UTNN-45 PLANNING FOR INDUSTRIAL DKVELOPENT IN 2IMONESIA Chapters I VII Policies and the General, Strategy C T.Ji'CY E_7JTVALE'ATS us $ 1. 00 Rp 378 1 xupiah = US 0 0.003 1 nmillion. 3rUpiahs us $ 2 61.6 TABLE OF COIITENTS Pages BASIC DATA SUI4IIARY Part One: ISSUES -AFFECTING 'THE UTDUSTRIAL SECTOR GEJERA11Y CHAPTER I. THE PRESENiT STATE OF IS-DU TPLJ DEVT OWENIT - Historical Im£fluenQes on Indonesian Industrial Development - Characteristics of the Industrial Sector Relative Size Structure of the Industrial Sector' Geographical Distribution of Industry Size of Industrial Firms - Recent Trends in Production - Utilization of Industrial Capacity - Annex to Chlapter I. A Note on Sources and Quality of Industrial Data. CHAPTER II. .PROSPECTIVE PATTERNS OF GROWTH AND A STPRATEGY FOP, LILTFJAL D§,\-QOi,Il'' 34 - Grorwth of Industry as a Whole - The Industrial Sector Disaggregated - Gross Investment - Statement of a General Strateg for Industrial Development - Specific Institutional Steps. CHAiTER III. TIE INTCE!TTIVE SYSTU-2i FOR INDJSTPIA_L DVELOCl`ETT 56 - The Present Incentive System * Foreign Investment Law, Domestic Investment Law Taxes on Manufacturing Enterprises Foreign Trade Taxes Priority Areas for Foreign and Domestic Investment Administration and ?rocedures Labor Laws - Performance of Present Incentive System Foreign Ptivate InvestzLen t Domestic Private Investument Implement ation Problems Economic Cost of Administrative Delays Smuggling Nominal and Effective Protection Allocation Effects Promoting Manufactured 1:ports Value of Incent¾ve *System to Investors - Criteria for an Effective Lnccnt,ive System - Recomrm.endations for lrnprov-`g the Incentive System - List of Tables - Stati:stical Appendix C .1A PTER IV. FI'A, ,CT D 5iT 1) UTt T>FI. IL I:.TEST.EiWT 126 - The Supply of Credlit The Structure and Operat ions- of the Banking- System The E edium Term Credit F-rogrearns Bank Liquidity and Loan Policy - Conditions of Demand Lor Credit - Surummary and Rcorec.nendations CHAPTER V. TDUSTRI!1 ESTATES 150 - Purpose a-nd Operations of an Industrial Estate - Summary of Recent ELxDerience - Functions and Power of a HJational nIndustrial Estates - Bonded Wlarehouses - Summary and RecoTnmendations CHAJ?TER VI. THE I-EEGOTILTIOW AND OP.E- ATIOII OF COi,3SSIOUiRY AG't ;s Z L1'TS 161 - ELements in Bargaining aind Ne gotiat ion - Tinber Concession Agrecmrrcnt,s - IMineral Conces sion Agreements ,HAPTER VII. P.ESEBARCH. D7EVTLaOFM-i'l-T A:!1TDl TRAThTDIfllG FOR ThDU. 3'f hI A K L D.(iiLO~± j 180 - Objecti.ves and Iurposes of RPD - iThe Coimmitment. of Resources - I;anDower Trairning - Annex; Overal'. Picture of Research for the Inddustrial Sector Part T-w.o: I1 UDtRT R 1!I--!VTV ! S APTD) MM J` 7x OCT E V A LUAT I Oi NS CHAPTER VIII. IRON II'D STELT 191 - Current Status of the Iron arid Steel Indistry - A Proposed Out,line for Steel Planning Past Consumr;otio:1 an.d 1-Earket Prospects Alternatyies in -leeng Steel Demand Thie Rollinc, Program - Alternatives in Steel i'alking - Cost and Price Estvrates - The Role oL the Tjilegon Project in t,he Proposecd Outlinie. - Swunwary and R'ecommiendationS. CHAiPTETR IX - BuOrTEETJiIG IIIDUSTRT3S 21 - Int,roduction - Priorities for Developncont Pages S\ CHAPTER IX .- E_'SLCIN-:;,.IRTG ;'US,T?JS,S (Continued) 217 Determination of Iriority Sectors Present State of Industry Present State of Planning - In.dustrializ'tion. Strategyg- - l4otor Vehicle Industry Development - Niobile iouipment Industry- Development Stationary Ecuipment lndus try Development ShiplbuildinLr Indust7y Development - Regional Configuration of Development CH1APTER X. PETTROCHEIC_JIS 275 - Current Status of Petrochemicals - Background for Ealuating'Petrochemical Development - Model for the Analysis of Petrochemical Devrelopment - The Results: Investme-nt Levels, T'iming, and Rates of Return - Tabulation of Linear Programmr>ing Cases - Surivrary and Recommeindations - AnA.ex A: Basic Uses o.L Petrochemicals - A=nnex B: The P'etrochemical Linear Programiing 'Model CHAPTEM XI. TDABBZBARiLSED EI.DUSTIRIES 462 - Potenitial for the Deveiopment of Timber-based Indulstries - Current Status -of >-evelopment - TIe Character of Fut-re 1'arkets - The Direction of Pevelopmmt - Feasibility of a Timber-based Industri.al Complex in Eas-t Kalimantan Rationedle for tie Complex and Its Capacity Invest-;:ent Required Sales Throjections Projections during .hasing-In Operat-ing Costs Economiic Rate oL Return - Conclusions and Recommendations - Appendices CHIAP-TER XII - THE I-IIITERkL EDUSTRY 525 - Tin Mining and the Operations of P.N. TaTrban- Timah - Coal Mining and. the Operations of P.N. Tam.bang Batubara Bukit. Asam Ombilin Cbal. - Other "anerals and the Operations of P.N. Aneka Tamaoang Gold, Silver, and Dimnon>; Ope.ratiors Iron Bauxite Nickel BASIC DATA Area: (Sq. Km.) 1,90h,639 Population (million) 121.1 Esti2rated annuua go-.th rate (i965-70) 2 - Density (per sq. lon). For the country 692 For Java 592 Polit-ical Status: Unitar-y republic, member U.14. and the Association of South-East Asia Nations (ASEA1\i). GDP (1970) 3 3,328 billion Contribution of manufactuaring to GDP 6 .8% Composit,ion of value-added by manufacturing - Food, beverages and tobacco 39.7% Textiles 17., Clothinc and footwear 1.6% - W.ood products 10.3c. - Paper and paper nroducts 0.6,: - Printing and publishing 1.9% - Leather products ..3S -Rubber products *7 - Chemicals, and petroleum and co-al products 7.66 - Non-n-ata21ic mineral products 2. - Basic mretDals 2.0% - YI:tal products 13.2% 100.0, Per cacita GDP (Ecquiv. US $) Official (1970) Est'imated (1970) 90 Excharn-e Rate i 1 US $ = Rp 378 1,000 Rupiah - $ 2.6h6 Fore-in Ex:|:ch2ange RTe ervos. Dec. i969 Dec. 1970 Gross (US $ nillion) 119 157 Not (US $ million) (86) (51). Price Index (1966 100) 575 611 Dec. 1969 Dec. 1970 Moneyr SumDly Total (Rp billion) 180 243 Public Sector Operations (Rp bi:llion) 1969 1970/71 1971/72 Actual Est. Act. Est. -Bud. 6 Gover2m-nt current receipts 244 3414 16 GoverriLnent currernt expenditubres 216 310 364 Official development expenditures . 119 135 195 Balance of Payments ('US $ million) F--ports of goods and services 1,039 1,196 1,420 Inports of goods and services 1,4143 1,612 1,926 Current account surplus (deficit) (404) (416) (506) Co.odi tv concentration of eyxnorts (1970/71) Oil 37% R-ubber 22,% Tinber 7%0 1. Over the pas s several years tuhe economy of Indonesia has been relativelyr stabilized and growin-. Yet, compared to other counti ULes of sinmilar size an d per capita i-ncome IndonesiaIs industrial sector is underdeveloped, and -thiere are di touions and ga2s in tle structulre of industry. At the presen-t tiTne industty originates 7, - 8`t of the GDP? w..-hereas Lor the level of-per ca-nta_i income a.nd the mar.r sie one would exbect a coltribution to GDP about 591; hingher. Koreover, distortions in the structure of industry, are rsveraaed by the under- develop,-)ment of certain industr-ies relative to other industries in the econo,omyr. Th2 greatest lack of capabiliuy, exists in lietals, nmachnnery' and chemicals) Indo nesian iniustrial development will need to be accelerated and t.he major ganps in the stracture corrected if this sec- tor is no-t to hold back the development o-f the econor,y as a whole. 2. There are several possible paths for incastrial development and two polar cases are identified; one involves a "continuing lag" Al- thlough grow-th in the sector may occur, it continu-s to l1g behind in the percent of the GDP originating in industry. The second path fore- sees a "catching up" by 1980 tUo the more norinal or expected percent oL &GD? originating in industry. It is reasonable to expect a grow, :th rate for indust-ry alling somewa-ere betwTeen t-he two polar cases; the second case in particular might inrose too -,.,nm-ny pressures on resources aTid institutions in the near future. A 'rowth rate in the range 15'o for industry is probably feas-ible aid would supLort a growt. rate of GDP of about 7, - 8T . A disaggregation o0f -the inustzrial sector reveazls that- sona industries, notabl- the t-hree mn:,2on_-d in th-e previois para- graph, must grow7 at substantially hi-gher rates than the average, if a correction of distort-ions is to occur. These rate, of growth, in cer- tai-n cases, exceed 20,). 3. The rgeneral strate,w for1 inclustrial development is relatively flexible and includces the followir.Z: (a) a coJLmi t-ment to an accelerated rate of grow.th of industry; (b) correction of najor distortions in the stracture, primarily through emnharssis on the enginte ring or machinery inrustries, base metals, and c'hem,sicls,; (c) ir. ate initiation of Lull Leasibility studies of major Drojec-s that are show-nm in this report to have rates of retarn in the range of1 _15 - 20".. These m_ajor projects include: a dirocc rect-ioln stel, croject; a. petrocheincals core of plants ; a timber-based comnplex of plants to produce a ranage of productsS. Al,so special pror-arrs to change the orientat-ion o. t.he watomobile indus- try and too.stinmulate eng-ineering ndustries in mobile eouipient L. station- ary equipment, shipbuild-ing, and electrical. eouiyDment are required. (d) Special emphasis on light and medaum sca:Le plants in the enginee,.,'ing supplier (comtone:1t) industries and in consumer goods is also needed. P.2cornnmendaftions for institutoTnal actions that cai be talren no-w, to ac- tivate .the program are includced in detail in Chapter II. 4. The incentiLve system introduced since 1967 has stJ`Mnulated foreign and domestic investment in Indonosian mantiacturing but1 unidesirable side effects, biases and burdensome economic costs of the incenative system itself are apparent. Tne major problens, gar)s and adtLnistration of the incenitive system should be re-examined. and an aDpropriate mix of oolicies cand institutional arrangements intro- duced. The follovring programs anid measures appear to be recuiredl: (a) Special assistance to light industries such as: (i) a program of prefeasib-ility a-nd market studies to attract investme nt; (ii) assistance to establish an industurial project evaluation and studies uIit in the hlinistry'of Industry as a miieans of up grading the analytical arnd conceptual skills there; (iii) estcablishment an.d wide disIribution amongst potential investors of a lis' of priority products and procbct lines which the Goverinent wants to encourage; (iv) expansion of invfest-ment pronotion actirities, li-t.h a re- exxamination of taxi tariff' a-nd oLther incentives to diclerentiate and sharpen the impact of the incentives; (v) special financial, marlketinE and teohnical assistance to new and expanded enterprises during the early operational stage; (vi) special finzlcial incentives, including favorable loan terrns and conditions of eligibility, pos- sible direct equity participation and investment insurance. (b) -Lere is a need to re-cxamine the present investment licensing system; fred market access upon registration w;ould elimr,in- ate the automatic official presumption in favor of granting tax h6lidays, import duty exempt`ion and other incentives and the_ implicit com.itimennt of the Government to slhield local enterprise from conpet- ition. (c) There is a neE 1 to reconsider the cumbersome and costlly administrative, institutional and procedural aspects of' the present incentive systeJ1m and teclLnlcal1 assistance should be provided to examine the policies, rles, regulations, licenses, procedures and other controls and institutiomnl arrtanenmentrs affecting foreign and do.iestic i nvestment in order to estimate thle economic costs -inrolved and to recoi:ur-end refoins. (d) The problem of "J*egal" and "illegal" smuggling should be considered with the aim of instituting practical refor s and measures to reduce, if not eliminate, the serious competitive impact on fin- ished consumrergoods industries. A set of m,aeasures w.ill probably be requ i red to comibat simuggling on a w.ride front: (i) do-.nY-.ard revision of high tariffs, especially oin the principle smuggled goods, to reduce the incentive to evade duties; (ii) strangthen the customs aLdmiinistration and enforcement of penalties in ports aLnd harbors (iii) increase investment in coastal patrol craft and deploy them more efficiently; (iv) joint cooe-ration in coastal patrols to control illegal trade wvit,h ialaya, Singapore and the Philippines. (e) i1hile reform of import duties and taxes now under dis- cussion,in the Ninistry of in.ance seems to be generally in the right direction, est:imates of the rates of "eLfecti-ve protection" should be made in order to avoid over or underprotection of value- added. (f) Some easing of the tax burden on the revaluation of fixed assets is probably desirable in order to improve debt-equity positions., encourage joint venture arrangeTientns and iTorove the incentive to in- vest. (g) Technical assistance should be prorided to undertake a broad stady of the financial, economic aid, non-economic factors affecting the export of manufactures in order to establish the most effective set oL measures the Governm-ent might adopt. (h) In view of the grow.-ing concentration of industry, and popu- lation in Djakart2a and Java genierally, consideration should be given to establishing an industrial location policy aimed at creating new and strenlgtheiing inciDient resource-based gro-.ELth poles outside of Java, such as a w,ood products industry in Kaliiniantan. Inter-island and international shipping costs, especially from the larger is lands, should be eXarmined to ascertvain their impact on private locaticn decisions. (i) The 6resent incenti-ve sysstem appears bia-sed against employ- ment-creation and should be re-cxamined fror. this point oL view,;J. Duty-free imports of' capital g-oods, high depreciation allo,{7ances, severe restrictioins on discharging ermployees after 90 days of servi ce and other labor legisla'tion and financial arranger-nts tend to encour- age labor-saviinr, invesLm. nu. (j) There is a need to strengthen the weak and incadecuate sys- tem of industryr planning,, projlect evaluation, feasibility stUdrnaki-ng and collection of esscntial industrial plannir.n,g dat-a wt,iLthin the 'lih- istry of Industry and ou tside. 5. The provision of finance for industrial expansion seem.:s to be w.ork ing reasonably well. In particular, the mediu-m-term invEst:.lant credit prol,-ran has been exnoanded, but ccrtain chanaes would make it more eflective. At present, thr-ee-ouarters of the loans are for over Rp 100 m-illion ^and clearly go to larger scale incdustry. Speci.fic at- tention is require d to the needs of the smiller scale plants. Also, it is sug,gested tat this inves-tment crcci- progra ml be co,and-ad to include som7e of thc stronger orivate baniks, all of :ilom are liw; e:clu:- ded. Th-iey should be enacou-ra-ed to provide fTndt', t'o smnaller in½ustries throug,h a limit on tlihe size of loails and -:2arough other rn;asures. If the bainkdi.ng systumn is to ex-.and its share of invectm znt funds, in comp,oris on to that supplied by thle central bank, some chane-s in t;he s strcture of intuerest rates will probably have to be effeGted possibly through a lowering of deposit rates. Certain other changes in prefer- enrtisl interest rates may also be desirable. 6. There are vari.ous plans for the ex:pansion of industrial est--t,es; private i.nvestors lhave expressed a definite interost in participatirng in PUlo Gadung and Tjilatjacp. T-hey are not in a position to undertake full financing of an estate and joint pronmotiion tvith the Goverrancnt seems clearly indicated. The IBRD has indicated a wvl'lin lness to con- sider financial support, if a Government authority is established to be the channel Lor such funds, as w.ell as to undertake the oromotion and supervision of them. The lack of' such an authority, with certain key powers and responsibilities, appears to be a prira-ry imnpedi-ment to the success oL the program. There are other deficiencies in the pro- gram, such as lack of provision for space for, smaller scale industries, but these are fairly easily correctable. 7. Indonesia has negotiated a nmiLber of- concession a-remTents for tbhe exploitation of 31i neral and timber resources. 11any ofL these a-ree,- ments were exoce;i:agly generous to the concessionaires in terms of Dreferential treatment on t-aes and ot,her pa2yments, a-nd conditions of performance. A review of selected agreements indicates that the terms for the division of rLet revenrues and benefits, the stipulatioinls a- to the rate of development and production, and the specification of tests of perLormance undul-y favor concesionaires. Sucgestions are made in the report, nd in re-reonced. materialL for tightening the provisions in each of these areas, so that the agreements will better support the develo.pmrent objectives of the country. 8. Approximately $20 million is earmarked Lor nominal research and developtent activities in the Gove:nn:^ent budget und about 10'O of this is directed towiiard industrial needs. Unfortunately there is a prolif- oration of research insti-utes. most of xihich have too small a prof- essional staff end a research program that is not focusod on the pres- sinc industrial wroblems, w.-hich are concentrated in the medium and small scale industries in engineering products and ccnsixmer goods. It is suggested that an improvement could be effected tuhrough a consolida- tion of research inrtitutes, a redirection of their BRD programs, and, as a prioritr progrnii, it is suggested that an initial effort be made to strengthen the staff, budget, and programs oL the lMetals Industries Development Center and the Ins titutue of Technolcgy at B-andun-ig. 9. Althloiiclh in the past there have been plans for t,he establishnent of a steel indus,truy in Indonesia, the one specific project at Tjilegon has not been compl-eted. The extremely large size necessary for a con- ventional plant probably forbids consideratilon for some years, until the market grow,s substanti.^Illy. How-ever, an analysis of 'the market and of a newer,. t,pe of direct reduction process that. is economical at a scale of 400L,000 tons, Tm..a-es a plant of this t3--) appear very attrac- tive. A prefeasibility study concludes t-hat the economLic rate of - v-. return woldld be about 185' a-nd all teclhnica, marketing, and other factors are f avorable It, is rtco-indod hat a Lull feasibilit-y- study leading to a project proposa-l be undertalken immediately. 10. Petrochemical dcvel'.^)ment is a natural opport-anity for Indonesia because of the abundl.ant sui_Tlne3 of oil and gas; yetr the r-isk-s and un- certainties, both in mar:e's and production, are se-rious. A rather de- tailed mathematical prograrc:Lin model Lor analyses of potetial develop- ment of petrocheiicals has b,2en prepared. It analyzes the rces 0o retLulrn and investanent required under differen.' assumptions about demand, market prilces, costs, and ot-hcr factors. About eighteen diffi7erent runs of the model were mrde, yielding-- invesanent levels ran:ging, frorm, :`90 mil- lion- to $350 million, and covering the period f:rom 1977 to 19SL in sta;ges. The study indicates that a larrgC petrochemical core facility would be an attractive addition to the econom,r of Indonesia. A staging of the dev- elonmenit is indicated - hle selected initial facility costiLLg $186,000,000 would be expanded to a $320,000,000 facility bet-ween 1977 and 198)4. The initial facility wzould yieltl a 16' rate of return and this could be in- creased in later stages. 1-t is recommended that a detailed feasibility study be undertaken; concurrently, efforts should start to attract tech- nically coimpetentv and ex-pert rmarket oriented foreign equity participants for the project. 11. The encirneerinri indust-ries are underdeveloped, even by the sta-n- dards oL the develo-0ping- cou,antrles of Asia. The situation.calls for car- ful platmnrin and strat-egic -,ro!-rams that wil- u iiize the limi:ted local resou'rces in he most effective -way possible; a sugge-stcd strate^r calls -for parallel deve-l on-qenus in ,thf followinig indu--tries (a) mobil e equip- ment industries, (b) stationarnr eauiemcnt industries, (c) shipb-uilding7 industry. Within each inJl.s tr, the desirable direc'ion of d,:velopment is indicated, with spec-ial em.phasis on the development ol the supplier sector. The mobile eeuipmn, indlustries cover the motor vehicles and heavier equtipment surh as co--. ruction equinment. In the motor vehicle industry, it is suggestiec tw-at the development emphasis should be shiftd from passenger cars to lighiut truckl;s and buses. Il the other mobile eouirIment indhstry, the establilshment of a nrucleus enL,erori-re is sug,g:estcd. The viability of the enterprise ;ill depend on the selectiioB ofL a compriat- ible prodact. mix; an enteror-ise with a sample product iPix is analysed. The statsionary equipment inr1usmtries favored for developmnt, are farm eauir.,,ment and the light indu.;trial electrical equipmc:nt. The key prociuact in fann equi,prment is ju6i,-2i to be the irr-igation puumas; pro[;ran Leasibili- ty wil hinge on the availability of quality castinlg,s at a cormn.petitive iintern-tional price. Thae cieTctrical eoq¢'ipment indbustry should be very attractive to develop, but thue dir ection of dcvoloprmnoCnt of this industry will depend largely on the electric po-wier situationl wJhich is not clear at this timre. In the shipbuWl Lding industry, the case for building inter- -sland ships is relatively all esteUblishad; ho-weover, t.he future direction of develogment will be sha,pcd by efhiether or not a comriiaa-ent is made to build ocean-going ships (gene:ral cargo vessels); the feascibility of the latter proposition is. pnlysecd. 12. Indonesia is, endowed with onle of the niost im,portant forest resources in tlhe wJorld. Save for teak forests in Java they were very lightly exoloited until 1267. In the last three years the voline. -off timber 'elled has increased vSery rapidly and value of exports reaclhed more than US $86 million in 1970. Yet timber-based industries are not now important elemnl.lits in the country's development. The Foreigin Cap- ital TIvestmnent Lawz and the Basic Forestry Liaw, together w.ith a, surge in demarnd for logs in Japan, JKorea, and otlher countiries, were instrumental in the rapid inicrease of forest exploitation. Th-e liberal policyr embodied in tuihese law3 and several Gverment rcgulations has resulted in the grant- ing of concessions boverine 12 rmi'llion Ha. of forest land. Concession agree,nents contai,n clauses on -the obligatiion to build processing Pi ants, butJ this obligation is conditioned on the plants being found technically and economnically feasible by the concessionaires. l4cLany concessions are too small to allow-T for their e.rn1 oitation under sustained-yield manage- amernt%. There is therefore no assurance that this approach w'.ill maximize long-ter,x benefits for the couItrJ, and for the conc essionaixes -them- selves. On the contrary, it is conceivable that it wi1ll result in unused capacityr, unproductive investment, lower value acdded and mis- allocation of huran financial and physical resources. An alternative approach suggested in the report is to develop intezr2ated t-imber manu- facturing operations. A nrefeansbility stutr on such a conplex. recnuirn a fixed investment of aboutv Us 894 million to process 1.6 mE2.lion m3 of logs, pulpwood, and forest .Taste (such as l-imbs and culled treez), coald attain ar± internal economic rate of return of 2G, per year. The comrplex as envisaged wo-..d be located in EastI Kali3mantan. Th2e cormlxp proposed consists of' a sawm_--qill idth anni1ual capacity for about 175SO0 1O of sairm- r,ood; a 225%000 m3/yr plyrvood plant, by-prooduct, plants; a 500 tpd pulp mill mnd 300 tpd paper miLll. The complex is a very attractive project and shows an economic rate of retanl of about 20'. These fnding's justify a recomcnendation lor carrying out detailed feasibilit,y stucLies, leading to firm.project proposals, in zhich alterniative capacities and locations could be examined. These studies should be ilnitiateCl withcat de.ay. 13. The minerals indust- ies have pro-idsd indonesia writh much of her export receipts and i n other wa.-3 have contributed specially to invest- meint and development. The state eniterprises responsible for the hard mineral areas have had a mixed emoerience in recent years. The tim mining enterprise has shown appa.rently high levels of net incoLe, though account- ing practices in use cause- some doubts as to the actual levels. This enterprise cculd becone more 'profitable if its production m-ethods iand employment prracticr.s oul d be revised. Difficulties have also been en- countered in the rehabiliitation of equipment a-nd the operation of the smelter. It is suggested that technical assistance is required to help the enterprise achieve its potenti-al. In coal mining there are t-w;o main deposits that are. promising. Tne BuK.it Asam depositi is no-.w losing morey, but it is a very good grade of steamn coal. There are several alterna- tives for development that the report examines: (a) development- for ex.port only; (b) development for productioin of: electric powe>r generation at the mine-head writh the potential major customr r a second alilrdninitn smelter (in addition to the oTne n'olI conlcmplated in conjunctio'l with Asahan power); or (c) a corbination of the previous tw,o. Each alter- native involves different costs, bEn.sfLits, and institution1l -rrnge- mnlt.s. Before e. finl decision is made, the 2altern.ives should be investigated. A project for developing Ombilin coa-l is under wJay, and two private. fiims have pre-paered prelL2iAinary inves tr'--it plans and a proposed conuract of -ork. An analysis of the proposed contract of work reveals that it is highly unfavorable to Indonesia, 2nd a recom- mendation is nade that it be rejected. Ah to the proposed plans for the pxroject, they now indicatJe a program for rehabilitating a railroad and developaT-fnt of a new port. !An analysis of the1R costs and revenues -fndicates a very low ratue of return. An alternative is to substitute- a pipeline and associated facilities for the railroad and mir3xy of the port facilities. An analysis ol this alterriative seems to indicate that investment costs could be cut at least ii hl.f, and it is recor.- manded tvhata' he pipeline case be more thoroughly eval-uated before a final decision i s nade. ... .. .. FOREWORD The -&t incustrial ]Aission to Indonesia visited the countrY inl April eand lay, 1971. Its objectives, were two-fold: to help ar- ticulate the. framew-ork and the issues for the preparation of a plan of i-nd-astrial develop-ment for the next few, years, and part-icularly provide a star-ting point for the wvork on the next five-year plan; and, to identify specific project opportunities and to prepare reasonably detailed preLeasibility studies of them, so that decisions can be made in the appropriate cases to undertake the furlther wTork necessary for fim project proposals. The mission was comnposed of the following mnemTbers: Frederick T. Mloore, Chief of IIission Edward Pi Holland, Economist' Indas trial Stru-ature and Projections Wolfgang a2upisch, Inidustrial Ec oromist Iron and Steel Antonio S. Tarnawviecki, Industrial Economist Tiiber-based indastries Kenneth G. Brovn, Chemical Engineer (Consu:ltant) Petrochernicals Harry Y. Choi, Industrial Engineer (Consultant,) Engineering Industries Walter Paj2alich, Mliniing Engineer (Consult,ant) Mlineral Industries James D. Theberge, Economist (Consultant) Industrial Incentives'. CHAPTER I THE PRESEaIT STATE OF IThUSTRIAL DEViTELPhIT 1.1 Cornoared to other countries of similar size and per capita incomre either now or in thie past, Indonesia has a relatively under- sized industrial sector. Although the statistics are very weak, this backwardness of industrial development seems to existu in each main branch of manufacturing production as w,ell as in the aggregate. 14oreover, in those branches that have been examined in detail, the variety of products is more limited than would be expected in a dynamic industrial sector. E,ven allowing for a large nmargin of pos- sible error in the statistics, it must be concluded that Indonesian industrial development .i.LL need to be accelerated and certain gaps in its structure filled in, if this sector is not to hold back the development of the economryr as a whole. 1.2 In the rest of this chapter, we will briefLy sketch a few of the past events that have significantly afLected the pre.sent state of industry and describe soime of the features of the existing struc- ture, mating comparisons to other countries and to statistical ncrms. Historical Inlfuencvs on Indonesian Indus tri al iJvelopment 1.3 The report of an Induslrial Mlission is not the place for an extensive review of Indonesia's econonic history. However., kno-wTledge of soire aspects of that history can be very helpful in understanding the present state of the economy and of the industrial sector. The next few paragraplhs summarize briefly those historical influences that seem to be most relevant for that understanding. A muore compre- hensive sumrmary of recent events can be found in the IBRD economic report of 1968, supplemented by those of 1969 and 1970.1/ 1.4 The experiences through which Indonesia has passed in t1ho. course of its history have ½rhibited th- e develo-ient of tne mranufac- turing sector, so that th.t sector is presently neither as large nor as advanced technically as would normally be expected in a country of Indonesia's size and level of income. During the rnitch colonial period up to W Nold 'Jar II, the main emphasis wzas on produc- tion of prim.ary goods for export. During most of that era, industry was developed only to the e;xt.:ent necessary to providea ana miaintain equipment for the plantations of coco-nut, rubber, cacao, tea, and so on, and to keep mining operations and transportation systems func- tioning. Petroleum companies in Indonesia as in other underdeveloped 7 Report Nos. AS-132a February 12, 1968 EAP-5a llay 16, 1969 EAP-lOa 1Noverr.ber 27, 1969 EAP-l9a Novez;rler 27, 1970 -2- countries, imported most of their requimlnents. A few f2irly large er±-ineeririg firms got established, mainly to repair machinery and shipOS. No0 i-de variety or large volime of metal goods or electrical equipment were manufactured. The ideas of rmanfacturing consumers' goods for the domlestic market, or of developing indust,ries to make machinery or ecquipment for industrial use, instead of iiporting it all, were not thought to be appropriate. Of course such basic in- dustries as food processing and clothing manufact.ure developed to a degree, but they tended to be mainly smill-scale operations wfith traditional technologies. 1.5 Toward the end of the Dutch colonial period, some domestically- oriented industries -were established, such as prodaction of glass, cement, textiles) and a rramber of &ther goods, but their scale was quite limited. Dt.ring the Japanese occupation (1902-45) and the sub- sequent struggle for independence (10g-49), there was little oppor- tunity for development of these or other manufacturing industries. Thus the coloni.al patterni tended to persist and overall growth of industriY continued to lag. 1.6 Independence was expected to change all that. Hoowever, the national leaders found it hard to get started toward the development of a modern econory. As in many other new, nations, there was a period of floundering and confusion w.hile debates w;ent on about pol- itcal, social, and economic philosophy and doctrine. Then there was a rebellion (l1956-6l) to be dealt with, and some territorial disputes, leading to Indonesia's withdrawal from the United 1Nations in protest against the seating of MIalaysia in the Security Council (1965). This cut Indonesia off from both technical and financial assistance that might have helped solve some of the problems of getting development started. 1.7 There was, evidently, some growth in the economy during the first fifteen years of independence (l95o-l96h), but much of it was mere extensioni of agriculture and basic necessities -to keep up with the growrth of population. Some significant, infrastructure and in- dustrial projects wJere undertaken, but nothing resemibling a self- generating process of growth got slarted, especially in the marnu- facturing sector. Mlining, petroleum, and lumabering for export were far more attractive than manufactaring, bo-th from the viewpoint of expected proffts and from that of tuhe nation's balance of payments. WiRth a fairly continuous inflation going on, moreover, it was clearly more prudent for an investor to speculate in conmodities than to undertake long-term plant construction. 1.8 Government policies during the period were not effective in establishing a solid basis for long-run growth. It is true that two development plans were formulated, at diffaerent tiTes in th:ts period, but implementation fell far short of the targets. Little effort iias -3- made to miobilize domestic finance, either through taxation or encourageTnent to increase private savings. Balance of payments poli6y, aside fromn what appeared to be deliberate efforts to discourage any inflow of capital, consisted inainLly of restricting and rationing imports when external inflows and export earnings diminished. The weakness of .the system wlas clearly apparent when (largely because of a decline in world rabber prices) export earn- ing w7ent dorm by one third between 1958 and 1963, and thle value of the currency began to get out of control. T'ne restriction of imports in the face of scarcity ol foreign exchange throttled domestic indus- tries that used timported materials. As manufacturing output sagged., maintenance and replacement were neglected. But in spi.te of import restrictions, fareign exchange reserves were exhausted and service payments oni the foreign debt could not be kept up. The fonnerly tolerable rate of inflation accelerated in-to hyperinflation with the Djakarta cost-of-living index more tharn doubling each -year fror' 1961 to 196b, then rising by a factor of 4 in 1965 and 12 in i966L/, National product may have grown slowly during this period (the stat- istics are not good enough to be sure), but probably not as fast as the 2½ percent annual population growth. 1.9 Since 1966, tuhe stabilization progra=n has beer- remarkably elfective. The Djakarta cost-of-living index in 1967 was about 2.7 times that in the previous year; the c 9rresponding factor for 1968 was 2.25; for both 1969 and 1970, 1.22/ In 1969 a Five-Year Drvelop- ment Plan was promnaulgated, and there are indications that investinent and output have begun to pick up. The Five-Year Plan put prinary emphasis on investment in agricult-ure and in indws tries and irfra- st-ruct'ure cl6sely related to agricultu-re. Nevertheless, many other industries were in a position to expand t,heir output wYith relatively little in-vestnent because they weare operating far below capacitye A relaxation of import restricuions made it possible to step up out- put in industries t-hat use inported materials. In others, demand was the determining factor. There -is no reliable basis for estimating the groweth of industrial output in the aggregate, and for many branches of industry there are no statistics that can be used for year-to-year comparsons, but most ol the specific products for wJhich data exKist were produced in' increasing voluanes during 1969 and 1970, compared wuiti the lo-s reached betvmen 1966 and 1968. Characteristics of the Industrial Sector 1.10 As explained in the note at the end of this chapter, the statistics and estimates fromn various sources concerning the industrial lJ Statistical Pocketbook of Indonesia 196L-1967 Biro Pusat Statistik, i)jakarta, Table Q-1. g/ Based on IBiD Report PAP-19a, Table 9.1, plus Il*onthly Bulletins of Biro Pusat Statistik to comrDlete the y,ear 1970. sec.tor- disagree and are w-idely recognized to be subject to large mar- gins of uncertainty. Tne figures used here to present a quantitative description are correspondingly open to error. Nievertheless, they represent what seeln to be the most plausible esti mates available and, moreover, they could be considerably altered without changing the qualitative characterizations and conclusions that are associated with them.1/ Relative Size 1.11 Most measures indicate that Indonesia's indust-rial sector is smaller, relative to the overall economy, than womuld be expected in a country of Indonesia's size and level of- income. There are sev.eral ways to judge what would "normally" be expected. One is by comparison to other countries believed to be similar. Table 1.1 presents data from the IBRD Socio-Economic Data Bank, cDmparing the proportion of GDP that oHiinates in the industrial sector (either including or ex.cluding construction) for several countries whose income per capita is in the same low range as Indonesia's. Since Korea and the hllilippines are now sign1ficantly mrore pros?,erous, figares are given for those countries for earlier years (1961 and 1962) when per-capita income was lower. Malaysia -,,as included because it has manay cultural and economic similarities to Indonesia, even tiough its per-capita income level is much higher and its popu- lation nmuclh smaller. Whether it is actually relevant for this com,parison is open to question. 1.12 Various comparative:studies have indicated a strong tendiency toward proportionately larger industrial sectors in larger countries (measured by population) and in countries at higlier levels of per- capita incoyrie. Table 1.1 includes countries that are both larger and smaller than Indonesia, aTd both higher and lower on the income scale, withi the populations and per capita incomes listed. 1.13 It rill be noted that, when construction is excluded, four countries have manufacturing sectors smaller in relation to C-DP than Indonesia's. (Ceylon, Malaysia, Nigeria and Uganda). Of these, three are relatively small countries, having less t1han 10 percent of Indonesia's population, and small countries, according to other stud- ies, tend to have smaller industurial sectors. The fourtuh, Nigeria, while half as big in population as Indonesia, is at an even lower incoe lev.el, and that is another factor strongly correlated with the size of the manufac-turing or industrial sector in intercountry studies. 1J T'nese com.ments are not intended to disparage the ertremely valuable work of Dr. Wilhelm Boucherie, whose estimates we have used wJith a minirnmm of modification as explained at the end of the chapter. Neevertheless. even the most diligent researclh by the most. competent individaal wvork-ing alone cannot entircly make up for the absence of any recent census of manufacturing fi'ms or properly designed, executed, and analyzed surveys. -5- Table- l.l , :, S' J t 'E 0 T i.141TL J CT .U; I-l G- P, POPULATIOI'i G7,P PaR , C'hT ., AC' TJJ,G LTAIcG CAPITA AII TiU (millionl) (U.S.) (Percent of GDP) Lnd.onesia (aS70)V 116.0 89 7.1 9.8 Ceylon 11.4 150 6.C 12.2 india 498.7 70 13.4 17.* Kenya 9.6 120 10.9 15.2 Korea 29.1 130 15.8 19.5 Korea (1061) .(25.4) (100) (11.7) ( L.9) Ma-laysia 9.7 320 3.9 13.1 nieria 59.I7 80 6.1 11.2 Pakistan -117.0 100 10.6 i .5 Thailand 31.7 150 10.6 16e6. Uganda 7.7 120 4.3 6.0 Philippiniecs (1962) 29.3 140 16.6 19.5 Source: for all except Ir-ndoncsia: ocio-ecor.cic Data Bank, r.r . for Ind.onclsia: Bouchcrie (rnodified'; ccc Annex to Chapter 1). 1Tote: Data 'cre Lor 19-66 unless noted. '1/ % of GNTP Wher, constructi.on is includ.ed as part of the industrial sector, only a single country, Uganda, remains below the level of Indonesia. It is the smallest of the countries in the comparison, and its economy is strongly biased toward agricultural exports. Thus, in comparison to a variety of other low-income countries, Indonesia has a relatively small industrial sector. 1.14 Anot'Ler, perlhaps more scientific w7ay of corparing one country's data Vwith a norim based on other countries is by subjecting the data on otlher countries to statistical regression analysis arid then usinga the regression fonrula as a standard of reference. In the next chaipter is an explanation ol a study made by Chenery and Taylor in w-hich regression formulae were established for the "normal" proportion of GDP generated in manufacturing and constraction, expressed as a functiorn of per-capita income and country size (population). For Tndonesia's size and income, the foxrmulae call for a proportion of 14 to 15 percent, whereas the ac- tual proportion in Indonesia now is less tlhan 10 percent. Even if a wide margin of error in the Indonesian data is allowed for, this approach, nevertheless, corroborates the conclusion indicated by the simple cora.par- ison -- that Indonesia's industrial sector is relatively undersi7ed. Structure of the incdustzrial Sector 1.15 Vqithin the overall industrial sector, which seems to be under- sized for a country of Indonesia's population and per-capita income level, it might be supposed that somebranches of inCastr%r Jwould be mrore developed than others. Tlo investigate whethler this is so, it, is neces- sary to have some standards of reference to ind c atr,&wat proportions among different branches of industry could be considered 'normal". Again two approaches are found possible: comparison viti-,h other individual countlies and comparison w-ith foririulae derivred from statistical analysis of marWr cointrLes. TaLking Boucherie's estinates for value added (witn the modifications explained at the end of this chapter) as the best for Indonesia, both kinds of coi>arison have been made. 1.16 Data on the value added in different branches of industr3 were found in individual country studies for four Asian countries in a col- lection of papers from. a conference conven-d by the Uth Econodic Jom- mission for Asia and the Far East ( -AFE)L7. These figures, expressed as percentages of GDP, are tabulated in Table 1.2, together witŽl-figures on the Philippines, from a 1969 IBRD report2/ and on Inc.onesia from Boucheriets study. It is to be noted that the data for the other coun- tries is for a time eight or ten years earlier than that for Indonesia. 1/ Indu.strial Devel.orpnent in Asia and the Far Easst I'Docum.ent, from 1965 EClFE conference in anila)', United Nations, 1066. studies were included for a good many other countries, but only for the five were data included that could be used for this com- parison. EAP - 7, 1969. TATPJE, 4.2 SIIARF, IN GDP OF PRiNCIPAL BRANCHtES OF 1MNNJFACTURING, VARIOUS COUNTITES (Value added. as % of GDP) China Indo- Pnilippines Korea Iran (Taiwan) Thailand nesia/l (1962) (1960) (1962) (1962) (1960) (19707 Bra.nch of N'srnufacturin; Food, Beverages and Tobacco . 6.7 4-ii 3.2 4.1 6.3 2.8 Textiles' 0.7 2.h. 2.2 0.3 1.2 Clothinpr and Footw-ear 1,2 O0. 0.3 0.3 0.5 0.1 Vocd Products, Fulrniture, and Fixtures 1.0 o.14 0.2 1.0 1.0 .0.7 Paper and Paper Pr-oducts 0,3 0.2 0.1 o.8 - - Printing and Puiblislhing 0. 0.l4 0.1 0.3 0.2 0.1 Leatlher Products 0.2 0.1 - 0.2 0.1 Rsucber Products 0.6 0.3 0.1 0.4 0.14 O.] Ch6e'icals. Petroleum and Coal Products 1.2/2 0.8 8.7 2.6 0.8/2 o.5 I nII-m,{eta1lic I'aneral Products 0.6 o.5 0.2 1.14 0.> 0.2 Pasic 7btals n.a, 0.3 - o.5 - 0. 1 'lchanical Industries 2.5 0.8 2.0 1,,9 0.9 OS9 'i scellaneous 1.3 0.2 0.1 0.2 n.a. n.a. Per Capita GCTIP (U.S. $) 140 100 210 150 100 89 Population (Million) . 29.3 214.7 22.8 11.3 26.14 116.o - Indicates value less than .05 n,a. Indicates figures rnot available /1 p oL GNP. /2 Includes chemCical and chemical products only. L Included in metal produc4;½, /J Incluclcs basic rictals, but excludes electrical machinery. L Motal products electr-ical ncl non-electrical machlinory, and transport equiprnent Slource: For all oxcopt Indonosia zand Plillppl.noo., Inchintrial. ibvelo2mmnt in A:sin and tlhe Fnr ns3t (Docimu.nts £fr-n 1965, EGE r:Cor:oreiico if.n i4 la)), TJn:Lt;cl Hnt.i.ons;, l'in(i; J.lor Iwins1(, I llo-Tui- (wit.rn ;1ci.ilcat,i.on. oe-plained in .~ ~ ~ ~ ~~~~~~~~~A .I s >- -~.< rtll 2sfFtp 0n,9- nas 'rl Tn s(;f§MDE) )4. 1.) This serves to reduce thec difference in income levels; nevertheless, Indonesia still has the lo,west per-capita income. 1.17 Compared to the other countriles ifn one branch of inidstry after another, Indonesia ranks either low*Test or near the low.,T and of the range in most. Oinly in combination of "wood products, furniture, and fixtures" is the figure for Indonesia nearly up to the average of the other countries. Unfort.unately, 'we do not have infommation for the siibdivsirons of this category for the other countries, to compare wl{th In-idonesia, 'where "furnLiture and fixtures" accounts for alost three-cuarters of the total, In the category we have called "mechanical industries'! comprising metal products, machinery, acnd transport equipmaent, Indonesia appears 'on a par with two other countries and consid-.rably below the other three. 1.18 Turning from individual country 9omparisons to' ,he statistical approach, Chenery and TaylorJL made regressi-ons from main brarnches of the industrial sector in the same way as they did for the sect'r as a wrhole. Their article presents the regression formula for the proportion of GNP generated in each of the industry groups as c! function of population, per capita income, the invest- ment ratio, and the rat,ios of primary and manufactured exports to GNP. From these formulae the "normal" value-added3 proportions have been calculated and are shorm in Table 1.3, togeether witlh the proportions that are estimated to exist in Indonesia in 1970. 1.19 The proportions of' GIT? for diff6rent industries as derived from the ,henery-Taylor formula give a rathler different picture than that obtained from looking at specifiQ countries. -lIost notew..orthy, perhaps, is that the standard set by this reference is almost met by Indonesia in the first tw,o categories, food, beverages, and tobaco6, and textiles. The reference level based on the statistical analysis is mucl lower th-an the valuie for most of the countries of' Table 1.2 for food, beverages, and tobacco, and is belowv their average for textiles, alth>ough within the range of variatic:n. Tne explanation, of course, is that the five countries in the individual- country cornoarison do not fom a sample witlh characteristics closely Comparable to those of Indonesia, and the statistiical analysis has show¢n that, some of the charactertistics that differ have significant effects. The Chenery-Taylor formula,,in other words, has taken into account and made allowances Lor 'hese characteristics. 1.20 One of the principal differences is the size of the country. According to the statistical study, the relative size of industries are significantly correlated with population. Where the forrmala ;/ H.B. Clhenery and L. Taylor, "Development Patterns: Among Countries and Over Tim=", The Feview of ' c.ncmics and Statist.ics, lNoveinber 1968 -9- Table 1. 3 SLARE IN GNP OF PTZIJJCIPkL BlRIJCHBS OF MAlUFACIURINGC, C01{PAR!SON WI-EA REGRESS ION FORiMiJLA (Value added as % of GNTP) Chernery- Taylor i Indornesia '\Forlmia 7 (1970) Branch of 1^nufacturing Food, Bevcr.age,7Tobacco 3.2 2. 8 Textiles 1.4 1.2 Clothing and Fibres 0.2 0.1 W-.Tood Product, Purniture and Fixtures 0.4 0.7 Paper and Paper Products 0.2 - Printing and Publishing 0.2 0.1 Leather Products 0.2 O.1 Rubber Products 0.1 0.1 Chem. & Petrj1m. Products 0.9 0.5 Non-Met2allic Ilinerals 0. 4 0.2 Basic I'etaals o.5 0.1 Mechanical Industries 1.3 0.9 - -. indicates 2.8 percelnt of ITP for the food, beve-rage, and tobacco iLndustries in a country wr.Tith Indonesia's characteristics, it rields a value of 3.6 if the population is changed from 116 million (Indo- nesia's) to 25 million (conparable to inost of tl-he countries in Table 1.2) wnith nio change in any other parameters. Other character- istics that are taken into account explicitly in the Chenery-Tkylor foamu-la and thereby affect th-e comparison are the level of per caniit income, ex-ports (two categories), and the ratio of inveStmnct to GNP. L.21 With all of these factors taken into account in establishing the referenice levrels, Table 1.3 st-ill shows mriost Indonesian industries below "nor,al", w-ith the exception of the first two, as already noted, and tlhe composite group., wJood products, furnit.ure, and fixtures. The, meaning of the apparently high le-vel of this composite is not clear, in the absence ol a more detailed examnnati'on. It would be useful to haNre a separate reference figure for "wvood products" alone.. It might also be useful to know more about the Indmesian "fulniture and Fix- tures" industries, w¢hich overshadow the wood pro ducts category in a ratio of almost three t,o one. Nei.ther of these desiderata seems to be attainable, however, without considerpb.b.y more research t1han is justified for the present pv:rpose of getting an overview of the stracture of indonesian industry. Regardless of tuhis statistical comparison, there is evidence of a great potenitial for e.ansion of the wood products industrieg on the basis of natural resour-ce en,dow- ment and export markets., and this will be examined carefully and in detail in a later chapter. Geolgrap,hical Distribution of Industry 1.22 Both popuilation and industrial act>voty are very unevenly distributed among the various islands and island groups that make up Indonesia. Sia:ty'-five perc.ent of the total population live in Java (the Java admriniat.ratuive region including Elliaura), which con- stitutes only seven percent of the country's land area. In these two islands the population density is over 1,400 persons per square mile, while the ot.her islands have densities ranging from 20 to 100. The gross regional product in different regions varies fromi about $75 per capita in-Java to about $1400 per capita in Sumatra, pri- marily because of differences in agricultural productivity and in the location of natural resources such as tizber, petroleu-m, and rminerals. The industriallcomocnent of value added is quite small in every re- gion and has little or nothing to do wTith the variations in regional product per capita. In the main islands it contributes from 6/ to 8/,; ol gross regional product, and about halt as much in the smaller islands. The distributions are shown in Table 1.4 1.23 Tnese statisticS indicate a concentration of industrial activity parallel to the concentration of poulation. Java, with 65 percenit of the population, produces 61 percent of the industrial value added. The only regions in -hich the share in industrial Table 1 4 GEOGRA PHICAL DISThRITBUIO!',S, POPULATIONJ AND PRODUCT Population GR?/1 Industrial 2 (millions) per capita Val. added U.S.$ per capita Region U.S.$ Java 75.0 $ 75.0 5.9 Sumatra 18.6 14O.O 9.5 KalimTantan 4.9 90.0 5.2 Sulawesi, 8.4 100.0 6.3 Others 9.1 90.0 3.2 All of Indonesia 116.0 $ 89.0 $6.3 Regional Shares in Each Total Indus-trial Region Population GRP value added Java 65% 55". 61% Sumatra 16 25 24 KalimantaLn 4 4 Sulawesi 7 8 7 Others 8 8 4 All oL Indonesia lood 10M 1_00 /1 Gross Regional Product. /2 Not :including construction, and wTituh the adjustment explained at the end of the chapteir. Source: Wilhelm Boucherie; paper in preparation, 1971. -12- value added is notably differcnrll, f'rom the share in populUtion are Sunatra (iwith proportionately m,orc industr,iy) and the miscellaneous smaller isl..:nds (w.i,th less). 1.24 Sumatra's larger share of industrial value added does not indicate a higher ratio of indu Kry to other activ.ities. As the upper half of the table show5s, the per capita regional. product is higher than the nationa- average by a slightly greater margin (57%.) than the per ca-pita industrial p_roduct exceeds its national average (5I%). Thus, as the lcG!br part of the table shovTs, Sunetra's share in industry and GNIP are abouL' equal. The "otlher" islands, including the 1]1oluccas, Uhe Lesser Sundaas (lEusa Tenggara) and various smaller groups, are less industriallzed, as indi.cated by theL' contribution of only four percent to industrial value added, while their share in GCP and in total population care both eight percent. Java has the peculiar distinction of contributing to total industrial.product almost in proportion to its share, of population while falling much lower in its share of produict irn other activities. Eresumably this is an indication of low-per capita agricultural output, associated with high population density. 1.25 For many years, Indonesian leaders have talked about the desirability ol encouraging people to migrate out- of Java to the other islands. Perhaps the polic'y of encouraging in gration of people needs to be complem,lented by a policy of encouraging indiiustrial dev;el op- ment in the less densely inhabited regions. Size of Industri_l Fi±Ls 1.26 To get any picture of the distribution of industrial estab- lishments according to size, it is. necessary to go back to the i,n- dustrial census of l964t. Sinc;e that date there has been no census, and even the registration of firms, supposedly required by law., has not been kept up. At the present time, there are apparentuly many unregistered fir-ms, as w7e- as m-any that have ceased operating but are. still, carried on the official lists. 1.27 Attempts to survey the industrial sector by questionnaire have encountered very poor rates of response, in addit,ion to the compl-ete omissioln of the many non-registered firms. Thus any es- tirates of changes since l9614 are onily estimates and, considerirng how some of them are made, not reliable. The pattern of 190 4 is the latest that has been observed. Aithough levels of total output and employment have. undoubtedly changed since the 1961t census, it seems unlikely that there have been significant changes in the relative proportions of different sized firms ritliin the various branches of industry. Hence the l964 figures may be assumed to gi-ve a reasonably good picture of the present patten. 1.28 The census classified industrial establishments as large, medium, and sinall on the b-sis of the number of employees and whether they did or did not uase po.ered mnachinery. One of the tables at the end of the chapter (Table 1.12) sumarizes the nuierical data in tenTs cf the establishments in each size group and the corresponding numbers of empDoyees, for each branch of industry. From that basic information, the figures in Table 1.5 have been calculated to bring out the propor- tions in relative terms. 1.29 In the first three cr 17olumns, Table 1.5 shows the distrib-ation of each indastry group's total emvployment among the different sized establishments. Te other three column!s show the average size of the establishments in each class, in terms of the number of employees. Of course, the defin-tions put lirits on the possible rGange of nuimbers in the small and medium classes, but it is notable, for example, t;hat small firms in the tobacco processing industry average niearly five persons compared wi-th two or less in a number of cUter -ndustries. It is also of some interest to k-now. how large the "large" establishments are, there being about a four-.to-one range in that class. 1.30 As to the size distribution itself, it is remarlkable how much of what is classified as "industry," or 'manufacturing" is conducted in small scale establishments. Half of the industrial branches listed have more than 50 of their total employment in small-scale firms. Of course, the nwiber of industrial branches is not a proper me.-?.ure, since sor.e of them are much bigger than others. But, looked at in another way, 70 per- cent of emaployment in all branches of industry combined is in small-scaLe establishments averaZing a-bout two persons each (from the totals in Table 1.5). That does not mean that 70 percent of production or of value added occurs in small plants. Ver-y likely the productivity per per6on is highar in larger plants, but reliable data are lacking for value added and the comnparison has to be in terms of employment. 1.31 Food processing, the largest industryZ seems to have a polarized distribution, wJith more emp?loyees in large than in medium-sized establish- ments althouuh the vast majority are in small ones. The large fims are evidentulyv very large (averaging over 330 employees each), and are probably producing different types of prouicts than the small ones. 1.32 Categories in which small "firm s.s" predomrinate even more than in food processing are clothing and footwear, wood and wood produLcts, fur- niture and fixtures, non-metallic mineral products, and miscellaneous manufacturing. The small firm>s in these activities average about two employees, sugge(Isting that many one-man operations are included along with those. employing more than twJo. It has to be recognized -that the definition of "industr" in general use for statistical purposes does not raean only modern; riech-anized factory industur, but includes cottage indust ries and individual artisans as well. If we were able to compare the modern industry sectors of different countries (which we have n-ot found feasible in the present study) we might get a some-wThat differenlt pic- ture. Although there is no reason to doubt that most economies in which -1/ in terms of Bouclherie's estimates of value added. Table 1.5 SIZE DISTRIBUTIONI iN VARIOUS BrUdICHES OF IDiDUSTRY (1964) % of Tfotal Employees Average NuLnber of llho Are E-mployed in Employees Pe-r -- Establishments of Establishmnent Each Size e____-____ Small Medium Small Medium Large Branch of Industry Food 77 9 14 2.3 . lI 323 Beverages 26 1.6 27 .3.0 15 173 Tobacco t 18 34 4t.9 26 263 Textiles hi 38 21 2.0 17 206 Clothing and Footwear 9h 4t 3 1.6 19 100 ,. Wood and lWood Products 96 3 1 1.7 1L 108 Furniture and Fixtures 86 13 1 2.1 l14 83 Paper and Paper Products 2h 34 41 2.0 27 231 Printing and Publishing 11 38 51 I. 17 130 Leather and Leatlher Products 38 35 27 1.8 17 82 Rubber Products 15 22 6-4 3.0 25 186 Chemical and Chemical Products 28 27 46 3.6 19 218 ,Non-Metallic 1Lineral Products 85 10 6 2.3 18 128 Metal Products 72 l4 14 2.4 1i5 l141 Machi nery (UJon-electric!al) 9 24t 67 . 1.8 17 204 Electrical Michinery and Equipment 54 13 33 2.3 16 125 Transport Equipment 62 23 16 1.6 15 I?07 Miscellaneous Manufacturing 82 11 7 1.7 17 115 TOTAL .70 14 16 2.1 17 215 Derived from Table 1.12 .. f-1tr the per capita income is in the neiz-hbor.hood o.. $100 inclucde a great deal of cottage industry, there might be differences worth identif y- ing in their small modern sectois, wzhich are due to play a significant role in their future developyment. Clearly in the categories listed above, with 80 to 96 percent of emplomrnent in estuablishments averaging less than two ermployees, there cannot be much of a modern industrial base. 1.33 At the other end of the size-distribution spectrum are a few branches of industry in wAhich large or large-and-me-dium sized establislments predomimnate. ttith from one-half to tTo-thirds of employment in large-s6ale firms and only mine. to fifteen percent in small-scale ones are printing and publishing, rubber products, and noni-electrical machinery. Not 'uite so skewed, but still with over a40% in large-scale firms and about a quarter in small-scale are paper and paper products and chemicals (includirng refinery products and pharma- ceuticals). All of these activities are ones in w4hich the techriology calls for organized, more or less modern establish1ments iAiich tend to have a minimum size in the nedium-scale category, and in many of the specific sub-industries economies of scale favor larger sizes. With the exception of chemisals, none of these industries produces as much as twso percent of total industrial value added; the chemical incustry is the only one of the set tilat is a sizeable component of the indus- trial sector, writh seven percent of industrial value added. Al1 five of these industries together account for only five percent of employ- enat in the industrial sector. 1 .34 It might be supposed that the same considerations that were mentioned above as favoring large sized establishments in the indus- tries just discussed i.- d-apply in the same wa-y to the mechanicel industries other than just the non-electrical machiinery branch. It is a bit surprising, then, to find metal products, electr1zal ma,chinery, and tr2nsport ecripment al with more than half of their employment in small-scale establishments. A large part of this phlenonenon is believed to be accounted for by the existence of mran one-man machine shops, making parts on contract for larger firms or replacement parts directly for the ultimate users. In addition, it shouald be noted thatu the machinery and transport squi-ment categories include repair as well as manu.facture. The one-or-two-man shops under "transport equipment" do not build autonobiles, but there are a very great mamber servicin-g. them and repairing them. The sane applies to oth-r kinds of machincry and eauipTiant. Thus, these "industries" are not engaged entirely in manufact-Lring in the assembly--line sense of the word, and tLis fact shouL-d be remnembered when looking at any aggregated statistics.for these industries. RECENT TREIDS IIT FRODUCTI0N 1.35 Not only did the Indoniesian economy runn into serious trouble - in the middle 1960s, so also did the statistical syst-em_. As ex)plained in the anlnex to this chapter, the attempts to produce rmumbers wit'hout adequiate basic data since 1964 have led to the publication of natiolnal income accouits that are very un-reliable estimates. Especially shalky, in the jud-;rnent ofL the World Barnk's statistical mijssion, are year-to- year differences or irrmlicit trends in the value-added figures for industry, either in toto ox, by branches. The methods by which the annuval f cr-ures are estimiated unquestionably bias the trends. 1.36 In the absence of reliable aggregate data, it is still pos- sible*to get some indicatioi-s of the changes in manufactuxring activity from statistics ol t'h output of specific products. Tables 1.6, 1.7, and 1.8 present such statistics mainly for pro ducts of state enter- prises, obtained from t-wo or tihr-ee sources, as noted. Where figures from different sources for overlapping years do noti agree, both are - sho-im. For most itens the different sets of figures agree or differ only slightly. Occasionally., however, we find ma2jor differences, some of which result from the peculiar custom, described in thle statistical note below, of omitting the output of newer plants and repo-t'n that of the old ones as if it iwere the total. (The dat-a on paper production are described in the annex. It has. not been possible to explore t,he reasons behind all of the anomalies, however). 1.37 While the pattern differs for different products in degree and to some extent in timiing, it is notable that for a great maTy items, production was declining in the middle six:ties, hit a miniz.u)a in 1967 (or 1968 in a fewi cases), and then began to recover. Thie decline wTas drastic in some instance.s (arn 83/G; d;'op in one year for electrical wire), much gentler in ot.hers for cement, a ma-:iur.ium one-year drop of 17V -L'uh a tot,1 decline or 38j' in five years, Lro-'i the peak of 500,00O torm in 19621. to 312,000 in 19671). Tne rate of recovery also varied markedly amrong the different products, but it is auite clear there has been an upward trend inI most of thc aetivities shown. 1.38 The set of activities included in the three tables is far from a representative sample of the mnanmfacturing sector. It is stronrgly biased toward state enterprises. The private sector could, theoretically,, have been follow1ing a somewhat different pattern, but it is generatlly believed that it was not mach different. From produc- tion .statistics on 'specific goods it is not easy to make a good esti- mate of value added for the sector as a whole. The last general economic report of the World Baink says: "By mid-1969 industrial production has on the whole reached 1963 levels, and by mid 1970 it had in general exceeded them, +houzh some in- dustries were still lagging.'& 2/ A.R. Soehoed, 'r.ani.-facturing in Indonesia" in Bulletin of Indonesian _o n0i_StudJs. , Canberra, October 1967. 2J IBRD report EAP-19a, The Indonesia Economy: Development Trends and Foreign Aid Requirements, 1970-72, NJovember 27, 1970, VoluXile III, para 3. Table 1.6 BASIC INDUSTRIES Production Fi ures for Some Particular Products Prodaict Units 1965 1966 -1967 1968 1969 1970 Sources Storage Batteries 'OOOs 33.7 31.2 21.0 28.6 32.0 56.2 1, 2 Radios 'OOOs 142.3 92.9 216.0 319.8 363 . 5 393.1 1, 2 TV Sets Single units 536.0 1,1448.0 500.0 1,200.0 14,500.0 14,752.0 1, 2 Light Bulbs Millions 7.5. 6.0 7.8 . 5.9 8.2 5.1 1, 2 Electric and Telephone Wire '000 meters 1,1460.2 250.0 210.0 572.0 1,000.0 1 Water Pumps Single units 391.0 201.0 - 600.0 900.0 1 HIullers Single units 794o.0 539.0 - 900.0 2,300.0 1 Galvanized Iron Sheets '000 tons - 8.1 8.5 3h4.4 1, 2 Structural Iron '000 tons - - - -4.5 14.5 1, 2 I-ater Pipe and Union Pipe '000 tons 2.2 3.1 1.2 1.2 2.0 1 H 1.9 2.5 2 Road Roller3 tons - - 200.0 200.0 200.0 1 Sorayers 'OOOs - - - 5.0 20.0 1 Dry Batteries Millions 4.2 2.6 1.2 4.1t4 45 14.5 1, 2 Sewing Machines '000s 6.0 10.8 5.5 14.0 14.0 13.41 1, 2 Autoonobile s 000s 2.2. 2.2 1.2 2.14 5.0 2.9 1, 2 Motorcycles CO0Os - - 0.8 6.2 21.4 31.1 1, 2 Engine and Spare Parts for Mining, Textile and Agri- cultural Estates '000 tons 1.14 1.5 1.1 1.9 2.14 1 Sources: i. Pelaksanaan Tahun Pertama Repelita as reported in IBRD, EAP-19a, Vol. III, Table 1.3 (thlough 1969). 2. Department of IndustLiry, unpublished (1969, 1970). 1, 2. Indicates both sources agree for the overlapping year, 1969. Table 1.7 CHEMICAL INDUSTRIES Production Figures for some Particular Products Product Units: 1960 1964 1965 1966 1967 1968 1969 1970 Source Fertilizer QOOOtons 95.2 84.2 :100.6 1,2 94.1 93.0 93.3 95.5 84.2 5 Cement 'Q0Otons 386.4-V 438.6 389.5 323.4 312.0 411.0 534.0 1,3 535.4 545.0 2 389.5 338.7 322.0 411.0 534.0 5 Paper eOOOtons 8.7 8.5 11.3 15i8 1 15.6 18.4 2 -11.4 11.1 9.9 7.4 8.8 3- I1.2 10.0 7.6 1ll,3 14.3 5 O Tircs and Tubes W000 Tires for motor vehicles 89.5 84.8 238.9 359.0 1 534. 4/ -226.1 222.1 232.4 238.9 368.0 370.0 2,5 Tubes for motor vehicles 87.7 63.3 157.8 227.0 237.0 1,2 129.7 187.2 148.0 134.9 222.1 5 Tires for bicycles 3800 4/ 2869.0 2376.3 2703.8 2184.8 2216.4 2011.9 2,5 Tubes for bicycles 3900 4/ 4594.9 4152.1 3184.4 277.0 129.7 1,5 146.8 182.3 2 Glass aid Bottles 'OOOtons 12.7 - 7.0 9.0 n.a. 2.1 5.8 9.6 1,3 19.0 10.4 5.7 8.9 5 continued on next page Table 1.7 - continuad Product Units 1960 19614 1965 1966 1967 1968 1969 1970 Source Caustic Soda tons 750.0 686.0 1019.0 1113.0 1 445.0 708.8 2 1550 1550 1250 1050 5 Salt '000 tons 196.7 53.0 252.0 n.a. 100.0 23.3 160.0 1 . 1g.h1 68.14 2 Carbon oxide tons 872.0 64.l 620.7 1473.5 2149.7 361.0 514.0 1,5 Oxygen , million m3 2,1 1.6 1,5 1.8 2.1 2.61 1,2,3s5 1h8:ochloric acid (35%) 562.6 368.8 2 58o.o 640.o 1430.0 380.0 5 Liquid Chlorinc tons 15.o 38.0 2 Bleaching Liquor tons 696.6 21494.0 2 Bleaching Powder (30%) tons 4150.0 500.0 1460.0 250.0 5 Sodium hypochlorite m3 1400.0 527.1 2 Pharmaceuticals: Tablets mLillion 30[48.0 2314.0 2612-.0 2658.0 2950.0 5 Capsules million 45.o 32.0 38.0 .140.0 53.8 5 H Ampule/Vial million. 46.5 36.5 39.0 b1.2 13.0 e ° Liquid drugs miLlion liter 19.0 15.0 12.0 12.0 14.0 5 Sources: 1. Pelaksanaan Tahun Pertama Repelita as reported in I.B.R.D., EAP-19a,, Vol III, Table 1.3 (1960, 614, 68, 69) 2. Department of Industry, unpuiblished (1969, 1970) 3. Bank Negara Indonosia Reports for 1966-67 and 1968 (19614 through 1968) 14. Bulletin of Indonesian Economic Studies, Oct., 1967, article by A. R. Soehoed 5. Industrial Development in Indonosia 1960-19.70, prepared foir Second Asian Industrial Conference, Tokyo, 1970, by Department of Industry (1,2) irdicates the sources agree for overlapping years; similarly for 1,3 etc. Table 1. 8 OTHER INDUSTRIES Production Figures for some Particular Products Product Units 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 our e Textiles Spinning 0500 bales h2.7 77.6 4s6.0 93.1 129.7 160.3 5 Weaving millicn meters 374.0 307.4 268.3 236.6 456.0 250.0 225.0 316.5 la5.o 5 Batik' million meters 64.o 96.o 1 Soap '000 tons 200.0 250.0 1 133.7 130.9 2 Coconut OiGO 000 tons 217.1 108.8 109.h4 n.a. 215.6 2h4.8 221.h 2o8.o 2h9.8 257.2 1,L.i,2,5 Cooking Oil '000 tons 23.5 28.1 26.5 1,2 I4iatches million boxes 470.0 359.0 415.0 n.a. 238.0 262.9 290.0 1,2,A , Toothpaste million 13.0 16.0 25.3 152 Cigarettes billion 25.4 23.1 31.6 n.a. 10.9 13.1. 2,5 Kretek Cigarettes billion 13.3 36.0 36.7 n.a. 18.8 19.1 2,4 Sources: Same as Table 1.7 -21- A-nother aorld Bankl r3port on the olon;er-run perspective Says: 'Bstim.tes by t1Že Central Burueau of Statistics put the grow-th of GDI In l1099/70 at a-pproi-:at:ely 5 T)ercent, in conritx't pricer;. Incorovpcte and al8o not ful1y reliable production datua indicate that the growth of GD? in 1970/71 may have been approx- inately 8 percent. In 1970/71 the m:ost simnificant growth11 of out½ut appears to h.-ve bean in minin-, constructiiorn and manu f'ac tur ing . However, a coMr.qent later in the report suggests that in the past five years the inoot ranid growTth has not, been in macnufacturing but in mining.- These various stat=ements in co,.ibination indiccate that the mam-ufacturna sector has been recovering from its pre-1967 decline and that the genneral trend is upward. In vie-vi of the scarcity of da'ta ad the unreliability of such data as do exist there is nothing more that can be said abouit the- trenid ofL manitfacturing production in the aggre- gate. UTTh*Z T'O:i R' Tij4JTp-L_ CA?A3TY 1.39 The capacit,y o f an industry is not aluays a clearly dfe-fined or measirable corncept. It is most meaningful for a specific process in wJhich speciA-li-e. machi!nery is r.Qo½red zad is the 1iritring facto-r, as in the marnuf acturingr of cement. It is more neb-ulous vnhen applied. to an aggregate of miscellan.-eous activities using general-purpose tools and. part-tiie labor,, as in artisan shops or in snmi.l-scale Production of clothing-. The concept of canacity of t'Lc i-ndustr-il sector in the aggregatle or eve-n ofL a branch of industi-ry 1 ike chilmicals, is oPen to SeriOUS ,uestion. One liTn1, of production in a composite industry may be at its liit wfhiLe others uring only a fraction of their faciliti es Thus a discussion of> capaciAty5 to be meani-n -D,al has to refer to rather narrow producti groups rather tlhan broad sectoral. concepts. 1.40 Because of une=en developm.ent in-the past and the genera-1 slow- doim of economic activit- in1 the mp-iddle 60's , some industries in Indone- sia are producing at levels far be-low thcir nominal capacities. A survey of industries-in the Jogjrakarta region, and a 2later foll0-u-, yielded the estimates show,n iln Tabe 1.9 for the years 1966, 1967 and. 1969 ior a number ol particular products. The low perceentages of capacity utilized are striking, even for 1969 wi-en, for most; but nrot all products, there had been some degree o,f recovery Lrom the bottom of the decline. 1/ IBRD report EAP-22, Indonesia: Investinent and Grow th P?rspoctives in the 1970's -- A First, Report N1arch 25, 1971, para. 3 2/ Ibid. para. 143. -22- 1.hl Another set of estimates, this tine for the country as a whole and for a difLerent list of products, wqas provided by the Depai' tlleLT. of Indust,ry and is sho-.n in Table 1.10. Here again, conlsiderable underutilization of capa-city is -indicated, at1though not so much as appears in the figures for Jogjakarta in 1969. 1.2 These capacity utilization figures caLnot be taken at face value or w.ithout some inter-pretat.ion. It appears that the "Design Capacityy" figures of Table 1.10 for somee Products may include some new plants that are still actually in the process of' get,ting ready to produce. h4oreoVer it -is undnerstood that some manarfacturing plants that have cut back from previous higher output levels have failed to maintain their machinery, and would have difficullty increasing pro- duction now without some investument for rehabilitation. In some indiistries (e.g. textiles) either the technology or the kind of pro- duct being demanded have changed so that much of the "idle capacity" consists of machinery that is now; obsolete. iNlevertheless, it is evident that, for many lines of manufacturing, at, least part of the facilities for higher levels of production exist, and the innvest-ment necessary Lor rehabilitatioh or replacement of mrachinery would be significantly less than what vrould be required to build whole new plants for a given increase in production. Thus, in any macro-economic attempt to estimlate investment requiremnents for exmanding output in the near future. it w.oiuld be misleading to applyr a capital-o'atut- ratio of conventional mYagrnitude. A more apppropriate approach would be to use a relatively low0i capital output ratio at first, gradually ii- creasing it as the slack was taken up in -one line of pro duction after another. These generalizations, of courSe, will not apply to all specific induEtries, and for pl-anning purpsses it will be necessary to examine the state of affairs at a more detuailed level. Table 1. 9 Estimated Capacity Utilization, Selected. Industries: Jogjkar ta Region, 1966, 1967 end 1969 ±Percenat.aFe of C,--v Fc ity Utilizced 19b6 1967 1969 Batik 12.5 10-15 25 "veaving/S:innLing; 10 10 35 1/ Flour 65 50 40 SofLt drin'ks 10 10-15 15 Ice making 80 50 40 Canidy n.a. 30 30 Kretek cigarett-es n.a. 30 n.a. CiJ,,rs/Tobacco 60 40 40 Soap 20 15 20 Ti~;-,zer (wood cutting) 50 5Q 30 Pri.nting or stencilling h5 15-20 35 Silvcr wiork 30 20 15, Concrete and cerment fl oor tiles 10 la 25 Bicycle as0se,,bing 10 10 35 1/ includes spLnning and weaving nrilLs and handloomms. :-n 19,69, these were reported as operati. at 60 per cent. 70 per cent and 10 per cent of cazaci.ty reSpectively. The' capac ty I of the he.ndloom sector is reported to be four ti:mez that of machLne operated loo1..s. Sources: i*,ubyar ,o and Atje Part1adi, reda,a ,t, Econlomic Survey of the Spec3al ejiorn of Jog,jak:,^rt-a ini Ralletin of Indonesian Econoc2i Stud'ies (Canberra) Oct-. 1968, and lhbyarto, "Ecornomric Developments in D.I. Jogrjalrartall, same Bulletin, Niov. 1970. Table 1.10 Utilization of Capacity for Various lanufactured Products: All of Indoiesia, 1970 Ac t,ual Procuction. as % of Design Ca.pacity Actual Producti-on Design Kind oL Products .1970 Caoacit Cement 615,000 ton 560,595 ton 91.2 Fer-:'lizer 355,000 ton" 983407 ton 27.7 OJRy genr 4,260,o000 m3 3,098,5r0 143 72.7 Paper 42,600 ton 25,290 ton 59.1 Matches 828,000,000 box 284,000,000 box 3L.3 a. Tires 617,230 pieces 603,183 pieces 97.7 b. Tube 544,680 U 315)977 5 59.2 a. Bicycle tires 4,870,000 " b. Tubes (Bicycle) 4,234,000 " Textiles 900,000,000 " 598$355,000 Meter 66.5 Soap 333,000 ton 130,910 ton 39.3 Co-conut Oil 776,000 ton' 2_7,184 ton 33.1 Cooking Oil 113,000 ton 26,0503 ton 23.5 Tooth Paste 82,000,000 tube 22,000,000 tube 26.8 Kretek Girarettes 30,000, 000, 000 19,1.03,000,000 63.7 Cigarettes 41h,000,000,0004 13,914,o00o000 33.9 Storage Bat teries . 69, 96 56,150 , 80. Bulb 10,000,000 . 5,090,465 'O. 9 Dry Battery 42, 800,000 L4, 502,400 10. Radio 3,000,00o 393,211 13.1 Te' evision 5-,000 b,752 8.6 Motorcar/Truck 4,500 2,908 6I.6 Sew inrg Machine 67,000 13,1443 20.1 Salt 300,000 ton 68i412 ton 22.8 Soda Ash 3,000 ton 708 ton 23.6 Source: Dep-arrtment of Industry (unpublished). AkIEXD', TO CHA7TER I A Note on Souirces and Quality of Induistrial Data Some of the Prohleor3: One indisputable fact about induLstry in indonesia i:s that quant1titative information about i t is pitifully inadequate. In addition, some of the information that is offi'cially published is undoubtedly misleading. In the fall of 1970, at the reauest of the Indonesiana Government anid the IBRD Resi:lent IMission in Djakarta, a four-person Statistical Rlevietw Mission from the IBRD headquarters spent about six iweeks in Djakarta studying the methods in use for data collection and processing, and evaluating the quality of the resulting statistics. Their report (which also goes into management and organizational matters and proposes changes in the agencies responsible for statistical work) is still in draft at the time this is written, but certain relevant parts of the draft can be auoted in order to clarify the data problem. For exanple, in the Summary Findings, it is stated: 'With some exceptions' the statistical output of almost all agencies of goverrnent, including that of the CBS (Central. Bureau of Stat-istics), fails to meet minimum standards of reliability." and "The national income accounts, which should normally provide an indispensable basis for economic planning and analysis, are irn Indonesia largelv aunusable for these purposes and may, indeed, be misleading. This is true -of both the absolute level of the major est- K imated aggregates and their implicit trend over time." To a large degree these problems result, not from ineptitude of the staff but from lack of appreciation of the need for a good statis- tical system on the pa:rt of past governmen-ntal leaders, with a conseouent weak organization and meager budgetary allocations Lor statistical pur- poses. Althouch the attitude has changed, and efforts are being made to establish a good statistical system and organization, much of the data that was not collected, pertainine to the past decade, can never be recaptured. These statements about deficient data are not just complaints about errors of a few percent in magnitude. They concern quite large ranges of probable error and, perhaps even more significant, an almost total absence of meaningf'ul 'iformation on year-to-year changes, except in the output of a few specific products (writh some tricky pitfalls even in these apparently straightforward statistics). A deceptively promising source oL information on the economy as a whole and by sectors, including the aggregate manufacturing sector and major branches writhin it, was the recently published NQatiornal Income -26- Accounts for l96O-68- The many tables included in this report ap)peared to offer a great deal of useful information on the numbers o.f people engaged in different economic activities, the gross value and value added in each activity., and many other aspects of the economy. For the indus- trial sector there are tables -f or large and medium-sized firms in each two-digit ISIC branch of production, giving, for a series of years, the gross value of produiction, nwmber of employees, intermediate inputls, capiital consumption, and gross value added. It would seem that these data incluide most of what we need to k:now about the size of the industrial sector and of its various'branches and even their recen: rates of growth. Urfortuanately., the figgires in these accounts are not based on any thing like an adequate foundation of factual informatiion, and the procedures thati were used for naking estimates in lieu of statistics are such that any year-to-year comparisons or apparent trernds are sure to be misleading. There has been no census of manufac-turing establishments since, 1964, and only a one percent sanple of the data collected then has been pro- cessed. For more recent years, estirmates of output and val-ue added by branches of ma2ufacturing and by the manufacturing sector as a whole ar derived from the 1964 census figutres (referring to 1968 production) on the basis of estimated year-to-year ratios. The ratios, in turn, are ratios of the variables within firms. that responded to a questionnaire in each of the two years. No allowance is made for any increase or de- crease in the number of firms in the industry. These methods are used for medium-and-largq-scale establishment. Estimates by branch of Ttianu- facturing ha.ve not been made for small-scale establishments, and their contribution to the sectoral total is estimraued by methods even cruder than that just described. To wzhat degree the conditions within the relatively small. nLmber of firms responding to two successive questionnaires are representative of any given branch of matmLacturing is a debatable question. Another mat- ter, not debatable at all, is the fact that if business conditions are bad and firms are going out of existence, this method will underestimate the rat e of decline for the sector. Conversely, when new firms are entering and altering the market shares of existing firms, the rate of growJth will be underestimated. The effects oL firms that are in and remain in business but do not answer the cuestionnaire cannot, of course, be ascer2ained, but it cannot be taken for granted that their abstention does not bias the results. After considerinig the methods by which the national income estimates were put together, the IBRD Statistical IMission concluded that the mag- nitudes themselves were probably subject to large errors, while the imaplied trends or year-to-year differences were even more unreliable. 1/ Pendapatan Nasional Indonesia (National Income of Indonesia) 1960-68, Biro Pusat Statistik (central .1ureau of Statistics )Djakarta, 1970. -27 - Even when it comes to data on the output of specific prodcts from small nuanbers of state-oper.ted enterprises, there are serious difficulties in ascertaining vhich "official" figures are most likely to be correct. An exa-mie is afforded by information on the paper industry as found in various different souLrces. This is a much sim.- pler induptry than maay, from t1he point of view of gat]herinig datat there are only seven significant paper mills in Indonesia. In 1965 there wJere only fouir; tw-o more came into operation in 1968 and another in 1970. Nevertheless it seems that some oL the statistical series that have been disseminated as "production of the paper industry" have not always included all plants. Among the series encoimtered by this mission, the most authoritative are the followirng: Paper Production (M,,etric tons) 1965 1966 1967 1968 1969 1M70 Source Bank of Indones.ia (1) 11120 9870 7710 9290 (l; plants only) Bank of Indonesia (2) 159C0 20700 Dept. of Industry (3) 11190 100l 0 7660 11270 1b330 (six) Dept. of Industry per Japanese Study (4) 11120 9870 8680 11310 1l850 18980 (prel . es. IBRD (5) 11270 15760 Dept. of Industry, Dir. Chem. Industries (6) 11190 10050 84 80 9Q460 1h850 21730 Dept. of Industry (7) 15560 1845C Sources: (1) Bank Indonesia Report for Year 1968 (latest). (2) Bank of Indonesia information to missions not yet in print. (3) Paper for isian Development Conference in Tokyo, Sept. 1970, prepared by Jept. of Industry. (4) Dept. of Industry-., as reported. in Pe-Dort on Develonment of tPulp and Paper Inrw:try, prepared by japanesc Survey Te-am, I'ov- 19,70. (5) IBiiD report IAY:-lc5a, 1970 vol. III, Table 1.3. (6) Furnished to mission, by Direeto-te of Chemical Industries Dept. of Industry. (7) Furnished to rmis.ion by Bureau of Planuning5 Dept. of Incistry. (8) Furnished to mission by Bureau of Planni-ng, Dept. of Tndustry. -28- Depending on which series one. happen*.?d to have, itL cpuld be concluded that th-e increase from 1967 to 1968 was 20%, or b7?, or 3O0, or 1J%. Or, distrustirng one-year differences -the average rate of increase from 1967 to*1970 could be calculated ald found to be anythi.ng from 28v: to hb. AncT-.her exa-mple of the unreiiabili ty of any set of figares that is not carefully verified and cross-chec'ced is in the figures given, n the M4arch 1971 tmonthly bulletin of the Ce±itral Bureau of St,atisfics- for cenent production. Poduction from three plants is tabulated or *a month-by-mont.h basis. through all of 1969 and nine Tronths of 1970. The figures given for mnonthly output of the Padang plant rang e from just unider 200,000 tons to almost L00,000 tons, although info-ation fronm other sources puts the capacity of' the plant at 120,000 tons per year. whereas the production of this one piant for the year 1969 is given in the Bureau of Statistics publicatior- as 3,368,729 tons, data from the Depart.me-nt of Industry and the Bank Indonesia are almost in agreemen,t on a figure for cemen't, production from all sources of about 535,000 tons. Apparently, the fact that figures appear in an official publication is no guarantee that any one has checked even their gross order of magrnitude. Estimates by Wilhelm. Boucherie A careful and painstaking effort to overcome the defic-encies in datba on the industrial sec.tor has been carried out during thle past three years by Dr. `WlilheLm Bcucherie of the Harvard Develosrn- t Advi- so-ry Service with the objective of establishing a basis for planning farther development. He found that there were some statistiics in regional and local goverrmerrt offices that had never been col.ected by the Central Bureau of Stat-istics, and he obtained them. In add.i- tion he personnally intenriewed entrepreneurs and managers of about l40o industrial firms, some Indonesian and some Loreigrn, and he derived furth!er data from various feasibility stiudeies. His evaluation of ihat he has collecte.d. is, "The quaiiity of the gathered dat.a is far from excellent. Even aftor serious evaluation of the figures, substan- tial doubt remains about their reliabi ity. Further-more, because these data have been collected on the bpsis of avail-ability and the w.illingness of governmer.t officials, entrepreneurs and oK- :n,s to provide information, rather than iTth respect. to the requirements of proper statis- tical samnpling, the data obtained are subject to severe bias. In spite oL these obvious deficiencies inherent to the data, it is felt that the estima-tes could yet" serve a usef-al purpose; critical co,.rne.s will prob-.bly point to discrepamnci es between realitty and estixa4es which the.n could be used to correct the latter. V 1/ Indi-kator D-konomi, Viarnthly Sttistical Bulletin, I.arch 1971, Biro Pusat Stati-stik. / Doucherie, Wilhelm., unzpublished draft of Many 1971 -29- In spi.te of thc sampling biases and othLer siources of unrelabilitty pointed out by Boucheri.e, his data are withoqt doubt the best presently available picturc -of te;c structure of Indonesian industry. His genero- sity in nLmaing, these data available to the industrial Mllision before he had comipleted his o.;ml analysis and technical pa;..er in -hich they are used, and his wJillingness to take time to explain and disc':.ss them; with us as well as to give us the benefit of his know.-ledge of mn-ry related matters ere great contLributions to the success of the Industrial Miission, and our deep appreciation is hereby recorded. In general, 'he categories in which Boucherie classified his data correspond to the "tw.Eo-digit" categories of the International Standard Industrial Classification.- He has also combined them in wiays to matcli the categories used in the Chenery-Taylor analysis. Boucherie's esti- mat,es are presented in Table 1..11, inth one modification, ex-plained below.Y, in the figures for wood products. Table 1.13 shows the degree to which Boucherie's estimates (Lor 1970) differ from those (for 1966) in the NFational income Accounts for large and medium-sized establish- ments. To avoid the problems of eXchange-rate valuation at, tw7o differ- ent -times in a period of inflation, t he tWo sets of figares have been converted to percentages of GIM'P. Although there may have been some changes in economic structure beti,een the two years involved, such chang-es could not have been as great as the differences shomwn in Table 1.13. Miainly, the diflerences must be ascribed to differences in data and in its analysis. The differences in the estimIrtates are not Small. One problemi, with aggr-egate data of this sort is to understand what it really represents. As Boucherie point s out, much oL the small- scale activity in some sectors (especially in the mechanrcal industries) is more in t,he nature of services than ma ac.L-Lrir.g./ In the case of Indonesia'as metal products, machine3r, and vehicle industries (lupe_d together in soms listings simply- as "imetal products", which is somiewhat misleadifig), Boucherie's figares showz 89 percent of the combined value added corining from the Category '1;ianu'facture and Repair of Transport Louirment. They s3how, further, that 60 percent of that subtotal is generated in small scale establishmients. The 1064 Census sho-wed about 62, of employees in the "Transport E'quipment'" category worked in "small-scale establishments" wiith an average of 1.6 workers per estab- lishment. Obviouislvy this category must include many independent solitary workers and "lestab1ishments"' made up of one head man and a helper. Undoubtedly, much of their activity consists OL repair services on automobiles, wagons, trucks, anrd tZ-icycles (betjak!.). INevert1heless, the same small-scale ca.tegor,y- probably includes one-man, one-nachine shops which are typical ol Asian cottage industry and which do manufac- ture replacement parts for machinery. Since it is impossible to seDarate / See also the discussion of this qluestiorn in Belassa and Hughes, St2tistJica- l Ind-ricators of Levcls of Industrial Develonment, Bi.D Economcs ork-ing Laper i`o. 45. -30- the services fromn the x:anufacturing activit,ies, and since the sam,e sort of mixture probably exists in other low-inccmc countries with which compa,.risons are to be made, no attempt hos been made to adjust e figures as estimated by Boucherie. It must be kept in mind that much of the activituy in this sector does n-ot corr-.spond to the modern fac- oryr operations often associa't,ed with the -w.7ord "industry". For one branch of industry--wood products--another kind of prob- lem ex:istec, and we did, in this case, undertake to make apn adj,ustment to Boucherie's figures. Ln the wood products industry, as recorded in the 196l0 census, 96-' oL the )anpo,;jer was in small-scale operations, averaging less than two workers per Ilestablishment" . A large propor- tion of these operations involved not only sawing logs into boards and making articles (other tuhan furnitue) out of wood, but also the extrac- tion of timber from the forest, done by the same people., The lumbering operation, of course, should not be counted in the maouaafcturing sector, and we have mnade al estimate of its magni,,ude arid deducted it. Approximately three million cubic rmeters of logs went inrto t,he wood products industrry (not including furniture making) inl 1970. It is estimated that, of the value added in the conmbined logging and processing activities, 61 percent is added in lo-gi n and 39 percent in processing (mainly sawing the logs into boa-rds). ThereLore, Bou- cherie's value-added figure Lor this industryj was reduced by 61 per- cent on grounds that that portion belonged in "forestry" rathelr than in "manufacturAmc". The resulting estimate for the wood prodaucts branch (wit.hout funitiure) is $19.8 milli-n, Instead of 3Boucherie's $50.2 millionl/ This is the only category in -,nich Boucherie's..figures were adjusted for this report. 1/ The $19.8 million anounts to $6.60 per cubic meter wihich is close to the figure for thle wood-products indus try in tb e Plhilippincs. -31 - Table 1.11 Lndciu3str 1al Structure. Lndoneosia, 1970 *Estiiates bv lWilhelm Boucherie, 1a 1971 Value Share of smilall Value added Value added of added scale industry of s:all of larger Industry in million in % of value scale indus- scalc- Lndustry US $ added try in mil- million US $ lion US $ 1. Food, beverages a. tobacco 1.1 Food 207.1 60 124.3 82.9 1.2 Beverages 15.3 50 7.6 7.6 1.3 Tobacco 68.8 30 20.6 48.2 Subtotal 291.2 52 152.6 138.7 2. Textiles 2.1 Spinning 7.6 - - 7.6 2.2 Weaving 118.1 45 53.2 65.0 2.3 Iyeing and finishing 2.6 - - 2.6 Subtotal 128.3 41.4 53.2 75.2 3. Clothing and footwear 3.1 Clothing 10.1. 10.1 3.2 Footwear 1.9 .1.9 Subtotal 12.0 12.0 4. I Tood products h4.1 Wlood manufacturing 19.81/ 80 16.0 3.8 4.2 Furniture and fixtiares 56.1 50 28.1 28.1 Subtotal 75.9-/ 58.o 4.4.1 .31.9 5. ?apei- and paper prodact 4.4h 10 .4 4. 6. Printing and publishing 13.6 50 6.8 6.8 7. Leather products 9.6 75 7.2 2.4 8. Rubber products 12.4 4o 5.0 7.4 -32- Table 1.11 continued \alue Share of small Value added Value added of added scale industry of small of larger Industry in million in % of value scale indus- scale industry US $ added try in mil- nillion US $ lion US $ _____ 9. Chemicals, petroleum and coal products 9.) Chemicals 46.8 40 18.7 28.1 9.2 Pharmaceuticals .45 10 .4 4.0 9.3 Refinery prodLucts 3.8 - - 3.8 9.4 Others .6 100 .6 - Subtotal 55.7 35.5 19.8 35.9 10. Non-metallic mineral products 10.1 Stone a.. clay product 6.1 50 3.1 3.1 10.2 Glass proiucts 3.0 10 .3 2.7 10.3 Cement 8.6 10 19 7.7 10.4h Others 1.6 90 1.4 .2 Subtotal 19 .3 29.4 5.7 13.6 11. :-asic metals 14l. 35 5.0 9.3 12. Metal products 12.1 Fabricated metal pro- ducts exc. machinery a. equipmcent 6.7 60 14.0 2.7 12.2 Manufa6ture a. re- pairiLng of raachin. exc. electr. mach. 2.3 50 1.2 1.2 12.3 MIanuf. a. repair. of electr. machinery, apparatus, app'- .a- 1.5 ces and supplies 1.5 - - 1.5 12.4 Manuf. a. repairing of transport equip. 85.8 60 51.5 34.3 Subtotal 96.4 58.7 56.6 39.7 1/ Total 1 - 12 733.0- 48. 356,2 376.8 .1/ Figures in these rows have been adjusted by IBRD estimate to elLminate logging from "Wilood manufacturing". Table 1.12 Number of Establishments and Workers in Each Size Class, in Various Branches of Industry (1964) Nu1nber of WorkersV Number of Fstablishrments in Small in t4ediura in L.arge Small Siediuin Large Establishriients Establim3ments Establ'isLints Branch of Indust Food 326,561 6,372 424 747,000 90,500 136,900I Deverages 817 299 15 2,500 4,400 2,600 Tobacco 31,631 2,166 437 155,300 '55,500 106,;400 Textiles 87,135 9,125 421 170,400 159,tO00 86,700 Clothing and Footwear 67,804 230 29 110,200 4,300 -2,900 Wood and Wood Products 289,254 1,247 37 497,700 16,900 4,000 Furniture and Fixtures 26,082 581 6 54,700 8,400 500 Paper and. Paper Products 1,120 - 116 16 2,200 3,100 3,700 Printing and Publishing 681 614 109 3,200 10,700 14L,200 Leather and Leather Products 1,353 132 22 2,500 2,300 1,80( Rubber Products 3,893 678 265 11,600 16,700 49,200 Chemical and. Chemical Products 2,741 507 76 10,000 9,700 16,6o0 Non-mietallic Mineral Products 79,742 1,186 93 184,200 21,100 11,900 - etal Products 24,551 752 80 57,800 11,300 11,300 Machinery (non-electrical) 333 93 22 600 1,600 41;500 Electrical Machinery 1,430 49 16 3,300 800 2,000 Transport Equipment 18,052 753 71 29, 7Q0 11,000 7,600 Ij;iscellaneous Manufacturing 26,718 344 34 45,500 5,800 3,900 Total 989,928 25,244 2,173 2,088,700 433,600 466,700 Source: Scnsu3 Perindustrian, Tahun 1961t (1964 Industrial Census) volumes IIA and. XI, Biro Pusat Statistik, Djakarta, l969 and. 1970. 1/ In the Census terminology for medium and large establishments this "persons engaged" -- a more inclusive term than "employees"; for small establishments the term used is "warlcers", and it includes part-time as well as full-time workers, both paid and othor,;ise. CHAPT FR Il PROS)'FECTTVF,F ThP OF G'ThThT H1 ALND A STT?ATEGY FOR TNZTThTiiTSUPRDEVLPLiH 2.1 The foregoing chapter w-Tas concerned with the existing stnicture of Indonesian industry. The present one looks at itus possible future evolution. This is not an attempt at forecasting the exact picture of thle future economy nor the precise sequence oL events leading there- to. It. is, rather, an analysis and a series of judgements, based on comparisons with other cou-ntries (both individually and by stat'i-stical techniques) as to ,hat pat tern of grow.Tth rates of cliflerent branches of industry is likely to be conducive to smooth and efficient developnment of the economy, as a whole. 2.2 After analyzing some of the alternatives for aggregate indus- trial growth and the distribution of outpu;t among industries in the sector, a general stratey-r for industrial development is presented. This is followed by recomnendations for specific actions that could be takern in the immediate future to prepare feasibility studies of major projects that are analyzed later in this report, plus some programs for the sup- port of, medium and smaller scale industry. 2 .3 1/ UFing a multi-sectoral macroeconomic model, a recent VWorld Ban-k stud- produced some projections that are plausible and consistent as targets for develoDment planning in the period up to 1980. Boucheries more recent and detailed work probably offers better estimates of abso- lute values as of 1970, and we have retained those figures as our start- ing point, wiile tuLring to the V^orld Bank study for projected rates of grow'rth of GliP and population as well as some other parameters for the analysis below. With this combination we havre arrived at the follo-wing figares as a general context within which to consider the development of the industrial sector. Level Level Average in 1970 in 1980 rate of growth Population (millions) 116 147 2M.I p.a. Gross N'ationaal P?oduct at market prices (billion US$) 10.33 22.0 7.95 p.a. GThP per capita (US $) 89 150 5.4% p.a. Grow-th of Industr, as P. Whole 2.4 Economic develoDment is not a process of equiproportional growuth. It entails different growth rates for different sectors and for different Inlone.sia: Invet-t.ment :inrl Growthl Pro>rrctr, in the 19701' 1 eDort. INo. EA?-22, I.arch 25, 1971, C]hapter activities wLthin each sector, bainig about a transformna-tion in th7 structure of the economy along with increasing average incomne. Analysts of the process, fromn Colin Clarlk. onward, have noted the increasing share of industrial product in the total economy as income increa,ses, either in tracinc, one country through tire or in comparing countries at different income levels at the same time. 2 .5 zcono!ries, like people, have their o-m individcalities, and no rigid patterni.can be identified as universal. But, like people, they tend to develop more or less along what can be regarded as "normal" paths of evolution. Wile bearing in mind the likelihood of indiviial deviations from the 'noxnal, we can still get sonme guidance from. the experiences of other coountries. Essentially all analysts ol the process agree that development entails growth of industry at a much more rapid pace than the rest of the economTy. Some types of industries seem to be more likely to accelerate early in the process, others later. Human needs and wants are such that demand for food, beyond some ver,y low in- come level, tends to grow less rapidly than demand for other goods and services, and hence less rapidly than total expenditure. The first increase in demand occurs in goods that supply the basic necessities. But few countries have ever developed very far purely on the basis ol a comparative advantage in agriculturc, even with food-processing in- dustries added,4 and most have found industrializatiion an importarLt part of their development process. 2.6 St,udies 2Vf Indials industrial growfth during three successizve Five-"ear Plans- show growfthi rates for manufacturing more than twice as great as for GNP. Similar ratios havre been observed in various other countries as wsell. However, the scarcity 6L reliable, comparable and relevan' historical data on more than a few countries, as well as the wide variability of individual country circumstances make it difficult to general]ize from case studies. 2.7 Takii-c another approach, quant,itative analysts have reli ed heavily (though 'not exclusively) on statistical analysis of the "cross- section" variety, i.e. using a large numLber of countries at different stages of development to infer what the "nornal"l path of developmnent might be. T'wo attempts to relate the gro-wth of industry to that of G'N?1 in terms of a statistical formula.iwere made some years ago on the basis of data for the period 1938 to 1958, compiled by the UN in its compenaiu;ml // Perhaps New Zealand and Denmark have done rather well that way, but they are exceptional, and dependent on exceptiona.l markets. 2/ See, for example, Raj, K.N4., ln!lian Econoriiic OrowSth, Perforrmlnce and Pror-!nc!cts Allied PubliFhers, 19(5; iMn'ad, Jaleel, 'LWnport Substitution and Structural Change in Indian N.=Lufacturing Tndusr,," in The Joiurivil. of Dr?vr.:.onnent Stuadiese, April 1968; Desai, Padmna, "Groe-t;Ur a.nd Structluual CI-N;;e in the Incian Mianufacturing Sector: 1951-10263" in The Indi?m Bcor.c Jourimiil October.-December, 1969. -36- "Patterp of ndastrial Growth'Ki One stutdy is report.ed in a UN report.-. The other is in a book by Alfred iiaizels .- Both applied conveintional statistical regression analysis to the data, asswuing the main explanatory variables to be per capita income anld country size (measiu.red by population or total C-11P). Both reported ereression formulae that may have been valid in the mildle incomne range,, but fitted poorly in the income range where Indonesia ir at presenit ($90-.00 per capita). It seems likely that they erred in assuming (as is cormmron in regression work) a log-linear relation bettween the industry share and per capita incomne_, and log-linear "size-of-country" effect, without looking hard encugl.h at the evidence for non:linearity. 2.8 Later on, Chenery end Taylor made'a study with similar objec- tives, using more recent data and postulatuing a curvilinear variztion of industrial share with per caDita income (bot,h in log terms).- The effect of country size was handled partly by separting countries into. "large." and "small" categories (the dividing line being 15 million population). In addition, however, population is still an exn)lanatcry variable in the regression equation for each group of countries, and is treated linearly (in log form) in each group. To further accou,rnt for differences in counlry characteristics, investment, primary exports, and manufactured ex-ports (all as ratios to GNP) wrere also included as expmlanatory variables. 2.9 One of the Chenery-Taylor alternative regression forrralae (Large. Cbuntry, Regression A) explicitly takes int,o zaccount all five of the fctors mSentioned above, while another (Large Country, Re- gression B) accounts for only per capita income and popu-alation, leaving the elffects of investment and -export ratios iLnplicit. (Both formulae include a. quadra'ic relation in log form for the effect of income). If we use Formul-a B as a norm, wTe are in effect lmplying that invest- ments and exports ohould be expected to followq a pattern that is "1average"'.or "ty,,Jical" for the se' of countries in the sample. With Regression A on the other hand, we are able to specify vhatever values we consider appropriate for the additional parameters. 1/ UN Statistical OLfice, Patterns of Industrial Grotvth, 1938-58, United Nations, 1,959. 2/ UN Departrent of Economic and Social Affairs, A s0tudy- of Indus- trial. Growth, Unitea ' Nations 1963. / Naizels, Alfred, indu-t r1al Grow.,th and W-Torld Trade, Cambridge University Press., 1963. L/ Chenery, Hollis B. and Lance Taylor, "Dcvelopl=ent. Patterns: A-ronl- Counltrie s arid Over Ti:me" Revziew of Econorics and Statistics, Ilovember 1966. -37-t 2.10 The variabl-s included under Regression A and Reg-.ession B were used to coiipute hypothetical variations of the share of' "industry" (manufacturing and construction, as defined by-, Chenery and Taylor) in GNP ov6r a range of per capita income levels from $89 (the estLmated level for indonesia in 1970) to $200.-I The results are sho-wn graph- ically in Figure 2.1, where it is evident that the outcorae is approx- imnately the samLne by eituhe-r approachE The asternsl atU $89 per capita income a nd justu ovrC 310 percent on the vertical scale represenLs thle situation of Indoinesia as of 1970. This is another ,Tay of vie-wring a fact that -ve alread teredin Chapter I - that even for its low levelof'per c api ta inconi\J,, Indonesia is under2m.t-z izrd.LOu interest now is in .nerehe industri sector Til- to in the fu ture. 2.11 The Chenery-Taylor study also considered this queEtion Lor countries on w.hich sonie tretid data were available and which did not fall on the "nornail curve to begin with. Their finding w,Tas that in some cases there was a tendency to convrerge toward normal patterns, but that in many other cases, the trend was par:l½el to the normal curve, suggesting the continued existence of some systematic causes for the deviation. For our purposes, it would seem advisable to ex- plore twTo possibilities: ( a) that t.hte es i o o5uldrb;fTffst enough to reach the "normal' proportion for its per 6-api:Taln-on-by--l970- anld._ (l that wthe Thtio of industry to CTP would inro gr enough to keep it at its pres fe c urvrom' c , eonIese two l y hses labeled, 'for convenienne in future discussion as: (a) "catching-l uDX and (b) "contiinued lag." They are illustrated in ure 2.12 The slope of the regression line (the "normal" variation) in Figure 2.2 implies that when per capita income grows, the per capita procduct (value addec) of the iindustrial sect.or would be expected to grow at. a rate at ieast 50d higher. For exarn.ple, if the growth rates listed a't the beginn½- of' this chapter occurred, indlustrial value added (in order to r each 15" o' GNP by 1980, when per capita incomie wfould be $150) iwould growi at about 13% per year, compared wi-h 7.9%3 f6r (ITP. MAaizels and the U.N. study both arrived at growth elasti- ci-ties of roughlyr this order of magnitude also. 2.13 If instea.td o'L the "continuing lag" ass'umption, we postulated that the industrial share of GNTP would climb up to the "norral" level by 1980, with a-per capita income ofL $150, tLhen the rate of growth of induistry *ould have to be 17 percent per year. It seems reasonable to asswme that a desirable growth rate Lor industryr, with the economy as a whole growing about 8% per year, duld be at least 12% and prob- ably sig-iifJicantly hiig,her, though probably not so high as 17` per year. 1/ The GI!P and population groiwh rates tabulated in tuhe first part of t.his chiapter were applied over the whole range to the $200 incone level for the sake of defining thne curve. -38- FIGURE 2.1 INiDJ5TRIA L S -I-AR E I N G. N.P. (INCLUDING CONSTRUCTION) 30 J I___l__ __l__ .25;- 1 _ _ o _ _ _ F _ _II_ _1! o 20 ~A 10 * INDONESIA, 19701_______ 90 100 110 120 130 140 150 160 170 180 190 200 G.N.P. PER CAPITA U.S. DOLLARS IBRD - 6091 FIGURE 2.2 I N D IU 5Tf Ui? 3A L L a AE I1 N G N P (INCLUDING CONSTRUCTION) 30 25 ___ ._ _ - B-1 v 4 l _____ L7 i49A. _ 1 - - , 77°S -- o. -_ __ . - 7~- = = = = = 0 20 'I - - v A - 20 ,u-..-J . __ - U LU 00 AN 15 90 100 110 120 130 140 150 160 170 180 190 200 G.N.P. PER CAPITA U.S. DOLLARS IBRD - 6092 These are rapid rates of growfth, but it should be reca.lled that they refer, not to c tpacity but to outnut (va-lue added), wand that soMle advantage can ble taken of the idle capacity referred to in Chapter I. In gmne-ral one mlay calculate that for inco:e to gro.r at 7,n - 83 D ear -"J the r .veigs. . nave i51 t aiJ51 3' to 15,$ Per year. The Industrial SeG,,or Disaggre ated 2.1).1 Projecting the growuth of1 industry as an aggregate helps us to recognize the impor'ance of tI s sector, but is of limited value for plamiing, .hich ultirmately has to come do-,n to the level of specific projects. It is useful, however, to consider different bra-nches of industry-, hoN. they interact, a-nd hot, in the e2perience of other cowu-tries, they have gro..n relative to each other. 2.$5 Hirsch-man, wsith his concepts of interindustry "linkages," offers some id-as on howT the growth of well selected industries might induce accelerated gra.tbh of others. 1/ The idea was treated more for- mally by Rasmussen 2/, who contributedS the label "key industries"1 for those .}hich add -,hat he called "1h gh poivers of disperion"'-i;e strong interactions wJith other industries. Chenery anid Watla-nabe rank?ed industr ies accordinig to their inkcage effects, based oni emrpiricaL input- output coefficients 3/, wand :mari applied the Rasmussen technique, -.th some variatiohs, to the economy of India d ;/. Al1, of these analyses, except Frsclhmaa Is were based on static input-output r,.atrices and thus missed Some possible linkages operating throug¢h investment and the demands for capital-coods inputs. Nevertheless, they offer some partial insight, and -he kxno,.ledge of ho-ri different; industries rank i-n terms of the inrt it-output linkages mna,.- be) as Hirschean puts it) a useful addition to the econor;ist plaanner's set of criteria. 2.i6 Both the Chenery-Weatanabe analysis ard that- of Hazari indicated strong linkage elffects .`or the mnetals indus,tries, paper, petroleum products 1/ IHrschlman, A. 0. The of Economic Develonment, Yale University Press, 1958., Caapter 6. 2/ Rasmussen, P.N., Studies in Inters6ctoral Relati ons, North-Holland Publishing Co. , 1952. 3/ Chenery, H. B. and T. Watanabe, "International Comparisons of the Structure of Production'.Economatrica October 1958. / Hazari, Bharat R., "'moirical Identification of Kev Sectors in the Indian Economy" in Revie;e.r of Economics and Statistics August 1970. anad chemic.als. As Hirsch,man Doints out, the machinery and transport equipment in-dustries are underrated because their .outputs are largely treated as final demand. A less formal and more dy-nanmic a,rproach was the concept of' "leading sectors" as propounded by Rost.ow7/, wfho con- ceived oL the development process as being propelled by first one and then another very rapidly gro..ing industry -- suddeilyr become profit- able fbr technological or other reasons --w.hose linklcage effects induced grotlrh in other industries mad thence in the economy as a 14hole. Wthile RostowJ tended to think of' the history of the presently-advanced coun- tries as the model for nei%.1.y developing ones, Hirschman has brought out the possi.b-ilities for a-.di ferent process of development in a world where developed countries already exist. In addition to the technologys that is ready to be applied, there is the advantage of being able to start nroduction of fiinal goods using imported intermediate goods, and then building up the int-ermediat-egoods industries later. Others be- lieve a development progratm should start with exploitation of a country's natural-resource advantages. Obvi.ously there is no single, simple recipe for building a modern industrial sector. 2.17 A more pragmatic approach is to analyze twhe industrial sttacuure of other countries at different levels of income, looking for "average" relationEhiks a-nd hoping to draw inferences as to which incdustries are likely to be the fast-grdwiLng ones in a dyr-nmically grow7ing economy. This was done by Chenery and Taylor as another part of the study already discussedi. For various br,,anches of industry (1imnostlyr corresponding to the tw,o-digit standiard international classificati.ons but wi th some categories further dggregatued), they made a regressior analysis similar to the one that they did for indu sr aqs a wihole. The resul-lt' was a set of formulae expressing the value added in each brancih of industry either per capita or as a share of GNP) as f.unctions of per capita income, country size (population) anid the t-wTo kinds of exports. 2.18 From the shapes of the resulting regression lines, Chenery and Taylor cl?ssify industries as early, niddl(, and late, aIcord½n to iwhere in the range of ?TP per capita they rise rapidly, and i.0nere they tend to level ofi-. Sinoe these classifications depend sigaificantly on chang- in slope at incomwe levels above $200 per ca.pita, they are not ideal for present plinn ng in indonesia, wrhere getting upv to $150 is the target for nine years hence. Instead, we h^ave examnned the relations in tnhe ie- gion airound $100 per capita income and have grouped the industries accord- ing tuo their income-elasticities of expansion, as follows: R/ Rostao, W.JW.,, The Proqc=-. of 'ccmrnn-i ('ro-.rth, 0-xford University Press 1953 or T`c Stli:s o§ ;-cono!-Jc Gr,,th.h Cambridge University Press, 1960. 2/ Chenery and Taylor, op. cit. Pro-oortJ ona3l ..roAtuh indC,u.stries (vhich ow at. about the sz.rne proport-;tionate rat-.e as income): Food, beverages, and t-obacco Leather products. I-diuro. -,.r'..h indluStrier- ( ich -roTa alo'Wi 7 (') faster than income): Textiles Wlood products Hi row-oth irndustri es (whlich grow fromii 2.0 to 2.4 times as 'ast as income): Basic metals MachiMe-ry industries (elect.rical and non-electrical) nbabber products UC)on-metallic minerals Miemicals (particularly plastics ar-1. synthetic products) Pulp and paper products. 2.19 As the exp-mination of linkagres suggested, industries concerned with metals and metal products, pape-r, and chemric'al products are among thosc that may be oxpected to grow much Laster tharn the econol r as a w.-hole. Presumably, any lag, in the growth of thesc industries i7ould be likely tuo imp nede tlhe gro,wtuh of other ind)ustries bn-cnusE; of the linkageo-. They should get a good bit of emaphasis in development planning and po'licy. Other in- dustrieF for which the lirLkages did not appear so strong butJ w.Thich sho. up as fast-gro'.T-g sectors 'in tihe 'ncomne range relevant for Indonesia) are oriented more to Lfnal demanad and also may be 1.portant either as invest- mennt goods or as cons.umtr 'goods, neither of which can be neglected ;ilthout inviting other problems. 2.20 Although w.Tood prodacts do not rarlk extremaly highn either in terms of linlkages or as a fast-growing industry in the multi-country statiiStical analysis, they ofCfer special opportunities -for Indonesia as a source of foreig. e_xchange bas.ed on a col-arative resource advantage. The industry has high priority for these reasons. a'lern;ative G2o 0eh Patterns 2.21 On an industry-by-industry basis, as for the sector as a whole, we can consider tWo hy-pothcses to defLie a range of likely cgroowsTh rates: the "continuing lag'" h.-tmothesis and the "cat-ching-up-by-1980" h,pothesis. From the Chenery-Taylor' formula for eazh branch of industry, the "nornal"l share of that industry in GN-P was computed for t'he assumed pooulation and GNP levels of 1970 and 1980 (as tabuJl ated at the beirnning of this chap- ter). Tne ratio of actu?a to norl-m,- product obtaining in 1970 was assumed to perFist through 1980 for the "continuing lag" case. The grow-th rates thus detecrinerd for each industry are shoian in the second col-nmn of Table 2.2. For tlle "'1atchinz-up" caso, the "llnorihal" leveIs were asssnmed to be reacheA in 1980, a-nd the ratues of growtlh necessary to reach tlem, starting froia actual 19070 levels, are shown in the third coluinn of Table 2.2. Al- though this does not, constiti.te a prescription for a development plan, it does suggest the desirabilitty of emphasis on certain industries -- essen- tially the same ones tffiat have beer, mentioned. Irnlicati.ons for Investrment 2.22 It would be qurite unrealistic, at this stage, to guess at a caOit.al-outr,u ratio -or ench 'branch of industry and (after allow11ing" for idle capacitv on some basis or other) to specify a volum,oe of invrestment for each. Aside from thle L.oUsibility of estimallting, idle cOapacity and the costus of' rehabilitating it writhout getting dovm to a m.uch finer degree of disaggreg-ation, ..he difficulties of the capital output ratio acporoach are very significant. Unless investment requirenmnts are to be estimated on the basis of particular kinids of projects within each industry, any estimates should be recogn-ized as rough orders o'L magnitude and might as well be made at the level o'L the nL>aufacturing sector as a whole. It is unlikely that anything w.-ould be gaLied by doing it for each branch of industry separately. 2.23 For the sector as a whlole, the IBRD racroeconomic mrodeli relates gross investanent in mamf act+uring to growuth in tha3t sector 's value added th!rough a capital-output ratlo of 2.5 (exceupt -for ext,ra invesilRnt that is undertaken specifically fol ½mort-sub-s tit-uLDion, -wrhere a value of 3.0 is applied). For the constniction industr-y a capital-output ratio of 1.0 was assumed. If' we assume the vralue ofL 2 .5 is approcriate for the broadly- de-fined industrial sector (con5t,rction and manufacturing), then the total investmTrent (gross) in that sector associated with the ten-year period with the continuing-lag hypothesis would be $3,780 nmillion, (Rp 1,1130 bil:Liozn, i-f the present. exchange rate remains in effect). The corresponiding fizUres for the catchiing-up case w.oulId be $6,845 million (q.p 2,590 billion) of in- vestmnenn in constraction and man-afacturing. Dist| butirnr these outlays over t -r, with a ri'sig trend similar to that of the asssuwtda Sectoral ou- put, would yield the f ollowing tim e paths. Gross Investment (Rp billion) in X-nnufacturing and Coil2truction 1970 1975 1980 Continuing lag 70 127 226 Catching up 95 216 475 These are, of couirse, only rough order-of-magnit de figferes, to give a prelim!iinary ida.- ol thie miviwestment imtli-cations of the alternative grow.th path.s previourly discuLssed. For actual platnniLrn puarposes,. of course, much more detailed study, ut a di-s-reg,aed level, will be required. / TA hP-22 op. cit. Chapt.er h Table 2.1 STRUCTURE OF M1AUFACTURE-G WNEITH ALTERNATIVTE HYPOTHESES FOR 1980 Value added, as A of GNP For =- T.aYI1 = $r J' ' ='50 Ch enery- Taylor Actual Continuinig Catching Formula lag no Branch or iganu.acturia Food, Beverages, Tobacco 3.2 2.8 2.6 3.0 Tex-tiles 1. 4 1.2 1.2 1.3 Clothiang and Footwear 0.2 0.1 0.1 3.3 Wood products, Furniture and Fixtures °. 0.7 0.5 0.5 Paper and Paper Products 0.2 0.1 0.2 Printiing and Publishing 0.2 0.1 0.2 0.4 Leather Products 0.2 0.1 0.1 0.1 Rubber Products o.1 / 0.1 0.2 0.2 Chemicals, Petroletmn Products 0.9 / 0.5 0.8 1.3 Non-;letallic 1P.nerals 0.4 / 0.2 0.3 0.8 Basic Mietals 0.5 0.1 0.4 13r3 Ytecbanical Industries 1.3 / 0,* 2.0 2.7 \. C, Tabl a 2 .2 T10 POSS BL3M PATTaR'NS OF GROWTH OF INDONBESISAI MA.1"L7!ACTR1II'Z, 1970 - 1980 Avga Grofth Rate, 1970-80 Case I Case II Gross Value Coitug Catcg Added, 1970 lag up Branch of 11anxufacturing Food, Beverages, & Tobacco $291 hn. 7.2% P.A. 8.5% P.A. Textiles 128 7.8 8.7 CLothing & Footwear 12 10.6 18.9 Wlood Products & Furniture 76 2.9 2.9 Paper & Products 1 12.5 29.5 Printing & Publishing -1 13.1 19.6 Leather Products 10 4l1 12.0 RubberProducts 12 13.9 14.9 Che,ncals & Product,s of Petroleum & Coal 56 21.5 17.3 Non-metallic Mlineral Products 19 15.0 25.2 Basic Metals 14 19.6 35.6 Mretal Products Machinery & Trasnport Equipment 96 16.3 20.0 Statement of a General Strateixv for Industlrial Develor.nent 1 4 2J24 The analysis in uhe plrior sec-tions has de.scribed alternative gro,-iwth rates for industry under different assumptions abLoAt the over-all share of industry- in the gross national product. The aggregate grotuh rate has also been decomposed to show the :Lminlications for disaggregated indus'tries wthin the sector, 2.1lhough the degree of disaggr eation is modest and does notL show-i details for i-mpqortant1 pro6uc.t-groupr, or indiv- idual industuries. Based on this analysis, and other material contained in later chapters of tlhis r-eport, it irs now possible to present tUhe out- lines of a general industrial strateQr for IndoicsiLa. I-e Etres.E the fact that it is an outline, lith only a few ,najor points, and notV a systematic plan covering each industry. That task muest be uiidertalken dulrin the preparation of the next five year plan, the preliminaries of which wl start shortly. However, the general directions for industrial development should be reasonalDly clear froni the outline that is presented. 2.25 The aggregate growtlrh rate for industry might reasonably be in the range of 11% to 17%. This is based not only on the prevrious statistical analysis of what constitutes a nonal or average pattern for countries in this stage of deveTopment, buit also on the basis of tihe results of hlie macroeconomic model tha't has been referred to earlier, plus the mrission's omni work on the potential development; of major individual industry cmoups in the ec&nomy. A growth rate near the lowTer end of t.he range .would be consistent w-iith gro-vth of the S;fP, roughly on the order of 6' if the agricultuural sector growuth is m2aintai-ned at a level of at least '1,%. This may be regarded as a satisfanctory outcome overall, but it womuld represent a case .here industry cont1inues to lag in terms of other country e,xperi- ence. If indulstrial growth laags it is likely v . be much more.difficult to sustain the GINP growtbh rate in the future, -i Jless conditions in the other sectors continued to be very favorable. 2.26 .A somewe hat higher growtbhl rate is achievable and would be likely to result from a progream such as the one suggested here tihat emphasizes development in metals and rach,ine,- industries thCt are stating from a Very low, or almost non-ex-istent, base. These industries are relatively capital-intensive and recrui:re a scale of op:eration that .is fairly large. Thus units of output are apt to come into the markel, in certain cases., in substantial amounts. It i. neither feasible nor desira2ble to try to pinpoint a specific rate of^ grow.th a. in some sense the best or the op- timal rate for these industries. Reliance for performance rests largely on the private sactor and tha' means that governiTent policy must ope.rate through appropriate provision of incentives and maintenance of fa2rorable econo.mnic conditions in the econory, rather than through direct public inves &nent. 2.27 As a guideline to private industry or an indicator oL govern- ment intent and objective, it would be helpful to establish som.e projec- ted rate of growt^h for total industry,, in the middle of the range of growth discussed above, evrcn though it is realized that the actbual outcome would probably diverge from the projection. Tne mission does not believe that a detailed developnent patuh for industry (or for the economy) can i 7- sensibly be formulated at present given the present st ate of information (statistical and oth}erwoise) about the secto.rs. For the innediate future some rougher gaidelines wzill ha-ve to be accepted, but they can nonetlhe- less be effective in moving the economy in desirable directions. 2.28 Of eoual, or perhaps greater, im%portance to inaustrial develop- ment is the need to correct the serious distortions in industrial struc- ture that now.exist. In spite of recurrent difficulties and problems there are some industries - mainly in light consiw!er goods - that have progressed, but there are others thiat are retarded. These are also Ute ones of greatest importance for establishing a firm base for future IDowih. They incluie, above all, the machinery or engineering industries that are described in Chapter :K, and not, far behind in degree of re- tardation are basic metals and chemicals. These are thae industries that should be given special attention and encouragement in the next few years. Several specific steps are suggested in the follow.Ting section oLf this chapter for beginniing their development. Th-ere has, to date, been some considerable emphasis on rehabilitation of fooundries and while these efforts are both ne,cessary and productive, the focus is far too narrow to accomplish w.hat is needed. Foundries are an integral part oL the engineering industries, but their development alone is insufficient stizllus to the development of the whole spectram of these industries. 2.29 In part II of this report, which covers individual projects and industries, a numnber of large maajor projectsF in metals, machinery,, chem- icals, and wood-based products are individually analyzed and gene,aliy sho .n to be economi6ally feasible. The worlc is at a preliir!inax-y. stage, but the initial results are quite encouragin. It is -econended that these projects be specifically included in the list of those that are to be assessed in the imiediate future. These projects typica.lly have the property that their linkages backward to.other supplying 'ndustr-es are cuite strong. Their developm.:nt could, and should, be one of the means for stLmulatingc the development of indistries producing com-ponents, Eub-assemblies, and similar items that have some end-uses (e.g. pwmDs) as well as being important ingredients into more complex machinery end- it.ems. The mission regards these linkages as one of the more significant reasons for accelerating tUhe development of these projects, given that their economic rates. of return are attractive. 2.30 A special effort should be made to stiimulate the develornent of the abovementoned component and sub-assembly product lines in the engin-ering industries. H-lost of these wvill be in medirumn to smaller scale plants'. Because of the almost total lack of facilitics for pro- ducincg these items, indoniesia must start practically from scratch. This means th.at studies Tmust be prepared testing the fea.:ibility of investments in these products; strenuous investment promotion o-irk w.ill be recuired to interest potential investors in them; special financial incentives makingf investment attractive wrill be required both in the initiial phases of the projects and during the first few years of opera- tion. These efforts are necessary in unison and Ymust be plarnned. as a packcage. The inrt.it,utionril steps for carrying them out are briefly described in the next secTion. 2 .31 There is a sinmilar need for cdeveloomen-tn of mcdium an,d small scale inlastry in products priiarily of a light consi er-good tyqpe. 'Ihi5 ahol1d be part of a program to broaden the base of industry, and. because tmany o:C the pro6uction methods are relatively labor-intensive, thlere are distinct opportunities for expanding en-ployment. The Govern- ment has taken one steo in 4his direction bv iden'ifi SoMe se ie-n- o5-uct lines t,7- .11jrovisionall- close t amr5elestic in,estments. The detailed listing is showjn in Che.ter.-II and includeFT s psints, b r.n glass and pottery goods. clothing, food rocucts and similar goods. Tnese are judged to be products for whiiich the technology irs relatively sirmple and w.ell know-,,an, the size oL investmaent is generally modest, and the scale of efficient operation is suff.iciently small to admit- a nmnber of productive units to the manket. Itu is aMprooDriaite tob expand production iJn these goods for the consumer mark.et. But it is probably not suufficient simoly to identify them and leave it to private Lnitiative to undertake all of the Drelimina.y work. N4any of the new entrepreneuirs in thir hmoney in tTad. _rnd cco, --rce -areticularly auring tne in.flati.onary period. They typically have. ouite £i1iited i ior n aboutThE.>ial'S needs, o7portunities, or techniques. It is necessar7n to prepare pre- feasibility studies showing hle potentia.1 profitability of investment and incidentally de-non-sturating that the Govermient lookn favorably on exnsnsio ns in tlese prodb.uct-s. Financial and technical support and promotional activities must aloea r 5M.. B-X o.§ 'o>.>.^CSiE nQ { e^U L1i1-; t-..1;5< .a.. -.n u. one d above, though the eLfort recuired'l for the consumer goods incI3vFtries witl probably be le.ss dificult and less intense. Ne-ver`rheless, the types of developmental assistance are similar for both classes of prod- acts, 2.32 The general strateg-y for industrial developrment provides a fraxiiework for a detailed progr,mn that could b- prepared beginning aLmost immediately. It is a auite unrestrictive fraLnme-,ork; there is latitude for worki-Lng out variations' in particular programs, but in suimary the strategy includes: (a) a: coinitment to an accelerated rate of growth for industry; (b) correction of major dis¢tortions in the stn,acture, prinarily wiith empha:,is on the engineering or machinery industries, base metals, and chemicals: (c) iTTr,-r` cate attention to the major projects described in later chapters of thiL ;- ort; (d) special stimulation to component and sub-asFeibly product lircs in the engineering industries; and (e) s.niilar encouragementl to 1i-ht industries to broaden the base of industry and ministpr to consumer necds. A lag-e conimitment ol public resources is not required to aDiiplement the overall progr;ms., but a cocnitment to an activist progr,ams of promotion and stimnulation is deLinitely needed. It might'be said that it is a continuinc comntlument, but in a newi direction, since the Govemnmwnentls oolicies, as evidenced in the foreign and domestic investment la.w;s for example, have been to encourage in.dustrial investment. 2.33 The statement of the general strategy har been charact.eried as requiring an activist iolicy for industry. It is useful to explore the implications of an apparently different kind of strategy which might be called the case of thUe "calculated neglect" of industry in'the overall economic program. This tyr,pe of stregy could be characterized by primary emphasis on development of the aglricultural sector and oin raising the rate of growthi of agricultura.l outut and productivity (hence raising inc one). Foreig:-n exchange requirement's tto meet the needs of deilopr..eiv . l.-ould be met by 11c;:a:Jing utradition al ex-eorts, i which ar -e priJarily aricultural pro- dluct- and minerals (including petroleuLm). Thus, intornalvllr the emphasis is on agriculture and external neecs are to bc mwet by the trad_itictnal produact-s. There are twio main strands to this straterT. and industry is more or less cast. in a passive or follo ver role. It is expected to develop to the exten' dictated by the needs of the wo main drivingr, forces in the ecornony. 1here is an m-licit or unstated belief tha; incru-trial expansion a. under these conditionF, be quite modest. Some will, read this bri eL characteriza-tion of the strategy as port,raying the develop-ment philosophyi of Indonesia in te last few yearF. It remriaLs to be seen wEThether the implications of this strategy foz in-dustril21 develolnent are, in essential respects, different from the generally activist program that has been outlined previously. 2.3h W%ith this strategy for development, income should rise and t_e demand Lor a11 products wMil simila;rly increase; however, it is 'generally, recognized thatthe deman.d for manufactured products -w,ill r ce more rapidly than incom.e even for low levols of income. As basic needs are mret, ani in- creasing p-roportion of inccme is direct.ed to manufactured onroducts so that Lor indonesa the incone elasticity of demand maay be on the order of l.5. Unless domestic prod.uction can increase to keOp pace with this demand, there will be a rise in the leakageF to mpocrts wvhich ma.y affect the balance of paym-ents adversely) unless in turn traditional e:..orts can rise to close the gap. Although it is entirely possible that exportr- m ay ir- tcillly grow very rapidly, there axe some limitations on the growulth that m.ay be. expected. Generclly speaki7aig, th-e demarand for agricultural exports my not be st.rong; for exam.ple, exports of natural rubber are facing increasing compet.ition fromn synthetic rnbber. There is also some evidence in inter.national trade that the terms ol trade tend to move against agricultural products. For pro=&cts such as tin, there are also intuernational agreements tha may limit the abilitly of individu ual countries to e,prnd its e.po-ts. Consequently, reliannce on a verjr rap-id and sustamred . emansi;on of tra.dition^.l exports may be dangerous. if exports, are to grow., new product lines mu-st be found C>:ong manufactured wilh a leseer relianoce on tradition-l exports. 2.35 It is entirel-y possible that as develo,pmient persilsts there w.l11 be increasin- precsure on the balance o-f paym ents. Ar.y of several. things rmlay occur; one result may be increased inflationary prersure in. thle country or, it nay be necessary to reduce the rate of growth, or an -increased amount of e'xtenr.al aid may be necessary. iost probably some comftbinatLionl of a11 of these could occur. The prospect ol inflationaryj pressure is particularly distressing, but it is not unreasonable to e.x,pect that if such pressu-es do be.gin to emerge busi nessmen and traders will come to expect further in- flation- and wrill act in such a wqay a- to make inflation a self-fulfilling prophecy. 2.36 If donestic output of mnanufactored goods can be expanded rapidlyr enough these undesirable effects may well be avo0ided, but it ir: not at all certain thai, this will happen. It is ganerally not possible to plCn every'tlhing so toll thalt- expansion of output of rmanufactuared productsi occurs smoothl.y. For examrple, if some end-items are expanded, they .ill initially rely on imiported components and ra-.w materials and it is too much to expect that the com-onent and sub-assembly indiustries wrill be ex:.j-nded pa-eari pasFu writh the end it'vns. Mioreover, in order for such e-opn.sic)n to occur, imports of cap.':ital goods normally .ill rise very rapidly,. In the short runn this w;Til l further exacerbate balance of payment Trpoblemn. There ic an inJ-titut-ional lag betwenen the emergence of profitable opportanities for domestic products and r the new investment and output to satisfy tlhe demand. As mentioned earli-er, many- of the new entrepreneurs in ind"Custry must be dravw,n from tra.e and comme.-rce and to persuade themi t-o undertake such investnent inill take time. 01 course foreipp investmrent wIll fill a part of the need but certainly not all of it. Conseqnuently, one may ex- pect that inflationary pressures and balance of payments cLifficulties could occur together if t-here is a lag in the re-iponse of manufacturing outiputs.. The mission believTes that these institutional consrtraints are apt to be particularly sign.ificant in Indonesia. 2.37 In the longer ran a lag in mnanufacturilg output also acts as a deterrent, to -the development of the mass distributive trades -wfhich offLer one of' the major hopes for expansion in emplo3,rncnt opportunit-es for a gro-wTing population. The prirary emnployment outlet tends to be agriculture and that usually means the perpetuation of under-employ-.mnt in that. sector. 2.38 - In general, agriculture. tend.s to be the classic case of a dirm- inishing returns industry; it becomes increasingly difficult to mairnbain a high rate oL gro.th in agriculture over a long pei4iod of tinme. To do so may require ma.ssive capital invesfetmients ..,hi ch -c .1 sinsiil 2rly ev.icdence dininishincg returns. Over the long ran reliance on agriculture aF the leading sector wrill te4nd to lead to a regrepsion of the rate of growth of gross national prodiuct to the maxi~iwu level that can be. sustained in agriculture, and that is not likely to be mrore than 4! to 5 percent. 2.39 Ii± short, it appeaxs that pursuance of this kind of stratec.y without a rapid increase in incdiustrial output, could lead to serious pro'blems in the economy. If, however, the p_rivate sector can be helped ,to perceivre the profitable opportun-ties for investmnent quickly., and act on them equalla nuickly, many of tth ese problems mnay weTll be avoided. 2. 40 The lXorld Banlk rmacroeconomic nodel, which has been rel^erred to earlier in this chapter, presents a case siLmilar to the onie just described. The, major driving forces in the economy are growrth in i,he agricultural sector and an expansion oL tra.ditional exports. A rate of growth of agri- culture is set £.xoge.noaLrly at L to 41½ percent over the next ten years. In one case a high growth rate for exports has also been stipulated wl 1hich should lead to roughly -a doubling of such exports in the next five years with a sorac.hat lowier rate therealfter. It is useful to show the implied effects on industrial development as a result of these two factors. 2. 41 A sumnary of the most signif3icant results are showini in Table 2.3. It can be observed that even in the context of this straney manufacturing TAPL E 2.3 INDUSTrl .AL S U1;JB-M DD Case l High exprt gro;,h; high a,ricultural growth (Billions of RP.) Itern 1970 1 975 1980 1, GNI? at factor cost 3254 4569 6794! 161 3o5 }460 a.. 331 544 1028 b. I-rinmf pcturinlg 331 537 1028 (1) Domest ic uses 331 537 (2) Import Substitutes 0 7 83 c. Construction 10 2 38 d. Percent: mrfg. 10 12 2. Eports (Total) 455 753 1100 a. 11ining (including oil) 18 393 be 1inuf acturers 10 24 77 c. Percent: Tinn & 46 55 58 3. Thiports (Total) 635 l052 1h24 a. Use in mining 67 132 284 b lMg. gc.^ods for con. 97 138 c. b dustriaL ra;; aterials 99 . 163 308 d. Tnvest-rianct goods 2014 385 680 4. Invest ment (Total) 458 869 1540 a. !'-ning 57 81 82 b. i, I domesti c uses 63 146 283 c. I4£g., import sub. 0 6 2 d. Colistr.uction 27 39 22 e. Percent: mfg. 5. Consumption (Total) 3158 14356 6120 a Nfg. goods 1071 1667 2898 b. Percen't of total 33 38 147 6. Other leasures a Invostment/GNP 14.1 19.0 22.7 b. ICleto ntRN 2.14 2.6 2.8 c. ICOrts/GIW l1i 16 16 Ci. Txports/GNP 19 2321 *Sp,ccified outside of the 3]bde1. Imports riot counted in total imports. output does in fact rise very rapidly. The share of manufacturing in GIIP rises from 10 to 15 percent in a decade while thbe rate of' groi,tL of GNP is slightly over half of the i1ndustrial grow,tlh rate. It can also be observed that to achieve this expansion imports of investment goods mulst rise rapicdly fro)m 32 percent of total imports in 1970 to p8 percent i.n 1980. The percent oL investment in manuf'acture also increeases by over 50 percent du-ring the decade. Tn the result the ex- pansion of domestLc nanufacturing industry is able to meet a larc-e percentage of the increased demand; even so the balance of paym'en'ts tends to worsen during this period. 2.42 There manry c,rveats to the interpretationa of the actuUal numbers in the model results. This w,as a first attempt to const-ruct a miacro- economic model for Indcnesia and imany of the data had to be derived by analog,y to experience in other countries. Yet it does show wJhat happens to industrial output w-itihin a consistent framiework. A significant fact is that evren withl primary emphasis on agricultural output and a high level of traditional exports there is an inevitable need for very rapid expansion of the i ndustrial sector, but.. certain characteristics of the model must be kept in mind. FirFt of all, if der.jand for manufcacturing output rises, the model attLmpts to meet this through expansion of domestic capacity and also throug-h increase in imports. The model does not show t'le possibility of adverse price changes and iiflationary pres;ures such as those that have been mentioned earlier. Moreover, the model -assumes Jnstant-,a:aeous (w;ithin a year) or smooth exoansion of manu- factur-ring out.put in response to demand, buit it is not able to present a case of institutional lag and inertia in the response of output. Yet, in the actual circumstances it i,s recognized that there are suclh lags and poor response and that in order to overcome them. it will be necessary to have a program to stimulate and accelerate industrial development. 2.43 The re.sults of the macroeconomic model simply cor-inn the fact that even starting from an a-po .rently different strateg;. of develop:;.>snt the implied resul1;s are the same; 'in fact this should not be a surnrising result. The activi;st program that lias been outline earlier is onle that is aimed primarily at overcoming institutional difficulties and ccrrecting dis.tortions within the industrial sect.or. Sinace the model contains onaly a single sector caalled ''"manufactur-ing" it is not able to showz the dLifficul- ties and the distortions that. actually occur or that exist withiin the sector. In short, there is no rea difference betwTeen the two strategies. Both imply a greatly accelerated industrial develop-ment wkhich is- the first point in the str:tegy wie have outlined. The renmaining points in the recom- mended strateg for industrial developmnent emohasize the need for giving attention to major projects th.at are important i,n terms of t,heir linkages as a basis for development and also emphaEize the desirability of the promotion of the engineering and consumer goods industries as a step toward broadening the brsis of indiaxstrial developnment. Speci fic Thntit.utional Steps 2.44 There are several specific steps that could be taken immediately to implemrent the furthler development of industry and to establish a pat- tern and direction for the future. Il:ost of the point. siam-arized here are discuscsed at greater length in succeeding chapters, but they are presented to round out t,he picture of the deveLopment strategy for induss.ry and to reduce it to some specific actions. 2.45 This reoort presents fairly detailed analyses of several mnajor projects, notably a direct reduction stEl plant, a core of a petroche-rmical comrplex, a wolod-products complex anid several machiner,y projectr (e.g. electrical equiprnen., construction equipment, and ship- building). Suggestions are also made for aternative potent/ial uses or plans for developing two major coal deposits. These analyses are of pre-feasibility grade, and the resultr are rather encouraging. Economic rates of return for several ol the projects ranrge roughly from 15, to 20', w.hich indicate that the projects are very attractive. Moreover, tlhose projects have other desirable characteristics, in the form of strong linkages to other industries that could be developed, large foreign exchange earning possibilities, increasing the domeptic value added from processing natural. resources, and efficient substi- tution for imports. 2.L46 It is reconmmended that steps be taken immediately to initiate full feasibility studies of these, projects, to subject the pre- feasibility analyses of costs and. benefits to close -cru tiny and to prepare specific technical and financial project plans as appropriate. There is an inevitable lag of several years from the initiation of fu1l fe- Ji.bi 'lity studies to the actual begginning of operations. For major projects of this type the lag is approximately five years, comprising up to ot.e year for the feasibility study itself, a second year for reviewz and final submission to international lend-ing agen- cies and to potential private investors. and several r.ore years for finial approval ard actual construction. The feasibilit,-y studies themselves migl.ht cost on the order o $500,000 to $1 dillion, and it cannot be e.x,:pected that private industr7 will be prepared, at this stage, to undertake the studies them;selves, thouph they should par- ticipc-to to some degree. afternal assistance, both financial and technical, -ill be required. Th- ulliimnte investment; cost of these project.s typically wTould range up-.wards of $100 million. 2.147 Unless the full feasibility studies are started soon, the projects will not nmature, even wuithin a minimal five-year period, and the p-otential developmTent benef its to the country will be idelayed and, in 'So-me ca§1es, the opportunlities may be lost. Prudent long-range rniann`½nc, for industrial development should have a horizon of at least five years. The studies of these projects are deerr. L an appropriate step in the right direction. 2.148 I also recommended that. the --nics age progr ¢:m of f inanl ebc ,su-at;e- of.jdo5.gint o_ and sma1ler-scale industri n r.tvs,jnain. -:as: 17 compoinent, sub-assembly and related pro.ducts in the en- - .j col uxiw--g6o i-nditries. This could be ba coT3riplished by the ,ons. es 'tablish a ut in the 14inistry of Industr-y to undertake the prepartion of u-n ' n.EalsoF^:cS C ;-u s-i rof14 -T.h53,7trat e,to ir&i-os ThT7iV-eT§r &6vegaes that would be realized in a prrticular case, analyze the markets and the riskss, and present the results. 11any potentyuial investors are ignoran-t of basic industrial in'ormri..ion and cannot take the time or incur hle cost of an investigation. Technical assistance should be sought to start thlis uinit.. Second, greatly strengthen the investrment promrotioni activ2ities oT the Irnestment Board in tlh-se areas. Th-e experience of other count.riLeS, such as Singapore, ma.y suggest types of promotional actix%r.ties that bave been succecsful. Trdnro- vide financial assi stance for both invres-b-.-, 777.1k t Among ot-her things ckhis means modification of the prevrent investment credit program now operating through117k the state b-.nks to extend credit to smrnlet ines- tr-ies. Provisions on int.erest rates, collateral requirements, and dowT payment.s may ',have to be suitcably modMLied to encourage the small invrestor. Soue of these maTrters are discussed in Chapt.er IV. The financial institutions to serve these need- mirht include .a special "I-,.indow' at a re-invigorated BainDi do; creation oL investTrent subsidIlaries of the-state bankcs:; inclu sion oL the strongter private banks in the credit progrmTns now reserved to the state banks; privatie development banks that are lagging behind in cownnencing operations. Fourt7h. establi,sh a technical .assistance unt to helo ncw bl __-u C: L.T a- - a s --'p-, I,-rJ7 cinl mrarket½nc lTobr, and similar problems datiring their first few yrears;. Such a .n~t. Et il li,.J llhY prno, or be eSt?..blished independent.ly. Foreign technical assistance would be reouired. It is- an essential part of the pack- age progran. Fifth, con-ider establishing "risk insurance" on these investine-nit-s, possiblAy operatin- through the .3redit Assuransi. It ight' involve adding a poercantage point or two onl the interest rate charged. Genorally speaki:ng, it i- the dow. parient and the collateral reouirema-nts that. limit smialler investors and not a small change i n interest rates. If each of the above s'teps are ttken in concert and coordiiat,_d, an effect-ive programri for stirnuating nvt- mzents in these industries probably could be achieved. 2.49 There are a number of policy isqsues that ma:r invol-,re making changae in curre-nt practice at some time i-n the future. It is sug- gested that, .uith-in the planing machinery of t-he Goverimaent, sone atUL4ntion be directed toward an exanmination of these issues to deter- mine ithe policie.s that ,.ill best serve the development interests of the country. (1) The present licensing systan for privt.=e investment in comparison to a system of free access to the mar-ket after registration. A licen-,sLng syfterm often implies or i!- exolicit wiith respect to future protection for the new industry. Thiis can, and indeed has., led to s-upplying protection to industries that are inefficient,. A re-istration system would malce it plain that the invrestor tiakes the risks of the market, and should not result in protection of quasi-monopolistic pos it.ions. (2) Incentives to fQ',reign investment. There is some slight evidence that the flow of forei-n investwent, may decline in th1e ne-Xt fe- years. This may be re-arded as desir-ble in the longer rnn for various reasons, but for the L=ediate future such a development. could seriously i.npair the rate of growth. On t.he other hand, the conduct of certain-i investwment projects has not been in the best in- terests of the industry or the country. It is probable that-as the better investment opportunit1ies are taklcen up), the incentives to go into other lines of acti-vrity mray becomr wea1Rer. A stuct,r of the likely future flow of inveslarent, into -which industries, and undv,8r what kinds of incentives, should be an essential part of future planning. (3) Tax on the revaluation of fixed assets. There is evidence that the present tac is inhibiting desirable mergers, placing domestic industry at a disad.vanUtage in joint ventures, anid niring efficient business activity. It is suggested that the Governjment consider mod- ifying, softening, or removae of this tax. (4) Taxation of open and closed (famrdly) corporaiions. At some timne in the future it ,ilbbe desirable to consider altering the corporat,e tax schedules to encourage open corporations. The tine is not now. Because of the slortaoe of funcd that might be used to-buy stocks, the height of the returqn th.-t can b-s earned on other invest- mentS (notably the time deposit interesu rate.), and the lack of a capital market a appartus, it w.7ould be premature to initiate this step, but it would be appropriate to .ex-arne the experience of other coun- tries such as Korea, and to make tentative pla.ns for the fut,ure. In Lhe course of this analysis proposals for strenagtheiiing the bapital mar'ket Ciould emerge and miTight be acted upon. The institutional actions outlined abovre are recorrmiended in the belief tlhat they constitute an LLDJortant.ingredienrt in an indastrial developrment program for Indonesia. TC'T \T1__ : ;D II T TH'3 11 FI , ,,J T 7 ,SYWr ) T`~1 11}, I0U,I 1^ J,- r T .).]L 3' } ;s The Present, T ncentive System 3.1 In the mi d-1_Q60's the Gove,-nrient of Indonesia began to devise a new fr_-c-.A.ork oL incenntives aimr:ed at stimulating do-mestic and fo.eign inve4stmt,--' in the underdeveloped and leg2ing industrial sector. The highly- protecti;onist and statist policy frarne,work whii^ch contributed to Indonesia 's small-scale, technologic ally-backward, poorl v-inaged end underc^-pita'ized rin arufacturing industryr has been -ubsstnt ially niodified since 1967 a'nd gracdally is be-ing replsced by a ne-w, more liberal sys- tem of industrial invcestme,nt incentives. 3.2 The Governmernt has made conpiderable progress in replacing the old policy frame-work with a sy,rstem of tax, tariff, and other incentives more conducive to investment, grow-th, and efficiency. Pol- icies -hich successfully stabilized prices and exchange rates and es- tablished close relations wTith the internatiomal financial coironunity, also share responsibility for the improvement in the investment climate. How,ever, excessive protection, the tax structure, bureaucratic obst-acles, inadecuate infres tract'.,re, scarcity of management and skcilled workers, and 'onl-,etlition from illegally traded goods stuill hanipers the rapid growth oL a balanced and efficient manufacturing sector -.n Indon-iesia. ;3.3 Thc-e has bee,n a rapid increase in both the number an-d value of foreign and doniestic investment applications annrovo.-ed under the invest-ment laws, par.ticularly since 1969. ITo date, the rate of actUal investument exoDenditures compared to planned intment approvals has lagged someewhat as a result ofa dnistrative problems and, more re- cently, investor- uncer:taintay. Ho-wiever, the i-pact of investment e%x- penditures on the stracture and groith of the manufacturing sector i already discernible and should increasingly affe.ct lhe pattern and rate of ind-astr;l. development over the next fe-, years. A. Foreign Tnvestmnint, Lawr (Act 3'No. 1 of 1967) 3.L4 The Foreign Investment Law of 1967 sets forth the basic prInciples gover-ning Government policy towards foreign priv.ate ceanital investnient; it provides the basi-c legal framew.Tork for encouragin Ng a;-d regulatiTn foreign investment in Indonesia; enqd it expresses the Government's con- viction that foreign caci tal, techlnoloy, and skill., adequately regu- lated to promotne the iarutual int-Lerets of the In-lonesinl. people and the foreign investor, can make a scgnlficant contribution to Indonesia's economric develounmnt wvithout creating an excessive dependence on foreign countries. 1/ The description of the Foreign Investment incentives is indebted to the report by Donald W. Hoagla-nd "Investment in Indonesia Today: A Revised Guide to LawTs and lrocedures for Foreign Investors" (mimeo) Febraary., 1971, Djakarta. 3.5 Under the ForAgn Investment La,,, foreign capital investment is defined as direct i vestment for the purpose of establishing a new ent.erprise or expanding a foreign subsidiary. The concept of "loreign capital" includes: (i) foreign exchange, commiodi..ties or rights to technology purchased with foreimg exchange not a part of Indonesia's foreign exchange reserves (ii) that part of profits w7hich can be legal- ly transferred. abroad but iwhich instead is reinvested in Indonesia. 3.6 The kinds of investments which enjoy stecial fiscal incentives under the Law (and subsequent amendments) are :/ (i) investments which i1ll increase foreigni exchange earnings (mining, tourism, primary, and man-ufactured exports); (ii) investments w1hich substitute domestic production for imports; and (iii) investments w.hich yield rapid returns increases employent opportunities, and introduceF ne-wz technology which raises productivity in a sector. (a) Posit ive Investment Incentives 3.7 The Foreign Investment Lawq provides the following positive investment incentives: Tax Incentives Approved investments are exempt fron the staim tax other- wise applicable to capital transfers, and exempt from .m,Dort du.ties and (iLmnort) sales tax on certain essential starting-uo zmports such as machinery. cqui.fme,nt, and supplies. Tn addition to these exsrmptions, the corporation tax,: offe1rs a period of four yrears for the eazrry-f o2n;ard of losses, giving lossel taken during tihe first six years of proauction an urnlimited period of carry-fo;ward; authorizes accelerated depreci,a- tion; and est_a-blishes a-n investm^ 1Cent al1oJce for the new investmnent beyond that originally pl-.n-nd-. 'hein-vec nt allomnce is a deduct Dion from taxable corporate incormic of 20 percent, of tlhe amount of the addi- tional investnent, spread over four years. ILn addition, investors are offered exemption from the ta.c: or dividlend.s for a per-iod of t-w.o years after the start of production. 3.8 New enterpris-es may also be granted up to sic years of exeription from income taY. at the company level ("ta`: holiday?!) after corrmencing actual operatiomn. The avea41ib4"lity and extent of the exemrtion Iill depend on a number of factors relating to the development priority that the C-overnment attaches to the project. Article 16 oL thle Foreign In- vestm,tent Law '(as 2ainended in August, 1970) provides that ne.-ly established enterprises which inve-,t in projects in priority sectors established by the Goverrnment may be granted a two-year tax: holid., (i.e. incore sen- erated during the first twqo years after the enterl.rise starts production 1/ Cabinct Presidi:Lun decrec lJo. 06/EVK/D1/1/l967 is free of corporate income t:x). An eddit,ional year of ta-% exempC,ion up *to a axi-Lmumi of six yearas can be granted providing: (i) The iA'.nvestm-ent significantly increases or saves foreign e*:chainge for the Gover.ment; (ii) the capital is invosted otutside heavily populated Java; (iii) the project requires the investor to rn.ke a large investment in infrastanacture or in- volves other extraordin-try riclks; and (iv) the invJertrr±ent coincides with other special priority olbj ectives oL the Goverm.ent. These exemptions are available for domestic as w-tell as for for- eign invre5tors, and the Governmeret ex-ercises broad discretion to grant further incentives of this, kind for investments urgently needed for the development of the Indonesian economy. Tra.ns-er of Earnin_gs 3.9 The rights of transf.er of profits, debt payments, and depreciation are specifically granted. At present Indonesia has one single rate of exchange (378 Rupiah to o.ie US dollar); although prior to 1970, Indonesia's system of foreign exchange controls was complex, it was sinplified on April 17, 1970, at wThich tinme the Goverr-nment completed the. dismantling of the system of multiple exchange rates started in 1967 and established a single rate of excharnge (genieral foreign exchange rate or GFE) set by market forces. Except for a special rate for aid funds, all other trans- actions are unrestricted and einploy the general foreign exchange or free market rate. 3.10 Under specific provisions of the Foreigrn irnvestent, Law-, foreign entLuerprises are granted the right to transfer in the originctl currency oL the invested capital atu the prevailing exchange rate for: (i) accwied prof'its af-t.er subtracting taxes anqd otuher financial obligations to Indo- nesia; (ii) cost.s relat.ing to the employment of foreign personnel wox;ing in Indonesia; (iii) other costs to be determined by the Covernriment in cae course; (iv) depreciation of capital assets; and (v) comper±sat,ion in the case of nEltiomalization or proceeds of the sales of existing shares to Indonesian .1- 711an-arnemnt Freedom 3.11 Under Chapter 4 of the Foreign Investment LawT', the owmer of foreign capital enjoys full authority to appoint his own managerment. On the other hand, exceDt in instances where eli gible Indonesia.n rmranagement and technical personnel are not available, firmn are required to employ indonesian nanpower. 111 foreign enterprises are required to organize and provide regular and systematic ttraining facilities in Indonesia or abroad in order to progressively replace foreign employees by Indonesian ;/ Transfer pcrmits wi.l not be granted for repatriation of capital while the investor is enjoying certain tax incentives (notably the tax holiday). nationals. The policy of t.hesc legislative reouirements i-s reflected in the contracts negotiated by the various Hinristries, and appliceants for the benefits of the Foreign Investment Law- are ex.ected to present plans and malce reasonable progress tow-ards the training and devc-lopment of Indonesian manoowser for their staff at all levels of responsibili.ty. 3.12 llhile the -nales to be applied differ in var-.ous industries, a pattern ha-s developedc in the rining indu'stry,, for examile, in wihich 75 percent of all e: mloyees in the ent,erprise at 211 levels are expected to be Indonesisns iT.h -in a 5 to 8-year period. d lhi s policy is adminis- tered through the work per.it required by all foreign employees and issuLed by the Departrmnt of 2'L-npoower. The basi c issue considered in grantia-ng a work permit to a foreigner is w.Thether or not the foreigner in questicn is going to anderta-ke tasks for w4hich qualified Indonesians are available 1/ A4thoughl the GCvernment takes a Llexible approach to the nwnerical levp-Ls of Indonesians employed in the early years of opera- tion, it expects its policy to be accept.ed in good fait,h and can exercise the necessary autholity to insist on appropriiate- training prograns. Irr)roired Land IRi-hts 3.13 The Basic Agrarian LaJ of 196,0 established the princip-' that all land in indonesia is State-controlled but, not State-ownied. n11 densely populated areas most landholdings are private property. Land outside this category is directly controlled by the State and coni-ironly called "State lands". The Basic Agrariani Law recognizes several types of rights in land, *fo-ur of whi.ch are significant to the Foreigni- n- vestor: (i) the right of ownership: "hak millik" (ii) the right of exploifttion: "hak guina-usaha" (iii) the right of building: "hak guna bangunan" (iv) the right of use: "hak pakai". These rights ca;rthorize the use of land in different ways. The right,, of o-wnership is the strongest hereiditary right in land and is the exclusive right, of Tndonesian nat-ironals and certain legal bodies desi.gnated by the Gov-ernent, such as State-owned banks. 3.14h The policy adopted by Indonesia under the Fore.ign InvestTrment Law is to offer to forein inrvestors those ri ghts in land which are directly pertinent to the natture of the enterprise conicerned, wYhich include: (i) the right-of exploitation (for agricultural estates); (ii) the right of buildinng for industries' and other building purposes: and (iii) the right of use for investors nbt requiring the other rights. I/ This inquiry has beaen made of all foreig-n work pL)n-it applicants since 1958, and the present practice is merely a continuation of that required under laws adopt.ed in 1958. 3.15 Before tho Foreign TLf%S+stntS , Law was introdlauced in 1967, forei-gn co.anies wore-i not ent,itlcld to obtain thc- rights of building or exploitat.i.on w?hich they mrary no-., acquire. Ho;: r, t,he duntion of these three rigphts in land are lin.ited: (i) the rightu of ex:ploita- tion is vtalid for 25 to 35 years depending on t.he ty-pe of enterprise, and at the Goveriimmr-nt's di rrin anolther 25-year cxtension may be grant,ed; (ii) the right o,f buildin- is valid for 30 years, extendable by aoltlh. r 20 years at Governm-ent discretion; and (iii) 4thQ right.of use miiay be for either a fixcd pe-riod or for as lon- as thae land is axsed 'or-a pzzrticular purpose. F6reign investors w.ho have obltained min-ing rights from tlhe Vinisqter of I'iining or forestry-ex;Dloitatior right,s from the 1'iinister of Algriculture automat ically obtain use-rigghtS for lands wiT'hin the boundaries of their concessions and for purposes directly co-nected w.ith the operations of the eLrterprise. (b) Restrictions. on Yoreszn Investnent 3.16 Indonesia considers that foreigrn investmient, to be suiccessful must not only be profit3able b-uLt also serve muutual interests of the foreign investor anld the Indonesian people. In o-rder to insure that Indonesian natilonal interests are served by foreig-n capi-tal, the For- eign ITveL3 Lmuft Law-, con,t--nins cerLain restricti-ve anld regulatory pro- vi.ions, the purpose of wdhich is also supported by laWs and policies elsewhere in the GovenLmoTient system. of regulation and control. The Tndonesi.an Goverrnment believes that these provisions will provide a fram eork for the kind of mutuali-tJy that is more likely to produce successful, long-te-rm investmaentu iCn Indonesia. Specifically, th1e main regulatory and restrictive provisions of the ForeiEn Investment Laiw are: (i) restriction' against investmerrts in certain fields, (ii)res- triction on the employ.ment of foreign. persoinmel, (iii) restrictions on foreign ownership and (iv) the 30-year limit for investmen't. per- mits. Investment Sector 3.17 According to the Foreign Investment La,. (Article 6), indus- tries w.-hich are considered vital to the national defense such as anis, anTmunition, explosives, and waTr eq,uipment, are closed to foreign cap- ital investment,. The IMinistry of Trade also rejalt.tes trade and dis- tribution, and prescnt',ly domestic retail and eXport- import businesses are closed to foreign in-estors, unless they are closely related to domestic manuf acturing. Other ministries, such as the Ni.,nistry of Industry, may 4lso restbrict cert-ain kinds of inv.estment to Indonesians or close certain industries to foreign invest;Mont because capacity (planned or actual) is adequate to satisfy domestic demand. 3.18 The Foreign Investtment Law (Article 6) also closes certain acti*\tites to foreign capital investoient and preVcnts foreigners from exercising f'ull control over activiti z'that affect the necessities of life or are oither'ise of Vital importance to thae countr)'. These in- clude: (i) harbors, (ii) production, transmission and distribution of electric power, (iii) telecoinmnunications, (iv) shipping, (v) aviation, -61- (vi) drink-ing water, (%rii) public railh.ays, (viii) atomic enerr dev- elopmlLent, anid (ix) the mrass media. Foreign capital is not completely prevented from investing in these fields, but can enter only under arranigements with the Indonesian Governmcent or Indonesian citizenls. These arrangemiieints must give the Governmient sufficient owrnership and control to (i) assure the Indonesian piub:lic that national interests are adequately safega.arded; (ii) the necessities of life are available to all at a reasonable price; acnd (iii) the qu.1ity of the service provided is regulated in the public interest. The methods employed for limitin- foreign control in these fields have not been specified by tne Government, but joint owrnership, sale, end lease-back of plarnt and equipmenzt, mmanagement agreemients involving profit sharing witih a governent, entity, and other joint venture arrang,mnts .?ith Govern- ment enterprises are possible. Such arrangements have already been worked out in thie fields oL teleconmuunications and aviation. 3.19 In addition, the Directorate Geneiral of Light Industries nd Handicraft has issued statemTients from time to time containiljg lists of light industries closed to foreign investmenlt. t,,. prc.s nt- ther.e are 37 light industries closed to foreigL investament (see Table 3.3) al- ht)i6igh the list is somew.hat misleading since it gives the impression that all kinds of products that are cove-red by the general category of goods prohibited are, in fact, closed to foreign inivest-ment. Thi-s is not the case according to the ILLnihtry of Industr-y; for example, not all paint products are c.losed to foreign inv-estors, only some oL teim. There is, however no way for the foreign investor to knaw this from the list. Foreign Personnel 3.20 AP noted above, although foreign investors are assured full authority to select,, their owvn management porsonnel, they are normally required to meet other mano-oer needs with Indon-esian natzionals. Foreign enterDrises are specifically authorized to selecv and assign foreign manZ.Rers and tech-ricians to positions for which cualied Indonesian nationals are nLot available. Additionally, foreign enterprises are re- quiired to present plans and progressively t,rain Indonesians for their staff at all levels, ultim'ately repla%cing most, if not all, foreign nationals in due course. Foreign Ownership 3.21 It is the policy of the Goverlinent of indonesia to encourage all foreign inlvestors to join w-Jith loca;l par,tners in manufacturing ventures in inQdonesia in order to facilitate the transfer of management and technical knowV-how, to Indonesian entrepreneurs. Foreigners invest- ing a capital of US$ 2.5 million or more are not reouired to have local industrial participation initially, although joint ventures are stroncly prcferred by the Government. Foreign investtments of less than US$ 2.5 million must provide for local participation either initially or at some time in the future. JL, Jn e 1971 -62- 3.22 Foreign invs-tim.ient ap"plicat-ions are all expected to disclose a plan for the sale of some of the enterprise to Indonesi-an citizens as required explicitly in Article 27 of' thle Foreign Investment Law-. The foreign investor is assured thiatu the proceeds of the sales of existing shares in the foreign enterprise to Indone,s:ian citizens can be repatria- ted in tthe original currency of the foreign capi-tal in-vrestment. At present, mhat the G3vrerr:nent reoquires is that provision be made by the foreign investor for the participation of local capital and not that a stated share of local o-nership be required at any particular timne. It iS, of course, recogniL ed by the Govern-ment that under present conditions, local caital is not likelY to furnish much more than 10 percenlt ofn the equity recuirem.ents of a new ventuure and therefore, no hi-gh or rigid levels of' local capital participation is be.in½ established for joint ven-t- ture projects. Foreign investors uncertain or concerned about t,he stan- dards they wiill be required to meet by the Goveri-nent are encouraged to formulate a plan for local participation and incl'3de it in their invest- ment application. 30-Year Investment Permait 3.23 The Foreign Investment La.-w (Article 18) also establishes a 30-year UMaxiM validi ty for an investUment permit. The Government does not intend this 30-year lmit to be understood as policy of explusionl or force-d acuiSiticn of foreign investrients at the end of 30 years. It maerely estaablishes the madiw.mYm duration of the initia:l i-ncentuives and inducerm;ents to invest giveri to new foreign investors b,r the Governrm,,ent under the Foreign investment Law. The Goverrment has indicate-d th at it inill reviewr the te2mis of the investmrnnt agreerc-m-t slhortly before the end of the 30-year period or alterniati-vely establish ob-ecti-ve standarcis to be met by foreign investorE. If these standards are met, the 30-year period can be renewed at periodic intervals. 3.214 Such standards wTould include provisions concerning levels of production, the amoun. of increased investment, extent of land user rights, the percentuae of Indonesian employment and owmership or other releva&nt consoe-rations. No pattern of such objective standard- are discerLnible at present since.the Foreign Invs!.tment Law has only recently been estab- lished and put iilto operation. However, over the next several years some pattern -will emerge to provide new. and existing investors with a clearer notion of th'he functioniing o1 the 30-year lim-it. B. Domestic Inv.restmre-_nt Lawr (1'o. 6 of 1 968) 3.25 The Domestic Investment La:w of 1968 establishes the framewTork of governmmrent policy to promote domestic canital- formation by Indonesian private and corporate parties. According to the Domestic Investment Law, an Indonesian or nat.ional company is defi>ned as one in which at least 51 p)ercent. of the inv,ested ca-pital is ovned by the State arid/or Indoneian citizen. Foreign ccpnini.es operating in the field of trade mst have become domestic companies by Docember 31, 1977; and in the field oL industry, -63- a 30-year 1. limit is eEt,bl!>shed for 'the validity of the foreign inlvestmnenut pelrimit. Before the 30-year period expires, the foreign cormpany mulst con- vert to an TIdonesian or national company. Ho;7ever, as noted above, the Government's pollcyr is a flexible one and enrvisages the possibility of renewal of the investrent agreement at periodic intervals providing cer- t-in still-to-be specified conditi,,ns are met by the investor. 3.26 The lawq offers exemotion from taxation on capital invested by Indonesian citizens an.d comrnanies for the Durpose of expa_nding or rehab- ilitating:enterprises inihe following fields: (i) pls-ntation a-ricul ture, (ii) forestry, (iii) fisheries, (iv) cattle b)reeding, (v) ininin, (vi) in- dustry, (vii) transport-stion, (viii) housing, (ix) tourism, (x) infrastruc- t=e; and (xi) other procictive undertakings (as specifically allowed). In addition, capital invested in newv enterprises in these samne fields are also granted exemption fromn profit taxes (tax holiday) and shareholders' dividend tax for a period of two years from start of production. As in the case of the Foreign Investment Law, domestic investors can 6btain an ettension of the basic two-year t,ax holiday up to a maxiu.m of six. years of exemption providing the investment meets certain specified criteria established by the Goverment concerning the size, nature and location and foreign exchange imripact of the investment. These criteria are the sa-me thalt apply for foreign investment. (See paragraph 3.8 above). lKew and e.xisting domestic enterprises operating in the priorityr fi elds. men- tioned above are also eligible for relief on imoort duties on equipment and materials required to initiate or expand prodction. 3.27 As in the case of foreign companies, domnestic enterprise must also employ Indonesians in all posts except those wh1ich cannot yet be filled by Indonesian citizens, and make provision for the training and education of Indonesian r,an-o-wer. Tne aim of both the Domne,sic and For- eign Investmc.n't Laws is to prevent the domination of the national- ecollonmy by foreigners and yet encourage foreigners to help develop tuhe country on mutually advantageous terms. C. Taxes on tiMnufacturing :EnTerprises 3.28 There are a nmwber of basic taxes on manufacturing set out in Tax Ordinance;s, Tax LaITs., residential and 1I1iniste-rial Decrees and Decisions ol the Pirector Gen.era-l and Direct,or of Taxes w..hich affect the profitability and productivrity of domestic and foreign invrestment in m-nu-facturing. in general, the TaY. Ordinances date from t.he pre-lori1d WTar II -Priodi while the Tax Laws and other regalatzions are of m.ore re- cent date. As a coni.ffiuence, the tax law is scattered in mnany regulations and decrees, making reference difficult, and time-consu_m.ing, -results in collection-and assessment problems, and also makes difficult any analysis of the iTpact of the tax syv-tem on mnimafacturn-g enterpriFe. Corooration Tax 3.29 At the corporate level, the tax is contained in the Corporation Tax Ordiinance of 1925, which has been frequently amended. Up t o 1970, inco,me above 1.5 million rupiah was taxed at 60 percent. The basic tax rate is now 20 percent with an addlition tax of 25 percent makin a total ofb5 p2rce.nt on taxnlhe 3nr2o]:i? over 5 mill.ion runia3h. It is a tax on -614 - the poiits oC all kinds of busniess cnterprises organized under Iindon. siain 1v, whether, in cri:-ted or unLnc crrort'ed, nith limaited- or nlivit.,e( 1 iabilCity, including p,--'ner.-.hips, cooperatives, State enterprioses, and mid-ed or j oi-ntW -ventuLe s. Cam-i~_al GyLAins 3.30 Busiress inco.mie 5ubjebt to taax includes not only earnings and profitWs bu't also capoital ga-ins, as long as they are not realized during a tax holidayr. Gains fromn the sale or eaxchange of certain cacoitaJ. as- rtebs held for cer'tad- periods ofC time are taxed at, a low.'er raue. How,- ever. the red-i_ctionz a-re noi-o equally applic^blie t,o all as-sts or tax- Payers. Under the Corporation T,ac Law, a capital gains tax of 20 per- cent is imposed o-n the sale or exchange of inmnovTable properft-y (real estate ad fixed installations) that are held for at lekast foux years. Otherwti-se, such gains are taxed at. the saie rat,e as corporate c urrent income. TiLs mriens that all gains made in less than four yers are taxed as current inco-me. Tay, Holialys 3.31 The IEnister of Finaonce uLnder t,he new pro-visions of the Foreign xiirestmentn Lairw (lArticle 16 as amnended-in Augu.st, 1970), may grant a basic two-year tax holiday for inveStmentUs that. falZ uit-h cert.ein Tri- ority econondi c sectors and additional exsn mntilons un uo a max-rimum. olf six years from the stan-t. of pProduction. The anvailibility and extent of the exnit;-'ons Egrrited CienenO on the develomnient p tority attached to the project by tihe Gcve,nment. These exeniptions are available to both foreigpn and 6oriestiic investors aid the Govrer.mnment Is criteria of eligj- bilit-Y hare been Cescribcd in paraggraph 3.8 above and in Table 3.2. Invlre otmen t. Allowanes 3.32 The ForeiLgn Investment Act arnendments of 1970 int-roduced a neii investment allov;amce as an incentive o existing companies as ,Yell as now invesLment- uroj not eligible for tax to make additional in- vestment. Under trhe -rior lax, additional inve-stmnents of going enter- prises (ex-pan sion or modernization) -ere eligible for the samme 1 knd of incentives that wo-ere avarailable for newo enterDrises. This authority proved admirnistrati.vely un-.workable and w2as rarely used. Th-e 1970 anend- ments aLlowT a total of 20 nercent of actual investmentls made Ln any one year -zo be subtracted rom taxable profits in that yrear and three sub- sequent years, tlereby providing an aCtual annual rdeductible allowance of 5 percent. The annual 5 percont inrestmnv allowance cannot be cqrried ovrer to the next yeazr if itu is not used in a certain fiscal year. 3.33 The inrvestment allow ance is not applicable to initial invest- meants by new enterprises for wihich a taxc holiday w-as grazted under 1/ 'The 5 percent inveosLment. allowa-,nice can be added to a loss s- that the overal. total loss (the loss plus the 5 percent allow.ance) can be ,;ritten o2L f later. FIoreig,n and Domrestic rlVrtl, Lawrs, even if t,he invest.MntL. e:cn oii2.ture is m,a.de after the ex;pirationt of the tx holid day. In such cases, the inVreS tn t allova-nce is grean-ed only f or nadd" tiona,-l iveserms after t1lhe initlal inve .itKe'nt has been made*. On thW7e othller hand, wh'cmn additional invest-ment is unCeirtaken prior tjo the ex-pirat-ion of tuhe taxa: holida,7N3 the tax relief provided u;lnder tl-hs investment incentive schene can only begin after t.he tax holid ay period has ended and only -f or the remainrLng portion o' the annual investment alloi7ance. Acceleratued D-orecl;ation 3 .34 The 1970 amend>-1ent t;o the Foreign Investment La w est-ablished the principle of accelerated depreciation of fi-ed assets. The iir,plem- enting decree of t he i7jJnis.tCe!r of Fincmce l/ established a Thur-year depreciacion period for co?mpanies enjoying the benefit of a t*,2: holiday under the Domestic and Foreign invest.ment Laws. Capital e;penditunres on plhysical infzr-structure (roads, bridges, electrical, telecphone and tele.cor(nnunication installations) and machinery, tools, a-nd equipment undertaken by foreign and dormestic com-panies m.,ay increasre their normal depreciation by 25 percent in any selected year of the four-year period. A 10 porcent accelerated depreciation is allowable on permanent goods such as land, buildi;ngs, and e-m,ployees' housing. Companies benefiting from tax holida)y leg,islat-ion mast start their four-vear accelerated denreci- ation period in the year after the expiration of the tax. holida,y. nt orest, Divid eni and PLCoralty_TwTax 3.35 This tax is a withholdinog t;e2: ac 'he rate of 20 nercent. and levied on paymrents of Li;crest, dividencOs, or royalti Les. 'or rliy the 20 percenLl ta3; a,lied onlyv to dividends, bu't tlhe 1970 ,ro.ennts to the Foreign _mv-esue:nb La7w P,btended t.he coverage to interest and royalty payiaents. incorrz receierd, directlyy or indirectly, from the foll-ciin sources are subject to the taxl:: (i) *loazn- to individuals, et-,nt-erprises or governnm:-.en` enm,-.'o''S ioT-nhi-1jd or engged in business, or issuing govern- ment bonds in Indonesia; (ni) securities of companies of all lkindls doJ?i-:- ciled in Indonesia vhose cp.pi'U-l is divided into share-; (i ) partq ic- patuion as a pa:rt,ner or member o,r co-mpanies no. covereo n (i ) aboo,-e bi'tl- subject. to the cor-orat- ion `taxw (ma=inly connani es not do.iciled i-n indoniesia but havryng a branrch or pexrmranen-i establishnont; thre); and (iv) pateOnt's, copyr-i.h)ts, i censes., trademarks, hro;-how, and other such intellectual propertuy ri_ghts and the lease of equicmiient and tools. The tax is due from., the person, co--Da.uy or gcver-nme-t unit makingt he taxable pavien't an-id constitutes a.n advan-ce pa-yment- oft i.ncomne ta- -ather than a se-aratc tax. Th liis -orov, is,on w-as largely aimed at clos, ng, t,he looehole wherc-oby iteres u pa-.L to foreigm. banks went untaxed. 3.36 The e ;,xe!.mtion fromr,,i withhol1 din- tax- for dividends on capital invested urnder the Foreigxn InvestMent Law of 19`7 was modified in 1970. Origin,ally, the e::e:-ption -.,as good for fCive years. As amended in 1970,. the tax: exemption on dividonds ...,as rediucecd to tiwo years and t,hen only if the exempted incom-Oe is not :sub.-oquentul-Y taxedD by the fore-Lgrn i-vestor's home country. Tlhe exemoption does not ppl' y i results in shpfting the tax collection fro- T_ndonesia to the investDor's countr-y of origin. 1/ Decree Nqo. KEP. 630/!¶VII/210/70 dated Oct'obrer 9, 1970. D. Fo reA:n Tr;.-,:e Tax-es (a) Lmnort Duties 3.37 The existing stnrcture of import cuties and import sales taxes in Indonesia has the follow.inc functions: (i) encouraging the production of certa'in mc..nufactured goods by protecting agroainst+ iLmport conpetition; (ii) restricting the imrnorts of goods of a luxury or semi-luruol-y nature .hose consamptioia the Goveri-rentL wishes to discourage; (iii) Droviding revenaues for the Government bucdget; and (iv) altering the distribution of income. 3.38 The Indonesia-n tariff structure, based on the Geneva- nomen- claturek/, includes ni.ne bssic rates oL dut-y applicable to L.xports (o, 5., 10, 20, 30,0, 5 50, 70, and 100 percent), and these rates are surplemented by surchargess or exemptionr irn the. form ol percenta--ge modifi.cations of the basic rate. For example, a basic rate of 100 perceentU i-ith a surcharge of 50 percent would havTe a total import duty of 150 percent. 3.39 ;he average rate of duty under the January 1970 tariff schodule2. is 60.3 perc.ent (on an unwqeighted basis). "A few basic con- sumption items (e.g. rice and w.heatl flour), some raw materials (e.g. coal, asphalt, analine .dies, fertilizer, paper and pulp, newsprint, pig iron and un.7orked metals, generall-), and a few firnished items (e.g. airplanes, dredg.es, surgical instrckments, na.vigating instrumnents ) are f.roe of duty. Raw mmateriols are. gener-Llly dutiable in a ranrr.e from 0 to 70 percent, semi-finiEhed products in a range from 30 to 120 percent, and finished products in a range Lrom 30 to 300 percent.. heFn3se are geineralizatwcons, of course, and tb ere are rumerous extceDtions' 3/ From the vieorsoirnt of the protective effect of the tarifff system, pro tection in Indonesia, as in other countries, telnds to inlcrease from lowvier to higher stages of fabrica- tion, wi-ith the exception of the relatively low, 0T duties on machinery and equipmentU . 1/ Vith the as-istance of the T!MF the Government of Indonesia is adjusting the existing ta;ritf structure to con-forrm to the newer Brussels Tariff Nomenclature, and this should be puu into effect in 1972. 2/ This is the -.ost recent schedule and it is still in force as of this this 1-=iting (June, 1971) R Fichard N. Cooper anid. Lawmence J. 2h-ite, Some Pronolr-1s Rcrsrding Indonesia's Tariff S estnm. Harvard Deve.0ope1 a. Advisory 6 erviCe, I.-LSLtl, 1970, Page 11. (Henceforth Cooper Report). The descrip- tion of the tariff structure in this anrd subsequent sections is indebted to the Cooper Report. 3.40 Capital goods indi3tries appear to be penalized by having to purc.hase protected inputs i.;hile enjo,ying little, or no protection for their oiitput . Hoiwcv'2r, thile exemption from import duties of cer- tain capital goods as 'iTell a-s spare parts and compolents for priority industrial projec.ts, malkes it difficult to ascertain the real extent of protection oni capital goods induastries, or mire geer a-ll,y, to fore- see the long-term ef'fects on the patteni of indastrial development. 3*1l In January, 1970 the total im.ort duties ol some one hundred. and twenty-five items, mainly- finished consumer goods, -vere reduced. The avrerage weighted dut,)y on Indonesianr inmports decliieLed irL 1970 to 15.7 percent fror 17.9 percent in 1969, as can be observed belowf. Customs enforce.ient procecdures w.ere probably better and in any event no worse in 1970 than in 1969. TABLE 3.1 AVERAGE WE7ITGHTED D'JTY ON NDD11EST'-P TlhFORTS 1969 197C5r Imports (c.,i.f) (millions US $) 921.0 1,093.0' Conversion rate (P.p/US $) 325.o 378.0 Thnoorts (c.i f) .(billion Rp) 299.3 413.2 Customs Collections (billion Rp ) 53.7 61.7 Averaged weignted duty 17.°% 15.7% So-urce: 3;import.s froTm Bank Incdonesia ( endis.res on jr.ots) B3ulletin of Statistics, Ajpril 1971. Customs Collections fbr 1969 and 1970 from Customs Departznent, Ninistry of Finance ~/ Preliminary 3.42 The restra.c-t.1ring of the tariff schredull u., how.ever, take into account the effectF on -overn'mJent revenues. At present ta:riffs and sales taxes on in-ports account for' approx-Ji:.atly 30 percent of or- din-ary revenues of -the ofo.e nrert of Indonesia.. Such heavy reliance on revenucs deri-ved from .im.IFports sru.ggests the strict'. limits inposed by revenue needs on loivering of the tariffs and se es taxes in the pursuit of other objectivess such as the reduction o -tx ev,rasion througlh smuggling, in chist l protril mcotion tlhrough taris, exr ..ptions and em-plonent creaton. Altarneative,- sources of revenues are not, available at ?rrt-e,ent to pe):rmiit a sha-_rp average reducti-on of 0 V.Tr T-V S5t T..Nr 'sconom-ic ''sectors 1. XAgriculture, forestry and husbandxy 2. Agrjbusiness (Indastries t-hat proces3 the ouLtputL or suppiPY inputs to agriculture, forestry and husbpndry) 3. Domestic resource-based indastries 4.. Domestic raw-material and interi:.1ediate-goods production 5. Basic i ndustries 6. Infrastraoture (transports irrigation, power) 7. Fully inte r7ated tet-ile industries 8. Industries producing -the nine essential products. 3.47 Howe-ver, the Ministr-y of Tndustry has not taken an active role in the identification, preliminary evaluation, an± prcinotion of specific in-vcstrnr'nt opor-tLLnities withl,in thlese broad priority areal, and each domeStic and fcreizn innvestor mTUSt discover for hinself what concreto projects are of iri:Lerest to the Govmernr-lint and are able to recei-ve zvec ,qsca1 and other incentives. Oxf the contrary, the Ministr of Industry hias established a list of 37 1'ner-ative prioritie.s" for light iindutry or light induwtries closed to foreign) investmcent in resnonse to pres-sure from loca.l manufac;turers of the products. (See Table 3.3). This list is employe. d to provide geineral policy Cuidance in5si de the Mi-ni stry (Directorate of Light Industry and Hmndicraf ts) but is very misleading since produact differentiation mrn--'es it' iT.possible for an investor to know fromH looking at the list ;,hether all or only somrne of the vtrietes of the prorluct (e.g., paints or batteries) are pro'h-ibited. / Populnar consu-muption items: rice., salted fish, frying oil, surgar, salt, kerosene, washsoap, cheap textiles anid batik. Tablee 3 3 LIST OF LIGHT INTh$UTRIMS CLOSED TO FOREIGN C id) I' iT.'.L IN. V2S '1,,i .i '-~ No. Field o.f Thfdustry Remarks l. ilW end other dai-ry products Quota fullfilled 2.Batteries 3a Vetsin rbrnosodium glu].tarate h;. Cigarettes " n Ttche s 6. Paint 7. FIastic and leather Shoes, slippers, etc. 8. Patjol (hoe,, speds) -. Nail/wooden scre-s is .10. Laundry sQaps Eccept Non soap deter- gents. '11. Coconut oil Except other vegetable oils/edible oils but not from copra/coconut. 12. Flour milling Quota fulfilled 13 IbTooth paste l;. Biscuit & confectionary I 15. Bicycle tire & Tubes 16. Boot polish S,17. Plastic products (including formica sheets but e.xcluding decorative plywvood) T 18. Printing . . Ecept Lithographic Printing ,19. BJicycle Asseembling Plant - Ecept B.Lcycle Parts manufac'turing. 20. Printing Ink Quota aulilled 21. Enamel i.orks t 22. AluMinum household ware n -23. Candies. Ti 2h4 Soft drinks/beverages " 25. Concrete tiles/porcelain tiles 26. Bricks & tiles Except Refractory Bricks 27.- SewIing machines ass-mblinrgL- Except Sewaing machine plant pars manuf acturing. 28. ice Cubes Except as a supplementary part of a nonimported. 29. Can mak Ing Food stu.i'f canning plant 30. 1a'tch assembling Quota fulfilled 31. Tooth brash i 32. lbsquiito coil incense 33. Corrugated 'card board t 34. Instant' noodle/spaghetti et.. . 35. Zip fasteniers 36. TannerY " 37. Hair Wligs B Source: l1inistry of Industr3, Directorate General of Light Industry and Handicraft, May, 1971 -72- F. Admiin'_istration and Procedures 3.118 'Me Goverinmenat of Indonesia has established various administrative units, regul ations, and procedaures in connection with the indusltrial investment incentive -system embodied in the Foreign and Domiestic Invest.Ment Law3s. Quite apart from the tariff ard tax incentives offered to foreign and domestic investors, the nature, extent, anrd efficiency of the proced-ures an-Ad ad;minis.tration of the incentive system can be iiroort-nt incentives or disincentives to investment in themselves. Admin.istrativ,e conhtrols and licensing can create waste, frictions, and inflict costs on the econony. 3.49 The, --rospective domestic or foreign investor seeking the benefLits provrided unnder the respective investment promot ti-on laaws -nust negotiate an investument agreenent with the Governrient oL Indonesia to obtain permission to establish a ne-w plant or expand an existing enter- prise. The pri-ncipal Govern2rcnt bodies involved in the negotiations and discussions are the Canital Thvest.ent. Board and the Iriinistry of Industr- . The Capital Ty±nvestment Board is divided into -two sections (1) the Donestic Investrment, Board and (2) the Foreign Investment Board. The Capital Investment Board is a high-level, interdepartmental com- mit,tee (including representratives of the !'inistry of Finance, the 14inirtxy of Industry, Bappenas , e tc. ) tha.t insures that investrment pro- posals are in conformit,y wi-th the investnent laws, government policies, *Land foreign exch!n-e availabilities . Preoident Slharto must approve. investmenet potectsL alt,houh in practice, the President has vetoed very- fewo proposals. 3.50 eign investors normrilly approacch the Foreign Investment Board and domestic investorC approach the Domestic Investment Board for advice and gaidance ona he- r rnrestment proposals. N\either of these corrnnittees has any executive arthority, although they may inter- cede to advance a particular investment proposal when negotiations bog doi-n in the Mlinistries Af ter dreliinary cisc ions with the appropri8ite advisory conimittee. the prospective forei gn irnvestor rust approach the Elinistry of TLdustry (Dopar-temen Perindustrian). Indo- nesisn companles formed uiider the DomeFtic Investment Lai do not negotiate tax and other concessions wTitlh the Nini,try of Industry, but thev do so wTith the Domestic inves't_ment Board. The '11inistry of InduF:try% is divided into six depart-ments o- "Directorate Generals": (1) Basic Industry, (2) Lightl Induastries (3) Chemical Industries (14) Te xtile industries (5) iKaritime Industries and (6) Aviation. The investor discus.ses the inves-tment proposl writh the! Di-ectorate General responsible for the industry in which his investment will operate. 3.51 When agreerent in principle has been reached, for exanple, betv,een thc prospective foreigi investor and the Direct;orate General concerned oNrer the advisabili-ty of submitting an investoment applica- tion, the foreigi investor imast complete a letter of intent., knonm as Form A, wihich describes the innvestor, the nature of the business, the -73- location, partners, annual production capacity, nrnpower provisions. and the benefits requestcd under the investment, lawvs (such as exempt*ion from corporate taxes ai'd cdutty-free imports). The comi.pleted Forn A is forwarded to the Minister of Indw-try with a copy tio t,he appropriate D;ir-ctor General i,ho is responsible for the industry and the Foreign In-vestmnlent Board. If no modifica-LtUion of Form A is required, the, M'inistry of Industry w-rill give its pre1irainary apr.roval. The foreign ir vestor has three months from the date of the prel:uiminary anproval in which to complete and submit a project proposal (known as Form B) to est-ablish and operate a company under tuhe Foreign Investment LaiJ. The Foreign Investment Application .Fonn B provides a detailed descrintion of tihe project proposal including partn:,ners and participants; product,-ion planis, processes, csapacity; sales potential, export,s, foreign exchange savi-ngs; capital struct.ure; projected income; manpoiwer requirements, and foreign/ domestic corMposition0 3 52 The foreign investor must negotiate separately with rtunerous Government miinistries and departments for tax holi-days (Minist-ry of Finance), duty-free imports (G-astoms Department), permission to employ non-Indonesian manpower (Department of Imaigration), and investment credit (Bank. Indonesia). In a.dditicn, after approval of Form B by the President of the Revub1ic the investor must nevctiaue the acquisit;ion of land use and c-onstruction rights in order to erect and operate a factory. The inrvestor -must select t}, land he reouires and i-nsure that the Indonesian authoritieo aqree -to its use as ind±ustrial propertyr. The land is purchasod fro.om the Indonesian owner with the assistance of the Directo rta o f 1g rasari,7n fr'fairs. Since foreigners cannot own land in Indcne-ia, the land of: ciially becomues the property of the Indonesian Government, and foreign investors must negotiate f£or the righit to use it. 3.53 These negotiations, as w.allas others Xhat the prospective inver-tor must undertake, are compolicated, time-consuing, anzd involve substm-Jnntipl economaic costs. Table 3.h presents schematically some of tUhe. princ nal intQtitutions w2i-,b .hich the domest-ic and foreign investor must negotiat-e, normally more than once, to obtain license and pernrits, or to reconfirm them once they a granited. It often takes a foreign investor twzo ryears from the tiume he initiates diCcussions writh the Foreign investment Board to the start up of production. It t-kes some six imonths to one year from. initil exploration of the possibility of applying for forei gn inves'trent approval to the fi nal approval of the investment applicatOion (Form B). AnotLher year is recuired on the average from. 1-.ormr B approval to the start-up of production, although this w.i1 obviou..ly vvary depending upon the npture and magnitude oL the inve stment. The econom-ic copts, the present administration of the industsrieal ilvest- meln incentive syster., and the need for institutional and procedural reforms are discuissed below. G. Labor Laws 3.54 The existing labo- legi.slation is designed to protect the living standards of ernploye-d wTori1kers and guarantee security of em loy- inent by providing generous fringe beneCfit5s and mading it virtually irrno.sible to dis.ziS a worke flor m.isco.Id-ct or other cause. Ater employmcnt by a firm for 90 dcays, manageme-nt is not able to di5miss -7 )4- J. 1 DOjETIGC A 1D FOR-FIGN I,N5V7T1t-f2.iNT AM+i? VAL PF-OVEDULURI> .... Preisident anistry of Finance Capital Inxestnsnt Tax Office Customs Committee Department Domestic Foreign Investment Investment rinistry of Industry Board Bo a rrd Directorate General Basic Industry Department of C, r tiona. __on Directorate General Ligcht Industries Director,ate of Agrarian kaf airs . ._ _ Directorate General Chemical Industries Do CO I& .j. Directorate General Textile I; dustries Bank ' Ir.donesia |Directorate General Maritime Industries Directorate General Aviation a worker even for serious, nmisconduct or the absence of profitable emnploymnent. If a wornker is finally dismiSsed due to a legitimate contracction in business activity, heavy severance pay mlust be granted to the worker by tuhe fimn. 3.535 Large and medtun-sized firms are able to evade the law by hiring workers on a "tempioraryl' basis for three months, discharging them. and then rehiringr themn; hoever, small-si-ed plants are 6ft2n able to evade the lawJ coraTepletely since officin' enforcement is nore difficult. In addition, firnis face a complex of other labor laws and reg-lations that provide for pa.e:-nt in kind, bonus payments, and generous.holiday and sick leave .hich, together uh th restrictions on managemnentl' right to disniss for reasonable cause, have the effect of ihlibitiing employment creation and en6ouraging labor-saving methods of prodiction. Thnus, the Government's proper concern to protect the conditions and stability of employrmient has the undesirable side effect of discouraging em.ployment-creation in spite of official preoccupation about grow-ing urban unemployment. Per-fonmance ofr P-resellt Incentive System 3.56 The section above described in some detail the investment la-,S, policies, t-axes and tarifL's, organizations and procedures that coinLsti- twut.e the main elements of the ex-isting systemn of incentives affectwirng the manuracaturing industry. This section examines t1he perfo:rance, allocation effects, administrative costs and otler special problems of the present incentive system in an attermpt to clarvIfy the natDure, scope. and directuion of its irTmact on domestic a-nd foreign investment in Indonesian manlafac't'ir- ing in recent years. hA. F orei[.,n .. rivate in-ves tment. (a) Cc:mosition and Recional ri!:tribution oL A8crovals 3.57 From 1967 to March, 1971 some 357 foreign investienit projects in all economic sectors except petroleum and b.rnking, involving an esti.nated investment expenuiture on a 'ly 5 $,. billion ($177.h thousand), were approved by thle G-ovrerlnm.:nt of Indonesia.. As caun be observed in Ta2ble 3.5 below, there has been a gener-.al slo.jdaown in the r-anLfer of foreigi invest- menit aonrov-als in-?1971 as compared to 1970, although the average size of investm.nt during the first cuarter of 1971 is considerably larger than the previous. year, with no foreign investment application -oroved for the naining, forestry, Qr agricultural sectors. -76- Table 3.5 Foreign Investment Akoro%ral.s. 1967-1larch 1971 (millions ofl US dol lars 1io . of PI anned 1 Year Projpcts Investment 1967 22 170.4 *1968 66 224.0 1969 84 704h5 1970 163 2ho0.6 'Jan-Mar 1971 22- 137.9 Total 357 $1,147.4 Source: Foreign Investment Board, April, 1971 3.58 1'early 90 percent of total planned foreign investment is accounted for by mining ($534.5 mnaillion or 36 percent), forestry ($36),9 million or 26 percent), and nanuafacturing ($368.5 million or ,?2parcent). There are Lewer riining and forestry projects, the pro- ject scale being on an average much larger than manu-acturing projects, as ca-n be observed in Table 3.6. In the manufact.uring sector alone, 193 foreign investment projects have.been approved during the period from 1967 through March 31, 1971, with planned investrment amountuing to $1403.5 million. There has been a steady increase in the rwber and amolunt of foreign investnentu projects approved each year since 1967, writh a peak year for approva.ls reached in 1970, when-_7 projects w.ere approved wii planned inveLstament o-f $127.3 million. WThile there has been a decline in the riwiber of foreign investment project approvals in manufacturing- during the first quatter of 1971, the estimated, value of project approvals 'for the year will undoubtedly ex6eed that of 1970. i/ All economic sectors except petroleum and banking -77 - Table 3.6 Foreign Investmrre it Projects Apmroved Planned Divestmtent BY Sector 1967 - Merch, 1971 _1967 - ya.rch, 1971 Noe of Planned Percent Sector Pro iec Investmcent A,giculture and Estates a/ 4i 62.7 4.2 Forestry 4 49 38)4.9 26.1 Fishing*C. 9 13.4 .9 Mdning 9 534.5 36.2 Manuf acturing X ho3.5 27.3 Ho tels/Tourism 6 42.8 2.9 Transport/Coa-n. i ication 9 9.4 .6 Others b/ 39 26,2 1.8 Total 3 7 | 1 477.4 100.0 a/ Includes livestock S/1" Includes infrastructire and sezi.ces -78- Table 367 Forel,gn Inve stmngent ADioovals Ain ianufactaurin- Indust,2- i27 -Mach ,71 (millions of US dollars) No. of . Planned Year. Projects Inves Umet 1967 11 29.8 1968 37 '5. 1969 40 76.2 1970 87 127.3 Jan-I\iar 1971 18 124;. 8 193 $403.5 source: Foreign Investment Board, April, 1971. 3.59 Table 3.8. shows that three-fourths of the f3reign investment project approvals for all sectors are scattered in four islands: Java (30 percent), VWest Irian (14 percent).,iKalimantan (23 percent), and Sumatra (9 percent). The Djakarta area accounts for 18 percent, of totual foreign investment projects, which are predominately man-afactur- ing projects, the mi ning and forestry, investmrLents being located mainly in VJrest Irian, Sulavesi, Kalimanntan, and cumatra. 3.60 Table 3.9 indicates the. distribution of foreign investment project approvals within the mara2facturing sector for the 1967-1970 period. I4ost foreign investment has gone into food processing, cheamicals and rubber, metal produccts and textiles. A number of.these projects are fully operational, and they tend to be medium and large-scale plants, employing 50 and more local laborers and ope-rating near rated capacity. -79- Table 3.8 Foreigm Investmelt Pz:jects hppmved 1967 - Miarch. 1971, By Rgion ( in millions of U.S. $ ) 1967 - 1970 Jan - Moarch 1971 1967 - March 1971 [No. o'o Planned NO o I Planned No of Planned Percent Region/Sector Pro-iects | Investment Projects Investment Projects Invest: ientv _ _ Dj akarta and Suburbs 156 209.2 1o 56.6 166 265.8 13.0 Java, excl. Djalcarta 67 116.6 8 62.6 75 179.2 12.1 SLumatra 60 114.8 3 17.7 63 132.5 9.0 Kalimantan 29 314.0. 1 1.0 30 3142.0 23.1 (Borrneo) Sul awesi (Celebes) 8 87.9 8 87.9 6.o West Iri an. 5 204.4 5 204.14 13.8 Other Tslands| 10 265.6 __*___ 10 265i56 18.0 Total 335 1,339.5 22 137.9 357 1,,477.4 100.0 .S Source: F'orei¢gn :Invstme.nt Board, April, 1971 Table 3.9 ForeiRn Investment Prolect ApDrovals. in 1Nanufacturing 1967 - 1970 (millions of US dollars) Sector .O, of Projects Planied Inivestment Food processing 29 147.3 Textiles and leaQher 19 .58.6 Paper and paper prodilcts 6 14.2 Chemicals and rnubber 62 66.6 Basic metals 4 L4S5 Metal products 52 65.2 Other 3 175 278.7 Source: Foreign Investment Board and Bank Indonesia, March, 1971. An adjuFtment, was made in the "Other" category to confonr' wiith latest total figures available from the Foreign In- vestment Board. 3.61 The food processing projects (including beverages and tobacco) are small and medium sale, moderately capital-intensive and utilize imported raw materials; they are located main2y in the Djakarta area; and the outpuat is destined for the domestic mar'ket, -w.-ith a few pro- jects that can be considered export-oriented. Most textile projects are spinning and weaving plants based on imported Syntuhatic fibers and filamnents, although at a later stage there are plans to manufact.re synthetic fibers locally to supply this industry. The chemical projects cover a range of industrial chanicals and chemical prodicts, includ:ing pha.inaceutical:s, plastics, and fertilizers; rubber products include crumb. rubber and tires for lighlt and heavy vehlicles. They tend to be mediunm-scaLe inustries by i-nternaticnal standards and employ relatively simple capfital equipment and semi-skilled labor. Foreign investnent in metal products include such items as sewinc machines motor scooters, trucks, light bulbs and electrical transforTmers, mainly destined for the domestic mnarket, although a fewJ specialized items such as air conditioners, refrigerators and electronic co,ponents are exported.i/ 2;/ See .TBRD .teport No. EAP-22 (InU- nesia: Investmen`d and Growth Perspectives in the i970's) N.arch 25, 1971, for .,uller details. 3.62 The US is thie most important source o'L foreign investmeant (measured ½n terms of value of planned investment) with $522.6 million as of ]varch 31, 1971, followed by Japan vith $213A4 million and Hong- kong weith $78 million. During the first quarter of 12g71 both Japan and -onvkong- w.ere grant.ed more investment licenses w-ith a higher value of plannned inVestnent tlhan the US, There appears to be some slacken- inlg in the overall ratre oLf US investmient in Indo'nesia. (See Tables 3.10 and 3.23). According to thle Foreirgn TInvestment Board, te slow-dowvn in >reigr invrest:ent applications has been noticeable since SeOptember, 1970. It is variously attributed to the slow imrDlementation of the tax holiclay incentive as government policy heas become more selective; uncertainty induced by the july, 1971 elections and their porsible i pact on Govern-Lment policies; and the difficult-y invrestors encounter in importing machinery, spare parts, and raw materials, although this lest factor is not a new one. (b) Disbursements 3.63 Date available from Govlernment sources on the number of foreig. investment projects in the plananing, const-,racticn, and, pro- duction pheases, as -,ell as their actUal investment expenditures, are incomplete and not current. How;Tever, according to the best a-r.ilable data on r-ecorded disbursem,ents (derived from the Customs Department) on projects approved from 1967 through Decer.ber 31, 1970, investnt expenditures have ben made by nearly 60 percent (197 out of 341) of the projects appro-;ed for all economic sectors. Disbursements are lagginig conziderAably since o1nly 13 percent of plann-ed inivestm.nt ex-penditures have actually been completed by tuhe end of 1970. 3.64 With respect to the manufacturing sector, disbursement per- fo rnance is considerably better, probably reflr.cting smUller avo:1age project size and more quick-yielding projects, since aboutJ 25 percent (or $75 mlionl) of pl.:annd investment expenlditures ($278.6 million) have been real½e during the same per§.od.l/ Thle distribution of *disburscirent by major industry sector can be observed in, Table 3.11. 1/ There is considerable discrepancy bix-tween the high distfursement rates by economic sector derived from the recent Uiniversity of Indonesia study of foreign inrestment performance based on a sample of approximately tw.o-thirds of the total foreign invest- mentL project approvals, and disbursement rates based on recorded Customs data as described above. According to the University of Indonesia stuudy, the disbursement rate for a sample of mnanufac- turinia sector projects iias 58 percent (i.e. 58 percent of planned investment was realized by )rcemLber 31, 1970). The discrepancy may be due to the fact that the 203 Lirm sample Jwas not represen- tative of the universe of foreign investment projecti approvals to Decem-iber 31, 1970, or to incoa;rplete and unr.-_1.:ble Customs data. Table 3.10 Foreign Invlestment Pmrjectq Amproved Princihai Countris. 1967 - Mlarch, 1071 ( millions of U. $ )$ Country of No. of Planned Of gin Pr jects Investment U, S. 56 522.6 Japan 60 213.4. Hongkong 46 78.0 Canada 3 77.7 Philippines 13 61.5 Singapore 27 52.5 Netherlands 20 34.3 MIalaysia 18. 29.6 United Kingdomn 27 26.2 Other 87 382.0 Total 357 $1,A77.8 Source: Foreign Invest-ment Board.. Data refer to investment in nall economic sectors except banking and petrole-Lm. Tble - 3.11 F .i.nnf .t- I-o2oct Dsbur'sements in !V'nr'.acturinP, 1967- i970 (millionas of US dollars) Di bsbursemen ts Sector No. of Projects mount Food processing 29 22.3 Texti,iles and leather 19 12.2 Paper and Paper products 6 1.4 Chemicals and rubber 62 14.6 Basic metals 4 .1 Mletal prodlucts 52 24.14 Other 3- TOTAL 175 75.0 Source: Foreign Investment Board and Banrsk indoneisa. Disbursements for ood processing and mnetal products arei especially high, in the 30-35 percent range.. The other sectors tend td be lower than average in disbursement performance cornmared to the sector as,a whole. By the :.,nd of December, 1970, about h:ilf of tLe foreign invest'nent pro- ject approvals in manaLfacturing has recorded some investL-ent expenditures. At the end of March, 1971, disbdrsements on planned foreign. investment in mranufacturing of T$403.5 million should be approximately $100-110 mil- lion. 3.65 There appears to be no single central body in the Govermqent, including the Investment Irplementation Unit of the Foreign Invest~:ent Boaird, that collect-, records, and disseminates infoonration on disburse- men'ts for foreign invrestment projects. Partial data are available from *he Bank Indonesia, the CuFtoms Departrent, and the 1;inistry of Industry. Progress reports are submitted irregularly. to the ;ilinistry of' Industry and to the o'reign Investnment Board by finns, but there is no comprehensive information on the overall rate of' progress of fo.reign firms in startincg up production, investmient e.-menditures, or utilization of capacity. No regular procedure eixi;sts by w,,hich the Goverrmient bodi-es concerned -w'ith foreign investmzwnt (Foreign investrnallt Board, Ministry of Finance, Ihinis- try of Tndu3try, Bank Indonesia) are able to keep themselves informed and up to date on the progrcss inade by foreign investors, after approval of Fonm B, in setting up. a new. plant or in carryjing out -n expansion program. in established enterprises. The Customs Department has informia- tion on in-ported items on the inve,tor's master -ii-port list that have cleared cus;toms. The Bank Indonesia also has data on investmett credit disbursements on foreign and domestic investnent programs. In addition, the MIinistry bf Industry requires periodic proLress reports on invest- ments which are filed -,ith the relevant Directorate Generals writhin the Mlinistry. These sources provide partial and inconplete information on the progress and statuis of capital projects, but it is not collectued or distributed on a regular basis within the Government. 3.66 Infrequent surveys sponsored by the Foreign Investmient Board and undert.aker by the University of Indonesia's Management Institute provide the only comprehensive review of the performance and problems of foreign firms: the stage of p1aysical construction, capacity utiliza- tion, arri%ral of inported machinery and problems encountered in obtaining concessions and licenses. This kind of ad hoc information is useful but it does not keep the Governlment of Indonesia adequately informed of the status of investments which have important effects on domestic supply, employment and foreign exchange availability. 3.67 It would .be desirabl e for the Capital Investment Beard to establish a regular questionnaire survey of all foreign and domestic investors enjoying b^nef it under the Foreign and Domestic Investment Laws. A simple questionnaire could be sent quarterly to all foreign and domestic investors to be completed and returned by the enterprises within a two--week period. Some effective penalty for noncompliance with the request for idformation would probably have to. be introduced to in- sure regular, comprehensive coverage. The Capital Investm;-ent Board could then prepare a: quarterly report, based on the results of the ques- tiornaire, on the status of t,hese investament projects for the distribu- tion to the Przvident, Cabinet officers, Bappenas, and releva-nt ministries and departments. The report would provide valuable informat.ion for industrial planning anid project implementation as well as for Bappenas' annual economic projections. B. Domestic Private Investment (a) Composition and Begional Distribution of Apwrovals 3.68 From November, 1968 to December,. 1970, a t,otal of-LULdomestic investmient applications were processed under t,he Tomestic Envestnent Law (No. 6, November, 1968) and 488 were approved for all economic sectors. Planned investment for the 488 approved projects amounted to 2.53.2 bil- lion Rupiah or about $410 million, with a foreign exchange comonent o,f 113.2 billion Rupiah or 74 percent. of total planned investnent cost / Accordi-ng to the Domestic Investm,ent Board, in January, 1971, 32 additional domestic investment applicat,ions were approved with planned 3-nvestment t.otalling 18.4k bil-lion Rupiah. Therefore, at the end of January, 1971, there were 520 approved domestic invest- ment projects with planned investment of 171.7 billion Rupiah or about $)L60 million. About 85 percent of planned iwnoetnment of 153.2 billior Rupiah is con- centrated in the man2uacturing (63 percent), agriculture estates (15 percent) and forestry (8 percent) sectors. 3.69 The regional distribut ion of domestic investnent projects approved for all economic sectorsc can be observed in Table 3.12. Djakarta and the rest of Java account for 107.2 billion Pupiah or.ZQ_ perceni't of total planned invoeatb-ent., while the other larger islands with a richer nactur'al. resource base, such as Sumatra, Kalimantan (Borneo) and Sulawesi (Celebes) account for only 28 percent. Mlost of the planned dormestic investment in agiculture estates is located in Sumatra; foretry in Kalirmantan; manufacturing, transport and tourist investment overwvhelmingly in.Java. 3.70 lWith respect to manuf cturing, during the November, 1968 - December, 19070 period a total of _.0.domestic investment projects were approved wTith planned investment amounting to 86.5 billion Rupiah or about $230 million. Domest,ic investmient has been attracted mainly into the food and beverages, textiles, and chemicals and plastics sectors. These are mainly smaall-sca2e, qui.ck-yielding investments, of 'the p ack- aging, finishing and asserrbly type; they have a high inport content and mainly supply the domestic -market. A few, large-scale projects, such as synthetic textile mills and electronic assembly plantus, pro6wce mainly for export. Oven,-helinznglyr, domestic investiqent has been of the import substitute rather than export-oriented type. 3.71 As in the case of foreign investment, domestic investment projects in tihe manufacturLMg sector are heavily concentrated in Djakarta and Jls!Sehere in Ja-va. About 90 percert of planned domestic investment in manufactluring is located in Djakarta (L47 percent) and the rest of Java (Ls3 percent); Su.natra accounts for most the remainder. See Table 3.13 for further details. The imbalance in the distribution of manufac- S turing investment in recent years is by no means new and merely continues a longer-term trend towards industrial and demographic concentration in Java. The atitraction of the Djakarta area as an industrial site is the result of powerful hist,orical and economic factors which fiscal incen- tives alone obviously are incapable of overruling. The Dljakarta area is the hub of government policy and decision makilng-, banking and corerce; it contains the largest) most sophisticat,ed urban marxket in Indonesia; the greatest concentration of entrepreneurs, managers and skilled labor generalay; comparatively good transport yiuf rastnxcture and access to internatio,nal marl1fets. While public utilities a-nd servilces (electric power, water, sewerage and teleco.r.-uni--catio.os) are inadequate, they are superior to what is foundelse-.l-2re in the country. It is not surprising thact Djk-arta exerts a strong pull on foreign and domnestic investors. 3.72 On the other hand, the thinness of industrial concen,trauion in the other najor islands is the result) among other things) of the scarcity of local and foreign capital (foreign capital often is held by Indonesian nationzals of Chinese origin) wTich has been attracted to the Djakarta area. Investcrs of Chinese origin Lace considerable risk of political Table 3.12 Pritvate Domestic Investment Projects Approved November, 1968 - December 1970 ( Anxrnts in Rps. million) Agriculture 1l4nufac- T.axsport Region/Sector Estates 1/ Forestrr Fisherv tuxring Mining &,Tourism Others 2 Total 'Djakarta & Suburbs 110 (2) - 369 (1), 36,957 (11h6) - 18j553 (35) 208 (3) 56,197 (187) ;Java, elel. Djakarta' 2,147 (18) - 352 (1) 44;274 (132) 1,093 (1) 1,930 (12) i,170 (1) 50,966 (165) Sumatra 16,210 (43) 2,o14 (7) | 5h8 (2) 2,556 (2) - |1,591 (3) - 22,9h96 (80) Kalimant.an (Borneo) 3,078 (12) 13,977 (29) 29 (1) 166 (2) - 56 (1) - 17,306 (14) 0 Sulzaqesi (Celebes) - - 50 (1) 2,398 (2) 302 (1) - - 2,750 (14) Other Islands 3/_| - |1,712 (5) 126 (1) - 1,226 (1) - 3,084 (7) mta 21,545 (75) 17,730 (41) 1,348 (6) 86,477 (308) 1,395 (2) 23,376 (52) 1,378 (4) 1i3,2h9 (488) In/cludes livestock. Real Estate & Infrastructure 2/ Bali, Nusatenggara, Maluku, West Iri'an. Figures in brackets indicate number of projects. |Source: Domestic Investment Board -87- Table 3.23 Domestic Investment Project Approvals in Manufacturing By Location and Major Products, 1968 - 1970 d td o t - t Percentage U C To t a Composition Food & Beverages 32 14 7 . 1 1 - 55 17.9 Tobacco - .6 1 - - - 7 2.2 Tex tile 19 73 - - - - 92 29.9 Chericals and Plastics 37 16 8 - 1 1 63 20.5 Printing 5 2 - - - la §§8 1ital Products 21 5 3 29 9.4 Electronic Assembly 9 2 - - - - 11 3.5 Other 17 11 4 1 - - 33 10.7 Ttail 146 132 25 2 2 1 308 100.0 Percentage of Total 47.4 42.9 8.o o.6 o.6 0.3 100.0 Source: Domestic Investment Board repression and discrimination in the outlying islands. In addition,. costs to investors stening from bureaucratic delays, distribution and transport costs are generally higher a-nd real incomes lower. (b) Disbursements 3.73 The reporting on the imnp2-emenltatiorn and disbursements of approved domrestic investnent projects is incomplete and not uD to date. However, partial data available indicates that about 35 per- cent (170 out of 488 projects) of apcroved projects hor all econiomic sectors are in opsration (11), under cconstraction (51), oP e.ngaged in pre-investment activity (8). it is no$ possible to say anything about disbursements on approved domestic investment in the ma.nufac- turinrg sector for lack of data. Jlthough most of the approved domestic projects reported tJo be in production are estiablished enterprises, completely new enterprises are becoming progressively more numerous as time passes. (c) Sumaary 3.74 In s.mmary, the incentive system has contributed to the rapid grow..th of foreign and domestic investment in maiufacturing wqhich has been observed in recent years in Indonesia, especially since 1969. At the end of December, 1970, a total of 483 foreign and domestic invest- ment applications had been approved for the manufacturing sector, -ith planned investment of $508.7 -million. The key question is how nuch of this investment canq be attributed to tax, tariff ai-d other specific incenitivs offered inrvestors sinlce 1967 - 1968 compared to other factors such as the f avorable political and econoic c lmate established by tuhe Government in recent years. There is evidence that the elimination of political inrtabilitr, the anti-business bias} inflation, mulltip-le exclhange rates, import licensin, the threat of nationalization, and labor unrest were t1ae major factors in making Indonesia attractive to foreign and domestic investment ./ 3.75 Until these major political and economic obstacles to investment were removed, it is higihily doubtfuul that the specific incentives described earlier would have stimulated investment by thenselv6s. In some coun- tries investors have reported that the favorable political and economic climate was sufficient incentive to induce them to establish operations 2;/ Thes-e were the factors most cited by foreign investors causing them to rule out Indonesia. from their investm-nt considerations during the SukaLcrno regime. See Obstacles and Incentives to Foreig Private Inve>stm t.ll 1962 - 1968, lNational industUrial Conferonco Bloard, iUewiz York, 1965 -89- ir.thout snec_ial t,.x and tariff treatmrent." In the absence of'systCmatic iiilorniation on investment motiiTation in Indonesia, there is no w-ay of knowing wi%ith any degree of confidence whether or not the incentive system has made much difference. H1ow.ever, there is fragiontary evidence to support the contention that at le-ast some of the investment since 1967 - 1968, particularly foreign investment in the initial yaars, t7ould not have been made without special incen dves in spite of the sharp improvement in the general investnent climate.- 3.76 Actual investment expenditures by local and foreign Lirms as opposed to planned investmeint of $508.7 rmiillion is estim7ated at $100 - $125 nillion at the end of 1970, and by June, 1971, actual investment is est-hinat2eJ at $175 - $;200 million. These are crder of magnitude estimates since precise, reliable 2igures on disbursements by foreign and domestic investors are not available. The economic imrpact of this volurme of realized investment over esrsentially the past three years on Indonesia's small mrianu- *Lacturing sector has not0 beeni insubstantial. The incentive system has -helped to encouragtl foreign and domestic investmnent amounting annually to roughly 7 - 8 percent of value-added in manufacturinrg,3/ a not considerable achievement wThen compared to the poor investment performance in manufac- turing during most of the 1960's. 3.77 There has been a slow. iown in foreign investment project applica- tions since September, 1970, w.;hich has continued into 1971. It is variously attributea to. a more stringent government policy in granting incentives delays in freeing goods from Customs, and political Lucertainties in the pLe-July, 1971 electio.n period. Data on domestic investumnit for 1971 is uoo incomplete to permit any Lirm conclusions. to be dra.n, but it does not appear that there has been 2C. similarzlow down in domestic investznent, apolicLticno. The US is the main source o.f foreign vest--nent (planned investmrent of $522.6 million at the end of M;arch, 1971), followed by Japn and Hongkong. Foreign and domestic industrial .investnent is heavily con- centrated in Djakarta and the rest of Java as a result of the .~-rong pol- itical, cconom- c., financial, and iri.frastructure attractions and the higher costs oL production and scarcity of entrepreneurs and skilled labor in the---J other isl!-nds. 3.78 The fiscal inducements oLffered by tuhe government to cocat-e out- side of Java (essentially an additional year of exemption f-rom corporat-e. taxes) are far too weak to offset the considerable additional transport, comnz:u.ications, infrastructure and other costs incurred by the investor. Tne gover;rm.ent has fiot yet formulated a comp-rehensive indusurial location policy that includes public investment and other incentives (fiscal, -finan- cial, infrastruct-are) needed to encourage industrial location outside Java. 1/ Ibid D/ Discussions with forei[,n investors in Djakarta, April/MIay, 1971 3/ Value-added in manufactarinig is estimTnated at about $800 million per year in recent years. C. InDlementation Problems 3.79 As noted above, the inicentive system has helped to encourage a considerable volune of domestic and foreign investment., especially in 1969 and 1970; while complete and up-to-date infon-aation is not available, the existino clata indicated that total foreign and domestic inVestmnent approva.s for all economic sectors since 1967 is close to $2 billion. Investment approvals (foreicn and domestic) in the manufactiring sector from 1967 to mnid-1971 ?rnouits to about $600 m.-illion and actual investment exPenditLres in the vicinlity of $75 - $200 million, These are order of magnitude estimates and are subject to correction as better information becomes available. Pevertheless, the Ligares indicate that t,he Govern- ment has been t-o a large extent successfLul in stimulating foreign and domestic investment in Indonesian industry. 3.80 Despite the over.ll success of the system, there are various implementation problems which arise after investment project approval, sone of then of a long-standing nature, that must, be ovirconie if indus- trial invest:nent is to be further accelerated in the 1970's. These implementLation probleems are of an admin. strative, institutional and legal nature and are not easily solved. In part t'hey are the result of, the considerable inflow of new investmeTent which the administrative machin:ery is not equipped to. handce efficiently. (a) Domestuic Private'Investament 3.81 As pointed out in IBRD Report on the Indonesian Economy (lNo. EAP 19a) orf November 27, 1970, domestic approvals could be accelera- t.ed by reducing tuhe duplication of iTork involved in the application pro- cedare. . "The procedure is a three-stage process whereby the applicant gets approval from a ?egioal a eam, the Domestic Investment Board, and finally the M4inistry of Finance. At each stage the same questions must be answuered and the identical issues resolved." In order to reduce delays in the donestic investment approval process, the Gover-r1nment should centralize decision-making authorityvin the Domestic Investment Board and Begioil.1 Teans by requiring that representatives of the Government ministries and departments and the 'local government agencies be members of or irniediat,ely available to the romest.ic Invest:ent Board and have the rowqer to act. for their ministries and departrients in the grntniiig of operating, building, and land-title licenses; duty.-free import permits; and tax and other incentives. (b) Foreign Private Investment 3.82 The adminianstrative and procedural problems f'aced by foreign investors in obtaining investment approval, locating land and purchasing it, erecting a factory and starting up operations are so considerable that they clearly discourage inreestment. Mbany of these problems have been described in earlier economic reports; howiever, it may be useful to -91- suiTmarize briefly some of thn major problerm ca-Lsing delays, frictions and costs to be incurred by foreign inve3tors. These includ2: confusion and lack of coordination bet.een local arid central Government. policies and regu- lation.s; inadequate econoomic infrastructure facilit,ies (transport, teleco.- munications, ports); eXcOSIive and arbitrary customr inspections; uncertain application of tax and custo-mv dutby exemptions for wThich aporoval lhas been received: lack of coordiiaition betwTeen central goverrnment departnents; ex- cossively complicated proceaures for impb_rt clearance and tca^J documentation and extreme difficulties in obtaining land-titles and purchasing land for factory.development. Doi,estic investors are, oL course, faced with parallel problems. 3.83 A recent survey of ioreign invest,ors whose invest-ient applications have been approved was undertaken by the ]ianagement Institute of the Univer- sity of indonesia, and foreign investor com-olaints and suLggest ions wuere rec- orded. A few of them are quoted below to indicate foreign investior thinking. Land -Purchase z "There is a great need for practical assistance from 0overrmment in locating and purchas nnX land for factory developrn.tn." "Land purchase is ex-tremely confusing and difficult dae to vtwrner- ship laws, lack of title deedLs, and absence of kno-wdledgeable brokers." Excessive TDec entralis ation oof Dec is ion. laking "If aLl renquired approvals and licenses were negotiated with one central int-erdepartmaentDcal authority, much time could be saved." "Our experience is that we must negotiate with an exce3sive num- ber of authorities to obt>ain approvals which is cum'ibersome and timae-consm.ing . "rWe recocmumend that the Govermnent stQudy the EDB system in Singa- pore. TheP Republic of Sin-apore has succeeded in atbracting foreign invest- ment, among otvher re-asons, because tIB investor 'has only to deal with the £DB. Tax ead -T2,ortu Privil-ees "lApprovals for duty--ree inrorts, tax holidays and concessions, work permits, etc. cotld be granted automatically followv.,ing- President's ap- proval thus obviating, the need lor each application to be again submitted for further approval.'" "In order to speed up flow of imported goods all procedures regarding import c' earances and t,ax documentation should be very much sim- plified and inot bureaucratic." 3,.84 The Governmen-t is actively considerinc the establishment of in- dustrial estates which would solve some of the problems faced by domestric and forcig-n- investors in purchasing land and obtaining land-use righns, access to adecua'te infrastracture facilitics, and various licenses and pennits. The much-discussed inve-stment Promnotion Center aippears to be no closer to reality than it was a year ago, although somn central au- thority ith-la the task of provicinn- infonrmation and assistance to foreign -92- inyvestors, but more importantlylJ with the del:-.-ted powiers to nsgotiate the necessa-ry licenses and permtits w-ith the investor, is urgently needed. D. Economic Co.-' of Ah'q_nijtrative Delays 3.85 In Indonesia the magniriitde of the economic loss due to adminis- trative delays and cunmbersome regflatio'is has neve-r been studLed in detail. The length of time required to obtain goveniment clearances and approvals can discourage foreign and domnestic investors from making a direct investnent. It aprIears that a&ministrative delays in Indonesia have seriously retarded the ralte of foreign invTest.',ant and discouraged foreign or domestic firms from establLshing new plants . WIhlile bureau- cratic delays, such as negotiating the master import list or obtaining title to land-use rights, vary from sector to sector and project to project, on the average it tca^es an e stimated tw.-o years to start up of production from the date of initial sub.aission of a letter of intent (Form A) to the iniistry of industry, as was noted earlier. Very large industrial imnestments involving heavy iinfrastructure expenditures take much longer to move from initial application to production start-up. Adbaininstrative delays in Indonesia app3ar to be excessively burdensome compared -.Tith other developing countries, and every effort shlould be made to minimize them. 3.86 To the extent tha't the lengthiness and cumbersomeness of * obtaining Government (national and local) clearances requred to malke an investmenntn discourages foreign or domestic firms from proceeding with a direct iinrestment, the rate of capital formation and grow.th of the Indonesia. economy is retarded. Lengthy adminis,rative procedures arc costly and adversely affect the competitiveness of Indonesian industry. They tend to dicscriminate more against the small and medium-sized firms, which are predominantly Indonesian enterprises, tuhan ag,ninst the large- sized firms, often foreign-o-med, that are able to bear the cost of delays better. Bureaucratic delays and other hidden costLs also tend. to discourage entrepreneurshliip in a country where .it is extremely scarce and needs stinmulation. E. Legal and Ille al Srn_ggling 3.87 There have been various estimates of the magnitude of Indonesia's "unrecorded" trade or "hSmuggling!! that range from $100 tx $200 million a year.1/ Formidadle stiatistical problems and incomplete data makes any attempt at quantitative estimation exltremely hazardous. N'evertheless, there is considerable evidence that "smuggling" is a major economic issue wit,h far-reaching impact on the deve.opment of national industry. 1/ Far East, Econiomic Review ,Year Book, 1968 Page 201, and IBAOD L cononic LJevelor,mrent of Indsnesia February 1968 Volume I3 .'age 18. -93- 3.88 WJhile shipments of oil and mineral products more. generally are hard:ly affected by smuggling, th)ere is plenty of opportuniity for srrmggling of manufactured goods, especiall, for the smgglinlg of con1sumer goods. Indonesia has some 50 larger ports, and many sr1ller ones scatte-ed over a 3.,000 island archipelago that stretches 3,500 miles from western to eastern ends . The exten -,ijre Indon;-ian coastline is natura1ly difl' cul t o patrol effectively, and the Gov-r --nnt-'is coastal patrol capL.city is s vereely limited. According to the Customs Department, only 16 coastal patrol cra'tW of a fleet of 40 craft operated by the Coast Guard are current1 -r in opera- tUion. Coastal patrols for cust-oms rPurposes probably can never prevtent all or even a substantial amount of goods entering t,he country -illeglly, but it is clear that 16 coastal pat,rol boats are entirely inadecaate to control even a smiall part of the Shipbonie smugglings that occurs across the Strait of 1Malacca bet-,een Sumatra and 1"alaysia-Singapore. 3.89 There are twio kinds of smuggling or illegal import of goods into Indonesia: (1) illegal smuggling, or the clandestine movement, normally by ship, oL goods into Indonesia that do not pass thrcugh Customs and (2) Irleglil" smuggling, sometimes termied "techni.$al smuggling > by which goods are imported into Indonesia through the systuem of ports a-nd customs control points with the active collusion of customs officials. * (a) Ilegal Smuggling 3.90 There are essentiallr t-..o stages in -the illegal movemient of goods int,o indonesia by ship from Singapore, l4alaysia, Phlilippines, and POrtu- guese Ti'mor. First the goods are transported by ship f:-.om the Loreign export port or location to one of the many secluded, sparsell, populated islands of the Indonesiani archipelago in the South Chi-'1na or Java Seas; the second stage consists of transhiping the goads by intUer-island air or sea tralsport, or by land tralsport, to the densely populated regions and urban centers w-.here t,he rgoods are sold. The major centers oL "illegal"t smuggling (goods entered ilDlegally that evade customs control completel) are the follo-Arlng: (1) Riau islands at the eastern mouth of the Strait of Mialacca (2) Sabang, on W%Teh island off the -.;estern tip of Sumatra (3) Ban1ca-Belitung isl,ands off the mast Sumnatra coast (4) KarLmaba islands aand West Kalimantan (5) Kruch`ng in Sarawak (6) Nunukon r=gion of East Kalimantan (7) Niamudju region betieen South and Central Sulawesi (8) Sangir Taland islainds off 'the southern coast oL Miindanao in the Piilippines (9) The border betveen Indonesia and Portu.auese Timor. 3.91 DIring 1970/71, the Coast Guard made 296 patrols, mainly in the Straits of Malacca area, apprehended 294 persons, and captured 49 vessels including sailing ships. Approximately 450 metric tons of smuggled goods wvere seized during the twelve-month period, a small part of the many tons of goods enterinlg Indonesia illegally through the shipborne comnerce. ( b) I'Le;c.l E)Pui-Fl-_Ln_ 3.92 Sometimes called Iladministrative"' of "techrncal" smu,ggling, this kind of importation of goods requires the cooperation of the Customs 'epartMenl at sea and airports. Evasion of import duties t-2kes place through under-invoicing the value of import; underassessing the d:uty owing on imports; and misclassifying goods in order to qualify for a lower duty. In all these instances, the Customs ofLicials cooperate and share in the gaimn enjoyed by the smuggler. According to the Customs Department, passengers ol ships operating bet.ween Saban- and Ti e Theue and on the Belawan-Singapore-Djakarta line import goods without paying customs duties, although they enjoy no legal exermtions. 3.93 In the 1970/71 fiscal ,year the Customs -inspectorate collected 230 million rupiah (or about $600 thousand) from custiomrs violations, 70 percent, of wlich were derived from Tandjung Priok, the port of DjEL'arta, and about 15 percent from Belawan. In 1969/70 fiFcal year 260 million rupie.h were collected in fines. 3 .94 There is considerable direct evidence of smuggling in the Djakarta market. Daua was collected for eleven items on the CuFtoms Department's list of most actively smuggled items to compare the local wholesale prices and the estimated prices of the same goods based on c.i.f. import prices plus duties and taxes d1ue at tUhe time of inport. As can be observed in the Table 3.14 below, smuggled goods were being sold by dealers in Tandjung Priok at roughly one third to one half of i_ the prices of the samre legally imported goods on the local Djakarta market. -Although admaittedly a very small sample, there was no consis- tenlt p2ttern that indicated the degree of evasion tends to rise with the height oL the duty plus tax. as the Cooper report. .ound. YMarket and Reve,iue Effects 3.95 There havTe been numerous comlplaints of the adverse impact of large-scale smuggling on the locaL raufarrf-ctur-ung enterprise producing the same or .similar products. The imported goods on wrffhich full taxes and duties are not pa.id prov%ide severe competition to the local manu- facturer ;hAo may not be able to compete with more efficient producers abroad. It may make it impossible for the local manufacturer to con- tinue production and may discourage new investment in manufacturing. There is evidence, for example, that srmruggling, is reducing the domestic market for domostically manufactured textile goods even when local production is relatively efficient. Japanese textiles, such as shirting material, are able to sell in Djakarta below the cost of production of Table IPTL C rs. or3 of' prices or Selected Dut.r-?ad and Srmnaled lT.rt,ts in the Dalart-a trket a,/ ( in Rupiah ) Djakarta W.4holesale Prices Imnport Taxes 'Unit and Duty Duty-Paid Price Smuggled Price Te:ctiles per yard. 167 390 220 t2etoraxi cloth 36 " wide 1, 788 5,000 3,000 P?Odei,ed Soup 4514 Kg. 50,24i 68,100 25sooo Condensed430 M1k se. per carton 3, 02k 8,640 h,300 Plain Glass . Tublers per dozen .4.,2212 7,75o0 ,000 Plain Porcelain per dozen 757 1,860 1,000 Plates Soap 64 00 (Creen lea) per dozen 2,861 8,640 |,000 Tires 5(20 x 12) per tire 2,283 6,250 h,750 1Battery t( e x 30) per dozen 1.30 600 250 Biscuits per dozen . I tins 2,370 |7,80 3,600 Lager Beer 21 i can - 1,318 2,b00 ,500 a/ s o.C ap-x'raimately IrGy 1I 1971. Note: Prices for the legally or duty-paid im_.oorted goods wJere obtained at Pasar Pagi marlket in Djakarta .whereas prices on illegally ir;ported goods were obtainod from dealars in Tmridjung Priok, -96- even effici.nt, large-scale producers. In addit.ion, smuggling is knomn to have reduced the induce:;ent to invest of certain foreign inves-tors who decided not to establish plants in Indoneia since they could not coi-imete with their ow,n oods proclaced in Singapore and smugaled into Indonesia. 3.96 Smugglinig also involves considerable revenue losses to the Goverrnment sTce import duties and tax;es either are not paid at all or paid or underassessed values. Assuming. that goods valued at $100-200 million (which may be a coniservative estimate) evade full payment of import duuties and taxes, and an average rate of duty of 20 perc mt is aoolicable on these imports, then the Government's revenue loss is roughly of the order of $20-40 million per year; a reduction in smuggling clearly could have i-mportant revenue ef- fects. Uinenforceably highi tarifLs are self-defeating sinc e they- make smuggling profitable and may weaken the incentive to invest in local manuofactu:'n½a. 3.97 In order to recice, if not elininate, smuggling and the adverse effects on local manufacturing, the problem must be combated on a wide front. It is desirable that high tarififs, especially on knowm smrulggled goods, be revised downwv.ards to reduce the incentive to evade duties; the investment incentives and policies of the Govern- ment should encourage more eLficient production and lower prices for local maunufactures; the cust,oms adinnistration in harbors and portLs should be irrDroved and increased penalties should be attached to smugglliw and official collu-sion; the nwubers of coas tal patrol craft and the size of the Indonesian coast guard should be increased; and joint cooperaticn should be established with the Coast Guards of Ialaysia and Sinigapore. F. Nomin-il and E.ffect;ive Protection. 3.98 Then are a variety of advantages and disadvantages of em- ploying tariff policy as an instrment of promoting the industriali- zation of developing countries like Indonesia. On the one harnd, protectiona provides a poi7erful inducem.-=ht to foreign and domestic inves':ors to establish manufacturing plants; by raising manufactaring profits it provicles a source of savings to sustain further industurial growtuh; and it provides a ready made madset. of k1no,m dimensions for the output of the nei.1ly-established manufacturing enterprises. On the other hand, protection enablas industry to make high profits (if efficiant) or to beconme inefficient at the expense of consumlers iho must pay the difference betwJieen the c.i.f. price of imports and the protected price of local production. Protection, therefore, is a way of taxing the economy, but it mray be better under some circum- stances to rely less on protection and to tax the corn.munity more directly and to channel these public savings to industry through develoLpment banks. Hligh protection can have adverse effects on foreign trade and the rate of growth; it can lead to monopoly profits and a low inceiftive to technological and product iiLro-vation; and may incre.se rather than reduce dependence on inports. -97- 3.99 As an instzrment of industrial pro.o tion, the Indonesian tariLf structure suLfers from the follo-ing defects: (1) excessive aggregation or aiumbrella" categories for goods.where more refinement of commodity description is needed; (2)-excessive disaggregation or reflinem:.ent for certain goode, such as textiles, wlhere it is not needed; (3) classifica- tion of some products according, to end-use, which presets problems for customs enforcement; (4) excessively high tariffs on firnished consumer goods resulting in widespread evasion of payment of duties (5) anomalies which take the form of substantially dilfferent dutios, on goods of similar use; differenlt duties on the same goodF, depending on its end-use; raw materials dutiable at higher rates than goods at a higher stage of fab- rication embodying the raw- material, t'hus, discouraging some processing activ ities; (6) low duties, noni-ially ten percent, on capital goods which encourages the adopLtionl of capital-i2lltensive techniques of production. 3.100 The general principles guiding the restructuring of the Indonesian t,ariff schedule (simplification, lowering and hanronizing of ri lties) for long-term industrial development. proposed in the Cooper Report and the specific recommendafions currently under stady by the Governm,ent move in the -rnght Cirection and deserve full support.l/ How- ever, the encouragement, given to an inrdustry, the strength ±Lth ;.hich protection pulls factors of production into manufacturing, is better measured by effective than nomninal protection: the nominal rat6e of prot,ection (product protection) being eo,).al to the percen-tage excess of domestic over fore-ign prices &,).e to the imposition oL tariffs and other protective measures; elfective protection (protection of value added) measured by 'the percentage excess of domestic value added resulting from protection over w-orld market value added.2/ 3.101 It is desirable that a study be undertaken soon oL the struc- ure of effect.ive mrotection in Indonesia and its resource al-location and growtlth-effets. Such a study could provide an irmproved basis for further modifiLation of the tariff structure to make it a more efLective instrwuent of indus-trial development,. Thile adnrittedl-y there are many difficulties in mnasuring effective protection in Indonesia, including tlae lack and. poor quality of basic stat2istical data for manufacturing, a start should be made. G. P2location Esffects 3.102 Although it is not possible to demonstrate precisely on the basis olf few an-d unreliable statistics, it appears tlat the system of incentives designed to promote the domestic and foreign.p investment in ,/ See the Cooper Report, pp. 31-35, and.an earlier section of this chapter d-:i-ng w,Tith import dut,ies for a fuller discussion of the recomi-mended tariff changes. i/ Bela Balassa, Indcustrial ?cotection in DeveloDing Countries, Rprt ou 17- - IBRD Report lNo. E;C-175., Junep 1970. manufacturing, in confoin`ation writh the other Govrreri,,mnt policies affecting t,he general invcst¶ont climate, is having the followJing broad allocation effects: (a) Reallocation -of labor to the D ,!karta area. 3.103 The reallocation of labor from the countryside to Djakarta and otlher urban centers is a characteristic Indonesia shares with the entire developing world. Since less thlan 10 perc-ntl of1 the Djakarta region inco-me is generated by mamif, actturi ng industry, the overall ef- fect of in.dustrial i-nvast.L-mnt on t.he reallocation of labor to Djakarta has been s mall. On the oth!ler hand, the incentive syst,em for -nt.in-s tjr tends to pro:iaote the continued concentrat-ion of manufacturing, investment and emplo,yrment in Djiakarta and else,NAere in Java. In order to reduce, if lot reverse, t,e concet.'ration of manufacturing in the Djalcarta area, a comprehenirive program must be established by the Government w.Jhich coulri c2dee. s te bli et hinent of indas,triai estates, st engt e. ng the incentive sys`em to provide considerably- greater benefits to those lirrmes that locate outside of Java, and regionalizing goveriment decision making to redace hle need to recur to Djakarta to obtain licenses and approvals from- the cent,r-al goverrnment. (b) Cv ods of oduction 3.104 The incentive system appears to have led to some reallocation of domestic caDital froml noiim_nufacturing sectors to manufacturing, es- pecially since 1969, as -ell as increased the inflow.- of foreign capital to manufact-uring. Like most developing countries, Indonesia tenLds to import highly caoital-intensive and labor-saving maufactar7ing equipment designied in the advanice d countries .f.or different recuircmen ts and factor endow.m. ents. This is partriCuL2.c rl y evident in the ne Jw medilm and large- size industries established under the Foreign and Domiestic Tnvestrient Laws. The policy of dutuy-flree imports of capital goods (a central part of the incentive system) ke-ps t-he price lo01 in relation to other capital goods. V.lhile wages tend to overst,ate the social cost of labor, the price of cap)ital goods tends to understate their social co-st of scarcity value. In addition, serere restrictions placed on the employer's right to dis- miss wor]kers (in practice virtu2lly impossible) and other labor legisla- tion tend- to encourage a policy of substituting capital Lor labor and discourages newz ep. lo-rnent. 3.105 In indonesia the rapid depreciatuion of a capital (maclinery, eq4uipment and tools) permiiitted under the incentive lawris also encourages capital intensive investment. Relatively low-v interest rates on- Slate Bank loans to industry under special crediit prog-rams tends to reinforce the overall bias of the incentive system towards capital intLen-ive, labor saving investzments. As industrializatiofl proceeds, indonesials 1/ Census and Statistics OT'ffice D'I Djak.arta. -99- current policies Aill tend to steer maimafacuuriing investment int,o capital-intensive technoloMyr nel; ecting the poSsibilities open to creating employment by ad:.pting the form of capital, encouraging labor-intensive industries and increasing the nur-abr of shifts vzorked. (c) Allocation of Capital to Large and iedium Size Firns 3.106 The imperfections of the Indonesian capital mark-et tends to allow; only large firmis with cassh reserves and collateral access to the relatively cheap credit of the State Banking systenm while limiting the small-size firms and. handicraoft production to the unorganized seg,lent the capitel market with extremely high interest rates. All industries must have 25 percent of the credit sought ready for deposit in a State Bank as collateral upon a-,ooroval of the credit. Total collateral must amnount to 150 percent of the loan, including t,he 25 percent cash. This matter is discussed at lenguh in Chapter IV. 3.107 Snall-scale industries and handicraft production shoumld receive special credit terms and. facilities fromii the StLate bank-ing system. At present the industrial finance system discrTnina.tes against small fis, handicrafts and newr ventures; it tends to favor large firms, and w.ealthy individuals vrith cash reserves and property. Large and mediuw size firms also can withstand the burdensome administrative costs of obt,aining governmient clearances, licenses and credits better than sm-aller size firms. (d) Othler Effects 3.108 Under the 1970 amendment to the Corporate Income Tax, the Minister of Finance is at.;fthorized to establish riules for th-e revaluation of fixed corporate assets. However, as of this wrriting (June, 1971), the regulations to imDlement this decision have not yet, been formLlated or published. At present,, Indonesian firms have seriously understated book values for their fixed assets purchased more than five years ago as a result of past, inflation and devaluation. In many cases, the book value is nowT virtuall21y zoro altL,hough the marSket value of the assets is much higher. As a consequrence, under pr-:oent capital gains and corporate tax laws, the saale of such under-valued assets leads to fictitiious or paper capital gaiim- which are tayed at the 20 percent rate i the azssets have been held over four years.1 3.109 The undervaluation of corporate assets tends to discourage mergers and industrial rationalization since the capital gains tax. is relatively high and there may be little real gain fronm which to pay the tax. It also tends to discourage investment since the asset c2nnot be ;/ The 45 percent corporate tax rate applies to capital gains on assets held less than 1a years. further depreciated unider the present system, while it mightll be possible in maany cases to further write off the rea,iaing useful life of the as- set if a more realistiic valuation system applied. There is a need for a reduction of t1y tax burden on the revaluation of fixed assets. H. Prom.oting I?anuf actuireci : xorts 3.110 Like other developing countries in Indonesia innthe past has encouraged import substitution inidustries more than manufacturing for exoort. Tndonesials diversified resource base should permit the sub- stantial development of semiL.nufactulared and manufactiured exports over the mediur,i and lon-er te-m. if adequate export incentives and economic policies are adopted by the Government. ixtensive and varied forest resources offer an exceptional opportunity Lor developing a wzood pro- ducts industry to supply domestic needs and foreign markets. The processing oL miner1al products and foodstuffs, t,he inanufacture oL rubber, leather, chemical, petrochemical and other products for ex-:port., should also becormie possible as the doiaestic irndustry base expands. 3.112 The Government policy on the promotion of manufactured ex- ports is atu an experimental and preliminary stage an-d a comprehensive, effective export promotion program is lacking. There has been some experimentation by the Foreign Investmrrnt Board in providing tax rebates, negotiated on an ad hoc basis, on manufactured, exports. How- ever, bureaucratic delay,s and costs involved in obtainingr the rebates have been considerable and have reduced their value to iUhLe exporting manuf acturer. 3.112 There is considerable evidence available that e-port incentives (and disinrcentives) do work, as the c::amples of Honrg I ong, Taiwan and Korea suggest.l/ However, w.7hat is required for a successful export promot,ion policy goes far beyond adjustments in the tax and tariff sys- tem, althou-ih t'hey are important. An export promotion "packag e" must be devised after careful consideration of tJhe special conditions of Indonesia's manmfacturri-n sector and potential export marketws. Special institutions, such as a strong Export P:rorotion Center, will probably be reouired to provide di-rect govern ment assistance to exports. The 'ipackage" of promotional measures might include governmr-Lnt export credit and insurance; disseminantion of foreign market information; as- sistance with foreign market surveys and exhibitions abroad; assistance in design, packaging and quality standds; and refonrm of those elements of the public ad-ilustration and export procedures which cause delays and increase the administrative cost of exporting. 1/ See Ian Little Tibor Scitovsky, Maurian-"ce Scott: Industry amd Trade in oome Develop gountries, London, 1970, Ch(apter VII. 3.113 Tle Government should be assisted to study the establishnment of an adequate framework of inducemrents -to export lwhich could serve to stimulate manufactured exports during the 1970's. Since Indonesia's manufactur,ed exports are sarting from a low, base, there is exceptional scope for increasing exports in the 1970's. There are no grounds for export' pessLaimis if steps towards establishing the proper inst.itutional and policy I raxraevork are taken over the next few years. I. Value of Incenti-vre Svstem to Investors 3.l14 The value of the tax and tariff incentives provided under the foreigrn and domestic in.striennt laws during the ealy years of plant operation may.be considerable. A rough estim-te of the incenLtive effect or subsidy to manufacturing enter:Dpise under the- corporate tax holiday, exemption Lrom im-port duties and tax>;es and accelerated depreciation allowance can be gathered from the follo-ving (actual) e;xample, of a $10 million investment in a textile enterprise in Indonesia. (The figures have been rounded and modified somewhat to avoid disclosure of the firm). Table 3.15 Textile Plant and Investor, Sv.bSi dy (G US) 1. Total investment expenditures: $10 million (a) la,Id and buildings 8 million -(b) machinery, equipment, vehicles 2 million 2. Grovs profit: 1 million per annum 3. Corporate tax holiday of 5 years 4. Corporate tax rate of 45 5. Accelerated depreciation (L1 years on $10 miillion) 6. Ndormal depreciat-ion (10 years straight line) 7. Averar-e import duties and taxes of 25, on $8 bmillion (dutiable) im.ports. -102- - 3.115 Under the above conditions en inv-estment of $10 million in a textile plant would lead to exemption from over $4.3 million in corporate taxes, import duties and sales taxes during the first five years of plant operation. In practice, additionial exemqDptions are normally requested and granted for exe;mptions from the capital stamp duty as well as dividend, intucrest and royalty taxes. The accelerated dapreciation alloT,ance vOuld co.-mmence in tle year afuer the expiration of the tax holiday. During the four years of accelerated depreciation, investln-ent expendit,ures would be increased by rouchly $6 million, con- siderably reducing post tax holiday profits. Any los-ses sustained turilng t,he period of exemption from corporate tax caln be off-set against proLit subject to tax after the end of the period of the tax holiday. 3.116 During the first four years of construction and initial opera- tion of the plant, the rate of return on the $10 million investment wi-tiuh exemptions fromri corporate tax an-d import duties wJould be-10 percent. If, ho-.ever. pay>ientu of imnport duties is spread over tlhe four year period ($,50o thousaend per year for lOUr yrears) and corporate taxes were requlired to be paid, the rate of return would drop to less than 1 percent daring the critical initial years. Thus the incenitives clearly are extremely valuable to Uthis project. 3.117 The textile project gives a rough inddication of the value of the tax aznd tariff incentives to a potentlial investor, and suggests that such incentives cani provide a strong inducement. to invest in Indo- nesia. They alqo suggest tuhat, in cert,ain cases the incentive systei may be excessively generous to investors at the expense of government revenues and domnestic producers; the system might be re-examined fr6m this point of view. CPGTRIT FOR AN =iT4FEvCTrJE :TCENTIVIE SYSTEM 3.118 In broadest terms, the objective of a system of industrial incentives (embracinrg financial, fiscal taiff and other direct inducements) is to encourage industrial investment, employment, and output beyond that uThich would have occurred under a po' icy of laissez faire. An effective system of incent;ives to industrialization in an econcoav l1Že that of Indonesia's, with both publicly and privately-o-mned manufacturingr enterprises, wTould limiit direct government. licensing, resturictions and controls over the daily economic affairs of management, and use the pric inechanMsr. to induce public and private industrial manargers to miake decisions based on calculations of profitability. 3.139 In order for a systemr 6f specific incentives to be effective, the general investument climatue must-be favorable, vhich implies the existenice of a reasonable degree of political and economic stability as a general framework wJithin wvhich the incentives can operate. If there is political instability., an anti-business bias, rapid inflation, labor unrest, imDort and other controls and a threa' of nationalization, as existed under the Sukarno regime, specific tax and tariff disincen- tives are insufficiently powerful to overrule these genera1 disincentives and cannot be expected to promotue industrial de-velopment alone. Ho-,.ever., even with a favorable clim-te for domaestic and foreign investnent, tle ef'ectiveness of specific ilicentives ashoul-d not be exaggerated. The Govenr-inent should re-cxamxine the obstacles to increased dom.estic and foreign investmLen in manri,a.cturing, in order to decide which incentives effectiAiely encourage investnent and w4hich should be reduced or elimina- ted. 3.120 The incentive system must influence prices in such a way that the right industries are given sufficient encouragemzent so that a more bro.dly basecci, competitive na.tional industry is established in Indonesia over the next few decades. There is, of course, no single "most effec- tive"l incent,ive systemn that is valid for all- countiries and times. Tncen- tives mullst be established on an empirical basis and adapted to the actual conditions and needs ol the manufacturing sector of the pprticular country in question; duly tak; ng into account any undesirable side eLLects. There must also be a degree of consistuency betw een the incentive systemr and the Government's o-M industrial development strategy and priorities, which im.plies that the latter are specified in an operationally useful, way. 3.121 In general, Indonesi-as industrial incentives have helped to encourage loreign and domestic investment in manufacturng in recent years. Direct colntrols and reastrictions have been broadly eliminated, and a mrooth transition effected to an open economy. Industrial invest- ment has benefited greatly from the favorable cIlm-ate for foreign investment and private initiative established by the Government, and reforms are planned or undernay to modify the financial, tax'and tariff systemrs, and to pro.ride services that v.ill tend to promote a more ef- ficient industurialization. Ko-.-wever, the present i.ncentive system should be re-exa.2;ined and modified in new directiofs to ofLset, at least par- tially, the inherent biases against manufactured exports, industrial emp.l oym.ent, light industry, and. to correct other aspects of the systemi which., by raising costs, discourage foreign investument and local entre- pren-eurship. Indonesia ould benefit from replacement of the present restrictive system of in .-Lstr.ial licensing and multiple official approvals recuired by various levels of governt by .a simlified, centralized system which womuld include investor registration, a.nd more automatic approvals, and elimination of non-essential applications and tax reporti-ng. 3.122 The costu to tuhe econonTy of a liberalized systLe,m of entry Lor foreign anld domestic investors '-*ould likely be small in the event of overinvestment or other inves tor mistakes. Simpler, centralized govern- ment procedures and m.ore automiatic approv-uls., once specified conditions are met, wqould reduce bureaucrati,i delays. arbitrary official decisions, and increase industrial efficiency. On the other hand, in cases where it is clear that the local market cannot support more than one factory to produce a particular couniodityly, only one plant Should be enLouraged and monopolistic practicces avoicded or minimized by pernitting import competition. Although imports are not licensed in Indonesia, the administrative regulation of Liroorts under t,he investament laws produces results5 similar to that oL an import licensing system. Customs Depart- menrt deiciL ons on permitting imports of tax-exempt goods oftLen involve delays of matny wkseuw, or even months, in obtaining essential materials, compone-,nts, parts, and spares. The manufacturer rmiust irs.¢ure against these delays by either holding an e-xcessive inventory of these inputs wiith attendant costs or suffering, prochtction slow dolns, lower capacity utilization, wasteful use of capital, and lowzer inconme. 3.123 1Ti2ile requiring more of ic: al judgment and running the risk of aluse, the incentuive sy-tLem should be made more fltixible and eff ec- tive by making greater distinctions between industry sectors, production scale and products, loreigin and dom.estic investors, ;,port substitution, and export-o-iented industrii to be stimiulated or discouraged. The aim should be to desi_n the incentives to alter the inustrial mi (for example, encouraging machine industries, wzood and miner,a-l-based indus- tries); to increase a7nd divers ify y n-factuured exports, to more eJfec- tively employ local resources (particularl y labor), andrd to achieve a better incomra distribution resulting from higher employimelnt.. 3.12b. In general, experience seems to indicate that incenltive syste,s tend to be crude policv instruments and are . :ore effective in increasing the arr3unt than ..n determining the precise direction oL industrial investnment. It is also diffi cult to anticipate un,!an-ed side effects which .ccom.pany any atteiqpt tuo guide investment tharough the *Qrice mechanis-m, including government revenue losses from excessive generosity in granting ta nd ta iff exiptions . mpoer- ence in the less developed countries-/ indicate tlhat there is olfen limited scope for an investLnent -sy ¢yteml ev-eni broadly cornceived and IT l-administered, to achi eve certain governmient- industrial developime-nt objectives. The direct., and indirect employment generad by industal expansion, in- cuced by sDecial incentives, ty,ically is small or negligible in m:uiy deveeloping countries, for exma.ple. In Indonesia the exceptionally sm all share oL manufacturing in GI1P (8 - 10%S) inE-ures that a substantial impact on emplo57m,ent cannot be expected fromni industrial growrfth, howTever effective the incentive system might be in encoura.,ing labor-intensive methods and industry sectors. 3.125 The -ndustrial develo-,-4ent objectives and.priorities of the Governmment are set for-th in the Foreign and Domestic 1 vestm.cnt. L--.s, Ministry of Industry documentis and in the Repelita. They provide general guidance on' the broad industry categories (e.g. domestic resource-based industries, basic and tax-tile industries) and types of industries (e.g. eani or save foreign e::change, create substantial emi.ploymnent) to be Droimoted by the incentive system. h11owever, these broad priorities are too general to be operat:i.onally useful to govern, ment officials responsible for deciding which specific products or 1/ See George Lent, Tax Incentives for the Promotion of Industrial Employnmrint in DevelopinT- Count,ries, D7 Fiscal Department document, January 13, 1971. product lines axre appropriate for ITndconB--s-La and deserve special fiscal and other incentives. A more specific, less aggregated set of indus- trial priorities (based on preinvestment studies) is nequired to pro- vide more discrininating gui dance for policy-rmakers in grantirng incen- tive s. RECCO'TH. 'ATIOMTS FOR IThRO7OTIG TElE I1iC7E2ITTT7 SYSTE"MI 3.126 The incentive syrstem introduced since 1967 has undouLbtedly helped to encourage the flow oL foreign and domiestic irnrestrient into the back';ard TIndonesia-n 1-iianufacturing sector, especially since 1969. HoTever, the -andesirable side ef fects, biases and burdensome economic costs of the incentive system itself have become increasingly apparent. The major problems and gaps in tuhe incentive system and t-he way i n .hich it is administered should be re-exaimined and the necessary chianges introduced into the system. An appropriate mix of policies and in.ti- tutional arrangements must be established in order to insure appropriate and efficient incentives for ind:ustrial development in t-he 1970's. TIhe follo;,ing important progra.ms and measures appear to be required.8 (a) Special assistalncc is needed to broaden the base of industrial development in light industries and strengthen localy-o;e3d enterprises to withstand competition from imports and" foreig-n investors. The follolYing measures w.:ill be required: (i) a pr:oE'a'm ofL prfe-asibility and market studies to attractu investment; (ii) technical assistance to establish an industrial project evaluation and studies unit in the 11inistry of Industr-y as a means of upgrading the analy-ical and conncp- tual skills there; (iii) establishment and wide distribution amongst potential investors of a list, oL priority products and pro&ict lines which the Gov-nn ren'u wants , to encourage; (iv) expan-ion of investment prom,,otion actilvities, with a re-exarmLination of tax, tarifL, and other incent,ives to differentiate and sharpen the impact of the incentives; (v) special financial, marketing and technical assistanco to newJ ad expa.ndi.ng enterprises duringc the early operational stage; (vi) special fLiancial incentives for smaller scale industries, including favorable loan teims and conditions of eligibility, possible direct equity rpar- ticipation, and investment insurance. (b) Re-exinination of the presenit licensing system for investment is requ ired since this system oftern leads to arbitrary decisions and other abuses, discourages some new. investment duie to the costs of bureauc!7atic delays; and contains an ij;plicit or explicit understanding of future official prot,ection from competitive pressure. There is a need to re-examine this system and consider r-.placing it by a system of free access upon registration, which wCuld eliminate the .automat,ic oLficial presumption in favor of granting tax holidays, ofport duty exeimption and oth6r inrcentives and the implicit commitrmnt of th Goverrzxent to shield local cnterprise from competition. (c) T'n re is a need to reconsider the afministrzative, insti- tutional and procedural aspects of the prosent incentive system. The present cumbersome .-.trnm o'L obtaining investment liceis-es, tax clearances, d-u-ty exmrptions, locating land aend gaining title, securing permits to erect and operate a factor-y results in heav.ry economLic cost,s, discourages capital. Lormation and privai;e initiative, and cliscrimLinates against small and medium, scale industry. Technical assistance should be provided to undertake an ex&m)iataion of th-e policies, rules, regu- latuions, licenses, procedures, and other controls and institutional arrangements affectIng f'oreign and dormaestic investmnent in order to estimate the economl,ic costs involved and recorlmmend refonrs. There is an urgent need for a central authority not, only to provide information anid assistance to all investors but with the power to negotia.te the necessary licenses and permits. C'henever possible autuomatic approval should be granted to investors that have met specil'ied conditions and multiple approvals for the same thing should be eliLinated. (d) It appears desirable to reconsider the problem of' "legal" and "illegal" smuggling wit,h tuhe aim of instituting practical reforms and measures to reduce, if' not elnimnate., tuhe serious competitive inpact on finished consumier goods industries. 'Lega1l" smruggling or evasiol of import duties results Lrom u-nlderinvoicing, underassessing the duty ow.ed, and misclassif'ying goods to qualify for lo-vier duuies and mainly occurs in ports and harbors with. the active collusion of customs oficials. "IZ Xgal" smuggling avoids passing goods tuhrough the customs at all; they enter Indonesia in a clandestine manner in sparsely settled islands or planes and generally are transhipped to populated. regions wihere the-y are sold. A set of measures w-ill orobably be re.Tqired to coxnbzcbt smiuggling on a wide front: (i) don;:arc1 revsion of high tariffs, especial-ly on the principjie smuggled goods, to reduce the incentive t-o evade duties; (ii) strengtuhen the customrs admiLni Stration in ports and harbors; increase the penalties attached to smuggling and of'f'icial collusion; and provide genercus rewards to irnormers; (iii) increase investment in coc.stal patrol craft and deploy them more ef- fici'Lently (iv) joint coope>:ation in coastal patrols to control illegal trade wTituh Tilaya, Sing,aTore and the Philippines.. (e) The reducttion and simolification of inport daties and taxes now under discussion in the Ministry of Finance seems to be generally in the r1ght directi on; howTever, an attem.pt should be made tv estinate the rates o'L :lef'fecti\re protection" in o:rder to proviide the basis for a more effective a-luSrtment of the tariff code to avoid over or under- protect,ion of' value-added. (f') Qome easinrg of the tax burden onr the revaluation of fixed assets is probably desirable in order to ir.pove debt-eqWty posit-ons, encourage joint venture arr2nuerments and inprove the incentive to in- vest. Some of' the alternatives to be considered include: a deferred tax payment; a percent age-of-gain basis of valuation; and offsets of tax against increased depreciation allowances. (g) There is a need to promote manufactured elxports through a prograrai whlich .inclueles economiLc as well as noneconomic incenti-es and -107- assistance to exporters. A system of rebates of import duties and sales taxes (domestic and imDort.) should be exaJrined in order to orfset duties paid on intermiediate goods embodied in exports mad sales taxes embodied in the price of such exports. ConFideration should also be given to ex- port subsidies. Initially, to simplify adcministration, it w7ould probably be preferable to establish a flat percent subsicdy of export value. However, a broader study of the framlework of' financial, economic, and noneconomic inducements (including related inistitutional arrangements) is required to establissh the most effective set of measures thae Goverr2nent, might adopt. Technical assist,ance could be provi-dcd to undertake such a study, including the feasibi lity of duty-frze exoort areas and reduction of the bureaucrat,ic costs of ewporting. (h) In view of the growing concentrat-ion of industry and popula- tion in Djakarta and Java generally, consideration should be given to establishing uan industrial location policy aimed at creating newz and strengthening incioient resource-based grow-th poles outside of Java, such as a wood products industr,y in Kalimantan. The present incentive system, overly centralized in Dja,-krta from a regional locational point of view, is incapable of counteracting the powerful historical and economic factors attracting industrial investment to the Djakarta region. Intier-island and inter,national shipping costs, especially froam the larger islands, should be examined to ascertain their iinpact on pri- ate location decisions. (i) In spite oL Goverrmnent concern over the serious urban un- employment in TIdonesia, the present incentive syst-em appears biased against emplooyment-creation. Duty-free imports of capital goods, high deprecirtion allo-wances, seve're restrictuions on discharging emplc)yees af^ter 90 days of service and other labor legislat:,.on anid financial ar- rangements encourage labor-saving irv,ESztzient. This aspect of the incentive system recluires further arnalysis. (j) There is a need to strengthen the wealk and inadequate system of industry planning, project evaluatiion, feasibility studymriking and collection of essential industrial plannirig dat,a .ithin the Kinistry of Industry and oulside. A consideration should be given to establishing more specific operational ind,bustrial invrestment priorLities (including a positive list of products w.hich are eligible for inavestment) tio guide investors; to identify s,:ecific industry investment opportunities th-ough prefeasibility and miar.ket studies; and to bring this information to the attention of potential domestic and foreign investors. Tnis could be done :Th the linistry of Industry or some related oreanization. (k) There is evidence that the value of the incenti-ve system, in terms of tangible benefits in the foni of tax and tariff ex;emptions, tax holidays, loss carry-overs and accelerated depreciation and otlier allou;ances, is considerable and exercises a consiacrable attraction for new inveslient. It may, ho-.ever, be excessivIely generous to some investors and -hould be re-examined to avoid unnecessarily high benefitus to investors and uncde Goverrvient reveaiue losses. List of Tables No. Title 3.1 Average Weighted Duty on Indonesian Imports 3.2 Priority Areas for Foreign and Domestic Investment 3.3 List of Light Industries Closed to Foreign Capital Investment 3.4; Domestic and Foreign Investment Approval Procedure 3.5 Foreign Investment Approvals, 1967 - March, 1971 3.6 Foreign Investment Projects Approved, Planned Investment By bector, 1967 - March, 1971 3.7 Foreign Investment Approvalsin Manufacturing Industry, 1967 - March, 1971 3.8 Foreign Investment Projects Approved, 1967 MZrch 1971, By Region 3.9 Foreign Investment Project Approvals in Manul:facturing, 1967-70 3.10 Foreign InvesGment Projects Approved, Principal Countries, 1967 - Mlarch, 1971 3.11 Foreion Investment Project Disbursements in Elantulacturing, 1967-70 3.12 Private Domestic Investment Projects Arproved, November 1968 - December, 1970 3.13 Do-mestic Investment Project Approvals in Manufacturing, By Location- and lajor Products, 1968-70 3.14 Comnparison of Prices of 6elected Duty-Paid and 6muggled Imports into the Djakarta MIarket 3.15 Bypothetical Text-le Plant and Investor Subsidy -109- STATISTICAL APPENDIX Table Number Title 3.16 ScheduIle of Normal Depreciation of Capital Expenditures 3.17 Accelerated Depreciation oI' Capital E:.:penditures (Four Years) 3.18 Investmr.ent Alloimnce for Addi-tional Investments by E.-dsting Enterprises 3.19 Interest, Dividend, and Royalty Tax 3.20 Corpcrate Tax Pate bchedule and Tax Exemptions 3.21 Import bales Tax Schedul1 (PPN) 3.22 Foreign Investment Projects Approved Annually By Country Of Origin and Planned Investment, 1967-1970 3.23 Foreign Investment Projects Approved By Cotuntry of Origin and Planned Investment, January - March, 1971 3e24 Foreign Investmnit Projects approved Planned Investment By Sector, 1y67.-1970 3.25 Foreign Investrrent Plrojects Approved By Sector, January - March, 1971 3.26 Foreign Investmeht Project A.pprovals and Disbursements, 1967-1970 3.27 Foreign In\restument Disbursements i-s a Percentage of Planned Investmexrt 3.28 Estima-ted Future Manpo-sr Needs for Foreign Investment Projects in Operation as of December 31, 1970 3.29 Survey,^ of Planned and Realized foreign Investmzent Including Fixed and V.orkilng Capital E.penditures as of December 31, 1970 3.30 burvey of labor Lmployed on Foreign Investment Projects as of December 31, 1970 3.31 Domestic Investments Classified By Payout Period and Capitalization 110- Table 3ja6 SCIIEDULF. OF D,O)T.AL rEPRLCIATION OF CAPITJ,L PXPEIBDITUR A. No depreciation is allowed fo, expenrditures made by wheatever body for: 1. Luxurious f=uriture and fittings. (Luxurious furniture and Littings, which with due regard to their function in the enterprise con- cerned, are considered as lux-urious items by the Director General of Taxes). 2. Rest-hotuse buildings. B. Depreciation is allo:qed for expenses incurred on 'Lixed assets and for operating expenses covering several years according to the following schedule: DeDreciation items 1. a. Building -- not being residential houses or rest-houses -- for business engaged in agriculture, horticulture, fishery, cattle- breeding, mining, industry, transportation and other productive activities to be speci- fied by the Minister of Revenues: 1. Permanent building .......-....-... 15 - 4o 2. Semi - permanent building ......lo........ 10 - 15 3. Wooden buildings etc. ........ .......... 8 - 12 b. Building -- not being residential houses or rest-houises -- for business engaged in the fields of operation other than those men- tioned under a : 1. Permanent buildings ....e*.e*ee*e#*****b* h0-50 2. Semi - permanent buildings 5............. 15 - 40 3. Wooden buildings etc. ................. 10 - 15 -c. Buildings for residential purposes 1. Permanent- buildings .................... 5o - 75 2. Semi - pernanent buildings .............. 20 - 40 3. Wlooden builldings etc. ................... 10 - 15 2. Non - luxury furniture and fittings, office machines 5 -10 3. Land transportation equipment -- not being sedan cars nor lmuxrious station wagons including tractors etc. .................5... - 10 4. 1ntor vehicles -- such as sedan cars.and lux- urious station wagons used by bodies: a. operating in agriculture, horticiLlture, fisery, cattle-breeding, inining, industry, transrp-i tation and other productive fields to be specified by the MLnister of Finance for the performance of work of their staff of the first, second, andr third level .... 5 - 10 b. operating in fields other than those mentioned under a for performance of work of their staff of the first level ........ - 10 5 btor vehicles, like sedans and lVuxirious statiom-agons for taxi - undertakin-s en- tirely used for public transportation *. 5 - 10 6. Water/transportation, equipment, including docks, etc. 1.. . .** ****.*** 10 - 12 7. Air transportation equipment ............. 7 - 10 a. E:ploitation for-several years, if the period of use can be determined accurately during useful period b, Exploitation for sevex'al years if the period of use canniot be determined accurately 5- 10 C. xenditures incurred on equipment not montioned under (B) atve for business enaaged in the fields of: 1. Agriculture, horticulture, fishery and cattle-breeding . 16 -2 2. Industry, mining and transportation ..... 8 - 12 Source: I4inistry of Finance, May, 1970 -112- Table 3.17 Accelerp.tsd Deoreciation of Capital 1xnrEnditu res (Four Years) Canital :-.endiluros Bli ible Accelerated Yor Iccelex-rted Depreciation. DeDrociation 1. Infrastructure e:pandit-ures 25% (roads and bridges, electrical installations, telephone and telecoirnmunication installation s) 2-, Permanent goods (land improvements, lo/" buildings, employees' housing) 3. Directly productive 2r.5aclnery% tools and eqaipment. Note: Companies e,njoying the benefit of a tax holiday under Domest,ic and Foreign Lnvestment Laws must start their four-year dcpreciation period in the year after the expiration of the tax holiday. During tax holiday no rmral depreciation is the rule. Firms nov enjoying tax holidays may choose in which of the four years to take the accelerated depreciation. Source: Decree of Minister of Finance No. KE? 630/!I/II/10/70 October 9, 1970. -113- Tbl n8 vestment Alloi.Jance for Additional Allo-ance 20% of actual investment spread over four years startirug with year of the investment Year 1 5% Year 2 5% Year 3 5% Year 4 5h Tot-al 20% Table 3.19 Interest, Dividend, and Royalty Tax Coveracye Tax Rate Tax levied on payment of interest, dividends or royalties (writhholding tax paid by person, government 20% entity or company making the tax- able payment) Table 3.20 Corpora2te Tax Rate Schedul2e and Tax. .em-Lons (%) I. Corporate ePrfits Tax Rate Up to and including 5 million ipiah 20% Over 5 million Rupiah 45% II. Tax: E;emntions Ith of Tirae Dividend Exemrntion 2 years Ta: ?olida-s Basic exe."ption-for ne. investmeents 2 years (dorstic and foreign) in priority areas. Additi.onal : e-mrtions for projects tihat: (a) are subst=ntial foreign exchange 1 year earners or savers. (b) are established outside of Java. 1 year (c) require special infrastrcture investmrEnts or extraordinary risk. 1 year (d) coincide wit.b other special priori;ty objectives of the Government. 1 year 6 years (max.) Table 3.21 Imrn-ort Sales Tax Schedule (PPN) Imnort Duties PPN Kind of Goods 0 0% 'Essential Goods 51 10, 20%- 5% Sen=iessential Goods 30, 4O% 10% Ordinar,y Goods 50570, and 100% 20% Ordinary Goods 5% Luxury Goods. / #;/ Lux-ury articles such as console radi o s. T,V. sets of 23r' tube size and larger., kitchen ovrens, electrical washing machines, and automobiles with f.o.b. value of U.S. $2,000 and above Note: The import sales tax must be calculated on the total of the c.i.i. value of the imortcd goods, import duty, surtax and retribution (profit margin estimate). Scurce: ainistry of Finance, Customs Depart-ment, May 1, 1971. -116- Table 3.22 Foreign InTestment Projects ATDOp1c:C-d 1!)inua11yV BE Cou:nt'y Of Origin and Plamned Tnhvestment .1967 - 1970 ( mii.llions $ ) 1/ 167 1968 1969 1970 7btal No. of IL-vest- ]'o. of Lnvest- Io. of Invest- 11o. of Tinvest- io. of Invest- Country, oL Pro- rmr,et Pro- ment Pr- m.ent Pro- ment Pro- ment Ori Rin i ects A.7.;int jects k.rmint jlects n. eLMt lects Amr.o int U. S. . 5 143.70 10 1i4.92 114 282.66 214 74.714 53 516.02 Japan :2 3.00 8 114.39 15 .102.03 28 37.20 53 136.(2 Hongkong 1-. 0.25 10 12.02 9 13.58 21 17.14 1A 143.89 Sircapore - - 7 10.24 .8 16.68 11 10.60 26 37.52 Nethert2ids -1 0.30 8 18.83 2 0.80 7 12.92 28 32,85 West. Gmirmanv 2. 0..3 , L 7 3.29 40.12 1 19.8U nriilippine 2 14.5o 1 5.co 8 2149.00 2 3.00 13 261.50 Xala-ysia - - 1 1.00 14 11b.00 13 1W.614 18 29.664 France 3 2.50 2 3.00 2. 5.79 1 2.10 7 23.39 United Kingdom 2 2.14 3 0c55 1 4.5o 21 21.05 27 26.214 Swiss - - 2 0.99 1 0.33 8 14.o90 11 16.22 Belgium 1 0.24 2 5.36 .1 0o.0 10 3.63 11: 9.73 Australia& 2 3.5L 1 0.10 3 0.91 14 7.90 10 12.15 Canada - - 3 77.66 - - - - 3 77.66 No --as - - - 3 14.23 - - - 3 14.23 Denmlark 1 1.00 1 1.5o 1 1.50 o 1.00 1I 5.00 Thailand - - - - 5 4.25 2 2.85 7 7.10 Panram 1 9.00 1 1i50 1 1.50 3 *12.00 South Korea - - 1 48.50 - . 3 54.90 1 3.-h0 Sweden - - - - 1 1.20 - - 1 1.20 Liberia - - - - 1 1.00 - - 1 1 .00 India - - - - - - 1 o.65 I o.65 22 170.38 66 2214.02 84 70L.52 163 240.93 335 1,339.85 Source: Foreign invcLt^raen- Ibard iJ Converted from foreig,n currencies at going rate -117- Table 3.23 Foreign nve stment ProA.ects ATmomved B1v Country of Origin anld Planned invest7,-:n9t Januarr - March, 1971 ( thousa-nds of U.S..$ ) Count:7 of Oricgin Ro. of Projects Anmunt '1/ U.S.A. 3 6,630 Japan 7 76, 81 iongkong 5 34,100 Singapore 1 1ooo Nebherlands 2 1 5 WIest Germany PhilippinDe Ilalaysia Prance . 2,1.73 United KIEmgdom. Switzerlandl Belgiurm hAustrali.a 2 1,15o Canad i Nornzay Dennarl . Tnailand Panama South Horea S,Jeden. Liberia Irdia Bahama 1 boo Total. 22 137,917 Source: Foreig n invorn1-ent Bard I/ InclJud's Indniiesian share in joint enterprises. Tt,'le 3.24 Foreign Inv-estne^nt Pro,iect3 Anproeed Planned Invest.rent L,, Sector. 1967 - 1970 (1millions U.S.$ ) 1 1967 1968 1969 1970 TItal 1`o. of Invest- Ilo. of Invest- 1;o of m-est- I.o. Of innest- I.o. of 1etest- Sector Pro- rp3nt Pro- ment Pro- Iment Pro- menit Pro- nient jects A'mnun t ects Am unt iects \nDuit je .ts P .jnt jec.s A,.unt Agriculture 2 8.19 2 2.00 39 52.50 43 62.69 Forestry 4 5.50 9 67.61 22 279.75 II 32.00 49 38&L.86 Fishery 3 4.50 2 3.00 1 o.50 3 5.36 9 13.36 Maning 1 122.50 2 83.50 5 329.21 1 0.30 9 534.51 T. 5f.I.3r 2.0 28.76 30 38,83 38 70.68 68 105.60 1h6 2143.87 Pharn.aceutical! 1 1.00 7 6.56 2 5.50 19 21.67 29 314.73 Public works - - 3 3i10 - - 8 14.68 11 7.78 Housing/P4al- Estate 1 2.00 3 5.60 5 6.91 8 14.70 17 29.214 Comnunication transportation L 6.oo 2 0.16 3 1.42 1 0.50 7 8.08 Trade/Crm-b- rubber 1 0.20 5 3.40 2 o.63 2 3.62 10 7.85 Hotel/Tourism| - - | 1 2.60 | 4 7.89 - 5 10.49 22 170w46 66 223.55 84 704.52 163 2A0.93 335 1,339.46 Source: Foreign Investment Board iJ Converted from foreign currencies at the going rate Table 3.25 ForrciFn IThvestrnent Projects ADproved By Sector, January - Ilarch, 1971 ( thousands of U.S.$ ) No. of Projects Sector Januarv February March Total Agriculture Forestry Fishing Mining and Quarrying 18 Yinuifacturing| 23,449 64,238 1,100 89,387 2 Food 800 500 1,300 6 Textile and Leather 17,049 57,265 300 74:,614 3 Phnarmaceuticals 1,600 2,473 4,073 2 Printing 750 550 1,300 1 Ciemical Products 250 250 1 Nonmetalic minerals 1,75o0 1,750 . Steel h4,000 | 000 , Metal Products 1,5o00 1,500 2 Other 600 600 1 Construction . 15,00 15.,0Co 1 Hotels 32,250 32,250 2 Transportation & Communication Services LOC 880 1,230 otal 22 240374, 80.,238 34,230 137,9171 ource: Foreign InvestmrentL Board and Bank Indonesia -120- Table 3.26 Foreirgn Investment Project Anorovals and Disbursements, 1967 - 1070 Approved Project s Disbursements I Proposed invesceted Field of Number of Lavestirent NiLnber of CaDital Activity Projects (1ve1 .$) Projects (in .$ ) IManing 9 463.5 8 11.7 ,Fo re stry 49 385 .3 42 43.0 Plantation 40 62.6 8 2.3 Fishery 10 14.4 8 7.2 Transportation and comnmnication 8 10.7 7 6.0 Tourism 10 18.2 10 8.6 Manufacturing 197 305.8 106 80.7 Processing of agricultural products (38) (55.2) (18) (12.0) Electrical eouipmnt and appliances (13) (29.1) ( 6) (12.1) Phar.ceutical (31) (36.7) (16) ( 6.9) Lighnt iron and steel products (22) (26.0) (11) ( '5.4i) Chemical (12) ( 8.L4) (10) ( 3.7) Textile (12) (53.9) ( 8) (11.2) aiscellaneous manrufacturing (69) (96.5) (37) (29.L4) i4iscellaneous 18 | 17._ 8 | 8 1.9 Total 34 |1,2783 127 161.9 Note: Ei;cludes iinvestments in the petroleum and banking sectors. Data covers invest- mernts approved by the Foreign Investment Board from 1967 to December 31, 1970. invested capital is the recorded disb'usement for the sa-me projects through Decem.ber 31, 1970, based upon customs data arnd conversion of foreign claims under the DICS. Source: Foreian Investment Board and Bank Indonesia -121- Table 3.e27 Foreign Investrcrit Disbursemr.ents As a Percentac-e of Planned Investment Disbursements as Percent age of Sector Planned Investment KILning 10, Manuf acturing. .8 Forestry s44 Fishery 63 Transport/Communication 72 Trade/Crumb Rubber. 88 Real Estate 4 3 Inf rastructure a4 h Hotels 162 Plantation/Agribusiness 39 Source: The MaraC,eent Institute, University of Indonesia. Data as of December 31, 1970. Sur-wey of 203 enterprises. a! Housing, dredging, etc. -122 - Table. 3.28 Estimr ated ILture Mane e r Ne6ds for Foie-i n Investment P?2ojects in Operation as cf December 31, 1970 Estimated Nun,rbe.r of ErTployees Required Skills lReuired 1970 1971-1972 173-197-5 1976-1980 1981-1985 Total Skilled 3l5 1, 736 1, 223 306 193 3 773 Unsk,illed h41 2, 02 1,707 749 250 6,027 Supervisory 29 183 62 31 25 330 Mlanagerial 21i 107 37 18 5 191 Technical 1129 438 312 172 158 1.,199 Others 375 327 1 1 1 705 _ 1,281 5,693 3,3h2 1,277 632 12,225 Source.,, Mannaement Institut>e 'Surveyr University of Indonesia, April, 1971. Survey of 203 Enterprises in variox=s sectors. -123- Table 3.29 Survey of Planned and Pealized Foreign Investment Includin, Fixed and W:.orking, anital EI,;oonditures AS Of DeCerr'er 31 97 ( in thousands U.S. $ ) Realized Investmentu No. of Planned Fixed WNTorki ng Sector Prj s Investment Capital Canital T.htal Irining 8 368,5o0o 3,820 7,721 37,14. a/ nmiuf acturing 113 15 9, 500 67,7141 23,322 91,661 a/ Forestry 39 139,400 39,174 19,782 61,419 a/ Fishery, 7 . 9,606 4,534 1,538 6,072 Transportation/ communication 6 11,749 15,265 961 16,226 a/ Trade/Cxrumb Rubber 8 4, 030 2,566 995 3,561 Peal Estate 12 21,847 7 555 1, 1848 9,4o3 Inf ras tructure (Housing, Dredging.,. etc.) 4 8,790 260 90 35o Hotels 1 400 65o - 650 Plantation/ Arribusiness - .25 20,75o0 6, 96h 17 Total 203 744,972 148,529 5 p7,420 235,olo Source: Questionnaire Survey, Lambarga Management Institute, University of Indonesia, April, 1971 !/ Does not total due to incompl6te data on disbursements on fixed and working capital -12b - Table 3.30 Survey) of Labor Ermlo:ved on Foreian Investment Proecs As of December 3l 970 Labor Emloyed Sector Construction Onerat ions Total 4ining 2,0714 2,0714 Manuf acturing 2.,277 18,816 21,093 Forestry 1,V091 12.,025 13,119 Fi shery 160 8214 984 Tran siy rt/Co.7U lunication 11 346 357 Trade/COumb Rubber 1,775 1,775 Real Estate 830 1.,366 - 2,196 Inf rastbracture a/ 1,023 1,023 HIotels 14314 434 Plantation/,gribusirness 300 214,772 25,Q72 Total 6, 7146 61,381 68.,127 Source: l4ana-ement Institute Sunrey, University of Indonesia, April, 1971. Data as of December 31, 1970 from survey of 203 enterprises. a/ Housing, dredging, etc. (capital/labor ratio in manufacturing $14,31414 per employee.) Table 3.31 Domestic Investments Classified By Payout Peri4od and Capitalization Gestation Period Sources of.Capitalization Natural- Natural- Short-terr Ibdiwn-term Long-term born ized i;xed Sectors (1 year) (2-5 Y6-l5jas Citizens Citizenss Oririns Agric./Estates 57 16 2 35 29 Forestry 3 7 21 5 Fishory 6 4 1. 1 kEning/Ifg. 225 55 89 176 46 Transport/Tburismn 30 21 1 29 13 10 Others 3 1 4 - Tbtal No. of Projects 385 100. 3 186 230 72 Source: Domstic Investment Board ..e -126- CHfA?PTKR IV F INANCN tG DiDUST}RIAL JD2VEST1IENT -4.1 The availability of credit and finance for fixed iLvestment and working capital has a significant effect on the success of an industrial development program. The cost of credit, the terns on wzhich it can be obt. _ied partly determine the type and extent of investment in industry that will be undeitalen. In this sense the conditions surrounding,, the availability of finance can be considered a part of the policy framew3 rk of incentives that is discussed in Chapter III. This chapter covrers the conditions and tenis of supply of credit, and the factors affecting demand. This involves a brief discussiorn of the structure of the banking sysuem and how the several parts of .the system contrib-ute to the supply of credit. A special program to increase the supply of invest,mnt funds to industry and other economic sectors is also evaluated. b.2 In view of the acceleration of industrial development that is recomnended in Chapter II of this report, provisions for credit for investment and working capit,al purposes shouLd be adequate so that finance will not be a constraint. It is not only a problem of the sufficiency of credit in the aggregate but also whether credit facilities and prograams are varied enough to meet the different kinds, of demands that are licely to occur in the next few years. From the analysis that follows it appears that credit availability is not atI present limiting the growth of -inchistrial development, though :there are certain gaps in the programns, but in the future the needs will very likely be not only greater in amount but also require a greater range of credit facilities. Reco=nendations are made Lor several types of policy development or change that will help adjust to the changing economic environment. TE SUBP?LY OF CREDIT The Str.ctare and O%erations of the Banking System 4.3 The principai banking sources of finance for industZ7 consist of the Barnk Indonesia (the Central Bank), the State Cornercial Banks, the State Development Bank (Bapindo), the' group of national private banks, and branches of foreign banks. All of these banks provide both short-term and investment credit for industry; nowever, the groups of banks within the system differ from one a -'Kjer in their conmiand over resources, their position and importance in the market, and their ability to provide particular kinds of credit (specifically investment credit). These differences among the groups of banks have certain ef- fects on the supply of credit that are described below: 14.4 At the present time, there are five State commercial banks which have about 600 officees in the countr, about half of which are concentrated in the DJakairta area. About half of the total branches -127 - are those of the Bonk Negara Indonesia l9b16 (ENI). Initially the five State coimnercial bzanks were intended to concentrate their activities in. certain functional areas; for example, the BNI has been regarded as the prime industrial banlk; the Bank Bumi-Daya (BBD) has concentrated on estate agriculture, and the BaLnk Dagang Negara (BDN) has emphasized midning. 3nrk Ranjat Indon.sia (BRI) has specialized in rural credit and Baink Ek- spor Impor in financing export products. Although there is still so-me degree of speciali- zation in the loan and credit activities of the State banks, there is more and more evildence that these specializations are becoiming blurred and that the degree of competition among these banks has beeni increasing. Customers in one economnc sector no longer have as strong ties to a p4rticular barn as they once did. This seems par- ticularly true in loan activities affecting manufacturing industry-, inCluding product,ion for export. It see-s likely that this process ill continue and that each of the banks iill more and more reach into economnic areas that were formally the main provrince of anothler ban1k. Such a blurring of specialization is probably all to the good, since it means that there wvill be more than one bank to whom a new customer in ind-astry might apply for credit. One official oft a State commercial bank said .tiat competition for deposits and loans was indeed keen and seemed likely to continue so. There is still a close relationship bet-ween individual banlks and many of their old customers, but as business expands the ties will not be so close as they may have been in the past. This also suggests the possibility that the State baxks may undergo change in the future, possible in the directioin of merger or aonsolidation of some of the barnks in the group. Such a development might occur if there are advan-tages in having larger total assets in a single institution. 4.5 The group of national private banLks is comprised of about 120 bank;s with some 250 offices. As the name implies these are private banIks in which the State has no owrnership interest. Three of the largest of the private baneks are permitted to engage in £oreign exchange transactions and together with the State banlcs they comprise a group called the foreign exchange banks. On the whole the private banks are small in terms of their total assets, limited as to the kind of banking business that they normally undertake, and they have had a somewhat checkered career in the banking system in Indonesia. There have been a umbier of cases of failures with a loss of deposits and assets; embezzlements and other illegal practices have marred the reputation of these banks as a group and their ex- perience and competence as bankers has often. times bEen brought into question. As a result, their relative position in the banlring system has de^lined parvicularly in comparison to the growth of the State banks and the foreign banks. Yet they have a potentially important role to play in the future in the provision of bankinig facilities for industry and other sectors. 4.6 Although there have been branches of foreign bankcs for a number of years, some of the branches have been established in the -128- last few years. There are leleven such banks and they are confined to the Djakarta area. Several of these branches have been associated with banks in Singapore and Hong Kong and have been particularly im- portant in the repatriation of funds that originally left the country in the early 1960s. The volume of business of these banks has grown very rapidly in the last few years. 1X.7 In additioni to the banlks just mentioned there are others of lesser current imoortance to industrial finance. The local or re- gional development banlks, about twenty in number, are located in each province. Originally it was intended that they undertake dev- elopment finance of local industry and agriculture, but they now function primarily as the banking agent handling the receipts and disbursements of local government. Tneir development bankina activities are minimal, as statistics presented later clearly show. But this may be changed in the future. Tne needs and opportunities for development finance for industry will increase and the local development banks 'should be encouraged by the central bank and the government to re-enter the field. Encouragement could take the form of technical assistance in creating competence in project evaluation plus making credits available to these banks, as is now done for the state comnercial banks, for investment and working capital for local industry. Such a progra-n could be one sigrnificant element in sGirmU- lating the geographical dispersion of industry. 4-8 There is a private developnent bank thai. has been .n opera- tion for some years and a new one with.foreign participation was organized recently; The former bank has had only indifferent success. During the period of inflation the bank barely sur-rived, since all investment in industry was at a very low level. It is possible that in the future private development banks may grow and become a sig- nificant part of the credit system, but they are not significant elements now. A ne-w private finance company is also in Drocess of formulat>ion, though it has taken a rather long time. It will con- centrate on supplying credit to small or medium-sized business6s thati are now very poorly serviced. In addition to supplying credit, this company will also provide technical assistance; this is a very necessary ingredient to the success of small business. Without it the supply of credit alone is probably insufficient to guarantee survival of the new firm,s. There are also plans to have the private finance company make direct equity investments and undertake under- writing of security issues, but these activities are p-robably far in the future. The immediate need is to get the finance company organized and in operation. It has been too long delayed, and some action should be teaken to get it mloving. 4.9 There are other kinds of banks and financial institutions in Indonesia such as village and paddy bankcs, insurance comDanies, state and private savings banks and the like, but none of them are of importance for industrial finance, though they have other roles. -2.29- TMere is one additional elemient that deserves mnentior and at is the unorganized moncy majrket located r,iainly in Glodok. These are the street money lenders. Very little is knoin about tlhis rmarket. It provides short-te:mm high interest rate loans to individuals, which is traditional, but it may also provide funds to firms. In Korea business firms regu.larly go to the unorganized maznket for funds, bu,t this apparen-tly is not so true in Indonesia. To some extent the privato barnks provide funds at interest rates higher thani can be obtained from the state banks for loans that are risky or that do not qualify at the state bankcs But it is possible that sorme firims do utilize the unorganized market at certwain times. More information is needed to determine the extent and importance of credit transact-ions outside the banlcing system. 4.10 Total bank credit has beeri increasing rapidly in the past few. years and this has been accomrpa-nied by an increase in the pro- portion going to the private sector and a change in the relative shares supplied by the State banks. Sunary figuares on bank credit by banking sources, division between the public and the private sector, and economic sector use are sho-wn in Table 41l. In the period from the end of 1968 to the end of 1970 total bankC credit. al2nost tripled. The central bankla still supplies more than half of the total (a graat part of it in the fora of liquidity credits to the State banks) but this proportion has declined. The largest gain was by the s'tate corn,ercial banks which now account for over 1/3 of the.total (excluding the aforementioned liqluidity credits). The national private banks and the foreign bankls to- gether account for appOimately 8 percent. In this period there was also a shift in the supply of credit in favor of the private sector. At the end of 1968 the public sector received about 2/3 of the total, but, by the end of 1970 the private sector was re- ceivLig over half of the total credit. There has been very little change in the general sector allocations. Production, which de- notes loans made to industry, agriculture, and sinilar coimnodity producing sectors had slightly under half of the total and the sector called "other",, which covers conmierce and trade, had about the same. Slightly less than 8 percent was to export fiinance. 4.11 Some details on the structure and operation of the supply of credit are given in tables 4.2 and h.3. In the forrer table Banlc Indonesia credits to the banking system are accounted as part of the State bank total. The private banlks are broken do-wm to show separate figures for the private co.mmercial banrks, the local dev- elopm.ent banks and the foreign banks. Based on these figures the State ban.ks supplied almost 2/3 of the total credit outstanding, a large part of which was represented by the credits from the central bank. Only a nominal amount of central bank credit has been provided to the private banks. There are also differences in the sectoral composition of the loan portfolios of the different -130- Table t;.1 Total Bank Credit b- Source, Sector, and Use 1968 1970 Increase I. Source Rp bill% Rp bill A_ _a Total 126.8 100.0 363 3. 100.0 186 Bank Indonesia 92.0 72.6 209..6 57.7 128 State banks 26.2 20.7 123.3 34.O 371 All private banks 8-.5 6.7 30.2 8.3 255 II. Sector Public 81.7 64.4 157.7 I43.4 93 Frivate |L5.1 35.6 2054 | 56.6 355 III. Use Production 55 43.7 168.5 164 24o Export Finance 10.1 8.0 28. L 7.8 181 Other 61.2 48.3 166.2 h5.8 172 * End of year. Bank Indonesia credits to the banking system included in BI total Source: Bank Indonesia Table 4.2 Total Ban(r dit'by Bank Source and Use, 1970 (lRp billion) Distribution JRp bil1lion within Banlks - t%) 1. Bani-: Indonesia 96.8 100 Prod.uction 19.8. 20.} Export .*4 .*4 Other 76.6 : 79.2 2. State Banks 233.6 100 Production 137.2 58.7 Export 26.3 11.3 Other 70.1 30.0 3. ?rivate Conrercial Banks 20.9 100 Procduction 9.0 143.1 Export 1.41 6.7 Other 10.5 50.2 4. Local DeveloLmaent Baniks 3.6 100 Production .,9 25.0 Export .1 2.8 Other 2.6 72.2 5. bore,ign Bariks 8.2 100 Production 1.7 20.7 a-port . .1 .1.2 Other 6.4 78.1 6. Al1 Banrks 363.1 100 Rroduction 168. 46.4 Export 28.14 . 7.8 Other 166.2 45 .8 Bank Indonesia creits to barning system are counted in the State B-nnk and Private Bank totals Source: Bank Indonesia -132- bank groups. The State banks have a majority of their loans to indtustry, agriculture., alnd the commodity sector P.hereas the pri- vate banks have a majority of their loans to trade and commerce. In part this is a reflection of the affect that the medium term credit program, wvhich is discussed in the next section is almost exclusively the province of the State banks. 14.12 Table 14.3 presents a specific comparison of bank credit outstanding purely in the cormpercial banks, that is, excluding Bank Indonesia. On this basis the State banks provide over 80 per- cent of the credit, with the foreign banks providing about 6 per- cent and the national private co-mercial banks about 12 percent. It was not so long ago that the national private banks supplied about 20 percent of total credit. Over the past few years they have been losing ground to both the State banks and the foreign banks. 4.13 The relative decline of the private banks is traceable to several elements. As mentioned earlier, their performiance and stability has not always been satisfactory. Losses have been incurred by depositors, and there are numerous instances where they were in violation of the requirements with respect to the maintenance of reserves. Also deposits at the State banks have been guaranteed by the central bank and the rise in interest rates paid on their deposits has tended to direct the flow of savings towards the State banks. Finally, lending rates at the State bankcs, are typically lower than those in the private banks. Loans to industry by the State banks are at the commercial rate of 2 to 21½ percent per month, whereas rates at the private banks are above that and at present range upwards to 10 percent per month. For all of these reasons, the State banks and the foreign banks 'have grow-n more rapidly than private banks. The latter have essentially become, to some extent, lenders in more risky ventures or those that cannot, for some reason,. secure a loan from the State banks. This factor, coupled with the fact that the private banks have not had effective legal means to collect on defaulted or overdue loans has placed these banks in a some- what precarious ar marginal position vis-a-vis the other parts of the banking system. The central bank is now undert laking steps to help correct some of these problems. At the direction of the central barLk some State banks are undertak-ing to help one or more private banrks with respect to training and the conduct of their banking operations, but there is a great deal that needs to be done, and it will take some time to accomplish. It is a necessary task, however, since it seems likely that in the future there wiall be increased demands upon the banking system that can- not be met by the State baniks alone., Moreover, since foreign banks are limited to the Djakarta area they cannot be expected to meet needs that arise out of that area. -133- Table 4*3 Bank Gredit by Soturces and Use (Rp billi-on upnless indicated otherwiise) Statbe Foreign Other Total B____ Bank}: BanLks 1. 1968 Production 13.4 . 2.5 15.9 Export 6.1 - .8 6.9 Oth-ier 6.7 1.1 4.2 12.0 Total 26.2 1.1 7.5 35.8 2. 1970 Production 60 .5 1.6 7.3 69.14 Export 16.9 .1 1.2 18.2 Other 45.9 6.14 9.2 61.5 Total 123.3 8.2 17.77 1149.2 3'. Increase, 1968 to 1970(P%) Production 351 - . 192 336 * Export .177 - 5O 1614 Other . 585 14814 119 412 Total 371 645 136 317 Omitting Bailk Indonesia and Bank Pembanguanan Daerah Source: Bank Indonesia. l4.lL; Prior to 1969 bank credit was almost solely liinited to short-term credit primarily for uses in trade and commerce. Until the economy was relatively stabilized and inflationary pressures were curtailed, there was neither a demand for longer tenni credit for investment purposes nor any willinrgness on the part of the bainks to make such credit available. Beginning in 1969, how-ever, a special program was inst;ituted to make investmrent credit avail- able in the economy. The growth of that program is indicated by the figures in table 4.h;. Although short term credilt is still by far the largest part of the total, as of January 1971 investments credits amounted to about 23 percent of the total. The details and performnance of the investment credit program are described in the next section. 4-15 -In summary, it appears that the banking system has been expanding credit at a rather rapid rate and the structure' of the system is clearly dominated by the State cormercial banks. In the future they are likely to continrue to expand but it will be desirable to streng,hen the capabilities and the role of the national private commercial banks. The program is already under- way and should be continued and possibly accelerated. At the saTre time the lar'ge num.iber of national Drivate banks probably cannot be maintained. It will be difficult for all of them to continue to grow, and m,any of thEn are of such a small size that their effectiveness is quit,e lin'ited. There are economies of scale in banking as in indiustry and in the interests of efficiency some merging of the private banks into a lesser number with a larger average size would probably be in the interest both of the banks themselves and of the country. The steps cannot be accom- plished by direction but could be encouraged in various ways by the Goverrm-ent. At the present time there is about one ban-king office per 130,000 people and while this is adc-qtiate at present, over the next five to ten years the commrercial banking system .will undoubtedly. need to expand its facilities and services if other development objectives are to be achieved. The I-ledium Term Credit Progran 4.16 This program was .started in early 1969 to provide invest- nent credits at favorable interest rates and with longer maturity periods thar. had formerly been available from the banking system. The purpose.was to stiinilate investmnent in priority projects in. all sectors in accordance with the development plan. The funds are channeled through the State commercial banks to the private firns. This programn has expanded rapidly in total size since its inception and in the process has undergone certain changes in the sect.oral allocation of the loans. In the next few years decisions mist be made as to the growth in this kind of credit that will be reouired or desirable, the composition of the sources of funds, Table 4.h Distribution, i of Credit Shor u-term Credit Investment Credit REnd Or Year RD bill Percent RD bll Percent 1967 31.2 100 0 0 1968 126.2 99.5 .6 5 1969 238.7 96.3 9.2 3.7 1970 321.8 88.8 40.14 11.2 Jan. 1971 331.9 76.7 43.0 23.3 Source: Bank Indonesia -"-' \G -136- the terms on which the credit is extended, and the sectoral empha- sis in the program. These decisions are particularly important if the suggestions made earlier in this report for an acceleration of industrial development are accepted. The first two years of the progran have been a period of experimentation and learning; the next fe-wi years should be a period of maturing of the program and a skillful use of it to accomplish the industrial development objectives. 4.17 The original funds for the invest-ment credits were pro- vided by BardŽ Indone6ia, the budget, and the state banks them- selves. 'The figures belowi show how the percentage shares of the actual credits outstanding have changed &ring the past two years, Orig January 1 Januarjy 19721 Bank Indonesia 50 65 59 Budget 33 25 17 State banks 17 10 24 The central bank continues to supply the Yrajority of the funds in the form of credits to the state banks. The contribution from the budget.has been declining and probably will continue to do so Ji-th a possible stabilization at some as-yet undetermined level. The share of the state banks, using the funds supplied by the growth in their toaie deposits, has been growing and is now almost a quarter of the total. 14.18- The budget share is at no interest cost to the state banks and the central bank share carries an interest cost of 14 percent. With the rate on one year time deposits at 24 percent, the interest cost of' the funds to the state banks under the orig- inal sharing arrangement was about 6 percent, since the state banks have been supplying a larger part of the total. The lend- ing rate for the medium term credits is 12 percent. There is a spread betwreen the costs of the funds and the returns which makes the program a profitable one to the State banrks, but the spread has been decr~easing and may continue to do so. There lies a problem for the next few years. If we assume that the central bank provides half of the total and the budget 10 percent, with the State banlks' share rising to 40 percent, the interest cost of the fun'ls with the present rates on time dcposits woald be almost 12 percent, the same as the lending rate, and the moti1lva- tion for the State banks to continue the program would be gone. On the other hand if time deposit rates were decreased to 1.5 percent per month, as has sometimes been discussed, the interest cost of the progr: would be slig1htly over 9 percent, thus pro- viding a margin of profit to the State banaks. Clearly, if the State banlks are to assum,e a larger share of the prIogram Lrom their owTn resources, the appeal of the program, and its success, are sensitive to the interest rate structure on deposits. 4.19 Typ cally the funds are made available for up to five years and 75 percent of the project cost can be financed. The borrower must contribute 25 percent of the total and also pro- vide collateral to total 150 percent of the loan. These have been the standard terms for the loans under the program. It has now been proposed to make these tenis applicable to priorit.y projects and to establish separate terms for non-priority pro- jects. The differences proposed are an intterest rate of 15 per- cent rather than 12 percent and a requirement that the borrower contribute 33 percent of tihe cost of the project. This is a step that should inject some greater flexibility into +his credit program; howvever. it is likely to affect primarily larger-scale projects that conceivably could obtain funds from other sources. If the total investment credit program can grow without limit, allocation of resources to such users throiugh this progra-m is generally helpful to development. But the progrann probably has some limits on its size and if preferential interest rates and other ternis are to be used as incentives for industrial develop- ment, some greater rarnge in all terms ihay be desirable. For example, a range Li interest rates from 10 percent to 18 percent, borrower contributions ranging from 10 pei'Cent to 40 percent, and maturities r-nging up to 8 or 10 years could be considered within the next few vyears. As is shovwn a little later in this section, the mediumL- term4 credit programn has primarily been direc- ted toward larger-scale industries, and the greater needs for finance may very well lie w,,ith small:er-scale industry. YNreover, a consideration of a 7i'der range of lending rates, downpayments, and matlurities could make this program a more effective credit instrument, capable of meeting a wider range of needs. L;. 20 There have been proble-ms in the imaplementation of the investment credit program but they have been those uonmron to a learning process. The processing and.disbursement. of loans has not always been followed in uniform fashion by all of the banks. Slightly different criteria have sometimes been applied, as for instance, wJith respect to the character of the borrowers' con- tribution. Sometimes the bank has interpreted this as requiring 25 percent cash payment on the part of the borrower, -wihereas at other times actual work in place has been accepted. Although feasibility studies are required on loans above Rp 100 million, such studies have sometimes been required of smaller projects and sometimes omitted. The requirements for central barnk appro- val of loans usually adds a month or two of delay and if the project is regarded unfavorably, a typical action is simply to -138- delay the processing rather than to give a negative decision. The banks themselves have not had the technical stai'f capable of making the feasibility studies 'JUt have employed local consultant firms for that purpose. It is taking time to build up mutual confidence among banks, consulting firms, and the customers. All of these problems are gradiaally being ironed ouit and as there is more ex- perience of t.he program, loan applications and implement.ation will undoubtedly become smoother. 1.21 By January 1971 the investment credit program had grown to a total of about P,p 71 billion in approvals and has continued to grow in the months 'therea.ter. Tables 4.5 and h.6 surr:rize the pro gram as of early 1971. Tot,al disbursements are about 60 percent of appro-vals and in general disbursements seem to lag about five or six moinths behind approvals. This is not an unusual amount of lag, but there are individual differences within the sectors; in particular, loans to maenufacturing seem to lag more in their dis- bursement than do loans to agriculture or other industries. On the other hand, the percentage of funds allocated to manufacturing industries has grown more rapidly than the total program and now accounts for abcut 38 percent of the total. Within the manufactur- ing industries there has been some concentration. Food processing and textiles together account for over 6o percent of the total. Only very small amounts have gone to the chemical industries (ex-. cept for the crumb rubber plants) or to metals or machinery indus- tries, which are the induttries identified in as being particularly retarded in the economy. This lack of credit undoubted- ly stems from the lack of demand and not because of any lack of willingness to supply funds to such industries. There can be no complaints about rate of growtrth of the total program or of the share going to manufacturLog industries. Investment credit appears to be supplied in a satisfaG: tory manner. 14.22 There has also been a concentration of funds geographically. As of lAarch 1971, 41h percent of the credit appro72' % for industry were concentrated in Djakarta; an additional 36 percent were to firms allocated in other parts of Java so that together the island corman- ded three-fourths of the total. This is more than the existing geo- graphical concentration of industry in Indonesia and suggests that the concentration is 2yt to grow.higher as a result of this 1rogram. On the whole the loans in The investment credit program have gone to medium and larger scale firms. Three-fourths of the total funds have been in the form of loans of over Rp 100 million as is sho-wn in Table 4.7. Only 2 percent have been in loans under RP 10 million and only about 1c percent in loans of under 1tp 50 million. Based upon a small and probably biased sample, it appears that abaut 60 percent of the loans have gone to firms that employ over 300 pople and very few to .firs employing less than 100. It is probably in- evitable that this kind of emphasis should have occurred during the -139- Table 4.-5 Thvestr.ent Credit Ceilings and Act,uAals Januar-r 1971 (Rp billioln) Percent Sector Ceiling Actual Used 2. Total 70.8 43.0 60 7 Bankuf actu ring 31.2 16.3 52.2 .3 .133.3 St 18.9 12.5 6 Agriculture 20.4 14.1 70.0 Othiers 2. Shares (total) 70. 253.4 60.7 Bank Indonesia 50.3 2$.h0 State Bankcs 10.2 10.701.0 Budget 1037.3 70. Source: Bank indonesia IL Table 4.6 Investmnr.t Credit Outstanding (Rp billion) Percent Total Manufacturing | June, 1969 3.6 .2 5.6 January,1970 11.3 3.1 27.4 January, 1971 -43.0 16.3 37.9 Percent increase ('Jan.1970-Jan.,1971) 280 426 Source: Bank Endonesia Table 4.7 Size of Loans in the M.edivvon Tom Investtment Pro-ram. Percentage of Funds 1. Under Rp 10 million 2.1 2. Rp 10 to Rp 50 rmillion 9.8 . 3. Rp 50 to Rp 100 million 13.4 4. Over Rp 100 million 74. 7 Source: Bank Indonesia early phase of the program; the larger firms are generally in a better position to take advantage of the availability of this kind of credit. lioreover, it takes just as much time and energy to appraise and supervise a snal:l loan as a large one; that is true of all kinds of financial iristitutions and p =_tially accounts for t,he banks' preferences for the larger loans. It is suggested, however, that in fuLture some greater attention be paid to the lower end of the spectrum. It, is further suggested that this attention might be undertaken not only by the State banks but possibly also through the private banks. What is being suggested is the possibil- ity that the investmnt credits be channeled through the private banks rather than solely thrcugh the State banks. This might be done on a highly selective basis to include those banks that have demonstrat,ed by past performance and conditions that they deserve trust and confidence. It would be one way of bringing them into investment finance activties, and they might be able 'to ister effectively to the smaller scale industries leaving the larger ones to the State banks. In fact it might be initially useful to set some upper limit on the total amount of credit that the private banks could extend in a single loan2. At present there is some joint financing between state and private banks but it is nominal. The implementation of a program of channeling investment credits through the private banks would of course require a careful analysis by the monetary authorities in Irndonesia before any action. could be taken. 4.23 The medium tenn credit program seems to be fulfilling the expectations that were originaIly held out for it. It has been. both responsive and expansive and shows every sign of continuing to be so. This program is no-v being supplemented by development loans through the bankcing system where the loans are supplied by foreign countries with an initial loan :of $15 million under con- sideration. This supplementary program is primarily for the pur- chase of machinery and apparently contains no specific commnitments beforehand to particular projects. It should be a useful supplement in the area of investment finance. If the suggestions made previous- ly in this section are examined and found useful by the Governruent it seems entirely likely that this investment credit program could become strengthened and more effective in fulfilling the invesiment needs in the development of industry in Indonesia. Bank Licuidity and Loan Policy 4[.24 Over the past few years there have been recurrent periods when the bank;ing systemn appeared to have excess liquidity in the sense that actual reserves substantially exceeded required reserves. Although the former normally ,.ill exceed the latter by some small safety margin, when excess or free reserves continue to pile up, it is somctimes concluded that the demand for credit is deficient or that the banking system could expand its loans if it chose to do so. An implication-is that the banks are pursuing too conservative a loan policy. There i s some evidence that the banking system in Indonesia hias accumulated excess reserves and is in a quite liquid position, and the question is whether this condition is temporary and could be reversed by appropriate central ban-k action or wihetlher there are basic conditions that explain why banks choose to hold excess liquid assets. The statistics that seem to indicate excess liquidity in the banking syst-ema are Shown in Table h.8 for the four main groups of banks. Reserves actually at the Bank Indonesia are much higher than required reserves for each group. The private comnmercial banks maintain over twice as many reserves at the central bank as are re- quired, and the other bank groups are n3t far below this figure. These figures appear to confirms excess liquidity, but in fact they do not. Reserre requiramnants are set at 30 percent of current lia- bilities, of wihich a min:mum of 10 percent mrast be ith-th& central banzk and the remainder mnnay be held in the bank's owqn vault. The figures just, cited sniply indicate that the banks choose to maintain a larger portion of required reseives at the ce,ntral bank, and a small proportion in their own vaults. 4.26 It is more appropriate to look at the other column in Table 4.8 showring 'he ratio of total liquid assets to 30 percent of current liabilities (which represents required reserfe levels).l/ These figures are lower than the formter ones and show far less excess liquidity, though still relatively high for the private cormercial banks and the local develo-Ment banks. There are differences among the ban]k; grouaps that are most clearly shoi.n by their holdings of liquid assets compared to their total assets (or total liabilities). Table 4.9 presents the comparative figures by six-ronth intervals going back to Dacember 1968. 4.27 The branches of foreign banks are in a strng position, as might be e.pected, with a low percenLtage of their assets in liquid (i.e. non-earn.ing) form. The foreign exchange banks (the state banks plus three private banks) may, in a sense, be considered to have excess liquidity, but they have had a big increase in their deposits and also large increases (niow exceeding Rp 100 billion) in credits from the central bank. Though suach credits do not re- quire reserves, a change in the credit programs or wit'. rawals of There has been a recent chanige in the definition of current liabilities against which reserves must be held. The base now includes demand deposits, 10 percent of tinm and savings deposits. It is said that the change in definition does not materially change the size of the base, but the mission was not able to verify this from the published statistics. Table 4.8 Measures of Excess Liau.iditv in the Banking System (January, 1971) Ratios Reserves at BI Total liauid assets Banks Required reserves 30% of current liabili ti es 1. Foreign exchange banks 1.89 1.15 2. Foreign banks 1.85 1.25 3. Private cor-ercial banks 2.34 1.37 4. Local development banks 2.21 1 40 Source: Bank Indonesia: Toole 4s.9 The Fatio o' Liquid Assets to Total As--ets (or Total Liabilities) in the Bankingc- System Percent Foreign Foreign Other Date Exchange Banks Banks Banks Janiuary 1971 11.5 20.2 December 1970 10.1 5.7 17.9 June 1970 11.3 L4.3 12.7 December 1969 15.2 3.3 16.8 June 1969 19.7 2.0 18.9 December 1963 11.3 1.5 27.9 Source: EBa-nk Indone sia. deposits could place these banks in an unfavorable position. The extra liquidity may well be regarded as a cushion or extra safety margin against the risks of the market. Except for 1969 the ratio of liquid assets to total assets has held steady at about 11 per- cent for the foreign exchange bankcs. This does not denote very high liquidity during this period of change and stabilization. 4.28 Tne private comnercial baLks are in a different position. They.do maintain a quite liquid position together with high levels of reserves at the central bank. The reasons for this are well :ow.n. These banks fear the consequences of not meetLing a clear- inr of checks. Even missin.g by a few hours has led to suspension of the banuk, a loss of confidence, and large withdrawals of deposits. Consequentily they maintain a-n extra measure of liquidity to guard against these risks. The central bank has attempted to strengthen the banks in this respect by maaking available an automatic credit liquidity equal to the reserve on deposits at the central barLk, and in tiame this added protection shoul-d permit a reduction in the w'awunt of liquid assets held by private banks. For t- time being, however, the private banks are overly liquid and with so large a fraction of funds tied up in liquid form, the remaining funds must be very productive to earn a return above that neces- sary to pay interest on their deposits. This has often raeant going after the higher-interest bearing risky loans, and when defaults have occurred the priv-.te banks appear to have failed in portfolio managenent, inich is what the central bank has often charged. Ini fact.their need for liq7aidity and safety drives them into unnecessarily risky positions. That is the irony of their position. 4.29 As a whole, the banking system does not seen to be in a state of permanent excess liquidity. The appearances from the published statistics are explicable in terms of the somewhat unique conditions irn the structure and operation of the banking system in Indonesia. In the future one should expect to see some decrease in liquidity. The degree of liquidity in the banking system is not due to a lack of demand for credit. CONDITIONS OF 7 X t`JTD FOR CREDIT 4.30 There IS very little that can be said with precision about the future demand for credit, particularly in the industrial sector. The decisions with respect to the relati-ve emphasis to be given to industrial development in the next five years or so are still to be made. If the suggestiorLs and recomziendations contained in this report are accepted and implemented, the demand for credit could rise rapidly, and the kcinds of credit instruments and insti- tutions to satisfy the demand effectivel;y would have to become more varied. As has been discussed elsewihere in this report, Indonesia is starting industrial development from a very low base. The record of the past few years in encoairaging new foreign inrvestment iniflows is very satisfactory, but somewhat less so in terms of domestic in- vestment. A continuation, or acceleration, of these flows depends very much on tuhe maintenance of economic stability in the country. The re-emergence of general inflationary pressures could dry up the demand for funds for investment in. industry- and divert attention to trade, cormrnerce, and other activities where the turnover of funds is mluch more rapid. 4.31 The medium term investment credit program. has demonstrated that there is a demanad for credit for fixed investment, under appro- priate circumstances including the subsidized interest rates. But this new invest-ment will also generate a de-mand for working capital. A survey conduc'ted by the State banks concluded that on the average the follow-on demand for working capital is about 60 percent of the fixed invest-ment. This figure wiill of course vary from one type of industry to the next, but this illustrates the need to make provision for both kinds.of credit. A lack of working capital is one of the classic reasons for the severe underutilization of capacity that is frequently found in developiLn countries. Tne State banks are al- ready considering the volume of working capital demands that will be generat9ed by the investment credit program. This ta-kes on added significance at the present time when something of a credit squeeze is being imnposed. 4.32 Finally, very little is known about the elasticity of credit demand relative to changes in the lending rate. This will depend on expected and realized profit rates in industry. There seems little doubt that some of the investments under the medi-um term credit pro- gram would not have made without the preferential interest rate, but that is not universally true. For the ixnediate future the preferen- tial rates probably rast be maintained. SLITfLARY AND REC OIMa4DATIONS h .33 There have beern virtually no financial constraints on invest- ment, at least in the industrial sector, in the last few years. Total barnk credit has been expanded rapidly, stimulated in part by large liquidity credits to the State banks by the central bank. The alloca- tion of credit has also shifted in favor of the private sector. An investment credit program has been started, greatly expanded, and can be counted a success so far. The ranid increase in credit, both short- term and invest'ment, has appar-ently not had any inflationary impact, though the price increases in the first half of 1971 have been somewhat greater than expected. The rate of increase in the supply-of credit probably will decline in the next few years, and the existence of ceilings on total new credit may raise some difficult allocation decisions among credit programs. There are several policy problems that deserve attention in the future. )4.34 At the present time the mix of investment credit to short- term credit is about 1 to 3. Whether this or some other ratio will prove to be the appropriate one cannot now be determined. It is said that the investment 6rectit program will be expanded to about Rp 150 billion, or twice the level at the enid of the first quarter of 1971. These plans may change of course; the level of the program wrill depend on the strength of the demand, the extent to which over- all credit ceilings may pinch all credit, 'and the concurrent need for credit for working capital purposes. Tne management of credit will undoubtedly become somewhat more complex in the next few years. 4.35 An e:coansion of the investment credit program is justified, but it is suggested that the government consider certaiLn modifications in the program. First, a greater range in interest rates, maturities, and downpayment terms would give greater flexibility to the program and permit great discrimination among types of projects. The propo- s al for a distinction between priority ai-id non-priority projects is a first step in that direction; other steps can be taken later. Secoaid it is suggested that central bank credits to the banks for this pur- pose be expanded to include selected private comnercial banks, thus strengthening and ex-panding the institutions serving the investment mar- ket. Initially a ceiling might be put on the size of a loan that can. be made by the private baics and they should be encouraged, with help from the State banks, to service smaller-sized businesses. Third, all of the banks in the program should be siinila,rly encouraged to seek out investment needs of under Rp 50 million. 4.36 For some time to come the-irivestment credit program must be supported through central bank credits, if a preferential interest rate on such loans is to be maintained. However, the banking system through its ovm resources is taking a larger share of -the total. This has liritations based on the interest rate on deposits, and the upper limit of the State banks1 share at present is about 40 percent. In the future, if deposit rates can be reduced, it should be possible to phase dovm the central barnk credits and to place greater reliance on the banking system. At the same time the gap between the preferential interest rates and normal cornniercial rates can be decreased. 1.37 As mentioned both in the chapter and in an earlier one, a special effort should be made to stimulate medium to small scale in- dcstry. A package program including prefeasibility studies, vigorous promotion, technical assistance, and provision of finance is required. It also may be desirable to arrange sDecial risk insurance on loans to small companies. The p ovision for finance should include a variety of institutions such as a special "window"'0 or section of Bapindo, the state and private comunercial banks (possibly through investment sub- sidiaries), and one or more private finance companies such as the one now being promoted. The financial part of this program taill have to be planne.d with some care. It might parallel the existing investment credit program but with somewhat easier terms and- downpayments in particular. At the sane time care must be taken to insure that the funds do not get channeled into trade or commerce but are used for the industrial project that is proposed. 4.38 The private co.nv.ercial banLks are being assisted in several ways by the central bank, and additional suggestions have boen men- tioned above. Thl- merging of some of these banks to achieve larger financial units is desirable. In the past, mergers were difficult because of the legal requirement that all claims had to be settled prior to merger and only the nat balance could be included in the merger. The r'equirement for such a lisuidation process virtually prevented any mergers. The requirement is different from, practices followed in other courntries. Apparently now it has besn agreed that the liquidation is to be simply pro form aGnd not actual, so that this barrier to merger is renzved. If there is any doubt on this agreement., the central bank and the Government should confirm that an actual liquidation is not required. It would further improve the financial position of the banks if the Monetary Board ,rould provide some form of tax relief or dispensation for banks that increase their capital. 150 - CIIAPrER v I I )S ! Ji. i T ' *ES 5.1 There has been a great deal of iinterest in industrial estates in Indonesia in the past twio years; discussioris oL the prospects and uses of estates have been embodied in various reports., and a nmaber of tentative plans have been made. Several of the. individual estates have made son.e considerable progress in the planm-ing process, genlerally due to the persis-tence of some con any or goverrnment office, and there is a sense of.optimiism about tae' role of such estates in the future developraennt plans of the country. Yet tangible physical progress has been- slow, and as of the Samn rer, 1971 it' does not seem likely that the first- estate will be open for business in less thani another tlhree years. This conclusion could prove to be wrong, *but i that is to happen, cer- tain actions and decisions will have to be taken that so far have been delayed. In at least two instances paper planninig is reasonably well advanced and could be followied in short order by physical construction, but there are some obstacles remaining, primarily in the determinaticon of the funcltions or roles that the government(s) (central and provini- ciaL) annd private partners are each to perform, and in specific plans to provide services and il-frastracture that are needed to support the indiridual estate plans. Aft'er a brief summary of tthe functioning of industrial estates.s, including recent experience and the status of in- dividual units, suggestions are presented for ways to remove some of the main obstacles and to 'accelerate the existing proposals. Par-pose and Gt-erations of an Industrial Estate 5.2 The purposes that industrial esltates are designed to serve and the tays they operate vany depending on the circxstances and the countr}ies in w4hich they occur. They need not be oif a uniform kind in Indonesia, but there are some cornm-on or minimal charact,eristics that should serve thLe development needs of the country. An industrial es- tate is not just a designated zone in which industry is permit;ted to locate, nor is it sirapl a land development sche,me, though it includes both of these aspects. It is an area of land that is developed and managed as a unit, and provides utilities, infras.tru.ctu-re, and services specifically for the industrial clients that locate in the estate. This im.plies that the estate is a separatLe legal entity, possibly in the form of a lidited liability co'pany.(i.e. P.T). 'That is the plan for at least several of t.he estates. 5.3 The general purpose of the estates is to encourage the instal- lati.Lon of new irdust'ries through zdetcing_the. costs, the delays,, and .#he uncertainties that typicailly beset an entrepreneur injIndonesia. One of the main stumbling bi-oc-s has been the difficulties attehdcant on finding and malking arrangemrents for the use of land. As is briefly indicated in Chapt. er III, there are many forms of ow.nership or rights in land, ranging from outright ownership, which is' permitted only to Indonesian citizens, to various riglhts to use, exploit, andc/or build. Many firms have mentioned the difficulties and delays in obtaini.ng a site for a factory. The industrial estate cuts through these difficul- ties by providing a site for lease. Costs are reduced for the firrr because it does not lhave to invest its o,n funds in roads, electric power facilities (typically rdiesel plants), water or other types of utilities and services. These are provided by facilities for the -,,,hole estatie and through economies of scale in supply, the unit costs to the consurers normally are lower than they could achieve for them- selves. I4oreover, the firm does not need to obtain investmnent funds for these puLposes, but simply pays a charge that becomes part of operatiing cost.. Total investment funds for any given size of plant are less. P11 of these elements also tend to reduce the risks or uncertainties of investment, which on a relative scale are particularly significant tlo smuall ventures. BecauLse of the numerous approvals that are required between the original submission of an investnient project and the commencing of operations, and the nmany governrmient offices that are involved in the approvals, it has been suggested that the estate company might be a means to streamline this proceare - su anti delays intthe start of actual production. These delays can represent a very real loss to the economy, and as chapter III has shown, Uhey now may amount to several years delay or even be a reasor± for cancelling an investment. Ideally, the firm should be able to sign one piece of paper to cover all of the approvals needed and obtain these in one step, but that is not possible under present regulations. Them are three alter- native arrangemrents that might hasten the process of approvals: (1) the government offices delegate to the individual estates corporation the power of decision in these specific instances; (2)* the government offices recognize the estates corporation as their agent nithout the power of final decision; (3) the government offices establish branch offices at each industrial estate to make the decisions. There is at least one other alternative, not involving the individual estate corporation, that- may be superior to any of these. This alternative involves a national estates authority and is discussed later. 5.$ TThe first and the last of these alternatives can be rather quickly dismissed. The first involves a delegation ol government authority to a coiroration that probably will have nixced public and private o0Xmership. but where the active management rwould probably be private. Such a delegation is almost certainly unacceptable in the present circumstances.. The third alternative. of establishing branch offices would proliiferate a bureaucracy and might simply add another layer to the many layers already in existence. The branch oLfice might not make the decisions. The second alternative is somewhat more attrac- tive and palatable. If the individual estate corporation coul.-,« act as the governmentts agent., assemble the necessary papers, arnd establish good working relations iiith the offices giving approvals, the process +v.-''# could probably be shorter.;,ed to a measurable degree. However, if each individual estate corporation acts in this way, as the numnber of estates, ' increases the procedure is likely to become somewhat un.7ieldy. It might ? -1VJ 72 work reasonably well in the first few cases but less well thereafter. i. 'rie It may well be inferior to the alternative of delegating thi.s function to a national estates authority, but that depends on appropriate. powers being given to such an authority. If the authority has only advisory functions, the only alternative to indiv-idual firm responsibility is to -152 - operate through the estate corporation. 5.6 If an estate is to be ran by a mixed public-private corporation, can it be- expected that this will be a corrnuercially profitable opera- tion? A corollary question is whether there is any need that it be profitable. The investmrient costs of an estate cover the following items: initial acquisition of thne land; ccsts of movring people from the land; levelling, draining, and fiilling; construction of roads; electric power, water, and sewerage systerms; buildinggs for the estate management and meintenance. Other buildings, such as flatted factory buildings to be rented or leased in small lulits, may be included but are not always in the plan-s. The operati,ng costs are those incidental to the maintenance and operation of the estate. There are a fewz rough estimatees of invest- ment costs for estates in Indonesia. The investment office of Djakarta- Raya estimates that these costs will =mount to about Rp 4000 per square meter for Pulo Gadung, or slightly over -a$Iper square meter at current exchange rates. A somewhat more detailed cost estirmate prepared by Westinghouse W^Jorld Corporation for the same estate arrives at a figure of about Oper squaare meter but the detailed costs are missing. Several other estimates oL investmsnt costs, apparently used foz, plai-ning pur- poses, also are in this same range. These estimates mean that the invest- ment costs for a nominal estate of 100 hectares would be on the order of $8 - 10 million. These costs will vary depending on circumstances. At the proposed Tandes site near Surabaya drainage and filling of tae land would be very extensive - and expensive. At Antjol lan& developnent is combined w7nith land speculation and prices of land have ircreased rapidly. But it is significant that-these estimated investment costs are high by comp, 7arison to the costs incurred at several estates in other countriesA such as the Masan zone in Korea or a JLew estates in Latin America. 5.7 Tlhe estate corporation wrill derive its revenues from leases of land and rental of premises, from charges for providing powzer and water, centralized services such as riaintenance and ,warehousing, and fees for other services that the estate xaanagemaent might provide the client finns. So far as is kaoc-,m, no one has made any estimates of projected streams of revenu.e or cash flows based on assumied schel'Wles of zharges. LApro- jected income statement does not exist for a n;ingle indastrial estate; conseouently it is irpossible to judge the likely profitability o'f an estate based on specific estimates. However, in the mission's experience, wthich has been check-ed in discussions with other persons,, .he-e is no Industrial estate in a developing coun-ry that has been consistently run as .a cnmmercially profitable ventare.. The profitability is that the same experience -will hold true in Indonesia. This does not mean that private companies will necessarily lose interest in helping to develop, finance, and operate industrial estates, since tŽ±ere are other reasons than the estate profits that may motivate them, one being that2 this is a way to help open the.market and/or make their ow-n investment in facili- ties in Indonesia easier and more secure. But it does imply that some greater burden may fall on the national and provincial gover.nments to insure the success of the industrial estates prograr,. In that event the measure of success is not the amount of profits that an estate can gen- erate but rather hoSw mrach of a-n incentive it provides to increase the level of investment, output, and employment. The investment of ! resources in the estate would have an imputed (though not easily realizable) prof it. *-ofR eent rei 5.8 At one time or another approximately a dozen different sites have been proposed as locations for industrial estates. Of these about half are in the Djalarta ar.ea and one in north Sumatrs.a is the only one which is outside of the island of Java. The status of these proposals ranges from a fewT on which detailed planning is under way at the present timae to others that exist only in the b,aue. t conceptual form and on which little or no analysis has been conducted. The two that have the greatest promise for early implementation are at Pulo Gadung on the eastern edge of Djakarta and Tjilat,jap on the south coast of Java. The first of t,hese has been under active.consideration and planning by the investment offices of the municipality of.Djakarta and very recently the mlost thorough report prepared on any indstrial estate has been completed by the Westinghouse World Corporation and its subsidiaries. The idea for the estate at Tjilat.jap originated in 1968 w:ith a group of Western Australian businesses Wihich established A.D:O Pty. Ltd. to carry on this particular venture. In other areas, provincial goverrunents, municipalities and at least one private com- pany have expressed interest in the establishment of an estate and in some cases prel.iminary plans or prospectuses hav, `been drawm up and additional work i.s beiing undertaken, in a few cases actively and in more other cases on a somewhat sporadic basis. An estate to be located at PU1Q Gadung seems- likely to be the first that will actually-go into operation, primarily because of the joint interest of the mrm icipality and the private corporation. 5.9 The W-estinghouse report selected ix possible sites in the Djakarta area for evaluation: an area 'rear the port of Tandjung Priok; Pulo Gadung; TJarw.ang and Tandjungtoapekong; both located on the Ring Road; Gandaria, located -r uth of Djakarta on the Bogor Road; And Tjibinong which is about 20 la, south of the city. The report gave ratirgs to each of these locations based Qn 89 specific criteria, covering the size and characteristics of the site, the ease of access, the availability oL utilities and transportation, and other special considerations. The ratings were weighted according to the relative importance of the critLueria to te ultimate success of the estate. The highest rating wias achieved by the site at Tandjln,, Priok and the sec- ond by Pulo Gadung. All of the others rated we'll below these two. The former site was not ultirately considered because in the mnaster plan it is destined for a combined industrial-residential use and the availability of this land is tied in with the future of the Keniajoran airport. The report concludes that an estate at Puo Gadung coald be established in several- stages, with the first stage to develop about 150 Ha, at an estimnated cost of slightly over $11 million. Ln this area, but not inicluded in the proposed stage one development, there are already_eight existing plants and se;enx more are under construc- tion. Each of these plants have provided all of their own facilities, but they could be incorporated in sulcceading phase3 of the develhpAnent oL the estate. The lanild is nowi controlled by the Governm-,nt and cannot be sold for any purpose wit1hout- its approval. It is significant to note that the reporl also conieludes that it would take,23 years after the final approval before the first sites would. be readv for occupancy. It is entirely likely th at both the estimates of oosts and the timre to completion co-:Ld prove to be conservaotlive. In any' case negot.iations betw.,eon the Government and the corporation must resolve a nu-,rber of difficult issues. No specific provision has as vetJ been made for bring- ing utilities up to the edge of the propos-ed site. A final plan showing the participation by the GoveLrm'nent and by the corporation has not yet beeii confirmed and fin.L-iocial plarnning wAth respe.zt to the amount, of debt and ecuitLy is also in a pr&Liinary phase. Solutions to each of these probleT,ns musti be founcd before aniy actual wor'. can corpnce. 5.10 The proposed estat-e at Tjilatjap is being promoted vigorously by a consortium oL Australian firn.s incorporated as A;C,T0 Pty. Ltd. and the co-sortiium itself has been adding new mnembers. None of the firms has had any experience with a vent-ure of this kind, but the location of the estate at the or,l]r good harbor on the south coast of Java and on the main shipping routes froa western Australia to other ports of Asia has seemed a natbaral place for t'his kind of development. Tne conisor- tium and its consultants have undertalken studies of -the port area, the .economic potential of the nerlad, and various other special featLres. No re)ort of the kind co-n-oleted for Pulo Gaduna has as yet been prepared, but. essential elemTnts harw. been identified. The consortiuia has ou- lined a mode of opert-lon f or the estate and for the capital structure. After discussions with Cover=mcnt officials and othUers it is suggested AD-OQ suppl-y one-hrii'd of the capital, central govierznent, and/or 'region- a! government another one-third, and the final third w7ould be supplied by the private indivicdals i,r tlestment banks, ite Internti.onal Finance Cor-oration and possi'bly the Private Tnvestnent Corporation for Asia. AD4T0 would want a mana-a;.w-t contract for 10 years and effective con- trol of op-a ons airing thiC s period but it expects that the Govern- munt w>1, acquire the aproxaLnately 200 Ha. of land that will be reouired. Iii early suLmmer A^IAT0 exp,cted to designate to the Co-vernmr,ent the speci- fic land that would be requira . They have estinated the land cost at app0ron:iately $50O0 per Ha. so that the total land cost would mount to $1 million. They also estimate a need for $1 million for working capital for three years and an additional $1 million for infrzistlructure. The last item is al-nost cert.ainLy too low. A recent decision to locate a major oil refinery at Tjilatjap has increased the prospects for a suC- cessful venture sine sonie of the infrastructure may now be shared in comnion. There is one si gnficanl difference between the plans. at Tjilatjap an-d those being made at Palo Gadung. The members of Ala7T0 wil1 constitute the largest single group of companies to locate in the estate. A number of the-m have expressed an interest in establishing facilities- to serve the Indonesia market, and theyt rega.d the industrial estate as the most efficient way to obtain entry. There are of course incenitives for firms that are not members of Afl4TO to locate in the estate as well. AD-'TO has been persistent in its promotion of the es- tate and a key decision point will be reached when they designate a sDe.cjfic land area to be acquired. 531. A4; Suirabaja two areas have been suggested for consideration. Tandes is northoest of the city and Rangkut is southeast; how,;ever, both of these areas have? mopr soil conditions and -.7ill require exten- sive drainage and filling. It has been estir-ated that the swamp-depth at Tandes is over 1 meter and no tests have been conducted as to whether dredge fill is available. 11oreover, this site, would require a rock- filled darn to lower the wvater level and provide fresh water and this item could be quite expensive. As an alternative to these two, a third area, the Perak airstrip, is now; being more actively considered. It is understood that discussions have been held between the Bechtel Corpora- tion (UtS) and the local government, but these discussions are at an early stag,e. 5.1.2 None of the other proposals for industrial estates are ver,y far advanced. Gandaria is an industrial zone rather than a separate estate. A number of plants are in actiual operation in the area but they wtere established independentQly, they are not in a contiguous area, and tfhey do not share any facilities in comr,on nith the exception of a telephone exchange. Antjol in tlle port area of Djakarta is a dev- elopment scheme that combines bonded warehouses, office buildings, hotels and residences, and a major recreational area. The land is very swampy and a great deal of work lies ahead. Land costs under lease have apparenLtly been rising at a very rapid rate. In north * atrz the provrincial governxnent has undertaken preliminary plans for the industrial estate ''Mary lnd" which lies just off the road from M4edan to the harbor at Belauor.7 About 600 Ha. have been selected and it is estimated that the land cost wi-l be about Rp 700 per scpqare meter. Even .ith a persistent effort it would take l4 least five years to complete the estate. No analysis of physical facilities, finance," or operations has as yet been started. -5 13 The outstanding feature of the experience to date in the establisl-ent of estates is the ad hoc and individualistic character _othe cfforts. There is no shared experielce; each effort is attempt- ing to solve the problems as best it can. There are no convm-on solu- tions to cormon problems. In fact there seems little or no awareness on the part of one effort regarding what is happening in other efforts, .aid no attempt to beneLit from discussions. The success so far has depended on the vigor of local governaents and private corpcnrations, with asdvs .ryassistance at the national 1evel frdm the interdepart - mental comiattee. This way of proceeding is not necessarily a bad one in one impor'ant respect. It relies on the interests of those who will benefit most from the developmnent to see that progress is made, but in several respectis it is not) the most effective fonn of organization. In particular, it is entirely probable that there -ill A be diff'iculty in arranging outside finance for the estates so long as such planning is on an individual unit basis. Funding assistance from interna'tional agencies cannot easily be given in small amounts to in- dividual estates with the necessity of evaluating the viability of a single unit. Mloreover, there is no agency through ,hich such finance can be channeled th tcanprovidethe necessary guarantees. " a ca becanfdi.-'i nation.:l authorrity for the devaelounent of industrial estates is established., ma.ny of the arrangeirments would beconme far easier; in- deed, the IBRD has indicated to the Governiient that it is prepared to conlsider financial asstsaince once such a national aluthori ty has been established. The Governrumient of Indonesia has indicated that it intends to establish an industrial estate.s development corporation. When such an agency is established wi.th appropriate powers and func- tions, financial and other assistance should becone readily available. Funct,iorns and Po,wers of a National Industrial Estates Authority - _.-- - , - -du t ial es a e 5.li It is antLicipated that some fcxia of national industrial estates authority rill be created to succeed the existing interdepartzental com- mittee. Tne question is how e-xtensive the functions ard pow.ers of the authority will be particularly v-is-a-vis functioa3 remaining with local government or private firms. It is useful to consider this question in the context of' two quite different alt_.erratives. It would be possible, for exarmple, to create an authority which had prirmarily dvisory and coordinating functionls but wi.thout the responsib1lity or the Cogers to engage directly-in the operati.on, finance, and supervision of individual estates. If this course is followed, primary reliance would rest with local govermnents and the private sector; they would be expected to undertake virtually all of the essential functions for initiataing, fin- ancing, and managing the estates. The total progranm that would ermerge would be primarily local in character rather than w;ith the imprint of a commion nationa'l coourse of action. This way olf procceding might work exceedingly well, particularly in freeing the hands o-f local people and private interests to find new w-ays and new arrangements to realize the benefits to local industry. But, as has been mentiorne above, su"h an -L -einative also has serious disadvantages, prilari:ly in tei-ms of ob- tamning external financial support for an estate program and in the supervision of" indiv-idual estates in the best interests of national1 development objectives. 5-15 The alternative is the creation of a national authority which has pow,ers beyond those of mere coordination and advice, and w.hich includes the ability to make contLracts, to arranige loans, to invest funds directly or to comrmnit other resources and to exercise some degree of control and su:Dervision over the conduct of the individual estates. The missiou believes that this alternative has distinct advantages for development. The adoption of this alternative would not deny the im- pota"nce of loca!. i-niiti atives but rather should be aiLmed at complernen- ting and strenj,-thenini- such initiatives. Tnitially, such an authority should be provided funds from the government budget, to stimulate the development of new estates or to Darticipate irn those that have started with local or privateb initiatives. Such a provision of funds from the development budget has been the course of action followed in Singapore (Jurong), Taiwan (Kxaohsurn.,) and Korea (Masan). -157 - 5.16 There are other powers that -ould be reauired by the authority in order to make it both responsive and effective. The following are necessary and probably also sufficient powers to invest in such an au- thority. First, it must be able, in conjunction wit.h local government, to acquire land and to make this land available on long term lease to an individalal estate corporation. It would be particularly appmpriate J for the authority to take a slhare in the equity finance of the estate in exchange for making the la-nd available, that is, to capitalize the value of the land and exchange it for stock in the estate corporation. It is suggested that this type of arrangement might become the typical pattern for handling land in estate planning. Second, and very impor- tantly, the national authorituy should be the channel for loans from international lenders so to increase the resources available for this program. Because of the necessity for Government g-larantees on loans it is assiuned that other agencies of the Government, such as a2p nas, the Iinistries of Finance and Lndustr, and the Investment Board would together decide on the total size of such programs. Tnese are the two most important functions for the national authority. 5.17 The national authority would also be the appropriate agency to undertake responsibilities for insuring that utilities, roads and other infrastructure were brought to the estate border. For example, in some cases, it would be possible to divert some of the resources in an on-going project in electric power or roads, etc., to provide direct access to the industrial estate. The national authority. might also become the intermediary betw-een the industrial f:Lms and the governmrental oLfices in obtaining the licenses and approvals that are nmo required for investmert. This does noot mean a usurpation of the approval Dower by the national authority but sily that it should be possible to work out some shortcuts to current procechires. Finally, because the national authority would, in all probabilit-y, provide both equitv and debt finance for an individual estate, there would exist a basis for exercising some degree of supervision of the conduct of the affairs of the estate. Such supervision should a:llow substantial free- donm to the estate management but should also, at a mininu, insure the conduct of affairs in accordance with acceptued standards of financial accountability. 5.18 The mission, believes that the establishment of a national industrial estates authority along the lines that have been briefly outlined above is possibly the single most important step that could now 'e taken by the Government of Indonesia to advance the industrial estates program. Borded Warehouses 5.19 It has sevreral times been suggested that the establishment of bonded warehouses in the Djakarta area (and possibly other port areas) would provide a valuable service both as a form of econoric infrastructure for industry and as a commercially proLitable venture on its own account. In this operation goods are permitted to move directly from the port and are stored under bond in the warehouses. Customs duties and t,aYxes are collected onl-y when the goods are re- moved fromn the warehouse by the business firm or user. There are several obvious benefits in such an operation. It permits better schedaling of the inventollr flow.s so thcat, for exa-ple, a manufac- turer need not wait a long time, possibl- until he runs out of spare parts or otlher materials before he receives a shipment. This meaml3 tuhat he can gerierally make better production plars and does not have idle machinery while he is w;aituing delivery. Moreover, he can use the warehouse receipts for these goods as collateral in financing of them. In addition, through better scheduling it is usually pos- sible to maintain lower levels of inventorv and hence have fewer fu-nds tied up in invent.ory invrestnent. Obvioui,sly these beneufits coald be obtained by a manufacturer who has purchased goods for his o;rn operations; by a supplier (importer) wrho is marl-eting products to local manraufacturers and business; or it is possible that a bond- ed warehouse operation coald be run by corn, ercial bandcs as an additional- service for their cli^Qnts. It would also be possible for Goverrenent offices to undert-ake such a ventire. In-fact there are several bonded warehouses now operating in the Djakarta area, but it is not know.n how successful or profitable their operation is. 5.209 Bonded warehouses are frequently located in industrial estates or in free trade zones w+hich permit import of materials, processing and re-export of a finished or a semi-finished prodact without ppyment of the usual duties and taxes. SuclhI kinds of arrangements are found in Singapore, Taiwan, Korea, and in most other cases involving free trade zones. Bonded warehouses also can be coinducted as an independerntu con.erci operation serving a single custoner or many customers. A pruine requirement in successfulL opera- tion is the absolute security of the goods. The lack of theft or pilferage and the absence of otŽer kinds of fraudulent behavior is essential. At times it is difficult to insure that -he operation of the warehouse measures up to these requirements. This sometimes accounts for the lack of interest or success of this type of operation. 5.21 At present Singapore has become the prime supply depot for Indonesia. I.mporters maintain warehousing facilities in Singapore and tranship to Djakarta when orders are.received. It wrill be dif- ficult to compete with this sort of arrangemnmnt by the establishmant of local bonded warehouses, although the plans for the Antjol area apparently have allocated 80 Ha. for bonded warehouses alone. This is undoubtedly. many tiies more than the demand will be over a rmber of years. Although operations based on Singapore are nowi dominant irn the market, it has been estimated that on typical shipments oL spare pprts and machinery an operation based directly in Djakarta could provide the goods to a local manufacturer at about 10 percent less than an operation based on cingapore because of finance and hancling charges. Tnis margin normally would be sufficient to stimulate some local development of bonded warehouses, but under the peculiar cir- cumstances of port and customs operations now existing, this Fmargin might not be sufficient. 5.22 In normal circumstances the operation of bonded warehouses is at least a reasonably profitable operation. There is a single case study wT}hich attempts to project the costs and revenues from operating one in .the Djakarta area. 5.23 The basis for the calculations is an area of 25,OOO square meters consisting of a storage yard of 10,000 square meters and a covered warebouse also of 10,000 souare meters. Security is provided by perimeter fencing. It iF assumed that bo percent of the area rep- resents non-usable space (i..e. aisles, etc.) and that usable space would be occupied only 3/4 of the time. On the assumption tlhat goods would turn over five times a year, the warehouse and storage yard would have an annual capacity of 90,000 reverme tons. The study, estimates gross annual revenue of $459,00o and gross costs (fixed and operating costs before taxes but including interest on loans) at $216,000 leang a net profit belore tax of $243,000 annually. The cash flow is based on a 4:1 debt: equity ratio with an equity of only $250,000. ConFequent- ly the net profit each year is almost equal to the equity inlrestment-L/ 5.24 These calculations are overly optimistic and are cited here only to indicate the possibility of undertaking a systematic anaysis of the operation of a bonded warehouse. If information of this type were available to investors or businesses, some of them might be in- terested enough to undertake an investment, but it should be noted that in its discussions the mission did not find any very gre-at interest ir pursuing this kcind of operation. As and wihen induistrial estates, such as Palo Gadung or Tjilatjjap, become operatiional, it is a virtual cer- tainty that they will inc6rporate a bonded warehouse as an integral part of the estate. 2/ SWurLYn? and Recommendations 5.25 Industrial estates should continue to be an integral anid important element in the iLdustrial development plans for Indonesia. TIey can be tuhe vehicle for providing facilities in the form of factory sites and associated services with an ease that is now¢ n-on- existent in the countgry. \Then properly adninistered theyr should also makce it possible for tenant fims to undertake venltures at low.er inresmnent costs and probably at lower operating costs than those firm1s could achieve if they had to proceed on an individual 2;/ American Technical Assistani e Corporation, V --rehoh o nil s and1 Fi nancin.. Arran-en1i-?.nts to Facilitate US - In:oricn2½nn Trale, (mimneographed) October 1268. E./ Ibid pp -57. basis. . The risks of new ventures are similarly reduced. But in order to get many of them st.rted, financial awd other assistance prob7ably will be reqaired. For these reasons it is su-gested that national industrial estates authority be established to accelerate and sustain +th,e creation of such estates. Such an authority might have various kinds of powers but among these,. t.o are deemed to be critic.l to success; first the authority should be the channel throuah v'hich funds from the Government and from international lending agencies can be made available to individlual estatles; second, th.e national au thority s.-ould have t,he powcer to accuire land and to make it available fo.r use by tLhe estates. It is suggested that the la,-nd might typically be made available in exchange for an equity position in the estates. The national authority also should have some responsibilities for supe:wvision over estate operation, par- ticularlY with11 respect to financial accounntability. A.lthough in the discussion we have designated the national body as an "autuhority", this is not, meant to suggest that one specific institutional form oL organiz, ati on is recqired. The term is used in a generic way to suggest that, such an autwhority should have the key powers and responsibilities that have been indicated. 5.26 There i-s one major deficiency in the planLnin of all of the industrial estates and tlha-t is provrision for the constractiion of fac, tor-y buildings in which smal1 anounts of s-pace can be made avrailable to sm-all scale. industries. At t;He pranentt time the planning s-;,ms to be primarily diroc ted tow7ard mediwn and larger scale firms thatu would lease a whole- site and cons-tract their ow.n buildings. AS has been indicated in chapters II and III, there i.s a need to stimulat'e the developmenit of smnF.aler scale industries and t'he provoision of factory space within a buildingr should be rega-rded as part of the package program in this area. 5.27 At th p;resent time there seems to be rather little interest in the sep-,.rate establishment df bonded warehouses as corirmercial -.en- tures; however, some -dditiopal '.plorations of ThLis topic a.re probably warranted p-articularly with respect to making, information on their advrantages and costs more readily available to prospective invrestors. It is anticipated that with the establishment of industrial estaates, bonded wvarehouses wil1 pTrobably-:T be included within the estUate itself to serve the residcnt te-nant firms. No special Drorlotional& effort appears to be necessary other than thost suggested. C1 El R VI THE .:T2.GcTTATTON .OT: 0 ? CC1G,SST0UfdtY AcvrBrr,,- 6.1 Over the past f,eiw. v Te_nd,S ono,a ha,.s concluded, a,,, of concessionnary agrecmcent s - T h prvatle foreign fir,-as or ix .erntm-cs for 't-he develo; e,it of nineral ;nd timber resources, , marflP- on islamds ot-her thman Java . The- physical e-reas covered the agreements Eare oftlen cxtenJi-ve, onie of them rigin into tl. hundredis. of thoustmnds ofJE0 som2re k1cilometers. The imiti al result has been- a greatly -icreased level of activ^it- eplora-tion and develonpment oL minerals and timber, thouch notl always in v7 ays or clt a pace that is Most1 beneficial to the country. In this chapter tihe experience under these agreemnaentl',s is briefly surveyed in sepaxate sections for mrnerals -mnd timber. Preceding these surveys there is a secltion dealin.g wi_th some of the general issues that arise di the course of negotiatin- concessiona=ry agreements and a few suggesti ons are miade concerning aspects oL bargaining that may,y help mirniraize points of friction betuwNeen the parties and assist in arrivdng at a mutua2ly benei ciaa ar-eement. 6.2 I;imv of the current agrecments were nego-tsiated hastily. oLten with only prtial comprehension of the fhcts and the econothc attraction oi the particular resource by the governmeg-nt, c-S with additdimc-m.iJ. Pressures to st,-art te con-e,v movgnr. In the ru5ult the bz-aaIns struck. were adiedly generous t,o tUhe concessc'ntlires. Tins situ ati on, 2rid 'hth problems, tmt. mustbe Ltfaced in future nego- tiateons have been smnmmariLed cuCC,nctly by a coveient off cil. "In-en we stDarted out aetracting foreign investr-entus in 1967 everyTtlhi g and every,,body was wvelcome. We did not dare to refuse; w e did not even d-re to ask for bonzafiditdy (sic) credentials. We' needed a list of names and dollar igures o1" intended inv.rest'mt-nts to grive credence t.o our drive. Tghe first inring company vrtually wrote its o,-n tichet. Svince wre had no concep'tion abou+t, a nmining contract we accepted the draft writte-. by the comnpa1ny as basis for negotiations and only cor-mon sense and. the desire to bag the first contract w.ere our guidelines. W7e still do not reg:ret doing so. 1/ Although technicaplly manv or mrlost of the agr-eements are "contracts of 1rork," the term concessionary agreement is aCcurate. There are slighlt legal differences in items such as the t,ime of passage of the property right in the rcsources -162- iith the years, we got experience and iernational advise. 'Ve are learning how better to protect our national interest. And a greater protection of- national interest iiill in the long run also mean a better protection of the intere-t of foreign invest- me.nts. If the national society `nd the foreigm investor are both reasonably happy then the relation- ship iwill last a very long time. In unfair contract reflecting inexFperience of the host country can boomerang later in the form of political repercussions.tl Elemnents i.n Bargaining and Negotiation 6.3 It, is not too difficult to state the general objectives of a concessionary agreement; probably both parties to the agree- ment would accept the statement that the agrecmernt should lead to the development of the resource so as to support the overall- develop- ment needs of the country; that it should be "leouitable" in its distribution of' benefits, and that it should seek to avroid conditions or requirements that are likely to lead to a confrontation between the partuies and to the, imposition of sanctions. This general: state-u me-nt is not, however, very lhelpful in defining the detailed pro- visions of -an agreement that me-et the objectives. The mearLa; of equity is often in the eye of the beholder' and there are oti1her souLrces of di`fference. Yet the. general s,aterment is useful im making explicit the desire to avoid a corSrontation that would lead to disqruption of activities or producti on. That eventuality is unqlikely to result in benefit to eitlher party. A goinc orperation provides a stream of revenues a-nd benefits that need not be inter- rupted if the negotiation.is carried out, writh rorethought and con- sideration of the altenatives. At Uhe least. it is reasonbl1e to aim at a-n agreerment that ill ianinize the risks off disruptions, s:ince those risks can never be completely eliniinatedj/ 6.J4 An unfortunate mistake in approach that can lead t o disagreaeents arid, iore importantly,, to acceptance of proviRsions that tend to depress the total benefit stream available, is to regard the negotiation as inherently one in which the gains made by- one party are necessarily matched by equal losses to the other party. IIn the language of mathemzatical game theory this is call.ed 1/ M4. Sadli, "Indonesian Inrestment .Climato 1971," 9 Jan. 1971, Paper prepared for SRI Bangkok meeting. 2/ There are very few systematic discussions of concessionary agreements and nerotiations. O-ne exception, that is recoTiwiended reading, is R. F. lI:ikesell, Foreifrn Investment in the Petroleum & I-aneral Industriees, Jolns Hopkins Press, 1971, espe.,ially Chapters 2 & 17 -163- a zero-suim gam-; what is ijon by one side is matched by a loss to the other. One re;:ult. may be that the outcome of the negotiati6n tends to mir1i-dize the m,nwximim ga:n or benefit, that they could att i jointly. T-n an actuea situat-ion tl-he resu1 t rmiay be t.hat the revenues accruing both to the government and to the concessionaire are smaller than they coould attain u-der some different arra.ge- mient. It iS , difficult. to dieonstrate by. example an exact situation wrhere this kind of outcome has occurred, because in all cases thlere is a mixture of circumstances at w.orr and it. is not pos,ible. to establish the motiv-ations of tDhe par;ties, but one rescao0-.l corii- parable case has occurred in c coln ection w i t-h providing w.ood pro- cessino facilities at each tlviier con-cession. Miost oi these agreements have language to the effect thatt the paxtuies ritend that a processiln facility will-be est.ablished wiithin a ceraitr period such as five years. The interest, of the gove_mment is clearly to increase the processing of the products Gnd hence the dornestic value added. On the otlher hand the concessionaire usually has reasons to p-efer thie export of logs. In an economic sense it frecuently is not desirable to matuch one processing facility to one ti,mber concession. Thi s is not the best use of resources. The existing concession ag-reements are thus sub-optimanl from the point of view of both parties. But., as is demonstrated in Chapter ZI, a larger and integrated wood products compl.ex is economically feasible anid represents a better basi s for action in `terms of total revenues and rewiards than, -the existing arrangements. Both parties can gain fro,m such ani aggreement. At the present ' time the concessionp-res can ore-vent the establishnment of Pany processiLg facillity sinc e t,he agreements do not spec.i f:v- that there.is an obli gation to do so; they simply state that it is a policy objecuive or an in$nt, but in terms of the contra.ct there is no enforceable obligation.-a In the negotiation of a concession the major elementlus to be covered, and the ones likely to give the most dif-ficul.ty, are: (a) the provisions -or the division of the revenues or bene-fits; (b) the rules on which pa-rty is responsible for incurring costs; (c) the rate iAhich develonraient is to pDroceed;- and (d) t-0e tests of performance on the partu of the concessionnAre. In some of the agreements, not2ol'v those concerning timlber concessions, these e-lemenats are not always covered explicitly, so thlat 'here mray not be any clear agreement as to the performance expected or recuired of the concessionaire. 1/ For further corments on this and other points see T. A. iHanring, I!Co:T.ients on Agreements in the Fields of i'ining aend. TLriber, U tmdatcd manuscript. 6.6 The negotiation of rules or criteria for the division of revenues also includes a consideration of the kinds of financial incentives that are prov-ided, since these incentivres are normally intended to increase the potcntial profitability of a venture or to reduce the risks. Trpically the financial iLncentives include t,he follo,ving: tax holidays up to five years (thoug1h normally no6 given to minerlal processors); reduced levels of income tax; accelerated depreciation, including privilege of.,changing the method of cal.cula- tion each year; exemption from import duties on equip-ment. brought in; exemption fromi export t.axes and excises; investment tax credits; exztensive loss carry-forward privileges; and sometimes the conces- sionaire is nerrnitted to make payments that are due on a deferred basis. The multuiplicity of the incentives and the generosity of the provisions will contribute greatlv to tihe profitability of the ventures to the concessionaires, and also often represent tax or other revenue foregone by the government. A model contract for mineral concessions has been prepaed Cor the government by the Harvard Development Advisory SeTvLce. That contract suggests restrictions in the use of many of the incentives; for exanple, it suggests that once a method of calculating depreciation is chosen, it should be maintained and not changed anually at the discretion of the concessionaire. The mrission believes t.hat this model contract could be the intial basis for negotiating future mineral concessions, even though modifications in it would uwndoubtedly be requilred in individual cases. 6.7 Since most of the agreements in both minerals and timber have been in existc-,ace for at most a feSJ years, it is somewhat pre- matuuxe to judge what share oL the net revenues generated by Whe concessions Tidonesia will obtain. The -nco:me tax nrovisions usually are favorable, and quite typically provide for a rate of 35/% in the early years, ri-8ing to liO% after about ten years, whereas the rate on other businesses is b5. But, because of the incentives and some ability to inflate costs above those representing actual cost's of resources (e.g. interest paid to affiliates), the income tax rates do not necessarily reflect the true share oC ne+ income. that should be going to the government. Tn the future, as the concessions mature, it would be prudent to hav.e a continuing a-Lnalysis made of the net Tevenus. generatced by the concessions and the goe,rnmenrtls share of them. These could usaful.ly be coMppared to the experience in other cowuutries wxith sini lar agreermants. 6.8 As to tha incurring of costs, the government has elected to have the concessionaires incvur v irtually all costs of inlrastructure such as roads, housing, schools, and hospitals. All direct project costs are also to be wholly borne by the investor; there is no public participation in the vent-ures. The avowed purpose is to conserve public funds for high priority development nceds that private investors will not undertake. The arrangement on infrastructure costs is similar to thl-i follc.:ed by miost, countries; ho.,ever, in W7cstern Austr a the governrmnt lhas considered unrerIt.aaking some of these cost s in the Nforthiwest iron ore coiutr,y, in orde, to prevent their deterior- ation in the. future as and w.ihen indi-ridual mining opereations decline or ot1hea-iii se change. It i-nay be useLul to fiznd out about thlis exe'er- ience and to determine if any of it is applicable to circunistances likely to arise in Lndionezsia. 6.9 The govern-.m-ent is natAr al-1, interested in ranid exploit- ation or the resources a-nd e=rlyr ,oduction; yreu in m'n-v of the agreercients there is little or no Provision for requ-iring early per- forr-ince by twhe concessiona-ire. In mineral aCeei.ents it is cc onmn to define period3 of tin.Ue fo gren-eral surveys, exploration, feasibility studies and const-u<;zion prior to actual operaons. Ji-an, of these tinve periods can1 be extended if ce_rtain ninimal actions are undertlaken by the concessionaire. As is shoun later in tihis chapter, it i s entirely possible that actual product'ior. mghlt not occur Lor .ten years or more unlder certin circurmstances.. Tn timber concessions the situation is) if nmythiLg, worse. There are often no provrisions requiring perfornance., and when one views tEhe number of concessiI.n on which no work is i. progress, there is an implication that some of them are being held for speculative purposes and wsere obtuained to preempt thelandfor future use. Those, delays in perfcr.,.cs aee onc of the most servasive, and least defensible; characber1sti-,cs of thei concessi.on arennt. ThlisC is one as-oect thiat the goverrmentu rmi-'ghti correct in future negotiat.ion;. PenalIties, including e forfziture o:o The concessioll, could be ir-Dosed 'if somni schedule- ofl work is no'trc met. 6.10 The spe.cificatcion of perfornance, levels that, a ccncess ^-- aire is to meet in actual operations is desirable Lnd follo's natLurally from the ar ,Ut of the paragraph soove. The goverrien.t isUnot only interested in early exploitceaion, but also in a high sustained level of development. The concessionaire may not, h.avre the sc-me interest un a high rate of production since th'at,h' usually implies a high level OL inve stmrentL1 ; he muay simply be interestD ed in a miniramal scal-e o` op,ezration Jasting over a long period of time. Put in an.othor ;.3ay th-e gZ-rient apoears tvo have a high tvire rate of discount and the concessicoln.jrc a lowler one. I1n these cir'cumstances it would be decirable to try to specify performance s-tandards for production so thau t-e issues can be clearly facecd. This is prn-eraSbic to having no stannerd4 and alter becoming dissazisl"ied with the level oL performnuice. The specific-aion! need not, nnd probabl:tr should not, be in the form of f; ed production levels to' be raet, since theare many reasons w^hy a paricula_r level rn-y not be achiLeved, but a flexible form.ula tied to market conditions and alluowing for contingencies can be suflicintly w;e'll st-ated as to consi:Ltute a, requirement; that mu.ast be met. 6.11 In gene.ral many of the agreements contain langliage that. is so vague as to be Lnenforceable. 1With regard 1to the. installa'..ion of processing f-acilities ;wards such as tha.t, the agre-.e-n`, "contem- plates" or ",intends" that a facil'ty be erectued is too vague and does -166- not create an obligation on the part of the concessionaire. This should be corrected in future agreements. J/ 6.12 The poinits that have been made on the elements in negotiat-ing an agreement are only major selected ones; they do not exhaust the subject. These and other points are illustrated by the su2rlmaries of the timber and min-Leral concessions, as well as being covered in the material cited in the footnoties ol this section. Timber Concession Agreements 6.13 Between 1957 and 1967, pern&ts for the exploitation of areas of less than 10,000 Ha were graited by the prov,incial govern- nments, and for larger areas, product sharing agreements were signed between Perhutani (the Government enterprise in charge of forestry exploitation, created in 19-60) and private enterprises. Since the enactment in 1967 of Law- No. 1, dealing wiith foreign invest.nsnt and Lawr No. 5, on basic forestry principles, investments,; whether made directly by private foreign or national fi3ns or as joilt ventmiires, have been encouraged. Ilith the exception of a small area of privately o,ned forest land (estimated at 20,000 Ha) and of pre-existing rights based on traditional customs or on specific written grants issued by provincial governors, all forest land in Tndonesia ca-n be explloitved only after speci-^ic agreements are approved by the Central Gorern- ment t,hrough the Directorate General of Forestry in the Ministry of Agriculture, or by the governor (in the case of areas of less than 100 Ha). 6.1b There is no aggregate information on the small regionally a7warded concessions. The Directorate General of Forest&y has made available a listing of. 96 agreements in operation or apprcrved by the GOX throu,h Mlarch 31, 1971, , wvhile 26 more are drafted and ready for approval, and 72 applications are pending in different stages of processing (surveying t*sams baing prepared, survey -uander-ay, agreement drafts in preparation or under discussion by the parts, etc.). The total area involved is more than 20 rtllion Ha of which nearly 12 Tnillicn have already been approved. Therefore, of the totaal forest land available for exploitation, almost one-ha:lf has already been disposed of. axmd about 8lp has been either awarded or spoken for. (See Graph 1 .1 in Chapter XT). 1/ Cf. ]Manrina, Op. cit., for specific examples. F -167- Areas in 000's of Ka. _/ Approved Draft Agrree- Appl ications Irreem,ients menris re; r -oeo-d Foreign investments 3,178 50 SbO '1iational enterprises 3,572 858 832 Joint ventures >1329 1,135 711 Other or undecided 897 335 3,669 11_97 2.378 5_752 6.15 Th:is listing published by the Forestz-, Directorate G nerae , ho-, e er, imiay not be complete. -any .concessions sho,n in a mapp, also prepared by the same Directorate, are not included in the listing. Thi s i.s.especi3lly noticeable in the case of applica- tions, pending in vest 1Cu mLLr±t an, the lioluccas and Iest Iria. Jtint ventu,res have origina.ted predo-inantl, thr ou lh Japanese snd '1l-alysiam co:m.panies, -ehile in the case of straight fo-reign iivest.ments, the largest concessi on aica2rded by the GOI (to A. So-ia-ano & Cia.) 'makes the P-hil ippines the most i.mrt ant country osf iLnive -tmi.Tit oriigi, i' t the UTnited Stat.ses second (Table 11.2 in Chapt r Xi). The lI's.:T pj.n sl se (] by the Directo-aLe., en era1 of For estry. sho-s thIt- the lIar est areas giv, -in concession ir absolulte as *1ell a- in ;relatire terms (in relatdon- to territorinl geographical e:d.ension) are located inKlimanan. As a % of Concession aren %s (000's Ha.) Terrtorial Areas gre-em ens rgr -men ts G-cmran'ed or Applications Granted or Apr pl ications Drafted PendinF Dr afted PendLncp Sumatera (Surmatra) 2,719 I L, 58 5.7b 3.08 PiLrnt- (Born;o) 10,728 3,617 19.89 6.70 Djawta (Java) - - - - SiLla:esi (Celebes) 1400 385 2.10 2.O0 Cther or niodfi ned 507 262 0.89 O.1t6 , 5,752 7.5L 3.0° 1 f/ Tablc, 11.1 in Ch2apt_r XI -168- B:t'ect ed and`. Drocef ong orerac;tions 6.16 Targets for the volume of timber logged bry each onle of the concessionaires in the period 1969-73 have been set by the Directorate of indust ries: 1973 hroduc.Ction Trr=gets Average expected o0o00 of m3(r) yield in m3(r)/Ha. Kalimantan 13,617 1.25 Smiatra .L.150 1.53 Other islands 99b 1.57 Total or average 18,761 1.31 Average expected y-ield - 1.31 Tm3(r) pei, Ha. (equivalent to 0.37 forest tons per acre) - is not unrealistic. *With a total recycling period of about l0 years, the rbquired volume of net usable Dimber of some 52 m(r) per Ha. (or 15 FE per acre) comTp-ares well 'with pro- jected or actual yields in the projects beinig developed in scrij1ar forested areas in ot,her regi- onsi7. But-, an nanayrsis of targets. for indivcidual concessibnaires (Appendix 2 in Chap. XI) shows a w,di and, at least in sorae -cases, difficult t^d just-ify %va5'ization in the e::Pected yields, the largest being 65 times the smallest. Dren if the extreme cases are elinrinated,, expec'Lted yields fluctuate between 0.5 acnd 2.5 m3(r) per Ha. For seven import;ai-t concessions (AppendiL 3 in Chap. XI) explo-itable stand1Is are exnected to y,rield betTveen 22 and 120 m3(r) of timber, after 5 years of exploitation, a nd on the basis df a 35-yea: culttingl, cycle. Based on the experience so far acquired b-y active concessionaires it would seemn safe to project future rolurne of log output in siz-s and qua:li iies adequate for lumrber anld plrood at about 3O/1O m /Iia. 6.17 A concessien a!-reem.renLt;s contGaThzc prov isos for the estbablish- inc-et of processing f acil~.ties. If all these aclities are established, invrestment ofC $571 rmllion would be required (Alendix-li 2 in Chaanter XI ) but lclck of enforcement condi tions mnak.e*s it very difficult to fore- cast what will be the actual extent of processing reached w'itrhin the prescnt de.cade. lieariy one-half of the estimates innrestment, xe con- sidered in only tu,wio agreeraents: tihose with A. Sorinno & Cia. and Korea Development Co. 1/ For instance, 1..5 FT/acre expected in the Jengka project in Mlalaysia for the larger project area. Logs for saw and peeler use iv=lable in tUhe-- Bislig Bay area for the ?aper Industr4.s Corporation of the Phil pines (PICOP) have been estimated at 150 'n3(r)/1a. -169- Est1Li~ated Irnrestment T ot1a Unitmy-yr 'ya Uity (9 il.) (6,oo 'Ha.) (Per m3 loged Klim antan 1U86.5 36 S-aia tra 71.2 26 17 J;Other islands 13.5 15 114 Total or average 571.2 0 30 Soriano & Korea Dev. Co. 283.0 193 35b Total or Avge. ex Soriario 288.2 22 16 & Korea Devo CGo SavmnillL2a capacity, in some ofL the t-ypical important concessions shou2d be abic to Tprocess betw.een 13% and 11 of expec,ted loa ex.traction, Total processing has been speciffied at 55,' to 601% of lorgs ect:+ract.ei in anot'her &,ase. ?Plroot3 nEnufac\?t.tuarc capaci.ty has been includ6 d n `bihe concessioni terms Lr one agreer.ent. mI this case (A. Soriano L. Cia., projected log iLnput for the sawmills an plyw,iood plantts would use all of `her minimnu_ log output tuarget. COblI-at- FCc; io n s r 1th co:rccssion2i res 6.18 Bcsides t'he obligation to instiall processing facIlities and to makLe irvestrrionts or t*his purpose--an obligation i,which iS, however, consLderably .we.L.en6d by tlhe factu that- the cdetermrnatwon of' the feas- K ibility is not in the h,-7nds of the GoverLen'en--concess.or-res havre, the follow-ing obligatiollns ( ') To pay7 license fees (per ha.. and per armua for the period of the concession). (ij) To pay royalties on volume of t,iber felled. (iii) To use Tndonesian labor .and t,taff personnel. (iv) To subriit work schedules. (v) To r0f.o,i use of roaOs an.3i generaly the r:.ssng Cthrough their concession of vworker, materials and products from or for- other cbncessionz-,ires. 6.19 Tl all the conltracts that havxre been made avairlnable to the V)ssion, pA-y-r-nt of license fees is stuipulat, ed at U.S. ,O.0.5) per Ha. 1/ Based on 19714 l.og, produotion targets -170- and per annum for the period of the conoession. Royalties on pro- duction were established (as also ,7ere license fees) by Government Regulation NO 22 of Decemnber 30, 1967, and rates wJere set by Decree of the .iinister of Agriculture T° I?EP. 2/1/I968 of Janua_r 20, 1968 (Apppend:- .6 in Chapter Xr). The royalt ies for the more cormonly used species range beti,een $'1.00 and $2.00 per m3(r). Lhe obligation to use Indonesian labor is just, a declaration of desirability and al1l contracts contain -'iording t,o the effect thatu concessionaires a-re allvoed to use foreign technical and admninistrative personnel in thhe proportion w-hich they find necessary to carry out their operations. Plany ccintracts have c lauses referringc o coimmunity development. In one case exandined (Soriano & Cia.), the concessionaire has explicitly offered to budget U.S. $5 million for this pyrpose oveer a 10-year period, including the supply of electricity (200 KW). At the other extreme in vagueness., a concession granted to the Korea Development Co. disposes of this question wjith the follow,ing "obligation".: "In the frame-work of regional development the C014?.AITY is willing to cooperate with the local Government." 6.20 According to Circular Lb61/A-1/DD7O of the Director General of Forestry, dated February 2, 1970, concessionaires ;must present annual, -yrear and oyerall exploitation plans. Potentially., this obligation is a powTerful tool wfhich the GO! has in order to attain its long-term objectives. However, t1his obligation has generally not been fulfilled-by the concessionaires. L.znu l- plans should be a-greed uDon t.o months prior to the start of a turee-cutting carm.paign -rid should contain a production target based on 805 of the inventoried timber 50 clm in diameter or larver found in the area chosen for e_xploit- ation. Cutting cycle for this calculatuion is assumed t.o be 35 years. The five-year 1ogg;La plans should contain the samie information as the onre-yeax plans and more specifically contain determirnation of the forest sections to be cut, construction of ifrastructure planned, labor to be employed, atnd heavy logging equipment to be used. The timber manage- ment plan must cover the whole terni of the concession and must inLclude the over-aal logging plan, forest development and prouection mnethods, the silvicultural syst,em to be.used, maps of the whole area and all information required for sustained management of the forest resources. 6221 Concessions may be terminated due to: (i) Exzpiration of tUhe period for uhich the concession was granted. (ii) W.ithdrawal by the concesiornare before end of con- cession period (prior fuli_illJint of financLal or other outstanding obligations).. (iii) Revocation decreed by the Ninistry of Ag,iculture as a sanction applied to the concessionaire. -171- Causes for revocation are tlLe following:#V (i) Non-payrient of license fees at stipulated times. (ii) ln of royalties. (iii) Oper-icns not ber-un ithi:n 130 days of date concession is granted. (iv) Niro-delirery of' amuz1 rorking plams, s-year worldng plan or overall fores. exploitcation rolan. (v) Abandoimment of concession area cmd operations by the concesSioniEre* (vi) KIon-estobali_-krrnnt of processing facilities (accord- ing to section 5 of the s-me law, in which, howiever, wThat is called Lor is a sincere effor't, to estlablish said facili.Lities). (vii) Lack of com.,liance with w'n- gs issued b-y the authorites (presu-Lnably both Forestry Directorate and Provincial governxi,ent offLicials) for three tirhes. 6.22 The GO! has a limited role in the makng of decisions or the utilizati-on of' her timber resource-s. The only measure expiicitly con- sidered in soe agreemeints is a reduct.on in the concession a27ea if' th'e concessiona'lŽre does not install processA f7 Lacilities. This neassurs, in the best of' case.s coald be taken on-ly at the end of the p'riod indicated in the contract for t,he start of mara.fctuxing activities, but. since this -oeriod is fLi-ve earz or longrer, a, consideracble volume of' -Tiber miay,l have beben ex-trU_acted belfore such a re,uction in area takes place. 1al the concessionaires are. supposed to presenat annual, five-year 51d long-term orerationall ol1,n's. Strict, eaf'orcement of uidli n- T'for the preiparation of' operation pla-ns - can be an irportant tool in the contro' tIiJer resources but enf'orcelcn -I'is very% lax at' preSent. Systems for effective control of the -pplicat',-ion of' those guiielir:es and. volmae of' tirober cut should be establi-shed. J.o,ieve, the 'numoer of' professional and intermaodia1ce-Tvel technical persQonel in the country is inadeouate to carry out all the s-ucerision woork required for forestryz, lorging., and ex-epoi-'t control. In spite of tUhese diffic-lLties, the n ssior believes thaft if integrated plants are Istalledj""in indonesia, the Goernment would have enough adir-istrat-iyve tools to insur, e tIhe prrocessL.g of a high proporti,on o:F tirfoer, Twitout unrdue or ulfair iLuilateral T;1J rc1 Mording of a-ny outustan.iding concession aL-recments. This po.iLt is further explored in Chapter "T. 1/ Government Reculation of the GCovennent of the Republic of Indonesia lo. 21 (Year 1970) of llay 23, 1970, Chapter V, secti on 1b. 2/ Sc 'Circulcr 0b64l/L-l1/DD/70, Felb. 2, 1970, of the DGF; Rcgulation 3o12l, 1ay 23, 1970, Section 3., zund Guidelines for Prpem(ation of lForE-t l4anagcment Plmns., Appendi: to DGF'Is decision of Oc'. 20, 1970, LNo. 3516/l-2/DD/1970. -172- Mineral Concession Agreements 6.23 State enterprises, national private business undertakings, cooperatives, or individuals may conduct mining on the basis oT "mining authorizations" issuc2d by the M, nis`ter of M'ines on behalf of the Govern- ment*. "lso), the las7 stipulates thiatL i5Ehmi necessary the Minist,er of Mines may a-point other parlties, includiaxg p-iv,.te foreign buvsLiesses as contractors to carry our mining activities which have not. yet been or canaot be carried out by a government agency or state enterprise which is the holder of a mining autl'orizaLtion. The Mining Law also contains basic regulat,ions concerning so-called "pe.oole's mining", that is, traditional and primitive mining carried out by t..he local population on a small scale and individual basis. 6.21 The law divides the minerals into three categories: a. Strategic minerals (oil, tin, nickel, radioactive minerals, etc.) b. Vital- Pinterals (gold, silver, lead, zinc, etc.) c* Other nonvital minerals (minerals not included in above categories) The implementation of the Sta.tets autho'city$ to develop -strategic and vital rinerals is exercised by t.he 11inister of i'neS, wnereas that of ,the other (nonvital) minerals is exercised by the 1rovinciaa Govern- ment of the territo-:-y to develop certain deposits of strategic and vital minerals. Any request.s for mining concessions a-re submitted to tothe i -is& of iMiines. Applicants must prove t,heir ability and their capability bo'th technically and financially, to undertake the development of ,the deposit. 6.25 Foreign compa_nies may obtain exclusive rights to conduct minerral exploration develunment on the basis of a "contract of wtork" agreement w.ith the Goverrrrren[t. Foreign compoanies may also act as mining operators or contractjors for Stlate enterrrises under contract. The foreign party as the operating company has to be incorporated in Indonesia, but Jt has full 6ontIrol and management of all its activities under the agreement, full responsibility, and it must ass "-me a_ll risks. 6.26 The genervOl agreement consists of a pros-pecting period of 12 months, an exploration period of 36 months, an a ealuatti on period of 12 r;montlhs, a construction period of 36 monrths; the period 'or exploitation cal run up to 30 years. Within one year after the t,ermina- tion of' the e:.plo-ration period, the company has to file a suraary of its :eolor~cal minig ore dressing, and net'allur-gical investigations with the 1.nstryz of M,1ines together .ill all other gathered data. Althlough the various periods of tine for prospec'tng, exp:orati-on, etc. appea,z to be specified exactly, in factu they, frequent'vly can be extended so that the lag betwjeen initial exploration and tihe beg-nning of actual -173- production mtiay be exceedingly long. An example shoVTs that this leg mnay be bet';.cn 8.5 end 11.5 years&/ Wlithout :xtension lWith Extension (months) (months) a D Date of agreement ' o begiamn-ing o f general survey 6 6 b. Gene.ral Surverey 12 2b c. FID:ploration 36 60 d. Feasibility study 12 12 e. Con,sGruction 36 36 Tot al 102 138 Sin,ce t-here are rno provisions co-.pnelling a.pproval of these time : periods, it is even possib,le for the pre-production period to last lonver tUhan the figures indicated above. 6.27 The company is subject to nn---ent of land rent for the cont racted area, royalties in nmineral production corpr-ation tax., end general sa-le. - o etx.o JiC c ^or c-rpora loa - Oincorl t ares e grantCd t,o mil-ning tc-: :r- b, but ther i s a reduc- on o:^ ta% ratles fo-r thne first r. ten years. Addi J on-np ta;x conce-.ssons n--.5y even be granted to the invc.-stor in the for f of n invrest-.,ment tUzX credit in spacial cases of large investmentes. A surtr,iy, of tlhe -,povisons ' show;n in Table 6.1. 6.28 The Fo-eign Capital Th-vest;menlu Law iNo. 1 (1Q67) ees the investdorcfro.'us om dues or,Y Unachinery, eqLnipm.-?t, tbools, 2--id rilncia2i-,r supplies neerled for operatLion of tuhe project-. Ž elc, e Omportedc by theforei- comp^n f -cb h' or ope-ra.tion of the project aand that is no lon-gei needed m-S be re-e.-oorted free from a11 regular export and otCher custon duties, or ma.y be sold. in. Tnidonesia after corn- pli ance ; uh custons arnd import lawr..S and. regulcatC io I r a The law per-its repatiriation of -pro-fits, provided ta:es and all other official obliga- tions have been-rnst. Pov.isiIon I al-so made for accelerat.ed denrtcia- tIion of f.cc c mival asset's. "iot only is accele-rated. depreciation allowed but the firm also has the option of changizng the method used 1/ T. A. a'nring, op. cit. p. 6. from one year to the next. MIoreover., it is somLetines stated that the method used may be different for tax purposes th=n i-t is foir financial purposes. 6.29 As of Decermber 1970 nine foreign companies have signed agreemnrints with the Tndonesian govem8rnment for the development and e.xiploitation of mineral deposits in Uhe country. Eight are still operating as o-f the writing of this report, and eleven are- cu-rently negotiating contracts with the government. The followiing foreign companies have agreements for mineral developnient: 1. Freeport ndonesia Inc. (Su?osidiary of Freeport Sulphur Co., U.S.A.) 2. N. V. Billiton Maatschappij (The Netherlands) 3. P. T. International 'Nickel indonesia (Subsidiary of a2CO, Canada) h. P. T. Pacific Indonesi-a (Consortiun of U. S. Steel Corp., U.S.A., KmaL?z;lijke 1iederlandsche Hoogovens en Staa2fabrieken, N. V., Willian T. 1M1uller : Co., N. V., the Netherla-ids; NTe.iw-ont ning Corp., U.S.A.; Sherritt Gordon lines, Ltd., Canada.) 5. lmwninui Company of A,erica (Alcoa, U.S.A.) 6. Thdonesian UNickel Development Co., Lt.d. CcnsortilMn CT Fuji Lron Steel Co., TLtd.; >TI"Usubishi Shoji Kaisha Ltd.; ILitsuai & Co. Ltd.; I.ippon; lining Co. Ltd.; Nippon Yaldn Ko Jo Co. Ltd.; Pacific Nlickel Co. Ltd; Sumitono ,et'al Mining Co. Ltd.; Sum.itom o Shoji Kaisha, Ltd.; and Yaw[zata T-ron &'. Steel Co. Ltd. 7. Overseas 'ireral Resources Development Co. Ltd. (Japan-) 8. P. T. Kennecott Indonesia (Subsidiary of .erLnecott Copper Corp., U.S.A.) 9. P. T. Riotinto Bethlehem Tidonesia (Consortium of Rio Tinto Zi;nc Corp., Tngland, and Bethlehem Steel Corp,, U.S.A.) All companes except Overseas ILneral Resources Development Co. Ltd. are still act,ive in Indonesia. Of these ei gh1t, three are for nickel, one for aluitnum, one for copper, one.for tin, and tWo for exploration of any mineral deposits. 6.30 An extensiv-e cofrw,intary on the provisions in present. minerel concession a-reoe.,e;ts and a model contract for such agree- 1ents hves been prepared ard ar.-e available to tle governrmont.l/ The Pission endorses the general concluisions of the coilnentarv particularly those to the effect `h-h,at' (P.) the pro'.-isOiL of Lncent-ives has probaLbly been excessively, g-nerous. This applies importantly to the gra-Ltilg ofr investmnent tax cred-its, provisions for changing depreciation methods, and thee la$ treatment of interest pae.ymentus paeid to affJliates beincg included nrL costs. (b) The t ero periods permritted orior to produiction and the specification of tests of prforriaLnce may ;well lead t,o excessive delays arnd to performan.c in production that is loier thaL the preferences of the govezrn-enient. 1/ T. A. Kanzring, op. cit., and 'Iodel Contrzact prepared by the Harvard Development Advisod> or Service, -t 4 -176- Tabl,e 6.1 Su-mmary of Contractual 1dneral Agreements Name of Date of Size of Obliatory Roalty , Obligatory Tax Present Company Agre e rnnt Cones- E.:cploratory Rent Payner"s Doyelop.m,ent Requirements Status Ter.iina- sion Expenditure Rxpenditure N. V. 1968 trJO areas $1sOO,OOO 8 2/35i'of value of $6,'000,000 40%, of not in- exploration of one area Belliton rnstly over- tin metal.contained como for first comPleted withini a year-- Maatschappij ocean each in concontrateS pro- ten years of cost M was aCcout $2 million (tin) 1°98 about 12 duced--L% for asso- operating --eal dril1 samples mna- square kiO- ciated mrcetals period--48% for lyzcd in Hollarn--indi- meters each remiainder of cat!ons are that suffi- $0.00125 per annum contract cient reServes are avail- por hectare during acle for develop-nent-- survey psriod- possi ble develop-:i wiL . 0*25 during ex- start in a2roat 1 1/2 :..,lorat^onl--'0. .20 y-e sS--r . irning during operating depth 50 m.ctcrs--explor- period ations indicates ore belo-w tihis doepth International 1963 6,600,003 $1500,000 ore with loss than $75,ooo0000 37 1/2< of net to date, Inco spent $l1 Nickel hectares 2. 5 nickel-cobalt incor. for filrst rrilion--plans to invest (nickel) $500,C00 ro-alty of $O..015 ten yecrs of $200 rillion on plant to 1998 30 days per kilogrnam of operating perLod prodC ce O 5 ilr;o after containcd metal-- --)45 for re- pounds of nickcel by 1975. contract ores w.ith more maindolr of con- Process will incli,de both approval. than 2.5 royalty tract Inco latcrite §elti i to produce a 75Ar matt ,nd Thco reduction/acid .le p to0 nroduce $0.0o0 per hec,-2 iickc1 slfld-- tare per annum exact ultimate process during survey-- technology not yet dcci- $0.10 duxring e-e. ded. Inco clains to have i ploration--$1.C0 discovered a larae low- during operation .rado sulfidu ore tody . period . on t.heir concesion ' ., . IA 2 -177- Suinary of Contractual 1N;ineral Agreements Namne of Date of Size of Obligatory F-Ya1tY Obligatory Tax Present CoIpa ny Acrconnt Conces- E:pr1toa'rv Rent Paynlants Development Requirements Status Tron sion Expond ture Expenditure ti6n. P. T. Pacific 1969 283,000 $1,500,000 samo as interna- *$75,00O,000 samre as Inter- at present, raking gene- Nickel hoctaros tioral Nickel national Nickel ral survey ln6ir)nosia (r.icksl) 19R9 Alu;inu.-i 1969 | O,O00 |11,2CO,Ooo $02O0 per ton dry $100.,0C0000 jsam- as Inter- ALCOA has indications of Ccr.D-ny of scu=re. bas4s of bauxite national Nickel P lazge bauxite deposit America kilomreters proccsscd in Indo- on ',1LantzLi. PI-ClS (baueitt) 1999 nessia. 1o0.Io Der are to construct a reduc- ton- drv basis ofL tion plaunt nith en initial bauxite c,-rtecl . cap^cityv of 200,00O mietric tons of motel per year-- first f2 Jntztho of eventual capacity of general s4rV?y,. 360,00o .etric tons of .5ojOOG next 12 rctal per yea-r--total montls qf gcper1cl project cost -will be Gur;vcy $9o.?io2 hce- tare pr y ear-- ..v300,000,OOO--plan to be . duri-nC enlora- . on stream 1976-1977 tion--$0.l0 per hcc.tre dcVtUn2 de- .. eloount !' .$ 0 . * pcr -oce ae year. Indonesian j 969 3,880,000 $75o,o000 sam, as J.nterna- $75,000,000 sarne as Ilnter- at present, doing ex- Vickcl h^ctares tional Nickel nationral Nickel ploration. Development 000oooo Cor.cpany 1999 30 days (nickel) after con- tract, a1pp,,)roval -178- Suxm,ary of Contractual Mineral Agreewgnts Name of Date of Size of Obligatory Royalty Obligatory Tax Present Co.pany Ngreoont Conces- Ehploratory Zent Payiisnts Devuloirrient Pequi.roments Status onrmina- sion , E&penditure EBponditure tion. Overseas 1969 1,000,000 company has relinqu-shed Mineral hactares all of its holdings Resource Devolonlpment 1999 Ltd* Fronport 1967 10 square $1,50oo,o0 None None exempt for first company =ill start Indonesia kilometers 36 nrnths of on- -aining 1/1973--tota In. . eration--35 of oxpcnditure $130 (copper) 1997 no:t 84 nnn th s a:0-11ion--33 mill-ion ton . ut not loss orc body--2.5% copp,3r th*an L of net with small anunt of sales--!t.75% of gold and silver-i-ron romaLnixn period ore (401;) present but but not less than! not economically nminable 10% of net sales --13-18 yec- life of present rine Kennecott of 1969 30,761 during general royalty scho- None based on type of Indonesia square curvoy $10 par dule set up mincral deposit ('&U minerals) 1999 kilometers square kilo- for 43 mine- developed--see meter rals contract for details -179- Surmmary of Contractual 14I,neral kg,roermonts Name of Date of Size of Obligatory POy t,r Obligatory Tax Present Co r,pany Agrecment Corcos- Examlorato,y Rant Pymnontus De-rmopncnt Requirrem.nts Status Termina- sion E;penditure pnditure tion Kenne:ott of dur½c. ex- vce contrn'ct for None exploratory drilling on Lmlonosia, plor-atin dctr?4ls--lancd mrot Wost Irian for low-greAe (all mrerals) .P'gramn 4$0.00' per hctc a- re. copper deposit $100 per per mnnura during continued square lkilo- Scu, 3m U r -- c'tcr with $0.10. during- explor- . ndvrance pay- ation--$2.00 per mrnt (Af hectare during oper- $300,000, ation 30 dwas af- ter corit-act approval RiOtinto 1970 35,000 during gone- roy2lty schedule set None eased on type a present, naking gene- Ess tl--.I Squaro ral survoy up 'for 43 m.inorals-- of mineral dcpo- ral survey Insdonesia ki)-omQters period $10 see contract for sit develoced-- (all minereals) 2000 per squareo details see conturact for kilorioter-- details e:xploration period $100 pcr souare kilometer * 1 C(HAPTHM VII PR,3ZA.RCH, D+-E7LOF WENT A-,"D TRU1Iki'sG FGR INDUSTRIAL DEVMTOF1'E-NT 7.1 As in most developing countries there is an active interest in the potential bonofits to d-eve1or-:ncnt from research and development activiti-o, on problens such as the transfer or incorporation of tech- nology., the pursuance of informiation on topics or areas that'-, are unique to the country (e.g. marine biology and pisciculture in tropical waters), and there is a recognition that research and developiment is generally retarded, in a somne-,4hat confused state, and perhaps not receiving the attention and the resources that are deserved. There is a2S ar feeling with respect to traini_-`c needs, though it is :aot so much a feeling of possible neal ect of this topic as it is a recognition of the co.mplexity of defining the needs in speciNic terms and formulating programs th i'hat will be effective. 7.2 The interest and concern with the use of research, development, and ur;,.ining in the national interest is evidenced by recent reports and the papers o-f a scientific conference. A thoughtful reportt by Lembaga Ilmlu ?engethuan Indonesia (LTPI; the Indonesian Institute oG*> Sciences) co-vers broadly the problems and the opportuaities for apply,riing science and technology to the deviaopment needs of indonesia anid devotes atten- tion to each of th-e major sectors oL agriculture, indaustry,Y, health, education, natural resou 2ces inf, rastructure, and the soci--l sciences., The report is a compendiuxii of infornmation- on these topics that could w,ell serve as a bas.is for discussion and tUhe formulation o-f appropriate poli- cies. In addition there are the papers of a conf-er nce sponsored jo-Lnt.y by LIPI and the 1National Academ,uy of Sciences, USA. Tnese papers cover a wide rwnge of topics in tlhe fundjng, sup.port,. anid progrsm fo:mulation of research and development, anid the e.x-erience with theas.e problems in various industries or sectors in Indonesia.. Xhat emerges s te central thesis of the report and the confersnce papers is the need for gidance and a program of support for research and developmint to realize the latuent benefits that, are awailable to the country. 7.3 Unfortulinately "research and development-" has beco.me a debaied term in recent years. It *2as, correctly, meant to identify activities that contribute to knowlledge and that lead to newT or better solutions to real problems. In its debased form it is loosely used to cover activities thbat range from "sales engineering" to largely paper studies of problems whose replity has been removed by appropriate choice of the as-s-mptuions- This is not said in criticism of rany particular set of activities now going on, 1/ LIPI, The Akolication of Science and Techmolo to Develooment in Indonesi . 'ol. T-Tf, D^-ak.rt. April, 197i. / .orkshon on Irldutri2 Iandl Technoloc1ical Research Djakarta January 25-31, 1971. There are some 75 individual and working group reports amcn,; the conference papers, the mnajorityL of ihich are by Indonesian officials and scholars. but rather to make the point that suppor` for activities designated as "research and developmenit" is often blindly regarded as desirable, with- out investigating the content of the activities, wherea3 in assessing support jfor an industrial development program., these activities should be held to rathler strict account. The tests are the relevancy of the research and developmen to specific problems and their productivity in improvning the quantity a_nd quality of industrial pExformnnce. One know- ledgeable observer of the problemn in indonesia has summarized in the following words" " . . . lately many institutions are besotted bDy 're- search fever.,' This is partly drae to pressures from real needs to carry out research. For the other part, it is due to pressures originating from the urge to Lollow.T the fashion to 'do research' on everything. To guard against wastage in research, it is necessary to have a research plan which includes research priorities orierited to strategic sectors of -development. Objectives and Purposes of R&D 7.4 MIuch oL the writing and discussion at the present time is directed toward the need for a "sciences policy" in Indonesia or the proper foc-as for research and development as a general matter. There is undoubtedly merit in raising such issues, but that is too broad a framework; for Uhis discussion. We are confined to R&D as it can', or should, app'ly wJithin the industrial sector, and specifically as R&D may be directed to solving industrial problems wi%rthin the coontext of a de-velopment plan. This may be regarded as too narrow a focus, but it has the vesture oL cdirecting at- tention to the most immed-iat a'nd pressinig needs. It is also relatively short-run in its outlook; we are primarily concerned -wvit h winhat might be accomplished in about the nextu five years. If a good start can be made in this time frame and modest success achieved, the fture for R&D, whi3.e not assured, wirll at least be much easier to maintain at a healty -.level. This limrited definition of the horizon for planning industrial R&D will obviously affect decisions on the programs to be selected, the institu- tions to be supported, and the budgetary support for them. Programs and personnel that can have a pay-oLf in the shoit-run will be preferred over those with along gestation period. 7.5 The implications of this kind of orientation can be cont-rasted to a Some;,Aiat different characterization that has been outlined.J This alternative sugges ts several chaacteristic.,feat_res of I' in Inonesia. The topic area is first characterized as having a "nati onal scope." If this means that tuhere is a national interest or concern nn the results, there can. be no uarrel, but the programs suggested here is more paro- chial. Its scope ext ends only to industrial problems. Tnere is no nec- essary conflict between the twJo approaches. Secord, the solutions, to ~/ i. Salim, "Research and Econoamic revelopment" paper presented at t-he tlorkshop on the Techiiique of Choices and Evaluation of Research Projects, Djakarta, October, 1970. 2/ Ibid. pp 9-10. -.- the problems are described as thcxe that vill bring about "a stractural chan-ge" in the economzic and social system. This is an appropriate charac- terization for a total development program, but in industry the objective is the much more modest one ol solving the tech-nical problems in production that are impeding the successful performance of individual plants. ThZird, the problems are said to require a "fundamental solution" that is "long term in nature", w.Thereas we emphasize the proxdnate or prag.atic nalure of the required work and sturess the need for short-run results; The viewoint of the for-mer position, which is that of tuhe total developmental effort is, as -before, not incompatible with the proposals for industryu. Fin-ally, the alternative charactorization says that the problcas are developm-ent-directed and have a "less basic research character", and with that both points of viewz are in agreement. Tne contrast that is drawn here is more apparent than real; it has been made in order to empha-size again, and in another way, the imLperative need to organize and support an industrial RD effort that is actve not somnolent, and that is problen and performance orienited. 7.6 A statement ol objectives or purposes for industrial R&D rus tuhe risk of either being too general, and thus ambiguous and trite, or else too sDecilic, and thus missing the big opportunities, but it suggested that the folloirnig elements constitut,e a wor'.kable set of objectives. (1) Finding sol-tionls to specific production and technical problems now existing in industry to raise the rate of utilization of capacity, low,-er operating cosis, and for regularized productQion runs in a plant. Such prob- lerns are apt to be most severe in the mediuw-i and, sinaller sttale industries, those of domestic origin, and those in the mechanical and light industries. Initial concentration should be in those areas. (2) Adapting prodaction processes to local conditiions. These should be viewed more as micro-problems in adaDtation rather 'than macro-problemis. The correct illustratAion is determininrg how best to adapt a machinery opera- tion to a metal product, rather than preparing a grand design for a proposed steel industrry (though, as is indicated below, certain aspects of this latter kind of work may be required). (3) Povis on of limiled but intensive training Lor selected cadre-s from industry in the types of problems mentioned in (1). and (2) above. (4e) pepar'ion of feasibility (and pre-feasibility) studies of projects, or processes wtithin inajor projects, that are deemed desirable or feasible wtrithin the development plan fra-me. Thus, for ex:nmle some of the effort of research institutes could be assigned to the preparation of parts of feasibility studies on the major projects that are recomm-ended in Chap- ter II and described in detail in ChapterS -\JTII-XII o-f this report. Such assigrinents should be made by Bappenas in consultation with other govnLernment agencies as appropriate. 7.7 The four points of the suggested program do not exthaust the import- ant opportunities that are available for app'lying flR;D to the tasks of development, but they probably do exhaust the inoediately available resources -183- of qualified personnel and facilities that Indonesia has tuo devote to these problems. How can these resources be best devoted to the tasks at hand? The Connitment of Resources 7.8 Indonesia together with many other developing countries, has taken seriously the mandate that 1% of the GNP should be set aside Lor research and development expendlitures, and this in spite of the Lact that the criteria for establishinc, that stancdard are axabigous, genr2alized rather than related to country uniauc circumstances, and intended as a guideline rather than a target. But there is little evidence that the standard has been taken lit2. erally. Although it is difficult to disentangle the statistics on allocation of Lunds to specific programs that are supported by different niiniFtries an1d governmeent agencies, it appears that in 1970-71 tuhe government is allocating about Rp 8 billion (i.e. slightly over $20 million at current exchange rates) to research and experimentDal development.!/ These are fvnds directly allocated through the public budget and exclude funds that arise in private india.try, foundaations, foreign and other sources. All sectors of activity are included. Of this amount approximately 23 percent originate in the routine Go vernment budget and 77 percent in the developmen't budget. The total amount cited is swollen by allocations that clearly have little to do with research and develop- ment as defined under even generous standards. For exani-le, aLmost 30 percent of the amount in the development budget is attributed to expenditures, ol Govern.- ment offices .hose responsibilities are public information. The nominal amount attributable to activities in industry is on the order of 10 percent of the total. In the aggregate, and accepting the total of Rp 8 billion as re-resen- tative of all ex:penditures on research and development, appro:imately two- tenths of one percent of the GNP. is currently allocated to these act-ivities. Given the low level of income per capita and the many claims made against revenues in a forced-draft^ development program, this allocat-lon cannot be arbitrarily dismissed as insufficient. 1Ihat can be questioned is the dis- tribution and uses made of the total. Bven $20 million will buy a lot of expert assistance if it is concentrated and spent on high priority items. 7.9 There are apparently personnel and special research institutes devoting attention to particular problem areas or topics. The LIPI re-Dort identifies 74 non-educational and 96 educational institutes concerned, writh technological research in one forrm or another. About 90 percent of the research institutes (ex:clud:ing academic institutions) are in the I-inistries of Agriculture and industry.. There are 17 industrial research institutes in the Iiini.try of Industry alone, reporting to live different directors general. These insti- tutes get oart, of their funds from the Govermment and part from direct con- tracts. But on the average the size of Drofessional staff of the research institutes is small. The LIPI report notes that "the average non-educational research institute has 12 full-time scientist,s and 3 part-time -eople. If 1/ Miuljons "Current Research and Development Funding by Government Agencies", LIPI-NAS Workshop Papers. we assume that this applies to th t.echnological activities the.n these institutes are much too sma:ll. / The same report estimates that there is an upper limit of 800 to 900 equivalent full-time personnel doing tech- nological research, and the implicat.ion is that in all probability the actual number falls far short of that limit. in several places, the report also notes the lo, salaries paid to the research staffs, wVith the remsalt that mLany of them hold more than one job. Tnis phenomenon is not uniqus to re- search, ho,-wever; it is typical throughout Government. 7.10 . A survey of the actual research wTork undertaken by research insti- tutes in terus of it.s applicabiuiy and relevance to developme.-re needs in indus ti-j is somew-hat di-scouraging. The LIPI report contains a brief summary oL the e;tent of work now going onl in industrial resecrch; this s.ummary is included as anI annnex to tlhis chapter. In particular iT is naoted that the machinery and metals industries are not well covered by research. The work on chemicals has some good points but it is not uniformn, and thare are gaps. Plastic products are considered only writh respect to packaging, or their mechanical properties. There is apparently a lack of information and under- standing oni tihe part of the research institutes of the needs for inastrial research -ork in support of the development plans being formulated by the Government, and an equal lack of corTrununication bet'T:een private industry and the institutes. Guidance, discussion, and mutual agreement on the priority issues are generally weak. The "market' is not functioning as it could. As a result, it is not surprising that the research programs tend to be some-what vague a-nd spor.adic in coverage. 7.11 Yet there is evidence that within the research ccrn:.nity there is a desire to be productive and to assist in development if gui_d-nce ca.n be givi an^d certain other problems can be solved or at least ame-iiorated. A paper prepared for the LIPI-IJAS conference in January, 1971 concerning re- search at the Bandung Irstitute of Techniology (ITTB) sunms u this attitude rather well.2 - 'P1ost of the facuilty staff with advanced degrees are in an- age brackiet which is considered to be iithin the peak at their creativity and the, need an outltet. Op- portunitieS should be created for them; other-uise frustration w-ill arire which will be det:?imental and the result wJill be anything but useful to all." . . .a valid qestion might be raised on tufie sound- ness of the budget allocation for research. Clearly the conclusion can readily be obtained that the research 1/ 1PIP op. cit., Vol. II, p .32 2/ S. Sapiie, "Current Situation of Industrial and Technological Research System W'Tithin ITB3," LIPI-NAS working paper. projects being carried out do not reflect any clear cut objectives supporting the basic aimw of the pres ent developmeent plan. This is a very valid point ,indeed wihich needs clarification. .*. . ".. * the money appropriated for research in the budget year 1960-70 camne very late, towards the end of the year. Bound by va-rious G-overnnmnt regulations on spend-ing which must be done writhin the budget year, the whole planning wvas thrown off balance. Control and evaluation of the projects in that budget year wlas just not possible. Valu- able data w7hich could have been reported and :izould shed more light becomes non-existent.1" "It is to be hoped that lets bureaucratic procedures could be app'lied . . . . This is a plea for guidanme and direction so that the professional personnel can feel a sense of cornaiitment to and participation in development, and a rscuest for reasonable budgetary support so that the tasks can be adequately carried out. 7.12 Onie might sunnoarize briefly the current situation in research and development in the follo.ing points: (a) there is a proliferation of research institutes agencies, etc. beyond what is found in ma-:,ny countries; (b) on the average the size of t'he orofessional staf in a unit s small - in a sense to be deLined 'later the average size is "too small", (c) there is a lack of gaidance anQd cor.minlicat,ion among the planning olfices, tLhe institutes, and orivate industry and the result sho.s in less than fully productive and un- systemavtic research programs; (d) professiona'l personnrel mLust oft.en hold S,J- eral jobs which inpairs their product,ivity, but, this is a condition shared with many ot-her persons. Yet there is basis for prockctive work on important problems. -what nmight be done to improve the situation? 7.13 There are several possible actions that coald be initia ated; they are offered for consideration and discussion, since detailed programs couad not be prepared. First, some conisolidation of re,.-earch institutes serving in- dustry might be undertz,,en. The Cowilev report. suggested consolida-tion of the institu-tes into seven ).major groups 1/ te:-tiles and ba-ik; ceramics and cement; materials testing aid metallurgy (w-lhich is now; to be covered by the newv }Ietal Industries Development Center); chemicals; food chemistry and processing; cellulose research; including p per and packagin.; and an insti- tute to concentrate on training in operationE. These suggestions rmght be the starting point for a detailed a1aaysis of the problem and the formulation ~/ W.E. Cowzley, U-II9 report, 1969. Cited in LIPI, op. cit., Vol. II, pp. 1, 8ff. -1086- of an action- progra-m. IT is evident that if consolidation occurs, the average size of the proLessional staff in aan institute could be increased. There are certain economies of scale in research as in prodction, notably in the better coverage of inter-related probLems and more effective speciali- zation. The mission hazards the guess that the mini.m)UM critical size of staff is on the order of twice the average size now found, that is, a staff of 25-30, though this -:~aries depending on mzany factors. This should not (and undoubtedly wi-ll not) be taken as a comfirmed judgment on w.hich to aci, but it is probabl y in the right direction. 7.14 Second, since it is unrealistic to expect that actions can be undertaken to st,rengthen guidanice and research prograx;i fonmulation in all areas simultaneously-, it is sugp.ested that a staxt be r,,ade in the area of machineiry and metals. This is in accord with the reconniendationis made in the letter part of 'Dhapter II where the en.gueer-ng in'ustries are shoirn to be both essential to development and currently re-Larded. This further suggevts an initial concentration on stren,thening the -work prograns, staff, and bud,etary support for 141DO and ITB. This is a program in iiich Bappenas should take ain interest, in close cooperationi with the i'inistry of Industry and the anstitutes thnenselves. 715 T h-Thrd., in this regard Indonesia can prolit fron the experience in other countries. One of the more successful prograns in coordlnauing development planning, project feasibility studie's, and technilcal help, to industry exists in Korea. There is close coordination among the Econolic Planning n 3oard (corresrTondiicn to B:-Oenas), the Uiinist`ry of. Co=-Crce a-nd Industry ( porressongirS to the 1inistry of clustr)and th-e Koraca Insti- tute o0 Science and Teclhrnology (correspond-ing to I- and ITB). It is recomm.endedl that a group repreoe.nting the four units e-xe.ine the Korean experience to determine i4hat techniques and arra2;,ercnt might reasonably be transplanted to Indonesia. 7.16 Fou>th. if the proper autention is to be given to helpingg industry with its irmLiediate producttion and technica:1 problems, the institutes rmnst establish a close relationship with priva-e industry- so that -theris a mutual understa2ndi-tg of the problems and tihe carabilities, and so that a, habit is formied of looking to Lhe institut,es f-or help wthen it is needed. This i s part,icul-arly imnportant f or the medium and smaller scale firms in industry. 7.17 Finally,- if this first step in inachinery and metals is successful, a pattern wTill be established that can be emulated in othler institutes and industrial areas. . The "demonstration effect" should be a relatively power- ful one, far more likely to be effective th:.in aAteCrmts to underte'-e improve- ments across the board at a single time. ManDower Training 7.18 The mission has little to suggest in the manpowear trai-ning field, beyond reiterating points made by others who have w-iorked intensively in -187- this field and are more '.nowledgeable.1/ The interrelationships among manpower needs, training, and educationial planning are varied, complex, and their significanice tranzcends 'the interests of a single economic sector such as industry. Unless one is prepared to consider these inter- relationships quite fully, in order not to omit salient points, it is 4, pruadent to limit the remarks to a fexq fairly obvious points. There is, first of all, fairly general agreement that a lack of entrepreneur3hip (in the classic sense of that term) combined with mnanagerial skills constitutes a potential constraint on the ex-pansion oL industry in the future, though there is less agr-ement on the types of programs that Vill be helpful. l:iost, analyst s believe tuhaut the problem is one that can be overcomfe by teaching standard business method courses (though there is a need, for examnple, for more people trained in standard skills such as accounting). As has been suggested earlier in this reportu, new entre- preneurs in industry probably must be drat.m from those iwho have made money in trade and comnerce and, as the experience of mGay count,ries indicattes, this transition takes time and careful cultivation. There is general *agreement on the need for some kind of management development program in conjunction wJith imTiprovements in the incentive and support systems for new businesses. Tne programs of Pendidikan dan Pembinaan Mlanagement (PR') and the I'anagement Institute of the Faculty of Economics of the University of Indonesia are cited as ex.!,iples of some success in the field; their experience may be worth expanding and/or transferring to other selected agencies. In any event the topic of management development and training is one that deserves contintxed attention. 7.19 Second, an earlier IBRD reportt/ notes that vocational training in the present system is rather specialized and rigid, and of poor q,uality partly because of insufficient and, poorly trained teachers, and partly because of lack of equipment. An alternative is to focus on more flexible and general training in basic knowledge, leaving specialized skills to be learned on the job. If the ind1ustrial sector growth is accelerated, the requirements for vocational training oL a labor force wrill similarly be ex:panded so that this too is an area of special interest to those concerned writh industrial development. J For example, The Ford Foundation has a number of programs and an active interest in training and education and has sponsored reports on a number of topics. Cf. S.B. Jaedono, "Report on a Survey of Opinion on Manageme-.nt Problems," April, 1970. E. Rubin, T'anage-rent Problems of the Pri- vate Sector and Public Enterprises in Indonesia and 1"eans of Solution.I 2/ .Cf. IBRD, "Appraisal of an Education Project Indonesia," PE-19a. 7.20 Because of the inadeo,uac and unreliability of the statistics, nainy basic studies of the Apaand '.or and supply of labo, pro) ctivty, etc. cannot Sens-ibly be undartaken, or at least are of very cdbious ,uality when they are undertaken. This impairs seriously the ability to ainalyze and make decicionF relating to the w.ihole range of labor problem-s. This problem matches the statistical proble,mF, Tnen.;iored earlier, -ith respect to basic industrial statist,ics on ouat,put, value added and the like. A high prJiority needs to be given to nTproving the statistical base, not only for industry, but for all sectors. 4 7T112)J1471t. VA h O- - -C An. ,. , -' -l ) L b E - V Nf £ - * 'a - F' '6 -B - w ~ ~~ ~ ~ - Vr 'aa r J 6 V ;r t s , 5 - - / v . rl n n t UNN-45 TPINATN G FO.R. DIU 1S.RAL DZ, ,ELO Yi -IT MI E'TDO7 S Chapters VhhI - 'Jt,ecl andl -th rim-i-arinc.; indu., r BASIC DATA (.Jrigina1 with Chapter I) -191- CHAPTER VIII IRON AND STEEL CURRENT STATUS OF THE IRON AND STEEL INDUSTRY 8.1 Plans to provide. Indonesia with its own steel industry go back to 1955 when the Government commissioned a study which recommunended the establishment of various small plants. In 1959, under an agreement with the USSR, further studies were undertaken which lead to 3 projects, a blast furnace plant at Lampung, North Sumatra, to make 35,000 tons of pig iron annually, the Tjilegon.Steel Plant with a capacity of 100,000 tons of ingot steel annually and th3 Kalimantan Survey Project, aimed at the establishment of an integrated plant of 250,000 tons of ingot annually. The pig iron from Lampung was to be used, in addition to scrap, in the Tjilegon steel melting shop, which for the purpose was to be equipped with two open hearth furnaces. The Lampung project was abandoned when the iron ore reserves turned out to be insufficient and the Kalimantan Survey Project did not get beyond the survey stage. The T1ilegon Project 8.2 For the Tjilegon project, a contract was concluded with the USSR which covered, at a price of $36 million equivalent, the engineering, design, supply of all equipment, construction supervision and training of staff. The plant was started at Tjilegon, about 80 km. west of Djakarta, the main market and 10 km. east of Merak, the nearest place at which a deep water,port could be built and was in fact planned. The rolling mill consisted of a bar and light section mill and a wire rod mill with a capacity, depending on product mix, of 200-250 thousand tons of product annually. 1he planned output, however, due to the constraint of steel melting shop and billet reheating capacity was 8h,000 tons annually. In 1965 project implemren- tation was discontinued for lack of Rupiah f'unds. By that time, about 80< of the civil engineering work had been completed and about the same per- centage of equipment had been delivered, though little had been installed. In 1968, Granite City Steel International made a proposal to complete the project. The proposal provided for the replacement of 100,000 tons open hearth capacity and ingot stripping by electric arc furnaces and contiiluous casting with a capacity of 208,000 tons annually, so as to provide a more economical steel making process and a better utilization of rolling mill capacity - 200,000 tons annually instead of 86,000 tons as originally planned. No agreement was reached on the terms of Granite City Steel. The Covernment expects in the very near future from the Goverrnment of the USSR proposals for the completion of the project. Other Proj.ects 8.3 Meanwhile, a local company, P.T. Air Trading built a steel, plant in Djakarta with an initial capacity of 10,000 tons annually of reinforcing rods and bars. The plant is understood to have a scrap-fed -192- electric arc furnace and a cross country mill, built by the company from various new and second-hand components. Licenses have been issued to local firms for fourteen other projects, ranging in capacity from 1,000 tons to 60,000 tons annually, of non-flat products, mainly reinforcing bars and rods, and some of them are in various stages of implementation. Estimated investment costs vary between $29,96 and $297.94 per ton of capacity, and total capacity, if all projects materialize, would be 245,000 tons annually. This., however, seems most unlikely. 8.4 In addition, 8 proposals have been received from foreign investors ranging in capacity from 15,000 tons to 120,000 tons. In May 1971, one,of these proposals had been rejected. On four, no progress was achieved, one was under negotiation, and a 30,000 ton project was under construction. Total capacity of the active proposals would come to 246,000 tons. Total capacity of all licensed local and foreign projects would be 492,000 tons annually. 8.5 Licenses have also been issued for 3 plants to make pipe from imported skelp, the largest with a capacity of 21,000 tons. To meet demand for i:orrugated galvanized sheet, 8 licenses have been issued and 4 plants have meanwhile been built) with a total capacity of 25,000 tons per year. Present Planninq 8.6 The picture of a steel industry emerging here is very similar to that of the Republic of China and the Republic of Korea 15-20 years ago. The Government, preoccupied with urgent development tasks in all fields, and primarily in agriculture and light industries, decides to leave the development of a steel industry to private initiative, perhaps reasoning that the investor who puts his money at risk should best be able to decide whether the time had come to produce steel in the country, and what type of plant meets best the local requirements. In keeping with that approach the Department of Basic Industries has compiled a number of demand forecasts and licensed about double the capacity that would be required on the strength of these demand forecasts - assnring that the Tjilegon project would not come into operation. Given the high mortality rate among such projects, and the early stage in project development at which the license is issued, there would appear to be no danger of over licensing. Project proposals are reviewed, and, to the extent that they call for special preferences or privileges, recom- mendations are made which in the case of one foreign proposal led to its rejection. Evaluation 8.7 However, this approach to steel planning has a number of 1/ A bar mill with the stands arranged side by side, with manual transfer from stand to stand. -193- drawbacks, as the experience of Korea and China has demonstrated. Basic iron and steel making is a highly capital intensive eilterprise, and, as in most capital intensive enterprises, calls for large volume output to achieve economies of scale. In some fields of industrial enterprise production technology itself sets a lower limit - modern aimmonia synthesis processes are just not feasible below an output of 500 tons of ammonia per day - but steel, unfortunately, can be made by nearly any process in any desired volume - at a.price. Plant capacity becomes then a matter of the investors' ability to raise finance, rather tharl a matter of relating output to demand in order to determine, whether the marketable output volume pernits sufficient economies of scale in production for the product to be competitive with imports. As a result, too many small plants are built, many of which cannot expect to have a positive and acceptable economic rate of return. These small plants pre-empt the market, create planning problems and increase the cost to the economy of eventually establishing an efficient steel industry. 8.8 In planning their small plants the investors do not seem to be taking into account important factors affecting their future production cost. The difference in planned investment cost in the proposals presently licensed quoted aboye - a ratio of 10:1 (see Paragraph 8.3 above), indicates that quite a few proposals must have been based on-unrealistic cost estimates, even allow.ing for differences in the cost basis and for different rates of exchange used in converting estimated local cost. The very low price for local scrap - $15-25 per ton reflects lack of demand. With increasing demand prices are bound to rise until they reach import parity, at present $60 per ton landed cost net of duty. At present consumers do not appear to be very quality conscious so that savings in investment costs can be made by the use of second hand or rebuilt equipment. But with growing demand and product standardization, quality might well become an important consideration. Imports are presently handled in a way that increases the CIF price by about 15-20% on account of landing cost and so adds considerably to the natural protection afforded indigenous production through the transport cost differential. lWth the streamlining of port operations, document processing and customs procedures landing costs are bound to come down. 8.9 Protection would then be needed and the Government would be faced with a difficult choice: either burden the developing metal using and construction industries with a high steel price brought about by high duties, or be accused of sacrificing, the "national steel -industry". In the latter case, considerable investment resources would be wasted, and any Government would find it very difficult to make such decision. In the former case, the commercial risk for what was a private investment decision is being transferred to the GoverruMent, and passed on by the Government to other branches of the economy which had no influence on those investment decisions. 8.10 In the event, the Government might try to compromise, under which the marginal "backyard" producer would be left to his own devices, -194- and steel capacity would be laid out in such a way as to enable the better equipped small plants to produce finished products from intermediate products supplied by an economically sized integrated plant. In this way at least in steel making,' if not in rolling, economies of scale would be achieved. 8.11 Fortunately, the point has not been reached where this difficult policy decision will unavoidably be forced upon the Government simply because most of the licensed projects have not yet reached the implementation stage. This should make it easier for the Government to begin planning development of a steel industry with due regard to considerations of efficiency and economy, taking into account the country's resource endowment. The following is intended to provide an outline for steel planning in Lndonesia. A PROPOSED OUTLINE FOR STEEL PLANNING 8.12 As with other productive investment, any meaningful plarning for steel has to proceed from the market size and the resource endowment to establish whether a satisfactory economic rate of return can be expecteO' from the investment. WIth moderm large scale low cost bulk transport, gaps in the natural resource endowment can be overcome. The necessary skill transfer (,an be arranged through collaboration or management and technical assistance agreements, and capital can be found if the rate of return is right, but there is no substitute for the domestic market. The viability of a steel industry thus becomes a function of the size of the market. It determines whether the establishment of a steel industry can be considered, and what degree of manufacturing: rerolling, scrap melting or fully integrated processing from ore to finished product, best meets the country's demanc-. The resource endowlment and the cost at which missing resources can be obtained then determine, through the expected economic rate of return, the order of priority in the queue of competing claims for limited investment resources. Past Consumption and Market Prospects 8.13 The figures on consumption show,n in Table 8.1 are those published by the Biro Pusat Statistik, the Government's Central Bureau of Statistics. These figures rep.resent imports as evidenced by customs documents, and since the rate of duty on steel products is very low, they can be taken to represent actual imports. Steel is imported in small consignments mostly to fill actual orders, and there is no indication that substantial stocks are being held anywhere. Indigenous production - by one small scrap based rolling mill - is only a few thousand tons per year. Imports thus car, be taken to represent demand. 8.14 Indonesia consumed in 1970, 426,000 tons of finished rolled steel products corresponding to 50,000 tons of crude steel, if we assume continuous casting, or I7O,000 tons of crude steel if ingot casting and stripping is assumed, Of the total demand for rolled products 44.2 per cent -195- were for nonflat, and 55.8 per cent for flat products. In an economy in Indonesia's stage of development one would expect to find a slightly higher demand for non flat products than for flat products. The difference is easily explained. Structurals, shown in the table under fJat products for planning purposes, have most likely been rolled, not welded, e--ructurals. I.I' th a large oil and gas industry and extensive ship building and repair, Indonesia is bound to consune more plate and pipe, which, if welded from strip, belongs under flat products, than a country in a similar stage of development, but without the need for interisland sea transport and rithout an oil industry. 8.15 Demand has nearly triple. during the last three years from the lowest point in 1967. It reflects the extent to which the economy was starved for steel, the speed and dispatch with which aid was organized and put to use, a return of confidence, and the inherent vigor of the economy. But these growth rates are not a suitable basis for demand forecasts, since they indicate deferred maintenance and rehabilitation needs rather than new iz.vestment. Any projection method requiring a time series is not applicable in Indonesia to forecast steel demand. Also, as pointed out elsewhere in this report, Indonesia's industrial structure is aty'oical, so that cross references to other countries might be misleading. Earlier forecasts made by others are definitely too low. The report of the ECAFE Iron and Steel Su:rvey Miission predir!ted that from 1966 onwards steel consumption would increase by 4 per cent per annum in accord!nce with a stabilized, but growsing economy. The Japanese- AIDC Iron and Steel Survey in their January 1969 report proposed a growth rate of 4.6 per cent through 1985. A forecast computed more recently by the Directorate General of Basic Industries, Department of Industry, quotes various forecasts made by different agencies and consultants of 5-10 per cent for bar mill products. 8.16 The Bank's macro economic model - assumes an average growth of investment between 1971 and 1975 of nearly 14 per cent annually, and 10.4 per cent thereafter. For steel consumption 'this investment growth rate would imply a doubling by 1975 of the rolled steel consumption of 426,000 tons in 1970. However, there are two factors that would justify projecting an even faster growth over the next five years. We have no way of knowing whether the rehabilitation phase is over. The rapid demand growth, observed over the last three years may very well continue, perhaps at a somewhat reduced rate over the next two to three years before it flattens into a growth rate consistent erith that of investment growth. If that should happen, "nornal" growth would take off from a level appreci.ably higher than present consumption. With increasing import substitution in the metal working industries discussed elsewhere in this report, and the preponderance of construction activities in overall invrestment, the growth rate of steel consumption is bound to exceed the investment growrth rate. Both factors are not synchronous; while the rehabilitation-induced consumption growth is bound to abate, consumption caused by new investment and import substitution is bound to accelerate over time. 1/ Indonesia: Investment and Growth Perspectives in the 1970's - A First Report;, EAP-22 - March 25, 1971 -196- 8.17 Outside the macro economic model the Bank Economic Mission calculated a public and private investment growth rate of 16-17 per cent, derived from projected development budgets and from an aggregate of projects in the pipeline, planned or identified. This growth rate has been adopted for steel demand up to 1976. 8.18 A 16 per cent growth rate may well turn out to be on the low side. Even with about one million tons of steel products, corresponding to 1.2 million tons of crude steel Indonesia would only have a per capita steel consumption of about 9 kg in 1976. Ten years earlier Thailand had 21 kg, Malaysia 43, the Ehilippines 2. and Taiwan 51 kg. 1/ Furthermore, an error of 2 per cent in growth rate on either side, would advance or defer the time by which the projected demand is reached, by about six months. Even with a growth rate of only 12 per cent for 1971-73, and 10 per cent thereafter, total consumption of rolled steel in 1976 would still be 807,000 tons. 8.19 These forecasts, also shown in Table 8.1, require various caveats. As actual imports demonstrate, the growth of demand is unlikely to proceed as steadily as the use of a constant growth rate makes it appear. The growth rate itself is unlikely to be constant. It could well be higher in earlier years, in catchina up with a demand back log, then recede, while new investments are prepared and finance organized, and pick up again when projects get underway, and when the multitude of investments, presently in the pipeline and planned, materialise and have secondary investment effects. Nor is it likely that demand for the various steel products grows pari passu, as the forecast assumes. The dema-nd for pipe of 61" diameter and above is largely determined by the growth of oil and gas output. In the early years of sustained econormc development demand for reinforcing bars typically grows faster than that for other bar mill products. As engineering and durable consumer goods industries develop the share of steel sheet in total steel demand increases. However, in the medium term to which the forecast addresses itself, these developments are not so significant as to justify the assumption of equally arbitrary different groTth rates. 8.20 The statistical information, on which the forecasts have been' based, shows some gaps which should be filled in in the course of a more thorough study of the market. It is inconceivable that no heavy structurals (joists and beams) have been imported into Indonesia before 1970, when a figure for imports is shown for the first time; earlier imports were presumably listed under some other category. Rails are not shown at all and a separate statistical position for them is required. Sheet and plate are shown in one position, but are produced on very different equipment. dhile plate can be economically produced on a Lauth plate mill with a capacity of 150,000 tons per year, obviously wmithin the reach of the Indonesian econoniy in the fore- seeable future, sheet can nowadays only be economically produced from coils 1 Report of the CAFE Iron and Steel Survey IMission, December 8., 1967 -197- rolled on wide strip mills, 1/ with capacities of about one million tons and more. Statistical information should be so organised as to distinguish between black sheet up to 14 gauge) cold rolled sheet, light plate (3 mm - 5 mm), medium plate (5 mm -.12 mm) and heavy plate. Steel pipe is an importaht item in the Indonesian import bill, but the statistics do not distinguish between seamless pipe -- made from ingots or blooms - and welded pipe which requires strip. Since the product range of specific continuous pipe welding equipment is limited, it would be useful to know what the diameter ranges of the imported pipe are. A breakdown in sizras from 1/2" to 3", and from 3" to 6" and from 6" to 161" would facilitate capacity planning. 8.21 A full review of e.:asting statistical classifications for raw materials, intermediate and finished products of the steel industry so as to -segregate inputs according to users, and products according to rolling and finishing facilities needed to make them, would be advisable to put planning for steel on a sound basis. The Directorate General of Basic Industries in the Department of Industry should be able to provide an appropriate breakdowm. Alternatives in meeting steel demand 8.22 With market prospects in this order of magnitude, the Government would be well advised to consider the various alternatives open to it for the supply of the country's steel requirements. 8.23 One obvious alternative would be to continue the present policies, described earlier in this chapter, iith the effects described there - clearly not a desirable policy. 8.24 Another logical, but perhaps not practical, alternative steel policy would be to concentrate investment, through suitable policies, on the metal working and using industries,, and to provide them with access to the cheapest stee: available in world markets. This should lead to a fast growth in steel consumption, and should, at some 'uture date, provide the basis for a really competitive steel industry. 11hoever wanted to invest in steel makdng or processing in Indonesia, would be free to do so, on the understanding that under no circumstances would protective duties be introduced. In practise this approach has a number of drawbacks. Steel prices in the world markets are fluctuating more than in national markets, because of marginal exnort pricing during slack business periods. During boom conditions in major exportina countries supplies to overseas markets become uncertain and expensive. Moreover, steel, even if imported duty free, is subject to a 1/ Operational experience with reversing single stand strip mills, in the Mission's view, rules out their use for Indonesia. -198- inarkun of at least 25 per cent, on account of transport and landing cost, over the f.o.b. price. Reliance on steel imports imrplies that local production would even then not be competitive with imports. Because this is not necessarily so, the Government has a third alternative: to investigate the feasibility of establishing a competitive steel industry. The folloiing observations are intended to demonstrate a possible approach to the problem. 8.25 As pointed out earlier, steel planning starts with the demand forecast, then eliminates from expected demand all items that cannot be fitted into an economic rolling program, converts the balance into inter- mediate products, and intermediate products into steel. As a next step the most economic way to make steel is investigated, given the country's resource endowment, and the cost at which these resources can be obtained. Output cost at every stage is then compared, in economic terms, with the cost of imports and the result would show, whether, and at what stages of production the country has a sufficient comparative cost advantage vis-a-vis imports to contemplate indigenous production, and whether the establishment of a stee'- industry has a high enough economic rate of return expectation, relative to alterna-tive investment opportunities, to justify the conanitment of scarce resources. The rolling program 8.26 with the product mix, as forecast in Table 8.2, the configuration of a rollingf program-begins to erierge. Sheet, hidden in the plate jnd sheet position, and in the foxn of galvanized sheet, tinplato and hoop,_S even with a much higher growth rate will not reach the Million ton volume required by a modern wide strip mill. The demand volume would certainly be sufficient to support a 200,000 ton cold rolling mill to roll various types of sheet from imported coil, but the economics of such an operation may present problems. In any event, such a mill need not be part of an integrated steel plant. Its proper place would be in, or close to, it.s main market-ing area, near a deep water port and with ample power supply. In the planning of steel making capacity sheet demand should be disregarded for the time being. 8.27 The inadequacies of statistical information for planning purposes referred to above require estinates of the actual product consumption of the plate and sheet portion and the pipe portion. It has been assumed that plate and sheet (including tinplate and hopp iron) share equally in the plate and sheet position. This is about the ratio prevailing in Korea in 1960, while ten years later sheet showed about double the volume of plate. A similar development for Indonesia appears feasible. 1/ Heavier gauges of hoop would nor-mally be rolled on a bar mill. Allocation of narrow hoop to flat products is somewhat arbitrary, blit, on account of its small volume, does not affect the concept proposed lhere. -199- 8.28 For pipe it has been assumed that 20 per cent of the volume would, for technical reasons, be seamless pipe. The statistics show a separate position for drilling pipe, which is seamless, and therefore not considered in Tables 8.1 and 8.2. With modern automatic welding techniques welded pipe is making further inroads in the fields formerly reserved for seamless pipe, so that an estimate of 80 per cent welded pipe is in fact conservative. However, the problem is the size of pipes. Strip for pipe welding is now largely obtained from the' slitting of wide strip, but up to a pipe diameter of 6", equivalent to 20" width of strip, a skelp mill might still be an economic proposition. No information was obtainable on the breakdown of sizes. The Department of Industry has licensed or under consideration three pipe welding projects with a combined capacity of 34,000 tons for pipe sizes of up to 4". The balance of demand would come from the dil industry's need for pipe of up to 6" but there was no way of ascertaining what that demand presently is. The problem of size would, of course, disappear, if skelp were produced by slitting wide strip, but the total need for sheet, with skelp added, would still be below the output of a wide strip mill. For purposes of planLing it has been assumed that pipe will largely be of 6" and below diameter. A skelp mill, to produce 150,000 tons annuaLly from slab, would then be justified. 1/ 8.29 Finally an admittedly arbitrary assumption has been made that about 45 per cent of medium and heavy structurals would riot be made from welded plate. Except for piling, most structurals can be made from plate, and what is used in a country, rolled or welded structurals, depends on what is easily available. 8.30 The situation is somewhat clearer in regard to bar mill products. All reinforcing bars and rods and most of the wire-rod can be made in the country. For sections, flats and profiles the volune has to be reduced to take account of special steel products, such as high tensile strength sections for transmission towers, and of odd shapes. The existence of the latter l1ads to,a general observation. 8.31 In countries without a steel industry a multitude of sizes, shapes and quality specifications is in use that removes a considerable share of the market from the scope of a reasonable rolling program. Iany of the specific sizes and shapes are used in quantities too small to be rolled locally - except at heavy cost. By adopting and enforcing suitable standards a great deal - except specialty products - can be brought into the scope of a reasonable rolling program by eliminating shapes and sizes that serve no other purpose than that of being different. Standardization should, of course, not stop at rolled products but should include pipe, bolts, nuts, screws, nails and extend from there into the whole range of mass produced metal working and engineering products. Instead of developing specific Indonesian s-candards one of the existing na*tional metric standards should be adapted to the country's needs. Technical assistance in setting The 1/ Given the arbitrary character of these assumptions, an alternative, and equally likely, interpretation appeared to be called for. It is presented in paras. 8.L48 and 8.49. -200- standardisation process into motion appears to be required and is herewith recommended. 8.32 Table 8.2 shows what rolling program would emerge from all these modified demand- forecasts, and, through conversion of final products into intermediate, and intermediate products into crude steel, what steel making capacity is required. Conversion is based on the use of continuous casting, since ingot casting and stripping is in every respect more expensive. Since virgin metal is going to be used, no problems would be expected with continuous casting, which can occur on account of metallic impurities growing from scrap. 8.33 Total crude steel capacity needed would then be 865,000 tons, provided that the estimates of plate- volume and of pipe sizes turn out to be about right. If flat products were, excluded for the time- being, 480,000 tons oL crude steel would be required to make non-flat products. ALTERNATIVES IN STEEL MA1,GTU 8.34 The first question, of course, is whether steel malcing is an economic proposition, whether steel furnace input can be produced and sold at cost below that of scrap. At present local scrap prices in Indonesia $15 - $25 per ton the answer is negative. However, present prices reflect the lack of local demand. Once major scrap consumers appear on the scene, scrap prices are bolmnd to rise until they reach import parity. Im=orted scrap of Heavy IMelting No. II quality is presently offered at $60 per ton landed cost. Conversion cost from scrap to billet, at a level of 250,000 tons annual output and a power price 6f 10 mills, would be at least $38 per ton, including a 12 per cent return on resources invested. Even if scrap, throucgh bulk imports, shouild come doam in price, to say, $55 per ton, the billet price would still be around $93. Given the transport cost advantage, such price would be competitive with imports, and the concept of a steel industry, based on imported scrap for processing in electric arc furnaces would merit further investigation, which shouild include a reviow of the long term scrap supply prospects. This concept appears to underly the Government's plans for an indigenous steel industry, as evidenced by the Tjilegon steel project. However, it should not preclude an investiga- tion of the costs and benefits of indigenous steel makin- from ore. 8.35 There are various ways to provide steel maldng capacity. One way would be the conventional route. Conventional steel plants can be built at any size, but the economies of scale in capital as well as in operating cost are significant. Investment cost up to the crude steel stage are about $135.00 per ton of steel capacity for a 400,000 ton plant, but only. $'86 per ton for a 2 mi.llion ton plant. At the present state of technoloMr, the minimum economllic size for conventional steel mald.ng facilities -- coke oven, blast furn.ance, basic oxygen furnaces -- is generally considered to be about 1.7 million ingot tons per year, or double the crude steel capacity forecast for 1976. 'With a growth rate of 15 per cent -201- it would take about five years, to 1981, until demand would be suf- ficient to justify a plant of that size, assuming, that no significant changes in the economies of scale occur. However, there are three reasons why Indonesia should not consider, in the foreseeable future, investment in conventional steel making facilities. One reason is the heavy claims on investment resources such a plant would make. Depending on its rolling ,facilities a plant an the 1.7 million inoot ton steel per year range may cost anything between $500-$700 million, equivalent to $295-$410 per ton of annual capacity. Even with an easier resource position in the next decade and given a satisfactory economic rate of return, such a chunk of investment would crowd out other equally'desirable investments. On account of its high investment costs this type of plant would have a very high break even point (between 80 and 85 per cent in Japan) so that any fall off in sales could become very expensive. The problem of indivisibilities is difficult to overcome for a country just building up its steel industry. 8.36 The second reason is that there aro now alternative processes, wvhich can be competitive with conventional plants, which permit a capacity build up in much smaller steps and have much lower investment cost, between $180 and $250 per crude steel ton of installed capacity, depending on the extent of rolling facilities provided. 8.37 The third reason is that Indonesia's natural resource endcwment points in the direction of these new plants. Indonesia has neither a type of ore suitable for efficient blast furnace operation l/ nor has it good coking coal (the Ombilin Coal has some strata of weak coking quality but would require the import of strong coling coal for blending). But Indonesia has ample resources of natural gas. Some of the new direct reduction processes do not require coal but -use steam reformed natural gas. 8.38 Ways and means of by-passing coke ovens and blast furnaces through 4irect reduction, have been intensively studied over the last 30 years. 2/ The Krupp-Renn process introduced shortly before World War II was the first technically satisfactory solution, but would not be com- petitive today. There are various processes presently under trial or in use, with either solid or gaseous fuels as reduction agents. The product is either sponge iron or metallised pellets, with metal contents between 80 and 95 per cent, sufficient for conversion to steel in an electric arc furnace with scrap addition. Nlone of the solid fuel based processes has so far been sufficiently proven to warrant its use in Indonesia. There 2 Haematite deposits as Lampong, Pleihari and Tanalang are either too small or too low grade to warrant commercial exploitation. Titaniferous ore at Djampangaand Tjilatjap has too much Tio2 to permit its exclusive use in a blast furnace. Laterites found in Kalimantan and Sulawesi are -nsuit- able for reduction given the present iron-technology. 2/ It was first proposed, and subsequently tried out, by Siemens in the 1870's. -202- are at present two gas based processes in successful operation. The HyL process, used in various plants in M4exico and Aith one plant under construction in Brazil and the Midland-Ross process, on which two plants are presently working successfally in the United States and one plant each is under construction in Germany and Japan. The latter process uses fine ores which are pelletized in the conventional way and then reduced in a vertical shaft furnace. Metallization of the pellets reaches 95 per cent. These metallized pellets are then continuously charged into electric furnaces for finishing into steel. This process has been chosen to demonstrate here what such a plant might look like, what it would cost and what its economic rate of return could be. It would appear that subject to further investigation, both processes are proven ard safe enough to be considered for use in Indonesia. At first sight, the Midland Ross process appears to be simpler and to require less investment than the HyL process. However,.this questioni needs further review. 8.39 It' should again be emphasized that the follo7wing project outline is merely intended to test whether such investment in Indonesia is feasible enough to warrant the effort and egpense of a full range feasibility stukly. This study, described in more detail later would have to refine demand forecasts based on demand, segregated according to rolling programs. It would have to analyse various processes, investigate site alternatives and to propose an optimal size, composition and location for rolling capacity. In arriving at such solution, market volume, structure and transport costs would have to be carefully weighed. 8.40 If the gas based M4idland Ross reduction process is chosen the location of the steel making facilities would have to meet, in descending order of priority, the followiing requirements: i) The plant should be located near enough to sheltered deepwater, that large ore carriers can offload fine ore directly onto the plant's ore yard or slurry pond and product can be shipped out. If the location is in or near a marketing area, rail and road communications are also required. ii) Natural gas supply should be abundant and close at hand. An 800, 000 ton crude steel plant needs about 17.h x 10 12 BTU steamun reformed gas per year for pellet hardening, metallization and power generation. iii) Ample power supply at prices not to exceed 5 mill per KW^H. A plant of 800,000 tons crude steel capacity might consune up to 560,000,000 KWH per year and would have a peak demand of 130 MW. 8.41 The first task of a thorough feasibility study would be to determine the plant location. Assuming natural gas of a heat- ig value of 950 BTU per standard cubic foot (scf) an 800,000 ton per year steel plant, -203- including power generation, would require 366.L x 109 scf over t4e twenty years of economic life of the nlant, or a dedication of 550 x 10' sef if a 50% reserve is included. This is not an excessive amount measured against proven reserves and recent discovery experience, but it has to be found near enough to deep water to keep transmission cost at a reasonable level. Deep weater in this context refers to the draft - about b5' - needed by 60,000 ton ore carriers. The plant's ore requirements l.b million tons per year - would keep two carriers of that size employed year round, Nith some time reserve for annual docking and maintenance, and for unforseen events. 8.b2 A major cost-saving, both on port operations and gas supply, could be obtained, if the steel plant described here, and the petrochemical plant, described in Chapter X of this report, would draw their gas from the same field, and share at least some of the same port facilities. Their claims on gas are complementary rather than competing. The higher fractions of hydrocarbons which the petrochemical plant requires, would have to be removed from the raw gas, before the remaining methan is steam reformed to convert it into a reduction agent. lthile each plant might require distinct bulk handling facilities, port services such things as tugs, water boats and administration or navigational aids and channels could be used by all ships serving either plant. Considerable cost savings could be achieved, if exploration and production cost of gas could be allocated to, and if the cost of port installation and dredging were recovered from, two, rather than one, revenue generating enterprise. Steel Melting Shop 8.43 To produce 800,000 tons per year and with a 90 per cent pellet charge electric furnace capacity of 2L0 tons would normally be required. It is suggested, however, subject to the findings of the proposed feasibility study, that for a first plant in Indonesia the steel melting shop should have b electric arc furnaces of 80 tons capacity each. To reduce tap to tap time and increase output, the furnaces should be laid out for ultra high power operation and provide for continuous charging of metallized pellets. The pelletizing and metallization plant would be composed of tTwo units of 00,000 tons capacity each. The balance of the electric furnace burden would be made up of mill retrn scrap and scale. The fine ores are assumed to come from Australia, I" with an Fe content of 63 per cent. Under the conditions postulated here the furnaces wqould have a rated capacity of 500,000 tons. Continuous Casting 8.bb To provide u00,000 tons of billets which the market forecast assumes, at the most two four-strand continuous billet casting machines would be required. Jith some of the latest continuous casting techniques 1/ The import of fine ore has been assumed here rather than. the import of pellets, to enable the operator of the reduction plant to provide the oxide pellets with such specific physical and chemical proDerties as the metallization process might require. In the absence of such requirements the import of pellets instead of ore might be more economiical and should be explored. -2014- this capacity could probably be reduced, but has been retained here to provide,spare capacity against higher furnace output through the additiorn of mill return scrap. 8.L5 The layout for slab casting depends on the configuration of rolling mills for flat products, discussed below in Para 8.39 to 8.50. If the product mix assumed in Table 8.2 is borne out by a subsequent demand survey, and a strip mill and a Lauth plate mill is accepted as meeting best the demand, then a continuous slab caster with 100,000 tons capacity would be needed. If product mix and demand forecasts should justify a semi-continuous wide strip mill the slab caster would have to be laid out for 800,000 tons of annual capacity, using modern continuous concasting techniques.I/ Addition of a plate caster might be considered, if demand for heavy plate justifies the investment, and if present trial operations prove the reliability of the equipment and the quality of the product. The Rolling M4ills 8.46 The processing of nearly b00,000 tons of billets iwould justify the use of a large continuous mill. However, there are various arguments against such proposal. Even after the product standardization suggested elsewhere in this.chapter, has become effective, Indonesia may have too small volumes of the individual shapes and sizes to exploit fully the economies of scale of a continuous merchant mill. Frequent roll changes to accommodate a diversified rolling program might increase d9wnt4.me to a point, where the advantages of a large continuous mill would become negative. A bar, section and rod mill, generally on the configuration of the Tjilegon Steel Project, but updated to reflect recent improvements in rolling technology, would probably better meet market needs. Such a mill would have an annual output of 200-250,000 tons, depending on the rolling program. For 400,000 tons of products two such nills would be needed. Wnether a large mill or two Tjilegon type mills represent the better solution requires a careful analysis of the projected demand for the shapes, sizes and volumes of the various barmill products. 8.17 In making this analysis the location of the steel. plant has to be taken into account. If the prerequisits for the establishment of the reduction and steel melting plant discussed in para 8.1i0 wvere found in the main marketing area, i.e. on Java, rolling of bar mill products would certainly take place at the plant. The composition of the rolling program, as forecast, would then determine whether the flexibility offered by ttlo mills offsets their higher investment cost. However, if the steel plant, to meet the requirements outlined in Para 8.L0, wjould have to be established, say, in Sumatra, or Kalimantan, then the establishment of the bar mills in the main marketing areas might offer advantages. The diversity of bar mill products 1/ hich permits several heats to be cast continuously. -205- argues for nearness to the market, whose specific demands should be closely followed, and preferably anticipated in composing rolling programs. Market orientation would also be an additional argument in favor of two Tjilegon type mills rather than one continuous mill. Finally, this layout of rolling facilities would leave room for the investment made at Tjilegon, discussed in para 8.74 below. 8.48 There is no technical reasbn why the processing of billets into final bar mill products should take place at the steel plant. There might be a very slight advantage if billets fresh from casting were immediately rehated for rolling, to make use of whatever residual heat is left in the billet after casting. But reheating of a cold billet to rolling temperatures should not require more than 2.4 x 106 BTU per ton. Assuming that the mill receives its gas at 10 cents per MA BIU, and that a rolling mill elsewhere had to pay 40 cents per MM BTU in the form of heavy fuel oil, the difference would only come to 72 cents per ton of billets. There are also certain offsite and staffing economies of scale in having steel making and rolling in onti place, but the considerable economies available in conventional plants from the use of blast fuarnace and coke oven gas in the rolling mills do not.apply to a direct reduction plant. On balance and subject to the findings of the feasibility study there appear to be advantages in locating the rolling mill close to the markets, and', given the demand dispersion, in having two separate mills of 200-250,000 tons, one in the Djakarta and one in the Surabaya area. 8.49 The demand forecasts for flat products shoam in Table 8.2 suffer from the inadequacy of statistical information, discussed in para 8.20 and 8.28. If half or more of the sheet and plate demand were in fact for plate and if most of the welded pipe were not to exceed 61" in diameter, a three-high plate mill and a skelp mill would provide the right equipment, though their economies might be somewhat marginal. Sheet would then be produced from imported coil. However, plate demand might very well be predominantly for light and medium plate, as used in the ship building and engineering industries and/or demand for shee t micht be much larger than half of the plate and sheet demand. Pipe demand might have a sizable share of sizes between 6" and 16" needed for oil and gas transmission. Then a combination of a plate mill-and a skelp mill would be seriously underutilised, but practically all of the 550,000 tons of flat products forecast for 1976, including sheet, could be made more economically from wide strip. Minimum economic output of a 56" semi-continuous wide strip mill would be in the region of 750,000 tons per year. A plant to w'eld 6"1-16" pipe from strip would have to have an output of around 150,000 tons per year. Again this output would not be too far above the 122,000 tons forecast for 1976. Depending on the growth of demand for flat products a semi-continuous w.ide strip mill (with a reversing roughing train to be expanded, when required, into a c-ontinuous train) would be justified two or three years later, in 1978 or 1979. 8.50 This configuration has considerable advantages over the plate mill-skelp mill combination,based on a somewhat arbitrary interpretation of demand forecast for 1976 but it would call for a phasing of the investment in reduction and steel mak5ng facilities, because investment costs are too high to risk u.nderutilisation. -206- The Phasing of Investment 8.51 Most steel plants are built up in stages, particularly so in developing countries, to assure high capacity utilization. In this instance, a phasing of investment suggests itself, because it would provide time to obtain a clearer picture of the demand development for flat products, and because no economies of scale would be lost in the reduction plant. Some savings might be obtained if the melting shop capacity was distributed to three or even two instead of four furnaces, as proposed here. However, very much larger f,iurnaces might create problems with the powrer supply since it is unlikely that the plant could be connected to a sufficiently large grid with a base load high enough to absorb with ease the peakl loads generated by large electrical arc furnaces. Distribution of the melting capacity over four rather than two or three furnaces would also be advantageous if continuous con-casting were to be used. 8.52 Another advantage would be a phasing of investment cost over a longer period of time. More time would also be helpful in building up and training the required skilled staff. The phasing of the investment would be dealt with in the proposed feasibility study. For the purposes of this report it is assumed that the first phase would consist of a 400,000 ton 1Midland-Ross pelletizing and metallization plant, two 80 ton electric arc furnaces and two four-strand continuous billet casting machines. The second phase would foilow, depending on demand development, perhaps 2-3 years after construction for the first phase got underway. It would either duplicate the reduction and the steel making facilities, but have a slab casting machine instead of a billet casting machine and presumably a plate mill and skelp mill. Or, if demand growth for sheet, welded pipe and light and medium plate (up to 12 mm thick) would justify it, capacity and steel making Facilities could be tripled to allow for the Installation of a semi continuous wide strip mill, to produce hot coils for cold rolling into sheet and tin plate, strip for pipe ;elding, and light and medium plate for the dockyards and engineering industries. 8.53 Since with the suggested procel,s there are only marginal economies of scale in bluilding up capacity in one place, the second phase might even be built as a separate plant in a different location, if subsequent gas discoveries lead to a combination of factors substantially more advantageous than those, on which the location of the first place was based. COST AND PRICE ESTDLA.TES 8.54 Given the same capacity utilisation, larger steel plants have generally lower capital and operating cost per ton of output than smaller plants. Consequently, the cost at all three output levels, 400,000 tons, 800,000 tons and 1,200,000 tons of crude steel representing Stage 1 and alternatives for Stage 2 should have been estimated. Howqever, as stated before, the purpose of this chapter is not to recommend the establishment of a steel industry along the lines proposed; it is merely to ascertain the justification of a full in-depth feasibility study. This purpose is best served by costing the smallest of the plants proposed here, under the least -207- favorable circumstances, making very conservative estimates of capital and production cost. To that end, it is assumed that only the 400,000 tons Midland Ross plant reduction plant with a steel melting shop consisting of 2 electric arc furnaces and two four strand billet casting machines is built 1,200 miles away from the main marketing areas, and that two merchant mills, roughly identical, each with about 200,000 tons capacity are establishecd in two different locations. 8.55 Both the steel melting shop and the billet caster have been over designed. Two 80 ton electric arc furnaces with ultrahigh powver operation, continuous charging and 80-90 per cent metallised pellet input should reach an annual output of 500,000 tons of crude steel. With 5" x 5" bil ets one machine should be sufficient to handle that output. But such a produiction requires sophisticated operating practices, which during an extended learning period cannot be expected. It has been assumed that the capability to run the plant at full output would be acquired after five years, and that actual output and sales will not exceed, on the average, 90 per cent of capacity. 8.56 The capital costs are based on U.S. prices - not necessarily the cheapest source of supply - with an addition of 30 per cent to allow for the cost of transport of equipment to Indonesia and for construct".on and erection far away from home base. 8.57, As regards operating cost estimates, the present Indonesian wage level in private industry has been tripled. A gas price of 20 US cents has been assumed, though it might well be lower, if the plant draws its requirements from non-associated high pressure reserves close to the plant, that does not require too much scrubbing and cleaning. Such gas does ea:ist in Indonesia, (e.g. on the PERTTAMINA fields southwest of Palembang) and the discovery experience is encouraging, but the requirement that the plant be located near deep water, and the sheer volume needed, greatly iarrows the choice of sites. The landed cost of iron ore reflect prices obtained in recent long term cif contracts, with 2 cents per Fe unit added to cover landing cost.s. 8.58 Finally, it has been assumed that no duties would be introduced, except those necessary to defend the industry against marginally priced imports. The validity of this concept is discussed in Para 8.66 below. Capital and operating cost estimates up to and includinig the billet stage are presented in Tables 8.3 and 8.4. The estimates shoW capital cost, including interest during construction and permanent working capital at $70 million, and production cost of 647.143 without and $59.83 with depreciation calculated at 8 per cent on depreciable assets of $62 million. These estimates provide the basis to test the financial viability and the economic rate of return of steel making in Indonesia. To this end assumptions had to be made on the explant price for billets, and the landed cost of imports net of duty. -208- Competitive Position 8.59 In determining the.ex-plant price of billets the split up between steel making and rolling assumed here has to be taken into account. The lowier limit is set by the reasonable profit expectations of the steel plant's shareholders. The upper limit is given by the billet input price, at which the two rolling mills can compete with imports and still have a reasonable return on their investment. This in turn calls for a review of the landed cost of finished products. 8.60 Present cif import prices for selected bar mill products quoted in Djakarta in May 1971 are shown below. 1. Plain reinforcing round bars Thomas quality, 12 m, 1 x folded Countries of Origin Japan Taiwan Europe 5,5mm 135 133 142 7,5mm 127 128 135 9 - 24mm 107-113 l12-114 139-122 2. Nailwire 134-135 130 1)42-146 G.I. Wire 150 148 168-'72 3. Steel Bars 'Flat Round, squares 108 110 124-129 Angles, 60/60/8 113 llL 1,35 Larger 122-130 120-125 140 The prices quoted for reinforcing bars and for angles correspond roughly to those quoted in Granite City Steel's Report on the Tjilegon Steel Plant for October 1968 for imports from Japan. Prices for flat bars from Japan were 16 per cent higher in 1968. The mission wras told in Djakarta, that the prices showm above were depressed and inconsistent. The price comparison betwzeen 1968 and 1971, and the billet price of $110 F.O.B. in Japa.n would support a judgment that the present product prices do not reflect real prices, but indicate marginal pricing by various prodlucers trying to stay in the market. -209- 8.61 The small amounts of the various product categories contracted individually, make marginal pricing viable. To illustrate the point: if the present F.O.B. billet price of $110 per ton ex Japan is taken to cover full cost and profit and if only $12 is added to that as the minimum cost of converting a ton of billets to flat bars (in a modern efficient bar .and structural mill net of 'depreciation and with no return on capital) then the resultant F.O.B. price for flat bars would be $122 per ton or, with a minimum shipping rate of $12 per ton, about $134 per ton C and F, $26 per ton or 24 per cent above the cif price, at which that product has been traded in Djakarta in HIay 1971. 8,62 It will obviously be a highly speculative venture to establish what the real prices should be, and would be, for the various products if the suppliers on changing market conditions or with increasing volumes oIf supply would raise their prices closer to those of their home market. The Japanese billet quotation, obtained six weeks later thani the product prices quoted in Djakarta, would seem to indicate that this process has already begun. Whatever results a thorough study would show, we consider it safe, for the purpose of this report, to add an average of $12 to the Djakarta prices quoted above, to obtain longer term prces. We have also assumed that with a streamliniLng of commercial, customs and port procedures landing cost for shipments larger than at present, would drop to $8 per ton, or half the average present cost. The average landed cost of imports, weighted in accordance with the product mix forecast in table 8.2 and net of duty would then come to $139.80 per ton. 8.63 With a bil et input price of $95 per ton the rolling mills, if they were to match landed costs, would have nearly $45 per ton to cover full conversion cost and to obtain a return on the investment. Conversion cost, net of depreciation, in a modern rod and bar mill at the 200,000 output level are about $12 per ton including a scrap and scale credit oL $2 per ton for the cost above billet input. Despite the low Indonesian wage level, even after adjustment, we have assumed $14 per ton for conversion cost. A modern mill, as described, might require $20 million investment cost. We have assumed $25 million, including worki.ng capital, and a debt equity ratio of 1:1, depreciation on $20 million depreciable assets at 8 per cent and a capacity use of 90 per cent. A proforma income statement is shown in Annex 8.5. The return to shareholders grows from 6.2 per cent in the first year of opeVtion to 20.2 per cent in the twelfth year with an average O'L 21.2 per cent*- Considering that the return is based on a price competitive -with imports admittedly adjusted to eliminate marginal pricing but without the benefit of a protective duty the return is very satis-factor-y. 8.64 To test the financial viability of the steel plant three questions have to be answered. WJould a delivered billet price of $95 be competitive with imnorts? IWould it be competitive with scrap based electric furnaces? ihat would be the financial position of the steel plant if it had to deliver ingots at $95 per ton landed cost to the rollinc mill? 1/ On account of higher after tax earnings during the tax holiday. -210- The answier to these questions poses several problems. No billets have so far been imported into Indonesia because there is no use for them, so that freiglht and landing costs have to be projected from comoarable imports. The cost of shipping from steel plant to rolling mill has to be assessed. Present door to door transport costs do not offer a reasonable basis. anally, marginal pricing poses a problem per se. The following attempts to answer these questions. 8.65 F.OsB. prices for Japanese carbon steel billets stand presently at $110 per ton, 1/ up from slightly under $100 per ton by the middle of 1970. Even if it is assumed that regular bulk shipments would halve the present shipping and landing cost of $30 per ton, and that a bulk rebate would bring the F.O.B. price down to, say, $105 per ton, landed cost in Djakarta would still be $120 per ton net of duity. European prices F.O.B. Antwerp were recently quoted at $84 per ton af Thomas quality and $88 per ton of open hearth quality billets. With shipping and landing cost the landed price should be about $110. 8.66 Information on Australian prices is more difficult to evaluate, since the major producer tends to adjust export prices to market requirements. A notional F.G.B. quotation, converted from Australian to U.S. dollars and from long tons to metric tons, obtained in June 1971, was $82.68 per ton F.O.B. southwest Australian port, or ilth freight and landing cost about $97 per ton. The price of $82.68 may very well contain an element of marginal pricing, since the Australian steel industry is unlikely to be a more efficient producer than the Japanese i ndustry, and the iron ore transport cost differential cannot amount to more than, say, $7.00 per ton of billet. IWhether and to what ex-tent marginal export prices are accepted as a basis for economic return calculations is a complex problem. One might argue that marginal prices ought to be accepted, as long as they apply to the volume anticipated for local production and are offered for reasonably long term contracts, it being of no concern to the importing country, that the exporter's home market iln fact subsidises the consumer in the importing country. An equally valid argument would be that marginal pricing is by nature short lived and uancertain, and there2sore no suiltable basis for lon-term investment decisions; that with growing interdependence of the national economies' imports obtained at marginal prices are not in the long-term interest of the importing country, because higher prices paid by the consumer in the exporting country reduce, among other things, his purchasing powrer to buy goods, which the importing country wants to export; and that consequently a case for indigenous production exists, if the full cost does not exceed the full landed cost of imports net of duty. Without taking sides in the argument we will assume that the Australian producer has a $10 per ton cost advantage in billets over the Japa-nese producer on account of lower iron ore and coal cost and lower transport cost to Indonesia, 1/ American prices in June 1971 were about $ll4 per short ton explant, equivalent to $125.69 per metric ton used in tVAis report. -211- and take a landed billet cost of $110 as the lowest full cost price, at which billets can be imported. At that price, Indonesian billets would not only be fully competitive but would show a considerable gain to the 6conomy. At the same time, it is recommended, that the Government explore, before investment decisions are made, at wihat prices and terms billets are offered from various sources, and specifically from Australia. 8.67 The competitiveness of billets from indigenous steel making facilities with those made in electric furnaces from scrap is more difficult to establish for two reasons. We do not know, how much scrap is avail2able in the country, how much would have to be imported, and what the prices for both categories would be. It has been assumed earlier in the report that with increasing demand scrap prices would increase until they reach import parity. If that should happen scrap ba.sed steel and pellet based steel might have about the same cost, as estimated in para 8.34 above. The second problem is cost allocation. Phi scrap based electric furnaces, with which pellet based billets would have to compete, form an integral part of integrated plants, and overhead cost and profits can therefore to some extent be shifted between steel melting shop and rolling mill. 8.68 The proposed feasibility study would have to investigate whether steel malkng, in economic terms is superior to, or just competitive with, electric scrap melting. The study would have to arrive at a difficult judgment on the availability and price prospects for scrap. Presently the U.S. is the only reliable an,d steady supplier of scrap of a quality that would justify the considerable transport cost. If steel making in Indonesia should be fou-nd to be competitive with scrap imports then the mission feels that it should have preference for two reasons: it has a considerably higher value added, and iron ore, or pellets can be procured under long term contract, guaranteeing a degree of input price stability, while scrap moves in a fickle, fairly short term market. 8.69 To arrive at an explant price for billets transportation and landing cost over a distance of 1,200 miles had to be estimated. It is assumed that at both ends the plants would have direct access to deep water so as to permit the use of self unloading specialised carriers, perhaps in the 5,000 DUT class. At a level of 400,000 tons per year and takng into account some return freight in the form of scrap costs have been estimated at $8 per ton. WSith a delivered billet price of $95 per ton that would leave $87 as explant price. 8.70 An income forecast has been prenared, based on the capital and operating cost estimates shown in Tables 8.3 and 8.4 and is presented as Table 8.6. Again, a 1:1. debt equity ratio has been assumed; depreciation is taken at 8 per cent straightline and an output growth to 90 per cent of rated capacity of the steel melting shop and the continuous casting plant is assumed to achieved after six years of operation, to talke account of the Jearning period required to operate a sophisticated plant efficiently. After tax return to shareholders would theh increase from 8.9 per cent in the second -212- year of full operation to 20.2 per cent in the twelfth year, when all debt is repaid with an average of 17.6 per cent over 12 years of operation. Interest is assumed at 12 per cent and debt repayment at 10 equal annual rates of principal, beginning at the end of the second year of full operation. A comparison between the return to shareholders for both plants would indicate, that a slightly higher billet price would distribute returns more evenly. However, since it is assumed that the rolling mill would buy the billets under longer contract terms than they can obtain from their clients thus carrying a greater marketing risk, the profit distribution assumed here between steel plant an~d ro].ling mills appears equitable. 8.71 The conclusion then is, that steel production in. Indonesia should be financially viable even in the first stage investigated here. Economic Justification 8.72 The economic rate of return, obtained by discounting the cost and benefit streams over 20 years, the economic lifee of the plant, is 24.75 per cent for the steel plant. It is presented as Table 8.7. The cost of imports has been assumed at $110 per ton and account has been taken of the cost to the economy of transporting billets from the steel plant to the rolling mills. Output and sales have been kept at a level of 90 per cent, to present as realistic a picture as possible. This rate of return would be satisfactory. Another test of the economic justification for a project intended to replace imports would be to calculate the cost of local resources needed to replace $1 worth of import as an indicator of the efficiency o' import substitution. To thiis end the foreign exchange element in capital and operating cost is calculated for the local product and deducted from both the price of the local product and the cost of the import. The ratio between the balances left then represernts the cost of replacing $1 worth of replaceable imports. In the case of the steel plant $0.76 of local resources are needed to replace $1 of imports. The calacul-ation is shown in Table 8.9. 8.73 To obtain an overall economic rate of return for both the steel plant and the olling mills, it has been assumed that the second mill would go into operation two years later than the first mill. Also, total cost of the second mill has been increased to take into account an increase in equipment prices. The economic rate of return, showm in Table 8.8 would then be 18 per cent. This lower, though still satisfactory, rate is due to the split up between steel plant and rol:Ling mills and the ensuing transport cost. THE, ROLE OF TIE TJ1IEGON PRO)JECT IN THE PROPOSED OUTLINE 8.74 Plannin', for steel in Indonesia is at present clouded by the uncertainty surroundiiiC the fate of the Tjilegon steel project. In view~0 . per toe f- r pllt t aeor 13 t 15:' ' as top o: retlat I.o; 'o ,LI l2ec:g coe tlO, s.se a 5 kj. per ton of tot ctal. -216e- Tablo 8.5 250,000 TO: ROLLIYG NIILL IXCOIN PROJECTIONS 4th Year After One Full Financial Year Ending Beginning of Operating Dece=ber 31 Construction (4 lMo.) fear - 2 3 4 j 6 7 8 . 9 10 11 12 Tat-al Production (tong) 40,000 165,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 % of ratea capacity!A 16% 66% 80% 80% 80% 80%', 80% 80% 80%B, 80% 80% 8;a0 Increase in inventories (tona) 5,000 15,000 Sales Volume (tons) 35,000 150,000 200,000 200,000 200,000 2Q0,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 Net Sales .) $140/ton 4,900 21,000 28,000 28,000 28,000 23,000 28,000 28,000 28,000 28,000- 28,000 28,000 28,000 Cost of Production nrot of depreciation 4,360 17,935 21,800 21,800 21,800 21,800 21,800 21,800 21,800 21,800 21,800 21,800 21,800 ,-.Žciation 1,440 1,600 1,600 1,600 1,600 1,600 1,600 960 Increase in Inventories (tons) (545) (1,635) Operating earnings (355) 3,050 4,60o 4,600 4,600 4,600 4,600 4,600 4,600 4,600 4,600 4,600 4,600 Intereat on long term debt 1,320 1,500 1,350 1,200 1,050 900 750 600 450 300 150 Earnings before tax (1,675) 1,550 3,250 3,400 3,550 3,700 3,850 4,000 4,150 4,300 4,450 4,600 4,6c0 Incoze lax - - - - - - - - - - - - - - - - T A I E 0 L 1 D A Y - - - - - - - - - -- 978.8 1,800 1,867.5 1,935 2,002.5 2,070 2,070 Net earaings (1,675) 1,550 3,250 3,400 3,550 3,700 2,871.2 2,200 2,282.5 2,365 2,447.5 2,530 2,530 Operating earningsAtet Sales 14.5% 16.4% 16.4% 16.4% 16.4% 16.4% 16.4% 16.4I 16.4% 16.4% 16.4% 16.4,4 Pretax aarnin&a/ahare capital 6.2% 26% 27.2% 28.4 29.6% 30.8% 32% 33.2L 34.4% 35.6% 36.8% 36.8% Post tax earnings/share capital 6.2% 26% 27.2% 28.4% 29.6% 23,C 17.6,% 18.3% 18.9% 19.6% 20.2%, 20.2% TL.ea debt service covared 1.4 2.4 2.5 2.7 2.9 3.1 3.4 3.6 4 . -4 no debt no debt j Capacity depends on rolling program. The aasumzption of 200,00 output assumee a leee than optional rolling program and a 90% use of the capacity available in the mills at that program. -2161'- Table 8.6 STEEL PLAhET IICIO3 PROJE;CTION 4th Yaar After One Full Fir.-r.clal Year £>rding Beginning of Operatirng D-cozber 31 Construction (4 1;09.) Year 2 3 4 5 6 7 8 9 10 11 12 Tctal production (tons) 50,000 200,000 340,000 400,000 440,000 440,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 ,d cf rated capao;ity 10%o 4. 0% 66% 805a 8c1% 8P' 90e 90% 90% 90,% 90% 905% 9C; Increase in inventories (tons) 5,000 15,000 20,000 Zaleas volo:e (tcns) 45,000 185,000 320,000 400,000 440,000 440,000 450,000 450,000 450,000 450,000 450,000 450,003 450,003 liet Galas t 617/ton 3,915 16,095 .7,8140 34,800 38,280 36,230 39,150 39,150 39,150 39,150 39,150 39,150 39,150 Cost cf p-roduction net of d-ciation 4,779.4 10,861.9 16,538.9 18,972 20,869 20,869 21,343-5 21,343.5 21,343.5 21,343.5 21,343-5 21,343.5 21,343.5 Dupreciation 4,400 4,560 4,d0o 4,960 4,960 4,960 4,960 4,960 4,960 4,960 4,960 4,960 3,600 Increase in inventories (202.8) (608.3) (811.0) Operating earain%a (5,061.6) 1,281.4 7,312.1 10,868.1 12,451.0 12,451.0 12,846.5 12,846.5 12,846.5 12,846.5 12,846.5 12,846.5 12,846.5 Int)ruet on longterm debt 2,520 3,900 4,200 3,780 3,360 2,940 2,520 2,100 1,680 1,260 840 420 al-.- n - befour taxes (7,581.0) (2,618.6) 3,112.1 7,088.1 9,091.0 9,511.0 10,326.5 10,746.5 11,166.5 11,586-5 12,006.5 12,426.5 12,8L.6.5 Incon tax ---------------------------Tax Rol±day------------I ----- 496.9 1,61:6.9 4,835.9 5,024.9 5,213.9 5,L402.9 5,551-9 5,780.9 Not earinru (7,561.0) (2,615.6) 3,112.1 7,038.1 9,091.0 9,012.1 5,b79.6 5,910.6 6,141.6 6,372.6 6,603.6 6,534.6 7,065.6 OFerating oarnings/nat sales 8 11.2%, 31. 2 31.2% 31.2% 31.% 32.8% 32.8A 32.8p 32.8% 32.8p 32.8% Pretax earninJs/ehare oapital 8.9% 20.3% 25.9O 27.2% 29.5:% 30-7% 31.9% 33-1% ~ 4-3% 35-5% 36.7p Potti rarni%ngs/abae- capital 8.9% 20.3% 25.9% 25.7% 16.2;% 16.9% 17-5%; 18.2 % 1859% 19.5% 20.2% Tiicas dobt srvice covered 1.5 1.7 2.2 2.5 2.7 2.9 3-1 3.4 3-7 4.1 4-5 n debt Table 8.7 -216g- FC0.0I0ac RiTi OF RETITRJ STEEL PIAOT Discounted Discounted Output Benefits Discounted Discountod Investment at 24% at 25% Tons at 214% at 25% 6,000 4,836.0 4,800.0 14,000 9,100.0 8,960.0 22,000 11,52e.0 11,264.0 16,000 6,768.0 6,560.0 . 50,000 470.6 199.1 192.9 7,000 2,387.0 2,29o6.0 200,000 10,135.1 3,457.1 3,325.3 1st year of= full oper-tion 5,000 1,375.0 1,310.0 3140,000 19,161.1 5,269.3 5,020.2 400,000 23,028.0 5,112.2 4,635.9 440,000 25,606.1 4,583.5 4,301.8 440,000 25,606.1 3,687.3 3.431.2 450,000 26,250.0 3,045.0 2,808.7 2,1467.5 2,257.5 1,995.3 1,811.3 1,601.3 1,443.8 1 286.3 1,155.0 1,050.0 918.8 8140.0 735.0 682.5 603.8 551.3 472.5 446.2 367.5 367.5 315.0 388.8 236.0 236.2 183.7 183.8 157.5 5oooo 0 26,250.0 157.5 131.2 20th year of full operation 70,000 35,994.0 35,190.0 37,517.4 34,704.7 241 - 359914.0 - 1.0423 25% - *- 0.9862 °.0o523 - 0.7514% ±/ Calculated 35100 .0561 Pate of discount 214.75%- x banefits to the economy 0.0561 - 1% discountrate difference i - landed cost of imports net of duty per ton f . fi=ed cost t2 v - variable cost t2 ti= tons of imports t,. tons of output and Eales a- cost to the economy of shipping billets from steal plant to rolling mill or landing place of imports - assumed at $5.0 per ton tl assumed to be equal to t2 Table 8.8 -216hi- ECONIIOIC RATE OF RENuld1 CALCUIATI0G.1 STZ3L PI-LAT A)D TWO ROLLING HILLS C O S T B EN E F I T S Stool Plant 1. Bolling Mill 2. Rolling Kill Total Discounted Saleu tons per year Benefits Discounted 000 I 000 S 000 s 000 . at 185 1. 14ill 2. Mill 000 at 18 6 cc 6,000 5,082 14,000 3,000 17,000 12,206 22,000 10,000 32,000 19,4885 16,000 8,000 4,000 28,000 14,448 35 2,409.0 1,43 7,000 4,000 lo;oC.o 2,000 9,177 150 10,324.5 4,511.8 1st year of full operation 5,o0o 9,000 14,000 5,180 200 90 19,960.7 7,385.5 h.000 4,000 1,256 200 160 24,773-8 7,760.5 200 200 27,532.0 7,323.5 70,000 25,000 27,000 200 200 27,532.0 6,194.7 205 205 28,220.3 5,390.1 265 205 28,220.3 4,571.7 205 205 28,220.3 3,866.2 205 . 205 28,220.3 3,273,6 205 205 28,220.3 2,793.8 205 205 28,220.3 2,370.5 205 205 . 28,220.3 2,003.4 205 205 2d,220.3 1,693.2 205 205 28,220.3 1,439.2 205 205 28,220.3 1,213.5 205 205 28,220.3 1,044.2 205 205 26,220.3 874.8 205 205 28,220.3 733.7 205 205 28,220.3 620.8 205 205 28,220.3 5i6.2 20th year of full operation 122,000 o6 8_7 6,150 423,304.5 66,86h.1 66346.* - 1.0004 Banefit calculation: Economic cost sf production 6r837.0 Billat cost net of depreciation $47.43 Lanied cost of importt Econocic rate of retu.rn - 18 per cent Add 10 par cent for scrap loss 4.74 net of duty $140.00 roeight from plant to mill at % cost of production 7).17 cost to econory 5.00 $ 68.83 Conversion cost rolling nill 14.00 $71.17 -216i- Table 8.9 Foreign Ecchange Cost Per Ton of Sales 12 Years of Full Operation Debt Service of Foreign Loans $ 7.46 Dividends on $19 million at 17.4% (assuming full payout of profits) 5.46 Reduction Plant - Iron ore at 20 cts. per Fe unit c and f 22.05 Stores, Spares, Misc. 0.60 Maintenance 0.75 Steel Melting Shop - Electrodes 3.50 Ferro Alloys 3.01 Maintenance 1.00 Miscellaneous 0.15 Power Plant - Maintenance & Miscellaneous 0.50 Offsites and Utilities Maintenance & Miscellaneous 0.30 Transport from steel plant to rollinig mill 2.00 Total foreign exchange cost , a Price of Local Billets Price of Imported Billebs at rolling mill $95.00 $110.00 Less FE Cost 46.70 Less FE Cost 46.70 Value added Part of import cost locally g18.30 replaced by value $ 63.30 added locally $48.30 : $63.30 $ 0.76 -216j- Explanations: To calculate the foreign exchange element of capital cost per ton, the following assumptions have been made: 1. The foreign exchange element in capital cost is 77%, roughly equivalent to the ratio estimated in the PUSRI Fertilizer Project. Foreign exchange cost would then be $54 million out of the total cost of $70 million. 2. The debt equity ratio is 1:1, equivalent to $35 million equity and $35 million debt. 3. It is assumed that total foreign exchange costs are obtained from outside Indonesia, $35 million as loan and the balance of $19 million as equity. 4, Loan money is to be repaid in ten equal installments of principal. The rate of interest is 10 per cent, below the rate of 12 per cent used in the financial projects but representing the rate at which Indonesia could obtain financing from abroad at conventional terms. The advantage Indonesia may have in obtaining finance at concessional terms is disregarded for the purpose of this calculation. 5. It is assumed that the foreign share holder receives his full share of profits available for distribution after tax. 6. Tne i'oreign exchange cost element in the shipping cost from steel plant to rolling mill has been assumed at $2 per ton as the estimated cost of steel, machinery and equipment imported to build the required ships in Indonesian shipyards. -217- C5HAPTER IX ENGThEERETG INDUS TRIES Introduction 9.1 The engineering industries are concerned with the processing and the fabrication of steel and other base metals into useful products for the market. This study will cover in the main, the following in- dustries: Agricultural, industrial and electrical, machinery and equip- ment (except electronic equipment), transport equipment, and fabricated metal products. The definition covers literally hundreds of thousands of di,fferent products. These industries exert a powerful influence on overall national development in that they shape the productive capaci- ties essential for the growth of national output, and they contribute possibly more than any other industry to fostering labor, technical and -management skills. These factors combine to make engineering industries a bellwether of the industrial development of a nation. 9.2 A comron characteristic of the engineering industries is that they are skill-based rather than natural resource-based. In the devel- oping countries, the skills in design, manufactu nrg and management are an even more scarce co=nrdity than capital, and herein lies the ec>.-.w*. of the problems behind the aspirations of these countries to industri- alize. Skills talce time to develop, but the needs of industrializat-ion are immediate. The nearest thing to an "instant skill" is joint venture with an experienced partner, but potential foreign partners w.ould rather sell than make their products locally. Tne usual consequences are (a) increased import burden, (b) uneconomic manufacturing (assemnbly) operations, and (c) a general retardation of indtustrial development. Looking at the problems from another-angle, in industrially advanc-e. nations, engineering industries are chara.cterized by a close lin' ttlreen the end-product sector, engaged in the final fabrication and assembly; and the supplier sector that manufactures an almost infinite variety of components and sub-assemblies. The final fabrication and assembly may typically account for 20-30 percent of the product value, with 70-80 percent going to the supplier side. The underdeveloped state of the supplier infrastructure in the developing nations can be cited as one of the more critical problems in their industrialization process. 9.3 Statistical trends of consumption and production provide a rough guide to development in this sector. Data from a number of countries have been analyzed in order to arrive at some simple relationships between per capita income and engineering industries production oR total manufacturing productiorn. The follow-ing table sholws some of these relationships (data pertains to countries with population over 100 million).l/ 1/ Derived from United Nations, A Study of Industrial GroTwth, 1963, 63.II.B.2. -218- Per Capita Income in Dollars 100 200 400 800 Dollars Apparent consumption of engineering pmducts (gross production value), per capita 5.8 17 51 150 Value added in engineering in- dustries production, per capita 2.8 11 t44 173 Value added in all manufacturing production, per capita 23 59 153 396 Value added in engireerina in- dustries production, percent of value added in all manufacturing 12 19 29 44 Over the developing nations as a whole, per capita consumption of these products in 196h was estimated at $17; Asia averaged $10. By compari- son, per capita value added in engineering industries production was roughly $5 Asia averaged only $1.6. The table also shows that the share of engineering industries production in all manufacturing rises from 12 to L44 percent as per capita income grows from $100 to $800. For Asia, in 1965, the share averaged 18 percent. For the in.Tistrialized countries, the average was about 40 percent. 9.4 The estimated per capita consumption of engineering goods by the developing countries of $17 in 1964-1965 corresponds to a total consumption of $25'billion. The estimated per capita production of $5 (value added basis) in 1964-1965 corresponds to a total production of $15 billion. The deficit of $10 billion represented net imports. 9.5 Table 9.1 shows value add,ed by the mechanical industry sector in Indonesia for the year 1970.1/ The figures cover value added for Mth small-scale shops and larger scale enterprises (small-scale shops desig- nate those with less than 10 employees and engaged in some form of manufacturing). rhe industry shows a highly distorted stzructure, domi- nated by the "mnanufacture and repair" of transport equipment. It might further be noted that around 60 percent of the value added in transport equipment was contributed by small-scale shops of less than 10 employees. By contrast, small-scale shops were totally inactive in the electrical machinery sector. A comparison with similar statistics for the year lJ Data supplied by W;[ilhelm Boucherie, May, 1971. -219- 1963, taken from the Industrial Census of 1965 (last published census), is even.more revealing as to the structural change undergone by, the mechanical industry in the sixties, as is shown in Table 9.2. The metal products, machinery and electrical machinery sectors all regi- stered a sharp relat ive decline; the transport equipment sector alone gained from 36 percent share of value added to 89 percent. Table 9.1 Estimated Value Added by Engineering Industrial Sectors, 1970 Value Share of Value Added in Added Small Scale Millions of U.S5. $ Industry . Industry, % M5illions of Value Added Small U.S3. $ " Scale Larger Shops Enterpri-ses Fabricated metal products exc. machinery and equipment 6.7 7.0 60.0 4.0 2.7 Manufacture and repair of machinery exc. ,3lectric mach- inery 2.4 2.1 5o0.0 1.2 1.? Manuflacture and repair of elect- ric machineryj, appliances and supplies 1.5 1.6 - - 1.5 Manufacture and repair of transport equip- mbnt 85. 8 89.0 60.0 51.5 35.3 Total 96.4 100.01 9.4 56.7 39.7 -220- Table 9.2 Comparative Value Added Percentages by MIechanical Industrial Sectors, 1963 and 1970 Value Added, Percent Mechanical Industry 1963 1970 Fabricated metal products except machinery and equipment 38.0 7.0 Manufacture and repair of machinery, except electrical machinery 18.0 2.4 Manufacture and repair of electric mnachinery 8.0 1.6 IManufacture and repair of transport equipments 36.o 89.0 Total 100.0 100.0 -221- 9.6 Value added in engineering industries products in Indonesia is estimated at 96.4 million dollars, or on a per capita basis, roughly 0.8 dollars in 1970 (estimated per capita income in 1970, $90). The average for the developing countries of Asia in 1964 wJas 1.6 dollars (estimated average per capita income in 1964, less than $100). These statistics would seem to reinforce the observation that the engineering industries in Indonesia are underdeveloped even by the st-:nards of the developing countries of Asia. Priorities for Development Determn.natidn of Priority Sectors 9.7 Past studies of the Indonesian engineering industries have tended, by and large, to be surveys with superimposed corrective or rehabilitation programs. They tend to result in a shopping list of programs, all urgent, whose relative priorities are difficult to judge. aperiences in more advanced industrializing nations have shown that the best results are obtained not by a shopping list, but by focusing the objectives on developing a small number of products favored by the country's circumstances. This approach permits the nation to concentrate development planning on select high-priority programs around which other programs can arow or be built. The remarks would seem particularly relevant when tackling industries as extensive and heterogeneous as these. Accordingly, the first step in the planning process is to locate products that offer the most favorable possibilities. The following steps should be necessary: * Establish a list of candidate development propositions. . Gauge the feasibility of nmanufacturing these pro ducts in Indonesia. * Forecast the development patterns to be expected Lrom launching various preferred enterprises. Suggest the most favorable means of imrplementing and organizing industrial development plans. 9.8 An initial list of developmental products was compiled by reviewing standard lists of product categories, such as the U.S. Standard Industrial Classification (S.I.C.). Tne list shown in Table 9.3 involves items mostly at the four-digit level of S.I.C. classification. That is, they name prc .`ct areas such as "agricul- tural equipment" rather than specific products. Major criteria used in the compilation are the statistics on labor intensity and labor content for various U.S. industries. Similar statistics on -222- Indonesian industries are not possible to compile, but data on labor content in Korea is presented for comparison. Tne labor in- tensityJ index was calculated from the value added per employee. The latter can be used as a measure of labor and capital intensity, because it reflects both the skill level of workers (labor costs) and their use of capital equipment (overhead and profit). The index of 1.00 is the average value added per employee for U.S. manufac- turers, $13,200 in 1966. In the motorcycle and bicycle industry, for example, the value added per employee was $9,500 in 1966 or 72 percent of the average. The index is the inverse of this per- centage or 1.39, which indicates a relatively high labor intensity in that.industry. The labor content figures are percentages: Total payroll divided by total production costs. A premise in presenting the table is that products which are labor-intensive in the U.S. are also labor-intensive in the developing nations, while products with only average labor-intensity in the U.S. could be produced in a more labor-intensive manner in those countries. Also, pro- ducts in the U.S. or Korea with high labor contents are potential candidates for production in areas where labor costs are lower.. 9.9 The candidate list would need to be further reduced to a small number of the most-preferred product areas, or "b1uilding blocks," from which the manufacturing capability of the country can be forged. There are standard operations research techniques for accomplishing this, but the present state of the mechanical industry of Indonesia does not seem to warrant any elaborate analysis. Rather, a final list was deter- mined through an examination of the available statistical resources, engineering considerations of the technical and manufacturing character- istics of the various product categories, estimates of required future growth rates, and pooled judgment of knowledgeable people both in Indonesia and the U.S. -223- 9.10 The final selection of the industries or product lines that appear most desirable or advantageous for development in Indonesia was made on the basis of several criteria. The character and extent of future demand was appraised to determine that a demand sufficient to support a reasonably efficient scale of plant would be likely. The linkages backward to supplier industries was also considered of im- portance and the importance to other sectors, such as agriculture, was also given weight. The statistics on labor intensity and labor content provided a measure as to whether or not a given product could be made in Indonesia at reasonable costs. Technical judgment involved the consideration of the product complexity, the need for sub-assemblies, components and standard parts, the size of operation needed, the raw material availability, and the cost of importing technical know-how for starting up an operation. The following product areas are suggested as priority targets for national planning: * Agricultural Equipment * Construction Equipment * Trucks and Buses Industrial Electrical Equipment Railcars * Ships The list covers the end products. Products in the supplier sector, eg., foundry products, fasteners, etc. are not listed separately as targets because they are not capable of independent development. They are, however, critically important to a balanced industrialization strategy as shown in the next section. Products in the light manufac- turing category such as bicycles, sewing machines and home appliances are not included in th' above list because of their capacity for devel- opment under private initiative and because of the relatively low rating in their industrialization effects on the nation. Automobiles are visibly important, but are excluded from the priority list for reasons given later. 9.11 Tne primary industrial-support base that must be developed can now be identified in terms of the priority targets. This is illus- trated by a flow chart that shows some of the principal components and sub-assemblies that are essential to a viable industrial development. Figure 9.1 shows the progression of development from raw materials through the finished product for the proposed building-block list. This figure is not complete (such figures never are complet until every nut and bolt is counted); however, it does serve to illustrate the primary supporting industrial development potential inherent in the decision to manufacture these end products. There are both tangible -224- Table 9.3r Labor Lntensity and Labor Content on Select Products Labor Labor Labor Inten- Content Content s'ty Index S.I.C. U.S. U.S. Korea Product Name Number 1966 1966 1968 1) Foundry Products 3321 1.19 19 36 2) Hand Tools, Cutlery 342 O.99 28 28 3) Heating and 3433 & Cooling Equip. 3585 1.02 21 4) Boilers 3433 1.07 20 27 5) Fasteners 3551 & 2, 1.0 17 27 6) Springs 3493 1.19 44 7) Valves & Fittings 34 9 0.97 30 8) Bearings 3562 0.98 33 9) Internal Com- bustion Egines 3519 0.83 23 23 10) Fanrm Machinery, 3522 0.93 19 22 11) Construction Equipment 353i 0.90 21 25 12) Machine Tools 351a. 0.90 27 34 13) Food I4achinery 3551 0.95 29 14) Textile Mach- inery 3552 1.31 27 32 15) lWood WIorking Machiner,y 3553 0.99 27 16) Paper Machinery 3554 1.08 22 31 17) E1ineral Crush- ing 4achinery 3559 0.99 29 18) Pumps and Corn- pressors 3561 091 17 26 19) BlQwers and Fans 3564 0.98 28 20) Transmissions 3566 0.93 19 31 21) Office Machines 357 0.70 18 22 22) Electric lbtors 3621 1.04 16 32 23) Home Applances 3631-3 O.96 21 24) Sewing Machines 3636 0.87 38 25) Trucks and Buses 3713 & 5 1.31 23 26) Autorobiles 3717 0.72 23 14 27) Ships 3731 & 2 1.39. 25 41 28) Railway Vehicles 3741 0.89 20 29) Ibtorcycles & Bicycles 3751 1.43 17 24 30) r4bcharical Meas- uring Equipment 382 1.04 35 Figure 9.1 Building Block Flow Chart Raw-r Primary Primary General Special End Materials Conversions Componentus Sub-assemablies Sub-assernblies Products Ste Pr uIll| Found-, rsees -nes Fasten StructuresTh . Beari ng Cortstruicticn Aljlo yj|lng j |ens lulls Equipment Foundi v Transmission Pumps .IniusL l| Sta!T Ipings Truckcs,Busi jPig Ij | ] Components | Comnressors | 1ardare Valve,rou| e ydiaii5 | c f cssor IT7 Eloctricaj 'USral | iD e et |uinment |Ec iijT,nt Note: Heavy outline designates sectors whera there is some significant activity or capability in [ Eecrical] Suspe-nsion || the country. I nI S,ystem I Control System Machinery -226- and intangible effects of industrialization. The tangible effects are felt through the linkages to other industrial products. The intangible factors fostered in the industrialization process include general man- agement skills, quality control skills, and labor pool development. Of course, these are necessany ingredients for the implementation of an industrialization process. 9.12 Connecting lines illustrating the linkages among the elements in this figure are omitted. With few exceptions each element in a given column in the figure can be connected to all the elements in the other column. Therefore, at first glance it might be thought that each ele- ment in the chart represents a potential singular industry which re- ceives goods from those industries on its left and ships goods tr, each industry on its right. With such a structure, the end-product industries would involve assembly operations only. Such an organization is tech- nically feasible. However, the viability of such an arrangement hinges on the size of the operation as well as on the compatibility of the manu- factured product and the manufacturing processes and skills. As we move from left to right in Figure 9.1, the elements become more end-product specific; that is, similar elements destined for different end products lose commonality with each other. For example, an industry to manufac- ture engines could serve many end products, while a frame manufacturing industry, to serve all end-product industries. may not be as attractive because of the variability in both the product and the processes. This is an additional factor to be kept in mind in determining reasonable development strategies for the proposed end products. Present State of Industry 9.13 With reference to Figure 9.1, some brief comments iwill be pre- sented on the end products and their supporting elements as they pertain to the situation in Indonesia. Sectors wJhere there are some significant activities in the country are shoTnm in darker outline on the figure. In 1969, there were over 200,000 passenger cars, 95,000 trucks and 20,000 buses registered in Indonesia, with an estimated 60 percent of the fleet operational. The motorized 2-wheel vehicle fleet (motorcycles, etc.) exceeded 300,000 wnith about 70 percent operational. Since 1961, the regi- stered fleet has grown on the average of about 6 percent per year, but the growth each year has been irregular (buses actually recorded negative growth in some years). On the average, passenger cars increased at 9 percent, trucks at 3 percent and buses at slightly above 2 percent. Tne market is fragmented among roUghlyJ 60 different makes from over a dozen countries. There is no significant manufacture of components and sub-assemblies. The dilemma Indonesia faces is how to avoid a course that has bur-dened the economy of many developing nations with a costly automobile industriy. 9.14 In the agricultural sector, a few simple products are made on a limited scale--hand tools, hand sprayers, small irrigation pumps and processing mills (parts and assembly). The manufacture of farm tools -227- requires forging, a technology not very far advanced in Indonesia. The single most important item is patjols, the import of uvhich is estimated at around one million pieces per year. Locally made tools sell for a- round half the price of imports, but they are not competitive in quality. Pump production is estimated at around 1,000 units, and roughly satisfies a quarter of the annual demand. The principal market is the Government. The demand for power equipment such as spr'ayers and tillers also depends largely on the government subsidy program in the small farming sector. Imports in 1969 under the heading of "agricultural machinery," but excluding pumps and mill machinery, totalled only a little over half a million dollars, a trivial volume for a farming nation of over 100 million people. It is noteworthy that the sole assembler of power tillers ceased oper- ation in 1967. Activities in processing mills for rice and estate crops are limited in the main to repair and parts manufacturing. 9.l5 The industrial electrical machinery sector in Indonesia can be summarized in one word--non-existent. For a country that annually im- ports several million dollars of motors and transformers, there is pres- ently no active manufacture of these relatively simple products. In many developing countries, the electrical equipment industry tends to establish itself early in the industrialization process and predominates over the non-electrical machinery sector. In industrialized countries, the output of non-electrical machinery is generally higher than that of electrical machinery. One transformer manufacturing facility is presently under construction and expects to begin production late in 1971; plans are also uinderway for the production of cables and electric motors. 9.16 A variety of ship types operate on inter-island trade. 'It is estimated that 190 vessels with a total capacity of 200,000 dwt are effect- ively participating in the Regular Liner Service introduced by the govern- ment in 1969 for serving the islands, Singapore and a few Malaysian ports. The ocean-going general cargo fleet is estimated at around 50 ships with a dwt capacity of 430,000 tons. In addition, there are tankers operated by Pertaamina and other special vessels. The general condition of the inter-island ships is poor, since they operate in the tropical waters and have been drydocked sporadically. There are ten major yards in Indone.sia. Nearly all are government-owmed and all are engaged in re- pair; the largest in Surabaja is capable of repairing ships up to 30,000 dwt. Capacity for new ship construction is limited to about 2,000 dwt ships; but only a few up to 700 dwt have been built in recent years. 9.17 The weakness of the supplier industries is one of the most seri- ous internal problems of the engineering industries. The end products sector is only the visible tip of an iceberg; the absence of a supplier sector is like an iceberg without a base--the industry can hardly be ex- pected to be stable. To date, original equipment parts have all been imported, and locally made replacement parts have not proven satisfac- tory in service. For example, some rubber plantations order remilling -228- rolls from Singapore despite the lower price of local products, which is about half that of the Singapore price. Since local quality pro- vides only one-third the life of the imported product, import saves two complete tear-down and rebuild operations involving weeks of machine time loss and substantial labor cost. 9.18 In the primary conversion sector, the art of casting and fab- rication has had a relatively long history in Indonesia, but it has not developed sufficiently. Foundry products are needed by the mechanical industry second only in quantity to rolled steel products, but the cost of local products is over twice that in the U.S. The market for castings has been estimated at 25,000 tons for cast iron and l0,OQ0 tons for cast steel. Since the estimate is based largely on current outlook of the mechanical industry, it .could well prove low by a factor of two or more. 9.19 In 1969, Indonesia imported $1.5 million worth of fasteners; over 70 percent of this value was bolts of all types (large structures are still bolted rather than welded). There are facilities for forgLng simple parts and sheet metal rollers for heavy fabricated equipment, but there are no facilities in the whole country for any relatively com- plicated forged or pressed parts. No gears are made today in the country. Even valves, flanges, elbows, etc. for water pipes are presumably all imported. Many large estates maintain their own shops and carry a sub- stantial inventory of imported spare parts for their processing machines. Engines are much in demand to power the pumps and the various mobile and stationary equipment in agriculture and industry, and almost all are imported. 'The-requirements generally fall into two well-defined power bands, 6-12 H.P. and 4o-60 H.P. Attempts at local assembly of engines have not proven very successful, which is not surprising since engines are technologically complex and require preci sion in production well beyond the present experience or capacity of the Indonesia industry. 9.20 The buildup of the supplier industries through the natural market forces is a gradual process and could well hold up the whole process of industrialization. Special incentives for the supplier industries should probably be an important part of any industrial development strategy. 9.21 The state of the mechanical establishments is rather typical of the circumstances in the industrializina nations. The facilities and equipment are generally old, outmoded and inadequate. Operations are jobbing-oriented. Ilachines are misused and lack proper mainte- nance. The workers are untrained in modern production techniques, and at the top, there is a serious lack of supervisory or managerial talent. The shop managers are likely to point to a lack of orders and working capital as a source of most of their problems. Other observers have pointed to an apparent inability by the management to place the industry in a competitive position from the standpoint of cost, productivity, quality and delivery. The following are illustrative of the problems within and surrounding the industry. -229- (a) Casting costs are unreasonably high because of uneconomical scale and poor foun(ry practice. With labor costing less than one tenth that in the United States, costs double or triple that known in the de- veloped countries cannot be defended, even allowing for the high im- port cost of coke and pig iron. A second example is equally revealing. The making of a pump part has been observed being done on a shaper and taking 5 hours each. At 200 Rps./hour, the cost for a production run of a hundred pieces is 100,000 Rps. The same operation on a hori- zontal mill by updated methods should take no more than 30 minutes each; there could be a cost saving of 90,000 Rps. per 100 pieces. (b) Major government consumers of mechanical products (public works, electric power, railroads, large estates, etc.) import a substan- tial part of their needs from abroad, while machines stand idle in local shops. These production machines are expensive and their idle time in dollar equivalent represents a substantial Lbss to the nation. (c) Raw material must be imported as needed recuiring long lead times; yet there is no association or agency operating to help the in- dustry buy in quantity to secure price benefits and improvre delivery schedules. Another general problem is the power shortage. One Japanese survey team recently recommended delaying the production of cast steel in West Java until the electric supply situation improves. 9.22 The seriously depressed state of the industry has made it neces- sary for the major buyer industries to establish their own captive facili- ties, which are apt to be uneconomically small, or to turn to imports. Imports of mechanical products in 1969 totalled $250 million, an in- crease of $50 million over 1967. The amounts represent roughly one- third of all imports. Table 9.4 gives a breakdown of the imports by primary components (5%), sub-assemblies (?20) and end products identi- fied on the flow chart, Figure 9.1 (3h4?). Table 9.5 lists the major locally-made products. In some cases, the item itself is produced or assembled (e.g., patjols, road rollers). lbre often, a component part is made (e.g., roll for a rubber mill), but not the complete unit. In many cases, an item listed may only be repaired or rehabilitated by a shop. -230- Table 9.4 Inport of I4echanical Products--1969 Value % Millions U.S. $ .All Imports 780.7 All Mechanical Products 2h7.9 100.0 Primary Components 13.2 5.3 Sub-assemblies (40' is accounted for by internal combustion engines) 49.2 19.8 End Products Agricultural Tools and Equipment 21.5 8.7 Construction and Mining Equipment 26.3 10.6 Trucks, Buses 1L.9 6.o 1btors, Transformners, Switchgear 8.6 3.5 Ships, Fishing Vessels l0.5 4.2 Railmad Equipment 3.0 1.2 Others 100.7 4o.7 -231- Table 9.5 Major Products of the Mechanical Industry Machinery and Equipment 1969 Production Processing mills for agricultural estates (mainly spare parts) 2,400 tons Parts for mining and textile machinery Road Rollers (assembly) 200 units Water pumps 900 units Hulle2's 2,300 units Hand sprayers 20,000 units Sewing machines (assembly) 14,000 units AntonDbiles (assembly) .,000 units Ybtorcycles (assembly) 21,400 units Industrial machinery as ordered (e.g., machinery for pulp-paper mill) unknown' Mlajor fabricated structures unknown Tools and IMiscellaneous Small tools unknowm Hardwrare (home and industry) unknown Pipes 2,000 tons Storage tanks, boilers, drums, containers unknovn Autom,mtive and bicycle parts unknown -232- Present State of Planning 9,23 , A number of programs have been proposed in Indonesia in the mechanical sector, and a few appear to be at advanced stages of planning. These include: Regional foundry centers: They have been ranked at or near the top in importance in past surveys by visiting experts; proposed production volumes seem conservative, possibly because the markets are not precisely identi- fied. Table 9.6 provides a comparative summary of the plans. Machine tool rehabilitation center: A rehabilitation program of one type or another has been under active con- sideration for over ten years; the present plan calls for a center (possible location--Barata) serving the entire industry, a potentially difficult proposition even with mobile field units. It should also be under- stood that a program limited to physical rehabilitation of machinery does not get to the root of the problems, which are poor maintenance and improper tool selection and usage. Merger of several metal-working shops: This would appear to be a very significant reform, but unless the refoim is made as part of an overall game plan, the problems that beset each individual enterprise could simply be compounded by the mergers. The mergers under consider- ation are the BBI Group composed of Bisma, Boma and Indra and the Barata Group composed of Earata, Sabang Merauke and possiblyT Peprida. 1bre will be said on these groups later in connection with the recomernded development programs. Reorganization of P.L.N., the State Electrical Authority: Although electric power is outside the scope of this mission, matters affacting P.L.N. are relevant since St controls the market for industrial electrical equipment. This electrical equipment sector today is remai-Kable for the total absence of any producion activity. Planning under- way will be discussed in the sections under electrical equipment. Incentives for light manufacturing and handicraft indus- tries: Joint venture interest appear relatively stiong in the assembly of certain light, durable consumer pro- ducts, e.g., watches, sewing machines, bicycles; these industries should be capable of developing under private Table 9. 6 Comparison of Proposed Plans for Foundrz Centers (Thousands of U.S. Dollars Medan Djakarta Surabaya 5,0QO t/y cast iron 10-12,000 t/y 2,000 t/y cast steel 4,000 t/y cast iron of mixed castings Total Investments Land and Buildings 1,213 348 1,425 MIachinery and Equipment 727 723 725 Others (triag run, consulting services, etc.) 249 538 250 -Wlorking Capital 310 126 790 Total 2,w499 1,735 3,190 , Production Costs laterial (Over i is impor,t) 959 474 4l,ho Labor 115 37 25o Other variable costs 168 32 208 Fixed costs (depreciation,. interests, etc.) 478 265 520 Total 1,720 808 2,418 Total Sales 2,000 95( 4,ooo Rlan submitted by Plan submitted by Recent report for Barata by UNIDO advisor Japan Consulting German Consultant discusses Institute production plan for 3200 t/y cast iron and 1800 t/y cast steel, but gives no cost de- tails. -234- initiative and entrepreneurship as the economic climate continues to imnprove, if industrial incentives plus fin- ancial and technical assistance are provided to purely domestic ventures. Rehabilitation programs in general: In a developing nation, rehabilitation programs are necessary and urgent industry-wide; however, they serve only as stop-gap measures aimed at braking the decline of the ind.ustry, and do not contain in themselves the driving force to move the industrY. 9.24 A compar .,n of the Djalcarta and Medan foundr,y- plans in Table 9.6 gives the following costs in dollars per ton of output: Material Labor Total nvestment Djakarta (cucola) 118 {' 434 Medan (induction furnace) 137 16 1 357 The discrepancy in investment costs is actually greater than showm, since (a) the Medan foundry is designed to produce both ioni and steel castings, wrhereas the Djakarta foundry will produce only iron castinigs, and (b) the former uses the more costly induction furnace. The material costs on the other hand are reversed; for a given output, cupola should have a con- siderably higher material cost. There is also a large difference in labor costs that cannot be explained by the difference in melt process. 9.25 With ret-erence to the foundry centers, considered critically important by many experts, they have the characte.ristic shared by all supplier industries in that they are "captive"l to the end Product manu- facturing markcet. Recent Production figures show that the largest pro- ducer of castings i.n 1970 w.ras Barata with a voluwme of only about 1,000 t-ons. The Pindad Armi Shop in Bandung was second with 500 tons. This lack of a stable and sustaining demand for foundry products was partly caused by the problems of the foundrJy sector itself, e.g., inefficient operatiol., poor quality and high cost of castings, but more fundamentallyrd it reflected a general .ueakness of the manufacturing sector. The, pro- posed foundry centers can hardly be exrpected to have the leverage to correct the general situation. Thle need is quite apparent for the planning in the foundrby sector to be made a part of the overall strategy En the mechanical sector. An 4ntegrated approach will make it possihle to plan the scale and the facilities of thle foundry centers to serve specilic re-ional markets in terms of the type and size of castings, the .mateia quality rcquiremnents, the '.-nt1-th of runs, etc. 9.26 The proposed consolidation of metal-working establishments should eliminate multiplication of facilities and competition in what is essentrl-ially a small market and make possible larger production units. This st ep, it seems, has been overdue. Present plans c-all for first, changirnl- P.N.'s into P.T.'s (essentially making these en-terprises inde- pendenrt* of the responsible government agency) and second, merging 5 or 6 shops. into .two groups: The Barata group consisting of Barata Sabang Meraulc.', and possibly Peprida, and the B.P.I. group comprised of Bisimia, Boma zcad Indra. 9.27 The Barata group will be dominated by Barata, the largest and possibly the best shop in the industry. Barata proposes to expand its road roller assembly into other construction equipment and it could, well be the site for the proposed new foundry center in Surabaya. Sabang Nerauke serves the textile indust;ry and. makes parts for other industrial machinery; Peprida is a government-owned construction company. Planning for the B.B.T. group seems to be at a more advanced stage and will be more critical, since itG involves the merger of three troubled enterprises. Bisma is a crowded shop covering 2,600 square meters, It is engaged in platework and the building of structures and machines on job order, Eighty percent of its machines are over 30 years old and iLts small foundry has an u.tput of about 100 tons/year. In 1970, its estimated value of output was U.S. $600,000. Its major asset appears to be an energetic and competent management. Boma has three plants, the largest at Bineka covering 20,000 square meters. The Bineka plant does repair/replacement work for sugar mills and tin mines. Its foundry has a minimum capacity of 1,000 tons, but prodijces only about 200 tons/year. The Tarranga plant is a relatively newz machine shop; it still produces some agricultural sprayers, but -much of the plant is iole. The Wahana plant was built for the assembly of rolling stock; it has been idle for several years and its labor force all transferred to Bineka. Boma, in 1970, had an estimated total output of slightly over $600,000. Indra performs major supporting services to the sugar industry and the mines, but like Foma, it has a general shortage of work. Trhe plant covers 3,300 square meters. Thle marine Diesel as- senibly shop has been idle, and the plate shop has a heavy press which is infrequently used. The foundry has a nominal capacity of 4L,000 tons, but produces only some 300 tons/year including sugar mill rolls up to 8 -tons finished weight. In 1970, Indrahad an estimated output under U.S. $1 million. Both Boma and'Indra have been very short of work. Only Bisma, the smallest among the three, has been reasonably busy. Under the merger plan, Bisma wJill specialize in rice processing machinery,. Boma in structural steel w*ork and agricultural tools, and Indra in light fabrications a-nd pumps. Plans also call for concentrating the foundry of the group at Boma's Bineka plant; it is not clear how this wrill affect the proposed foundry center in Surabaya. Total capital cost of the plan, including cost of rehabilitation and increase of working capital, has been estimated at $1.8 million. -236- Industrialization Strategy 9.28 The demand for mechanical products, apparently low0r at the pre- sent time, based on production and import statistics, will likely ac- celerate over the coming -years both to satisfy the demancd backlog and the normal expanding demand of the economy. vvidence from both a macro- view and a detailed look into the activities and products of the irnustry, show that the engineering industry in Indonesia has been generally stag- nant over the past decade, w-Thile most other countries in Asia were making progress. On a per capita basis, the consumption of metal and mechani- cal products is just about the lowest in Asia, despite relatively high irmports. For example, per capita consumption of iron castings in Indonesia is estimated at 0.1 Kg today, versus 5 Kg in India and 12 Kg in TaiwTan (over 100 Kg in the U.S.). 9.29 Ait the policy level' the Government miaht in one extreme adopt a laissez-faire apprmach, that is, let the mechanical industry develop at its ownr pace. In these circumstances, Government actions will be largel-y- limited to institutional and rehabilitation programs. *This could bDe a minimal cost prograr. ovrer the short run, but it must be recognized that the industry- does not have the inherent strength to advance itself. The problems in evidence today could conceivably get much wJorse before any improvdmnent, of the si.tuation can be foreseen. In the meantime, the expanding economy will rely increasingly on imports, and this in turn could have a further depressing effect on the domestic iindustury. 9.30 It has been argued earlier in this report that Indonesia cannot forever remain an agricultural, resource-exportincg and incidental manu- facturing country, that the country should develop industrially, that the national market is big enough to support a substantial manufacturing activity; consequently, a n-ore positive set of programs is required from the government planners. The priority of developing the engineeringC industries as the foundatioon of the industrialization process wrill need to be established. The followzing paragraphls outline, in general terms, a possible development process with reference to the end product list generated earlier. Relevant market forecasts and coSt analysis for spe- cific product lines or complexes wJill be presented in later sections. The mobile equiipment sub-sector is suggested as the starting Dlace for development because the existing motor vehicle industry offers a ready marklet for certain component and sub-assem1bly industries, and because most of the other mobile end products (construction equipment, farm equipment) require much of the same technology as the motor vehicles. Stationary equipment (industrial machinery, electrical equipment) and shipbuilding are suiggested as parallel developments. A principal ob- jective of the strategy will be the priming of the link bet..een the svipplier industryi and end product assembly. In some instances this will mcan a carefully, planned integration of. the manufacture of select com- ponents and of end product assembly in a single manufacturin, comple.-c. -237- It also means a deliberate channelling of industrial technology and skills into the supplier industries where they can most effectively contribute to the building of capabilities and to the domestic diffusion of manu- facturing knolw-how. In general, the strategy is seen as composed of three stages extendina over the next decade. Stage 1: The first development stage 'involves expanding the production of trucks and buses and establishing the assembly of a limited line of construction equipment. The foundry industry, primarily for gray iron casting work, will be reorganized to provide castings at competitive costs. A power transmission industry will be established to assemble transmissions and other drive-line sub-assemlblies. Tne foundry industry will be scaled to produce castings not only for the mobile equipment industry, but also for the eristing stationary equipment industry (prin- cipally parts for textile niachinery, pumps, and mills). The production of basic lines of motors and transformers iwilJ be established. Existing shipyards will be rehabilitated to service and build ships for the inter- island fleet; this wiLl provide the learning period for building larger ocean-going ships. Gear sets, bearings, and precision compornents would be imported in this stage to be used in the sub-assemblies. Forging capability will be introduced to produce a variety of tools for the farm and industry. Stage 2: At this stage, the construction equipment 112ne will be expanded, and farm tractors will be added to the product mix. The manufacturing plans will draw upon the experience gained during Stage 1. Implementing this plan will require an expansion of the foundry industry both in size and in capabilities. Steel and non-ferrous casting facilities would be added. Also, a stamping industr-y could be established, initially con- centrating on small stamping such as machine components. The autbmobile industry- will have been reorganized and a limited progra.m oL increasing the domestic content of cars could begin. The most significant new pro- -rim co-uld be the building of ocean-going ships for the domestic fleet, followring a study of the shipyard requirements. Stage 3: Tnis development stace primarily involves the establishment of a precision comr:onents industry, serving in the main the sub-assemblly industries. This industriy would set a new level of sophistication to the industrialization process in that the required skills and precision would surpass those of the other industries, Generally, the manufacture of machinery and equipment will become specialized. There will be large manufacturing comtplexes as well as small special makers of components and products. Also, the mark-et should now be capable of supporting a machine tool i ndustry. 9.31 The stages indicate a path to mechanical industrialization th-'ough the establishment of a complex of industries based on the building blocl products. Here, the use of' the word "complex1" is just a wray of thin'king about the organization of the plan; it does not necessarily mean that -238- production wrould onlyr be in one or two plants3 or that there would be a group of plants in one place, or even near each other. The idea is 'a complex of industries rather than a complex of factories. A possilble complex is illustrated in Figure 9.2, as it would appear perhaps 10 years from now. Industrial operations are represented as enclosed areas with inputs of technology and material. Outputs are all directed to specific marlcets. Products not identified on the figure are to be derivatives of the primary products shonm. 9.32 The supporting industries, called "mother" industries here, would typically produce foundry items, power transmission components and sub-assemblies, and fabricated structures. Tne "mother" i'ndustries supply the "satellite" industries, which make end items for the market. i;bbile and stationary equipment makers would draw heavily on the "mother" in- dustries; by comparison, the shipbuilding industrny would only be a tznu- ously related "satellite," since its initial development, centered a- round hull construction, does not demand an extensive supplier netwrork. 'Tne "satellite" industries could be expected to branch out and grow, and neT ones could be added over a period of time. The mobile ecuip- ment product lines could be expanded and diversified. The stationalr equipment is an especiall-y broad category covering machine tools, tex- tile machines, pumps and compressors, electrical equipment, etc. The shipbuilding industry could include boilers, locomotives, and fabricated structural steel as well as railcars. 9.33 This statement QL stages of development for the engineering industries is necessarily in general terms, although the delineation in Figure 9.2 indicates the extent of the interrelations. It is not possible in this report to present detailed plans and precise quantitative relation- ships among all of the industries. Tlat should be the task of the planning exercise for the next five year plan. However, in succeeding pages we have analyzed major engineering complexes that are judged to be feasible now and that shouild constitute a basis for continuied development of the engineering industries. A shift in the orientation and product compo- sition of the automobile industry. is also suggested. ITotor Vehicle Industry Develoonient 9,34 The industry is repres6nted on the priority product licst byr trucks and buses. Automobiles are assembled today in Indonesia, but were not included on the list. Automobiles are probably the most corm- plex and technolo='cally demanding products in the me-hanical sector. It is noted that even a small car averaces 2,500 major parts and sub- assemblies, or over 20,000 parts if every nut and bolt is counted. A standard engine averages up to 1,000 parts and about 15,000 separate machining and treatment processes to turn steel shapes, forgings and castin-s into finished engine corponents. Hundreds of different types of metals and nonmetallic materials are required. WSithl all these, there must be rigid specifications and standardization, essential to -239- Figure 9.2 Industrial "Complex" - beyond 1980 "Mother" Industries "Satellite" Industries Primary & Secondary Conversion Processes Final Fabrication & Assembly * 5007/Y Motor Vehicles $100 , Xmillion Foundry r| -, / - WV Other Mobile $100 Equipment million Sb-Assemblies/, Pximary components (Power train . Structures, etc.) \ stationary $60 4ooooT/ Equipment million Stampings ooo 40- - -- tOor/y Ships $100 . million NOTE: All shipment figures are annual denotes steel mill products -240- mass production. To an international auto maker, an assembly affiliate in a developing country represents a sizable customer for components, sub-assemblies, manufacturing equipment as well as technology. To a developing nation, it can be stated categorically that automobile manu- facture does not make short-term economic sense no matter on what basis it is established--assembly only or backwiard intearated--because of the essential capital intensiveness of the industry and the impossibility of achieving scale economies. This generalization holds regardless of any labor cost advantage the developing nation may enjoy. In spite ofP this fact, many developing nations including Indonesia are manufac- turing (assembling) cars. Furthermore, it is evident that they will continue to do so in spite of the near-term diseconomies that analysis readily shows are invariably occurring. The motivation for this practice must lie in benefits of national pride, the opportunity to factor the designs in small ways to the local conditions and anticipated long-term economic benefits. The expected long-term benefits could be the most persuasive. They involve the expectation that the nation will develop iiidustrially overall so that, eventually, through the achievement of scale and integrated technological capability, the diseconomies of automobile production will disappear. They also recognize the strong industrial- izing effect that auto manufacturing can have, in greater measure than any other single product area classification. Thus, for the near future, the policy question is how to approach the process of building up the industry and utilizlng the industrialization potential. One extreme is to subsidize or protect the industry very heavily; technology has to be imported and investments must be made in uneconomic manufacturing facilities. The result of this approach is cost multiplication, already observed in many developing nations. The other extreme is to allow eco- nomic forces-free play, with the local (import)price acting as the control function determining the rate of increasing local content. This could mean that the local content will remain low for the forsee- able future. Most policies in developing nations fall betwreen these two extremes. 9.35 A comprehensive study of the Indonesian motor vehicle industry was undertaken recentlyl /. Tne registered motor vehicle fleet was es- timated to have gro'.m on the average of about 6% per year since 1961-- cars at 9%, trucks at about 3% and buses at only slightly over 2%. Tne number of vehicles in operation in 1968 was estimated at 198,000 with the following breakdow4n: Cars (sedans, jeep-type vehicles, taxis, etc.) 64' Trucks small (under 3 tons) 6% large (over 3 tons) 24% Buses small 1% large 5% / "Indonesia: The Motor Vehicle Industry," J.R. Hansen, rec. 29, 1970. -241- The low number of small trucks (12,500 vehicles) and small buses (1,600) is noteworthy. A rough demand forecast, based on past growth pattern, shewed that the number of operational 4-wvheel vehicles by 1975 will1 roughly double that in 1968, with the same percent breakdoi.m by type. Yet it seems likelr that the demand for trucks and buses shoulds shift the composition of output in their favor rather than in favor of pass- enger cars. A policy of encouraging production of the latter rather than the former may not be the best choice. The history of development of the motor vehicle industry in Japan provides an interesting case study. Around 1940, annual production reached its pre-war peak of 46,0oo ve- hicles, 98 percent of which were trucks, After WJorld War II, production of motor vehicles was resumed with trucks and buses, the emphasis shifting to passenger cars by the late fifties. However, even as late as 1966, when the total outpuct exceeded 2 million vehicles, only about 38 percent of this total were passenger cars. 9.36 It is suggested that a strong case can be made for Indonesia to shift the development emphasis from cars to trucks and buses. Truck and bus manufacturing is fairly labor intensive, and since their compon- ents are generally simpler (e.g., sheet metal), the establishment of the supplier sector should prove economically more feasible. It should be possible to develop a low-cost manufacturing source for frames, van bodies, assembled chassis and a closely related product, shipping containers. 9.37 It is not possible to set a precise output target for trucks and buses, but the shift in output could be substantial, particularly in the case of small trucks and buses, since the potential market is juLdged to be fairly large. A shift aw.ray from passenger cars should also have the effect of decreasing imports of components; the simpler requirements of trucks and buses can, as mentioned above, be more easily met by local manufacture. In addition, the comparative dis- advantage of indonesia in the manui-factulre of tru-cks and buses (measur- able roughly by the difference between domestic price and import pCrice) is less than for passenger cars, so that there should be a net economic benefit from the shift. It is suggested that this shift could be accomplished by negotiation, plus some changes in import regulations and tariffs. -242- Mobile Equipment Industry Development 9.38 The major products under this category are construction equip- ment, Larm tractors, and ierae trucks and buses, This product group would appear to offer the best proving ground for establishing a major manufacturing operation in Indonesia, particularly in terms of leading the development of the supplier sector. The demand for these products is estimated to be large enough to support a domestic production oper- ation, but the lack of data makes it difficult to forecast demand exactly with great assurance. 9.39 The mobile eqo,ipment in the agricultural sector consists principally of products in the tractor family. Tractors (35-60 H.P.) are mostlyr used in the big estates, and they.are all imported. The agricultural machinery census of 1963 gives the numrber ol tractors in the country as 4,120, and the number today may not be much above this value. Tne demand i s difficult to project, but is estimated to be at least a few hundred units a year. Thie demand backlog is unknown, but could be quite large. Even with a limited market, the proposition to manufacture tractors could prove feasible, since they fit well into a production complex wJith construction equipment. 9.40 The construction equipment category covers a broad range of product possibilities. Domestic production is very limited, the only significanti activity in the nation being road roller assembly. The number and types of equipment in use are not knoTm, but some years back, it was estimated that Caterpillar had 5,000 pieces of equipment in Indonesia, with less than half in operatinc condition. Recent stat- istics suggest that the import of construction and mining equipment totalled around $10 million in 1967, and the figure roughly doubled in 1969. Future equipment demand is exDected to keep pace writh invest- ment and output in the construction sector. Indonesian industry should be quite caDabln of learning to produce a balanced line of construct,ion equipment w-ithin a few years, with over 50 percent local content, since a large portion of the manufacture is concerned wlith the fabrication and the assembly of plates, shapes and castings. 9.41 A rough estimate of de.mand is possible from the projected investments in the construction sector. Statistics from other developing countries show that generally the amount spent on machinery and equip- ment is typicall, high in highway construction (40-70% of construction value) and lowq in building construction (20-30"). An average of 40o might be reasonably assurmed for all construction. Of this total, about. a auarter will be spent on medium to heavy mobile equipment (bulldozers, road rollers, dump trucks, etc.). Thus, an estimated 10% of the total investment in construction can be takcn as the basis for projecting the moboile construction equipment demand. The results of the calculation for Indonesia are shoi-m in Table 9.6 The figures for demand rise froi 4,800 pieces of mobile equipment to 11,400 br 1980. -243- Table 9.6 Requirement for Mbbile Construction Equipment 1970 1975 1980 All Construction, million $ 300 6o0 1,000 Spending on Mobile Equipment, million $ 30 60 100 'Bulldozers/tractors, million $ 12 2 40 Other mobile equipment, million $ 18 36 60 Bul.1dozers/tractors* at $10/hr., pieces 6o0, 1,200 2,000 Other equipment* at $5/hr., pieces 1,800 3,6oo 6,000 Total requirement, pieces 4h,800 8,000 ll,O0 (% operative) (go%) (60%) (70%) Normal service life of 12,000 hours or 6 years has been assumed. Com- ponents will need mare frequent replacement; typically, a track set may have a life span of 3,000 hours, but will need rebuilding after 1,500 hours on the average. These estimates are probably generous for the Indonesian climate. -244- 9.42 Based on these estimates of demand, a mobile equipment manu- facturing enterprise will be analyzed as to its capital requirement and production cost in Indonesia. A typical product mix for the enter- prise might be hauler/dump trucks, bulldozers and farm tractors. The selection of a particular equipment type will not be critical to the analyrsis, which is based on the volume of material flow through the plant. Product identification will be necessary,- however, when equip- ment prices are considered. Nevertheless, each type of equipment in the product mix of this study can be regarded as representative of a class of products of similar weight and material composition--in other words, the product mix has a degree of flexibility. 9.43 For the purpose of this exercise, t,he annual output at full production consists of: A. End Products Unit Weight Annual Output Total Weight (Ton) (Pieces) (Ton) Bulldozer 12 240 2,880 Farm Tractor 2 720 l,b4o Heary-duty Track .5 720 3,240 B. Intermediate products for outside sale Industrial transmission sub-assembly 1,200 tons Fabrication (welded structures, etc.) 2,000 tons The production schedule is set as follow.rs: Preparatory Period - 2 years planning and construction 1st Stage - 2 years limited production, domestic content 20% Bulldozer 60/year Truck 360/year Transmission 400 t/year Fabrication 1,000 t/year 2nd Stage - 2 to 3 years 'ull production, domestic content 40o 3rd Stage - expansion of product lines, domestic content 60%Q or hLgher The key step in the analysis of the production costs is a breakdowm by material weight of each product. Table 9.7 gives a repr-esentative breakdowm. For the end products, an average composition is shown for simplicity, with the cautionary note that the variation in composition can be quite large for seemringly similar products (for example, the amount of forgings in a power shovel is less than 10% by weight, but can exceed 20,O in the case of bulldozers). The estimated current prices of castings, structural shapes, etc. are showm in the table. A further consideration is the "make versus buy" decision on each component, from nuts and bolts to engines. The purchases wzill be mostly imports, but there will be some domestic procurement. The cost to plant of imports is simply estimated from the import content, using the f.o.b. prices of products in the U.S. as a point of reference. The domestic procure- ment is estimated as a percentage of the domestic content. The results are shown in Table 9.8. As stated earlier, pricing requires rather pre- cise identification of products. F.o.b. prices in the U.S. are indi- cated within brackets. The bulldozer i s an intermediate range equip-ment rated at 100 H.Pe, with standard gear shift ($20,000). The farm tractor is a Diesel model in the po-wer range of around 30 H.P. ($3,000). Th7e truck is a standard, intermediate-size dump truck (cabin anld chassis, $7,100; body, $900; and hoist $1,000). Table 9.7 Prduct Breakdobvm by Material Weih ad CoSt/Ton Plate Struc- Bar Shapes Castings Forgings & tural C Alloy Iron Steel Sheet Shapes Steel S'teel Total Ibbile equipment Composition % 1 20 15 15 20 20 5 5 pxpduct mix Tons j51,2 1,134 1,134 1, _12 1j,152 37a 378 7,560 ComFosition ,15 5 10 5 65 Transmisoion" Tsns 180 60 120 - - 60 780 1,200 Composition % 6o 30 5 Fabrcation Tons - - - 1,200 600 100 100 | 2,000 Total Material, tons -,692 1,19 1,2514 2,712 2,112 538 1 258 10,760 Total material requirement with I 25` allowance for processing 2,115 l 1,)492 1568 3,390 2,640 673 1,572 13,450 loss, tons I . Cost per ton, U.S. $ 250 )4oo 300 150 150 190 260 Total Material Cost, 000 U.S. $ 529 597 470 510 396 128 blio 3,0)40 '-The quantities shiown do not include in-plant consumption. Table 9.8 Value of Purchased Parts Base Price Product for Base Value of Production (milliorn $) Computation Purpose 1st Stage 2nd Stage 3rd Stage Bulldozer 15,000 0.90 3.60 3.6o Farm Tractor 3,000 2.16 2.16 Truck 6,500 2'.34 4.68 4.68 Transmission 9oo/ton 0.36 1.08 1.08 . Fabrication 500/ton 0.50 1.00 1.00 Total 4I.10 12.52 12.52 Import content, % 80 60 40 Imported parts, million $ 3.28 7.51 5.0l Domestic parts, % of domestic content - 10 15 Value 0.50 1.13 -248- 9.44 With reference to the production schedule given earlier and to Tables 9.7 and 9.8, the cost of raw material amd purchases are sumar- ized below.. Costs under Stage 1 are for a limited production. Stage 1 Stage 2 Otage 3 Raw ,.aterial 0.15 1.22 1.82 Domestic parts - 0.50 1.13 Imported parts 3.28 7.51 5.01 Total 3.43 9.23 7.96 The labor costs may be estimated based on the followJing salary and pro- ductivity figures. Product.iv-ity is assumed at a low 20% of U.S. pro- ductivity at Stage 1 and at 40%xO at Stages 2 and 3. Salary: Direct wiorker $700/year Supervisory personnel $1,200/year Productivity in tons/man-year: U.S. lst Stage 2nd and 3rd Stages Machine shop L45 9 18 Fabrication shop 45 9 18 Assembly shop 100 20 4o In estimating the investment costs, it is noted that the production facilities will consist in the main of a machine shop that includes heat treating and forging facilities, a fabrication shop and an assem- bly plant. A f6undry has not been included within the enterprise, assuming that castings will be purchased f:jm a regional foundry center. The machine shop is Planned as a separate' building from the fabrication and assembly building. The totial investment, including contingency fund and working capital, is estimated at $19.1 million. The working capital is estimated at 25` of the variable costs plus 2 - rwnths receivables. The total sales is determined, allowing a 20,; return on investment. The computation results are sumrarizer.t in Table 9.9, when the operation has attained Stage 3 level. A typical supplier plant is also sholM. Table 9.9 Typizal Mobile Equipment Manufacturing Supplier Enterprise--Output 10,000 Tons Plant of Product Mix FastNnj'crs Machne |Fabrication Fast0 qicr Mahine and Assembly Total 2,00 T/YShopShop Total Investment 1.3 19.1 Land 0.2 0.5 Buildings 1.0 1.5 2.5 Equipment and Machinery C.5 - 5.o 3.5 8.5 Contingency 0.4 1.0 Working Capital 0.2 6.6 Production Costs 0.9 11.8 Iaterial o.5 8.0 LaUor 0.1 1.2 Variable Overhead i.5 Depreciation: Machine Equipment, 15 years .0.7 Building Facilities, 25 years. Interest at 12% on fixed and working capital 0.9 Other costs--sales pmmotion, training, etc. 0.5 Sales (estimated) $550/ton (Total)15.6 Rheturn on Investment i5# II 20% -250- 9.15 The following table summerizes the operation of the enter- prise throuah the three stages: (million $) 1st Stage 2nd Stage 3rd Stge -Sales total 4.73 15.60 15.6o (Sales/ton) ($11810) ($1,450) (.$i,1L5o) Production Material 3.43 9.23 7.96 Labor 0.39 1.06 1.24 Other variables 0.30 o.40 o.5o Fixed costs 2.10 2.10 2.10 TotaI 6.22 12.79 11.80 (Cost/ton) ($2,340) ($1,190) ($1,1oo) The per ton values are not a fair basis for evaluating this ty-pe of manufacturing operation; nevertheless, tha sales price of $1,450 per ton would seem to compare favorably with the intiernational prices for the line of equipment considered. A weakness in the analysis is a lack of reliable information about tihe market an.d actual product mixes, but it is estimated that the future demand for medium to heavry mobile equipment will be considerabl, larger than in the p2st. The market may be li.mited for individual items; h:t-iever, the produict mix of construction equipment, agricultural tractors and truck's is judged to have the potential to lead industry-wide development that, will generate a degree of "volume" marlket for the supplier sector to grow. Opportunities for sub-assembly oper-tions could eds.st i n equip- ment attachments and herdw.la-re, tool systems, tracks, hoist, cabin- chasis, and eventually to primariy components. It is suggeste-d that this program might be patticularl- timely -'r consideration in indoresia in view of the plans to restructure the metal-worlkiin- industry, and specifically, the pl ans to establi.sh a foundry center and the Barata Group in Surabaja, Figure 9,3. The figuire shows a possible conffrl7r- ation of development in the Surabaja region centered around the mobile equipmnent program and the agrictiltural equipment program to be discussed next. Stationary Equipment Industry Development 9.46 The stationary equipment covers a broad category of products-- industrial machinery, pumps, electrical equipment and machine tools, in additi6n to such durable consumer goods as sewing machines. In the agricultural sector, production in 1969 was limited to the following: Processing mills for agricultural estates (mainly spare parts) 2,400 tons Irrigation pumps 900 units Hullers 2,300 units Hand Sprayers 20,000 units Small Farm Tools (pa'tjols, etc.) 350,000 units No industrial electrical equipment. is made or assembled in the country; and presumably, all requirements of the powJer sector are imported. Tne prospects for domestic manufacture, or even assembly of industrial machinery and machine tools is not anperent at this time. Sewzing machines are currently assembled, and could become the leading indu.;stry for the development of a wide range oL liaht mechanical products under private entrepreneurship (a possible role of the governmen-t here is the establishmenit of a light industrial estate comprised of parts makers and assemblers of these products). Agricultur'al Iachinery 9.47 lWith the agricultural sector first in national priorities, the manufacture of farm and estate machinery has received the special attention of machinery makers. The direction of the present efforts is to expand the production of small farm tools, hand sprayers and irrigation pumps, and to start the production, beginning with asse.nbly., of rice processing machinery. Tle demand for power eauirzment, such as sprayers and. tillers will denend on the government subsidy progran in the small farminq sector and, unless the !overnment is prapared to implement a massive subsidy program for the small farmers, the market for pow.-er equipment should cont,inue to be small, limited b,r the farm inco;ie. ITmport in 1969 under the heading of "agrioultural machiner2y," but excludina pumps and mill machinery, totalled only a litt,le over half a million dollars. 9M,8 From a strategy standpoint, pumps are judged to be the most promising product in the a-ricultLiral mechinery sector in the sense of contributing to the development of the enEineerina industry. In addition to the irrigation market, the pump manufacuting indust2r can expand into a w-ide variety of pumping syrstems demarnded by the che.hcica)., marinie and other industries, and it can stimliate the developnent of the supplier industries. 9.49 Wiithin the irrigation program alone, estimates of the market range from 2,000 to 4,000 pumps per year. Production in 1969 was under 1,000 pumps, and 1,000 pump sets and all engines were imported. AU- though the domestic pumps are generally cheaper than imports, they can- not as yet compete in quality. The principal buyer is the Government through the Land Development Agency and the Department of Agriculture. The end-users are the farmers and the cooperatives. Financing has been a major bottleneck, since the pumping system is most needed by those who can least afford it, the ones with arid land. Pump alone accounts for only about 20 percent of the total cost of a pumping system. A 6-inch centrifugal pump costs about $250 in Indonesia; engine costs about $800 and the pump set about $1,)400. 9.50 The market for irrigation pumps should be capable of supporting an industr,y scaled to produce about 5,000 puTps a year, but the reali-. zation of this market requires an effective program by the government to put the pumps in the hands of tihe end-users. The principal types o'L pumps in iTnnediate demand are cast iron centrifugal pumps in the horse- power range of 10 to 50 H.P. The cost of' producing 1,000 pumps of 8- inch nominal diameter is roughly analyzed. The material breakdown and costs follow: Quantity (ton) Cost/ton Total Cost ($) Iron Castiings (body, housing, covers) 300 250 75,000 Bronze Casting (Tmpellor) 20 1,200 2L4,000 Steel Products 10 200 2,000 Purchased Components (C)" of cost) 5,ooo Total $l06, 000 The production processes consist essentially of machining, assembly,J anrd finishing operations. MaTchinin, productivity may be assumed at l)_ tons/ man-year and assembly at 30 tons/man-year, wzhich are about 305 of U.S. values. The total investment may be estimated at $1 million. The annual production cost is: Matf eri als $106,000 Labor (40 men) 28,000 Variable overhead 0, 000 De?reciation & other fixed costs 50,00 Interest at 12<¢ 60,000 Total $294,000 Co st/pump 2 9.L4 The c.i.f. value of import is reported at around $450. AssumLing that the domestic units would sell at 20/%x below the c.i.f. price, the sales price is $360. A key factor in the operation is the availability of quality iron castings at the assumed cost of $250/ton. The present cost in Indonesia is over $400/ton. The lo-wrer cost has been estimated for the output of the proposed foundry centers, and was used in the analysis. 9.51 In the merger plan of the B.B.I. Group, there are plans for specialized production of rice processing equipment, hand sprayers and irrigation pumps. The proposition to assemble and progressively enter into the manufacture of rice processing equipment is rmre cornplicated than in the case of hand sprayers or pumps, but should be technically feasible, again if the market can be assured. The technical problems are judged to be wsitlhin the general experience level of the metal- working industry., although no large mills have been built in the countnry in recent years. The B.B.I. merger combines three relatively wreak enter- prises, but yet its formation should have a singularly important imnact on the industrialization process by creatina the first major mak-er of agricultural equipment in the country. In this sense, the merger plan merits careful review and support with the objective of assuring the success of the operation. Electtrical EquiPment 9.52 Tne electrical equipment product category includes those elec- trical products excluding electronic equipment and communication devices. Following is a rough classification, identifying typical products in each classification: Industr-.'al A. Heavy a. Generators b. Power Transformers c. Mbtors d. Electric Loco.-otives B. Light a. Distribuition Transformers b. Light M botors c. Sw;itchgear d. Circuit Breaker General a. Home Electrical Applionce b. Li'ghting Equiprient c. Electrical Accessories In industDrial electrical equipment, the demand for power generation and diistribution equipment is largely determined by the Government policy on electric power, and the major buyer is the powzer authoritY. The market for consumor products could expectedly be closely re'.ated to the nation's living standards. The distinction between heavy and light industrial equipment applies to differences in size as well as in power or voltage range. Tne heavy equipment is usually custom- designed, calling for highly skilled worlmanship, special equipment for manufacture and testing, and higher quiality components. Technical con- sideration would sug?gest that Indonesia might best concentrate at the start, on light industrial equipment, and thereb. gain experience before planniing for even a limited entriy into the ma,nufacture of heavry equip- ment. 9 $ 5 3 lectrical energy production in Indonesia in 1967 was 1,600 million KJH; the average growth rate bet-Teen 1962 and 1967 wTas only about 6 percent per year. By comparison, energy production in the neighboring countries such as India, Philippines and Thailand expanded at a rate of around 15 percent over the decade from 1955 to 1964. 'The operating time of power-generation facilities (ratio of energy production over installed capacity) in Indonesi a was also one of the lowest in Southi East Asia. Public supply of electric power in Indonesia is ad- ministered by Perusahaan Listricle Negara (PT), the national powrer authority. The supply is unreliable, though there has been some sub- stantial improvement. It has therefore becomne a standard practice for manufactuaning concerns and other large establishments to have their ow-m Diesel generating sets for use during power cuts. Investment in the power sector to date by PUI has concentrated on power generation. with apparent lesser priority on the rehabilitation and development of transmission lines and distribution nettror1c. As a result., in parts of Java, the power bottleneck is in the distribution system. Thle 'West, Central, and East Java each have its oj-m distribution system, with West Java serviced by 150 KV line and the rest of the island byr 70 KV line. There are practically no transmission lines on the other islands. According to government sources, the annual investment in nower gener- ation over the next few years wJill level off at around 15 iillion dollars a yrear, wJith a possible l5 to 30 million dollars a year going into the tran s.mission/distribution secto.rs. 9.54L Import of electric motors and transformters totalled $l4.6 million in 1969. The figure presumably does not include units imported as part of machinerir or equipment import. No data is available on the total demand for major electrical equipment in recent years. If it is assuLmed that (a) all motor and transforimer dermand was met by import, and (b) the motor anci transformer dema-nd comprised rougfhlyr 25 percent of all industrial electri;c-]. equipment demand, then the size of the market for industrial electrical equiipnment in recentLU years can be roughaly estimated as sho.-m below: (millions of U.S. $) 1966 1967 1968 1969 Electric Tbtors and Transformers 2.1 3.0 14.14 14.3 Industrial Electrical Equipment 8.4 12.0 17.6 17.2 9.55 An estimate of future demand for electrical equipment might be made on the assumption that the demand wrill parallel the rate of g-h.;h of electric power generation. The results for growth rates of 10 percent, 15 percent, and 20 percent are shonm: Demand for Electrical Equipment (millions of U.S. $) Growth 1970 1971 1972 1973 1974 1975 lo% 18.8 20.8 22.8 25.2 27.6 30.4 1W 20.0 22.8 26.14 30.14 3)4.8 140.0 20% 20.8 24.8 29.6 35.6 142.8 51.2 Taking the figure of $40 million in 1975, assume that half or $20 rmilli.on represents the demnazrd for the light industrial equir:.ent. It wzill be assuned furtlher that the demand breaks down as followzs: Distribution t,ransformers 25W 5 million It tors 25W, 5 million SwiICtchgear 15CJJ 3 million Others Lho0 8 million In the case of transformers, takina an average value of $20/TIVA, $5 mnil lion translates into a market for 250,000 i!VA installed capacity in 1975. For nmtors, at $il0O/.motor, the demand is for 50,000 motors i.n 1975. Th-tse are not forecasts, but guesses of the order of magnitude of the otentiu market for the domestic manifectu-ring induzstr-. -256- 9.56 Some steps are being taken to establish an electrical equip- ment industry. A transformer plant (Unindo) is under construction in Djakarta and scheduled to begin production by late 1971 of one line of distribution transformers (25-630 KVA', up to 20 KV). It is a joint ventura between a French concern and PIT. The init,ial production tar- get is 1,000 transformers a year. As :. sole source of low tension distribution transformers in Indonesia, the plant seems small, parti- cularly with reference to the market projected earlier. Early indi- cations are that the product will cost approximately ho05 higher than in West Europe (France). A rough comparison gives: *Cost, Index of Cost, France Comparative Costs Indonesia Material 50 160 80 Labor 30 100 30 Other costs 20 150 30 100 i40 Planning is also at an advanced stage for t'he establishment of a largne- scale cable manufacturing palnt (Kabel Indonesia). Tne cable plant appears will eonceived both in terms of plant size and product mix-- telecommunication 'ables, power cables, wires and conductors. It should contribute importantly to the growth of the infant electrical industries as a supplier of one of the main materials needed by the latter. 9.57 There is a preliminarxy plan to produce mo)tors (MIetrika, July 15, 1971). The production plan calls for 16,000 electric motors and 2,000 small generators per year at full production. The motors are 1/2 H.P. single pahse and 3/4 to 5 1/2 H.P. three phase. Presumritchbbards, circui t breakers, etc. $3 mill]i on outuput This is a modest target, but its attainment will not be easy when the present low base of this industry and the uncertain situation in the electric power sector are taken into account. These fac.tors are probably reflected in the cautious planning at Unindo. The plan at Metrika should probably be reviewed as to thQ appronriateness of its production plan, in particular the initial mix of mrtors and Lelier- ators. Ordirprily, it should be an opportune time for the cot.itry to establish a general maker of light electrical equipment, wi-Jth a producct mix comprised of a combination of some. of the above-listed products, but the desirable line of development of the industry is far from clear. A special study is suggested; this stud.- should in- clude an evaluation of the effect,. on the equipment mar'ket of any changes in the administrn-tion of public powrer, e.g., financipl Participation by the power autlhority in the manufacture of electrical equipmcnt, capacity limittlation hy law of private generating plents, equi½m Indonesia Ma'riti.me !i-ssion. 2/ J- Report of Directorate General of Sea Cor.muinu cations, 1971. i] Report of Indonesie. ."aritir.e 'i'ssi0n, June 1h, 1971., aol.. 2. Table 9.10 Projection of Inter-Island R.L..S. Fleet (1,000 tons) (1,000 dwt) Year 1969 1970 1971 1972 1973 197W 1976 1978 Note Cargo trade, domestic 3,100 3,b10 3,750 4,130 4,5L,o 5,220 6,900 9v,00 Estimated to increase at IO; rate til 1973, and 15 after 1973. Cargo trade, Singapore/Malaysia 1,900 2,000 2,100 2,210 2,320 2, )40 2,690 2,960 Estimated to increase at 5,. 4'Total Inter-island trade 5,000 - ,410o 5,85o 6,340 6,860 7,66o 9,590 12,450 Cargro, non-R.L.S. 3,hOO 3,500 3,600 3,700 3,800 3,900 4,000 b,o00o Growitli in inter-island trade channelled into R.L.S. fleet; slhare of non-R.L.S. vessels Cargo, R.L.S. 1,600 1,910 2,250 2,640 3,060 3,760 5,590 8,450 kept under 4 million tons. Performance' Cargo ton/dwt 8 8 9 1p 12 15 15 15 R.L.S. Fleet 200 240 250 264 255 250 372 560 Previous Projection 6 Report of Directorate General of R.L.S. Fleet 200 177 160 of Sea Communications, 1971 V.. -262 - Ocean--oing Fleet. Estirmptes of the presont oce-n-going goeneral carrgfo flOet -rance from 2300,00 dtrt to 1475,o0o0 drt. For thle purpose of this computation, the figure of 430,000 dwt was chosen. The share oL ocean freig,ht carried by domestic-flag vessels wras es- timrated at 25"2 in ic969-1070, correspDnding ½. ocean Lreight voli'zie of 6-7 million tons. In the demand projec4.:;)n the ocean freight is assumed to increase annually, at 15,% (a rath.-ar conservative figure in the light of an almaost standstill in the nation 's total foreign trcide duiring the sixties and the vigor of the current economic recover,y), and the domestic bottom ratio is -rogressivel-y increased from the estimated 25d today to 455 by 1978. The translation of cargo tons into ships require information on t,he average yearly nuimber of voyages for each comnmdity on the major routes; in tlhe absence of such information, best-guess estimates were used in computing the ship tonnage. The resulting demand forecast is show,m in Table 9.11. Table 9.11 Projection of Ocean General Cargo Fleet Year 1969 1970 1971 1972 1973 1974 1976 1978 1930 Ocean Freight 6,000 6,900 7,930 9,120 10,490 12,060 15,930 21,100 27,900 (1,000 tons) - - uJ Domestic 2ottorn 25 25 26 28 30 33 39 45 45 Ocean-goin, Ships h30 430 6o 510 630 790 1,240 1,rD0 2,510 (1,ooo dT.-t) -264- R.L.S. Shipbouilding Pro gram 9.63 Tne st-te of the inter-island fleet and shipyards, and the scope of currmn t government plans are discu-sed in adequiate detail in the Indonesia kIaritime IFission report-L/ Table 9.12 shows a-n es- timate of the rehabilitation and replace;ment sch'edules of the R.L.S. fleet in tha.t report, allowting a decline in fleet strength to 210,000 dwit by 197)4 and 190,000 dwt by 1978. Table 9.10 stiggests t,hat the fleet strength should be kept at 2)40,000 to 250,000 dTwt level through 19714. The implication of tlhe difference in forecast to the ship- building sector is that, assumng the sanme "out of service" rates as in Table 9.12, the estimate of newT ships to be built by 197Li would need to be more than doul-3Ied from 36,000 to 80,000 cbft. Since newT shios in th6 inter-island ra.nge co.st rourhly ten times the cost of rehabilitation, a rrore desirable option would probably be a significant revision upw.ard of the proposed ship rehabilitation prograr. Tne differences in pro- jection showr up even more dram-aticll1y when thle 1978 figuires are com- p-- fed. W;fith the higher estimated demand for neT:T ships, the feasibility of building more of thlese ships in domestic yards deserves attention. Tne higher schedules of ship rehabilitation and new-T ship constrlction also reinforce the case for an early pro,gram of repair and improve- ment in efliciency of the existing yards. 1 / Rport ol Indonesia Maritime !Thssion, June 114, 1971. Table 9.1-2 Preliminaryr Projection of R.L.S. Fleet 197h-1278 (Pased on 1970 slhips of over 500 dwt) Fleet at )I yr. 1970 out of DMT Less Net out service out of RIehab- of A.,ge DRIT ShLips rate service i-litate service D'WTT 1074 0 - h yrs. 1,000 .o8 36,270 (New- bldg.) 5 - 8 11 32,291 .20 6,470 , ooo 2, h60 1,000 9 - 12 "1 70,771 .5 39,000 29,000 10,600 29,630 13 - 1l 58,50o .75 h4)000 30,000 ih,ooo 60,700 17 - 20" 1 38,708 .90 34,600 17,000 17,600 1)T.,6oo + 20 40 , 9O1 ,7 .2 38,800 15, oo0 23,800 34,300 2)42)000 162,860 95,000 67,8,6o 206,50C f1leet at 19h !mD.T 1978 0 - hyrs. 3 ,270 .o6 2,175 2,175 30, 000 (NTew bldg.) - 8 1,000 .10 -- -- -- 36, 270 9 - 1 2 11 25920 .62 5926 3,000 2,900 1'000 13 - 16 " 60o .)O 24o000 12',000 12,000 26,730 17 - 20 ") 1d,6eo .o 26,7(60 10,000 1 ,700 h,7C0 + 20 " 3h,300 .84 2 ,700 10,000 l<,700 _____70 205,50o 37,175 47,3o 18,11 C. Eoto s: (a) "Qut of Service Pates" are estimated from- curves. It is only the 9-16 -ear gro-nDup un icri eT'ti C varia.ble sul.ist-nti-ti1.,y in tho first calculation. The "out of .service" rate is, for;.., t i.pro v. e Jin the secon-cl period as a result of generJ.O fleet opor-tional impremen . (b) 'J:i1-i.tation can excrued. the levrels shoirn acco-rding to cuLrrent dock-;-.C capacity, ' which is r.o5;n( . 1)U.(` Ohat i.r. 'our 'trears. -Rr rt of Indoi.ociz, .rktime i'-ission, Tol. II, June Lh, 1971. -266- Ocean Shipbuilding Program 9.64 The ocea-n sentor differs froma the inter-island sector in that the donlestCic-flag carri -rs must compete with foreigcn-flag ships. Arguments in favor of eoandh.ln- the domestic *.leet such as protection of service disruotion, influenc:ir- con:erentic-. decisions, etc- coul.d. b&eimportant considerations. Ho,:cver4 tho 1ke- econoric factor is the balance-of-payment, effect. Table °.13 shows proiected freight payments to foreign-fla:g carri ers for two cases: (a) The domestic bottom ratio attains LtO4 by 1976, and (b) old ship.s are rehabilitated or replaced, but the domestic fleet is maintained at the 1969-15170 lcvel. For putrposes of illustration, a shlipping, rate of $20 per ton has been assumed. It is noted that the freight payments in the table do not represent the net saving-s. There wTill be losses from dislblir-e- ments overseas and other foreign ex-change losses. If it is assumed, that tUhese losses total 50of of t,Jhe anP- 'ent saving in freicht payments, the net effect on balance of i-.1>nts wTould 1eP helf the fiwures shown in Table 9.13. This c:.:`rci_se shows that in case (a) tne not fore-i-Ign exrchangre paymernents w>ill increase from under 'O million in 1°71 to o ver $9i mrillion b7, 1976, despite a tripl½ng of' the doMestic oce.n- going fleet to at,tin the 4VoC share. Tol payment over the five- year span 1972-157 O Twill exceed NL0GO million. In casse (r,) where the fleet is Ik;ept at the pre!s-ent size, the toat*1 ppym.ent to foreign ships over 1972-1976, wrill be .,150 millioni. Irn 1976 elone, Darr,y Ten , will amount to almost .-i150 mdillion; the share of domestic bottom wTill have f'allen to under l102<. Th-ose figuroaD; are not offrered as a conclusive evidence that the domestic fleet tonnage should' be increased; the question deserves a far more comprehensive stuLdy.r This chapt.r is more narrowi'; concerned with the cuest:ion of C'niob-uilding. The issue of relevance here is not the shipping fleet pcr se, but wrhetlher or not l the ocean sector provides a^n opwortu3it~,r for the do.mestic ship- buildil-nv industry, or more precisely, for thMe operation of a modern yard capable of buildi-r ship)s in the 5,o0 to 2i0,000 ",wt ran,cre . lk Table 9.13 Freight Pym,ent to Foreign Flpag Vessels (mi.llion U.S. $) Year 1971 1972 1973 1 974 1975 1976 I72-t76 Domnestic Bottom lRatio 26 28 30 33 36 40 1 Freig-ht. Payment 117.2 131.2 146.6 161.6 177.2 191.0 807.6 Domestic TBotto.m Ratio 19 16 14 12 11 9 2 Freight Payment 128.6 152.4 179.8 231.2 247.2 288.6 1,099.2 Case 1 Domestic bottom ratio attains h0l in 1976. Case 2 Replace old ships only and maintain ocean-going fleet at the 1969-1970 level. -268- 9.65 Any proposition for a major yard in Incl.onesia to huild ocean- going ships w-ould have to be measured against the lar.-ely-r negative background of the ship-blulding industry. r evertheless, on the posi- tive'side, one might cite the labor factor, the market factor and the import factor. To the nation, there is also t'he general buLt very iriTportant factor of the potential contribution of shipbuildin- to its indust,rialization process. To project a merket size, it will be assumed that the domestic shipbuilding operation will supplyr lo0 of the ocean fleet requirement in 1973; this share wJil]. be increased to 30' byt 1976 and kept at 30' beyond that year. The hal'ance will represent ship import. The foKllowling table showJs the possible scale of domestic shipbuilding operation: 1973 197l4 1975 1976 1978 1980 Total Ne P remand, 1000 &.Tt for Ocean Shi ns 120 16'C0 210 2lo 360 330 Domestic Supply %f 10 20 20 30 30 30 1000 &rt 12 32 4A2 72 108 110 It is seen that the domestic shipbuilders can anticipate an ocean shin market of aroxrnd 100,00 to 110,000 dwTt per year beyond 19,76. This means that there could be a basis -for a. program that ,.will realize a prodtuct tion capacity of 150,000 to 2QO,C000 t,ons beyondq 1976, assuariing an avera5,-e capacity utilization rate of 6o;. Presumpbly, the larest ship built will be 20,000 dw,rt. Tlese est+irn.at.es do not. take into con- sideration the repair mcnrket for the domestic as wiell as the foveicgn- f1ag shin.s, and in this respect, the canpp^city projection is conserva- tive. 9.66 A prelimvinary cost-benefit anal-ysis, based on the new ship- buildi n- progra.m alone. is presented b elow. It Jis ssumqd that t,he program v-i±'l be establi.' ed over a six-ea-r pe-iol 1973-1978. Shin export has not been considered in the analysis, although it is not ruled out as a long-term prospect. -269- (M1illion US $) 1973 1974 1975 1976 1977 1978 o73tl78 Costs Fixed investment 7.0 3.0 7.0 -- 17.0 Worlcing capital 0.7 1.2 o.6 1.8 1.1 1.1 6.5 Loans on domestic ships 2.1I 6.5 8.5 14.6 18.2 21.9 72.1 Total 95.6 Benefits Residual. value, ships 1.6 4X.9 7.1 13.3 17.9 23.2 68.0 Residual value, fixed investment 13.6 Value added in mra ri- time indusstry o.6 2.2 4.2 l0. I 12.4 17.8 l17.6 Total 129. Under costs, tlie fixed investmvent includes dockcs, buildings, m'.chlim.ory ancd ot'hler yard facilities. The construction, sc heduled in sto st:gas, is to be complet`ed in 1975 corresnundinr to tho l' slhip r'-ud- Supply pro jectuiioi Cdi scussed e rlier. The working c,?Pital is estim ated at $60 per dwit incroase in ship constnra3tion to cover salaries, gener;cl empenses and material costs. The loan amount has Leen coml-pi`ted on the bnsi s of 75, of the ship price. For nstimti.+on pu-rposcs, the cost of shin constr,':cl ion has 'been assumq1d at $2,30 pe dwt, and tue sales price at $270 per d,.wt. The assumed construction cost implies that Indonesia by 1975 shoild att"-in t1he product,ion cost. level of Korea tod -.r. The sales price is based on sample recent intr. c r'.:icn.1 contract.s; a 6,250 dwt ship wsas.reported as contraicted at ,J ,7,CQ:D and a 21,500 dwt Fortune class ship at $`t,720,000 for deli-.rer,- in 1907T After 1976, the estimated cost n:-d scles fiFures sh-ioluld pr,ae, ;an Lnnurl return on investm.ent of 17'). UnJor^ '-.benefits, the resWi'l-al -270- values of ships and facilities have been computed on the basis of 15 years of servrice life for ships and 20 years for facilities. Tne vallie added in maritime .industry by the domestic-built ships is shown in equivalent value of net reduction in paynments to foreign-flag vessels. The analysis shows that the simple (undiscounted) benefit- cost ratio will be about 1.35. 9.67 The proposition for a major nDdern yard in Indonesia poses a number of additional questions, such as: 1. What is the relative priority betwTeen the inter-island fleet program and the ocean fleet program? 2. Should a new Jyard be built, or should an existing yard be modernized? 3. lih,y consider another yard, when the existing yards are largely idle? 4. Is any new shipbuilding program over 5,000 r-t premature for the country? 5. How does shipbuilding relate to other prografas wxithin the national industrialization strategy? 'Takin,g the above questions in order: 1. WThat is the relative priority betlTeen the inter-island fl eet program and the ocean fleet program? The emphasis today on the inter-island fleet is justified from the standpoint of the importance of the fleet to the domestic transport system. Also, from the shipping standpoint, the inter- island fleet is a separate matter from the ocean fleet. Howrever, from the shipbuilding standpoints5 tiae two programs are not separate and technically, a 10,000 ton hall is no different from a 1,000 tori hull. A learning period, however, sf;;)luld be necessa-.r, and speal:ing for the industry as a whole, the pard (either of the a'bove yrardrs or possiblly the partially const"-!cted Klaopin or Pelita Bahari) -271- to build ocean-g-oing ships will hinge on the joint venture possibilit'r wJith a forein shiip,ard. Possiblyr, a -iell-designed newX yard withoLt. any acciumulated problems wrould apneal best to a_ potential venture nartner. 3. V:hyr consider ano'her yard, when the existing yards a-re lergely idle? Reaons are complex as to whyr the existing yards hare been idle, but they ultimatel,y boil do'm to the stuate of the econolmy oL the past years. With the current marked improvere-len in the general econoriy and the urgency oL the programs in the inter-island shipping, sector,. the yards shouLld soon be filling their docks. y, 1974i, the repair require,ients for ships of all sizes has been conservativelyr estima-ted byr government sources to exceed onfe million dat. Is any newt shipbuilding program over 5,O0O dw-t premature for the country? The question mig,ht be rephras3d to st-ate wr!hether the indus- tri'al infrastnrcture is too wTeakc to support a me,jor shipbuilding effort in Indonesia. It should be noted, first, -t1 at the proposition on ocean shipbuildiLrng calls for a rather modest. program. Second, shipbuilding is primerily, a steel fLbric=tion and construction oper- ation arAl can become a healthyi industry of true local econorric value without a significant fnout from the donmestic supporting irndustries. The breadt'.h of required sub-indust.ry input is very large, yet th.e depth in any, single sub-industry is ty-pically quite shallo-.w. It might also be not,ed that a shipbui ldingT enternrise i.s not linlk;E:d to shins as a final product to the same degree that an autD!' .obile industry is lin'ked to automobiles. Its ;.'>.iln.nfac t.rrcng, processes, sk,ills, and equipment are not specifically end-product, ori-ntue. Therefore, a shipbuldind nf.acilit-y can be th,oug,ht of as 'cein: -loser to a primar- induistry than to an end-produc-t Lurer. 5H. How does shi.pbuid , relate to ol:..er pro gra:ms wi-ithin the national industrialitzstion stratey,? FlYoD a technical view.po-int, an indust ial z atio n pl,an c,rmte. re arouind mobile and station*.ry equipment, ond an c nc.u,trielLtion pl:^n centnered around shipbuilding can be developed quite inder-endenitly from one another, wqithout the necessity of 1-? nsinsr priority beti-le--n the tw!o . Tre-y are ob-vously co:-plemenr t. ry. CortaRin foundry , .=,-1ults, stamTir.gs, ower tran-milsion sub-assebl i1ics, consistent iwit.h th)e capabilities of the mir. le ecquJih:ment industries, will be reullired by the shipbuilding indistry. Furthen-.oro, these sub-in.: tr are ex"n'.ndalle. For e-MlT)10-, the p0-o-'r-t.rain sub-ass.lv iradust -: co'J' rlanulaztl.urc sh-i piinps, oon resnors. alO.T'S, and other related equip- reit. Therefore, t.he 1i.n:n,-' e 11 ' .x*il as the incdust- rilizati- --ril c- ceeds. Initial. olns for shiih) uildi n- could be developed on the p.! 'P that this indu-t would constuLct the hiill and suiperst.Arct.ure and certain fabriceted dec'. mpchinvr!y, whiloe e:-ines, co-ntrols rid c-rc- b-a'- . ';ie 5 'wol) d be i..:"fpo.re. -2 72- 9.68 The case for launchinng an ocean-going slhi'TpDbuiIdinc programn has been outlined in some detail as part of the Mission s purno -ose to examin- ootential area.s of development opportunities for Ind,o'l a. A central point brought out byr this stucly is tha,t the plarnnin, in the shipbuildingr sector, principally focused on the inter-island fleet at the present time, should be extended to includei the ocean-going, fleet so that an integrated approach to developmcnt can be worked out. It would sopear that the proposition to establish a mdern yard for building ocean-going general cargo ships for the domestic fleet has sufficient near-term merit to warrant a feasibility study aimod at providing a sounder basis for planning. It could well be that the combined inter-island and ocean shqip program wuill contain sufficient leverage to transform the shipbuilding industry into a vital and competitive indulstry. WTith refe-rence to the crealtion of an Indonesian I4aritJime Bank recomnended by th e Xaritime Mission, con- sideration should be aiven to extending its scope to cover the financirg of ocean ships. Tihe proposed faasibility study shouild cover: a. Ocean freight stpKistics and forecasts b. Performance of tihe present ocean fleet c. Comparative meriits of shipbuLilding versus ship import d. Iaterial supply and cost e. If building of ocean-going ships can be justified, the type and size of shins to be built f. Location and leyout of the shipyard, with due regard to jointu venture possibilities. -273- Sumriary and Conclusions Q 9.69 The underdeveloped state of the engineering ind.ustries, even by th? standards of the developing countri.es of Asia, is the bottle- neck of irxdustriplization. .in -.ssessment of the prioriti es of this sector should be necessary in the plannTning ex ercise for the next five year plan. In contrast to rehlabilitation pro7raris thet serve in the mrin to brake intdustrial decline, strategic programs are needed to provide the dr-Lving force to advance the industry. The strategy calls for' three parallel developmenits: A. Ibbilo equipme-nt industr development a. Expand production of smal]. trUcks and buses b. Establish production of constniction equipment, tractors and heavy duty trucks B3. Stationaryr eoiprment inrdustry developn=re nt a. 3xpand production of farm equipment b. Develop productiQn of 1 -ht ndustrial electrical equvip- ment C. Shipbuilding- industrr development 9.70 The industries and pro¢rrams relevant to the strate'g,y w ere exanmined in the chapter and are recapitulated belowJ: 1. Supplier sector -fxtrnemely waakz: build-up through natural nrkt. f,'orces - is a slow- p:rocess and coulld hold up inchistri-,Qiatirn; promote t.hroulh bz;c'7,.Trd linl:c-e in strategEi.c. 'Dinduc' sectuors. 2. Ragi on. l foundry cent-ers Imrortant, but pnlanning must be closel- 'tied Lo rrlar':ts they seaNe; pla-nnnc should1 be f'o future, not pnst. T,rn§ -.. e -'US. 3. Light m-nufacturin- sector Capable of developing under private ini.tinztive; po ssaible gover.rnment ro-le in estabhlishenst of a liight industrial estate. h. Automobile as se- ly industr,d Sug,rest a shift of developrinnt r,1' s_ fro.m ps-ssengPr c.rs to trucks and bus7e*s. -27L- 5. iobile eouipment program Key is finding competible product. miX satisfyring r:s.r dem-rid; t-Tpical product miX su-,i-e-sted and analyzeai; l'Srat- group could be sole enterprise capable of undertalking, pro- gram; orient plEanning tow.T.rrd: buliding supplier sector. 6. Agric'1ltural equipment program Build program arouind irri -a' ion piumps; government assur- ance of market essential. B.B.I. group could undertake program and become first major maker of agriculttural equip- mer.t in coantry. 7. Electrical equipmentln industry Thcouraging 1--eginnina, but i.ndustry at too early st,ate for major program; mwnarlket and technology apparently ½vor development, but situation in electric powrer -sector i.1ust firstu clarify. 8. Shipbuildirnu program Ocean shipbuilding deserves close lool; inter-island and. ocean fleet logically, separate from shipping viiewpoint, but need not be separate from shi:pbuilding vi.ewpoint; direction of committment to ocean s1inbWHuildirr, wfill deter- mine future character of this.industry. 9.71 It is not surprising that the above programs alrmost natulrall.- polarize around the twT,-o maj-or indu1strial centxers in the countr'-- Surabaja and Djakcarta. Surabaja wzill be thne log.ical focal point for the develoo:ients in mobile equipment and, a-ricultu.ral equiprment, whes Djakarta will be the center for the develomrents in light ranufa.ctulrin>, automobile industry. and electrical equL pment injdustr-yr. Shipnbuildiln- will be diiLded 'between thc twso locptions. The surtli-er i.nr hSt i es as well as t1e recional foundries will na{tur;Jllv. reflect the res;ec- tive cheracter of the industries in each region. d -0 . ~ - . . f . ., - i bbh - *t.. U - -~h 3 I.. t... ... 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" ,, : . . i .-..- - - --. ., .. - . . 4  ." - I 1"'t ,- " -- , ,,:s ,.  " , I.,  .1.L . -...%I - .'. ... .- ' ` -"'% ",  - - - - Ih.iJ I.I,1 ,, I'.--- Z:-,,-.6-.- ;...,1--..-,-. -, -` - I.A -.'-'-.,j.-f-.'-1 , --Fr-:;, .. i-. -.-1 :,- ,"I,....... .4 1. -11, .-..I-, ,I I ...I--, ,. , ,. "...-`-,-.-.-.,,-.'-- -- -.- 71-....,,", -  '. ,- - -' '.,. ' --_ -'. ,' ip.''--e 1jr.4", ,t,1---,-j--,.!- -, ..-2 f' .. ,........ ,;..;, -,-11 . ...-.j..I'I"- z ., . -:, . ". .., 1.1I-1 -, C-0. m.;.,r..III . . .L,.:--L- .,.I-, , -1.I.:..'!...".--- '. 0, C,- .--,,"- -,,,?.: ". .",2, .j )5,2 . , . , ".. , .. r,, i----....-.--:-i ,J - .;. ,-.-.''- --- ..,.- J , I ,. p i-f , ,.,.t I.I'.1 -.,...1..., -- 1, .,,. , .. ..-'. .-!-I :, , -.. Z . , -":w-,! -,III VJTC[ OTIVyt CHAPTRM X - PETROCHEIIICALS 10.1 This chapter will prusent a concise view of the potential for petrochemicals in Indonesia. This will include a brief exar ina- tion of the current status of the products in this industry, together with a sumrrary of the petroleun industry. A stdke, petroleum industry is the basic ingredient needed for starting a petrochemical industry. The petrochemical growth potential for Indonesia and foir areas that are tributary will be presented; thc.se growth projections will be compared to other historical patterns elsewrhere. Linear programmxing, the investment evaluation technique used in this review will be dis- cussed and the results of over twenty alternative investanent cases covering the time period 1977-1084 that appear to be of interest will be presented in some detail. A detailed discussion of the specific petrochemical data used in the linear programinng model will not be undertak-en but is included as part of the description of the model which is shown in the appendix. All data and: methods are presented and explained so that other analysts could use this model for further work. In addition, an organizational. plan for essential foreign and Indonesian collaboration will be suggested and an outline of how it might be accomplished will be presented. Reconmmendations concerning future work, timring, and cost will be offered. Current Status of Petrochemicals 10.2 The current status of the petrochemical industry in Indonesia is confined aloclost entirely to a few processing piants. These are essentially small labor intensive factories where pur- chased plastics and resins are made into consumer products. Of the active processing plants less than half a dozen are mlore than rudimentary cottage industries. Cne plant went into receivership not long ago due to "inadequate" management. A moderate size plant in Djakarta is typical of the type of processing operation that must be multiplied many timaes to supply future needs. The Djakarta plant represents an investment of about Ql1,000,000, employs 300 people and hias a capacity of about 2,500 MT/year of plastic consiuner, items for the Indonesian market. The quality of the products made is adequate for Indonesia., which is not yet quality sensitive, but the quality is not suitable for export. Similar products made in Hong Kong and Sinigapore are noticeably superior to products made in Indonesia. Du.e to quality problems the commercial market and the engineering plastics market are almost ccnp].etely underdeveloped. These represent newf use opportunities and demand will grow rapidlXy in the future. Judging fro.m a survey of retail prices of the consumer articles it appears that the processing operation is very profitable. It was imocssible to obtain an income statement or balzace sheet. The future develop- ment or stimulation of an additional 100 small to mediium processing plants is a reasonable goal for a coumtry Cas diverse and densely populated as Indonc_ia. To effec.t the stimulation, however, it will "76- be necessary to build on the current narrow base and to protect newi fledging businesses by restricting competition for a few years. It. -will probably be necessary to encourage the establishmient of plastics processing plants to provide them with protection by whatever measures are most suitable for a limited period of time. This form of stimula- tion will be necessary so there wtill be a normal market outlet for the monomiers and polymers produceU- at the core facility. 10.3 The only current activi-ty to manuf~acture a petrochemical product is the polypropylene plant which is nowi being built by Pertamina at Palembaig. There is also the possibility of a caprolactun plant. at Surabaja, but this appears to be a weak venture. No doubt it would be possible to graft other small petrochemical manufacturing industries into various existing facilities;' however, this shoulId not be pursued as it willI inevitably lead to uneconomic-sized plants that willI be a burden in the future. Unf ort-unlately, for developing nations, manufacturing the monomer and the polymerization of it are extremely capital intensive. It is only the processing step that is not so deriand4_ng of capital in relation to the~ numiber of people employed. An additional caveat is that capital intensive in,_u.stries are also technical intensive, and it is often more difficult to entice tech- nology than it is to entice capital. The total bsence of competent technology (and in depth) is primarily rezsponsible for the slow growth in plastics; it is not basically a lack of effective demand. The entire induF+ry, however, 'IS currently at such a low level of develop- ment that it is lacking in the abili-ty to develop rapidly, even tLhough the use of plastics continues to growr rapidly through imports. Although there are obvious shortcom-,ings in tehrnology, i-n maoulding equipment acquisition, maintenance, and in managemient, etc., a comamon complaint voiced by local managers is the depressing effect of tight money, i.e. 2½g percent per month for working cap-ital is a normal charge. The relatively low level, of processing, pl-ant activity is notL. apparently caused by lack of demnand or by any difficulty of-introducirn- plastics into the market. The factors previously cited, i.e. management, tec'-- r-;ic&l Iziowhow, high interest rates, etc., relative1ly poorer quality thz:n imports, allI have contributed to holding back local activity but this has not, except indirectly, constrained the acceptance of plastics by consiumers. Price is a major f actor, but surprisingly several spot surveys showied that some imported products were selling better than products made locally even though the imported product was 50% to ans much as 100%" higher in price. Furthermore, the demiand for some items, not made locally, but which could be made locally (i.e. film for wraping)without a quality problem, appeared to be in tight supply. Thils indicates that there is an unsatisfied demnand for some of the more rudimentar-Y products, and this is just whatv is needed to form a good. demand base for a petrochemiical core facili-ty. 10.4~ A look at the current situation, and the obv%ious manifo-ld shortcomings, is not ballanced until the natural advantages of geography and -resources are placed in perspectuive. Indonesia is f avorably -277- situated geographically. Indonesian products, (petrochemicals and oils) can move economically to the West (Africa and the Indian sutbcontineznts), the North (where 800 million people live), the South East (Australia, New Zealand) and even to Japan. Furthermore, Indonesia, in contrast to Japan, is abundantly endowed with hydrocarbons, (exports of 50-mil- lion tons versus Japanese imports of 150 imillion tons) some of which can be manufactured into petrocheird.cals without diminishing other petroleum sales, In effect, therefore, domestic value added can be increased through the selective use of these hydrocarbons (which cur- rently have minimum alternate value due to fact they are unexploited gas reserves) to produce petrochemicals in competition with Japan and from a geographical center more favorably situated (the freight advantage is 25$/M1T to some locations now served by Japan). The favorable geography and the very low alternate value feeds must be supplemented by manufacturing know-how, a suitable financial and tax structure, and an exportable blend of products. The manufaczturing know-how is available from foreign sources. Favorable financial and tax features will require governmenti action similar to incentives now offered other industries, and it will take government as well as com- mercial planning to launch a project that can meet domestic Indonesian requirements and export requirements at minimum cost. The new petro- chemical core can easily co-exist writh petroleum activities and in fact, they will complement each other technically and commercially. Background for Evaluating Petrochemical Development 10.5 Tne Indonesian petroleum industry was developed over a period of 50 years by the major oil companies, and is now; operated by Pertamina, an agency in the MLnistry of Mining. When Pertamina acquired the oil operations the basic activities of crude oil produc- tion and refinery were concentrated on the islands of Sumatra and Kalimantan. In the last.5 years many new areas of exploration and development have been opened. The future of the industry is exceed- ingly bright. The largest reserves of crude oil are still those operated by Caltex in Central Sumatra (the Ninas field) and sorne estimates place the recoverable reserves in the range of 10 billion barrels. This is a very large field by any standard. Currently, this field produces about 750,000 BD, and the concession extends to the year 2001. As a source of petrochemicals feed the 1Ninas field is "undersaturated" and, therefore, cannot be thought of as a source of gas. In South Sumiatra, where crude oil production also exists along wsith two refineries, there are commercial gas fields, and the gas is in use for the manufacture of fertilizer, as well as for fuel. The gas in Soluth Sumatra was discovered some years ago. There have been some extensions in reserves as well as new indications, but it is questionable if a single field of sufficient size Lo support a petrochemical complex is likely to be discovered in this area. How- ever, there have been discoveries of gas in other parts of Indonesia on which a petrochomical industry could be based. In any case, la-rge petroleum reserves do exist, and the ultimate developmlen't of a petrochemical industry is assured.. The timing and extent of the development are uncertain and study is needed to point-up the risks and the opportunities. As is'shown in this chapter, Indonesia is now at the point where decisions can be taken regarding the timi n and the extent of investment and development of petrochemicals; furthermore, it is also now appropriate to establish a new fonnat for introducing a highly sophisticated industry, like petrochemicals, into an economy and country that is going to need help from outside for a number of years. 10.6 Indonesia is the largest producer of crude oil in Asia. The current production rate is approximately 1,000,000 B/D, and there exists the potential for 2 million B/D by 1980. Along with the rapid rise in crude oil production, there have also been recent discoveries of gas in Java, Sumatra, and Kalimantan that lend credence to expecta- tions that large gas reserves soon will be added to the oil reserves. The limited information released indicates that the Kalimantan gas discovery is the largest so far. Cae well>tested at over 30 million standard cubic feet per day, but no data have been released on estimated reserves or quality. Considering the geology in the area it is reason- able to expe-It at least a trillion cubic feet reserve, but there is -no firm-information as yet on the quality. Howiever, the existence of gas in North Sumatra has long been established, and some of the recent exploration efforts appear to have found promising new reserves, although the extent remains uncertain. Some industry sources antipate that within the next year gas reserves will be sufficiently defined to show if large scale commercial development is warranted and of what ty-pe. A large petrochemical complex should not be started on gas reserves of less than one-half to a trillion cubic feet, depending on the quality and location. This appears to be reasonably certain of achievement in one or more locations. 10.7 A proven reserve of gas is the single most important factor needed toward developing a petro^hemical indruotry. If the new gas reserves turn out to be mostly methane, (i.e. more than 60;ff) a use better than petrochemicals can likely be developed. For instance, methane is more useful as an export or in fertilizers, on in steel manufacturing (e.g. see Chapter VIII) thcan as a petrochemical fecd. A petrochemical industry can be based on natural gas, natural gas liquids, or on refinery by-product gases. It can also, to a limited extent, be founded on methane-rich gas but in the cases we are considering, the basis of feed is ethane or heavier. 10.8 Large crude oil reserves and the existence of refining capacity can be supportive to a petrochc-mical industry, but they are not essential in this instance. Gas is the predominate feed in the U.S.A. but nachtha prevails in Japan and in Europe, and in some areas the advantages of various feeds change frequently. The favored feed depends on geography as well as on nattual resources, and the prox-imity to markets. RefLnery streams that might serve as a feed are not a factor in Indonusia at this stage of economic development. Japan, on the other hand, depends on its refining industry to make naphtha to feed the petrochemical plants. In Ja-o. feed costs are 18-20$/T1T for naphtha, whereas the max±.um alternative value for ethane or nrop.r.-. gas in Indol esia is probably 10$/NsT (about 20¢/DU2I BTTU). The point is that crude oil fractions such as naphtha or gas oil which could serve as primary feedstocks to a petrochemical facility, are not a real factor in this case. For Indonesia, the refinery by-product approach is not a serious alternative to associated rich gas. For examiple, the current value of Indonesian crude oil in the export market is betwieen 2.50- 2.70$/BBL, depending on the market and on the use. Expressed in terms of the cost of heat, this is about $.4O/million BTU or roughly twice the value Pertanina currently places on gas. Naphtha and gas oil values would be even higher (20 to 30$/MT) and petrochemical yields would be less attractive than they wzould be.for gas. If ap- propriate gas reserves are confirmed, the growth of a petrochemical industry can proceed without in any way, detracting from exports from the oil industry and with a much lower feed cost than is available to competition elsewhere in Asia or Japan. 10.9 Three distinct categories of activities are involved in the development of a petrochemical industry. The three are monomer produc- tion (i.e. ethylene), the manufacture of the polymer (e.g. polyethylene), and the processing of the polymer i.e. injection molding to tooth- brushes, bottles, building materials and many other products. Eacl- step is necessary, and there are major cost advantages to planning the production of the monomer and the polymer jointly. Processing of the polymer into consumer goods can be nurtured as a smaller-scale industry; therefore its development, although essential, is not pre- planned to the extent monomer and polymer production is. Furthermore, the smaller resource entrepreneurs will be able to finance and manage processing operations, but the planning, financing, technology, and operation of polymer and monomer facilities are not wJithin the reach of the private domestic Indonesian sector. Ibdel for the Ana2Lysis of Petrochemical Develonment 10.10 The purpose of the analysis that folloTs is to demonstrate the conditions that will permit the introduction of a petrochemicals industry on a sound economic footing and to explore the effects that alternative assumptions sihout costs, product prices, plant capacities, etc. have on the level and timing of investment. The analysis shows the various options open to the Government and interested foreign investors. After considering the many difi&erent approaches available to carry out the pre-feasibility study and to insure leaving behind a methodology that could be followed by those seri.ously ,interested in undertaking further detailed work, it was decided to build a mathe- matical model of the options, opportunities, and constraints and to use the model as the basis of the pre-feasibility sCtudy. Thus any interested party or group can reproduce ouir results quickly or test variations that will become important as the project matures. The model, which is described subsequently, isre'.aLively simple in concept at this juncture, but it is broad eniough to reveal the scope, economics, and staging of the development. The aspects considered in, the model cover all the conventional parameters important to any new venture. 10.11 Building the model entails the acquisition of marketing volume and quality data, product pricing information at po.int of sale, product variety requireimrents, transportation costs to the markets from the plant, manufacturing options with respect to the feeds (inputs) and yields (output) for each activity in the scheme and all associated variable and fixed costs, and it also requires information on invest- ment, tax, and other financial matters that are important in optimiz- ing the model. Models can be built that are extremely complex and large, containing many elements from muny- activities. Large complex models are useful when the data is accurate and current, and when there are many complex interactions that are known to effect the optimal solution. Ultimately a large complex model (i.e. on the order of several thousand activities and constraints) will probably be needed for the analysis of the Indonesian petrochemical coi,aplex. However, until the data concerning markets, etc. can be i-mproved on (through more detailed study) it would not be productive to attempt the construction of a large model. Therefore, the model that we have constructed is designed to provide us iiith first level insights as to what are the most important relative elements. The model is fairly small; it has roug,hly 200 activities and constr4,nts. We are primarily concerned with the expected magnitude of invest-iment and its profitability; the sensitivity of investment and product mix to product price changes; the extent to which maximun foreign exchar-ce earnings or savings are consistent with maximizing the economric rate of return; for instance, maximun. income does not necessarily result in maximum rate of return. IWe also examine the effects of minimiz- ing investmienit on profitability and manufacturing costs. The model will also provide product "transfer-pricet" information that can be used to indicate the buy and sell levels for every monomer and polymer tramsfer point in the pet.rochemical comaplex. The mathematical teclmique we are using is know.,n as linear pro-ram.u.:rig. 10.12 A brief word on linear prograzrzning is in order for those unfamiiiliar with it. A fulll discription of the molel and the solu- tion teclhiques is given in annexes to this chapter. In general, linear progranming is a method for finding the stratiegy or the course of action that will lead to the allocation of a limited resource at maxirnmi profit or minimui cost. In our situation we want to program the developmenti of a petrocheaifical industry o,o that it will yield the best rat,e of return under soecified conditions on the demand in donestic and ex;port markets. Hence our use or linear pro-,sxnming is for investment planninp&, and we will attaept to find an overall strategy that not only satisfies the physical realities of the malket, with respect to quantity of product needed and price (using world m;arKet prices), but wre will also i:-, ooe techical lnimts that must be met conicurruntly and, witlhout violating an;r oi these -2 8L- constraints, we will find the maximum rate of return that can be earned, and the invsrstments needed. Very little recent construction has taken place on which to base investment cost estimates and the same ignorance exists relative to local operating costs. Consequently, wqe have used contractor estimates of both construction and operating costs in other areas, and in general havre raised these by 20-30, on average to reflect conditions in Indonesia. 10.13 One of the pivotal aspects in our model is the product dem,annd information and the pricing of the products. Unfortunately, there is virtually no reliable data concerning corlsumption of even basic goods, and the demand or consump-tion informiation on plastics, a minor consum- able, is a hopeless loss. To fill this gap from Japanese wid U.S. sources we obtained good quantity (but less relaible price) infor.na- tion on Japanese and U.S. exports to Indonesia. This was supplemen-ted with data from PertamnLa, various Banks, arAd from. importers of plastics, resins, etc. As a class, locally produced products from petrochemicals are relatively new to Asia. The first monomer and polymer plants were started in Japan in 1937. In the first years after that the growrth rate was explosive, with consumption often doubling or tripling each year. Following the initial explosive growth period there has been a steady and high rate of growth in Japan proper and among the natuions that Japan serves in South East Asia, including Indonesia. However, the demand for petrochemicals in Indonesia is currently very small, i.e. less than 50,000 metric tons per year for all items; yet three years ago the demand (as measured by imports) was less t.han one third as much as it is now. 10.14 - The estmnated normal or most likely grow.th rate for petro- chemuicals demand in Indonesia is show-n as Figure 10.1. F.o:m a very low base at the end of 1970 we project that domestic consumption of basic petrochemicals i.e. polyethylene (LD and HD), polypropylene, polysty-rene, and polyvinyl chloride will reach 275,000 1,T/year in 1960 and 540,000 M T/year by 1985. The curves are consistent writh an income elasticity of about 1.7 and a trend elasticity of .2. These are judged reasonable for Indonesia. The growrth rates for individual prodLucts are shown below: 1972/1980 Polyethylene 19% Polypropylene 17% Polystyrene 14.5% Poly Vinyl Chloride 18% The projected growth rate showin above repriesents a concensus ao-ong inforiation suuplied by Japanese companies, studies made by interna- tional chE!L,iccal companies, interviews in Indonesia and the, mission s -282- ESTIMAATED INDONESIAN DEMAND FOR BASIC POLYMER POLYSTYRENE THOUSAND MT /YR 700 . POLYPROPYLENE 600 PVC 500 400 300 POLYETHYLENE 200 100 '1 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 ° YEAR I3RD - 6093 own estimates of trends of industrial development. On balance, how- ever, it is likely that the estimates of future growith are low as op- posed to optimistic, again because of the very- low current base in relation to population and potential usage. LEven so, as is showm below, some of the model runs use a demand esti-mate that is 40 per- cent below these estimates. By coamparison the growth rates expected in other nations are: Vinyl Total P.E. Styrene Chloride Other Ethylene U.S.A. 10 8 11 8 9 Europe 10 8 15. 9 10 Japan 12 11 13 8 12 Iran 15 10 15 - 10-.15 A growth rate for Idonesia that is nearly double the rate of industrialized nations is not surprising L view of: (a) the very low current base; (b) the large population with a growing income; (c) the large variety of substitutable plastic applications (d) the high rate of growJth in the last three years) and (e) th'l historical performance of demand in other Asian nations. There is, however, a need to recognize thab the projected growrth rate is founded on the outlootk that Indonesia will develoo economically, free of political unrest and essentially enjoyinmg close cooperation between state planning and free enterprise. As long as these conditions can be maintained, Indonesia' s- special advantages of raw material and geography will permit a petrochemical industry to thrive. Implicit, however, in this growth is the corntinued infusion of sufficient foreign technical know-how capable of planning and operating petro- chemiical facilities as well as ap.rropriatie steps to export products not needed inside Indonesia during the early years of the project. The funds to starti the industry must likewise be pirovided in large part by foreign investors. It is also fairly evident that the demand inside Indonesia is not likely to provide a large enough marrket to justify a project alone, at least in early years, but there are sub- stantial tributary markcets that Indonesia can expoort to until the local demand. develops to a level that would either justify backing out of the export markcet or expanding the facilities to maini-tain or increase exports. Thus for the initial petrochemical facility Indonesia will need to rely on sizeable export markets (this means supplanting, Japanese and US exports) and in fact she must aggres- sively seek out and cultivate these marlcets long before the sale can be made. At the same time ex:ports are cultivated, the domiestic market iriust be encouraged because this is the essential market with respect to a "break even" on the facilities once they are in opera- tioIn. On occasion, it rmay be necessary to avoid meeting dwuping competition head-on, andl when this takes place it will fall on the donmest-ic Indonesian marlet to provide "breaic6ven" sales. No doubt, conservative plannring can obviate some of these risks, however, -284- facilities that are plarmed on free market economics can become a social buarden if all the risks are not adequately provided for. The exports that Indonesia can capture a portion of will be in Hong Kong, Thailand, Ph-lippines, Bunria, M41aysia, Singapore, Australia, and New Zealand. Spot sales mioht also take place to Africa, India, Pakistan, and the Middle East. In some instance exports to Japan and the U.S. can be visualized, but these should not be relied upon in future planning. 10.16 Figure 10.2 shows the estimated demand of basic petrochemi- cals for countries tributary to Indonesia. The estimates are projec- tions of the 1970 (first six months) demands based on statistical data showing exports from Japan and from the U.S. To the extent that supplies from other nations come into these countries the estimate understates the demand. The mission was not able to get accurate import information from each country. Interviews with industry and government representatives are the basis for the growth projections. The countries forming the export base for Indonesia are non-petro- chemical producing, except Australia. Consequently, there are few restrictive tariff or duty regulations, and certainly there is no reason to expect that any of these nations would favor Japan or the U.S. over Indonesia as a source of monomer or polymer. It is well known, however, that Thailand, Singapore and the Philippines have petrochemical projects of their own unader study, and it is to be expected these nations will raise barriers to imports that threaten their own production. The mission is not sufficiently familiar with plans in each country to know if there is some area of industrial collaboration that might be feasible, but the possibility should certainly be explored. For instance, Indonesia might export ethylene, styrene or vinyl chloride to each or all of these countries at very attravtive prices, and buy back a variety of polymers of other derivatives. Unfortunately, it has not yet been possible to develop any mealingful economic multinational cooperation in Asia, and the mission has concluded that it is impractical to base any part of this evaluation on any condition so problematical. Althouzgh Japan and the U.S. are the main coifrpetitors now, it is very likely that Iran (with Japan) will be a major petrochem:ical exporter by 1975. Just hows far East Iran will reach for markets is not known, but Indornesia will enjoy an advantage east of Ceylon. 10.17 Due to the demand growth rate, and the effect it might have on the itiming or the size of the petrochemical facility, it was decided to divide the demand projections into three ti-me periods. The years 1977, 1980, and 1984 were selected. Probably it would be about 1977 before a major petrochemical complex could be fully operational; a plant could be completed by 1975 but this is considered unlikely. 'Tle estimated Indonesian market in each of these years is shown below: 0 -285- ESTIMATED DEMAND TRIBUTARY TO INDONES!A (1) BASED ON JAPANESE AND US IMPORTS POLYSTYRE!IE THOUSAND MT/YR 140i0 - POLY VINYL CHLORIDE 1300- 1200 POLYPROPYLFNE 1100 1000 900 S00 700 600 POLYETHYLENE 530 400 300 100 -n 71 72 73 74 75 76 77 78 79 80 81 82 83 84 m (1) Thailand, Singaporo, Malaysia, Hongkong, Philippines, Burma, Australia & New Zealand IBRDD-6(94 -286- (Metric Tons) 1970 1980 1984 Polyethylene 150,000 175,000 310,000 Polypropylene 30,000 60,000 90,000 Polystyrene 25,000 30,000 40,000 Polyvinyl Chlorice 40)000 50,000 60,000 Ethyl Alcohol 5,000 10,000 15,000 Benzene 10,000 10,000 10,000 Toluene 6,0ooo 6,ooo 6,0o0 Xylene 5,000 5,000 5,000 Vinyl Chloride 10,000 10,000 10,000 Styrene 5,000 5,000 5,000 In preparing these demand estimates for the linear programming model each was treated as an upper limit rather than as a fixed requirement. Consequently, in the subsequent discussion of case results. a short- fall in meeting a demand is indicative of a product being under-alued and hence uneconomic to produce, i.e. it is better to continue to import. The first five major product demand estimates are based on better -data than the last five, and it is for this reason that the estimates for all three years is the same, plus the fact that at this level these products (lo not constrain the model solutions. However, since demand estimates are always subject to error we have also studied the conservative case of demands at 60` of the foregoing; these and other results will be discussed later. 10.18 Next to importance to product demand information is realistic price information. The price information used will be discussed later. 10.19 In addition to particular demand and price information the organization of the model can be described as being composed of the following major parts: 1. Feeds or raw materials - type available and cost 2. Petrochemical plants and yields or outputs 3. Operating costs 4. Investment costs 5. Ilarket demands - Indonesian and export 6. NIarket prices. -287- The feeds or raw materials considered are as followis: 1. MIethane - as. a fuel only 2. Ethane 3. Propane 4. Butane 5. Naphtha 6. Gas Oil. Each of these feeds produces a different range of olefin products, and each is subject to its o-wn set of operating and investment economics. Since the most suitable site for a petrochemical complex is open to question at this time, and since the exact composition of the gas is not known, the case studies are based on selecting any of the foregoing, rather than on a fixed composition. When an actual gas analysis is available, the ratios can be fixed. As will be seen later there is not too much overall cost advantage for one feed (gas) over the other, in this particular Indonesian situation. Naphtha and gas oil were in=luded in the feed options but actual case studieF on these potential Leeds have not yet been made. Regarding price of the feed the mission was advised to value the gas at the equivalent of .20 $/million BTU's; howev.r, we also determined the directioral effect on the economic optimum for a gas price twice as high, that is, .40 $/million BTU. Availability of feeds was assumed to be unlimited. In fact, however, it is likely that the location of a large petro- chemical complex would have to coimacide with a gas reserve of about one trillion cubic feet (37 million metric tons) to insure a 40 year supply of the proper quality. A reserve of half a trillion cubic feet would probably suffice if the reserves were determined conservatively and if the general area was promising for furtiher development. 10.20 The variety of petrochemicals plants included in the model has been restricted to basic type plants and includes: 1. Gas separatien 2. Naphtha and gas oil feed prepation 3. Steam cracker * 200,000 I1T/ . 4. fromatics extraction and separation * 10,000 MT/B 5. Polyethylene plant * 100,000 14P/XR 6. Vinyl chloride unit * 40,000 MT/YR -288- 7. Poly vinyl chloride unit * 20,000 MT/YR 8. Ethyl alcohol unit * 10, 000 MT/YR 9. Sturene unit * 20,000 Y1r/YR 10. Polystyrene plant * 20,000 lIT/YR 11. Butadiene extraction 12. Styrene butadiene rubber unit 13., Polypropylene plant * 15,000 MT/YR The model is permitted to select which units it wishes to build and the selection is made oa the basis of the costs, and prices of inputs and outputs. None of the units is "forced" into the solution; how- ever, due to the fact that it is generally uneconomic to build plants that are "too small," the model is not pernitted to select certain units unless they exceed a certain minimum size. The units with an asterisk are canstrained by a minimum economic size. The minimum sizes are showm opposite the asterisk. 10.21 There is a cost of operation connnected with each petro- chemical unit when it is built and produces output. Nlormally the main cost elements are included in one of the followJing: Labor, supervision, overhead, etc. Maintenance Catalyst Chemicals Utilities Royalty Fuel Insurance and local taxes (not incomrre) Foreign technic,al assistance Also when it becomes feasible the utilities item can be subdivided in more detail to: Electricity Boiler Feed Wdater Steam (high and lowi pressure) Cooling water Bags and Packaging When better information about a specific site is available the fore- going czn be estimated with accuracy for each petroch-cmical unit and for the offsite investments. However, in the meantime, we have utilized the overall categorv of utilities for rno3t ol the foregoing (except electricity which was assumed unavailable at rr location) and all costs are based on similar co:ts for sim-ilar units in other -289- parts of the world. The actual operating costs used are shown in the model matrix in an annex to this chapter. 10.22 The. investment cost of each unit has been estimated and is dependent on size. Due to the fact that large units produce at low cost and since Indonesia will be required to compete in the world market it was anticipated that the individual units would be large to compete and costs were estimated accordingly. Shown below are the mi.nimum and maximum sized units and the approximate onsite investment for the unit, both at minLmum and maximum size: Minimum Maximum MT/YR $ MM NT/YR $ NMI Steam Cracker l52L/ 20.0 454/ 72.0 Aromatics 10 1.7 200 22.2 P.E. Unit 100 53.2 300 87.0 VICL 40 8.0 200 33.6 P.V.C. Unit 20 5.8 200 33.9 Alcohol Unit 10 5.6 200 20.6 Styrene 20 3.6 200 18.9 Polystyrene 20 3.6 200 18.9 S.B.R. Unit - - 50 19.8 Buthadiene - - 20 9.0 Polypropylene 15 6.0 100 23.0 1/ Based on ethylene products yield. 2/ For a gas oil feed. The minimuns are based on ethane feed. 10.23 The estimated investment costs have been made based on world wide experice with an escalation to represent likely conditions for Indonesia. Even so the costs must be considered as approximate and preliminary; but it should also be noted that they are appreciably higher than would be anticipated if bids were being obtained today. These investments are for onsites only (battery limits) and offsite investment costs can and do add appreciably to the total costs. Loca- tion is a major unkmown factor in attempting to determine what should be included for offsites. In the U.S.A., Europe, and Japan the off- sites can range from 40- of the onsites to 120/v. There isnllt any valid procedure to estimate off'sites accurately; only when the site -290- is known and considerable design is completed is it realistic to judge 6ffsite costs. Ie can, however, define a representative offsite package, roughly for Nlorth Sumatra or East Kalinantan; but it should be clearly noted that this is not based on any particular site. Ac- cordingly the offsites might be defined for a small, a medium and a large facility as follows: SmallL/ bdiumi/ Large3 ($ millions unless otherwise indicated) Gas transmission 16 t 2011 24 " 50 miles, $ MM 5.6 9.7 10.2 Gas storage 5.0 7.0 9.0 Tankage (5 $/BBL) 5.0 10.0 15.0 Power 2.5 3.0 4.0 Water o.4 0.6 1.0 Pollution control 1.0 1.6 1.9 Housing (staff) 3.0 4.0 5.0 Shops (MLaintenance) 20 2.5 3.0 Docks and harbor 10.0 15.0 20.0 Site preparation 2.0 2.5 2.7 TOTAL . 36.5 55.9 71.8 Contingency 30% 11.0 16.8 21.5 47.5 72.7 93.3 1/- Up to 110.0 $ M! onsites 2/ Up to 180.0 $ 1I41 onsites 3/ Up to 250.0. $ MN onsites It should be emphasized that any estimate of offsites is highly speculative at this time. l0.2ht Market prices used in the linear program are based on (a) recent shipments to Indonesia obtained from reliable industrial sources in Indonesia (b) published export prices from Japan adjusted for freight, and (c) exports from the U.S. to Indonesia and other couwtries in South -291- East Asia. W.1e believe the pric.es upon which we have made future pro- jecti`on are actual w1orld trading; prices in most instances for thl-iis sector of the world. Thc-re is, however, a degree of caution necessary, fitbst because deli.vered prices are sometimes tied-in Teith other sales or with fin.a-ncing and .secondly, there is, on occasion, reason to declare mand import at higher prices than actual; this permits eas-y export of capital a-nd tends to minimize local tax obligations. However, ve believe that tlhrough interviews, confidential sources, and informna- tion on world prices the prices used in the model are realistic and, furthermore, wje have adjusted these so that 'they reE'lect our best, estimate of the 'low"t; that will be reached in the 1977-198L period. The lov prices have been used in order to be conservative in our evalu- ation. The folloiing tabulation shows the prices used. 2/ Domes .ic- Export- $/IT __ __ __ Ethylene -18 Polyethylene (LD) 270 250 Propylene 18 Polypropylene 230 200 Butanes 35 Gasoline. 30 Fuel Oil 17 Xylene 09 22 Toluene 50 25 Benzene 90 70 inyl Chloride 150 125 Poly Vinyl Chloride 230' 210 Ethyl Alcohol 250 200 Styrene ;?Q5 200 Polyst-yrene 320 235 Butadiene 150 132 Buty'lene - 30 SBRubber 265 250 1/ Domestic price., arc adjusted fromii C.I.F. dutly paid data obtained fromn actual purchasers and confirmnd by turading corTtlnries. in those cases iwhsre c-s:uch informationn w-as not ava ilable we.p e stimated prices at equivalent w-orld rates adjusted for locatvion. 2/ T:poP'; rice:,s are based on meeting cct:p.rH t' on fro_ the U.S. aj.. -} Jap an. -292- FIGURE 10.3 OUTLOOK FOR DOtMESTIC PRICES (1.) P.V.C. (COMPOUND) (2) 300 POLYSTYRENE POLYPROPYLENE $/MT / POLYETHYLENE 200 - 1977 1980 1984 * PRICE USED IN MODEL (1) Export Prices A.oproximately 20 $ / MT Lower (2) Resin 80 $ / MT Lower IBRD 6095 -293- The Resuilts: Investment Levels and Timing, and Rates of Return 10.25 A wide variety of "optimal" solutions; are possible. Each optimal depends on the constraints of product miLxture, (which v,-uries with time), the cost of feeds, the domestic and export v-alues of products, the operati ng costJs and characteristics oL t5he petrochemi- cal units in the comDle: and of course, the capital costs associated with building the iunlits, including ancillary (off si_te) facilities. The model recognizes approximately 200 acti-ities along with about the saLne number of constraints ELnd contains about 1,000 non-zero entries iLn the matrix. Although this is a relatively modest-sized linear programming model, it is more than adequate to provide directional guidance as to wqhen and what kind of petrochemical com- plex should be evaluated in greater detail,. 10.26 A total of 15 types of cases are summiarized in Table 10.1. Three additional cases are presented im-mediately follo-.ing the table. The basic organization followed in deciding t,he minimunm nurmber of cases to scan required dividing the time period into three part,s, namely 1977, 19830 and 198)4. Furtherr-iore, since thkre i s considerable uncertainty about the demrand growlth rate, it was felt prudent t,o look at "normal demands, "* resulting from our best predlctive effort, and to 'also evaluate a greatly reduced growth rate. !,,Te arbitrarily defined the reduced growth rate as being approx-limately 60'% of the normal rate. TiTe effect of absolute investment on rate of return w.as the other major paracter that varied. This means that we atte+:T='ed to determine when there w.ere opportunities to obtain a hl_c'h rate of return at relatively lowi investment cos's (i.e. by elim inti, activities yielding returns below soime specified rate.) This i s a some;];hat difflicult noint and ce:; ves -urther ex-olanation. An in- crease in the size of an innvest.mnt in otroch.nicals usually means adding activities that change (usually denr -ease) the enterprise ' s rate of et-urn on investmentr; consequently, we have tr4ed to .Cind the investmlent size (for any g"ivenl set of other ch..irnc teristics of donan , price s, etc.) 'tha n za;imiz- thdis rate of retLurn, -v!he-an, ho; e-.er, it is soecified that certain cut-ofl rates' CteTs.vrT .a minirmuri arccen,- able. In tUhse tab -oul n of c.aselS?s thIat, is qhboT,n 7 ater, a conlu:-'I sho-.n headed "R.O..I." (return on investment) witih sulb-cases rnging from 1 to 6; these represrn't, increaoing- pressure to raise the rate oL return. As presurse increases, the size of the inv-es't.ment nornailly decreases, because less profitable activities are dropned offL, or there are .switches among intuer-related activitics. TThe actual enter- priso rate of return in any ease i deriner] by the eff"ects of these kinds of chla.nrres in onsite inve stm.ent plus the off site investm.ent that is indeTendontly estimated. 10.27 The effect of feed cost. can often be very significant in proJects (as can the by product '.ral-V-eo) of this nu Lc entl.v several cases .1w1're run to shiw the effect in thi situt,ion. Ue -294- found, that aIthough feed cost is an importamt variable, its effect was not, enough to alter any of the cases in any reall inpyrtam wjay. Hence, only a feiw cases w^iere run that reLlect different feed costs. Frequently,r, in evaluation wJork of this nature, realistic solutions depend on building certain unit,s above a cert,in capacity; and this entails modelinir the problem to allovw use of integer tecluliques, alonc, .with the normal rout½Les, which are imor/wn as continuous techniques. Thus for most of tUhe cases, we have twro solutions; one is contiiuous3 and does not recornize that only a certain minimu size unit i s perrrmitted. The other is the integer solution. Integer solutions are, in an econo-mic sense, more realistic than the continuous solutions, but con the,other.hand, they never showr as high a rate of return as the continuous, and usually the results are substant,iallyr different due to the restric- tion of onlyRr minimuxm sizes for certai1n key activities. The tabulatuion shoTws the cases described and included in Table 10.1: 10.28 The fifteen cases shoiwn in T'able 10.1 cover a w.ide rance of alt,ernatives witph rcrpect to demand, cost of feed stocks, invest- ment pressure and prodluctJ prices. Total invest-ment varies from a lotw of $;79.3 million (Case F) in 19077 for reduced demand levels -nd a non-integer solution to a hLigh of !`316.9 million (Case A) for normal demand and an integer solution. As mentioned earlierg, an int.eger solution al7.w,ays involves a hi,her investment, cost in con- trast to a continuous solution because of the -indi'vJ.sibili-ies involved in bringing units into prodic.t0ion; but it is probably al;so more realistc c. The raxvje of produact,s a lso varries wicdely am.cng t1he cases. * n So.e cases Onlly Polyth-11ylene end ;gasoline are produced for the domt-stic rket elnd only the forner is ex.porIted. In ot'De r cases a fuJll rang--e of t-,wclve prodiucts i-s pnroduced for donest,ic u7e and many o^f theat are exoortecid. In the linenr prograrLming solut-io.ns the price of the product is thle, rn'ajo drniNn,g f'orce asnd the desrqncls deterrrine fthe u.zper' limitL that can be made at one ol' t.he -forfgoing prices. In most cases studirri the domes-ic price is hgher than the export price, as ..cu'.d be c:oect.ed As a res ult., the dc:-L'. E demandIs will be file-d f'Lirst. aand theni if t1he Tiarg;inaL cosl-t of p)ro- duction is less th-n th-ie export price, the ex-port reui*renmt i11 be either par--ial1ly or- conlt.etly filled-. When anm e':port. demenc: f S only ar-t.Oly fillcd it ,,eas thipat t.he maargina,l cost is greater than the price for additional amountls. 10.2-9. More cases were not` ar .rat.e at this tUime since the scope of the current effort is to fincd a viable approach rcather tha--n a specific design ba1sis. The ana'lyij,s of the cases aat,-.ach-ed sholws theat the 19777 cases writh acceptable.Jrates of retur-n are as fo'lclrs: wie have ,'rbi_r-r+.ily de^fined- 1 . 5,/'t as the ,ilmniniaru acce t a0le fLn.-anci.J. rate of r.- ;urn. tlThe rtes of! r&t "i d b' the T.0P. cv;a0 luatioijn toclmiunuc circ aft,'r t.rx. The rates of roiv.rn. ,.Ll bre (hilC te.e tax. ho] i0l.- n(;n tcc& eat-rtod dcpn''1(ci .,tion. Ai(: c:7~: .hn;*>;;5 in:: * the offuc'ts oUL ti.iiO' ' actosrt; 1 C ; i'Ul:c tnLa'2r in Jt .] ^chi.ntm-r. -4 ~ >44 C) 0l ) ut 8 8z 88 8 8 8 8 8 X 8g 8 8 8 8 o1I U)- = *CO 0 N. , , ciJ CD :' 0 888 8 KX8 88 ,:<, H 88 C) QC 0 @ i- oq O cic. ON C~ O N Hr - H H O -296- RI½te of Canie Solution Incrwic, Ni4 Tnvestmncnt, .'LiM Return 1977 A Continuous 95 342 16.1 Tnteger 90 3116 15.i E Continutou s 30 106 16.2 Integer lii 203 11.5 G Integer 11 186 12.2 One interesting point of this comnprison is that these are two very different cases -with respect to the needed investment, i.e. A versus E, which appear to be on a par economically with a 15-16%, of return. Although "Case E - continuous" is not at the integer level it is achievable technically without 6ifficulty, and it is only one thirrd the cost of "Case A - integer". Case E - ccnti.nuous is howTever, based on a normall demand projection but is lazg&ly keyed to meet only domiesttic requirements, except for vinyl chloride and ethyl alcohol. When Case E proceeds to a_ny integer level the economies show7 that added polyethylene capacity to meet the export market is more attractive than the production of vinyrl chloride. Thus "Case E - integer" is on balance about 3.6% less attractive than "Case A - integer". The inveestment recuired 'is diminished by 143 "-4I, but incorme is also redu6ed by b6 p.1 per year. Probably, if there were no scarcity of investment funds and if the expectation of realizing a normal dema-nd situation T;were less uncertain, the decision would be to elect Case A - integer as the staLrting basis. However, in the interest of cone.rvatism -nd because it is more pruden-t to e:pand from a sound base (rather than to be saddled wit.h over capacity) the choice mntust be betl.een Case E - integer and Ca5e, G - integer, where G-is a reduczd deamnd c'ase. 10.30 The only real phrsical dif'erence betocen Case E and GT is the size of the ethyl alcohol h unit'; all othe1r o lr.iti S ae e-r ssenllyssIn the samne. 1owever, the econo7ic dilfference is inte:c-tingbeczau se i t shows that even if the domestic Indonesinn polyethylene m earket. is only 90,000 t/yecur, rather th..n a normral l50,noo t/yer itema-rAs econorta-l t.o build a 300,000 t/year capacity plant and to e::port polyethylene at. 3 ll.>3'/1b. (et,hylene costs 2.1t88o,/lb.. in thids case). Thus the avrerage value of polyethylene i7n Case B is ll.8&I/lb. while in Case G it is ll.6V1/lb. or a slightly more conscr=ative. bal,%nce. The reduction in the anount of alcohol made is relatively uniriportant, 20,000 tons per year in Case E versus 12,000 tons in Case G. Case. G - intec.cr, therefore, i.s a rational selection as a starting situation for 1977 Indonesia. it nowvi bcco-ies necessary to exaDmine 1980 aLnd 198b11 cases to sec how the project shoulc be exptnded to keep up wyu.ith demand and expnort carability. Natur-aly, cases for 198-0 and 1908 Fshould be consi;stent with Case G, or rather Case G should be readil-y e:axpand~-.bl e to 1980 Mand 198'1. -297- TAl1I S 10.1 Alternative C4wea of PULtLoChe aIcal Investments CASFM A B C Feed Cost low Low Low LOW HigH gh Deam Year 77 77 77 77 77 77 Demand Basin on Open . IV Integer Teas No Yes so 1e6 Prof 4 4 1 1 4 4 Products. MT/Yr Don Export Dom Export Dom F.xaort Dom Expart 'Do Eyport Dom Fxwort Ethylene P.O. 23 26 200 200 26 Polyethylene 150 128 150 128 120 65 120 65 150 128 150 128 2/ Propylene 203 203 237 237 119 203 Polypropylene 30 30 32 9 32. 9 30 30 Gasoline 135 152 158 158 85 153 Fuel Ci1 ,6 6 . 9 9 3 .6 Xyl'enes 3 - 2 2 3 Toluene 6 - 4 4 6 - Vinyl Chloride 10 25 10 25 i60 160 10 25 10 25 P.V.C. 4o 150 40 150 23 20 23 20 40 350 40 150 Ethyl Alcohol 5 15 5 15 50 50 50 .50 5 15 5 15 Styrene 5 - . -- Polystyrene 7 8 8 t 3i...ad!..".e, Butylene - - 10 10 Prod. Value o if-r 75.752 83.571 74.445 83.71. 92.450 43.550 92.450 4.3.550 68.-26 70.250 68.495 71.414 Onsite Invest. 4M 249.182 252.924 223.308 231.337 220.781 235..674 Offeite Invest. S;2t 93.000 g9.000 89.700 91.600 59.300 W. oo Total (A) 342.182 346.924 313.008 322.937 310.081 337.074 Gross Rev. $es 160 158 L36 136 139 1.39 Feed Cost 11 11 13 13 .7 21 Operating Cost 54 57 46 46 54 57 Gross Margin (B) 95 90 77 77 68 61. Rate of Return 16.1 15.1 15.2 13.0 11.5 9.3 V/ N - NC:u - R - REDUCED OPE.1 - Case B roelect3 effect of exporting larre amounts of polyier grade et!.ylane and propylene, and a reduced polyethy1ene de-iand, ani large vinyl chloride zwnomar exports. Substantial monosir exporta are dependenL on installation of polyarization plantz in surrounding nations. 2/ Propyle.ne is valued am fuel due to uncertain macrket; it is howevw, y:lver grade. (FooLnotas aply to all ca.es) -298- CASES ___1_ D - -_E- F , ° Feed Coat High High hiHigh High High High Drand Year 77 77 77 77 77 77 n Dc-.nd Basis R N N . R R R R Integer res No Yea s No Yes No Tes Pror. 6 6 6 6 6 5 5 Prod-.t, T/yr Dom Eort Doe Export Dom Expart Dom Export DoDm cE D>D t Ethylane P.O. Polyethylene 90 49 i50 150 1'27.5 90 90 188 90 188 90 188 Prop/lene 7 7 12 5 U1 11 Polypropylene Geeollne 10 12 19 7 18 20 19 Fuel Oil Zyler.e Toluene Vinyl Chloride 10 . 25 10 25 10 25 P.7.C. Ethyl Alcohol 5 15 5 15 . 3 9 3 9 3 9 Prod. Value WX 25,009 12.187 43.785 6.8,5 4?.778 t15.625 26.899 5.375 25.525 146.875 29,620 52.250 25.510 49.125 Onaite Inveat. t9( 73.535 71.212 133.232 44.3841 126.470 115.571 121.299 Orraite Invest. 42 37.500 35,500 70.000 L5.0 6605Oo 62.500 65.ooo Total (A) 111,035 106.712 203.232 79.3804 192.970 178.071 186.299 Orosa Re*. N 37 51 78 32 72 82 75 Fe'I Coat 4 5 7 3 7 10 9 Operating Coat 116 28 10 27 ' 29 25 Groas ?argln (B) 19 30 41 19 38 * 43 11 Rate of Beturn 8.7 16.2 11.5 13.0 10.0 13.7 12.2 -299- CASES . Basis H, I !J- Feed Cost High High High !Jigh High Demand Year 77 77 77 80 80 Demand Basis R R R E N Integer. Tea No Tea No Teo Prof. 6 4 4 2 2 Prodacti, MT/yr Dom Export Dom Exort. Dom Export Dot Export Dom Export Ethylene-P.0. 15 15 Polyethylene 90 188 90 188 90 188 175 103 175 103 Propylone-P.3. 36 36 ] Polypropylene 18 60 120 60 120 asc,line 19 8 215 112 3.12 FuelOil 6 6 Xylenea 1 4 4 ¶ Toluene 1 6 3 6 3 Vinyl Chlorida 10 25 10 25 10 25 10 25 P.V.C. 24 120 24 120 50. 120 50 140 Ethyl Alcohol 3 9 3 j 10 20 10 20 Styrene 5 Polystyrene 1 17 17 Butadiene & Butylenes 14 14 ValuP $2T 24.895 46.875 37.991 77.475 32.710 77.450 87.883 89.519 87.883 89.519 Onsite Invest. 1*i 115.296 163.481 170.732 325.647 338.818 Offsite Invest. $tIM 62.500 78.800 80.900 99.200 99.500 Total (A) 177.796 242.281 251.632 4.24.897 438.318 Gross Rev. $H 72 115 110 176 176 Feed Cost 9 12 13. 21 21 Operating Cost 24 4 48 56 71 Gross Margin (B) 39 53 51 99 84 Rate of Retu 11.5 11.5 10.8 13.0 10.0 ,4 -300- CASES Bags I t H Food Cost Righ High High High High High Dona"Ymr 80 80 80 80 80 80 Den" B&sN N N IR R¢ latogerl No 'ros No No T63 Prt.4 41 6 6 5. 5' Products<. B/yr Dom ZrWt Don Export Dom Exort Don Export DOm Expwt Dom Export ltlylone-P.G. 20 PItbylAe 175 103 175 103 175 175 103 105 173 105 173 Propylene-P.0. 85 169 9 12 PolypropylIen 60 60 G"olins 841 153 114 20 20 20 Pal Oil 3 6 Xlen. 3 Tolune . 6 Vinyl Chloride 10 25 10 25 10 25 10 25 P.V.C. 50 1140 50 140 Etbyl Al o1 10 20 10 20 10 20 10 20 6 12 6 12 Styrene 5 Polysty.en 8 Prod. Value ;M 814833 63.150 90.612 64.030 51.672 8.125 50.555 30.625 34.308 49.250 30.168 46.125 Onile in7es.. :V¶ 239.130 253.1418 83.555 3.34.659 116.655 121.7S0 Offaite Inest. aE 92.800 914.100 45.000 70.500 63.000 65.2CC Total (A) 331.930 347.518 128.555 215.159 179.655 186.930 GroanRev. O22 1148 - 1148 60 82 84 76 Foed Cost 17 f21 5 8 10 9 Operating Cost 57 60 17 27 26 Gross Yargcn (B) 74 67 38 147 44 141 Rate of Rmtiuz 12.2. 10.0 17.0 11.5 13.7 11.5 A G -301- CASES Food Cost .igh High High High r.,r 84 94 84 84 D aand Ba3is N R R Integer No Yo No rev Prof. 4 4 5 5 Product!,_r/ r. Dom Export Dom Fcport Dom Export Dom Extort Et.hylu~e-F.G. 14 P1ly1ene 277 277 186 92 186 92 Propylene-P.G. 51 136 Polyprupyl.ne 90 90 13. Gasoline 843 153 20 20 Fuel Oil 3 6 lylene 3 Toluene 6 Vinyl Chloride 10 25 10 25 1D 25 P.V.C. 60 130 60 130 Ethyl Alcchol 15 25 15 25 9 15 9 15 Styrene 5 Pclystyrzen Volue SM 121.966 36.675 126.654 37.271 56.817 29.750 52.695 26.625 Onaite Invest. $MH 257.480 271.162 117.740 *122.638 Offaite Invest. $0H 94.300 96.0oo 63.700 65.000 Total (A) 351.750 367.162 181-.40 187.638 Gross ReT. K 159 162 87 79 Feed Costa 17 21 10 9 Operating COst 61 64 30 26 Gross Margin 81 77 47 44 Rate of Ret.a 13.0 10.8 14.4 13.0 -302- 10.31 An examination of cases for 1980 and 19814, with reduced demands (Case M4 and P) shows that the type and size of the petro- chemical complex remains essentially unchanged from Case G for 1977. The product output of polyethylene gradually changes from export to domestic usage, and there is an increased incentive to expand polyethylene capacity. There is also a favorable increase in alcohol demand. The incentive to fill this demand does not diminish. It is clear that vinyl chloride is the most attractive production monomer but essentially the same plantthat sufficed in 1977 would suffice in 1981. Thus our course of action is to build Case G and then stay with it. A calculation of the economic and financial rates of return is shown belot.r. / 2 1/ 2/ $IEM Depreci- Tax- Net Cash7 Year Capital Income Expense Total ation b54' Income Flow 71 -18.0 -18.0 -18.0 75 -37.0 -37.0 -37.0 76 -113.0 -113.0 -113.0 77 -18.0 37.0 -20.0 -1.0 -1.0 -1.0 78 76.1L -34.0 12.4 142.4 2.4 79 76.8 -34.0 42.8 12.8 12.8 80 77.2 -34.0 13.2 13.2 13.2 81 77.8 -314.0 3.8 43.8 13.8 82 78.6 -314.O 14.6 14.6 41.6 83 78.7 -314.0 44.7 18.0 12.0 14.7 32.7 81 78.7 -34.0 11.7 18.0 12.0 14.7 32.7 85 78.7 -314. 141 .7 18.0 12.0 114.7 32.7 86 78.7 -31.0 44.7 18.0 12.0 11i.7 32.7 87 78.7 -314.0 1.7 18.0 12.0 14.7 32.7 186.0 77.3 360.0 271.33/ 90.0 60.0 121.3 211.3 1/ Five year tax holiday from first full year of operation 2/ Assumes 100%C equity, hence no interest expense J/ Economic rate of return is i6.Wo' -303- 10.32 This case shows an economic rate of return of 16.l percent and a finffncial rate of return of 11.3 percent after tax and depreciation, based on a five year tax holiday and 10% annual depreciation. This assumes that no major charges or sub- stantial capital additions are made to the project through 1987. In determining the financial rate of return it should be noted that it is based on 100% equity and is exclusive of interest charges. Leverage, of course, will improve the return .on equity, provided the borrowing cost is less than rate of return. 10.33 Cases G, M & P for 1977, 1980 and 198L respectively, are all based on reduced product demands. To confirm there would be no unusual changes in the event demands are higher (normal). The computer summary printout for normal demand cases equal to G, M and P, labeled Q, R, and S are included.. 10.31 An alternative to maintaining a minimum investment case throughout the whole period, 1977-1984, is a staged expansion starting from Case G in 1977 and building to a major petrochemical complex by 1981. A normal demand case by 19814, assuming the ulti- mate objective of the staging is to meet all domestic demands for major petrochemicals the minimum output targets would be: Polyethylene 310,000 metric tons Polypropylene 90,000 Polvstyrene 0$000 Poly Vinyl Chloride 6o0,ooo Ethyl Alcohol 15,000 TI It is likely, however, that from a b5b,000 t/yr ethylene plant which is fed with an ethane or propane rich feed, it will be impossible to fill the demand for polypropylene or polystyrene. The yield of propylene is too low from both ethmne and, propane; howrever, in thle event heavier feed streaum becam. e available, the -deinand for prop,ylene could be met, provided t,he steam cracker had been desiMed to accept a heavier gas feed. The shortfall of polystyrene will come about due to inadequate domestic benzene supplies; this is readily corrected by increasing imnports of benzene. There is a possibility that additional benzene w.ill be available from one of the refineries, although excoptu for UIorth Sumatran crude- the Indonesian crude oils tend to be para- ffinic rather than aromatic. Because of the uncertainty we assume that benzene wi11 be imported (up to 126,000 t/yr.). There could also be a demand for 93,000 t/yr. chlorine, a major part oL P.V.C. which also is assumed to be imported, although this demand could well serve to stimulate other industrial development. 10.35 The expansion of Case G to 198. will result in the followig before and after look. - - ~~~~~~ ~ ~~-304- __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ CASE Q (1977) INDONESIAN PETROCHEMICAL PROJECT SIZE - Iki T T C TH.TONS/YR MOST*HM\ ----- ---------- -------- ,qTFA.' CRArSER 42 -Rs425 AROMAT IC5 UNIT 1 n P2l YFTL4L FNiF tIr'IT 3nn R7.fnnl . OXYCHLOONATrIorN I CL UNIT POIY VTri IJT- T ETHYL ALCOHIOL HYURATIOf( UNIT 13 6.065 STY FNF lMULr TT- POLY STYRENE 'JINT POt Y PQOPYLFN;r ON Tr GAS SEPARATION 486 .576 BUTADIENE EXTRACTION UN4IT(DWF) CAR lJIlT --o---- ---.----- TnTAI 1?, . 066 ONS;TTTFS; ONLY VAl IJF VAt-IJF PRODUCTS DOMEST EXPT DOM.MMS/YR EXP.MM$/YR -------- ------ ---- --------- - ---------- GAS TO FLARE ElHYI FN, QLYFP GpAnF POLYETHYLENE LD 150 128 40.500 31.875 PROPYLEF tDLYOt F Y rP r-QPF POLY PR OP L E NE -IITXFF nUTA'iFS/H,ATS . 27S GASOLINE 400EP 11 .344 F F FL 0T- 4n0PL-S XYLENIES HIXED TOLUF'Ne 8ENLEi'JE FTHYI r7F 7F- VINYL CHLORIDE Yo*V VTt'YI C!-4 OTlnF ETHYL ALCO0:)L 5 1S 1.000 3.750 STYRENE BUTADIENiE eUTYLE NE PP0F59-FU=-L 1 On Q00 SYNTHETIC RU398ER POt YSTY CN!Ct - ------- -------- TOTAI 42 -1 A2 3 O 2 G GROSS REV 78 EFFn (nsT A. (S ID lit'1,C OPEPATING COSTS D CA! FORGN 13 NET MA14GIN 44 N - -305- INDONESIAN PETROCHEMICAL PROJECT CASE R (1980) SIZE UNITS TH.TONS/YR COST9$MM -------------- -------- STEAM CRACKER 419 28.764 AROMATICS UNIT LD POLYETHLENE UNIT 300 87.000 OXYCHLORONATION VICL UNIT POLY VICL UNIT ETHYL ALCOHOL HYDPATION UNIT 19 7.142 STYRENE UNIT POLY STYRENE UNIT POLY PROPYLENE UNIT GAS SEPARATION 498 .590 EBHYILE 319 BUTADIENE EXTRACTION UNIT(DMF) SBR UNIT TOTAL 123.496 ONSITES ONLY VALUE VALUE PRODUCTS DOMEST EXPT DOM.MM$/YR EXP.MMS/YR - -- -- - -- - ---- - ---- -- -- -- -- -- - -- -- -- - - - GAS TO FLARE ETHYLENE POLYMER GRADE POLYETHYLEwNE LD 17!\ 103 47.250 25.625 PROPYLENE POLYMER GRADE POLYPROPYLENE MIXED BU1TANES/IJNSATS 8 .280 GASOLINE 400EP 12 .351 FUEL OIL 400PLUS XYLENES MIXED TOLUENE BENZENE ETHYL BENZENE VINYL CHLORIDE POLY VINYL CHLORIDE ETHYL 'ALCOHOL 10 20 2.000 5.000 STYRENE BUTADIENE LOSS 22 .000 BUTYLENE PROCFSS FUEL 185 .002 SYNTHETIC RUBBER * POLYSTYRENE TOTAL 49.883 30.625 * MM/YR GROSS- REV 81 FEED COST 9 MARGIN 71 OPERATING COSTS LOCAL 12 FORGN 13 NET MARGIN 47 N -306- INDONESIAN PETROCHEMICAL PROJECT C AS (1984) SIZE UNITS TH.TONS/YR COST#SMM ------ ---------- -------- STEAM CRACKER 428 29.10.3 AROMATICS UNJIT LD POLYETHLENE UNIT 300 87.000 OXYCHLORONATION VICL UNIT POLY VICL UNIT ETHYL ALCOHOL HYDRATION UNIT 26 8.220 STYRENE UNIT POLY STYRENE UNIT POLY PPOPYLENE UNIT GAS SEPARATION 510 .604 :T326 BUTADIENE EXTRACTION UNIT(DMF) SBR UNIT TOTAL 124.926 ONSITES ONLY VALUE VALUE PRODUCTS DOM4EST EXPT DOM.MMS/YR EXP.MM$/YR -------- --e---- ---- ---------- ---------- GAS TO FLARE- ETHYLENE POLYMER GRADE *POLYETHYLENE LD 277 74.925 PROPYLENE POLYMER GRADE POLYPROPYLENE MIXED BUTANES/UNSATS 8 .286 GASOLIN4E 400EP 12 .358 FUEL OIL 400PLUS XYLENES MIXED TOLUENE BENZENE ETHYL BENZENE 'VINYL CHLORIDE POLY VINYL CHLORIDE ETHYL ALCOHOL 1S 25 3.000 6.250 STYR E NE BUTADIENE LOSS 22 .000 BUTYLENE PROCESS FUEL 191 .002 SYNTHETIC RU9BER POLYSTYRENE TOTAL 78.571 6.250 $MM/YR GROSS REV 85 FEED COST 9 MARGIN 75 OPERATING COSTS LOCAL 12 FORGN .13 NET MARGIN 51 N -307- Thousand Tons/Yr. 1/ Short of 1977W 198b Local Deranxd 2/ Polyethylene 278 278- Polypropylene - 16 711 Propylene - Gasoline 19 19 Fuel Oil - - Xylene - 2 Toluene - 2 VICL - - P.V.C, - 165 105 Ethyl Alcohol 12 3h 19 Styrene - 1 Polystyrene 160 120 Benzene 126 Chloriine 93 30.36 The schematic diagram, Figure l1.0, indicates the staging of new petrochemical unit&^ into Case G. The more profitable units are added first and the less profitable ones later until the total capacity of all petrochemical units consumes all the ethylene capacity. The additional costs, capital as well as operating, and the new income streams are presented in Table 10.2 and 10-3. The financial rate of return showJs that the staged development represenls an opportrunity to improve from lI,% where Case G is not expanded to 23% in the expanded 1985 petrochemical coraplex. 10.37 The total capital investment in onsite and offsite facili- ties amounts to $186,000,000 in Case G and another $13b,800,000 for the staged expansion by 1984. The total estimated cost of $320,800,000 is too great a co=mtment for any private company to nmdertake in Indonesia. By the same t.oken,Pertamina (in effect the government) probably could not conmence such a ventuxre alone because of the tecnni- cal requirements for managing the project and operating it once it is built. Also Pertamina does not have the export marketing organization or background to develop the export market in competition wvith Japan or the U.S. Assu;ming Pertamina can negotiate for the managerial, technical and marketing skllls that wjill insure successful project execution and efficient operation,then the door is open to financing and equity participation by private investors. 1/ AssuLmed on ethane feed 2/ Considered equal to 310,000 t. demand ... -308- TABLE 10.2 STAGING OF CAPITAL ADDITIO?N3 Year 78 80 81, 82 , 86 Ethylene Expannion 5.0 16.5 10.0 Ethyl Alcohol 0.5 1.0 0.5 p.V.c. 13.0 28.0 5.0 Acromatics 0.6 1.3 0.5 Polystyrene 7.0 13.0 2.0 Polypropylene - - - 2.0 3 o.6- Onsites 18.5 45.5 23.1 14.3 4.5 3.9 0.6 Offaites 4 10.0 .1 3.2 1.0 1.0 Total Capital 22.6 55.5 28.2 17.5 5.5 4.9 o.6 New Operating Costs, b)?1M Ethylene, Alcohol, Oxychlorination, and Poly Vinyl Chloride 27.5 Aromatics .9 Polystyrene 19.5 Polypropylena 1.8 2.5 9 19 17 New Revenues 39.7 39.8 8h.1 88.0 88.0 88.3 88.3 88.3 88.3 88.3 88.3 88.3 88.3 Depreciation - - 2.2 7.7 10.5 12.2 12.8 13.3 13.3 13.3 Income Before Tax 86.1 80.6 77.8 76.1 75.5 75.0 75.0 75.0 Income Tax 45% 38.7 36.3 35.0 34.2 33.9 33.7 -309- TABLE 10.3 STAGINO OF ADDITIO1 TO CASE 0 7 fi 76 11 78 72 80 81 82 83 84' § e6 87 88 89 9° 91 92 Case 0 - 18 l 37 - 113 - 1 42.4 42.8 43.2 43.8 44.6 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7 44.7 Capital Addations, - 18.5 - 45.5 - 23.1 - 14.3 - 4.5 - 3.9 - .6 Onsi to Capital Additiona, - 4.1 - 10.0 - 5.1 - 3.2 - 1.0 - 1.0 orrfste New Operating -27.5 - .9 - 19.9 -1.8 Costa New Operating----- 39.7 -- E 8=4.1 88.0 88.3 88-.3 8.3 E2d 88.3 88.3 88.3 88.3 88.3 Revenues Gross Revenue - 18 - 37 113 - 1 19.8 - 12.7 27.2 65.2 103.3 126.0 132.4 133.0 133.0 133.0 133.0 133.0 133.0 133.0 133.0 Depreciation 'GI 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 23.0 New Depreciation ---2.2 7.7 .105 12.2 12.8 1±. 13.3 13.3 Incoma beforo Tax 18 - 37 - 113 1 19.8 - 12.7 27.2 65.2 103.3 108.0 114.4 112.8 107.3 104.5 102.8 102.2 101.7 101.7 96.7 Income Tax (old) 12.0 12.0 12.0 12.0 12.0 '12.0 12.0 12.0 12.0 10.0 (now) 38.7 36.3 35.0 34.2 33.9 33 7 33.7 3237 Not Income 19.8 - 12.7 27.2 65.2 103J3 96.0 102.4 62.1 59.0 57.5 56.6 56.3 56.o 56.0 53.0 Cao; Flow - 18 - 37 - 13 - 1 19.8 - 12.7 27.2 65.2 103.3 114.0 120.4 82.3 84.7 86.o 86.8 87.1 87.3 87.3 89.3 CASE G AND 1984 SCHEMATIC 1984 DOMESTIC EXPORT POLY h 278,000 ETHANE STEAM ETHYL ', . , . ___- . 15,000 19,)00 594,0001,00 TTR'RCE 11980 1P 60, 0 105,000 193,000 85,000 . STYRENE BENZENE . AND POLY . P.S 400100 126,000 9802 45,000 T/YR l ______ 1. POYPOPLNE.- 16,9000 [ I ] -AROMATICS XYLENE 2,000 s W C CITY 12 - 1 TOLUENE 2,000 (YEAR AMOUNT) GASOLINE 19,000 1 93IR-09 85BR0000T -311- Summary and Recommendations 10.38 In conclusion, this report, finds that the circumstances and the timing are propitious for commencing work toward developing a petrochemical complex in Indonesia. Such a project would be economically viable and would yield a 1-23% financial rate of return. The cost of the project would be about $186,000,000 to start and with a staged expansion the total capital cost would rise to $320,800,000 by 198b. The project is too large for private industry to undertake alone and the Indonesian government does not possess the teclmical resources to forego participation by a fori-ign party. Therefore, formal private and government collabo- ration is indicated. 10.39 By way of beginning the project it is recommended that the pre-feasibility sttUdy presented here be broadened to full feasibility and concurrently that discussions commence among all interested narties to stimulate interest in the project. Concerning a full Leasibility study we suggest that the task be umdertaken by a qualified firm in petrochemicals, a firm w-ith recent demonstrated experience in market surveys, a knowledge of the areas around Indonesia, and a strong background in the technology and economics of petrochemicals. The major factors to be included in the scope of the study would be: 1. Detailed market analysis covering eight (possibly 10) countries tributary to Indonesia. It is estimated that tbis w-ould take about eight months. 2. Site feasibility study. Three br four potential areas should be evaluated to determine if there are major advantages or disadvantages in location. This would include consideration&of transporting products from the point of manufacture to cons-mzing centers. Two months are needed and it could be done concurrently w ith the market survey. 3. Facilities planning and economic optimization of the entire complex. A more detailed linear prograrning model will be needed for this, including a transporta- tion and distribution sector, and costs w-ll need to be based on a specific location as well as prelimiLinary contractor's estimiates valid for Indonesia. This activity should commence when the market survey is completed, and it should take about four months. 10.O QFigure 10.5 shows the timing for the project. The reason for conducting discussions with interested foreign partUies from the inception is that somc compan=y or consortium of companies rlight come -312- V forfard and be prepared to take a major equity position. If this wqere to happen the study work the-n in proaress cou2.d be tcrminated or taken over by the foreign partner. VlIe believe that any foreign group intentu on taking a major equity position would insist on ca-,rr-ying out their own studies. It is estimated that the full feasibility study, embracing the first three steps on Figure 10.5 would cost between $500.,000 - -750.,000. In addition there may be expenses incidental to or in support ofL the feasibility study, probably amounting to $100.,000 - $"200.,000. In totual, therefore, a budget of about $1,000,000 should be con- ~sidered as the probable upper limitb to carry out the formal feasibility 8tudy. I I I :1 .1 -313- FEASIBILITY STUDY -INDONESIAN PETROCHEMICALS PROJECT! MONTH 1 2 3 14 5 61 7 18 19 1011 1213.1415 1. MARKET SURVEY, ___ . 2. SITE STUDY 3. ECONOMIC OPTIMIZATION (FINAL REPORT) | 4. FINANCING/EQUITYE PROGRAM BY THE BANK 5. SELECTION OF FOREIGN L - - PARTICIPANT [ . - -.- ; 6. FINAL SITE SELECTION 7. CONTRACTOR SELECTION DISCUSSIONS (FOR BIDDII'G | 8. COMMENCE BID DOCUMENT c PREPARATIONS m IBRD -,'097 -314- * i NEX A Basic Uses of Petrochemicals Figure A 1 is a somewrhat more detailed flow diagramr of the major components of the steam cracker. This is included to pro- vide a small indicat'ion of the relative complexity of these processes. Figure A 2 showrs the uses of the basic products as we.ll as some future uses anticipated when the demand increases to permit building econamically sized plants. There are of course many other potential corbination and product end uses possible. A brief section of this report will show, the major.end uses of petrochemi- cals and provide suggestions for new uses in Indonesia. The products available in sigificant quantitury with appropriate separation are as folloW`s: Ethylene, Propylene, Butadiene, Benzene, Toluene, and Xylene. The major uses of these products are: Ethylene: Polyethylene and coopolyvmers Ethanol (Ethyl Alcohol) Ethylene oxide Styrene Vinyl Chloride Pron ene: Polypropylene Isopropanol Propylene oxcide Acrylonitrile (propylene and arzonia) Ethylene propylene rubber Acetone Butadiene: Styrene-butadi ene rubber and foam ABS plast-ics (styrene and butadiene and acrylonitrile) Poly butadiene rubber Nitrile rubber (butadiene and acrylonitrile) Adeponi trile -315- Benz ene: Styrene Cyclohexane Detergents Aniline DDT P1e:o01 Toluene: Benz ene Cyclohexane Phen)l TNT Motor fuels (0 . Xyles (s mr, p ) FnthalJ G Anhytride (orthio) Isophthalic Acid (meta) Polyester fibers (para). Many of the foregoing uses are only of minor importance in Indonesia and in South East Asia at this time; however, the availa- bility of these be-inning chemicals will serve to accelerate usa.-e. Some of' the more important engineerig plastics are shoTwn on Figure A 3. In addition a rough comparison is shown in Table A 1 to indi- cate the price relationships between materials that are subostitute- able in some instances. The development of greater use of synthetic fibers is notu paru of this petrochem:ical- project. However, the basis for such develop- ment on a sound economic footing prooablv will not be possible u-nless there is a large petrochemical project established. The basic buildinv blocks will be available from primary or secondarl petro- chemical products. Products suc.h as ethylene glycol and DYCIT or TPA needed in polyester fibers manufacture could be derived secondarily frorm a petrochemical complex, as could acrylonitile and caprolactum. IHowe-ver, a full expo- sition of the fiber potential is beyond the nurrent scone, although t,he market. potential seems to be substsntia7, When the detailedl feasibility study is made it should include a section on sym,thetic fibers as thlese will probably grow to considerable importlance by 1988. -316- TABLE A 1 SUBSTITUTE I LATERIALS Tensile Strength Densi.ty Cost $/Tensile Unit (T/EN2) _ $/Ton _ Steel bo.0 7.8 220 .ooo67 P. E. 1.0 0.9 270 .0049 P.V,C. .0 1.b 230 .00127 .Alrninum 16.o0 2.7 1032 .0028 Tirmber .5 .5 121 .00013 R. Concrete 1 2.b 19 .0007 I.. -317- Synthetic rubbers are an important consumer of the basic petrochemical monomers of butadiene, styrene, isoprene, and ethylene-propylene. However, the manufacture of SBR, cis- polylutodiene or cis-polyisoprene is not part of this study, even though some of the monomers will be available fronm the petrochemical complex. There is not likely to be any great pressure to delve deeply into synthetic rubbers for Indonesia or South East Asia, except for special uses, inasmuch as the country and the region are rich in natural rubber, at very little foreign exchange cost. ETHYLENE PLANT FUEL GAS FEED (GAS) ETHANE .C2 -RECYCLE PRODUCT N A OFF GAS PURIFICATION l QUENCH 2 ~ COMPRESSIONETLN QUNHC OIG H 4 HYR GNTION MOAS HY MOGAS MOGAS' CONDESATE FRACTSTRIP STRIPPERMTAN 2 | MHY MOGAS 400 FVT+ C3= PRODUCT... 4PROPYLENE ; ME THYL ACETCH| |HYDROGENATION § IJ c C4- PRODUCT (MIXED) ETHYLENE C3 4 C 4000 F TO AROMATICS EXTRACTION PLANT IBRD-6098 -3 19- INDONESIAN PETROCHEMICAL COMPLEX SCHEMATIC BASIC PRODUCTS: ETHYLENE PLYETHLEE POLY VINYLCHLORIDE VlINYL CHLORIDE PPE I . -i.-ETHYL ALCOHOL PRO PYLE NE- | OL';P L PROPYLENEII BUTADIENE MIXED C4'S 4-> BUTYLENE . . STYRENE BUTADIENE RUBBER BUTANEII. < ETHYLENE GLYCOL> I NAPHTHA I . I NAPHTHAt- STYENE -POYSTYRENE XYLENE FUEL OIL L .- , Im ' < DMT/ TPA> i< POLY ESTER. FIBERS > 0 I SALE OR OWN USE C) IBRD- 6099 -320- SUBSTITUTE ENGINEERING PLASTICS NH3 PROPYLcENE BENZENE BUTYLENES METHANOL XYLENE ACE TgN PHENOL | ETHYL 2,6 XYLENOL BENZENE ACRYLONITRILE CYCLO FORMALDEHYDE HEXAME THLENE H . I I rPOLY PHENYLENE I BUTADIENE OXIDE ADIPIC BISPHENOLA C ACETAL RESINS PHOSGENE STYRENE ABS POLY CARBONATES 7n NYLON c * ~IBRD -6100 ANINEX B IDIDX Pages Description of model 322 - 327 L.P. Dictionary 328 - 329 L.TP. Data 329 - 334 L.P. Nagen 334 - 360 Rows 3314 Columns 334 - 360 L.P. Natrix 361 - 381 Case G Continuous 382 - 393 Case G Integer 394 - 1406 19814 Continuous 407 - 420 1984 Integer 421 - 432 -1977 Benzene Continuous 1433 - 446 1977 Benzene Integer 447 - 461 -322- ANNNEX B The Petrochemicals Linear ProgrmrfLng IModel Wiat follows is an explanation of the content of the linear progranmming model, i-nclu.ding remarks on the format used; this is designed to explain the model and to present all the basic data used. The format adopted facilitates-use of MAGE1N (logic and language that causes the matrix to be assembled) and is simple to maintain and understand. This part should be read in conjunction with the computer print-out sheets that follow. First, the basic definitions are created that will be needed to identify stream and keep track of costs. For simplicity, items are divided into classes. Thus Class PU includes all of the different petrochermical units that will be considered in the model. In Class PU you Twill note that we use 2 letters, for instance, SC means steam cracker. Similarly, under Class PR are shoim the products that can be made, i.e. PP is polypropylene. Note that Class STR (stream) and Class COS (for costs) each has three letters, and that all members of the Class also have 3 letters. It is necessary not to exceed the number of letters sho-in in the Class. The advantage of identifying items in classes is that we can increase the members in the Class but still need only reference Class PU to refer to all the process units, regardless of howT many members are -n the Class. Since the model is for use in a metric system countiry it has been designed to use weight inits, n',anely metbric tons, rather than volume units, such as barrels. Hence, in the Class COS where LAB stands for labor, supeniision, overhead and indirect costs, the uwits connected wJith LAB are dollars per metric ton. The unit s of all cost s are shown below-: KWH - KiloTwatt hours per MT of feed BFW - MT of ,rater per M-T of feed SIT.4 - MIT of stearm CWA - I-T of cooling water per MIT of feed LAB - $ per I-T of feed I INT - $ per MIT of feed based on a percentage of the investment cost. CAT, ITX, ROY., EXA, UTL are all based on $ per NoT of feed to the unit. FUL - is in FOEIT per MIT of feed. F.O.E. is an abbreviation for fuel oil eauivalents and equals 39.07 I 1a U3TU, by definition. F()FJ I-IT CL, - MT per 14T. Chlorine is costed at 70'/M1T. ENV - is the investment associat,ed with installing one ton of annual capacity. Mlore on this later. -323- IWith respect to Class FED, this class identifies the variety of feeds that are available to the petrochemical plant. Hence for study purposes, we have assuimed that the plant could buy any of several feeds. In actual practice the choice iwould either be a gas mixture or naphtha or gas oil. It is not likely the steam cracker would be designed for multiple feeds, although in some places this is necessary. Benzene is included in this group for modeling convenience. It is not a feed to the steam cracker. All feeds are in metric tons. For instance, Table FD showJs that ETH is 595 under column M;(. This means that ethane in the amount of 595,000 metric tons is considered available for pur- chase au $18.0 per MT (under FE Cost). Thus for convenience we have rounded off by units of 1000 per year with respect to quantities of products, streams and feeds. There are other classes showm but these are used in_ con.nec- tion wjith carrying out the runs, or Lor ease in modeling. Con- sequenltly, wJe will not comment further on Class 1, R, IIF or CAP, 0, YR, FOR or DRN. The DATA section is organized in Ta-bles where each table con- tains y?eld and cost in1formation for a particular activity. Exhamine Table SC and you wiill' note that stream CH2 (ethane from the gas separation plant) yields .196 tons of gas (which is consumed as fuel or is flared), .762 tons of C2X or ethylena, .0292 tons of propylene, .0191 of butanes and other C4' Is and .0279 tons of gasoline fractions. Looldng down the column wse see that local, labor costs .25Q/2W of ethane feed, and so forth. The rowvs CP mand CJ'T are used to place capacity limits when needed. Exactly the same procedure is followed for all the oth-er Detro- chemical units. There is a feed to eaclh unit, streams are yielded from the unit and costs are incurred. Table FD has already been explained and Table CAP is for the purpose of settting either minimum or maximum, limits on the canacities of the process imits. However, these limits aDply only to 'continuous solutions and w1e are more interested in integer solutions, as will be discussed later. Table MRD is used for blending stre--ms produced on the various units to final products. To avoid too much complc-:i>- it i7as decided not to permit polypmer blends or t1o set specific gravity quality con- straints. However, when more accurate product demsnd and market use information is acquired, polyrmer blending, plasticizer additions, etc. will be evaluated. This table also conveits weight, units to lhe-t units for gas and certain other streams that can be used as Lucl in the plant. T.able COSTS represent amn estimate of the local and foreign cost fractions for each cost ftunction. Ho-ever, this item cloes not inLlience -324- the solution nor does it have any real bearing on the foreign exchange costs. It is useful, however, in e'stimating what portion of the costs reside in Indonesia and what portion ultimately goes out again. Only operating costs are treated in this manner. The next two tables labeled DEI and DEX represent, along with Table RHS, current estimates of product demands and prices, both domestic and export. This subject has already been discussed; this is the format used to introduce t-e data to the L.P. model. Table INT showqs the integer investment costs for various petro- chemical units. For example, the steam, cracker SC has a minimum size of 200,000 MT/year feed and a minimum cost of $20,000,000 (200,000 X 100 SAIT). Thus this is the minimum size Dermitted for any case. Ln the event the size selected exceeds 200,000 MT/yr. then the added cost is at a rate of LO $/IIT of annual capacity. In similar fashion the other units have integer minimums and maximum sizes. The maximum size permitted in this study is a 1 billion pound per year ethylene unit. Although. larger units have been built, and by 1977 probably even larger plants than 1.5 billion pounds will exist, the 1 billion pound size is economical and by 1977 should be very reliable. Currently, reliability is still improving, but by then the problems will be resolved. One word, of caution is appropriate concerning the sizes and costs. These costs are predicated on the onsite (battery limits) for plants built in other parts of the world over the last five years scaled either up or dow.7n from the sizes show-n in parenthesis alongside each unit. Unfortunately, these uLnits are not spacifically for an Indonesian location and even though every effort was made to be con- servative with the investment costs, there could be some surprises. However, based on some recent refinery work, which is similar but not as complex, these costs looic reasonable. Certainly as a prefeasibili,ty effort we have attempted to be on tUhe conservative side. Table COSONV is a cost factor table that we will make more use of when a specific location is being evaluated. It, places unit prices on the items listed. For exam-ple, a KWH costs 2¢ per unit. Table PROF lists "investment pressure" factors and is used to re- quire increasing rates of return and lower investment. Thus by increasing the numerical value of the nu-mber in the table we are in effect demanding that each unit invested earn a greater return, and this is done by decreasing the least profitable overall activity first, etc. This is a very useful shortcut for improving a projectts rate of return Within the framework of the L.P. IMathlematically, it is a unique wJayr to avoid the non-linearities of discounted cost flow calculations and also it points up that neither a maximum profit nor a mi-limuLm cost solution is necessarily a maximum discounted cash flowi7 solution. Table RHS is the table in which spdcific annual demanuds a-re included and t.hese data override the data in Table DEI or DEX, except with re-spect I, -325- to price. W[e can also go from one solution.year t o the next seauenti- ally and this makes it easier to do a group of case studies. We are now into the logic and language of the matrix generator, a proprietary system knoiwn as INAGE. Suffice it to say that on the next tiwio pages are all of the necessary statements to construct the matrix. An explanation of PIAGETT, or of matrix construction wfould not be appropriate in this report. How-ever, reference wrill be supplied to anyone who wiishes to go deeper into the subject. Next follows the listing of all the vectors (activities) and the rows (constraints) that have been formed into the matrix. The listing starts with the work ROWJS and contains 229 entries. The RowTs are the. constraints in the problem. Next come the columns and here each activity that intiersects with a Row' has a value which is indicated alongside. Thuis these are the elements in the actual matrix. Using the listing and the matrix picture, it is easy to find any value of a vector, row, or RIIS and to see how-i they fit with each other in the matrix. The listing and the matrix are included for the benefit of those who wish to go deeply into the ldetails of linear progr anmig, rather than for the casual reader. The computer solution printout for Case G integer is attached for the record and to serve as a base point for further rork. The Case G integer showm in Table 10.1 is not identical with the computer printout attached as part of this Annex. However, the only substantive difference as far as Case G is concerned is in the export price of ethyl alcohol which was reduced in the case showin in this Anne . The solutiqn strategy i s unzchanged, hence the version wh-ich is attUached is more up to date in matters of detail. The first six pages list the basic variables that make up this particular solution. On the first page inspection of the objective functions PROF 1 through PROF 6 shows that particular solution is PROF 5 numerically and hlas a sign chrange. This indicates that a solution with a somewIlat better DCF lies bet-een PROF 5 and PROF 6; since the improvement is probably around 2¶ and because t.his is a prefeasibility study we did not feel it ojorthi,,hile to explore the solutions. betueen PROF 5 and PROF 6. It is relatively easy to understand the printout i.f -you know what to look for. For instance, the last line on the first page reads. ETIX 191.13919 b03.86081 595.ooo This mea-ns that the anount of etha-ne is IiO3,8O0 tons per year o-t of a maximum availability of 595,000 tons per year, leaving 191,139 tons per year that isn t used. Thus the mean-ing is that; the ethane activity is 191.139 tuits (value) belo-w the max-imum nermitted (-Fchic). Loo; at Table i1D and fincd out how- this fits. The next line ETF.u indicates -326- that ethane activity is bO3,860 units above the miniimm. permitted. Again loolc at Table FD and you will see that ETifl;;IT is zero. Of course, there are no dual values because the basic variables are in the basis. The lower and upper bounds are constraint valtues which set limits which cannot be exceeded. For instance CPI'U upper bound is L51i.000 and the constraint value is 307.7111. in th:is case it means that the plant is not penritted to roduce more than !51i,0O0 t/year of ethylene (1 billion poundsT, Mlow if the constraint value were at its limit then we would expect to see a dual value. DU is not one of the integer units. On the fourth page the first 13 l1.nes are all cost items in thousands of dollars. For instance, maLntenance for the complex is expected to total 7,897,115 per year. However, TNVTR is the total onsite invastment, 121,281,1ib7. The individual unit investments are like SCIJTVTR - Literally "steam, cracker investment transfer'" - $28,15l1,b32 and so on. The next group DEXT'I through D IPSTR shoT the dollar values of sales of each product and its destination. The code is DEX for 'demand export', ET is the product identificat,ion for ethylene md TR is a symibol meaning the revenue has been trans-- ferred to the income account. Lines DEXTR and DETIR show; the surns of all sales to export and domestically. From this point through the seventh page auantities are shown for various activities. For inst3ce, I]ETGS is 56,71l tons per year of methane gas feed to the gas plant. Since nothing is made from rmtethane in this part,icular complex, it is clear that this is the amount of gas it is necessary to buy in order to meet tlhe plants internal fuel needs. In sirmilar fashion C2iFH 7.741 is that. a-molutin, of eth,ylene going to the ethy,,ri alcohol plant as feed from which alcohol i s made. About two-thirds of the way dowln the sixth page and on th:ough the seventh page the quantities oL exports and domestic sal-es, in thousands of tons per year, are shown. BegiLning the eighth Page (ThTDO/TBK ,PROF5$'L `774L 09/09/71 are non basi-c variables and fromrX this page through the thirteenth page we can learn certain economic facts about the solution. How+ever, great care and s1kill is necessary in placing the proper i-nterpre- tation on the Dual Value and on the DJ's. For instance, look at the dual value for ETHCOST and PROCOST, namely 1.0 and .66332. As we knoa.,r ethane is the optimumn feed because it is being used. The price of ethane is '8;:/1T. The price of propane is 18.3 $/MtT (see Table FD)., and it is not being used. The du-al value for the first ton of propane as a feed is only w,orth about 66' as much as ethane. A crosscheck of this can be fouLnd under the DJ values on the tenth page where CH2DA is 18.36 and CHI3BA is 12.5288 or 685g. Thae small dis- crepancy is due to the fact that the BA (balance row) value is for f'eed to the steam cracker whereas the cost of propane is as a feed to the gas plant . Thus., f'or the .first ton of propane to be as attractive as -327- the last ton of ethane, its price VTould need to be 12.25 $Ar11, approximately 6.05 'i;/M4T less than it is. However, this is not for all the propane, and if we wished to determine the actual averag-e difference we wrould force propane into the solution and determine the difference. Although most of the dual values and DJ's are important for purposes of understanding marginal valrue, shadoTwr prices or cost s, and so on, we will not discuss them all at this time, but rather will pick out seiected ones. On the ninth page there are a series of items endinc i-n BA, like C2ItA, etc. This is a particularly interesting item because it, says that the cost of making ethylene in this solution is 56.35687 ,/ItT, or 2.557 ¢/lb. Thus the plant could sell marginal quantities at this price (or buy at this price) and not influence the economics. On the eleven-th paae the Dual Value for EADPVIX (ethyl alcohol domestic demand maximum) is 188.573 and indicates that the profit would increase by that amount if -vre could find a market 2or one more ton. You could also imply that its break even value is 62 $/,I`T (its sale price of 250 $/M4T - 188 s1r'T). On the twel-vth page near the bottom ETC2H shoiTs a DJ of 12.356 which means that for the sale of ethylexie to be economical its price w-ould have to be increased that much. The export price of ethylene is Lui).OOO $/14T so it would havre to be 56.356 $/i4T in order to be attractive. From POC3,T .30175 we can tell that this is the amount propylene is underpriced, i.e. at 18.30175 $/IA, it would be profitable. As explained in paragraph 1O0311 and subseauently a staged expansion of Case G appeared viable and feasible. To confirm the end result of -the staging a 1{8I1 linlear progr=anning case was run and the continuous and integer solutions are attached, following the solutions of Case G, on pages - in this Lnnex. You will note the L6. i has found a more rol-. x',rle end-reSu't for 196b than slhown in 10.37 or in Tables 10.2 and 10.3. The imzproved result only confirms the basic approach and it was not, deemed necessary to try to show a revised setu of econorLmcs for t.he indicc?;Led 23< ra.te Of return. In evaluating Case G it appecared that t,he unavailability of benzene was seriously limitin_g the core facilities a0bility to operate on a larger and more profitable scale. Con.sequently, we made benzene available to Case G at 941 WVIN-T for 1977 at thl- reduced demand for overall pe-Grochanicals. The result is that it becomns attractive to expand t,he facility into str,,rrene nnd polystyrene activity on a large scale. The resuit is a -nore econorniecally, attractive 1977 case thani Case G. IHo-.wever, the firmi La'ilahility of bensene is necessary to take this route. The solution for the "1977 benzene availability case" is attached on pages to . followiing t-he 190- case. -328- GENER.ATEoMSI1 DICTIONARY CLASS MFoR,MNF MX M MAX MN N MIN FX F FIX CLASS CAP CPM.CPN CLASS PR PRODUCTS FOR REPORT WRITER FL GAS TO FLARE ET ETHYLENE POLYMER GRADE PE POLYETHYLENE LD PO PROPYLENE ,OLYMER GRADE pp POLYPROPYLENE C4 MIXED BUTANES./UNSATS MG GASOLINE 400EP FO FUEL OIL 400PLUS XY XYLENES MIXED TO TOLUENE BZ BENZENE EB ETHYL BENZENE YC VINYL CHLORIDE * PV POLY VINYL CHLORIDE EA ETHYL ALCOHOL -SY STYRENE BT BUTADIENE LS LOSS BY BUTYLENE PF PROCESS FUEL SR SYNTHETIC RUBBER PS POLYSTYRENE CLASS STR GAS,C2H,C3H,C4M,MOl.MO2,MO3,FEO0RAF,XYL,BEZ,TOL,EBZ, NiSAqGOA.PVC.EAL.STY,PST.PPl.M049M05,PE19LOS.VC1,BTY.BTA9 SRR*HYDqCH2tCH3vCH4.C2X CLASS QU QUALITIES GR CLASS PU PETROCHEMICAL UNITS GS GAS SEPARATION SC STEAM CRACKER DU DUMMY AR AROMATICc UNIT LD LO POLYL'YHLENE UNIT OX OXYCHLORONATION VICL UNIT PC POLY VICL UNIT EH ETHYL ALCOHOL HYDRATION UNIT SE STYRENE UNIT PY POLY STYRENE UNIT PL POLY PROPYLENE UNIT BU BUTADIENE EXTRACTION UNIT(DMF) SB SBR UNIT CLASS COS COSTS KWH ELECTRICITY BFW BOILER FEED WATER STM STEAM CWA COOLING WATER LAB LABOR,SUPERVISION,0\.ERHEAD AND INDIRECT COSTS MNT MAINTENANCE CAT CATALYSTS AND CHEMICALS ITx INSURANCE - LOCAL TAXES(NOT INCOME TAX) * * .^. , .-*............................. .^X ........ . "VT KU I AL I * t UK tt)L I tlrll4ULUt3T FUL FUEL(OWN USE) BAG BAGS FOR FINISHED PRODUCTS, -329- EXA FOREIGN EXPERTS UTL UTILITIES INV INVESTMENT*DOLLARS PER ANNUAL UNIT CLO CHLORINE CLASS FED FEED TO CORE FACILITY MET METHANE ETH ETHANE PRO PROPANE BUT BUTANE NAP NAPHTHA GAO GAS OIL BEZ BENZENE PURCHASES CLASS 0 VARIOUS OBJECTIVE FUNCTION 1 #293t4.596 CLASS YR VARIOUS RHS NUMBERS 77,78979,80,81982983984985 CLASS FOR FOREIGN EXCHANGE EARNINGS OR-SAVINGS DOL CLASS ORN FOREIGN EXCHANGE OUTFLOW NEG DATA TABLE GS GAS SEPERATION MET ETH PRO BUT NAP GAO GAS 1.15 .105 C'H2 1.0 CH3 1. O CH4 1.0 NPA .9 GOA i.O INV 1.1 1*2 1.3 1.4- 1.5 1*6 CPM 1.0 1.0 1.0 . 1.0 1.0 1.0 CPN 1.0 1.0 1.0 1.0 1.0 1.0 TABLE SC STEAM CRACKER (t1 BILLION LBS ETHYLENE PER YR) CH2 CH3 CH4 NPA GOA GAS .196 .363 .305 .351 .382 C2X ..7620 .422 .401 .340 .294 C3H .0292 .171 .2085 .158 *116 C4M .0191 .0456 .0982 .100 .040 MO1 .0279 M02 .06 M03 .037 MO4 .014 Mu5 .115 FEO .0123 .0049 .045 .232 LAB .25 .139 .1325 .10 .086 MNT 4.5 1.5 1.55 1.44 1..70 CAT .835 .46 .44 .51 .61 ITX .9 .45 .465 .43 .52 ROY .5 .4 .3 .2 .1 EXA 2.02 1.11 1.06 .82 .99 FUL .43 .45 .48 .20 .24 INV 60.0 30.0 31.0 28.8 28.8 CPM 1.0 1.0 1.0 1.0 1.0 CPN .1.0 1.0 1-0 1.0 1.0 KWH 1lQ 64 61 48 58 TABLE DU DUMMY. C2X C2H 1 CPM 1 CPN 1 TABLE AR AROMATICS UNIT (20.000 T/YR BEZ) MOTi M02 M03 M04 M05 RAF .40 .43 .368 .83 .80 w ^ . . . . . . A I L IiJ ,US . *U UJ3 BEZ .30 .285 .316 .08 .10 TOL .10 .19 .210 .05 .07 EBZ .10 .005 .006 .001 LAB 6.0 6.3 6.7 1.0 .8 MNT 5.0 5.4 8.3 1.2 1.0 CAT 6.0 6.5 6.9 1.0 .8 UTL 30.0 31.4 34.8 4.9 4.0 ITX 2.0 2.1 3.3 .5 .4 ROY .75 .77 1.18 .2 .2 FUL .2 .2 .2 .2 .2 INV 100 108 166 24 20. CPM 1.0 1.0 1.0 1.0 1.0 ( CPN 1.0 1.0 1.0 1.0 1.0 TABLE BU BUTADIENE EXTRACTION(OMF) C4M ( BTY .30 BTA' .70 LAB 3.8 MNT 22.5 CAT 4.62 ITX 11.2 I ROY .5 EXA i0.0 FUL .1 INV 450, UTL 18.5 KWH ' CPM 1.0 CPN 1.0 TABLE SB SYNTHETIC SBR (45400 T/YR) . BTA SRR 1.4 STY -.4 ( LAB 21.7 CAT 80.3 MNT 19.8 UTL 49.4 INV 396 EXA 90.0 ( CPM 1.0 CPN r.o TABLE LD LOW DENSITY POLYETYLENE (136.OOOT/YR) C2H PE1 .925 LOS .075 . LAB 2.2 MNT 20.0 CAT .90 ( UTL 30.0 ROY 11.0 EXA 8.84 ( INV 430 CPM 1.0 CPN 1.0 TABLE OX VICL OXYCHLORONATION (90800 T/YR) C2H VC1 2.05 C CLO 1.10 LAB 3.30 MNT 9.13 CAT 1.80 UTL 5.30 ROY 6.10 ( EXA 9.90 INV 183 -. CPN 1 -331- fKWH 1305 TABLE. PL. POCY PROPYLENE PLANT C3.H PPl .90 LOS .10 C LAB 2.5 MNT 31.0 CAT 1.0 UTL 35.0 *sj ROY 20 .0 EXA 10.0 INV 500 CPM 1.0 CPN 1.0 ' TABLE PC POLY VICL UNIT (45400T/YR) 'I vC1 PVC .95 ( LAB 2.65 MNT 10.7 CAT 18.2 UTL 10.5 ROY 1.15 EXA 10.6 INV 215 CPM 1.0 CPN 1.0 HDAINUI TABLE EH ETHYL ALCOHOL oYDRATION UNIT(90800T/YR) C2H EAL 1.55 FUL -. 34 LAB 2.05 1 MNT 10,3 4 CAT 5.16 UTL 1.36 ROY 1.0 EXA 6.85 INV 205 CPM 1.0 CPN 1.0 ITA 4.10 KWH 88.8 .1 ~CWA 0.68 TABLE SE STYRENE UNIT (45400 T/YR) C2H EBZ STY 3.71 .87 BEZ -2.78 LAB 2.75 1.0 ( MNT 6.60 3.0 CAT 1.00 UTL 35.2 27.8 ROY 1.0 EXA 11.1 7.5 INV 132 100 ( ITX 1.8 CPM 1.0 l .0 CPN 1.0 1.0 (. HYD .071 .01 TABLE PY POLYSTYRENE UNIT(45400T/YR) STY * PST .95 LAB 2.1 MNT 6.6 ( CAT .42 UTL 6.2 I n . . . .~ INV 132 -332- ITX 1 .8 CPM 1.0 CPN 1.0 TABLE FO FEED TO COMPLEX(THOUSANDS OF TONS AND S/TON) MX MN FECOST I =/GAL MET 300 0 21.0 ETH 595 0 18.0 PRO 1 0 18.3 BUT I 0 19.5 NAP I 0 25.0 ' GAO 1 0 30.0 TABLE CAP UNIT CAPACITIES (THOUJSAND TONS PER YEAR) CPM CPN ' GS 2000 0.1 ,SC ISO00 O. l DU 454 0 AR 100 0 LD 30 0 0 OX 200 0 PC 200 0 EH 90 0 SE 200 0 PY 200 0 PL 200 0 *BU 200 0 SR So 0 TABLE PRD DECISION TABLE FL ET PE PO PP C4 MG FO XY TO BZ E3-VC PV EA SY PS LS PF GAS I 1.13 C2H 1 1 1.149 C3H 1 1 1.115 C4M 1 1 1.114 MO1 1 M02 1 M03 1 M04 1 MO5 1 FEO RAF l XYL BEZ TOL EBZ PEl 1 LOS PVC EAL STY i PST PP1 1 TABLE PRDA ( BT BY SR BTY 1 BTA 1 SRR 1 TABLE COSTS LOCAL FORGN KWH .S .5 CWA .8 .2 LAB 1.0 MNT .3 .7 CAT .2 .8 1: 1A 1U 1.0 ROY 1. O -333- BAG 1.0 EXA 1.0 UTL 1.0 * *CLO 1.0 TABLE DEI DOMESTIC INDONESIAN DEMAND (MT/YR) ($/MT EX PLT) MX MN VALU FL 0 .01 ET 0 0 PE 120 1 270 PO 0 18 Pp 32 0 230 C4 0 35 MG 0 30 FO 0 17 XY 5 0 49 TO 6 0 50 BZ 10 0 90 EB 1 0 88 VC 10 0 150 PV 23 0 230 EA 50 0 250 SY 5 0 200 PS 18 0 260 BT 3 0 150 BY 5 0 18 SR 5 0 265 LS 0 .01 PF 0 .01. TABLE DEX EXPORT DEMAND (FOB VALUE) MX MN VALU ET 100 0 44 PE 16 0 250 pp 32 0 200 XY 1 0 0 22 TO 16 0 25 VC 25 0 125 PV 50' 0 210 EA 50 0 200 SY 45 0 180 PS 70 0 235 BT 10 0 130 SR 20 0 250 TABLE INT INTEGER VARIABLES AND COST SC AR LD OX PC EH SE PY PL MINSIZE 2u0 10. 100 40 20 10 20 20 15 MAXSIZE 1500 200 300 200 200 100 200 200 99 INTCOS 100 166 500 250 290 558 180 180 400 VARCOS 40 108 185 160 156, 167 85 85 200 TABLE COSCNV COST CONVERSION FACTORS KWH BAG CWA STM BFW CLO CF .02 1 1 1 1. 70 TABLE PROF FCT 1 .0001 2 .0011 3. .01 '4 .2 5 .3 6 .4 TABLE RHS £ 84 PEDMN 270 PEDMX 31G EADMN 14 EAEMN 17 EAEMX 19 -334- PVDMN 54. PVDMX 60 PVEMN 90 PVEMX 105 PSDMN 36 PSDMX 40 PSEMN 108 PSEMX 120 PPDMN 14 PPDMX 16 * . ROWS COLUMNS NEED 2 CHARACTER NANE(PA) (PR)E(MF) ENTRIES HERE MUST HAVE AN ENTRY IN * AND - TABLE DEI OR DEX tN ORDER TO * (PR)D(MF) GENERATE THE ROW IN FORM ROW ID (FED)(MF) FORM TABLE PRO ((XX).(YYY))= TABLE PROA. ((XX)h(YYY)) FOR XX=TABLE PRDA (=9) FOR YYY=TABLE PROA (,=) MACEN COPY N4AME INDO/WBK ROWS FORM ROW ID PROF(O) =OBJ (FED)COST =MAX INV(PU) =MAX (COS) =MAX (REV) =MAX FOR REV=DEI.DEX LIM(PU) =MAX WHEN TABLE INT ((PU),INTCOS) (fED) (MF) =(MNF/MF) WHEN TABLE FD((MF),(FED)) CP-(R)(PU) =(MNF/R) WHEN TABLE CAP(CP(R)9(PU)) EXCEPT TABLE INT ((PU)INTCOSI CPM(PU) = MAX WHEN TABLE INT ((PU)tINTCOS) (PR)BA =MAX (STR)BA =MAX REV(PR)(REV) =MAX WHEN TABLE (REV)(VALU.(PR)) FOR REV=DEI.DEX (PR)(X/REV)(MF)=(MNF/MF) WHEN TABLE (REV) ((MF)v(PR)) FOR X=D*E FOR REV=DEI*DEX BEZMX =MAX COPY COLUMNS FORM VECTOR BEZPUR BEZCOST =94.0 BEZBA -I BEZMX =1 FORM VECTOR (COS)TR EXCEPT COS=FUL PROF(O) =1.0 EXCEPT COS=INV PROF(O) =TABLE PROF(FCT9(O)) WHEN COS=INV (COS) =-1.0 EXCEPT TABLE COSCNVU(COS)qCF) (COS) =-1.0/TABLE COSCNV((COS),CF) WHEN TABLE COSCNV((COS)oCF) FORM VECTOR TR(FED)COS PROF(O) =1.0 (FED)COST =-1.0 FORM VECTOR (PU)INVTR INV(PU) INV =1.0 FORM SECTION (REV) FOR REV=DEX,DEI FORM VECTOR (REV)(PR)TR WHEN TABLE (REV) (VALU9(PR)) REV(PR)(REV) = 1.0 (REV) =-1 FORM SECTIONtEND FORM VECTOR (REV)TR FOR REV=DEX.0EI (REV) = 1 FORM VECTOR (PU)INT WHEN TABLE INT((PU)91NTCOS) LIM(PU) =-TABLE 1NT ((PU)iMINSIZE)- 335- TABLE INT ((PU)tMAXSIZE) i ( CPM(PU). =-TABLE TNT ((PU),t4INSIZE) INV(PU) = TABLE INT ((PU)vINTCOS)* TABLE INT ((PU)9MINSIZE) FORM VECTOR (PU)VAR WHEN TABLE INT ((PU)oVARCOS) LIM(PU) = 1 CPM(PU) =-I C INV(PU) = TABLE INT ((PU)qVARCOS) FORM SECTION (PU) | . FORM VECTOR(FED)(PU) FOR FED=TABLE(PU)(=0). C (FED)COST =TABLE FD(FECOST,(FED)) (COS) =TABLE (PU)((FED)9(COS))EXCEPT COS=INV (FED)(MF) =.1.0 WHEN TABLE rFD( (F),(FEO)) C (WHEN PU=GS INV(PU) =TABLE(PU)((FED),INV)*TABLE(PU)(UFEDJ,CPM) EXCEPT TABLE INT((PU),INT,COS) ( (CAP)(PU) -TABLE(PU)((FED),(CAP)) WHEN TABLE CAP((CAP)#(PU)) EXCEPT TABLE INT ((PU)9INTCOS) ( CPM(PU) = TABLE (fU) ((FED)tCPM) WHEN TABLE INT ((PU)tINTCOS) (STR)BA =-TABLE(PU)((FED)q(STR)) WHEN TABLE (PU)((FED)v(STR)) (FED)BA =1.0 EXCEPT PU=GS FORM SECTIONoEND ' ( FORM VECTOR(PR)(STR) W;EN TABLE PRD((PR)f(STR)) (STR)BA =1.0 FUL =-TABLE PRO(PFv(STR)) WHEN PR=PF (PR)BA FORM VECTOR EXP(PR) WHEN TABLE DEX (VALU9(PR)) (PR)BA 1 REV(PR)DEX =-TABLE OEX(VALU9(PR)) (PR)E(MF) = 1 WHEN TABLE DEX ((MF)9(PR)) FORM VECTOR DO,4(PIR) WHEN TABLE DEI (VALU9(PR)~ (PR)BA =1 REV(PR)DE.t =-TABLE DEI (VALU.(PR)) J (PR)D(MF) = 1 WHEN TABLE DEI ((MF).(PR)) COPY RHS FORM VECTOR (PA) FOR PA=TABLE RHS(=t) I. (FED)(MF) =TABLE FD((MF.9(FED)) EXCEPT TABLE RHS((FED)9(PA)) (FED)(MF) =TARLE RHS ((PA)q(FED)(MF)) CP(R)(PU) =TABLE CAP(CP(R),(PU)) EXCEPT TABLE INT((PU)tINTCOS) (PR)E(MF) = TABLE DEX ((MF)*(PR)) C EXCEPT TABLE RHS ((PA),(PR)E(MF)) (PR)E(MF) = TABLE RHS ((PA-tPR)E(MF)) (PR)D(MF) = TABLE DEI ((I >.;PR) C EXCEPT TABLE - ((PA),(PR)D(MF)). (PR)D(MF) = TABLE RHS ((PA)q(PR)D(MF)) BEZMX =126.0 COPY BOUNDS FORM BOUNDS BNDI i (PU)INT98V = 1.0 WHEN TABLE INT ((PU)?INTCOS) COPY ENDATA SAVE END,L NAME INDO/WBK ROWS N PROF1 Ir%r gi rmvr cr N PROF3 N PROF4 -340- N PROF5 N PROF'6 L METCOST L ETHCOST L PROCOST L BUTCOST L NAPCOST L GAOCOST L 8EZCOST L INVGS L INVSC L INVOU L INVAR L INVLO L INVOX L INVPC L INVEH -L INVSE L INVPY L INVPL L IN'"'BU L INVSB L KWH L BFW L STM L CWA L LAB L MNT L CAT L ITX L ROY L FUL L BAG L EXA L UTL L INV L CLO * L DEI L DEX L LIMSC L LIMAR L LIMLD L LIMOX L LIMPC L LIMEH L LIMSE L LIMPY L LIMPL L METMX G METMN L ETHMX G ETHMN L PROMX G PROMN L BUTNX G BUTMN L NAPMX G NAPMN L GAOMX G GAOMN L CPMGS L CPMDU L CPMBU U LeNU.' G CPNOU * -341- G CPNBLJ L CPMSC L CPMAR L CPHLO L CPMOX L CPMPC L CPMEH L CPMSE L CPMPY L CPMPL L FLBA L ETBA L PEBA L POBA L PPBA L C4BA L MGBA L f-OBA L XYBA L TO0A L BZBA L EBBA L VCBA L PVBA L EABA L SYVA L BTBA L- LSBA L BYBA L PFBA L SRBA L PS8A L GASBA L C2HBA L C3H8A L C4MBA L MOlBA L M02BA t ~L M038A- L FEOBA L RAFBA L XYLBA L BEZBA L TOLBA L EBZBA L NPABA L GOABA L PVCBA L EALBA L STY8A L PSTBA L PP1BA L M048A L MOSBA L PE1BA L LOSBA L VC1BA L BTYBA L BTABA L SRRBA L HYDBA L CH2BA L CH3BA L CH4BA A -^ . ... - . L L*A t5 A . . L REVFLDEI -345- L REVETDEI L REVETDEX L, REVPEDEI - L REVPEDEX L REVPODEX L REVPPOEI. L REVPPOEX L REVC40EI L REVMGDEI L REVFOOEI L REVXYOEI L PEVXYDEX L REVTOCEI L REVTODEX L REVBZDEI L REVEBDEI L REVVCDEI L REVVCDEX L REVPVDEI L REVPVDEX , L REVEADEI L REVEADEX L REVSYDEI L REVSYDEX L REVBTDEI L REVBTDEX L REVLSOEI L .REVBYDEI L REVPFDEI L REVSRDEI L REVSRDEX L REVPSDEI L REVPSDEX G FLDMN G ETDMN L ETEMX G ETEHN. L PEDMX G PEDMN' L PEEMX G PEEMN G PODMN L PPDMX G PPDMN L PPFMX G PPEMN G C4DMN G MGDMN G fODMN L XYDMX G XYDMN L XYEMX G XYEMN ( L TODMX G TODMN L TOEMX G TOEMN L BZDMX G BZDMN L EBDMX G EBDf4N L VCDMX G VCDMN * L VCEMX , yvLt.MN L PVDMX G PVDMN L PVEMX G PVEMN L EADWX G EADMN L EAEMX G EAEMN L SYDMX G SYDMN L SYEMX G SYEMN L BTDMX G BTOMN L BTEMX G BTEMN G LSDMN L BYDMX G BYDMN G PFOMN L SRDMX G SRDMN L SREMX G SREMN L PSDMX G PSOMN L PSEMX G PSEMN L BEZMX COLUMNS BEZPUR BEZCOST 94,00000 BEZPUR BEZBA -1.0000Q0 BEZPUR BEZMX 1.00000 KWHTR PROF1 1.00000 KWHTR PROF2 1.00000 KWHTR PROF3 1.00000 KWHTR PROF4 1.00000 KWHTR PROFS 1.00000 KWHTR PROF6 1.00000 KWHTR, KWH -50.00000 BFWTR PROF1 1.00000 8FWTR PROF2 1.00000 BFWTR PROF3 .OOOJo BFWTR PROF4 1.00000 BFWTR PROFS 1.00000 BFWTR PROF6 1.00000 BFWTR BFW -1.00000 STMTR PROF1 1.00000 STMTR PROF2 1.00000 STMTR PROF3 1.00000 STMTR PROF4 1.00000 STMTR PROFS 1.00000 STMTR PROF6 1.00000 STMTR STM -1.00000 CWATR PROF1 1.00000 CWATR PROF2 1.00000 CWATR PROF3 1.00000 CWATR PROF4 1.00000 CWATR PROFS 1.00000 CWATR PROF6 1.00000 CWATR CWA -1.00000 LABTR ?ROF1 1.00000 LABTR PRQOF2 1.00000 LABTR PROF3 1.00000 LABTR PROF4 1.00000 i Lonm L. rmur.J £.uU'v v LABTR PROF6 1.00000 LABTR LAB -1.000 00 -34- MNTTR PROFI 1.00000 MNTTR PROF2 1.00000 MNTTR PROF3 1.00000 MNTTR PROF4 1.00000 MNTTR PROFS 1.00000- mNf PRYF6 -1:88898 CATTR PROF1 1.00000 CATTR PROF2 1.00000 CATTR PROF3 1.00000 CATTR PROF4 1.00000 CATTR PROFS 1.00000 CATTR PPOF6 1.00000 CATTR CAT -1.00000 ITXTR PROF! 1.00000 ITXTR PROF2 1.00000 ITXTR PROF3 1.00000 ITXTR PROF4 1.00000 ITXTR PROFS 1,C3000 ITXtR PROF6 1.00000 ITXTR ITX -1.00000 ROYTR PROF1 1.00000 ROYTR PROF2 1.00000 ROYTR PROF3 1i.00000 ROYTR PROF4 1.00000 ROYTR PROFS 1.00000 ROYTR PROF6 1.00000 ROYTR ROY -1.00000 BAGTR PROF1 1.00000 BAGTR PROF2 1.00000 -.BAGTR PROF3 1.00000 BAGTR PROF4 1.00000 BAGTR PROF5 1.00000 BAGTR PRQF6 1.00000 BAGTR BAG -1.00000 EXATR PROFI 1.00000 EXATR PROF2 1.00000 EXATR PROF3 1.00000 EXATR PROF4 1.00000 EXATR PROF5 1.00000 EXATR PROF6 1.00000 EXAtR EXA -1.00000 UTLTR PROF1 1.00000 UTLTR PROF2 100000 UTLTR PRUF3 1.00000 UTLTR PROF4 1.00000 UTLTR PROFS 1.00000 UTLTR PROF6 1.00000 UTLTR UTL -1.00000 INVTR PROFi .00010 INVTR PROF2 .00110 INVTR PROF3 .01000 INVTR PROF4 20000 INVTR PROF5 .30000 INVTR PROF6 .40000 INVTR INV -1.00000 CLOTR PROF1 1.00000 CLOTR PROF2. 1.00000 CLOTR PROF3 1.00000 CLOTR PROF4 1.00000 CLOTR PROFS 1.00'000 CLOTR PROF6 1.00000 CLOTR CLO -.01429 TRMETCOS PP.OF1 1.00000 TRMETCOS PROF2 1.00000 TRMETCOS PROF3 1.00000 -348- TRMETCOS PROF4 1.00000 --TRMETCOS PROFS- 1.00000 TRMETCOS PROF6 1.00000 TRMETCOS METCOST -1.00000 TRETHCOS PROFI 1.00000 TRETHCQS FROF2 1.00000 TRETHCOS PROF3 . 1.00000 TRETHCOS PROF4 1.00000 TRETHCOS PROF5 1.00000 TRETHCOS PROF6 1.00000 TRETHCOS ETHCOST -1.00000 4 TRPROCOS PROF1 1.00000 TRPROCOS PROF2 1.00000 TRPROCOS PROF3 1.00000 TRPROCOS PROF4 1.00000 TRPROCOS PROFS 1.00000 TRPROCOS PROFb 1.00000 TRPROCOS PROCOST -1.00000 TRBUTCC5 PROF1 1.00000 TRBUTCOS PROF2 1.00000 TRBUTCOS PROF3 1.00000 TRBUTCOS PROF4e 1.00000 TRIUTCOS PROF5 1.00000 TRBUTCOS PROF6 1.00000 TRBUTCOS BUTCOST -1.00000 TRNAPCOS PROFI 1.00000 T:ArCCS PROnF2 I1. 00000 TRNAPCOS PROF3 1.00000 TRNAPCOS PROF4 1.00000 TRNAPCOS PROF5 1.00000 TRNAPCOS PROFo 1.00000 TRNAPCOS NAPCOST -1.00000 rRGAOCOS PROF1 Ic00000 TRGAOCOS PROF2 1.00000 TRGAOCOS PROF3 1.00000 TRGAOCOS PROF4 1.00000 TRGAOCOS PROF5 1.00000 TRGAOCOS PROF6 1.000 0 0 TRGAOCOS GAOCOST -1.00000 TRBEZCOS PROF1 1.00000 TRBEZCOS PROF2 1.00000 TRBEZCOS PROF3 1.00000 TRBEZCOS PROF4 1.00000 TRBEZCOS PROFS 1.00000 TRREZCOS PROF6 1.00000 TRBEZCOS BEZCOST -1.00000 GSINVTk INVGS - i .0 000 GSltiVTR INV 1.00000 SCINVTR INJVSC -1.00000 SC'NVTR tI>V 1.00000 DUINVTR INVDU -1.00000 DUINVTR INV 1 .00000 ARINVTR INVAR -1.00000 ARINVTR INV 1.00000 LDINVTR IN''LD -1.00000 LDINVTR INV 1.00000 OXINVTR INvOX -1.00000 OXINVTR INV 1.00000 PCINVTR INVPC -1.00000 PCINVTR INV 1.00000 EHINVTR INVEH -1.00000 EHINVTR INV 1.00000 SEINVTR INVSE -1.OJOOO SEINVTR INV 1.00000 PYINVTR INVPY -1.00000 PYINVTR INV 1.00000 PLINVTR INVPL -1.00000 PLINVTR. 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V V V V S V Vf V V \E VV T E P Y O C VS A Y T R s L T E O P 4 G O RC CCCCT TT T TTT TTTT TTTTTTTTTTT T TTT TT * - O O O O O R R R R R R R R R R R R RRA ARR RRR RRRRRRRR R R S S S S S S S * PROF I I I I I I lII I I I I I A I I I I I I I I PRiF 2 I I I I I I I I I I I I A 1 1 1 i I I I 1 PROF3 1 1 1 1 1 1 1 I I 1 1 1 A I I 1 1 1 1 1 1 PROf4 111111III111A I I I I I I I I PROFS *I Il 1111IIA1111111 * * * I a I PPOf 6 A I 11 I I I I I I I NETCOST -1 ETHCOST -1 PROCOST -1 BUTCOST a a a . vl * * * * a * t4APCOST I GAOCOST -I BEZCOS1 C -- INVGS ;NVSC a a * . a 'l * a * a * INVOU * INVAR 1 INVLO - INVOX I INVPC . * * * * * -1 . . . a INVEH -1 INVSE INVPY I IVPL INVBU I . a a * * - a INIVSB - KWH -C BFW -1 STM -I CWA * -I . a a a a a a e a LAB -1 HNT -1 CAT -1 ITX -1 ROYaa 1 0 fUL BAG -I EXA -1 UTL INV a a a -I * I *1 11 * a CLO -A DEI -1-1-1-1-1-1-1-1 DEX -1-1-1-1-1-1-1-1-1-1-;- LIHSC LIMAR a a a a a a a a a a LIMLO LIMOX LIMPC LIHEi LINSE . . a . a a a a a a a IfJDO/W8K A-MATRIX PICTURE SEP 02. 1971 -362- ,-AGE NUMBER 2 ROW NAHE COLUMN NAME 8 K 8 5 C L H C I R B E U I C T T T T 7 T T G S O A L O P E S P P a S D D D OD ID D D D D D D D O D D D O D D E W f T W A N A I O A X T N L R R R R R R R S C-U R D X C H E Y L U B E E E E E E E E E E E E E E E E E E E E Z H W N A d T T X Y G AL V M E P B N G 8 I I I I I I I 1 I II .1 I X X X X X X X X X X X I 1 11 1 1 I I P T T T T T T T T T r r T T I E 7 R U A A,E'N N N N N N N. N N N N N N E P P X T V P E S B S P F E P P P C N F U R RR R aR aR AR R R T H OT P 0 Z V v V V V V V V V V V V V T E P Y 0 C V A Y T R S L T E O P 4 6 0 RC CCCC C T TT T T T T T T T T T T T T T T T T T T T T T TT 0 0 0 0 0 0 0 R R R AR A R R R R R R RRR A RARR RAR R RR -: SS SsSS SS LIMPY LIMPL METMX METMN ETHMX . . . * * * E THMN PROHM) PROMN BUT m BUTMN . . . . . . . . NAPMX NAPHOt GAOMX GAOMN N CP'GS . . . . CPMDU CPMBU CP.NGS CPNOU CPNEU c . * . * . * * * * CPHSC CPHAR CPMLO CPMOX CPMPC. * * * * * * * * * ' CPAEH . CPMSE CPMPY CPMPL FLBA . . . . . . * ETBA PEBA POfA PPBA C4BA . . . . * * a * * * a MGBA FOA XYBA TOBA BZBA . . . . . . . CBBA VCBA PVBA EABA SYBA *.... ** BTBA LSBA BYBA PFBA SRBA . * * a a * * * * * a INDO/W8k A-MATRIX PICTURE - SEP 02, 9 -363- PAGE NUMBER 3 ROW NAHE oCOLUMN NAME B K B S 'C L N C I R B E U I C T TT Tt T T T C 5 D A L O P E S P P 8 5 D D D D D D D D O D O D O D D D O D O D E W F T W A N A T O A 'X T N L R R iR R R R R 5 C U R D X.-C H E Y L U O E E E E E E E E E E E E E f. E -E E E E E Z H W M A 8 T T X t- G A L V O M E P O N C, 0 1 I I I I I I I I I I I I X X X X x A X X X X X X I I I I 'I I I I P T T T T T T T T T T T T T T E T R U A A E N N N N NH N N N N N N N N E P P Y, T V P E S B S P f E P P P C N f L! R R R R R R A A R RR A R R T H 0 T P 0 2 V V V V V V V V V 4 V T E P ' 0 C V A Y T R S L T E 0 P 4 G 0 R C CC C C C C T T T T T T t T T T T TT I T T TT T T TT T T T. T T T T T T T O O -O O O O O R R R R hq R R R R R P- R R A R R R R R R R R R R R R R R R R R R GASBA C2HDA C3H8A C4MBA MOIBA M028A . M03BA FEOBA RAF8A , * e * * * * XYLBA BEZBA -I TOLBA * EBZA .. '!* * * *** NPABA aa GOABA PVCEA EALaA STYBA PSTBA a . a . . PP1BA M04BA M05BA PEIBA LOSBA aaa VC1BA BTYBA BTABA SRRBA .'. HYDBA . . . a .' . ... CH2BA CH38A CH38A rl4.8A CeXBA REVFLDEI . . . . a 1 REVEIDEI I REVETOEX 1 REVPEDEI * RFvPEDEX I REVPODEI . . . - . 1 REVPPOEI REVPPDEX 1 REVC4DEI REV4GODEI REVFODEJ I . . . . REVXYDEI REVXYDEX 1 REVTOOEI REVTODEX 1 REVBZDEI .. . * * * a * a a lNDQVwBK A-MATRIX PICTURE SEP 029 1971 -364- PAGE NUMBER 4 ROW NAME COLUMN NAME B K B S C L H C I R 8 E U I C T T T T T'T T 6 S D A L 0 P E S P P 8 S 0 0 D 0 D 0 O D D 0 0 0 D 0 D D0 0 0 0 E W F 7 W A N A T 0 A X T N L R R R R A R R S C U R 0 X C H E r L U 8 E E E E E E E E E E E E E E E E E E E E Z M W H .A O T T X Y G A L V O N E P D N C O I I I I I I I I I I I I I X X X X X X X X X X X X I I I I I I I I. P T Y T T T T T T T T 7 T T T E T R U A A E N N N N N N N N N N N N N -E P P X T V P E S B S P F E P P P C M f U R R R R.R R R R R R R R T H 0 T P 0 Z V V V V V V V V V V V V V T E e Y O C V A Y T R S L T E O P 4 6 0 C C C C C C C T I T T T T T T T T T t T T T T T T T T T T T T T T T T T T T T T .O O OO O O O R R R R R R R R R R R R R R R R R R R R A R R R R R R R aRa R REVEEiOEI REYiCi.El REVVCOEX 1 REVPVDE; ,PEVPVDEX . .I REVEA )EI REVEADEX ,1 REVSYDEI REVSYDEX REVBlDEI **** REVUTOEX REVLSOEI REV8YDEI REVPFDEI -REVSRDOE . * * REVSROEX REVPSOEI REVPSOEA FLDH'J ETTOM,* ETEMN PEDMX PEOMHN PEEMX- PEEHN POOMN PPOMN PPEMX . . . PPEMN C4D4N HGD.H4N ODMN XYDMX XYD94 xYE.YX XYEMN - TODMN TOOHN . . * * *. TOE'4X TOEMN 8ZOMA BZDMN E OMX . .* EB*DN VCD4X VCDMN VCEMX VCEM(. . INDO/WBK A-MATRIX PICTURE SEP 02. 1971 -365- PAGE NUMBER S ROW NAME COLUMN NAME B K 8 S C L N C I R B E U I C T 7 T T T T T 6 S 0 A L O-P E S P P D S 0 D D 0 0 D 0 00 0 0 O D 0 D 0 0 0 0 D E Wi f T W A N A T O A X T N L R R R R R R R S C U R D X C N E Y L U D E E E E E E E t E E E E E E E E E E E E Z H W A8 T I X V GA L V 0 H E P 8 N G6 III I I I I X X X X X X X X X X X X I I I I I l I I ; P T -T T T1 T T T T I T T T T E T R U A A E N N N N N N N N N N N N N E P P X T V P E S 8 S P f f.E P P t N f U R R A R A R R R R R R R R R T N O T P O Z V V V V V V V V V V V V V E P V O C V A V 1 R S L T E 0 P4 G O R C C C C C C C T T T TTIT T T T TTTTTT T TTTT TT t I T T O 0 O O O O 0 R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R PVDMX PVDMN PVEMX PVEMN EAOA ,M EADHN EAEHX EAEMN SYDHX SYEHA SYEHNN BTDH4X BTDMN BTEMA ,. . . . . . . 0 . DTEHN LSDMN BYDMX BYDMN PFOMN . . . . . . ; . * * SRDHX SRDMN SHEMX SREHN PSDMX . . . . . . . PSDMN PSEMX PSEMN BEZMX I INDO/WBK A-MATRIX PIC1URE SEP 02* 1971 -366- PAGE NUMBER 6 ROW NAME COLUMN NAME D D DO O D OOO DO D O O OO OD OO S A L O P E S P P A A L O P E S P P H E P O N O C C C N 0 C H M H N M t C V C E E E E E E E E E E E E E E E E C R D X C H E V L C R D X C H E Y L E 7 R U A A H h H P 0 2 O 0 O O O 2 2 C 2 I I I I I I I 1 I I I I I I X I I I I I I I I I I V V V V V V V V V T h O Tf P O 2 3 4i A A X 1 2 3 4 5 H H I H x T 8 E V P E S L L a P S P T T N N N N N N N N N -A A A A A A A A A C G G C C G S S 5 S S D A A A A A L O P E Y O Z B C V A Y T s Y F R S a R T T T T T T T T T R R R R R R -R R R S 5 5 S 5 S C C C C C U R R R R R O X C h TTTTRTT rR T T T T T U T T fi R R R A R R R R R R R R R PROFI -1-1 PROF2 r1-l PROF3 -1-1 PROF4 PROFS * 1-1 PROF6 -1-1 METCOST' c ETHCOST C PROCOST C BUTCGS1 * . C . . t AAPCOST C GAOCOST C BEZCOST !IIVGS livSC - .F . C * * . * * a INJVDUJ I NVAR E D INVLD F C IijvOv. F 0 It4VPC * * * * * 0. O'.* ptjvp E~ ItJVEH I'jVSE E C INVPY E -C INVPL E - INVBU a . . * a a r * INVSB KWH D C C CC E C BFW STM CWA a ' . . a a a . * LAB A A A A A 6 6 6 1 82 3 22 Hir, 4 J J JJ s 5 58J I C 9 C C CAT 8 A A 8 B 6 6 6 1 8 O J C 5 ITX D A A A B 2 2 3 8 A 4 ROY * A A A A B 8 J A A C 6 J I FUL A A A A A A AAAA A BAG EX.A 2 J aJ 8 9 C 6 UTL C C C 4 4 C S C J INV . . . - * * * * CLO J DEI -l-l-l-l-l-l-l-l-l-l-l-i-l-l 1 DEX LIHSC -E I LIMAR . * . . - * . I . a e LIMLO -D I LIMOX - 1 LIMPC -D 1 LIMEH C 1 LIMSE * a * a a 0 * *1 * * * a INDO/WOK A-MATRIX PICTURE SEP 02, 1971 -367- PAGE NUMBER 7 ROW NAME COLUMN NAME O D OD O D O D O O D D )O 0 O D O S A L O PE S P P S A L'O P E S P P H E P B NG* C C C N C C i tm CC VC E E E E E E E E E E E-E E E E E C R D X C H C Y L C R D X C H E Y L E T R U A A H h H P O 2 O O O 0 O 2 2 C 2 - IIIIIII I I I I I X I I I I I I I I I I V V V V V V V V V T h O T P O 2 3 4 A A X 1 2 3 4 S H Hd I H X T B E V P E S B L B P.S P T T N N N N N N N N N A A A A A A A A A 6 6 6 6 6 G S S S S S D A A A A A L 0 P E Y 0 Z B C V A Y T S Y f R S R R T T T T T T T T R R R R R R R R R S S S S S S C C C C C U R R R R R D X C H T T I T T T T T T T t 1 T T R R R R A R R R R R A U R R LIMPY L IMPL -C I METMX METMN 1 ETHt4X * ETHHN PROMH 1 PROMN BUTHX BUTHN . 1 * * NAPHX NAPHN , GAOMX GAOMN CPMGS * * * 11II1I. . CPM4DU .1 CPMBU CPNGS 1 1.1 1 1 1 C P NOU - I CPIJi3U * CPiiSC .-D -1 11111l *CPMA1 -C .-I . 1 1 1 1 I1 -CPML D -D -1o CPHOX .-C. -1 i CPI4PC . . . . C . -I1. * . a CPMEH -C -I CPMLE -C *- CPMPY -C -1 CPMPL -C -I FLBA . . * . . . . ETBA PEBA POBA PPBA C4BA * . . . * . * * . HGBA FOBA XYBA TOBA BZBA . . . a . . . EBBA VCBA & PVBA EABA SYBA . . * . a * a * * * BTBA LSBA BYBA PF8A SFOA . a . . . . . a * * INDO/WBK A-MATRIX PICTURE SEP 02. 1971 -368- PAGE NUMBER a ROW NA4E COLUMN NAME D D D D D D O O O D D D 0 D S A L O P E S P P S A L O P E S P P M E P O N G C C C N G C M A j M M C C V C E E E E E E E E E E E E E E E E C R D X C H E Y C R 0 X C H E Y L E T R U A A H H H P 0 2 0 0 0 0 0 2 2 C 2 I I I I I I I I I I I I I I X I I I i I I I I I V V V V V V V V V T H O T P 0 2 3 4 A A X 1 2 3 4 5 H H I .4 -,X T B E V P E S B L B P S P T T N N N N N N N N N A A A A A A A A A G G G G C G S 5 S 5 5 0 A A A A A L O P E Y 0 Z 8 C V A Y T S Y F, R S R R V T T T T T T T T R R R R R R R R R S S S S S S C C C C C U R R R R R D X C H T T T T T T T T T T T IT T R R R R R R R R R R R R R R.- PSBA GASBA -J. -A -A-A-A-A-A C2HBA -1 1 1 C3HBA -A-A-A-A-A C4MBA * -A-A-A-A-A. MOIDA -A 1 MO2A -A I M038A -A I FEOEA -A-A-A-A RAFBA . . . . . . . .-A-A-A-8-8 XYLBA -A-A-A-A-A BEZBA -A-A-A-A-A TOLBA -A-A-A-A-A EBZBA -A-A-A-A fJPABA .. * . . .- -B . 1 . GOAUA PVCBA EALBA STYBA PSBbA . * * * * * * . PPIBA H04HA -A MOSBA -A PEIBA -8 LOSBA . - A . * * * * * * *-A VClEA -2 1 BIABA SRRBA HYOBA .....***** CH28A -1 1 CH38A -I 1 CH4ZA -I 1 C2XHA -B-A-A-A-A I REVFLOEI . . . . . . . . . . REVETOEI REVE TOEX REVPEDEI REVPEOEX WEVPODE I *** REVPPOEI REVPPOEX REVC40EI REVMGOEJ REVFODEI . . . * * * * * * REVXYDEI 1 REVXYDEX REVrObEI I REVIOOEA REVaZOEI 1 . . . . . . * * * INDO/WOK A-MATRIX PICTURE SEP 02. 1971 -369- PA6E NUMBER 9 ROW NAME COLUMN NAME O 0 D 0 0 0 D D 0 0 0 0 0 0 0 D S A L 0 P.E S P P 5 A L C P E S P P N E P B N 0 C C C N G C M N N N N C C V C E E E E E E E E E EEE E E E E C R D X C N E Y L C R O X C N E Y L E T R U A A N h H P 0 2 0 O OO 0 2 2 C 2 11I I I I I I I I IX II 11111 I I I V V V V V V V V V T H 0 T P 0 2 3 4 A A X I ?-- 4 5 h I h x I 0 E V P EE S a L a P S P T 7 N N N N N N N N N A A A A A A A A A C 6 G G C 6 S S S S S t A A A A A L O P E Y O Z 8 C V A Y T S Y F R S R R T T T I T T T T T R R R R R R R R R S S S S S S t C C C C U R R R=-K R D J1 C H -T T I IT IT T T T T T T TT R lR R R a R F R R A;^ Q R R R R REVEODEI I * REVVCOEI I REVVCOEX REVPVDEI I * REVPVDEX * * * * * REVEADEI ' * REVEADEX REVSYDEI I REVSYODEX REVBTDEI . a i . a * * * * ' j . REVBTOEX REVLSDEI 1 REV8YDEI I REVPFOEI 1 REVSMDEI . . 1 . REVSRDEX REVPSDEI 1 REVPSDEa FLDMN ETD1N . a . . . ElENA -ETH N PErfl4X PEDHN PEEMX * . * * * * * * * * PEEMN PODHN PPDHA PPDMN PPEMX . . . . a . . . . . . PPEHN C4 DMH MGOHN FOOMN XAOMA . . . XYDHN XYEMX XYEMtJ TODMX IODHN . . . . . TOEMX TOE14N BZDHX BZODHN ECDM * , . . . . a . . . . EBDBN VCDMX VCDHN VCEMX VCEMN . . . a . . * * * * INDO/WBK A-MATRIX PICTURE SEP 02, 1971 -370- PAGE NUMBER 10 ROW NAME COLUMN NAME O O D D D O O D O D D I) D D D S A L O P E S P P S A L O P E S P P It E P B N 6 C C C N G C 11 H M1 M N C C V C E E E E E E E E E E E E E E E E C R D X C H E Y L C R D X C H E Y L E T R U A A H h A P 0 2 0 0 0 0 0 2 2 C 2 'I I I II I I I I I I I I I X I I I I I I I I I I V V V V V V V V VT H 0 T P 0 2 3 4 A A X 1 2 3 4 5 H H I H X ATb E V P E S D L h P S P T T N N N N N N N N N A A AA A A A A A G G G t, S S S S S D A A A A A L 0 P E YOZ C V A Y T S Y F R S R R T T T T T T T T T R R R R R R R R R S S S S - S C C C C C U R R R R R X C h 1 T T T T T T T T TI T T T R R R R R R R R R R R A R R PVDMX PVDMN PVEMX PVEMN EADMX . a . ' EADMN EAEMA EAE4N- SYD X SYDMN a a a : 0 0 0 0 SYEMX S YEHN BTOiX BTDM!N BTEMA . . . , . * Bi'EMN LSOMN 8YDMX BYOHN PFDMN a a a a a S 0 * SRHAX SRDMN SREMX SREMN PSDON a a a a a a 5 a PSDM.N PSEMX PSEHN * BEZMX jNDO/WeN A-MATRIX PICTURE SEP 029 19711 -371- PA6E NUMBER 1 ROW NAME COLUMN NAME C E S C C 8 V V f F E P'P P C H M 14 M Ii 1 F X T B E V P E S B L a P P P P P 5 P E E E E E E E E E C E E D D 0 S S P P a S A 2 3 4 2 E 3 P 4 00 0 A 0 0 E V 0 E B C V A 7 T 0 T A 2 3 4 'E R S E P P X T V P E S B S P F E P E E YL U OSH Mh NhI hIMI 23 F4 50L LZ Z IC L Y A SYS5H H A RT T EP V 0C VA ITR 5LT E PROFI PROF2 .PROF3 PROF4 PROFS PROF6 ME TCOST ETHCOST PR OCOSTI BUTCOST ....a NAP CO ST GAOCOST * BEZCOST INVGS * ~~~~INVSC a aaa INVAR * INVLD rtNvEI1 I'JVSE_ * ~INVIVY INVSB 0 KWH BFW CWA... 0 *LAOB 2 2Z3 C MNT 6 3 6C CC CAT 1 A 14 C ITX J j C ROY I I C a..* FUL A JJ,-- BAG EXA C 7C CC C UTL C C 6CC C INV * CLO - DEI DEX LIMSC LIHAR . ** LINLD LIMOX LIMPC 4..IMEHI ILIMSE a .. IB- I * * * * BAS VOAd b I V93A j V883 I- * * 5 vSzB * Yfidd I- VO3d I Y813 * 1dWd:) II 3SIWd3 YOIid) 3Shrd:) (laNd) SgOhd) I (nawd) tJ PiI ov 9 NWdvN YWd%fN NWOHd YI~.ON d NWHI3 * * ** a WHI3 idWIl AdWIl 3 L I S 8 I A V A 3 0 A d 3 1 1 8I 0 14 H H S A S V A 1 3 I Z Z I 1 0 S t I £ m 4 H m4 H H S 8n 1 A 3 3 3WVN NHfl1o3 3HVN A0 Z1 8I3914(N 3OVd -ZE- IL61 *EO cI3S 3ufl3l)d Y18LVW-V )BI8F/0NI INDO/WSK A-MATRIX PICTURE SEP 029 1971 -373- PAGE NUMBER 13 *ROW NAME COLUMN NAME C E S C C B F f F F E P P P C 14 14 14 N H V K 13 BE V P"E S B L B P P P P P S P E E E E E E E IE E E E 0 0 0 2 S T 3 4 T LIL L L T E O P 406 66 66 60 V 0 Z B C V A V T 5 V V f f F FR X X xX x Xit X.X X xXa 10 0 HZ V h NA 6C C C CP ICP C A AR F X T 8EV P E S BL aOc c-c rs PP p pPp p pP P ppPA C * ~PSBA - GASBA11 C3HBA11 11 C'4MBA * 1 . 1 . MOIBA FEOBA11 RAFIiA * 1 aa XYLBAI aEZBA 21 TOLBA1 EBLBA11 NPAUA aa 60ABA PVCI3A - * ~EALBA1 STYBA -3-B 1 A1 PSTBA -B **** 1 PPIBA1 M0SBA1 PEII3A1 LOSBA * -A **** * a. VClt3A STIYBA -A' BTABA - SRRBA - HYOBA -A-A **a* Ct42BA CH38A * ~CH4UA C2XQA REVFLOEI aaaaa 000.-A REVE IDE I REVEIfDEA -c RE DEk I REVPEDEX -D REVPODEI a *aa REVPPDEI RE VPPDfEX - REVC4DEI I4EVMGUOEI REVFODEI aaa RE VAYDE I *REVXYDEX A RE VTODE I REVIODEAX- REVH.WEI ** aaa I XW3J)A YHODA NW0O3 NHOZ8 YWQZ8 I NH301 * S NWOOI YWGOL I NW) AX * YWOAX I NW)3dd * j 5 S W3dd ?4HOdd NXHOdd I NW33d * is - 6YW33d NWO )d I ?JW313 6 5 a6 5 NWHOIJ a- X3OSdA]H I JOSdA3H * S ** a 5 50 513(IHSA3H I3JOdA38 I US~IA3d 0- N301RA3H 0- XJOASA38 S !JGASA3d I JOv3A3b * -9 Y 3OAdA36 i )aAdA3H U- vYaO3AA3H 1J30AA3H w w W d d d d'd d d d d d -d d d S J 3 3 3 9 8 1 8 S 3 d A 3 8 I X A N H 8 H N W 3 d 3 d 3 3 3 3 9 V H H A Z H 3HNh'NwnioO3 3HVN AOH V I H83HflN 39Vd 11E- I61 *ZO d3S 3unll3Id XIHAVH-V AI8M/OUNI INDO/WOK A-MATRIX- PICTURE SEP 02. 1971 375-. PAGE NUMBER 15 ROW NAME COLUM4J NAME C E SC C 9FfF F E P P P C NM MMM fX T E VP E S L BP P PP P SPEE E EE E E EE E EEDDD PVOI4K PVDMN PVEMX PVEMN~ EADMX EADMN EAENKX EAEMN SYDHN SYENK SYEMN1 OTE?tX .... BTEMN1 LSDMN HYDMN BYDMN SRDONX SRD0MN SREMXK SREMN1 PSOMN PSEMX PSEIrN BEZMX INDO/waK A-MATRIX PICTURE SEP 02, 1971 -376- PAGE NUMBER 16 ROW NAME COLUMN NAME O D D D D O D D D D O D D D 0 0 0 D 0 8 R O O.O O O O O O O 5 O O O O O a- o o 4 O H MMMM m H H M H H MH T P P C N f X T 8 E V P E S f L L P S P Y a P 4 G O Y O Z H C V A Y T S Y F R S P E PROF I N PROF2 N PROF3 PROF4 N PROF5 N PROF6 N ME TCOST L ETHCOST L PROCOST L BUTCOST . L . N APCOST L GADCOST L BEZCOST L ItNVGS L INVSC L* INVDU L I NVAR L INVLD L INVOX L INVPC L . . . INVEH L INVSE L IN1vPy L INVPL L INVBU L * * INVSB L KWH L BFW L STM L CWA L . . . L LAB L MNT L CAT L ITX L ROY L . . . FUL L BAG L EXA L UTL L INV . . . . L CLO L DEI L DEX L LIMSC L LIMAR L . . . I LIMLD L LIMOX L LIMPC L LI6EH L LIMSE . . . . L * AX INDO/WKI( A-MATRIX PICTURE SEP 029 191 3PAGE 19U11ER ROW NAME COLUMN NAME D 0 D 0 D O O D D D O D O O D D DDD 8 R 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 4 0 Hl M tH M M M A M 1M 1M T P P C M F X T 8 E V P E S L 8 PSP Y O P 4 6 0 Y O 6 C V A Y T S Y F R S P E LIMPY L LIMPL L METMX OL MET MN ETHHX * . e D L ETHMN 6 PROMS IL P ROM t G BUTMX IL BU1MN * 6 NAPHA I L *4APHM 6 GAOMA I L GAOMN 6 CPMGS E L CP4DU O L CPMBU D L CPNGS A G CPNDU G CPNBU . . 6 CPMSC L CPMAR L CPMLD L CPHOX L CPM4PC . . a CPMEH L CPMSE L CPMPY L CPMPL L FLBA . . . L ETBA L PEBA L PORA I L PPBA 1 L C4'A 1 r . L HGBA 1 L FOBA 1 XYBA L L TOBA I L BZBA L F*BA L VCBA & 1 L PVBA L EABA 1 SYBA o * 1 * L BTBA L 1 LSBA I L BYBA L 1 PFBA I L SRBA . * * 1 L INOO/WBK A-MATRIX PICTURE SEP 029 1971 -378- PAGE NUMBER, 18 ROW NAME COLUMN NAME DO D 0 0 0 0D 0 D D 0 0 0D DDD D D 3 R O O O O O 0000 0 0 0 0 0 00000 4 0 H H H " H H m m m H M H N H M N H " H T P P C m F X T B E V P E S 8 L B P S P v O P 4 G 0 Y 0 Z 9 C V A Y T S Y F R S P PSBA I L GASBA L C2H8A L C3HBA L C4HBA L , MO2BA L M03BA L FEOBA L RAFBA L *L XYLBA L EBAEA TOLBA L EBZBA L NPABA L * . . GOABA L PVCBA L EALBA L STYBA L PSTaA L * PP1BA L hO4BA L M058A L PElBA L LOSBA L . . . VCIBA L BTYBA L BTABA L SRRBA L RYD8A L . L CH2BA L CH3BA L C'4BA L C2XBA L REVFLDEI * * L* * REVETOEI L, REVETDEX L REVPEDEI L REVPEOEX L REVPOOEI -C , . L REVPPOEI -O L REVPPOEX L REVC4DEI -C L REVM60EI -C L REVFGOEI . -C L . . L REVAYDEI -C L REvXrDEX L REVTODEI -C L REVYODEX L REVBZDEI . * -C * * L INDO/WOK A-MATRIX PICTURE SEP 02. 1971, '379- PAGE NUMBER 19 ROW NAME COLUMN NAME O O D O O 0 D O D D D D O D D D D D D 8 R O 0'0 0 0 0 0 0 0 00 D0 0 0 0 0'0 0 4 R P P C M f X T H E V P E S D L O P S P Y 0 P 4 G O Y O Z G C V A Y T S Y f R S P E REVEBDEI -C L REVYCOEI -D L REVVCDEX L REVPVDEI -0 L REVPVOEX * L REVEADET -D L REVEADEX L REVSYOEI -D L REVSYOEX L REV3TDEI * . . -D L L REVBJDEA L REVLSDEI -A L REVUYOEI -c L REVPFOEI -A L REVSRDEI * * * * -D L REVSRDEX L REVPSDEI -0 L REVPSOEX L FLDMN 6 EDOMIJ . . . ETEHX D L ETEHN - PEDMX D L PEOMN 0 6 PEEMX . C L PEEMN C PODHO 1 6 PPDMX C L PPOHN C G PPE?X . . C L PPEHN 6 C4DMN 1 6 MGDHN 1 6 FODMN 1 6 XYDHX . I * . S L XYDMN I 6 XYEMX C L XYEHN 6 TODMX 6 L TODMN G . I . 6 OEMA C L TOEHt 6 BZDMX C L BZDMN 1 6 EEDMX I . l . * 1L EBOHN 1 6 VCDMX 1 C L VCDmN 1 6 VCEmX C L VCEMN . . . G INDO/WBK A-MATRIX PICTURE SEP 029 1971 -380- PAGE NUMBER 20 ROW NAME COLUMN NAME l D D D O D D OO OO O D DO O D D 8 R O O O O O O O O O O t) O O O O O O O 0 4 0 H MM I M Am m M m M T P P C K F X T B E V.P E 8 L PSP Y O P 4 G O Y O Z B C V A Y T S Y FR S P E PVDMX C L PVMfN I C 6 PVEMX * L PVEM4N 5 C EADMX * . C L EADMN 1 C EAEMX C L EAEMN C G SYDMX 5L SYOMtJ . . * 1 . o 6 SYEHX CL SYEMN 6 8TDMX 1 3 L BTDMI4 1 6 8JEMIA * . . . C L VTEMN G LSDMN 1 6 BiYDMX 5 L -YOMN G I PFOMN * 6 . 1 I SROMX I 5 L SO.MN 1 G SREMX C L SiEMN G PSOMX . . . * 1 CL PS DM N 1 G G PSEMX , DL PSEMN 06L PSEHN D G BEZMX o L I -- TABLE OF CODED MATRIX COEFFICIENTS -381- CODE RANGE OF ABSOLUTE VALUES * N a 0.0 A 0.0 < H < 0.5 a 0.5 5 N < 1.0 1 N a 1.0 J 1.0 c N < 2.0 2 2.0 S N < 3.0 3 3.0 5 N < 4.0 4 4.0 S N < 5.0 S 5.0 S N < 6.0 6 6.0 S N < 7.0 7 7.0 S N < 8.0 a 8.0 S N < 9.0 9 9.0 S N < 10.0 C 10.0 S N < 100.0 D 100.0 S N < 1000.0 E 1000.0 S N < 10000.0 6 10000.0 S N 4 100000.0 6 .100000.0 S N . I -382- 09/09/71 PAGE 1 S(,LLIT IO' TYf-,F = PHASE 2 - RPTIMU;l 1''UU F 'i4-ST CHA&'3ES 'TflCI Tr-. STI,a OF 11WL- k`~;~ 'LE. = 1,58 MAA! .4' T~' tI~ t FL IJi v F I-A NC I It)~ =4 PHrjF5A ''-F O)F 'lLF(C1fY: R1jS 7 = %!6 AE ri F 1,LL:C T c U t,(% ;U i7S SF =-lj: ',I,% ,'E JF SrLL'C1lt, HOUdeiS SET ~~c I1 VF~LUE (iF T4,VF f..J:iJCTIVF F'J:4CTIo; -7j52.454-n5 HASIC VAN1AliLLS *'Y It I A.'JI ,j uL it ALUtr ( 014i: 1^AIi\'iT COi\ST14AINT "i CONSTRAIN~T it [UAL ~ OMMAENTS' V)J*~Ai A ~* 'ALLI'F LOP-ER bUUN'lD-- UPP~ER buUNfD': VALUE * F *Flb-ItJ*~ 4 4 3 3l o e,)&. ~3 3 I 04 * r N6ThL Q 0 . 0 000 (I)' *4 -L I iF Ž 1, 11 4 1s9 ' *a P .7h'', ~ ,1 *7,~3 iu M1ONE NE 0 . 00.0 00* *1 *F .814 3 J,4,',7'Kh7'o -4K-17I" NONE * ~rE * 0 . J 0u * F lkr'i2'jF dvc4 ~ !-) 4;1 :. ¶- * - 1 i- . i5 4 -i 5 * N i4E 14 0 iE 1 * :0(I0cC *F i ..F .4 2* -A .4t, 9 ,7.- II0A. 69 ? 7 Ž* 1,10ijE lb t.OiIL * 0 '0 0 ) 4 * *E I~~jjj i o 4i () C * 0 o%Ju(jI3j* U.UUOJOLa** 0 J Fr,F* V 0 UV¼ 'I*OaOJ 0 . )0001) Q 0.00000* a. g*qF g *ArF* 0 . 'J,I1I(j(i i* 0, r 3~J * .00 0 . 000cI" ~ ~F* C . (i Wt )u q(I L) 0 AoGUIJr* 0.uOOOUO 4 ~' 'r' L'F,b c?99Ž Y U..jOiI :j it 300'0j.,UOOQo4o%0G Ii4 Rb .s 7-' Jo 7.5'?'It I~j -u .uL)0L,~ u 0 i. v0 U0'j *..' 4 " T* 1.2613, 4+a~o.734ol* 9.Uiu* 0 . 'Ou C.* oi i i d'~ib *t: 7 I~ 4de.7 3- o1 I~ -O00 *Gu L,L ' 0 . u C r)1 a tI * P ,JP O'I 11 a LW.0OIQ * .0 0 0 00* 0~0G. lb q lb 0d ii,a1 - 0t pi ~I i4 ,0i 0 I tI t44' l 1 ti i' ti 10 41 0 4b * ) i* *l i li i lb *,i4 t 00I , t 00 00 00a0I tI C,~,~ n- r r 1,'V- 'V -t -t 1 11 '' Jl L .T, U * X * AZ;LZ . . . . . . . . . .- . .Z 2 ' . .t. 'J 4 o. - . C . . C. - C C C- C~ . J: Cj'z . -Q C'. - CIC. C' C. C C-C .', ' C'C. -J . .C .- . C . C. ." . . 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D C-- z .LcC CC.Cz c.:c, , C C-' (ZC)C.c'C.,CC 1-1C C -L,C ,C : C'C'r 'C C'C-C C >OC. C - C. C, Z: C,C C C .: C: Z;i C. C, . .C'C C C' C-.,L', L C-, L;' C C'. Z C C , C . C' C , C Cf. C! C= C C ; C- C -4 C t n C CCC C C) *> C- C- C,; C, C. C, C, C,C C)C - C1 C, C, C C C C~ C C, c, C CCZ * c C~' : C,C= C,a0 C L12 C C C C C ..C C'C' C, C. 0 - c Ci -: C '- C, ;C .C -C C 0 C b;l: ,C: . 0~ O C- Ci C, J',) CiC 0 C ., C- C'C, C ' C- --' \ C r, C,CC= 9 00c i c p sc. c,c'CZ00c: ic-'CCc, =c. - . -) rjc >L C:,,CC 'C- iC0 0CCC. COCC C Ct,-i CC C) ~~ * rnr C~0 'QCC ti'A,4 ~ C C C C C C C C *C CC CC CC CC C C.C CC *C C C C '~C CC C C C C C C> C Cn C OD A C -390- 09/09/71 PAGE 9 S TPRU lJ;u91 O CP Lr' ;. e r * L * , r'U* u (; 0 0 ) t00 0 ii i, C LH *, J. D | ,t r J . Li ')C Ui U * . 0 ° 0 0 0 ,J(: 0 t4 LH T, A 16j0* 0 * U.00C00u3 44.U0O0601 3'-. -i AbPd00v it O.00000J'i 3.50-00660* * .-)'.)b>\ J J. 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',;' i.!Cu'3 ' J * 0'.O0Oo)o 58. 735920 1 -J j.;;-.:I -i 0. UU"0'. 3S.441UJ 9* * C4' .'J)g "; 0 . U (; J)(I 35.U00030* * 69 ' oni4 *,.jF-* t.*.: si1 ' ;-}-'iJi :SG U.00006u*' 30.C30600' * , ) .))U . . j. 0 U , J * . ^;.)., ,.O00,* 30.00000 - 4. OF F U 4:0 : I" i 'LI UIiF J-UjJ f U Ui 0 3 0 ' 0 17.6060i0* * * t. 0* it.Ol4 *-F * 4; i, Ui?I* i00 7 *O w * '. .* ; * * * *E *' *F * * * * * * * * *A:f|: F}9Q: ;.>> w' ''.-r;>W;<;; >* ZisSFf i1| . r SF;S} i * { Q kw 4 § w f Q* 4 * § U Q* 4 * Q § IX § w § 4 { -391- 09/09/71 PAGE 10 IIJIDo/ 1IhC APf.RFS74 77 ;F40' ci tui ,i 4. * fitkw , Q i i Fi ,* * ;9Ji41i 'z: 'z. $Qt:i w= .vww"o it*;Qi O ; *i *.' '.- f-, ,4 O ',wiiw it it@ t, u 4 i it t ii, t F 4 2 iD 0 i*OtS9iS*O*tS*QQ Xtt t'T 4-; 4'? * a i 4Y *iVAqlA-,Lrflr VAL1c-E CuiriS -I I 11 COWSTRAINT * CONSTRAINT * ' UAL * COMMENTS V * . i *LUF LOviEk BOUNu* UPPELR *UUNDi* VALUE * i~ * * *T t ** *§i Q 4 I ' * * ft * 4* it P'F *AF f -IF* i'a.C*u 0 , ;J. 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O 2: B>G- ........................O' 0 C)- t(ts. 2? 2: * @ @ 9 * w e * * ' *- P1 * ' 2 s= nr )C :C qCnW§~CQC :' 4 C'' CJ * JC :C wC JC t C* O : '2 ?C C ;c , - -csOC : : o 2:' t? 2? : t . t ; tw i : t t ; :8 * * 2: ,- ' 2: ** 2? 2:' :;' 4 2? 4. * *2?****2:'*2'* 4****:: *4* t t i. t U 'C -Z 'I C ZiC u v, U' C C ' . C. I! : . . . .c . . . c. . c . . - . . . -. . . c.. . ~C',C C~ C L C C. C C-,. C.f C C. C.' C' :. I C .7 C C :, C C, -t: , 7- C C. C~ - - C C C. C, ., I.; C C- Z C C C ,~~c C.- c Z,I,' ec, cC. z' . - :: C- C Z." C C C*0C C, ' -- 17 K'-N Z A Y;' a'> 'V C, ~ C. Cs C .* . . . C. . C. . C. C. . . C. C. C. C. C. C. . . . C- .1~~* ~ C . C .C .C ~C ~ .1.~ C- C) C Z * C 4. Y Z~ ~ Y Ck *Y C.n N oC,. o > C C. C. C.I:.L, L I" C l. 0z M'P C., r Ui41 Li 4 ., - C,-4 C C. z, C~ c - 0 C % * 0 C. VIz * z. CD -402- 0O'/09/71 PAGE 9 *T'J/wsK !4Pu'5- 447 7* r* V 5L Tlrm\ *i , ..aT,: f C T ;A N C0i' INT ' C IJSTA I;T D* UAL * CO14ENTS A '4 !t- 4- * . VA Lu' *. LO%.ELR UPPJIIO) J .R i30UlIN)* VALUE * s J . ft 41 * i i* 1 3 * * S 'C 41t,)t.-' i;.l* S* viJ,tS ' * Oi IJ'j'J4- *# 0 *gJOnnG 24.23261i- * * ' ' tCr 3lf .' '^i, .4- ,. ,)l,;j: 'Ct ,.00b * ))I(; O.OOO* 112.S3bS * 't' '4-CH *, Wi'~ * * . r. i')U *; "r(J;1)4)'j$ uv 0.0000)u ll2- 14 OdJ * 04 4=' JiC..r .uv 1.,ulo'Ch'* * 0.0 000; 364.b7314* * t CF-;I ,t ;'*w; !.QC,(LUU * O.oG i,004" 8.7J3000* * at- QC .V *,9 0 §.@ !v ' -4J),JtbtO 89.1995-c3 *t i; v4wtst F .,/,{4l v )''tutl i .Jot .1S;JB , C'LP S. Tj,. 4A.lJ{;,JtJ''' 0.0030') 44.000J* r 4.j *i--,A ,.g-. ' 0 ;4J). 1 ,.U,tjI)" L I.VJO * 2,iij. ,00,* * *-4tJl,2t *, ;: ; , ,)I,ot....,vJ9ts '4- O * 0.00Ii0( 11.960IOt} * 4t, t LF\ *J I , ,, 4, . * 4t * i * ;.00U) 3Sv'o2ooo ' ~--.a .~* 0.00005* 35.C0Oud'* 4t t, .. -., *,t }. j.f t os #.-;l t, At 0.0000,1, 30).0006 OUt. :r +-'s .r Jt ; b C. 3 .i L; U1{' i0 t-9{0( 17.JOIlGOO*4 *-' AY,'f H4- tI,,*,';,-O t*';ijl4.. i .U00000* 40(6.472724 T . (14 U L *; . 'i' * 0,G 174.16364o * 4>+'t to7rits } !- * ,. . ' { §j0';" 0t.oU uf 90.t 0 u "If' 'S.:'-4 ty i4 .#3 .' ,.J(i),iU* *F S.G0u0zJ* '?.\F3vuOO44- ** *t PV/5A . .*;. . ..&:,.' *..if>4!,ij>; *t 0.00(00-j* 23f(JQ2!0~(ji * '.4-'- rr 4) . :4;000 t* t 0. * 61 .42621* * ;J 1: U J 0 * U i 0 0 L 200.QOC;* F LI0JQ . n l)U .l)1n000 % . U ., ;, ;t , I 0 . LI ,) U 04J n s 18 ff U . u w1{liv O t1 U i O 0 .000 * 01 ,;J (j* i'-' '.-Y P ir'0 . >ThtjLa* 0.(04i I ) 1, .u00 ; *s *+§ *.F,)4.t ' drwI- 0.00')0*0J 25.OOUC,o" tt' 0. . -; h)U 2 60 .u O3. 0 - - ., r '- , 4 i ; O o ; 4 7 ' 6 i) j4l4~ 1t r' j,. - j,;J* 1 : ; O.:', Iin)-t'oiI) l'0 )-tt U J 30 .:)U(') *,U;§ U,.lJ)' ~~i4L' * 0.6)U 3 .GL1. f C- '.i - -, O- * J.)r-:- O.iiOOd 3Q.QG17* 0 U *u,ofA, 0 0. uo(lo* 1735. 306j as 4. ;; t A i ;.;ttt lX ,s ;1}u) ti *Fr0 . o) t) L, On 3} 0 u Os . i il)UU ) -- :Y-4. ; ,A." r.0Td * 0.CG's" 'ju-')el*: tlcft(t4QqR47;272* 0 00 iUW S * U *t 0 U,-, 9 f:3 'Sr 4, * a .t' * 4- * * * 0 (' U f.i rudoFo* 17.D 4Of -l 4 *~. : ..,4 ,,*.*'- *- * .,.'*** 4-*4,. ******~-****.-*'********4-*****************44****00 -403- 09/09/71 PAGE 10 V( E F 4V ( * / - 4'LC -c;j,1r5 T~I~ CC05TrkAlT C C6"--Sbir?AI T UUA L COMMENTS * ' F VI1LLPJ LOtiEr~ jitUND* LJPP--A t3(jUbjD* VALUE *4 ****.'I -.kili, .ib , 0* r D, t :i C 4 l4 t ~ i D 0i' .t , a** k**-. ** **C*ik*i1*.- 1ii 4 4 R .. 1*ik**ia it it ik* ** **4*S*k*k*4 * *44 k* T ) L --ji*Zu'0~O0~i~ 174.1636z4* 4 IF J .6 0 *,AU U*iO.. 00 )oj U 8.-0j d0o ' * O, ~ .* ; . L 0 . c (I I 1 3. 5'i 7 - *~ii~Q U, * 0I * u 0 000 13 .467;DSf* VC- O!'.'J * ¼* UJ.~ 230.30000* * *~' *i.L F* U.U.) Uij* * 0.(0-J 0* 61 .42621a* Y. *; 0.Li P O.u0t6 ii 2~0 0 u 0u'J *j 0 o .k.uO' );j* i.0'C.i. 23 0.)0 uu:!,i4 "S-! ,- .i:, O,)lH . 1.(ou Du!' 3 (J. Oi)uL4k C5* 'i 6 . '*u..o.. 0 000ouU205 3 i).uUI;0;(,' * .io0 0 45 )I I1 * C~ I c~ D,,jh'* 0u'0, 15a.'jo0o3u i) Li L . k; Ov 0 0 * 0 *) 0 j.i 11.66043-' * 1St - fL 1 E Cxt * jFJ 0* ' '.LI U9 C, 0.C 0 0 * I O C U . 37 F%p:~LJ T'.)JT ir* ¼ (jhiie o.J'dc0 0.t 0 000* .UL'' F- U Q C .I t .I. 0* (*S(J* j Ok O.. C V L)LJ f .JIC U. * 0OC0C 1 J3UO0 F V E 4'F1' i-- 0 . M. Oi i* C.(i t)U IJ** 0 0.tJtjiU 1 Cj) 0utI" ('C *pIFpji *F (.t~~G0.00j0.)' 0-*c 1 0.0UO0 .)&(0~ U 0.Ut)0 1.1) t it (4 UZ) J* O)110 0 0~ *P EI-VA Y0.T*v.F4k *i:.,.j(sq 0 ')C' i * d. 0:yj 15 66(0 94 F J O 3 . 3 u OU4. ~6 8.z7 353C' -It: A 9r 4O I~~ Y*JoI)jj.,* 9.00000* 138.57380.*" -4 It * 1: : 1 4 l -. i, * *' *~U i . kC -i' koa -405- 09/09/71 PAGE 12 Y'i V,. j.kT'AL~ COS L WF LJPiPLr Di COMMENTS* * ) * '~ ~ 4 ~o LII * * I * * -' U* * -L C t .'),u' UUJ(U.~j~ .3366o*- T:- *P- UTCVrz u-' ~ I*~l: 0 . 0 uO o o * 4 2 36( 47 r C "cc, (J ii o' 0,~C uU0 * iN W. E .4 531- * 1tC T-f . G~I.) , 0 * 'C u :)(, No!.4E *.56707* Od A ( u 4 .- * -J 0 iJJ* 0 *i ;0 G )* N OX E 3 3U 0 0 * 1, iT % r. a (v i (j.uOCI U iZ,~ .1 322*~ Y "-~1. T' -c U . uL~JJ uiLiur. .20j7 a s'-. 6..J 'T.' "H-" u O~;)j 0. CrJjo;*ItF *94l3* fj a- -LI:J,j 0.30OOf* N * *30u(lu ep u, u C,0uOUOk L * 1r5uuj' rS L. * * ~ :'~IYt ;. *C u.~3 UO''i~) (jJj 75t4* U E GU,*~J!j * 5965 -' TFl 0 0 '0 . I'C.0. 0 * i, *j *?4 J)t~;*o~i 0Oj,j C\ 6w 1 (JlI.1~ *0~U:~ 1.000)Ot* -.4-36.1b5l2` * *JF*k T 1 ,Au. 0.0t' 0.0J6')( 1674.u'0000* * T 'r ~LI) !;l.j;W i.i: tUP .uoou*-67304.62774* T F t'L I '. '3 ;( ;u* I aI),0J' -1990.72(L;2A` rnI j 1) OI Li f; NON'E * 5i:. 1cou'* O~*'4\ i j',~L )0 .00i,JIau't P* ~0 uU [u u.E 12,34327* *1. )*J J . U 6 'J P Li-'j.0 C, r\ONE * 6 . -6&0u** -. u 1J( t.o, Efp It 319.17314*~ ~ T**1- ' . . CC('J - . ) O( tj 0 j i N * ,;E 1 o (I *t- "FL - vJ .x:00J J i. 0 JiiO C Niut-L Ii Lb. 33763e *P( i.J;00 ij' C) ~. (0 0 00(h Nlor:E * S6.346;j7* ;i '--1 It.0jG 'UtF * 1 .1 S - i~ *u; 0' I) N'ul:E * 34(q9U(;* ItIt- o e.LlOJOIJ 0W* *215 C ,-- . 0.GL,1:,~ ).L U 37.1L9734'2 I:It -406~- 09/09/71 PAGE 13 *Y ~'AU~-~r* VALUF.C GS T LOSER~ UPPER~ * COMMENTS LiF41 ~ U..~3'~ u':U' .)Ou OE * 16.71466* . *i*~f,FFRC *j'F* O;TSf' J~~U) .UoCioo* NQ * NE*9 ( 0i * *TFL- i. )f )0 .U J Ui14 134 *i it * * 4, it v I, I I it -4it , I 4 I. I. C Itib ikO i ia A*'g -0It b I O0 I f-O Q I,ij .1 1 4 i 0 i 0 w ' t it it k it6i4b k 4A k i it4 I i 0 0 9 4 i 'i I (st rl r -i.',>fu . J .i C- I 008'!t . sL- .' ' 'fThH031:: -AF1 > r7 -1 k 'm .' 3 : , F j'17 C'J ?ir/JWOfl i1 JN ~'13CIO ?P1VA OLZV h' Sl reQ/tl-7l-'lA3t AT40 S3IISNO TP2T~ T21C. SL9'9t~~~~j1f 1£vr8X " i i31A AlOd.9 1Nr 13'1A r:9 OiV,es 5r Th- K, -AIn -------- ------ 000In I O V -1 f.I 1,k 7 (~~~~~~ -!f)lhw tJI!DV'y n T',. IJ t, A1 0d I~'1SO3 ~ 1A/1I1 A I':¶01 I 4t7' I'47 17 1'# . 1v' A .S c) 13 Nq It 1vJT Ws 3i; 1',', ------- -- -- - -- - ----------lG - X' (i)n - AF snpo-)?l 4,t n J.Jlr d lo 1V130ns rW QoostI5gl /NI)r: (JTi r,~.l I21J 113 I ';S W-Ij l" .k( M '-fldl- .t.' ?1IICJ : S7J'.A Ai---- --------0 --- --- -- IE'!i slO )tll/ilfJ-iJ 5 1I; FFU L I , 0* -408- F'r-L t rc; .t T T AL 25.66u 48.675 L F ') Ci 6 T (iPF.i : ViG cQSTS LC'~2~4.13 F t14 N'T iAr' GI l'j NJ -a >Gor -409- 09/02/71 PAGE 1 INDO/WBK SOLUTION TYPE = PHASE 2 - OPTIMUM NUMBER OF BASIS CHANGES SINCE THE START OF THE PROBLEM = 314 NAME OF THE OBJECTIVE FUNCTION = $PROFI* NAME OF SELECTED ISET = *-* NAME OF SELECTED RHS = *84$ NAME OF 5ELECTED RANGES SET = *$ NAME OF SELECTED.HOUNDS SET = *BNDI* VALUE OF THE O8JECTIVE FUNCTION = -75922.03112 BASIC VARIABLES **ooo @ eo0onoo * 000 B e-eo-o-oo OCCOCO 400410000 - o. eoolo@eon one000eooeooeoe.oo0ooloeie*conno *o.ooooMee*E*-o.o*n*oo*Co.*.Co C.o..--*0.CCC..C0.o--o *TC *5. * O *O *Y *VARIABLE'T * VALUE * CONSTRAINT * CONSTRAINT * CONSTRAINT * DUAL * COMMENTS *P * NAME OA * * VALUE * LOWER BOUND* UPPER BOUND* VAL'E * 4 rE *T * O * * * C 0 C C * C C OF 'PROFI *8 * 75922.03712*-73922.03712* NONE * NON'E * 1.0000Q * OF OpROF2 B * 75730.10663 -75730.10663* NONE * NONE * 0.000000 OF *PROF3 *B * 74021.925300-74021.92530* NONE * NONE- * 0.000000 C OF *PROF4 08 O 37555.132680-37555.13268* NONE * NONE 0*00000* OF *PROFS *B, 18362.08396*-18362.083960 NONE O NONE * 0.000000 C OF *PROF6 06 * -830.964810 830.96481* NONE 0 NONE C 0.00000w OP OINVDU *Fo O.00000* 0.000000 0 0.00000* 0.00000* C OP *INVSB OBF* 0.0G0000 0.00000* 0.00000' 0.00000o *P *BFW at3F* 0..0000* 0.00000- O 0.000000 0.00000* *P *STM *BF* 0.000000 0.00000- C 0.00000* 0.000000 Gp *BAG O°FO 0.000000 0.000000 0.000000 0. ' C °°° OP °MFTMX GtBF* 196.99255* 103.007450 * 300.000000 0.000000 GM 'METMN OBF* 103.007450 103.007450 -0.00000* 0.000000 *P *ETHMX *BF* .68110* 594.31890* * 595.00000* 0.000000 C OM OEThMN OBFC 594.31890* 594.31B90* -0.00000C 0 0.000000 4 OM *PROMN *BF* 1.00000* 1.00000* -0.00000* 0 0.000000' * C 0 * 0 0 . . . . *ooo.o-*-ooeo oooeoooon.oooeooe.ooo OCO*OC-CC*COC0000000000COOO@eOOOOOonOgO004oVYVV0nOe400e0040009*0*§00000000000000000000000000 QQOOO'O * *00 0'0- *0000090 00000'0 *Jg* NW33A* N *00000 0 00COO se # 00000*0 O0000SZ J9o X 033A* d 00000.0 * *00000'0- .0000060 00000O *.38. NHODA* Wo *00000,0 * *00000.0- *0000000 .0000000 .3. NHW0H3. Ho *.00000.0 .000000 * o00o000 .000000 1 *.39 xW(fl3. do *00000-0 * *00000.0- .00000'Q *00000'0 *J30 H1HOH0- W1 *00000.0 OOOOOOt * 00000,0 *00.00 !0 *.H8 XHOZ0* do *0000000 * *00000,0- *00000.0 .00000.0 30.* NW301* HW *00000.0 *0000091 * *00000,0 00000091 .3.* XH301O do *00000.0 * *00000.0- *4919001 *.9180'! *30* NWOOI1 HN *00000.0 0000009 * *89180'1 ZUR164, .30. VWYOOI do *0000000 * *000000- *00000.0 .00000.0 .J30 NH3AX. HN *00000.0 .00000.01 * *00000.0 *00000-01 .308* YH]3AW do o0000000 * o000000 *.E'18001 .EtleO' .48*3 NWOAX* Ho Q00000'0 .00000'S * *E:791001 *LC,B16'C *J.* XHOA)* d* .00000.0 * .000000- *OLLSO *OLLSO *-30* NH(10J Ho *00000'0 * 000000- *.,920201 *79200o1t .430 NHDH. No H *00000.0 * *00000.0- *8S662-L *BS662'L *3.3* NWaO,) Ho **00000'0 * *00000'0- *.280O* *UEZ00 .J NH3ddo H. *00000.0 .0000002c * *EU80' *LL116IC .30.* WW3dd* do *00000.0 * *00000t1 .00000091 *00000' Z *.. NtJhCddo H. *00000'0 * *00000'0- .0000060 00000-0 *J80 NH(lOd. H *0*'0 00.0 * O00000.0- *00000.0* *00000*0 30.* Nh33d* No * .00000.0 .00000091 * *0000000 00000091 *.3f0 Yh33do do *00000.0 * *00000OLZ 0000SLL 0000'L .30* NW03dd ho Q000000 o00000-01t * OOOOS'LLZ *0000s5ZE *A30 XWH3d. do O *000000 * .00000.0- *00000-0 0000000 *3g. NW313* hN 000000'0 *0 O00O * e - 000000 00000.001 *. YIW313* do *00000-0 * *00000.0- *00000.0 *00000.0 *30. NHWO3* H. *00000.0 *00000.0- *00000.0 .00000.0 .40* NWO1Jo H. .00000.0 *.0000'0 * S911CC- .S911E, *38* VOOAH* do *00000'0 * 0000000- *ILS58Z *1LS90Z' .38. nONd3. No .000000o * *000000o- *00000'to .00000'4S47 *48* n0fNdJ. w. *00000-0 * *00001 4SE92c004L *SE922'OOL *38. SStNd)o Ho *0,0 00000 *000002 * ILS80Z *627IL'S6t .3-0 nHWdZd) do *0'0 000 000000'000 * *SC92C200L *S9CL9'6621 g ig* S9Wd:) do ° 0000000 * 000000- .0000000 *00000 0 *J0* NWOV9o H. *00000.0 *00000. ' * *00000-0 *00000'1 *.48 XHOV9* do *00000-0 * *00000'0- *00000'1 .00000.1 .30. NWdVNo H. o000000 * o000000- oooo00'! 0ooo00'l *.38. NHwilno H. * * . *.. * * * * .o**.oo.e*-o.o.o*o.o*ooeho*oloo*i*"e0o.o*o.o 006666660*660000*6600*0*0006600066*6*60666 6600600660*00600*00 416*050*0X*060 * * * * * * -*.i. .3- * 3nlA *0Nnos H3ddn UaNnos 83 M0 * 3nVA * * . 3WHVN * do SIN3HWHO * 1vna * INIV8iSN03 IN1V81SNOZ) * INIVHISNO) * 3nlVA *41o318V18VAo A. ~~* * ' * * 0 ~ 1. #b7 $ *!08dt MGM/OIoNI 39'ld IL/20/60 . 1 -411- 09/02/71 PAGE 3 - INDO/W8K *PROF1I $* $84* *,.*400-0..o.o.oo,oY D*410000*oo 004*UOO*4k O0o*oooofl §O4h* 00U§OU000OIGoo0oih§§4* §§h*4h&*o*0O0i*00*0o*0000o§*oo0 §**0*000@000@0@0**0 T *s * *i *Y *VARIABLE*T * VALUE * CONSTRAINT * CONSTRAINT * CONSTRAINT * DUAL * COMMENTS 'P * NAME A * * VALUE * LOWER BOUND' UPPER BOUND* VALUE E** * * T * * * * 0 * * * *0 '1M *PVDMN *HF' 6.000000 60.00000* 54.00000* * 0.00000* *P *PVEMX 'BF- 7.84501' 97.15499* * 105.00000* 0.00000* * OM *PVEMN HBF' 7.15499- 97.15499* 90.00000* * 0.00000* *'1 'EADMN 'Fr ' 1.00000* 15.00000* 14.00000* * 0.00000* 'M *EAEMN *BF' 2.00000' 19.00000* 17.00000* ' 0.00000* OM *SYDMN 'BF' 5.000000 5.00000* -0.00000 * 0.00000* *P 'SYEMX eBF- 45.00000* 0.00000- * 45.00000- 0.00000* OM *SYEMN eBF- 0.00000o 0.00000 -0.00000* 0.00000o 'H *BTDMN 'HF* 3.00000* 3.000000 -0.00000' ' 0.00000' 'P *8TEMX *'F' 10.00000° 0.00000* , 10.00000* 0.00000' - 4M *BTEMN *BF- 0.00000- 0.00000* -0.00000* * 0.00000'* OM 'LSDHN *'F' 24.287580 24.28758' -0.00000* * 0.00000* *p *BYDMX 'BF- 3.714294 1.28571* ' 5.000004 0.00000* 1M 'BYDMN HBF' 1.285710 1.28571' -0.00000- 0.00000o 'M *PFDMN *BF' 236.03397' 236.03397* -0.00000* ' 0.00000* ' 'P *SRDMX *tF' 5.00000' 0.00000' ' 5.00000* 0.00000' 'M OSRDMN 'BF' 0.00000' 0.00000' -0.00000* * 0.00000' 'P 'SREMX 'BF' 20*00000* 0.00000' ' 20.00000' 0.00000' OM *SREMN OBF' 0t00000* 0.00000' -0.00000* ' 0.00000' * 'M 'PSDMN 'BF' 4.00000' 40.00000* 36.00000' ' 0.00000* 'M *PSEMN 'BF* 12.00000* 120.00000' 106.00000' 0.00000o * * 0 * .....-* * 0 * * 0 * * * * * 4 * * ** -412- 09/02/71 PAGE 4 INDO/WBK *PROF1$ $ #84A *T *5* * i * * * *Y *VARIABLE*T * VALUE * COST * LOWER 0 UPPER * DJ * COMMENTS *P * N4AME 'A' * 0 BOUND B fOUND * * - OE 4' * * o 4 * , * 0 * 0 0 * * * *0 *P *BEZPUR OHF* 126.00000* 0.00000. 0.000000 NONE 0 0.000000 OP 'KWHTR *8F* 3583.29940* 1.00000* 0.00000* NONE * 0.000000 0 ^P *CWATR 'HF' 14.91613* 1.00000' 0.00000° NONE * 0.00000* 0 *P *LABTR *BF 2183.14800* 1.000000 0.00000' NONE * 0.000000' , *P 0MNTTR 'BF' `3582.37421* 1.00000* 0.00000* NONE ' 0.00000* *P *CATTR *BF* 4265.37318' 1.00000* 0.00000* NONE 0 0.00000* *P ITJ-TR OBF* 1082.593020 1.00000* 0.00000- NONE * 0.000000 0 *P 'ROYTR *BF* 4914.896690 1.00000# 0.00000* NONIE * 0.00000* *P *EXATR 'BF' 10737.42307^ 1.00000* 0.00000* NONE 0 0.000000 *P OUTLTR tBF' 14960.40350* 1.000000 0.00000' NONE 0 0.00000A - *P 'INVTR 1f8F 191930.48748* .00010* 0.00000* NONE * 0.00000* * OP 'CLOTR 'HF° 6587.20712' 1.00000Q 0.00000o t NONE , 0.000000 *P OTRMETCOS*8F* 2163.156440 1.00000' 0.00000* NONE 0 0.000000 *P *TRETmC0S*6F* 10697.74013* 1.00000* 0.00000* NONE * 0.00000' OP *TRPHOCOSHBFO 18.300000 1.00000* .0.00000* NONE * 0.00000* 0 'p 'IRBUrCOS*BF4 19.50000* 1.00000* 0.00000' NONE 0 0.00000' - 'P *IPNAPCOS0HF' 25.00000* 1.00000* 0.00000' NONE * 0.000000 *P *TRHEZCOSd8FO 11844.00000' 1.00000* 0.00000* NONE ' 0.00000* 'P *GSINVTR OHF' 830.69087* 0.00000' 0.J0000* NONE 4 0.000000 *P 'SCINVTR OBF* 28666*50701' 0.000000 0000000* NONE 0 0.000000 0 'P *ARINVTR 4BF' 1200.285070 0.00000* 0.00000' NONE 0 0.000000 , *P *LDINVTR *BF* 86999.999930 0.00000* 0.90000* NONE * 0.00000* 0 iWP *OXINvTR 08F' 15232.13795' 0.00000' 0.00000* NONE ' 0.000000 'P OPCINVTR 'HF* 28023.2i660* 0.00000' 0.00000* NONE * 0,00000* 'P 'EHIrJVrR 'HF' 45?0*903210 0.000000 0.00000* NONE * 0.00000* *P 'SEINVTR 'BF' 4495.53255* 0.00000* 0.00000* NONE * 0.00000* OP 'PYINVTR 'HF' 15915a73i]9420 0.000000 0.00000* NONE * 0.000000 *P 'PLINVTR 'HF' 4116.85363* 0.00000* 0.00000' NONE 0 0.00000* OP 'IUINVTR 'HF' 1928.571420 0.00000* 0.00000* NONE * 0.000000 'P *ODEXETTR 'BF' 0.00000' 0.00000o 0.00000* NONE 0 0.00000* * 'P *DEAPETR *BF' 0.00000* 0.00000* 0.00000' NONE * 0.00000* 0 OP *DEXPPTR 'HF' 17.64614* 0.000000* 0.00000* NONE . 0.00000* *p'*OlEXAYTR *BF* 0.00000* 0.00000' 0.00000* NONE ' 0.000000 *P *DEXTOTR 'HF' 0.00000* 0.000000 0.00000* NONE 0 0.000000 'P *DEAVCTR °8F* 0.00000' 0.00000' 0.00000* NONE 0 0.000000 'P *DEXPVTR *BF* 20402.54863* 0.00000* 0.00000* NONE 0 0.00000* 0 'P *DFXEATR *BF* 3800.00001* 0.00000* 0.00000* NONE 0 0.00000* * 'P *DEXSYTR *BF* 0.0.000 00.000NE 0 0.00000' N OP *DEXHTTR *BFO 0.00000' 0.00000* 0.00000o NONE 0 0.00000* . oP *DEXSRTR OBF' 0.000000 0.00000e 0.00000' NONE 0 0.00000' 0 0 0 =0 * o 0 * * 0 0 0 0 0 0 * 0 4 o * 00000000000B0000000*000*04100**§0 00000000000000000000000000040?*00000 00000000004I000000000000**0000000*O000000000000-0000000*00 -413- 09/02/71 PAGE 5 INDO/WBK $PROF1I t0 e84* 0*vc0 *Ofteo * gefteooXe.*seooaoo§ 4§§0 oooooooaoOOooo es, sO s000000e*lu ,*,*vvRS§O S4, t ftB@00000ftf*f*-*'ftftft u...,........o....ftft..tftft.ft T DJ* * C * * *Y *VARIABLE*T * VALUE * COST * LOWER * UPPER * DJ * , OMMENTS *P * NAME A* * *t BOUND * BOUND ' *E * 'T * * T *P *DEXPSTR *BF 28200.00005' 0.000000 0.00000* NONE * 0.00000' 'P 'DEIFLTR 'BF* 0.00000° 0.00000* 0.00000* NONE * 0.00000* 'P 'DEIETTR 'BF 0.00000w 0.00000 0.00000* NONE * 0.00000* *'P 'DEIPUTR '*BF* 74925.00039* 0.00000o 0.00000o NONE * 0,00000* 'P 'DEIPOTR 'BF* 0.00000* 0.00000* 0.00000* NONE ' 0.00000* - *P ODE!PPTR *BF* 3680.00001* 0.00000* 0.00000* NONE * 0.00000- *P 'DEIC4TR 48F' 255.48518* 0.00000' 0.00000' NONE * 0.00000' 'P 'DEIMGTR 46F 306.07913* 0.00000* 0.00000' NONE * 0.00000' *P'*DEIFOTR *BF .98090- 0.00000* 0.00000' NONE ' 0.00000* *P 'DEIXYTR 08f* 52.99012* 0.00000* 0.00000* NONE * 0.00000* *0 'DEITOTR BE3F 54.08415* 0.00000* 0.00000* NONE * 0.00000' *P *DEIBZTR 'BF 0.00000* 0.00000 0.00000* NONE ° 0.00000 'P *DEIEBTR *'FB 0.00000' 0.00000* 0.00000* NONE * 0.00000' 'P 'DEIVCTR 'BF 1500.00000* 0.00000* 0.00000* NONE * 0.00000* *P ODEIPVTR *BF* 13800.00003' 0.00000' 0.00000' NONE f 0.00000' 'P *DEIEATR 'BF 3750.00001* 0.00000* 0.00000' NONE f 0.00000* *P *DEISYTR BF* 1000.00000' 0.00000' 0.00000* NONE f 0.00000' 'P 'DEIBTTR *BF 450.00000* 0.00000 0.00000'* NONE ' 0.00000* *P 'DEILSTR 'BF* .24288* 0.00000* 0.00000* NONE ' 0.00000* *P 'DEIHYTR 'BFJ 23.14286* 0.00000- 0.00000* NONE * 0.00000' *P RDE1PFTR OBF* 2.36034* 0.00000' 0.00000' NONE * 0.00000* 'P ODEISRTR 'BF* 0.00000* 0.00000' 0.00000* NONE ' 0.00000' 'P 'DEIPSTR 'BF 10400.00002' 0.00000' 0.00000* NONE * 0.00000* 'P *DEXTR 0AF' 52420.194870 -1.00000* 0.00000' NONE ' 0.00000' 'P 'OEITR 'BF 110200.36610* -1.00000* 0.000004 NONE ' 0.00000* *'I *SCINIT * .39ai5* 0.00000' 0.000004 1.00000* 0.00000* *1 *ARIN 'B ' .05412* 0.00000* 0.00000' 1.00000* 0.00000* 'I )X(INT *B * .42787* 0.00000d 0.00000' 1.00000' 0.00000' *I OPCINT *8 ' .82713' 0.00000' 0.00000* 1.00000' 0.00000* *1 *EHINT *B * .21935* 0.00000* 0.00000 1.000l00' 0.00000' *I *SEINT ' ' .23786* 0.00000' 0.0000(0 1.00000* 0.00000* 'I OPYINT 'B * .84211* 0.00000* 0.00000* 1.00000* 0.00000* 'I 'PLINr *'3 * .18056' 0.00000- 0.00000' 1.00000' 0.00000' 'P 'SCVAR *BFO 517.58971* 0.000004 A.000000 NONE ' 0.00000' 'P 'ARVAR 'OF' 10,281970 0.00000' 0.00000' NONE ' 0.00000* 'P *LDVAR 'BF" 200.00000o 0.00000* 0.00000* NONE ' 0.00000* 'P 'OXVAR *'FB 68.45905' 0.00000* 0.00000* NONE ' 0.00000* OP *PCVAR 'BF 148.88368' 0.00000* 0.00000* NONE ' 0.00000* 'P 'EHVAR 'BEf 19.74194* 0.00000' 0.00000' NONE ' 0.00000* 'P *SEVAR 'BfE 42.81460* 0.00000' 0.00000* NONE f 0.00000' *t *t ft., ft * ft ftf ft * t ft ft ft ft ft * ftfftf*ftft*tfttftt*fftfftfftO4bfftfftfftfOftftfft*t0fIbf*ftt§fftt*O ftfftf*fttftW4*t4Iifttftt*fft*ft0ftOt*fftfft*ftfftf** t Q f ftft t f ftft * t f * t *ft t f ftft t f ftft t f ftft t f f -4J4- 09/02/71 PAGE 6 INDO/WBK *PROF1* * 84* o*Oo h 00-* **v***wO o00 *0*0000*e00O* o04h 00000000 o4 §;§* oXeoO*0000000 uv*§ h *00 *****000000 -000000*-**-*000----0-0--00-0--00 * 0 * 4 0 *Y 4VARIABLE*T * VALUE * COST * L6WER 4 UPPER * DJ * COMMENTS *P * NAME *A* * * BOUND * BOUND 4 * ** * O * * * * * * * 0 o 0 *P *PYVAR 4BF4 151.57895' 0.00000* 0.000000 NONE * 0.00000* 'P OPLVAR *BF' 15.16736* 0.00000* 0.00000* NONE * 0.00000* OP 'METGS *BF' 103.007454 0.00000* 0.00000* NONE 4 0.00000* 'P *ETHGS eHF- 594.318900 0.00000* 0000000* NONE ° 0.00000* 'P *PROGS 4BF- 1.00000* 0.00000* 0.00000* NONE 4 0.00000* * *P *bUTGS *BFQ 1.00000* 0.00000* 0.00000* NONE 4 0.00000* * Op *NAPGS *BF* 1.00000* 0.00000* 0.00000* NONE ° 0.00000° 'P *GAOGS *F* 0.00000* 0.00000* 0.00000* NONE 4 0.000004 *P *CH2SC *BF* 594.31890* 0.000000 0.000000 NONE * 0.00000' *P *CH3SC 4flF* 100O000 0.00000' 0.00000' NONE * 0.00000* 4 *P *CH4SC *8F* 1.00000* 0.0000o 0 0.00000* NONE 4 0.00000* 0 *P NPASC *BF* .90000* 0.00000* 0.00000* NONE * 0.00000* 0 op OGOASC 'BF' 0.000000 0.00000* 0.00000* NONE * 0.00000* Op *C2X)U 'HFB 454.000000 0.00000* 0.00000* NONE 4 0.00000* *P 'MOlAR *i3F* 10.81053* 0.00000o 0.00000* NONE * 0.00000' *P 'MO4AR 'BF .012600 0.00000* 0.00000* -NONE * 0.00000* 4p 'MOSAR *RFO 0.000000 0.00000* 0.00000* NONE * 0.00000* *P *C2HLD *BF' 300.00000* 0.00000! 0.00000* NIONE * 0.00000* 'P *C2HOX 01Ff 85.573810 0.00000' 0.00000* tJONE * 0.00000- * Gp *VCIPC *BF9 165.42b31* 0.000U)'e 0.000000 NONE * 0.000000 'P *C2HEH *3F' 21.91'4)48' 0.00000' 0.00000' NONE * 0.00000* *P *C2HSE OBF* 46.49071° 0.00000 0.00600 tlONJE * 0.000000 OP *EBZSE 'BF 1.08107* 0.000000 0.00000* NONE . 0.00000' oP 'STYPY 08F* 168.42105* 0.0000C 0.00000' NONE * 0.00000' ep oC3HPL 'HF' 17.8758i* 0.000000 0.00000e NONE * 0.00000* *P OC4MBU -HF 4.285710 0.00000' 0.00000* NJONE * 0.00000' 0 OP 'PEPEI ehF4 277.500000 0.00000- 0.00000' NlONE 0 0.000000 - up ppppiP 'fBF 16.08823* 0.00000* 0.00000* NIONE * 0.00000* op *C4C4M *AF' 7.299584 0.000000 0.000000 NONEJ. 0.00000' *P 0MGMOI GF0e 5.77097* 0.000000 0.00000' NONE * 0.00000- 'P 'MGM02 'HF' .060000 0.00000* 0.000000 NONE 0 0.00000* 0 OP *MGM03 'BF* .037000 0.000000 0.00000' NONE I 0.000000 *P *MGRAr eBFe' 4.334670 0.00000' 0.00000* NONE 0 0.000000 'P *FOFEG *BF' .057700 0.00000* 0.00000° NONE 0 0.000000 0 OP OXYXYL eBF- 1.08143* 0.000000 0.00000' NONE * 0.00000° op 'TOTOL 'HF' 1.08168' 0.000000 0.00000* NONE ° 0.00000° 'p 'VCVCI 9BFF 10.00000' 0.000000 0.000000 NONE 0 0.000000 * 'P *PVPVC 'BFo 157.154990 0.00000' 0.00000* IIONE * 0.00000* op *EAEAL OHFO 34.000000 0.000000 0.00000* NONE * 0.00000' * 'P *SYSTY 'HF' 5.00000' 0.000000 0.00000' NONE 0 0.000000 * o * * 0 * 0 0 0 * 0 * 0 0 0 * * 0 0 * 0 ** 4 * 0 * 0 * 0* *- 4 4 0*4 *00000.0 * 3NON ,00000'0 .00000,0 000000w, .Jgo SdWOO* do .00000-0 . 3NON *00000,0 a00000,0 *0300000 *J8. MSHOGo do *00000,0 o 3NON 00000000 *00000'0 *L6ECO9CZ *380 3dWOQ d* *0000 0' * 3NON *00000.0 .00000.0 *tLS8Z I *38*. ARWOO do o00000*0 . 3N0N .00000'0 .00000.0 OqSL92'4 *Ag SIWOO do * 00000'0 * 3NON .000000 0 0000000 *00000(' *.380 I1WOOs do *00000,0 3 )NCN .0000000 00000040 *00000s *A8- ASWOO* d* *00000-0 * 3NON *00000.0 *00000-0 *000000St *J38 V3WOO. do **00000.0 * 3NON .00000,0 000000 .00000,09 *.8*. AdHOG do *00000,0 * 3NON 0000000 *00000-0 .00000.0! .38* DAWOO* do *00000.0 o 3NON *00000.0 *00000U0 .00000.0 *.38 8R3WOO d* *00000.0 * 3NON *00000'O *0'0 0000oono000000 8 ZHHOO* do 00000.0 3.N0N *00000.0 *00000,0 *89980! 1 .48* O-IWOO* do *0000000 , 3NON *0000000 *00000,0 .EIYIPO! *An AXWOO* do *00000.0 3 3NON *00000,0 000000-0 *OLLSO .38. 03W0oa d* .00000.0 * 3NON *00000-0 000000-0 .b920201 .38. 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NnONO ONog * *0 * Vo 3 WT/f o do SJN3NHO3 ra * 83ddn o 83MO1 . 1SO3 o 3nJVA * 1i318VIHVA* A* o h *.* ° * So 1 -1 9; *130t8d )S NM/1O41 L 39Vd IL/ZO/60 t ** 0 0 * * 0 0 * 0 * 0 0 0 0. 0 0 0 0 0 *S6000P 00000`0 o00000,0 .00000.0 *AN* AdWIlo do S&60001 *000000 * .00000.0 *00000,0 *3No 3SJ1o do *-16EOO *00000*0 * O000000 00000'0 *AN* HWWII* do * E.t00* *0,0 000 .00000'0 O00000'0 #jN. 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O V 3HVN * do SIN3WHO3 0 lna I NIVNISNO INIV81SNO) 0 iNIV81SNOD W JOlVA o 1*38WV!dVA* A* a o 0 o oS 1* ,-----..ooo...o....ooooo..,..oo..oooo,oooo.o oooo.pooo,,oio o6 oo.o,oooa ooooo o oo;sso "ooouoooooen. oo*o...o.oo*o...ooe*ooo S318V1IVA )DISV8 NON #a8* $ #t408d* N8M/lO(INI 8 39Vd IL/ZO/60 -91W- ) 5a -417- 09/02/71 PAGE 9 INDO/W6K APROF1I * 84at 0000000000000000000800000000 0 00 0 0 00*080 00000000001000000000 00*0'§ei§§X§fv 000000 * 000098 §s* 0§*00*0* 0000* 000000§*****X§X** of * OS * 0 * , 0 0 * *Y OVARIABLE*T * VALUE * CONSTRAINT * CONSTRAINT * CONSTRAINT . 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NONE ' 0.00000* fP *DEIETTR 'BF* 0.00000a 0.00000° 0.00000* NONE ' 0.00000* *p *DEIPETR 'BF' 74925.00039' 0.0000Q0 0.00000' NONE f 0.00000- fP *DEIPOTR eBF' 0.00000* 0.00000' 0.00000* NONE 0.000000f *P °DEIPPTR eBF' 3680.00001* 0.000000 0.00000* NONE ' 0.00000* eP *DEIC4TR 'BF' 255.48518* 0.00000' 0.00000* NONE f 0.00000' fP *DEIMGTR ObF* 306.07913* 0.00000* 0.00000' NONE f 0.00000* fP ODEIFOTR *BF* .98090' 0.00000* 0.00000° NONE * 0.00000* 'P ODEIXYTR 'BF* 52.99012* 0.00000* 0.00000' NONE ' 0.00000* fP *DEITOTR OBF* 54.08415* -0.00000. 0.00000- NONE ° 0.00000' *P *DEIBZTR *BF* 0.00000' 0.00000' 0.00000' NONE f 0.00000*f 'P *DEIE6TR '8FO 0.00000* 0.00000' 0.00000* NiONE ' 0.00000* °P *DEIVCTR OBF* 1500.000000 0.00000* -0.00000* NONE * 0.00000* fP 9DEIPVTR *'BFf 13500.00003' 0.00000' 0.00000*' NONE f 0.00000* 'P *DEIEATk 'BF' 3750.00001* 0.00000e 0.60000' NONE ' 0.00000* *P *DEISYTR OAF* 1000.000000 0.00000' 0.00000' NONE ' 0.00000' *P *DEIBTIR OBF* 450.00000* 0.00000* 0.00000* tNONE 0 0.00000' ep *DEILSTR eOFH .24288' 0.00000' 0.00000' NONE f 0.00000* *P *DEIBYTR BF* 23.14286* 0.00000* 0.00000* NONE f 0.00000' 'P *DEIPFTR 'BF' 2.36034* 0.00000' 0.00(000 NONE ' 0.00000* P 'DEISRiTR *OF' 0.00000* 0.00000' 0.00000* NONE ° 0.00000* Op 'DEIPSTR *BF* 10400.00002* 0.00000, 0.00000* NONE f 0.00000' 'P 'DEXTR 'OF' 52420.19487* -1.00000' 0.00000* NONE f 0.00000 ' p'DDEITR 'BE' 110200.36610' -1.00000' 0.00000* NiONE f 0.00000* 'P 'SCVAR 'lF' 397.21890* 0.00000* 0.00000* NJONE f 0.00000* op 'ARVAR 'OF' .82313* 0.000000 0.00000' NONE * 0.00000* 'P *LDVAR 'BF' 200.000000 0.00000' 0.00000* tONE f 0.00000f 'P *OXVAR OBF. 45.57381' 0.00000' 0.00000* tNONE * 0.00000' 'P 'PCVAR 'BF' 145.42631' 0.00000' 0.00000* NONE. 0*00000' 'P OEHIAR OAF3 11.93548' 0.00000* 0.00000* NJONE ' 0.00000* 'P 'SEVAR OF'F 27.57177* 0.00000* 0.00000* NO1NE ' 0.00000* *P 'PYVAR 'BF' 148.42105* 0.00000* 0.00000* tiONE f 0.00000* 'P 'PLVAR 'BF' 2.87581i 0.00000' 0.00000* NONE * 0.00000* 'P 'METGS "BF' 103.00745* 0.00000* 0.00000° NONE f 0.000000' 'P *ETHGS *'Fo 594.31890* 0.00000* 0.00000* O10NE ' 0.00000* *P *PROfGS 'BF 1.00000* 0.00000* 0.00000' NONE ' 0.00000* 'P *BUTGS 'BF' 1.00000' 0.00000* 0.00000* NONE ' 0.00000* P DNAPGS 'BF' 1.00000* 0.00000* 0.00000* NONE ' 0.00000* 'P 'GAOGS 'Bf* 0.00000* 0.00000' 0.00000* NONE f 0.00000* f ft 0 ft *, ft ft -426- 09/02/71 PAGE 6 INDO/W6K $PROFI* 84- * eOO*ooovo4§O*a UOOlhOOQ*1 0O9*@1h*OO*O******4h ,Q**§oO *0*O*O@Oeo**OX*Q*Ofl**OO **@O**§§*,o§***oO**X§**o*e*40**-***,*O-*oOO*O* T* * *Y *VARIABLE*T * VALUE * COST e LOWER * UPPER * DJ * COMMENTS *P NAME 'A ' * BOUND * BOUND ' * * E* * , * * O * 0 O e * * O *P *CH2SC °BF° 594.31890* 0.00000' 0.00000* NONE * 0.00000* ep *CH3SC *BF* 1.00000* 0.00000' 0.00000* NONE * 0.00000' eP *CH4SC 'OF' 1.00000* 0.00000* 0.00000' NONE * 0.00000* 'P *NPASC '8F' .90000' 0.00000' 0.00000* NONE * 0.00000* *P 0GOA5C 'OF' 0.00000* 0.00000* 0.00000* NONE ' 0.00000* 'P *C2XDU 'BF* 454.00000- 0.00000° 0.00000* NONE * 0.00000* *p 'MOlAR 'BF- 10.81053' 0.00000* 0.00000° NONE * 0.00000' *P *M04AR? 0iFk .01260' 0.00000 0.00000* NONE ° 0.00000' 'P *MOSAR 'dF 0.00000' 0.00000* 0.00000* NONE ' 0.00000'* OP *C2HLD *BF' 300.00000* 0.00000* 0.00000' NONE ' 0.00000* 'P *C2HOX 'OF'F 85.57381' 0.00000* 0.00000* NONE ' 0.00000* *P *VCIPC 'OF' 165.42631* 0.00000' 0.00000* NONE ' 0.00000' 'P *C2HEH 'SF' 21.935489 0.00000' 0.00000' NONE * 0.00000* 'P *C2HSE 0OF' 46,49071° 0.00000* 0.00000* tNOtNE * 0.00000* *P 'EAZSE 'FOF 1.08107- 0.00000' 0.00000* NONE 0 .0000000* 'P #STYPY °BF' 168.42105* 0.00000* 0.00000* NONE ' 0.00000' 'P *C3HPL 'OF' 17.87581' 0.00000* 0.00000' NONE 0.00000 'P *C4MOU *O3F' 4.29571' 0.00000* 0.00000' NONE ' 0.00000* 'P *PEPEI 'i3F 277.50000' 0.00000* 0.00000* NONE ' 0.00000* 'P 'PPPP1 Q'F' 16.08823* 0.00000* 0.00000' NONE ' 0.00000* 'P 'C4C4M 'OF' 7.29958* 0.00000* 0.00000'* NONE ' 0.00000* 'P OMGt4Ol 'BfO 5.770970 0.00000* 0.00000* NONE ' 0.00000' 'P *MGMiU2 *BF' .06000* 0.000004 0.00000' NONE ' 0.00000' 'P OMG:403 OBF' .037000 0.00000* 0.00000* NONE ' 0.00000* 'P *MGRAF 'IHF' 4.334670 0.00000* 0.00000* NONE ' 0.00000' 'P *FOFEO 'iOF' .05770' 0.00000 0o.00000* NONE ' 0.00000* 'P *XYXYL 'BF* 1.08143* 0.00000* 0.00000* NONE ' 0.00000* 'P 4TOTOL *8F' 1.081680 0.00000* 0.00000' NONE ' 0.00000* *P 'VCYiCI *'OF' 10.00000' 0.00000* 0.00000* NONE '* 0.00000' *P 'PVPVC *aF' 157.15499' 0.00000' 0.00000* NONCE - * 0.00000' 'P *EAEAL OBF' 34.00000' 0.00000* 0.00000* NONE ' 0.00000* 'P 'SYSTY 98F' 5.00000' 0.00000 0.00000' NONE * 0.00000* 'P *BTBTA 'OF' 3.00000' 0.00000* 0.00000* NONE ' 0.00000* 'P *LSLOS 'OF' 24.28758* 0.00000' 0.00000k NONE 4 0.00000* 'P 'BYOTY OBF' 1.28571* 0.00000* 0.00000' NONE ' 0.00000* *P 'PFGAS 'OF' 236.03397' 0.00000' 0.00000* NONE ' 0.00000' 'p 'SRSNR '8F' 0.00000* 0.00000* 0.00000' NONE 0.00000* *P 'PSPST 'BF' 160.00000* 0.00000' 0.00000 NONE ' 0.00000' 'P *EXPET *BF' 0.0000-' 0.00000* 0.00000* NONE ' 0.00000' 'P *EXPPP 'BF' .08823* 0.00000' 0.00000* NONE ' 0.00000' * * * * IF* IF * * * , * * * * * * o-*e* *****O 9 00 e*0 00000*"*O0**;*@***4. *000**Q***00 0000****0*k0000*0000 000 O***os*§***§t**X**X** -427- 09/02/71 PAGE 7 INDO/WBI APROFI* It* 984A T * * *Y *VARIABLE*T * VALUE * COST * LOWER * UPPER * DJ a COMMENTS 0 *P * NAME *A° * BOUND * BOUND' * * *E * * * * a 0 * o * o * * *P *EXPPV *BFC 97.15499* 0.00000* 0.000000 NONE * 0.00000* *P *EXPEA OBF' 19.000000 0.00000* 0.00000* NONE 0.00000* *P *EXPPS *BF* 120.00000' 0.00000' 0.00000* NONE * 0.00000* * *P *DOMFL OBF* 0.00000* 0.00000* 0.00000* NONE * 0.00000* - *p *DOMPE °BF- 277.50000' 0.00000° 0.00000* NONE * 0.00000* *P 0D00PO *BF- 0.00000* 0.00000* 0.00000* NONE * 0.0000* *P DO1j4PP *BF-* 16.00000* 0.00000' 0.000000 NONE ° 0.00000* 0 OP ODOMC4 *8F* 7.299580 0.00000° 0.00000* NONE * 0.00000* 0 *P ODOMMG OBF* 10.20264* 0.000004 0.00000* NONE * 0.00000* *P ODOMFO 'bF* .05770* 0.00000' 0.00000* NONE * 0.00000 op °DOMXY *BF' 1.08143° 0.00000* 0.00000* NONE e 0.00000* *P ODOI4TO OBFC 1.081680 0.00000o 0.00000- NONE * 0.00000* *P 'DOMBZ 'aoFo 0.00000 0.00000* 0.00000* NONE * 0.00000° OP 'DOIE8 °Bf° 0.00000* 0.00000* 0.00c00* NONE * 0.00000* *P *DOIIVC *BF° 10.000000 0.00000' 0.00000* NONE * 0.00000* *p *DO4Pv °BF° 60.00000° 0.00000e 0.00000* NONE ° 0.000000- p 'DOM4EA °BF' 15.00000° 0.000000 0.00000* NONE e 0.00000° 'P ODOMSY *BFo 5.00000' 0.00000* 0.000000 NONE * 0.00000* 'P 'DOMBT *BF* 3.00000* 0.0000-0 0.00000k NONE * 0.000000 - 'P *DOMLS *BFC 24.287580 0.00000° 0.00000' NONE * 0.00000* * *P ODOMBY *1FC 1.28571' 0.00000* 0.00000* NONE * 0.00000, *p oDO14PF *Cf* 236.03397* 0.00000* 0.00000* NONE * 0.00000' *P *DOM5R 'BCF 0.000000 0.00000* 0.00000* NONE * 0.000000 - * OP OD014PS 'BF° 40.00000* 0.000oe* 0.00000* NONE ' 0.00000* * o * o e * * * * 0 * *e * * * * * * -* * *§******o*0000*000000*00e0*o*0a000**00*X*O *oo*§o§o§oo*o***oooo 000000000* 0000w@*o*000 *******§**00000000000000*0*****9***0000 -428- 09/02/71 PAGE 8 INDO/WJBK *PROF1 $i384* NON BASIC VARIABLES *T *S 'Y *VARKABLE*T * VALUE ' CONSTRAINT * CONSTRAINT ' CONSTRAINT * DUAL * COMMENTS P* NAME 'A * VALUE * LOWER BOUND* UPPER BOUND' VALUE ' E* T a* 0 ob 0 0 * * o 'P eMETCOST 'NF' 0.00000' 0.00000' 0.00000' laOOOOO' 'P *ETHCOST 'NF* 0.00000o 0.00000'' 0.00000' 1.00000' 'P 'PROCOST *NFO 0.06000' 0.00000' 0.00000', 1.00000* *P OdUTCOST ONF- 0.00000' 0.00000' ' 0.00000' 1.00000' 'P *NAPCOST ONF* 0.0000051 0.00000* * 0.00C000 1.00000* 'P 'GAOCOST 'NF* 0.000000 0.00000' 4 0.00000' .92354' 'P 'HEZCOST QNF* 0.000004 0.00000° ' 0.00000' 1.00000* 'P 'INVGS ONF& 0.00000o 0.00000* 0.00000' 600010* 'P *INVSC 4NF' 0.00000' O.COOOO 0.00000' .00010* 'P 'INVAR *NFV 0.00000' 0.00000' , 0.00000' .00010* *P 'INVLD *NF' 0.00)009 0.00000p 0.00000° .00010* 'P 'IIIVOx ItFo 0.000(00 0.00000' 0 0.00000* .0-0010* 'P *INVPC °NF^ 0.00000* 0.00000° * 0.00000' .00010* 'P *INVEH ONF* 0.00000° 0.00000' O.OOC00° .00010, 'P 'INVSE 'NF' 0.00000n 0.00000' 0.00000* .00010' 'P *INVPY ONF' 0^00000, 0.00000' 0.00000' .00010' *P 'INVPL ONF* 0.00000 0.00000 ' 0.00000' .00010' *P 'INVdU *NF' 0.00000* 0.00000' 0.00000' .00010* 'P 'KWH ONFV 0.00000' 0.00000' * 0.00000' .020000 'P *CWA 'NF* 0.00000* 0.00000' 0.00000' 1.00000* 'P *LAB PJF* 0.00000* 0.00000 * 0.00000o 1.00000' 'P 'MNIT 'NF 0.000000 0.00000' ' 0.00000' 1.00000* 'P 'CAT 'NF' 0.00000* 0.000000 * 0.00000' 1.00000' 'P *ITx *NVF 0.000000 0.00000* * 0.00000* 1.00000* 'P ROY 'NFV' 0.00000 0.00000* 0.00000' 1.00000* 'P *FUL *NF' 0.00000' 0.000000 ' 0.000000 16.15130' 'P 'EXA *NF* 0.00000* 0.00000' ' 0.00000'- 1.00000* 'P 'UTL JFV 0.00000' 0.00000' ' 0.00000', 1.00000', 'P 'I00f 0* 0'0 0F00000- 0 0000000 .00010* 'P 'CLO *NF' 0.00000' 0.00000* * 0.00000' 69.97901* 'P *()EI '*NF 0.00000' 0.00000' ' 0.00000' 1.00000* 'P 'DEX *NF* 0.00000' 0.00000' 0 0.00000' 1.00000* 'P 'LIMLD 'NF' 0.00000' 0.000000 ' 0.00000' 16.?6214* *P 'PROMX 'NF' 0.00000' 100 1. ' 1.0000' 8.98988' 'P *bUrMX *N'F 0.00000* 1.00000* ' 1.00000* 9.66945* *P *NAPMX 'NF' 0.00000* 1.00000' ' 1.00000' 2.95579* 'P *CPmDU 'NFO 0.00000' 454.00000' 454.00000' 122.34051' 'P 'CPMSC 'NFV 0.00000' 0.00000 ' 0.00000' *00400* *P 'CPMAR 'NF' 0.00000' 0.00000'o 0.00000' .01080' 'P QCPML.D 'NfV 0.00000' 0.00000' ' 0.00000' 16.78064* * 0 * * 0 * 0 0 1h * * o * 0 * * * 00000000000oOOU04S1§*i§XQ§4 4 §§§**§§§"*§§0*0§§X O*V"**0**9§00****0*@***v* *00 * * * * * 0 0 * * *°°° 05 *0°°°°°0 * 00000- *00000 0 0JN 0 B38* d oL0000064 *0000000 4 *00000-0 o00000-0 *JN* Vg81O1* do *L00000L9E .00000 0 * 0000000 *00000-0 oANo VZ3f4 do 4O00O*&L #r00000,0 * 0000000 o0000000 *JN* V803A do * O00000t L 000000.0 o *00000,0 000000.0 *JN* PVROW* do - *00000LOE .00000'0 0 o00000,0 000000,0 *AN* V20WlO d# 000OE *0 * O£ oOO O '0 *0 * O 00000o O O *JN* VY8OW do *00000'OS *00000.0 0noooolo .0000000 oJNo VHW:OWo do **O000910' .000000.0 o 000000*0 000000.0 *JN* VBHOW. do *00009090S *000000 * 0000000 o00000'0 .JN* VPH2o do *L060908t *000000 * o00000,0 .00000.0 *JN* t8)SZgo do *o2LE091Z o00000,0 o00000,0 *00000,0 *ANo VHSd*o do *L090891z 000000.0 * 000000-0 000000.0 *ANo BHS5* do oo000L09 000000Q00 * .o000000 00000.0 *JNO Vg8Sd do 000000-t .00000,0 * *00000-0 00000-0 *o4N* VYThS do *00100 o000000 * o000000 *00000.0 *AN* VBSI* do oC *000908T 000000.0 * o000000 000000,0 .JN* VBIB*A d* o0691000O1 000000 * 000000 000000.0 oJNo V8ASo d# o9ZL92 T 000 oOOOOO nooo ooooo o000000 oJNo VYB3* do oO0000012 o0006000 0 v00000-0 *00000.0 *JN* VeAdS do *0o o9Z9?sl? 000000- 000000.0 00000.0 *JN* V83A3 do ** 00000.0t .00000 * *00000'0 000000.0 0I4N. V2a3 do *00000-06 *00000,0 * 0000000 *o00000,0 *ANo VZ* do o00000BS 000000.0 o o000000 000000-0 *ANo 488Lo do 0 000.00064 000000,0 4 00000.0 000000.0 o.JN* VBZ8o do 0OO000OL 000000 000000.0 o00000'0 oJN* VBOA* do 000006O-L 0000.VO ** '00000.0 o00000,0 oJN* V20o d* 0 OOOOO!E oOOOOGO o o00000O0 o00000.0 *oJNo VtD8 do *o00000002 000000C0 o 000000,0 oOOOOOO0 o*N* V2ddo do * 00000SCt .00000.0 * 00000,0 000000010 *ANo V8OOd do o .00000*0 oOOOO-O * o00000'0 *000000 oANo VRddo do 0o000001414 oOOOOOO * e000000 oOOO00N0 *JN id3 do oo0000100L o0000000 * 00000e OOOOO-O*O eJN* V23d d- *O000O00 000000.0 00000000 Au000000 oJN* Vd13o do 0 00010' e000 OOOOO- nooGOO eOOOOn*o oJNo V8do do o .0OQZO e000000 * 000000.0 oOOOOO@O .iNo ldNdJo de *OSSOOO *00000'0 o o000000 *00000.0 *AN AdHd3o do *oOROO' *000000 0 a000O0,0 0,00000S0 JNu 3SWdJ do o°L910 o000000 - * o000000 -OOOOO oJNo H3Wd3o do oQ09T0- 00000000 * .0000000 .0000,0 o3r4o 2dHdDo do o0091-0 oOOOOOO0 * -u0000°@0 *0000000 oJN* YOHdWd do o o 0 * 0o o n* 3 o~ . * * , * lo * 3o o o 3nlVA ONnOa 83ddn oONnOe d3S0Mo * 3nlVA ** Vo JWVN * d- SIN3WHO3 0 lvno o iNIVH1SNO) * 1NIVHISNO e iNIV81SNO:) o 3nlVA * 1*318IHVA* A* eo 0 oS0 o 'S I* #$1308d* )IUM/OaNI 6 39Vd TL/?ZO60 * V8 * 0 * 0 * * * 0 * * * *00000'1 000000 * o00000 0 *00000,0 *AN*I13AdA3J8 do * *00000'1 00000 0 * o000000 0000000 *JNo*X3G)3\A3d* do * eO0000-I 6-OO 000000o 0000000 o000000 JN*I303AA3 do *.00000'! O00000 0 * 00000.0 0 00000 0 o*AN130G3A3d* do * 000001 000000,0 *006oO-0 Q00000i0 a OON*I3aZRAmJH. do OOOO0'! *00000-0 * 00,0 0 o00000Q- *JNX3OIA3H. do * 00000'1 *0-1 000000'0 0000000 *JNI.J30O1A38* do o o000001 .00000o 0 ,0 0000 o000000 oJN*YMlAXA3He do 00000'1 *001 oOO o OO0 o000000 *AN)130aAW,3H9 d* o 00000)1 o000000 * .0000000 *00000,0 o3N1300AA32J. do **0000001 *00000,0 * 000000,0 .0000000 *AN*1309WA38. do o .00000! #000000,0 o 0000000 OOOOO'O *AN*1:30a)wA3d* do o *00000'1 *00000'0 o 0000000 *000000 *JNvY30d7dA3d* do O OOOOO' 00000°0 * °00000.0 ° 000000 .JN.N30ddA3J8 do 00000'1 *0-0OO- *00000-0 o00000,0 *JN*IlGOdA38* d* o °00000' I 00000 0 * '000000.0 *oOOOO0 oJfY03dA3do do o ..000001 .00000* * 000000-0 000000-0 *oN*1303dA321o do *00OO0OO1 900000.0 .0000000 .0000000 *ANsY3ai3A3?H do * .00000.1 000C00 ° *00000-0 .0000000 *AN.1303Aljd* de * *00000'1 000000 * *00000,0 o0000000 *JN*13(lIJA3M6 do o *19689L£ *00000*0 * .0000000 *00000,0 *JN* VPX3o do * .6S691'62 *0000000 * 000000.0 O000600 *AN. VPaHOo do o1006Z'LZ .0000000 o 0000000 *00000'0 *ANa VREH3 do * oZ1000'1 .000000 o00000' 10 *000 *4N* oN V92HDo do o 400000-S9Z *00000.0 0 OOOOOG 00000.0 *AN* V188S* do * ECLS-9At1 #0000000 * *0000000 *00000'0 *JN* V81VI* do * *0000081 .0000000 f .00000-0 .00000,0 *AN* VSAio do * .07999Sfy1 *00000'0 * .0000000 *OGOOO-O *JN* VBT1A. do o -00010. *00000'0 o *00000-0 *00000-0 oJNo VfSO1. do o 0OOOOOOLZ *0000000 * .00000.0 *00000'0 *JNo V013do do o hZt Z6't£ 000000,0 * .00000-0 000000,0 *oqJo VHSOWo de o .LC'90'0C *00000-0 * 00000-0 *00000-0 oAN* V$3+OW do * *00000002 .0000000 O0000O0 .0000000 *AN* VOTddo do o c*c .000000o0 000000.0 0000000 *4JNo VHSdo do * o969T0-Z51 *0000000 * *000000 0000000 *AlJ VRAiS do o9L9Z-RzT *10 000 0 * O00000 0 *00000,0 *JNo VPV3* do °000000°01 O 000000 ° °00000-0 *00000'0 *JN* V9DAdo do o90OLU .00000,0 o00000O0 *00000,0 .JNo V8409o do * .LI£C6-8 o000000 400000°0 oOOOOCO *JNeo Vg8dN do SZ9t90'611 u00000*0 * *0000000 oOOOOO--O *J#- VRZ8J3 do o * 0 * * * 0 * 0 * o o , * 0 0 0 1. 3 - * 3nflVA oONnos 83ddn *ONno8 83,'01 * 3n1VA * o v* 3hVN o do o S1N3HHOD o lvnfo * INIV81SNOD INIV81SNOO * INIV81SNOa * 3nlVA * Io319VP4VA* A* * * * * ° * 0So o 1* I $10O8d* )46M/OONI 01 30Vd IL/20/60 ., C0I- -431- 09/02/71 PAGE 11 INDO/iBK *PROF1a ;$ *84* '*-@ea@-**0000000O00*0-0.o00oo,oooooooooooooouoooooooooooo.uooo.o*be§4§o.*oeoeoo0o eXo0-eo0**0*0*000*00*0*O000 -o00@*0@0O0.00 *r * 050 * * * ' * * *Y *VARIABLE'T * VALUE * CONSTRAINT * CONSTRAINT * CONSTRAINT * DUAL e COMMENTS *P * NAME 'A * * VALUE * LOWER BOUND' UPPER BOUND* VALUE * eET * * - * * * R * * *0 * * . *P *REVPYDEX°NFO 0.00000* 0.00000. * 0.00000* 1.00000* °p *REVEADEXINFO 0.00000* 0.00000' * O.0ooo0 * 1.00000* *P *REVEADEX'NF* 0.00000* 0.00000 0.0I0Q0* 1.00000* oP *REVSYDEIXNFO 0.00000- 0.000000 0.00000o 1.00000O *P *REVbYDEX'NF* 0.00000* 0.00000' * 0.00000' 1.OOGOo' 'P *REVBTDEX*NF* 0.00000* 0.00000* * 0.00000* 1.00000' *P *REVBTDEX'NF* 0.00000' 0.00000* * 0.00000* 1.00000* 'P 'REVLBDEI'NF' 0.00000* 0.000000 ' 0.00000' 1.00000* *P *REVPYDEI*lNF' 0.00000' 0.300000* * 0.00000* 1.00000o *P *REVPFDEI'NF* 0.00000* 0.000°00 * 0.00000* 1.00000' *p *HEVSRDEI'NF* 0000 0.00000 ° 0.0000 1.00000' * 'P *REVSADEX*NF' 0.00000* 0.00000* ' 0.000000 1.00000* *P *REVPSDEI*NF* 0.00000o 0.000000 * 0.00000* 1.00000* *P *REVPSDEX01NF* 0.00000r 0.00000* * * 0.00000* 1.00000* 'P 'PPDMX *Nf' 0.000000 16.00000o * 16.00000* 30.00000* *P *VCDMX NF' 0.00000' 10.00000* 10.00000* 4.31560& *P 'PVDMX *NF' 0.000006 60.00000' * 60.00000* 20.00000* *P 'EAO4X 014F* 0.00000* 15.00000' * 15.00000' 121.73274' *P *EAEMX *1F* 0.000000 19.00000* ' 19.00000* 71.73274* ep *SYDHX *NF* 0.00000* 5.00000* 0 5.00000* 17.98305- 'P *BTDMX *NF- 0.00000* .3.000000 * 3.000000 3.74267* *P *PSDMX ONF' 0.00000' 40.00000' ' 40.00000n 28.16268* 'P *PSEMX *NF* 0.00000* 120.00000* * 120.00000' 3.16268* *P *BEZHX *NF' 0.00000' 126.00000* * 126.00000* 69.954787 * * * * *t * . * * * * 0 C * * * * -432- 09/02/71 PAGE 12 IhDO/IBK *PROFI* $84* *T 05* * * * a 0 0 *Y OVARIABLE*T * VALUE * COST * LOWER * UPPER * DJ * COMMENTS *P a NAME *A* * a BOUND * BOUND 0 0 *E * r 0 * - * . * 0 0 0 * * 0 * 0 'P STWMTR *NF* 0.00000* 1.00000w 0.000000 NONE * 1.00000* 0 *P *STMTR ONF* 0.00000o* 1.00000* v.00000* NONE a i.oooo0 f *P OBAGTR 4NF- 0.00000* 1.00000* 0.000000 NONE * 1.000000* *p *TPGAOCOSoIJF* 0.00000* 1.00000. 0.000000* II3NE * .07646* *P *DUtU!VTR ONF*-z-' 0.000000 0.00000' .00* INONE * .oooio* *p *SBI4VTR *NF* 0.00000* 0.000000 0.0000&o NONE * .00010* ,t O*F*SCIr(J *UP* 1.00000* 0.000000 0.00000' 1.000000 1.200000 0 *IF*ARINT *UPO 1.00000* 0.0O0030* 0.00000* 1.00000* .05800* * *I *LDINT 'UP. 1.00000' 0.000000 0.00000' 1.00000* -5025.49074* 0 *IF'OXINT 'UP* 1000000* 0.00000* 0.00000* l.oooou' .36000* *IFOPCINT *UP* 1.000000 0.000000 0.00000* 1.000000 .26800* 0 *IF*EHINT *UP* 1.000000 0.00000* o,00000 1.00000* .39100* *TFcSEINT *UP* 1.000004 0.00000* 0.00000' 1.00000w .19000* f IFPYIlNT *UPU 1.00000* 0.000000* 0000000* 1.00000* .19000* 0 *IFOPLINT *UP* 1.^:iC2' 0.00000 0eo0000* 1.00000 .30000* 0 *p *MO2AR 4NFe 0.000000 0.00000* 0.00000* NONE * 11.57872* *p *MO3AR 0HF* 0.00000* 0.00000* 0.000000 NONE * i5.45707* 0 *P 0BTASB *NF* 0.00000* 0.00000* 0.0000('* NONE * 109.26411* . *P *FLGAS *NF* 0.00000* U*.000000 0.00000* NONE * 18.25097* *P *FLC2H *NFO 0.000000 0.00000* 0.00000 NONE s 160.020120 0 *P *FLC3H *NFe 0.000000 0.00000e 0.00000' NONE 0 80.47100' *P *FLC4M ONFO 0.00000' 0.00000* 0.000000 NONE * 34.99000* 00 *P *ETC2H ONr i 0.00000' 0.00000s 0.00000* NONE * 116.03012* *P *POC3H *0NF 0.00000* 0.00000* 0.000000 NON!r a 62.48100* 0 *p OMGM04 *NFf 0.000000 0.000000 0.00000* NONE * .06437* op *HMGM05 fNF* 0.00000* 0.00000' 0.000000 NONE * 4.924420 0 p *BZIBEZ *NFo 0.00000 0.00000C ' 0.000004 NONE 0 73.954780 *P *EBEBZ *NFO 0.000000 0.00000- 0.00000* NONE a 31.04625* .ft *P *PFC2H ONF* 0.00000* 0.00000* 0.00000' NONE * 141.46228* 0 *P *PrcC3H ONF* 0.00000* 0.030000 0.000002 NONE * 62.46231* 0 *P *PFC4M ONFO 0.00000" 0.00000* 0.00000* NONE f 16.99746* 0 *P *FFFEO *NF* 0.000000 0.00000* 0.00000* NONE 0 .83870* 0 *P *EXPPE *NF* 0.000000 0.00000* 0.00000* NONE f 20.00000* op *FXPXY °NF* 0.0j0000 0.00000* 0.00000* NONE * 27.00000* P 0EXPTO *NF* 0.00000* 0.00000* 0.00000* N0N4E a 25.00000* 0 *P *EXPVC *NF* 0.000000 0.00000* 0.000000 NONE a 20.68440* *P *EXPSY °NF,* 0.00000` 0.00000* 0.00000* NONE e 2.01695* 0 *P *EXPBT iNF* 0.00000* 0.000000 0.00000* NONE * 16.25733* *P *EXPSR *NF- 0.000000 0.00000° 0.000000 NONE 0 15.00000- P *ODOMET *NF' 0.00000* 0.000000 0.00000* NONE * 44.00000* 0 a . oo0oo000oo0 :O§ L 00o0oooqoXgo i000000000 O§*000 0000000000000000'00000000 0000000000*00ft00ft00000o00ooe0ooooo0oo 00.0000k a It -433- tMAGEN 6000 kUN CONTROL DATA CORPORATION CYBERNET SERVICE IHE MAGEN LANGUAGE WAS DEVELOPED BY AND IS PROPRIETARY TO HAVERLY SYSTEMS INC DENVILLE N.J. DATE OF RUN 09/02/71 START TIME 20:36;43 VERSION 1.2*1 CP TIME 4.012 SECONDS FIELD LENGTH 145000 OCTAL INDONESIAN PETROCHEMICAL PROJECT ---------- ------------- ------- SIZE UNITS TH.TONS/YR COST.*MM ---- - - ---- - --- - ----- STEAM CRACKEk 597 35.689 AROHATICS UNIT 11 1.749 LD POLYETtLENE UNIf 300 87.000 OXYCHLORONiATION VICL UNIT 86 17.292 POLY VICL U1IT 165 28.487 ETHYL ALCOHOL HYDRATION UNIT 22 7.573 STYRENE UNIT 48 5.944 POLY STYRENE UNIT 168 16.216 POLY PROPYLENE UNIT 18 6.575 GAS SEPARATION 100 .831 DUMHY 454 BUTADIENE EATRACTION UNITCDMF) 4 1.929 SBR UNIT -- ---- ----- -- - TOTAL 209.483 ONSITES ONLY VALUE VALUE PRODUCTS DOMEST EXPT OOM.MHS/YR EXP.MHS/YR -------- ------ ---- ---------- ---------- GAS TO FLARE EThYLENE POLYMER GRADE POLYETHYLENE LD 277 74.925 PQiPYLENE POLYHER GRADE POIYP;OPYLENE 16 0 3.680 .018 MIHEp BUTANES/UNSATS 7 .255 GA,..NE 400EP 10 .306 FU L IL 400PLUS 0 .001 XYLENES MIXED 1 .053 TOLUENE 1 .054 PENIlE.E ETHYL bENZENE VINYL CHLORIDE lQ 1.500 POLY VINYL CHLORIDE 60 97 13.800 20.403 ETHYL ALCOHOL 15 19 3.750 3.800 STYRENE 5 1.000 BUTADIENE 3 s4o0 LOSS 24 .000 BUTYLENE 1 .023 PROCESS FUEL 236 .002 -434- SYNtHETIC RUI3WR .0 44 POLYSTYRENE 40 120 10.400 28.200 TOTaL 110.200 52.420 1MM/YR GROSS REV 163 FEED COST 25 MARGIN 138 OPERATING COSTS LOCAL 32 FORGN 30 NET MARGIN 76. N -435- 09/09/71 PAGE 1 ,; LJT )L T YPt I Y 2L - OPT IPIUM ~I' r.,F [FF fl> t )t- r.d E)-i*LF = l; !t'r 'rF T.' ',1 JrCTiV- F'I',CTIO'j = 0PJF: t'FY - rL*C; iSgT - T "'C OF -rLVJi..i - e7 7 ':lt.V*r .Or *n-tFi * . - = - 'W -:L -C T HJU; ib SET = -;rNDA VAJL0' 'fF ft-'E 1, JECTIVf Fu'-CTION = -1o733.61424 3ASIC VAR14LLES Y V A',A I w1t. F; V'4Lib- * C iJ S I5AIiTl T CONSTRAINT CO CSTRAINT 4 DUAL * COIMMENTS 1 A ,i' r- ; VAL 'JE E LOlR B3OUNiDO UPPER 3OUNDO VALUE * i, it it Cj .t StkC- 4 i Ai" .- 1- i q t 4 t4 t it 4t it * t s it to' ko , **^ : * *. 4* j* IF p,*4 F1 . . 7 3 :. 64' -o7 1 2i.6?*6 RQi 4E * NON'E * o.0 0 0 0 u I ;F -'1 137 7 I . 1GF * F. t r1 -. 0 . O0 0 u -F; -. jf.'., . I I. I I i t) ; *.6 Z .1 . £tQ:Je. 2 4 1!6 "; . O E 0 ( GA iF sJ F- 1 n%7 43. ?14-*- 6 133 .,5 1 F4* 1.ONE .NO), F * ] * ( 03 IV 03 J . I, *:*l.;I i f ; . .OC. ('j (0C 130'J * ut i.I - :0 * * U. 0 ; i0 )' j' T* I 0i .O O0 >*,il 0.0000004' *: '4 rT$ t ; r >i )o 5 . ; . ju 1)* F 0 . 0 ()0 0 0 0 0GtO t)0 4 211. , .F3 22.-i3j,' 1/%95] A* 300.00000* O.00O000 * *. * .T *:r* I4; 7I,b9 ;I 3le -0 0 0 0 * 0.00000* T J *iT; , , 1 , v : 4i.7453a* 595.00000*k O.)O0'000 - t- T -N * A 74t,--r> 4.iD . 7465;2-! -0.00000* it 0.O000i0 U0' *;)YJ sA ; ' * J.)4 1 . 0)OU 0 0.00000* * ` ti * ** t '; it * , r i;- *t 1? 4' st ii * *7 * 7 4 r.-. 4 4 444-... . 44. 4 4 ..-If' -' -K C-CLN J *v. C- -.P~ C'4-1: JC,CC L ' * (-7 ~ Z Z -j'-P 4-4 . . . . . . . . . . . . . . . . - I , \C0c-J Z' ZC44. C- :'Ci:- -,J C- cc.= ~: '-r1 -U 0C ' C CC -CC4q :~ = 1'Lj :- - Z4 -- -,.- . , - ,r CC, C '. . Z.s- Z.' C' L) -C4 C C, 4-4 ,C .C C . C -c . ~ -Z C - C 4 C .C CC C C C C ., C' . - C ' LC'~7 N, -C, C, C- W'''C U-. L4 C4; C ' C- C: 4, C)C C'CC-1 C:, C- c Ct OC, c'r C,C. $--CD. 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IA F* A F (;;'io.0 * 0. 90.0 )0*1joi F . , - -,'j- ti.; . 6 Ja ( 0 U 0.00000* 88. kiuO; r4' J.J0lu0U 0.00 0o04i 122.31357* 4t,C V 0V-A 0 if U.t) ) JIJ(r* 0 0 ( OO O 230.00006* F *FI.,.t F* .J 0tj fj i.U(I)l 0J* * 0.00000* 102.85140* *C- t *,.,, : u.11000u* * 0.110060u 156.6LuOO* ¢, i-JF> 1rVW.!J)S1 j $-tJD)i* 0tO*X0J(1U* L0.O O SOO 4.t *>'y-A F *1.1-k U OC.)1 C. tJUdI i V 0. 0000* 150.010000* F~*L( A KV 0 J 3a.T 1 IuLIi, * 0.00000'- 0 10) 0 **, *0iA *t* ,.:(.)dj* ;.0000;)4 * 0.001100* 265.0O000* *F* *rThI4 ;; if' ;:.j:;J rf t ,.u U 0U 0.00s0u* 235.00000* ,, '5:, A . i.F) * '):i(j4k ( 0.00 0) 0 ( o.oOOo 18.54783* itr *C,H-AP hiF * U fJ! ; u sIJ 0 it * 0U.(U0 0 C 5B.73592* i1 -il-l , , i.1 ,i , j, ii.0090k 4 0.0000(o 38.41009* C *C4 A. . 1A o. i' r 0. 0o0 UJ 0.00000O* 35.00000k * J 5, 'JP Th- .) Ci .OC Gl(0,JU * 0. 0 0U U,# 30.00000* * * NFan .9-i F 9F 0 f)i. u41jco * 0.00000* 31.84231* 4 * A.,j; *c.Ni- k.: rU-,C; o.ooro0o0 4 0.0000u* 3G.u0000* OF 44EJ.. *1I It 0 ;'- ou. G. 0u 0U * 0. 0 000Oil 17.00000" 4k 4k *R * * 4 * * * *t ;; u ~ 4k '4 *{ Y 4k -444-- 09/09/71 PAGE 10 r; r/: ,t 4pRrjp -;t At- 7 7; *FT w S* t o * * F 4 tfo *4'III1L wT * VAL'j * CIJNSTrtAlt,I1 * CUNtSTRAINI C' CO>'SrtNI * i)DUAL * COMMENTS t E A 4F f* VALUJE F LGwER bOUNo* UPPER U VALUE CMUF *F FoT to i * C n ft 0 4' 4' i~ ft fEt ft Ar -F a W.F* J J luiJ', 0 0') a )4 0 .OOu U" 30.lon(jGa 4 *tJYL93 '-*!if UJ03t,Q00* 0.00000t O.0040u 49.00000a, 4 .*-F?bA *. d'1 I.; rF 0.00006* 156.3S377* .t *1)0 14 . J 0 0( 6.0oo&o0 0.00006.* 165..08963* . )t 0 4 I * u to to 0 .0) 0 0 0 ( to b8 '' 3 * 40; (Vj-ArD -'t> . I!J,c .0o). * 0 0 0O o0a 15.0,i326*t * op 1&'VI-,") t,jF* 9F ..: J(1 Z tI IJ0 C) Q, 0* . O00)i a 14.dc10368 4 4i -d ; iC;- :o,F , - S i t. t,u 0 .S) 0 J OU W . 0 tJ ( U 230.0uoCo * 4- f*e.L -:2 O ) , 0d Ju* 0.00006* 102.d5140* * S TY * -Or 4 ).Qi J0UJ¶Y 0 . 'l,004 't 0*00000* 156.68000* P ; *1-"T-s ' L>Jf t,j0 o.ooooo4' 235.0o0u0oo * i. a J * ,I* : u I .- e ft 0 . tO O* 23*'.u6000'i " . ;' U. u l 0 (IUJ- 0 . u 1) ( o 30.00000O * .P *.--rj- 0 . 0* v.0 0*J1 ftJ1I 0 .00 0000 36.09056* I P r1 a . t.) t 0 n. u C 0 0 0 0 0 * 0.0()it104 * ;P 4*L.(;zA4 I Fu 0 do0 0 4 0.0000.3* .0iO000 * a' 4Cl'uiA C .Ft 0. u' O0ii f 0 .0,0000 122.31357* - f -p *8T?riA *,ff* 3.', > .0 00UJ0 ft O.000(I0 0Q 18.(0000- *"TV4 .4 A ' 0 0. 0 0 0 . 0.0000oooe 150.600000, * z A 4'.-* ). ;;0 0 0 to 0.00000* 265.OOuCO* v b) C 4'iL ; 2 W 1F ; (I C 4 0 .0 Ju at )o uU0004b 18.36000* , F 04 *C; U.'.tJor. 01 030d4)k * U.u0000J4 i4.681l6o* f 4EJ "C,H ".:r 9 J. jC U .U j ti ,J . 0.00000it 14.407tj?2 to to XC A --A 0 o ) 'i,0J"o 0 .(I'Oao, 0.00000* 58.735927 * 4* t >/ L ) T* F .5Jd it . 0 0 *4' 00 0 0 40 0(y ;)*rVF 4 )Ehti:F t o )0.)fne;n u. (Ji)'IG(' * U.Ji)U000) I .0O00(I9 ' Fi; L&.*iHP4 0.000004' 1.000('J4ooo' 1F tU 0.-t,C:.' 4.l.i .F* F o,flr)0j ;t - ).0000-* 1.00000* Q, X >rF- V'! J) f E I I F *H * 0 U; -J, uor 4J r t jo ; *-7 F,- ivrL I f' CtJ~ . u) 0'3 J.,,,?Oj0,,,t 4 0.000O o'J 1.OOOO,,',o i v-) -.r I F* U * .-j r ; U J UJ O ' 4 * O. 0 i ( C Sl 1 . 000JU* VJ*L. j9 U: .U 0JUii i 3.000000 1.150004f 'FVCF,' 0* 0.00000* 1.06000a0 f 4' G.%t '3Jt E-*'I-4' -.4i U .UA . C.00 0 04 0.00000I* Iu0 0oU 4 4 V 4 F( -EI4 iv (.-'.0C'CJ D.OOOou* tot 0.00DU6* 1. 0 000 0 ft ' .) r, E FjorlO'- '' .O))UU4 * 0.00000* 2.22727* 4t {-;eE *V T 7,E' IF1.F u:)i; U 00Lw G.0000 0.0000c* 1.00000* FV r J E X ;a 0r v 0 . O U , Q, 0.00000o 6603594 Q, ii, 4*cvr791iif4*-,Fu' u.3'0J . *O'), ft 0.00000, 10000046 * ; " ft o f f * ft * f a ft -, , f at Sf i a a ,,4k*C 0} i *0i4' Uit. *41. 4J1i*; I; ,i4i,* X4'4. ..i i ii . i.4 4 i4' i~ QS* .;**t.* Ck41'1ft*wi,ift*1f# ;tftYt 4 o Fv*4S§ §s wXet{si§* § Vt§*3§it§§sis§e -445- 09/09/71 PAGE 11 I 2lJ/; I. wf'.C F:)i W} -A 17 A T * * *Y aAi14.LE'T * VALUJE * CO!1ISTRA4r C CONSTRAINT O CONSTRAINT O DUAL '* COMMENTS * 1 U4A.E - 4A VALuE it LOWIER SOUNDQ UPPER fOUND* VALUE * ME FT * * T* * 4i no ., *i04ik 04 41 b*0)fi44 z.t 1 * *** i4S 4kI4 * S; f O OFSt 4. A *O.***k4k********- 1 6! tftOft0*OO1:ft*4*O**fttfffttfQ*Oftf t*O * t i * 41 O * * * § * EOI d.;: du()l 0 U0.O0000* * 0.06000* 1.0000U0 * f *P WF/V CUEIL) E IF* "F:'J0 u , 0 .0 0000 * 0.00000* I .100oi * C;) ., VrCOi*.* (. )fuI) ) 00 . 0 0t)n1 * 0.Ou00* 1.00000* * . L UE If F * o . C -*t) f0. 0Ou * 0.0(16000 1.00000* *p 4tEv J.-Fx. .F * ( 0.' ) 0 0 (.0u0 0 * 0.00000* 1.09524* . *,) *&F"Fvr t@ Dl !,G!F* P,.5:1 0u" ;). ;iiJ,i i 0.00000* 1.00000* * * *i .t UE A i (.J ., .7 it O 1) C) t) C U i 0.000o0* 1.00000* 0 0. )0 C. U0dG.0001'G 0.00000* 1.00000. * !1-*.Y) F* (43jil."i* 'J'"jJ' * 0.00000* 1 .00000*1 it* *'Fj4T1)E I " C .u 0F ) u i. 0 0 01 *t 0 .U0 000 1 .00000* PL 4.*IV TI )r." E. A J 0U ) I' 0 . 00" WI , 0.6(000uu 1.153bSo Po. r; F- , Yf[) F I ' t i JJ.,:UJ11 . U fj .) . G 4 ^ O I O 0 ; 1.OO 0 0 st it t tF v - s F C) tr 1 F> f - hs . G O O O 1 .0Q 0OO O0 0*30 6** *G)u ;~, E st -P)E X lt5 :F it toj (I[)%- 0e0 t0 4 SF 0 (I 0 S 1.06000it' O *; " J-P - g)E I f) , ,. u. * 6 ,.:o0) * 0.0o0oo0oU 1.000'o) * ',E7 *;vP-SEA) F F* 0 . 0'j)I I* * 6 .0J JI * SF 0.00000* 1.0000o 0 '. OFI).,' 4['1Fit 0. J 0r(,l 9UJ.U"0*' * 9G.0Ov'OU) 20.0000U '- EVCCJ-:A s gh 77it 4T* =* * * * . * * *Y *VtAH14tuLUT i VALlJE * CtST * LOiWEk * QFPER D iJ * COMMENTS *4 11 it A i w * BUIUND. * BOUND 4 * * F T * * , ** 41 7* . F r T jF 4 & U . t) O J 4 ' 1 u o G 0 . O O O o o 4 ' H O N E 1 . O0 0 0 O0 * aJ~ri 4f~ 4* 0~~V ~ iOOO 0.00000O* H-OtIEf 1.L0(04' * I '(iCO"i 1 I . 0 u O.0c3o* NONE * .21932* *. T 'iC'j3,1 $F 1 .00U Qd Tj O.OOuot* IjONE * *.2272Q T.- CT 6 'CGS 'Ii -* ;). *r . ( fl.::j* U.000C0 Ij.00000* lO[rE * .30U00U* 4'4 245 06.tiiu3tl U .UtJuO4 .()G ui4 NONE * 42450t6 *' 1 F - .; 1: ao 3 .0tfpj 0* 0.OUO04 HIONE * .2E04978r* *Aj I .vrrPL . 1UdL, u 0.OG)060u4 NOIHE .29413* *H *IF* U.).J0(Io- I 0ud( 0.00000* NONE 0 .35UO2* 4'0 u. / 0 1 U., ,* 0 . .lU00i NOE * .1EOU10 *I :. n A Y I '1* r- 0 1 . 0 3 o 0 NI 0 0 ) 1 NUE * 1.22727§ *' v r',Tt *E4' U (0c,t ,.0,J() J* 0.000.00 NONE S U.6u3i9a 4 4' ''Iv v fF -' :it 0 ,,Ii , . (, ' 2 0: N 0 tO O0 00 U OE * .09524k 0 * *IF. A¢.TTo k a,-a 0.( tJib0, U.UOo0,; 0.00000* NONE 4 .15365a r li TR tP,I 0. )J1r3t t,.uGiol U 0.,00004 14 )1HE . 06000* 4I *L)l 4T Ou'dr4 I o.j Um') u.00)0* 0.(J60"100 1.o000OR -3772.45062- *p *. )4, f *F U.V,0.j* U ).i;du i O.') iJuUJU' tIOkE . .95091* . i , oC .o C w; 1j U vU 0. Uo( 0 0 t4 ONE 4 19.33340* ) .. L: 9.Y O'JL4 O.')0l0 1 U 0.00o04 ONE 4 102.87200* *P *FLbA'i r O. v a U U.0(0u 0Is0 0 . 0u00 NrJ'l 18.53783* 4' *FLCC-I t1, { 4, o ':)' o . 0 0 6 Oil * I56.725'25C, *F 4fLC Js -.,F 0 '-i0 ) a . ' 'U 0.00300* uJONE * 38.4000O5 4'; 4sFLC" ' 'F 0 ;C0:,J V.OG3r6 0 . U0 JaOOG h 4* 34.99000* *lTCSL L. auO*,* 0.o0IJu 0.J00o0'* N0N4E 14.73592*- 4; 0 r.u O:o 0.000o00' NONE 20.41009* AL ); rAFJ2 4* ' (. ,* 0 a J.00 JU* O. 0't}000U* NOiNE 1* .84231* 4 V: 4GLi 4'.iNF F1, ,0 - ')XO)oo00' dOcoooo0, IJOrNE * 6.09056* .d 47,eZT 'h ;FL 4E., r.J, * ,0.1nuo4,* 0.0000011* 1HONE * 66.'333774 F H,, 0. C G.rO-U4' - .00u0oU NONE * 39,a7639r 4P s?PFCJH *i'!F* 0 . :?IO40 0.00000* 0.0.000&J4 NONE * 20.10834* *P *O)FC(*4; 'F4 0.'JJ&oCr J.GOZGO 0.00G00* NONE * .16.71466* it ;'FFE0 F'IF4' o.i0 )ul4Uit 6.6c0lo00 0.00000* NIONE * .58484* *n r)Q4r T * Fs o.3(0oo)§ 0°.0000(0°* 0.00000* NONE * 44.00030* up Ur,o!4 TO i. * tl 0 .0:10 ' 0 00 0 0 0 0.00000* N-ONE 0. 115.08963* * * 4' . - * ..0 * 0t*FXQ.{S'@tE)XtS;l xiRi Qw;iI*;i>-<*X}*§{*QSf**§si§§SS;* 10*E*E§I>X§§ElSQ§§Q§Ot -447- Vf4'(If. I eror.n ,,X. COQ rj'OL 'jAl.A Cu;zA I i CY:,r-P.(!Ef r br-! /I Cr THIF 'AirFt- L1tUAki- :'05S w- J jLYl'L.; ji' HAVFRLY qYS[T&Si i-iC DF:IiVILLt N.J. 811't OF 4ie.4 09/ 69/71 STA T TI;T. 1 I;31 :-3 VEr'-JEr 1.O1 CP T I'IE 3.77- SECiJ.'40S F I EL.f tE-: IGI H 145i000 (Ol 4iL loiD)uNt-SlAN PETROCHEM.' ICAL PRIiCT Iorts UNIlT Q,lF) ------- --------- TOTAL 141.436 ONSITES ONLY VALUE VALUE P-i)(,J!CCS TDOi, .T EAPT f Ci1. ,I'1u/YR EXP i'Wt$ /YR -------- ------ ---------- ---------- GAS ro) FLA-t r rl)LY- U[;YLE?-'i L0 3l 18Ib 24.3lJO 46.875 '(: {LtA L ;POL YI-R 6P:DE 4LXiF' IUT'~,/J~.ATS.310 GPSO)LINE 411'EF, .13 .386 FUP'L UIL 4f0:,PLUS XYL.4JE-b 41I.tEfU FOL'JE\Ld f I 0 L F. - i i ; -' N F -I' ETHYL -NF '11jYL CH,LU.;'1ILh POLY tI'fL C'-LO';J|Ec. FTHYL -l COrN;4.L 3 9 .750 1.800 STY-F; 45 1.000 8.1aO 'LI.TYL- r-448- t L(jCe ,; Fl,L l7bz .00? 41 SY;NThilr[fC RLU ir.EP 'YSTYIENE 1z 97 3.900 22.6S2 ---YST-EN -------- TOTAL 3G.6 30 79.6??7 FEtC,) C',-ST JPh -.ir IN.cG C.)sT' Lu'CAL 17 FO§T1I -449- 09/d9/71 PAGE 1 SOLUTION TYPE = PHASE 2 - MEDIARY SOLUTION fJIJPFRt ° OF BASIS CHA-IAGES SINICE THE STFART OF THE PCjtlLEM, = 249 NAM*E OF THE GLiJECTIVE FUNCTION = ;PWOF5# NI'tE OF SELECTrCD ISET = NiJlE OF SELECTED RriS =71= NA;ME OF SELECTEU kAN6ES SET = WIAF OF SELECTCD t3OU,4'DS SET = g8ND1 VALUE OF IriE Oo.JF:CTIVE FU1NCTION = -11760.13739 BASIC VARIABLES *5 T *;: * St * * 0 *Y *VA'OIABLE4T * VALUE CUN4STRAINT * CONSTRAINT * CONSTRAINT * DUAL * COMMENTS * Op * N'JAME 44A * V /ALUE * LOWER BOUND* UPPER BOUND* VALUE * *E * T 0 *Ft&14?*4t*44.trtt r).~<{@}2 4? * 4 44? -ar*4?0g4?4' *" ?O*004&'E ***O:.* *p0XW0U 0*0*4S 4?099iXbU§X§iiAttiX 0*0040000#O*0i ooit-00*0o*0000*0t 4 * 4 0 i * S *b * OF *rQOFI 4I; * 54176.8b6?2'-j4l76.866Ž22 NOME * NOt it O.0O)0 .0 *F fPFIEF *;4 * 54 0.jS.b,d9% n4b03 35.4 , 4(NONE * NONiE * 0.00000' 0 *F rF') 3 4iR n ?7b.64743 7tjd64{J0 NONE * NU'E * 0.000000' * *'F * ;r: jF4 It S¶t *2q903.7'71A3'-59ijJ3.761-53it NONIiE* t 0.00000* oF it4.'- tF5 6 11769.137-9-1176bu.13-/390 NONE * NONE 0 1.00000* *F *04.OF6 OB -23FA3.4667,it 2383.4d679* NONE U NONE * 0.00000 0 * 1IJvr)Uj *;4F* 0. :r,duo* 000000* * 0.00000' 0.000000' 4Y ' 1NV1<; %F's fj*.v.UJOIi 0}.'T(hUOi * 0.00OO8(* 0.o000004? u*.J *Plv0 0. 00000 00 0 U00' 0 '4TM *-jf.* O.'JI 0Uu 0 00 iCiO' 0,00000* 0.00-000* L.00OuO * 0.000000* 0.00000* *L. 1I45C *'r-' 1036.6i'22* -103na.b5922* st O.o0000* 0.00000* t * . I b4Fg;j E H 4 90.%3O*) -9 i @ . 0 0 ") J 0 * 0 0 0 0 0 0 a 'LL'IS, 'J' 1i4.676cc64 -1b4.676?6* 0.00000 On o.cooo04 4 *P 4LIIPV | ¼-F* 81.34.s894* -d1 .84392* 0.00000* 0.00000* O *F' F; 'E | '.A 'I-IF' 235.23461* 64.76539* * 300.00000* 0.00000* * *4F 4? a a Q 4 0 w*4? a i' **** ,4 a 4?. 0. SF*4? it ****Q-4***t4 4?**4 4?4 it 4?i **tk****ooo Q*ik * *P4*4 4£ 4 0 4 4 *P 4 04 4 40 4 4, 4*44 P 4*P P 4 * P P) I llr 4 r- : C,',a C ,7 4 * -F 7 . Z. - . r C i :L4 O Li43 44 4 4P *4 4P P P4 4* 4414)P4 44 4 44 4e 4 l 1,-n.Il- C'4 P4 4 4* 4 4 *4a,P 4 44 4 P4 4 P CP 4 SP 4 4 P * V . * C* Z . *V z ,J L, C C -C, CC C,L, e .4 . C, C P ~ CI =, C. *L, -. C, -, C .1 uL W .,C . - Q ~ C' C, C, C 4 . C,C. CC a.., Z. C ~ -w 4 P1 Ct C,C, C--C  -C.; vrlC . C. C,~ C, .C-,,.C, L U, C.3-- CJ1Lp ., '~.C, CD L.C \J, J ,.C * rC .C' C, -:C - ~ - 4'-*C, - C ,, C-Z a- Z 'L. =Vt -J'n CCC C; ~C, 'Z .4 L., CC C 4 4 C C, P 4 P * . a) c-4 4 c. c- 44 4 C, C-r. P C P pP 4 4 4, ,CD C C . > C 0. V, C> C _ C C - - S ,C ,C vI .Lr:r ol D Ct,lJa O' 4 Z4I C,* .,CC C . ,C 4 C) ~ P . 4 0 00 400 0 . 00 0 . 30 C C0 0 C 04 -n C4 'v Z 4 0 .'C, CC .4L'.0 Co C..O C .C.--L C, Lf C, C' ' C, C>~ CD' 4 C) Z 4 *OC~ , - - - C ,1 DC, 0 0 0 00 . 00 C, .4 00 C C. 4L, 4 - P 00 CCC C, -. , C,C-040 00 4 ~0~0.0 C.CD C,00C4O4* 0, C, C4P4 40 *P PP PP 44 44 p4C,44 P4 40,4 4 4 4 * C, ,- ,C lC 0 CD00 = ,C 0 C,C0D0 ~ C C,C 0 00, 00 C~ 0, CD 0,>C 0 C,C0 C, C: 4CD4 C,C pC , >0, C,C C> C, C> IC, 00 1 00 00CI>1 IC C > C C ,Ce 0~ 0' C 0- 'C 0 C-0 4 0* P 0 0 000 00 00 -C 0 0 0 0 0 0 * Z 4 4 0 0 000 00 04' 0 0u0 0 0 0 0 0 P -4 -451- 09/09/71 PAGE 3 I 'i ri -Y' /s r,r A PWOF5- A jf r- 7; t QT * it *k . * i *.) *Y 1ALeT * VALklU * CO)N:S rI;;A IT * CONSTRAINIT * CONSiRAINT " DUAL * COMMENTS * *,) N l4A 'F, *A 4 VALIJU LOWFER BOUND* UPPER 0OUNO* VALUE * 4 **1I * * f* * * . * *F It * * nt * * A * ' *"* i T r, E X; xb: 16. * 0 t.0) Ou* 16.00O0U* O uO OO* O #1, *1')E.2&IN *EIf* V.)iruoolh 3. o 0 0o 0 -0.00000* 0.00000' *-G ' " 'A,K. ,iF* 10.6jGtjr,4 .OU J' * 1000 0 .0 ( 0.000001o 4* 4'9ro *r F -* 0.60J*iJJ 0G . .5 uo -0.0G000u * 0.00000G ' 4'l ; I .1 0000( * * 1.00 00w O.U00000 * *t. * % jIr*j * F* , (.' ",* ( 0.000 0* 0. .000*00 it * * t r ,ICUii '.4* Ilo u'Or, .i)fs LI*i 10.00000iu* 0.00600 * 1 I* r,. 1 0 I ou O. 1* o* -0.00000* § O* 0.00000* * * ' E' Cr^lA of I ?5 . :D O c;0;*t 0 *u O* * 25.00000* 0.00000* Ps *Pv' )"; *iAE ?4.0 ) ,)C* u.uJoosop * 24.00000*. O.U00000 * v) * r, I tt {1 . ;0JDU *- U. 0Li* I -V.OOOUO' * 0.00000"* *p v&)Xc *;Ft 12o.',do)L* 1.oo) U0 * . 120.00000* O.COOO* 4 *j fVF- %-Ii.I ;; 0.L',0'a -0.f0000* It 0.0)0000* *E4" *F* 3, i i C .OO IJOt, -0.000*)( * 0.00000u* F4 iEt.IlAi WiFt 9 9 . .lJ 0 0 -0.00000* * 0.00000* *'.lI *..Y5)n ,-I i~ j' , S-1S.00034 -0.00003* 0.00000* *I 1 *i * C . 4 ) A. ! i F 4 4 ... J) 0 i -0.000,30* 0.00000* * 4 . 0 *t. 3l. jJ*u)J.Jfl* * 3.00000* 0.00600* * . i&,-T).i 4.-jF* 0 . u 0 OjI 0.(0U(f0( -0.000o)OO 0.00600* t 0 rT E " :F* i d ..;. :0 0.00000* 10.00000w 0.00000* * *'T c F .j . J I( 1;0 I tu . 0, o.) c u 0 -o.0* 0.0000O " i"t *L),S I -r ?P..5 ,luM'" . 22.50G.jo* O0.0000u, o.0oouo* . -Y I ,)!.' ,.F* 5. ;u0(; , F.I0 * oo IOuOFOtJ* 4*.l *-.'Y',.)j. itit G.C '019 JZ ' J.;)|)'J'P 03.o000 * 0OOCOCGO* *'4 '4-'FIV'Nz '>nF' 174.:324'vA j71.83~4 5u -0.00030*F * 0.00000* 0 *jF 4;53), ~~*-4 5, ;Iv0vjI ( .4(J0&J0U * 5.003000* 0.00000*14 * n*4 t'Se<;j.).. :' --F* t l *u~'.* i),;:TtC';,k -)0.00000 * 0.0(0000* 4)4B<\^ *4-ff* 900)$L 0.00000)tlt))\* *t 20.00000* 0.00000* * 1S4 'J-ND^. l lb 5. 'i%;:, 1S.000006 -i0.00000* * 0.00000*- *4rJSLA *iF* 1,o.', M47I J* I2433* * 108.00000* 0. .0 *,A ii *,sEFl *.i Fa 17.24:3:3* 97.24535* -O.UOCOO0 0.00000* 4* * * * . t* 4 * 11 * it0 * n *E * F 9 9* 0 * * 4 *****t1 C **@*fth******1Z4&*****X **k*4k***gE1 *i1;**********o**41|§*o**************o**o*:@*Q*§1wiw&0 i****o***A*o*e*o*.§§0*o.***0o.00000*0*.*.. L: I:, -. P 1 7 ~ ,-- -C 'UC UT. C' r- J' L r-Jt ~-1.N I ~ .-- > Z. 4. (v 4 4 4*4 --I4 *- IL4v4 4 *- -C. 4 4 4 4- 41 4- 4 44444 . 4. 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Z ZZ0 ZZ ZZ . 00Z X0ZZ -0ZZ0 000Z 0 ZZ 00000,; Z00'Z00 00C r 4 n r0 00 i 0C r mmmFr nri mr, rr mr;0 C rr ocm cc-c0Cr.*ocr'c rnCr00m.m00rC.CCC v- C) C) 00~ 00 11Q0C5C )00 0 c 00C,DC)C 0 Q C.C0cc,CcCC C , 0CO C' 4 - V, 0 0 0 0 0 c 0 0 C 0 0 C0 C 0 C C 0 0 0 C 0 - 444**4*44L 4***4*4.IC-,Z *4 44:.4*4 44*4 4 C) 44C. 41 C,C )4 4,0 D- _,C , ,C,C ,0 QC-C ,C >C C )C >C ,mC DC )C 4 * ,4 ,C ,C C ,I )C .C ,0 >C,a ~C - z~QC :1C,C )C C-C )C,C )C C)4C - ,C I 4 , ,C ,C)C ,C DC-C, 4>C 'C MC,C 'C >C ~ -C ,C )C C-* C'4- : ,C, , QC~C ,C C . )CCC ,C4CC ~C L-C ~L 4 ZZ Z~~ _ _ Z~ Z Z7~ Z Z Z Z Z~ % Z 4 t3 4 00 0000 0C~ 000C 0C0 000C 000 c000 oo0 0 4 tC) * zZ~ ZZ ZZZZ~ :7 z~,z ~ zzz z~2.z:z ~''C) * ~ mimpmnmprnmm m~rrnR~rnmnmm~p ~ rnrv~rrmmrn *C) -453- 09/09/71 PAGE 5 J q J'; -it , i1t rl ;k ' Ff 7 *.1T 4 *k *; 'I * * * , *Y *VAiIt1tLFi;1 'i VALUE . CoST * LOUtP * UPPER DJ COMMENTS *p * l4L*A It* BOUND * BCJJiUN*D * . 7 * E*' -7 *. 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L- 'I : ,tLI' * c~n;Si1I';: I4T -E CON%STRAIN'T * COnlSTRAINT ;J DUAL SF COM4MENTS O1 *.H J '- \ir,Fr &^A *> :r V,ALUf; i L0qhER t3OUN'sD41 tiPPEiR F-'OLJ.4U VALUJE St O1 41 L F1 40 s41O*0rOu dI*i t4S}n s .r* O-41*1***OO#:.:-*41**t- :i.'. wwi* : ..LQ.; ;. -..*41* 41*S41* **U**it* * * tU*** r *41*41O* 4 :tr11*4 41 *Ijl*41**41*QttOt §*YS *St**410*114 t t44*1444oo14o14444144o CJ* *1 . " ' ;. U:K;' u. OUOi,' * 0.0OuQ 13.50727L 0" Th- ;141 ' r . ;, ,, 4tUU 0 00000' 14 *644263 4 41.-i *4,'!(,s s. 1: -S x,@ ,,J,@,,. t,.¶J0U,J(',. *. 0.d00lt'Ui 2.30.SjO ;zJ> , I'.(1000* bP- .42621* ° i i 41i .e r . ViT* f .j *(. v- i\.0 i(,d01i41 O a . 0a00)i , i59O53i)00* § O Vs, &LU '-E '.r* . 6., ' .N* UPPRGAU:J* 250D 0CVAU it I , , . t. 4S 4)- ii (r~Olh1*, )4fl I{I0(fjI* 4 0* ; I L 1, r 4 X444 -"4T44 'C -44t 44 44'4 *1 T r 4 r 4 r ., . m 4, r .'I ~ ir ,,! r l r _ j-ir , -, C < 4 4444444 4 444 44 Z C C- C- . .. . ... Z C0'' 00C,C:C,CC ,C -, ,= C C.c-C'C ,' o 0 ' C0. C' C :- C- .C) 0 C C Cc- C i C C C 0 C, C, i C C 0 C-'. Z C) ,C~C CCC,C,C. o ! C C; C ,C CZ C.C, C -C C. * -C,C, Z 4 C-C'C,C-C' C :C C C,C CC-'.1C.0C'C,C- C,C: C-,"i 'Q C C. C.r-.. 4L 4c 4 ,C )0CIDC rln17 C C >C -C - , C ,C)C 4-IC Y, C-C - C ,C4. . ,C ,C-C .0 C )C C C 4 -' C,C4)C .C ' ,C-CC .r C ,0C -C )C ,=C ,C CI C .-:C DQC -C"CC C . 00mCC o . ' - - C, C ,C , 7c > - vC -CC .C-CC 4r ,Li (n LI L 4 l ) C L,4 4: )c jc \ i ,c ,L , , v ,, , c' c' c-' C- 4 ,- ,C l ,C.0OC ,C . ,-l1 ,C DC ,C T 4 . 'CC nC . DC =C ,C oC 1 : )C - 4 ) = Q ,op ,C0r ,o ,~ wC,C.OO 0O 0 'OCO0 . 0 0C. C-,C;, - -459- 09/09/71 PAGE 11 * * -Y '*t;T. tLf.-" * V 1-J7-" C j wT1 r CO,!-ST;hA1r4T '; CO::SHAIT OVAL w COMMENTS . ,,Fj * V4LI, LGeJER BOUNDUi UPPER dUlliJNlU VALUE * P i * 1 (I U0 * LI * i i ) V * 'EA I* F * Si 41 U *P Jt *' V I IE AI' ;F 4 t Jt !; ¢ Ui j .l(i J rJ V . 0 xi* ; O fj U 1 U iD G l) 0° J,)tt~9 -X) U1 . ;i 's,?]i: 0 6!,,,.o 0.00. ))Cotjs 1 .v0Ot\Jj J0*- lT.I ~ i 0:'3 *. 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BASIC DATA (original irith Chapter I) -462- CHAPTER XI TDlBER BASED INDUSTRIES 11.1 The timber based industries, covering the production of sawmill products, ply-wood, pulp, paper and including final products such as furniture, offer some of the best opportunities for develop- ment in Indonesia. This is because of the resource endowment of the country in forest land and also because the scale of efficient operation in many of these products is relatively small and the technology well known so that they are well suited to early develop- ment.. These conditions are not uniformly true for all products (e.g. pulp) but do describe many product lines. 11.2 This chapter assesses the potential for development of timber based industries and particularly notes certain cualifications that must be made in evaluating the resource base. In some respects the base is not as extensive as it has sometimes been assumed. The current status of development is next examined and the efficiency of present practices in exploiting the forests is discussed, with particular reference to the conduct under the concessionary agreements. This material supplements the material presented in Chapter VI. Finally, a major part of this chapter is devoted to a pre-feasibility study of a wood-products complex (including saw,mills, ply0ood, pulp, and paper), and it is concluded that such a complex is economically desirable. A recommendltion is made that a full feasibility study be undertaken. POTENTIAL FOR THE DE,VLOFE1I!T F' TINBER BASED DIDUSTRIES Natural Resources 11.3 Forest Areas - Indonesia has one of the largest forest land areas in the world, surpassed only by those in Canada, Brazil, Congo, U. S., and Australia. The total area of forest land in Indonesia is 122 million Ha., but the area of forest damaged or destroyed by shift cultivation, con-ersion to permanent agriculture, or other reasons has been variously estimated at between 10 million Ha.1/and 38 million Ha.2 . A recent Japanese survey team estimated this area at 26 million Ha. On the basis of the latter figure34' distribution of forest land by use is as follows: Ref . 7, page 22 (the figure given, how.,ever, apparently excluded West Irian unstocked land). (For list of reLerences see Table 11.7). j Ref. 5, pp. 18/19. j Ref. 1, page 4L. -463- Hectares (milllion) - Reserved or needed for protection of land and hydrological regulation b8 - Conversion to crop land after one cutting 18 - Under exploitation or potentially productive 2L - Denuded forest 26 - Other types 6 *122 Of this total, man-made forests comprised (att the end of 1967) 1,193,000 Ha., mostly in teak and pine trees. 11.4 Forest land in Java and Bali has largely been converted into agricultural land, but in other islands it still has a domrinant role. Forest land are s Ratio of forested (million Ha)- area to total geographical area Djawa (Java) and Madura 2.9 0.23 Dali, Nusa Tengarve (Lombok Sumbawa, Flores, Sumba and Timor) 1.5 0.18 Kalimantan (Borneo) 1X.5 0.77 Sumatra 28.4 o.60 Sulawesi (Celebes) 9.9 o.46 Maluk-u (Moluccas) 6.o O.80 Irian Barat (West New Guinea) 31.0 0.73 121.7 o.6b 11.5 'Types of forest - Only about 12% of the forested area has been surveyed, even in a prelirrinary iiay The greatest proportion of the forested area (73%') belongs to tropical jungle, but in Java very little tropical forest is found, while teak and mi;xed deciduous forest are the most common. Needleleaf softwoods, mainly pine (Thinus merkusii) and Agathis are found in the Takengon area, near Lake Tav-rar, in the Atjeh province, Northern Sumatra, as well as in the area around 1/ Ref . 5 , pp . 17 and 26, arLd Ref. 1, page L,3 -464- the Slamxet mountain in central Java, and in Sulawesi and Southern Kalimantan, Great mangrove areas exist in Southeastern Sumatra and West Irian. Among the tropical hardwoods, Diptrocarpacea are predominant, and among them species of the Shorea, Eusideroxylon, and Dryobalanaps genera. A breakdown showing frequency of the different species, however, is not available except for very small and unrepresentative areas. Furthermore, terminology is sometimes confusing. For instance, two different species, belonging to th- Hopea and the Vatica genera are sold under the same name: resa'A/. Kapur also seems t be a name used for species belonging to two different genera.E 11.6 Volune of Timber - "Indonesia so far has even less data on volume, species Cistribution, and timber quality than they have on forested area. 13S Small reconnaissance surveys have been made in accessible localities. Since samples are not randomized, and the methodology is not uniform, data obtained in these surveys is not applicable to all areas. Data obtained from concessionaires are not being systematically collected and analyzed for use in the valuation of prospects for the development of timber-based industries. 11.7 The volume of timber in s6me areasib/ has been estimated a.t more than 120 m3 (r) per Ha..5/or even at higher figures.. According to some concessionaires visited by the MIission, actual yields, however, are much smaller. Two possible reasorns for yields being smaller than expected are that sampled areas may be unrepresc-ntative and different methods of measurement may be applied. Apparently, the Forestry Directorate staff counts as exploitable timber all trees more than 50 cm (approximately 20") in diameter (measured one foot above top root level), but concessionaires are generally exploiting only "meranti" (Shorea species) and a few other types of timiber. The systems of measurement seem not to have been completely unified, differences of about O,1 4etween official and concessionaires' figures having been- reported.d Yields as low as from 10 to 20m3(r) of "merantilt have been indicated for Smnatra and between 30 and bOi3(r) per Ha. for Kalimantan. Othpr calculations have been made on the bases of 50m3(r)/ or bOm3 per Ha.3/. On the basis of the latter figure and assuming a wastage of 20 experts dl s- close that there are logged-over areas wihere a two-storied cover has developed, in which the overstory is composed of defective trees or trees belonging to unmerchantable species, while the understory 1/ See Appendi x 11.1 2/ Ref. 1, page 135 T/ Ref. 10, page 53 -466- is made up of mixed species, not a1l merchantable, and where individual trees may be in poor condition. "Some stands will be converted by present cutting practices to unproductive and unmerch. ntable stands in as little as one cutting cycle unless steps are t-a1en to incorporate some stand improvement measures promptly." 11.11 In some cases, where there are no roads and rivers are too shallow to permit the use of barges, "sinkers" are left in the stand. A second-stage cutting operation undertaken at a later date, when transportation can be arranged, will result in considerable damage to younger trees and the loss of a number of years in the recycling of forest exploitation. One of the most serious threats to a well managed utilization of Indonesian forests is shifting cultivation. Unauthorized cutting or cuttin& authorized in smanll areas by local authorities is also a source of economic losses, confusion and solution of problens posed by these threats inivolves more than the applicaticn of solr.d forestry techniques by management.; serious social, legal and political i ssues must also be faced. 11.12 Efficient forest management will neither automatically result from steps taken voluntarily by the concessionaires nor by Government fiat, unbacked by technical and administrative competence. It will require knowledgeable cooperation at all levels between the public and the private sectors, and wxithin each one of these sectors. 11.13 Lack of coordination in forest adrmninstration - There is very little co-uinication bet;ween the Ministries of Agriculture and Industries. Clauses dealing wvith the developing of processing industries by tiHber concessionaires are generally written or approved by personnel of the Forestry Directorate, without consullting the Directorate of Chemical Industries (except in the case of the agreement with A. Soriano and Cia, in which officials from the two directorates are retyorted to have cooperated). On the other hand, tenns of reference for studies on the pulp and paper industriy in Indonesia, as wiell as for specific reports on specific projects such as the proposed Takegon and N'otog paper plants and a study to be made on the possible uitilization of pine and agathis plantations in Central Java, have been prepared by the Directorate of Chermical Industries without the collaboration of the Forestry Directorate. 1/ Ref. 7, page 28 -467- 11.14 There is duaal responsibility in the administration of forest resources. Felling ol trees in the past has been authorized by province governors in areas as large as 10,000 Ha. Even at present, provincial authorities can issue permits to cut areas of up to 100 Ha. The reach of the provincial authorities extends, however, much farther; the 1957 regulation under which provincial Governors were given the responsibility for management of the forest resources has not been rescinded. The provincial govern- ments pay salaries and office expenses for two thirds of the forestry personnel in their provinces; the status is unclear, but generally it is assumed that the Directorate of Forestry has the technical control of the forest manavement personnel, but that administratively, they depend upon the provincial governments. The Governors have veto powler over the appointment of regional directors. Even if the issue were not clouded by legal ambiguity, in fact, the Governors would have a large influence on forest management, given the wide geographical dispersion of the country's territories and the political real.ties under which its unity has been attained, not to mention their control of local authorities, means of t-ansportation, protection against outlaws, etc. 11.15 Size and duration of concessions - Many concessions are too small or have been given for such termns that exploitation can be carried out only for a period much shorter than a cutting cycle. The concessionaires often have little economic interest in sustained yield management or stand improvement in their areas. There is no cooperative effort betwfeen concessionaires to form "Working cycle" blocks of their areas under unit management. Plans to correct this situation through pressure from above are not in sight. 11.16 Lack in human resources - One of the reasons for the situation described above is the serious scarcity of human resources in all levels. Although there is overt and hidden unemployment in Java and some urban centers in other islands, labor - even unskilled labor - is scarce in the main tropical forested areas, and wages are higher than in Javy e Forest services are understaffed and existing staff is inderpaid.- Total nutiber of people employed in -forestry (excluding Perhutari, which is a public agency engaged in sawmLilling, and other co-mimercial operations), is nearly 1,1,L00 or 92 per million Ha. of forest land. Although much lowTer than similaLr figures for Germany or India, which were 2,675 and 1,000 respectively in 1960J/, the main problem is not with the total nuimrer, but with the relativrely small number of professional foresters, rangers and trained guards.]/ l/ High officials in the Directorate General of Forestry can earn less than $1,000 a year 2/ Ref. b, page Q6 and country paper on India, page 28 3/ Ref. 7, page 16 -468- 11.17 Problems of infrastruicture - Forests are located in areas where infrastructure facilities are generally lacking. Dxceptions are the teak forests in Java, a la.ge proportion of which can be reached by road. The pine plantations located around Slamet Mountain in Central Java are also within easy reach of the Banjwuas crossroads, where highways to the west (Bandung and Djakarta), to the east (Jog- jakarta and Surabaya), north to the Java seacoast, and south to the Tjilatjap port meet. Po&ijer is not generally available to concession- aires or to industries and enterprises having large demand require- ments must install their osn power plants. Water for industrial enterprises is generally obtained from their o'w.1n wells or by treating river water. Waste disposal can be an inpor-tant problem in Java, and even in the largely underpopulated outer islands, it may become an important issue. Eash project for the larger plants must be carefully studied in this respect and pollution levels eventually monitored. 11.18 Legal deficiencies - In spite of her large forestry rescurces, the question of wuhat the actual volume of available supplies is must be raised. Because of the number of agreements already signed and the area covered by them, there is some doubt that there will be sufficient forest reserves to insure that processing facilities are actually in- stalled. The terrs of concession agreements 1/ have been discussed in Chapter VI. Suffice to say now that "they provide no assurance that local demand in the timber industry wrill be met by the operations of the companies."2/ None of the agreements contain any provisos Lor the purchase by future public or privately-oi-med plants installed in Indo- nesia of the unprocessed logs produced by forest concessionaires. 11.19 Lack of financial resources - Problems related to the lack of adequate human resources, infrastructure anad efficient technical forestr" management can be partially ascribed to lack of fiinancial resources. But, there is little evidence of eL±orts being made to overcome th-s deficiency. Funds for training programs, construction of ports and roadz, improvement of other infrastructure facilities and development of forestry and forestry-based industries as well as for studies leading to the same objectives could be made available if their need is demonstrated and their sound use is reasonably assured. For this, a coordinated effort on the part of officials i'n the public sector and loaders in porivate enterpirise is needed. 11.20 Concession areas and Drojiected volume of log extraction - Tables 11.01, 11.02, and 11.03 show the area of forest concessions granted or applied for; the area of concessions onmed by foreign enter- Drises or by mixed ventures, and the volume of logging and level of investments expected to be readied. Total area of concessions alr=aay granted cover almost 50? of the area allocated for e:-ploitation and another 34,J is in drafts ready for approval by the Government or in 1/ The wordings "conlc--sion" or '1conc-s-ion ag-reements" are usrd th-rough- outU this rep)ort in substitution of "workin- contract." 2/ Ref. 11, page 36. -469- applications being processed. Log extraction is expected to reach 18.8 million m3(r) by 1973 or an average of approximately 1.3m3(r)/Ha. On the basis of a 35-year cutting cycle this is equivalent to assume that the average stock of merchantable timber in the concessions is 57m3/J4a. (if the average wraste is 20,' of stock). Projected inlvestment is more thaxn $570 million, of -.hich more than one-half would be for two concessions: A. Soriano & Cia. and Korea Development Co. As it has been mentioned in Chrp)tcr VI there is no assurance that these projected investments wa1l be carried out.. CUBRE4T STATUS OF DEVZLOF117T Production of Timber and Timber Products 11.21 Forest Removals - No reliable inforn2ation exists on removals for Indonesia. FAO figures for total removals in the fifties and the sixties are franidkly incom3matible, for they include an unexplaincl gro;rwth of fuelw.ood from l.4 million m3(r) in 1950 to 75.3 million m3(r)f/ in 1960. A-ter 1960, figures are practically the same, and after 1963, they are repetitions of that year's figures. Indonesian sources give very divergelnt figvres (Table 11.01), which, however, if fuelwood ic excluded, do showz two important trends: (i) A dip in production in 1965/66. (ii: A very rapid groRth after 1966, mainly because of recent developments in Kalimanten. The following figures are representative of removals other than fuel.iobd: Removals2/ (Fxcludiiag Fuelwl.ood) Geograuhical.distribution (d)) V Million m-(r) index Java Sunmatra ..0alim antan h -3r 1962 2.0 100 55 34 8 3 1963 2; 0 100 46 42 9 3 1900 1.9 95 47 39 8 6 1965 1.8 90 47 46 3 4 1966 2.0 100 41 42 13 4 1967 2.9 145 39 42 14 5 1968. 3.8 190 43 35 16 5 1969 7.2 360 22 25 44 9 1970 (est.) 11.5 575 n.a. n.a. n.a. n.a. Most of the prlesent production is in typical tropical hardacoods . ApproXna:-tely 0.5 million r.3(r) of teak is cut annuyally. j Cubic meters in the round without bark. It usually refers to the Hoppus system. 2/ Source: Table 11.4 3/ Ref. 1, page 50 for 1963/68 figures. Ref. 2 pp. 5/6 for 1962 and 1969 figures (list of references in Tablc 11.17 at end of Clh.i)tar). -470- 11.22 Use of Logs - The uncertainty in the amount of fuel- wood conswned is so extreme that no meaningful relationships can be found wqhen it is considered in the calculations. The Central Statistical Office figures as publ Nhed by Bank Negara Indonesia, show only about 1.5 million m3 of timber being used as fuelwood; The Directorate-General of Chemistry indicates a consumption of 5 million m3(r); and, FAO statistics report a figure of 79.2 million m3(r). Excluding consumption for fuel, end use for exports was relatively small until 1967, but in the last two years it has become the most important end-use for logs felled in Indonesia. Internal consumption, on the other hand, does not seem to have increased significantly. Discrepamncies in data from different sources are again encountered in relation to exports (Table 11.5). According to official Indonesian figures, exports grew more than 30-fold in only five years from about 0.2 million m3(r) In 1965 to not less than 7 million m3(r) in 1970. But there are indica- tions that Indonesian export figures may be under-r ported,1 TIf4BER EXPORTS ACCORDITG TO IYDONESLM1 SOURCES Volume Value Unit Value 000's m.t. US $ million $r/m.t. 1961 102 1,328 13.02 1965 137 2,022 14.70 1966 203 3,500 17.21 1967 01 6,30Li 15.72 1968 837 11,102 13.26 1969 29030 25,b2b 10.b6 1970 5,161 86,118 16.68 1971 Jan/Mar; 1,137 30,576 21.27 The most important buj,crs of Indonesian sawlogs and peeler logs are Japan and Korea; smaller volumes are absorbed by China (Taiwan), other Far East countries, and Wlestern Europe (about 26,000 m3 n 1968). Due to the recent slowf-down i-n the Japan'se "boom", 1971 figures may not reach the 1970 level. 1/ According to the 1969 FAO Yearbook., non-coniferous wood expo-rts from Indonesia, taken from importUers' data, weve 1,879,000 m3'(r) in 1968 - equivalent to about l,3b0,0 m.t. - and were valued at US $ 53.b mil m ion. 'The latter figure is c.i.f., but even after halving it, f.o.b. val.ues would be much higher thcan those reported by Indonesian sources. -471- Capacity and Evaluation of Existing Timber Processing Industries 11.23 The most important timber-based industries are saw- ndllin-, furniture-making, shipyards and - on a smaller scale - some other manufacutin!. Since a great majority of the plants are very small (for instance many "sawmilling establishments" employ 2 or 3 persons), value added and gross vralue of production, as well as physical production figures, are at best educated guesses. Value added in 1970 by all timber-based industries (large or medium-sized mad small establihments) has been estimated in a recent study at US $50.2 million1 , excluding furniture making. Unfortunately, this figure apparently includes value added in the logging of timeer used in industry. After deduction of this value, manufacturing would account for US $19.8 mnillion in value added or 2.7% of industrial conturibution to GIJP. In the same study, the contribution of furniture making Lo GNP is given as being $56.1 million, but this figure seems to be overestimated. Total annual timber inputs to industryr have been estimated at 3.9 million m3(r) for sawxmills and 0.2 million m3(r) f or all other., including one small paper mill which uses about 1000 m3(r) of pie timber for pulp. (Pulp and paper plants ij;ll be, de-scribed in the followiing section). Sawmills - There are approximately t!,000 "establishments," but only 412 use poTwer equipment. Timber input for the latter is estimated to be be'tween 600,000 and.900,000 m3(r), but including smaller units, total sai.niwood is thought to be nearer to 4 million in m3(r)2/. Recorded production between 1960 and 1965 averaged 1,602,000 m3(s)3/ annually. Most of the sawmills are private, but the 15 operated by Perhutan.i (the Central Governmen; timber pro- cessing enterprise) are among tMhose having better facilities. Eight of those mills are located in Java and they process riainly tealc. Their capacit,y is estimated at 80 m3/day -orking one shift. Outside Java, Perhutani operates 7 other mills, with a total capacity of about 80,000 m3/yr. (Table 11.6). Plrjood - There are four niants, twio of which, located in Java, are very sm2al and apparently only occasionally operative. The two other ones are located in Sumatra and most of their, producti on is used to make tea chests for exports.' Combined capacity of the two plants is bet 7en 25,000 and 30,000 m3/yr. but they operaate at about half capacity- . A larger mill has been established in Sulawocsi, but 1/ Ref. 3 2/ Source: Ref. 5, pp. 17. 3/ Source: Ref. 1, report on Indonesia, pp. 1l T/ Source: Ref. 1, pp. 58 -472- is reported not wzorking. One reason advanced for this situation is di fficulty in securing regular supplies. There is also one very small - about l500 tpy - hardboard plant, in East Java wihich is based on use of sugarcane bagasse. Matches - In 1967, there were 11 plants manufacturing matches with a total annual capacity of 100,000 cases of 7,250 boxes each but competition from imports (in spite of LO duties irmiposed on them) has resulted in an ou'put averaging only .50c of capaci-ty. Timber required by this industry (mostlyr rine and agathis), Ihas been variously estirated at betwueen 4o,ooo m3(r)/yr.-l/ Pencils - One plant in Java operates at about )40`< of its 30,000 gross/`r. capacity. Demand is about 25,000 gross annually, and a decade ago it was largely covered by domestic plants. Nowz imports have practically substituted lo al production. Timber required at present is less than 5000 m (r) per year. Wood Boxes - There are 27 small plants using about 37,000 i3(r) of tiimber- annually operating at a little more than 605 of capacity /. Furniture - Most of the furniture is made using hand tools. rThere were more tUlan 355 establis1hents registered in 1967 vlith a total consumpti n of approximately 116,000 m3(r) of wood, two-thirds of Lhich was tea G/. Qualitby of the furniture made, haoever, gencrally does not justify using high quality materials. Including numerous cottage-type furniture malcers, total constmption of w-ood in furniture can easily double the figure given for registered enterprises. Other end uses - Building ships, bus bodies, and similar activities lhave been es'timated to use 70,000 m3(r) timber annually. Pulp and Pacer Production 11.24 There are seven paper mills in Indonesia, of which one began production in 1969 and another in 1970. (The latecoaers are partly the reason for some of the divergent production figures received by the mission), Four of the plants are located in Java, 1/ Ref. 1, pp. 58 2/ ReL. b, pp. 16 3/ Ref. 6 T/ Ref. 5, pp. 36 -473- one in Sumatra, one in Sulawesi, and one in Kalimantan. Only two of them depend partially on wood for their supply of cellulosic fibers. lal of them are small and f'ace technical and econormic problems. Capacity and Producticn - Total capacity of the seven Central Government-owrned mills is 1)47 t/d (approximately )1i°000 t/yr.),d but actual production has recently not been more th2n 65, of capacity. No. of mills Capacity Product.,9n Capacity in operation t/y m.t- Utilization (d) 1965 1' 17,100 11,122 65 1966 1 17,100 9,866 58 1967 5 21,600 8,678 L0 1968 5 314 300 11,308 33 1969 6 12,100 15,559 37 1970 7 4,lC100 18,)1,53 12 Private mills working manually on very small quantities of rice straw and as- e, have a combined additional capacity estimated at about 3,000 t/yr2 . The main products are white .writ,ing paper, Kraft and wrap- ping papers, and paperboard. Sotne mills have integrated forwsard int'o manufacture of ruled notebooks. Estimated 1969 Production (m.t.) l',hite writing and typing paper 9,1414 Notebooks 1,180 Krft' and wfrapping paper 2,184 Paperboard 1,i80 Cigarette paper 250 Other, including newsprint 1,321 15,559 11.25 Location and raw maaterials - The seven existing rmill s have been located generaly on the basis of availability of ra;w materials, 1/ Ref. 1, pp. 63/61j, and direct comxmuication from tlhe Direc orate General of Clhemical Industries 2/ Ref. 5, pp. 33-31. -474- but these have not always been secured in sufficient quantities or at economically attractive prices, so that most of them are not able to operate at their capacity, which is small to begin with. The location, capacity, and main cellulosic raw materials for these milLs are the following: Capacity Mills Location t/d Main Cellulosic raw materials Padalarang W. Java 12 Rice strae and imported pulp (10%) Blabak C. Java 20 Rice straw and imported pulp (l0/30%) Letjes E. Java 30 Rice strawr and imported pulp (10/205<) Banjuwangi E. Java 30 Bamboo Gowa S. Sulawesi 30 Bamboo Siantor N. Sumatlra 15 TWastepaper, p;nus merk-usii and imported pulp Martapura S. Kalimantan 10 KP from rubber trees, GP from Agathis and imrported pulp (about l10' ) 11.26 Other Inputs - There is one 3,000-t.py caustuic soda plant located in WVaru, near Surabaya. It sas built by Asahi Gl, ss Co. (Japan) in 1956 and is owned by t,he indonesian Government, but because of difficulties in placing by-product chlorine, production has been f'requently suspended, and equipment has been damaged by corrosion. At present, existing paper mills import catustic soda. Salt is available from a state-ow-ned solar evaporation plant located in IIadura, as well as from private compen2nies, Combined capacity is estimated at 600,000 t/yr. wqhile demaand was 465,000 m.t. in 1968. There are several sulphur deposits in Indonesia, but none is Imown that is large enough or has adlequate sulphur content Lor econom-ic ex,loitation. Limestone deposits appropriate for pulp production are known to exist in Ad-jibarang and Karnmgbolong in Java, around LaI:e Tawar, in northern Sumatra, and in- Baturadja, near Pale mbang, where a l0,000-tpy calcininag furnace is in operation. Power is not generally available at present, paper plant sites, except for Padalarang and Letjes, and even in these twro plants, capt,ive powrer plants are required to satisfy part of the demand or to assure continued operatirons. 21.27 Plant ecui-Loent and oneration problems - There is a great variety in type and origin of equipment, used in the existing plants, and they all lhve problems, only some of whiclh are derivwed fromn their small size: (a) The Padalarang mill is the oldest having been inaugurated in. 1922. It has two 5/6 t/d German-made paper machines 2b0cm and 225cm ;wide. It has good infrastructure and supplies of rice strawv , . . . -A -475- a,re secured in a radius of l50 km from the plant. The main prob- leins are very low plant capacity and very old equipment. (b) The Blabak mill was cornpleted in 1961 and was originally planned to use the Pomilio process. However, this was later changed to the conventional soda process, but capacity was lowJered to 10 t/d. It comprises one Pom lio digester, a 260 cm-wide paper machine, a 240 cm rewinder, a 14C cm paper cutter, and two 820 KVA diesel generators. The main problems, besides low capacity, are: power shortages due to one generator efficiency being only 60o; width imibalance in the paper machine, reopinder, and cutter; filter clogging by silica becausa3 of.process deficiencies; time lost because of lack of roll grinders. (c) Letjes was established in 1939. Its original capacity was 10 t/d. In 196b, with the aid of West Germany, an expansion plan was started, -which, however., was discontinued in a short tir,;e, and not begun again until 1968. Work on this plan wras completed in May 1970 and present capacity is 30 t/d with two 270 cm-wide paper machines. The plant has an excellent location, with good water smpply, raw materials (rice strawT) bought within a radius of 100 km, and transportation facilities for its product. Increased production may require collection of raw materials from areas -further away than at present and it ma-y have to buy pulp from Banjuwangi.- (d) Construction of the Banjuwangi paper mill was started in 1963, as part of the Japanese war reparation program, but was sus- pended later and not resum,ed until 1968. Operations started in 1969. The plant comprises two 50m' da'glesters, five 2Ln3 bleaching towrers, hydropulper, steel and stone refiners, 285 cm paper machine, 9-stage calenidar recovery boiler and two 2500 km generators (one is a stand-by). Main problems are insufficient soda recovery, shut-dolns because of lack of spare parts, high cost of imported liquid chlorine and caustic soda, lower quality from use of bleaching powder instead of chlorine, and high cost ("l7/m.t.) for the cellulosic raw material (bcemoo) bought fron Perhutani. Water supply is adequate for present capacit,y, but river source used will not allow production expansion in dry season, unless recirculated. (e) The Gowa mill, as the preceding one, was started by Japan in 1963 as part of war reparations. Comipleted in 1965, operations could not begin because of lack of funds due to run-away inflation. In 1966 electrolytic facilities wxere added, also as parz of repara- tions, and operations sta;rted in 1967. The follow.sing year the process was changed from Kraft to soda, and in March 1970 work was suspended because of lack of working capital. Main problems: small size; lack of funds; shortaae of spare parts; defective chemical plants; in- sufficient teclmical training of operatinc personnel, and high trans- -476- portation costs of products to Java (the paper market in Yakassar has been estimated at 300 t/yr.). For regular operation., more regular wrater sources must be found. (f) The Permatangsiantar (Siantar) paper mill wTas the first to be built by Japan as a war reparation project. It was completed in 1962, additional facilities having been added in the yea3rs 1965/ 68. It comprises wood room equipment, including a 2m diameter drum barker, two 50 -k pulp grinders, one 200 cm-wide paper machine, one pulper, three boilers, and two 1250 hVA diesel generators. Mlain problems: need to combine mechanical pulping o~f coniferous wood and use Qf iaported pulp and/or purchased waste paper, the latter being, however, in very short supply (about bo tons in a period of 3 or months). Other problems are water shortages, lack of spare parts, bad state of power generating facilities, and lack of working capi tal generally. (g) The iNartapura paper mill was the last to be finished among the war reparation projects, in spite of equipment having arrived at Surabaya in 1960. It comprises wood room equipment, 300 hp grinder, digester, bleaching equipment, 150 cm paper machine, 140 cm rewinder, 1L5 cm paper cutter, and chemical and heat recovery equipment. It was originally planned to be fed wiith Agathis pulprood to be brought from forests located some 300 hn upstream on the Barito river. Stock of this timber has later been proven smaller than expected and in- creased demand for it in construction made supply look.-uncertain. The fact that waste rubber tree wood is abundantly available in the neighborhood of the mill and the development of processes- for ius pulping (partly through research in the Bandung Cellulose Research Institute), led to a decision to make ground pulp from Agatuhis and Kraft pulp from rubber trees. This is the fundamental weahless of this plant: too small a size for combined mechanical grinding and Kraft pulping of two raii materials, which are not particularly abundant or chearp. Furthermore, demand for paper in the area is extremely lo.; and transportation cost"s to Java are high. THE CHARACT7R OF FUTURE 1M!-ARKEETS 11.28 Future Demand for T'Jood - By 1985, total industrial demand for jood has been estimated to exceed 2L00 million m3(r) more than twice thelevelof about 1,189 million m3 in 1968. Of that total demand, approximately 112% will go to paper and paperboard, and t.he balzance tJo construction, furniture and other uses. These figures and the resultin average growth rate - 1t,.2t =nnually - are based on Lnown factors and trends and could be affected both by technological breakthroughs and by changes in patlters of consLnption. Processes to make entirel-y ne.7 products from wood may be developedl, and., by the snume token, new raw -477- materials for present end-uses of wood resources may be found to be economically available. Steel and concrete have already replaced great quantities of the potential demand for construction wood, and pla~tics (and metals) have substituted wlood in furniture and other articles. Tfhere are other remote, but not unthinkable possibilities which could upset any long-range projections. To mention only a few: sharp curtailmnent of newsprint because of substit.ution of newspapers by special TV circuit$ independently operable by the viewer; manu- facture of non-woven fabrics from wood; construction of medium-durable houses (good for about 5 years' use), etc. 11.29 The general pattern of trade - The present over- all pattern of trade in the Far East shows Indonesia and Mialaysia exporting logs to Japan, Korea, and other countries in the process of being industrialized. At the same Uime, large quantities of pl yood are being exported fron Japan, Korea, and - in a smaller proportion - the Pnilippi'nes to the U. S . and Canada (Graph 11.2). WJoodpulp, on the othsr hand, is imported in large quantities only by Japan, and in smaller vol ues by K1orea and China (Taiw7an). The most important paper importer is Hong Kong, followed by Japan and Singapore (Table 11.7). Japan, however is a net exporter of paper products (Table 11.7). Pro- jected trend for the main net, importers through 1975 show the fol- lowing deficits: Deficit -resent million m3(r) Suooliers Saw and Peeler Logs Puli-wood European Conion Marlket 56.5 8865 N. T!urone, Uc`5^7, and the United Kingdom Canada and W. Africa Uniued States 28.0 21.0 Canada, and S.E. Asia Japan 20.0 - S.E. Asia, US,' Canada, and USSR 104.5 119.5 1/ Ref. 12 Toa-e 36. -478- 11.30 The international market for saw.qnwood - A recent study by FA0=,, concludes that broadleafed sawnwood consumption in the more developed countries, including those with a central-planned economy, is expected to increase from about 61 to 90 million m3 bettween 1962 and 1985, but production would increase only from 60 to 85 million mn3. As a consequence, the deficit in broadlea.fed sawnood in those countries, which was 1.0 million m3 in 1962 would reach 5.7 million m3 in 1985. This deficit would be partly covered by a surplus in saimwrood production in Asia wrhich would increase 2½- times to an estimated volume of 20 million m3 by 1985. This surplus production would undoubtedly be taken up to a large degree by exports f.rom Indonesia, Mialaysia and t'he Ph-Jlippines. rurthermore, the volume given Is based on an admittedly over-opti- mistic calculation of the expansion in production of coniferous sawnwTood in the US and the centrally-planned economy countries, which may not be realized. 11.31 Of special potential interest is the development of the tropical sarifnwood mark' in Western Europe. A special study pre- pared for GATT in 1967- conrcludes that total tropical woods imports by the European Goimmon Mlarket countries and the United Kingdom will reach 2,232,000 m3 by 1975. It further sho.7s that one possible development is that about 803,000 m3(s) equivalent will be imported as roundwood, and the balance of more than 1.11 mraillion m3(s) as sawnwood. This would be a level 50% higher than that registered i-n 1965. A further analysis of imports in the samne study further high- lightis the importance that this market ma.y have for indonesia anld other S.E. Asian countries (as well as for Africa and Latin America). Bet½een 1956 and 1965, tropical broadleafed log imports by the EEC countries and the UK, increased by 9.6% annually and tropica-l sawn- wood by 6.2%, while temperate broadleafed timber increased by only 3.b% annually on the average. Furthermore, the trend for tropical saTmwood imports swung upwards in the last three years studied, reaching an average rate o' 10p annually, while that for tropical sawlogs diminished to 11.32 The international market for w:voodbased nanels - The world- wide rate of increase in consimption was more than 10! axe_nually since 1950. IMuch of the growth was due to the impetus received fromn a relatively new product: particleboard. Expec,,ed growth through 1985 is projected to slorwdonm to 5.60 annually for plywood and 6.5% for fibreboard and particleboard. In spite of these conservative assuirp- tions, a very substantial rorld market of 79.3 m:illion mn3 w;lould be reached biy then.4/ According to the same FAO projections (T-ble 11.8) 1/ Ref. 13, pa e 6. 2/ Ref . 1lI, pp. XXVII and CXVIIr. 3/ Ref. lli. page 11. T/ Ref 13, p-o-e 7. -479- plywsood 8ad veneer consumption in the market-economy developed countries would be 6.1 million m3 higher than production. Even after assuming that the centrally plannaed economy countries should take up 1 million m3 of this deficit - as the study does - pro- duction in the less developed countries is ex-pected to rise much faster than consLurptior-. Fro-n Asia alone, a surplus of 3.0 million mJ3 has been projected.I In the case of fiberboard, a smaller deficit of 1.6 million m.t. (equivalent to 2.7 mllion m3) of pro- duction in relation to' consumption in the more developed countries has been projected but would be subfstantially offset by a surplus in the centrally-planned-economy countries. 11.33' The international market for other ;wood products - Parquetry i-4ports ale important in the Netherlands, the United Kingdom, and lIest Cermany, with a total value of more than $12 million annually.- Import statistics for the US do not show' paraueu blocks or elements differentiated from hardwood flooring. The market, however, is not thought to be substantial because in general parquetry has found little acceptance in private housing, and in office and apartment buildings, other materials and use of wall-to- wall carpeting, make for a very small consumption of parauet. Inports into the US have been estimated at about US $1.3 million annrinlly. Penetration of the European market will probably be easier for exports of indivvidual blocks or strips to be further manufactured in the consuming colunryu ' Flush doors installed have been estLmated at 1.7 million units annually in the U. S. and 1.1 million units in Western Europe., but imports are very small in relation to consumption (for instance only 187,700 doors, of al.I types, were imported by the U. S. in 1968). Dimensioned stock is imported in great quantities by the U. S., mainly from Candia. Tropical hardwood dimensioned stock imports from Thailand, Japan and the Philippines anounte'i to U. S. $b.b mill ion i-n 1967. Prices ranged from $85 to $300/m.3 -/. Imports of hardwood mouldings by the U. S. in 1967 were 76,500 thousand linear fCeet for a value of U. S. 2P,135,000. Imports into Europe, in recent years, haer been about 160,000 m3 amnnually-. 11.34 The international mnarkot for Tfurnitlire - Tile market for imported wood furnituLre in the U. S. is- about :,:25 million, and it i s very limited in other countries. Tne main suppliers at present are Denmark, Greece and Yugoslavia. general trend of the nrarket showrs a growth rate of b to 5% annually'/. Importers interviewed about 1/ Plywood im'Dorts biy the U. S. alone, in 1969, were about U. S. $ 2LO million' 2/ Ref. 15, pp. 58 and 60 3/ Ref. 17. p. 12. 5/ Ref. 18, p. 10 g/ Ref. 16, page 75 -480- the more important conditions to be considered in choosing sup- pliers gave the following answlers: i) Capacity to fulfull orders ii) Design iii) Competitive prices iv) High quality (absence of damaged wrood) v) Punctuality in delivering (or maintenance of local stocks) vi) Flexibility in manufacturing In general, it is thought that furniture-making for export should be in the hands of small independent operators. The same applies to furnLture components, which however, could have the advantage of facilitating joinft-venture agreements, in which merchandising, specifications, and an important part of the design work iwould be the responsibility of the foreign ent erprise. 11.35 Wood pulp - In the decade of the sixties wzorld demand for wood pulp increased at an annual compound rate of 5.7% to reach a total volume of nearly 100 rmillion in.t. by p969. Even with a lo;er rate of growqth (5%/yr.) in the years ahead= consumption iiould reach 170 million tons by 1980. For a long time, pulp production tas pre- ponderantly based on coniferous wood. Furthermore, its -manufacture was generally resource-oriented (although Japan is importing chips from the U. S. West Coast). The distribution of manufacturing capacity, however, is not directly related to avi'lability of total timber re- sources. The U. S., Canada, and WIestern Eu-rope, irith less than one quar'ter of the world' stocked forest area, has an 82,% share of total wood pulp production- . This lack of balanqce and the threat of fure shortages have brought technological changes in pulD and paper mak-ing and new pulps - mainly hard-wood pulps - have been developed; Althoug-h favorable pricing of these pulps is still an import-ant reason for the demand for them, their capacity to satisfy specific characteristics to the end-produc'ts is al-so important. For better prirtebilit Itr, for instance, addition of bleached hardwood Iraft pulp is desirable. The ratio of bleached and semi-bleached hardwood sulphate pulps to total sulph,ate sales in the U. S., Canada and Scandinavia increased Lromz 25 in 196G4 to 30p in 1969. This trend has been undoubtedly helped by the lact that althoughl physically integrated large-scale pulp-and-Daper mills still have a sigrificant cost advantage over non-integrated mills in the manufacture of low-priced, la-rge-volume products, new specifi- caQions for many types of white paper reauire paper mills to use blende'i 1/ Refe 19, page 2/ The shares aes not strictly speaking totall-y comp.uxaable as forest areas arc 1963 fi_mures and production sha-res are based on 1969 figures. Up-dated fLiures, ho-evc.r.j, WoUld notu materially change the relationso-ps. -481- feeds. Non-integrated mills have versatility in making various end-products and by bu,,in- hardwood and softwood pulps from diverse sources, they.ccan meet changing demands. For these paper mills to build their own pulp mills, or for existing balanced integrated operations to enlarge their capacity fractionally, would require building large new. mills in remote locations or costly additions in localities already facing difficult problems in pollution control. The mtio of "inarlcet" to "captive" bleached and semi-ble'ached sulphate pulp in the U. S., Canada and Scand- navia has grown from 47` in 196o to 72% in 1969, and, on the basis of new capacity estimats, it is expected to continue in- creasing to about 82` by 1972--. And, the groTwth of hardwood bleached and semi-bleached sulpahte pulp - 100% between 1961b and 1969 - was much fas-ter than that for softwood bleached and semi- bleached sulphate pulp - 53% for the samie five-year period. Pro- jected world supply and demand for unbleaclied sulphate "'market" pulp and wrhite pulps are showqn belo,w. The estimated supply is based on actual figures for 1969, and 95ct of estimaated installed capacity for the Luture (Table 11.9). Projected demand has been calculated on the basis of annual gro-with rates of 67' for total p,aper-grade _chemical pulp (i.e. a slightly lowier rate thwn that observed for the 1960-69 period) and 0.56,4, for unbleach,d, sulphate pulp (or at the same ratue as during the 1960-69 years)-/. Lack of known project's under construction or w-ell u-ndoin¢ray irn pre- paratory stages (although some are Imo-m to exisu in early planning stages) will lead to deficits in projected supply in relation to demand after 1972. Supply and Demand for .Paner-grade ToTOr½ ul1p Total "maurket and "capTive"i *ul 'D-ari,-et"' rpu1b Bleached & seni- Total paper-grade bleached sulphate Total paper-grade chemical Dulp pulp chemical p ub1 Supply Demand Supply Dend supply Demand 1969 56.1 55.8 23.b 23.0 15.9 151.9 1972 65.o 66.3 28.b 29.1 19.1 18.9 1973 67.b 70.1 29.8 3119 19l3/ 20.1 19Th 69.7 7b-5 31.3 33.9 19.12 21.3 1/ Ref. 19, page 1l 2/ Ref. 19, page 25/26 3/ Ref. 19, page 15 -482- 11.36 Part of the developing deficit (probably at least b0?-') will be covered by hardwood pulp. Although there is as yet no operation at a significant scale of "market" chemical pulp being cormnercially produced from miLed tropical hardwqoods, intensive research and some large-scale tests carried out recently would tend to show, that economic. manufacture of 'woodpulp from hardwoods similar to those found in Indonesia is already possible or on the point of becoming possible. The Bank Group has helped in the financing of one project based on this proposition,a.nd several other projects using tropical hardwoods in other parts of the world, are either operating in small scale or under study. In Indortesia, at least two or three years will be required for any serious p.oposal to be underway. In this time, any doubts about the techniical and economic factors involved should be resolved and the industrial complex proposed wJill therefore depend to a high degree for its realization on -the outcome of the feasilbility studies wihere these factors will be considered. International Trade Prospects 11.37 The volume of trade will show greater rates of groifth than either production or deficits of production in relation to consmrption. The final pattern qf trade will depend on those values, but also on: i) Opportunities for profits resulting from the economic factors affecting production cost<; ii) Quality, quantity and timing demands of the marke&t; iii) Resistance to trade flo, offered by tariff and trade regulations in the importing countries (and conversely subsidies, negative duties or other export promot;ion measures in the- supplying court.ries); iv) The cooperation or resistance off;era-i by established international merchandising, eistribution, trans- portation and sales channels. A projection of potential exnports in 1975 acnd 198 for the main wood products is shown in Table 11.8. According to agree-me.nts now in effect tariffIs on the more con-mon wzood-based materials which would be ef'fective in 1972 are showm in Table 11.10. The Domestic IMarket for Wood Products 11.38 Present demand for sax*mwood in Indonesia - approximately 1.6 mllion m3 annually - is mostly used in construction, shiubuil di.g and sleepers (these latter are included as sx,rniwood). It is estim2ted 1/ Ref. 19, page 15 -483- that no more than 15% is used for furniture. The GOI should strongly pursue a policy of increasing teak prices, promoting exports, and safeguarding quality of the teak exports. A large share of the international teak market is held by ot:her S.E. Asia countries due to the poor quality of Indonesian teak or to lack of uniformity in specifications. At present less than 10% of teak produced is exported and the balance is processed often for uses for which less fine timber could be substituted.1/ Some teak is even ised as fuelwood. But, to atta;.n this objective of increasing teak exports, treated and dried sawnwood from other species must be made available for sleepers, fur- niture making and shipbuilding. 11.39 Plywood is used at present mostly by the furniture industry, which imported about 1,000 m.t. in 1968, and in the manufacture of tea chests, which uses up most of the local production of plywood. Addition- al volumes of plywood and chipboard will be required in order to substi- tute teak now used in furniture, and also for large-volume production of furniture for village health centers, as envisaged in the development plan. Still another potential use for plywood and chipboard will be in shipbuilding. No projections of wood panel demand by these activities can be made. But for the purpose of the sales estimates made for the industrial complex described later in this chapter, such projections are not needed. Export markets are large enough to absorb proposed levels of production, and the only reason for including estimated local sales of plywoo and chipboard in the study, is because this is a more conser- vative approach since prices in the internal market are assumed to be lower than for exports. An industrial complex of the type envisaged here should have a promotional aspect, and this is assumed to be the basls for assigning lower prices for local sales of plywood and chip- board. The Dormstic Market for Pulp and Paper ll.4O Paper and paperboard demand has grown rapidly in the last few years as is shown belcx.2/ Domestic production has almost doubled but imports have grnm even more rapidly between 1966 and 1970. Quantity (000's of m.t.) Value (US$ million) Domestic 3/ Imports -/ Productior Imports Total 1966 7.3 9.9 h14.7 5h.6 1967 10.8 8.7 67.6 76.3 1968 13.7 11.3 87.9 99.2 196? 13.8 15.6 88.0 104.3 1970 20.2 18.5 116.0 134.S l/ Nearly 150,000 teak sleepers were sold by Perhutani in 1967 2/ Due to distortions in exchange rates no value has been estimated for domestIc production 3/ Ref. 6 Land 13. -484- Projected demand of paper and paper-board has been estimated indi- vidually for each type of product as follows: Average Projected - 1968/70 rate of Dcmand Dis t.ifi on . Damadl/ gr oth 1969/70 1975 (000's m.e.) ($/year) (000/s m.t.) AvEe. Pro, Printing & WTriting L0.0 6.5 58.b 35.5 29.7 Kraft 1b.8 20.0 bL.2 13.1 22.5 Paperboard 5.3 30.0 25.6 b*7 13.0 Newi sprint 284.4 5.8 39.8 25.2 20.3 Cigarette 6.5 b.1 8.3 5.8 L.2 Others 17.7 2.3 20.3 15.7 10.3 112.7 9.7 196.6 100.0 100.0 TIIE DIR3CTIONS OF DDEN OPIPiT 11.11 In a general way, the pattern of developoment may fall into one of the following directions: (a) The "natural" development of small-sized sawmills followed by other mechanical T.wood processing and finally by pulp and paper making. (b) Planned development of industries starting pwith those wihere investment per TIJorter, minimum economic size, and technological sophistication are louer. Since these three parameters increase as one moves from saiimilling to veneer and plr; ood- manufacuting and to pulp and paper making, this line of developiment would, in a. broad way, paxallel the traditional or natural development. (c) Establishment and promotion of planned industrial com- plexes in wthich industries of varying degrees o1 complexitvy and cani- tal intensity, would be started more or less at the sane time, to benelfit from integraued operatiions and join' economies in production. 1/ Figures for newsprint as shown in Repfi. 1, page 67 have been mocli- fied according to findings of the Japanese Surve,,y Teamn for t,he Develo-onent Plan of the Pulp and Paper Indusary in the Republic of Tndonesia (Ref. 1, page 69). The main reason for this chmn,e is that some paper classifi ed as newspring is probably tised for w..rapping and wlriting. 2/ Ratues ol grow,,th in-elicit, in the sa>me study; (Ref. 1, page 68), e:- cept -hat Kraft a.nd paperboard rates after 1973 have been cul'tv do.iMn. Rates for thesc are based on estimated 1969/73 con-sumpt,ion for cement and otlher articles. -485- ll.b2 The first two alternatives seem attractive, among other reasons, because the problems of' investment seem miniTmidzed. Capital would be required in smal. doses over a long- period of time and coul'd be supplied both by the public sector, and by local and foreign private investors, wvithout too much strain on the countr,y's fiscal balance or need to look for special sources of financing, which, if available, may be required for other pressing needs. In fact, it would seem that the second of the three alternative lines of develop- ment described above is the one chosen by the DirecQorate-General of Forestry. Investment obligations generally involving only the instal- lation of relatively small sawmills are the only ones considered in most concessions. In no way - through mechanisms for t,he cooperative exploitation of tiTber resources in industry or the obligatory sale of logs to independent processors - are concessionaires bound to look for the possible development of industries larger than those normally assumed to be profitable for the size of the concessions. Only in one agreement knomo to the mission' (A. Soriano & Cia.), ejith the larcest concession area, is paper manufacture menti.oned, and in this case, it is envisioned as a st>ep to be undertaken after 12 years of timber exploitation. Paper manufacturt'X ill probably also be included after 10 years of operations in an agreement being negotiated rith a group of Japanese enterprises. If the concessionaires carry out plans considered in the agreements, it is nossible that a number of ply-ood plants will be established, some smaller tha-n the size con- sidered economdically desirable at present. It is also possible or even probable that the Leasibility reports prepared by the conces- sionaires will be negative and that no wood processing plants will be built at, all. There is little lik-elihood that the GOIT-ill be anble to muster, in a. short time, enough expertise - in numcrs as wezll as in quality - to develoo its own feasibilitly studies for each importaent concession and to dispute the restult.s obL,--`Ined by t.he conces ionr,rres. 1l.I 3 There is no assurance that by foilowing alternative "A' or 'B", the over-all investment made in the timrlber-based i ndustries wril l result in the most value added, or that non-productive irvestments -.ll not be made, or capccity will not remain unused. A more detiled analysis o-f the factors involved follow;s. It is possible that indi- vidual. plants, could be proven profitable, even while the couxnty- incurLs in losses because of extira cost. s in transportntion and po-.wer generatilon, wasted timber, anid eventtual misallocation of hiuman resources. 11 .h The small-scale processLng of tiimber presents sevreral problem.3: (a) Timber supplies - Uniformity of timber supplies is of r- o'int im.portance in sawniling if sawnwiood is goinc to be ex:ported. In ore er to secure this unif'ormlity, relatively imnortant inventories must be carried, and small samniills are. in no positC;ion tlo do it. To make pulp from mixed t,ropicc-l hardwoods, it will be necessaary tuo se,greg-te chips of different densities 2nd chem-:ical prorerties in ordor to have lo-er processin,, costJs. -486- (b) MIarketing - Buyers of many timber products require de- pendability in their supplies. Thi:s cannot be attained unless stocks are kept wjhich normally cannot be carrled by small operator. But if prodiicts -are exported this is not the main dlfficulty. Sal:es of wood products are subject to a large numqber ol varying - and, in some cases, very exacting - spcif.f-ca'ion7. in many countries. Knouledge of, and effective ranufacturi-rig in conforrmit,y to thom, as wiell as payment for distributic*n and marketing services, customs; brolkers, and other services, will become prohibitivcly costly if only small lots are involved. Customs' brokers fees and lmnding charges may become important even in the case oL inter-island ship- ments in Indonesia. (c) Transportation - In a recent study on maritime freight rates, one of the reasons given for hig.h rates betwveen the Phili- piilnes, and Japan and the United States, .as the large number of ports of call and the small size o. lots shipped. (d) Waste Utilization - In small mills waste disposal becomes a problem. Only a large integrated mill can make efficicnt use of practically all the residues from. nechanical operation in timber processing. This also applies to primary waste (waste left in the forest-) from logging operations. LTmbs, branches mad culted logs are generally not useable unless there is a combined or relatsd pullp .mill. (e) Economies of scale - Strictly speanking there are no problemas of scale in the case of sawmill.s, since there i s sawing equipment of all sizes available a-nd large output is generally obtained by havinc more than one line in parallel. It is generally recognized th.-t fls2od plants are optimized at sizes betWeen 5O,000 2and 100, 00 m3(r) o'w lo;, inputs an-nual1y (al:thou>ghi smaller veneer plants for e:xternal ty-pes of tropical hardwoods are still b.eing built). For an integratued sysitem, the deciding element is the pulp m11: iinuam econonic size is estui- mat.ed to require at leasl 600,000 m-3(r) per year. ll.5 In di-.`inct contrast to cthe tyrpe of develo-r--en' discussed above, aLn inLJe,,,r ated 1 ar re volumre ;irmber proceSSing comp1lex has thlie followiing advsantlages: i) Economy of scale in the operation oL a pulp mill ii) Availability of cor1ln1er&ci al volunmes of varlous hardwood species and consequent possibility of their utilization to the best advntaqge of the processor; iii) Better possibilities in marketing of sa*.mnood cand other tinber products because of arvailailit y in the qualilties required and dep¢.nd^lbilitv in ufori ;SU')Suplies; -487- iv) Economies in transportation and maerchanldising costs; v) Bettler utilization of waste, wJhether prinarxy forest waste (limbfs, brcanches, culled trees, etc.) or m ill waste, incluidin, bark and sawrdust; vi) Better allocation of limited managerial, techLli cal and other huzmn.setL resources; vii) Possibility of creatin7 additional developmnent opportunities in the region . ll.46 The last of the alternatives listed above, involving the development of an integrated wood products complex in an appropriate location, has distinct advantages for Indonesia in terms of the increase in domestic value added (and employment), the possibilities o greatly expa_nded foreign exchange earnings, and the general impetus that could be given to economic development in the region select ed. This altern.ative is superior in several important reps pcts to the passive, piecemeal approaclh that is exDlicit in the first two alternatives. I1oreolrer, as is show-n in the results of the prefeasi- bility study that, is presented in the next ssction of this chapter, the prospects for developing such a coril.ex- are farorable. BeLore presenting the actual results of the studyv, some collateral i ssues are worth ex&mining. 11.b7 No one.advocates the establishlrment of one tihber-based industrial comple-r to the exclusion of other similar establis!7m.ent or of smal1 saw"mills and other processing plants. Given the maggni- tude of Indonesian forest resources and the far-flung disnersion of her islands, it is nbt only possible but desirable that, in the long rimn, a number of industrial- centers to process wood products shotuld develop. The questi on before us is where anqd how should then GOI exrert its initial effort to develop t,hose resources. Figures given below wjill showv that a complex whose size is such that it will use only a fraction of the volume of timb,,er already being cut at present is vriable. Severa--l such cormplexes coulU be in Pexistence before the end of the centtury. 11.48 Pine and gr-at.his sta^nds in nattural and plantation forests in northern Sumnat"ra a-nd in central Java may be devrel-oped for newc^print. by private interests, if t'hle tim.Pber resource2 iro-ve ar(eoua:;-.e. Because of the type of paper to be made, they would noto interfere with an industrirl comnplex based on the e:--ploitatiorn of tropic,)l hm-rduoods. The location chosen for this plant must be studicd in feasibility studlies to be carried out as the next 3tage in the developiiient of this grouo of industries. One Plternative considered w.'ould place the .n.ain indu.,strial plant in Java at or near a-port. Logs .;ould be transo)rted from I'ral½an+-'n and Smnatra in rafts anld b.arges (becau.se of the high proport,,on of risinkers" in some forest ar2,n.s). Advantages of ;,uch a location would be: availability of skilled and un.7kil'lod Libor, -488- possible utilization of pine anTd Agathis (mainly from Notog), and pro-ximity and avEllabilitlt of transportation netwtorks for that partu of the industry's products t hat is sold domestically (most of wlich wJould be mariceted in the larger urban areas of Java). The main disadvantages are: continued centralization of indus- trial activities in Ja7a, pollution problems more dsifficult to solve than in other loca:.lions, and higher costs of transportation, at least until a fleet of log carriets, barges and tug boats is developed. 11.)19 The locat,ion chosen for the prefeasibility study civen belo,T is East Kalimantan. -The main disadvantage oL this location is lack of labor and scarcity of food products. The main advantage is that such a complex would have a decisive influence in the crea- tion and development of a new- growth pole. Samarindo and Bal ikpa,an are already joined by a road and the latter is a minEor but grow.ing port, wJhere Perta-mina has installed a petroleum refinery. Develop- ment of gas resources discovered in the general area, would give' enormous impetus to the creauion o-f an industrial zone ln East Kali Lrnant azn. Other advantages are that rivers a-re genera:lly deep enough for tr,-ns- portation all year round or most of the year a-nd coastal transportation is not seriously impaired by prevailing w-inds, c7urrents, and wT.aves. Residual fuel oil is available at near-by locations. l1.5o Backwuard linkages in forest ;ndustries are non-existent (un.less the possible utilization of cleared land in agriculture is so considered). The rst important forward linkages are wiith con- struction, housing, furniture making, manufacture of paper products, and printing. A healthy, w.ell developed ti-mber-based industr-r w -i1 have a poslitive effect in all these fields. integratiion with them is not believed to be convenient. Tec'lnical, man,?gement and merclhan- dising problems are too diverse, 2nd size o0 possi1ble operaQions some cases - for inst.ance in furniture making - do not warrant the necessary increase in comTplexiity, which -TQuld be required in the corpo- rate structure of the industrial complCx. ll.Sl The orgaiLza,tion and o-eration of the comDplex. could be quite fle;xible; several alternative arran-genents ca-n easily be imagined: one, a large conglomerate, in wxhich eouity shares Irould be held b, con- cessionaires, foreign technical oartners, and the GOT, directly or tlhrough Perh-utani. ; another alternative ;ould consit of one common service company and several manu-fctczuring enterprises each operating a.-n indivildual plant. A thlird possibil L +y is that one sinmgl large investor might taIke a majority position in the w-hole com.plex of plantS. The first scheme, althouigh sinpler in terms of overalIl design, iwould be undoulbtedly very diffficult to implement. The ccornd schpnem would i practice be a specialized y,rpe of industrial estate. A hoMldigs compan=r, formed by the GOI and in-terested concessionaires would o.;n the . -489- land, power plant and other utilities, the pier and port warehouses, and would be responsible for the financing arrangements for indivi- dual plants. It would be desirable, but not indispensable, that this company should have minority equity participation in the indi- vidual plants and conversely, owners of individual plants could have a minority participation in the holding company. The main advantage of an arrangement of this type is that technical foreign partners could take a commanding pos-tion in those lines in which they are specially competent and responsibility for results would not be dilu- ted. Also, there would be more flexibility in the arrangements to be made between different parties in each individual plant. M4ain disadvantages would be the possible disarray in overall planning that might result from delays in individual plant construction and start- up, and difficulties which could be encountered in setting fair prices for inter-plant transfer and utility rates. The third alterrative would avoid these kinds of problems but would require a greater con- centration of financial, t2chnical and merchandising capacity in-the participating company. The type of organization to be eventually selected, however, would not significantly affect the over-all results and the economic advantages obtained from setting up a tinber-based industrial complex such as the one described in the following section. 11.52 It is asstumed that between 50% and 60% of the total fixed investment including capitalized interest and other expenses during construction, could be secured from international lending agencies. This type of financing is reasonable, and there are comparable projects that have been financed in this proportion. Equity would of course be supplied by private investors. Suppliers' credits may also be utili7ed, especially in the case where the technical partner should insist in specific types and makes of some equipment. There are no unusual features to the complex that should cause any diffi- culty in finance; quite the contrary, the aspects are favorable if, as shown below, the whole project is economically feasible. -490- FEASIBILITY OF A TIT-3R-BASED PIDUSTRIAL COIPLEX IN FAST KALIL4AiITTAi Rationale.for the comnlex and its canpaciti 11.53 The proposed industrial complex is based on the integral utilization of available tiMber resources within a chosen area Twhich in this case is assuLmed to be within 100 Km. frori the Balikpapan- Sam.arindo road. Most of the timnber in this auea can be reached by river or short access roads. Total area of concessions i n this region (Graph 11.04) is 1,800,000 Ha., not, including 800,000 Ha. in one Perhutani concession located a little farther. away and some tree areas left between concessions or adjacent to them. 11.5b Assmning average timber stock yields of 110;n3(r) per Ha. in sawlogs a-nd peeler logs - which is -nuch smaller than figures generally given by t,he survey of the Forestry Directorat'e - a total anmual pro- duction of l,.h0,0COM', (r) should be attainable from the area described above. o = 0.8 x lio m3(r)/I'a. x 1,800,000 Ha- = 1,L410,000 m(r). 0 yrs. cutting cycle Not all of the timber oroduced in thlis area will be, or should necessarily be available t6 the industrial complex. On the other hand, a strong point can be made that even concessionaires who are not involved with the cormple.x - whether as shareholders or through supply contracts - should agree to supply the comrplex w. 7ith a percentage of their production at prices sim.ailar to those the-y obtain in their overseas markets less freight, isurance, and other shlipp:-ing charges. 11.55 The minimum economic size of a -oaD-ulpo mill, as it has been mentioned before, is about 500 short tons per day, requirinc, in the case of sulphate pulps, about /00,000 m3(r) of pulpiuood and waste annually. In a similar type of forest, this volume is approximately o5%-' of the volunme of sawlio-s and peelers. Applvlng this proportion to the area chosen, availability of Fr!imary waste and pulpwqood could rseach over 900,000 n3(r) per year, so there is ample feed for t,he pulpmill. The capacity of the complex envisioned in this study is the Mniimum for whLch an economic scale in pulp production is achieved: 1.65 million r!13(r) in total input, of whlLich 1 mi.lion m3(r) would be in sxaw.logs and peeler logs, 0.2 million m9(r) in pulpwood, and the balance in primany forest5 waste. 11656 Graph 11.03 shows the general flo.j of materials and produc½'s in the compiex. A1 the timber received will be bucksa-,wed and barkced in a central loca-tion. A proportion of the more valuable logs will be exoorted. Sawzlogs and peclers will be sent to the sn mill eend th veneer and oly--ood plant. Sorne of the primary waste, fromq cirauTlr_J species in sizes not approp:' i_iate for sawnillinrg, as .jell as sone -491- trimmings from the saw1mill, iJill be used in parquetry. Most ol' the "solid" i waste from mechanica-l ood processing (including cores .from the plywood plant) wvill be chipped. Separate chippers *will be used for the pulpmill and to feed a chipboard plant. The latter will allow the utilization of chips -from some species which are not adequae, for pulp making. Bark and sawdust from all sections of the complex will be pressed for reduction of water contents and burned for steam generation and power. Some unbleached pulp may be sold as such, but the bleaching plant will have enough capacity to treat all of the woodpulp which is not used for Kraft paper and linerboard. The paper mil. will be able to make the latter products as well as white writing anr-' printing papers. 11.57 The complex will comprise: (a) a wood reception area, including bucksawing and barking equicment, log yard hamdling eaquip- ment, and waste storage and handling facilities; (b) sawmill; (c) veneer and plywood plant; (d) parquettry plant; (e) remanufacturTng plant, including joinery, dimensioned stock and flushed door making equipme-nt; (f) chippers; (g) chipboard plant; (h) pulp and paper mills, including bleaching plant, and electrolytic caustic soda and chlorine plant; (i) hogged and sawdust fuel storage; (j) power plant; (k) water supply and treatment systen; (1) pier and warehousing; and, (m) other services. These plants -wzill be lo9ated in coEr.non grounds in an area large enough to allow f .t-,ue expansion and modification without problems because of the need to relocate existing facilities. Some of the features- of the individual units are set forth below. Saw,ill - Thcept for some co-=on faeilities, the sawmill will comprise two parallel lines, each with required deck saws, band saws, log handling equipment, saw doctoring equipmennt and drying kilns. Only o:ne impregnat ng plant is considered necessa:ry. Total-input has been set at 300, OOT (r) of logs. Plywooci plant - This will also be built in two stages, each as a separate parallel line, comprising vreneer lather, continuous dryer, deck tcray system, core lathe system, hot presses, patcher, cultting saws, sander, glue spreader, etc. Projected/capacit,yr is )!50,0O3(r). Barling - Hydraulic drurn barkers -rwith capacity for the whole proposed input will be used. ClipDers - In addition to chippers for the pulp mill, specialized chippers for tlhe chipboard plant are included. Pulp mill - The capacity chosen is O00 shlort tons per day} considered to be the mirimum economicacl size. Batch digesters are thoug1ht to be rmore convenient because of their greater fle;.:ibility for utilization with a mixed or c1h(anring feed. To econor-mize in -492- chemical consunntion, different types of PulIj-?ood and waste may have to be processed separately. Also time required is different for pulp to be bleached and for pulp to be used unbleached. Complete heat and chemical recovery equipment will be included. Paper mill - Standard paper machines will be used for liner- board, Krafu sack paper, a-nd writing paper. Paper equipment must be able to handle all of the tumbleached ouilp made, and the canacity chosen is 300 t/d. Sale of bleached and unbleached pulp in markets located at great distances from the mill requires pulp dryers. These are expensive. Considerable cost savings could be obtained by flash drying or by buLying a second-hand paper machine to be used for this purpose. A reoulper will also be needed to incorporate import-ed long- fiber woodpulp in the paper blend. Chpbord_plant - A two-line chipboard pln.ant havinr an axinual1 capacity of 60C000m3 of finished chiphor.-d is proposed. The two lines will be complementary for preparation of three-layer boerd, with finer chlLos in the su-rface layers. It, will include multiple- windo.w presses, cutting saw, trirmers, sanders, etc. Pow-er olant - PowTer reqilired w.ill be 33,000 Kw Ln the manu- facturing plants. Includ-ing offices, housing, and other services, Dower dermand has been estimated at 38,000 Mw. Because of the need to avoid costly stoppages, and the impossibility of purchasing electricity from other sources, continuity of powTer supply mrust be assured. Three 18,000 Kw,i steam turbine generatiors have been ronl- sidered. Steam wjill be generated in three boilers; one is part of the pulp mill recovery system; a second one ill burn sa.dust and mill waste not used elsewhe-re; and the third one wAill be residual oil-fired, with a maxi-miu caDacitL. of 308,000 lbs. stean per holir. IJater su, s-tcr. - To',al fresh water required is 16,000 GFI, of whichl,,260 GCtPU must be chlorinat.ed and 880 GF_MT pass-ed through ion excharngers. Liquid wiaste should be I.xEd ,with salt-lat.er eff'luent from the power plant. Cost for treatment of efLluent lias not been included in the calculations. hnvestment required l1.-5 Total fLxed investment for the w-hole complex in olant.o buildings and equipment, including installation costs, utiliti, engineering cand other construction overhead, and contingencie.s- m. 8'IJ- tuo US O`3.8 mlli on (Table 11.11). Calculation of the invesUment 1/ Techn cal contingencies were included in cost of equ-inFenlt} an- d buildings of each unit. An additional overzall cont, in >-;nc:, r o f 5 for Price escalation has been added. -493- reuiL ed has been mnostly based on the costs of similar plant's oxn by the Bank Group 1/. Certain other costs have been estimated on the basis of other studies.2/ Pre-operating expenses and fees, interest during construction, and other cap,italized exn-nze3 have been estimated at US '10.2 mill-on for a total investment of US $104,0 m.illion, excluding working capit.al, or $'117.8 m-illion includ- ing workihg capital. After redistribution of the initial costs of the powTer plant and other common facilities, investment required is divided between mechanical wood processing facilities and pulp a-nd paper making as follows: - ---------------US $ million----------- Fixed .assets and Total investmnZent capitalized expenses including ' C .C. Pu.1p and paper mills 58.6 65.7 Mechanical wriood processing 41.1 L!7.7 Shipping department -.3 . 104 ..O 117.8 Sales projections 11.59 Sales prices for all export products are f.o.b. prices calculated on the basis of lrmo-wn prices now being paid f.o.b. South East Asian ports 3/ or on prices in tXhe main external market less transportation and landing costs, includyg duties -'There *oapplicable 1I/. Sales of mechanicanlly processed wood products in 'he domestic mar-ket have been assumed t,o be at lower than interna'tional prices, in the case of saiwinvwood because of the compre-tition from srn1al marginaIJ operators, and in the case of wJood psnel nroducts because of the need to promote their use and 'to facilitate the introduction of cheaper mass-produced furniture, housing eleinents;, tr-ansportation equip-ment, etc. The onl-y- domestic sales w-here tariff nrotection is thought -to be necessary for a number of years (at l.easL until pre- operating and other c.-apitalized expenses are am,.ortized) are in all types of paper, irhere the sales prices have been calculated on the basis of c.i.f. Drices plus 10, to 205 du'ty plus landing, custons' brokerage fees, and other landing and transportation to varehouse 1/ References, 20/23 2/ References 214/27 3/ References 23 and 29 IV References 30 and 31 -494- costs. On the other hand, small sales of unbleached pulp to Government- owned paper mills are as,sumed to be made at prices below those prevailing for imports c.i.f. Indonesian ports. Sales projections are showin in Table '11.12. The assumptions on which they are based follow. Logs - It is assumed that logs whose size fetch best prices, or a proportion of them, up to 25% of the total volume of sawlogs and peeleqs received by the plans, will be exported. Present price is $25/m-'(r) f.o.b. ship East Kalimantan for logs longer than 6m and with diameters larger than 600cm, but for shorter cuts and smaller diameters, the average price has in recent months fallen from $21/m3(r). For this project we will use, 21.8o/m3(r) or a total of US$5,450,000 by the fifth year of operations.- For use by the plant, assigned price is $13/m3(r) w~hich is better than the average log cost used in a similar starting forestry project ($10/m3). It is understood that the assigned price is a little lower than the average price which could be fetched for the same logs if they were exported-or, in other words, that a small short- term profit advantage should be sacrificed to long-term returns, and to company and national stability. Sawnwood - Price in the export market, which had improved in the second half of last year -3s now assumed again to stabilize at about $h2/m3 f.o.b. East Asia port for pre-dried rough sawn timber. $56 for wood kiln-dried to 12%.moisture and $66 for impregnated sawnwocd. With a 50%: 10%: product-mix the resulting average export price $5d per m3(s) f.o.b., plant port. In the domestic market, prices are assumed to be 80% of the export prices, but with a higher proportion of treated wood (mainly because of demand for construction materials, sleepers and utility poles). The average price would therefore be $4o/m3(s). Total external sales of sawnwood would amount to $7,425,000. Transfer prices for sawn- wood used in other parts of the complex has been set at $35/m (s). Plywood - Prices that ranged from $57.20 to $80.20 per thousand sq. ft. (i" basis) for plywood 12 mm to 3 mm thick, had dropped by 7% in the second half of last year, and may continue falling as Japanese plywood manufacturers are forced to curtail production and cut the number of wor-kirig days. Prices as low as $L7.h0 have been indicated for some types of plywood. Given a product-n7ix of approximately h:h:3 in the 3-ply, 5 im thick, 3-ply, 6 mm, and 5-ply, 12 mm sheets for external use, average price has been calculated at $63.50 per thousand sq. ft. (1¼"s bas- is) equivalent to $107.50 per m3 of product in the export market. Prices in the domestic market are assumed to 5.5, lower. Transfer price to other plants in the complex has been set at $90/m3. Parouet - Imported hardwood flooring, including blocks, have c.i.f. US port prices ranging between $100 and $170/mn3. For the 1/ This sum, however, is not considered as part of the sales. Only the gross profit in the sale of logs is credited to the complex. -495- proposed plant, an average. price of US,.85/rn.3 has been estimated after deduiction of 1O, duty, freight, and in.-ursauce. Total value for sales in t,he export market (80, of total sales) wvould therefore be $2,Qob,000. At a lower price of US13 80/), sales in the internal market would be $b 0,000 annually. RenaniLfacturin,o and door plant - Prices for the. great variety of products that this plaut should be able to produce range widely. For hardw-ood molding, average price is *80/rm3 and for dimensioned stock, $120/m3. On the Other hand, for solid doors and knocked-down furniture elements, prices ranxw up to $[oo/1oo per ri3. An average price f.o.b. plant pier of $193/rn hlas been considered conservative and sales would be $1,216,000.. Chi-pboard - Pa-rticle board also showrs great varia.tion in prices. For three-layer chinboard without overlays, a price of about $00 is obtained per m3 o-f 191im board. An averagre pr2.ce OT $ 60/rn f.o.b. plant pier has been projected for exports and `SLi for the internal market, resuilting in total sales of $3,561j,000 annually. Bleached Puln - Given distance to market, bleached pulp must be sold dried. Present contract rrices Lor Yraft bleacihed hardwood pulp average US3$ 155 per short ton, air dried, US delivered pulp, equivalent to US. 1L12 per m.t. (imports into the US are duty free) c.i.f. port rast Kalimant an. Assurning further than initially nulp from tthis plant w-il1 be sold at a discount ('$l)iO/m.t.) in relation to prices for established hardwood pulps, tot.l annual sale: have been estimated at USr' 8,L,00,000. Internal transactions haver been calculated at $130/m.. - Unbleached p - Surplus unbleached pulp is expected to be placed with Governmental paper plants and raninly with those wuhich can improve capacity utilization because of present, difficulties in securing sufficient and regular rawJ materi-al supplies (Gowa, t.cr a, and, to a lesser degree B2,njuwTangi). Price for these sales has been set at f,,120/r.t. (pr ices c-.¾.f . Sieden are about $ll0/m.t .). internal plant sales are assumed to be made at $80/m.t. Unbleached Kraft sack paper - AssuiTng prices to average $215/m.t. c.i.f. nort ina Javwra (')2007m.t. has been quot,ed for' urg-l zcd paper used for cement bags, which -culd constitute about 55% o-f the narktet for sack paper), average sa-_l'es price at plant pier w7oulr' be $221/m.t. or $.6,519,500 annually (assuming l10%o ad-valorein duty). Unbrleached linerboard - On the basis of Krafft liner at $130 per short ton h3 plant, rinimnupi price c.i.f. Java port wrould be 113 $178/m.a.t.. Adding landing and clearing ucoss (approximately I13b.t.) and an average of only 10% ad valorem dut-,- (at present it is 305), final price at cust-omierls ;aarehouse in Djakarta would be t 20O. IDIn -496- Price c.i.f. plant pier would be this price less freight, landing and transportation to warehouse (T,29), or $179.80/m.t. and total sales of this product can be estimated at $,1,996,000. Unbleached corrugated medium - The sales pri'ce Lor CM4 is approximately $Lp/i.t. less than for linerboard. Sales for 7,b00 m.t. annually will be $1,302,000. Whitoe writing pamer - Domestic production of wJhite writing paper is being sold at Rp 2,160 per ream (500 sheetus 63 cm x 100 cm), wshich'with a discount of 6 f'or lot sales, results in an average price of US$32Lb.50/m.t. Imported paper is higher priced, averaging $395/m.t. including bo% duty. Assuming that duty should be diminished to 20% and that prices should tend to be equalized, average sales price should not be less thmn $331/mt.u. l-and:ed Java port, equivalent to a price of $302/rm.t. c.i.f. plan" pier. f.rnu21 sales under th1 conditions would reaclh 9,060 C00. Shippinpg department - The shipping depar"mnent is credited with the gross pro.'its from sale of logIs, $ .71/i3 (r),and with a charge of $5.00/m.t. of pulp and paper and $3.00/ri3 of wrood products shipped. Projections during the phasing-in neridd 11.60 Full operation sales are those sho-n in Table 11.12. They are 90%0 of physical capacitv for the pulp mill and low.er for the bleaching plant (691) and the paper mill (71%)., because in order to assure flexibility of operation vis-a-vis changes in demand, these plants should be designed to be able to process unbleached pulp no,, projected to. be sold without further processing. Table 11.15 shows sales and cost projections during the phasing-in period for the various components of the complex. These projections are based on a construction and start-up schedule outlined in Table 11.16. Operating Costs _1.61 The volume of timber inouts and the yields in the different plants of the complex are shocw.n in Appendi:- 11.9. Cost of other materials and supplies and labor havre been covipi -ed either on the basis of projects 1lmoiAm to the Bank 1/ or other studies'/. In all 1/ R.eferences 20/23 2/ Re-ferences 211/28 and 32/37 -497- cases, the figures used are conservative, especially for general repair materials and spares since in the location chosen, occasionallyr they may have to be imported by air or kept in stock, consecuently increasing inventor--carrying costs. 11.62 Depreciation has been estimated on a straight-line basis at the followning over-all rates for the main plants. Pulp mill 750 annually Bleaching and eletrolytic plants 10.0 armnnually Paper mill 6.5p annually Sawm ill 10.0, annually Plyt-rood plant 10. 0- annuually Other wzood processing 10.'0 annually Fier and shipping facilities 5 5d annually 11.63 A more dettiled analysis of some of the cost elements is contained in the following paragraphs; the detail'ed coat projections are shown in Table 11.13. Saw;msill - The most imnortant cost element in t,he sa,mill is the cost of logs, which is assuLmed to be 13/m3(r), equivalent to $,22.61/m3(s), given anl expect.ed yield of 57.5,'4, not difficult, to attain since many of t,he smaller s-zes of saxiwwood which irould norma11y be considered Iaill waste, can be used in the parquet bloc' plant and in remanu.facturing. The cost of maintenemce a-nd oper.cn supplies averages ,0.501./m3(s). Powrer is not considered as an element of cost, because labor and deprecialtion charges for po.rer generation have already been apportioned to the varrious in'ust.rial complex plants. But, t,he cost of fuel and other supplies i5s char'ted atu the rate of iUS4,336,OOO aznually or `1.95 pe.r m3(s). Costs of labor, depreci'ation and a-mortization of cap-italized exceroses are shownm in Table 11.13. -Ppairs, spares and other supplies (as a serivariable cost element) is estimna.^ted to corise oou /M3() plus 1' of the equ:ipmet cost ($51i,OOO Lnnually). The sawrmill is creditea with 5'/m3 of 'solid't resiuJue usnable for chipping (Table 11.13). 5'1°ood andfr venr lpnt - Cost oo' I ogs is the sane as for the sa-..raill. Labor, depreciation, and amortization costs attr-.Ibuted to this plantu are seho,n in Tcible ITo. 11.13. The cost` of resins ,nd cther chemicals avrerages '9 per Tin o0f product., Ot!-hcr arb.ri.alS arid supplies have been estiated to aumout to /to , of whiLch 50;o is assiuried t'o be direct cost and tlhe balnce (plus I'J of' Li;-ed inves::t) -498- is cost of other supplies and repairs not proportional to production. Fuel and lubricants have been estimated to cost $1990,000 ($b.bO/r3). The' plant is credited $1 per m3 of solid "residue" sent to chipping units. Parquet Plant - The main elements of cost are those of -selected small timber from the log yard, charged at $9/m3(r), and sawznwood in small sizes or from some species not generally accepted coimmercially, estimTa'ted at $35/m3(s). The cost of other materials and supplies amount to $8/mn3 of output. At first, most of the sales .*iiht be as blocks, in which case this item would be considerably reduced. Labor, depreciation and amortization costs are showln in Table 11.13. The other elements of cost are minor. Remanufac±uring Plant - The main input items are sawnwood and plywood charged at Q35/m5 and $90/m3 respec-tively. The other elements vary greatly according to the type of products which will actually be made in the plant. Cost of materials and supplies average $0.bO per m3 of dimensioned stock, $0.76/n3 of joinery, $0.80 per ml of doors (without fittings) and $15.70/mr3 of knocked-down furniture elements, so that an average of $6.00/nm3 ($38,000 annually) is con- servative. Chipboard Plant - Chins and chemicals are important in this pla.nt. A charge of 3.00/m of chips has been chosen, which, taking into account the losses in sawidust, amounts to $7.60/r3 of matesial. fed to the chippers. Considering the cost of pulpwTFood ($,7.00/m ) and nill waste ($1.00/mr3), the average for the feed to the chippers is $5.83/n3 and the 'gross' margin in chipping is $1.77/r13. The cost of chemicals in the chipboard plant has been estimated at cll/n3 of ou,- put ($660,000 annually) and that of other materials and supplies at $8/m-) ($2L0,000 annuaily), one-half ofa which is charged as a direct cost; the other half plus 1% of the fixed investm.rent is assumed to be a semivariable cost. Thle cost of chips is credited to the pulo mill. PulIT Mill - The cost of puliTood cannot be ascertained at present, since there is no large onpration in Tndonesia, an.d the small paper mills onerating there use other raw materials. In the PhilipnInes, urit pulpDwood cost is only 50,°' of the saulog cost. Conservatively for this study, 'we have considered a cost of $7.00/m of pulpw-ood and pri- mary waste fed to the chippers (5bM of the cost for saw.Clogs). Mill waste has been valued at $l/m.t. Total costs would therefore be $b,281,200 for pulpwlood and 6'l18,500 for mill waste (includ½l mnaterials used for chipboard). The cost of the che-micals used in pulnin" (maninly saltcake, limestone, and sulfur) has been estimate d atu $'55.50/m.t. of pulp, on the basis oL imported salt and sulfur and 'ocal limestone. Other dlirect na4terials and supplies are estimated to cost $1.10/r (6160,000 aLnuaully). ApDrox:imatoly 1% of fixed investment ($250,000 annually) is charged to semivariable cost-s (renair materials, screons, etc.). Cost of labor, depreciation, and other costs are shoon in Table 11.13. -499- Bleaching and Electrolyt;ic Plants - The pulp mill will supply unbleaclhed w oodpulp to both the paper mill and the bleach- ing plant, at a cost which has been set at $80/m.t. (althougvh there might be a small variation in cost f'or pulp fed to either one of the twio other plants). The main chemica-s needed in the ble_china clant are chlorine and caustic soda (98/105 Kg/m.t.). Laquid chlorine and solid caustic soda are uresen-lJy sold at $5.00 (fou-r carloads mLinmum) and '$,7.00 per 100 lbs. respectively. Because of the nature of these chemicals, freight, insurance, and hn=dling charges are extremely high, and establishrent of an electrolytic mercury- cell plant has been considered as parrt of this project. Cost of production if salt can be obtained at no more than $3.00 per m.t. and powrer at 8 mi lls/k.^r'nh would be about $166/m.t. of liq,uid caustic soda or chlorine gas (on the basis oL using all the caaustic required by pulping and dumping the balance). if surPlus caustic soda could be sold or used elsew1here, the cost of that pa-rt used in pulping r-ould diminish (to ` 17/1at. of caustic or chlorine used). Since the cost of labor, depreciation, and po.rer in the electrolytic plant has already been included in the bleaching, howqever, the only chemicals to be considered are salt (and small amounts of sodium carbonate, sulfuric acid, etc.) which are estimated at ,8/m.t. of bleaclhed pulr. The cost of operating materials and pl>ants (including screens and filter cloth) can be estimated at $1.00/m.t. (',$83,000 annually). In addition, for major repairs and some materials, 1% of the fixed investment ($)108,000 annually) is charged to semivariable costs. Cost of labor, depreciation, and other charges, as.maentioned before, are shown in Ta.'ole 11.13. Paper mnill - There are t-wo large inputs toi this plant: one, unbleached pulp, valued at $80/m;t. of pulp produced in the same complex ($j3, 2b0,000 annually) plus softw,ood pulp imported at $l145/in.t ($il,580,000 amnnually); the other is bleached pulp, also combining plant -wroodpulp transferred at 6$130/m..t, ($2,860,000 annually), and imported pulp) at US $;189/m.t. ($770,000 r..nnually). Cost of chemicals and sizing will be $1.60/m.t. for Kraft container- board and paper, and 'D15.50/m.t. of writing paper. CJOher m. aterials and supniecs, includin- felt, wire, screens, and other supplies Mnd repair materials, are estimated to average 6$3.l0/m.t. ($8,1b9,000 annually) for contuaner)oard and sack Kraft, and $6.20/mL.t. (;11", 000 annually) for wihite paper. 1% of fixed investrent will be cha:'eg1 to semivariable costs to cover major repasrs and improvrements not related to Droduction. This item has 'bc-n distributed pro orTionall r to the tonnage of Lraft liner and sack paper, on one hand, and white writ.i-g and printing paper on the other. Slzinping denprtment - Cost of shipping inaterials (pel', steel st-rapping, mater-il o f ooxes, etc.) is est.,imated to cost $2.50/A.t. of pulp and paper (i379,000 aunlninlly), "1. 50 per m3 0 timber products, ercl5uing logs ($'709,000 annually), and $'.0.80/fn of logs. Cosu o-f labor and depreciation, as in other cases, h br bcan indicated in Table 11.13. -500- Economi3c rate of return 11.64 Gross profits before ta:xes asnd interest for full scale operation are show1n in Table 11.13. On the basis of those figures and those calculated for the period during which the plants in the comie1x will be phased into operation (Table 11.15), the internal economic rate of return for the complex as a whole has been foi.rnd to be more than 20% (Table 11.1.i). This is a high rate of retJlrn on resources even for conditions in Indonesia. 11.65 It has not been thoughu necessary in this calculation to make any correct.ons for the few products which will be sold locally behind tariffs. These would be applied to only a small portion (less than 25,,) Qf the total projected sales and the moderate level of protection afforded - 105 and 15% ad valorem - would be needed only tempQrari?y until pre-operating, and otiher capitalized initial expenses were amortized. Furthermore, shado,w pricing would also have to take into account that a number of pro- ducts have been assiuned to be sold locally at prices well beluo the dut,y-free imports of similar products which are being import,ed or would have to be imported. At full operational rate, the positive and negative effects of such correction would practically canc;.V each other. 11. 66 A more detailed analysis of the econormic returns for each one of' the plants in the complex, under the conditions assumed in this study, would reveal diff,-rences in the raues. This is in'Jicative, on one hand, of an incompletely balanced oper-ation of the pulp and paper mills, and, on the other, of inter-plant transfer prices which are not necessarily fair. Kjore balanced individual rates of return and a somewhat his-her over-all ecQnoQmc rate of return probably would be obtained if: (a) Some of the un1bleached pulp assumed to be sold locally were further proces.-ed into bleached pulp (to be either exported or so2.,d to Govern- ment-owned paper mills) or into paper. (b) The mechanical w0ood processing plants were to be credited Twrith a lower value for "solid"! residues used in chipping and nith a small value for bark, sawdust and unclhinpable residues sent to the power plant. Steam generated in the re- covery system (pulp mill) could be crediteAd to that mill. 11.67 The result,s of t'his study arpe favorabl1 and demonstratie the need to carry out a full-fled5ged feasibility study,;, for the establivl- ment of an in½tea-ited t-iimber-processing ;industrial comrplex, and the start of conversat,ions wiih possible technical and merchandising -501- partners. Furthermore, parallel studies should be carried out for detailed recommendations on the better utilization of existing in-' dustries. Paper mills now} operating i Indonesia should not be con- sidered as competitive with an industrial complex, but complementary to it. They are very small for economic production of Kraft, liner- board and ordinary white paper. They could specialize in some specific. product lines, such as cigarette paper and the finer grades of writing paper, where size of output and possible cost differentials -would not have a serious effect on overall prices or on the country's economy. The same consideration is applicdable to teak exploitation and sawvmill- ing by Perhutani plants. Upgrading equipment and quality of production for these plants should also be an import.ant consideration in any plan to develop timber-based industries in.Indonesia. But these impro- ments, important as they are, should not hide the pressing need for the development of better ways for the utilization by Indonesia of her important forest resources. The integrated wood products complex offers attractive possibilities for an effective use of these resources. CONCLUSIONS AND RECOT0IfNDATIONS 11.68 In the exploitation of its timber resources, Indonesia should sbrive to upgrade its exports and obtain ai higher value added per unit removed from its forests; maximizing of long-term benefiis is an appropriate basic guideline for action. To demonstrate that it is possible to obtain greater benefits by integration of multiple *types of processing into one industrial complex, a pre-feasibility study has been made. This study is based on the installation of a large complex, using 1 million m3(r) of sawilogs and peelers and 0.65 riillion mT3(r) of woodpulp and primary timber waste in East Kalimanta-n. An internal economic rate of return of 20% in 16 years has been sho7n to be attainable in suich a project. 11.69 The investment required for an industrial complex such as the one envisioned in this report, is in the order of US $100 million. The objective of this pre-feasibility study is to demonstrate the desirability of carrying out several more detailed feasibility studies, in which different location and capacity alternatives should be exam.noci. But, what is important is that no time should be lost in starting these studies. In spite of the size of its forest area, Indonesia does not have an exclusive claim on potentially attractive opportunities t o develop timber-based industries. ATMd, unplanned exploitation of its resources, even if very attractive on a short-term, may prevent the country from pursuing its longer-range objectives at a later date. 11.70 Rational forest exploitation and industrialization of these resources in a really beneficial wlay wzill require close collabor- ation of different branches of the GOI and continued collaboration be- tween all levels of the administration and of private enterprises active in this economic subsector. -502- TABLE 11.1 NUMRI.ll AND AREA OF FOREST EXPLOITATION CONCESSION AGREENlrS Al;D AlPLEJCATrIOtlS PENDINGO - INDCGJSIA Applications preFlentad, surveys being pro- Operating unite, or agreenta/inveotment pared or undr way, survey rqepart under wa permnita alrendy approved by tho Oovernmmt Agremente ready for Ooeniem nt approval or draft agoemnat in preparation ClAaafifcAtionfb Type of Ditirpriel Number Area (000's Ha.)L umiber Area l0002e Ha.) tar. 31 Mar. 31 Wi Ti. 3 i.W 3 Mar. 31 rLar. 31 hFi.31 Mar. 31 Mar. 31 Xar. 31. tar. 31 Mar. 31 1970 1971 1970 1971 19170 1971 1970 1971 1970 1971 1970 1971 Priwate - ?iatimal anterpriaoe 20 40 1,294 3,572 10 743 13 832 - Joint enterpriaes 20 31 3,015 3,529 12 1,005 - 6 681 - StralFht roreign investnent 13 17 2,841 3,184 1 50 14 -0 - Co,,pcraL. Ae and other - - - - 2 335 7 735 - To be decided - - - - - 39 Sub-total 53 88 7,150 10,285 25 2,133 Perhutani - Joint enterpriee 1 1 8O Bo 800 1 115 - Prodebtlon "haring 7 7 897 897 Sob-tatal 9 8 1,697 1,697 115 Totals 62 96 8,847 l1,982 - 26 25 2,576 2,2148 61 69 6,530 5,582 Not lioted in sep - Joict enterpriae - - - - - 30 - To. to decided - - - - -1 100 - Joint enterprise IL -To be decided 0- - GRJJJD TOTAS 62 96 8,347 11,982 26 26 2,576 2,387 61 ?2 6,5S 5,752 GE&-,PJPXIICAL DISTRIBUTIOU Sunrntera (:uz.atra) 2,296 27 2,296 5 423 18 181c58 - At.Jeh a" Su=tera Utara 295 7 485 1 50 3 210 - Riau 1,380 11 1,090 3 273 6 1109 - Su=tctra Farat and Bengklu 381 2 125 - - 3 235 - .u.:tera Seatan, Djaobi ani LaVpung 21,0 7 596 1 100 6 604 La1I.anr.tan (P/.r-neo) 8,819 62 9,114 19 1,765 143 3,617 - KaLL-antan Baret 1,0°0 8 830 3 390 3 1cg - En1U.i Lr.an Tengah 1,1I37 11 1,587 7 830 24 2,294 - Kallznntan Selantan 215 4 485 - - 3 250 - Lalirxntan Tinur 6,007 39 6,212 9 5145 13 850 Silxr.re-i (Celeh-s) 31,0 2 195 , 1 60 5 385 KaC1kl;A' (YMlalccan) 377 5 377 - 14 162 Irjan Earat (Wcot New Oainea) - - - - 1 100 DI'. (Javt) 1 30 lx(at.lI ('ft y1v'n 1 130 72 5,739 -503- TABLE 11. 2 AREA OF CONC7MSIONS GRAJNTED, DPA-T7?D AND APPLIED FOR B3Y FOREIGN ETrrERPRISES OR IN JOINT VENTURES (000's of Ha.) Straight Foreign Investment Joint Ventures or Production Sharing Totals Grand Country Agreements Agrenments Applications Agreements Agreements Applications Agreements Agreement s Applicatiors Total. Approved Drafted Pending Appr oved Drafted Paending Approved Drafted Perd.ing Japani 35 - 100 2,197 210 - 2,232 210 100 2,542 U.S. 71U5 - 150 602 . - 1,347 - 150 1,497 Philippines 1,:l.d | - 602 240 - 1,950 2|40 - 2,190 Nalaysia O - 200 1,085 | 440 596 1,185 | 4° i 796 2,421 Korea 217 50 90- 120 245 - 390 295 90 '775 Hong Kong 176 - - 125 - 85 301 .- 85 386 s Ln gapore d o 265 -. 345 3145 Sigpr o- . - 265 -- 3. - . - 3- France ?CO - - - - - 280 - - 280 Other 150 - - 125 30 275 - 30 305 TOTALS 34f?4 50 540 5,121 1,135. 711 8,305 1,185 | 1_251 10,741 -504- TABLE 1l3 , IGOGWTIIG AIMD DMVESFSETT TARG-T3 rTI CONCESSIONlsS GRNT ED OR READY FOR APPROVAL Proiected investments Log production Avge. proj. Per unit Per unit targets (1973) 1973 yields U.S.$ 1973 output concession area APPROVED CONCESSIOUIS OO's m (r) m (r)/Ha. million $/m3(r) $A{a. East Kalimantan 8,000 1.29 3b0 a 3 .55 South Kalizrantan 500 1.03 63.bb 127 131 Central Kalimantan 1,736 1.09 25.5 15 16 West Kalimantan 1,1ib5 1.38 16.8 15 20 Sub-total Kali.1,antan 11,381 1.25 U!9.5 39C 1° At4eh & North Sumatra 1.93 15.2 o3 Riau 1,110 1.29 22.2 16 20 E. Surratra &I Bengkulu 310 *2.L.8 3.5 11 28 S. Sumatra, Djam'bi 855 1.1.3 20.3 2b -L 3ub-total Slumatra 3,510 1.53 61.2 17 27 Sulawesi 270 1.38 13 1 --luku 620 1;L ___' 23 Totals or anl es. 15,781 1.32 522.7 33C - ,d CONCESS1X,ON REPMY FOR APPROVAL East Kalimantan 828 1.52 16.5 20 30 Central Kaulimantan 758 0.91 13.5 18 16 West K1airmantan 650 1.67 7.0 11 18 Sub-total Kar an-z,an 2,236 1.27 37.0 17 21 Atjehl aRnd ;. Sumrazra 10( 2.00 2O5 2 0 Riau 11t0 1.61 5.5 13 20 S. Suriatra, Djan.bi 100 1.00 2.0 20 20 Sub-total Surat-ra 6o0 * 1.51 10.0 16 21l Sulawqcsi - 104 1.73 1. - I_2 *iotals or a,%?-ges. 2,980 1.25 1!8.5 16 20 a) Including $235..- in the A. Soriano &: Cia. concession.. b) Including $L8m in a concession granted to Korea Development Co. c) Averages would droo to $>16 per n3(r) of annual projected out-ut, if the two concessions mentioned above are excluded- d) Averages wsould drop to 822 for Kalimman'tan and $23A/a. for all of Indonesia if the Sori,?.no ard Kodeco concessions are excluded. -505- Table 11.L j 'NEIA - JMU.1AJD 7n2= R ALS ACCORmInG TO VARWUS SOURCES Quantities In 000's of m3(r) YA8 bank Ne era 1n G In aia1 C. A..P.? Biro Pusat StatiaLk`V Bir e tuat 3tatiatLi Directarate Omwal of QOw. Xnd1atrf' Tear -Ltcl. i'"uelwood Ix17iiI-d Tota Totals Ezcl. fuelvood Totals txcl. fuelwood Exel. fualwood Quantity Index Quantity Index Quantity Index Quntity Index i36 1i. ax 1960 up M. LOUii Vol. Ind"x rn.x TIndeC- .1962 - 100 TSk Other Total 1963 - 97 1960 5,301 96 3,177 98 6,1,91, 1i0 100.0 96 ]0,61 5,71, 9/ J320 122 3,316 102 6,910 107 106.14 102 1962 5,556 100 2,018 - 100 3 100 32 930 900 3,21,1 100 6,158 100 10a.0 100 1963 5,63*- 101 1,%91 97 3313 106 350 10l 3,200 . 99 6 013 93 102.6 99 1s90 1,1,10 1,960 197 1 01 192 9 31 99 31,980 97 3,096 96 5,576 - 86 9. 517 ,,0 1809 1965. 101 117t0 8 2685 86 27,750 81 2,168 67 3,361 52 69.5 67 L9O 1,210 1,680 83 1966 * 101 1,983 98 3,507 104 33,560 102 1,201 37 2,818 1, 38.5 L25 1,983 2,108 119 1967 * 101 2,853 1,21 I,350 129 41,170 125 2,614 01 *3,2103 SO 83.9 81 L69 2,-853 3,1422 169 1968 3,828 190 5,299 158 50,2,0 153 3,561 32 1.69 66 25 1o 67 3,828 L,295 233 191 SL820 166 532 4,8S9 5.390 267 2/ YAO Yearbooks or ormat Products, Year 1960 through 1969 For 1950, the flgure record4d was 1,391 thou.. *3(r) 2/. From Bank Negara Indoneaje (Unit I), laporan Tahun Fembukan 1968, p.135 attributed to Diro Puaat Statiatik 3J From Corm:rcial Advtsory Foundation in Indomesa (C.A.F.I), Circular Tan. No. 3, Forestry Problema and Statiztical Figures in Indonasias Djpka-rta, July 1970, p.S (figure attributed to Biro Fonat Statietik). L4/ From Pendapaten lnazjinal Indoneasa (National Incom) 1960-68, Dj krtm*, 1570, p.73/71, / From Pendapatan National Indoneias (National Thco) 1960-1968, Djakarta, 1970,p.77 . 6/ From Tiober Situation In Indoneaia, by Mr. J.F. Wattine-a, Dept. of DTdutry, Dlrectorate General or Chexical Induatrys Djakarta, HIarch 1971 (WE/mt/I/li) From Bank Negara Indonesia (Unit I), Repcrt for the Financial Tears 1966-1967, p.159 TabIm 11.S INDUSLA - zsORT or U0S AIID T I- I X-31DTS AC0Rn TO VU 341112 SARnCE3 Le v,____t__st.to.tiJ _ __ _ __ _ __ _ ___E_ __ _ __ _ 7.r Dtt lZ nlL Vs1. ''n1t4e "{01'a .t "--n--iL1.5 (CC) N(r'" Qntitli (5412' *lt( Q jl 1 iua UJ1 i7 16 h'e ..a,.oOd . 'wUMoO61.A&1' wv (2M - - -_Tk Qthr,, TcLA1 000'. .3 00O'. .r) 1960 1,669 ,1 710.9 1961 1a321 1962 1,072 1 , ii 6 I ? 6 9 1963 : '11 6.a 107. I :.7 7.1 35.9 .3.1 6. 1 ? . 0 196 9 1 822 7-7 62.1 6S.6 A Sl.l * * .Sl 91.1 - 91 - m 196 2S022 9.1 123.6 133.5 1.6 U6.6 196.3 117.S 2.. 15.3 a 179 11? 9 - 9 7 2. 1966 3.500 SW M 192. 251.2 25.1 263.3 2e8. 9 203b36 3.6 11 114 263 21 11 - 31 - 290 1s67 6, P. 39 m .0o.2 26.3 SO6.5 595.6 560.2 7.5 575.0 LOO.9 6.3 15.1 la 51 51 12 2 3 S U1 2.966 13,102 .7 6o9.8 n31.5 28,7 1,159.0 1,217.1 1.!79.0 10.6 1,694.0 637.5 31. 13.2 1969 2532. 36.5 31,665.3 3,703.9 , ,L.29.6 25.3 SDb 170 " :,161 16 16.66 71200.0 .1127713 66.1 3.0 197 J.,A 1,3.7 30,516 21.2i -9 o-k Xod'm-A., 1aa.Le liaul3 6tt65m, kh vv11.t18, Apr61 MI. -P. PI .d 30 LI/W mrs ?.a StAtLk.1h mA-m i. 3k NO- bDWn.1a (ULU19 ). lwb.i 23664, p.16, "A 1966, p.1.336 ,f ?1'4m O-1u4a. la bDm.mt, op. sit., p.1 FAD. y' 96, 1emLaI If fUmt qtt. am, -p1 (if606." b)) * X M U - 0. . .U TABLE ii.6 PRODUCTION OF FORMT PRODUCTS BY PERHIUTANI P r o d u c t i o n Kind of Product 1965 1966 1967 1.. Timber/Teak (cu.m) 452,678 42143595 468,764 2.' Fire-wood (sm) 707,4Y70 667,123 681,184 3. Charcoal (ton) 5,19o 3,250 3,711 4. Tannin bark (ton) 3,293 3,619 1,799 5. Pine resin (ton) 4,o66, 5,107 5,032 6. Turpentine (litre) 22,823 29,93& 30,145 7. Cayu-put oil (ltr) 39,341 5,825 43,012 8. Stock-lac (ton) 74 89 146 TABLE 11.7 Part 1 INTERNATICNAL TRADE OF TIMER AND WOOD PRCDUCTS EXPORTS (196B QUANTIT; (000's in3) _ __ _(o m.t.) Non-coniferous Panels Wood Paper Products Veneer Paperboara (OLU%TRIES Sawlogs Sawnwood Sheet Plywood Pulp Total Newsprint and other World 29,006 6,363 910 3,785 15,013 19,946 9,733 7,598 Asia 20,329 2,312 303 1,853 4 - 63 36 259 Indonesia 1,879 11 - - Malaysia Sabah 5,796 4 9 5 rSaravwak 2,988 311 6 10 WJest Malaysia 1,730 799 5 45 * 1 1 Philippines 7,511 - 220 254 China 2 58 398 24 1 16 Japan 2 250 3.- 425 3 343 6 207 Korea 560 : Hong Kong 22 15 5 19 4 12 &ingapore 16 556 60 69 . 16 1 12 VALUE (U.S. $ 000's) World 735,292 386,124 191,003. 601,922 1,772,127 3,411,675 1,285,416 .>.525,562 Asia 4b8,825 121,490 14,362 256,048 528 97,296 2,628 48,372 Indonesia 53,359 1,633 - - ° Malaysia Sabah 109,135 195 461h 464 - - - - Sawawak 45,274 13,8h3 378 835 - I-est Malaysia 24,850 34,728 925 5,615 - - - rhilippines 170,001 6,054 7,996 18,697 - - - - China 128 3,933 - 53,028 - 4,010 127 2,208 Japan 158 13,104 697 93,032 503 74,789 917 38,455 Yorea - - 65,691 - , - Hong Kong 580 2,102 . - 223 - 3,822 574 2,437 Sngapor3 363 22,629 3,776 16 3,109 130 2,113. *} ~~-509- +jt INTERNATIONAL TRADE OF TIMER AND WOOD PRODUCTS Part2 EXPORTS (1968) (OOO's m33) (OO0's m.t.) Non-ooniferous Veneer * Wood P-ner Products Countries sawlogs sawnwood sheets Plywood Total NIewsprint Paperboard & Other World 29122 6222 935 j863 14720 194n1 9539 7616 Asia 20278 850 45 163 1322 1719 580 940 Indonesia -----36* 16* 9* N'alaysia Sabah 12 28 ----- 2 Sarawak 2 ----- ----- - 1- ------2 1 12 Ilest. Malay. 2 2 ----- 2 1 81 21 4l0 Philippines ----- ----- ----- ----- 25 140 68 60 China 1090 2 ------ 57 5 1 4 Japan 14476 191 7 7 784 135 104 29 Korea 2436 1 ----- ---- 146 33 21 7 HongKong 314 58 41 272 52 181 Singapore 1466 218 ---- 39 1 110 16 69 ----- ------------ --- * Exporters' figures * VALUE World 1037828 449156 199487 548259 1920795 3589584 1403455 1721540 209593 Asia 593410 38504 5832 23979 165880 345867 85689 209593 Indonesia --- - ---- ----- 9068* 3436* 2000* Mlalaysia Sabah 156. 683 ---- ----- 10 ---- Sarawah 12 20 1 188 ----- 549 90 200 West. Malay. 24 209 77 348 178 15800 131 235 Phillippines ----- ----- 2400 - ----- 3238 7562 China 33799 449 ------ 5864 1l41 185 1701 Japan 438466 11026 1756 1495 112570 27063 15726 10881 Korea 73974 254 89 53 23901 6156 3096 * 2197 Hong Kong 5885 3087 12 5854 ----- 44620 7207 2711.4 * Singapore 21541 72k5 81 4548 210 20463 2344 11878 -510- Table 11.8 ESTIliATED ANNUAL REPORT AVAILABILITY- FOR MAJOR FOREST PRODUCTS FROM DEVELOPING COUNTRIES (1975 and 1985) Fibreboard Pulp and Sawn- Veneer & and par- pulp Logs wood plyood ticle board products 1962 Africa 5,030 680 170 - 58 Asia 5,710 490 340 1 34 Latin America 350 1,400 .40 4 98 Near East 10 50 3 - Total 115100 2,620 -5 190 1975 Africa 5,200 1,h040 670 20 280 Asia 21,500 2,300 2,000 20 40 Latin J:merica 300 1,750 330 50 300 Near East - - - - Total 27,000 5,090 3000 620' 1985 Africa 4,700 1,500 1,250 50 940 Asia 32,000 3,200 3,QOO 40 70 Latin America 300 1,880 910 160 990 Near East - - - X - Total 37,000 6.580 5.160 250 2_000 Source: Ref. 13, p. 11 1/ Units: 000's m3 for logs, sawnwood, znd veneer and plywood 000's m.t. for fibreboard, particleboard, pulp and pulp products. TABLE 11.8 ESTIMATED ANNUAL EXP`RT AVAILABILITY FOR MAJOR FCRES PRODUCTS FROM DEVELOPING COUNTRIES (1975 and 1985)- Suurce: Rei. 13, page U I/ Units: 000's m3 for logs, sawnrwood, and veneer anzd plywood 000's m.t. for fibreboard, particleboard, pulp and pulp products. -512- Table 11,9 WRLD PULP MAKING CAPACITIES (000's m.t.) Totals- 2/ "Market" I'Markkt" tTlarket" Totals- Unbleached Pleached and Paper-grade Paper-grade Sulphate Semi-bleached Woodpulp Chemical Puxlps * 1969 1972 1969 1972 1969 1972 1969 1972 Act. Est. Act. Est. Act. Est. Act. Eit. North America 1,683 652 6,111 7,652 8 319 9,720 39,009 43,290 us 330 340 2,200 2,925 3,165 3,865 Canacd 353 312 3,941 4,727 5,154 5,855 Western Europe 1,314 1,177 3,528 4,400 9,240 10,027 14,706 16,948 ,indnavia 1,265 1,085 2,885 3,460 7,715 8,305 urher 49 92 643 940 1,525 1,722 Latin America 135 170 325 la 606 78 1,108 1,483 Brazi-. 0 0 225 170 370 395 Other 135 170 100 215 236 386 Africa & M. East 185 197 65 113 250 317 1490 692 Asia ! Pacifiz 3?0 370 710 810 1,292 1,L18 5,414 6,31L Japan 300 300 700 800 1,210 1330 4,906 5,781 Other 70 70 10 10 82 88 508 533 Eastern Europe n.a. n.a. 1,829 2,370 USSR n.a. n.a. 1,800 2,325 Other n.a. n.a. 29 45 tals n.a. n.a. 21,536 24,633 Totals, not in- 2,566 10 19,707 22,263 60,727 68,727 cl uding Eastern 2 ,561079633687__ E-urope Including sulphite and mechanical paper-grade pulp / Including unbleached sulphate and sulphite pulps Source: Ref. 51 - pp. 31/46. t, -513- TL.1e 11.10 TARIFFS ON MAIN WOOD PRODUCTS EEC 2/ U.S. Countries- O.K.- Japan Other Logs free free free free Sawnwood (rough) free free - Dipterocarpacea 10% - Other hardwoods free Sawnwood (planed & grooved) free 5% 5% Veneer 7% 5% - S.E. tropical hardwoods 10% 15% - Teak free Plywood 13% 5% - Softvood 20% 17% - S.E. Asia hardwood 20% 20% - Spanish cedar 12.5% - Other hardwood species 7.5/10% Particleboard and reconsti- tuted wood 6/10% 12% 15% 15/20% Woodpulp free Doors 7. $% Wood furniture 5% Wood chairs 8.5% Wood furniture parts 8.5% - Common tariff. 2/ - External tarif (i.e. applicable to countries other than EFTA and the Comm.onwealth. Less than 1%. Sources: IBRD, Economics Department U.S. Tariff Commassion, Tariff schedules of the U.S. annotated (1971): Washington, 1970. -5114- Table 11.11 INESTIENiT REOUIRED (in US$ 000s8) Capital Investment and Other Expenues _Redistribution of site, utilities, and other plant costs Electrolytic Timber Power Water Land Offices and Plant Preparatica Pier Plant Supply Improvements Shops Warehouses Boualng Pulp mill 12,4145 - 6,532 180 1,727 938 143 369 84 168 Bleaching plant 4,548 2,150 - 280 1,816 525 60 199 127 70 Electrolytic plant 2,150 - - Paper mill 14,450 - - 300 2,273 171 59 385 137 165 Sib-total pulp and paper plants 33,593 - - Sawmill 2,370 - 289 20 1,448 346 163 92 23 396 Ply-wood and veneer plant 15,908 - 434 140 4,521 415 434 568 59 1,237 Parquet block plant 986 - - 20 127 15 19 31 7 79 Plant for doors, joinery, etc. 1,277 - - 20 152 5 29 38 2 93 Particle board plant 3,018 - - 40 267 74 18 91 16 40 Timber preparation plant 7,1496 - - - - - - - - - Sub-total mechanical processing plants 31,055 lier and equipment 2,000 - - - - - - - - Power plant and electric distribution 12,700 - - - - - - - Fresh vwter supply and treatment 2,560 - - - - - - - - Land improvement 1,000 MCachine, electrical and mainteaance shops 1,855 - - - - - - - - - Warehouses 2,275 - - Offices 1,930 - - - - - - Housirng and other personnel services 400 - - - - - - - - 82 Shippimg department - - 241 1,000 369 71' 35 82 1,820 Sub-total (cumulative) 09,368 - - - - - - - - Contingencies 4A,32 - - - - - - - - Total fixed assets 93,0 ° - - - - - Pre-operating expenses and foQa 2,070 - - - - - - - - Ii'terest and other financial charges 8,130 Total capitalized intereat and expenses 10,200 - - - - - - - - - Total projeot, excluding Working Capital 1P4,000 Working Capital 13,aO - - - -- Totals 2,150 7,496 2,000 12,700 2,560 1,000 1,855 2,275 2,330 -515- INVESTMT REQUIRED IContlinued) (in US$ 000's) Redistributed Fixed L:veotcent Capitalized Total Inv. Total Inv. Ecludimg Including Iatereat and Excluding W.Ch Including Capacity Unit Investment Contingencids on ng i* Contingencies Ex-pensas W.C. C 22,586 1,120 23,706 2,578 26,284 2,457 28,741 440 t/d 8 65,300 t/d 9,775 435 10,260 1,116 11,376 1,756 13,132 320 t/d 41,100 t/d -106,400 t/d 17,980 892 18,872 2,052 20,924 2,924 23,8li8 300 t/& 79,500 t/d 2,497k 52,838 5,746* 58,584* 7,137* V2' 65,721* 185,900 t/d/ 5,147 255 5,402 587 5,9a9 928 6,917 23,716 1,176 24,892 2,707 27,599 3,960 31,559 1,284 64 1,348 147 1,495 605 2,100 1,616 80 1,696 134 1,880 270 2,150 3,564 177 3,741 407 4,148 602 55 4 950 35,327 4,249* 89,917* 9,778* 41,111* 6,S65* ' 47,616* 150 M 3(R)/Y 63, 43(r)/Y/ 1,752 37,079 4,032 3,700 183* 3,883 422 4,305 89,368 4,432 93,800 10,200 104,000 13,800 Sub-totals T/ The value for a similar plant based on hardwoods now under construction (with a smaller bleaching plant) is 1159,500 t/d (Ref. 15- pp.14 an-l 19), including power plant and other services. Another pulp mill (without paper mill) would coat $112,000 t/d if it made only market bleached pulp. / The value for a reoent plant based on similar wooda and location is also 163A1 m3(r),/y (Ref. 30-py. 10 and Annex 13). -516- Tible 11.12 PROJECTED SAIJq AT FULL OPER.AIN RATES Couisions Consolidated Net Sales Slit Quantity Price value Selling £xp . Net Sales .iazity Vaue U- AJnit $ 000's $ 000's $ 000 1 000's Pulp KM mt. 12,750 1_8 12.602 13.5 1,472 - Unblasced pilp, disesc market * 13.5 120.00 1,620 148 1,472 13.5 1,472 - Unbliached pulp, export rkot - - - ,, - Unbleached pulp, plat cons=ption 131.4 80.00 10,512 - 1, 512: - Chips, chipuoard plan ccumptioa 33 77.3 8.00 618 - 618V - - Bleaching (and electrolytic) plants nut. 82.0 11.260 720 10.540 60.0 7,680 - Bleached pulp, export market 60.0 140.00 8,400 720 7,680 60.0 7,680 - Blached pulp, domatic .iLrket - - - Bleached pulp, plant oorwfupion' 22.0 130.00 2,860 - 2,860;Y Paner ui.iU t. 78.0 i8,877 1,335 17,5112 78.0 17 - ISneoard, dcmstic surket 11.1 179.80 1,996 155 1,811 - Corrugated med., domestic market 7.14 176.00 1,302 102 1,200 - Kraft z=k, domestic market 29.5 221.00 6,519 1175 6,0oL4 - Writing and paimning, dcastic market 30.0 302.00 9,060 603 8,457 Sub-total nulD and ape 4t. 12,887 2,203 140,6814 151.5 26,386 Sacdl 23(s) 172.5 8.072 834 7,238 154.0 6,591 - Saiocd, expsrt market t130.9 50.00 6,505 719 5,786 - Sa -uod, domestic market 23.1 410.00 920 115 805 - Saicioad, ranaufacturing 18.5 35.00 6147 -64;,V P1,wood ad veneer nlaxt 33 225.0 21.005 1,855 22.150 222.2 21,898 - PlTnod, export market 200.0 107.50 21,500 1,675 19,825 - Plywooe domestic imrket 22.2 101.50 2,253 180 2,073 - PIpVood, re-anmvfactusing 2.8 90.00 252 - 2521/ Parquet block Dlat M3 }0-0 2.520 216 2,30l 30.0 2.30 Parquet blocks, export mret 24.0 85 2,0410 1714 1,866 Parquet blocks, do:stic wrket 6.0 80 480 42 438 Rerrnactaring plant M3 6.3 1.216 80 1,136 6.3 1.136 Varivs, export market 6.3 193.0 1,216 80 1,1L36 - Varlous, doestic market Chipbcard ulrt 33 60.0 3.564 358 3.206 60.0 3,206 - Chip*oard, export market 54.0 60.00 3,210 324 2,916 - Chipbowd, dor.stic merkut 6.0 54.00 324 34 290 Sub-total mchanical wood a.roce5sirig iz-.ri.e5 m3 1193.8 39,377 3,9143 36,034 1172.5 35.135 Shifi4 iScartment revnues 1102 4.- 1,102 - Charge cc all ship3mets, pul, and paper m.t. 151.5 5.00 757 757 - Charge on all ship.nts, vood pdudts 33 722.5 3e00 2,168 2,168 - Gross irofit on log exports 33 250.0 4.71 1,177 1,177 Grand Total for !rALstrial com=lex 86,36 5,56 80,820 65 623 Interp1aL trwanfers. -517- TABIZ 11.12 ThBEi-BAsED IMUMiTRIAL CQ1PLE3 OFEEIATINO COSTS AND GISS 11'DIITS (US 8 000o.) Total Direct (varlable) coats S3e-1-vriable cost Drixed cost. Coa Thcote Rap.irs Dapreciation & lbor Kianegement Oo.Laxea Log.. ilp- Tiber Other Nat- LAbor uel oil Labor Spare & Amortization (not prod- & General Sub-totel & IUr'reet woo & ror- Hill Inter-d- Wood Ch-icale arials & (varl- & Lobri- Sub-total (s..i- Other 3ub-total wotlai) Overhead eat wat. weat ae.r1s pulp supplitm ble) cents Tariable) Supplies 1'iptltl L,281 1L9 - - 798 160 73 27 5,1.88 105 250 355 2,100 17 600 2,717. 8,560 L,042 81-ching electrolytic plentA - - 7,272 661 83 21. 182 8,222 37 108 14,5 1,166 20 50 1,236 9,603 937 Unbleach,,t paper - - - h,820 77 lL2 U. 366 5,L56 62 123 185 White paper ' - - 3,630 L65 136 30 228 1,539 Lo 77 117 Total pAper 8,L50 512 335 7L 594 9,995 102 2D0 302 1,389 15 so50 15IM 11,751 5,791 ,~polo an r,p-..prrna. k1 28 1119 7 ] _2~ 2 00 171 aŽ1 2 3 7 5 21,.h 5 802 IL,65 ' 5.107O 29 91!, 10,770 TFj9o ~ ~201 33 09 3 32613 2092 ~ ,5 IUDalpnr5rl ll13i - 8722,0 1 h 3C e F02 3 a S09 "N7S 1,559 Plyooi nd veneor plant 5,850 ( 79) - - ?,025 675 805 990 10,266 554 924 1,L78 2,027 78 350 3,255 IL,999 I,151 Parquuet block plant 31,6 ( 18) 525 - - 240 34 10 1,137 LO 253 293 153 25 30 206 1,638 666 Wool r-.nutacturing plast - - 37L - - 1/ 38 31 22 L6' 53 17 . 70 193 25 30 21.8 783 353 ChIpboard plant - 3 618 - 660 120 16 30 11hh7 15 157 172 425 14 *30 h69 2,088 1,118 M-ch-n-cal aood lusltre. I0,096 9) 1 - 2*65 1 159 1 087 1.38! 17 783 875 1 1bh 2 315 c 8 5.089 25 187 10 K7 S Idpnnin depariment - - - - - 2 -9 1J ..o _ 5S1 _.021 -2 667 22 i1.2J.7 2 32 } 2 11 1.6 - 13 ' 5*18 2 / Included in othr ateriala and muppli -518-- Table li.iA iNzTU1AL ECOllitIC RFIURN FOR TDlDElt n%SED InmusJsnA. CCHPLE Year 1 2 3 4 5 6 7 a 9 10. 11 12 13 14 15 16 Total - 300 3,072 16,955 3 61 268 80 8?0 80.820 800,820 80 870 ' ,820 0,820 80,800 800,20 Pulp a-d paper - -2,!7j 75 1t&,1W 1.ia1% -ectannlcal wood induatrloe m - 2,472 i4,1,55 28,696 31,431 36,034 .30.034 Shipping depa.e,ent (reenue) 300 600 2,500 3,300 3,950 4,,102 1,.102 Coats 1 I.1 1I,_310 2930 1,6227 57,185 57 185 57.185 5718 5715 571% 5.15 5.15 5,85 5.8 iupand paper - - - 16,3 715 8,18 29 g7,1 29,911 Mechan.ica1 vod Industris - - 3,394 12,836 21,1103 241363 25,187 25,187 Shipping departent - 711 822 1,474 1,794 2,033 2,084 2,084 11I.4 t -ni. b-fr.e te. e..d Iteteet (-ju - -Id6) 7.160 10,773 26 6.3 26 26.635 26.635 I6 6365 363635 26,635 Fulp -nd paper - - - (1,899) 3,056 10,770 10,770 Mch.a-ical tood 1Idu.t,-Isa - - (922) 1,619 7,553 10,068 10,8147 10,8147 Sipping depurte*nt - (4ai) 5222) 1,026 1,506 1,917 2,016 2,018 r- n r --rltlon . rortilcain cap P. - 267 68 3,077 6 736 9 133 ,1 9133 9,133 133 33 22 2A13 P.)l and paper - - - . I 655 i. M-bh-niral -ood InduiLriem - - 420 2,8"10 3,786 L,211 4,211 I4,211 51,1pping deparLnent - 267 267 267 267 267 267 267 lerfita - (223) (1,57) 5,722 13 896 21 174 32 768 32 768 32,768 376 3276 ,768 2768 32,768 32,768 32;768 32,768 Pulp .nd Fpajer - - - '71 77t- 131 137 Mechanical aoud induatree (223) (50)2) 4,429 11,339 14 279 15 058 Shipping departannt 145 1,293 1,773 2,181 2,285 In,e-, ent co.ts "1 2 6051 ((I, 800) (32 200) (32,237) 118a95L - - - - - --- PulIp mad paper T560 u t202U) 17,0u0 I2135J n - - - - - - - - - - Heclhenical aood induetrie (500) (i,0) (10,600) (15,200) (10,737) ( 2,074) - - - - - - - - - - - Shipping departLnent (200) (2,105) ( 2,00) - - - vene:fit 121u(/yr) - - (155) (291) 2,758 5,586 8,098 9,142 7,635 6,357 5,Jo0 4,421 3,670 3,047 2,556 2,130 1,769 57,610 Inveat1- et coAts (20$/yr) (1,200) (3,836) (10,271) (18,641) 15,538 (7,621) - - - - - - - - - - - 57,110 -ler.cfit (.t 20.5%/yr) (151%) (261) 2,718 5,475 7,905 8,880 7,373 6,128 5,079 L,227 3,5o6 2,916 2,392 1.999 1,638 55,594 Inveet,-ent coat. (i. 20.5%/yr). (1,200) (3,822) (10,197) (18,418) (15,313) (7,469) - - - - - - .56,h19 I/ Including int.r-plant eale er transfrs Ii; -519- TBIE 11.15 Tfl{M1-BASED INDUJSTRIAL C0MPIEX DE'MINATION OF oSSrS DlIINO PHASING-IN OF PLANTS I (US $ 000's) Tears 2 3 4 5 6 7/15 Sales (net) - Pulp and paner mills 4,474 22,887 ho 684 Pulp mill - - - 2,554 6,926 Bleaching plant - 1,920 7,190 10,5140 Paper mill - - - 8,771 17,5142 Variable costs - Pulp and paver mills - - 2 610 13 622 23 705 Pulp mill - - 1- 2 3, 0 Bleaching plant - - - 1,498 5,609 8,222 Paper mill - - - - 4,997 9,995 Sales (net) - Mechanical wood industries - 2 1472 114455 28 696 34,1431 3640314 Sawmill 5667 723 7,23t 7,23i Plywood plant - 8,212 19,162 22,150 22,150 Parquetry plant - - 576 1,728 2,304 2,304 Remanufacturing - - - 568 1,136 1,136 .Chipboard plant . - - - 1,603 3,206 Variable costs - Mechanical wood industries - 1 526 7.,88 14 4314 17 059 17,783 Sawmill 9 16 4,4684 Plywood plant - 3,806 8,881 10,266 10J,266 Parquetry plant - - 284 852 1,137 1,137 Remanufacturing - - - 233 465 1465 Chipboard plant - - - 723 1,447 Revenues - ShivDing denartment 300 600 2.500 3 300 3 950 14 102 Variable costs - ShiDDing deDartment TrI _0_ 644 Total costs - Puln and paver mills - 6 373 19 831 29 914 Variable --__I- Semi-1ariable - - 428 802 802 F--xedl - - 3,335 5,407 5,407 Total costs - Mechanical wood industries - ,394 12 836 21 143 21h,363 25,187 Variable - 1,526 17,059 17,73 Semi- riable - 300 1,560 2,0145 2,215 2,315 Fixed - 1,568 3,688 4,664 5,089 5,089 Total costs - Shipping deuartment 731 822 191474 1 794 2 033 2.084 Variable 'I M 44 1;3 Semi; riable 60 70 90 100 108 108 Fixet . Beginning in the twelfth year, depreciation reserves for same plants will cover entire value of same, and capitalized expenses during construction wil be totally amortized. FiLed costs could be dtiminished, but it is as- sumed that new fixed assets will be purchased during the plant operation. I. -520- TABLE 11.16 SCHEDULE FOR PANT START-UPS IN THE TSBER-BASED INDUSTRIAL COMPLEX Years Asking for bids on build- Plant - Plant ing & equipment start-up Pier & general land impr. 0 1 1/2 Saw mill, Line1 0 2 Sa mill, Line 2 1 21/2 Plywood, Line 1 1/2 3 Plyood., Line 2 1 3 1/2 Parquettry plant 2 3 1/2 Remanufacturing 1 1/2 4 Chipboard plant 2 1/2 5 Pulp mill 1 4 Bleaching & electrolytic 1 1/2 4 1/2 Paper mill 2 5 Power plant O- 2 -521- Table 11.17 List of References 1. Government of Japan, Overseas Technical Cooperation Agency, Report on the Development of Pulp and Paper Industry - Republic of Indonesia, November 1970. 2. Commercial Advisory Foundation in Indonesia (CAFI), Forestry Problems and statistical Figures in Indonesia (11), Circular Tan No. 03, Djakarta, July 29, 1970. 3. W. Boucheric, lnpublished study. 4. German Foundation, Lor Development Countries, Report on a Seminar on Planning of Forestry and Forestry Industries, co-sponsored by FA0: Manila, Nov/Dec., 1967. 5. Department of Agriculture (Indonesia), Directorate General of Forestry, National Progress Report on Indonesia, December 1968. 6. Directorate General of Chemical Industries, w7ritten communications sent to Mission while in Indonesia. 7. B. H. Payne and D. S. Nordsall,'!A Review of Certain Aspects of the Forestry Program and Organization (In Lridonesia)," April 23, 1971. 8. GOI, Direktorat Djendral Kehutanan, Direktorat Inrventiorisasi dan Perentjanaan Kehutanan, Report No. 162 (December 1970). 9. Ford Foundation, private information; 10. FAO, Forest Industries Development - MIalaysia, Rome, 1970. 11. Tymothy A. Manring, Gomments on Agreements in the Fields of M- ining and Timrber, 1970. 12. FAO, Unasylva, Vol. 23 (3), No. 9b (1969), Commodity Report, pages 34/39. 13. FAO, Unasylva, Vol. 23 (.), No. 95 (1969), Targets, Policies and Inputs in Forestry, pages 10/1l. 1b. GATT, International Trade Center, The Major MIarkets for Tropical SaTmnwood in JYestern Europe: Geneva, Dec. 1967. -522- 15. Elrick and Lavidge Inc. (Chicago) and the Economist Intelligence Unit, Ltd. (London5, El Nercadoen Norteamerica,_Europa y Japon para Ciertos Productos de Centroamerica: April 1967. 16. Elrick and Lavidge Inc. (Chicago) and the Economist Intelligence Units Ltd. (London%, El IMercado,en EE. UU. para Ciertos Productos de Centroamerica; Febrero 1967. 17. ICAITI, Opaortunity for Installing a Solid ',Tooden Door Plant in Central America, and Opportunity for install' n a Knocked-down Wooden Furniture Plant in Central America, Guatemala, June 1968. 18. ICAITI, Opportunity for Installing a Hardwood Dimension Stock Plant in Central America, Guatemala, June 1908. 19. J. L. Ritchie,,"Prospect.s for Market Pulp Supply and Demand," April 1971, paper presented to the Second Consultation on WKorld Pulp and Paper Demand, Supply and Trade of the FAO Advisory Committee on Pulp and Paper, held in Rome, May 1971. 20. Picop Feasibility Study (Draft), MIanila, July 1969. 21. IZ.RD, Financial and Technical Appraisal, Paper Industries Corporation of the Philippines, December 1969. 22. IFC, Appraisal Report on Industria de Celulose Borregaard, S. A.3, Brazil, April 1971. 23 MMBRD, Appraisal Report No. PA-31a (Second Jengka Triangle Project - Malysia) April 29, 1970. 24. Stadler - Hurter (Consulting engineers), Report on Guayana Pulp & Paper Project; MIontreal, September 1.964. 25. ICAITI, Opportunity for Installing a Parquetry Plant in Central America: Guatemala, June 196b. 26. BID, "Curso de Preparacion y Evaluacion de Proyectos, Estudio de Factibilidad - Tableros de Virutas, tl Bogota, Abril/Julio i968. 27. U.N.I.D.O., Profiles of IL *-.acturinc Establishnents. Industrial Planning and Progr2-=Lng, Saries No. 5, Heu York, 1968. 28. FAQ, A. SThrnitz-LeHanne & F. C. Lynam, "Questions that must be Answered before investing capital in a wsood-based panel operation, presented to Cormittee on Wlood-Based Panel Products, Third Session, Rome, December 1970: FOI:I^P/70 b.1 - Rome, November 1970. 29. Castrans, direct communications. -523- 30. Pulp and Paper International (July 1971). 31. Arne Sundelin AB, Malawi - Paper and PUlp Marketing Survey (UNDP financial study - IBRD executing agency), Nasbypark (Si.reden), April 1971. 32. ECAFE and FAO, Proceedings of the Conference on Pulp and Parer Development_in_Asia and the Far East (held in Tokyo, October 1960): Bangkok, 1962. 33. FAO, Fibreboard and Particle Board, Technical Papers: Rome, 1958. 3b. FAO, Pulp and Paper Prospects in Latin America: New York, 1963. 35. FAO, Plywood and Other Wood-Based Panels: Rome, 1966. 36. FAO/UNECE, Fibreboard and Particle Board, Technical papers sub- mitted to the International Consultation on Insulation Board, Hardboard and Particle Board in Geneva, 1957, Rome, 1958. 37. UNIDO, Excess Capacity - "IMeasurement, Causes and Uses: A Case Study of Selected Industries in Israel" (by Meir Merhar), Rio de Janeiro, March 1969. 38. ICAITI, Study of the Wood Industry in Central Lmerica, Guatemala, June 1965. 39. J. N. Stephenson, Editor, Pulp and Paper M4anufacture, 1McGraw-Hill Book Co., New York, 1950. 40. FAO, European Timber Trends and Prospects 1950-75, New York, 196o. 41. G. S. Witham, MIoden- Pulp and Paper Making, Reinhold Publishing Corp., New York, 1912. '42. Pulp and Paper Manufacture, edited by Ronald G. 11acDonald, McGraw-Hill Book Co., NewT York, 1970. 43. Bank Negara Indonesia (Unit I), Report for the Financial Years 1966/67 and 1969. bb. Bank Indonesia, Indonesian Financial Statistics, lionthly Bul. April 1971. b5. Biro Pusat Statistik, Monthly Statistical Bul., Mlarch 1971. b6. FAO, Yearbooks o; Forest Products, Years 1960 through 1969. 47. Pendapatan Nasional Indonesia 1960-68, Djakarta, 1970. -524- Table 11.18 CONVKRSIONJ FACTORS 1 Ha. = 1 Hectare 2.721 acres 1 sq. mi. = 1 square mile = 2.59 sq. Km. = 259 Ha. 1 m3 = 1 cubic meter = 35.31 cu. ft. = 0.33 cord .1 m3(s) = 1 m3 sawnwood = b2b board feet (BF) 1 standard s.w. = 165 cu. ft. = 1980 BF. 1 BF = 1 board foot = 0.0833 cu. ft. = 0.00236 m3(s) 1 estereo = 1 mn3(r) stacked = 0.75 m 3(r) 1 ton charcoal = 5 m3(r) 1 m3(s) = 1.82 m3(r) (broadleaf) = 1.67 m3(r) (coniferous) 3 1 FT = 1 forest ton = 50 cu. ft. = 1.15 m (r) 1 Hoppus ton = 50 Hoppus cu. ft. = 1.273 forest ton 3 1 standard = 4.672 m3 1 IMBFI = 2.36 m3(s) 1 cord = 2.55 m3(r) of pulpwood (aniother definition is 128 cu. ft. = 3.625 Tn3) 1,000 sq. ft. ¼14" thick =0.59 m3 (plymood) 1,000 sq. fte 1/10" thick . 0.236 m3 (veneer) 1,000 sq. ft. 1/16" thick 0.l1l7 m3 (veneer) Appendix' 11.1 CALCTLATIOII OF POTENTLLL MIAXIfIU4 YIELD OF JtiDONESIAN TIMBE. From prodiction forests: Bases of calculation: -- Area total: 24 million Ha. - Volume standing: 50 m3/Ha (commercial) - Breakage and other waste: 20% - Cutting.cycle: 50 years (an acceptable average between 30 years for a sustained yield managed forest cycle , which will probably never be applied everywhere, and 60 years for normal exploitation as given in other sourcesZ/). The Forestry Directorate-General apparently haF often used a 35-year figure for concession agreements = 2O0000Q x 5o x o.8 = 19,200,000 m3(r) From forests converted to agriculture: Bases of calculation: - Area: 18 million Ha - Volume standing: 60m3/Ha (although some estimates have used ,mich larger volumes per Ha. considerin.g that all the trees must be removed) - Breakage and other waste: 30% (Jincluding wood removed for fuel). l/ Martin R. Reyes, paper on Selective Logging as a Tool for Continuous Philippine Mahogany Production, presented to a cminar on Planning of Forestry and Forests Industries in Tropical Regions, held in Manila, November/December, 1967, organized by FAO and the German T'oundation for Developing Countries: page 1,44 of the report on the Seminar. 2/Ref.l, Page 54 and Ref.2 Page 3. - Time for conversion: 70 years. In theory, the time could be much shorter, as shown by estimates that shift cultivation alone destroys up to 200,000 Ha. annually 3 A period of 36 years has also been estimated -, but the shorter periods entail large migration flows from over-populated Java, where there is little forest land left, to Kalimantan,, Sumatra, and West Irian, where the largest forested areas are. y= 18,000,000 x 60 x 0.7 1 10,800,000 m3(r) 70 Total medium-future potential production 1+ 3mlin3(r) T + T 330 mllion m3r (This potential could be ideally realized, but any realistic projections must be based on only a fraction of this figure..) / Ref.5, Page 25. / Ref.2, Page 3. Appendix 11.2 AREAS, PRODUCTTION TARG2OS AND ItrVRF31-3' M STh1ATZ) FOR APPrDVED ORt DigAFTEZri CONCESSION TEl4BER AG=~r -dC Production Targets E.3timated Investmcnt Average 1973 Page Province Area 000's m3(r) Totals Per unit output Yield (DGF List) 000's Ha. 1969 7 1973 (US $ million) - m3Hr) A 1 East Kalimantan 52 48 60 60 3.2 1a1 148 48 60 3.3 0.43 268 24 30 30 3.3 0.11 78 44 50 50 3.2 0.64 94 30 40 40 3.1 0.42 A 2 14 10 60 lCO 0.2 7.14 200 40 160 200 o.6 1.00 50 10 30 50 0.5 1.00 100 20 100 150 0.1 1.,50 50 20 60 100 1.0 2.00 20 , 5 10 30 0.5 1.50 100 20 60 100 2.0 1.00 10O 20 65 100 2;0 1.00 i2o 10 50 80 1.0 2.00 50 10 30 75 1.0150 35 20 40 60 1.0 150 50 100 180 3.5 1.20 50 20 4o 65 1.0 1.30 100 50 100 150 2.0 1.5c 4o 20 50 8o 1.0 2.00 50 15 40 70 1.0 1.4n 3 60 25 55 95 1.5 . 100 h0 120 200 2.0 2.00 602 300 800 1,200 15.0 1.99 150 Ito 160 250 4.0 1.60 150 50 200 300 3.0 2.00 100 100 160 200 2.5 2.00 50 15 45 75 1.0 1.50 125 35 90 150 3.0 1.20 80 100 160 200 2.5 2.50 A 5 800 100 700 1,600 16.0 2.00 70 30 80 140 1.5 2.00 250 100 250 boo 5.0 1.60 60 20 60 120 1.0 2.00 120 20 ho 80 3.0 0.67 A 6 1,200 200 130 600 235.0 0.50 350 50 160 250 8.o 95 20 . 100 190 2.8 A 7 68 25 70 120 2.5 Sub-7otals 6,212 1,80h 8,000 3143.8 42.97 1.29 B I1 ho 80 140 2.5 1.22 80 15 30 50 4.0 0.62 70 40 80 120 2.5 1-.71 40 20 14 65 1.0 1.62 65 50 110 151 2.0 2.32 45 50 100 150 1.5 3.33 60 25 50 90 1.5 1-50 ho 5 12 22 0.5 0.55 30 15 25 40 1.0 1.33 Sub-Totals 545 260 828 16.5 19-93 1.52 A 2 Southern Kalimantan 20 40 80 80 3.4 4.00 A 115 20 60 100 2.0 O.96 A 6 80 20 100 120 10.0 1.50 270 20 100 200 48.0 0.71; Sub-Totals 485 1co 500 63.h 126.80 1.03 A 1 Central Kalimantan 244 40 45 45 2.0 0.18 A 2 135 50 100 160 2.0 1.18 98 30 50 125 1.5 1.28 200 30 50 150 3.0 0.75 A 3 150 100 200 325 3.0 2.17 200 30 90 250 3.0 1.25 150 50 100 160 3.0 1.07 120 ho 80 140 2.5 1.17 70 5 13 21 0.5 0.30 70 20 40 60 2.0 o.86 A 4 150 100 200 300 3.0 2.00 Sub-Total 1,587 195 1,736 25.5 1!).69 -528- Production Targets ttirmated Investmnent Average 1973 PageProvince Area 000's m3(r) Totals Per unit output Yield (DGr ..st) 000's Ha. - __ 1__1 =17 (US $ million) t/m3(r) , B 100 50 150 200 2.5 2,00 100 - - - 270 60 120 170 3.0 0.63 65 11 27 43 1.5 0.67 80 50 100 200 2.5 2.50 65 10 25 142 2.0 o.65 150 15 50 103 2.0 o.69 Sub-Totals 830 196 758 13.5 17-81 0.91 A 2 Kalimantan Barat 200 100 500 500 10.0 2.50 30 10 20 30 0.3 1.1k A 4 70 15 90 150 1.0 21 200 80 1iO 180 1.0 0.90 170 20 60 100 1.0 0.59 30 15 35 I5 1.0 1.50 AS5 90 15 50 90 1.5 1.00 LaO, 15 30 50 1.0 1.25 Sub-Totals 830 270 1,L!aS 16.8 i4.67 1.38 B 80 40 160 200 1.0 2.50 60 10 ko 60 1.0 1.00 250 100 200 390 5.0 1.56 Sub-Totals 390 150 650 7.0 10-77 1.67 TOTALS - KALIMANTAN Granted 9,114 2,609 11,381 41h9.5 39.50 1.25 Drafted 1,765 606 2,236 37.0 16.55 1.27 10,879 3,275 13,617 486.5 35.73 - 1.25 Atjeh & Sumatra U tara A2 60 ko 80 120 1.5 2.00 A3 70 30 70 110 2.5 1.57 75 30 80 160 2.5 2.13 A4 85 30 75 135 1.5 1.59 A5 60 10 L5 60 1.5 1.00 A6 35 20 60 100 3.2 2.86 A7 100 60 150 250 2.5 2.50 Sub-Totals liB5 220 935 15.2 16.26 1.93 B 50 30 60 100 2.5 2.00 Sub-Totals 50 30 100 2.5 25.00 2.00 Riaa A 2 100 30 50 70 1.0 0.70 100 20 60 100 2.0 1.00 A 3 100 20 60 100 2.5 1 .00 80 20 ko 80 1.5 1.00 100 30 60 100 2.5 1.00 A4 100 50 200 280 1.0 2.33 30 10 35 k0 1.0 1.30 A6 100 20 80 150 0.7 80 20 80 150 1.0 1.87 200 30 110 200 6.0 1.00 100 0 100 1ik0 3.0 1.4o Sub-Totals 1.090 290 1, lo 22.2 15.74 1.29 B 80 50 100 200 1.0 2.50 65 20 LO 65 1.5 1.00 128 50 100 175 3.0 1.37 Sub-2',oIq 273 120 kIlo 1250 1.61 -529- Production Targets Estimate.d Investment Average 1973 Pate Area 000's m3(r) ctaLs Per unit output Yield (DGF List) Province 000ts Ha. I _ 1671 (US / miioi sl(r)m A 3 Sumatra E.arat & B3engkulu 90 50 150 240 2.5 2.67 A 4 35 20 h0 70 1.0 2.00 Sub TotalS 125 70 310 3.5 !.2- 2.1,8 A 2 Sumatra Selatan 55 10 45 70 1.0 1.28 DJi & Laepung A 5 35 10 20 55 8.o 1.57 A 6 100 20 80 150 0.8 i-5o 150 50 150 200 3.0 ' 1.33 76 20 50 80 3.0 2-00 A 7 * 100 25 100 200 2.5 5 80 20 60 100 2.0 1.25 Sub-Totals 596 . 155 855 . - 20.3 23.7h 1-.3 B 100 20 6o 100 2.0 1.00 Sub-Totals 100 20 100 2.0 20.00 1.00 TOTALS - ST1Y'ATRA - Granted 2,296 735 3,510 61.2 17.43 1.53 - Drafted 423 190 640 10.0 15.62 1.51 2,719 925 4,150 71.2 17.16 1.53 A 3 Sulavesi 70 15 50 70 . 1.5 1.00 A 4 125 LO 100 200 2.0 1.60 Sub -Totals 195 55 270 3.5 12.96 1.3' B 60 20 45 10 1.5 1.73 Sub-Tctalz 60- 20 lOb 1.5 1h4A2 1.73 A 1 Maluk- 65 20 40 60 1.5 0.92 A 2 40 10 '0 60 1.0 1.50 A 4 100 50 120 150 2.0 1.50 90 75 '125 200 2.0 2.22 82 25 75 150 2.0 1.83 Sub-Totals 377 180 620 8.5 13.71 1.6L ml D.7W= B 130 SOTAL - OTHER ISLANDS - oranterd 572 235 890 12.0 13.48 2.56 - Drated (except undefined loc.d 60 20 10o 1.5* 1h492 *97 632 255 994 13.5 13.58 1.57 APPENDIX 11.3 TYPICAL LOGGING TERMS IN S)ME IMPORTANT CONCESSIONS Annual agreed log out 'it Conmession Ters3 . _ Unit Yield (000's m3J) Forest- Irn 3/Ha (1) -Minimum (m) Maximum Concessionaire Date Term Area I Tvestnent By the After After . Yrs. 000's Ha. $ million Min. Max. 3rd. Yr. 5.yrs. 5 yrs. d. 1 1 - - - 8 200 korea Development Co. Feb. 2, 1968 20 270 | 32 120 80 2 740 l ealog, Hong Kong May 8, 1968 | 0c 200a n.s. 66 120 6b 300b 550 l .T.C.I. (De Long, USA) July 11, 1968 20d 602e 7.5 87 120 n.S. 1200e 16500 Georgia Pacific Int'l Corp. Aug. 28, 1969 20un 350 62 120 160 50O 960 I d Jleyerhaeuser Int'l Inc.. Dec. 6, 1969 20 95 | ns. 46 88 60 100 190 Id oh0 oriano (Philippines) |Dec. 4, 1969 30 1200(g) 52.7 22 120 200 60O | 3300 Perhutani - IFORECO (Japan) (k) 20J 700 36.6 31 72 445 500 1160 a) Plus 5g000 Ha, of open land for agricultural purposes. The 25q000 Ha. to be chosen from totual 36q900 Ha. survey area b) Round measure of exportable logs c) Can be extended to 40 yrs. d) Can be extendedan insdefinite number of times provided each extension does not leave an unexpired term longer than 20 (or 30) years. e) As amended un Jan. 16, 1969, the original figures having been 400,000 Ha. and 500,000 m3. f) No fixed tera is explicitly mentioned for the production of 500,000 m but from the context it should be the fifth year; all figures are, however, weakened by saying that company will make its best efforts to reach them. g) This area can be reduced to 350,000 Ha. if the concessionaire finds that establishing a pulp and paper plant is not physically or economically feasible. h) During the fifth year, increased to 1,000,000 m3 by the end of the 10th year, and to 2j000,000 m3 by end of 14th year. Page 2 Appendex 11.3 i) It is not specifically mentined, but arises from text of term extensions j) Automatically extended to 30 years upon establishment of pulp and paper industry. Further extensions possible if Ministry of Agriculture thinks them necessary. k) Signature expected before end of 1971 1) Estimated unit yield x concession areas x 0.8 - 35. Unit yield to be calculated using Hoppus system for trees 50 cm id or more at 20 cm above surfaoe (Circular 461/A-l/00 of Feb. 2, 1970). m) Defined as either marketable or exportable logs n) May be extended "if not contrary, to public interest" Regulation No. 21 (1970) o) Not included in agreement bat-based on yields of 120 mn3/Ha n.s. = not specified ., -532- APPP'4DLX 1U4 PNOJ.CTED PROCESSTNG FACILITTIES # SO,'; IMPO1TANT 003NCOSSIONS Sawr:llling Plywood Pulp and/or Paper 1otal Proce,e5ing C.re:esionaire PotCL.tIal Potential Potential J.ai-e cf Aftoer Invcstment % of Log Capacity After Investmjent Capacitr After Investment Capacity After Investment % of Log LO Years ($ million) 2traction 000Is m3(r) Years ($ million) 000's m3(r) Years ($ million) 000's m3(r) Years ($ million) xctraction Y',Is -rA Sealog, Hong long 2 n.s. 1j 25 n.s. n.s. n.s. - - - 5 6.- n.s. n.s. I.T.C.I n.a. 0.8. n.s. n.s. n.s. n.s. n.s. - - - 5 7.5 n.s. n.s. G"ciyia Pacific 3 2.0 20% 70 5 3.0 n.s. - - - n.e. 10.0 0.3. 0.5. W aJ i cer n.s. n.s. n.s. n.s. n.s. n.s. n.s. - - 6 2.8- 6% 60/il1 3 n.3. 13%/16% 50/100 12 34.1 350 tpd 5 1.1 3NC;J 603 Soriano 9 n.e. 17% 150 10 n.s. 150 14 135.0 350 tpd 10 L;o.0 L 55% c3. 12 n.s. 17% 150 13 n.s. 150 16 300 tpd 15 1ls.5 3 0.5 n.Is.. n.a. 6. 1.9 n.s. 9 39.9 Perhutani-I. .;CO 12/ 2/ n.s. n.s. n.s. n.s. n.s. 6 0.5 n.s. n.s. 12-- 0.7 n.. 12- 10.0 1/ Indr.dtry logging :I Between the 11th and 15th. year TI La3ed on tte minimum projected output. Sawnills and plywood alone would use 110% of minimun _/ Based on maximum output (Appendix 11.3) n.s. - not epecified -533' Apprendix 11.5 No. u 461/A-l/2XD/70 Februnry 2, l970 AtWaahmont s 1 (one) Subject i Guide-Line on Implc-- Forwarded to mantatiun of Forestry All Forestry Concession Concess-zn Holders throughout Indo- sia. Copios to I 1. All Governors/Provin- cial Regional Chiefs, 2. All Di:-ectorate Chiefs of General Directorate of Forestry, 3. All Chiefs of Provin- cial Forestry Service, 4. B. P. U. Perhutani. 1. Please be informcd that by means of forestry exploitations, as the material in tho Forcstry Basic Lav;, the way to earn income from, forests in Indonesia fur thc public and the Statc has become widely opened, duc to the likelihood of employing large-scale capital, whe- ther domoztic or foreign. However, should such exploitations bo abus- ed or miscarrxiod oD the operators fail to abido by provisions incor- porated in the aGreements at the moment of acquisition of forostry concessicn, entry of large capital can easily destroy safety or con- servation of our forosts. Emergnnce of this faotor stems frem non application of the sustained yield principles, unde@rlined in Article 13 of the 1967 Forestry Basic Law as the only means of forestry ex- ploitations to be carried out; in the end such mismanagement becomes detrimental to the public and the relevant area. 2. Basis of forestry exploitations originates from a detailed operation- al planning for a curtain period as well as their systematic applica- tion of the rules. These plans actually were promised by the fores- try concession holders in their " 1.greements" vwith the Department of Agriculturo and yot in practice so far no forestry pompanies have substantiated them, although they have long cleared the forests, in- deed, they have repeatedly exported their opcrational products. 3. Through this letter therefore we order forestry concession holders to settle immodiately wvhat had been promised in the Agrcoment and appli- cation letter, namely s a. To drav;-up the anrual operational plan or forest clearance scheme for 1969 and 1970 to ascertain the stipulated target. These plans should have beon confirmed 2 months prior to the start of tree cut- ting campaign. The cutting cycle we temporarily set at 35 years for selective cut, ir. the sense of outting trees exclusively of 50 m-s. or more in diameter (at a height of 20 ems above tho surface roots) with tho factor of 2e,0o grade roduction so that the annual allov:able cut is enuivalent to 1 . a0 x volumc total ef f 50 cmsand above; b. Start immcdiately drafting of the Five Year Operational Plan, namely, from 1969 to 1973 (inclusive), stating order of stops (including: de- signation of forest sections to be cloarud in the next 5 years, con- struction of infra-structuro, employment of labor force, heavy equip- ment for loggin.g, ate) to assuro case of targottod production. Those plans should have been confirmed one year after issuance of the decroo granting the for-stry ccnceosion; c. Start immediately with the Forcstry Mxplaitation Plan or Timber Man- agement Mlan, enecmpassins? all activities in thc- whole fbrostry con- cessiLn area for tho entire duration of the cycle or rotation to ac- hiovo tho sustained grovth prinoiFles. This plan within a period of throo rears since issuanco ot the d.lcrL *'n granting forestry ccncc.e- sion, wo shculdl have o.r.ffin.icd. -534- 4. Pending subsequent inatmactions on drawing up of tho aforementionad operational plans, tomporLrily employ the outlina attached to thi3 lotter. Furthermoro, temporarily we stipulato that the annual plan be oonfirmed by Chiof of Provincial Forestry searvice, the Five Year Plan bo confirned by tho Chief of the Forost :y Exploitation Director- ato, whilc theo Porestry Exploitation Plan, we oursclves confirm. 5. It is necessary for us to emphasize that sanctions vwhich threaten holders of forestry concessions at the moment of acquisition of such right arc as follows i a. Rcvocation of forostry concession t a. 1. If thc holder itself does not carry out forestry exploitation; a. 2. If tho holder fails to pay license fee and royalty; a. 3. If thc holder does not carry out forest care and forest securi- ty (oonsisting of: re-forestation, prevention-of erosion, flood and fire, maintenance of springs, naturc protection, hunting control). a. 4. If tho holders do not start operations positively and seriously at the latest 180 days sincc issuanc' of decree on forestry con- cessicn. b. Reducticn of arcal e:ctent b.l. If the holder fails to buildi the neoded infrastructuro to dis- char&e forestry exploitations; b. 2. If the holder does not f;;und a wood processing industry (at the very lea3t to install a saw-mill to- saw unexported stumps). b. 3. If the holdor doesnot oporatc according to the aforo-mentioned operatirnal plans. 6. We vish to emphasize again that forestry sxpkcitationa are not an easy and simple matter, not forestry exp-oitati.n3 exclusively, but cornplex oporatiAns, not easy ta be studied and understood by non- specialists but the complexity is highly essential to assure offi- cient forest utilization. .'ithout plan basod on f:rcstry exploita- tion knowledgc, the target outline at the moaent of applicaticn of forestry concesoion cannot be achieved or be asgortained as its achievement. 7. Finally, we hopo the Gcvornors, Chiefs of Pror ncial Forestry Servico and Chief of F¢zrectry Expluitation Directorato to watch steps or acti- vities of forestry concession holders on matters as stated above, for our common intores'; namely; to distribute forostry products for publio prosperity and for the safety or rcstorati..n of forests whose lumber are cut on a large scale. ','o have the obligatiun to leavo to the future goneratio.ns our healthy forosts of high econcmic value. DIRECTOR 9EVERAL OF FORESTRY Signed, - (SOEWIJARVO). OUTLIIJE OF LOGGING PLThMTING. A. ONE YEAR LOGGING PLAT. I. Target of production. 1. Cutting areas with estimated production in m3 2. Volumo per troe specios. II. Standing Stock Survey. III. Road Locaticn anid Construction in the Cuttinii Areas. 1.Constructed, 2. To be constructod. 3. Volume in m3 per ICk, road. IV. Operatinn Plan. 1. Base oamp. 2. Equiremcnt. 3. L a o u r. 4. Scidding, ar.d Yarding. 5. Hauling. 6. Long Yard. V. Long Pond. VI. E x p o r t. VII. Sawmilling. VIII. Statisticts and Location map of the Cuttin- Area and tha Roadsis bo Built. Note: Tho cutting cycle i3 for the being fixed at 35 year hence the yearly outting area is aproximatc 1/35 of the whole con- sossion area with 1/35 of the total, volueno f tho standing stock. B. FIVE YflAR LOGGING PLAIT The same outlinc as for the "One Year Logging Plan" C. TIMBER IAUTAG CT PLAN I. Summary of Plan. 1. Resources data and allowablo cut. 2. a. Permanent forest. b. Disposiblo forost. Volumo and classes of Tinter spccios. 3. SilviAJltural system approved. to be practiced. II. lanagement Plan. 1. Statement of General Policy. 2. Land Description. A. Londtion. B. Boundery of liconso aroa C. Sub Boundorics. a. Blocks. b. Compartment. D. Relation of wvorking circle to othor liconse areas. 3. Forest dcscription of concession area, of each block and of cach ocmpartmEnt. A. Arens by types and by sizo classes. B. Stocking and thrift. 4. Management objectives. A. Business and community support. B. Silvioultural treatment in unavena-ed Diptcrocarp forest. 5. Coordinatir,n with other uses (vater supp,ly and controll Soil conoervati.J.n grnzing; wildlife and recroation; etc). 6. Regulatior.. A. Crovrth and mortality. B. Period of adjustmont. C. Cutting cycle. D. Grazin- stock objectives. a. Residual stands. b. Puturo crop from peed reproductisn. E. Calculati,;n of allowa'blo Cut. F. Troe mazrking rulos. 7. Plan of oxtraction. A. Logging plan. B. Logfing mcthz.o and eqaipments (SOlective loCging, modified seloctive log,,in;, leaving of seed 'rocs). 8. Utilization policy% A. Disposition of ot. 1. For manufacturir, plants of liacnsos. 2. For other plants or dooXestic uso. 3. For export. D. 1t$nimum size of logs and quality roquirements. 9. Forost development and proteoction. A. Transportation; road constr&ztion and maintenance. 3. Timber stand improvement. C; rantlin. D. Control of forest destruction, illegal aoupation and. tirnber trospa3s, Protection moasurce. a. Concessi9n guard foroo b. Resottlomont e. Other measures. E. Insect and dosease control, if sori:.ue in the looality. 10. Ooopornti'in. A. With local, district and rogional forestry office. 3. With municipality and provinco. C. With private lando;%nera. 11. Dato revision is proposed (at least after 10 yoars). 12. Mamnagement plan maintenanoo. I S!Aporting data (i..hioh bear directly on plan). i. .Hi story. 2, Physiegraph;y; (topogr)aphy soil, climat-e). 3, Econom;+ (population, indiUstries, trade, eto,) 4, Detailcd forest data by blocks, (fron timbor inventory data)- if oomjlate invontory detail not yet Avoilable, at least data from area planneo gsr five yoar operaet,c%ay be used) A. Permanent or pub9io forest. a. Virgin forost operable. 1. Stand and stock tablos, 2. Reproduction. 3. Total number of troes and r.umo by block, of 10 am diameotr classes from 50 am and up, b. Logged ov-;. 1. Siso olass distributioL of healthy -h4duals 29 om ma4 over diameter. 2, Reprodutticn. 3* Crovwth mcr4a ity and predleod yie4l for the sooond cutting 3 l, licnablo and disposable forcA. 5* Regulation calculations. 6. Control records. 7# List of refcroncos. 8. Maps. A. Wholo liconse area sho;wing blocks .-d oompartments aroas in ha and total exploitablo volume, boundery line of permanent forest, logged ovor and non timberrod areas, o tc. B. Lagging plpn, showing transportati':n system. C. Timber stand, icmprovecent and dlanting. 9. Portinonts illustration (optional). A. Grnphs or curves on growth and sizo class distribution. B. Pioturen. Appendix 11.6 rc-aR.a, 0il' sT;7Y.';) OF F rflJI0:I; 01 1 M'TH.'; DUIUTT OF FOICST LICO CE .:Ii.-;'2: CF '-R ,.; ju Consic'erinc ', 'that to ac.lorŽ1'., tL.- .Volcsb t,:frtdl:in rwid forcst rovc t. tl.d:inw, ' Jrtionola ccoriom:ic X2.z?Lopr..mt. it ;ls n:c-scs;y to c..:iAia l; roor,lor tho cll,i,Acticins otl b. Th2-t* for tho r-''.?.A . .ct: ., r-, z2rc1 : c - a-j to .i- thu c".!' o-. of Yor-ost Liconec Foo and RoycIlti, throiEh- out', T'l,:..:;5, With a viwr to. 1. Gov.Joi'nor.t 'J. atiNo . Uo, 22 Yo3r 19 67 (O,G. yo,= 3.967 llo0 36) ro Forost -inzcnce Foc and' ficyp'tics5. cticle 5; 20 lc; ,:., 5 yua.va I° ro' 3:.c: o rXw1ronc On Forcstr'j; 30 1L tV 11C., yrczr 1965 ro .onpoixt on R.CPicnmL! /.ctiais- A. Docrou o.l' ,`;i.ictor of JCrin1otlt.O- 10,4 Xp 31/1.2/3.966; 50 b;2ocou of. :: iSGar of;.iltw2 iQ, Ku; 1 /3/196.. L S D 2 C I b E D: o0 1., do1rn. ilon tYlt; ; .oCt of Forust LicenCe Fcc- cnzi 1,ylti.z, c.Z folo.'c;; FITRMTL. : o2 iO.Cvrs of Favest undortnkinn, Right sht.,A1 bo chargcd with il-, .., 1!, -;:6yaltio,; as r-f,rrzad tC. iti tho c.-idi; : o.. thi.s K. ra b. EolJor's of Forost F7rodcl.; Ctc CCtin tg ancl all forC-st a-d to b: 4.eA sl I ba chargad wil-t,h Fri'tics .od to in th' .Onr-.ad- of this Du.ro, .'C'T... . . or-dy4r.t uv.''ly n.- knry , this i cru s~hnll be inaort- ,el in t.ha WV&. iKG.Uu. .f f'ha ' tx'io I ; cf Irxdonesia. THIRDLY -1.: T:1.s Duou :, frr t;cti.vo c.s fx-on t hc c - .tnd.. chc; ti iolnng. S..:s;:tjion J ir. Djckvnr;tn on . 'r,,r 20, )18 ,- 7w. . - IITCTt , CT , I h.: c: 1' r hi p, U..,r. r .I5 Io Iat i,'' r. :irt p, 't:r' .'. tP1ctnce lir:nhtF pin.o"( '; thes '-\ 'oth.'J 4 i-cor.ca Ri"r;t. II. R 0 Y 1 L T I .S Kins / 'r:'Oll 'Poxi.mancnt .Lyaltics in US. $./i3. DJa-ti (T-2ct40liiri-rnnCli:,) .' 7.00 ,l,.s I Bel2aWDcnri L&uiti (Shioroc d 'SI"Ci-cil upn) B angldrai ( Shocroc aLnr..vifool ic) Mcrbact (InmAtsla =,:p) Ulin (Eusic1.:: ]osi cr;:ri) US, $t 3.00 Pooti (O..o-r:pica isp) Lcra (ric-t,;si.L.ros spp) Mort'jol^,/:" .mi/al. .(ii8: sp c ) 3e1 -r.zt (3S.u U..... ',;) US. $. 2, 50 AurlaX (T r,I-2t.rista .]-sa " TTTKicms,u s) or sp ) Mi.da.n sp.. p - M ( j.uo s 0p( Vocan -.--; !-LTr us, 1. C , stre:s(,t°wl,u* spp US;7, $. 150 :i*j OC. -,.,, If ,C :.,, *,zlr w" .tc!-:-l ...... sr- S s G -539- Apoeuluix 1I1.7 ROUt0D WOOD PRODUCTION (00O's o1' m3(r) S.awloe Total Industrial Puelwoed Coniforoua !Ion-conif.-rous Coniferous Non-coni erous Coniferoub 7 -- 196 I967 1967 39ot T169e7 19T5 I>c72 World 5]1,767 531,734 190,277 193,303 850,226 869,530 314,590 319,317 155,878 156,660 734,693 ?710,319 Asa 46,109 44,401 55,604 59,691 61,354 62,015 70,970 82,325 55,999 196,363 20,1563 L-,r.- a 76 4,065 .,500 76 5,563 - 79,232 - a-h and Sarwak 1 1 9,273 10,125 1 1 9,329 10,125 - 65 - s-, Uliyala 14 15 4,185 5,o64 14 15 4,303 5,161 505 6:9 rca 230 250 9,954 11,087 230 250 9,954 11,087 -20 5 ---,30 2576 - - 2,192,582 2,166 2,132 6827377 25,09 6,887 7, 183 33,316 30,119 18,097 28,050 53 52 7,.05 S,:S1 ., - 1,125 4,801 1,137 5,562 35 12,725 P- - 763 -- 884. 6,1.25- r.atnLand 12,400 12,700 7,600 7,800 23,010 23,550 14,090 IL,160 66,cco 72C200 7aL Taiwan 643 670 5 60 723 760 338 358 210- 213 EJro Kng - - - - --- Korea- 8-,z 9,53a 8,000 8,220 9,900 10,530 10,050 10,320 10,500 11,000 129,500 131,-2 0 Lustralia 1,703 1,612 7,1"6 7,452 2,183 9,084 9,145 9,179 453 453 2, 670 2,553 .ew Zealand 4,7no 5,352 107 116 6,151 . 6,754 139 136 , 57 57 Anpendix 11.8 PRODUCTION OF SANWOOD AND PANtLS * 'articleboard and Coniferotis Non-coniferous Veneer Plywood rclerooard 1967 1968 1967 l968 1967 196t 1967 1965 1967 =9ca World 289,84h 301,293 87,665 87,625 401 449 26,348 28,060 13,529 15,628 Asia 40 492,38 28008352 532 A si41,123 2h,O82 24,861 5,455 6,812 876 941 Indcresia ..6 1,765 1 1 Mia] aysia - Sabah and Sarawak - 799 713 12 15 3 4 - - - West Malaysia 17 54 1,709 2,000 55 100 1 1 Philipoines 110 120 1,189 1,022 225 267 285 299 52 Thailland - - 1,210 1 340 7 8 28 31 6 Japan 30,139 30,940 7,867 8,076 151 3,778 4,742 501 566 India 680 710 112 21 Pa l: is tan - - 1416 - - 5 3 China, mainland 7,700 8,000 4r800 5,000 120 130 130 h4O China, Taiwan 390 4o0 152 164 1 2 33h 390 55 Hong Kong Si.napore - - 528 642 76 56 - Korea 618 656 - - 41o 703 20 21 Brazil 3,618 3,900 3,OCO 3,100 292 77 148 100 1145 Australia 768 707 2,451 2,472 29 98 100 262 291 New Zealand 1,539 1,673 54 57 7 18 21 43 51 Appendix il.9 TABLE OF MATERIALS FLOW VARIABLES TIMBER BASED INDUSTRIAL COMFLEX 3 F - Merchantable sawlog: and peeler logs = 1000 m (r) 3 F - Primary waste = x F 0.45 x 1000 - 450m (r) 2 2 1 F - Pulpwood=xF = 0.2 x 1000 200m (r) 31 1 11 W x (F + F + F ) x (F + F )+ x F 1 11 2 3 1 1 3 1 2 = 0.035 x 1650 = 57.7 m.t. 3 A Total to yard = F + F + F - W 1650 ra (r) 1 2 3 1 (Bark is not counted in the round volumetric measure). 3 A F - 1000 m (r) 2 1 3 A =F + F =650 m (r) 3 2 3 3 L = Peeler logs = 450 m (r) 1 3 L = Sawlogs = 300 m (r) 2 3 3 =Sale of' logs (mainly f or export) A -L -L 250 m (r) 1 2 1 2 3 P - Veneer and plywood production = x L - 0.S x 450 = 225m 1 41 - 381 M sq.ft. (¼4" basis). 3 P Sa'wnwood production = x L = 0.575 x 300 = 172.5m (s) 2 S2 -5L2- - ii - W = "Solid" or "chipping" residues from sawmilling x. P = 2 3 62 - 0.32 x 172.5 = 55.1 m 3 W - "Solid" residues from plywood plant - x,P1 0.35 x 225 - 78.7m 3 W = Sawust and other "non-chipping" residues from saumilling = L - P - W 4 2 2 2 3 = 300 - 17?C5 - 55.1 - 72.4 m W = Sawdust, etc. from plywood plant TL - P - W 5 3 1 1 3 = 450 - 225 - 78.7 = 14J6.3m P - Production of joinery, doors and other wood elements - x (B + B + B ) 3 . 8 1 2 3 3 - 0.701 (2.8 + 3.5 + 2.7) - 6.3m 3 S = Sales of Joineryr, doors and other elements = P = 6.3m 9 3 W - Sawdust and other waste from wood elements plant = B + B + B - P = 6 3 1 2 3 3 = 9.0 - 6.3 = 2.7m B - 300 (1000 daily) x 2 x 8 x 2 = 9600 sq. ft (1/8 basis) 4 )4800 sq. ft. ¼" 1 3 - 2.8 m B = "Solid" residues from plywood plant fed to wood elem-ents plant = 2 3. = 2.7m (estimate) B - 2 x 1/6 x (2 x 8 + 3 x 2) x 200 (670 daily) 1467 BF 3.462m3 3 = 3.5m3 S - Sales of veneer and plywood 2 P B = 225 2.8 = 222.2m3 = 376.6 sq. ft. 2 1 1 (¼" basis) 9 S - Sales of sawnwood P - B B 172.5 35 15.0 154.0 in3(s) 3 B W -B =78.7 -2.7 =76.0m 4 3 2 C Primary waste and pulpwood diverted to parquet blocks plant -x P - B 1.783 x 30 15.0 - 38.4m3 9. 14 5 P = ?roduction of parquet blocks 30.0m3 4 B = 15.2m3 (estimate) S S = P 30.0m3 1414 3 W = Fawist waste from parquet plant = x P = 0.2 x 30.0 = 6.0m 6 10 14 C = A - C ' D50.o - 38.14 611.6om3 2 3 1 W ='thipping" waste from parquet plant C + B - P - W = 38.4 + 15.0 7 .1 5 14 6 3 - 30.0 - 6.o = 17.4m C C W w + W +611.6 + 55.1 + 17.14 + 76.0= 760.1m3 3 2 2 7 8 w B 8 4 W Sawdust from chipping mills = x C 0.05 x 760.1 = 38.0m3 9 11 3 = Chip production - C - W , 760.1 - 38.3 = 722 .1m3 5 3 9 -iv- Di = Chip feed to pulp mill (m3)P -D 722.1- 7.3 - 644.8 m3 5l D2 - Chip feed to chipwood plant = x12P 6 1.289 x 60.0 -77.3 m P66 P6- Production of chipboard 3 60.0 m3 S6 = P6 Wlo Waste from chipboard manufacture D2- P6 = 17.3 m3 P7 = UnbleFached pulp production (m.t.) x 3-D1 0.22 x 644.8 145.1 met. S8 = Sales of paper, total S + S = 30.0 + 48.o 78.0 m.t. 89 10 S7 Sales of bleached pulp 60.0 m.t. S5 - Sales of bleached paper - 30.0 m.t. Slo = Sales of unbleached kraft paper and conta±iierboard = S11 + S12 48.0 m.t. Sl= Sales of kraft paper and linerboard = 29.5 + 0.6 x 18.5 = 40.6 n1.t. S'11 = Sales of kraft sack paper 5 29.5 m.t. S'12 Sales of containerboard - 18.5 m.t. -5L5- -v - S - Sales of corrugating medium - 0.4 x 18.5 = 7.4 m.t. 12 F - Feed of purchased unbleached softwood long-fiber pulp to paper mill m x S -0.27 x 40.6 - 10.9 m.t. 1411 D - Feed of own unbleached pulp to paper mill 4 =x S - F - 1.07 x 48.0 - 10.9=Sl -l0.9 =40.5 m.t. 15 10 5 D = Feed of bleached pulp from own mill x S - F =0.88 x 30 -0.2 D 5 16 9 6 5 - 26.4 + 1.2 - 22.0 m.t. F = Feed of purchased bleachedpulp x D - 0.2 l - 4.4 m.t. 6 19 5 5 P = Production of bleached pulp = D + x S = 22.0 + 1.01 x .60.0 - 82.6 9 5 18 7 D = Feed of own unbleached pulp to bleaching plant = x P = 1.1 x 82.6 3 17 9 = 90.9m.t. D = Surplus unbleached pulp P - D - D = 145.1 - 90.9 140.5 13.7 m.t. 6 7 3 4 S = Sales of unbleached pulp D x = 13.5 m.t. 5 6 18 1 F = Binding agents for particle board manufacture x D 0.09 x 77.3 x 0.7 8 21 2 - 14870 kg F - Binding agents and other chemicals for veneer azid plywood production 7 2x0 20. -5L- F Chemical feed to bleaching plant a 9 F - Chemical feed to paper mill 10 F - Chemical feed to kraft pulp mill 311 Technical Coefficients for Materials Flow Tables x o45 (1) - III pt.29 2 2(L) - p.61 = 0.16 (1) - III p.29 3 0.20 Adopted x + x 1.00 (11) - p.61 2 3 3 3 x - 0.06L4m /m (1) - Ill p.29 3 xi = 225 lbs. dry bark/cord pulpwood = 4.0 kg. dry/m (r) (12) p.140 = 1225 lbs. 80% wet bark/cord pulpwood 3 x = 0.035 t.m./m (r) (dry basis) Adopted x - o.45 - o.50 (13) p.112 4 - 0.50 (1) - L. p.29 = o.45 - 0.52 (2) - 110 - 60000 m 4" sq. ft./40 580 timber tons = - 35 400 m3/C68U(0 m3 0.62 (3) - An 24 = o.5o Adopted x = 0.617 (3) - An. 24 ° .50 (1) - III p.29 o o.563/.632 (European sawailling industry) (13) - p.95 - 1/182 - o.55 (6) - po2S 0 0t,.575 Adopted x - o0. (1)- III p.29 6 = 0.388 (13) - p.94 - 0.215 (8) - p.l7 0. 32 Adopted X6 = 0.35 Adopted x 0 Q.04 (1) - III p.29 7 x - (1 0.299) 0.701 (8) - p.364 8 x 7.4/4.15 1.783 (7) - p.12 9 x 0.2 (estimated) 10 x =o.o5 Adopted 11 = o.o5/o.o6 (18) - p.117 x 1 (1 - 0.224) 1.289 (8) - p.248 12 9 x 1 4 (1.72 cords chips/ton wood pulp) = 1/4.39 0.228 (l) - p.49 13 1 /(4.8= 0.208 (6) - p.211 -1 (6.4/1.6) 0 0.25 (14) - p.20 -0.225 Adopted x = 0.27 (1) - p.49 14. - 0.31 (14) - Ap. 5-6 = 0.267 (15) - p.15 - 0.27 Adopted x a 1.07 (1) - p.49 15 1.04 (14)- Ap. 5 1.07 Adopted x - 0.257 (14) - Ap. 5 16 0. 2 Adopted x = 1.10 (1)- p.49 17 - 1.094 (14) - Ap. 5 - 1.10 Adopted -iv- x 8 1.01 ,(14s) - iAp. 5 x -0.11 (05) - p.16 19 - 0.257 (14) - Ap. 5 - 5 -0.20 Adopted x - 0.08/0.10 (17) - Paper 3.7 p.1 20 INDUSTRIAL TIMBER INDUSTRIES COMPLEX C.RAPH NO. Il.rl FLOW SHEET - POeler & Sowlosq ALL FIGURES IN 000'5 OF iCoo m3(.) UNITS SHOWS PER YEAR PrimotyVluste 1650 m3(r) --- P50 Wn3(r) 1 POSSIBLE FUTURE PLANTS 200 m3(,) B.rks ord S..duit 57.Zr .t. A iCS\JNG AN BAR RING 1 ~38.o.13 . . POWER HOGGSAND LOG Pulpwood WASTE Pulpwood & W.teo CHIPPER PLANT -FUEL SiLDRAG YARD 650.01011.63( STOAGE 760.1m3(r) Y EILLS i 5-0 .3,. 7i .1Z3.3;1 SURNITt S PP t L------I 7 PLA il1 .~- ~ -] -| -X IBRO - 6101 CHAPTER XII THE MDTEFtAL IIIDUSTRY 12.1 Mineral resources of Indonesia are far from being exten- sively exploited. MIost of the present production comes from deposits -which have been Inown for over 50 years, others have yet to be de- veloped. Under the present minera1 development progra2m, many of these deposits have been taken up by foreign companies, and plans fopr heir development are under wJay. To date, two new- mineral discoveries have reportedly been made (INCOts low grade sulfide ore body and Kennecott ore body). TWthin the next five years, fqreign investment in mineral development iwill amouuit to an estimated i750 million. Earnings from mineral exports are expected to double wqithin the next ten years. 12.2 Forei-gn technological and financial ability as w7ell as pro- prietory "1know how" are needed to develop some of the complex mineral deposits. In these as well as other mineral deposits, the best return on inxi'estinent is in the sale of the mineral. Although most oL the existing agreements are called "Contract of r'Jo..-k" they are essentially 'tLease" type wherein the Government receives only royalty and tax revenue. Therefore, in the interest of rec6iving the largest return fror' its natural resources, the Government may wish to review its policy of agreements and consider other types of contracts such as "Participation" or "Partnership," or a Urue "Contract of WHork" w,hereby sharinr some of the financial responsibility, or financing of a project, the Government will receive a greater return from its natuural resources. The.se points are developed later in this chapter. 12.3 The discussion starts wiith a consideration of the operation of the state enterprises in tVl.e mineral field; certain problems are identified and suggestions are made for improvements and for additional assistance. Special attention is then directed to the potential for development of coal at Bukit Asam., and a number of alternatives are briefly presented. Finally, an analysis of the 0mbilin coal project is.undertaken and present plans for the contract of work and for the development of the projec, are assessed. It i,s suggested that an alternative capital development plan is likely to be superior to the one now contemplated. TIM' I.rMrTI±G MiD THE OPFATIOITS OF P. iT. TA:IBAiCG TETLAH 12.) Tin mining perhaps has the longest 1- stoioy in the cowutry. Since 1816 tin has been mined on the island of B,angka. Today, tin is being mined ons'-ore as wrell as offshore on the islands of Ba-ngka, Bilitung, and Singkep. Tirma has a tota'al offshore concession area of 33,000 square kilometers. The present tin production comes from about -553- 130 workings (both onshore and offshore) from the islands of' Ban-Iga, Bilitung, and Singkep. Offshore, various size dredges are used, and they account for the majority of prodvlction. Land operations include open-pit and hydraulic mining of surface and near surface alluvial placer type deposits. Small amounts of primary ore are being mined. Exploration is underway to evaluate the feasibility of mini:Lig the lower-grade, primary deposits. Production and Costs 12.5 There are a total of 34 sea ;and land dredges ranging in capacity from 5 to 18 cubic feet. Their ages range from 1925 to 1970. Most of the offshore dredges are of the 1b,to 18 cubic feet capacity. The maximum minig depth of the dredges is 4O meters, and this can only be done witch the 18 cubic foot dredge. The smaller dredges can only mine to a depth of 30 meters. Dredges account for 60 percent of the production, and the land operations account for the remaining L0 percent. Production costs of dredging are about $0.18 per cubic meter and hydraulic mining costs about $0.67 per cubic meter. The ore is processed on the dredges by washing followsed by three stages of jig- ging. The concentrate, containing 50 percent tin, is transported to the island for further concentration at central washing plants where tabling, magnetic, and hiigh-intensity separators produce a 68-72 percent tin concentrate. The ore dredged contains about 0.3 kilo- grams of tin per cubic meter. It ranges in size from b8 mesh to about 200. Recovery of tin ore is only up to 150 mesh, aed the remainder is lost in slimes. An estimated 20 percent of the contained tin in the ore is lost in the slimes (-150 mesh). At present there is a study underwqay to improve the recovery and cut dowzn on the loss of tin in the slimes. 12.6 Timah estim,ates that it w,ill produce 19,552,000 kilos of tin metal in 1971. T-n 1970 Timn-i had 28,O00 people on its payroll, most of whom were laborers whose average iTage was about '$,1 per day. Hotwever, there are wrelfare benefits such as family allowjrances, food, fuel, housing allowiances, etc.., the cost of which wrell exceeds the $1 a day wTage. 12.7 Currently, Timai is un;ergoing a large exEaploration program to locate and evaluate new offshore tin reserves. The aim of this ex- ploration program is to establish proven offshore ore reserves until the year 2000. The exploration program, which started in April, 1970, will take an estimated eight yea-rs to complete. The total cosu of this exploration progran is expected to be 415.7 milliorn; 8;.6 million wll be financed by Tima4h and $1.1 million throu-h technical aid of the Dutch Government. The Dutch firm of Sesco N. V., Coastal Engtieering Survey Consultants has been contracted to do the initial e:ploration. 4. 55 Table 12.1 Tin Production i-n 1967-1970 (Kilograms of Tin ietal) Source of Ore 1967 1968 1969 1970 Bangka- Island. Dredges 3,918,700 b,980,100 b,579,50o 5,223,500 Hydraulic mining 3,1466,500 b,321,900 5,456,o0o 5,2)19,3700 Primary ore 375,100 502, 000 328,000 310,0000 Dismantable dredges ) 67,900 555,700 558, 700 616,700 Slag (recirculated) 270,600 890 ,100 873,900 827,300 I'lscellaneous 163 900 b39,100 98k1200 902 000 Subtotal -6,623700 Il,6b3b,900 12 ,273,300 1 Bilitu-ng Dredges 3,289,935 2,889,888 2,880,865 3,169,208 Hydraulic mining 1,043,027 1,194,699 1,2795L1 1 ,334,355 Dism.atable dredges 21,611 70°,555 53,20L 93,9911 lIscellnneous 15k, 258 k53525 b 3L,52 u 515,1',G Subtothl ' !i0Oo , 1 l. 605,oo7 L 37 - 5,113,023 Sinkoep Dredges 363,582 275,654 1128,7i 77Mi,9L16 hydrauli c ra niunLg 276,802 279,122 363,061 b03,935 liascelo3neous 15,127 Ll,760 - 321,655 - 171,856 Subtot.il - 5 11 5$?,530 1,112,990 1,353,737 TOTAL 13,827,072 16,89b,103 18,03b,b28 19,600,360 The exploration program t'ill be done in four major steps, reconnaissance surveys, scout surveys, detail survey, and drilling for reserves. The 33,000 square kilometers of offshore concession will be delineated into areas of possible interest, special interest, and those deemed most promisinge Drilling will be used to evaluate these areas and to deter- mane the extent of ore reserves. About 3,000 drill holes are expected to be completed during the entire project, 12.8 The cut-off grade for offshore reserves is 0.2 kilogrVams of tin per cubic meter of ore and 0.3 kilograms per cubic meter oi ore for the land deposits. Based on these grades, Timai has suffi- cient proven reserves for the next twjenty years at the current level of production. Reserves are reported on the basis of contained tin, not on the volume of ore. The 1969 reserves were as follows: Possible Plus Proven Ore Reserves, 170 (metric tons of tin) Bangka Island 375,000 Bilit,ung Island 170,000 Singkep 23,000 568, 000 In 1970 an additional 30,000 metric tons of tin were added to the reserves, and 19,000 tons w,ere mined; thus, the current reserves of possible and proven ore is 579,000 metiric tons of tin. .4n estimcat,ed 60 percent of this is proven ore. 12.9 The three main mining areas of Bangkac, BiLitung and Singkep are managed independently of each other. Therefore, the Djakarta oflfice receives three sets of production costs. These are adjusted for acccunting purposes. There is insufficient information on hand to account for the rationale of the cost figure adjustment by the Djakarta office; howsever, the adjustment of these costs has a significant impact on the reported profit and t,axes. Direct and Indirect MIining Production Costs As Reported by the Field Operations (1970) Banglca Bilitung Singkep General.Costl/ $ li,952,OOO $l2,O5,OO $3,337,000 1220,3311,000 Hydraulic IMining 5,ib8,ooo 2,710,000 550000-- Dredging 2/ 1,107,000 3,739,000 1,062,Q00--L 18,77L,OO0 Other nines 3/ 7l1),000 Sl,l000 203,000--' Depreciation 5,0b3,000 279,000 555.2000 5,8772000 V/ $19,964 ,000 $19.,31l,000 $5,707,000 i'41i,985,000 5/ 12.10 In their end of the year statement, Djakarta adjusted the field operations direct and indirect mining production costs to $23,998,000 6/, and added $10,735,000 for other oporational costs which were as follo-ts: 1/ Includes direct and indirect cost of field management, personnel, socil allowiances, exploration, telephone, travel, road buildin ½, ,irarehouse, electrical costs, transportation oL ore, etc., 2/ Includes dismountable dredges. 3/ includes contractors. 1/ Depreciation taken by field offices. 5/ 17cchange rates used: 1968: 258 Rupiah tuo $l1 1969: 328 tiipi&lh to $1 1970: 382 Rupiah to $1 These rates are based on cost data froin Timahx where Rupiah fir12res iere converted to dollars. Some differencc-s may result due to rounding. 6/ This a.ount includes the depreciation schodule set up byr Dja2'iarta of :L ,590,000 for Ban-ka, <'2,392,,000 for Bilitung, and 0603,0o0 for Singkep. Export tax .6,507 000 General sa-les tax 1/ 2169,000 Djakarta operating costs 915,000 Smelting costs 2/ 898,000 Local tax 202,000 *Miscellaneous bb,000 Total 410,7335000 Including mining costs, and other indirect operational e:zpenses, Timah reported a total production cost of b43,733,000 in 1970. 12.11 The difference betw*een the field,oneration costs and Djakarta adjusted costs is in excess of $10 million. Since analysis of costs received from Timah ;-ere not made until after the ITission wras com,pleted, no reasonable explanation can be given for such a large variation. If the field operation oosts are valid, the striking point is the large indirect cost as contraasted to direct mining cost. This condition is incongruous with normal mining operations .,here general or indirect costs are usually less than one-third of direct mining costs. 12.12 I-ost of the difficulties in tin smelting operations are caused by the rebellious nature of highly heated tin metal. In as much as the smelter has only one ore to deal with, the metallurg-y of tin should be comparatively simple. Its reduction is generally accomplished by the use of carbonaceous materials. However, at temper- atures of 12000 to 13000 C. severa-l problems occur: oxides of other mebals that may be present are also reduced, these in turn may produce troublesome tin alloys, and unless carefully regulated, furnace linings are attached. Siliceous acid linings cause tin silicates to be formed; basic linings of lime or magnesia result in losses as stanniates, and a consLderable earmount of tin inva-riably combines with silica in the flux, and goes into the s' ag if an acid slag is used. If basi c slag is used, the tin oxide w ill act as acid and also enter the slag. Tin in the slags may- run 10 to 25 percent tin. The slag iwith high tin cont,ent (10-25 oercent) is recycled into.the same or anot'her furnace for the recovery of any addit,ional tin. I-n addition, at elevated temrmeratures ttin is more fluid than mercury is at ordinary temperatures, mnd it escapes into the most minute openings as well as soaking into the porous refractory lining,,. Although there are a number of s-melt- ing processes, the most corny-entional w.ay of smelting tin is in revcrberatuor 1/ Includes transportation and toll smelting clharges at Panang. 2/ Includes depreciation of 4$530,000. furnaces followred by refining through heat reatment or en electrolytic process. The heat treatment is the most widely used. 12.13 The Tinah smelter is a departure from the conventional type in that instead of reverberatory slhaft furnaces, they have a rotating furnace. The initial design capacity of the smelter ;ras for 2.5,o00 metric tons of metal. Current indications are that, it has a maximum,capacity of only 13,500 metric tons of metacl. T'he smelter produced 5,994 metric tons of metcal in 1969, and 5,190 metric tons in 1970. Smelting costs per kilo of metal produced in 1969 T-ere 0.22 cents and in 1970 they were 0.23 cents. Tlhis is based on operating costs wli-ach include depreciation. At pr6sent, it is less expensive for Timali to have their concentrates smelted on toll basis at Eastern Si:elting Compeny Ltd. at Penang in -Malaya than in their ow;n snelter. This suggests the need to reexaMine the operation of the smelter !-o upgrade perfor-mance and to mahke whatever technical changes are neccossary. Marketing 12.1 Tin is one of the four commodities the iworld market prices of which are presently subject to cciti:,rol by an international connediLd t agreement, wlich includes provisions for a buffer stock. The first International Tin Agreement (I.T.A.) of 1932 -ras ext,ended in 1936 and remnened in effec until 19)42. At that time a govermental body of allied countries took; over the control ol produ~. bion, distribution, and prices durin- iorlcl Tar !I end the iinedi,-te postQar period through 19109. The first post"war I.T.A. agree-nt, en-ered into force in 1956 for a five-yean term, end a second end third agreement succeeded in 1901 and 1966. The -third agreement will end on July 1, 1971. The main objectlive oL the agreei-ent is to stabilize the prices of tin. This is done by exortLation quotas imposed on producing co-untries end deliveries to a buffer stock. Lhe ex:portation nuotas are link.ed bo the accuTnulLtion of tin stocks. Under the agreinient, the I.T.A. buffer stock manager must offer tin for sale, if he has tin a-l- ble, when the price is at or above a pre-se-t ceiling. UIhcn the price is below the ceiling pr-Jice, he uust buy tin if he has funds. In October, 1970, the Lloor and ceiling prices %'r the neT agreenent beginnigc in 1971 wiere tentatively establish,d by I.T.A. They are as f ollow Z S: Old New (per ton of metal) (per ton of metal) Floor Price 1 ,250 Pounds t,.erling 1,350 Pounds Strling Ceiling Price 1,605 1,650 " 1/ 1/ This is abouL 63.96 ror kilo. The current price of tin is 1,1i69 pounds Sterling per ton of met.a1 with no restrictions on exports. 12.15 Some of the marketing problems facing Tndones-an tin arec 'the practically stagnant wjorld demand for tin; producer reactions in response to changes in demand, wihich may lead tJo unbcalaence in supply and demand; and strategic stock, pile purchases and sales of the centrally planned countries as wsell as changes in their trade pattern. Since 1968, when the last shipment of Timrah concentrate was shipped to Durope for smelting, there has been some shift in the marketing of Indonesian tin; Japan is not- a more favorable place to market their product. The United States, however, is still the main market, havinr imported about 5,000 tons in 1970. Timah markets its productu directly to large U.S. Steel producers. IVost of the contracts are for one year and are flexible in the amounts delivered. 12.16 Based on tin consiumption in the last 20 years, the trend -indicates a consumption of about 190,000 tnns of tin metal in the year 2000 1/ In 1969 the consummption was about 162,000 tons. if the historical trend is accurate, this will mean an increase in 't-he wqorld tin consumrption of about 1,000 tons per annum l'or tlhe next thirty years, or a trend rising less than 1% per year. This is a contrast to the demand forecasts for most other met,als. Si: countries, includingf Indonesia, account Lor about 90 percent of the total mine production and exnortation of tin. lIalaysia and Thailand have been increasing their produc-ion at a more accelerated rate than indonesi a. Eventually, there rlCy be a limitation on how. much ti-n cen be produced for exportaation by Indonesia. 12.17 . In 1970 Timah reported the following incomie: Sale of Tin $64,995,,000 Interest from investments and other incoine 121,000 Tot,a:L ^716, 000 Reported Operating CostLs 3000 ProLi' before Taxes t21,383,000 Based on a )5 percent corporate tax, Timah's txc obligation for 1970 w las Q9,622,000. But, by virtue of a re-investment privilege, Tinah actually 7aid only 62,178,000 in taxes in 1970. Since the taxes are pre-daid, and since auditinJ is about two yars belind as :c'l as subject to negotiations, Tiiah maya even get back so,,le money from the 1970 taxes -'-hey% have alreaclr paid. | 1/ U. S. Bureau of 'lncs, nleral Fzcts and Problcrs Bulletin No. 650. Rehabilitation of Oerational "Euipment 12.18 Tima'ils rehabilitation program is a key to future succeso and it is noit moving along as rapidly as originally planned. Of the total request for ';$47 million of aid, only $7 to '8 million have been cormmitted to date by the donor nations. For obvious reasons, thc "know hol't for the rehabilitation of equipment, particularly the dredges, lies in the countries wlhere they were purchased. 1Most of the equipment in question CaLie from the Netherla-nds, United Kingdom, and the United States. Time schedules have been set up for the rehabili- tation of Timah dredges and other equipment; but the rate at irhich aid has been received has already delayed the program about tTwj,o ye-ars. 12.19 At t,he present rate of progress, the five-year, $I)9 million ra :La p rehabilliation program, scheduled will never be realized. To date, only one dredGe has been rehabilitated. Since Timah has not found the flow of foreirn aid rap-d enough for its planned rehabilitation, they are using internal funds for rehabilitation and expansion. Conclusions 12.20 Assmning that the Field Operations reportud cost of pro- duction lvas true ($iXl,996,000), with -the "other operational" expenses (l10,735,oo0), plus taxes (l11,223,00O)I/ the total operating cost would be $p9,95b,0OO. Based on a gross income of 6',l5,116000, Tmi,nd profit in 1970 wjould only be `5,l62o,OOO. Timnah could be much more profitable. It is evident that the. high overhead costs and tha employment of 28,000 people would have to be reduced to increa2se t-he profitability of the operation. It appecars that prof-ita,.ibili'ty might be increased by ;10 mnillion if the overhead cost-s could be scaled dotm to a more realistic level typical of thlis type of mining opera- tion. t should be pointed out that this increase in profit would provide forcign e::change a part of Twhich could be used for other development needs, since tIhe taxc lawis provide that one-quarter of profit remaining af ter t,ax shall be paLid to the general development fund. NTot only would a more efficient onerat,ion sncre ssprofrii- ability, but world tin market conditions -may develoT) that would make it necessary to ooerate more efficient-ly, 12.21 Administrative efLfLiciencv and technical comnetency need to be developed to cope w-ith operations problems of Tim.9h. The smeltingL° operations are par-bicularlv in need of techrnical assistance. It is suggested that assistance in tTwo areas (a) m-nrzigement zand scheduli-n of operations, and (b) technical operation of Uhe smelter wiould be desirable. Teains of experts slhould be deployed wxith Timah for at l/ Asstuming no rcLnvesttment privilege. -561- ,1l - .5 sL ,oti b ac eti-c nlye op;mft the operations and to determine COAL NTiIG ThD TIU, OPER,ATIO:T' OF' P. II. TAI]-31IG BATUJBLT?.A 12.22 Indonesia is rich in coal. The major coal deposits are located on tbhe islands of Sum-atra and Kalimantan. There are also deposits on t-he islands of Java, Sulawesi, and West Irian. The OimbiJAn and the Bulkit Asamn depDosts on Sum-atra anmd the 1--ahaka-m deposit i-n eastbern Kalimantan are all operated by. the State Enterprise P. N. Tamabang Batubara. Ho-wever., the present condition of: the coal industry is distressing. Only t-wo unprofitable coalI mines are still in opera-tion,, Bukit Asam and Ormbilini *The future develo-pm-ent of: thes& tw.,o mines are Il actively under consideration and an evaluation of the alternatiJves-, including a consideration of: the participat,ion or, role of: the GovernMent,5 f:orns tUhe main part of: thIis section. A Bukcit Asam 412.23 'The :Buk-it Asam depos-its., located in the foothills of: tUhe 4 central mou:ntain range, are about 115 kilometers south-mest of: Palembang, w-hich is connected with the midne by a 160 kilometer railroad. ,A road that on-ce connected these tiro points swras com-oletely destro,Yedl several years ago. 1Mining of coal sta-rted in 1919. To date, totql poroduction from, t-he mine has been about 19 mi-llion metric tons. All bu 3mllion tons came from strip maine opora-Uion:i. Th-e o)rini coalI beds are as followrs: Upper Coa-l- Bed Series Thiclme ss I (meters) Lignite coal beds., one to six in number, len- ticular Jin occurrence, ranging fromA a feurcenti- mneters to 2.5 metecrs in 'Chiciwless, sepLarit,ed by pa-tings `that range f'rom one to 5O metuers in tlhicimess of sedimentary stratua . . . .. ................. 85 - l0 M-iddle Coal, Bed Series Mahn,us ("tAll) Coal bed Top coal bench (A-l). . . . . . . . . . 665 -5 Parting, sedimentary strata ... . ..3.0 5- Boto coa bnch (A-2) . . . . . . . . . . . . 7.0- 10.0 Interval1, sedimen-t-aryv stratua 15 ..*l.0-18".0 Suban ("r3") coal bed Top coal bench (b-1). . . . . . . . . . 7.0 - 965 Partin-, sedLiment-ary strata . . . . . 1.5 - 3.0 Bottom Coal be,:-nch (B-2) . . .. . . . . . . . . . 2.0 - ~. Interval, sedimcnt.ary strata . ......................30.0-35.o Peta-i ("C" i) coal bed,.......... . . . . . 6.0 -75 Interval, (Jrfj -~ trJ,n. . ........ . . 25o.O-2"0.0 L ouic r C oal_ Bed Scri-cs Mcrapi (I'D') coal bed. . . . . .................. . 8. 0-10.0 -562 - 12.2b Coal is now mined at the Air Laja strip-mine are-,.; The over- burden is removed from the A-1 bed by wheel ex;cavators and by :mall pow er shovels and turactors. The exposed coal is loadod by power shovels onto cornveyors that trmnsport the coal to a discharge station on the eastern rim of the pit. The A-2 bed is mined in a similar falhion. From this point the coal is hauled by electric locomotives in tr.ains of small mine cars over a narrow7-guage railroad track to the screening and cleaning plant, a little more than four kilometers aJay. Approximately 6O percent of the 'run of the mine coal is under 30 mn; 50 percent is under 20 mm. 12.25 The operating equipment and the plant equipment are in a deteriorated state. The ore dressing plant is over 50 rears old, and there is a chronic shortage of spare parts and materials. The in- eff-ciencies stem not only from the use of deterioraued equipment bu-; also from techniques and operating procedures. One half of t,he pro- duction cost is for labor. Operating costs are about Rp. 5,600 ($l.93) per metric ton. Selling price is about Rp. 3,300 ($38.80) per metrig ton. The mine had a net loss of $2b0,000 in 1970 on an output of 5b,000 tons. Prior to 1968 the Government Made us the company I s losses. In 1969 the Government gave Rp. 700 million to the mine; Rp 300 million w-jas to cover the direct cost of' running the minn. *The remainder lwRas to be used as -orking capital. This loan was pnid back in 1971. Under Uhe present agreem ;nt bet7een the 1inister of Ilines and the Minister of iinance, the State-owvned rail- road ref'unded p 529 mlillion in transport charges to the coal opera- tion in 1970 to make up the di fference bet'ojcen p-roduction costs ond selling price. Quaility of the Coal and Reserves 12.-26 Though geologically very young (pliocene) the Bukit Asem coal field has attained subbituiinous rank through low teTDe-mrature thermal tramnsformation from the local intrusives. Trrns0ormations, how,ever, have not all been uniform, and Lhc quality of coal varies from lignite (browin coal) to anthracite. The quality of the codl froii the currcnb operations at Air La1jax is transitional in rank bet.ween h-igh-volatile bituminous coal and subbittuninous. Because of the various de-rees of mretor-irphism of the coal in situ, naly ses var-y over an appreciable range . As a result, it is difficult to detrmiJne ,,he ex ac' Tahveragell of the col?as quality. Saples taken byr J. G. Ut-e Corporation (1951) and Paul U'ir Company (1962) and anda.rzed by U. S. Bureau of Ilines, and a commel'rical t't½eS iE ComUp.z7my in tlhe U. S. indicat.e a B.t.u. range fro-m 11,000 - 13,000, ash 3-10 eprccnt, volatile mattr 35-Lo, fix:ed carbon IL,-51- Fnd sulnhlr 0.35 Tercent. Lvery rTport w1ritten on DukiJ;t Asam stresses the cxcellnet quallity of this deposit as a ste.om coal. -563- 12.27 In the ear'y 1950's investigations were made by the Indonesian government to determine sources of coking coal, or processes for- forniinr metallurgical coke from semicoking coal. Between 1955 and 1957 a comprehensive study for determining the coking properties of Indonesian coals from various fields was conducted by U7c2exro, Dussel- dorf, Germ,ny. Coal seams in the Bukit Asan and Om.bilin fields of Sumatra, as well as in southwest Java and southeast Kai mantanj w7ere investigated. Findings indicated that none of the coals that ,ere investi,ated showed strong colking characteristics, but the coals in some of the fields had moderate or fair coking properties. They referred to Onbilin and southes',; Kalimantan as having more strongly coking coals then tLhose o.L Bukit Asan. 12.28 Exploratory efforts have been limited tio the i=mediate vicinity of the present operations. No exploration has *attempted to fully delinea-te the coal field, detcrmine the full eztent of the stripable coal, or determine the arount of lignitic coal thlere is in tlhe deposit. Batulbara engineers indicate that in the vicinity thcre are 'bilJions" of tons of lovr-grade strirxable coal w.ith a B. ,. uL. content of less than 10,000 (lignite). The estimated reserves are as shoun below: A. Recoverable Reserves by Strip 1ininig (In millions of metric tons) Recoverable coal Overburden Classification of Area Coal Bed (m.etric tons) RatUio 1/ reserves Air Laja A & B 29 1.82:1 Proved Kel l . A,B,C 8 2:1 Probable 37 B. Recoverable Reserves by UTndergrotund iMethods (In mil1ions of metric tons) Classificat-ion of' Area Coal Dods In Place RecoverableJ reservcs Central .,B,C bl 16 Prooved and probable Sout'hw est A,B,C 68 2b Probable Florthwest A,B,C 133 1q Proved Xor`hea st A,B,C 83 30 Proved 32 119 1/ Cubic rieters of overburden per Mretric ton of re:cov%ered coal. 2/ Con2-c-rvativ;re pCrCcn.;a2f of recol;cr- s based on the ohuical mining co1';',o~;. ,nd a rostoobl' . co,;t o 2inin- :1' dz. A1lou,h th!e reserves >are ver- larrge and tle quality is good, there i-s very 1iJttle present domeLitic demanld, for this coal other than thh small -amount consum'ed by the Etate- oained South Sumatra railroad an-d the thermal powler plant at Bangka Islanld. The question is what sort of develorpmnt of the mine is feasible. Develonment 4Aternatives: 12.29 There are at least three alternatives that might be considered in further developiaent of Bulit Asam coal, though the third is a combina- tion of the other twIo: (a) develop the rmine solely for export of 'the coal; (b) develop the m,iing operation to supply coal for electric power generation at the imine-head with the major consumer of the -o.ar possibly bbixrg a large aluminmi smelter (in addition to the one nowJ being considered as part of Asahan hYd-ropoier developruant; or (c) conbine the possibilities to involve both pojer generation and some export. The last alternative m-ight permit a larger output and hence lower costs than either of the other two alone. This i s ex-:,mine l la't,er. 12.30 All of 'the alternatives, to be really feasible, require a greatly- enlarged output- of the mine, ranging Drobably between 1-3 mirillion tons annually. The fixed investment and operating costs for increasing output to these levels are estimated below-. They are the basis for a later consideration of the alternatives. Obviously, if there is to be extensive ex.port, there will be other costs involved in transport, handling, and shipping the coal . The cost estimates have b'nen prepna-id -based on the following assumptions regarding physical conditions: (a) Overburden varies fror;i outcrop to a maxinurai thicImcess of 120 feet (a.bout 37 meters) w-vith an av,erage depi,h of 80 feet (about 24 meters). (b) Ccal seam is 5 feet tlhiclk (about 1.5 meters). (c) A largo port-on of the over;burden is cormi-posed of hard st;rata such as limestone, sandstone and cermentOd lime shale. (d) Terrain varies from rolling to steeply pitchirg hills. 12.31 On these assusiptions the fixed cnd o-perating costs, In total and per ton are estimated as followzs: -56)7- Fixed Investinent Production (metric tons per year) 1000,000 2,000,000 3,000,000 Stripping machinles . . . ... . . . . .$11,685,000 $15 ,o65,0ooo %$.18,l5,o000 Ilaulage, roads, utility vehicles, buildings . . . l.35.,000 2,031,000 2,690,000 Overburden, drilling, and blasting equipment . . . . . . . . . 290,000 390,000 490,000 Drainage, refuse, bos cut, develop- ment expenses, contingencies . . . . 1,260,000 19500,000 2,650,000 Additional contingency for installation in Indonesia. . . . . . 2:000,000 2,000,000 2,000,000 Total capital cost . J * a * * * * * .$l6,580,00O $2,21,36,000 .6,2o275,000 Operating Costs Cost per Ton of Coal- Based On 1,000,000 X-T,/y 2,000,000 iiT/y 3,000,0OO i.iT/Y Labor $,0.677 $.O ,577 0. 00 Materials 0.800 0.800 0.800 Union WTelfare 0.b00 o.boo 0 400 General Administration 0.200 0.200 0.200 S,2les and Iia^rketing 0.030 0.030 0.030 Insurance.03 0.035 Total Operatiig- and other Costs 1/2. 1L1 1/ c2. V' 1/ Fixed cost allocation $2.187 V $.d608 2?/ 8 211i 7/ Total cost per ton 6$.629 $3.650 $3.179 1/ Costs do not i.nclude royalty or po--er costs. 2/ Based on 15,. of investment. This Licludes return on capital, depreciation, and insurance. Current practice is to use 20. lor fixed charges, which includes all above mentioned items and taxes. In this case, taxes were omitted. -568- Alternative T: EB:port as Steam Coal 12.32 Although Bulit Asam does not have the favorable met,al- lurgical characteristics as Ombilin coal, it doa-s have export potential as a steam coal. However, any plan of developing the coal mine to service an export market should give consideration to the conditions of the railroad and the port of loading facilities, and the additional costs that may be incurred. 12.33 All the coal from Bukit Asam is shipped out on the Southern Sumatra Railroad (a division of the State Railway Service). The eastern terminus of this railway is at Kertapati, a deep-wate- channel.in the Musi River, which is opposite the city of Palembang. The Sumatra Rail- road has been in a deplorable state concerning both its trackage and its rolling stock. Under the 1959 Development Loan Fu-nd, the conditions of the rails and road beds were improved. The old lightw;oeight (28-30 kilograms per meter) rails were replaced early in the 1960's with 38 kilograms-per-meter rails. These welded 85-meter section.s are an improvement; however, they are medium-wreight rails and are not service- able Lor extensive heavy traffic or on any excessive gradient,s. The weight of rail required in minercl transportatlon with heavy rolling stock on standard track and with any gradient is betw-een 50 to 60 kilograms per meter. The rolling stock noiT used for coal is composeLd, of 50-year old steam locomotives. iMost of the 500 coal carrying cars are unavailable for service. These ste-am locomotives are capable of moving only 1i50 tons on each run. Thlus for any ext,ensive tonnage thlere would haave t.o be new investmcnt in rebuilding track cand replacing rolling stock. 12.34 Assumiun that the port now is caoable of handling one m-illlion tons a year for a port and the State Railroad improves its rolling stock to acco:-2nodate this volune of coal transport to the dock uilthout improving the rails and road bed, and charges Batub¢ara 0.0125 cents per ton mile l/, the additional cost per ton of coal w-ould be "l1.50. 12.35 2team coal does not cormmand the s-ame price as metallurgical coal. The avreragre price in the U.S. for bituminous coal (steaun coal) in 1o69 w.as tTJl.90 F.o.b. Bukit Asamm may be able to commandl a F.o.b. price of $7.00 per ton. TWJith a possible operating cost of NI.629 per ton plus $1l.50 per ton for transportation, the total operating cost midght be y6.13. Before taxes the rrine might realize about $1 mrillion profit per year. It is very Lulikely that any greater tomrn;a-e could be hcandled without grea l , inncre-sing the costs of rehabilitation on the railroad and the port. As is shown in the section on CGmbilin coal, a pipeline mnight be considered as an alteniative to the railroacl. 1/ Sce Onrmbilin section. Z 12.36 The M'ission did not attempt to make detailed est,imates of the investment and operating costs bo achlieve export levels of 2-3 million tons annually, and the estimate that 1 million tons rmight> be achieved without large new. expenditures is speculative. This alter- native deserves further analysis; the material and arguments Dresented in the case of Ombilin coal apply, in many instances, to Bukit Asam, and reference should be made to that section of this chapter. In any case, a successful export operation Twoould undoubtedly require the technical and financial assistance and participation of a kmo-ledgeable coal producer. Such a company could undertake the detailed economic and technical evaluations of the project. Alternative II: Electric power generation at the mine 12.37 Among the several large coal fields of Indonesia, the Bukit Asam, deposit has all of the favorable characteristics for use as direct feed fuel (as mined, no wTashing) for a mine-mouth-Dlant operation (electrical generating plant at the mine site). Fromn what is Pmon about the coal reserves of tlis deposit, there are 37 million metric tons of coal. The mine run coal as received, has a B.t.u. range of 10,000 to 12,000. It is low in ash (less than L00') and low in sulphur (less than !§`). It is ideal coal for a steam plant. There are additional tons of proven and probable coal reserves (minable by underrround methods) of 325 million inetric tons of wbhich at least 119 million metric tons are recoverable. 12.3' For the establishment of a mine-head elect,ric po2.7'er gelaeratuing plant- to look attractive, the costvs of powver -by this means must be com- pctiti-ve with alternative sources of por-er, and there must be a major consumaer to take the majority of pow7er that is generated. In the ancLysis that follow1s, prelimainary calculations indicate that the cost olf rpooer may wjell be co_petitive, and it is suggested that the extent of tI e batux,ite discoveries will justify the exi-stence of twzo aluminum smelters in TIndonesia. 12.39 There are large bau_dite deposits nowz being w orked on Binl;an Island and larger new discoveries have been made on Kalimanmtan. The ompanlies invrolved have planned the establishment of smelters with capacities initially in the range of 200,000 tUons per year, and probably expandable up to 360,000 tons. It is ob-rious that one of these smeltoers will secoure its electric powcr needs from the sahan dropo:Ur pot{il and sone steps have been tUaken to 'secure the develonment o' lrronower facilities plus a smelter in a single pack-.e. Therefore, alternative sources of power must be considered to encourage the erection of a second alizaiuni reduction plant. -570- 12.1i0 A 200,000 metric ton aluminum reduction plant requires about 560 megawatts of power. Lo generate this amoun-t of powser, it takes aboutl two mnillion metric tons of coal. This amount of coal can readily be supplied by Bukit Asaxrn coal from its large reserves, possibl-y at a cost per kiloiwatt, comparable to pow-er generated at Asaha-1. 12.4l Between 1960 and 1967, in the United States, 56 non-Govern- ment and Government hydroelectric plants were constructed and started operatuing. The average investment cost per kilowiatt was $'300. In- vestment costs per kilowatt in eieght U.S. non-Federal plants constructed in 1968 ranged from $,90 to ",b22. Conditions out of the ordinary can escala-te investment costs rapidly. Based on present day cost,s it is likely that pow.rer from Asahlan w ill be available -it around four mills per kilowcattb. This is a rough judgment and is not based on speciLic analysis of the data. 12.1i2 In the United States typical capital invesstnent for a lig-nitue burning mine-head plant wvith an installed generating capacit,r of 20_)b megawatts was $29,270,000 or $'122 per kzilowatt of installed capacity. This includes equi-pment cost of $'22,260,000; structures G6,810,000; and land $200,000. A plant such as this stZarted operating in 1966. The investe,,nt for similar plants ran-ges Lrom $100 per kilowiatt for large plants and $155 per kilowiatt for small placnts. 12.43 Based on the Bukit Asan mine producing two mioion tons of coa-l a year at a prodiuction cost of '3.63 per ton as estima:ted earlia:, a nine site thermal plant instlcledi at *:150 per kilor.att, ma:y be ab:le to deliver po;r at 4.30 mills per kilowatt.l/ Capaci t- of Thermal Plant L, x 125 I.J 500 14.-T Cost per k>T installed Plant not intercoinr±ctcd wiBlth system $150 Assuming a plant avacilfbility f actor of 80,O and, a plant fact-or of 855< k,Wh generaued per anumn - 8760 x 500,000 x .u x .85 2 2978 illion kT.I Assume thermal effliciency of 3L.i% Cnlorific value of coal 11,000 BTU per lb. Cost of coa1 `$3.65 per met,r-ic ton (2205 lbs.) CostJ of coal per million BTLU 15.0 US cents Very cheap coal. Coal per ki?,h1 genera`ted 31)12 DSTU per k-,h .314 :.: 11, o'S0 = 0.91 lbs. 1/ byCs.ir ( by c h itc 7m± of tho 'B3onk's -,bic Ut.LLtics Th?oj.ct.; Do2).t..cnt, July, 23, 1971. r Total quantity of coal required = 2978 x 106 x .91 per annum = 2710 million lbs 1.23 million metric tons Cost of coal per annum = $3. 65 x 1.23 = $L461 million Cost of coal per klAh generated =41465,000,000 mills 2978,000,000 i 1.50 mills Other costs Salaries and Wages 1.50 US mills per kW6h generated Repairs and maintenance i.00 US mills p-er k',Jh generated (based on Malayan 1969 cost + 335d) 2.50 US mills per kW'dh generated Coal handling & ash disposal allow 0.1 mills per kWh Total Operating Costs per kWh generated Coal 1.50 Salaries and wrages 1.50 Repairs and maintenance 1.00 Coal handling and ash disposal 0.10 74.10 US mills Allow0 for 5% of klW,1h generated to be used in plant Cost per kEh delivered 1.30 US mills 12.LL The estimated cost per KWIH delivered is in the competive range, but the estimates are rough and iiould have to be verified. At this point, it is only possible to say that this alternative should not be rejected without further study. Alternative I - development of the coal for export - may prove the more attractive, or some combination of the two may be even better, particularly if the combinauion could result in levels of output in the neighhorhcod of 3 million tons annualiy. Some kind of action, however, is desirabl.e. The mine is now a drain on public funds and should not be continued in its present oper- ation. 12.15 It is recomriended that a study be made of the alternatives and that5 a course of action be decided upon based on the study results. The study should encompass an evaluation of potential export volumes and prices, . -572- f - and an assessment of the costs of mine developi;en-t, -nd production up to an annual tonnage of 1l-5 million -tons. It mighti also be appro- priate to e:rlore t;he topic with the industrial fLrms that could be large conseiers of the power in analwminum smelter. Ombilin. Coal 12.. 1i6 Ombilin Coal field is about 165 kilometers by rail (about 100 m-iles) sutheast of the, city of Padang, in the niorthiw.est part of SumTatra. In 1892 a railroad 'vwjas constructed to develop the mine aU Saw~allunto and to c onnec t it uith the poa't at Padang. The existi_ng7 railroad has to cross a mountain ranmge betwr-een Kaju Tamari, which is 60 kciloineters fromn Pada-ng and 11Th metbers above sea level, an-d Datu Tehior, w-,hich is Oli kilo:~,ete-rs flromr Padangr and i-s 370 meters above sea level. A rackc and pi-ni-on railw-ay system is used be'iw,:C-n these tw..7o points. 12.I47 There are three miain coal seums; "tA", "13"II, a-nd "IC". Thae coal beds dip 12-16 'icgrees to tUhe east. How-ever., botch 'the st-rike- anad thle dip va-ry. Mlost of th-is i-s duie t'Uo faultdirg on the etr side of the depoSit. ALmos al ofhe concession is underlain uith coal. The principal- coal areas have been n-amed as follow-s: 1) Te~nah- MHitam. 2) Su-nuai Durian 3) Suga )i) S i gal ut-U 5) Paream Barmam Co-al is bein r;ix~in t',he a na Durian coa,l area,wihcvr theL enti-re wjeStrc-n culgne of' tUhe coa!l fLield. In this ;area there aretre s3eams, Al B, and C. Secim A has an average thicl-z-ess of 1.50 - .5 1 . motocrs, *Se-am B is 0."0 m.-eters thiick, and Seam,. C is 6 - 10 meqtuers `hickc. The ovorbtuvcien -is 120 r.'eter.,, and tr± e st&ral-igraphic dista-nce bet,ween Seamn A, B, and C is 30 meters. P-reent StLtu of tUhe Onerat ion 12 .48 all of the coal P'roduction comes from undergrou-nd w-orkings. T,he mfigis done by tuhe lojng w-,all systemi with 'face lengvths of' 100 to 12-0 mieters * Sanid is hi.draulica-lly, pumne.)d for b~~co, 'Miln7. Sean-i C j..s w,orkecd in benches ofL 2.0 tuo 2." metc,rs in thick ness. Mos of t-he Coal _s minned by: drilling -nd blastUing, thacn transporte'c by chain conveyeors amnd r2i-ne cars. *The major uLnderground haulage way was abando:ned follow:ing WI.orld WIar II, w-hen a fire broke out in tho mrine. 'U~:n1, h coa,lI is -raLnsp-orted by n arrow- gauge rail and by beltu conv11cyors arolund the aba-.dnded m,inae area and over thei hilils to t-he screc,nin one w ashi-ng pl-ant. !Mo7rt. of thei o-,eratin- ui:icn is in need of repair workc or else is -looii: nonz-r2-blo. rBoth' scr'conirnE :2d :mashLn- pi ant as w-,ell as the1 ps~ J n-L * eOver 50 ye'ar-s' o13. 124.9 The 50-year old, 6,000 K.W. power plant is delivering only 1,000 to 15o00 K.wI. In 1962 a contract was signed with the Polish' government to rehabilitate the mine in twso stages. The first stage was to increase its output of coal to 300,000 tons per year, and 7,000 tons of equipment was delivered to the mine. Equipment for a power plant of 12,000 K.W. was also included in the shipment, but because of insufficient funds, stage one was never realized. Parts of this equipment have been used to help maintain and prolong the life of the mine. Of the Po'lish technicians that were sent to assist in the rehabilitation, all but one have returned home. 12.50 Of the ore available, 30 million tons have already been mined from the Surigai Durian area. The probable-reserves, within the con- cession, are estimated to be b60 million metric tons. An estimated 117 million metric tons of coal reserve is available at depths from 0 - 350 meters below the surface, 155 million from 350 - 700 meters, and 188 million below 700 meters. The coal has a B.t.u. content ranging fron 12,700 to 13,300 and is particularly desirable because the ash con-tent is 1-3% and the sulphur content about one-half of one percent. The mine has been in production since 1892, and its best production year was 1939, when 590,7L3 metric tons of coal were produced. Production has been steadily declining to the present low of 63,855 metric tons. The main consumers are the railroad, which connects the mine to the port, and the cernent plant at Padang. The cement plant is the larger consumer of thS two. Small amounts of coal are used by the steam plant for the generation of electricity at the mine. In 1970 production costs were $11 per ton and losses of almost $200,000 were sustained. The prices received were, however, rather 1.0o1. Future Market Prospects 12.51 Ombilin coal will be developed primarily for export to Japan which is one of the world's largest consumers, as well as importers of coal. In 1970 Japan consumed 86.6 million metric tons of coal, of which 8.8 million metric tons were imported. Their main interest, as showm by some of the most recent large, long-term contract purchases, is in low-sulphur, low ash, blending coals and Ombilin fits those require- ments. Geographically, Indonesia is one of the closest coun'ries to Japan writh a source of this tuype of coal. There is a possibility that the International Nickel Company might use the matt method for reduction of its nickel ores in Indonesia. If they do, they might use metal- lurgical quality coal as a reductant. The amount of coal they might need is estimated to be 200,000 metric tons a year. Ombilin may be suit,able for this purpose but this potential demand is still speculat,ive. 12.52 One of the largest exporters of coal to Japan from this part of the world is Australia. The exporting conditions which exist betL.een Japan and Australia can be used as a guide for what might be expected in Indonesia. In 1970 Australia exported 16,b70,77b metric tons of coal to Japmn. The reported average delivered price of coal imported from Australia into Japan in 1970 w.as $iLb.96 C.I.F. per metric ton. The average F.o.b. port value price wsas $a10.6O per metric ton. Howelver, the individual contract prices varied depending upon the grade or coal, location, date of contract, etc. For excanple, in 1970, coals from Coal Cliffs Austra-lia (212) volatile, l10',' ashl, 0.14/ sulDhur, 5-7 free swelling inde,x) w¢ere exportedI at a C,I.F. price of $lf12.35 per -metric ton. The neir 1971 contract for these coals increased to 'lL.6L1 per metric ton. Coals coming from Dialyon in Aust,;raliza (1!8/) volatile, 8.56'% ash, and 0.75, sulphur) sold -for C.I.F. $;9.46 per metric t-on in 1970. Bo-th of these coals havoe higher ash content than Ombilin coal. In Aus`rcalia some of the Imerican companies are paying a royalty of e..05 per metric ton of coa-l and a rail .freig'-ht rate of ,0.010 - $0.015 per rmetric ton mile for the transportation of coa.1 to dockside. Vessel loading costs of Australiawn coal vary with individual port faclities. The cost ma ra,nge from 1 to 50 cents per metric ton. In general, Oibilin coal can probably command some premixmi over pcrices listed above; a C.T.F. price in the rEnge of $2 - ',15 par metric ton, F.o.b. price in the range of $9 - ,12, is probably on the conservati,ve side. TaBasic Agreement" sqnd Rroposed "Contract of "TTIrk1c? Agreement 12.53 Japan has alreacly expressed a -trong interest in this coal deposit by signing a Btasic A.greement"- and pronosing a "Contu.acti of 'IorCk" Cgreerent with the Indonesian Government. The "'Dasic Aitgreenent" - concluded on Apnril 29, 1970 between P. IT. Tsi.hbang Battubazra, cN iarubeni-TIciC. Company Ltd. ofL Japan, mnd Kaiser Steel InternaLtional nin½g Corporation of the U. S., w!as approved by- the Minister of ;>aines of Indonesia on June 1, 1970. 1I-arbeni and K,caiser agreed to cooperate fully i.n the execution ofc all stages of relabilitation ald developm-.ient of the nLine. This consistecd of a detailed feas-bility stud y including sales, r f '1:eting, construction, development, aznd opereation wor}k. Although th1 "Basic Agreen--en;ll has no date of terlmina'tCion ot,her than thr clause stating that Mla-ubocni-Kaiser must give the Government, the results o.' their fecasibilitics stiudias -within approximately 12 montuhs, the dee.relopientn work. on the deposit cannot be started until a "Caontract of UTork" be- tween t1he Government and M'arubeni-Kaiser is a-reed upon. A dramft cowrL of this conr.Lact has already been prepared and presented to t,he Govern- ment for considerat-on. 12.51i Bas-ical-ly the co0nmnunics have pronoscd that th3y undert 0k'- the develonni-nt; of the mine and that the Govern-lent, ascsume r,,sponsibJln';v. for infrastructure. The proposed contract calls for the Goverun7amnt; to do the followling7: 'For t-he purpose of this Agreement, the Iollouinti IfUtructue facilities slhall be newl- const'ruct,ed, equi.pped, installed, or reohbi- lit-at-d by the Coevcrm;ent. in accordance with designs .alnd specificati ons ii) Coirnncncing with the beginning of the seventh year of the Cormmercial Onoratuion Pcriod and continuing through t,he ssixteenthl yCar thcreof, the Hevr CCompany shall pay corporation tarx at a rate (before credits) of five percent. (5) of Net Taxable Tncome determied in accordance w.ith Annex D hereof.1 1/ "(c) No duties, taxes or levies of anyr kind shall be imposed on or in connection wiith the export oL any products of the Projects." 2/ 12.55 The rehabilitation ol the mine to produce 3 million metric tons of coal a year for exportation to Japan would cost an estimated $30 million, This cost would.be borne by the Llarubeni-Kaiser group. 'a- though there are numnerous points in the proposed aoreement which do not favor the Goverrment, the most striking ones are the terms regarding the infrastvructure, paynent of rents, royalties, annd taxes. Alternativee lJNays to Develo-p Ombilin 12 .566 Although the develoPr;.-int by modern, efficient- methods of extraction and the sal-e t'o foreign markets of the Ombilin Coal is very desirable, there are several major alternatives tUhe Governrment -TaY wish to reviewi before proceeding with this project. A. Evaluate the prmr-osed "Contract of -.Tork" ag reem.ent an d tho proposed share of financial responsib litles and benefits derived fro-m tihis agreement. B. Alternative contract based on "lease" tyrpe ofP agree- ment. C. !Alternative "Contr.cct of NJork" a.greemennt :-7here the Government is the con-r::ct.or in control r., 1l financial capital responsibilities based on present proposal oL mine, raJl and port rehabil iattion and emplnoyment of foreign contractor to ope_ ate the entire vent-urc. D. Alternative "Conrtr-ct of Worlk" agreement where -t-he Government is thc ccntra.ctor in control assumming -1ll financial capital responsibilities but, re-evaluating the rehnai'lIt-ation of the rail mdnd nort facilitI,s 1/ Proposecd "Contract of '-ork." bctw7Cen I-^aubeni-E-aiscr aand LnJlonci-1-i Govcrnment, Article 9., pagc 30. 2/ On. cit., A cle '17, 0 i page l13. as shall be mutually agreed upon between the Government and the Companies: i) Railway between the mining site and port site and its auxiliary facilities. ii) Seaport facilities at port site being available for direct loading to ocean vessel of 100,000 DWTT tons or larger. iii) Electric power supply necessary for the full operations of the designated capacity of the Project. iv) Telecommunications facilities among Djakarta, port site .nd the mining site. v) Hospitals, schools, atilities, and other towmsite -facilities and roads in the mining site." 1/ Land rent, royalties, and taxes of the proposed "Contract of Work" are stipulated as follows: 11(b) The New Company shall pay the Government land rent in -the amount of U. S. $0.05 per hectare per annum on the number of hectares included in the Contract Area, such payment to be made during the term of this Agreement commencing the first calendar year of the Commercial Operation Period. (c) The New Company shall pay quarterl'y royalties in respect of coal from the Contract Area on the basis of the quantity mined and sold. The rate of royalty to be paid shall be U. S. $0.05 per metric ton of coal sold. Such payment shall be accompanied by a statement in reasonable detail shoTwing the basis on w-hich the payment has been calculated. (d) Corporation tax shall be p2id by the New Company to the government as hereinafter provided: i) During the first six (6) years after the commencement of the Commercial Operation Period, the New Company shall be exempt from the corporation tax. 1/ Proposed "Contract of WJork" between Marubeni-Kaiser and Indonesian Government, Article 9, Page 19. -<77- based on dirffrent concepts of cod transport-LLion and shlip loading, and employment of foreign c6ntractor to operate the ont,ire venture. Altecrnative "IAl - The Proposed Contract 12.57 The techunical reports from KNaiser Steel Intcrnational Jiining Corporation of ''eptuerTiber 1970 indicate that extensive worlk needs to be donc on the railroad which link's the mine to the port and on the port itself. In brief, the railroad connecting the rmine ,and the port, needs extensive rehabilitation before it is capable of handling any heavy- traffic of codl. The railroad is a narrMT gauge (1,067 m.m., sta-ndard U. S. 1,h32 mn.m.) w-ith light construction of 25-35 kilograms per meter rail. The existLing car axle load is 10 met ric tons, and the existing bridg-es are capable of handling 12½ metric tons per axle load. The common a-xle load for this type of light, narrorT-gauge railroad is 15 metr4.c tons per ax;le. Narrow--gauge railroad of this type is used for mineral transportation but w-ith heav.ier weight rail, and rolling stock with 20.5 to 22.5 metric tons per ax:le load. T'.Jo to si-2 loaded t irns would hacve to be dispatched daily from t,he mine under 'he present condi- Uions in order to MoVCe 3 rmillion tons of coal. This wxould involvre 75 loco-loti-ves and 1650-b60 cars. 'here are noi; 23-i coa cars and 19 steam. 16co-nic'-dives available. Increasing the number of rolling stock does not appoar to be the solution. The main oroblen. is the railroad bed, grade, (in certain sect;ions ) ligweiglit bridges, and the rail itsolf. HIeavT y traffic. over Uhe existi ngf rails wlould fatigue them at an early date. 12.58 Railroad cost-s i)ere esLimaIcdf] based on (1) ur-rading of the railroad and equiTinent of` e,isting l nc and (2)- upgrad-g of ';he rL lroad an-d equirment *ith relocation of sections of the railroad. EstiLnat-e Cost of Upradin- R.ailroald Pa -dciuilment of ExcstinC Railroad Line 1 (thousands of U.S. $;) Axle Loads (metric tons) 10 121 15 20½ 22½ Direct costsV ybl;,795 3'L2,722 c390,992 $32 5 6,31,173 Indirect, cos8s-b 44,078 3,570 3,69 3, `5 Escalation &' cont'r enc, I0,591 10,2 ,79 ,1j6 8j2,2L Tota5l ;;,70 '57,052 Ilb7,35 ',,1,tl)3,091 1/ Preliminary report Lciscr Steel Internationnl Cornoration Septem,iber 1970. 2/ TIclucle manl-iin bcoI^tC vos coal cars, ima-in traclk- ecquir transportc.tion of coal from the mlnc to the port on this rshchilltated railroad, the fixed charg-es on t he invcstrnt crnnt t aken at 15 ec-t' . Based on this, the fi:ed charge w,ould be '^.97 per metric ton, or '0.0.l ij per riir'Lric ton per kilomreter. Altheough direct oper.t,irg costs for the raiLroad are net avalablc, it is es'imt...ed t.hat naLntenancc, labor cacnd supplies uill zcLmount to abou'tlI !'O.11 per ton, (,present e;li cost from? the rmine t,o Pai.'an, is ',l1.70 per ton of coa,l includes loadOingr and unlioa- inng chiargfes), or $.0.002.9 per metric ton per kilometcr. 12.6o Based on an, esti;iat'cd in.- lt, nt cost of ','9O,CO9 I'or reht'.` _ltation of the railroa-, and assix-in-1 an au.nnal capac`cit ofr 3,000,000 met-ric tons of coa--,I the totall operating' costs of this rail - road system are esti-ated to be as follows: 0-eratin- costs Cost per mc-1.rXic 100' CaPaci-tVy per annual metric ton ton per kilometer F:Lxed charges . . . . . . . .. . . . 97 0.0180 Operation and a'Lintarnc_nce . . . . . 0.. 0.0029 Total $3.1N5 `0.0209 1/, 2/, and 3/ Rofrcnc-s r,a2;le as f or previous ta.blet 1I/ Tchludes return on capitLa,l, depreci.-tion., and insurance. 12.61 The Kaiser Report also outlies tUhe scope and capital invest- ment necess,ary for the loc ation, development nmd erection ojf the poQt and coal loading facilities at the port. The harbor at Padang comLnot be used for various reasons. There is a good naturall harbor south of Padang, and newJ port facilties need to be erecLed. The Invost-zixit cost of-l these facilities is estimated as follow-s: Civil works (access track, excavation, etc.). . . . . . . . 1,21i3,000 1Iaterial h-andlin- (R.R. unloading stackers, feeders, conveyors, shiploaders, etc.) . * . . . . . . . . . . . . 7,026,000 Utililties (electLric potrer, di stribution, watuer, sewage, communication, etc.). . . . . . . . . . . . . . 1,831i,000 Marine structur's (moorings, dolohins, w ihar , r Ship- loader quadrext rails, etc.). . . . . . . . . . . . . . . 3,225,000 Buildings and genera-l servlfices. . . . . . . .... . . . . . . 69o,000 iIaaine services (tugboats, navig;Tbiona2 aids, etc.). . . . . 1,360,000 Other miscellaneous . . . . . . . . . . . . . . . .. . 10000 Total direct cost . . . . . . . . . . . . . . . 0 . . . ILdirect cos5ts. . . . I . . . . . . . . . . ......... 2,1413,000 Escalation and contincency. . . . . .. . . . . . . . . . . .7000 Total $27 , 98, 000 Assiii a dlir u cost of loading at l5 cen-ts per metJric ton arid a fin-.ed cos"t of QTh.37 - the total operating costu olf thho port mright be $l.¢2 per :. etric ton. 12.G62 Base-d on the royaLt-yd),, mnd rentL. ii-n. in t-he pr-on sc,s '"Coniritrac, of ".ork" and possible ircomc iron ramil mid Port infrIastu-ctu the Ioverr.ont s income,-.e wit1h generous estnta'es for 'he operat:ion of tho railroad' and t`1 he port-, w-iould be as f ollo--s: Tncone for Governmient Rent 20,000 hect',ears at '0.05 per hec re......... . .....' 1, 000 :oalty 3 mtillion mietric tons at- $0.O, ptor tar. ..... .........1 f_C0 Inc one fr3 railroadm................. fisrc'osa.ir°° p tn....................3,90 .. .10,000 Incoi-oe m ,..roapd . . . . . . . . . . . . . . . . 10,00 0° ot l . . . . . . . . . . . . . . . . . . . . . . . . . . . , 0l, 12 .63 Ta'aLi .int:o acC:,,j=t the iapital inve3--o'-,n 2i-i: c :; l)US the aaswacd aSS, V- in' cost's, th aul'- *:penrlture mo.yv "-e so!:-.- ti-ng of th i-2s Ckntc,1 1/ nl - 15i, Oil' :Lnvc74 .,,,L.J Tnfrastructurc operating cost-S Rail transpor?tation 3,000,000 metric tons at $`3.15 per ton. . . . . . . . . . . . . . .$10,350,000 Ship loa.ding 3,000,000 metric tons at 61.52 per ton. .. . . . . .*. . ....... . i,o000 To ,;al $ 18, 910,000 IhcrecLore, it appaars that under the predent terins of the proposel aUreer.ant, the project -is not favorable to ,he indonesial Goverin-nont. Under these terms the Government bill lose about $,')10 million a ,ear. tu is under:s-ood t,hat the Government is not in fact, considerin-P -L, -i'- taking rnesponoibilitv for relhabilt. t.ii`g the railroad and buL ldfng the port,. iThe xianlysis above clearly indicates t.he iTisdoan oL t,his - ecision, and has been presented to shoiT lust h10o- bad a deal the proposed con _trat is. On the other han d the pot,entia profi,s to the private coripanies arce subst-ntial. 12.6L Basecl on tho terms of the prIope sd contract, MITruoben - Kaiser w,ould inves' $30 rmillion to reha'D`litate the mine and produce 3 million nei-ric tons of coal a year. Their' annual iLncozae from -he r,imin., aLnd sel ing of coal miglhL be as folloTws: Opera'tin7- cost T)oer mert uric tGon ofL coal F ecl costs. . . . . . .. . . . ... .'1.5o Dir ect operzting,, c O st s of 0 '½ing (cclusive of ro-yJlies and rent). . . 2.7(2? ., . . . . . . .0.05 Ta il rotd truzp o -t oin . . . . . . ... . 1 . 78 Vesscl loading- cos,. . . . . . . . . . 3.30 Total FP,o.b. costG Poss-blc F.o.b. price p er t-on ............ 9 . CIO Prof;it per toi . . . . . . . . . . . . . 2.65 )-iual ro.t... . . . * e * e $7,?-0UC00 1 B ased on 15,rl of in>. traan . 'Based o]n cIhi mirLinrj of l "' clod in the Ti. S. Cost ½hs'- ;s " 1c:; ad,--4l ';: .no wela;e *;lstrt' io-n, >tar~~Cr.ng, oriIiar±, rncc This is a very conservative e-tim.mte of profit because the assu.ned selling price of ',;9 per ton is lowi. Thn all probability the profit lCvel could be iiuc'h1 h-iig-her. Alterntit¾e I'D" - A Ae 7 A-rirement 12.65 The poroposed agreement reads more like a 'Seasell or aoncessigon2r -reement than a "Contract of Tor'k." In concessionax,y or lease agree-ment,s, tUhe leasee is gener-ally responsible for the infrastruc-ture. Therefore, if the "'royalty" concept is pursued byr -he IIaxubenri-K.Eiser group, the infrastructure responsibilityr should be re-evaluated. This type of agreement mayr have its advant,age in that no large government f"unds anre tuied up znd fret there i s en incorle fro., the deVosit, not only as royalty but in taxes and expo-r- u-ti_s as we1 1. I/ Gove-nmenl income from royaycnlty and taxes in a lease type agreement m1ight be between "'1 - 2 rmillion per year. "_Othough 'thi s ret-rn nght be raised by hig,hr taxes and royalty payments, It would still be relatUively modest. AlterLative "C" - Goverrnment Assumition of Resrnonsibilitv 12.66 If thPe Govern-ient were to assurae 111 of the inan.cial resp :nsibilityr of rehabilitating the mine ¢nmd railroad, erec'ing a new? port facility, ecnd ermploy a forei,n con-ract -or to opera'ee tohe projectJ on a royn'lt, pay!r-.int, the nu 1/ re'ciiv SC o:t.: o'i AicŽ nroviri.ions of$ the contraXct are chicn::';:'. r. / Dn: . -on c:;t 5. o de c -' . . C. .cd L- ' -582- At a possible F.o.b. price of ;9.00 per ton, the project is unpro- fitable. At a higher F.o,.b. prico (",12 per metric ton) it becomes a profitablc operatlion. lIowcver, a $67.6 million a year return on a 100 million dollar investment does not appear desirable. The profit might be higher if the selling price is hicher. That is a distinct possibility since it is und3rstood that tho Ombilin coal is greatly desired (because of its low ash content) by one of the componies Lo min w1ith other coal that has a high ash content. Consequently the Ombilin coal may iwell cornnend a premium. 12.67 It is also recognized t'hat the Government, prefers to conse-rve its funds for development and hence to have private investors assume as much of the investmen burden (inciuding infrastructure) as s possible. NJevertheless, if a particular project loolks highly- profit- able, such that the retIuMrn would not onl.y repa, the debt but al-so involve a surDlus above debt repay,ment, it iwould be prudent for the Government to consider undertaking such a project on its ow'mn accouxlnt or to partIcipatue acti-vely to some degree. It 'appears that wi-th some modification. the OinbilLin coal project rmiglt be such a case. Aleraive 11D" Installatio faFpln ILI t c- rn .au u uion oS a PiocinLre 12.68 The railroad and port facilities' capitaal costs are the major^ problcm in the developnient ofL this deposi-t, and consideralion shou.!ld be, given tc o-ther wo Of shlipoing a lou-value cor.mmiodlty such as coal ; ,ns suggested that a O_pel ner might be substitutd .or tvhe ralroad an:d f or part ol' port expenses. 12.69 The use aind developmnent- of a coal slurry pi-peline i s not, neir; in f act at th-ie present time mrore emph-asils is be½'; p1laced on pinpelines in coal tronspnort, One of t1he .Cercst coal pipelins Ln the Unit,ed *S,a 1,es w os morlml-ed in 1950 and wras used to deliver 1.3 mill ion tons of col21 a year to a pooue plant 103 milos (about 163 thlolo'ers) aiay through a 10-inch line. Anothcr pipeline, jut, recently pUt into servi^c, dclvers coal to a thermd p.una4 1,h an installed capaciy,-,. of ,500 m eg a-';,s. This ipolinrc s 27 7 1-, long, (about L!)o kiloi-ters), 18 inchl-es wide (about 1:6 cenm-.e.Xers), and can deliver 660 tons of coal per hour. Thle nipelno roue, descends from an elevation of 6,300 feet '(about 1,909 meters) to 780 feet (about 215 meters), and the .r:-ir4muLm gradient of the pirpeline is 16 porcentl' . Thiese are more severe conditions tha-Ln are recuired for Ombilin. 12.70 The coal is normacll,, prcpa.red by, c rushh-ing in rod aills to approx- irimatcl, the foll o'o-in sizes: plus lLi mnesh 2 l1i -nosh by 325 mesh 82 ; 5 manulS 325 mcsh l6't This is aixed with water, and by grraviy. and pum,pDs, the maixture is transported tJo t;hc pow:lr plant. Thie ratio of -iater t0o col c2n vary from up to 70 pe-rcent coal to 30 percent wJater; how;-ever, thlae slurry is enerallyJ monitored, and wrater can be ardded or extracted as is necessary along the wray. 12.71 Generally speaking",, in;'transpotzation of large torinage:S, if the railraod f'reight is beyong 0.005 cents per metric ton over an e-isti:Lng line, therc is a goocd chance that a. slurry pipeline con be comnetitive. The investnent in coal pipeline facilit'ics is made up of (a) slurry preparation plant, (b) termainal facilit½es at distribu- tion end of tlhe line, and (c) pipeline and pumps. The investmenn in a sluLrry Dreparat on plant is a function of capacity, and varies be- tw-een $;31.00 - cl.50 per ton. The investiient in terminal faclies alnd toanTk storage is also dependent upon capacity. TIhe investment in pipeline and pusmps is related to the pipeline length and dianmeter. IT' is esti.mcated in the range froi $o0.025 to $0.035 per metric ton -ile for a 10 - 1 inch diametter pipe. An investment in a 10 innch or a lb inch line 100 miles long, (about 165 kilomie'eters) wvith an nnual- capacity of 3 million meturic tons of coal irn Indonesia, would be approximately as follow's: Slurry preparation plant. . . . . . . b,L000j000 TermiLnal fcilities (10 0,000 tons storage) . . . . . . . . . . . . 2,000,000 Pipnl:me and pIum.ns 100 - 3 ,000,000 letric tons at `>0Q03 per ton mil. 92,00 SUbtotal . . . . . . . . . . , . . .ei5,000,000 Added conting; ency f or installation in Indonesia. . . . . . . . . . . . 000 To'al . . . . . . . . . . . . . . . .$'17, 000, 000 12.72 This t.otal amounts to `'$12 per metric tron of annual c8.ci . Ta-kIn- f v:ed charg-es on theie in stvmenllt at 15 p2rcen', t1his -:ouli muntd to '$0.'50 per rmletric ton, or `O.00850 pcr -metric ton ' mile. The cost' of ovaration and m.aintoencnc, inclui_n,g labor sun-rmlies, is est.,irw:Z^.-od to be from "'0.00l0 t;o "'0.00)15 rer otvcrz-c t;on m-Lilc. Thuns the total cost per ton .ouli be $0.970 or $0O.0Q),(70 per meCric Lon mile. i,o ollo;Czoc s wcre made f£or any sa-vng,s which cou'ld be Lncurrced ror:' !, g ,'the r--nt- line folloir p,rallel to e:axistingr railroad grades, or for the fact LtWU the r'ipo1ine nzy* Cut t-hie dista-lnce bc l-e -- th-, -Lhe ilL!nc and th- port,. *2.73 -lhhu2h t1 is - c us-or--.r to thin; o iDr,r as .iing Cdoc .s, deeo-w h=';X L hzi'bo:-=, znd shin loading _ac4-lis -when lrr-'c ' oc,s r.incrcl transport are being considered, there are some ne'Tr and so.r.e- ihhat radical systems now, being devised and used, particularly for lrge bulk ineiral cargos. One of t,he nclw syslems provides for slurriy loadin, of shlips. An ideal situation is created by thlis method, if a coal slurry pipeline is used to tranisport the coal to dockside at Omnbilin. This syst,em has the potent-ial for reducing- the cost of load- ing and discharging of bulkxc minerals by up to 90 percent in certain cases. 12.74 Thc substitution of a pipeline for the railroad and the port wiould apparently cut fin-ed investment costs by,r a factor of t,a or more, and .vould- sinmilarlyr lo.Ter the operating costs of the system. Although the Ifission did not undertake a d'etailcd evaluation of the system, a preLminary7 analysis strongly suggests that this solution is superior to the roilroad-port combination. The financi l flowjs and costs are as estimated below, for a conservatively estimated sell- in- pric e. Operating costs per metric ton Fixed cost . . . . . . . . . . . . . . . 2.52 5 1 Direct operating cos't;s of mininG. . 2.72 3/ Pipeline transportat:ion cots.s...... . . . 0.97 Port facili-ti3es cost , . . . , . . . . . . O.06 Ot al . . . . . .. . . . . . . . . .62 E nploymen t of Loreign contractor to operate entire System. . . . . . . .$d;0.20 3I Total . . . . . . . . . . . . . 4 . . . . . .(6. *Possiblo F.o.b. price ier ton . . . . . ..q9.0o Profit per ton . . . . . . . i2.55 AtnLual profit. . . . .- . ... .............$7TO-`(O, oo Conclusi ons 19 75 Based on some elementary cost calculatvions, it- i.)ppers th?.2; tUhe project- as -propocei in the 'IContrac of `Worlk" is not a -finarc.ll'r f avo::rohle one for tGhe g-o-ven-lent, nor are other stipullato-, ons in th3 ar-rec:icnut dcirc'blc for the Government to en't.er in-to. Tlhe Dpropos-ed / BDasod on 15]$ of investmcn't,. 2/ Based on chescp .Linflju o;° dc,np coal in the U. S. Cos-L inclu13 labor rln.tc-rials, po:Cir, Lun.on -:nlorrc, en-ral a ( ,tro:,;n, salo2 non] o rring .'ri insuronct' . 1 ?h L2;)' .' '. ac2;.:o-Cz Lnce' '.' no rai-,ap necXr Jo-`jd:,akr.a, is under eon .i6de?tratoon for doxrolonment,? . Prelii,.iiary e:-ploration shows.s a possible dcposi.t cor:-ining more ±,han )lo mill-on tons of ortable iron sands. Howviever, harbor conditions rc more difficult than thoce encouantared at Tjil..tjaTo. -587 Bauxi-Le 12.83 Most of the present lining of bauxite is done on the is-l and of Dintzin, as well as on Buton, and there are mline5 on Koj>anc and Dondang. I-ining is a simple operation of stripping, follo;wed by Jash- ing. Hiost of the ore is shipped to Japan, and small anounts a-re exzported to IJestern Europe. A recent N0-year contract w;jith Japan calls for delivery of 800,000 tons of bauxite in 1969 and 1 million tons each year thereafter. Bauxite Ore Exports Year Metric Tons Value in U. S. $ 1966 688,385 3,626,373 1967 888,537 L ,560,125 1968 8b7,751 3,881,021 1969 863,626 l, 3611,221 1970 1,182,239 5,891i,733 I,' Aneka Tambang's operations enrDloy about one thousand nen. The cost of T)rodiTcLic a metric ton of baux-cite is -about 03.50, and it, is being sold for about. $-5.60 per metric ton. Discussion ancl feasibility stCudies are underuzq for thc possibility of putting up a:n alumina plant. T.ec^nical aid has been requestued for this project. iclckel 12.8) 8 ibckCel, arlong, il-l-;h bauxite-, -re the tuo T,iost pro`itable minerals for Anska i. Ta.x.a. _ 'inin- of nickcel by, the Sta-le e':ernrise. is bei ng done in the soutLhe-.ern Pn'ninula of Sulawesi, at1 Poma'la, L -5unr Pakar,. and Datuk--_,u1.-ilat f -.c1ds, as -w1ell as on the isl and of H ni anm;. 1N,ickcol ores occu aI:n vas,t c.ua,,.ntit,-t,o3,: in Tlndonc-Si a. The:e orcs are nic:-o1_ - bea0a)-1-; I ater-''tcJ hiTh are cderived fron the oc.r o , eridot.te in serl:entine oT of rockc. WePlatharinF', process re.moves tihe alxuminun-i and calciuwl of 'the rock .while iron, chromrium, nicklcc, awnd cobclt a;re concent-rated in th.e- ,eathered soil, particularly -at the interface oT the u1ncatered an'il ieatherecd rock. The existance ol thliese doposit_ have been lkncwn for a long tine; howctleecr, +,,r hal;e defied economic m-zetallurgic.al rececvry bec ause- 1.he nickel-bcarinfi minterals a-e silic al6es . T? sec y e..1: e h a s1r b een an inc:r easing icnlS, i*. deposits. se L-!wch.nzd, s cctive sr½n ranininr and rinnual pilck Lnd slhovecl zare used tUJo -;nine tho nickel ore,s of va-rious grdies, end hthcrS-a are. b1whnded toge,tchr t:o produce exporb qualzity carc. T-hle nresent a:grae- men; n 'ith the.lle J.a.panese -roup o-f Suni-doco, calls for the nickcl ,)lus cobalt. ccnitcnt of the onre to be no low.er t;,hcn- ?.)4 percent. information is available why the published value & reported selling price are not the same. Nickel ore Exports of Indonesia 1965-1968 Year Loaded Weiglht Value in In M,etric Tons 1 I.S. b 1966 133,650 1,190,315 1967 1456,881 1,39b,8Q6 1968 2b0,51b2 2,367,11)2 1969 257,761 3,3114,871i 1970 538,1653 8,315,266 Therc are abou.t 3,000,000 tons of this high-grade nickel-cobalt ore left. This year Aneka T nar.bang expects to ship out 800,000 tons of ore and one m,illion thereafter. At this rate, the high-grade trill be exhausted in about tlree years' time. Alt,hough the concession has been drilled by Anekrl Tamribang, t,he low--grade (1.8 percent nickel- cobalt) ore reserves were not made available. 12.85 Aneka TajbLbng is pro-posing the construction of a ferr- nickel plant at the mihe site that would -utilize the low-grade ni ckLel- cobalt ores and have an cnnual capacity of 1,000 metric tons of con- tained nicklel in ferro-nick.el. The cost of the plant is about 125, Plillion and the proposed plan for financing is i 2 milli-on out of Anecka T=.oann-grs profitus, with the rema-inder to be borrowed from the loca-l banks. The planned carmcity of this plant is somewhast sasmall for mos' efficient production. Smeltin' is done in blast furnaces, rotary, kiTlhs and most oftLen in electric ore furnaces. TechreloF-y of smelt- ing as comple and 1mow-hou plus cx:^:rionce in the erection -nd o-era- tion of tUhe plant are cssential. iTeithcr of these are present in Indon.esia; yet tJhe ' mizllion project of a ferrz-nickel, plan i.s scheduled for construction. A review of t'Lese plans might, be prudent. 3j Irnclucies Mioisture.