Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT (38450; 3845A; 3845S) ONA LOAN IN THE AMOUNT OF US$398 MILLION

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Energy and Mining Sector Unit East Asia and Pacific Regional Office Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT (38450; 3845A; 3845S) ONA LOAN IN THE AMOUNT OF US$398 MILLION TO THE GOVERNMENT OF INDONESIA FOR THE SECOND RURAL ELECTRIFICATION PROJECT September 11, 2000 Report No: 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 without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective February 2000) Currency Unit = Indonesian Rupiah (Rp) Rp 1000 = US$ 0.14 US$ 1 = Rp 7200 Exchange Rate Effective December 1993 (Appraisal) Rp 1000 = US$ 0.46 US$ I = Rp2193 FISCAL YEAR April 1 to March 31 (GOI) January 1 to December 31 (PLN) ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank PMU Project Management Unit CAC Contract Administration Contract Pola I KUD Meter reading and billing services scheme CS Consumer Surplus Pola 1I KUD House wiring services scheme (30I Government of Indonesia Pola III KUD Assets Ownerslhip and RE services scheme EIRR Economic Internal Rate of Return PSKSK Regulations for the Pricing of Small Private and Cooperative Power Generation GWh Gigawatt Hours PUEKK PLN Fund for Development of Small Enterprises & Cooperatives HV High Voltage QAG World Bank Quality Assessment Group ICR Implementation Completion Report RBS Rural Business Services IPP Independent Power Producers RCP Reinforced Concrete Pole KPI Key Performance Indicator RE Rural Electrification KUD Village Cooperative Unit RE I First Rural Electrification Project (3180-IND) kwh Kilowatt Hour RE II Second Rural Electrification (3845-MNP) lm Lumen Repelita Five-year Development Plan LV Low Voltage RESP Renewable Energy Small Power LRMC Long Run Marginal Cost ROR Rate of Return MIS Management Information System Rp. Rupiah MOCSE Ministry of Cooperatives and Small & SAR Staff Appraisal Report Medium Enterprise MSA Management Services Agreement SPLN PLN Technical Standards MV Medium Voltage SWER Single Wire Earth Return MW Megawatt TA Technical Assistance NGO Non-govermmental Organization TAP SS Tapped substation NOL No Objection Letter US$ United States Dollar PLN State Electricity Corporation WTP Willingness to pay Vice PresidenIt: Country Manager/Director: Sector Manager/Director: Task Team Leader/Task Manager: Jemal-ud-din Kassum Mark Baird Yoshihiko Sumi Anil Cabraal

3 FOR OFFICIAL USE ONLY Implementation Completion Report Indonesia Second Rural Electrification Project CONTENTS Page No. 1. Project Data 1 2. Principal Perfonnance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 5 6. Sustainability 6 7. Bank and Borrower Performance 7 8. Lessons Learned 8 9. Partner Comments Additional Information 11 Annex 1. Key Performance Indicators/Log Frame Matrix 13 Annex 2. Project Costs and Financing 15 Annex 3. Economic Costs and Benefits 19 Annex 4. Bank Inputs 27 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 29 Annex 6. Ratings of Bank and Borrower Performance 30 Annex 7. List of Supporting Documents 31 Annex 8. Status of Loan Covenants 32 Annex 9. Lessons Learned: Results from Stakeholders Meeting 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 be otherwise disclosed without World Bank authorization.

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5 Project ID: P Project Name: RURAL ELECT II 7Team Leader: R. Anil Cabraal TI Unit: EASEG ICR Tvpe: Core ICR Report Date. September 15, Project Data Name: RURAL ELECT II Country,Department: INDONESIA Sector,'subsector: PD - Distribution & Transmission L/C'/TFNumber: 38450; 3845A; 3845S Region: East Asia and Pacific Region KEY DATES Original Revised/Actual PCD: 05/15/92 Effective: 07/19/95 07/19/95 Appraisal: 01/10/94 MTR: 03/01/96 03/27/97 Approval: 02/28/95 Closing: 12/31/98 03/31/2000 Borrower/Implementirng Agency: Other Partners: Government of Indonesia/State Electricity Corporation (PT PLN (Persero)/Ministry of Cooperatives STAFF Current At Appraisal l'ice President: Jemal-ud-din Kassum Gautam Kaji Country Manager: Mark Baird Marianne Haug.Sector Manager: Yoshihiko Sumni Peter R. Scherer Team Leader at ICR: R. Anil Cabraal Arun P. Sanghvi ICR Primary Author: R. Anil Cabraal 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: H Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entrv: S Project at Risk at Any Time: Yes Project Development Objectives (DO) were downgraded in mid-1998 becausepln was not in compliance with the Rate of Return and other financial covenants on account of the macroeconomic crisis and inability to raise the retail tariffs to adequate level. PLN became technically insolvent on account of the crisis. All Indonesia power projects DO were rated Unsatisfactory in June 1998 for this reason.

6 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objectives of the Second Rural Electrification (RE II) Project as noted in the Staff Appraisal Report of February 3, 1995 were to advance the efforts begun under the RE I project to place the rural electrification program in Indonesia on an efficient and sustainable footing and expand the coverage and supply of electricity to rural areas through a time slice investment program. The project would establish incentives for private sector and local cooperatives to take an increasingly larger share of REl distribution and renewable energy development wiithin the framework of a least cost RE Master Plan and continue PLN's institutional development to undertake RE planning and implementation, especially at the regional level. It would support pilot programs with potential for further reducing the costs of RE. The objectives were clear and consistent with the Government of Indonesia (GOI) stated objective to improve the welfare of the population and to support and stimulate economic activities and social development in both rural and urban areas. RE is a fundamental part of the Government's rural development strategy and the long-term goal is to electrify all villages and enable the basic services provided by energy. The scale of the Project was realistic given the progress PLN had achieved in the previous years, particularly the achievements in the RE I Project (Loan IND). 3.2 Revised Objective: The objectives were not revised. 3.3 Original Components: 1. Electrification of 7,000 villages in the second and third years of Repelita VI (95/96-96/97) comprising about 2.1 million new consumers. 2. Promote private sector participation in small scale generation especially using renewable energy sources. 3. Development by PLN of 7.5 MW mini-hydro projects and field test drilling of two mini-geothermal fields. 4. Pilots to test the adaptability of low cost, "low tech" equipment designs, low Cost network designs and more efficient construction management methods for full scale adoption in future RE programs. 5. Expansion of the ongoing rural business services component to promote productive uses of electricity and get 30,000 rural enterprises to start or enhance their productive use of electricity by 36 GWh/year. 6. Support participation by village-level cooperatives and organizations in RE services delivery. Double the number of Pola I, II and MSA schemes to 4400 and increase five fold the number of MSA schemes to Technical assistance for planning and RE implementation support. 3.4 Revised Components: The components were not revised. 3.5 Quality at Entry: Quality of entry was not assessed by QAG. At appraisal no significant technical or implementation risks were foreseen with respect to the RE planning, management and implementation and other investments except the geothermal field development risks. This was substantially borne out daring implementation. Risks of private sector participation in small power production and sale to PLN were expected to be minimal due to issuance of standard power purchase agreement and published tariff. The private sector response was positive but it took longer than anticipated for PLN to operationalize the approach. Risks associated with implementing the overall policy reform agenda (institutional restru[cturing and tariff policy reform) were under estimated. Work towards attaining these objectives continues today with support from - 2 -

7 the Bank, ADB and other sources. The financial crisis that hit Indonesia in 1997 which was beyond GOI and PLN's control could not be foreseen at project appraisal. While the crisis did not affect PLN's ability to achieve the physical targets, it caused substantial deterioration in PLN's financial performance. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Over the five year period, 1994/95 to 1999/00, good progress was made in meeting the overall objective of placing the rural electrification program on an efficient and sustainable footing. The Project exceeded its physical objectives and is economically viable. To improve the benefits and reduce costs, PLN emphasized consumer connections rather than village electrification by intensifying connections in already electrified villages and by increasing connection ratios in newly electrified villages(villages electrified was 80 percent greater and connections made were 270 percent more than estimated) The higher achievements are consistent with the Repelita VI targets and were feasible because the Project period of performance was extended to nearly five years from the original three. Household electrification ratio increased from 32 percent in 1994 to 53 percent by October To further improve the economic value of RE, the Project successfully promoted productive uses of electricity by rural businesses. Unit costs were significantly below estimates at appraisal (see Annex 1). Cost reductions are mainly attributed to lower cost of materials, higher density of connections per km of MV and LV line, and lower international inflation and higher Rupiah depreciation than projected in price contingencies. The project successfully piloted a number of lower cost RE technologies and management methods as well as mini-hydro as an alternative to diesels. The Pola program targets were met albeit two years later than anticipated,in PLN's efforts to decentralize some RE service functions to cooperatives to reduce costs However, Village Cooperative Unit (KUD) training was not fully successful due to: (a) shortage of training funds from PLN which had anticipated providing funds out of its profits, and from GOI which had agreed at negotiations to make up any shortfall; (b) PLN fee structure for KUD services were considered too low to permit the KUDs to fund the training out of its own resources; and (c) lack of a clear policy mandate within PLN for outsourcing services to KUDs. Private participation in small power generation was supported by the issuance of regulations and letters of awards, announcement of purchase tariffs, but the financial crisis in 1997 prevented further progress. The project substantially strengthened PLN's RE management capacities. Of particular note was the effectiveness of the Project Management Unit which was specifically set up to coordinate project implementation. The PMU greatly facilitated Bank supervision as well as provided timely information to PLN management. While the Project addressed the issues of financial sustainability through cost reductions from improved management practices and adoption of lower cost technical solutions, it did not have actions to explicitly strengthen PLN's overall financial capacity, other than financial covenants addressing such considerations. PLN's financial position weakened dramatically during the tenure of the Project. Since 1994, prior to the onset of the crisis, PLN was moderately profitable but nonetheless was unable to achieve the target ROR level of 8 percent. PLN was able to comply with the debt service coverage covenant of 1.5 times until the 1997 financial crisis. The financial problem is especially acute outside Java. While PLN RE operations in Java had operating profits (Rp 557 billion in 1999), outside Java RE operations were loss making (Rp. 657 billion operating loss in 1999). For details see Section E in Annex 3. Based on GOI's agreement with the IMF on rationalization of energy prices in January 2000, PLN's average tariff was increased by about 29% effective April 1, The GOI issued a Power Sector Restructuring Policy in August 1998 for which the Ministry of Mines and Energy is drafting the supporting legislation. The policy addresses a number of - 3 -

8 financial sustainability issues affecting RE. 4.2 Outputs bv components: 1. Distribution component. PLN substantially exceeded the targets by electrifying 12,300 villages (7,900 outside Java and 4,400 in Java) and connecting about 7.7 million consumers (2.8 million outside Java and 4.9 million in Java) up to October Annual average connection rate was 1.8 million per year over the five year time slice in Repelita VI. At appraisal, PLN expected to connect 2.1 million consumers in 7,000 villages during a two-year period. 2. Private sector participation in small scale generation. By January 1996 the 'GOI had issued the small power purchase (PSKSK) regulations,announced the purchase tariffs and established the MW limits of PLN's obligation to purchase. By March 1997 PLN had issued Letters of Award for power purchases for nearly 220 MW from renewable energy sources. The Bank approved the Renewable Energy Small Power Project (RESP) Project in 1997 to finance such projects, but the financial crisis prevented further progress and the RESP Project was subsequently canceled. 3. Mini-hydro and mini-geothermal component. The mini-hydro projects (7.8 MW) were commissioned at about 14 percent under estimated cost. After geo-scientific studies PLN decided to proceed with drilling at the Ambon (Malukku) site but was later abandoned as acceptable bilds were not received. PLN also prepared mini-hydro and mini-geothermal projects with an aggregate capacity of about 30 MW for assistance under a future project, but the financial crisis prevented further action. 4. Pilot projects. Tap substation, reinforced concrete pole, contract administration contract pilots were successful. The wood pole tending were successfully completed, but implementation could not take place due to contracting delays. PLN has begun incorporating these approaches into PLN guidelines but formal issuance of standards has yet to occur. SWER project was stopped during the crisis. 5. Rural business services component. PLN successfully engaged rural NGOs to promote productive electricity uses resulting in 66,000 enterprises investing Rp. 148 billion in electric equipment, and creating 22,000 new jobs and increasing consumption by 180 GWh per year. ][mportantly, this development took place even during the national financial crisis. 6. Participation by cooperatives in RE services delivery KUD participation in RE service delivery increased as planned. The total number of Pola I, II and MSA schemes doubled to 4,516 compared to 4,400 expected at appraisal to serve 20.8 million customers. The number of MSA schemes increased seven-fold to 665 compared to 600 expected at appraisal. The secondary objective of setting up Pola III schemes could not be met. The training planned under this component was :not as successful as expected due to the reasons mentioned in Section Other Technical assistance. The RE planning capability was developed for four regions extending the work in the RE I Project. Renewable Energy Master Plan software and databases were developed and transferred. However their routine use in RE planning has yet to take place. T'he PMU functioned as a very effective management unit. 4.3 Net Present Value/Economic rate of return: For the distribution component, the EIRR was estimated at 26.2% and the NPV at 12% discount rate at 2,079 BRp (1995 Rp). The analysis is sensitive to the estimate of residential willingness to pay, which is in tum sensitive to the consumer surplus. There is also a high degree of uncertainty in the consumer surplus estimate as it had to be estimated from secondary data sources (for details see Section 8 lessons learned and Annex 3 Economic Costs and Benefits). The switching value for consumer surplus at which the EIRR drops to 12% is estimated to be -12%. Almost all the other components also met or exceeded the economic performance indicators estimated at appraisal. Summary results are shown in the table below with details given in Annex

9 Component Criteria At Appraisal End of Project Distribution Component EIRR 21% 26.2% Mini-hydro EIRR 22 to 26% 10-38% Mini-geothermal EIRR -40% not completed Pilot Projects: - CAC Cost Savings Compared to 20% 30% - SWER Conventional Approach 44-54% not completed - HV TAP Substations 20% 50-60% - Reinforced Concrete Poles 10-15% 30% - Wood Poles (tendered but not 60% 60-80% implemented) Rural Business Services Enterprises benefited 30,000 66,000 Increased prod. elect. use (GWh/year) KUD Pola I, II & MSA Services Total no. of participating KUDs MSA Schemes Financial rate of return: Financial rate of return for the RE II Project was neither calculated at project appraisal nor at project completion. 4.5 Institutional development impact: A key innovation introduced in the project was the establishment of the PMU, initially under the Director of Planning and subsequently under the Director of Marketing and Distribution. This unit effectively coordinated this complex project which involved a multiplicity of components scattered throughout Indonesia and requiring cooperation among numerous PLN departments at headquarters and regions, consultants, contractors and the Bank. The PMU was particularly effective in monitoring and reporting progress and advising PLN Directors on problem resolution. However, given the vertically organized departmental structure within PLN, the PMU had little capacity to directly effect change by cutting across the departmental hierarchy. The PMU's effectiveness as a management unit was also constrained bythe lack of reliable inventory and performance data. The use of a supervision consultant to oversee the implementation of the mini-hydro and pilot projects was effective given the multiplicity of PLN offices involved but reflects the need for institutional streamlining. The use of trained local NGOs in promoting productive uses of electricity was particularly effective and the capacity built will permit these groups to continue to provide such services. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The economic crisis in Indonesia led to: (a) the sharp depreciation of the Rupiah and greatly increased the cost to PLN of its US$-denominated long-term payment obligations; and (b) PLN's planned addition of about 11,000 MW by 26 projects of IPP-based capacity has resulted in excess capacity given the economic downturn. The net result is that PLN is currently unable to service fully its debt or to meet its payment obligations to IPPs. 5.2 Factors generally subject to government control: Sector reform has proceeded at a much slower pace than anticipated. Technical assistance undertaken in 1996 under Cirata II project (Ln 3602-IND) provided a set of recommendations which served as a - 5-

10 blueprint for power sector reform and restructuring. The recommendations provided the underpinnings for the Government's Power Sector Restructuring Policy which was launched in August The Policy calls for far reaching changes in the power sector, including the unbundling of PLN and subsequent privatization in phases. It is expected that the policy framework will be instrumental in providing a sound foundation of PLN's and the sector's medium and longer-term viability, including establishment of a Social Electricity Development Fund to explicitly fund the GOI's obligation to provide electricity services to rural consumers. The Ministry of Mines and Energy is presently drafting legislation to support this policy. To promote the gains so far achieved, the Bank is providing technical assistance (under Loan 3978-IND) for corporate and financial restructuring of PLN. The Financial Advisor which was funded under this project, also provided timely input to PLN in this critical time. 5.3 Factors generally subject to implementing agency control: Appointment of competent, properly motivated staff at the PMU was a key to the success achieved in project management. PLN has strong technical capacities down to the regional and branch levels which enabled it to embark on the ambitious RE program. Nevertheless, there are managerial, organizational and implementation improvements possible to lower cost and speed execution. Further cost reductions and efficiency improvements require PLN to adopt the low-cost technical solutions piloted in this project, establish tighter inventory controls and audit procedures, increase procurement efficiency, and most importantly give regional and branch-level managers the right incentives to minimize costs and increase revenues (see Section 8 and Annex 9). MOCSE performance was constrained by inadequate training fimds from PLN and GOI sources and clear PLN directives for outsourcing RE services. 5.4 Costs and financing: Estimated total project cost at appraisal was $841 million while the actual projeclt cost was $656 million (based on PLN and Bank disbursement records of August 1, 2000). Total savings of $185 million (22%) occurred while PLN connected 7.7 million consumers between July 1995 and October 1999 compared to the appraisal target of 2.1 million consumers in two years. Reasons for the cost savings include: Rupiah depreciation far greater than estimated in price contingencies at appraisal caused the dollar costs to decline; lower cost of materials; and greater emphasis on intensification rather than extensification (300 connections per km of MV and LV line compared to 100 connections estimated at appraisa). 6. Sustainability 6.1 Rationale for sustainability rating: Sustainability of RE II Project achievements is likely because of the inherent techmical and institutional capability of PLN which were further strengthened during the Project; and through the implementation of the GOI's announced Power Sector Restructuring Policy The policy proposed (a) setting up a Social Electricity Development Fund (SEDF) to transparently subsidize rural and less developed area electricity operations to "promote national cohesion and unity,"by providing explicit funding by the GOI of the incremental costs of RE as part of its social obligation. The SEDF will subsidize the difference between allowable costs and revenue receipts from electricity sales to the poor in less developed and rural areas(b) increasing average tariffs over time to permit full cost recovery, especially on Java(c) restructuring PLN to establish a regional electricity company to own outside Java assets and be fully accountable for its operation; and (d) to functionally unbundle Java operations. The legislation to support the policy is presently being drafted. The Bank and ADB are financing technical assistance to support policy implementation. PLN's technical and institutional capacities remain intact today despite the financial crisis. Care should be taken during the proposed restructuring of PLN to ensure that these capacities are strengthened and not diminished. PLN has begun adopting the low cost designs and improved construction management methods - 6 -

11 piloted in the Project which will further reduce costs. 6.2 Transition arrangement to regular operations: On a technical level, PLN's current organization is fully capable of operating and maintaining the RE investments and providing new service connections.re will continue to be a priority as a majority of Indonesians yet live in rural areas and 20 million rural households are still without access to electricity. It is recommended that the PMU be established as a permanent feature for RE project management and such functional units be mainstreamed to the regions during PLN restructuring. 7. Bank and Borrower Performance Bank 7.1 Lending: Identification of project components and techno-economic and environmental assessments were satisfactorily conducted in a participatory manner. Project objectives continue to be consistent with Bank and GOI development objectives. Preparation and appraisal were satisfactory and complete. The management structure established was a key contributor to the Project's successful completion. 7.2 Supervision: Supervision is rated highly satisfactory with typically two to three missions per year. The team that prepared the project essentially remained the same throughout the implementation period except for one team member substituting for another as task team leader in This team continuity permitted better understanding, greater confidence and cooperation with PLN.The IP (Implementation Progress) was either rated "Highly Satisfactory" or "Satisfactory", while the DO (Development Objective) rating was downgraded to "Unsatisfactory" in June 1998 due to the financial crisis that began in 1997, and was kept so till loan closing. The Bank took proactive actions on loan proceeds cancellations once loan savings were identified; the Bank also responded quickly to PLN's deteriorated financial situation by restructuring the Project and amending the Loan Agreement to allow increase of the Bank loan disbursement percentage for local expenditure (excluding payment of taxes) to 100% from July 1998 onwards, which relieved considerably the pressure on PLN to pay the contractors. 7.3 Overall Bankperfonnance: Bank performance is rated satisfactory overall. Borrower 7.4 Preparation: GOI and PLN's performance is deemed satisfactory. They were involved in all aspects of the project concept and design. 7.5 Government imiplementation performance: The Govemment's performance during implementation was marginally satisfactory. Counterpart funds were made available in a timely manner except close to project completion when the financial crisis was in full swing and PLN's financial performance was deteriorating drastically. In August 1998,GOI officially issued the Power Sector Restructuring Policy, which provided the framework for restructuring the power sector, including PLN. The Ministry of Mines and Energy is presently drafting legislation needed to implement the policy. Delays in instituting agreed-to tariff reforms have substantially eroded PLN's finances. GOI also has not been proactive in addressing the issues of under-capitalization of PLN

12 Govemment rules goveming procurement led to delays in contracting which was a further drain on PLN's resources (see below). 7.6 Implementing Agency: PLN's overall performance is generally satisfactory, with RE program management and physical implementation capacity rated highly satisfactory. Areas where improvements are essential are in procurement and contracting, inventory management and technical auditing. Because of procurement delays, PLN had to draw substantially on their own funds to permit it to meet its Repelita VI targets particularly in the first the two years of the Project (e.g., two thirds of 1995/96 and 1996/97 RE investment funds were from PLN's own resources). This further exacerbated PLN's already strained financial situation. There is also a need to have better inventory information and controlpl,n was also never able to satisfactorily conduct technical audits of physical progress (see Section 8). PLN's financial performance has not been satisfactory. It's financial position has deteriorated dramatically during the tenure of the Project, though mainly due to factors (including the financial crisis, high cost of IPPs, and GOI's unwillingness to approve required tariff increase) beyond its control. As a result, PLN was unable at any time during the Project period to fully comply with the financial covenants established for it under the Project. 7.7 Overall Borrower performance: Overall Borrower performance can be considered marginally satisfactory. 8. Lessons Learned Rural electrification programs must be financially sustainable and the implementing organization must be financially accountable. The Government continues its policy of uniforn national tariffs which resulted in revenue losses to PLN for its higher cost rural operations outside Java. PLN maintains separate operating cost accounts for its RE operations. Data from 1995 onwards show that Java RE operations consistently had operating profits while outside Java operations had operating los,sesrevenues from outside Java operations did not even cover variable operating costs. These losses were covered by cross subsidies from Java operations and from Government funds.the Bank's appraisa]. of the RE II project did not evaluate the financial viability of the RE program, rather, only the financial viability of PLN as a whole was considered. As such, inadequate attention was paid to the financial viability of RE, especially outside Java operations. Moreover, the lack of transparency in allocating government budgets and use of PLN resources for RE makes it difficult to assess performance and assign accountability. Holding management accountable for financial performance down to region and branch levels is required to increase cost efficiency of RE services. Presently PLN allocates annual budgets to regional (Wilayah) offices with unspent funds used to reduce following year's allocation. The regional and branch (Cabang) offices are set village and household electrification targets, and loss recduction goalsthere is little incentive for regional and branch level managers to increaserevenues or reduce costs Holding management accountable for meeting cost reduction and revenue enhancement goals is essential. Productive uses promotion was effective in increasing economic benefits and revenues. The Project demonstrated that local NGOs could be effectively used to advise rural businesses to increase productive electricity use. The rural business service (RBS) component clearly demonstrated that a marketing oriented approach can increase energy sales, investment and rural employment for productive purposes, even during the crisis period after The approach used could be considered good practice (see Annex 7, Reference 8). Similar approaches should be included in future rural electrification projects

13 Electricity consumption by key consuming categories must be included as Key Performance Indicators as this is a better indicator of benefits from a project, rather than just the number of connections made. As noted in OED's 1994 review of rural electrification in Asia, accurate determination of the benefits and costs of RE is needed to ensure that resources are optimally allocatedconsumption data is routinely collected by utility billing departments, but their managementinformation system must be designed to report on consumption by consumers connected during a specified time-slice investment program. In addition, consumer surveys must be conducted prior to and after connections to determine how energy use and expenditure patterns changed after receiving electricity services. Centralized project management was effective in monitoring progress but less effective in directing change. The PMU demonstrated the importance of having a centralized unit for managing this complex project involving multiplicity of components scattered throughout the Indonesian archipelago, and requiring coordination between numerous PLN departments, consultants, contractors and the Bank. The PM-L enhanced the effectiveness of Bank supervision. The PMU ability to take timely corrective actions was limited by the vertically organized directorate structure at PLN which required instructions from the PMU to a division in another directorate to be coursed through their respective directors. Future multi-disciplinary projects can benefit from such a management unit if it is led by experienced managers and has the necessary authority to affect change in a matrix management structure. Complex procurement procedures cause implementation delays and inefficiencies. PLN acknowledged that their current procurement processes are lengthy and inefficient, partly due to GOI-mandated requirements. The CAC pilot demonstrated that significant cost and time saving are possible using performance-based contracting approaches. Management commitment supported by timely, accurate and accessible information is essential for effective management and increasing the efficiency of rural electrification. Current approaches in accounting, inventory management, technical audits, demand/benefits assessments and timely dissemination and adoption of best practices can be improved. * Transparency of accounts: In a time-slice investment program of this type, the current accounting practices made it nearly impossible to determine the sources and uses of financing for a particular RE scheme - a specific RE scheme may use material financed by several sources, the Bank, GOI, PLN or even other donor funds. Therefore, the actual costs are hard to determine due to the co-mingling of resources. Inventorvy Effective inventory information and control are needed. This is essential in a project such as the RE II Project where huge quantities of materials are procured, delivered and installed throughout the vast regions of Indonesia. PLN must have better ability to track costs, material distribution and usage, and inventory levels in each region in a timely manner. * Audits: Independent technical audits - a Project monitoring requirement - while valid in concept failed in implementation. These audits were expected to check compliance with construction standards, authenticate inventory reporting, confirm customer service standards, verify equipment performance, and accuracy and adequacy of reports on materials used. Strong management support and conviction is needed for such independent audits to be conducted effectively. Without such audits, the effectiveness of RE programs cannot be evaluated adequately. * Best Practices: The Project implemented pilot projects and mini-hydro projects with lower costs than conventional alternatives, and developed new RE planning tools. PLN is compiling standards and issuing guidelines for their use. benefits from these experiences will occur only if PLN adopts these standards ("SPLN") and procedures and requires their use. See Annex 9 fbr additional lessons learned that were documented during stakeholder meetings. -9-

14 9. Partner Comments (a) Borrower/implementing agency: The following are synopses. The full reports are in the Project Files. 9.1 PLN Assessment of the Project General. PLN is a very large organization responsible for generation, transmission and distribution for both urban and rural area throughout the country. In the past PLN emphasized generation, transmission, urban distribution and village electrification (in contrast to consumer connection). However the RE II project has helped PLN develop the know-how and capacity to carry out rural electrification in a more efficient manner. PLN is now in a good position to proceed with future rural electrification projects and ensure that it is undertaken economically and in accordance with PLN and GOI objectives. PLN was able to achieve these impressive goals of electrifying 7.7 million households in five years with an effective management team - The PMU. The PMU became the focal point for directing the program from its conception to final implementation. Bank has been an essential and effeclive partner to PLN during the design and implementation of the project. It supported PLN both financially and in guiding implementation. PLN Implementation Completion Report is in the Project files Key Lessons. Based on the experience carried over from the RE I Project and the lessons learned during the RE II Project, PLN acknowledges that four major points need to be considered in future RE efforts. (i) Improve procurement processes. During project implementation, PLN endeavored to reduce the procurement processing delays. However, existing institutionalized processes at PLN and at the Bank sometimes took almost twice as long as the period of performance (e.g., delays of up to 20 months from tendering to contract award for components with a one-year delivery time). This caused problems with the construction phase, and to overcome this, PLN drew on its own funds to purchase the necessary materials to keep up progress of work. Shorter procurement time is possible as demonstrated by the TAP Substations pilot project, when only 10 months was needed from tendering to contract signing. However, some of the delays are due to GOI procedural requirements. (ii) Encourage adoption of least cost solutions for materials and construction. The pilot projects were designed to demonstrate least cost solutions in RE. PLN found that a lack oif awareness as to the foreseen benefits by PLN staff hindered progress. Even though results were positive, PLN still foresees a difficult task to get these approaches mainstreamed regionally. (iii) Planning and management software must be transparent and accessible to headquarters and field staff. PLN found that lack of skilled staff in the Regions as well as Head Office constrained the adoption of Renewable Energy Master Planning and RE Planning software developed by consultants. Moreover, PLN staff did not fully perceive the benefits of such software. An important lesson is that PLN staff must be more involved in all phases of software development. (iv) Establish a permanent Project Management Unit for Rural Electrification. PLN acknowledges the positive impact of the PMU approach for any multi-disciplinary program and congratulates itself on the success of this approach. This in-house team enabled a more efficient approach to project management in all phases of the RE program Effectiveness of the Bank and Borrower Relationship. The relationship between the Bank and PLN was generally good. Most of the problems encountered were clearly identified by both parties, solutions were promptly agreed to and provided to those concemed. In particular, mutual understanding was achieved in selecting least cost materials and processes, developing monitoring and tracking processes and overcoming procedural problems likely to cause potential delays

15 9.1.4 Performance of Co-financiers and Effectiveness of Relationship between Borrower and Cofinanciers. None Assessment of Outcome. As a continuation of the RE I program, the main objectives of the project were not only to electrify villages and connect rural households but also to build PLN capacity to efficiently and sustainably carry out rural electrification program. It also included a number of other components as detailed in Section 3.3 of the ICR. PLN confirms that the outcome isin globo positive. 9.2 Evaluation of PLN's Performance by PLN PLN staff gained significant experience from the project. PLN's capacity to carry out rural electrification program efficiently has improved. Positive features must be mainstreamed within PLN. To maintain PLN's financial health, its important for PLN to minimize construction and service cost and at the same time maximize revenue through tariff revenues and through Government assistance. PLN must also develop systems criteria to prioritize selection of villages for electrification. Systems developed within the RE II Project to monitor and track progress should be mainstreamed to the regions, especially if PLN is restructured. 9.3 Evaluation of Bank Performance by PLN The RE II Project effectively built upon the Bank and PLN's prior relationship and experience during RE I Project (Loan IND). Implementation assistance by the Bank was generally satisfactory. The efforts were very constructive in every aspect from project identification through implementation. The Bank's involvement was consistent and diligent through all phases. During the identification phase, the Bank sent qualified and competent missions so that the process in establishing the project objective, and assessment of the project cost, scope of work, financing plan and time schedule was accomplished successfully in a relatively short time. During appraisal, the Bank was fully involved in the assessment of cost, planning the scope of work, source of finance, time schedule, and delivered constructive suggestions during cost revision and scope of work negotiations. During construction phase, Bank consistently assisted PLN in supervision of procurement, and implementation of the components. 9.4 MOCSE Assessment of the Project MOCSE notes that Pola training targets could not be achieved due to sharp decrease in PUKK funds from PLN and the Government's inability to provide additional funding as originally planned. However, the Pola training program need not be overly dependent on formal classroom training provided by PLN training center - direct on-the-job training provides an acceptable alternative. A clear policy and mission statement for rural electrification is needed if the Pola Program and its training is to be effective. (b) Cofinanciers: (c) Other partners (NGOsJprivate sector): 10. Additional Information

16

17 Annex 1. Key Performance Indicators/Log Frame Matrix Project Objective Performance Indicators Baseline Midterm ICR Year (1994) March Year (2000) Expanded coverage Outcome Indicators and supply of electricity - Additional MV lines (kmc) Not applicable to rural areas through a - Additional LV lines (kmc) Not applicable time slice investment - Additional poles (million) Not applicable program - Additional distribution transformer Not applicable capacity (MVA) Impact Indicators - Additional villages electrified Not applicable Additional rural households electrified Not applicable (million) Rural household electrification ratio (%) 2. PLN RE Program made more efficient and sustainable by: a) reducing RE unit delivery Outcome Indicators costs - $/kmc MV lines $/kmc LV lines $/pole $/Distribution transformer capacity (kva) Impact Indicators Total costs savings on materials purchased within RE II project (Million US $ equivalent) b) establishing incentives for Outcome Indicators private sector firms and - Number of KUD customers - 9 million - 16 Million 20.8 Million local cooperatives to take an - Pola I (meter reading and billing) (Pola I, 3657 increasingly larger share of - Pola II (house wiring) 11 and MSA) 24 RE distribution and rural - Pola I renewable energy -MSA (line maintenance, simple fault 665 generation clearing, tree trimming, streetlight maintenance (PLN owns assets) - Pola IlIl (ownership of diesel 3 1 generation & distribution assets and operation Impact Indicators - Generation capacity served by KUD's c) increasing the economic Outcome Indicators benefts of RE by promoting - No. of enterprises in RBS program productive uses of electricity - Number of enterprises benefted in rural areas Impact Indicators - Number of jobs created Increase in productive electricity use 180 (GWh/year) d) investing in renewable Outcome Indicators energy generation to - Numbers of Projects 0 5 displace high cost diesel - Capacity (MVW) generation Impact Indicators - Electricity Generated (GWh/year) Hydro Electricity Cost (Rp/kWh) Displaced Diesel Electricity Cost (Rp/kvh)

18 Project Objective Performance Indicators Baseline Midterm ICR Year (1994) March Year (2000) Capacity of institutions built a) Prepared renewable Outcome Indicators energy development plan for - Plan developed (4 regions only) 75 % 100 % outside Java and strengthened PLN capacity Impact Indicators to undertake RE planning - Projects Identified 0 10 and implementation at the regional level b) Strengthened Outcome Indicators MOCSEIKUD capacity to - Number of KUD's trained facilitate implementation of Impact Indicators the Pola program - Number of KUD's operating with trained staff 3. Pilot Projects Conducted a) CAC [Contract Outcome Indicators Administration Companies] - Number of projects 3 Impact Indicators - Cost Savings 30 % b) SWER [Single Wre Outcome Indicators Earth Retum] - Number of Projects 2 0 Impact Indicators - Cost Savings Not completed c)..tap SS [HV Tapped Outcome Indicators Sustations] - Number of Projects 2 2 Impact Indicators - Cost Savings 1 'i % % d) RCP [Reinforced Outcome Indicators Concrete Poles] - Number of Projects 5 4 Impact Indicators - Cost Savings 1'5% 30 % e) WP [Wood Poles] Outcome Indicators - Number of Projects 65 6 Impact Indicators -Cost Savings (tender prices) 40 % % -14-

19 Annex 2. Project Costs and Financing RE 11 PROGRAM - LOAN 3845-IND ANNEX 2: PROJECT COST & FINANCING 2.1: Project Cost by Component Appraisal Actual/ Percent of Project Cost by Component Estimate Laet Estimate Appraisal US $million US $million % 1. Distribution Schemes Pilot Projects including relevant TA SWER Low Tech Concrete Poles Tap Substations CAC Wood Poles Sub-Total Pilots Mini HydrolGeothermal including relevant TA Mini Hydro Geothermal Sub-Total Mini Hydro/Geo RBS POLA Program Other Technical Assistance Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs Interest during Construction Total Financing Required (PLN) B. MOC Component Base Cost for MOC Component Physical Contingencies Price Contingencies Total Project Cost (MOC) Interest During Construction Total Financing (MOC) Total Project Base Costs Physical Contingencies Price Contingencies 35.7 Total Project Costs Interest During Construction Total Financing Required Appraisal estimates in constant December 1994 dollars. Actual costs as of August 1,

20 2.2: Project Cost by Procurement Arrangement at Appraisal (Millions of US$) Expenditure Category Procurement Method ICB NCB Other NBF Total Cost A PLN Component A.1 Line Materials & Poles (197.7) (54.1) (2.7) (254.5) A.2 Transformers & Other Equipment (44.7) (10.7) (55.4) A.3 Construction of A.1& A A.4 House Connections (incl. construction) (48.5) (48.5) A.5 Drilling Services & Civil Works (10.8) (10.8) A.6 Technical Assistance A.6.1 Implementation Support (17.8) (17.8) A.6.2 Policy Support (0.7) (0.7) A.6.3 Institutional Development (8.1) (8.1) A.7 Pola Training Program A.8 Engineering, Construction Supervision A.9 Taxes A.TOT Subtotal PLN (290.9) (54.1) (50.8) 0.0 (395.8) B MOC Component B.1 POLA Training (1.5) (1.5) B.2 Pola Ill Preparation (0.7) (0.7) B.3 Taxes B.TOT Subtotal MOC (2.2) 0.0 (2.2) TOTAL (290.9) (54.1) (53.0) 0.0 (398.0) - 16-

21 RE II PROGRAM - LOAN 3845-IND ANNEX 2: PROJECT COST & FINANCING 2.3: Project Cost by Procurement Arrangement - ActuallLatest (Millions of US$) Expenditure Category Procurement Method ICB NCB Other NBF Total Cost A PLN Component A.1 Line Materials & Poles (126.6) (44.7) 0.0 (171.3) A.2 Transformers & Other Equipment (261) (2.7) (28.8) A.3 Construction of A.1& A A.4 House Connections (incl. construction) (285) (28.5) A.5 Drilling Services & Civil Works A.6 Technical Assistance A.6.1 Implementation Support (9.1) (9.1) A.6. Policy Support REDP (0.8) (0.8) A.6. Institutional Development RE Planning & PMU (4.6) (4.6) A.7 Pola Training Program A.8 Engineering, Construction, Supervision A.9 Taxes A.TOT Subtotal PLN (181.2) (44.7) (17.2) 0.0 (243.1) B MOC Component B.1 POLA Training (1.3) (1.3) B.2 Pola Ill Preparation (0.3) (0.3) B.3 Taxes B.TOT Subtotal MOC (1.6) 0.0 (1.6) TOTAL (181.2) (44.7) (18.8) 0.0 (244.7) - 17-

22 RE II PROGRAM - LOAN 3845-IND ANNEX 2: PROJECT COST & FINANCING 2.4: Project Financing by Component (Millions of US$) Component Appraisal Estimate Actual / Latest Estimate PercentageAppraisal Bank Gol Bank Gol Bank Gol PLN Component % 93% MOC Component C% 120% Total Financing

23 Annex 3: Economic Costs and Benefits A. Economic Analysis of Distribution Component The economic analysis of the distribution component involves a cost benefit analysis of electricity sold to residential and non-residential consumers that were connected under the project. The analysis was done in constant 1995 Rp to facilitate comparison with the original SAR. Input data from PLN and other sources, as well as key estimates and assumptions are contained in tables at the end of this section of the Annex. Connections and Consumption by Residential and Non-residential Consumers Under the Project Data on total annual connections per year under the project was supplied by PLN for , along with forecasts of intensification connections to be made in villages electrified under the Project. Based on estimates supplied by PLN for all rural customers in 1998 and 1999, these connections were split between residential and non-residential customers. Average annual residential and non-residential consumption per consumer was obtained from PLN records for rural Java and outside Java for 1998 and In 1995, average consumption per new customer per year was estimated at 540 kwh/year per residential customer in Java, 430 kwh/year per residential customer off Java and 5,000 and 3,184 kwh per year for non-residential customers on Java and outside Java, respectively [1] Growth in average consumption of newly connected customers, based on PLN sales data by consumer category, was estimated at 2% per year for residential consumers and 7.8% per year for non-residential consumers. Estimation of Benefits Willingness to Pay ofresidential Consumers. Benefits for electricity are based on the willingness to pay for electricity used for lighting and other purposes. The willingness to pay for electricity used for lighting is estimated as the tariff paid plus the calculated consumer surplus obtained from the substitution of kerosene lamps by electric lights. The methodology used to estimate consumer surplus compares the price and quantity of light obtained from kerosene lamps and electric lights, on a per lumen basiq'2]. In the absence of recent survey data, it is assumed that half of all electricity used is for lighting, the other half for other purposes [3]. Willingness to pay for electricity used for other purposes is estimated as only the tariff paid, in the absence of survey evidence on uses and willingness to pay for altemative energy sources for those uses. The analysis probably underestimates the willingness to pay for services other than lighting. In the future, conmected consumers should be surveyed to better determine the uses and value of electricity to the user. Prices used in this analysis are based on 1995 price levels, which are considered to be more representative of realistic prices for kerosene and electricity than post-1997 financial crisis price levelf4]. Using 1995 price levels and the methodology for calculating consumer surplus developed for the Bangladesh Third RE Project ICR, results in an estimated consumer surplus for lighting of 1,153 Rp/kWh for both Java and outside Java[51. The willingness to pay for all uses is then calculated to be 709 and 715 Rp/kWh for residential consumers in Java and outside Java, respectively[6j. Willingness to Pay of Non-residential Customers. Benefits for non-residential customers were based on willingness to pay, estimated as the costs of self generation using a captive diesel. These costs were estimated in 1995 prices as 400 and 440 Rp/kWh in Java and outside Java respectively. Project Costs The project investment costs were adjusted to 1995 prices and taxes were excluded. Investment costs included the MV and LV distribution network and house connections, including house wiring. Energy supply costs were based on LRMC for residential customers at LV and commercial customers at MV, estimated in a 1998 study prepared by Hagler & Bailly for PLN. LRMC were corrected to 1995 prices, and the costs for residential customers were corrected to MV, since distribution investments were included in the project costs

24 Results of the Economic Analysis The results of the economic analysis for the base case and switching value analyses are shown in Table I. The detailed cash flow is given in Table II. The EIRR was estimated at 26.2% and the NPV at 12% discount rate at 2,079 BRp. This is slightly higher than the original estimate in die SAR of 21. 1%. The analysis is very sensitive to the estimate of residential willingness to pay, which is in turn sensitive to the consumer surplus. The switching value of the consumer surplus at which EIRR drops to 12%, was estimated to be -12%. The analysis is robust with respect to electricity consumption levels as the switching value is -72%. Table I Summary of Results of Economic Anal sis Base Case EIRR (%) Estimate in Staff Appraisal Report 21.1% ICR Estimate with Consumer Surplus 26.2% 2,079 ICR Estimate without Consumer Surplus -15,134 Switching Value Analysis Percent Decrease in Value to Reach 12% EIRR Consumer Surplus 12% Residential Electricity Consumption 72% Endnotes 1. The kwh consumption for a newly connected consumer was taken as 90 percent of average estimated 1995 consumption per residential consumer. PLN data of average 1999 sales to rural residential and non-residential customers on and outside Java was deflated back to 1995 levels using consumption growth rates experienced by PLN. 2. Using the model developed by D. Barnes (SASEG) to compute consumer surplus for the Bangladesh Third Rural Electrification Project ICR (Report No ). 3. From Indonesia Rural Electrification Review (1986), the last data available on consumption patterns. 4. Kerosene price has not changed since 1995, while the electricity tariff increased only 20% in current terms (by end of Project). Since the financial crisis resulted in inflation that increased the CPI by 226% over the period, the real kerosene price declined by 56% while the real electricitv price declined by 46%. 5. There is no difference between Java and outside Java because the kerosene price are the same, and the results are insensitive to variations in quantities consumed. 6. This is calculated as [(tariff+consumer surplus)*(percent kerosene used for lighting)-ftariff*(percent kerosene used for other purposes)]. The methodology used is veiy sensitive to two key assumptions: * The demand curve is a straight line. While the use of a straight line demand curve is standard practice when calculating consumer surplus in the Bank, there is little empirical evidence to support this assumption. If the demand curve were to be concave rather than a straight line, the consumer surplus would be less. Assuming a concave shape (slope of 0.3) rather than a straight line (slope of 0.5) would reduce the estimated consumer surplus to 691 RpIkWh. * The share ofpressurized lamps in the lighting mix is small. Because pressurized lamps are more efficient, the consumer surplus from the switch from such lamps to electricity is much less than from wick lamps or hurricane lamps. The shares assumed in this analysis are 10% pressurized lamps, 40% hurricane lamps, and 50% wick lamps based on PLN estimates. If the share of piessurized lamps were to increase, the consumer surplus would drop

25 Table 11 INDONESIA SECOND RURAL ELECTRIFICATION PROJECT (Loan 3845-IND) Re-calculation of Economic Rate of Return: INDONESIA PLN's RE Investment Proeram 1995/ /00 [BillionRp., Jan Prices] Investment: Distuibution & Conrec. O&M GnidElectricily Supply DieselElec SuEe y Total Cost Year BRp BRp GWh BRp GWh BRP BRp , , , , ,417 1, , S2 2, , ,379 2, , ,813 2, , ,227 2, , , , , , , _ 8, i , , , , ,097 3, , ,567 3, , ,067 3, , !601 4, , ,169 4, ,027 S,SS ,774 4, ,054 5, , ,083 6, ,110 5, ,113 6, ,144 6,S , ,176 6, , _ , ,245 7, ,331 6, I 282 7,935 NPV (&12% 2, ,928 19,970 2,38 5,195 28,128 Costs Benerits Residential Non-residential Total Net Elec use WTP Elec use WTP Benefits CashFlow Year GWh BRp GWh BRp BRP BRp ( ,613 (372) ,805 1,993 1, ,549 (466) ,531 1, , ,951 2,807 2, , ,146 2,946 2, , ,319 3,069 2, ,094 S ,473 3, , ,612 3,277 2,957 1,214 4, ,739 3,367 3,203 1,315 4, ,856 3, ,421 4, ,964 3,527 3,738 1,534 5, ,069 3,601 4,032 1,655 5, ,172 3,675 4,348 1,785 5, , ,687 1,924 5, ,381 3,823 5,052 2,074 5, ,489 3, ,236 6, ,978 5,871 2,410 6, ,711 4,057 6,329 2, , ,823 2,801 6, , t355 3,019 7, , ,254 7, ,181 4,392 8, ,900, ,305 4,480 9,214 3,782 8,262 1, ,43 4,077 8,646 1, ,560 4,66 10,07 9,056 1,121 NPV_312% 29,87 21,213 21, ,079 -IRR

26 Input Data for Distribution Component Economic Analysis Table A. 1 Connections Made Outside Java Year Java Connections Connections Total Connections ,103, ,300 1,660, ,373, ,192 2,036, ,294, ,846 2,078, ,005, ,070 1,461, , , , ,795 99, , ,819 79, , ,508 60, , ,562 45, , ,105 30,099 74, ,038 19,526 46, ,826 11,233 24, ,232 4,996 11, ,507 1,938 4,445 Total 5,598,612 3,179,199 8,777,812 Source: PLN, PMU Final Report March 2000 Table A.2 RE II Investments Billions of Current Rupiah Billions Const Rp Distribution Household Conn. Management Total Total 1995/ / / , / / , , , , Source: PLN, RE: More Data Clarificationfor EIRR: "RE2PDP from 12-7.x1s", of July 13, Table A.3 Long Run Marginal Costs Java Off-Java Grid Elec. Diesel Elec. Grid Elec. Diesel Elec. Residential 346 n/a Rp/kWh Non-residential 309 n/a RpkWh Source: PT PLN (Persero), System Long-Run Marginal Cost Study, Chapter 4, prepared by Hagler Bailly Company, Corrected to MV line by data provided by Bob Vemstrom, consultant on the report, by to Anil Cabraal Aug. 8, All data corrected to 1995 Rph using inflation rates below Table A.4 Economic Data: Exchange (Rp/$) Dom. Inflation Intn'l Inflation , ,300 9% 7.9% ,383 8% -4.4% ,773 7% -5.1% ,607 58% -3.9% ,400 24% -0.6% - 22-

27 Table A.5 Willingness to Pay Java Off-Java Residential Rp/kWh Non-residential Rp/kWh Base case assumes 50% electricity used for lighting. Assumes no consumer surplus for non-lighting uses of electricity. Non-residential value based on self generation using small diesel genset Table A.6 Average Tariff Rp/kWh and Consumer Surplus Residential Non-Residential Outside Java Tariff 138 Java Tariff 132 Outside Java Tariff 181 Java Tariff 310 Consumer surplus residential 1,153 Tariff data from PLN Tariff Schedule, PLN Annual Report Average tariff corresponds to consumption levels in Table A.8. Java and outside Java average kwh tariff differential reflects the effect of fixed kva charge. Residential consumer surplus uses methodology applied in Bangladesh Third Rural Electrification Project ICR (Rpt 21290). Consumer surplus only applied to lighting where kerosene lighting replaced by electric lights. Table A.7 Other Assumptions Off-Java Diesel Elec. 15% Residential Consumers 95% O&M 5% of capital cost T&D Losses, Java 9% T&D Losses, Off-Java 12% T&D Losses, Diesel 7% Source: PLN Table A.8 Rural Electricity Consumption (kwh/connection/year) Java Off-Java Residential Non-residential 5,000 3,184 PLN 1999 consumption data for rural residential consumers adjusted to 1995 base case data using growth rate, then adjusted by factor 0.9 reflect lower new customer consumption level. Non-residential estimated for Java at 5000 kwh. Table A.9 Consumption (kwh) Growth Rate per Connected Consumer Java Off-Java Residential 2.0% 2.0% Non-residential 7.8% 7.8% Based on historical rates 1994 to Java and off-java assumed to be same Source: PLN Annual Report

28 B. Economic Analysis of Mini-hydro Component The economic analysis for the mini-hydro component is given below: Table 2 Mini-hydro Levelized Energy Cost (LEC, 1994 Rp/kWh) Levelized Electnicity Cost At Appraisal Levefized Electricity Cost Ex-Post Site LEC Hydro LEC Diesel LEC Hydro LEC Diesel U. Peliang Bambolo Kolondom Lokomboro Werba All Projects The mini hydro projects, except for Ulung Peliang are lower in economic cost, i.e. the least cost solution compared to diesel alternative. The EIRR is also greater than Io% for all sites except for Ulung Peliang even if useful energy output dropped to 80% of base case assumptions (Table 3). Table 3 Economic Internal Rate of Return EIRR (Percent) U. Peliang Bambolo Kolondomn Lokoinboro Werba Base Case - Ex-post S evaluation Base Case - At Appraisal If Useful Energy is % of Base The poor performance of Ulung Peliang is a result of a poor analysis of the site hydrology during the feasibility study. The design consultants overestimated the size of the catchment (30 km2 versus 9 km2 actual due to erroneous maps and over-estimated mean annual flows. In order to avoid similar problems in future projects it is essential to have critical project design work such as hydrological analysis reviewed and vetted by qualified consultants. Details of cost calculations and assumptions are given in: Worley Intemational, "RE II Mini Hydropower Project Completion Report," June 2000 in the Project Files. Further details with respect to the Ulung Peliang issues are found in: Winrock International, "Post Commissioning Inspection Report of the RE II Mini-hydro Projects," prepared for World Bank, April

29 C. Pilot Projects Component Pilot Project Cost Savings Compared to Conventional Alternatives Contract Administration Companies 30% in overall line and distribution construction costs Single Wire Earth Return Pilot could not be completed due to financial crisis HV Tapped Substations 50-60% compared to conventional substations Reinforced Concrete Poles 30% compared to spun concrete poles Wood Poles (based on tender prices) 60-80% compared to spun concrete poles Details are found in the various pilot project final reports in Project Files. D. Rural Business Services Component The RBS program demonstrated that PLN can increase productive uses of electricity by targeting marketing interventions and price incentives which address information constrains and business needs of small enterprises in rural areas. it also demonstrated that local NGOs can be viable rural marketing partners for PLN. The RBS component enabled 63,000 new commercial enterprises to become PLN customers receive electricity services and resulted 16,700 jobs being created. The corresponding increase in electricity usage was 180 million kwh per year. For details: see: Worley International, "Case Study Review of the Rural Business Services Program," prepared for PT PLN (Persero), May 2000, in the Project Files

30 E. Financial Accounts of PLN Rural Electrification Operations PLN INCOME STATEMENT - RURAL ELECTRIFICATION 1 JANUARY - 31 DECEMBER 18"9 in --- ordonc. with SE Oi3PST/tII7 Rp 000,00CI PLNReion R Erw ysaiea F. InoomeT 1o perati5n Maintenance Direct Deprecie h"d Total Operalig = IS Re" in 28, ,447 23,617 5,675 11,362 13,125 10,944 64,727 (36,280) 2. Region II 487, , ,661 29,094 4Z758 66,826 18, (73,266) 3 Reain III 75, , ,137 54,076 2, ,950 (5Z710) 4. Regin IV 178, ,56 7,644 51,420 18,213 56,271 18, ,884 (52,8 5. Re.0n V 35, ,087 9,329 14,046 2,428 19,114 3,780 48,668 (13831) 6. Region Vl 10,836 1, , ,530 11,846 79,196 7, ,399 (148,641) 7. Regicn Vil 41, ,626 17,824 26,043 7,316 21,147 4,821 77,131 (35.504) S. Region VIII 64, ,352 63,983 23,790 7,115 50,653 4, ,352 (91,000) 9. Regin IX 14, ,513 4,738 4,420 7,040 16,319 1,310 33,626 (19,313) 10. Regin X 11, ,019 15,599 5,158 8,664 2,403 42,843 (31,237) 11. RegicnXi 278.,23 1, , ,007 51,243 60,814 19, ,833 (94,033) OFF JAVA 13,65,072 5, , , , , ,389 1,957,086 ( ) 12. Di.t. Eatj va 1, s67n , , , Dist C-nftai J- 567,623 1, , , , Dis.Weut Java 88n , ,863 64,20 659,488 36,316 JAVA 2.741, ,835,477 1,137, ,09 2C0,00 593S2, 128,51B 2,278, ,773 IN DO N ES IA 4,037,015 98,986 4,138,001 1,983, , ,614 1,1042, ,450 4, (9,778) Sobr. :PLN SE6013.=#Wbn DBL - DIVDES 800 Profit/Loss from PLN Rural Electricity Services Operations n o I I I I C _ e ear Java Year Outside Java

31 Annex 4. Bank Inputs (a) Missions: {age of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implemerdation Development MonthWYear Count Specialty Progress Objective Identification/Preparation 07/ Renewable Energy Spec., 1. Sr. Power Engineer, 1 Wind Energy Spec., 1 Senior Operations Officer 05/ TTL/Economist, 1 Renewable Energy Spec., 1 Ssr. Power Engineer 08/ TTL/Economist, lpower Engineer Appraisal/Negotiation 11/ TTL/Economist, 1 Senior S S Financial Analyst, 1 Power Engineer, IRural Enterprises Spec., I Renewable Energy Spec., 1 Enviromnental Spec., I Economist 02/ TTL/Economist, 1 Power S S Engineer, IRenewable Energy, 1 Rural Enterprises Specialist, 1 Rural Electrification Planning Information System Spec., 1 Economist Supervision 06/ Task Team HS HS Leader/Economist, 1 Renewable Energy Spec., 1 Rural Enterprises Spec., 1 Economist 11/ Task Team Leader/Economist, S S 1 Renewable Energy Spec., 1 Rural Enterprises Spec., 1 Power Engineer 03/ Task Team Leader/Economist, S S 1 Renewable Energy Spec., 1 Rural Enterprises Spec., 1 Power Engineer, Resettlement Spec. 06/ TTL/Economist, 1 Renewable S S Energy Spec., 1 Resettlement Spec., 1 Power Engineer, 1 Rural Enterprises Spec., 1 Environment Spec

32 11/ TTL/Economist, 1 Renewable S S Energy Spec., I Resettlement Spec., I Rural Enterprises Spec., 1 Power Engineer, 03/ TTL/Economist, I Renewable S S Energy Spec., 1 Rural Enterprises Spec., I Economist, 1 Power Engineer, 1 Environment Spec. 06/ ITL/Economist, 1 Renewable S S Energy Spec., 1 Rural Enterprises Spec., I Economist, I Power Engineer, I DSM Planner, 11/ TTL/Economist, 1 Renewable S S Energy Spec., 1 Economist, 1 Power Engineer, 1 Resettlement Spec., 1 Renewable Energy Engineer 03/ TTL/Economist, 1 Renewable S S Energy Spec., 2 Power Engineer, 1 Economist, I Renewable Energy Engineer 06/ TTL/Economist, I Renewable S U Energy Spec., 1 Economist, I PowerEngineer, 1 Renewable Energy Engineer 05/ TFL/Economist, 1 Renewable S U Energy Spec., 1 Power Engineer 12/ TTL/Economist, 1 Power S U Engineer ICR 02/ TTL/Renewable Energy S U Spec., 1 Power Engineer (b) Staff Stage of Project cycle Actual/Latst Estimate ; No. Staff weeks us$ (,000) Identification/Preparation Appraisal/Negotiation Supervision ICR 5 25 Total Note: Regional direct costs in 1999 and prior FYs have been marked up by 25% to adjust to full costs

33 Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies O H OSUOM O N * NA FSector Policies O H O SU *M O N O NA N Physical * H OSUOM O N O NA O Financial O H O SU O M * N O NA O Institutional Development 0 H O SU O M 0 N 0 NA O Environmental O H OSUOM O N * NA Social L Poverty Reduction O H OSUOM ON * NA O Gender O H OSUOM O N * NA El Other (Please specify) OH OSUOM ON O NA Z Private sector development 0 H O SU 0 M 0 N 0 NA O Public sector management 0 H 0 SU O M 0 N 0 NA El Other (Please specify) O H OSUOM O N O NA

34 Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactoiy, S=Satisfactoiy, U=Unsatisfactoiy, HU=Highly Unsatisfactory) 6.1 Bank performance Rating F Lending OHS OS Ou OHU F Supervision OHS OS OU OHU F Overall OHS OS O u O HU 62 Borrowerperformance Rating 1Z7 Preparation Z Government implementation performance OHS OS O u O HU O HS 0 S 0 U 0 HU Z Implementation agency performance OHS OS OU O HU Z Overall OHS OS 0 U 0 HU

35 Annex 7. List of Supporting Documents 1. Intemational Science & Technology Institute,Pola Program Services, Final Report prepared for Directorate General of Urban Cooperative Development, Ministry of Cooperatives and Small & Medium Enterprises, November Ministry of Cooperatives and Small & Medium Enterprises,Borrowers Project Completion Report, March PT PLN (Persero),Rural Electrification RE If Program PMUFinal Report, Jakarta, Indonesia, March PT PLN (Persero),Borrowers Project Completion Report, Draft report submitted by Head of Rural Electrification Division, Jakarta, Indonesia, March 24, World Bank, Indonesia Second Rural Electrification Projecf Staff Appraisal Report Report No IND, Washington DC, USA, February 3, World Bank, Aide Memoire, February 1994, June 1995, November 1995, march 1996, June 1996, November 1996, April 1997, July 1997, December 1997, July 1998, May 1999, December 1999, ICR Aide Memoire of February World Bank, RE II Project Economic Analysis, MS Excel Spreadsheet, Washington DC, USA, June 6, Worley International, Case Study Review of the Rural Business Services Program, Report to PT PLN (Persero), Jakarta, Indonesia, May Worley International, RE II Mini Hydropower Project: Completion Report, Report to PT PLN (Persero), Jakarta, Indonesia, June Winrock International, Post Commissioning Inspection Report of the RE II Mini-hydro Projects, prepared for World Bank, April

36 Annex 8. Status of Loan Covenants Loan Agreement Descrption of Covenant Covenant Status 3.01(b) Relend portion of proceeds to PLN under a subsidiary loan Complied with agreement (a) undertake, and by 31 March 1995, complete a study on private Partially complied with power development; (b) review and discuss study report with bank; after dlelav (c) based on results of study, prepare draft rules and procedures, review with Bank, finalize and adopt approved rules and procedures by 31 December (a) undertake, and by 31 March 1995, complete a study on Not ccimplied with but regulatory reforn in the power sector, (b) review and discuss study Power Sector report with bank; (c) based on results of study, prepare draft Restructuring Policy regulations for the power sector, review with Bank, finalize, adopt paper issued in August and enforce regulations by 30 June Legislation presently being drafted (a) Reorganize PLN into a limited liability company (Persero); (b) Partially complied with. furnish to Bank a progress report concerning reorganization, TA funded by Bank (Ln together with draft time bound action plan for corporate 3602-IND, 3501-IND) reorganization and restructuring; (c) review report with Bank; and and ADB. Bank and (d) by June 30, 1995 take appropriate steps to implement action ADB currently plan. suppoiting preparation of PLN corporate and financial restructuring plan Establish Directorate of Regulations within DGEED with adequate Partially complied with staff and funds by 30 June after delay 4.01(b) Furnish, no later than six months after the end of each PLN FY, Complied with audit report concerning special Account and Expenditures in respect of all components provided under the project (a) By 12/31 eachyear commencing in 1995: (a) review with Bank: (i) Complied with after Power Sector Development Program, (ii) least cost plan, analysis delay used to formulate program, (iii) roles of PLN & private sector in program, (iv) transparency and appropriateness of business environment for private sector participation: (b) review with the Bank and PLN, PLN's development and investment program with respect to: (i) their consistency with power sector development program, (ii) balance among generation, transmission and distribution Investments, and (iii) balanced development of regions (b) By January 31 each year commencing in 1995 until project Complied with after completion, furnish to the Bank for review and comment, prior to delay finalization, annual targets for village electrification for the following fiscal year 4.02 (c) Ensure PLN has access to funds to finance its capital expenditures Not complied with after for its investment programs financial crisis

37 Project Agreement Description of Covenant Covenant Status 3.01 PLN to carry out operation with sound administrative, financial and Complied with partially engineering, managerial, public utility and environmental practices. 3.02(a) PLN to maintain its existence and right to cany out operations and Complied with take steps necessary to acquire, maintain and renew all interest in land and other properties in carrying out implementation of the project. 3.02(b) PLN to operate and maintain plants, facilities, equipment and other Complied with property, and promptly make all necessary repairs and renewals. 3.02(c) PLN shall not sell, lease or transfer, or otherwise dispose of any Complied with property or assets 3.03 PLN to take out and maintain with responsible insurers, or make Complied with provision for insurance against risks and in amounts consistent with appropriate practice. Covenants 4.01 to 4.08 with respect to PLN's financialperformance reaffirmed agreements reached under the Sumatra and Kalimantan Power Project (Ln IND) 4.01(a) PLN to maintain records and accounts adequate to reflect its Complied with operations and financial condition. 4.01(b) PLN to furnish to Bank no later than six months after the end of Complied with each FY: (a) certified copies of its financial statements; (b) corresponding audit report PLN shall: (a) by October 30 every year conmencing in 1995, Not complied with review its LRMC with a view to formulating its tariff structure; (b) sporadically and delay. discuss results with Borrower and Bank; (c) take steps to revise tariff structure PLN not to incur any debt unless a reasonable forecast of revenues Not complied with after and expenditures of PLN shows that projected new revenues for 1997 financial crisis each FY during the term of debt shall be at least 1.5 times the projected debt service requirement PLN shall (a) prepare a ten-year financial forecast; (b) test each Not complied with fully development plan for financial feasibility; (c) develop financing after 1997 financial plan to cover first five years of forecast period, including identifying crisis potential financing sources; (d) ensure review with Borrower and Bank prior to adoption by its Board. 4.05(a) PLN to take measures as necessary to realize for all its operations, Not complied with for its FY1994/95, and in each FY thereafter, an annual ROR of eight percent (8%) of the average current value of PLN's net fixed assets in operation. 4.05(b) PLN shall review whether its tariffs are adequate to meet the Review complied with requirements of 4.05(a) for the next FY and furnish to Bank for but tariff not revised review PLN shall for its FY 1994/95, and for each FY thereafter, revalue Complied with its fixed assets and accumulated depreciation 4.08 PLN shall review: (a) annually with the borrower and Bank, PLN's Complied with investment plan for the next five FYs, including balance between generation, transmission and distribution; and (b) by December 31 every year, commencing in 1994, PLN's development plan and associated financial forecasts and financing plan

38 Project Agreement Description of Covenant Covenant Status Schedule 2 PLN shall, by June 30 (or such other date as may be agreed by the Compiled with in Para 5 Bank) every year commencing in 1995, revise, and publish the December 1996 only small power purchase Tariff (SPPT) schedule including the form of the standard power purchase contract in accordance with the methodology agreed to by the Bank. Schedule 2 PLN shall, by June 30 (or such other date as may be agreed by the Partially complied with Para 6 Bank) every year commencing in 1995, revise and publish the bulk supply tariff schedule in accordance with the methodology agreed to by the Bank

39 Annex 9. Lessons Learned: Results from Stakeholders Meetings With 47% of rural consumers yet unelectrified, attention should be given to enhancing PLN's RE capability and increasing its effectiveness within a restructured and unbundled PLN. Therefore, it is important to ascertain and record the lessons learned from the project to benefit future RE programs in Indonesia (as well as similar programs in other countries). To assist in the process of gathering and analyzing the lessons learned from the various stakeholders, the Bank ICR team led two half-day brainstorming sessions attended by PLN, MOCSE and consultants. Representatives included PLN (Rural Electrification, PMU, Supporting Services, Foreign Cooperation Administration, Construction Accounting, Environment, Procurement. Construction Control, Supervision Unit, MOCSE, Central NGO for RBS, and consultants). The method used in eliciting and ranking responses was a modified form of the Objective Oriented Project Planning (OOPP) approach. The OOPP methodology is described in detail in the UNIDO publications "Quality Management of Development Cooperation, Part 2, The Method," UNIDO, Vienna These sessions were well attended with a very high level of participation (-25 persons/day) and contribution from all the attendees. Observations made by the participants summarized below and noted in the subsequent tables. The scores assigned to each "Lesson" were based on the votes cast by the participants - the higher the score, the greater the importance assigned to that observation. Due to time constraints, mini-geothermal component, technical audits and small power purchase regulation adoption were not discussed. Management - The Project Management Unit demonstrated the importance of having an organizational mechanism for managing this complex project involving multiplicity of components scattered throughout the Indonesian archipelago, and requiring coordination between numerous PLN departments, consultants, contractors and the Bank. The PMU ability and authority to cut across the vertically organized directorate structures are critical. Distribution Investment Component - The PLN should not have to bear the public service obligation of rural electrification. The off-java RE operations requires GOI assistance for financial sustainability. The establishment of the Social Electricity Development Fund as proposed in the August 1998 policy statement supports this finding. - Existing GOI regulations and PLN procedures cause delays in tender preparation, bid evaluation and contract award. Permitting just-in-time materials supply; timely issuance of NOLs by the Bank; and use of perfonnance-based contracting can reduce time and costs. - The lack of adequate materials inventory information and controls and recording of physical progress through field audits are a severe hindrance to effective management and cost controlan integrated Management Information System accessible by all PLN units is needed to provide wide and timely access to information - Centralized planning, management and operations hinders responding effectively to customer needs and local conditions - many such functions should be decentralized to regional offices. Pilot Projects (CAC, Tap substations, RCP, Wood poles, SWER) - The CAC, Tap substations, RCP poles pilot projects in particular, have clearly demonstrated that significant cost savings are possible even at pilot scale. Prospects exist for even more savings when mainstreamed. PLN has begun drafting the standards and guidelines for mainstreaming but as yet have not required their adoption. - Future pilot project identification and formulation should involve PLN regional staff to increase buy-in and ownership