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ReportNo: 20637 IMPLEMENTATION COMPLETION REPORT (CPL-35010;SCL-3501A; SCPD-3501S) ON A LOAN IN THE AMOUNTOF US$ 423.6 MILLION

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TO THE GOVERNMENT INDONESIA OF FOR THE SURALAYA THERMAL POWERPROJECT

June21, 2000
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Energyand MiningSectorunit EastAsia andPacificRegion This documenthas a restricted distribution may be usedby recipientsonly in the performance their and of officialduties. Its contentsmaynot otherwise disclosedwithoutWorldBankauthorization. be

CURRENCY EQUIVALENTS (Exchange Rate Effective - ICR Mission - February 2000) Currency Unit = Indonesia Rupiah (Rp) Rp. 1000 = US$ 0.14 US$ I = Rp. 7200 FISCAL YEAR January I to December 31 ABBREVIATIONS AND ACRONYMS

BOD
COD DGEED EIA EIRR ESP HGI GOI ICR IPP LOLP NERC MIS MME OPRC PJB I PLN PPA PPE PSR QAG ROR SAR

Biological Oxygen Demand Chemical Oxygen Demand Directorate-Generalfor Electricity and Energy Development Environmental Impact Assessment Economic Internal Rate of Return Electrostatic Precipitator Hardgrove GrindabilityIndex Government of Indonesia Implementation Completion Report Independent Power Producer Loss of Load Probability North American Electric Reliability Council Management Information Systems Ministry of Mines and Energy Operational Procurement Review Committee Java Bali Power Company I State Electricity Corporation Power Purchase Agreement Engineering Services Center of PLN Project Summary Report Quality Advisory Group Rate of Return Staff Appraisal Report Jemal-ud-din Kassum Mark Baird, EACIF Yoshihiko Sumi, EASEG Kurt Schenk, EASEG

Vice President: Country Manager/Director: Sector Manager/Director: Task Team Leader/Task Manager:

-'-I..

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CONTENTS

1. Project Data 2. Principal Performance Ratings 3. Assessment of Development Objective and Design, and of Quality at Entry 4. Achievement of Objective and Outputs 5. Major Factors Affecting Implementation and Outcome 6. Sustainability 7. Bank and Borrower Performance 8. Lessons Learned 9. Partner Comments 10. Additional Information Annex 1. Key Performance Indicators/Log Frame Matrix Annex 2. Project Costs and Financing Annex 3. Economic Costs and Benefits Annex 4. Bank Inputs Annex 5. Ratings for Achievement of Objectives/Outputs of Components Annex 6. Ratings of Bank and Borrower Performance Annex 7. List of Supporting Documents Annex 8. ICR Mission Aide-Memoire Annex 9. Borrower's Completion Report Map: IBRD No. 2361OR

Page No. 1 I 2 3 8 10 12 13 14 14 16 17 19 23 25 26 27 28 36

Project ID: P003916 Team Leader: Kurt F. Schenk ICR Type: Core ICR

Project Name: SURALAYA THERMAL POWER TL Unit: EASEG Report Date. June 23, 2000

1. Project Data
Name: SURALAYA THERMAL POWER LIC/TFNNumber: CPL-35010; SCL-350 IA; SCPD-350IS Region: East Asia and Pacific Region

Country/Department: INDONESIA Sector/subsector: PT - Thermal KEY DATES PCD: Appraisal: Approval: 05/30/90 06/13/91 06/30/92

Original Effective: 12/23/92 MTR: Closing: 09/30/99

Revised/Actual 12/23/92 09/30/99

Borrower/lImplementingAgency: Republic of Indonesia/State Electricity Corporation (PT PLN (Persero)) Other Partners: ADB, KfW, Export Credit STAFF Vice President: Country Manager: Sector Manager: Team Leader at ICR: ICR Primary Author: Current Jemal-ud-din Kassum Mark Baird Yoshihiko Sumi Kurt Schenk Kurt Schenk; Yuling Zhou; Selina Wai Sheung Shum; Thomas Walton; Mariko Ogawa. At Appraisal Gautam Kaji M. Haug P. R. Scherer V.P. Thakor

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely,L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High,SU=Substantial, M=Modest, N=Negligible) Outcome: U Sustainability: UN Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) Quality at Entry: S Project at Risk at Any Time: Yes ICR S

3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 OriginalObjective: The objectives of the project as stated in the Staff AppraisalReport dated June 3, 1992 were to: (a) expand PLN's generating capacity in Java; (b) promote the economic use of coal for electricity generation; (c) develop PLN's institutional capacity to operate and maintain thermal power plants; and (d) strengthen PLN's financial capacity. The objectives were clearly defined and consistentwith GOI's strategy of meeting the country's energy requirements at least cost, by substituting oil consumptionby alternative more economical fuels (such as coal, gas and hydropower), and by promoting the environmentallysustainableproduction and utilization of energy resources. The objectives were also in line with the Bank's energy sector strategy (to satisfy unmet electricitydemand and to promote decentralization)as well as its previous work in Indonesia, in particular, Power Plant, the first coal-fired power plant in the financing of the first four units of the Suralaya Tlhermal the Eight, Ninth, Twelfth and Fourteenth Power projects (Loans 1708-IND, 1872-IND, Indonesia, through 2214-END,and 2243-IND). The objectives were clear, relevant and largely realistic. As part of the Bank's sectoral dialogue with GOI and PLN, an Electricity Tariff Automatic Adjustment Mechanism was introducedby Presidential Decree in October 1994(Keppres 68/94). In addition, a FinancialAdvisor, financed by the Project, was hired in August 1997 to advise PLN as PLN's financial situation deteriorated rapidly due to the financial crisis in the region and the imminent economic collapse in Indonesia. 3.2 RevisedObjective: The original objectives were maintained throughout the Project. 3.3 OriginalComponents: The original design of the Project included thlefollowingcomponents: (a) constructionof 3x600 MW coal-fired units (Nos. 5, 6 and 7) at Suralaya, and a 5OOkV transmission line from Cilegon to Cibinong with associated substations, to enable evacuation of power to the demand centers in Java; (b) consulting services for engineering design and constructionsupervisionof the proposed units: (c) feasibility study for a high voltage submarine cable link between Java and Sumatra; (d) engineeringand design of a thermal power plant at Banjarmasin in South Kalimantan; (e) consulting services for institutional development;and (f) training of PLN's staff in public utility practices. The site for the Suralaya power plant was developedto accommodate sevenlunits. Units 1-4, each with 400 MW capacity, were commissioned between August 1985and October 1989with financing from Bank loans. Although the original size for units 5-7 was 500 MW each, subsequentstudies, including an EnvironmentalImpact Assessment, showed that the optimum unit size should be 600 MW. This change was consistent with the faster than expected power demand growth in Java and also allowed best utilization of the potential of the Suralaya site. The project also provided for reinforcementof the 500 kV grid so that the total 3,400 MW at the Suralaya site could be transmitted to the major load centers in Java. 3.4 RevisedComponents: The above components were not revised.
3.5 Quality at Entry:

The Project was selected by the World Bank's Quality Advisory Group (QAG) for a Rapid Supervision Assessmentin July 1997,which concluded that the project had a sound design, that procurement, relationshipswith the Borrower and other stakeholders,and the realism of the Project's performance

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ratings, were highly satisfactory. The Project received a satisfactoryoverall assessment with a highly satisfactory focus on development impact. This ICR also rates the quality of entry as "satisfactory". At appraisal, the technical risks and project management risks associated with the Project, including possible delays in implementation,were assessed as low. This assessmentwas made in line with PLN's general technical capacity and the extensive experience gained from buildingthe Paiton coal-fired power plant and the first four units of Suralaya. The Project did benefit from excellent project management and all the units were completed either on or ahead of schedule. Environmentalrisks were also adequately assessed in the EIA and mitigation measuresproposed and implemented.The following risks were, however, not identified at appraisal perhaps due to overly optimistic expectations: * Commercial risks associated with coal supply: accordingto the original arrangement, coal was to be delivered from only one supplier. However, due to various reasons, the main supplier could in fact only meet about 80% of the coal needs, thus the balance has to be obtained from other sources. Multi-suppliers caused variations in the coal quality, which in turn has impaired the efficient operation of Suralaya. Risks related to under-utilization of Suralaya: although the Project did achieve the benefits of generating electricity at least cost and increasinglevels of reliability in Java-Bali, it achieved such benefits to a lesser-than-expecteddegree due to over-capacityand decreased load growth levels in PLN's Java-Bali system.

In addition, the financial crisis that hit the country in 1997,which was beyond GOI/PLN's control and could not be foreseen at Project appraisal, affected the Project adversely. It caused substantial deterioration of PLN's financial performance (thus resulting in liquidityproblems and shortage of counterpart funding, which, fortunately, did not adversely affect project implementationas the Project was largely completed by that time).

4. Achievement of Objective and Outputs

4.1 Outcome/achievement objective: of Despite the achievement of all physical objectives,the overall outcome of the Project is rated as marginally unsatisfactory mainly because of: (i) PLN's financial capacity was not strengthenedduring the implementation of the Project; on the contrary, it deteriorated substantially during the late years of the Project due to the financial crisis; and (ii) low economic viability of the Project. The lower rates of return are due primarily to delayed realizationof the incrementalenergy sales revenues,and the lower average tariff given the sharp depreciation of the Rupiah. The achievement of the Project's objectives is detailed below. Objective 1: To expand PLN's electricity generating capacity through completion of the Suralaya Thermal Plant. With the successful completion and operation of the 3x600MW units 5-7 at Suralaya, this objective has been satisfactorily achieved. The completed Suralaya Thermal Power Station, with a total installed capacity of 3,400 MW, is a major contributorto economic development in Java and to employment in the local area. Objective 2: To promote the economic use of coalfor electricity generation. This objective has been satisfactorily achieved. Coal is now supplied from several coal mines in the country on a long- or short-term basis through open bidding. The increasinguse of coal spurredthe development of competitive coal mining facilities, which are also contributingto increased coal exports. In addition, compared to coal,

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oil is more exportable and contributorto value added. Therefore, substitution of oil with coal as fuel for power generation promotes the economicuse of coal. At present, Indonesia's hydrocarbon sector produces about 500 million barrels of crude oil and condensatea year, and 3 trillionicubic feet of natural gas, both for domestic consumption and export. This generates about US$ 7.5 billion per annum, which represents 27% of the Government's total revenues and 7 % of GDP, at the current exchange rate. GOI's vision for the hydrocarbon sector includes (i) the ability of meeting the domestic demand for oil and gas, as well as to provide fuel for Indonesia's economicgrowth, (ii) maximizethe generation of revenue for the country, (iii) ensure securityof supply, and (iv) develop national capabilitiesin the sector. Objective 3: To develop PLN's institutional capacity to operate and maintain thermal power plants. This objective has been achieved through successful completion of the associated TA activities. In fact, the achievement is beyond the objectiveas stated: not only the targeted 55 engineers were trained in efficient utility management including power plant engineering and design, as well as operation and maintenance aspects of large, modem thermal power planits;but also studies were conducted in organization and human resource planning as well as benchmarking. In addition,a study was completed leading to the establishment of a more autonomousunit within PLN responsible for electricity transmission in Java-Bali. Objective 4: To strengthen PLN's financial capacity. This objective was not achieved, since PLN's financial position has weakened dramaticallyduring the tenure of the Project. Since 1994, prior to the onset of the crisis, PLN was moderately profitable but nonetheless was unable to achieve the target ROR level of 8%. However, PLN was able to comply with the debt service coverage covenant of 1.5 times until the final crisis in 1997. Four main factors contributed to this outcome: (i) failure of GOI to implement needed tariff increases; (ii) high cost of power purchased from IPPs; (iii) lack of competitive pressure on PLN to drive costs down; and (iv) the financial crisis and resulting depreciation of the Rupiah that hit the country in 1997. Currently, PLN is unable to service its debts to GOI and to meet its payment obligations to IPPs. Since the financial crisis in 1997,PLN has become technically insolvent; its profitability, liquidity and capital structure have continued to deteriorate. PLN's financial difficulties are attributable, in part, to the sharp decrease of its average revenue in US dollar terms from the pre-crisis level (7 US/kWh in 1996to 2.8 US/kWh in 1999) while the lion share of its expenses (fuel, power purchase costs and debt service) are denominated in foreign currency. Mainly due to concerns over political repercussions, the tariff adjustments anticipated earlier did not materialize in 1999. Further, fixed obligations under IPP contracts are increasing rapidly, despite over capacity of power generation for Java Bali system for at least the short term. Consequently, PLN reported operating loss of Rp. 5.5 trillion (US$ 0.7 billion) and its rate of return on revalued net fixed assets was negative 9. .% in 1999. Its net loss amounted to Rp. 11.4 trillion (US$ 1.4 billion), thus continuing the rapid erosion of its equity (by a total of 46% over the past two years). In 1999, GOI supported to help PLN cover its cashflow deficit, amounted to (a) Rp. 2.3 trillion for equity investment in PLN's capital expenditures;and (b) Rp. 11.6trillion for deferred debt service due to GOI. In sum, government support for PLN in 1999totaled Rp. 13.9 trillion [or US$1.7 billion, increased from Rp. 10.7 trillion (or US$1 billion) in 1998]. Based on GOI's agreement with the IMF on rationalizationof energy prices in January 2000, PLN's average tariff was increased by about 29% effective April 1, 2000, with small consumers (<900 VA) not subjected to any tariff increase. At the same time, its petroleum fuel costs would also be increased. For the year 2000, PLN's average tariff is projected to increase by about 33% to 293 Rp/kWh (or about US 3.9/kWh); its net loss is projectedto decrease to Rp. 7.7 trillion mainly due to increases of revenue and government subsidy, and decrease of interest payment, despite increases of payment obligations to IPPs of about Rp. 10 trillion. Under the scenario that IPPs will be paid at the "best estimated negotiated price" -4 -

(about Rp. 4.2 trillion), total government support needed is estimated at Rp. 16.5 trillion (or about US$ 2.4 billion), including increased GOI cash subsidy to about Rp. 3.9 trillion, plus the aforementioned deferral of debt service due to GOI and equity for PLN's capital expenditures.

4.2 Outputsby components:

The Project completed satisfactorilyall the components as stated in the SAR. The design of the Project was generally satisfactoryexcept that there was no concrete Project component in support of the objective to strengthen PLN's financial position. Construction of three 600 MW coal-fired units at Suralaya: The achievement of this component is rated as highly satisfactorily. Suralaya units 5-7 were built under budget and ahead of schedule and with exemplary project management. SAR dates for commercialoperation for units 5-7 were 6/97, 12/97and 6/98 respectively (i.e., a six-month interval), while the actual dates were 6/97, 9/97 and 12/97, on or ahead of schedule. The 500 kV transmission line between Cilegon and Cibinongand associated substations,were commissioned without any major problems. Routing of the line was selected so as not to disrupt human settlements, agricultural land or forest areas. Land acquisition for the tower footings was done smoothly, with compensation at market prices. Engineering, Design, and Construction Supervision. Project Management was exemplary, with smooth cooperationamong all the parties concerned. The contract for engineeringservices was awarded on December 13, 1991 to a foreign firm in associationwith a local firn, which provided experienced and professionalassistance to PLN through specializedtechnical advice, transfer of knowledge, design review, contract management and construction supervision and so on. The project team was adequately staffed. Throughout the Project, the consultingfirm overcame many difficulties (including being not paid on time and taking the risk of working before approval of contract amendment- refer to Section 10) and worked closely with PLN both in the design office established in Jakarta and in the construction office on the plant site. The associated Project engineeringfirm also benefitedfrom the new technology introduced at Suralaya. Feasibility study for a high voltage submarine cable link between Java and Sumatra. The output of this Project component is deemed satisfactory.The study, finalized in 1994, concluded that it is technically and economically feasible to establish a HVAC link of 200 MW capacity between Java and Sumatra, which could be converted to an IHVDC at a later date. The study concluded that the link could be used, in the link medium term, to supply the Tanjung Karang area in SoutlhSumatra with power available in Java, and in the longer term, to exchange power between the two islands on a limited basis. Although the proposed link may still be attractive to PLN at present, the feasibility study would need to be updated to consider the changing supply-demand balance situation in the regiontaking advantage of the economies of scale (both in terms of the cost of new capacity and the cost of energy) of the larger generating plant that is installed on the Java-Bali system. Engineering and Design for a Thermal Power Plant at Banjarmasin. This activity was satisfactorily concluded. It provided the design basis for the Banjarmasin coal-firedplant (2x65 MW), a component being financed under the on-goingSumatera and Kalimantan Power Project (Loan 3761-IND). Institutional Development and Training. This componentwas completed satisfactorily. The TA activities conducted under the Project facilitated strengtheningof PLN's organization,enhancing its institutional efficiency, and the establishmentof more autonomousbusiness units. In particular the conclusionsand recommendationsof the Studyon Human ResourceDevelopmentand Planning are largely included in

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PLN's reform and restructuring plans, of "hic' Performance Appraisal System has already been implemented. An internal regulation has been I d by PLN on the Remuneration System, which is expected to be implemented soon, once its impac - the Pension Plan is thoroughly reviewed. In addition, competencies and gaps have been defined as parn human resource development; special training has been provided for mid- and top-level managers. The Human Resource Information System has been completed, and Human Resource Planning is being undertaken in parallel with the ongoing Corporate Restructuring of PLN. Senior Financial/Corporate Advisor. A Senior Advisor to the President Director of PLN was hired in August 1997 for a period of two years to assist PLN in coping with the financial crisis. Although it is difficult to assess the impact of the advisor in assistingPLN's President Director in the decision making process, the advisor has played a strategic role in assisting in coming to grips with the restructuring process of PLN, and in sorting out various pressing issues such as those associated with the IPPs. PLN has stated that it was very satisfied with the advice obtained.
4.3 Net Present Value/Economic rate of retur,:

The Project was part of PLN's dynamic least cost expansion program for the Java-Bali system. The EIRR calculated for the Project at appraisal was based on the incremental economic costs and benefits associated with PLN's investment time slice corresponding to the Project's implementationperiod (between 1991/92 and 1997/98) of this least cost program. According to the appraisal projections, the EIRR was 20 percent with consumer surplus, or 11 percent without consumer surplus. The EIRR was recalculated with the same methodology and for the same time slice but based on projectionsat Project completion. The ex-post EIRR was 12 percent with consumer surplus, and would be negative without taking into account consumer surplus, much lower than the appraisal estimates, indicatingthat PLN's investment program during the time slice may not be economically viable. Major contributing factors include: (i) PLN's average tariff at current level (about 3 USO/kWh)is well below the pre-crisis level (about 7-8 US/kWh, which would allow full cost recovery and a reasonable return on investment);(ii) reduced electricity sales; and (iii) impact of IPPs with their high levelized tariffs of power purchase.Recalculating the economic benefits with PLN's latest projected tariff increase (to 8.9 US/k;Whin 1991constant price by 2003 and beyond) resulted in an EIRR of 19 percent with consumer surplus, and 8 percent without consumer surplus. The SAR also presented a generation cost analysis for different sources of power (i.e. 600 MW coal, 600 MW combined cycle (CC), 600 MW nuclear, and 55 MW geothermal) for the Java-Bali system. The analysis was repeated during preparation of this ICR (but excluding the 600 MW nuclear alternative, as it is not viable for Indonesia at present). The levelized cost of generation over the assumed lifetime for the three altematives is as shown below. Even though PLN's Java-Bali investment program for the time slice corresponding to the implementation period of the Project (which was an integral part of the investment program) is not economically viable as mentioned above, it is clear that the coal-fired Suralaya Project is still the most economical among the alternatives available.
Levelized Busbar Cost (0/kWh) 600 MW 600 MW Description Coal CC CapitalCost 2.0 1.7 Fuel Cost 1.2 1.8 O& M Fixed 0.5 0.4 O& M Variable 0.06 0.09 Total Generation Cost 3.7 4.0

55 MW Geothermal 1.8 4.0

0.4

0.20 6.4

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4.4 Financial rate of return:

A financial rate of return was neither calculated at project appraisal, nor at project completion.
4.5 Institutional development impact:

Overall, the institutional development impact of the Project is rated as substantial. As discussed above (paras. 4.1 and 4.2), the Project provided a framework for greater decentralization of management, and the creation of more autonomous business units, as well as human resources development and planning. Although some of the recommendations have not been implemented at the time of financial crisis, they have been incorporated into the Corporate and Financial RestructuringProgram that PLN is presently undertaking with assistance from both the Bank and ADB. PLN understands that the sooner it introduces the marked improvements to the way in which it manages, develops and rewards its human resources, the better it will be able to introduce and sustain improved levels of company performance which the current economic crisis will demand as the only way of staying in business. In addition,the Financial Advisor provided impartial advice at the time PLN needed it most. The training of 55 engineers has been favorable; their expertise is now being used by PLN successfullyin the design, engineering and construction of coal-power plants.
4.6 Environmental impact

The power station, situated about 100 km west of Jakarta, was built initially with an infrastructure to support the installation of seven power generating units. For an installed capacity of 3,400 MW and an annual coal consumption of about 9 million tons, Suralaya has a significant impact on the environment. However, Suralaya is equipped with appropriate environmental mitigation measures to take into account the following: (a) thermal pollution caused by cooling water discharge to the sea; (b) water pollution caused by discharge of effluents from the plant; (c) air pollution caused by particulate matter, sulfur dioxide (S02), and nitrous oxides; and (d) disposal of plant solid wastes including bottom and fly ash, sludge, garbage, etc. The plant uses a 1.7 km discharge channel to reduce impact of heated effluent discharges on coal and marine habitats. To minimize the likelihood of adverse impacts on ambient air quality, low sulfur coal was specified at appraisal (0.5% total S). The coal being obtaining from the PT Bukit Asam (80% of plant supply) had an average total sulfur content of 0.25% in 1999. The remainder (20%) came from three other sources, only one of which exceeded the 0.5% limit. Electrostatic precipitators(ESP) for Unit 5-7 were designed for a particulate removal efficiency of 99.5% and have been meeting that standard. Stack emissions for S02 and NOx from Units 5 - 7 have been consistently within standards during the year of data examined
(1999).

Influent cooling water temperature averaged 29 C during 1999, and the average outfall temperature was 34.2 C, well below the limit of 40.0 'C. Effluent from the sewage treatment plant contained negligible concentrations of BOD, COD and total dissolved solids concentration, easily complying with standards. Boiler blow down water and water treatment plant effluent were subject to the same standards (pH, copper, nickel and iron). Data for 1999 show no compliance problems. Effluent from the oil separators was within standards according to the 1999 annual averages. Runoff and leachate from the ash disposal area are collected in a settling pond that is in urgent need of dredging. In some sections it has no freeboard, and the berm has been overtopped in heavy rains this year. The pond effluent is sampled for 11 metals. According to samples taken in August 1999, the settling pond supernatant met all metal standards and the Suralaya flyash is not considered to be toxic waste. Chlorine is used to prevent growth of algae and other biomass in the plant cooling system. The free chlorine concentrationis maintained at 0.3 mg/l. Annual monitoring by Gadja Madah University does not reveal any significant deterioration in the marine ecosystem that can be attributed to Suralaya. The quality of nearby coral reefs has declined slightly, but the reason identified by

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the scientists is sedimentationcaused by tree-cuttingand land development the Ash handling, sale for reuse, and disposal are the major environmentalclhallenges plant faces. Whereas the plant (units 1-7) had at one time been selling as much as 70% of flyash for reuse, only 10-15% is currently being sold. The ash disposal site is therefore filling more rapidly, but it is still expected to have capacity until 2007-8 even if flyash sales dc not improve. Gadja Madah University is investigating a range of new flyash use options for PLN. In the meantime, the disposal site needs road improvement, compaction,and other actions to stabilize the slope of the piles which have exhibited a tendency to slide in heavy rain. As predicted at appraisal, the construction of the transmission lines did not prove to have any environmentalproblem. The routing of the lines did not disrupt human settlements,nor agricultural land or forest areas. PLN paid market prices for the tower footings acquired. There were no resettlement issues associated with the project. 5. Major Factors Affecting Implementation and Outcome 5 1 Factorsoutsidethe controlof governmentor inplementingagency: The economic crisis that hit the country in 1997 has impacted substantiallythe financial situation of PLN. The sharp depreciation of the Rupiah greatly increased the cost to PLN of its US$-denominated long-term payment obligations. These include debt service payments on foreign loans on-lent by Government, take-or-pay fuel supply agreements for gas and geothermal steam (backed by standby letters of credits issued by state banks), and take-or-pay power purchase agreements with IPPs (backed by "comfort" letters issued by Government). As a result, PLN is currently unable to fully service its debt and to meet its payment obligationsto IPPs. The crisis has also affected the electricitydemand in the country. PLN's previously rapid sales growth, particularlyon Java, slowed considerably,leaving it with a mounting excess of baseload generation capacity as new plants came on stream. A lower demand growth rate and attendant reduction in sales growth rate combined with the current low average tariff have decidedly affected the economics of the Project. As the demand picks up, coal quality improves(see para 5.3), and other efficiency measures are implemented (see para 6.1), the capacity factors of the units will equal or exceed the benchmark upon which the economicanalysis was based. There are already some improvementsin capacity factors in 2000. 5.2 Factorsgenerallysubjectto government control: (a) The Pace of Sector Reform has proceeded at a much slower pace than anticipated.A technical assistance activity, undertaken in 1996 under Cirata 11project (Ln 3602-IND), provided a set of recommendationswhich served as a blueprintfor Sector Reform and Restructuring. The recommendations of this technical assistance provided the underpinningsfor the Government's Power Sector Restructuring Policy, which was launchedin August 1998. The Policy calls for far reaching changes in the power sector, including the unbundling of PLN and subsequentprivatization in phases. It is expected that the Policy framework will be instrumentalin providing a sound foundation of PLN's and the sector's medium and longer-termviability. To promote the gains so far achieved,the Bank is providingtimely technical assistance (under Loan 3978-IND) for corpo:rateand financial restructuring of PLN. The Financial Advisor which was funded under this project, also provided timely input to PLN in this critical time. (b) Tariff adjustments: In addition to the financial crisis, GOI's continued failure to approve the needed tariff increases greatly contributedto the deteriorationof PLN's financial position.

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Change in Customs Clearance Procedures: In October 1995,the GOI introduced change in (c) customs regulations with the import master list and the authority under which it needs to be certified before the customs authorities release the items being imported under the list. This change, introduced retroactively without consideration of the impairmentit could cause in the implementationof ongoing projects, resulted in several critical steam generator components and other materials being held up for customs clearance for much longerthan before; thus precious erection time was lost. Although Unit 5 was not significantly affected since imported equipment had already been delivered to the site, it affected Units 6 and 7. Generally speaking, the Project would have been completed earlier had the regulation change not been made. agencycontrol: 5.3 Factorsgenerallysubject to implementing Management. Project planning, management,and coordination provided by PLN Good Project (a) and the other parties involved were exemplary. The Project was implemented by an extensive critical path schedule which controlled engineering,procurement, manufacturing,construction and commissioning activities. Despite the factors (as discussed above and below) that have affected the project implementation,the Project was commissioned ahead of schedule. The timely completion of the Project also reflects PLN's overall strong technical capability as well as the experience gained from the earlier Bank financed thermal power projects (Paiton and Units 1-4 of Suralaya). (b)
3

Technical Issues ol Fire in the Secondary Air Heaters of Unit 5. During commissioning September 22, 1996 (due to an unexpected trip of the station service transformer), a fire broke out in Unit 5, causing a two and half month delay to its commercial operation. The Contractoraccepted full responsibilityfor the incident and provided all repairs at no additional cost to PLN. The availability of duplicate spare parts for Unit 7 was instrumental in minimizingthe schedule impact on Unit 5. Units 6 and 7 were fortunately unaffected by this incident. Temperature in DCIS and Turbine Hall. Shortly after commissioning Unit 5-7, it was noted that the temperature in the DCIS and the Turbine Hall was higher than specifications, which could lead to potential technical problems. Additional work was therefore needed by the Contractor to bring the temperature within specifications. Though taking longer than expected time, the issue was solved satisfactorily before loan closing. Black Start Capability. Although the original design for Suralaya did not require black-start capability, subsequent events during a serious blackout in April 1997 made it necessary to provide black-start capability. To this end, 2x20 MW gas turbines have been installed at the site. Coal Quality. According to the original agreement, all coal supply for Suralaya should have been obtained from one local supplier. Apparently due to unsatisfactory prices in the domestic market, this supplier is presently supplying only 80% of the contractedquantity. The balance is then procured in the spot market from several other suppliers. Whilethis arrangement allows some limited competition on coal supply, it also presents some technical problems as regards coal quality due to the variable nature of the coal characteristics of the various suppliers (i.e. calorific value, ash content, sulfur content, nitrogen, grindability). The substandard quality of the coal is impairing somewhat the efficient operation of Suralaya. The Bank has persistently requested PLN to deal with the contract breach by the main supplier as well as coal quality.

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(c) PLN's Excess Reserve Capacity. In the face of double digit sales growth rates in the 90's and apprehension of having to face power outages and the attendant high cost of i. rruptions of service, PLN's planning approach was to maintain an overexpandedsystem in Java-Bali, that is, one with large regional reserve margins. This was justified on the basis that a high reserve margin was necessary to avoid the costs of power interruptions to thleeconomy, and to hedge against the risk of unreliability of existing thermal plants, and the possibility of implementationdelays, particularlyon the commissioning of transmission lines and substations (i.e. about 10 months for power plant and 13 months for transmission projects). Under subsequent loans, a generating capacity margin covenant was introduced to request PLN to take all such actions as shall be necessaryto reduce the realized reserve margin in the Java-Bali System to 30% by December 31, 1999 (including present IPP commitmentsin Java-Bali, the capacity reserve margin was over 45% on loan closing). This covenant has not been complied with. It is clear that committed private power additions and the reduction of sales growth rates will not allow PLN to achieve a reasonable level of reserve capacity margin (i.e. 20-25% range) till the 2002-4 time frame. The annualized carrying costs of the excess capacity have been variously estimated to vary between US$ 150 - 400 million. more In light of its financial woes, PLN has started to implementan under-planningapproach based on1 realistic demand projections. (d) Timely Action on Counterpart Fundin. During the last stages of Project implementation in 1997, the economic crisis and PLN financial difficulties were affecting the Project, particularly as regards counterpart funding. The Project was restructured with unnecessaryloan proceeds canceled and the Loan Agreement amended to allow for 100% of local financing (i.e. Bank loan disbursement percentage for certain local expenditures to increasefrom 65% to 100% excluding taxes) effective from April 1, 1997 and October 31, 1999. This timely action relieved considerably the pressure on1 PLN to pay the contractor's invoices and allowed the Project to be comp.eted with no delays. 5.4 Costsandfinancing: The estimated total project cost at appraisal (excluding interest during construction) was $2,024.5 million. The latest estimate of the actual project cost is $1,453.1 million equivalent, resulting in a cost under-run of about 28.2%. This cost under run was achieved largely due to: (a) competition under Bank ICB and procedures; (b) world-wide decline in equipmnent materials; and (c) conservative cost estimates. Including interest during construction,the total actual project financing required was $1,602.7 million (vs. $2,360.5 million at appraisal), of which, Banikloan provided $299.5 million (vs. $433.6 at appraisal) and GOI/PLN provided $424.6 million (vs. $813.8 million at appraisal), and the balance of $878.6 million (vs. $1,113.1 million at appraisal) from other financiers (including ADB and export credits). The original amount of the Bank loan was $423.6 million. At the requests of the borrower, two partial loan cancellationswere made during project implementation in August 1996 and August 1998 with respective amounts of $100 million and $32.2 million; resulting in the revised loan amount of $294.1 million. The final disbursement is $282.2 million; and the undisbursed balance of $9.2 million will be canceled upon closure of the loan account. 6. Sustainability 6.1 Rationale sustainability for rating. Due to the economic crisis in the country and PLN's deterioratedfinancial situation, the sustainability of the Project objectives appears to be uncertain. Unless the financial situation of PLN improves in the short to medium term, the sustainabilityof the Project may be impairedthrough perhaps lack of maintenance

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budget at PLN/PJB 1, deterioration of the transmission system to evacuate power from Suralaya, and dissipation of the commitmnent reform and restructuring,on which the restoration of PLN's financial for viability rests. Over the short to medium term, PLN is facing the challenge to cope with a difficult period of transition, within the context of a highly uncertain operating environment that is to a certain extent beyond the control of the company. With a view to restoring the financial sustainabilityof the sector, GOI publicly launched a Power Sector Restructuring Policy in August 1998. International consultants (financed under the Second Power Transmission and Distribution Project, Loan 3978-IND) are expected to be mobilized shortly to assist GOI/PLN in the implementation of the corporate and financial restructuring of PLN. Within the context of GOI's restructuring policy, various remedial measures have recently been initiated by GOI/PLN to put the company on the road to financial recovery, including: (a) expenditure reduction and efficiency enhancement; (b) tariff rationalization; (c) rationalization of IPP contracts; (d) debt relief, and (e) debt restructuring. Under the Presidential Decree No. 166 dated December 18, 1999, a ministerial level committee for the restructuring of PLN was set up and chaired by the Coordinating Minister of Economy, Finance and Industry. Other members of the committee include four ministers (Mining and Energy, Finance, State Enterprise and Foreign Affairs). However, the degree and pace of PLN's financial recovery remain unclear at this point. On the institutional side, the policy framework established in August 1998 for sector reform, which provides the blueprint for sectoral restructuring, is expected to facilitate a reversal PLN's dramatic downturn in financial viability. Moreover, it is expected that the framework will also be instrumental in providing a sound foundation for the medium and longer-termviability of the sector as a whole and of PLN in particular. In addition, PLN is starting to institute some changes in the way it develops and rewards human resources, which is expected to have a positive impact on PLN's performance. In addition, PLN is implementinga system-wide EfficiencyImprovement Program to improve the availability and heat rates of generating units, as well as reduce the duration time of inspection and extend the interval between inspections. As a result, the cost savings at PJBI (which is responsible for operating of the Suralaya) alone were expected to be Rp. 54.9 billion($7.3 million equivalent) in 1999. The effect of this program is also felt in Unit 5 where the realized availability in 1999 was 98% (compared to a NERC Standard of 81%), and the heat rate was reduced from 2,590 Kcal/kWh in 1997 to 2,478 Kcal/kWh in 1999. The target heat rate is 2,310 Kcal/kWh. Technically, Suralaya Thennal Power Plant is of good quality and the generation units have operated at high availability since commissioning. Suralaya is well maintained under a predictive maintenance regime (as opposed to time-based maintenance) that has been recently introduced. The average plant availability for Suralaya units 5-7 in 1999 was 80% (98% for Unit 5, 77% for Unit 6, and 69% for Unit 7) compared to 75% in 1998. As of March 2000, average plant capacity factors have improved over those in previous years, with values of (for 3 months only): 64% for Unit 5; 76% for Unit 6, and 68% for Unit 7, slightly lower than the 70% target, due to a number of causes, including unit deratings caused by bad coal quality; scheduled maintenance; excess capacity; and reduced demand. As regards excess capacity, PLN generation assets are expected to be fully utilized by 2001 to maintain an LOLP of I day/year, at which time additional demand would need to be met by IPPs alone as PLN does not have any new generation project in the pipeline. Industrial sales growth rate was about 4% in 1999, which bodes well for economic recovery and the full utilization of Suralaya. 6.2 Transitionarrangementto regularoperations:

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All Units 5-7 completed under the Project lhavebeen handed over to PJB 1 for operation and maintenance. All the units are now fully operational. PJB1 is one of the few relatively autonomous generation subsidiaries under PLN and has the technical capability to operate and maintain the units at Suralaya, which is perhaps PLN's most important power plant in Java-Bali integrated system. However, PJB1 budget highly depends on PLN's bulk power purchase tariff (about 155 Rp/kWh at present), which, according to PJB 1, may not be sufficient to cover costs at present. It is to noted, however, that under the Power Sector Restructuring Policy for corporate and financial restructuring of PLN, the optimal number and composition of independentgenerating companies, or Gencos, is to be reviewed, given the Government's objectives conceming competitive markets operations and privatization. In the context of the on-going corporate and financial restructuring of PLN, a different entity other than PJB 1 may be responsible in the future for the operation and maintenance of the Project.

7. Bank and Borrower Performance

Bank 7.1 Lending: Identification of the Project components and analysis of technical, financial, environmental, and economic issues during project preparation and appraisal were satisfactory. The Project objectives fitted well with the prevailing sectoral objectives. Project preparation and appraisal were comprehensive. The procurement and other implementation arrangements were adequate. The developmentof an environmental management plan for Suralaya was thorough and provided the basis for the clear-cut and fair agreements reached during negotiations. 7.2 Supervision: Supervision of the Project is rated as highly satisfactory. 12 supervisionmissions (including the ICR mission) were fielded in combination with missions for other projects/activities,at about 2 missions per year on average. Timilg of supervision mission was generally satisfactory and the duration of the missions was well planned, taking into account the sectoral work that went along with the mission objectives. Although the Task Managers were changed three times during Project implementation,this did not hamper the continuity and effectiveness of the supervision efforts because of overlap of team members. Project implementation progress was reported on a timely and regular basis throughout the life of the Project. Procurement was handled satisfactorily, although the problem with Memorandum Number 5 (refer to Section 10) was allowed to fester too long without taking a final decision for a line of action. The IP (Implementation Progress) was either rated "Highly Satisfactory"or "Satisfactory",while the DO (Development Objective) rating was downgraded to 'unsatisfactory'when the financial situation of PLN deteriorated in 1997, and was kept so till loamclosing (September 30, 1999). The Bank took proactive actions on loan proceeds cancellations once loan savings were identified; the Bank also responded quickly to PLN's deteriorated financial situation by restructuring the Project and amending the Loan Agreement to allow increase of the Bank loan disbursement percentage for local expenditure (excluding payment of taxes) to 100% from April 1998to January 2000, which relieved considerably the pressure on PLN to pay the contractors. Fortunately, the wrenching economic crisis in the region did not affect the completion of the Project. 7.3 OverallBank performance: Overall, the Bank performance is rated as satisfactory. The Bank maintained continuous contact witlhPLN and other stakeholders which provided the basis for taking quick actions when required. In addition, the Bank's dialogue with PLN and the Government focused on much more than the agreed objectives of the specific project and provided a significant contribution to the identification of the sector issues which were discussed regularly with PLN and Government.

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Borrower 7.4 Preparation:

The performance of the Borrower is rated as satisfactoryduring Project preparation. PLN prepared the Project with excellent technical quality and realistic implementationarrangements. The Project fit well into PLN's priority investment program and was in line with the Govemment's overall sector strategy.
7.5 Government implementation performance:

The Govemment's performance during implementationwas deemed satisfactory, although marginally so. Counterpart funds were made available in a timely manner except close to project completion when the Asian crisis was in full swing and PLN's financial performance was deteriorating drastically. GOI officially launched in August 1998, though later than expected, the Power Sector Restructuring Policy, which provided the framework to restructuring of the power sector including PLN. During the project implementation,three issues related to the Government should be noted: (a) GOI did not approve the tariff increase as required due to political sensitivity, which substantially affected PLN's financial situation; (b) GOI has not been proactive in addressing the issues of under-capitalizationof PLN, and (c) a change in the clearance procedures introduced by GOI early 1996 caused problems in obtaining customs clearance for several critical components, with the result that precious plant erection time was lost trying to sort out the problem. Fortunately, this did not affect the timely completion of the project as a whole.
7.6 Implementing Agency:

Performance of PLN is rated as highly satisfactory on the technical side with highly effective Project coordination with consultants, suppliers, contractors and subcontractors. It implemented the Project ahead of the schedule and below the budget. PLN's procurement activitieswere fairly on time. However, as discussed in Section 4, PLN's financial performance has not been satisfactory. It's financial position has deteriorated dramatically during the tenure of the Project, though mainly due to factors (including the financial crisis, high cost of IPPs, and GOI's unwillingness to approve required tariff increase) beyond its control. As a result, PLN was unable at any time during the Project period to fully comply with the financial covenants established for it under the project. Overall, the performance of the implementingagency is rated as satisfactory.
7.7 Overall Borrower perJormance:

Overall, the Borrower's performance was satisfactory. The GOI and PLN were fully committed to the successful completion of the Project on the physical construction side; and the GOI launched the important policy framework for power sector reform; however, PLN's financial position deteriorated substantially. 8. Lessons Learned * In addition to quality at entry, full commitment from both the borrower and the implementing agency, as well as close coordination among the key players (suppliers, contractors, consultants, donors, owners), good project management, and extensive supervisionare key factors, contributed to the successful and timely completion of the Project. Bank quick action to respond to the financial crisis situation by increasing the loan disbursement percentages for local expenditures was instrumental in avoiding any potential delays due to shortage of counterpart funds. Project cost estimates should be more realistic and robust, to avoid large amounts of cancellation of the

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Bank loan (about 33% of the Bank original loan amountwas canceled under the Project). * The high cost of the IPPs has been a contributingfactor to the failure of the Project to meet its financial objective and has adversely affected the economics of PLN's entire investment program, indicating the need for thorough risk analysis in aihighly uncertain operating environment, particularly in a sector undergoing major structural reform. The use of a "rate of return on revalued assets" covenant to measure financial performance is not appropriate for a company like PLN w:itha very large and lumpy investment program.

9. Partner Comments (a) Borrower/implementing agency: Borrower's own evaluation report is attached as Annex 9. (b) Cofinanciers: ADB's Project Completion Report for Surai.aya (May 1999)recorded the following: "Reduction in the overall project cost by 23 percent compared to the appraisal estimate was achieved as a result of strong international competitivebidding and the worldwide decline in demand for power plant equipment. The main objectives of the Project were achievedwith the commissioning of units 5-7 of the Suralaya Thermal Power Plant and their supplying of electricity to the grid. It is unfortunate that as a result of the financial crisis, the full benefits of the Project cannot be utilized in the time frame originally envisaged. However, with gradual improvementof the economic, load growtlhis expected to be resumed again. Overall, the Project is considered generallysuccessful.The TA accompanying the Project achieved its objectives in benefiting PLN, and is considered generallysuccessful as well." (c) Otherpartners (NGOs/private sector): None. 10. Additional Information Memorandum No. 5. PLN signedan agreement on December 13, 1991 with a foreign firm in association with a local firm to provide Engineering and Design Consultancy Services, as well as Construction Management and Start Up support for Suralaya Units 5, 6 & 7. The original agreement was for a value of US$ 33.463 million plus Rp 12.996 billion. The Services were to be provided in two stages: Stage I for preliminary engineering and the preparations of bid documents for major contract packages, funded by a completed Bank loan (Ln 3349-IND),and Stage II for the balance of services to complete the work, funded by the Bank loan for Suralaya. After the invitation for proposal for the above services had been issues by PLN, a study concluded that the size of the individual units, which were 500 MW or the last three units in the original design could be increased to 600 MW each for an ultimate plant capacity of 3,400 MW (Units 1-4, 400 MW). The incrementalcapacity of 300 MW gave rise to the need for several additional studies to be made by the Engineers. The Engineers were also required by the Bank to compress the implementationschedule from 9 months to 6 months between commissioningof the three units. Even though the out of scope work was already identified immediatelyafter contract signing, PLN was reluctant to start processing any contract amendment so soon after securing the Govemment's approval to

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the original contract. Also, the full extent of scope changes was not yet final. Although the Bank persistentlyrequested PLN to regularizethe scope of work of the Engineer, PLN did not attempt to do so until October 1996. This caused the Engineerto work under a contract for which payment could not be made; in October 1996the Engineer was out of pocket by about US$ 14 million. In October 4, 1996 PLN sent to the Bank Memorandum No. 5 to amend the Engineer's Contractto support an additional of 711 rn/m to complete all the activities in the contract. Because of the large sums of money in Memorandum No. 5, the matter was discussed at an OPRC meeting which decided that MemorandumNo. 5 should be reviewed by an independententity. OPRC agreed on payment of 50% of the expenditurescovered in MemorandumNo. 5 to the Engineer, and the remaining 50% was subject to an examination by an auditor of the book of the Engineer to verify that the man-months claimed have actuallybeen expended under the ContractAgreement have already been so expended. A conditional NOL was issued in March 1997. KPMG Peat Marwick was selected to do this auditing work. On September 17, 1997 KPMG submitted their report which satisfactorilyverified the man-monthsand direct expensesand confirmed deliverablesto visible activities. It is to be noted that the manner in which the contract was "manipulated"by PLN is neither normal nor desirable. Most of the additionaltasks to be accomplished under the contract were known during negotiationsand prior to contract signing. It is difficult,therefore to justify the five year delay in putting the proposal together for appraisal of the additionalcosts involved. Nevertheless and in spite of this unfortunate event and out of pocket expenses by the Engineer, there was no measurable impact on project management.

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Annex 1. Key Performance Indicators/Log Frame Matrix

Indicator Commercial Operation: * Unit #5 * Unit #6 * Unit #7 Training of PLN O&M Engineers
Indicator

SAR Tarsget 06/97 12/97 06/98 55

Benchmark

Actual 06/97 09/97 12/97 55

Actual

1998 Utilization and Efficiency Capacity Factor (CF, %) * Unit #5 * Unit #6 * Unit #7 Equivalent Availability Factor (EAF, %) * Unit #5 * Unit #6 * Unit #7 Standard Coal Consumption (g/kWh) * Unit #5 * Unit #6 * Unit #7 Gross Thermal Efficiency (%) * Unit#5 * Unit #6 * Unit #7 Environmental Protection ESP Efficiency (%) at * Unit #5 * Unit #6 * Unit #7 System Reliability in Java-Bali * SAIFI (times/customer/year) * SAIDI (hours/customer/year)

1999

03/2000

70 70 70 80 80 80 455 455 455 36 36 36

62 34 65 79 58 87 479 449 463 34.8 37.2 36.1

69 50 43 98 77 69 462 449 440 36.1 37.1 38.0

64 76 68 80 95 85 451 451 450 37.4 37.4 37.4

99.5 99.5 99.5 -

n.a. n.a. n.a. 12.4 9.8

n.a. n.a. n.a. 13.1 8.9

n.a. n.a. n.a. n.a. n.a.

Note: a/ ESP efficiency in 1997 was 99.75%, 99.81% and 99.88% for Units 5/6/7 respectively; and has not been tested since then.

16 -

Annex 2. Project Costs and Financing

ProjectCost by Component (in US$ millioniequivalent)

Appraisal Estimate
Project Cost By Component US$ million

ActuallLatest Estimate
US$ million

Percentage Appraisal 78.15 109.87 77.32 76.73 51.23 86.34 71.06 80.18 76.58 61.59 94.36 133.24 0 92.15

Turbine generator and ancillaries Steam generators and ancillaries Piling and circulating water channels Marine works Main civil works Stacks Steelworks and cladding Ash and coal handling plants Mechanical and electrical works Substation and transformers 500 kV transmission system Own administration and supervision Housing colony Technical assistance (engineering & other TA) Total BaselineCost
PhysicalContingencies PriceContingencies

253.40 627.50 52.90 29.70 99.00 29.50 36.80 96.70 203.00 49.00 75.00 6.80 9.40 61.40 1630.10 107.20 287.20 2024.50 336.00 2360.50

198.02 689.45 40.90 22.79 50.72 25.47 26.15 77.53 155.46 30.18 70.77 9.06 0.00 56.58 1453.08

Total ProjectCosts Interest during construction

Total Financing Required

1453.08 149.63 1602.71

44.53

Project Costs by ProcurementArrangements (Appraisal Estimate) (IJSS million eauivalent) Procurement Method Expenditure Category 2 N.B.F NCB Other .__________________ .ICB 136.90 0.00 0.00 70.90 1. Works (45.70) (0.00) (0.00) (0.00) 2. Goods 365.60 0.00 0.00 1365.20 (0.00) (0.00) (0.00) (318.30) 77.30 0.00 0.00 0.00 3. Services (0.00) 0'0.00) (69.60) (0.00) 0.00 0.00 0.00 8.60 4. Miscellaneous
(0.00) 1'0.00) (0.00) (0.00)

TotalCosts 207.80 (45.70) 1730.80 (318.30) 77.30 (69.60) 8.60

(0.00)

Total

436.50 MEN_ L 4A!

0.00 o.00)

77.30 (69.60)

1510.70 (0.00)

2024.50 (433.60)

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Project Costs by ProcurementArrangements (Actual/LatestEstimate) SS million equivalent) Procurement Method Expenditure Category 2 ICB NCB Other NB.F l. Works 48.26 0.00 0.00 50.72 (37.77) (0.00) (0.00) (0.00) 2. Goods 213.70 0.00 0.00 1074.76 (206.97) (0.00) (0.00) (0.00) 3. Services 0.00 0.00 56.58 0.00 (0.00) (0.00) (54.74) (0.00) 4. Miscellaneous 0.00 0.00 0.00 9.06
(0.00) (0.00) (0.00) (0.00)

TotalCosts 98.98 (37.77) 1288.46 (206.97) 56.58 (54.74) 9.06

(0.00)

Total

261.96 1 (244.74)

0.00

(0.00)

56.58 (54.74)

1134.54 (0.00)

1453.08 (299.48)

I/ Figures parenthesis theamounts befinanced theBank in are to by Loan.Allcostsinclude contingencies. 2/ Includes works goods beprocured civil and to through national shopping, consulting services, services of contracted oftheproject staff management training, office, technical assistance services, incremental and operating related (i)managing project, (ii)re-lending costs to the and project funds local to government units.

ProjectFinancingby Component (in US$ millionequivalent) Component A-Draisal Estimate

Bank PLN/GOI CoF. Turbine generator Steam generator Piling C.W. & channel Marine works Main works civil Stacks Steelworkscladding & Ash coalhandling and Mechanicalelectrical & Substation &transformers 5OOkV transmission sys. Own admin supervision &
Total

Bank PLN/GOI CoF.

Actual/LatEstimaite st Percentaee AvDraisal of Total Bank PLN/GOI CoF. Total

7.38 190.64 198.02 158.17 531.27 689.44 40.90 40.90 5.24 5.24 20.24 30.48 68.27 5.25 25.47 2.64 26.15 8.65 66.97 77.53 2.64 155.46
1.46 30.19

17.55 20.22 23.51 1.91 152.82

28.73

11.52 59.26 9.06 I

Housing colony Technical assistance

Totalfinancingrequired

70.78 9.06 56.571 1

_

I
433 60

_I_I
477.80 1,113.10

__

54.74

1.83

2,024.50 29948

274.98 878.62 1.453.08 69.07

57.55 78.93 71.77

Notethe following: * Appraisalfinancingplanby components by financiers not available. and is * CoF (cofinancing) includesloansfromADB,exportcreditsandother sources. * The estimatedBankfinancinginclude$10 millionfromLoan 3349-IND. * The actual Bankfinancinginclude$10 milliondisbursed underLoan 3349-IND; excludingthis amount, the actualBankfinancingvaluedby the borrowerin the abovetablewould be $289.48million,whichis differentfromthe actualdisbursement $282.15millionvaluedby the Bank;the gap was dueto of fluctuationsof exchangerates as the Bankand the borrower valuedthe transactions terms of USDon in differentdates.

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Annex3: EconomicCosts and Benefits

Economic Internal Rate of Return (EIRR) Appraisal Estimate 19.98% on PLN's investment program in Java for 1991/92 through 1997/98 (that the Bank financed project was a part) at the prevailing tariffs and including consumer surplus. If the consumer surplus is not taken into account, the EIRR is 10.96%. Ex-post Estimate 12.40% on PLN's investment program in Java for 1991/92-1998, the period that the Bank-financed project ended up covering, including consumer surplus. Without consumer surplus the revenue streams are all negative and hence the EIRR cannot be re-evaluated.

The ex-post calculations are shown in Tables I and 2 below. Table 1, the base case, is evaluated witlhthe prevailing tariff. Table 2 is a case study for the expected tariff increases to 8.9 /kWh in 1991 constant prices by 2003 and beyond. The assumptions are available on file as part of the supporting documents listed in Annex 7.

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Table 1. Suralaya Steam Coal Power Plant Project (Units 5, 6 & 7) Calculation of EIRR on Java Investment (1991/92 - 1998) Base Case (without tariff increase) Year Investment Shadow Price Total Sales (GWh) Total Incr. Sales Revcnue Consumer Surplus Total Benelit 2) 0 0 0 366 758 1,078 1,460 2,044 2,680 2,030 2,012 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 2,357 Total Cost (3) 0 0 1,257 1,785 1,933 2,291 3,284 2,458 2,095 1,343 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 (US$: Million) tenefitc - Costs Revenue Total at avg. tariff Benefit ( - (2 (2) -(3) 0 0 -1,257 -1,606 -1,504 -1,664 -2,350 -1,151 -600 -833 -81 265 265 265 265 265 265 265 265 265 265 265 265 265 265 265 265 265 265 265 265 265 265 0 0 -1,257 -1,419 -1,175 -1,213 -1,824 -414 586 687 1,229 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575 1,575

(1)_______ ___________ 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 0 0 0 179 430 627 934 1,308 1.494 509 702 1,048 1,048 1,048 1,048 1,048 1,048 1,048

L.

1,249 1,628 1,626 1,946 2,819 1,815 1,385 579 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

25,078 27,838 31,213 34,638 40,134 45,936 51,511 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078

0 2,760 6,135 9,560 15,056 20,858 26,433 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000

0 188 329 451 526 737 1,186 1,521 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1.310

1,048
1,048 1,048 1,048 1,048 1,048 1,048 1,048 1,048 1,048 1,048 1,048 1,048 1,048 1,048

1,310
1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1.310 1,310 1.310 1,310

EIRR with consumer surplus a/ Average tariff in US censtkWh referred to 1991 as base year are: 6.54 in 1991; 6.47 in 1992; 7.00 in 1993; 6.56 in 1994; 6.20 in 1995; 6.27 in 1996; 5.65 in 1997; 1.96 in 1998; 2.70 in 1999; and 4.03 in 2000. b/ Additional economic benefits for residential and industrial consumers are: Residential (in US cent/kWh): 11.16in 1991; 10.70 in 1992; 9.41 in 1993; 8.07 in 1994; 6.75 in 1995; 6.86 in 1996; S.10 in 1997; 8.42 in 1998; 7.68 in 1999. Industrial (in US cent/kWh): 5.65 in 1991; 5.42 in 1992; 4.07 in 1993; 3.76 in 1994;2.36 in 1995; 2 49 in 1996; 3.45 in 1997; 6.06 in 1998; 4.80 in 1999. c/ EIRR at average tariff is not evaluated since net revenue cash-flow is all negative.

12.40%/,

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Table 2. Surclaya Steam Coal Power Plant Project (Units 5, 6 & 7) Calculation of EIRR on Java Intestment (1991192 - 1998) With Tariff Increase Year Investment Shadow Price Total Sales (GWh) Total Incr. sales Revenue Consumer Surplus _ 0 0 1,249 1,628 1,626 1,946 2,819 1,815 1,385 579 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 25,078 27,838 31,213 34,638 40,134 45,936 51,511 51,078 51,078k 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 (l0 2.76( 6,135 9,56C 15,056 20,858 26,433 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 26,000 179 430 627 934 1,308 1,494 509 702 1,048 1,314 2,139 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 2,313 0 188 329 451 526 737 1,186 1,521 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 1,310 Total benefit (2) 0 0 0 366 758 1,078 1,460 2,044 2,680 2,030 2,012 2.357 2,624 3,449 3.623 3,623 3,623 3,623 3,623 3,623 3,623 3,623 3,623 3,623 3.623 3,623 3,623 3,623 3,623 3,623 3,623 3,623 3,623 Total cost f3) 0 0 1,257 1,785 1,933 2,291 3,284 2,458 2,095 1,343 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 783 , Million US$ Benerisc- COst Revenue Total at avg. tariff benefit (1) - (3) 0 0 -1,257 -1,606 -1,504 -1,664 -2,350 -1,151 -600 -833 -81 265 531 1,356 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530 1,530
____-_(3)

___ _fl) _ 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

-_

0 0 -1,257 -1.419 -1,175 -1.213 -1.824 -414 586 687 1.229 1,575 1,841 2.666 2,840 2,840 2,840 2,840 2,840 2,840 2,840 2,840 2,840 2,840 2,840 2.840 2,840 2,840 2,840 2,840 2,840 2.840 2,840

EIRR without Consumer Surplus EIRR with Consumer Surplus a/ Average tariff in US cent/kWh referred to 1991as base ! ear are: 6.54 in 1991;6.47 in 1992; 7.00 in 1993; 6.56 in 1994; 6.20 in 1995; 6.27 in 1996;5.65 in 1997; 1.96 in 1998;2.70 in 1999;4-03 in 2000,5.05 in 2001; 8.23 in 2002; and 8.90 in 2003. b/ Additional economic benefits for residential and industrial consumers are: Residential (in US cent/kWh): 11.16 in 1991; 10.70 in 1992;9.41 in 1993; 8.07 in 1994; 6.75 in 1995;6.86 in 1996; 8.10 in 1997; 8.42 in 1998; 7.68 in 1999. Industrial (in US cent/kWh): 5.65 in 1991; 5.42 in 1992; 4.07 in 1993;3.76 in 1994; 2.36 in 1995; 2.49 in 1996; 3.45 in 1997; 6.06 in 1998; 4.80 in 1999.

7.74% 19.18%,

- 21 -

Comparative Generation Costs Table 3 compares the costs of generation for various sources of power, including coal, combined-cycle and geothermal. Nuclear was left out (which was included in the Staff Appraisal Report) as it is at present not a viable alternative for Indonesia.
Table 3. Levelized Busbar Cost of Alternatives Combined Cycle 600 700 12 0.134 20 94 21.0 Gas 1000 2.53 48 1792 0.018 50 55 60 65 1.7 1.8 0.4 0.09 4.0 1.1 1.0

Description Installed Capacity Capital Cost Discount Rate Disc. Rate (12%) Life Time Ann. Capital Cost Ann. 0 & M Fixed Cost Fuel Type Heat Content Fuel Price Thermal Efficiency Heat Rate Fuel Cost Capacity factor c1st year * 2nd year * 3rd year * 4th year Capiial Cost Fuel Cost O & M fixed O & M Variable Total Generation Cost Ratio to coal Ratio to combined cycle

Unit (MW) ($/kW) % pu ($/kW-Year) ($/kW-Year) (kcal/kg, btulscf) ($/ton, $/MMbtu) (%) (kcal/kWh) ($/kWh)

Coal 600 900 12 0.1275 25 115 27.0 Coal 5300 28.0 37 2324 0.012 55 60 65 70 2.0 1.2 0.5 0.06 3.7 1.0 0.9

Geothermal 55 1000 12 0.1275 25 127 30.0

(%)
80 80 80 80 1.8 4.0 0.4 0.20 6.4 1.7 1.6

(0/kWh) (0/kWh) (/kWh) (/kWh) (CkWh)

Source: PLN All costs are expressed in US$ as of January 1999 Discount rate 12% Fuel price escalation rate is I % per year

Other assumptions are availableon file as part of the supporting documents listed in Annex 7.

- 22 -

Annex 4. Bank Inputs

(a) Missions: Stageof ProjectCycle Month/Year Identification/Preparation 06/90 11/90 Appraisal/Negotiation 04/91 Nc. of Personsand Specialty (e.g. 2 Economists,I FMS,etc.) Count Specialty 2 I 2 I 3
I

Performn ce Rating Implementation Development Progress Objective

Engineers FinancialAnalyst Engineers FinancialAnalyst Engineers FinancialAnalyst Engineers FinancialAnalyst Engineers FinancialAnalyst Env. Specialist Engineer Env. Specialist HS HS HS HS S HS HS HS HS S S

07/91 Supervision 05/93

2 I 2 I I

HS

06/94 03/95 09/95 03/96 11/96 07/97 11/97

1
I

HS S

HS HS

1 Engineer 1 Engineer
2 2 Engineers Engineers Engineer Engineers Economists Procurement Specialist Engineers Env. Specialist Engineers FinancialAnalyst Engineers FinancialAnalyst Operations Officer

1
2 2 I 2

07/98 12/98 04/99

I
2 I 2

S S S

U U U

I
I

- 23 -

ICR 02/00 2 I I 1 Engineers Financial Analyst OperationsOfficer Env. Specialist S U

(b) Staff. Stage of Project Cycle Identification/Preparation Appraisal/Negotiation Supervision ICR Total Actual/Latest Estimate US$ (,000) No. Staff weeks N/A 29.1 N/A 66.5 N/A 105.2 N/A 8.1 N/A 208.9

- 24 -

Annex 5. Ratings for Achievement of Objectives/Outputs of Components

N=Negligible, NA=Not Applicable) (H=High, SU=Substantial, M=NModest,

Rating Macro policies Sector Policies Physical Financial Institutional Development Environmental

O H O SU O M O N * NA
O H *SUOM

O N O NA

E
N M

*H

OSUOM

ON ONA

O H OSUOM O N O NA 0 H 0 SU 0 M 0 N 0 NA O H *SUOM O N O NA

Social

Z PovertyReduction
[ Gender N Other (Please specify)
X

O H OSUOM
O H O SU O M

O H OSUOM

O N * NA O N * NA O N * NA

Private sector development

Publicsectormanagement

Z Other (Please specify)

0 H O SU O M 0 N 0 NA 0 H 0 SU 0 M 0 N 0 NA OH O SU O M O N * NA

25 -

Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1Bank performance F Lending M Supervision N Overall 6.2 Borrower performance Rating OHS OS *HS OS OtHS * S Rating
O

OU

OU

CU

OHU OHU O HU

Preparation Z Governmentimplementation performance Z Implementation agencyperformance E Overall

HS * S HS * S

C U O HU
0 U 0 HU 0 U 0 HU
C U

0 HS 0 S 0 HS 0 s
O

O HU

26 -

Annex 7. List of Supporting Documents 1. ADB's Project Completion Report on the Power XXII Project (Loan No. 1172-INO), May 1999. 2. Auditor Report in Engineering Services Contract for Suralaya Steam Power Plant Units 5, 6 and 7 by KPMG Peat Marwick, 17 September 1997. 3. Engineer's Project Completion Report. 4. Environmental Assessment Summary for Suralaya, June 5, 1991. 5. Assumptions on ex-post calculation of Economic Internal Rate of Return (EIRR).

27 -

Annex 8 Suralaya Thermal Power Project ICR Mission Aide-Memoire February 2000

Project Objectives 1. The objectives of the Project as stated in the SAR are: (a) to expand PLN's electricity capacity through completion of the Suralaya Thermal Power Plant; (b) to promote the economic use of coal for electricity generation; (c) to develop PLN's institutional capacity to operate and maintain thermal power plants; and (d) to strengthen PLN's financial Capacity. Project Components 2. The Project includes the following components: (a) construction of three 600 MW coalfired units at Suralaya, including associated works, and a 500 kV transmission line from Cilegon to Cibinong with associated substations; (b) consulting services for engineering design and construction supervision of the proposed units; (c) feasibility study for a high voltage submarine cable link between Java and Sumatra; (d) engineering and design of a thermal power plant at Banjarmasin in South Kalimantam; (e) consulting services for institutional development, and (f) training of PLN staff in public utility practices. Preparation for the ICR 3. The mission reviewed with PLN the ICR' process and requirement, and collected data and information for its preparation. The mission also visited the site and followed-up on some outstanding issues. 4. In addition, the mission provided advice to PLN for preparing its own evaluation report, which will he attached unedited to the ICR. The evaluation report should include: (a) an assessment of the project objectives, design, implementation and operation experience; (b) an evaluation of the borrower's own performance during the evolution and implementation of the project, with special emphasis on lessons learned that may be relevant in the future; and (c) an evaluation of the performance of the Bank, and cofinanciers or other partners during the evolution and implementation of the project, including the effectiveness of the relationships among the borrower, the Bank, cofinanciers and other partners, with special emphasis on lessons learned. Project Overview 5. In spite of various initial delays in the contract awards by about 8 months, and other mishaps, Suralaya Units 5, 6 and 7 were commissioned with a minimum of delay. During commissioning of Unit 5 a fire broke out in the secondary air heaters which contributed a 2 I/2 months delay to Unit 5. Unit 6 was accepted for Commercial Operation within contract schedule

CoreAccountability ICR. - 28 -

2. and Unit 7 three months ahead of schecdule Excellent project management and good coordination efforts by PLN, Consulting Engineer, Contractors, and the Bank contributed to this exemplary implementation record despite having 1.3 main contracts for the Project's scope of work. The 500 kV reinforcement of the grid was corrmmissioned successfully with the construction of a 130 km single-circuit line between Cilegon-Ci'binong-Sagulingand expanding the substations at Cilegon and Cibinong. No problems have been experienced with the transmission line nor the substations. Resettlement was minor and land accluisition issues were successfully resolved. The 500 kV transmission line and substations were energized on 30 July 1996.

6. DCIS Room Temperature. Thle Contractor (Stone & Webster) completed the additional work by September 30, 1999 as requested in previous mission. The DCIS temperature can now be maintained within the range of 21-24 CC. The DCIS specifications require the temperature to be maintained at about 23 'C. However, if not set correctly, the DCIS temperature can be reduced to about 18.5 'C at which time condensation will occur with the possibility of damage to the sensitive electronic control cards. The mission advised PLN/PJBI to regularly inspect the temperature setting in the AC system and maintain Ihe temperature level close to the 23C design specification temperature. 7. Turbine Hall Temperature. PLN/PJB1 indicated that the temperature in the turbine hall can now be maintained in the range of 34-39 'C if the temperature outside is about 29C. This is a 5-10 'C incremental over the ambient temperature. The specifications require a five degree Celsius differential above ambient. The mission observed that the temperature inside the 2 "d floor of the turbine hall is still uncomfortably high. The design basis for the additional work by the Contractor (Stone & Webster) would decrease the temperature of the turbine hall by at least 1fO. The commissioning/performance test requires that the three units be available during the test, a situation which is now possible. PLN/PJB 1 indicated that the commissioning test will be carried out in shortly. The mission requested l'LN/PJB1 to (a) carefully review the Contractor's design after the commissioning test; (b) write a letter to Contractor requiring design modifications if warranted by a review of the commissioning test data; and (c) carefully check all equipment that may be affected by the high temperature in the various floors in the turbine hall, particularly on the 2nd floor (mezzanine floor). At the wrap-up meeting, PLN indicated that some temperature tests have already been carried out and the temperatures are seemingly within specifications. 8. Air-Monitoring System. A new air-monitoring system (also provided by Stone &Webster), to replace the lighting-damaged weather station, has been placed into operation and meteorological monitoring has already begun. The mission advised PJBI/PLN to recalibrate the station. The following environmental clata is now collected: S02, NoX, NO, N02, PM10, and wind speed and direction as required at appraisal. The mission requested that (a) PLN provide for the proper maintenance to the air-monitoring system as the tendency is usually to neglect it; (b) as

Commercial Operation Unit 5: SAR:5 March1997. of Actual: 25 June 1997. Unit 6: SAR: 16September1997.Actual 10September1997. Unit 7: SAR:March1998. Actual 19December1997. 3 Because of limited space within the ground floor and the mezzaninefloor, the grating between floors is very limited. The heat loadin the turbinehall is about 6,078,502BTU/hir. Witha 20% safetyfactor, the selectedventilationsystemrequiresan air flowof 187,608Cfm to reducethe temperature the turbine of hall by 1C. To reducethe temperature the turbinecall by 2C would haverequired an air flow of over of 500,000Cfm whichwouldhave increased cost forthe additionalwork considerably. the
2

- 29 -

the new asset has not been transferred to PJBI, the mission requested for PLN to finalize the transfer to PJBl so the responsibility of operation and maintenance of the facility is normalized. 9. Coal supply situation. As PT Bukit Asam (PTBA) is only delivering 80% of contracted amounts, PJBI is required to purchase the balance in the spot market from other suppliers 4 including PT Kideco, PT Berau, and Kalimantan (KUD) . Coal deliveries in 1999 from the various suppliers amount to 6,955,266 Kgs for PTBA, 512,098 for PT Kideco, 737,328 for PT Berau and 210,270 for KUD for a total of 8,414,962 Kgs. PJBI is at present negotiation with coal suppliers regarding tonnage and price. The spot market suppliers are providing good competition and PTBA has reduced its price form Rp 167,000per ton, to Rp 155,000 per ton, as the spot market suppliers are submitting coal supply offers at very competitive prices. PJB I indicated that it would consider increasing the tonnage from selected spot market suppliers if the price is advantageous and so provide an incentive to the selected spot supplier to increase investments in the mine and further reduce prices. However, the downside to this arrangement is the inhomogeneous nature of the coal as the coal characteristics of the various suppliers, particularly as regards to the ash content, varies. 10. Coal Quality. Notwithstanding the above, the mission indicated that is very concerned about the coal quality being delivered to the site by the various suppliers. The quality of the coal is specified in the contractual arrangements, but suppliers, apparently do not mind being penalized for the bad quality of coal delivered. The bad quality of the coal, as well as its inhomogeneous nature (i.e. as the coal delivered from the various suppliers has different characteristics), are impairing the efficient operation of Suralaya, producing frequent unit deratings (see next para) which affect the spinning reserve in the Java-Bali system and hence the integrity of the system (see also Attachment 5). Derating levels up to 50% of full capacity in some units is not infrequent. PLN/PJBI also indicated that the January rains were also a cause of the derating loading levels at Suralaya. The mission requested that PLN investigate carefully the cause of these derating and take whatever action is required to normalize the situation as the integrity of the Java-Bali system is of paramount important for economic recovery. Operational Performance. Plant availability (i.e. EAF) for Suralaya units 5-7 improved in 1999 with a value of 80% compared to 75% in 1998. Unit availabilities in 1999 were 98%, 71%, and 72% for units 5-7, respectively. Previous mission reported units 5-7 availabilities in 1998 of 79%, 58% and 88%. Coal related problems (i.e. coal quality) are still an issue, particularly as coal is procured from various suppliers. The mission is very concerned about the frequent intermittent deratings of Suralaya. P3B indicated that the dispatch of Suralaya is cumbersome due to these deratings, many times made in real time, which require the demand to be supplied from more expensive oil-fired plant (i.e. Muaratawar, Grati and Tambaklorok). The mission requested PLN/PJBI to (a) to careful inspect the quality of coal from suppliers; and (b) investigate all means
11.

Coal Properties from Suppliers Item Calorific value, kcaUkg Ash content % Sulfur content % Nitrogen % HGI PT Bukit Asam 5,150 4.09 0.25 0.70 49 PT Berau 5,142 3.97 0.78 0.83 49 PT Kideco 5,098 1.87 0.19 0.80 50 Kalimantan (KUD) 5,302 6.62 0.30 0.82 48

- 30 -

necessary to decrease the derating levels at Suralaya since it is contributing to inefficient operation 5 of the system . 12. Efficiency Improvement Program. PLN is implementing a system wide Efficiency Improvement Program6 to improve units availability, reduce plant heat rates, reduce the duration time of inspection and extend the interval between inspections. The savings at PJBI alone are expected to be RP 54.9 billion in 1999. The effect of this program is already evident in Unit 5 where the realized EAF in 1999 was 98% (compared to a NERC Standard of 81%), and the hear rate was reduced from 2,590 Kcal/kWh in 1997 to 2,478 Kcal/kWh in 1999. The target heat rate is 2,310 Kcal/kWh. The mission indicated that it was very pleased with these measures, which are in line with the Arthur Andersen recommendations7. Technical Assistance 13. The technical assistance for Suralaya was satisfactorily carried out. The principal components of institutional development consisted of human resource planning and development (HRPD) and training. Regarding HRPD, regulations for a perfornance system have been implemented within PLN and a remuneration system is almost 100% complete. A competency assessment has been performed for mid- and top managerial levels and special training has been given where appropriate. The HR information system is almost 100% complete. HR planning is being undertaken in parallel with the Corporate and Financial Restructuring of PLN which is underway. A training program under Suralaya for onsite and offshore training was established in the design, and operation and maintenance of thermal power plants. In total about 12,000 personweeks of training was provided. 14. Under another TA for Suralaya, a feasibility study for a HV submarine cable was also carried (in 1994) to deternine the various options for interconnections between Java and Sumatra. The study concluded that the preferred option is in the range of 140 MW and 200 MW. As the expected average annual peak demand growth rate in South Sumatra is expected to be in the rage of 12-14% (medium growth scenario) in the year 2000-2005, the study has been revisited in 1999 by the Ministry of the International Trade and Industr! with the conclusion that an interconnection would provide economic benefits and would allow surplus capacity to be interchanged between South Sumatra and West Java. Environmental issues 15. Fulfillment of Envirolniental Impact Management Commitinten2ts.Because this is the ICR mission, one objective of the field visit was to review the extent to which PLN successfully carried out the environmental management and monitoring activities recommended in the ANDAL/RKL/RPL and summarized in the SAR. The overall finding is that the plant staff The costof oil generation 3-4 hig:her from coal. is than Under Phase I, PLN efficiencydrive, the savingsin year 2000 are expectedto amount to RP 198 billion for PJB1, PJB2, P3B and JEDU cormbined.Phase II of the efficiencydrive will concentrateon a reductionof capital expenditures financiag,as well as improvementin humanresourcesand information and technology.Phase III willextendPLN's EfficiencyImprovement Programto OutsideJava.
6

OperationalEfficiencyand EffectivenessReview of PT PLN (Persero),Final Report, December

1999. Feasibility Study of SubmarineLinieBetween Java-Sumatra,March 2000, Japan Extemal Trade Organization (JETRO). Therecommendation for the interconnector be commissioned 2004. is to in
8

- 31 -

(particularly the Environment Unit) has taken not only the management and monitoring plans but also the associated record keeping and reporting quite seriously. Any environmental data the mission requested was readily available. 16.
>

The status of air quality management actions is summarized below. To minimize the likelihood of adverse impacts on ambient air quality, low sulfur coal was specified (< 0.5% total S). The coal being obtaining from Bukit Asam (80% of plant supply) had an average total sulfur content of 0.25% in 1999. The remainder (20%) came from three other sources, only one of which exceeded the 0.5% limit. Electrostatic precipitators (ESP) for Unit 5-7 were designed for a particulate removal efficiency of 99.5% and have been meeting that standard. ESP for Units 3 and 4 operated at 96.6 and 95.1% efficiency according to the last full year of data available (1998), although the standard when they were installed was 93.7%. ESP in Units I and 2 are not achieving standards and require modifications that will be scheduled after alterations to the units' ash handling systems are completed (by the end of 2000). Stack emissions for S02 and NOx from Units 5 - 7 have been consistently within standards during the year of data examined (1999). The number of "bad" readings indicates that more attention to instrument maintenance is needed, but the fact that most of these occurred in the first half of the year suggests an improving trend. Instruments on Units I and 2 were evidently out of order for most of the year but showed compliance with S02 and NOx emission limits in December. Stack instrumentation has still not been installed on Units 3 and 4 despite reminders in Aide Memoires dating back to July 1998.
t

>

>

Compliance with the 20% opacity standard has evidently been difficult. The 1999 data for Units 1, 2 and 5 - 7 include few minimum readings below 20% and minimal in the 40 60% range are not uncommon. Plant environmental staff reported that Suralaya's opacity standard was originally set at 40%, then lowered to 20%. Ambient air quality standards, on the other hand, have not been a problem. Annual high and low readings for the period 1995 to 2000 show that none of the applicable standards (S02, NOx and PM1O)has ever been exceeded at any of the 11 sampling locations. It should be noted that to date the ambient air quality measurements have had to be taken manually. The instrumentation at the three automated meteorological and air quality monitors has been replaced, but telemetry problems were not resolved until January 2000. All three stations are now reporting hourly data to the main control room, but it is clear from readings that recalibration is required. The stations have not yet been taken over by the operating company, but environmental staff has been trained in operation and maintenance. The mission was assured that adequate O&M budget would be available despite reports to the contrary. The status of water quality management actions is summarized below.

>

>

17.
>

Influent cooling water temperature averaged 29C during 1999, and the average outfall temperature was 34.20 C, well below the limit of 40.00 C. Effluent from the sewage treatment plant contained negligible concentrations of BOD, COD and total dissolved solids concentration, easily complying with standards.

>

- 32 -

>

Boiler blow down water ancl water treatment plant effluent were subject to the same standards (pH, copper, nickel and iron). Data for 1999 show no compliance problems. Effluent from the oil separators was within standards according to the 1999 annual averages. Runoff and leachate from the ash disposal area are collected in a settling pond that is in urgent need of dredging, which the mission was told will occur in March. In some sections it has no freeboard, and the berm has been overtopped in heavy rains this year. The pond effluent is sampled for 11 metals. According to samples taken in August 1999, the settling pond supematant met all metal standards and the Suralaya flyash is not considered to be toxic waste. Chlorine is used to prevent growth of algae and other biomass in the plant cooling system. The free chlorine concentration. is maintained at s 0.3 mg/l. Annual monitoring by Gadja Madah University does not reveal any significant deterioration in the marine ecosystem that can be attributed to Suralaya. The quality of nearby coral reefs has declined slightly, but the reason identified by the scientists is sedimentation caused by tree-cutting and land development.

>

>

>

>

18. Ash handling, sale for reuse, and disposal are the major environmental challenges the plant faces. It is clear that the flyash collection and conveyance systems for Units I - 4 are still not functioning properly. The result is large amounts of fine dust that can potential affect the health of employees as well as the condition and useful life of nearby equipment, including for example switchgear and associated cooling system for machinery in Units 5 - 7. Modifications to the ash handling equipment for Units 1 - 4 are expected to be completed by the end of 2000. 19. Whereas the plant had at one time been selling as much as 70% of flyash for reuse, only 10-15% is currently being sold. The ash disposal site is therefore filling more rapidly, but it is still expected to have capacity until 2007-S even if flyash sales do not improve. Gadja Madah is investigating a range of new flyash use options for PLN. In the meantime, the disposal site needs road improvement, compaction, and other actions to stabilize the slope of the piles which have exhibited a tendency to slide in heavy rain. The mission also suggested that PLN not become fixated on sale of flyash, because in actuality giving the flyash to contractors at no cost is still a cheaper altemative to having to find a new disposal site sooner than intended or having to pay to have the flyash hauled to a more distant disposal point. 20. Outstanding Environmental Issues. To summarize, the following conditions require attention to ensure that Suralaya's environmental impacts will continue to be minimal:
> > > > > >

dredge ash settling pond; complete modifications of flyasli collection and conveyance systems, Units I - 4; complete repairs to ESP for Units 1 and 2; install stack emission monitoring instrumentation for Units 3 and 4, and improve operating reliability through better inspect.on and maintenance; recalibrate automated air/meteorology stations and fund and implement an effective maintenance program for the equipment; and continue planning for alternative flyash reuse and disposal options.

- 33 -

Recalculation of Economic Internal Rate of Return (EIRR). 21. At appraisal, the Project was part of PLN's dynamic least cost expansion program for the Java-Bali system. Suralaya units 5-7 operate at high efficiency as a base-loaded plant with an average heat rate of 2,314 Kcal/kWh at a 100 % loading level. Using the same methodology as in the SAR, the EIRR has been recalculated as 11.8 % including consumer surplus. With the prevailing tariff the net revenue is negative and hence the EIRR cannot be re-evaluated. PLN will submit to the Bank a re-evaluated EIRR based on a tariff prevailing before the crisis along with the major assumptions and detailed calculations, as well as a comparative analysis of generation costs for various alternatives, by end of February 2000. Loan Disbursement 22. The original loan amount was $423.6 million. Partial loan proceeds cancellations were made in the aggregate amount of $132.2 million, resulting a revised loan amount of $291.4 million. As of February 3, 2000, $282.2 million has been disbursed, accounting for 96.8% of the revised loan amount. The undisbursed balance of $9.2 million is likely to be canceled upon closure of the loan account. Performance Indicators 23. The mission reviewed with PLN the Project performance indicators as shown in Attachment 1. It was agreed that PLN will review by February 17, 2000. Next Steps 24. It was agreed that (a) PLN's own evaluation report will be submitted to the Bank by midMarch 2000 and (b) PLN will provide an update of the perfornance indicators by end of February 2000. 25. The mission advised PLN that a draft ICR is expected to be sent to PLN by end of March 2000. PLN will forward its comments, if any, to the Bank by no later than April 30, 2000.

On the basis of the incremental costsand salesresultingfromthe implementation the least-cost of planfor the Java-Balisystemfor the period 1991/92 1997/98. 9

- 34 -

Attachment 1 Key Indicators for Project Operation Indicator Utilization and Efficiency
Capacity Factor (CF, %) * Unit #5 * Unit #6 * Unit #7 Equivalent Availability Factor (EAF, %) * Unit #5 * Unit #6 * Unit #7 Standard Coal Consumption (g/kWh) * Unit #5 * Unit #6 * Unit #7 Gross Thermal Efficiency (%) * Unit #5 * Unit #6 * Unit #7 70 70 70 80 80 80 455 455 455 36 36 36 62 34 65 79 58 87 479 449 463 34.8 37.2 36.1 69 50 43 98 77 69 462 449 440 36.1 37.1 38.0 64 76 68 80 95 85 451 451 450 37.4 37.4 37.4

Benchmark

1998

Actu

03/2000

Environmental Protection
ESP Efficiency (%) a/ * Unit #5 * Unit #6 99.5 99.5 n.a. n.a. n.a. n.a. n.a. n.a.

* Unit #7

99.5
-

n.a.
12.4

n.a.
13.1

n.a.
n.a.

System Reliability in Java-Bali

* SAIFI (times/customer/year)

* SAIDI (hours/customer/year)

9.8

8.9

n.a.

35 -

Annex 9

Suralaya Thermal Power Project (IBRD Loan No. 3501-IND) Borrower's Completion Report

I. Project objectives. The objectives of the proposed project were to: A. Meet the increasing demand for electrical generation within industrializing West Java. B. Shifting the consumption of fuel resources from natural gas and oil to coal, natural gas and oil are primary export product for which Indonesia receives significant revenue. C. Extended the capabilities of PLN's design of steam power plant projects. D. To provide considerable employment opportunities in West Java area for construction and operation. II. Achievement of project objective. Suralaya steam power plant Unit 5, 6 and 7 3 X 600 MW achieved the goal of providing a commercially operating power station addition in five years from award of the contract. This should be considered a significant accomplishment to the success of PLN ability to provide reliable power to the Java-Bali power grid. The new units are principally being operated as base load unit to maximize the benefit to our country. As of 24 March 1998, the total unit generation is as listed: Unit 5: 914.984 MWh, Unit 6: 694.157 MWh, Unit 7: 562.796 MWh with fuel resources coal. PLN project training was provided by an extensive program of Transfer of Technology presentations provided by the consultant and offshore and onsite training by the contractors. The Suralaya project training program was a composite program provide by the: Civil works (C55), Stacks (C58), Steam generator and ancillaries (C60), Turbine generator and ancillaries (C61), Ash handling plant (C62), Mechanical & electrical works (C63), Coal handling plant (C64), Compressed gas insulated bus (C65A), Power transformer (C65B), 150 kV substation (C65C). This project provided employment for 7300 manpower during implementation of total project for construction and operation. III. Implementation report and major factors affecting the project Engineering, design and construction supervision of 3 x 600 MW of Suralaya Steam Power Plant (Units 5,6 and 7) were conducted by PT.PLN (Persero) Jasa Enjiniring, consultant Black & Veatch International in association with PT.Encona Engineering Inc. agreement No.178 PJ/070/199l/M has been successfully complete. The project were subdivided of 13 construction packages: Piling and Circulating Water Channel (C5 Marine Works (C53), Civil Works (C55), Steelwork and Cladding (C57), Stacks (C5 Steam 1), 8), Generators and Ancillaries (C60), Turbine Generators and Ancillaries (C61), Ash Handling Plant (C62), Mechanical and Electrical works (C63), Coal Handling Plant (C64), Compressed Gas Insulated Bus (C65A), Power Transformer (C65B), 150 kV Substation (C65C). Unit 5 of lx 600 MW the project was started on 19 February 1993 with the turbine generator contract. Units 6 and 7 were started at six months interval. The final package of the contract was awarded July
-

36 -

1994. Unit 5 of lx600 MW was declared commercial operation 25 June 1997, Unit 6 of 1 x 600 MW was declared commercial operation 10 September 1997, Unit 7 of lx600 MW was declared commercial operation 19 December 1997.Completion of overall project was finished two months ahead of schedule. Status of mid March 1998 project allocated cost US$ 1,898,500,000 and in the implementation the contracts for the project were awardecdat a total cost of US$ 1,423,762,000. The overall project cost is approximately 30 percent lower than original project estimate. PLN's also ensured compliance with the loan term achievement of continuous operation as especially on base-load time during lifetime of the plant. IV. Bank performance The economic evaluation of the project was carried out on actual basis of the tariff, sales and exchanges rates before crisis condition. PLN's financial and economic performance regarding the project now is dependent on the maximization of the utilization of this project on the base load time. In PLN's view the performance of the Bank was satisfactory throughout all phases of the project from the preparation to completion. Only the C60 contractor for Steam generators and ancillaries experienced difficulties with loan agreements between the Ministry of Finance and USEXIM, JEXJM. The opening of the letters of credit were impacted by these delays. Tfheletters of credit for JEXIM were opened on 27 October 1994. The letters of credit for USEXIMvI were opened on 23 May 1995. Letter of credit numbers were required for processing of the Master lists for shipment of equipment and material to Indonesia. V. Borrower Performance. The perfornance of PLN's was generally satisfactory and improvements were achieved by using the experienced gained in previous project. The planned schedule to award all contract between February 1993 and November 1993, the contract were actually awarded between Februaiy 1993 and July 1994 which is a variation delay on the original schedule of 8 months. The reason for this delay was shifting of scope of supply from Turbine generator contract to the steam generator and mechanical electrical contract and the difficulties in evaluation of the large steam generator contract. The Suralaya Units 5,6 and 7 was completed two months ahead of schedule. VI. Operation A. Initial operation Trial operation were divided into two phases: 1. Operation of common equipment - Desalination plant 23 May 1996. - Water treatment plant 13 November 1996. - Coal handling plant Unit 5 on 20 December 1996. - Coal handling plant Unit 6 on 26 March 1996. - Coal handling plant Unit 7 on 19 September 1996. 2. Operation of generating units - Unit 5 of I x 600 MW on 16 December 1996. - 37 -

- Unit 6 of I x 600 MW on 20 March 1997. - Unit 7 of I x 600 MW on 19 September 1997. B. Commercial operation 1. Operation of common equipment under the jurisdiction of PLN subsidiary PT PLN(Persero) PJB-I Unit Pembangkit Suralaya. 2. Operation of generating units under the jurisdiction of the Load Dispatching Center PT.PLN (Persero) P3B Jawa Bali: - Unit 5: 1 x 600 MW 25 June 1997. - Unit 6: 1 x 600 MW 10 September 1997. - Unit 7: 1 x 600 MW 19 December 1997. VII. Main findings and key lessons learned The project contracts were subdivided into 13 (thirteen) main contracts; this significantly increased the coordination effort required to complete the project. The turbine island procurement was subdivided into Turbine Generator and Ancillaries (C61) and to Mechanical & Electrical Works (C63); this also significantly increased the coordination effort. Base on the above matters, we have to pay more attention to the subdivision of the contracts, so that the same problem does not recur in the future. Contracts should be awarded on the basis of a single responsible contractor and not as a joint operation. Joint operation leaves the owner with difficult control over the contract should one member default or otherwise not be capable of completing the work. The primary contractor shall be capable of completing the entire scope of work.

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