Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 5393 1-ID

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$225 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR THE

POWER TRANSMISSION DEVELOPMENT PROJECT

May 26,2010

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

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

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

(Exchange Rate Effective as o f March 1 , 20 10) Currency Unit Indonesian Rupiah IDR 1,000 US$O. 10799 US$1 IDR 9,260

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank CPS Country Partnership Strategy DSCR Debt Service Cover Ratio DSCR Debt Service Coverage Ratio EASIS Indonesia Sustainable Development Unit EMP Environment Management Plan ERM Enterprise Risk Management ERP Enterprise Resource Planning Go1 Government of Indonesia IBRD ICB International Competitive Bidding IFR Interim Financial Report IS Implementation Support JBIC JICA Japan International Cooperation Agency LARAP

International Bank for Reconstruction and Development

Japan Bank for International Cooperation

Land Acquisition and Resettlement Action Plan NCB National Competitive Bidding NPV Net Present Value ORAF Operational Risk Assessment Framework PLN Perusahaan Listrik Neaara

(Indonesia’s State Power Company) PMC Project Management Consultant PSO Public Service Obligation PTD Planning and Technology Department OBS Quality Based Selection QCBS Quality and Cost Based Selection VAT Value-added Tax VSL Variable-Spread Loan

Regional Vice President: James W. Adams Country Director: Joachim von Amsberg

Sector Managers: Sector Director: John Roome

Task Team Leader: Leiping Wang Sonia Hammam/N. Vijay Jagannathan

FOR OFFICIAL USE ONLY

Table of Contents

I . I1 . I11 . IV . V . VI .

Strategic Context .................................................................................................................... 1 Project Development Objectives ............................................................................................ 3 Project Description ................................................................................................................. 3 Key Risks ................................................................................................................................ 6 Implementation ....................................................................................................................... 6 Appraisal Summary ................................................................................................................ 7

Annexes:

Annex I: Annex I: Annex 11: Annex 111: Annex IV: Annex V: Annex VI:

Results Framework and Monitoring ......................................................................... 12 Results Framework and Monitoring ......................................................................... 13 Detailed Project Description ..................................................................................... 14 Implementation Arrangements ................................................................................ -16 Operational Risk Assessment Framework (ORAF) ................................................. 25 Implementation Support Plan .................................................................................. -27 Team Composition ................................................................................................... 30

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

PAD DATA SHEET

INDONESIA

POWER TRANSMISSION DEVELOPMENT PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC Indonesia Sustainable Development Unit (EASIS)

Sustainable Development Department

Date: May 26,2010 Country Director: Joachim von Amsberg Sector Director: John Roome Sector Managers: Sonia Hammam and

Team Leaders: Leiping WangElvi Schaefer Project ID: P117323 Lending: Instrument: SDecific Investment Loan

N. Vijay Jagannathan

Sector(s): Power (1 00%) Theme(s): Infrastructure services for

private sector development (1 00%)

Environmental Assessment Screening Category: B

Y , Project Financing Data:

Proposed terms: [ X I Loan [ 3 Credit [ 3 Grant [ ] Guarantee [ 3 Other:

Source Total Project Cost:

Cofinancing : PLN: Total Bank Financing:

IBRD IDA

New Recommitted

Total Amount (US$M) 254.1

0.0 29.1

225.0

225.0 0.0

Borrower: Republic of Indonesia Responsible Agency: PT PERUSAHAAN LISTRIK NEGARA (PLN) J1. Trunojoyo Blok MI/135, Indonesia, 12160 Tel: (62-21) 725-1234 Fax: (62-21) 722-1330 Web site: http:/lwww.pln.co.id

Contact Person: Nasri Sebayang, Director of Planning and Technology Telephone No.: (62-21) 726-1 875/726-1122 Fax No.: (62-21) 722-1330

I O Y e s O N O Does the project meet the Regional criteria for readiness for imulementation? I The development objective of the proposed project is to assist the Borrower to meet growing electricity demand and improve the reliability of electricity supply in Java and south-central Sumatra by streng;thening the Dower transmission svstem. Project description The Project consists of the following parts: 1. Java-Bali Transmission Substation Expansion and Construction

(a) Expansion of four (4) existing 500 / 150 kV and twenty (20) to twenty-five (25) existing 150 / 20 kV substations through the installation of new transformers and associated equipment.

(b) Construction of one (1) new 150 / 20 kV substation, including two (2) 60 MVA transformers, and installation of associated equipment.

2. South-Central Sumatra Transmission Substation Upgrading and Expansion (a) Upgrading of five ( 5 ) existing 150 kV substations through the installation of new transformers and

associated equipment. (b) Expansion of ten (10) to fifteen (15) existing 150 / 20 kV substations through the installation of new

transformers and associated equipment. Safeguard policies triggered?

Environmental Assessment (OP/BP 4.0 1) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OPA3P 4.1 1) Indigenous Peoples (OPBP 4.10) Involuntary Resettlement (OPBP 4.12) Safety of Dams (OPA3P 4.37) Projects on International Waters (OP/BP 7.50) Projects in Disputed Areas (OPBP 7.60)

*Yes o N o o Y e s * N o o Y e s * N o o Y e s * N o o Y e s * N o o Y e s * N o *Yes o N o o Y e s * N o o Y e s * N o o Y e s * N o

Conditions and Legal Covenants: Loan/Project Agreement Reference

1. Section 4.01 of the LA.

2. Section I A. 5 of Schedule to the PA

3. Section I A. 6 of Schedule to the PA

4. Section I1 A. 1 (a) of Schedule to the PA

5 . Section I1 B. 2 of Schedule to the PA

6 . Section I1 B. 3 of Schedule to the PA

7. Section II.B.4 (a) of Schedule to the PA

Description of Covenant

The Additional Conditions of Effectiveness: (a) Subsidiary Loan Agreement executed on behalf of the

(b) Project Implementation Plan and Procurement Manual Borrower and the Project Implementing Entity.

. , adopted by the Project Implementing Entity.

The project Implementing Entity shall establish, and thereaft& maintain throughout Project implementation, the Procurement Committee, chaired by a manager of the Department of Strategic Procurement, with an adequate composition, institutional framework, functions, and resources The project Implementing Entity shall appoint and maintain throughout Project implementation, a Project Management Consultant with qualifications, experience, and terms of reference satisfactory to the Borrower and the Bank, who shall be responsible for coordination between the various departments of the Project Implementing Entity, The Project Implementing Entity shall monitor and evaluate the progress of the Project and prepare Project Reports. Each such Project Report shall cover the period of one (1) calendar year, and shall be furnished to the Bank. The Project Implementing Entity shall prepare and furnish to the Bank, interim un-audited financial reports for the Project covering the quarter, in form and substance satisfactory to the Borrower and the Bank. The Project Implementing Entity shall have its financial statements audited by independent auditors acceptable to the Borrower and the Bank, in accordance with consistently applied auditing standards acceptable to the Borrower and the Bank. Each audit of these financial statements shall cover the period of one (1) fiscal year of the Project Implementing Entity. Audited financial statements for each period shall be furnished to the Borrower and the Bank. Except as the Bank shall otherwise agree, the Project Implementing Entity shall not incur any debt unless a reasonable forecast of the revenues and expenditures of the Project Implementing Entity shows that the estimated net revenues of the Project Implementing Entity for each fiscal year, during the term of the debt to be incurred, shall be at least 1.5 times the estimated debt service requirements of the Project Implementing Entity in such year on all debt of the Project Implementing Entity, including the debt to be

Date Due

Before effectiveness of the loan.

No later than one (1) month after the Effective Date.

No later than three (3) months after the Effective Date.

Not later than one (1) month after the end of the period covered by such report. Not later than forty-five (45) days after the- end of each calendar quarter.

Not later than six ( 6 ) months after the end of the period.

I. Strategic Context

A. Country Context

1. stronger than many had expected. Real GDP has been growing at 5 to 6 percent annually since 2003, reaching 6.1 percent in 2008. Despite the global financial crisis, the country’s GDP growth rate reached 4.2 percent in 2009, one of the highest in the region. Its fiscal position also remains strong, providing Indonesia with options to respond to the global financial crisis as well as providing additional resources for meeting infrastructure development priorities. Successful implementation of priority infrastructure projects will be essential for Indonesia to emerge as a strong middle income country in the coming decade.

A decade after the Asian financial crisis, Indonesia is emerging economically and fiscally

B. Sectoral and Institutional Context

2. 1990s, it was significantly weakened by the East Asian financial crisis of the late 1990s. For about a decade thereafter, from the late 1990s to 2007, investments in the power sector were below the level needed to ensure reliable supply. As a result, Indonesia still has the lowest per capita electricity consumption and electricity access rate among all of the Bank’s middle-income member countries in the East Asia region. Most parts of the country are currently experiencing serious power shortages.

Although the power sector underwent rapid expansion between the early 1980s and late

3. social development:

The power sector is facing the following challenges to sustain economic growth and

Electrification rates remain low, while robust and sustained economic growth is driving the demand for electricity to grow at an annual rate of over seven percent. There is tremendous pressure on the sector to keep pace with economic growth due to the strong correlation between energy and GDP growth.’ In addition, around 70 million2 people still do not have access to electricity, or electricity supply is unreliable. To reach the Government’s target of electrifying 90 percent of the population by 2020, the power sector will need to connect roughly two million new subscribers annually, double the rate of the past few years.

The current electricity tarijJs are insufficient to cover the cost of supply of the national power utility (PLN), leading to unsustainable Government subsidies to provide PLN with financial support. PLN’s financial condition was negatively impacted upon the removal of petroleum fuel subsidies in 2005, the suspension of electricity price increases since 2004, and the increase in fuel prices. The company’s financial viability is reliant upon the Government’s public service obligation (PSO) subsidies, which reached US$7.2 billion (48 percent of the total revenues) in 2008, and was US$5.6 billion (37 percent of

’ Elasticity of electricity sales growth to GDP growth was on average greater than 1.5 in the past 15 years. World Bank,” Electricity for All”, 2006.

1

total revenues) in 2009, raising doubts about the long-term sustainability of this financial support mechanism.

The restructuring and institutional reform of PLN remains influx, weakening the Government?s ability to provide public financing for power sector development. Although the Government of Indonesia (GoI) started to pursue decentralization, unbundling, corporatization, and restructuring of PLN as early as 1993, progress has been inconsistent and slow as a result of the East Asian financial crisis of the late 1990s and the ongoing legal uncertainty regarding PLN?s future. Effective institutional restructuring and strengthening of the sector is critical for facilitating the Government?s ability to attract private finance and to improve the efficiency of the power sector.

While abundant renewable resources are largely unexploited, the rapid increase of coal in the generation fuel mix may expose the country to environmental risks, both locally and globally. According to PLN?s long-term capital investment plan, the share of coal in the generation fuel mix will increase from around 35 percent today to roughly 70 percent by 2020. The magnitude of this expansion is raising concerns of the likely negative environmental impact in the heavily populated areas of Java and Bali, and in the environmentally sensitive areas of some of the outer islands. Also, Indonesia?s greenhouse gas emissions will continue to grow at a much faster pace than most of its neighbors. Although Indonesia is rich in renewable energy resources, especially geothermal, hydropower and biomass, the lack of incentives and regulatory certainty, combined with the relatively weak institutional capacity of major national and local institutions, has hindered the rapid development of these indigenous and clean energy resources.

4. After the successful completion of the general election in July 2009, the new administration was established in October 2009. Although the new government is still re- defining its energy sector policy priorities, the emerging energy sector strategy is focusing on: (a) facilitating private investments and increasing public financing to grow supply capacity; (b) improving the generation fuel mix by developing coal fired and renewable energy, especially geothermal and hydropower generation; (c) rationalizing the electricity tariff and subsidy regime; and (d) further strengthening institutional capacity and improving the management efficiency of PLN.

5. the Bank is supporting a large investment lending program to finance: (a) public sector power infrastructure projects, especially renewable energy, to sustain economic growth; (b) development policy lending programs to support GoI?s efforts to establish a sustainable policy environment for infrastructure project development and move the energy sector towards a low- carbon development path; and (c) technical assistance to rationalize the electricity tariff and subsidy regime, establish incentives for geothermal resource development, and strengthen the capacity of national state-owned companies in the energy sector.

In line with the Bank?s Country Partnership Strategy (CPS) and GoI?s strategic priorities,

2

C. Higher Level Objectives to which the Project Contributes

6. energy sector to rapidly eliminate the bottlenecks in major transmission systems. It will strengthen the main transmission system in Java-Bali and upgrade the main transmission system in south and central Sumatra. When implemented successfully, the proposed project will play an important role in supporting economic growth in both islands over the medium to long term.

The proposed project will form an integral part of the Bank’s assistance program to the

7. The proposed project is also consistent with the Country Partnership Strategy for Indonesia FY2009-20 12, which inter alia, supports the building of effective and accountable institutions in the power sector. It will contribute to the country program by: (a) improving the business climate by better meeting the increasing demand for electricity (in line with Core Engagement 1 for supporting private sector development); and (b) strengthening the technical, managerial and operational capacity of PLN to implement large scale investment projects (in line with Core Engagement 2 for support for infrastructure development).

11. Project Development Objectives

A. PDO

8. growing electricity demand and improve the reliability of electricity supply in Java and south- central Sumatra by strengthening the power transmission system.

The development objective of the proposed project is to assist the Borrower to meet

B. Beneficiaries

9. supply from all substations financed by the project, a population of 56.2 million (49.0 million in Java and 7.2 million in south-central Sumatra). Indirect beneficiaries include people who are not directly connected to the substations financed by the project, but connected to the power grids indirectly supported by the project, a population of 74.6 million in Java and Bali, and 8.4 million in south-central Sumatra. This indirect support will improve the security of supply and reduce losses of the power grids as a whole.

Direct beneficiaries of the project include people who directly benefit from electricity

C. PDO Level Results Indicators

10. Achievement of the development objective will be assessed through increase in electricity sales, as well as reduction in transmission interruptions and transmission losses, as a result of the strengthening of transmission systems in Java and south- central Sumatra.

111. Project Description

A. Project components

1 1, of which $225 million will be financed by IBRD. Each component is described below (See

The Project has two components with a total investment cost estimated at $254.1 million,

3

Annex I for a detailed project description).

Java-Bali Transmission Substation Expansion and Construction:

(a) Expansion of four existing 500 / 150 kV and twenty to twenty-five existing 150 / 20 kV substations through the installation of new transformers and associated equipment.

transformers, and installation of associated equipment. (b) Construction of one new 150 / 20 kV substation, including two 60 MVA

South-Central Sumatra Transmission Substation Upgrading and Expansion:

(a) Upgrading of five (5) existing 150 kV substations through the installation of new

(b) Expansion of ten (1 0) to fifteen (1 5) existing 150 / 20 kV substations through the transformers and associated equipment.

installation of new transformers and associated equipment.

B. Project Financing

Lending Instrument

12. PLN, in agreements reached with the Ministry of Finance, has selected a variable-spread loan (VSL) of US$225 million for the project. Repayments will be annuity, with a total maturity of 24.5 years, including 9 years of grace.

Project Financing Table

13. price and physical contingencies, taxes, interest during construction, and the front-end fee. PLN will finance US$29.1 million for land acquisition, project management, tax, interest during construction, and the front-end fee. The remaining costs of US$225.0 million for goods, works, and contingencies will be funded by the IBRD loan. Detailed information on costs and financing sources is provided in Table 1 and Table 2.

Total project financing requirements are estimated at US$254.1 million, inclusive of

4

Table 1. Project Costs by Component and Use of Financing

Local Foreign Total $ million $ million $ million Project Cost By Component and/or Activity

A. Infrastructure

the Java-Bali System 1. Expansion and Construction of Transmission Substations in

1.1. Expansion of 5001150 kV substations in Java 1.6 47.1 48.6 1.2. 150 kV Millennium substation in West Java 1.5 8.4 9.9 1.3. Expansion of 150 kV substations in Central Java 0.9 27.9 28.8 2. Upgrading of and Expansion of Transmission Substations

2.1. Upgrading of 275 kV substations in South-Central

2.2. Expansion of 150120 kV substations in South-Central

in South-Central Sumatra System

Sumatra 15.3 85.9 101.2

Sumatra 3.9 21.9 25.8 Subtotal 23.1 191.2 214.3

B. Service Project Management 0.1 0.1

C. Land Acquisition and Compensation 0.2 0.2 Total Baseline Cost 23.4 191.2 214.6

Contingency Physical 0.5 3.8 4.3 Price 0.7 5.7 6.4

Tax (VAT) 22.5 22.5 Total Project Costs 47.1 200.8 247.8

Interest During Construction 5.6 5.6 Front-End Fee 0.6 0.6

Total Financing Required 47.7 206.4 254.1 ~

Table 2. Project Costs by Component and Source of Financing

PLN IBRD Total $ million Project Cost By Component and/or Activity

$ million $ million A. Infrastructure 1. Expansion and Construction of Transmission Substations in Java-Bali System 11.8 91.7 103.5

1.1. Expansion of 50011 50 kV substations in Java 6.5 51.1 57.6 1.2. 150 kV Millennium substation in West Java 1.4 10.4 11.8 1.3. Expansion of 150 kV substations in Central Java 3.9 30.2 34.1

2. Upgrading of and Expansion of Transmission Substations in South-Central Sumatra System 17.3 133.3 150.6

2.1. Upgrading of 275/150 kV substations in South-Central Sumatra 13.8 106.2 120.0

2.2. Expansion of 150120 kV substations in South-Central Sumatra 3.5 27.1 30.6

Total Financing Required 29.1 225.0 254.1

Note: Base costs are at early 2010price level.

5

IV. KeyRisks

14. power utility which has successfully implemented many Bank projects. Potential risks are summarized in the Operational Risk Assessment Framework (see Annex IV). The overall project risks are rated moderate. Risks identified are manageable and mitigation measures are in place.

The proposed project is a technically simple project to be implemented by an established

V. Implementation

A. Institutional and Implementation Arrangements

15. PLN will be the implementing agency. The Planning and Technology Department (PTD) of PLN will be responsible for overseeing and coordinating project implementation, including monitoring and reporting. A project coordinator will be designated to take on this responsibility. A project implementation plan (PIP) has been developed and will be adopted for project implementation. Procurement activities will be managed from PLN headquarters by the Strategic Procurement Department (SPD). A Procurement Committee, chaired by a manager of SPD, will be established to carry out procurement of goods and works under the project.

16. Under the guidance of the Department for the Operation of the Java-Bali Region and the Department for the Operation of the West Indonesia Region, the two regional project offices in Java Bali and in Sumatra (the Regional Project Office of the Generation and Transmission Unit for Java, Bali and Nusa Tenggara, and the Regional Project Office of the Generation and Transmission Unit for South Sumatera) will be directly in charge of supervising the construction of their respective components. Disbursement and financial reporting will be carried out by PLN’s Finance Department (FD). A Project Management Consultant (PMC) will be employed by PLN to provide support to: (a) the PTD on project coordination, monitoring, and reporting; (b) the FD on financial management, reporting, and disbursement issues; (c) the Procurement Committee for preparing bid documents and in bid evaluation; and (d) the two regional offices for project reporting. The PMC will be on board before project effectiveness.

B. Results Monitoring and Evaluation

17. outcomes of the project e.g., electricity sales in the project areas, and reliability statistics for transformers. Project progress will be monitored by the regional project offices in Java and south-central Sumatra. With the assistance of the PMC, PTD will compile the data and monitor the performance of project implementation.

PLN maintains a good statistical system with sufficient data to monitor most of the

C. Sustainability

18. of the power sector, and at the project level, by the proper implementation and operation of the proposed project.

Sustainability of the proposed project will ultimately be determined by the sustainability

6

19. with PLN’s management efficiency. It is also taking key measures to rationalize the electricity tariff and subsidy regime to improve the financial sustainability of PLN and improve the sector’s investment climate. The need to make substantial investments in the power transmission system is well understood by Go1 after the recent failure of several high voltage substations supplying the Jakarta region, which resulted in widespread power interruptions across the capital.

Go1 is committed to strengthening the electricity sector’s institutional capacity, along

20. through accelerated project preparation already has well established operational capacity. Sustainability of the project is further supported by robust electricity demand growth in the country.

At the project level, PLN has demonstrated a high level of commitment to the project

VI. Appraisal Summary

A. Economic and Financial Analysis

Economic Analysis

21, The economic internal rate of return (ERR) of the project has been assessed for the five subcomponents of the project using the cost benefit approach. As shown in Table 3 below, the ERRS range from 25 to 65 percent. Sensitivity analysis carried out demonstrates that the project remains economically viable against a simultaneous 10 % drop in benefits, 10% increase in investment costs, and 10% increase in supply costs. More details on the economic analysis are available in the project files.

Table 3. Summary of Economic Analysis

7

Financial Analysis

22. PLN’s Financial Performance and Financial Condition. PLN’s financial condition continues to be substantially reliant upon the Government subsidy which covers the shortfall between electricity tariffs and PLN’s cost of power upp ply.^ In 20094 PLN’s net operating income of Rp. 1 1.4 trillion (inclusive of Government subsidies) was 3.2 times higher than the 2008 net operating income of Rp. 3.6 trillion. Operating revenues decreased by Rp. 17.8 trillion as a result of a reduction in Government subsidy, which fell due to a decline in fuel costs. Operating expenses decreased by Rp. 26 trillion as a result of lower fuel costs. However, in the absence of gas supply, PLN will remain vulnerable to fuel price increases in the near to medium term due to the heavy utilization of high grade diesel in PLN’s Combined Cycle Gas Turbine power plants. PLN also booked a foreign exchange gain of Rp 4.7 trillion in 2009 as a result of the strengthening of the IDR.

23. PLN has shown an ability to raise financing for its investments in local and global financial markets, but this capacity is dependent on the implicit and explicit Government backing of its financial obligations. PLN’s capital expenditures were approximately Rp. 3 1 trillion’ in 2009. This increase reflects the scale-up in implementation of its on-going capacity expansion program to build the country’s energy capacity by investing in generation and in transmission projects.

24. from 201 1 to 2015. Combined with projected average annual tariff increases of 12% over the same period, PLN expects revenues (excluding Government subsidies) to grow at an average annual rate of about 22 percent during 201 1-15. As a result of the projected higher revenues, government subsidies are expected to decline from Rp. 55.8 trillion in 2010 to Rp. 10.7 trillion in 2015 in 2009. Net income, after taxes, will grow to Rp. 59.8 trillion in 2015, compared to Rp. 1 1.4 trillion in 201 1. This substantial growth is mainly driven by electricity sales growth, increase in electricity tariffs, a change in the fuel mix away from fuel oil, and the addition of new generating capacity.

PLN’s Financial Projections. PLN expects an annual sales growth of around 10 percent

25. Monitoring PLN’s Financial Condition. In the context of the above financial projections, the key financial measure to monitor PLN’s financial viability would be the company’s liquidity; this would ensure that the company is able to meet its financial obligations and raise sufficient funding for its capital investment requirements. The financial covenant of a DSCR of 1.5 times (which is the same as in the on-going Java-Bali Power Sector Restructuring and Strengthening Project, Loan 7758-ID) is considered appropriate for this project.

26. has significantly improved its liquidity from 2008 to 2009. PLN received a 5 percent PSO

Evaluation of the preliminary 2009 unaudited financial information indicates that PLN

The Government is obliged to pay a public service obligation subsidy under the State-Owned Enterprise Law 19/2003. In addition, MOF Decree No. 11 I/PMK.02/2007 ensures that the difference between sales and cost of roduction is covered.

‘Based on 2009 unaudited financial information provided by PLN. Based on PLN’s 2009 unaudited financial information. Actual capital expenditure will be known upon the release

of audited financial statements by end June 20 10.

8

subsidy margin in 2009 that added to its revenues. PLN also raised US$2 billion from the issuance of corporate bonds in the global financial marketsS6. In addition, PLN exercised prudent financial management by deferring the use of these funds for capital investment until they are needed, and instead used this liquidity to pay down its third-party arrears on which it was incurring significant financial charges. However, even after paying third party arrears and meeting all other 2009 financial obligations, PLN had a cash balance of US$ 1.3 billion, thereby remaining sufficiently liquid. Under the circumstances, PLN’s financial performance is satisfactory, despite the possibility that the DSCR might not meet the agreed target for 2009.

27. PLN is also expected remain liquid throughout the duration of the project. However, the company is undertaking a significant investment program, while the sector is expected to undergo reform in pricing and subsidies that may impact its financial condition. In view of this, PLN’s financial condition would need to be monitored during 2010 and beyond to ensure that its financial strategy is consistent with the assumptions made in its current financial forecasts.

28. More information on PLN’s financial condition is available in the Project files.

B. Technical

29. Feasibility studies of the project were reviewed and found to be sound. All the subprojects selected for the proposed project form part of PLN’s least cost transmission system expansion plan, and the selection has been verified through regional load flow and stability analyses to ensure that system reliability and security requirements are followed. Individual technical designs of all subprojects meet Indonesian technical standards, which are consistent with international standards. The Bank has also reviewed PLN’s planning approach and methodology, and has found it acceptable.

C. Financial Management

30. strengthen PLN’s financial management capacity have been agreed with PLN. The assessment has concluded that with the implementation of these actions, the proposed financial management arrangements will satisfy the Bank’s minimum requirements under OPh3P10.02. Taking into account the risk mitigation measures proposed, the overall financial management risk for this financing is assessed as “moderate”, both before and after mitigation. Annex I11 provides additional information on financial management. The detailed financial management capacity assessment and arrangements are available in the project files.

A financial management assessment has been conducted by the Bank, and actions to

With large companies such as PLN, it is common to access financing when market conditions are most favorable. As a result, it is not uncommon to have a mismatch in timing between the availability of financing and its capital expenditure needs. It can be acceptable practice to utilize the resulting excess liquidity for other purposes that may improve the company’s financial position.

5

9

D. Procurement

3 1. A procurement assessment has been carried out and has concluded that PLN has adequate experience and capacity to carry out procurement activities related to the proposed project. PLN is familiar with Bank procurement procedures through its experience with implementing past projects financed by the Bank. As a result, procurement risk is assessed as moderate. Risk mitigation measures have been discussed with PLN and agreed. The procurement plan for the project has been received by the Bank and found to be acceptable. It will be updated at least annually (or as required) to reflect project implementation needs. A brief summary of the procurement capacity assessment and project procurement arrangements are provided in Annex 111. More details are available in the project files.

32. to mitigate fraud and corruption risks. It summarizes the actions that have been agreed to and will be undertaken by PLN to reinforce project governance, thereby enhan’cing transparency of project activities, increasing public accountability, and reducing opportunities for corruption, collusion or fraud. The GAF is available in project files.

A Governance and Accountability Framework (GAF) has been developed for the project

E. Social

33. Negative social impacts of the proposed project are in general limited and manageable. No indigenous people, as defined by OP 4.10, are present in, or are collectively attached to, the project areas. Four substations in Sumatra involve land acquisition, with no resettlement or impact on building structures; the remaining substations do not require land acquisition. PLN has prepared a land acquisition and resettlement action plan (LAMP) for the four subprojects in Sumatra. The L A M P has been reviewed by the Bank and found to be satisfactory. The L A M P has been disclosed locally and in the Infoshop. The institutional capacity of PLN has also been reviewed and is regarded as being adequate for the implementation of the LAMP.

F. Environment

34. The project is rated as a Category B project. PLN has prepared an Environment Management Plan (EMP) for the proposed project. No cultural property or natural habitats are impacted by the subprojects. Environment impacts are likely to be short term, site-specific, non sensitive or irreversible, and in every case, mitigation measures can be designed to reduce the negative impacts. The EMP has proposed practical methods of mitigating the impact during construction and operation, and it has been reviewed by the Bank and found satisfactory. An assessment of PLN’s capacity concluded that it has adequate capacity to carry out the activities necessary to comply with the Bank’s safeguards requirements. The EMP has been disclosed locally and in the InfoShop.

35. of the existing substations where the Bank will finance expansion or upgrading, including any physically connected projects and other potential corporate reputational risks, such as the potential climate change impact of the project. The due diligence confirmed that PLN has acceptable environmental, health and safety policies in place, with no potential environmental

Due diligence was conducted to identi@ any potential environmental and social liabilities

10

and social liabilities identified in the existing substations. It also confirmed that there are no other projects which are related directly or significantly to the proposed project activities as defined by OP 4.12. They are also in compliance with relevant national environmental and social regulations and policies. Due diligence also confirmed that the proposed project will rapidly eliminate transmission bottlenecks in the two most important power systems in Indonesia. This will allow PLN to reduce transmission losses and optimally dispatch its generation system, which will result in fossil fuel savings and therefore reduce greenhouse gas emissions.

11

Annex I: Results Framework and Monitoring

The results framework is designed to represent the underlying logic to achieve the Project Development Objective (PDO). All project outcome indicators, e.g., electricity sales, transmission systems losses, and reliability indicators of the transformers, are directly related to the PDO. The intermediate outcome indictors are directly linked to the commissioning schedule of the project, are easy to monitor, and are consistent with the project outcome indicators. All these indicators are specific, measurable, realistic, relevant and time-bound.

12

m Y .-

I .;" :s

+ + + + + = c c I c c c c

0 E" g g

+ + + + + R c c 1 c c c c

+ + c c g g

+ + j + + c c c c c c

m 3

Annex 11: Detailed Project Description

INDONESIA: POWER TRANSMISSION DEVELOPMENT PROJECT

1. growing electricity demand and improve the reliability of electricity supply in Java and south- central Sumatra by strengthening the power transmission system.

The development objective of the proposed project is to assist the Borrower to meet

2. project investment cost is estimated at $254.1 million. The Bank will finance the supply and installation of all equipment and civil works at US$225 million. PLN will finance land acquisition, taxes, interest during construction, and project management at around $29.1 million.

The project has two components, each of which is described in detail below. The total

Component 1: Java-Bali Transmission Substation Expansion and Construction

3. twenty-five existing 150 / 20 kV substations through the installation of new transformers and associated equipment; and (b) construction of one (1) new 150 / 20 kV substation, including two 60 MVA transformers, and installation of associated equipment. It will significantly strengthen the transmission capacity of the 500 kV transmission network and increase the transmission capacity of the 150 kV systems in Java. The total investment cost is estimated at $103.5 million, of which IBRD financing is estimated at $91.7 million. Component 1 includes:

This component includes: (a) expansion of four existing 500 / 150 kV and twenty to

Expansion of the Depok 500/150 kV substation in West Java (1x500 MVA); Expansion of the Balaraja 500/150 kV substation in West Java (1x500 MVW); Expansion of the Pedan 500/150 kV substation in Central Java (1x500 MVA); Expansion of the Krian 500/150 kV substation in East Java (1x500 MVA) ; Construction of the Millennium 150/20 kV substation, which includes two transformers with a 60 MVA capacity, associated substation equipment, and civil works; and Expansion of approximately twenty to twenty-five existing 150/20 kV substations in Central Java; each subproject will install one or two 150/20 kV transformers and associated substation equipment.

Component 2: South-Central Sumatra Transmission Substation Upgrading and Expansion

4. installation of new transformers and associated equipment; and (b) expansion of ten to fifteen existing 150 / 20 kV substations through the installation of new transformers and associated equipment. It will significantly strengthen the capacity of the transmission link between south and central Sumatra, and increase the capacity of the transmission systems in south and central Sumatra. The total investment cost is estimated at $1 50.6 million of which IBRD financing is estimated at $133.4 million. Component 2 includes:

This component includes: (a) upgrading of five existing 150 kV substations through the

Upgrading Lahat 275/150 kV Substation, which includes the installation of 2x250 MVA 275/150 kV transformers and associated equipment;

14

e

e

e

e

e

5.

Upgrading Lubuk Linggau 275/150 kV Substation, which includes the installation of a 275/150 kV transformer at 250 MVA and associated equipment; Upgrading Bangko 275/150 kV Substation, which includes the installation of a 275/150 kV transformer at 250 MVA and associated equipment; Upgrading Muara Bungo 275/150 kV Substation, which includes the installation of a 275/150 kV transformer at 250 MVA and associated equipment; Upgrading Kiliranjao 2754 50 kV Substation, which includes the installation of a 275/150 kV transformer at 250 MVA and associated equipment; and Expansion ten to fifteen existing 150/20 kV substations, each of which includes the installation of one 150/20 kV transformer at 60 or 30 MVA, and associated equipment on the existing premises of the substation.

Project scope for the following will not be changed during implementation: (a) the expansion of four 500/150 kV existing substations and the construction of the new Millennium Substation in Java; and (b) upgrading of the five 275/150 kV substations. In the case of the expansion of the existing 150/20 kV substations, since investment priorities may change during project implementation, some specific subprojects under the two components may be dropped and new subprojects may be put forward for financing. However, all new subprojects (expansion of 150/20 kV existing substations only) must meet the following criteria:

The subproject will contribute to the development objective of the project; The design of the subproject will meet Indonesian technical standards; The subproject has been formulated after taking into account alternative investments to ensure that it is a least cost option; The subproject has an economic rate of return of at least 10 percent, calculated using methodology acceptable to the Bank; The EMP amendment to reflect the specific site conditions, satisfactory to the Bank, has been prepared and disclosed in accordance with the generic EMP adopted by PLN for the project; The new subprojects will not require land acquisition; All necessary clearances/approvals for implementing the sub-projects, including the feasibility study and environmental approval, have been given by the relevant domestic agencies or authorities; and Financing, procurement, and implementation plans satisfactory to the Bank have been prepared.

I

15

Annex 111: Implementation Arrangements

INDONESIA: POWER TRANSMISSION DEVELOPMENT PROJECT

1. Project Administration Mechanisms

1.1 Project implementation institutional arrangements

1. as follows:

PLN will be the implementing agency, with detailed project administration arrangements

1.2

2.

The Planning and Technology Department (PTD) of PLN will be responsible for overseeing and coordinating project implementation, including monitoring and reporting. A project coordinator will be designated to take on this responsibility. A project implementation plan (PIP) will be adopted for project implementation. Under the guidance of the Department for Operation of the Java-Bali Region and the Department for Operation of the West Indonesia Region, the two regional project offices will be directly in charge of detailed engineering design, development of bidding documents, and construction supervision of their respective components. Construction will be undertaken by contractors under supply and installation contracts. Contractors will be selected through international competitive bidding. Procurement activities will be managed from PLN headquarters by the Strategic Procurement Department (SPD). A Procurement Committee, chaired by a manager of SPD, will be established to carry out procurement of goods and works. Disbursement and financial management reporting will be carried out by PLN?s Finance Department (FD) with the support of the two regional offices.

Measures to address capacity constraints

To address lack of coordination among various implementation units in financial management, reporting and procurement experienced during the implementation of the on-going Bank financed Java Bali Power Sector Restructuring and Strengthening Project (Ln. 47 12-IND), an internal Project Management Consultant (PMC) will be employed by PLN to provide support to: (a) the PTD on project coordination, monitoring and reporting; (b) the FD on financial management and disbursement issues; (c) the Procurement Committee for bid document preparation and for bid evaluation; and (d) the two regional offices for project supervision and reporting. The PMC will be on board within three months of project effectiveness. In addition, training and capacity building support will be provided to PLN teams during the project implementation (details in Annex 5).

16

2. Financial Management, Disbursement and Procurement

2.1 Financial Management

3. Overall, the residual financial management risk for the project is assessed as Moderate.

4. several donors, including the Bank. Its FM performance on past projects is considered satisfactory. There is sufficient segregation of duties between technical and financial/administration functions. Operational policies are documented in a manual that is adhered to. PLN is audited by a public accounting firm and its last three audit reports have been received on time. The audit reports are unqualified and have not reported any significant accountability issues.

PLN is an established State-owned Enterprise that has received financial assistance from

5. slow processing of payment to contractors; and (b) expenditures paid under the project not accounted in a timely manner in PLN records. These were mainly the result of a lack of coordination between the corporate treasury office in Jakarta and project offices elsewhere in the country.

The key FM issues experienced under the last project (Java Bali Power Project) were: (a)

6 . hire an individual consultant to coordinate between project offices and the corporate office. This consultant will be responsible for monitoring claims processing and ensuring that payments will be made within acceptable period of time. The problem of timely recording of transactions in PLN records has been partly alleviated through providing an access to client connection to PLN accounting department.

Some measures have been agreed to mitigate risks arising from these issues. PLN will

7. the budget will be prepared bottom-up from decentralized units, then consolidated and discussed centrally. The IBRD loan will finance only supply and installation of equipment. Direct payment, reimbursement, and special commitment method of disbursement will be used. There are no risks associated with funds flow, as all payments are to be controlled centrally from PLN head quarters.

Budgeting and Flow of Funds. The current PLN budget process will be followed, i.e.

8. system and will be included in the PLN financial statements. Some of PLN offices, including HQ, have implemented SAP, while other offices use another software. Because of this, PLN uses excel spreadsheets to consolidate accounts for financial reporting. This is not ideal, and PLN proposes to adopt SAP company-wide by 20 14.

Accounting and Reporting. All project transactions will follow the existing PLN

9. basis through Interim Financial Reports (IFRs). PLN will submit IFRs to the Bank no later than 45 days after the end of each calendar quarter.

PLN will continue to separately report project transactions to the Bank on a quarterly

10. approval of transactions and segregation of duties. FM procedures and policies are documented

Internal Control. PLN has adequate internal controls in place for preparation and

17

in a manual. All changes in finance/accounting policies and procedures are formalized through the issue of circulars by the Finance Director.

1 1. This department and its units undertake internal audit based on an annual work program. The proposed project will be included in the annual internal audit work program of the department.

PLN has an internal audit department at Head Office reporting to the President Director.

12. PLN will be audited by a public accounting firm. A copy of the audited financial statements of the company, along with the auditor’s opinion will be submitted to the Bank not later than six months after the end of each financial year. The auditor will provide information about the loan, use of funds and their opinion concerning the use of funds separately within the main audit report of PLN.

13. The following action plan was agreed with PLN.

FINANCIAL MANAGEMENT ACTION PLAN Action Actions to be followed up during implementation Hiring of FM Consultant not later than 3 months after project effectiveness. 1.

2.2 Disbursement Arrangements

14. be: (a) direct payment; (b) reimbursement method; and (c) special commitment, subject to the minimum amount per withdrawal application at US$lOO,OOO, except the last withdrawal application. Expenditures or invoices below the minimum amount need to be paid by PLN, and consolidated for submission to the Bank for reimbursement when the amount reaches the minimum of US$ 1 00,000 equivalent. Applications requesting direct payment and reimbursement shall be supported by records of such expenditures and evidence of all payments made (in the case of reimbursements).

Designated accounts will not be opened for this project. The disbursement methods will

15. available for audit, and to the Bank and its representatives, if requested.

All documentation showing expenditures shall be retained by PLN and shall be made

2.3 Procurement

Procurement review thresholds

16. Procurement for the proposed Project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, revised in October 2006, and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised in October 2006; and the provisions stipulated in the Legal Agreement.

18

17. project are indicated in Table 3.1.

Prior-Review Thresholds. Prior-review and procurement method thresholds for the

Table 3.1: Procurement Thresholds Prior Review Thresholds

Proposed (USD Procurement Method Thresholds Proposed (USD million)

18. prepared by PLN, has been reviewed by the Bank and accepted. This plan will be updated annually to reflect the latest circumstances. The Procurement Plan comprises six supply and installation ICB contracts, as indicated in Table 3.2. The World Bank Standard Bidding Document for Supply and Installation of Plant and Equipment will be used for these contracts.

Procurement Plan and Procurement Arrangements. Procurement Plan for the project,

Table 3.2: Procurement Arrangement and Schedule for Goods and Works

Packages

1 A

J- 1

5-2

5-3

B s- 1

s-2

s-3

'ote: Lots J

Project Title and Scope

2 JAVA PART Supply and Installation 500/150 kV Interbus Power Transformer 500 mVA for Java Supply and Installation 150 kV Millennium Substation in West Java Supply and Installation 150 kV Power Transformers for Central Java SUMATERA PART Supply and Installation 275 kV Lahat, Lubuklinggau Substations Supply and Installation 275 kV Bangko, Muarabungo,Kiliranjao Substations Supply and installation 150/20 kV Transformer for Substations in

Procurement

Method 3

ICB

ICB

ICB

ICB

ICB

ICB

Sumatera

Pre-qualif.

(YesiNo) 4

No

No

No

No

No

No

Domestic Preference (YesiNo)

5

No

No

No

No

No

No

vi11 under one package.

Bank Review

(PriorPost) 6

Prior

Prior

Prior

Prior

Prior

Prior

Expected Bid

Opening date

6

Aug- 10

Sep- 10

Sep- 10

Oct- 10

Oct-10

Sep- IO

19

19. Selection of Consultants. No consulting services are expected at this stage. If, during project implementation, any consulting service becomes necessary, PLN may use QCBS , QBS , Selection based on Consultants’ Qualification, Fixed Budget Selection, Least Cost Selection, Single Source Selection, and Selection of Individual Consultants as appropriate, subject to approval by the Bank.

Risks and Mitigation Measures

20. .

procurement is envisaged, and all contracts are subject to prior review. The following measures were agreed to mitigate the remaining risks:

Procurement risk for the project is assessed as “moderatey’, as only one type of

e

e

3.

3.1

21.

A Procurement Manual, prepared by PLN, which clarifies that Bank Guidelines should be followed in case of conflict between PLN RegulationKeppres 80 and the World Bank Guidelines, will be used for procurement using loan funds. A Procurement Committee, comprised of qualified members, preferably staff who have experience with procurement financed by international financing institutions, will be established by PLN. The credentials and qualifications for committee members will be provided to the World Bank for information. PLN should appoint a sufficient number of experienced staff for this project in the Department of Strategic Procurement. PLN will prepare a detailed schedule of procurement activities for monitoring progress by both PLN and the World Bank. Staff from the regional project offices should be involved in the Procurement Committee to ensure smooth transfer after the contracts are signed.

Environmental and Social Safeguards

Project types, locations and impact assessments

Project types and locations. Project investments (subprojects) are located in various provinces in Java and in South and Central Sumatra. The project involves three types of subprojects: (a) subprojects implemented within the existing fence of an existing substation, with no land acquisition involved (thirty six subprojects); (b) subprojects implemented adjacent to an existing substation site, requiring some land acquisition (four subprojects); and (c) the Millennium subproject, which involves the construction of a new substation on land transferred to PLN by the owner of the industrial zone free of cost.

22. Environmental Impacts. Environmental impacts are likely to be modest, non-sensitive and reversible, and in every case, mitigation measures can be designed to reduce the negative impact. For both components, there are no conservation areas or cultural sites within 10 k m s of any of the substations in the area. All the components are classified as Category By as defined by paragraph 8(b) of OP 4.01.

23. Expected impact during construction include: (a) increased level of dust and noise from the use and movement of machinery; (b) non-toxic solid waste during construction; (c) oil spill

20

or leakage from machinery or transformers; (d) prohibition of Polychlorinated Biphenyl (PCB); and (e) worker health and safety from existing electromagnetic fields (EMFs). Impact during operations include: (a) oil leak from transformers; (b) fire and emergency preparedness; (c) solid waste; and (d) worker health and safety.

24. Social Impacts. Land acquisition, including public consultation, and satisfactory compensation for the population residing in the project area, are the main social issues of the project. Since land acquisition is limited, social impacts are modest, and are limited to the acquisition of small pieces of land or cutting down of a few trees.

25. requirements of PLN were reviewed by the Bank team and found to be consistent with international good practice.

The Emergency Preparedness and Response procedures and Worker Health and Safety

26. resettlement or impact on building structures: acquisition of 3.9 ha of permanent land and 6.9 ha of land for Right of Way (ROW) during construction and subject to limited use during operation. 17 households will have their fields or garden land acquired; 24 households will have their agricultural trees cut under ROW.

Resettlement. Four subprojects in Sumatra involve land acquisition, with no

27. Potential indirect impact. The project will result in improvement of the quality and adequacy of power supply in the project areas, which is a key ingredient for economic growth and in the quality of life for households. By eliminating transmission bottlenecks in the two most important power systems in Indonesia, the project will allow PLN to optimally dispatch its generation system and reduce transmission losses; these will result in fossil fuel savings and reduce green house gas emissions. There are no long term adverse impacts as a result of project activities.

28. environmental and social liabilities were identified in the existing substations. In addition, none of the substations is located close to areas of ecological or cultural significance. A review of other projects which are physically connected to Bank activities under this project confirmed that these are not directly or significantly related to the project activities as defined by OP 4.12. In particular:

PLN has acceptable environmental, health and safety policies in place. No potential

Coal thermalplants. Two coal thermal power plants and the two associated 150 kV transmission lines will connect to the Lahat 150/20 kV substation, which is a part of the Bank project. However, while the timing of the two power plants overlaps with the Lahat subproject, the thermal plants are neither required nor necessary for the subproject to achieve its objective. The two thermal plant projects are in compliance with national regulations on land acquisition and compensation, as well as on environmental policies and regulations.

Land Acquisition for the Millenium Substation. Land acquired by PLN for the Millenium Substation from a private company (PT. Bumi Citra Permai, the owner of the industrial zone to which the substation will supply electricity) was in compliance with national

21

regulations and no controversial issue was recorded. The Millennium substation will deliver power to a number of industries in the industrial park; these industries are operating with valid operating permits, and are in compliance with all Indonesian legal requirements (including environment).

3.2 Key Measures to be taken by the Borrower to Address Safeguards Policy Issues

29. involve land acquisition. The EMP and the LARAPs meet Bank requirements.

PLN has prepared an EMP for all subprojects and LAMPs for four subprojects that

30. set out in the EMP, which include: (a) sprinkling construction sites with water; (b) limiting construction activities to normal working hours, and notifying the local community in advance if construction activities have to be performed outside these hours; (iii) removal of contaminated soils and solid waste, and their disposal to sites approved by local authorities; and (d) highlighting the prohibition of equipment containing PCB in bidding documents. The EMP will be included in the bidding documents and contracts as legal obligations for contractors. The EMP will be transferred to the respective operating entities for implementation.

Mitigation Measures. Environmental impacts will be mitigated according to measures

3 1. cash at market value. Crops and trees will be compensated at market value or be replaced. Temporary use of ROW land during construction, and limitations on ROW land use during operation, will be compensated at negotiated values to be agreed with the affected households and in consultation with local governments.

Compensation. Permanent land will be compensated in the form of land substitution or

32. Capacity for Safeguard Implementation. The two PLN Regional Project Offices at Java and Sumatra are directly responsible for the preparation and implementation of the EMP and the LAMPs. PLN and the Regional Project Office in Java have experience with preparation and implementation of EMPs and LAMPs for Bank projects. The Regional Project Office in Sumatra lacks such experience, but has four competent environmental and social specialists on its permanent staff, who are very experienced with national regulations on land acquisition and environmental management under domestic regulations. Environment and social staff of the two project offices received training from the Bank team, and have prepared satisfactory EMP and LAMPs for subprojects under their responsibility. Further training will be provided to PLN staff in charge of social and environment management during project implementation.

33. Sumatra that involve land acquisition and for the Millennium subproject. For subprojects that will be implemented within their existing premises, public comments were solicited through posting the EMP on the PLN website and in the respective project offices, and announcements were made in local newspapers in this regard. Stakeholder concerns have been incorporated into the project design and in the EMP.

Public Consultations. Public consultations on EMP were held for those subprojects in

34. inventory and public meetings. The process has been described in the LARAP.

Consultations were conducted throughout the land compensation process, including

22

35. with the Bank’s policy and were sent to the Infoshop in Washington D.C. in February 2010. The EMP and the LARAPs were disclosed in the project areas in Bahasa Indonesia.

Disclosure. The draft EMP and the draft LAMPS have been disclosed in accordance

4. Governance and Accountability Framework (GAF)

36. A guideline on Good Corporate Governance is in place in PLN, incorporating an Enterprise Risk Management ( E M ) system. Operational since 2007, PLN’s internal procedures mandate that all major activities should be subject to a review by the Risk Management Division under the Director of Business and Risk Management. Risks evaluated include those associated with the delivery of project objectives, reputational risks, social and environmental risks, and risks of fraud and corruption. Risk criteria have been established, and risk ratings are determined based on likelihood and impact, and mitigation measures are proposed. The risk assessment is considered by a designated Committee of Directors and mitigation measures approved. PLN’s own internal risk assessment and proposed mitigation for the Indonesia Power Transmission Development Project will complement actions outlined in the GAF, as agreed with PLN.

37. project files):

The following provides a summary of the GAF action plan (the full GAF is available in

Enhanced Disclosure Provisions and Transparency. The project will make use of the website and other communication channels (notice boards at the project website, press releases and/or conferences, public meetings) to disclose information regarding the project. All forms of communication will also display channels available to the public to make inquiries and to file complaints. Contractors will be required to take pictures of activities and/or physical progresses as part of their report, to be uploaded in PLN’s website at regular intervals. The risk of corrupt practices arising from land acquisition and resettlement will be addressed separately through transparent consultation and deliberation process as defined in the Bank’s social safeguards framework.

0 Civil Society Participation in Oversight. The Enhanced Disclosure Provisions and Transparency component of the Action Plan will serve as a catalyst to bring the project closer to its internal and external stakeholders. Enhanced participation will also be achieved through intensive communication with local government, and the public will be invited to oversee the project - at least virtually through the project website.

0 Complaints Handling Mechanism. A complaints handling mechanism will be established and integrated with the existing mechanism at PLN. Apart from the existing customer service phone and web hotline, PLN should make other channels (such as mail and email addresses, text message numbers) available for the public to file complaints. The available channels will be displayed in the project’s communication materials such as bid documents, public notices at the project site, and PLN’s website (www.pln.co.id). The complaints will be acted upon in a professional and timely fashion, and without risk of reprisal to ‘whistleblowers’, by maintaining confidentiality of the sources of information. Complaints and follow up actions will be presented as part of the project report.

23

0 Sanctions & Remedies. In all procurement contracts, evidence of corruption, collusion or nepotism will result in termination of the relevant contract, possibly with additional penalties imposed (such as fines, blacklisting, etc.) and in accordance with Bank and Government regulations. In addition, requirements in the contract will enable PLN to terminate contractors for poor performance as stipulated in the contracts.

0 Mitigating Collusion, Fraud & Nepotism. PLN will make use of its ‘semi’ e- procurement system in its official website (http://eproc.pln.co.id) to disclose procurement related information. It will also maintain fairness and transparency in the procurement processes by managing complaints effectively, and enforcing sanctions appropriately and consistently if there are proven cases of collusive and corrupt practices.

Audit. An independent audit of PLN will be conducted and will include a paragraph explaining the loan, the status of funds used, and the auditor’s opinion on the use of funds.

5. Monitoring and Evaluation

38. Data on electricity sales, transmission losses, and reliability statistics of transformers will be provided by the power system dispatching centers in the project areas. These indicators are monitored by the dispatching centers on a daily basis and statistics will be collected monthly. Data will be provided to the project offices in Java and south-central Sumatra by related dispatching centers annually for project monitoring and evaluation, starting from’ 20 12.

PLN maintains a good statistical system with sufficient data to monitor project outcomes.

39. Project progress will be monitored by the regional project offices in Java and south- central Sumatra. During the early stages of the project implementation, progress monitoring will focus on progress of procurement activities against the agreed procurement plan, implementation of the agreed LAMPS and EMP, and construction progress on sub-projects. Starting from 2013 monitoring will focus on progress in commissioning of sub-projects.

40. and monitor project implementation at least once a year. During regular supervision missions, the Bank team will work closely with the project coordinator and the regional project offices to evaluate implementation progress. The cost of data collection, monitoring and evaluation will be covered by the administrative budget of PLN for the dispatching centers, the two project offices and the PTD. No extra budget is required.

With the assistance of the project management consultant, PLN’s PTD will compile data

24

Annex V: Implementation Support Plan?

INDONESIA: POWER TRANSMISSION DEVELOPMENT PROJECT

Strategy and approach for Implementation Support

1. The strategy for implementation support (IS) has been developed based on the nature of the project and its risk profile. It will aim at making implementation support to the client more flexible and efficient, and will focus on implementation of the risk mitigation measures defined in the ORAF.

0 Procurement. Implementation support will include: (a) providing training to members of the Procurement Committee and related staff in the regional project offices, as well as the Projected Management Consultant; (b) reviewing procurement documents and providing timely feedback to the Procurement Committee; and (c) providing detailed guidance on the Bank?s Procurement Guidelines to the Procurement Committee; and (d) monitoring procurement progress against the detailed Procurement Plan.

0 Financial management. Supervision will review the project?s financial management system, including but not limited to, accounting, reporting and internal controls. Supervision will also cover sub- projects on a random sample basis. The Bank team will also work with the Project Management Consultant to assist PLN in improving coordination among different departments and units for financial management and reporting.

0 Environmental and Social Safeguards. The Bank team will supervise the implementation of the agreed Environmental Management Plan and the LAMPS and provide guidance to PLN to address any issues.

0 Anti-Corruption. The Bank team will supervise the implementation of the agreed Governance and Accountability Framework, and provide guidance in resolving any issues identified.

0 Other Issues. Sector level risks, such as electricity tariff, will be addressed at the portfolio level through policy dialogue with the government and PLN. However, as they are closely related to PLN?s financial viability, the team will monitor them during project implementation.

Implementation Support Plan

2. Most of the Bank team members will be based in the Indonesia country office and other country offices in the region to ensure timely, efficient and effective implementation support to

This is an indicative and flexible instrument which will be revisited during implementation as part of the ISR and adjusted based on what is happening on the ground. The implementation plan should be consistent with the design and riskiness of the operation, and should be adequately resourced.

7

27

the client. Task team leadership will also be transferred to the country office by the second year of project implementation. Formal supervision and field visits will be carried out semi-annually. Detailed inputs from the Bank team are outlined below:

0 Technical inputs. Power engineering inputs are required to review bid documents to ensure fair competition through proper technical specifications and fair assessment of the technical aspects of bids. During construction and commissioning, technical supervision is required to ensure technical contractual obligations are met. The team’s power engineer will conduct site visits on a semi-annual basis throughout project implementation.

0 Fiduciary requirements and inputs. Training will be provided by the Bank’s financial management specialist and procurement specialist before the commencement of project implementation. The team will also help PLN identify capacity building needs to strengthen its financial management capacity and to improve procurement management efficiency. Both the financial management and the procurement specialist will be based in the country office to provide timely support. Formal supervision of financial management will be carried out semi-annually, while procurement supervision will be carried out on a timely basis as required by the client.

Safeguards. Inputs from an environment specialist and a social specialist are required, though the project’s social and environmental impacts are limited and client capacity is generally adequate. Training is required on environment monitoring and reporting. On the social side, supervision will focus on the implementation of the agreed land acquisition and resettlement plan (LAMPS). Field visits are required on a semi-annual basis. The social and environmental specialists are both country office based.

Financial review of PLN corporate finance. Input is required from a financial specialist for regular review of PLN’s financial status to verify compliance of financial covenants. This exercise will be combined with the supervision of other WB financed projects implemented by PLN through semi-annual review.

Operation. An operations officer, based in the country office will provide day to day supervision of all operational aspects, as well as coordination with the client and among Bank team members.

28

Annex VI: Team Composition

Leiping Wang Elvi Schaefer Sameena Dost

INDONESIA: TRANSMISSION DEVELOPMENT PROJECT World Bank staff and consultants who worked on the project:

Task Team Leader, Senior Energy Specialist Co-Task Team Leader, Energy Specialist Senior Counsel LEGES

EASIN EASIS

Name

Anh Nguyet Pham Dhruva Sahai Bernard Baratz Andrew Daniel Sembel

Title

Senior Energy Specialist EASVS Senior Financial Analyst EASIN ConsultantRnvironmental Safeguards EASIN Environmental Specialist EASIS

Unit

Ninin Dewi Raj at Narula- Christina I. Donna Zhentu Liu Budi Permana

ConsultantISocial Safeguards EASIS Senior Financial Management Specialist EAPFM Financial Management Analyst EAPFM Sr. Procurement Specialist EAPCO Procurement SDecialist EAPCO

Puguh Imanto Raja Iyer Kelly Walters Sri Oktorini Melissa Ortega Sanchez Teri Velilla

ConsultantIOperations EASIS ConsultantIOperation Adviser EASCS ConsultantIOperations EASIS Program Assistant EACIF Program Assistant EASIN Program Assistant EASIN

30