RESTRICTED FILE CADY Report No. -79 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF INDONESIA FOR AN ELECTRICITY DISTRIBUTION PROJECT October 9, 1969 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DUDECTORS ON A PROPOSED DEVELOPIMENT CREDIT TO THE REPUBLIC OF INDONESIA FOR AN ELECTRICITY DISTRIBUTION PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the Republic of Indonesia in an amount in various currencies equivalent to $15 million for an electricity distribution project in Indonesia. PART I - HISTORICAL 2. The Government of Indonesia has asked for an IDA Credit to help finance the improvement and expansion of the electricity distribu- tion system in Djakarta and its environs and to provide extensive manage- ment consulting services to improve the organization and efficiency of the power sector. This would be the first credit in the power sector. The project was appraised in March/April 1969. 3. Negotiations for the proposed credit took place from September 10 to September 19, 1969. The Borrower was represented by: Mr. Dandi Kadarsan, Secretary General, Ministry of Public Works and Electric Power; Mr. Sufrani Atmakusumah, Director of Planning, Directorate General of Electric Power; Mr. Bambang Sarah, District Manager, District XII, Peru- sahaan Listrik Negara (PIN); Mr. Sadu Sundaru, Director, International Relations, Department of Finance; Mr. Dahlan Ibrahim, First Secretary (Economic), Embassy of Indonesia; and Mr. Carl Slater, Attorney, Delson & Gordon, Attorneys, New York. 4. This would be the fifth credit to Indonesia. The following is a sunmary statement of IDA credits to Indonesia as of August 30, 1969: Credit $ millions No. Year Borrower Purpose Amount Undisbursed 127 1968 Indonesia Irrigation Rehabil-itation 5.0 3.7 135 1968 Indonesia Technical 2.0 2.0 Assistance 154 1969 Indonesia Highways 28.0 28.01/ 155 1969 Indonesia Agricultural 16.0 16.02/ Estates - Total 51.0 h9.7 1/ Became effective October 2, 1969. 2/ Not yet effective. The credit for irrigation rehabilitation was declared effective on y on March 25, 1969 owing to delays in concluding the consultants cor-- tract and agreeing on personnel. Disbursements from the credit there- after have been prompt. The technical assistance credit, intended to be drawn upon when other financing sources were not readily available, is expected to be used, among other things, for a national fertilizer study, consulting engineering services for the Djatiluhur irrigation project, and for studies of the tea plantation sector and two sugar mili projects. 5. It is intended that a credit for the expansion of the PUSRI fertilizer plant in Sumatra and related gas supply facilities will be presented to the Executive Directors as soon as arrangements for joint financing with other lenders are firm, probably in the first quarter of calendar 1970. PART II - DESCRIPTION OF THE PROPOSED CREDIT 6. Borrower: Republic of Indonesia. Beneficiary: Perusahaan Listrik Negara (PT0). Amount: Various currencies equivalent to $15.0 million. Purpose: The improvement and expansion of the electricity distribution system of the City of Djakarta and its en- virons, and the provision of exten- sive management consultants' services to improve the organization and effi- ciency of the power sector, including assistance and training in operations, engineering, finance and management. Amortization: In 50 years with a 10-year period of grace through semi-annual instal- ments commencing December 15, 1979 and ending June 15, 2019. Each in- stalnent up to and including payment due on June 15, 1989 to be 1/2 of 1 percent of such principal amount and each instalment thereafter to be 1-1/2 percent of such principal. Service Charge: 3/h of 1 percent per annum. PART III - THE PROJECT 7. A detailed description of the project is given in the attached appraisal report entitled "Appraisal of the Electricity Distribution Project, Djakarta of the Perusahaan Listrik Negara Indonesialt (PU-18) dated October 3, 1969. - 3 - 8. The electric power system deteriorated seriously during the long period of political and economic difficulties before 1966. Both maintenance and construction of distribution facilities have been neglected, inhibiting the growth of power consumption for commerce and industry, especially in Djakarta. Organization and operation of the power sector continue to be inefficient. The Government's new Five-Year Plan calls for a total investment of $262 million for the expansion of public power facilities, but the full amount of external aid required for the purpose, amounting to $190 million, will not be forthcoming unless PLN, the State power enterprise, is reorganized. 9. PLN, though largely autonomous under its charter, is actually operated as a government department. Its management consists of a President and a five-man Board of Directors, which is responsible to and administers the policies of the Directorate General of Power, an office of the Ministry of Public Works and Power. At present, PLN does not negotiate or enter into contracts for the purchase of goods and services or organize and execute its own major construction works; it also does not incur long-term debt directly or set its own tariffs. PLN's true financial position is obscured for lack of complete, audited and up-to-date records and weakened by large unpaid debts due from govern- mental agencies. 10. The Government desires assistance in financing vital improve- ments in power facilities and in reorganizing the public power sector so that PLN functions as an autonomous and effective public utility, operating on a sound commercial basis. The project has accordingly been designed to achieve two purposes. Firstly, it would finance the foreign exchange cost for two years of the five-year program of expan- sion of the electricity distribution system in and around Djakarta, at an estimated cost of $13.6 million, providing distribution and power system equipment, materials and supplies, and engineering services. Secondly, it would meet the foreign exchange costs over a two-year period of management consulting services, in an amount of $1.4 million, to improve the organization and efficiency of the entire power sector and provide assistance and training in operations, engineering, finance and management. 11. Agreement was reached with the Government during negotiations on the means to be adopted and the period of time within which Government would realize its objective that PLN functions as an autonomous power utility, providing services on a sound commercial basis. PLN will be vested with immediate responsibility for the selection and procurement of goods and services and for the construction of all new projects, in- cluding the proposed project; and not later than April 1, 1971 with res- ponsibility for all on-going projects. PLN's organization and operations will be reorganized and its charter will be suitably revised within twelve months of the date the credit becomes effective; its fixed assets will be revalued to provide a base for rational financial operation, within twenty months; and PM will be empowered to determine its o