RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF GEOTHERMAL POWER GENERATION DEVELOPMENT PROJECT GEF TF IND APPROVED ON MAY 29, 2008

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF GEOTHERMAL POWER GENERATION DEVELOPMENT PROJECT GEF TF IND APPROVED ON MAY 29, 2008 TO THE REPUBLIC OF INDONESIA June 22, 2011 Report No:

2 ABBREVIATIONS AND ACRONYMS CO 2 DGESGWM DGMCG DGNREEC GEF MEMR WB Carbon dioxide Directorate for Geothermal Enterprise Supervision and Groundwater Management Directorate General for Mineral, Coal and Geothermal Directorate General for New and Renewable Energy and Energy Conservation Global Environment Facility Ministry of Energy and Mineral Resources World Bank Regional Vice President: Country Director: Sector Manager / Director: Task Team Leader: James W. Adams Stefan G. Koeberle Franz R. Drees-Gross Migara Jayawardena 2

3 INDONESIA GEOTHERMAL POWER GENERATION DEVELOPMENT PROJECT P CONTENTS Page A. SUMMARY... 4 B. PROJECT STATUS... 4 C. PROPOSED CHANGES... 6 ANNEX 3: EXTENSION OF CLOSING DATE

4 INDONESIA GEOTHERMAL POWER GENERATION DEVELOPMENT PROJECT SUMMARY RESTRUCTURING PAPER 1. This restructuring paper is in response to a request by the Government of the Republic of Indonesia (GoI) made through a letter dated June 14, 2011, from the Ministry of Finance. The letter and the associated detailed Action Plan, request the extension of closing date of the GEF Grant from June 30, 2011 to June 30, 2013 for the Geothermal Power Generation Development Project. 2. Approval for the proposed extension of closing date is sought from the Regional Vice President since, although it is the first extension of the project, it covers a period of two years. 3. Details of the proposed extension are discussed in Annex 1. PROJECT STATUS 4. Background. The project, approved by the World Bank s Board of Executive Directors on May 29, 2008, was designed to support the policy and institutional reforms in order to promote the expansion of economic and environmentally friendly geothermal power generation in Indonesia and reduce CO 2 emissions from the power system. Following the realization of effectiveness conditions, the Project was declared effective on October 16, The project comprises the following components. (a) Component 1: Policy Framework for Scaling-up the Development of Geothermal Power (b) Component 2: Transactions Management for Mobilizing Investments in Geothermal Power Generation (c) Component 3: Geothermal Sector Technical Capacity Building (d) Component 4: Project Management Assistance Summary of Implementation Progress. Due to initial delays and management challenges faced by the project, the project implementation rating is marginally unsatisfactory. However, given the progress made in terms of sector development and the scale-up in project activities in support of the reforms, project can achieve its objectives with the extension proposed through this restructuring paper, 6. As of April 30, 2011, the Grant had disbursed US$ 0.55 million (15 percent of the total Grant amount) and commitments had reached US$ 1.6 million (40 percent of the total Grant amount). 4

5 7. At project outset, delays were experienced with respect to the completion of internal government procedures for activation of the Special Account, and the procurement process for the selection of consultants for key activities, particularly to develop a pricing policy to address incremental costs (pricing consultants) and to design and prepare for geothermal investment transactions (transaction consultants). 8. In order to compensate for these delays in completion of the required processes, the World Bank task team became actively involved in supporting the Ministry of Energy and Mineral Resources (MEMR) and organized workshops and seminars to make progress with capacity building activities on pricing, incentive mechanisms and transaction. In order to be able to respond to the government s priority needs, the Bank mobilized funding resources outside the project to carry out a study 1 focusing on geothermal resource risks in Indonesia. This analysis will inform further project activities related to geothermal resource risks. 9. Project activities have picked up considerably over the past year. MEMR mobilized consultants under the project to carry out two key activities focusing on the removal of major barriers related to pricing and transactions involving geothermal power development in Indonesia. Since project inception, existing geothermal developers have added 220 MW of geothermal capacity. Furthermore, with the assistance of the project and the World Bank, six power purchase agreements were signed between PLN, the national power company, and state-owned geothermal developer, Pertamina Geothermal Energy (PGE). Since the consultants were mobilized under the project, they have played an important role in undertaking the urgent tasks of reviewing the existing policies and embarked upon an intensive work plan as envisaged by the GEF Project design. This has included advisory support to the GoI in general, and MEMR in particular, for mobilizing investments in the sector. The consultants have delivered draft reports to MEMR, and consultation workshops to obtain feedback on the reports were organized. Their recommendations are currently under review by MEMR, and it has become evident that additional time is required to implement GOI decisions. 10. The scopes of some studies under the project were also slightly modified during supervision as a result of findings of scoping studies and in order to reflect evolving priorities in the sector due to ongoing developments on the ground. For example, as a means of resource risk mitigation, MEMR recently decided to upgrade data quality and provide independent validation of resource information for a selected field proposed for competitive tendering under the project. 11. As a part of the effort to mainstream renewable energy, including geothermal, the GoI has established a dedicated Directorate General for New and Renewable Energy and Energy Conservation (DGNREEC) in MEMR. In line with this new institutional arrangement, the Directorate for Geothermal Enterprise Supervision and Groundwater Management (DGESGWM), which was the designated implementing department for the project, has been renamed as the Directorate for Geothermal and relocated under DGNREEC. The Project Implementation Unit (PIU) is under the Directorate of Geothermal. 1 An Assessment of Geothermal Resource Risks in Indonesia, Private Participation in Infrastructure Advisory Facility (PPIAF), The World Bank,

6 12. MEMR has faced some challenges in managing the project due to a lack of familiarity with World Bank procedures, changes in personnel, and the recent institutional restructuring at MEMR. As a result, there is room for improvement with regards to procurement and financial management. The financial management of the grant is rated moderately unsatisfactory in the latest supervision mainly due to non submission of interim financial reports (IFRs), lack of withdrawal applications submitted for disbursement, delays in budget availability and weaknesses identified in transaction review. However, following Bank provided training, the IFRs have now been submitted. A withdrawal application for disbursement has also been submitted to MOF, and the audit by BPKP has been carried out. The budget issues are being dealt with and the task team is working with MEMR to address the documentation issues identified in the transaction review. The task team has agreed with MEMR on remedial actions and training opportunities to address these project management shortcomings in order to improve implementation going forward. 13. Despite the challenges faced by the project, MEMR has reaffirmed that the project in general, and the activities focusing on pricing and transactions for geothermal power generation in particular, continue to make a critical contribution to the government s effort to remove the major barriers facing geothermal energy scale-up in Indonesia. Furthermore, the project remains relevant to the achievement of the country s development goals, particularly in light of the significance of geothermal energy in the country s power generation expansion program. 14. Action Plan for Project Implementation. Despite progress made by MEMR thus far, the major barriers related to pricing and transactions still exist. Therefore, an assessment undertaken by MEMR confirmed that the project continues to contribute to realizing the government s objectives for geothermal energy. As part of this effort, the MEMR prepared an Action Plan in consultation with the Bank, which forms the basis for the proposed extension of grant closing date. 15. The Action Plan, which is available in project files, envisages adjustments to implementation of individual activities, and proposes revisions to the scope of a select set of activities within existing project components, which are necessary to reflect the current development status in the sector and ensure continued alignment with the government s priorities. 16. According to the action plan, a total of US$ 654,850 in GEF funds will be freed up due to cost savings resulting from actual contract values under some activities being lower than originally envisaged, and revision of scope of some studies in order to better align with current priorities, or whose objectives have been met under other activities. MEMR will allocate the funds freed up towards other priority activities that reflect the recent progress in the geothermal energy sector in Indonesia. Specifically, MEMR intends to use US$ 600,000 of the remaining available funds for a study to upgrade and validate data for geothermal fields proposed for model project tendering under Component 2. Furthermore, the remaining US$ 54,850 will be directed towards strengthening the capacity of the project management unit in order to improve overall project implementation. 6

7 17. The reallocation of funds among individual activities within the project does not affect the allocation of Grant proceeds presented in Section IV, Part A, Paragraph 2 of the GEF Grant Agreement. 18. None of the changes in activity details or implementation arrangements impact the Project Development Objectives, or the expected outcomes of the individual activities. On the contrary, the Action Plan helps ensure that the project continues to meet the government s objectives. 19. The Action Plan also includes a revised implementation and disbursement schedule, which is presented in Paragraph 20 of this Paper. Accordingly, the procurement plan will be updated by MEMR and submitted to the Bank for review. PROPOSED CHANGE 20. Extension of closing date. The Government of Indonesia requests the extension of the project closing date, by two years, to June 30, This extension is necessary in order to compensate for initial delays and allow time for the completion of the critical activities under the project. Further details are available in Annex Implementation schedule. Consistent with the proposed extension of project closing date by two years, the following revised implementation schedule is envisaged for each component. 7

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9 ANNEX 1: Extension of Closing Date INDONESIA GEOTHERMAL POWER GENERATION DEVELOPMENT PROJECT GEF TF92324 P Restructuring Paper 1. The closing date for the Indonesia Geothermal Power Generation Development Project [GEF TF92324 P099757], will be extended from June 30, 2011 until June 30, As described in Section B of the main text of the Restructuring Paper, the project implementation progress is rated moderately satisfactory and with the proposed changes the project objectives continue to be achievable. 3. The proposed extension is necessary to compensate for initial delays in project implementation, and allow time for the completion of high priority activities under the following components: (i) Component 1: Policy Framework for Scaling up the Development of geothermal Power (ii) Component 2:Transaction Management for mobilizing Investments in Geothermal Power Generation 4. The Recipient has put in place a realistic Action Plan to ensure completion of the project by the revised closing date. The World Bank task team has reviewed the proposed action plan and has found it to be satisfactory. The action plan and implementation timeline are available in project files. 5. This will be the first extension of the project.