 outside Java). The rural household electrification ratiotoday is approximately 32 percent (38 percent in Java and 23 percent outside Java); compared to ratiosof about 60 percent achieved by some of the countries in the region (notably, Malaysia, Philippines,Thailand). Under Repelita VI, PLN's target is to increase the rural household electrification ratio toabout 45 percent by 1998.

4. Bank's Past Involvement in the Sector. The Bank has provided about $4 billion to theelectricity sector since 1969, through twenty one power projects, of which 14 have been completed and

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PCRs prepared for them. Taken altogether, these projects have assisted in the expansion of generation,transmission and distribution facilities and rural electrification and institutional development of PLN. Thetechnical assistance provided by the Bank has also strengthened PLN's technical and managementcapabilities in engineering, project design and implementation capabilities, distribution and ruralelectrification planning, and corporate and financial planning. As a result of these efforts, PLN'simplementation capacity and operational efficiency have increased significantly; whereby it now handlesan investment program of about US$3 billion per year, and connects about one million new customersannually.

5. The Bank's first and ongoing lending operation for rural electrification (RE I, Loan 3180-IND) provides US$329 million to finance the bulk of the foreign exchange costs of a time slice of theRE development plan through FY 94/95. The Bank's objectives in the RE I project derive from thefindings of the Rural Electrification Review (report 6144-IND, 1986). In addition to helping financeimplementation of the physical program elements, the key objectives of RE I are aimed at developmentof a RE Master Plan and upgrading of PLN's planning, technical and manpower capability in this area;and reducing the costs of future RE development by promoting the development of appropriate technicalstandards for equipment performance and network design and construction practices and reducing PLN'scosts. Other objectives were to provide an opportunity for the development of village-based localparticipation in the form of managerial, technical and labor resources; increase the productive uses ofelectricity by small businesses, establish financial transparency in PLN's accounting of the costs of ruralelectrification, and personnel training for PLN and the Ministry of Cooperatives (MOC) to support theRE program.

6. By and large, the RE I project's scorecard vis-a-vis its objectives is favorable. The MasterPlan work-in-progress represents a major step forward in strengthening RE planning in Indonesia, andis directly helping rationalize the sequencing of network (grid) reticulation in the proposed project;including the allocation of national electrification targets by region, extensification and intensificationwithin each region, and village selection. The performance of the RE I project has to be seen in thecontext of a gradual and continuous learning process. Thus, changes in equipment standards andperformance specifications and in network design, facilitated by the RE I project, provide the basis forsignificant cost reductions in the equipment and material costs of the physical program in the next stageof rural electrification under the proposed project. Furthermore, advanced knowledge coupled with PLN'sevolved state of technical readiness set the stage for testing pilot distribution projects in the proposedproject that would form the basis for further cost reduction in the next stage of RE, possibly supportedwith Bank financing. Experience gained with local participation under RE I-- in the form of the Polaprogram -- has been generally quite positive, and provides the basis for seeking a more ambitious andlarger scale promotion of this concept.

7. Rationale for Bank Involvement. The constraints to efficient delivery of electricity in ruralareas are related predominately to broader power sector development and PLN organizational issues onwhich the Bank is working closely with the Government and PLN. The Bank is promoting actionswhereby PLN accords rural electrification a more important role in its strategic planning. In thisconnection, the Bank has established a close association with PLN in preparing the technical andorganizational basis for implementation in the proposed project. In the broader context of power sectordevelopment, a convergence of views has been reached between the Bank and DGEED regarding themain issues facing the sector, and on an agenda and action plan for regulatory and institutional reform.The proposed lending operation together with the Sumatera and Kalimantan Power Project will ensurecontinuation of this dialogue and Bank support for implementation of the first stage of the overall power

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sector reform agenda; key elements of which, enhancing private sector development, increasing localparticipation by community organizations in electricity distribution and by NGOs in promoting productiveuses of electricity , and institutional restructuring of PLN to enhance the efficiency of its RE and non-REoperations and management, are consistent with the Country Assistance Strategy (CAS) for Indonesia,that was discussed by the Board on April 15, 1994.

8. Project Objectives. The specific objectives of the proposed project, besides continuingBank support for the broader reform agenda for the power sector initiated under the Sumatera andKalimantan Power Project, are to: (a) advance the efforts begun under RE I project to place the ruralelectrification program in Indonesia on an efficient and sustainable footing; (b) expand the coverage andsupply of electricity to rural areas through a time slice investment program; (c) establish incentives forprivate sector and local cooperatives to take an increasingly larger share of RE distribution andrenewable energy development within the framework of a least cost RE Master Plan; (d) continue PLN'sinstitutional development to undertake RE planning and implementation, especially at the regional level;and (e) undertake pilot distribution programs that have the potential for further reducing the costs of REextensification and intensification.

9. Project Description. To achieve the above objectives, the proposed project would includetwo main components:

(a) PLN component which includes: (i) electrification of 7000 rural villages and 2.1million households, in the second and third years of Repelita VI (95/96-96/97); through theconstruction of an estimated 28,000 kmc of MV lines and 35,000 kmc of LV lines, 1.3million poles and 833 MVA of distribution transformer capacity; (ii) economic sub-transmission schemes aimed at promoting private sector participation in small scalegeneration by interconnecting captive power plants, cogeneration plants and other smallpower producers that are prepared to sell power to a PLN regional or mini-grid servinga rural area on the basis of a published small power purchase tariff to be offered by PLN.This tariff is derived in a transparent manner from PLN's "avoided cost of supply" indifferent regions, and made available to all such potential sellers on a non-discriminatoryand non-negotiated basis as per the terms of a simple and standard power purchase contract;(iii) development of five mini-hydro power projects with an aggregate capacity of 7.45 MWand field test drilling of two mini-geothermal fields in Lombok and Ambon for which powerplant construction would be considered for financing under a proposed follow-on RenewableEnergy Development project; (iv) pilot projects to test the adaptability of low cost "lowtech" equipment designs, low cost network reticulation designs and more efficientconstruction management methods for full scale implementation at a subsequent stage,possibly supported by a future Bank loan; (v) expansion of the ongoing small rural businessservices component to promote productive uses of electricity, including participation byNGOs; (vi) technical assistance for: (a) enhancing the RE planning systems capability withinPLN and transferring it to PLN Regions and branches; (b) preparation of a RenewableEnergy Development Plan for rural electrification in areas not likely to be covered byPLN's major regional grids within the next ten years and; (c) implementing RE-specificinstitutional changes required to enhance the organizational and management efficiency ofundertaking RE within PLN, consistent with the ongoing restructuring of PLN; and

(b) MOC component which includes: (i) implementation support for expansion ofschemes for local participation by village level cooperatives and organizations in power

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distribution related activities; and (ii) preparation of up to two geographic areas for possibleconversion to a "Pola III" mode of organization, wherein responsibility for all distributionfunctions including ownership of assets is transferred from PLN to a third party.

10. Project Costs are estimated to be US$ 743 million, inclusive of duties, taxes, and physicaland price contingencies. The total financing required, including interest during construction and financingcharges on the Bank loan, amounts to about US$ 841 million. The proposed Bank loan of US$ 398.0million equivalent to the Republic of Indonesia would finance 100 percent of the foreign exchange costexclusive of interest during construction and taxes, and about 47 percent of the total financing required.Of this amount about US$ 2.2 million equivalent would be made available to the MOC, and the balanceof US$ 395.8 million equivalent would be on lent to PLN under a Subsidiary Loan Agreement. Theonlending term will be for 20 years, including five years grace period, and the onlending interest ratewould be equal to the Bank's standard variable rate plus 0.5 percent per annum. The foreign exchangerisk will be borne by PLN. Schedule A shows project costs and the financing plan. Schedule B sets forththe amounts and methods of procurement and disbursement. Schedule C summarizes key projectprocessing events, and Schedule D summarizes the status of Bank Group operations in Indonesia. Onemap is also attached. The Staff Appraisal Report No. 12920-IND, dated February 3, 1995 is beingdistributed separately.

11. Project Implementation. PLN will be responsible for implementation of the entire physicalprogram in the project. The specific villages to be electrified as per the regional electrification targetsdefined in the project will be based upon the use of village selection criteria acceptable to the Bank.Expansion of the rural business services program will be the responsibility of PLN, with assistance fromNGOs in carrying out the necessary field work and outreach activities. The project component that isaimed at increasing local participation in electricity distribution functions (the "Pola Program"), will bejointly implemented by MOC and PLN. A key element of the implementation plan would be theappointment of a Project Director as the focal person responsible for ensuring implementation, andcoordination and monitoring of all activities related to the project; and for undertaking the necessarycorrective actions in a timely manner. To ensure timely implementation of the physical program,preparation of activities related to the tendering and procurement process are proposed to begin inadvance of the expected date of loan effectiveness in June 1995. In the case of pilot projects and TAs,detailed TORs have been finalized to enable the contractor/consultant selection process to begin well inadvance of the expected date of loan effectiveness.

12. Sustainability. The long term sustainability of the national rural electrification programwill depend upon the degree of success in minimizing the burden on Government resources to financethe program investment and operations (without excessively burdening other consumer segments throughoverly cross-subsiding retail electricity tariffs); while increasing access of service at a rapid pace andensuring its affordability to the rural household population. Thus, sustainability will depend uponincreasing the efficiency of investments as well operating efficiency, increasing the mobilization of non-governmental resources, and through a tighter targeting of subsidies. This strategy underlies the designof the project's components. The project will help enhance the efficiency of investment through a varietyof means, including reduction in the unit cost burden of RE delivery through least cost planning, loweringof equipment and construction costs, and employing lower cost network designs and standards that areappropriate for rural areas, and by changing PLN's RE-specific organizational structure and managementprocesses in order to create a mission oriented environment within which the RE managers themselveswill be more creative and energetic in seeking solutions that reduce the unit cost of RE and acceleratethe pace of program coverage.

13. The proposed project incorporates several components/mechanisms that will provide strongincentives and otherwise facilitate private sector and local participation by cooperatives and otherorganizations in activities such as: (i) provision of generation capacity and energy -- e.g., captive power,cogeneration, and other cost effective and renewable sources of electricity -- facilitated by implementationof the published small power purchase tariff and a standard power purchase contract; (ii) undertakingsome functions related to retail electricity distribution otherwise performed at a higher cost by PLN,facilitated by the "Pola Program" and; (iii) taking over all aspects of retail electricity distribution,facilitated by the introduction of a bulk supply tariff. The proposed project, by promoting theimplementation of a published small power purchase tariff and a bulk supply tariff, combined with theestablishment of profit centers within PLN in the context of the overall institutional reform agenda,should ultimately lead to a desire to differentiate retail tariffs by region, narrow the present gap betweenthe retail tariff and the willingness to pay for such service in rural areas, thereby further enhancing thesustainability of the program.

14. Environment and Resettlement. The proposed project is not expected to pose significantenvironmental and resettlement problems as it will consist of numerous, very small power generation,and medium and low voltage distribution subprojects, and test well drilling at two mini-geothermal fields.These subprojects, while having the potential to cause minor and localized impact, are not likely to belarge enough to warrant major environmental concern. Accordingly, the project has been assigned a "B"classification. The environmental and resettlement impacts will be established by utilizing a screeningprocess based on guidelines satisfactory to the Bank; and people affected by any of the sub-projects willbe compensated and resettled on the basis of an agreed resettlement policy. A report on each sub-projectcontaining the relevant information on environment and land acquisition and resettlement measures willbe maintained by PLN, with a summary report to be sent to the Bank annually for review and comment;and a technical audit of the overall project will include an evaluation of the environment and resettlementaspects of the project.

15. Agreements Reached with the Borrower. During the negotiations, the Bank reached thefollowing agreements with Borrower:

(a) The Borrower shall onlend the proceeds of the proposed Bank loan, except for the $2.2million for technical assistance to the Ministry of Cooperatives, to PLN under a subsidiaryloan agreement with a 20 year term including five years grace period. The subsidiary loanwill be denominated in foreign currency withdrawn and the onlending interest rate wouldbe equal to the Bank's standard variable interest rate plus 0.5 percent per annum. Inaddition, PLN will pay to GOI a commitment charge of 0.75 percent per annum or at suchother percentage rate as the Government shall pay to the Bank on the undisbursed amountof the Subsidiary Loan from time to time. The foreign exchange risk will be borne by PLN.In addition, the Government would provide the necessary local funds to PLN to completethe project;

(b) The Borrower shall permit financing for the Rural Business Services (RBS) programas well as financing for the local costs of the Pola program component of PLN to beprovided from the PPELK fund; and to the extent that such funds turn out to be less thanthe required amount, the Government would make up the shortfall;

(c) The Borrower shall: (a) prepare and, by June 30, 1995, adopt a policy regardingimplementation of the power purchase tariff and bulk supply tariff satisfactory to the Bank

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including policies governing the granting of any subsidies related to implementation of thebulk supply tariff, rules and procedures for determining such subsidies and how suchsubsidies are to be financed and directed in a transparent manner; and (b) draft, and byDecember 31, 1995, promulgate rules and regulations concerning oversight of the powerpurchase tariff and bulk supply tariff implementation, in a form acceptable to the Bank;

(d) The Borrower shall, by December 31 each year commencing in 1995: (i) review withthe Bank, its power sector development program, the least cost planning analysis used toformulate the said program, the roles of PLN and the private sector in the said program,and the transparency and appropriateness of the business environment for private sectorparticipation; and (ii) review with the Bank, PLN's development and investment programswith respect to their consistency with the power sector development program, the balanceamong generation, transmission and distribution investments, and the balanced developmentof regions. In addition, the Borrower shall ensure that PLN has access to sufficient fundsto finance capital expenditures for its investment program pursuant to the said reviews;

(e) The Borrower shall: (a) undertake and complete a study on private power developmentin accordance with terms of reference satisfactory to the Bank; (b) upon completion of thesaid study, furnish the same to, and discuss the results and recommendations thereof, withthe Bank; and (c) based on the said study's results and recommendations and subsequentreview, comments and discussions prepare draft rules and procedures to govern privatesector participation including the solicitation and evaluation of all forms of proposals forprivate power supply, furnish the said draft rules and procedures for review and commentsto the Bank, and (iii) by December 31, 1995, finalize, adopt and enforce the same takinginto account the comments, if any, thereon by the Bank;

(f) Borrower shall by June 30, 1995, establish a Directorate of Regulation within DGEEDwith adequate staff and funds and necessary functions and power to administer and overseecompliance with regulations (including pricing and technical regulations) regarding theelectricity sector;

(g) Borrower shall: (a) undertake and complete a study on regulatory reform in the powersector in accordance with terms of reference and in a manner satisfactory to the Bank; (b)upon completion of the said study, furnish the same for review and comments to, anddiscuss the results and recommendations thereof with, the Bank; and (c) based on the saidstudy's results and recommendations and subsequent review, comments and discussions: (i)prepare draft regulations for the power sector, (ii) furnish the said draft regulations forreview and comments to the Bank, and (iii) by June 30, 1996, finalize, adopt and enforcethe same taking into account the comments, if any, thereon by the Bank; and

(h) Borrower shall ensure that any transfer of profits from PLN to the DPS shall notprevent PLN from implementing its agreed investment program.

16. Agreements Reached with PLN During the negotiations, the following agreements werereached with PLN:

(a) PLN shall: (a) by October 31 of each year commencing in 1995, until completion ofthe project, furnish to the Bank for its review and comments PLN's draft annual

electrification development and investment plans; and (b) thereafter finalize the saiddevelopment plans taking into account the comments, if any, thereon by the Bank;

(b) PLN shall select villages to be electrified each year under the project in accordancewith criteria and procedures agreed with the Bank;

(c) PLN shall maintain the project Management Unit within its Rural ElectrificationDivision with functions, powers, staff, and funds necessary to coordinate and supervise andto ensure the implementation of the project;

(d) PLN shall, by June 30 (or such other date as may be agreed by the Bank) every yearcommencing in 1995, revise and publish the small power purchase tariff schedule includingthe form of the standard power purchase contract in accordance with the methodologyagreed to by the Bank;

(e) PLN shall, by June 30 (or such other date as may be agreed by the Bank) every yearcommencing in 1995, revise and publish the bulk supply tariff schedule in accordance withthe methodology agreed to by the Bank;

(f) PLN shall: (a) furnish to the Bank, (i) such periodic reports concerning thereorganization of PLN as reasonably requested by the Bank, and (ii) a draft time boundcorporate reorganization and restructuring action plan, based on terms of reference agreedwith the Bank, for PLN to operate according to best utility practices (including an actionplan for restructuring specific to rural electrification); (b) discuss the said report(s) and draftaction plan with the Bank; (c) finalize the said action plan taking into account thecomments, if any, thereon by the Bank, and (d) by June 30, 1995, take appropriate stepsto implement the said action plan taking into consideration the comments, if any, thereonby the Bank;

(g) PLN shall, from time to time, take all such measures, satisfactory to the Bank, as shallbe required for it to realize, for all of its operations, for its fiscal year 1995 and in eachfiscal year thereafter, an annual rate of return of not less than eight percent of the averagenet revalued fixed assets in operation;

(h) PLN shall ensure that the consultants for the various TA components, identified inTable 4.1, will be appointed under terms-of-reference and conditions satisfactory to theBank, and by no later than the corresponding dates identified in the Project Managementand Implementation Plan (PMIP);

(i) PLN shall: (a) by October 31, 1995, establish principles and procedures for technicalaudit of Subprojects in consultation with the Bank: (b) commencing in 1996, untilcompletion of the Project, carry out an annual technical audit of the completed parts of theproject, through independent technical auditors acceptable to the Bank in accordance withthe principles and procedures acceptable to the Bank, focussing on the quality and standardsof the goods, works, and services financed out of the proceeds of the Loan includingeffective utilization thereof, operation and maintenance of the equipment, and theenvironmental and resettlement aspects of the Subprojects; and (c) furnish to the Bank assoon as available, but in case not later than September 30 of each such year, the report of

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such technical audit by such auditors and such other information relating thereto in suchdetail as the Bank may reasonably request:

(j) PLN shall: (a) undertake environmental screening, and resettlement and rehabilitationplanning for subprojects to be financed under the Loan in accordance with criteria andprocedures satisfactory to the Bank; (b) submit, for Bank's approval, a proposal for eachSubproject under the mini-hydro and mini-geothermal component of the project, to befinanced out of the proceeds of the Loan including environmental mitigation and/orresettlement and rehabilitation measures therefor; (c) ensure that during the execution ofeach subproject the environmental mitigation and resettlement and rehabilitation measurestherefor are carried out in a manner satisfactory to the Bank, and (d) by April 30 every yearcommencing in 1996, furnish such information about the environmental mitigation andresettlement and rehabilitation measures taken during the preceding fiscal year of theBorrower in such detail as the Bank may reasonably request; and

(k) The following agreements with respect to PLN's financial performance, reached underthe Sumatera and Kalimantan Power Project, were reaffirmed: (i) PLN shall submit auditedaccounts and reports no later than six months after the end of each fiscal year; (ii) PLNshall not incur any additional debt unless a reasonable forecast of its net revenues afterexpenditures for each year during the term of the debt to be incurred shall be at least 1.5times its projected debt service requirements; (iii) PLN shall periodically review its LRMCand tariff structure, and discuss the results of the review with the Government and theBank, and before October 31 in each year, commencing in 1995, review the adequacy ofits tariffs to meet the requirements of the revenue covenants, taking into account the resultsof the review of the LRMC-based structure; (iv) PLN shall prepare a rolling ten-yearfinancial forecast and for the first five years of the forecast, prepare a financing plan; and(v) PLN shall annually revalue its fixed assets and accumulated depreciation.

17. Condition of effectiveness. Execution of a subsidiary loan agreement between Borrowerand PLN satisfactory to the Bank.

18. Actions to be Taken before Withdrawal of Loan Proceeds. PLN shall complete, in amanner satisfactory to the Bank, the environmental screening and conceptual engineering design forenvironmental mitigation for well test drilling in the mini-geothermal component, before anydisbursements would be approved for that component of the project. Disbursement for the mini-hydroprojects will be conditional on Bank clearance of PLN's specific proposals for compensation andresettlement measures for the affected persons.

19. Benefits. The proposed project would increase the effectiveness of RE delivery by thedevelopment and implementation of an efficient RE program in Indonesia, and hence lead to higherreturns and speedier coverage. It would help reduce present and future unit costs of RE and help addressa primary constraint to further enhancing the efficiency of RE delivery as well as the long termsustainability of the RE program; by facilitating a significant change in PLN's present organizationalstructure and management processes for the RE program. In addition, it would help extend the supplyof electricity in rural areas in Indonesia during 1995-1997 to 7,000 villages and thereby contributing toa significant improvement in the quality of life of 2.1 million rural households -- with women andchildren being primary beneficiaries -- and more broadly contributing to the development of rural areas,by facilitating economic opportunity through productive uses of electricity.

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20. Project Risks No significant technical or implementation risks are foreseen with respectto the physical network development program, that involves routine grid extensions and consumerconnections. PLN has consistently exceeded annual rural electrification targets and implementationschedules. The risk associated with implementation of the mini-hydro is minimized by a technical designthat places emphasis on standardization, and ensuring appointment of highly qualified constructionmanagement and supervisory contractor in the case of mini-hydro; and in the case of the mini-geothermalcomponent by employing an internationally reputed firm under a single integrated drilling servicescontract. Risks associated with implementation of the overall policy reform agenda in general and otherelements of the policy component specific to RE -- institutional restructuring, and implementation of thebulk supply tariff -- are minimal in view of the Government's and PLN's satisfactory record inimplementation once agreement is reached.

21. Recommendation. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank and recommend that the Executive Directors approve the proposed loan.

Attachments

Washington DC Ernest SternFebruary 3, 1995 Acting President

- 10 - Schedule APage 1

INDONESIA

SECOND RURAL ELECTRIFICATION PROJECT

ESTIMATED COSTS AND FINANCING PLAN /a(US$ million)

Estimated Project Costs Local Foreign Total

PLN Component1. Distribution Schemes 264.5 337.1 601.72. Pilot Projects 4.4 6.6 11.03. Mini-Hydro/Geothermal 12.5 16.1 28.74. Rural Business Services 5.0 1.5 6.55. Pola Program 6.2 - 6.26. Other Technical Assistance 3.8 5.7 9.5

Base Cost 296.4 367.1 663.5

MOC Component1. Pola Program Support 0.5 1.1 1.52. Pola II Preparation 0.1 0.5 0.7

Base Cost 0.6 1.6 2.2

Total Base Cost 22247 oL A

Physical Contingency 19.9 21.7 41.6Price Contingency 16.5 19.2 36.7

Total Project Cost /b lf Zia

Interest During Construction 42.7 55.6 98.3

Total Financing Required 32 .8

/a Due to rounding, totals may not add up./b The local costs are inclusive of taxes and duties estimated to be about US$63.7 million

equivalent.

- 11 - Schedule APage 2

FINANCING PLAN

Local Foreign Total

PLN ComponentIBRD 11.4 384.4 395.8GOI/PLN 364.1 78.7 442.8

Subtotal PLN 375.5 463.1 838.6

MOC ComponentIBRD 0.5 1.7 2.2GOI 0.2 0.3 0.5

Subtotal MOC 0.7 2.0 2.7

Total a= 6LI

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INDONESIA

SECOND RURAL ELECTRIFICATION PROJECT

PROCUREMENT ARRANGEMENTS(US$ million)

Procurement MethodInternational LocalCompetitive Competitive Total

Bidding Bidding Other /a N.B.F./b cost

A. PLN ComponentLine Materials and Poles /c 197.7 67.6 3.6 24.4 293.3

(197.7) (54.1)/d (2.7)/e - (254.4)

Transforners and other Equipment 44.7 - 12.7/f - 57.4(44.7) (10.7j (55.4)

Construction (installation of - - - 160.6 160.6poles, power lines, etc.)

House Connections (including 48.5 - - 24.0 72.5construction) (48.5) (48.5)

Drilling Services and - - 10.8 7.8 18.6Civil Works (10.8) (10.8)

Technical Assistance1. Implementation Support - - 17.8 - 17.8

(17.8) (17.8)2. Policy Support - - 0.7 - 0.7

(0.7) (0.7)3. Institutional Development - - 8.1 - 8.1

(8.1) (8.1)

Pola Training Program - - - 6.4 6.4

Engineering, Construction, - - - 41.6 41.6Supervision

Taxes - - - 63.5 63.5

Subtotal PLN 290.9 67.6 53.7 328.4 740.6(290.9) (54.1) (50.8) - (395.8)

B. MOC ComponentPola Training - - 1.5 - 1.5

(1.5) (1.5)Pola III Preparation - - 0.7 - 0.7

(0.7) (0.7)

Taxes - - - 0.2 0.2

Subtotal MOC - - 2.2 0.2 2.4(2.2) - (2.2)

Total 290.9 66 55 9 328.6(290.9) (54.1) (53.0) - (398.0)

/a Goods and services to be procured by limited international bidding or shopping procedures.7b Not Bank-financed. Equipment and construction to be procured by local competitive bidding.7T Includes insulators, LV and bare conductors and accessories, poles, pole hardware and molds and

fittings./d Out of the total of $67.6 million for concrete power line poles, the Bank will finance 80% (or S54.1

million)./c Compnses equipment for pilot projects.r Comprises equipment for mini-hydro projects ($8.6 million), for pilot projects (S1.7 million), and

miscellaneous purchases ($2.4 million).lg Comprises two drilling services contracts for mini-geothermal component.

Note: Figures in parentheses are the respective amounts to be financed under the proposed IBRD loan.

- 13 - Schedule BPage 2

DISBURSEMENTS

Allocation of Loan Proceeds

Amount of the % of ExpendituresCategory Loan Allocated to be Financed /a

(expressed in US$ million equivalent)

(1) Equipment and 272.2 100% of foreign andmaterial (excluding 100% of local (ex-factory)power line poles) expenditures

(2) Concrete poles 54.1 80% of local (ex-factory)expenditures

(3) Civil Works 10.8 100% for mini-geothermal

(4) Technical Assistance 28.8 100%

PLN 26.6MOC 2.2

(5) Unallocated 32.1

Total I2LU

/a Expenditures financed are exclusive of value-added-tax (VAT).

Estimated Bank Disbursements(US$ million)

Bank FY 1995 1996 1997 1998 1999

Annual 4.0 116.7 188.2 83.5 5.6Cumulative 4.0 120.7 308.9 392.4 398.0

- [4

Schedule C

INDONESIA

SECOND RURAL ELECTRIFICATION PROJECT

Timetable for Key Project Processing Events

(a) Time taken to prepare the project :22 months

(b) Prepared by :PLN, with Bank assistance

(c) First Bank Mission .July 1992

(d) Appraisal Mission Departure January 1994

(e) Negotiations :November 1994

(f) Planned Date of Effectiveness :June 1995

(g) List of Relevant PCRs and PPARs

Credit PPAR//Loan No. Project PCR Date PCR No.

Credit 165 Jakarta Power Distribution November 1979 2741Credit 334 Jakarta Power Distrib. II November 1979 2741Credit 399 Thermal Power May 1984 5104Loan 1127 Fourth Power May 1984 5104Loan 1259 Fifth Power October 1984 5300Loan 1365 Sixth Power June 1986 6238Loan 1513 Seventh Power April 1987 6762Loan 1708 Eighth Power June 1989 7902Loan 1872 Ninth Power June 1989 7902Loan 1950 Tenth Power June 1989 7902Loan 1950-1 Tenth Power Supplemental June 1989 7902Loan 2056 Eleventh Power June 1990 8701Loan 2214 Twelfth Power September 1992 11014Loan 2300 Thirteenth Power September 1992 11014Loan 2443 Fourteenth Power September 1992 11014

This report is based on an appraisal mission comprising Messrs Arun P. Sanghvi (Task Manager),consultants John Tulloch, Jim Finucane, John Cranston and Richard Carroll, and Anil Cabraal (ASTAE),who visited Indonesia during January/February 1994. The financial analysis was prepared by SushilBhatnagar. Peer reviewers were Messrs. Andres Liebenthal and John Irving. (Mrs. Marianne Haug,Director (EA3DR) and Mr. Peter R. Scherer, Division Chief (EA3IE) have endorsed the project).

Schedule D- 15 - Page 1 of 4

STATUS OF BANK GROUP OPERATIONS IN INDONESIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS /a(as of December 31, 1994)

Amount (US$ million)Loan/ Bank IDACredit Fiscal Original principal Undis-

Number Year (less cancellation) bursed

One-hundred-twentysix loans and 10,652.49 901.60fourty-eight credits fully disbursed

Of which SECALS, SALs and Program Loans /b

2780 1987 Trade Policy Adjustment 300.002937 1988 Second Trade Policy Adjustment 300.003080 1989 Private Sector Development 350.003267 1991 Second Private Sector Development 250.00

Subtotal: 1,200.00

2638 1986 Nusa Tenggara Agriculture Support 33.00 5.612705 1986 Manpower Development and Training 58.10 4.382773 1987 Fisheries Support Services 20.00 3.922930 1988 Forestry Institutions & Conservation 30.00 7.152932 1988 Jabotabek Urban Development 150.00 28.062940 1988 Accountancy Development 113.00 20.132992 1989 Tree Crops Human Resource Development 18.40 3.223000 1989 Tree Crops Processing 88.40 33.633031 1989 Agriculture Research Management 35.30 4.513040 1989 Industrial Restructuring 238.06 5.783041 1989 Small & Medium Industrial Enterprise 94.43 0.463042 1989 Third Health 43.50 10.463097 1989 Power Sector Efficiency 337.00 59.743098 1989 Paiton Thermal Power 346.00 64.433112 1990 Public Works Institutional 36.10 4.95

Development & Training3133 1990 Highway Sector 350.00 37.183134 1990 Professional Human Resource Development 117.50 11.313158 1990 Second Secondary Education 154.20 67.883180 1990 Rural Electrification 329.00 106.023182 1990 Third Telecommunications 350.00 117.833209 1990 Gas Utilization 86.00 67.933219 1990 Second Jabotabek Urban Development 190.00 102.003243 1990 Second Forestry Institution 20.00 11.75

and Conservation3246 1991 Third Jabotabek Urban Development 61.00 39.29

/a The status of the projects listed in Part A is described in a separatereport on all Bank/IDA-financed projects in execution, which is updatedtwice yearly and circulated to the Executive Directors on April 30 andOctober 31.

/b Approved during or after FY80.

- 16 - Schedule DPage 2 of 4

Amount (USS million)Loan/ Bank IDACredit Fiscal Original principal Undis-

Number Year (less cancellation) bursed

3249 1991 Second BRI/KUPEDES Small Credit 125.00' 10.283282 1991 Fertilizer Restructuring 221.70 34.143298 1991 Fifth Population 104.00 34.923302 1 991 Provincial Irrigated Agriculture 104.50 61.49

Development3304 1 991 East Java/Bali Urban Development 180.30 85.863305 1991 Yogyakarta Upland Area Development 15.50 8.023311 1991 Second Higher Education 150.00 43.323340 1991 Sulawesi-Irian Jaya Urban Development 100.00 50.163349 1991 Power Transmission 171.60 62.663385 1991 Technical Assistance Project for 30.00 24.21

Public and Private Provisionof Infrastructure

3392 1992 Second Irrigation Subsector 215.00 40.193402 1992 Agricultural Financing 106.10 76.903431 1992 Third Non-Formal Education 69.50 39.233448 1992 Primary Education Quality Improvement 37.00 30.253454 1992 BAPEDAL Development 12.00 9.743464 1992 Treecrops Smallholder 87.60 64.103482 1992 Fourth Telecommunications 375.00 302.333490 1992 Third Kabupaten Roads 215.00 94.713496 1992 Primary School Teacher Development 36.60 24.823501 1992 Suralaya Thermal Power 423.60 346.763526 1993 Financial Sector Development 307.00 143.223550 1993 Third Community Health & Nutrition 93.50 79.153579 1993 E. Indonesia Kabupaten Roads 155.00 114.663586 1993 Integrated Pest Management 32.00 28.673588 1993 Groundwater Development 54.00 49.043589 1993 Flores Earthquake Reconstruction 42.10 27.503602 1993 Cirata Hydroelectric Phase II 104.00 96.793629 1993 Water Supply & Sanitation for 80.00 76.91

Low Income Communities3658 1994 National Watershed Management and 56.50 53.48

Conservation3712 1994 Second Highway Sector Investment 350.00 325.633721 1994 Skills Development 27.70 25.703726 1994 Surabaya Urban Development /a 175.00 175.003732 1994 Fifth Kabupaten Roads 101.50 96.523742 1994 Dam Safety 55.00 55.003749 1994 Semarang-Surakarta Urban Development 174.00 169.003754 1994 University Research for Graduation Study 58.90 55.913755 1994 Integrated Swamps 65.00 65.003761 1994 Sumatera & Kalimantan Power 260.50 260.503762 1994 Java Irrigation Improvements and 165.70 163.70

Water Resource Management

/a Not effective a of December 31, 1 994.

- 17 - Schedule DPage 3 of 4

Amount (US$ million)Loan/ Bank IDACredit Fiscal Original principal Undis-

Number Year (less cancellation) bursed

3792 1995 Land Administration 80.00 80.003810 1995 Second Accountancy Development 25.00 25.00

Total 19,193.88 901.60of which has been repaid 4,618.85 125.28

Total now held by Bank and IDA 14,575.03 776.32Amount sold 88.08

of which repai 79.72

Total undisbursed 4,428.09

- 18 - Schedule DPage 4 of 4

B. STATEMENT OF IFC INVESTMENTS(as of December 31, 1994)

(USS million)- Original Gross Commitments - Held Held Undisb'd

Fiscal Year IFC IFC by by incl.Committed Obligor Type of business Loan Equity Partic Totals IFC Partic Partic1971 /a P.T. Kabel - Indonesia Industrial equip. & t 1.80 0.37 1.00 3.17 - -

1971 P.T. Unitex Textiles 0.75 0.80 1.75 3.30 0.351971/73f74/76/84 /a P.T. Semen Cibinong Cement & constructi 21.23 5.31 25.27 51.81 -

1971/74 /a P.T. Primatexco Indonesia Textiles 3.35 0.80 0.65 4.801972/77/79 la P.T. Deralon Textile Textiles 4.43 1.12 1.73 7.28 - -

1973/89 /a P.T. Jakarta Tourism 4.00 1.49 7.00 12.491974 /a P.T. Monsanto Pan General mfg. 0.90 - - 0.90 -

1974 P.T. PDFCI Bank Devleopment financ - 0.48 - 0.48 0.341974/77 /a P.T. Kamaltex Textiles 2.36 0.75 1.39 4.50 -

1980 /a P.T. Supreme General mfg 5.10 0.94 6.00 12.04 -

1879 P.T. Papan Sejahtera Capital markets 4.00 1.20 - 5.20 1.20 -

1980/88 P.T. Semen Andalas Cement & constructi 28.51 5.00 28.53 62.04 23.44 13.981982/85/94 P.T. Saseka Gelora Capital markets 4.52 0.38 2.00 6.90 1.90 -1988 /a P.T. Nonterado Mas Minin Mining 3.50 2.00 4.50 10.00 - -1.351988 P.T. Asuransi Jiwa Capital markets - 0.32 - 0.32 0.32 - -

1988 P.T. Bali Holiday Village Tourism 9.32 - 2.00 11.32 1.09 0.171990 /a Nomura Jakarta Fund (NJF Financial services - 3.00 - 3.00 - -

1990 /a P.T. Federal Motors Automotive & acces 12.50 - - 12.501990 Bank Niaga Capital markets 7.50 - - 7.501990 P.T. Bank Umum Nasional Capital markets 10.00 - - 10.00 -

1990 P.T. Nusantara Island Tourism - - - 0.00 1.411990/91/94 P.T. Astra International Automotive & acces 12.50 35.43 - 47.93 22.43 -

1990/91/95 P.T. Indo-Rama Synthetics Textiles 57.00 6.18 67.50 130.68 58.31 67.50 97.501991 /a Raja-Pandopo Oil Energy - 3.60 - 3.60 - -

1991 P.T. Agro Muko Food & agribusiness 10.50 2.20 - 12.70 12.701991 P.T. Argo Pantes Textiles 30.00 13.00 53.00 96.00 37.38 41.641992 P.T. Bakrie Kasei Chemical & petroch 30.00 9.63 95.00 134.63 39.63 95.00 -

1992 P.T. Indonesia Asahi Textiles 4.00 1.83 - 5.83 4.23 - 0.391992 P.T. Rimba Partikel Timber, pulp & pape 9.88 0.60 10.00 20.48 11.31 7.50 -

1992 P.T. Swadharma Kerry Tourism 35.00 - 51.00 86.00 35.00 51.00 -

1992/94 P.T. Lantai Keramik Mas Cement & constructi 5.40 3.10 10.00 18.50 7.73 8.00 0.131993 P.T. BBL Dhamala Finance Capital markets 5.00 - - 5.00 3.82 - -

1993 P.T. Nusantara Tropical Food & agribusiness 9.00 - 7.00 16.00 9.00 7.00 2.251993 P.T. Samudera Indonesia Industrial services 12.00 5.00 3.00 20.00 17.00 2.631993 P.T. South Pacific Textiles 20.00 - 25.00 45.00 18.66 18.101993 SEAVI Indonesia Aruba Capital markets - 1.50 - 1.50 1.501993/95 P.T. Mitracorp Industrial services 21.45 4.12 - 25.57 25.44 - 2.701994 P.T. Asia Wisata Tourism - - - 0.00 2.63 2.63 -

1994 P.T. KDLC Bali BancBali Capital markets 15.00 1.14 - 16.14 16.14 - 15.001994 P.T. Pama Indonesia Capital markets - 0.71 - 0.71 0.71 - -1994 P.T. Saripuri Pamai Tourism 8.00 3.60 24.00 35.60 11.60 24.00 19.601994 P.T. Sinar Pure Foods Food & agribusiness - - - 0.00 1.39 - -

1994 Prudential Asia Indonesia Capital markets - 6.75 6.75 6.75 - 4.781995 P.T. Bakrie Kasei Pat Chemical & petroch 12.00 2.00 14.00 14.00 14.00

Total gross commitments /b 420.50 124.35 427.32 972.17Less cancellations, terminations, repayments & sale 145.12 12.34 89.52 246.98Total commitments now held /c 275.38 112.01 337.80 725.19 387.41 337.80 156.35

/a Investments have been fully cancelled, terminated, written-off, sold, redeemed, or repaid./b Gross commitments consist of approved and signed projects./c Held commitments consist of disbursed and undisbursed investments.

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