Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No.. 19978

IMPLEMENTATION COMPLETION REPORT

INDONESIA

CIRATA HYDROELECTRIC PHASE II PROJECT

(LOAN 3602-IND)

December 31, 1999

Energy and Mining Sector UnitEast Asia and Pacific Region

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

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CURRENCY EQUIVALENTS

Currency Unit - Indonesia Rupiah (Rp)US$ 1.0 - Rp. 8,000 (ICR)US$ 1.0 - Rp. 2,050 (Appraisal)

WEIGHTS AND MEASURES

kV - kilovolt (1,000 volts)kVA - kilovolt-ampere (1,000 volt-amperes)MVA - megavolt-ampere (1,000 kilovolt-amperes)kW - kilowatt (1,000 watts)km - kilometerMW - megawatt (1,000 kilowatts)kWh - kilowatt-hour (1,000 watt-hours)GWh - gigawatt-hour (1 million kilowatt-hours)MMt - million metric tons

FISCAL YEAR

April 1 - March 31 (Borrower)January 1 - December 31 (PLN)

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development BankBAPPENAS - National Development Planning AgencyDGEED Directorate General of Electric Power and Energy DevelopmentEIRR - Economic Internal Rate of ReturnGOI - Government of IndonesiaICB - International Competitive BiddingIDC - Interest During Construction1PP - Independent Power ProducerMME - Ministry of Mines and EnergyMOF - Ministry of FinanceNGO - Non-Governmental OrganizationPLN - State Electricity Corporation (P.T. PLN (Persero))PJB 1 - PLN Java-Bali Company IPJI32 - PLN Java-Bali Company 2PPE - PLN's Engineering Services CenterROR - Rate of ReturnSAR - Staff Appraisal ReportUSAID United States Agency for International DevelopmentWATSAL - Bank's Water Sector Adjustment Loan

Regional Vice President: Jean-Michel Severino, EAPCountry Director: Mark Baird, EACIQSector Manager: Yoshihiko Sumi, EASEGTask Manager: Kurt Schenk, EASEG

FOR OFFICIAL USE ONLY

Table of Contents

Preface ............... iEvaluation Summary .............. ii

Part I Project Implementation Assessment

A. Statement/Evaluation of Objectives .1B. Achievement of Project Objectives .4C. Major Factors Affecting the Project .10D. Project Sustainability .13E. Bank Perfortnance .15F. Borrower Performance .16G. Summary Assessment of Outcome .17H. Future Operations .17I. Key Lessons Leamned .8

Part II Statistical Tables

Table 1: Summary of Assessments .21Table 2: Related Bank Loans/Credits .22Table 3: Project Timetable .25Table 4: Loan Disbursements .25Table 5: Key Indicators for Project Implementation .26Table 6: Status of Implementation of Environmental Recommendations .27Table 7: Studies included in the Project .29Table 8A: Project Costs .30Table 8B: Project Financing .30Table 9: Economic Analysis of Hydroelectric Power Plant .31Table 10: Status of Legal Covenants .32Table 11: Compliance with Operational Manual Statements .34Table 12: Bank Resources: Staff Inputs .34Table 13: Bank Resources: Missions .35

Annexes

Annex A. Mission's Aide Memoire ........................................................ 37Annex B. Borrower's Evaluation Report ........................................................ 42Annex C. Ex-post Calculation of Economic Internal Rate of Retur ........................... 46Annex D. Equalizing Discount Rate - Comparison with Thermal Altemative~ ............ 48Annex E. PEA's Key Financial Indicators ........................................................ 51

Maps: IBRD No. 23612 and IBRD No. 24493

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

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IMPLEMENTATION COMPLETION REPORT

INDONESIA

CIRATA HYDROELECTRIC PHASE II PROJECT

(LOAN NO. 3602-IND)

PREFACE

This is the Implementation Completion Report (ICR) for the Cirata Hydroelectric Phase IIProject in Indonesia, for which Loan No. 3602-IND, in the amount of US$104 million equivalent wereapproved on May 11, 1993 and made effective on October 28, 1993. Cofinancing of the project wasprovided by Austrian Export Credits in the amount of US$149.2 million equivalent.

The loan closing date was June 30, 1999 as originally scheduled. An undisbursed balance ofUS$13.9 million was canceled.

The ICR was prepared by Kurt Schenk, Senior Power Engineer, and Yuling Zhou, OperationsOfficer, EASEG, and endorsed by Yoshihiko Sumi, Sector Manager, EASEG.

Preparation of this ICR was begun in April 1999 with a Bank's ICR mission to Indonesia. Itis based on materials in the project file, and on information and comments provided by the Borrowerand implementing agency, P.T. PLN (Persero). The Borrower contributed to the preparation of theICR by preparing its own evaluation of the project's execution and commenting on the draft ICR. Theaide-memoire of the ICR mission is attached as Annex A. The Borrower's own evaluation report isattached as Annex B.

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INDONESIA

CIRATA HYDROELECTRIC PHASE II PROJECT

(LOAN NO. 3602-IND)

EVALUATION SUMMARY

Introduction

1. PLN, the State Electricity Corporation, established by Government Regulation No. 18/1972under the Electricity Act (Law No. 15 of 1985), is responsible for generation, transmission anddistribution of electricity in Indonesia. In 1995 two generating subsidiaries, PJB1 and PJB2, wereestablished in Java-Bali as a first step in the unbundling of the Java-Bali system. These twosubsidiaries were charged with supplying power to the Java-Bali system from generating plantstransferred to them by the parent company and from new plant that they might subsequently construct.The responsibility for the operation of Cirata was assigned to PJB2.

2. As part of the Bank's assistance program, Loan 3602-IND, in the amount of US$104 millionequivalent for civil works and technical assistance, was approved by the Bank in May 11, 1993 topartly finance the Cirata Hydroelectric Phase II Project for PLN. The project was cofinanced byAustrian Export Credits (US$ 149.2 million equivalent) for mechanical and electrical equipment. Toassist with lack of counterpart funding due to the economic crisis in the Region, the Loan Agreementwas amended to allow for an increase to 100 % for the cost of local financing (i.e. disbursement ratioincreased to 100 % excluding VAT) from April 1, 1997 to October 31, 1999. US$ 26 million of theBank loan was cancelled on August 26, 1998. An undisbursed balance of $ 13.9 million wascancelled on October 31, 1999. No loan extensions were granted.

Project Objectives and Description

3. As stated in the Bank's SAR, the objectives of the Cirata Hydroelectric Phase II Project, wereto: (a) provide economical and environmentally sound expansion of PLN's peaking electricitygenerating capacity in Java and improve service reliability; (b) update hydro inventories and carry outpre-feasibility studies for promising hydroelectric schemes; (c) strengthen PLN's capability in theplanning, investigation and operation of hydroelectric schemes and in environmental management ofpower projects; (d) study options for enhancing the environmental conditions in the area of PLN'sexisting reservoirs on the Citarum River. The institutional and sectoral objectives included: (a)strengthening of PLN's financial position; (b) enhancing the dialogue on introducing a mechanism forformula-based adjustment of electricity price; and (c) continuing the process of institutionalrestructuring of PLN to provide for greater decentralization, delegation, and commercialization.

4. The project comprised the following components: (a) implementation of Phase II of the Ciratahydroelectric development; (b) consulting services for engineering and construction supervision of theCirata Hydroelectric Phase II Development; (c) studies to upgrade hydrological and environmentaldata bases, and improve data collection practices; (d) studies to update PLN's hydroelectricinventories, and determine pre-feasibility of selected schemes; (e) studies to identify options toenhance environmental conditions in the existing PLN reservoirs on the Citarum River, and training ofPLN staff in environmental management; (f) training in dam safety and instrumentation monitoring;

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(g) power sector institutional and regulatory studies for GOI; (h) studies aimed at assisting GOI todetermine a long-term strategy for financing power sector investments; and (i) pre-construction stageengineering services for the Besai hydroelectric project in South Sumatra.

5. The objectives were relevant and important, consistent with the Bank's Country AssistanceStrategy, and reflected the Government and Bank strategy for the sector, namely, in expandinggenerating capacity and in meeting the expected high growth in demand in the Java-Bali system topromote economic and industrial development, and in fostering decentralization andcommercialization of PLN operations.

Implementation Experience and Results

6. The Project achieved its major physical objective of finalizing the development of a majorhydroelectric site. The total capacity of Cirata, Phase I (also financed by the Bank) and II (financedunder the Project), is 1000MW; it is the largest hydroelectric plant in the Java-Bali interconnectedsystem. It is the most important plant for meeting peak demand and for maintaining frequency andvoltage regulation in the system. It is therefore essential for system security and in improving servicereliability. Cirata II has operated at high availability since the units were commissioned.

7. Key dates in relation to civil works and mechanical and electrical works were essentially met.Procurement delays were only minor caused mainly by problems with the customs office and theimportation of materials and equipment due in part by a change in regulations. Other potential delayscaused by delay in signing the civil works contract and of design changes, which were deemednecessary for project completion but were recovered during project implementation by a joint effort ofthe Consulting Engineer, PLN and the Bank. Project management was exemplary. Commissioningof Units 5&6 was almost on time but commissioning of Units 7&8 were somewhat delayed, inFebruary and April 1998 (SAR October 1997), due to the severe drought which affected the region in1997, which produced very low water levels at the Cirata reservoir during the commissioning of theseunits.

8. Since the major resettlement was accomplished during Phase I, resettlement aspects forCirata-I1 were only minor. For the switchyard extension and for siting the transmission towers, PLNacquired land from 17 landowner families amounting to 28,891 square meters. The land acquired didnot constitute the place of residence for the families nor was it a major source of livelihood. With themoney received from compensation (i.e. about RP 2000 per square meter or about US$ 1 at theprevailing exchange rate) the affected people purchased alternative plots of land in the same districtthat are more productive for cultivation than the land they left.

9. The achievement of the objective of continuing the process of institutional restructuring of.PLN was modest as sector reform has proceeded at a much lower pace than anticipated. Nevertheless,the recommendations of the comprehensive policy and strategy studies undertaken by the Projectprovided the underpinning for the Government's Power Sector Restructuring Policy, which waslaunched in August 1998. The Policy Paper is serving as a blueprint for the recovery of the sector andit is expected that the pace of reform will accelerate once a new President is appointed and a newcabinet is installed. It is also expected that the framework will be instrumental in providing a soundfoundation of PLN's and the sector's medium and longer-term viability

10. The objective to study options for enhancing the environment conditions in the Saguling andCirata reservoirs was successfully achieved. PLN is implementing many of the recommendations inthe studies but is hampered by the reality that it has no control over a group of necessary actions,

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namely, land use planning, land development, water pollution control and water resource managementin the reservoir catchments. Continuing pollution of the reservoirs, from domestic, industrial andagricultural sources, will clearly affect the sustainability of the fish cage aquaculture in the reservoirs.The environmental study outputs have also influenced lending programs within the Bank, mostnotably the emphasis given to the policy changes to promote river basin management and municipalwater pollution control that are being supported in the Water Resources Sector Adjustment Loan(Loan No. 4469-IND).

11. The objective of strengthening PLN's financial position was not achieved. In fact, PLN'sfinancial position has weakened dramatically during the tenure of the project. PLN was unable at anytime during this period to comply fully with the financial covenants established for it under theproject. Two main factors contributed to this: (i) failure of GOI to implement needed tariff increases,and (ii) lack of competitive pressure on PLN to drive costs down. The monetary and economic crisisexacerbated these problems due mainly by a sharp depreciation of the Rupiah, and slightly less so by areduction in sales growth rates in Java-Bali in particular. The net result is that PLN is currently unableto service its onlent debt to the Government or to meet its payment obligations to IPPs. The plannedtechnical assistance activity on 'Long-term Financial Strategy for the Power Sector", which wasdesigned to assist PLN on developing a financial strategy, was not initiated by the DGEED onaccount, first, of a shared perception that this should logically follow the regulatory and private powerstudies described above and, second, the onset of the crisis requiring a different focus and approach.

12. The objective of enhancing the dialogue of introducing a mechanism for formula-basedadjustment of electricity prices was achieved since an Electricity Tariff Automatic AdjustmentMechanism (ETAM) was introduced by Presidential Decree in October 1994. However, because ofdeficiencies in the implementation of ETAM, and the economic and financial crisis, ETAM has beensuspended with the understanding that consideration may need to be given of introducing an improvedmechanism once the base tariff has been restored to a commercial viable level.

13. The estimated total Project cost at appraisal was US$ 313.0 million (excluding IDC). Theactual Total Project Cost before interest during construction was US$ 193.2 million, a reduction of38% from the appraisal estimate. The savings in Total Project Costs, of about US$ 119.8 millionbefore IDC, can be largely attributed to the following factors (a) reduction in Civil Works prices dueto ICB of 41% (from US$ 75 million to an actual US$ 44 million; (b) very conservative engineeringestimates particularly on civil works; (c) international inflation was lower than projected in estimatesof the price contingencies, (d) reduction in engineering and supervision due to ICB by 35% (from US$22.8 million to US$ 14.8 million); (e) reduction in technical assistance by 50% (from US$ 14.1million to UD$ 7.0 million) due to a reduction in the scope of technical assistance; and (f) controlledconstruction schedule which allowed the plant to be commissioned with a minimum of delay and nocost overruns. US$ 26 million was cancelled in August 1998 after a project restructuring exercisecarried in early 1998. An undisbursed balance of US$ 13.9 was cancelled.

14. At appraisal, the Project was part of PLN's dynamic least cost expansion program for theJava-Bali system. The EIRR calculated for the Project in the SAR was based on the incrementaleconomic costs and benefits associated with the entire investment time slice (between 1992/93 and1997/8) of this least cost program. Based on PLN's projected tariffs the EIRR in the SAR was 10.6percent, and incorporating consumer surplus the EIRR was 19.1 percent. Using the samemethodology as the SAR, the ex-post EIRR has been recalculated as 6.6 percent including consumersurplus. With the prevailing average tariff the net revenue is negative and hence the EIRR cannot beobtained. The principal factors affecting the economic viability of the Project are: (i) PLN's currentaverage tariff (2-3 US¢/kWh), is well below the pre-crisis level of about 7-8 US¢/kWh, which would

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allow full cost recovery and reasonable return on investment; (ii) reduced electricity sales, and (iii)impact of IPPs with their high levelized tariffs of power purchase. Recalculating the EIRR with thetariff prevailing in the SAR gives 15.1 percent with consumer surplus and 5.9 percent without,reflecting the fact that the present tariff is too low to get adequate financial benefits from this project.

15. Nevertheless, even though the Java-Bali system's current configuration is clearly not optimal,this does not necessarily imply that the Cirata II plant per se is not economic. The SAR also presenteda deterministic analysis of the Project which found that the equalizing discount rate between Cirata IIand the next best thermal alternative was 31.8 percent. The avoided costs of operating the Ciratacomplex entirely as a peaking plant are, at a minimum, the fuel and operating costs of peaking gasturbine plants (595MW), net of the similar costs for the base load plant (95MW) which needs tooperate to compensate for the loss of previously operating Cirata I at base load. Given that: (i) fuel isthe major avoided cost component (and that this is primarily US-dollar denominated); (ii) theconstruction cost of Cirata II was 38% below the value estimated at appraisal; and (iii) excepting thesmall reduction in available capacity due to commissioning problems the plant is being dispatchedclose to expected capacity (irrespective of the impact of the crisis on demand); the plant can still beconsidered to have net positive economic benefits. The deterministic analysis based on avoided costshas been redone with the result that a comparison of Cirata with the best thermal alternative yielded anequalizing discount rate of 22.4 percent, indicating a preference for Cirata, which lends more credenceto the argument that Cirata has net positive economic benefits. The lower estimated value than that atappraisal is due primarily to the lower fuel prices for the thermal alternatives.

16. Due to the impact of the economic crisis in the region and PLN's dire financial condition, thesustainability of the Project is uncertain. On the physical side, and since the commissioning andcommercial operation of the last unit of Cirata II, some local slidings were detected at the river bankslope opposite the tailrace discharge tunnel. Although the result of the monitoring has produced nosign of slope instability that will cause a disturbance of the operation Cirata, PLN has agreed tocontinue the monitoring of the slope stability and take corrective actions if necessary and to report tothe Bank when an action was taken. In addition, a flow-induced noise, which exceeds the contractednoise level, has appeared when the units are operated at power levels over 115 MVW. Correctiveactions are being taken by PLN and the Contractor. In addition, since Cirata is Y2K non-compliant,PLN is developing a contingency plan including an emergency response for Cirata for the turn of themillennium. The sustainability of the Project on the physical side is not expected to be impaired.

17. Despite the economic crisis and PLN's dramatic financial downturn, Cirata is operating athigh availabilities. It is well maintained under a cost-saving predictive maintenance regime and recentoperational problems are being addressed forcefully. The expectation is high that Cirata will continueto be well maintained and efficiently operated since it is the most important hydroelectric plant in theJava-Bali system.

18. Although the current low average tariff and the resulting dire financial situation of PLN, aswell as IPP commitments, militate against a reasonable financial viability of the Project, the recentsigns of the country's economic recovery bode well for the future of the Project. Outstanding issuesinclude PLN financial recovery and the resolution of the IPP commitments whose impact to PLNcannot be gauged at this time. Within a policy that seeks to provide reliable and affordable electricityto consumers, an IPP rationalization Program under the oversight of a Government Ministerial Team(established by Keppress 139/98 of September 1998) is underway to seek a resolution to this issue.The guiding principles of the Rationalization program require that the process be transparent, with dueconsideration to the legal rights and obligations of all parties concerned. In light of the above there is

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still a high risk that project sustainability will be impaired if (i) PLN financial situation does notimprove, and/or (ii) the outcome of the IPP Rationalization Program fails short of expectations.

Summary of Findings, Future Operations, and Key Lessons Learned

19. The overall outcome of the Project is unsatisfactory and sustainability is uncertain basedmainly on two factors: (i) PLN dire financial situation, and (ii) low ex-post EIRR on a Java-Balisystem basis. However, comparing Cirata Project on an avoided costs basis with a thermal alternativegives reassurance that Cirata, considered on its own, is still the preferred alternative.

20. Implementation of the Project was exemplary and Cirata-II was commissioned with aminimum of delay. Cirata is one of PLN's most important plants in the Java-Bali system. It isdispatched high in the merit order and the four 125 MW units are presently operating at highavailability, displacing thermal generation and providing environmental benefits in reduced pollution,as well as system benefits in its system regulation capability. Peak demand is expected to increase andthe utilization of Cirata as a peaking plant is therefore guaranteed. PLN has demonstrated that it hasthe technical capability to operate and maintain Cirata efficiently. The Bank's and the Borrower'sperformance are deemed largely satisfactory.

21. Although progress in institutional reform and restructuring has been slow, the policy reformframework established by GOI in August 1998 provided the blueprint for sector recovery, particularlyin meeting the challenges posed by the current economic crisis and assisting to reverse PLN'sdramatic decline in financial viability. It will also provide for a sound foundation to its medium andlong-term development, which also increases the likelihood of the sustainability of the Project. Overthe short to medium term, PLN is faced with the challenge to cope with a difficult period of transition,within the context of a highly uncertain environment that is beyond the control of the company. Witha view to restoring the financial sustainability of the sector, international consultants (financed underthe Second Power Transmission and Distribution Project) will assist GOI/PLN in the implementationof the corporate and financial restructuring of PLN.

22. Although the Bank's and Borrower's performance has been rated as satisfactory, there arethree critically important areas in which Government's performance must be assessed to have fallenshort of expectations: (a) permitting excessive commitments to new generation capacity and allowingor requiring power purchase agreements to be negotiated on the basis of unsolicited proposals fromsponsors; (b) reluctance to increase sufficiently the base electricity tariff or to implement fully theautomatic tariff adjustment mechanism; and (c) slow progress in developing and implementing theframework for sector reform.

23. In view of the above, there is a high risk, that unless the financial situation of PLN improvessubstantially in the short to medium term, the sustainability of the Project may be impaired throughperhaps lack of maintenance budget at PLN/PJB2, deterioration of the transmission system toevacuate power from Cirata, and dissipation of the commitmnent to reform and restructure the sector.Continuos dialogue will be kept with GOI and PLN on these matters and particularly in maintainingthe commitment to sector reform and restructuring of PLN to restore its financial viability.

24. Several key lessons, which have operational and strategic implications for the design of futurepower sector projects, can be drawn from this project: (i) good project management by the consultingengineer and good coordination throughout Project preparation and implementation were key elementsin successful implementation of the physical part of the Project; (ii) rapid action by the Bank to cover100% of local financing (excluding taxes) was critical in avoiding project delays by nonpayment to

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contractors due to lack of counterpart funding; (iii) environmental studies of the sort included in thisProject do not received the high priority from operating staff - it is important to obtain commitmentfrom senior management responsible for operations when contemplating such studies in providingadequate budget and purchasing authority, and incorporation of responsibility for study execution inthe job description of operation managers; (iv) cost estimates should be more robust; the actual Projectcost (excluding IDC) was 38% less than the appraisal estimate; (v) close on-the-ground supervisionand willingness to be flexible in adopting the Project to the local conditions is an essential ingredientfor good project implementation.

INDONESIACIRATA HYDROELECTRIC PHASE II PROJECT

(LOAN 3602-IND)

PART I. PROJECT IMPLEMENTATION ASSESSMENT

A. STATEMENT/EVALUATION OF PROJECT OBJECTIVES

Background

1. PLN, the State Electricity Corporation, established by Government Regulation No. 18/1972under the Electricity Act (Law No. 15 of 1985)1, is responsible for generation, transmission anddistribution of electricity in Indonesia. In 1995 two power generation subsidiaries, PJB I and PJB22,were established in Java-Bali as a first step in the unbundling of the Java-Bali system. These twosubsidiaries were charged with supplying power to the Java-Bali system from generating plantstransferred to them by the parent company and from new plant that they might subsequently construct.The responsibility for the operation of Cirata was assigned to PJB2.

2. Feasibility studies were carried out in 1981 for the optimum development of the storages3 ofthe three major storage sites in the Citarum River: Jatiluhur, Saguling, and Cirata. Jatiluhur (150 MW,820 GWh), the furthest downstream, was developed in 1964, primarily for irrigation. Saguling (750MW, 2156 GWh), the furthest upstream, was best suited to maximize energy generation, and CirataPhase 1 (500 MW, 1424 GWh) and Phase II (500 MW), were to be adjusted according to the needs forirrigation and power. Saguling and Cirata Phase I, constructed with Bank assistance, were completedin 1985 and 1988, respectively. Cirata Phase I, consisting of four 125 MW units, has a 125 m highconcrete faced rockfill dam and spillway, four intakes and powerhouse cavern for both phases I and II,two headrace tunnels, two surge tanks and four tailrace outlets. With Phase II the total capacity of theCirata development became 1,000MW, the largest and most important hydropower power plant inIndonesia. There is however, no additional energy generated from Phase II as the entire 1000MWwould be available only for meeting peak demand during fours hours daily4 .

3. Since 1970 the Bank has been, assisting PLN in system planning, in implementing its largepower system expansion program in generation, transmission and distribution, and in supportinginstitutional development and the reform and restructuring of the sector. This project was the 25th in aseries of Bank Group-financed projects for PLN for which the World Bank's Board of Directorsapproved a US$104 million loan on 11 May 1993.

1 Under the Law, PLN has both the right and obligation to supply electricity to Indonesia.

2 At the time of the creation of PJBI and PJB2, their installed capacities were 5,655 MW and 5,068 MW, respectively.According to PPAs contract obligations, the installed capacity in the Java-Bali interconnected system at the end of1999 is expected to reach 18,307MW. This includes 2,935 MW of IPP capacity (150 MW at Cikarang; 165 MW atSalak; 110 MW at Wayang Windu; 60 MW at Dieng; 1230 MW at Paiton l; and 1220 MW at Paiton 11).

3 These storages provide a very high degree of regulation, enabling annual energy generation of 4,400 GWh, irrigationof about 200,000 ha of land, and supply of about 34 cumecs of water for municipal uses in and around Jakarta.

4 Without Cirata II, the operating regime for Cirata I was to provide 95 MW and corresponding 835 GWh for base loadoperation, and the remaining 405 MW and 589 GWh during four hours of daily peaking operation. With the additionof Cirata 11, the entire complex of I OOOMW would be operated as a peaking plant with a total energy production for anaverage hydrological year of 1424 GWh.

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4. At the time the Project was conceived in the early 90's, the average annual electricity salesgrowth rate in the Java-Bali interconnected system was over 10% and the expectation was high that itwould continue unabated. In addition, least-cost plans carried out by PLN established that anadditional 500 MW of peaking capacity would be needed by 1997. The Project was in line with theBank's country assistance strategy and formed part of an assistance program for the sector that wasdesigned to further strengthen planning and investment decision-making, to achieve greaterdecentralization and commercialization through the restructuring and unbundling of PLN, and toreduce the financing and managerial burden on the Government and PLN through introduction ofeffective competition and expanded private sector participation. The Project focussed on institutionalreform and restructuring, improving reliability and quality of supply, and in providing needed peakingcapacity and frequency regulation to the Java-Bali interconnected system, at the time of double-digitsales growth rates in the Java-Bali system.

5. The Project was expected to be implemented over 45 months with a total investment ofUS$398.8 million equivalent. PLN would bear the foreign exchange and interest risk, and theGovernment of Indonesia would guarantee the loan. The Project was cofinanced by Austrian ExportCredits in the amount of US$ 149.2 million equivalent, with the balance of US$ 145.6 equivalentprovided by GOI/PLN. The loan was declared effective on 28 October 1993 and the closing date wasJune 30, 1999. There were no loan extensions. US$ 26 million of the Bank loan was cancelled onAugust 26, 1998 after a thorough restructuring exercise carried out in early 1998. US$ 13.9 million,which remained undisbursed, was cancelled on October 31, 1999.

Project Objectives

6. As stated in the Bank's SAR, the objectives of the Cirata Hydroelectric Phase II Project, wereto: (a) provide economical and environmentally sound expansion of PLN's peaking electricitygenerating capacity in Java and improve service reliability; (b) update hydro inventories and carry outpre-feasibility studies for promising hydroelectric schemes; (c) strengthen PLN's capability in theplanning, investigation and operation of hydroelectric schemes and in environmental management ofpower projects; (d) study options for enhancing the environmental conditions in the area of PLN'sexisting reservoirs on the Citarum River. The institutional and sectoral objectives included: (a)strengthening of PLN's financial position; (b) enhancing the dialogue on introducing a mechanism forformula-based adjustment of electricity price; and (c) continuing the process of institutionalrestructuring of PLN to provide for greater decentralization, delegation, and commercialization.

7. The above objectives were to be achieved by: (a) implementation of Phase II of the Ciratahydroelectric development consisting of: (i) Construction of two 690 m x 8.4 m diameter headracetunnels, two surge shafts 80 m x 18.6 m diameter, four steel lined penstock tunnels 200 m x 5.2 mdiameter, and four tailrace tunnel 138 m x 6.4 m diameter, with associated outlet structures; (ii)Installation, within the existing cavern of the powerhouse, of four additional units each of 125 MW,including turbines, generators, governors, regulator and control equipment; and (iii) Installation oftransformer and switchgear for connection to the grid; (b) consulting services for engineering andconstruction supervision of the Cirata Hydroelectric Phase II Development; (c) studies to upgradehydrological and environmental data bases, and improve data collection practices; (d) studies toupdate PLN's hydroelectric inventories, and determine pre-feasibility of selected schemes; (e) studiesto identify options to enhance environmental conditions in the existing PLN reservoirs on the CitarumRiver, and training of PLN staff in environmental management; (f) training in dam safety andinstrumentation monitoring; (g) studies aimed at power sector institutional and regulatory reform; (h)studies aimed at assisting GOI to determine a long-term strategy for financing power sector

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investments; and (i) pre-construction stage engineering services for the Besai hydroelectric projects inSouth Sumatra.

Evaluation of Project Objectives

8. The objectives were clearly stated in the appraisal report. The physical objectives weredirected at ensuring additional economical and environmentally sound peaking capacity in the Java-Bali system. They were achievable since they were in line with PLN's implementation capability. Thebroader institutional objectives were also within PLN and GOI ability to achieve over time. Theobjectives proved to be relevant and consistent with the Government's sector strategy as well as theBank's Country Assistance Strategy. They remained unchanged for the duration of the Project. Theexpected benefits from achievement of the objectives could be measured against realistic andquantitative and qualitative targets by means of performance indicators, which were retrofitted inNovember 1996 during Project implementation. Implementation of the physical component of theProject was neither complex nor demanding for the implementing agency. Since commercialoperation, Cirata-I1 has operated at high availabilities5, plays a critical role during system start-up andduring blackouts. It is essential in maintaining frequency regulation and improving supply reliability,and provides the Java-Bali system with much needed peaking capacity.

9. However, the pace of institutional restructuring and sector restructuring has been far slowerthan envisaged. Prior to the economic crisis and PLN's consequent financial difficulties, commitmentto reform had clearly been waning. Following the events of May 1998, concerted efforts were madeby Government to rekindle and reinvigorate the reform effort, notably through the launch of the PowerSector Restructuring Policy on August 25, 1998 and the adoption of the Implementation Plan inDecember 17, 1998. However, further slippages have occurred during 1999, in part because of thecompeting demands on the time of key decision-makers generated by the crisis. Nevertheless, theGovernment and PLN remain committed to the restructuring of the sector, and are being assisted inthis effort by the ADB,6 the Bank,7 and other donors (e.g. USAID).

10. The objective of strengthening of PLN's financial position did not have a related projectcomponent. The idea was initiated during project preparation and was pursued as part of the Bank'ssectoral policy dialogue with GOI and PLN by the implementation of an automatic, quarterlyelectricity tariff adjustment mechanism (ETAM, para. 30). Yet ETAM was not sufficient to ensurePLN's financial viability. The improvement of PLN's financial viability is an action in theGovernment's Power Sector Restructuring Policy launched in August 1998 (paras. 20-21 and footnote7) as a result of the technical assistance carried out under this Project.

5 During 1998, Cirata units 1-8 generated 1734 GWh; compared to an expected 1424GWh during normal hydrologicalyears. Generation from units 5-8 was 850 GWh. Station losses amounted to only 0.4%. During 1998, availabilitiesfor units 5-8 were 88%, 85%, 96%, and 97%, respectively. During March 1999 Cirata 5-8 generated 54.5 GWh andavailability was 98. 1%.

6 On March 1999 the ADB approved a loan of US$ 380 million of which for a Power Sector Restructuring Programconcentrating in establishing a competitive market for electricity in Java-Bali that will increase economic efficiency ofthe power sector, and associated US$ 20 million TA loan to support implementation of sector reform.

7 Utilizing project cost savings from the Bank-financed 2nd Power Transmission and Distribution Project (Loan 3978-[ND), the Bank is providing technical assistance for consultancy services for PLN's Corporate and FinancialRestructuring with the main objective to assist the Government and PLN to implement the Power Sector RestructuringPolicy with respect to corporate and financial restructuring of PLN.

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11. The Loan Agreement and Project Agreement included financial perfonnance covenantsincluding: (i) achieving a rate of return on revalued assets (ROR) of no less than 8% for its Javaoperations, and (ii) and a debt service coverage ratio of 1.5 times. In 1994, both covenants werereplaced (under Loan 3761-IND Sumatera and Kalimantan Power Project) by a single 8% rate-of-return covenant of PLN's entire operation in Indonesia.

B. ACHIEVEMENT OF PROJECT OBJECTIVES

Overall Results

12. The Project satisfactorily achieved its primary objective to provide economical andenvironmental sound expansion of PLN's peaking capacity, and to improve service reliability.Although total generation capacity expansion proceeded at a rate significantly faster than envisaged,in part because of accelerated commitments to unsolicited proposals from Independent PowerProducers', most of the additional capacity was base loaded plants. Cirata is one of the most importanthydropower facilities in the Java-Bali system. The Cirata complex (Phases I and II) provides neededpeaking capacity to a mainly base-loaded system for which demand has grown at over 10% averagegrowth rates during the 90's. It also plays an essential role in frequency regulation of the Java-Balisystem, which improves system security as well as service reliability. Since being commissioned, ithas operated at high availability. During the heavy rains in 1998 it provided cheap electricity at a timewhen PLN was trying to save costs from thermal-based electricity.

Review of Physical Objective

13. The Project achieved its physical objective of developing a major hydroelectric site to supplymuch needed peaking capacity to the Java-Bali interconnected system. This was accomplished with aminimum of delay. Project management was exemplary and played a key role in overcoming manyobstacles including a large potential schedule overrun caused by a mismatch of interface datesbetween the civil works and electro-mechanical works, necessary design changes, as well as problemswith the customs office while importing the turbine and generator equipment. Commissioning of units7&8 was somewhat delayed by the severe drought affecting the region in 1997, which produced verylow water levels at the Cirata reservoir in late 1997 during the time the units were beingcommissioned9 .

14. The renovation of the seven small hydropower plants operated by PLN in Java to recovercapacity and maximize energy output was achieved successfully"). The units are operating at highavailability and maintained effectively by PLN.

8 PLN has concluded 27 agreements for power purchase from IPPs. On December 28, 1998 PLN announced itsintention to commence a 'Rationalization of IPP Contracts' with the objectives of: "(i) achieving a contractualstructure that is commensurate with PLN's financial resources and restructuring goals; (ii) improving overall systemefficiency; (iii) meeting international standards for objectivity, openness and transparency; and (iv) maintainingIndonesia's attractiveness to investors in the power sector."

9 Commercial operation of Units 5&6 was in August 15, 1997 (SAR: June 15, 1997) and for Units 7&8 in February 16,1998 and April 16, 1998 (SAR: both units in October 1997).

1 This small hydropower plants which comprise an unfinished component of Loan 3097-IND, were incorporated underthe present loan with an appropriate amendment of the Project description.

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Review of Technical Assistant

15. Updating hydro inventories and carrying out pre-feasibility studies for promisinghydroelectric schemes. The objective of this technical assistance was successfully achieved. Thescope of work was subdivided into two phases: (i) hydro-inventory study, and (ii) pre-feasibilitystudy. The Hydro-inventory Study, completed in July 1997, identified and classified an inventory of1,369 projects into various categories based on economic and technical viability. Of the total ofhydropower projects identified, nine of them were selected to prefeasibility". The Prefeasibility Studywas begun in August 1997 and the nine sites were examined in more detail. The selection of the nineprojects was based on PLN's favorable distribution of project sites and in line with the Government'spolicy to develop the eastern part of Indonesia.

16. The main benefits from this important technical assistance activity are: (i) collection of allrelevant hydro development data in a comprehensive database to be available on demand; (ii)strengthening of PLN's hydro-planning group so that they are able to carry out similar work in thefuture; and (iii) on the job training and transfer of knowledge through PLN's active involvement withthe Consultants.

17. Study options for enhancing the environmental conditions in the area of PLN's existingreservoirs on the Citarum River. Not only has this objective been successfully achieved byanalyzing various options, but PLN's environmental staff and the two generating companies involved,PJB1 (responsible for the Saguling reservoir) and PJB2 (responsible for the Cirata reservoir) havegone one step further and have implemented most of the study's recommendations that are within theircontrol. Reservoir shoreline management has been improved. All fish cage management actionsrecommended for reducing the frequency of fish kills have been taken, including trials with newspecies and reductions in fish biomass. However, it is important to recognize that the reductions in thenumber of cages have occurred primarily because of increases in fish food costs and diminisheddomestic demand for the cultured fish rather than as results of overt action by PLN or Department ofFisheries.

18. There is a group of actions over which PLN has little or no control; these concern land useplanning, land development, water pollution control and water resource management in the reservoircatchments. However, the project has had a significant and positive influence over these processes;by conducting the environmental studies and making the results known to other agencies in reportform, through its own workshops, and by its participation in other seminars on water resourcesmanagement in the Citarum Basin. The environ-mental study outputs have also influenced lendingprograms within the Bank, most notably the emphasis given to the policy changes to promote riverbasin management and municipal water pollution control that are being supported in the WaterResources Sector Adjustment Loan (Loan No. 4469-IND).

19. Strengthening PLN's capability in the planning, investigation and operation ofhydroelectric schemes and in environmental management of power projects. The objective of thistechnical assistance was largely achieved. PLN has improved its capability for planning and operatinghydropower schemes. In addition, both PJBI and PJB2 have implemented all the consultant'srecommendations for modification of the routine water quality monitoring programs and most of therecommendations for environmental data management and reporting. Some pieces of sampling

i The nine hydro-schemes examined were: Kambera-2 (65.4MW, Region XI); Tala (52.4 MW, Region IX); Masang-3(192 MW, Region II and IV); Tamboli (20.8 MW, Region VII); Wai Ratang (9.3 MW, Region XI); Sawangan (9.0MW, Region VII); Talawi (21.6 MW, Region IX); Sitoto (29.6 MW, Region XI); and Tina (22.8 MW, Region IX).

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equipment recommended for analysis of rainfall and runoff effects in the reservoirs have not beenpurchased because of budget limitations. To further improve and consolidate the environmentalmanagement capabilities of PLN, it was decided to continue with the work"2 through a new technicalassistance activity attached to the subsequent Sumatera and Kalimantan Project (Loan 3761-IND).

20. Continuing the process of institutional restructuring of PLN to provide for greaterdecentralization, delegation, and commercialization. The institutional development objective--tocontinue the process of institutional restructuring of PLN to provide for greater decentralization,delegation and commercialization--was pursued through the conduct of comprehensive policy andstrategy studies, which provided a good basis for advancing the dialogue with Government and PLN.The studies, which were conducted by international consultants and completed in December 1996,culminated in an integrated set of recommendations concerning sector structure, commercialarrangements, legal and regulatory framework, privatization policy and private power projects, fuelpolicy, institutional and organizational changes, and the introduction and use of competition and otherincentive mechanisms to promote sector efficiency, together with an outline action plan for theirimplementation.13

21. Following submission of the final report, Government and PLN established a number of inter-and intra-agency working groups to further review the consultants' recommendations and to developmore detailed plans for their implementation. Their progress was affected first by a seniormanagement change and shortly after by the onset of the monetary crisis. However, therecommendations of this work provided the underpinnings for the Government's Power SectorRestructuring Policy, which was launched in August 1998. This serves as the blueprint for thesector's recovery-- particularly in meeting the challenges posed by the current economic crisis andassisting to reverse PLN's dramatic decline in financial viability--and provides a sound foundation forits medium and longer term development. Although implementation has continued to be slower thanprojected, in part due to the continuing political uncertainty, ownership of the reform agenda at themiddle management levels of Government and PLN has strengthened considerably and there aregrounds for expecting that the pace will accelerate once a new President is appointed and a newcabinet is installed. The achievement of this objective, due to the slow pace of reform, has beenmodest.

22. Upgrading Hydrological Database. This technical assistance activity was designed toimprove the quality and availability of the data required for hydro inventory studies by upgrading thedatabases and improving data collection practices. The objectives of this activity were only partiallyachieved. Work began in August 1995 and the Consultant's Final Report was submitted on January1997. There was, unfortunately a long period of indecision on the part of PLN regarding the properlocation for the computer equipment. After the decision was finally made in mid-May 1999, to placethe database and computer equipment at PPMK (formerly PLN-LMK - Electrification ResearchCenter), there was not sufficient time before loan closing for procuring the equipment, installing it atthe center, debugging the software and providing training. Nevertheless, improvements have beenmade in the data collection practices of PLN, which will be used to advantage at the research facility

12 The primary objective of this new consultancy assignment was to further assist PLN in strengthening the capabilities ofits existing Environmental Division and to establish environmental capabilities at corporate and plant levels.

13 Two parallel and complementary studies --Power Sector Restructuring (TAI) and Development of Private Power(TA2)--were conducted by a single consultant consortium, with one study being financed under the Cirata II Projectand the other under the Bank-financed Technical Assistance Project for the Public and Private Provision ofInfrastructure.

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PLN-LMK. In this regard, the research facility has set up improved data collection procedures andmaintenance and has provided material needs for hydrological stations throughout PLN regions.

23. Training in Dam Safety and Instrumentation Monitoring. This technical assistance whichbegan in June 1995 increased awareness and skills of PLN hydropower operators and maintenancestaff on dam safety inspections of large dams and in properly compiling, reporting and interpreting theinstrumentation results. Training for dam safety inspection was particularly useful for the Sagulingand Cirata dams, which covered the designing of up-to-date and effective dam inspection programsfor these dams. A total of twenty PLN engineers took part in the training. The objectives of thisinstitutional development activity have been achieved.

Review of Financial Objectives

24. Compliance with Financial Covenants. The following financial performance covenants wereintroduced for PLN under the Project Agreement: (a) a minimum of 8% rate of return (ROR) onrevalued net fixed assets on PLN's Java operations; and breakeven on PLN's outside Java operations;and (b) a minimum debt service coverage ratio of 1.5 times. The breakeven covenant on PLN'soutside Java operations was successively rolled-over. In 1994, the covenant (a) was replaced underLoan 3761-IND (Sumatera and Kalimantan Power Project) by a single 8% ROR covenant for PLN'sentire operation in Indonesia. Since 1994, PLN has been in non-compliance with the ROR covenant,even though it had complied with the debt service coverage covenant until the financial crisis in 1997.The shortfall in ROR was partly attributable to the inadequacy of the basic tariff adopted in 1994(which was based on optimistic sales projections in the base year budget) and the automaticadjustment mechanism could not be implemented as effectively and as timely a manner as originallyenvisaged. It is apparent that the ROR target for financial performance is inappropriate for acompany/sector with very large and lumpy investment program.

25. Strengthening PLN financial position. This objective has basically not been achieved. Infact, PLN's financial position has weakened dramatically over the period during which the Project wasimplemented, and the Company was unable at any time during this period to comply fully with thefinancial covenants established for it under the Project. Prior to the onset of the crisis, PLN wasmoderately profitable but nonetheless was unable to achieve the target ROR level of 8% (actuals circa4-6%). This was due, on the one hand, to the failure by Government to implement needed tariffincreases and, on the other, to the lack of competitive pressures on PLN to drive down costs.

26. The monetary and economic crisis greatly exacerbated this situation by superimposing twomajor new problems. First, the sharp depreciation of the Rupiah greatly increased the cost to PLN ofits US$-denominated long-term payment obligations. These include debt service payments on foreignloans on-lent by Government, take-or-pay fuel supply agreements for gas and geothermal steam(backed by standby letters of credits issued by state banks), and take-or-pay power purchaseagreements with independent power producers (backed by "support" letters issued by Government).Second, PLN's previously rapid sales growth, particularly on Java, slowed considerably, leaving itwith a mounting excess of baseload generation capacity as new plants came on stream. The net resultis that PLN is currently unable to service fully its debt or to meet its payment obligations to IPPs.Technical assistance originally envisaged for the development of a 'Long-term Financial Strategy forthe Power Sector", was not initiated by the DGEED on account, first, of a shared perception that thisshould logically follow the regulatory and private power studies described above and, second, theonset of the crisis requiring a different focus and approach.

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27. In 1998, average revenue of Rp. 21 1/kWh was a sharp reduction (72%) from the 1996 pre-crisis level in US dollar terms, despite a 25% increase in Rupiah terms. Consequently, with salesincrease of only 1%, PLN reported operating loss of Rp. 2.8 trillion and its rate of return on revaluednet fixed assets was negative 7%. Its working capital decreased sharply to negative Rp. 11 trillion anddebt service coverage ratio was only 0.2 times. For the same year, GOI cash subsidy of Rp. 1.9trillion helped PLN to cover its operating cash deficit. In addition in 1998 GOI also supported Rp. 2.8trillion for equity investment in PLN's capital expenditures. However, for the Rp. 6.5 trillion fordeferred debt service under 100 subsidiary loan agreements (for loans onlent from internationalfinancial institutions), GOI still has not given its approval of PLN's proposal of May 1999 on debtrestructuring. The company also reported deferral of payment (about Rp. 1.1 trillion) for obligationsunder IPP contracts.

28. Based on PLN's latest financial projection for 1999, its average sales are assumed to increaseby some 2% and average revenue increased by about 14% to Rp. 241/kWh (or about US 3 cents/kWh,at an appreciated exchange rate of Rp. 8,000), resulting in a reduction of operating loss to about Rp.20 billion (before fixed IPP obligations). However, after taking into account PLN's increasedobligations (Rp. 4.4 trillion) under IPP contracts, GOI cash subsidy would have to increase to aboutRp. 3.7 trillion. In any event, government support would include deferral of debt service due to GOI(Rp. 7.3 trillion) in 1999.

29. Over the short to medium term, PLN is faced with the challenge to cope with a difficult periodof transition, within the context of a highly uncertain enviromnent that is beyond the control of thecompany. With a view to restoring the financial sustainability of the sector, GOI publicly launched apower sector restructuring policy in August 1998. International consultants (financed under theSecond Power Transmission and Distribution Project) are expected to be mobilized soon to assistGOI/PLN in the implementation of the corporate and financial restructuring of PLN. Within thecontext of GOI's restructuring policy, various remedial measures have recently been initiated byGOI/PLN to put the company on the road to financial recovery, including: (a) debt restructuring; (b)rationalization of IPP contracts; (c) expenditure reduction and efficiency enhancement; and (d) tariffrationalization.

30. Enhancing the dialogue of introducing a mechanism for formula-based adjustment ofelectricity prices. This objective was achieved inasmuch as an Electricity Tariff AutomaticAdjustment Mechanism was introduced by Presidential Decree in October 1994 (Keppres 68/94).PLN's base tariff was increased by Presidential Decree at the same time. The formula-basedadjustment mechanism, which was designed to maintain the real value of PLN's charges betweenchanges to the base tariff, empowered the Minister of Mines and Energy to make quarterlyadjustments on the basis of the weighted average of changes in the prices of fuels, prices of powerpurchases, local inflation, and the US$-Rupiah exchange rate. While the implementation of theadopted mechanism did result in increases in PLN's tariffs, these were not sufficient to enable PLN tomeet its ROR target during the period prior to the crisis for three main reasons. First, the October1994 increase in the base tariff was too low as a result of 1995 sales having been significantly over-estimated. Second, the mechanism was designed to enable the pass-through only of those changes incosts that outside PLN management's control. Third, there were some deficiencies in itsimplementation, including significant lags in applying increases and adjustments made to base figures.The use of the mechanism was suspended following the onset of the crisis when it became apparentthat the rapid depreciation of the Rupiah would trigger very large across-the-board tariff increases.Consideration may need to be given to adopting an improved mechanism once the base tariff has beenrestored to a commercially viable level.

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Loan Disbursement and Cancellation

31. The original loan amount was US$104 million. A partial loan proceeds cancellation in theamount of US$26 million was effective August 26, 1998 as a part of the portfolio restructuringprogram in response to the economic crisis in Indonesia. At the termination of the 4-month graceperiod for disbursement on October 31, 1999, the loan disbursed US$64.1 million. An undisbursedbalance of US$13.9 million has been cancelled.

Economic Internal Rate of Return (EIRR)

32. At appraisal, the Project was part of PLN's dynamic least cost expansion program for theJava-Bali system. The EIRR calculated for the Project in the SAR was based on the incrementaleconomic costs and benefits associated with the entire investment time slice (between 1992/93 and1997/8) of this least cost program. Based on PLN's projected tariffs the EIRR in the SAR was 10.6percent, and incorporating consumer surplus the EIRR was 19.1 percent'4 . Using the samemethodology as the SAR"5, the EIRR has been recalculated as 6.6 percent including consumer surplus,and negative without"6 . The principal factors affecting the economic viability of the Project are: (i)PLN's current average tariff (2-3 USO/kWh), a value insufficient to cover PLN's debt commitments,is well below the pre-crisis level of about 7-8 US¢/kWh which would allow full cost recovery andreasonable return on investment; (ii) reduced electricity sales, and (iii) impact of IPPs with their highlevelized tariffs of power purchase. Recalculating the EIRR with the tariff prevailing in the SAR.gives 15.1 percent with consumer surplus and 5.9 percent without, reflecting the fact that the presenttariff is too low to get meaningful economic benefits from this project.

33. Nevertheless, even though the Java-Bali system's current configuration is clearly not optimal,this does not necessarily imply that the Cirata II plant per se is not economic. The SAR also presenteda deterministic analysis of the Project which found that the equalizing discount rate between Cirata IIand the next best thermal alternative was 31.8 percent. The avoided costs of operating the Ciratacomplex entirely as a peaking plant are, at a minimum, the fuel and operating costs of peaking gasturbine plants (595MW), net of the similar costs for the base load plant (95MW) which needs tooperate to compensate for the loss of previously operating Cirata I at base load (see Footnote 4).Given that: (i) fuel is the major avoided cost component (and that this is primarily US-dollardenominated); (ii) the construction cost of Cirata II was 38% below the value estimated at appraisal(para. 44); and (iii) excepting the small reduction in available capacity due to commissioningproblems (para. 71), the plant is being dispatched close to expected capacity (irrespective of theimpact of the crisis on demand); the plant can still be considered to have net positive economicbenefits. The deterministic analysis based on avoided costs has been redone with the result that acomparison of Cirata with the best thermal alternative yielded an equalizing discount rate of 22.4percent, indicating a preference for Cirata, which lends more credence to the argument that Cirata hasnet positive economic benefits. The lower estimated value than that at appraisal is due primarily to thelower fuel prices for the thermal alternatives.

4 The incorporation on consumer surplus in the evaluation of the EIRR was criticized in the SAR.

As in the SAR, the year 1992 is considered the base year; thus all expenditures are valued relative to the base yearusing deflator indices.

16 The reevaluated EIRR was obtained assuming 1992 prices as the base year; thus all expenditures are valued relative tothis base year using a deflator index.

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34. On February 1997 the scope of the Project was amended to include an unfinished componentof another loan (Loan 3097-IND: Power Sector Efficiency Project), to renovate seven smallhydropower plants operated by PLN in Java to recover capacity and maximize energy output. Thiswas a very successful component of the Project with an estimated 24 % EIRR.

C. MAJOR FACTORS AFFECTING THE PROJECT

Implementation Organization.

35. PLN was the executing agency for the Project. As is common to PLN's Projects of thismagnitude, a special unit with a Project Manager was formed within PLN and a Site Project Officewas setup under the aegis of Proyek Induk'7 of West Java and Jakarta Raya. On June 9, 1994, PLNawarded the contract for Engineering Services to a Taiwanese-foreign joint venture (although it hadalready commenced work on November 1993) to include the review the detailed design of PLN'sEngineering Service Center (PPE) and for construction supervision. Competent and qualifiedengineers forming various groups, namely for: Engineering Design, Construction Management;Construction/Installation; Testing and Commissioning, and Administration and Support, supported thesite office. PPE also supervised the work of the Engineering Consultants. The contract for civilworks was awarded to a Japanese-foreign construction joint venture while the balance of plant wasundertaken by an Austrian - foreign joint venture. As the dam had been built during the constructionof Cirata I, there was no need to set up a Special Board of Consultants to review and document atvarious stages of the project's implementation. PLN's environmental unit and the site office handledresettlement aspects, which were only minor for Cirata II (paras. 45-47).

Implementation Schedule and Record.

36. The implementation schedule established in the SAR provided for the commencement of civilworks on January 1994 and commissioning of Units 5&6 forty-two months after, that is, on June 15,1997. Units 7&8 were to follow four months later, on October 15, 1997. Even though the Cirata damwas already built under the Cirata I Project, the schedule was demanding and necessitated anexperienced intemational Engineer and Contractor. Units 5&6 were placed in commercial operationon August 15, 1997; a two months delay. This was followed by Unit 8 on February 16, 1998 and Unit7 on April 16, 1998. The delay, particularly of Unit 8, was due to low water level in the Ciratareservoir due to the 1997 severe drought in the region.

37. In spite of delays caused in part by a change in regulations having to do with the clearing ofimported materials as specified in a Master List and the authority under which the list needed to becertified before the custom authorities would release the imported items under the list, thecoordination of work by the various contractors and the Engineer must be rated as outstanding. TheEngineer optimized the schedule frequently to minimize any mismatch between the schedules of thevarious contractors. This kept the schedule of the Project on track.

38. The preparatory work carried out by PLN's site office to establish a fully functional BaseCamp at the site was very important. In addition, prior to transport of large or heavy pieces ofequipment, the inland transportation and route selection was investigated carefully. Finally, aftercompletion of the installation of all major items, training of PLN staff, as required for operation andmaintenance of all the equipment under the various contracts, was begun on site.

17 Proyek Induk Pembangkit Hidro Jabar.

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39. Civil Works. After ICB, the civil works18 contract was awarded on April 15, 1994 after adelay of about three and one half months caused during the bid evaluation stage and signing ofcontract. Although this was not a large delay, it affected right at the outset the agreed revised masterimplementation schedule for the other contracts so that the Project was now expected to be fullycompleted by February 16, 1998. In addition, mobilization of the civil works contractor was about 3months behind schedule. It was decided to coordinate the various efforts and tasks more intensely sothat this delay could be effectively made up during project implementation. In addition, a consciousdecision was made at the time by PLN and agreed by the Bank that Project implementation would beexpedited selectively for critical work items only and no effort need to be made to recover the losttime if there is an additional cost to the Project. Several intensive meetings were necessary amongContractors, Engineer and PLN site staff to carry out this selective 'accelerated' schedule at noadditional cost.

40. Another potential source of delay was the design changes necessary for Project completion. Itwas found that due to incorrect tailrace apron elevation of Phase I, the riverbed immediatelydownstream of Phase I tailrace apron was scoured down by an additional 5.5m due to the operation ofPhase I since 1988. The No. 3 tailrace apron had also settled and broken which would undermine thesafety of Phase II tailrace outlet structure in the future. In addition to the above, the portals of theinspection and ventilation adits were found to be incorrectly placed which could undermine slopestability and interfere with each other during construction. Construction of both adits was on thecritical path of the revised master implementation schedule. In the original design, both adits couldonly be started after the yards were fully or partially developed. As for the new layout, the upper yardwas eliminated and the transformer yard was made a separate construction. This allowed savings of5-6 months of potential delay to be recovered during implementation. The matter was successfullydealt by a joint coordinated effort of the Engineer, PLN and the Bank.

41. PLN's Excess Reserve Capacity. In the face of double digit sales growth rates in the 90's andapprehension of having to face power outages and the attendant high cost of interruptions of service"9,PLN planning approach was to maintain an overexpanded system in Java-Bali, that is, one with largeregional reserve margins. This was justified on the basis that a high reserve margin was necessary toavoid costs of power interruption to the economy, and to hedge against the risk relating to unreliabilityof existing thermal plants, and the possibility of implementation delays, particularly on thecommissioning of transmission lines and substations20. Including present IPP commitments in Java-Bali, the capacity reserve margin could reach over 60% in 199921. It is clear that committed private

18 Since the excavation and most of the first-stage concreting work for the powerhouse and construction of the powerintake for the project were completed during the first stage development, the remaining civil works to be included inCirata-II consisted mainly in the construction of two headrace tunnels, two surge tanks, four penstock shafts, theremaining civil works of the powerhouse, four tail race tunnels and outlets, river bank treatment, ventilation adit forsurge tanks, inspection adits for headrace tunnels, bus duct tunnel, transformer yard, and foundation for theintermediate transmission tower.

19 Indonesia: Economic Consequences of Power Supply Inadequacy, World Bank Report No. 15623-IND, June 1996.The report concluded inter alia that the chronic situation of inadequate power supplies has caused delays in newindustrial development and direct cancellation of direct foreign investment. The annual private cost of poor powersupply reliability and quality and power shortages of all manufacturing establishments in Indonesia was estimated atUS$ 850 million per year.

20 About 10 months for power plants and 13 months for transmission projects.

21 Under subsequent loans, a generating capacity margin covenant was introduced to request PLN to take all such actionas shall be necessary to reduce the realized reserve margin in the Java-Bali System to 30% by December 31, 1999.Needless to say, this covenant has not been complied with.

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power additions, and the reduction of sales growth rates, will not allow PLN to achieve a reasonablebalance of supply and demand till the 2002-4 time frame. The annualized carrying costs of the excesscapacity have been variously estimated to vary between US$ 150 - 400 million. In light of itsfinancial woes, PLN has started to implement an under-planning approach based on more realisticdemand projections.

42. Cofinanced Scope of Work. The Metal Works contract and the Turbines and Auxiliariescontract were signed on December 3, 1993 after a limited competition according to guidelines of theGovernment of Austria under the Soft Loan and Export Credit Scheme. The Generators and IndoorEquipment contract was signed on November 30, 1993 under the same guidelines.

43. Economic Crisis and Counterpart Funding. During the last stages of ProjectImplementation in 1997, the economic crisis and PLN financial difficulties were affecting the Project,particularly as regards counterpart funding. The Project was restructured and the Loan Agreementamended to allow for 100% of local financing22 (i.e. disbursement percentage to increase to 100%excluding taxes) from April 1, 1997, and October 31, 1999. This relieved considerably the pressureon PLN to pay the contractor's invoices and allowed the Project to be completed with no additionaldelay. Fortunately, apart from the proper provision of counterpart funding at the end of the Project,the wrenching economic and social problems caused by the financial crisis in the region did not affectthe completion of the Project.

44. Project Costs. The estimated total Project cost at appraisal was US$ 313.0 million (excludingIDC). The actual Total Project Cost before interest during construction was US$ 193.2 million, areduction of 38% from the appraisal estimate. The savings in Total Project Costs, of about US$ 119.8million before IDC, can be largely attributed to the following factors (a) very conservative engineeringestimates, (b) international inflation was lower than projected in estimates of the price contingencies,(c) Civil Works were 41% lower than estimates due to ICB (from US$ 75 million to an actual US$ 44million); (d) engineering and supervision costs were 35% lower than estimates due to ICB (from US$22.8 million to US$ 14.8 million); and (e) reduction in technical assistance by 50% (from US$ 14.1million to US$ 7.0 million) due to a reduction in the cope of technical assistance. US$ 26 million wascancelled in August 1998 after project restructuring carried out in early 1998. An additionalundisbursed amount of US$ 13.9 million was also cancelled on October 5, 1999.

Resettlement, Land Acquisition and Environment

45. The major resettlement aspects for Cirata were dealt with under the Cirata-I Project and willnot be repeated here23.

46. For the switchyard extension and for siting of the transmission towers, PLN acquired landfrom 17 landowner families amounting to 28,891 square meters. The land was deemed lowproductivity land. The land acquired did not constitute the place of residence for the families involvednor was it a major source of livelihood. Compensation was paid by PLN at a rate of Rp 200024 per

22 Excluding payment of any taxes.

23 For Cirata-I the resettlement of 8,949 families was needed from the reservoir area and 2,593 families from above thereservoir area. About 34% of the affected families were resettled throughout the Transmigration and Nucleus Estateand Smallholder (NES) programs. Those that elected to stay were provided with training in aquaculture and industrialskills.

24 Or about US$ I per square meter at the prevailing exchange rate.

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square meter, which was deemed to be adequate by the families concerned. With the money receivedfrom compensation under the Project's Rehabilitation and Resettlement measures, the affected peoplehave purchased alternative plots of land in the same district that are more productive for cultivationthan the land that they gave up. About 100 affected people have found work in the construction site.PLN assisted the affected people in the costs for renovating their mosque and a school building as wellas in providing them with drinking water. The agreements for PLN land acquisition were signed onFebruary 13, 1992, well before Project implementation, and the payments were made during theensuing 12 months.

47. Poor water quality in the reservoirs and the likelihood of its further deterioration werecorrectly identified during preparation as factors that could adversely affect not only this project butalso the livelihoods of the families resettled in Cirata I who are engaged in aquaculture in Saguling orCirata Reservoirs. The environmental studies that had consequently been incorporated into Cirata IIconfirmed that organic pollution and nutrients from their catchments adversely affect both reservoirs;about 75% of the organic pollutant load originates in urban settlements, and 25% from industry. Thefrequent fish kills observed since 1986 are caused by a combination of toxic substances washed intothe reservoirs during major rainstorms, low dissolved oxygen in bottom water which is displacedupwards in some storms, high concentrations of ammonia, and toxic and anoxic conditions caused byaccumulation of wastes beneath fish cages.

Procurement

48. The Project included one major civil works contract for which US$ 44 million equivalent wasdisbursed, and seven smaller contracts for which were disbursed about US$ 14.8 million equivalentfor engineering services for Project supervision, and US$ 7 million equivalent for technical assistance,for a total of US $ 65.8 million. All procurement activities for the Project were performed inaccordance with the Bank's procurement guidelines and were generally carried out satisfactorily. TheBank-financed contract for civil works was procured subject to ICB. The Consulting services wereprocured in accordance with the Bank's guidelines for the Use of Consultants. As expected, theprocurement procedures financed by confinanciers and PLN, for which contract in the amount of US$132.2 million were disbursed, did not affect adversely the execution of the Project. The lastdisbursement was made on October 31, 1999. There was no procurement incident of note during theProject.

D. PROJECT SUSTAINABILITY

49. Due to the economic crisis in the region and PLN's financial situation, the sustainability of theProject objectives is uncertain. There is a high risk that that unless the financial situation of PLNimproves in the short to medium term, the sustainability of the Project may be impaired throughperhaps lack of maintenance budget at PLN/PJB2, deterioration of the transmission system toevacuate power from Cirata, and dissipation of the commitment for reform and restructuring.Continuos dialogue will be maintained with PLN and GOI on these matters and particularly inmaintaining the commitment to sector reform and restructuring of PLN to restore its financialviability.

50. Although the current low average tariff and the resulting dire financial situation of PLN, aswell as IPP commitments, militate against a reasonable financial viability of the Project, the recentsigns of the country's economic recovery bode well for the future of the Project. Outstanding issuesinclude PLN financial recovery and the resolution of the IPP commitments whose impact to PLN

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cannot be gauged at this time. Within a policy that seeks to provide reliable and affordable electricityto consumers, an IPP rationalization Program under the oversight of a Government Ministerial Team(established by Keppress 139/98 of September 1998) is underway to seek a resolution to this issue.The guiding principles of the Rationalization program require that the process be transparent, with dueconsideration to the legal rights and obligations of all parties concerned. In light of the above there isstill a high risk that project sustainability will be impaired if (i) PLN financial situation does notimprove, and/or (ii) the outcome of the Rationalization Program is below expectation.

51. On the institutional side, the policy framework established in August 1998 for sector reform,which provides the blueprint for economic recovery, is expected to assist to reverse PLN's dramaticdownturn in financial viability. Moreover, it is expected that the framework will also be instrumentalin providing a sound foundation for PLN's and the sector's medium and longer-term viability.

52. Technically, the finished hydroelectric development is of good quality and the units haveoperated at high availability since being commissioned25 . Two recent issues can be noted: the stabilityof the slope at the opposite bank of the tailrace is being monitored because of the heavy rains in 1998and 1999. If required, action will be taken to stabilize the slope (para. 70). Corrective actions (para.71) have been taken regarding a flow-induced noise that is limiting the output of units 5-8 to about110-115 MW, which is about 10% below the nominal 125 MW. The Y2K non-compliance of Ciratais also not expected to cause any problems (para. 72). Hence these recent issues are not expected toaffect the sustainability of the Project.

53. Cirata is well maintained under a predictive maintenance regime (as opposed to time-basedmaintenance) that has been recently introduced. The new maintenance regime reduces maintenancecosts (annual inspections are now performed in 8 days instead of 20 days). The expectation is highthat the good operation and maintenance practices will be continued in the future and hence thesustainability of the physical infrastructure is likely.

54. Although the demand for electricity as well as the peak demand went down during the crisis --peak demand in 1998 dropped by 144 MW to a low of 9,872 MW -- the peak demand in 1999 hasrebounded and has already surpassed the historical high of 1997 of 10,015 MW, and hence has notaffected the operation of Cirata. Recent peak demand forecast (i.e. February 1999 optimistic scenario)calls for peak demand to increase at an average annual growth rate of 3-4 percent till 2002. Thus theProject in this regard is likely to be sustainable and fully utilized.

55. The environmental studies show continuing deterioration of water quality in both reservoirs.In the absence of "a massive reduction" in pollutant inputs from domestic, industrial and agriculturalsources (listed in order of declining importance), continued deterioration is unavoidable. Over thelong term, declining water quality will jeopardize the sustainability of the fish cage aquaculture in thereservoirs. PLN does not have the authority to carry out any of the measures to achieve pollutantreduction, except with respect to the relatively small amount contributed by aquaculture (chiefly fishfood inputs) in excess of local carrying capacity. The studies show that such improvements in fishcage management would improve local conditions that contribute to fish kills but would have aninsignificant impact on overall water quality and the primary causes of fish death. Both numbers ofcages and biomass per cage are now greatly reduced because of the high cost of fish feed and lowdemand for fish caused by the economic situation in Indonesia. It remains to be seen whether PLNwill exert stronger control over cage numbers, consistent with reservoir carrying capacity, when

25 Availability of units 5-8 since conmnercial operation: 88%, 84%, 95% and 95%.

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demand for fish begins to increase again. PLN had not taken such actions during the life of theproject.

56. The resettlement of Cirata-I has been sustainable since an economic base has been establishedin the cage fisheries that provided the households with a flow of annual revenue. For the additionalfamilies that were affected under Cirata-Il (i.e. 17 families), surveys indicate that they are happy andtheir livelihood has improved. They have better land for cultivation and better opportunities forincreased their livelihood (i.e. from fisheries) with the Project. However, the economic crisis has hada serious impact on the cage operators, which is hoped to be only temporary. The number of cages inoperation is greatly reduced, perhaps to one-third of the pre-crisis level, and profits have been cutsharply by high fish feed costs and low demand for the more expensive species of fish. Economicrecovery should bring improved conditions in this industry in the medium term, but optimism for thelonger-term has to be tempered by the immense difficulty inherent in reversing the water qualitytrends described above.

E. BANK PERFORMANCE

57. Overall, the Bank's performance during this Project is rated as satisfactory. The identificationand preparation of the Project were carried out smoothly and capitalized on four factors: (i) the needfor dependable peaking capacity in the fast growing Java-Bali interconnected system, (ii) the highexpectation of continuing economic growth in Java-Bali and the resulting high demand growth rates;(iii) the need for robust frequency regulatory capability and increased reliability of supply in Java-Balito attract more business investments; (iv) apprehension about supply interruptions and attendant costof interruption of service; and (v) minor environmental penalties of the Project.

58. The project was clearly identified. Potential risks were flagged during identification and pre-appraisal and mitigating measures introduced in Project design and implementation, particularly inproviding dam safety training and in environmental concerns associated with the reservoirs on theCitarum river basin. The SAR identified all the major risk factors of inherent in hydrological projects,and was justified in assigning only a small risk for cost and schedule overruns due to geological andhydrological risk because of the knowledge gained during the construction of Cirata Phase I, and inparticular as the dam construction took place during Cirata Phase I. The justification for the Project isdeemed sound and Project preparation is deemed satisfactory.

59. During implementation, the Bank supervised the Project regularly through one to twomissions a year. All the field supervisions were conducted in combination with other projects inIndonesia. The Bank correctly identified the risks associated with accelerated commitments to newgeneration plant-both PLN and IPP-and with negotiating private power projects on the basis ofunsolicited proposals, and communicated clearly its concerns on these matters to Government. It alsoconsistently stressed the importance of ensuring PLN's financial viability through the establishment ofa soundly designed base tariff. On the institutional side, the Bank played a leading role in assistingGovernment to develop the framework for restructuring and reforming the sector, which formed thebasis for Government's Power Sector Restructuring Policy launched in August 1998. In addition, theBank played an instrumental role in Project restructuring to cover a potential counterpart-fundingdeficit caused by the crisis by allowing 100 percent financing (excluding taxes) of local costs.Although four different Bank Task Managers were responsible for the Project during implementation,coordination problems were kept to a minimum by having some overlap of duties during the periodsof transition.

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60. Regarding environmental issues, there was a noticeable decline in the amount of attentiondevoted to the reservoir studies after the responsibility for the environmental management of theCirata and Saguling reservoirs fell into the hands of the two subsidiaries, PJBl and PJB2. The Bankand PLN organized joint meetings during Project implementation with PJB1 and PJB2, to discusswhat this responsibility entails. These discussions have been partly successful; they have led toincrease environmental awareness within PFIB and PJB2 and renewed interest in the water qualitywork. Clearly, both PJB 1 and PJB2 need to have a recurrent budget for improving the environmentalquality of the water in the reservoirs.

61. The Bank was able to use the findings of the reservoir environmental studies both internallyand externally to draw attention to the condition of the Citarum River and its watershed. For increasedlocal awareness of the peoples whose livelihood depends on fisheries, and to awaken commitmentwith Local Government of the environmental problems of the reservoirs, particularly from wasteeffluents into the reservoirs and over-fishing, the Bank sponsored a National Seminar on Managementof the Citarum watershed. PLN presented study results at this Seminar, which was very successful andled to an Action Plan. The Bank-supported WatSAL was directly influenced.

F. BORROWER PERFORMANCE

62. Overall, and particularly during the implementation of the Project, the performance of PLNwas satisfactory. PLN successfully implemented both Phase I and Phase II of the Cirata hydroelectricProject.

63. The Government and PLN took ownership of and responded satisfactorily to the Project'svarious technical assistance components, including the major studies concerning sector reform andrestructuring. Close cooperation with consultant teams has helped ensure effective knowledge-transfer, and follow-up actions have been taken or are being taken in connection withrecommendations of the technical assistance activities. While progress on sector reform andrestructuring front has been slow, the recommendations of the consultants were ultimately wellreflected in the Power Sector Restructuring Policy launched by the Government in August 1998. Thisdocument has provided the needed framework for sector reform and PLN's restructuring, andimplementation is proceeding albeit still with some continuing delays.

64. In accordance with the agreement reached in the loan and project agreements, PLN hasmaintained and periodically inspected the Cirata dam in accordance with sound engineering practices.PLN can also take pride in the significant and positive influence, it has already exerted overenvironmental issues including water pollution control, land development, and water resourcemanagement in the reservoir catchments. It undertook the environmental studies and training and hasmade the results known to other agencies in report form, through its own workshops, and by itsparticipation in a seminar on water resources management in the Citarum Basin. PLN has in this waybeen influential in the major water resource management policy changes which are now taking placein Indonesia, supported by the Bank's Water Sectoral Adjustment Loan (WatSAL). However, thereare two aspects on which more could be done. First, more effort should have been expended onimproving the environmental quality of the Saguling and Cirata reservoirs and on controlling theconditions near the cages. Second, both PJB1 and PJB2 should allocate a recurrent budget for thispurpose and become more environmentally conscious and proactive in their planning and operatingdecisions.

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65. There are three critically important areas in which Government's performance must beassessed to have fallen short of expectations: (a) permitting excessive commitments to new generationcapacity and allowing or requiring power purchase agreements to be negotiated on the basis ofunsolicited proposals from sponsors; (b) reluctance to increase sufficiently the base electricity tariff orto implement fully the automatic tariff adjustment mechanism; and (c) slow progress in developingand implementing the framework for sector reform.

66. The Borrower's evaluation of the Project is appended as Annex B.

G. SUMMARY ASSESSMENT OF OUTCOME

67. Although Project implementation was satisfactory, the outcome of the Project is deemed to beunsatisfactory due mainly to two factors: (i) PLN dire financial situation; and (ii) low economicviability of the Project. Notwithstanding the above, it is noted Cirata II was constructed with aminimum of delay under first-rate project management from both the Engineer and PLN's side.Supply and customer reliability has shown progress, as shown by the performance indicators. Peakdemand is forecasted to increase, albeit at reduced historical rates in the short to medium term; hencethe utilization of Cirata as a peaking plant is guaranteed as it is most important economic peakingplant in the Java-Bali system. Cirata is highest in the merit order and its operation is vital tomaintaining system security. The process of institutional restructuring which was initiated under thisproject is continuing, albeit with some delays due to the crisis. Options for enhancing theenvironmental conditions in the Saguling and Cirata reservoirs are being discussed and theenvironmental studies have influenced lending programs within the Bank, and environmental planningand management at PLN have improved. Finally, although currently suspended, the mechanism forformula-based adjustment of electricity prices was introduced under the project.

68. PLN's current financial situation is for the most part caused by factors beyond its control andclearly beyond the control of a single Bank project. These factors include the macroeconomicsituation, the dramatic devaluation of the local currency, and the IPPs commitments which wereimposed on PLN by Government. Improving PLN's financial performance as envisaged in the projectwould have not been enough to protect PLN from the financial crisis.

H. FUTURE OPERATIONS

69. Both Cirata I and II have been operated successfully: Cirata I since 1998 and Cirata II sinceAugust 15, 1997 with the commissioning of units 5&6, followed by the commissioning of units 7&8occurred in February and April 1998. During 1998, due to favorable hydrology, Cirata operated closeto the design output, in an average year with all units operating (8 units). This has saved productioncosts from thermal generation at a time that PLN is facing tremendous financial challenges. PLN hasthus demonstrated that it has the technical capacity to operate Cirata efficiently.

70. Since the commissioning and commercial operation of the last unit of Cirata II, some localslidings were detected at the river bank slope opposite the tailrace discharge tunnel. Inclinometerswere installed on 5 April 1998 and the situation is being closely monitored. Although the result of themonitoring has produced no sign of slope instability that will cause a disturbance of the operationCirata, PLN has agreed to continue the monitoring of the slope stability and take corrective actions ifnecessary and to report to the Bank when an action was taken.

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71. A flow-induced noise which exceeds the contracted noise level (i.e. 97 dBA) has appearedwhen the units are operated at power levels over 115 MW26, that is about 10% lower than its nominallevel. Corrective actions taken by PLN and the Contractor27 are expected to resolve this problem. It istherefore expected that the flow-induced noise will not affect the physical sustainability of the Project.PLN has agreed to submit to the Bank a Report about the corrective actions taken and their effect onthe noise and power output of the units.

72. Since Cirata I and II at both Y2K non-compliant, PLN is developing a contingency planincluding an emergency response for Cirata. As part of the contingency plan, PLN has decided to usethe backdating solution (to 197228) as an interim measure for the short time during the critical periodat the turn of the century, since a decision for corrective measures will not be made till next year29.This backdating would solve the malfunctions encountered during testing of the event/alarm reportprinting function. In addition, PLN has agreed to continue with the rollover compliance testsregarding remote start-stop and operation of the units as well and event/alarm reports, and to report tothe Bank of any unusual situation that develops".

73. PLN/PJB2 has a very capable O&M staff and has agreed to properly operate and maintain thenew facilities. In this regard, comprehensive and well-documented operation and maintenanceprocedures are in place to ensure proper operation and maintenance of the new facilities. Predictivemaintenance procedures have been introduced and PLN and PJB2 have agreed to prepare follow-upreports regarding the experience and costs savings attained with this new operation and maintenanceregime.

74. PLN has agreed to continue monitoring the quality of water in the reservoirs and to submit tothe Bank annual reports. The Bank will also check the monitoring program and data collected thoughits ongoing dialogue with PLN. PLN, PJB1 and PJB2, have agreed to continue with the publicawareness program regarding environmental quality of the water in the reservoirs, including optionsfor enhancing the environmental conditions of the reservoirs, factors that lead to fish deaths duringreservoir destratification and mitigation measures. Table 6 (Part II) summarizes the environmentalmanagement activities completed, in progress, and yet to be initiated.

I. KEY LESSONS LEARNED

75. Both Cirata Phases I and II were well designed and constructed. Both Projects benefited fromexcellent project management by the Engineer. For Cirata-I1 in particular excellent coordination was

26 The investigation carried out by the Contractor indicated that the dominant peak vibration mode of 230 Hz was causedby Karman vortices from the trailing edge of the stay vanes.

27 This work is being carried out at no cost to PLN since Cirata II is still under guarantee provided by the Contractor. Infact the guarantee period has been extended by one extra year to allow for mitigation of this problem.

28 The year 1972 was selected since it offers the same characteristics for weekdays and weekends as the year 2000.

29 The Supervisory Control Equipment (SCE) needs to be upgraded. PLN is an present investigating various solutions,ranging form a complete change of the SCE at a cost of about US$ 4.5 million, to other more modest changes notinvolving replacing the present SCE.

30 PLN has conducted several rollover compliance tests and the result obtained show that remote start up and stoppingand operation of the units from the switching yard is possible.

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attained among the various contractors and PLN site and head office which allowed many difficultiesto be overcome during project implementation. ICB is still the best means of reducing costs.

76. Environmental studies of the sort included in this project, while of interest to environmentalstaff in PLN, do not receive high priority from operating staff. It is important to obtain commitmentfrom senior managers responsible for operations when contemplating such studies. Such commitmentmust be shown in two ways: adequate budget and purchasing authority and incorporation ofresponsibility for study execution in the job descriptions of operations managers. Without these, it is acontinuous struggle to keep sufficient human and budgetary resources focused on the studies, and theycome to be seen as an unimportant and a nuisance.

77. Rapid action by the Bank to cover all of local financing (excluding taxes) was critical inavoiding potential project delays by nonpayment to contractors due to lack of counterpart funding.

78. Cost estimates should be more robust. The actual Project costs (not including IDC) were 38%less than at appraisal.

79. Close on-the-ground supervision and willingness to be flexible in adopting the Project to thelocal conditions is an essential ingredient for good project implementation.

80. As in the other Bank projects with PLN, the relationship with PLN throughout the Project wasbased on mutual trust and confidence and, in fact, complementary. This has helped to solve and ironout during procurement many problems without negative impacts on the Bank-Borrower relationship.It was instrumental in the rapid action taken to amend the loan agreement to cover 1OOpercent of localcosts (excluding taxes) which minimized the risk of lack of counterpart funding at the time when PLNneeded it the most.

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IMPLEMENTATION COMPLETION REPORT

INDONESIA

CIRATA HYDROELETRIC PHAES II PROJECT(LOAN 3602-IND)

PART IL STATISTICAL TABLES

Table 1: Summary of AssessmentTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Status of Implementation of Environmental RecommendationsTable 7: Studies Included in ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Analysis of Hydroelectric Power PlantTable 10: Status of Legal CovenantsTable 11: Compliance with Operational Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

I

- 21 -Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Neglible Not applicable

Macro Policies E] a C] lSector Policies I] i: C :Financial Objectives E I] 5 EInstitutional Development . 5Physical Objectives 5 a 5Poverty Reduction 5 5 El 3

Gender Issues 5 5 ElOther Social Objectives E E aEnvironmental Objectives E O aPublic Sector Management 5 R IaPrivate Sector Development 5 5Other (specify) 5 ] D]

B. Project Sustainability Likely Unlikely Uncertain

(1) (V) ~~~~~~~~~(V)

5 5Highly

C. Bank Performance satisfactory Satisfactory Deficient(/) (v') (V)

Identification 5 5Preparation Assistance 5 a

Appraisal 5 5Supervision 5 5

HighlyD. Borrower Performance satisfactory Satisfactory Deficient

. . ~(a/) (v') (1)

Preparation 5 5Implementation - Physical a 5

- Institutional 5 5Covenant Compliance 5 5Operation (if applicable) 5 5

Highly HighlyE. Assessment of Outcome satisfactory Satisfactory Unsatisfactory unsatisfactory

5/) 5/) 5/) (/)

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Table 2: Related Bank Loans/Credits

Loan/credit Purpose/Description Year of Statustitle approval

Loan 2506- Comprising: (a) a distribution system for Jakarta and the 1981 CompletedIND regencies of Bogor, Tangerang and Bekasi (Jabotabek) in in 1988Eleventh West Java, involving about 450 km of kV cables, 760 km ofPower Project 20 kV overhead lines; (b) a 150 kV voltage system,

involving 5 new substations in Jakarta, 46 km ofunderground double-circuit 150 kV cables and 980 MBA oftransformers; (c) engineering of the next base-load thermalpower unit (at Paiton) in Java; (d) engineering of the ExtraHigh Voltage (EHV) Central-East Java transmission line;and (e) management consultancy for further improvements inPLN's financial planning and control systems.

Loan 2214- Comprising: (a) construction of 110 (2 x 55) MW extension 1982 CompletedIND Twelfth of Kamojang geothermal power station in West Java; (b) in 1991Power Project construction of the third 400 MW thermal generating unit at

Suralaya, including engineering services for the third andfourth generating units; (c) distribution system improvementsin Java, North Sumatra and South Sulawesi; (d) a mini-hydrodevelopment program in North Sumatra; and (e) trainingfacilities and services to assist PLN's manpowerdevelopment program.

Loan 2300- Comprising: (a) construction of Cirata hydroelectric power 1983 CompletedIND project (4x125 MW); (b) construction of 500 kV switchyard in 1990Thirteenth and 25 km 500 kV transmission line; (c) consultant servicesPower Project for Cirata project and an energy sector support program to

support engineering and design for major thernal stations, aninformation management system study, and feasibilitystudies for hydro, thennal and transmission and distributionschemes.

Loan 2443- To construct and install the third and fourth 400 MW thermal 1984 CompletedIND generating units at Suralaya in West Java; to extend the in 1992Fourteenth distribution network in Jakarta, Bogor, Tangerang andPower Project Bekasi (Jabotabek), East Java and Central Java; and to

provide consulting services for engineering and constructionsupervision of transmission lines and substations in Java andfor engineering and design of hydro projects.

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Table 2: Related Bank Loans/Credits (Cont'd)

Loan/credit Purpose/Description Year of Statustitle approval

Loan 3097- The project included: (a) diesel power units rehabilitation 1989 CompletedIND and relocation; (b) small hydropower renovation; (c) in 1995.Power Sector distribution investment; (d) expansion of PLN'sEfficiency telecommunication facilities; (e) training program; (f)Project distribution management program; (g) technical assistance

for general accounting/cash management andfinancial/corporate planning; (h) institutional mechanism toadvise GOI on energy price adjustments; (i) informationsystem to provide costs for PLN's rural electrificationprogram; and (I) utilization by PLN of captive generatingcapacity.

Loan 3098- To provide for the construction of the Paiton coal-fired 1989 CompletedIND power plant with an initial capacity of 800 MW and an in 1995.Paiton ultimate capacity of 4,000 MW in East Java; associated 500Thermal kV and 150 kV transmission system; and technical assistancePower Project to strengthen capacity of Ministry of Mines and Energy in

environmental matters and train PLN personnel in powerplant technology.

Loan 3349- The overall objective of the project was to expand, 1991 CompletedIND Power strengthen and upgrade the transmission facilities for the in 1997.Transmission Java-Bali system to supply electricity to new consumersProject and to meet increases in electricity demand arising from

existing and new consumers. To support this overallobjective, the project had three specific objectives: (a)physical objective: to ensure that investments in powertransmission facilities proceed at an appropriate level tosupply electricity to new consumers and to meet increase inelectricity demand in Java, by strengthening and upgradingthe Java-Bali transmission system; (b) institutionalobjective: to improve PLN's capability in long-termplanning of transmission systems, by providing technicalassistance in long-term development of the transmissionsystem in Java-Bali; (c) financial objective: to promotemeasures for strengthening PLN's financial position byestablishing an institutional mechanism to review andadvise the Govermnent on all price adjustments in theenergy sector.

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Table 2: Related Bank Loans/Credits (Cont'd)

Loan/credit Purpose/Description Year of Statustitle approval

Loan 3501- The project includes: (a) the construction of three coal- 1992 CompletedIND fired units of 600/MW each at Suralaya, including in 1999.Suralaya associated works and a 500 kV transmission line fromThernal Cilegon to Cibinong, with associated substations; (b)Power Project consulting services for engineering, design and

construction supervision of the proposed units; (c)feasibility study for a high voltage submarine cable linkbetween Java and Sumatra; (d) engineering and design of athermal power p-ant at Banjarmasin in South Kalimantan;(e) consulting services for institutional development; and(f) training of PLN's staff in public utility practices.

Loan 3761- The main objectives of the project as stated in the Staff 1994 Implemen-IND Appraisal Report (SAR) are to support the first phase of the tationSumatera and Government of Indonesia's long term policy agenda for the underway;Kalimantan power sector aimed at efforts to: (a) Increase private sector loanPower participation to accelerate expansion of generating capacity closing onDevelopment and upgrade sector operating standards; (b) Restructure PLN DecemberProject to improve its operational performance and services 31,2000.

efficiency; (c) Formulate and implement regulations alongwith supporting administrative arrangements to promoteefficiency in Sector operations; and (d) Introduce a formulabased periodic tariff adjustment mechanism to recover cost.

Loan 3978- To improve customer service by (a) increasing the physical 1996 Implemen-IND capacity, efficiency, and reliability of the Java-Bali tationSecond transmission system and distribution network; and (b) underway;Power promoting sector efficiency, competition, and private loanTransmission sector participation by implementing functional closing onand decentralization of State Electricity Corporation (PLN) SeptemberDistribution operations in Java-Bali and developing effective regulatory 30, 2000.Project oversight and institutions. The project has two principal

components: (a) the restructuring of and investment inPLN's operations; and (b) the development of regulatoryoversight.

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Table 3: Project Timetable

Steps in Project Cycle Date Planned Date Actual/Latest Estimate

Identification (Executive Project Summary) 02/20/92

Preparation 03/09/92

Appraisal 06/23/92

Negotiations 03/29/93

Board Presentation 05/11/93

Signing . 06/25/93

Effectiveness 10/28/93

Midterm review (if applicable)

Project Completion 08/31/98 06/30/99

Loan Closing 06/30/99 06/30/99

Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual(US$ million)

FY94 FY95 FY96 FY97 FY98 FY99 FY00

Appraisal Estimate 14.0 41.8 72.4 94.0 100.0 104.0

Actual 4.3 14.1 22.8 37.2 46.5 62.3 64.1

Actual as % of Estimate 30.7 33.7 31.5 39.6 46.5 59.9

Loan Proceeds Cancellation $26 million was canceled out of the loan effective August 26,1998 as a part of the portfolio restructuring program for Indonesiain responding to the financial crisis in the country.

Date of Final Disbursement October 5, 1999.(An undisbursed balance of US$ 13.9 million was canceled.)

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Table 5: Key Indicators for Project Implementation

Development Objectives and Performance Indicator Actual

Provide economical and environmentally sound expansion of 1. Units 5&6 were commissioned twoPLN's peaking capacity in Java and improve service months behind schedule in August 15, 1997reliability as follows Unit 8 was commissioned on February 16,

19981. Peaking capacity increased by Unit 7 was commissioned in April 16, 1998(a) 2x125 MW in Units 5&6 on June 15, 1997(b) 2x125 MW Units 7&8 by October 15, 1997 2. SAIFI:

FY 97: 9.6; FY 98: 12.4; FY99: 12.12. Improve service reliability in Java as follows: (b) SAIDI(b) SAIFI (no. of outages per customer per year) targets FY 97 10.1; FY 98: 9.8; FY99: 12.0FY97: 12.7; FY98: 12.1; FY99 12.0(b) SAIDI (min of outages per customer per year) targets 3. Unit availabilities in FY98 were for Unit 5-FY 97: 12.5; FY 98: 12.2; FY 99: 12.1 8: 88%; 85 %; 98% and 97%.

3. Unit Availabilities over 85%Update Hydro Inventories and carry out prefeasibility studies Hydro inventories have been updated and 9for promising hydro electric schemes prefeasibility studies have been undertaken

Strengthening PLN's capability in the planning, instigation Hydro database was updated and a long-termand operation of hydroelectric schemes and in environmental strategy for hydro-resource development wasmanagement of power projects finalized, including framework to carrying out

enviromnental impact assessments.

Continue the process of institutional restructuring of PLN to Comprehensive policy and strategy studiesprovide for greater decentralization, delegation and were developed which provided a good basiscommercialization for advancing the dialogue with GOI and

PLN. The recommendations of the workundertaken provided the underpinnings for theGovernment's Power Sector RestructuringPolicy, which was launched in August 1998.

Study Options for enhancing the environmental conditions of A National Workshop was organized with thethe existing reservoirs on the Citarum basin participation of Local Government, PLN, and

both PJBl and PJB2.Most or the no-cost and low-costrecommendations to improve theenvironmental conditions of both Sagulingand Cirata reservoirs have been carried out.

Enhancing the dialogue on introducing a mechanism for An Electricity Tariff Automatic Adjustmentformula-based adjustment of electricity prices. Mechanism (ETAM) was introduced by

Presidential Decree in October 1994.Strengthening PLN Financial Position PLN's financial position has unfortunately

weakened over the period during which theproject was implemented. Prior to the crisis,PLN was moderately profitable but sill unableto achieve the target ROR of 8% due mainlyby the failure of Government to implementneeded tariff increases.

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Table 6. Status of Implementation of Environmental Recommendations

Recommended Action I Status | Comments

Actions with immediate urgencyHomogeneity of water quality monitoring complete Implemented by lab contractors.

Continuity of data collection andanalysis should be covered in CirataII Operational Plan.

Sediment quality monitoring program ongoing Cirata 1997, planned for both in 1999Strengthen laboratory capability ongoing Training seminar conducted; mission

recommended split samples.Analytical quality assurance shouldbe covered in Op. Plan.

Continue PROKASIH in Citarum, Cimahi, inactive PROKASIH is not within control ofCisokan Rivers PLN, nor is it highly effectiveControl agriculture in drawdown area ongoing Rice, corn, peanuts and peppers are

I grown, on share-cropping basisConduct new census in both reservoirs ongoing 1998 completed; 1999 scheduled

Actions with short-term encComputerized data storage facilities for partially $300,000 price precludes fullEnv. Div. and hydropower plant env. units complete implementation, but can transfer data

between reservoirs and PJB offices.Reliable storage and goodaccessibility of all data should becovered in the Op. Plan.

Procure water quality profiler not Under consideration, but $127,000complete price makes this difficult at present

Avoid concentration of polluting industry in not Not within PLN's control, but Op.West Bandung as currently planned complete Plan should include mechanism for

PLN to participate in land useplanning and land developmentdecision-making in the watershed.

Isolation of Saguling compartments to act as not Pre-feasibility study cost of $127,000treatment ponds. complete makes this difficult at present, but

idea under consideration. PJB 1 hasreceived proposal from privatedeveloper to isolate one arm ofSaguling for recreation.

Reduce number of fish cages, with priority complete Restocking already done; krismon hasto remaining resettled families; restock with already reduced operating cages by50% Tilapia (Nila) 85% in Saguling and 80% in Cirata.

Governor's decree has given PJB2full authority over Cirata includingfishery. Op. Plan should provide forsame authority for PJB1.

Integrate env. monitoring unit in Env. Div. partially Quarterly coordinating meetings arewith necessary authority over PJB's in complete held, but no organizational changes

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environmental matters. made. Needs attention in Op. Plan.Constitute working group on fish pathology complete A group is on call at UNPAD.

Actions with short-to-medium-term urgencyImplement wastewater treatment program in not Not within control of PLN, but PLN'sthe catchment complete presentation of this study's findings

has contributed to movement towardCitarum Basin management program.

Destocking and staggering of fish mass in complete Economic conditions have causedcritical periods reduction in fish mass. See comment

on reducing number of fish cages.Purchase equipment for continuous not Purchase, staff and training deferredmonitoring at Janggari and Bongas complete by PJB 1.Conduct detailed analysis during fish kills; partially Heavy metal analysis ongoing; quickdetermine heavy metals in fish complete response team at UNPADPLN take active role in watershed complete PLNshould carefully track progressmanagement agencies toward Citarum Basin AuthorityWatershed management agency assist W. not Not under control of PLN; newJava in enforcing environmental laws complete agency will be created with stronger

. authority.Promote awareness campaigns not PLN should disseminate study results

complete and other information on reservoirsIand water quality to the public.

Actions with medium or long-term urgencyUpper Citarum riverbank management not PJB 1 has been replanting greenbeltsprogram complete around reservoirs; other agencies

responsible for riverbankSupport trials for natural sustainable, completeplankton-feeding fish in CirataAchieve 80% urban sewage treatment, not Beyond control of PLN, but100% sanitation and industrial wastewater complete BAPEDAL and PU are developingcontrol in catchments regulations and program

- 29 -

Table 7: Studies

Study Purpose as Defined at Status Impact of StudyAppraisal/Redefined

Regulatory To develop (i) a framework of Completed. The studies undertaken have served asFramework regulatory controls for the sector Final Report a blueprint and underpinning for theStudies consistent with and supportive of the in December Government's Power Sector

chosen private participation strategy, 1996 Restructuring policy which wasand (ii) an industry structure and draft launched in August 19987.laws and regulatory instruments to Ownership of the reform agenda atimplement the necessary regulatory the middle management levels ofchanges. Government and PLN has

strengthened as a result of the studies.

Hydro To update hydroelectric and pumped Completed. The study allowed PLN to prepare aInventory & storage inventories; to formulate long database of hydropower projects. ItPrefeasibility term strategy for hydro-resources Final Report has strengthened PLNB hydropowerStudies development in line with Government in October capabilities. The comprehensive

long term objectives; to identify 1998. information available will be ofpriority schemes for preparation; to importance to PLN and other potentialstrengthen hydro-planning group investors when planning on the nextwithin PLN and the capabilities of hydropower scheme.national consulting industry in thisfield.

Environmental To investigate the environmental Completed. The recommendations of the studiesStudies conditions of the catchments and are being implemented as much as

reservoirs of the Cirata and Saguling Final Report possible. In particular thepower development; to gain a better in June recommendation on fish cageknowledge of the pollutant sources 1999. management of fish kills have beenand to understand how the various taken. PLN and the two generatingpollutants affect the reservoirs; to subsidiaries (PJB 1 and PJB2) are nowidentify options to improve the more keenly aware, as owner andenvironmental health of the existing operators of the Saguling and CirataPLN reservoirs on the Citarum River; reservoirs, of water quality problems asand to assist the Government/PLN to well as with the institutional needs toimprove the environmental mitigate the problem.management of the Citarum Riverreservoirs.

Hydro Data To improve the quality and Not The analytical work of upgradingBase Studies availability of the data required for completed. hydro databases and improving data

hydro inventory studies by data base collection practices was finalized.upgrading and data collection Interim However, the acquisition of theimprovement. Report in required software and computer

January equipment was not undertaken.1996.

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Table 8A: Project Costs

Appraisal Estimate (US$M) Actual/LatestEstimate(US$M)

Item Local Foreign Total Local Foreign Total

Costs Costs Costs Costs

Preliminary & Environmental 1.4 0.9 2.3 0.5 0.8 1.3

Civil Works 17.6 57.4 75.0 19.4 24.6 44.0

Metal Works 3.1 10.4 13.5 1.9 14.3 16.2

Electrical& Mechanical Equipment 17.3 106.5 123.8 6.5 109.6 116.1

Engineering and Supervision 4.4 18.4 23.8 4.5 7.2 11.7

Administration 5.9 - 5.9 0.9 - 0.9

Subtotal 49.7 193.6 243.3 33.6 156.5 190.1

OtherTeclnicalAssistance 5.2 8.9 14.1 0.9 2.2 3.1

Base Cost 54.9 202.5 257.4 34.5 158.7 193.2

Physical Contingencies 7.8 23.1 30.9

Price Contingencies 6.3 18.4 24.7

Total Project Cost 69.0 244.0 313.0 34.5 158.7 193.2

Interest During Construction* 24.0 61.8 85.8

Total Financing Required 93.0 305.8 398.8* The actual interest during construction is not available.

Table 8B: Project Financing

Appraisal Estimate (US$M) Actual/Latest*Estimate(US$M)

Source Local Feign Total Local Foreign Total

Costs Costs Costs Costs

GOI/PLN 93.0 52.6 145.6 13.2 3.2 16.4

Export Credits - 149.2 149.2 - 112.7 112.7

IBRD - 104.0 104.0 21.3 42.8 64.1

Total 93.0 305.8 398.8 34.5 158.7 193.2

* The actual interest during construction is not available.

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Table 9: Economic Analysis of Hydroelectric Power Plant

Appraisal Estimate Re-estimate

Economic Internal Rate of Return 19.1% including Consumer 6.6 % including Consumer(EIRR). Surplus Surplus.

Obtained based PLN's investment 10.6% without Consumer Not measurable since all theprogram in Java for 1992/93 - Surplus net benefits are negative1997/98 of which the proposedCirata Hydroelectric Phase IIProject is a part as follows:

Equalizing Discount Rate based on 31.8% 22.4%avoided costs with thermalalternative.

Note: For detailed calculations, see Annexes C and D.

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Table 10: Status of Legal Covenants

Original RevisedAgreement Section Covenant Present fulfillment fulfillment Description of covenant Comments

type status date date

Loan 3.01(b) 3 C Subsidiary loan agreement with PLN.

3.0 1(c) 3 C Borrower to enforce subsidiary loan agreement.

4.02(a) 11 C Review annually PIN's investment plan,

4.02(b) 11 C Review annually PLN's development plan,associated financial forecast and financing plan.

4.03 11 C Borrower shall take all actions necessary toensure that transfer of profits from PLN to theOverall Development Fund (DPS) shall notprevent PLN from implementing its annualinvestment plans.

6.01 3 C Subsidiary loan agreement executed.

Project 2.06(a) 9 C PLN shall continue to have Cirata Damperiodically inspected; and inspection byindependent experts as required by the Bank.

2.06(b) 10 c PLN shall continue to implement the program ofmaintenance of Cirata Dam.

2.07 9 C PLN shall (a) by 10/31/94, submit action plans focreating database for service reliability andconsumer waiting lists; and improving servicereliability and reducing waiting lists; and (b)implement action plans.

4.02 2 C PLN shall periodically review LRMC and Tariffstructure with Bank.

4.03 2 NC PLN shall not incur any debt unless reasonableforecasts of revenues and expenditures showprojected net revenues for each FY during termsof debt at least 1.5 times the projected debtservice on all debt.

4.04 13 C PLN shall (a) prepare a 10-year financial forecastbased development plan; (b) test each proposeddevelopment plan for financial feasibility; (c)develop financing plan for first 5 years; (d) ensureits recommended development plan, etc. arejointly reviewed with the borrower and the Bankprior to their adoption by its Board.

4.05(a)(i) 2 NC PLN shall take measures to realize for its Javaoperations, for FY92/93 and in each FYthereafter, an annual ROR of not less than 8%.

4.05(a) 2 NC PLN shall take measures with respect to its(ii) outside Java operations to produce no later than

1994/95 and in each FY thereafter, total revenuesequal to no less than the sum of outside Javaoperations: (a) total operating expenses; (b)amount by which debt service requirementsexceed depreciation provision.

4.05(b) 2 CP Before Dec. 31 each year, PLN shall reviewadequacy of tariffs to meet requirements in Art.4.05(a) and furnish to Bank results of suchreview.

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4.06 13 C For FY93/94 and each FY thereafter, PLN shallrevalue its fixed assets and accumulateddepreciation.

4.08(a) 13 C PLN shall review annually with Bank and 001,its investment plans for next five years.

4.08(b) 13 C PLN shall review annually with Bank and GOI,its development plans, associated financialforecasts and financing plan.

Covenant types:I. = Accounts/audits 8. = Indigenous people2. = Financial performance/revenue generation from 9. = Monitoring, review, and reporting

beneficiaries 10. = Project implementation not covered by categories 1-93. = Flow and utilization of project funds 11. = Sectoral or cross-sectoral budgetary or other resource4. = Counterpart funding allocation5. = Management aspects of the project or executing 12. = Sectoral or cross-sectoral policy/ regulatory/institutional

agency action6. = Environmental covenants 13. = Other7. = Involuntary resettlement

Present Status:C = covenant complied withCD = complied with after delayCP = complied with partiallyNC = not complied with

-34 -

Table 11: Compliance with Operational Manual Statements

Statement Number and Title Describe and comment on lack of compliance

There are no OMS relevant to the Project that have not been complied with and/or been acted against.

Table 12: Bank Resources: Staff Inputs

Planned Revised ActualStage of

Project Cycle Weeks US$ Weeks US$ Weeks US$

Preparation to appraisal - - - - 20.3 -

Appraisal - - - - 53.8 -

Negotiation through Board approval - - - - 13.1 -

Supervision - - - - 43.8 -

Completion - - 8.5 -

TOTAL - - 139.5

- 35 -

Table 13: Bank Resources: Missions

Performance RatingStage of Month No. of Days Specialized IP DO Types of

Project Cycle /Year Persons in Staff Skills ProblemsField Represented

Through Appraisal 03/92 6 8 Eng., Fin.Analyst, Env.Spec.,Economist

06/92 5 10 Eng., Fin.Analyst, Env.Spec.,Economist

Appraisal throughBoard Approval

Board ApprovalthroughEffectiveness

Supervision 04/94 2 5 Eng., Fin. 2

03/95 1 5 Eng. S HS

09/95 1 5 Eng. S S

03/96 2 5 Eng. Power S SSpec.

11/96 2 5 Eng., Power S S Slight implementation delays (bySpec. 3 and a half months).

07/97 1 5 Eng. S S Vibration in Unit 5.

11/97 4 5 Eng., Eco. S S Subsoil movement at tailrace;Pwr Spec., noise in Units 5-8.Env. Spec.

07/98 3 5 Eng., Power S U Unsatisfactory financialSpec., Env. performance; non-complianceSpec. with financial covenants.

12/98 3 5 Power Spec., S U Technical issues (such as subsoilEng., Fin. movement, noise); poor financialAnalyst performance.

Completion 04/99 5 5 Power Spec., S U Technical issues (such as subsoilEng., Env. movement, noise); poor financialSpec. Op. performance.Officer, Fin.Analyst

Note: * All the above missions were conducted in combination with missions for other powerprojects, therefore, the days spent in the fields are only estimates.

** IP - Implementation Progress; DO - Development Objective;S - Satisfactory; HS - Highly Satisfactory; U - Unsatisfactory;

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IMPLEMENTATION COMPLETION REPORT

INDONESIA

CIRATA HYDROELECTRIC PHASE II PROJECT

(LOAN 3602-IIND)

ANNEXES

ANNEX A: ICR MISSION'S AIDE MEMOIREANNEX B: BORROWER'S EVALUATION REPORTANNEX C: CALCULATION OF ECONOMIC SNTERNAL

RATE OF RETURNANNEC D EQUALIZING DISCOUNT RATE

COMPARISON WITI THERMAL ALTERNATIVEANNEX E: PLN'S KEY FINANCIAL INDICATORS

I

- 37 -

ANNEX A

CIRATA HYDROELECTRIC PHASE II PROJECT(LOAN 3602-IND)

AIDE MEMOIRE

ICR Mission(April 1999)

Project Objectives

1. The main objective of the project was to expand PLN's peaking electricity generation inJava to improve service reliability through financing the second phase of Cirata HydroelectricPower Plant. In addition, the project also aimed at strengthening of PLN's institutional capacityand financial position through related technical assistance activities.

Preparation for the ICR

2. The mission reviewed with PLN the ICR process and requirements, and collected dataand information for its preparation. The mission also visited the Cirata Hydroelectric Power Plantand followed-up on some important outstanding issues.

3. In addition, the mission provided advice to PLN for preparing its own evaluation report,which will be attached unedited to the ICR. The mission suggested that PLN's own evaluationreport should include: (a) an assessment of the project's objectives, design, implementation, andoperational experience; (b) an evaluation of PLN's own performance during the evolution andimplementation of the project with specific emphasis on lessons learned that may be relevant inthe future; and (c) an evaluation of the performance of the Bank during the evolution andimplementation of the project, including the effectiveness of the relationship between PLN andthe Bank, with special emphasis on lessons learned.

Overview of Physical Component

4. General Progress and Status The project financed four 125 MW units for the secondphase of the Cirata Hydroelectric Power Plant. Units 5&6 were put into commercial operation onAugust 15, 1997 (compared to the SAR schedule of June 30, 1997). Unit 8 started commercialoperation on February 16, 1998 (compared to the SAR schedule of September 30, 1997), whileUnit 7 started commercial operation on April 16, 1998 (compared to the SAR date of September30, 1997). The delay with Unit 7 was mainly caused by low water level in the Cirata reservoirdue to extensive drought at the time.

5. In 1998, all Units 5-8 generated 1,743 GWh with Availabilities of 88%, 85%. 97% and83%, respectively. The operation of these units has been outstanding and has provided electricityat low cost and needed peaking capacity to the mainly base-loaded system in Java-Bali. Cirataalso provides an important frequency regulation function, which enhances system reliability andquality of power supply. It is an essential plant for operation of the Java-Bali system. Thus thephysical objective of the project is deemed to have been met.

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6. Outstanding Issues. Two outstanding issues were followed-up by the mission duringits field visit, namely:

(a) Subsoil Movement at Tailrace - Opposite Bank Monitoring of the slopestability at the opposite bank of the tailrace area was initiated in March 1998.During the rainy season of 1998, several local slidings were found at thedownstream area. According to the inclinometers installed on site, thedownward movement is about 0.3-3 cm in the upstream area since monitoringbegan. However, no occurrences of recent slidings at the downstream andupstream sliding areas were observed and no sign of slope instability that willcause a disruption of Cirata HEPP. Its was agreed, however, that the monitoringbe continued for one more year, on a monthly basis or immediately after heavyrains or earth tremors, and that a report be sent to the Bank immediately once aproblem is observed.

(b) Noise in Units 5-8. Higher than expected noise levels have been observed withall units. The matter has been under investigation by the Contractor (VoestAlpine) and remedial work on the stayvane vibration and the removal of thereinforcement of the aeration tripod from the draft tube cone of Unit 8 wascompleted with testing initiated on April 20, 1999. As a result of the highernoise level, the output of the units must be limited (e.g., Unit 5 has been limitedits output at 100 MW or below) at an economic cost to PLN. PLN indicated tothe mission that it may consider claiming for compensation from the contractor.In addition, since the modifications to the stayvane may not significantly reducethe noise levels, PLN will request the contractor to extend the guarantee period totwo years - the Contractor has suggested that they will only cover one yearextension. It was agreed that PLN will keep the Bank informed of thedevelopment of this matter and prepare a short report to the Bank by mid-June1999. It was also agreed that the supervision engineer (Sinotech EngineeringConsultant) prepare an addendum to the completion report and send to the Bankdirectly upon completion (expected in end June 1999) to include two additionalitems: (a) description and results of the works for the guarantee inspection ofUnits 7&8, and (b) results and recommendations regarding the modifications toreduce noise in Units 5-8.

Overview of TA Components

7. Hydro-Inventory and Pre-feasibility Study. The contract for this TA was signed onFebruary 6, 1997 between PLN and Nippon Koei in association with PT Indra Karya and PTWiratman. The hydro-inventory study, finalized in December 1997, identified 1,369 projectsconsisting of 1,249 hydropower projects and 58 pumped storage projects. A classification of nineprojects followed which proceeded to the pre-feasibility study stage based on (a) generationexpansion studies; (b) favorable distribution of regions; (c) sites with easier accessibility.Although the timing of the hydropower projects may no longer be valid (projects to be completedup to 2018), the technical parameters were based on international experience and therefore stillvalid. The pre-feasibility study will include an updated economic analysis based on currentconditions. This TA is proceeding satisfactorily and expected to be completed by loan closing(June 30, 1999).

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8. Upgrade of Hydrological DataBase. The contract of this TA was signed on June 28,1995 between PLN and Sogreah Ingenierie in association with PR Pratama Widya and PTKwarsa Hexagon. Implementation of this TA activity is not satisfactory because of extendeddelays. The technical specifications of computer hardware, which were prepared in December1996, are now out-of-date and need to be reviewed and revised. Previous Bank missions hadrequested PLN to ask the Consultant to prepare revised specifications for equipment procurementfor review by PLN and the Bank. However, the Bank has not received such revisedspecifications to date. The mission advised PLN that unless the equipment is procured anddelivered before the loan closing date (June 30, 1999), the loan allocation for this purpose willhave to be canceled. A meeting was held on April 30, 1999 with a Sogreah representative todiscuss this issue. According to the contract, Sogreah is responsible for the purchase of thecomputer equipment, installation and testing. (IBRD International Shopping. Since Sogreahcould not commit time and effort to finalize by loan closing, the mission agreed in principle withthe suggestion of PLN for a last effort and contact Nippon Koei (Consultants for the Hydro-Inventory and Pre-feasibility Study) to find out if they can take over this work. PLN will advisethe Bank about this matter by Ist week of May, 1999

9. Environmental Studies of Cirata and Saguling Reservoirs PLN confirmed that theenvironmental consultant, Electrowatt Engineering in association with Amythas Experts andAssociates, PT., satisfactorily completed all work under the contract. The mission reviewed withPLN (including staff from head office, PJB 1, PJB2 and the reservoir operating units) the status ofthe actions recomrnended in the consultant's final report.

10. PLN environmental staff report that all of the actions regarding modification of theroutine monitoring program have been implemented. Training in laboratory procedures toimprove accuracy and reliability has been conducted. Management of monitoring data has beenimproved to the extent that PJB I and PJB2 can themselves produce reports of monitoring results(the mission received samples), and data can be transferred electronically between the reservoiroffices and the PJB offices. However, current budget constraints have prevented implementationof the full data management recommendation, which would among other things allow PLNEnvironment Division to access data files from Jakarta. Budget constraints have also causedother high-cost actions to be deferred, namely the purchase of profilers and continuous monitors,and the pre-feasibility studies for using portions of Saguling as wastewater treatment ponds. Afish pathology working group and quick response team have been set up and are on call atPadjadjaran University

11. All fish cage management actions have been taken, including trials with new species andincreases in the percentage of Tilapia in the cage operations. However, the dramatic reductionsin the number of operating cages and in fish biomass have occurred primarily because ofincreases in fish food costs and diminished domestic demand for the cultured fish rather than asresults of overt action by PLN or Department of Fisheries.

12. There is a group of actions over which PLN has little or no control; these concern landuse planning, land development, and water pollution control and water resource management inthe reservoir catchments. PLN can take pride in the significant and positive influence it hasalready exerted over these processes by conducting the environmental studies and making theresults known to other agencies in report form, through its own workshops, and by itsparticipation in other seminars on water resources management in the Citarum Basin. In thisway, PLN has been influential in the major water resource management policy changes that are

-40 -

now taking place in Indonesia, supported by the Bank's Water Sectoral Adjustment Loan(WatSAL). The mission urged PLN to remain engaged in all of these activities, for it is both aprimary stakeholder and an important contributor of data and technical advice, particularly on theintegration of water quality management into land use and water resource use decisions.

13. For PLN to derive the full benefit of the environmental studies, it is important that theplan for the future operation of the Cirata II project provide for continuity in monitoring and foreventual implementation of the additional studies and other actions recommended by theconsultant.

14. Regulatory Framework Study (DGEED). The contract for this study was signed onMarch 31, 1995. The study has been successfully carried out and provided the basis for thepower sector restructuring policy, which was launched by GOI in August 1998.

15. Financing Strategy Study. This study was not undertaken as planned because it wasdeemed unnecessary by DGEED as it was covered by other studies.

Resettlement and Land Acquisition

16. No families were resettled as part of the project. Land was acquired from 17 owners,amounting to 28,891 square meters. Compensation was paid at a rate of Rp. 2,000 per squaremeter in all cases. The agreements were signed on February 13, 1992, and the payments weremade during the ensuing 12 months.

Recalculation of Economic Internal Rate of Return (EIRR)

17. It was discussed and agreed that PLN will submit the re-evaluated EIRR along with themajor assumptions to the Bank by mid May 1999.

Loan Disbursement

18. The original loan size was $104 million. $26 million was canceled in end 1998 as part ofthe portfolio restructuring program for Indonesia. As of April 20, 1999, $62.1 million or 79.6%of the revised loan amount had been disbursed. The undisbursed balance was $15.9 million. Themission reminded PLN that the loan will be closed on June 30, 1999. Though the Bank maynormally grant a four-month period after loan closing for disbursement purpose, the balance ofthe loan can only be disbursed against the expenditures associated with goods delivered orservices rendered on or before the loan closing date. Any unutilized loan proceeds will becancelled.

Project Sustainability and Operational Plan

19. As a response to the economic downturn, PLN has suffered a drastic reduction in salesgrowth rate in 1998 (-0.6 %) from the historic 12% levels prior to the crisis. It is expected toreach the 10% level by 2003. Peak demand in 1998 also dropped by 144 MW from the highestpeak of 10,016 MW in 1997. However, peak demand growth is expected to resume. It hasalready surpassed 1997 level in the year on April 20, 1999. Average peak demand growth rateduring 2000-2003 is expected to be over 6% per annum. The mission considers this growth rate arealistic expectation as the economic crisis tapers off past the end of the century. However, the

-41 -

additional uncertainty regarding the elasticity of demand to possible price increases in the nextfew years has not been precisely quantified in these forecasts.

20. Cirata (i.e. both Cirata I and II) was designed as a peaking plant, in proximity to largeload centers, since the Java-Bali system is heavily base-loaded. In addition, Cirata has a veryimportant system frequency regulatory function and black start capability, which are essential tomaintaining system integrity. These important considerations will remain valid during the projectlife.

21. The operational plan to ensure sustainability of the outcomes achieved under the projectwas discussed with PLN during the mission. Central to the operational plan isPLN/PJB2's commitment to (a) properly maintain the new facilities; and (b) monitorperformance of the system. To this end, the mission notes that Cirata has adoptedsatisfactory maintenance procedures and in particular the introduction of predictivemaintenance will ensure the project's sustainability at lower cost.

Next Steps

22. It was agreed that PLN's own evaluation report will be submitted to the Bank bySeptember 30, 1999.

23. The mission advised PLN that a draft final ICR is expected to be sent to PLN forcomments by October 15, 1999. PLN will forward its comments, if any, to the Bank by no laterthan November 15, 1999. The ICR will then be finalized by end of December 1999.

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ANNEX B

BORROWER'S OWN EVALUATION REPORT

I. Project Objectives

The objectives of the proposed project are to:

a. Provide economical and environmentally sound expansion of PLN's peakingelectricity generation capacity in Java and improve service reliability.

b. Update hydro inventories and carry out pre-feasibility studies foT promisinghydroelectric schemes.

c. Strengthen PLN's capability in the planning, investigation and operation ofhydroelectric scheme and environmental management of power projects.

d. Study options for enhancing the environmental conditions in the area of PLN'sexisting reservoir.

HI. Achievement of Project Objective

Within the scope of work of PLN, the project success can be assessed as substantial inthat all their objectives were met within most of the imposed limitation.

mI. Implementation Record and Major Factors affecting the Project.

Engineering, design and construction supervision of 4 x 125 MW Of the Cirata HydroElectric Phase II Project (Units 5, 6, 7 and 8) were conducted by the consultant SinotechEngineering Consultant, Ltd. in association with PT. Hasfarm Dian Konsultan financedby Bank loan IBRD 3602 IND has been successfually complete.

All the Project phases were implemented successfully, although a review of the keyindicators for project implementation shown in Table 1 of this report shows delaysregarding scheduled key dates.

With the modifications implemented, all critical programme key dates were met and theindividual Contracts for Lots I to IV Works was completed on schedule and to requiredstandards. Units 5 and 6 went into commercial operation, as planned, on 15 August 1997and Units 7 and 8 went into commercial operation on 16 April 1998, incurring delay of 2(two) months due to low level in Cirata Reservoir, attributable to the widely reported " ElNino " effect in 1997.

IV. PLN's Financial and Economic Performance

-43 -

The economic evaluation of the project was carried out on actual basis of the tariff, salesand exchange rates during crisis condition.

PLN's financial and economic performance regarding the project will now be dependenton the maximization of the utilization of this project on the peak load time and the levelin Cirata reservoir.

V. Bank Performance

In PLN's view, the performance of the Bank was satisfactory throughout all the phases ofthe project from the preparation to completion.

VI. Borrower Performance

The performance of PLN's was generally satisfactory and improvements were achievedby using the experience gained in previous project.

The activity of procurement already be done follow the schedule dates from Bid Openingtill Contract Award, almost of the Packed items are performed on schedule.

The completion of the Project is on schedule for Units 5 & 6 and 2 month behindschedule for Units 7 & 8 is caused by low level in Cirata reservoir.

VIH. Assessment of Outcome

The project achieved most its major immediate objectives within budget. The inability tocomply with the schedule as stated in Table 1 of this report, Key indicators for projectimplementation.

The actual Total Project Cost is lower than Appraisal estimate.

PLN is also set to ensure compliance with long term achievement of continuousoperation as especially on peak load time during the lifetime of the plant.

VII. Operation

a. Initial operation

Because of the heavy rains and to save on thermal based electricity, Cirata 5-8have generated 884.9 GWh from Jan - Dec 1998 and total generated Units 1 - 8are 1,734.2 GWh.

b. Future Operation

Later.

IX. Main finding and Key Lessons Learned

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The output of the Unit 5 - 8 is limiting to be under 110 - 115 MW due to the high noisein the turbines.

Unit 5 has been modified at site but no success.

Unit 8 has been modified on April 1999 and base on the result of the test, there was nomodification anymore on this unit.

Model test already is done at the factory.

Unit 5, 6 and 7 will be modified to follow the model test on October 31 - November 11,1999

Base on the above matters, we have to pay attention to the design aspect, so the sameproblem does not occur in the future.

- 45 -

Table 1: Key Indicators for Project Implementation

1. Procurement

Package Bid Opening Evaluation Complete Contract Award L/C________________ _____ __ ________ _________opened

Planned Actual Planned Actual Planned ActualCivil Work 02-08-93 02-08-93 06-11-93 04-11-93 05-02-94 15-04-94 -

Metal Work 05-03-93 05-03-93 07-09-93 28-07-93 0 1-12-93 03-12-93 18-02-93Turbine & Aux 01-06-93 01-06-93 07-09-93 10-08-93 01-12-93 03-12-93 18-02-93Gen& Indoor E.E 01-06-93 01-06-93 07-09-93 21-09-93 01-12-93 30-11-93 18-02-93

2. Construction and Commissioning

Significant Key Dates

Description of Waterway No.3 Waterway No.3Key Dates Unit 5 and 6 Unit 7 and 8

Planned Actual Planned ActualExcavation for penstock complete 14-05-95 14-05-95 14-04-95 14-04-96Tailrace structure complete 14-11-96 14-11-96 14-11-96 14-11-96Headrace tunnel complete 14-01-97 08-01-97 14-07-97 10-07-97Penstock complete 31-03-97 07-01-97 30-09-97 27-07-97Waterway complete 31-03-97 31-03-97 30-09-97 25-09-97Synchronize 30-06-97 30-06-97 31-12-97 11-02-98Commercial operation 15-08-97 15-08-97 15-02-98 16-04-98

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ANNEX C

Cirata Hydroelectric Phase II Project (Loan 3602-IND)Calculation of Economic Internal Rate of Return (EIRR)on PLN's Java Investment Program (1992/93 - 1997/1998)

Costs (US$ million)

Investment Incr. Fuel Iner. O & M Consumer TotalYear Gen. a/ IPP T&D b/ Total Prod. Prod. Cost!c Fuel cost Cost /d Contribution e/ Cost

GWh GWh

1989 57 57 571990 124 124 1241991 529 529 5291992 1,247 589 1,836 33,900 699 0 64 1,9001993 953 881 1,833 37,935 4,035 816 117 109 39 2,0201994 698 1,497 2,195 41,978 8,078 780 81 164 18 2,4221995 1,606 1,572 3,178 48,545 14,645 850 151 244 45 3,5281996 1,019 1,027 2,046 54,984 21,084 986 287 295 52 2,5761997 825 83 652 1,559 62,229 28,329 1,099 399 334 139 2,1521998 99 83 469 650 62,199 28,299 1,023 324 350 20 1,3031999 62,199 28,299 1,023 324 350 6742000 62,199 28,299 1,023 324 350 6742001 62,199 28,299 1,023 324 350 6742002 62,199 28,299 1,023 324 350 6742003 62,199 28,299 1,023 324 350 6742004 62,199 28,299 1,023 324 350 6742005 62,199 28,299 1,023 324 350 6742006 62,199 28,299 1,023 324 350 6742007 62,1 99 28,299 1,023 324 350 6742008 62,199 28,299 1,023 324 350 6742009 62,199 28,299 1,023 324 350 6742010 62,199 28,299 1,023 324 350 6742011 62,199 28,299 1,023 324 350 6742012 62,199 28,299 1,023 324 350 6742013 62,199 28,299 1,023 324 350 6742014 62,199 28,299 1,023 324 350 6742015 62,199 28,299 1,023 324 350 6742016 62,199 28,299 1,023 324 350 6742017 62,199 28,299 1,023 324 350 6742018 62,199 28,299 1,023 324 350 6742019 62,199 28,299 1,023 324 350 6742020 62,199 28,299 1,023 324 350 6742021 62,199 28,299 1,023 324 350 6742022 62,199 28,299 1,023 324 350 674

a/ Only disbursements of projects which were commissioned within the period are taken into account.Considering that the project cycle for generation is usually 4 years, disbursements for generationprojects commissioned during 1993 up to 1998 will include disbursements from 1989 up to 1998.

b/ Transmission and distribution investment cost are derived from accounting data using the following formula:Disbursement year I = Work in Progress year I - Work in Progress year I-l + Fixed Asset Addition year I

c/ Fuel costs according to World Bank Datad/ O&M costs are estimated at 2.5% of the cumulative investmentse/ The willingness to pay for residential consumers is derived from the average spending for lighting from a pressurized

kerosene lamp at international kerosene price. The consumer surplus is the difference between the willingnessto pay and the residential average tariff.The willingness to pay for industrial consumers is derived from spending for electric energy producedfrom a diesel engine at international HSD price. The consumer surplus is the difference between thewillingness to pay and the industrial average tariff.

- 47 -

Cirata Hydroelectric Phase H Project (Loan 3602-IND)Calculation of Economic Internal Rate of Return (EIRR)on PLN's Java Investment Program (1992/93 -1997/1998)

Benefits (US$ million)

Sales (GWh) Total Incremental sales (GWh) Total Revenue Consumer Suirplus /b Total Total Net Benefits EIRR Calculation /c

Res. Cornlls. Public Ind. Sales Res. Commu. Public Ind. Iner. at avg. Res. Ind./c Total benefit cost Net Revenue Total Net Net Revenue Total Net

Year sales Tariff/a at avg. tariff Benefits at avg. tariff Benefits

(GWh) (GWh) (1) (2) (3) (1) - (2) (2) - (3)

1989 57 -57 -57

1990 124 -124 -124

1991 529 -529 -529

1992 8,574 2,471 1,704 15,089 27,838 0 0 0 0 0 0 0 0 0 0 1,900 -1,900 -1,900 -2,610 -2,610

1993 9,678 2,961 1,758 16,816 31,213 1,104 490 54 1,727 3,375 246.5 123 98 221 467 2,020 -1,774 -1,553 -1,774 -1,553

1994 10,769 3,279 1,841 18,749 34,638 2,195 808 137 3,660 6,800 465.1 215 155 371 836 2,422 -1,957 -1,586 -1,957 -1,586

1995 12,606 3,945 2,065 21,518 40,134 4,032 1,474 361 6,429 12,296 795.3 339 252 592 1,387 3,528 -2,733 -2,141 -2,733 -2,141

1996 14,406 4,851 2,305 24,374 45,936 5,832 2,380 601 9,285 18,098 1,183.3 410 229 640 1,823 2,576 -1,393 -754 -1,393 -754

1997 16,660 5,624 2,567 26,660 51,511 8,086 3,153 863 11,571 23,673 1,395.8 579 301 879 2,275 2,152 -757 123 -757 123

1998 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 1,303 -828 298 -828 298

1999 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2000 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2001 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2002 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474,8 802 324 1,126 1,601 674 -199 927 -199 927

2003 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9.001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2004 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2005 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2006 18,070 6,281 2,637 24,090 51,078 9.496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2007 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9.001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2008 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23.240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2009 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2010 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2011 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2012 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2013 18.070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474,8 802 324 1,126 1.601 674 -199 927 -199 927

2014 18,070 6.281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2015 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2016 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474,8 802 324 1,126 1,601 674 -199 927 -199 927

2017 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2018 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2019 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2020 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2021 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

2022 18,070 6,281 2,637 24,090 51,078 9,496 3,810 933 9,001 23,240 474.8 802 324 1,126 1,601 674 -199 927 -199 927

a/ Average tariffs intUS /kW referred to 1992 as base year are: 6.75 it 1992; 7.30 in 1993; 6.84 in 1994; | i

6.47 it 1995; 6.54 in 1996; 5.90 its 1997; 2.04 in 1998. IEIRR with consumer surplus 6.59%

b/ Additional ecosionsic beiiefits for residential and industrial cotisuniers are:

Residential (in USc/kWh): 11.16 ins 1992; 9.81 its 1993; 8.42 itt 1994; 7.04 it 1995; 7.16 in 1996; 8.44 in 1997; 8.78 iis 1998; 8.01 in 1999

Itidustrial (itl USOt/kWi): 5.65 its 1992; 4.25 in 1993; 3.92 in 1994; 2.47 its 1995; 2.60 in 1996; 3.60 in 1997; 6.32 in 1998; 5.01 in 1999

c/ EIRR at average tariff ttot evaluated siisee taet revenue cash-flow is all negative.

- 48 -

ANNEX D

Cirata Hydroelectric Phase II Project (Loan 3602-IND)Calculation of Economic Internal Rate of Return (EIRR)on PLN's Java Investment Program (1992/93 - 1997/1998)

Costs Benefits

Year Capital 0 & M Total Capacity Value Energy Value Total

Cost Cost Cost Coal PP GTPP Coal PP GTPP Benefit

1992

1993

1994 4,300 4,300

1995 14,100 14,100

1996 22,800 22,800

1997 37,200 37,200

1998 46,500 1,874 48,374 -17,034 36,033 -9,922 39,542 48,620

1999 62,300 1,874 64,174 -17,034 36,033 -9,922 39,542 48,620

2000 64,100 1,874 65,974 -17,034 36,033 -9,922 39,542 48,620

2001 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2002 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2003 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2004 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2005 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2006 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2007 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2008 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2009 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2010 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2011 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2012 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2013 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2014 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2015 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2044 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2045 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2046 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

2047 1,874 1,874 -17,034 36,033 -9,922 39,542 48,620

Equalizing Discount Rate % 22.4

-49 -

Caracteristic of Cirata Hydro Plant

Installed Primary Secondary Total Base Peak

Capacity Energy Energy Energy Capacity Energy Capacity Energy

(MW) (GWh) (GWh) (GWh) (MW) (GWh) (MW) (GWh)

500 1191 233 1424 95.27 834.57 404.73 589.43

1000 1191 233 1424 0.00 0.00 1000.00 1424.00

Expected Annual Operation Mode ofCirata Hydroelectric Plant

Item Without With

Cirata Cirata

Installed Capacity MW 500 1000Energy Production GWhFirm 1,191 1191Secondary 233 233Average 1,424 1424

Expected 'peak and base portion'

[peak duration = 4 hrs]

Capacity (MW)

Peak portion 405 1000

Base portion 95

Energy (GWh) 1424

Peak portion 589

Base portion 835 0

- 50 -

Economic ComparisonCirata Hydroelectric Plant

(US$/yr in thousands)

Item Without WithCirata Cirata

Capacity benefitsPeak portion 24,499 60,532Base portion 17,034 -17,034

Energy BenefitsPeak portion 27,927 67,470Base portion 9,922 -9,922

O&M cost/year 1.5% of Capital cost of Cirata II

- 51 -

ANNEX E

INDONESIACIRATA HYDROELECTRIC PHASE II PROJECT

(LOAN 3602-IND)

PLN - INCOME STATEMENT(Rp. billion)

92/93 93/94 1994 1995 1996 1997 1998

SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual

Operating RevenueEnergy revenue 4,883 4,794 6,515 5,922 9,069 5,133 10,625 8,110 12,524 9,418 14,753 10,877 16,357 13,766

Other operating revenue 143 123 163 140 201 119 229 196 261 228 294 249 329 270

Total operating revenue 5,026 4,917 6,678 6,062 9,270 5,252 10,854 8,306 12,785 9,646 15,047 11,126 16,686 14,036

Operating expensesFuel & lubricating oil 2,553 2,132 3,395 2,783 3,142 2,046 3,409 2,970 3,562 3,361 3,757 4,339 3,692 9,409

Power purchased 23 20 17 47 15 58 15 77 599 183 1,354 325 2,757 1,886

Personnel expenses 450 427 562 504 624 473 735 758 868 886 1,025 1,068 1,212 1,019

R&M material & services 458 498 534 562 586 555 830 809 1,017 911 1,240 965 1,465 925

Depreciation 1,097 712 1,215 909 1,746 899 2,210 1,567 2,653 1,887 3,141 2,251 3,611 3,074

Other expenses 157 203 190 265 209 249 229 356 252 414 277 502 303 496

Operating expenses 4,738 3,992 5,913 5,070 6,322 4,280 7,428 6,537 8,951 7,642 10,794 9,450 13,040 16,809

Operating income 288 925 765 992 2,948 972 3,426 1,769 3,834 2,004 4,253 1,676 3,646 (2,773)

Other income/expenseNonoperating income 140 202 62 184 186 168 229 180 297 295 350 352 307 1,225

Nonoperating expenses 163 173 172 151 182 153 202 210 223 182 247 235 270 472

Foreign exchange loss (gain) 1,247 (109)

Government subsidies 1.930

Net other income (23) 29 (110) 33 4 15 27 (30) 74 113 103 (1,130) 37 2,792

Net income before interest 265 954 655 1,025 2,952 987 3,453 1,738 3,908 2,117 4,356 546 3,683 19

Interestchargedtooperations 412 39-1 462 443 685 398 1,041 718 1.081 950 1,279 1,124 1,371 1.282

Net income before tax (147) 563 193 582 2,267 589 2,412 1,020 2,827 1,167 3,077 (578) 2,312 (1,263)

Corporate tax

Net income after tax (147) 563 193 582 2,267 589 2,412 1,020 2,827 1,167 3,077 (578) 2,312 (1,263)

Rate of Return (%) 2.1 5.5 4.3 4.6 12.0 5.4 10.8 6.2 10.1 5.2 9.5 3.5 7.1 (6.8)

Debt Service Coverage Ratio (%) 1.4 3.0 2.3 2.9 3.8 2.1 3.2 3.2 3.7 1.8 3.2 1.4 2.3 0.2

a/ Before government subsidy and debt restructuring; debt service coverage ratio would have been 0.9 times if debt were restructured in 1998.

-52-

INDONESIACIRATA HYDROELECTRIC PHASE II PROJECT

(LOAN 3602-lND)

PLN - BALANCE SHEET(Rp. billion)

92/93 93/94 1994 1995 1996 1997 1998SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual

ASSETS

Fixed AssetsGross plant in service 24,048 17,572 30,924 22,391 41,989 19,978 50,670 28,774 62,264 33,248 72,140 48.166 82,515 57,578Less: Accumulated depreciation 6,938 4,124 8,418 4,987 10,486 520 13,096 1,563 16,249 3,409 20,012 5,636 24,387 8,724Net plant in service 17,110 13,448 22,506 17,404 31,503 19,458 37,574 27,211 46,015 29,839 52,128 42,530 58,128 48.854Work in progress 7,731 8,256 9,478 9,927 8,837 12,994 9,070 13,621 8,437 18,210 9,425 13,996 11,417 14,166Total fixed assets 24,841 21,704 31,984 27,331 40,340 32,452 46,644 40,831 54,452 48,049 61,553 56,526 69,545 63,020

Current AssetsCash 604 916 652 853 448 754 431 649 494 1,653 575 897 630 4,205Net accounts receivable 495 568 660 659 919 764 1,077 885 1,270 1,020 1,496 1,310 1,658 1,596Net inventories 409 563 613 773 609 782 635 728 686 646 752 599 788 771Other current assets 227 182 238 71 250 82 262 169 275 358 289 211 303 214Total current assets 1,735 2,229 2,163 2,355 2,226 2,382 2,405 2,431 2,725 3,677 3,112 3,017 3,379 6,786

Other AssetsSinking funds I is 57 120 110 254 470Other assets 242 611 368 676 416 672 591 570 891 748 1,099 711 775 1,525Total other assets 242 611 368 691 416 729 591 690 891 858 1,099 965 775 1,995

Total Assets 26,818 24,544 34,515 30,376 42,982 35,562 49,640 43,952 58,068 52,584 65,764 60,508 73,699 71,801

EQUITIES & LIABILITIES

EquityPaid-in capital 11,064 11,881 12,814 15,316 14,151 19,294 15,193 22,486 16,341 27,116 17,717 28,341 19,101 31,461Retained earnings (229) 1,185 (350) 1,347 1,831 289 3,415 1,020 5,212 2,116 6,487 1,744 6,685 482Revaluation surplus 6,281 - 7,282 - 8,527 - 10,089 - 11,897 13,963 187 16,338 187Total equity 17,116 13,066 19,746 16,662 24,509 19,583 28,697 23,506 33,450 29,232 38,167 30,272 42,124 32,130

Consumer contributions 1,160 1,076 1,472 1.430 1,922 1,736 2.182 2,092 2,440 2,458 2,714 2,847 3,007 2,972Long-terns liabilities

Long-term debt(LTD) 6,208 4,731 10,327 5,265 13,184 6,030 14,565 7,631 16,209 12,915 18,71 1 15,449 21,149 18,974Bonds 300 900 900 1,898 2,598 3,198 2,518Consumers' deposits 610 534 762 701 930 840 1,047 1,031 1,172 1,231 1,308 1,447 1,450 1,694Other 3,113 3,706 3,347 3,975 864 2,445 4,981Total long-term liabilities 6,818 8,678 11,089 10,572 14,114 11,117 15,612 14,535 17,381 17,608 20,019 22,539 22,599 28,167

Current LiabilitiesCurrenttportion LTD 336 448 536 467 710 540 7t5 1,227 794 1,466 849 1,607 980 1,891Accounts payable 692 681 727 583 763 679 801 910 842 1,077 884 2,323 928 6,048Other Current Liabilities 374 595 393 663 412 1,907 433 1,683 455 743 477 920 501 593Total current liabilities 1,402 1,724 1,656 1,712 1,885 3,126 1,949 3,820 2,091 3,286 2,210 4,850 2,409 8,532

Other liabilitiesContribution to DPS 137 349 328 954 1,436 2,356 3,233Other liabilities 185 203 224 246 270 298 327Total other liabilities 322 - 552 - 552 - 1,200 - 1,706 - 2,654 - 3,560

Total equity and liabilities 26,818 24,544 34,515 30,376 42,982 35,562 49,640 43,952 57,068 52,584 65,764 60,508 73,699 71,801

-53 -

INDONESIACIRATA HYDROELECTRIC PHASE II PROJECT

(LOAN 3602-IND)

PLN - FUNDS FLOW STATEMENT(Rp. billion)

92/93 93/94 1994 1995 1996 1997 1998

SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual

SOURCES OF FUNDS

Internal SourcesNet income before interest 265 954 655 1,025 2,952 987 3,453 1,739 3,908 2,117 4,356 1,793 3,683 (89)

Depreciation 1,097 695 1,215 863 1,746 520 2,210 1,043 2,653 1,847 3,141 2,227 3,611 3,088

Deferred Consumercontributions 236 152 312 353 450 309 260 355 258 367 274 389 293 125

Consumer deposits 160 81 152 167 168 141 117 191 125 200 136 216 142 247

Total internal sources 1,758 1,883 2,334 2,408 5,316 1,957 6,040 3,328 6,944 4,531 7,907 4,625 7,729 3,371

Debt-serviceInterest charged to operations 595 307 462 393 685 238 1,041 497 1,081 950 1,279 1,913 1,371 1,244

Debt repayment 361 323 336 453 536 160 710 79 715 736 1,094 1,522 1,749 376

Total debt-service 956 630 798 846 1,221 398 1,751 576 1,796 1,686 2,373 3,435 3,120 1,620

Distribution of after-tax income a/ 12 547 14 422 4 1,644 41 289 72 70 78 92

Others 27 (2,284) 87 (227) 103 (1,937) 163 (232) 478 (58) 802 (2,349) 1,147 (1,310)

Net Internal Sources 763 2,989 1,435 1,367 3,988 1,852 4,085 2,696 4,598 2,833 4,654 3,539 3,370 3,061

External SourcesBorrowings 2,288 936 3,554 1,025 3,093 999 1,791 1,147 2,059 4,209 3,295 4,144 3,888 6,672

Bonds 300 300 900 600 300 - 300 998 300 1,000 300 600 300 -

Govemmentequity 2,100 2,730 1,750 3,434 1,337 3,245 1,042 4,477 1,148 2,028 1,376 1,666 1,384 3,120

Total external sources 4,688 3,967 6,204 5,060 4,730 4,244 3,133 6,622 3,507 7,237 4,971 6,410 5,572 9,792

Total Sources of Funds 5,451 6,956 7,639 6,426 8,718 6,096 7,218 9,318 8,105 10,070 9,625 9,949 8,942 12,853

APPLICATION OF FUNDS

Capital expenditureConstruction expenditure 5,227 6,768 6,698 6,173 8,048 6,195 6,143 8,962 6,658 8,407 8,032 9,971 7,771 9,545

Interestduringconstruction 223 76 654 316 867 806 461 996 657 1,144 733 1,458 37

Total capital expenditure 5,450 6,844 7,352 6,489 8,915 6,195 6,949 9,423 7,654 9,064 9,176 10,704 9,229 9,582

Change in working capital and other 1 112 287 (63) (197) (99) 269 (105) 451 1,006 449 (755) (287) 3,271

Total Application of Funds 5,451 6,956 7,639 6,426 8,718 6,096 7,218 9,318 8,105 10,070 9,625 9,949 8,942 12,853

Increase in cash (200) 111 48 (63) (204) (99) (17) (105) 63 1,004 81 (756) 55 3,308

Cash at beginning ofyear 804 805 604 916 652 853 448 754 431 649 494 1,653 575 897

Cash at end of year 604 916 652 853 448 754 431 649 494 1,653 575 897 630 4,205

Note: a/ including contributions to Overall Development Fund (DPS) and Development of Cooperatives and Weak Economic Businesses (DCWEB).

IBRD 23612

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IBRD 24493pp6 loa 110' '.a il: I

INDONESIASUMATERA CIRATA HYDROELECTRIC PHASE 11 PROJECT

MAJOR POWER PLANTS AND MAIN TRNSMISSION LINES

UNDER PROPOSED FUTURE. EXISTIPIG CONSTRUCTON PROJECT DEVE[OPMlENT TRANNTIINGON NIUNTSOK) s. JAKARTA Rd fldANKARTA

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