for official use only - world bank

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 49495-ID

PROJECT PAPER

FOR A

PROPOSED ADDITIONAL LOAN

IN THE AMOUNT OF US$30 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR THE

EXTENDED DEPLOYMENT OF AN ENTERPRISE RESOURCE PLANNING SYSTEM

IN SUPPORT OF THE

JAVA-BALI POWER SECTOR RESTRUCTURING AND STRENGTHENING PROJECT

April 22, 2010 Infrastructure Sector Unit Indonesia Sustainable Development Department East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective as of March 1, 2010)

Currency Unit = Indonesian Rupiah (IDR) IDR 1,000 = US$0.10799 IDR 9,260 = US$1

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

BAPPENAS Badan Perencanaan dan Pembangunan Nasional (Indonesia’s Ministry of National Development Planning)

CPS Country Partnership Strategy DC Direct Contracting DRC Disaster Recovery Center DSCR Debt Service Coverage Ratio EA Environmental Assessment ERP Enterprise Resource Planning FM Financial Management

FMR Financial Management Report

GOI Government of Indonesia HR Human Resources IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDR Indonesian Rupiah IT Information Technology IT SSU PLN Information Technology Shared Services Unit KPI Key Performance Indicator MM Materials Management NCB National Competitive Bidding NPV Net Present Value P3B PLN’s Java-Bali Transmission System Business Unit PGN Perusahaan Gas Negara (Indonesia’s State Gas Company) PIU Project Implementation Unit PLN Perusahaan Listrik Negara (Indonesia’s State Power Company) PSO Public Service Obligation QBS Quality Based Selection

QCBS Quality and Cost Based Selection RF Radio Frequency

Vice President: James W. Adams Country Director: Joachim von Amsberg Sector Director John A. Roome Sector Manager: Sonia Hammam

Task Team Leader: Migara Jayawardena

FOR OFFICIAL USE ONLY


ADDITIONAL LOAN FOR THE EXTENDED DEPLOYMENT OF AN ENTERPRISE RESOURCE PLANNING SYSTEM

TABLE OF CONTENTS

I. Introductory Statement ................................................................................................... 1

II. Background and Rationale for Additional Financing .................................................... 1

III. Proposed Changes .......................................................................................................... 5

IV. Consistency with Country Partnership Strategy (CPS) .................................................. 8

V. Appraisal of Restructured or Scaled-up Project ............................................................. 8

VI. Expected Outcomes........................................................................................................ 9

VII. Benefits and Risks .......................................................................................................... 9

VIII. Financial Terms and Conditions for Additional Financing .......................................... 10

Annex 1: Project Description and Costs .............................................................................. 11

Annex 2: Financial and Economic Analysis ........................................................................ 18

Annex 3: Procurement Arrangements ................................................................................. 29

Annex 4: Financial Management and Disbursement ........................................................... 33

Annex 5: Governance and Accountability Framework ....................................................... 39

Annex 6: Project Performance Indicator ............................................................................. 41

Annex 7: World Bank Project Team Members ................................................................... 42

Annex 8: Documents in the Project File .............................................................................. 43

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.


ADDITIONAL LOAN FOR THE EXTENDED DEPLOYMENT OF AN ENTERPRISE RESOURCE PLANNING SYSTEM

PROJECT PAPER

EAST ASIA AND PACIFIC

EASIS

Basic Information (Original Project)

Project ID: P063913 Project Name: Java-Bali Power Sector Restructuring and Strengthening Project

Team Leader: Migara Jayawardena Expected Closing Date: December 31, 2011 Environmental category: B, Partial Assessment Lending Instrument: Specific Investment Loan

Basic Information (Additional Financing)

Date: April 22, 2010 Team Leader: Migara Jayawardena Country Director: Joachim von Amsberg Sector Manager: Sonia Hammam

Sectors: Power (80%); Central government administration (20%) Themes: Infrastructure services for private sector development (67%); Other public sector governance (33%)

Project ID: P116855 Environmental category: C, Not Required Lending Instrument: Specific Investment Loan Additional Financing Type: Scale Up

Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 30.00 Proposed terms: Variable Spread Loan, repayable in 24.5 years, including a grace period of 9 years

Financing Plan (US$m) Source Local Foreign Total

Borrower 0.00 0.00 0.00 IBRD 15.67 14.33 30.00 Total: 15.67 14.33 30.00 Borrower: Government of Indonesia Responsible Agency: PLN (Persero) Jl. Trunojoyo Blok MI/135, Indonesia, 12160 Tel: (62-21) 726-1875/726-1122 Fax: (62-21) 722-1330 http://www.pln.co.id

Estimated disbursements (Bank FY/US$m)FY 2010 2011 2012 2013 2014

Annual 0.217 15.789 9.884 3.166 0.944 Cumulative 0.217 16.006 25.890 29.056 30.000 Project implementation period: Start: May 25, 2010 End: December 31, 2013 Expected effectiveness date: June 15, 2010 Expected closing date: December 31, 2013

Does the project require any exceptions from Bank policies? Have these been approved by Bank management?

[ ]Yes [X] No [ ]Yes [ ] No

Does the project include any critical risks rated “substantial” or “high”? Negative impact on PLN’s system due to system malfunction that could result from changes to operations made by multiple vendors poses a particular risk that is rated as Substantial. In order to address this risk, Quality Assurance and Quality Control processes and procedures based on industry best practices will be instituted and managed on behalf of PLN by the Supervision Consultants for the ERP System.

[ X ]Yes [ ] No

Project development objective: The objective of the project is to improve the reliability and efficiency of the power system in Java-Bali and strengthen PLN and PGN’s management capabilities. Project description: The Enterprise Resource Planning (ERP) system is aimed at strengthening PLN’s management capabilities through the use of an integrated IT system to facilitate its financial, materials, and human resources management. Designed as one single component, the proposed project will finance the following activities: (i) assess and carry out system upgrades, enhancement modifications, and business process improvements for PLN’s current Enterprise Resource Planning operations, (ii) support the expansion of PLN’s IT Shared Services Unit through upgrading of technical skills and implementation of improved support tools, (iii) extend the ERP system, already successfully implemented in the Java-Bali operations, to the business units in Sumatra and Sulawesi, (iv) reinforce PLN’s IT infrastructure through upgrades to central systems in the Disaster Recovery Center and Computer Center, (v) assess PLN’s Customer Care and Meter-to-Cash business processes and technologies, and (vi) provide supervision support to PLN for its Phase III activities. Which safeguard policies are triggered, if any? The proposed project is assigned an EA category C since the project exclusively provides technical assistance in the form of consulting services and information technology equipment. Therefore, it will not trigger any of the World Bank safeguard policies.

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I. Introductory Statement 1. This project paper seeks the approval of the Executive Directors to provide an additional loan in the amount of US$30 million to the Republic of Indonesia for the Java-Bali Power Sector Restructuring and Strengthening Project Loan 7758-ID / Loan 4712-IND Project ID: P063913.

2. Between 2005 and 2008, as part of the Java-Bali Power Sector Restructuring and Strengthening Project Loan, an Enterprise Resource Planning (ERP) system was piloted in PLN headquarters and subsequently extended to all the business units in the Java-Bali area1. The main objective of the deployment of the ERP system was to strengthen PLN’s management capabilities for the Java-Bali business units. This was achieved through the implementation of an integrated information technology (IT) system to support PLN’s business processes through modules for Financial Management, Materials Management, and Human Resource Management. The system standardized and made PLN’s business processes more transparent, and improved its control environment by enabling better auditable tracking of all transactions. This led to greater accuracy and timeliness of corporate information and enhanced PLN’s capabilities for well informed decision making. As a result, there is improved integrity, greater transparency, and improved corporate governance.

3. PLN now proposes to extend the ERP system to business units outside the Java-Bali area. The proposed additional loan would help finance the costs associated with extending the deployment of the ERP system and strengthening the supporting IT infrastructure. II. Background and Rationale for Additional Financing 4. The Java-Bali Power Sector Restructuring and Strengthening Project’s objective is to improve the reliability and efficiency of the power system in Java-Bali and to strengthen PLN and PGN’s management capabilities. This is to be achieved by implementing the following components:

Component 1 & 2: Investments related to improving the electricity system and strengthening the transmission network;

Component 3: Implementation of an initial pilot and then subsequent deployment of an Enterprise Resource Planning (ERP) system in the Java-Bali business units; and,

Component 4 & 5: Technical assistance to assess the feasibility of a key power plant; and strengthen capacity and assist with the restructuring of PGN, a state-owned gas company.

5. The original loan amount of US$141 million (including front end fee) was approved by the Board on June 26, 2003, and became effective on July 7, 2004. The current project development objective, structure, and results indicators reflect a first-order restructuring of the

1 Excluding PLN’s subsidiaries.

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project that was approved by the Board on June 19, 2008, at which time the project’s closing date was also extended to December 31, 20092. The project closing date was further extended on December 28, 2009 by an additional 24 months through December 31, 2011 mainly to facilitate the completion of several transmission lines under Components 1 and 2. Project Performance 6. The project has gained momentum since its restructuring, and is on track to achieving the revised development objective by the extended project closing date. Presently, over 84% (US$119 million) of the loan is disbursed and the remainder with PLN is fully committed. The project’s development objective (PDO) and implementation progress (IP) are rated Satisfactory. All physical investments designed to strengthen the transmission network are contracted, a majority already completed and the remainder under construction. The ERP Component is rated Highly Satisfactory having fully met its expectations within the anticipated budget. The technical assistance component supporting PLN has also been successfully completed, and the feasibility study for the Upper Cisokan Pumped Storage Facility funded by the project led to a proposed investment loan currently under preparation estimated at US$530 million. The PGN component of the project has also been completed and they have requested the unused balance to be cancelled3. 7. PLN’s overall management of the project is rated Satisfactory. They have satisfactorily completed all procurement activities related to the project and have made available sufficient counterpart funding to meet their commitments. PLN has submitted the Financial Management (FM) Reports in compliance with the project covenant. However, project FM is rated Moderately Satisfactory. PLN has agreed to a specific action plan with the Bank in order to improve this aspect of the project, and the expansion of the ERP itself is expected to improve the company’s overall FM capacity. PLN’s compliance with safeguard policies applicable to the project is Satisfactory. 8. PLN has maintained sufficient liquidity over the duration of the project to cover its operational costs and debt service obligations. However, presently PLN’s financial condition is dependent upon Government subsidies since the electricity tariff does not cover the company’s production costs. The Government provides a Public Service Obligation (PSO) subsidy to cover the difference in PLN’s tariff revenues and a targeted 8% profit margin. Therefore, the Bank opted for the debt service coverage ratio (DSCR) covenant that measures PLN’s cash liquidity with an agreed annual target of 1.5x. In March 2010, the Bank received information from PLN suggesting that it might not meet this covenant in 2009.4 However, further analysis showed that PLN continued to remain liquid during 2009, aided by US$2 billion in financing raised in the global bond markets. Because of favorable market conditions, PLN was able to raise more

2 The main reason for the restructuring was the annulment of the Electricity Law by the Constitutional Court in Indonesia. A sub-component of the project was designed to support the implementation of the Law, which needed to be revised to address the resulting inconsistency. As a result, the project’s performance rating was revised from satisfactory to moderately satisfactory during the period until the project was restructured. Thereafter, the project’s performance was upgraded again to satisfactory. 3 The World Bank is expected to accept this request because, while the GoI took a single loan from the World Bank for this project, it has treated the PLN and PGN components as separate subsidiary loans in its systems. 4 PLN’s compliance with the covenant in 2009 can only be ascertained for certain when its audited financial statements are issued in June 2010.

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financing than was needed for investments in the short to intermediate term. Given its strong liquidity position at the end of 2009 and the company’s desire to use its excess cash productively, PLN made the prudent financial decision to accelerate the reduction of its arrears to third parties. As a result, PLN was able to reduce annual financing charges by about US$110 million on these arrears and thus improve its financial position for future years. In addition, the Government incurred Rp. 6.4 trillion (approximately US$650 million) in PSO subsidy arrears to PLN; most of these arrears will be paid down in 2010. Even after its prepayment of third party arrears and the delay in receiving its final subsidy payment from the Government, PLN has remained substantially liquid and had an ample cash balance of Rp. 13 trillion (approximately US$1.3 billion) at the end of 2009, the second highest year-end cash balance during the past decade. If not for these two year-end strategic events, PLN’s estimated DSCR for 2009 would have been about 1.66x.5 Under the circumstances, PLN’s financial performance is satisfactory, despite the possibility that the DSCR might not meet the agreed target in 2009. Based on PLN’s current forecast the company is expected to remain liquid through 2015. Rationale and Reasons for the Borrower to Request the Additional Loan 9. This request is in compliance with Bank Guidelines 6 concerning the provision of additional financing in the context of ongoing, well-performing projects to expand project activities to scale up impact and development effectiveness. 10. The original project design called for the pilot implementation (Phase I) of an ERP system in PLN’s Headquarters and three subsidiary business units, aimed at strengthening the company’s management capabilities through the use of an integrated IT system to facilitate its financial, materials, and human resources management. The pilot included the procurement of software licenses and hardware. The pilot ERP component was successfully implemented as scheduled, and in June 2008 the project was restructured to expand the ERP (Phase II) to cover all of PLN’s business units in the Java-Bali system (excluding subsidiaries), using savings7 and unallocated funds from the Java-Bali Power Sector Restructuring and Strengthening Project. Table 1 depicts the present as well as potential coverage of PLN staff and revenue base through various phases of the ERP implementation.

Table 1: Coverage of ERP for PLN Personnel and Revenue (excluding subsidiaries or internal sales revenues)

Coverage of Staff and Revenue (millions of

Rupiah)

Phase I: Pilot ERP (Completed)

Phase II: First expansion to rest of

Java-Bali (Completed)

Phase III: Expansion under Additional

Financing (Proposed)

To be determined based on the results

of Phase III

Area Staff Revenue Staff Revenue Staff Revenue Staff Revenue PLN Headquarters and 3 Java-Bali Business Units

9,253 30,512,357

Remainder of Java-Bali Business Units

9,433 42,732,283

Sumatra & Sulawesi Units 12,844 13,151,829 Kalimantan & Other Islands 5,919 5,389,518

5 Even after the two extenuating events, Standard and Poor’s on March 15, 2010, upgraded PLN’s rating from BB- to BB with a stable outlook. Moody’s had similarly upgraded PLN’s rating on September 16, 2009 from Ba3 to Ba2. 6 September 2008 “Processing Additional Financing, Guidance to Staff”, paragraph I.1.ii. 7 The development and implementation of the pilot ERP (phase I) came well under original estimates.

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Coverage of Staff and Revenue (millions of

Rupiah)

Phase I: Pilot ERP (Completed)

Phase II: First expansion to rest of

Java-Bali (Completed)

Phase III: Expansion under Additional

Financing (Proposed)

To be determined based on the results

of Phase III

Area Staff Revenue Staff Revenue Staff Revenue Staff Revenue Subtotal 9,253 30,512,357 9,433 42,732,283 12,844 13,151,829 5,919 5,389,518 Percentage of Total 24.71% 33.24% 25.19% 46.56% 34.30% 14.33% 15.81% 5.87% Cumulative Percentage 24.71% 33.24% 49.90% 79.80% 84.19% 94.13% 100% 100%

11. The ERP has significantly strengthened PLN’s management capabilities through standardized and more transparent business processes and improved internal controls. Although the primary benefits of the ERP system are not easily quantifiable, there is considerable evidence on a qualitative basis that indicates that it has contributed towards enhancing the company’s transparency, accountability and governance through improvements in financial management, material management, and human resource management. As a result, there is improved integrity, accuracy and timeliness of corporate information that is available for PLN’s management for enhanced decision making. As an example, the end-of-year financial statements (Balance Sheet, Income Statement, and Cash Flow Statement), which took three months to prepare manually in 1996, are now produced before January 15 every year for Java-Bali. This has had a very positive effect on PLN’s capability to plan its yearly operations and investments, finance operations by accessing capital markets, and interact with customers. 12. Although the primary benefits are qualitative, PLN has also made some quantitative gains in the form of savings as a result of the ERP system, as shown in Table 2. Broadly, the savings for Financial and Human Resources Management are based on the reduction in staff effort to produce financial reports, reconcile bank and tax statements, and personnel functions including payroll. In Materials Management, the use of uniform Material Codes and Standards and the integration of information across the organization have resulted in a reduction of inventories at PLN’s warehouses, which decreases the financial cost of keeping the inventories and also reduces time delays in project implementation. Further savings are also achieved in inventory costs due to the use of blanket orders, volume discounts, verifiable unit prices and other similar mechanisms enabled by the ERP system.

Table 2: Annual Savings for Phases I-III of the ERP expansion

Area Phase I Total

(US$) Phase II

Estimated (US$) Phase III

Projected (US$) Financial Management 678,018 358,608 996,235Materials Management 229,468 2,117,041 4,079,101Human Resources Management

129,483 64,327 413,836

Total 1,036,969 2,539,976 5,489,172

13. Based on this success, PLN has requested additional financing for the extended deployment of the ERP to PLN business units in the islands of Sumatra and Sulawesi (Phase III). This extension would also include: a) the reinforcement of the IT infrastructure through upgrades to central systems in the Data and Disaster Recovery Centers; b) improvements to support functions such as the call center; and, c) capacity building through targeted training programs for the IT support and deployment units. In preparation for adding further functionality to the ERP in the future, the project would also finance a diagnosis for the enhancement of the customer billing business process. The additional financing would help extend the benefits of the ERP system to an additional 34% of staff and 14% of PLN’s revenue base.

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III. Proposed Changes Project Development Objective, Design and/or Scope 14. The proposed extended deployment of the ERP (Phase III) is fully consistent with the project’s development objective. The considered activities correspond to an expansion and replication of existing procedures and systems without alteration in the project design or the overall structure. The project scope is scaled up so that the ERP system’s total coverage will reach a cumulative 84% of personnel and 94% of revenues. Upon conclusion, PLN will then evaluate the feasibility of deploying the system to cover the remaining business units. 15. As a result of the extended deployment of the ERP system to Sumatra and Sulawesi, it is expected that the improved integrity, accuracy and timeliness of corporate information presently available for PLN’s management in Java-Bali will be expanded to include Sumatra and Sulawesi, enabling better decision making with regards to their operations in these respective areas. Conditions of Effectiveness of Additional Loan 16. The following conditions of loan effectiveness will apply to the proposed project:

PLN would have adopted the addendum to the Project Implementation Plan (PIP) to take into account the activities to be carried out under the proposed additional financing project;

he PLN Subsidiary Loan Agreement has been executed on behalf of the Government and PLN.

he PLN Subsidiary Loan Agreement is legally binding upon the Government and PLN in accordance with its terms.

Project Duration and Execution 17. The project is expected to be implemented over 43 months, with a loan closing date of December 31, 2013. PLN has already begun with advanced procurement. Retroactive financing would therefore be used for all project activities, which comply with Bank guidelines, up to 20% of total project cost. 18. Since the proposed project is expected to close on December 31, 2013, after the loan closing date of the original project, all relevant project implementation arrangements of the Java-Bali Power Sector Restructuring and Strengthening Project will remain in effect until December 31, 2013.

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Project Costs and Financing Plan 19. The proposed project has a single component as follows:

Table 3: Project Sub-Components and Costs

Project Cost Amount (US$ '000) % of total Activity 1.1 ERP Optimization 2,425 8.08% Activity 1.2 ERP Support and Capability Building 2,833 9.44% Activity 1.3 Expansion to Sumatra and Sulawesi 19,490 64.96% Activity 1.4 Disaster Recovery Center and Computer Center Upgrade 1,250 4.17% Activity 1.5 Customer Care and Billing Assessment 960 3.20% Activity 1.6 Phase III Supervision Support 700 2.33% Baseline Total 27,658 92.19% Contingency 2,343 7.81% Total 30,000 100.00%

20. No major changes are proposed for project implementation. The executing agency will be PLN. The Project Implementation Unit (PIU) will be the same as the one that is implementing the ongoing Java-Bali Power Sector Restructuring and Strengthening Project, under which the previous two phases of the ERP deployment have been successfully managed. The PIU was originally established on September 18, 2002 by PLN Decree specifically for this Project, and it has been re-established since to reflect the recent reorganization within the company. The PIU will be responsible for implementing the overall project including monitoring and reporting of progress, per the agreements made with the Bank for the ongoing project. Accounting, Financial Reporting and Auditing Arrangements 21. The Financial Management rating of the Java Bali Power Sector Restructuring and Strengthening Project has improved during 2009. PLN has submitted on time the Financial Monitoring Report (FMR) for the project up to Q3 2009. During the life of the project, annual audited financial statements of the entity with clean opinions have also been submitted on time to the World Bank. However, the following three issues remain to be addressed: (i) slow payment process resulting in delays in payments made to contractors; (ii) delays in recording loan draw-downs in books of accounts, and (iii) inaccurate exchange rates used in FMRs submitted, which provide an inaccurate calculation of PLN’s contribution to the project. The project is currently rated Moderately Satisfactory on financial management. 22. PLN has already taken several steps to address these risks and has proposed further mitigation measures going forward. These include formal instructions from PLN Headquarters to its regional offices directing them to reduce the length of time for processing payments. Furthermore, PLN’s Accounting Department has already been provided with direct access to Client Connection to ensure timely loan transactions records. Since the proposed loan will finance 100% of the project costs, the issue related to inaccurate estimation of PLN’s contribution in the project will not apply to the proposed additional financing. In addition, the expansion of the ERP itself will contribute towards the improvement of the overall financial management of PLN’s operations since this is a specific aspect addressed by the ERP system. The company will also continue to submit audited reports as per the existing agreement with the Bank. 23. Taking into account the risk mitigation measures proposed, overall, the financial management risk for this additional financing project is assessed as “Moderate” before and after

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mitigation. This assessment has concluded that with the implementation of the action plan, the proposed financial management arrangements will satisfy the World Bank’s minimum requirements under OP/BP10.02 and are adequate to provide, with reasonable assurance, accurate and timely information on the status of the loan as required by the World Bank. Disbursement Arrangements 24. The disbursement methods would be (1) Direct payment and (2) Reimbursement method, subject to the minimum amount per withdrawal application of US$100,000, except the last withdrawal application. Any expenditures or invoices below the minimum amount would need to be paid by PLN and consolidated for submission to the World Bank for reimbursement when the amount reached is the minimum of US$100,000 equivalent. 25. Applications for requesting direct payment and reimbursement shall be supported by records evidencing such expenditures and proof of payments made in the case of reimbursements. All documentation evidencing expenditures shall be retained by PLN and shall be made available to the auditors for audit and to the Bank and its representatives if requested. Procurement Arrangements 26. A procurement capacity assessment of PLN was completed for the Upper Cisokan Pumped Storage Project (Project ID: P112158) in March 2009. Since the project implementation agency for the proposed additional financing will also be PLN, the existing assessment was utilized again as the basis for evaluating the procurement capacity, except for arrangements that were made specifically for the proposed additional loan. These include: (a) the institutional arrangements inside PLN for procurement activities, (b) work procedures inside PLN for handling procurement, and (c) contracts to be procured under this proposed project. 27. The procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, revised in October 2006, and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised in October 2006; and the provisions stipulated in the Legal Agreements. As was the case in the ERP deployment through the ongoing project, similar prior review arrangements will be adopted for the proposed additional financing. According to the project implementation schedule, there will be five goods contracts and four consulting services contracts, out of which two are proposed to be procured using direct contracting. These cases have been cleared in principle by the Bank. Several contracts will be procured in advance and retroactively financed beginning in January 2010, consistent with relevant Bank guidelines. 28. PLN’s performance in implementing the ongoing project is reasonably satisfactory. However, inadequate staffing; uncertainty over the capacity of procurement committee members; and possible delay in the selection of consultants could still increase the procurement risk for the project. Several measures have been agreed to mitigate these risks. These include the appointment of a qualified staff member dedicated for procurement; establishment of qualified procurement committees; utilization of the pricing information in the original contract for direct negotiation of new contracts; and the training of procurement committee members. The initial procurement risk was rated as “substantial”, but it is reduced to a rating of “moderate” based on the above mentioned mitigation measures.

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IV. Consistency with Country Partnership Strategy (CPS) 29. The additional loan is to finance the extension of the ERP system, implemented in the Java-Bali area through the ongoing project, to Sumatra and Sulawesi. This extension of the ERP system is fully consistent with the World Bank’s latest Country Partnership Strategy (CPS) that focuses on "investing in Indonesia's institutions". More specifically, it supports Core Engagement 2 – to support the development of infrastructure by helping "strengthen the capacity and accountability of institutions" to deliver better outcomes. V. Appraisal of Restructured or Scaled-up Project 30. Economic: The direct benefits of the ERP system are to strengthen PLN’s management capability to operate the company more efficiently. Therefore, the impact of the project is mostly institutional and it cannot be easily isolated or quantified. Consequently, a traditional economic analysis to justify the project is not appropriate in this case. However, there is clear evidence from the deployment of the ERP system in PLN thus far, that there is a positive impact to the operations of the company. The deployment of the same systems to business units in Sumatra and Sulawesi will expand these benefits to PLN operations in these areas, whereby the company’s operational efficiency will be further improved. As a result, the power sector in Indonesia will operate more efficiently generating economic benefits to the country. 31. Financial: Investment costs for ERP implementations in the industry are rarely justified on a financial basis using either Net Present Value (NPV) or other similar calculations. The investment rationale is generally based on qualitative elements that strengthen the entities corporate governance, transparency and accountability. These elements include inter alia standardized and transparent business processes; improved control environment; and auditable tracking of transactions. There are some savings that could potentially be indirectly linked to these qualitative elements, but industry experience generally indicates that it would take 2 to 5 financial cycles as the ERP implementation matures before these indirect links can reasonably be quantified and analyzed. Such benefits may initially accrue from the use of technology and the standardization of business processes that will lead to more efficient use of assets, elimination of leakages, a strengthened control environment and other similar capabilities enabled by the ERP. 32. Although the primary benefits of the ERP system are mostly justified on a qualitative basis and improved efficiency over time, PLN has already realized some immediate cost savings as a result of the deployment of the system in the Java-Bali business units. Similar savings can be expected from the extended deployment of the ERP system to business units in Sumatra and Sulawesi. These savings, calculated on the basis of actual data from the Pilot (Phase I), for Financial and Human Resources Management are estimated based on the reduction in staff effort to produce financial reports, reconcile bank and tax statements and personnel functions including payroll. For Materials Management, the use of uniform Material Codes and Standards and integration of information is expected to reduce the level of inventories, which will decrease the financial cost of maintaining excessive inventories. The total estimated savings generated as a result of the deployment of the ERP to Sumatra and Sulawesi is US$5.5 million annually. 33. Technical: There are no technical issues. The equipment contemplated consists of mid-range servers, workstations and peripherals similar to those already in use in PLN and no technical issues are likely to arise in their acquisition and use. Minor deficiencies in the PLN computer center were

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identified, mostly in physical security, and are being addressed by PLN. The capacity of the Computer Center and the Disaster Recovery Center will need to be upgraded to cope with the expanded demand; this will be addressed by the proposed project. 34. Institutional: PLN has established and staffed an “Implementation Team” for the extension of the ERP. Training of this team will be supported by the project. The sustainability of the extension of the ERP depends to a large extent on the support provided by the IT Shared Services Unit (IT SSU), both to users through its call center and software maintenance through its programmers. Training for the unit as well as development and call center tools will be financed through the additional financing requested. However, this existing unit will require additional capacity in order to support the extended deployment of the ERP system. PLN has formally begun recruiting additional staff to fill the existing vacancies and to continue to meet the increasing needs of the IT SSU. 35. Environmental: Although the original Java-Bali Power Sector Restructuring and Strengthening Project is assigned an EA category of B, mainly due to the physical investments related to improving the electricity system and strengthening the transmission network, the proposed additional financing is assigned an EA category of C since the project exclusively provides technical assistance in the form of consulting services and information technology equipment. It does not trigger any of the World Bank safeguard policies. 36. Social Aspects: The objective of this additional financing project is to strengthen PLN’s management capabilities. This will improve the efficiency and reliability of PLN’s operations, which will eventually enable increasing the effectiveness, efficiency and quality of PLN’s services. Thus, the project will indirectly and positively affect the population in Indonesia. VI. Expected Outcomes 37. The main outcomes expected from the project are strengthened management capabilities in PLN. This will be made possible through the improved integrity, accuracy and timeliness of corporate information available to PLN’s management as a result of the ERP system. This is reflected by the fact that end-of-year financial statements, which can take up to three months to prepare manually, can now be made available to PLN management in less time. Therefore, the performance indicator for the proposed additional financing project, consistent with the indicator used for the previous deployment of the ERP system under the Java-Bali Power Sector Restructuring and Strengthening Project including the previous phase (Phase II), is:

Reduction in the amount of time it takes for PLN to consolidate its year-end financial statements for Sumatra and Sulawesi by 50% from 90 to 45 days.

VII. Benefits and Risks 38. The ERP implementation has brought improved management capabilities and important benefits to the PLN’s business units in the Java-Bali area. It is therefore expected that similar benefits will accrue to its operations in Sumatra and Sulawesi through the extended deployment of the ERP system. In particular:

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Greatly increased opportunities for the use of management information for enhanced monitoring, control, auditing and decision-making. The improved data integrity, greater transparency and enhanced corporate governance enables better and more timely operational and investment planning. As a result, it is improving PLN’s overall operational efficiency.

Increased data integrity and security through single-entry input, real-time verification, and access control. As a result, inventories are better managed leading to lower financial costs of maintaining excessive levels of inventories.

Standardized data and procedures in Human Resources Management will permit an increase in efficiency in employee management and payroll administration.

Table 4 – Risk Rating and Mitigation Measures

Risks Mitigation Measures Risk Rating w/

Mitigation In the Sumatra and Sulawesi PLN units - Internal resistance to change (new Business Processes, new Controls etc.), lack of project credibility, lack of commitment

A combination of measures will mitigate this risk including: a) a change management program similar to one successfully used in previous phases; b) enhanced credibility due to the successful implementation of ERP in Java-Bali; and, c) commitment of PLN’s senior management and their active involvement through regular review.

Low

Possible threat to sustainability due to inadequately staffed and skilled IT SSU and Implementation Team

Maintaining adequate staffing of the IT SSU and the Implementation Team is a covenant; capacity building, training and support of the IT SSU and Implementation Team is specifically addressed in the project

Moderate

Uncertainty regarding procurement capacity and potential delay in the selection of consultants

Repeater of all procurement activities from previous phases; Established baseline costs for direct contracting cases; Qualified procurement committees to be established; Procurement training to build capacity.

Moderate

Changes to Operational ERP system by multiple vendors could potentially cause system malfunction and impact PLN operations

Quality Assurance and Quality Control processes and procedures based on Industry Best Practices will be instituted and managed by the Supervision Consultants on behalf of PLN. These rigorous processes will ensure that changes to the Operational System are fully tested and qualified before being applied.

Substantial

Overall Risk Moderate

VIII. Financial Terms and Conditions for Additional Financing 39. PLN, in discussions with the Ministry of Finance, has selected the terms for the additional financing – variable-spread loan (VSL) in US$ currency. Repayments will be annuity with total maturity of 24.5 years including 9 years of grace. The Front-end Fee will be paid from PLN’s own resources. 40. PLN selected the VSL in US$ as it offered a lower spread as compared to the Fixed Spread Loan.

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Annex 1: Project Description and Costs

INDONESIA: ADDITIONAL LOAN FOR THE EXTENDED DEPLOYMENT OF AN ENTERPRISE RESOURCE PLANNING SYSTEM

Background 1. In the early 2000s, caused in part by the East Asian financial crisis, PLN went from being a moderately profitable company into one unable to meet its obligations. The increase in production cost due to the rise in oil prices made clear the need for improving the efficiency and effectiveness of PLN. In addition to a number of investment programs in electricity infrastructure and the rehabilitation of existing power assets, it was decided to carry out a financial and corporate restructuring of PLN, strengthening it institutionally with a view towards a possible unbundling of the company and attracting more private sector investments. 2. PLN updated its IT Strategy in August 2002 to be consistent with its ongoing strategic program as well as with current industry and technology trends. A key aspect of the renewed IT strategy involved the introduction of an organization-wide Enterprise Resource Planning (ERP) system to strengthen PLN’s management capabilities. 3. The Java-Bali Power Sector Restructuring and Strengthening Project (Loan 7758-ID / Loan 4712-IND) provided the financing for the initial stage (Phase 1 of 3), consisting of the pilot rollout of an ERP system to facilitate its financial, materials, and human resources management8 in PLN Headquarters and three business units (PLN has power generation, power transmission and power distribution units). PLN engaged consultants to prepare technical requirements and bid documents using World Bank standard documents, and the resulting scope of work was agreed with the World Bank. 4. Among the benefits expected were standardized and more transparent business processes, improved control environment, and auditable tracking of company transactions that together could enhance transparency, accountability and governance. This was expected to lead to improved integrity, accuracy and timeliness of corporate information that is available for PLN’s management to enhance their decision making.

8 In particular, for Financial Management: General Ledger, Accounts Payable, Accounts Receivable, Cash Management and Treasury, Fixed Assets, Planning and Budgeting, Cost Control, Capital Projects. For Material Management: Materials Requirements Planning, Purchasing, Quality Management, Inventory Management (including Fuel), Warehouse Management, and Logistic Invoice Verification. For Human Resource Management: Personnel Administration, Organizational Management, Payroll, Time Management, Travel Management, Benefit Administration, Compensation Management, Personnel Cost Planning, Recruiting, Training and Event Management, Personnel Development, Employee Self-Service, Incident Reporting.

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5. The results of the ERP pilot, which was completed by November 2006, were reviewed during the World Bank’s supervision missions and considered satisfactory. The business processes of the relevant PLN units had been rationalized, simplified, standardized, and made more efficient, by using a template with identified “PLN Best Practices”, an intermediate result of the initial stages of business process diagnostic and definition. The quantity, integrity, and timeliness of management information for decision making, planning and control, in particular in the three areas of emphasis, greatly increased. Consequently, the ERP has reduced the time and effort to complete monthly and yearly financial closing (Financial Management), improve inventory control (Materials Management), and improve organizational planning and the identification of individual training needs (Human Resource Management). 6. The adoption of the ERP system by PLN was primarily intended as an instrument to strengthen and improve its management capabilities. However, accompanying the overall increase in management capabilities, the ERP system has also begun producing some yearly savings, which can be expected to increase as the use of the system matures and the “PLN Best Practices” are applied in more business units. 7. In late 2007, the expansion of the ERP to the remainder of the PLN’s Java-Bali business units had commenced, which was financed through a re-allocation of project savings and unallocated project funds under the Java-Bali Power Sector Restructuring and Strengthening Project. This expansion was completed successfully by December 2008, it expects to generate additional estimated annual operational savings of US$2.5 million, although the actual savings can only be determined once a full fiscal year cycle has been completed and the information for the year has been confirmed through an audit. 8. With the most recent deployment (Phase II), the ERP system now covers 50% of the PLN employee base and 80% of the revenue base. The success in the introduction of the ERP system, which is considered to be a highly complex and difficult task worldwide, led PLN to decide on a further expansion to Sumatra and Sulawesi, with Kalimantan, Papua and the remaining islands to be considered for a possible later phase based on demand as well as financial feasibility. PLN has chosen to use the high credibility garnered by the reforms achieved by this project and the change momentum gained, as well as the experience acquired by management and staff involved in the process, to continue the implementation of the ERP to reach 84% of staff and 94% of revenues under the proposed Phase III.

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Table 1-1: Savings due to ERP Implementation

Area Process Area Phase I Total (US$)

Phase II Estimated

(US$)

Phase III Projected

(US$) Financial Management

Manage Financial Period-End Closing (Effort Reduction) 339,009 179,304 498,117

Manage Treasury and Cash Management (Reduction on Reconciliation Effort) 339,009 179,304 498,117

Subtotal 678,018 358,608 996,234 Material Management

Manage Requirement Planning (Increasing Inventory Turn Over (ITO)) - Change in Inventory Level and Aktiva TetapTidak Beroperasi (ATTB, or “non-operating asset”) ex Material (Scrap)

23,473 195,796 1,287,775

Manage Requirement Planning (Using Blanket Order) 635,642 1,167,463

Manage Inventory (Integration between Logistic and Accounting) 205,995 662,127 1,110,159

Manage Inventory (Discounts through Earlier Payment for Material HAR (Pemeliharaan, or “maintenance”) and Proyek Dalam Pelaksanaan (PDP, or “asset under construction”)) 623,477 513,704

Subtotal 229,468 2,117,041 4,079,101 Human Resources Management

Employee Administration (Reducing Effort on Processing through Central Administration)

58,856 29,239 189,410

Payroll (Reducing Effort on Payroll Adjustment) 70,627 35,087 224,426 Subtotal 129,483 64,327 413,836

TOTAL 1,036,969 2,539,976 5,489,172

Phase I (3 Units) : Actuals – Based on Year-End Financial Statements Phase II (3 Units): Original Estimate – Will be confirmed once the financial information following a full cycle is audited.

Phase III (12 Units): Projected Savings Activities under the additional financing 9. The additional financing requested would support a number of tasks under one single component of an extended deployment of the ERP system within PLN. The specific tasks under the single component are as follows: Activity 1: ERP Optimization (US$2.4 million) 10. The ERP implementation and “PLN Best Practices” standardized business process have been in operation for more than 2 years in the Phase I units, and for at least 6 months in the Phase II units. It is appropriate and good industry practice at this point to take stock, identify lessons learnt and prepare recommendations for improvement. Therefore, an assessment of the current operation of the ERP system would be carried out under this activity. One initial area for strengthening is management-level reporting regarding the efficiency of back-office operations. This activity would also finance the consulting services required for the improvements and modifications required to the system as well as training PLN staff for using the ERP system. Finally, a firm would be retained to help PLN monitor the implementation of the modifications.

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Activity 2: Capability Building (US$2.8 million) 11. PLN’s client support unit (“IT Shared Services Unit”) provides assistance to users as well as maintaining and supporting the ERP software and hardware. The progressively expanding deployment will require an increase in the number of staff, from the nominal 30 (excluding management) to 45, and all will require in-depth training (both in technical and personnel support). In addition, a number of necessary support tools, such as an improved call center, will need to be implemented to enable an adequate level of support to users of the ERP. At present, however, the unit is understaffed. PLN has formally begun recruiting staff to fill these vacancies and will continue to progressively hire and retrain the IT SSU team to ensure an adequate level of support. This activity will also finance the gathering of statistical information and semi-annual surveys to measure the level of accomplishment of the unit. Activity 3: Extension to Sumatra and Sulawesi (US$19.5 million) 12. Changes in management and training would accompany the introduction of the new PLN business templates and the supporting software and new hardware to the PLN business units in Sumatra and Sulawesi. The business process changeover is expected to have four (iterative) steps:

Analysis, which includes assessments of existing capabilities and gaps including for new or upgraded hardware, identification of training requirements for both implementation team and users, preparation of conversion strategies, determination of new workflow and reporting requirements, and preparation of the deployment plans.

Configuration, which includes modifications to the business process templates, workflows, and reports as appropriate, updates to the data migration tools, preparation of testing, and data cleanup.

Testing, including user training and acceptance of new products.

Deployment, which is the phased conversion from the testing environment to the production system, including the use of the cleaned-up and migrated data, and ongoing support.

Activity 4: Disaster Recovery Center and Computer Center Upgrade (US$1.25 million) 13. PLN now depends on automation to support its back-office business processes, and ensuring that its computer center continues to operate, even after a possible disaster such as volcanic activity or earthquakes (to both of which Indonesia is unfortunately vulnerable), is essential. To this effect, PLN has leased a Disaster Recovery Center (DRC) in Gandul, 30 km from Jakarta, in a secure facility owned by IKON Corporation, a wholly owned PLN subsidiary company. This facility will offer anti-seismic and fire protection, Tier 3 security protocols, which include biometric access verification and other characteristics which put it at the forefront of such centers in Indonesia. Data from the operational PLN systems will be streamed to the DRC every three hours, thus assuring that in case of a disaster PLN will be able to continue its operations after no more than a three-hour delay. There will be some loss of data which will require re-inputting and re-running of programs, but this is considered acceptable compared with the extremely high cost of having an up-to-the-second identical facility.

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14. The additional financing requested would cover the acquisition of equipment to upgrade the DRC to cover the additional load represented by the Sumatra and Sulawesi expansion, plus a small number of additional software licenses (as they are only needed in emergencies). 15. The PLN computer center is operating in an environment which precludes taking the usual physical security measures unless some minor changes are carried out (e.g., blocking of windows). PLN will be carrying out the necessary office rehabilitation activities. The center will also be strengthened through the acquisition of equipment to enable it to take the increased load foreseen. Activity 5: Customer Care and Billing Assessment (US$0.96 million) 16. The expectation is that in the future other business functions will be adapted to make use of the ERP concept. Of these, the most pressing (because of its large revenue implications) is billing, and the accompanying customer care processes. At present the link between the ERP and these functions is ad hoc and mostly manual. This component will evaluate PLN’s Customer Care and Meter-to-Cash business process and technologies and determine benchmarks through assessing and comparing current operations to utility industry leading practices, and make recommendations for improvement; these recommendations will be taken into account as PLN updates its business and corresponding IT strategy. Activity 6: Phase III Supervision Support (US$0.7 million) 17. This activity would finance consulting services to assist PLN in the supervision of the implementation of Phase III, including review of technical specifications and verification of intermediate deliverables. To minimize inherent risks when there are multiple suppliers potentially making changes to the operational ERP system, Quality Assurance and Quality Control processes and procedures based on Industry Best Practices will be instituted and managed by the Supervision Consultants on behalf of PLN. These rigorous processes will address this risk by ensuring that changes to the Operational System are fully tested and qualified before being applied. Table 1-2: PLN ERP Extension to Sumatra and Sulawesi – Project Activities and Estimated Costs in US$’000

Fiscal Year (WB) Total FY10 FY11 FY12 FY13 FY14

Calendar Year

2009/ 2010

2010/ 2011

2011/ 2012

2012/ 2013

2013/ 2014

1 1.1 ERP Optimization

1.1. 1 Assessment of current ERP and detailed recommendations

200 200

1.1. 2 Consulting Services (procured with 1.3) for improvement of the template and software

1,320 800 330 190

1.1. 3 Monitoring of remediation (procured with 1.6) 275 200 75

1.1. 4 On-the-job training, re-training, train the trainer programs

630 250 250 80 50

1 2 ERP Support and Capability Building

1.2. 1 On-the-job training of IT SSU staff (with consulting services 1.3)

Project Management 251 188 63

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Calendar Year

2009/ 2010

2010/ 2011

2011/ 2012

2012/ 2013

2013/ 2014

Process Change Consultants 724 443 181 100

Technology Consultants 21 21

Advanced Business Application Programming Technical Services

184 138 46

1.2. 2 IT Operations Policy and Standard Definitions

Process Change Consultants 125 94 31

1.2. 3 Service Level Agreement (SLA) Definition


1.2. 4 Service & IT Operations Management Implementation


1.2. 5 System & Network Management Implementation


Technology Consultants 63 47 16

1.2. 6 SAP Training and certification 165 110 55

1.2. 7 Server Upgrade 200 200

1.2. 8 Software Upgrade

Agent 50 50

Agentless 100 100

Service Level Management for Business Process Management

150 150

Service Level Management for System Availability Management

40 40

Diagnostic 300 300

1 3 Expansion to Sumatra and Sulawesi

1.3. 1 Sumatra

Hardware

Server and Storage 1,500 1,500

PCs 1,322 1,322

Printer

Personal Printers 102 102

Network Printers 187 187

Software

SAP Professional User 3,689 1,959 1,230 500

SAP Limited Professional User 375 250 125

Payroll & Employee Self Service Processing 121 81 40

Oracle 447 298 149

Services (single consulting contract for all 1.3)

Project Management 836 569 167 100

Application Consultants 780 524 156 100

Process Change Consultants 2,745 1,696 549 500

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Calendar Year

2009/ 2010

2010/ 2011

2011/ 2012

2012/ 2013

2013/ 2014

Organization Change Consultants 565 352 113 100

Technology Consultants 544 435 109

Training Specialists 214 171 43

1.3. 2 Sulawesi

Hardware

Server and Storage 500 500

PCs 432 432

Printer

Personal Printers 28 28

Network Printers 51 51

Software

SAP Professional User 1,153 853 300

SAP Limited Professional User 117 117

Payroll & Employee Self Service Processing 40 40

Oracle 140 140

Services (single consulting contract for all 1.3)

Project Management 544 335 100 109

Application Consultants 557 346 100 111

Process Change Consultants 1,672 938 400 334

Organization Change Consultants 345 200 76 69

Technology Consultants 335 200 68 67

Training Specialists 149 89 30 30

1 4 Disaster Recovery Center and Computer Center Upgrade

1.4. 1 Equipment upgrade Sumatra support 625 625

1.4. 2 Equipment upgrade Sulawesi support 625 625

1 5 Customer Care and Billing Assessment

1.5. 1 Preparation of TOR and contracting of services

1.5. 2 Consulting services 960 200 760

1 6 Phase III Supervision Support

1.6. 1 Preparation of TOR and contracting of services

1.6. 2 Consulting services 700 250 250 100 100

Base Costs

27,657 200 14,556 9,112 2,919 870

Contingency of 8.5 % applied to each activity 2,343 17 1,233 772 247 74

Total 30,000 217 15,789 9,884 3,166 944

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Annex 2: Financial and Economic Analysis


Project Financial Analysis 1. Investment costs for ERP implementations in the industry are rarely justified on a financial basis using either Net Present Value (NPV) or other similar calculations. The investment rationale is generally based on qualitative elements that strengthen the entities’ corporate governance, transparency and accountability. These elements include inter alia standardized and transparent business processes; improved control environment; and auditable tracking of transactions. There are some savings that could potentially be indirectly linked to these qualitative elements, but industry experience generally indicates that it would take 2 to 5 financial cycles as the ERP implementation matures before these indirect links can reasonably be quantified and analyzed. Such benefits may initially accrue from the use of technology and the standardization of business processes that will lead to more efficient use of assets, elimination of leakages, a strengthened control environment and other similar capabilities enabled by the ERP. 2. Although the primary benefits of the ERP system are mostly justified on a qualitative basis and improved efficiency over time, PLN has already realized some immediate cost savings as a result of the deployment of the system in the Java-Bali business units. Similar savings can be expected from the extended deployment of the ERP system to business units in Sumatra and Sulawesi. These savings, calculated on the basis of actual data from the Pilot (Phase I), for Financial and Human Resources Management are estimated based on the reduction in staff effort to produce financial reports, reconcile bank and tax statements and personnel functions including payroll. For Materials Management, the use of uniform Material Codes and Standards and integration of information is expected to reduce the level of inventories, which will decrease the financial cost of maintaining excessive inventories. The proposed Project is expected to have tangible financial benefits in the form of cost savings projected to be US$5.5 million for the extended deployment of the ERP to Sumatra and Sulawesi. More specifically, savings of approximately US$1.0 million from Financial Management; US$4.1 million from materials Management; and US$0.4 from Human Resource Management are projected. These savings are outlined in the table below.

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Table 2-1: Savings due to ERP Implementation

Area Process Area Phase I Total (US$)

Phase II Estimated

(US$)

Phase III Projected

(US$)

Finance Management

Manage Financial Period-End Closing (Effort Reduction) 339,009 179,304 498,117

Manage Treasury and Cash Management (Reduction on Reconciliation Effort) 339,009 179,304 498,117

Subtotal 678,018 358,608 996,234 Material Management

Manage Requirement Planning (Increasing Inventory Turn Over (ITO)) - Change in Inventory Level and Aktiva TetapTidak Beroperasi (ATTB, or “non-operating asset”) ex Material (Scrap)

23,473 195,796 1,287,775

Manage Requirement Planning (Using Blanket Order) 635,642 1,167,463

Manage Inventory (Integration between Logistic and Accounting) 205,995 662,127 1,110,159

Manage Inventory (Discounts through Earlier Payment for Material HAR (Pemeliharaan, or “maintenance”) and Proyek Dalam Pelaksanaan (PDP, or “asset under construction”)) 623,477 513,704

Subtotal 229,468 2,117,041 4,079,101 Human Resources Management

Employee Administration (Reducing Effort on Processing through Central Administration) 58,856 29,239 189,410

Payroll (Reducing Effort on Payroll Adjustment) 70,627 35,087 224,426

Subtotal 129,483 64,327 413,836

TOTAL 1,036,969 2,539,976 5,489,171

3. Phase I savings have been confirmed with the business owner (user). Phase II savings are estimates. Although the extension of the ERP to the rest of Java-Bali is complete, it has not run through a full fiscal period, and thus savings still remain estimates. Phase III savings are, of course, projections. 4. The estimates have been calculated mainly in two ways.

a. The decrease in the effort involved. b. Financial cost of reduced inventory (Inventory Turnover).

5. Decrease in the effort involved in Financial Management, Materials Management and Human Resources Management. For example, the effort reduction in producing the Financial Year-End Closing Reports for Phase III (based on actual results from Phase I) has been estimated at 7008 man days (8 days per month per site in all 73 sites). The reports are produced monthly. Similarly, the days spent per site (58 sites in Sumatra, 15 in Sulawesi) preparing, tendering and evaluating procurement contracts are expected to be reduced from 4 per year to one per year through the use of Blanket Orders, which will be possible because of more accurate inventorying and other capabilities enabled by the ERP. To manage inventory (the integration between

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logistics and accounting), each site had one accountant addressing this issue (73 sites in all); with the ERP, one accountant in each unit (12 units in all) will be sufficient. 6. Financial Cost of Reduced Inventory. Inventory Turnover based on the financial cost of the reduced inventory (10% according to user data) has been calculated.

PLN Financial Analysis 7. The World Bank has one ongoing project with PLN – The Java Bali Power Sector Restructuring and Strengthening Project - and three additional loans under preparation. The loans under preparation include: a) the proposed additional finance loan for the Extended Deployment of the ERP System under the ongoing project with PLN; b) a Power Transmission Development Project; and c) the Upper Cisokan Pumped Storage Project. During past years, PLN’s financial condition has been evaluated through the supervision of the Java Bali Power Sector Restructuring and Strengthening Project, which is documented in mission aide memoires. The following analysis includes a summary of these assessments along with 2009 preliminary unaudited financial information and the latest financial forecasts for 2010-15 provided to the World Bank by PLN. 8. Under the Java Bali Power Sector Restructuring and Strengthening Project, PLN has continued to produce its audited financial statements in a timely manner. For 2009, PLN has finalized its unaudited financial information and submitted it to the independent auditors for confirmation and preparation of the audited financial statements. The final audited financial statements are expected by June 30, 2010. Historical Financial Assessment 9. PLN’s capacity to deliver quality services depends on the company’s ability to maintain its financial condition. In order to remain sufficiently liquid, PLN needs to generate enough cash to meet its operating and capital requirements. Leading into 2004, the Government, which established PLN’s retail tariff by decree, implemented seven quarterly tariff increases. However, the Government has since maintained the same tariff levels up to now due to social and other considerations. Prior to 2005, PLN also benefited from the Government’s policy to subsidize petroleum products, but this also led to the over reliance by PLN on the utilization of diesel for power generation. In 2005, the Government removed the fuel subsidy for PLN, which instantly increased the company’s cost of supply. Coupled with a retail tariff level that has remained constant since 2004, PLN was placed in a precarious financial position. The Law on State-Owned Enterprises mandates that the Government should cover any financial shortfall that would arise as a direct result of one of its policies. This would include the Government having established a retail electricity tariff that is less than the full cost of providing electricity to consumers. As a result, PLN remained financially liquid since it now receives a substantial Public Service Obligation (PSO) subsidy that augments its revenue from the sale of electricity.

10. PLN’s financial results for 2007-09 are summarized in Table 2-2. Results for 2007 and 2008 are based on audited financial statements. The results for 2009 are based on the most recent unaudited financial information provided by PLN.

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Table 2-2. PLN Financial Performance 2007-09

2007 Audited

2008 Audited

2009 Preliminary Unaudited

I Income Statement (IDR billions)

1 Operating revenue excluding PSO 77,438 85,631 91,548

2 PSO subsidies 36,605 78,577 54,841

3 Revenue from operations 114,043 164,209 146,389

4 Operating expenses (111,506) (160,598) (134,947)

5 Operating income 2,537 3,611 11,442

6 Other income (expenses) (5,635) (15,802) (40)

7 Net income before tax (3,098) (12,191)9 11,402

8 Net income after tax (5,645) (12,304)10 9,405

II Balance Sheet (IDR billions)

1 Current assets 43,213 31,076 38,457

2 Non current assets 230,267 259,643 294,801

3 Current liabilities 40,276 40,654 37,541

4 Non-current liabilities 96,791 123,079 155,471

5 Equity 136,413 126,987 140,246

III Cash Flow Statement (IDR billions)

1 Cash flows from operating activities 16,890 7,780 (625)

2 Cash flows from investment activities (20,760) (21,952) (23,942)

3 Cash flows from financing activities 7,192 4,268 31,189

4 Net increase (decrease) in cash 3,322 (9,903) 6,621

5 Beg. of year cash balance 12,968 16,291 6,388

6 End of year cash balance 16,291 6,388 13,012

IV Financial indicators

1 Debt to total asset 50% 56% 58%

2 Current ratio 1.07 0.76 1.02

11. PLN’s financial condition is substantially reliant upon the adequacy and timeliness of the Government’s Public Service Obligation (PSO) subsidy payments, which covers the revenue shortfall between electricity tariffs and PLN’s cost of power supply. This PSO subsidy, which the Government is mandated to pay by law, was 37% of PLN’s total revenues in 2009, down from 48% of PLN’s total revenues in 2008, as a result of lower operating costs due to a decline in fuel prices. 12. Revenues and Expenditures. PLN generated total revenues of Rp. 146 trillion (US$14.9 billion) in 200911 or a decline of 12 percent relative to 2008 revenues of Rp. 164 trillion (US$15 billion)12 as a result of the decline in the PSO subsidy. PLN’s total operating expenses dropped

9 Due to significant unrealized foreign exchange losses that contributed to an accrual loss. 10 Taxes incurred even in the instance of consolidated losses due to PLN’s subsidiaries being liable for taxes on profits. 11 An exchange rate of Rp. 9,800 to US$1 is being used for all 2009 calculations.

12 An exchange rate of Rp. 10,950 to US$1 is being used for all 2008 calculations

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by 16 percent from Rp. 160.6 trillion (US$14.7 billion) in 2008 to Rp. 135 trillion (US$13.7 billion) in 2009 primarily due to lower oil prices. However, the heavy utilization of fuel oil in PLN’s Combined Cycle Gas Turbine (CCGT) power plants due to a lack of gas supply will continue to leave PLN vulnerable to fuel price increases. 13. Net Income: In 2009 PLN’s net operating income of Rp. 11.4 trillion (US$1.2 billion), was 3.2 times the prior year’s amount of Rp. 3.6 trillion (US$330 million). Operating expenses declined by Rp. 26 trillion as a result of lower fuel costs that dropped by Rp. 31 trillion (US$3.2 billion). PLN has also booked a foreign exchange gain of Rp. 4.7 trillion (US$484 million) in 2009 as a result of the strengthening of the Indonesian Rupiah (IDR), and interest expense of Rp. 5.4 trillion (US$550 million) leading to a profit before tax of Rp. 9.4 trillion (US$960 million) in 2009. As a result of these operating and non-operating factors, PLN’s performance on an accrual basis in 2009 was strong. 14. Table 2-2 indicates that PLN improved its liquidity position in 2009 when compared to 2008, and had ample cash balances of US$1.3 billion by the end of the year. The Government has also continued to make the PSO payments to PLN throughout the year albeit with some minor delays. In 2009, the Government has also contributed approximately Rp. 3.85 trillion (US$393 million) of additional paid in capital in order to finance power plant, transmission line, and distribution projects adding to its existing capital stocks. Government equity and retained earnings represent over 40 percent of PLN’s asset base, as indicated by the 2009 debt-to-asset ratio, providing PLN with substantial capacity to leverage additional financing to cover its future investments.13 PLN’s Financial Forecasts 15. PLN is executing a large capital expenditure program during 2010-12, largely due to the continued implementation of the first and second phases of its 10,000 MW crash programs. The estimates based on the information provided by PLN confirmed that they will be able to maintain sufficient liquidity and a minimum DSCR of 1.5x during the projection period 2010-15. The conclusions reached through the analysis are based on the assumption that PLN will be able to (i) receive outstanding 2009 PSO receivables on time, (ii) obtain proposed tariff increases during each of 2010-12, (iii) benefit from an 8 percent margin reflected in the PSO, and (iv) spread its remaining payables to third parties (mainly Pertamina) over three years. 16. The following are the key assumptions behind the forecasts:

i. PLN informed the World Bank that it has outstanding PSO receivables of Rp. 6.4 trillion from 2009, of which Rp. 4 trillion will most likely be received during 2010 while the remaining Rp. 2.4 trillion is expected in 2011. According to PLN, they plan to request this balance of Rp. 2.4 trillion from the Government in 2010 itself.

ii. PLN is estimating that they will receive a 15 percent tariff increase in each of years 2010-12. This tariff increase has already been factored in by the Parliament in estimating the PSO allocation for 2010.

13 Standard and Poor’s upgraded PLN’s corporate rating from BB- to BB with a stable outlook on March 15, 2010. Moody’s had similarly improved PLN’s rating from Ba3 to Ba2 on Sept. 16, 2009.

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iii. The PSO subsidy is based on the difference between PLN’s cost of production plus a margin; and its tariff revenues. For 2010, the Government and the Parliament has approved an 8 percent margin for PLN. Therefore, the PSO subsidy is estimated as cost plus an 8 percent margin minus the estimated tariff revenues. 14 The margin of 8 percent for 2010 is up from the 5 percent margin provided to PLN by the Government in 2009. PLN informed the World Bank that they have applied for and received approval from a Parliamentary Commission for a similar 8 percent margin in 2011 and is awaiting final approval from the full Parliament through the normal government budget process. PLN expects the continued strong support of Parliament for maintaining this 8 percent margin.

iv. PLN's preliminary unaudited financial information indicates that it has Rp. 14.7 trillion in payables to third parties as of end 2009 of which most of arrears is to Pertamina largely for fuel supplies. According to PLN Rp. 5 trillion of this amount is not due given that it is paid each month on a net 30 day payable without incurring financing charges, and that going forward the remaining Rp. 9.7 trillion will be spread out to make the payments coincide with PLN's revenue and PSO inflows (including the payment of PSO arrears owed to the company by the Government). Therefore, PLN informed the World Bank that payables to third parties of Rp. 9.7 trillion will be made over a three year period (Rp. 3.0 trillion in each of 2010 and 2011 and Rp. 3.7 trillion in 2012).

17. As noted previously, the above four factors would enable PLN to remain in compliance with the DSCR requirement of 1.5x during the forecast years of 2010-15. However, during the 2010-11 period there is little room for deviation from the forecasts. Therefore, PLN’s financial condition in 2010 would need to be monitored carefully, particularly during the first six months of 2010 during which PLN will need to pursue its financial strategy along the lines of the current financial forecasts. If there are deviations at mid-year, then PLN would need to take corrective actions during the second part of the year. 18. The company is in a transitionary period during which, as a result of the proposed tariff increases, it will gradually move away from its reliance on Government subsidies to become financially self-sustaining. As a result of this transition, the company is expected by 2012 to change its financial orientation from having liquidity as its main focus to having efficiency of service as the key performance driver. PLN is expected to be sufficiently liquid with a net operating income that is expected to grow by 73% between 2011 and 2012 while its year-end cash balance will likely average US$2.6 billion during the same period. This transition is dependent upon the Government honoring its own obligations to PLN and to the power sector, through its approval of proposed tariff increases. Beyond 2012, PLN will need to develop indicators that would track improvements in efficiency and effectiveness as the leading measure of its performance.

14 The actual PSO payment made to PLN is a reconciled amount between the forecast and the true cost of supply calculated ex-post. Therefore, any fluctuations in the cost of supply will be reflected through a change in the PSO subsidy to ensure that PLN can cover its costs and maintain the Government approved margin.

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A summary of PLN’s financial forecasts are provided in Table 2-3.

Table 2-3. PLN Financial Forecasts 2010-15

2010 2011 2012 2013 2014 2015

I Income Statement (IDR billions)

1 Operating revenue excluding PSO 104,288 143,686 180,881 217,917 246,895 276,898

2 PSO subsidies 55,888 35,178 15,518 9,594 10,069 10,746

3 Revenue from operations 160,176 178,864 196,399 227,511 256,964 287,644

4 Operating expenses (139,199) (150,896) (147,988) (155,013) (169,405) (188,534)

5 Operating income 20,977 27,968 48,411 72,499 87,558 99,110

6 Other income (expenses) (6,917) (24,046) (13,645) (13,014) (20,885) (18,518)

7 Net income before tax 14,060 3,922 34,766 59,485 66,673 80,591

8 Net income after tax 12,821 2,622 25,196 43,920 49,176 59,808

II Balance Sheet (IDR billions)

1 Current assets 52,532 57,670 54,265 55,406 57,432 59,732

2 Non current assets 348,247 373,751 444,435 501,030 552,776 608,253

3 Current liabilities 14,796 23,070 25,445 37,081 36,210 44,346

4 Non-current liabilities 235,103 284,109 321,217 321,397 324,163 314,997

5 Equity 150,880 124,242 152,038 197,958 249,834 308,642

III Cash Flow Statement (IDR billions)

1 Cash flows from operating activities 25,853 19,197 59,458 65,062 75,523 80,396

2 Cash flows from investing activities (29,696) (78,793) (85,670) (71,396) (72,255) (82,340)

3 Cash flows from financing activities 21,014 57,237 22,324 6,541 (2,579) 2,658

4 Net increase (decrease) in cash 17,171 (2,359) (3,888) 207 689 714

5 Beg. of year cash balance 13,012 30,183 27,823 23,935 24,142 24,831

6 End of year cash balance 30,183 27,823 23,935 24,142 24,831 25,545

IV Financial indicators

1 Debt to total assets 62% 71% 70% 64% 59% 54%

2 Current ratio 3.55 2.50 2.13 1.49 1.59 1.35

Debt Service Coverage Covenant 19. The Government had decided, for social and other considerations, that PLN could not charge the full cost of providing electricity to consumers through the retail tariff15; therefore the Government was required by Law to supplement tariff revenues through the Public Service Obligation (PSO) subsidy. Under the circumstances, the usual financial covenants applied by the World Bank to revenue producing entities – rate of return covenant or a self-financing ratio covenant – could not apply.16 In this case the most significant measure of PLN’s financial

15 The Government, which was implementing a quarterly tariff increase for several consecutive periods leading up to 2004, when it decided for social and other considerations not to further increase the retail price of electricity up until now. However, the Government is now seriously considering tariff increases over the next several years. 16 In a circumstance where the tariff does not fully cover costs and yield a profit, a covenant that measures the adequacy of the tariff by itself is not relevant. Moreover, PLN’s financial health is largely controlled by the adequacy and timing of the Government’s PSO payments.

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condition is its liquidity; therefore the Government, PLN, and the World Bank agreed to the use of a debt service coverage ratio covenant as a proxy for measuring liquidity. 20. The computation of the debt service coverage ratio also includes an accounting anomaly. Usually, Government subsidies are accounted for as contributions to capital, similar to bank loans and other debt obligations; however, in this situation, the PSO payments are considered to be an addition to revenues.17 In 2008, due to the treatment of PSO subsidies as revenues, a slight delay in the final PSO payment caused the DSCR to dip briefly to 1.38x. This situation was immediately rectified by the Government through the clearing in Feb. 2009 of the final PSO payment from 2008, along with all arrears stemming from prior years. This led to the DSCR increasing to 2.03x indicating that PLN had more than sufficient cash to meet its debt service obligations. 21. In 2009, PLN continued to remain liquid aided by US$2 billion in financing raised in the global bond markets.18 Because of favorable market conditions, PLN was able to raise more financing than they needed for investments in the short to intermediate term. It is common for a company such as PLN to enter the financial markets at a time when they think they can attract the best offers and then raise more funds than is immediately required when financial market conditions are favorable. Due to their strong liquidity position at the end of 2009 as a direct result of the two bond issues, PLN made the prudent financial decision to accelerate the reduction of arrears to third parties by making a payment of Rp. 8.8 trillion to third parties (mainly Pertamina). This was a strategic decision on PLN’s part to use unutilized commercial financing to pay for operating expenditures19. 22. Had this cash flow from financing activities been included in the covenant calculation, it would have had a beneficial impact on the DSCR. Due to PLN’s decision to take advantage of its strong liquidity position to pay down its arrears to third parties PLN’s debt service coverage ratio is likely to drop below the covenant requirement (the actual DSCR will only be known once the audited financial statements are released by end June 2010). However, in addition to reducing PLN’s future payment obligations, this decision saved the company about Rp. 1 trillion in additional financing charges they would have incurred during 2010-12.20 Furthermore, even after this transaction, PLN still had an ample cash balance of Rp. 13 trillion at the end of 2009 (the second highest year-end cash balance during the past decade). If PLN had not advanced the Rp. 8.8 trillion to Pertamina and other third party suppliers, and they had also received the timely payment of PSO arrears of Rp. 6.4 trillion from the Government, then the DSCR would have been 1.66x. This DSCR would have been fully compliant with the covenant agreed upon with the World Bank. 17 The PSO can only be requested in relation to the sale of kWh of electricity and the amount of the PSO is determined as an augmentation of revenues per kWh. 18 The two bonds of US$750 million and US$1.25 billion were issued in August and November 2009, respectively. The first bond was rated Ba3 by Moody’s and BB- by S&P while the second was rated Ba2 by Moody’s and BB- by S&P. 19 With large companies such as PLN, it is common to access financing when market conditions are most favorable. As a result, it is not uncommon to have a mismatch in timing between the availability of financing and its capital expenditure needs. It can be acceptable practice to utilize the resulting excess liquidity for other purposes that may improve the company’s financial position. 20 PLN finance charges in the event Rp. 8.8 trillion in Pertamina arrears is also being paid over a three year duration from 2010-12 at 7.8% per annum (2010 - Rp. 2.9 trillion, 2011 – Rp. 2.9 trillion, 2012 – Rp. 3.0 trillion) using the same payment assumptions as with the remaining payments in arrears.

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23. In PLN’s current situation, the key criterion for measuring its financial health is its cash liquidity. The evaluation of the preliminary unaudited financial information indicates that PLN has significantly improved its liquidity from 2008 to 2009. The DSCR covenant for the same period is expected to be below the agreement with the World Bank. However, it can be concluded that the DSCR is not an appropriate measure of PLN’s liquidity in 2009. Going forward, the Bank and PLN will retain this covenant on the basis that in the next two to three years if there are extenuating circumstances leading to PLN missing the covenant, the Bank would be able to seek corrective action. In addition, each year PLN’s financial condition will be assessed based on its ability to meet its operational and debt service obligations. Also, based on PLN’s financial forecast, liquidity remains the most important variable in determining PLN’s financial soundness over the next few years. This covenant remains the best available measure of liquidity.

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Table 2-4: PLN Financial Information

IDR billions2007

Audited2008

Audited2009

Unaudited2010

Estimate2011

Estimate2012

Estimate2013

Estimate2014

Estimate2015

Estimate

Key AssumptionsTariff (Rp/kWh) 665 665 665 716 876 1007 1108 1146 1175

Proposed increase in tariffs 15% 15% 15% 10% 3% 2%ICP (US$/ barrel) 80 85 85 85 85 85

Margin 8% 8% 5% 5% 5% 5%Operating Revenue Operating revenue excluding subsidy 79,377 87,672 93,234 103,542 143,686 180,881 217,917 246,895 276,898 PSO subsidy 15,038 64,694 49,049 55,967 35,178 15,518 9,594 10,069 10,746 Total operating revenue 94,415 152,366 142,283 159,509 178,864 196,399 227,511 256,964 287,644

Operating Expenses Cash paid to employees (5,994) (7,287) (7,941) (10,576) (12,885) (13,338) (14,081) (14,904) (15,766) Cash paid to suppliers (65,744) (128,652) (126,634) (116,849) (122,441) (115,970) (119,337) (130,196) (145,808) Total operating expenses (71,739) (135,939) (134,575) (127,425) (135,326) (129,307) (133,418) (145,100) (161,575) Payment to third parties (3,000) (3,000) (3,700) Proceeds from PSO arrears 4,000 2,400 Net operating income 22,676 16,427 7,708 33,083 42,938 63,392 94,094 111,864 126,069

Non operating revenue 667 511 242 - 43 45 47 50 52 Taxes (net of restitution) (1,171) (1,450) (477) (493) (1,301) (9,570) (15,565) (17,497) (20,783) Net non-operating income less tax (505) (939) (235) (493) (1,258) (9,525) (15,518) (17,448) (20,731) TOTAL CASH BEFORE DEBT SERVICE 22,172 15,487 7,473 32,591 41,680 53,867 78,576 94,416 105,338

Interest Paid 5,282 7,707 8,098 11,662 14,546 16,235 17,505 20,241 20,755 Principal Repayments 4,883 3,526 5,574 6,078 11,976 11,652 14,367 21,934 20,684 TOTAL DEBT SERVICE 10,164 11,233 13,672 17,740 26,522 27,887 31,872 42,174 41,439

Notes:1. 2007-08 based on audited financial statements2. 2009 based on preliminary unaudited financial statements; 2010 based on RKAP3. 2011-15 adapted from PLN financial projections assuming annual tariff escalations 4. Forecasts assume payment of Rp. 9.7 trillion of Rp. 14.7 trillion of payment to third parties over 3 years (2010-12) and the receipt of PSO arrears of Rp. 6.4 trillion over two years (2010-11)5. The financing charges on Pertamina arrears shall be included in the PSO payments for each of the three payment years 2010-12. These payments are not included in the analysis due to their being netted out as a result of identical inflows and outflows of these charges in the payment years.

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Economic Analysis 24. The direct benefits of the ERP system are to strengthen PLN’s management capability to operate the company more efficiently. Therefore, the impact of the project is mostly institutional and it cannot be easily isolated or quantified. Consequently, a traditional economic analysis to justify the project is not appropriate in this case. However, there is clear evidence from the deployment of the ERP system in PLN thus far, that there is a positive impact to the operations of the company. The deployment of the same systems to business units in Sumatra and Sulawesi will expand these benefits to PLN operations in these areas, whereby the company’s operational efficiency will be further improved. As a result, the power sector in Indonesia will operate more efficiently generating economic benefits to the country.

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Annex 3: Procurement Arrangements


1. The procurement for the proposed Project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, revised in October 2006, and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised in October 2006; and the provisions stipulated in the Legal Agreement. As was the case in the ERP deployment through the ongoing Java Bali Power Sector Restructuring and Strengthening Project, similar prior review arrangements will be adopted for the additional financing. The prior review thresholds are as follows:

Category Contract Value Threshold

(a) Goods US$0.5 million

(b) Consulting Service US$0.2 million

(c) Direct Contracting All, regardless of value

2. Procurement Arrangements for Additional Financing:

2.1. Procurement of Goods and Works: According to the project implementation schedule and nature of procurement, there will be five goods and/or information technology equipment contracts:

Table 3-1: Procurement Arrangement and Schedule for Goods and Works

Package Ref No.

Contract (Description) Estimated

Cost (US$’000)

Procurement Method

Review by Bank

(Prior/Post)

Expected Bid Opening Date

1

IT Equipment and system software: Server & storage Sumatra & Sulawesi; Server Upgrade and Software for Capacity Building (HP BTO Suite); DRC Equipment upgrade (Sumatra & Sulawesi Support)

4,090 ICB Prior Aug-2010

4 Desktops and peripherals Sumatra 1,611 ICB Prior Jan-2011

5 SAP: Phase III licenses; training & certification for IT SSU personnel;

5,661 DC* Prior Nov-2011 (Draft Contract)

7 Desktops and peripherals: Sulawesi 510 ICB Prior Jun-2012

11 Oracle Licenses 587 DC* Prior Nov-2010 (Draft Contract)

* The two Direct Contracting Award cases have been cleared in principle by the Bank.

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2.2. It was agreed that the World Bank Standard Bidding Document for Procurement of IT System – single stage will be used and ICB procedures will be followed for all contracts except for those that are proposed for direct contracting. 2.3. Selection of Consultants: There will be four contracts for consulting services:

Table 3-2: Procurement Arrangement and Schedule for Consultants

Ref. No.

Description of Assignment Estimated Cost(‘000

US$)

Selection Method

Review by Bank

(Prior/Post)

Expected Proposals

Submission Date

Comments

6

ERP Implementation Services: Implementation of ERP Optimization (Remediation); Phase III; Capacity Building TA; train-the-trainer programs

13,063 QBS Prior June-2010 Retroactive Financing

8 Assessment of current ERP implementation

475 QBS Prior June-2010 Retroactive Financing

9 Customer Care and Billing Assessment

960 QBS Prior Aug-2010 Retroactive Financing

10 Phase III Supervision Support 700 QCBS Prior Aug-2010 Retroactive Financing

2.4. All four contracts will be eligible for retroactive financing. 2.5. Shortlist comprising entirely of national consultants: Short list of consultants for services, estimated to cost less than US$400,000 equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Given that all four consulting services contracts included in the procurement plan are estimated to cost more than US$400,000, it is not envisaged than an all-national shortlist will be used for the selection of any of these consultants. 2.6. PLN may consider alternate procurement methods which include Consultants’ Qualification Selection, Fixed Budget Selection, Least Cost Selection, Single Source Selection, and Selection of Individual Consultants, and Shopping, if necessary, for new contracts, subject to approval by the Bank.

3. Procurement Plan: During project preparation, PLN prepared an Addendum to the PIP to incorporate the proposed project in the implementation documents. The PIP Addendum also included a Procurement Plan that was submitted to the World Bank for its approval. The World Bank provided its no objection to the PIP Addendum on December 20, 2009, and to the Procurement Plan as well on December 20, 2009 which was further updated during loan negotiations on April 12, 2010.

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4. Procurement Capacity Assessment

4.1. The World Bank team recently completed a procurement capacity assessment for PLN for the preparation of the Upper Cisokan Pumped Storage Project (Project ID: P112158) in March 2009. Since the project implementation agency for the proposed additional financing will also be PLN, the existing assessment was utilized again as the basis for evaluating the procurement capacity except for arrangements that were made specifically for the proposed additional loan. A summary of the procurement capacity assessment at the time it was conducted is as follows:

4.1.1. the Director for Finance is coordinating the project preparation;

4.1.2. one dedicated staff has been appointed for project preparation with assistance from the Business Process and System Information (PSI) and Accounting Sub-Directorates;

4.1.3. the Director for Strategic Construction will be responsible for project implementation and a Project Implementation Unit (PIU) will be set up;

4.1.4. Procurement committees will be established for procurement of hardware, software (SAP/Oracle) and consulting services respectively.

4.1.5. The procurement committees will be responsible for all the required procurement steps, from preparation of bidding documents up to contract award. The procurement committees will prepare bidding documents, arrange for the publication of bidding advertisements in newspapers and PLN’s website, hold pre-bid meetings, receive and evaluate bids, and prepare bid evaluation reports (BER). With the approval by the President Director, the notification of successful bidder will be issued to all the bidders who participate in the bidding process. The notification of award will be published. The procurement committees will follow a similar procedure for the selection of consultants, which will adhere to the World Bank’s Consulting Guidelines mentioned above including prior review requirements.

4.2. Major risks for the additional financing project include:

4.2.1. Inadequate staffing: at the time of the assessment, no staff was assigned for procurement of the project in the project implementation team.

4.2.2. Uncertain capacities of the procurement committee members: since the committees will handle all procurement activities, the capacity and qualifications of this group are important for successfully carrying out procurement activities. Since the committees are yet to be established, their capacity could not be evaluated at the time of the assessment.

4.2.3. For the above Package No.6 ERP Implementation Services, it is expected that firms which were previously involved in development and roll-out of the PLN ERP system may participate in the competitive selection. Since these firms have more information of the existing system, they would have a certain competitive advantage over others, which may also discourage other consultants to participate in the selection.

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4.2.4. Possible delay in selection of consultants: Under the ongoing Java-Bali Power Sector Restructuring and Strengthening Project, selection of supervising consultant took almost one year through a CQS process. According to the current draft procurement plan, QCBS and QBS methods will be used, which tend to be more complex than the CQS method. As a result, there may be delays in the procurement.

4.3. To mitigate these risks, the following measures were agreed:

4.3.1. A dedicated staff person for procurement should be appointed as soon as possible (the latest by the deadline for submission of proposals for the consultancy services in Table 3-2 or launching of the procurement of goods or services in Table 3-1, whichever is earlier) to coordinate preparation and implementation of procurement in the project preparation team. This staff person should also be a member of the PIU and will coordinate procurement activities in the PIU to ensure continuity of project implementation.

4.3.2. The procurement committees should be comprised of qualified members, preferably staff who have experience with procurement financed by international financing institutions. PLN should provide the credentials and qualifications for the committee members to the World Bank for its information.

4.3.3. To create a level playing field for Package No. 6 where the incumbent consultants have an information advantage, the TOR for this assignment has detailed descriptions of the current ERP implementation and configuration. Additionally, consultants will be provided an opportunity during the selection process to examine PLN’s ERP System Documentation on-site. This will be stated in the EOI advertisement.

4.3.4. As the ERP was implemented under the original project and there is information regarding rates and prices for software this information can serve as the basis for negotiating with the designated vendors under the proposed direct contracting.

4.3.5. PLN will seek training opportunities for the procurement committee members.

4.4. The initial procurement risk is rated as substantial but it is reduced to a rating of moderate based on the above mentioned mitigation measures.

5. Frequency of Procurement Supervision

5.1. In addition to prior review, procurement supervision will be conducted twice a year, as a part of the overall supervision of the Java-Bali Power Sector Restructuring and Strengthening Project.

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Annex 4: Financial Management and Disbursement


Executive Summary

1. PLN has requested an additional loan of US$30 million, with the objective to achieve the extended deployment of the Enterprise Resource Planning (ERP) system to cover the business units in Sumatra and Sulawesi. The additional financing has been endorsed by the Government of Indonesia and is included in the revised Bluebook for External Financing by the Ministry of Planning (Bappenas).

2. Currently PLN is one of the implementing entities for the Java-Bali Power Sector Restructuring and Strengthening Project (Loan 7758-ID / Loan 4712-IND). Total amount of this loan, including the front end fee, is US$141 million and amount disbursed as of April 22, 2010 is approximately 84% of loan allocated. Part of this loan amounting to US$6 million is implemented by PGN and US$2.2 million has been disbursed as of April 22, 2010.

3. The purpose of the project’s financial management assessment is to determine whether the financial management system of the loan implementing agency, PLN, has capacity to produce timely, relevant and reliable financial information on the project activities, and if the accounting systems for the project expenditures and underlying internal controls are adequate to meet fiduciary objectives and allow the World Bank to monitor compliance with agreed implementation procedures and appraise progress towards its objectives.

4. Financial management risks may arise from the possibility of not completely accurate financial statements, due to (i) a system of consolidation of PLN financial statements which is only semi-automated and (ii) delays in recording loan draw-downs in PLN’s books of accounts. Although a certain degree of control risk related to accounting has been identified as substantial, other areas have been considered as moderate, since policies are in place to use direct payment and reimbursement method of disbursement and PLN has submitted the company’s audited report on a timely basis to the World Bank with a clean opinion. In some ways, the additional financing is expected to address the issue of multiple systems used for financial statements. The additional financing would establish the ERP through a majority of PLN business units.

5. The Financial Management rating of the PLN Java-Bali Power Sector Restructuring and Strengthening Project has improved during FY09. PLN has submitted the Financial Monitoring Report (FMR) for the project up to Q3 2009 on time. During the life of the project, annual audited financial statements of the entity with clean opinions have also been submitted on time to the World Bank. The World Bank has received PLN’s audited financial statements for 2008 in April 2009 and the auditors have rendered an unqualified opinion. However, the following three issues remain to be addressed: (i) slow payment process resulting in delays in payments made to contractors; (ii) delays in recording loan draw-downs in books of accounts; and, (iii) inaccurate exchange rates used in FMRs submitted, which provides an inaccurate calculation of PLN’s

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contribution to the project. The project is currently rated Moderately Satisfactory on financial management.

6. PLN has already taken several steps to address these risks and has proposed further mitigation measures going forward. These include formal instructions from the PLN Headquarters to its regional offices instructing them to reduce the number of days for processing payments. Furthermore, PLN’s Accounting Department in its Headquarters in Jakarta has already been provided with direct access to the World Bank Client Connection system to ensure timely loan transactions records. Since the proposed loan will finance 100% of the project costs, the issue related to inaccurate estimation of PLN’s contribution in the project will not apply to the proposed additional financing. The expansion of the ERP system within PLN itself will contribute towards the improvement of the overall financial management of the company’s operations since this is a specific aspect addressed through the deployment of the ERP system.

7. PLN will submit its audited report no later than six months after the end of fiscal year. A paragraph will be included in the audited report stating the loan status and auditor’s opinion on the use of funds.

8. Taking into account the risk mitigation measures proposed, overall, the financial management risk for this additional financing project is assessed as “Moderate” before and after mitigation. This assessment has concluded that with the implementation of the action plan, the proposed financial management arrangements will satisfy the Bank’s minimum requirements under OP/BP10.02 and are adequate to provide, with reasonable assurance, accurate and timely information on the status of the loan required by the Bank.

Project Description

9. The additional financing components are as follows:

Table 4-1: Project Cost by Activities

Project Cost Amount

(US$'000) % of total

Activity 1.1 ERP Optimization 2,425 8.08%

Activity 1.2 ERP Support and Capability Building 2,833 9.44%

Activity 1.3 Expansion to Sumatra and Sulawesi

Sumatra 13,427 44.76%

Sulawesi 6,062 20.21%

Activity 1.4 Disaster Recovery Center and Computer Center Upgrade 1,250 4.17%

Activity 1.5 Customer Care and Billing Assessment 960 3.20%

Activity 1.6 Phase III Supervision Support 700 2.33%

Baseline Total 27,657 92.19%

Contingency 2,343 7.81%

Total 30,000 100.00%

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Summary of Risks and Proposed Mitigating Arrangements 10. The project’s overall risk assessment and summary of mitigating measures is as follows:

Table 4-2: Risk Assessment

Risks Assessment Summary Comments & Risk Mitigation Measures Conditionality

Risk Rating after

Mitigation Measures

A. Inherent Risks

1. Country Level Risks N/A

This operation will not rely on Government financial management systems. Although for budgeting and treasury purposes, the entity is linked to the Government system, but this will not directly affect the operations.

N

2. Entity specific risks

a. Implementing Entity Organization

Moderate PLN, a State-Owned Enterprise, has been the recipient of financial assistance from several donors.

N Moderate

b. Entity Governance & Audit arrangements

Moderate

Audited report of the company for FY 2008 has been completed with an Unqualified opinion. During implementation of Java Bali project, the entity has been consistently meeting the Bank’s loan covenant to submit the audited reports within 6 months.

N Moderate

Overall Entity Specific Risk

Moderate Moderate

B. Control Risks

1. Budgeting Moderate Budget prepared bottom up from decentralized units then moderated centrally.

N Moderate

2. Internal Controls Moderate

Policies are documented in manual. Changes in policies and procedures are formalized through the issue of circulars by the Finance Director. In conducting daily operations, staff complies with this manual.

N Moderate

3. Accounting Substantial

Due to different systems used in the various units of PLN, PLN uses Excel spreadsheet to prepare the consolidated financial statements. Delays in recording the loan draw-downs were still an issue. The project has started submitting FMRs on time since Q4 2008.

Additional access to Client Connection has been provided to Accounting to ensure timely bookkeeping. The use of ERP throughout the organization should progressively eliminate the multiple systems issue.

N Moderate

4. Flow of Funds Moderate

Direct payment and reimbursement method of disbursement will be used.

All supporting documentation will be retained by PLN and shall be made available to the auditors, the Bank and its representatives.

N Moderate

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Risks Assessment Summary Comments & Risk Mitigation Measures Conditionality

Risk Rating after

Mitigation Measures

5. Audit arrangements Moderate

For this loan, independent private audit firm of the company will include a paragraph explaining the objective of the loan, the usage of funds and an opinion on the use of funds. Audit report of the company, with a specific paragraph on the loan and auditor’s opinion on the use of funds will be submitted to the Bank within 6 months of the end of PLN FY.

N Moderate

Overall Project Specific Risk

Moderate Moderate

FM Rating of Java-Bali Power Sector Restructuring and Strengthening Project

11. The Financial Management rating of the PLN Java Bali Power project has improved during this year. The project has submitted the Financial Monitoring Report (FMR) up to Q3 2009 on time. During the life of the project, annual audited financial statements of the entity with clean opinions have also been submitted on time to the World Bank. The World Bank has received the entity’s 2008 audited financial statements in April 2009 and the auditors have rendered an unqualified opinion. However, the following three issues remain to be addressed: (i) slow payment process resulting in delays in payments made to contractors; (ii) delays in recording loan draw-downs in books of accounts; and, (iii) inaccurate exchange rates used in FMRs submitted which provides an inaccurate calculation of PLN’s contribution to the project. The project is currently rated Moderately Satisfactory on financial management.

12. PLN has submitted Q3 2009 FMR on time; however they still need to provide an accurate calculation of PLN’s contribution to the project. Currently, PLN uses a fixed exchange rate to translate PLN contribution. It was suggested that for past transactions, PLN may use an average monthly actual exchange rate, and for the transactions onwards actual exchange rate should be used.

13. Long internal processing in PLN has contributed significantly to the large lag between the date of submission of invoice by vendors and actual payment date. It was recommended that the internal processing of payments at PLN should be streamlined, and that internal service standards should be set so processing delays can be reduced to an acceptable level. However, this may not affect the additional financing because payment verifications for ERP will take place in the PLN Head Office. Based on past experience, long internal processing took place when payment verification occurred in the project office based in Semarang.

14. Financial reporting by the Accounting Department did not reflect current information on project expenditures, due to up to two months of delays in recording loan transactions. This delay can be avoided if the Accounting Department has direct access to the World Bank Client Connection system to verify receipts of payments made by World Bank Headquarters. Previously, access to Client Connection was given only to Corporate Finance for budgeting purposes and Treasury for payment reconciliation. PLN’s Accounting Department has now

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obtained access to Client Connection in order to record the loan draw-downs promptly and accurately, and be able to reconcile their records with Client Connection for preparation of FMRs.

15. PLN has also taken further actions regarding the financial management issues in response to the feedback provided by the World Bank during project supervision. In addition to gaining access to Client Connection by their Accounting Department, PLN has also submitted up to Q3 2009 FMRs on time. On the delay in processing of payments, PLN Head Office had sent formal instructions on June 12, 2009 to its regional offices directing them to reduce the length of time required for processing payments. The PLN Head Office has also conducted a meeting with Pikriting JBN (Semarang Project office) followed up by a formal letter from the Deputy Director of Treasury to General Managers of regional offices (including Pikitring JBN) instructing them to reduce the number of days for payment processing to not more than 25-30 days.

Accounting and Reporting

16. Six PLN Business Units (including PLN Headquarters in Jakarta) have implemented the ERP system. The additional financing has been requested to implement the system in other offices. Adoption of the ERP system in all decentralized offices would improve the quality of accounting and financial reporting. Currently, some of the other offices still use Magic, a DOS-based system. Due to the different systems implemented, PLN uses Excel spreadsheets to consolidate all financial statements. This task can be challenging, especially to account for inter office transactions and balances so that they can be reflected accurately in the consolidated financial statements.

17. Delays in recording loan transactions were considered an issue. However, PLN’s Accounting Department has already been given direct access to Client Connection in order to ensure prompt recording of loan draw-downs.

18. All project transactions will be included in the PLN financial statements. To have better project information, PLN will continue to separately report the project transactions to the World Bank on a quarterly basis through FMRs. Quarterly project financial reports should be received by the World Bank no later than 60 days after the end of each calendar quarter.

Internal Control

19. PLN has adequate internal controls in place for the preparation and approval of transactions and segregation of duties. FM procedures and policies are documented in a manual. All changes in accounting policies and procedures are formalized through the issue of circulars by the Finance Director.

20. PLN has an internal audit department reporting to the President Director. This department undertakes internal audits based on an annual work program. For the Java-Bali Power Sector Restructuring and Strengthening Project, internal audit department has not included the project in their work program yet.

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Audit Arrangements

21. The project financial statements under this loan shall be prepared by PLN. The auditor of PLN will provide information on the loan, its use and an opinion on the use of the funds. A copy of the audited financial statements of the company, along with the auditor’s opinion related to project expenditure, will be submitted to the World Bank not later than six months after the end of each calendar year.

Disbursement Arrangements

22. The disbursement methods would be (1) Direct payment and (2) Reimbursement method, subject to the minimum amount per withdrawal application at US$100,000, except the last withdrawal application. Any expenditures or invoices below the minimum amount need to be paid by PLN and consolidated for submission to the Bank for reimbursement when the amount reached the minimum of US$100,000 equivalent.

23. Applications for requesting direct payment and reimbursement shall be supported by records evidencing such expenditures and evidences of payments made in case of reimbursements.

24. All documentation evidencing expenditures shall be retained by PLN and shall be made available to the auditors for audit and to the World Bank and its representatives if requested.

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Annex 5: Governance and Accountability Framework


1. The GAF summarizes the actions that have been agreed to and will be undertaken by the Indonesia’s State Power Company (PT PLN) to reinforce project governance, enhancing transparency of project activities, increasing public accountability and reducing opportunities for corruption, collusion or fraud. All measures mentioned below have been adopted as a part of the existing Project Implementation Plan (PIP), which was the document developed by PLN to serve as the project implementation guide for the ongoing project.

Risk Analysis

2. Overall governance and accountability risk rating for this project is low. This is based on the fact that the PLN’s long history with World Bank projects (25 loans and 3 credits since 1970, with an aggregate amount of US$5.1 billion equivalent) and an experienced project implementation unit. PLN Procurement Teams have successfully undertaken a complex 2-stage ICB process for Phase I of the ERP implementation as well as subsequent ICB’s and also the negotiation of a Direct Contract for Phase II. PLN is therefore very familiar with the Bank’s procurement and financial management guidelines and requirements. The additional financing requested corresponds to a limited number of consultant and equipment contracts, all of which will be managed by PLN from Jakarta. There are no works contracts.

3. The project consists of technical assistance for strengthening management capabilities. As part of the activities, change management and retraining activities are planned, to promote participation and accountability within PLN. There are no effects outside PLN except as the increase in PLN back office efficiency reflects on a more satisfied customer base.

Financial Management Measures

4. Financial Management capacity is adequate, with quarterly reports being prepared and external audits carried out by leading private sector accounting firms. The only issue heretofore has been delays in the processing of payments within PLN as well as with the Government of Indonesia; PLN has formally issued a formal directive from the Head office to its regional offices instructing them to reduce the number of days for processing payments.

Procurement Measures

5. As mentioned above, the PLN has a long history of doing business with the Bank, and are very familiar with the Bank procurement guidelines and standard bidding documents. There are only twelve contracts, all of which are subject to prior review by the Bank. The major contracts are repeat or very similar to those engaged in through the ongoing Java-Bali Power Sector Restructuring and Strengthening Project as noted earlier. Furthermore, sealed financial bids will be held for safekeeping by notary publics or a similarly secure institution to be agreed upon with the Bank. PLN will also invite external observers from outside government to attend public bid

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openings as independent observers. The Bank has already provided procurement training to PLN officials. A refresher course will be provided.

Complaints Handling

6. In addition to the provisions allowed in Keppres 80 providing bidders a 5-day period after bid opening to register any complaints regarding the procurement process, the project will also ensure that a secure email account is established through which any interested individual can, anonymously or otherwise, seek additional information or register complaints of any nature regarding the project. The email address will be made available in all bidding documents pertaining to contracts under this project as well as during any events organized under the public engagement component of the project. There will be PLN oversight to ensure that any issues raised are resolved adequately. This mechanism will be subject to regular supervision by the Bank.

Sanctions and Remedies

7. The Implementing Agency will apply remedial actions and sanctions for cases of fraud and corruption that are reported and for which evidence is found. This will include sanctions against agency staff and/or contractors proven to be involved in such cases. In all procurement contracts, evidence of fraud, corruption, collusion or coercive practices will result in termination of the contract with additional penalties imposed in accordance with the Bank and Government of Indonesia regulations. Disbursement of funds to any project activity may be suspended in cases where there appear to be significant problems and where the Implementing Agency has not taken appropriate actions to rectify the problems.

Supervision

8. The Implementing Agency is expected to review all aspects of the GAF on an annual basis and to include a summary of their findings (including the rationale for any problems encountered) as part of their regular reports to the Bank. For its part, the Bank will review the GAF as part of its regular supervision missions. By mutual agreement, the GAF can be jointly reviewed and revised on an annual basis.

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Annex 6: Project Performance Indicator


INDICATOR

FY10**

FY11**

FY12**

FY13**

PLN issues reconciled financial statements for the Java-Bali, Sumatra, and Sulawesi systems within 45 days upon the completion of PLN’s fiscal year

x - Java-Bali system*

x - Sumatra system

x – Sulawesi system

* This indicator is accomplished under the Original Java Bali Power Sector Restructuring and Strengthening Project with respect to the Java-Bali system.

**FY is defined as PLN’s fiscal year of Jan. 1 – Dec. 31.

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Annex 7: World Bank Project Team Members


Task Team Members

Name Title Unit Migara Jayawardena Task Team Leader, Senior Infrastructure

Specialist EASIN

Ramesh Siva Lead ICT Specialist CITPO Dhruva Sahai Luis-José Mejía Noureddine Berrah Shawna Fei Li Elvi Yani Dewi Nasution Schaefer

Senior Financial Analyst ICT Specialist Consultant Energy Advisor Consultant Junior Professional Associate Energy Specialist

EASIN EASIN EASIN EASIN EASIS

Zhentu Liu Sr. Procurement Specialist EAPCO Imad Saleh Rajat Narula

Sr. Procurement Specialist Sr. Financial Management Specialist

EAPCO EAPCO

Christina I. Donna Financial Management Analyst EAPCO Yogana Prasta Operations Advisor EAPCO Nina Masako Eejima Senior Counsel LEGEN Melinda Good Thomas Walton

Senior Counsel Environmental Specialist Consultant

LEGES EASIN

Ninin K. Dewi Social Safeguards Specialist Consultant EASIS Jamil Sopher Financial Advisor Consultant EASIN Melissa Ortega Sanchez Teri Velilla

Program Assistant Program Assistant Consultant

EASIN EASIN

Sri Oktorini Hermawaty Misnan Suci Bintang Karuniasih

Program Assistant Team Assistant, STT Team Assistant, STT

EACIF EASIS EASIS

Peer Reviewers

Name Title Unit Salvador Rivera Senior Energy Specialist ECSS2 Rakesh Asthana Senior Manager ISGOS

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Annex 8: Documents in the Project File


1. Indonesia Country Partnership Strategy

2. Feasibility Study for ERP Extension beyond Java-Bali

3. Terms of Reference for Assessment of current ERP Implementation

4. Terms of Reference for Customer Care and Billing Assessment

5. Terms of Reference for Phase III Supervision Support

6. Terms of Reference for ERP Implementation Consulting Services: Remediation (ERP

Optimization); Phase III; Capacity Building TA; train-the-trainer programs