ASIAN DEVELOPMENT BANK PPA: INO 21214

Transcription

1 ASIAN DEVELOPMENT BANK PPA: INO PROJECT PERFORMANCE AUDIT REPORT ON THE Seventh, Eighth, and Ninth Port Projects (Loans 688/797/951-INO) I N INDONESIA D e c e m b e r

2 Seventh Port (Loan 688) (June 1984) CURRENCY EQUIVALENTS Currency Unit Rupiah (Rp) At Appraisal Eighth Port (Loan 797) (October 1986) Ninth Port (Loan 951) (September 1988) $1.00 = Rp1,015 $1.00 = Rp1,631 $1.00 = Rp1,715 Rp1.00 = $ Rp1.00 = $ Rp1.00 = $ SR1.00 = Rp282 $1.00 = SR3.60 At Project Completion Seventh Port (March 1992) E i g h t h P o r t (June 1993) Ninth Port (April 1996) $1.00 = Rp2,010 $1.00 = Rp2,074 $1.00 = Rp2,310 Rp1.00 = $ Rp1.00 = $ Rp1.00 = $ SR1.00 = Rp536 $1.00 = SR3.75 At Operations Evaluation (June 1999) $1.00 = Rp 7,600 Rp1.00 = $ SR1.00 = Rp2,027 $1.00 = SR3.75 ABBREVIATIONS ADB Asian Development Bank DGSC Directorate General for Sea Communications DMC developing member countries DWT dead weight ton EA executing agency EIRR economic internal rate of return FIRR financial internal rate of return ICT international container terminal JBIC Japan Bank for International Cooperation J EXIM Export-Import Bank of Japan PCR project completion report PTPI Persero Pelabuhan (Public Limited Corporation) TA technical assistance (i) (ii) NOTES The fiscal year (FY) of the Government ends on 31 March and that of the PTPIs on 31 December. In this report, $ refers to US dollars. Operations Evaluation Office, PE-5 4 1

3 ii CONTENTS Page BASIC DATA ii EXECUTIVE SUMMARY v MAP Error! Bookmark not defined. I. INTRODUCTION 1 A. Background 1 B. Formulation, Objectives, and Scope at Appraisal 1 C. Completion 2 D. Evaluation 3 E. Project Performance Audit Report 4 II. THEMATIC EVALUATION 1 A. Gateway and Regional Port System 1 B. National Gateway Ports and Inland Transport 2 C. Assistance to Secondary Ports 2 D. ADB Support for Privatization, Port Reforms, and Infrastructure Development 3 III. PERFORMANCE EVALUATION OF THE PORT PROJECTS 1 A. Implementation Performance 1 B. Operational Performance 2 IV. CONCLUSIONS 1 A. Overall Assessment 1 B. Lessons Learned 2 C. Follow-Up Actions and Recommendations for the Future 3 APPENDIXES 6

4 BASIC DATA Seventh Port Project (Loan 688-INO) Key Project Data ($ million) As per ADB Loan Actual Documents Total Project Cost Foreign Exchange Cost Local Currency Cost ADB Loan Amount/ Utilization ADB Loan Amount/ Cancellation 9.5 Key Dates Expected Actual Appraisal March 1984 Loan Negotiations July 1984 Board Approval 28 August 1984 Loan Agreement 13 September 1984 Loan Effectiveness 13 December February 1985 Project Completion December 1988 May 1992 Loan Closing 31 December October 1992 Months (Effectiveness to Completion) Key Performance Indicators (%) Appraisal PCR PPAR Economic Internal Rate of Return Financial Internal Rate of Return B o r r o w e r Republic of Indonesia Executing Agency Perum Pelabuhan III Mission Data Type of Mission N o. o f M i s s i o n s Person-Days Appraisal 1 60 Project Administration Review Special Loan Administration 3 12 Project Completion 1 30 Operations Evaluation a 1 20 a One operations evaluation mission was undertaken to review three port projects, i.e., Loan 688-INO: Seventh Port Project, Loan 797-INO: Eighth Port Project, and Loan 951-INO: Ninth Port Project, simultaneously.

5 iii Eighth Port Project (Loan 797-INO) Project Preparation/Institution Building T A TA Project Name Type Person-M o n t h s Amount Approval Date 595 Sixth Port Project TA Loan 445 $5,400,000 4 November Institutional Strengthening of Perum IV A&O 27 $445, November 1986 Key Project Data ($ million) As per ADB Loan Actual Documents Total Project Cost Foreign Exchange Cost Local Currency Cost ADB Loan Amount/Utilization ADB Loan Amount/Cancellation Key Dates Expected Actual Appraisal 20 April 9 May 1986 Loan Negotiations 6 8 October 1986 Board Approval 18 November 1986 Loan Agreement 31 July 1987 Loan Effectiveness 29 October January 1988 Project Completion December 1991 June 1992 Loan Closing 30 June October 1992 Months (Effectiveness to Completion) Key Performance Indicators (%) Appraisal PCR PPAR Economic Internal Rate of Return Banjarmasin Balikpapan Financial Internal Rate of Return Banjarmasin Negative Balikpapan Negative B o r r o w e r Republic of Indonesia Executing Agencies Perum Pelabuhan III Perum Pelabuhan IV Mission Data Type of Mission N o. o f M i s s i o n s Person-Days Appraisal 2 77 Project Administration Review 7 33 Special Loan Administration 1 9 Project Completion 1 8 Operations Evaluation a 1 20 = not calculated. a One operations evaluation mission was undertaken to review three port projects, i.e., Loan 688-INO: Seventh Port Project, Loan 797-INO: Eighth Port Project, and Loan 951-INO: Ninth Port Project, simultaneously.

6 iv Ninth Port Project (Loan 951-INO) Project Preparation/Institution Building T A TA Project Name Type Person-M o n t h s Amount Approval Date 980 Ninth Port PP 4 $91, May Port Maintenance and Rehabilitation and Computer Operation A&O 25 $515,000 7 February 1999 Key Project Data ($ million) As per ADB Loan Actual Documents Total Project Cost Foreign Exchange Cost Local Currency Cost ADB Loan Amount/Utilization ADB Loan Amount/Cancellation 0.65 Amount of Cofinancing: JBIC a Key Dates Expected Actual Appraisal 5 26 September 1988 Loan Negotiations November 1988 Board Approval 7 February 1989 Loan Agreement 1 March 1989 Loan Effectiveness 30 May August 1989 Project Completion June 1993 August 1994 Loan Closing 31 December July 1995 Months (Effectiveness to Completion) Key Performance Indicators (%) Appraisal PCR PPAR Economic Internal Rate of Return Financial Internal Rate of Return Project 5.1 Civil Works 6.2 Harbor Craft Cargo Handling Equipment Banjarmasin 25.0 Semarang 34.0 B o r r o w e r Republic of Indonesia Executing Agencies Directorate General of Sea Communications Perum Pelabuhan I Perum Pelabuhan III Perum Pelabuhan IV Mission Data Type of Mission N o. o f M i s s i o n s Person-Days Appraisal Project Administration Review Project Completion 1 85 Operations Evaluation b 1 20 = not calculated, JBIC = Japan Bank for International Cooperation. a This Project was cofinanced by the Export-Import Bank of Japan (J EXIM). On 1 October 1999, JBIC was established by merging the Overseas Economic Cooperation Fund of Japan and J EXIM. b One operations evaluation mission was undertaken to review three port projects, i.e., Loan 688-INO: Seventh Port Project, Loan 797-INO: Eighth Port Project, and Loan 951-INO: Ninth Port Project, simultaneously.

7 EXECUTIVE SUMMARY This evaluation covers the three most recent loans provided to rehabilitate and improve Indonesian ports: Loan 688-INO (Seventh Project), Loan 797-INO (Eighth Project), and Loan 951-INO (Ninth Project). The common objectives of these projects were to modernize and increase the capacity of the project ports to efficiently handle cargo traffic, and improve the management information systems in the respective Executing Agencies. The Seventh Project was appraised in March 1984, and Asian Development Bank s (ADB s) loan of $86 million approved on 28 August The Eighth Project was prepared by a feasibility study under the Sixth Port Project (Loan 595); this Project was appraised in April-May 1986 and the loan for $40 million was approved on 18 November The Ninth Project was appraised in September 1988; ADB loan of $22 million was approved on 7 February All the loans were sourced from ADB s ordinary capital resources. The Seventh Project comprised the construction of an international container terminal at Surabaya, provision of container handling, and other related equipment. The Eighth Project comprised construction and rehabilitation of ports in Banjarmasin and Balikpapan, and provision of tugboats, computer equipment, and consulting services. ADB s loan for the Ninth Project financed civil works for rehabilitation at 16 secondary or smaller ports. The procurement of equipment, harbor craft, as well as consulting services for design and construction supervision, and a master plan study for Benoa port were financed under the Japan Bank for International Cooperation 1 cofinancing for $12.6 million. Overall, the three ADB projects are rated as generally successful, in that (i) (ii) (iii) (iv) the facilities provided were needed; they were in most cases of the right type, although in one case (Banjarmasin s Trisakti quay), an old fashioned and inappropriate berth design was used; the facilities are being used, at high rates of occupancy; and the economic internal rates of return have been high, and transport costs are lower than they would have been without the investments. The high returns are partly attributable to traffic growth that exceeded expectations at appraisal. Some of ADB s assistance, however, was suboptimal. With the benefit of hindsight, not enough was done to improve productivity at the project ports. If it had been, the need for new berth construction could have been reduced. The Mission observed that the key to improving port efficiency is the replacement of government operations by competing private terminals, combined with deregulation. Instead, ADB has concentrated on technical assistance to the Government bodies, which retained control and effectively limited the most efficient forms of private participation. 1 The Ninth Port Project was cofinanced by the Export-Import Bank of Japan (J EXIM). On 1 October 1999, the Japan Bank for International Cooperation was established by merging the Overseas Economic Cooperation Fund of Japan and J EXIM.

8 vi The Evaluation Mission undertook a thematic evaluation, in addition to an audit of individual components under each Project, to identify key issues, draw lessons relevant to the port sector in Indonesia as well as in other developing member countries. The Mission also reviewed experiences of other funding agencies in Indonesia and in other developing member countries. Gateway and Regional Ports System The gateway system (introduced under the World Bank-sponsored Integrated Sea Transport Study of 1982), established a four-level hierarchy of ports: at the apex were four main ports of Tanjung Priok, Surabaya, Belawan, and Ujungpandang. They were served by regional collector ports, that received traffic from regional trunk ports, which, in turn were fed by feeder ports. Thus export cargo originating in a feeder port would have to be transhipped three times by the time it left Surabaya and probably a fourth time at Singapore. The rationale of the gateway system was to match ship sizes and thus costs with cargo densities on given routes. The consolidation of cargo in these ports was expected to lead to a reduction in the overall transport and shipping costs. While another aim of this hierarchy was to ration the scarce funds available for investment in ports, the transport costs became extremely high. Moreover, this centrally planned system did not recognize that the private shipping industry incurred high cost to adapt to the gateway system. Since 1985, when the system was abandoned, ships have made direct calls at many small ports, thereby avoiding multiple transhipment costs; regional ports are no longer limited to serving as gateway ports. Ships on international routes can, and do, now call at many ports in Indonesia. Nevertheless, much of the export cargo from the islands of central and east Indonesia is in fact routed via Surabaya. Many of the smaller ports do, in practice, operate as regional ports. ADB assistance (the Eighth Project) did not acknowledge the abolition of the hierarchy system. The Mission concluded that categorizing ports as regional ports is not helpful and only raises transport costs unnecessarily, as in the past. It is recommended that development plans for each port should be based on each port s actual role in practice not as part of a hierarchical system. As for operations, there has been little attempt to extend the Government s privatization program to the regional ports. Furthermore, the Government-regulated tariffs, are too low to attract private investment. These problems require attention. Integration of National Gateway Ports with Other Modes The only gateway port covered in the evaluated projects was Surabaya. It had few problems with inland transport. There is a good road network linking it with its hinterland, and road haulage tariffs are reasonable. The Mission observed that the $2 million rail link to the port, which was funded under the Seventh Port Project, still has little traffic. Experience elsewhere confirms that road transport dominates rail at almost all container ports, except where distances are long, or where there is acute urban congestion. The situation in Surabaya did not require special assistance under the Seventh Project for inland transport. Furthermore, projects for improving inland transport are best implemented separately. Strategies for Efficient Rehabilitation and Operation of Secondary Ports

9 vii Upon reviewing ADB s Ninth Project, the Mission confirmed the conclusion of the project completion report that monitoring a large number of small ports in remote locations was impracticable, and required disproportionate expenditure on ADB missions. Furthermore, the investment, mainly for rehabilitation, affected only a small part of the overall port. Thus, there are few quantifiable benefits that can be monitored properly. The Mission also confirmed that the Persero Pelabuhans, domestic consultants, and construction companies have adequate capacity to implement these projects. In hindsight, considering the implementation experience in the Ninth Project, the Mission concluded that the secondary ports would have been better assisted through a sector-type assistance instead of a project-type. The Directorate General for Sea Communications, which continues to directly supervise the operation of smaller ports, should be advised to prepare a long-term strategy for sustainably operating these ports, without Government subsidy. ADB should actively support the Government to provide autonomy to the ports to allow them to set tariffs to recover costs. ADB s Support for Privatization, Port Reforms, and Infrastructure Development Privatization has been limited to two international container terminals. The privatization program at these main ports, in which ADB had no active role, is misguided. These terminals were already quite efficient and made very large surpluses before the program commenced. Consequently, the significant outcome of the container terminal privatization was to raise money for the central Government rather than to improve port efficiency. There were no significant attempts to promote competition between or within the ports. The two most lucrative berths (at Tanjung Priok and Surabaya) have been handed over to foreign companies, which, although efficient, often have a keen eye for a monopoly position in the countries in which they operate. There are no plans to require the private concession holders to reduce tariffs, as might be expected when private specialist firms replace state monopolies. Government regulation of tariffs and port investment has been retained, despite the fact that freedom of entry and pricing are crucial to the working of market mechanisms. The regulatory framework does not include surrogates for competition. Therefore, it will be difficult to extend privatization to the interisland/domestic port facilities, mainly because the domestic port tariffs, which are regulated by the Government, are too low to allow a return on investment. The Government is urgently in need of specialized guidance on how to proceed with port reform and privatization. The concept of privatizing port infrastructure was also to include financing of port investments on commercial terms. The commonly held view is that the multilateral development agencies, including ADB should move away from funding port infrastructure. It is claimed that the private sector can now be relied on to build berths. But in practice there has been relatively little private investment in port infrastructure in Indonesia or, indeed, in neighboring countries. Unlike international container operations, domestic cargo handling, and operation of public terminals and smaller ports are not attractive to the private sector. Tariffs are too low to allow an acceptable return. Radical tariff reform and removal of subsidies are therefore necessary preconditions to attract private sector funds to domestic ports. Concomitantly, external assistance is needed to rehabilitate, expand, and efficiently operate these ports.

10 I. INTRODUCTION A. Background 1. Since 1972, the Asian Development Bank (ADB) has provided 11 loans for a total of $ million and 18 technical assistance (TAs) for $6.15 million to Indonesia s ports sector. 1 Six loans provided financing for rehabilitation and improvement of the three major gateway ports. 2 Of these, three loans (103, 317, and 375) were evaluated. Two other loans were provided for similar improvement to the regional ports. 3 One loan was provided for rehabilitating the feeder ports This evaluation includes loans 688 (Seventh Project), 797 (Eighth Project), and 951 (Ninth Project). The evaluation aims to assess the overall impact of these loans on the sector, and extract lessons for future activities. The background and rationale of individual projects are in Appendix 1, Table A1.1. B. Formulation, Objectives, and Scope at Appraisal 1. Seventh Por t Project 3. The Seventh Project was appraised in March 1984, and approved on 28 August The loan for $86 million was sourced from ADB s ordinary capital resources. The main objective of the Project was to enable the port of Surabaya to cope with the rapid shift to containerization (Appendix 1, Table A1.2). The Project comprised the construction of an international container terminal (ICT) to handle cargo volumes until 1993, and provision of container handling and other related equipment. The Project was also designed to help with institutional development of the executing agency (EA), Perum Pelabuhan III. 2. Eighth Port Project 4. The Eighth Project was prepared by a feasibility study under the Sixth Port Project 5 (Appendix 1, Table A1.1). The Eighth Project was appraised in April-May 1986 and approved on 18 November The $40 million loan was sourced from ADB s ordinary capital resources. The Project was accompanied by an advisory TA for standardization and modernization study of 1 While the ports of Belawan (in Sumatra island), Jakarta, Surabaya (in Java island), and Ujungpandang (in Sulawesi island) are the four major gateway ports of the country, there are about 40 other key regional ports that are also open to foreign trade. In addition, there are more than 230 smaller ports that cater mainly to interisland and local trade and passenger movement. 2 Loan 91-INO(SF): Tandjung Priok Port Development Project, for $5.3 million, approved on 24 April 1972; Loan 103-INO: Surabaya Port Development Project, for $5.5 million, approved on 24 October 1972; Loan 245-INO: Belawan and Surabaya Ports Project (Phase I), for $4.35 million, approved on 2 December 1975; Loan 317-INO: Fourth Port Project, for $17.5 million approved on 17 November 1977; Loan 375-INO: Fifth Port Project, for $26.3 million, approved on 7 December 1978; and Loan 688-INO: Seventh Port Project, for $86 million, approved on 28 August Loan 688-INO: Seventh Port Project, for $86 million, approved on 28 August 1984; and Loan 797-INO: Eighth Port Project, for $40 million, approved on 18 November Loan 951-INO: Ninth Port Project, for $22 million, approved on 7 February Loan 595-INO: Sixth Port Project, for $5.4 million, approved on 4 November 1982.

11 2 traditional sailing vessels for $260,000. This was financed out of the loan savings, and was approved in July 1989 at the request of the Government. 5. The Project s objective was to modernize and increase the capacity of the ports at Banjarmasin and Balikpapan in Kalimantan to efficiently handle general cargo traffic volumes growth until 1995 (Appendix 1, Table A1.2). The Project also aimed to strengthen the institutional and operational capabilities of the Government-owned ports corporation (Persero III and IV) through the TA. The Project comprised construction and rehabilitation of the two ports, and provision of tugboats, computer equipment, and consulting services. 3. Ninth Port Project 6. The Ninth Project aimed to modernize and increase capacity at 16 secondary or smaller ports located in remote and resource-rich hinterlands across the main islands, primarily to support the nonoil exports of the country. 7. The Project was prepared under an ADB-financed TA (TA 980), 6 and was formulated after a detailed analysis of the constraint on access to these remote ports and the availability of the domestic construction capabilities for rehabilitating the ports. The Project was appraised in September The ADB loan of $22 million was approved on 7 February The Project comprised civil works for rehabilitation, most 7 of which was financed by ADB loan. The procurement of equipment, harbor craft, and consulting services for design and construction supervision, and a master plan study for Benoa port were financed under the Japan Bank for International Cooperation 8 cofinancing for $12.6 million (Appendix 1, Table A1.2 summarizes further details). 9. The EAs included Perum Pelabuhan III (for the Seventh, Eighth, and Ninth projects); Persero IV (for the Eighth and Ninth projects); and the Directorate General for Sea Communications (DGSC) and Perum Pelabuhan I (for the Ninth Project). 9 C. Completion 10. The project completion reports (PCRs) observed that all three projects were generally satisfactorily implemented. In addition, all projects PCRs adequately reported and analyzed deviations in the designs, delays, and cost variations. The PCRs also highlighted the issues affecting project performance and included specific recommendations (Appendix 1, Table A1.3). 11. The Seventh Project was implemented substantially according to the scope at appraisal. However, there were modifications of the volume of dredging and reclamation, length of the access bridge, and of the equipment for container handling. The project s completion was 6 TA 980-INO: Ninth Port Project, for $91,000, approved on 12 May The rehabilitation of Martapura Port in Banjarmasin was financed by the Government. 8 The Ninth Port Project was cofinanced by the Export-Import Bank of Japan (J EXIM). On 1 October 1999, the Japan Bank for International Cooperation was established by merging the Overseas Economic Cooperation Fund of Japan and J EXIM. 9 Persero Pelabuhan = Public Limited Corporation (for Sea Ports), Perum Pelabuhan = Public Enterprise for Sea Ports.

12 3 delayed by more than three years. 10 The PCR was prepared in The overall project cost was 16 percent less than the appraisal estimate of $158 million (Appendix 2, Table A2.2) The Eighth Project design was substantially modified during implementation. Several engineering specifications, such as the width of the access channel and depth of dredging, were modified. Many of these changes were appropriate, a few were not. The Project included the construction of a container yard at Banjarmasin, although the need was not foreseen in the feasibility study or at appraisal. Project completion was close to the appraisal schedule and the PCR was prepared in The total project cost was substantially below the appraisal estimate. 12 The PCR observed that the berth extension for Balikpapan port was not the leastcost alternative for improving the efficiency of the terminal, in view of the high cost of construction and unsuitability of the site for container operations. Construction of a container handling facility at a new site within Balikpapan Bay would provide an optimal solution for managing the break-bulk cargo traffic between the nearby facilities rehabilitated under the Ninth Project. 13. The Ninth Project was completed 14 months later than the appraisal schedule. Contract awards under DGSC suffered long delays (up to three years) mainly due to the lack of appropriate technical staff. Once contracts were awarded, the construction was completed within the contract schedules at all ports. (Other issues raised in the PCRs are summarized in Appendix 1, Table A1.3). D. Evaluation 14. The Operations Evaluation Mission undertook a thematic evaluation, in addition to a typical audit of individual components under each project, to draw lessons relevant to the ports 0sector in Indonesia as well as in other developing member countries (DMCs). Four themes were identified for investigation based on the Mission s assessment of their relevance to ADB operations in the ports sector in Indonesia and other DMCs. These themes also emerged from the PCR conclusions: (i) Gateway and Regional Port System. Both the Seventh and Eighth projects were designed by the Indonesian Government s hierarchical system that was abandoned in 1985 (para. 18). The Mission investigated the impact of ADB s assistance under the new policies. (ii) Integration of Gateway Ports with Inland Transport. The Seventh Project s PCR observed that the Project did not place adequate emphasis on intermodal and inland distribution to optimally utilize Surabaya Port. The Mission investigated the performance of the railway link extended under the Project. (iii) Assistance to Secondary Ports. Indonesia has over 300 small ports that mainly cater to interisland and local trade, and passenger movement. The Ninth Project 10 Awarding of contracts for civil works and equipment were delayed by more than three years. This was mainly due to the change of the project manager and unfamiliarity with Government procedures. The civil works suffered delays of nine months during implementation. 11 The savings were attributed to a high original cost estimate, major devaluation of the rupiah in 1986, and competitive bidding by domestic suppliers. 12 The appraisal estimate for unit costs and quantities of civil works were too high because even the highest priced bid was only 70 percent of the appraisal estimate.

13 4 targeted 16 such ports. The Mission evaluated the impact of ADB s assistance and assessed the preferred modalities of funding projects in the future. (iv) ADB s Support for Port Reform and Infrastructure Development. The Mission reviewed and assessed the level of success of port sector reforms, particularly those targeting privatization. A desk review of port reforms in other DMCs was also accomplished to rank the relative achievement in Indonesia with those of other DMCs in the region. 15. The Mission collected detailed information on individual port operation, and reviewed and assessed other issues such as dredging, siltation, lighter operations, boats, waiting times, etc., in relation to project sustainability. The Mission visited Indonesia between 23 June-3 July 1999 and met with officials from DGSC, the EAs, and all project ports. The Mission organized a workshop on 12 July 1999 to present the preliminary findings; representatives of ADB s operations department participated. E. Project Performance Audit Report 1. Report Organization 16. The themes addressed in this evaluation are discussed in Chapter II. Chapter III presents the highlights of the evaluation of implementation and operational performance. Conclusions, including overall assessment, lessons learned, and follow-up actions are presented in Chapter IV. Relevant details pertaining to individual projects are in Appendixes 1-6. Other information on port reforms in DMCs, and a summary of recommendations from the special evaluation study of port projects are in Appendixes 7 and 8, respectively. 2. Report Finalization 17. This report is based on the findings of the Mission and discussions with representatives from the Government, the EAs, individual project ports, ADB s operations department, and other funding agencies. The report is also based on a review of relevant documents available in ADB on these projects and other ongoing projects. The draft report was circulated to the Borrower, EAs, and concerned departments for review and comments. Comments received were incorporated in finalizing this report.

14 II. THEMATIC EVALUATION A. Gateway and Regional Port System 18. In the first half of the 1980s, the Indonesian government introduced a hierarchy of ports. At the top were the four gateway ports the only ports permitted to handle foreign traffic. They were Tanjung Priok, Surabaya, Belawan, and Ujungpandang. At the second level were the regional collector ports (e.g., Banjarmasin and Balikpapan) whose role was to feed the gateway ports. The regional collector ports were in turn fed by regional trunk ports that were in turn fed by feeder ports. Thus export cargo originating in a feeder port would be transhipped three times by the time it left Surabaya, and probably a fourth time at Singapore. The rationale of the gateway system was to match ship sizes and thus costs with cargo densities on given routes. Cargo consolidation in these ports was expected to lead to a reduction in the overall transport and shipping costs. Another aim was to ration the scarce funds available for port investment; but the transport costs became extremely expensive. Moreover, this centrally planned system did not recognize that the private shipping industry could not adapt to it without major cost sacrifices. Since this system (introduced via the International Bank of Reconstruction and Development-sponsored Integrated Sea Transport Study of 1982) was abandoned in 1985, ships have made direct calls at many small ports, thereby avoiding multiple transhipment costs. The diversity of the interisland fleet meant that even larger, old ships could operate on short hauls and smaller ones on long trips. The whole system needed effective regulation, which was lacking. Much of the export cargo from the islands of central and east Indonesia continues to be routed via Surabaya so that many of the smaller ports do in practice operate as regional ports. 1 ADB assistance, through the Eighth Project, did not acknowledge the abolition of the hierarchical system of the ports. 2 As a result, the expansion provided at Balikpapan and Banjarmasin was based on conservative traffic volume and even lesser growth in containerized cargo this proved to be wrong (para. 33). In fact, the port converted part of the open-space parking area for container storage (para. 33). 19. The Mission concluded that the categorization of a port as a regional port was not helpful, and raised transport costs unnecessarily. It is recommended that the development plan for all ports should be based on their actual role in practice not on their place in a hierarchical system. 3 In particular, careful attention should be paid to forecasting when direct calls are likely to be made by international ships. This usually depends on reaching a threshold volume at which it pays the shipping line to divert directly to the regional port. 4 DGSC has recently adopted a new master plan (prepared under a Japan International Cooperation Agency study, 1999) to 1 The Seventh Port berth design depth of 13 meters (m) provided for deeper draft direct-entry vessels at Surabaya. But the reality of continued Singapore feeder vessels was recognized by only dredging to 10.5 m, thus saving cost while catering to future development, not only to potential direct entry, but to increase the intra Asian and Singapore feeder trade using gradually larger vessels. Both of the latter events have occurred, as the ADB staff expected. 2 The Appraisal Mission apparently recognized that the gateway prescription would be unlikely to occur, and that the dynamics of shipping would determine actual routing and technology. In that sense, the design was perhaps deliberately conservative. 3 The Government and ADB operations department concurred with this assessment. 4 A forced gateway and rigid hierarchy of domestic port feeder services was unrealistic. While the appraisals were constrained partly by official gateway policy, it would have been unrealistic to not cater to possible development of larger vessel calls in the Seventh Port Project design. The Government proposals for 14 interisland berths at Surabaya, which ADB declined to include in the project scope, were motivated partly by the Government s gateway feeder expectations.

15 2 develop regional hubs. 5 However, while external assistance is needed to develop these ports, ADB is not yet actively involved in such proposals (para. 56). B. National Gateway Ports and Inland Transport 20. The road network is good in Java, but poor on the other islands. Thus Surabaya has good links with its hinterland and reasonable road haulage tariffs; while Banjarmasin, Balikpapan, and the small ports have very poor links with their potential hinterlands. The Mission reviewed the $2 million rail link (included under the Seventh Project) to the port of Surabaya. The rail link was a relatively low cost option, and in line with practice elsewhere, to provide access to the hinterland. 6 While the Mission acknowledged the rationale for the rail link, it could have been deferred, as it attracted little traffic. Experience elsewhere confirms that road transport dominates at all container ports, except where distances are long or where urban traffic is affected by acute congestion and truck bans. 7 The situation in Surabaya did not require special assistance for inland transport. In this regard, in the Mission s assessment, problems of inland transport, contrary to claims in the Seventh Project PCR and the Special Evaluation Study, 8 should not be simultaneously targeted under port projects. They should be addressed under regional master plan studies and implemented as separate projects. 9 In addition, road and rail construction cost much more and take more time to implement than port projects. Moreover, they usually come under a different agency or authority. The construction of a road network in south and east Kalimantan, will be a major undertaking. C. Assistance to Secondary Ports 21. The Mission reviewed the project components and implementation arrangements under the Ninth Project. The Mission concurs with the PCR s conclusion that the monitoring of large numbers of small ports in remote locations was impracticable, and required a disproportionate expenditure on missions. Also, the data obtainable at the small ports was inadequate to monitor performance in the normal way. The need for continuing assistance to rehabilitate and develop the numerous secondary ports was confirmed by DGSC and Persero Pelabuhans (Public Limited Corporation) [PTPIs]. The available evidence suggests that the PTPIs, as a result of good advisory intervention from ADB under this Project, domestic consultants and construction companies have developed adequate capacity to allocate and implement sector loans. As for ADB, the central problem associated with project-based lending for the small ports is that the cost of ADB mission visits and office analysis is disproportionately large relative to the cost of the individual subproject. Thus, in practice, the analysis is not done properly. 10 It would be inefficient for ADB to supervise future projects with the same approach. In conclusion, future secondary ports would be best assisted via sector loans rather than project loans. ADB can 5 The East hub was chosen at Bitung port; the location of the West hub is still under discussion. 6 The rail links to the Nilam Quay, which were also rehabilitated under the Project are in regular use. 7 It is quite likely that this will continue to be valid in East Java until fuel subsidies are totally removed, or the road sector becomes significantly congested, which is not the current situation. 8 TA 5715-REG: Special Evaluation Study on Port Projects, for $260,000, approved on 20 December Covenanting road improvements are ineffective, as the EA for ports usually has no control over the roads. 10 In the Ninth Project, the analysis only skimmed the surface at each port. In fact, the PCR conceded that it was not really possible to calculate the economic internal rates of return (EIRR) and the financial internal rates of return (FIRR) for these small ports partly because the data needed for ADB analysis is not available, and partly because the investment is often only for rehabilitation, or because it affects only a small part of the overall port. In many cases, there are few easily quantifiable benefits (e.g., where a pilot boat is provided). While these were useful inclusion in the Project, nevertheless, attempts to produce EIRRs and FIRRs in these circumstances lead to a lowering of standards.

16 3 extend further capacity building services to DGSC and the PTPIs. 11 Concerned external financiers could also actively participate in supporting the Government to provide autonomy to the PTPIs and the smaller ports to set tariffs that allow them to recover operation costs. DGSC, which continues to directly supervise the operation of smaller ports, should be advised to prepare a long-term strategy for sustainably operating these ports, without Government subsidy. External financing agencies could actively assist in these areas in the future. D. ADB Support for Privatization, Port Reforms, and Infrastructure Development 1. Privatization at Major Ports 22. The privatization program, which has recently started in Indonesia s main ports, has been generally supported by multilateral agencies (the International Monetary Fund, World Bank, and ADB). While the first steps in the mid-1990s were very much in the wrong direction, 12 the next initiative was a step in the right direction: the allocation of the general cargo berths at Tanjung Priok to about 11 companies, each holding 2-3 berths. But there are still several flaws in the arrangements. In particular, labor is still effectively employed by the national pool, via the port administration, rather than the cargo handling company, thereby limiting company loyalty. Also, the contractors concession periods of about five years are too short to encourage investment. Finally, in 1999, there were two more developments that combined both good and bad aspects. Hutchison (the largest port operator in Hong Kong, China) was granted a 20-year concession to run the main container terminal at Tanjung Priok in a joint venture with the port authority; and the Peninsular and Oriental Steam Navigation Company [P&O] (Australia) was granted a similar concession at Surabaya. 13 This was commendable in the sense that these two companies are the world's top two international stevedoring companies, and transparent open bidding took place However, the port privatization program at the main ports (in which ADB did not actively participate) is misguided. 15 In particular, as these ports were already efficient, the significant outcome of the container terminal privatization was to raise money for the central Government rather than improve port efficiency, which might have been the original intention. The current program, which culminated in the granting of the concessions to Hutchison and P&O, was not 11 The thrust of a sector loan approach is not limited to reducing the supervision and monitoring responsibilities of the EA and ADB during project implementation. ADB s sector loan policy stipulates that application of this modality has to be built on three building blocks, including a well-defined sector policy agenda, a corresponding investment program, and an appropriate institutional setup. 12 The initial plan was to hand over control of Indonesia s top two container terminals (those at Tanjung Priok and Surabaya) to companies without cargo handling experience. Neither attempt, however, was successful. At Surabaya the deal was not concluded; and at Tanjung Priok, the Humpuss Corporation subsidiary, entered a joint venture with the port authority (PTPI II) at terminal 3 (CT3), failed to perform, and is now bankrupt. 13 Between 1992 and 1997, ADB explored, at length, ways to get port privatization moving in appropriate directions, especially for relating a subsequent expansion of the Surabaya container port terminal after completion of the Seventh Port Project. As for the stated present lack of competition at Surabaya, there could have been two terminals had the Government followed two of the potential options discussed with ADB missions. 14 PT (Persero) Pelabuhan Indonesia III has started to restructure the Port Hospital. Furthermore, PTPI III has sold 49 percent of its operating concession to PT. Terminal Petikemas Surabaya, on a lease basis for 20 years. 15 ADB essentially maintained an appropriate dialogue with the Government, where it was possible, to deal with the difficult political and institutional framework that created and has perpetuated the inefficiencies.

17 4 initiated by the port authorities. 16 Furthermore, while no final decision has been made on the status of the port sales revenues, a part of the proceeds (just under $400 million) went to the central Government (as an advance dividend). Only a small fraction went to the port (PTPI II), which is now short of funds. The Mission recommends that the responsibility for the ports should be shared by the Ministry of Communications, specialized in transport, and the Ministry of State- Owned Enterprises. This would promote the long-term objectives of privatization, which include stimulating competition and improving efficiencies, while helping the Government fulfill its obligations to the International Monetary Fund Port Sector Reforms 24. The Mission reviewed ADB s support for port sector reforms through these evaluated projects. The projects, or accompanying TAs, provided capacity building components to improve the management information system and skills of the government bodies and PTPIs. With the benefit of hindsight, although not much was accomplished to improve productivity at the project ports, and thereby reduce the need for new berth construction, ADB has appropriately concentrated TA on improving the existing Government bodies. The Mission acknowledges that this approach was partly needed to achieve early benefits in safeguarding project investments, and to educate all stakeholders on the advantages of the reform. The government bodies should not continue to retain control, which would limit the most efficient forms of private participation. 18 Experience elsewhere confirms that the key to improving operations is the replacement of government operations by competing private terminals, 19 combined with deregulation. However, Government regulation of tariffs and port investment has been retained, despite the fact that freedom of entry and pricing are crucial to the working of market mechanisms The Ministry of State-Owned Enterprises (MSOE) was set up to provide overall supervision and management of state-owned enterprise (SOE) reforms including privatization. These policy changes are an integral part of the economic reform program being supported by international financial institutions in the aftermath of the financial crisis. The current efforts comprise stage I of SOE reforms, which include restructuring, profitability, and privatization. SOEs with good financial performance may be privatized immediately. ADB is supporting the implementation of the overall economic reform program including SOE reforms and privatization. ADB has an ongoing TA that helps MSOE formulate the SOE reform agenda. ADB has also been working with the Government to develop a comprehensive SOE reform program that focuses on improving SOE corporate governance, addressing financial and corporate restructuring and strengthening competition. MSOE was asked to draw up a list of industries for sale to generate funds for the Government, which was in financial difficulties during the Asian crisis of 1998, and was committed by the International Monetary Fund to raise revenue. The list included cement production, telecommunications, ports, airports, steel, trading companies, etc. The privatization procedures and the use of consultants were dominated by MSOE, not the port authorities. 17 MSOE had at first considered selling Indonesia s four regional port authorities wholesale to the private sector, but found that law required an SOE rather than a private body to control the ports. 18 However, it should be emphasized that very few countries were aware that privatization, deregulation, and/or competition was the best approach at the time of the appraisal of the Seventh, Eighth, and Ninth Port Projects. Even the United Kingdom did not really tackle port reform until Indonesian ports still use the old-fashioned system under which private contractors deploy gangs drawn from the national dock labor pool. This system, despite being private, is inefficient and often corrupt in almost all countries in which it still operates. It is usually much less efficient than the more modern system of privately run terminals with their own permanent staff. In Indonesia, the national dock labor pool is technically employed by a local representative of the Ministry of Communications rather than the stevedoring companies, and has little loyalty to the cargo handling contractors. 20 The Seventh Port Appraisal Mission advised the Government to adopt specific measures to improve productivity by about 20 percent and provided consulting services, to support earlier advice under the Fourth Port Project. This avoided the construction of about 14 new interisland berths in response to the perceived productivity gains.

18 5 25. Privatization so far has been limited to the two most lucrative international container terminals, which were reasonably efficient and highly profitable before they were privatized. 21 It will be difficult to extend privatization to the interisland, domestic port facilities, mainly because tariffs, regulated by the Government, are too low to allow a return on investment. 26. The most lucrative terminals were handed over to foreign companies, which although very efficient, often have a keen eye for gaining a monopoly position in the countries in which they operate. 22 There are no plans to require the private concession holders to reduce tariffs, as might be expected when private specialist firms replace state monopolies. On the contrary, the private concession holders are reported to have already exerted pressure for an increase in tariffs (although without success). 27. Throughout the world over the last 20 years ports that used to be inefficient have seen productivity increase and costs fall when the right types of reforms were introduced. These generally entail privatization, deregulation of entry, investment and tariffs, and strong government measures to tackle the labor problems of overstaffing, and restrictive practices But in many Asian countries, the results have not been so impressive. Although the private sector is generally allowed to build and run single-user ports, the governments usually protect their own monopolies over common user ports, i.e., general cargo. The experience at the major common user ports of Bangladesh, the People s Republic of China, India, Indonesia, Malaysia, and the Philippines and the most common defects in the respective port reform programs are summarized in Appendix Port Infrastructure Development 29. There is a common view that the private sector can now be relied on to finance and build berths. But in practice there has been relatively little private investment in port infrastructure during the 1990s in Indonesia or, indeed, in neighboring countries such as the Bangladesh, the People s Republic of China, India, and the Philippines. 30. Unlike the international container operations, the domestic (interisland) cargo handling and the operation of the public terminals and smaller ports are not attractive to the private sector. The tariffs are too low to allow an acceptable return. The port tariffs for domestic shipping which are fixed by the central Government, are well below those for international shipping. Most of the domestic ports therefore register losses, and their PTPIs are only able to make surpluses because they are subsidized by large revenues from two other sources pilotage for private berths, which often handle very large tonnages (e.g., petroleum, liquefied natural gas, and coal), and concession fees from private ports. Neither source of revenue would 21 The container facilities at Tanjung Priok and Surabaya were both privatized in a single unit, despite having enough traffic (1.7 million twenty feet equivalent unit [TEU] and 0.7 million TEU, respectively) to justify being split into at least two separate terminals. In theory, Hutchison faces competition from a smaller terminal at Tanjung Priok (CT3), run by a joint venture of Humpuss and the PTPI, but in practice Humpuss has not been able to provide funds or to operate efficiently, and PTPI II is trying to buy them out. Also, CT3 s traffic level is only one sixth of that at the Hutchison terminal. 22 MSOE argues that it would have preferred local investors its favored method of privatization being sale of shares on the local market. But this did not prove possible, as Indonesian investors are short of funds at present, and the share market is depressed. 23 There is a general consensus on the desirability of the withdrawal of port authorities to a landlord role, with all operations carried out by private companies in a competitive environment with incentives to succeed and penalties for failure.