World Bank Document€¦ · PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ... In cases where...

Documcnt of

The World Bank

FOR OMCAL USE ONLY

Report No. 8820

PROJECT COMPLETION REPORT

REPUBLIC OF INDONESIA

COAL MINING AND TRANSPORTATION ENGINEERING PROJECT(LOAN S-9-IND)

AND

BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATION PROJECT(LOAN 2079-IND)

JUNE 25, 1990

Energy DivisionTechnical DepartmentAsia Regional Office

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

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LIST OF AioBREVIATIONS

BACOMDAT Bukit Asam Coal Mining Development and TransportationGOI Government of IndonesiaIBRD International Bank for Reconstruction and DevelopmentIDC Interest During ConstructionMAP Maximum Austerity ProgramPCR Project Completion Report

FOR OMCIAL USE ONLYTHE WORLD SANK

Washington. DC 20433U.SA

Ohke di OwtwmGowatawm vluit

June 25, 1990

MEMORANDUM TO THE EXECUTIVE DIRECTO0t AND THE PRESIDENT

SUBJECT: Project Completion Report on IndonesiaCoal Mining and Transportation Engineering Project andBukit Asam Coal Mining Development and Transportation Project(Loans S-9 and 2079-IND)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on Indonesia - Coal dining and Transportation EngineeringProject (Loan S-9-IND) and Bukit Asam Coal Mining Development and TransportationProject (Loan 2079-IND)" prepared by the Asia Regional Office with Part II ofthe report contributed by the Borrower. No audit of this project has been madeby the Operations Evaluation Department at this time.

Attachment

This document hu a resuicted distribution and may be used by reciintu only in the petformanceof their official duties. Its contenu may not otherwise be disclosed without World Bank authoriruion.

FOR OFFIMCAL USE ONLY



COAL W.NING AND TRANSPORTATION ENGINEERING PROJECT(LOAN S-9)


TABLE OF COhTENTS

Page

Preface .................................................. ivEvaluation Summary .............................................. v

PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE ........................... 1

1. Project Identity ............................................. 12. Background .................................................. 13. Project Objectives and Description ........................... 24. Project Design and Organization.......... .................... 35. Project Implementation ................................... 46. Project Results ................................... 67. Project Sustainability ................................... 78. Bank Performance ................................... 79. Borrower Performance ................................... 810. Project Relationship ................................... 911. Consulting Services ................................... 1012. Project Documentation and Data ............................... 10

PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ....................... 11

Preface ...................................................... 12Highlights ...................................................... 12

1. Introduction ........... ..................................... 14

2. Project Background ..................... 152.1 Objective .152.2 Scope .152.3 Schedule. ......................... 162.4 System Design . 172.5 Location .172.6 Organization .17

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

TABLE OF CONTENTS (Cont.)

Page No.

3. Project Implementation . . ..................................... 193.1 Project Master Schedule .................... 193.2 Technical Deviations .......................... 203.3 Capital Costs ......................... 203.4 Notable Successes ....................... 22

3.4.1 Decision on Development of Non-Air Laya Mines ..... 223.4.2 Decision on Interim Coal Movement and Facility .... 223.4.3 Operational Constraints and Equipment Deficiencies 223.4.4 Decision to Restructure the Coordinating Body ..... 233.4.5 Management of Entities ............................ 233.4.6 Blanket Insurance ................................. 233.4.7 Decision on Second Tarahan Turnkey Contract ....... 24

3.5 Problem Issues ........................................... 243.5.1 Inadequate Survey and Investigation ............... 243.5.2 Inaccurate Technical Design ....................... 253.5.3 Land Acquisition .................................. 253.5.4 Procurement ....................................... 253.5.5 Insufficient Rupiah Financing ..................... 263.5.6 Delay of Offshore Financing ....................... 263.5.7 Poor Contractor Performance ....................... 263.5.8 Ineffective Use of Consultants .................... 273.5.9 Inadequate Project Coordination ................... 273.5.10 Problems in Training Design and Application ....... 273.5.11 Problems in Staffing and Recruiting ............... 283.5.12 Train Traffic Management Problems ................. 283.5.13 Lack of Attention to Environmental Issues ......... 283.5.14 Deviation in Coal Price Forecast .................. 293.5.15 Delay on Coal Sale and Transportation Agreements.. 293.5.16 Finlancial Performance ............................. 29

4. Bank Peforman^ee .............................................. 30

5. Conclusion and Lessons to be Learned ......................... 315.1 Conclusion ............................................... 315.2 Lessons to be Learned .. 31

5.2.1 Technical Design .................................. 315.2.2 Maximum Austerity/Valua Engineering ............... 325.2.3 Project Preparation Team .......................... 325.2.4 Project Organization Structure .................... 325.2.5 Responses to Change in Project Master Schedule .... 325.2.6 Recruitment, Staffing and Training Program ........ 325.2.7 Procurement Procedures ............................ 335.2.8 Time Value of Money ............................... 33

TABLE OF CONTENTS (Cont.)

Page No.

PART III. STATISTICAL INFORNATION .......................................... 34

1. Related Bank Loans and/or Credits . .342. Project Timetable .. 343. Loan Disbursements (Cumulative) US$million . . 344. Project Completion .. 355. Project Costs and Financing .. 35

A. Project Costs .35B. Project Financing .36

6. Project Results .. 36A. Direct Benefits .36B. Economic Impact .37C. Financial Impact .37

7. Status of Covenants .. 388. Use of Bank Resources .. 41

A. Staff Inputs .41B. Missions .42

4


COAL MINING AND TRANSPORTATION ENGINEERING LOAN

AND



PREFACE

This is the Project Completion Report (PCR) for the Coal Miningand Transportation Engineering Loan and for the Bukit Asam Coal MiningDevelopment and Transportation Project in Indonesia, for which Loans S-9and 2079-IND in the amounts of US$10 millOn and US$185 millionrespectively, were approved on May 9, 1978 and January 7, 1982,respectively. The engineering loan was refinanced under the project loan.The project loan was closed on September 30, 1989, two years behindschedule. The last disbursement was on April 4, 1990, and US$5.11 millionwas cancelled (excluding US$1.14 million cancelled in August 1986) duringApril 1990.

The PCR was prepared by the Energy Division of the TechnicalDepartment of the Asia Region (Preface, Evaluation Summary, Parts I andIII), and the Borrower (Part II).

Preparation of this PCR was started during the Bank's finalsupervision mission in May/June 1989 and is based, inter alia, on the StaffAppraisal report; the Loan and Project Agreements, supervision reports;correspondence between the Bank and the Borrower; and internal Bankmemoranda.

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COAL MINING AND TRANSPORTATION ENGINEERING PROJECTM S -9)

MUKIT AZAM COAL MINING DEVELOPMENT AND TRANSPORTATION PROJECT1LQ"V`179-IND)

PROJECT COMPLETION RRPYD

EVAL'UATION SUNY

Objective

The key objective of the Bukit Asam Coal Mining Development andTransportation Project was to assist the Government of Indonesia (GOI) tomove away from a mono-energy policy and to invest in an alternative (coal)energy development to free scarce petroleum resources and increase relatedforeign exchange earnings (para. 3.1).

Enginepring and Implementation Experience

Engineering study work undertaken under Loan S-9 was effective inproviding the technical and financial basis for Bank appraisal of thecomplex integrated (mine-rail-terminal-ship) project (para. 4.1). Theengineering study phase took longer to complete than anticipated due to thecomplex nature of rhe project scope.

Project implementation was dogged by delays, compounded byorganizational deficiencies, with the result that the original target datefor coal movement to Suralaya slipped over four (4) years. Arrangementsfor project control were ineffective (paras. 4.2 and 4.3). Projectconstruction faced many delays occasioned by inadequate qualifications ofstaff in the implementing agencies, cumbersome and biased GOI procurementprocedures, poor performance of local contractors, protracted GOInegotiations with cofinancing agencies, land acquisition, mobilization oflocal currency, and inadequate ground investigatior.s (paras. 5.1 and 5.2).Initial operations were disappointing. Mine development was slower thananticipated due primarily to poor performance of main mine equipment (para.6.3) and unsuccessful training campaigns (para. 11.1). Coal transport frominitial mine operations was slow to develop due to incomplete construction,rail operations planning deficiencies, and settlement difficultiesexperienced at the terminal site.

ProQect-Results

However, project objectives were eventually reached, which is atribute to the dedication of the implementing agencies (para. 4.4).

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International coal prices, which governed the sales price ofproject coal outk.ut and the revenue of the mine implementing agency, didnot follow the increases predicted at appraisal (para. 5.4). As acovqequence and compounded by project implementation delays, the miningcompany faced financial distress. GOI, with Bank agreement, willrestructure finar-ially the implementing age-icy, reducing its debt/equityratio to 35:65 (para. 6.3).

Project Sustainability

Following the proposed financial restructuring of the miningcompany, the project is likely to sustain an acceptable level of netbenefits throughout its economic life. Main risks to sus...ainability aredevelopment of maintenance facilities at the mine and rail components,which remain to be completed and manned with fully trained personnel (para.7.1).

Findings and Lessons to be Learnt

Implementation of such a complex integrated project has proved amonumental task for the relatively inexperienced implementing agencies,compounded by inadequate project organization and control arrangements putin place by GOI. Although ultimately, physical project objectives havebeen reached, project benefits in terms of financial results can and willonly be reached by substantial financial restructuring of the implementingagency. This has been necessitated, inter alia, by falling internationalcoal prices not anticipated by the Bank (para. 5.4).

The critical importance of developing an adequate organizationalstructure for project implementation that focuses on establishment ofeffective project coordination and monitoring cannot be overstressed (para.9.4). Streamlined procurement procedures are critical to theimplementation of high capital cost and complex integrated projects (para.9.4). In cases where implementing agencies have limited experience ofdevelopment of advanced technology and complex projects, turnkey contractoptions should be considered as an alternative implementation arrangement(para. 9.5).

Although there are minor differences in focus and presentationformat between Parts I and II, the Bank and the Borrower are in agreementregarding the definitioi, and analysis of major implementation issues;project results; Bank and Borrower performan-e; and lessons to be learnt.

PROJECTC COMPLETION REPORT

REPU4LIC OF INDONESIA

COAL MINING AND TRANSPORTATION ENGINEERING PROJECT(LOAN S-9)

BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATION PROJECT(LOAN 2079-IN)

Part I

1. Project Identity

Project Name - Bukit Asam Coal Mitling Development andTransportation Project

Loan No. - 2079-INDRVP Unit - AsiaCountry - IndonesiaSector - EnergySub-sectors - Coal and Transpo-

2. Background.

2.1 Prior to 1945, Indonesia relied to a large extent on coal andhydroelectric energy for its commercial ernergy. owever, subsequentavailability and exploitation of indigenous oil ' I the country to developa petroleum-based energy sector, and domestic coal production, which hadpreviously exceeded 2 million tonnes per year (mtpy), slumped to less than0.5 mtpy through the 1970's. The oil crises of the 1970's and theresultant greatly increased opportunity cost of utilizing indigenous oil,prompted the Government of Indonesia (GOI) to formulate a strategy ofdeveloping alternative energy sources. Repelita III (the third Five-Yearplan period) gave first priority in the energy sector to the d- elopment ofa more balanced domestic energy cors'imption, encouraging the development ofcoal for internal consumption wherever technically and economicallyfeasible. In 1976, a Presidential Instruction was issued requiring themaximu.. possible utilization of coal for future domestic electric powergeneration and industrial use.

2.2 A comprehensive Java (Electric Power) System Development Studyfinanced by the Bank under the Third Power Project (Credit 399-IND, signedJune 1973) identified the Suralaya Power Scheme in West Java. Theselection of Suralaya as the major center for power development in WestJava followed Bank-financed feasibility assessment under the Fourth PowerProject (Credit 1127-IND, signed June 1975). Construction of the firstphase Suralaya Units I and II was undertaken with Bank assistance under theEighth and Ninth Power Projects (Loans 1708-IND and 1872-IND, signed June1979 and June 1980 respectively). To accord with the 1976 Presidentialinstruction (para. 2.2), the power units (initially 2 x 400MW) weredesigned to burn oil and/or coal (dual-fired).

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2.3 In 1976 and following the Presidential Instruction, the State CoalMining company requested Bank assistance to rehabilitate the Bukit Asamcoal mining operations in South Sumatra. Initial GOI thoughts forrehabilitation were modest and through Bank financed technical assistance(Engineering Loan S-9, signed May 1978), a series of studies wereundertaken to investigate rehabilitation of the Bukit Asam coal area todevelop to a coal production level of 3.0 mtpy to feed the Suralaya powerunits I/HI (2.4 mtpy) and to service other domestic industry coalrequirements (0.6 mtpy). The studies effectively addressed major physicalissues relating to assessment of available coal reserves and coal quality,mine system and technology selection, and the selection of an optimaltransport system to carry coal through South Sumatra and across the SundaStraits to West Java and the Suralaya site.

2.4 With the growth of domestic demand for oil outpacing the increasein oil production ir. the late 1970's and oil exports showing a decliningtrend, GOI recognized the urgent need to increase investment in thedsvelopment of other energy sources, particularly coal, to ensure continuedand, if possible, increased petroleum export earnings critical toIndonesia's economic position. GOI and Bank staff identified (1978/79) thebenefits of developing the Bukit Asam coal mine and of developirg andintegrating related transportation to carry the coal to Suralaya. Thecomponents of the project were appraised in Octooer and December 1980 and apost-appraisal mission was undertaken in June/July 1981. Funds (US$5million) were provided to initiate coal exploration around Bukit Asam andelsewhere in Indonesia. Utilization of these funds is referenced in theProject Completion Report dated May 4, 1989 for the Coal ExplorationProject (Loan 215$ IND).

3. Project Obiectives and Descrixtion.

3.1 The key project objective was to assist GOI to move away from amono-energy policy and to invest in an alternative (non-tradeable coal)energy development to free scarce petroleum resources and increase relatedexport earning potential.

3.2 The development of the Bukit Asam Coal Mining and TransportationProject - involving the development of the Bukit Asam coal mine in SouthSumatra, rehabilitation and renewal of rail facilities, development of acoal terminal, and provision f a ship to transport coal to the Suralayapower plant on Java - was a first-step in meeting this objective. The keyproject components were:

(i) engineering, procurement, and construction of an openpit coalmine, and related mine infrastructure, to produce 3.0 mtpy coal to feedSuralaya Units I/II and local industrial consumers;

(ii) engineering and procurement for rehabilitation and renewal of405 km. of rail track from the mine to a proposed coal terminal on thesouthern coast (Tarahan) of South Sumatra;

(iii) turnkey engineering, procurement and construction of a coalterminal at Tarahan; and

(iv) engineering and procurement of a self-unloadirg 9,200 DWTcoal ship to transport coal across the Sundra Straits to Suralaya.

3.3 Other project components included development of a mine townsite,rehabilitation of the existvig coal terminal at Kertapati (Palembang)through which coal delivery to Suralaya could be initiated pendingcompletion of Taral-an, and develnpment of a short-term Muara Tiga mineadjacent to Bukit Asam that could generete early coal pending full coalproduction at Air Laya (Bukit Asam).

4. Project Design and Organization

4.1 The conceptual fokindation for the project design was developedthrough extensive pre-feasibility and feasibility study programs preparedby international consultants and financed under the Engineering Loan S-9.These studies were reviewed by Bank staff and GOI agencies and the conceptswere shared and understood mutually by all concerned parties. The scopeand scale of the project were appropriate and particularly timely in lightof the objective of supplying coal to the Suralaya power plant and localconsumers.

4.2 The roles and responsibilities of the government institutions andagencies responsible for the project were clearly defined and understood.However, the Bank and the Borrower were not in full agreement, at the timeof appraisal and at loan negotiations, regarding the most appropriateinstitutional structure for project control, coordination, and monitoring(see also paras. 8.2 and 9.3). Bank staff held the view that gc.vernmentshould place the project under the direct control and supervision of asenior government official or Authority in order to ensure fullcoordination across the mining and transport sector components of theproject, and to ensure that overall project implementation was effectivelycontrolled and that any implementation issues received the attention ofpersonnel in a position to make valued and quick corrective decisions. GOIpreferred to permit individual entities (mine, rail, terminal and ship) tocontrol their own implementation activities including schedule and costs,and that overall project coordination be placed in the hands of a SteeringCommittee, chaired by the Secretary General of Communications with theDirector General of Mines as Deputy Chairman, and assisted by a governmentProject Monitoring Group that would track progress by individual entitiesand ensure integrated scheduling and efficient cost control, thus providingan early warning system in the event schedule slippage or cost overrunsdeveloped. This arrangement was accepted by Bank management.

4.3 In practice, this organizational structure was ineffective:project monitoring and cost control analysis, which depended on monthlyreports from individual entities, was typically 3-4 months behind time and,therefore, of little value in quickly identifying implementationdifficulties and issues; reports on monitoring were informative rather thanissue- and action-oriented; and the Steering Committee, although attentiveto the concerns of Bank supervision missions regarding implementationissues, was ineffective in controlling the project and ensuring thatcorrective action was quickly taken or that issues were raised to a highenough level in Government to ensure rapid resolution of them.

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4.4 It was the above aspect of project organization and design thatmainly delayed project implementation. The eventual attainment of theprimary project objective of supplying 200,000 tonnes of coal per month toSuralaya is a tribute to the dedication of successive President Directorsof the individual project entities.

5. Project Implementation

5.1 The most notable variance between planned and actual projectimplementation was the progressive cumulation of project delays. Theoriginal target date for full coal movement from Bukit Asam to Suralaya wasJune 1985, a target that was achieved only in July 1989, an overall projectimplementation delay of 49 months. Even by that date, project constructionwas not completed (critical mine and rail workshops and warehouses remainedin construction) and the Bukit Asam (Air Laya) mine will need to beaugmented by coal production from adjacent contract mine areas (notincluded in the project scope or cost) until at least end 1990. Projectdelays were many and varied, and dogged the project from the outset ofimplementation, and throughout construction and early years of operations.The main reasons for project slippage included:

o deficiencies in project control, coordination and monitoringo inadequate qualifications of project entity staffo cumbersome and biased procurement procedureso poor performance of local contractorso protracted negotiations with cofinancing agencieso delayed land acquisitiono delays in mobilizing local currencyo inadequate original ground investigations

5.2 A more candid dialogue with government representatives during loannegotiations could have led to improved organizational arrangements forProject control and therefore, improved project implementation (para 8.2).At appraisal, project staff recognized that project entities would need toupgrade the qualifications and experience of key staff by appropriaterecruitment and trainin-. Unfortunately, implementation was plagued by theinability of project entities to recruit personnel with the requisiteskills to assimilate project technology. Proposals developed by theentities and their international consultants to facilitate recruitmentefforts by the development of appropriate compensation packages for theproject, more in line with private sector packages, were not in line withexisting Ministerial scales and were found unacceptable by GOI. Duringappraisal, allowances were made for the likelihood of Drocurement delaysbut the lengthy deliberations and apparent bias of the GOI centralprocurement agency (SEKNEG), and its complex procedures, were notanticipated by project staff or indeed, by project entities. Localcontractors were frequently selected on other than a lowest evaluatedbasis, and unit contract rates were frequently negotiated downward, withthe result that many local contractors were selected that lacked therequisite physical, human, and financial resources to undertake their workprogram. A more thorough review of government procedures and approvalprocesses for local procurement would have sharpened Bank appreciation ofthis issue and led Bank staff to initiate discussions with GOI regarding

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the benefits of streamlining procuLement and bid evaluation procedures topreserve project benefits. GOI incurred various implementation delaysthrough drawn-out cumbersome negotiation with cofinanciers. Initially,many delays were occasioned by development of a GOI Counter PurchasePolicy. At the inception of the project, a 10 month delay occured infinalizing the Tarahan contract and the project master schedule had to besubstantially revised at this early stage of *lementation. Similardelays occured subsequently. Land acguisitii.t was a major issue during theearly years of the project. At both the mine and rail sites, cumbersomeand time-consur. ̂ inventorization and compensation procedures led tosubstantial e...tlys -n completion of mine service facilities and developmentof a rail con -:ii. into Tarahan. OI faced increasing budget constraintsthroughout prc.J,.t implementatior and scheduled equity and local budgetinjections into; the mine and rail components of the project were typicallydelayed or deferred. Project entities repeatedly felt obliged to deferlocal works and the mining company was obliged to seek commercial loans atinterest rates not included in project costs. Deferral of study of bridgeabutment conditions by the rail company continue, to this day, to impactthe timely and efficient transport of coal from Bukit Asam to Tarahan.Project implementation identified weaknesses in original groundinvestigations. At the mine site, a major mine equipment (excavator)redesign was required because of the unexpected conditions of overburdenand coal and major equipment downtime, not anticipated or scheduled byproject consultants ox Bank staff, occured. Serious settlement problems atTarahan were experienced by the original Tarahan contractor. This resultedin a protracted soil investigation and legal investigation that finally ledto GOI dismissing the contractor and to the procurement of a second turnkeyarrangement. The project cost of the terminal consequently exceededestimates by US$34 million equivalent.

5.3 Project risks were defined at appraisal. These related toanticipated problems in project coordination and management, procurementdelays and availability of local funds. The definition of these risks wasaccurate, in principle, but their impact, in retrospect, wasunderestimated. Technical risks were considered few due to the well-knowntechnologies involved. However, the high technological nature of the minesub-systems selected, proved to require a substantially longer learningcurve than predicted and proposed by project consultants or allowed for inthe Bank appraisal. Sensitivity analysis undertaken at appraisalidentified the impact of various factors (delay, project costs and prices)but did not adequately consider the impact of extended delays and asubstantial deterioration of international coal prices, or the possibilityof a combination of these factors, which the project actually incurred.

5.4 A serious project risk, inadequately addressed auring appraisal,was that the opportunity cost of importing coal might not develop inaccordance with official Bank projections. The sensitivity analysisundertaken by Bank staff did not fully quantify the risk that falLinginternational oil and coal prices would seriously affect financialprojections and project viability.

5.5 A number of aspects of the project design contributed to projectimplementation delay. First, the project design was of a complexintegrated nature involving mine development, railway rehabilitation and

renewal, construction of a coal terminal and design and procurement of acoal ship. Such 'a project configuration was ambitious and more complexthan any other project previously implemented by GOI. The design of themine sub-system selected from alternatives elaborated by projectconsultants was technologically complex compared to alternative systems. Inaddition, the mine sub-system had not been successfully operated in otherLDC's within the time frame envisaged by the consultants. Organizationalarrangements for the railway sub-system were complex involving two parts,one for which the State Railway retained responsibility and another, forwhich the State Railway retained responsibility but supported by extensivetechnical assistance. This arrangement led to confusion ofresponsibilities and inconsistent implementation arrangements. Althoughthe design and construction of the Tarahan coal terminal was placed in thehands of a turnkey contractor, unforeseen ground conditions led to severesettlement, necessitating long investigations and the eventual dismissal ofthe contractor and the appointment of a second turnkey contractor. Thisconstruction delay was the longest single project slippage of 41 months.

6. Project Results

6.1 The primary project objective of developing the Bukit Asam mineand related transport infrastructure to supply fuel requirements ofSuralaya power plant was met in July 1989, with the start of delivery of200,000 tonnes coal per month to the power plant. The major variancebetween planned and actual project implementation schedule occurred dueprimarily to delays occasioned by sub-optimal organizational arrangements,procurement difficulties and delays, delays in mobilization of local funds,delays in railway track upgrading, and settlement problems at Tarahanterminal (Section 5).

6.2 The installed project cost at project completion is estimated atUS$811 million, 28% below the appraisal estimate of US$1123.9 million. Thethree principal reasons for the cost reduction are devaluation (cumulative186%) of the local currency against the US$ over the project implementationperiod; competitive costs for imported equipment, obviating the need toutilize US$ 140.9 million physical and price contingencies; and a maximumausterity program initiated by GOI during detailed engineering.

6.3 However, despite the project cost reduction, delays in projectimplementation, slower than planned build-up of coal production andtransport to Suralaya and other domestic consumers, and a continuing weakinternational coal market which depresses the price for project coal, theproject financial rate of return is estimated ar 3.4%.I/ This compareswith the estimate at appraisal of 11.7%. Similarly, the economic rate of

J/ The Borrower has calculated a financial rate of return "in theneighbourhood or 6%" (Part II, para. 3.5.16). This calculation wasbased on an allocation of part of the capital costs of the railwaycomponent of the Project to a "within the Project" scenario. Thisprocedure follows that of the Bank's SAR but, due to the quitearbitrary nature of the investment split, was not included in theBank's calculation of the estimated FRR at Project completion.

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return is estimated at 2.2% compared to the appraisal estimate of 12.2%.The financial distress that the project caused to the State Mining Companyled the Bank and Government to review the company's financial structure.GOI propose to reduce the debt/equity position of the company from theoriginally proposed 60:40 to 35:65 by the assumption of certain of the debtincurred through project development. The Bank has supported thisproposal, in principle, which will enable the company to operate in apositive cash environment in the future without further subsidy. A finalfinancial structure will be reviewed by GOI at project completion when fullproject costs are evaluated.

6.4 Even recognizing the lower than anticipated financial and economicbenefits of the project and the need for GOI to restructure financially themining company, the project has facilitated GOI's move away from itsearlier mono-energy policies. Through recognition of the reasons for thelower than anticipated project benefits, GOI remains committed to theutilization of coal for thermal power generation and, supported by the Bankin this position, is continuing to encourage specific public and privatesector plans for expansion of coal mining, subject only to financial andeconomic viability, and domestic coal market requirements.

6.5 The project has contributed to human and regional resourcedevelopment providing substantial employment and training opportunities.Although the technology selected for the project was relatively complex,project entities committed themselves to its effective operation andmaintenance, and this has raised Indonesia's technological capacity in boththe mining and transport sub-sectors. Strengthening of state mining andtransport entities has been considerable and the capability of theseentities to undertake similar projects with much reduced technicalassistance has been considerably enhanced. The critical importance ofeffective project organization and project coordination and monitoring ofcomplex integrated projects is now more fully appreciated by GOI agencies.

7. Proiect Sustainabilitv

7.1 Following financial restructuring of the mining company, theproject is likely to sustain an acceptable level of net benefits throughoutits economic life. The ability to sustain net benefits is the main riskfactor and depends on completion of mine and rail maintenance facilitiesand the fine-tuning of mine, rail and coal terminal operational planningpractices. Technical assistance is still being provided to secure thisposition. Planned expansion of the Bukit Asam project to supply futurephases of power development, if financially viable and competitive withalternative domestic and international sources of coal, could enhance theposition of the project entities.

8. Bank Performance

8.1 The main strengths of the Bank performance were in assisting GOIthoroughly to identify, prepare and appraise the project; to provide,through its supervision effort, constructive assistance during projectconstruction and initial operations to define implementation issues and

options for their quick resolution; and to ensure that criticalimplementation issues were escalated within GOI to expedite theirresolution.

8.2 Ths main weaknesses of the Bank's performance relate to (i)inadequate emphasis during appraisal and loan negotiations on theimportance of effective organizational arrangements for project control andcoordination, (ii) an inadequate assessment of the sensitivity ofinternational coal price projections during appraisal, and (iii) aninadequate focus on environmental matters during project supervision. Inrelation to (i) above, Bank staff and regional management should havepressed, during negotiations, for project monitoring and controlarrangements that would have expedited project implementation, rather thanaccepting GOI preferences. The Bank has a considerable amount of experiencein this critical area which should have been capitalized on. In relationto (ii) above, greater care should have been exercised in undertakingsensitivity analyses of Bank commodity price projections, particularly inlight of established relationships between the supply/demand and pricing ofoil and coal. In relation to (iii) above, supervision missions should havebeen planned to include environmental specialists to assist to define andimplement action programs to ensure controlled mine drainage, effluentdischarge, and recontouring/reafforestation of mine excavation areas.

9. Borrower Performance

9.1 The Borrower's performance during project preparation andappraisal was one of total commitment and led to fundamental agreement onproject scope and the need for extensive technical assistance. Projectentities were totally committed to ensure their thorough understanding ofthe project components and of implementation issues that could beanticipated.

9.2 The Borrower and project entities took a number of successfulinitiatives at critical stages of project implementation, the most notableof which were (i) the GOT decision in 1983, faced by deteriorating oilprices and an increasingly high debt service burden, to review the benefitsof contiuing or delaying the project and to implement a Maximum AusterityProgram, which effectively minimized capital requirements while retainingthe basic project objective and targets; (ii) the development of interimcoal loading facilities at Tarahan to enable initial coal movement to beundertaken following settlement at the main terminal site that seriouslydelayed completion of permanent facilities; (iii) recognition of delays inmine technology development and implementation of contract mining aroundBukit Asam to ensure timely initial coal delivery to Suralaya; (iv)recognition of serious construction and training delays in the developmentof mine workshop and materials management facilities and decision torecruit additional international assistance to expedite operational status;(v) recognition of deficiencies in the development of rail operationsplanning and recruitment of additional international assistance to ensuresustainable full coal transport; and (vi) GOI recognition of deficienciesin project coordination and monitoring and establishment of a new andaction-oriented Steering Committee (Team Keppres 35/87) in 1987.

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9.3 The main weaknesses of the Borrower's performance were (i) lack ofinitial recognition of the importance of developing an effective structurefor project control and coordination that would have enabled issues to beidentified quickly and resolved; (ii) cumbersome and bureaucraticprocurement procedures within the project entities and ineffectiveprocessing within the GOI procurement system; (iii) cumbersome and biasedGOI decision making in relation to procurement issues and lack ofappreciation of the time-value of money; (iv) difficulties in recruitingstaff of adequate qualifications and experience, particularly to beassigned as counterparts for international technical assistance groups andfor operational training, and (v) a lack or focus on environmental matters.

9.4 There are two main lessons of experience for the Borrowerregarding the implementation of high capital cost and integrated projects.First, the critical importance of developing an organizational structurefor project implementation that focuses on the establishment of aneffective project coordination and monitoring body that can refer issues toa high enough level in GOI so that implementation, procurement and otherkey issues can be addressed and resolved without delay. Secondly, athorough review of government procurement procedures is critical to ensurethat procurement processing focuses on the benefits of the selection ofcompetent local contractors and their expeditious selection, rather thanminimizing unit costs. In addition, the importance of thorough projectpreparation and preliminary engineering, particularly in relation tonecessary ground investigations, cannot be overstressed.

9.5 In retrospect and in the event GOI would consider a future projectinvolving complex technology and cross-sector components, some benefitmight be gained by a full turnkey or BOT (Build, Operate, Transfer)contract arrangement. Alternatively, considerable care would need to betaken in the future by GOI and any supporting lending institutions toreview complex technology that has not been proven in an LDC environmentand to simplify project components and projects of an integrated nature.The importance of effective organizational arrangements for project controlcannot be overstated and is probably the key lesson to be learnt from theBukit Asam project

10. Project RelationshiR

10.1 The main strength of the Bank-Borrower relationship during projectimplementation was the continuing mutual desire to identify action plansfor the resolution of implementation issues. Unfortunately, the mainweakness of that relationship was the difficulty in identifying mechanismswithin the government system to implement action plans quickly and toescalate decision making to a level within government where the importanceof early resolution of issues could be fully appreciated.

10.2 The Bank and GOI agencies maintained close working relationshipswith key cofinanciers who typically participated constructively in projectpreparation and appraisal and in Bank supervision of the project.

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11. Consulting Services

11,1 Consultants played a substantial role during project preparation,financed under Loan S-9, taking lead responsibility for all feasibilitystudy assessments. The consultants performed well, particularly bearing inmind the complex and inter-sectoral nature of the project Engineeringcompanies played a major role during project implementation, participatingin the engineering, procurement, construction, and initial operations ofthe mine and rail components; acting as owner's engineer in supervisingconstruction of the Tarahan terminal; engineering of the caal ship; andproject monitoring. Generally, their performance was satisfactory.However, training components of the construction and operations phase ofthe project were not as successful as anticipated. On the one hand,project entities faced difficulties in providing personnel of adequatebackground and experience who could benefit from the training programs; onthe other, engineering companies did not organize their training effortsappropriately for a project of this size and complexity. In a number ofcases, consultants failed adequately to bridge the "cultural gap" with theimplementing agencies. The general implication of the involvement ofconsultants, engineering companies, contractors and suppliers was positive,and resulted in a considerable transfer of technology; nroject entities arenow so positioned that similar projects could be implemented with a lowerlevel of international support.

12. Project Documentation and Data

12.1 Legal agreements for the project were adequate throughout theimplementation period and no particular lesson can be learnt from thisaspect of the project

12.2 The Staff Appraisal Report proved an invaluable reference documentthroughout project implementation, especially for project entities, and inview particularly of the complex and cross-sectoral nature of the project.This document enabled the Borrower and the Bank to maintain a clear focuson the project objectives and to identify progressively, conceptualdifficulties that bad not and, in many cases, could not have been foreseen.

12.3 Data relevant to the Project Completion Report were readilyavailable. However, because of the complexity of the project and the timescale from project preparation through project completion, considerabletime was necessary to assimilate technical and cost project data.

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REPUBLIK INDONESIATIM PENGARAH

PROYEK PENGEMBANGAN PEMBANGKIT TENAGA LISTRIK(TIM KEPPRES 35/87)

PROJECT COMPLETION REPORTPART 11

BUKIT ASAM COAL MINING DEVELOPMENTAND

TRANSPORTATION PROJECT

Prepared by:

Suralaya Working TeamPTDA

PT Pelayaran Bahtera AdhigunaPJKA

PT PANN

Assisted by:

REDECONIGedung Patra st Floor, J. Jend. Gatot Subro 32-34 Jakart 1210

Phone: (021) 510215;511821.511824; 513927. Fax:(021) 515133, Telex: 82182 REWOCN IA

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PREFACE

This paper is Part II of the Bukit Asam Coal Mining D-elopment andTransportation (BACOMDAT) Project Completion Report 'ared by theGovernment of Indonesia (GOI) as the Borrower to fulfill .. obligation inaccordance with Loan Agreement 2079-IND between the GOI and the World Bank(IBRD). This report describes the implementation and the initial operation of theProject, the cost summary, the benefits derived or to be derived from the Project,the performance of the Borrower and the Bank, and the attainment of the loan'sobjectives.

The GOI appreciates the contribution made by all parties in the preparation of thisreport. It is the GOI's intention that this report is to be used as a reference by allGovermnent Agencies involved in similar projects and by the IBRD as it exercisesits supervisory activities on projects in Indonesia.

HIGHLIGHTS

The BACOMDAT Project is an integrated project whose main objective is to supply2.4 MTPY of coal to the Suralaya Steam Power Plant Units 1 and 2. To meet thisobjective, the coal mine at Bukit Asam was to be developed to produce another 2.4MTPY of coal in addition to the present 0.6 MTPY Bukit Asam had been producingfor the local market, the 420 km railroad between the mine and coast was to beupgraded to sustain unit trains with an 18 tonne axle load, a coal terminal was to-bebuilt to receive and ship the coal, and a 9,200 CDWT self-unloading bulk carriervessel was to be purchased to transport 2.4 MTPY coal from Tarahan across theSunda Strait to Suralaya.

The Project's objectives are in line with the GOI's policy on energy diversification.These goals are to shift from the use of mono-energy based on oil to poly-energybased on coal, natural gas, hydro power, geothermal, solar, and other appropriatesources. It is a complex project in terms of its costs, the diverse sources of fnanci9g,and the necessity that many Government agencies, regulatory bodies, State ownedcompanies, contractors and suppliers integrate their activities and timetables tomeet the Project's objectives.

The GOI and IBRD originally agreed that the Project infrastructure would becompleted and that Suralaya would begin receiving 2.4 MTPY of coal in June 1985,however full production was not achieved until July 1989 and the remaininginfrastructure i.e. mine service facilities, railway workshops and permanenttelecommunications system will not be complete until January 1990. The Projectwas forecasted to cost Rp.319 billion and JS$674 million. Project delays haveincreased costs, however the increased costs were offset, in part, by theGovernment's Maximum Austerity Program (MAP). The Project is now forecastedto cost at completion (not including deferred costs or costs of substitute fuel forSuralaya) Rp.532 billion and US$519 million. The delays in the Project are due tothe following factors:

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- Lack of project coordination and project control.- Poor performance of contractors and consultants.- Inadequate survey, design and technology selection.- Governmental regulations and bureaucracy.- Constraints on local funding due to the condition of the National Economv.- Failure to recruit and train qualified personnel.- Inadequate preparation for the system's operation.

In spite of the delavs, the Project has been completed and the GOI has derived thefollowing benefits:

- A working prototype of an integrated system for supplying power p'ant steamcoal;

- The development of a 'state of the art' continuous coal mining system usingBucket Wheel Excavators;

- A modern terminal facility capable of handling more than 3.0 MTPY of coal;- 420 km of 18 tonne axle load railroad track;- A 9,200 CDWT self-unloading vessel to transport 2.4 MTPY of coal to the

Suralaya Steam Power Plant;- Coordinating teams and regulatory bodies experienced in planning and

managing major development projects; and- A work force trained in the construction and operation of an integrated coal

mining and transportation system.

With additional investment, relatively small compared to original investment, thesefacilities and resources can be easily upgraded to supply 4.4 to 5.1 MTPY of coal toSuralaya Steam Power Plant Units 1 through 4. The experience gained on. theBACOMDAT Project is directly transferable to other development projects inIndonesia and abroad.

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1. INTRODUCTION

This report compares what was achieved by the BACOMDAT Project to the initialplans. Tlh,e report is issue oriented rather than a chronological description. Theissues were selected for their ultimate influence on the Project's scope of work,schedule, costs, and financial performance. The issues are categorized as "ProblemIssues" and 'Notable Successes'.

This report is based on data collected from the principal Project entities PTBA,PJKA, and PT PANN, the Project Monitoring Group and Steering Committee, andProject records. The contents have been reviewed carefully by all Project entities,the IBRD, and the steering committee to ensure that it is comprehensive andaccurate.

This report is organized f"i follows:

o The Introduction describes the purpose and the methodology of the veport;

o The Project Description presents background material to explain theProject's origin and objectives;

o The Project Implementation focuses on the negative and the positive issuesof the Project; and finally,

o The Conclusion consists of a summary of the report and a description of thekey elements which should be applied to other projects in Indonesia.

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2. PROJECT BACKGROUND

The BACOMDAT Pro ect is a continuation of the IBRD Engineering Loan S-9,which was included in IBRD Loan No. 2079-IND. The scope of work of Loan S-9,as quoted from MCS Project Services Contract, is ".... a feasibility study and thedesign and partial engineering of an optimized rining and transportation system forthe development of Bukit Asam coal mines located at Tanjung Enim on SouthSumatera and the delivery of its product by rail and sea to Sura!aya on the westerntip of Java." Loan 2079-IND was signed on January 22, 1982 following a 1980feasibility study and a 1981 IBRD appraisal report.

2.1 Objective

The BACOMDAT Project is an integrated project whose main objective is to supply2.4 MTPY of coal to the Suralaya Steam Power Plant UIidts 1 and 2. To meet thisobjective, the coal mine at Bukit Asam was to be developed to produce another 2.4MITY coal in addition to the present 0.6 MTPY coal Bukit Asam had beenproducing for the local market, the 420 km railroad between the mine and coast wasto be upgraded to sustain unit trains with an 18 tonne axle load, a coal terminal wasto be built to receive and ship the coal, and a 9,200 CDWT self-unloading bulkcarrier vessel was to be purchas(d to transport 2.4 MTPY coal from Tarahan acrossthe Sunda Strait to Suralaya.

2.2 Scope

The scope of work is based on the 1980 Feasibility Report and the 1981 IBRDAppraisal. The Project was implementea by three entities which were divided intoseven sub-systems. The three entities are the mine (PTBA), the railway (PJKA) andthe sea transport (PT PANN).

PTBA, a government owned coal mining company was to establish or upgrade, ownand operate the Air Lya Mine, Muara Tiga Mine, Mine Townsite, TarahanTerminal, and Kertapati Terniinal. PTBA's Scope of Work was as follows:

Air Wva MinePurchase and install five BWE's, supporting belt wagons, two spreaders, onestacker/reclaimer, one train load out facility, approximately 30 km of belt conveyor,and supporting facilities. Construct the Mine Service Facility and purchase and

stall its equipment. Construct a stockpile facility.

Explore and mine coal from the Muara Tiga Kecil mine.Mine IowniakeConstruct approximately 2460 houses, 96 dormitories and, power and water supplyfacilities for PIA employees.Taraban TeriminalConstruct and install the rotary car dumper structure, pri nary and secondarycrusher, stockpile area, coal jetty, and purchase and install a shiploader and its beltconveyor.Kehabati TerminalRehabilitate the coal handling equipment and construct the terminal building.

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PJKA (the Indonesian state railway) was to improve and operate the railway inSouth Sumatera; its scope of work was as follows:

Rehabilitate and renew 420 km of railway track and strengthen the railway bridgesto sustain 18 tonne axle loads. Const. uct the mine and terminal rail loops.Purchase and install a permanent telecommunications system and construct towersfor the telecomnmunicatiorns system. Purchase 259 coal wagons (assembled inIndonesia) and 15 locomotives with 18 tonne axle load and construct wagon andlocomotive maintenance facilities.

The above scope of work will be carried out by PJKA's project management calledKP3BAKA and the operation of the coal transportation from Tanjung Enim toTarahan will be executed by South Sumatera Region of Indonesian State Railway(ESS).

PT PANN, the National Fleet Development Corporation was to purchase the self-unloading vessel and lease it to PT Pelayaran Bahtera Adhiguna for operation.

2.3 Schedule

The original Project Master Schedule of the Project was approved byPOKKORLAK in July 1982 and issued in MCS Overall Project ImplementationReport - August 1982. This Schedule stated that the system should be ready for coalmovement to Suralaya through Tarahan in June 1984 and come into full designcapacity operation (produce and transport 200,000 TPM of coal) in June 1985.

The key completion dates for the Project were as follows:

OriginalSub-system Key Activities Schedule

Air Laya Mine: - Ready to begin operation 01 Jun 1984of coal load-out station

- Start operation of 01 Oct 1984first mine sub-system

- Mine Service Facilities complete

Muara Tiga Mine: - Begin coal production 01 Jan 1984

Tarahan Terminal: - Ready to receive 01 Jun 1984and stockpile coal

- Ready to start operation 01 Aug 1984(handling capacty of200,000 tonnes/month)

Kertapati Terminal: - Complete terminal upgrading 01 Nov 1983

Mine Townsite: - Complete 2460 houses, 1988 2)96 dorms and townsite facilities

Railway: - Ready to begn coal 01 Jun 1984transport to Tarahan

- Commence operation at 01 Apr 1985200,000 tonnes/month

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Sea Transport: - Self-unloading coal 01 Aug 1984carrier available

Suralava: - Commence Unit 1 on 15 Aug 1984Project coal at100,000 tonnea/month

Note: 1) Not included in Original Schedule.2) Original Schedule did not specify month.

2.4 System Design

An IBRD financed engineering study (Loan S-9) was completed in 1980. The mainpurpose of the studv was to find alternative for rmining system to optimize thedevelopment Bukit Asam coal mines (BWE vs shovel and truck) and, railwaytransportation route i.e. northern route (via Kertapati/Palembang) vs southernroute (Lampung bay). The proposed design was accepted by GOI and IBRD had noobjection to the proposed design. The accepted design was then used as abenchmark during the construction stage. The design consists of four major items:

o Use 5 Bucket Wheel Excavators in a continuous mining system to mine theAir Laya coal deposit.

o Transport the coal to the coast by the southern route using 4 sets of train perday, each carrying 40 wagonm ioaded with 50 tonnes of coal and hauled by 2locomotives.

o Construct a coal terminal in Tarahan consisting of a rotary car dumper, a setof belt conveyors and a ship-loader.

3 Purchase a specially designed self-unloading coal vessel which fits the coaljetty in Suralaya.

2.5 Location

The Air Laya coal deposit in the Bukit Asam area, Tanjung Enim, South Sumaterawas seiected for development. This decision was based on previous study performedby PN Batubara and Shell Minjbouw N.V. in June 1975. This study proved that AirLaya mine contain massive deposits capable of producing up to 3.0 MTPY of coalfor more than 30 years. The location for coal terminal was selected in Tarahan,approximately 7 kms south of Panjang harbour in Lampung.

2.6 Organization

Prior to the project implementation of engineering study (Phase I) the Departmentof Mines and Energy and Department of Communications agreed to set up aSteering Committee with the Secretary General of the Depacament ofCommunications as its chairman. Twenty eight members were selected representingall Government agencies involved in the Project. This committee's charter was toestablish guidelines for Project implementation. Hence, the Steering Connittee swtup an implementing body called KP5BA to coordinate the engineenng study whosemember consists of representatives from the Department of Mines anid Enzqgy.Departmer.t of Communications, state owned Coal Mining company called PNTBand PJKA and other respective government agencies. Ater the compietion ofengineering study, KP5BA was replaced by POKKORLAK and the chairman ofKP5BA became the Permanent Secretary of POKKORLAK The main assignment

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of POKKORLAK was to coordinate the activities of the Project's sub-systems, toidentify and assist the entities to resolve problems, and to act as Project monitor.This included tracking Project progress and costs against budgets, schedules andtechnical specifications. The members of POKKORLAK consisted of the PresidentDirectors from the newly created state owned Bukit Asam Cola Mining Company(PTBA), the railway, and the sea transport entities. The position of POKKORLAKchairman was rotated every 6 months among the President Directors of the entities.Daily work was handled by a Permanent Secretary assisted by 7 professional staff.

In October 1987 the original Steering Committee was replaced by a new SteeringCommittee called Team KEPPRES 35. Following the creation of Team Keppres35/87, the Department of Communications and the Department of Mines andEnergy dissolve POKKORLAK.

Team KEPPRES 35/87 is headed by the Minister of Research and Technology, andconsists of 6 ministers. The Steering Conumittee's responsibility has been expandedto include the coordination and supervision of Indonesia's power plant projects andthe management of their fuel sources.

Team KEPPRES 35/87 set up three working teams which are coordinated bv theSecretary of Team KEPPRES. These working teams are Suralaya Working ream,Paiton Working Team, and Gresik Working Team. The Suralaya Working Team,replacing the previous coordinating body of POKKORLLk is responsible for theSuralaya Steam Power Plant which includes the Bukit Asam Mine, railway and shipas the plant's irtain source of coal.

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3. PROJECT IMPLEMENTATION

3.1 Project Master Schedule

The first contractor was on site and working in the last quarter of 1981. Theeffective date of the IBRD loan was April 1982. Th( original Project MasterSchedule (PMS), dated August 1982, stated that the system should be readv for coalmovement to Suralaya through Tarahan in June 1984 and come into full designcapacity operation in June 1985. However, as a result of a 10 month delay in *.heprocurement of the first Tarahan Turnkey Contract due to lengthy financingnegotiation, the PMS was revised effective August 1983. The revised schedulecalled for coal movement to Suralaya to start April 1985 and full d(.sign capacitycoal movement on 01 June 1986.

The actual completion of the key activities as compared with the revised ProjectMaster Schedule is as follows:

RevisedSub-System Activity Schedule Actual

Air Laya Mine: - Ready to begin operation 10 Dec 1984 26 May 1986of coal load-out station

- Start operation of 01 May 1985 01 Nov 1985first mine sub-system

- Mine Service 01 Jun 1985 Jan 1990 1)Facilities complete

Muara Tiga Mine: - Begin coal production 01 Jun 1985 01 May 1986

Tarahan Terminal: - Ready to receive 04 Apr 1985 15 Aug 1988and stockpile coal

- Ready to start operation 04 Jun 1985 01 Nov 1988 2)(200,000 tonnes/month)

Kertapati Terminal: - Complete terminal 15 Mar 1985 01 Oct 1986upgrading

Mine Townsite: - Complete 2460 houses, 1989 31 Jul 1989 3)96 dorms and townsitefacilities

Railway: - Ready to begn coal 04 Apr 1985 01 Jun 1986transport to Tarahan

- Completion of 18 tonne 29 Dec 1987axle load

- Transport 200,000 01 Jun 1986 01 Jul 1989tonnes/month

Sea Transport: - Self-unloading coal 01 May 1985 01 May 1985carrer available

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Suralaya: - Commence Unit I fullcommercial operation on:'Project coal 01 Jul 1985 01 Jul 1987 4)'Non-Project coal 15 Nov 1985

- Commence Unit 2 fullcommercial operation'Project coal 01 Jun 1986 01 Jan 1989 5)'Non-Project coal - 07 May 1986

Note: 1) Forecast completion.2) Actual coal throughput of 200,000 tonnes/month was achieved

in July 19893) The revised schedule did not specitf the month. The scope

of work was reduced and onlly 275 houses were built.4) Receive 100.000 connes/month of Project coal.5) Receive 200,000 tonnes/month of Project coal.

3.2 Technical Deviations

The original technical specifications have been modified several times over the lifeof the Project. Certain of the modifications are technical deviations which reflectadditional information on physical conditions, others are management decisions tocompensate for problems and delays elsewhere in the Project, while othermodifications reflect tight financial constraints imposed by the GOI's MaximumAusterity Program (MAP). The principal modifications are listed below.

O Develop and expand Muara Tiga Mine to supply coal during constructionand initial coal movement of Air Laya Mine.

o Decrease the number of townsite houses to be built and implement a homeownership program.

O Eliminate the ballast plant for the railway.o Eliminate the concrete sleepers plant.O Rearrange mine mud removal contracts.O Revise the dumper pit foundation and relocate it to the other side of the

Tarahan Terminal rail loOp.o Implement an interim coal movement program.

In 1983 the GOI implemented its MAP following a major drop in world oil prices.Portions of the Project dependent on Rupiah financing were reexamined and inmany cases reduced, delayed or eliminated. For example, the decisions to eliminatethe concrete sleeper and ballast plants and to reduce the number of townsite houseswere based on a MAP analysis. Other deviations from the original technicalspecifications were in response to the availability of additional information and tocompensate for delays elsewhere in the project.

3.3 Capital Costs

The foreign portion of the capital costs for the Project is lower than originallyprojected; however, the Rupiah portion is higher. In equivalent dollar terms, thetotal Project cost has decreased by approxmately US$393.7 million or 33.2%. Thisdeviation is due in part to the transfer of budget items such as PTBA spare partsfrom foreign currency loans to Rupiah loans (USS10.0 million), the GOrs MAP

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(US$12.2 million), transfer of certain capital costs to start-up operating accounts(USS43.2 million), and devaluation of the Rupiah (US$328.3 million). Acomparison of original estimates to current forecast is shtown below.

PROJECT COST REPORT

Original Current DeviationDescription Budget Forecast (%)

Mine Townsite LOC 54,981.00 31,605.00 42.52%FOR 1,179.00 0.00 -100.00%TOT 32,596.71 18,060.00

Air Lava Mine LOC 127,455.00 201,718.00 58.27%FOR 405,248.00 260,842.00 -35.63%'TOT 478,079.43 376,109.43

Tarahan Terminal LOC 22,868.00 32,885.00 43.80%FOR 43,656.00 89.500.00 105.01 TOT 56,723.43 108.291.43

Kertapati Terminal LOC 1,018.00 6,190.00 508.06%FOR 2,480.00 3,042.00 22.66%TOT 3,061.71 6,579.14

Muara Tiga Mine LOC 636.00 13,867.00 2,080.35%FOR 25,367.00 0.00 -100.00%TOT 25,730.43 7,924.00

PTBA Management LOC 4,912.00 18,780.00 282.33%FOR 0.00 280.00TOT 2,806.86 11,011.43

Total PTBA LOC 211,870.00 305,045.00 43.98%FOR 477,930.00 353,664.00 -26.00%TOT 598,998.57 527,975.43

Railway LOC 103,460.00 186,741.00 80.50%FOR 161,319.00 132,343.00 *17.96%TOT 326,855.00 239,052.14

Sea Transport LOC 1,404.00 1,249.00 -11.04%FOR 31,293.00 16,710.00 -46.60%TOT 32,095.29 17,424.71

Project Monitoring LOC 2,462.00 2,430.00 -1.30%FOR 3,636.00 5,357.00 47.33%TOT 5,042.86 6,745.57

Total Project Cost LOC 319,196.00 495,465.00 55.22%FOR 674,178.00 508,075.00 -24.64%TOT 1184,892.00 791,197.86

NOES:LOC (Local Financin&) = Million RpFOR (Foreign Financmg) = Thousand USS (1 US$ = Rp.1750)TOT (otal inancing) = Thousand USS (1US$ - Rp.1750)

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3A Notable Successes

The BACOMDAT Protect was not without problems. However the GO0, theIBRD, and the Project s management staff were able to minimize the negativeeffects of many of these problems. Notable Successes describes the way in whichmany of these problems were handled.

3.4.1 Decision on Development of Non-Air Laya Mines

As it became apparent that production from the Air Laya Mine would be delayed, itwas recommended that other coal resources should be developed to fulfill coaldemand for the first four years of the Project. Therefore, a sub-system called MuaraTiga Mine (later called Non-Air Laya Mine) was set up to produce up to 1 MTPY ofcoal. This arrangement provided coal ior the Suralaya Steam Power Plant in 1984,two years before the Project w as able to deliver coal at design capacity via theTarahan Permanent Facilitv and five years before the Air Laya mine would be ableto produce 200,000 TPM. - This arrangement has been expanded to include cnalfrom Kelawas Mine and Air Petai Mi;ne. which were later included in the Non-AirLaya Mine.

3.4.2 Decision on Interim Coal Movement and Facility

In September 1985, as a result of settlement problem in Tarahan Terminal, Projectmanagement agreed to implement a program on Temporary Coal Mining,Transportation and Handling Facilities. The program was to build a temporaryfacility at Tarahan to handle coal shipments until the Tarahan Terminal PermanentFacility could be completed, installation of wooden sleepers on the bottom of coalwagons to carry 60% of the design capacity weight, and adjustment of Muara TigaMine coal production to meet this program.

The temporary facility consisted of a car unloading station, a set of belt conveyorsconnecting the unloading site to a stockpile and the shiploader, and a stockpile witha capacity of 60,000 tonnes. This facility could handle a maximum of 100,000 tonnesper month and received coal on 13 tonne axle load trains from the Non-Air LayaMline. The Project was able to move approximately 60,000 tonnes/month throughthe temporary facility for a total of 1.8 MT coal from June 1986 to September 1988.This arrangement was running for more than two years before the commencementof full design capacity operation. After the completion of Tarahan TerminalPermanent Facility, with small modifications, the equipment was used for anexpansion of Suralaya oil jetty to become coal jetty.

This decision, coupled with the decision to develop the Non-Air Laya Mine, reducedthe amount of coal purchased for Suralaya from non-Indonesian sources and was amajor source of MA revenue during constructionL

3.4.3 Operational Constraints and Equipment Deficiencies

The Mine implemented an action plan on Operational Constraints (OC's) andEquipment Deficiencies (ED's) in May 1987. The plan identifies 26 areasoperational constraint and 7 equipment deficiencies. The priority of this task was toresolve the problem of the lake mud removal contract, completion of mine servicefacilities, award of additional contracts for auxilliary overburden removal/removalof old dump material/removal of overheight material, improve recruitment andstaffing, and reduce break-downs of bucket wheel excavators. This program was

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instrumental in overcoming problems with the poor performance of the rnine's mainequipment. Problems with the lake mud remova; contract and other delayedcontracts were resolved by reducing the incompetent contractor's scope of work andappointing a new contractor to complete the remaining work. This action plan isstill being followed.

3.4.4 Decision to Restructure the Coordinating Body

The Government's decision to change the composition and responsibility of thecoordinating body has improved management response to changes in Projectprogress. The Committee for Indonesian Coal Development Program, which actedas Steering Committee for BACOMDAT Project, was replaced by a new SteeringComnmittee, Team KEPPRES 35/87 consisting of 6 ministers. The coordinatingboard, POKKORLAK was dissolved and the Project coordinating function wastaken over by the Suralava Working Team under the coordination of the TeamKEPPRES 35/87 Secretary.

The new steering committee takes a more active role in identifying problems andencouraging the implementation of solutions. However, the restructuring of thecoordinating body was taken place after most of the construction work has beencompleted. The advantage of the new arrangement is the existence of an officialwho consistently monitors Project progress, coordinates the Project entities and hasdirect access to decision makers at the ministerial level. However, the steeringcommittee still needs the optimal support provided by full time staff andconsultants.

3.4.5 Management of Entities

The early overall Project implementation has been adversely affected by theperformance of key personnel in each of the Project's entities. Some Directors ofPTBA have been reassigned and PJKA has replaced key personnel in KP3BAKAand ESS. The changes have increased management effectiveness in bothorganizations and have contributed to an improvement in Project performance. Thenew coordination system by the new management of PTBA and PJKA improved thecooperation between the entities in implementing the coal transportation. The newcoordination system held two regular monthly meeting i.e., task force meeting andmanagement meeting. This meetings has improved relatonship between entitiesand increase coal transportation from Tanjung Enim to Tarahan significantly.

3.4.6 Blanket Inurance

PTBA elected to carry blanket insurance protecting both PTBA and its contractorsfrom substantial loss due to non-performance. This blanket insurance covers all ofPTBA construction activities both in the mine as well as the Tarahan Terminal.This decision has proved to be sound as evidenced by the problem of the firstTarahan Turnkey contractor. PrBA and the turnkey contractor filed claim to theinsurance company and received compensation for the losses due to settlementproblem with the terminal.

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3.4.7 Decision on Second Tarahan Turnkey Contract

The settlement was first detected in the beginning of 1984. Hence, majorconstruction delays were caused by an inability to resolve a dispute over theresponsibility for redressing the effects of ground subsidence during the initialphases of the Tarahan Terminal construction. PTBA's decision to terminate the oldcontract and appoint a new contractor was a significant event on the Project.Contract termination was agreed by PTBA and the first contractor on 4 February1987.

The new contract was signed on 21 August 1986, but the construction started inFebruary 1987 due to delay in financing negotiation between GOI and the Dutchgovernment. The terminal design was revised and the new contractor did anexcellent job completing the second Tarahan turnkey contract on schedule.

3.5 Problem Issues

Problem Issues are broader than the ones successfully dealt with in NotableSuccesses. The problems described in this section tend to be institutionalized in theGOI's bureaucratic practices and in many cases were outside the control of theProject's managers. We believe that the inability to deal with the following issuesstems in large measure from the lack of a central entity responsible for managing allaspects of the Project.

3.5.1 Inadequate Survey and Investization

In general, the Survey and Investigation for the engineering design was notadequately performed. This deficiency caused unexpected problems duringconstruction and during the initial operation of the Project.

Survey and investigation on soil conditions in the mine was inadequate. The Projectwas based in part on mine soil condition data from an earlier coal exploration study.However, minimal site survey and investigation was performed to support the data.BWE design specifications were not applicable to the hard soil and coal conditionsand seasonal changes at the mine site. The BWE's required extensive redesign as aconsequence.

The original Tarahan turnkey contractor elected to minimize the number of soil testholes drilled before construction. The spread footing system selected proved to beinadequate and failed to prevent settlement of loadout facilities. Eventually, thecontract was canceled at a significant cost to the Project.

Funding for the survey of the bridges' sub-structure condition was eliminated earlyin the project. Cracked piers and abutments were found on 92 bridges during theinitial operation. These will require repair or replacement which wiU have to befunded out of the railroads operaing costs, and which are expected to be adisruption to efficient coal movement for years to come.

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3.5.2 Inaccurate Technical Design

Several of the Project's subsvstems and technical designs have been found to beinappropriate curing the initial operation, though they were selected based on a*ariety of factors such as soil conditions. weather, and personnel availabilitv. Forexample, the BWE's experienced more problems than anticipated and the operatorsrequired a longer training pe ' d than planned before becoming proficient. Majoradjustments and modifications uiad to be done during initial operation such asreinforcement of BWE's bucket, C-frame and ring girders, and redesign of BWEbucket teeth.

Simiar problems occurred with railway sub-svstem, for example the need to greaserail track curves, reinforcing the coal wagon's center plates, upgrading wheeibearings, and the revision of wheel sDecifications to Compensate the roundness andmaterial problemrs due to faults in technical design.

3.5.3 Land Accuisi

The land acquisition for Panjang extension rail track to Tarahan North was timeconsuming and was compounded by the time taken for evacuation. The localgovernment's disagreement with the original plan necessitated the redesign of theroute and additional time to acquire the land, which contributed to the delay in thecompletion of the railway.

The problem of land acquisition in the mine sub-system was occured in someportion of mining area, i.e. the acquisition for the main mine equipment stockyard.The delay of land acquisition in the mine did not affected the overall Projectschedule, but the total costs were increased because PTBA had to providetemporary stockyard for the incoming main mine equipment.

3.5.4 Procurement

Prior to Project implementation, the World Bank identified possible problems withprocurement for supply and service contracts. GOT Counter Purchase Policy,procurement procedures, centralized governmental bid reviews involving pricenegotiations with non-lowest bidders, and poor bid specification preparations weresome of the problems that were identified. In general, the adverse effects of theprocurement procedure were greatest during Project start up. Inappropriateprocurement practices added significantly to the delays of the Project, thusIncreasing both direct and indirect costs.

An "Early Warning System" was set up by the Project to monitor the progress ofsupply and service contract procurement. This system flagged contracts formanagement action which had exceeded a six month period from tender issue to thetarget effective date. This system did not work because Project management did notreact to wamings from the system and were unable to implement effectiveprocurement actions to correct the delays. Few contracts completed theprocurement process in a timely manner.

Thc. financial aspects of procurement/contracting process contributed to the 10month delay before the first Tarahan Terminal turnkey contract became effective.The delay caused the revision of the original Project Master Schedule.

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The centralized governmental bid review policy involving price negotiations withnon-lowest bidders created problems for a number of supply and service contracts.For example, the railway sub-system ballast and wooden sleeper suppliers wereforced to decrease their unit price below the market price. Consequently, thesuppliers were unable to complete the contract which contributed to the delays withtrackwork.

3.5.5 Insufficient Rupiah Financing

The Project was not able to draw sufficient Rupiah from the GOI during theimplementation phase to finance its local contractors. PTBA obtained acommercial bank loan on 5 June 1984 to finance critical tasks, and was forced topostpone several other works projects which were dependent on local financing.PJKA had to delay several work projects and was finally forced to obtaining asubsidized loan from the Bank Of Irndonesia.

3.5.6 Delay of Obfsore Finang

Some of the offshore financing institution followed time consuming procedures andrequired cumbersome conditions. This caused a delay ir. the start up of severaloffshore contracts. The first Tarahan Turnkey Contract was delayed ten monthsbecause of the procedures followed by one of the lending institution; and the secondTarahan Turnkey Contract was delayed four month for the same reason. Thepotential savings that may have resulted from the protracted negotiations were faroutweighed by Project delay costs such as PTBA's loss of revenue from coal sales,the cost of the negotiations, and increased IDC fees.

3.5.7 Poor Contractor Performance

Contractor performance was critical to overall BACOMDAT Project success,unfortunately several contractors failed to comply with either the conditions of thecontract or with good business practices. Contracts were awarded to firms who hadlittle applicable experience, and inadequate resouices. The bidding process did notallow tor an adequate system of liquidated damages or a bonus system to rewardtimely or early completion of project tasks. The Project entities and theirconsultants did not consistenlsy practice effective supervision of contractorperformance, and in most cases failed to intervene promptly when key performanceindicators were missed. Intervention to assist delinquent contractors was generallydone only after the contractor was so far behind that there was little hope of evermeeting deadlines.

In the mine subX-tem, the performance of Mine Service Facility contractor is aglaring example. The contractors have incurred a total 55 month delay thus far dueto both construction and equipment rehabilitation (forecast completion in January1990). The delay caused by SE/SW Lake mud removal contractor slowed down themovement of bucket wheel excavator and forced modifications of the mine plan.

In the railway sub-system, the supply of ballast and wooden sleepers for trackworkwas assigned to a contractor who had insufficient resources or incentive to meetcontractual deadlines. The failure of this contractor caused the trackworkcontractor, who was dependent upon these key materials, to fall behind schedule.The net effect was a delay in the Project's ability to operate at 18 tonne axle load.

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3.5.8 Ineffective Use of Consultants

The supervision of the PMS implementation relied heavily on the performance ofthe Project's consultants. Both the mine and the railway used consultants withvarying degrees of success.

The mine sub-system retained a project management consultant to manage theengineering procurement and construction of the subsystem. Several ongoingaspects of the Project were turned over to the owner's staff on contract completion.TIhe consultant and owner had not adequately prepared for this transfer,consequently materials management and purchasing remain a problem area whichmay adversely affect mine production.

The railway sub-system retained a consultant for the trackwork program both as aproject control and engineering consultant. However, the Project arrangement wasconfusing and the railway sub-system did riot use the consultant effectively.

3.5.9 Inadequate ProietCoordination

Both PTBA and PJKA's initial management organization structures were notdesigned for construction project management. Responsibility and authority werenot clearly allocated, consensus on relatively straight forward decisions was difficultto obtain and to implement.

No single institution was fully responsible or could be held accountable for overallProject performance. The coordinating body set up in the beginning of the Projectto synchronize Project implementation did not perform effectively. Nor did theProject monitoring team that was installed to assist the coordinating board. Projectmonitoring reports submitted two months late were of little use in identifying andresolving pressing problems. Furthermore, the coordinating board was not given theresponsibility and authoritv to define and resolve problems and was not able tomaintain an effective communication between the two Ministries.

The replacement of the original Project Monitoring structure with a more unifiedarrangement has produced promising results and appears to be a better model forProject coordination. However, the Team Keppres 35/87 is required to besupported by profesional consultants.

3.5.10 Problems in Training Design and Application

The long term success of the Project rests on the effective application of newlyimplemented technology throughout the Project's entire coal mining andtransportation system. The mine sub-system's traimng program suffered from basicdefects in design and application. People were selected For training programs forthe wrong reasons, received the wrong training, were given inappropnate rolemodels on how the new technology was to be applied, and were not given adequatetime to become' proficient before assuming full responsibility for production.

Project maLi-gement frequently adopted short term solutions to the long termtraining and development problems. TMere was not a consistent management policyto guide consultants' training and to ensure that all PIBA employees and localcontractors benefited from the unique opportunities for technology transfer. Theconsultants' performance varied widely as there were few incentives for them to domore than make a superficial effort to comply with contractual training obligations.

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Additional training is still required before mine sub-sector's personnel will be ableto make efficient use of the Project's mining system.

The long unit train transportation svstem is the first to be operated in Indonesia andit is operated outside Java in a former low traffic area. Long unit train operationrequires high disciplir' from section managers, train operator and other supportstaff. The recruitment and training programs that have been followed may notprovide the high level of technological expertise and discipline required.

3.5.11 Problems in Staffing and Recruiting

The Mine sub-svstem was plagued by an inability to recruit personnel with therequisite skills to assimilate rapidly the new technology and accept responsibility forthe new systems. The official policv was 'o keep P'TA's saiaries low and increasethem only after the orgasization had proved it was financially viable. This policvwas compounded by the problems inherent in recruiting good personnel forassignment in a remote location. Surveys conducted erly in the Project nighlightedthese issues as well as a basic image problem that coal mining had with the targetemployee population. Once new personnel were selected, training and promotionwas often based on loyalty to employees of the old organization and nepotism ratherthan PTBA's long term needs.

The mine's employees felt that there was a wide imbalance between wages paid andresponsibility held, especially in the case of the personnel charged with operatingand maintaining the main mine equipment.

MBA staffing and recruiting initially fell far behind schedule disrupting contractmanagement and training schedules. To resolve this problem, PTBA hired aconsultant for recruitment, and extended the mine construction consultant's contractwith an operational and training assistance (OTAS) contract. However this was nota satisfactory solution as no one consultant was fully responsible for carry outrecruiting, staffing, and development.

3.5.12 Train Traffic Management Problems

PJKA is responsible for the staff development as well as the operation of the coaltransportations system. In the begining of operation, one of the key position i.e.,traffic control management in ESS required more training. In addition, the delay ofcompletion of telecomunication installation caused a more hurdle in trafficoperation. However, this problem will be resolved at the time the training and thetelecommunication installation completed.

3.5.13 Lack of Attention to Environmental Issues

An environmental study was conducted for the mine sub-section in the beginningofthe Project, but received little attention during the construction phase. Theinformation contained in the follow-up report is not supported by an environmentalaction plan, a trained staff and an operating budget. The principal area of concernis water quality standards at the mine.

Environmental standards were not built into supplier and subcontractor contracts.For example, PTBA lacked the means to properly ensure that the mud removalcontractors provided adequate safeguards.

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3.5.14 Deviation in Coal Price Forecast

At the beginning of the Project, forecasts were made which now appear to havebeen extremelv optimistic. Coal prices followed oil prices as they dropped. Theprice difference between forecasted and actual is now approximately 50%. This hashad a drastic effect on the overall financial performance of the Project, especially asit concerns the Government's ability to recoup the original investment. In addition,delavs have reduced TBA's earnings and the ability to pay for basic services suchas the transportation tariff to PJKA and PT Pelayaran Bahtera Adhiguna.

3.5.15 Delay on C;oal Sales and Transportation Agreements

The coal sales and transportation agreements are as follows:

- Coal Sales Agreement between PTBA and PLN,- Coal Transportation Agreement between PTBA and PJKA, and- Coal Transportation Agreement between PTBA and PT Pelayaran Bahtera

Adhiguna.* Lease agreement between PT PANN and PT Pelayaran Bahtera Adhiguna.

These agreements are short term and were signed after the coal has beentransported from Tanjung Enim to Suralaya, either via Kertapati or the TarahanTerminal Temporary Facility. At the time of Project completion the railway tariffcalculations had not been refined.

3.5.16 Financial Performance

FTBA's financial position is much worse than onriginally forecasted. This is due tothe substantial drop in coal prices and the long delay in Project completion, in termsof both loss of revenue and additional costs such as coal transportation tariff,interest accrued, etc. Much of the interest is at commercial rates rather than thepreferred rate included in the forecast. The Interest During Construction (IDC) isnow estimated at around 20% of the total Project costs. The IDC will be e principalcause of PTBA long term financial problems. The Project's financial rate of return,in real terms, is now calculated in the neighborhood of 6% compared to 11.7%calculated in the IBRD Staff Appraisal Report October 1981. However, the GOIhas agreed to restructure PTBA debt/equ position from 60:40 to 35:65.Furthermore, considering the GOI intention to increase the capacity of the projectto transport 4.4 million tons/year of coal to supply Suralaya Power Plant unit 1 thru4, the long term financial performance of this project will be improved.

The Project's financial performance would be much worse if the cost of importedcoal required by Suralaya to make up for PMBA shortfalls were included in thecalculations.

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4. BANK PERFORMANCE

In general, the Bank's performance through the Supervision Mission has beenpositive. The focus of their efforts has been to identify problem areas and work withthe respective Governmnent orgarizations to identify and implement constructivesolutions.

The current coal price is approximately 50% lower than the coal price forecast inthe IBRD Staff Appraisal Report. This has resulted in significant problems with themine sub-sector's internal rate of return. The IBRD Supervision Missions has beeneffective in reducing the short term effects of the problemns stemming from thedifference in coal price. The Bank's support to MA financial restructuring andwillingness to participate in Phase II of the project is indicative of their long termsupport for the Project.

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5. CONCLUSION AND LESSON TO BE LEARNED

5.1 Conclusion

The GOI has acquired an integrated system for feeding 2.4 MTPY of coal to theSuralaya Steam Power Plant. Tis system is comprised of a continuous coal miningsystem based on BWE technology capable of producing 3.0 MTPY of coal for morethan 30 years; a 420 km railroad track with 18 tonne axle loads; and a 9,200 CDWTself-unloading bulk carrier vessel to transport coal from Tarahan Terminal acrossthe Sunda Strait to Suralaya.

All stages of the Project were completed behind schedule. Overall Projectcompletion was delayed by more than 2 years, increasing the fuel cost for Suralayaand the cost of the Project. The financial viability of the Project was also reduced bythe drop in world energy prices and the effect on the economy of Indonesia.

The delays in Project completion was due to several factors, principally procurementdelays, poor contractor and consultant oerformance, insufficient Rupiah financing,delays in offshore financing, Project management's inability to anticipate and maketimely reactions tO deviations in the PMS, an inadequate system for Project control,nd insufficient site survey and investigation.

The Project's poor financial performance is a direct result of delays in completingthe Project, higher investment costs including interest, problems with productionand transportation, and coal prices far below those projected. However, the efectwas mitigated through restructuring the debt equity ratio to become 35:65.

The initial system established for the Project's management was cumbersome andlacked the means to make timely changes in schedules, budgets, procedures,contractors, and personnel. However, this deficiency has been resolved by forming amore action oriented project coordinating board.

5.2 Lessons to be Learned

The following elements were selected as Lessons as their inclusion in the Projectdesign and management methodology would have prevented many of the delays andreduced associated costs.

5.2.1 Technial Design

The Government of Indonesia makes every effort to advance industrial technology,however the preparation to receive the new technology was inadequate. The delayin construction of Mine Service Facilities and Mine Townsite has proved to be theinadequate preparation of the Project. Manpower recruitment and training shouldbe performed prior to the arrival of the equipment. Other infrastructure facilitiesi.e. workshop and housing for the workers should be ready at the same time themining equipment ready to operate.

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5.2.2 Maximum Austerity / Value Engineering

The MAP has proved to be an effective way to maintain a sound economiccondition during Indonesia's recent recession. However, the economic impact ofthis austenrty program to the project should be evaluated on a case by case basis.Major curtailments of programs, such as elimination of concrete sleepers and ballastplant, and reduction the number of houses to be built, should be first evaluated byreasonable Value Engineering programs which might include material substitution,technical redesign, and other methods to achieve major cost savings without thesacrifice of the entire program.

5.2.3 Project Prartion Team

Projects of this size and complexity should be prepared by a team consisting ofcompetent government officials supported by competent national and internationalengineering construction firms with extensive experience in mining andtransportation and in working in a third world country. This team should be able toforsee the availability of manpower, training and other resources.

5.2.4 Proiect Organization Structure

The Project definition should be inclusive of all associated elements if possible.Under ideal conditions the Suralaya Power Plant should be included in theBACOMDAT Project unlike the previous organization structure where the SuralayaPower Plant is separate from the BACOMDAT Project. Project Managementshould have an unified organization structure with a single chain of command, sothat resource and schedule conflicts can be readily resolved by the next highest levelin the organization. In addition, Project management can be extended to carry onthe responsibility of managing the entire coal supply required by the Suralaya PowerPlant. Overall management responsibility may rest with a keyv Government officialwho oversees multiple projects, however day-to-day management responsibilityshould be assigned to one decision maker supported by an experienced projectmanagement staff. Project audits and monitoring should be done by an outsideorgamzation, independent from project management but responsible for timelyinput to problem identification and resolution.

5.2.5 Response to Changes in the Project Master Schedule

Management by exception procedures should be set up and followed for alldeviations from the Project Master Schedule and budget. Sensitivity analysis shouldbe incornorated into the process to anticipate the ripple effect of delays andproposed remedies. Decisions should be evaluated in terms of the effects on theproject schedule, project costs, and on the post-construction operating requirements.

5.2.6 Recruitment. Selection and Traininy Programs

Project staffing and training must be a critical path activity on all projects with ahigh technology transfer content. Human resource studies are an important part ofproject feasibility phase enabling Govermnent officials to evaluate the long termcost of labour and the probability of recruiting qualified staff for the project and tobe trained to operate the mine once it has been completed. The contractors' abilityand willingness to trair. must be included as an important part of the contractorselection criteria. Consultants and contractors have a responsibility to ensure thatthe personnel selected for training art, capable of learning and applying the relevant

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skills. Project management must be notified when agreed upon selection criteria ischanged and when personnel who have been trained are not assigned to the jobs forwhich they are qualified. Ultimately the contractor and consultant's performancemust be evaluated based on the ability of the client's staff to assume responsibilityfor the operation of the mine.

5.2.7 Procurement Procedures

Projects of this size and complexity may require special regulatory mechanisms toexpedite the selection of contractors, consultantc and suppliers; finalize purchasingagreements for materials and services; and which comply with World Bankguidelines on procurement. Exception procedures should be prepared which willtrigger prompt intervention by senior government officials to resolve impassesbetween government entities and curtail protracted negotiations.

5.2.8 Time Value of Money

The BACOMDAT Project Managers, consultants, contractors, and suppliersappeared to make a good faith effort to comply with project schedules andcontractual obligations on an incremental basis. However, there was not acorresponding effort to ensure that the collective entities, supporting Governmentagencies and lending institutions adhered to the aggregate objectives defined by theProject Master Schedule. The net effect was that financial and scheduling decisionswere made at the individual contractor and transaction level with little regard foroptimizing the overall project activities and costs. Examples cited in the ProblemIssues section include training programs which were forced to start on time butwithout qualified trainees due to a lack of decisions on compensation policy, subcontracts negotiated with no bonuses for timely completion or safeguards againstinferior work and delays, key materials supplier contracts finalized with no marginof profit thus no incentive for completion, and protracted negotiations over tenths ofa percent which cost the Project tens of thousands of Dollars in delays.

The key elements common to most of the Project's problems appears to have beenan inability to recognize the significance of any and all delays; to build in protectivemechanisms for anticipating and identifying problems which will create delays; toquantify the full cost of all delays; and to take timely corrective actions which areoptimal for the entire Project.

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REPUBLIC OF XNDONESIA

COAL MINING AND TRANSPORTATION ENGINEERING PROJECT (LOAN S-9)and

DUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATION PROJECT (LOAN 2079-IND)

PART III

1. Related Bank Loans and/or Credits

Loan/Credit Year ofTitle Purpose Approval Status Comments

CR 399-IND Third Power Project 1973 Completed -CR 1127-IND Fourth Power Project 1975 Completed -LN 1708-IND Eighth Power Project 1979 Completed -LN 1872-IND Ninth Power Project 1980 Completed -LN 2153-IND Coal Exploration Project 1982 Completed -

2. Proiect Timetable

Date Date DateItem Planned Revised Actual

Identification/Preparation 03/76 N/A 03/76Pre-Appraisal 01/80 N/A 01/80Appraisal 07/77 08/80 10&12/80Post-Appraisal N/A N/A 06/81Loan Negotiations 10/81 11/81 11/81Board Approval 12/81 01/82 01/82Loan Signing 01/82 N/A 01/82Loan Effectiveness 03/82 N/A 05/82Loan Closing 09/87 09/88 09/89Loan Completion 03/88 03/89 03/90

3. Loan Disbursements (Cumulative) USS million

Financial Year 1982 1983 1984 1985 1986 1987 1988 1989 19O

Appraisal Estimate 30.5 67.7 122.6 176.0 184.5 185.0Actual 1J/ / 7.0 33.5 62.7 103.3 122.5 152.5 164.6 169.2 178.7Actual as % Estimate 23.0 49.5 51.1 58.7 66.4 82.4 89.0 91.5 96.6Date of Final Disbursement 04/04/90

1/ US$1.139 million cancelled 08/86.2/ US$5.107 million cancelled at loan closing 04/90.

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4. Proiect Completion

Indicators ADDrrisal Estimate Actual/PCR Estimate

Available Funds 1 2Project Management 1 2Development Impact 1 1Overall Status 1 1

5. Project Costs and Financing

A. Proiect Costs(US $ million)

--Appraisal Estimate-- --------Actual--------

Local Foreign Local ForeignCosts Costa Total Costs Costs Total

Air Laya Mine 136.3 308.6 444.9 151.5 258.1 409.6Muara Tiga Development 3.8 11.4 15.2 7.8 - 7.8Mine Townsite 39.8 12.0 51.8 17.7 - 17.7Kertapati Terminal 1.1 2.9 4.0 4.0 3.0 7.1Tarahan Terminal 19.0 39.2 58.2 21.9 89.5 111.4Railway/Communications 79.5 136.8 216.3 90.9 143.1 234.0Ship 1.4 22.5 23.9 0.0 16.7 16.7Project Monitoring 3.4 3.2 6.6 1.4 5.8 7.1

Total Base Cost 284.3 536.6 820.9 295.2 516.2 811.4

Physical Contingencies 44.3 37.0 81.3 - - -Price Contingencies 117.8 103.9 221.7 - -Installed Costs 446.4 677.5 1123.9 295.2 516.2 811.4

Refinancing of S-9 Loan - 10.0 10.0 - 7.0 7.0Working Capital 41.3 8.4 49.7 13.4 - 13.4Interest During Construction 27.3 125.0 152.3 69.3 143.3 212.6

Total Financing Required 515.0 820.9 1335.9 377.9 666.5 1044.4

Comments:

1. Incremental working capital for PTBA only. Breakdown into foreign and localcosts not available.

2. Installed cost of US$811.4 million is approximately 2.5% higher than thatcomputed by the Borrower (Part II, para. 3.3). This factor and specificdifferences in individual foreign and local cost elements are attributable to(i) differing treatment of foreign and local costs; (ii) different exchangerates for the conversion of local costs into US dollars; and (iii) thetransfer of certain capital costs into start-up operating costs in Part II.

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B. Proiect Financing(US $ million)

PlannedLoan

Sources Agreement Final

Equipment 51.1 54.1Consultants' Services 75.7 114.9

& TrainingCoal Exploration 5.0 2 2.7& Engineering

Refinancing of S-9 Loan 10.0 7.0Unallocated 43.2 _

Subtotal 185.0 178.7Other External Sources 389.2 508.2 3Domestic Sources 766.7 360.1Total Financing 1340.9 1047.0

Comments:

I/ Allocated the Coal Exploration Engineering Project (Loan 2153-IND).

21 Includes US $0.5 million financed under IBRD Loan 1250.

6. Proiect Results

A. Direct Benefits

Estimate Estimate

Appraisal at at FullIndlcators Estimate Closina Date Develement

Project Coal Production 3.1 mtpy 2.0 Dtpy^' 3.1 +Rail Transport to

Suralaya 200,000 tonslmonth 270,000 tonsbmonth_ 200,000 tons/month +Coal Terminal throughput 200,000 ton3smonth 200,000 tonsimonth 200,000 tonslmonth +Ship Transport 200,000 tonslmonth 200,000 tonslmonth 200,000 tonslmonth +Project Revenue_l US$260 millionlI US$73 million US$88 million

a/ Supplemnted by in excess of 1.0 mtpy contract minimn of non-project coal.kb Facilitated by rolling stock procured for project expansion to 400,000 tonslmonth.c/ Based on coal sales to Suralaya only._i Based on US$108 per tonne (1989) estimated at appraisal.

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B. Economic Impact

AppraisalEstimate Actual

Economic Rate of Return 12.2 2.2

Assumptions

Incremental basis Yes Yes

Same cost streams used forfinancial rate of return Yes Yes

Exclusion of import duties Yes Yes

Shadow pricing of diesel andelectricity Yes Yes

No shadow pricing of laborand other local costs Yes Yes

Benefit stream based on thecost of coal import fromAustralia adjusted fordifference in calorific value Yes Yes

C. Financial Impact

EstimateAppraisal atEstimate Completion

Financial Rate of Return 11.7 3.41/

Other Financial Indicators

FY89 Bukit Asam Coal Sales (mt) 3.0 2.3

FY89 Coal Price for Deliveredat Suralaya (US$/t) 108 34

FY89 Coal Sales Revenuefrom Bukit Asam (US$ million) 312 72

FY89 Cash Operating Costs(Rp bil) 129 116

1/ Borrower's calculations indicate an FRR in the neighbourhood of 6% (Part I,footnote to para. 6.3, and Part II, para 3.5.16).

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7. Status of CoverAnts

Covenfnt Subioet Status

Ltom As: PT Buklt Asa

3.01 Prompt provision of dequate funds to PTBA, PT Pann, PJKA In Compliance

3.02 Coal sales to Suralaya according to specifled price meclanism

3.03 Ensure interlm power supply

3.04 Ensure timely land acquLsition

3.05 Hire consultants per Bank guldellnes U

3.06 Provide adequate insurance for foreign goods, use restriLtionsof goods to Project for Bank-financed goods

3.07 Reportlng requirements:

(a) Provlde plans, speclfLcations, reports, contract documents andconstruction and procuremcet scheduless S

(b) MaLntaLn records for monitoring, allow Bank supervision of Bank-financed aspects, provide Bank regular reportsl S

(c) Provide Bank with procurement LnformatLon on awarded contracts;(d) Prepar. completion report.

3.08 MaLatain records in accordance with acceptable and consistently S

applied ccounting princLples

4.01 Bank loan is safeguarded against other loans and liens U

Project -Ar,

2.01 Due diligence in carrying out Project in Compliance

2.02 Employ consultants accordLng to Bank guidelinest (a) Sr. TechnicalAdvisor and TeobnLcal service advisorst (b) Project ManagementConsultants (c) Owner's Engineers for terminalst (d) PMC fortownsite

2.03 Procurement of Bank-financed goods accordlng to Bank guidellnes

2.04 Provide insurance for foreign goods; use restrictions of Sank-financed goods to Project

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Covenant Sub ect Status

troeet Aar. 8ukitt Asam (Cont'd)

2.05 Reporting requirements:(a) Provide plans, speclflcations, reports, contract documents and

construction and procurement schedules In Compllance(b) Maintain records for monitoring, allow Bank supervisLon of Bank-

financed aspects, provide 8ank regular reports(c) Provide Bank with procurement informatlon an awarded contracts

(6) Prepare completion report(e) Allow Bank supervisLon of all facilitLes, records

2.06 Comply with Subsidiary Loan Agreement S

2.07 Exchange views with Bank on ProJect progress and inform Bank of aforeseen difficulties

3 01 Maintain suffLeLent project insurance a

3.02 Provide Bank wlth operations assLstance contract at least 12 monthsbefore estimated operational acceptance of flrst mLuLng subsystem v

3.03 Prepare vater pollution control guLdelines nd monltor environmental Inadequatelyaspects of Project addressed

3.04 Prepare land reclamation plan

Pro-lect Astr, PJKA (ESS)

2.01 Due diligence in carrying out Project In Complance

2.02 Employ consultants according to Bank guidelines: (a) to a

implement financial and management accountLng system In ESS(b) PNC for management, training and operational assistance S

2.03 Use restrictLon of Bank-ftnanced services to Project a

2.04 Reportlng requirements-(a) Provide plans, specifLcations, reports, contract

documents and construction and procurement schedules S

(b) Maintain records for moanltoring, allow Bank supervision ofBank-financed aspects, provide Bank regular reports 5

(c) Provide Bank with procurement information on awardedcontracts a

(d) Prepare completion reports S

(e) Allow Bank supervlsion of all facilitLes, records S

2.05 Exchange views with Bank on Project progress and inform Bank offoreseen difficulties

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Cven nt Sublect Status

Projset Ar PJKA (ESS tCcnt'd)

2.06 Implement finuncial end mcaagement accounting system by April 1,1983 In Compliance

2.07 Review level of coal beiAg transported and take steps to ensuretimely and efficlent operations

3.01 Maintain sufficient project insurance

3.02 Beginning April 1984, maintain minimum operating Inventories andcash balances of at least 16S of previous year's working expenses

S Enter Into coal transport contract vith PTBA a

4.01 Maintain records in ccordance with acceptable and consistentlyapplied accounting principles a

4.02 Provide Bank n--nl audited financial statements not later than6 mnths after the end of each fiscal year, and supplementaryfinancial data as requested a

4.03 (a) During 1984-86, set railway tariff at not less than 251 of N

delivered price of coal at SuralayaCb) From 1987 onwards, set annual tariff to allow ESS to obtain Tarlff in line

annual rates of return on net fixed (project) assets of not with overallless than 132 Project FRR

Pro ect Aar. PT Pan

2.01 Due diligence in carrying out Project In Compliance

2.02 Employ consultants according to Bank guidelines for design,construction and delivery supervision, and training 0

2.03 Use restrictions of Bank-financed goods to Project a

2.04 Reporting requirements:(a) Provide plans, specification, reports, contract documents

and construction and procurement schedules N

(b) Maintain records for manitoring, allow Bank supervision ofBank-finaned aspects provide Bank regular reports 6

(c) Provide Sank with procurement information on awarded contracts S

(d) Prepare completion report a

(e) Allow Bank supervision of all facilities, records

2.05 Comply with Subsidiary Loan Agreement

2.06 Exchange views with Bank on Project progress and inform Bank offoreseen difficulties a

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Subiect Statu

Protet Agr. PT Panm (Cont'd)

2.07 Lease ship to ship operator acceptable to the Bank In Compliance

3.01 Maintain sufficient project insurance

4.01 Maintain records in accordance with acceptable and consistentlyapplied accounting principles

4.02 Provlde Bank annual audited financial stateinmts not later than6 months after the end of each fiscal year, and supplementaryflnanci-a data as requested

8. Use of Bank Resources

A. Staff nvuts

IX&k m 8x ms mI MO r XL l M& 8 -81 FY84 MS PY86 FY89 FY0 TOTAL

L8SP 108.6 40.2 25.6 123.3 24.8 322.5LEM 100.0 46.6 146.612DI 11.9 11.9LOP 3.0 2.8 0.1 1.0 6.2 9.7 22.9SPY 22.6 35.3 29.4 28.2 34.1 30.3 20.0 28.6 0.2 228.7PCR 1.4 4.0 5.4PAD 0.2 1.4 1.5 0.9 1.7 1.3 1.4 8.5

TOTAL 111.6 43.0 25.7 124.3 131.1 91.0 36.7 31.0 29.1 35.8 31.7 21.4 30.0 4.1 746.5

Lahnd

LEP - Preparation-IMA - Appraisal

LENl - NegotiationsLOP - Loan ProceasingSPN - Supervision

FCR - Project Completion ReportPAD - Project Admiulstration

42 -

Stage of Month/ humber of Days SpecialisatLon Performance Rating Types ofPZiuuse Cycle -sta. Persons a Fileld Rflveaented ai Status b/ pblem c1

Through Appraisal 03/76 2 - H06176 3 - M.P

09/76 1 - M03/77 5 - t,F,P05/77 6 - N,H4E08177 3 - M,F06/78 4 - t,F09/78 3 - M,F,ME02179 1 - HE05/79 3 - M,F,)IE06/79 6 - M,F,R,ME12/79 6 - H,F,SA,R,NE01/80 6 - M,F,SA,R,ME03/80 6 - M,F,SA,R,ME05/80 2 - FA,R

Appraisal throughBoard Approval 10/80 7 - X,F,R,L

12/80 1 - ME01/81 1 - H06181 5 - H,F,SA,R

Board Approvalthrough

Effectlvess 03182 3 12 X,SA,R 2/1 E,S,P,C

Supervision

Mission 1 08/82 5 12 M(2),F,E,R 2/2 S,P,C2 12/82 1 12 H 2/2 S,P,LA,CF3 06/83 4 14 M(2),F,R 2/3 S,P,LA4 11/83 3 is m(2),R 2/3 S,P,LA,FS 03/18 3 16 X(2),P 2/3 S,P,LA

6 12/84 1 4 M 3/3 S,P,LA7 03/85 1 5 M 2/1 P8 07/85 3 13 H,P,R 1/2/2/2 P9 02/86 3 15 H,SA,R 2/2/2/3 P.?

10 09/86 5 23 M,F,SA,R,L 1121212 PM,111 03/87 1 8 M - S,P,Pl,I12 06/87 2 9 M,P 1/4/3/4 S,P,PM,F13 02/88 2 21 M,F 1/3/3/3 S,PH,F14 0588 1 8 M - S15 10188 2 13 H,P 1121212 S,F16 12188 1 14 M 2/2/2/1 8,P,F17 05/89 4 20 N(2),F,R 2/1/111 F

a/ H - Mlning Engineer; F - Financl Analysts E - Economists 8^ - Staff Assistant,; R -Railvay/Port Engineer L - Lawyers P - Power Engineers HE - Marne Engineer.

ki Through 3/85, performance rating is Trend/Status, through 12/88 rating are AvailableFunds/Project Management/Development Impact/Overall Statust 1989 rating is OverallStatus/Project Development/Compllance with Loan Covenants/Project Man-gement/AvaLlabillty of

unds.£t B - Loan Effectiveness; 8 - Implementation Schedule; P - Procurements C - Project Costs; LA -

Land Acquisition, CP - Cofinancing F - Financiai; PH - Project Manageentg I - InstLtutional.

Energy DivisionAsLa Technical DepartmentJune 1990

World Bank Document€¦ · PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ... In cases where...

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Transcript of World Bank Document€¦ · PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ... In cases where...