Document of f1 V The World Bank FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of f1 V The World Bank FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA ELEVENTH POWER PROJECT September 30, 1981 Report No IND Projects Department East Asia and Pacific Regional Office 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 Currency Unit - Indonesian Rupiah US$1 = Rp 625 Rp 100 = US$0.16 Rp 1 million = US$1,600 WEIGHTS AND MEASURES 1 metric ton = 1,000 kilograms (kg) I liter (1) = barrels 1 kilometer (km) = miles (mi) 1 kilovolt (kv) = 1,000 volts (V) 1 megavolt-ampere = 1,000 kilovolt-amperes (kva) 1 kilovolt-ampere = 1,000 volt-ampere (VA) 1 megawatt (MW) = 1,000 kilowatts (kw) 1 gigawatt hour (GWh) = 1 million kilowatt hours (kwh) ABBREVIATIONS BAPPENAS - National Planning Agency BATUBARA - National Coal Entity DGEP - Directorate-General Electric Power, Ministry of Mines and Energy GOI - Government of Indonesia LNG - Liquified natural gas MME - Ministry of Mines and Energy Newjec - New Japan Engineering Consultants, Japan NIRA-ENEL - Italian Nuclear and Electricity Agencies OECF - Overseas Economic Cooperation Fund (Japan) PCR - Preece, Cardew and Rider, UK PERTAMINA - National Oil Company PLN - National Power Authority REPELITA - Five-Year Development Plan SBC - Special Board of Consultants GOVERNMENT OF INDONESIA FISCAL YEAR April 1 - March 31

3 -5- Growth of Energy Consumption 1.14 Consumption of commercial forms of energy in Indonesia grew in the recent past at about 13.6% p.a., doubling in about five years. For Repelita III (FY80-84), growth is projected at 11% p.a., with the share of petroleum products falling from 90% in 1977 to 79% in Currently, electricity provides only 7% of the country's energy, but is projected to increase to 11.3% by The table below shows a breakdown of consumption by energy sources: Table 1.1: ENERGY CONSUMPTION BY SOURCES (in million tons of coal equivalent - MTCE) 1970 % 1977 x 1984 % Petroleum products LNG Natural gas Coal Hydro Geothermal Total Organization of the Energy Sector 1.15 In May 1978, the Ministry of Mines and Energy (MME) was established as part of a general reorganization of government departments to coordinate all activities in the energy sector. MME has overall responsibility for mining, oil, natural gas and electricty. It controls the state enterprise b responsible for the execution of the government policies in the energy subsectors - viz. the national oil and gas entity (PERTAMINA), the coal agency (BATUBARA) and PLN. The Ministry has been recruiting staff over the past three years and developing its organization to fulfill its role in the energy sector. NME's organization chart is shown in Annex GOI has established an interdepartmental energy policy and planning committee at the technical level. The Chairman and Vice-Chairman of the Committee are the MME's Directors-General of Oil and Gas and of Electric Power (DGEP), respectively. A permanent energy committee has also been formed by the Minister and entrusted with the tasks of assessing energy technologies, dealing with day-to-day energy problems and preparing long-term projections for demand and supply. A ministerial level National Energy Board has recently been formed to review proposals emerging from the

4 -6- technical committee and eventually to establish a more clearly defined energy policy with specific implementation instructions to the ministries concerned PrLoblems in the Energy Sector: Policy and Pricing 1017 Because of the deficiencies of available statistics on both resources and consumption a comprehensive energy balance, indicating the various sources of energy, patterns of transformation, transportation and consumption has not yet been prepared for Indonesia. The preparation of a preliminary balance is within the brief of the Bank's energy sector mission (para. 1.01), and the exercise is expected to highlight the areas of greatest statistical deficiency and hence indicate the direction for urgent data collection efforts. Thus far, therefore, the country has lacked a quantitatively based overall energy policy. This policy weakness is compounded by a system of energy pricing that does not equate rational consumer choices with the national interest. In particular, petroleum product prices - subsidized by Government for political and social reasons - have caused serious distortions in the economy by failing to reflect their value to the economy as an export good. The effect has been to favor the use of oil over other competing fuels, promotion of domestic consumption over exports, and because the degree of subsidy between oil products is uneven, to distort the demand between individual petroleum products The elimination of these subsidies has been under serious discussion between GOI and the Bank for some time. In the context of negotiations of Loan 1872 (Power IX), the Government confirmed that, as a matter of policy, it would ultimately abolish subsidies on domestic oil consumption, subject to the ability of consumers to pay, and a further step in this direction was taken in May 1980 when petroleum product prices were increased 50%. Nevertheless the prices of most petroleum products except gasoline are still only at about one third of international levels. The ernergy sector mission is examining the economic consequences of these subsidies, and the Bank has agreed to allocate about US$3.0 million under Loan 1513 (Power VII Project) for further studies to support the formulation and implementation of a new pricing policy Loan 1513 would also help to build up a management information system (MIS) for DGEP activities and ensure that development programs in the electricity sector are entirely consistent with national policy objectives. A contract for this study has recently been negotiated with a consultant selected on the basis of evaluated proposals from a number of firms, and awaits approval by the GOI Procurement Control Team. The Electricity Sub-Sector 1e20 The Electricity subsector is regulated by MME through DGEP. It comprises (i) PLN, (ii) captive plants installed by private parties for

5 -7- their own use, (iii) some small municipal franchises, and (iv) a small number of cooperatives which were set up to providet electricity in certain rural areas remote from PLN supply systems Legislation was enacted in 1979 to provide for private and cooperative franchise participation in the electricity sector with the intention of providing electricity generation/supply in areas where PLN was unable to develop its own supply systems fast enough. However, no new parties have so far been licensed DGEP. Since its inception in 1978 DGEP has been responsible for electricity policy in the country. Until its establishment, PLN had been responsible for giving advice to the Minister on sector policy and for planning and licensing. Legislation enacted in 1979 transferred these responsibilities, particularly in policy planning, licensing of franchises, and general supervision of the sector from PLN to DGEP. Its organization structure is shown in Annex PLN. PLN was first formed in 1961 when three Dutch-owned electricity utility companies were nationalized, but its growth as an effective modern organization started around 1972, when its status was changed from that of a department of a ministry to a public corporation, and foreign financing became available for its urgently needed rehabilitation and expansion programs. PLN's subsequent growth has been impressive. It now has 2.6 million consumers and provides 70% of the total electricity supply in the country. Further details are given in Chapter Captive Plants. Until the mid-1970s public sector development was severely constrained due mainly to lack of financing and PLN could not meet the demand with any reliability. Captive plants therefore grew rapidly and the total capacity of such plants is currently about 2000 MW compared to 2,610 MW of PLN; most of the plants are small diesel installations, with a few larger gas turbines. During ,. the average annual growth rate of captive plant was 15% (with a peak of 22% in 1975). Since then the growth has fallen off rapidly to an average of about 4% during (Annex 2); it was negligible during 1979/80. This is a direct consequence of the rapid augmentation of PLN's system supply, significant improvements in reliability standards, and positive marketing measures. It is PLN's policy, when connecting owners of captive plant, to allow such plant to remain in use as reserve until the end of its economic life. Some captive plants will continue to be installed as PLN's investment program is not large enough to meet the entire demand at all locations in the country, but the rate of growth is likely to remain below 5%. Rural Electrification 1.25 Rural electrification (RE) is being initiated by PLN with consultancy assistance, among others, from the National Rural Electric Cooperative Association (NRECA) of the US and financed by USAID, which provided a loan

6 - 8 - for seven pilot projects (US$20 million). Financial assistance in the form of a loan has also been committed by Holland (Fl 15.5 million, US$737 million) and as a grant by Finland (FM 0.48 million, US$0412 million). Tlese pilot projects were conceived wholly on considerations of consumdtive use of power and did not explore productive uses. This is being rectified in the implementation stage Rural electrification as defined in Indonesia covers all towns and villages in the country except provincial capitals and second level provincial towns. During Repelita III GOI plans to electrify about 3,700 of the 4 64,000 villages, and specific national budgetary allocations have been made for this purpose (Rp 60 billion - US$96 million) in FY81 and 82. indonesia does not yet have a plan or time scale in which all villages in the country will be provided access to electricity, but those villages and areas ir. which electricity would have the greatest economic impact will be given priority. GOI policy will be to implement village schemes Sherever possible by extensions from the PLN system rather than through isolated diesel generators, and Java in particular is being treated as an integrated total network for this purpose because of the contiguity of population centers throughout much of the island. As the growth of a system base to support RE is a prerequisite, it will inevitably be some time before the national RE plan can be significantly enlarged. The Bank supports the GOI approach. The proposed project provides for the extension of supply into a number of villages at an estimated cost of US$46 million; about 400,000 inhabitants will be served. Status of Surveys 2. THE POWER MARKET AND THE DEVELOPMENT PROGRAM 2.01 Several attempts were made during the 1970s to prepare a meaningful demand forecast for the Indonesian power sector. The only records of consumption which were available were those of PLN's sales, and these were unsatisfactory as a basis of forecasting future demand since they reflected the very low levels of electrification, frequent supply outages, and extensive use of captive generators which then prevailed. Basic market research was therefore necessary to establish potential demand, Such a study was carried out for Java in by consultants financed by IDA Credit 399, and similar studies are now in progress for the islands of Bali and Sulawesi. At negotiations for the Power X project (Loan 1950), PLN agreed to equip itself to keep these studies updated, and to carry out similar studies in other islands, with diminishing dependence on consultants, To improve the quality of its power surveys, PLN also requires the active association of the DGEP of MME, which should provide guidelines on national energy policies, firm data on primary energy availability and usage and pricing policies, as these influence the demand for electricity. The strengthening and coordination of planning for electricity growth is one of the principal tasks of the Power Sector MIS study (Para. 1.19),

7 - 9 - Present Consumption and Access to Service 2.02 The per capita consumption of electricity in Indonesia is still extremely low at about 76 kwh (FY81) compared to 570 kwh in Malaysia, 250 kwh in the Philippines and 250 kwh in Thailand. Indonesia's population has low access to electricity; only about 10% of the households are connected. The degree of electrification in different regions varies, being about 12.3% of households in Java, 8.6% in Sumatra, 12.0% in Kalimantan, 10.3% in Sulawesi and 2% to 3% in the other islands. Demand Projections 2.03 The initial results of the Java study suggested that the magnitude of the underlying demand was so large that annual growth rates of public electricity supply would have to be on the order of 30-35% during FY76-85, compared with historic rates of 10-12%. It was recognized, however, that PLN's sales in Java could not quickly rise to such levels and that, in the short and medium term, their growth would depend on the rate at which PLN could build up its facilities and meet an increasing proportion of the existing demand. In the longer term, PLN sales would reflect more closely the growth of the power market itself. Extensive discussion of these forecasts and their assumptions and methodology took place during the period and eventually agreement was reached between GOI and the Bank on a series of sales forecasts to be adopted for planning purposes up to The development program for electric power incorporated in Repelita III is based on them. It follows from the foregoing, however, that they are in the nature of feasible targets for expansion of supply rather than objective estimates of underlying demand, at least through FY The energy sales forecasts are summarized below: Table 2.1: FORECAST OF ENERGY SALES (GWh) Fiscal Year Java Outside Java Total % growth Actual 81 5,117 1,323 6, ,368 1,474 7, ,924 1,746 9, ,588 2,132 11, ,506 2,544 14, ,692 3,038 16, ,157 3,593 19, ,604 4,616 23, ,530 5,480 27,

8 Connection Program 2.05 As a necessary instrument of meeting its sales targets, PLN agreed with the Bank in 1978 that it would prepare and actively implement a consumer connection program consistent with its improving capabilities. The results are summarized in Table 2.2 below. Figures in parentheses indicate the growth over the previous year: Table 2.2: GROWTH OF PLN'S CONSUMERS AND SALES Fiscal Number of Connected Sales Year consumers load MVA in GWh 76 1,140,745 1, ,804 (5%) (13.0%) (14.7%) 77 1,208,538 1, ,082 (5.8%) (11.8%) (10.1%) 78 1, , ,527 (16.9%) (21.3%) (14.6%) 79 1, , ,270 (26.2%) (26.6%) (21.6%) 80 2,246,657 3, ,343 (25.9%) (25.1%) (24.6%) 81 2,591,067 3, (15.3%) (17.1%) (20.5%) 2.06 PLN exceeded its customer connection targets each year from FY78 through FY80, but energy sales grew rather less rapidly. In FY81 energy sales growth overtook that of both connections and connnected load, ref lecting mainly the diminishing use of captive plant by PLN's industrial consumers. The result was also influenced by PLN's ongoing loss reduction program although the effect of this was relatively small In some of the Wilayahs, notably East Java (XII) and North Sumatra (II), the results of PLN's efforts at expediting consumer connections have been impressive. For example, in East Java the growth rates in FY79 through FY81 were 30%, 36% and 33% respectively. These growth rates give some indications of the extent to which potential demand - at least in some areas - exceeds PLN's near-term sales targets. Of more immediate # concern is the fact that such growth rates were ahead of the growth of PLN's capacity to supply. In particular, the sitution highlights the urgency of accelerating completion of the EHV (500 kv) Central - East Java link. These needs are addressed in the formulation of the proposed project (para. 4.07). The situation in North Sumatra is similar. There is an urgent need for PLN

9 - 11- to update its market surveys both in Java and other islands in order to properly plan the scale and pace of its immediate expansion program. To sustain the momentum built up during the past 3 years, special efforts should be made by PLN and GOI to ensure that the targets of expansion of power supply facilities in Repelita III are achieved by improved monitoring of construction, and provision of adequate financial resources. At negotiations for the Power X project (Loan 1950), PLN undertook to improve its system planning capabilities, to identify emerging system bottlenecks in advance and to ensure that its power systems continue to be adequate as the demand escalates. Development Program 2.08 On the basis of its forecast of power sales, PLN follows the practice of preparing annually a 10-year development plan to cover the projected requirements of generation, transmission, distribution and other facilities. The latest plan finalized in October 1980, covers the development period FY81 to FY89. A time slice of the program for the period up to FY84 has been incorporated in Repelita III. In the past, least cost investment programs for generation, transmission and distribution were planned with the help of consultants. PLN has recently developed in-house capability for carrying out least cost generation planning studies with computer modelling which is utilized to review and update the Java generation plan. Java accounts for 59% of Indonesia's population (1980 census) and 80% of PLN's sales. The development plan has been formulated to achieve the following objectives: (a) optimize resource utilization by substituting oil by using coal, by greater exploitation of hydro and geothermal resources for power generation and by reducing the use of fuel inefficient installations; (b) realize economies of scale by larger sized installations; (c) achieve operational economy by coordinating the utilization of plants through interconnected operations; and (d) provide acceptable standards of reliability of supply. The planning process represents a significant improvement over previous versions, but requires further refinement. In particular, it needs to be subjected to tests of financial feasibility; this is discussed further at paras Thus far, planning for the other islands has been done by less sophisticated methods, and, with the exception of major generation projects, has tended to take the form of global projections in mainly financial terms. However, in FY80 the regional offices of PLN were given a significantly greater role in the development of their plans and a considerable amount of detailed planning data was assembled. The task of collating this data in manageable form for computer processing is now in progress, and a significant improvement in the quality of planning for the other islands is expected over the next two years or so.

10 In terms of growth of generating capacity, PLN's development plan may be summarized as follows: Table 2.3: INSTALLED CAPACITY (MW) Java Other Islands Total Change FY81 FY89 FY81 FY89 FY81 FY89 % Hydro 464/a 1, , Steam 706 3, , , Gas turbine Diesel , , Geothermal - 240/b Total 1,891 6, ,107 2,610 9, /a Including Jatiluhur. /b Including plants to be built and operated by agencies other than PLN. Within a total generating capacity three and one-half times its present size, steam plants will show the greatest growth, and will constitute 53% of total generating capacity compared with 29% now. All new steam plants will be designed for the possibility of coal-fired operation. Hydroelectric capacity will show important growth, and geothermal plants will appear although on a modest scale. Diesel generation will be eliminated in Java but will show some growth in the other islands, chiefly in connection with RE schemes The cost of this investment program together with associated transmission, distribution and other facilities is estimated at US$7.4 billion at 1980 prices (non-pln geothermal stations excluded), with a foreign exchange component of US$4.5 billion: further details are at para These totals ignore expenditures to be incurred in the later years on projects to be commissioned in the 1990s; even so, the program represents average annual investments of US$900 million. PLN's recent rate of capital expenditure was US$530 million in FY80 and just over $800 million (provisional) in FY81, so the investment program seems realistic in terms of PLN's capacity to implement it. a 3. THE BENEFICIARY 3.01 The beneficiary of the propsed loan would be PLN, the Government-owned national power utility.

11 Legal Status and Responsibilities 3.02 By Presidential Decree No. 18 of 1972, PLN was constituted a public corporation (Perum), with responsibility for the generation, transmission and distribution of electricity and the planning, construction and operation of electricity supply facilities. Until 1979 these responsibilities were exclusive to PLN, but in that year, with the objective of facilitating the exploitation of electric power to the greatest degree possible, GOI enacted legislation allowing the intervention of private entities and cooperatives in the sector under license of MME PLN is required to participate in the national economic planning process and in the formulation of national power policies. Financially, PLN is expected to cover all operatino and raintenance costs (including depreciation and financing costs) from current revenues, and to generate a contribution to the financing of its expansion program; the amount of this contribution has been the subject of a continuing dialogue with the Bank (para. 5.07). PLN-s major policies -- including in particular its investment plans, budgets and tariffs -- are subject to review by a Supervisory Board chaired by the DGE, and ultimately to approval by GOI. Generally these supervisory arrangements appear to work smoothly, apart from an undesirable constraint which is imposed on PLN-s financial management by the GOI capital budget system: this problem is addressed in para However, PLN is also bound by a number of procedures affecting all public sector enterprises; of particular importance are those relating to the award of procurement contracts set out in Presidential Decrees 10 and 14A of There is some evidence that the application of these procedures has caused delay in the execution of recent Bank power projects. Remedies should be devised between the Bank and GOI as a country matter through on-going discussions on project implementation of which the next round is scheduled for January At negotiations of this project assurances were received that GOI will take all necessary steps to ensure adherence to the project construction schedule agreed with the Bank. Organization and Management 3.04 PLN's operations are managed by a board of directors headed by a president director, who is appointed by the President and is accountable to the Minister of Mines and Energy. The board currently comprises five other directors with functional responsibility respectively for planning, construction, operations, finance and administration. These directors operate more in a staff than a line role, since line responsibility strictly devolves from the board as a whole (following the principle of collective responsibility) to 16 regional operating managers on the one hand and 12 construction project managers on the other. Regions are responsible for minor construction work, whereas all major construction work is handled by construction project managers. PLN-s organization chart is at Annex 2.

12 The lines of authority are in practice not as clear as might appear from the organization chart, and there is some overlapping of responsibility both amongst the central departments and between the central departments and the regions/construction projects. For example, construction project managers are not in a position to take full responsibility for the progress of their projects since all tendering and contracting is handled by the Planning department. On the other hand, construction project managers and the Construction department prepare the capital budgets, manage disbursements and maintain all accounting records relating to individual projects, so that the Finance department is to that extent unable to exercise full financial control of PLN's operations. The process of management is also characterized by the tendency which has developed over past years for Head Office to exercise control of regions by intervention in their operations in a degree of detail which causes delay and risks becoming a hindrance to future growth It is evident that if PLN's growth is not to be hindered by such organizational constraints, the thrust of institutional development in the immediate future must be direced towards the rationalization of central department functions and the concomitant delegation of greater executive authority to the regions and projects. To this end, the Minister recently required PLN to re-examine its structure of responsibility and prepare revised job descriptions for all senior and middle-level management positions to eliminate anomalies and in particular to unify responsibility for all aspects of financial control. This task was be completed by mid- 1981, and is now awaiting Ministerial approval. Beginning in FY83, it is intended that head office control of regional operations will focus increasingly on performance as measured by certain key physical and financial performance indicators, with a consequential relaxation of detailed supervision. In preparation for a greater decentralization of management, all first and second level regional managers have attended management development courses. However, it is recognized that the speed with which operational responsibility can be fully delegated with safety may vary from one region to another The Bank has been involved in the formulation of these plans for institutional development both by consultation and by the provision of appropriate consultant inputs in various Bank-assisted projects. Those currently in progress or planned are: (a) on the recommendation of the Bank, a management audit was commissioned by PLN and carried out by a local firm working in association with international management consultants. Their report contained a large number of recommendations for improvement, and PLN-s president director has set up a working party to progress consideration of them. A number of them have already been implemented, including in particular a decentralization of the facilities planning functions from Head Office to the regions;

13 (b) through the Power VIII project (Loan 1708) the Bank provided US$2.5 million for the foreign costs of consulting assistance to improve PLN's construction management systems. This work suffered considerable delay in abortive contract negotiations and is now to be treated as an extension of the Power Sector management information systems study contract (para. 1.19) to avoid loss of time in retendering; and (c) the proposed project would provide US$0.6 million for the foreign costs of further management consultancy, which would assist in the development of performance indicators (para. 3.06) and in setting up the accounting and financial control systems necessary to support a more decentralized form of management. Draft Terms of Reference for this assignment have already been substantially agreed between PLN and the Bank and appear at Annex 3. The assignment is estimated to involve about 45 man-months of expatriate services at an average rate of $11,200. Other measures necessary to strengthen PLN's system of financial planning are the subject of assurances obtained at negotiations and are described in more detail at paras By these means the Bank-s continued involvement iin PLN's institutional development is assured, and supervision missions will monitor the timely introduction of the organizational changes and their effectiveness in operation. Present Facilities 3.08 Until the early 1970s, PLN's expansion was severely restricted because of the lack of foreign exchange in the country. A crash program resulted in gas turbines being preferred; currently they comprise about 30% of the total capacity. The imbalance in plant is being corrected with the commissioning of 1,000 MW of new steam capacity by 1982 and PLN's planning is now based on the least cost program of system development for Java. Similar programs are being developed for the grids located in the other islands PLN operates over 6,000 km of transmission lines at 70 and 150 kv and about 47,000 km of distribution lines, the bulk of which are in Java. About 2,000 km of 150 kv transmission under construction are scheduled for completion by Java will have a fully interconnected grid at 150 kv by By 1984, a 500 kv system linking West and Central Java will be commissioned. PLN intends to extend the 500 kv system to East Java by Manpower and Training 3.10 PLN now has a total staff of about 32,000 of which about 21,000 are on the permanent payroll. The rate of growth has averaged 10% in recent years. PLN experiences no difficulty in recruiting at levels up to technical

14 high school, but difficulty is encountered in recruiting graduates; PLN sponsors scholarships annually to help assure a supply of such graduates. Currently PLN plans its staffing only on a year-to-year basis, but it has recently requested Electricite de France, who acted as training consultant to PLN during the early 1970s, to review manpower planning and personnel development arrangements. Its report is expected in November If appropriate, the Bank's twelfth power project in FY83 will include a suitable training component Six training schools are run by PLN throughout the country to provide vocational courses for the staff; about 1,100 attend the various courses each year. Staff members are sent abroad for advanced and other training not available in Indonesia. Project oriented training, particularly in foreign financed projects, is also provided PLN does not have adequate training facilities for the operation and maintenance staff for steam power stations. About 40 people have been trained in the USA with the assistance of Black and Veatch International (BVI), the Project Consultants for the Muara Karang and Semarang steam stations. A similar training program is also being arranged for the operation and maintenance staff for the Suralaya project. To provide more advanced training needed, Power IX Project (Loan 1872) contains a provision for the establishment of a thermal station training school including a simulator replacing the existing facility at Tanjung Priok. It will be in operation by mid Research 3.13 PLN has established a power research institute which includes a high voltage testing laboratory. The institute, which conducts applied research in power associated areas, has a staff of 278, including 87 graduates. Accounting and Audit 3.14 PLN prepares its financial statements according to generally accepted accounting principles and normal utility practice. Assets in use are revalued from time to time according to indices published by the Ministry of Finance, and annual depreciation charges are revised accordingly. The last revaluation was carried out in FY80. PLN's accounting system was installed by consultants in the early 1970s and, while it has generally served the company's aeeds well, there is increasing evidence that it is due for overhaul. With the expansion of PLN's operations and the proliferation of accounting units, preparation of financial statements is increasingly delayed by cumbersome and time-consuming procedures. Furthermore, the trend towards increased decentralization of management functions will call for some restructuring of the system so that adequate financial information is

15 available to local managers in a timely manner. These problems will be addressed in the management consulting assistance to be provided under the proposed loan (para. 3.07). The same assignment will also review the desirability of extending the use of computer facilities in accounting and financial control systems Audit of PLN-s accounts by the Directorate General of State Financial Control is prescribed by PLN's charter. The Directorate General follows the standards of the International Accounting Standards Committee and the International Auditing Guidelines of the International Federation of Accountants and their audit reports are acceptable to the Bank. In the 1981 audit they plan to introduce a management audit component into their program which will examine the efficiency of PLN's operations and systems as well as the accuracy of its accounting. PLN also has an effective internal audit group reporting to the president director which carries out various special investigations in addition to keeping general accounting matters under review. Insurance 3.16 PLN carries motor vehicle insurance, and transit and marine insurance on equipment and materials in transit. Fire and other hazards are self-insured. In view of the geographical spread of PLN's assets, any single loss would be relatively small by comparison with total assets and operations, and this policy is therefore considered satisfactory. Performance Under Earlier Bank Operations 3.17 The Bank has provided US$1,139 million for power generation/distribution facilities in and around Jakarta and in West and Central Java. Three distribution projects (Credits 165 and 334, and Loan 1259) rehabilitated and expanded the distribution facilities in the greater Jakarta area. They also enabled some major institutional, organizational and financial reforms to be carried out in the electricity subsector, including providing PLN with a new charter giving it substantial autonomy. Seven power generation projects (Credit 399, and Loans 1127, 1365, 1513, 1708, 1872 and 1950) in West and Central Java were undertaken to help PLN expand electricity generation capacity in Java and to optimize its utilization by constructing a 500 kv transmission link from West to Central, and eventually to East, Java. Past loans and credits have also provided funds for various consulting services such as the large management consulting effort of SOFRELEC, the Java System Development Study undertaken by PCR, and feasibility studies for thermal, hydroelectric, transmission and distribution projects A completion report on the first two projects (Credits 165 and 334) was issued in November It describes how, after an initial period of difficulty and delay (the two projects were completed some three and a half

16 years behind schedule) many institutional and operational improvements were effected, greater reliability of supply was achieved, and PLN's sales began to increase rapidly. Lessons learned from these operations were applied to subsequent operations. A specific program for financial recovery, designed to improve PLN's management capabilities and to overcome its financial weaknesses over time was incorporated in Credit 399 and was accomplished ahead of target during FY PLN's performance in implementing the 10 Bank-assisted power projects was uneven at first, but there was significant improvement until the introduction of new GOI procurement procedures during 1979/80 (para. 3.03). The earliest generation project (Credit 399) covering the first and second 100 MW units at Muara Karang thermal station was completed about two years behind schedule; the next (Loan 1127) for the third 100 MW unit, had a delay of less than one year. Subsequent generation projects at Muara Karang (Loan 1365) and Semarang (Loan 1513) are about 4-6 months behind appraisal schedule; two projects at Suralaya (Loans 1708 and 1872) are also a few months in arrears. Loan 1950 for the Saguling hydropower plant has only recently become effective. The record of implementation of agreements reached in connection with these operations has been satisfatory 3.20 There are quantitative indications of PLN's steady improvement in performance in other areas. Its system losses, as high as 27% in FY75, were down to 25% during FY79 and less than 22% in FY80. The generation per employee increased from 240 in FY75 to about 340 during FY80. There is still scope for considerable improvement. Objectives 4. THE PROJECT 4.01 The main objectives of the project are to: (a) increase PLN's transmission and distribution capacities; (b) enable grid extensions to be made to rural areas; and (c) provide consultancy services for schemes which will enhance the use of coal, develop an effective grid system and continue PLN's institutional growth. Project Description ' 4.02 The project comprises: (a) a distribution system for Jakarta and the regencies of Bogor, Tangerang and Bekasi (Jabotabek) in West Java involving construction of about 450 km of 20 kv cables, 760 km of 20 kv

17 overhead lines, 1,336 sub-stations and 800 pole-mounted transformers, about 5,300 km of new low voltage lines and some 320,000 service connections; (b) a high-voltage (HV) system, complementary to (i) above, involving five new sub-stations in Jakarta, 46 km of doublecircuit 150 kv cables and 980 MVA of transformers; (c) engineering of the next base-load coal or multiple fired thermal power units 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. PLN-s Transmission and Distribution Program 4.03 The project forms part of PLN's development program (paras ) for the period , of which 37% (US$2.7 billion at 1980 prices) is for Transmission and Distribution. Of this about $1.4 billion is required for the short term (1982 to 1985) to meet the most urgent needs. The project is a part of this immediate program. PLN is also preparing a detailed transmission and distribution scheme for Java and major demand centers in Sumatra and Sulawesi to meet longer term needs up to The study financed by loan 1365 (the Bank's sixth lending operation to the electricity sector) will be completed by the end of These schemes are essential for achieving GOI's energy policy objectives of shifting to coal and hydro-electric resources for electricity generation (para. 1.02) and rapid electrification. Evolution of the Project 4.04 Reinforcement and expansion of the distribution system of the City of Jakarta - a densely populated (5 million) urban center covering 200 sq km - was carried out under the Bank's first two lending operations. Its completion was followed by the fifth operation (Loan 1259 of 1976) for extension of the distribution system to about 2,800 sq km of Jabotabek, which will be completed in Part (a) of the proposed project is intended to extend electricity supply to both urban and rural areas of Jabotebek's 5,700 sq km (with a population of 10 million) and represents a continuation of the Bank's development efforts in an important area of PLN's operations which accounts for about 40% of its electricity sales. In 1979 SOFRELEC of France, the engineer associated since 1970 with the rehabilitation and expansion programs mentioned above, carried out a

18 feasibility study of the requirements of the region during the period The distribution expansion component of this project (Part (a)) is based on the SOFRELEC report prepared early in SOFRELEC also pointed out the need for reinforcement of the 150 kv high voltage system in the Jabotabek region to meet the growth of demand. PLN has in the past been primarily responsible for planning and implementing schemes of high voltage system expansion and it has done this successfully using consultants only in some areas of specialization. The project component described in para. 4.02(b) is based on detailed system studies carried out by PLN and covered in its March 1981 "Report on reinforcement of the Jabotabek H.V. system during " 4.06 Part (c) of the Project is a further step in implementing the country's energy policy of utilizing coal instead of oil for electricity (para. 1.02) which began with the Suralaya Thermal Power Station project (ultimately 3,100 MW) under implementation in West Java with Bank assistance through loans 1708 and Two units, each of 400 MW, are currently under construction at Suralaya. PLN is studying the feasibility of installing a third unit of 400MW at this site by A feasibility study to establish a similar (ultimate 4000 MW capacity) site in East Java was initiated as part of the Bank-s seventh operation in the electricity sector (Loan 1513) and is now nearing completion. A site near Tuban has been chosen. The first generating set at Tuban (400 MW) is required to be commissioned in To achieve this detailed engineering has to commence early in GOI has requested Bank financing for the purpose. During negotiations an assurance was obtained from the Government that sources of coal for the next base-load coal, or multiple-fired thermal power units in Java will be identified by mid-1982, and that arrangements for mining and transport of coal required will be implemented in time for their commissioning in The first steps towards development of an effective grid system in Java at 500 kv were taken during the Bank's eighth and ninth operation. An 800 km line extending from West to Central Java is under construction, scheduled for completion during The 300 km extension to East Java is required by GOI has decided to use bilateral financing sources for construction but has requested that the Bank finance the engineering primarily to ensure uniformity in approach on the features of the EHV grid. Part (d) of the project provides for this. Assurances were obtained during negotiations that GOI and PLN will take all necessary steps to construct the Central-East Java EHV line by Cost Estimate 4.08 The project cost estimate is detailed in Annex 4 and summarized below. The cost estimate has been prepared by PLN, and is considered reasonable:

19 COST ESTIMATE (SUMMARY) Local Foreign Total Local Foreign Total Item -- (Rupiah billion) (US$ million) --- Jabotabek distribution Jabotabek high voltage system Engineering of new thermal power units Engineering of Central- East Java EHV Extension Management Consultancy Total (base cost) Contingencies Physical Price Total Project Cost Detailed bills of quantities of equipment required have been prepared and are listed in Annex 4. The basic prices have been determined from material and construction costs for ongoing transmission and distribution projects at levels prevailing in November [980. Physical contingencies of 5% have been allowed for. Price contingencies were estimated as follows: on foreign costs at 9% for FY82, 8.5% for FY83, and 7.5% for FY84 and 85; and on local cost at 18% for FY82, 14% for FY83 and 10% for FY84 and 85. Financing Plan 4.10 The financing plan for the project will be as follows: US$ million Bank Government sources and PLN Total 319.4

20 As in previous operations the Bank loan would be made to GOI which would relend the proceeds to PLN on similar terms. Signature of a subsidiary loan agreement to this effect would be a condition of effectiveness of the proposed loan. Engineering and Construction 4.11 The detailed engineering of Part (a) of the project (the distribution component) covering preparation of bid documents, evalation of bids and supervision of construction will be carried out entirely by PLN which has now acquired the necessary experience. The construction organization built up during the past few years will be adequate for this project. The milestone schedule is at Annex 5. Bid documents for the first lot of equipment have been prepared by PLN and reviewed by the Bank. No major problems are foreseen in the construction of this part of the project but progress will have to be monitored by the Bank, particularly on procurement, as PLN will be undertaking work entirely on its own for the first time. 4e12 The 150 kv high-voltage component (part (b) of the project) will be implemented by PLN with the assistance of consultants in some specialized areas as in the past (para. 4.05). The West Java Transmission Project unit was set up for PLN's ongoing construction program of 150 kv transmission lines, cables, and sub-stations (including the first two gas-insulated substations). It will be responsible for construction of Part (b) of the proiect. The unit has a dynamic experienced manager, and a nucleus of supporting staff. Preece, Cardew and Rider (PCR) of the UK now acts as the consultant to this unit. PCR started this role in 1976, when PLN drew on funds under the Bank's credit TA 451 for assistance in planning for procurement through bilateral sources, using export credits. Later, PCR's assistance was arranged through British Technical Cooperation and for supervision of construction up to end PLN has established a joint project team with PCR, including six specialists with counterpart staff and it is working satisfactorily. The same organization pattern will be used to execute the new project. PLN proposes to use PCRs services on the same lines. The Bank had no objection to this arrangement and PLN has started to mobilize the required consulting services immediately to meet the construction schedule The cost estimate for PCR-s engineering services (para. 4.12) covers 360 man-months at an average man-month cost, including basic salary, overheads and fee, international travel and overseas allowance for resident field engineers of US$10,000. It is based on rates and costs prevailing at present. 4a.4 Land is required for construction of the five new substation sites at Kebonjeruk, Karet, Senoya, Mampang and Kemang (all in Jakarta) and right of way for the cable routes. In view of its importance for timely completion of the project, acquisition of land and obtaining necessary right of way were made conditions of Board presentation.

21 In September 1981 DKI gave PLN the right of way for the cable routes and PLN acquired the new substation sites Under this project, it is proposed to carry out the work of the detailed engineering of the next base-load coal or multiple fired thermal units up to the stage of preparation of bid documents. This is estimated to require about 400 man-months of expatriate effort at a man-month cost of about US$8,000. The estimate also provides for about 128 man-months of local consultants at an average cost of about $1, PLN proposes to use consultants primarily for construction supervision of the EHV extension project. About 70 manr-months of expatriate effort will be required at a cost, inclusive of international travel and mobilization, of US$820,000. The average man-month cost is about $7,000. The local cost, including use of local consultants, is expected to be about US$200,000. Procurement 4.17 All equipment and materials to be financed from the proposed loan (other than poles for the distribution expansion project) will be procured through international competitive bidding in accordance with Bank guidelines. As some participation by Indonesian manufacturers is likely a 15% preference on the c.i.f. price, or prevailing duties, if lower, will be applicable. For economy it has been proposed that the procurement of concrete poles be arranged through local competitive bidding in accordance with GOI procedures. Adequate competition is expected from recently established and growing local industries to obtain prices which are expected to be significantly lower than the alternative of importing either steel or concrete poles under ICB. Disbursement 4.18 The Bank loan will be disbursed as follows: (a) equipment (except poles) - 100% of foreign expenditures for directly imported goods, 100% of local expenditures (ex-factory) for locally manufactured goods and 65% of the total expenditures for imported goods procured locally; (b) concrete poles - 80% of the expenditures, representing the estimated indirect foreign cost; and (c) consultants services - 100% of expenditures. The schedule of disbursement of the Bank loan is at Annex 6. It is based on the recent experience under the Fifth Power Project (Loan 1259) - a similar project.

22 The project is expected to be completed by December 1985 and the closing date for the loan would be June Ecology 4.20 No environmental problems arise in connection with the project. In congested areas the 150 kv system and the medium voltage system will be underground. The 150 kv substations will be of the compact gas-insulated type appropriate in such locations and medium-voltage transformers will be located in kiosks. In less congested areas both the medium-voltage and low voltage systems will be overground. I

23 FINANCIAL ANALYSIS Past Results 5.01 PLN's operations have expanded rapidly throughout the last decade, and energy sales tripled between 1971 and During the last five years the rate of growth accelerated; energy sales increased from 3,100 GWh in FY76 to over 6,400 GWh in FY81, and for the last three years the rate of growth has exceeded 20% per year From FY76 through FY80 PLN's tariff was held constant and its revenue grew proportionately to the growth in energy sales. In net income terms, the corporation averaged a breakeven result over this period./l A new rate schedule was introduced effective May 1, 1980 (para. 5.06) which has had the effect of lifting average revenue per kwh sold from Rp 27 to about Rp 42. On this basis net earnings of Rp 10 billion are estimated for FY81, and the interim results at midyear (available at appraisal) suggest that the estimate for the year will be achieved safely Around FY75, PLN's investment program began to accelerate rapidly from its previous low level, and since FY78 capital expenditure has been running at about twice sales revenue. With negligible net income, PLN's only sources of internal funds have been depreciation retentions and customers connection fees, which amounted to 21% of capital expenditures over the last five years. GOI provided the rest of the funds required, mainly in the form of equity capital, though since 1978 the onlending of finance from international lenders has formed an increasing proportion of GOI funding to PLN Income statements, funds flow statements and balance sheets for the last five years are at Annex 7. Present Financial Position 5.05 PLN-s estimated balance sheet at March 31, 1981 may be summarized as follows: /1 FY80 results subject to audit.

24 Rp billion Net worth Fixed assets in operation, at depreciated replacement cost 776 Construction in progress 1,229 Current assets 237 Less current liabilities 50 2,005 Net current assets 187 Total Net Worth 2,192 Financed by Capital and reserves 1,648 Customer contributions 198 Long-term debt 346 2,192 Since loan financing is a relatively recent innovation for PLN, the debt: equity ratio stands only at 17:83, which leaves the company conservatively leveraged to sustain a high level of borrowing for capital expenditure. The current ratio is 4.7, and with current assets including Rp 100 billion in cash the company's liquid position is satisfactory. The level of receivables has given some cause for concern in the past, but as a result of the adoption in 1980 of a more rigorous policy towards delinquent debtors the average length of credit has been reduced from 94 to 68 days. While still too high, this measure reflects mainly the long delay in settlement of certain public accounts; discussions are presently in progress between PLN and the concerned authorities to try to improve payment procedures. At negotiation of the Power IX Project (Loan 1872), it was agreed that GOI outstanding accounts will be reduced to two months' billing by March 31, 1982; the covenant is be repeated in the proposed loan.

25 27 Tariff 5.06 PLN's tariff comprises about 20 consumer classes. For all except the smallest domestic class, two-part charges are applied, and for industrial and the largest commercial consumers time-of-day pricing is in effect. Provision is made for a cost surcharge, variation of which requires the Minister's approval; alteration of the basic rate requires Presidential approval. When the present rate schedule was introduced in May 1980 it represented the first deliberate step towards marginal cost pricing, and the Bank was extensively consulted in its preparation. Further refinement will be necessary before this objective is fully achieved, in particular as regards the relative weighting of the demand and energy charges, which in the present structure tends to understate the effect of fixed costs on power pricing. Such adjustments will be incorporated in the next review of tariffs, expected to be called for in FY83 (para. 5.08). The power tariff is also economically inefficient insofar as it reflects the subsidized prices at which PLN buys its fuel oil (para. 1.17); this issue must be addressed in the context of GOI's overall energy pricing policy (para. 1.18). Future Financial Performance 5.07 In 1977 PLN and the Bank agreed that a level of contribution to capital expenditures from internally generated funds was suitable as a measure of financial performance. At negotiations for the Power VIII Project (Loan 1708) this was set at 30% (on a 3-year moving total basis) which was to be achieved by FY86; this agreement was repeated in the loan documents for the Power IX Project (Loan 1872) and Power X (Loan 1950). Indicative targets for the intervening years have also been the subject of discussion and revision from time to time between PLN and the Bank; the latest ones are: FY80 through 82 12% FY83 through 84 20% FY85 25% 5.08 PLN achieved a contribution rate of 20.2% in FY80 and 18.3% in FY81, thus exceeding its target for each of those years. Financial projections show that the target for FY82 can also be comfortably met (a rate of 17.9% is forecast) without any increase in average revenue per kwh sold. A tariff change is therefore not anticipated during this year, especially in view of GOI's declaration in its FY82 budget statement that energy prices should be held stable for the year. However, achievement of the indicative targets for FY83-85 and the covenanted level for FY86 will require an increase in PLN's tariff estimated to average 20% in real terms. In the financial forecasts, this has been assumed to become effective towards the middle of FY83.

26 Around 1986, PLN is expected to enter a period in which its unit costs will decline gradually (1-2% per year) in real terms. The factors contributing to this include, in particular: (a) the expected impact of the loss reduction program; (b) increased efficiency of operation in Java on completion of the EHV transmission line; and (c) increasing economy of operation in some of the systems outside Java as a result of scale. These considerations suggest that for the remainder of the 1980s, PLN's requirements for increased unit revenues can be secured by use of the surcharge, and that average revenues may therefore be allowed to advance at rather less than the rate of cost inflation without prejudice to the achievement of the target contributions to capital expenditure. In terms of operating income, this would represent a rate of return (on fully revalued net fixed assets in operation) of around 8%. Forecast financial results of PLN for FY82 through FY87 are at Annex 8. Financing Plan 5.10 According to its constitution, PLN is authorized to borrow from local and foreign lenders, and to issue its own obligations. In practice, the remainder of PLN's investment program which is not financed from internal cash generation is presently funded exclusively by GOI. Local currency expenditures are customarily reimbursed to PLN in the form of equity contributions; foreign exchange expenditures have been funded partly as equity and (increasingly) partly by the onlending on similar terms of finance secured by GOI from overseas lenders. These arrangements have generally worked well enough in the past, but with the increasing scale of PLN's funding needs (para. 2.13), a number of aspects are beginning to give cause for concern. The most important are summarized below, together with the measures which are now proposed to address them The project budgeting (DIP) system through which PLN obtains its capital funds from GOI involves approval of expenditures on a project-byproject basis in advance of the beginning of each fiscal year. Two important features of this system are that the insertion of new projects during the year, and the redeployment of funds from one project to another, while technically permissible are in practice difficult and time-consuming. PLN's flexibility to deal with unforeseen contingencies and to accommodate divergencies between planned and actual project progress, is to this extent constrained. This constraint has contributed to the underspending of capital budgets which has occurred regularly in past years. To overcome it,

27 PLN has built up a liquid position (currently about Rp 100 billion) which it intends to use in part to cover any hiatus that might occur in project progress as a result of DIP constraints. PLN is considering augmenting its available funds for this purpose through occasional bond issues on the recently-established Indonesian capital market With the assistance of Bank personnel PLN has recently developed a capability for financial forecastinig using computer models. However, this system does not at present interface with the development program planning system (para. 2.08), nor is the development program routinely tested for financial feasibility. PLN's investment program is now of such a size that its financial implications must be reviewed with equal care with the technical and economic considerations, and a judgment made of the feasibility of the proposed investment in terms of the requirement for capital funds, and the level of revenues necessary to meet associated operating costs PLN then needs to develop a financing strategy which will give it the greatest assurance of the availability of funds for its capital program. GOIs commitment of funds is limited to the fiscal year's budget, whereas the lead time for many of PLN's projects is 4-6 years and its overall investment planning period is 10 years. In consultation with the Bank, PLN is currently engaged in an exploration of the extent to which it could prudently increase its debt: equity ratio over the next few years. Once this exploration is complete, and a system of financial forecasting and evaluation is integrated into the planning process, PLN will be in a position to draw up a financing plan which should form the basis of agreement on medium-term financing strategy between PLN and GOI At negotiations, assurances were therefore obtained: (a) from PLN that it will: (i) institute as part of its annual planning procedures for FY83 and subsequent years, the preparation of a 10-year financial forecast based on its proposed development plan; (ii) test each proposed development plan for financial feasibility; (iii) develop a financing plan covering the first 5 years of the forecast period which will specify the quantum of external funding and the appropriate mix of equity and debt, and, to the extent possible, identify potential sources of the latter;

28 (iv) ensure that its recommended development plan and associated financial forecast and financing plan are jointly reviewed and adopted by its board, and provided to and discussed with GOI and the Bank; (b) from GOI, that it will review with PLN its development plan and associated financing plan, and take appropriate measures to facilitate access by PLN to the sources of finance it requires. 6. JUSTIFICATION 6.01 The distribution system in Jabotabek presently comprises the old 12 kv system in Jakarta and the 6 kv system of Bogor, and the newer 20 kv systems developed through the Bank-s first, second and fifth operations in the electricity sector. The total installed capacity of these substations early in 1980 was about 1056 MVA, which includes 230 MVA of the old system. The peak load on the system was about 530 MVA. Assuming a diversity factor of 1.3 and 80% loading the maximum capability of the system is estimated at 650 MVA On completion of the fifth power project (Loan 1259) the total installed capacity of the Jabotabek distribution system will be about 1640 MVA in 1982 and the corresponding system capability will be about 1010 MVA. The review of the growth of demand carried out by SOFRELEC during its feasibility study indicates that the peak demand on the system would be about 1000 MVA by the end of Thus, unless additional substation equipment is installed and energized, the Jabotabek system will be subject to overloading in 1983, with all the consequences which have hampered growth of public electricity supply in the past. Studies have established that approximately 300 MVA of new capacity will have to be added in 1983 and about 700S MVA in to meet the expected growth of demand in the area The system capability analysis described above includes the capacity of the older. 12 kv and 6 kv networks. On these, losses are heavy and reliability is poor. SOFRELEC had recommended that these networks be eliminated by This project will not however attempt to do so as it was felt that these systems could be useful at reduced loadings for a few more years, and that extension of service to new areas deserves higher priority in the use of restricted finances. The question would be reviewed during the ongoing comprehensive study of overall transmission and distribution requirements of Java and main demand centers in other islands (para. 4.03) and, if justified, adequate provisions could be made for the

29 purpose under the next Bank operation scheduled for FY83 which will also cover PLN's transmission and distribution requirements Proposals for reinforcement of the 150 kv high voltage system to meet the additional demands of the Jabotabek area have been finalized after carrying out power flow studies and considering available alternatives which narrowed down to two. The proposed project component was chosen because of marginally lower costs and greater flexibility for future expansion. The proposed sub-station capacity of about 980 MVA is consistent with the expansion program of the distribution system. Economic Rate of Return 6.05 In projects involving transmission and distribution networks where it is usually difficult to assess the benefits attributable to the expansion programs, and where the schemes represent an area and time slice of a total development program, it is customary not to attempt a separate economic analysis, and to utilize instead the economic rate of return of the entire program. In the case of the Jabotabek transmission and distributiion project, PLN and SOFRELEC have made an analysis of the supply situation with and without the project and have established that PLN's sales would increase by about 700 GWh in 1984 to about 3000 GWh in 1990 and beyond. On the basis of these, and other assumptions set out in Annex 10, the economic rate of return has been calculated as at least 18%. It is a minimum measure of the benefits as PLN's revenues have been used as a proxy for benefits and consumer surpluses have been ignored. Risks 6.06 There are no risks of any significance associated with this transmission and distribution project. 7. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS 7.01 Earlier covenants with GOI and PLN which were consolidated in the loan documents of Power Ten (Loan 1950) - except those which were projectspecific - will be repeated in the documents for the proposed loan. Specific new agreements reached during negotiations of the proposed loan are: (a) Government agreed: (i) to take all necessary steps to ensure adherence to the project construction schedule (para. 3.03);

30 (ii) that sources of coal for the next base-load coal or multiple-fired power units will be identified by mid-1982 and that arrangements for mining and transport of coal required will be implemented in time for commissioning of these units in 1987 (para. 4.06); (iii) to review PLN's medium-term financing plan in association with its development plan, and facilitate access by PLN to appropriate sources of finance (para. 5.14); (b) Government and PLN agreed that they will take all necessary steps to construct the Central-East Java EHV line by 1985 (para. 4.07); (c) PLN agreed: (i) that it will institute financial forecasting as part of the annual planning process, and test its development plans for financial feasibility; (ii) that it will prepare each year a five-year financing plan for review by GOI and the Bank (para. 5.14) Execution of a subsidiary loan agreement between GOI and PLN will be a condition of effectiveness Agreement having been reached on the above, the project forms a suitable basis for a loan of $170.0 million to GOI for a period of 20 years, including 5 years of grace, at interest rates prevailing at Board presentation.

31 INDONESIA ELEVENTH POWER PORJECT ORGANIZATION CHART OF THE MINISTRY OF MINES AND ENERGY Minirter and it Mines Energy f P- Canvron C obtreari Ba zreau D-I.P-~~~~~~~~~~~x O Breau r C urearu Inriractorate Innpectorate - ; toae Iscore r Inptooe Planning Personnel Finance Foreign Coop Le sal Affairs Afea Personnel l Finncel & LigiStiaC S Develnomerir Projects Deaelnpme.nr Projects Directfirron Genneral of Mines l retrt eea o 1 dgs ll zcoaegnrl o e czl o(o u+ron= lt 1 ~~~~D;rec Mirres tnr rate D:rnr3c'.r-t nlgi lifnra, D vidrectorar0 rec sit e Direct ) orate Gi Tl and Dtas Direcinrate Directorate of Dealoomat of ocano ot Mirnralmenia Daveopar-t, DD-ooritDi nodn Pplrrnoo ilar of Miin lot 1 Reo n Geoog Centr Cente a ri Prodaciotn Gas ladusirres rv rorc e tdey orirer of PowEn erp 3 Fregisral Dfticns of The Department if Mines and Energy Stare Enterprises P N. Batobara PT Tiar P T A-reka Ta-bang Pertacina PLN PGN ICpal l Tin I General Mining) D i and Gai) L ce rsctrjl Utilty <.aol W-isld B.nk ~21988

32 7] 77 [ m r' 7 FT1 mo 0 0 o5 0 0-, r , -0 COO - 0 oc -n 0 00 le, -0 C o0 < , L j 0 Li C) C) 0 O Cm 0 CO os 00 = s- 0- '3 0 B o H C-c, CC 0 C 0 CO t-p 0 CO 0 CC - 00 C- C -p 0 0 z c,- _ - -o mo -v B or 0-- oz COZ ; - 02 o? -. - CO 2 B' - 00 CCCB CO Co EOW _ 7m 0 OLD CO 0 S 0< ' _ T0< < o ci- Zm) x CO -, 0 0 S TO,,- ci C ci 0- Z -. CD 0±1 C.C 0 I--,

33 ANNEX 3 Page 1 INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA Sugested Terms of Reference for Management Consulting Assistance 1. Perusahaan Umum Listrik Negara (PLN), the state electric enterprise of Indonesia, wishes to retain the services of a suitably qualified consultant to assist with the development of certain aspects of its accounting, budgeting and management information systems. The need for these developments has arisen partly as a result of the growth in scale and geographical distribution of the corporation's operations, which now require the updating of certain of its systems, and partly through the evolution of its management structure, which calls for a review of the financial reporting and control' arrangements. A brief description of the corporation and its operations is attached to these terms of reference;/1 a statement of the responsibilities of the various levels and locations of management will be provided to the consultant at the beginning of the assignment. 2. Consultants retained by the Government of Indonesia are already working on the design of an overall MIS for the power sector in Indonesia, of which PLN forms an important part. The consultant appointed for the assignment described in these terms of reference will be expected to familiarize himself with the recommendations of this consultant to the extent they affect his work. Objectives of the Assignment 3. The principal objectives of the assignment are to: (a) speedup the preparation of annual and interim financial statements; (b) improve financial control of certain aspects of PLN's operations, including in particular capital project expenditures and Wilayah operating results; and /1 To be provided by PLN.

34 -36 - ANNEX 3 Page 2 (c) ensure that financial reports provided to managers are appropriate to their needs and focussed on matters requiring their attention. Preparation of Accounts 4. Under the present arrangements, Wilayahs report their trial balances to Pusat each month. Corporate financial statements are prepared from detailed consolidations performed at Pusat. This procedure has now become too cumbersome and time consuming, and is complicated by the difficulty of achieving a clean cutoff of data at closings and consequential problems in reconciling inter-office current accounts. The consultant is required to recommend a way of shortening and simplifying the task of financial closing, with the goal that financial statements (for each Wilayah and for PLN as a whole) should be available within [4 weeks at interim closings and 8 weeks at the yearend]. It is recognized that staff constraints may preclude the immediate adoption of the recommended solution throughout all Wilayahs, but implementation should be effected in at least [one] Wilayah and a program developed for implementation in the others. Financial Control 5. Currently the principal instrument of financial control is the annual budget. However, with the growth of the corporation the maintenance of budgetary control by Pusat in the present amount of detail has become cumbersome, and is beset by the same kind of administrative difficulties as accounting. In addition, PLN's management now wishes to supplement the budgeting system with additional controls which will focus on key aspects of financial performance. The consultant is required to assist management to develop and refine the financial control system so that: (a) budgets are prepared, maintained, and updated in the degree of detail, and at the location, most appropriate to the maintenance of effective control; (b) performance indicators are established for each responsibility center to measure the effectiveness of that center in achieving its objectives under the corporate plan, and are monitored and reported to the appropriate levels of management. 6. The control of construction projects presents particular problems. The present accounting system does not readily permit the allocation of expenditures to individual projects; as a result, expenditure control, reforecasting of cost to completion, and determination of values to be capitalized and depreciated, have become difficult and are effected largely

35 ANNEX 3 Page 3 outside the accounting system. It is desired that these (and related) functions should be integrated with the accounting system and carried out under proper accounting controls to the extent possible. In this connection it should be noted that PLN has retained consultants under separate contract to assist with the improvement of construction management in general; the consultant appointed under these TOR will be required to maintain close liaison with that consultant, and will be invited to participate in the formulation of his recommendations on those aspects of his assignment which interfce with the accounting, budgeting and management information systems. Reporting 7. The consultant should review the system of financial reporting in PLN and prepare proposals for improvement. His proposals will take into account the statements of management responsibility provided to him at the beginning of the assignment, the structure of performance indicators proposed, and the enhanced reporting capability of the accounting system. The following basic principles should guide the formulation of reporting requirements: (a) reports should be accurte and presented in a timely manner; (b) they should reflect a level of detail appropriate to the recipient; (c) they should focus on matters of concern to the recipient, and indicate clearly those on which decision or action is required; (d) budgets, plans and forecasts should be revised when significant events make realization of the current ones unrealistic. 8. In the context of reviewing the accounting, budgeting and financial reporting systems the consultant is required to comment on the adequacy of the present arrangements for recording and transmitting data within PLN. Detailed evaluation of computer hardware and software is not required at this stage, but the consultant will be expected to indicate clearly the nature of any system changes which seem to him to be necessary, and indicate order-ofmagnitude cost involved in implementing them. Scope of Work 9. In all the above aspects of the assignment, the consultant is required to: (a) investigate the existing arrangements;

36 ANNEX 3 Page 4 (b) develop proposals for improvement consistent with the objectives described above; (c) implement the accepted proposals, including where appropriate, the design of forms and reports, specification of coding systems/charts of accounts, and preparation of procedure manuals or instructions; (d) train the concerned staff - accounting and other - in revised procedures, and make managers fully conversant with the form, content, purpose and use of any new reports. 10. The implementation requirement is subject to the limitations mentioned above for Wilayah accounting arrangements, and for computer hardware and software. Assignment Organization il. PLN will appoint [a senior financial manager] to be principally responsible for providing a formal channel of communictions with PLN's top management and coordination with other consultants working on related assignments, to provide the consultant with technical briefing, to articulate PLN's responses to the consultant's recommendations, and to provide logistical support to the consultant at the working level. Details of day-to-day working arrangements will be worked out when the assignment commences. Timetable and Reports 12. It is envisaged that work on the accounting system, budeting systems and management reporting will be carried out largely in parallel, and on this basis an elapsed time of not more than 12 months is allowed for the assignment. 13. The key reporting dates envisaged during the assignment are as follows: end fourth month: proposed changes to (a) accounting system (b) budgeting system end fifth month: proposed system of financial control and structure of reports end eighth month: recommendations on data storage, transmission and processing.

37 ANNEX 3 Page A period of review and consultation will follow the submission of each of these reports, in which PLN will decide on the recommendations to be adopted for implementation. In the case of accounting, budgeting and financial reporting, implementation and training will be completed within the overall assignment time limit. Written material ancillary to implementation (procedures, manuals, etc.) are to be completed by the consultant during that time.

38 ANNEX 4 Page 1 INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA ELEVENTr POWER PROJECT Bills of Quantities and Project Cost Estimate 1. The following table summarizes the bill of quantities for the Jabotabek distribution system expansion. Medium Voltage (20 kv) Network Urban Rural Total Insulated cables km Main overhead lines km Branch overhead lines km Sectionalizing switches units Switching stations units Sub-stations Substations units 1, ,022 Transformers (250/400/630 kva) units 1, ,022 Pole-mounted transformers units Private sub-stations units Raiser poles and cables units 3,562-3,562 Low Voltage Network Rehabilitation of existing lines km New Twisted-cable lines km 2,888 2,340 5,228 Poles units 74,500 56, ,850 Underground cables km Service Entrances Service drops units 247,232 68, ,232 Customer panels units 249,332 68, ,332 Single phase meters units 200,304 68,000 68,000 Three phase meters units 49, ,028 Voltage changeover units 18, ,600

39 ANNEX 4 Page 2 2. The Jabotabek High Voltage system expansion program for comprises construction of five new substations at Kebonjeruk, Karet, Senayan, Mampang and Kemang and extension to 12 others, with the following equipment requirements. (i) 150 kv underground cable - 46 km of dou-ble circuits comprising: (a) duri Kosambi to Kebonjeruk - 11 km (b) Kebonjeruk to Karet - 7 km (c) Petukangan to Senayan - 12 km (d) Senayan to Mampang - 5 km (e) Candul to Kemang - 11 km (ii) 150 kv line bays units 20 (iii) 150 kv bus couplers units 5 (iv) 150 kv transformer bays units 19 (v) 150/20 kv transformers units 14; total 750 MVA) (vi) 70/20 kv transformers units 10; total 230 MVA) (vii) 70 kv transformer bays units 10 (viii) 20 kv switchgear units 292 (ix) 70 kv bus coupler units 1 (x) Communication and control units 5

40 ANNEX 4 Page 3 3. COST ESTIMATE FOR JABOTABEK DISTRIBUTION SYSTEM EXTENSIONS Medium Voltage Network Local Foreign Total Insulated cables Main overhead lines Branch overhead lines Branch overhead lines - rural Sectionalizing switches Sectionalizing switches - rural Switching stations Subtotal Substations New substations Transformers (250/400/630 kva) Pole-mounted transformers Pole-mounted transformers - rural Private substations Raiser poles and cables Subtotal Low Voltage Network Rehabilitation exiting lines Twisted cable lines Twisted cable lines - rural Poles Poles - rural Underground cables Subtotal Service Entrances, Meters, etc. Service drops Service drops - rural Customer panels Customer panels - rural Single phase meters Single phase meters - rural Three phase meters Voltage change-over Subtotal

41 ANNEX 4 Page 4 Sea freight and insurance Land acquisition Local handling Engineering Administration Construction equipment Total Base Cost Contingencies Physical Price ' Total Cost COST ESTIMATE OF THE JABOTABEK HIGH VOLTAGE SYSTEM EXTENSIONS (US$ millions)- 1. Equipment Local Foreign Total 150 kv underground cables kv line bays kv bus couplers kv transformer bays kv/20 kv transformers kv/20 kv transformers kv transformer bays kv switch gear kv bus couplers Subtotal Sea freight and insurance Land acquisition/substation building Local handling Engineering Administration Total base cost Contingencies Physical Price Total

42 ANNEX 5(i) INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA ELEVENTH POWER PROJECT JABOTABEK 11 DISTRIBUTION SYSTEM IMPLEMENTATION PROGRAM ACTIVITY DESCRIPTIONI T ADVERT. JABOTABEK If LOT I 02. BID JSSUANCE LOT IH 03. BID OPENING LOT I DETAIL STUDY LOT I a LAND AQ. & RO.W. I/LOT I 06. LAND AQ. & R.O.W. II/LOT I 07 LAND AC. & RO.W. Illi/LOT I 08. CONTRACT SIGNING LOT I I 09. DELIVERY BATCH I/LCT I a DELIVERY BATCH Il/LOT I ll DELIVERY BATCH III/LOT I 12 T.O.C LOT I 13. ERECTION BATCH I/LOT I 14. ERECTION BATCH!Il/LOT I _ 15. ERECTION BATCH Ill/LOT I 16. RETENTION MONEY LOT I 17. COMMISSIONING I/LOT I 18. COMMISSIONING Il/LOT I 19. COMMISSIONING III/LOT I 20. ADVERT. JABOTABEK 11 LOT BID ISSUANCE LOT II 22. BID OPENING LOT II :23. DETAIL STUDY LOT II 24. LAND AQ. & R.O.W. I/LOT II 25. LAND AG. & R.O.W. Il/LOT II 26. LAND AQ. & R.O.W. Ilt/LOT CONTRACT SIGNING LOT II 28. DELIVERY BATCH I/LOT DELIVERY BATCH II/LOT II 30. DELIVERY BATCH III/LOT II 31. T.O.C. L.OT ERECTION BATCH I/LOT If 33. ERECTION BATCH II/LOT II 34. ERECTION BATCH III/LOT II 35. RETENTION MONEY LOT II 36. COMMISSIONING I/LOT COMMISSIONING I/LOT li 33. COMMISSIONING Hl/LOT 11 World Bank 22860

43 ANNEX 5 (ii) INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA ELEVENTH POWER PROJECT Milestone Schedule for Jabotabek Distribution Project LOT I LOT II Issue for bid 15 July Dec. 82 Detailed design 01 Sept Feb. 83 Bid opening 15 Oct Apr. 83 Land acquisition 01 Nov Apr. 83 Contract signing 01 Mar Aug. 83 Begin delivery 01 Dec Apr. 84 Begin erection 01 Feb May 84 Complete erection 01 Oct Nov. 85

44 INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA ELEVENTH POWER PROJECT IMPLEMENTATION SCHEDULE OF THE JABOTABEK 150/70kV TRANSMISSION PROJECT LOT YEAR No. ITEM j- NQUIPMENT E QUARTER M Q EQUIPMENT Preparation of Tender Documents Tender Prep. IBRD Approval and Specifications7 1 SWIt 1CHGEAR Tender Call SEKNEG L/C Eval. Neg'n Design, Manufacture and Delivery Outdoor 150KV an and... Installation 79kV Ssvitchiyear T Indoor 150KV First Substation ~~~~~~~~~~~~~~~Design, Mariufacture and Delivery Indoor 180KV 2 1 Switchgear Installation and Testno l l l l 7;7 ~~~~~~~~~~~~T T _ Suirs LstSusatiori 20kV Switchgear Design, Manufacture and Delivery _r_i. l ml - T ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Installation and Testing I1 2 TRANSFORMERS Tender Call Eva SEKN First t a ti ont Sbs TRANSFORMER iiioaa I,t..l.t.L. L. i W. N -=. I I.. Test ng / / T l l ~~~~~~~~~~~Installation and Testing 3 CAB LES T~~~~~~~~~~~~~~endpr call SEKNEG LUC -Fl 7btatio) 3 CAB LES.. e. Neg'n Design, manufacture and delivery P ~~~~~~ -E ~ R V F 1 - I M I NI I In sta lla tio n a n d T e stin g I PREl_IMINARY SIT-EWORK Obtain Cable RouteCabJe Route ~~~~~Select DKI Permnits Substation Sites Now SelectPLrcse Soil Invest. Existing Soil Invest. Civil Design and Testder Peaair CIVI L WORKS vilw '5' First Site TC nd- Call E.r t-tioa Cl.-I,IUCt Ci [ast Site ConstI oct on r B j j Te~~~~~~~~~~~~~~~~~~~~~~~~~~nder CalEva _ WVorld Bank H

45 ANNEX 5 (iv) INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA ELEVENTH POWER PROJECT Milestone Schedule for Jabotabek 150/70 kv Transmission Project Switchgear Transformers Cables Issue for bid 01 Oct Oct Oct 1981 Bid opening 07 Jan Jan Jan 1981 Latest date evaluation 06 Mar Mar Mar 1982 complete Latest date GOV. 06 May May May 1982 (SEKNEG) approval Latest date of issue 05 Jun Jun Jun 1982 IBRD approval Latest date of issue 12 Jun Jun Jun 1982 letter of intent to negotiate Latest date contract 17 July July July 1982 award Date letter of credit 17 Sep Sep Sep 1982 opened Starting date begin 17 Sep July Jun 1983 shipment (FOB) Complete shipment 31 Oct Oct Jun 1984 (at site) Begin installation 01 Oct Oct Mar 1983 Commercial operation - 31 Dec Dec Dec 1983 first site Commercial operation - 28 Feb Feb Feb 1985 last site (Project complete)

46 ANNEX 6 INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA ELEVENTH POWER PROJECT Estimated Schedule of Disbursements IBRD Quarter Disbursement Cumulative disbursement Fiscal Year ending during quarter at the end of quarter FY82 03/31/ /30/ FY83 09/30/ /31/ /31/ /30/ FY84 09/30/ /31/ /31/ /30/ FY85 09/30/ /30/ /31/ /30/

47 INDONESIA PERUSAHAAN UMUJM LISTRIK NEGARA PAST FINANCIAL RESULTS INCOME STATEMENTS (Rupiah, Billions) Years ended March / Sales Increase % Energy Sales (GWh) Average Price/kWh Energy Revenue Other Operating Revenue Other Income Net Total Revenue Operating Expenses Fuel Operations Depreciation Total Expenses Operating Income Interest IDC Charged to Operation Net Income Rate Base / 734 Rate of Return % Operating Ratio % / Subject to Auditz 2/ Revalued Assets 3/ Estimated 0

48 INDONESIA PERUSAHAAN UMUM LTSTRIK NEGARA PAST FINANCIAL RESULTS FUNDS FLOW STATEMENTS (Rupiah, Billions), Years ended March / 19812/ Internal Sources of Funds Operating Income Depreciation and other non-cash charges to income Consumers Contributions Total Internal Funds Operational Requirements Variation Working Capital Interest Charge to Op 1 Debt Repayment 1 Total Operational Requirements Internal Funds Available for Investment Total Capital Investment Balance to be financed Financed by Borrowings Equity Total Capital Sources Cash Increase/Decrease Cash at beginning of year Cash at year end Annual Contribution To Construction Year Average / Subject to Audit 2/ Estimated

49 INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA PAST FINANCIAL RESULTS BALANCE SHEETS (Rupiah, Billions) As at March / 19813/ Assets Fixed Assets Plant in Service / 881 Less Depreciation Operating Plant Work in Progress ,229 Current Assets Cash Inventories Receivables Other Current Assets n Total Total Assets ,247 1,736 2,242 Equity and Liabilities Capital and Reserves ,013 1,354 1,648 Retained Earnings Total Equity ,018 1,344 1,648 Long Term Debt Other Long Term Liabilities Current Liabilities Consumers Contributions Total Equity and Liabilities ,247 1,736 %m Debt % of Debt + Equity Current Ratio * 1/ Subject to Audit 2/ After Revaluation 3/ Estimated

50 ~~~~~~~~~ANNTEX 8 Page I o f 3 ITNDU!N S I A PFRlJ.SAFHAAN Ut1t1M I 1STkiIK NE(UARA F IThAfCIA1. F Jfkif ASTS I19H lnutime STAIEYt.NT ( jf!jiahv billjwins) 19R2 ~ ~~~~ r!i )I l9b7 SALES INt:4.AbE <J.o 2 R3 A Id 9,e 1 9,rD7 18,( )5 ENiFRrY SALLS(CG-.X1) 7 o t,? 9e7( (1 tod lfD AVF PRIrF /KNH 42.8'4f,2 t). j,1qttt bb.t)3?r2 tb. 7h)l c h.6076 ENF RGY PF Ve NE 3* ihs 7 81'C 9_se S51 3 COTH84 tip PEVFNOt I 2? Z 3 14 nt,,ifr l1wf NET O111 I " 7 a l R E V E I\J J t S 3 -j s 9 7 cj 7 7 bz91z O I S/ 1 8 np Fw'ATJN r. >fsf FLJFI /t.l')l P1WE4 1 d t) ZQ o00 n P E RA T r(in ' b Z (I DF P KF L IA T II 40 1) 1 tij Zv) e TH[TAI, V XePFNSE3S b3-54 ans s I3 nlpfqattnfs INCf)F j r Li106 NE T I NCO)Pt 6t f (RF - VIJTQERST 1(1 I9 22( I N T R E ST 3z 09 9)4 1Z F7 IDC P2 46 h4 9tJ CH/9~Gt npekati(ins tu (I q 7Z4 115 NET INCt,leF I oq I Q 1 9Z RETAINED) FA;IMJ6$I e Ih q9i e9?44 3 0t RATE BASF 7 1 I 1? i4829 RATE (3F' pe TI-IRNi \ a ' 8. (]PEPjkTTN(-, 1ATIll% 9.17 o V)

51 ANNEX 8 Page 2 of 3 INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA FINANCIAL FORECASTS FUNDS FLOW STATEMENT RUPIAH# BILLIUNS) A b 1987 TUTAL INTERNAL SOJURCES - OF FUNrS OPERATING INCOME DEPRECIATIUN b t 203 2b CONSUMEfS CCINTBNS Hi TOTAL INTERNAL - tunhs S OPERATIONAL - REQUIREMENrS INCREASE/DECREASE - working CAPITAL S6 269 INTEREST CHARGED - OPERATTIINS DE8T REPAYMENT TOTAL OPFRATIONAL - REQUIRFMENTS loo INTERNAL FUNDS = AVAILABLE FOR - INVESTmENT S CAPITAL INVESTMENT TOTAL COTNSTRUCTIUN 70B b971 INTERFST DURING - CONSTKUCIC)N TOTAL CAPITAL - INVESTMENT BALANCE TO BIE - PINANCFD FINANCED BY BGRROWINGS b EQUITY TOTAL CAPITAL - SOURCEs n 8$8 840 loib CASH INCREASE/ - DECPEASE _4-28 P5 12 3b CASH AT BEGINNING - OF YEAR CASH AT YEAR END q ANNUAL DEB T SERVICE - COVERAGE ANNUAL CONTBN - TO CONSTRUCTION , YEAR AVERAGE % (F) YEAR AVERAGE % (P) ?

52 ANNEX 8 Page 3 of 3 INDONESIA PFRUSAHAAN UMUM LISTRIK NEGARA FINANCIAL forecasts BALANCE SHEETS RUPIAbH, billiuns) 1982 t9a IY ASS E75 FIXED ASSETS PLANT IN SERVICE bo LfeSS: DEpRECIATION OPERATING PLANT t WORK IN PROGRESS CURRENT assets CASH cb INVENTORIES RECEIVABLES OTHER CURP ASSET 26 3Z l'otal T3OTAL ASsETS o E4UIIY AND LIABILITIES EQ:UITY PAID IN CAPITAL RETAINED EARNINGS 0 1b t098 REVALUATTON RESRVE TOTAL EQUI T Y e 6827 LONG TERM DE8T DEST DuE CURNENT LIABILITIES PA\\AA5LES bb TJTAL F CONSUMEPS CONTSNS o TOTAL EtUITY AND LIA81LTTIES 2921 o b630 82bd =:==s_== :=_= ~ =::_=zs- =_5r 2-:=-: s-== DiC8T % NF - DEBT + EQUITY d CURRENT RATIO

53 ANNEX 9 Page 1 INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA Assumptions for the Financial Forecasts General 1. Period of the Forecasts is through FY87. The latest investment program of PLN does not (as in previous years) include global estimates of expenditures to be undertaken in the late 1980s in respect of projects to be completed in the 1990s and which have not thus far been costed in detail. Therefore, financial forecasts for years oeyond FY87 would be misleading by virtue of the understatement of capital expenditures. 2. Inflation has been taken into account at the following rates (%): CY Offshore costs Local costs (exc. fuel) Fuel costs Income Statements 3. Revenues assume a tariff increase of approximately 60% (20% in real terms) in FY83. Thereafter use of the surcharge facility is assumed to maintain a self-financing ratio above 30% for the rest of the period. 4. Fuel/Bulk Power is derived directly from the planting schedule. Power produced at geothermal plants is assumed to be bought by PLN from the agency responsible for generating it. 5. Operating Expenses have been forecast in detail taking into account the facilities expected to be in use each year, and subject to local cost inflation indices as at 2 above. 6. Depreciation is based on the application of PLN's normal rates to assets revalued annually as described at para. 9.

54 ANNEX 9 Page 2 Funds Flow 7. Financing. Borrowing has been assumed for 50% of the foreign exchange component of capital expenditures, except where loan agreements with international agencies require a higher proportion of foreign exchange costs to be financed as debt. Assumed terms on future borrowings are 9% for 19 years, including 4 years grace. Remaining foreign exchange and all local capital expenditures (after deducting internal cash generation) are assumed financed by equity contribution. 8. Capital Expenditures exclude geothermal generating plants, which are assumed to be constructed and operated by another agency. Balance Sheet 9. Fixed Assets are revalued annually according to the following assumed indices: FY FY Thereafter

55 ANNEX 10 INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA ELEVENTH POWER PROJECT Cost and Benefit Streams for Internal Economic Rate of Return Calculations (US$ million) Incremental Costs revenues For- Domes- Gener- Sales Reve- Benefits Year eign /a tic /b O&M /c ation /d Total (Gwh) nue /e (net) , , , , , , /a Shadow price 1.0. /b Composite labor conversion factor of 0.8 applied. /c Transmission and distribution costs assumed at 1% of capital investment. Id PLN's generation costs including investment costs calculated at prices, assuming a mix of 60% thermal, 30% hydro and 10% gas turbine/diesel (which approximates the mix at that time) and international fuel prices, which works out to be about 6.3 US per kwh. /e Based on PLN's prevailing tariff structure, adjusted for international fuel prices, which works out to about 9.0 US per kwh. _f For further details reference may be made to project files.

56 ANNEX 11 INDONESIA PERUSAHAAN UMUM LISTRIK NEGARA ELEVENTH POWER PROJECT Information Available in the Project File A. Reports on the Sector 1. IBRD Appraisal Reports PU 18(a) of 1969 PU 95 of (a)-IND of IND of (b)-IND of (a)-IND of (a)-IND of IND of IND of IND of Java System Development Plan by Preece, Cardew and Rider (PCR) UK: 1975/76 3. Legislation affecting PLN 1972, 1979, Final Accounts of PLN through FY79 and Draft A/Cs, FY80 5. Audit Reports of PLN through FY79 6. Financial forecasts and working papers 7. Mangement Audit Report, S. Parman & Co., October 1979 October 1979 B. Reports on the Project 1. Feasibility Study of the Jakarta Distribution System (Stage I) Period ( ), Vols. I and II, by SOFRELEC of France February Java Power System Development ( ) by ENEX Power Consultants of New Zealand October Report on Jabotabek II Distribution System ( ) by PLN, PUSAT March Report on Reinforcement of Jabotabek HV System Period ( ) by PLN PUSAT March 1981

57 s M.G ~~15-IBRD "0 2' ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~INDONESIA GENERATING FACILITIES BY AREAS & R2 '0;3E5:}THAI 02APID 1'3 1'5 0 aoi?z5x v'i1 ' 000 ' 3 0' ' F195 djrd' i0e4 : ::<r_ wg. wphilppne PUBLIC 3O L't CAion S '-o BRJIJE \ E 4g;g 'H76N AS 7 S A9 n CJ; L. _ 650 r5t sl.f MW0020 d 2.6 C 196r XIAA OATR K \71 02;S61L5s,Ui 00 ~ / r>> ixj ' bo3e _ >ANGAPOF -7J <t /, 1 TOT6L i STA00, 00. Oo 55WAAvil oo ~ ~ ~ ~~~~~~~~~ u30005g pdtsta 19 Alot A r ;., a') I~ -' 0OAoA5AHEVA P o c fi / /)- C0, 0 I t z ln 5VLA 0 0 5' A T -- - I L.* '- I N C - F 000 VA_A--HERA,/ WS X '/ - /; oor 50LAW~~~~Sl C K Al ~~~~~~~~~~~ P A Nu L ng I~~ A, NY /M /6nkotekr *0ool 0a0o * _ soocij /is 2 I -, I -. JAKAROOTA ayo 4ML, _ * ' 0XE! o FlnFfS s ;;2i<_0, 0.00, ' r n80 l0 a doo S a ,04 AL5 '! 1O3_ - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ - *o ~ tm JAV -' =29t PsMrE ' 002 O05oooO0 ~ ~ ~ ~ ~ ~ ~ I 21 II II0II - III 101- im, "W 12V~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~01,