a Second Shipping Project FILE COPY

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1 Public Disclosure Authorized Public Disclosure Authorized Report No. 982a-IND Indonesia: Appraisal of a Second Shipping Project FILE COPY April 15, 1976 Transportation Division East Asia and Pacific Region FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank 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 Units = Rupiah (Rp) Rp 1.0 = US$ Rp 415 = US$1.00 Rp 1,000,000 US$2,410 WEIGHTS AND MEASURES 1 metric ton (t) = 1,000 kilograms (kg) 1 kilogram (kg) = pounds (lb) 1 kilometer (km) =.62 statute mile 1 knot = kilometer per hour (km/h) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BAPINDO - Bank Pembangunan Indonesia (State Development Bank) BAPPENAS - National Planning Council BIMCO - Baltic and International Maritime Conference BKI - Biro Klasifikasi Indonesia (Indonesian Classification Bureau) DOC - Department of Communications DWT - Deadweight tons; approximate cargo capacity in tons CL - Germanischer Lloyd, a classification society LMCO - Inter-governmental Maritime Consultative Organization INSA - Indonesian National Shipowners Association LTFD - Long-Term Fleet Development Study MCD - Maritime Credit Department (in BAPINDO) NORAD - Norwegian Agency for International Development OECF - Overseas Economic Cooperation Fund (Japan) PANN - P.T. Pembangunan Armada Niaga Nasional (National Fleet Development Corporation) PELNI - P.N. Pelayaran Nasional Indonesia (National Shipping Company) RLS - Regular Liner Services of Inter-Island Shipping SEACOW - Directorate General of Sea Communications of the Department of Communications FISCAL YEAR April 1 - March 31

3 FOR OFFICIAL USE ONLY INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Table of Contents Page No. SUMMARY AND CONCLUSIONS i-iv I. INTRODUCTION... 1 II. BACKGROUND A. Transport - General B. Maritime Sector III. ORGANIZATIONS INVOLVED IN THE PROJECT... 5 A. The Government B. Directorate General of Sea Communications C. Ship Owners and Operators D. Other Organizations...I IV. THE PROJECT A. Description B. Cost Estimates C. Financing Plan D. Project Execution and Procurement E. Technical Assistance and Consultants F. Training G. Disbursement H. Environmental Impact I. Project Risks J. Possible Future Developments V. FINANCIAL REVIEW A. Introduction B. The Forecast Financial Position of PANN C. Tariff and Tax Implications of the Project D. Financial Implications of the Project for PELNI.. 25 This report was prepared by Messrs. G.F. Bain (Shipping Specialist), F. Chapman (Financial Analyst), S.Y. Park (Economist) and with assistance from R. Ullmann (Financial Analyst). 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.

4 -2- VI. ECONOMIC EVALUATION A. General B. Traffic C. Shipping Capacity and Productivity D. Economic Rate of Return on the Project VII. RECOMMENDATION ANNEXES 1. Progress of Ship Rehabilitation Project (Credit 318-IND) 2. Transport Planning and Non-Maritime Transport Activities in Indonesia 3. Summary of Consultants' Analysis of Existing Regular Liner Service Fleet Expansion Alternatives Attachment 1 - Age and Deadweight of Inter-Island Fleet as of June 1973 Attachment 2 - Age and Deadweight of Licensed RLS Fleet as of June Technical Assistance and Training Program and Main Points to be Included in Consultants' Terms of References Attachment 1 - Summary of Technical Assistance Related to Shipping Program 5. P.N. PELNI Attachment 1 - Operational Forecast Attachment 2 - Consolidated Profit and Loss Statements Attachment 3 - Consolidated Balance Sheets Attachment 4 - Consolidated Source and Application of Funds

5 -3-6. P.T. PANN Attachment I - Ship Procurement Program Attachment 2 - Schedule of Ship Deliveries Attachment 3 - New Ships, used ships, and Rehabilitation Program Attachment 4 - P.T. PANN Projected Income Statement Attachment 5 - P.T. PANN Projected Balance Sheet Attachment 6 - P.T. PANN Source and Application of Funds 7. Project Execution and Procurement Procedures Attachment 1 - Policy Statement - Memorandum Concerning Project Implementation by P.T. PANN 8. Implementation Schedule 9. Estimate of Economic Benefits Attachment 1 - Average Annual Costs of Maintenance, Lubrication and Bunker by Age and Size of Ships Attachment 2 - Revenue of Typical PELNI Ships Attachment 3 - Daily Operating Cost of PELNI Ships TABLES 1. Indonesian Fleet by Category and Size Classes, Shipping Acquisition and Rehabilitation Program 3. Disbursement Schedule 4. Alternative Projections of Freight Traffic and Shipping Capacity Requirements 5. Passenger Traffic CHARTS 1. No Organization of Directorate General of Sea Communications 2. No Cause and Effect Relationship 3. No Standard Ship Types MAPS 1. No. IBRD-11493

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7 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT SUMMARY i. The pattern of natural resource and population distribution in Indonesia makes it important to maintain an extensive inter-island shipping service to ensure sound economic development of the country. In light of this, the Bank has been actively engaged in assisting shipping development in Indonesia. ii. The Government of Indonesia has requested the Bank to assist in financing a part of the costs of a Five-Year Inter-Island Fleet Development Program prepared with the assistance of Dutch consultants, Maritime Research Centre. The Long Term Fleet Development Study (LTFD) concluded that even if the productivity of the existing ships improved by 40%, after scrapping the poor quality ships, and if port turn-around time improved, there would still be a growing shortage of shipping during the next five years and beyond. The Consultant's proposals were intended to meet the inter-island shipping requirements of Indonesia during its Second Five- Year Development Plan (Repelita II), The program prepared by the consultants consists of purchase of 134 new ships totalling about 195,600 deadweight tons (dwt) to achieve a 265 ships fleet of about 338,000 dwt at an approximate cost of about US$587 million equivalent by The estimated cost included certain technical assistance. iii. The scope of the program suggested by the consultants has been reduced and the proposed project, agreed to by the Government, would finance, in addition to technical assistance, about 60% of the shipping tonnage included in the LTFD at a cost of US$195 million equivalent. The project scope was reduced because of: (i) the uncertainty with regard to the high traffic growth assumed in the preparation of the program; (ii) the need for an additional economic study to determine an optimum size of the fleet; and (iii) the financial constraints of the Government. The project would emphasize rehabilitation of existing ships and purchase of used ships rather than purchasing only new ships as the consultants had suggested. iv. The tonnage to be financed by the proposed project is required to meet part of the growing demand for shipping during the next five years. The project will consist of (a) rehabilitation of 54,500 dwt of existing inter-island ships, demonstrated to be economically sound and technically and financially feasible; (b) scrapping of about 70,000 dwt of ships that cannot be rehabilitated; (c) procurement of about 52,000 dwt of used cargo ships; (d) procurement of 50,250 dwt of standard design new cargo and cargopassenger ships of 750, 1,000, 1,500 and 2,500 dwt; (e) a technical assistance and training program designed to support and improve inter-island fleet

8 - ii - operations and planning, and the training of marine officers and engineers; and (f) a study to determine the further needs for shipping during Repelita II, the second five-year plan ( ), and to v. The total project would cost about US$195.2 million equivalent or US$201.5 million including interest during construction, of which it is proposed that the Bank finance US$54 million equivalent. The Government would finance this amount using the proposed loan, bilateral aid already secured from Japan and Norway, funds to be provided through BAPINDO, cash generation by PANN, export credits from Norwegian banks, and commercial loans from a consortium of Norwegian, United States, and Singapore banks. All of the project ships would be acquired by Pembangunan Armada Niaga Nasional (PANN), the national fleet development corporation, established in 1974 to rebuild the nation's shipping fleet, and leased or sold to Indonesian shipping companies. vi. The proposed Bank loan would be made to the Government, loan proceeds, together with other required funds, would be made available to PANN under a financing agreement between the Government, PANN and BAPINDO. Funds from the proposed loan would be used to finance: (a) procurement and delivery of used ships to be obtained from the international market through PANN's shipbrokers, (b) rehabilitation and modification of ships carried out under negotiated contracts as is now done for Credit 318-IND and (c) a technical assistance program and an economic study. vii. The Directorate General of Sea Communications (SEACOM) of the Department of CommunicEtions will have the overall supervisory responsibility for the project, which will be executed by PANN and BAPINDO. SEACOM, BAPINDO and PANN will require additional technical assistance from internationally recruited advisors, the cost of which is included in the project. 'viii. PANN's present capital is owned 60% by the Government and 40% by BAP1TDO. Equity of Rp 2.0 billion (US$4.8 million) has already been paid-in and PANN has commenced operations with a small staff. The balance of equity needs, estimated to be about Rp 37.0 billion (US$89.1 million equivalent) or just under 50% of total project cost, and about the same amount of debt, will be provided by foreign credits and loans, the proposed loan, BAPINDO and PANN cash generation. Borrowing by PANN for new ship procurement would be by direct Government loans of up to 15 years at 12% including one year of grace; borrowing for used ship procurement would be for up to ten years including one year of grace and for rehabilitation would be for up to five years, with one year of grace, and would be via both Government loans at 12% p.a. and by loans obtained from BAPINDO at 15% p.a. ix.. PANN would lease or sell the ships it acquires to Indonesian shipping companies which are operationally competent, are judged to be able to repay lease or sales costs, which have been appraised and which have agreed to undertake improvements set out in a Development Agreement forming part of the sale or lease. Sales of new ships would be for 10% cash with the

9 - iii - balance to be repaid at 10% p.a. for 15 years including six months grace after delivery. Used ships sales would be for 30% cash by delivery with the 70% remaining balance to be repaid at 10% p.a. for up to 10 years including six months grace after delivery. Leases of new ships would be for up to 15 years at 10% p.a.; of used ships for up to 10 years at 10% p.a. Ships rehabilitated by PANN would be leased for up to 5 years at 10% p.a. including three months grace after delivery. In all cases a 1% commitment fee will be charged. Lease payments will be due in advance. The terms of leases and sales contracts would be such as to permit PANN to recover the cost of ships, operating expenses and interest on borrowed funds plus a net margin representing about 4% return on its equity. PANN, with a weighted average cost of debt of 12.5%, would obtain a 3.75% net margin between its lease rate of 10% and its total weighted cost of capital (about 6.25%). All but about US$4.0 million of the proposed loan would be made available to PANN, half as equity and half as loan at 12% per annum. On this basis PANN's financial position would be satisfactory. x. In order to enable shipping companies to meet the lease payments due to PANN and to maintain a satisfactory financial position, the Government has agreed: (i) to an annual review and adjustment of freight tariffs to permit an efficiently operated company to earn an adequate return and (ii) to satisfactorily reimburse P.N. Pelayaran Nasional Indonesia (PELNI) for Government ordered operations. This is required especially for PELNI which will be one of the major beneficiaries of the proposed project. Technical assistance for PELNI to prepare a plan of action, within 15 months of signing the proposed loan, to improve its operation is included in the proposed project. xi. Successful execution of the project is essential for continued sound development of the Indonesian economy by ensuring economical and reliable sea communications to various population, production and marketing centers of this archipelago nation. The quantifiable benefits of the project would yield an economic rate of return of about 18%. The rate of return for the new ships would be about 15% and for used ships about 19%. Rehabilitation yields an economic return of over 100%. With a 20% cost increase and 10% reduction in benefits, the overall return would still be over 11%; with a 10% cost increase and a 10% reduction in benefits, the return would be 13%. xii. Risks in carrying out the project as projected are deemed to be mainly financial and could be substantial. They would arise from lax enforcement of the safety and ship classification regulations by the Government and continued operation of obsolete and unsafe ships which would undercut freight rates and would result in operators of leased ships being unable to pay their leases. Measures have been proposed to reduce these risks. A plan to scrap 70,000 dwt shipping as ships are added to the fleet or rehabilitated has been agreed. xiii. The project provides a suitable basis for a Bank loan of US$54 million to the Government of Indonesia for a term of 15 years, including three years of grace.

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11 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT I. INTRODUCTION 1.01 The Government of Indonesia has requested the Bank's assistance in financing part of the cost of its Five-Year Fleet Development Program prepared with the assistance of Netherlands consultants, Maritime Research Centre. The current program is designed to meet the inter-island shipping requirement of Indonesia during its Second Five-Year Development Plan (Repelita II), The proposed project which has been agreed to by the Government would finance about 60% of the tonnage included in the program suggested by the consultants, leaving the balance of short term requirements and additional needs to 1990 to be determined on the basis of a ffurther economic study. The project consists of scrapping and rehabilitating existing ships and adding used and new ships to the fleet. The proposed loan of US$54 million equivalent would finance 28% of the project's foreign exchange cost. The balance of the funds would come from Japanese and Norwegian bilateral aid, BAPINDO, the Norwegian export credit organization (EKSPORTFINANS) and Norwegian, United States and Singapore commercial banks The Bank Group's first shipping credit (Credit 318-IND), made in 1972, was directed to rehabilitating ships of the Regular Liner Service (RLS) of Indonesia's inter-island shipping. An initial delay was experienced in getting the project started because of the need to set up the Maritime Credit Department (MCD) in Bank Pembangunan Indonesia (BAPINDO), through which the credit funds were channelled. There was a steep cost increase in ship rehabilitation over that estimated during appraisal necessitating a cut-back in the project's scope. However the Credit, now 78% committed, is expected to be fully disbursed before the revised closing date of September 30, 1977 (Annex 1) There have also been three credits and one loan for highways, (Credits 154-IND, 260-IND, 388-IND and Loan 1236-INa as well as a loan for railways (Loan 1005-IND). A fertilizer distribution loan (Loan 1139-IND) was made in Progress on all projects has been slow but no major difficulties have arisen. A port project is under preparation This report is based on the consultants' study, data supplied by the Government and ship operators in Indonesia, and the findings of an appraisal mission composed of Messrs. G.F. Bain (Shipping Specialist), T. DeLaney (Financial Analyst) and S.Y. Park (Economist), which visited Indonesia in November/December Messrs. F. Chapman and R. Ullmann (Financial Analysts) also participated in the preparation of this report. Government delay in deciding on the project composition as well as the financial plan necessitated further missions in June and October Government discussions with Norwegian officials were completed in February 1976 and the financing plan agreed.

12 - 2 - II. BACKGROUND A. Transport - General 2.01 The Indonesian transport system consists mainly of inter-island marine services, highways and railways. The marine services comprise Regular Liner Services (RLS) between more than 100 specified ports, unscheduled (tramping) services, and ocean-going shipping. Land transport is well developed in Java with extensive railway and highway networks, whereas in Sumatera, railways have only been developed in some parts, and the road network is limited to basic links between principal cities. On Fhe other islands, except for a small railway on Madura, transport facilities are limited to a few roads in areas around ports and towns. Air transport volume is still small but has increased rapidly in the last few years The Government's strategy, as set forth in the Second Five-Year Plan (Repelita II), is to continue to gradually upgrade the country's existing transport facilities. This provides a sound basis for further economic growth. Additional new infrastructure will also be built for (i) exploitation of new resources, (ii) support of the Government's regional development policies, and (iii) improvement of rural transport. Roughly 17% of Repelita II expenditure, Rs 1,800 billion including Government expenditure of Rp 718 billion, is earmarked for transport. A description of transport planning and of transport sector activities on land, inland water, and air is given in Annex 2. B. Maritime Sector (a) General 2.03 The Indonesian shipping fleet, excluding an undetermined number odf sailing craft, consists of about 1,055 registered vessels having a total deadweight tonnage (dwt) of 1,159,000 (Table 1). Supplemented by ships which are hire-purchased or chartered, mainly oil tankers and oil industry supply vessels, the operating fleet was considerably greater. As well as can be determined from inadequate records, Indonesia in mid-1974 had 57 oceangoing general cargo ships owned by seven major and a number of minor companies; some 423 local vessels which had an average tonnage of under 200 dwt and normally engage in coastal voyages of under 200 miles; and about 336 inter-island registered ships of 500 dwt and over, totalling some 426,000 dwt owned by 56 companies. Of the inter-island fleet ships, 209 totalling 220,000 dwt owned by 47 companies were licensed in the RLS The country has about 300 ports scattered over the archipelago but about 70% of traffic volume is concentrated in ten of them. The major ports are in Java, Sumatera, Sulawesi and Kalimantan. Port and customs procedures present a serious impediment to transport flows in Indonesia and improvement thereto could result in significant increases in port capacity and a reduction in shipping costs. However, due to institutional rigidities, major improvements cannot be expected in the near future (para 2.09).

13 Studies of short-term port requirements have been completed by consultants, NEDECO (Netherlands), and main ports are being improved with assistance from the Asian Development Bank (ADB), the Netherlands and Japan. Preparation of master plans for the ports of Surabaya, Belawan and Panjang, financed by UNDP with ADB as executing agency and carried out by consultants, Sir William Halcrow (U.K.), have been completed. A master plan study of Tanjung Priok (Jakarta), the largest general cargo port (handling about 30% of the country's total traffic) was completed in September 1975 by consultants, Swan Wooster (Canada), financed under IDA Technical Assistance (Credits 216-IND and 275-IND). Appraisals by the Bank for Tanjung Priok and by ADB for other port projects are underway. The Government recognizes the importance of improving port operations and is devoting some Rp 15.0 billion (US$36 million) of its budget to port improvements Indonesian cabotage law, like that of most countries, reserves the domestic trade for vessels owned and operated by Indonesian shipping companies; in addition, the Government has arranged with Singapore that one half of the Indonesia-Singapore trade will be reserved for Indonesian ships. Domestic shipping services were formally established in 1969 and, following the pattern of earlier times, classified into three categories: local, special and inter-island trades. Licensing of shipping companies in each of these sections is supplemented by the licensing of inter-island RLS routes designed to provide trade links among the various islands and to ensure service even when seasonal transport demand might tend to divert ships to more profitable routes. (b) Regular Liner Services (RLS) 2.07 In 1975, the RLS system consisted of 28 trunk or main routes, 20 feeder routes, and 18 routes which serve Singapore. These 66 routes serve about 140 ports (see Map IBRD 11493) with varying frequency and regularity. The RLS system is continually under review by the Government and the number of ships serving each route is adjusted quarterly where necessary. The RLS section of the inter-island fleet, comprising 47 companies, is dominated by the Government-owned company, P.N. Pelayaran Nasional Indonesia (PELNI), which owns 40% of the total RLS tonnage of about 220,000 dwt. Many RLS companies own only a few ships; about 20 of them own only two ships which is the minimum number of ships required by law for engaging in stevedoring businesses (para 3.05). A large part of the RLS fleet is overage; in 1974, 35% by number were over 20 years old, 53% were between 11 and 20 years of age and only 12% were under 10 years of age. Given the poor maintenance practices prevalent, the consequent frequent breakdowns and long repair times, only about 35% of the total fleet operated over 300 days a year in 1972, with 47% operating less than 200 days per year. Poor productivity 1/ of these ships also stems from inordinately high port 1/ Measured by the cargo tons carried per year per deadweight ton of shipping. Current values for productivity are 10 to 12 tons/dwt and are about half of what might be expected.

14 time and delays so that the present ratio of port-to-sea time is 2:1; a ratio of 0.7:1 is considered to be possible. The Government agreed during negotiations to commence the introduction of unitized cargo handling in the RLS fleet in order to reduce port time. Further operational improvements will be included in the proposed port loan for Tanjung Priok and have been recommended by the ADB consultants. A description of the RLS fleet is contained in Annex A three-year fleet rationalization program starting in 1972 was planned by the Government in connection with the First Shipping Credit (Credit 318-IND). The program, in addition to emphasizing the enforcement of regulations, and providing technical assistance to ship repair facilities, was expected to improve the RLS by rehabilitating ships and by scrapping obsolete ships (Annex 1). It was also expected to improve the operational performance of RLS shipping companies, through conditions attached to rehabilitation subloans of the Credit. Lax enforcement of safety standards delayed the ship scrapping program. The upsurge of traffic in 1973 and 1974, and the Government's need to secure shipping for the emergency transport of rice during the 1972/73 drought caused additional delays in removing ships from operations to make repairs. Nevertheless, the tonnage of licensed ships in the RLS fleet in 1975 has been reduced by about 20% since early Progress has been made in consolidating and improving the operations of shipping companies through formation of groups to share the use of cargo-shed facilities. Stevedoring and RLS freight rates have been separated. Freight tariffs for the RLS were raised by 20% in 1973, 20% in 1974, and 25% in July These tariffs are related to costs (para 5.08). Port operations, particularly in the main ports, have improved partly as a result of Government action on an Association suggestion for the formation of a high-level inspection and review team. A regrouping of stevedoring companies is required to produce further improvements and is recommended in the proposed port loan. Three main shipyards which receive technical assistance under Credit 318-IND have substantially improved both the quality and quantity of their work, particularly rehabilitation work on RLS ships. Considering the difficulties of implementing change and the short time involved, progress made in executing the fleet rationalization program is encouraging. Nevertheless, much remains to be done, including further physical rehabilitation and stricter enforcement of shipping safety regulations. The Government published revised safety rules in October 1975 requiring each ship to pass a new safety inspection in 1976 and has agreed to revise its basic safety rules (para 4.12 and Annex 4) Rapid improvement in economic conditions in Indonesia in recent years has been reflected in growing volumes of ocean and inter-island trade. The excess capacity in the inter-island fleet in 1971 when the traffic volume was 1.9 million tons disappeared by 1973 when RLS traffic rose to 2.5 million tons. By early 1974, shippers were offering premiums on freight rates

15 in order to obtain service. With the current slow down of economic activity, a temporary oversupply of shipping capacity may reappear. But even if port operations and customs procedures are improved, thereby increasing average ship productivity, there would still be a growing shortage of shipping during the next five years and beyond. To overcome this shortage, as well as for other reasons stated below, the Government has decided to provide a financial incentive to increase investment in and utilization of inter-island shipping. This incentive would be via relending of funds to shipowners at 10% p.a. which is about 5% p.a. lower than the current long term lending rate in Indonesia The provision of incentives is a sound policy in view of the facts that: (i) all but a few shipping operators are financially weak and cannot procure ships or pay for them on normal terms, though many are operationally acceptable; (ii) the maintenance of reliable transport service among the islands of the archipelago is of vital economic and political importance; and (iii) tariff increases required to pay for the new capital for shipping have to be minimized in order to reduce adverse developmental impacts in distant islands. If shipowners could borrow from the international capital market with the guarantee of the Government, they could borrow at about 9% to 10% p.a. By borrowing directly from the international capital market and allowing PANN to re-lend the proceeds at 10% p.a., the Government is providing competitive financial terms to Indonesian shipowners and relieving them of a foreign exchange risk. III. ORGANIZATIONS INVOLVED IN THE PROJECT A. The Government 3.01 The Department of Communications (DOC) is responsible, among other things, for the administration of the maritime sector. It includes a planning bureau, finance, personnel, and secretariat groups, and a Research and Development Board and a Training Board. Separate Directorates General for Air, Land, and Sea Communications, Tourism, and Postal Services and Telecommunications are responsible to the Minister In the maritime sector, the Minister is responsible for issuing legally binding decrees which may set or alter freight rates for the RLS and tariffs for port and stevedoring operations as well as regulate shipping activities, including classification of ships and issuance of safety and operating certificates. By delegation from the Minister of Finance, the Minister of Communications may appoint the supervisory board of state companies in the transport and communication sectors and may supervise such companies. This is the case, in the maritime sector, for PELNI (paras ) and the newly formed shipping development company, P.T. Pembangunan Armada Niaga Nasional (PANN) (paras ).

16 - 6 - B. Directorate General of Sea Communications 3.03 The Directorate General of Sea Communications (SEACOM) is responsible for all maritime operations through its directorates of shipping 1/, ports and dredging, traffic, shipyards, navigational aids and communications, and coast guard (Chart 1). The Director General and nearly all of his present directors have been involved in the planning and execution of Credit 318-IND for rehabilitation of the inter-island shipping fleet. SEACOM has received bilaterally financed technical assistance for shipping operations from the Netherlands and Japan, and for navigational aids and communications from a number of countries. A description of this technical assistance is contained in Annex 4. C. Ship-Owners and Operators (a) The Private Sector 3.04 There are 55 private shipping companies with 230 ships aggregating 174,000 dwt licensed to operate in the Indonesian inter-island trade. Of these, 46 operate in the RLS. Only eight companies in the private sector have qualified for rehabilitation loans from BAPINDO, the project executing agency (para 3.12) under Credit 318-IND. It is unlikely that many more will prove creditworthy and therefore be capable of buying ships under the proposed project. The majority of the companies are poorly managed and do not maintain adequate finances or records, and many operate unsafe, poorly maintained (para 2.07) and technically inadequate ships (Chart 2). Some companies, perhaps 15 to 20 at most, carry out efficient operations and maintenance, and are perhaps making profits. However, many of these more efficient companies, owned by "non-indigenous" operators, are excluded by Ministry of Finance regulations from access to credit of the state banks; they would, however, be able to buy or lease ships from PANN (para 3.09) under its rules The decree 2/ establishing the licensing of shipping companies requires ownership of a minimum of two ships in order to engage in stevedoring. This requirement seems to have been responsible for the proliferation of shipping companies (about 27 out of the total of 55 private shipping companies) having only two ships and weak financial condition. The requirement was originally designed to improve and extend stevedoring in ports in outlying regions, which are served infrequently. However, as such services are now adequate, the link between stevedoring and shipping should be made optional; this change was also recommended by the LTFD. Separation of the two functions may result in the sale, charter or scrapping of ships, particularly those owned by "two ship" companies, and lead to the gradual appearance of a small 1/ This Directorate licenses shipping companies and assigns routes and tonnage to each route. A subsidiary organization assigns ships to these routes in consultation with ship-owners and operators. 2/ Presidential Decree of 2 of 1969.

17 - 7 - group of stronger companies. The implementation of the change could be made easier by the separation of payments for shipping and stevedoring functions in the revised cost-based RLS tariff. The Government has been made aware of these views and will take them into consideration as it moves to strengthen the structure of the industry. (b) P.T. Pelayaran Nasional Indonesia (PELNI) 3.06 Government-owned PELNI is the largest inter-island shipping company in Indonesia. It carries about two-thirds of inter-island RLS passenger traffic, 40% of cargo and operates its own large stevedoring and forwarding divisions. Its 49 ships, 21 of which have been rehabilitated under Credit 318-IND during the past two years, represent about 40% of RLS ship tonnage. PELNI will continue to be a major factor in RLS operations in the future. It will be a major beneficiary of the proposed loan, though not a direct party to it PELNI has been a financially and operationally troubled company for many years. Since 1972, the Netherlands has financed, at the Government's request, a team of six advisors to assist in improving PELNI management and operations. So far, the advisors have had limited success in having their advice accepted and, thus, in raising PELNI's productivity and operational capability to a reasonable standard. Yet, they believe that PELNI's productivity could be doubled by reducing port time, by better maintenance, and by reducing deviation from schedules and routes. A number of operating goals to be achieved by 1979 have been proposed by the advisors and are included in detail in Annex 5. These have the objective of increasing PELNI productivity by The present advisory services will be continued to March 1977, under Netherland bilateral aid and will be extended under the project until March 1979 (para. 4.20) PELNI's management has not responded adequately to many of the advisors' suggestions, with the result that the company still has severe operational problems which must be overcome. This is a serious problem if PELNI is to continue to be the backbone of the RLS system. A new management was installed in late 1975 with a view to achieving operational and financial improvements and reducing the need for budgetary assistance required from the Government, amounting to Rp. 3.4 billion over the past two years. In view of the inability of PELNI to make a profit, even when freight traffic and revenues increased and sound advice was given by its advisors, a thorough review of the company's operations leading to a specific plan of action is provided for in the project. The Government has agreed to retain consultants within three months of signing the proposed loan, to prepare a recovery plan (para and Annex 4). (c) P.T. Pembangunan Armada Niaga Nasional (PANN) 3.09 PANN was organized as a commercial company in May 1974 on the advice of the LTFD and the Japanese shipping advisors to SEACOM to procure and lease ships to financially weak RLS ship-owners. It commenced operations

18 with an initial equity of Rp 2.0 billion (US$4.8 million equivalent) and plans to to acquire 47 new and 47 used ships utilizing Japanese and Norwegian export credits and loans from BAPINDO and the proposed loan. It has access to Government budget funds only through Government purchase of equity and it operates in all respects as a commercial company. The company's lack of experience requires active participation of BAPINDO (para 3.12) in the execution of the project, for this reason the Government decided that PANN would be owned in the initial years 40% by BAPINDO with the remaining shares in the hands of the Government 1/. PANN will act as a financial intermediary and will acquire all the project ships after arranging for their sale or lease to acceptable shipping companies on terms adequate to recover the capital invested, interest costs on its borrowings, and a profit margin from which its expenses would be paid. As ships would be fully insured at replacement value (para 3.16), PANN would incur risk only when ship operators did not earn sufficient revenues to meet payments on their leases. With ships assigned to specific routes, with freight tariffs linked to capital and operating costs and under yearly review (para. 5.08), and with a more efficient PELNI to operate any ships of private operators whose leases may be in default, PANN's financial position would be secure assuming that the forecast cargo tonnages (para 6.02) are offered. Default on PANN leases by the private sector would result in financial difficulties for PANN. The Government has agreed to adequately compensate PELNI in the event that PELNI would incur arrears to PANN or BAPINDO as a result of operations carried out at the Government's request. Difficulties arising from defaults may also be ameliorated by the transfer of the ships involved to PELNI or to other operators. A description of PANN operations and finances is given in Chapter V and Annex PANN has a Board of Supervisors, or Dewan Komisaris, to set overall policy and to supervise major financial matters and a Board of Management, or Direksi, to operate the company 2/. The top executives who have been appointed are experienced and satisfactory to the Bank. PANN's 1/ BAPINDO's risk exposure in PANN via loans and equity could exceed the limits for lending to individual companies noted in its "Policy Statement" prepared in connection with the Bank's industrial loans. The Government has agreed to limit BAPINDO's share ownership and its loan exposure in accordance with the "Policy Statement" (para. 4.11). Thus BAPINDO's share at PANN equity will decline in the future. 2/ The Dewan is composed of the President of PANN; the President of P.T. Jakarta Lloyd, one of Indonesia's largest shipping companies engaged in ocean shipping; the Managing Director BAPINDO's Maritime Credit Department; and SEACOM's Director Shipbuilding. The Direksi is composed of the President of PANN, a Vice President of Sales and Purchases, and a Technical Vice-President. In the future, PANN may have additional directors.

19 - 9 - charter is satisfactory. It was agreed during negotiations that PANN's Direksi would seek Dewan approval each quarter for the investment program for the coming quarter, based on the annual approval by the shareholders of an investment plan. These arrangements are satisfactory and are incorporated in PANN's "Policy Statement Memorandum" (Annex 7). PANN has appointed Indonesian legal counsel (Gani Djemat and Associates, Indonesia) and auditors (P.T.SGV-UTOMO, 1/ Indonesia) satisfactory to the Bank. It will also retain internationally recruited financial and technical advisors acceptable to the Bank to assist in ship acquisition and in training staff (para 4.21). PANN will also retain BAPINDO, under a two year contract acceptable to the Bank, to undertake appraisals of lessees and ship purchasers and to train PANN appraisal staff PANN discussed its proposed plan of operations with the Bank during negotiations and has prepared an outline of its proposed leasing and ship sales policies and procedures. Agreement on procurement procedures and the form and content of sale and lease documents to be used was reached during negotiations (paras 4.14 to 4.19 and Annex 7). D. Other Organizations (a) Bank Pembangunan Indonesia (BAPINDO) 3.12 This major state-owned development bank has received two credits and one loan from the Bank Group for industrial finance and ship rehabilitation totalling US$68.5 million. A detailed review and appraisal of BAPINDO is contained in the Bank's Appraisal Report, 526a-IND, dated October 22, The Association's first industrial credit of US$10 million (Credit 310-IND) was fully committed within three years. A second industrial loan (1054-IND) for US$50 million equivalent was made by the Bank on November 20, Disbursement by BAPINDO was initially slow, but is now satisfactory. The Bank will continue to maintain its close relationship with BAPINDO A Maritime Credit Department (MCD) was organized within BAPINDO in connection with Credit 318-IND in mid The MCD is staffed with competent personnel and provided with advisors in ship finance and repair formerly financed by UNDP under a Bank executed contract. The contracts of the advisors will be renewed until mid February 1978 and financed from the proposed new loan (para. 4.23). The MCD under BAPINDO's key executives who are technical and financial experts, has operated satisfactorily. After a slow start, the volume of MCD operations increased sharply in 1974 and Credit 318-IND is about 78% committed by BAPINDO but due to sharp cost increases since the original repair estimates were made in 1972, only about half the tonnage forecast will be repaired. BAPINDO's maritime portfolio as of December 31st 1975 consisted of Rp. 10,458 million in long term loans, of which loans made under the Credits 310-IND and 318-IND accounted for Rp. 2,349 million (22%) and loans from BAPINDO's own funds Rp. 2,025 million (20%) while the balance Rp. 6,084 million (58%) has been 1/ A joint venture of Sycip Gorres Velayo and Co. and P.T. Utomo.

20 submitted for re-imbursement under Loan No IND. Arrears of principal and interest at December 31st 1975 amounted to 10% of the portfolio or Rp. 1,043 million. Rp. 554 million of these arrears were accounted for by PELNI. By the end of February 1976 repayments on a number of the outstanding accounts had been made and arrears were reduced to Rp. 821 million (Annex 1). Rp. 156 million of the reduction resulted from an agreed rescheduling of instalments of principal in one case where the impact of fleet repairs on operations has drastically reduced cash generation temporarily. In the first week of March 1976, PELNI reduced its arrears by Rp. 117 million thus leaving Rp. 437 million arrears outstanding. This payment reduced total arrears to Rp. 704 million representing 6.7% of the MCD investment portfolio. (b) Biro Klasifikasi Indonesia (BKI) 3.14 Indonesian law requires that every Indonesian ship over 100 gross tons 1/ be registered with the ship classification society, Biro Klasifikasi Indonesia (BKI). All ships in the RLS, and most of the interisland fleet, must be classified. BKI standards, although similar to those of many international societies, are uncertain in application. Because many of its surveyors lack training and experience, the survey of work specified for repair and the actual work done is often inferior or incomplete. Through bilateral aid from the Federal Republic of Germany, training of BKI personnel has proceeded since 1971 under the direction of the experts of Germanischer Lloyd (GL), an internationally recognized ship classification group. This training is expected to be financed under bilateral aid from Germany. However, should such aid not be available it will be financed by a Norwegian grant until July 1978 (para and Annex 4) Besides safety, a major purpose of ship classification is to maintain minimum technical standards so as to realize lower insurance premiums. In order to achieve this purpose, as well as to ensure a sound execution of its project, the Association required that Credit 318-IND be disbursed only where ships were dually classified. 2/ In order to continue the process of improvement of survey work, and to support the process of familiarizing the insurance market about BKI, the Government has agreed to cause BKI's ship classification standards to conform to those of any internationally recognized ship classification society acceptable to the Bank. Dual classification of all ships acquired or rehabilitated by PANN from the proceeds of the proposed Loan will be maintained until each ship has passed its first quadrennial survey after acquisition. 1/ A measure of cubic capacity within a ship. 2/ Classification by BKI and an internationally recognized classification group is required. GL has arranged that no extra fee will be charged for dual BKI/GL registration, so most dual classing is presently with GL.

21 Insurance of ships in Indonesia to cover all risks is expensive and usually is quoted at from 4% p.a. to 6% p.a. of the value of ships. Goveriment regulations require that all insurance be placed with an Indonesian company which may then reinsure about 25% internationally. Experience with Credit 318-IND indicates that it is difficult to elicit a competitive market response for ship insurance in Indonesia. The proposed loan will ensure the continuation of technical assistance on navigational aid and communications, as well as provide for training of engineers and navigators (para 4.25). These measures may reduce the casualty rate at sea. PANN has agreed to hire a qualified insurance executive and to require "iall risk" coverage on replacement cost for all of its ships and for ships in which it has a beneficial interest to be included in all leases, hire purchase, and sales contracts. PANN has agreed to seek fleet insurance from national and international insurance companies in order to select the best coverage at the lowest cost. IV. THE PROJECT A. Description 4.01 The project will finance the rehabilitation of existing vessels and the procurement of about 60% of the additional tonnage included in the five-year program proposed by the LTFD. As the consultants' traffic forecast, on which their recommendations were based, appears to be too optimistic, the balance of tonnage, not financed under the current program will be subject to further economic study. While the total program proposed by the consultants for the period to the end of 1979 is estimated to cost not less than US$587 million equivalent at current prices and to provide 195,655 dwt, the proposed project will cost only about US$195 million - 33% of the total proposed program cost - but will provide about 60% of the tonnage proposed by the consultants. The lower cost is due to emphasis on purchasing used ships and rehabilitation of existing ships whereas the program proposed by the consultants envisaged only the purchase of new ships. All but about US$5.4 million of the project cost will be in foreign exchange. The proposed Bank loan of US$54 million equivalent will provide 28% of the foreign exchange required The first priority of the project is the continuation of the rehabilitation program and the scrapping of over age and technically deficient ships which are too costly to repair. The second priority is procurement of used cargo ships and new cargo and cargo-passenger ships of standard design in the 750, 1,000, 1,500 and 2,500 dwt classes (Chart 3). Emphasis is also placed on the continuation of existing, and the initiation of new technical assistance and training programs, with the assistance of bilateral and other lenders.

22 The project forms a part of the program of reconstructing and expanding the inter-island fleet. This program provides about 53,750 dwt of new ships, 59,500 dwt of used ships to be acquired outside Indonesia and the rehabilitation of 54,500 dwt of operational ships (Table 2). The project consists of the following elements: (a) Rehabilitation, where economically sound and technically and financially feasible, of 54,500 dwt of existing interisland ships; (b) procurement of about 47 used cargo ships, totalling about 52,000 dwt, in the 1,000, 1,500 and 2,500 dwt classes (about 41, 4, and 2 in each class, respectively); (c) procurement of 47 new standard cargo and cargo-passenger ships, totalling about 50,250 dwt, in the 750, 1,000, and 1,500 dwt classes (about 13, 21 and 13 in each class); (d) scrapping of about 70,000 dwt of existing inter-island ships of over 500 dwt which cannot be economically rehabilitated; (e) a technical assistance and training program, designed to support and improve inter-island fleet operations and planning, and the trainin.g of marine officers and engineers; and (f) a study to determine shipping requirements during the remainder of Repelita II and the period up to The balance of eight used and four new ships required to complete the Government's program, totalling 7,500 dwt and 3,500 dwt respectively, will be acquired (i) by transfer to PELNI as equity of two new ships provided by 1972 Japanese bilateral aid and, (ii) by private finance already arranged by several shipping companies. 33. Cost Estimate The proiect is estimated to cost about US$195 million equivalent of which 97% is foreign exchange. This includes delivery costs of US$8.5 million equivalent, and a physical contingency of US$2.5 million equivalent to provide for modification of some used ships to suit them for Indonesian service. Mhe project cost excludes interest during construction of US$6.3 million equivalent which will be financed by PANN from its cash generation rpara 5.03), Prices of new ships are based on fixed price contracts already signed with Indonesian, Japanese and Norwegian shipyards. These contracts were based on detailed specifications satisfactory to the Bank. Shipyard prices were checked using a man-hour and materials list and, considering the Credit terms involved, appear to be reasonable. The Government has stated that

23 the new ship prices obtained from Norwegian shipyards, taken together with the credit terms involved, are the lowest obtained from a number of offers made by various countries. Used ship prices are expected to remain stable during the procurement period to mid-1977 and no provision for escalation is believed necessary. Costs of rehabilitation, mainly to be undertaken in Indonesia, are for labor, steel and equipment. These costs, amounting to US$9.5 million equivalent, are assumed to inerease by 15% in 1976, 10% in 1977 and in 1978, and by 7.5% in Estimated project costs by category are given below and are detailed in Annexes 4 and 6, Attachment 9. Million Rupiah Million US$ % Local Foreign Total Local Foreign Total Project 1. Rehabilitation 1,584 2,374 3, Used Ships - 17,084 17, New Ships - 51,529 51, Delivery Costs - 3,536 3, Technical Assistance to: (a) PANN (b) Government 166 2,365 2, Base Cost Estimate (BCE) 1,750 77,012 78, Expected Price Increase , Physical Contingency - 1,038 1, Project Cost 2,233 78,773 81, Additional Financing Required for Interest During Construction 75 2,523 2, Total Finance Required 2,308 81,296 83,

24 C. Financing Plan (a) Sources of Funds 4.05 The proposed financing plan for the project is summarized below and the physical participation of Norway and Japan is given in para. 4.14: Millions of US$ Project Cost Source of Financing Cost Japan Norway Proposed Base Escalation Total (OECF) Ln/Gr. BAPINDO PANN Govt. Loan Total Rehabilitation _ 4.0/a 1.1/a Used Ships /b New Ships /b Delivery Cost Technical Assistance to Pann Technical Assistance to Govt Physical contingency (used ships) _ Total project cost Interest during Construction (c) 6.3 _ Total Financing /d Required /a Local currency /b For ships already ordered and to be built in Indonesia; these may be financed from Loan 1054-IND. /c From PANN cash generation (para 5.03). /d Includes funds from Euro-American consortium banks A Japanese Overseas Economic Cooperation Fund (OECF) loan of US$25.0 million equivalent at 2.75% p.a. over 30 years including 10 years of grace has already been made. The Norwegian Government has made a grant of Nkr. 70 million (US$12.5 million) to be used for a variety of purposes inc:luding US$2.2 million equivalent to finance certain technical assistance re!lated to the project (Annex 4). When the grant agreement becomes effective, a loan of Nkr. 492 million (US$87.8 million) will be made by A/S EKSPORTFINANS, the Norwegian export credit bank, to Indonesia for 15 years, including three years of grace, at 8-1/2% p.a. plus a single fee of 1.9%. This loan will cover 90% of the cost of ships and tugs (the latter not included in the project) to be obtained under contract from a group of Norwegian and Indonesian

25 shipyards. At the same time, and to provide for 10% of the cost required to complete the Norwegian ship finance, a consortium of banks, including Bank of America NT&SA, Continental Illinois Bank and Trust Company of Chicago, den Norske Creditbank, and Nordic Bank Ltd. will make a loan of US$12.0 million equivalent in kroner to the Government 1/ of which about US$10.0 million equivalent would be used for the project. This loan is for five years ending June 15, 1981 and carries management and commitment fees of 3/4% each. It is made at a rate of 1-7/8% over the rate quoted from time to time by designated reference banks for three or six month Eurodollar deposits The financial resources provided and to be provided by the credit and loans noted above are more than sufficient for the new ship part of the project and specific technical assistance elements related to the project. The proposed Bank loan of US$54.0 million equivalent would be for 15 years, including three years of grace, at its current lending rate. All of these loans would be made to the Government which would assume the foreign exchange risks on repayments. Funds obtained from BAPINDO and any other local banks, estimated to be about US$15.0 million equivalent, would be obtained at 15% p.a., the current term lending rate, for periods determined by the type of ship to be procured. These funds would be made available for project finance under a financing agreement, satisfactory to the Bank, to be signed between the Government and PANN and BAPINDO prior to effectiveness of the proposed loan Funds for acquiring inter-island ships in excess of the requirements of the project may become available from bilateral lenders and/or foreign credits and could be applied to a subsequent project if it is identified. Due to uncertainties about the tonnage of ships required, traffic growth and cargo handling (para 6.10), agreement has been reached with the Government that, pending the results of the economic study and a review of shipping requirements, the Bank may, after consultations with the Government, reduce its participation in the project if more than 12,000 dwt of interisland ships are acquired outside the project. (b) Flow of Funds and Use of the Proposed Loan 4.09 The Government would re-lend to PANN as debt, using Bank Indonesia and BAPINDO for administrative purposes, about half of the funds provided by external lenders at an interest rate of 12% p.a. for up to 15 years including one year of grace for the purchase of new ships; up to ten years including one year of grace for used ships; and for five years including one year of grace for rehabilitation of existing ships. These funds will be made available to PANN as required under the terms of its shipbuilding contracts and ship purchase and rehabilitation agreements. The other half of the 1/ The total financing to be provided from Norwegian sources amounts to US$112.3 million equivalent of which US$99.7 million equivalent would be used for the project.

26 external funds would be passed on to PANN by the Government as equity. Loans by BAPINDO would also be made directly to PANN, repayable over the same repayment periods as under Government loans to PANN for new and used ships procurement and ship rehabilitation The proceeds of the proposed Bank loan would be used (i) to procure all of the used ships included in the project and to pay the foreign exchange cost of modifying them for service in Indonesia, (ii) for rehabilitating existing ships, (iii) provide the foreign exchange cost of used ship delivery to Indonesia, and (iv) for the foreign exchange cost of specific elements of the technical assistance program and of the economic study Repayment by PANN to BAPINDO and the Government would be related to collections. BAPINDO's interest in any ship it finances, and which is subsequently sold by PANN, will be protected by adequate amounts of ship mortgages. Agreement on lending and re-lending terms and conditions to be included in a subsidiary financing agreement, to be agreed as a condition of effectiveness of the proposed loan, has been reached with the Government, RAPINDO and PANN during negotiations (paras and 5.04). Agreement has also been reached during negotiations that the Government's loan and equity contribution to PANN will be made available in a regular and timely fashion related to PANN's needs; and that the Government will ensure that (i) BAPINDO resources amounting to a maximum of about US$15.0 million equivalent will be provided to be loaned to PANN, on terms and conditions acceptable to the Bank; and (ii) BAPINDO will abide by its-covenants to and agreements with the Bank on account of the previous Bank loans and credits. D. Project Execution and Procurement (a) Project Execution 4.12 The project will be executed by PANN and BAPINDO, with the assistance of consultants acceptable to the Bank, under the supervision of SEACOM. BAPINDO, for the first two years of the project and subsequently PANN, will prepare a comprehensive appraisal report on the shipping enterprise seeking to lease or buy ships from PANN (Annex 7). This report will make recommendations about the measures to be taken to improve the enterprise and to be embodied in a Development Agreement between PANN and the shipping enterprise forming part of the lease or sale. On approval of this appraisal by PANN alone in the case of new ships and by PANN and the Bank in the case of used ships, PANN will procure ships for lease or sale. In order to ensure that all shipping companies are involved in the Government's program, improved means of enforcing existing regulations related to safety, the classification of ships, and the financial and operational state of shipping companies would also be required. DOC and SEACOM have issued the necessary administrative orders to enforce the existing and revised safety and classification regulations in effect and to enable PANN and BAPINDO to execute the project properly. NKI, SEACOM, PANN and BAPINDO will be assisted by consultants in carrying out their responsibilities under the project.

27 Successful project implementation also requires removing from service over age and/or technically deficient ships, with the objective of scrapping 70,000 dwt of existing inter-island licensed ships of over 500 dwt which cannot be economically rehabilitated by December 31, Agreement has been reached with the Government that it will prepare, by August 31, 1976, and cause to be undertaken, on a basis agreed with the Bank 1/, a specific scrapping and rehabilitation program tied to a specific program of acquisition of new and used ships. (b) Procurement 4.14 Procurement of new ships under agreements between the Government, Norway and Japan has been arranged by PANN using specifications acceptable to the Bank and developed by naval architects, Bureau voor Scheepsbouw (BvS) (Netherlands), who are satisfactory to the Bank and are financed by the Netherlands. Twenty new ships will be procured from Norwegian shipyards under commercial arrangements and six from Indonesian shipyards. Seven new ships will be built in Japan and five OECF financed ships will be built in Indonesia. Nine ships will be built in Indonesia using BAPINDO funds under procedures established for Loan 1054-IND (Annex 6, Attachement 1) Used ship procurement is more complex than is new ship procurement because the ships to be acquired are mainly located at a great distance from Indonesia and can only be inspected at times and places difficult to arrange much in advance. Such purchases, being non-standardized, require negotiation of the sale price and the time of availability, and require detailed inspection and, sometimes, repair or modification to bring them up to classification standard before they can be used for Indonesian service. International competitive bidding is inappropriate for the purchase of used ships in the number and variety contemplated. Instead PANN's consultant naval architectsurveyors, shipbrokers (exclusively representing PANN), and resident financial and technical advisors will assist in identifying and procuring, through a canvass of the international market, appropriate used ships and negotiating purchase and as necessary, repair contracts for them. The estimated cost of used ships to be acquired will be included in the appraisal report to be approved by the Bank and more closely determined on the signing by PANN of an internationally accepted sale form. After an inspection of the ship in question PANN will notify the Bank of the final price and, if the Bank agrees, will proceed to acquire the ship under a 1/ A committee has been set-up by SEACOM to develop the details of the scrapping program. The Government has agreed in principle that any ship over 20 years of age and/or that cannot be rehabilitated economically should be scrapped.

28 letter of credit guaranteed by the Bank. Used ship procurement contracts of PANN will be based on documents satisfactory to the Bank 1/ and will contain arrangements satisfactory to the Bank covering verification of relevant documents and cost prior to disbursement. The detailed procedures are described in Annex International competitive bidding is also impractical in the case of rehabilitation of ships as each repair costs a relatively small amount and may involve the purchase of a wide variety of proprietary parts. It is proposed to continue the procedures established for ship rehabilitation under Credit 318-IND. This work will be undertaken mainly in Indonesian shipyards. Funds for shipyard improvement are available from a variety of sources, including the Bank's recent industrial loan (Loan 1054-IND) and a number of possible foreign joint ventures now under discussion A procedure and check-list of documentation and important procurement and operating considerations have been discussed with PANN and BAPINDO and are incorporated in a "Policy Statement Memorandum" agreed on during negotiations (Annex 7) to be adopted by PANN's Dewan Komisaris and used by the Direksi in carrying out PANN operations The proposed loan would also finance about US$1.0 million equivalent for specialized equipment suitable for a maritime training school. It is expected that procurement of this equipment will be undertaken, under arrangements satisfactory to the Bank, by the Inter-governmental Maritime Consultative Organization (IMCO) acting as procurement agent for the Government using, so far as is practicable, the procedures set out in the Bank "Guidelines for Procurement". Where these procedures are deemed to be impracticable by the Bank, procurement will be made through international shopping Agreement has been reached with the Government during negotiations that legislation providing for registering ship mortgages during the delivery voyage of ships acquired and sold overseas will be promulgated. In the meantime PANN has agreed that it will not sell its ships until they will have arrived in Indonesia, where mortgage security exists. Copies of all PANN project appraisals and summaries of all contracts and leases entered into by PANN will be made available to the Bank for information. BAPINDO will, similarly, forward to the Bank copies of its project appraisals relating to any purchase of used ship or to any rehabilitation undertaken. Agreement on these procedures was reached during negotiations. E. Technical Assistance and Consultants 4.20 During the past three years, a substantial technical assistance and training program has been underway in the maritime sector. This program 1/ Procurement of used ships will also use standard forms, i.e., Japanese and Norwegian Sales forms. An appraisal of the shipping company and a Development Agreement will also be approved by the Bank prior to procurement.

29 has been funded by bilateral lenders, UNDP, ADB, and the Association. The programs directly related to the improvement of inter-island shipping are described in Annex 4. Some of these programs must be continued in connection with the proposed project. These are: assistance to BKI, training of ship inspectors, advisory and planning services to SEACOM, training of crews, communications advisory services, and advisory services to PELNI and BAPINDO, described in more detail in paras 4.22 and While some of these activities have already been funded for up to two additional years, it is prudent to ensure the continuation of these projects. The Government has agreed to apply to the bilateral lenders now financing these projects for their continuation until the end of 1978 or the end of the first quarter in Should such finance not be available, the Government will continue to finance these projects under arrangements acceptable to the Bank. In the case of advisory services to SEACOM, PELNI, and BAPINDO funds are included in the proposed loan to provide the required technical assistance to these institutions Several new programs have also been included in the proposed project and are described in detail in Annex 4. They are provision of instructors and equipment for training marine engineers and deck officers described more fully in Section F, below; technical assistance to PANN amounting to about US$0.3 million equivalent over three years for resident financial and technical advisors, a large overseas training program financed by NORAD for 802 man-months for SEACOM, PANN, and PELNI, provision of instructors and equipment for a shipyard training centre, also financed by NORAD, advisory services for the revision of shipping safety regulations; management consultant services for a review of PELNI operations noted in para. 3.08; and the economic study of future shipping requirements In the case of PELNI, funds for continuing the present advisory team from March 1977 to March 1978 have been included in the proposed loan with the agreement of the Government in case further Netherlands financing is not available. The Netherlands has agreed to act for the Bank in administering any contract extension required. The services of a recognized management consultant experienced in shipping are required to review PELNI's procedures and operations. This study will be initiated within three months of signing the proposed loan with a view to preparing a plan of action acceptable to the Bank within the following 12 months, and implementing it. Additional services for PELNI are likely to result from the management consultant's report and provision has been made in the loan for about 108 manmonths of specialist services for carrying out and supervising improved shipboard maintenance and repair services. Should PANN or shipyards require additional technical assistance, these funds would also be available With the assistance of its advisors, BAPINDO is considered to be sufficiently experienced and able to undertake initial preparation of appraisal reports to be used as basis of PANN's leasing and sales of ships. To continue the advisory services, the contracts for the two existing MCD advisors will be extended until the end of February Funds have been

30 included in the Bank's proposed loan for this purpose. The extension of these advisors' contracts has been requested by BAPINDO and agreed to by the Government (para. 4.26) The total amount of technical assistance included in the project is US$6.4 million equivalent, of which about US$1.3 million is to finance existing programs and US$5.1 million is for financing new programs. The foreign exchange cost of the technical assistance program is estimated to be US$6.0 million equivalent. Of this, NORAD will provide US$2.3 million equivalent and the proposed loan US$3.8 million equivalent. The latter would finalnce about 570 man-months of consulting services at an average annual cost of US$64,000 equivalent and US$1.0 million equivalent of training equipment. 1:n the event that any of the US$3.7 million equivalent of funds proposed to be provided by the Bank are not required, they will be reallocated for ship procurement and/or rehabilitation. The Bank has obtained agreement from NORAD that NORD will consult the Bank about the terms of reference and qualification of the consultants to be financed by it. In special cases the Government will request bilateral donors to extend certain existing technical assistance arraingements to be financed by the proposed project. Agreement has been reached during negotiation that the technical assistance program described -in paras 4.20 to 4.23, and in Annex 4, will be undertaken. J. Training 4.25 A training program for ship crews and marine officers is included i-n :the proposed technical assistance component of the loan (Annex 4). Bi- Ilateral aid from Japan will finance crew training and the training courses will be organized by four Japanese experts (24 man-months). Further crew training is included in the NORAD program and amounts to about 200 manmonths. The Bank has agreed to a program with the Government for training of1 navigating and engineering officers involving an estimated 294 man-months of assistance in planning, training and instruction preceded by a three nionlzh survey to determine the precise need for instructors and equipment. 1he training program has the objective of doubling the annual output of trainees by 1980 to reach 400 per year. The officers' training program proposed would be financed by the proposed loan and is expected to be executed by IMCO which has carried out similar projects in Brazil and Egypt. Equipment procurement for this part of the project would be based on a 14s: to be prepared by an IMCO survey team and will be agreed by the Bank. (>7 Disbursement,426 The proposed Bank loan would finance 60% of each ship rehabilitation or modification done in Indonesia and 100% of each rehabilitation or modification done abroad, 100% of the foreign exchange cost of procurement and delivery costs of each secondhand ship, 100% of the foreign exchange cost of foreign consultants and technical assistance and equipment for the training program, and 80% of costs of Indonesian consultants and experts. No retroactive financing of ship procurement will be required. It is proposed to finance retroactively up to US$200,000 equivalent for technical

31 of action for PELNI, for technical assistance contracts concluded after January 31, Conditions of disbursement from the proposed loan would be as follows: When requesting disbursement for the purchase or rehabilitation of a ship an application will be submitted to the Bank together with: (i) an appraisal by BAPINDO and PANN for the technical, operational and financial conditions of the shipping enterprise concerned and of its ships; (ii) a statement from SEACOM indicating which ships, if any, of the shipping enterprise concerned are to be rehabilitated or scrapped; (iii) a certified copy of the Development Agreement between PANN and the shipping enterprise concerned executed pursuant to the provisions of the Project Agreement; and (iv) (a) in respect of the purchase of a used ship, a description of the ship, certified copies of the purchase contract and the bill of sale, a certificate issued by SEACOM that the ship meet the Government's licensing requirements and will be registered, a deletion certificate, confirmation by Pann that the ship is acceptable, and a certificate issued by an internationally recognized ship classification society acceptable to the Bank that the ship is in class; or (b) in respect of the rehabilitation of a ship, a description of the rehabilitation works to be carried out, a certified copy of that contract between PANN and the shipyard that shall carry out such works, and certificates issued by SEACOM and BKI showing that the rehabilitation works are designed to meet at least the Government's shipping regulations and BKI's classification standards. A disbursement schedule is given in Table 3. A forecast implementation schedule is included in Annex 8. H. Environmental Impact 4.27 There are no Indonesian regulations dealing with the pollution of the sea by inter-island ships. Indonesia is a member of IMCO and is, therefore, bound by international conventions when they are in force. To date, few IMCO anti-pollution of the sea conventions are in force, although many countries have adopted the conventions related to oil pollution. The new ships to be procured by PANN will be equipped with sewage tanks and oily water separators meeting the IMCO specifications. Used ships to be acquired under the project which would have been operating in, mainly, European and Japanese territorial waters will meet the relevant anti-pollution requirements. I. Project Risks 4.28 Because the proposed project is based on estimates of traffic growth and will provide for only a modest expansion of the existing interisland fleet (paras 6.09 and 6.10), there is only a small chance that the ships provided under the project would be underutilized or that the economic results of the project would be adversely affected (para 6.13). However, a major risk is that continued lax enforcement of safety and ship classification society rules would result in a reduced ship scrapping and rehabilitation program and continued operation of many obsolete and unsafe vessels. These risks would arise from the undercutting of freight rates by owners of ships having little or no book value and, as a result, shipowners who have leased project ships would be unable to secure sufficient freight at going rates to pay for the costly new assets. Major financial risks would

32 then have to be faced. Proposals have been made to deal with these possibilities through new administrative orders of SEACOM calling for timely and proper ship inspection (para 3.15), by stricter enforcement of regulations (para 4.12), by improvements to shipping companies and through better training (paras and 4.25), by the implementation of the scrapping and rehabilitation program (para 4.13), and by increased freight rates (para 5.08). J. Possible Future Developments 4.29 The present project covers only a part of the RLS fleet expansion plan proposed by the consultants. A study, which would be carried out during the next 18 months as part of the project, will determine the scale of additional shipping requirements to 1979 as well as make a traffic projection to 1990 (para 6.10). Additional loans for ship procurement are foreseen, as is a continuation of technical assistance, particularly training for navigators and marine engineers for at least the next five years. Technical assistance needs of shipyards may be met by commercial sources, possibly as part of the joint venture agreements or through continuation of bilateral aid. An expanded technical training program for shipyards will also be required. Improvement of port operators will continue to be an urgent task for the Government. V. FINANCIAL REVIEW A. Introduction 5.01 Though PANN is the major recipient of the proposed loan, PELNI is expected to lease and operate about half of the ships involved. Income to PANN depends on the earnings of RLS operators but, except for PELNI and the seven small companies which have received rehabilitation loans under Credit 318-IND, financial records are unavailable. It has therefore been decided to forecast the financial position of PANN and, by analyzing the implications for PELNI of its participation in the project, to attempt to infer implications for the RLS fleet as a whole. The financial implications affect both existing laws and the tariff. It must be emphasized, however, that the financial projections made are largely on the basis of assumptions as given briefly in para 5.02 and in detail in Annexes 5 and 6. Nevertheless, they serve to indicate the financial positions of PANN and PELNI during and following project execution and are considered reasonable. B. The Forecast Financial Position of PANN.5.02 PANN will acquire all the project ships (47 new and 47 used) and will operate as a commercial leasing company earning net revenues from the net margin it maintains between its lending interest rate and its weighted cost of capital; a 3.75% net margin will provide sufficient revenue. Thus, with PANN's income derived from a 10% interest rate included in its sale

33 or lease calculations, it would be able to acquire 50% debt at a weighted average cost of about 12.5%, blending the 15% cost of funds from BAPINDO with funds from the Government at 12%, and still earn an amount equal to about 4% on its equity. 1/ These financing assumptions, used in preparing the financial forecasts for PANN4, were agreed during negotiations. Details of the projections and assumptions used are summarized below and, together with a procurement and disbursement schedule for PANN, are detailed in Annex The total acquisition cost to PANN of the project ships (plus technical assistance to PANN) to the end of 1979 is about Rp billion (US$195.4 million) including interest during construction and delivery costs..fj Of this amount, PANN would contribute about Rp 3.1 billion (US$7.4 million) from its own cash generation. The balance of Rp 78.0 billion (US$188.0 million) is assumed to be made available in equal amounts of debt and equity. 3/ With about Rp. 5.9 billion (US$14.2 million) of debt from BAPINDO funds, the Government will be obliged to provide at least an additional Rp 33.1 billion (US$79.8 million) as debt and Rp 39.0 billion (US$94.0 million) as equity, including the Rp 2.06 billion already provided (para 3.09) PANN, having acquired new or used ships, or financed rehabilitation of existing ships in the fleet, will sell or lease them at acquisition cost, including interest during construction and delivery costs, if applicable, to qualified Indonesian ship operators. It is expected that about half of all of PANN's leasing will be to PELNI. Loans for sales of new ships, with a minimum 10% cash deposit and a 1% commitment fee, would be for a maximum of 15 years, including six months grace after delivery and at an interest rate of 10% p.a. Leases of new ships would be for varying periods of time with a maximum of 15 years, at an interest rate of 10% with a 1% commitment fee, and would be payable quarterly in advance. Used ships of up to 10 years of age would be sold to shipping companies at acquisition cost, with 10% down payment and 20% on delivery of the ship, with financing over a maximum of 10 years including 6 months' grace after delivery, at an interest rate of 10% p.a. Leases for used ships would be on similar terms to those for new except that the maximum term would be 10 years. Sales and lease terms would provide PANN with the net revenues noted in para Leases will actually be of varying periods, on the expiration of which the leases would be revised to reflect the depreciated replacement cost of the ships, as agreed during negotiations. The cost of rehabilitating ships would be recovered from the ship operator over five years, including three months grace after delivery, at an interest rate of 10% p.a. and with a 1% commitment fee. As noted in para 4.13, preparation of a program of rehabilitation and scrapping tied to a specific program of used and new ship acquisition was agreed during negotiations. 1/ This ignores any earnings from reinvestment of surplus cash accruing to PANN which, over the period , would accumulate to over Rp 55 billion. It is likely that the bulk of these funds would be re-invested on more ships, thus increasing PANN's earnings. 2/ Included here for conservative estimating. Included also is the acquisition of the ships noted in para See also Annex 6, Attachment 1. 3/ PANN's debt to equity ratio may rise from 50:50 initially to 65:35 by the time procurement is completed.

34 The cash flow for the period 1974 to 1979 (as given in Annex 6, Attachment 8), shows that the Bank's loan provides about 27% of the resources required by PANN to carry out the project. Cash generation by PANN during this period is equivalent to 30% of the proposed loan. PANN would earn a net income i1n 1978, by which time procurement is expected to be largely completed. PANN's ftnimces are detailed in Annex 6 and are summarized below for the period : P.T. PANN Profit and Loss and Cash Generation, (Million Rupiah) (Actual Estimated) (Forecast) Gross Revenues ,399 10,213 10,933 11,187 11,187 11,028 Less: Operating Eixpenses Gross Income (27) ,000 9,788 10,408 10,662 10,662 10,503 Less: Depreciation ,730 5,309 5,742 5,980 5,980 5,823 Net Operating Income (27) ,270 4,479 4,666 4,682 4,682 4,680 Less: Interest Charges & Reserves ,369 4,496 4,110 3,724 3,300 2,889 Net Income (Loss) (27) (134) (476) (99) (17) ,382 1,791 Add: Depreciation ,730 Other Income ,309 5,742 5,980 5,980 5, Reserves Total Cash Income ,713 5,310 6,308 6,938 7,362 7,614 Less: Repayment of Debt ,890 3,410 3,410 3,390 3,240 Nat Cash Generation ,733 2,420 2,898 3,528 3,972 4, By 1980, when the project has been implemented, PANN's debt service coverage will be 1.5 its current ratio 1.9 and debt will be about 38% of combined debt and equity. These ratios are satisfactory.

35 P.T. PANN Balance Sheet, 1980 Rp. million Total Current Assets 8,271 Net Fixed Assets 61,123 Other 549 Total Assets 69,943 Current Liabilities 4,353 Long Term Debt 24,790 Reserve for Losses 818 Equity 39,982 Total Liabilities and Equity 69,943 C. Tariff Implications of the Project 5.07 The RLS freight tariff, increased by about 20% in 1973, 20% in 1974 and with a further increase of about 25% in 1975, is a commodity tariff based on a constant factor plus a mileage allowance. It applies to ship operations only 1/ and has been calculated to produce about an 8% return on total capital invested in a modern efficiently operated ship of a representative size on a representative route liost existing ships have little or no book value. Therefore, aside from the inefficiency of operations, it might be supposed that the current tariff would yield adequate returns. But the present poor financial condition of most RLS companies and PELNI belies this. Poor productivity, diversion of cash flow from the industry because of outmoded pricing policies and poor management are common. As costly new assets are introduced into the fleet by the project and leased to RLS companiess, their cash requirements will increase sharply, even if company operations improve. The Government therefore intends to continue a yearly review of planning for the interisland fleet, including tariffs based on costs, and to make adjustments required to produce adequate returns on investments in shipping companies. This was discussed and agreed during negotiations. D. Financial Imp D. Financial Implications of the Project for PELNI 5.09 PELNI now makes profits only from terminal operations and stevedoring while its shipping activities incur losses. Partly due to close consultation among PELNI and its advisors, BAPINDO and the Bank, some improvements have been achieved in PELNI's operations over the past two years. Additionally, in 1974 PELNI received about Rp. 2.8 billion (US$6.7 million 1/ Other tariffs are published for on-board and shore-side stevedoring, terminal operations, and forwarding. Port charges cover a separate group of costs.

36 equivalent) in new equity from the Government, with a further Rp 0.6 billion (JS$1.5 million equivalent in 1975, which was used to reduce medium and long-term debt. Repair costs, particularly in foreign shipyards, and losses in the catering department have been reduced. As a result of these and other actions such as the freight tariff increases referred in para 5.07, losses were reduced by over 75% between 1973 and 1975 (Annex 5, attachment 2). As of December 31, 1975 PELNI was in arrears in repayments on account of rehabilitation loans received from BAPINDO in an amount of Rp. 512 million. In the budget for 1976, a further Rp 2.7 billion (US$6.4 million equivalent) is expected to be received from the government as additional equity. Rp 1.7 billion of this will be used to reduce long term debt. The remainder, together with additional debt of Rp 600 million and cash generation of about Rp 900 million by PELNI will finance investment in ships and terminal facilities (Annex 5, Attachment 4). Nevertheless PEL-I, whose losses in the first quarter of 1975 increased sharply, mainly due to an accident at sea, is forecast to earn a small consolidated net profit only in 1980, after the proposed project is completed. A small positive cash flow is estimated to appear in 1979, increasing annually thereafter. These forecasts, however, are based on the assumption of a 80% increase in productivity by 1979, with PELNI leasing half of the project ships. The assumptions are further detailed in Annex Forecasts of important aspects of PELNI costs and revenues, using the assumptions noted in Para 5.09 and Annex 5 are set out below. They are capable of being achieved only through an improved management and the improvements proposed and referred to above.

37 P.T. PELNI Summary Profits and Loss Accounts Billions of Rupiah (actual) (estimated) --- Forecast Shipping Freight Revenues Passenger Revenues Total Shipping Revenues Fixed Cost Variable Costs Total Costs Operating Profit (Loss) (0.1) (0.2) Capital Costs (depr. and leases) (0.8) (0.6) (1.7) (3.7) (6.1) (6.9) Total Net (Losses)on Shipping (0.9) (0.8) (1.4) (3.0) (4.4) (3.4) Agency/Terminal Net Income Other (Expenses) (1.0) (0.8) (0.6) (0.4) (.3) (0-3) Consolidated (Losses) (0.8) (0.5) (0.8) (1.7) (2.2) (0.9) 5.11 Thus, about Rp. 6.9 billion (US$16.6 million) in cumulative losses from shipping operations is forecast to occur between 1974 and However, the above figures take no account of any increases in tariffs arising from the annual reviews referred to in para 5.08; an increase, in real terms, of about 20% would be sufficient to enable PELNI to earn an annual net surplus its shipping activities. Assuming that the balance of the industry leases the remaining 50% of project ships, and that the position of private companies is no worse than that of PELNI, 1/ the proposed tariff reviews should enable PELNI and other companies to earn revenues sufficient to repay leases and provide, together with the measure noted in para 5.08, funds for future 1/ In fact the position of efficiently run private companies should be be better than that of PELNI, as the latter has to operate certain unprofitable routes, due to assignments given by the Government.

38 investment in shipping. Bearing in mind that PELNI's poor financial outlook reflects that of the whole industry, it becomes essential to set reasonable targets for PELNI to achieve by the end of about The proposed management consultant study (para 4.22) is intended both to set targets for PELNI and to indicate what may be possible for the balance of the RLS fleet if actions for similar recovery plans are taken. It will also be necessary to review the position as more up-to-date PELNI results become available. VI. ECONOMIC EVALUATION A. General 6.01 The scattered geography of Indonesia, the fact that about twothirds of the country's 130 million population are concentrated in the small island of Java, and that most of the natural resources are located in other under-populated islands, mean that shipping is of crucial importance for economic development of Indonesia. Implementation of many of the programs of Repelita II depends to a large extent on improved shipping services which the proposed project is intended to help realize. The transmigration of people from over-populated Java to other islands, improved agriculture and development of agriculture-based industries in the outer islands, and exchange of processed goods and raw materials between the more developed Java and the other islands, all depend on shipping. In this regard, providing adequate and reliable inter-island shipping services in Indonesia is similar in importance to the maintaining of an adequate land transport system in many other countries. Herein lies the basic justification of the proposed investment in shipping. B. Traffic (a) Freight Traffic 6.02 As projected in the Bank's First Shipping Project--appraisal report, total inter-island cargo traffic has grown at 7% p.a. from 2.8 million tons in 1969 to 3.6 million tons in If traffic continued to grow at 7% p.a. it would reach 5.6 million tons in The LTFD, however, has forecast cargo traffic to grow about 15.5% p.a. for the period. Total inter-island traffic in 1979 was therefore forecast by LTFD to reach 8.2 million tons, of which about 6.0 million tons would be handled by RLS ships compared to 2.5 million tons in The LTFD forecast was based on the assumption that the Government's plan for Repelita II would be fully executed during the plan period. But there is now considerable uncertainty as to whether the plan targets will be achieved. In view of this, the LTFD traffic forecasts for the RLS may well be optimistic. On the other hand, in light of the recent quickening pace of development of the Indonesian econcmy, the past rate of growth of 7% p.a. could very well be surpassed during the Repelita II period and it is likely that the actual rate of growth

39 of freight traffic to be realized would probably be somewhere between 10,'% and 151%, but perhaps closer to 10%. Projections based on alternative assumed rates of growth are shown in Table 4. (b) Passenger Traffic 6.03 In the immediate Post-World War II years, inter-island passenger traffic was between 600,000 and 800,000 passengers a year, growing at an average annual rate of perhaps 4%; it fell drastically to about 250,000 by 1965; and then grew to about 350,000 by 1970; but fell again to 310,000 in 1972 due to irregular and unreliable services (see Table 5) The LTFD projected that passenger traffic would reach 976,000 in 1979, an 18% annual compound growth during the seven years between 1972 and 1979 (see Table 5). This is a very high rate of growth, but if ships are available and reliable services are provided, it may be attained Additional passenger liner services are now planned only for the Jakarta-Belawan service. On other routes mixed passenger/cargo vessels are proposed. Passenger traffic does not, therefore, have an appreciable influence on the total tonnage required in the project; it only determines the number of ships that have to be equipped with passenger facilities. C. Shipping Capacity and Productivity 6.06 The proposed project is intended to improve the average productivity of the fleet through rehabilitation, and adding new and used ships. Increased average productivity depends on scrapping old ships, increasing the number of days a ship is in service, i.e., not under repair, reducing port days, and on proper management and scheduling Average ship productivity in Indonesia, based on data provided by INSA, shows a low figure of nine to ten cargo tons per dwt for Even this low productivity level will rapidly decrease to the level of four or five tons if no rehabilitation of the old ships takes place. The LTFD estimated that if about 80 ships of the 1973 RLS fleet with less than 200 commission days a year were scrapped by 1979 and if 134 new ships having over 300 days per year operations were added to the fleet by 1979, the average productivity could increase to 17.7 tons per dwt. This productivity level, however, could also be achieved if the load factor were to be increased and the turn-around time shortened. These improvements depend on maintaining a regular and reliable schedule and on improved ship maintenance and port operations and facilities. While the project will improve regularity of shipping services, improvement of port operations and facilities will take more time After rehabilitation, the number of service days per ship per year would be considerably improved. New ships would be in operation for about 330 days per year, and used and rehabilitated ships for at least 260 days per year. On this basis, the average productivity could reach, al least, about 15 tons per dwt.

40 On completion of the proposed project, the number and tonnage of RLS ships would be as follows in 1979: No. of Ships Total Tonnage Existing Fleet /a (remaining in 1979) ,200 New Ships Purchased 51 53,750 Used Ships Purchased 55 59,500 Total ,450 /ac After scrapping about 70,000 dwt of obsolete tonnage and rehabilitating about 54,500 dwt of useable ships Table 3 shows the shipping capacity required for each year betwveen 1973 and 1979 on various assumptions regarding traffic growth and :tipping productivity increase. It is clear from the Table that the snippizg tornage after the completion of the proposed project would be adequate vo nandle the 1979 traffic volume either if the traffic grew only at 7% 03.a., and 15 tons/dwt productivity is attained, or if it grew at 10% with aa asverage productivity of,7.7 tons/dwt. If these conditions are not faet, additional shipping capacity would be required before The anount of additional tonnage needed by 1979 in excess of that provided tunder the project is dependent entirely on the rate of traffic growth and productivity improlrement. These factors must be closely monitored during project execution, Because another shipping project would require at least a year's preparation time, the basis for fleet planning should be set up as soou as possible. Agreement on an early start on this project preparation u'iork was reached during negotiations and funds for financing a study have been included in the proposed loan (Annex 4). I. Economic Rate of Return on the Project 6.11 The estimated benefits of the nroject consist o. (i) reduced ni? operating costs, (ii) increased snlp productivity, and (iii) increased eco'aomic activity catered to by the additional shipping capacity. Benefits under (i) and (ii) are assumed to be realized by rehabilitation and the purchase of used ships. The tonnage of net ships to be purchased represents additional capacity and their benefits would accrue in the form of increased economic development shown on (iii) above. Since data with which to quantify the economic development effects are not available, the net revenue from ship operation based on the current tariffs are used as proxy for the benefits of increased economic activity. Details of the estimates of benefits will be found in Annex On the basis of a seven-year average economic life for the rehabilitated ships, ten and 20-year econoimic life for used and new ships respectively, the overall project would have a rate of return of about 18Z, with used ships alone having a return of about 19%, and new ships about 15%.

41 Return on the rehabilitation part of the project is very high. The benefits arising during the three-year project period alone are more than the total cost of rehabilitation, which means that the return on this part of the project is well over 100% The sensitivity of the calculated economic return was checked, based on assumed variations in both costs and benefits. Since benefits are estimated on a very conservative basis, it is unlikely that their variation would be large. On the cost side also, since the estimate is realistic, no wide variation is expected except for price rises due to inflation. Inflationary price rises are likely to be offset by similar increases on the benefit side since the benefits represent the savings in ship operating costs and the increases in revenues. In view of the above, the possible variations in costs and benefits are limited to 10%. If the cost alone increased by 10% with no change in the benefits, the project's economic return would fall to about 15%; also if the benefits decreased by 10% with no increase in the cost, the rate of return would be about 15%. If the cost increased by 10% and the benefits decreased by 10%, the project's return would be about 13%; in the unlikely event that costs increased by 20% while benefits fell by 10%, the project return would be a little over 11%. VII. RECOMMENDATION 7.01 During negotiations, agreements were reached: (a) with the Government that: (i) it will adequately compensate PELNI, on a basis satisfactory to PANN and BAPINDO, in the event that PELNI would incur arrears to PANN or BAPINDO as a result of operations carried out at Government request (para 3.09 and 4.11); (ii) it will cause BKI's ship classification standards to conform to those of an internationally recognized classification society (para 3.15); (iii) a Financing Agreement satisfactory to the Bank will be signed between the Government, PANN and BAPINDO to specify: (a) the proposed lending terms and relending terms, (b) that loans and equity v-ill be made available to PANN in a regular and timely fashion related to PANN's needs, and, (c), that about US$15.0 million of resources will be made available for the project from BAPINDO (para 4.11);

42 (iv) a program to scrap dwt of shipping by December 31, 1979 will be prepared by August 1976 and implemented in relation to the acquisition and rehabilitation of project ships (para 4.13); (v) a comprehensive maritime training program will be carried out (para. 4.25); (b) with PANN that: (i) auditors, legal counsel, and financial and technical advisers acceptable to the Bank will be retained (para 3.M10); (ii) the content of lease and sales documents; its procure- Tent procedures, and its "Policy Statement Memorandum" wi1l be satisfactory to the Bank (para 3.11 and 4.17); (iii) it will hire an insurance executive, seek the most economical fleet policies from national and international insurance brokers, and purchase "all risk"' insurance onthe replacement cost of its ships (para 3, ;6); 'c). with PA1,N and BAPITDO that: (i) a contract, satisfactory to the Bank, between PANN and BAPINDO for BAPIN-0h to undertake appraisals of lessees and Duyers of PZ'A7i ships will be concluded (para 3.10); and (ii) copies of all appraisal reports and development agreements with shipping en arprises will be forwarded to the Bank (para 4.19). 'i D02 A condition of loan effectiveness would be that the financing agreement, satisfaztory to the Bank, para ;>o01(a)(fii,i and the Project!greement would be signed (para 4.06). The project forms a suitable basis for a Banik loan of US$54.0 vlll3ion to the Government of Indonesia to be repaid over a period of 15 y7ears including three years of grace. April 1976

43 fleet ANNEX 1 Page 1 INDONES IA APPRAISAL OF A SECOND SHIPPING PROJECT Progress of Ship Rehabilitation Project (Credit 318-IND) Introduction The credit for US$8.5 million equivalent was signed on June 29, 1972 to finance a project consisting of: (a) a rehabilitation program to repair about 160,000 dwt of Inter-Island and Regular Liner Service (RLS) shipping (US$7.0 million); (b) provision of technical assistance for three shipyards (US$1.5 million); and (c) provision, via UNIDF and blatera-'l aid, of technical asisistance for 'the. establish-ment of a Naritime Credit Department in the State Developmenc Baank (BAPINDO), f'r a fong-term developiment studv, and for technical assistance to the Indonesian ship zlassif'cation or-anizatio,n and to thie Indonesian National Sh4powners Associati,on (INSA) T],4R project is progrsslcg slowlj;, but sli funds for sl,p rehabilitacton art. exe cte Lbte o tite; b-y t-e enid of?9,76 or early l 97 T he Bank h'pas agreed to the request of z½.he C >.e rnment tc exterd t ne cl½sing d a t e u.sntii SepteMber 30, 1977, All of lhe crfi ginal cosnltant Service contracts (,for shipyard assistance, advisory to T'S3, an. ad visors to BAP3INDWI, which fiaanced 'the rehab fl.tanloz) have t:pi red Onl'y Lhe last noted was extended to February Thi'ze services wv,iz. extended xe -until Febrsary 1978 under the Proposed second shipping loan. iio BAPINDO has cortiitted about 78t of e credit. Delays in Bank disbu-, sements are attrlbutable to.-:o 'leng4phy repair time, delays in scheduling repairs, and slowness in applying for rd imbursement. Steps are being taken to reduce these delays. Due to the long titwe elapse. between initiating ship surveys in early 1971 and commencement of lending in mid-1973, the poor quality of some of these surveys, cessation of normal repairs and consequent

44 ANNEX 1 Page 2 further deterioration in the ships after the initial surveys, lack of enforeemient of rules by Goverfnment and the resulting sharp cost increases, the available funds will repair only about half of the tonnage originally estimated to be repaired under the rehabilitation program. Progress of the Pr_iSct 1. The project which, in addition to funds rrom Credit 318 uses funds zrico an Industrial Credit (Credit 310-IND) is progressing slowly. A sumary of the situation as of December 27, 1975 is as follows: Cr. 310 Cr. 318 Total V.N ships rehabi.)jttated or io progress No4 to be rehabu1d.1tated by '9/30/77 /a f, I 0I 930/ '' Je-waeight toons 24,877 67,264 92,141 riseec Costs, eszi.r.ated ($000) ,038 13,951 -"ND) LGoans, e stimated (N0O) 2,201 9,447 11,648 IDA Reinil se:me-t-1t expected ($000) 1,131 7,051 8,202 e I e a, wc it > to (UI S ) Jfect Casts, estinated 1' i -YINf)') Toan, esa"cated t sa Reir0bursement, expected Aprjaisal Report astimates i.o T wrhins 142 Diea& eight tornnage 168,000 Project costs ($000) 11,400.ost per deadweight ton /a Including US$897,000 of projects finhncced by BAPINDO's own funds. 2, A number of ships which were li cnsed in the RLS at the time of apppraisal and wnhch subsequently Lad becn :emporarily licensed for use on 0onean routes, were rehabilitated unde-r Credit 310, This was due to the wording of the Lce-n Agreement for Credit 318 which Unimted lerding to licensed RLS inter-island ships. For purposes of assessing the rehabiicitation scheme, those ships rehabilita.;e under CreS`.z 310 should be included in the totals. There were 10 ships ir this categet-&- total'ling 21,7/.. The repair of these ships involved sub-prcjects of US$1 9 million including BAPINPJO loans of US$1.5 million. IDA reimburs.m-nents of US$1.2 i1n,.lion fc-r tcaese projects hnas beern made under Credit 310. in addition, BAPINDO his loaned about US5200,000 of its own funds for ship rzs?airs for three ships 3 durt) ).

45 ANNEX I Page 3 3. Thus, the total ship rehabilitation program will eventually probably involve 55 ships of 92,141 dwt; repairs of US$13.95 million; BAPINDO loans of US$11.6 million; and IDA reimbursement, both already received and expected, of US$8.2 million. All of these expenditures are likely to be committed by the end of 1976 or early in While IDA disbursement approvals at February 29, 1976 of US$5.3 million (US$4.2 million under Credit 318 plus US$1.1 million under Credit 310) are lower than the estimate during appraisal - US$8.4 million as of December 31, the shortfall is due to (a) substantial time lags resulting from the finalizing of shipyard accounts which the shipowners do not want to accept, or pay for, until presented and (b) disputes arising after presentation in which more time is lost while a final account is developed. As some (in most cases, much) work is added and done after the original repair estimate and contract has been made, such disputes are inevitable. In an attempt to improve the pace of disbursements, BAPINDO has now insisted on progress payments being made under ship-repair contracts. Heretofore, the IDA prohibition against retroactive finance has weighed against BAPINDO payment of all or part of an account, in case unexpected delays were to stretch out the repair period and imperil further reimbursement by IDA. Contracts are now to be signed in advance of repairs which authorize up to 50% of costs to be reimbursed prior to completion. This will speed disbursements. The Association has agreed to waive the 90-day rule in such cases. As of mid- December, 1975 two such contracts have been signed. 5. Nevertheless, for inter-island ship rehabiiitation the two Credits taken together are being utilized financially about as was expected for Credit 318. Measured against expectations of physical achievement, the Credit will have accomplished less. At the end of 1975, 27% of the expected number and 41% of the expected ttonnage of ships have been rehabilitated with total project costs of US$8.8 million as of that date. By the completion of the project on September 30, 1977, 39% of the expected number of ships and about 55% of the expected tonnage could be rehabilitated by the US$13.95 million of projects noted in para 3. The eventual total dollar value of repairs was expected to be US$11.4 million at the time of appraisal. This was estimated to result in the repair of 142 ships totaling 168,000 dwt. Sharp cost increases - from an estimated US$67.86 per dwt to an average of US$ per dwt - are accounted for by price changes, original under estimates of the work, and rapid deterioration of ships because of poor maintenance in the two-year period from the original surveys until the actual work was started. It is difficult to apportion the increased cost between these items, but a reasonable estimate of the US$83.54 per dwt difference (123% increase on original estimate) is as follows: Accounted for by: (i) Original physical contingency 5% (ii) Added physical contingency reflecting poor original survey 17%

46 ANNEX I Page 4 (iii) Original price contingency 15% (iv) Added price contingency ( ) 50% (v) Increased cost of deterioration and poor maintenance 36% Weighted Average Increase 123% 6. Many of 142 ships originally surveyed have been scrapped, many are no longer in the RLS (though they may be sailing), and some were repaired to a lower standard. A number of applications, made prior to June 30, 1973 deadline (which had to be met if access to an interest rate of 9-1/4% was to be protected) were withdrawn after mid Uncertainties following the January 15, 1974 riots in Jakarta also caused some further withdrawals. The Credit was slow in being utilized by the privat:e sector, but was vigorously pursued by t:he state shipping company. As of December, 1975 BAPINDO had committed loans to nine borrawers for a total of US$8.98 million. 7. In early 1973, BAPINDO estimated that it would be feasible to rehabilitate only 89 of the original 142 ships surveyed in Of the 89, 32 have been committed under Credit 318 and 7 under Credit 310, and 6 have been repaired by BAPINDO funds. A further 9 await final decision, 21 were withdrawn, and 14 were rejected. The balance, plus some of the ships noted previously as withdrawn or rejected, have either been scrapped or are still sailing with special dispensation from laws which restrict their operation if not classified by the Indonesian ship classification society, Biro Klassifikasi Indonesia (BKI). 8. Four consultant contracts, each of 2 years duration have been corapleted. Two of these involved technical assistance to three shipyards and resulted in some substantial improvement in the quantity and quality of work undertaken. Two of the shipyards in question are the subject of joint venture negotiations with a foreign shipyard. Another consultant contract involved UNDP-finance and Bank executed technical assistance to INSA. This was less successful becausl of the reluctance of shipowners' to avail themselves of the services provided. 9. A fourth consultant contract for advisory services rendered to the state bank, BAPINDO was extended for a third year and expired at the end of This contract for services of a financial and technical adviser was financed by UNDP and was once more extended to February It has been a successful and important part of the project. The contract for two ad.visors has been further extended to February 1978 as part of the proposed lcpan and will assist in further rehabilitation to be undertaken during 1976 and Credit 318 is expected to be committed by the end of 1976, or early 1977, unless PELNI does not borrow from BAPINDO to rehabilitate five eligible ships with an estimated repair cost of US$1.465 million, now under consideration. Additional ships will be rehabilitated under the proposed second shipping loan. April 1976

47 ANNEX 2 Page 1 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Transport Planning and Non-Maritime Transport Activities in Indonesia The Transport Sector General 1. The Indonesian transport system depends chiefly upon inter-island marine services as well as upon highways and railways. The marine services comprise Regular Liner Service (RLS) between specified ports as well as unscheduled (tramping) services and ocean going shipping. Land transport is well developed in Java with an extensive railway and highway network, whereas in Sumatera railways have only been developed in some parts, and the road network provides the basic links between principal cities. On the other islands, except for a small railway on Madura, facilities are limited to a few roads in areas around ports and towns. Air transport volume is still small but has increased rapidly in the last few years. 2. GDP was the equivalent of about US$16.3 billion in 1973 or about US$130 per capita. The economy grew during the First Five-Year Plan and in 1975 at over 7% p.a. The Second Five-Year Plan projects continuation of the growth pattern from the previous plan period but with greater emphasis on industrial expansion, particularly in basic industry; transport is projected to grow at the rate of 10% p.a. With the increase in oil prices, substantial new resources have become available to the Government and have already been committed to expanding investment. Indonesia's export earnings are expected to rise further from US$4.4 billion in 1974 to US$11.4 billion in 1980 and to provide the necessary foreign exchange and savings for additional increases in the rate of investment. The Government is also stressing the balanced development of all regions in Indonesia and the opening up of remote areas. All the foregoing trends will place large new demands on the transport system and may well require transport to be expanded in excess of the projected 10% p.a. if the demands are to be met. 3. The Government's strategy as set forth in the Second Five Year Plan (Repelita II) is to continue the rehabilitation program for infrastructure including the gradual upgrading of the country's existing transport facilities. This will be supplemented by the provision of new infrastructure for (i) exploitation of newly discovered resources, (ii) support of the Government's regional policies and (iii) improvement of rural transport infrastructure. 4. The contribution of transport to GDP virtually stagnated for most of the 1960's but grew at nearly 11% p.a. in constant prices over the First Plan period as the economy recovered. The Government's policy in the First

48 ANNEX 2 Page 2 Five-Year Plan emphasized rehabilitation of transport facilities and the condition of infrastructure and the transport fleet has improved markedly as a result. In addition, some fleet expansion took place, particularly in road transport and aviation. The primary aim of the Government's Second Five-Year Plan in the transport sector is to create substantial capacity increases both by additional investment and by improved productivity, through completion of unfinished rehabilitation work and further strengthening of sectoral institutions and organizations. 5. As a result of its enlarged oil income, the Government has expanded expenditures under the and development budgets over the levels projected in the Second Plan documents. The increase for transport is almost the same as for the budget as a whole and, other than differential acceleration of expenditures in some transport activities, the Government has not indicated a shift in its sectoral strategy. Over the Second Plan period, investments for transport in the public sector (assuming continuation of development expenditures at increased levels) and by the private sector are estimated at about Rp 1,800 billion (US$4.3 billion, in 1973 prices) roughly 17% of total investments; about 56% of this will flow through the public sector under various central and local governments' development budgets with the remainder being financed privately, particularly for the purchase of road and other transport vehicles. While investment projections were based on very limited data, particularly regarding local government expenditures, the proportion devoted to transport falls within the range most frequently observed in similar economies. Transport Planning, Policy and Coordination 6. Responsibility for planning and policy formulation in the transport sector is divided at the national level between two departments, Department of Public Works (DPW) for roads, and the Department of Transport, Communications and Tourism (DOC) for other modes. Investment proposals are formulated at the modal level in these departments and then submitted by them to the National Planning Council (BAPPENAS) for review. Project proposals, which normally include cost-benefit analyses, are then individually reviewed and approved by the Ministry of Finance. Project cost-benefit analyses are frequently made by consultants and thus have not represented an overwhelming burden on the limited number of Indonesian transport specialists. Nevertheless, as the number and complexity of analyses is increasing, the Government intends to employ one or two expatriate experts financed under an IDA Technical Assistance Credit (275-IND) to help the MOC in reviewing investment proposals from its constituent agencies. 7. Modal planning is hindered by the lack of trained staff and by the limited and irregular flow of data. Nevertheless, planning of highways in DGH has been greatly strengthened in recent years with the assistance of the HPAT and will receive significant assistance under the proposed loan. Railway planning will be improved under the current Bank loan for the railways, and national ports planning, which is urgently needed to coordinate the ports with each other and with shipping and land transport, will be given special attention in the proposed Bank loan for the port of Jakarta (para

49 ANNEX 2 Page and Annex 1). The Government has initiated training programs for transport planning staff and is pursuing several means to improve the availability of information, among them the provision of another expert financed from Technical Assistance Credit 275-IND to work with DOC on data problems. The training of Indonesian staff as well as improvements in modal planning and data operation will take time and it will be some years before these essential prerequisites to a national transport plan and to improved transport coordination will become available. 8. The Government wields considerable influence over the operation of the transport system, not only through provision of infrastructure and ownership of important transport enterprises in all modes but through rate setting and other regulatory activities. While it has not formulated an explicit transport policy, the Government has identified areas requiring special attention, particularly financial objectives and control of public sector transport firms and pricing policy. At present, accounting systems vary widely among sectoral enterprises and means are not available to compare financial performance or to set standards. The Government's decision on rates must frequently be made without analysis of costs, demand factors or the effect on competing modes. Two experts, financed from Technical Assistance Credit 275-IND, are now advising DOC in these areas with the aim of making the Government's activities more consistent and effective, improving the return on its investments in the sector and ensuring that it considers all relevant economic factors in transport pricing. Improved information is also considered vital to better sector management and will be aided by the measures described in para Road Transport 9. The extra-urban public highway network totals 86,264 km. The roads are classified as "national" (10,628 km), "provincial" (24,466 km) and "district" (kabupaten) (51,170 km), indicating their relative importance and the basis for defining administrative, financial and executive procedures associated with construction and maintenance. In addition to the public highway network, agricultural estates and oil companies construct and maintain their own roads. Tables 1 and 2 show the public network by classification and by surface type. 10. In 1974, registered four-wheel vehicles (excluding military and diplomatic) totalled about 535,000 of which 338,000 were cars, 166,000 trucks and 31,000 buses (Tables 5 and 6). The number of vehicles actually in use is considerably less; on the basis of 1972 inspection records, only about two-thirds of trucks and buses registered were then on the road. The rapid expansion of vehicle registrations over the last five years (by nearly 70%) has been reflected in a significant reduction of the average vehicle age which dropped from 12.1 years in 1969 to 10.6 years in Most trucks still have only two axles but recent additions to the fleet typically have somewhat higher carrying capacities than the older vehicles (previously about 3.5 m tons, now 4 to 5 m tons).

50 ANNEX 2 Page 4 Railways 11. Railways are confined (with one minor exception in Madura) to two islands: about 4,700 km on Java and 2,000 km on Sumatera. The railways, which were built during the 70 years prior to World War II to more primary commodities to foreign markets, suffered with declining exports in the 1950's and 1960's and, as with most public infrastructure in Indonesia, they were allowed to deteriorate. Limited rehabilitation took place during the First Five-Year Plan and freight traffic recovered significantly, at about 7% p.a. in m ton-km, while passenger traffic after many years of decline is starting to show an upward trend. Due to long neglect in replacing of overage assets and poor maintenance facilities, railway operations have remained deficient. 12. With better performance, the railway could continue to make an important contribution to the economy, especially along high density freight corridors in Java and on certain sections of the Sumatera railway network and in moving the growing volumes of industrial bulk commodities. Accordingly, the railway has formulated a comprehensive program of modernization and rehabilitation coupled with technical assistance which formed the basis of a Bank Railway Project (Loan 1005-IND), in June 1974, and is presently being implemented. The proposed action program, which has recently started, includes acquisition of locomotives and rolling stock, improvement and modernization of maintenance of assets, reorganization of management, further phased staff reduction and modernization of accounting. Important performance targets have also been agreed: by , the railway is to cover all operating costs including depreciation and earn a small return on investment (1-1/4%); average net train loads are expected to be increased in Java from 110 m tons in 1973 to 162 in 1979 and car turn-around time reduced from 8.3 to 7.3 days. Inland Waterways 13. Commercial river transport extends to 10,000 km of navigable waterways. The most important river traffic is logs. Fourteen rivers in Kalimantan and Sumatera totalling 4,000 km were recently studied by consultants, Research and Development (Belgium), and the Government is installing better navigational aids but no major improvement works are contemplated. The Government is also planning to expand "pioneer" services by river craft in some of the remote regions. Pipelines 14. Pipelines are under the control of the state-owned oil company, Pertamina. A product pipeline from Cilacap to Jogjakarta is already in use; another line from Cilacap to Bandung is presently under construction; when open it will divert significant amounts of petroleum products from the railway. A gas gathering pipeline system was financed by IDA in 1972 in Sumatera to supply gas for the PUSRI II fertilizer plant (Credit 193-IND)

51 ANNEX 2 Page 5 and will be extended to supply PUSRI III and PUSRI IV under Bank Loan 1089-IND. Another gas line is under construction in Java to supply gas for the proposed West Java fertilizer plant at Jatibarang and a steel plant near Merak. Aviation 15. In 1972 about 95% of domestic civil air traffic movement in Indonesia passed through 27 airports (about one-third of these movements through Jakarta) and recent improvements were concentrated in these facilities to permit use by modern aircraft which could handle the rapid rise in traffic most efficiently. As a result, 19 airports can now accept jets as against only 3 at the start of the First Plan. While landing fields have been improved, substantial deficiencies persist in aeronautic communications, navigational aids and air traffic control. In line with the rapid rise in traffic (nearly three times between ), the capacity of the civil aviation fleet has been expanded and the types of aircraft diversified. The number of planes has, however, been reduced with the replacement of low capacity older aircraft by more efficient equipment. Most of the needs in the aviation subsector are for equipment for which bilateral financing is likely to be available. The Government is studying the construction of a new international airport for Jakarta and is presently reviewing a report on this subject by consultants, Aviation Planning Services (Canada). During the Second Plan, the Government also intends to promote the construction of landing fields in the remote districts which will be provided with a subsidized service by low capacity aircraft. April 1976

52 ANNEX 3 Page 1 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Summary of Consultants' Analysis of Existing Regular Liner Service Fleet and of Fleet Expansion Alternatives Introduction 1. Consultants (Maritime Research Centre, Netherlands) retained by the Government and financed by Netherlands aid, made a study of the interisland and Regular Liner Service (RLS) fleets in connection with the Long Term Fleet Development Study (LTFD). A sum-ary of their analysis and proposals for provision of transport services over the period 1975 to 1979 is given below. Indicative forecasts were then made up to Aging of the 1973 Fleet 2. There were about 324 ships registered in the inter-island fleet in 1973, of which 187 were licensed to operate in the RLS. For analytical purposes, and to assist in making projections based on scrapping, trade forecasts and ages of ships, the Consultants studied changes in the interisland cargo fleet between 1972 and 1973, (Attachment 1) because vessels could be shifted among the various sections of the fleet according to the licensing process. Licensing is related to seasonal needs for shipping; to the requirements of the Government for meeting needs in out-ports not normally served regularly; and to the ebb and flow of trade to nearby countries, for which trade some of the inter-island fleet is suitable. 3. The Consultants carried out detailed studies of the inter-island fleet structure in the base year 1973 in order to gain an insight into what might be the attrition to 1979, the first forecast year, assuming certain scrapping. The 1979 fleet was then forecast using replacement for scrapped ships and with certain assumptions concerning ship productivity and cargo availability, and routes. 4. The details of the 1973 fleet are given in Attachments 1 and 2. In broad outline the tonnage and age structure of the RLS fleet of 187 ships in 1973 was:

53 ANNEX 3 Page 2 dwt Year of Build (Age) Under % prior to 1955 (+20) 35% 600-1,000 31% (11-20) 53% 1,000-2,000 24% after 1964 (0-10) 12% Over 2,000 12% 100% 100% The aging of this fleet to 1979, assuming no scrapping, would mean that many ships would be over 25 years of age by that date. As the useful and economic life of ships in Indonesia is currently estimated to be under 20 years, large numbers would have to be scrapped. Of the 324 ships in the 1973 inter-island fleet, 118 or 36% would be over 25 years old in Figures for the RLS section are similar, but by deadweight classes they vary substantially. While no ships of 3,000 to 4,000 dwt would be over 25 years old in 1979, 50% of the 1,600 to 2,000 dwt class, 52% of the 400 to 800 dwt class, and 41% of the 1,200 to 1,600 dwt class would be in that category. Rehabilitation 5. The Consultants studied the possibilities for further rehabilitation of ships in the 1973 fleet and concluded that only 10 ships, in add'tion to the 53 then reported by BAPINDO likely to be rehabilitated under the First Shipping Credit, would be rehabilitated by the end of This estimate was based mainly on age but also on cost estimates made early in Since then, with sharp increases in the cost of new and used ships, rehabilitation became economically attractive even at costs substantially in excess of the current average cost of US$146/dwt. This is shown in the calculations below which have been made by Bank staff. Assumed Lease Costs (Capital Only) Rehabilitated Used New Ships Ships Ships Cost per dwt $200 $700 $1,800 Lease Terms 5 yr. at 15% 10 yr. at 15% 16 yr. at 15% Annual Cost, dwt $ $ $ Add Other Costs: (i) Costs of non-standardized ships (+15%) $ $ (ii) Use of less Productive Ships (+6%) Total Cost Ratio

54 ANNEX 3 Page 3 6. Even assuming a greater penalty in costs than allowed for in the above figures, the attractiveness of rehabilitation and the high cost of new ships is evident. Of the 1973 fleet of 187 shilps, 81 units were found to be in good condition, 45 in barely acceptable condition, and 61 in poor condition. As deterioration will continue among the non-rehabilitated ships (unless the operators substantially alter their maintenance procedures), a further decline in the availability of the fleet for operations is implied. Unless rehabilitation increases, scrapping of many more than half of the 118 ships to be over 25 years of age in 1979 is likely. Commission Days 7. The Consultants, working with indicative 1972 data, concluded that only 35% of the fleet operated more than 300 commission days per year; t8% of the fleet achieved between 200 and 300 commission days; and 45% had less than 200 days per year. Adjusting the available data to show commission days according to age of ships in 1973 revealed that the proportions had shifted so that 41% had over 300 days and 40% had under 200 days. This Lfnprovement was a short-term result of the rehabilitation program and ref'lected the increased traffic available which induced ship owners to repair their ships and to operate them more efficiently Fleet Capability in Consultants assumed that rehabilitated ships could operate for over 300 days per year and that proper maintenance would take place after rehabilitation as a result of loan agreements calling for annual dry docking. It was further assumed that 10% of the old ships with good performance would survive by the end of the seventies, while 20% would have reduced performance (from 200 to 300 days p.a.). The balance (70%), would show poor performance of under 200 days per year. Finally, they assumed that half of the ships built from 1955 to 1965 would show a lower technical availability by the end of the decade than currer':ly. 9. Available records and estimates were then used to calculate probable commission days according to size class. This analysis indicated that about 80 RLS ships, all likely to have under 200 commission days per year, should be scrapped in the 1973 to 1979 period. 10. Seventy-two of the 80 ships proposed to be scrapped were built prior to 1955, 8 were built between 1955 and A scrapping program totalling 70,600 dwt was proposed for , with from 12,000 to 20,000 dwt scrapped per year. It was also clear that, without further rehabilitation, the efficiency of the 1979 fleet would not be sufficient to meet the productivity levels indicated to be required in order to carry the forecast cargos available. To the extent, then, that further rehabilitation is not carried out, more new ships will be needed to provide for the forecast cargo availability.

55 ANNEX 3 Page These assumptions led to changes in the 1973 RLS fleet forecast to be available in 1979, as shown below: Number of Ships Forecast to be Available Each Year To Be Scrapped/a Under , ,000-2, Over 2, /a Consultant's Data There will be only 106 ships, or 57% of the 1973 fleet available for operations in Even this number will not be available unless the rehabilitation and repair of ships is continued. Replacement and Expansion 12. In order to obtain the number of ships to be required in 1979, Consultants projected the yearly increase in traffic from 1973 to the forecast 1979 level. Productivity of the RLS fleet in cargo tons carried per deadweight ton was 12.2 in 1973, far below the levels obtainable with proper operations but significantly above the 9.0 tons/dwt recorded in Forecasts of yearly productivity to reach a target of 17.7 tons/dwt were made by the Consultants based on a variety of factors including estimates of unloading and loading efficiency to be attained in the ports. These forecasts were used to estimate the yearly shipping tonnage required each year as shown below. A building program was derived from this: Year Productivity (tons/dwt) Cargo Available (million tons) Shipping Needs (000 dwt) Consultants then studied two processes by which the 1979 fleet could be expanded to meet forecast requirements. One process involved adding only new ships, the other involved adding a mix of new and used

56 ANNEX 3 Page 5 ships. These estimates are given below and include some small ships which would be phased out of the RLS though they are currently sailing in that fleet FLEET FORECAST Alternative I Alternative II Remain- Adding RLS Adding Adding Remains RLS ing 1973 New Fleet New Used 1973 Fleet Ships Ships 1979 Ships Ships Ships 1979 Under 400 dwt , ,000-2, Over 2, Less Small Ships /a MXajor RLS Types Ia These ships, while sometimes now used in the RLS would not be so used after Addition of 56 secondhand ships of the 700 and 1,500 dwt classes from among ships built prior to 1965 was proposed. The fleet including used ships was assumed to have slightly less productivity so that a total of 252 ships rather than 235 ships of the major RLS classes were considered to be necessary. Of the ships to be added, 21 of the under 1,000 dwt, 44 of the 1,000 to 2,000 dwt class, and 10 of the over 2,000 dwt class were judged to require passenger accommodations. j5. Thus the recommendations for shipping until 1979 were for fleet expansion and replacement via: (a) Used and New Ships 26 used ships of 700 dwt 18,200 dwt 30 used ships of 1500 dwt 45,000 dwt 63,200 dwt 90 new ships of 1400 dwt average size 126,000 dwt (b) New Ships 49 ships of 945 dwt 46,305 dwt 72 ships of 1650 dwt 118,800 dwt 13 ships of 2350 dwt 30,550 dwt 195,655 dwt

57 ANNEX 3 Page 6 Long Range Requirement 16. Based estimates of 21.6 million tons per year traffic and ship productivity in 1990 of 25 tons/dwt, the Consultants estimated that, after allowance for scrapping, the following number of new ships would be required between 1979 and ships of 945 dwt 118,125 dwt 212 ships of 1650 dwt 349,800 dwt 149 ships of 2350 dwt 350,150 dwt 818,075 dwt 17. Investment in ports, excluding dredging and beaconage, would be required at a level of about Rp billion per year to 1990 in order to accomplish the hanlding of 25 tons per dwt of shipping, the Consultants estimated. April 1976

58 INWjNES'-A APPRAISAL OF A SECOND SHIPPING PROJECT Age and Deadweight of Inter->sland Fleet as of lb June 1973 (OOO'e of Tons) Deadweight unknown total Tons hoo oo oo unknown 2 2 total h Source: List of Inter-island Shipping Companies and their Fleet (activities ); Direktorat Lalu Lintas Dan Angkutan Laut; June 14th Apri- La issued by the

59 INDONESIA APPRALISAL OF A SECOND SHIPPING PROJECT Age and Deadweight of Ligenmed RLS Fleet as of 114 June (Number of Ships) prior to Deadweight 1950 '50 - '54 '55 '59 '60 - '64 '65 - '69 '70 - '71 unknown total Tons o oo o urknown C total Source: List of Inter-island Shipping Companies and their Fleet (activities ); issued by the Direktorat Lalu Lintas Dan Angkutan Laut; June 14th pri-L.L970

60 ANNEX 4 Page 1 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Technical Assistance and Training Program and Main Points to be Included in Consultants' Terms of Reference 1. There are twenty technical assistance projects related to the shipping project. Of these, five, costing US$705,000 equivalent, are now financed by German, Japanese and Netherlands bilateral aid for periods of up to two years. Seven technical assistance projects with an estimated total cost of US$2,424,000 equivalent will be financed by the Norwegian Agency for International Aid (NORAD). One of these seven (US$510,000 equivalent) is the provision of funds to extend the current German projects of assistance to Biro Klassifikasi Indonesia (BKI) should continued German aid not be available after July Two projects (US$414,000 equivalent) are based on UNDP projects which were in an advanced stage of negotiation prior to the reduction of UNDP funds. 2. The proposed Bank loan will finance the balance of eight projects with an estimated cost of US$4,046,000 equivalent. One of the projects (US$245,000 equivalent) replaces UNDP financing for a project for which funding has expired. Another project (US$560,000 equivalent) provides for continuing two projects now financed by Netherlands bilateral aid, should that aid not be available after the planned expiry dates in March Thus a total of US$6,470,000 of technical assistance is directly related to and is included in the project finance. Of this 37% (US$2,424,000 equivalent) will be supplied by NORAD and the Government, and 63% (US$4,046,000 equivalent) by the Bank and the Government. 4. NORAD and the Government agreed with the Bank that all terms of reference for experts NORAD will finance will be discussed and agreed with the Bank. NORAD will also supply information to the Bank on the training programs to be financed by Norway. The Bank has received assurances from the Netherlands that the Directie Internationale Technische Hulp (DTH) would be willing to act as a contractor in extending the two projects referred to in para 2 above. (a) On-going Projects 5. The Federal Republic of Germany has extended its technical assistance by consultants, Germanischer Lloyd (GL) to BKI until July Japanese shipping advisors to SEACOM and crew training and communications advisory services have been arranged until 1978.

61 ANNEX 4 Page 2 7. Netherlands advisory teams for management assistance to PELNI (72 man-months) and for planning services to SEACOM (72 man-months) expire in Mlarch 1977 (para 2, above). (b) New Projects 8. New technical assistance projects are required for assistance to PANN; for training marine officers and engineers and shipyard workers; for a revision of maritime regulations; for a management consultant review of PELNI; for additional maintenance and training services; and for economic and planning studies. These are described below and are summarized in Attachment I to this Annex. 9. PANN will require assistance in procurement and supervision of new ship construction, in organizing the financial arrangement with lessees, and in assessing prospective charterers of ships it acquires. It will require assistance with the procurement of used ships which may be located, and must be inspected, in widely spread geographical areas at unpredictable times. Consultant naval architects/surveyors, legal counsel, and resident financial and technical advisors will be retained under terms of reference satisfactory to the Bank to provide local and overseas advisory services and liaison in Indonesia,, particularly for the procurement of used ships. Ninety-two man months of such services will be financed by NORAD. Financial services and advice to PANN would be rendered by BAPINDO on a mutually agreed basis satisfactory to the Bank. PANN, with the agreement of the Bank, would also retain shipbrokers to be its exclusive representatives in soliciting offers for the sale to PANN of used ships. The two resident advisors for finance and technical matters would be appointed with the agreement of the Bank using terms of reference approved by the Bank. NORAD will finance 48 man months of these services. 10. Training Assistance, both in the form of equipment and instruction, is essential to improve the quality and increase the number of officers and engineers. The latter have the main responsibility for maintenance, which is poorly done in Indonesia. The program is based on an existing proposal developed over the past few years with some bilateral assistance, to double the output of maritime establishments to 400 persons per year within five years. UNDP had been asked by the Government to fund the program and a project document for an initial survey of requirements had been agreed. The Inter-governmental Maritime Consultative Organization (IMCO) had been designated as executing agency. Due to the shortage of UNDP funds this project was deferred and the Government asked the Bank to include funds in the proposed loan for this project. This has been done and, due to the unique circumstances and the experience of IMCO, the Bank has agreed to IMCO carrying out the trainproject, subject to the Bank's agreement on terms of reference and the list of ing equipment required. IMCO would procure the agreed supplies and equipment under procedures contained in the Bank's "Guidelines for Procurement," as agent for the Government, and the Bank would disburse to suppliers directly.

62 ANNEX 4 Page A shipyard training center, the first stage of which is to be financed by NORAD, will be surveyed and organized in Indonesia in connection with the local ship construction program. 12. Revision of Indonesian maritime regulations: These regulations, currently applicable to inter-island shipping, are out-of-date and are based on 1935 Netherlands regulations. A revision is overdue and the prospect of increased shipbuilding and of ship acquisitions resulting from the Government's maritime expansion plans, makes such a revision urgent. Technical assistance for an expert for about 18 months is required for producing a draft of revised regulations. This procedure was effective in the Philippines and is practicable in Indonesia. The expert would be financed bv NORAD and his terms of reference have been agreed with the Bank. Implementation of the regulations may be undertaken in connection with further Bank involvement in the sector. 13. Assistance to PELNI: PELNI, the major state-owned shipping company, has received bilateral technical assistance in the form of advisory services since 1970 and from a team of advisors since The company has improved its operations somewhat with the advice of this team. It has 57 ships in operation, 21 of which have been rehabilitated with funds derived in part from the Association's Credits 318-IND and 310-IND. Its fleet is, then, in reasonable condition. The company has loan agreements with its banker, BAPINDO, made in connection with rehabilitation which refer to implementation of certain recommendations of the bilateral advisors. Nevertheless PELNI has not been able to succesfully control its costs or to increase substantially its proportion of sailing days to days in service. It is currently in arrears on its payments on loan made by BAPINDO. A management consultant is required to review the company's status, structure, operations, management, and technical capabilities, and draw-up a timed p'lcn of improvement. This is necessary because PELNI is the only company able to assume the main responsibility for operating PANN ships if, for any reason, the lessees default; and because an improvemenl of PELNI operations is an important requirement for meeting RLS transport needs. The Bank will finance this technical assistance project; terms of reference have been agreed on during negotiations and an appointment acceptable to the Bank, will take place within three months of loan signing. A plan for implementing recommendations has been agreed. 14. An economic study of RLS shipping requirements will be carried out with a view to preparing an optimum investment program in shipping during Repelita II ( ). Such an optimization analysis is necessary to supplement the analysis of the LTFD Study which is based on a cost minimization model in which the traffic demand was considered as given and the main purpose of the investigation was to minimize the cost of meeting the given demand. Since the proposed Second Shipping Project forms a part of Repelita II shipping investment program, the purpose of the study is to establish the additional, if any, shipping

63 ANNEX 4 Page 4 tonnage requirements, and to estimate their economic benefits, not only in terms of improving the efficiency of the existing shipping activities but also the contribution which the investment in shipping will make in developing the economy, particularly that of the outlying islands. Such a study is necessary to prepare and support a possible third shipping project. Terms of reference have been agreed with the Government and arrangements have been made for one expert, to be financed under the proposed loan, to be added to an existing Netherlands team undertaking planning for SEACOM. 15. Additional services for shipping will be required when the PELNI management consultant reports (for example, additional maintenance inspection services and internal training) and when the shipyard training survey is completed. It was considered prudent to provide for these items. April 1976

64 TECHTIICAL ASSISTLITCE Related to Shipping Program Attachlent 1 Page 1 1. I:FNAlKlCD BY "OFW IAN; CRDIT (a) Overseas Training '382 nan months Local F.E. Total (i) for PAW man months (ii) for PMZNI man months (iil) other SEACOM, BKI man months - $800,000 $80,000 (Classification, repair, safety, construction, supervision, insurance, legal, shipbroker) 'b) 3hipyard Training Center - Phase I 24man months Instruction, training equipment, facilities $50,000 $600,000 $650,000 c) Provision for Continuing BKI Team. 108 man months - to be used only if German aid unavailable. 2 year program to end 1978 (2 mten x h year; a4 -en x 2 years) $50,000 $510,000 $510J,00 d) Advisors for P.T. Pann - 48 man months Resident financial and technical advi sors $143,000 $245,000 $268,000 (el Revision of Ship Safety Rules 18 man nonths - one expert $26,000 $100,0C0 $126,000 T.otal Funded by Nlorwegian Credit $t169,000 $2,255,000 $2,4214,00 2. FINANCED BY OTHFU 3ILATERAL AID (a) Germr - technical assistance to 3K ~FTA22) - Funded to July 1J76 for 2 men $5,000 $50,000 $55,000 (b) Japan - FTA 102, 24 man months Crew training - 4 experts for organizing training courses $2,000 $52,000 $60,000 (c) Japan - Teleconmmunications advisors - 12 man maonths $4,000 $26,000 $30,000 1/ These costs are to cover namely cash costs of Indonesian nationals in training and are not comparable to those for foreign expatriates resettled in Indonesia a.s employees of consulting companies. April 1976

65 TNEX 4 Attachment 1 Page 2 (d) Netherlands Local F.E. Total (i) PELNI advisory team (FTA 11?) - 72 man months - funded to M-arch 1)77. 6 experts, project underway $35,000 $240,000 $275,000 (ii) Sea Transport Planning (FTA 126) 72 man mths. funded to M-arch experts project underway 35, , Total Funded by Other Bilateral Aid $87,000 $618,000 $705, FINANCED BY WORLD BANK (a) BAPINDO Advisors - 48 man months Resident financial and technical advisors 60, , ,000 (b) Maritime Training Academies 294 man months (i) 6-month survey and 8 experts for 3 years and shipboard training 100,000 1,450,000 (ii) Provision for equipment 1,000,000 2,550,000 (c) Provision for Continuing PETLI Advisory Team (FTA 119) - 72 man months _ 6 experts for one year. 35, , ,000 (d) Management Consultant - Study of PELNI 36 man months To be concluded in 12 months 10, , ,000 (e) Provision of Additional Service for Shipping Engineering services (including acceptable local consultants) 30, , ,000 (f) Provision for Continuing FTA man months - 6 experts for one year 35, , ,000 (g) Economic Study of Future Fleet - 12 man months - 1 man to be added to FTA 126 Team for one year. 10, , ,000 Total to be financed by World Bank $280,000 3,766,000 4,o46,ooo

66 AkNEX 4 Attachment 1 Page 3 4. SUN~MRY OF FDTAXICING SOURCES Local F.E. Total (a) NORWAY $169,000 $2,255,000 $2 L2t (b) OTHER BILATERAL SOURCES 87, , ,000 (c) WORLD BANK 280,000 3,766,000 4,o1 1 6,000 $536,000 $6,639,000 $7,175, SUMIMARY OF PROJECT ITEMS (a) to ATN 43, , L80 (b) to Government from (i) Norway 126,000 1,, io,200 2,044,200 (ii) World Bank 280,000 3,766,000 4,046,000 $hoo,ooo $5,68L,200 $6,090,200 TOTAL PROJECT TECHNICAL ASSISTANCE $449,000 $6,021,0300 $6,470,000 April 1976

67 ANNI'X 5 Page I INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT P.N. PELNI A. The Present Outlook for PELNI 1. An examination of PELNI finances provides a basis for determining the financial future of the industry. PELNI's importance is emphasized by the fact that in case of default by a private operator to PANN, PELNI would likely assume the defaulted lease(s) and operate the ship(s). PELNI, recipietnt of 21 rehabilitation loans from BAPINDO under Credit 318, has a 57 ship fleet in reasonably good operating condition. It received about US$6.7 million (Rp. 2.8 billion) in additional equity from the Government in 1974 with a further $1.5 million (Rp. 0.6 billion) in 1975, as a result of the efforts of the Minister of Communications, BAPINDO, and the Bank to improve its financial condition by reducing PELNI's long-term debt. PELNI is expected to receive a further injection of equity amounting to about US$6.4 million (Rp. 2.7 billion) in 1976, of which about US$4 million (Rp. 1.7 billion) will be used to further reduce long term debt (about US$5.1 million (Rp. 2.1 billion) at the end of 1975). Expenses related to repairs undertaken in foreign shipyards have also been reduced. Losses have been cut by over 75% between 1973 and 1975 due to increases in freight tariffs of 20% in 1973, 20% in 1974 and about 25% in 1975, and some progress has been made in internal accounting. Lack of cost control is now one of PELNI management's main problems. Better control over shipping operations is the key to future improvements. These matters are under review by the advisors and will be examined by the proposed management consulting technical assistance project. B. Future Prospects General 2. PELNI advisors, who have worked closely with BAPINDO and the Resident Staff to effect improvements, have proposed a number of operating goals to be achieved by 1979, and they are summarized in para 3). If these goals can be achieved by 1979, and if adequate cost controls can also be established, PELNI can play the major role assigned to it in the proposed project and become financially viable by The PELNI management study to be undertaken by consultants as part of the proposed project would review these goals and, if necessary, amend them so that PELNI could function at least as successfully as is forecast herein.

68 ANNEX 5 Page 2 Operational Forecast 3. The operational goals referred to above and which are discussed below, combine to produce an 80% increase in PELNI's productivity (Attachment 1). Equally important, achievement of this increase in productivity will be mandatory if PELNI's future financial results are to be realized. In order to review these goals, and to achieve needed administrative and organizational improvements, the Government has agreed thmt gn internationally recognized shipping management consultant will be retained to produce a timephased plan of action. The increase in PELNI's productivity factor, therefore, represents one of the major inputs in the company's financial forecasts. 4. Projections of PELNI's financial position up to 1979 are attached, and the assumptions on which the projections have been made are detailed below: (a) Tonnage Carried - PELNI's tonnage forecast is based on revenue tons. PELNI must rely on revenue tons because the ratio between weight tons and revenue tons is unknown. The LTFD report forecasts are made in terms of weight tons. (b) Load Factor - Revenue tons carried divided by available capacity. Although a gradual improvement is assumed, such an improvement depends heavily on the organization of the future RLS (licensing, route structure, competition, etc.). (c) Repair Days - Gradually decreasing due to a younger fleet and better planning and organization. (d) Sea Days/Port Days Ratio - A gradual improvement is assumed. This improvement is of critical importance and is heavily dependent on increased Port efficiency (labor productivity, number of shifts per iay, night facilities, etc.) and shipboard cargo handling equipment (type of gear, palletizing, stowage, etc.). (e) Sea Days - Calculated as follows: number of days in a year (365), minus repair days, times one over one plus seadayl portday ratio. (f) Average Distance - Gradually decreasing due to a more efficient distribution of cargo. Although the LTFD mentions an average distance of 620 miles, PELNI's average will be higher due to service requirements to West Irian not usually offered by other members of the RLS.

69 ANNEX 5 Page 3 (g) Average Speed - Increasing slightly due to improved ship reliability and higher speeds of new ships. Load factor x Sailing Says x Speed/Hour x 24 (h) Productivity Ratip - P Avrg=Dsac Average Distance (i) Tonnage Required - Based on PELNI's share of the total RLS tonnage in (j) Passengers Carried - Although no accurate data exists in Indonesia regarding the extent of inter-island passenger traffic, PELNI believes its ships carry a minimum of two-thirds of the total. Approximately 50% of PELNI's future gains in passenger traffic are based on attracting more existing traffic from other RLS operations due to better and more reliable ships (Table 3). Financial Prospects 5. PELNI's profit and loss forecasts, based on management traffic estimates, appear in Attachment 2. The financial forecasts assume no increase in the present tariff but do assume an 80% increase in PELNI's productivity by Except for two ships acquired as equity in 1976 from a Japanese aid commitment all future PELNI ships will be acquired from PANN under lease. This situation would continue until PELNI became able to service additional debt fromn net cash income, when PANN would act as purchasing agent for PELNI. Under the proposed project PELNI would lease 46 ships having an acquisition cost, including delivery costs, of US$110 million (Rp. 46 billion). These ships represent 46% of project tonnage and 55% of project cost. 7. PELNI's diverse operations now result in net profits only from terminal operations. Shipping activities, even after allowing for profits from passenger operations, have continually incurred losses. Profits from shipping or on a consolidated basis are not expected in the period of the forecast. However, the Government has agreed to review, annually, shipping tariffs in the light of costs and any tariff increases granted in the light of such reviews should improve PELNI's shipping operating financial results. Additional details, including a sources and uses of funds statement appears in Attachment 4. Financial Assumptions 8. Aside from the tariff increases received by the RLS in 1973, 1974 and 1975, referred to in Section A above, no additional increases have been

70 ANNEX 5 Page 4 built into the forecasts outlined in Attachments 1 to 4. These forecasts do include operating efficiencies outlined in para 4. The majority of future expense forecasts are based on the high cost structure of the past and do not reflect the future reductions due to fleet upgrading and better management. The assumptions are: (a) All revenues are based on the present tariff structure. (b) Freight revenues based on tonnage carried times present average tariff rate on an assumed average distance. (c) Passenger revenues equal number of passengers times average fare per person. (d) Commissions equal 7% of total freight and passenger revenues. (e) Passenger expense, assumed to be 18% of passenger revenues, is based on past experience. (f) Port expenses increase proportionately to tonnage carried. (g) Bunker fuel costs at present prices rise in proportion to total tonnage times sailing days. (h) Depreciation for existing PELNI fleet is based on 10% declining balance. (i) PANN lease payments are based on an interest rate of 10% per year. (j) Management costs are assumed to increase at 5% per year, or less than the rise in tonnage. (k) Terminal income increases are based on tonnage factor (1) Terminal costs are chiefly labor. (m) All other expenses include funding past pension costs and writing off doubtful accounts. (n) Forecast variable costs (fuel, port call costs, port lay cost, cargo cost, commissions and passenger costs) are given below for the years

71 ANNEX 5 Page 5 Variable Costs (Rp. million) Fuel 1,527 1,863 2,270 2,378 Port Call Cost Port Lay Cost Cargo Cost Commission 785 1,005 1,274 1,406 Pass. Costs ,920 4,757 5,849 6,264 April 1976

72 INDONESIA APPRnAISAL OF A SErCX0-D SHIPPING PROJECT P.N. PELNI Operational Forecast (Averaged) Actual Estimate Forecat - Year Revenue Tons (000's) 1,050 1,O44 1,111 1,334 1,787 2,412 2,674 Passengers (000's) Load Factor (L.F.) Repair Days Ratio: Seadays/Portdays 1/1.58 1/1.88 1/1.75 1/1.35 1/1.33 1/1.28 1/1.28 Seadays (S.D.) Average Distance (miles)(a.d.) 800 1, Average Speed (m.p.h.) (A.S.) Ratio: Productivity: (L.F. x S.D. x A.S. x 24) ( A.D. ) Ship Tonnage Required Existing 82,400 82,300 80,670 80,150 77,800 75,450 72,260 Time charter (net) - 4,700 9, Add: Used ,750 11,500 11,500 New , ,750 _3650 Total Ship Tonnage 82,400 87,000 89,870 82, , , ,510 Vessels in Operation / Average Size of Vessel (D.W.T.) 1,524 1,578 1,504 1,359 1,345 1,385 Source: PELNI Management Advisors, Bank Staff April 1976 C..

73 INDIDEIA APPRhISAL OF A SRO= SEIPP3= PNJCT P.N. PELZI Elscal 1 2/31 Consolidated Profit and Loss State-ents (millions of Aupiahs) Actual Actual Tentative Budget Forecast Shipping Operations PFeight Revemnes 4,528 6,571 7,560 8,071 10,518 13,560 15,812 Passenger Revenues 1,962 2,560 2,727 2,873 3,300 3,600 3,900 Total Shipping devenues 6,490 9,131 10,287 10,944 13,818 17,160 19,712 Variable Costs 2,300 3,055 3,993 3,907 4,757 5,849 6,264 Fixed Costs 5,264 5,378 5,400 5,769 7,297 8,502 8,831 Management Costs , ,050 1:,10 1,100 Sub-total 9TW TU1,0 7T 15,45l 10, Depreciation s ' Ship Lease Costs Total Shipping Operating Costs 8,992 10,072 11,126 12,341 16,806 21,514 23,116 Net Operating Terminal/Agency Income (loss)- shipping (2,502) t941_ ) (839) (1,397) (2,988) (4,354) (3,4) Operations Revenues 4,657 5,468 6,858 6,601 7,813 9,469 10,286 Operating Ecpenses 3,634 4,204 5,601 5,314 5,992 6,871 7,378 Sub-total 1,023 1,264 1,2571 1,821 2,598 T,96tF Depreciation llp Net Income - Terminals/Agencies 833 1,112 1,074 1,147 1,681 2,458 2,768 Other Activities -/ Inceme 410 1,008 1,349 1,163 1,218 1,274 1,333 Less: Interest on Long Term Debt n/a n/a n/a Pensions Other tcpenses 1,012 1,989 2,093 1,111 1,139 1,140 1,1V Net Income (loss) - Other (542) (981) (744) (563) (371) (306) (287) Consolidated Income (loss) (2,211) (810) (509) (813) (1,678) (2,202) (923) Note 1/ Includes Hospitals, Housing and Miscellaneous Activities April 1976

74 Attac1Sent 3 APPR&ISAL OF A SLCCND SHIPNG PRDJECT P.T. PELNI Consolidated (millionb Balance Sheets of Rupiah) Actual Actual Provisional -Forecast CURIR$T ASSETS: G'a.sh IReceivables Stores/Supplies 2, , , , , , , Others Total Current Assets 2,897 4,725 4,513 4,540 4,429 4,896 5,623 CURRENT LIABILITIES: 921 1, Die Bank l2, ,941 2,076 2,500 3,500 4,000 Othras a.be Tota:L Current Liabilities 3,618 3,874 3,148 3,226 3,600 4,550 5,000 N±et Working Capital (721) 851 1,365 1, FlIMD ASSETS: F]eet at Cost 35,710 35,710 34,250 35,920 35,920 35,920 35,920 LeSE, iepreciation 27,981 28,7CI 27,927 29,hA3 30, L36 33,51 Fleeet at Net 7,729 6,956 6,323 6,467 4,938 3,484 2,369 Other MeOta it Lt 2,412 2,284 2,581 3,322 3,117 2,912 2,707 Tcital Net Fixed Assets 10,141 9,240 8,904 9,789 8,055 6,396 5,076 Other Assets Sub-total Assets 10,389 10,790 11,079 11,913 9,694 7,552 6,509 Less Long Term Debt 3,<13 1,848 2, Total Assets less Long Term Debt 6,876 8,942 8,946 1GA52 9,214 7,192 6,269 OWNERSHIP AHD OR Capital 7,387 10,153 10,785 13,455 13,455 13,455 13,455 Accimulated Sarplus (Loss) (1,867) (2,567) (3,195) (3,959) (5,597) (7,619) (8,542) Capital Surplus 1,356 1,356 1,356 1,356 1,356 1,356 1,356 Net, Jquity ,942 8,946 10,852 9,214 7, SOUtC:E.: PELNI and Bank Staff

75 INDONESIA APPRAISAL OF A SECOND SHIPPING PI)JECT P.N. PELNI Consolidated Source and Application of Funds (millions of Rupiahs) hctual Actual Estimated Budget ---- Forecast- Sources Net Income (less) SJipping (1,642) (941) (839) (1,397) (2,988) (4,354) (3,404) Terminals 948 1,112 1,074 1,157 1,681 2,458 2,768 Other (648) (871) (864) (563) (371) (306) (287) Depreciation: Shipping ,526 1,529 1,454 1,115 Other Total Cash Flow (480) (543) 397 Scrapping Proceeds Increase in iquity - 2, , Increase in Long Term Debt 1, _ Applications Total Sources 637 4,046 1,783 4, (363) 397 Fixed Assets Expenditures: Ships , Terminals Sub-total , Reduction in Long Term Debt 791 2, Total Application 1,267 2,474 1,269 4, Net Change in dorking Capital (630) 1,572 "I4 (51) (485) (483) 277 Net Working Capital Beginning of Period (91) (721) 851 1,365 1, Net 'Working Capital End of Period (721) 851 1,365 1, e Source: PELNI and Bank Staff

76

77 ANNEX 6 Page 1 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT P. T. PANN A. Principal Assumptions Unerlying Financial Forecast 1. PANN's charge-out rate is assumed to be 10% per annum, or 2-1/4% quarterly. 2. PANN's average borrowing rate is assumed to be 12.4% per annum, or 3.1% quarterly. 3. All ships are assumed to be passed on by PANN to its customers on lease terms. PANN's customers will make equal payments on a quarterly basis beginning in the quarter prior to receiving the ship. 4. Payments were scheduled by ship program in the following manner: New - 15 years - 60 quarterly payments Used - 10 years - 40 " " Rehabilitated - 5 years - 20 " " 5. Depreciation, or the return of PANN's principal, was not computed on an actuarial basis but, for simplification purposes, on the straight line method. 6. All of PANN's new and used ship customers are assumed to sign a binding agreement, inter alia, prior to their acquisition of vessels. 7. Commitment fees represent 1% of loans and leases on all new and used ships and will be paid by PANN's customers at the time of contract signing. Such fees are to be used as a reserve for possible loan losses. 8. Insurance expenses have not been taken into consideration in this forecast. 9. It has been assumed that PANN pays no income taxes. 10. It has been assumed further that PANN will retain all internally generated funds to assist in the financing of the project. After project completion, PANN will use internally generated funds to either pay dividends to the Government or finance subsequent ship acquisitions.

78 ANNEX 6 Page PANN's owners will declare no cash dividends, or return of capital prior to the liquidation of the company's long-term debt. 12. The Government will inject equity capital into the company's capital structure in equal proportion to long-term debt. 13. Annual escalation factors, computed by quarter, were added to the base price of the rehabilitation programs on the following basis: 1976, 15%; 1977 and 1978, 10%; and 1979, 7.5%. Escalation was not applied to new and used ship purchases. 14. Interest during construction was computed at 12% per year, or 3% per quarter, on all outstanding loan funds by ship (new and used) or by tonnage (rehabilitation). 15. Delivery costs were calculated at an average of US$120,000 for all new and used ships. Since most ships would be purchased or built in Europe and Japan, these costs reflect the many expenses pertaining to transfer, registration and mortgage fees, sailing expenses to Indonesia and, in the case of used ships, surveyor costs, legal fees, etc. 16. P.T. PANN is assumed to receive loans for new ships on a 15 years, one year grace period basis; for used ships on a 10 years, one year grace period base and for rehabilitation on a five years, one year grace basis. B. Notes to Financial Projections 17. Low profitability in the first years is caused because depreciation was assumed on a straight-line basis. To be exact, one would have to use the capital portion of each annuity as depreciation since the income of P.T. PANN is the interest differential between borrowing and lending and depreciation, i.e., capital recovery should be neutralized. This would show higher profits at the beginning of the project life but reduced profits in the last third of the project period. 18. The borrowing rate of P.T. PANN is assumed to be 12.4% p.a. This is a weighted average between borrowing from BAPINDO at 15% (US$15.0 million) and borrowings from official sources (US$79.6 million) at 12% (assume about 50% equity and 50% debt (para 5.03)). 19. Under the above assumptions, the Government would be able to price its equity contribution at between 3% to 4% which would still allow a large enough spread to cover operating expenditures. April 1976

79 ANNEX 6 Attachment 1 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Ship Procurement Program P.T. PANN New Ships Used Ships 13 x 750 = 9,750 dwt 41 x 1,000 = 41,000 dwt 13 x 950 = 12,350 ' 1 x 1,200 = 1,200 it 8 x 980 7,840 " 3 x 1,500 = 4,500 8 x 1,700 = 13,600 " 2 x 2,500 5,000 5 x 1,650 = 8.25o 47 ships 51,790 dwt 47 ships 51,700 dwt 1. New Ships (all fixed prices) (US$000) (a) Indonesian Shipyards 1975 (20 ships) 750 dwt I 750 ' II 1, , " " 1, , " 2, ,700 " 3,200.0 (b) Japanese Shipyards " 1,916.1; (7 ships) " 2,101.6 (c) Norwegian Shipyards " 3,015.6 (20 ships) 980 " 3, ,650 " 3, ,700 " 3, Used Ships 1975 = actual price 1976 US$800 per dwt 3. Delivery Costs US$120,000 per ship April 1976

80 TNDONESTA APPRAISAL OF A SECOND SIIIPPING PROJECT P. T. PANN A. NEW SHIPS Schedule of Ship Del-veries 1/ Total dwt 2/ i _TITI TV T ii 111 IV 1 TI TTT TV T TI TT TV T II ITT IV Es-Japan 7 a 750 dwt 5,250 5,250 Ex-Indonesia 6 s 750 dwt 2,250 2,250 4,500 8 x950 dwt 2,850' 4,750 7, dwt 2,940; 2,940 3 x 1700 dwt 5,100, 5,100 Ex-Norway 5 x 950 dwt 1, ,900 4,750 5 x 980 dwt 1,960' ' 980 4,900 5 x 1,650 dwt 1,650' 4,950,1,650 8,250 5 x 1,700 dwt 1,700' 3,400 3,400' B. URED SHIPS bapindo Financed 6 x 1,000 d.t 4,000 2,000 6,000 1 x I1,200 dvt 1,200 1,200 ITRD Financed 35 x 1,000 dwt 6,300 6,000 6,000 6,000 6,000 5,000 35,000 3 x 1,500 dvt 3,000 1,5(( 4,500 2 x 2,500 dwt 5,n03 5, C. REHARBILrIA'ttON 1,500 6,500 2,500 3,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 54,500 NOTE: i/ Actua] tim.ing of ship deliveries say vary from that shown below. 2/ Slight discrepancies between these figores and those given in the Aenne Lo the agreed Minutes of Negotiations are of individual ship tonnages. April 1976

81 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT SHIP COST ESTIMATES (P.T. (Rupish millions) PANN) NEW ians USED SHIIPS_ _ Ships Interest during Delivery Total Ships Interet ur S - TDa ivry tt Year Quarter No. Dwt Base Cost Construction Cost Cost No. Dwt Bsse Cost Construction Cost Cost ,000 1, , ,200 1, , ,250 2, , ,000 3, ,100 4,113 4, , ,000 2, , ,500 2, , , , ,000 1, , , , ,000 1, , ,280 9, , ,000 1, , ,790 51,530 2,142 1,345 55, ,700 17, REHABILITATION Interest During Total Year Quarter Dwt Base Cost Escalation Construction Cost , , , , , , , , , , , ,500 3,958 1, ,293 oi

82 IND0)NESIA APPRAISAL OF A SECOND SHIPPING PROJECT P.T. PANN Projected Income 3tatement (Hp. million) (Actual)(Estimated) Forecast Revenues New Ships ,958 6,788 7,120 7,120 7,120 7,120 Used Siips ,201 2,913 2,913 2,913 2,913 2,913 Rehabilitated tonnage ,154 1, Conmitment Fees Total Revenues - T ,399 10,213 10,933 11, Expenses Operating Expenses Technical Assistance Total Operating EXpenses T Gross Income (27) ,000 9,788 10,408 10,662 10,662 10,503 Less Depreciation: New Ships ,417 3,120 3,166 3,166 3,166 3,166 Used Ships ) ,146 1,703 1,703 1,703 1,703 1,703 Rehabilitated Ships) ,060 1,o Other Assets _ Subtotal - depreciation ,730 75,309 5,742 5 Net Operating Income (Loss) (27) ,270 4,479 4,666 4,682 4,682 4,680 Less: Fixed Charges _ ,287 4,478 4,100 3,724 3,300 2,889 Reserves for Loan Losses _ Plus Other income Net Income (Loss) 4 56 (476) (99) (17) ,382 1, 791. April 1976

83 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT P.T. PANN Prolected Balance Sheets Rupiah Millions (Actual) (Estimated) Forecast AS SETS Current Cash 1, ,236 1,120 2,405 S,998 10,074 14,284 Receivables ,271 Total Current Assets 1, ,354 3,166 4,638 8,271 12,345 16,613 Fixed Ships - new - 6,883 45,763 56,054 56,054 56,054 56,054 56,054 Ships - used 1,231 10,124 19,601 19,601 19,601 19,601 19,601 19,601 Rehabilitation tonnage ,377 5,292 5,292 5,292 5,292 Sub-total 1,231 17,130 66,988 79,032 80,947 80,947 80,947 80,947 Less: Depreciation ,921 8,199 13,895 19, _ Net Fixed Assets in use 1,197 16,923 64,067 70,833 67,052 61,123 55,194 49,416 Plus Works in Progress , Total Net Fixed Assets 29 2,318 39,260 74,382 71,285 67,052 61,123 55,194 49,416 Long term receivables - 1,288 1, Intangible Fixed Assets Other Assets (net) _ _ 235 Total Assets ,830 41,194 7,757 75,426 72,Yo4 69,943 67,823 66,268 LIABILITIES Current Accounts Payable ,150 1, Current Portion of Long Term Debt ,890 3,410 3,1410 3,9C90 3,240 3,12i0 Total Annual Liabilities ,312,782 3~~~~~,56, ,09 3, 2 Long Term Debt ,7, ,7 21,6403 5i1 Reserves for Loan Losses ' Deferrea Income Equity Share Capital 2,000 2,000 20,500 39,000 39,000 39,000 39,000 39,000 39,000 e&p Accumulated Earnings (Losses) 4 60 (416) 5_ 2) ( 2,41 Total Equity 2,004 2, ,485 20,084 38,468 39,024 39,982 41,364 43,1 Total Liabilities and Equity 2,010 3, , ,T , h April 1976

84 IND)ONESIA APPRAISAL OF A SECOND SHIPPING PROJECT P.1, PANN Source and Application of Funds Sources: Rupiah Millions Totals Net Income (Loss) 4 56 (476) (99) (17) ,382 1,791 Plus Depreciacion ,730 5, ,007 5, ,823 Cash from Operations 4 98 (292) 2,631 5,292 14,031 6,930-7;36t2 7smi Increase in Equity 2,000-18, ,500-39, Debt - 1,700 18,500 18, M,0,_- - -Reserves Payables (78) 1,066 (109) (112) (106) Deferred Income Decrease in Long Term Receivables Total Sources 2, , ,043 7, Applications: Shipping Investment - New Ships ,016 26, ,054 - Used Ships - 2,352 8,S21 9, ,601 - Rehabilitation ,457 1,794 1,463 5,292 Other Assets 66 ( 2, D0 500 Sub-total Investmenit 66 2,350 37,151 37,936 2, Repayment of Long Tenm Debt , ,41 Increase in Receivables - 37 (1) 1, ,187 7, ,240 Total Applications _ 2X Surplus (Deficit) for year 1,946 (1,855) 6h (116) 1,285 2,405 3,593 14,076_ 74T Cash Beginning 191 of Year - 1, ,236 1,120-2,40 5,998 Cashi End of Year 10,0714 1, (314 1,3,2, ,74114,2814 April

85 ANNEX 7 Page 1 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Procedures for the Execution of the Project A. General 1. PANN shall invite Shipping Eaterprises to apply to PANN for the purchase or lease of a new or used ship or the rehabilitation of one or more of the ships then owned and operated by such Enterprises. 2. Upon receipt of such application and upon the request of PANN, BAPINDO shall, pursuant to a consultancy agreement between PANN and BAPINDO, carry out an appraisal of the technical, operational and financial conditions of the applicant Shipping Enterprise and of its ships. 3. On the basis of the application, the appraisal and the advice of its consultants, PANN shall decide whether the applicant Shipping Enterprise is eligible for assistance under the Project and, if so, the form such assistance shall take, and the terms and conditions upon which it shall be made available. 4. Subsequently, PANN shall inform SEACOM of its decision and furnish to SEACOM such information as SEACOM may require, and shall obtain from SEACOM a statement indicating what ships, if any, of the applicant Shipping Enterprise shall be rehabilitated or scrapped. 5. Thereafter, if the Shipping Enterprise is eligible for assistance under the Project, PANN shall enter into a Development Agreement with the Shipping Enterprise specifying the terms and conditions under which ships will be made available to the Enterprise by PANN or be rehabilitated. 6. Ships constructed to the order of, or purchase by, PANN shall be sold or leased to Shipping Enterprises. PANN may sell ships to creditworthy Shipping Enterprises on terms pursuant to which the sales price will be paid to PANN in installments subject to interest on the balance of the sales price outstanding from time to time. 7. Ship rehabilitation under the Project shall be carried out by PANN under arrangements whereby PANN will lease the ship to be rehabilitated from the Enterprise and lease it back to the Enterprise upon completion of the rehabilitation.

86 ANNEX 7 Page 2 B. Appraisal of Shipping Enterprises 8. The appraisal of Shipping Enterprises referred to in paragraph A.2 of this Annex shall be carried out, at least during the first two years, by BAPINDO's Maritime Credit Department pursuant to a consultancy agreement with PANN. During this period of two years, staff of PANN will assist BAPINDO's staff in making the appraisals with the intention that at the end of this period further appraisals will be done solely by PANN's staff. 9. The appraisal shall to the extent possible include inter alia the following: (a) An inspection of the ships owned by the Shipping Enterprise and operated in inter-island carriage. The inspections shall be carried out with due regard to the regulations of SEACOM and in consultation with BKI. The inspection report shall provide the technical specifications and age of the ships; state their value as estimated on the basis of appropriate valuation principles and procedures; specify what ships, if any, meet the Borrower's licensing requirements and BKI's classification standards or may be rehabilitated or are recommended for scrapping; and state for each ship that may be rehabilitated what repairs or modifications must be made to the ship or its equipment to meet such requirements and standards or to improve its productivity, as well as the estimated cost of rehabilitation. In those cases where lack of time or physical difficulty of access make it impractical to inspect all ships of an Enterprise before completion of the appraisal suitably qualified reports will be made on ships not inspected and every reasonable endeavor will be made to inspect such ships at a later date and to report on the results of the inspection. (b) An evaluation of the staff of the Shipping Enterprise, with special emphasis on- management, organization and administration of the Enterprise; salary and wage structure; accounting; planning and budgeting; navigational qualifications; routine maintenance; internal and external communications; and passenger and cargo handling. The evaluation report shall make detailed recommendations on the actions to be taken to correct any deficiencies found, including without limitation training required and the employment of consultants. (c) An evaluation of the operations of the Shipping Enterprise, producing, on the basis of reliable

87 data on past operations and realistic forecasts of future operations (including the effect of the Enterprise's participation in of the Project), and on an annual basis, detailed information covering the two fiscal years immediately preceding and the two fiscal years immediately following the year in which the evaluation is made as well as the current fiscal year, and in outline forecasts for the third, fourth and fifth fiscal years immediately following the year in which the evaluation is made, on: routes covered; revenues earned per ton or ton-mile or, if possible, the ratio between weight ton and revenue ton; number of passengers carried; load factor; repair days; seadays-portdays ratio; seadays; average distance travelled each year per ship; average speed per ship; productivity ratio (i.e., tons carried or ton-miles sold each year per dead weight ton); crew-ton ratio or crew per ton-mile sold ratio for each ship; and total tonnage required each year to meet demand on the routes concerned. The evaluation report shall make detailed recommendations on the actions considered to be required to improve the Enterprise's operations and financial condition. ANNEX 7 Page 3 (d) A financial appraisal of the Shipping Enterprise, based on its financial statements and records for the immediately preceding fiscal year, audited by qualified independent auditors (or, if such audit was not made and cannot be completed in time, reviewed by BAPINDO), and on realistic forecasts of revenues and costs, and covering the periods referred to in the preceding paragraph (c). The financial appraisal report shall include a detailed analysis of past and future balance sheets, statements of income and expenses and related statements and shall specify inter alia the debt-equity ratios and current ratios for said periods. The appraisal report shall make detailed recommendations on the actions to be taken to improve the financial condition of the Enterprise, and shall recommend financial targets to be met by the Enterprise. C. Terms and Conditions on which PANN will make Assistance Available to Shipping Enterprises 10. PANN shall on the basis of the appraisal report and SEACOM's statement referred to in paragraph A hereof conclude a Development Agreement in form and substance acceptable to the Bank with each eligible Shipping Enterprise stating the terms and conditions on which assistance will be made available.

88 ANNEX 7 Page 4 I1. Only Shipping Enterprises that are considered to be able to meet all their foreseeable financial obligations to PANN shall be eligible. 12. Each Development Agreement shall be entered into on terms and conditions adequate to protect the interests of the Bank and PANN, and shall inter alia: (a) Specify the main particulars of the new or used ships to be acquired by PANN for sale or lease to the Shipping Enterprise and the ships of the Enterprise to be rehabiliated with the assistance of PANN or to be scrapped. (b) Require the Shipping Enterprise to enter into agreements with PANN for the sale (on cash or credit terms as appropriate or lease to the Enterprise of any new or used ship acquired by PANN pursuant to the Development Agreement, and such sale or lease agreements shall be substantially in accordance with the form of sale or lease agreement attached to the Development Agreement. (c) Require the Shipping Enterprise to rehabilitate any ship that is to be rehabilitated under the Development Agreement from resources otherwise available to the Enterprise; or, alternatively, if the rehabilitation of the ship is to be financed by PANN, to lease and deliver the ship to PANN and, upon completion of its rehabilitation, to lease the ship back from PANN under a lease agreement substantially in accordance with the form of lease agreement attached to the Development Agreement. (d) Require the Shipping Enterprise to deliver to PANN, by the date specified in the Development Agreement, the registration certificate and sailing permit of any of its ships to be scrapped, or evidence that these certificates have been cancelled or that the ship has been struck off the Indonesian ship register. (e) Require PANN: (i) to purchase or to rehabilitate the ships to be purchased or rehabilitated by PANN pursuant to the Development Agreement with due diligence and efficiency, in conformity with appropriate financial, administrative, engineering and shipping practices, and at reasonable costs which shall not exceed the maximum cost figures specified in the Development Agreement, as such maximum cost figures may be amended from time to time by agreement between the parties to that Agreement, with the consent of the Bank if such costs are to be financed out of the proceeds of the Loan; and (ii) to

89 ANNEX 7 Page 5 arrange for the training of staff of the Shipping Enterprise in the operation and maintenance of the ships so purchased or rehabilitated. (f) Require the Shipping Enterprise: (i) to manage its affairs, carry on its operations (including without limitation the adequate and timely maintenance of its ships) and plan its future expansion in accordance with appropriate financial, administrative and shipping practices under the supervision of experienced and competent management assisted by competent staff in adequate numbers; (ii) to maintain adequate records and to have its accounts and financial statements for each of its fiscal years audited by a qualified independent auditor; (iii) to take out and to maintain, or to authorize PANN to take out and to maintain for the acount and benefit of the Enterprise, with responsible insurers insurance against such risks and in such amounts as shall be consistent with appropriate practice, providing without limitation for allrisk insurance in respect of each of the ships of the Enterprise for the full replacement value of such ships and for the assignment to PANN of the insurance proceeds if and to the extent required to cover the Enterprise's obligations towards PANN in respect of such ship; (iv) to furnish to PANN such information as PANN shall request concerning the operations and financial condition of the Shipping Enterprise, to permit representatives of PANN and the Bank to inspect the ships of the Shipping Enterprise and any relevant records and documents; and (v) to perform such other obligations as shall be designed to improve the operations and financial condition of the Shipping Enterprise and shall be specified in the Development Agreement. (g) Permit PANN to exercise appropriate remedies in the event that the Shipping Enterprise will have failed to perform any of its obligations under the Rehabilitation Agreement.

90 ANNEX 7 Page 6 D. Procurement of Used Ships 13. PANN shall procure the used ships specified in the Development Agreements in accordance with the following procedures. 14. PANN shall, through its shipbroker and surveyor consultants, secure offers for the sale of used ships that will be less than ten years old at the date of their purchase by PANN' and that meet the requirements of the Shipping Enterprises as specified in their respective Development Agreements. If an offer is made, PANN shall, prior to its acceptance, make an inspection of the ship. i5. PANN shall send a copy of the inspection report to SEACOM and BK1 and obtain statements: (a) from SEACOM that the ship qualifies for licensing in inter-island shipping, or, if not, a statement of the alterations to be made so to qualify the ship; and (b) from BKI that the ship meets BKI's classification standards, or, if not, a statement of the alterations to be made to permit the ship to meet such standards. 16. On the basis of the inspection report and BKI's statement, PANN shall prepare a final report and recommendation on the purchase of the ship. PANN shall furnish copies of the inspection report and its final report and recommendations to the Enterprise and consult the Enterprise thereon. 17. If PANN and the Enterprise decide that the ship is suitable, PANN shall negotiate with the shipowner the sale of the ship to PANN and arrange for the repairs and alterat½ons required, if any. If PANN accepts the ship and if during the predelivery drydock inspection PANN considers it necessary or desirable to carry out any repairs or modifications to the ship PANN shall obtain an estimate of the cost thereof and arrange for such repairs or modifications. E. Rehabilitation of Ships of Shipping Enterprises 18. The rehabilitation of ships pursuant to the Development Agreements shall be carried out in accordance with the following procedures. 19. If the Shiipping Enterprise shall decide that the rehabilitation of a ship will not be financed by PANN, the Shipping Enterprise shall enter into a contract acceptable to PANN for rehabilitation of the ship with a qualified and experienced shipyard which contract shall provide inter alia that the rehabilitation works shall include at least the modifications to be made to the ship puisuant to the survey report referred to in paragraph B.2(a) of this Annex. PANN shall promptly notify SEACOM of such decision.

91 ANNEX 7 Page If the ship's rehabilitation is to be financed by PANN, the Enterprise shall lease and deliver the ship to PANN under a lease agreement which shall run for not more than five years. PANN shall enter into a contract for rehabilitation of the ship with a shipyard selected by PANN in consultation with the Enterprise and after prudent shopping. The ship rehabilitation works contract shall provide inter alia for a rehabilitation cost which, unless otherwise agreed between PANN and the Shipping Enterprise with the consent of the Bank, shall not exceed the maximum cost figure specified in the Development Agreement with the Enterprise, and for the execution of all modifications to be made to the ship pursuant to the inspection report referred to in paragraph B.2(a) of this Annex. Upon completion of the rehabilitation works, PANN shall lease the ship back to the Enterprise. F. Terms and Conditions of Sales and Leases by PANN 21. Sales of Ships by PANN (a) Sales of ships by PANN shall be made under arrangements whereby the purchase price of the ship shall be paid either in cash upon delivery of the ship to the Shipping Enterprise or in installments. (b) At the request of the Shipping Enterprise PANN shall sell to the Enterprise the ships constructed or purchased under of the Project, under a purchase agreement substantially in accordance with the form of purchase agreement attached to the Development Agreement with the Enterprise. (c) If the Enterprise is creditworthy, PANN shall at the request of the Enterprise finance a portion of the construction cost or the purchase price of the ship by permitting the Enterprise to pay such portion of the purchase price in installments. The portion of the purchase price to be paid in installments shall not exceed 90% of the purchase price. The Enterprise shall pay interest at the rate of 10% per annum on the portion of the purchase price outstanding from time to time. In addition, the Enterprise shall upon signing of the purchase agreement pay to PANN a one-time commitment fee equal to 1% of the portion of the purchase price to be paid in installments. For newly constructed ships, the installment period shall not exceed fifteen years including a grace period of not more than six months after the delivery of the ship to the Enterprise; for used ships, the installment period shall not exceed ten years

92 ANNEX 7 Page 8 including a grace period of not more than six months after the delivery of the ship to the Enterprise. All debt service obligations of the Enterprise to PANN shall be secured by a first mortgage on the ship. 22, Leases of Ships by PANN April 1976 (a) If the newly constructed or used ship cannot be sold to the Shipping Enterprise, PANN shall lease the ship to the Enterprise at a lease price that shall be calculated on the basis of amortization of the acquisition cost of the ship to PANN and interest at the rate of 10% per annum on the unamortized portion of such cost outstanding from time to time. New ships shall be amortized over not more than 15 years; used ships shall be amortized over not more than 10 years. Upon signing of the lease, the lessee shall pay to PANN a one-time commitment fee of 1% of the value of the ship on the basis of which the lease price is calculated. The lease price may be revised on termination or renewal of the lease to reflect the ship's depreciated replacement cost. The lease agreement shall be substantially in accordance with the form of lease agreement attached to the Development Agreement with the Enterprise. (b) If the ship is rehabilitated by PANN, the ship shall, upon completion of its rehabilitation, be leased back to the Shipping Enterprise under a lease agreement substantially in accordance with the form of lease agreement attached to the Development Agreement with the Enterprise. The total lease price shall be determined on the basis of the following: (i) amortization of the cost of rehabilitation of the ship; and (ii) 10% per annum of the unamortized cost of rehabilitation. Upon signing of the lease, the lessee shall pay to PANN a one-time commitment fee of 1% of the cost of rehabilitation of the ship. The lease period shall not exceed 5 years after the date on which the rehabilitated ship is recommissioned to service. All obligations of the Shipping Enterprise towards PANN pursuant to the lease agreement shall be secured by a first mortgage on the ship.

93 ANNEX 7 Attachment 1 Page 1 P.T. PANN Policy Statement Memorandum 1. Management and Budgeting Budget and review - The Dewan Komisaris at its quarterly meeting prior to the commencement of each quarter will give approval to the Direksi to execute the functions stated in Art.9 C 1.1 (a), l(b) of PANN's charter for the quarter in question and this approval will be based on the annual working program and budget approval by the shareholders. Quarterly review of budgeted performance each quarter covering four prior quarters will be carried out by Dewan and Direski. - Submission of quarterly reports to World Bank in agreed form will include details of payments due and receipts for each lease/sale. Lease/sale terms - Sale/leasing terms and conditions to: New Ships - Sale: - minimum 10% cash payment paid on delivery of the ship - maximum terms of payments 15 years - interest rate 10% - 1% commitment fee (lump sum on signing) - 6 months of grace after delivery. lease: - no down payment is required - lease hire to be paid quarterly in advance - maximum terms of lease 15 years - interest rate 10% - 1% commitment fee (lump sum on signing)

94 ANNEX 7 Attachment 1 Page 2 Used ships - Sale Rehabilitation - none to be acquired over 10 years old - to be required 10% down payment on signing of the contract and 20% on delivery in Indonesia of the ship. - maximum term of payment 10 years - interest rate 10% - 1% commitment fee (lump sum on signing) - 6 months grace after delivery. lease: Options to purchase - none to be acquired over 10 years old - no down payment - maximum term of payment 10 years - interest rate 10% - 1% commitment fee (lump sum on signing) - lease hire to be paid quarterly in advance on delivery in Indonesia. - maximum rehabilitation costs normally to be about 1/2 of comparable used ship price - no rehabilitation of ship of over 20 years of age - interest rate to be included in charter to be 10% - 1% lump sum commitment fee of rehabilitated cost on signing - maximum term of lease to 5 years including up to 3 months of grace after delivery. - all leases to be firm for the period of the lease. The lessee has the option to purchase the ship on payment of the last month hire (on terms as stated in the lease) provided the lessee has fulfilled his obligations according to the provision of that contract/ lease.

95 ANNEX 7 Attachment 1 Page 3 Lease/sale documents - all leases and sale contracts and procurement documents to be prepared in a standard form inn agreement with Bank and submitted with application for reimbursement. Dual class for PANN's ships - During the course of payment by lessee or buyer on any ships in which Pann has a beneficial interest, such ship will: (a) New Ships - when a new ship constructed at Indonesian shipyard, be single class by Bureau Klasifikasi Indonesia (BKI) as well as conforming to all Indonesian Laws. - when a new ship constructed at a shipyard abroad, be either single class by BKI, but supervised on behalf of BKI by an internationally recognized classification society (new ships in Japan) or dual class by BKI and an internationally recognized classification society (new ships in Norway) as well as conforming to all Indonesian laws. - be single class BKI (unless decided differently by the Government) for newly built ships as soon as the ship is delivered to Indonesia. (b) Used Ships - When a used ship, if classed by an internationally recognized classification society having a cooperation agreement with BKI, be changed to dual class with BKI as well as conforming to all Indonesian laws. Dual class will be maintained until the ship passes its next special survey. After that, class may be single BKI.

96 ANNEX 7 Attachment 1 Page 4 - when a used ship, if classed by a classification society not having a cooperation agreement with BKI, be changed into a dual class with BKI and an internationally recognized classification society having a cooperation agreement with BKI as well as conforming to all Indonesian laws. Dual class will be maintained until the ship passes its next special survey. After that, class may be single BKI. (c) Rehabiliated Ships - When a rehabilitated ship, be dual classed by BKI and an internationally recognized classification society as well as conforming to all Indonesian laws. Dual classification will be maintained until the ship passes its next special survey. After that class may be single BKI. Foreign Loans - PANN will, should it be the beneficiary of any foreign loan, provide the lender with a copy of this policy statement and of the World Bank project document and will not make any agreement with such lender which negates the provisions of the policy statement and/or of the project documents. Lease/sale - Leases or sales shall only be concluded with where obligation companies which are considered to be able in arrears and willing to meet their foreseen financial obligations to PANN. Insurance of ships - PANN will insure (or cause to be insured) for "all-risk" at replacement cost, any ship which it owns or in which it has a beneficial interest. - Such insurance on all ships in which PANN has a beneficial interest will be adjusted from time to time, in accordance with the best business practice, to reflect the cost of replacing ships should they become a total loss. Suitable coverage for damage will also be included in the policies.

97 ANNEX 7 Attachment 1 Page 5 - Pann will solicit sources of "all-risk" coverage and will continually attempt to secure reduction of premiums by the use of fleet policies, with reasonable deductibles, and will, through national insurance companies, seek proposals from national, international and regional insurance companies in order to select the best coverage at the lowest cost. - For this purpose an experienced insurance executive will be hired by Pann. Training - Pannn will seek to arrange for training of its executives and operational staff by arrangements with its shipbroker and its financial adviser and with shipyard and classification societies. It will draw up a comprehensive training proposal for submission to the Bank within six months of the loan being signed. The intention is to develop adequate, practical and formal training programs. Technical assistance - Pann, in consultation with its financial and technical advisers will prepare a program of technical assistance requirements covering the project period, i.e. until the end of 1978, for discussion with the Bank and other lenders. After agreement the program will be put in hand in a timely manner. It is expected that, in addition to training, technical assistance may include technical services, accounting services, and necessary support equipment and material. 2. Financial - PANN will not borrow without Dewan approval Guideliunes based on forecasts of PANN's cash flow, income statement, and balance sheet which will be designed to reflect, to the extent feasible, on an annual and five-year basis, the sources and uses of funds, the return on total capital and on equity capital employed, the weighted average borrowing rate, the working capital and reserves for bad debts and the profit or loss incurred. - Pann will not permit its debt to exceed 65% of combined debt and equity.

98 ANNEX 7 Attachment 1 Page 6 - Pann will maintain a weighted average cost of its debt such that, weighted together with a 3% notional return on its equity, its total costs of capital (equity plus debt) will not exceed 7.7% of its total capital. - PANN shall earn revenues sufficient to achieve a minimum 3% rate of return on its equity. - PANN will, for tax purposes, claim depreciation on all assets at the maximum rate allowable or at such a rate as to minimize its tax liabilities. - no dividends or return of capital will be declared during the first five year of operations. After that no dividends or return of capital shall be declared except after providing for debt repayment, for adequate reserves for losses, and for any increase in working capital appropriate in view of the both then current costs of ships and PANN's operating costs. - all assets acquired shall be taken on the books at the time of acquisition at acquisition cost. - Pann will base its leases or other time payment contract in the first instance on the acquisition cost of the ships. - Mortgage interests of second parties will be expressed on the mortgage deed. April 1976

99 I'DONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Implementation Schedule HIALF-YEAR PERIODS OF CALMDAR YEARS ,77 127T 1)7) ::vent 2 ½n -2/2 ½ 2/2 ½ 2/2 ½ 2/2 '. Agree:aent on Legal Docs. x 2. Tech. Asst. to PA-IN, TORAD (a) Fin. 5.v Tech. Advisors Retained x (b) Other, Legal, Accounting, etc. x 3. Tech. Asst. to Govt. (a) Revision of Ship Safety study x-x iriplementation X_ Regulations, IORAD (b) 'ar-itime Training Center Study & Advisors (c) Management Study of PM, VI i) Starts x x---- x _---- i2e.tmentation x ii) Report iii) Agree on Plan of Acticn x x iv) Start Plan of Action x ipl e ent ation x (d) Econonic Study Starts, Ends. x x L. New & Used Ship Procurement, Starts x Rehabilitation, Starts x Scrapping, Starts x April 1976

100 ANNEX 9 Page 1 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Estimate of Economic Benefits Replacement of Existing Tonnage Benefits from replacing the obsolete existing ships with more efficient ships would be the reduction in the operating cost and the increase in the productivity of the ships. The unit benefits were estimated as follows: (a) Operating Cost Savings The main categories of costs that vary with ships' age and state of repair are maintenance (both floating repair and docking and running repair), lubrication and consumption of fuel. Based on data supplied by SEACOM and PELNI these costs were compared in Attachment 1 for three types of ships - 20 year old ships, 10 year old ships and new ships. The per dwt per operating day total of those costs are: 20 year old ships Rp year old ships Rp 130 New ships Rp 78 The average number of operating days per year for different ships are assumed to be as follows: 20 year old ships 180 days 10 year old ships 260 days New ships 330 days Operating cost saving was calculated for the existing number of commission days for those ships to be replaced, the additional commission days for rehabilitated and used ships being taken into account in the estimate of productivity increase. The rehabilitated and used ships will halve the per dwt operating cost from Rp 265 per day to Rp 130. Multiplying this by 180 days, the total annual operating cost saving per dwt is Rp 24,300. (b) Productivity Increase Productivity increase is calculated using estimated additional net revenue per dwt (based on the existing tariff) as proxy. According to PELNI data the typical RLS ship in reasonable repair seem to earn a gross revenue

101 ANNEX 9 Page 2 of Rp 744 per dwt a day on the basis of estimated 260 commission days (see Attachment 2) and the average daily operating cost per dwt is Rp 334 (see Attachment 3). This leaves a net revenue of Rp 410. Since we assume 260 commission days, the additional commission days after rehabilitation or acquisition of used ships over the typical existing (20 year old) used ships would be 80 days a year. By multiplying the net daily revenue per dwt of Rp 410 by 80 days, we get Rp 32,800 which is the per dwt net revenue per year due to rehabilitation and used ship purchase. The total annual benefit of rehabilitation and used ship purchase per dwt is therefore as follows: Operating cost savings Rp 24,300 Net additional revenue Rp 32,800 Rp 57,100 The amount of annual benefit per dwt equals about 80% of the per dwt cost of rehabilitation or about 20Z of the estimated acquisition price of one dwt of used ships. Net Increase in Tonnage The benefits from the net increase in tonnage to be realized by acquisition of new ships would be only the increase in net revenue which is used as proxy for production increase. Similar to the case of used ships, the new ships are expected to produce a net revenue of Rp 410 per dwt daily. Multiplying Rp 410 by 330, the number of commission days a year, we get Rp 135,300 which is the annual net revenue per dwt of new ships. The annual net revenue so calculated is an equivalent of about 13.8% of the estimated acquisition cost of new ships of Rp 984,000 per dwt. April 1976

102 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Average Annual Costs of Maintenance, Lubrication and Bunker by Age and Size of Ships (Rp. Millions) 20-Year Old Ships 10-Year Old Ships New Ships t ,000 1, ,000 1,500 2,500 dwt dwt dwt dwt dwt dwt dwt dwt dwt dit Annual Costs of: 1. Floating Repair and Docking Running Repair Lubrication Bunker Oil Total Per dwt Cost (Rp.1000) ; Weighted* Average Per dwt Cost (Rp. '000) Average Operating Days Per Year Cost Per dwt Per Operating Day (Rp.) * With the exception of 20-year old ships for which non-weighted average cost Js shown Source: SEACOM, PELNI, Bank staff. April 1976

103 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Revenue of Typical PELNI Ships Per Commission Number of Size of Number of Day Revenue Ships Ships Annual Revenue Per dwt Revenue Commission Per dwt Sampled (dwt) (Rp. Million) (Rp. Thousand) Days (M.) Weighted 6 1,000 1, Average Source: SEACOM, PELNI, Bank Staff April 1976 'IN C..m

104 INDONESIA APPRAISAL CF A SECOND SHIPPING PROJECT Daily Operating Cost of PELNI Ships (Rupiahs) Ship Sizes 750 1,000 1,500 2,500 Cost Category dwt dwt dwt dwt Crew 55,246 65,625 80,869 99,283 Ship Operation 117, , , ,171 Port Fees 120, , , ,000 Agency Fees 13,750 16,275 23, Total 306, , , ,854 Per dwt Weighted Average Per dwt Daily Operating Cost for all Ships 334 Source: SEACOM, PELNI, Bank Staff. April 1976 CF

105 INDONESIA APPRAISAL OF A SECOND SHIPPING PROJECT Indonesian Fleet by Category and Size Classes TOTAL Total Total Total Total Total Total Total NAME OF VESSEL No. Dwt. No. Dwt. No. - Dwt. No. Dwt. No. Dwt. No. Dwt. No. Dwt Ocean going cargo vessels , , , , ,607 Inter-island pass/ cargo vessels 9 2, , , , , ,166 Local inter-island vessels , , ,822 Tankers 12 2, , , , , , ,507 Tug Boats 72 9, , ,320 Fishing Boats 68 8, , ,603 T 0 T A L , , S , , ,790 1,o55 1,159,025 Source: Directorate General of Sea 5ommunications April 1)76

106 TABLE 2 INDONESIA APPRAISAL CF A SECCND SHIPPING PROJECT Shipping Acquisition and Rehabilitation Program GIDI S~2ping rogramac3uired B PANN Acquired By Private Compnes (First Phase, *An4S5 rrojec-i7 -Non-FANN) A. New Ships Class Number Total Class Number Total Class Number Total , , ,500 1, ,000 1, ,000 1, ,000 1, ,500 1, , Total 51 53,750 Total 47 50,250 Total 4 3,500 B. Used Ships , ,500 1, ,00' 1, ,000 1, ,000 1, ,000 1, , _ 2, , ,000 - Total 55 59,500 Total 47 52,000 Total 8 7,500 C". Rehabilitation Total 54, Grand Total , ooo April 1976

107 TABLE 3 INDCKESIA APPRAISAL (F A SEC ND SHIYPING PROJECT IBRD Fiscal Year Cumulative Total And Quarter Ending Disbursement 1975/76 June 30, /77 September 30, December 31, March 31, June 30, /78 September 30, December 31, March 31, June 30, /79 September 30, December 31, March 31, June 30, /80 September 30, December 31, April 1976

108 INDONESIA APPRAISAL CF A SECOND SHIPPING PROJECT Alternative Projections of Freight Traffic and Shipping Capacity Requirements Assumed Annual Growth Rate 15.5% 10% 7% Freight Shipping Capacity Freight Shipping Capacity Freight Shipping Capacity Traffic Needed (Thousand dwt) Traffic Needed (Thousand dwt) Traffic Needed (Thousand dwt) (Millions With Per dwt (Millions With Per dwt (Millions With Per dwt of Tons) Productivity of of Tons) Productivity of of Tons) Productivity of 17.7 Tons 15 Tons 17.7 'rons 15 Tons 17.7 Tons 15 Tons 1973 (Actual) Oi h Source: LTFD Study, Bank staff. April 1976

109 TABLR 5 INDONESIA APPRAISAL OF A SEC CD SHIPPING PROJECT Passenger Traffic P.N. PELNI Other Companies Total Actual N.A. NA N.A. N.A N.A. N.fi N.A. N.A N.A. N.A N.A. N.A N.A. N.A Estimated Projected o Source: LTFD Study, Bank staff. April 1976

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111 ORGANIZATION CHART DIRECTORATE GENERAL OF SEA COMMUNICATIONS Director General Adml. Haryono Nimpuno Inspectorates Secretariat General - Planning - Organization and Method - Personnel - Finance - Material - Legal and International DIRECTORATES Shipping Marinv Navigation Aids Coast Guard Research and Training Health Traffic Safety Capt. V. Arun Kol. I Supardi Development J.H. Warula L. Sapta Adli. M. Wibono Mr. J. Rustarndi - Maritime Academies - Upgrading - Examining Board Security Ports and Dredging Shipyards Kol. Jakarso Ir. Boediardjo Ir. Chatab Nuzwari Maritime Districts - Ports - Navigational Aids - Finance - Health World Bank-9677

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113 INDONESIA APPRAISAL OF SECOND SHIPPING PROJECT CAUSE & EFFECT RELATIONSHIPS IN SHIP OPERATIONS C_uses _--- Effects Poor Ship Maintenance -Long repair time -Breakdown delays Low Saling -Poor ship efficiency Tm -Irregular scheduliig Competition Competition ~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Maintenance I ~~~~~~~~~~~~~~~~~~~~Laid-up Vessels _ -Bad service L o Low Working Poor Ship Efficiency -Irregular sailings Low Productivity Nominal Profit Capital Dependency on Shippers No marketing effort Load Factors Ratios (1I or Net Losses feficits Supplier Credits -Inefficient route patterns _ ~~~~~~~~~~~~~~~~~Breakdown Delays ~~~~~~~~~~~No Schedules Working Capital Loans Borrowing -Freight wars -High capacity cost CapitalHighClCapital Debt & H.P. Repayments Cash -fliow F ~~~~~~Capital L(2 Lack of Equity A Key: (If Low productivity ratios are also due to inadequate ports, port facilities, and trained personnel. (2) As a result of the lack of equity, companies resort to more debt, thereby repeating the cycle. World Bank-9604(R)

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117 IBRD A S -IN nfl PHILIPPINES )0N ~~~~~~~~~~~Appraisal of Second Shipping Project Proposed Regular Liner Service Route Systems S~~~~~~~~~~~~oufh Chmoa Sea BRUNE/ MAJOR PORTS I -mss,c f-nm,' J..a purts Pronvin,ial b.uraais I BatE IA j Wasn Kaliergoran JORPOSTA~ ~ ~ W K,M. ~~~~~~~l. I ii.,.tg~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~ 5 Spcia SsnitnnJgtaiant isoetal alaoes de-d.caaa ~~ NotCh Soananena Cilsoap 25 SogAlt-Esen Salaa,esi A ~~~~~~~~~~~~~~~~~~~~~~~i' OMBOAK04 ISenhuL ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ vas an ola~~~~~~~~~~~~00 aadnaigaac sartj c PROVINCES~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,nAniCttOtrrnrnt I J.. E.v oplo 14is s ta an icrbakaaaisi.,r-go t