Docment of

The World Bank

FOR OFFICIAL USE ONLY

AOv. ws ' -zy

Report No. P-4287-IND

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$34 MILLION

TO THE REPUBLIC OF INDONESIA

FOR THE

GAS DISTRIBUTION PROJECT

April 16, 1986

I This document has a restricted distribution and may be used by recipients only in the performanceof their 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$1.00 = Rp 1,100Rp l,000 - US$0.91

WEIGHTS AND MEASURES

1 barrel (bbl) = 0.159 cubic meters (cu.m.)1 standard cubic foot (cf) = 0.028 cu.mkWh = kilowatt hoursmcf = thousand standard cubic feetMW = megawatt (1,000 kilowatts)tcf = trillion standard cubic feettpy = metric ton per year

ABBREVIATIONS AND ACRONYMS

BAKOREN National Energy Coordinating BoardBAPPENAS National Development Planning BoardGOI Government of IndonesiaICB International Competitive BiddingLNG Liquefied Natural GasLPG Liquefied Petroleum GasMICAS Directorate General of Oil and Natural

Gas, Ministry of Mines and EnergyOPEC Organization of Petroleum Exporting

CountriesPGN Perusahaan Umum Gas Negara (National

Gas Company)PLN Perusahaan Umum Listrick Negara

(National Electricity Company)REPELITA National Five-Year Development Plan

(Repelita I, 1969-74; Repelita II,1974-79; Repelita III, 1979-84;Repelita IV, 1984-89; Repelita V,1989-94)

FISCAL YEAR

April 1 - Harch 31

FOR OMCIAL USE ONLY

INDONESIA

GAS DISTRIBUTION PROJECT

Loan and Project Summary

Borrower: Government of Indonesia (GOI)

Beneficiary: Perusahaan Umum Gas Negara (PGN)

Amount: US$34.0 million equivalent

Lending Terms: Repayable over 20 years, including five years of grace, at thestandard variable interest rate.

OnlendingTerms: The Government would onLend US$32.6 million of the proceeds of

the loan to PGN at a rate of at least 12Z per annum.Repayment of funds for gas distribution and training (US$23.1million) would take place over 15 years, including a graceperiod of five years; repayment of funds for customerconversion (US$9.5 million) would take place over eight years,including a grace period of five years. US$1.4 million wouldbe used by the Government for additional studies. GOI wouldbear the foreign exchange and interest rate risk.

ProjectDescription: The principal objective of the project would be to accelerate

the utilization of natural gas in high-value uses in thedomestic market. This would be achieved by developing theinfrastructure needed to distribute gas to industrial andcommercial consumers currently using liquid fuels as a sourceof energy, and by building up the institutional capability ofPGN to actively market and distribute gas. Support would alsobe provided to facilitate the conversion of industrialconsumers from liquid fuels to natural gas, and to assist GOIin setting appropriate fuel prices so as to encourage theoptimal utilization of gas.

The project would consist of: design and construction of majorextensions to the existing natural gas distribution networksin Jakarta, Bogor and Medan, including new supply lines, localdistribution pipelines, regulator stations and customermetering stations; rehabilitation of PGN's existing gas dis-tribution networks, which are unsafe; and establishment of aprogram to assist industrial users in plant conversion fornatural gas use. A centerpiece of the project would be the"twinning" of PGN with an established gas utility to developPGN's managerial and technical expertise through close collab-oration with a similar, more experienced, operating entity.

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

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Risks: The potential risks faced by the project fall into four cate-gories: (i) timeliness of gas supply, (ii) delays in marketdevelopment, (iii) declining fuel values, and (iv) shortfallsin institutional capability to implement the project. Theserisks have been recognized from the beginning, and, as far aspossible, precaptions to minimize them have been built intothe project design. The substantial'benefits which can be de-rived from the project far outweigh these risks.

Estimated Costs: Local Foreign Total…-- (US$ miLlion)

Distribution SystemsJakarta 10.4 9.7 20.1Bogor 2.6 2.2 4.8Medan 2.6 2.3 4.9Upgrading of networksin other cities 0.8 1.5 2.3

Sub-total 16.4 15.7 32.1

Technical Assistance - 3.0 3.0Training - 0.5 0.5Equipment - 1.5 1.5Customer Conversion 2.6 13.8 16.4LPG and Energy Pricing Studies - 1.2 1.2Taxes and Duties 11.9 - 11.9

Base Cost 30.9 35.7 66.6

Physical Contingencies 3.1 3.6 6.7Price Contingencies 5.4 7.3 12.7

Total Project Cost 39.4 46.6 86.0

Financing Plan: Local Foreign Total(US$ million) ---…--

IBRD 34.0 34.0Bilateral Assistance - 3.8 3.8PGN Internal Cash Generatign 6.5 - 6.5GOI Equity Contributions 18.3 - 18.3Commercial Loans 10.4 - 10.4Consumers 4.2 8.8 13.0

Total 39.4 46.6 86.0

Estimated Disbursements:

IBRD Fiscal Year 1987 1988 1989 1990 1991 1992… ------------ (US$ miillIT'

Annual 4.8 9.5 8.8 5.8 3.4 1.7Cummulative 4.8 14.3 23.1 28.9 32.3 34.0

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Economic Rate of Return: About 312.

Appraisal Report: No. 5942-IND, dated April 11, 1986.

Maps: IBRD No. 19437194381943919440

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICOF INDONESIA FOR THE GAS DISTRIBUTION PROJECT

1. I submit the following report and recommendation on a proposed loanto the Republic of Indonesia for the equivalent of US$34.0 million to helpfinance the Gas Distribution Project. The loan would have a term of 20 years,including 5 years of grace, at the standard variable interest rate. TheGovernment of Indonesia (GOI) would onlend a portion of the proceeds of theloan (US$32.6 million) to Perusahaan Umum Gas Negara (PGN), the national gascompany, at an interest rate of at least 12Z p.a. Repayment of funds for gasdistribution and training (US$23.1 million) would take place over 15 years,including 5 years grace; repayment of funds for customer conversion (US$9.5million) would take place over 8 years, including 5 years grace. TheGovernment of Indonesia would bear the foreign exchange and interest risk.

PART I - THE ECONOMY1'

2. An economic report, entitled "Indonesia: Policies for Growth andEmployment" (No. 5597-IND, dated April 23, 1985), was distributed to theExecutive Directors on April 30, 1985. Annex I gives selected social andeconomic indicators for the country.

Background

3. The Republic of Indonesia is a highly diverse country spread acrossan archjpelago of more than 13,000 islands with a land area of about 2 mil-lion km'. It now has a population of over 155 million, growing at about 2.2Zp.a., and is the world's fifth most populous nation. The country has adiversified resource base, with plentiful primary energy resources, signifi-cant mineral deposits, large timber potential and a developed system of agri-cultural commodity production and export. A high proportion of these primaryresources are located on the sparsely populated islands of Sumatra andKalimantan, while two thirds of the population live on Java, which has areaswith some of the highest rural population densities in the world. About aquarter of the population lives in urban areas, and the current rate of urbanpopulation growth is about 4% p.a. The 1983 estimate of GNP V r capita isUS$560, which places Indonesia among middle income countries.-

1/ Substantially unchanged from the President's Report on the Central andWest Java Irrigation Development Project (No. P-4205-IND), circulatedunder cover of R85-360 dated December 31, 1985, and approved by theExecutive Directors on January 23, 1986.

2/ On the basis of the World Bank's system of country classification andAtlas methodology for calculation of GNP.

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Macroeconomic Developments and Resource Management

4. Until 1981, the economy had been growing at almost 8% p.a. for overa decade. This growth was associated with rapid increases in public expendi-tures, total investment and savings. The initial impetus for this occurred inthe period of recovery from the turbulence of the mid-1960s. The Governmentof Indonesia (COI) took effective action to restore macroeconomic stability,liberalize the economy, rehabilitate infrastructure, and provide incentivesfor domestic and foreign private investment. However, the dominant externalinfluence over the past decade has been the huge expansion, and significantvariability, in foreign exchange earnings from oil. Net exports from the oiland gas sector rose from US$0.6 billion in 1973/74 to US$10.6 billion in1980/81, when the current account enjoyed a surplus of US$2.1 billion. Oilreceipts also provided about 60Z of Central Government receipts by 1980181 andhelped finance a sustained increase in demand. The pattern of expenditureshas also helped foster diversified growth. Of particular note has been thesupport for agriculture, through investment in infrastructure and support ser-vices. This supported an agricultural growth rate of almost 4% p.a. over thepast decade, and led to the recent achievement of self-sufficiency in rice.Manufacturing also enjoyed a high growth rate during the 1970s (of about 14Zp.a.), although this was from a very low base and predominantly orientedtoward the protected domestic market.

5. During 1982, the Indonesian economy was affected adversely by theprotracted international recession and the accompanying decline in exportearnings, especially from oil. These developments led to a sharp turnaroundin Indonesia's external resource position and a falL in real per capitaincomes. In response, the government acted promptly to ensure that the coun-try's balance of payments situation was manageable and to provide a basis forlonger-term structural transformation. Particular attention was paid toreducing Indonesia's dependence on oil for export earnings and public reve-nues. Specific measures introduced over the past two years include:

(a) a 28% devaluation of the rupiah against the US dollar in March 1983,without any change in the policy of full convertibility;

(b) a major rephasing (postponement/cancellation) of large-scale andimport-intensive public investments, especially in the industrialsector;

(c) successive price increases for petroleum products, which havelargely eliminated domestic subsidies;

(d) a far-reaching financial reform, inclading the liberalization ofinterest rates and the abandonment of credit ceilings;

(e) introduction of a comprehensive tax reform program, aimed atincreasing government revenues by broadening the tax base, simplify-ing the structure of rates and improving administration; and

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(f) an ongoing effort to reduce the unfavorable impact of the regulatoryframework, including simplification of investment approvaL proce-dures and a major reorganization of customs, ports and shippingoperations.

6. These measures, aided by more favorable trends in the world economy,are already having their desired impact. GDP, led by strong performance inthe oil (including LNG and refining) and agriculture sectors, rose by an esti-mated 4.7% in 1983 and 6.5% in 1984. The balance of payments situation isalso improving. In particular, the current account deficit was reduced fromUS$7.1 billion (8.5% of GNP) in 1982/83 to an estimated US$1.9 billion (2.4%of GNP) in 1984/85. The major factors responsible for this improvement areimport cuts, resulting from the Government's efforts to curb aggregate demand,and higher export earnings from non-oil products, due to recovery in theindustrial countries and the Government's policies to promote non-oilexports. The Government's restraint is also evideut in the budget, where realexpenditures have probably fallen over the past three years. This fiscal dis-cipline, in turn, helped keep domestic inflation down to about 12X in 1983 and9% in 1984, despite the inevitable pressures associated with the 1983 devalua-tion and the petroleum price adjustments. Faced with the prospect of evenlower oil prices in the year ahead, the Governmenc recently announced anaustere budget for 1986/87. In particular, total expenditure is projected tofall by 7% (compared to budgeted levels in 1985/86), with a 22% reduction inthe development budget.

Policies for Medium-Term Growth and Transformation

7. Sustained growth of the non-oil economy by at least 5Z p.a. is pro-bably necessary to have a significant impact on employment creation and pov-erty alleviation over the remainder of this decade. To promote such a growthrate, without generating unmanageable balance of payments pressures, is one ofthe major challenges facing the Government. Successful transformation of theeconomy will require continued action in three key policy areas: managementof the public investment program (and improvements in the regul.tory/policyenvironment for private investment), rationalization of the external traderegime and development of the financial sector.

8. The projected import constraint imposes serious limitations on therate at which Indonesia can undertake new investments over the next fewyears. At the same time, some reallocation of resources towards agricultureand the social sectors might be justified, in order to reduce the import con-tent of investment while still meeting the Government's employment objec-tives. It is therefore important that mechanisms are established to facili-tate orderly and rational adjustments to the public investment program. Pos-sible options include preparation of multi-year expenditure plans (at leastfor the larger projects), identification of a core program of high priorityprojects and strengthening of project appraisal/selection procedures. TheGovernment is also considering ways to improve project implementation, so thatinvestment returns can be realized more promptly. Given the budgetarv con-straints, it is expected that the private sector will be called upon to playan increasingly important role in capital formation. To encourage this pro-cess, the Government recently announced simplifications in investment approval

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procedures and a major internal reorganization of the Investment CoordinatingBoard.

9. The recent decline in the price of oil has clearly demonstrated theimportance of reducing the economy's heavy dependence on a single source offoreign exchange and, more generalLy, the need to rationalize the externaltrade regime. The Government has set a target of doubling non-oil exports innominal terms over the next five years. This target should be attainable pro-vided that economic recovery in the industrial economies is sustained,Indonesia's access to those markets is not constrained by protectionist mea-sures and, most importantly, Indonesia follows appropriate trade and exchangerate policies. The Government has already introduced a range of export promo-tion measures intended to improve export incentives, ensure ready access tofinance for exporters, raise product quality and enhance marketing canacity.However, over the longer term, there is no effective substitute for comprehen-sive trade reform. On the import side, Indonesia's trade regimt has histori-cally been characterized by a predilection for high tariffs and quantitativerestrictions. In March 1985, the Government announced a major reduction inthe range and level of nominal import tariffs. However, other actions --

including increased use of import quotas/bans and regulations requiring higherlocal content in production -- have served to promote some potentially costlyand uneconomic investments which could prove counter productive to the exportdrive.

10. The Government's decision to move towards a more liberal financialenvironment raises a number of issues relating to resource mobilization,financial intermediation and credit allocation. Over the longer term, as thescope for subsidized credit is reduced, the banking system will have to playan increasingly important role in mobilizing domestic resources. However,during the transition period, some potential conflicts between the resourcemobilization and credit allocation objectives could arise. For example, thein-rease in deposit rates following the recent financial reforms, whileencouraging resource mobilization, has also led to high real lending rateswhich have tended to dampen investment and credit demand. This in turn mayrestrain economic activity. It is therefore important to find ways to reducethe high intermediation costs of banks. Consideration should also be given toother ways of mobilizing financial resources, including development of a capi-tal market, expansion of the banking network (especially in rural areas) andselective relaxation of restrictions on private banks (combined with increasedbank supervision).

Incomes, Employment and Human Development

11. Indonesia's physical, human and economic resources are very unevenlydistributed between its main regions. Java, for example, accounts for almost50% of Indonesia's GDP and 62Z of its population, but only 7X of its landarea. Although all five of the country's main regions experienced rapid percapita growth in the 1970s, regional differences in output tended to widen.To a large extent, differences in performance are associated with the impor-tance vf the mineral sector, particularly petroleum. However, there are twoimportant prGcesses at work in Indonesia which enable the benefits of growthto be more evenly spread than indicated by output trends. The first of these

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is migration. Between 1971 and 1980, 4.3 million people (or 16% of the natur-al increase in population) resettled permanently in provinces outside those oftheir birth. Approximately 1.7 million people moved from Java to the OtherIslands, of whom some 675,000 were resettled through the official transmigra-tion program. There has also been substantial rural-urban migration bothbetween and within provinces. The second process is the redistribution ofincome through the government budget. Regional variations in per capita con-sumption are much less pronounced than differences in per capita output. Thisis largely due to the impact of taxation on the oil sector.

12. An analysis of household expenditures indicates that Indonesia'srapid econc,ic developmen,t has been accompanied by significant progress inreducing poverty. Between 1970 and 1980, the proportion of the populationliving in poverty declined from 57% to 40%; the decline was particularly rapidin the Other Islands and in urban areas. The core of the poverty problem con-tinues to be in rural Java, where landless laborers form a large, and possiblyrising, proportion of the population and where, for most of the 1970s, thereis little evidence of any rise in real agricultural wages. However, there wasa significant rise in real agricultural wages around 1980-81, associated withthe sharp increase in rice output and booming overall economic growth.Increases in rural non-agricultural and urban wages also occurred at thebeginning of the 1980s. Despite the slowdown in economic growth and stabili-zation measures since 1982, the limited available evidence suggests that wagesand incomes have held up, partly as a consequence of continued agriculturalgrowth.

13. In the future, the availability of productive employment will be akey determinant of income distribution. The labor force is expected to growat about 2.3% p.a. over the next decade, while economic growth will be lowerthan in the 1970s. The resultant squeeze in the labor market is not expectedto lead to a dramatic increase in unemployment but there is a serious risk ofstagnant or declining labor income in both rural areas and the urban informalsector. Given the balance of payments constraint facing the country,Indonesia's employment ouLlook depends crucially on the pattern of economicgrowth, and in particular the extent of labor absorption in the commodity-producing sectors. Although over the long term the structural shift inemployment away from agriculture should continue, this sector will stillaccount for half or more of total employment and the growth in agriculturalincomes will be an important determinant of job opportunities elsewhere innon-farm activities. This will require continued priority to agriculture inthe form of supportive pricing and investment policy, with some shift inemphasis toward the Other Islands. On Java, attention will need to be paid toissues of agricultural diversification and the pace or mechanization. Withrespect to the industrial sector, the development of an efficient, relativelyexport-oriented pattern of production can also contribute to significant laborabsorption in the medium to long term, especially in Java; this will involve acontinuing major role for small-scale firms. If a favorable evolution of theemployment situation is to occur, there will also need to be an appropriatepattern of public expenditure and supportive policies for the urban informalsector; finally, the transmigration program can make a substantial contribu-tion, provided it is closely coordinated with complementary agriculturalinvestment programs, in tree crops, water resources and livestock development.

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14. There has been substantial progress in extending the provision ofsocial services throughout the population. Universal enrollment in primaryeducation has been virtually achieved and the enrollment rate in secondaryschools is now about 35%. However, the weak educational base of the popula-tion continues to be a major obstacle to rapid economic development and a sub-stantial further expansion of secondary and tertiary education will be neces-sary as well as a major effort to raise the quality of the whole system. Inthe health sector, there has been a large expansion in facilities, notably atthe sub-district level, but continued investment and an improvement in qualitywill be necessary to increase effectiveness. This will have to be complemen-ted by a major expansion in water supply and sanitation if the improvement inindices of mortality and morbidity during the 1970s is to be maintained. By1981, only 18% of the rural and 40% of the urban population had access to safewater, compared with government targets of 60% and 75%, respectively, for1990.

External Capital Flows

15. The recent improvement in Indonesia's balance of payments situationis evidence of the Government's commitment to manage short-term economicshocks. The ongoing program of economic refo.ms should also help to hold thecurrent account deficit to sustainable levels over the medium term. Even so,continued resource transfers from abroad will still be essential if the Gov-ernment's modest growth targets (5% p.a.) for the next five years are to beachieved. Staff projections indicate that new public medium- and long-term(MLT) borrowing will have to average about US$5.2 billion p.a. over the nextthree years, including about US$2.5 billion p.a. of official developmentassistance and the balance from import-related credits and untied borrowing.Indonesia is well placed to arrange the necessary financing on reasonableterms; the profile of existing debts is good and a comfortable level of exter-nal reserves has been rebuilt over the past two years.

16. Total public debt outstanding at the end of 1984 is estimated atUS$22.9 billion, with an additional US$14.0 billion of undisbursed commit-ments. Of the total debt disbursed and outstanding, official assistance(including non-concessional multilateral aid) accounts for 50% and obligationsat variable interest rates for only 24%; there is no short-term public debt.The average maturity of public MLT debt at the end of 1984 is estimated at 16years. The Government continues to manage its external debt quite prudently.Until 1982, Inconesia had succeeded in maintaining its public debt serviceratio, based on net exports (i.e., net of oil sector imports), at or below20Z. However, because of the sharp drop in oil export receipts over the pastthree years, the ratio rose to 25% in 1984. With the projected levels andcomposition of borrowings and export earnings, Indonesia's public debt serviceratio, again based on net exports, would rise to about 30% in 1989 and thengradually decline in later years. With private MLT debt included, the totaldebt service ratio. based on the conventional concept of gross exports, wouldrise from 21% in 1984 to around 24% in 1989 and decline back to 22% by 1995.While debt management will require careful attention in the coming years, theprojected debt service ratios are not excessive by international standards.

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PART II - BANK GROUP OPERATIONS IN INDONESIA 3/

17. As of March 31, 1986, Indonesia had received 48 IDA credits total-ling US$896.49 million (less cancellations) and 107 Bank Loans amounting toUS$8,149.54 million (less cancellations). IFC commitments totalledUS$163.2 million. .nnex II contains a summary of IDA credits, Bank loans andIFC investments as of March 31, 1986. The share of the Bank Group inIndonesia's total (disbursed) external debt outstandinS at the end of 1983 was13.1%, and the Bank's share of debt service 10.3%, compared with 13.3% and7.9%, respectively, in 1982. From 1968 until 1974, all lending to Indonesiawas made through IDA. Due to the country's improved creditworthiness follow-ing the commodity and oil price boom in 1973/74, the bulk of the Bank Group'slending in the remainder of the 1970s was through IBRD loans, with a modestamount of IDA lending being justified primarily on poverty grounds, as the percapita GNP was well below the IDA cutoff level. IDA lending was discontinuedin FY80. Given the critical importance of agriculture (including transmi-gration) for employment, food security and exports, over one third of BankGroup-assisted projects have been in this sector. In addition, Loans andcredits have been extended to virtually all other sectors of the economy,including transportation, education, urban development, water supply, ruraldevelopment, industrial development financing (including small-scaleindustry), power, telecommunications, population and nutrition, and technicalassistance.

18. During Repelitas I (1969-74) and II (1974-79), and in line with theobjectives of these first two Five-Year Plans, a high proportion of Bank Grouplending was directed initially toward the rehabilitation and then the expan-sion of infrastructure and production facilities. Special attention was alsogiven to meeting the shortage of skilled manpower and technical assistanceneeded for preinvestment studies and project execution. Repelita III (1979-84), published in early 1979, stressed the need for continued high growth andstability, but departed from previous plans by placing special emphasis onmore equitable income distribution and poverty alleviation. This focus, whichwas fully in line with the conclusions of the Bank's economic work, requiredgreater attention to employment generation (particularly in the industrialsector) and to improvements in basic public services. While Bank lending wasalready consistent with these objectives, increased emphasis has been given tothese priorities. However, the adverse economic developments that occurred inthe latter half of the plan period and the measures taken to address them, ledto a reshaping of development objectives for Repelita IV (1984-89). Theseemphasize restoring growth of incomes and emp'oyment while continuing finan-cial prudence, promoting structural change toward a more diversified economy,and maintaining efforts to improve income distribution and alleviate poverty.This shift in focus has underscored the need to follow through on reforms that

3/ SubstantialLy unchanged from the President's Report on the Central andWest Java Provincial Irrigation Project (No. P-4205-IND), circulatedunder cover of R85-360 dated December 31, 1985, and approved by theExecutive Directors on January 23, 1986.

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have already been initiated, seek increased efficiencies in the economy, mobi-lize domestic resources to finance needed investments and recurrent expendi-tures, and foster a policy environment conducive to the achievement ofrequired changes.

19. The Bank has geared its lending and economic work program to addressthese needs and to maintain a high level of resource transfer. The approachis to continue to emphasize the ongoing dialogue on economic policy that hasbeen a cornerstone of the Bank's relationship with the Government for manyyears, and to coordinate discussion of macroeconomic issues with advice oninstitutional and policy reform in important sectors and subsectors, coupledwith lending operations and technical assistance that meet priority needs andsupport institutional improvements in specific areas. Emphasis in economicwork is being given to trade and industrial issues, development of the finan-cial system, and public resource management. In the lending program, agricul-ture continues to receive the most attention. However, the program is broadlybased, and includes increasing emphasis on education and human resource deve-lopment. Continued attention is being given to power and energy, where theBank is concentraEing on policies to diversify Indonesia's energy base,rationalize pricing and improve sector planning. In transportation, the Bankis focussing on efficiency improvements in the maritime sector and on improv-ing the national network of highways and rural roads. In urban developmentand water supply, lending is being directed more and more to developing inno-vative low-cost solutions, providing for cost recovery and strengthening localinstitutions, in order to minimize demands on the government budget and decen-tralize the responsibility for addressing basic needs. In all, the Bank'slending program is intended to contribute about 20% of Indonesia's capitalrequirements during the next three years and is expected to be an importantcatalyst in attracting other funds. Where possible, we are seeking also towiden the impact of Bank lending through technical assistance, as well ascomplementary investments and coordinated policy dialogue with other donors.This is especially true in our lending programs for power, urban development,water supply and transportation.

20. There has been an improvement in the last few years in thedisbursement ratio - from a low of 13% in FY80 to over 17Z in FY85. The poorFY80 ratio was in large part merely a result of the rapid increase in commit-ments during the FY77-79 period, when total Bank/IDA commitments to Indonesiaincreased by 122% compared to a Bank-wide increase of 83%. However, it alsoreflected implementation difficulties arising out of the Government's budget-ary, procurement and payment procedures, as well as the severe shortage ofmanagerial and technical manpower in Indonesia. A number of steps have beentaken by the Government and the Bank to address these issues. Several specialBank missions have visited Indonesia to analyze the problems and make recom-mendations for-simplifying budgetary and financial procedures. The Governmentand the Bank have also instituted formal and regular joint review proceduresto identify general and project-specific problems and work out corrective

4/ The ratio of actual disbursements during the fiscal year to thecumulative undisbursed amount at the beginning of the fiscal year.

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measures. Procurement seminars were held in Jakarta in September 1979,November 1981 and May 1984. As a consequence of these joint initiatives, theGovernment has taken measures to streamline some of the complex budgetary andfinancial procedures affecting project implementation. In addition, in orderto reduce disbursement delays due to initial project implementation difficul-ties, many operations are now being presented for Board consideration at alater stage in the project cycle. The combined effects of all of these acti-vities are reflected in the increase in disbursements from US$206 million inFY79 to US$728 million in FY85. It is nevertheless clear that continuedefforts to improve project implementation and the pace of disbursements arerequired, as Indonesia continues to show a disbursement ratio below the Bank-wide average. A number of initiatives are underway. The Bank is helping theGovernment in a special effort to identify problems in the construction indus-try with a view to developing appropriate remedial actions and policies, asweaknesses in the domestic contracting industry have been identified as one ofthe major causes of implementation problems in Indonesia. Efforts are alsounderway to develop standardized tender documents in order to speed theprocurement process, and to improve project monitoring and land acquisitionprocedures. It is the Bank's and the Government's intention to devote conti-nued attention to these and other aspects of project implementation in thecoming year, in order to ensure that maximum benefit is realized from theGovernment's investments, Bank-assisted and other.

PART III - THE ENERGY SECTOR

Introduction

21. Indonesia is a country richly endowed with diversified energyresources. While virtually all of its energy requirements are met from twosources -- indigenous oil, which is also a major source of foreign exchange,and biomass -- the energy resource base of the country also includes naturalgas, which is exported in large volumes as LNG (liquefied natural gas), coal,hydroelectric power and geothermal energy, all in substantial quantities.Indonesia has so far made relatively little use of its non-oil energyresources to meet domestic needs, and the modern sectors of the economy areessentially geared towards the consumption of oil products, while the ruraleconomy is still heavily dependent on biomass fuels. However, the changinginternational environment over the last decade has prompted the Government ofIndonesia to reconsider the use and allocation of its vast energy resourcesand, more generally, the role energy should play in the economic developmentprocess.

22. The optimum development of Indonesia's energy resources calls forthe exploitation of a broader range of energy sources and a reduction in thepreponderant role of oil products in the economy. Against this background andin the interest of mitigating the decline in oil export revenues that hastaken place in recent years, the Government has made energy conservation anddiversification two of its major objectives. Large amounts of funds are beingallocated to coal and hydroelectric power development. However, despite thepotentially large economic benefits that could be derived from expanded gasconsumption, progress has been slow in this area.

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Primary Energy Resource Development

23. Much of the development of Indonesia's energy resources reflects itssingular geographic setting -- an archipelago consisting of five main islandsand Literally thousands of smaller ones. The spatial dispersion of thecenters of economic activity and energy resources imposes severe limits on theuse of the country's energy potential and explains much of its past relianceon oil. The need for major infrastructure investments remains an obstacle tothe development of coal and natural gas. The export of natural gas as LNG hasbeen a striking exception to this general picture, benefitting from a readymarket -- Japan -- and from the Government's ability to work out suitablearrangements with the oil industry to take advantage of this unparalleledopportunity.

24. Oil. Oil dominates the Indonesian economy, accounting for about 80Xof commercial energy consumption and 70% of export earnings as well as ofGovernment revenues. Cumulative production as of January 1983 was about 10billion barrels. Over the past five years, oil production has declined fromabout 1.6 million barrels per day (bbl/d) in 1978 to 1.3 million bbl/d in 1984in response to changing world market conditions and lower OPEC quotas.Estimates of oil reserves are inevitably subject to large uncertainties.Remaining proven oil reserves are reported to be about five billion barrels,with the possibility of adding another seven billion barrels from existing andnew discoveries by the year 2000. These reserves could support a moderategrowth in annual production over the next decade (current production capacityis estimated at 1.6 million bbl/d). However, without unexpected new finds,production will then start to tail off. This long-term production constraint,together with continuing uncertainty in world market conditions, underscoresthe importance of diversifying Indonesia's primary energy sources. Explor-ation activity has recently shown a downturn following the country's mostactive period from 1980 to 1983. While the slowdown in the interest of oilcompanies may, to a large extent, reflect world-wide trends, a revision ofincentives provided to industry and the pace at which new acreage is beingoffered is probably needed if Indonesia is to increase or maintain its pro-duction potential.

25. Natural Gas. Indonesia has considerable gas resources with recover-able reserves estimated at about 80 trillion standard cubic feet (tcf).Natural gas was originally produced in Indonesia as associated gas in theproduction of crude oil. Several large-scale gas fields were discoveredduring the seventies and now Indonesia has reserves of gas comparable to itsoil reserves. The bulk of this gas is non-associated and consequently can bedeveloped independently of the level of oil production.

26. Coal. Indonesia's coal reserves are believed to be in excess of 10billion tons, located primarily in west and south Sumatra and Kalimantan.While current production of about 450,000 tons per year (tpy) is still wellbelow the peak levels achieved in the 1940s (2 million tpy), major projectshave been undertaken in Sumatra to increase production. In addition, in 1981,the Government entered into a number of production-sharing agreements withprivate foreign and Indonesian joint-venture companies for exploration andexploitation of the Kalimantan coal reserves. Exploration is now in progress.

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27. Hydroelectricity. Indonesia's total hydroelectric resources arelarge, but development is limited by their geographic distribution relativeto demand. The greatest hydropower potential (over 35Z) is in Irian Jayawhere electricity demand is less than one percent of total domestic demand.On the other hand, less than 102 of the total potential is in Java, whichaccounts for 80Z of the current electricity demand. Existing hydroelectricinstallations have an aggregate capacity of about 1,300 MW. Schemes with anadditional combined generating capacity of about 1,500 MW are currently underconstruction.

28. Geothermal Energy. Surface manifestations of geothermal energy arefound on all islands except Kalimantan, but only a few sites have been inves-tigated and only one, Kamojang in west Java, has been developed. It isbelieved that potential reserves may approach 10,000 MW. Overall, however,utilization of geothermal energy is limited in relation to this potential. Toaccelerate the pace of development, the Government has announced its intentionto lease other sites to international investors, but the response appears tobe limited. A major impediment to geothermal development has been the lack ofa clear policy in setting the transfer price of geothermal steam to the powerutility. There is a need for the Government to revise its pricing formula andwork out the implications of this revised formula on the package of incentivesoffered to industry for geothermal exploration and development.

29. Biomass. Annual availability of biomass -- mostly by-products orwastes from agriculture and forestry -- is estimated at about 17 million tons.Approximately 80% of rural households depend on firewood and biomass ascooking fuels. However, deforestation has become an acute problem in Java.Development of biomass potential for increased domestic consumption willrequire a major organizational effort at the grassroots level to increaseplanting of fast-growing bush species on waste land, develop systpmatic col-lection of agricultural wastes, construct facilities for energy conversion,and develop a distribution network.

Power

30. A key Government objective is to improve and expand the supply anddistribution of electricity in rural and urban areas. The state electricitycompany (PLN) has about 3,300 MW of installed capacity and operates over8,000 km of transmission lines and about 35,000 km of distribution lines, thebulk of which are in Java. In addition, large captive generation units,accounting for about 40% of total capacity, have been developed over time tosupplement the shortage of generating capacity in the public system.Indonesia's electricity consumption (about 140 kWh per capita) is low inrelation to its income level and plans have been made for a rapid increase ingeneration capacity. About half of public investment in the energy sector isnow directed to the electricity subsector.

Energy Pricing

31. Until recently, subsidized petroleum product prices impededefficient resource use in the economy. The Bank, through its economic andsector work, has had a continuous dialogue with the Government on energy

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pricing issues and has highlighted the consequences of Government pricingpolicy. In 1983 the Bank prepared a study entitled "Indonesia - SelectedIssues of Energy Pricing Policy" (Report No. 4285-IND) to analyze the policyoptions available to the Government and their implications. Over the lastthree years, GOI has taken bold steps to increase the domestic price ofpetroleum fuels and eliminate subsidies. As a result, fuel prices are at orabove international levels with the exception of kerosene, which is stillsubsidized for social reasons. Electricity tariffs were increased by over200X on average between 1981 and 1984 and are now comparable to thoseprevailing in the region and within 10-15% of estimated long-run marginalcosts. The pricing of natural gas is discussed in paragraph 37.

The Natural Gas Subsector

32. Indonesia has considerable gas resources, with estimated recoverablereserves of about 80 tcf. The Government has so far given priority to the useof gas for LNG export projects and, in the case of associated gas, for oilfield maintenance to the extent possible. Other important uses of gas are insteel and fertilizer production. In view of the continuation of gas disco-veries but limited additional opportunities for export of LNG, the Governmentis presently reviewing this general policy. To this end it has commissioned,with IDA assistance, three studies intended to provide guidance in designingan appropriate investment strategy and policy framework for the gas sector:(i) a Gas Utilization Study to assess, in a long-term perspective, the poten-tial for expanded use of natural gas domestically; (ii) a City Gas Distribu-tion Study to assess the potential for expanded gas distribution to small andmedium industries, commercial entities and households in urban areas; and{iii) an LPG Feasibility Study to evaluate the economic viability of distri-buting LPG more widely for domestic uses. The first two of these studies havebeen completed and the Government is now reviewing the results. This processis expected to lead to major modifications in the gas sector developmentstrategy, which should in the future give priority to gas utilization in thepower, industrial and commercial sectors as a substitute for liquid fuels (seepara. 39 below).

33. Reserves. The largest gas reserves have been discovered in theBadak region in east Kalimantan (17 tcf), the Arun region in north Sumatra(14 tcf) and the Natuna offshore area in the South China Sea (40 tcf). Theworld's two largest operational LNG projects are at Badak, operated by Huffco,and at Arun, operated by Mobil. Other regions with major proven gas reservesare south Sumatra (6 tcf) and west Java (2 tcf).

34. Gas Utilization. Industrial use of natural gas has grown steadilyover time but is still very low relative to its economic potential. The firstmajor industrial use was as feedstock for urea production at the Pusri ferti-lizer plant in south Sumatra in 1963. In 1970, LPG and carbon black plantswere constructed in Rantau, north Sumatra. With the commencement of LNGproduction in Badak (1977) and Arun (1978), consumption of natural gas grewrapidly. Total production reached 1.2 tcf in 1983, of which field use (gaslift and gas injection) accounted for 22%, LNG production for 43Z, and flaredgas for 12%. The remaining 23% is used domestically by various industrialusers (including gas used as fuel gas), and city distribution systems.

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35. The Government's attention has so far been mainly drawn by theprospects for LNG export. It has been extremely successful in this area,having developed with the assistance of international oil companies thelargest LNG projects in the world and, in doing so, pioneered new formsof contracts with the oil companies. However, the potential for furtherexpansion of LNC exports (beyond projects already planned) appears limitedand, in any case, well below the country's gas production potential, thusleaving a substantial surplus production capacity available for the domesticmarket. Actually, the recent Gas Utilization Study indicates that manydomestic applications, such as natural gas used as fuel for power generationand in industry where gas substitutes directly for liquid fuels, would likelyyield greater economic benefits to the country than LNG export. These con-clusions have added impetus to the Government's decision to review its gaspolicy with a view to giving natural gas a major role in its energy diversifi-cation strategy. Some of these recommendations, such as accelerating thedevelopment of gas reserves in Java and some areas of Sumatra to convert powerstations and city gas systems (including local industries) from liquid fuelsto natural gas, should be given high priority. Recommendations on longer-terminvestments to ensure long-term supplies, such as the construction of atransmission system linking Java to a gas surplus area (e.g., Kalimantan),will require, because of their magnitude, close review and further study.

36. Institutions in the Gas Sector. The principal agency responsiblefor the development and implementation of Government policies in the gassector is the Ministry of Mines and Energy, which was established in 1978 tocoordinate and supervise the activities of the public and quasi-publicenterprises operating in the sector. These include Pertamina, which hasoverall responsibility for the development of oil, gas and geothermal energy,and Perusahaan Umum Gas Negara (PGN), which is responsible for gas distribu-tion, other than to very large consumers which are supplied directly byPertamina. Coordination of energy policy is the responsibility of an inter-ministerial body, the National Energy Coordinating Board (BAKOREN). PGN is apublic corporation first established in 1958, after the nationalization ofN.V. OGEM, a gas supply company of Dutch ownership. PGN is supplied withnatural gas by Pertamina, and distributes natural gas in Jakarta, Bogor, Medanand Cirebon. Manufactured gas is also distributed by PCN in Bandung,Semarang, Surabaya, Ujung Pandang, and Medan. Large parts of PGN's pipelinenetworks are corroded and in general disrepair, with gas losses averagingabout 30% of sales volume, which affects both the safety of the network andoperating results. The small scale of its operations, predominantly for thehousehold market, has also contributed to financial losses on PGN's pastoperations, despite relatively high (50%) gross margins on sales.

37. Natural Gas Pricing. Gas tariffs in Indonesia vary according toend-users and reflect the Government's development priorities (e.g., topromote the production of steel and fertilizer), which may not be fullyconsistent with sound economic principles based on the opportunity cost of gasin each area; they are, in general, not designed to encourage gas productionfor domestic use. Tariffs vary from US$.57/mcf for fertilizer (Pusri) andUS$.65/mcf for steel (Krakatau) to about US$3/mcf for power generation,cement and city gas. Clearly, considerable review and eventual revision ofGovernment policies is in order in the area of pricing, since the setting of

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proper price signals is essential to the success of the gas utilizationstrategy being formulated by the Government. GOI is aware that an appropriatepricing strategy should promote economic efficiency in the allocation ofnatural gas across sectors and provide adequate incentives to the oil industryto develop gas reserves for the domestic market. At the Government's request,the proposed project will include an energy pricing policy study designed toestablish guiding principles for setting natural gas prices at the producerand the consumer levels in relation to the price of alternative fuel sources(i.e., petroleum products and coal). This study is expected to provide thenecessary background for a review of the complex issues involved and will formthe basis for subsequent dialogue between the Bank and the Government onpricing matters. During the course of the project, PGN will also review itsown gas tariffs (by July 31, 1988), discuss the results of this review withthe Government and the Bank and make necessary changes, taking into accountthe Government's and the Bank's comments.

Bank Role and Lending Strategy

38. The Bank has a long-established involvement in the Indonesian powersubsector, with tourteen approved operations since 1969. The first comprehen-sive involvement of the Bank in the energy sector began with the EnergyAssessment Report of 1981 (Report No. 3543-IND). This report aimed toidentify policy options, rank investment priorities, promote a framework fortechnical assistance and advise GOI on the policy and institutional aspects ofthe sector. The report confirmed earlier findings that alternative energysources could be developed economically and should be developed quickly toreplace oil consumed domestically in view of limited oil reserves and in orderto maintain potential oil exports. Major changes in sector policies havesince been introduced by GOI, particularly with regard to coal development(especially for use in the power sector) and petroleum product pricing.

39. The Bank has maintained a continuous dialogue with GOI on the issueof gas utilization through the supervision of the three gas studies referredto in paragraph 32. The results of these studies are now becoming availableand are being reviewed by GOI. The results of the gas utilization studyindicate that there is scope for gas development for domestic use which wouldavoid further claims on oil and complement current coal investments. While acomprehensive gas development plan would require further analysis (inparticular, a feasibility study of major pipeline projects designed to linkgas-surplus areas to key demand centers), a number of specific investmentshave been identified which would yield quick economic benefits and helpIndonesia strengthen its e:tpertise in gas development, partly through thechannelling of the necessa&y technical assistance. The Gas DistributionProject discussed in this report, which would be the first Bank operation inthe petroleum sector, is in support of such high priority investments. Theremaining issues in the gas sector are essentially to assess the long-termpotential for gas in the economy, in particular for power generation beyondthe conversion of the existing oil-based power plants and gas turbines; todemonstrate the feasibility of specific gas development projects and formulatean overall development strategy to meet this potential; and to establishcoherent investment and pricing policies in support of this strategy. Theproposed project would serve as a vehicle for further dialogue with the

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Covernment on the broader sectoral issues as GOI develops a policy andinstitutional framework for the development of the gas sector.

PART IV - THE PROJECT

40. The proposed project was appraised by a World Bank mission thatvisited Indonesia in July 1985. A report entitled "Indonesia, Staff AppraisalReport, Gas Distribution Project", No. 5942-IND, is being distributedseparately. Negotiations were held in Washington, March 24-28, 1986. TheGovernment of Indonesia delegation was led by Hr. Soedarno Martosewojo,Director General for Oil and Natural Gas, Ministry of Mines and Energy.

Project Objectives

41. The proposed project would be the first Bank operation inIndonesia's gas sector. The main operational focus of the project would be onstrengthening Perusahaan Umum Gas Negara (PGN), the existing gas utility,which will be the entity ultimately responsible for distribution of naturalgas to private commercial and industrial consumers (while bulk users aresupplied directly by Pertamina). The project was conceived as a follow-up tothe City Gas Distribution Study (para. 32), which was carried out by Osaka GasEngineering Co., Ltd. The objectives of the project will be:

(a) to encourage the use of natural gas by small- and medium-sizedindustries, thus ensuring the utilization of gas in a high-valuemarket, by constructing new gas distribution facilities;

(b) to replace and/or rehabilitate portions of PGN's existing gasdistribution networks, which are unsafe and subject to substantialleakage;

Cc) to build up the managerial and technical capabilities of PGN to planand implement system expansion and operate its networks efficientlyand cost effectively;

(d) to establish replicable technological standards on which to basefuture expansions of existing gas distribution networks, or thecreation of new ones, as natural gas becomes more widely available;and

(e) to support GOI's efforts to review sector policies, particularlywith regard to energy pricing.

42. PGN -- like many gas utilities around the world -- has experiencedthe difficulties of supplying manufactured gas in competition with cheaper andmore flexible fuels, e.g., LPG and oil. Traditionally, PCN has been supplyinggas to a predominantly household market in the older parts of the cities.With such a restricted domestic market, increasing production costs and littleprospects for Large industrial and commercial loads, inadequate attention hasbeen paid to the development and maintenance of the supply systems which, in

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certain area-a, are in a state of total disrepair. Gas leakages from corrodedpipelines are widespread, resulting in gas losses equivalent to about 30Zof sales volume. Conversion to natural gas can provide the much needed oppor-tunities, impetus and means to reverse the decline in PGN's operational effi-ciency. Efficient project implementation and development of PGN's planningand operating capabilities will be promoted under the project by linking PGNto an experienced foreign gas utility capable of providing assistance in keyareas. The project would thus include four components: (i) a gas distributioncomponent; (ii) technical assistance and training for PGN; (iii) a customerconversion component; and (iv) associated studies to be carried out by theGovernment. These components are described more fully below.

Project Components

43. Gas Distribution Network (US$52.9 million).5' The project willsupport the detailed design and construction of extensions to PGN's gas dis-tribution networks in Jakarta, Bogor, and Medan. Project works will includenew suppiy lines to industrial and commercial areas, and local distributionwithin such areas. Specific items will include design services, constructionof distribution pipelines, regulator stations, service lines and meter sta-tions for a core group of approximately 350 industrial and 800 large commer-cial consumers, and installation of monitoring systems wherever economicallyjustified. The market for gas under the project is made up principally ofindustrial and commercial entities which will substitute gas for fuel oil anddiesel, and to a lesser extent for LPG and kerosene. A small proportion ofdemand is accounted for by domestic users, who will substitute natural gas forbottled LPG. Total annual sales in the three cities covered by the projectare expected to reach 540 million cubic meters in PNG's fiscal year 1990/91.

44. PGN, assisted by the twinning agency (see para. 45 below), will alsodefine subprojects in cities outside the main project areas (i.e., Cirebon,Bandung, Semarang, Surabaya and Ujung Pandang), with a view to improving theefficiency of the existing distribution networks in these cities and reducingthe currently substantial gas losses. To ensure the timely completion of thiscomponent of the project, adequate technical information, together with econo-mic and financial justification for subprojects outside the main areas, wouldbe submitted to the Bank for approval not later than December 31, 1987.

45. Technical Assistance and Training (US$4.3 million). The projectwould involve the twinning of PGN with an established gas utility, which isessential to ensure the successful implementation of the project and achievethe institution-building objectives which provide the principal rationale forBank involvement. Through the secondment of a number of professionalpersonnel into selected parallel positions in PCN and the services ofspecialized technical personnel on short-term assignment, as required, theestablished-utility would provide assistance in detailed project design; back-up support for day-to-day technical and commercial operations; assistance forcustomer conversion; and assistance in the design and implementation of

5/ Cost figures in paras. 43-47 are inclusive of contingencies.

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management systems required by a commercial gas utility, including operationaland maintenance standards, project cost monitoring, marketing, and managementinformation systems. Negotiations are currently underway with an experiencedgas utility and the related bilateral donor. The execution of a twinningagreement acceptable to the Bank will be a condition of loan effectiveness.As a complement to the twinning arrangement, the project would also support asmall training program for PGN staff. Staff would be trained in areas such asdemand forecasting, system planning and design, project cost monitoring,industrial gas utilization, and management control systems. PGN would prepareand furnish to the Bank for approval a detailed training program by March 31,1987, indicating the staff to be trained, areas of training, and traininglocation and timetable.

46. Customer Conversion (US$27.4 million). An important part of theproject relates to the conversion of customer energy equipment. To encouragethe early conversion of industries to gas and maximize project returns, PGNwould assist potential gas customers with necessary feasibility studies,finance and implement equipment conversion, and i-sure and maintain therelated equipment during an initial operating period. Consumers would fullyrepay PGN for the costs PGN has incurred on their behalf (including the costof capital, insurance, maintenance and administration) in installments paidalong with their regular gas bills over a three-year period. Once a consumerhas fully reimbursed PGN, ownership of the conversion equipment would betransferred to him. In order to ensure a smooth and early introduction of thecustomer conversion program, PGN would prepare and furnish to the Bank, bySeptember 30, 1986, detailed operating procedures for the implementation ofthe program.

47. Studies (US$1.4 million). The project would include an EnergyPricing Policy Study to be undertaken by the Ministry of Mines and Energy(para. 37 above). The Bank loan would also include a provision (US$200,000)to cover the unfinanced portion of the ongoing LPG Feasibility Study carriedout by A.D. Little (USA), following the closing of the Fifth TechnicalAssistance Credit (IDA Cr. 898-IND), under which the initial portion of thisstudy was funded. Since the expense involved would take place before signingof the proposed loan, provision for retroactive financing (for expendituresmade after January 1, 1986) would be made for this activity.

Project Costs

48. The total project cost is estimated at US$86 million, of which aboutUS$47 million (55%) is expected to be in foreign exchange. The cost estimatesare based on end-1985 price levels. Physical contingencies are 10% of basecosts. Price contingencies are based on the following expected price in-creases: 7.0% in 1986-87, 7.5% in 1988, 7.72 in 1989, 7.6% in 1990, and 4.5%thereafter for imported goods and services; 6% in 1986-90 and 4.5% thereafterfor domestic goods and services. Import taxes and duties have been calculatedat an average rate of 40% for imported goods and equipment. Interest duringconstruction has not been included in the project costs since PGN is expectedto charge such interest expense against income during the same year. The Bankloan would cover the foreign exchange requirements of training, the distri-bution works and the studies (about US$24.5 million) and a portion of the

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foreign exchange cost of the customer conversion program (US$9.5 million).This will represent 73X of the foreign exchange cost of the project and 46% oftotal costs, net of taxes and duties. The remaining expenditures will befinanced by the Government, through bilateral aid (for the technical assis-tance to PGN), through PGN's net internal cash generation, by commercialloans, and directly by customers (for part of the conversion expenses).

49. The proposed Bank loan (less US$1.4 million for Government-executedstudies) would be onlent by the Government to PGN under a Subsidiary LoanAgreement satisfactory to the Bank. The signing of this agreement would be acondition of effectiveness of the proposed loan. Bank funds allocated to thedistribution and training components (US$23.1 million) would be repaid to GOIby PCN over ten years after a grace period of five years, while Bank fundsallocated to the customer conversion component (US$9.5 million) would berepaid over three years after a grace period of 5 years. The onlending ratewould be at least 12% per year, with the Government carrying the foreignexchange risk, which is in line with current government puiLcies applicable topublic corporations.

Project Implementation

50. PGN -- The Beneficiary. PGN is organized geographically throughregional branches with a central office located in Jakarta responsible forcentral systems and planning. The project will involve a reorganization ofPGN designed to provide for a better distribution of responsibilities andclearer definition of lines of control, placing greater emphasis on thefunctions that require strengthening, i.e., project management, budgetarycontrol, marketing and assistance to conversion. Approval by GOI of theproposed reorganization will be a condition of effectiveness of the loan.

51. PGN will have overall responsibility for implementing the project(except for the LPG Feasibility and Energy Pricing Policy Studies, which willbe undertaken by the Ministry of Mines and Energy). Seconded staff from thetwinning agency will assist in designing and supervising the construction ofproject facilities. In particular, the twinning agency will provide detailedengineering designs, project implementation schedules and advisory service toPGN on project management. Construction work will be carried out by localcontractors. The project is expected to be completed by July 1991.

52. The project will require that PCN recruit additional staff, prima-rily engineers and middle-level managers. To ensure that PGN is in a positionto attract and retain sufficiently qualified staff to implement and operatethe project efficiently, assurances have been obtained that GOI will allow PGNto maintain its pay scaLe at a level as remunerative as that offered bysimilar public corporations. The project will also represent a substantialexpansion in PGN's assets and operations. Therefore, PGN would review itsinsurance practices and discuss the results of this review with the Bank byJune 30, 1987.

53. Gas Supply. In order to undertake the project, PGN requires assuredsupplies of natural gas from Pertamina which manages, under guidelines set bythe Government, the distribution of natural gas produced from its own oil and

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gas fields as well as from fields operated by foreign oil companies underproduction sharing contracts. The execution of long-term supply contractsbetween Pertamina and PCN for sufficient quantities of gas, acceptable to theBank, will be a condition of loan effectiveness. Moreover, PCN will berequired to prepare a rolling five-year plan covering its future gas require-ments, to be updated each year and discussed with the Covernment and Pertaminato form the basis for further network expansion.

Procurement and Disbursement

54. All major items of materials, equipment and related servicesfinanced from the proceeds of the loan shall be procured through internationalcompetitive bidding (ICB) in accordance with the Bank guidelines, except for(i) items of small value for the gas distribution component (not exceedingUS$50,000 each and US$3 million in total) which are available off-the-shelf,such as electrical switchgear, flex, low pressure pipes and valves; and(ii) goods required for customer conversion and costing less than US$100,000individually, subject to an aggregate limit of US$6,500,000. Such small valueitems will be procured through international or local shopping in accordancewith the Bank guidelines. Works related to customer conversion to gas wilL beprocured under local competitive bidding procedures satisfactory to theBank. For the purposes of evaluation and comparison of bids for the supply ofgoods under ICB, qualified domestic suppliers will be allowed a preference of15% of the CIF price or the applicable import duty, whichever is lower.Bidding packages for goods over US$300,000 will be subject to the Bank's priorreview of procurement documentation. Consultant services for the EnergyPricing Policy Study will be obtained in accordance with Bank guidelines forthe use of consultants.

55. The Bank loan will be disbursed against: (a) 100% of the foreignexchange cost of imported equipment, materials and related services; (b) 100%of local equipment and materials expenditures (ex-factory); (c) 65% of thecost of other items procured locally (off-the-shelf); (d) 50Z of the cost ofworks related to customer conversion; (e) 100% of foreign expenditures fortraining; and (f) 10OZ of expenditures for consulting services. Disbursementis expected to follow the Bank's standard profile over six years (the lastyear for retention fees).

Ecology and Safety

56. No significant environmental problems are likely to result from theimplementation of the project. Actually, the project is expected to result inimproved environmental conditions. The combustion products of natural gas areconsiderably less polluting than those of the liquid hydrocarbon fuels (fueloil, diesel and kerosene) which will ba replaced, and the project will contri-bute to a reduction in the urban pollution level, especially in industrialzones. The pipelines will be buried and therefore pose no unusual environ-mental hazard. Appropriate standards and codes of practice will be followedin the detailed engineering and construction to ensure proper protection andminimize the likelihood of third party damage. Moreover, the proposed projectwill drastically reduce the environmental hazards due to leaking and corrodedpipelines in the cities served by PGN, which are either going to be replacedor rehabilitated to proper standards.

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Accounts and Audit

57. PGN's accounts are maintained in accordance with current Governmentregulations. The timeliness and accuracy of reporting is generally satisfac-tory. On the whole, PGN's accounting system folLows generally accepted prin-ciples and utility practices. However, the accounting process is still verylabor-intensive and computerization of accounting routines is required to per-mit PCN to expand its operation in an efficient manner. The terms of refer-ence for the twinning agency provide for assistance to PGN in this area.According to its charter, PCN's accounts are audited by CovernmenL auditorsfollowing generally accepted audit practices. Assurances have been obtainedthat PCN will supply the Bank with its annual financial statements within sixmonths of the end of its fiscal year and the corresponding audit report,prepared by independent auditors satisfactory to the Bank, within three monthsthereafter.

PGN's Finances

58. Due to small-scale operations and an old and leaky pipeline network,PGN's gas operations produced a net loss up to FY83, and financial performancehas been spotty thereafter, despite high gross margins on gas sales. Throughreplacement of leaky networks, increased sales volume and improved producti-vity, PCN's financial performance is expected to improve markedly under theproject. At the end of the project period, PCI's internal cash generation isexpected to finance all its capital investment, and projected financial ratiosare expected to be fully satisfactory. Assurances have been obtained that PGNwould produce, with effect from its fiscal year 1988/89, a rate of return onrevalued net fixed assets in operation of at least 10Z.

59. Once the project is completed and when PGN's financial record hasimproved, the Government should consider giving PGN greater financial autono-my. This could be done by allowing PGN greater borrowing in its own name inthe commercial market and by letting PGN use a higher propcrtion of its cashgeneration for future investments. These aspects will be discussed with PGNand the Government during project execution.

Project Justification and Risks

60. The principal justification for the project is that it will enablethe substitution of gas for other fuels in high-value, mostly industrialuses. Concommitant to this, the project will build up the institutional cap-ability needed to establish the active marketing of gas to small/medium indus-try. It will also help develop replicable technological standards for citygas distribution. The project has been designed to result in a significanttransfer of technology and skills to PCN, which will enable it to expanddomestic gas distribution in the future with minimal expatriate input.

61. The project has been evaluated by comparing the economic costs andbenefits accruing to the country with and without the project. The benefitsconsist principally of savings in liquid fuels which will be replaced by gasin industrial use. In view of the considerable uncertainty regarding theprice of liquid fuels, relatively conservative projections (corresponding to

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an oil price of US$16/bbl in 1990 and US$22Jbbl in 1995, in 1985 dollars) havebeen used as a basis for project economic analysis. On this basis, theproject is expected to yield net benefits to the country of about US$18.0million p.a. by 1992, and to result in an economic internal rate of return of31Z. Sensitivity analysis indicates that the viability of the project issusceptible to variations in the value of alternate fuels and in the magnitudeof demand, but remains acceptable even under rather adverse circumstances.Even with 50Z lower gas sales than projected, the economic rate of return ofthe project would be 13Z; similarly, a drop in alternative fuel prices of 30Z(relative to the assumptions described above) would still permit an economicrate of return of 13Z.

62. The potential project risks are: inadequate gas supplies, inabilityof PGN to carry out the project efficiently, and slow conversion to gas ofpotential customers. To address these risks, assurances have been obtainedthat adequate quantities of gas would be allocated to PGN, the proposedtwinning arrangement has been designed to provide PGN with the necessarymeasure of technical and managerial support, and assistance would be providedunder the project in the form of a customer conversion program to helpalleviate the financial and technical constraints to conversion. Moreover,the demand projections prepared by the consultants appear conservativerelative to the size of the potential market. Finally, as mentioned above,even if sales value were to drop by 50% relative to the assumptions underlyingthe analysis, due either to reduced demand or lowered gas value (related tolower-than-assumed costs of alternative fuels), prcject economic returns wouldbe acceptable.

PART V - RECOMMENDATION

63. I am satisified that the proposed loan would comply with theArticles of Agreement of the Bank and recommend that the Executive Directorsapprove the proposed loan.

A.W. ClausenPresident

AttachmentsApril 16, 1986Washington, D.C.

.

ANNEX I-22- Page I of 6 pages

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- a1111n mmcuI.oouaa Of aD. 10mqumvmur 58. 91.0 131.0 564J 993.6

PoMflU.ID-!UR (?NMIA) 94680.0 116201.0 1550*6.013* 203UL12O (X0f TOTAL) 14.6 17.1 24.1 35.3 67.7

PWUIJT!0 VEJCTZPoeiilaZ IN nu 200 (N=L 21).0UTATZOUAE IIIWIOPUT (NZLL) 368.0POHIIA?10 MOETU 1.6

POIULATMZ *in.n3 SQ. M. 43.2 60.5 31.1 386.3 43.0

M SQ. U. ANI. LAND 319.3 373.4 4*3.4 1531.2 31.1

101MA4220W A03 UTNUCTURE CI)0-14 us 40.7 44.0 40.6 33.2 33.3

15-64 SU 56.2 53.4 55.5 57.7 57.162 ANS ADM 3.0 2.5 3.5 2.5 4.2

POIDLAZZO& cli 3am3 CZ)TOTAL 2.1 2.0 2.2 2.3 2.4O1RB 3.7 3.6 4.3 4.1 3.6

Cluall 32a CPS TI) 44.2 41.0 34.0 30.1 30.9CUlS: D0un 3823(3cm3TRU) 22.9 17.6 12A 3.4 *.0CiOU 311 CTIaU 3121 2.7 2.7 2.1 1.3 2.0

1*A51. PLANNINGACC3PTOUS. ANNAL (05) .. 181.1 3051.0 IC

sts CZ of 1 WOMEN .. .. 53.0 54.5 45.3

-103 0 row0 MM0. *1 CAITA(1963-71-100) 33.0 102.0 123.0 124.4 108.6

:3 CAWPITA 1PLY OfCALOuANS CZ or 33uwTAmurr3) 73.0 92.0 112.0 115.7 113.2moTuzS (CaI JU D3 ) 34.0 41.0 53.0 60.3 69.407 NUCi AUm aMM PMU 6.0 6.0 7.0 Id 14.1 34.2

CuIW C(AGS 1-4) V1423 RA2Z 21.9 18.1 13.0 7.2 4.8

LXVI Flfx . AT 3M (C181) 41.2 47.0 53.5 60.6 64.3XIPAIT NO!?. t2 (M TR00) 150.0 121.0 lG!.C 64.9 59.7

ACCESS TO 3111 *AT1 (2POIP)TOAL .. 3.0 23.0 *6.0 65.3

UAW .. 10.0 A0.C 57.6 76.5RlAL .. 1.0 13.0 37.1 44.2

ACC7S TO II3A DISPOSALCZ or POrULAUOx)

TOAL .. 15.0 23.0 50.1 56.3UU33* .. 19.0 20.0 52.9 73.4A3WAL .. 14.0 24.0 44.7 25.5

Pa1ULATION PU P1TSICLU 46780.0 26510.0 11530.0 J 7751. 1903.7POP. PER N0353 P1150 4510.0 /t 7680.0 230.0 0 2464.5 803.2

POP. PR HOSVITAL nDTOTAL 1360.0 1650.0 1720.0/ 1112.1 262.003381 250.0 .. 700.0 I 651.4 422.0uL .. .. 3160.0 7i 2536.9 2716.7

ADSUOIS S& NOSDFITAL *10 .. .. .. 41.1 27.5

AWZUMI S=l 0F IMZIOI8ELTOTAL 4.4 4.3032*5 4.9 5.3RURAL '.3 4.7

AWUCK NO. OF PI3SM5RWHTOTAL .. 1.5035*2 .- 1.6RuAL .. 1.5

3C rA'T OF or U.LZUCS 1111 ELCT.TOTAL .. ..

umi .. .. . ..

ANNEX I- 23 - Page 2 of 6 pages

INDON SIA - SOCIAL INDICATO04 DATA SHEETINDONESlA REPERORC CAOUPS (IJSlGNTD AVERAGES

HOST (MOST RECENT ESTIMATE) /bRECENT MIDDLE INCOKE MIDDLE TxCoHc

9lbt 197a-b ESTIHATELk ASIA A PACIFIC tAT. AKEICA 4 CAR

ADJUSTED ENROLUIENT RATIOSPRXNARY: TOTAL 71.0 77.0 100.0 100.7 106.7

MAIZ 86.0 83.0 106.0 104.4 108.5FEMALE 58.0 71.0 94.0 97.2 104.6

SECONDARY: TOTAL 6.0 15.0 33.0 47.8 44.2HALE 10.0 20.0 38.0 50.6 42.7tEHALE 3.0 10.0 27.0 44.8 44.9

VOCATIONAL (Z OF SECONDARY) 20.4 22.1 13.9 18.6 13.3

PUPIL-TEACHER RATIOPRIMARY 39.0 29.0 29.0 30.4 29.9SECONDARY 14.0 13.0 16.0 22.2 16.7

COMITIOPASSENGE CARS/THOUSAND POP 1.1 Z.1 4.4 /c 10.1 46.0RADIO RPCEIVERS/THOUSAND POP 7.2 21.9 131.2 172.9 328.3TV REtcIVtRs/rw0SA POP 0.1 0.9 22.6 58.5 112.4NEYSPAPER (CDAILY GUIEAL

INTE1ZSrS) CIRMJLATIONPER THOUSAND POPULATION 11.0 .. 14.9 65.3 B1.1

CINMIE AblUAL ATTENDANCE/CAPITA 2.8 .. 1.0 /c 3.4 2.4

TOTL LASOR fORo (tm1s) 34791.0 41090.0 54417.0FEUALE (PECNT) 27.0 30.9 29.3 33.6 23.6AGR:COLTURZ (PERCENT) 75.0 66.0 58.0 /c 52.2 31.4

IONUSTrY (PERCEN 8.0 10.0 12.0 7; 17.9 24.3

PARTICIPATION RATE (PERCENT)TOTAL 36.7 35.4 35.0 38.9 33.5MALE 54.2 49.5 49.6 50.8 51.3VZALz 20.0 21.6 20.4 26.8 15.9

ECOlMC DEPEUCY RATIO 1.2 1.3 1.3 1.1 1.3

X113 DI5r32TIOEPERCENT OF PRIVATE INCQOMRECCIVED B

IcUEsr 5X OF HOUSEHOLDS .. .. 23.5 IgHcHsTs 2zm OFIIHOUSHOLDS .. 49.'4-A, 48.0LOIICST 20I OF llOUSEHOLDS 6.. .6 7i 6.4 .LHCEST 401 OF HOUSIEOLDS .. .. 14.4 41.5

POYM TA crOWESTIMATED ABSOLUTE POVERTt INCOMELCVEL (USS PER CAPIT)

URBAN .. 124.0 /b 124.0 lh .. 288.3RURAL .. 106.0 7 106.0 7;i 151.9 185.3

ESTZNAZE RELATIV POVERlt INCOMELEML (USS PER CAPITA)

URAN .. .. 119.0 lb 177.9 519.8RURAL .. .. 98.0 7ii 164.7 359.7

ESTIMATED POP. BELOW ABSOLUTEPOVER INCOME LZVEL (2)

URBA .. 51.0 lb 26.0 lh 23.5RURAL .. 59.0 71 44.0 7T 37.8

NOT AVAILALENOT APPLICABLE

N OT S

Lf Thb group averages for each indicator are population-wigbted eritheltic mens. Coverage of countriesamong the Indicator. depends on availability of date end is not uniform.

/b Unless otharvlse noted. "Dota for 1960" refer to any year betvwen 1959 and 1961. "Data for 1970" between1969 and 1971; and data for "Most Recent Estimte" between 1981 and 1983.

Je 1980; /d 1977; /a 1979; If 1962; , 1976; /h 19B0 price.

JNCE. 1985

ANNEX I- 24 - Page 3 of 6 pages

DWIYETNOfES Ot SOCLAL I1DICAT1tSNoew Athogh ta dam en dawn rmm aowjm pmwauljudpd Stt autkonatsv and mala.b sbo ii aWm be owlA ta they my not be unmiaiaislycompamable bua oft tac lat affndarsd dasitioma and no.pu urnd by dillt cumtm in aflactangw mba .da dT s am ma eIm , __ todanbe orden of _ m ddiu 1 mdr. and eanetm d.m anam major dlranon b-n enenmThe refetne poop am( II) thm enmity wpp of ik stjm country MM (2) a eDounwy moop with wewhat hinm avama incioe thmn tbe comirypotp of the rWa coy ( t fir or-HiSe lu. Ol aEponm poop _a -iMdleeIorn onh rAfirn an lMdle Em" is c bhmos d onger

ci ti litial. In i reri proup data ie *au am poWpuation etd andac rm rr ect idiar nd sbw oly wen myoityof dth coutrie in p up km daa for that indiator. Sine ovaera cuamsria aions e aindimors dpned_ on tie amIability eodata md is not umfom.cautn mu beceraud m ietim ava"n or ow indtrme another ium atr arm oyumandli comparing tie valueeori eindicators a tiume amongthe couty ran reiefene poo

AREA (thousand sq.kmj Crud Sll Rate (pfr theusiad-Number oflive birtd in tie yearTeti-Total surface area compnsing land area and inland wates. per thousad or mid-year population; 1960. 1970, and 1983 data.1960 1970 and 1983 data. Crud Deat Rate (pe shoutassd-Number of deaths - the yearAfrkbnl-Estrimate of agricultural area used temporarily or per thousand of mid-year population 1960. 1970. and 1983 data.pernanendy for crops. pas turs. narket and kitchen gardens or to GCn Repe die Rae-Average nurnber of daughten a womanlie fallow, 1960. 1970 and 1982 data. will bear in her normal reproductive period if she expcnenmcs

present age-specific fertility rates; usualy five-year aveges endingGNP PER CAPITA (USS)-GNP per capita estimates at current in 1960. 1970. and 1983.market priccs, calculated by sane conversion method as Wfrld Fandy Plmmnivq-Acepn. A I (rhot ssdJ j-Annual num-Iik Atlas (198143 basis); 1983 data. ber of acceptors of birth-control devices under auspices of national

ENERGY CONSUMPIION PER CAPITA-Annual apparnt family planning programconsumption of commercial primary energy (coal and lignite. Fandp Pl r-Usfws (percen ofmruid macnj-The percen-petroleum. natural gas and hydro-. nuclear and geothermal elec- tage of married women of child-bearing age who are practicing ortncity) in kiograms of oil eqwvalent per capita; 1960. 1970. and whose husbands are practiing any forn ofcontraception. Women1982 data. of child-bearing age are gnerally women aged 1549. although for

some countries contraceptive usage is measured for other agePOPULATION AND VtTAL STATISTICS groups.

Toral paloria Mid- Year (thoumsaudsj-As orfJuly 1: 1960. 1970. FOOD AND NURFONand 1983 data.Urban Popufwriaie (percent of orael)-R.ttio of urban w total A

tSx offOdAW&Crin Pr Capirt (196-71 - 100)-lndex of per

dr a w {ot f re'r-Rao ol' urbn tO tOUI captia annual production of all food comnmodities. Productionpopulation; different definitions of urban areas may affect compar- excludes animal feed and seed for agculture. Food commodutiesability of data amnong counlrnes; 1960. 1970. and 1983 data.exusanalfdadsedorgclte.Fdcmoiisinclude primary commodities (e.g. sugarcane instead of sugar)Ppuatio Plojections which are edible and contain nutnents (e.g. coffee and tea arePapulaion u- year .0O-The projection of population for 2000. excluded); they compnse cercals. root crops. pulses. od seeds.made ror each economy separately. Starting with information on vegetabksl fruits. nuts. sugarcmane and supr beet livestock, andtotal population by age and sex. fertility rates. mortality rates. and hvestock products. Aggregate production of each country is basedinternational migrtion in the base year 1980. these parameters on national average producer price weights: 1961-65. 1970. andwere projected at five-year intervals on the basis of generalized 1982 data.assumpuons until the population became statonary. P capita Spply ofCalori (percet efreq0eniemsrn-Comput-Stanionarv populanon-ls one in which age- and sex-specific mor- ed from calorie equivalent of net food supplies available in countrytalitv rates have not changed over a long penod. wihle age-specific per capita per day Available supplies comprise domestic produc-fertility rates have simultaneously remained at replacement evel EIon. imports less exports. and changes in stock. Net suppliesmnet reproduction rate = 1) In such a population. the birth rate is exclude animal feed. seeds for use in agrnculture. quantities used inconsuant and equal to the death rate. the age structure is also food processing. and losses in distnbuton. Requirements wereconstant. and the growth rate is zero. The stationary population estimated by FAO based on physiological needs for normal activitysize was estimated on the basis of the projected characteristics of and bealth considenng environmental temperature. body vociglhts.the population in the year 2000. and the rate of decline of fertlity age and sex distnbution of population. and allowing 10 percent forrate to replacement level waste at household level; 1961. 1970 and 1982 data.Population Momentun-Is the tendency for population growth to Per Ctpita Supply of Protei (grams per day)-Proteon content ofcontinue bevond the time that replacement-level fcrtility has been per capita net supply of food per day. Nct supply of food is definedachieved. that is. even after the net reproduction rate has reached as above. Requiremenis for all countnes established by USDAunity. The momfentum of a population in the year r is measured as provide for minimum allowances of 60 grams of total protein pera ratio of the ultimate stationary population to the population in day and 20 grans of animal and pulse protein. of which 10 gramsthe year t. given the assumption that fertility remains at replace- should be animal protein. These standards.are lower than those ofment level from year r onward. 1985 data. 75 grams of total protein and 23 grams of animal protein as anPopylado Dansy avenge for the world. proposed by FAO in the Third World FoodPer .q.kin.-Mid-year population per square kilometer (100 hec- Supply: 1961. 1970 and 1982 data.tares) of total area; 1960. 1970. and 1983 data. Per Ca Jherei Supply Fro Ammal ad Pabe-Protemn supplyPer sq.km. agriculura land-Computed as above for agricultural of food derived from animals and pulses m grams per day; 1961-65.land only. 1960. 1970. and 1982 data. 1970 and 1977 data.

Popularioe Age Structe (percrsi)-Clhldren (0-14 years). work- CW'ages 1-4J Deat Rare (per thAwsad)-Number ordeaths ofing age I 15-64 years). and retired (65 years and over) as percentage children aged 1-4 years per thousand children in the same ageof mad-year population; 1960. 1970. and 1983 data. group in a given year. For most developing countnes data denvedPopulation Growth Rate (Pereemt)-0rtat--Annttal growth rates of from hfe tables; 1960. 1970 and 1983 data.total mid-year population for 1950-60. 1960-70. and 1970-83. HEALTHPopulation Growth Raze (percezmti--rrou--Annual growth rates Life ExPrey a Birth (year-Number of years a newbornof urban population for 1950-60. 1960-70. and 1970-83 data. infant would live if prevailing patterns of mortality for all people

ANNEX I-25- Page 4 of 6 pages

a the time of of la birat wee to stay the sae throughout it iife NWpS-An'r Aaio - prnmay. and zecmnelr-Total tudents en-1960, 1970 ond 1983 data. rolbd in primay nd econday levels divided by numwb ofJ_fa MOp Ber (paw a*_heud)-Numbur of infans who die teach in the corrpondin levels.before rechiWg one year of ae per thousnd live birth in s givenyear. 1960. 1970 and 1983 do. CONSUMmPIONAm ir to JIbW rpmv o Ud Ub 4W &Id Punqe Cans (fpr Secsnd pepslieuj-Fhsocnger cas corn-mod-Number of people (totl urb and rurl) with reaaoeable prim motor cas sating les thsn eiSht penons; excludes ambul.acor to afe water spply (iwhude treatd sfce wat or ancms, he ad maiftry vehicleuntratd but unontanaedo water suh a tht from protected Rese Rv ,m, epe iemen popsilata)-Al Mtys of recversboisholes. spnnp nd satay wedls)u petUDUes of their rsp for radio brod u t generalr public per thousand of population;Sv popuationEz In - urban are a public fountain or s excudes un-licensed mrcve in countie and in years whenlocu vatdnt more than 200 meter from a house may be cowir regitration of radio set was in effect data ror recnt year mayas beial within reasonable scoesof that hour In ru ralr aaed eretenabk scom would imply that thehousewife or eambers of no be c r t cho s a hed ienehousEhold do not have to spend a disproporttinare pan of the day TV Reive (per SSC5EpqUiS)-Tv receivr fr broadcastwithout ttmbm 0 the f day's human cxcdse andto general public per thousand poptain excudes unlensed TVinc ritngte famu Diphrs w patrned receidm__ t wdxvers in countries and in year when registration of TV set wins

ead meld-Number of People (total, urban, and rural) served by i fetexcroa disposa as pretages of their respectve populations dWmaner CJulsueu (Pw rheuwd pop.Moliee-Shows the aver-Eacreta disposal my include the collecton and disposal, with or aP circulation of "dailY genera intees newspaperC defined maswithout trmatnient. of human excreta and wast-water by water- ptiodiznl publication devoted PnmarilY to erdwing guenera news.borne sysems or the we of pit privies and similar installations. It is considered to be *Maily" if it appears at ks four times a wek.Populur Per PhYskdE--bpulation divided by number of prac- Cms Ama)_ Asreuim per C;ta per Ye_-Bsed on thetisang pbYicia qualified from a medical school at university level. number of tckets sold during the yer. including admissions toP.hbni. per Nusin Parwn-_Population divided by number of drive-in cinenas and mobile units.

practicing male and female graduate nurse assiant nurses.pracical nurses and nursing auxiliaries. TOlAB FORCElo Ne*J per HadBnl-M, orb .|s dra-Populztion TtLbrFem thsadh t-)-Economicly active persons. in.towla urbsn. Hnd umal divided by an,ir rispective numbur on cluding armed forcns and unemployed but excluding housewives.

hospital beds available in publc and private. gneral and specialkId stude nts. dc .. cvcring poput i of a1 . Definion inhospitals and rehabilitation centers. Hospitals are estblishments vanous countries are not compable 1960. 1970 and 1983 dta.permanentlh eaffed by at east one physician. Establshments prov- Femo (percrmaulFemale labor frce as percentage of total laborWing principally custodial care are not included. Rural hospitals. force.however. include health and medial centers not permanently stffed Agrule ( -Labor fore in fanning, forstry, huntingby a physicia (but by a medical assistant. nurse. midwvft. etc.) and fisLing as percntage of torll labor foe 1960 1970 and 1980which ofer in-patient accommodation and provide a limited range data.of medical facilities. I1iury (pereent-Labor force in mining. constructioi, manu-Adntsstie per Hospi s ru -Total number of admissions to or facturing and electricity. water and gas as percentage of total labordischrges from hospitals divided by the number of beds. force. 1960.1970 and 1980 data.

Pbniierdim (tfpermeatD-.raat inh sdkfnh-ParticipationHOUSCNG or activity rates ar computed as total male. eandf emale labor formAuerqe Sir of Hoehol (psns per Aseh _el)-trl, urbn as percentages of totaL male and female population of al agesndrwal-A household consists of a group of individuals who share respectively: 1960. 1970. and 1983 data. These are based on ILO'sliving quarters and their main meals. A boarder or lodger may or parOcipation rates reflcting age-sex stuctureof the population. andmay not be included in the houschold for statistical pusposes. long ame trend. A few estimates are from national sourcms.Aveae Number of Persons per Room-total. urban, and mai- Econmic Drpendency Rae-Ratio of population under 15. andAverage number of persons per room in all urban. and rural 65 and over. to the working age population ithose aged 15-64).occupied conventional dwellings, respectively. Dwellings excludenon-permanent structures and unoccupied parts. INCOMJIE DISTRIBUTIONPerctage of DweEngs ebb Eceiiry-roral. urbn. and ma!- Perceng of Toal Disposable Inco (both in cash ad kind)-Conventional dwellings with eleancity in living quarters as percen- Accruing to percentile groups of households ranked by total house-tape of total. urban. and rural dwellings respectively, hold income.

EDUCATION POVERTY TARGET GROUPSA4ded fErlbinnr Res The following estimates are very approximate measures of povertyPriry scheie - toal. ma/c ard fema/eGross totaL male and levels, and should be interpreted with considerable caution.female enrollment of all ages at the prmiary level as percentages of Esimaed Absolue tewrry Iacome Level (LS per capita -_urbrespective primary school-age populations. While many countries an ndra-Absolute povrty income lvel is that nme levelconsder primary school age to be 6-11 years, others do not. The below which a mnimal nutntionally adequate diet plus essentialdifferences in country pracuces in the ages and duration of school non-food requiraments is not affordable.are reflected in the ratios given. For some countries with universal Eited Relafe Poverty Income Leve (SI per cepdro)--wbaneducation, gross enrollment may exceed 100 percent since some ed rxral-Rural relative poverty income klvel is onc-third ofpupils are below or above the country's standard prmary-school average per capita personal income of the country. Urban level isage. derived from the rural level with adjustment for higher cost ofSecondary school - tolrl. male and ferale--Computed as above: living in urban areas.secondary education requires at least four years of approved pn- Esrimed Populwio Below Abslirte Por Incom Leve (per-mary instrucion provides generaL vocational. or teacher trainig crnr -urbn ad rel'- Percent of population (urban and ruralinstrucUons for pupils usually of 12 to 17 years of age. correspond- who are "absolute poor.ence courxs are generaly excluded.Vocational Enrolmnmi (percent of secandaw,-Vocational institu- Comparative Analysis and Data Divisiontiors indude technical. industrial. or other programs which operate Economnic Analysis and Projections Departnentindependently or as departments of scondary instutwons June 1985

- 26 - ANNEX IPage 5 of 6 pages

Population 155.8 mlllion (mid-1983)GNP per Capita: US$560 (1983 estimate)

INDONESIA - ECONOMIC INDICATORS

Amount(Million USS at Annual growth rate (Z) /bcurrent prices) Actual Projected

Indicator 1983 19_0 1981 l9Z 1Y83 19834/a 195 1986 198a Ly85 1989 1990

NATIONAL ACCOUNTSGross dome-tSE product le 78,344 9.9 7.9 -0.2 4.7 6.5 2.9 4.6 5.1 4.7 4.1 4.3

Agriculture 20,651 5.2 4.9 2.1 4.8 5.0 3.7 3.7 3.7 3.7 3.7 3.7Industry 29,896 12.5 .5 -6.4 5.0 9.8 0.9 4.5 5.5 4.6 3.0 3.5Services 27,797 11.8 .8 5.5 4.3 4.0 4.5 5.5 5.5 5.5 5.5 5.5

Consumption 62,731 12.4 15.8 3.0 0.7 7.2 3.1 3.1 4.2 4.2 4.2 4.2Gross lnvestment /d 18,908 18.9 11.1 8.5 -7.0 -9.0 5.1 5.1 5.3 5.5 5.7 5.5Exports of CNFS 19,508 -5.6 -2.4 -12.6 14.2 3.5 1.4 6.4 5.2 3.9 1.4 3.0Imports of CNFS 22,803 15.1 27.1 3.2 -8.6 -7.5 3.6 1.5 2.4 2.6 2.6 3.4

Gross national savings 12,273 33.2 -20.0 -11.3 3.7 18.4 -3.3 8.9 8.0 6.9 5.3 5.2

PRICES--2ri1deflator (1981 - 100) 91 100 113 131 142 154 168 183 199 217 237Exchange rate (Rp per US$) 627 632 661 909 1,026

Share of GDP at market prices (Z)(at current price) Average annul increase (Z) lb

TW-0 1910 1975 p 78 197n-80 198085 199l-90

Gross domestic product 100 100 100 100 100 100 3.9 8.4 7.4 4.3 4.6Agriculture 54 47 32 25 26 25 2.7 4.1 3.3 4.1 3.7Industry 14 18 34 43 38 38 5.2 12.0 9.8 3.4 4.2Services 32 35 35 32 36 37 4.8 9.7 9.5 5.6 5.5

Consumption 91 89 79 71 78 76 4.1 8.4 9.2 6.0 4.0Gross investment /d B 14 20 21 18 19 4.8 18.3 12.2 2.6 5.4Exports of GNFS 13 13 23 31 25 24 3.6 9.2 2.9 -1.1 4.0Imports of GNFS -13 -16 -22 -22 -21 -19 3.2 22.1 44.0 2.6 2.5

Gross national savings 8 9 17 26 19 21 6.1 23.1 14.2 -0.3 6.8

As Z of GDP1960 19_0 197T 1980 1954

PUBLIC FINUNCE Ie=urrent revenue 11.7 10.1 17.4 22.5 21.5Current expenditures 14.0 8.4 9.9 12.8 13.3Surplus (+) or deficit (-) -2.3 +1.6 +7.5 +9.7 +8.2Capital expenditure n.a. 5.0 11.3 13.0 10.0Foreign financing 0.2 3.5 3.7 3.3 1.8

1960-70 1970-75 1975-80 1980-85 1985-90

OTHER INDICATORSAnnual GNP grouth rate (1) 4.5 7.6 7.1 4.1 4.7Annual GUP per capita growth rate (Z) 2.4 5.1 4.7 2.0 2.5Annual energy consumption growth rate (Z) 2.2 11.2 11.0 1.4 4.6

ICOR 2.2 2.2 3.3 6.8 4.0Marginal savings rate 0.30 0.48 0.28 -0.01 0.29Import elasticity 1.2 2.8 0.84 0.57 0.53

/a Estimates.78 At constant 1973 prices for 1980-81, and 1981 prices for 1982-90.7T5 At market prices.7T Fixed investment; stock changes are included in consumption.7e9 Central Government only, on an April-to-March fiscal year basis.

East Asia and Pacific RegionMay 31, 1985

Populatlon : 155.8 million (mid-1983) - 27 -GNP per Capita: US$560 (1983 estinate)

INDONESIA - BALANCE OF PAOYENTS AND EXITERNAL CAPITAL AND rkIMlllons US5 at current prices)

ActualL9o0 19B1 l9I2 198B I1B4/a

BALANCE OF PAYMENTS/b1. nxporta 22,885 22,994 18,672 19,817 20,243

(a) Oil and LNG (gross) 17,297 18,824 14,744 14,449 14,341 r

(b) Nonoil 5,588 4.170 3,928 5,368 5,9022. Imports (including not NFS) -17.589 -22,570 -22,339 -19,655 -17,611

() Oil sector -4,050 -5.407 -4,802 -3,839 -3,135(b) Nonoil imports -11,837 -14,561 -15,824 -14,246 -12,805(c) NFS (net) -1,702 -2,602 -1,713 -1,570 -1,611

3. Resource balance 5,296 424 -3,667 162 -2,6324. Factor services -3,165 -3,210 -3,573 -4,476 -4,596

(a) Interest public debt -823 -994 -1,145 -1,256 -1,62C(b) Other (net) -2,342 -2,216 -2,428 -3.220 -2,976

5. Capital grants 76 67 105 95 1006. Balance on current account 2,207 -2,719 -7,135 -4,219 -1,8647. Dlrect foreign Investnent 140 142 311 193 2508. Public H & LT loan.

(a) Disbursement 2,551 2,673 4,192 4,965 3,828(b) Amortization -936 -1.053 -1,102 -1,295 -1,628(c) Net disbursements 1,615 1,620 3,090 3,670 2,220

9. Other capital (net) -1,488 -31 455 1,975 28710. Change In reserves (- Incresse) -2,736 988 3,350 -1,619 -87311. Net offEcial reserves 7,342 6,354 3,004 4,623 5,496

Reserves In months of nonoil ilports+ NFS 6.5 4.4 2.1 3.5 4.6

Memorandum ItemNet foreign assets of the banking

system/c 10,787 10,622 6,322 8,395 9,930Total reierves In months of nonoil

imports + NFS 9.6 7.4 4.3 6.4 8.2

EXTERNAL CAPITAL AND DEBT/dGross Dlabursements 2,551 2,673 4.192 4,965 3,828Concesslonal Loans 5[ ;8 F W '1

Bilateral. TI7 m 34T 1W7IDA 42 69 78 60 54Other 6 7 8 8 19

Nonconcessional Loans 1.892 1880 3,503 4 357 3,277Milateral :U f itm -3TT ;,II '7LU

IBRD 331 314 505 489 772Other multilateral 52 85 126 160 163Private-source 1,421 1,310 2,356 3,219 1,938

External DebtDebt outstanding and disbursed /e 14 971 15 870 18 515 21 686 22 863

official-source *5 1 Tflir1- T711Z T7O ,821Private-source 5,465 5,812 7,403 9,649 10,042

Undisbursed debt 9,481 11,387 12,870 13,778 13,973

Debt ServiceTotal servlce payments 1,759 2,047 2,247 2,551 3,248

Interest 823 994 1,145 1,256 1,620Payments as Z of exports/f 7.7 8.9 12.0 12.9 16.0

AveraRe Interest Rate on New Loans (1) 8.1 8.7 9.2 8.8 9.1otticial-source 5.4 7.8 8.8 8.7 8.6Private-source 12.4 9.4 9.5 8.8 9.8

Average Maturity of New Loans (Years) 18.8 15.5 15.2 15.1 15.9ozr es.i.-source 24.4 20.5 20.6 22.3 20.9Private-source 9.8 11.1 11.1 10.3 9.2

Asn -Maturity structure of debt outstanding

Maturities due within 5 yearsMaturities due within 10 years

Interest structure of debt outstandingInterest due within first year

/a Estimates.7T On an April-to-March fiscal year basis.7T Ineludes foreign assets of deposit money banks in addition to official reserves.7i Excludes private nonguaranteed loans.7e At end of period.7r Oil exports treated on gross basis.

ANNEX II- 28 - Page I of 4 pages

THE STATUS OF BANK CROUP OPERATIONS IN INDONESIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1986) /a

Loan/ Amount (US$ million)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

Forty Loans and forty-four Credits fullydisbursed 1,971.86 777.89 -

1578 1978 Tenth Irrigation 109.00 - 22.961604 1978 Nucleus Estate and Smallholders II 50.50 - 10.401653 1979 Third Urban Development 53.60 - 9.141707 1979 Transmigration II 90.00 - 75.491708 1979 Eighth Power 175.00 - 37.341709 1979 Second Water Supply 35.49 - 4.87946 1980 Yogyakarta Rural Development - 1.2.00 5.501751 1980 Nucleus Estate and Smallholders III 92.00 - 23.85995 1980 Fifteenth Irrigation - 37.60 5.53996 1980 National Agriculture Extension II - 39.00 19.261811 1980 Fourteenth Irrigation 116.00 - 36.551835 1980 Nucleus Estate and Smallholders IV 30.00 - 15.691840 1980 Naticnal Agricultural Research 35.00 - 35.001014 1980 National Agricultural Research - 30.00 0.561872 1980 Ninth Power 253.00 - 65.461898 1981 Smallholder Coconut Development 25.00 - 10.511904 1981 University Development 45.00 - 31.261950 1981 Tenth Power 250.00 - 10.971958 1981 Swamp Reclamation 22.00 - 11.701972 1981 Fourth Urban Development 43.00 - 19.662007 1981 Nucleus Estate and Smallholders V 134.00 - 80.692049 1982 Jakarta-Cikanpek Highway 85.00 - 66.602056 1982 Eleventh Power 170.00 - 39.422066 1982 Second Seeds 15.00 - 9.34

/a The status of the projects listed in Part A is described in a separate report onall Bank/IDA financial projects in execution, which is updated twice yearly andcirculated to the Executive Directors on April 30 and October 31.

-29- ANNEX II

Page 2 of 4 pages

Loan/ Amount (US$ million)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

2079 1982 Bukit Asam Coal Mining Development andTransport 185.00 - 65.84

2083 1982 Rural Roads Development 85.00 - 32.272101 1982 Second Teacher Training 79.59 - 64.192102 1982 Second Textbook 25.00 - 21.222118 1982 Sixteenth Irrigation 37.00 - 15.662119 1982 Seventeenth Irrigation (East Java 70.00 - 36.31

Province)2120 1982 National Fertilizer Distribution 66.00 - 31.352126 1982 Nucleus Estate and Smallholders VI 55.50 - 43.772153 1982 Coal Exploration Engineering 25.00 - 14.562199 1982 Central Java Pulp and Paper Engineering 5.50 - 4.032214 1983 Twelfth Power 300.00 - 223.082232 1983 Nucleus Estate and Smallholders VII 138.90 - 136.432235 1983 Provincial Health 27.00 - 23.252236 1983 Jakarta Sewerage and Sanitation 22.40 - 19.222248 1983 Transmigration IIT 101.00 - 54.162258 1983 Public Works Manpower Development 30.00 - 24.742275 1983 East Java Water Supply 30.60 - 17.352277 1983 Fifth BAPINDO 208.90 - 131.242288 1983 Transmigration IV 63.50 - 59.142290 1983 Second Polytechnic 107.40 - 105.472300 1983 Thirteenth Power 279.00 - 171.842341 1984 Third Agricultural Training 63.30 - 52.432344 1984 Nucleus Estate and Smallholder Sugar 79.20 - 47.842355 1984 Second Non-Formal Education 43.00 - 34.892375 1984 Second Provincial Irrigation Dev. 89.00 - 60.31

-~ 2404 1984 Highway Betterment 240.00 - 185.232408 1984 Fifth Urban Development 39.25 - 35.452430 1984 Third Small Enterprise Development 204.65 - 96.732431 1984 Second Swamp Reclamation 65.00 - 62.732443 1984 Fourteenth Power 210.00 - 196.071950-1 1985 Supplemental Loan for Tenth Power

(1950-IND) 50.00 - 19.752472 1985 Secondary Education and Management

Training 78.00 - 73.58

-30- ANNEX II

Page 3 of 4 pages

Loan/ Amount (US$ million)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

2474 1985 Upland Agriculture and Conservation 11.30 - 11.272494 1985 Smallholder Rubber Development II 131.00 - 131.002529 1985 Fourth Population 46.00 - 46.002542 1985 Second Health (Manpower Development) 39.00 - 39.002543 1985 Kedung Ombo Multipurpose Dam and

Irrigation 156.00 - 156.002547 1985 Second University Development 147.00 - 147.002560 1985 West Tarum Canal Improvement 43.40 - 43.402577 1985 National Ports Development 111.00 - 111.002578 1985 Transmigration V /a 160.00 - 160.002599 1986 Science and Technology Training 93.00 - 93.002628 1986 Smallholder Cattle Development /a 32.00 - 32.002632 1986 Second East Java Water Supply /a 43.30 - 43.302636 1986 Second Nutrition and Community Health 33.40 - 33.402638 1986 Nusa Tenggara Agriculture Support /a 33.00 - 33.002649 1986 Central and West Java Irrigation /a 166.00 - 166.00

Total Bank loans and IDA credits 8,149.54 896.49

Of which has been repaid -577.51 -23.38

Total now outstanding 7,572.03 873.11

Amount sold to third pauty 28.24Amount repaid by third party -28.24 -

Total now held by Bank and IDA /b 7,572.03 873.11

Total undisbursed /c 4,053.25

/a Not yet effective.

/b Prior to exchange adjustment.

/c Includes loans not yet effective.

ANNEX II31 Page 4 of 4 pages

B. STATEMENT OF IFC INVFSTMENTS (as of March 31, 1986)

Fiscal Loan Equity Totalyear Obligor Type of business - (US$ million) -

1971 P.T. Semen Cibinong Cement 10.6 2.5 13.11971 P.T. Unitex Textiles 2.5 0.8 3.31971 P.T. Primatexco Indonesia Textiles 2.0 0.5 2.51971 P.T. Kabel Indonesia Cable 2.8 0.4 3.21972 P.T. Daralon Textile Mfg. Corp. Textiles 4.5 1.5 6.01973 P.T. Jakarta Int. Hotel Tourism 9.8 1.6 11.41973 P.T. Semen Cibinong Cement 5.4 0.7 6.11974 P.T. Primatexco Indonesia Textiles 2.0 0.3 2.31974 P.T. Monsanto Pan Electronics 0.9 - 0.91974 P.T. PDFCI Dev. fin. co. - 0.5 0.51974 P.T. Kamaltex Textiles 2.4 0.6 3.01976 P.T. Semen Cibinong Cement 5.0 1.5 6.51976 P.T. Semen Cibinong Cement - 1.1 1.11977 P.T. Daralon Textile Mfg. Corp. Textiles 0.4 - 0.41977 P.T. Kamaltex Textiles 1.3 0.2 1.51979 P.T. Daralon Textiles 0.9 - 0.91980 P.T. Papan Sejahtera Capital market 4.0 1.2 5.21980 P.T. Indo American Industries Glass dinnerware 11.1 0.9 12.01980 P.T. Semen Andalas Indonesia Cement and construc-

tion material 48.0 5.0 53.0198215 P.T. Saseka Gelora Leasing Capital market 5.0 0.3 5.31984 P.T. Semen Cibinong Cement 25.0 - 75.01985 P.T. Asuransi Jiwua Dharmala Capital market - 0.4 0.4

ManuLife1985 P.T. Semen Andalas Indonesia Cement 0.8 - 0.S

Total gross commitments 144.4 20.0 164.4

Less: sold or repaid and cancelled 113.4 7.3 120.7

Total held by IFC 31.0 12.7 43.7

-32 - ANNEX IIIPage 1

INDONESIA

GAS DISTRIBUTION PROJECT

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time taken by the country to preparethe project : 1 year

(b) Agency which prepared the project : Perusahaan UmumGas Negara

(c) First presentation to the Bank : 1984

(d) Date of departure of Appraisal Mission July 15, 1985

(e) Completion of Negotiations : March 28, 1986

(f) Planned date of effectiveness : August 1986

Section II: Special Bank Implementation Actions

None

Section III: Soecial Conditions

A. Condition of Effectiveness:

(i) the execution of a technical assistance agreement acceptable tothe Bank between PGN and an established gas utility (para. 45);

(ii) the execution of a subsidiary loan agreement satisfactory to theBank between the Borrower and PGN (para. 49);

(iii) approval of the proposed reorganization of PGN by GOI (para.50); and

(iv) the execution of long-term contracts acceptable to the Bank forthe supply of natural gas in accordance with the quantitiesrequired through the end of the project period (para. 53).

- 33 -ANNEX IIIPage 2

B. Other Conditions

Assurances were obtained at negotiations that:

(i) PCN will review its gas tariffs by July 31, 1988, discuss theresults of this review witi GOI and the Bank and thereafter makeany necessary tariff adjustment, taking into account the Bank'sand GOI's comments (para. 37);

(ii) PCN will submit to the Bank, not later than December 31, 1987,plans for upgrading its existing networks in cities other thanJakarta, Bogor and Medan with the economic, financial andtechnical justification for the proposed activities (para. 44);

(iii) COI/PGN will prepare and furnish to the Bank detailed operatingprocedures for the customer conversion program, not later thanSeptember 30, 1986 (para. 49);

(iv) the Borrower will allow PGN to maintain its pay scale at a levelas remunerative as to that offered by similar publiccorporations (para. 52);

(v) PGN will prepare a rolling five-year plan for its future gasrequirements to be updated by the end of each fiscal year anddiscussed with Government and Pertamina (para. 53); and

(vi) PGN will take necessary measures to produce as from its fiscalyear 1988/89 a rate of return on its revalued net fixed assetsin operation of at least 1OZ (para. 58).

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