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1 Public Disclosure Authorized Document of The World Bank Report No IND Public Disclosure Authorized STAFF APPRAISAL REPORT INDONESIA Public Disclosure Authorized SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT JANUARY 22, 1996 Public Disclosure Authorized Industry and Energy Operations Division Country Department III East Asia and Pacific Regional Office

2 CURRENCY EQUIVALENTS Currency Unit - Indonesian Rupiah (Rp) (As of June 1995) US$ 1 = Rp 2,246 Rp 1 billion = US$ million FISCAL YEAR PLN: January 1 - December 31 Government of Indonesia: April 1 - March 31 WEIGHTS AND MEASURES 1 metric ton = 1,000 kilograms (kg) I liter (1) = barrels (bbl) 1 kilometer (kmr = mile (mi) 1 kilovolt (kv) = 1,000 volts (V) I megavolt ampere (MVA) = 1,000 kilovolt ampere (kva) I megawatt (MW) = 1,000 kilowatts (kw) I gigawatt hour (GWh) = I million kilowatt hours (kwh) ACRONYMS BAPPENAS - National Development Planning Agency CAS - Country Assistance Strategy DGEED - Directorate-General of Electricity and Energy Development EA - Environmental Assessment EHV - Extra High Voltage GIS - Geographical Information System GOI - Government of Indonesia HV - High Voltage EIRR - Economic Internal Rate of Return IPP - Independent Power Producer JEDU - Jakarta Electricity Distribution Unit JABETU - Java-Bali Electricity Transmission Unit LNG - Liquefied Natural Gas LRMC - Long Run Marginal Cost MME - Ministry of Mines and Energy PLN - State Electricity Corporation PIP - Project Implementation Plan PPA - Power Purchase Agreement PPE - Engineering Services Center of PLN RAP - Resettlement Action Plan REPELITA - Five-Year Development Plan ROR - Rate of Return TA - Technical Assistance

3 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT LOAN AND PROJECT SUMMARY Borrower: Beneficiary: Poverty: Amount: Terms: Commitment Fee: Onlending Terms: Republic of Indonesia State Electricity Corporation (P.T. PLN (PERSERO)) Not applicable US$ 373 million equivalent Repayable in 20 years, including 5 years of grace, at the Bank's standard variable interest rate for currency pool loans 0.75% on undisbursed loan balances, beginning 60 days after signing, less any waiver The proceeds of the loan, except $2.0 million equivalent which would be made available to the Ministry of Mines and Energy (MME) for the Directorate General for Electricity and Energy Development (DGEED) for the implementation of its project component, would be onlent by the Government of Indonesia (GOI) to PLN for 20 years, including a grace period of 5 years; the subsidiary loan will be denominated in foreign currency withdrawn and the onlending interest rate would be equal to the Bank's standard variable interest rate for currency pool loans plus 0.5 percent per annum. PLN would bear the foreign exchange risk. Financing Plan: See para 4.19 Economic Rate of Return: 25% Maps: IBRD IBRD Project II) Number: 4021

4 TABLE OF CONTENTS Page No. 1. THE ENERGY AND POWER SECTORS... 1 A. Overview... 1 Energy Sector Overview... 1 Key Energy Issues... 1 Power Sector Overview... 2 B. Key power sector issues... 3 Sector Vision and Strategy... 3 Transmission and Distribution Bottlenecks... 4 PLN Efficiency, Reliability and Customer Service... 4 Private Sector Participation... 4 Regulatory Reform STATE ELECTRICITY CORPORATION (P.T. PLN (PERSERO))... 6 A. Operational Performance... 6 Transmission and Distribution Losses... 6 Staff Development and Employee Productivity... 6 Bulk Power Operations... 8 Customer Service and Power Supply Quality... 8 B. Assets and Investment... 9 Generation... 9 Transmission and Distribution Development Program Balance Between Generation, Transmission and Distribution C. Financial Performance Profitability Financial Forecasts Financing Plan and Capital Structure Liquidity Tariffs Taxation Billing and Collections Accounting, Budgeting and Audit Asset Revaluation This report is based on an appraisal mission undertaken in June 1995 and comprising Ms. Judith Magyari (Task Manager) and Mr. Stephen Howes (EA31E), assisted by Messrs. Arun Sanghivi (EA3IE), Jose Maria Bakovic, Hernan Garcia (IENPD) and Subodh Mathur (Consultant). Peer reviewers were Messrs./Mmes. Irving (EA31N), Ladhibi-Belk (SAlEF) and Moscote (LATAD). Mrs. Marianne Haug, Director (EA3DR) and Mr. Peter R. Scherer, Division Chief (EA3IE) have endorsed the project.

5 - iii - D. Performance Monitoring in PLN Performance Targets Sectoral Review PLN RESTRUCTURING Restructuring Strategy PLN's Restructuring Plan Distribution Restructuring on Java-Bali Transmission Restructuring on Java-Bali Restructuring Outside Java-Bali Financial Aspects of Restructuring THE PROJECT Objectives Summary Description Investment Components Technical Assistance Project Engineering Efficiency Improvement PLN Restructuring MME Component Project Cost Financing Plan Procurement Disbursement Implementation Monitoring and Supervision Project Performance Monitoring Indicators Environment and Resettlement PROJECT JUSTIFICATION A. Past experience and lessons learnt B. Rationale for Bank involvement C. Project Benefits Sectoral benefits Economic Rate of Return Analysis D. Project Risks Slow Sales Growth Risk Other Risks E. Sensitivity analysis... 48

6 - iv - 6. AGREEMENTS REACHED AND RECOMMENDATION Agreements Reached with the Goverrnent Agreements Reached with PLN Condition of Effectiveness Disbursement Conditions Recommendation TABLES Table 2.1 Comparative Performance of Electricity Utilities in Asia Table 2.2 PLN Financial Indicators.15 Table 2.3 Comparison of Financing Plans, Repelita IV to Repelita VII.16 Table 2.4 PLN Global Performance Targets.21 Page No. Table 4.1 Project Cost Summary.33 Table 4.2 Financing Plan Table 4.3 Procurement Arrangements.36 Table 4.4 Allocation of Technical Assistance.37 Table 4.5 Allotment of Loan Proceeds... 39

7 v - ANNEXES 1.1 Organization Chart - Ministry of Mines and Energy (MME) 1.2 Government of Indonesia Policy Statement (Goals and Policies for the Development of the Electric Power Sub-Sector) 2.1 Organization Chart - PLN 2.2 PLN Non-financial Performance Indicators 2.3 Peak Load, Production and Installed Capacity (a) in Java-Bali (b) outside Java-Bali 2.4 PLN's Investment Program - Indonesia, Java-Bali and outside Java-Bali 2.5 PLN's Financial Statements - Historical and Forecast 2.6 Notes and Assumptions for the Financial Indicators and Statements (a) Notes and Assumptions for the Financial Indicators (b) Notes and Assumptions for the Financial Forecasts 2.7 PLN's Tariffs 3.1 Action Plan for the Establishment of the Jakarta Electricity Distribution Unit as an Investment Center 3.2 Performance Targets for Jakarta Electricity Distribution Unit 3.3 Action Plan for the Establishment of the Java-Bali Electricity Transmission Unit as an Investment Center 3.4 Performance Targets for Java-Bali Electricity Transmission Unit 4.1 Detailed Project Costings (a) 500 KV Transmission (b) 150 KV Transmission: Jakarta and West Java (c) 150 KV Transmission: Central Java (d) Distribution 4.2 Contract Packaging 4.3 Estimated Disbursement Schedule 4.4 Project Implementation Plan 4.5 Project Supervision Arrangements 4.6 Guidelines for the Environmental Chapter in the Distribution and Transmission Subproject Feasibility Reports 4.7 PLN's General Policy Concerning the Establishment of Overhead Transmission Lines 5.1 Power Subsector - List of IDA Credits and Bank Loans 5.2 Investment Economic Appraisal Notes and Tables 5.3 Selected Documents and Data Available in the Project File Maps: IBRD IBRD 27589

8 1. THE ENERGY AND POWER SECTORS Energy Sector Overview A. Overview 1.1 Indonesia is richly endowed with diverse and abundant energy resources including oil, natural gas, coal, hydropower and geothermal. The oil and gas sectors continue to play a critical role in the Indonesian economy, together accounting for over 85 percent of commercial net energy consumption and about 30 percent of the country's export receipts. 1.2 The principal agency responsible for implementing Government policies in the energy sector is the Ministry of Mines and Energy (MME), an organizational chart for which is given in Annex 1.1. MME coordinates all activities in the energy sector and supervises the state enterprises in the sector including PERTAMINA (oil, gas and geothermal), Bukit Asam (coal), PGN (gas transmission and distribution) and PLN (electricity). Other ministries and agencies are also involved in the sector. The Ministry of Public Works is responsible for hydropower resource surveys and the operation of multipurpose hydro plants; the National Atomic Energy commission is responsible for nuclear development; and the Ministry of Cooperatives and Small Enterprises Development (MOC) is responsible for enhancing the role of cooperatives in rural electrification. An inter-ministerial National Energy Board (BAKOREN) coordinates energy policies and development with those of other sectors. BAKOREN is supported by a Technical Committee (PTE) consisting of senior officials in different departments, chaired by the Director General of Electricity and Energy Development (DGEED). 1.3 Indonesia's basic goals and policies for the future development of the energy sector are described in the Outlines of State Policy (Garis-Garis Besar Haulan Negara or GBHN), promulgated by the People's Consultative Assembly (MPR) in March 1993 to guide the formulation of the Sixth Medium-Term (five-year 1994/ /99) Development Plan (Repelita VI) and the Second Stage Long-Term (twenty-five year) Development Strategy (PJPT-II). The GBHN highlights the importance for Indonesia's sustained economic and social development of meeting its rapidly growing energy needs efficiently -- including through conservation and diversification of primary energy resources and their more efficient utilization -- and of minimizing the adverse environmental and social impacts of energy use. Key government policies are outlined briefly below. Key Energy Issues 1.4 Diversification. A central and continuing thrust of the Government's energy strategy is to slow the pace of Indonesia's transition to a net oil importer by diversifying domestic energy consumption towards alternative and more economic and indigenous energy resources that either

9 - 2 - have a non-exportable surplus, such as coal and natural gas, or are non-tradeable (hydro, geothermal). In the power sector, which is a major user of petroleum fuels, plans call for a further reduction of oil's share in power generation from about 50 percent in 1992/93 (about 34 million barrels of diesel and fuel oil) to about 7 percent by the end of this decade (14 million barrels per year). Considerable potential exists for substituting conventional energy supplies and especially for meeting the decentralized energy needs of the rural sector by use of economic nonconventional and renewable energy supplies, particularly mini-hydro and mini-geothermal power schemes, biomass-based power projects (including cogeneration), and solar photovoltaic energy systems. The Government has been undertaking several solar pilot projects for demonstration purposes. 1.5 Energy pricing. On the demand side, the Government's policy has been to maintain average petroleum product prices at or above international parity (efficiency pricing), while cross-subsidizing as necessary the price of kerosene in order to ensure its affordability, with an implicit tax on gasoline. Likewise with electricity, while periodic adjustments have generally maintained the average retail price close to the long-run marginal cost of supply in Java (para 2.43), electricity prices have been maintained below economic cost for small residential and industrial users who account for about 40 percent of sales. The Government's pricing policy has also maintained a uniform price structure for electricity and petroleum products in all parts of the country, thereby providing a subsidy to outside Java-Bali and to the rural population. 1.6 Private sector participation. The private sector operates significant amounts of captive power capacity, and is expected to play an increasingly important role in the supply of oil, gas and electricity. In oil and gas, Pertamina forms joint ventures with private Production Sharing Contractors (PSCs) for exploration and production. Private sector participation is also being welcomed in the gas transmission grid Indonesia is developing. In power, 55% (11,600 MW) of the additional capacity planned for Indonesia between 1994/95 and 2003/04 (excluding captive power) is envisaged to come from independent power producers. Private participation in PLN is also envisaged. 1.7 Envirommental protection. The Government has established and utilizes uniform procedures and guidelines for the preparation and approval of environmental impact analyses (AMDAL), for the issuance of environmental clearances, as well as for periodic reporting requirements on environmental management and monitoring during project implementation. Power Sector Overview 1.8 At present the sector comprises: the national integrated utility, the State Electricity Corporation (PT PLN Persero); captive plants installed by private parties for their own use; three Government-sponsored rural electricity cooperatives; and a large number of informal micro-enterprises providing electricity to clusters of customers in rural villages not served by PLN.

10 The Electricity Act (Law No. 15 of 1985) defines the legal framework for the electricity sector. Under this Act, PLN, established by Government Regulation No. 18/1972, has both the right and obligation to supply power in Indonesia. Under Government Regulation No. 23/1994, PLN was converted, effective August 1, 1994, from a Perum (a government company) to a Persero (a limited liability corporation). The provisions of the Electricity Act are amplified in Government Regulation No. 17/1990 for PLN and No. 10/1989 for others. The Electricity Act permits establishment of private power producers, distributors and licensees. Presidential Decree No. 37/1992 specifically authorizes private sector participation under BOO schemes, and permits cooperatives and other legal entities to generate, transmit, and distribute power for public use. The electricity subsector is regulated by MME through DGEED. The organization chart of MME is shown in Annex The power sector has expanded rapidly during the 1980s and 1990s. Electricity sales of PLN grew at an average annual rate of 14.3% between 1981/82 and 1993/94, from 7,845 GWh to 38,962 GWh. During the same period, the number of customers grew nearly five-fold, from 3.2 million to about 15.2 million and the number of villages electrified increased eight-fold, from 3,400 to over 29,000. In order to meet this growth, PLN's installed capacity increased over four-fold from 3,032 MW in 1981/82 to 12,825 MW in 1993/1994. (See Annex 2.2.) 1.11 In spite of the rapid growth, there is considerable unmet demand at economic prices. In 1993/94, PLN was able to serve just over one-third of all households (44 percent in urban areas and 29 percent in rural areas). By contrast, at least nine-tenths of urban households and twothirds of rural households are estimated to be able to purchase electricity at the economic cost of supply. In the industrial sector, PLN accounts for about 87 percent of electricity used by industries, with the remainder provided by captive generation plant.' Sector Vision and Strategy B. Key power sector issues 1.12 Based on the dialogue between the Bank and the Government of Indonesia (GOI), a consensus has emerged regarding the main issues facing the sector and on the fundamental policy changes needed for efficient long-run development of the power sector. The Government formulated its strategy in a 1994 Policy Statement ("Goals and Policies for the Development of the Electricity Power Sub-sector", attached as Annex 1.2), which it is now implementing Underlying this strategy is a vision of a world-class power sector, which is not only able to meet the anticipated rapid growth in demand but which does so at world-class levels of performance. The Java-Bali system in particular is well developed, and measures should be taken now to approach best practices in the shortest time possible. Closing the "performance 'Indonesia: Economic Consequences of Power Sector Inadequacy in the Manufacturing Sector, mimeo, World Bank, Feb

11 -4 - gap" between current standards and international best practice is one of the central challenges which will face the power sector over the next five to ten years. To meet this challenge, the sector is currently moving from monopoly and govermnent domination to a multi-operator, mixed-ownership environment. In this period of transition, the power sector is facing four critical issues: removing transmission and distribution bottlenecks; improving PLN efficiency and power supply reliability and quality; private sector participation; and regulatory reform. Transmission and Distribution Bottlenecks 1.14 As outlined in Chapter 2, Section B, the Java-Bali electricity sub-sector is currently characterized by an imbalance between generating assets on the one hand and transmission and distribution assets on the other. This has arisen as a result of over-optimistic load forecasts, further aggravated by implementation delays in network investments. Correcting this imbalance by reducing transmission and distribution bottlenecks so as to enable a rapid growth in sales is a central objective of PLN. It has developed a well designed least cost investment program for transmission and distribution to use the excess generating capacity. PLN Efficiency, Reliability and Customer Service 1.15 The entry of the private sector notwithstanding, PLN remains by far the dominant player in the power sector. While PLN has been steadily improving its operations, its overall performance has not yet reached best utility practices; moreover, it lags behind some of its regional counterparts in certain regards. Reliability continues to be poor, and PLN has not achieved sales growth targets. The underlying causes are rooted in deficiencies in the transmission and distribution network and in the consumer service functions. The Government indicated in its 1993 policy statement that improving the performance of PLN through decentralization, commercialization and corporatization is a priority aim for the sector, and this strategy has since been pursued by both the Government and PLN. A key organizational issue which is already being addressed is the importance of separating transmission and distribution functions - management, operations and finances - from those relating to generation. The latter has been separated out on Java-Bali by the creation of two generating subsidiaries (see Chapter 3). The former functions need to be upgraded in terms of autonomy and responsibility, and the distribution management function reoriented to be customer driven. PLN performance is analyzed in the next chapter, and PLN restructuring in Chapter 3. Private Sector Participation 1.16 The Government has concluded that private sector participation is a prerequisite for reducing its financial burden as well as for increasing the efficiency of electricity production. As indicated in earlier paragraphs, the majority of new generating capacity planned is to come from the private sector. Major policy, institutional and sector structure changes are needed to ensure that this participation -- entry as well as operations -- is based on competition and

12 -5 - transparent rules, that the resulting power purchase prices are the lowest possible, and that private sector entry into generation is market-driven Some progress has been made. The Government is taking steps to adopt a competitive framework approach for private participation in the power sector. And power purchase prices have fallen. The Government recently conducted a competitive bid for IPPs to build, own and operate a coal-fired power plant in Cilegon, Java. The resulting agreed price per kwh of energy has set a new benchmark which is competitive by international standards and represents a substantial improvement over PPAs negotiated earlier The Government has recently established a Directorate of Private Power under DGEED. Using Bank financing, the Directorate is currently undertaking a study into the regulation of private power development. During negotiations, it was agreed with the Government that it shall, on the basis of this study, prepare draft rules and procedures to govern private sector participation in the power sector andfurnish these to the Bank for review and comments by June 30, 1996, and finalize and enforce such rules and procedures by September 30, Reguhstwy Reform 1.19 With a significant role assigned to the private sector, and the unbundling of PLN (see Chapter 3), the Govermnent has recognized that a new approach to regulation is required. In order to identify and define further specific changes needed, the Ministry of Mines and Energy is currently undertaking a major review -- with the assistance of consultants financed by the Bank -- of the power sector's current regulatory framework, with the aim of formulating and implementing a new regulatory regime. The regulatory reform study and the private power development study (para. 1.18) are closely linked, and thus synchronizing the timing of their implementation is crucial for the sector reform. Therefore, during negotiations it was agreed with the Government that it shall, on the basis of this study, prepare draft regulations to govern the power sector and furnish these to the Bank for review and comments by June 30, 1996, and finalize and enforce such regulations by September 30, While the introduction of a new regulatory regime would be an achievement in itself, international experience indicates that effective implementation can be an even more difficult task. The proposed project would provide training and expert support to DGEED for the implementation of power sector regulation.

13 -6-2. STATE ELECTRICITY CORPORATION (P.T. PLN (PERSERO)) 2.1 The State Electricity Corporation (P.T. PLN (PERSERO)) is managed by a Board of Directors headed by a President Director appointed by the President of the Republic and accountable through a Board of Commissioners to the Share-holder Designates, MME and MOF (through the Director General for Supervision of State Enterprises). PLN's organizational chart is given in Annex 2.1. The organizational structure of PLN, and its ongoing restructuring, are the subject of Chapter 3. Briefly, for the Java-Bali system, operational responsibility rests with the managers of two newly-created generation subsidiaries, the Java-Bali transmission unit and load dispatch center, and four distribution units. PLN's operations outside of Java are divided into eleven geographical regions (Wilayahs). PLN Headquarters houses the Directorates of Planning, Construction, Operations, Administration and Finance. There are also special support units for engineering design, testing and research, training, and management. 2.2 PLN's managing and operating capabilities have increased over the years along with its energy sales. It now connects over one million new consumers annually, a pace un-matched by most utilities, and manages a very large investment program (US$ 3 billion annually). Since the late-eighties, it has turned around its financial position, moving from losses of Rp 133 billion in 1988/89 to profits of Rp 378 billion in 1994, without increases in taniffs above the rate of injlation. PLN's historical performance indicators in Annex 2.2 show significant achievements in several areas. However, as Table 2.1, which compares PLN's performance with selected utilities in the Asian region, suggests, there remains considerable scope for improvement in all three areas of PLN's performance appraised below: operations, investment and finances. Transmission and Distribution Losses A. Operational Performance 2.3 PLN has brought down transmission and distribution losses from around 18-20% prior to and including 1987/88 to 12.2% in This is a major achievement which has been accomplished mainly through a reduction in distribution losses from 15.5 % in 1987/88 to 9.5% in 1992/93. In regional terms, PLN's performance with regards to losses places it ahead of India, Pakistan and Philippines, but still behind China, Malaysia, Thailand and Korea (5.6%). Staff Development and Employee Productivity 2.4 As of December 31, 1994, PLN had 58,500 employees. PLN has no difficulty in recruiting staff educated at levels up to technical high school; however, less than 5 % of the staff have university degrees. PLN's Center for Education and Training (PUSDIKLAT) plays an important role in upgrading the skills of its technical and administrative staff, and manages ten

14 -7 - Table 2.1: COMPARATIVE PERFORMANCE OF ELECTRICITY UTILIrIES IN ASIA Rural Gross T&D Load Reserve Customers Sales Operating Electri- Generat- Losses Factor Margin per (MWh) per Ratio fication ion Employee Employee (%) (Twh) (M) (%) (M) (%) Indonesia China India Korea , Malaysia Pakistan Philippines Thailand Notes: Rural electrification is percentage of rural households electrified. Company and year: Indonesia: PLN, for all Indonesia, except for reserve margin which is for Java-Bali only; 1994, except for rural electrification which is 1992 China: Totals and averages for six major regional utilities; 1989 and 1990 India: Totals and averages for major state utilities; 1989 and 1990 Korea: KEPCO; 1990, except for customers and sales per employee, 1987 Malaysia: TNB, SEB and SESCO; 1990 Pakistan: WAPDA, except gross generation which includes KESCO; 1991 Philippines: NPC for generation and operating ratio, all companies combined for system losses; 1990 Thailand: EGAT for generation and operating ratio; EGAT, MEA and PEA for losses and customer and sales per employee; 1991 Sources: Asia Enertv Profile: Enerev Sector Performance, ATD, World Bank; Ishiguro, M. and Akiyama, T. (1995) 'Energy Demand in Five Major Asian Developing Countries: Structures and Prospects', World Bank Discussion Paper No. 277, Washington, D.C. Electric Utilities Data Book for the Asian and Pacific Reeion. Fourth Edition, ADB, Manila, January training centers with a staff of over 500, including over 200 trained instructors. In , about 10,000 staff received training, including about 110 staff abroad. The Bank has supported PLN's training activities and human resource development efforts, including the establishment of several training centers, and training in the areas of diesel power plant efficiency improvements, distribution management, corporate and financial planning, and general accounting.

15 Employee productivity, as measured by sales per employee and customers per employee, has been increasing steadily over time, and in regional terms Indonesia ranks second in these indicators behind Korea. Bulk Power Operations 2.6 The operational performance of most of PLN's major plants are good. In terms of both the operational availability factor and the forced outage rate, PLN's generating plants compare well with similar plants in North America. Customer Service and Power Supply Quality 2.7 A recent survey of Indonesia's industrial establishments on Java revealed that PLN's reliability of power supply service leaves room for improvement.' The survey found that the average PLN industrial consumer must endure frequent outages (about 15 to 50 outages per customer per year, depending on location) resulting in cumulative outage durations from 40 to 90 hours per customer per year. By contrast, reliability levels in power systems where consumers are generally satisfied with service reliability are typically characterized by an outage frequency of under five interruptions per consumer per year and cumulative outage duration not exceeding 30 minutes to 2 hours per consumer per year. Only 62% of survey respondents were satisfied with the reliability of PLN supply. 2.8 Additional burdens are imposed by power quality problems - distortions in voltage, frequency and wave form - as well as the long and uncertain waiting times for new consumer connections. The above-mentioned study found that randomly selected data on connection records for industrial establishments over the period revealed average connection times ranging from 167 days to over three years. 2.9 Inadequacies in power supply -- shortages, problems with reliability and quality of supply and long waiting times for connection -- are one of the driving forces behind the reliance on captive power in Indonesia. Approximately 6000 MW of captive generation has been acquired by Indonesian companies. On average a firm met 13% of its electricity requirements in 1992 by self-generation, with an average capacity factor utilization of only 7 %. This indicates that captive power is being used mainly as a backup to compensate for deficiencies in PLN supply reliability and quality The above-mentioned survey conservatively estimated the total cost of low power supply reliability and quality to be Rp 340 billion -- $170 million p.a. or 0.8% of manufacturing GDP PLN will need to focus more on the issues of customer service and power supply reliability and quality if it is to improve its sales and level of customer satisfaction. One of the 1. Soe Indonesia: Economic Consequences of Power Sector inadequacy in the Manufacturing Sector, mimeo, World Bank, Feb

16 - 9 - key objectives of PLN's decentralization and corporatization is precisely to make it more consumer-oriented. Indicators of the number and duration of outages will be monitored over time (see para 2.56) and significant improvements expected over the coming years. Generation B. Assets and Investment 2.12 The generating plant capacity in Indonesia which is currently owned and operated by PLN totaled 14,171 MW at the end of March 1994, of which 10,734 MW is installed in Java. The generating capacity comprises a mix of unit types, sizes and fuels. The largest units currently operating are the 400 MW generators at Suralaya power station in West Java and Paiton in East Java PLN has traditionally been building very large reserve margins, compared to peak load, into its generating capacity. Its 1994/95 Java-Bali reserve margin, 2 at 51% is well above the internationally accepted best-practice of 25% or less Annex 2.2 shows the evolution of the Java-Bali reserve margin from 1985/86 to 1994/95, and Annex 2.3 shows the projection to 2003/04. The projection is based on the latest generation expansion plan for the sector (PLN plus private producers selling to PLN), sales forecast (12.5% annual average growth) and load factor forecast (constant at 70%). The time-series shows that the reserve margin after falling in the late-eighties has been rising -- largely as a result of overoptimistic load forecasts, aggravated by implementation delays in network investments -- in the nineties to a high of 65% of 1993/94. However, it is now falling (51% realized for 1994/95, 40% likely for 1995/96), and is projected to continue to fall towards 25% There is considerable uncertainty over the projected reserve margin. PLN is adding very little of its own capacity in Java-Bali, but instead is relying on the private sector to produce additional capacity (see para 2.23). Delays in negotiating the IPP projects have already occurred, and further delays would quickly eat into existing excess capacity. On the demand side, the sales forecast of 12.5% average annual growth up to 2003 is reasonable, PLN assumes higher growth in the earlier years (17% up to 1998/99). If this is not achieved, excess capacity will fall more slowly Although the reserve margin is now falling, the over-expansion of the early nineties remains an expensive burden for PLN. During negotiations an understanding was reached with GOI and PLN that under the conditions currently facing the power sector in Java-Bali, 25% would be the appropriate planning reserve margin for the power system. It was agreed that it was a matter of high priority and urgency to bring down the realized reserve margin over time 2. This figure takes into account PLN capacity plus the capacity of any producers whose power is purchased by PLN; it excludes the capacity of captive plants.

17 and aim to achieve a reserve margin of 30% by December 31, It was further understood that the target of 30% was an intermediate one and that in the later years the reserve margin would be further reduced (para. 2.56). Transmission and Distribution 2.17 The islands of lava and Bali are served by an interconnected power system, while on the outer islands isolated systems have developed around major load centers, and electricity is delivered through minigrids. The backbone of the Java-Bali power system is the about 1,750 km long 500 kv extra high voltage (EHV) transmission network, extending from Suralaya at the western extremity of Java to Paiton in East Java. The installed generating capacity connected to the 500 kv system is about 4650 MW, of which about 1850 MW is located in East Java and the rest in West Java. The network in West Java is double circuit construction while the backbone lines to Central Java and East Java are single circuits. The 500 kv system transfers power from the major generating stations to the load centers. The 150 kv and 70 kv high voltage (HV) systems transfer the bulk of the generated power from the 500 kv system, and from generators connected at HV to the distribution systems. The 150 kv network comprises about 8,600 km overhead line and underground cable throughout Java, Bali and Madura, including a submarine cable link to Bali. The 70 kv network in Java, about 4,000 km in length, is systematically being upgraded to 150 kv to increase its load carrying capacity. As of June 1994, the installed transmission substation capacity in the Java-Bali system (500/150/70/20kV) totaled about 22,600 MVA. The intert:acing distribution network, operating at 20kV and below, comprises about 156,600 km medium voltage (MV) and low voltage (LV) circuits and serves about 10.2 million consumers The power transfer capability of the present 500 kv system is constrained because of its configuration and the composition, size and geographical location of the generating units connected to it. Dynamic stability and security of the whole Java-Bali system depends on the single circuit link between West and East Java. System studies indicate that disturbance either on the Krian-Ungaran or Ungaran-Bandung Selatan lines will likely lead to system collapse. Therefore, for stability reasons power transfer from East to West is restricted to 800 MW during peak load conditions, jeopardizing the economic operation of the system. Within the next five years about 6000 MW additional generating capacity will be connected to the system of which about 3600 MW is in East and Central Java, including the extension of Paiton coal fired power plant (2 x 400 MW) with 3x600 MW units. A flexible 500 kv network is planned to be in place by year 2000 (Chapter 4). This will ensure economic operation of the whole system, optimum use ol the installed generating capacity and system security. The Paiton-Klaten 500 kv line, to he linanced under the proposed project, is part of this transmission development plan The IIV networks are overloaded and also need to be strengthened. There are a number of HV transmission and distribution bottlenecks, especially in the supply of power to industrial estates near the major cities of Jakarta, Bandung, and Surabaya, and to commercial areas in the heart of cities like Jakarta. To relieve these bottlenecks, four actions are required, all of which are in process, and all of which the proposed project would support. First, investment in

18 transmission and distribution needs to be stepped up, which PLN is doing (see para 2.26). Second, the management and planning capabilities and processes in transmission and distribution need to be enhanced. This is being done by a process of functional unbundling, which again the proposed project would support (as described in Chapters 3 and 4) Third, PLN needs a better information base for its transmission planning to reduce problems of geographical mismatch, which can be severe in a rapidly growing economy such as Indonesia's, where demand growth is variable and difficult to predict. PLN's transmission system planning facilities have already been upgraded under the ongoing Power Transmission Project (Loan 3349-IND) with state of art analytical tools and optimization programs (PSS/E/TPLAN). The proposed project would support use of a Geographical Information System (GIS) as a transmission planning tool to optimize the location of additional transmission facilities Lastly, transmission projects have been particularly susceptible to implementation delays due largely to problems with land acquisition and right-of ways. These delays will become more costly as PLN has entered into take-or-pay contracts which bind it to pay high capacity charges even if it lacks the transmission facilities to evacuate it. PLN is currently reviewing its implementation cycle for transmission project, and with the Bank's support has prepared a new compensation and resettlement policy framework (para 4.41). Both of these actions should mitigate the problem of delay. Development Program 2.22 The potential for future growth in electricity consumption remains high in Indonesia. Residential energy sales will increase as the household electrification ratio and incomes rise. The growth in industrial consumption is underpinned by the industrial sector GDP growth rate projected to be about 10 to 11 % per annum during this decade. PLN's current forecasts imply average sales growth of 13.6% per year over The latest generation expansion program for the power sector -- given in Annex 2.3, and including PLN and IPP capacity -- envisages adding to the 1994/95 base of 14,170 MW of generating capacity another 8,810 MW over Repelita VI and 12,220 over Repelita VII. Capacity in Java-Bali is envisaged to grow from 10,700 MW in 1994/95 by 7,210 MW in Repelita VI and 8,160 MW in Repelita VII. Capacity outside Java-Bali is envisaged to grow from 3,440 MW in 1994/95 by another 1,600 MW in Repelita VI and 4,060 MW over Repelita VII. Private power is now expected to be dispatched from 1998/99 onwards. It is concentrated on Java-Bali, where some 80% of capacity addition in Repelita VII is expected to come from the private sector As shown in Annex 2.4, PLN's investment program is costed (in 1994 prices) at US $19.8 billion in Repelita VI and $18.1 billion in Repelita VII. 49% of this is for generation; 21 % for transmission; and 30% for distribution. 40% of investment expenditure is allocated for outside Java-Bali.

19 Balance Between Generation, Transmission and Distribution 2.25 The coexistence of power supply inadequacies and power shortages with excess generating capacity implies an imbalance between generating assets on the one hand and transmission and distribution assets on the other. Correcting this imbalance is a central objective of PLN's current investment program, which is well-designed to maximize transmission and distribution investment so as to fully utilize existing generating capacity This can be seen in monetary terms by comparing the historic to the projected trend in net fixed asset additions. Under the investment period covered by the First Power Transmission and Distribution Project (1986/87 to 1993/94), net generating asset additions were valued at $716 million p.a. (in 1993/94 prices) and transmission and distribution (T&D) at $390 million p.a, giving a ratio of generation to T&D new assets of For the investment period covered by the proposed project (1996/97 to 1999/00), net generating asset additions (PLN and IPPs) are valued at $1,300 million p. a (in 1994 prices) and transmission and distribution (T&D) at $1,400 million p.a. Thus, comparing the two time periods, T&D asset additions increase by a factor of three, and the ratio of generation to T&D new asset additions falls from 1.83 to The increased investment focus on transmission is also evident from physical indicators. For example, the length of transmission lines in Indonesia increased by 26% over Repelita V, but is projected to increase by 80% over Repelita VI and by 30% over Repelita VII. Transformer capacity is also being rapidly increased. Average peak loading of transformers in 1994 was 108%; in high load density areas transmission lines and transformers were loaded up to 130% of their rated capacity during peak hours. PLN's investment plan will reduce average peak loading of transformers to 96% by the end of Repelita VI and to 85% at the end of Repelita VII, comparable with best practice. C. Financial Performance 2.28 PLN's financial statements for 1985/86 to 1994 are shown in the financial statements in Annex 2.5. (With the change to a Persero on August 1, 1994, PLN's fiscal year changed to coincide with the calendar year.) Its financial performance is summarized by the financial indicators shown in Table 2.2. Profitability 2.29 During negotiations, it was agreed that PLN shall, and shall cause PLN's Subsidiaries to take all measures as shall be required for them to realize an annual rate of return of not less than eight percent of the average current value of PLN's and PLN's Subsidiaries' consolidated net fixed assets in operation. This covenant is required, at least until a new regulatory regime is in place, to safeguard PLN's profitability and ensure sufficient funds are generated by PLN to meet its investment requirements. The supplementation of this agreement by covenanted

20 perfornance targets (para. 2.56) should prevent the former from leading to an abuse of the costplus approach to tariff setting PLN's overall profitability as reflected in its rate of return on net revalued average operating assets (ROR) was negative or only marginally positive until 1989/90 since when it has averaged just above 5%. PLN's turn-around in financial performance since the late eighties has been achieved while holding the price of electricity roughly constant in real terms. Adjusting for inflation (and using the 1995 exchange rate), the average price of electricity fell from 7.6 USc per kwh in 1987/88 to 7.3 USc in Major tariff increases since % in April 1989, 20% in August 1991, 13% in February 1993, 8% in November have more or less kept pace with local inflation Key factors behind PLN's improved financial performance have been the improvements in operational performance highlighted earlier, such as reduced losses and improved staff productivity. An additional important factor has been the cost and mix of fuels. While the large increases in the domestic cost of diesel oil (100% between 1989/90 and 1993/94) had a significant negative impact on profits in the early nineties (especially outside Java), the corporation's recent increased reliance on more economic gas plants has helped counter this and contain the fuel bill. Financial Forecasts 2.32 Part (b) of Table 2.2 gives forecast financial indicators for the period , based on the forecast financial statements given in Annex figures are based on the revised budget for the current year. Projected figures are based on PLN's latest sales and investment forecasts and assume that tariffs increase as required to maintain an 8.0% ROR from 1996 onwards. (A detailed listing of assumptions is given in Annex 2.6(b).) While the forecasts provide an indication of likely trends, it should be noted that they are subject to a considerable margin of error, and that this is increasing with time Most factors point to a favorable financial outlook for PLN: losses are contained and slightly reduced; the reserve margin falls over the forecast period; and fuel costs per kwh of electricity produced by PLN remain constant in nominal terms at around 50 Rp (due to a continued move away from oil to gas and coal). However, the key new factor affecting PLN's financial performance is the price and volume of power purchased from private generators. Privately-produced power purchases rise from their current level of 0.5% of total power produced for PLN sales to 12.4% in 1998 to 29.5% in 1999 to 43.9% in The expensive nature of the initial contracts will put upward pressure on the price of electricity, which is forecast to rise in real terms from 7.3 USc per kwh in 1994 to 8.8 USc in While the current price is competitive by regional standards, the forecast price for 2003 would make Indonesian power relatively expensive.

21 PLN's fnancial performance has improved this year and, the latest estimate, based on unaudited, first-half figures -- and therefore subject to a wide margin of error -- shows PLN is forecast to achieve a ROR of 7.1 % for 1995, its highest to date for overall operations. Audited figures will only become available in March 1996 at the earliest The forecast in Table 2.2 shows in most years tariff increases roughly in line with inflation (assumed at 6%) are required to obtain the 8% ROR. The Government, consistent with its record of maintaining the real value of the electricity tariff, has committed to increasing tariffs as required to achieve a 8 % ROR. It is projected that for next year, the increase required would be roughly equal to the rate of inflation. Large tariff increases -- 14% and 19% respectively -- are, however, forecast to be required in 1998 and 1999, the two years in which the first private power projects come on stream. The actual magnitude of these increases will depend on the realized entry of private power (see para. 2.15) and sales volume. However, serious attention does need to be given now as to how best to smooth the transition towards higher average levels of retail tariffs by the entry of private power in This is already a central topic of the Government-Bank dialogue. Financing Plan and Capital Structure 2.36 As mentioned (para. 2.24), PLN is implementing a large investment program of US$38 billion over Repelita VI and VII. Table 2.3 (based on the financial statements in Annex 2.5) forecasts how this program will be financed in Repelita VI, compared with the two earlier Repelitas. There are four sources: government and private equity, PLN's internal funds, and borrowings The Government's intention is to reserve its equity contribution to the extent required to fmance rural electrification and other projects with social objectives. The precise mode and extent of government financing is still to be determined, but it is clear that the proportion of investment financed by govermnent contribution will fall dramatically: current forecasts indicate a fall from 48% of investment in Repelita V to 19% in Repelita VI (approximately Rp 9.5 trillion in absolute terms). In addition, about three trillion Rp in private equity contributions is projected for Repelita VI, primarily in generation with substantial further increases in private equity projected during Repelita VII. Part of this is the capitalization of privatization proceeds, part the injection of new equity from private sources in joint ventures envisaged with PLN. As a consequence of these evolving and positive shifts in the financing structure, the fiscal impact on the Government will be greatly reduced in real terms, notwithstanding the real increase in overall sector investment requirements over Repelitas VI and VII PLN's forecast self-financing ratios average 25% for Repelita VI and are forecast to rise further in Repelita VII, an improvement on the averages of 14% and 18% achieved during Repelitas IV and V respectively. This increased self-fimancing does not, however, compensate entirely for the reduced government funding, making it inevitable that PLN will have to take on more debt. In turn this leads to the debt-equity ratio rising over the forecast period. Debt as a percentage of debt plus equity (excluding revaluation surplus) is projected to increase over the

22 Table 2.2: PLN FINANCIAL INDICATORS (a) Historical, 1985/ /89 89/90 90/91 91/ Operating income (b Rp) R*ifr b as(8 p)st;g J :rr ~< 0?3S i.t(f:::g:if^ ;j$ ;02lwsffii,840 3,84554,04t77!:747 8,358 8,,336 9,791 10,894 o It Rate of return on net revalued assets(%) * 1 Ratofretumon lty(%) P4.M"0 Ave. revenue(rpikwh) AVe. r~ni :IM(RplkW1 ; 05500j:f;04$^ 4.2 :-0:.; ::;:24.2 O.8 :1ft401S;l: r,,.yx W' :wif:'tr' "'4' Ave. revenue (USc/kWh, constant 1995 prices) Qpm.1ingr6tio(;: 1O,3 9D ' Current ratio Quickt i, A i :1 - Debtl(debt+equity) (%) i R/e~dty{%) ' i... 56A ' : 2 5.9: 52.1 M*Y0 Annual self-financing ratio(%) ysarveorsgeetspfo4la IngrtI~%)E, ,3i I t7 Debt service coverage Ave. Osti ri. ^9i' if 6;110.0 '1 Fuel cost (Rp.) per kwh of PLN-prod. power Averge osdit of private PPAj*& A i :fw (b) Forecast, Operating income (b Rp) 1,704 2,547 3,257 4,119 5,110 5,908 6,653 7,549 8,822 Rtatbae'(b R p!)."' <.'.23 i9 1.8f , I 7,548i8% Rate of return on net revalued assets(%) Rate *f retuoqity, %).o.n. 8Z. 4.1: ; Ave. revenue (Rp/kWh) Ave.revenue in cm'a68"(ralcwft. %) IC 1, Ave. revenue (USc/kWh, constant 1995 prices Operating rai (%) 7 7& & Current ratio Culckr f i -I4 0, Debt/(debt+equity) (%) Debt/.q0ut( : ;4 4w i Annual self-financing ratio (%) year avesenaci j i$ f(('j,(i,}ttt' g '20.8tf 24 > 50 ~i%$0i '2&#f ~2< Debt service coverage Ave. cost off"' powr i<,',10t'',.o'4 ;,'Jl9Why'(3397, ' ,4 207.t@0242i. ~2 Fuel cost (Rp.) per kwh of PLN-prod. power Average cot fprivate P (p'v ' Vib, s : 1488A 105A 202. Notes: See 'Notes and Assumptions for the Financial Indicators', Annex 2.6(a) PM pcwer\xis\pin1095\plnfinstxls

23 Table 2.3: COMPARlSON OF PLN FINANCING PLANS, REPELITA IV TO REPELITA VII /a REPELITA IV REPEL1TA V REPELITA VI Year /b Rp b. (%) Rp b. (%) Rp b. (%) Capital expenditure 8, , , Financed by: Net Internul sources c 1, , , Extermal sources 6, , , Equity /d 3, , , Borrowing 3, , , /a All Rp. values in nominal terms. /b Fiscal years for Repelitas IV and V; calendar years thereafter. /c Capital expenditures minus external sources (excluding changes in cash balance). /d Includes private equity for Repelita VI. next nine years from its current conservative level of 25-30% to 50%. The debt-service coverage remains satisfactory at 1.5 or above throughout the forecast period PLN has traditionally been reliant on foreign borrowing, and this is anticipated to continue given the limitations of the domestic capital market. However, this leaves the corporation exposed to foreign exchange risk, which will rise with the debt-equity ratio. recognizing this, PLN has been increasing its local borrowing in recent years, and continues to do so, despite the currently high domestic interest rates. PLN made its first domestic bond offering in It made its third and fourth offerings this year and plans to offer Rp 1 billion annually from Recognizing the small size of Indonesia's bond market, PLN is currently (and successfully) working to attract interest from Asian investors in its domestic bonds. Any increase in private equity will also help PLN reduce its debt dependence and the Govermnent its equity contribution Three existing covenants under previous projects relating to PLN's fnancial forecasts and financing plan were agreed to under this project: (i) (ii) PLN and PLN's Subsidiaries will not incur any additional debt unless a reasonable forecast of their consolidated revenues after expenditures for each year during the term of the debt to be incurred shall be at least 1.5 times their projected consolidated debt service requirements. PLN will prepare and review with the Bank and the Borrower its investment plans and associated multi-year financial forecasts and financing plans; and,

24 (iii) the Government shall ensure that PLN and PLN's Subsidiaries have access to sufficient funds to finance capital expenditures for their consolidated investment program pursuant to the reviews of the program also agreed to (see para 2.58). Liquidity 2.41 PLN was facing severe liquidity problems from late 1994 until recently. Its current ratio fell from 1.3 on July 31, 1994 to 0.76 on December 31, The inmediate cause for this was difficulties with PLNs third bond issue. First scheduled for end-1994, but delayed until early 1995, it raised only Rp 318 billion out of Rp 1 trillion offered, because the rate offered on the bonds -- set by the Ministry of Finance -- was below market levels. In the face of a number of large pending liabilities, PLN had to resort to short-term borrowing and defer some of its liabilities to the Government. However, PLN's fourth bond issue of September 1995 was more successful (oversubscribed by 40%), and the forecasts predict a current ratio of one or above for the projection period. Assurances would be obtained to prevent that liquidity problems will reappear. Under the proposed project, it was agreed to include the current ratio as a performance indicator, with a minimum target value of one (see para. 2.56). Tariffs 2.42 PLN's most recent tariff schedules, which became effective November 1994, comprise 24 consumer categories. For medium and large industrial consumers, large commercial consumers, large social institutions, and for large office buildings, time-of-day pricing is in effect. The November 1994 and earlier tariff schedules are shown in Annex The Bank has reviewed PLN's estimates of long run marginal costs (LRMC) for Java- Bali that accounts for about 80 percent of PLN sales and for several of the regional grids outside Java. PLN's average revenue would be about Rp 190/kWh in Java, if the tariff to each consumer category was set at the estimated LRMC of supply in Java. PLN's estimated overall average revenue of Rp 162/kWh for Java-Bali (based on actual sales during the period January through March 1995 and not including connection fees paid by consumers) is thus close to average LRMC of supply in Java. However, cross-subsidies exist between different consumer groups. To compensate for subsidies to small consumers, electricity prices to large consumers in Java (residential, industrial, and especially commercial) are higher than the economic cost of supply. These cross-subsidies are currently under consideration as part of the regulatory and private power reviews the Government is engaged in (see paras and 1.19). A gradual approach to changing the tariff structure is likely. However, implementation of key elements of the sector reform agenda -- commercialization of PLN operations, published bulk power purchase and supply tariffs, increased participation of the private sector in electricity supply and distribution, and instituting a uniform regulatory framework for PLN and the private sector -- will ultimately bring about conditions under which the need for substantially reducing crosssubsidies will become unavoidable; conditions under which the Government will also find it politically easier to allow such changes.

25 The Government approved, together with the retail tariff increase in November 1994, a Periodic Tariff Adjustment Mechanism. This formula-based mechanism adjusts the average tariff every quarter for deviations in price changes (fuel price changes, power purchase price changes, local inflation and depreciation against the US dollar) from those forecast by PLN in its last annual budget following an increase in the basic tariff. An average of these price changes is obtained using the ratio of the annual budgeted expenditure items (fuel, power purchases, local and foreign operational costs) to annual budgeted revenues as weights. The mechanism operates with a 3-month lag (beginning July 1, 1995 for changes in January-March 1995) and will help protect PLN in case there are delays in implementing a basic tariff increase. However, the protection is only partial (on account of a number of factors including the weighting system and the lag). Simulations show that adjustment of the tariff via the mechanism alone would not allow PLN to reach its target ROR over the forecast period, and moreover, would lead to unacceptably low debt-service coverage ratios Under the Second Rural Electrification Project (Loan No IND), it was agreed that PLN shall: (a) by October 31 every year commencing in 1996 review its long run marginal costs with a view to formulating its tariff structure; and (b) discuss the results of such review with the Borrower and the Bank; and (c) thereafter, take appropriate steps to revise the tariff structure taking into account the views, if any, thereon of the Borrower and the Bank. This covenant was also agreed to under this project. Taxation 2.46 With the change in PLN's corporate status from Perum to Persero (see para. 3.2), PLN is now a corporation able to pay dividends, though none have been distributed to date, and is subject to corporate tax, though payments here are not expected till 2001 due to the use of double-declining depreciation for tax purposes. Under Perum status PLN was obliged to set-aside 55 percent of its annual net profit after corporate income tax for "Dana Pembangunan Semesta" (DPS), or the Overall Development Fund, payable in five annual installments commencing two years after the year in which the DPS obligation was incurred. PLN's conversion to a Persero will not affect the remaining DPS installments due the State Treasury. Billing and Collections 2.47 PLN's bills for the Java-Bali region are computerized and prepared monthly at its Jakarta headquarters; for the Outer Islands, bills are prepared at the branch level and printed by the regional Finance Divisions. Overall collection performance is generally satisfactory. The receivables position of general consumer accounts has been improved from two months in the mid-eighties to just over one month (36 days as of June 1995). Receivables from government users (including the armed forces and local governments), which account for just over 10 percent of PLN's total sales, have been reduced to 48 days (as of June 1995).

26 Accounting, Budgeting and Audit 2.48 PLN's accounting system, recently upgraded through technical assistance provided under the Power Sector Efficiency Project (Loan 3097-IND), follows generally accepted accounting principles and a standardized set of accounting policies and system procedures. PLN is expected to finalize computerization of financial reporting in all PLN regions by end PLN's internal procedures for preparing budgets and monitoring actual expenditures still needs to be strengthened through better coordination among and participation by the various functional directorates and regional offices PLN has an effective internal audit group which, in addition to keeping general and project accounting matters under review, reports to the President Director for various special investigations. PLN's accounts are required by its charter to be audited by Government auditors. The audits are carried out following generally accepted accounting practices and standards. In the audit reports for 1989/90 through 1993/94 there were no qualifications. As a result of joint efforts by PLN and its auditors, the time required for completing PLN's audits has been reduced significantly. In recent years, the accounts have generally been finalized within three months after the closing of the fiscal year and the audited accounts have been available within four months of the close of the fiscal year. The existing audit covenant which requires PLN to submit to the Bank its auditedfinancial statements and the report of such audits no later than six months after the end of each fiscal year was also agreed to under the proposed project. PLN would also continue to furnish to the Bank a copy of its unaudited annual accounts whenever they are sent to the auditors. Asset Revaluation 2.50 PLN's assets have been revalued periodically. The last detailed revaluation was done in 1979 as required of all public corporations under instructions of the Ministry of Finance. The revaluation was recorded in the books and was accepted by the Bank. Fixed assets acquired after March 31, 1979 are appraised at cost. Following the currency devaluation in September 1986, the Government issued Regulation No. 45/1986 dated October 2, 1986, providing for the revaluation of assets of businesses and public corporations acquired through September 12, The Regulation specifies the annual revaluation factors for the years 1970 to 1986 for adjusting the asset values as of January 1, For purposes of monitoring the proposed revenue covenant (para. 2.29) PLN has prepared a revaluation of its assets for 1979/ /87 based on the Regulation. A covenant, under the Sumatera and Kalimantan Project (Loan No IND) that requires PLN to revalue annually its fixed assets (including work in progress and consumers' contributions) and accumulated depreciation for the purposes of the rate of return calculations under the revenue covenant was also agreed to under the proposed project. The method used for annual revaluation since 1986/87 has been reviewed, and an agreed method for revaluation is set out in Annex 2.6(b).

27 D. Performance Monitoring in PLN 2.51 While the preceding appraisal of PLN's performance shows that PLN has made significant progress on a number of fronts, it also indicates there is still some way to go before the company can compare itself in all respects with the best in the region, let alone world-wide. The Java-Bali system is now well-developed, and there is no reason why its performance standards should not now approach best practice, at least regionally. Closing this performance gap is one of the central challenges facing PLN over the next five to ten years, and is a key development objective of this project PLN and the Goverrnment have been paying greater attention to performance monitoring in recent years. PLN's management now has a contract with the government to which its salaries are tied. The contract is based on three sets of indicators: financial, operational and administrative. Further, PLN now annually establishes a comprehensive set of operating targets, including targets for power supply interruptions, connection time, customer service and employee productivity Internally, PLN Headquarters is also introducing performance contracts for all the company's units. These reflect the Government's contract with PLN. For example, the unit responsible for distribution in Jakarta has a contract with PLN HQ based on three sets of indicators relating to operational efficiency, quality of service and administration PLN's performance monitoring rests on MISIP (the Management Information System for Immediate Improvement). While MISIP provides a fairly comprehensive data base, the accuracy of some of its information has been questioned, particularly in relation to power supply reliability and connection time. The Bank is currently financing technical assistance to PLN to review and improve MISIP. Performance Targets 2.55 Increased commercial pressures and accountability, which are being enhanced through the on-going program of corporatization and decentralization, is expected to make the company more consumer-oriented (leading to better service) and more cost-conscious (leading to a reduction in excess capacity and losses). To monitor actual progress and provide benchmarks for performance measurement, the set of indicators included in Table 2.4 will be closely tracked over time (see Chapter 4) Specifically, to ensure PLN management attention to improving perfornance, key performance targets were agreed on during negotiations. These include the financial targets given in the previous sub-section (rate of return, debt service ratio and current ratio), the reserve margin indicator (para. 2.16), and operational indicators covering losses and power supply reliability (see Table 2.4). During negotiations, performance targets were agreed with PLNfor the first two years of the project, and these will be updated annually (always two years

28 Table 2.4: PLN GLOBAL PERFORMANCE TARGETS /a Actual Target Target Target International best practice Customer Service No. of outages (customer/year) (*) 5 Duration (hours/customer/year) () Operational T&D Losses(%) (M) 6 Investment Reserve margin (%) Financial Rate of return(%) Debt-service ratio Current ratio () 1 /a In addition to these global targets, specific performance targets are proposed for the distribution unit (JEDU) and transmission unit (JABETU), as discussed in paras. 3.7 and 3.10, respectively. Notes: 1. Technical (operational and investment) indicators are for Java-Bali only; financial are for all-indonesia. 2. All years are calendar years, except for excess capacity and T&D losses which use the fiscal year (eg is the fiscal year). 3. Rate of return is on net average revalued assets. (*) Targets will be set on the basis of annual review. Sources: 1. T&D losses and excess capacity targets are based (with some modifications) on PLN's latest investment plan. 2. Power outage 1994 and 1995 figures are from PLN 1995 corporate budget; 1995 is a target; targets for later years are still to be proposed. 3. The rate of return and debt-service ratios are based on existing covenants.

29 ahead, starting no later than November 15, 1996). PLN will take all measures to meet the agreed performance targets starting 1996, and will report to the Bank on its progress in this regard no later than four months after the close of fiscal year. It was also agreed that in the event of targets not being reached, remedial action plans subject to review with the Bank, will be drawn up. While it was agreed not to include intermediate targets for the reserve mnargin indicator, it was also understood that the Bank would review annually the appropriateness of the planning reserve margin currently in use in reaching the agreed reserve margin target of 30% by December 31, 1999, as well as the realized reserve margin. Sectoral Review 2.57 As noted throughout the preceding analysis, PLN's performance cannot be viewed in isolation from the rest of the sector. The entry of the private sector into PLN's grid could give rise to a number of problems, including exacerbation of excess capacity, imbalance between generation, transmission and distribution, and upward pressure on tariffs due to expensive PPAs Under the Sumatera and Kalimantan Power Project, agreement was reached with GOI that it shall: by December 31 each year commencing in 1995, (i) review with the Bank its power sector development program, the least-cost planning analysis used to formulate 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 sector participation; and (ii) review with the Bank PLN's development and investment programs with respect to their consistency with the power sector development program, the balance among generation, transmission and distribution investments, and the balanced development of regions. During negotiations for the proposed project, it was agreed to amend this covenant to emphasize the importance of the power generating reserve margin (both planning and realized) in the least cost planning process.

30 PLN RESTRUCTURING Restructuring Strategy 3.1 GOI's strategy for restructuring PLN has two inter-related aspects: decentralization and unbundling; and corporatization and private participation. The strategy calls for unbundling of PLN organization and management processes along functional lines in Java-Bali (generation, transmission and distribution), and decentralization along geographical lines elsewhere. This would entail creation of a mix (changing over time) of profit centers, investment units and subsidiaries, possibly with private participation, either partially or fully. The various units would be given increased autonomy over time in preparation for their creation as subsidiaries. Unit managers would be held accountable through performance contracts. 3.2 As an initial step in the direction of corporatization, the Government converted PLN's corporate status from a Perum (a state-owned agency with a social purpose) to a Persero, or government corporation, effective August 1, The end-product of PLN restructuring would be a group of limited liability companies, with private participation in their ownership. These would compete in a market-oriented environment and be subject to oversight by the regulatory regime that is currently under preparation (para. 1.19). The Government would only exercise strategic control over PLN on an "arm's length" basis through performance contracts that specify clear targets. Under such an arrangement, GOI's financial contributions to PLN would be reduced over time to provide only cost recovery for (i) socially mandated activities (such as for rural electrification) and (ii) operations for which Government-mandated transfer prices or retail tariffs are set too low. PLN's Restructuring Plan 3.3 PLN has prepared a first stage restructuring plan for the Java-Bali system endorsed in principle by the Ministry of Finance. Key features of the plan include the creation of three generation subsidiaries, as well as the conversion of support service units -- including the training center (Pusdiklat/Udlikat), engineering services center (PPE), and management services center (PMP) -- into subsidiaries. Other units -- the four Java distribution units, Java-Bali transmission and dispatch, construction, and the Testing and Research Center (LMK)-- would be retained within the PLN holding company, but would be given greater autonomy and be governed by performance contracts. 3.4 In accordance with this action plan, two generation subsidiaries were legally established in October Each subsidiary has similar capacity (about 4,800 MW) and a balanced mix of units. Private participation in these subsidiaries -- through an Initial Public Offering and through joint ventures -- is planned from 1997 onwards. The creation of the service center subsidiaries is also scheduled for early A third generation subsidiary will be specialized

31 in geothermal and will be owned jointly by Pertamina and PLN. Further, under Bank financing, a consultant is analyzing the most appropriate sequencing of divestiture. Preliminary recommendations of the consultant indicate that distribution should come first in terms of divestiture. Distribution Restructuring on Java-Bali 3.5 PLN recognizes the need to improve its customer services. This requires a clear separation of distribution from generation and transmission. In contrast to the latter two, distribution is fundamentally a customer-oriented business, the primary goals of which should be to ensure timely and hassle-free connections for new customers, maintain high power reliability and quality standards, and handle customer billing enquiries in an efficient and responsive manner. Increased independence for PLN's four distribution units in Java-Bali (East, West and Central Java and Jakarta) has been an aim of PLN since 1992 when it drew up a plan to provide "semi-autonomous" status to these units by the end of The distribution units now function as cost centers. They are allocated funds at the start of each year to cover their operational expenses, and, subject to various centrally-imposed constraints, are expected in return to meet a certain level of performance as set out in performance contracts with Headquarters. 3.6 Of the four distribution units in Java, the Jakarta Electricity Distribution Unit (JEDU) is the largest and best-run, with 12% of PLN's customers and 28% of sales. Japan-Grantfinanced consultants have appraised the operations of JEDU, and have prepared an action plan by which JEDU would, via a staged process, be given increased responsibilities and authority in areas of management, planning and implementation. There are two key milestones for this process. The first would be the conversion of JEDU into a profit center, whereby it would have responsibility for operating revenue as well as cost management under a performance contract with the Holding Company, focusing on profit levels and the operating ratio. The second would be a subsequent conversion into an investment center (or "business unit"), which would give JEDU additional responsibilities for capital cost management under performance contract focusing on the rate of return. After a track record has been established, JEDU would be ready for corporatization and divestiture. During loan negotiations, agreement was reached on the conversion of JEDU into an investment center by December 31, 1997, in accordance with an action plan agreed to with the Bank (a draft summary plan is attached as Annex 3.1). 3.7 The expectation is that the decentralization of management authority to JEDU would fundamentally improve its performance; indeed, that it would develop into a world-class distribution utility providing reliable power and responsive customer service. To monitor the performance of JED U over time, a subset of the performance indicators and targets covenanted as set out in para would relate specifically to distribution in Jakarta (such as power reliability and quality, and connection waiting times). A draft table of indicators and targets is included in Annex 3.2. The performance targets for JEDU and the action plan (para 3.8) will be finalized once the relevant consultants' records have been reviewed by PLN, but not later than April 1, 1996.

32 The proposed project would provide financing for specialist services identified through the preparatory consultancy work as required for the staged development of JEDU. 3.9 It is envisaged that JEDU would be a pilot for the other three distribution units on Java, which would follow a similar process of staged development. The proposed project would finance the application of the JEDU pilot to West, Central and East Java Distribution Units. Transniission Restructuring on Java-Bali 3.10 A separate transmission unit and load dispatch center (the Java-Bali Electricity Transmission Unit (JABETU or P3B)) was created within PLN at the same time as the generation subsidiaries. Unlike JEDU, JABETU is a fledgling organization. However, it will soon take on a central role in the power sector, both as transmission investment is increased and as multiple generators begin to operate. A staged plan for development has been prepared by consultants (financed under the Suralaya Thermal Power Project Loan 3501-IND for JABETU), with the same key milestones as for JEDU for transformation into a profit center and subsequently to an investment center. Agreement was reached during negotiations on the conversion of JABETU into an investment center by December 31, 1997, in accordance with the action plan agreed to with the Bank (a draft summary plan is attached as Annex 3.3) The expectation is that the decentralization of management authority to JABETU would lead to improved performance in the areas of transmission construction, and operations. To monitor the performance of JABETU over time, a subset of the performance indicators and targets covenanted as set out in para would relate specifically to transmission on Java-Bali (such as transmission losses andfaults, and construction targets). A draft table of indicators and targets is included in Annex 3.4. The performance indicators for JABETU and the action plan (para. 3.10) will be finalized once the relevant consultants' reports have been reviewed by PLN, but not later than April 1, The proposed project would provide financing for specialist services identified through the preparatory consultancy work as required for the staged development of JABETU. Restructuring Outside Java-Bali 3.13 The long-run development of the power sector outside Java-Bali requires the progressive replacement of the large number of high cost isolated diesel generating units currently operating by interconnected regional grids supplied by more efficient generating plants or where appropriate by decentralized renewable energy sources that are cost effective. Even though the private sector is expected to play an increasingly important role, and there is scope for harnessing captive power capacity not currently connected to PLN's grids as well as renewable energy generation by the private sector, PLN will continue to play a dominant role in the supply of electricity outside Java.

33 PLN is currently decentralizing outside as well as on Java. Given the less developed nature of the systems outside Java, the decentralization is appropriately taking the form of geographical (vertical) rather then funtional (horizontal) unbundling. The aim is to devolve powers to the existing Wilayahs, and, in due course, corporatize them. Using Bank financing, consultants are currently preparing action plans along these lines for two, relatively-advanced, pilot Wilayahs (IV -- South Sumatera -- and VI -- South Kalimantan). Financial Aspects of Restructuring 3.15 The recent creation of generation subsidiaries, and the planned unbundling of transmission and distribution clearly have major financial implications for PLN. Over the last few years, PLN has been developing financial statements for generation and transmission (combined) and for distribution. These require further development; in particular, the separation of transmission from generation needs to be accounted for. The accounts of the various subsidiaries will be consolidated in the PLN holding for purposes of regulation (e.g., for the automatic tariff adjustment mechanism) and for legal covenants (e.g., the rate of return and debt service coverage covenants with the Bank). New arrangements will have to be made at the time of divestiture. PLN has a number of major outstanding liabilities, which will need to be allocated in the course of unbundling. Chief among these are its long-term debts, and the takeor-pay power purchase agreements it has entered into. PLN Holding will of course continue to be bound by its earlier contractual obligations, but will wish to pass on at least some of these obligations to its subsidiaries. While these financial questions are currently under study, it is likely that PLN Holding will continue in the role of a single power purchaser.

34 THE PROJECT Objectives 4.1 The objective of the project is to improve customer service by: (a) increasing the physical capacity, efficiency and reliability of the Java-Bali transmission system and distribution network; (b) promoting sector efficiency, competition and private sector participation by implementing functional decentralization (unbundling) of PLN operations in Java-Bali and developing effective regulatory oversight and institutions The effectiveness of the project will be measured by several important indicators that measure improvements in customer service, including the frequency and duration of power supply outages. The key customer service performance indicators and targets that will be used to monitor the progress in achieving the project development objectives are shown in Table 2.4. Summary Description 4.3 The proposed project has two principal components: (i) restructuring of and investment in PLN's operations (PLN component), and (ii) the development of regulatory oversight (MME component). The scope of the project is outlined below. i. PLN component: A. Investment Components (1) 500 kv transmission component (a) construction of about 415 km of 500 kv double circuit overhead transmission lines from Paiton to New Klaten via Kediri, required in 1998; (b) extension of the 500kV substations at Paiton, Kediri and New Klaten; (2) 150 kv transmission component (a) construction of about 60 km of 150 kv double circuit overhead transmission lines in Jakarta and West Java; (b) construction of 3 new substations in Jakarta and West Java, including about 240 MVA transformer capacity; (c) extension of 4 existing 150 kv substations in Central Java, including addition of about 120 MVA transformer capacity; (3) Distribution component implemerntation of PLN's distribution investment program for Java-Bali to support the projected increase in sales and connect about 420,000 new consumers in 1997; (4) Compensation and resettlement of the Affected People under the 500 kv and 150 kv transmission components and the distribution component;

35 B. Technical Assistance Component (1) Project engineering (a) design, engineering and construction supervision services for the 500kV and 150kV transrnission components; (b) design and engineering of the distribution component; (2) Efficiency improvement and training (a) upgrading of PLN's Geographical Information System (GIS) for system planning purposes; (b) upgrading of PLN's power plant simulator at Suralaya thermal power plant; (3) PLN restructuring (a) establishment and strengthening of the Java-Bali Electricity Transmission Unit; (b) establishment and strengthening of the Jakarta Electricity Distribution Unit, including implementation of a Distribution Management Program; (c) preparation for the restructuring of PLN's remaining distribution operations in Java into a West Java, Central Java and East Java Distribution Unit; IL MME component: Technical Assistance Components Investment Components training of and support for the Directorate of Regulation and Private Power in - implementation of the new power sector regulatory regime. 4.4 Expansion of the EHV and HV netw ork by PLN is based on the recommendations of the Java-Bali transmission system long term development study, completed in 1994 under the Bank financed Power Transmission Project (Loan 3349-IND). This study provided a master plan for establishing an efficient and least cost transmission system for supplying the demand up to 2003/2004. For defining the target network, the study evaluated several alternative network configurations for meeting the requirements of load and generation in the horizon year and selected the least cost option. The target network is implemented in year by year steps; optimizing transmission expansion to match the commnitted and planned generation expansion and the growth in consumption. The 500 kv and 150 kv transmission lines and substations financed under the proposed project are part of PLN's least cost transmission development plan for 1998 and kv transmission facilities. The main guidelines driving the EHV system development in the next five years are the need to (i) accommodate the planned new generating capacity which will be connected at 500 kv, (ii) reinforce all sections of single circuit 500 kv lines in order to increase transfer capability and enhance security of the Java-Bali system; and (iii) provide a more flexible configuration which can accommodate the diverse demand growth while allowing secure and

36 economic operation of the system. Within the next five years about 6000 MW generating capacity will be added to the 500 kv system and the peak power transfer is expected to increase to about 7600 MW by 1998 (58% of system peak) compared to 4300 MW in The 415 km long double circuit transmission line from Paiton to Klaten is a strategic link in the 500 kv network development. Construction of this line is the first step towards establishing a 500 kv loop which will interconnect all regions in Java and facilitate economic operation of the whole system. In addition to increasing the security and supply capability of the 500 kv system, the line will also provide the transmission capacity required to evacuate the ultimate 4000 MW output of Paiton power development. The commissioning of Paiton I Private Power Project, the first 2x600 MW extension to the existing 800 MW plant, is scheduled for September Map No. IBRD illustrates the development of the 500 kv transmission system up to 1999/2000. Reinforcement of the single circuit sections from Cibinong to Saguling, Bandung Selatan to Ungaran, and Ungaran to Krian is currently being implemented under an ADB-financed transmission project. Completion of the second circuit through the northem part of Java is expected by June To supply the rapidly growing load in the southern region of Central Java, PLN has committed the construction of a 500 kv substation at New Klaten and a 500 kv single circuit line from Ungaran to Klaten. The project is financed by KfW and is expected to be commissioned in The double circuit transmission line from Paiton to Klaten via Kediri substation, financed under the proposed Bank loan, is scheduled to be in operation by the time of the commissioning of Paiton I Private Power Project in September Extension of the EHV backbone from Klaten to Tasikmalaya in West Java is proposed to be implemented by OECF. Detailed scope and cost estimates for the Paiton-Klaten transmission project are given in Annex 4.1(a) kv transmission facilities. PLN's 150 kv network in Jakarta and Central Java needs to be strengthened in the face of bottlenecks and rapidly growing demand (para 2.19). The 150 kv component would finance the construction of three new substations and of about 60 km of overhead transmission lines in Jakarta and West Java and the extension of 4 existing 150 kv substations in Central Java; required for commnissioning in A detailed project costing is given in Annex 4.1 (b). 4.8 Distribution facilities. During Repelita VI about 7.6 million new consumers will be served by PLN. in Java and Bali. The distribution component of the proposed project will finance the requirements for expanding the non-rural distribution in Java-Bali and connecting about 420,000 consumers in This is about one-sixth of the distribution investment program in Java-Bali for that year. The corresponding targets of physical construction are (a) 2,181 kmc of MV lines; (b) 1645 kmc of LV lines; (c) 235 MVA distribution transformer capacity; and (d) 418,645 consumer connections. Annex 4.1(c) gives details of the physical quantities subdivided into PLN's regions in Java, and the cost estimates. Technical Assistance 4.9 The emerging commercialized units of PLN in Java will have to meet the expectations of its stakeholders including the Government, the holding company P.T. PLN, customers, employees, lenders and private companies with whom these units will be engaged in transacting business, as well

37 as potential future investors. Mere year-to-year incremental improvements in efficiency, performance and business practices from previous levels achieved will not suffice any longer. Rather, stakeholder expectations in Java-Bali are increasingly based on PLN meeting efficiency and service delivery standards that are in line with other efficient providers of such services - for example PLN's regional peers - or in certain cases in line with standards defined by international best practice Meeting these expectations will require a fundamental turn around in the corporate culture and management approach - a process that is underway - as well as quickly closing the performance gap in Java-Bali, in terms of operating efficiency and service delivery. Such changes will need to be underpinned by a mrjor effort to strengthen management, financial and operating systems and human resources, and to put in place an information system to allow monitoring of critical performance indicators. The technical assistance components under the proposed project, and described below, have been designed to facilitate such changes in PLN's transmission, distribution and support service units Draft Terms of Reference for all but one of the technical assistance components have been prepared and are contained in the Project Implementation Plan (PIP) document (para 4.34). The TOR for the initial implementation support for the Office of the Regulator are currently under preparation by the consultants. Project Engineering 4.12 Design, Engineering and Construction Supervision for Transmission Investments. Engineering design and preparation of bidding documents for the 500 kv and 150 kv transmission components financed under the proposed loan will be carried out by PPE, the engineering services unit of PLN. For detailed design, project management and construction supervision of the transmission projects however, PLN will require the services of engineering consultants. Since PPE is operating as a commercial unit, the cost estimates for project engineering includes for their services, which would be self financed by PLN Design and Engineering for Distribution Investments. Engineering design and preparation of bidding documents for distribution materials and equipment, financed under the proposed loan, will be provided by PPE, and self financed by PLN. Efficiency Improvement 4.14 Geographical Information System (GIS). PLN's operational GIS, implemented for rural electrification planning under the Bank financed RE I project (Loan 3180-IND), provides geographical and statistical data for inter alia potential power generation sites, regional boundaries, natural obstacles, infrastructure, general statistics on population, existing and planned EHV/HV and HV/MV substations, location and characteristics ot about 2,700 PLN power plants, electrification status by desa, and electricity consumption density. Under the proposed technical assistance the capability of the GIS software and hardware would be expanded to enable to: (a) provide data on existing and planned EHV and HV transmission facilities and distribution facilities (b) interface with existing PLN load forecast models to create a macro planning tool for transrnission and distribution expansion, and (c) use load

38 -31 - forecast models for and provide mapping of urban centers. The enhanced GIS will improve PLN's transmission and distribution planning capability and management of these projects Suralaya Steam Power Plant Simulator. The plant simulator in PLN's training center is based on the first 400 MW unit of Suralaya thermal power plant, commissioned in The development in power plant control technology in the past ten years and the higher level training requirements for modem steam power plants like Suralaya units 5, 6 and 7, and Paiton necessitate the upgrading of training facilities for operators and supervisors. The consulting services proposed under this project would assist PLN to: (a) design and implement a state-of-the-art steam power plant simulator suitable for all existing and future generating units at Suralaya, and (b) develop and implement an appropriate training program for PLN instructors and staff, taking into account current and future operational needs. The new facilities will enhance the efficiency of PLN's education and training unit (PusdiklatlUdiklat), and therefore the prospects for conversion into a subsidiary in the near future (para 3.3). PLN Restructuring 4.16 Java-Bali Electricity Transmission Unit (JABETU). Creation of an independent transmission company is a key element of the sector reform (see Chapter 3). Through the first phase of restructuring, PLN Holding will most likely remain the central power purchaser and responsible for despatch and generation planning. The role of the new transmission company would be the efficient transportation of electricity in the Java-BaG system. JABETU would operate and maintain PLN's existing transmission facilities and invest in new facilities to provide adequate transmission capacity to the power purchaser and operate metering at the grid supply points and generation connection points. Management consultants financed under the Suralaya Thermal Power Project (Loan 3501-IND) identified the minimum organizational and functional structures and procedures required to establsh a transmission unit within PLN and prepared an action plan for the staged development of JABETU to an investment center (business unit ). For allowing JABETU to operate with increasing autonomy in a decentralized fashion while accountable for its performance through key targets would require technical assistance in the areas of management systems, operations, finance and budgeting, planning, efficiency and productivity improvements, development of a Grid Code, etc. The technical assistance under the proposed project would finance the minimum systems, structures and procedures required to enable JABETU to operate as an autonomous unit Jakarta Electricity Distribution Unit (JEDU). A major focus of this project is the transformation of the present Jakarta Electricity Distribution System into an autonomous Jakarta Electricity Distribution Unit (JEDU), which would be comparable with world class utilities in efficiency and service quality (Chapter 3). Management consultants, financed under Japanese PHRD grant, prepared an action plan for the phased development of JEDU from cost center to investment center and identified specific technical assistance needs in the areas of management systems, operations, finance and budgeting, planning, marketing and development of human resources. The operation and efficiency improvement measures recommended for implementation by the consultants are based on and incorporate earlier plans for a Distribution Management Program developed under the Power Sector Efficiency Project (Loan 3097-IND).

39 West Java, Central Java, and East Java Distribution Units. Mainstreaming and applying the lessons learned from the JEDU pilot to create three additional independent distribution units in Java is the focus of this TA As preparation for the establishment and implementation of autonomous units in these regions, PLN will use technical assistance to evaluate each operation and adapt the JEDU model to apply to each one. Development of action plans and the preparations for implenenting those plans will be financed under this project. MME Component 4.19 Regulatory Framework Implementation. The Government is committed to implemenfing the regulation and oversight required in the emerging multi-operator and more competitive sector environment with the objective of increasing sector efficiency and improving customer service. Two consultancies - financed under Bank TA -- are underway in the Directorate General for Electricity and Energy Development (DGEED) to design the requisite regulatory framework and draft the corresponding regulations. The Office of the Regulator, which is located in DGEED, will require support in implementing the said regulations and the related administrative processes as well as training of its staff to perform the supporting tasks. Project Cost 4.20 The estimated project cost, exclusive of duties and taxes but including physical and price contingencies, is US$648.6 million equivalent. The total financing requirement, including taxes and interest during construction (IDC), amounts to about US$826.5 million equivalent. This is made up of US$610.2 million in foreign exchange and US$216.3 million in local finds and is calculated on the assumption that PLN and GOI self-finance their contributions to the project. Cost estimnates by major project components are sumnmzed in Table 4.1. Cost estimates are in June 1995 prices and use an exchange rate of Rp2246 per US$. Price contingencies for foreign costs are assumed at 2.6 percent per year during the project implementation period, and for local costs at 6.0 percent per year. Physical contingencies are amounting to about 7 percent for transmission lines, 5 percent for substations, and 10 percent for land acquisition and compensation.

40 Table 4.1 Project Cost Summary Ruplah billion US$ million Foreign Ex. rate RpIUS$ as % Local Foreign Total Local Foreign Total of total A. PLN Component kv transmission (a) Lines (b) Substations (c) Land acquisition Subtotal A kv transmission (a) Lines (b) Substations (c) Land acquisition Subtotal Distribution Project engineering (a) 500 kv (b) 150 kv (c) Distribution Subtotal PLN restructuring (a) JEDU (including DMP) (b) JABETU (c) WJ, CJ & EJ Distribution Subtotal Efficiency Improvement (a) GIS (b) Power plant simlator upgrade Subtotal Base cost Physical contingencies Price contingencies Total Project Component Cost B. MME component Base cost Price contingencies Total Project Component Cost Total Project Base Costs Physical Contingencies Price Contingencies Total Project Costs Total Taxes Total IDC on Bank loan Total Financing Required /13M961:21 PM Wv%x1&%COSTEST.XLS o.1

41 Financing Plan 4.21 A financing plan is presented in Table 4.2. A proposed Bank loan of US$373.0 million equivalento the Republic of Indonesia would finance 100 percent of the foreign exchange cost of investment exclusive of interest during construction and taxes, and 100 percent of all contracted technical assistance. US$2.0 million equivalent would be made available to MME and the balance of US$371.0 million equivalent would be onlent to PLN. Agreement was reached with GOI during negotiations for the proposed project that the GOI will onlend the proceeds of the proposed Bank loan, except for the US$2.0 million eqivalent for technical assistance to the Ministry of Mines and Energy, to PLN under a subsidiary loan agreement with a 20 year term including five years grace period. The subsidiary loan will be denominated in the foreign currency withdrawn and the onlending interest rate will be equal to the Bank's standard variable inteest rate plus 0.5 percent per annum. In addition, PLN will pay to GOI a commitment charge of 0.75 percent per annum or at such other percentage rate as the Government shall pay to the Bank on the undisbursed amnount of the Subsidiary Loan from time to time. The foreign exchange risk wull be bome by PLN. Execution of a subsidiary loan agreement between GOI and PLN, satisfactory to the Bank, will be a condition of effectiveness of the loan. Agreernent was also reached that the Governnent would ensure PLN has access to the necessary local finds to complete the project. Table 4.2: FINANCING PLAN Local Foreign Total (US$ million) PLN Comnreerf LBRD PLN/GOl Total MME comoonent IBRD GOI Total Total financin! IBRD PLN/GO Total

42 Several bilateral and international lending agencies are expected to be involved in financing the transmission investments in Indonesia. GOI is arranging financing for PLN's investment program for transmission and distribution facilities during 1997 to The proposed project is part of that program and accounts for about one-tenth of the related financing requirements. Procurement 4.23 Procurement arrangements for the proposed project are summarized in Table 4.3. The 500 kv and 150 kv transmission lines and substations will be procured under supply and installation contracts, which will be bid through international competitive bidding (ICB) in accordance with Bank's procurement guidelines and using the Bank's Standard Bidding Documents (SBD). The Bank will finance the cost of all materials and equipment, including telecommunication equipment for the transmission lines and substations under these contracts. Provision will be made for payment of a bonus for the contracts which are on the critical path and are likely to secure benefits to PLN from early completion For distribution, the Bank would finance procurement of equipment and materials for customer connections, distribution transformers, and MV and LV distribution lines through ICB procedures in accordance with Bank's procurement guidelines and using the Bank's Standard Bidding Documents Equipment and material for the power plant simulator upgrade will be procured under ICB procedures Consultants for all technical assistance financed under he proposed Bank loan will be selected and engaged in accordance with the Bank's guidelines for the Use of Consultants, and using the Bank's Standard Form of Contract for Consultant's Services. The summary description of expected TA contracts, their estimated value and person month requirement is presented in Table Qualifying local manufacturers competing for the supply of goods under ICB procedures would be eligible for a preference in bid evaluation of 15 percent or the import duty, whichever is lower. In the case of the supply and installation contracts, the preference margin for local suppliers shall not apply to the whole package, but only to the locally-manufactured equipment within the package All supply and installation bid packages will be reviewed by the Bank. Bid packages for material and equipment for the distribution component and for the plant simulator to be financed by the Bank loan estimated to cost over US$ 200,000 equivalent (over 90% of the procurement volume) would be subject to the Bank's prior review. Al consulting services provided by firms above $100,000 equivalent and above US$50,000 equivalent to be provided by individuals would also be subject to the Bank's prior review (over 90%/of the procurement volume). The contract packaging for the transmission and distribution components is given in Annex 4.2.

43 Table 4.3: PROCUREMENT ARRANGEMENTS (USS MILLION) /a 1. Goods Procuremt Medhod ICB NCB Other bl NBF cl Total Cost kVtransmissionsupply&install /d contracts (200.5) (200.5) kv trnsmission supply & install contracts (33.2) (33.2) 1.3. Distribution materials and equipment (100.5) (100.5) 1.4. Simulator equipment (4.2) (4.2) 2. Works 2.1. Erection for distribution component 27.2 le Building for simulator 0.6 /f Consultandes 3.1. Engineering design and construction /g 12.9 supervision (8.2) (8.2) 3.2. PLN restucturing TA (21.8) (21.8) 3.3. Efficiency improvement TA (a) GIS (0.6) (0.6) (b) Power plant simulator upgrade (1.9) (1.9) 3.4. MME TA (2.0) (2.0) 4. Mscellaneous 4.1. Land acquisition Total (Bank-ftnanced) (338.4) 0.0 (34.6) (0.0) (373.0) a/ Excluding taxes and IDC but including contingencies. b All items under 'other are for consultancy services to be procured in accordance with World Bank guidelines for the use of consultants. cl NBF: Not Bank-financed. dj Funds to be provided by PLN/GOI for 500 kv substations. el Funds to be provided by PLN for construction of distribution facilities, using national competitive bidding. fl Funds to be provided by PLN for civil works associagted with power plant simulator upgrade. gl Services provided by the PPE engineering unit of PLN. Note: Figures in parentheses are the respective amounts to be financed under the proposed IBRD loan. Figures may not add up exactly due to rounding.

44 Table 4.4: ALLOCATION OF TECHNICAL ASSISTANCE Category Component Value Persons US$ million /a Month PLN 1. Engineering Services /Implementation Support a. 500 kv Transmission b. 150 kv Transmission c. Distribution Policy Support Benchmarking and establishment of Wl, CJ & EJ Distribution Units 3. Development Institutional Restructuring/Efficiency Improvement /b a. JEDU b. JABETU c. GIS d. Plant Simulator MME Implementation Support Regulatory Framework Total /a Excluding contingencies and VAT. b/ TA includes hardware and software as well as consulting services. Disbursement 4.29 The proposed Bank loan would be disbursed against approved contracts and is estimated to the following amounts of each category: (a) 100 percent of C.I.F. for directly imported equipment and materials; (b) 100 percent of ex-factory expenditures for locally assembled equipment and material; (c) 65 percent of local expenditures for other items procured locally; (d) 100 percent of all contracted consulting services expenditures. Table 4.5 shows the agreed allocation of loan proceeds to finance expenditures under each category. No disbursements will be made for expenditures prior to loan signing. During negotiations it was agreed that the minimum withdrawal applications for this project will be US$500,000. Withdrawal applications would be fully documented for all expenditures against which loan disbursements would be made, except for materials and equipment valued at less than US$200,000, and consulting firm contracts valued at less than US$ 100,000 for firms and US$ 50,000 for individuals and training that would be disbursed on the basis of statements of expenditures (SOE). Documents supporting the SOEs would be retained by respective project implementing agencies and would be made available for review as requested by Bank missions.

45 (SOE). Documents supporting the SOEs would be retained by respective project implementing agencies and would be made available for review as requested by Bank rnissions Loan disbursement agains expenditures for the 500 kv and 150 kv transmission components will be subject to PLN furnishing to the Bank a 500 kv RAP and 150 kv RAP, satisfactory to the Bank, based on the agreed PLN's general policy for the establishment of overhead transmission lines (paras 4.42 and 4.43) The estimated disbursement schedule for the proposed Bank loan is shown in Annex 4.3. Disbursements are expected to be faster than the Bank profile for power projects in Indonesia because of the absence of a generation component, which would have a longer run-up time, and because nearly all of the investment component is due for completion by end-1998, only three years after expected Board approval. lmplementation 4.32 PLN and MME would be responsible for implementation of their respective components. For the transmission and distribution components, PLN's Engineering Services Center (PPE) will handle the design and preparation of bidding documents; procurement will be handled by a central procurement unit; and construction, including survey, land acquisition and compensation, will be managed by the transmission project construction units in West, Central and East Java. The manager of the central Transmission Construction Supervision Division will be responsible for coordinating and monitoring the implementation of the subprojects and providing progress reports to the Bank. Consultants will assist PLN in the detailed design and supervision of the transmission construction (para 4.12) The GIS project will be managed by the System Planning Division in PLN Headquarters, while the upgrading of the plant simulator and training of instructors will be the responsibility of PLN's Education and Training Center (PUSDIKLAT). Establishment of the distribution and transmission units, and their development into profit and then investment centers (see Chapter 3) will be the joint responsibility of a Steering Committee, comprising the PLN Board of Directors, and the manager of the respective units. The technical assistance aimed at supporting the development of the units would be be managed by the respective units and implemented by task teams. Within MIME, the Directorates of Private Power and of Regulation (to be established within DGEED), would implernent the technical assistance on regulatory framework PLN has prepared a Project Implementation Plan (PIP) which was appraised by the Bank and found satisfactory. This document is part of the project file. The PIP contains the following principal elements for each component of the project: scope and objectives, detailed project description, organizational arrangements, project management structure, time bound implementation plan including procurement schedule, milestones and performance indicators, and TORs for the technical assistance components The project management and implementation schedule with allocated responsibilities is presented in Annex 4.4. It shows key activities and timing by total project and subcomponent.

46 Construction of distribution facilities is expected to be completed by end of 1997, of the 500 kv transmission lines by September 1998, and of 150 kv transmission facilities by end uf The anticipated project compleion date i DLceiber 3,1 I19, an 1 th; la:. cklsing date 3epte,nb'.r 30, Table 4.5: ALLOTMENT OF LOAN PROCEEDS Category Amount of the loan allocated (expressed in dollar equiv. million) % of expenditures to be financed 1. Equipment and materials 100% of foreign and 100% of (a) 500 kv Transmission local (ex-factory) expenditures; (b) 150 kv Transmission % of other items procured (c) Distribution 95.0 locally (d) Power Plant Simulator PLN Technical Assistance % of all expenditures 3. MME Component % of all expenditures 4. Unallocated 35.0 Total 373.0

47 Monitoring and Supervision Procedurts foi iiioutorins th} physicil p ogre.;s of the p-o)ject and iinancial repotiing has been discussed with PLN. Key monitorable indicators of project impiementatio l and iroject perforiance are given by the schedules of project implementation (Annex 4.4), PLN would be required to submit to the Bank monthly and quarterly progress reports which would form the basis of monitoring the procurement and construction of the transmission and distribution components and execution of the technical assistance components against the time bound implementation schedules. Such progress reports would be sent to the Bank within ten days after conclusion of each calendar month. After procurement activities completed, quarterly reports would be submitted The project supervision arrangements are described in Annex 4.5. During the first two years of project operation, two supervision missions are scheduled each year; subsequently; one supervision mission per year is allotted. Supervision will focus on (a) review of PLN's power development program and investment plan, (b) financial covenants and financial indicators, (c) progress with PLN restructuring, (d) progress with the implementation of the new regulatory regime, (e) implementation issues including implementation of the RAPs, (f) technical supervision of implementation of project components. Supervision will require expertise in power engineering, institutional development, organizational and commercial issues, project management and econornic and financial analysis and resettlement specialists. Staff input is budgeted for about 45 staff-weeks to the end of the project. Project Performance Monitoring Indicators 4.38 A monitoring and evaluation scheme will be established for periodically assessing the progress of implementation of the project in terrns of attainment of objectives. Key project performance indicators that would be used for monitoring progress will include the following subsets: (a) Impact Indicators: These key performance indicators will be directly linked to the project development objective and will track whether or not these developmental objectives have been met. (b) nput and Process Indicators will track the planned investment and relate to specific actions such as procurement, disbursement, contracted technical assistance, and management. (c) Output and Outcome Indicators will track the results of physical investment and technical assistance Key performance indicators for the project components will be finalized and agreed upon with PLN once the relevant consultants' reports are completed and reviewed by PLN and the Bank, but not later than April 1, Environment and Resettlement 4.40 PLN's General Policy Concerning the Establishment of Overhead Transmission Lines. By the end of the decade PLN will need to double the HV and EHV transmission network throughout

48 Indonesia and increase the length of MV distribution lines threefold to ensure efficient and reliable power supply to its consumers. To meet this formidable challenge, PLN has been reviewing its approach to acquisition of land, houses and other structures and compensation and rehabilitation of project affected people (PAPs) due to power transmission and distribution projects. A major objective of PLN's new policy is to minimize adverse effects to people and to ensure that PAPs are compensated and rehabilitated so as to enhance, or at least restore their pre-project standard of living. The new policy will also reduce implementation delays caused by protracted and often unsuccessful price negotiations with land owners and affected people. The increasing public interest in the negative environmental impacts of transmission lines has also signaled the need to PLN to focus on public information and consultation With the Bank's support, PLN prepared a new policy framework for land acquisition, compensation and resettlement for all its transmission projects. The new policy framework provides eligibility criteria for determining compensation to be provided to PAPs to be affected, and compensation, resettlement and rehabilitation measures to be provided to PAPs to be resettled. It also includes provisions relating to: (a) valuation and compensation of assets at their replacement cost and provisions relating to resettlement and rehabilitation; (b) participation, information dissemination; consultation and grievance procedures; and (c) implementation schedules, budgets and monitoring. PLN's general policy concerning the establishment of overhead transmission lines (attached as Annex 4.7) has been reviewed and found acceptable by the Bank; as it conforms to Bank's policy as set forth in OD Agreement was reached during negotiations that for purposes of carrying out the resettlement and rehabilitation of the affected persons under the project, PLN shall, in a manner satisfactory to the Bank, apply the PLW's general policy concerning the establishment of overhead transmission lines kv Transmission Lines. Based on the Initial Environmental Examination (LEE) reports prepared by PLN in May 1995, the Paiton-Kediri and Kediii-Klaten transmission lines have no major adverse physical, socio-economic and cultural impacts. The 415 km lines, routed through the southem part of East Java and Central Java, affect mainly dry agriculturaland, rice fields and home gardens in villages. They also pass through a state owned forest production (teak and mahogany) area in East Java. Land acquisition for tower sites will involve about 900 families of which 86 require relocation. The estimated cost for compensation and resettlement is about US$ 16.2 million. Agreement was reached during negotiations that: (1) PLN shall (a) revise the 5OOkV-RAP in accordance with PLNV's General Policy concerning the establishment of overhead transmission lines; (b) include in the RAP the final base line survey of affected people; and (c) furnish a SOOkV-RAP, satisfactory to the Bank as a condtion of disbursement for this component of the Project; and (2) PLN shall adopt and implement the 500kV-RAP, satisfactory to the Bank; for purposes of carrying out the compensation, resettlement and rehabilitation of the Affected Persons under the 500kV transmission component of the project (para. 4.41) kv Transmission Lines and Substations. The 150 kv transmission component of the project includes the construction of three new substations in Jakarta-West Java and their transmission interconnection, about 60 km overhead lines in total. Greater Jakarta is the most densely populated area in Java, so special attention will need to be paid to minimize the environmental impact of the project. Draft LEE reports have already been prepared and reviewed with the Bank; detailed design

49 and survey of transmission lines will, however be completed only by August Therfore during negotiations, it was agreed that: (i) the environmental and resettlement impacts of the 150 kv transmission component shall be established and documented in the Envronent chapter of the design reports as per guidelines satisfactory to the Bank (Annex 4 6); (ii) Resettlement Action Plan (RAP) shall be prepared andforwarded to the Bankfor approval as a condition of disbursementfor this component; and (iii) PLN shall adopt and implement the 150 kv RAP, satisfactory to the Bank for purposes of carrying out the compensation, resettlement and rehabilitation of the affected persons under the 150 kv transmission components of the project Distribution Facilities. The proposed loan would finance a portion of PLN's non-rural distribution expansion in This component will include several projects in Java and Bali for which the location and detailed design would be developed subsequently and closer to the time of implementation. Generally, construction of non-rural distribution facilities (short length of MV and LV overhead lines and underground cables, distribution transformers and consumer connections) is not expected to pose major environmental problems, and negative impact can be mitigated by selecting alternative routes, design and method of construction. During negotiations it was agreed that: (i) PLN shall design the construction and installation of the power distribution facilities under the distribution component of the project, and thereafter carry out such construction and installation in such a way as to avoid any acquisition of private property or establishment of easements therein for installing power poles and transformers; provided, however, that if the acquisition of private property or the establishment of easements therein can not be avoided, PLN shall promptly inform the Borrower and the Bank and proceed to compensate, resettle and rehabilitate the Affected Persons pursuant to provisions of the PLN's General Policy concerning the establishment of overhead transmission lines, in a manner satisfactory to the Bank; providedfurther that if the construction and installation of these facilities as designed would adversely affect more than 100 persons, then PLN shall, prior to the start of such works, furnish to the Bankfor its approval a resettlement action plan prepared in accordance with PLN's General Policy concerning the establishment of overhead transmission lines, and thereafter implement such plan as so approved (para 4.41) Monitoring PLN will maintain data and progress reports on implementation of land acquisition and resettlement measures for all components of the project. During negotiations it was agreed that PLN will (i) on April 1, July 1, October 1, and December I of each year, commencing on July 1, 1996, prepare andfurnish to the Bank quarterly progress reports on the implementation of the resettlement and rehabilitation of the Affected Persons under the Project during the preceding three (3) months; and (ii) by July 1, 1996, under terms of reference satisfactory to the Bank retain an independent entity with qualified and experienced staff to. (a) undertake the external monitoring and supervision of the implementation of the resettlement and rehabilitation of the Affected Persons under the Project; (b) prepare andfurnish to the Bank and PLN semiannual monitoring reports thereof, the first of such reports to be furnished by September 30, 1996; and (c) prepare and furnish to the Bank and PLNa final evaluation report on completion of the resettlement and rehabilitation of the Affected Persons under the Project.

50 PROJECT JUSTIFICATION A. Past experience and lessons learnt 5.1 The Bank has been active in Indonesia's power sector for twenty-five years during which time the Government has borrowed more than $US 4.7 billion in Bank loans and IDA credits to undertake 24 power projects (listed in Annex 5.1). Despite some problems with implementation, past Bank-financed PLN projects have in general been very successful and have helped strengthen PLN's capabilities in almost every aspect of its operations. Over the last twenty-five years, the Bank has also engaged the Government and PLN on a dialogue on sector issues. In the seventies and eighties, this focussed mainly on sector planning, tariff and organizational autonomy issues. In recent years, beginning with the Sumatera-Kalimantan Project in 1994, the Bank and Government have shifted their emphasis towards issues of sector structure, private sector participation and regulation. 5.2 The positive lessons from the Bank's involvement have been brought out by successive Project Performance Audit Reports (PPARs), Project Completion Reports (PCRs) and Implementation Completion Reports (ICRs). These reports attribute the success of power operations in Indonesia to the facts that: (i) there was a long-term vision for the development of the sector and this vision was shared by the Bank, Government and PLN; (ii) the vision was translated into a long-term strategy which was resolutely pursued; and (iii) a reasonable balance was struck between the physical and institutional development components of the projects. The negative lessons largely concern implementation. First, most projects have suffered delays due to extended procurement cycles and, in the case of transmission projects, problems with land acquisition. Second, the last transmission project has required loan cancellations due to the use of outdated cost estimates by PLN. Third, technical assistance for institutional capacity building has in some cases fallen short of expectations due to limited absorptive capacity and inadequate supervision and ownership. The ways in which these lessons have been incorporated into the proposed project are detailed in paragraphs 5.17 to Lessons learnt from previous projects suggest that narrowly focused T&D projects that emphasize incremental engineering solutions and investments in physical capacity alone will not result in significant improvements in efficiency and reliability standards, that are urgently needed to move the Indonesian power system closer to compare to best practices levels. Bankwide experience suggests that achieving quantum and sustainable improvements in efficiency and customer service, while placing the sector on a sound financial footing depend upon the degree of success achieved in steering the power sector from the monopoly of a single public utility to a more competitive, decentralized, multi-operator environment with private sector participation, corporatization of the national utility, and, where appropriate, unbundling of its generation, transmission and distribution functions l. Further, Bank experience indicates that although the 1A. Malhotra and R. Lamech, Power Sector Experience in Asia, Asia Technical Department, Paper No. 8, November 1994; A. J. Covarrubias and S. B. Maia, Reforms and Private Participation in the Power Sector of Selected Latin American and Caribbean and Industrialized Countries, LAC Technical Department, Report No.33, March 1994.

51 reform options used to restructure the sector are varied across countries, a common denominator is the provision of the appropriate regulatory framework and related oversight. B. Rationale for Bank involvement 5.4 Bank involvement in electricity transmission and distribution and in the policy dialogue is clearly indicated under IBRD's Indonesia Country Assistance Strategy (CAS, Report No IND, 1995). The CAS argues for Bank investment in power transmission and distribution rather than generation as private sector finance is readily available for the latter - and for Bank assistance to improve regulatory structures so as to increase private participation (CAS, para. 58). Further, reduction of infrastructural bottlenecks is a key element in the strategy to promote Indonesia's productivity (CAS, para. 24). It is appropriate therefore, that Bank financing help overcome the transmission and distribution bottlenecks that have been identified in the power sector. 5.5 The CAS (para. 37), also supports the Government's decentralization thrust. The proposed project would promote decentralization in a major sector of the Indonesian economy. PLN's decentralization would occur first of all in Java, where increased autonomy would be given to the four regional distribution units. Later projects are expected to support mainstreaming of the Bank-financed decentralization pilot currently underway outside of Java-Bali (see para. 3.14). 5.6 The Bank has been playing a unique role in the development of power sector in Indonesia. More than other lending agencies, the Bank's primary focus has been on sectoral and institutional development, with a view to enhancing the performance to levels that are comparable to those of Indonesia's main competitor countries. This is to be achieved by ste-7ing the power sector from the monopoly 7 a single public utility to a competitive, decentralize(, aiulti-operator environment. The overall strategy for this process was set out - as a result of Bank-Government dialogue -- by the Government in its 1993 policy statement (attached as Annex 1.2), and sector reform is now in the implementation phase. While sectoral and PLN restructuring might occur in the absence of the proposed project, they would probably not occur as rapidly nor in as orderly a manner. In particular, the proposed project would aid implementation of the results of major Banksupervised technical assistance efforts already underway -- including private power development, power sector regulatory reform, and establishment of PLN distribution and transmission investment centers in Java-Bali.

52 C. Project Benefits 5.7 The main economic benefits of the proposed investment in the project are to: (i) facilitate the economic operation of the Java-Bali bulk power system as well as improve its dynamic stability and security, by increasing the physical transfer capacity of the EHV (500 kv) transmission system; (ii) facilitate increased customer connections and electricity sales -- especially to industrial estates and commercial areas in and near the major urban centers -- while simultaneously reducing the current excess generating capacity, by removing major capacity bottlenecks in the transmission and distribution network; (iii) evacuate power under a take-or-pay contract from the 1,200 MW private sector coal fired plant ("Paiton I"), planned to come on-line in 1998; (iv) improve customer service and supply reliability to consumers through improved management and operations of the distribution and customer service functions; and (v) institutional building through technical assistance. Sectoral benefits 5.8 The project would promote the implementation of sectoral reform in the areas of private sector participation, regulation, and PLN restructuring. This is expected to lead to greater efficiency and a more dynamic sector, to better customer service and less reliance on government funding. 5.9 The proposed PLN restructuring would lead to greater accountability and initiative within the corporation, and would also pave the way for the introduction of competition and private sector participation in the transmission and distribution sub-sectors, both of which should promote efficiency. In particular, the creation of independent distribution business centers would result in greater responsiveness to customer demands for timely connection and reliable high-quality supply and service. The technical assistance component of the proposed project is essential to ensure that the benefits of restructuring are realized The emphasis given by the project (para. 2.56) to performance measurement is an iimportant new development. The proposed loan would for the first time covenant not only financial indicators (rate of return, debt service, etc), but also technical indicators (reserve margin, losses, etc). This two-track approach is expected to provide an appropriate balance between protecting PLN's financial health on the one hand, and providing the company v.ith greater incentives to improve performance, on the other. Economic Rate of Return Analysis 5.11 The project's physical components are an integral part of PLN's master plan for optimized expansion of the Java-Bali transmission network, in light of currently committed generation expansion. The transmission master plan, completed in 1994 under the Power Transmission Project (Loan 3349-IND), was developed using advanced computer simulation models that evaluated the power flows, reliability, security and economics of several alternative network expansion and strengthening configurations (see Chapter 2, Section B and paras 4.3 through 4.6), to identify the least cost plan.

53 Time-slice analysis An economic internal rate of return (EIRR) has been calculated for PLN's Java-Bali 1995/96 to 1999/2000 investment program, which the proposed loan will partially finance.the costs included in the economic analysis are: (i) those for all investments commissioned during the period of analysis; (ii) those for the incremental fuel and O&M associated after commissioning with these investments; and (iii) power purchases during the period. All sales increases during the period of analysis are attributed to the investments and to the availability of new purchased power. Sales and investment forecasts are based on a conservatively estimated annual compound medium-term growth rate of 13.5% over 1995/ /2000, which is significantly below PLN's most recent projection of 16 % for the same period (paras ). For industrial consumers, willingness-to-pay is estimated by the cost of self generation from a captive diesel plant. For residential consumers, willingness-to-pay is estimated by aggregating two components: (a) consumer surplus in the diverted market i.e, cost savings from the substitution of kerosene by electricity for lighting, and (b) the incremental consumer surplus in the new market i.e., the benefit of increased consumption because of the availability of lower cost electricity. Willingness to pay for commercial and public and other users is assumed equal to tariff levels. Further details of the assumptions and calculations involved are given in Annex On the basis of the incremental cost and benefit streams associated with PLN's least cost expansion program for the period 1995/96 to 1999/2000, which the proposed loan will partially finance, and under the above assumptions, the EIRR for the least cost sector investment plan is estimated at 25%, which shows the high return currently obtainable by focusing investment on transmission and distribution development that has lagged generation expansion kv transmission component In addition to the conventional time-slice analysis, a separate economic analysis has been carried out for the 500 kv transmission component of the proposed project, using the conservative assumption that the sole purpose of the Paiton-Klaten line is to evacuate power from the 1,200 MW Paiton I coal plant, under the provisions of the take-or-pay contract governing that power purchase. This assumption significantly biases downwards the EIRR for the 500 kv transmission component, since it does not reflect the other substantial benefits attributable to the line that derive from the fact that this line is an essential and integral part of the optimized development of the EHV grid system in Java-Bali that would afford improved economic operation of generation plant systemwide, and improved reliability of the transmission network. This EIRR is based on an incremental cost stream that has the following components: (i) investment cost for the line; (ii) power purchase cost from the Paiton I power plant; (iii) and the marginal costs associated with the HV transmission network and the distribution network (3.0 c/kwh). The incremental benefits stream is derived from the projected sales based on the Paiton I power plant, valued at willingness-to-pay levels as discussed in Annex 5.2, The resultant EIRR for the 500 kv transmission component is estimated, conservatively, at 15%. D. Project Risks 5.15 In view of the Government's and PLN's generally excellent record with regards to Bank projects, the risk of this project producing outcomes substantially below expectations is minimal. The

54 primary risk is that PLN's medium-term sales growth will be below expectations; this and other sectoral and implementation risks faced by the project are detailed below. Slow Sales Growth Risk 5.16 PLN's sales target for Java-Bali for the period 1995/96 to 1999/2000 is an average annual medium-term growth rate of 16%. There are two principal reasons why PLN may be unable to meet this target. First, the demand may not materialize at this high growth rate. PLN's recent Java-Bali sales growth indicates that its load promotion activities have had a significant impact: based on data up to July, 1995, the Java-Bali sales growth rate for 1995 will be about 16%. However, it is by no means certain whether continued load promotion activities will sustain a 16% growth rate over the next five years Second, there may be implementation delays. In the past, most transmission and/or distribution projects have suffered from serious delays due to extended procurement cycles, for both equipment and consultants. In addition, in the case of transmission, lengthy delays (upwards of a year) have been caused by difficulties in land acquisition. Procurement delays are a generic problem for Indonesia, and there are limits to what can be achieved to improve procurement processes within any one sector. However, PLN has agreed to use standard Bank documents, to streamline the procurement process and to shorten the period between issue of tender and awards. With regards to land acquisition, PLNs new General Policy concerning the establishment of overhead transmission lines (Annex 4.7) which was approved by PLNs Board for all its transmission projects (regardless of the source of financing) would also help reduce delays by ensuring (i) use of replacement cost as the basis for compensation and (ii) direct negotiations between PLN and asset owners. Finally, PLN's commercialization should make it more sensitive to the cost of delays, whatever the cause A lower-than-expected sales growth rate would have an adverse effect on the economic viability of the project. Therefore, the base case economic analysis has been conducted with a projected sales growth rate of 13.5%, which is a conservative estimate based on an independent analysis of medium-term sales trends, instead of the 16% growth rate projected by PLN (para 5.12). The results of further sensitivity analysis on the sales growth rate are reported in paras Other risks 5.19 Delays in sectoral reform Although some delays have occurred in the past, in general the Govermnent and PLN have good implementing records once agreement has been reached on key issues. Clear delineation of and agreement on the timing of critical decision points will assist in monitoring and limiting any lags and significant deviations Sub-optimal private sector participation Rushed divestiture of PLN assets to overcome a financing gap could lock in a non-competitive, inefficient industry structure. Likewise, a continuation of the Government's "deal-by-deal" approach to PPAs, rather than adoption of a competitive framework approach, could keep the price of private power high. Recent indications, however, are that the Government is moving towards adoption of a competitive framework approach to private sector participation in the power sector and PPA prices have fallen substantially (see para 1.17) with the adoption of competitive bidding. The government also may run the danger of

55 contracting too much private power, given the current ample reserve margin; however, the Government is now committed to reaching the agreed reserve margin target of 25 percent Limited effect of institutional development technical assistance While technical assistance for engineering, design and construction management generally have performed well, technical assistance for institutional capacity building has in some cases fallen short of expectations due to limited absorptive capacity and inadequate supervision and ownership. However, it should also be noted that those institutional development TAs which are linked to and "owned by" specific functional units have performed better than those under general headquarters control. The technical assistance planned under the current project builds on this lesson by being directed largely at individual PLN distribution and transmission units. In addition, the Bank has now moved to an integrated portfolio approach to the monitoring of institutional technical assistance. This has made for more effective supervision, and reduced the likelihood of delay in the inception of technical assistance Partial loan cancellation The last transmission project involved a large cancellation of unused funds due to overly conservative cost estimates. Cost estimates under this project have been developed by PLN using up-to-date prices. E. Sensitivity analysis 5.23 This section considers the sensitivity of the economic rate of return -- for the time-slice as well as the transmission component alone -- to lower than expected sales growth, which is the primary risk Time-slice analysis With respect to the overall investment program for the period 1995/96 to 1999/2000, the primary risk that potentially affects the EIRR relates to the uncertainty about the sales growth realized over the period 1995/ /2000 (para 5.16). This risk has already been taken into account by calculating the EIRR with a conservative sales growth rate of 13.5%, instead of the 16% growth rate incorporated in PLN's projections (paras 5.12, 5.18). The results of sensitivity analysis show that: (i) (ii) (iii) With PLN's projected medium-term sales growth rate of 16%, the EIRR would be 37%, instead of the base case of 25%; With a slow medium-term sales growth rate of 12.5% -- which is consistent with PLN's long-term sales growth rates -- the EIRR would be 20%; To reduce the EIRR to the switching value of 12%, below which the project would not be economically justifiable, the sales growth rate over 1995/96 to 1999/2000 would have to be a low value of 10.8%. The probability of this happening is negligible, given that: (a) PLN has already achieved a sales growth rate of about 16% for 1995, (b) PLN's load promotion activities are likely to raise the sales growth rate above past trends, and (c) the medium-

56 term growth rate of 10.8% is below PLN's most recent historical mediumterm as well as long-term sales growth rates kv transmission component Sensitivity analysis shows the importance of timely completion of the Paiton-Klaten line. A significant delay in the implementation of the 500 kv Paiton- Klaten line would result in an inability on the part of PLN to evacuate power from the private Paiton power plant, which is due to come on-stream in September Under the scenario of a one year delay, the EIRR for the Paiton-Klaten line reduces from 15% to 12%. This scenario, however, would have a serious financial implication for PLN on account of the take-or-pay contract on Paiton.

57 AGREEMENTS REACHED AND RECOMMENDATION Agreements Reached with the Government 6.1 Duning negotiations, the following agreements were reached with the Government: (a) (b) (c) (d) The Govenmment shall onlend the proceeds of the proposed Bank loan, except for $2.0 million equivalent for technical assistance to the Ministry of Mines and Energy, to PLN under a subsidiary loan agreement with a 20 year term including five years grace period. The subsidiary loan will be denominated in foreign currency withdrawn and the onlending interest rate would be equal to the Banks standard variable interest rate plus 0.5 percent per annum. In addition, PLN will pay to GOI a commitment charge of 0.75 percent per annum or at such other percentage rate as the Government shall pay to the Bank on the undisbursed amount of the Subsidiary Loan from time to time. The foreign exchange risk will be borne by PLN. In addition, the Government will ensure PLN and MME have access to the necessary local funds to enable the project to be completed (para. 4.21). The Government shall upon completion of a study on private power development with terms of reference satisfactory to the Bank: (a) furnish the same to, and discuss the results and reconmmendations thereof, with the Bank, and (b) based on the said study's results and reconmmendations and subsequent review, comments and discussions (i) prepare draft rules and procedures to govern private sector participation including the solicitation and evaluation of all forms of proposals for private power supply, (ii) by June 30, 1996, furnish the said draft rules and procedures for review and comments to the Bank, and (iii) by September 30, 1996 finalize, adopt and enforce the same taking into account the comments, if any, thereon by the Bank (para 1.8). The Government shall upon completion of a study on regulatory reform in the power sector with terms of reference satisfactory to the Bank: (a) furnish the same to, and discuss the results and recommendations thereof; whit the Bank, and (b) based on the said study's results and recommendations and subsequent review, comments and discussions (i) prepare draft regulations for the power sector, (ii) by June 30, 1996, furnish the said draft regulations for review and comments to the Bank, and (iii) by September 30, 1996, finalize, adopt and enforce the same taking into accounthe comments, if any, thereon by the Bank (para 1.19). The Government shall: (a) by December 31 each year commencing 1996: (i) review with the Bank: (A) its current power sector development program, (B) the least cost planning analysis and parameters, including the planning power generating capacity reserve margin used to formulate the said program; (C) the realized power generating capacity reserve margin; (D) the roles of PLN, PLN's Subsidiaries and the private sector in the said program; and (E) the transparency and appropriateness of the business environment for private power participation; and (ii) review with the Bank and PLN, PLN's and PLN's Subsidiaries' consolidated current development and investment programs with respect to: (A) their consistency with the Borrower's power sector development program; (B) the balance among generation,

58 transmission and distribution investments; and (C) the balanced development of regions; and (b) ensure that PLN and PLN's Subsidiaries have access to sufficient funds to finance capital expenditures for their consolidated development and investment programs pursuant to the said reviews (paras and 2.58). Agreements Reached with PLN 6.2 During negotiations, the following agreements were reached with PLN: (a) (b) (c) (d) (e) PLN shall, and shall cause PLN's Subsidiaries to, take all such actions as shall be necessary to reduce the realized power generating capacity reserve margins in the Java-Bali Power System to 300/o by December 31, 1999 (para. 2.56). PLN shall, and shall cause PLN's Subsidiaries to: (a) take all such action as shall be necessary to meet in fiscal year 1996 and in each fiscal year thereafter, technical and financial performance targets, satisfactory to the Bank; (b) by November 15, 1996 and in each year thereafter, furnish to the Bank, for its approval, its proposed technical and financial performance targets for the subsequent two fiscal years; (c) no later than four months after the close of each of its fiscal years, commencing on fiscal year 1996, report to the Bank on its progress in meeting the technical and financial performance targets during the preceding fiscal year; and (d) in the event of targets not been reached in any given fiscal year, prepare and furnish to the Bank, for its approval, proposed remedial actions to be taken and, thereafter, undertake such remedial actions as so approved (para 2.56). These targets will include global performance targets for overall PLN performance as well as targets relating specifically to distribution in Jakarta (para 3.7) and to transmission on Java-Bali (para 3.11). PLN shall and shall cause PLN's Subsidiaries to, from time to time, take all such measures, satisfactory to the Bank, as shall be required to realize for all PLN's and for all PLN's Subsidiaries' operations, for their fiscal year 1996 and in each of their fiscal years thereafter, an annual rate of return of not less than eight percent (8%) of the average current value of PLN's and PLN's Subsidiaries' consolidated net fixed assets in operation (para 2.29). PLN shall not, and shall cause PLN's Subsidiaries not to, incur any debt unless a reasonable forecast of the consolidated revenues and expenditures of PLN and PLN's Subsidiaries shows that the projected consolidated net revenues of PLN and PLN's Subsidiaries for each fiscal year during the term of the debt to be incurred shall be at least 1.5 times the projected consolidated debt service requirements of PLN and of PLN's Subsidiaries in such year on all consolidated debt of PLN and PLN's Subsidiaries, including the debt to be incurred (para 2.40). PLN shall, by Decernber 31, 1997, provide its Jakarta Electricity Distribution Unit (JEDU) and its Java-Bali Electricity Transmission Unit (JABETIJ) with the required degree of autonomny in

59 managing their operations and investmentso as to function as investment centers (paras. 3.6 and 3. 10). (f) (g) (h) (i) (I) (k) (I) PLN shal for its fiscal year 1996 and for each fiscal year thereafter, revalue the consolidated fixed assets of PLN and PLN's Subsidiaries (including work in progress and consolidated consumer's contributions of PLN and PLN's Subsidiaries), and accumulate depreciation, in a manner satisfactory to the Bank (para 2.50). For purposes of carrying out the resettlement and rehabilitation of the Affected Persons under the Project, PLN shal in a manner and substance satisfactory to the Bank, apply the PLN's General Policy concerning the establishment of overhead transmission lines (para. 4.41). PLN shal adopt and implementhe 500kV-RAP, satisfactory to the Bank, for purposes of carrying out the compensation, resettlement and rehabilitation of the Affected Persons under the 500kV transmission component of the project (para. 4.42). PLN shal adopt and thereafter implementhe 150kV-RAP, satisfactory to the Bank, for purposes of carrying out the compensation, resettlement and rehabilitation of the Affected Persons under the 150kV transmission component of the project (para. 4.43). PLN shall complete the provision of compensation and rehabilitation measures and resettlement of the Affected Persons for each sector or phase under the 500kV and 150kV transmission components of the project before the commencement of the work on that sector or phase (para. 4.44). PLN shall design the construction and installation of the power distribution facilities under the distribution component of the project, and thereafter carry out such construction and installation in such a way as to avoid any acquisition of private property or establishment of easements therein for installing power poles and transformers; provided, however, that if the acquisition of private property or the establishment of easements therein can not be avoided, PLN shall promptly inform the Borrower and the Bank and proceed to compensate, resettle and rehabilitate the Affected Persons pursuant to provisions of the PLN's General Policy concerning the establishment of overhead transmission lines, in a manner satisfactory to the Bank; provided further that if the construction and installation of these facilities as designed would adversely affect more than 100 persons, then PLN shall, prior to the start of such works, furmish to the Bank for its approval a resettlement action plan prepared in accordance with PLN's General Policy concerning the establishment of overhead transmission lines, and thereafter implement such plan as so approved (para. 4.44). PLN shall: (a) on April 1, July 1, October 1, and December 1 of each year, commencing on July 1, 1996, prepare and furnish to the Bank quarterly progress reports on the implementation of the resettlement and rehabilitation of the Affected Persons under the Project during the preceding three (3) months; and (b) by July 1, 1996, under terms of reference satisfactory to the Bank, retain an independent entity with qualified and experienced staff to: (i) undertake the

60 external monitoring and supervision of the implementation of the resettlement and rehabilitation of the Affected Persons under the Project; (ii) prepare and furnish to the Bank and PLN semiannual monitoring reports thereof the first of such reports to be furnished by September 30, 1996; and (iii) prepare and furnish to the Bank and PLN a final evaluation report on completion of the resettlement and rehabilitation of the Affected Persons under the Project (para 4.45) (m) With respect to various financial issues: (i) (ii) PLN shall: (a) review annually with the Bank and the Borrower, the proposed consolidated investment plans of PLN's and PLN's Subsidiaries for the next five years, including the priorities assigned to the investments included under such plans and the balance between the generation, transmission and distribution of electric power likely to result from such invetsments; and (b) by October 31 every year commencing in 1996 review with the Borrower and the Bank, the consolidated development plans of PLN's and PLN's Subsidiaries and associated financial forecasts and financing plans (para 2.40). PLN shall: (a) prepare a ten-year financial forecast based on the proposed consolidated development plans of PLN and PLN's Subsidiaries; (b) test each proposed development plan for financial feasibility; (c) develop a financing plan covering the first five years of the forecast period which will specify the quantum of external funding and the appropriate rnix of equity and debt and, to the extent possible, identify potential financing sources; and (d) ensure that its reccmmended development plans and associated financial forecast and financing plan are join tly reviewed with the borrower and the Bank prior to their adoption by the PLN's Board,para 2.40). (iii) PLN shall and shall cause PLN's Subsidiaries to: (a) by October 31 every year commencing in 1996 review their respective and their consolidated long-run marginal costs with a view to formulating their tariff structures; (b) discuss the results of such review with the Borrower and the bank; and (c) thereafter, take appropriate steps to revise the tariff structures taking into account the views, if any, thereon of the Borrower and the Bank (para 2.45) (iv) PLN shall and shall cause PLN's Subsidiaries to: furnish to the Bank as soon as available, but in any case not later than six months after the end of each such year, (A) certified copies of their individual and consolidated financial statements for such year as so audited, and (B) the report of such audit by said auditors of such scope and in such detail as the Bank shall have reasonable requested (para 2.49).

61 Condition of Effectiveness 6.3 Execution of a satisfactory subsidiary loan agreement between the Government and PLN satisfactory to the Bank (para. 4.21). Disbursement Conditions 6.4 PLN shall: (a) establish and document the environmental and resettlement impacts of the 150kV transmission component as per guidelines satisfactory to the Bank, and (b) prepare and furnish a 150kV-RAP, satisfactory to the Bank, as a condition of disbursement for this component of the Project (para 4.43) and 6.5 PLN shall: (a) revise the 500kV-RAP in accordance with PLN's General Policy Concerning The Establishment of Overhead Transmission Lines; (b) include in the RAP the final base line survey of affected people; and (c) furnish a 500kV-RAP, satisfactory to the Bank as a condition of disbursement for this component of the Project (para 4.42). Recommendation 6.6 With the above agreements and conditions, the proposed project is suitable for a loan of US$373.0 million equivalent to the Republic of Indonesia, for a period of 20 years including a grace period of 5 years, at the Bank's standard variable interest rate.

62 INDONESIA SUMATERA AND KALIMANTAN POWER PROJECT Organization Chart of the Ministry of Mines and Energy m LLF3t &rmur &md -l, -, &na~~~ Td f kcknl8d k~~~~~~s~~~ad I i hiw~~~~~~~paucas L~;mFiLXil cl~~~~~~~~~~1ardlgasu Rssg Ne:uZIec - -" 1~iiL L Ei3EAlAIEEliES31F3x~ctedbtdhs1iwHPlAIPSI rd~~~~~~~~~~~ I I Ii I I I FV PTThuhF hbti F_a~ FjN _ F'G X estl n (ra mdw X _&68 G 6 1 _ H

63 ANNEX 1.2 Page 1 Govermment of Indonesia Ministry of Mines and Energy GOALS AND POLICIES FOR THE DEVELOPMENT OF THE ELECTRIC POWER SUB-SECTOR Background Indonesia's basic goals and policies for the future development of the energy sector are described in the Outlines of State Policy (Garis-Garis Besar Haluan Negara or GBHN) promulgated by the Peoples' Consultative Assembly (MPR) in March 1993 to guide the formulation of the Sixth Medium-Term (Five-Year) Year Development Plan (REPELITA VI) and Second Stage Long-Term (Twenty-Five Year) Development Strategy (PJPT-II). The GBHN highlights the importance for Indonesia's sustained economic and social development of meeting its rapidly growing energy needs efficiently--including through conservation and diversification of primary energy sources and their more efficient utilization--and of minimizing the adverse envirornmental and social impacts of energy use. In the electric power sub-sector, the GBHN recognizes that an adequate, reliable and reasonably priced electricity supply is essential for the country's continuing development, emphasizing its role in serving the needs of other productive sectors and in contributing directly to improving the living standards of the people. The recent development of Indonesia's power sub-sector is characterized by very rapid growth in the demand for electricity and in the total capacity of the public power supply. Over the last 15 years, the generating capacity owned and operated by the sole state-owned power utility, Perum Listrik Negara (PLN), has incresed from about 900 MW in to about 11,000 MW in 1992/93. Over this same period, the number of customers served by PLN has grown by thirteen times. These impressive achievements have been made possible by the continuing institutional development of PLN, and by a strong commitment on the part of Governmento ensuring that PLN obtained the necessary financial and other resources. However, the very rapid pace of growth of power demand since the mid-1980s, attributable to the success of the Government's economic policies, has--when coupled with the country's archipelagic geography--posed challenges that have exceeded PLN's evolving capacities. Thus while extensive power grids serve most areas of Java and Bali, the coverage and quality of electricity supply in the outer islands generally remains very low while costs remain stubbornly high. Moreover, even in Java and Bali, the rapid growth in industrial demand for power has outstripped PLN's ability to supply, with the result that the capacity of privately-owned autogeneration plant is now equivalent to around 30% of PLN's installed capacity. The Governnent recognizes that the challenges confronting the power sub-sector will necessarily intensify in the coming plan periods, and that this in turn will necessitate changes to the policies that have guided its development in the past. Policy Goals for REPELITA VI and PJPT-fl During REPELITA VI and PJPT-11 the Government's policies for the electric power subsector will be designed to: (a) (b) improve the performance of PLN, notably through decentralization, commercialization and corporatization; structure electricity tariffs so as to reflect more closely the economic costs of supply; M:PTD2\SAR\ANN\POL.ANN

64 ANNEX 1.2 Page 2 (c) (d) (e) reform and refine the regulatory and institutional framework so as to foster competition and facilitate increased and more efficient private sector participation; enable equal access to primary energy sources at market-determined prices for publicly and privately owned power generators; and develop and implement appropriate measures for inducing energy conservation and improving environmental protection. The broad policies for achieving these goals have been established as part of the process of formulating REPELITA VI and are outlined below. ImnDrovinp PLN's Performance The Government recognizes that improving the efficiency and quality of PLN's services and equipping it to respond effectively to continuing rapid growth in demand for power will necessitate significant changes to its present organization structure and corporate strategy. These changes, which will be implemented in a number of carefully planned stages, will entail: Decentralization: PLN's organization and management processes will be structured and decentralized so as to establish profit centers along functional (generation, transmission, distribution) and geographical lines. Managers of profit centers will be given expanded and more clearly defined decision-making responsibilities, and will be made accountable for their performance. A system of contract-based objectives and incentives will be established to encourage improvements in the operational performance of profit centers. Commercialization: PLN will be required to function as a commercially oriented enterprise, with individual profit centers planning and managing their activities in accordance with sound commercial principles. Cross-subsidy between commnercial and non-commercial businesses will be phased out, with Government providing explicit subsidies on a transparent basis for rural electrification and other social programs that are carefully targeted to benefit low income groups or regions. The sub-secto regulatory and institutional framework will be enhanced, inter alia to prevent exploitation of monopoly powers (see below). Corporatization: PLN's corporate status and structure will be amended to reflect and reinforce these initiatives and to enable it to compete on an equal basis with private power enterprises. The present Perum entity will be converted progressively into a group of profit-oriented limited liability companies (Perseros): these will be empowered to raise funds on the capital markets, and private participation in their ownership will be sought as soon as their financial performance permits. Such state-owned companies will be expected to compete in a marketoriented environment, with Government exercising strategic control over them on an 'arm's length" basis through performance contracts that specify clear objectives and efficiency indicators. Restructurin2 Tariffs The Government's policies on electricity tariffs are designed, inter alia, to ensure the sustainable sound financial health of the power sub-sector and, in particular, its capacity to respond effectively to the rapid growth in demand for electric power. As a first step towards enabling PLN to play an expanded role in financing the needed massive investments in new and replacement capacity, the average sales tariff will be increased to enable it to achieve at least an 8% overall rate of return on revalued assets; this is expected to result in a self-financing ratio of 30-35% for the period To avoid erosion over time of the real value of the power tariff, rates M :UTDnSARAANNTPOL.ANN

65 ANNEX 1.2 Page 3 will be adjusted periodically to reflect changes in the costs of supply, with the mechanism adopted being designed to promote efficiency improvements and tight control of costs. The present sales tariff structure will be simplified and the distortions inherent in it will be progressively reduced so as to enable rates to reflect better the costs of supply. As part of this process, the uniform national tariff policy will be reassessed during REPELITA VI with a view to its replacement by a system of two or more regional tariffs. Cross-subsidies between businesses and between consumer categories will be progressively phased out and replaced by a transparent system of explicit Government subsidies for social programs or services that benefit carefully targeted low income groups. To facilitate increased private participation in the power sub-sector, the Govermnent will require PLN quickly to establish and publish rates for the purchase of power from small generators through standard forms of contract, and to establish tariffs for the bulk supply of power to distribution enterprises. The Government is currently examining mechanisms and conditions for enabling 'third party access' to PLN transmission grids, and intends that PLN should introduce a tariff for "power wheeling." Reforming the Regulatory Framework and Promotinn Private Participation The Government is committed to expanding quickly private sector participation in the power sub-sector, both to complement PLN's efforts to meet rapidly growing power demands and to promote healthy competition that will produce improvements in efficiency and standards of service. It recognizes that this will require, on the one hand, a transparent, comprehensive and consistent regulatory framework to define the rules under which state-owned and private power enterprises will operate, and, on the other, an independent agency to oversee the operation of these regulations and, in particular, to ensure that the natural monopoly elements of the system are managed in a manner consistent with the public interest. The oversight agency will be responsible for ensuring that regulations are administered and applied in a transparent, timely, and consistent manner, and will be required and empowered to deal with appeals relating to their implementation. During 1994, the Government will review the current legal and regulatory framework for the power sector and plans to formulate the revisions and additions that are needed to secure the above goals. It will also initiate the establishment of a regulatory oversight agency under the Ministry of Mining and Energy by separating those functions that relate towpower sector policy and planning from those that relate to the power industry's regulation and oversight. As a first step, a separate Directorate of Regulation will be created within the Directorate General of Electric Power and Energy Development. This will subsequently be converted to a higher level agency with greater powers and independence. The Government is currently refining its strategy for securing private participation in the sub-sector, and is strengthening its procedures and capacities for promoting, evaluating, and negotiating proposals from private entities. While the initial efforts in this area have focused on the solicitation of proposals for large Build-Owen Operate (BOO) power generation projects, the existing regulatory framework permits a much broader spectrum of private participation and considerable attention is now being devoted to exploring other opportunities. Unsolicited proposals for BOO generation projects are being encouraged, and several are now in preparation under Letters of Preliminary Approval. Arrangements for permitting small independent power generators to sell electricity to PLN at published tariffs through standard forms of contract are being developed and will be finalized shortly. These arrangements are expected encourage more efficient use of existing autogeneration capacity and to promote development of cogeneration capacity by industrial plants. Active consideration is now also being given to expanding the role of private enterprises and cooperatives in the distribution / supply function, and to permitting private participation in the short-to-be-corporatized elements MA:YMD2\5ARMANMAPOL.ANN

66 ANNEX 1.2 Page 4 of PLN. In addition, the Government intends also to require PLN to provide "third party access" to its transmission grids for independent power producers. The conditions and charges for such access will be clearly defined and their implementation will be monitored by the regulators oversight agency. Enabling Equal Access to Primary Energy Sources The Government recognizes that success in securing efficient private participation in large scale power generation will be contingent on intending private power enterprises being able to enjoy the same access to and prices for primary energy as are enjoyed by PLN. Accordingly, it intends to review and, where necessary, to revise its current policies in these areas, particularly with respect to natural gas and geothermal stream, so as to make the markets for primary energy resources open and transparent. Promotinp Enermv Conservation and Environmental Protection Energy conservation is a central theme of the Government's energy policies, and it is recognized that the appropriate pricing of primary energy and of electric power as outlined above will play a key role in promoting the economically efficient use of scarce resources. The Government's commitmento such pricing policies is reflected in the statement of the President, made in January 1993, concerning the principles that will in future govern the pricing of refined oil fuels for supply to the domestic market. It recognizes, however, that the proper pricing of energy products will need to be complemented by other initiatives and measures designed to encourage and induce sound energy use decisions, particularly on t}c part of industrial, commercial, and transport enterprises. In the power sub-sector, the Government is now developing a strategy for encouraging the more efficient utilization of electricity and the implementation of this strategy will be accorded high priority during REPELITA VI. Encouraging conservation and diversification in the use of energy resources is an important element in the Government's strategy for reducing the adverse environmental and social impacts of energy consumption. More generally, the Government recognizes that safeguarding the environment is a prerequisite for sustainable development, and accordingly has put in place the regulatory framework and institutions needed to achieve this. During REPELITA VI, considerable attention and resources will be directed to ensuring that these regulations are implemented as intended. Within the electric power sub-sector, attention will be focused on the careful planning and design of new generation, transmission and distribution facilities so as to minimize and mitigate their impacts on the natural environment and adjacent communities, and on effective monitoring designed to ensure proper compliance with applicable standards and practices. Implementation The Government will implementhe above policies through a comprehensive and carefully phased mediumterm action plan whose preparation is being coordinated by the Ministry of Mines and Energy. Other concerned institutions and agencies, most notably representatives of the People's Representative Assembly and the Ministry of Finance, are being consulted on those aspects of the actin plan that extend beyond the jurisdiction of the Ministry of Mines and Energy. The action plan is conceived as an integral component of Ministry's strategy for the development of the energy sector during REPELITA VI, and it is therefore intended that its key elements will be finalized by the end of M:\PTD2\SAR\AN?APOL.ANN

67 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Organization Chart of PLN Corporation Inspectorate The Board of PLN Region I Special Are1 Aceh PLN _PWN Region 11 North Sumara Directorate of a,b*v ot a, _West Sumatra and Riau Annex 2.1. ~~~~~~~~~PLN Region IIl PWN Region IV Directorate of ~~~~~~South Sumatra, Lainpung C;onrudon O ot _Jambi and Bnghu DCln=nb do_ PLN Rgin Main Project Generation and Transmission PLN = Sout, V nw North Sumatra Ess K - rn Main Project PlN Generabon and Tansmission West Sumatra and Riau Nort Ces Suwec Main Project PWN RagZi VIII Generation and Transmission - South South and Sout-East Sumatr a Lanpung, Jamnbi and Sengkilu -J alwe Main Project Generation and Transmission Su aw M al Psi PLN Region IX Man_PrPlX EastJoanandB Sall ide JaysX Main Prolect l J PLN Region Xl Thermal Power n l Ball, West and East East Java l l Nusa T I PLN Dniobun Generation (Thermal) and Transmission - CentralJava IEA Jo ~~~~Main Proqedtll Maln Project PLN D13rbJtlon g Cent~Hral Power I CenJava ~~Hydro Main Project Transmission West Java and Jakarta Raya. E H V Transmission and LDC PLN DkiutKIOn Weet Java Main Project Thermal Power West Jav and Jakarta Rays rraryan PLN Distribution agm Main Pmroect HroPower PNGnrW usi West Java Conpan I 'IIEngineering Main Project Cw L r PLN Genarabo Subsidlar Physb alnd Supportdng Fdles SlervicPoersdc'o Cornan 11 enteren I Generabon andt7ransmission I ~~~Kalimantan Comer ] Transmisson and Contn Center I Serzkes l ~~~~PLN Specia Regbn Puu Starm be6172a ~t

68 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT PLN Historical Performance Indicators /84 84/85 85/ /88 88/89 89/90 90/91 91/ / Generating capacity (MW) 3,032 3,406 3,935 4,515 5,635 6,200 6,421 8,149 8,941 9,118 9,189 10,874 12,825 14,171 Ptalo4 (#'4 t8w Z?3ei eb;wxtt=t 2.41 js L%; 2. ii g 4,54 N Reserve margin(%) Peak load for Java-Bali (MW) 2,245 2,862 3,943 4,565 4,722 5,277 5,756 7,093 > [ APL < 65.0 Res. margin for Java-Bali, 3-year mov. ave. (%) I r " L", ~ 4 7 N~NIPWWM I ON 0 " Prmvate purchased power over prod'n(%) ";t4te4,2%$a",25w i2o> 44< 2# W>; Of which: generation (%) p't'"I'I Zfl '20 19,8; in> '.j07 ';U;3 T 0 >",bz 5Xwn$t0Mt ' -,9,t e jp t Electricitysales(TWh) ~~~oa0 A&o' 94 10* :--ti1 010* 18.-:0k 1*3 mos04 WS 4.~4 Load factor(%) it 4 14j 0 8,150, 28 10,71142,38 141St 1 1Y&1 /104 % villages electrified Sales (MWh) per employee Notes: 1. Historical figures come from past SARs, ICRs and PLN statistical publications. 2. Figures are for all-indonesia unless stated to the contrary. 3. Prior to 1994, the Government fiscal year is used. From 1994, PLN's fiscal year is used for most indicators, but not for generating capacity and peak load. 4. Reserve margin is defined as the difference between generating capacity and peak load divided by the peak load, expressed as a percentage. 5. The reserve margin 3-year moving average is defined using the average of the reserve margins of the preceding, current and following years. 6. The load factor is the ratio of annual sales (MWh) to peak load (MW) times 8760 hours (the number of hours in a year), expressed as a percentage. I X'

69 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Java-Bali System Peak Load, Production and Installed Capacity 1993/ / / / / / / / /03 9 Sales volume GWh 31,819 36,655 42,887 50,178 58,708 68,688 77,618 84,836 92, ,844 Sales increase % T&Dlosses % Sentoutenergy GWh 35,605 41,076 47,948 55,948 65,459 76,587 86,544 94, , , ,016 Station use % Gross generaton GWh 37,916 43,617 50,874 59,312 69,395 81,192 91, , , , Peak load MW 5,756 7,,093 8,273 9,645 11,285 13,203 14,919 16,307 17,774 19,321 20,345 Load factor % instailed capacity MW 9,499 10,734 11,576 13,341 Of which 14,826 17,941 20,076 21,241 22,871 24,401 26,104 New Private MW ,660 4, ,940 8,340 9,200 % ExistingandNewPLN MW 9,499 10,734 11,576 13,341 14,721 15,281 15,411 15,411 15,931 16,061 16,904 # Of which Hydro % Coal-fired Steam % Gas Turbine % Geothermal % Combined Cycie % Reserve margin % year average reserve margin % Hydro Power Plant MW 2,024 2,024 2,037 2,037 2,537 2,637 2,537 2,537 2,537 2,537 2,800 ExisUng MW. 1,988 1,988 1,988 1,968 1,988 1,988 1,988 1,988 1,988 1,988 1,988 New PLN MW Cirata II 5-8 MW Jatigede 3 MW Kesamben 1 MW 33 Rajamandala 1 MW Tulis 1 MW Tulung Agung 1-2 MW Coal-fired Steam Power Plant MW 3,800 4,200 4,200 4,200 5,300 7,175 8,650 9,850 10,860 12,250 13,660 'U Existing MW 3,400 3,400 3,400 3,400 3, ,300 3,300 3,300 3,300 3,100 * New PLN MW ,000 2,600 2,600 2, ,600 3,400 F Paiton 1,2,3,4 MW ,600 Suralaya 5-6,7 MW -, 1,200 1,800 1,800 1,800 1,800 1,800 1,800 Note: and actuals; later years P1N forecasts 11/81954:11 PM PowerWAp195MUKN.XLS jova

70 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT New Private MW ,275 2,950 3,950 4,950 6,350 7,150 Cilegon 1,2 MW LSWR MW Paiton 5,6.7,8 MW ,230 1,830 2,430 2,430 2,430 Pangkalan 1 MW PLTU 600 MW 1 MW Tanjung Jati A 1,2 MW ,200 1,200 Tanjung Jati B 1,2 MW ,320 1, ,320 1,320 Gas Turbine Power Plant MW ,231 1, ,101 1,101 1,621 1,751 1,731 Existing MW New PLN MW ,511 1,641 1,641 Bali 1-2 MW Grati 1-3 MW Muara Tawar 1-3 MW Peaking 1,2,3,4.5,6 MW Geothermal Power Plant MW ,175 1,340 1,450 1,450 1,510 ExIsting MW New PLN MW Darajat 1 MW Salak 1-2,3 MW New Private MW ,090 1,090 1,150 Candi Kuning 1 MW Darajat 2,3 MW Dieng 1,2,3 MW Kamojang 4,5 MW Karaha 1,2,3,4 MW Patuha 1,2,3,4 MW Salak 4,5-6 MW Wayang Windu 1.2,3,4 MW Combined Cycle Power Plant IW 2, ,360 5,513 5,513 6,413 6,413 6,413 6,413 6,413 6,413 ExIsting MW New PLN MW 2,840 3,426 4,360 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 Grati 1,2 MW Gresik 1,2 MW 1,412 1,578 1,578 1,578 1,578 1,578 1, ,578 1,578 1,578 M. Karang 1,2 MW M. Tawar 1,2 MW Priok 1,2 MW 780 1,200 1,200 1, ,200 1,200 1,200 1,200 1,200 1,200 *, T. Lorok 1-,1-S,24,2-S MW ,035 1,035 1, ,035 1, p Now Private MW '_ Pasuruan 1,2 MW Note: and actuals; later years PLN forecasts 118 4:11 PM powe. a%m1095mu.xls j.,

71 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Outside Java-Bali Peak Load, Production and Installed Capacity S,iliSN k$ liii iiw...,, ele i; inix *g,. IR Is Salesvolum. GUlh S Sales Increase % Gross generation GWh Peak load MW Load factor % Installed capacity Of which MW New Private MW V Exis& gand Now PLN MW % * Of wahi Hydra % Gas-twbine % Conbiw cye GtennS.% cow % Sbeam-ol % iri-dra V o Dts % Hy" Mw SW 704 EON" 41to VW J PUt 267 2U WV 26? Lovw. U A of e as PmduowwoIV MW Roo,..~m MW a 0 a a _Ie..pu MW O O i AagU mw 0 0 O ea MW O 1l4 : S k 114 mw 0 0 O NOeOOW m1s SV~~~~~M e Wum 210 2t0 MW n o I O N Kill"IW 0 MW O 0 a es a03l a 3 raw MW 0 0 e e 0 e53 _aki MW 0 0 e o UhbumS 27 2? MW a Ga4bwT MW 3I? d so 470 MW NePKm MW _ t U ~ ~ ~~W e u_tm o 2 O le re 50 li.pqiml 26 P_2 W 20 2 MW W esoa e so fyyyy so F Id e U.P_2 PUrgO"I MW MW I Y 28 2 Yf P_2 WV 0 Y5 32 Ss Y6 Y1 3Y "apmuui M 0 a U.Psn MW I e a MW 35" a3 on 1124 ts1s 14t2 1s" 1t3 MW NewPUI MW af 120 t20 f1 50 t6 e6 to 50ZtetZt Note: 1993/94 arnd 1994/95 actuals; later years PLN forecasts; only planned plants of at least 20 MW capacity are shown. I jm9 4:11 PM htbiioowlw AuXU OA JOe

72 INDONESIA SECOND POWER TRANSMISSION AND DiSTRIBUTION PROJECT Outside Java-Bali Peak Load, Production and Installed Capacity i I tl1l MW ilno t0 4t0 4t swnwimw ~~~MW 0 a as as No. p4i r MW t6o T in I mw MW a 3 MW ti 4 MW iw*m 5 MW R66ON VW i_n 0fW t esioni-wg MW MW S f Sang-Songs MW S.Il~~~~~~~~U19 ~~~~MW es as66u S.o~~~~~~~mig ~~~~~MW a6 66 G.46Wfnml MW $ Eais86g M~~~~~~~~~~hW a M. PLN MW Its66 6. NSP W ISO 1O Son" MW 00 0 O O0 1 1l0 1fi SIF. MW 00 1O smila MW MW L.4MW a6 col MW 130 It otstso MW 130 lo NW. PiN MW 0 es5 IN t i s.o 6o,asM, ~~~~ ~ ~~~~~~MW es 06 as wiwoueA MW as as U'P.ndu MW a 0 0 o es as U.Pa64gMW 0 a o so S,*A A"M ~~MW as BukkASAin 0 o e so as as 65 as as56 OniAn ~~~~MW 0I I0 10 0"*&A ~~~~MW TUaihai MW uahu. MW00 0 0too000 0 MW so so P11.6 MfW Ills AMmWSO MW s so so so AAlsue MW so so Pg.AWak MW so o s so so POsAsnAk MW 0 0a soo PMWanaas ~~~~ 0 ~ ~~~ 0 0 ~~MW 0 I sosoo Tarshton MW T.50., MW too t00 SMa i: MW 00 O00 t 1O00 tis ito too sbio.u MW Sholge IMW ) 100 U PI MW o0 100 P.Sid t MtW tmw o 10o 100 soma rd&* Mw as1!oms"") NW 311 D11 III D I r~ig MW o o r..pue MW 0 o os `t* _ o o lb PWggs M~ ~ ~~~~~~~~~W ci... W 1w$666l ) lo6 lot 166$ 1616 MW 1751 Ms MM wplu MW , Ms P MfW T.~p. imw S6 60 t0 60 s0 Note: 1993/94 and 1994/95 actuals: later years PLN forecasts; only planned plants of at least 20 MW capacity are shown. 1I 166t4.11 PM A6%psl0g06lMA.XL L JOA

73 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT PLN'S INVESTMENT PROGRAM (MILLION US$ CONSTANT 1994 PRICES) PROJECT NAME REPELITA VI REPELITA Vll GRAND 1994/ / / / /99 TOTAL 1999/ / / / /04 TOTAL TOTAL Generation Total 4,455 2,351 1,495 ' ,696 1,019 1,735 2,215 2,044 2,028 9,040 18,737 Fc 3,895 1,859 1, , ,227 1,612 1,450 1,466 6,425 14,337 Lc , ,616 4,400 Diesel Total Steam Coal Total , , ,075 4,275 6,668 Hydro Total , , ,020 5,195 Mini Hydro Total Gas Turbine Total Geothermal Total Combined Cycle Total 3,359 1, , ,038 Transmission Total 976 1, , ,047 7,902 Fc , ,457 6,382 Lc ,520 Lines Total , ,398 3,763 Substation Total , ,649 4,139 Distribution Total ,148 1,286 5,247 1,183 1,052 1,134 1,219 1,406 5,994 11,241 Fc , ,076 4,595 8,641 Lc , ,399 2,600 Consumers Total , ,765 MV Line Total , ,108 5,474 LV Line Total , ,504 2,590 Transformers Total ,412 Total Total 6,419 4,350 3, ,886 19,798 2,803 3,425 3,856 3,800 4,198 18,082 37,880, Fc 5,440 3,483 2,624 2,128 2,209 15,883 2,060 2,556 2,904 2,815 3,142 13,477 29,360 cx Lc , ,056 4,605 8,520 p- Note: 'Fc' is foreign cost and 'Lc' local cost. 11/995 :t2 AM xtmp1n1090ks5.xls

74 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT PLN'S INVESTMENT PROGRAM FOR JAVA - BALI (MILLION US$ CONSTANT 1994 PRICES) PROJECT NAME REPELITA VI REPELITA VIl GRAND 1994/ / / / /99 TOTAL 1999/ / / / /04 TOTAL TOTAL Generation Total 3,774 1, , ,188 1,260 1,476 5,064 11,809 Fc 3,332 1, , ,074 3,751 9,520 Lc ,313 2,289 Diesel Total Steam Coal Total , ,244 4,997 Hydro Total ,457 1,745 Mini Hydro Total Gas Turbine Total Geothermal Total Combined Cycle Total 3,066 1, , ,577 Transmission Total , ,615 5,244 Fc , ,297 4,248 Lc Lines Total , ,256 Substation Total , ,987 Distribution Total , ,626 5,758 Fc , ,992 4,402 Lc ,356 Consumers Total ,085 MV Line Total , ,378 2,737 LV Line Total ,012 Transformers Total Total Total 5,201 3,201 2,074 1,487 1,543 13,506 1,323 1,590 1,874 1,979 2, ,811 p x Fc 4,461 2,597 1,689 1,167 1,217 11,130 1,014 1,229 1,448 1,462 1,888 7,040 18,170 fd ) Lc , ,265 4,641, Note: "Fc" is foreign cost and "Lc" local cost. 11/9/95 9:12 AM x1s%pn41095v8r0ok95.xls

75 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT PLN'S INVESTMENT PROGRAM FOR OUTSIDE JAVA-BALI (MILLION US$ CONSTANT 1994 PRICES) PROJECT NAME REPELITA VI REPELITA Vll GRAND 1994/ / / / /99 TOTAL 1999/ / / / /04 TOTAL TOTAL Generation Total , , ,976 6,928 Fc: , ? 393 2,674 4,817 Lc: ,303 2,110 Diesel Total Steam Coal Total ,031 1,671 Hydro Total ,563 3,450 Mini Hydro Total Gas Turbine Total Geothermal Total Combined Cycle Total Transmission Total , ,432 2,659 Fc: ,160 2,134 Lc: Lines Total ,507 Substation Total ,152 Distribution Total , ,368 5,483 Fc: , ,603 4,238 Lc: ,244 Consumers Total MV Line Total , ,729 2,737 LV Line Total ,578 Transformers Total Total Total 1,218 1,149 1,266 1,316 1,343 6,292 1,480 1, ,821 1,659 8,777 15,069,., Fc ,753 1,046 1,327 1,456 1,354 1,255 6,437 11,190 x Lc , ,340 3,879 m' Note: "Fc' is foreign cost and 'Lc" local cost. 11/9/95 9:12 AM xi5%pdn1095%wfooik95.xls

76 INDONESIA Annex 2.5 SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Page 1 PLN'S FINANCIAL STATEMENTS HISTORICAL AND FORECAST IA. PLN Historical Income Statements (Rp billion) 8S86S / / Oceratlng revenue L1 4S 2 89a A.Z Z 6 78fi Energy revenue 1,227 1,382 1,581 1,840 2,674 3,139 4,063 4,794 5,922 6,642 Other operating revenue From consumer contributions 108 Other 37 Operatina expenses t 222 t292 1Z 63 I A.464 4A2 I25 5i874 Fuel & lubrcating oil ,006 1,085 1,552 1,829 2,132 2,783 2,638 Power purchased Operations ,127 1,331 1,721 Personnel expenses R&M material 6 services R&M material R&M services Other expenses Revalued Depreciation ,096 1,439 ooeratina incorne m J-t0 2 f z2 NA4 912 Nonoperating income Nonoperating expenses Net other imnco2-133 a 2E Net income before intrest -i. 124 A- 4 A NQ 222 Z Interest charged to operations Net income before coroorate tax _ : 2QQ Corporate tax Net income after cormorate tax ffi :122 2QQ Notes: See 'Notes and Assumptions for the Financial Forecasts' in Annex 2.6(b) 1/24/96 11:28 AM4 c:powertxis\pln1o95\plnfinst XLS YS

77 INDONESIA Annex 2.5 SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Page 2 1 B. PLN Forecast Income Statements (Rp billion) QprtiWg rvenuo 8.l L247 3t Energy revenue 8,150 10,087 12,506 16,536 22,417 26,890 31,458 36,791 42,648 Other operating revenue From consumer contributions Other Ororatno expenses , , Fuel & lubricating oil 3,090 3,707 3,877 3,897 3,714 3,832 4,150 4,549 4,794 Power purchased ,047 5,699 7,959 9,979 12,305 14,312 Operations 1,873 2,082 3,014 3,694 4,381 4,988 5,765 6,638 7,889 Personnel expenses ,049 1,245 1,457 1,722 2,036 2,410 2,856 R&M material & services ,523 1,953 2,376 2,657 3,050 3,473 4,193 R&M material ,221 1,485 1,661 1,907 2,171 2,621 R&M services ,144 1,302 1,572 Other expenses Revalued Depreciation 1,599 1,807 2,416 3,069 3,838 4,559 5,301 6,175 7,294 Oprorating income , Nonoperating income Nonoperating expenses Net other income -014 :42I :2M A Net income before interest t a A Interest charged to operations ,665 2,569 2,755 3,082 3,504 4,075 4,136 Net income before co=rate tax AN t34 H 13 2Z47 2Z 773 AM23 Corporate tax ,079 Net income after corporate tax AN t.34 j2 ia 2A A Notes: See 'Notes and Assumptions for the Financial Forecasts' in Annex 2.6(b) 1/24J9611:32 AM c:power%xis%p1n10951plnfinst XLS YS

78 INDONESIA Annex 2.5 SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Page 3 2A. PLN Historical Balance Sheets (Rp billion) 85/86 86/ /90 90/ / Fixed Assets 6,444 8,538 10,809 12,943 14,269 16,223 19,938 26,791 32,998 39,029 Plant in service 4,807 6,492 8,268 11,146 13,785 15,962 18,177 22,636 28,143 24,353 Accumulated depreciation 1,099 1,530 2,090 2,699 3,404 4,312 5,310 6,453 7,746 1,439 Net plant in service 3,708 4,961 6,179 8,447 10,380 11,650 12,866 16,183 20,397 22,914 Work in progress 2,736 3,577 4,630 4,496 3,888 4,573 7,071 10,608 12,601 16,115 Current Assets ,302 1,550 1,881 2,229 2,355 2,382 Cash Receivables Inventories Other current assets Other Assets Sinking funds Prepaid emition expense Other Total Assets M , Eauitv and Liabilities Equity 4,321 5,487 7,003 8,504 9,732 11,401 14,212 17,598 21,725 25,483 Paid-in capital & Gov't equity 3,000 3,422 4,282 5,245 5,890 6,690 9,869 12,599 16,033 17,770 Paid-in capital (ind. specific reserve) 15,802 Gov't equity 1,968 Retained eamings Revaluation reserve 1,514 2,217 3,009 3,680 4,063 4,929 4,977 5,822 6,587 7,683 Common stock LTD and bonds (net current portion) 1,856 2,535 3,140 3,481 3,666 3,835 4,165 7,161 7,065 6,930 Long-term debt (LTD) 6,165 6,030 Bonds Current Liabilities ,023 1,025 1,132 1,495 1,724 1,712 3,126 Current portion LTD Accounts payable 659 1,180 1, Other C/L ,907 Other Liabilities ,247 1,523 2,098 3,148 5,541 6,601 Consumers' contributions 1,414 1,631 2,034 2,412 Consumers deposits Other (inc. DPS payable) ,806 3,349 Total eauity and liabilities Z t Notes: See 'Notes and Assumptions for the Financial Forecasts' in Annex 2.6(b) 124/e t911:28 AM C:\POWER'XLS\pin1O95\PLNFINST XLS BS

79 INDONESIA Annex 2.5 SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Page 4 2B. PLN Forecast Balance Sheets (Rp billion) Fixed Assets 48,950 60,901 74,212 88, , , , , ,700 Plant in service 33,468 44,778 57,218 74,138 91, , , , ,034 Accumulate depreciation 3,107 5,102 7,827 11,371 15,898 21,421 28,021 35,894 45,364 Net plant in service 30,361 39,675 49,390 62,767 75,952 84,777 96, , ,670 Work In progress 18,590 21,225 24,822 25,723 27,057 35,515 44,082 53,837 58,029 Current Assets 2,445 2,705 3,075 3,751 4,946 6,086 7,109 8,227 10,096 Cash ,048 1,589 2,169 2,626 3,068 4,190 Receivables 848 1,023 1,233 1,631 2,211 2,652 3,103 3,629 4,206 Inventories ,032 1,125 1,249 1,390 Othercurrentassets Other Assets 852 1,083 1,433 1,786 1,915 1,569 1,848 2,281 2,326 Sinking funds Prepaid emition expense Other ,042 1,146 1,261 1,387 1,526 ITtalAssets Eguity and Liabilities Equity 30,051 35,606 42,275 52,196 60,844 73,342 84,801 99, ,847 Paid-in capital & Gov't equity 19,815 21,448 23,618 25,380 27,193 29,246 31,591 33,983 36,345 Paid-in capital (incl. specific reserve) 15,802 15,802 15,802 15,802 15,802 15,802 15,802 15,802 15,802 Govltequity 4,013 5,646 7,816 9,578 11,391 13,444 15,789 18,181 20,543 Retained eamings 788 1,917 2,935 3,849 5,623 7,685 9,935 11,749 14,351 Revaluation reserve 9,448 12,240 15,722 19,967 25,028 30,911 37,775 45,819 55,151 Common stock ,000 3,000 5,500 5,500 8,000 8,000 LTD and bonds (net current portion) 12,664 18,184 23,714 26,606 31,592 34,993 42,789 49,441 59,976 Long-term debt (LTD) 10,764 15,284 19,814 21,706 26,374 29,693 36,489 42,141 52,676 Bonds 1,900 2,900 3,900 4,900 5,218 5,300 6,300 7,300 7,300 Current Liabilities 1,964 2,184 2,686 3,645 4,105 4,316 4,860 5,214 5,652 Current portion LTD ,369 2,262 2,653 2,791 3,259 3,533 3,887 Accounts payable ,003 1,053 Other C/L Other Liabilities 7,569 8,715 10,045 11,580 13,330 15,297 17,494 19,944 22,647 Consumers' contributions 2,883 3,473 4,175 5,003 5,964 7,058 8,295 9,688 11,236 Consumers' deposits 1,001 1,190 1,413 1,674 1,973 2,306 2, ,514 Other (ind. DPS payable) 3,684 4,052 4,458 4,903 5,394 5,933 6,526 7,179 7,897 Total eauity and liabilities 52, Z Z Notes: See 'Notes and Assumptions for the Financial Forecasts' in Annex 2.6(b) 1/24/961:27 AM C:\POWER1XLSVpIn1O95%PLNFINST.XLS BS

80 INDONESIA Annex 2.5 SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Page 5 3A. PLN Historical Funds Flow Statements (Rp billion) / Gross Intemal Sources ,268 1,313 1,637 1,900 2,455 2,813 Net income before interest Depreciation ,096 1,439 Other Consumer contributions Consumer deposits Operational Reauirements ,023 1, Debt Service ,047 Interest charged to operations Debt repayment Bond repayment 0 Corporate tax Distribution of after-tax income DPS Social & ed'n funds, bonuses, DCWEB Dividends 0 Others ,630 Ch. in work. cap. (excl. crash & current portion) ,215 Changes in net other assets Net Internal Sources IN5 3S External Source 1,260 1,318 1,792 1,676 1,094 1,268 2,967 6,096 5,492 3,332 Govemment equity ,274 2,730 3,434 1,968 Common equity Borrowings (exc1. bonds) ,066 1,458 1,364 Bonds Total sources t40 1 t804 t t Capital exoenditur I I OM Construction expenditure 3,721 6,768 6,139 5,990 Interest during construction Incrmase in cash _z 22 2 IQ M Cash at beginning of year Cash at end of year Notes: See 'Notes and Assumptions for the Financial Forecasts' in Annex 2.6(b) 1/ :32 AM caspowernxis%p1n1095kplnf1nst XLS FF

81 INDONESIA Annex 2.5 SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Page 6 3B. PLN Forecast Funds Flow Statements (Rp billion) 199S Gross Intemal Sources 3,619 4,808 6,142 7,794 9,652 11,177 12,754 14,635 17,063 Net income before interest 1,504 2,398 3,011 3,889 4,858 5,552 6,277 7,165 8,372 Depreciation 1,599 1,807 2,416 3,069 3,838 4,559 5,301 6,175 7,294 Other ,065 1,176 1,295 1,397 Consumer contributions Consumer deposits Operational Reauirements 2,531 2,031 3,154 4,656 6,251 6,662 6,994 8,986 10,294 Debt Service 1,158 1,727 2,594 3,938 5,699 6,652 6,295 7,334 8,669 Interest charged to operations ,665 2,569 2,755 3,082 3,504 4,075 4,136 Debt repayment ,369 2,262 2,653 2,791 3,259 3,533 Bond repayment ,000 Corporate tax ,079 Distribution of after-tax income DPS Social & ed'n funds, bonuses, DCWEB Dividends Others 1, Ch. in work. cap. (excl. cash & current portion) 1, Changes in net other assets Net Internal Sources i 98 3 a W 6.77 External Sources 8,548 8,082 9,069 9,916 10,133 11,663 13,400 15,078 17,783 Govemment equity 2,045 1,633 2,170 1,762 1,813 2,053 2,345 2,392 2,362 Common equity , , ,500 0 Borrowings (excl. bonds) 5,503 5,449 5,899 4,154 7,320 6,110 10,055 9,186 14,421 Bonds 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Total sources , Camital expenditure Construction expenditure 9,154 9,209 9,346 9,698 10,178 12,567 15,355 16,657 19,081 Interest during construction 485 1,580 2,690 3,150 2,815 3,031 3,349 3,627 4,350 increase on cash l -a 21 2 m4l Cash at beginning of year ,048 1,589 2,169 2,626 3,068 Cashatendofyear ,048 1,589 2,169 2,626 3,068 4,190 Notes: See 'Notes and Assumptions for the Financial Forecasts' in Annex 2.6(b) 124/6 11:30 AM c:paw exwi 1095%PLNFINST XLS Fg

82 INDONESIA Annex 2.5 SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Page 7 4A. PLN fuel co ts, 1994 (est.), 1995 (revised budget) and (forecast) Quantities MFO (m. liter) 1, HSD (m. liter) 1,799 2,227 3,001 2,094 1,987 1,671 1,544 1,692 1,863 1,908 Coal (m kg) 5,511 7,279 7,549 10,713 12,884 12,579 12,282 12,349 12,524 13,777 Geothermal (GWh) 1,537 1,750 2,039 2,698 2,769 2,880 2,868 2,853 2,857 2,891 Natural gas (mmscf) Expense (bn Rp) MFO HSD , ,051 1,141 Coal ,031 1,067 1,104 1,177 1,265 1,475 Geothermal Natural gas 946 1, ,722 1,482 1,340 1,411 1,493 1,609 1,549 Lubricating oil Total 2,638 3,090 3,707 3,877 3,897 3,714 3,832 4,150 4,549 4,794 Unit values MFO (Rp/iitre) , HSD (Rp/fitre) , Coal (Rp/kg) , Geothermal (Rp/kWh) , Natural gas (Rp/mmscf) 5,655 5, ,992 6,149 6,206 6,351 6,486 6, B. PLN power pur hases, 1994 (est.), 1995 (revised budget) and (forecast) Publicly-produced power Quantity (GWh) 1, ,727 1,727 1,727 1,727 1,727 1,727 1,727 1,727 Unit value (RpIkWh) Cost (bill. Rp) Privately-produced power Quantity (GWh) ,088 11,928 32,440 43,411 52,622 62,645 70,234 Unitvalue Cost (bill. Rp) Total purchased power Quantity (GWh) ,670 2,815 13,654 34,166 45,138 54,348 64,372 71,961 Unit value (RpIkWh) Cost (bill. Rp) Notes: See 'Notes and Assumptions for the Financial Forecasts' in Annex 2.6(b) 11/23/95 2:24 AM c:pow*r\x1s\plnfinst Xl'

83 Annex 2.6 Page 1 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT NOTES AND ASSUMPIONS FOR THE FINANCIAL INDICATORS AND STATEMENTS (a) Notes and Assumptions for the Financial Indicators (Table 2.3) 1. The rate base is the average of the current and the past year's PLN net plant in service (ie., net plant in service minus consumer contributiops, all revalued). 2. The rate of return on net revalued assets is operating income over the rate base; this is set to 8% from The rate of return on equity is net profits after interest but before tax over equity (total equity niinus the revaluation surplus). 4. Average revenue (USc/kWh, constant prices) is the average revenue expressed in current Rp/kWh deflated by the local inflation index into 1995 prices and then converted into USc using the 1995 exchange rate. 5. The operating ratio is operating income over operating expenses. 6. The current ratio is current assets over current liabilities. 7. The quick ratio is cash and receivables over current liabilities. 8. The annual self-financing ratio is internal sources minus cash increase all over capital expenditure. 9. The three-year average self-financing ratio is net internal sources mninus cash increases for three years all over capital expenditure for three years (last, current and next). 10. Debt-service coverage is net income before interest plus depreciation minus taxes and DPS payments all over debt service. 11. Debt over debt plus equity: debt is net long tenn debt and bonds; equity is total equity minus the revaluation surplus plus unrevalued consumer contributions. 12. Additional notes are given in subsection (b) below. November 12, 1995 m:apo12u&raimfrn.as

84 Annex 2.6 Page 2 (b) Notes and Assumptions for the Financial Forecasts 1. Fiscal years PLN was converted from a a government corporation (Perum) to a limited liability company (Persero) on August 1, As a Perum, PLN's fiscal year was from 1 April-31 March. As a Persero, PLN's fiscal year now coincides with the calender year. The 1994 calender year was never an official fiscal year for PLN and so uses estimated actuals and earlier years use audited figures is based on the revised budget for that year, with estimates based on the first six months used whenever possible. Figures for 1996 onwards are projections, though PLN's draft 1996 budget figures are used where possible. 2. Inflation For the period , 6% local annual inflation is assumed. 2.6% is assumed for foreign inflation (MUV index). The exchange rate is assumed to depreciate from its 1995 value, (Rp 2246/$US) at a rate equal to the difference between the local and foreign inflation rates, so as to keep the real exchange rate constant. Income statements 3. Energy sales Energy sales are projected in line with PLN's latest investment and sales forecasts. 4. Fuel costs and power purchases are projected as shown in Tables 4A and 4B of this annex. Over the forecast period, fuel oil, diesel and coal are assumed to increase at the rate of international inflation. Prices for natual gas and geothermal are assumed to remain constant in dollar terms. The nominal price for power from gas-turbine generators which is held constant at Rpl 10/kWh. Fuel quantity requirements are simulated by PLN (note the increased reliance on coal and gas and the reduced reliance on oil). Purchased power forecast prices are held constant in dollar terms (7.03c for coal-fired, 5.82c for combined-cycle, 7.32c for geo-thermal) and escalated by the rate of currency depreciation. 5. Personnel expenses consist of salaries, fringe benefits and training. Salary spending increases at the sum of the rate of economic growth (assumed 6.5%), the rate of increase of staff size (approximately 5%), the rate of increase in experience (2.5%), and the inflation rate. The value of fringe benefits increases at the rate of increase in staff size (5%) and the local inflation rate. Training is set equal to 5% of the value of salaries and fringe benefits. 6. R&M materials are set at 1.6% of gross fixed assets (not revalued). 7. R&M services are set at.97% of gross fixed assets (not revalued). 8. Other operating expenses increase slightly faster than the sum of local inflation and the staff growth rate. 9. Depreciation is based on category-specific depreciation rates and so vary from year to year (betwen 4.6 and 4.9%). The depreciation rate is defined as the ratio of current depreciation to the average of the current and last year's non-revalued plant in service. Depreciation of revalued assets is the deprecation rate times the average of the current and last year's revalued plant in service. 10. Non-operating income increases at approximately 10% p.a. 11. Non-operating expenditure increases at approximately 10% p.a. 12. Interest expenses For foreign loans, a repayment period of 20 years with a 5 year grace period is assumed and an interest rate of 13% (with allowance for the foreign exchange risk). For local loans, an interest rate of 22% is assumed and a repayment period of 12 years with a 2-year grace period. For bonds taken out prior to , actual interest rates and repayment periods are used; for bonds issued subsequently, a repayment period of 7 years and an interest rate of 13% are assumed. 13. Corporate tax is 35% of net income after interest. However, since the tax law allows for accelerated depreciation, PLN is not forecast to pay corporate tax. November map[d2\sa,r\mfrn.wss

85 Annex 2.6 Page 3 Balance sheet 14. Revaluation The value of PLN assets on 31 March 1979 is taken as the revalued value of PLN assets as of this date. For revaluation for every year subsequen to that, annual escalation factors are utilized (using compounding). For 1979/ /87, the escalation factors used are those set out in Govermment Regulation No. 45 of For revaluation subsequent to that date, PLN uses escalation rates which are the weighted average of foreign and local inflation rates. The foreign inflation rate is given a weight of 70%, the local rate one of 30%. The foreign inflation rate used is calculated from the MUV index multiplied by the $/Rp exchange rate, forecast or actual. The local inflation rate used is the CPI. These are given in the table below. These escalation factors are used to revalue the pervious year's gross fixed.assets including consumer contributions and work in progress. 15. Gross fixed assets equals revalued fixed assets at the beginning of the year (see below) plus fixed asset addition, which is determined based on forecasts of project completion. 16. Accumulated depreciation equals revalued accumulated depreciation at the beginning of the year (see below) plus depreciation for the year. 17. Work in progress equals revalued work in progress at the beginning of the year (see below) plus capital expenditure minus the value of completed projects. 18. Cash balances are set equal to 12% of fuel expenses plus 8% of operating expenses plus 8% of local investment materials. 19. Accounts receivable are set at the equivalent of 36 days. 20. Inventories are 12% of fuel expenses plus 25% of operating materials plus 25% of constructing materials. 21. Other "other assets" increase at the rate of 10% per annum. 22. Paid-in capital is the previous year's paid-in capital plus the government's equity contribution. 23. Revaluation reserve is the previous year's revaluation reserve plus this year's revalued fixed assets net of revalued consumer contributions multiplied by the annual revaluation or escalation factor. Put differently, it is the remainder after the current year's addition to PLN's fixed assets is subtracted from the current year's growth in PLN 's revalued fixed assets. 24. Retained earnings is equal to the previous year's retained earnings plus net income after tax minus the distribution of after-tax income (DPS etc) and minus the change in DPS payable. 25. Net long-term debt is equal to the previous year's gross long term debt plus new debt minus debt repaid minus the current portion of this year's long-term debt. 26. Bonds are the previous year's plus new bonds minus retired bonds. 27. Current portion LTD over the forecast period is the amount of debt repayment in the next year. 28. Accounts payable increase at 5 % per year. 29. Other current liabilities increase at 5% per year. 30. Consumer contributions are the stock of revalued investments made by consumers. 31. Consumer deposits is the stock of deposits which will be returned upon disconnection. m 1X 7SmA stn\i s

86 Annex 2.6 Page Other "other liabilities" increase at the rate of 10% per annum. Funds Flow 33. Consumer contributions are the annual increment in accumulated consumer contributions (end of year's consumer contribution minus last year's revalued by current year's escalation factor) 34. Consumer deposits is the annual increment in the stock of consumer deposits. 35. Contribution to DPS As a Perum, PLN was exempt from corporate tax but was obliged to contribute 55 % of its annual net income (calculated using straight-line depreciation on unrevalued assets) to the Overall Development Fund (DPS). Such payments were due (depending on the year) in five or ten equal installments commencing one, two or three years after the year in which they were incurred. 36. Contribution to DCWEB, social and education funds, and bonuses PLN has contributed in the past to DCWEB (Development of Cooperatives and Weak Economic Businesses), and to social and economic funds. Under the forecasts, 25% of net income (using straight-line depreciation of unrevalued assets) after corporate tax is set aside for these purposes. 37. Dividends PLN has never paid out dividends. For the forecast period, it is assumed that PLN pays our 5% of its net income (using straight-line depreciation of unrevalued assets) after corporate tax is distributed as dividends. 38. Changes in net other assets is the change in other assets minus the change in other 'other liabilities' 39. External financing The projected financing of investment is based on the following assumptions: (a) local financing (i) annual issuance of Rp 1 trillion in local bonds; (ii) Rp 600 billion from the Govemment in DIP allocation; (iii) maximum local borrowing subject to assumed lending limits on the part of local banks due to exposure guidelines; (b) foreign financing (i) average annual issuance of Rp 1 trillion in commnon stock from 1997 onwards; (ii) new project funds-(aid/concessional loans to the Govemment passed on to PLN as equity), assumed equal to 30% of the foreign cost of outside-java investments); (iii) new foreign borrowing to make up the financing gap. 40. Capital expenditure is based on PLN's generation expansion plan with associated transmission and distribution investment requirements. This plan is costed in constant prices and escalated using the foreign inflation rate (for the foreign component) and a weighted (60-40) average of the local and foreign inflation rates for the local component. VAT of 10% is assumed. This is applied to the pre-tax foreign component in its entirety and to 95% of the value of the local component. An import tax of 15% is applied to the pre-tax foreign component. November maptd2%saavnnnfin ass

87 INDONESIA SECOND POWER RANMISION AND DISTIBUrION PROJECT PLNsS TAFF EXMANATION OF THE TAIFF CATEGORI IN THE BASIC ELECnTIcTY TARIFF SCHEUL, 1993 Tariff No. Categorv Contracted Power Exvlanation of the Tariff Category 1. S-l/LV Up to 200 VA Tariff S-1 for Small Consumers (LV) 2. S-2/LV 250 VA to 2,200 VA Tariff S-2 for Small Social Institutions (LV) 3. S-3/LV 2,201 VA to 200 kva Tarrif S-3 for Medium Social Institutions (LV) 4. S-4/MV 201 kva & above Tariff S-4 for Large Social Institutions (MV) 5. SS-4/MV 201 kva & above -- Tariff SS-4 for Large Commercialized Social Institutions (MV) 6. R-l/LV 250 VA to 500 VA Tariff R-1 for Simple Residential Service (LV) 7. R-2/LV 501 VA to 2,200 VA Tariff R-2 for Small Residential Service (LV) 8. R-3/LV 2,201 VA to 6,600 VA Tariff R-3 for Medium Residential Service (LV) 9. R-4/LV 6,601 VA & above Tariff R-4 for U-liL Large Residential Service VA-----to VA------Tar----iff U---o (LV) m 10. U-l/LV 250 VA to 2,200 VA Tariff U-2 for Small Commercial Service (LV) II. U-2/LV 2,201 VA to 200 kva Tariff U-2 for Medium Conumercial Service (LV) 12. U-3/MV 201 kva & above Tariff U-3 for Large Commercial Service (MV) 13. U-4/LV - Tariff U-4 for Temporary Service (LV) 14. H-li/LV 250 VA to 99 kva Tariff H-1 for Small Hotel Service (LV) 15. H-2/LV 100 kva to 200 kva Tariff H-2 for Medium Hotel Service (LV) 16. H-3/MV 201 kva & above Tariff H-3 for Large Hotel Service (MV) I/LV 450 VA to 2,200 VA Tariff 1-1 for Home Industrial Service (LV) /LV 2,201 VA to 13.9 kva Tariff 1-2 for Small Industrial Service (LV) /LV 14 kva to 200 kva Tariff 1-3 for Medium Industrial Service (LV) /MV 201 kva & above Tariff 1-4 for Large Industrial Service (MV) /HV 30,000 kva & above Tariff 1-5 for Large High Voltage Industrial Service (HV) 22. G-l/LV 250 VA to 200 kva Tariff G-1 for Small & Medium Govemment Office Service (LV) 23. G-21MV 201 kva & above Tariff G-2 for Large Government Office Service (MV) J/LV Tariff I for Street Lighting Service (LV) : Note: LV = Low Voltage; MV = Medium Voltage; HV = High Voltage. Source: PLN Finance Department.

88 BASIC ELEcuRIcrTY TARIFF SCHEDULES, p 1993 (February) 1994 (November) Tanff Tariff Contracted Demand =harge knern tharge Average Ynce Uemand :harge nergy C'harge Average YnceE No. Category Power (Rp/kVA/month) (RplkWh) (RplkW ) (RpIkVA=month) (Rp/kVAlmonth) (Rp7kWh) I S-l/LV u to200va /a /b S-2/LV 250 VA to VA 3.T , S-3/LV 2,201 VA to t00kva 4, , S-4/MV 201 kva & above 4,860 P = ,020 P OP =98.50 OP SS-4tMV 201 kva & above 5,520 P = ,060 P OP= OP = R-I/LV 250 VAto500 VA 3, for C60hrstmo , for <60hrstmo for >60 hrs/mo for >60 hrs/mo 7. R-2/LV 501 VA 502,200 VA 3, for <60 hrs/mo , for <60 hrs/mo for > 60 hra/mo for > 60hrs/mo 8 fr-3/lv 2,201 VA to 6,600 VA 7, , R-4/LV 6,601 VA & above 8, , U-liLV 250 VA to VA 6, , U-21LV 2,201 VA to 200 kva , U-3/MV 201 kva & above 4,940 P = ,180 P = OP OP U-4tLV H-liLV 250 VAto99kVA , H-2/LV 100 kva to 200 kva 5, , H-3tMV 201 kva & above 5,020 P ,400 P = OP OP = I-lI/LV 450VAto2200VA 3, , /LV 2,201 VA to 13.9 kva , tLV 14 kva to 200 kva P ,760 P = OP = OP = /MV 201 kva & above P ,060 P for < 350 hrsamo for > 350 bra/mo OP= OP = /MV 30,000kVA & above 4,440 P = , OP= (3IiLV 250 VA to 200kVA 7, , G-2tMV 201 kva & above 4,240 P ,560 P OP = OP = JiLV Averae Tariff S-1: Contracted Demand Charge Demand Charge Power (RP[Montha b(rdmonth) 75 VA 2,550 2: VA 3,300 3, VA 4,200 4, VA , VA 5' VA 6,300 6,750 Note: P = Peak hours (18:00-22:00); OP Off-peak hours (22:00-18:00; LV 5 Low Voltage; MV - Medium Voltage; HV High Voltage Source: PLN Fmance Depanmct.

89 PLN's TARIFF AVERAGE REVENUE FROM ELECTRICITy SOLD, BY MAJOR CONSUMERS (RP/kWh)= I Tariff calegoly /82 82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91 91/92 92/93 93/ Residential Commercial Industrial Buildings S Lightings Source: PLN Fnawce Departmnent. Note: 1995 figures based on first Jan.-March sales. :Z

90 PLN's TARFF. HISTORY OF TARiFF ADJusrmENTs, S2 (Febr_y) 1963 (Februar) 1964 (Mwoh) 1966 (Augur) 1969 (Apri* l Turif Dmand Enrgy Avee Demand EKrrt Averge Demand Enrty Averag Denod Eer Average Demnd Enrgy Aveg caei chup dchrge price char charge price chae chare price chwig cd-c pric chare chre price (Rp/kVa/m(tWh) (RphkWh) (RpAVA!mo) (RphW4. (RpAWI.) (Rpk VA/no) (RpkWh) ("phwh) (RpAVAim) (tp/wwh) (RIAkWI) (IptAVAle.) (RpAkWI) (RpA WI) S isk - - h k /d S. Lt D 4*.2 2,1W , ,7G 45.0O * * * P S. 3, R, 1.6w S5 1.60D , D , fx c 60hrtlo D k > 60 hr/ne R, 1, G0 67.0D , D fr < 60hr/mo for> 602,/on R. 2, S D R, 2,tO , S.OO 1U U, 2,0w ,D D M66.00 for < 150 hrlm for> 150 hlw/wi U, 2, D JO SO for 15D0 lw/to fo > 150 h,/neo U, WUP P - IIIGO ,300 P D P ,4650 P LV,8P OP - 70.O OP Or - 99 OP U, ,H4 2.tOD * - * I,H ,45 * - S2.1S 3, l,h , IM.55 1, W8P P - * p D P O LWSP OP _ OP OP , 1,750 WBP P D P - 10D P S P LWBP OP OP OP OP , 1,600 WDIP - U.00 3S P P- f U 2,100 P P LWOP OP OP OP OP - 60.OD 1, 1.5CO WBP P - 5S.0O P ,970 P , GJMV 1.00 WBP-46.GO U.10 1,50D P ,970 P ,970 p ,960 P LWBP OP OP-65.0G OP - 65.O Op I - 41.O D Avenae A Taiff S,: 100I o 20D VA-fRp to 2.935/morh k Triff S,: I00 o 200 VA-Rp 2,010 to 4.020mosh Twiff S,: 100 Io 200 VA - Rp 2.5I10,5/0o5ih Id Tariff S,: 60 to 200 VA - Rp 1,750 io 5,450A.momh No: WE3P - P - Peak bean (IIDD-22:00) LWBP - OP - Off-penk Iotn (22:00.1:0) AQ ) For 19S3, dhe ariff catory wu reduced lo 17 tariff cawtgries. Cstgories 11,, (now I) an If, (ww I/li) fr hoel cosurs with low _ug wee gued baa 1, and I,, reapc-ively. Fo the taiff ceagcr wu eranded km 17 in 21 cagria. A cw ariff cagory (S,) ewtalied fr larle social uisiitm wih medium votage, and separate iff catgwi (I,IH. IH,. I,H) we esalithed for hotd camwe with 4 low and madm vokgs. wat wm previouly gopdwi Iwdurria comen a conrepotidg volta (I,. I, sd Ij. The av kprioe sbri fo 1966 rels es loat eriff c i ia i So,rs: PLN FwA= Dqep me.

91 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Action Plan for Establishment of Jakarta Electricity Distribution Unit (JEDUI as Investment Center 1996 f ID TaskNamne Duration Start Finish 01 Q Q2 03 Q41 Q 02 Q3 J 04 Q1 Q2 03 i Focus on Efficiency and Productivity Improvement 783d 04/01/ /99 i _ 2 Strategic Planning 783d 04/01/96 03/31/99 3 Processes (including Information Systems) 458d 04/01/96 12/31/97 4 People (including Project Administraion Groups) 458d 04/01/96 12t31/97 5 Cost Center Od 04/01/96 04/01/96 * 04/01 6 Profit Center 130d 04/01/96 09/27/96 7 lnplement Organization Structure 65d 04/01/96 06/28/96 8 Cost Analysis by Tariff& Transfer Pricing 65d 04/01/96 06/28/96 9 Accounts Payable & Accounts Receivable Systems 130d 04/01/96 09/27/96 10 Reporting Mechanisms 130d 04/01/96 09/27/96 11 Investment Center 458d 04/01/96 12/31/ Asset Management & Asset Register System 261d 04/01/96 03/31/97 13 Confirmation of Assets & Liabilities 64d 01/01/97 03/31/97 14 Independent Valuation 64d 04/01/97 06/27/97 15 Opening Balance Sheet, Notional Debt/Equity 132d 07/01/97 12/31/97 16 Finalize Management & Organization Structure and Approve 66d 10/01/96 12/31/96 17 Migrate Staff& New Appointment 129d 01/01/97 06/30/97 Note: The above draft action plan will be finalized by April 1, 1996, once the consultants reports have been reviewed by PLN, and included in the Project Implementation Plan (PIP). M Div Di,k@A3IEWORLDBANK'P2MAR%BARCHARrJVDU.MPP

92 INDONESIA ANNEX 3.2 SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT PERFORMANCE INDICATORS AND TARGETS FOR JAKARTA ELECTRICITY DISTRIBUTION UNIT (JEDU) Indicator Unit A. Key Indlcators Electricity Sales Growth (%) Addition of Consumers Distribution Losses (%) Number of Outages (times/customer/year) B. Other monitorable indicators Length of Outages (hours/customer/year) Connected Capacity (MVA) Construction 4.1. MV lines (kms) LV lines (kms) GD (capacity) (MVA) Inventory Turnover (times) Average age of Receivables (days) Speed in Answering Application (days) Speed in Installation Execution: (days) 11.1 lnstallationwithoutlowvoltagenetwork (days) Installation with Low Voltage Network (days) Installation with Distribution Substation (days) Speed in Bill Processing a/ (days, after reading) Notes: a/ 1995 & 1996: Non-cyclic Meter Reading 1997 & 1988: Cyclic Meter Reading 1995 are estimates; are targets These performance targets are indicative only. They will be finalized once the relevant consultants' reports have been reviewed by PLN but no later than April 1, /1 9:23 AM PrD?SARW*WERP XL3 JEDU

93 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Action Plan for Establishment of Java-Bali Electricity Transmission Unit (JABETU) as Investment Center 1996 :: ~ 1997 ID Task Name Duration Start Finish Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr I Qtr 2 Qtr 3 Qtr 4 Qtr 1 I Ongoing Efficiency and productivity Improvtmcnt (Project 1) 261d 04/01/96 03/31/97-2 Maintcnance 131d 04/01/96 09/30/96 l 3 Logistics 131d 04/01/96 09/30/96 4 Human Resources 131d 04/01/96 09/30/96 l 5 Management Information 261 d 04/01/96 03/31/97 l 6 Cost Center Od 04/01/96 04/01/96 * 04/01 7 Profrt Center 131d 04/01/96 09/30/96 l 8 Dedicated Management and Leadership for JABETU 65d 04/01/96 06/ Reorganization and Business Integration (Project 2) 66d 07/01/ /96 10 Financial Restructuring (Project 3) - identify costs or JABETU 131d 04/01/96 09/30196 _ l 11 Corporate Planning (Project 4) 66d 07/01/96 09/30/96 12 Investment Center 391d 10/01/96 03/31/98 13 Financial Restructuring (Project3) - identify assets, liabilities & revenues 261d 10/01/96 09/30/97 14 Revalue Fixed Assets (Project 3) 391d 10/01/96 03/31/98 15 Establish Shadow commercial Contracts (intemal)(project 7) 391d 10/01/96 03/31/98 16 Support Service Shadow Contracts with PLN (Project 7) 261d 04/01/97 03/31/98 17 Grid Codc (Project 4) 195d 10/01/96 06/30/97 18 Corporate Plan (Project 9) 261d 10/01/96 09/30/97 19 Feeder Systems for Financials (AP, FA) (Project 3) 261d 10/01/96 09/30/97 20 Fully Separate Accounts (Balance Sheet, P+L) (Project 3) 130d 10/01/97 03/31/98 21 Settlements System (internal) (Project 6) 391d 10/01/96 03/31/98 22 Legal Team for Corporate Form (Planning)(Project 8) 130d 10/01/97 03/31/98 Note: The above draft action plan will be finalized by April 1, 1996 once the consultants reports have been reviewed by PLN, and included in the Project Implementation Plan. x D.~~~~~~ Di.kA3IEe~~~~~~~~~~~~~~~~WORLDBANKWTD2~~~~~~~~~~~~~~~~~~~~~5AR~~~~~~BAAC14AANABETU.MPP ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~.. D.D2

94 INDONESIA ANNEX 3.4 SECOND POWER TRANSMISSION AND DISTRIBUTION UNIT PERFORMANCE INDICATORS AND TARGETS FOR JAVA-BALI ELECTRICITY TRANSMISSION UNIT (JABETU) Indicator Unit Transmission Losses (%) Number of Faults kv (times/year) kv (times/year) Duration of Faults kv (minutes/year) kv (minutes/year) Employee productivity MWh/employee Transmission Line Construction kv (kms) kv (kms) Substation Construction kv (MVA) kv (MVA) and 1994 actuals 1995 estimated targets These performance targets are indicative only. They will be finalized once the relevant consultants' reports have been reviewed by PLN but no later than April 1, I11 tss 11:09 PM PTD2ARAMPERF LS J.AETU

95 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT ANNEX 4.1(a) DETAILED BASE COST ESTIMATES JAVA 500 KV COMPONENT Project Scope Unit Year FC LC Total million US$ (June 1995 prices) A. EXTENSION 500 kv S/S 1. Palton /a GIL Telecommunications Kediri /a Diameter 500 kv with 3 CB Diameter500kVwith2CB Shunt reactor, 500kV, 100kVA MVA IBT 500/150 kv Transformer bay 150 kv Telecommunications New Kiaten/Pedan (a) S/S Equipment for Palton-Klaten TIL /a Diameter 500 kv with 3 CB Diameter 500 kv with 2 CB (TL B) Diameter 500 kv with 2 CB (TR) CB 500 kv Shunt Reactor 500 kv, 100 MVA (with Neutral Reactor) Transformer bay 150 kv Telecommunications (a) S/S Equipment for Ungaran-Kiaten T/L /b Diameter 500 kv with 3 CB (Klaten) Diameter 500 kv with 3 CB (Ungeran) MVA IBT 500/150 kv Line bay 150 kv Transformer bay 150 kv Bus coupler 150 kv Subtotal 500kV S/S B. TRANSMISSION LINES lb km 1. Paiton - Kediri kv, 2 cct, 4x338 (Gannet), OHL 2. Kediri - New Klaten kv, 2 cct, 4x338 (Gannet), OHL Subtotal T/L Land Acquisition and Compensation Engineering Design & Bid Document Preparation Engineering Service for Construction Supervision TOTAL Notes* /a Financed by PLN/GOI lb Financed under IBRD loan AM PM2\SAR\COSTEST XLS

96 INDONESIA ANNEX 4.1(b) SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Page 1 DETAILED BASE COST ESTIMATES 150 KV COMPONENT: JAKARTA AND WEST JAVA Unit Year FC LC Total million USS (June 1995 prices) A. SUBSTATIONS Jakarta New 150 kv GIS 1 Gandaria II (GIS) kv Line bay kv Bus coupler /20 kv, 60 MVA trans kv Trafo bay kv Switchgear Control Building Telecommunication Subtotal West Java New 150 kv Conv. SIS I Poncol II kv Line bay kv Bus coupler /20 kv, 60 MVA trans kv Trafo bay kv Switchgear Control Building Telecommunication Tambun II (Switching Station) kv Line bay kv Bus coupler Control Building Telecommunication Subtotal West Java 150 kv SIS B. TRANSMISSION LINES kmr I Tambun II - Incomer kv, 2 cet, 2x429 (Zebra), OHL 2 Poncol II - Incomer kv, 2 cct, 2x429 (Zebra), OHL 3 Gandaria II - Incomer kv, 2 cct, 2x429 (Zebra), OHL 4 Tambun II - Depok lil kv, 2cct, 2x429 (Zebra), OHL Subtotal TIL C. LAND ACQUISITION Gandaria II S/S Poncol II S/S Tambun II SIS T/L land acquisition T/L land compensation Subtotal TOTAL Li 2L2a AM 11 RVS5 2:32 AM PTD29RMIANMCOSTEST.XLS

97 INDONESIA ANNEX 4.1(b) SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Page 2 DETAILED BASE COST ESTIMATES 150 KV COMPONENT: CENTRAL JAVA and ENGINEERING SERVICES A. CENTRAL JAVA Unit Year FC LC Total million US$ (June 1995 prices) Extension 150 kv S/S I Beringin /20 kv, 30 MVA Transf kv Trafo Bay kv Switchgear Rembang /20 kv, 30 MVA Transf /kVTrafo bay kv Switchgear Purworejo /20 kv, 30 MVA Transf /kV Trafo bay kv Switchgear Secang kv, 30 MVA Transf /kV Trafo bay kv Switchgear Subtotal B. ENGINEERING SERVICES FOR 150 KV COMPONENT Engineering Design & Bid Document Preparation Engineering Services for Construction Supervision Subtotal /23/ AM PTD2SARAWCOSTEST.XLS

98 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT ANNEX 4.1(c) DETAILED BASE COST ESTIMATES JAVA - BALI DISTRIBUTION COMPONENT JAKARTA Project Scope Physical Unit FC LC Total Qty. million US$ (June 1995 prices) - Medium Voltage Lines 170 kmc Low Voltage Lines 223 kmc Distribution Transformers 56 MVA Consumer Connections unit Sub-total WEST JAVA - Medium Voltage Lines 883 kmc Low Voltage Lines 584 kmc Distribution Transformers 69 MVA ConsumerConnections unit Sub-total CENTRAL JAVA - Medium Voltage Lines 492 kmc Low Voltage Lines 375 kmc Distribution Transformers 53 MVA Consumer Connections unit Sub-total EASTJAVA - Medium Voltage Lines 574 kmc Low Voltage Lines 410 kmc Distribution Transformers 52 MVA Consumer Connections unit Sub-total BALI - Medium Voltage Lines 61 kmc Low Voltage Lines 52 kmc Distribution Transformers 4 MVA Consumer Connections 8506 unit Sub-total JAVA & BALI - Medium Voltage Lines 2181 kmc Low Voltage Lines 1645 kmc Distribution Transformers 235 MVA Consumer Connections unit Total t :27 AM PTD2\SAMANWCOSTEST.XLS

99 Annex 4.2 INDONESIA SECOND POWER TRANSMISSION & DISTRIBUTION PROJECT CONTRACT PACKAGING No. Contract Packaging Scope of Work I. 500 KV TRANSMISSION FACILITIES PAITON - KEDIRI-KLATEN Lot I 500 kv transmission line Paiton - Kediri Supply & Installation Lot II 500 kv Transmission line Klaten - Kediri Supply & Installation Lot III 500 kv Substations Supply & Installation II 150 KV TRANSMISSION FACILITIES IN JAVA Lot I 150 kv Transmission lines Supply & Installation Lot II 150 kv Substations Supply & Installation III DISTRIBUTION COMPONENT Lot I 20 kv Metal Switchgears Supply and delivery Lot 2A Distribution Transformer (three phase) Supply and delivery Lot 2B Distribution Transmer (Single phase) Supply and delivery Lot 3A 20 kv Cables Supply and delivery Lot 3B XLPE Covered Conductor Supply and delivery Lot 4 20 kv Cables accessories Supply and delivery Lot 5A 20 kv aresters Supply and delivery Lot 5B 20 kv Fuse Cut Out Supply and delivery Lot SC 20 kv Load Break Switches Supply and delivery Lot 5D 20 kv Current limiting arching horn Supply and delivery Lot 5E 20 kv Reclosers and Sectionalizer Supply and delivery Lot 5F 20 kv Automatic Switches Supply and delivery Lot 6A Insulators and Fitting (Post insulators type A) Supply and delivery Lot 6B Insulators and Fitting (Post insulators Tye B) Supply and delivery Lot 6C Insulators and Fittings (Tension insulators) Supply and delivery Lot 8 Bare Conductors Supply and delivery Lot 1OA LV Service Drop cables Supply and delivery Lot lob LV Bundled conductors Supply and delivery Lot I IA LV Bundled conductors accessories Supply and delivery Lot 1 IB LV Bundled conductors fittings Supply and delivery Lot 1 IC LV Bundled conductors connector Supply and delivery Lot 12 Overhead conductor fittings Supply and delivery Lot 18 Miscellaneous equipment Supply and delivery M:APTD2\SARkANN\LOTS

100 Annex 4.3 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT ESTIMATED DISBURSEMENT SCHEDULE (USS MILLION) Disbursement Cumulative Bank FY Semester Semester Cumulative % of Loan / :33 PM pows xbicostest.xls

101 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Overall Implementation Schedule ] ID Task Name Duration Start Finish Q4 I Q Q! Q I Q2 Q3 Q4 Q I Q2 I Q3 Q4 Q I Q2 Q3 Q4 Q I Q2 Q3 Q4 Ql I PLN COMOET kv Transmission Lines 770d 10/02/95 09/11/ Transmision Lnes & Sub-stations 770d 10/02/95 09/11/ Land Acquisition and Compensation 588d 10/02/95 12/31/ Consulting Services 745d 11/06/95 09/l1/9S ISO kv Transmission Lines OOOd 11/01/95 0/31/ Transmision Lines and Substations ilood 11/01/95 08/31/ Land Acquisition and Compensation 435d 12/01/95 07/31/97!o -_ Consulting Services 761d 10/01/96 O8/31/ Distribution Facilities in Java 566d 11/01/95 12/31/97 j PLN Restructuring Component 7S4d 01/01/96 12/31/98 _ - _ 71 Jakarta Electricity Distribution Unit (JEDU) 784d 01/01/96 12/31/98 79 West/Central/East Java Distribution Units 368d 11/01/96 03/31/98 87 Java-Bali Electricity Transmission Unit (JBAETU 523d 01/01/ /97 95.S EMiciency Improvement and Training 740d 01/01/96 10/30/98 - *.. 96 TA for Geographic Information System (GIS) 479d 01/01/96 10/30/ TA for Suralaya Power Plan Simulator Upgrade 740d 01/01/96 10/30/ MME COMPONENT 674d 06/03/96 12/31/ Technical Assistance (Regulstory Regime) 674d 06/03/96 '2/31/918 Div DWm~L43M*WORUDLAWn"DrSARNMAROL"TOVOLMA-MD

102 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Implementation Schedule kv Paiton-Kediri and Kediri-Kiaten Transmission Lines _ 1999 ID Task Name Duration Start Finish Q4 Q1 Q2 Q3 04 Ql Q2 I Q3 Q4 Q1 0 Q Q1 Q2 3 I PROJECT IMPLEMENTATION 770d 10/02/95 09/11/98 - _ Transmission Lines & Sub-stations 3 Preparation of Bidding Documents 44d 10/02/95 11/30/95 4 WB Approval of Bidding Documents 21d 12/01/95 12/29/95 5 Issuance of Bidding Documents 23d 01/01/96 01/31/96 6 Bid Opening 21d 03/01/96 03/31/96 7 Bid Evaluation 64d 04/02/96 06QV8/96 8 PLN Board and GOI Approval lod 07/01/96 07/12/96 9 WB Approval 13d 07/15/96 07i31/96 10 Contract Preparation 22d 08/01/96 08/30/96 11 Contract Award Sd 09/02/96 09/06/96 12 Manufacturing and Construction 520d 09/16/96 09/11/ Land Acquisition and Comnensation 14 Local Government Permit I Ogd 10/02/ /96 15 Land/Assets Inventory _ 51d 12/01/95 06/28/96 16 Price Negotiations 392d 04/01/96 09/30/97 17 Payment/Compensation 413d 06/03/96 12/31/ Consultine Serices_ 19 Finalization of TOR 19d 11/06/95 11/30/95 20 WB Approval of Shortlist lid 12/15/ /95 21 Issuance ofloi Od 01/15/96 01/i5/96 * 01/15 22 Evaluation of Proposals/WB Approval 55d 03/1 /96 05/31/96 23 Finalization of Contract 65d 06/03/96 08/31/96 24 Engineering/Construction Supervision 530d 09/02/96 09//11/98 Div _ M OFV.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r.o hf be

103 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Implementation Schedule kv Transmission Lines and Substations 1996 : '1999 ID Task Name Duration Start Finish Q4 Q1 Q Q3 Q4 1 Q2 0 Q I PROJECT IMPLEMENTATION 1000d 11/01/95 08/31/99 _ i 2 1. Transmission Lines and Substations 3 Preparation of Bidding Documents 66d 11/01/95 01/31/96 4 WB Approval of Bidding Documents 21d 02/01/96 02/29/96 5 Issuance of Bidding Documents 43d 03/01/96 04/30/96 6 Bid Opening 43d 06/03/96 07/31/96 7 Bid Evaluation 109d 08/01/96 12/31/96 8 PLN Board and GOI Approval 64d 01/01/97 03/31/97 9 WB Approval 22d 04/01/97 04/30/97 10 Contract Preparation 65d 06/02/97 08/29/97 11 Contract Award 21d 08/01/97 08/29/97 12 Manufacturing and Construction 522d 09/01/ / Land Acquisition and Compensation 14 Survey 151d 12/01/95 06/28/96 _ 15 Local Government Permit 262d 02/01/96 01/31/97 _ 16 Land/Assets Inventory 175d 06/03/96 01/31/97 17 Price Negotiations 20d 02/03/97 02/ Payment/Compensation 23d 07/01/97 07/31/97 I19 3. Consultine Services 20 Finalization of TOR 23d 10/01/96 10/31/96 21 WB Approval of Shortlist 21d 11/01/96 11/29/96 22 Issuance of LOI 22d 12102/96 12/31/96 23 Evaluation of Proposals/WB Approval 55d 03/17/97 05/31/97 24 Finalization of Contract 65d 06/02/ /97 25 Engineering/Construction Supervision 522d 09/ /31/99,, - - _ OQ X 4 - Div OhbUWMIWORLSA.,MK TD27SARBauAacIAAh5eV.MI

104 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Implementation Schedule - Distribution Facilities in Java 1] _ '_ ID Task Name Duration Start Finish Q Q4 Q Q4 Q1 Q2 03 Q4 Q Q 1 PROJECT IMPLEMENTATION 566d 11/01/95 12/31/971 2 Preparation of Bidding Documents 43d 11/01/95 12/29/95 3 WB Approval of Bidding Documents 23d 01/ /31/96 4 Issuance of Bidding Documents 21d 02/01/96 02/29/96 5 Bid Opening 22d 04/01/96 04/30/96 6 Bid Evaluation 66d 05/01/96 07/31/96 7 PLN Board and GOI Approval 45d 07/01/96 08/30/96 8 WB Approval 43d 08/01/96 09/30/96 9 Contract Preparation 44d 10/01/96 11/30/96 10 Contract Award 43d 11/01/96 12/31/96-11 Manufacturing and Delivery 261d 01/01/ /97 _.. 12 Design/Environmental Screening 130d 01/01/96 06/30/96 13 Survey 66d 05/01/96 07/31/96 14 Local Government Permit 22d 08/01/96 08/30/96 15 Assets Inventory 44d 09/02/96 10/31/96 16 Price Negotiations 41d 11/01/ /96 17 Payment/Compensation 20d 02/03/97 02/28/97 18 Construction 261d 01/01/97 12/31/97 _ 19 Project Completion Od 12/31/97 12/31l97 * D DI D4v WRD3AKrWR%RHIrDSRU

105 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Implementation Schedule - TA for PLN Restructuring =~ ID Task Name Duration Start Finish Q4 01 0Q2 3 Q4 Q1 Q2 03 Q4 _01 I Q2 0 Q3 Q4 Ql Q3 1 Jakarta Electricity Distribution Unit (JEDU) 784d 01/01/96 12/31/98 2 Finalization of TOR 65d 01/01/96 03/29/96 3 WB Approval of Shortlist lid 04/01/96 04/15/96 4 Issuance of LOI lid 04/16/96 04/30/96 5 Evaluation of Proposals/WB Approval 56d 07/ /30/96 6 Counterpart Tean Established 22d 0U101/96 08/30/96 7 Finalization of Contract 23d 10/01/96 10/31/96 8 Implementation 113w 11/01/96 12/31/98 9 West/Central/East Java Distribution Units 368d 11/01/96 03/31/98 10 Finalization of TOR 66d 11/01/96 01/31/97 I 11 WB Approval of Shortlist lid 02/03/97 02/17/97 12 Issuance of LOI tod 02/17/ ( Evaluation of Proposals/WB Approval 56d 05/15/97 07/31/97 14 Counterpart Team Established 22d 08/01/97 09/01/97 15 Finalization of Contract 21d 08/01/97 08/31/97 16 Implementation 152d 09/01/97 03/31/98 17 Java-Bali Electricity Transmission Unit (JBAETU) 523d 01/01/96 12/31/97 18 Finalization of TOR 65d 01/01/96 03/29/96 19 WB Approval of Shortlist lid 04/01/96 04/15/96 20 Issuance of LOI Ild 04/16/96 04/30/96 21 Evaluation of Proposals/WB Approval 56d 07/15/96 09/30/96 22 Counterpart Team Established 22d 08/01/96 08/30/96 23 Finalization of Contract 23d 10/01/96 10/31/96 24 Implementation 60.8w I 1/01/96 12/31/97 _o -_ OQ m DD Div Diak@BAtEl~WORWDBANXtPTD2iSAR%BARCHAA1PLI4jTAI.MPP

106 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Implementation Schedule - PLN Efriciency Improvement _ ID Task Name Duration Start Finish Q4 QI 02 Q3 04 Q1 02 Q3 Q4 Q1 Q2 03 Q4 Q Q4 I TA for Geographic Information System (GIS) 479d 01/01/96 10/30/97 2 Finalization of TOR 23d 01/01/96 01/31/96 3 WB Approval of Shortlist lid 02/01/ /96 4 Issuance of LOI lid 03/01/96 03/15/96 5 Evaluation of Proposals/WB Approval lid 07/01/96 07/15/96 6 Counterpart Team Established 22d 10/01/96 10/30/96 7 Finalization of Contract 24d 10/I 5/96 11/15/96 8 Implementation 50w 11/15/96 10/30/97 _ 9 TA for Suralaya Power Plan Simulator Upgrade 740d 01/01/96 10/30/98 10 Finalization of TOR 23d 01/01/96 01/31/96 11t WB Approval of Shortlist Ild 02101/96 02o15/96 12 Issuance of LOI lid 03/01/96 03/15/96 13 Evaluation of Proposals/WB Approval IId 07/01/96 07/15/96 14 Counterpart Team Established 22d 10/01/96 10/30/96 15 Finalization of Contract 24d 10/15/96 11/15/96 16 Implementation 102.2w 11/15/96 10/30/98 _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~mx 00 D 1\.iC O\Js Div DiSk@F A3IE@WORLnDANtDO\SM5ARaiOAPLNjA2.MPP

107 Annex 4.4 Page 7 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT INVESTMENT COMPONENT (5OOkV & 150kV Transmission and Distribution) Implementation Responsibilities ~.- - T... NO. ACTIVITY I RESPONSIBLE UNIT 1. Land acquisition PLN Project Teams in West Java, Central Java, and East Java Survey, soil investigation PLN Project Teams in West Java, Central Java, and East Java I Preparation of tender document PLN Engineering Center in Jakarta Bank Approval PLN HQ Procurement Division I... I Tendering PLN HQ Procurement Division Tender evaluation Procurement Committee t... I Board/GOI approval PLN HQ Procurement Division Bank approval for contract award PLN HQ Procurement Division Contract negotiations and signing PLN HQ Procurement Division Supervision of contract implementation PLN HQ Network Construction Div r1. L/C opening PLN HQ Treasury Division Design and drawing review PLN Engineering Center in Jakarta Site supervision PLN Project Teams in West Java, Central Java and East Java

108 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT SUPERVISION STAFFING AND SCHEDULE Approximate Activity - Major Focus Skill Requirements Staff Dates/Duration Weeks 5/96 2 week Launch workshop to highlight issues of regulatory reform, sector Engineer, Institutional Development Specialist, 7 structure and PLN restructuring. Consultants (PW, C&L, E&Y), RSI procurement and disbursement specialist 11/96 2 weeks Review of progress of technical assistance, procurement status, Engineer, Institutional Development Specialist, 7 disbursements, review of key performance indicators and Financial Analyst implementation of restructuring Action Plans; physical implementation status 5/97 2 weeks Review of progress of technical assistance, procurement status, Engineer, Financial Analyst 5 disbursements, review of key performance indicators and implementation of restructuring Action Plans; physical implementation status 11/97 2 weeks Review of progress of technical assistance, procurement status, Engineer, Financial Analyst 5 disbursements, review of key performance indicators and implementation of restructuring Action Plans; physical implementation status 11/98 2 weeks Mid-term review of: instutional development and restructuring Engineer, Institutional Development Specialist, 7 status; status of physical implementation, review of key Financial Analyst Engineer, Financial Analyst, 7 implementation of restructuring Action Plans; physical implementation status 9/00 2 weeks ICR mission to review: final status of physical implementation of Engineer, Institutional Development Specialist, 7 T&D facilities, key performance indicators, PLN restructuring Financial Analyst progress performance indicators, review of EIRR 11/99 2 weeks Review of progress of technical assistance, procurement status, disbursements, review of key performance indicators and pi2dsar\aim\s~emv.seh

109 ANNEX 4.6 Page 1 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT GuidleUnes for the Envirownental Chapter in the Transmission and Distribution Project Feasibility Reports I1. This annex identifies the points that would be reviewed in the environmental chapter of the project feasibility report. It should be noted, however, that they are often not an issue in the project. In those cases it should be mentioned in the enviromnental chapter that these issues have been considered but are not present in the subproject under review. 2. Relevant Background Data. It is assumed that the following information is already present in the project feasibility report: (a) (b) (c) (d) (e) (f) (g) project plan with maps indicating route(s) and obstacles such as mountains, forests, lakes, rivers, ravines, etc; description of land morphology, and topography; land allotment, protected lands, protected forests and other protected areas; project implementation including land clearing, excavation, and access road construction; list of heavy equipment if used in the project. information on all PAPs whose land, building, incomes, business, etc. are adversely affected by the project. details of all land (wholly and partly), buildings, and other assets adversely affected by the project. 3. Meteorological Data (a) (b) (c) (d) (e) Describe relevant meteorological data for wind direction, speed and seasonality; describe corridors used for the project and land acquisition requirements. List proposed crossings of corridors of forests, protected forests, natural parks, protected areas and wetlands (including swamps). List all corridors that are not situated along roadsides using public owned land, such as corridors over agricultural land, over plantations, and over other sensitive areas. List corridor crossings of rivers, lakes and other waterways. Indicate surface areas required for the right-of-way corridors through the areas mentioned under paras. 4 and 5. M:ISAD2\MAR\ANWENVIRON

110 ANNEX 4.6 Page 2 (f) (g) (h) (i) (j) (k) Estimate number of trees that have to be cut in forests, protected forests and natural parks for the right-of-way conidors. Indicate how these corridors and the ones through protected areas and wetlands will be maintained: if the use of herbicides cannot be avoided describe how spraying will be done (spraying from airplanes should be avoided). If corridors through wetlands are required indicate if mangrove forests are touched and describe measures to prevent cutting mangrove trees. Describe flooding risks if corridor crosses a flood area and indicate the measures taken to minimized risk of damage on the subproject's system. Describe transformer installations and indicate if land acquisition for transformer stations is required and indicate which transformer fluids will be used. Describe all other land requirements for the subproject for switchyards, substations, and others. Describe the mitigation measures that are being proposed and have been agreed upon to minimize environmental impacts on all environmental sensitive areas such as forests, protected forests and areas, natural parks and wetlands. (1) Describe measures taken to minimize the impact on agricultural land, dwellings and communities. (m) Describe measures proposed to minimize impact on birds especially migratory and rare species from river, lake and wetland corridor crossings. 4. Alternative Corridors If construction of a power line requires a corridor through environmentally sensitive areas alternative corridors should be discussed and evaluated, and definitive recommendations should be made for the corridor that has the least environmental impact within reasonable economic limits. 5. Land Acquisition, Resettlement and Compensation If the environmental survey indicates the need for resettlement and/or compensation, detail the required actions on the basis of the resettlement framework agreed to between the Govermnent of Indonesia and the World Bank (Annex 4.7 to this document). M:\PTD2\SARANNENVIRON

111 PLN's GENERAL POLICY CONCERNING THE ESTABLISHMENT OF OVERHEAD TRANSMISSION LINES Annex 4.7 Page 1 1. General Overview -- PLN's compensation and rehabilitation policy follows from the national regulations on land acquisition (Kepress 55/93), whose purpose is to ensure that people whose land is acquired for national development needs experience no decline in their incomes or living standards. Wherever possible, PLN will explore all opportunities to avoid land acquisition and displacement through engineering alternatives. Where impacts are unavoidable, PLN will ensure that all affected people, as participants in national development, are better off or at least no worse off than they were prior to the project. Compensation for all assets acquired by PLN will be provided at their replacement costs. PLN will also promote public understanding of the land acquisition process through community information campaigns, public awareness programs, community-level assistance, and the establishment of grievance procedures and local field monitoring to help address any problems experienced by communities affected by PLN projects. This policy will be followed by all PLN offices and should be supported by all related Government Bodies concerned with transmission line. 2. Relevant Laws. Policies, and Regulations -- (see appendix 9) All land acquisition in Indonesia is regulated by Presidential Decree (Kepress) 55/93 concerning Land Acquisition for the Development of Public Interest. Additional relevant regulations include: a. State Act No concerning Basic Principles on Agrarian b. State Act No concerning Basic Principles on Administration in The Region and Elucidation c. State Minister/Chief of The National Land Use Agency No. I d. Government Regulation No concerning Environmental Impact Assessment. e. Ministry of Mines and Energy Regulation 01.P/47/M.PE/1992 concerning "Clearance Space of High Voltage Overhead Transmission Lines and Extra High Voltage Overhead Transmission Lines for the Supply of Electric Power" f. WHO Recommendation IRPS 1990/INIRC Guidelines of Limits of Exposure to 50/60 Hz Electric and Magnetic Fields (EMF) 3. ons -- (see appendix 8 ) This policy covers all people affected by PLN transmission line projects, irrespective of their land tenure status. "Projects" include all impacts associated with PLN activities, such as land acquisition associated with the need for access roads. Families losing all of their productive assets (farmland, house or

112 Annex 4.7 Page 2 business) or in cases when the remaining assets are not economically viable, will be entitled for full compensation for the remainder of their land or property at replacement cost and to rehabilitation assistance that allows them to enhance or at least maintain their standard of living. All families affected by the PLN project who are present at the time of the baseline survey are eligible for compensation. Clearance Space means the space around the conductors formed by the Minimum Clearance to the objects as defined by PLN technical guidelines where no residence or physical intrusions are permitted. Areas where PLN requires temporary passage but no permanent acquisition are called easement areas. Land and other assets acquired for clearance spaces or easements will be compensated at their replacement costs. 4. Avoiding or MinimtizinLg Impacts -- Projects will seek to minimize all physical impacts by exploring alternative route alignments. Special attention will be given to avoiding as much as possible areas with dense populations, schools and other public facilities, shopping areas, and housing developments. Where there are no options, projects should use lattice extended towers to raise the clearance space so that it is situated above the building of at least the Minimum Clearance Space allowed (see Table - MM&E Regulation No. 01.P). 5. Public Information and Participation -- PLN survey teams will provide site-specific maps describing physical impacts and project needs. Prior to any land acquisition, PLN will conduct a public consultation and information campaign to inform the people of the project and to absorb their views on impacts, concerns, compensation procedures, resettlement options, and project activities. If necessary consultation programs can be assisted by qualified independent bodies (i.e. university), who can provide informal doorto-door interviews to get reliable information and to establish close communication between the project and affected people. Consultation should begin at the same time as initial project surveys. 6. Compensation and Rehabilitation (see Appendix 8 & Apprndix 10) -- Land acquisition policy refers to Keppress 55/1993 and its implementing regulations. Land acquisition and compensation should be done directly between PLN and affected people. Compensation will be provided for all land and houses purchased by PLN (i.e. for towers, substations, access roads, etc.) and for all objects acquired within the clearance space. Compensation rates for all land and fixed assets will be at their replacement costs; i.e. sufficient so that the owner can find a better or equivalent replacement. This activity will involve the Camat, the Kepala Desa, and the affected family. Land acquisition mapping will be done by BPN (Badan Pertanahan Nasional). Project maps and compensation lists will be posted locally, in the office of the Lurah and project office, where they will be visible to the affected people. Where resettlement is necessary, PLN will develop resettlement options that can include cash payments or equivalent, replacement land as described by Government Regulation, or other forms of assistance based on discussions with the resettler families. All families affected by the project activities should have the opportunity to improve or at least recover their living standards.

113 Annex 4.7 Page 3 7. Procedure a. PLN purchases land, plant, houses that exist in foundation locations for towers, and all fixed assets i.e. trees & buildings within Clearance Space (see M M & E Regulation no. 01.P Part Three - Article 5 items (2),(3), & (4)) at replacement rates as defined in Para. 6, above. Easements will also be paid at replacement cost (see M M & E Regulation No.Ol.P Part three -Article 5 items (6) & (7); Part one - Article 3 items (2) & (3); Part two - Article 4 items (2) & (3)). b. The procedure for land compensation is as follows: Guidance & Counseling-- The PLN Project Team, in cooporation with the head of Subdistrict & head of Village, provides a special meeting with the project affected people (PAPs) regarding the project and to elicit their views and concerns. PLN's public information brochure should be distributed at this time. Public Consultation with the project affected people will be conducted by the PLN and involve related Government agencies. Agencies will provide all necessary information about the project and related matters, including the timing and procedures for compensation. The next step is to stake out the boundaries of the needed land. Then follows the detailed mapping of the land holdings. After the maps are completed, the inventory of crops, vegetation, buildings and other assets will be conducted. The next step is to prepare the list of the acreage of the land holdings, structures, and the volume of the affected crops. PLN prepares a list of compensation for land and assets based on the replacement cost. The guiding principles to determine replacement costs are described in Appendix 10. Any transaction costs, as defined in this policy (para. 6), will be provided by PLN. Records will be kept and reported, and made available to the affected people. The final price of the properties should be negotiated between both parties (PLN & PAP) to reach full agreement that compensation reflects replacement costs. The final list should be approved and signed by both parties. Grievances that cannot be resolved locally should be resolved through the procedures defined by Kepress 55/93. The final step will be payment of the compensation directly to the landowners and other affected people as agreed between PLN and the project affected people.

114 Annex 4.7 Page 4 8. Responsibilities and Grievance Procedures -- (see appendix 1). PLN will remain ultimately responsible for ensuring that people affected by project activities receive the compensation defined by this policy. To ensure that this policy is carried out effectively, each project will appoint a "resettlement officer" reporting to the project Pimpro. Resettlement officers will ensure that all required activities are carried out promptly. Resettlement officers will receive all necessary logistical and staff support. Pimpros should make special efforts to ensure good community relationships and to promptly resolve compensation problems and complaints. Problems that cannot be resolved satisfactorily should be resolved through discussions with assistance from the responsible local government authorities. Monitoring by PLN pusat, with assistance from a qualified independent body if needed, will ensure that all people affected by PLN projects receive compensation and any agreed rehabilitation assistance as defined by this policy. 9. Planning Policies -- Resettlement plans will be prepared for all transmission projects. Plans will include an identification of all anticipated impacts, compensation guidelines, implementation policies for land acquisition and resettlement, field assignments for PLN agents responsible for resolving problems, agreements with civil agencies, an implementation schedule linked to the anticipated civil works, and a detailed budget for compensation and any other necessary resettlement activities. Where more than five families are affected in any one site, more detailed information should be provided to indicate how production will be restored, such as through PLN's assistance to identify and transfer equivalent productive land. These items should be summarized in the PLN overview sheet attached to transmission lines project proposals for review. Compensation payments to affected families will be completed for eqach subproject before the start-up of physical works on the land. 10. Reporting and Documentation --(see appendix 2.1, 2.2, 2.3, 2.4, 3, 6.1 & 6.2) This information should be sent to PLN pusat with each subproject proposal. a. Resettlement preparation checklist; b. Record of consultations and information disseminated; c. Compensation table based on replacement cost (Appendix 10); d. Project documentation land accquisition checklist for PLN staff; e. Standard monitoring TOR (for qualified independent bodies i.e. universities); f. Grievance rules and name of officer assigned to resolve problems; g. Illustrated public information booklet explaining: - what PLN is doing (project description and map) - process that is about to happen (para. 7b) - compensation policy and local rights - where to complain or inquire

115 Annex 4.7 Page 5 Transmission and Distribution Preparation Checklist For all Projects 1 Baseline survey (house-to-house)--(see appendix 7.1 & 7.2) a. List of physical items requiring land acquisition (i.e. towers, access roads, clearance space) b. No. of people affected (KK) c. No. of people displaced (KK) d. No. of houses acquired (meters and units) e. No. of farms acquired (meters and units) f. Major source of income g. Area of land acquired h. Land tenure status i. No. of trees, buildings, and other assets j. No. of public buildings acquired (meters and units) k. No. of businesses affected 2 Public information Campaien a. Timetable for information campaign b. Record of meetings with head of village (Kepala Desa) and villages c. Distribution of information booklets (number and dates) d. Involvement of qualified independent bodies (i.e. university) (see appendix 4) 3 Resettlement a. No. of families requiring replacement land, if any. b. Agreement with PAP & PLN (appendix 5) 4 Detailed Budget (as required) a. Land acquisition costs b. Other fixed assets (buildings, trees, etc) c. Community consultations and information costs d. Management and overhead

116 ACTIVITIES (UNDERCONSTRUCTION) Activities Procedure responsibility Description Resettlement 1. SK BER No: 969.JK05/MPE/ PLN Project 1. Relocation of housing located in the 429/Kpts - 11/1989 land to be used for tower location. 2. SK BER No: 1101.K/702/M PE/ PLN Project 436/Kpts - 11/ The Minister Mining and Energy Regulatio number 3 PLN Project 01. P /47/ M. PE / KEPPRES No.55/ SK BER No: 969.K/05/MPE/ PLN Project 1. Compensation for loss of protected 429/Kpts - 11/1989 forest to be cut along transmission line route. Compensation/ 2. SK BER No: V702/MPE/ PLN Project 2. Compensation of protected forest Rehabilisation/ 436/Kpts - 11/1991 land to be used for tower location. Easement. 3. Minister of Mining and Energy Regulationumber 3. PLN Project Applied for Java & Lampung only P /47/ M.PE / Compensation for loss of tress or the 4. KEPPRES No.55/1993 trees to be cut along transmission line route. Land acquisition 1. Minister of Mining and Energy Regulatio number 1. PLN Project 1. Compensation for land to be used for 01.P /47/ M.PE / tower location. 2. KEPPRES No.55/ Minister of Mining and Energy Regulatio number Purchased (House) 01.P/47/M.PE/ PLN Project 1. Compensation for houses/structures e e 2. KEPPRES No.55/1993 existing in land to be used for location x of towers or within the clearance space x 4 *) After project completion PLN's Maintenance & Operation unit will be responsible for compensation.

117 Annex 4.7 Appendix 2.1 TOWER LOCATION PAP/Protection Forest/ Issue Solution Plantation etc. _ L a n d 1. Relocation 1 Perhutani (Ministry of Forestry) should find out the suitable area through the Commitee for the Relocation of Forest, as replacement of forest area affected by the project. All relevant cost should be financed by PLN. S K BER No S K BER No: 969.K/05/MPE/ /Kpts - Il/ K/702/MPEI /Kpts - 11/ Compensation 2. PLN provides guidance, counseling and data collection for the acquisition of land. PLN purchases the land directly from PAPs (as listed in the inventory list). PLN starts project activities. (KEPPRES No. 55/1993) Buildings 1. Resettlement 1. PLN provides guidance, counseling and data collection of buildings. PLN purchases buildings directly from PAPs (as listed in the inventory list). PAPs move to new houses by themselves. ( KEPPRES No. 55/1993) Trees 1. Relocation 1. PLN collects data concerning trees within Perhutani area and provides the compensations for replacement of affected forest. S K BER NO : S K BER No : 969.K/05/MPE/ /Kpts - 11/ K/702/MPE/ /Kpts - Il/1991

118 Annex 4.7 Appendix 2.2 OBJECT WITHIN CLEARANCE SPACE PAP/Protection Forest/ Issue Solution Plantation etc. Buildings 1. Compensation 1. PLN provides guidance, counseling and data collection of buildings within the clearance space. PLN purchses all buildings within the clearance space directly from PAPs, as listed in the nominative list. (KEPPRES No. 55/1993) Trees 1. Relocation 1. PLN collects data about trees in Perhutani area, and than provides compensations for replacement of forest affected areas. S K BER No 969.K105/MPE/ /Kpts - 11/1989 S K BER No 1101.K/702/MPE/ /Kpts - Il/ Compensation 2. PLN collects data about trees within the clearance space, and than provides compensation to PAPs.

119 Annex 4.7 Appendix 2.3 STRUCTURES OR OBJECS DAMAGED DURING CONSTRUCTION (INCLUDING SURVEY WORKS) Productive asset Issue Solution L a n d 1. Compensation 1. PLN provides guidance, counseling and (Access road, data collection for land acquisition. temporary strorage etc) PLN purchases the land based on replacement values, and starts project activities. 1. KEPPRES No. 55/ Minister of Mines & Energy Regulation No: 01.P/47/MPE/92 Buildings 2. Compensation 1. PLN provides guidance, counseling and (Damages part of the data collection of buildings within building under T/L the clearance space. construction ) PLN purchases all buildings within the clearance space directly from PAPs, based on compensation values. 1. KEPPRES No. 55/ Minister of Mines & Energy Regulation No: 01.P/47/MPE/92 Crops/vegetation 1. Compensation 1. PLN collects data about trees within the clearance space, and than provides compensations to PAPs. Minister of Mines & Energy Regulation No: 01.P/47/MPE/92

120 Annex 4.7 Appendix 2.4 SUBSTATION LOCATION PAP/Protection Forest/ Issue Solution Plantation etc. L a n d 1. Relocation 1. Perhutani ( Ministry of Forestry ) will find out the area through the Commitee for relocation of forest, in replacement of forest areas affected by the project. All relevant costs will be financed by PLN. S K BER No : 969.K/05/MPE/ /Kpts - 11/1989 S K BER No: 1101.K/702/MPE/ /Kpts - 11/ Compensation 2. PLN provides guidance, counseling and collects data for land acquisition. PLN purchases the land directly from PAPs (as listed in the inventory list). PLN starts project activities. (KEPPRES No. 55/1993) Buildings 1. Resettlement 1. PLN provides guidance, counseling and collects data for buildings. PLN purchases all buildings directly from PAPs (as listed in the inventory list). PAPs move to the new houses by themselves. (KEPPRES No. 55/1993) Trees 1. Relocation 1. PLN collects data about trees within Perhutani area and provides compensations for replacement of forest affected area.1 S K BER No: S K BER No : 969.K/05/MPE/ /Kpts - 11/ K/702/MPE/ /Kpts - l/1 991

121 Annex 4.7 Appendix 3 INVENTORY OF THE ASSETS AFFECTED BY THE PROJECT No PAP (name) l DESCRIPTION Total Price Remarks ASSEXTSt 0 TY Unit price - - PAP PLN ) (... Head of District/SubDistrict/Village (..

122 Annex 4.7 Appendix 4 Statement Certificate for ttie witness of the compensation payment The present certificate is made and endorsed the day of the month of... in the year of...,.conceming the participation to the execution of payment to P A P, according to the inventory list established for this purpose and attached. University of.

123 Annex 4.7 Appendix 5 CERTIFICATE FOR THE ACQUISITION OF LAND The Undersigned: 1. Name : Age : Nationality : Occupation : Address : states in the present certificate that this land lies at subdistrict... district. regency.... with land certificat no... surface... sq.m. as described in cadastral mapping prepared by the National Land Bureau, Regency... date... No... here below referred as 'FIRST PARTY". 2. Name... Ag9.... Nationality :... Occupation. :... Address :... who tor purpose o1 present certificate acts as PLN representative, as per the letter of Minister of Mines and Energy, here below referred as 'SECOND PARTY", and who stay at front of Head of of District... witnessed by: 1... head of subdistrict secretary of subdistrict. declare as follow: 1. FIRST PARTY accept to release the land for public utility, so that the land will pass to the responsibility and control of Goverment. 2. The compensation for releasing of land under point (1) is agreed and stated by both parties, at Rp.(.), and has been recieved by FIRST PARTY. 3. FIRST PARTY guarantee that the land wil be in use of SECOND PARTY, and torever not of other parties, and no other charges are due by SECOND PARTY.... date SECOND PARTY FIRST PARTY (Chief of PLN Project) ( P.A.P) witness 1. Head ot Subdistrict 2. Secretary of Subdistrict (... ) (.

124 Annex 4.7 Appendix 6.1 INVENTORY OF TOWER LOCATION Drawing of present land situation for location of 150 kv towers: Location Tower number: T. Subdistrict : District Regency. Name (PAP): 1..(. sq. m) 2..(. sq.m) 3 ( q.m.. sq. m) 4.(. sq.m) Remarks : Drawing of land situation Date... Signatures (P A P): PLN Project wi tn s s Head of district head of subdistrict......

125 Annex 4.7 Appendix 6.2 INVENTORY OF FOR LOCATION OF SUBSTATIONS Drawing of present land situation for location of 150 kv substation: Location Subdistrict District : Regency : Name (PAP): l sq. m 2... sq.m) sq.m) sq.m) Remarks : Drawing of land situabon Date. Signatures (P A P PLN Project w i t n e s s Head of district head of subdistrict )

126 Annex 4.7 Appendix 7.1 NOMINATIVE LIST CONCERNING LAND FOR LOCATION OF TOWERS. Village. Subdistrict. District. Regency. Center line Center line No Tower P A P Land (sq.m) S i g n a t u r e witness: Head of subdistrict: Head of district: PLN project: (. ) (. ) (. )

127 Annex 4.7 Appendix 7.2 NOMINATIVE LIST CONCERNING LAND FOR LOCATION OF SUBSTATIONS Village. Subdistrict. District :. Regency. Center line Center line No Tower P A P Land (sq.m) S i g n a t u r e wi tn e s s Head of subdistrict: Head of district: PLN project: ). (. ) (.)

128 Annex 4.7 Appendix 8 TERMINOLOGY REVIEW Term Clearance Space Description Space around the conductor which formed by the minimum clearance to the objects. It is determined by factor such as voltage, temperature and wind. No objects or activities are permitted within the clearance space. (Regulation of the Minister of Mines & Energy No: 01.P/47/.MPE/1992). Easement The right of access and payment of compensation for loss or damage. PAP All persons affected by PLN project irrespective of their land tenure status (Project Affected Persons) NJOP Selling value for taxable properties. (Base value used for payment of compensations) EMF Electro-Magnetic Field, which includes electric field and magnetic field. Standard values follow WHO recommendation -- IRPA 1990/INIRC guideline limits of exposure to 50/60 Hz electric and magnetic field. Qualified Independent Bodies The independent bodies which is entitled to work for evaluation of project impacts or related activities. Local monitoring The organization which is entitled for continuous monitoring of impacts due to project and related activities. Resettlement The act or process of the relocation of the house which is affected by the project. Resettler Person who can no longer remain in his house and needed to be relocated Replacement Costs The cost for replacement of affected assets. Replacement costs to be determined with reference to current construction costs of structures at a given local market at the time of acquisition plus the market value of the land, trees and crops as determined by sales in the last year in the local market (see Appendix 10). Economic Viability The remaining assets of the PAP plus the cash compensation for the loss allows the PAP to enhance or maintain his/her previous standard of living.

129 RELEVANT LOWS, POLICIES AND REGULATION. Term Regulation Remakrs EMF 1. PLN Standard (SPLN No.112/1994) 1. E(max) 10kV/m and B(max): 0,5 mt (workinghour) 2. INIRC guidelines limits of exposure to 50/60 Hz - 2. E (max) 5 kv/m and B (max): 0,1 mt (continously) electric and magnetic field/who recommendation - IRPA Clearance Space 1. The Minister of Mining and Energy Regulation number 1. Regulation conceming clearance space of HVrL and EHVTL 01.P / 47 / M.PE / and minimum distance between ground/objects and HVTL / EHVTL conductors. Easement 1. The Minister of Mining and Energy Regulation number 1. Regulation concerning clearance space of HVTL and EHVTL 01.P / 47 / M.PE / and minimum distance between ground/objects and HVTL / EHVTL conductors. 2. S K BER No : 969.K/05/MPE/ Compensation or replacement of protected forest areas. 429/Kpts - 11/1989 S K BER No : 1101.K/702/MPE/ /Kpts - 11/1991 Replacement of land for 1. The Minister of Mining and Energy Regulation number 1. Regulation concerning clearance space of HVTL and EHVTL loss of protected forest. 01.P /47 / M.PE / and minimum distance between ground/objects and HVrL / EHVTL conductors. 2. S K BER No 969.K/05/MPE/ Compensations for replacement of protected forest areas. 429/Kpts - li/1989 S K BER No :1101.K/702/MPE/ /Kpts - 11/ KEPPRES No: 55/ Land procurement for development of public utilties. Compensation for loss of 1. The Minister of Mining and Energy Regulation number 1. Regulation concerning clearance space of HVTL and EHVTL protected forest. 01.P / 47 / M.PE / and minimum distance between ground/objects and HVTL / EHVTL conductors. Compensation for buildings 1. The Minister Mining and Energy Regulation number 1. Regulation concerning clearance space of HVTL and EHVTL 01.P /47 / M.PE / 1992 and minimum distance between ground/objects and HVTL / EHVTL conductors. 2. KEPPRES No: 55/ Land procurement for development of public utilities. _, _ = _. _=_==--=

130 Annex 4.7 Appendix 10 Replacement Cost PLN will determine the replacement cost of (a) agricultural land, by applying the market prices of land of productive potential in the vicinity at the time of acquisition; (b) houses and other structures and homestead land, by assessing in the local market current construction costs of houses and other structures and current market prices of land at the time of acquisition; (c) trees, by applying the market value; and (d) crops, by applying the market value of one year standing crops. Compensation for trees and crops should be in an amount sufficient to cover the costs associated with their replanting. PLN may also consider market prices without depreciation and NJOP values for purposes of valuation and compensation provided that the valuation results in a compensation payment equal to, or higher than, the replacement cost determined above. PLN may also retain the services of other qualified persons such as valuers, engineers and consultants or organizations to recommend rates of compensation based on the above mentioned principles of replacement cost.

131 ANNEX S.l INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT Power Subsector - List of IDA Credits and Bank Loans Bank Credit or Date Project Amount PPAR/PCR/ICR. FY Loan No. Closed/ClosI8 Title S Million Report No. Date 70 Credit Jakarta Power Distribution Nov Credit Jakarta Power Distribution Nov Credit Thermal Power May Loan PowerlV May Loan Power V Oct Loan Power VI Jun Loan Power VII Apr Loan Power VIII Jun Loan Power IX Jun Loan PowerX Jun Loan Power XI Jun Loan Power XII Sep Loan PowerXIII (Cirata) Sep Loan Power XIV Sep Loan Power X Supplemental Jun Loan Power Transmission & Distribution Jun 1995 Loan /' Power Sector Efficiency Loan a Paiton Thermal Power ICR under preparation 89 Loan " Rural Electrification ICR under preparation 90 Loan " Power Transmission Loan " Suralaya Thermal Power Loan " Cirata Hydroelectric Phase Loan " Sumatera-Kalimantan Loan " Rural Electrification Total /a Ongoing project 5ar\Pnn\pastpro; ann 11/1 2/95

132 Annex 5.2 Page 1 INDONESIA SECOND POWER TRANSMISSION AND DISTRIBUTION PROJECT INVESTMENT ECONOMIC APPRAISAL NOTES AND TABLES Investment Economic Appraisal Notes 1. In projects involving transmission and distribution where the benefits attributable to specific components are difficult to assess, it is appropriate to evaluate the economic rate of return of the entire investment program. An economic analysis of PLN's least cost investment program in Java-Bali for the period to (the "investment period") -- which the proposed project partially supports -- is the most appropriate way to judge the economic rate of return for the project. 2. The GOI fiscal year (April 1-March 31) is used for appraisal purposes. Even though PLN has switched to a calender-based fiscal year, investment planning uses the old fiscal year for GOI budgetary purposes. 3. There are four cost categories: investment, fuel, power purchase and operating and maintenance (O&M). The investment costs are for generation, transmission and distribution to be commissioned during the period (whether or not the expenditures are incurred during the period). 4. Investment costs are based on the disbursement profiles given in Annex 2.4 for Java-Bali, with additional disbursements allowed prior to 1996 for generating plant to be commissioned during the period. The unit of valuation is 1995 $US, so the 1994 figures in Annex 2.4 are updated using the 1994 MUV rate of foreign inflation in $US (3.1 %). All transmission and distribution investment disbursed during the period is assumed to be made operational during the investment period, except for the second last and last years. All generating investment disbursed up to 1997 is made operational during the investment period, but then the ratio declines over time. 5. Fuel costs are estimated by incremental fuel quantities (over the base year, 1995) multiplied by estimated fuel prices. Economic prices are given in Table 5.1 following. For years after 2003, it is assumed that prices are constant in dollar terms. 6. Power purchase quantities are taken from PLN's forecasts, and prices from PLN's financial forecasts for Java-Bali (see Annex 2.6). For the economic analysis, the tax element implicit in the power purchases (due to value added tax and corporate tax) is estimated on the basis of GOI information to be approximately 15 % of the price paid by PLN and is subtracted. 7. Operating and maintenance costs are set at 2.5% of accumulated investment costs. 8. It is assumed that all increments in sales during the analysis period are due to the commissioned investments, associated fuel and O&M costs, and power purchases of that period. (The operating costs and sales generated by capital commissioned in earlier years are assumed unchanged.) The sales increments are taken from the RUKN 1995 load forecasts for the four groups of residential, industrial, commercial and public and other.