Completion Report. Project Number: Loan Number: 1397 April Indonesia: Power Development and Efficiency Enhancement Project

Transcription

1 Completion Report Project Number: Loan Number: 1397 April 2006 Indonesia: Power Development and Efficiency Enhancement Project

2 CURRENCY EQUIVALENTS Currency Unit rupiah (Rp) At Appraisal At Project Completion April 1994 October 2004 Rp1.00 = $ $ $1.00 = Rp2,110 Rp9,129 ABBREVIATIONS ADB Asian Development Bank DCC distribution control center DGEEU Directorate General of Electricity and Energy Utilization FIRR financial internal rate of return HRD human resource development ICB international competitive bidding JBIC Japan Bank for International Cooperation PLN Perusahaan Listrik Negara (National Power Company) TA technical assistance WEIGHTS AND MEASURES km (kilometer) 1,000 meters kv (kilovolt) 1,000 volts kwh (kilowatt hour) 1,000 watt hours MW (megawatt) 1 million watts NOTES (i) (ii) Before 2000, the fiscal year (FY) of the Government of Indonesia ended on 31 March. Since 2000, the fiscal year has ended on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY 2003 ends in December The FY of Perusahaan Listrik Negara ends on 31 December. In this report, "$" refers to US dollars. Vice President C. Lawrence Greenwood, Jr., Operations Group 2 Officer-in-Charge S. Curry, South East Asia Department (SERD) Director P. Giraud, Infrastructure Division, SERD Team leader Team members S. Gupta, Senior Energy Specialist, SERD Y. Feng, Principal Environment Specialist, SERD E. Festejo, Project Officer, SERD A. Hirano, Energy Specialist (Financial Analyst), SERD

3 CONTENTS Page BASIC DATA MAPS i I. PROJECT DESCRIPTION 1 II. III. IV. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 1 B. Project Outputs 3 C. Project Costs 4 D. Disbursements 5 E. Project Schedule 5 F. Implementation Arrangements 7 G. Conditions and Covenants 7 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 8 J. Performance of Consultants, Contractors, and Suppliers 9 K. Performance of the Borrower and the Executing Agency 9 L. Performance of the Asian Development Bank 10 EVALUATION OF PERFORMANCE A. Relevance 10 B. Effectiveness in Achieving Outcome 10 C. Efficiency in Achieving Outcome and Outputs 11 D. Preliminary Assessment of Sustainability 11 E. Impact 12 OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 13 B. Lessons 13 C. Recommendations 13 APPENDIXES 1. Chronology of Major Events 2. Project Outputs at Appraisal and Actual 3. Appraised and Actual Project Costs 4. Financing Plan 5. Actual Disbursements, Implementation Schedule, Compliance with Covenants 8. Summary of Contracts Financed by the Asian Development Bank 9. Financial Analysis 10. Calculations of FIRR 1995/ /03

4 BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 5. Borrower 5. Executing Agency 6. Amount of Loan 7. Project Completion Report Number Indonesia 1397-INO Power Development and Efficiency Enhancement Republic of Indonesia Perusahaan Listrik Negara $337 million INO-945 B. Loan Data 1. Appraisal Date Started Date Completed 2. Loan Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness In Loan Agreement Actual Number of Extensions 6. Closing Date In Loan Agreement Actual Number of Extensions 7. Terms of Loan Interest Rate Maturity (number of years) Grace Period (number of years) 8. Terms of Relending Interest Rate Maturity (number of years) Grace Period (number of years) 19 June July September September October December March June June October Pool-based variable lending term for dollar loan 20 5 Loan rate plus 0.5% 20 5

5 ii 9. Disbursements a. Dates Initial Disbursement 15 August 1996 Effective Date 06 June 1996 Final Disbursement 25 October 2004 Original Closing Date 30 June 2001 Time Interval 98 months Time Interval 61 months b. Amount ($ million) Category or Subloan Original Allocation Last Revised Allocation Amount Canceled Net Amount Available Amount Disbursed Undisbursed Balance A. Java 150 kv Transmission B. Sumatra Transmission 1. Sumatra 150 kv 2. Sumatra 275 kv C. Distribution Control Centers D. Peusangan Hydropower 1. Metal Works 2. Electrical Works kv Transformer E. Human Resource Development F. Engineering Design G. Engineering Services H. Interest and Commitment Charge During Construction J. Unallocated Total Local Costs (Financed) Amount ($ million) 0 Percent of Local Costs 0 Percent of Total Cost 0

6 iii C. Project Data 1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost Local Currency Cost Total Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower Financed ADB Financed Other External Financing (JBIC) Total IDC Costs Borrower Financed ADB Financed Other External Financing Total ADB = Asian Development Bank, IDC = interest during construction. 3. Cost Breakdown by Project Component ($ million) Component Appraisal Estimate Actual A. Base Costs Part A: Java Transmission Part B: Sumatra Transmission Part C: Distribution Control Centers Part D: Peusangan Hydropower Part E: Human Resources Development Part F: Engineering Design Part G: Engineering Services Taxes and Duties B. Contingencies C. IDC on ADB Loan ADB Loan JBIC Loan Total ADB = Asian Development Bank, IDC = interest during construction, JBIC= Japan Bank for International Cooperation.

7 iv 4. Project Schedule Item Appraisal Estimate Actual Part A: Java Transmission Tendering Aug 1995 Mar 1996 April 1997 Feb 1999 Bid Evaluation/Contract Negotiations Apr 1996 Dec 1996 May 1998 May 2000 Manufacture and Supply Apr 1997 Mar 1998 Jul 1999 Mar 2003 Erection and Commission Jul 1997 Jun 1998 Sep 1999 May 2004 Part B: Sumatra Transmission Tendering Jul 1995 Jun 1996 Aug 1996 May 1999 Bid Evaluation/Contract Negotiations Jul 1996 Mar 1997 Oct 1997 Mar 2000 Manufacture and Supply Jun 1997 Sept 1998 Apr 1998 Oct 2001 Erection and Commission Jul 1997 Jun 1999 Jun 1999 Jun 2004 Part C: Distribution Control Centers Tendering/Bid Evaluation/Contract Negotiations Jul 1996 Sept 1997 Canceled Manufacture and Supply/Erection and Commission Oct 1997 Sept 1999 Part D: Peusangan Hydropower Tendering/Bid Evaluation/Contract Negotiations Jan 1996 Mar 1998 Canceled Manufacture and Supply/Erection and Commission Jul 1997 Jun 1998 Part E: Human Resources Development Tendering/Bid Evaluation/Contract Negotiations Oct 1996 Jun 1997 Canceled Manufacture and Supply/Erection and Commission Jul 1997 Dec 1998 Part F: Engineering Design Short-listing and Invitation of Proposals/Contract Negotiation Field Investigations and Analysis/Reports and Tender Documents Mar 1996 Dec 1996 Jan 1997 Dec 1998 Canceled Part G: Engineering Services CS for Part A (Java Transmission) Oct 1996 Jun 1998 Canceled CS for Part B (Sumatra Transmission) Jan 1997 Jun Contract Signed 26 Sep Contract Terminated 31 Jul 2002 CS for Part C (DCC) - Contract Signed - Contract Terminated Apr 1995 Mar Dec 1997 Jul 1998 CS for Part D (Peusangan Hydropower) Oct 1995 Dec 2000 Canceled 5. Project Performance Report Ratings Implementation Period Development Objectives Ratings Implementation Progress From 1 December 1998 to 28 February 1999 S S From 31 March 1999 to 30 June 2000 PS PS From 31 July to 31 December 2000 PS S From 31 January to 30 April 2001 S S 31 May 2001 S S 30 June 2001 to 31 May 2004 S S 30 June to 31 December 2004 S S CS = construction supervision, DCC=distribution control center, PS = partly satisfactory, S = satisfactory.

8 v D. Data on Asian Development Bank Missions Name of Mission a Date No. of Persons No. of Person-Days b Specialization of Members c Reconnaissance Oct a Fact-Finding Mar a, b, c, d, e Appraisal 19 Jun 7 Jul a, b, d Review Aug h, j Review Dec h Review Apr a, f, j Review 4 28 Oct 11 Nov a, j Review Feb a, j Review 6 24 Nov 5 Dec a, j Review 7 25 Feb 2 Mar a Environment Mitigation Case Study May g, I, c Review Jun a Review Jul l Review Mar k, l Review Feb 7 Mar h Review Oct h Review Sep h Review Mar h, d, j, i Special Project Administration Jul h, d, f Review Nov 3 Dec h, d, j Project Completion Review d 28 Aug 3 Sep d, e, h, 2i, j a b c Most of these missions were undertaken in conjunction with reviews of other projects. Number of days fielded for Loan 1397-INO. a = project engineer, b = financial analyst, c = programs officer, d = project economist, e = environment specialist, f = social development specialist, g = project specialist (environment), h = energy specialist, i = staff consultant, j = associate or assistant project analyst, k = sector specialist, l = power sector specialist. d The project completion report was prepared by S. Gupta, senior energy specialist, Infrastructure Division and E. Festejo, associate project analyst, Infrastructure Division.

9 130o00'E 110o00'E o 'E o 10 00'N o 10 00'N INDONESIA South China Sea PA C I F I C O C E A N NORTH SUMATRA MALAYSIA HALMAHERA 0o SUMATRA 0o SULAWESI KALIMANTAN BANGKA BELITUNG Jakarta PROJECT LOCATION SERAM Java BALI Pekanbaru SUMBA INDIAN 0 RIAU o FLORES SUMBAWA JAVA o 10 00'S 0 o PAPUA Sea TIMOR-LESTE o 10 00'S TIMOR OCEAN 110o00'E 130o00'E o 'E INDONESIA Kiliranjao POWER DEVELOPMENT AND EFFICIENCY PROJECT Padang Aur Duri WEST SUMATRA Payau Selicah SUMATRA POWER TRANSMISSION (as completed) Jambi Muara Bungo Bangko JAMBI BANGKA-BELITUNG Talang Kelapa Betung Borang-Mariana Lubuk Linggau Lahat Curup Palembang SOUTH SUMATRA BENGKULU Java Sea o o 4 00'S 4 00'S Bengkulu National Capital Manggala City/Town 150 kv Substation Project Kotabumi 275 kv Transmission Line Project LAMPUNG 150 kv Transmission Line Project N Tarahan Provincial Boundary 0 Bandar Lampung International Boundary INDIAN OCEAN o 'E Map a HR Kallianda o 100 Kilometers Boundaries are not necessarily authoritative 'E 50

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13 1 I. PROJECT DESCRIPTION 1. The Indonesian electricity sector was growing rapidly in 1994, although regional imbalances existed. Electricity capacity, generation, and sales increased at around 15% per annum from 1974 to The village electrification ratio had reached 72.3% in the Java-Bali system and 43.5% outside Java, with a nationwide figure of 55%. Annual per capita electricity consumption was 305 kilowatt-hours (kwh), which was at that time lower than that in the People s Republic of China, Malaysia, Philippines, and Thailand. To rationalize system design and reduce energy losses, the state electricity corporation, Perusahaan Listrik Negara (National Power Company, PLN), had standardized voltage levels at (i) 500 kilovolt (kv), 275 kv, 150 kv, and 70 kv for transmission; (ii) 20 kv for primary distribution; and (iii) 380 V and 220 V for secondary distribution. The 275 kv level was introduced for interregional interconnection in Sumatra. Supply-side efficiency improvements, expansion of grid, and diversification of generation sources were targeted to increase consumer access and lower costs, especially outside the Java-Bali grid. 2. At appraisal, the Project covered (i) expanding 150 kv transmission in Java and 275 kv and 150 kv transmissions in Sumatra; (ii) establishing distribution control centers (DCCs) in Central Java; (iii) developing and constructing the Peusangan hydropower project in Aceh, Sumatra; (iv) human resource development (HRD), including to enhance operator training facilities and install a power plant training simulator; (v) engineering design of the Pula-3 and Malea hydropower projects in Sulawesi and Cimandiri-3 hydropower project in Java; and (vi) engineering services for designing and engineering of DCCs and simulator, and construction supervision. 3. The Project supported the Government s power sector policy of geographically balanced economic development through (i) expanding the electricity supply, (ii) diversifying the electricity generation mix away from oil, (iii) integrating isolated systems outside Java, (iv) improving supply efficiency, and (v) developing human resource capital. 4. Indonesia s severe economic and financial crisis in 1998, and the ongoing security situation in Aceh, resulted in implementation delays that led to cancelling most components of the Project except for the expansion of transmission in Java and Sumatra. 5. Despite the reduced scope, the Project contributed to balanced economic development in Java and Sumatra by (i) interconnecting the regional power grids of central Java, thereby allowing load transfer between the 500 kv network-based power stations and the load centers, (ii) interconnecting the central and southern regional grids in Sumatra, and (iii) allowing load transfer between new power plants and load centers. The Project supported the least-cost, long-term transmission development plan ( ) for Java-Bali and Sumatra. II. EVALUATION OF DESIGN AND IMPLEMENTATION 6. The chronology of major events in processing and implementing the Project is in Appendix 1. A. Relevance of Design and Formulation 7. The Project was designed to support Government policy objectives by reinforcing the transmission networks in Java and Sumatra and establishing DCCs to enable more efficient operation of power systems. The hydropower subprojects and engineering design components

14 2 were intended to directly address the policy objectives of balanced regional development and diversification of the generation mix away from oil. The HRD component was intended to enhance PLN s in-house training capabilities for developing a pool of skilled combined-cycle power plant operators for both PLN and the private sector. 8. The transmission components of the Project were identified on the basis of least-cost planning studies conducted by PLN as part of a long-term (15 years) program to expand generation. The 150 kv transmission system in Java was urgently needed to provide the vital links between the 500 kv network-based major power stations and load centers. The 275 kv transmission system expansion for Sumatra was needed to bridge the southern and central regional grids in Sumatra and to provide links between new and planned generation and load centers. The planning study accounted for 600 MW of new capacity in Sumatra and for capacity to be added during the following 5 years in South Sumatra. 9. PLN had been installing DCCs in urban areas with a view to reducing the frequency and duration of supply outages and thereby improving sales and revenue, minimizing system energy losses, and reducing supply costs. Studies carried out by PLN, then reviewed and found to be in order by Asian Development Bank (ADB), indicated the need for DCCs in Semarang, Solo, and Yogjakarta in Central Java. 10. The HRD component was included to equip PLN with a state-of-the-art training simulator for gas-fired combined-cycle gas turbines. This was proposed and agreed to by ADB on the basis that several gas-fired plants were envisaged for the future and PLN and private sector operators would be trained using the simulator. 11. The engineering design component was included to help the country utilize its renewable hydropower energy resource and to move away from oil dependency. In the case of the Sulawesi subcomponents, these were integral parts of PLN s long-term, least-cost power development program and were intended to meet the Government s balanced regional development objectives. 12. Indonesia s severe economic and financial crisis in 1997 saw the Government and the ADB undertake a comprehensive portfolio review of ongoing ADB projects in 1998 and Consequently, several project components, including the DCCs in Central Java, HRD, engineering design of the hydropower projects in Sulawesi and Java, and engineering services, were canceled due to PLN s inability to raise counterpart funds because of the financial crisis. 13. The Peusangan hydropower plant development had been put on hold indefinitely due to continuing security concerns about the project site in Aceh province. 1 In view of the long delay in implementing the Project and severe power shortage in Aceh, the Government suggested to PLN to find an alternative source for electricity generation that could be implemented rapidly when the security situation improved. As a result, in September 2004, ADB decided not to maintain the loan facility for the Peusangan hydropower project and this component was canceled. 14. Despite the cancellations, the remaining transmission components of the Project were still relevant to the objectives of (i) linking generation and load centers, (ii) relieving bottlenecks in the 150 kv Java-Bali network, and (iii) linking the central and southern Sumatra regional 1 The Japan Bank for International Cooperation, cofinancing the front-end civil works and consulting services for Peusangan, decided not to extend the loan closing date beyond 31 December 2003.

15 3 grids. This was consistent with ADB s revised country strategy of maintaining reasonable quality and reliability of the power grid. B. Project Outputs 15. At appraisal, the following were the expected outputs of the Project: (i) Part A: Java transmission. Constructing 161 kilometers (km) of 150 kv line, expanding 56 existing 150 kv substations, and constructing 5 new 150 kv substations. (ii) Part B: Sumatra transmission. Stringing of second circuits on 545 km of 275 kv lines, installing about 305 km of 150 kv line, expanding 10 existing 150 kv substations, and installing 4 new 150 kv substations. (iii) Part C: distribution control centers. Installing DCCs at Semarang, Solo, and Yogyakarta in Central Java. (iv) Part D: Peusangan hydropower project. Installing an 86.4 megawatt (MW) (v) plant in Sumatra. Part E: human resource development. Enhancing operator training facilities, including installation of a power plant training simulator for combined-cycle power plants. (vi) Part F: design and engineering of hydropower project. Designing the 74.8 MW Palu-3 hydropower plant in Central Sulawesi, 182 MW Malea hydropower plant in South Sulawesi, and 352 MW Cimandri-3 hydropower plant in West Java. (vii) Part G: engineering services. Designing and engineering the DCCs and the simulator under HRD, and supervising construction of all the project components. 16. The Project had a long implementation period that spanned a period of radical changes in the economy and Government priorities. As a result of high electricity demand growth in the year following appraisal, the operational flexibility of the Java-Bali transmission system deteriorated rapidly as transmission lines and substations became heavily loaded. PLN responded rapidly by completing some of the components of part A using its own materials in stock. As a result, PLN redesigned the transmission components of part A, aiming for operational flexibility and reliability through (i) rerouting transmission lines, (ii) installing additional transmission line bays, and (iii) installing additional transformer capacity to relieve heavily loaded substations. The new scope of works for part A was justified and approved by ADB in December Due to rapid and high load growth, the scope of work for part B was revised to include the 150 kv Kotabumi Menggala and Aur Duri Payo Selincah transmission lines and associated substation extensions. The implementation of the Sumatra double circuit 275 kv transmission lines was jointly financed by Loan 1320-INO: Sumatra Power Transmission Project 2 and this Project (Loan 1397-INO) employing the same turnkey contractor and the same supervision consultants. With the closing of Loan 1320-INO on 31 December 2000, the remaining payments against the Sumatra 275 kv transmission lines were financed by this Project using reallocation from loan savings and the unallocated category. 2 ADB Report and Recommendation of the President to the Board of Directors on Proposed Loan to Indonesia for the Sumatra Power Transmission Project. Manila. (Loan 1320-INO, approved in September 1994).

16 4 18. Appendix 2 details line length and segments at appraisal and as actually implemented. The revised scope of work and remaining work are as follow: (i) (ii) (iii) (iv) (v) (vi) (vii) Part A: Java transmission. Construction of 140 km of 150 kv line, expansion of 48 existing 150 kv substations and construction of 3 new 150 kv substations. All work is completed except for four sections of 70 kv lines that are being upgraded to 150 kv by using the center line of the existing transmission line and strengthening tower foundations. The ADB-funded portion was only the supply of line materials. Part B: Sumatra transmission. Stringing of second circuits on 545 km of 275 kv lines, installing about 223 km of 150 kv line, expanding 10 existing 150 kv substations, and installing 4 new 150 kv substations. All work is completed except for the stringing of 20 spans of transmission line. The remaining work is being financed from PLN s own resources. Part C: distribution control centers. Canceled. Part D: Peusangan hydroelectric project. Canceled. Part E: human resource development. Canceled. Part F: design and engineering of hydropower project. Canceled. Part G: engineering services. Partly canceled. Prior to cancellation, construction supervision services were contracted for parts A and B. 19. For the incomplete components of parts A and B, PLN reported that all towers have been erected and conductor stringing can be completed in the unfinished sections as soon as access and right-of-way problems have been settled (paras. 29 to 32). For part A, PLN expects to complete the work in June For part B, PLN has taken over the contractors outstanding work and has decided to complete the component through its own budget allocation. Right-ofway settlement will be achieved using PLN's budget, and PLN has given this issue priority by engaging all stakeholders concerned. PLN expects to complete part B by October C. Project Costs 20. At the time of appraisal in 1995, the project cost was estimated at $734 million equivalent, consisting of $423 million in foreign exchange costs (72.5%) and $311 million equivalent in local currency costs (27.5%). The part A cost was appraised at $98.3 million equivalent, consisting of $76.7 million in foreign exchange costs and $21.6 million in local currency costs. The part B cost was appraised at $83.5 million equivalent consisting of $53.3 million in foreign exchange costs and $30.2 million in local currency costs. 21. Approved changes to part A and part B in July 1996 amounted to a cost reduction of $16.5 million (including foreign exchange cost and local currency cost). The part A cost was re-budgeted from $98.3 million to $85.2 million equivalent. For part B, only the 150 kv substations and transmission line cost components were re-budgeted, from $31.9 million to $28.5 million equivalent. 22. Following the crisis, the total cost for part B was reappraised from $83.5 million to $30.2 million, comprising $27.5 million in foreign exchange costs and $2.7 million in local currency costs. All components from part C to part G were canceled except for the component of part G related to engineering service support of the Sumatra 275 kv transmission lines. 23. The actual total cost of part A was $84.8 million equivalent, compared with the budget cost of $85.2 million equivalent. The actual total cost of part B was $44.1 million equivalent,

17 5 compared with the budget cost of $30.2 million equivalent. The actual cost differed from the reappraisal estimates because of the large devaluation of the rupiah that took place during the construction period and the addition of rupiah escalation into previously fixed price contracts. 24. The actual cost of the Sumatra component of part G was $2.1 million equivalent, compared with the appraisal cost of $2.7 million equivalent. The actual cost for the Java component was $0.3 million equivalent, versus the appraisal cost of $5.0 million equivalent. The actual cost was lower because the components relating to construction supervision contracts were canceled following the onset of the Asian financial crisis. 25. Overall, the total actual project cost was $159.9 million equivalent, consisting of $107.3 million in foreign exchange costs (67.1%) and $52.6 (32.9%) million equivalent in local currency costs (Appendix 3). ADB financed 67% of the total project cost. The project financing plan is in Appendix 4. D. Disbursements 26. Total disbursements were $107.3 million, compared with the originally approved amount of $337 million. Appendix 5 shows the annual disbursements under the loan. Disbursements were lower, as the Government and PLN took corrective action to limit expenses in the aftermath of the Asian financial crisis and canceled some components of the Project. E. Project Schedule 27. According to the original implementation schedule, parts A and B of the Project were to be completed in mid The actual implementation schedule (Appendix 6) shows delays of around 3 years and 3 months, and completion was reported by PLN in mid-2004 (loan closure in October 2004). 28. All contracts were awarded on a turnkey basis with international competitive bidding. The Project had a significant number of unforeseen changes in scope due to the rapidly changing economic and financial conditions in Indonesia relating to the Asian financial crisis. These changes required renegotiation and issue of contract amendments, with approvals from the Government and ADB, and which resulted in greater overall delays than would be expected in normal conditions. 29. Delays in part A are due to technical and operational issues: (i) (ii) Within 6 months of the loan effectiveness date, high load growth required PLN to modify the scope of part A. PLN submitted a load flow study in July 1996 to justify the revised scope. Some of the changes were rapidly approved by the Government, but one component of the proposed change in scope had to be resubmitted as the Government approved only 6 out of 12 substations included in the revised scope submitted by PLN. The Government s final approval for the revised scope for substations in West Java and Sumatra was obtained during an ADB review mission in December There was a need to upgrade 70 kv lines passing through densely populated areas of Jakarta with considerable operational planning required to avoid interrupting customers power supply. This resulted in delays in construction works although the supply of materials under the Project was completed on time.

18 6 30. Delays in part B were attributed to more difficult issues related to budget availability, poor contractor performance, and right-of-way issues: (i) The execution of the civil works contracts was delayed due to a shortfall in available budget after the crisis and consequent delay in contract award and implementation. Delays also resulted due to changes in scope that were necessary to accommodate changes in demand, such as the addition of the 150 kv Kotabumi Menggala and Aur Duri Payo Selincah transmission lines and associated substation extensions to accommodate higher load. (ii) There were delays in completing the 275 kv transmission lines because of poor performance by a turnkey contractor. (iii) The most significant delay occurred when the contractor was obstructed from accessing the rights-of-way granted by PLN, and PLN had to reenter protracted negotiations with landowners. 31. The negotiations with landowners in Sumatra (part B) were extremely slow and difficult due to the following reasons: (i) (ii) (iii) (iv) (v) There was a long period between initial PLN negotiations with the landowners and commencement of works (as inventory was prepared 5 years before the works started), resulting in claims that the negotiated compensation payments were too small. Prior to the crisis, PLN had negotiated a survey route. The survey route was provided to the transmission line contractors so that they could access the land to conduct the survey and prepare a preliminary design of transmission lines. The survey route was secured through negotiations with landowners. The 1997 economic crisis occurred after the route was completed but before the preliminary design process was finished. As a result of heightened concerns regarding their financial welfare after the crisis, many landowners did not allow the contractors access to the survey route, and PLN had to reopen the negotiation process to deal with demands for greater compensation. PLN was constrained to compensate the remaining landowners at the same rates as provided to those landowners who had already been compensated, as otherwise this would have led to renegotiating all compensation already completed. Landowners and PLN disagreed on how to calculate the compensation amounts. PLN used the opportunity cost of land to determine compensation, but many landowners wanted a higher lump sum settlement that was not related to opportunity cost. Landowners in remote areas were difficult to reach and, in some cases, ownership was unclear. 32. There were particularly difficult disputes over land acquisition and right-of-way compensation in one section of the 275 kv transmission line between Lubuk Linggau and Bangko (lot 1AA2), two sections of the 150 kv transmission line between Kotabumi and Manggala, and between Aur Duri and Payo Selincah (lot 2B) in South Sumatra. ADB requested PLN to increase its efforts to resolve the dispute with the landowners and to work closely with the Regency government to resolve the claim and complete the compensation payments. PLN took up the matter with the governor of South Sumatra and chief of Musi Rawas Regency, and a steering committee was established in the Regency government in 2002 to address the issues. The committee continued the dialogue with the affected people, and the Regency government

19 7 coordinated the negotiations for compensation and examined these claims. PLN will settle rightof-way issues using its own resources and expects part B to be completed by October F. Implementation Arrangements 33. PLN was the Executing Agency for the Project and its head office was responsible for project implementation. PLN s Engineering Services Center and Directorate of Construction handled the engineering and procurement, and they designed the transmission lines and substations. Local PLN project organizations were responsible for day-to-day construction coordination and supervision. Both PLN s head office and its local project organizations received assistance from international and local consultants financed by ADB under the Project. 34. In 1994, PLN was corporatized and underwent significant changes that had implications for project implementation arrangements. The corporatization of PLN was followed by a restructuring process to establish new branches and to decentralize responsibility for operations. The Project control and reporting arrangements were clearly documented with relevant corporate and branch staff informed of progress on a regular basis. G. Conditions and Covenants 35. PLN generally complied with the Project s covenants. However, the submission of audited project accounts and financial statements was not timely. Significant delays occurred also in meeting some of the loan conditions because of disputes during the land acquisition and right-of-way negotiations, and this prevented the timely completion of some line sections. 36. Appendix 7 shows the status of compliance with conditions and covenants. The covenants were realistic and those initially laid down in the Loan Agreement have not been modified, suspended, or waived. H. Related Technical Assistance 37. ADB provided two technical assistance (TA) grants to help the Government in developing a strategic plan for future development for the power sector and to prepare strategies and policies for developing the geothermal sector. 38. The first TA on Strategic Planning Study for Power Sector 3 had two components: (i) (ii) Prepare a strategic plan for development of the power sector for optimal utilization of the indigenous energy resource potential and financial resources. Improve institutional capabilities of the Directorate General of Electricity and Energy Utilization (DGEEU) for future planning. 39. Its completion report rated the TA highly successful. The TA contributed to improving the institutional capabilities of DGEEU for policy analysis, planning, and regulatory functions. The TA also helped DGEEU to (i) develop demand forecasts for the power sector, (ii) review current power sector development plans, (iii) analyze available indigenous energy resources and financial resources, and (iv) prepare a strategic action plan in four phases setting out a road 3 ADB Technical Assistance to the Republic of Indonesia for Strategic Planning Study for Power Sector. Manila (TA 2429-INO, for $590,000, approved on 24 October 1995). ADB Technical Assistance Completion Report on Strategic Planning Study for Power Sector in Indonesia. Manila (IN , 30 June).

20 8 map of necessary steps for the sector reforms. The TA has strengthened DGEEU s capability for demand forecasting, which should support the approval of regional transmission grid proposals in future. 40. The second TA on Geothermal Power Development Study 4 provided assistance to the Government on its energy sector initiatives aimed at moving away from oil dependency in power sector, optimizing utilization of indigenous resources in an environmentally sustainable manner, and balancing regional development. The TA had two components. (i) (ii) Identify barriers to development of the geothermal power potential in Indonesia. Recommend an appropriate program for ensuring its optimal utilization. 41. Its completion report rated the TA highly successful. The main barriers impeding development of the geothermal power potential in Indonesia were (i) a complicated legal and regulatory framework, (ii) unclear institutional framework, and (iii) the related pricing and contractual constraints. The Government recognized the importance of the TA recommendations, and applied them in (i) drafting the relevant legislation, (ii) strengthening its institutional capabilities, and (iii) developing geothermal projects. The implementing rules and regulations of the Oil and Gas Law and the new electricity law 5 should be developed to enable implementation of the TA recommendations. I. Consultant Recruitment and Procurement 42. Consulting services were required under part G of the Project to supervise construction of the transmission components for part B. Other consultancy services under part G for engineering design were canceled. ADB reviewed and approved the terms of reference for the consulting firms. PLN carried out separate recruitment for each component following the Guidelines on the Use of Consultants by the Asian Development Bank and its Borrowers. 43. All ADB-financed supplies and services were procured using international competitive bidding (ICB) in accordance with ADB's Guidelines for Procurement. For preparatory work, civil work, erection, and construction financed by the Government, local competitive bidding procedures were used, which ADB reviewed and found acceptable. ADB financed no contracts involving local competitive bidding. Four 275 kv line sections, two 150 kv line sections, and five 150 kv substation packages financed by ADB were tendered in 11 separate turnkey contracts. The contract for transmission lines in West Java (upgrading 70 kv to 150kV) was changed from a turnkey to a supply only contract since the construction period would exceed the loan closing date. Construction and erection of this was taken over by PLN.. Appendix 8 summarizes all contracts financed by ADB. 44. A total of 12 contractors were engaged (5 for part A, 3 for part B, and 4 for part G), which made tendering for construction supervision, project administration, and monitoring an efficient process. Preparing and handling tender documents and bid evaluations, coordinating packages, 4 ADB Technical Assistance to the Republic of Indonesia for Geothermal Power Development Study. (TA 2430-INO, for $310,000, approved on 24 October). ADB Technical Assistance Completion Report on Geothermal Power Development Study in Indonesia. Manila (IN ). 5 Electricity Law No. 20/2002 was revoked by the Constitutional Court in December 2004, and policy actions toward implementing a competitive electricity market were put on hold. The Government issued Government Regulation No. 3/2005, which included almost all the provisions stated in Law No. 20/2002. Government Regulation 3/2005, which complements the reinstated Law No. 15/1985, expands the legal basis for limited reform. A new electricity law has been drafted and is expected to be proposed to the Parliament by June 2006.

21 9 and carrying out contract negotiations for a relatively small number of project components required a manageable level of effort. 45. For part B, the process of awarding contracts suffered from delays that were not anticipated by PLN staff. To avoid the long time lag between the invitation to bid and contract award that was due to required approvals, PLN divided the contracts into smaller lots requiring fewer approvals. Nevertheless, the contract for procuring the equipment and materials for the 150 kv substations was awarded 5 months later than the scheduled date. The contract for turnkey construction of the 275 kv transmission line became effective approximately 9 months after the date scheduled at appraisal. In addition, the invoicing of extremely small amounts unnecessarily burdened the Project s administrative staff. J. Performance of Consultants, Contractors, and Suppliers 46. For part A, the Project was executed by a small number of contractors who generally performed well. 47. For part B, there were numerous problems with a turnkey contractor responsible for the 275 kv transmission lines, who, because of his low bid price, tried to minimize his losses by employing low-cost subcontractors. The most serious problem occurred because the contractor did not have the necessary clauses in his conditions of subcontract to apply penalties in case of default. During execution of the contract, subcontractors demobilized their personnel without permission and, in one case, stopped all work and obstructed, sometimes with force, all attempts by the main contractor to take mitigating actions. These contract difficulties resulted in a delay of 6 months. 48. Consultants were recruited to supervise construction of the transmission lines for a limited period. Their performance is rated satisfactory. K. Performance of the Borrower and the Executing Agency 49. The Borrower and PLN were responsible for providing all funds not supplied by ADB. They did so in a timely manner until the onset of the Asian financial crisis, which caused local counterpart funds shortages that had a major impact on the Project s scope and schedule. 50. The assessment of PLN s capabilities at appraisal was reasonably accurate. The delegation of authority from the head office to the regional units was implemented progressively during the course of the Project. The Project was a challenge for the two PLN regional project units as the PLN head office s involvement was gradually reduced and an increasing share of responsibility was transferred to them. The head office no longer performs operational activities, and it is now only responsible for policy and strategic matters. 51. For Java, due attention was given to the local project organizations. The merger and reorganization of regional project offices and the resulting shifts of responsibilities were well managed. PLN provided a documented reporting structure applicable for Java-Bali projects. For Sumatra, despite a loss of staff and continuity over the long implementation period, the collection and reporting of information for the Project was of a good standard. 52. PLN is continuing to develop its organization by broadening the delegation of authority from its head office to its regional units. Given the difficult economic circumstances encountered

22 10 during the Project s implementation, the performance of the borrower and PLN is rated satisfactory. L. Performance of the Asian Development Bank 53. ADB responded in a timely and adequate manner to the Project s requirements. Reviews of tender documents and subsequent bid evaluation reports were processed appropriately. Project progress was reviewed at least twice a year, and withdrawal applications were processed promptly. ADB also helped PLN to manage the loan through the comprehensive reviews of all ongoing projects 6 after the 1997 financial crisis. ADB s performance is rated satisfactory. III. EVALUATION OF PERFORMANCE A. Relevance 54. The design of the Project was satisfactory and met the main project rationale of supporting the Government's policy objectives. Changes made following the Asian crisis were adequate to improve the Project s design relevance in line with economic developments in the region and to achieve the Project s goals more effectively. The Project is considered to be relevant. B. Effectiveness in Achieving Outcome 55. During appraisal, the Project was anticipated to contribute to reinforcing PLN s power network in Java and Sumatra by constructing additional 275 kv and 150 kv transmission lines and substations and upgrading existing substations. This purpose was achieved with the exception of two line sections that could not be completed for reasons discussed earlier (paras. 29 to 32). The Project is almost fully operational and has improved the power transmission network in Java-Bali and Sumatra. The cost of the works to be completed by PLN is estimated to be less than 0.5% of the total project cost. According to PLN s schedule, these line sections in Java will be completed by June 2006, and those in Sumatra by October The system average interruption duration index for Java improved from 7.07 hours in 2000 to 4.17 hours in 2005, and from hours in 2000 to hours in 2004 for Bali. Part A contributed to this result by relieving overloads on the 150 kv network. 57. The purpose of transmitting power from the generating plants to load centers in South Sumatra was achieved, and municipalities were connected by the 150 kv transmission lines to the network supply. As a result, the local diesel generating units could be relocated to remote areas. The economic interchange of power between central and southern Sumatra will be achieved step by step, initially, by a short distance (sub-transmission) interchange of power at 150 kv, then by a supra-regional interchange at 275 kv. Both will use lines developed under the Project. 6 ADB Report and Recommendation of the President to the Board of Directors on Proposed Loan to Indonesia for the Power XXIII Project. Manila. (Loan 1271-INO, approved in November 1993); ADB Report and Recommendation of the President to the Board of Directors on Proposed Loan and Technical Assistance Grants to Indonesia for the Power Development and Efficiency Enhancement Project. Manila. (Loan 1397-INO, approved in October 1995).

23 The Project also contributed to reducing transmission losses in the Java-Bali and Sumatra electrical networks. Transmission losses decreased from 2.54% in 2000 to 2.32% in 2004 in Java, and from 2.45% to 2.19% outside Java during the same period. Overall, energy losses in Indonesia in 2004 were 11.29% (stations own use not included), which were lower than the 12.33% in 1995, and below the covenant value of 15%. The decrease in transmission losses indicated an improvement in the transmission network. 59. Overall, the purpose of the Project, as formally modified during implementation, was achieved effectively. C. Efficiency in Achieving Outcome and Outputs 60. The Project's efficiency was affected by implementation delays. Because it was not feasible to isolate and quantify the benefits of the Project from those attributable to the entire power network, a time-slice method was used at project appraisal to estimate the economic internal rate of return and the financial internal rate of return (FIRR). However, the use of time-slice analysis for the economic internal rate of return calculations does not seem appropriate in this instance as it does not segregate the economic benefits of the Project. The Project Completion Mission did not conduct an economic reappraisal. The Project is part of the least-cost development plan for power system generation and transmission, and it is considered to be economically justified. 61. In recalculating the FIRR, the time-slice method was used as done at appraisal. The time-slice method reviewed the Project as an integral part of PLN s investment plan and was still valid for financial analysis. Appendix 9 provides details of the calculations and detailed conclusions. The recalculated FIRR is 1.53% compared with the analysis at appraisal of 7.3% (base case with a weighted average cost of capital of 6.7% for PLN in 1995). The deviation from the appraisal results is mainly due to a higher-than-expected increase in the cost of electricity supply because of the depreciation of the rupiah and the high share of foreign exchange costs, as well as the inability of PLN to increase tariffs in line with the increase in costs because of the economic crisis. Given the implementation delays and the low financial return, the Project is rated less than efficient. D. Preliminary Assessment of Sustainability 62. Electricity tariffs charged to consumers in the late 1990s were too low to ensure the sector s economic sustainability, and tariffs had to be increased to a level adequate to ensure not only financial survival but also the capacity to repay loans needed to fund new capital investment. PLN has made good progress in increasing tariffs since Average revenues from electricity sales increased from Rp211 per kwh ($0.024 per kwh) in 1999 to Rp557 per kwh ($0.065 per kwh) in July Consumers have accepted the tariff increases, but tariffs are still slightly below the economic cost of power generation and supply, which is currently estimated at $0.07 per kwh. Tariffs were not increased in 2004 and Expectations were that electricity tariffs would be revised in The Government recently decided, however, not to increase tariffs but instead to accelerate use of non-oil fuels, gas, and coal to reduce energy generation costs. PLN has also been directed to improve system efficiency in order to reduce the costs of power supply. PLN's financial strategy is based on (i) strict budget control over strategic business units and operational units, (ii) maintaining stringent cash flow norms, (iii) lowering energy losses, and (iv) promoting efficient energy billing and bill collection.

24 The blueprint for developing the national electricity industry recognizes the need for making high-quality and reliable electricity services available and for developing transmission and distribution facilities to meet regional electricity demand. The Government has programs for increasing supply capacity by addressing transmission bottlenecks and improving the capacity of the transmission network. Further, the distribution systems need to be strengthened to be compatible with an improved transmission network. 64. The initiatives taken by the Borrower and PLN ensure that, overall, the Project is most likely to be sustainable. E. Impact 65. At appraisal, the environment category of the Project as a whole was category A, as part D was regarded as category A. A summary environmental impact assessment was prepared and submitted to the ADB s Board of Directors in June Parts A and B of the Project were classified as environment category B. It was determined that new transmission lines and substations would not be located in environmentally sensitive areas, such as protected forests, wildlife reserves, national parks, or densely populated areas. PLN carried out the initial summary environmental impact assessment and submitted it to ADB. No significant environmental impact was expected, as PLN would take mitigation measures such as protecting the soil with terracing and grass, proper containment and disposal of spoils, minimization of vegetation clearing, and monitoring of environmental impact. 66. In the design of the Project in South Sumatra, attempts were made to mitigate the risk of soil erosion by using tower leg extensions in undulating terrain (avoiding the necessity to terrace the land). There was no evidence of soil erosion or dumping of landfill from tower foundation excavations. During route selection for the transmission lines, efforts were made to reduce environmental, sociocultural, and other impacts to a minimum. PLN routed transmission lines to avoid all environmentally sensitive areas so that the majority of the transmission lines cross agricultural land that produces palm oil, rubber, and rice. In line with the loan agreement, PLN determined compensation in consultation with representatives of the landowners and committees that included representatives of the village authorities. A plan for resettlement and compensation was not submitted to ADB, as this component was financed by PLN and the Government. In certain line sections, land acquisition and right-of-way issues were a more serious sociocultural problem than had been anticipated at appraisal. Acquisition of land and right-of-way was nevertheless carried out in an orderly manner, with recording of land areas affected by the owner as the basis for compensation payments. 67. For part B, the width of the cleared transmission corridor was fixed at 32 meters for the 275 kv transmission lines and 16 meters for the 150 kv transmission lines, which is in accordance with documented Indonesian standards and was verified in randomly selected locations during ADB site visits. Vegetation clearing was not excessive, conforming to the standard corridor widths. PLN has engaged local residents to maintain a watching brief over transmission towers and lines to report, or where feasible to clear, vegetation growth that is encroaching into the right-of-way. The Project is considered to have moderately positive social impacts at a local level.