Doumeut Of

The World Bank

FOR OMCIAL USE ONLY

Rkprt No. P-4089-tT

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 USS111.0 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR THE

NATIONAL PORTS DEVELOPMENT PROJECT

May 15, 1985

IThis d.c.nmt bo a rugIcte dhtulbdom ad may be ied by redplents emiy In the perfommee ofheir oU.cd dukies ]b coumibs qmy oherwiwe be dilosed wit"t Wold Bunk *traion.

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CURRENCY EQUIVALENTS

Currency Unit = Indonesian Rupiah (Rp)

US$1.00 = Rp 1,100Rp 1 million US$909

FISCAL YEAR

Government of Indonesia - April 1-March 31Public Port Corporation II - January 1-December 31

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

ADB - Asian Development BankBAPPENAS - National Development Planning Agency-DEPENG - Supervisory Board for the Pubiic Port CorporationsDGSC - Directorate General of Sea CommunicationsCOI - Government of IndonesiaINPRES - Presidential InstructionJICA - Japan International Cooperation AgencyKfW - Kreditanstalt fur WiederaufbauHOC - Ministry of CommunicationsMPW - Ministry of Public WorksMSDP - Maritime Sector Development ProgramPERUM - Public Utility CorporationPERUMPEL - Regional Public Port CorporationREPELITA - National Five-Year Development Plan (Repelita I, 1969-74;

Repelita II, 1974-79; Repelita III, 1979-84; Repelita IV1984-89; Repelita V 1989-94)

RLS - Regular Liner ServicesSPN - National Transport Sector Development Guide (Sistem

Perhubungan Nasional)YUKA - Port labor pool

FOR OFFICIAL USE ONLY

INDONESIA

NATIONAL PORTS DEVELOPMENT PROJECT

Loan and Project Summary

Borrower: Republic of rndonesia

Beneficiary: Public Port Corporation II

Amount: US$111.0 milLion equivalent

Terms: Payable in 20 years, including five years of grace, at thestandard variable rate.

RelendingTerms: Part of the proceeds of the IBRD Loan (US$100.2 million)

would be onlent by the Government to the Public PortCorporation II on the same terms as the Bank loan, at thestandard variable rate.

ProjectDescription The project would (a) improve port productivity and manage-

ment in one of four regional public port corporations inIndonesia and provide demonstration effects for the others;(b) facilitate seaborne cargo unitization; (c) rehabilitateand modernize five ports in the Public Port Corporation II(Tanjung Priok, Teluk Bayur, Panjang, Palembang, and Pon-tianak); (d) provide training for port personnel and staffof port service organizations; and (e) provide technicalassistance for strengthening of maritime sector managementand pLanning, preparation of future water transport andland transport improvement schemes, and improving oversightof state transport corporations. The project would yieldsubstantial economic benefits through reduction of seatransport costs in the foreign and domestic trades; as suchit would contribute to improving the performance of Indo-nesia's maritime transport system. There is some risk thatpart of the required land acquisition could not be timelycompleted; however, a feasible timetable has beenestablished and satisfactory contingency plans exist todeal with such problems, if they arise.

This document has a restrictcd distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be discksed without World Bank authorization.

Estimated Costs:/a Local Foreign Total-- (USs million) ---

Civil Works /b 49.8 54.3 104.1Equipment 2.6 26.7 29.3Consultant Services and 5.9 6.4 12.3Technical Assistance

Total Base Costs 58.3 87.4 145.7

Physical Contingencies 4.7 6.1 10.8Price Contingencies 12.5 17.5 30.0

Subtotal 17.2 23.6 40.8

Total Project Costs 75.5 111.0 186.5

Financing Plan:IBRD - 111.0 111.0Government 75.5 - 75.5

Total 75.5 111.0 186.5

ExpectedDisbursements:

Bank FY 1986 1987 1988 1989 1990 1991 1992- - (US$ millionT

Annual 4.5 15.5 26.0 26.0 20.0 10.0 9.0Cumulative 4.5 20.0 46.0 72.0 92.0 102.0 111.0

Rate of Return: 32%

Staff Appraisal Report: No. 5422-IND, daLed Hay 15, 1985.

Maps: IBRD Nos. 18065, 18066, 18067, 18068, 18069, and18070.

/a Including US$14.5 million in taxes.7i Including the cost of required land acquisition.

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 NATIONAL PORTS DEVELOPMENT PROJECT

1. I submit the following report and recommendation on a proposed loanto the Republic of Indonesia for the equivalent of US$111.0 million to helpfinance the National Ports Development Project. The loan would have a term of20 years, including five years of grace, at the standard variabLe interestrate. Part of the proceeds of the loan (US$100.2 million) would be onlent bythe Government to the Public Port Corporation II (PERUMPEL II) on the sameterms as the Bank loan, .at the standard variable rate.

PART I - THE ECONOMY

2. A basic economic report, "Indonesia: Growth Patterns, Social Pro-gress and Development Prospects" (No. 2093-IND dated February 20, 1979), wasdistributed to the Executive Directors on February 26, 1979, and a countryeconomic memorandum has been prepared in each subsequent year. The latest ofthese, entitled "Indonesia: Policies for Growth and Employment" (No. 5597-INDdated April 23, 1985), was distributed to the Executive Directors on April 30,1985. Annex I gives selected social and economic indicators for the country.

Background

3. The Republic of Indonesia is a highly diverse country spread acrossan archipelago of more than 13,000 islands with a land area of about two mil-lion sq km. It now has a population of over 155 million, growing at about2.1Z p.a., and is the world's fifth most populous nation. The country has adiversified resource base, with plenciful 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 r capita isUS$560, which places Indonesia among middle income countries.-'

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 in

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

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the 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. Met 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 60% of CentraL Government receipts by 1980/81 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 4X 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 14%p.a.), although chis 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 thecountry's balance of payments situation was manageable and to provide a basisfor longer-term structural transformation. Particular attention was paid-toreducing Indonesia's dependence on oil for export earnings and publicrevenues. 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 lomestic subsidies;

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

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

(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. CDP, led by strong performance in

the oil (including LNG and refining) and agriculture sectors, rose by anestimated 4.72 in 1983 and 6.5Z 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 (2.4Zof GNP) in 1984/85. The major factors responsibLe for this imp-ovement 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 evident in the budget, where realexpenditures have probabLy fallen over the past three years. This fiscaldiscipline, in turn, heLped keep domestic inflation down to about 12% in 1983and 9% in 1984, despite the inevitable pressures associated with the 1983devaluation and the petroleum price adjustments.

Policies for Medium-Term Growth and Transformation

7. Sustained growth of the non-oil economy by at least 52 p.a. isprobably necessary to have a significant impact on employment creation andpoverty alleviation over the remainder of this decade. To promote such agrowth rate, without generating unmanageable balance of payments pressures. isone of the major challenges facing the Government. Successful transformationof the economy will require continued action in three key poLicy areas:management of the public investment program (and improvements in the regu-latory/policy environment for private investment), rationalization of theexternaL trade regime 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 budgetary 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 approvalprocedures 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, che 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 arget should be attainableprovided that economic recovery in the industr_.al economies is sustained,Indonesia's access to those markets is not constrained by protectionistmeasures and, most importantLy, Indonesia follows appropriate trade and

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exchange rate policies. The Government has already introduced a range ofexport promotion measures intended to improve export incentives, ensure readyaccess to finance for exporters, raise product quality and enhance marketingcapacity. However, over the longer term, there is no effective substitute forcomprehensive trade reform. On the import side, Indonesia's trade regime hashistorically been characterized by a predilection for high tariffs and quanti-tative restrictions. In March 1985, the Government announced a major reduc-tion in the range and level of nominal import tariffs. However, other actions-- including increased use of import quotas/bans and reguLations requiringhigher local content in production - have served to promote some potentiallycostly and uneconomic investments which could prove counterproductive to theexport drive.

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, theincrease 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 acapital market, expansion of the banking network (especially in rural areas)and selective relaxation of restrictions on private banks (combined withincreased bank 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 almost50X of Indonesia's GDP and 62Z of its population, but only 7% 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 of the mineral sector, particularly petroleum. However, there a-e twoimportant processes at work in Indonesia wnich enable the benefits of growthto be more evenly spread than indicated by output trends. The first of theseis migration. Between 1971 and 1980, 4.3 million people (or 16X of thenatural increase in population) resettled permanently in provinces outsidethose of their birth. Approximately 1.7 million people moved from Java to theOther Islands, of whom one million were resettled through the official trans-migration 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 capitaconsumption are much less pronounced than differences in per capita output.This is largely due to the impact of taxation on the oil sector.

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12. An analysis of household expenditures indicates that Indonesia'srapid economic development has been accompanied by significant progress inreducing poverty. Between 1970 and 1980, the proportion of the populationliving in poverty declined from 57% to 40Y; 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 limiced 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 2.3Z p.a. over the next decade, while economic growth will be lowerthan in the 1970s. The resultant squeeze in the Labor market is not expectedco 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 outlook 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 of mechanization. Withrespect to the industrial sector, the development of an efficient, relativelyexport-oriented pattern of production can also contrinute 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.

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 35Z. However, the weak educational base of the popula-tion continues to be a major obstacle to rapid economic development and asubstantial further expansion of secondary and tertiary education will benecessary as well as a major effort to raise the quality of the whole system.In the health sector, there has been a large expansion in facilities, notablyat the sub-district level, but continued investment and an improvement in

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quality will be necessary to increase effectiveness. This will have to becomplemented by a major expansion in wattr supply and sanitation if theimprovement in indices of mortality and morbidity during the 1970s is to bemaintained. By 1981, only 18X of the rural and 402 of the urban populationhad access to safe water, compared with government targets of 60% and 75%,respectively, for 1990.

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 reforms should also help to hold thecurrent account deficit to sustainrnble levels over the medium term. Even so,continued resource transfers from abroad will still be essential if theGovernment's modest growth targets-(52 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 ro manage its external debt quite prudently.Until 1982, Indonesia had succeeded in maintaining its public debt serviceratio, based on net exports (i.e., net of oil sector imports), at or below202. However, because of the sharp drop in oil export receipts over the pastthree years, the ratio rose to 252 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, th- _otaldebt 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 31

17. As of March 31, 1985, Indonesia had received 48 IDA credits total-ling US$938.48 million (less cancellations), and 93 Bank loans amounting toUS$7,021.0 million (less canceLlations). IFC commitments totalled US$163.2million. Annex II contains a summary of IDA credits, Bank loans and IFCinvestments as of March 31, 1985. The share of the Bank Group in Indonesia'stotal (disbursed) externaL debt outstanding at the end of 1983 was 13.1%, andthe share of debt service, 10.3% compared with 13.3Z and 7.9Z, respectiveLy,in 1982. From 1968 until. 1974, all lending to Indonesia was made throughIDA. Due to the country's improved creditworthiness following the commodityand oil price boom in 1973/74, the bulk of the Bank Group's lending in theremainder of the 1970s was through IBRD loans, with a modest amount of IDAlending being justified primarily on poverty grounds, as the per capita GNPwas well below the IDA cutoff Level. IDA lending was discontinued in FY80.Given the critical importance of agriculture (incLuding transmigration) foremployment, food security and exports, over one-third of Bank Group-assistedprojects have been in this sector. In addition, loans and credits have beenextended to virtually all other sectors of the economy, including transporta-tion, education, urban development, water supply, rural development, indus-trial development financing (including small-scale industry), power, telecom-munications, population and nutrition, and technical assistance.

18. During Repelitas I (L969-74) 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 basic economic report, requiredgreater attention to employment generation (particularly in the industrialsector) and to improvements in basic public services. While Bank lending wasalready consistent with these objectives, increasef 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 employment while continuing finan-cial prudence, promoting structural change toward a more diversified economy,and maintaining efforts to improve income distribution and alleviate pov-erty. This shift in focus has underscored the need to follow through onreforms that have already been initiated, seek increased efficiencies in the

3/ Substantially unchanged from the President's Report on the Second Health(Manpower Development) Project (No. P-4040-IND), circulated under coverof R85-117, dated April 25, 1985, and approved by the Executive Directorso.a May 14, 1985.

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economy, mobilize domestic resources to finance needed investments and recur-rent expenditures, and foster a policy environment conducive to the achieve-ment of required 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 che 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 devel-opment. Continued attention is being given to power and energy, where theBank is concentrating on policies to diversify Indonesia's energy base,rationaLize pricing and improve sector planning. In transportation, the Bankis focussing an efficiency improvements in the maritime sector and onimproving the national network of highways and rural roads. In urbandevelopment and water supply, lending is being directed more and more todeveloping innovative low-cost solutions, p-roviding for cost recovery andstrengthening local institutions, in order to minimize demands on theGovernment budget and decCntralize the responsibility for addressing basicneeds. In all, the Bank's lending program is intended to c.ntribute aL,ut 20%of Indonesia's capital requirements during the next three years and isexpected to be an important catalyst in attracting other funds. Wherepossible, we are seeking also to widen the impact of Bank lending throughtechnical assistance, as well as complementary investments and coordinatedpolicy dialogue with other donors. This is especially true in our lendingprograms for power, urban development, water supply and transportation.

20. There ha, been a notable improvement in the last few years in thedisbursement ratio-/ from a low of 13% in FY80 to over 19% in FY84. The poorFY80 ratio was in large part merely a result of the rapid increase incommitments during the FY77-79 period, when total Bank/IDA commitments toIndonesia increased by 122% compared to a Bank-wide increase of 83%. However,it also reflected implementation difficulties arising out of the Government'sbudgetary, procurement and payment procedures, as well as the severe shortageof managerial and technical manpower in Indonesia. A number of steps havebeen taken by the Government and the Bank to address these issues. Severalspecial Bank missions have visited Indonesia to analyze the problems and makerecommendations for simplifying budgetary and financial procedures. TheGovernment and the Bank have also instituted formal and regular joint reviewprocedures to identify general and project-specific problems and work outcorrective measures. Procurement seminars were held in Jakarta in September

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

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L979. November 1981 and May 1984. As a consequence of these joint initia-tives, the Government has taken measures to streamline some of the complexbudgetary and financial procedures affecting project impLementation. Inaddition, in order to reduce disbursement delays due to initial project imple-mentation difficulties, many operations are now being presented for Boardconsideration at a later stage in the project cycle. The combined effects ofall of these activities are reflected in the increase in disbursements fromUS$206 milLion in FY79 to US$764 million in FY84. It is nevertheless clearthat continued efforts to improve project implementation and the pace ofdisbursements are required, as Indonesia continues to show a disbursementratio below the Bank-wide average. A number of initiatives are underway. TheBank is helping the Government in a special effort to identifv problems in theconstruction industry with a view to developing appropriate remedial actionsand policies, as weaknesses in the domestic contracting industry have beenidentified as one of the major causes of implementation problems in Indonesia.Efforts are also underway to develop standardized tender documents in order tosnedu the procurement process, and to improve project monitoring and landacquisition procedures. It is the Bank's and the Government's intention todevote continued attention to these and other aspects of project implementa-tion in the coming year, in order to ensure that maximum benefit is realizedfrom the Government's investments, Bank-assisted and other.

PART III - THE TRANSPORT SECTOR AND MARITIME SUBSECTOR

The Role of Transport in National Development

21. Transport demand in Indonesia is estimated to have developed atabout 12% per annum during the 1970s. When annual GDP growth slowed downduring the early 1980s as a result of worldwide recession, transport demandcontinued to increase at high annual rates of between 8% and IOZ. With thecountry's geographic dimensions and large population, attempts to cope withthe necessarily diverse nature of transport demand efficiently and equitablyremain a difficult task, which is aggravated by the need to constantly addressnewly emerging demands, resulting from economic progress and population in-creases. While the coverage of the country's transport system is generallyadequate, the system's performance is to a considerable extent not yet in linewith market demands. Not only have substantial elements of the system dete-riorated, but many facilities are obsolete in concept and cannot provideefficient services, consonant with new and cost-saving transport technologies.System obsoleteness implies avoidable transport costs and growing impedimentsto domestic and foreign trade development.

22. The transport system in Indonesia includes all major modes: high-way, railway, air, river and sea transport. The role and importance of eachmode in addressing transport demand vary among regions. There have also beenmarked differences in traffic growth by mode. Over the Last few years, annualtraffic growth was very high for air transport (22%), high to moderate for high-way (16%) and sea transport (12Z), and stagnant to negative for rail transport.The principal road network expanded from 85,000 km in 1971 to 148,000 km in1983, when there were about 4.6 milLion motorized vehicles on Indonesia's roads.

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The country's railway network comprises some 6,000 route-km, covering all ofJava and parts of Sumatra. Presently there are 53 classified airports in Indo-nesia and several hundred smaller, non-classified airfields. The total numberof commercial aircraft in operation exceeded 700 in 1983. There are severalthousand km of navigable waterways among Indonesia's river systems, and morethan lO,000 river craft are estimated to be in operation.

23. The Repelita IV transport development budget provides Rp 9,106 bil-Lion or about 12% of the total plan budget; for the maritime subsector anamount of Rp 1,964 billion has been appropriated. Of considerable burden toGOI's budget are the costs of various subsidy schemes in the transport sector,which have been devised over time to offset apparent inequalities and also tocover the difference between the revenues and expenditures of state transportenterprises. Cost recovery in the highway sector has been limited, at levelsof 40Z to 50% of annual government outlays. The State Railways continue to bedependent on subsidies, amounting to Rp 60-80 billion per annum, and there re-main several subsidy requirements in the maritime sector. The global sum re-quired to operate and maintain all Indonesian ports in 1983 was Rp 150 billion,whereas the combined revenues collected in these ports during the same periodwas about Rp 90 billion. GOI has also to routinely support the shippingindustry with subsidies at estimated annual levels of Rp 25-30 billion.

24. Faced with buoyant transport demand, substantial sector subsidyrequirements, and at the same time reduced financial resources, GOI needs topursue a policy aimed at improving the efficiency of existing transportresources and increasing the level of cost recovery in the sector. Also, asector environment has to be established and specific incentives have to beintroduced which are conducive to attracting private capital and initiatives.

Maritime Subsector

25. Maritime transport is a key link in Indonesia's domestic and foreigntrade. Between the mid-1970s and the early 1980s, domestic seaborne tradeincreased at an average annual rate of 8%, to reach 30 million tons in 1983.During the same period the annual increase of imported cargo flows was llX; in1983, 26.4 million tons of various import commodities were channelled throughIndenesian ports. The volume of annual exports has remained relatively stableat about 100 million tons during the last six years. The nature and composi-tion of export, import and domestic cargoes continue to undergo significantchanges. Crude oil and natural gas have been the major commodities for manyyears, but their share in the volume of seaborne traffic has decreased. Inearly 1982 GOI promulgated its export drive policy, aimed at diversifying thecountry's export base to offset losses in the oil trade, and to reduce theeconomy's vulnerability to fluctuations in the world market. As a conse-quence, other export cargoes are gradually gaining a more important share inseaborne trade.

26. There are problems associated with trade coordination which affectfleet productivity. Coordination among traders and between the traders andthe shipping industry is limited, and often inefficiencly guided by governmentinstitutions. As a result, there are frequent discrepancies between availablecargo space and cargoes to be transported. The consequences are either

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substantial delays in moving cargo, or underutilized ship capacity. Freightdocumentation is generally incoherent, leading to further impediments inseaborne cargo management.

27. The backbone of Indonesia's domestic shipping industry nre RegularLiner Services (RLS) providing transport capacity on fixed routes and at fixedintervals. RLS is complemented by short distance feeder services, and tradi-tional sail boats. The domestic fleet included 8,150 ships with a total deadweight tonnage of 4,648,000 in 1983. The proportion of old and technolog-ically obsolete ships in the domestic fleet is high; thus aLmost all ships arenot readily geared to modern, low-cost unitized cargo handling arrangements.The productivity of ships in the domestic fleet is low. This low performanceis partially due to conventional and therefore costly cargo handling practiceson board ships, but more importantly because of shortcomings in the operationof ports. It is because of these .inefficiencies that as much as 65% of totalsea transport costs are generated in ports. To reduce sea transport costs inIndonesia, and particularly the port time of ships, there is a need tounitize, seaborne cargoes.

28. The country's port infrastructure is geographicalLy fairly evenlydistributed. There are more than 300 ports, some 45 of which have annual car-go throughputs in excess of 200,000 tons. International cargo fLows throughall Indonesian ports have grown at average annual rates of 7.5% since the mid-1970s, whereas domestic cargoes increased at average annual rates of 13Zduring the same period. Almost all ports in Indonesia were established duringpre-independence days. The layout of these ports and port facility configura-tions were derived from design concepts and cargo handling arrangements whichreflect the applicable technologies and maritime industry customs in use dur-ing the first decades of this century. Over the last 25 years very few physi-cal adjustments have been made to the country's port system. The majority ofIndonesia's ports are therefore presently not equipped for the introduction ofmodern technology, low-cost cargo handling arrangements. In many ports, vitalinstallations are badly deteriorated. Cargo handling equipment is often inpoor state of repair. As a result, cargo movements are slow, and a signifi-cant percentage of cargo is damaged in the process.

29. Most land-side managemient of cargo is handled by shipping compani-eswhich generally give priority to their own ships, regardless of arrival datesand berthing time. In all ports there is a labor pool (YUKA), which is organ-ized and managed by a supervisory body composed of representatives from dif-ferent government institutions, the Shipowner's Association, and the laborunions. Each terminal operator is obliged to use YUKA labor over which he hasno disciplinary control. High rates of absenteeism are common and laborproductivity is generally low, as there are no incentives for improvingperformance.

30. There are several services which are involved in processing a shipor cargo through each port. These services include the harbor master, customsauthorities, terminal operators, freigh forwarders, and a host of brokers.The working hours of each service and the availability of service agents aregenerally not coordinated. It is particularly the customs inspection serviceswhich have caused substantial additions to ship waiting and cargo handling

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times. All cargoes, including shipments with origins and destinations withinIndonesia, have been subject to a stringent and time-consuming customsclearance procedure. Low port productivity has escalated the transport costsand such costs are reflected in the world market prices of Indonesian goods,and in the domestic market prices of imported and locaL commodities. Thesecircumstances have contributed to the poor performance of the merchant fleet,and capital invested in ships yielded low returns, which had consequentialnegative impacts on private initiatives in the shipping industry. Low produc-tivity has also become a significant and increasing impediment to regionaldevelopment in the port hinterlands, where growth of the local economies iscriticially dependent on efficient trade with other regions in Indonesia, andthe outside world.

31. Cost saving cargo handling technologies and management arrangementswhich are increasingly employed by Indonesia's actual and potential tradepartners, and in the international shipping industry, dictate changes in thenational ports. Cargo unitization, especially containerization, has becomecommonplace in global trade. Through unitization cargo can be handled faster,and the incidence of damage and pilferage is greatly reduced, all of whichresults in substantial transport cost savings. To maintain the competitive-ness of Indonesian commodities in international markets and to support theexport drive policy, GOI has chosen to pursue a program aimed at adjusting thecountry's ports and their management for unitized cargo handling. As in thecase of international trade, the domestic trade would also greatly benefitfrom seaborne cargo unitization. However, not only are the domestic portsill-equipped to handle containers, the local shipping industry and freightforwarders are not organized to effectively cater for such demand.

Sector Organization and Management

32. Responsibility for developing the transport system and organizingits operations and maintenance is shared among three Government agencies. TheMinistry of Communications (MOC) plans, regulates and controls all transportmodes through its Directorates General of Air, Land and Sea Communications.The Directorate General of Highways in the Ministry of Public Works (MPW) man-ages the highway system. The National Development Planning Agency (BAPPENAS),reviews sectoral investment plans drawn up by HOC and MPW and approves invest-ment plans under the development budget. The organization of MOC and MPW arerepLicated at the provincial level, but delegation of authority to the pro-vincial branches has been slow. Because of limited involvement of provincialgovernments in transport development planning and sector management decision-making, development plans have often not adequately reflected regional needs,and sector management arrangements have lacked effectiveness.

33. Coordination of transport sector development planning, programmingand budgetting across line agencies at the central level, is also a problem.While BAPPENAS has tried to balance modal investment programs, the absence ofan overall transport development and management strategy has hampered rationaldecision-making concerning the most cost-effective role of each mode in thetransport system. A critical constraint is the lack of effective mechanismsto compare the potential of optimizing the use of existing resources againstthe merits of proposed new investments, and to assess overall transport system

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adjustment needs in the light of ongoing national and international develop-ments. Avoidable investment decisions are frequently taken, and the transportsystem remains largely inflexible to changes in market conditions. The organ-izational and regulatory framework which governs the transport sector has thusbeen a major im-ediment to the evolution of an efficient system, and subsidieshave often masked system inefficiencies.

34. The organization and management of the maritime subsector have beenmajor factors contributing to poor performance. The subsector has been cen-trally managed by the Directorate General of Sea Communication (DGSC) withonly limited participation of individual port managers or the shippingindustry in decision-making processes. Highly centralized authority andlimited staff expertise in DGSC have led to inefficiencies which have beencompounded by the lack of effective pLanning, programming and budgeting.Financial practices in ports have been deficient, and DGSC's reguLatory frame-work governing the shipping and freight forwarding industries has beenrestrictive, causing distortions and high costs in the provision of maritimeservices. The laws and regulations applicable to the maritime subsector wereto a considerable extent promulgated during pre-independence years. Intoday's subsector environment and market conditions, many of these legalprovisions have become hindrances to required system reforms.

Cov-e-ament Policies and Actions

35. To address these problems, many of which have been long standing,GOI has established a program which aims at (a) rationalizing transport devel-opment planning; (b) decentralizating transport sector management functions;,c) deregulating transport services; and (d) increasing cost recovery fromsystem users, and private sector participation in transport development finan-cing. To overcome the problems associated with uncoordinated transport plan-ning, programming and budgeting, MOC is preparing a broad transport sectordevelopment guide, the Sistem Perhubungan Nasional (SPN), which takes intoaccount regional development plans and comparative advantages of each trans-port mode. Parallel to the preparation of SPN, MOC's Directorates General ofLand and Sea Communications are drawing up comprehensive development plans forland and water transport. In 1983, GOI issued a policy directive which callsfor increasing cwmmercial orientation of public sector functions and inducingprivatization in the transport sector. Consequently, many transport sectorfunctions which were managed by the Government in the past are now scheduledto be transferred-to state enterprises, which either exist already, like theNational Toll Road Corporation, or have been recently established for thatpurpose, as in the case of port infrastructure. These enterprises are man-dated to provide efficient, demand-responsive transport services and to becomefinancially self-sufficient. Cost recovery in the sector is improving as aconsequence of revised pricing for the use of transport infrastructure anduser taxation. For example, major highways are now being built as toll roadswith partial financing through bond sales in the domestic capital market. Amajor cause for subsidies in the transport sector has been removed as a resultof significant increases in prices of gasoline and diesel fuel. Cost recoveryin the highway sector will also improve as a result of the 1984 generaltaxation reform which provides for increased road user charges.

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36. The most important changes have been introduced in the maritime sub-sector. They include decentralization and commercialization of port manage-ment, and substantial deregulation of the shipping and freight forwardingindustries. There have also been profound changes in customs procedures. Thebasis for these reforms was established through the Maritime Sector Develop-ment Program (MSDP) which was initiated in March 1982 under the auspices ofDGSC. Under MSDP, 15 task forces were established to deal with differentaspects of the maritime subsector, including administration and management,the regulative framework, operation and management of port infrastructure,customs procedures, the shipping and ship-building industries, and requiredtrianing and human resources development. By late 1984 detailed problemassessments had been completed and remedial measures had been prepared.

37. As a critical first step in support of MSDP, GOI decided to separatethe management of key ports from DGSC, and four new public port corporationswere established in May 1983. These corporations are organized as stateenterprises with GOI as the sole shareholder (PERUMs). PERUMs are mandated tooperate and be managed in line with commercial principles, and to strive forfinancial self-sufficiency. The four public port corporations (PERUMPELs) areheadquartered in the country's four main ports. Each PERUMPEL has its definedzone of responsibility. The PERUMPELs manage 90 of the country's ports; allremaining ports continue to be managed by the DGSC through its regionaloffices, although the longer term goal is to integrate them into the PERUMPELstructure. During the intervening months since their establishment in May1983, the PERUMPELs have taken the necessary steps-to organize theiractivities. Managers and staff have been appointed. Financial and operation-al management procedures have been drawn up, and are being successively intro-duced. A guiding framework for port management is being prepared throughcorporate plans.

38. Also in support of MSDP, DGSC has drawn up a program forstreamlining the provision of inter-island shipping and port services. Thisprogram is now being implemented on an experimental basis, as the practicalityof several proposed systsem adjustments has to be tested. During negotia-tions, agreement was reached that the action program would be satisfactorilyimplemented (Section 4.02 of the draft Loan Agreement).

39. In April 1985, GOI announced through Presidential Instruction(INPRES 4/85), far-reaching and sweeping reforms on ports and shipping. Thesereforms address excessive subsector regulation and aim at reducing costsassociated with customs, port operations and shipping; they are expected toprofoundly affect all aspects of trade. Export goods, and domestic trade areno longer subject to regular customs inspection. Import commodities will beinspected at the ports of origin by Government-appointed surveyors who willdetermine import duties and other levies, which the importers will pay todesignated banks. Under these procedures the role of the customs authoritieswill be limited to ensuring that documents are completed, and that cargo willbe promptly released from Indonesian ports. Customs inspections of domesticcargoes have been completely abolished.

40. Foreign flag liners and conference carriers are to be treated on thesame basis as local shipping companies regarding harbor dues and the freedom

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to call in any port which is open to international trade. Terminal operationsby domestic shipping companies will be discontinued, and qualified enterpriseswill be appointed for these services on the basis of competitive bidding.YUKA will be reorganized and port worker wages have been substantiallyincreased. Freight forwarding has been completely dereguLated. A mandatory24-hour three-shift system has been introduced in all ports. To ensureefficient port services coordination the position of port administrators hasbeen established. These administrators are empowered with considerableauthority to enforce timely and effective provision of port services.

41. The past multitude of port charges and fees have been consolidatedand simplified. Cargo loading and unloading charges have been reduced.INPRES 4/85 provides also for several measures which represent major steps inderegulating inter-island shipping. Various requirements imposed on shippingcompanies providing domestic services have been removed. Sea freight tariffshave been consolidated and represent ceilings. Actual sea freight chargeswill be negotiated between shipping companies and shippers.

42. The drastic nature of the reforms introduced in INPRES 4/85 is aclear indication of GOI's determination to remove administrative and proce-dural impediments in the maritime subsector. The implementation of thesemeasures will be a major challenge, but given time and the Government's com-mitment to the reforms, there is little reason to doubt that significantprogress is Likely to be achieved in improving customs and port operations,and the provision of shipping services. -

Bank Group Role and Maritime Subsector Assistance Strategy

43. To date the Bank has assisted GOI in its effort to develop the mari-time transport system through three lending operations. The First ShippingProject (Credit 318-IND, US$8.5 million) was completed in 1979. The projectessentially aimed at rehabilitating RLS ships. The Second Shipping Project(Loan 1250-IND, US$54 million) was completed in 1984 and had an expanded scopeof providing financial assistance for ship procurment; it also helped toestablish the National Fleet Development Corporation. The Project PerformanceAudit Report for the First Shipping Project (SecM83-299), states that wbilethe aims of the project were desirable, they have not been achieved. Expectedship productivity improvements did not materialize because the Bank Group didnot attempt to deal with regulatory issues. Implementation of the SecondShipping Project was a noticeable improvement over the experience gained underthe first project. There were still weaknesses in institutional performanceand development, but to a much lesser extent. The project contributed sub-stantially to initiating the required sector reforms through MSDP. The thirdBank lending operation, the Tanjung Priok Port Project (Loan 1337-IND, US$32million), was completed in 1984. Under the project the domestic traffic sec-tion of the port was improved and expanded. Most importantly, however, theproject was instrumental in establishing container handling capacity in theport. The three projects were implemented over a period of 12 years. Thelessons to be learned from the completed Bank operations suggest that thecomplexity of problems in the maritime sector and institutional weaknesseslimit the extent to which policy, institutional and procedural reforms can besuccessfully implemented in single lending operations.

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44. An part of its subsector support strategy, the Bank helped GOI inassessing maritime transport problems and issues, and in drawing up MSDP. Alltechnical assistance in MSDP preparation and the implementation of the firmtMSDP action plans was financed with proceeds out of Loans 1250-, 1337- and2120-IND. In the meantime several multilateral and bilateral institutions havejoined the Bank in assisting COI to improve maritime transport under MSDP,including ADB, Japan International Cooperation Agency (JICA), Federal Republicof Germany (KEW), and the Netherlands Covernment. In parallel with continuingsector dialogue, the Bank will arrange for lending operations which wouldaddress high priority needs in the maritime transport subsector and increasinglyaim at rectifying system shortcomings. Integral parts of this strategy would begradual decentralization of sector management functions, increasing commercial-ization of maritime infrastructure and services, and progressive liberalizationof subsector regulations, all of which would be in support of INPRES 4/85.

PART IV - THE PROJECT

Background

45. During the initial phases of MSDP preparation, it became obviousthat low port productivity was a key bottleneck in maritime system perfor-mance. Therefore, a decision was taken to address port efficiency problems ona priority basis, which led to the preparation of the National PortsDevelopment Project. Bank-financed consultants were hired during the secondhalf of 1982 to prepare optimization studies for key ports, and to draw upplans and designs for required improvements. A pre-appraisal mission visitedIndonesia in June 1983. The project objectives, scope and composition emergedfrom joint discussions between the MSDP Steering Committee, DGSC, BAPPENAS andthe Bank. The project was appraised in November/December 1983. Since the newarrangements for port management and related services needed to be firmed up,there were two post-appraisal missions in Hay/June and November/December 1984.Negotiations were held in Washington on April 22-26, 1985. The Indonesiandelegation was led by Mr. J.E. Habibie, Director General for Sea Communica-tions. The Staff Appraisal Report No. 5422-IND is being distributed sepa-rately. Supplementary project data are provided in Annex III.

Project Objectives and Scope

46. The proj-ect would be the first Bank lending operation aimed atimproving port operations and management, and would support the objectives ofINPRES 4/85. Specifically, the project would demonstrate how port efficiencyimprovements, and thus sea transport cost reductions, can be achieved throughthe application of internationally proven port management and operationspractices and arrangements. The project would also arrange for necessaryfacility rehabilitation and modernization in ports to facilitate seabornecargo unitization. It is expected that the experience gained during projectimplementation would guide future similar efforts throughout the country'sport system.

47. The project's primary focus would be the new Public Port CorporationII. The Corporation would be assisted in establishing sound technical and

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financial management procedures, and in implementing port operations improve-ment schemes. Special emphasis would be given to introducing modern low-costcargo handling arrangements through selected upgrading of existing installa-tions. These measures would ensure that projected port traffic can beefficiently 1 idled until the mid-1990s. Extensive training of Corporationand port personnel would be arranged.

48. DGSC would be assisted in its efforts to: (a) promote cargounitization; (b) streamline seaborne trade coordination; and (c) improvesector performance monitoring and analyze freight market trends. MOC would beassisted in: (a) guiding state transport enterprises; (b) preparing forimproved utilization of the country's river network for transport purposes;(c) developing land and sea transport improvement schemes; and (d) estab-lishing a national transport sector development guide.

The Public Port Corporation II

49. In line with GOI's decision to commercialize and to separate fromDGSC the management and operation of the country's major ports, the PublicPort Corporation II (PERUMPEL II) was established as one of the four newpublic port corporations to manage these ports in the future. Like the otherpublic port corporations, PERUMPEL II was established on May 1, 1983, andbecame operational on January 1, 1984. Under the enacting legislationPERUMPEL II's mandate is (a) to build, equip and maintain all land- and sea-side port installations and ancillary facilities, required for efficienthandling of ships, goods and passengers, and (b) to provide all port services,such as pilotage and terminal operations in the Corporation's administrationzone. The Corporation is responsible for planning necessary infrastructureimprovement and development to meet changing port user requirements.

50. The administrative zone of PERUMPEL II covers the southern half ofSumatra, Wesc Kalimantan and West Java, and encompasses an area wherepresently most domestic and international trade is generated. The main portin the zone is Tanjung Priok, Indonesia's most important gateway. Second inimportance are the ports of Teluk Bayur, Panjang, Palembang, and Pontianak.Teluk Bayur is the major port on the west coast of Sumatra and serves ahinterland where extensive agricultural, industrial and mining developmentstake place. The port of Panjang is located at the southern tip of Stumtra andserves the Lampung and Bengkulu provinces with important agriculturalactivities and transmigration schemes. Palembang is a river port, about 100km inland, and serves the province of South Sumatra; it is the site ofimportant and fast growing fertilizer, cement and oil refining industries,which generate substantial sea transport demand. The port of Pontianak is theonly important sea outlet on the west coast of Kalimantan; it is located 20 kmupstream from the estuary of the Kapuas Kecil River. Except for TanjungPriok, all ports in the PERUMPEL II zone are characterized by substantiallydeteriorated installations and system obsoleteness. A main reason causingdeterioration of port installations and facilities was inadequate maintenanceand associated budgets. During negotiations PERUMPEL II agreed to implementimproved maintenance arrangements and to provide funds for adequate annualport maintenance budgets (Section 3.02 of the draft Project Agreement).

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51. PERUMPEL II is under the superviscry control of MOC. A Board ofSupervisors (DEPENG) has been established and includes representatives of MOC,the Ministries of Finance and Trade, the relevant provincial governments, andthe port users. vDEPENG reports to the Minister of Communications. TheCorporation is administered and managed by a Board of Directors, whichincludes the Managing Director as chairman and the Directors of Operations,Technical Affairs, Finance and Personnel/General Administration. An internalaudit unit reports directly to the Managing Director. The five directors andtheir reporting staff form the PERUMPEL II headquarters, which is Located inJakarta. The Corporation has branch offices in each of the 19 ports under itsjurisdiction. The organization and staffing of each branch office is tailoredto the size and importance of particular port in the PERUMPEL II zone. Theexperience of most Corporation staff in dealing with corporate management andin organizing port operations is still limited. The general policy andprocedual principles and criteria for PERUMPEL II management have beenestablished, and have been translated into operational standards, guidelinesand arrangements, which are reflected in PERUMPEL II's corporate pLan. Whilethe proposed approaches and arrangements for PERUMPEL II management are satis-factory, details of the proposed organizational and procedural arrangementsneed to be appropriately adjusted, as experience in port administration underthe new rules and regulations is gained.

52. Particularly importanc for PERUMPEL II management are financialpolicies and procedures which will be conducive to attaining the Corporation'smandate. As a PERUM the Corporation is to increasingly finance the operating-expenditures in all its ports and to contribute substantially to requiredinvestments through internally generated funds. The ports which PERUMPEL IIand the other public port corporations took under their responsibilitiesreflect a wide spectrum in terms of physical conditions, operatingefficiencies and financial performance. In many of these ports user chargeshave not been changed for several years, while inflation caused costincreases, which generated growing subsidy requirements. GOI recognizes thatthe new public port corporations will be hard tested during their formativeyears in trying to achieve financial self-sufficiency in the face of timerequired to effect operational improvements, and public sensitivitiesregarding tariff increases. Nevertheless, there is agreement on the objectiveto reach financial self-sufficienicy within a reasonable timeframe through -progressive improvements in financial and operational performance. In theinterim and until such condition is achieved, GOI will assist the public portcorporations in financing investment requirements.

53. To support effective financial management the existing accountingsystem needs to be adjusted in order to strengthen cost control, budgeting andfinancial analysis and tariff calculations. The system also should provideimproved information for senior management to conduct the operational andfinancial affairs of the Corporation. During negotiations it was agreed thatthe revised accounting system would be designed by December 31, 1985, would beintroduced not later than July 1, 1986, and would be used for that fiscal yearand thereafter (Section 4.02 of the draft Project Agreement).

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54. As a step towards sound financial management, the opening balancesheets for PERUMPEL II have to be formalized by GOI. An officially appointedliquidation committee, composed of representatives from several GOI lineagencies, has already drafted the opening balance sheets for Governmentapproval. The provisions of the draft balance sheets are satisiactory.Pending Government approval, PERUMPEL II management is pursuing its financialplanning on the basis of the committee's recommendation. It is not expectedthat there will be any material modifications in the draft balance sheetsbefore their legalization.

55. The last asset valuation for the ports in the PERUMPEL II zone wascarried out in 1977. The current replacement value of most assets is likelvto be much higher than in 1977, and depreciation allowances will have to beadjusted accordingly. During negotiations, agreement was reached that assetswould be revalued by December 31,-1986, and periodically thereafter (Section4.03 of the draft Project Agreement).

56. Based on the recommendations of port optimization schemes, PERUMPELII is preparing operations improvement action plans for each port under itsjurisdiction. Since Tanjung Priok is the pivotal port of PERUMPEL II, andearly operations and management adjustments are critically important for therest of the system, the action plan for the port has been completed. Theport's proposed operations improvement plan provisions are satisfactory. Itis expected that operations improvement schemes for Teluk Bayur, Panjang,Palembang and Pontianak will be prepared by July 1985. Receipt of satis-factory schemes would be a condition of disbursement for the individualports. (Schedule 1 of the draft Loan Agreement and Section 2.01 of the draftProject Agreement).

Project Description

57. In the Corporation's hub, the port of Tanjung Priok, existingcontainer handling facilities are reaching their capacity limits; additionalinstallations have to be developed to service projected traffic. Accordingly,the port's container terminal would be improved and expanded, including quaystrengthening and container crane rail extensions so that containers can behandled without restriction throughout the terminal area. Additionalcontainer handling and stacking areas would be obtained by developing zonesadjacent to the terminal. Capital dredging would be carried out to increasethe water depth in the terminal area in line with projected ship movements.In order to avoid the Longested streets in the port area and to ensure speedypassage of containers into and out of the port, a limited access road linkwould be constructed. A truck park would be established, and a new complexconstructed to house the terminal administration. Container-handlingequipment, based on the existing terminal operational system, incorporatingrail-mounted quay cranes, rubber-tired transtainers in the stacking areas, andtransitting tractors and trailers would be procured, and improved workshopfacilities would be established for the maintenance of container handlingequipment.

58. A short-term development plan for Teluk Bayur established thenecessary port rehabilitation and development measures to meet projected

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traffic demand. Based on the recommendations under the plan, three badlydeteriorated quays would be reconstructed. Without reconstruction these quayswould have to be decommissioned during the next five years. Substantialcapital dredging would be carried out to increase the water depth in the portand access channel in line with projected ship movements. Restricted workingareas and obsolete transit sheds behind these quays would be altered andmodernized. The port would be expanded to include a multipurpose terminal forcontainer and other unitized cargo handling. The terminal complex wouldinclude a 200 m long new berch, and a 30,000 sq m reclaimed back-up zone forcargo handling, working and storage areas for fertilizers, parking, mar-shalling, and additional open and covered storage needs of the port's generalcargo operations. A multipurpose freight station would be constructed, androad access to the port's hinterland would be improved. A set of basicequipment for unitized cargo, especially container handling would beprocured. To improve the maintenance of existing and new port equipment, aworkshop would be installed and provided with necessary tools and material.

59. In Panjang shortcomings in existing port facilities and installa-tions have to be remedied. For handling of containers and non-containerizedcargo, a 45,000 sq m land area would be developed behind new quays, and therewould be alteration and modernization of existing working areas and transitsheds. Construction of these quays is in the final stage and is financed byKfW. A multipurpose freight station would be constructed. Some capitaldredging would be carried out to increase the water depth in line withprojected ship_movements. A gap in existing quay frontage would be filled,and several measures to Tiprove tie proviL 1..f port services would beimplemented, such as demolishing delapidated sheds, pavin4 service roads andworking areas, installing drainage and water/electricity supply. A basic setof equipment for unitized cargo handling would be procured. To improve themaintenance of existing and new equipment, a workshop would be installed andprovided with necessary tools and material.

60. The present main problem in Palembang is the lack of handlingcapacity for unitized cargoes, although container traffic has started to buildup. A multipurpose terminal would be established on the north bank of theMusi river. About 60,000 sq m of land would be developed as back-up area forcargo handling. An existing warehouse would be remodeled for transit of non-containerized cargoes, and a new multipurpose freight station would bebuilt. A system of basic equipment for unitized cargo, especially containerhandling would be procured. To improve the maintenance of existing and newport equipment, a workshop would be installed and provided with necessarytools and material. A basin for service boats employed in the port would bedeveloped.

61. The Port of Pontianak is in poor condition, most of its structuresand installations are considerably deteriorated. Under the project, two ouLof three existing berths would be rehabilitated, and a new berth of 100 mlength would be constructed to fill an existing gap, such that the port wouldhave 400 m of continuous quays. An existing transit shed would be complementedby two new sheds with a total covered area of about 4,500 sq m. One shedwould be suitable for container and unitized cargo handling. Several measuresto improve the provision of port services would be implemented, such as

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demolishing delapidated buiLdings, paving service roads and working areas,installing drainage and water/electricity supply. Accommodations fordifferent port services would be built, including a service boat jetty. Abasic set of equipment for unitized cargo handling would be procured. Toimprove the m- ntenance of existing and new equipment, a workshop would beinstalled, and provided with necessary tools and material.

62. Technical designs and tender documents for all measures required inthe project ports have been satisfactorily completed by Bank-financed con-sultants.

63. Consultant Services, Technical Assistance and Training. Consultantservices would be retained for construction management in all project ports.The construction management contracts would be with consortia, formed by thedesign consultants and Local firms. Such arrangements would ensure technologytransfer to Local consuLtants and thereby contribute to GOI's objective ofdeveloping the domestic consulting industry. Technical assistance would beprovided to PERUMPEL II and the other public port corporations in corporatemanagement, port operations, and equipment management. PERUMPEL II managementwould arrange for required training of port personnel and staff of thedifferent services in the ports (like terminal operators, freight forwardersand brokers) in support of the operations improvement schemes. Technicalassistance would be provided for these training programs, for which theconcepts, curricula and implementation arrangements have been established.The training programs would be open to personnel from the other public portcorporations after meeting the priority needs of PERUMPEL II. Training forport workers would be provided by the NetherLands Government. There would beappropriate coordination of training provided under the project with theNetherlands-assisted port worker training.

64. TechnicaL assistance would be provided to DGSC in: (a) maritimesector monitoring and data management; (b) seaborne trade management (throughorganizing better coordination among traders and between traders/shippers andthe shipping industry, and streamLining freight documentation); and (c) cargounitization (through providing advisory services to traders, shippingcompanies and freight forwarders, on possible measures to facilitate unitiza-tion of seaborne cargoes). Jechnical assistance would also be provided to MOCfor: (a) the administration of state transport enterprises and to provideadvisory services; (b) the preparation of river transport development schemesto improve cargo distribution and passenger transport in Kalimantan andSumatra; (c) the preparation of transport improvement schemes to establisheffective land/sea transport interfaces, least-cost modal arrangements forinland movement and sea transport of cargoes and passengers; and (d) theestablishment of a national transport sector development guide. Draft termsof reference and resource requirements for technical assistance and traininghave been prepared, and these along with associated service arrangements aresatisfactory.

Project Implementation

65. Project implementation would be primarily the responsibility ofPERUMPEL II. Under the guidance of the Corporation's Managing Director, the

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Directorates of Technical Affairs, Operations, Finance and General Adminis-tration would manage the implementation of the different project provisions.Qualified foreign and local experts would assist in all these efforts. In theoffice of the Corporation's Managing Director, a project coordination unit hasbeen established. DCSC related project measures would be monitored and guidedby the MSDP coordinator in the office of the Director General. All studies inMOC would be under the direct supervision of the Ministry's Secretary Generaland managed by the head of MOC's Planning Bureau. The project impLementationperiod is expected to be about six years.

66. The different measures to be taken under the project aimed atimproved port management and productivity will need careful monitoring. Theappropriateness of actions taken, and the corresponding implementationarrangements will have to be tested, and timely adjustments made, as and whenrequired. Eventually, when optimal procedures and their operational impacthave been determined, it is expected that they would be replicated undersimilar efforts in other ports in Indonesia. To establish a benchmark againstwhich changes in port efficiency could be measured, current production ratesof key activities in the project ports have been established. Productivitytargets for these activities, to be attained in 1990, have been set, fromwhich semi-annually required productivity improvements will be derived. Theport productivity targets were agreed during negotiations (Schedule 2 of thedraft Project Agreement).

67. PERUMPEL II, DGSC afid MOC would maintain-separate records and -

accounts for the project components implemented under their respectiveauspices. These records and accounts would be sufficient in detail toidentify the goods and services financed with loan proceeds, and be maintainedin line with sound accounting practices. The accounts would be auditedannually by independent auditors acceptable to the Bank (Section 4.01 of thedraft Loan and Project Agreements).

68. Im?lementation of project measures will require clearance of landwithin port perimeters, which is presently occupied by private companies,government services, or squatters. This land is owned by the respective portadministrations, and compensation will only have to be provided to cover re-location costs. In Tanjung Ptiok and Palembang, there will also be a need toacquire land outside the present port perimeters to permit development ofrequired additional working spaces. Necessary land clearance or acquisitionprocedures have been initiated; the arrangements and timetable for this -

process, which will be completed by mid 1987, are satisfactory.

Project Costs and Financing

69. The total financing required for the project, including contingencyallowances is estimated at US$186.5 million (Rp 205.2 billion), which includesan amount of US$14.5 million, representing taxes. Equipment would be exemptedfrom taxes and import duties. An allowance of 10 physical contingencies was -

made for all project items, except equipment. Price increases for local costswere calculated at 8% in 1985-90 and 5Z in 1991, and for foreign costs at 5%in 1985, 7.5X in 1986, 8% between 1987 and 1990, and 52 in 1991. The foreignexchange costs are estimated at US$111.0 million, or 60% of the total project

- 23 -

costs, including taxes. The base cost estimate reflects April 1985 unitprices which were derived from extensive analyses of recently awarded civilengineering contracts for port works, and supplier quotations for port equip-ment. Estimates of technical assistance costs include salaries, fees,international and domestic travel, subsistence and other applicable charges.

70. The Bank loan of US$111.0 million would finance the project's esti-mated full foreign exchange costs. The remaining 40X of the total costs wouldbe financed by GOI. GOI would pass on the loan portion allocated for portimprovements (US$100.2 million) to PERUMPEL II through a Subsidiary LoanAgreement. Signing of the Subsidiary Loan Agreement would oe a condition ofloan effectiveness (Section 6.01 of the draft Loan Agreement).

Procurement Arrangements

71. Procurement of all civil works and equipment would be on the basisof international competitive bidding, in accordance with Bank guidelines; thiswould amount to US$161.7 million, including contingencies, of which US$94.2million would be financed by the Bank loan. All bidding documents would besubject to Bank review and approval before tendering; the same principle wouldapply to proposed contract awards. It is expectet that for most civil workscontracts joint ventures of local and foreign contractors would be formed.Given the highly specialized and often sophisticated nature of the requiredequipment, it is expected that the majority of such equipmenc would besupplied by foreign manufacturers. The usual preferential treatment (15Z) forbids from local manufacturers would be afforded. Construction managementconsultants and technical assistance/training experts would be appointed inaccordance with Bank guidelines; the Bank Loan would finance the entire amountof US$16.8 million, including contingencies.

Disbursements

72. The proposed loan of US$111.0 million equivalent would be disbursedas follows: (a) 50% of tocal expenditures for civil works; (b) 100% offoreign expenditures, 100% of local expenditures (ex-factory costs), and 65%of local expenditures for other items procured locally, for equipment; and (c)100% of total expenditures for technical assistance, consultants andtraining. Disbursements for (c) wouLd be on the basis of statements ofexpenditure. Supporting documentation would be retained by PERUMPEL II, MOCand DGSC for inspection by Bank staff during supervision. The expected loanclosing date is June 30, 1992.

Environmental Impact

73. The project is not expected to cause any adverse environmentaleffects. All construction measures under the project would be in alreadyexisting port basins; thus there would be no project generated interferencewith coastal or river currents. Land reclamation in Teluk Bayur would be withmarine sands which would be dredged from the sea bed; analyses have demon-strated that there would be no environmental damage resulting from suchaction. Except for the access road improvements in Tanjung Priok andPalembang, all other project measures would be carried out within existing

- 24 -

port perimeters. Possible disturbances resulting from the road works would betemporary and be kept at acceptable minimum through appropriate traffic man-agement arrangements.

Financial Performance of the PERUMPEL II

74. Among the four public port corporations, PERUMPEL II is the largestin terms of cargo volume and gross revenues. Over the last few years it hasalso become the financially strongest, accounting for more than two thirds ofthe net income generated by all ports. The financial performance indicatorsare satisfactory, and show continuing improvements. The Corporation's goodperformance is due principally to Tanjung Priok, which generates about 75% ofthe corporation's revenues and generally 90% or more of its net income. Theother four rroject ports together contribute about 17% to the Corporation'srevenues. Their financial performance has been weak over the last severalyears, with revenues often falling short of working expenses. TheCorporation's remaining branch ports contribute about 6 to 7% to combinedrevenues.

75. The projected financial performance reveals improving trends in allproject ports. The initial revenue reducing impact of tariff provisions underINPRES 4/85 should be gradually neutralized by the cost reducing effects ofproject measures and the other provisions of INPRES 4/85. As long as costinflation is offset by corresponding tariff adjustments in each port, PERUMPELII should attain a financial position by 1992 which would enable full coverageof future investment and operating costs with Corporation internaLly generatedfunds. Thus the Corporation could be expected to become financially self-sufficient by the end of the project implementation period. During nego-tiations financial performance targets were discussed and it was agreed thatworking ratios should be attained and thereafter not exceeded, as follows:PERUMPEL II 8OZ by 1987; Tanjung Priok 70% by 1987, Teluk Bayur and Pontianak75% by 1990, and Panjang and Palembang 80% by 1990. In addition, agreementwas reached that PERUMPEL II shouLd maintain a debt service ratio of 1.5(Sections 4.04 and 4.05 of the draft Project Agreement).

76. Given the presently weak financial position of all project ports,except Tanjung Priok, and the sizeable investment requirements under theproject, GOI has decided to fund the local project costs in each port asequity contribution. All other cash requirements in the project ports areexpected to be covered by Corporation internally generated funds, primarilythrough income in Tanjung Priok, which should maintain its good financialperformance. However, GOI has agreed that if this is not possible, forexample if ceilings are imposed on required tariff adjustments in pursuit ofthe objectives of INPRES 4/85, PERUMPEL II would be compensated for theresulting revenue shortfalls. (Section 3.01 of the draft Loan Agreement).

77. The Corporation's future financial performance needs careful moni-toring, so that timely remedial measures could be taken if performance trendswould not be conducive to attaining the agreed working ratios. During negoti-ations a monitoring procedure was agreed which provides for (a) an annualfinancial performance review; (b) determination of required operational and

- 25 -

financial measures to be taken to ensure that the agreed ratios will beachieved and maintained; and (c) an assurance that the required measures wouldbe promptly taken (Section 4.06 of the draft Project Agreement).

Benefits and Risks

78. Measurable project benefits would largely result from reductions inship waiting and services times. Such reductions would materialize as aconsequence of streamlined port operations and improved port facilities. Asubstantial proportion of ship turnaround time reductions would be achievedthrough gradually increasing cargo unitization, which would be promoted underthe project. Also, containerization of shipments would lead to a diminishingincidence of cargo loss and damage. All these reductions would translate intocost savings for the shipping lines, the freight forwarders, and insurancecompanies.

79. Indirect project benefits, which were not calculated, include: (a)more efficient utilization of domestic ships, which will curtail to someextent DCSC projected fleet development requirements; tb) reduced portexpansion needs because unitized cargo-handling allows a higher intensity offacility utilization than current arrangements; and (c) facilitating regionaldevelopment through reduced commodity costs, and thus accelerated tradegrowth. Finally, the project would be beneficial through estabLishing arepiicable framework for improving port productivity throughout Indonesia.

80. The overall economic rate of return on the project investment isexpected to be 322. The effect of possible changes in key parameters on therate of return was tested, tog-ther with the influence of possible costincreases above the appraisal estimate. For Tanjung Priok a detailed proba-bility analysis was carried ouz, considering the combined effects of differenthandling productivities, container dwell times, the rate of inter-island cargocontainerization, the extent of import/export cargo transshipments to otherports, and variations in construction costs. The mean incremental economicrate of return of the proposed project investments in Tanjung Priok isexpected to be 53%; there is only a 10% chance that the rate of return wouldbe less than 15%, but there is a 35% chance that the rate could exceed 100%.A more limited sensitivity analysis was carried out for the other projectports and revealed that a 20% shortfall in traffic forecast, containerization,or port productivity, or a 20% increase in construction cost, would yieldrates of return no lower than 15% for Teluk Bayur and Panjang, 19% forPalembang and 14% for Pontianak. Best estimates are 19% for Taluk Bayur andPanjang, 22% for Palembang and 17% for Pontianak.

81. The principal risks associated with the project are (a) the possibi-lities of slower than anticipated seaborne traffic increases; (b) limited pro-gress in port productivity improvements; (c) delays in land clearance oracquisition; and (d) constrained decision-making in PERUMPEL II. The combi-nation of (a) and (b) would be consequential for the economic rate ofreturn. However, because the project addresses critically required adjust-ments in these ports, even a combined effect of a 20% increase in projectcosts and 20% decrease in project benefits would still result in an overalleconomic rate of return for the project above 20%. Delays in land acquistion

- 26 -

and clearing are conceivable in the ports of Tanjung Priok and Palembang,where squatters have to be moved from port owned land. However, delays wouldbecome critical only in the third year of project implementation, and techni-cally acceptable alternative solutions have been established in case squatterrelocation could not be timely organized. Finally, it is important thatPERUMPEL II management be given the latitude to exercise its rights andprivileges conceded by the enacting legisLation of the new public portcorporations, without restriction in the pursuit of the project objectives.The port administrators, established by INPRES 4/85, are mandated to ensurethat the Corporation can perform efficiently. The performance of PERUMPEL IIwill receive particular attention during project supervision.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

82. The draft Loan Agreement between the Republic of Indonesia and theBank, the draft Project Agreement between the Bank and Perusahaan UmumPelabuhan II (PERUMPEL II) and the report of the Committee provided for inArticle III, Section 4(iii) of the Articles of Agreement are being distributedto the Executive Directors separately. Special conditions of the projectare: (a) the execution of a satisfactory Subsidiary Loan Agreement betweenthe Government and PERUMPEL II would be a condition of effectiveness of theproposed loan (para. 70); and (b) the receipt of satisfactory action plans forthe individual ports wouLd be a condition of disbursement for the individualports (para. 56). Other special conditions of the project are listed inSection III of Annex III.

83. I am satisfied that the proposed loan complies with the Articles ofAgreement of the Bank.

PART VI - RECOMMENDATION

84. I recommend that the Executive Directors approve the proposed loan.

A. W. ClausenPresident

AttachmentsMay 15, 1985Washington, D.C.

ANNEX I-27 - Page l of 5 pages

INDOUCSA - SOCIAL IDIAOS DATA SINDOI.SIA REFREN CR0631S (EIrGTED AVEACES) I/

aIDST (cOa BE= usrau) lbsc 1? r mcu MDD M mun INCuKZ

19601 19?Q!!!zmIATF-.I ASIA A PACIFIC LAT. AKZRICA & CAR

a (sO seBN .9 6)TOAL 1919.3 1919.3 1919;43ACIICULTURAL 296.5 307.1 317.3

GM a CU (CM) 90.0 150.0 580.0 1091.2 2106.6

uzr wana cur(EILOGAMS OF OIL EQUIVALDIT) 86.0 98.0 191.0 567.3 ff5.5

IOPUL&101U AND VITAL S5TXSCPOPULATIONID-.YA (THOUSANDS) 946O.0 116201.0 152598.0URBA POPULATION (S Or TOTAL) 14.6 17.1 22.3 34.7 66.5

POPULATIO PRoJECTIONSPOPULATION IN EAR 2000 (HILL) 212.0STATIOURY POPULTION (KILL) 370.1POPULArION IWNENU 1.,

POPULATiON ncmTPEt sq. 1M. 49.3 60.5 77.9 261.9 35.7PER sq. MI. AGIh. LAM 319.3 - 376.4 471.0 1735.1 92.4

POPULATION AGE SMUCTRE (C)0-14 tRS 40.7 44.0 39.5 39.0 39.9

15-64 US 56.2 53.4 57.3 57.6 56.065 AND AOVE 3.1 2.5 3.1 3.3 4.1

POPULATION ROUTH RATE CE)TOTAL 2.1 2.0 2.3 2.3 2.4URBaN 3.7 3.6 4.5 4.3 3.6

CRUDE BIRTN RATE (PER 730US) 44.2 41.0 33.6 30.1 31.3CRUDE DEATH RATE (PE THOUS) 22.9 17.6 13.0 9.5 8.1GROSS REpRODUCTION RATE 2.7 2.7 2.2 2.0 2.0

FAMILY PLANNINGACCETRS, ANNILL (THOUS) .. 181.1 3051.0USERS t2 OF H ORRIED WON) .. .. 53.0 /c 52.7 40.3

rFOD SM 5OHnorINOEX OF FOOD PRDO. PER CAPITA(1969-71-100) 93.0 102.0 117.0 123.0 114.3

PER CAPITA SUPPLY OFCALORIES C OF REQUIRIENTS) 36.0 96.0 110.0 114.4 110.6PROTEINS (CRAZUS PER DAY) 38.0 44.0 49.0 57.0 67.3

OF tWICN ANI ALD PULSE 6.0 6.0 7.0 ld 14.1 34.1

CWILD (ACES 1-4) DBEATH RATE 22.9 16.9 13.0 7.2 5.7

HEALS1LIFE EXPECT. AT URTH (TEARS) 41.2 47.0 53.3 60.4 64.7INFANT NORT. RATE (PEI TROUS) 149.9 120.9 1D2.0 66.3 60.6

ACCESS TO SAFE MATER (IPnP)TOTA '' 3.0 23.0 37.0 65.4URBAN * 10.0 61.0 54.8 _ 78.1RURAL *- 1.0 16.0 26.4 46.2

ACCESS TO EICRErA DISPOSAL(Z OF POPULATIONl)

TOTAL ' 15.0 23.0 41.3 52.9URBAN .. 19.0 20.0 47.4 67.0RURAL '- 16.0 24.0 33.3 24.5

POPULATION PER PISICIAN 46780. 0 26510.0 11530.0 le 7749.4 1917.7POP. PER NRSING PERSON 4510.0 /f 7680.0 2300.0 T 2460.4 815.8POP. PER HOSPITAL BED

TOTAL 1360.0 1650.0 17200 o 1044.2 367.2URBAN 250.0 .. 7.oTjt 651.2 411.5RURAL __ .. 3160.0 6a 2594.6 2636.3

ALNEISSIONS PER HOSPITAL MMD _ ._ 22.4 lh 27.0 27.3

aVaAVERAGE SIZE OF IO3USEIOLD

TOTAL 4.4 4.8URBAN 4.9 5.3RURAL 4.3 4.7

AVERAGE NO. OF PERSONS/ROMTOTAL .. 1.5

URBAN .. 1.6RURAL .. 1.5

ACCESS TO ELECT. (X OF DWELLIGs)TOTAL .. ..

Rm .. ..

RaRAL ' ''

- 28- ANNEX I28es - La-50-T s5 Pagem

silnenoMOS (M nm ses ^^^

1860Lk. 1070& M ASIA a i*avi@ MA2. MInO

ASJUUTU PA0UU3.O20nwA!asI OToAL 71.0 77.0 100.0 102.0 105.4

NALS 36.0 62.0 L06.0 ios.g 106.3FIXAU 5-.0 71.0 94.0 91.2 104.5

ICOIAys TOML h.0 15.0 50.0 44.0 U3.2MAI 10.0 20 a 26.0 41.7 42.3

nU 3 .o0 10.0 24.0 43.1 44.5 -

VOCAEI0AL (t Of 4UD) 20.4 22.1 13.4 17.5 33.6

COII-9CU RDZIRmARI 31.0 20.0 52.0 31.8 30.1SECONDARY 14.0 13.0 L6.0 23.3 16.4

AULT LITRIAS RT (C) 31.0 56.6 62.0 72.9 79.5

PASSZ CIIC/TwUSAJ PO 1.1 2.1 4.4 10.1 46.0RADIO uZc /TBOuUoo D POP 7.2 21.9 42.4 113.6 225.6TV RECKIVlRS/TBOUSAND POP 0.1 0.4 9.6 50.1 107.2msPAln ('D=Y 0na3

IiIURZS) nCSLATIOUPER 7hUAND DOPULAIIoU 11.0 .. 17.7 53.9 63.5

CIRISA ANNAL ATTUANCI/CAIrA 2.8 .. 0.8 -iE 3.4 2.8

LAMMTOTAL LABOR FORM CTMOUS) 34791.0 41090.0 543U9.0

-A CPRCENT) 27.8 30.9 29.1 33.5 23.2ACEICULTURE (PERCENT) 75.0 66.0 54.0 52.2 31.5INUSTRY (PERET) 8.0 10.0 12.0 17.9 23.9

PAFCIPATIO RATZ (PERCENT)TOTAL 36.7 35.4 35.8 38.7 32.2MALE 54.2 49.5 51.1 50.9 49.3-UALX 20.0 21.6 20.7 26.6 15.2

ECONOMIC DEPENCDC RATIO 1.2 1.3 1.2 1.1 1.4

1N mPERCENT W PRIVATE ID001RECEIVED FY

IE.S? 5 w OOSEOLDS .. .. 23.5 22.2HICHST 20 or OUSDW .. .. 49.7 AN.0

5IT 20X OF IOUSEHt .. .. 6.6 X 6. 1.LowIS? Am or HOUSE0.. 14.4 S5.5..

to10 rWl -ESTIKAO ABSOLUT POVUEf IUC=LEVEL (US$ PER CAPI)

URBAN .. L24.00 124.0 A 1a.6 248.2RURAL .. 106.0 _f 106.0 7 152.0 l84.0

ESTIMATED WIM E POVER?! DMMHELEVEL (US PE CAPITA)

nuR"AN.. .. 119.0 tl 177.9 522.8RURAL .. .. 98.011 164.6 372.4

ESRTD1E POP. ELO ARSOLUTEProzr X4 LEVL (Z)

URBAN .. 51.0 / 26.0 / 23.42mAIL 59.0 7F 44.0 37.7SOT AVAILABENOT APPLICABLE

..~~~~~~~~~~~~~~ ND T VZ

NOTES

/a The rmp aver*ge for each ladicator erz populatioan-i.1.ted rltebmtlc _ms. Coverage of ccmtr1ua m_ theindicators depends an swalobl2±ty of data .d Ie not ouolu.

/b Unl1s otbetwias noted, eta for 1960 refer to aW year bet_.. 1959 and 1961; -Data for 1970 boete 1969 end1971; and data for Most RIent Eetlaete beteen 1980 and 1982.

/c 1983; /d 1977; to 1979; lf 1962; J& 1976; h 975; lt 1940 price.

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P-3IOLal/I*-239/ICD-D/05-73-85/ujd-sdldb/2 - 30 -

ANNEX IPopapation 1 155.8 million (.ld4-1963) Fags 4 of 5 Page.GOI per Capita: US$560 (1983 estlmate)

INDONIESA - ECONOMIC INDICATORS

Awmunt(milllon US$ at Annual growth rate (X) /bcurront prices) Actual Projected

Indicator 1982 _0 lS81 l9YZ 1983 !S84/a 1955 196b 1987 1S5 198 IY9U

NATIONAL ACCOUNTSGross domestrc product /a 78,344 9.9 7.9 -0.2 4.7 6.5 2.9 4.6 5.1 4.7 4.1 4.3Agriculture 20,651 5.2 4.9 2.1 4.8 5.0 3.7 3.7 3.7 3.7 3.7 3.7Induetry 29,896 12.5 8.5 -6.4 5.0 9.8 0.9 4.5 5.5 4.6 3.0 3.5Services 27,797 11.8 9.8 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 invoetment /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 CGPS 19,508 -5.6 -2.4 -12.6 14.2 3.5 1.4 6.4 5.2 3.9 1.4 3.0Importe of GNlS 22,803 15.1 27.1 3.2 -8.6 -7.5 3.6 1.5 2.4 2.6 2.6 3.4

Groas national savinp 12,273 33.2 -20,0 -11.3 3.7 18.4 -3.3 8.9 8.0 6.9 5.3 5.2

PRICESlDrdeflator (1981 - 100) 91 100 113 131 142 154 168 183 199 217 237Exchange rate (Rp per US$) 627 632 661 919 1,026

Share of GDP at market prices (Z)(ot current pricee) ______ Aver~ ae*nnual increaee (1 /b

9b 1970 1975 80 1985 1991985-90

Cross domestic product 100 100 100 100 100 100 3.9 8.4 7.4 6.3 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 :i2 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 4.0Cross investment /d 8 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 CNFS -13 -16 -22 -22 -21 -19 3.2 22.1 14.0 2.6 2.5

Cross national savings a 9 17 26 19 21 6.1 23.1 14.2 -0.3 6.8

As I of GDPI960 19(0 1 /.5 1980 1984x

PUBLIC MUINAECE /eCurrent 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 e.penditure n.e. 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 INDICATORSAnInua CNP Fojwth rate (2) - 4.5 7.6 7.1 4.1 4.7Annual GNP per capita growth ra 2 (Z) 2.4 5.1 4.7 2.0 2.5Annual energy consumption grovtr rate (2) 2.2 11.2 11.0 1.4 4.6

ICOR 2.2 2.2 3.3 4.8 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.7W At constant 1973 prices for 1980-81, and 1981 prices for 1982-90.7- At merket prices.71 Fixed investment; stock changes are included in consumption.Te Central GCovernment only, on an April-to-March fiscal year basis. East Asia and Pacific Region

Nay 3, 1985

P-gOILl I1N-239/ICIU-ND/05-07-8t/sd/db/I 1

Population : 155.8 million (mid-1983) - 31 - ANNEX IGNP per Capita: US$560 (1983 estImate) aage of 5 page.

INDONESIA - LALANCe OF PAYHENTS AND TERNnAL CAPITAL AND DEBT(KilfLons U55 at current prie.s)

Actual Projected1980 IIII 198Z 1983 1954/a 1M5 1986 1981 1990

BALANCE OF PAYKENTS/baorts 22,885 22.994 18.672 19,817 20 243 20.769 22.868 26,170 36.235

(a) Oil and LNG (gross) 17.297 18,824 14,744 14,449 14.341 14.253 15,512 17,821 23.848(b) Nonoil 5,588 4,170 3,928 5,368 5,902 6,516 7,356 8.349 12.387

2. Imports (including net UFS) -17 ,589 -22,570 -22,339 -19,655 -17,611 -19,066 -20 ,783 -23,026 -31.586(a) Oil sector -4,050 -5,407 -4,802 -3.839 -3,135 -3,801 -4,113 -3,619 -6,540(b) Monoll imports -11,837 -14,561 -15,824 -14,246 -12,805 -13,616 -14,899 -16.462 -22.438(ce) NFS (net) -1,70Z -2,602 -1,713 -1,570 -1,611 -1.649 -1,771 -1,945 -2,608

3. Resource balance 5,296 424 -3,667 162 -2,632 1,701 2,085 3,144 2,8004. Factor services -3.165 -3,210 -3,573 -4,476 -4,596 -4,528 -4,994 -5,708 -7,287

(a) interest public debt -823 -994 -1,145 -1,256 -1,620 -1,598 -1,851 -2,132 -4,487(b) Other (net) -2,342 -2,216 -2,428 -3,220 -2,976 -2,930 -3,143 -3,576 -4,4R7

5. Capltal grants 76 67 105 95 100 112 119 125 1506. Balance on curreat account 2,207 -2,719 -7,135 -4,219 -1,864 -2,715 -2,790 -2,439 -2,4887. Direct Eoreign investment 140. 142 311 193 250 250 275 300 3758. Public K & LT loans

(a) Disbursement 2,551 2,673 4,192 4,965 3,828 4,988 5,428 6,068 6,892(b) Amortization -936 -1,053 -1,102 -1.295 -1,628 -1,980 -2,137 -2,545 -4,603Cc) Net disbursements 1,615 1,620 3,000 3,670 2,220 3,008 3,291 3,523 2,289

9. Other capital (fet) -1,488 -31 455 1,975 287 -143 -104 -418- 133lo. Change in reserves (- increase) -2,736 988 3,350 -1,619 -873 -400 -672 -966 -30911. Net official reserves 7,342 6.354 3,004 4,623 5,496 5,896 6,588 7,534 9.384

Reserves in months of nonoil imports+ UFS 6.5 4.4 2.1 3.5 4.6 4.6 4.7 4.9 4.5

Memorandum ItemNet toreign assets of the banking

system/c 10,787 10.622 6,322 8.395 9.930 10,331 11,003 11,969 13,819Total reselrves in months of nonoil

Imports + NFS 9.6 7.4 4.3 6.4 8.2 8.1 7.9 7.8 6.6

EXTERNAL CAPITAL AND DEBI/dGross Disbursements 2,551 2,673 4 192 4 965 3 828Concessionsi Loans -tsr 'Y t o tss

Bilateral TWm 7 Ir W7IDA 42 69 78 60 54Other 6 7 8 8 19

Nonconcessional Loans 1 892 1880 3503 4 357 3,277Bilateral W 704IBRD 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 Ie 14 971 15 870 18 515 21 686 22 863

OfEicial-source 9 , 50 ll ,llZ IZ,Private-source 5,465 5,812 7,403 9.649 10,042

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

Debt Service --Totar service payments 1.759 2,047 2,247 2,551 3,248

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

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

Aversge Maturity of New Loans (Years) 18.8 15.5 15.2 15.1 15.9OtXrci±A-source 24.4 20.5 20.6 22.3 20.9Private-source 9.8 11.1 11.1 10.3 9.2

As X of debt outstanding at end of 1984Maturity structure of debt outstanding

Maturities due within 5 years 34Maturities due within 10 years 65

Interest structure of debt outstandingInterest due within first year 7.0

/a Estimates.71 On an April-to-March fiscal year basis.7W Includes foreign assets of deposit money banks in addition to official reserves.7T Excludes private nonguaranteed loans.7eW At end of period. East Asia and Pacific Region71 Oil exports treated on gross basis. May 3. 1985

- 32- ANNEX IIPage 1 of 4 pages

THE STATUS OF BANK GROUP OPERATIONS IN INDONESIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1985) /a

Loan/ Amount (USS million)Credit Fiscal (less canceLLations)number year -pose Bank IDA Undisbursed

Thirty-five Loans and forty-one Credits fullydisbursed 1,584.59 642.71 -

1578 1978 Tenth Irrigation 140.00 - 68.021604 1978 Nucleus Estate and Smallholders II 65.00 - 29.75869 1979 Polytechnic - 49.00 11.291645 1979 Twelfth Irrigation 77.00 - 23.471653 1979 Third Urban Development 54.00 - 11.261692 L979 Second Agricultural Training 42.00 - 8.291696 1979 Fifth Highway 123.20 - 19.59919 1979 Transmigration II - 67.00 0.01707 1979 Transmigration II 90.00 - 86.271708 1979 Eighth Power 175.00 - 41.641709 1979 Second Water Supply 35.50 - 9.85946 1980 Yogyakarta Rural Development - 12.00 7.401751 1980 Nucleus Estate and Smallholders III 99.00 - 34.79984 1980 Smallholder Rubber Development - 45.00 27.57995 1980 Fifteenth Irrigation - 37.6 15.72996 1980 National Agriculture Extension II - 42.00 24.951811 1980 Fourteenth Irrigation 116.00 - 53.391835 1980 Nucleus Estate and Smallholders IV 42.00 - 29.721840 1980 National Agricultural Research 35.00 - 35.001014 1980 National Agricultural Research - 30.00 5.941872 1980 Ninth Power 253.00 - 86.711898 1981 Smallholder Coconut Development 46.00 - 33.061904 1981 University Development 45.00 - 37.301950 1981 Tenth Power 250.00 - 21.681958 1981 Swamp Reclamation 22.00 - 13.451972 1981 Fourth Urban Development 43.00 - 24.13

/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.

33 -ANNEX IIPage 2 of 4 pages

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

2007 1981 Nucleus Estate and Smallholders V 161.00 - 114.442011 1981 Second SmaLl Enterprise Development 106.00 - 8.952049 1982 Jakarta-Cikampek Highway 85.00 - 75.702056 1982 Eleventh Power 170.00 - 84.112066 1982 Second Seeds 15.00 - 10.802079 1982 Bukit Asam Coal Mining Development and

Transport 185.00 - 85.872083 1982 Rural Roads Development 85.00 - 63.112101 1982 Second Teacher Training 80.00 - 76.262102 1982 Second Textbook 25.00 - 24.892118 1982 Sixteenth Irrigation 37.00 - 21.242119 1982 Seventeenth Irrigation (East Java 70.00 - 48.11

Province)2120 1982 National Fertilizer Distribution 66.00 - 41.712126 1982 Nucleus Estate and Smallholders VI 68.10 - 59.492153 1982 Coal Exploration Engineering 25.00 - 19.692199 1982 Central Java Pulp and Paper Engineering 5.50 - 4.212214 1983 Twelfth Power 300.00 - 256.202232 1983 Nucleus Estate and Smallholders VII 154.60 - 152.322235 1983 Provincial Health 27.00 - 25.972236 1983 Jakarta Sewerage and Sanitation 22.40 - 21.382248 1983 Transmigration III 101.00 - 66.002258 1983 Public Works Manpower Development 30.00 - 28.722275 1983 East Java Water Supply 30.60 - 27.492277 1983 Fifth BAPINDO 208.90 - 158.712288 1983 Transmigration IV 63.50 - 61.752290 1983 Second Polytechnic 107.40 - 107.132300 1983 Thirteenth Power 279.00 - 241.152341 1984 Third Agricultural Training 63.30 - 62.842344 1984 Nucleus Estate and Smallholdez Sugar 79.20 - 53.912355 1984 Second Non-Formal Education 43.00 - 41.382375 1984 Second Provincial Irrigation Dev. 89.00 - 85.342404 1984 Highway Betterment 240.00 - 235.372408 1984 Fifth Urban Development 39.65 - 39.152430 1984 Third Small Enterprise Development 204.70 - 204.142431 1984 Second Swamp Reclamation 65.00 - 64.842443 1984 Fourteenth Power 210.00 - 209.481950-1 1985 Supplemental Loan for Tenth Power

(1950-IND) /a 50.00 - 50.002472 1985 Secondary Education and Management

Training 78.00 - 77.81

/a Not yet effective.

ANNEX IIPage 3 of 4 pages

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

2474 1985 Upland Agriculture and Conservation /a 11.30 - 11.302494 1985 Smallholder Rubber Development II la 131.00 - 131.00

Total Bank loans and IDA credits 7,020.93 938.48

Of which has been repaid -395.81 -17.69

Total now outstanding 6,625.12 920.79

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

Total now held by Bank and IDA /b 6,625.12 920.79

Total undisbursed 3,693.82 98.65 3,792.47

/a Not yet effective.

/b Prior to exchange adjustment.

ANNEX IIPage 4 of 4 pages

B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1985)

Fiscal Type of Loan Equity Totalyear ObLigor 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

Manuf. 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 Devel. 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 -

Manuf. 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 Cement and

Indonesia ConstructionMaterial 48.0 5.0 53.0

1982/5 P.T. Saseka Gelora Leasing Capital Market 5.0 0.3 5.31984 P.T. Semen Cibinong Cement 25.0 - 25.0

Total gross commitments 143.6 19.6 163.2

Less: sold or repaid and cancelled 107.6 7.4 115.0

Total held by IFC 36.0 12.2 48.2

Undisbursed (including participant's portion) 9.5 9.5

36 ANNEX II IPage 1

INDONESIA

NATIONAL PORTS DEVELOPMENT PROJECT

Supplementary Project Data Sheet

Section I: Timetable of Key Events:

(a) Time taken to prepare the project : 24 months

(b) Agency which proposed the project : DGSC

(c) First Bank mission to consider project : June 1983

(d) Departure of appraisal mission : November 1983

(e) Completion of negotiations : April 1985

(f) Planned date of effectiveness : September 1985

Section II: Special Bank ImpLementation Action

None.

Section III: Special Conditions

COI and PERUMPEL II wilL ensure that the following actions arecarried out:

Ca) implementation of the shipping and port services 'iprovement schemes(para. 38);

(b) completion of operation improvement schemes for the project ports(para. 56);

(c) attainment of productivity targets for each of the project ports(para. 66); and

(d) achievement and subsequent maintenance of agreed financialperformance indicators in the project ports and for PERUMPEL II(para. 75-77).

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