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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL Industry and Energy Operations Division Country Department III East Asia and Pacific Region USE ONLY IMPLEMENTATION COMPLETION REPORT INDONESIA POWER SECTOR EFFICIENCY PROJECT (LOAN 3097-IND) JUNE 28, 1996 Report No This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit Indonesian Rupiah (Rp) US$ 1.00 = Rp 2,246 Rp = US$ 0.45 WEIGHTS AND MEASURES I metric ton (t) 1.00 kilograms (kg) I liter (1) barrels (bbl) I kilometer (kin) = miles (mi) 1 kilovolt (kv) = volts (V) I Megavolt-ampere (MVA) = kilovolt-amperes (kva) I Megawatt (MW) = 1,000 kilowatts (kw) I Gigawatt hour (GWh) I million kilowatt hours (kwh) FISCAL YEAR OF BORROWER April I - March 31 ABBREVIATIONS AND ACRONYMS BAKOREN BAPPEDA BAPPENAS D1131K DGEED DIVDES ESMAP GOI EIRR KUD LNG MIS MME MOCSE MSA MOF NGO PERTAMINA PlN POLA PMU PUSDIKLAT RE REPELITA REPS National Energy Board Provincial Planninig Commission National Development Planning Agenlcy Directorate Cieneral of Cooperatives Busi1ess Promotion Directorate General of Electric Power and Energy Development PLN's Rural Electrification Division Energy Sector Managemenit Assistance Program Government of Indonesia Economic Internal Rate of Return Village Cooperative Liquefied Natural Gas Maanagement Information System Ministry of Mines and Energy Miiistry of Cooperatives Managemenit Services Agreement Ministry of Finance Noon-Governimenlt Organization National Oil and Gas Company State Electricity Corporation (P.T. PLN (Persero)) Subcontracting Scheme Project Management Unit PLN's Center for Education and Training Rural Electrification Five-Year Developmenit Plan Rural Electrification Planning System

3 FOR OFFICIAL USE ONLY Table of Contents Preface... Evaluation Summary... i ii Part I Project Implementation Assessment A. Statement/Evaluation of Objectives. B. Achievement of Objectives.2 C. Major Factors Affecting the Project'6 D. Project Sustainability.7 E. Bank Performance.8 F. Borrower Performance.8 G. Assessment of Outcome.9 H. Future Operations.9 1. Key Lessons Learned.10 Part II Statistical Tables Annex Table 1: Summary of Assessments.12 Table 2: Related Bank Loans/Credits.13 Table 3: Project Timetable.15 Table 4: Loan Disbursements.15 Table 5: Key Indicators for Project Implementation.16 Table 6: Key Indicators for Project Operation.16 Table 7: Studies included in the Project.18 Table 8A: Project Costs.19 Table 8B: Project Financing.19 Table 9: Economic Costs & Benefits (EIRR).20 Table 10: Status of Legal Covenants.21 Table I 1: Compliance with Operational Manual Statements.22 Table 12: Bank Resources: Staff Inputs.22 Table 13: Bank Resources: Missions.23 A. Mission's Aide Memoire.26 B. Operational Plan.31 C. Borrower's Evaluation Report.33 D. Ex-post Calculation of Economic Internal Rate of Return.35 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wilhout World Bank authorization.

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5 IMPLEMENTATION COMPLETION REPORT INDONESIA POWER SECTOR EFFICIENCY PROJECT (LOAN NO IND) PREFACE This is the Implementation Completion Report (ICR) for the Power Sector Efficiency Project in Indonesia, for which Loan No IND, in the amount of US$ 337 million equivalent was approved on June 22, 1989 and made effective on October 6, Cofinancing for the project was provided by the Government of Netherlands to the extent of US$ 10 million equivalent. The loan closing date was extended by one year. to December 31, 1995 (original closing date was December 31, 1994). A partial loan proceeds cancellation in the amount of US$ 16 million was made in December The loan account was closed on May 14, 1996, with an undisbursed balance of US$ 11.7 million canceled. The ICR was prepared by Stephen Howes. Financial Economist, and Yuling Zhou, Operations Officer, EA3IE, and reviewed by Peter R. Scherer, Chief, EA3IE, and Richard A. Calkins, Operations Adviser, EA3DR. Preparation of this ICR was begun in January 1996 prior to the Bank's ICR mission to Indonesia from March 11 to 22, It is based on material in the project file, and on information and comments provided by the implementing agency, PT PLN (Persero). The aide memoire of the ICR mission is attached as Annex A. The borrower's own evaluation report is attached as Annex C.

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7 i IMPLEMENTATION COMPLETION REPORT INDONESIA POWER SECTOR EFFICIENCY PROJECT (LOAN NO IND) EVALUATION SUMMARY Introduction 1. Bank involvement in the electricity subsector in Indonesia began in For the first two decades, the focus was on first the creation of a national electric utility (which occurred in 1972) and then on system expansion. By the time of the late eighties, attention was beginning to shift more to sectoral efficiency. The Power Sector Efficiency Project supported the traditional objective of system development by financing PLN's distribution expansion needs. But it also responded to the increased focus on efficiency by packaging together a number of technical and institutional components to improve the operating efficiency of some of PLN's existing assets (diesel and hydro power plants) as well as to improve organizational efficiency. The total amount of the loan was US$ million. The loan was signed on July 21, 1989, and became effective on October 6, The loan closing date was extended by one year to December 31, Project Objectives 2. The overall objective of the project was to improve the economic, technical and institutional efficiency of the power sector. To support this overall objective, the project had three specific objectives: (i) Physical objective: to improve the operation of PLN's generation, transmission and distribution facilities by: (a) improving the operation and maintenance of selected diesel power plants; (b) renovating seven small hydropower plants in Java to recover capacity and maximize energy output; (c) investing in distribution facilities to support PLN's projected sales increases in and 1991; (d) augmenting PLN's telecommunications facilities in Java; and (e) providing technical assistance and training in the operation of diesel power plants, operation and maintenance of major steam power plants, and the operation, maintenance and management of distribution facilities; (ii) Institutional objective: to strengthen the administrative, financial and management functions of PLN, by providing technical assistance and training in general accounting and cash management, and financial and corporate planning; and (iii) Policy objective: to introduce appropriate efficiency-improving policy measures by: (a) establishing an institutional mechanism to review and advise the Government on all price adjustments in the energy sector; (b) establishing an information system to provide costs for the rural electrification component of PLN's investments and

8 ii operations; and (c) introducing suitable regulatory and contractual measures to utilize some of the captive generating capacity to reduce investment costs and promote cogeneration by industry. 3. The objectives remained unchanged for the duration of the project. They were important, clear and, for the most part, realistic. While the project was not especially risky or demanding, the number of objectives and sub-objectives is indicative of the complexity of the project. Implementation Experience and Results 4. The project's outcome was satisfactory. It was successful in substantially achieving physical, policy and institutional objectives. These achievements would seem to be highly sustainable. Physical program targets were generally met, though not on time, and in some cases exceeded. The technical assistance components were in general successful. The policy components were substantially met, though not fully and not without significant delays. The reestimated economic internal rate of return (EIRR) is 15.7%, slightly below the SAR's estimate of 18.3%. 5. The actual cost of the project (excluding IDC) was US$ million, compared to an appraisal estimate of US$ The main cost difference was on the distribution investment component. Other cofinancing resources were originally intended to help finance PLN's distribution facilities in 1990/91 and 1991/92. However, the source of the cofinancing was never identified and no distribution cofinancing ended up being included in the project. In addition, there was a partial loan cancellation in the amount of US$ 16.0 million from the unallocated funds in January 1995 upon the request of the Borrower. The remaining undisbursed balance of about US$ 11.7 million was canceled in May 1996 when the loan account was closed. 6. The SAR estimate of time from loan signing to physical completion was about 60 months. This implementation period had to be extended by 12 months, mainly because of the delays in selecting consultants and protracted procurement procedures for equipment and materials. 7. In terms of implementation, the Borrower's procurement practices and consultant selection procedures substantially delayed procurement of both goods and consultants. An increase in fuel prices, while welcome in itself, made the break-even covenant for PLN's outside-java operations impossible to meet; good project preparation, on the technical side was an important factor contributing to the project's success. 8. Both the Bank's and the Borrower's performance under the project has been satisfactory. Summary Of Findings, Future Operations, And Key Lessons Learned 9. The outcome of the project is satisfactory. The project met most of its physical, institutional and policy objectives and the benefits from the project are highly likely to be sustainable.

9 iii 10. It is expected that the project will be operated as planned. The physical components have been taken over by PLN's various operational departments, become an integrated part of PLN's operations and will be productive for many years. Results and recommendations from the technical assistance have already been or are being incorporated into PLN's management practices. The Bank will continue to monitor the project's operation through its on-going lending and institutional development programs and policy dialogue with GOI/PLN. Operational plans to ensure the sustainability of the outcome achieved under the project discussed with PLN during the ICR mission and are attached to this ICR. 11. Several specific key lessons, which have operational and strategic implications for the design of future power sector projects, can be drawn from this project: (a) Covenants: experience with the captive power and energy pricing covenants indicates that, to be effective, covenants should be realistic, dated, backed up by research and action plans, and systematically pursued and reviewed. (b) Establishment of a central Project Management Unit (PMU) could have benefited the overall project coordination and accountability. If a PMU is not established, then, as a minimum, implementation reports on all individual components should be required upon their completion. (c) Technical assistance: well-targeted technical assistance, which is taken ownership of by PLN, can be very productive. Bank's supervision of technical assistance activities should focus not only on process and minimizing delays, but also on substance and links with Bank's policy dialogue. (d) Performance monitoring: Although improvements in PLN efficiency was the aim of the project, there was no regular performance monitoring during supervision. Explicit performance monitoring has been built into the Bank's most recent loan to PLN for the Second Power Transmission & Distribution Project (Loan 3978-IND). (e) Cumbersome procurement processes are a leading cause of project implementation delays. PLN's procurement processes result in a lengthy procurement cycle adding delays and unnecessary costs to the projects that it undertakes. Speedier procurement processing and more efficient inventory management and materials handling are key to increasing efficiency of the investment program.

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11 IMPLEMENTATION COMPLETION REPORT INDONESIA POWER SECTOR EFFICIENCY PROJECT (LOAN 3097-IND) PART I. PROJECT IMPLEMENTATION ASSESSMENT A. STATEMENT/EVALUATION OF OBJECTIVES 1. The overall objective of the project was to increase the efficiency of the power sector in Indonesia. The project had three main objectives, each with its own subobjectives: (i) Physical objective: to improve the operation of PLN's transmission and distribution facilities: generation, (a) (b) (c) (d) (e) by improving the operation and maintenance of selected diesel power plants operated by PLN, including their rehabilitation and relocation as required; by renovating seven small hydropower plants operated by PLN in Java to recover capacity and maximize energy output; by investing in distribution facilities to support PLN's projected sales increases in and 1991; by augmenting PLN's telecommunications facilities in Java; and by providing technical assistance and training in: * operation of diesel power plants; * operation and maintenance of major steam power plants; * operation, maintenance and management of distribution facilities; (ii) Institutional objective: to strengthen the administrative, financial and management functions of PLN, by providing technical assistance and training in: * general accounting and cash management; * financial planning and corporate planning; and (iii) Policy objective: to introduce appropriate efficiency-improving policy measures: (a) by establishing an institutional mechanism to review and advise the Government on all price adjustments in the energy sector;

12 - 2 - (b) (c) by establishing an information system to provide costs for the rural electrification component of PLN's investments and operations; I and by introducing suitable regulatory and contractual measures to utilize some of the captive generating capacity to reduce investment costs and promote cogeneration by industry. 2. The objectives remained unchanged for the duration of the project. They were important, clear and. for the most part, realistic. While the project was not especially risky or demanding, the number of objectives and sub-objectives is indicative of the complexity of the project. 3. Financial covenants: In addition to the covenants supporting the above policy objectives, there were important financial covenants. Of these, the most important ones were to achieve annually an eight per cent rate of return on PLN's Java operations and to achieve break-even on PLN's outside-java operations beginning FY1990/91. The latter covenant was successively rolled-over. In 1994, both covenants were replaced under Loan 3761-IND by a single eight percent rate-of-return covenant for PLN's entire operation in Indonesia. B. ACHIEVEMENT OF OBJECTIVES Overall Project Objective 4. Overall objective: The overall objective of the project was to increase sectoral efficiency. PLN, the national utility, has gone over the period of the project ( ) from being a loss-maker to being a substantial profit-maker without an increase in the real value of tariffs. This indicates an underlying improvement in efficiency. The project selected several technical targets to measure sectoral efficiency improvements, e.g., capacity utilization and system losses. Most of these targets were achieved or exceeded (see Table 6 in Part II). In retrospect though, these targets were not very demanding. Moreover, any overall gains in sectoral efficiency can not be attributed to this one project which constituted only a small part of PLN's overall investment program during the project period. Moreover, although improving efficiency was the stated objective of the project, the largest component was in fact distribution expansion. To judge the success of the project, its success in meeting its specific objectives should be assessed. This is done below. 5. Internal rate of return: For practical purposes, it is impossible to separate out the benefits attributable to the individual power projects that form a part of a least-cost development plan. Project justification was therefore based in the SAR on PLN's entire development program for Java for the time period, 1988/ /91, of which the project 1' This is regarded as a policy objective since cost separation would be required as a basis for explicit subsidysetting for rural electrification.

13 was envisaged to be a part. This delivered a forecast economic internal rate of return (EIRR) of 18.3%. This EIRR has been recalculated using updated data for the period 1989/ /96 which, due to implementation delays, is the period the project ended up covering. The re-estimated EIRR is 15.7%. The detailed ex-post EIRR calculation is presented in Annex D. 6. One reason why the ex-post EIRR fell short of the appraisal estimate is the overexpansion in generating capacity which occurred in the early 90's. Starting in 1991, PLN began accelerating its system expansion based on a perception at that time that demand growth would outstrip earlier forecasts. This turned out to be over-optimistic. While the increase in peak load between 1989/90 and 1994/95 was almost on target (3,379 MW actual vs. 3,227 MW forecast at project appraisal), the actual increment in generating capacity turned to be 4,600 MW, far greater than the appraisal forecast of 2,600 MW. This issue has been repeatedly raised by the Bank in its policy dialogue. In a recent loan for the Second Power Transmission and Distribution Project, PLN covenanted to achieve a reserve margin of 30% by Review of Physical Objectives 7. Diesel rehabilitation and relocation: A total of 109 units were rehabilitated using Bank funding for a gain of 143 MW. This exceeded the SAR target of 82 units for a capacity gain of 133 MW. Over the same period (1991/ /95), an additional 28 units were rehabilitated using Dutch funds and an additional 21 units using PLN's own funds. The rehabilitation using Dutch sources was less than expected due to the termination of Dutch aid to Indonesia in June Substantial relocation of diesel units was also carried out using PLN's own funds. Between 1991/92 and 1994/95, 125 units with a total capacity of 65 MW were relocated. This exceeded the SAR target of 73 units. Total cost for the rehabilitation was US$ 18.3 million, compared to the SAR estimate of US$ 18.4 million. 8. Small hydropower renovation: The Bank loan provided for the procurement and installation of electrical and mechanical equipment, and engineering and construction supervision of renovation works on seven hydro power stations. During dismantling of the turbines and generators, new problems were found at most plants, and, instead of the 11 generating units identified in the feasibility study, 22 units were refurbished. The stations are now in commercial operation and the taking over certificate (TOC) has been issued to all units except one for which the turbine was damaged during the test run. The increased scope led to an increased cost by about 77% (from US$ 24.1 million to US$ 42.6 million), but the re-estimated EIRRs (given in Table 6e) are still impressive (12-35% ex-post vs % ex-ante). 9. Distribution investment: The project was originally intended to finance PLN's Java non-rural distribution investment program for the years of 1990/91 and 1991/92. However, on account of procurement delays, delivery of the materials financed under the loan was not complete until March 1995, about three years behind schedule. The project therefore financed instead PLN's 1993/94 and 1994/95 Java non-rural distribution program. This change in the time-slice makes the SAR investment targets for 1990/91

14 - 4 - and 1991/92 irrelevant as project targets. However, it can be noted from Table 6a (in Part II, Statistical Tables) that PLN achieved or exceeded mrost of its distribution targets in 1990/91, but not in 1991/92, due to a budget shortage. 10. The actual cost of the distribution component was much lower than the SAR estimate ($328 million versus $471 million). In the SAR, US$ 68 million of cofinancing funds for distribution expansion were included in the cost estimates. However, the source of the cofinancing was never identified and no distribution cofinancing ended up being included in the project. 11. Expansion of PLN's telecommunicationsfacilities: The project initially included the provision of trunk telecommunications facilities in West Java (about 500 km of fiber optic cables), but this was later amended to extend the network to Central Java. The loan financed equipment and engineering services and construction supervision. Commissioning of new facilities took place in June 1995, with final hand-over scheduled for June The final performance of the network was measured during commissioning and was demonstrated to have met or exceeded the requirements of the contract in all areas. PLN now has a comprehensive and modern communications network to support all of its operations in West Java and part of Central Java. The network also has much spare capacity, and PLN is currently considering various options to increase utilization. 12. Because of the extended scope of work as mentioned above, the actual cost went up to US$ 28.9 million from the SAR estimate of US$ 16.3 million. Review of Institutional Development Objectives 13. Training in the operation of diesel power plants: Funding for training and for the purchase of training equipment was to be provided under a Dutch grant. However, the suspension of all Dutch aid to Indonesia in June 1992 resulted in limited implementation of this component. 14. Training in the operation and maintenance of major steam power plants: This was funded by UK ODA prior to loan effectiveness (beginning in ), and was not supervised as part of the project. 15. Distribution Management Program (DMP): The consultancy for this component was undertaken between 1991 and The consultants developed a DMP Master Plan, which identified (first in October 1991) 14 activities to be undertaken to improve PLN's distribution management. PLN established in early 1994 a Working Group headed by PLN's Director of Operations and a Steering Committee headed by the President Director to carry out priority implementation of three activities: customer information system, distribution information system and data communications. Although there has not yet been a comprehensive follow-up, the Working Group is still in operation and various pilots have been initiated. Further follow-up initiatives arising from this consultancy will be undertaken by PLN's Jakarta distribution operations under the Bank financed Second

15 - 5 - Power Transmission and Distribution Project (Loan 3978-IND), for which the loan agreement was signed in March Technical assistance for general accounting and cash management: The impetus for this TA came from the fact that in the eighties PLN's audited accounts were delayed and received qualified opinions on a number of occasions (including 1985/86 and 1986/87, received during the course of the project preparation). The general accounting consultancy, aimed at improving PLN's accounting policies and systems, and preparing updated accounting manuals, commenced in September 1991 (about 18 months behind the schedule) and was completed in December New accounting policies, in line with the best international practices. have been implemented and accompanying manuals completed, and relevant training undertaken. PLN's accounts have been produced more quickly and have received unqualified opinions from the auditors in recent years. 17. Draft TOR for improving PLN's cash management were agreed with the Bank. PLN hired local consultants using its own funds prior to the loan approval. Much of the work was also completed prior to the loan approval due to the delays in the project processing. This component was not supervised by the Bank. 18. Technical assistance for financial and corporate planning: The consultancy commenced in October 1991 and continued throughout the remainder of the project period. The consultants prepared a Master Plan for Corporate Planning in April The plan recommended establishment of a separate corporate planning division and consolidation of corporate and financial planning activities with additional staffing. These recommendations were largely adopted. A corporate planning division was established by PLN in The consultants also assisted PLN in preparation of a fiveyear corporate plan ( ) and an Action Plan for PLN's Institutional Development, which was endorsed by the PLN Board. Many recommendations were implemented in a major reorganization. For improvement of financial planning, the consultants developed a new software which is replacing the old one used within PLN. The new software is an improvement in several ways, and has been officially adopted by PLN, though currently the old and new software are being used in parallel runs. Further training is required and planned for use in the new software, which will be especially useful in producing consolidated financial projections since PLN now has two subsidiaries, with more intended. Review of Policy Support Objective 19. Institutional mechanism to advise GOI on energy price adjustments: One of the objectives of the project was to have GOI take a coordinated approach for price setting by establishing a energy pricing task-force and a supporting technical energy pricing unit. In fact, the task-force was never established; the energy pricing unit also was not created, but the work was assigned to the energy planning directorate within MME. In hindsight, it is clear that energy prices are adjusted too infrequently to make the establishment of an energy pricing task force a feasible proposition. However, progress was made on the underlying goal of improving energy pricing. In 1993, GOI aligned domestic petroleum

16 - 6 - fuel prices to international prices (except for kerosene); and in 1994, an automatic adjustment mechanism was implemented for the electricity tariff. 20. Information system to provide costs for PLN's rural electrification program: PLN does now provide separate income statements for its rural electrification program. Although the segregation of accounts requires further development, some progress was made towards this objective. 21. Utilization by PLN of captive generating capacity: Another stated policy objective of the project was to link captive generating capacity to the PLN grid. An action plan for a pilot to achieve this objective was tabled at the loan negotiations, but it lacked concrete policies and little progress was made. This led to a more fundamental rethink, which resulted in an agreement between the Bank and GOI that the latter would implement a Small Power Purchase Tariff, under which PLN would offer a purchasedpower tariff to small (including captive) generators that would reflect PLN's avoided cost of power generation. This was implemented in December 1995, and provides a possible vehicle by which this objective of the project can be achieved, although with considerable delay. In addition, the unbundling currently underway on Java will lead eventually to an open-access regime, under which captive, PLN and private generators will compete to sell power through the grid directly to distribution companies and other large end-users. Compliance with Financial Covenants 22. While delay of the project contributed to an important tariff increase, full compliance with financial covenants was achieved only by successive "roll-overs" of one of the covenants. The project was delayed after appraisal for over a year in order to secure a tariff increase required to meet the existing rate-of-return (ROR) financial covenants. This strategy was successful. The Government approved an average increase in tariff rates of about 25% effective April 1, This enabled PLN to meet the 8% ROR target for Java. However, PLN was never able to achieve break-even outside of Java where its operations are far less profitable. Indeed, when GOI increased fuel prices (in accordance with Bank advice), the outside-java position deteriorated due to a heavy reliance on diesel. Compliance with the break-even covenant could only be achieved by repeated postponement of the target date. Not surprisingly, having different financial targets for different regions when a principle of uniform tariffs implied both regions would face the same tariffs proved unworkable. The move back to a single ROR covenant in 1994 was well-advised. C. MAJOR FACTORS AFFECTING THE PROJECT Implementation Record 23. The implementation of the project was satisfactory. Physical and institutional project components were completed, and targets met or exceeded. Implementation was, however, characterized by substantial delays. For those components for which the SAR

17 gave implementation schedules, the delays were between one and three years (the longest delay was for the distribution component). Major Factors Affecting the Project 24. Procurement of goods and consulting services: The Borrower's procurement practices and consultant selection procedures substantially delayed procurement of both goods and consultants. This was a key contributing factor in the one year loan extension. There were lengthy delays between bid closing date and bid evaluation, delays between receipt of Bank's no objection letter (NOL) and preparation of final contract document, and in posting of the performance bonds by contractors. 25. Increase infuelprices: The increase in fuel prices, while welcome in itself, made the break-even covenant for PLN's outside-java operations impossible to meet on account of its reliance on oil. 26. Good project preparation: The extensive technical pre-project preparation work was an important factor contributing to the project's success. Some of the preparation was financed by PLN under earlier projects. The diesel renovation component preparation was directly contributed by the Bank under the Energy Sector Management Assistance Program (ESMAP). D. PROJECT SUSTAINABILITY 27. The achievements and benefits of the project are sustainable. The physical investments will be productive for many years. In particular, the telecommunications project has provided PLN with a state-of-the-art communications technology which will provide valuable service to the company for years to come provided that some of the initiatives currently under consideration to increase its utilization are undertaken. Results and recommendations from the technical assistance have already been or are being incorporated into PLN's management practices. For example, the accounting TA produced manuals which are now the basis of PLN's accounting. PLN's corporate planning has been upgraded, and some of the restructuring detailed with the help of the corporate planning consultants has been undertaken. PLN has decided to adopt the new financial planning software developed under the financial planning consultancy, and its financial planning has already improved greatly. Recommendations from the DMP TA are still being pursued by PLN, including under the Second Power Transmission and Distribution Project (Loan 3978-IND). 28. Operational Plans to ensure the sustainability of results achieved under the project were discussed and agreed with PLN's management during the ICR mission. These plans are presented in Annex B.

18 - 8 - E. BANK PERFORMANCE 29. Overall, the Bank's performance has been satisfactory. With regards to identification, the project was innovative for the sector, both in terms of specific components (e.g. telecommunications) and the general thrust of the project. It was the first power project in Indonesia to make efficiency improvement an explicit project objective alongside system expansion. 30. With regards to preparation, as commented earlier, one reason for the project's success was the extensive technical pre-project preparation work. Some of this was financed by PLN under earlier projects. The diesel renovation preparation was contributed directly by the Bank under the ESMAP project. Loan preparation was also used effectively in the tariff dialogue. Approval of the Board was made conditional on a substantial tariff increase. The only area where preparation was less than thorough was in relation to some of the policy components which were not all well thought through (paras. 19 and 21). 31. Appraisal was also carried out successfully. The major risk was correctly identified, namely procurement delays. Attempts were made to mitigate these risks, though these proved unsuccessful. The implementation plan for the project components was simple, but sufficiently clear to quantify the extent of the delays which occurred. Performance indicators were provided for the physical, but not the institutional, components of the project. Project complexity could have been reduced at the time of appraisal by removing from the project particular components which were to be financed by PLN or other (unspecified) donors and which inevitably went unsupervised. 32. During supervision, the Bank successfully maintained good working relations with PLN. A total of seven supervision missions were fielded during the project implementation period. Specialists were brought out to supervise particular components when required. The project was supervised by two task managers, with no discernible negative impact on project continuity and outcome. The weaker aspects of supervision were technical assistance, where the emphasis was on process (reducing delays) rather than substance, and the monitoring of covenants which was neglected. In addition, the lack of regular performance monitoring undermined the project objective of increasing sector efficiency. 33. Project implementation involved no deviations from Bank policies and procedures. F. BORROWER PERFORMANCE 34. PLN's and GOI's performance was satisfactory. Macroeconomic and sectoral policies were generally favorable and improving. The project was carried out successfully and targets were met. Counterpart funds were available and audit

19 -9- requirements were met. Ownership was, in the main, taken of the technical assistance, close cooperation ensured knowledge-transfer, and ongoing use is now being made of the consultants' work. Against this overall satisfactory rating, two less positive aspects of the borrower's performance must also be noted. First, as mentioned previously, the project suffered from substantial delays in implementation due to lengthy procurement times driven by requirement imposed by GOI procurement procedures, as well as cumbersome, lengthy and inefficient procurement procedures and practices internal to PLN. Second, although compliance with covenants was satisfactory in general, not all covenants were complied with (see paras ). G. SUMMARY ASSESSMENT OF OUTCOME 35. The outcome of the project is satisfactory. The projects met most of its physical, institutional and policy objectives and the benefits from the project are likely to be sustainable. 36. The EIRR for the project has been re-estimated at 15.7%. Individual EIRRs for the hydro renovation component were also calculated and ranged from 12-35% with a cumulative EIRR at 25%. Individual EIRRs for the renovated diesels were not calculated due to a lack of data. H. FUTURE OPERATIONS 37. It is expected that the project will be operated as planned. The physical components have been taken over by PLN's various operational departments and have become an integrated part of PLN's entire operations. Proper training has been conducted and comprehensively documented operation and maintenance procedures have been put in place. In order to make better use of the capacity of the Java West Operations Telecommunications System (JWOTS) financed under the project, a joint utilization program is being developed with PT Telkom, the national telecommunications company in Indonesia. Furthermore, the JWOTS system provides many types of data communications interfaces linking all PLN sites and is suitable for establishing a wide area network, which is currently at the planning phase. To implement the activities identified by the Distribution Management Program (DMP), PLN has setup steering committees as well as working groups, and various DMP pilots have been initiated. 38. Plans for future operations are presented in Annex B. The Bank will continue to monitor the project's operation through its on-going lending and institutional development programs and policy dialogue with GOI/PLN.

20 - 10- I. KEY LESSONS LEARNED 39. Several specific key lessons, which have operational and strategic implications for the design of future power sector projects, can be drawn from this project. These are discussed in the following. 40. Covenants: Experience with the captive power and energy pricing covenants indicates that, to be effective, covenants should be (a) realistic, (b) dated, (c) backed up by research and action plans, and (d) systematically pursued and reviewed. 41. Establishment of a central Project Management Unit (PMU) could benefit overall project coordination and accountability: The project did not require PLN, the implementing agency, to establish a central project management and implementation supervision unit. As a result, no senior PLN manager was responsible for monitoring progress and the outcome of the project, and for initiating corrective actions in a timely manner. This also made it difficult for the Bank to supervise the project while adding to the time and financial resources devoted to the supervision activity. If a PMU is not established, then at least implementation reports on all individual components should be required upon their completion. 42. Technical Assistance: Well-targeted technical assistance programs (such as the financial planning and accounting financed under the project), which are taken ownership of by PLN, can be very productive. Bank's supervision of technical assistance activities should focus not only on process and minimizing delays, but also on substance and links with Bank's policy dialogue. For example, the corporate planning and DMP technical assistance recommendations are only now being taken up by the Bank under the Second Power Transmission and Distribution Project (Loan 3978-IND). 43. Performance monitoring: Although improvements in PLN efficiency was the aim of the project, there was no regular performance monitoring during supervision. Explicit performance monitoring has since built in the Bank's loans to PLN starting with the Second Power Transmission & Distribution Project (Loan 3978-IND). 44. Cumbersome procurement processes are a leading cause of project implementation delays: PLN's procurement process results in a lengthy procurement cycle adding delays and unnecessary costs to projects that it undertakes. Speedier procurement processing and more efficient inventory management and materials handling are key to increasing the efficiency of its investment program.

21 IMPLEMENTATION COMPLETION REPORT INDONESIA POWER SECTOR EFFICIENCY PROJECT (LOAN 3097-IND) PART II. STATISTICAL TABLES Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8A: Table 8B: Table 9: Table 10: Table 11: Table 12: Table 13: Summary of Assessment Related Bank Loans/Credits Project Timetable Loan/Credit Disbursements: Cumulative Estimated and Actual Key Indicators for Project Implementation Key Indicators for Project Operation Studies Included in Project Project Costs Project Financing Economic Costs and Benefits Status of Legal Covenants Compliance with Operational Manual Statements Bank Resources: Staff Inputs Bank Resources: Missions

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23 Table 1: Summary of Assessments A. Achievement of Obectives Substantial Partial Negligible Not applicable Macro Policies El E El Sector Policies El El El Financial Objectives El El El Institutional Development i: [= El Physical Objectives El El El Poverty Reduction E El El Gender Issues Ej I E Other Social Objectives El El 0l Environmental Objectives E El El Public Sector Management El E El Private Sector Development E El El Other (specify) El El El B. Proiect Sustainability Likely Unlikely Uncertain ('I) (V) (V) I C. Bank Performance satisfactory Satisfactory Deficient (V) (V) (V') l Identification El El Preparation Assistance El El Appraisal E El Supervision l E D. Borrower Performance satisfacto Satisfactory Deficient Preparation El El Implementation - Physical E El - Institutional E El Covenant Compliance E El Operation (if applicable) E El Highly Highly E. Assessment of Outcome satisfactrv Satisfactor Unsatisfactory unsatisfactory El) El) (V) El)

24 Table 2: Related Bank Loans/Credits Loan/credititle Purpose/Description Year of Status approval Loan 2506-IND Comprising: (a) a distribution system for Jakarta and the 1981 Completed in Eleventh Power regencies of Bogor, Tangerang and Bekasi (Jabotabek) 1988 Project in West Java, involving about 450 km of kv cables, 760 km of 20 kv overhead lines; (b) a 150 kv voltage system, involving 5 new substations in Jakarta, 46 km of underground double-circuit 150 kv cables and 980 MBA of transformers; (c) engineering of the next baseload thermal power unit (at Paiton) in Java; (d) engineering of the Extra High Voltage (EHV) Central- East Java transmission line; and (e) management consultancy for further improvements in PLN's financial planning and control systems. Loan 2214-IND Twelfth Power Project Comprising: (a) construction of 110 (2 x 55) MW 1982 Completed in extension of Kamojang geothermal power station in 1991 West Java; (b) construction of the third 400 MW thermal generating unit at Suralaya, including engineering services for the third and fourth generating units; (c) distribution system improvements in Java, North Sumatra and South Sulawesi; (d) a mini-hydro development program in North Sumatra; and (e) training facilities and services to assist PLN's manpower development program. Loan 2443-IND To construct and install the third and fourth 400 MW 1984 Completed in Fourteenth Power thermal generating units at Suralaya in West Java; to 1992 Project extend the distributio network in Jakarta, Bogor, Tangerang and Bekasi (Jabotabek), East Java and Central Java; and to provide consulting services for engineering and construction supervision of transmission lines and substations in Java and for engineering and design of hydro projects. Loan 3098-IND To provide for the construction of the Paiton coal-fired 1989 Completed in Paiton Thermal power plant with an initial capacity of 800 MW and an 1995 Power Project ultimate capacity of 4,000 MW in East Java; associated 500 kv and 150 kv transmission system; and technical assistance to strengthen capacity of Ministry of Mines and Energy in environmental matters and train PLN personnel in power plant technology.

25 Table 2: Related Bank Loans/Credits (Cont'd) Loan/credititle Purpose/Description Year of Status approval Loan 3501-IND The project includes: (a) the construction of three coal Implementation Suralaya Thermal fired units of 600/MW each at Suralaya, including underway; Power Project associated works and a 500 kv transmission line from closing in 1999 Cilegon to Cibinong, with associated substations; (b) consulting services for engineering, design and construction supervision of the proposed units; (c) feasibility study for a high voltage submarine cable link between Java and Sumatra; (d) engineering and design of a thermal power p-ant at Banjarmasin in South Kalimantan; (e) consulting services for institutional development; and (f) training of PLN's staff in public utility practices. Loan 3602-IND Its components are: (a) implementation of Phase 11 of 1993 Implementation Cirata the Cirata hydroelectric development on the Citarum underway; Hydroelectric River in West Java; (b) consulting services for the closing in 1999 Phase 11 Project engineering and construction supervision; (c) studies to upgrade hydrological and environmental data bases, and improve data collection practices; (d) studies to update PLN's hydroelectric inventories, and determine pre-feasibility of selected schemes; (e) studies to identify options to enhance environmental conditions in the existing PLN reservoirs on the Citarum River, and training of PLN staff in environmental management; (f) training of PLN's staff in dam safety and instrumentation monitoring; (g) power sector institutional and regulatory framework studies for the Government of Indonesia (GOI);(h) studies aimed at assisting GOI to determine a long-term strategy for financing power sector investments; and (i) preconstruction stage engineering services. Loan 3978-[ND To improve customer service by (a) increasing the 1996 Not yet effective Second Power physical capacity, efficiency, and reliability of the Transmission and Java-Bali transmission system and distribution Distribution Project network; and (b) promoting sector efficiency, competition, and private sector participation by implementing functional decentralization of State Electricity Corporation (PLN) operations in Java-Bali and developing effective regulatory oversight and institutions. The project has two principal components: (a) the restructuring of and investment in PLN's operations; and (b) the development of regulatory oversight.

26 Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/ Latest Estimate Identification (Executive Project Summary) 08/86 08/08/86 Preparation 04/30/87 Appraisal 11/19/87 11/19/87 Negotiations 05/11/89 05/11/89 Letter of Development Policy (if applicable) N.A. Board Presentation 06/22/89 Signing 07/21/89 Effectiveness 10/19/89 10/06/89 First Tranche Release (if applicable) Midterm review (if applicable) Second (and Third) Tranche Release (if applicable) N.A. N.A. N.A. Project Completion 06/30/94 06/30/95 Loan Closing 12/31/94 12/31/95 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ million) FY90 FY91 FY92 FY93 FY94 FY95 FY96 Total Appraisal Estimate Actual Actual as % of Estimate Date of Final Disbursement May 14, 1996 (An undisbursed balance of US$ 11.7 was canceled.) LUS$16 million was canceled from the loan effective January 30, 1995.

27 - 16- Table 5: Key Indicators for Project Implementation 1. Key Implementation Indicators in SAR/ President's Report Estimated Actual None n.a. n.a. II. Modified Indicators (if applicable) n.a. n.a. II. Other Indicators (if applicable) n.a. n.a. Table 6: Key Indicators for Project Operation I. Key Operating Indicators in SAR/President's Report SAR Actual/ Estimated Re-estimated 1. General performance improvement (from a baseline of 1986/87 actuals): * Capacity utilization to improve from 55% to: a/ 65% 64% b/ * Reserve margin to fall from 45% to: 35% 36% b/ * T&D losses to fall from about 19% to: 16% 12% * Fuel consumption for diesel generating units should 3% n.a. reduce by: 2. Hydro renovation - ERR ranaing: 15% - 32% 12% - 33% II. Modified Indicators (if Applicable) n.a. n.a. III. Modified Indicators for Future Operation (if applicable) n.a. n.a. Note: a/ Reserve margin = (generating capacity - peak load) / (generating capacity). b/ Actuals for Table 6a: Java Distribution Investment Implementation 1990/ /92 b/ 1992/ / /95 Target/c Actual Target/c Actual Actual Actual Actual MV Line (kmc) a/ 4,459 4,684 5,077 2,265 2,934 3,250 10,992 LV Line (kmc) ,894 4, ,074 10,405 21,509 Distr.Transformer(MVA) 1, , ,179 Consumer Connections 440, , , ,937 1,169,385 1,250,248 3,700,082 Note: a/ kmc - circuit kilometers; b/ 1991/92 actual fell short of targets due to lower than expected budgets; as shown, the actual construction picked up in later years. c/ Targets from SAR

28 - 17- Table 6b: Hydro Renovation Benefits Nominal SAR Estimated (lain Actual Gain a/ Plant Name Capacity Capacity Energy Capacity Energy (MW) (MW) (GWh) (MW) (GWh) Ubrug Kracak Lamajan Ketenger Jelok & Timo Giringan Plengan Total Note: a' The actuals fell short of estimates for Ubrug because of the deficiency in the original design which did not take into account appropriately of the local water supply level. Consequently, a much reduced investment program was implemented. b/l "Actual Gain" is engineer estimate at the project completion. Table 6c. Hydro Renovation IRRs SAR Re-Estimated Estimated (09/30/95) Ubrug Ranging from 15-32% Kracak 28.9 Lamajan 26.7 Ketenger 19.7 Jelok & Timo 35.3 Giringan 11.7 Plengan 13.5

29 Table 7: Studies Included in Project Purpose as Defined Study at Appraisal/Redefined Status Impact of Study 1. Study for the To improve PLN's accounting Completed New accounting Improvement policies and systems, and to prepare manuals adopted; of General updated accounting manuals. unqualified auditor Accounting opinion. 2. Distribution To upgrade all aspects of PLN's Completed DMP Master Plan Management distribution management for Java adopted and various Program including customer service, pilots initiated. (DMP) planning procedures, design standards, construction methods, maintenance practices, operations procedures, organization, information and monitoring systems. 3. Corporate To enhance PLN's corporate and Completed Establishment of a and Financial financial planning process, separate corporate Planning including determining corporate and planning division, financial objectives, identifying key consolidation of issues, developing strategic corporate and approaches, preparing monitorable financial planning action programs and evaluating activities; new results; to assist PLN in acquiring a financial projection suitable utility financial planning model. software package, and also to address the needs for staff training and organizational improvements.

30 - 19- Table 8A: Project Costs Appraisal Estimate (US$M) Actual/Latest Estimate(US$M) Item Local Foreign Total Local Foreign Total Costs Costs Costs Costs Diesel program llydro renovation 17.( Distribution 101.( Telecommunications Consulting services - Hydro renovation Technical assistance - Telecommunication Distribution management Diesel efficiency a/ Corporate and financial planning Accounting and cash management Total Project Cost Interest during construction Total Financing Required Note: a/ Component not executed due to termination of the Dutch aid. b/ All actual costs for local procurement/construction and consulting services include 10% VAT. Table 8B: Project Financing Appraisal Estimate (USSM) Actual/Latest Estimate(US$M) Source Local Foreign Total Local Foreign Total Costs Costs Costs Costs Cofinancing from Gov. of the Netherlands IBRD Other cofinancing a/ PLN TOTAL Note: a/ The other cofinancing resource was intended to finance the distribution facilities in 1990/91 and 1991/92. However, the source of the cofinancing was never identified and no distribution cofinancing ended up being included in the project.

31 Table 9: Economic Costs and Benefits Appraisal Estimate Re-estimate Base Case IERR (%) 18.3% on PLN's investment 15.7% on PLN's investment program from 1988/89 - program from 1989/ / /96 Major Costs (US$ million) Investment (cumulative) 3,194 9,168 Fuel (Max. Incr.) O&M (Max. Incr.) Major Benefits Max. incr. sales (GWh) 6,896 24,031 Max. incr. revenue at average 455 1,754 tariff (US$ million) Max. incr. benefits (US$ million) 704 2,637 For detailed calculations, see Annex D. The large differences between estimated and re-estimated costs and benefits are due to the difference in time-slices used for the appraisal estimate and for the re-estimate. The re-estimate also uses updated (1995) prices.

32 Table 10: Status of Legal Covenants Original Revised Agreement Section Covenant Present fulfillment fulfillment Description of covenant Comments l type status date date Loan 3.01b) 3 C Subsidiary loan agreement between GOT Condition of and PLN. effectiveness 3.04 GOI to: l 3.04(a) 12 NC A) establish and maintain task-force from MOF, MME and BAPPENAS to review and advise GOI on all price adjustments in energy sector 3.04(b) 12 CP B) establish and maintain energy pricing Task assigned to a tinit within MME to support above task- Directorate in MME torce 3.04(c) 10 NC C) prepare, review with Bank and Now being implement action plan with suitable implemented with regulatory and contractual measures to Small Power Purchase utilize captive generation capacity in PLN ~~~~~~~~~~~~~gridl l gi 4.01(a) 9 ( Review annually potential changes in load growth of Java power and variations of PLN's development program. 4.01(b) 9 PLN/GOI would review with Bank its nannual investment plan for the next FY. 4.01(c) II Review annual PLN's development plan and l ~~~~~~~~~~~~~~~~~~associated financial forecast and financingl _ ~~~~~~~~~~~~~~plan C' Ensure all GOI electricity bills paid within I ~~~~~~~~~~~~~~~two nionths 4.03 C 3/31!90 Obtain required cofinancing Dutch cofinancing l obtained C' Subsidiary loan agreement executed Proiect C PLN to review with Bank its distribution Being implemented l. expansion plan for Java C PLN to provide to Bank a report containing Implemented justification for each diesel rehabilitation carried out under project CP PLN to carry out action plan for efficiency Efficiency improved, improvement, including targets for non-java but no operational so that non-java operations break-even targets and no breakeven 4.01 i C PLN to submit audited accounts, and other financial information, including segregated RE accounts C' PLN to review periodically with Bank its l LRMC and tariff structure C PLN to revalue fixed assets C PLN to maintain projected debt-service l coverage of at least C PLN to prepare ten-year financial forecast l and review with Bank Project 4.06(a) 2 C PLN to achieve 8% ROR for Java-Bali Covenant modified from under Ln 3761-IND to require ROR not less l l than 8 % for PLN as a whole, commencing _ from FY 94/ (a) 2 PLN to achieve break-even for outside-java Not applicable, as l from described above. 4.06(b) 2 C PLN to review adequacy of tariffs to meet 4.06(a) targets Tariff

33 Covenant types: I1. = Accounts/audits 8. Indigenous people 2. Financial performance/revenue generation from 9. = Monitoring, review, and reporting beneficiaries 10. Project implementation not covered bv categories Flow and utilization of project funds I I. Sectoral or cross-sectoral budgetary or other resource 4. = Counterpart funding allocation 5. Management aspects of the project or executing 12 = Sectoral or cross-sectoral policy/ regulatory/institutional agency action 6. = Environmental covenants 13 = Other 7. = Involuntary resettlement Present Status: C = covenant complied withi CD= complied with after delay CP = complied with partially NC= not complied with Table 11: Compliance with Operational Manual Statements Statement Number and Title I Describe and comment on lack of compliance There are no OMS relevant to the Project that have not been complied with and/or been acted against. Table 12: Bank Resources: Staff Inputs Planned Stage of Revised Actual Project Cycle Weeks US$ Weeks US$ Weeks US$ Preparation to appraisal n.a. n.a. n.a. n.a n.a. Appraisal n.a. n.a. n.a. n.a n.a. Negotiation through Board approval n.a. n.a. n.a. n.a n.a. Supervision n.a. n.a. n.a. n.a n.a. Completion n.a. n.a. n.a. n.a n.a. TOTAL n.a. n.a. n.a. n.a n.a.

34 Table 13: Bank Resources: Missions Performance Rating Stage of Month/ Number Weeks Specialized Implemen- Develop- Types of Problems Project Cycle Year of in Staff Skills tation ment Persons Field Represented Status Objectives Through Appraisal 02/ Power Eng. Preparation n/a Through Appraisal ~~~~~Energy Econ. Fin. Analyst 05/ Power Eng. Preparation n/a Preparation progress reported Fin. Analvst to be slow. 08/ Power Eng. Pre- n/a Preparation progress reported Energy Econ. appraisal to be slow Fin. Analyst 11/ Power Eng. Appraisal n/a Fin. Analyst Appraisal through 02/ Power Eng. Energy Eeon. Preparation n/a Board Approval Fig. Analyst 09/ Power Eng. Post- n/a As above. Energy Econ. appraisal Fin. Analyst 02/ Power Eng. Post- n/a Fin. Analyst appraisal Board Approval through Effectiveness Supervision 02/ Power Eng. I I Delays in TA Fin. Analyst Energy Economist 11/ Power Eng. I n/a (i) Decentralized Fin. Analyst procurement worked out for diesel rehabilitation; (ii) increased scope for hydro rehab; (iii) delay in distribution component 04/ Power Eng. 1 2 (i) Delay in most 2 Fin. components; (ii) PLN report Analysts argues little potential in linking captive power to the grid; (iii) no use made of contingency fund for diesel rehabilitation 10/ Power Eng. 1 2 (i) Request to PLN to Fin. Analyst monitor diesel efficiency; (ii) no progress on captive power 03/ Power Eng. I 2 (i) PLN's Corporate Planning Fin. Analyst, Op. Officer Unit remained understaffed; (ii) need for close liaison between various consultants.

35 Table 13: Bank Resources: Missions (Cont'd) Performance Rating Stage of Month/ Number Weeks Specialized Implemen- Develop- Types of Problems Project Cycle Year of in Staff Skills tation ment Persons Field Represented Status Objectives Supervision Power Eng. I 2 (i) Progress on the diesel Fin. Analyst efficiency program was slow; (ii) GOI had not established an energy pricing unit as agreed. 04/ Power Eng. l 2 Little progress made on the Fin. Analyst evolution of the regulatory and contractual measures to utilize captive generating capacity. 04/ Power Eng. l 2 (i) No progress in captive- Fin Analyst PLN coordination, but dialogue on small power purchase tariff begun; (ii) extension and reallocation of loan identified as required. 11/ Power Eng. S S (i) Disbursement one year Fin. Analyst and implementation two years behind appraisal schedules; (ii) corporate & financial planning and accounting TAs not yet achieved full benefits for PLN. 11/ Power Eng. S S (i) ICR initiated; (ii) one hydro turbine damaged, l delaying completion Completion 03/ Power Eng. Fin. Econ. l _ Op. Officer

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37 IMPLEMENTAION COMPLETION REPORT INDONESTA POWER SECTOR EFFICIENCY PROJECT (LOAN 3097-IND) ANNEXES ANNEX A: MISSION'S AIDE MEMOIRE ANNEX B: OPERATIONAL PLAN ANNEX C: BORROWER'S EVALUATION REPORT ANNEX D: CALCULATION OF ECONOMIC INTERNAL ECONOMIC OF RETURN

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39 ICR Mission Aide Memoire Annex A ANNEXA INDONESIA POWER SECTOR EFFICIENCY PROJECT (LOAN 3097-IND) IMPLEMENTATION COMPLETION REPORT (ICR) MISSION AIDE MEMOIRE Introduction 1. This Aide Memoire records the findings of a World Bank Mission comprising Mr. Stephen Howes, Mrs. Judith Magyari and Mr. Yuling Zhou, who visited Indonesia during March 11 through March 22, 1996, for preparation of the Implementation Completion Report (ICR) for the Power Sector Efficiency Project (Loan 3097-IND). The mission records its thanks to PLN staff for the assistance provided in the ICR preparation and acknowledges the courtesies and cooperation extended to it during its visit. Activities Undertaken by Mission 2. The mission: (i) collected the data necessary to prepare the statistical tables in the ICR; and (ii) reviewed other background data to develop its analysis. Discussions were held with PLN staff to better understand and interpret the available data. The project was assessed with regard to the degree of achievement of the objectives, prospects of its sustainability, Bank and Borrower performance, and the lessons learned. In addition, the mission provided advice and support to the Borrower for preparing its own contribution to the ICR. Overall Project Objective 3. The overall objective of the project was to increase sectoral efficiency. PLN has gone over the period of the project ( ) from being a loss-maker to being a substantial profit-maker without an increase in the real value of tariffs. This indicates an underlying improvement in efficiency. The project selected targets for four technical indicators to measure sectoral efficiency, i.e., capacity utilization, reserve margin, system losses, and fuel consumption. Some, but not all, of the sectoral targets were reached. Realistically though, any overall gains in sectoral efficiency cannot be attributed to this one project which constituted only a small part of PLN's overall investment program. To judge the success of the project, its specific activities and objectives should be assessed.

40 ICR Mission Aide Memoire Annex A Review of Investment Activities 4. Diesel Rehabilitation and Relocation A total of 109 diesel units were rehabilitated using Bank funding for a capacity gain of 143 MW. This exceeded the SAR target of 82 units for a capacity gain of 133 MW. Over the same period (1991/ /95), an additional 28 units were rehabilitated using the Dutch funds and an additional 21 units using PLN's own funds. The rehabilitation using the Dutch financing was less than expected due to the termination of Dutch aid to Indonesia in Substantial relocation of diesel units was also carried out using PLN's own funds. Between 1991/92 and 1994/95, 125 units with a total capacity of 65 MW were relocated. This exceeded the SAR target of 73 units. 5. Hydro Renovation The Bank loan provided for the procurement and installation of electrical and mechanical equipment, and engineering and construction supervision of renovation works on seven hydro stations. During dismantling of the turbines and generators new problems were found at most plants, and instead of the 11 generating units identified in the feasibility study, 22 units needed to be refurbished, which caused cost increase. Refurbishment of the 22 generating units was completed. The stations are in commercial operation and the taking over certificate (TOC) has been issued to all but one unit for which the turbine was damaged during the test run. 6. Distribution Investment The project was intended to finance PLN's Java nonrural distribution investment program for the years of 1990/91 and 1991/92. However, delivery of the materials financed under the loan was not complete until March 1995, about three years behind schedule, so the project thus financed instead PLN's 1993/94 and 1994/95 Java non-rural distribution program. This change in the time-slice makes the SAR investment targets for 1990/91 and 1991/92 irrelevant as project targets. However, it can be noted that PLN achieved or exceeded most of its distribution targets in 1990/91, but not in 1991/92, due to a budget shortage. 7. Expansion of PLN's Telecommunications Facilities The project initially included the provision of trunk telecommunications facilities in West Java (about 500 km of fiber optic cables), but this was later amended to extend the network to Central Java. The loan financed equipment and engineering services and construction supervision. Commissioning of new facilities took place in June 1995, with final hand-over scheduled for May/June The final performance of the network was measured during the commissioning and system availability tests and was demonstrated to have met or exceeded the requirements of the contract in all areas. PLN now has a comprehensive and modern communications network to support all of its operations in West Java and part of Central Java. The network also has the spare capacity to satisfy additional needs in the medium term.

41 ICR Mission Aide Memoire Annex A Review of TA Activities 8. Distribution Management Program (DMP) The consultancy was undertaken between 1991 and The consultants developed a DMP Master Plan which identified 14 activities to be undertaken to improve PLN's distribution management. PLN established in early 1994 a Working Group and a Steering Committee to carry out priority implementation of three activities: customer information system, distribution information system and data communications. Although there has not yet been a comprehensive follow-up, various pilots have been initiated. Further follow-up initiatives arising from this consultancy will be undertaken under the Bank financed Second Power Transmission and Distribution Project. 9. Technical Assistance for General Accounting The general accounting consultancy, aimed at improving PLN's accounting policies and systems, and preparing updated accounting manuals, commenced in September 1991 (about 18 months behind schedule) and was completed in December New accounting policies, which in the main follow best international practice, have been implemented and accompanying manuals completed, and relevant training undertaken. PLN's recent accounts have received unqualified auditor opinions (in contrast to the late eighties). 10. Technical Assistance for Financial and Corporate Planning The consultancy commenced in October 1991 (about 18 months behind schedule) and continued throughout the remainder of the project life. The consultant prepared a Master Plan for Corporate Planning in April The plan recommended establishment of a separate corporate planning division and consolidation of corporate and financial planning activities with additional staffing. These recommendations were largely adopted. A corporate planning division was established by PLN in The consultant also assisted PLN in preparation of a five-year corporate plan ( ) and an Action Plan for PLN's Institutional Development, which was endorsed by the PLN Board. Many recommendations were implemented in a major reorganization. For improvement of financial planning, the consultant developed a new software which is replacing the old one used within PLN. The new software is an improvement in several ways, and has been officially adopted by PLN, though currently the old and new software are being used in parallel runs. Further training is required and planned for use in the new software, which will be especially useful in producing consolidated financial projections since PLN has created new subsidiaries. Review of Policy Support Objectives 11. Institutional Mechanism to Advise GOI on Energy Price Adjustment One of the stated objectives of the project was to have GOI take a coordinated approach for price setting by establishing a energy pricing task-force and a supporting technical energy pricing unit. In fact, the task-force was never established; the energy pricing unit also was not created, but the work was assigned to the energy planning directorate within

42 ICR Mission Aide Memoire Annex A MME. In hindsight, it is clear that energy prices are adjusted too infrequently to make the establishment of an energy pricing task force a feasible proposition. However, progress was made on the underlying goal of improving energy pricing. In 1993, GOI aligned domestic petroleum fuel prices to international prices (except for kerosene); and in 1994, an automatic adjustment mechanism was implemented for the electricity tariff. 12. Utilization by PLN of Captive Generating Capacity Another stated policy objective of the project was to link captive generating capacity to the PLN grid. An action plan for a pilot to achieve this objective was tabled at the loan negotiations, but it lacked concrete policies and little progress was made. This led to a more fundamental rethink, which resulted in an agreement between the Bank and GOI that the latter would implement a Small Power Purchase Tariff, under which PLN is now offering a purchased-power tariff to small (including captive) generators that reflect PLN's avoided cost of power generation. This was implemented in December 1995, and provides a possible vehicle by which this objective of the project can be achieved, although with considerable delay. Summary Assessment 13. Economic Rate of Return (ERR) The mission received an initial re-estimation of the ERR for PLN's Java investment program during the project life. Subject to further review of the data, it appears that the estimated ERR at project appraisal (18%) will be achieved. Individual ERRs for the hydro renovation component were calculated and ranged between 13% and 31% with an average of 24%, showing that the SAR estimates (15% to 32%) have been met. 14. Overall, the project performance vis-a-vis its objectives is satisfactory. However, it should be noted that the project suffered from substantial delays in implementation (in the order of one-and-a-half to three years) mainly due to lengthy procurement times. These in turn were driven by the requirements imposed by both GOI and PLN procurement procedures. Both these were significant contributing factors to the one-year loan closing date extension. In addition, the project only partially achieved its policy objectives in relation to the utilization of captive generation and energy price setting. Project Sustainability and Operational Plan 15. The project achievements and benefits are sustainable. The physical investments will be productive for many years. In particular, the telecommunications program has provided PLN with a state-of-the-art communications network which will provide valuable services to the company for years to come. Results and recommendations from the technical assistance have already been or are being incorporated into PLN's management practices.

43 ICR Mission Aide Memoire Annex A 16. Operational plans to ensure sustainability of the outcomes achieved under the project were discussed with PLN during the mission, and are attached to this aide memoire. Disbursement. 17. PLN indicated that there were a small number of payments, valued at approximately $1 million, which became, or would become, due after the loan closing date of December 31, The mission advised PLN to prepare an application for a transfer of these payments to an alternative loan. Next Steps 18. The mission's draft final ICR, reflecting the above findings, is expected to be sent to GOI and PLN by May 1, It was agreed that PLN will forward its comments, if any, to the Bank on the draft ICR by no later than May 15, The ICR will be finalized and printed in June 1996.

44 Operational Plan Annex B ANNEX B POWER SECTOR EFFICIENCY PROJECT (LOAN 3097-IND) OPERATIONAL PLAN Diesel Power Plants PLN has established comprehensively documented maintenance procedures for diesel generation sets. These procedures for maintenance of diesel power plants have been distributed to all regions where diesel generation sets have been installed. The procedures detail the type and frequency of maintenance to be provided and have an established reporting system to monitor adherence to procedures. Reports are submitted to operations division in the head office quarterly. Maintenance is carried out in accordance with manufacturers' specifications, a copy of which is held for each diesel generation set. Distribution Network Maintenance on the distribution network in Java is managed by the four distribution units. Patrols of lines take place on a regular basis and any deficiencies are noted and corrected. In addition, a faults service is in place to provide rapid response to faults as they occur. The maintenance and faults are conducted in accordance with the procedures for quality, reliability and efficiency indicators of electric supply. Hydro Power Plants The completion report, being prepared by the consultant, will outline future operational plan for the seven hydro power plants renovated under the project. Basically, all the hydro plants are being operated on a 24-hour basis, depending on the availability of water. Several indicators are used to measure the performance of these plants. Among them are: energy capacity targets, plant factor and operating/maintenance cost (less or within 0.5%-1% of the capital cost). Additional works have been identified by the consultants for each of the seven plants for operational safety and reliability as well as for improvement of efficiency. These works will be carried out according to their priority order upon approval by the PLN Board. Java West Operations Telecommunications System (JWOTS) Design tools and guidelines have been developed by the consultants for operation, maintenance and expansion of the system. Extensive training has been conducted by the

45 Operational Plan Annex B consultants and contractors which provided PLN staff with essential knowledge and skills for system maintenance and design. The system has the capacity to support future growth of PLN's power systems. In order to make better use of the system capacity, a joint use program is being developed with PT Telkom. After a successful trial installation, PT Telkom is now requesting further installations in Central Java and negotiations are now underway. Furthermore, the system provides many types of data communications interfaces linking all PLN sites and is suitable for the establishment of a wide area network (WAN). Such a WAN is seen as a high priority by many PLN departments and these interfaces are beginning to be used on a trial basis. A proposal is being developed by PLN to establish a WAN. Corporate and Financial Planning A separate Corporate Planning Division has been established to institutionalize this activity. The new financial planning software, SIMUL, requires final customization. This will be completed, and PLN's old software, FINPRO, will be converted to EXCEL to aid compatibility. SIMUL will be maintained and updated as required. Training of staff outside HQ will be undertaken so that financial projections can be made at the responsibility center level. SIMUL's capacity to consolidate financial statements will be utilized so that it remains useful in an unbundled PLN. General Accounting The manuals arising from the study will be updated as required by new events, for example, the recent creation by PLN of two generating subsidiaries. Distribution Management Program (DMP) The DMP Master Plan, developed by the consultants under the project, identified 14 activities to be undertaken to improve PLN's distribution management. PLN established in early 1994 a Working Group and a Steering Committee to carry out priority implementation of three activities: customer information system, distribution information system and data communications. Various pilots have been initiated and other follow-up initiatives arising from the consultancy will be undertaken under the Bank financed Second Power Transmission and Distribution Project.

46 Borrower Evaluation Annex C ANNEX C POWER SECTOR EFFICIENCY PROJECT (LOAN 3097-IND) BORROWER'S EVALUATION REPORT EVALUATION OF THE BANK'S PERFORMANCE Bank's performance during the evolution and implementation of the project was generally satisfactory. The efforts were very constructive during the process of project implementation. Bank's involvement was steadily maintained throughout the project circle. During the project preparation and appraisal, Bank had sent competent missions so the scrutinizing process in establishing the project objective, and also in assessing of the project cost, scope of work, financing plan and time schedule of the project could be accomplished successfully. Bank has involved in establishing Staff Appraisal Report (SAR) particularly in the assessment of cost planning, scope of work, source of finance, time schedule, and delivered suggestions during cost revision and scope of work negotiations. During the project implementation, Bank assisted PLN in supervision of procurement, project time schedule, cost disbursement and PLN got some advice in solving the pending issues prior to the date when the loan was nearly closed. Bank extended the period of the loan by 1 year which reflected the mutual understanding between the Bank and the Borrower (PLN). EVALUATION OF THE BORROWER'S OWN PERFORMANCE During the project implementation, PLN has made its endeavor to improve the process. However, delays occurred during the recruitment of Consultants and procurement processes. THE EFFECTIVENESS OF THE RELATIONSHIP BETWEEN THE BANK AND THE BORROWER DURING THE EVALUATION AND IMPLEMENTATION OF THE PROJECT The relationship between the Bank and PLN was good. Most of the problems encountered were clearly identified by both parties and relevant actions to solve the problem were promptly agreed and taken. In particular, good mutual understanding was achieved selecting least cost materials.

47 Borrower Evaluation Annex C ASSESSMENT OF THE OUTCOME The main objectives of the project were not only to focus the attention of PLN and GOI on the sector's efficiency and to implement selected actions in a timely manner to utilize resources more efficiently, but also to build PLN's institutional capacity in the fields of corporate planning, financial planning, accounting and cash management functions, and distribution management program. With regards to the operational improvement, PLN rehabilitated 109 Diesel Plants with total capacity 143 MW using the IBRD financing and relocated of 125 Diesel Plants with total capacity of 65 MW. The project was developed and implemented new ways of maintaining Diesel Units including improved inventory management for spare parts. The project also renovated 22 units on 7 Hydro Electric Plants in Java with total capacity gained of 25 MW. In the field of telecommunications, the project provided PLN with a trunk telecommunications network in West and Central Java using fiber optic cables which superimposed on and integrated with PLN's existing telecommunications facilities. To cope with the rapid demand growth, the project has complemented the earlier transmission and substation network projects financed by the Bank with expanding non rural distribution in the whole area of Java at voltages of 20 kv and below. The project expanded distribution facilities in Java with kmc MV lines, kmc LV lines, MVA distribution transformers and new consumers. This distribution project also included technical assistance to strengthen PLN's management of the planning, design, construction, operation and maintenance of the distribution facilities. On the institutional capacity building side, PLN's staff gained significant experience from the technical assistance. As a result, the corporate and financial planning functions has been strengthened and the cash management and accounting functions improved. In summary, the project outcome can be rated satisfactory. The successful elements of the Project should be used as reference for similar projects in future. KEY LESSONS LEARNED To maintain the agreed project schedule and to minimize implementation delays, it's very important for PLN to improve it's internal procurement procedures. The project was a very complex one with many independent components. A central project management within Supervision Division of PLN could have facilitated the overall project coordination and implementation.