Document of The World Bank · Document of The World Bank Report No: ICR3015 IMPLEMENTATION...

Document of The World Bank

Report No: ICR3015

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-4712 IBRD-7758 IBRD-7905)

ON LOANS

IN THE AMOUNT OF US$171 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR THE

JAVA-BAL1 POWER SECTOR RESTRUCTURING AND STRENGTHENING PROJECT

June 25, 2014

Infrastructure Sector Unit Indonesia Sustainable Development Department East Asia and Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of December 31, 2013)

Currency Unit = Indonesian Rupiah (IDR) IDR 1,000 = US$0.088

IDR 11,428 = US$1 FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank AMDAL Analysis of Impacts on the Living Environment ANDAL Environmental Impact Analysis BKSDA Office of Natural Resources Conservation Center BPKP Board of Supervisors Finance and Development CAS Country Assistance Strategy CHESS Community/Health/Environment/Systems/Sustainability CPS Country Partnership Strategy DGEEU Directorate General of Electricity and Energy Utilization DRC Disaster Recovery Center DIVSIM IT Shared Services Unit EIRR Economic Internal Rate of Return EMP Environmental Management Plan ERP Enterprise Resource Planning ESAMP Environmental & Social Assessment and Management Plan FMR Financial Management Reports GOI Government of Indonesia IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICR Implementation Completion and Results Report IDC Interest During Construction IPO Initial Public Offering IPP Independent Power Producer IPTD Indonesia Power Transmission Development ISR Implementation Status Report IT Information Technology JBIC Japan Bank for International Cooperation LARPF Land Acquisition and Resettlement Policy Framework LRMC Long-run Marginal Cost MOU Memorandum of Understanding NJOP Taxable Value of Property NPV Net Present Value PAD Project Appraisal Document PCAR Procurement Capacity Assessment Report PDO Project Development Objective PET Project Environmental Team PGN PT Perusahaan Gas Negara PIU Project Implementation Unit PLN PT Perusahaan Listrik Negara PMU Project Management Unit PSHP Pumped Storage Hydropower Project PSO Public Service Obligation QPR Quarterly Progress Report RFP Request for Proposals RKL/RPL Environmental Management and Monitoring Plan ROW Right of Way

SLA Subsidiary Loan Agreement SPN Specific Procurement Notice TA Technical Assistance UKL UPL Environmental Management Monitoring Procedures UKLAJPL Environmental Management and Monitoring Procedures Report

Vice President: Axel Van Trotsenberg

Country Director: Rodrigo Chaves

Sector Manager: Nathan M. Belete

Project Team Leader: Dhruva Sahai

ICR Team Leader: Dhruva Sahai

REPUBLIC OF INDONESIA

JAVA-BAL1 POWER SECTOR RESTRUCTURING AND STRENGTHENING PROJECT AND

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

IN SUPPORT OF THE JAVA-BAL1 POWER SECTOR RESTRUCTURING AND STRENGTHENING PROJECT

CONTENTS

Data Sheet A. Basic Information .......................................................................................................vB. Key Dates ....................................................................................................................vC. Ratings Summary ........................................................................................................vD. Sector and Theme Codes .......................................................................................... viE. Bank Staff .................................................................................................................. viF. Results Framework Analysis .................................................................................... viiG. Ratings of Project Performance in ISRs .....................................................................xH. Restructuring (if any) ................................................................................................ xiI. Disbursement Profile ................................................................................................. xi

1. Project Context, Development Objectives and Design................................................12. Key Factors Affecting Implementation and Outcomes ...............................................73. Assessment of Outcomes ...........................................................................................164. Assessment of Risk to Development Outcome .........................................................295. Assessment of Bank and Borrower Performance ......................................................306. Lessons Learned ........................................................................................................347. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ...........35

Annex 1. Project Costs and Financing ...........................................................................36Annex 2. Outputs by Component ..................................................................................37Annex 3. Economic and Financial Analysis ..................................................................42Annex 4. Bank Lending and Implementation Support/Supervision Processes .............47Annex 5. Beneficiary Survey Results ............................................................................50Annex 6. Stakeholder Workshop Report and Results ...................................................51Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ......................53Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ........................62Annex 9. List of Supporting Documents .......................................................................63MAP ...............................................................................................................................64

A. Basic Information

Country: Indonesia Project Name: Java-Bali Power Sector Restructuring and Strengthening Project

Project ID: P063913 L/C/TF Number(s): IBRD-47120,IBRD-77580,IBRD-79050

ICR Date: 06/25/2014 ICR Type: Core ICR

Lending Instrument: SIL Borrower: REPUBLIC OF INDONESIA

Original Total Commitment:

USD 141.00M Disbursed Amount: USD 150.77M

Revised Amount: USD 158.3M

Environmental Category: B

Implementing Agencies: PT Perusahaan Listrik Negara PT Perusahaan Gas Negara (Persero) Tbk

Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 11/28/2000 Effectiveness: 07/07/2004 07/07/2004

Appraisal: 03/10/2003 Restructuring(s): 06/19/2008 12/22/2009 12/29/2011

Approval: 06/26/2003 Mid-term Review: 06/16/2008

Closing: 12/31/2008 12/31/2013 C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Moderately Satisfactory

Risk to Development Outcome: Moderate

Bank Performance: Moderately Satisfactory

Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Moderately Satisfactory

Overall Bank Performance:

Moderately SatisfactoryOverall Borrower Performance:


C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance

Indicators QAG Assessments

(if any) Rating

Potential Problem Project at any time (Yes/No):

Yes Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:


D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Central government administration 20 10

Transmission and Distribution of Electricity 80 90

Theme Code (as % of total Bank financing)

Infrastructure services for private sector development 50 80

Other public sector governance 50 20 E. Bank Staff

Positions At ICR At Approval Vice President: Axel van Trotsenburg Jemal-ud-din-Kassum Country Director: Rodrigo A. Chaves Andrew Steer Sector Manager: Nathan M. Belete Mohammad Farhandi (acting) Project Team Leader: Dhruva Sahai Mohammad Farhandi ICR Team Leader: Dhruva Sahai ICR Primary Author: Sudhee R. Sen Gupta

F. Results Framework Analysis

Project Development Objectives The development objective of the Project is to improve the performance of the power sector in Java-Bali by (a) supporting the State power company (PLN) to implement its financial and corporate restructuring plan, and to strengthen key elements of the Java-Bali electricity supply system; and (b) assisting the State gas company (PGN) to prepare the groundwork for restructuring its gas transmission and distribution operations, given the importance of natural gas for power generation. Revised Project Development Objectives The revised development objective of the project is to improve the reliability and efficiency of the power system in Java-Bali and strengthen PLN and PGN’s management capabilities. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Natural Gas Pricing and PGN's restructuring and partial privatization studies completed.

Value quantitative or Qualitative)

Natural Gas Pricing and PGN's restructuring and partial privatization have not been undertaken.

Natural Gas Pricing and PGN's restructuring and partial privatization studies completed.

Studies Completed

Date achieved 06/04/2003 12/31/2008 11/14/2008 Comments (incl. % achievement)

Fully achieved. Natural Gas Pricing and PGN's restructuring and partial privatization studies were completed in November 2008.

Indicator 2 : Increased dispatch capability of generation units in East Java.


Around 2000 MW of dispatch capability in 2002

Additional 2000 MW of dispatch capability by project closing date.

Additional 2,322 MW of dispatch capability.

Date achieved 06/04/2003 12/31/2008 12/31/2013

Comments (incl. % achievement)

Exceeded Target. Dispatch capability for generation units in East Java has been increased. Due to shifting demand patterns, a Bank financed transformer from S. Surabaya S/S was relocated and it shall be replaced upon completion of the Grati-S Surabaya T/L.

Indicator 3 : Reduced substation loadings at key Java-Bali 500kV and 150kV substations. Value The majority of The majority of The majority of



approval documents)

Formally Revised Target Values



quantitative or Qualitative)

substations have loadings at 80% of the capacity or more in 2002.

substations have loadings at 50%-60% of the capacity.

substations have an average loading of 68.5% of capacity.

Date achieved 06/04/2003 12/31/2008 12/31/2013


Achieved. Due to power demand growth being higher than originally anticipated, average substation loadings are larger than the original target value. However, the Java-Bali system retains appropriate reliability levels per precise available information.

Indicator 4 : Improved voltages at key 150kV substations in southeastern Java.


The majority of key 150kV substations voltages are operating at 90% of capacity, or at 135kV in 2002.

The majority of key 150kV substations voltages are operating at 100% of capacity.

Majority operating at 100 % capacity


Fully achieved.

Indicator 5 : PLN issues reconciled financial statements for the Java-Bali, Sumatra, and Sulawesi Systems within 45 days upon the completion of the fiscal year.


90 days when performed manually

45 days since ERP fully deployed in Java-Bali System.

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

45 days from full deployment of ERP system.

Date achieved 06/19/2008 12/31/2008 12/31/2013 12/31/2013 Comments (incl. % achievement)

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

(b) Intermediate Outcome Indicator(s)



approval documents)

Formally Revised

Target Values



Indicator 1 : Implementation milestones and the commissioning dates of 500kV substation expansions.

Value (quantitative or Qualitative)

Component not begun. Completed by project closing date.

Completed by revised project closing date.

Date achieved 06/04/2003 12/31/2008 12/31/2013


All substations completed and commissioned. Due to shifting demand patterns, a Bank financed transformer from S. Surabaya S/S was relocated and shall be replaced at a later date by PLN using its own budget, upon the completion of the Grati-S Surabaya T/L

Indicator 2 : Implementation milestones and the commissioning dates of 150kV substation expansions and uprated lines.


Upgrade not begun. Completed by project closing date.

The substation expansions have been completed and two of the seven 150 kV lines have been completed.


Five transmission lines are delayed due to issues with land acquisition from private landowners, and with obtaining Ministry of Forestry's clearances. Negotiations with landowners under a new land acquisition law are ongoing.

Indicator 3 : ERP system deployed to entire Java-Bali System after completing initial pilot roll-out.


PLN does not employ ERP system.

ERP successfully completed.

ERP successfully completed in Java Bali, Sumatra and Sulawesi.

ERP system successfully completed and deployed in Java, Bali, Sumatra, and Sulawesi.

Date achieved 06/04/2003 12/31/2008 12/31/13 12/31/13


The ERP pilot in Java-Bali was completed by October 2008 and the ERP system-wide rollout was completed by January 2009. The extended deployment of the ERP system in Sumatra and Sulawesi was completed by December 31, 2013.

Indicator 4 : Progress report on PLN TA - Supplemental Study on Upper Cisokan Pumped Storage Project to increase peak power generation capacity.


TA has not begun. TA completed.

Study on Upper Cisokan PSP (as a means of increasing peak power generation capacity)

completed. Date achieved 06/04/2004 12/31/2008 06/29/2007 Comments (incl. % achievement)

The TA was completed in June 2007, It was a critical input in the preparation of the Upper Cisokan PSP project, approved May 26, 2011, and now under implementation.

Indicator 5 : Progress on TA studies for PGN.


TA studies not begun.

TA studies completed by project closing date.

TA studies completed through combined use of PGN and loan funds. Balance of Higher education program cancelled in 2009.

Date achieved 06/04/2003 12/31/2008 11/14/2008


The Gas Pricing, and the Restructuring and Privatization studies were completed on time. PGN decided to use its own funds to finance the balance of the TA activities, primarily the Higher Education Program. The unused loan balance was cancelled.

G. Ratings of Project Performance in ISRs

No. Date ISR Archived

DO IP Actual

Disbursements (USD millions)

1 10/14/2003 Satisfactory Satisfactory 0.00 2 05/27/2004 Satisfactory Satisfactory 0.00 3 06/16/2004 Satisfactory Satisfactory 0.00 4 10/07/2004 Satisfactory Satisfactory 1.41 5 03/21/2005 Moderately Satisfactory Moderately Satisfactory 1.41 6 03/22/2006 Moderately Satisfactory Moderately Satisfactory 4.68 7 06/20/2006 Moderately Satisfactory Moderately Satisfactory 6.75 8 06/27/2006 Moderately Satisfactory Moderately Satisfactory 7.31 9 06/27/2007 Moderately Satisfactory Moderately Satisfactory 28.98

10 05/10/2008 Moderately Satisfactory Moderately Satisfactory 41.75 11 11/22/2008 Moderately Satisfactory Moderately Satisfactory 76.67 12 04/15/2009 Satisfactory Satisfactory 94.26 13 08/08/2009 Satisfactory Satisfactory 96.83 14 02/27/2010 Satisfactory Satisfactory 118.80 15 04/12/2011 Satisfactory Moderately Satisfactory 125.76 16 03/11/2012 Moderately Satisfactory Moderately Satisfactory 125.94

17 03/22/2013 Moderately SatisfactoryModerately

Unsatisfactory 138.96

18 10/22/2013 Moderately Satisfactory Moderately Satisfactory 146.23

H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

DO IP

06/19/2008

To improve the reliability and efficiency of the power System in Java-Bali and strengthen PLN and PGN’s management capabilities.

MS MS 42.96

Revise PDO and indicators. Extend closing date to 12/31/2009. Remove certain corporate restructuring activities. Reallocation of proceeds.

12/22/2009 S S 109.76 To allow for the completion of unfinished transmission lines.

12/29/2011 S MS 125.94 To allow for the completion of unfinished transmission lines.

I. Disbursement Profile

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1. Project Context, Development Objectives and Design 1. In the aftermath of Indonesia’s financial crisis and political remake, the World Bank revisited its entire strategy towards Indonesia. To many Indonesians, the Bank was then associated with the old “New Order” regime, which it had supported for 32 years. The Bank was also associated with debt, perhaps Indonesia’s most visible economic problem in the post crisis years. Between 2000 and 2003, the Bank actively confronted these weaknesses and in close consultation with the new Government of Indonesia, lending volumes were sharply reduced dramatically from an average of US$1.3 billion per year before the crisis, to about US$450 million over those three years1.

2. Two main factors - Indonesia’s new decentralization strategy and the Bank’s commitment to improve transparency and effectiveness in the use of its funds - called for new delivery mechanisms. The top-down approach to the provision of public services under the old New Order regime was no longer an option for Indonesia or the Bank. However, decentralization of responsibility to local levels, the new way of doing business, also posed significant challenges. It was during this period of rapid change in governance and institutions that the Java Bali Power Sector Restructuring and Strengthening Project (the “Project”) was prepared.

1.1 Context at Appraisal 3. Governance reform and the new decentralization strategy, were also reflected in the various institutional reorganizations taking place at the time of appraisal. The country’s main electricity utility PLN, was one of the entities also undergoing drastic change. In addition to being caught up in the country’s decentralization, it was also in the process of being fundamentally restructured. 4. The financial crisis had a more profound impact on Indonesia’s power sector than on those of other countries in the region. The substantial devaluation of the Rupiah caused by the crisis transformed PLN from a moderately profitable company into one unable to meet its obligations for foreign currency-denominated debt service payments, fuel costs, and power purchases from private independent power producers (IPPs). The crisis also exposed shortcomings in the sector’s governance structure which were already present prior to the crisis, particularly in terms of PLN’s monopolistic organization, and the absence of competitiveness and transparency in Indonesia’s IPP program (which primarily depended on unsolicited proposals). In addition, the lack of funds flowing into the broader energy sector since the crisis meant that there was an urgent need for both substantial investment in new electricity infrastructure and rehabilitation of existing power assets, as well as investment in the upstream infrastructure used to supply fuel for power generation, particularly natural gas. 5. The Government therefore needed to strengthen not only the physical components of the power system, but also to develop the capacity of key sector institutions to function in a competitive electricity market. Although, the demand for power declined in the immediate aftermath of the crisis, as Indonesia recovered from the financial crisis, demand began to rebound and there was a need to strengthen the power system, remove bottlenecks and achieve greater utilization of existing generation capacity in Java-

1 World Bank Report No. 27246-IND

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Bali. PLN thus needed to make critical investments to build additional generation and transmission capacity at the time, and needed to undergo the ADB designed corporate restructuring to also comply with the 2002 Electricity Law (20/2002) that would introduce a competitive power market. The Project components were therefore designed to (i) strengthen the power system network, (ii) comply with the 2002 Electricity Law; and (iii) support PLN’s financial and corporate restructuring. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 6. The development objective of the Project is to improve the performance of the power sector on Java-Bali by: (a) supporting the State power company (PLN) to implement its financial and corporate restructuring plan, and to strengthen key elements of the Java-Bali electricity supply system; and (b) assisting the State gas company (PGN) to prepare the groundwork for restructuring its gas transmission and distribution operations, given the importance of natural gas for power generation.

7. This objective was to be achieved through the provision of Bank financing toward priority investments and technical assistance for PLN, and technical assistance for PGN. In particular, project components for PLN would: (i) support PLN’s financial and corporate restructuring, by providing technical assistance and by enhancing the company’s information systems capabilities; (ii) achieve greater utilization of existing generation capacity in East Java, by relieving constraints in the bulk transmission grid; (iii) improve the reliability of existing generation supply at the PLN and independent power producer (IPP) geothermal power plants in West Java, by strengthening the associated local transmission system; and (iv) improve the reliability of power supply at various locations throughout Java and Bali, by strengthening and debottlenecking local transmission and sub-transmission networks. Technical assistance to PGN would enhance its capabilities for expanding gas utilization in Java.

8. The original Loan Agreement had a simpler statement of the project objectives: “to assist the Borrower in improving the provision of electricity and gas to consumers in the Borrower’s Project Provinces.” During the initial years of implementation the PDO statement in the PAD was used in project reporting and assessment because it was more specific, adhered more closely to the project’s key indicators, and stated the objectives and outcomes in more monitorable terms. While the underlying rationale of the investments was that the benefits of an improved power sector would accrue to energy consumers, the attributable outcome of the project was to improve (and measure) system performance and institutional capacity rather than directly measuring electricity and gas provision to consumers.

9. The key performance indicators of the project were: (i) the establishment of independent distribution, transmission and generation successor companies from PLN’s operations in Java-Bali; (ii) improvements in PLN’s rate of return on revalued net fixed assets; (iii) increased dispatch capability of generation units at the Paiton, Grati and Gresik complexes in East Java; (iv) reduced substation percentage loadings at Mandirancan, Krian, and Klaten 500kV substations in Java; (v) reduced substation percentage loadings at key 150kV substations throughout Java-Bali; and (vi) improved voltages at key 150kV substations in southeastern Java. In addition, PGN should have completed the documentation outlining the framework and implementation plans for: (i) unbundling its transmission and distribution functions to create an appropriate corporate structure; (ii) preparing for an IPO or some other form of private equity participation of part of its distribution operations; and (iii) attracting a strategic partner for its transmission operations.

10. The Project Design Summary in Annex 1 of the PAD had some differences from the main text in terms of how the indicators were worded or grouped (PDO versus intermediate, or combining two indicators into one), in particular for the PGN-related indicators. However these discrepancies were more

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presentational than substantive, and are therefore documented in Annex 2 rather than explained at length here.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification Revised PDO 11. To improve the reliability and efficiency of the power system in Java-Bali and strengthen PLN and PGN’s management capabilities. 12. The project was to have determined how PLN’s corporate structure would be amended to comply with the competitive power market and related demonopolization and unbundling requirements of the 2002 Electricity Law. However, in December 2004, as a result of movement by PLN’s labor unions and others, the Constitutional Court annulled the 2002 Electricity Law due to which the legal basis for undertaking the corporate restructuring was curtailed. It was expected that the Government would revise the Law, and issue a new law shortly thereafter. However, by late 2005, a new Law had yet to be issued, and PLN came to an agreement with the Bank to explore alternate corporate restructuring activities that may be undertaken under the existing legal circumstances (Management Letter, November 2005). PLN, with the assistance of international consultants, reviewed available options, and notified the Bank in November 2006 of their decision to have a moratorium on restructuring activities to avoid significantly altering their institutional set-up when the sector was in a state of flux and its future structure was unclear. 13. The Bank immediately suspended the corporate restructuring study and took stock of the project. The Bank considered both options, restructuring and cancellation and realized that if the project were cancelled it would undermine system reliability and put the entire power system in a precarious position. 14. The Bank determined that:

a. The project was still highly relevant with respect to strengthening the power system. At each time the load flow diagrams were reviewed and it was found that the investments were still critical.

b. PLN had completed the ERP pilot, which was rated highly satisfactory and PLN wanted to and was ready to deploy the system to all business units in Java-Bali which would strengthen PLN’s management capabilities.

c. PLN had also overcome the initial delays in implementing the physical components with all contracts for goods signed and construction underway. These investments were key to strengthening the power transmission network in order to better utilize existing power generation capacity. The components had taken on even greater importance because of the critical need to facilitate the integration of recent generation capacity expansion in the Java-Bali grid.

d. The project in its restructured form would continue to be viable.

15. The Bank therefore recommended that the corporate restructuring sub-component be removed and focused the project on the remaining and highly relevant components. The revised PDO approved by the Board on June 19, 2008 dropped the objective related specifically to the institutional and corporate restructuring of PLN and articulated in simpler terms the objective of strengthening PLN and PGN’s management capabilities. In addition, the output and outcome indicators were expanded to account for the

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impact of the full deployment of the ERP system throughout Java-Bali. The existing outcome indicators of the project, which were related to the improvement in the Java-Bali power network, remained unchanged since the project continued to implement and complete the important work on the physical components to strengthen the power network. The revised PDO dropped some superfluous phrases and replaced improved “performance” with improved “reliability and efficiency” of the power system in order to set clearer measures for the achievement of outcomes rather than a measure of only outputs which the previous statements captured. In effect, it simplified the statement while retaining its two key elements (system performance and institutional capacity). 16. In 2010 an additional financing component of US$ 30 million was also added to expand the ERP program across PLN’s operations in other locations, specifically Sumatra and Sulawesi. This extension of the ERP system is fully consistent with the World Bank’s latest Country Partnership Strategy (CPS) that focuses on "investing in Indonesia's institutions". More specifically, it supports Core Engagement 2 – to support the development of infrastructure by helping "strengthen the capacity and accountability of institutions" to deliver better outcomes. Overall, other than the removal of the restructuring component and the related indicators, there were no other changes in any of the indicators including for the ERP additional financing which would help to meet the same respective indicators.

1.4 Main Beneficiaries 17. Specific beneficiaries mentioned in the text of the Project document include PLN, some industrial consumers and “all groups of consumers”. Since the physical project includes transmission and substations and the ERP and TA, it improves efficiency and effectiveness of PLN, the “primary target group” is indicated by inference – including the presumption of “inferred access”. While the true, long-term beneficiaries are the population whose well-being relies on efficient and reliable power supply, the outcomes directly attributable to the project are defined in more technical terms since “economic and environmental benefits for all groups of consumers” are not easily measured nor isolated from other factors, particularly in the implementation time frame of the project. 1.5 Original Components (as approved) Component 1 - Power System Strengthening (500kV Transmission System) (US$69.8 million) 18. The Project would support PLN’s initiatives to (a) achieve greater utilization of existing generation capacity in Java-Bali, (b) improve the security of supply to the cities of Cirebon and Surabaya, and (c) debottleneck local interconnections between bulk transmission and subtransmission levels, by: (i) expanding existing 500kV substations; and (ii) installing new 500kV circuit breakers. Total cost of this component is US$69.8 million (including contingencies and VAT), with IBRD financing of US$50.0 million.

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Component 2 - Power System Strengthening (150kV Subtransmission System) (US$90.4 million) 19. The Project would support PLN’s initiatives to (a) provide a level of security commensurate with the existing and potential PLN and IPP geothermal generation capacity evacuated2 through the West Java 150kV subtransmission network near Bandung, (b) improve security of supply to Surabaya, and (c) relieve multiple localized overloading and voltage problems at subtransmission level-via PLN’s 150/70kV and 150/20kV transformer replacement and substation expansion program-by: (i) uprating existing 150kV subtransmission lines; (ii) expanding existing 150kV substations; and (iii) installing 150kV circuit breakers. Total cost of this component is US$90.4 million (including contingencies and VAT), with IBRD financing of US$60.1 million. Component 3 - PLN Enterprise Resource Planning System (US$ 26 million) 20. The Project will support PLN to implement a pilot rollout of the company’s Enterprise Resource Planning (ERP) information system. The focus of this pilot will be core financial, materials management, human resources management and asset management in PLN Pusat and three representative subsidiary business units. This component will help to facilitate PLN’s corporate and financial restructuring. Total cost of this component is US$26.0 million, with IBRD financing of US$20.0 million. Activities under this component that were to be undertaken after appraisal completion but prior to effectiveness (using IBRD procurement procedures), would be eligible for retroactive financing under the loan. Component 4 - PLN Restructuring and Institutional Strengthening (Technical Assistance) (US$4.5 million) 21. The Project would also support PLN’s restructuring program as well as its institutional strengthening initiatives-through technical assistance for: (i) finalizing an action plan for the business reorganization and corporate restructuring of PLN; (ii) facilitating the implementation of that Plan; and (iii) strengthening PLN’s core capacity for environmental and social management. (Consultancy services for items (i) and (iii) would be financed by PLN). IBRD financing of item (ii) is US$ 2 million. Additional TA (IBRD financing US$ 1.5 million) would be provided to PLN for reviewing the detailed design and cost estimate of the Upper Cisokan pumped storage generating plant on Java. Total cost of this component is US$ 4.5 million, with IBRD financing of US$ 3.5 million. Component 5 - PGN Restructuring and Institutional Strengthening (Technical Assistance) (US$ 6 million) 22. The Project would support PGN’s restructuring and institutional strengthening initiatives, through technical assistance for: (i) gas utilization and pricing; (ii) PGN corporate restructuring (including the preparation of an information systems framework); (iii) PGN gas distribution IPO; (iv) PGN gas transmission strategic partner; and (v) PGN capacity building and training. Total cost of this component is US$6 million, with IBRD financing of US$6 million.

2 “Evacuate” is a common power sector term used to describe the absorption of the power generated by a power plant into the grid normally for delivery to users.

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1.6 Revised Components 23. The revised Development Objective was to be achieved through the provision of Bank financing toward priority investments and technical assistance for PLN, and technical assistance for PGN. In particular, project components for PLN would: (i) achieve greater utilization of existing generation capacity on East Java, by relieving constraints in the bulk transmission grid; (ii) improve the reliability of existing generation supply at the PLN and independent power producer (IPP) geothermal power plants on West Java, by strengthening the associated local transmission system; (iii) improve the reliability of power supply at various locations throughout Java and Bali, by strengthening and debottlenecking local transmission and sub-transmission networks; and (iv) by strengthening PLN's management capabilities by enhancing the company's information systems. Technical assistance to PGN will enhance its capabilities for expanding gas utilization on Java. 24. The proposed changes were intended to:

Focus the project on the important investments related to improving the electricity system and strengthening the transmission network (Components 1 & 2);

Expand the implementation of the successful pilot ERP to further strengthen PLN’s information

systems and management capabilities (Component 3); and

Remove the major corporate and financial restructuring activities that are beyond the capacity of PLN and the project given the present legal and policy environment in the power sector in Indonesia (sub-component of Component 4).

Component 5 on technical assistance to PGN was to remain unchanged, and therefore, all proposed changes in the Project Paper only apply to Components 1-4 with PLN.

1.7 Other significant changes 25. The first restructuring of the project was approved on June 19, 2008. As described in the context of the revised PDO in Section 1.3, it included the following specific changes:

Removal of the major sector restructuring activities of the project because the legal basis for successfully implementing them no longer exists due to the annulment of the 2002 Electricity Law by the Constitutional Court of Indonesia.

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Expanding the deployment of the Enterprise Resource System (ERP) to include the entire Java-

Bali power system capitalizing on the successful pilot so that the financial, material, and human resource management of PLN can be further strengthened.

Extend the closing date of the project by one year to December 31, 2009 in order to accommodate

the initial implementation delays so that the important physical components can be successfully completed.

26. In addition to the above there were two more extensions approved for the project.

Second extension – December 2009: The project was extended by 24 months in December 2009 primarily for the purpose of completing two transmission line packages that were delayed in execution. PLN also provided a specific action plan with identifiable milestones to complete all outstanding work. These milestones were prepared to provide reasonable assurance of adequate monitoring and follow up so that the work could be expected to be completed by the new completion date.

Third extension – December 2011: The project was extended by another 24 months in December

2011 for the last time primarily for the purpose of completing the same two transmission line packages that were delayed in execution. As of the ICR mission in December 2013, the lines are still not complete.

27. There was also a major change in one of the physical components of the project. The transmission components of the physical project were for uprating existing transmission lines (seven segments). However in 2005 or thereabouts, PLN decided that instead of uprating the transmission lines, they would need to build a parallel line to each segment. This was because, the uprating would require a somewhat protracted shut down of the lines causing a loss of power to major population centers such as Bandung and also prevent PLN from evacuating power from certain IPPs with whom PLN had take-or-pay contracts. 2. Key Factors Affecting Implementation and Outcomes

28. The key factors effecting implementation and outcomes are project preparation and design, in case of the transmission lines and arrangements for post completion operations, in the case of the ERP system. When the project was first approved in 2003 it was for an uprating of existing transmission lines. In 2005 or thereabouts it was found that uprating the transmission lines would mean having to shut the line down for a protracted period leaving the communities they served without power. There would also be a loss of revenue for PLN estimated to be around IDR 710 billion or approximately US$ 60 million. It is not clear from the documents and interviews, why this finding was not incorporated during project preparation and what changed between June 2003, when the project was first approved, and circa 2005, when the decision might have been made to go to a parallel configuration. It is important to resolve this question, as a decision to have a parallel configuration at the outset, would have forced safeguards triggers and pre-approval review of some of the key issues, forestry related ones in particular, which have impeded the full implementation of five transmission lines. The consequences of this decision in preparation and design and the subsequent change has cascaded through the project, requiring two additional extensions and generating issues that would have been best addressed prior to project approval. Upon the decision to do the parallel lines, PLN and the Bank had intensive communications on how to

8

resolve the safeguards issues and prepare the instruments needed, by conducting workshops and several assessments. This resulted in the preparation of a UKL UPL in 2007 that was finally completed in April 2008 causing a two-year delay from the time the contracts were originally signed in March 2006. 29. Although actual deployment of the ERP system was successful—it is up and running and is generating cost savings and other benefits for PLN—the system also has been plagued by chronic understaffing and lack of project management. While this has not seriously limited its benefits to date, insufficient staffing and weak arrangements for ongoing operation and maintenance may increasingly jeopardize its outcomes over time. As the project closes, the consultants for the first three phases of ERP implementation are likely to be leaving to implement an additional two phases. This will severely impair the capability of the ERP system to function optimally and could lead to a loss of the efficiency and effectiveness gains that have been achieved. 2.1 Project Preparation, Design and Quality at Entry 30. As described in Sections 1 and 1.1 above, this project was prepared during a time of transition. There were vast changes taking place in the country as well as in its institutions and in PLN in particular. As mentioned above, PLN was undergoing dramatic change in terms of the overall decentralization trend in the country and at the same time, its own reorganization to meet the objectives of the restructuring under ADB. While this was going on, there was also push back from the employees and the union in particular, resisting the changes. According to the task manager at the time, various departments and divisions were dismantled or decentralized, staff with whom the Bank had been working through the years were removed or reassigned to alternate areas, with the consequent lack of continuity not only in terms of personnel and institutional memory but also in terms of availability of information and data necessary for preparing projects. 31. The situation at the time was further compounded by changes taking place within the Bank itself. According to the task managers interviewed, after the hiatus over the preceding three years, where lending had had been drastically reduced, there was a renewed push to get projects going again with some urgency and in particular, in the case of this Project, to have it approved by the end of the Bank’s 2003 fiscal year. At the same time there reportedly was also some reorganization going on within the Bank, in the sector and country departments, and the task team leader was, at the time of project preparation, also the acting Sector Director. The project appraisal document was issued on June 6, 2003, the negotiations reportedly took place over the phone late into one night after that and the project was approved by the Board on June 26, 2003. 32. While completing the project preparation in time, under these reportedly trying circumstances, was truly an accomplishment on part of the Task Team, it appears in hind sight that some tradeoffs were likely to have been made between the demands of the political economy and the Bank’s relationship with the country on the one hand, and Quality at Entry and Project Design on the other. 33. The reasons behind the original decision to uprate the transmission lines instead of building a second parallel line is as yet unclear. Whatever was known in 2005, when the decision to change from uprating the lines to building the parallel lines was made, would most likely have been already known in 2003 when the project was prepared. It is possible that due to the reported flux in personnel at PLN and the shifting departmental responsibilities, the necessary data on load flows, evacuation needs (including for contractual obligations under IPPs) and demand information might not have been available in time for

9

the project preparation schedule. It is also possible that in view of the additional time that the safeguards work would entail if parallel lines had to be built and the need to get the project approved in the 2003 fiscal year, the decision was made to uprate the lines instead. After nearly a decade, it is difficult to tell. However, it appears certain from interviews with the task team leaders, that there was tremendous pressure on the team to get the loan approved in the 2003 fiscal year, largely for reasons of political economy. 34. It is also not clear, given the unsettled organizational situation in PLN with regard to the decentralizations and the restructuring, and the apparent resistance to these changes on the part of PLN staff and management, why the restructuring component was included in the project. It is likely to have increased the risk of the project significantly. This risk, which was rated moderate in the PAD document, did in the event prove to be significant and the mitigation measures (“A change management initiative and public awareness campaign have already been prepared for PLN by Bank-financed consultants”) were inadequate and eventually irrelevant when the electricity law was annulled. While the risk was high, the annulment of the electricity law was of course neither foreseeable nor manageable from the perspective of the restructuring component 3. 35. These two decisions, i.e., uprating instead of parallel lines and inclusion of the restructuring plan in the project given the risk at the time, have cascaded through the implementation of the project contributing directly and indirectly to many of the delays and changes in the project. Fortunately both of these were only a small part of the overall project both in terms of total cost and achievement of tangible outcomes4. 2.2 Implementation 36. Implementation progress was generally well monitored with actions under the control of the task and the counterpart teams being pursued assiduously and with diligence. As explained earlier, the project was restructured in 2008. Under this restructured configuration, the project’s components can be most logically grouped as (i) Substation investments, including transformers and switchgear (US$ 121.67 million or 66% of the original total project cost of US$ 184.2 million); (ii) Transmission lines (150 kV) (US$26 million or 14% of the original project cost); (iii) The ERP TA (US$26 million or 14% of the total project cost); and (iv) Other TA (US$ 10.1 million or 5.4% of original project cost). In 2010 an additional financing component of US$ 30 million was also added to expand the ERP program across PLN operations in other locations. The goods portion of the package was US$147.67 million of which the Bank covered US$110.1 million

3 Since the Charter of the Bank prevents it from interfering in the political processes of a country. 4 The stated outcome “Establishment of PLN's independent generation, distribution and transmission successor companies on Java-Bali” was strictly speaking an output with “competitive electricity markets” as its outcome, which would be intangible.

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The substation investments including transformers and switchgear (82% of the physical project) were 100% completed by December 2012.

The ERP implementation pilot was completed in October 2008 and the ERP systems installation for the rollout was completed in January 2009.

All the TA has been delivered.

Of the seven transmission lines in the project only two have been 100% completed so far. The

other five are in various stages of completion. Construction work in all five lines is held up due to PLN being unable to secure clearances from BKSDA (Office of Natural Resources Conservation) for traversing conservation forests or due to delays in securing the right of way from Perhutani (State owned enterprise under the Ministry of Forestry), or from private landowners who are claiming settlement amounts in excess of what is allowed by law. The table below is illustrative.

Table 2: Transmission line packages and completion status

Package Completion Status % as of December 31, 2013

3A i 150kV Bandung Selatan – Kamojang 87.7 ii 150kV Wayang Windu Incomer 100 iii 150kV Kamojang Drajat 83.5 iv 150kV Tasikmalaya Ciamis 85.1 3B v 150kV Drajat Garut 41.6 vi 150kV Garut Tasikmalaya 74.0 6 vii 150kV Perak Ujung 100

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37. This issue has been continuing since 2009 and has resulted in the Government requesting and receiving from the Bank, the two additional extensions after the first restructuring as mentioned above. Both issues have serious and sensitive political economy implications, and while the Government, PLN and the Bank have been working closely to resolve the issue as part of project supervision, it was unlikely that the political economy issues would be resolved in time and although all the procurement of materials have been completed as planned, the lines had not been completed by the time the project closed in December 2013. It has been agreed that PLN will complete the lines with its own funds once the right of way issues are resolved.

38. It is important to note that both PLN and the Government have shown their continued commitment to the project evidenced by:

1. A budget commitment for 2014 and indicative 2015 for the completion. It should be reiterated in

this context that all the procurement for goods has been completed. 2. A project completion plan has been provided by PLN which shows that the lines would be

completed within six months of the political economy issues being resolved. 3. A new law has been passed on land settlement issues (Law 2/2012) along with a Ministerial

regulation that will address many if not most of the open issues. At the time of the ICR mission, PLN was awaiting the issuance of the Permen prior to revisiting the option of seeking the District Court’s intervention with the resolution of ROW compensation disputes.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Design

39. The main tasks associated with monitoring and reporting during the implementation process were to be carried out by PLN Project Java-Bali, while the responsibility of coordination among all the parties concerned is with the PIU. A Master Implementation Schedule was prepared by the PIU, which comprised of several modules covering site preparation, environmental management, procurement, design, supply, construction, testing and commissioning. PLN Project Java-Bali also prepared detailed schedules for site survey and preparation, and worked out with each contractor/supplier, schedules covering equipment design, manufacturing, shipping and delivery, construction and installation, testing and commissioning, in line with the master schedule. The purpose of these scheduling activities was to provide a continual assessment not only on the predicted completion date but also of where schedule slippages were occurring so that remedial action could be taken in a timely manner.

Implementation 40. The PIU, in accordance to the monitoring plan, prepares Progress Reports every quarter. The last update was September 30, 2013. These reports cover all aspects related to project implementation, including but not limited to: project implementation status, progress made in the last quarter, procurement, financial management, construction, installation, schedule and cost control, issues/problems and actions. Progress and status of implementing the Environmental Management Plan (EMP) and the Land Acquisition and Resettlement Policy Framework (LARPF) are also being included in the quarterly reports. At Project completion, a borrower completion report was prepared to assess the achievement of

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project objectives, to assess the project design and implementation experience, to draw upon lessons learned, and to prepare plans for project operation. Utilization 41. These quarterly reports have been very useful as a monitoring tool and are not merely self-evaluative, as they might have been absent a well-designed monitoring and evaluation framework. A further verification of the value of the monitoring tools have been the ISRs which are prepared every year and include a thorough evaluation not only of project implementation but also of the effectiveness of the monitoring and evaluation tools such as the QPR. 42. Finally, PLN has regularly made good use of the Bank’s Supervision Mission Aide Memoires, which incorporated information from the QPR and the Bank’s guidance on it, to review and make changes if necessary to their implementation processes for this (and other) projects. PLN Management have repeatedly thanked the Bank Team for its thorough assessment of the project during each supervision mission.

2.4 Safeguard and Fiduciary Compliance Procurement 43. Given that the PGN part is very small, the procurement capacity assessment has focused mainly on PLN. Nevertheless, a brief assessment on PGN is also provided in the Procurement Capacity Assessment Report (PCAR), carried out in line with the Bank’s requirements. A brief summary of the assessment is on file. 44. As a part of PLN’s decentralization program, its central procurement unit (that was previously responsible for procurement under the Bank financed projects) was abolished in 2000 and most of the experienced procurement staff were reassigned to positions not directly related to procurement. While these decentralized regional Project Units were familiar with the GO1’s procurement regulations and procedures, at project commissioning there was a lack of direct experience with ICB. However, with the number of projects under construction through the 10,000 MW investment program, most of these branch offices have acquired substantial procurement experience. To mitigate any possible risks associated with this inexperience and to ensure successful implementation of the project, the following actions were taken:

A project management unit (PMU) was set up at PLN’s head office, a Project Office was established initially in Semarang which was subsequently moved to Gandul, and PIUs were created at project locations.

A Procurement Committee, comprising of 9-11 members from the Java-Bali Project Unit as well as from PLN’s Head Office was set up with 3 members having had prior experience with ICBs, including one senior procurement specialist, who has extensive experience with Bank financed procurement.

The Bank provided a procurement training program from April 23-24, 2003 and subsequent training thereafter.

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45. The overall risk associated with the procurement was assessed as average because: (a) a number of PLN PIU staff who had subsequently been selected by the staff team, had extensive experience with ICB; (b) all goods contracts would be subject to ICB procedures and Bank prior review; and (c) adequate arrangements were in place for the implementation of PGN’s TA component. 46. In course of the project restructurings the procurement plan was modified with approval of the Bank, and due to the delays caused by the political issues of right of way, some of the costs had to be revised upwards with No Objections from the Bank. In all, the procurement of all goods and consultant services were completed within the allocated resource envelope, and in compliance with Bank and project-specific requirements and policies. Certain amendments to contracts were negotiated between PLN and the contractors which included price escalations, and extensions of time for which the Bank advised PLN following project close, to get the methodology and calculations confirmed from its internal audit division and/or BPKP and proceed accordingly.

Financial Management

47. The Project’s financial management system, including its accounting, budgeting, internal controls, and funds flow, financial reporting, and auditing, was acceptable to the Bank. With few exceptions, PLN has been submitting the Financial Management Reports (FMRs) to the Bank on a regular basis. PLN also has submitted the audit reports (all with unqualified opinion) to the Bank on a timely basis. The audit reports are published on PLN’s website. Improvements in the accounting of loan transactions were noted in the final year of the project, and no prolonged delays were identified as had been the case during project implementation.

48. During the project, issues with slow payment processes remained unresolved despite PLN management’s initiative of setting a maximum time for processing of payments. The average number of days from invoice submission by vendors through actual payment was still high. Many factors contributed to the problem, namely: (i) delays in SLA budget approval, (ii) incomplete documentation submitted by vendors, (iii) delays in the submission of supporting documents from the project office to PLN’s Treasury Division at headquarters, (iv) delays in completing the Government’s document requirements (Surat Keterangan Tanggung Jawab Mutlak - SKTJM)5 for fund disbursement, and (v) delays in document verification by the Directorate of Investment System and Management (Direktorat Sistem dan Manajemen Investasi- SMI) at the Ministry of Finance. It should be noted that these delays are not limited to the project only but endemic in PLN and partly because staff are extra careful to ensure that all documents are complete in every respect and work to rule in view of potential incarceration of government staff that might sometimes take place for violations. Environment 49. The project was rated Category B at entry. An Environmental & Social Assessment and Management Plan (EMP) for the Project was prepared by PLN in which the World Bank Group’s safeguards policies on social and environmental issues were fully addressed. The EMP draft was

5 SKTJM (based on MOF decree 193/209) is a statement letter stipulating that the person signing the letter is accountable for any state loss incurred and is willing to indemnify the state for the loss.

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discussed at stakeholder consultation meetings according to E.5.4 Environmental Category: B (Partial Assessment). Although OP/BP 4.01 Environmental Assessment and OP/BP 4.12 Involuntary Settlement6 were triggered for the project, as no other new transmission lines were included in the original plan, the EMP indicated that adverse environmental and social impacts of all of the Project's planned physical Sub-components would be minor, and easily manageable. The EMP approved of Indonesia's environmental impact assessment documentation, namely ANDAL/RKL/RPL and UKLAJPL; institutional responsibilities for monitoring and enforcing implementation of RKWRPL and UKLAJPL recommendations: requirements and approaches for training programs, and other necessary institutional strengthening.

Social Safeguards

50. Specific policies and procedures applicable to land acquisition and compensation were also collated in a standalone Land Acquisition and Resettlement Policy Framework (LARPF). The EMP and the LARPF was publicly-disclosed at the Bank's InfoShop and at PLN's Head Office in Jakarta prior to appraisal. The General PLN Policy addresses public participation, land acquisition, compensation and rehabilitation of property, and general mitigation measures. This Policy was prior reviewed and approved by the World Bank. 51. Since OP/BP 4.01 and 4.12 were already triggered, the decision to go to parallel transmission lines in 2005 did not result in any new triggers. However, the supervision team, realizing the need for action, had had intensive communications with PLN, on resolving the safeguards issues and prepared the instruments needed, by conducting workshops and several assessments. This resulted in the preparation of a UKL UPL in 2007 that was finally completed in April 2008. This however, was after the contracts for the construction of the transmission lines were already signed in March 2006. 52. As also described in PLN's Environmental & Social Assessment and Management Plan (ESAMP), PLN established a JBPSRS Project Environmental Team (PET), to work in association with the overall JBPSRS Project Implementation Unit. The PET oversees and coordinates all aspects of the Project's EMP, including any issues relating to land acquisition, compensation and resettlement. Implementation of land acquisition, compensation and resettlement measures are carried out by the responsible PLN project operations office or PLN Project Team. The PET also works closely with the Community/Health/Environment/Systems/ Sustainability (CHESS) group in PLN's Central Office. A general schematic of these responsibilities and relationships is presented in the excerpted Figure below:

6 Only one component (the Perak-Ujung line of 5km in length) involved new transmission towers at the time, and these would be along an existing right-of-way (ROW).

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2.5 Post-completion Operation/Next Phase

53. As mentioned above, five of the seven transmission lines are in various stages of completion due to political economy and social issues pertaining to right of way. PLN will complete these lines within 12 months of the resolution of the outstanding issues, with their own funds. In the meanwhile all of the materials for each of the components pertaining to these five lines have been procured and some of the EPC contracts have lapsed. The Bank has been assured by PLN management as well as its own financial management team, that there is an adequate asset register and asset management system within PLN to ensure the integrity of this inventory until it is used. 54. As confirmed during the exit meetings of the ICR mission in 2013, PLN management has confirmed that they have budgeted adequate funds in 2014 and 2015 for the completion of the transmission lines. PLN has also prepared and submitted to the Bank a time table certain in the form of a Gantt chart indicating the completion schedule for the transmission lines. Although not required to do so, PLN management and relevant staff have agreed to continue to submit the Quarterly Progress Reports to the Bank indicating the progress on the completion of the transmission lines.

55. The quarterly progress reports will also include details on the implementation of the UKL UPL i.e. the safeguards program being implemented by PLN with respect to the transmission lines. The Bank shall continue to monitor safeguards compliance through this reporting mechanism. The Bank will also continue to monitor the completion of the transmission lines during the supervision of other ongoing projects such as the IPTD I and II loans, and the Upper Cisokan Pumped Storage Hydropower project. PLN has also included in its maintenance budget for transmission lines, adequate provisions for the maintenance of the 150 kV lines under this project.

56. With respect to the ERP system the World Bank had expressed its concern regarding the project management and staffing of the ERP program and has been assured by PLN that these would be addressed in 2014. The quarterly progress reports will also include a section on ERP implementation and operations. This will allow the Bank’s team to monitor the staffing and the administration of the ERP system within PLN.

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3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 57. As discussed above, the original development objective of the Project was to improve the performance of the power sector in Java-Bali by (a) supporting the State power company (PLN) to implement its financial and corporate restructuring plan, and to strengthen key elements of the Java-Bali electricity supply system; and (b) assisting the State gas company (PGN) to prepare the groundwork for restructuring its gas transmission and distribution operations, given the importance of natural gas for power generation. 58. In view of the restructured project consequent to the repeal of the electricity law, which rendered the unbundling of PLN illegal, the WBG Board approved the revised Project Development Objective (as the project was formally restructured) which is to improve the reliability and efficiency of the power system in Java-Bali and strengthen PLN and PGN's management capabilities. 59. The indicators related to restructuring activities were removed to be consistent with the revised project focus and development objective. The remaining outcome indicators of the project, which are related to the improvement in the Java-Bali power network, remained unchanged since the project would continue to implement and complete the important work on the physical components to strengthen the power network. However, the outcome indicators for the ERP were expanded to account for the impact of the full deployment of the ERP throughout the Java-Bali system and subsequently including Sumatra and Sulawesi. This improved impact on operational efficiency was and is very relevant to PLN’s ability to fund its needed capacity expansions not only though savings from improved efficiency but also due to improvements in the timeliness of the availability of its financial statements for consideration by providers of capital. This is reflected by the reduction in the amount of time it takes for PLN to consolidate its financial statements for the Java-Bali operations which was reduced by 50% (from 90 days to 45 days). 60. The development objective and the indicators, continue to remain very relevant for the country and its needs and priorities. The World Bank supported substations have allowed access to electricity to increase in several communities by virtue of the cross-bus transformers connecting the 500 kV backbone to the 150 kV transmission network which serves not only some sparsely populated and more rural areas of Java but also one major population center Bandung. It also needs to be noted here, that while the parallel transmission lines would help to build much needed redundancy in the transmission system, they were only a small part of the project (15% of the investment). The major and crucial portion of the project, were the substations and the transformers in particular (66% of the total project and 80% of the physical project). These have very long lead times and if overloaded can bring down the whole system. It is the substations that have kept the Java Bali system operational in the face of rising demand and have helped to greatly reduce overloading, maintain voltage levels and ultimately avoid load shedding The efficiency, voltage, load factors have all improved significantly as a result of the project, bringing the stated and much needed benefit and relief to the population served. 61. Specifically, the major purpose of the physical components of the project when it was prepared in 2003 was to strengthen the Java-Bali transmission system (both 500 kV and 150 kV) to (1) achieve greater utilization of existing generation capacity in east Java; and (2) improve supply reliability of power supply in West Java. These objectives remain valid. In fact, with power demand growing at over 8% per annum and PLN attempting a substantial scale-up in generation capacity, it has become even more

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important to alleviate shortfalls by improving the supply-demand balance through the strengthening of the transmission system in the Java-Bali grid. The project is now enabling PLN to supply power from plants in East Java to the rapidly growing demand centers in West Java, as initially envisaged. There is presently, a heightened importance to these investments, since PLN is in the process of expanding power generation in East Java by a further 2,500 MW as a part of the country’s accelerated power generation expansion program (10,000 MW “Crash Program”).

62. In 2008 an additional financing component of US$ 30 million was also added to expand the ERP program across PLN operations in Sumatra and Sulawesi. This extension of the ERP system is fully consistent with the World Bank’s latest Country Partnership Strategy (CPS) that focuses on "investing in Indonesia's institutions". More specifically, it supports Core Engagement 2 – to support the development of infrastructure by helping "strengthen the capacity and accountability of institutions" to deliver better outcomes. 63. The strengthening of the management capabilities of PLN and PGN, still remain very relevant. The expanded ERP program has significantly increased PLN’s ability to manage and control its operations and its finances. The TA provided to PGN has been useful in the context of the Bank’s operation in the gas sector. 3.2 Achievement of Project Development Objectives Project Development Objective (from Project Appraisal Document) 64. The development objective of the Project is to improve the performance of the power sector in Java-Bali by (a) supporting the State power company (PLN) to implement its financial and corporate restructuring plan, and to strengthen key elements of the Java-Bali electricity supply system; and (b) assisting the State gas company (PGN) to prepare the groundwork for restructuring its gas transmission and distribution operations, given the importance of natural gas for power generation.

65. Three of the outcomes indicators as stated in the PAD document, namely, (i) Increased dispatch capability of generation units in East Java; (ii) Reduced substation loadings at key Java-Bali 500kV and 150kV substations; and (iii) Improved voltages at key 150kV substations in Southeastern Java, were kept the same after the restructuring. They are measurable outcomes for which base lines and targets had been provided and could be deemed to contribute to strengthening key elements of the Java-Bali electricity supply system. Two of the other outcome indicators, “Establishment of PLN's independent generation, distribution and transmission successor companies on Java-Bali” and “Natural Gas Pricing and PGNs restructuring and partial privatization studies completed” are both outputs rather than outcomes 7 as discussed elsewhere (para 15) in this report. The PGN output has been completed but the Restructuring of PLN as mentioned before was rendered illegal by the annulment of the electricity Law and thus dropped –so it cannot be counted.

7 The outcome indicators for strengthening PLN and PGN, were originally flawed because they focused on the means of strengthening the agencies rather than whether they were actually strengthened (and power sector performance improved as a result). This was a shortcoming in the project preparation which was subsequently corrected during implementation and supervision when the project was restructured.

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Thus given that all the true outcome indicators have been met, and the outputs other than the Restructuring were also met and one, PLN’s rate of return, was found not to be a relevant indicator given new Government social policies which prevented tariffs from covering costs and provided subsidies to cover the difference in tariffs and the cost of power supply. Therefore, as part of the restructuring this indicator was subsequently dropped with the debt service coverage ratio being the remaining covenant to be tracked.In any event, the ERP significantly improved the efficiency of PLN’s operations leading to an annual operational cost saving of over US$ 9 million and exceeded the targets for the timeliness of the release of financial statements.

Board Approved Revised Project Development Objective

The development objective of the Project is to improve the reliability and efficiency of the power system in Java-Bali and strengthen PLN and PGN's management capabilities. 66. The key performance indicators of the restructured project were kept the same: (i) Increased dispatch capability of generation units in East Java; (ii) Reduced substation loadings at key Java-Bali 500kV and 150kV substations; and (iii) Improved voltages at key 150kV substations in Southeastern Java. The restructuring indicators were removed. For the ERP system the outcome indicators were the impact of the full deployment of the ERP throughout the Java-Bali system. This improved impact on operational efficiency would be reflected in the reduction of the amount of time it takes for PLN to consolidate its financial statements for the Java-Bali operations by 50% to 45 days, and also as mentioned above an externality savings of over US$ 9 million p.a. 67. The remaining outcome indicator was “Improvements in PLN’s rate of return.” In PLN’s situation at the time (and currently), the key criterion for measuring its financial health is its cash liquidity. TheGovernment had decided, for social and other considerations, that PLN could not charge the full cost of providing electricity to consumers through the retail tariff;8 therefore the Government was required by Law to supplement tariff revenues through the Public Service Obligation (PSO) subsidy. Under the circumstances, the usual financial measures applied by the World Bank to revenue producing entities – rate of return or a self-financing ratio – could not apply.9 In this case the most significant measure of PLN’s financial condition was and still is, its liquidity; therefore the Government, PLN, and the World Bank agreed to the use of a debt service coverage ratio as a proxy for measuring liquidity. 68. The substations have all been completed and the ERP system is up and running in all three of the phases funded by the Bank. The reliability and efficiency of the power system has been substantially

8 The Government was implementing quarterly tariff increases for several consecutive periods leading up to 2004, when it decided for social and other considerations not to increase further the retail price of electricity, and, it had not done so until recently (2010). The Government is now considering tariff increases over the next several years, and an estimated 10 percent increase in average tariffs was introduced during the second half of 2010, with the increase being fully realized during 2011. A further gradual tariff increase of 3 percent per quarter from January 2013 onwards until it reached 15 percent was implemented.

9 In a circumstance where the tariff does not fully cover costs and yield a profit, a covenant that measures the adequacy of the tariff by itself is not relevant. Moreover, PLN’s financial health is largely controlled by the adequacy and timing of the Government’s PSO payments.

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improved by the project. All transformers have been installed and energized. The implementation team was flexible and worked with PLN to relocate transformers to alternative substations to accommodate changing demand patterns and evolving network configurations. Substation loading and voltage levels have been significantly improved with more stability in the system. The transmission lines completed so far are allowing power to be evacuated from new generation facilities and the other lines when completed will help to evacuate power from two power plant extensions when they are expected to be commissioned from 2016 through 2018. The three phases of the ERP system now cover 84 percent of staff, and 94 percent of revenues, and generate cost savings of US$ 9.1 million p.a. The system has improved PLN’s financial, human resources and materials management. More timely financial statement issue has led to greater access to capital. Outcome Targets 69. The improvement of the reliability and efficiency of the power system can be measured directly by the first three outcome indicators listed above, namely (i) dispatch capability of generation units in East Java; (ii) substation loadings at key Java-Bali 500kV and 150kV substations; and (iii) voltages at key 150kV substations in Southeastern Java. The baseline in 2003 and the actuals as of December 31, 2013 the closing date of the project is provided below.

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Outcome Indicator Baseline - 2002 Target by Project

Closing Date Actual as of 2013

Dispatch capability of generation units in East Java

Around 2,000 MW of dispatch capability in 2002


2,322 MVA

Substation loadings at key Java-Bali 500kV and 150kV substations

The majority of substations have loadings at 80% of the capacity or more in 2002

The majority of substations have loadings at 50%-60% of the capacity.

68.5%10

Voltages at key 150kV substations in Southeastern Java

The majority of key 150kV substations voltages are operating at 90% of capacity, or at 135kV in 2002

The majority of key 150kV substations voltages are operating at 100% of capacity or 150 kV by project closing.

100%

PLN’s Rate of Return (%) 2002 - 4.0% At least 2.5% in 2004, 4% in 2005, 5% in 2006 and 6% in 2007. Removed post restructuring in 2008.

Removed post restructuring in 2008.

As the outcome targets have all been met in full, the project development objectives can be deemed to have been met as well. If based on the above values alone, the rating for the achievements would have been at a high level. However, as mentioned previously, only two of the seven transmission lines are 100% completed. The other five, while well advanced (four are between 74-87% completed, and one at 42%) will not be completed until after project closure. This is due to Right of Way issues pertaining to community demands for compensation beyond what is permitted by law, and legal and regulatory uncertainty concerning access through production and conservation forests. However, it is important to recognize in this regard that the substations were the most critical physical investments for addressing short - and medium-term system constraints. While upgrading the capacity of sub-transmission and distribution lines is essential to longer term system performance and capacity, and are economically and financially justifiable investments for the project, the existing capacities were in most cases sufficient to meet medium-term demand growth and do not diminish the performance benefits of other investments in the meantime. Thus, in spite of some of the transmission lines not having been completed (primarily due to political economy reasons as explained above) the project development objectives and the related

10 During the project implementation period, both the demand forecast and the generation supply have increased at a pace far greater than originally projected. Originally, PLN’s demand growth was estimated to peak at 9% p.a., in 2009 and then stabilize at 5% over the longer term. At present the long term peak demand trend forecast is of the order of 8%. At the same time generation capacity is also increasing much faster under the 10,000 MW “Crash Program”. Under the circumstances, the indicator can be deemed to have been met. Also it needs to be noted that the non completion of the transmission lines have no impact on the transformer loadings at present, but they still remain highly relevant as they will be needed to evacuate the power generated by the new power plants coming on stream in 2018 as explained in Box 1.

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outcome indicators have been met with only moderate shortcomings. However, the transmission lines still remain very relevant, as they would be the only means of evacuation for some of the new power plants coming on stream. This issue is explained in the Box below11.

11 The analyses in the Box 1, is based entirely on data provided by the operations department of PLN at the request of the Bank, and the

conclusions have been shared with PLN. (NB: In October 2012, Bandung Selatan-Kamojang become Bandung Selatan -W. Windu and W. Windu – Kamojang)

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70. Legal and regulatory reform has and is being instituted this year to address the right of way issues and PLN has agreed to provide a time table certain by when the five lines will be built and energized. 71. The additional TA has led to a new hydro pumped storage project, i.e. the Upper Cisokan Pumped Storage Hydropower Project (PSHP), funded by the Bank. The PSP study/design and the related PSHP, will help to improve the performance of the system by helping to increase peak power capacity when finished. The TA will also help to strengthen PLN’s institutional capacity to plan, prepare, and implement the PSHP and power investments generally. In summary the essential objectives and key outcome indicators have been achieved, in spite of a small part of the output being delayed. Institutional Objectives 72. The sector related CAS goals at the time of project entry into the portfolio were: Sustain economic recovery and promote broad-based growth by: i) addressing infrastructure bottlenecks; (ii) restructuring sector entities; (iii) mobilizing co-financing for infrastructure needs, emphasizing equity investments; and (iv) phasing out price subsidies and distortions. 73. Implementation of the GOI’s 1998 Power Sector Restructuring Policy has been supported by ADB, USAID, and the Bank. ADB (with co-financing from JBIC of US$400 million) provided the GO1 with a program loan of US$380 million, and a technical assistance loan of US$20 million to the Directorate General of Electricity and Energy Utilization (DGEEU) in order to deal with the sectoral aspects of restructuring-particularly the initial drafting of the new Electricity Law and associated regulations, as well as the market rules governing the creation of a competitive electricity market. While with the annulment of the Electricity Law, some of this co-financing had become irrelevant, including parts of the US$ 20 million TA, the bulk of the co-financing was for physical infrastructure, e.g., the 500kV backbone financed primarily by JBIC, and has remained extremely relevant and critical for addressing infrastructure bottlenecks and by increasing the efficiency of the system, reducing the need for price subsidies. The Ministry of Energy and Mineral Resources has continued to encourage and support private participation in electricity generation and several new IPPs are under construction and preparation. 74. In 2008 an additional financing component of US$ 30 million was also added to expand the ERP program across PLN operations in other locations. This extension of the ERP system is fully consistent with the World Bank’s latest Country Partnership Strategy (CPS) that focuses on "investing in Indonesia's institutions". More specifically, it supports Core Engagement 2 – to support the development of infrastructure by helping "strengthen the capacity and accountability of institutions" to deliver better outcomes. 75. The more recently promulgated institutional objectives of poverty reduction and shared prosperity have also been supported by the project, by increasing the supply of electricity to rural areas through increased dispatch of generated power on the medium voltage grid. Although an estimate of “inferred access” has not yet been done for Java Bali, the increased access is likely to be significant given the increased dispatch. Without the project, PLN has no option but to engage in a program of aggressive load shedding and would have to severely curtail the numbers of new consumer connections. This would disproportionately impact the rural poor, since the substations would serve areas where there is substantial suppressed demand due to long waiting lists for consumer connection.

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3.3 Efficiency 76. The project was shown to be very efficient at entry, based on the economic analysis during project preparation. The combined costs and benefits of both the 500kV and 150kV power system strengthening components resulted in an overall NPV of US$34.3 million, with a corresponding overall EIRR of 14.6%. The delays in project implementation have resulted in a reduction in the project NPV and EIRR from US$ 34.4 million and 14.6% to US$9.2 million and 11.88%. However as will be seen from Table 1 of the original analysis, the NPV and the EIRR calculated at project entry assumed an East-West transfer gain of US$ 27.3 million in avoided costs in the years 2005 and 2006, after which the 500kV backbone to the south would be commissioned and the East-West transfer gain would cease. This was entirely unrealistic as it assumed that the entire physical project would be procured, launched, constructed, installed, tested and energized in 18 months between June 26, 2003 when the project was approved and December 31, 2004. However, the project became effective only on July 7, 2004. Without the East West benefit, the NPV would have been US$-4.7million and the EIRR 9.51%. Compared to this the economic and financial performance has actually been better. 77. However, the cost effectiveness of the project during implementation was significantly increased with PLN and the task team working together to ensure strict adherence to the World Bank procurement guidelines. This resulted in significant cost savings both in the physical components of the project as well as in the ERP component. In the physical component, while the original design was based on an uprating, the project was modified to run an additional transmission line parallel to the existing one instead. Assiduous design of the RFP and a highly competitive bidding process, has allowed the vast majority of the transmission lines, and materials procurement for the unfinished portions of the transmission lines, to be completed at a cost lower than originally estimated for the uprating only. 78. Similarly, in the case of the ERP, the bidding process and the implementation of the project were managed in a way to result in cost savings in the order of US$ 9 million, with all deliverables being achieved. During the project implementation period, both the demand forecast and the generation supply have increased at a pace far greater than originally projected. Originally, a project net present value of US$34 million and an EIRR of 14.6% was projected based on peak demand growth peaking at 9% p.a., in 2009 and then stabilizing at 5% over the longer term. At present the long term peak demand trend forecast is of the order of 8%. At the same time generation capacity is also increasing much faster under the 10,000 MW “Crash Program”. 79. In the original analysis the costs were the costs of the physical components, while the benefits considered were only the value of the possible incremental demand growth with and without the project, and the avoided cost of generation achieved by relieving the 400MW east-west transfer constraint. To be conservative, the analysis did not include several other benefits, such as (i) reduced system losses; (ii) improved voltages; (iii) extended transformer lifetimes; and (iv) fewer localized planned and unplanned system outages. Furthermore, the approach taken also did not account for the benefit value of unserved energy (on a consumer willingness-to-pay basis), which would likely be considerably higher than the difference in LRMC values used in the analysis. Also, while the costs of the transmission lines uprating was included, no financial benefits associated with it were included since, unlike the substations, the existing capacities of sub-transmission and distribution lines were in most cases sufficient to meet the expected medium-term demand growth and would only become critical when the new power plants in the regions near Bandung would come on stream. 80. Within this analytical framework, the delays in the project would have eliminated the avoided cost savings of reducing the East West constraint as the 500kV line would have been already

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commissioned. Against this the cost savings of the project as well as the fact that since Indonesia imports oil, and high speed diesel and marine fuel oil in particular, while coal and gas are domestic production, the difference in LRMC between the bus at generation plants and that at the lower voltage bus (500-150 kV), would have increased if not decreased. The ERP project is yielding over US$9 million in annual savings which were not previously anticipated. At a project cost of US$ 41 million this yields an NPV of US$8.1 million and an IRR of 14.95 %. 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory 81. While the achievements of the development objectives as restructured remain highly relevant and based on all the outcome indicators having been achieved and achieved with efficiency, as shown in Annex 3, the rating for the outcome if there were no shortcomings, would have been highly satisfactory in accordance with the harmonized evaluation criteria. However, there were some shortcomings. This evaluation needs to determine if these shortcomings can be considered minor, moderate, significant, major or severe in order to assign an overall outcome rating to the project. There were mainly two key shortcomings in the operation:

I. Five of the seven 150kV transmission lines had not been completed (four are between 74-87% completed, and one at 42%) as of the closing date of the project. The impact of this shortcoming on the achievement of the operation’s objectives, needs to be evaluated in light of the following considerations:

i. The transmission lines were a small (14%) portion of the overall project as well as of the physical project, as explained in para 36.

ii. As explained in para 69 and in Box 1, the primary role of the transmission lines were to initially to build (n-1) redundancy in the system and due to this reason, the delays in completion of the transmission lines have had almost no effect on the achievements of the development outcomes.

iii. The transmission lines remain highly relevant however, since (as also explained in Box 1) they will be critical for evacuating the power from two new power plants which are expected to come on stream in the 2016-2019 time frame.

iv. The delays in the completion of the transmission lines are due to political economy issues which are beyond the control of the Bank and PLN.

In view of the above, it can be reasonably concluded that the effect of the delays in the completion of the transmission lines on the achievement of the project objectives have been minor.

II. The second shortcoming was that the project had to be extended three times for a total of 5 years. It is important to review carefully the cause and the effect of this shortcoming in order to determine its effect on the achievement of the operation’s objectives:

i. As discussed in paragraph 76, the initial design of the project with respect to the timing of the completion of the physical project, was entirely unrealistic as it

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assumed that the entire physical project would be procured, launched, constructed, installed, tested and energized in 18 months between 6/26/2003 when the project was approved and 12/31/2004. In the event, the project became effective only in 7/7/2004 as it took the borrower that long just to meet the conditions of effectiveness.

ii. Other than the transmission lines, the rest of the physical project, i.e., the substation work, was completed by December 2010, within the time frame of the restructured project development objectives and well within the timeframe required under the demand forecast and the timing of the other infrastructure buildup e.g. the 500 kV backbone to the south, to prevent overloading of the substations and to maintain the remaining outcome indicators within target limits between 2008 and 201012, based on a review of the QPRs.

iii. The second year of the second extension and the third extensions accounting for 3 out of the 5 years extended are related to only the transmission lines and have had no impact on the achievement of the objectives of the operation as indicated in para 69.

iv. All the other components, ERP pilot and the TA were completed prior to December 2008 i.e., the original closing date.

In view of the above it can reasonably be stated that the impact of the extensions on the achievement of the operation’s objectives had been moderate, and impact on the restructured objectives in particular, have been minor.

82. Given that there were two shortcomings of a minor nature, in aggregate the shortcomings would have been considered moderate. However, since the two shortcomings are in most part interrelated and both were caused primarily by the delay in the completion of the transmission lines due to reasons of political economy which were not foreseeable at project appraisal, and since the project outcomes have all been achieved, overall the shortcomings can reasonably be considered minor. Thus in summary, the project has been critical to improving power system reliability in the country. Without it, more densely populated parts of the country would be suffering severe load shedding by now. The transmission lines and the related ROW delays, in this context, were a small component of the project and when viewed in the totality of the achievements of the PDOs, the project as a whole has been the bedrock of the power system and transformational of our engagement with the Government on the energy sector for a number of years. As a result a rating downgrade to a satisfactory from a shortcoming free, highly satisfactory, can reasonably be justified. However, under the harmonized evaluation criteria for ICRs, the rating for the project development objective and its achievement in terms of outcome indicators prior to the restructuring needs also to be factored into the rating. This is based on the principle that for projects whose project objectives (as encompassed by the stated PDOs and key associated outcome targets) have been formally revised – through approval by the Bank authority that approved the original loans/credits/grants, (in this case the

12 During the period past the closing of the un-restructured operation.

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Board) – project outcome is to be assessed against both the original and revised project objectives to arrive at an overall outcome rating. Following this principle, separate outcome ratings (against original and revised project objectives) need to be weighted in proportion to the share of actual loan/credit disbursements made in the periods before and after approval of the revision. 83. This analysis and the result is presented below:

Against Original PDOs

Against Revised PDOs

Overall Comments

1 Rating Moderately Satisfactory13

Satisfactory Significant Improvement

2 Rating Value 4 5 3 Weighted

(disbursement before/after PDO change)

26% 74% 100%

4 Weighted Value (2x3)

1.04 3.7 4.74

5 Final Rating ( Rounded)


Thus the overall outcome rating for the operation is Moderately Satisfactory 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 84. The more recently promulgated institutional objectives of poverty reduction and shared prosperity have also been supported by the project, by increasing the supply of electricity to rural areas through increased dispatch of generated power on the medium voltage grid. Although an estimate of “inferred access” has not yet been done for Java Bali, the increased access is likely to be significant given the increased dispatch. Without the project, PLN has no option but to engage in a program of aggressive load shedding and would have to severely curtail the numbers of new consumer connections. This would disproportionately impact the rural poor, since the substations would serve areas where there is substantial suppressed demand due to long waiting lists for consumer connection.

13 Based on ISR ratings for this period.

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(b) Institutional Change/Strengthening 85. However, in spite of the prevailing difficulties of securing right of way for the transmission lines, the September 2011 mission had noted that there is some indication of a resolution of the present strict restrictions on allowing construction work in conservation forest areas by a Government regulation 28/2011 issued on May 19, 2011 under the Forestry Act No. 41/1999. This regulation allows for the approval of development projects in the national interest which have to traverse conservation forests. The regulation provides an opportunity for PLN to request ‘in principle approval’ of an entire transmission line route after considering the various alternative possibilities. Going forward, if PLN is successful in resolving procedural issues with Perhutani and BKSDA it will substantially ease the burden of increased costs due to unforeseen delays on future transmission projects. 86. PLN also informed the mission of the passage of a Ministerial Regulation (Permen ESDM) No. 38/2013 that offers compensation to private landowners under the ROW of the transmission lines at 15 percent of market value, against an assessment of land value by an independent assessor. According to PLN, this would in effect offer a seven fold increase in compensation to private landowners when compared with the current formula that offers 10 percent of NJOP value (land assessment for property taxes). In addition, PLN stated that a Task Force coordinated by UKP-4 (President’s Delivery Unit) with representation from eight ministries including the Ministry of Forestry has been formed to resolve all outstanding land acquisition issues for infrastructure projects. According to PLN, under the new Law (No. 2/2012) on Land Acquisition for the Development of Public Interest, in the event of a compensation dispute including for ROW, PLN will have the right to proceed with construction following it having deposited the compensation amount at the District Court which will be responsible for dispute resolution. (c) Other Unintended Outcomes and Impacts (positive or negative) 87. The main unintended outcome is that the power plant extensions at Wayang Windu and Kamojang have both been delayed and as a result the delay in completion of the 150 kV transmission lines have not adversely affected the transmission line loading beyond (n-1) or been an issue with regards to evacuating power from these two new power plant extensions. As a consequence the project has been able to meet all its performance indicators on an ongoing basis, and by the time these two power plant extensions are completed, it is highly likely that the transmission lines will also have been completed, as a result the project will continue to meet its performance indicators. 88. The more positive development not anticipated in the PAD or in the economic and financial analysis, is that the ERP component has started to yield savings to PLN of US$9.1 million per annum from improved efficiencies and other savings. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 89. The stakeholder workshops ( “Socialization Workshops”) held primarily with communities affected by the new parallel transmission lines, have yielded both positive and negative feedback and reactions. The positive has been mostly with regards to compensation they received unexpectedly. The negative was due to dissatisfaction with the level of compensation. Some of the demands for additional

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compensation have been in excess of what is permitted by law. There were also anecdotal reports of involvement of civil society and other interests in the demands and the claims being made.14.

4. Assessment of Risk to Development Outcome Rating: Moderate 90. While the development outcomes of the project in terms of network capacity balance and loadings, stability of the network15 and voltage regulation have been met with only minor shortcomings, the main risk to the development outcome, going forward, is that PLN will not be able to keep up its investment program in network development and maintain grid integrity in the face of increasing generation capacity, which is in large part being driven by private sector IPP investments. The project has been instrumental in significantly mitigating this primary risk to the development outcome, through its ERP component which has allowed timely and reliable disclosure and publishing PLN’s audited Financial Statements as well as significantly improving internal financial controls. This has significantly increased PLN’s ability to access the bank and capital markets to fund its network development program. 91. There is also the risk that PLN might not in the event complete the transmission lines as per the timetable to which they have committed. However, as mentioned in paragraphs 48 and 49 above, PLN will continue to issue quarterly progress reports even after the project has closed and until such time as the lines have been completed. This agreement demonstrates PLN’s commitment to complete the transmission lines as soon as possible and significantly mitigates this risk. 92. A related though secondary risk is that PLN will not keep up its supervision and maintenance of the ERP system. This risk is mitigated by the understanding reached with PLN management and the task team that project management for the ERP system will be strengthened and additional training will be provided through a train the trainers program which is currently being funded by PLN. 93. Furthermore , the present project is being followed on by subsequent Bank operations such as the Power Transmission Development Project and the Second Power Transmission Development Project, to further strengthen the transmission and sub-transmission network by expanding and adding new substations in the network; the Connectivity Development Policy Loans which support, inter alia, improved regulatory framework for land acquisition for public purpose development; and Financial Sector and Investment Climate Reform and Modernization DPL, which supports, inter alia, reinforcing financial system stability and ongoing financial sector reforms. These engagements will significantly strengthen PLN’s capacity to manage the grid better. For this reason, the risk to Development Outcome is rated as Moderate.

14 This anecdotal information was received during meetings with the PIU in Bandung to discuss the UKP/UKL and the socialization process that was conducted to announce the ROW compensation that can be offered under the Law. The actual sample reports are attached but as they are in Bahasa, a short English summary is also provided in Annex 6.

15 The terms Network and Grid have been used interchangeably in this report to allow easier visualization of the power grid issues by the non-technical reader.

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5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Rating: Moderately satisfactory 94. The discussion in section 2.1 needs to be considered in light of the overall preparation of the project. The PAD document is extremely thorough and covers all the requirements of the Bank’s preparation guidelines and was fully consistent with Operational Policy/Bank Procedure (OP/BP) 10.00, Investment Project Financing. The preparation took into account the need to helping build the Bank’s added value, by making good use of available information, and trying to find an adequate balance between risks and results. The implementation plan sought to support and help the client achieve specific development objectives while fostering borrower ownership and project sustainability. 95. The strategic sector context and the project rationale were sound. The Economic, Financial and Technical analyses were thorough and rigorous. Institutional issues were carefully considered and Environmental, Social and Safeguards Policies were adequately treated given project risk and other assumptions. All the required annexes were covered in considerable detail and were exhaustive and contained rigorous appraisal work and client and other stakeholder consultations. Under normal circumstances this preparation would merit a rating of highly satisfactory. 96. Therefore the discussion in section 2.1 needs to be considered in light of the superior capability and performance of the team reflected in the above two paragraphs. Section 2.1 alone would dictate that the performance be rated unsatisfactory. But, just as the political economy needs to be taken into account in the design and preparation of a project, it needs to be also taken into account in the evaluation of the project. It is not clear as to whether the shortcomings highlighted in section 2.1 were attributable to issues of attention and competence or if they were created as a consequence of the extremely tenuous and unstable conditions of the time and the need to have the project approved in that fiscal year. The answer is probably somewhere in the middle. Thus a rating of moderately satisfactory would be appropriate. (b) Quality of Supervision Rating: Satisfactory 97. Project supervision has been effective and diligent throughout the implementation period, with the task team working closely and responsively with the client at every step and issue. In addition to ensuring fiduciary and financial management integrity, the team also has:

quickly identified problems as they have arisen and worked closely with the borrower to help find ways to resolve them;

recommended and worked with the borrower to explore and implement changes in project concept or design, as appropriate, as the project evolved or circumstances changed;

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identified the key expected and emerging risks to project sustainability and recommended appropriate risk management strategies and actions to the borrower; and

diligently prepared the Bank's ISRs every year to account for the use of Bank resources, and to

draw lessons to improve the design of future projects, sector and country strategies, and policies - so far 18 ISRs have been completed for the project over the last 10 years, with the latest one having been completed on October 22, 2013, just prior to project closing on December 31, 2013.

98. As mentioned before, attentive management and supervision of project implementation and the procurement and financial management issues in particular have resulted in substantial project cost savings, most notably in the costs of installing the parallel transmission lines and the completion of all deliveries under the ERP component (including the additional financing) resulting in saving of around US$9 million. 99. In view of this superior project performance, the supervision rating should have been at a high level. However, against this superior performance, the delays caused by the political economy issues in the country, and contracting delays on part of the borrower due to the PIU being located in the operations department instead of the construction department – a decision that was made during an unsettled period at PLN and was therefore slow in being corrected – would require a closer look at the Bank’s supervision performance.

In this respect, the political economy issues, the absence of law for accessing conservation forests and other obstacles due to transition within PLN, this needs to be balanced against the fact that many of these issues were was outside the Team’s control but the Team nevertheless responded to these challenges in the political economy to restructure and extend the project in 2008 and then again in 2009 and 2011.

During this period the Team also brought these delays in transmission line construction to the

attention of the President’s Delivery Unit (UKP-4) that is responsible for relieving infrastructure bottlenecks and to PLN’s senior management.

For land acquisition from private landowners, the Team was advised by UKP-4 to await the

issuance of ESDM No. 38/2013under Law 2/2012 on land acquisition which was only ratified in late 2013. PLN is now working on a revised land acquisition plan that would enable it to provide market-based compensation under Permen (Ministerial Decree) ESDM No. 38/2013.

For acquisition of forestry land, PLN’s senior management advised the Team in early 2011 of

ongoing discussions between PLN’s President Director and Minister Forestry leading to a signing of an MOU between the two entities, thereby providing an opportunity for PLN to re-engage with the Ministry on ROW issues. A new Government regulation 28/2011 on forest land use permits was issued on May 19, 2011 under the Forestry Act No. 41/1999, and which replaced Permen No. 43/2008. Since then, PLN has been following the guidelines under a 27 step clearance process to acquire this land. They have recently received the recommendation from the Governor of West Java for the Ministry of Forestry clearance to be issued. For conservation land, PLN has submitted the required documentation to the Ministry of Forestry and is awaiting clearance to start construction.

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With respect to some of the delays caused by PLN’s unfamiliarity with Bank procedures, the Bank team has provided several trainings over the duration of the project, in addition to procurement training provided in early stages of project preparation. The Bank team also provided enhanced implementation support at each stage of the procurement process for the ongoing projects.

100. The Bank has been diligent in monitoring all these activities and has provided guidance, but not intervention, where appropriate. This approach by the Bank was entirely consistent with the Bank’s capacity development objectives to help country systems mature to be able to address these types of safeguard issues more expeditiously on their own. In view of these considerations we rated the Bank’s supervision of the project as Satisfactory. (c) Justification of Rating for Overall Bank Performance Rating: Moderately satisfactory 101. The rating for Bank performance in ensuring quality at entry for this project is rated moderately satisfactory, since the quality of supervision is rated satisfactory and the outcome rating for the project is in the satisfactory range, namely moderately satisfactory, the overall Bank performance may be rated as moderately satisfactory. Even if the rating for quality at entry were to be rated as moderately unsatisfactory, based on the ICR evaluation criteria harmonized over OPCS, IEG and ROC, the overall Bank’s performance would still be rated moderately satisfactory since the outcome rating is in the satisfactory range. 5.2 Borrower Performance (a) Government Performance Rating: Moderately satisfactory 102. While the Government has been cooperative and supportive of the project throughout its implementation, and has allocated adequate counterpart funds for the project, it has been reluctant to exert and enforce its authority, both administrative and legal, on some of the issues where it was within its powers. As mentioned before the two key issues delaying the completion of the transmission lines were the inordinately high, compensation claims that are in excess of those permitted under the prior law (10 % of NJOP value) by the landowners and the lack of permits being issued for traversing conservation forests. In theory, both of these issues would be under the control of the Government. However, given the political economy in the country and the fact that elections are to be held shortly, the Government’s reluctance to revert to the top down approaches of the past, is understandable. For this reason, the Government's performance in the context of this operation needs to be rated Moderately Satisfactory. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory 103. The implementation agency, PLN, has also been very cooperative, responsive and responsible throughout the implementation process. In spite of all the decentralization and reorganizations taking place within PLN during the implementation, both staff and management have worked closely and diligently with the Bank supervision team, to try to ensure that project implementation was completed in

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time, within cost, and efficiently. However, due to lack of continuity brought about by staff transfers and rotations, there was some continued unfamiliarity with Bank procurement systems. These were reflected in initial weaknesses in the ICB procedures. 104. There were also some delays in procurement as was highlighted in more than one ISR. Unfamiliarity with Bank procedures resulted in some instances of noncompliance with Bank procedures such as failure to publish a Specific Procurement Notice (SPN) in United Nations Development Business (UNDB); or failing to seek the Bank’s No Objection on a contract amendment involving an increase of contract price by more than 15%. Both of these were required under the Bank's Procurement Guidelines. The Bank team has since provided three trainings in addition to procurement training provided in each stage of project preparation and implementation. The Bank team also provided enhanced implementation support at each stage of the procurement process for the ongoing projects. 105. The PIU and the PMU has generally performed well in conducting the contracting processes, resulting in significant cost savings, both in the physical components of the project as well as in the ERP component. However, as mentioned in prior sections, the initial implementation design had located the PIU in the operations group instead of the construction group where they rightly belonged. This decision was partly due to the fundamental changes taking place in PLN and the country at the time of project preparation and approval. While this did not affect all the contracts, in some cases there were delays of up to two years due to weaknesses in contract management. The issue was recognized only when the delay persisted and was then addressed.

106. Finally there were also several payment delays in processing contractor invoices. However, as mentioned before, there have been incidents of incarceration of PLN staff, for circumventing rules and regulations to get things done expeditiously. These types of incidents have led staff to now work strictly to rule and following all regulations to the last detail (This sort of action is sometimes referred to as “work to rule”). While, PLN staff cannot be faulted for this, the performance of the implementation agency PLN would have to be evaluated with these practices in mind.

107. In discussions with the Bank, PLN has since indicated an awareness of the need to carry out diagnostics to identify the areas of weaknesses/ bottlenecks in procurement and contract management process including the issue of handling disputes, price adjustment, etc. for appropriate corrective action for future projects. In view of these considerations, its increasing familiarity with the World Bank processes, and in view of its otherwise superior performance overall 16 , PLN’s performance as an implementing agency should be rated at least as Moderately Satisfactory.

16 In fairness to PLN, it also needs to be noted that a number of these issues arose due to delays in obtaining ROW clearances, i.e. extensions of time, price escalations beyond 15 percent, etc. In this case, PLN was of the opinion that since they were paying for the cost escalation through their own budget, they did not need the Bank's no objection – revealing their lack of familiarity with Bank processes. In addition, the Bank obtained two clearances by OPRC (Director level) for the Additional Financing Loan for the Extended Deployment of the ERP system for PLN's failure to advertise in UNDB by proving that competition wasn't undermined and that re-tendering would cost PLN about the same as the contract value due to foregone revenues, and the circa 30 staff who had already been hired and would have to await the results of the re-bidding.

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(c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 108. Combining the Borrower and Implementing agency ratings as per the Harmonized ICR rating guidelines, the overall borrower performance is rated Moderately Satisfactory.

6. Lessons Learned

109. The key lesson to take away from this project is the need to better understand and assess the tradeoffs between the political economy and country engagement issues and the need for the Bank to preserve its best practices and ensure quality at entry in project design. The lesson here is that a balance needs to be found between these competing interests and there must be the willingness to make the hard decisions that may sometimes be required. As discussed in some detail above, at the time of project approval, the Bank’s lending to the country had almost come to a stop and it was extremely important, if not crucial, for the Bank to resume its lending program and this project was reportedly (and also confirmed by local staff during the ICR review meeting) the only one at the time that could have been approved within the fiscal year in question. Faced with this imperative, the task team most likely had to make some compromises in project design in order to be able to go for approval. The highly qualified and competent task team, would most certainly have been aware of the network loading issues. The likelihood of the project team (the institutional memory on this is rather limited) having assumed the uprating option would also explain the fact that the parallel lines could be procured and completed within the same budget as the uprating (not counting over-runs due to delays). It is also likely, as mentioned above, that the uprating decision was most probably also taken in order to avoid delays of several months that would otherwise have been caused should parallel lines be adopted. These issues needed to have been discussed and incorporated in the project documents prior to presentation to the Board.

110. The second lesson from this project has to do with transmission projects themselves. The delays with the transmission lines in this project are not unique. It is known to be happening with several other transmission projects in the country where very similar issues have caused or are causing delays in project implementation. It is therefore important to include in the project design, provisions for these safeguard issues and allow time either during project preparation or during implementation to address fully the safeguard issues that need to be addressed in order to increase the certainty of the timeframe of the project. 111. The third lesson here has also to do with a tradeoff of sorts. With respect to right of way issues, the question arises as to whether or not and under what circumstances should the Bank intervene at higher levels in the country to address such right of way issues. There is always the tension between the need to intervene in order to expedite the project vs. the need to provide guidance without intervention, in order to allow country systems to evolve and develop so that they are better able to more expeditiously address these issues in the longer term. Here too lies the question of striking the right balance. In the present case, the Bank’s approach of monitoring and providing guidance without intervention, most likely served the best interests of the country by allowing country systems to evolve to the point where now appropriate laws and regulations have been enacted and these will help to reduce the time it will take to complete future transmission projects.

35

112. Another lesson, albeit somewhat unexpected, to be taken away from this project, is the resounding success and a significant cost savings resulting from the deployment of the ERP system in PLN. It is important for sector practitioners to look more closely at ERP deployment and also at what was done here specifically, to explore opportunities for applicability in other utilities in other countries and regions. This lesson is also relevant and topical in the context of the present reorganization and increased sector wide approach being introduced within the Bank.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 113. In the area of resolving obstacles at the Government level, both the Borrower and the implementing agency have remarked that greater intervention by the Bank at the country partnership level, might have led to earlier resolution of some of the issues which are under the control of Government. However, the Bank was asked by PLN itself, not to intervene as it was felt that the nascent discussions with the Minister Forestry, and the subsequent signing of the MOU between PLN and the Ministry of Forestry would be sufficient to enable PLN to re-engage with the Ministry to resolve all outstanding ROW issues. (b) Cofinanciers N/A (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) N/A

36

Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent)

Components

Appraisal Estimate

(PAD) (USD

millions)

IBRD Actual/Latest

Estimate (ICR) (USD

millions)

Borrower Actual/Latest

Estimate (ICR) (USD

millions)

Total Actual/Lat

est Estimate

(ICR) (USD

millions)

Percentage of

Appraisal

PART A 1. 500 kV Transmission Network 69.78 55.35 27.04 82.39 118 2. 150 kV Transmission Network 90.39 45.95 22.09 68.04 75 3. Enterprise Resource Planning System 26.00 43.88 8.41 52.29 201 4. PLN Technical Assistance 4.50 1.75 - 1.75 39 PART B 5. PGN Technical Assistance 6.00 2.43 - 2.43 40 Total Project Costs 196.67 149.36 57.54 206.89 105 Interest during Construction 13.56 - 28.5 28.5 210 Front-end fee 1.41 1.41 - 1.41 100 Commitment Charge - - 4.60 4.60 - Local bank fee - - 0.91 0.91 - Total Financing 211.64 150.77 91.55 242.31 114

Amount cancelled from the parent loan, US$ 3.57 million.

In addition, US$ 18.7 million of the additional financing loan of US$ 20.9 million, or about 89.7 percent had been disbursed. US$ 9.1 million was canceled.

(b) Financing

Source of Funds Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 70.64 91.55 130 International Bank for Reconstruction and Development

141.00 150.77 107

Total Financing 211.64 242.31 114

37

Annex 2. Outputs by Component Physical Components of the Project ( Components 1 &2) 1. The Bank ICR mission visited the Unit Pelaksana Konstruksi UPK JJB V Office in Bandung, and met

with the UIP V, West Java Project Office in Gandul that is responsible for managing the project. Based on information provided by PLN, and through discussions with PLN management, the current status of the construction works and related issues are provided hereunder.

2. Substation Improvements: All substation works under the project (package nos. 1, 2A, 2B, 4, and 5)

are complete and the contracts have been closed. The key activities carried out during the last 12 months and remaining activities needed for the full realization of the project objectives are as follows:

For the 500/150 kV substations (Packages 1 and 4) the main exception is:

a. the South Surabaya substation (Package 4) where the 500/150 kV interbus transformer procured has been used at Ngimbang and PLN has to procure a replacement. However, the energizing of this substation is held up pending the completion of the Grati-South Surabaya line being funded through export credit from France (see Transformer Relocations section below).

For the 150 kV substations (Packages 2A, 2B and 5), the status is as follows:

i. Under package 2A, all work at the 11 substations has been completed and the contract has been closed. All transformers under the contract have been energized.

ii. Under package 2B, all work on the contract has been completed and the contract was closed in

December 2011.

iii. All substation work under package 5 has been successfully completed and the additional equipment of the 17 substations has been energized. All work under the contract has been completed and the contract has been closed.

3. Transformer relocations: Given the need to maintain continuity of supply, and the need to address

system exigencies (transformer failures) encountered by PLN at some locations, the Bank agreed to the relocation and emergency installation of a number of interbus transformers (500/150 kV) secured under the project at their needed locations. However, the Bank also stressed the need for PLN to secure replacement transformers to ensure that the project objectives at the selected locations are fulfilled. As a result, transformer replacements at Balaraja, Mandirancan, and Ngimbang have been completed and the transformers have been energized. The current situation with respect to the remaining 500 kV transformer for South Surabaya is as follows:

South Surabaya substation: The transformer procured for this substation has been used at Ngimbang substation due to the transformer procured for Ngimbang being installed at Mandirancan. However, the interbus transformer at South Surabaya can only be used when the transmission line from Grati is constructed. This line funded by export credit from France has been delayed for many years due to the delay in the settlement of a contractual claim for enhanced price adjustment. PLN informed the Bank that it would use its own budget to fund the Grati–South Surabaya line. PLN had tendered for the supply of one additional transformer for the South Surabaya substation in December 2011. Additionally switchgear

38

meant for South Surabaya has also been used elsewhere and replacement equipment has been ordered. A new contract is being negotiated. 4. Transmission lines (Packages 3A, 3B, and 6): The following are the transmission lines under

Packages 3A, 3B, and 6 along with their completion status: Table 2: Transmission line packages and completion status

Package Completion Status % as of December 31, 2013

3A i 150kV Bandung Selatan – Kamojang 87.7 ii 150kV Wayang Windu Incomer 100 iii 150kV Kamojang Drajat 83.5 iv 150kV Tasikmalaya Ciamis 85.1 3B v 150kV Drajat Garut 41.6 vi 150kV Garut Tasikmalaya 74.0 6 vii 150kV Perak Ujung 100

5. From the seven transmission lines that were awaiting completion as of the last extension of the Loan

Closing Date at end-December 2011, the construction of the Wayang Windu Incomer (one of four lines under Package 3A) is now complete with stringing having been finished, and the line having been energized on July 2, 2012. In addition, package 6 (Perak-Ujung), has been completed.

6. The five remaining project transmission lines are still under construction. These include three lines

under package 3A and two lines under package 3B. Construction work in all five lines is held up due to delays in securing the right of way from Perhutani, or from private landowners, or due to being unable to secure clearances from BKSDA for traversing conservation forests. In view of the expected delays the Bank had requested by December 31, 2013, a construction schedule for all five transmission lines indicating expected dates for securing rights of way, land acquisition, issues related to material supply, resolution of outstanding contractual issues, and expected completion dates of the lines.

7. Package 3A: The following is the current status of ROW access for each remaining line under

Package 3A:

i. Bandung Selatan –Kamojang section: 13 of 87 sites are not available of which 11 are within the Perhutani area while 2 are in the BKSDA area. The Principal and Dispensation permits have been pending for several months, for entering and building on Perhutani land, along with the Collaboration Permit for traversing BKSDA land.

ii. Kamojang – Drajat section: 9 of 41 sites are not available of which 3 are within the Perhutani area while 6 are in the BKSDA area. The Principal and Dispensation permits have been pending for several months, for entering and building on Perhutani land, along with the Collaboration Permit for traversing BKSDA land.

39

iii. Wayang Windu Incomer: Line construction has been completed and the line has been energized with a pending Principal and Dispensation Permit. For the 14 parcels for the Wayang Windu Incomer land, while the Principal and Dispensation permits have yet to be issued by Perhutani for construction in a production forest, the process of acquiring twice the amount of land to be reforested is continuing in parallel. Once the replacement land is available, an Ijin Pinjam Pakai (Forest Land Use Permit) will be issued by Ministry of Forestry.

iv. Tasikmalaya –Ciamis Section: Following initial resistance from 29 land owners in the three sub-

districts of Taman Sari, Manonjaya, and Ciamis on the compensation amount for ROW acquisition, PLN was informed that additional land owners in adjacent properties are also seeking compensation.17 As a result, PLN is working with the village heads to come to a resolution regarding the proposed compensation amounts.

8. Package 3B: The status of the two transmission lines under package 3B is as follows:

i. Drajat – Garut section: The acquisition of tower footings and obtaining ROW for the 150 kV Drajat – Garut line has been completed and construction can move forward upon the delivery of material which is ongoing. The Bank was informed however that only one work group was working at the site, while at least six work groups are required to enable completion of the line in the next six months which is unlikely to be achieved.

ii. Garut-Tasikmalaya section: The right-of-way acquisition for the 150 kV Garut-Tasikmalaya line is still pending with 40 spans out of the total of 126 spans awaiting completion of ROW compensation negotiations with 71 private landowners. 41 landowners in Kecamatan Tanjung Jaya, and 30 landowners in Kecamatan Mangkubumi have refused compensation. The revised completion date for this section is shown in the September 30, 2013 QPR as being December 30, 2013 which is unlikely to be achieved. PLN informed the mission that it would take 18 months to complete the line following the securing of ROW from the private landowners.

As of the last supervision mission dates in mid-late 2013, the 71 landowners in both kecamatans have yet to receive compensation. The Mission was informed that PLN is still working with the village heads to agree on a compensation amount. The Mission received from PLN information on land owners under the ROW, i.e. the total number of land owners, the number of land owners who have already received compensation, the compensation amount (in nominal Rp/m2 along with payment for trees), the number of land owners not yet compensated and the reasons for the delay in making compensation payments. It appears that only 2.5 percent of total landowners have yet to receive/accept compensation and the situation hasn’t changed since 2009.

17 The amount of compensation for land under the ROW was until recently based on a Decree of the Ministry of Energy and Mineral Resources at 10% of NJOP (land tax value). However, as a result of bilateral negotiations with the affected persons, PLN has paid for land acquisition at a rate of 10% NJOP, with a minimum of Rp. 5,000/m2. For the compensation of trees and crops, the price is based on the prevailing regent decree for each area. PLN informed the Mission that there is no pending objection from the landowners as the value of trees and crops already reflects the market price. For instance, in the case of Tasikmalaya District, at PLN’s request the District renewed the regent decree on the price of trees and crops during negotiation with an updated price schedule for determining the compensation amount.

40

9. Package 6: Perak Ujung: The line is now complete and the contract for Package 6 can now be deemed to be satisfactorily concluded.

Enterprise Resource Planning System 10. The pilot ERP component was deployed successfully as scheduled, and in June 2008 when the project

was restructured, a decision was made to further expand the ERP (Phase II) to cover all of PLN’s business units in the Java-Bali system (excluding subsidiaries), using savings18 and unallocated funds from the project.

11. The ERP system has significantly strengthened PLN’s management capabilities through standardized

and more transparent business processes and has improved internal controls. As a result, there is improved integrity, accuracy and timeliness of corporate information that is available for PLN’s management for enhanced decision making. This has had a very positive effect on PLN’s capability to plan its yearly operations and investments, and to finance its operations by accessing capital markets, and by interacting with customers.

12. PLN has also made some quantitative gains in the form of savings as a result of the ERP system. It

has been assessed that the pilot deployment of the ERP system is saving PLN over US$ 1 million per year while the rollout for the remainder of the Java-Bali operations is now saving more than US$ 3.9 million on an annual basis.

Additional Financing for the Extended Deployment of the ERP System 13. The Additional Finance Loan for the Extended Deployment of the Enterprise Resource Planning

System was approved by the Board on June 23, 2010 and was declared effective on April 21, 2011. 14. Procurement: Procurement was completed and a contract was signed with PT Accenture for the

extended deployment of the ERP system to Sumatra and Sulawesi on November 2, 2011. The project is now completed.

15. The Phase III supervision services consultancy was awarded to PT Indra Sistemas and the contract

was signed on April 27, 2012. The consultants conducted workshops with PLN’s counterpart team on Program Management and Risk Management. The consultants produced monthly reports and assisted PLN through July 2013 in monitoring and supervising the implementation in Sumatra and Sulawesi. The Phase III supervision consultancy is now complete.

16. The Bank Team accompanied by PLN staff had visited in July 2013 the ERP Disaster Recovery

Center (DRC) in Gandul outside of Jakarta. The DRC for the ERP and other critical PLN applications were established by PT IKON+ (a wholly owned subsidiary of PLN). The DRC went operational on April 1, 2013. While significant progress has been made with the physical implementation of the DRC, the Team noted that there remains significant work needed to strengthen the overall Disaster Recovery Plan (DRP) and Business Continuity process in the event of an actual

18 The development and implementation of the pilot ERP (phase I) came well under original estimates.

41

outage in the main data center. Similar observations have also been noted in the Phase III supervision consultant’s final report.

17. Overall, the Bank is satisfied with the progress and outputs of the major activities covered under the

Additional Financing Project. Generally, the schedule has been adhered to and outputs have been delivered on time and within budget.

18. While the overall implementation of Phase III of the ERP implementation has been completed

successfully, much remains to be undertaken by PLN to ensure the long-term sustainability and successful operation of the ERP – not just in Sumatra and Sulawesi, but also the original Phases I and II implementations in Java-Bali. The most significant of these issues is the lack of technical capacity and depth in the IT Shared Services Unit (DIVSIM). Even now, in DIVSIM, ERP staffing capacity has been diverted to carrying out Phase IV deployment in Kalimantan and Eastern Indonesia. This diversion of staff within DIVSIM has had significant impact and delays on operational support for the production system. For example there have been recorded instances of simple password-resets taking 2 weeks to complete. This poor quality of operational support services threatens the credibility of the system and its long term sustainability. The mission recommends that PLN’s management pays close attention and act on the recent quarterly Risk Report produced by the Phase III Supervision consultants that lists in great detail the risk factors and some potential mitigating action that should be undertaken. These risks if not addressed are significant threats with a high probability of occurrence.

Technical Assistance to PLN This component supported a Supplementary study for Upper Cisokan Pumped Storage Hydroelectric Power Development Project. The work has been delivered and has resulted in a new project for IBRD for this Pumped Storage HPP.

Technical Assistance to PGN The studies under the TA, and the majority of the training have been completed. PGN decided to cover the tuition and related expenses of two PGN staff using their own funds. PGN formally requested the World Bank through the Ministry of Finance, of its intention to cancel the unused portion of the TA Component, and the funds were canceled on July 29, 2010.

42

Annex 3. Economic and Financial Analysis (including assumptions in the analysis) Summary

1. Presented below is the original Economic and Financial Analysis as it appeared in the PAD followed by the updated Analysis at project closing. The delays in project implementation have resulted in a reduction in the project NPV and EIRR from US$34.4 million and 14.6% to US$9.2 million and 11.88%. However as will be seen from Table 1 of the original analysis, the NPV and the IRR calculated at project entry assumed an East-West transfer gain of US$27.3 million in avoided costs in the years 2005 and 2006, after which the 500 kV backbone to the south would be commissioned and the East-West transfer gain would cease. This was entirely unrealistic as it assumed that the entire physical project would be procured, launched, constructed, installed, tested and powered on in 18 months between 6/26/2003 when the project was approved and 12/31/2004. In the event the project became effective only in 7/7/2004. Without the East West benefit, the NPV would have been US$-4.7million and the EIRR 9.51%. Compared to this the economic and financial performance has actually been better. One unexpected benefit of the project has been that the ERP component has started to yield savings to PLN of US$9.1 million p.a.

Analysis in the PAD Cost/Benefit Analysis of 150kV Subcomponents ( for more background please refer to the PAD Annex 4)

2. At the 150kV level, the related subcomponents of the Project are intended to: (i) similarly allow increased demand to be met at numerous localized sites throughout Java and Bali; and (ii) provide a level of security commensurate with the existing and potential West Java geothermal generation capacity evacuated through the 150kV sub-transmission network near Bandung (375MW).

3. The costs side includes all the costs (net of IDC and VAT) of the Project’s 150/70kV and 150/20kV subcomponents, with the exception of the Perak-Ujung subcomponent, which is considered an integral part of the above 500kV measures. For simplicity, the costs of the Bandung-Ciamis line uprating and the Wayang Windu incomer subcomponents are considered to be an integrated part of the 150kV subtransmission measures. While the costs of these subcomponents are included, no benefits due to improved system security are included, in order to be consistent with the 500kV analysis. (Nevertheless, benefits associated with reduced outages in the southeastern Bandung area are likely to be substantial).

4. On the benefits side is the possible incremental demand growth with and without the proposed measures. The same assumptions are used as above for the 500kV investments, although the incremental energy is associated with the expansion of 38 substations, and is valued slightly higher-at US$0.006/kWh19. (For comparison, the Bank’s 1996 study calculated the LRMC between the 500kV and 150kV busbars at US$0.0077/kWh). Again, the analysis is conservative

19 The most recent estimates of LRMCs for the Java-Bali system were undertaken in a 1999 study for ADB.

43

because all the same quantified benefits which apply at 500kV level also apply at 150kV. In addition, at a significant proportion of the 38 substations included in PLN’s 150kV substation expansion program, existing transformers will be replaced by a new one with a larger capacity, rather than simply adding a new transformer. Replaced transformers can be relocated for utilization elsewhere in the system. The benefits of re-utilizing such transformers net of relocation and reinstallation costs would likely also be significant, but have not been calculated as part of the analysis.

5. Again, results of the analysis are provided in Table 1. The NPV of the 150kV power transmission strengthening component is US$11.1 million, with a corresponding ERR of 12.1%. Combining the costs and benefits of both the 500kV and 150kV power system strengthening components results in an overall NPV of US$34.4 million, with a corresponding overall EIRR of 14.6%.

Analysis at Project Close The methodology has been to keep all of the original assumptions the same and recalculate the NPV and the EIRR under two scenarios: (i) there is no East West benefit and (ii) actual project disbursement and implementation schedules.

44

1. No East West benefit from Avoided costs. Table 2: Original Analysis but no East West Benefit

Actual project disbursement and implementation schedules. In the original analysis the costs were the costs of the physical components, while the benefits considered were only the value of the possible incremental demand growth with and without the project, and the avoided cost of generation achieved by relieving the 400MW east-west transfer constraint. To be conservative, the analysis did not include several other benefits, such as (i) reduced system losses; (ii) improved voltages; (iii) extended transformer lifetimes; and (iv) fewer localized planned and unplanned system outages. Furthermore, the approach taken also did not account for the benefit value of unserved energy (on a consumer willingness-to-pay basis), which would likely be considerably higher than the difference in LRMC values used in the analysis. Also, while the costs of the transmission lines uprating was included, no financial benefits associated with it were included since, unlike the substations, the existing capacities of sub-transmission and distribution lines were in most cases sufficient to meet the expected medium-term demand growth and would only become critical when the new power plants in the regions near Bandung would come on stream.

Peak Demand

Growth

500kV Uns

Enrg

150kV Uns

Enrg

500kV Uns

Enrg

150kV Uns

Enrg

East‐West

Transfer 500kV 150kV Total 500kV 150kV Total

(%) (GWh) (GWh) (GWh) (GWh) (GWh) (US$m) (US$m) (GWh) (US$m) (US$m) (US$m) (US$m) (US$m) (US$m) (US$m)

2003 4.50% 0 0 0 0 0 0 0 0 0 5.7 6.1 11.8 ‐5.7 ‐6.1 ‐11.8

2004 4.20% 0 0 0 0 0 0 0 0 0 28.3 30.7 58.9 ‐28.3 ‐30.7 ‐59

2005 0.00% 0 0 0 0 0 0 0 0 0 22.3 24.5 46.9 ‐22.3 ‐24.5 ‐46.8

2006 5.10% 0 0 0 0 0 0 0 0 0 0 0 0

2007 5.00% 53 230 0 0 53 0.212 0 230 1.38 0.212 1.38 1.592

2008 7.90% 253 632 0 0 253 1.012 0 632 3.792 1.012 3.792 4.804

2009 9.00% 500 1126 0 0 500 2 0 1126 6.756 2 6.756 8.756

2010 8.00% 738 1605 0 0 738 2.952 0 1605 9.63 2.952 9.63 12.582

2011 6.00% 931 1992 0 0 931 3.724 0 1992 11.952 3.724 11.952 15.676

2012 6.00% 1136 2403 0 33 1136 4.544 0 2370 14.22 4.544 14.22 18.764

2013 6.00% 1353 2839 0 469 1353 5.412 0 2370 14.22 5.412 14.22 19.632

2014 6.00% 1583 3301 0 931 1583 6.332 0 2370 14.22 6.332 14.22 20.552

2015 6.00% 1827 3791 0 1420 1827 7.308 0 2371 14.226 7.308 14.226 21.534

2016 5.00% 2043 4223 0 1853 2043 8.172 0 2370 14.22 8.172 14.22 22.392

2017 5.00% 2269 4677 0 2307 2269 9.076 0 2370 14.22 9.076 14.22 23.296

2018 5.00% 2506 5154 24 2784 2482 9.928 0 2370 14.22 9.928 14.22 24.148

2019 5.00% 2756 5655 274 3284 2482 9.928 0 2371 14.226 9.928 14.226 24.154

2020 5.00% 3018 6180 536 3810 2482 9.928 0 2370 14.22 9.928 14.22 24.148

2021 5.00% 3293 6732 811 4362 2482 9.928 0 2370 14.22 9.928 14.22 24.148

2022 5.00% 3293 6732 811 4362 2482 9.928 0 2370 14.22 9.928 14.22 24.148

2023 5.00% 3293 6732 811 4362 2482 9.928 0 2370 14.22 9.928 14.22 24.148

2024 5.00% 3293 6732 811 4362 2482 9.928 0 2370 14.22 9.928 14.22 24.148

2025 5.00% 3581 7312 1099 4941 2482 9.928 0 2371 14.226 9.928 14.226 24.154

NPV (2002) ‐15.9 11.1 ‐4.7

EIRR 6.33% 12.13% 9.51%

Incremental Energy Incremental Energy

Without Project With Project Benefits (500kV) Benefits (150kV) Costs Net Benefit

45

Within this analytical framework, the delays in the project would have eliminated the avoided cost savings of removing the East West constraint, as the 500kV line would have been already commissioned.

Table 3: Actual disbursements and implementation Schedule

This analysis assumes that all equipment has been installed and powered up as of 2012. The less than 50% load balance in the 150kV transmission lines, (see figure 2 below) due mainly to the East West backbone, results in the entire incremental energy to be attributable to the transformers and substations. However, the analyses include the cost of the new transmission lines as they are a part of the project and would become essential for evacuating the new power plants at Wayang Windu and Kamojang, without losing the n-1 status of the 150kV lines.

Peak Demand

Growth

500kV Uns

Enrg

150kV Uns

Enrg

500kV Uns

Enrg

150kV Uns

Enrg

East‐West

Transfer

(%) (GWh) (GWh) (GWh) (GWh) (GWh) (US$m) (US$m) (GWh) (US$m) (US$m) (US$m)

2003 4.50% 0 0 0 0 0 0 0 0 0 0

2004 4.20% 0 0 0 0 0 0 0 0 0 0

2005 0.00% 0 0 0 0 0 0 0 0 0 0

2006 5.10% 0 0 0 0 0 0 0 0 0 3.742 ‐3.742

2007 5.00% 53 230 53 230 0 0 0 0 0 9.675 ‐9.675

2008 7.90% 253 632 253 632 0 0 0 0 0 46.578 ‐46.578

2009 9.00% 500 1126 500 1126 0 0 0 0 0 18.63 ‐18.63

2010 8.00% 738 1605 738 1605 0 0 0 0 0 15.24 ‐15.24

2011 6.00% 931 1992 931 1992 0 0 0 0 0 1.319 ‐1.319

2012 6.00% 1136 2403 1136 2403 0 0 0 0 0 0.091 ‐0.091

2013 6.00% 1353 2839 0 469 1353 5.412 0 2370 14.22 1.873 17.759

2014 6.00% 1583 3301 0 931 1583 6.332 0 2370 14.22 20.552

2015 6.00% 1827 3791 0 1421 1827 7.308 0 2370 14.22 21.528

2016 5.00% 2043 4223 0 1853 2043 8.172 0 2370 14.22 22.392

2017 5.00% 2269 4677 0 2307 2269 9.076 0 2370 14.22 23.296

2018 5.00% 2506 5154 24 2784 2482 9.928 0 2370 14.22 24.148

2019 5.00% 2756 5655 274 3285 2482 9.928 0 2370 14.22 24.148

2020 5.00% 3018 6180 536 3810 2482 9.928 0 2370 14.22 24.148

2021 5.00% 3293 6732 811 4362 2482 9.928 0 2370 14.22 24.148

2022 5.00% 3293 6732 811 4362 2482 9.928 0 2370 14.22 24.148

2023 5.00% 3293 6732 811 4362 2482 9.928 0 2370 14.22 24.148

2024 5.00% 3293 6732 811 4362 2482 9.928 0 2370 14.22 24.148

2025 5.00% 3581 7312 1099 4942 2482 9.928 0 2370 14.22 24.148

NPV (2002) 9.2

EIRR 11.88%

Without Project With Project Benefits (500kV) Benefits (150kV)

Incremental Energy Incremental Energy

Cost Total

(500kV + 150 kV)

Net Benefit

Total

46

The ERP project is yielding over US$9.1 million in annual savings which were not previously anticipated. At a project cost of US$41 million this yields an NPV of US$8.1 million and an IRR of 14.95 %

Table 4: ERP System

ERP cost ERP Benefit Savings from ERP System

(US$m) (US$m) (US$m)

2003 0

2004 0

2005 2.579 ‐2.579

2006 5.657 ‐5.657

2007 4.602 1 ‐4

2008 9.955 1 ‐8.918

2009 1.254 4 2.323

2010 1.119 4 2.458

2011 4 3.577

2012 11.642 4 ‐8.065

2013 7.076 4 ‐3.499

2014 9 9.066

2015 9 9.066

2016 9 9.066

2017 9 9.066

2018 9 9.066

2019 9 9.066

2020 9 9.066

2021 9 9.066

2022 9 9.066

2023 9 9.066

2024 9 9.066

2025 9 9.066

NPV 8.1

EIRR 14.95%

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Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members

Names Title Unit Responsibility/

Specialty Lending Mohammad Farhandi Sector Director (Acting) Task Team Leader Kurt Schenk Power Engineer/Procurement Specialist Power Engineer Rajiv Sondhi Senior Finance Officer CTRLA FM Specialist

Thomas E. Walton Consultant EASNS Environmental Safeguards

Farida Zaituni Environment Specialist Environment SpecialistKarin Nordlander Lead Counsel Legal Counsel Yuling Zhou Lead Procurement Specialist EASR2 Procurement

Ramesh Sivapathasundram Lead Information Officer TWICT Information Technology

Yogana Prasta Disbursement Officer EACIF Operations Adviser Carla Sarmiento Program Assistant EASWE Program Assistant Perry Radford Program Assistant EASWE Program Assistant

Supervision/ICR

Dhruva Sahai Sr Financial Analyst EASWE Task Team Leader [Current]

Noureddine Berrah Consultant EASIS Task Team Leader Migara Jayawardena Senior Energy Specialist LCSEG Task Team Leader Chrisantha Ratnayake Consultant AFTG1 Transmission EngineerLeiping Wang Lead Energy Specialist SASDE Power engineer Makoto Takeuchi Senior Power Engineer EASWE Power Engineer

Ramesh Sivapathasundram Lead Information Officer TWICT Information Technology

Yogana Prasta Operations Adviser EACIF Operations Adviser Eka Zarmen Putra Operations Officer CFPTO Operations Officer Melinda Good Chief Counsel LEGES Legal Sameena Dost Senior Counsel LEGES Legal Mariangeles Sabella Senior Counsel LEGES Legal Rajat Narula Sr Financial Management Specialist EASFM Financial Management Christina I. Donna Financial Management Specialist EASFM Financial Management Arip Syaman Sholeh Consultant EASFM Financial Management Ahsan Ali Lead Procurement Specialist EASR1 Procurement Zhentu Liu Senior Procurement Specialist EASR2 Procurement Yash Gupta Senior Procurement Specialist EASR1 Procurement Ninin K. Dewi Consultant EASIS Social Safeguards

Ina Pranoto Senior Environmental Specialist EASIS Environmental Safeguards

Krisnan Isomartana Environmental Specialist EASIS Environmental Safeguards

Puguh Imanto Energy Specialist EASIS Energy Specialist

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Emil Elestianto Consultant EASIN Consultant Shawna Fei Li Junior Professional Associate EASIN Team support Luis-Jose Mejia Consultant LCSPS Consultant Satiriantinah Bur Rasuanto Special Assistant EACIF Special Assistant Jeeyoon Jeeny Kim Consultant EASWE Team support Elvi Yani Dewi Nasution Schaefer Energy Spec. EASIS Team support Teresita G. Velilla Temporary ECSPE Team support Fnu Hanny Program Assistant EASER Team support Maya Augustin E T Temporary EACIF E T Temporary

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(b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY99 72.37 FY00 4 8.95 FY01 19 120.13 FY02 15 184.60 FY03 25 225.30 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00 FY08 0.00

Total: 63 611.35 Supervision/ICR

FY99 0.00 FY00 0.01 FY01 4.23 FY02 0.00 FY03 0.00 FY04 14 122.94 FY05 13 73.22 FY06 14 77.06 FY07 22 106.76 FY08 15 86.33 FY09 1 0.00

Total: 79 470.55

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Annex 5. Beneficiary Survey Results (if any)N/A

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Annex 6. Stakeholder Workshop Report and Results (if any)See attached PDFs Stakeholder Workshops and Public Consultation on Java-Bali Power Sector Restructuring and Strengthening Project As part of the preparation of Environmental and Social Assessment and Management Plan (ESAMP), PLN conducted public consultation with the people in the project area. The first meeting during project preparation was conducted in Surabaya on a planned subproject activity, the Perak-Ujung line uprating on July 10, 2002. This consultation was conducted at the municipal level, with representatives from most of the stakeholder groups: government agencies, landholders, local businesses, community organizations and academics. All participants agreed that the meeting was useful and, the meeting appears to have provided a good model for such meetings in future. (Minutes of meeting were attached in the ESAMP document dated March 2003). The meeting concluded that:

Project consultation at kecamatan (sub-district) level should be conducted in order to involve more local stakeholders (i.e. communities);

Partnership with related institutions should be developed as part of the AMDAL process to ensure that full transparency occurs;

Technical reviews on the transmission project should be conducted in order to measure the impact on port authority and navy activities;

Community support of the project is necessary because of the importance of the project to the East Java region.

After that first meeting, many other meetings were conducted during project preparation as well as implementation. Public consultation was done during the AMDAL (Environmental and Social Impact Assessment) preparation and several more meetings were conducted as part of the land acquisition process during project implementation. On the land acquisition process, PLN conducted a number of discussions with the community in the affected villages, particularly with the people whose assets were affected by the project. PLN provided the Bank with minutes of meetings in Bahasa which are summarized below:

1. Negotiation on land compensation at Desa Sirnajaya Kecamatan Tarogong for the Drajat-Garut

Transmission Line on December 12, 2007. The meeting was attended by land owners, the land acquisition committee and the local government apparatus (head of subdistrict and head of village). The only agenda of the meeting was negotiation on land compensation, for which they agreed on the amount of compensation at the end of the meeting.

2. Socialization on land compensation under the ROW of the transmission line for the Garut-Tasikmalaya Transmission Line on November 18, 2009 in Desa Margalaksana. The meeting reached agreement on the compensation for trees/crops under the ROW, which would refer to the Decree of Kabupaten Tasikmalaya Agricultural Office and compensation for the land under the

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ROW would refer to the KepMen No. 975.K/47/MPE/1999. The meeting also reached agreement on the compensation amount for structures/buildings.

3. The latest meeting is the socialization meeting for the construction of Tower No. 38 at Desa Sirnajaya for Drajat-Garut Transmission Lines that was held on September 27, 2013. The socialization was particularly targeted to the residents of the BUMARAS residential complex. The meeting was attended by the residents of the complex, the local government apparatus, and by the developer. PLN provided information on the project and informed the attendees that the transmission line would pass through the complex. The community’s concern was more on the safety of the transmission line as well as the tower that would be built in the area and they asked for compensation for buildings that would be affected by this component of the project.

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

1. Background The Java-Bali transmission system comprises of a 500 kV backbone overlaying a regional 150 kV sub-transmission network. The 500 kV network is a relatively new system that was built in the 1980s and 1990s. It predominantly comprises of a two circuit line running from the east to the west of northern Java. The 500 kV network runs in parallel with the 150kV network. It is largely radial in nature, and will remain this way until a southern 500kV transmission route completing a 500 kV double circuit transmission loop around most of Java is fully commissioned. Major generation capacity is mostly installed close to the northern section of the 500kV system. To strengthen the system the World Bank financed the Java-Bali Power Sector Restructuring and Strengthening Project (Loan no. 4712-IND) which was signed on October 1, 2003 and the loan became effective on July 7, 2004. The original validity of the loan was through December 31, 2008, and the loan was extended three times in order to allow for the construction of outstanding transmission lines, and for the installation of a few remaining transformers. The first extension was until December 31, 2009, the second extension until December 31, 2011, and the last extension was until December 31, 2013. In 2010 at the conversion of the loan from a variable to a fixed spread loan, the loan number was changed from 4712-IND to 7758-ID. The Loan categories and related amounts were revised during a restructuring of the loan and confirmed through a World Bank letter on June 27, 2008.

2. Project Development Objective The development objective of the Project is to improve the performance of the power sector on Java-Bali by supporting the State power company (PLN) to implement its financial and corporate restructuring plan, and to strengthen key elements of the Java-Bali electricity supply system. The revised development objective of the project became to improve the reliability and efficiency of the power system in Java-Bali and strengthen PLN and PGN’s management capabilities. This objective is to be achieved through the provision of World Bank financing toward priority investments and technical assistance for PLN, and technical assistance for PGN. In particular, project components for PLN will: (i) achieve greater utilization of existing generation capacity on East Java, by relieving constraints in the bulk transmission grid; (ii) improve the reliability of existing generation supply at the PLN and independent power producer (IPP) geothermal power plants on West Java, by strengthening the associated local transmission system; (iii) improve the reliability of power supply at various locations throughout Java and Bali, by strengthening and debottlenecking local transmission and sub-transmission networks; and (iv) by strengthening PLN's management capabilities by enhancing the company's information systems. Technical assistance to PGN will enhance its capabilities for expanding gas utilization on Java.

3. The Main Components of the Project Description of the Project (for PLN’s Portion) by component is as follows. 1. PLN Power System Strengthening (500 kV Transmission System &150 kV Sub transmission System)

a. Package IFB - 1 : 500/150 kV Substation for West Java and Jakarta

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b. Package IFB - 2a : Supply and Installation of 150 kV Substations for West Java and Jakarta

c. Package IFB - 2b : Supply and Installation of 150 kV Substations for West Java and Jakarta d. Package IFB - 3a : Supply and Installation of 150 kV Transmission Lines for West Java

and Jakarta e. Package IFB - 3b : Supply and Installation of 150 kV Transmission Lines for West Java

and Jakarta f. Package IFB - 4 : Supply and Installation of 500 / 150 kV Substation for East Java and

Central Java g. Package IFB - 5 : Supply and Installation of 150 kV Substation for Central, East Java and

Bali h. Package IFB – 6 : Supply and Installation of 150 kV Transmission Line for East Java

2. PLN Enterprise Resource Planning System

- PLN ERP Pilot Implementation Project - PLN ERP Rollout Implementation Project

3. PLN Restructuring & Institutional Strengthening (Technical Assistance):

- Supplementary study for Upper Cisokan Pumped Storage Hydroelectric Power Development

Project.

4. Assessment of Outcomes

A. Relevance and Impact of the Project and its Objectives The project was very important for the development of the Indonesian power sector and Java Bali in particular. It remains very relevant to the development needs of Indonesia to this day and has been of immense benefit to the country’s access to electricity. The project is now enabling PLN to supply power from plants in East Java to the rapidly growing demand centers in West Java, as initially envisaged. The installment of power transformers in Surabaya Selatan 500 kV Substation and New Kediri 500 kV Substation helps to relieve the highly loaded Krian 500 kV substation in East Java. The expansion of the existing power transmission Mandirancan substation 500 kV is relieving the load of Interbus Transformer existing, and strengthening the network in order to be able to transfer the surplus power from East Java to Bandung and Cirebon area. The Balaraja 500 kV substation was built to relieve system loading of the Gandul and Kembangan 500 kV substations, and to strengthen the network in the Balaraja area and at the nearby industrial estate and also to anticipate the commissioning of a new power plant. Packages IFB 3A, IFB 3B and IFB 6 were changed from re-conductoring of existing transmission lines to new route constructions of transmission lines parallel to the existing transmission lines, whilst packages 2A, 2B and 5 are for the expansion of existing power transmission substations to relieve overloading in existing transformers.

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B. Achievement of the Objectives The development objective and the indicators, continue to remain relevant. As mentioned, the project is now enabling PLN to supply power from plants in East Java to the rapidly growing demand centers in West Java, as initially envisaged. The substations have all been completed and the ERP system is up and running in all three of the phases funded by the World Bank. The reliability and efficiency of the power system has been substantially improved by the project. All transformers have been installed and energized. The World Bank’s project team was flexible and worked with PLN to relocate transformers to alternative substations to accommodate changing demand patterns and evolving network configurations. Substation loading and voltage levels have been significantly improved with more stability in the system. The transmission lines completed so far are allowing power to be evacuated from new generation facilities and the other lines when completed will help to evacuate power from two power plant extensions when they are expected to be commissioned from 2016 through 2018. The three phases of the ERP system now cover 84 percent of staff, and 94 percent of revenues, and generate cost savings of US$ 9.1 million p.a. The system has improved PLN’s financial, human resources and materials management. More timely financial statement issue has led to greater access to capital.

There is presently, a heightened importance of these investments, since PLN is in the process of expanding power generation in East Java by a further 2,500 MW as part of the country’s accelerated power generation expansion program. The efficiency, voltage, load factors have all improved significantly as a result of the project, bringing the stated and much needed benefit and relief to the population served. In short the objectives of the project have all been fully achieved.

C. Achievement of Performance Indicators

DEVELOPMENT OBJECTIVE The revised development objective of the project became to improve the reliability and efficiency of the power system in Java-Bali and strengthen PLN and PGN’s management capabilities.

Performance Indicator

Baseline Value 2002 Original Target

Values (from approval documents)

Actual Value Achieved at Completion or

Target Years

Assessment

Dispatch capability of generation units in East Java

Around 2000 MW of dispatch capability in 2002


2322 MW Achieved over 100%

Substation loadings at key Java-Bali 500kV and 150kV

The majority of substations have loadings at 80% of the capacity or more in 2002

The majority of substations have loadings at 50%-60% of the capacity.

Avge 68.5%20

Achieved objective 100%

20 During the project implementation period, both the demand forecast and the generation supply have increased at a pace far greater than originally projected. Originally, PLN’s demand growth was estimated to peak at 9% p.a., in 2009 and then stabilize at 5% over the longer term. At present the long term peak demand trend forecast is of the order of 8%. At the same time generation capacity is also increasing much faster under the 10,000 MW “Crash Program”. Under the circumstances, the indicator can be deemed to have been met.

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substations

Voltages at key 150kV substations in Southeastern Java

The majority of key 150kV substations voltages are operating at 90% of capacity, or at 135kV in 2002

The majority of key 150kV substations voltages are operating at 100% of capacity or 150 kV by project closing

100%

Achieved over 100%

Improved impact on operational efficiency

90 days 45 days 45 days Achieved over 100%

5. Implementation Status of the Physical Components

A. Environment

The World Bank’s Environmental Management Plan (EMP) approved of Indonesia's environmental impact assessment documentation, namely the ANDAL/RKL/RPL21 and the UKLAJPL; the institutional responsibilities for monitoring and enforcing the implementation of the RKL/RPL and UKLAJPL recommendations, requirements and approaches for training programs, and other institutional strengthening measures. This very detailed and exhaustive environmental safeguards effort was undertaken over a period of three years and it covered all environmental safeguards aspects of the project. The Project Environmental Team (PET) oversees and coordinates all aspects of the Project's Environmental Management Plan, including any issues relating to land acquisition, compensation and resettlement as outlined in the Land Acquisition and Resettlement Policy Framework. PLN has established a Project Implementation Unit (PIU) with overall responsibility for coordinating and managing the project, and the Project Environmental Team (PET) worked under the direction of the leader of the PIU. The relationship between the project management team, PLN management, the World Bank and the Government is shown in Figure 1.

21 Copies available on file.

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AMDAL ASSESSMENTS: The PET oversees any needed AMDAL studies in collaboration with PLN’s project operations units. Since the current regulation of the Ministry of Environment (Decree No. 17/2001) requires an AMDAL study for every 150 kV transmission project, PLN carried out an EIA for each transmission line even though these subprojects are expected to have only minor impact. If either ANDAL-RKL-RPL or UKL-UPL were needed, the PET reviewed the terms of reference for the preparation of the above studies, and provided advice and support to the project implementation unit. The PET also reviewed the results of these studies to ensure that they were satisfactorily completed and were ready for submission to the relevant AMDAL Commission. PUBLIC CONSULTATION: Public consultation with affected communities is now required in the screening and TOR preparation of AMDAL studies, and the affected public is represented in the AMDAL Commissions that review the ANDAL/RPL/RKL studies. During the preparation of the JBPSRS Project's EMP, PLN convened a public consultation in Surabaya concerning the planned Perak-Ujung transmission line uprating project. This meeting provided a model for consultations that would be conducted in the future for this (and other) project activities. In addition, the Ministry of Environment with World Bank support is preparing guidelines for public consultation under the AMDAL process. PLN's POLICIES AND PROCEDURES FOR LAND ACQUISITION, COMPENSATION AND RESETTLEMENT: PLN's established procedures for designing, building, and maintaining transmission lines are summarized in its General Policy Concerning the Establishment of Overhead Transmission Lines, which has been incorporated into the Project's EMP and in the Land Acquisition and Resettlement Policy Framework.

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The General Policy addresses public participation, resettlement, land acquisition, compensation and rehabilitation of property, and general mitigation measures. This policy has previously been reviewed and approved by the World Bank. The existing General Policy provides adequate guidance for activities planned under the JBPSRS Project. PLN's detailed policies and procedures in the General Policy applicable to land acquisition, compensation, and resettlement have been provided to the Bank. MONITORING AND REPORTING Environmental monitoring for the JBPSRS Project will be under the authority of the PET. The PET's team leader receives copies of all progress and other reports required under the AMDAL process, and shares them with all members of the PET. In addition to the AMDAL reports, which are to be submitted as required to Indonesian agencies, the PET prepares, every quarter, a quarterly progress report containing an environmental summary section. This report is submitted in English to the World Bank. The environmental summary briefly describes:

a list of new subprojects developed or approved for implementation, and the categorization of their likely environmental impact;

a summary of progress of any AMDAL studies in progress; a summary of significant mitigation measures, if any, undertaken during the previous six months

(including details of any land acquisition and compensation); a description of any significant problems or successes in environmental mitigation during the

period; and identification of any notable environmental or social events anticipated during the coming six

months

B. Social Impact Assessment The Land Acquisition and Resettlement Policy Framework has been prepared by PLN with support provided by the World Bank as part of joint project preparation. It is a companion document to PLN's Environmental & Social Assessment and Management Plan for the Project. As discussed with Bank planning missions in November 2001 and May 2002, the JBPSRS Project would be a Sector Investment Loan (SIL). The loan would provide financing for a range of critical projects under PLN's Limited Scenario (2002-2006) for Java-Bali. Major types of subproject activities covered by the loan include:

Relieving constraints in the Bulk Transmission System, which will improve power supply to the Cirebon area and to the southern part of Central Java;

Improving availability and security of generation capacity by improving the transmission system from the geothermal power plants at Wayang Windu, Kamojang, and Drajat in West Java;

Strengthening local transmission and sub-transmission systems, including in Cirebon, Surabaya, Bandung, and Bali.

These activities would all improve the existing transmission system, and thereby provide significant social and economic benefits to the people of Java-Bali. However, PLN appreciated the need for comprehensive analysis and mitigation of potentially adverse or negative impacts to the surrounding environment and communities. From past experience, PLN has learned that it is less costly to prevent, avoid, and mitigate problems than to be confronted by them after the fact.

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Equally important, PLN's activities are subject to Indonesia's national environmental assessment regulations and they need to be in compliance with the World Bank's environmental and social safeguards policies and guidelines.

C. Project Sustainability After completion, the projects funded by the World Bank will be transferred to and operated by PLN’s operations unit, which will also be responsible for maintaining the project’s assets for the duration of their operating life. The operating life of the transmission lines and substation systems is estimated to be more than 30 years. PLN will keep utilizing the project’s physical components to ensure the efficient and reliable supply of electricity in response to growing electricity demand. In addition the Enterprise Resource Planning System will support PLN’s Human Resources Management, Financial Management, and Materials Management systems and enhance its information systems capabilities. Given the growth in PLN’s role in meeting electricity demand, the ERP System will continue to play an important part in improving the timeliness of PLN’s reporting standards, and enhance the effectiveness of management decisions. In addition, the TA for financing the feasibility study for the Upper Cisokan Pumped storage HEPP led to loan approval for the first pumped storage project in Indonesia, which would improve the load factor of the Jawa Bali electricity system (flattens out load variations). A better load factor would enable thermal power stations such as coal-fired plants that provide base-load electricity to continue operating at peak efficiency, while reducing the need for "peaking" power plants.

6. Performance Assessment

A. World Bank’s Performance According to the guidance received from the World Bank, evaluation of World Bank performance needs to include both evaluation of preparation of the project as well as the World Bank’s performance in terms of supervision during the implementation phase. As the preparation of the project predates the year 2003, PLN’s institutional memory of that phase is limited. Anecdotal information and review of materials that are available indicate that there was close cooperation between PLN and the World Bank in the process of preparing the project. For PLN that was a period of change and there were several reorganizations underway at the time. As a result, there is very little information on the details of the preparation issues at the time. Overall it is the impression of our management and staff who have worked with the World Bank in the past, that the World Bank’s inputs during the preparation process were very valuable and in addition to helping to design the project, cooperation with the World Bank, also resulted in transfer of knowledge on international best practices. As to supervision during implementation, there is a greater amount of institutional memory. The cooperation with the World Bank team during implementation and the availability and flexibility of the interaction was highly satisfactory to PLN. The World Bank worked closely with PLN during the time when the project had to be restructured due to changes in the electricity law. This was a major change in the structure of the project and its objectives, and the support and cooperation of the World Bank during

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this period as well as its continued presence in the field, was indeed very helpful for PLN staff. As to the several extension requests due to right of way issues, the World Bank has been exceedingly cooperative and supportive of the process and has accommodated the needs of PLN with three extensions granted for a project, that would otherwise have been completed several years prior. In this context, PLN would rate the World Bank’s supervision performance as having been highly satisfactory. However some in PLN hold the opinion that the World Bank could have done more in working with higher levels of Government to address legal and other issues, such as traversing conservation forests that were impeding the implementation of the transmission lines due to right of way issues. The World Bank had several other operations underway in the country, including development policy operations, and had the wherewithal to assist in alleviating some of the constraints that were impeding the full implementation of this project However, it also needs to be recognized that due to negotiations that were underway between the PLN and various Ministries, PLN management did request the World Bank not to intervene.

B. Evaluation of PLN’s Own Performance The evaluation of PLN’s own performance, would necessarily be more subjective than its evaluation of the World Bank. The guidance from the World Bank in terms of borrower performance as a whole, is that it needs to include both the performance of the Government as the borrower and the performance of PLN as the beneficiary of the World Bank loan. In terms of borrower performance at the Government level, more could clearly have been done to facilitate the implementation of the right of way issues especially when it came to conservation forests and arrangements with land holders within the scope of the law in Indonesia. The performance of PLN as the beneficiary must necessarily be somewhat more subjective. However in all candor, it needs to be recognized that PLN worked closely with the World Bank in almost every aspect of the implementation process and has diligently met the monitoring and evaluation requirements set forth in the original project implementation plan. The procurement process conducted by PLN conformed in every way to the requirements of the World Bank’s procurement guidelines. But more than that, the procurement was efficient and the resulting costs were well managed. One example of this would be on the issue of having parallel transmission lines instead of uprating the transmission lines as was originally planned under the project. Due to the highly competitive procurement procedures adopted by PLN, the cost of the parallel lines initially came in no higher than the cost of the original uprating of the transmission lines. Except for two contracts, all the other contracts for substations and transmission lines have been executed satisfactorily. The quarterly progress reports have been diligently provided with the regularity, clarity and the required level of detail. PLN has also worked closely with the World Bank to make changes as needed promptly and diligently, for example transferring transformers from one location to another in order to ensure that substation loading levels and voltages regulation remain within the performance indicators of the project. All the performance indicators of the project had been met. This was certainly in part due to the efforts and diligence of PLN and staff.

7. Key Lessons Learned The project has faced several obstacles during implementation and this has yielded important lessons for the future:

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No. Problems Lessons Learned 1. Protracted process for land acquisition including

lengthy and unclear procedures for obtaining permits for land use in forestry (Perhutani and BKSDA) areas.

Better coordination between PT PLN (Persero) and all stakeholders in order to reduce the time required to secure permits for the utilization of forestry areas.

2. Lengthy and protracted compensation process for land acquisition leading to delays in project construction start.

Land acquisition issues to be resolved prior to contract signature.

3. Electrical systems being unavailable for shut down leading to a change in the project’s configuration.

Better coordination among operations divisions during project preparation in order to arrive at an optimal design configuration.

4. Poor contractor performance. Improving the procurement process (including the preparation of bidding documents) and locating the implementing unit in the appropriate department within the organization.

5. Organizational changes at PLN leading to delays in project implementation.

Organizational changes need to be followed immediately with making human resources available for timely and effective project monitoring during implementation.

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Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders N/A

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Annex 9. List of Supporting Documents

1. PAD 2. CPS/CAS 3. ISR 4. QALP Report 5. QALP Staff Rejoinder 6. Aide Memoire for ICR mission 7. Environmental assessments, EISA? 8. Quarterly Progress no. 30: July-September 2013 9. Project Paper June 2008 10. PLN Land Acquisition and Resettlement Policy Framework 11. PLN Land Acquisition and Resettlement Policy Framework - Annexes 12. Evidentiary Materials

a. ERP Savings b. Performance Indicators c. Java Bali Substation Voltages

13. Other; a. Report No. 27246-IND b. Connectivity Development Policy Loan 2 - P144774 c. Toward universal electricity access : renewable energy-based geospatial least-cost

electrification planning - Sahai Dhruva Nov 01, 2013 d. US Department of Energy: Electricity Transmission Congestion Costs:

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