Document of

The World Bank

FOR OFFICIAL USE ONLY

/S 32Z?2- /0Reort No. 8333-IND

STAFF APPRAISAL REPORT

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

NOVEMBER 26, 1990

Industry aid Energy Operations DivisionCountry Department VAsia Region

lfhis domnent has a resrcted disribution and may be used by recipients only in the perfomanoe oftheir offlial duties. Its contents may not otherwise be disdosed whout World Bak aulhoulzioid

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CURRENCY EQUIVALENTS(As of June 1, 1990)

Currency Unit = Indonesian Rupiah (Rp)

US$1.00 = Rp 1,830Rp 1 billioni = US$0.546 iilllion

WEIGHTS AND MEASURES

1 British Thermal Unit (Btu) = 0.252 Kilocalories (Kcal)1 Metric ton (t) = 1,000 kilograms (kg)1 Metric ton (t) = 2,209 pounds (lb)1 Cubic meter (m

3) = 35.32 Cubic Feet (cuft)

1 Standard Cubic Foot (SCF)of Natural Gas = 1,000 Btu

FISCAL YEAR

Government of Indonesia - April 1 - March 31Fertilizer Companies - January 1 - December 31

ABBREVIATIONS AND ACRONYMS

AAF - P.T. ASEAN Aceh FertilizerAPPI - Indonesian Fertilizer Producers' AssociationAS - Ammonium sulfateASEAN - Association of South-East Asian NationsBAPPENAS - National Development Planning BoardBI - Bank IndonesiaBPKP - Financial and Development Supervisory BoardBNI - Bank Negara Indonesia 1946EKUIN - Minister Coordinator for Economics, Financial and Industrial

Affairs, and for the Supervision of DevelopmentGOI - Government of IndonesiaGresik - P.T. Petrokimia GresikICB - International competitive biddingIKPT - P.T. Inti Karya Persada TehnikKaltim - P.T. Pupuk Kalimantan TimurKC1 - Muriate of potash, or potash, or potassium chllorideKLH - Ministry of Population and the EnvironmentKONEBA - P.T. Konservasi Energy AbadiKujang - P.T. Pupuk KujangMr4SCFD - Million Standard Cubic Feet per dayMMBtu - Million British Thermal UnitMOA - Ministry of AgricultureMOI - Ministry of IndustryMOF - Ministry of FinancePERTAMINA - National Oil and Gas CompanyPFE - Participating fertilizer enterprisesPIM - P.T. Pupuk Iskandar MudaPUSRI - P.T. Pupuk SriwidjajaREPELITA V - Fifth Five-Year Development Plan, 1989/90-1993-94SBI - Sertifikat Bank Indonesia (BI Domestic Money Market

Certificate Rate)SCB - State Commercial BankSLA - Subsidiary Loan Agreementtpd - Tons per daytpy - Tons per yearTSP - Triple superphosphate

INDONESIA

FERTILIZER RESTRUCTUIRING PROJECT

Loan and Proiect Summary

Borrower: Republic of Indonesia

Beneficiaries: Five State-owned Fertilizer Manufacturing Companies:Gresik, PIM, Kaltim, Kujang and PUSRI.

Amountt $221.7 million equivalent

Lending Terms: The proposed loan would be made at the Bank's standardvariable interest rate for a term of 20 years including 5years of grace.

Onlending Terms: The proceeds of the loar would be onlent to the fivefertilizer companies for periods of either 10 or 15 years,including respective grace periods of three and fiveyears, at a variable interest rate reflecting the marketrate for domestic term funds. The five fertilizercompanies would also pay commitment fees equal to thosepayable by the Government to the Bank under the loan. TheGovernment would bear the foreign exchange risk.

ProjectDescription: The overall objectives of the Project would be to:

(a) assist the Government in implementing an agreedStatement of Fertilizer Sector Policies; (b) support anindustry-wide investment program; (c) identify the scopefor improved efficiency in marketing and distribution; and(d) assess the industry's environmental impact andstandards, and prepare an environmental managementprogram. The Project's components would be: (a) buildinga new ammonia/urea facility at Gresik, with a capacity of1,350 tons per day (tpd) of ammonia and 1,400 tpd of urea,to provide low-cost ammonia to existing operations and tosupply low-cost urea in East Java, and modernization ofGresik's existing plants; (b) undertaking optimizationinvestments in four fertilizer plants (Lskandar Muda,Kaltim, Kujang, and PUSRI) to realize productivity gains,energy savings, environmental improvements and productdiversification; and (c) supporting preparation of amarketing and distribution study and of an overallfertilizer industry assessment of environmental impacts,including identification of long-term objectives forenvironmental improvement and an action program to ensurethat the industry meets appropriate standards.

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

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Benefits: The main project benefits would be an improvement in theindustry's performance, a reduction of budget subsidies,and minimization of the adverse environmental impact offertilizer production.

Risks: The investments to be supported under the Project do notpresent significant risks. The timely availability ofnatural gas to the Gresik ammonia/urea plant is apotential risk. To account for this risk no disbursementswould be made for expenditures under the GresikRestructuring Component until a contract, satisfactory tothe Bank, for the provision of the required natural gas toGresik has been executed oni behalf of Gresik andPERTAMINA. The main sector-wide risks are that domesticex-factory prices may not be increased to border prices asanticipated and that internatiGnal fertilizer prices maynot be in line with Bank forecasts. The first risk isniinimized by the Government's stated objective in thePolicy Statement to bring ex-factory prices to theireconomic levels. The latter risk is acceptable, since theindustry has a relatively low variable cost structure andeven at significantly lower prices it would remainfinancially viable.

Estimated Cost:Local Foreign Total----- (US$ million)…

Gresik Restructurlng /a 118.5 135.1 253.6Optimiization 16.3 75.8 92.1 -Studies 0.2 0.7 0.9 N

Base Cost (June 1990) 135.0 211.6 346.6

Physical contingencies 0.9 4.2 5.1Expected price increases 1.2 6.6 7.8

Interest during construction 64.8 - 64.8Working capital 20.0 - 20.0

Total Financing Required 221.9 222.4 444.3

/a Includes iheuitifiable taxes oni services estimated at $4.0 million.

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Financing Plan:Local Foreign Total----- (USS million) -----

Enterprises' equity 143.8 0.7 144.5IBRD / - 221.7 221.7Medium-term borrowing (BNI) /b 58.1 - 58.1Slhort-term borrowing (BNI) /b 20.0 - 20.0

Total 221.9 222.4 444.3

/a Includes retroactive financing of up to $22.2 million for eligibleexpenditures incurred by the fertilizer enterprises after January 15,1990, to cover advanced procurement of imported equipment and services.

/c Bank Negara Indonesia 1946.

Estimated Disbursements:

Bank FY 1991 1992 1993 1994 1995 1996 1997--------- $ million) ----------------

Annual: 22.2 55.1 65.0 37.0 25.0 13.0 4.4Cumulative: 22.2 77.3 142.3 179.3 204.3 217.3 221.7

Economic Rateof Return: Gresik anmonia/urea plant: 21 percent.

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INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Table of Contents

Page No.

I. THE FERTILIZER SECTOR . . . ....... .. ....... .. 1

A. Structure and Performance ... . . . . . . . . . . . . . 1Structure and Organization . . . . . . . . . . . . . . 1Fertilizer Consumption Trends . . . . . . . . . . . . . 1Distribution and Marketing . . . . . . . . . . . . . . 4Fertilizer Pricing.. . 5Fertilizer Production . . . 6Investment Program . . . .. . . . . 8

B. The Policy Framework.... 9C. The Sector and the Natural Environment . . . . . . . . . . 10

II. THE BANK'S PAST LENDING, STRATEGY AND RATIONALE FORINVOL'iEMENT IN THE SECTOR . . . . . . . . . . . . . . . . . . 12

A. The Bank's Past Lending in the Fertilizer Sector . . . . . 12B. The Bankle Strategy and Rationale for Involvement in

the Sector . . . . . . . . . . . . . . . . . . . . . . . lS

III. THE PROJECT . . . . . . . . . . . . . . . . . . * .. .. 15

A. Objectives and Description . . . . . . . . . . . . . . . . 15B. The P.T. Petrokimia Gresik Restructuring Component . . . . 15

Gresik's New Ammonia/Urea Plant . . . . . . . . . . . . 15Modernization of Gresik's Existing Fertilizer Plants . 16

C. The Optimization Component . . . . . . . . . . . . . . . . 17D. The Studies Component . . . . . . . . . . . . . . . . . . 19E. Project Organization and Implementation . . . . . . . . . 20

IV. PROJECT COST, FINANCING PLAN AND LOAN FEATURES . . . . . . . 23

A. Project Cost . . . . . . . . . . . . . . . . . . . . . . . 23B. Financing Plan . . . . . . . . . . . . . 26C. Features of the Loan . . . . . . . . . . .27

Onlending Arrangements . . . . . . 27Loan Administration .. 30

This report is based on the findings of an appraisal mission to Indonesia inMarch/April 1990. The mission consisted of J. Gamba (AS5IE), H. Murphy(AS5IE) and C. Escudero (LEGAS). D. Brown (ASTIF), K. Constant (ASTIF) andS. Venkataraman (Consultant) also participated in project preparation.

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V. FINANCIAL, ECONOMIC, AND ENVIRONMENTAL ANALYSIS, AND PROJECTRISKS .,. .. ........... . 33

A. Financial Analysis . . . . . . . . . . . . . . . . . . . . 33

B. Economic Analysis .... . . . .. .... . ..... . 37C. Environental Analysis .n.y.i.s. . . . ... . . . . . . . . 39D. Project Risks .... . . . . . . . . ....... . . . 41

VI. UNDERSTANDINGS AND AGREEMENTS REACHED . . . . . . . . . . . .

TABLES IN THE TEXT

1.1 Indonecia - Historical Growth in Fertilizer Consumpcion1.2 Indonebia - Projected Fertilizer Consumption . . . . . . . . .

1.3 Estimated Fertilizer Economic Subsidies . . . . . . . . . . .1.4 Fertilizer Production Capacity and Output in 1989 . . . . . .82.1 Bank Operations and Evaluation of Project Performance in the

Fertilizer Sector ... . . . . . . .134.1 Project Cost Summary .... . . . . . . . . . . . . . . . . . 234.2 P.T. Petrokimina Gresik Restructuring Component - Capital

Cost Estimate . . . . . . . . . . . . . . . . . . . . . . 244.3 Optimization Component - Capital Cost Estimate . . . . . . . . 254.4 Studies Component - Cost Estimate . . . . . . . . . . . . . . 264.5 Financing Plan . . . . . . . . . . . . . . . . . . . . . . . . 274.6 Initial Allocation of Loan Proceeds to Participating

Fertilizer Enterprises .2.8. . . . . . . . . . . . . . . . 284.7 Procurement Arrangements . . . . . . . . . . . . . . . . . . . 304.8 Allocation of Bank Loan ... . . . . . . . . . . . . . . . . 325.1 Gresik - Historical Financial Data . . . . . . . . . . . . . . 335.2 Gresik - Projected Financial Data With Project . . . . . 35 -

5.3 P.T. Petrokimina Gresik Ammonia/Urea Plant - Summary ofFinancial Rates of Return ... . . . . . . . . . . . . . 37

5.4 P.T. Petrokimina Gresik Ammonia/Urea Plant - Summary ofEconomic Rates of Return ... . . . . . . . . . . . . . . 39

ANNEXES

1. Government of Indonesia Statement of Policy2. Fertilizer Sector - Statistical Data and Analysis3. Terms of Reference

A. Fertilizer Marketing and Distribution StudiesB. Development of Fertilizer Industry Environmental

Improvement Program4. Project Cost and Financing Plan5. Detailed Capital Cost Estimates6. Estimated Disbursement Schedule for Bank Loan7. Financial and Economic Analysis8. Key Implementation Indicators and Supervision Plan9. Selected Documents Available in the Project File

MAP IBRD No. 22141R1

I. THE FERTILIZER SECTOR

A. Structure and Performance

Structure and Organization

1.1 During the past two decades, Indonesia has successfully developedand implemented a policy of promoting food self-sufficiency, particularly inrice, and including support for all agricultural inputs such as fert4 lizers,extension, seeds, irrigation, and research. The major agricultural j.F.ogramsfor this purpose have been developed and managed by the Ministry ofAgriculture (MOA). The fertilizer sector, in all aspects of production andmarketing, has been managed by the Ministry of Industry (OI) as an importantelement contributing to the above programs. A large investment program hasbeen planned and implemented in the public sector to produce and deliverfertilizers from domestic plants, which primarily produce urea based ondomestic natural gas resources, to minimize risks that farmers may face fromthe uncertainties of imported fertilizer supplies and highly fluctuatinginternational fertilizer prices. Large marketing and distributioninfrastructure facilities have been built, mostly in the public sector, toensure timely and adequate delivery of fertilizers to the farmers ataffordable prices. The farmgate fertilizer prices have been maintainod at lowand uniform levels country wide through a system of price subsidies manageddirectly by the Government. The Government is aware of the negative impactsof these subsidies and has taken steps and will continue to adopt measures tosustain a more economically efficient fertilizer industry (Annex 1). Thecurrent structure of the Indonesian fertilizer sector should be viewed in thisbroad context.

1.2 At present, the Indonesian fertilizer industry consists of sixgovernment-owned companies (PUSRI, Kujang, Gresik, Kaltim, Iskandar Muda, andAceh--the last owned Jointly with the ASEAN partners) with a total installedcapacity of 5.0 million tons per year (tpy) of urea, 1.2 million tpy of triplesuperphosphate (TSP) and 0.65 million tpy of ammonium sulfate (AS). The totalfertilizer requirements of the Indonesian farmers are obtained essentiallyfrom the above producers, supplemented as required through imports, andprovided to the farmers through a fertilizer distribution network solelymanaged by PUSRI. There has been concern, however, that the absence ofcompetition in the domestic marketplace has prevented all achievableefficiencies from being reached.

Fertilizer Consumption Trends

1.3 The historical consumption of the four major fertilizer products ispresented in Annex 2-1 and summarized in Table 1.1 below.

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Table 1.1: INDONESIA - HISTORICAL GROWTH IN FERTILIZER CONSUMPTION(thousand tons of product)

Year Urea TSP AS KW1 Total

1975 676 235 94 34 1,0391980 1,776 494 330 123 2,7231985 2,607 1,048 475 290 4,4201986 2,715 1,165 473 238 4,5911967 2,686 1,191 553 270 4,7001988 2,930 1,219 585 496 5,2301989 (Estimated) 3,065 1 514 653 635 5,867

Annual Growth Rate (Percentage)

1975/85 14.5 16.1 17.6 23.9 15.61980/85 8.0 16.2 7.6 18.7 10.21984189 3.3 9.6 9.9 20.3 6.8

1.4 Indonesia's fertilizer c3nsumption is characterized by heavyreliance on nitrogenous fertilizers--mosuly urea--for rice cultivation. Butthe share of urea has fallen in recent years, from about 65 percent in 1975 toabout 52 percen. in 1989, as urea dosages approached saturation andapplication levels of TSP and potash rapidly increased. The share of Java intotal fertilizer consumption is about 75 percent of urea, 64 percent of TSP,and about 86 percent of AS, but only about 28 percent of potash. which ismostly used for plantation and commercial crops. The importance of fertilizersupplies to the foodcrop sector is reflected by the share of fertilizerconsumed in foodcrop production in recent years--about 95 percent of urea andTSP, but only about 15 percent of potash. The rapid growth in fertilizerconsumption and the present high levels of application are due to highfertilizer subsidies resulting in favorable farmgate fertilizer pricesrelative to paddy support prices. Until the mid-1970s, Indonesia depended forfertilizer supplies nearly entirely on imports--except for a smallcontribution from PUSRI I commissioned in 1963. Since the 1970s, substantialcapacities--totaling about 6.8 million tpy--have been added, mostly for urea.As a result, Indonesia now meets its entire domestic urea requirements and isa major exporter of urea. However, all the potash and increasing requirementsof TSP will continue to be imported, since Indonesia does not possess the r'wmaterial base for their competitive production.

1.5 Most of the increase in fertilizer consumption took place from 1975onward. The growth rate in consumption during the last five years has onlybeen 3.3 percent for urea, 9.6 percent for TSP, 9.9 percent for AS, and20.3 percent for muriate of potash (KC1). Various studies have estimated thatto maintain rice self-sufficiency, rice production in Indonesia will have toincrease annually b- about 2.5 percent. However, the present levels offertilizer application are already high for the varieties of paddy seeds nowavailable, as reflected in the declining growth rate of urea consumption. Therequired increase in rice production cannot, therefore, be achieved mainly

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through increased fertilizer application. Urea consumption growth rates can,therefore, be expected to remain at somewhat low levels. TSP and KC1 conrucip-tion growth will be higher than the growth in urea consumption. The lneasures,now being considered by the Government, to improve fertilizer applicationefficiency would also reduce the need for additional fertilizers for ach1Uevingthe same production targets. These measures include the use of ureabriquettes placed appropriately below the soil, more selective use of AS andpotash, and use of partially acidulated phosphate rock where appropriate.Based on these considerations, the fertilizer ccnsumption projections in thisreport reflect growth rates of 3.5 percent, 6.5 percent, 7.5 percent, and7.5 percent, respectively, for urea, TSP, AS, and potash for the Repelita Vperiod and 3.0 percent, 6.0 percent, 7.0 percent, and 7.0 percent,respectively, for the Repelita VI period. As seen in Table 1.2 below and inAnnex 2-2 these projections are somewhat lower than those prepared by MOA andMOI, but are judged to be more appropriate for capacity planning purposes.

Table 1.2: INDONESIA - PROJECTED FERTILIZER CONSUMPTION(thousand tons of product)

Year Urea TSP AS KCI Total

1988 (actual) 2,930 1,219 585 496 5,2301989 (est.) 3,065 1,514 ¢53 635 5,867

A. Second National Fertilizer Study - Revision (ii)

1995 5,132 2,366 1,095 664 9,257

B. Ministry of Industry

1994/95 4,913 2,342 1,067 N.A. N.A.1999/2000 6,422 2,989 1,670 N.A. N.A.

C. World Bank Estimate

1995 3,770 2,210 1,010 980 7,9702000 4,370 2,960 1,450 1,410 10,190

N.A.: Not available.

1.6 Except in the case of urea, the domestic production of fertilizerwill be short of requirements. Some AS capacity may become available as acoproduct, should Indonesia proceed with a caprolactam plant. The additionalrequirements of fertilizer products other than urea will be met throughimports. According to the estimates contained in Annex 2-9 if all theinvestment programs now under consideration are implemented as scheduled, theprojected urea production will be about 6.4 million tpy by 1995. Therequirement of urea for industrial purposes--mainly for the productior ;cresins for the plywood industry--will be about another 0.3 million tr.1995. The planned capacities for additional urea production will, t--. <e

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be adequate to meet the projected domestic requirements and to maintain asignificant Indonesian presence in the international urea trade.

Disttibution and Marketing

1.7 Since 1979 the Government entrusted to PUSRI the total responsibi-lit,ie, for dListlibuting and morketing all types of fertilizers--both domes-tically produced and imported. During the past ten years, PUSRI has mobilizedand arranged for an impressive infrastructure to fulfill that responsibility;its marketing unit works as an independent cost center. To support itsfertilizer marketing operations, PUSRI maintains a central marketing office inJakarta, regional marketing offices in each of the 25 provinces, six ferti-lizer baggIng units, and 92 fertilizer warehouses located throughout thecountry. Tbe company owns such transport facilities as railway wagons,fertilizer vessels, and one ammonia tanker. In addition, the company hiresand uses similar facilities owned by such other agencies as the state andprivate railways. Three of the fertilizer bulk carriers and one of thebagging plants now being used by PUSRI are privately owned. PUSRI also usesthe large fleet of trucks owned and operated in the private sector forfertilizer movement. Increasingly, the additional fertilizer warehousingfacilities required are being obtained through hiring of privately ownedstorage facilities.

1.8 The flow of fertilizer products in the present marketing system isshown in Annex 2-3. PUSRI obtains its fertilizer supplies either from thedomestic producers or through imports (Line I). For each agricultural season,starting from October, the MOA estimates the fertilizer requirements of itsplanned agricultural program. Taking into account expected domesticproduction, imports are planned, as appropriate, through the Ministry ofTrade. The imported fertilizers are taken over by PUSRI at the erntry port.The annual strategy to minimize distribution costs is developed by PUSRI anddiscussed with all concerned. Based on the agreed plans, an amount of thedomestic production is reserved for domestic use. The producers are then free -to export their extra production at international prices. PUSRI transportsthe products from the plants or the importing ports (Line I) to bulkterminals/ports at the provincial level (Line II). The bulk material isbagged and then shipped to inland supply warehouses at the district levels(Line III). Fertilizers are sold from these warehouses to the dealers, whomarket them to the final consumers (Line IV). In the past the dealers couldbe government institutions, cooperatives, or private agencies; ho.'ever, in1988 the Government decided that the marketing of fertilizers to the farmersin rural areas would be done only through the village cooperative units, knownas Koperasi Unit Desa (KUDs). At present, except for sales to plantations,which can still be made through government institutions and private dealers,all retail marketing of fertilizers is through the KUDs. As a result, theshare of KUDs in the marketing of fertilizers has increased substantially--from 13 percent in 1'84/85 to 64 percent in 1988189. Thers are concerns thatthis restraint of compecition has caused efficiency losses. A FertilizerMarketing and Distribution Study, to be supported under the Project, willevaluate the scope for efficiency improvements in a competitive environmentand recommend an action plan to implement such improvements.

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Fertilizer Pricing

1.9 Fertilizer prices at the farmgate and ex-factory levels are set bythe Government. The differentiul from this two-level price setting is fundedby the Government in the form of a budgetary fertilizer subsidy. In general,farmgate fertilizer prices are set annually from October 1 of each year,keeping in view the need to promote adequate Fertilizer application, to ensurethat the levels of farm incomes are not unduly eroded, and to maintain riceself-sufficiency. Fertilizer is sold to farmers throughout the country at thesame price; the extra cost of delivery to remote locations is borne as asubsidy by the Government. Until October 1988, all the fertilizer products--u.ea, ?SP, AS, and KCl, were sold at the same product price irrespective ofnutrient content and farm economics. From October 1988, the Government hasstarted to change this situation. At present, delivered prices of TSP and KC1(Rp 260 per kg) are somewhat higher thar. the prices of urea and AS (Rp 210 perkg). Also, since the fertilizer pricing (and subsidy) system covers only thefour major single nutrient products (urea, TSP, AS, and KCl), manufacturersare reluctant to diversify and provide the farmers with a wider range of non-subsidized products, that would have to be sold at higher market prices.

1.10 Ex-factory fertilizer prices are set annually by the government,taking into account the actual costs for the two previous years and the indi-vidual fertilizer enterprise's budget for the coming year. The pricingproposals, prepared by the enterprises as part of their annual budget process,are reviewed by an interministerial committe--MOA, MOI, Ministry of Finance(MOF) and EKUIN--and become applicable from January 1. The ex-factory pricesprovide for depreciation and interest charges but do not include a provisionfor return on -quity. The rpoducers, subject to fulfilling certainperformance targets, are entitled to a profit of Rp 5,000 per ton of productirrespective of the capital employed.

1.11 Natural gas, the major input for all the urea plants, is priceduniformly at $1.0 per million British thermal unit (MMBtu), thus indirectlysubsidizing urea production at some locations. The breakdown of the presentex-lactory fertilizer prices is presented in Annex 2-4 for urea and Annex 2-5for TSP and AS. In the case of urea, the production costs (excludingdepreciation and interest) range from Rp 92,026/ per ton for Kujang toRp 100,375/ per ton for Kaltim. The higher production costs at Kaltim aremainly due to the higher energy consumption of Kaltim I, a situation beingaddressed under the proposed Projoct's Optimization Component. The capital-related costs of Kaltim and PIM are higher due to their recent plant vintages.

1.12 The fertilizer is delivered by the producers to PUSRI againstletters of credit. The producers are paid against despatch an amount equal tothe distribution costs allowed to PUSRI for supplies from the particularproducer. The producer issues claims on the Government for the differencebetween the agreed ex-factory price and the payment already received fromPUSRI. In the case of Kujang, there is a negative receipt from theGovernment. In the case of PUSRI, about 80 percent of the ex-factory priceof urea is received against despatches. In the case of PI'i and Kaltim, thereceipts against despatches amount to about 70 percent of the production costsof bulk urea, excluding capital-related costs. Gresik, however, receives only40 percent of the production costs (excluding capital related costs) for TSPand 64 percent for AS against despatch. Gresik thus faces a cash crtunch if

there are delays in the receint of the Government's share of the ex-factoryprice. The Government has recently assured the PFEs that these payments willbe made within 90 days and that, in case of defaults, the companies will bereimbursed interest charges.

1.13 Fertilizer Subsidy. As mentioned above, fertilizers are deliveredto the farmers at prices well below costs. The difference between the cost ofdelivering thr fertilizers to the farmers and the price realized through salesis borne by the Government as a budgetary subsidy. With the growth in theagricultural program, the increase in fertilizer consumption and the higherfertilizer prices, the size of the fertilizer subsidv has been steadilyincreasing, from Rp 219 billion in 1981 to an estimated Rp 721 billion in1989. In 1988(89 subsidies on agro-inputs other than fertilizer, like thoseon pesticides, have been eliminated.

1.14 The actual budgetary fertilizer subsidy for any particular year hasto be adjusted for carrying forward some expenses from other years, interestcharges and taxes. For purposes of evaluating the impact of various policyoptions on the fertilizer subsidy, the subsidy accruing within anv particularyear has been estimated exclusive of the above adjustments. Details of suchestimates for 1988, 1989, and 1990 are contained in Annex 2-6, Annex 2-7 andAnnex 2-8 and are summarized in Table 1.3 below. The 1988 estimates are basedon actual sales and costs. The 1989 estimates are based on actual sales up toAugust 1989 and on projections for the rest of the year. The 1990 estimatesare based on i989/90 fertilizer sales, as projected by the MOA and at thepresent price levels. The fertilizer economic subsidy has been split into"production" and "farmgate" subsidies using economic delivered costs based onborder prices. In the case of urea, where Indonesia is competitively placedfor exports, the border price is the export-parity price. In the case of TSP,AS, and KCI, for which Indonesia is not a competitive producer, the borderprice is the landed cost.

1.15 Table 1.3 indicates that the Indonesian urea producers -reinternationally competitive and are being paid ex-factory prices well belowexport prices. For TSP and AS, domestic competitiveness is very sensitive tointernational relative prices of fertilizer products, raw materials, andintermediates. The competitiveness of AS production is also partly affectedby the high-cost of fuel oil-based ammonia produced to enable operation of oneof Gresik's AS plants. The economic production cost of TSP tends to be mar-ginally higher or lower than the landed cost depending on the prevailinginternational prices.

Fertilizer Production

1.16 Fertilizer production in Indonesia started with the commissioning ofPUSRI I in 1963, with an installed capacity of 100,000 tpy of urea. By 1989the fertilizer capacity had reached a total of 6.870 million tpy. Thecapacities of the existing plants and those being planned are summarized inAnnex 2-9. At present, domestic fertilizer production meets the entirerequirements of urea and AS, and most of the requirements of TSP. Indonesiais now an exporter of ammonia (0.24 million tons in 1987) and of urea (1.04million tons in 1988). The recent exports of ammonia and urea, and the majorimporters of Indonesian urea, are given in Annex 2-10.

Table 1.3: ESTIMATED FERTILIZER ECONOMIC SUBSIDIES(Rp billion)

Urea TSP AS KC1 Total

A. 1988Delivered cost 646 464 161 152 1,422Sale realization 418 177 84 80 759SubsidyTotal (Budgetary) 228 287 77 72 664Production (314) 14 53 __ (247)FaLmgate 542 273 24 72 911

B. 1989 (est.)Delivered cost 702 684 188 171 1,745Sale realization 518 285 110 111 1,024SubsidyTotal (Budgetary) 184 399 78 60 721Production (364) 53 51 __ (260)Farmgate 548 346 27 60 981

C. 1990 (est.)Delivered cost 811 620 195 169 1,795Sale realization 665 294 125 133 1,217SubsidyTotal (Budgetary) 146 326 70 36 578Production (436) 54 53 -- (329)Farmgate 582 272 17 36 907

1.17 Most of the recent additions to fertilizer produttion capacity havebeen for urea, based on the abundant natural Pas resources of Indonesia. Theonly domestic plant (at Gresik) for the production of TSP and AS relies onimports of sulfur, rock phosphate, and phosphoric acid. All the potashrequirements are met by imports. Annex 2-9 and Annex 2-11 contain detailsabout domestic fertilizer production capacity and output.

1.18 The fertilizer plants in Indonesia have, in Sr-'eral, stabilizedproduction at high levels soon after commissioning. Many of them have alsocarried out optimization investments to improve plant reliability and streamefficiency. For example, such investments in Kujang have enabled it to be oneof the best-run plants in the world. Similarly, optimization investments onKaltim I, which had encountered serious initial commissioning and operationproblems, have enabled the plant to stabilize its operations. The overallgood performance of the Indonesian fertilizer plants is reflected by theirhigh capacity utilization, as seen in Table 1.4 below for the year 1989.

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Table 1.4: FERTILIZER PRODUCTION CAPACITY AND OUTPUT IN 1989

CapacityPlants Capacity Output Utilization

--- (thousand tons) ---- (percent)

UreaPUSRI II, III, & t! 1,520 1,445 95Kujang 570 542 95ASEAN Aceh 650 618 95Kaltim I, II, & III 1,710 1,454 85Iskandar Muda 570 542 95

Total Urea 5,020 4,601 92

TSPGresik I & II 1,200 1,200 100

ASGresik I, II & III 650 650 100

Investment Program

1.19 The Government's 1990-95 investment program in the fertilizer sectorincludes both investments for new capacity and for performance improvements, ;following the recommendations of the Fertilizer Industry Sector Report,prepared by the Bank in 1988. The estimated total cost of this program isabout $1.0 billion. Three projects for capacity additions have beenprioritized and are in advanced stages of planning. These include thePUSRI Ib project, which will add a 1,350 tpd capacity ammonia plant and a1,750 tpd capacity urea plant to the PUSRI facilities at Palembang. Thesurplus ammonia will be converted to urea in the optimized PUSRI II ureaplant, to be funded under the proposed Project. The contracting arrangementsfor the PUSRI Ib facilities and the financing arrangements have beenfinalized. The second large capacity addition will be the Gresik ammonia/ureacomplex proposed for financing under the Project. Kujang has been authorizedby the Government to finalize arrangements with a private partner for a KujangII ammonia/urea project, with majority private financing. This project willadd 570,000 tpy of urea capacity, half of which will be reserved for exports.A fourth company, Iskandar Muda is also considering expansion with a privatepartner. As a result of energy audits and feasibility studies, optimizationinvestments will be undertaken in several plants and supported under theproposed Project. These investments will aim for, inter alia, energy savings,increased capacity, upgrading of technology, amelioration of industrialpollution, and safety. The impact of the above investments will be toincrease urea capacity in Indonesia to 6.9 million tpy, which will makeavailable about 4.4 million tpy of urea to meet domestic requirements up tothe year 2000. No addition to TSP capacity is being planned, beyondoptimization investments, since the economic viability of domestic production

from new investments has not been established. No additional direct capacityfor AS production is planned.

B. The Policy Framework

1.20 The successful development of the Indonesia fertilizer industry hasbeen associated with: (a) controlled and heavily subsidized fertilizer pricesat the farmgate (the economic subsidy is forecast at about $317.0 million for1990), which have promoted intensive and possibly inefficient use; (b) naturalgas and ex-factory fertilizer prices that differ from economic prices and haveresulted in production inefficiencies (for TSP and AS) and inappropriately lowreturns to equity; (c) regulations on product distribution and marketing thathave constrained competition and efficiency; and (d) inadequate assessment andmonitoring of the environmental impact of '.ertilizer production.

1.21 The Government is aware of the impact of the above existingdistortions on its budget and on the overall economic efficiency of thefertilizer industry. As it has demonstrated its determination to deal withsimilar problems by undertaking substantive deregulations in trade, industry,and the financial sector, the Government has also decided to redress the abovedistortions. In May 1990, the Government issued a new deregulation packagewhich covers reduced import restrictions on fertilizer but introduced amarginal increase in tariffs coupled with temporary surcharges to offset theelimination of some import restrictions and assist producers to adjust to thenew regulations. These measures will mainly affect imports of TSP and potash.During the past two years, the Government has raised AS prices at the farmgateto their economic level, and has made some upward adjustments in the farmgateprices of urea and TSP, the prices of which are still about 47 percent and33 percent lower, respectively, than their economic levels. Because of theconcern to maintain rice production in line with domestic demand and toprotect farm incomes, the G(vernment intends to make the remaining fertilizerfarmgate price adjustments toward their economic level gradually, but withinthe Repelita V period (1989/90-1993/94), as indicated in the Policy Statementissued prior to negotiations. The Statement, which is satisfactory to theBank, is attached as Annex 1. In addition, the Government plans to:(a) replace the cost-plus formula for setting ex-factory prices for fertilizerby linking the ex-factory price of urea to its export parity and the ex-factory prices of all other fertilizers to their import parities (theseadjustments will also be phased in during Repelita V, together with theadoption of an appropriate dividend policy for fertilizer enterprises;(b) establish the price of natural gas to the fertilizer industry between afloor corresponding to the economic cost of the resource and a ceilingcorresponding to its netback value, and eliminate economically unjustifiedprice differentials among natural gas users; (c) open up the marketing anddistribution system to wholesalers and retailers to foster competition,improve efficiency, and provide better service to farmers on the basis of astudy to quantify efficiency improvements and to recommend an action plan; and(d) prepare an environmental management and monitoring plan for the fertilizerindustry, on the basis of a study of the current and projected environmentalimpacts and of environmental standards and targets.

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C. The Sector and the Natural Environment

1.22 Since 1986, in accordance with Indonesian laws and regulations,sponsors of major industrial projects, such as those proposed under theProject, must prepare environmental impact analyses. The policies,regulations and review procedures of environmental matters in Indonesia arethe responsibility of the Ministry of Population and the Environment (KLH),which is not a line ministry but advises operating ministries, for exampleMOI. Thus, all activities supported by the project will be in accordance withenvironmental guidelines stipulated by KLH and executed by MOI.11 Theenvironmental review procedures covering the Gresik Restructuring Componentand the Optimization Component of the proposed Project consist of thefollowing steps. A Preliminary Environmental Evaluation Report (PEL) for theproposed activity is submitted by the sponsor to the Environmental PlanningCommission, either at the central government level or at the provincialgovernment level, depending on the size of the project. Terms of reference,outlining the scope and procedure for conducting the project's EnvironmentalEvaluation Study (SEL) are then drawn up by the sponsor and approved by theEnvironmental Planning Commission. The completed study is submitted forapproval to the Commission along with an environmental management plan (RKL)and an environmental monitoring plan (RPL). Under the Gresik RestructuringComponent, a SEL has been drawn up for the Gresik ammonia/urea plant and foundsatisfactory to the Bank (para. 5.18). In the Optimization component, asatisfactory environmental impact analysis would be a condition of the Bank'sapproval of each subproject.

1.23 Sites and Activities. The Indonesian fertilizer industry consistsof two groups. First, there are the ten ammonia/urea plants--including theASEAN plant at Aceh--, in five locations, with three additional plants underconstruction or planning, to be added over the next 5-10 years. Second, thereis the large TSP and AS complex at Gresik, near Surabaya. The fertilizerplants in Indonesia have adopted the latest proven technologies available whenthey were built, taking into account both technological advancements andenvironmental requirements. The Government, at both central and provinciallevels, and plant management are also increasingly becoming aware of the needto minimize adverse environmental impacts from industrial plants. There are,however, still inadequacies in standards, monitoring, and management.Provisions are included under the Project to assist the Government and thefertilizer industry to remove these inadequacies.

1.24 Ammonia/Urea Plants. The two major effluent streams in these plantsare the liquid effluent stream, which contains ammonia and urea, and thegaseous effluent from the urea prilling tower, which contains urea dust. Mostplants built before 1985 adopted bag filters for the urea prilling towerexhaust, which are not as effective in urea dust removal as technologiesdeveloped later. The more recent plants use scrubbers for more completeremoval combined with hydrolyzers to decompose the urea to ammonium and thento recover the ammonia. Whereas the earlier vintage plants have liquid

l/ In June 1990, a presidential decision formed an Environmental ImpactControl Board as part of KLH. The Board will serve to further strengtheneavironmental impact analysis, pollution control standards, monitoringand enforcement.

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effluent streams containing about 200-450 parts per million (ppm) cf ammonia.the more recent urea technologies reduce the ammonia content in the liquideffluents to below 5 ppm through the use of hydrolyzer-strippers.

1.25 The industry has already made some progress in pollution control.Water treatment designs have been changed to eliminate the use of chromium,and some plants have adopted energy-saving schemes to reduce use of naturalgas. New technology is being adopted to reduce ammonia effluents, although ata slow pace for existing units. All new plants are being designed with state-of-the-art technology that will lower ammonia effluents to under 5 ppm.Kaltim II & III, built after 1985, have achieved such levels, and the companyis also considering installing a hydrolyzer-stripper plant for Kaltim I toreduce its effluent to under 5 ppm. The environmental analysis carried ovtfor the Kujang II plant has proposed the setting up of facilities at Kujang todegrade the effluent biologically, converting the ammonia into nitrogen, alsoto under 5 ppm. The 5 ppm standard is an achievable and desirable standardfor ammonia effluent. The MOI and KLH are currently reviewing the standardsfor the nitrogen industry. The proposed industry-wide environmental study tobe implemented under the Project will assist the government in developingappropriate standards and management systems to ensure compliance on asustained basis. A reasonable approach would be to impose a strict (buttechnically achievable) standard for new construction--i.e., 5 ppm maximum--for ammonia, and to give existing industry a reasonable time to reach similarstandards, taking into account technology and overall contribution to effluentlevels.

1.26 Safety is an important part of industrial operations in thefertilizer industry, particularly in ammonia plants. Each company has a well-established safety department that reviews safety programs and manages asafety awareness pregram. It is common practice internationally to designfertilizer factories with safety in mind, and this was the case with all suchplants in Indonesia. The safety program is fully supported by the MOI and theemphasis on safety has paid off. For example, the two oldest facilities,PUSRI and Gresik, have never had a work-related fatality, and both haveoperated for over three years without a lost-time accident.

1.27 The industry also maintains a good record with regard to socialprograms. Most facilities were installed in remote, unpopulated areas andneeded a comprehensive program of housing, health, schools, and other urbaninfrastructure to attract and keep staff. In two locations, (Palembang andGresik), nearby urban-industrial development has increased sufficiently tomake the companies consider urban development in their corporate planning.This issue is being addressed in the environmental assessment programs of theProject. There have been no reported problems with regard to resettlements orlocal claims. Several factories were built on agricultural land but theimproved productivity resulting from increased fertilizer availability morethan offsets this loss.

1.28 With regard to fertilizer use, inadequate attention has been givento any adverse environmental impact. The emphasis has been on increasingsupply at a uniform low price to ensure rice self-sufficiency. Although noserious environmental issue has emerged, there is some concern that subsidizedfertilizer prices may lead to overuse, resulting in ground water contamina-tion, and that the right type and specification for fertilizers are not being

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used. Some decisions have already been taken that have a positive environ-mental effect: (a) nitrates are not used; (b) production is moving closer toconsumption; (c) phosphate specification changes are being considered; (d) useof urea briquettes is being tried; and, perhaps most important, (e) thefertilizer pricing subsidy is being phased out.

1.29 From an environmental viewpoint, the fertilizer sector is intransition. While overall performance is good, there is a need to develop acomprehensive planning system to ensure that minimal environmental impact isachieved. To support this objective, the Project will provide support toenvironmental impact analyses and appropriate action plans for each of thePFEs and to a sector-wide environmental study that will develop anenvironmental management program for the sector, to be monitored by theGovernment.

II. THE BANK'S PAST LENDING, STRATEGY, AND RATIONALEFOR INVOLVEMENT IN THE SECTOR

A. The Bank's Past Lending in the Fertilizer Sector

2.1 Bank involvement in the Indonesia fertilizer sector began in 1970.Since then, two credits and four loans have been completed, and another loanis being implemented for a total amount of $375.0 million (Table 2.1). During1970-76 the Bank made four credits/loans, all to PUSRI, that enabled thiscompany to expand urea production to 1.4 million tpy by 1979. Theseoperations concentrated on expanding capacity, on ensuring gas supplies to theplants, and on improving overall management capability in the areas of projectdesign and implementation, procurement, finance, and marketing. Although theapproach was largely project-specific, it resulted in Indonesia developingcompetent management capability that enabled the industry to evolvesuccessfully. Many of the early PUSRI staff are now successful seniormanagers scattered throughout the industry and the Government.

2.2 In the mid-1970s, serious constraints began to appear in thedistribution network, given that most of the production was concentrated inone location (PUSRI, Palembang) and consumption mostly in Java, and that otherislands needed supply. The Government then decided to expand production atother locations and to improve the distribution system. During 1975-85, theBank assisted in upgrading the fertilizer distribution system through twooperations designed to improve the physical infrastructure, includingmaritime, rail, and road systems, plus storage and bagging facilties. WithBank support, Indonesia took a lead in promoting bulk transport .f fertilizerin developing countries. At present, about 75 percent of output istransported in bulk, up to the retail level. These operations were alsodirected at improving management of the marketing system, which is also underPUSRI's responsibility. During this period, other expansions of supply tookplace without Bank assistance. Both groups of Bank-supported operations werehighly successful. Fertilizer consumption and production increased fourfoldand eightfold, respectively, during 1970-85. PUSRI is widely recognized as aworld leader in fertilizer production. Distribution efficiency has improved,including the ability to handle the larger volumes produced. Today, Indonesiais a competitive producer and exporter of nitrogen fertilizer.

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Table 2.1: SAN OPERATIONS AND EVALUATIONS OF PROJECT PERFORMANCEIN THE FERTILIZER SECTOR

Approval Credit/Loan AmountProject date No. (8 million) Status

ProductionFertilizer Plant Expansionand Can Conservation 6/16/70 C-193-1 a0.0 Completed

Fertilizer Supplementary 6/21/73 C-193-2 5.0 CompletedThird Fertilizer Expansion 2/20/74 L-1009 116.0 CompletedFourth Fertilizer Expansion 6/20/76 L-1264 79.0 Completed

DistributionFertilizer Distribution 7/10/76 L-1189 68.0 CompletedNational Fertilizer Distribution 4/05/92 L-2120 66.0 Completed

Industrial Energy Conservation 11/09/87 L-2879 21.0 Ongoing

Total 876.0

Sustainabilitv of Prolects - Review of Experience in theFertilizer Subsector; Report No. 6078, Operation EvaluationDepartment, February 26, 1986

Indonesil - Fertilizer Industry Sector Report; Report No. 7184-IND,February 18, 1988.

Project Performance Audit Reports (PPARs)No. 1948 Credits 193-1/-2No. 6419 Loans 1089-IND; and 1264-INDNo. 4256 Loan 1139-IND

Prolect Completion Reports (PCRs)No. 7861 Loan 2120-IND

2.3 By the mid-1980s, several problems developed in the sector thatneeded urgent attention and required a broader sectoral perspective:(a) increasing subsidies due to price controls; (b) industrial efficiencylagging behind international standards, also in part because of pricecontrals; and (c) some economically unjustified investment decisions. During1985-88, the Bank undertook two activities to assist the Government inresolving these issues: an Industrial Energy Conservation Project and aFertilizer Sector Strategy Study. The Industrial Energy Conservation Project(Loan 2879-IND), currently under satisfactory implementation, concentrates onoptimizing energy consumption, the key variable in urea production, withinexisting fertilizer plants at PUSRI. This project is enabling PUSRI toupgrade for energy savings arnd increased output and profitability. It hasalso helped establish an Industrial Energy Conservation Center (Koneba) tobuild up expertise in energy efficiency in the fertilizer and other sectors.

2.4 The Fertilizer Sector Strategy Study prepared during 1987/88 wasdesigned primarily to assist the Government to develop a strategy for removingprice distortions and reducing subsidies, and to prepare a viable investmentprogram. This work too has been very successful. Through discussions of thesector report and project preparation activities, the Government has developeda good understanding both of the adverse effects of price controls and

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subsidies and of the investment priorities. As a result, it has adopted aninvestment strategy (para. 1.19) and has moved towards a comprehensive policyreform program (para. 1.21) that should enable the sector to maintain andenhance its internationally competitive position. During Project preparationtwo other areas of concern for the fertilizer industry emergeds itsenvironmental impact and the distribution and marketing efficiency. Theproposed Project provides for studies that will assist in the resolution ofthe main issues in these areas.

2.5 Project Completion Reports (PCRs) and Project Performance AuditReports (PPARs) as well as the OED's Review of rxperience in the FertilizerSubsector Report, listed in Table 2.1, have attributed such favorableperformance of Bank-assisted operations to the following main elements:(a) firm commitment by the Government and the fertilizer enterprises to attainthe projects' objectives; (b) presence of a competent, strong, and stablemanagement core at the fertilizer enterprises, assisted by capable technicalsupport for project implementation; (c) use of competent and highlyexperienced licensors and engineering firms; (d) comprehensive arrangements tofacilitate procurement; and (e) provision of on-the-job training opportunitiesfor fertilizer enterprises' staff. The reports also noted, however, thatthese operations focussed on the development of physical aspects of theindustry but did not attempt to address fertilizer policy issues. Experiencefrom Bank-financed fertilizer projects in other countries has identified otherlessons: (a) the choice of optimization investments should be based on botheconomic considerations and expected improvements in operating costs, avoidingoptimistic implementation sc&edulee; (b) project activities should beintegrated with normal plant operations to ensure their timely execution;(c) the effective transfer of technology and the skill upgrading of managerialand technical staff should be assessed carefully. The above elements haveplayed a central part in the design of the proposed Project. In addition, akey message from the implementation experience of Bank-supported fertilizeroptimization investments is that their complexity has put heavy demands interms of supervision. Therefore, the proposed Project supervision strategywould be carefully planned to ensure the adequate allocation and effectiveutilization of resources for this purpose.

B. The Bank's Strategy and Rationale for Involvement in the Sector

2.6 Bank strategy in the sector has evolved over the past two decadesfrom an emphasis on increasing supply, principally through financing selectedinvestments, to a broad, policy-based strategy to attain the sectordevelopment objectives detailed in para. 1.21. The main rationale for Bankinvolvement with the proposed Project is to ensure that the continuingevolution of policy reforms is implemented in a consistent and timely fashionto support the development of the fertilizer sector. The proposed Projectconforms well with this strategy by building upon an established policydialogue and assisting the Government to implement key policy reforms agreedujpon by the Government and the Bank (para. 1.21). Moreover, the proposedProject will apply important lessons learned under previous Bank-assistedactivities. The main thrust of the proposed Project is on economicefficiency, distribution and marketing improvements, and pollution abatement.

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III. THE PROJECT

A. Obiectives and Description

3.1 The primary objectives of the proposed Project would be to:(a) assist the Government in implementing significant sector reforms, alreadyinitiated and reflected in the draft Government Statement of Policy, that willsustain the continued development of the fertilizer sector on an economicallyefficient and environmentally sound basis; (b) support an industry-widepriority investment program; (c) identify the scope for improved efficiency inmarketing and distribution; and (d) assess the industry's environmental impactand standards, and develop an environmental management program.

3.2 To achieve these objectives, the Project includes: (a) a GresikRestructuring Component to provide financial assistance to P.T. PetrokimiaGresik for the construction of a new ammonia/urea plant and for modernizationof Gresik's existing fertilizer plants; (b) an Optimization Component tosupport investments in four participating fertilizer enterprises (PFEs)--Iskandar Muda, Kaltim, Kujang and PUSRI--to realize energy savings, capacityand productivity gains, and pollution control improvements; and (c) a StudiesComponent to undertake analyses of the scope for improved efficiency infertilizer marketing and distribution and of the environmental impacts of thefertilizer industry, including identification of long-term objectives forenvironmental improvement and preparation of an environmental managementprogram to ensure that the industry meets appropriate standards.

B. The P.T. Petrokimia Gresik Restructuring Component

3.3 This component will comprise: (a) building a new ammonia/urea plantat Gresik, with a caDacity of 1,350 tpd of ammonia and 1,400 tpd of urea, toprovide low-cost ammonia to existing operations and to reduce ureadistribution costs in East Java, including provison of engineering servicesand licenses therefor; (b) supporting modernization investments in Gresik'sexisting fertilizer plants to increase output of phosphoric acid and improveperformance of the AS facilities and ameliorate environmental pollution.

Gresik's New Ammonia/Urea Plant ($305.4 million)

3.4 The new ammonia/urea plant to be built at Gresik will be based onnatural gas and have a capacity of 1,350 tpd of ammonia and 1,400 tpd of urea.The Gresik complex already contains a range of plant facilities, mainly forthe production of TSP and AS. Half of the phosphoric acid--amounting to about151,000 tpy, required for TSP production--is obtained from the company's ownfacilities, and the rest is imported. The TSP facilities require importedphosphate rock, phosphoric acid, and sulfur. The production of phosphoricacid, by the sulfuric acid acidulation of rock phosphate, generates about750,000 tpy of gypsum, which needs to be either utilized or disposed of. Thelocal pollution control requirements do not permit the discharge of gypsuminto the sea. About 335,000 tpy of the gypsum is utilized for the productionof cement retarder sold to Indonesian cement plants. The company exportsabout 65,000 tpy of purified gypsum and uses the rest of the gypsum, about350,000 tpy, for the production of AS. This AS plant also requires bothammonia and carbon dioxide as raw materials. The company, therefore,

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continues to operate a 72,000 tpy capacity, fuel-oil-based ammonia plant atthe minimum level to generate the carbon dioxide requirements of AS productionplus a small amount of carbon dioxide for industrial sales. The high cost ofthis ammonia adversely affects the economics of AS production. Anotherexisting AS plant produces 400.000 tpy of AS by direct neutralization ofammonia and sulfuric acid; the latter in turn is produced from importedsulfur. The ammonia requirements for this plant are purchased from Kaltim.

3.5 The proposed new plant will use, to the extent possible, the utilityand infrastructure facilities already available in the complex. The companyhas finalized a contract with two well-known ammonia and urea licensors, andthe plant will therefore be based on one of the proven, energy-efficienttechnologies with environmental considerations consistent with presentinternational standards. The size of the plant is large enough to achieveeconomies of scale, and at the same time is in the well-proven capacity rangeto avoid undue technical risks. The plant will be located -within the existingGresik complex, and land has already been cleared for the purpose. The newammonia plant will allow the existing ammonia plant to be closed, replacepurchased ammonia, and maintain sales of industrial carbon dioxide.

3.6 Natural gas for the project will be provided by PerusahaanPertambangan Minyak dan Gas Bumi Negara (Pertamina) under a contract to besigned with Gresik. The contract will provide for a normal daily supply of48 million standard cubic feet per day (MMSCFD) with a maximum of 60 MMSCFD,starting from 1993. The gas will have a gross calorific value not below 950MMBtu per SCF and not above 1,200 MMBtu per SCF, and it will be delivered atthe plant site at a fixed price of $2.00 per MMBtu. This contractual gasprice is within the economic cost of supply, which has been tentativelyestimated by the Bank at $l.77-2.21/MBtu on the basis of the long runmarginal cost of supply, including risk and depletion premiums. The gas willbe delivered from the Pegerungan reserves of the Kangean Block--located acrossMadura Island and north of Bali and developed by Atlantic Richfield Bali NorthInc. (ARBNI) and Britoil (Alpha) Ltd. (Britoil) along with Pertamina.According to present indications, the above reserves total abctt 2,500 billionstandard cubic feet (BSCF) consisting of 2,300 BSCF proven and 200 BSCFprobable. The gas contractors intend to build an appropriately sizedpipeline--about 255 miles long, based on delivery of 180 MMSCFD to the PLNGresik thermal power plant, 60 MMSCFD to the Gresik ammonia/urea plant, andabout 90 MMSCFD for domestic and other industrial use in the Surabaya/Gresikarea. A feasibility report on the routing and sizing of the pipeline wasprepared by P.T. Bimantara, the Indonesian partner of the contractors. Allcontractual arrangements are being finalized and the pipeline would becompleted in time for the commissioning of the ammonia/urea plant.

Modernization of Gresik's Existing Fertilizer Plants ($15.8 million)

3.7 Gresik produces about 1.2 million tpy of TSP, partly with its ownbut mostly with imported phosphoric acid, and 650,000 tpy of AS. At presentthe phosphoric acid plant, with an installed capacity of 171,400 tpy, producesonly about 151,000 tpy due to equipment problems. The company is alreadychanging some equipment to reduce production interruptions. It should bepossible to increase phosphoric acid producti3n further through modernizationof the facilities, including increased output of phosphoric acid and changingproduct specifications in the TSP plant. To the extent additional phosphoric

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acid can be produced, sulfuric acid that will be converted to AS will bereduced. Feasibility studies will also assess utilization of waste calciumcarbonate in the adjacent cement factory and improvements in the performanceof the AS production facilities, including improved ammonia recovery andminimizing ammonia and sulfur dioxide (SO2) discharges into tih environment.To address the above issues Gresik, assisted by consultants and processlicensors, is evaluating an investment program which will be supported underthe proposed Project.

C. The Optimization Component ($122.2 million)

3.8 The Indonesian fertil'zer industry has an ongoing strategy tomodernize its facilities to current levels of proven technolcgy and to enhanceefficient operations to maintain an exportable nitrogen surplus and tominimize costs of the local supply of fertilizers. A major part of thatoptimization work is being supported under the Industrial Energy ConservationProject, Loan 2879-IND. The Optimization Component of this proposed Projectwill support the next phase of modernization of the sector, covering fourPFEs: Iskandar Muda, Kaltim, Kujang, and PUSRI. It will support investmentsfor energy and raw material efficiency, enhanced output, and improvedenvironmental performance of the plants. These investments are well definedat this stage, but require additional detailed feasibility work prior toimplementation. All subprojects will be reviewed and approved by the Bank, onthe basis of their technical, managerial, financial and economic viability, aswell as on the assessment of their environmental impact.

3.9 P.T. Iskandar Muda Ammonia/Urea Optimization Subproject. PIKfacilities in Aceh, North Sumatra, include a 1,000 tpd ammonia plant and a1,725 tpd urea plant. The facilities were commissioned in 1984 and have beenoperating consistently above rated capacities. The present energy consumptionis about 38 M4Btu per ton of ammonia, which indicates further scope for energysavings through appropriate investments. An energy audit of the facilitieshas been carried out by Koneba. PIM is also examining several productdiversification schemes, including industrial chemicals such as hydrogenperoxide, and maintenance improvements. The various possibilities are beingput together by PIM in a feasibility study for inclusion within the Project.

3.10 Kaltim I Ammonia/Urea Optimization Subproject. Kaltim operatesthree ammonia/urea plants in Bontang, East Kalimantan. Kaltim II and IIIoperate extremely well. Kaltim I ammonia and urea plants were originallydesigned as a ship-borne facility capable of being moved to different offshoregas fields. This concept proved nonviable, however, and a decision was madein 1975 to locate the plant on land at Bontang. Construction of the plant wascompleted, and commissioning started, in 1983. Because of the long storage ofequipment under less than ideal conditions and inappropriate design specifica-tions, the plants could not operate at rated capacities on a sustained basis.A study by the original process designers, recommended a rehabilitation schemethat was carried out in 1984-85. Following its implementation, stableoperations could be achieved, and in 1988 production factors of 88 percent forammonia and 82 percent for urea were achieved. Kaltim I is now reported to beoperating at an annual average capacity of over 90 percent, and running forsustained periods above rated capacity. Ho-wever, the plant continues to haveproblems. Some of the equipment is still unreliable, thereby affectingsustained production. The energy consumption per ton of ammonia is 44 t4mBtu

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per ton--indicating strong potential for achieving energy savings. There isalso scope for improving effluent quality.

3.11 on the basis of an energy audit carried out by Koneba, conceptualstudies undertaken by process engineering companies, and Kaltim's ownexperience with the plants, the company has developed an optimization programwith fourfold objectives: to improve efficiency, to achieve betterreliability, to expand capacity, and to improve maintenance. The studiesindicate that the Kaltim I ammonia plant capacity can be increased by up to20 percent, if the existing ammonia converter is replaced with a larger-capacity modern, low-pressure, radial-type converter. The capacity of theurea plant would be increased by about 10 percent. Kaltim I will utilize thisextra urea capacity to produce melamine, under a joint venture with a companyfrom The Netherlands.

3.12 Kuiang Ammonia Optimization Subproject. Kujang facilities atCiampek in West Java consist of a 1,000 tpd ammonia plant and a 1,725 tpd ureaplant commissioned in 1979. From direct operating experience and following aconsultant study carried out in 1980, certain plant modifications have beencarried out. As a result, the plant produced 391,500 tpy of ammonia and645,500 tpy of urea in 1986, corresponding to 119 percent and 113 percent,respectively, of original rated capacity. The objectives of this optimizationsubproject are to: (a) increase ammonia availability at Ciampek to supportproduct diversification schemes; (b) reduce energy consumption by about 2.67MMBtu per ton of ammonia through energy-saving investments; (c) maintain plantreliability after a decade of operations; and (d) decrease ammonia effluentsto a Fatisfactory level. After joint analysis by Kujang and Koneba, sevenenergy conservation opportunities were identified and further studied byKoneba in consultation with the various process owners. The present Kujangoptimization proposals are based on the March 1989 Koneba study. Theseproposals were selected based on a gas price of $1.00 per MMBtu. Since theeconomic value of natural gas at Kujang (located in Java) would be higher(likely about $2.00 per MMBtu), Kujang is evaluating further modificationsthat could be just.fied by the higher gas price. The subproject's scope willbe finalized on the basis of these studies.

3.13 PUSRI II Urea Optimization and Effluent Treatment FacilitySubproject. PUSRI has four ammonia/urea plants at its production :acilitiesin Palembang, South Sumatra. PUSRI II facilities consist of a 660 tpd ammoniaplant and a 1,150 tpd urea plant that have been in operation since 1974. Theperformance of these plants has been good, but serious problems have occurredsince 1983 because of deterioration of the titanium lining of the ureareactor. Its replacement is necessary for the continued operation of thePUSRI II urea plant on a sustained basis. PUSRI II has a urea prilling towerof the same size as those in PUSRI III and IV, capable of processing up to -1,725 tpd of urea. As a result of the optimization of the PUSRI II, III, andIV ammonia plants--now being carried out under the Bank-financed IndustrialEnergy Conservation P-oject (Loan 2879-IND)--the total ammonia output at PUSRIwill go up by about 315 tpd, with a reduction in energy consumption from anaverage of 41.5 MMBtu per ton to 37.2 MMBtu per ton. Also, the decision tobuild a larger 1,350 tpd ammonia plant as part of PUSRI Ib while building onlya 1,750 tpd urea plant will generate an additional ammonia surplus of 350 tpd.Its location and the draft limitations at its jetty will make it difficult forPUSRI to export the 220,000 tpy of ammonia surplus that will become available

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when FUSRI Ib is commissioned. The PUSRI scheme is to convert part of thesurplus ammonia to urea by optimizing the PUSRI II urea plant, takingadvantage of the surplus carbon dioxile available from PUSRI Ib. Theadditional urea will go mostly to the domestic market via coastal ships ofmedium size.

3.14 PUSRI has invited proposals from international firms and hasevaluated alternative optimization options, taking into account not onlytechnical and economic features but also reliability and commercially provenprocesses. The optimization subproject is now proposed to be based on theMTC/TEC (Japan) Aces Process. The proposed modifications will include:(a) replacement of the synthesis section--including the old titanium-linedreactor; (b) additional high-pressure recycle-solution feed pumps;(c) replacement of the carbon dioxide booster compressor and driver; (d) anadditional evaporator/coaidenser; and (e) modifications to the prillingsection, which will also alm to reduce air and water contamination. Inaddition, PUSRI has prepared, assisted by consultants, an investment forinstallation of a wastewater treatment plant, which would also be supportedunder this subproject.

D. The Studies Component ($900,000)

3.15 The proposed Project includes provision for undertaking studies to:(a) identify the scope for improved efficiency in fertilizer marketing anddistribution; and (b) assess the environmental impact and standards of thefertilizer industry, including identification of long-term objectives forenvironmental improvement and preparation of an environmental managementprogram.

3.16 Stud) of Fertilizer Marketing and Distribution ($400,000). There isgeneral consensus within Indonesia that the present system is performingreasonably well, mainly becatse fertilizer is delivered to farmers at a setprice and on time. However, this system is characterized by PUSRI's monopolyat the wholesale level and cooperatives' monopoly at the retail level (paras.1.7 through 1.9). As a result, there is a lack of domestic competition thathas constrained improved efficiency and, coupled with high distribution costsand controlled fertilizer prices has led to an increased budgetary andeconomic subsidy. The proposed Project includes provisions for a study thatwill identify means of improving fertilizer distribution and marketingefficiency in a competitive environment. The study will comprise two parts.The first, to be undertaken by PUSRI, will cover: (a) updating the datacontained in the 1986 Distribution and Marketing Study done by PUSRI;(b) assessing the current distribution system for both local sales andexports, in terms of ownership and operation costs; (c) preparing a ten-yearforecast of fertilizer supply and demand; and (d) evaluating the logisticaland physical changes required in the distribu-tion network over the next tenyears. The second part, to be undertaken by a team comprising primarilyforeign experts, will include: (a) identification of the existing marketinginefficiencies and constraints; (b) a compa-ative analysis of the cost-effectiveness of the Indonesian marketing b,stem with that in other countriesin the Asia Region; (c) an assessment of the impacts of changes in policy andfertilizer use--product types and application prospects--on the marketingsystem and on the natutal environment (para. 1.30); and (d) a recommended plan

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of action to improve the competitiveness and efficiency of the fertilizermarketing system. Detailed terms of reference are given in Annex 3-A.

3.17 Development of an Environmental Management Program for theFertilizer Industry ($500,000). The Government is committed to implement aprogram of environmental i-provement within the coantry. A system of laws andregulations has been adopted, but some key issues remain unresolved. For thefertilizer industry: (a) inadequate standards and targets; (b) lack of anenvironmental management program; (c) absence of an environmental monitoringprogram and enforcement arrangements; and (d) lack of a priority investmentprogram to meet the proper standards and targets. To assist in the resolutionof these issues, provisions have been incorporated under the Project toundertake a study, to be done by a team composed of local and foreignconsultants, with the following main objectives: (a) to assess Indonesianenvironmental standards for the industry and recommend changes, including atarget-based, phased implementation program of compliance; (b) to assess theenvironmental impact of current and planned fertilizer production facilities,including safety performance, and to recommend measures to bring these intocompliance with the revised targets and standards; (c) to recommend aninvestment program to accomplish (b) above; (d) to develop an environmentalmanagement program for the industry; and (e) to assess environmentalmonitoring and enforcement practices and recommend specific improvements.Detailed terms of reference are in given Annex 3-B.

E. Project Organization and Implementation

Policy-related Actions

3.18 Overall, the proposed Project will be implemented in accordance withthe principles stated in the Government Statement of Policy, as detailed inpara. 1.21 and in Annex 1. An assurance to this effect was obtained duringnegotiations. During negotiations, the following understandings were reached:Ca) that the revised farmgate fettilizer prices for 1991 adopted by theGovernment, as agreed during the exchange of views on these prices inSeptember 1990, between the Government and the Bank, represent a satisfactoryprogress in bringing these prices ultimately to their economic levels;(b) that the Government will, by October 1 of each year, commencing not laterthan October 1, 1991, review the farmgate and ex-factory prices offertilizers, exchange views with the Bank on the results of the review, andthereafter, if required, revise such prices taking into account the principlesset forth in the Statement; and (c) that actions will be taken duringRepelita V (1993-94) to bring the prices of fertilizer products gradually totheir economic level and eliminate the associated subsidy payments from theGovernment's budget.

The Gresik Restructuring Component

3.19 The New Ammonia/Urea Plant will be built by Gresik within theboundaries of its existing complex. The plant will be constructed through afixed-price turnkey contract, based on commercially proven and energyefficient technology. Gresik will be responsible for overall projectcoordination and for the supply of utilities. A local firm, P.T. Inti KaryaPersada Tehnik (IKPT) has been appointed as General Contractor. IKPT wasselected by Gresik, in consultation with MOI, after reviewing IKPT's extensive

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experience in industrial design and plant construction, which includes onelarge ammonia/urea plant. The provision of the ammonia and urea facilitieshas been contracted from internationally experienced licensors, followingInternational Competitive Bidding (ICB) procedures. In August 1989, Gresik,with prior agreement of the Bank, prequalified six firms (three for ammoniaand three for urea) and prepared the invitation to bid and draft contracts.All these documents have been reviewed and found satisfactory by the Bank.Bids were opened on February 28, 1990. The prequalified engin.jering/licensorfirms submitted proposals covering basic engineering and technology, offshoreequipment and materials supply, supervision of implementation andcommissioning, and operational performance guarantees, all under a subcontractwith IKPT. IKPT submitted a bid for onshore equipment and materials supply,detailed engineering, project management and procurement, and erectionservices. Gresik will be responsible for overall management and supervision,land preparation, and supply of selected equipment (i.e., water cooling tower,water demineralization plant, electric substations and other equipment) basedon licensors' specifications. Gresik completed the bid evaluation on June 5,1990, and proposed to award the contract to the lowest evaluated bids: KellogOverseas Corporation (USA) as the ammonia licensor, and Toyo EngineeringCorporation (Japan) as the urea licensor. The Bank reviewed the bidevaluation report and provided a no-objection for Gresik to proceed withcontract negotiations with IKPT and the two licensors. The contract,satisfactory to the Bank, was signed on September 7, 1990.

3.20 Construction of the ammonia/urea plant started on October 4, 1990,and would take 36 months to complete, including 3 months for commissioning.The Government has indicated to the Bank that construction of the gas pipelinethat will supply natural gas to the plant will have started by January 1,1991, and that it is scheduled to be completed by December 31, 1993, which issatisfactory. It would be a condition of disbursement for the GresikRestructuring Component that a contract for the provision of the requirednatural gas to Gresik has been executed on behalf of Gresik and PERTAMINA andfound satisfactory to the Bank.

3.21 Modernization of Gresik's Existing Fertilizer Plants will be theresponsibility of Gresik. For these investments, Gresik will prepare anappraisal report and an environmental impact analysis, which will be submittedto the Bank for review and approval. Gresik, assisted by foreign consultants,is currently preparing these documents, which are expected to be completed notlater than June 30, 1992. For implementation purposes, Gresik will set up aproject management team and will be using the services of local contractors,foreign licensors and engineering firms, as required.

3.22 For purposes of project implementation, Gresik will require theassistance of highly qualified engineering services. These services would beprovided by fertilizer engineering experts, for a period of about three years,to be financed under the loan. .hese experts will be internationallyrecruited in accordance with Bai.k guidelines. The terms of reference for theconsultants, to be appointed not later than May 1, 1991, were agreed duringnegotiations. Gresik will set up a project management team composed of itsown experienced staff and supplemented by staff to be hired from otherdomestic fertilizer enterprises, as required.

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The Optimization Component

3.23 The implementation of this component will be the responsibility ofeach of the four PFEs concerned with these investments. Three enterprises,Kaltim, Kujang, and PUSRI, have prepared preliminary proposals that werereviewed during appraisal. Detailed feasibility studies are under way and areexpected to be completed by March 1991. PIM has started to develop aproposal, assisted by Koneba, which would also be fully appraised by March1991. In addition, each PFE will prepare an environmental impact assessmentof these investments. Appraisal reports and environmental assessments will besubmitted to the Bank, not later than June 30, 1992, for review and approval.These investments are expected to be implemented during a period ranging from1 to 3 years. PIM, Kaltim, Kujang and PUSRI will, not later than May 1,1991, appoint consultants to assist them in the imp'ementation of theirrespective optimization subprojects, under terms of reference satisfactory tothe BAnk and procured in accordance with Bank Guidelines for the Use ofConsultants.

The Studies Component

3.24 The Distribution and Marketing Study will be managed by theDirectorate General of Chemical Industry of the MOI; this Directorate willentrust PUSRI with the distribution part, and will appoint a team of foreignand local consultants for the marketing part. Both parts would be undertakenunder terms of reference acceptable to the Bank. For the marketing part ofthe study, the above Directorate will employ qualified and experiencedconsultants. To coordinate and supervise the implementation of this study,the Government, not later than May 1, 1991, will establish a SteeringCommittee comprising representatives from MOI (Director-General of ChemicalIndustry as Chairman); EKUIN; MOA; the Ministry of Trade; the Ministry ofCooperatives; and the Indonesian Fertilizer Producers' Association (APPI).The study is scheduled for completion by March 1, 1992. The Government andthe Bank will review the recommendations of the Distribution and MarketingStudy, not later than 60 days after this completion, and agree on an actionplan to implement them. Assurances to the above effects were obtained duringnegotiations.

3.25 Development of an Environmental Management Program for theFertilizer Industrv will be undertaken by a team of qualified and experiencedforeign and local consultants, (to be appointed by the Directorate-General ofChemical Industry of the MOI), under terms of reference acceptable to theBank. The Government will set up, not later than May 1, 1991, a SteeringCommittee to coordinate and supervise the implementation of this study,chaired by the MOI's Director General of Chemical Industry and composed ofrepresentatives from EKUIN, MOA, KLH and APPI. The study is scheduled forcompletion by March 1, 1992. The Government and the Bank will review therecommendations of this study, not later than 60 days after this completion,and agree on an action plan to implement these recommendations. Assurances tothe above effects were obtained during negotiations.

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Project Implementation and Supervision

3.26 Overall Project monitoring and coordination will be theresponsibility of the Directorate General for Chemical Industry of the MOI. Aset of key implementation indicators is given in Annex 8, Section A. TheProject will require about 10 staff-weeks of Bank staff annually forsupervision, comprising mainly enginteering, financial, environment and projectmanagement expertise. A Project supervision plan is at Annex 8, Part B.

IV. PROJECT COST, FINANCING PLAN, AND LOAN FEATURES

A. Project Cost

4.1 The total financing required for the Project is estimated at $444.3million equivalent, including $222.4 million in foreign exchange (50 percent),as detailed in Annex 4 and summarized in Table 4.1 below. The estimatesinclude appropriate physical contingencies, expected price increases, interestduring construction, and incremental working capi-l. The total installedcost for the new Gresik ammonia/urea plant is based on the actual contractprice, and therefore no contingencies have been added for this investment.The base-cost estimates for the optimization subprojects were prepared by thevarious PFEs and have been reviewed and adjusted to mid-1990 prices. Priceescalations have been estimated using the expenditure schedules prepared bythe PFEs. The price contingencies are based on: (a) domestic inflation of6.5 percent in 1990 and 1991, and 6 percent in the subsequent ye'.rs; and(b) international inflation rates of 3.6 percent in 1990 and thereafter. TheRupiah costs have been converted to U.S. dollars using an exchange rate of$1.0 = Rp 1,830 for the life of the Project. Interest during construction hasbeen calculated using an interest rate of 18.0 percent per annum.

Table 4.1: PROJECT COST SUMMARY /a

Foreign Percent ofComponent Local Foreign Total Local Foreign Total Exchange Total Base

- Rp billion ---- ----- S million Percent Cost

Gresik Restructuring L 216.9 247.2 464.1 118.6 185.1 258.6 sa 78

Optimization 29.8 188.7 168.5 16.8 76.8 92.1 82 27

Studies 0.4 1.2 1.6 0.2 0.7 0.9 78 -

Total Base Cost 247.1 887.1 684.2 185.0 211.0 846.6 61 100

Physical Contingencies / 1.8 7.7 9.8 0.9 4.2 5.1 82 1Expected Price

Increases /c 2.2 12.0 14.2 1.2 6.8 7.8 84 2

Interest During Const. 118.6 - 118.6 64.8 - 64.8 - 19Working Capital 36.6 - 86.0 20.0 - 20.0 - 6

Total Prolect Cost andFinancing Requirod 408.1 406.8 612.9 221.9 222.4 444.8 S0 128

/a 81.00 = Rp 1,830Lb Includes identifiable taxes on services estimated at 84.0 million.Lc Applicable only to the Gresik Modernization SubproJect and the Optimization Component.

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4.2 The P.T. Petrokimia Gresik Restructuring Component. This component,with a total cost of $321.2 million, comprises two subprojects: the newamnonia/urea plant and the modernization of Gresik's existing plants. The newGresik ammonia/urea plant would cost a total of $305.4 million, includingincremental working capital ($20.0 million) and interest during construction($42.6 million). The capital cost is based on firm price bids and assumesthat the natural gas feedstock will be delivered by Pertamina at the plantpremises at the agreed tariff ($2.0 per MMBtu), with all pipeline facilitiesowned and operated by Pertamina and with no gas transmission capital costsrequired of Gresik. The total direct foreign exchange requirements of the newammonia/urea plant are estimated at $126.3 million. Details of the capitalcosts are given in Annex 5-1 and are summarized in Table 4.2. The proposedammonia/urea plant will be located within the existing Gresik complex nearSurabaya and will share the already existing plant infrastructure such as theport, water supply, power generation, and maintenance facilities. Capitalcosts are therefore considerably lower than a comparable 'greenfieldfacility," and the subproject is much less likely to experience capital cost

Table 4.2: P.T. PETROKIMIA GRESIK RESTRUCTURING COMPONENT -CAPITAL COST ESTIMATE

($ million)

Local Foreign Total

1. Ammonia/Urea Plant

Ammonia process licensor 93.1 93.1Urea process licensor - 32.5 32.5Civil works and erection 100.5 - 100.5Gresik-supplied equipment and services 16.0 0.7 16.7

Subtotal 116.5 126.3 242.8

Working Capital 20.0 - 20.0Interest During Construction 42.6 - 42.6

Total Subproject Cost 179.1 126.3 305.4

2. Modernization of Fertilizer Plants

Subtotal 2.0 8.8 10.8

Physical contingencies 0.1 0.4 0.5Expected price increases 0.1 0.6 0.7

Subtotal 2.2 9.8 12.0

Interest during construction 3.8 - 3.8

Total Subproject Cost 6.0 9.8 15.8

Total Component Cost 185.1 136.1 321.2

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overruns and construction delays. The capital cost of the Gresik moderniza-tion subnroject is estimated at $15.8 million, including contingencies; $9.8million is in foreign exchange, and $3.8 million in interest duringconstruction. Details of the capital costs and expected operating benefitsand costs are being prepared by Gresik and would be fully developed before thesubproject is submitted to the Bank for review and approval.

4.3 Optimization Component. The estimated financing requirements of thevarious schemes being considered for inclusion in the Optimization Componentof the Project amount to $122.2 million equivalent, including total foreignexchange requirement of $85.6 million equivalent. The estimate includesadequate provisions for physical contingencies, price escalation, and interestduring construction. Table 4.3 summarizes the financing requirements of theindividual components that would be included in the Optimization Component,and details for some of these investments are given in Annex 5-2 throughAnnex 5-4.

Table 4.3: OPTIMIZATION COMPONENT - CAPITAL COST ESTIMATE($ million)

Local Foreign Total

Base Cost EstimatePusri II Urea 7.8 19.7 27.5Pusri Effluent Treatment Facilities 0.8 2.3 3.1Kaltim I AmmonialUrea 3.9 32.8 36.7Kujang Ammonia 2.0 11.4 13.4PIM Ammonia 1.8 9.6 11.4

Total Base Cost Estimate (BCE) 16.3 75.8 92.1

Physical contingencies 0.8 3.8 4.6Expected price increases 1.1 6.0 7.1

Total Component Cost 18.2 85.6 103.8

Interest during construction 18.4 - 18.4

Total Financing Required 36.6 85.6 122.2

4.4 Capital cost estimates of the optimization component have beenprepared by the individual companies. In the case of PUSRI II urea optimiza-tion the company has invited proposals from the major urea process licensorand has evaluated them for both technical and cost considerations. Thecapital cost estimates are based on the selected proposals, which includedetails of the proposed plant modifications and the expected cost estimates.The PUSRI effluent treatment subproject includes a package of schemes aimed toimprove effluent quality, and the estimates have been prepared by PUSRI fromin-house information. The scope and cost estimates for the Kaltim Ioptimization project have been determined in-house by the Kaltim technical

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staff. This subproject envisages consultant studies to evaluate and firm upthe various options; the cost estimates should, therefore, be consideredpreliminary. The potential options arising from this study are being furtherevaluated by Koneba to determine the scope and cost estimates for the Kuiangammonia optimization subproject. PIM has contracted Koneba to evaluateoptimization options for the Iskander Muda ammonia plant. The presentestimates for the PIM ammonia optimization project--based on similar schemesin other plants--should be considered preliminary, to be firmed up when theKoneba studies are completed.

4.5 Studies Component. This component includes support for thepreparation of the two studies: a marketing and distribution study, anddevelopment of an Environmental Management Plan for the Fertilizer Sector.The cost of the two studies (Table 4.4) has been estimated in consultationwith the Indonesian authorities, considering the scope of the studies and thelocal and foreign expertise required to implement them.

Table 4.4: STUDIES COMPONENT - COST ESTIMATE($ million)

Local Foreign Total

Marketing and Distribution 0.1 0.3 0.4Development of Environment ManagementPlan for the Fertilizer Sector 0.1 0.4 0.5

Total Cost 0.2 0.7 0.9

B. Financing Plan

4.6 The financing plan is presented in Table 4.5. Overall, the Bankloan of $221.7 million would finance 50 percent of project costs and almostall (over 99 percent) of the estimated foreign exchange requirements. ThePFEs would provide $144.5 million, or 33 percent of project costs. Local costloans from Bank Negara Indonesia 1946 (Bank BNI) to P.T. Petrokimia Gresikwould provide $78.1 million, or 17 percent of project costs.

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Table 4.6: FINANCING PLAN

Local Foreign Total X of totalm- (l illion)…

Gresik Restructurina ComponentEquity (Gresik) 107.0 - 107.0 24LT borrowing - World Bank - 136.1 186.1 81MT borrowing (Bank BNI) 68.1 - 68.1 18ST borrowing (Bank BNI) 20.0 - 20.0 4

Subtotal 186.1 180.1 821.2 72

Optimization ComponentEquity (four fertilizer

companies 36.6 - 86.6 9LT borrowing - World Bank - 86.6 86.6 19

Subtotal 86.6 865.6 122.2 28

Studies ComponentEquity (five fertilizercompanies) 0.2 0.7 0.9 -

Subtotal 0.2 0.7 0.9

Total FinancinaEquity 143.8 0.7 144.6 88LT borrowing - World Bank - 221.7 221.7 S0MT borrowing (Bank BNI) 68.1 - 68.1 1SST borrowing (Bank SNI) 20.0 - 20.0 4

Total Financing Required 221.9 222.4 444.3 100

C. Features of the Loan

Onlending Arrangements

4.7 Lending and Allocation Arrangements. The proposed Bank loan of$221.7 million would be lent to the Republic of Indonesia at the Bank'sstandard variable rate and on standard country terms: 20 years, including agrace period of 5 years. The MOF would act as the Government's agent. Duringnegotiations an agreement was reached that the Government would allocate theproceeds of the loan as detailed below:

(a) Each of the PFEs will subscribe to a portion of the loan, based onthe amount of funds it expects to utilize for its respectivecomponents. The allocations are shown in Table 4.6.

(b) The Government would charge the PFEs a commitment fee on theundisbursed balance of their respective loan allocations equal tothe commitment fee payable by the Government to the Bank.

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Table 4.6: INITIAL ALLOCATION OF LOAN PROCEEDS TOPARTICIPATING FERTILIZER ENTERPRISES

PFE Amount ($ million)

Gresik Restructuring ComponentP.T. Petrokimia Gresik: Ammonia/Urea Plant 126.3

Modernization of Existing Plant 9.8

Subtotal 136.1

Optimization ComponentP.T. Pupuk Sriwidjaja 25.1P.T. Pupuk Kalimantan Timur 37.1P.T. Pupuk Kujang 12.7P.T. Pupuk Iskandar Muda 10.7

Subtotal 85.6

Total 221.7

(c) Funds to the PFEs will be lent by MOF through Subsidiary LoanAgreements (SLAs) with each institution. Loan proceeds onlent toGresik for the new Gresik ammonia/urea plant would be for a fixedterm of 15 years, including 5 years of grace. Loan proceeds onlentto the PFEs for the Optimization Component and the Gresik moderniza-tion subproject would be for a fixed term of 10 years, including 3years of grace. At negotiations, the Government and the Bankreviewed the draft SLAs between MOF and the PFEs. All PFEs wouldsign a Project Agreement with the Bank outlining their obligationsin implementing the proposed Project. Signing of SLAs between MOFand the five PFEs, on terms and conditions acceptable to the Bank,for undertaking of the respective project components would be acondition of loan effectiveness.

(d) To ensure that the onlending rate for Bank funds reflects the marketrate for domestic term-funds to Indonesian enterprises, theonlending rate to the five PFEs will be at a variable interest ratepegged to BI's three-month SBI (until the introduction of a six-month certificate in June 1990, this was BI's SBI of longest tenor).This rate would be adjusted on January 1 and July 1 of each year,based on the average of SBI three-month maturity quotations duringthe preceding six months plus one percentage point. While theGovernment would bear the foreign exchange risk, this formula forestablishing the cost of funds from the Government to the PFEsincludes an implicit premium reflecting market expectationsregarding exchange rate changes. Since deposit rates in Indonesiaare market-determined and capital flows are generally unrestricted,this approach would result in a rate that approximates the marketrate for prime industrial enterprises borrowing from local financial

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institutions. To protect the PFEs from possibly excessivevolatility in the reference rate, the onlending rate would notexceed the average of end-of-day quotations of the five SCBs' three-month time deposits during the same preceding six-mcnth period plusone percentage point.

(e) Gresik, for its modernization subproject, and the other PFEs, fortheir optimization subprojects, will, not later than June 30, 1992,submit to the Bank for review and approval a Subproject AppraisalReport and an snvironmental impact assessment of the subproject,including an Executive Summary of the latter (in English). Thesubproject appraisal reports would include: (i) subprojectobjectives and description; (ii) estimated cost, local and foreign,including physical and price contingencies, incremental workingcapital, and interest during construction (if applicable);(iii) proposed financing plan; (iv) procurement method;(v) subproject organization and management; (vi) benefits;(vii) financial and economic analysis, including FRR and ERR andsensitivity analysis; (viii) environmental analysis (summary of theEIA and proposed remedial actions, as appropriate); (ix) risks; and(x) detailed implementation schedule. Environmental ImpactAssessments would include: (i) an executive summary (not to exceed10 pages) of the environmental assessment (in English) including thesignificant findings and recommended actions; (ii) baseline data(not to exceed 10 pages) of the study area's existing relevantphysical, biological and socio-economic conditions, including therelevant government environmental regulations pertaining to thesubproject and the status of any environmental assessment requiredby government authorities; (iii) a description of the potentialenvironmental impacts, positive and negative, direct and indirectresulting from the subproject; (iv) the proposed feasible, costeffective mitigation plan for the subproject, outlining the measuresto reduce any significant adverse impacts on the environment toacceptable levels; and (v) the environmental monitoring andmanagement plan for the subproject, including how it will beimplemented and by whom. Assurances to the above effects wereobtained during negotiations. Conditions of disbursement for thesesubprojects would be that each subproject appraisal report andenvironmental impact assessment will have been found satisfactory tothe Bank.

4.8 Retroactive Financing. The Government has requested retroactivefinancing of up to $22.2 million to cover advanced procurement of importedequipment and services incurred by the PFEs. Such advanced procurement isnecessary to avoid Project implementation delays due to the long lead timerequired to purchase certain items of equipment and to appoint key engineeringservices, for which there is no other source of financing a'ailable.Procurement of the equipment and services covered by the retroactive financingwould be in accordance with Bank Guidelines. Retroactive financing would belimited to 10 percent of the Bank loan and restricted to costs incurred afterJanuary 15, 1990.

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Loan Administration

4.9 Procurement. The procurement arrangements for the Project aresummarized in Table 4.7. Equipment and materiale as well as engineering

Table 4.7: PROCUREMENT ARRANCEUENTS(- m1 I ion) /s

Project Components Totaland Elements ICB LIB LCB Other N.A. Cost

A. Gresik Restructuring

(a) Amnmonia/Uree PlantAmmonia ProcessEquipment and Materials 62.1 10 0 - 8.2 80.8

(12 1) (10-0) (8.2) (80 3)Engineering Services and 12)8 -( - 12.8Licenses (12.8) (12 8)Urea ProcessEquIpment and Materials 12 4 8 0 - B.1 2386

(12.4) (8.0) (8. 1) (23.5)Engineering Services and 9 -0 - - 9.0Licenses (9.0) (9.0)

Civil Works, Erection andCommissioning - - 26.0 7656 100.5Gresik Supplied Equipment - - 14.0 2.0 18.0

(b) Plant ModernizationEquipment and Materials 6.8 0.6 - 1.e 9.0

16.7 - .0(.8) ( )Q8Engineering Services and (.87) (0.8) -(0.4) 02.7Licenses (1.7) (1.7)

(c) Consultants for:(i) Ammonia/Urea Plant - - - 0.7 0.7

(0.7) (0.7)

(ii) Plant Modernization - - - 0.8 0.3(0.8) (0.3)

S. Optimization

Equipment and materials for:i) Iskander Muds 8.0 0.8 - 2.2 11.0

(ii) Kaltim .6(2) -01 37.892.4) 10 - 2.0 (88.6)

(iii) Kujang 2.4 1(0) 2.0 12.4~94) (10) f0:8) (11.2)

(iv) PUSRI f4 2 0 1 (8 0.6(18 4) (2.0) (0.8) (21.2)

Engineering Services andLicenses for:

(l) Iskander Muds 1.25 - - 0.26 1.50(1.25) (1.25)

(ll) Kaltim 8.25 - - 0.86 8.60(8.25) (8.25)

(lli) Kujang 1.26 - - 0.95 2.20(iv) PUSRI (1. 26) (1.26)

(lv) PUSRI 3:~865 - - 0.85 4.00(8.65) (8.85)

Consultnnts for:(i) Isksnder Muds - - - 0.26 0.25

(0.25) (0.25)(li) Knitim - - - 0.26 0.26

0. 25 (0.25)(iii) Kujang - - - (025 0.26025) (0.25)(iv) PUSRI - - - (0.26 0.26

(0.26) (0.26)

C. Studies

Consultants - - - 0.9 0.9

D. Others /b - - - - 84.8 84.8

Total 175.6 24.4 89.0 120.6 84.8 444.8(176.6) (24.4) - (21.8) - (221.7)

Figures In parenthesis are the respective amounts to be financed under the Bank loan.ZE Comprises working capitel and Interest during constuction.

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services and licenses, with a total value of $142.6 million equivalent will beprocured through ICB in accordance with Bank guidelines. Exceptions to ICBwill be made for: (a) equipment proprietary to the process design, with anestimated value of $19.8 million, to be procured by direct purchase fromoriginal suppliers eligible under the Bank guidelines; (b) contracts with anestimated value of less than $400,000 each (about $24.4 million) to beprocured under limited international bidding procedures (LIB) aftersolicitation of quotations from at least three suppliers eligible under theBank guidelines; and (c) contracts with a value of less than $100,000 each (intotal about $9.0 million) to be procured by international shopping proceduresacceptable to the Bank. The aggregate of equipment contracts financed underthe Bank loan to be procured under LIB and international shopping procedureswill not exceed $32.0 million equivalent. To the maximum extent possible,identical or similar items would be grouped together r purposes of biddingand procurement. For purposes of evaluation and comparison of bids for thesupply of goods under ICB, qualified domestic suppliers will be allowed apreference of 15 percent of the c.i.f. price or the applicable import duty,whichever is lower. Contracts for equipment and materials exceeding $1.0million and all contracts for engineering and consultancy services financedunder the loan will be subject to the Bank's prior review of procurementdocumentation, resulting in a coverage of about 70 percent of the totalestimated value of Bank-financed contracts. Other contracts for equipment andmaterials will be reviewed by the Government Procurement Control Units, asrequired, and by the Bank on a sample basis, subsequent to their award.

4.10 Ci-iil works contracts totaling $25.0 million, to be financed whollyby the PFEs, will be awarded through local competitive bidding (LCB). None ofthese civil tiorks contracts will exceed $1.5 million, and they are not likelyto attract interest from foreign bidders. Contracts for consulting servicesfinanced by the Bank ($2.0 million) will be awarded in accordance with theBank Guidelines for the Use of Consultants. A General Procurement Notice forthe Project has been published.

Disbursements

4.11 Disbursements of the proposed Bank loan would be made as shown inTable 4.8. Disbursements will be made against full documentation. Theestimated schedule of disbursements for the Bank loan (Annex 6) has been madeon the basis of the disbursement profiles of industry projects in Indonesiaand the Asia Region. It is anticipated that the loan would be conmitted byJune 30, 1996, and fully disbursed in seven years; thus the Project isexpected to be completed by June 30, 1997, and the loan closing date will beDecember 31, 1997.

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Table 4.8: ALLOCATION OF BANK LOAN($ million equivalent)

Component/Category Amount Percent of Costs to b Financed(I million)

A. Gresik Restructuring

(a) Equipment and Materials for: 1OOX of foreign expenditures for(i Ammonia/Ures Plant 103.8 directly iuported items: 90 of local(ii) Modernization 7.8 expenditure for locally manufactured

items (ex-factory costs); and 60! ofother items procured locally.

Subtotal 111.6

(b) Engineering Services andLicenses for:(i) Ammonia/Urea Plant 21.8(li) Modernization 1.7

Subtotal 28.5 100% of expenditur e.

(c) Consultants for:(i) Ammonia/Urea Plant 0.7(ii) Modernization 0.8

Subtotal 1.0 1OOX of expenditures.

S. Optimization

(a) Equlpment and Materials for:(I Iskander Muds 9.2 100X of foreign expenditures for(ii Kaltim 88.6 directly Imported Items; 90% of local(ii Kujang 11.2 expendituroe for lo-illy manufattured(iv PUSRI 21.2 tems (ex-factory ..sts); and 6OX of

other items procured locally.Subtotal 76.2

(b) Engineering and Services andLicenses for:

(I Iskander Muds 1.26*ii) Kaltim 8.26(ili Kujang 1.26(iv PUSRI 8.66

Subtotal 9.40 100l of expenditures.

(c) Consultants for:I) Iskander Muda 0.26

(ii) Kaltim 0.26(iii) Kujang 0.26(Iv PUSRI 0.26

Subtotal 1.00 1OOX of expenditures.

Total 221.70

4.12 Auditing and Reporting. The financial accounts of the PFEs would beaudited by the Financial and Development Supervisory Board (BPKP), which isacceptable to the Bank. Each PFE would submit to the Ba-:.; the report of BPKP(in English) no later than six months after the end of its fiscal year. AllPFEs woul be required to submit semiannual progress reports (in English),acceptable to the Bank, covering their respective operations under theProject. These auditing and reporting arrangements have been confirmed atnegotiations. The Project Completion Report will be prepared by theDirectorate General of Chemical Industry in MOI.

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V. FINANCIAL, ECONOMIC, AND ENVIRONMENTAL ANALYSIS AND PROJECT RISKS

A. Financial Analysis

Financial Analysis of Gresik Ammonia/Urea Plant

5.1 Past Financial Performance. Gresik's past financial performance hasbeen satisfactory and reflects the combined effect of the steady output of itstwo principal products, TSP and AS, Government-controlled prices, and a goodvolume of sales of industrial chemicals. In the four-year period 1986-89,sales have increased by an average of 13 percent p.a. The production volumeof TSP has increased at a rate of only 2 percent p.a., while AS production hasincreased by 4 percent p.a. during 1986-89. Earnings throughout the four-yearperiod have been consistently positive, althougn at times marginal, primarilyas a result of steadily increasing costs due to inflation and sporadicGovernment price adjustments. In 1988, fertilizer prices were reduced by anaverage of 2 percent; as a consequence, after-tax net income declined to onlyRp 2.4 billion in 1988 compared with Rp 37.8 billion in 1987. Net incomelevels were satisfactory at Rp 18.5 billion in 1989, representing a6.9 percent return on equity or a 3.5 percent return on total assets.Gresik's current financial condition is sound, with a total long-termdebt/equity ratio averaging 1:1 for 1986-89. The current ratic is favorable,at 1.4 times for year-end 1989. Debt service coverage has ave_aged asatisfactorv 2.4 times over the past four years. Gresik's recent operatingperformance and key financial indicators are summarized in the Table 5.1.Detailed financial assumptions and data are shown in Annexes 7-1 through 7.4.

Table 5.1: GRESIK - HISTORICAL FINANCIAL DATA(Rp billion, unless otberwise stated)

Item 1986 1987 1988 1989 /a

Sales 451.1 533.7 537.9 631.4Net income 39.0 37.8 2.4 18.5Accounts Receivable 239.0 314.0 590.1 456.0Internal cash generation lb 71.1 71.6 37.6 54.8Net income/sales, (percent) 8.6 7.1 0.4 2.9Net income/total assets, (percent) 6.8 5.9 0.3 2.3Current ratio 1.6 1.5 1.3 1.4Debt/equity ratio 1/1.7 1/2.1 1/2.0 1/2.6Debt service coverage, times 3.2 2.5 1.8 2.0Net income/equity, (percent) 17.2 15.2 1.0 6.9Accounts Receivable/Sales 0.5 0.6 1.1 0.7

/a Unaudited./b Net income plus depreciation.

5.2 Production Volumes and Unit Prices. During 1986-89, Gresik's TSPvolume increased from 1,120,000 tons in 1986 to 1,200,000 tons in 1989, an

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average annual '^crease of 2 percent, while its production of AS increasedfrom 577,000 tons in 1986 to 632,000 tons in 1989, a 4 percent per yearincrease. Unit prices for AS during the same period declined by an average of2 percent from Rp 215,000 per ton in 1986 to Rp 211,000 per ton in 1988 butrebounded to Rp 226,500 per ton in 1989, an increase of 7 percent. TSP unitprices, in contrast, increased by an average of 12 percent per year, fromRp 276,600 per ton in 1986 to Rp 307,100 per ton in 1988, and in 1989 werefurther raised to Rp 381,000 per ton, an increase of 24 percent.

5.3 Operating Costs and Margins. In contrast to the modest increases inproduction volumes and unit prices, operating costs (not including interestcharges) increased an average of 14 percent per year during 1986-88.Consequently, gross profit and operating profits (on sales) were reduced fromthe 19 percent gross profit and 9 percent operating profit experienced in 1986to a 5 percent operating loss in 1988. In 1988, however, income from subsi-diaries and outside income from Gresik's metal fabrication facilities turnedthe operating loss into a modest profit of F.- 2.4 billion. In 1989, Gresikshowed an operating profit of Rp 15.6 billion, representing a 2.5 percentreturn on sales.

5.4 Financial Structure. Gresik's level of long-term debt to equity isvery conservative (1989 long-term debt/equity ratio was 1:1), and noadditional paid-in capital would be required during the construction periodfor the new ammonia/urea plant. Projected long-term debt to equity (paid-incapital plus retained earnings) is not expected to exceed 1:1 during 1990-99.Gresik markets its two principal products, TSP and AS, through PUSRI'smarketing and distribution system. This sales arrangement results in Gresikcarrying on its balance sheet an accounts receivable that in the past fouryears has averaged nine months of sales--very high for an enterprise producinga baa' commodity such as fertilizer; comparable commercial enterprises wouldbe expected to carry receivables of from 60 to 90 days of sales. Some of thereceivables can be offset by withholding or delaying payments to creditors orsuppliers (accounts payable), but purchases of imported raw material orpayroll obligations must be met on time. The Government offers interimfinancing of 80 percent of Gresik's receivables from PUSRI at a nominalinterest rate of only 3 percent. Thke consequent high receivables and payablesresult in a balance sheet that con3ists mainly of current accounts (four-yearaverage: 70 percent).

5.5 Financial and Operating Strategy of the Gresik AmmoniajUrea PlantSubproject. The construction phase of the new ammonia/urea plant would takean estimated 36 months from start to production. At completion, Gresik'stotal assets will be more than doubled. Under the subproject, the productionlevels of TSP and AS would remain at the pre-project levels of 1,220,000 tonsfor TSP and 650,000 tons of AS, but a cleaner, more efficient natural gasconversion plant would substitute for the existing and aging fuel-oilconversion plant that is now used to produce ammonia. In addition, the newammonia plant would supply feedstock to an urea plant (also built as part ofthe subproject) with an annual capacity of 460,000 tons of urea. Because theammonia/urea plant is scheduled to commence commercial production in late1993, only 190,000 tons of urea would be produced in 1993. Froum a financialstandpoint, the subproject, because of lower unit production costs, wouldenable Gresik to adjust its fertilizer unit prices to border prices by 1994while obtaining a satisfactory return on assets and stockholders' equity.

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Without the new ammonia/urea plant, Gresik's earnings with border prices wouldnot be sufficient to cover even routinely needed equipment replacements.

5.6 Comparison of Production Volumes and Gross Profits. Projections,shown in Annex 7-5, compare, in 1989 values, the "with" and "without" projectproduction volumes and gross profits with border prices. As seen, with borderprices and no urea production, Gresik's gross profit from its main products(TSP and AS) would be significantly reduced. It is only with the addition ofby-product revenue that Gresik would show a minimal gross profit (Rp 12.9billion) that would result in a break-even situation when administrative,marketing, and other charges are added. However, 'with project" at borderprices for urea, gross profit would double from Rp 42.5 billion in 1989 toRp 88.3 billion at full production in 1994, before by-product revenue.

5.7 Projected Financial Performance. Under the Project, with currentprices and projected border prices for the main products, all financialparameters are forecast to remain favorable. During construction, financialratios (such as net income to sales) will increase from the 2.9 percent in1989 to 6.5 percent by 1994, due primarily to the reduced variable costscaused by the switch from oil to natural gas and the inclusion of ureaproduction at border prices. The same trend holds for net income to assets(1989: 2.3 percent; 1994: 5.0 percent). Current ratios are projected toremain at 1.3 or above during the project period. Debt service coverageaverages an adequate 2.2 times during 1990-94. Net income to equity yields asatisfactory 15.5 percent at full production (1994). A summary of Gresik'sfinancial performance under the project is shown in Table 5.2 and in moredetail in Annex 7-4.

Table 5.2: GRESIK - PROJECTED FINANCIAL DATA WITH PROJECT(Current Rp billion, unless otherwise noted)

Item 1990 1991 1992 1993 1994

Sales 677.0 754.6 791.3 896.6 981.7Net income 27.6 46.8 39.9 79.7 64.3Internal cash generation 63.9 76.9 71.5 118.4 105.2Net income/sales, (percent) 4.1 6.2 5.0 8.9 6.5Net income/total assets, (percent) 3.2 4.2 3.2 6.2 5.0Net income/equity, (percent) 9.6 14.9 12.5 21.3 15.5Current ratio 1.4 1.4 1.3 1.4 1.4Debt/equity ratio 1/2.3 1/1.0 1/0.8 111.0 1/1.4Debt service coverage, times 2.3 2.5 2.2 2.1 1.8

Optimization Component

5.8 Summary financial statements for PUSRI, Kaltim, Kujang, and PIM areshown in Annexes 7-6 through 7-9. These four PFEs are generally lightlyleveraged, with long-term debt/equity ratios ranging in 1989 from no long-termdebt in the case of Kujang to a still conservative, long-term debt/equityratio of 1.9 for PIM. Another structural characteristic of the four urea/

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ammonia-producing enterprises is their high percentage of current assets tototal assets (average 45 percent in 1989). In the case of PUSRI, thepercentage of current assets to total assets is 73 percent, which is explainedby its marketing and distribution responsibilities, whereby it must maintainrelatively larger proportions of working capital and inventory. The remainingthree have no requirement or facilities for keeping extensive inventories, andthe major portion of current assets consists of cash, short-term securities,and receivables, indicating a slow payment practice by the Government insettling accounts. The PFEs have adapted to this payment procedure by keepinga sizable cushion of cash and short-term securities on hand (1989 average forKaltim, Kujang, and PIM: 27 percent of annual sales). All four of theurea/ammonia-producing enterprises have ample capacity to take on the equityand debt requirements of the optimization subprojects. Each subprojectrepresents a much smaller project in terms of the ratio of new assets acquiredto existing assets compared with the proposed new Gresik ammonia/urea project,in which Gresik's total assets will more than double. By contrast, theinvestment requirements of the Kaltim subproject (the largest optimizationsubproject at $41.4 million), represent only 6 percent of Kaltim's totalassets at year-end 1989. All of the four PFEs carry equity investments ontheir balance sheets, ranging from only $0.2 million in the case of PIM to$16 million for Kujang. Kujang has invested in several downstream chemicaloperations.

5.9 Past Financial Performance. Past financial performance of the fourcurrent ammonia/urea producers has been satisfactory, but returns have beenrelatively low in terms of net income to total assets or total capital(equity). In 1989, the four enterprises returned a 5.4 percent average of netincome to assets and an 8.2 percent average return on capital. Net income tototal sales performance has been consistently positive, with an average forthe four PFEs in 1989 of 9.8 percent (a high of 10.9 percent for Kaltim and alow of 4.9 percent for PIM).

Financial Rate of Return (FRR) and Sensitivity Analysis

5.10 New Gresik Ammonia/Urea Plant. The base FRR of this subproject ofthe Gresik Restructuring Component has been calculated using constant 1990price levels for costs and 1990 border price levels for the urea production(Table 5.3). Under the base situation, the subproject shows a 16.6 percentrate of return over a period from 1990, the start of construction, until 2006.Annex 7-10 is a summary of the incremental costs and revenues of the base casewhich is derived from the income statement and sources and application ofGresik projected in 1990 values (Annex 7-3). Sensitivity analyses were basedon projected border prices, current domestic ex-factory prices, reduced borderprices, lagged construction schedules, and 20 percent capital cost overruns.

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Table 5.3: P.T. PETROKIMIA GRESIK AMMONIA/UREA PLANTSUMMARY OF FINANCIAL RATES OF RETURN

(1990 prices)

Item FRR(percent)

Base case - at projected 1993 border price for urea ($155/ton) 16.6 /aBorder price projections for urea 20.180 percent of border price projections for urea 15.3Capital costs increased by 20 percent 13.6Construction period extended by five months (until 1994) 15.1Lengthened construction period with 20 percent increasedcapital costs 12.3At 1990 domestic ex-factory prices for urea ($125/ton) 12.2

/a Landed, bagged price per ton (1990 prices):

1993 1994 1995 1996 1997 1998 1999 2000

Base case 155 155 i55 155 155 155 155 155Border price projection 155 176 195 192 189 186 183 18080Z of border priceprojection 124 1V41 156 154 151 149 146 144

5.11 Optimization Component. The subprojects of the OptimizationComponent that have been worked out in detail all show satisfactory financialreturns. The PUSRI optimization subproject (Annex 7-11) shows a FRR of32 percent using 1990 border prices. Using projected border prices, thereturn is even higher. The same is true for the Kaltim optimization component(Annex 7-12), which has a base FRR of 37 percent. Relatively high capitalcosts and a relatively modest increase in production limit the Kujangsubproject (Annex 7-13) to 16 percent using 1990 border prices. PIM has notyet completed all the financial projections required for its subproject. Eachof the subprojects will be subject to further review and approval whensubmitted by the PFEs to the Bank.

B. Economic Analysis

5.12 Economic Costs and Benefits. The principal assumptions used in theeconomic analysis of the various components of the Project are described inAnnex 7-14. The economic costs and benefits of internationally traded itemshave been valued at border prices. Wherever possible, prices have beenobtained from the latest commodity price forecast revisions of the Bank'sCommodity Studies and Projections Division. In all other cases, priceprojections have been derived by maintaining an appropriate relationship amongthe different prices. Ammonia and urea, in which Indonesia is in acompetitive position and is already a significant exporter, have been valuedat border export prices. Other items have been valued at landed costs.

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Natural gas has been valued at fuel-oil equivalent at Gresik and Kujang, sinceat these locations there is a significant demand for gas for alternativeenergy uses. At Kaltim and PIM, natural gas has been valued in economic termsat the present delivered cost of $l.OO/MMBtu. All prices have been expressedin constant 1990 U.S. dollars. Since no duties and taxes are applicable oncapital investments in the fertilizer industry, the economic capital costs arethe same as the financial project costs, less price escalations and interestduring construction. Conservatively, local currency costs have been convertedto U.S. dollars at an exchange rate of $1.00 = Rp 1,830, without furtherdeflation.

5.13 The major economic benefits from the various subprojects under theProject are: (a) for the new Gresik ammonia/urea facility, additional pro-duction of urea and replacement of ammonia (para. 3.5); (b) for PUSRI II ureaoptimization, additional urea production converting a part of the surplusammonia becoming available from the ammonia optimization project and PUSRI Ibnew ammonia/urea facility; (c) for Kaltim I optimization, additional ureaproduction, partly in granular form, and reduction in energy consumption; and(d) for Kujang ammonia optimization, additional ammonia production and areduction in energy consumption. For PUSRI effluent treatment, PIM ammoniaoptimization, and Gresik plant modernization subprojects, no economic analysishas been carried out because, in the first case, the benefits are notquantifiable and, in the other two cases, the subprojects are still in thepreparation stage.

5.14 New Gresik Ammonia/Urea Plant Subproject. Since the ammoniaproduced from the project will substitute (a) ammonia and carbon dioxide nowbeing provided from the existing fuel-oil-bas-i ammonia plant for gypsum-basedAS production and (b) ammonia delivered from Kaltim, the impact of the projecton the overall economics of the complex is assessed on the basis of the entirecomplex with and without the project. The base ERR of the new Gresikammonia/urea plant, considering the subproject as an integral part of thecomplex, is calculated at 19.5 percent (Annex 7-15).

5.15 The sensitivity analysis contained in Table 5.4 indicates that theERR of the subproject remains adequate, over a wide range of project risks.The switching-value analysis indicates that the capital cost has to go up bymore than 75 percent, and the urea price has to come down by more than28 percent, before the subproject's ERR will go below 10 percent. Such largechanges due to one or a combination of the risks are unlikely to occur, andthe project will therefore be economically viable over a range of unfavorableconditions.

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Table 5.4: P.T. PETROKIMIA GRESIK AMMONIA/UREA PLANT -SUMMARY OF ECONOMIC RATES OF RETURN

(1990 prices)

ERR(percent)

Base Case (total complex basis) 20.7

Sensitivity Tests (total complex basis)Capital cost up by 20 percent 17.6Construction period extended to four years 17.4Drop in urea price by 20 percent 16.2Gas price up by 20 percent 18.4

Switching Values for 10 percent Economic Rate of ReturnCapital Increase by 98 percentUrea price Decrease by 43 percent

5.16 Optimization Component. On the basis of the cost and benefitstreams for the PUSRI II urea optimization contained in Annex 7-16, thesubproject will have an ERR of 37.2 percent. If adjustments are made for apart of the investment for the above subproject, such as replacement of theexisting titanium-lined urea reactor (which will in any case be necessary forthe continued operation of the existing PUSRI II urea plant), the subproject'sERR will be even higher. The cost and benefit streams for the Kaltim Ioptimization contained in Annex 7-17, show that the subproject will have anERR of 57.1 percent, based on an economic value of natural gas of $1.00 perMMBtu. Since the increase in gas requirements after the optimization is verysmall, the ERR changes only marginally, even though the economic value of gasis taken as $2.00 per MMBtu.

5.17 Foreign Exchange Earnings. The total Project, including all itscomponents, has a foreign exchange investment requirement of about$220.0 million. The project will contribute an additional urea output ofabout 820,000 t, of which about 119,000 t will be in granular form. At borderprices per ton of urea (prill) of $150, urea (granule) of $160, and ammonia of$110, the additional output could contribute about $135 million per year asincremental net export income.

C. Environmental Analysis

5.18 Gresik Fertilizer Complex. In June 1990, Gresik completed aSEL 2/ (para. 1.23) for the Gresik complex which has been approved by theCentral Environmental Commission (CEC). The SEL has been reviewed by the Bank

2/ Study of Environmental Evaluation of Petrokimia Gresik Industrial Area,by PPKL Lemlit Unair, June 1, 1990.

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and found satisfactory. The principal environmental problems outlined in theSEL relate to gaseous NH3 and S02 emissions from various parts of the complexand to liquid effluents containing dissolved NH3, chemical oxygen demand (COD)and biochemical oxygen demand (BOD) from the wastewater treatment facility.

5.19 Gaseous Effluents. Emissions of NH3 and S02 in excess of local oraccepted international standards originate from four locations in the Gresikcomplex: the present ammonia plant (NH3 and NO.). the sulfuric acid plant(SO2), the power generation facility (SO2), and the AS plants (NH3). Under theproposed Project, the old ammonia plant will be permanently closed anddismantled, thus eliminating the existing hazardous gaseous NH3 emissions.The power generation facilities at Gresik would be converted to natural gasunder the Project, thereby eliminating SO2 emissions from that source. Gresikhas two sulfuric acid plants. One is a modern facility and the S02 emissionlevels are acceptable. The other sulfuric acid plant was built in 1972 and isrelatively inefficient with regard to energy and sulfur recovery. SO2emission levels of 2,400 ppm compare with the locally acceptable level of2,100 ppm and the international standard of 2 kg S02 per ton of acid produced.Ambient SO2 levels are acceptable (less than 0.2 ppm SO2). Gresik has held upretrofitting or renlacing the older plant with less polluting technologiesuntil the overall demand for sulfuric acid would justify the investment. Thedisposition of the old sulfuric acid plant will be assessed under the Gresikplant modernization subproject. Gaseous effluents of the AS operations at thecomplex contain from 40 ppm to 70 ppm of NH3 and are scrubbed to reduce theammonia. The environmental impact study identified the scrubbing operationsas areas requiring improvement. Another potential source of toxic gaseousemissions is the phosphoric acid plant, which produces fluoride gas that is irecovered and processed effectively into aluminum fluoride, a valuable by-product. 7

5.20 Liquid Effluents. At present the Gresik complex utilizes acentralized wastewater treatment plant that collects and processes all runoffand other liquid effluents for discharge into the sea. The environmentalimpact study notes that, during periods of high throughput (high rainfall),effluen: from the treatment plant exceeds local and international standardsfor NH3, COD, and BOD. The liquid effluents from the new ammonia/urea plantwill contain less than 5 ppm NH3 and will lower the total NH3 effluents thoughtotal liquid volume will be larger. In its environment management plan,Gresik will incorporate a provision for increasing the capacity of thecentralized wastewater treatmer.. plant to reduce total effluent discharge,including maximum flows to meet international standards for all containedpollutants.

5.21 Solid Waste. Problems with solid wastes at the Gresik complexrelate to the proper management and location of landfills for unwanted by-products, precipitated sludge, and spent catalysts. The plan to sell the by-product calcium carbonate to an adjacent cement manufacturer to substitutepartially for natural limestone has not materialized, and calcium carbonate isstockpiled in areas adjacent to the complex. The waste liquid effluents fromthe various parts of the complex contain high amounts of fluorine (up to 4,000ppm). These are collected and treated with lime in the centralized wastewatertreatment plant to precipitate as a sludge containing calcium silicofluoride.The sludge is thickened, filtered, and then landfilled. The water effluentcontains virtually no residual fluoride. Many of the chemical processes in

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the complex utilize catalysts containing heavy metals such as chromium andvanadium. At present, the spent catalysts are disposed of routinely in alandfill whereas they should be recycled and subsequently treated as hazardousmaterials.

5.22 The anvironmental impact of the new ammonia/urea plant to be fundedunder the Project would be to reduce NH, emissions to 5 ppm (well withinacceptable standards) and eliminate S02 discharges from the existing ammoniaand power generation operations. In addition, to overcome the principalproblems identified in the environmental impact study that would not bedirectly remedied by the installation of the proposed new ammonia/urea plant,Gresik agreed at negotiations to develop, not later than November 30, 1991, anenvironmental management plan to include: (a) the treatment of high S0 2

emissions from the existing sulfuric acid plant; (b) the treatment of gaseousNH3 discharge from he AS operations; tc) increasing the capacity of thepresent wastewater treatment facilities to cope with overload conditions andthe proposed new nmonia/urea plant; and (d) providing for the safe treatment,recycling, storage, and disposal of solids including calcium carbonate,wastewater treatment plant sludge, and spent catalysts. Gresik is studyingthese possibilities for inclusion under the modernization of their existingfertilizer plant subproject.

D. Project Risks

5.23 The Project is not expected to encounter any major technical ormanagerial risks because the technologies to be used in the several componentsare commercially proven, and because Indonesia has considerable experience inconstruction and operation of modern fertilizer facilities. The new Gresikammonia/urea plant is substantially identical to two other recent projects inIndonesia. Each of the PFEs has considerable experience, and each has anextensive training program to develop new staff and to retrain existingpersonnel. The timely availability of natural gas to the Gresik ammonia/ureaplant is a potential risk. The offshore gas supplies are proven, butcompletion of the pipeline could be delayed. To account for this risk, nodisbursements would be used for expenditures under the Gresik RestructuringComponent until a contract, satisfactory to the Bank, for the provision of therequired natural gas has been executed on behalf of Gresik and PERTAMINA.

5.24 The main sector-wide risks are that domestic ex-factory prices maynot be increased to border prices as anticipated (para. 3.18) and thatinternational fertilizer prices may not be in line with the level projected inthe Bank's commodity forecast. The first risk is minimized by the Government-stated objective in the Policy Statement to bring these prices to theireconomic level by actions taken during Repelita V. The latter risk isacceptable because the industry as a whole has a relatively low variable coststructure and so should be able to maintain a reasonable financial viabilityeven with prices significantly lower than the present forecast. In fact, theproposed Project is in part designed to enhance Indonesia's already favorablecompetitive position with regard to nitrogen exports, and to improvesubstantially Gresik's present cost structure.

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VI. UNDERSTANDINGS AND AGREEMENTS REACHED

6.1 During negotiations, agreements were reached with the Government onthe following:

(a) that th6 Project will be implemented in accordance with the PolicyStatement (para. 3.18);

(b) that the studies of Fertilizer Distribution and Marketing, and ofthe Development of an Environmental Management Program for theFertilizer Industry will be prepared by March 1, 1992, under termsof reference satisfactory to the Bank and by qualified andexperienced consultants, and that for each of these studies MOI willestablish, not later than May 1, 1991, a Steering Committee(paras. 3.24 and 3.25);

(c) that the Government and the Bank will review jointly therecommendations of the two studies mentioned in (b) above andsupported under the Project, not later than 60 days after theircompletion, and agree on Government action plans to implement theserecommendations (paras. 3.24 and 3.25);

(d) that the arrangements for the allocation of loan proceeds and theonlending terms to the PFEs will be as indicated in para. 4.7;

6.2 During negotiations, the following understandings were reached withthe Government: (a) that the revised farmgate fertilizer prices for 1991adopted by the Government, as agreed during the exchange of views on theseprices in September 1990, between the Government and the Bank, represent asatisfactory progress in bringing these prices ultimately to their economiclevels (para. 3.18); (b) that the Government will, by October 1 of each year,commencing not later than October 1, 1991, review the farmgate and ex-factoryprices of fertilizers, exchange views with the Bank on the results of thereview, and thereafter, if required, revise such prices taking into accountthe principles set forth in the Policy Statement (nara. 3.18); and (c) thatE tions will be taken during Repelita V (1993-94) to bring the prices offertilizer products gradually to their economic level and eliminate theassociated subsidy payments from the Government's budget (para. 3.18).

6.3 During negotiations, the following agreements with the PFEs werereached:

(a) that Gresik will, not later than May 1, 1991, appoint consultants toassist in the implementation of the ammonia/urea plant and of themodernization subproject (para. 3.22);

(b) that PIM, Kaltim, Kujang and PUSRI will, not later than May 1, 1991,appoint consultants to assist them in the implementation of theirrespective optimization subprojects (para. 3.23);

(c) that Gresik, for its modernization s¶tbproject, and the other PFEs,for their respective optimization subprojects, will, not later thanJune 30, 1992, submit to the Bank for review and approval a

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subproject appraisal report and an environmental impact assessmentof the subproject, including an Executive Summary (in English)(para. 4.7(e)); and

(d) that Gresik will, not later than November 30, 1991, develop anEnvironmental Management Plan to overcome the main environmentalissues identified in the Environmental Impact Study of the Gresikcomplex and not dealt with as part of the implementation of the newammonia/urea plant to be built under the Project (para. 5.22).

6.4 A condition of loan effectiveness would be the signing of SubsidiaryLoan Agreements between MOF and the five PEFs for undertaking of therespective project components, on terms and conditions acceptable to the Bank(para. 4.7(c)).

6.5 Conditions of disbursement would bet (a) for the GresikRestructuring Component that a contract for the provision of the requirednatural gas to Gresik has been executed on behalf of rresik and PERTAMINA andfound satisfactory to the Bank (para. 3.20); and (b) for subprojects under theOptimization Component and for the Gresik modernization subproject that theappraisal report and the Environmental Impact Assessment for these investmentsby each PFE will have been found satisfactory to the Bank (para. 4.7(e)).

6.6 With the above agreements and understandings reached atnegotiations, the proposed Project would be suitable for a loan of $221.7million equivalent to the Republic of Indonesia for 20 years, including agrace period of five years, at the Bark's standard variable interest rate.

- 44 -ANNEX 1Pagei 1

REPUBLIC OF INDONESIANAIlONAL DEVELOPMENT PLANNING AGENCY

JAKARTA, INDONESIA

10 October 1990

Mr. Attila KaraosmanogluVice-PresidentAsia Regional OfficeThe World Bank1818 H Street, N.W.Washington, D.C 20433USA.

Dear Mr. Vice President:

I. The Government of Indonesia has requested assistance from theWorld Bank to support a program of restructuring in the fertilizer subsector. This letter provides infornation on the latest measures taken by theGovernment to strengthen the industrial policy framework, particularly as itaffects the sub sector, and on the direction of planned policy actions to beimplemented during Repelita V.

2. The Government' s main policy objectives in the area of trade andindustry are di-ected to: maintaining a competitive excchange rate; removingnon-tariff barriers; rationalizing tariffs; and simplifying domesticregulations. To maintain the momentum of ongoing trade and industrialpolicy reforms, we intend to continue to employ a comprehensive approachthat will give priority to: (i) removing more non-tariff barriers, especiallythose that will have the greatest impact on increasing efficiency andreducing cost; (ii) rationalizing tariffs further to lower the average tarifflevel and its dispersion; (iii) further reducing the remaining constraints oninvestment; and (iv) reviewing a number of other regulations, with a viewto eliminate those that no longer serve a positive purpose or have the effectof raising production costs.

- 45 - ANWE 1IPage 2

3. These initiatives are being supported by a comprehensive reform offinancial sector policies, with the objectives of increasing resourcemobilization, improving efficiency and lowering costs in financialintermediation, and ensuring greater availability of term funds forinvestment. The Government is also committed to promoting technologicalupgrading and strengthening technical and managerial capabilities in theindustrial sector.

4. During the past two decades, the fertilizer industry has achievedimpressive result. Nevertheless, there remain problems that need to beovercome in order to ensure a sustained development of this industry. Theproblems relate, among others, to how to improve the currently usedtechnology, pricing of fertilizer product (at farmgate and ex-factory levels)and feedstock and the distribution and marketing system. The Governmenthas already taken steps and will continue to take furither measures to ensurean economically more efficient fertilizer industry. This objective will besupported under the Proposed fertilizer project through investments in newproduction facilities, optimization of existing plants, and studies which willaddress marketing, distribution, and environmental issues.

5. With regard to the pricing of fertilizer products, the Governmenthas begun and will continue to adjust these prices so that they will graduallyreflect economic prices. A major outcome of this adjustment wiil be thegradual elimination of the associated subsidy payments from theGovernment budget.

6. With regard to the marketing and distribution system, theL-overnment will continue to make efforts to improve efficiency of theexisting system and service to farmers. Thus, a study will be prepared forconmletdon before the end of November 1991, to develop recommendationsand appropriate timing for introducing increased competition at wholesaleand retail levels.

7. The Government is concerned about the environmental impact ofindustrial activities, including fertilizer enterprises, and has adoptedcomprehensive legislation for environmental protection. In this regard aspecial study in conjunction with the proposed ferdlizer project will also be

ANNEX 1- 46 - Page 3

undisgtakn, for completion before the end of November 1991, to asss theenvironmental impact of the fertilizer industry. The study will also reviewthe appropriateness of environmental standards in line with existingregulations, in order to recommend an environmental management plan thatwould be implemented by ferdlizer enterprises.

8. To improve the efficiency of the fertilizer industry the Governmentwill continue to pursue policy reforms in this sector. We consider theproposed fertilizer project will assist enterprises to respond effectively tochanging policy through the provision of technical and financial support.The successful implementation of the project should lead to essential gainsin technical, financial and economic efficiency and to proper managementand monitoring of the environmental impact of this important industrialsub sector.

Your sincerely,

Saleh Aflif

State Ministe for Natonal DevelopmentPlanmninCbarman of BAPMNAS

- 47 - ANNEX 2-1

INDONESIA

FERTILIZER RESTRUCTURING PP.RJJECT

Historical Growth in Fertilizer ConsumPtion(thousand tons of product)

Year Urea TSP AS KC1 Total

1975 676 235 94 34 1,0391976 686 211 122 24 1,0431977 962 183 140 69 1,3541978 1,080 205 155 109 1,5491979 1,240 268 196 122 1,826

1980 1,776 494 330 123 2,7231981 2,139 724 282 46 3,1911982 2,039 713 331 88 3,1711983 2,381 834 354 179 3,7481984 2,609 959 408 252 4,228

1985 2,607 1,048 475 290 4,4201986 2,715 1,165 473 238 4,5911987 2,686 1,191 553 270 4,7001988 2,930 1,219 585 496 5,2301989 (Est) 3,065 1,514 653 635 5,867

Growth Rate (Percentage)

1975/1985 14.5 16.1 17.6 23.9 15.61980/1985 8.0 16.2 7.6 18.7 10.21984/1989 3.3 9.6 9.9 20.3 6.8

AS5IEMarch 1990

- 48 -

ANNEX 2-2Page 1 of 2

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Projected Growth in Fertilizer Consumption(thousand tons of product)

Year Urea TSP AS KC1 Total

A. Revision (ii) of Second National Fertilizer Study

1988 (actual) 3,172 1,323 584 373 5,4521989 3,400 1,438 639 405 5.8821990 3,642 1,562 699 439 6,3421991 3,702 1,698 765 477 6,6421992 4,180 1,844 837 518 7,3791993 4,476 2,004 916 563 7,9591994 4,793 2,177 1,002 594 8,5661995 5,132 2,366 1,095 664 9,257

Growth Rate (Percentage)

1988/1995 7.1 8.7 9.4 8.6 7.9

B. Estimates of the Ministry of Industry

1989/90 3,508 1,600 6801990/91 3,765 1,739 7441991/92 4,042 1,889 8141992/93 4,339 2,053 8901993/94 4,657 2,230 974

1994/95 4,913 2,342 1,0671995/96 5,183 2,459 1,1661996/97 5.468 2,582 1,2751997/98 5,769 2,711 1,3951998/99 6,087 2,847 1,526

1999/2000 6.422 2,989 1,670

Growth Rate (Percentage)

Repelita V 7.34 8.66 9.40Repelita VI 5.50 5.00 9.40

- 49 -

ANNEX 2-2Page 2 of 2

C. Staff Appraisal Report Proiections

1988 (Actual) 2,930 1,219 585 496 5,2301989 (Est) 3,065 1,514 653 635 5,8671990 3,190 1,630 705 690 6,2151995 3,770 2,210 1,010 980 7,9702000 4,370 2,960 1,450 1,410 10,190

Growth Rate (Percentage)

198911995 3.5 6.5 7.5 7,5 5.21995/2000 3.0 6.0 7.0 7.0 5.0

AS5IEMarch 1990

- 50 -ANNEX 2-3

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Flow of Fertilizers in Marketing System

Urea Own Urea TSP/AS ImportedProducers Production Producer Fertilizers

Kaltim, AAF, atIskander Muda Pusri Petrokimia TSP, Potash

Kujang Gresik

LINE I

LINE II Provincial Marketing Unit 1. Bulk TerminalLevel PUSRI 2. Main Ports

LINE III Kabupatan (Inland SupplyLevel Distributors Warehouse)

Government Agencies KUDSand PrivateCompanies

LINE IVVillage KUDLevel

Village Kiosk

Estates rConsumers and Farmers

Plantations

AS5IEMarch 1990

- 51 - ANNEX 2-4

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Breakdown of Ex-Factory Urea Prices(Rp per ton)

Pusri Kujang PIM Kaltim

A. Production (in '000 tons)Bulk Urea 800.7 545.0 1,209.7Bagged Urea 579.3 570.0 25.0 340.0

B. Variable CostsNatural Gas 63,048 60,131 58,683 63,928Catalysts & Chemicals 2,969 4,317 3,561 2,745

C. Fixed CostsSalaries & Wages 15,850 13,726 16,640 14,072Spares& Maintenance 8,722 6,181 6,545 8,544Insurance 1,688 1,989 2,323 2,243Admin. Overheads 3,045 4,575 5,395 5,846Other Costs 570 1,107 2,781 2,997

D. Production Cost - Bulk Urea 95,892 92,026 95,928 100,375

E. Capital related CostsDepreciaton 15,910 19,492 23,858 33,130Interest 1,233 1,211 24,657 9,482

F. Total Cost of Production 113,035 112,729 144,443 142,987

G. Cost of Bagging 13,273 13,280 13,550 13,450

H. Cost of ProductionBulk Urea 113,035 112,729 144,443 142,987Bagged Urea 126,308 126,009 157,993 156,437

AS5IEMarch 1990

- 52 - ANNEX 2-5

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Breakdown of Ex-Factory TSP/AS Prices(Rp per ton)

TSP AS

A. Production (in '000 tons)

Bagged TSP/AS 1,200 600

B. Variable Costs

Phosphoric Acid 262,339Rock Phosphate 54,789LSFO 195 51,795Ammonia (Kaltim) 37,830Sulfur 63,842Catalysts & Chemicals 550 6,223Electricity 4,576 1,500Others 4,073 211

C. Fixed Costs

Salaries & Wages 8,983 14,571Spares & Maintenance 6,824 14,682Insurance 825 978Admin. Overheads 1,299 1,748Other Costs 485 576

D. Capital related Costs

Depreciaton 7,557 9,475Interest 15,470 9,727

E. Total Cost of Production 367,965 213,158

F. Cost of Bagging 13,025 13,300

H. Cost of Production (Bagged) 380,990 226,458

AS5IEMarch 1990

I

- 53 -A3NNEX 2-0

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Fertilizer Subsidies By Company - 1988Average based on 1988 Prices

Uresa TSP AS PotashPUSRI Kujang Kaltim AAF PIM Gresik Import Total

A. 1988 Dom. Sales ('000 tons) 1,040 481 814 120 468 1,220 698 664 6,298

B. Prices (Rp.000 per ton)

1. Ex-Fuctory excluding Profit 105 118 147 242 1J9 S07 211 2042. Profit to Producers 6 6 6 6 6 63. Form Gate Price 143 143 143 143 143 146 143 1424. Marketing Costs 87 46 100 98 98 67 58 e65. Pusri marketing Overhead 1 1 1 1 1 1 1 16. Border Price (USS/mt) 146 146 146 146 146 180 76 1227. Border Price (Rp.000/mt) 242 242 242 242 242 801 126 204

C. Production Subsidy - Econ.

1. Per ton Subsidy (Rp.000) (81+.2-87) (182) (119) (90) - (98) 11 91 -2. Ratio as X (81.2)/B) 46 61 es - 69 104 172 -3. Annual Subsidy in Rp.Bill. (A x C1) (187) (67) (78) - (46) 14 68 _ (246)

D. Farmgate Subsidy - Econ.

1. Econ. Del. Cost (Rp'000) (87.84.65) 830 288 348 841 886 369 184 2702. Per ton Subsidy (Rp.000) 197 146 200 198 198 224 41 128S. Annual Subsidy in Rp.Bill (A x D2) 195 70 168 24 90 278 24 72 811

E. Total Budgetary Subsidy

1. Del. Cost In Rp.'O0O/te 814B2+B4+69 198 169 253 841 288 380 276 2702. Retail Price in Rp.OOO/te I8 143 148 148 148 148 146 148 1423. Per ton Subsidy in Re'O00 E1-E2 65 26 110 198 96 286 132 1284. Annual Subsidy in Rp.Bt!l. (A x ES) 67 12 90 24 46 287 77 72 664

----------- Ur-s -------- Local Local KCI TotalTSP AS

Total Subsidy excl. transfers etc. 228 287 77 72 664Gas Subsidy In Rp.Bil1. 69 69Return Foregone in Rp.Bill. 47 6 1 68

Total Subsidy Other than taxesand transfers U88 293 78 72 776

ASSIEMarch 1990

- 54 -ANNEX 2-7

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Fertilizer Substdies By Comnany - 1989Average based on 1989 Prices

Urea TSP AS TSP PotashPUSRI Kujang Kaltim AAF PIM Gre-Ik Import Import Total

A. 1989 Dom. Sales ('000 tons) 1,117 440 928 120 460 1,200 653 314 S65 6,867

B. Prices (Rp.'O0O per ton)

1. Ex-Factory jxcluding Profit 118 126 146 261 146 J81 226 342 2272. Profit to Producers 6 6 6 6 6 63. Farm Cate Price 169 169 169 169 169 188 169 188 1764. Marketing Costs 85 46 96 96 106 73 67 78 42S. Pusri marketing Overhead 1 1 1 1 1 1 1 1 16. Border Price (US/mt) 146 146 145 146 146 190 85 190 1287. Border Price (Rp.'000/mt) 261 261 261 261 261 842 163 842 227

C. Production Subsidy - Econ.

1. Per ton Subsidy (Rp.'00O) (81+82-87) (138) (180) (110) - (111) 44 78 - -2. Ratio as % (81+82)/B7 47 50 58 - 5. 118 151 - -

g. Annual Subsidy in Rp.Bill. (A x C1) (154) (67) (102) - (61) 58 61 - - (261)

D. Farmgate Subsidy - Econ.

1. Econ. Del. Cost (Rp'000) (9784+.86) 847 307 368 857 867 416 211 416 2702. Per ton Subsidy (Rp.000) 178 138 189 188 198 228 42 228 943. Annual Subsidy in Rp.8ill (A x D2) 199 e1 176 23 91 274 27 72 SO 982

E. Total Budgetary Subsidy

1. Del. Cost in Rp.000/te 81+82+94+86 209 177 248 357 268 460 289 416 2702. Retail Price in Rp.'000/te 83 169 169 169 169 169 188 169 188 1763. Per ton Subsidy in Re'000 E1-E2 40 8 79 188 87 272 120 228 944. Annual Subsidy in Rp.Bill. (A x ES) 46 4 78 28 40 827 78 72 6o 721

----------- Urea -----------)Local Local Imp. KCI TotalTSP AS TSP

Total Subsidy excl. transfers etc. 184 827 78 72 60 721Gas Subsidy in Rp.Bill. 62 62Return Foregone in Rp.Bill. 49 6 1 56

Total Subsidy Other than taxesand transfers 295 838 79 72 60 888

AS6IEMarch 1990

- 55 -ANNEX 2-8Page 1 ot a

INDtONESIA

FERTILIZER RESTRUCTURING PROJECT

Fertilizer Subsidiea 8Y Commany - 1990Average based on 1989 *nd Prices

Ures TSP AS TSP PotashiPUSRI Kujang Keltim AAF PIM Oresik Import Import Total

A. 1990 Dom. Sales ('000 tons) 1,400 640 1,082 120 460 1,220 674 181 68a 6,800

B. Prices (Rp.'000 per ton)

1. Ex-Factory excluding Profit 117 126 145 261 144 881 228 342 2272. Profit to Producers 6 6 6 6 6 53. Farm Gate Price 186 185 185 186 16 210 186 210 2104. Marketing Costs 84 46 94 95 110 81 S6 61 896. Pusri marketing Overhead 1 1 1 1 1 1 1 1 18. Border Price (US/mt) 146 146 146 146 145 190 85 190 1267. Border Price (Rp.000/mt) 261 261 261 281 281 842 168 842 227

C. Production Subsidy

1. Per ton Subsidy (Rp. 000) (81+82-97) (189) (180) (111) - (112) 44 78 - -2. Ratio as % (B1 B2)/97 47 SO 67 - 57 118 161 - -3. Annual Subsidy in Rp.1111. (A x C1) (195) (70) (120) - (50) 64 53 - - (828)

D. Farmgate Subsidy

1. Econ. Del. Cost (RpOOO) (97+.8456) 848 807 8S6 867 872 406 211 405 2672. Per ton Subsidy (Rp.'O00) 161 122 171 172 197 195 26 196 57a. Annual Subsidy in Rp.8111 (A x D2) 225 66 186 21 84 238 18 36 86 908

E. Total Budgetary Subsidy

1. Del. Cost in Rp.'OOO/te B1.929445B6 207 177 246 867 260 449 289 406 2672. Retail Price in Rp.000/te 98 186 185 185 186 186 210 186 210 2103. Per ton Subsidy in Re'000 E1-E2 22 (8) 60 172 76 289 104 196 674. Annual Subsidy in Rp.B1il. (A x Ea) 81 (4) es 21 84 291 70 as 38 578

----------- Ure -----------> Local Local Imp. KCI TotalTSP AS TSP

Total Subsidy excl. trsnsfers etc. 146 291 70 8S a8 678Gas Subsidy in Rp.Bill. 78 73Return Foregone in Rp.Bill. 58 6 1 84

Total Subsidy Other than taxesand transfers 276 297 71 86 S8 716

AS6IEMarch 1990

- 56 -ANNEX 2-8Page 2 of 3

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Fertilizer Subsidy - Estimate for 1990Assumptions used in the Estimates

1. The subsidy estimates have been prepared using the followingassumptions to provide the base for testing the impact of various options onthe subsidy level. The estimates do not include subsidy on products otherthan the four considered, taxes and transfers to next year and from previousyears.

2. The fertilizer consumption in 1990 has been assumed to be the sameas the GOI estimates for the agricultural year 1989-90 i.e., a total of 6,300thousand product tons, consisting of 3,592 thousand tons of urea, 1,401thousand tons of TSP, 674 thousand tons of ammonium sulphate ard 633 thousandtons of potash. In view of the measures being adopted by the GOI to improvefertilizer use efficiency, the actual consumption could be somewhat lower.

3. The ex-factory prices of the domestically produced fertilizers havebeen assumed to remain at the present level, effective from January 1, 1989even though these are due for revision from January 1, 1990. 'An appropriatepart of the deliveries has been assumed to be bagged nd the rest in bulk. Theex-factory price for each plant has been estimated based on weighted averageof bagged and bulk supplies.

4. The profit margin of Rp 5,000 per ton available to the producers hasbeen added as a separate line item under "Prices' for all domestic suppliesexcept from Aceh.

5. Supplies from Aceh are assumed to be available at projected 1990urea price. Imported supplies of TSP and potash are assumed to be availableat landed cost even though a part of the potash supplies are obtained withgrant funds.

6. The border prices are based on estimates of projected 1990international prices, on FOB basis for urea and on landed cost basis for TSP,ammonium sulphate and potash. TSP border prices used are somewhat higher thanthe present likely delivered cost from US Gulf, but the Indonesian standardson water solubility require import of higher water solubility material fromother sources at a higher price. The sole purpose of using the border priceshas been to split the total subsidy into production and farmgate subsidies andthe assumed values do not have any impact on the size of the total budgetarysubsidy except in the case of imports.

7. Farmgate prices are assumed to remain at the present levels of Rp185,000 per ton of urea and ammonium sulphate and Rp 210,000 per ton TSP andpotash, which have been effective from October 1989. These prices are due forrevision from October 1990.

- 57 -ANNEX 2-8Page 3 of 3

8. Marketing and distribution costs are assumed to remain at thepresent levels effective from April 1, 1989. An amount of Rp 1,100 per ton ofproduct sold has been added as a separate line item to cover payment to Pusritowards marketing margin.

9. Gas subsidy has been calculated on the basis of an average of 35million BTU average gas consumption per ton of urea and assuming that theaverage economic value of natural gas in Indonesia is about $1.60 per millionBTU against the present cost of $1.00.

10. The return foregone has been calculated at 15 percent on thenormative equity base of a typical plant of average vintage at Rp 21,600 perton of urea, Rp 10,000 per ton of TSP and Rp 6,000 per ton of ammoniumsulphate less Rp 5,000 per ton now provided to the producers.

AS5IEMarch 1990

- 58 -ANNEX 2-9

INDONESIA

FERTILIZER RESTRUCTtMING PROJECT

Fertilizer Production Capacity('000 tons per year)

1980 1981 1982 1988 1984 1985 1988 1987 1988 1989 1990 1991 1992 1m 1994 199

A. Urea

Pusri I 100 100 100 100 100 100 100Pusri lb 670 670Pusr; II 0aso 8ao 8so 8so 8so aso 8so a8o a8o 8o 9so 8so 880 670 670 570Pusri III 5T0 670 670 570 670 670 670 670 570 670 670 670 670 670 570 670Pusri IV 670 570 670 670 670 670 570 670 670 670 570 670 670 670 670 570

Total Pusri 1,820 1,620 1,620 1,620 1,620 1,820 1,620 1,520 1,520 1,520 1,520 1,520 1,520 1,710 2,280 2,280

Kaltim I 570 570 570 670 670 670 670 670 670 681 681 631Kaltim II 670 570 670 570 570 670 670 670 670 670 670 670Kaltim III 570 670 670 670 670 670 670

Total Keltim 1,140 1,140 1,140 1,140 1,140 1,710 1,710 1,710 1,710 1,771 1,771 1,771

Kujang I 570 570 670 670 670 670 670 670 670 670 670 670 570 670 670 570Kujang II 670 670

Total Kujang 670 670 670 570 670 670 670 670 570 670 670 670 670 670 670 1,140

Isker.aar Mud. 670 670 670 670 570 670 670 670 670 670 570 670 670Aceh 570 670 670 670 670 670 650 860 860 860 860 650 650Gresik 460 460

Total Urea 2.190 2.190 2.190 2.760 4.470 4.470 4.470 4,870 4.870 6.020 6.020 6,020 6.020 6.271 6.401 6.871

8. Triple Suparphosphate (TSP)

Gres k I- 500 500 500 500 500 500 600 600 60 600 60 60 600 600 600 600Gresik II S00 500 6So 6oo 6oo 6oo 6oo 6oo 60o 6oo 6oo 600

Total TSP 500 500 600 500 L.O00 1.000 1.200 1.200 1.200 1.200 1.200 1,200 1.200 1.200 1.200 1.200

C. Ammonium Sulfate (AS)

Greslk I 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200Grestk II 260 260 260 260 250 250 260 250 260 260 260 250Gresik III 200 200 200 200 200 200 200 200 200 200

Total AS 200 200 200 200 450 450 650 650 650 650 650 650 650 650 860 650

ASSIEMarch 1990

- 59 ANNEX 2-10

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Expgrts of Amseeonis and Urea('000 tons)

1982 1988 1984 1936 1096 1967 1988

A. Ammonia

Pusri 16.0 NAKujangKaltim 168.2 197.6 264.4 225.6 NAPIMAcesh 0.8 1.6 1.0 1.2 NA

Tota 164.0 199.2 216.4 242.6 NA

8. Urea

Pusri 56.0 254.0 11.0 601.0 760.0 827.0 158.8Kujang 20.0 62.0 217.0 74.0 94.8KlttAm 59.8 78.7 216.9PIM 104.0 106.0 181.9Aceah 172.2 288.6 296.6 468.8 421.7

Total 75.0 816.0 188.2 784.6 1,486.9 1,048.0 1,028.0

C. Urea Exports by Country

China 199.1 870.7 841.7India 21.4 126.0 -

Phillipines 75.0 160.9 50.0 126.8 286.9 160.2Mataysea 66.2 118.0 165.1 29.4 62.6Thailand 2.2 20.0 69.7 176.7 189.5 NASingapore 19.4 80.6 106.4 28.8Vietnam 85.9 165.0 98.1

Others 77.8 0.2 86.8 288.6 217.8

Total 76.0 816.0 1JB.2 784.6 1,486.9 1,048.0

ASSIEMarch 1990

- 60 -ANNEX 2-11

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Fertilizer Production Post ond Prolactod('000 tons per year)

1982 1988 1984 1985 1986 1987 1088 1989 190 1991 1M 1998 1994 1m

A. Urea

Puort 1,480 1,621 1,688 1,677 1,528 1,480 1,881 1,445 1,445 1,446 1,445 1,626 2,082 2,160Kaltim 141 400 580 858 1,009 1,454 1,611 1,540 1,540 1,540 1,60 1,650KuJ sng 514 578 s7s 494 646 S52 582 542 542 542 U42 542 542 618Iakender Muds 566 687 589 602 542 542 542 542 542 642 542Aesh 68 549 548 629 572 576 618 618 618 618 618 618 6S1Orealk 280 410

Total Urea 1,944 2,265 2,906 8,586 4,020 4,046 4,149 4,601 4,658 4,687 4,687 4,868 5,664 6,898

8. TrIple SuporphosDhote 577 784 1,002 1,007 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200

C. Amonium Sulfate 210 208 804 475 578 674 574 650 660 650 660 e60 650 060

ASSIEMarch 1990

I

- 61 -

ANNEX 3-APage 1

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

FERTILIZER MARKETING AND DISTRIBUTION STUDlES

Ternms of Reference

A. Background

Consumption

1. Agriculture is an important part of the Indonesian economy and itsperformance in recent years has been impressive. Agriculture output duringthe past 15 years has grown almost twice as fast as the population. Thegovernment has developed policies to promote food self-sufficiency, includingsubsidies for key inputs such as fertilizer and rural infrastructureFertilizer consumption in 1987 totaled 2.3 million nutrient tons versus only0.6 million tons ten years previously. By keeping farm fertilizer prices lowand increasing '.he supply of fertilizer, Indonesia has been successful inpromoting food self-sufficiency, particularly in rice. However, the subsidysystem has contributed to an increasing budgetary deficit as well as toinefficiencies in the fertilizer industry.

Location and Capacity of Production Units

2. Production of fertilizer in Indonesia occurs at six locationsthroughout the country. The end product from five of these production sitesis urea (a total of about 4.3 million tpy). A smaller amount of ammonia isalso shipped from the R!kltim site. The sixth site produces triplesuperphosphate (TSP) ar-d ammonium sulfate (AS); about 1.2 million tpy and 0.65million tpy, respectively. A summary of the production facilities is given inTable 1.

- 62 -ANNEX 3-APage 2

Table 1: INDONESIAN FERTILIZER PRODUCTION UNITS

EstimatedGeneral Number of annual

Production site location Type of plant plants capacity('000 mtpy)

Asean Aceh North Sumatra Ammonia/urea 1 650 ureaIskandar Muda North Sumatra Ammonia/urea 1 570 ureaPUSRI South Sumatra Ammonia/urea 3 /a 1,520 ureaKujang West Java Ammonia/urea 1 570 ureaKaltim Kalimantan Ammonia/urea 3 330 ammonia

1,710 ureaGresik East Java Ammonia/urea /b 1 -- ammonia/c

TSP 2 1,200 TSPAS 3 650 AS

/a Does not include PUSRI I, which is being phased out.lb Urea plant shut down./c Quantity of ammonia uncertain. All is converted to AS.

Marketing and Distribution

3. The disLribution of fertilizer has been the responsibility of PUSRI,one of the country's largest nitrogenous fertilizer producers. Since 1988,the cooperatives (KUDs) handle all of the retail sales. Until 1988fertilizers were sold to farmers at a single fixed price for all products.Price differentiation according to nutrient content has been recognized asdesirable, but so far only modest changes in value by nutrient have beenintroduced. Prices are still uniform (freight equalized) throughout thecountry. Although only 26 percent of the fertilizer product tons are TSP, 46percent of the cost of the subsidy nationwide is for TSP. The situation withurea is reversed. Undoubtedly, the similar price for all fertilizers resultsin a different product mix than what market forces would dictate. Exportsfrom the nitrogen industry have been quite successful in improving industrialperforn,aace; the high cost of TSP and AS imports have offset many of thebenefits achieved by the nitrogen industry. However, two nitrogen companies,PUSRI and Kujang, are among the lowest-cost producers in the world, whileKaltim, Asean Aceh and Iskandar Muda are higher-cost producers due to variousconditions. The cost of delivering fertilizers to the farmers is highcompared with other developing countries (in part because of geography) andcontributes to the cost of subsidies. Steps such as allowing Kujang *ndGresik, which are well situated, to distribute fertilizer could reducedistribution costs. The costs of subsidies and whether they should becompletely or partially eliminated in some or all locations and for some orall products are major issues. Closely related issues are how much impactprices would have in changing the product mix and how to reduce the high costsof distribution. Should market forces dictate prices, or should prices be setto encourage use of certain products? The solution to these issues is comple:x

- 63 -ANNEX 3-APage 3

because of the Government's objectives to maintain food self-sufficiency andmaintain farm income.

4. In addition to the basic production units shown in Table 1, a fullyintegrated, largely state-owned physical distribution system is used to moveall products from the factory to the farm. The present system for urea isprimarily based on ocean-going bulk carriers with a capacity of 7,500 tonseach. These bulk carriers deliver fertilizer to eight strategically locatedbagging stations where the fertilizer is bagged and dispatched by rail andtruck to inland storage and distribution depots and then sent to rail deliversand onward to individual farmers (see Map). The same basic system is used forTSP and AS, with the exception that all bagging of these products occurs atthe oroduction site (Gresik) and the bulk carriers are not used.

Summary of Principal Issues

5. The principal issues in fertilizer marketing and distribution are:

1. High distribution cost.

2. Impact of subsidy removal on demand and cost to government.

3. Pricing policy and product mix.

4. Use of imports versus domestic production

5. Controlled versus free marketing.

6. Appropriate role of government and private sector.

B. Terms of Reference: Distribution

Objectives

6. The main objectives of the distribution study are to (a) prepare anupdate of the 1986 PUSRI/IFDC study; (d) prepare an assesjment of the currentdistribution system and the costs by component; (c) prepare a ten yearforecast of demand and supply; and (d) assess any physical changes needed inthe distribution network over the next ten years.

Detailed Terms of Reference

7. PUSRI should prepare a concise update of the 1986 PUSRI/IFDCfertilizer distribution study that would describe and assess in detail (a) thepresent system for distribution of each area; (b) the ownership and operationof each component of the network; and (c) the roles of the private sector,cooperatives, and the Ministry of Agriculture.

8. The update should also include a detailed analysis of how exportsare handled, including costs, from each factory. Issues should be addressedsuch as how to minimize export earnings and how to minimize transport costs,including the links with domestic distribution. Specifically, can a systemfor "product swap" be arranged that would improve efficiency and maintain each

- 64 -ANNEX 3-APage 4

company's present incentive to maximize profits through export sales linked tohigh production efficiency?

9. A ten year supply/demand forecast should be prepared that takes intoaccount the proposed removal of subsidies, recent consumption trends,agricultural information such as cropping patterns, land use and availability,irrigation, manEgement, etc. The supply forecast should also take intoaccount recent shifts in production toward the market areas, plus a realisticassessment of the impact of supergranular urea and other product changes onthe demand pattern.

10. An assessment should be made of the future requirements in thedistribution network based on the above supply/demand forecast and assessmentof present system.

Personal Requirements and Costs of the Study

11. The distribution study would be undertaken by P.T. PUSRI, at its owncost.

C. Terms of Reference: Marketing

objectives

12. The main objectives of the marketing study are to (a) appraise thepresent fertilizer marketing system in Indonesia for determininginefficiencies and constraints; (d) compare it with marketing systems in othercountries that may provide useful guidelines for improvement (c) recommend amarketing system(s) that will make the appropriate fertilizers available on atimely basis to farmers in the most cost-effective manner; (d) determine theadvantages of having a competitive fertilizer marketing system; and (e)determine the infrastructure needs required for the recommended fertilizermarketing system. In addition, the study would assess the impact of changesin fertilizer prices on use of fertilizer and also analyze the recommendedchanges in the appropriate fertilizer mix, including types, specification etc.

13. A marketing system should be prepared that would (a) promotecompetition at wholesale and retail levels and minimize the cost of fertilizerdelivery to the farmer; (b) facilitate the ongoing policy action of subsidyremoval; (c) eliminate the need for administrative controls on storage anddistribution; (d) accommodate the freight equalization policy to the maximumextent possible: and (e) promote market development for the most appropriatefertilizers, grades, specifications, etc.

Detailed terms of Reference

14. Part 1: Appraisal of present fertilizer marketing system inIndonesia.

(a) Review of the existing fertilizer demand, utilizing the PUSRI updateof the 1986 PUSRI-IFC Fertilizer Distribution Study (see Section B,paras. 7-9).

- 65 -ANNEX 3-AISage 5

(i) Where data permit, assess the trends and patterns offertilizer use in Indonesia over the past ten years for eachdistrict by different ecological zones and by crops.

(ii) Establish demand by seasons and months.

(iii) Review the current method of demand forecasting used at localand national levels as identified in the PUSRI update.

(b) Review appropriateness of fertilizers for different crops grown.

(i) Review fertilizer recommendations against latest fertilizerresearch and determine if fertilizer products being used arethe most appropriate ones available.

(ii) Compare nutrient cost at selected retail levels for the majorfertilizers used i.. principal cropping areas.

(iii) Estimate the economic incentive to farmers for usingfertilizer for majer crops by determining value/cost ratios byusing Indonesia's system of output prices.

(c) Evaluate the current fertilizer pricing policy of the government andthe methodology used in determining:

(i) product prices;

(ii) nutrient prices;

(iii) marketing cost;

(iv) marketing margins;

(v) subsidy determination and cost to government; and

(vi) buffer stocks.

(d) Review the present fertilizer marketing system and:

(i) identify the marketing organizational structure employed byPUSRI at all levels incrl.ding private, KUDs (cooperatives),estates, etc.;

(ii) determine the individual organizations and the role of each,with special attention to authority, responsibility, andaccountability;

(iii) assess adequacy of the credit system as it relates tofertilizer sales;

(iv) assess the capability of the key staff in fertilizermarketing;

- 66 -ANNEX 3-APage 6

(v) assess the operational efficiency of the fertilizer warehouseand distribution system and determine its ability to serveretailers, availability of supply, and logistic planning;

(vi) determine current level of buffer stocks;

(vii) identify the principal constraints to efficient marketing bycategories of marketing function including product pricing,buffer stocks, distribution, promotion, timeliness, etc.;

(viii) review the present monitoring system for quality control,pricing, supply and demand, and market coverage employed bythe government, PUSRI, and other manufacturers, and othermarketing channels; and

(ix) compare the cost effectiveness of the present marketing anddistribution system with India, Pakistan, and Bangladesh orother mutually agreed countries.

(e) Prepare an environmental assessment of:

(i) impact of price changes resulting from subsidy removal onfertilizer use;

(ii) present and recommended changes in product types and grades(i.e., PAPR, P205 water solubility in TSP, DAP, NPK, sulfur-enhanced products);

(iii) product application practices (i.e., urea prill vs. granules).

The consultant should work with the Ministry of Agriculture to developa long-term program for monitoring ground water contamination fromfertilizer use.

Part 2: Determining a recommended fertilizer marketing system(s).

(a) Visit and assess the potential capability of the basic manufacturingunits and other suppliers to market its products.

(b) Identify the markets each basic unit could potentially serve.

(c) Identify the marketing channels required to serve the markets.

(d) Diagram the organizational structure required for each production unitto carry out the marketing functions.

(e) Develop a fertilizer pricing plan for the recommended marketingorganization(s) incorporating the government's plan for elimination ofthe subsidy over a five-year period:

(i) factory gate price (uniform, free, or other);

(ii) transportation (subsidy or actual) cost;

- 67 -AN4EX 3-APage 7

(iii) warehousing (subsidy or actual); and

(iv) pricing policy by region (or subregion).

(f) Identify adequacy of credit programs required for fertilizer sales:

(i) current nonpayment problems; and

(ii) identify needs for further study.

(g) Determine institutional linkages and the role of each in the newsystem:

(i) role of government;

(ii) role of private sector;

(iii) research;

(iv) Ministry of Agriculture;

(v) Ministry of Industry; and

(vi) Ministry of Cooperatives.

(h) Determine government policy and actions necessary for successfullyimplementing the new system(s):

(i) quality control;

(ii) pricing;

(iii) supply and demand;

(iv) market coverage;

(v) efficiency of manufacturing and marketing; and

(vi) buffer stocks.

(j) Determine the staff requirements by positions required for each of therscommended fertilizer marketing organizations:

(i) training requirements; and

(ii) staff cost.

(k) Describe quantitatively the impact of the new recommended fertilizermarketing system(s) on:

(i) prices;

(ii) supply;

- 68 -ANNEX 3-APage 8

(iii) product mix;

(iv) fertilizer use;

(v) crop production; and

(vi) anticipated marketing cost of new system versus cost of oldsystem.

(1) Develop a time-framed plan of action for implementing the recommendedmarketing system(s):

(i) government acceptance;

(ii) government policy and actions;

(iii) changeover to new systems;

(iv) removal of subsidy;

(v) new pricing policy; and

(vi) personnel requirements.

Part 3: The advantage of the recommended fertilizer marketing systems.

(a) Assess the recommended fertilizer marketing system(s) for introducingand transferring recommended and proven new technologies:

(i) new and improved fertilizers and product mix, e.g.,briquetting of urea, nitrogen and phosphate products mixedwith sulfur, and partial acidulated phosphate rock (PAPR); and

(ii) ability to complement the extension service in advisingfarmers and recommended practices.

(b) Ability of new system(s) to lower fertilizer cost for the farmer andsubsidy cost for the government.

(c) Ability of new system(s) to mobilize private capital.

(d) Ability of new system to make the appropriate fertilizers more timelyavailable to farmers.

(e) Ability of new system(s) to increase market coverage.

Personnel Requirements and Costs of the Marketing Study

15. It is estimated that the total cost of the study would amount toUS$400,000, of which US$300,000 would be in foreign exchange. Estimatedpersonnel and time requirements for the marketing study are shown in Table 2.

- 69 -ANNEX 3-APage 9

Table 2: PERSONNEL AND TIME REQUIREMENTS

National Field ReportExpatriates counterparts study preparation Total

------------(weeks)------------

Marketing specialists:- Systems Same 10 6 16- Prices Same 10 6 16

Agricultural economist Same 10 4 14Agronomist Same 4 4 8Engineer Same 4 4 8

Total 38 22 62

- 70 - ANNEX 3-B

Page 1

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

DEVELOPMENT OF FERTILIZER INDUSTRY ENVIRONMENTAL IMPROVEMENT PROGRAM

Terms of Reference

A. Background

1. The Government of Indonesia has undertaken a program ofenvironmental improvement within the country. An extensive system ofregulations has been developed, although there are discrepancies between thenational and local levels. Monitoring and enforcement are also lacking. Thepresent system requires that an environmental impact assessment (EIA) beprepared as part of the approval process for any new investment. A majorinvestment requires a cormprehensive EIA (called an AMDAL) covering all relatedand surrounding areas and facilities; a smaller optimization investmentrequires a scaled-down, less comprehensive EIA called a PEL.

2. The fertilizer industry consists of six major products (fivenitrogen, one nitrogen/phosphate) throughout the country. The industry alsoproduces a variety of industrial chemicals to be covered under this study. Asunmnary of the production facilities was given in Table 1 of-Annex 9-A. Thereis a continuing program of optimization and technology upgrading within theindustry, including an increasing awareness of the importance of environmentalfactors. A part of the ongoing optimization program is being supported by theBank, including work at five of the six companies. Two full EIAs have beenprepared, and three scaled-down EIAs are under preparation. Local consultantshave developed some capability in the preparation of EIAs.

3. The work under this assignment will utilize existing material andundertake additional work as required to develop a comprehensive environmentalimprovement program for the fertilizer sector.

B. Terms of Reference

Objectives

4. The objectives of the assignment involve assisting the Governmentand the industry in:

(a) developing a comprehensive environmental improvement program for thesector including revised standards;

(b) improving the safety performance of the industry;

(:) evaluating current efforts within the Ministry of Environment (KLH)and Ministry of Industry (MOI) to improve monitoring and compliance,including proposals regarding incentives and penaltiea forenforcement;

- 71 -ANNEX 3-BPage 2

(d) identifying additional optimization programs and investments neededto enable the industry to meet the revised standards;

(e) developing an environmental management program within theenterprises and the MOI to implement the environmental improvementprogram; and

(f) assessing the long-term development prospects for the industry inregard to environmental impact, land use, resource base,resettlement, and social issues.

Detailed Terms of Reference

5. The work program will include:

(a) reviewing existing national and local standards applicable to thefertilizer industry--on the basis of current technology,international industry standards and guidelines within selected,relevant industrial countries, recommend any desired revisions inIndanesian standards and, if appropriate, a schedule forimplementing those standards;

(b) evaluating the performance and suggesting any improvements in theinstitutional requirements of MOI and KLH in managing the EIAprocess and the proposed environmental improvement program;

(c) undertaking an air, water, and solid waste generation survey in theindustry to identify the major source of waste, including energy ateach unit within each factory (this survey will include a detailedmaterial and energy balance for each unit);

(d) identifying and evaluating appropriate steps to minimize wastegeneration and maximize recycling to achieve the recommendedeffluent star.dards (these steps could include different processtechnology, process optimization, and new procedures);

(e) evaluating existing safety programs including analysis of hazardousmaterials and handling hazardous emergencies in comparison withappropriate international standards and propose any upgrading deemednecessary.

(f) developing a system for environmental management within theenterprises nd MOI that would include monitoring and implementationof the environmental improvement program;

(g) preparing a survey of land use (existing and future) to assessimpact of the industry on surrounding environment, the need forrevegetation and green belts, protection of any critical flora/faunalhabitat, impact of encroaching urbanization on existingfactories and townships, need for resettlement and its impact, andmaking appropriate recommendations;

- 72 - ANNEX 3-B

Page 3

(h) recommending a training program, if desired, to provide for long-term environmental needs for the sector.

6. Specific areas for attention under the study include:

(a) storage ureas (ammonia, sulfur, acids, rock, and TSP) to minimizelosses, dust, and gaseous discharge such as F, NH3S;

(b) calcium carbonate, to reassess recycling to cement;

(c) total F, NO and SO2 air emissions;

(d) metal content in water treatment (Cr. P20.);

(e) optimizing use of power and natural gas;

(f) alternative products such as lower-grade phosphate and sulfur-containing products and industrial chemicals; and

(g) any toxic materials used in the industry.

Approach and Implementation

7. The following team of experts will be required:

(a) three expatriate specialists (one of which would be the teamleader):

(i) an industrial environmental specialist with specific experiencein phosphatelsulfuric acid industry;

(ii) an industrial environmental specialist with specific experiencein the nitrogen fertilizer industry, including safety;

(iii) an environmental specialist with specific experience inregulatory systems, institutions, environmental management andtraining, land use, and resettlement;

(b) three local consultants with experience in fertilizer industry andin preparation of EIAs and full knowledge of local environmentalregulations and institutions.

8. The consultant teRm will prepare a comprehensive long-rangeenvironmental development strategy for the fertilizer industry in Indonesia,including (a) long-terr. development strategy, (b) revised nationalenvironmental standards, (c) specific investments and other measures needed toachieve these standards, (d) upgraded safety program, (e) management systemfor implementing the recommended environmental programs, and (f) a monitoringsystem to assess progress.

9. A three-stage approach is suggested. In the first stage, theconsultant team leader should prepare a detailed work program and a list ofinternational and local reference material to be used as a basis for the work.

- 73 -ANNEX 3-BPage. 4

The team leader would undertake a short visit to Indonesia to agree with MOIon the selection of the local consultants that will form part of the team.The team leader should prepare a detailed questionnaire to be given to eachenterprise before the second stage. MOI will also designate its environmentalsupport staff during this time, who will come from the fertilizer companiesconcerned.

10. The second stage will include a field visit of about eight weeks, towork with MOI, KLH, and the fertilizer enterprises in preparing the evaluationand recomrendations concerning environmental improvement in the industry,including and interim report to be submitted to the Government and the Bankbefore leaving Indonesia. That report would include a specific program to beagreed within Indonesia over the following three months by the relevantIndonesian entities. An action program would also be included, which theIndonesia authorities could begin implementing immediately. The Bank wouldsubmit its comments on the draft interim report to Government within onemonth.

11. The third stage would include a three-week visit to Indonesia, afteran interval of about three months, to assess progress and prepare an updatedanalysis and recommendations, as well as to complete a long-range plan forimplementing the various recommendations made. Following this final mission,a final report should be submitted to Government and the Bank within threemonths.

12. The phased approach will require an elapsed time of about 9 monthsto complete, including report writing, and would involve about 25 man-monthsof external consultant time plus about _ man-months of local consultants,plus travel expenses, plus report writing. The total budget is estimated atUS$470,000, as shown below.

- 74 -

ANNEX 3-B

Page 5

ESTIMATED COST (US$)

First and Second Phases

- External Consultants

(15 man-months) 200,000

- Local Consultants

(12 man-months) 45,000

- Travel

Local 10,000

Foreign 20,000

Subtotal 265,000

Third Phase

- External Consultants

(8 man-months) 110,000

- Local Consultants

(6 man-months) 25,000

- Travel

Foreign 10,000

- Report writing 20,000

Subtotal 175,000

Contingencies 30,000

Total 470,000

Summary

Local Foreign Total

80,000 390,000 470,000

- .75 -

ANNEX 3-BAttachmentPage 1

PRODUCTION TECHNOLOGY AND ENVIRONMENTAL ISSUES

Production Technology

1. Ammonia/Urea. The ammonialurea plants utilize a mixture of processtechnologies including, but not limited to, H.W. Kellogg (United States),Lurgi (Germany), Haldor Topsoe (Denmark), Mitsui Toatsu (Japan), andStamicarbon (Netherlands). Natural gas is the common fuel and feedstock;however, the ammonia plant in the Gresik complex is based on gasification oflow sulfur fuel oil using technology supplied by B.P.M./Shell (Netherlands).The ammonia/urea unit at Gresik is due to be replaced with anew, large-scaleunit (1,350 tpd ammonia/1,400 tpd urea) based on natural gas.

2. With the exception of one small (350 tpd) unit at the PUSRI site(PUSRI I), all urea is prilled. The PUSRI I unit was retrofitted withgranulation capability in 1979; however, the granulation unit is currently notbeing operated, and the entire PUSRI I unit is either shut down or in theprocess of being phased out. PUSRI I is expected to be replaced with a newunit (PUSRI V) tentatively scheduled for completion in 1992.

3. TSP and AS. Tbs Gresik facility is dedicated to the production ofTSP and AS. However, within thL cemplex, a large number of intermediateprocess units based on a variety of technologies exists including (1) ammonia(a mix of at least four technologies), (2) sulfuric acid (Monsanto),(3) phosphoric acid (Nissan), (4) gypsum conversion to AS and chalk(Merseberg), (5) AS by direct neutralization (two units), (6) granular TSPbased on stream granulation of run-of-pile material (Chimico/SpieBatignolles). In total, process technologies from approximately six countriesare represented in the major production units at the Gresik site.

Levels (Generation) of Technology

4. Indonesia's fertilizer industry has evolved over a period of about25 years, beginning with the formation of Gresik and PUSRI I in the mid-1960sbut most of the plants came onstream after the mid-1970s. The early plants(PUSRI I and II and Gresik) were very small by today's standards, having acapacity equivalent to only about 100,000-300,000 tpy urea. The Gresik plantproduced even less urea because much of the ammonia discharged from the once-through or partial recycle urea plant was used to produce AS.

5. Today, Indonesia produces about 5.0 million tons of urea, 1.2million tons of TSP, and 0.65 million tons of AS. This growth in capacity hasalso been accompanied by several improvements in the process technology,making the latter plants more energy efficient and less polluting than theearlier units. Furthermore, retrofitting of certain process units (forexample, the ammonia converter) to improve the operating efficiency of some ofthe older plants has occurred or is under consideration. The conversion ofwaste phosphogypsum from the Gresik phosphoric acid unit to AS is anotherexample of innovations that have occurred over the years.

- 76 - ANNEX 3-BAttachmentPage 2

Potential Sources of Pollution

6. The fertilizer industry of Indonesia is quite representative of theindustry worldwide because it is basic in nitrogen production and, except fornot mining phosphate rock, in phosphate fertilizer production. Potash, ifneeded, is imported in the finished form. Potash may also be used at theGresik facility as an intermediate to produce certain NPK products; however,this is currently not done.

7. The following is a summary of the major effluents (pollutants) thatmay be discharged into the environment by the Indonesian fertilizer industry:

Production Unit(s) Potential Effluents (Pollutants)

Nitrogen complex Thermal (in cooling water)Ammonia AmmoniaUrea Sulfur particulate

Sulfur compoundsNitrogen oxidesZinc oxide (desulfurization)Waste catalystMethanolCarbon monoxideCarbon dioxideOil (compressors)Miscellaneous hydrocarbonsParticulate (primary reformer)Urea particulate (prill tower)Various (due to process leaks)Plant site rainwater runoff

Phosphate complex Thermal (in cooling water)(Gresik only) Sulfur particulateSulfuric acid Sulfur oxidesPhosphoric acid FluorineTSP AmmoniaAS Waste catalyst

Particulate (phosphate rock,sulfur, TSP, AS)

Gypsum stack runoff andparticulate

Heavy metalsRadonVarious (due to process leaksPlant site rainwater runoff

In addition, some pollution in the form of dust, spillage, and rainwaterrunoff is associated with the physical distribution system (plants, baggingstations, and warehouses) and the raw material unloading operations at Gresik.

- 77 - ANNEX 3-BAttachmentPage 3

8. On the basis of the foregoing profile and a preliminary assessmentof work, the following major issues should be considered.

Issue 1. RELEVANCE OF EXISTING OR PROPOSED ENVIRONMENTAL QUALITY STANDARDS(NATIONAL AND PROVINCIAL) AS INFLUENCED BY (1) THE LOCATION OF THE PRODUCTIONFACILITY, (2) TEH 'YPES OF POLLUTION EMITTED, AND (3) THE INTERNATIONALSTANDARDS.

To illustrate, the Kujang urea and the Gresik TSP/AS facilities are located indensely populated or intensively cultivated agricultural areas, while theother four nitrogen facilities are located in areas more remote from majorpopulation centers. Should the environmental quality standards takepopulation density, plant location, type of process (nature of effluents), andinternational standards into consideration?

Issue 2. DIVERSITY OF AGE (GENERATION) OF PROCESS TECHNOLOGY USED AT THEVARIOUS PRODUCTION SITES.

The wide diversity and age (old versus state-of-the-art) of technology used inIndonesia, together with the large number of intermediate process plants(steps) within a given production complex, will have major impact on the scopeof the plant survey activity and on the formulation of an investment strategythat will bring the units into compliance with standards that are ultimatelyformulated. Should the survey work be limited to only those plants that arenot expected to be phased out in the near future? Should the formulation ofstandards take into account the age of the plant?

Issue 3. SETTING ENVIRONMENTAL QUALITY STANDARDS THAT ARE PRACTICAL ANDENFORCEABLE.

There is a general lack of published area about actual pollution from variousfertilizer production units. Worldwide, these data, even if known, are viewedas confidential bi' most producers and are generally not available. Dataregarding potential pollution sources and quantities published by processlicensors are generally not routinely monitored and confirmed in mostproduction units unless there are well-enforced standards (laws) in place.The existence of a standard is no assurance that a plant is in compliance. Insome cases, the technology required for accurately measuring and routinelymonitoring certain process streams may not be available. For example,specialized techniques may have to be developed to measure the particulate(dust) and ammonia emissions from the large flow of air exiting the ureaprilling towers.

Issue 4. QUANTIFYING THE INFLUENCE OF MANAGEMENT OF POILUTION.

The environmental impact of a processing unit is not only determined by theprocess technology. Management, especially as it pertains to operations andmaintenance, often has a significant impact on the level of pollution. Thus,the survey work must also include an evaluation of the relative impact oftechnology and management on the level of pollution observed at each unit.

Attac,amentPage 4

Issue 5. CURRENT LEVEL OF LOCAL ACTIVITY IN ENVIRONMENTAL PROTECTION.

The level of existing expertise and current level of pollution monitoring andcontrol activities in Indonesia must be determined during the design of theoverall program. This will help to determine the level of expatriateexpertise needed to perform the initial survey of effluents discharged fromthe production sites.

Issue 6. IMPACT OF INVESTMENT COSTS ON PRODUCTION COSTS.

Modification of existing technologies or installation of new technologies toeliminate or reduce the level of pollution may increase capital and operatingcosts. The recovery of these costs during the life of a project will increaseproduction costs unless these environmentally safe technologies are fully orpartially subsidized. A profile of production costs resulting from newtechnologies should be developed. Tradeoffs between investment costs andlevels of pollution should be assessed through a sensitivity analysis toidentify the least-cost process for a given level of pollution.

Issue 7. SEQUENCING AND PHASING OF ACTION AND INVESTMENT PROGRAM.

Having determined the least-cost process for an acceptable level of pollution,and its impact on production costs, the issues related to the implementationof such programs should be addressed. Special attention should be paid tocapital and manpower requirements and the timing of implementation of theseprograms.

'age

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

PROJECT COST AND FINANCING PLAN

Local Foreign Total----- Million----

I. Project Cost

Gresik Restructuring Component

Ammonia/Urea Plant laAmmonia Process Licensor (Kellogg) - 93.1 93.1Urea Process Licensor (T.E.C.) - 32.5 32.5Civil Works & Erection (IKPT) 100.5 - 100.5Gresik Supplied Equipment & Services 16.0 0.7 16.7

Subtotal 116.5 126.3 242.8

Plant Modernization 2.0 8.8 10.8Subtotal Gresik Restructuring 118.5 135.1 253.6

Optimization ComponentPUSRI II Urea 7.8 19.7 27.5PUSRI Effluent Treatment 0.8 2.3 3.1Kaltim I Ammonia/Urea 3.9 32.8 36.7Kujang Ammonia 2.0 11.4 13.4PIM Ammonia 2.0 9.6 11.4

Subtotal Optimization 16.3 75.8 92.1

Studies ComponentMarketing and Distribution 0.1 0.3 0.4Development of Fertilizer Sector EMP 0.1 0.4 0.5

Subtotal Studies 0.2 0.7 0.9

Total Base Cost Estimate (BCE) 135.0 211.6 346.6

Physical ContingenciesGresik Restructuring Component lb 0.1 0.4 0.5Optimization Component 0.8 3.8 4.6

Subtotal 0.9 4.2 5.1

Expected Price IncreasesGresik Restructuring Component lb 0.1 0.6 0.7Optimization Component 1.1 6.0 7.1

Subtotal 1.2 6.6 7.8

Interest During ConstructionGresik Restructuring Component 46.4 - 46.4Optimization Component 18.4 - 18.4

Subtotal 64.8 - 64.8

Working Capital /cGresik Restructuring Component 20.0 - 20.0

Total Project Cost 221.9 222.4 444.3

- 80 -ANNEX 4Dage 2

II. PROJECT FINANCING PLAN (SUMMARY)

Equity 143.8 0.7 144.5LT Borrowing - World Bank - 221.7 221.7Medium Term Borrowing (BNI 46) /d 58.1 - 58.1ST Borrowing (BNI 46) 20.0 - 20.0

Total Financing Required 221.9 221.4 444.3

III. DETAILED FINANCING PLAN

Gresik Restructuring Component

Equity (Gresik) 107.0 - 107.0LT Borrowing - World Bank - 136.1 136.1Medium Term Borrowing (BNI 46) 58.1 - 58.1ST Borrowing (BNI 46) 20.0 - 20.0

Subtotal 185.1 136.1 321.2

Optimization Component

Equity (Four Fertilizer Companies) 36.6 - 36.6LT Borrowing - World Bank - 85.6 85.6

Subtotal 36.6 85.6 122.2

Studies Component

Equity (Five Fertilizer Companies) 0.2 0.7 0.9

Subtotal 0.2 0.7 0.9

Total Financing Required 221.9 222.4 444.3

la Based on prill alternative.lb Contingencies only on modernization of Gresik's existing plants./c Incremental working capital for optimization component negligible./d Bank Negara Indonesia 1946.

AS5IEOctober 1990

I

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Potrokimia Gresik Restructuring Component

Detailed Cost Estimtes(t million)

Year I Year 2 Year a Year 4 Total

Local Foreign Total Local Foreign Total Local Foreigr Total Local Foreign Total Local Foreign Total

1. Petrokisis Gresik Ammonia/Urea Facilities

Amonis prccess liconsor - 11.0 11.0 - 65.8 55.8 - 22.3 22.8 - 4.0 4.0 - 93.1 98.1

Urea process licensor - a.8 3.8 - 20.0 20.0 - 8.7 8.7 - - - 32.5 32.5

Civil works and erection 12.2 - 12.2 E9.6 - 59.8 25.3 - 26.8 3.4 - 3.4 100.5 - 100.5

Creelk-supplied equipmnt 5.0 - 5.0 6.0 - 5.0 6.0 - e.o - - - 18.o - 16.0

Consulting service - 0.2 0.2 - 0.8 0.8 - 0.2 0.2 - - - - 0.7 0.7

Subtotal 17.2 15.0 82.2 84.6 78.1 140.7 31.3 31.1 62.4 3.4 4.1 7.5 118.5 126.3 242.8

Working Capital - - - 20.0 - 20.0 - - - - - - 20.0 - 20.0 0

Interest during constr. 1.8 - 1.3 9.6 - 9.6 19.2 - 19.2 12.6 - 12.6 42.8 - 42.6

Total Cost L! 18.5 16S0 a3.5 94.2 7e.1 170.8 S0.5 31.1 81.8 1S.9 4.1 20.0 179.1 126.8 305.4

2. Petrokimis Greslk PlantModernizationEquipmsnt and Civil works - - - 1.0 8.0 7.0 1.0 2.6 3.6 - - - 2.0 8.5 10.6

Consulting Services - 0.2 0.2 - 0.1 0.1 - - - - 0.3 0.8

Physical Contingency - - - 0.1 0.8 0.4 - 0.1 0.1 - - - 0.1 0.4 0.5

Price Contingency - - - - 0.3 0.3 0.1 0.8 0.4 - - - 0.1 0.6 0.7

Subtotal - 0.2 0.2 1.1 6.7 7.8 1.1 2.9 4.0 - 2.2 9.8 12.0

Interest during constr. - - - 0.8 - 0.8 1.5 - 1.6 1.7 - 1.7 3.8 - 3.8

Total Cost - 0.2 0.2 1.7 8.7 8.4 2.6 2.9 .S 1.7 - 1.7 6.0 9.8 15.8

Total Component Cost 18.5 15.2 33.7 96.9 82.8 178.7 53.1 34.0 87.1 17.6 4.1 21.7 es.L 136.1 321.2

Lf No pric, or physical contingencies duo to firm price contracts.

ASSIEOctober 1990

- 82 -

ANNEX 5-2

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

PUSRI II Urea Optimization Project - Capital Cost Estimates(million US$)

Local Foreign Total

Equipment, mat?rials and spares 1.00 15.16 16.16Freight, handl.ng and insurance - 1.07 1.07

Subtotal 1.00 16.23 17.23

License and engineering services - 3.19 3.19Erection and commissioning 6.29 - 6.29Other costs 0.53 - 0.53Consultants services 0.25 0.25

Total Base Cost Estimate (BCE) 7.82 19.67 27.49

Physical contingency 0.39 1.12 1.51Price contingency 0.62 1.72 2.34

Total Installed Cost 8.83 22.51 31.34

Interest during construction 4.97 - 4.97

Total Financing Required 13.80 22.51 36.31

AS5IEOctober 1990

- 83 -

ANNEX 5-3

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

PUSRI Effluent Treatment Facilities(million US$)

Local Foreign Total

Equipment, materials and spares 0.80 2.30 3.10

Total Base Cost Estimate (BCE) 0.80 2.30 3.10

Physical contingencies - 0.11 0.11Expected price increases - 0.17 0.17

Total Installed Cost 0.80 2.58 3.38

Interest during construction 0.6q - 0.64

Total Financing Required 1.44 2.58 4.02

AS5IEOctober 1990

- 84 -

ANNEX 5-4

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Kaltim I Optimization Project - Capital Cost Estimates(million 'IS$)

Local Foreign Total

Equipment, materials and spares 3.46 26.98 30.44Freight, handling and insurance 0.35 2.61 2.96

Subtotal 3.82 29.59 33.41

Consultants Services - 0.?5 0.25License and engineering services 0.05 2.94 2.99

Total Base Cost Estimate (BCE) 3.87 32.78 36.65

Physical contingency 0.19 1.67 1.86Price contingency 0.30 2.61 2.91

Total Installed Cost 4.36 37.06 41.42

Interest during construction 7.80 - 7.80

Total Financing keq[uired 16.16 37.06 49.22

ASSIEOctober 1990

- 85 -

ANNEX 5-5

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Kujang Optimization Project - Capital Cost Estimates(million US$)

Local Foreign Total

Ammonia converter modification 0.53 1.95 2.48Hydrolyzer - 1.50 1.50Steam superheater - 0.40 0.40Stack heat recovery - 2.10 2.10Carbonate flash - 0.50 0.50Air compressor - 1.00 1.00Reformer tube replacement 1.30 3.70 5.00Reformer lining 0.20 - 0.20Consultants Services 0.25 0.25

Total Base Cost Estimate (BCE) 2.03 11.40 13.43

Physical contingency 0.10 0.55 0.65Price contingency 0.08 0.74 0.82

Total Installed Cost 2.21 12.69 14.90

Interest during construction 2.53 - 2.53

Total Financing Required 4.74 12.69 17.43

ASSIEOctober 1990

- 86 -ANNEX 5-6

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

PIM Optimization Project - Capital Cost Estimates(million US$)

Local Foreign Total

Equipment, materials and spares 0.57 8.01 8.58

Subtotal 0.57 8.01 8.58

License and engineering services 0.31 1.19 1.50Erection land commissioning 0.90 0.15 1.05Consultants services - 0.25 0.25

Total Base Cost Estimate (BCE) 1.78 9.60 11.38

Physical contingency 0.09 0.44 0.53Price contingency 0.13 0.66 0.79

Total Installed Cost 2.00 10.70 12.70

Interest during construction 2.50 - 2.50

Total Financing Required 4.50 10.70 15.20

ASSIEOctober 1990

- 87 -ANNEX 6

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Estimated Disbursement Schedule for Bank Loan la(USS million)

Standard Profilefor Asia Region -

Bank Disbursement Industrial ProjectsFY semester Semester Cumulative Percent Percent

FY91III 22.2 22.2 10 0

FY92I 25.1 47.3 21 3II 30.0 77.3 35 6

FY93I 30.0 107.3 48 14II 35.0 142.3 64 26

FY94I 20.0 162.3 73 46 FII 17.0 179.3 81 58

FY95I 15.0 194.3 76 70II 10.0 204.3 92 78

FY96I 8.0 212.3 96 86II 5.0 217.3 98 91

FY97I 3.0 220.3 99 98II 1.4 221.7 100 100

/a Completion Date: June 30, 1997Closing Date: December 31, 1997

- 88 -

ANNEX 7-1

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Financial Projection AssumptionsGresik Ammonia/Urea Investment

1. Financial projections have been estimated at two basic price levels:(a) the base case, with and without project (Annjxes 7-2 and 7-3) with 1990prices; and (b) with 1990 prices escalated, with project (Annex 7-4) asfollows:

2. Production estimates are as follows:

1989 1980 1991 1m 1993 1994 1996+…------------------------------------ tons ---- - - - - - - - - - - -

TSP 1,200,000 1,200,000 1,220,000 1,220,000 1,220,000 1,220,000 1,220,000AS 882,000 600,000 660,000 660,000 660,000 660,000 660,000Urea (begged) -- -- -- -- 10,000 460,000 460,000 _

3. Main product base case prices (Annex 7-3) are as follows:

(Actual)1989 1990 1991 1992 1993 1994 1995+---------------------- (US$/ton) ------------------------

TSP 215 215 215 215 215 203 203/aAS 128 128 128 128 128 117 1177iUrea (bagged) -------- No production -------- 145 145 1457h

/a Assumes border prices used as basis for 1994 and 1995+.7h Border prices used as basis for 1993. Price for subsequent years

maintained at 1993 border price.

4. Main product 1989 escalated prices (Annex 7-4) assume the same unitprices as above, but have been escalated at 5 percent per year.

5. Projections of operating costs are based on Gresik's 1989 actuals.Natural gas is priced at US$2.0 MHBtu.

6. Escalated projected financial statements of Gresik (Annex 7-4) havebeen inflated at 6.5 percent for 1990 and 1991, anc 6 percent thereafter forlocal costs, and 3.6 percent for foreign costs except for fixed charges suchas depreciation and interest.

INDOESIA - FERTILIZER RESTRUCTURING PROJECT

PT PETROKIHIA CRESIK

ACTUAL AND PROJECTED INCOME STATREWST 1986-1999 I1THOUT PROJECT

(Rp Billion)

- CUL----------- -------------PROJECtED---------------------------------

S 1967 19 6t 1969 1990 1991 1992 1993 1996 1995 1996 1997 19M 1999

_. _. ---- .... ---- ---- _-- _ ---- --- --- --- ---- __ _ _

let *.1. 451.S 533.7 537.9 631.6 677.0 719.1 711.9 717.9 616.5 674.5 674.5 674.5 676.5 614.5

cost Of Good. Sold 353.2 '0'.0 *5S.7 522.0 545.3 563.2 561.6 566.5 513.6 508.2 588.2 588.2 5"6.' 5"8.2

____. --- __ _ _ __ _-- ---- _ ----- ----- ----- -- - -- - -- - ----- ----- _ __

Crsos Fgotls 114.9 129.7 19.2 109.6 131.7 155.9 156.3 151.6 100.7 66.3 86.3 66.3 66.3 16.3

4perat es Lupeoea

Nbr.tLaS gEapeme 6.6 6.7 11.6 11.2 12.6 13.6 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1

^.nsrsl & Ai n. 11.7 11.9 13.0 11.3 9.6 15.6 16.4 18.9 19.8 20.3 20.3 20.3 20.3 20.3 OD

Interest bapeas. 25.9 3S.0 66.3 35.0 29.6 27.0 25.3 23.8 22.3 21.0 20.2 19.5 16.9 16.6 I

Depreclatien 32.1 53.6 35.2 36.3 36.3 30.1 31.6 27.4 20.5 6.3 6.3 6.3 6.3 6.3

Total Opecatlas 3mpg.w. 76.3 61.4 104.1 93.6 87.7 *6.1 80.6 85.2 77.7 62.7 61.9 61.2 64.6 60.3

let 4ecrat1ag InoSs 56.6 42.3 -24.9 15.6 66.0 69.6 67.9 66.2 23.0 23.6 24.6 25.1 25.7 26.0

Ostht iPwl.1tI-Loss 6.6 11.4 27.3 14.1 7.5 6.9 6.3 6.7 9.1 9.6 10.3 10.5 11.1 11.6

E nbLps 2 fer. Tames 63.0 53.7 2.6 29.7 51.5 76.7 76.2 76.9 32.1 33.2 34.4 35.6 36.8 37.6

1m 6 .0 15.9 0.0 11.2 16.0 26.8 26.7 26.2 11.2 11.6 12.0 12.5 12.9 13.2

Samiasa After Tame. n 9.0 37.6 2.6 16.5 33.5 49.9 69.5 68.7 20.9 21.6 22.4 23.1 23.9 24.6

0 s

1/ projected in 1990 values. 0I

Without project. no escalation, border prices starting in 1994 with tsp end *r. 4

L}FPI8

INDONESIA - FERTILIZER RESTRUCTURING PROJECT

PT PETROKINlA GRESIK

ACTUAL AND PROJECTED FUNDS FLOW STATEIIENT 1986-1999 - WITHOUT PROJECT

(Rp Billion)

- -----ACTUAL--------- ------------------------------------ PROJECTED-11-------------------------------------

SCUICES 190 1967 1906 1989 1990 1991 1992 1993 1994 1995 1996 199 199 1999

MNt nom after tax 39.0 37.6 2.4 18.5 33.5 49.9 49.5 '8.7 20.9 21.6 22.' 23.1 23.9 24.4

Depreclation 32.1 $3.6 3S.2 36.3 36.3 30.1 31.6 27.4 20.5 6.3 6.3 6.3 6.3 6.3

Paid-la Capital 1.6 24.5 35.3

LAoq& Tero Debt 4.8

Total souace* 72.9 96.1 71.7 54.8 69.8 60.0 81.1 76.1 41.4 27.9 28.7 29.4 30.2 30.? 0

- - _ - - - - _ -_ - - - - o

APPLICATION

lve*t at 1.6 6.4 6.7 0.8 2.1 0.1

Pixed *asets 8.0 9.5 17.4 5.9 7.0 7.0 6.6 7.0 7.0 7.0 7.0 1.0 7.0 1.0

Inaoece tn Cmatwuct iot

to ?Posweaa 0.6 1.1 (4.4) 1.9

Iocreane to Otbhe Aasare. 0.6 6.6 (0.5) (2.0) (1.6)

Door"" is, Loon term Debt 6.6 13.7 24.0 18.0 15.7 15.6 13.9 9.7 8.3 8.3 4.1

Diwidenad,Doi2smae 7.5 39.0 31.8 1.9 11.7 17.5 17.3 17.0 7.3 7.6 7.8 8.1 8.4 8.S

Sub total 24.9 76.5 57.0 32.5 38.8 40.3 41.5 36.3 24.0 22.9 23.1 19.2 15.4 IS.1

Incaro I in orking Capital 48.0 19.6 20.7 22.3 31.0 39.7 39.6 39.8 17.4 5.0 5.6 10.2 14.8 15.2

Total Application 72.9 96.1 77.7 54.8 69.8 80.0 61.1 76.1 41.4 27.9 28.7 29.4 30.2 30.7

_---------------- - _,_. s--' - '

11 PRCJLCtED IN 1990 VALUES

O% "

BRWPSA

IIDOIESIA - FERTILIZER RESTRUCTURING PROJECT

PT PETROKINIA GRESIK

ACTUAL AND PiOJECTED BALANCE SUREM 1986-1999 - WITHOUT PROJECT

(Rp BILion)

-ACT----------- L-------------------------------- PROJECTED-/ -- - -------------------------------

ASSETS 19 193" 1988 1989 1990 1991 1992 199 1994 1995 1996 1997 1e 1Y99

Current assets

Cash 0.6 S.) 6.3 1.3 42.5 83.2 124.4 160.5 178.2 184.3 188.9 191.1 206.1 221.2

cmivablea 239.5 314.0 590.1 456.0 410.0 440.0 440.0 440.0 440.0 440.0 440.0 440.0 140.0 440.0

prcepad epenses 5.9 9.1 11.4 7.2 7.2 7.2 7.2 7.2 7.2 7.2 1.2 7.2 7.2 7.2

hvanterles 82.0 $9.1 101.4 153.2 153.2 153.2 153.2 153.2 153.2 153.2 153.2 153.2 153.2 153.2

totel current assets 331.0 412.7 709.2 617.7 642.9 683.6 724.8 760.9 778.6 784.7 789.3 791.8 806.5 821.6

laveat_mte 11.2 17.6 24.2 25.0 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 $2.2

lVIsd Assets

LOW 12.2 12.1 12.4 12.4 12.4 12.4 12.4 12.1 12.4 12.4 12.4 12.4 12.4 12.4

Ppeporty. plant

a 9"&pUoat 326.7 336.0 355.4 361.1 370.1 37.1 1 384.1 393.4 400.1 406.1 414.1 *21.1 *28.1 1.5.1

Lessai4preltalan -121.5 -153.2 -193.4 -226.8 -263.0 -294.0 -325.6 -393.0 -373.5 -379.8 -386.2 -392.7 -396.5 -405.1

Nbt f1ud *asets 219.4 195.2 177.1 141.0 119.6 95.8 71.2 52.8 39.0 38.7 40.3 40.8 *1.7 42.4

C.nstructlon in Progcros 4.9 6.0 1.7 3.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 o

Other Assets 6 0 12.0 12.3 10.3 12.3 12.3 12.3 12.3 12.3 12.3 12.3 12.3 12.3 12.A

Total Ascsto 52.5 644.3 924.8 803.6 8008.8 825.5 862.1 859.8 863.7 869.5 8S5.7 818.1 894.3 910.1

_ ._ _ - . _ . ,,,,, ,,,,, _ , ,, ,.I._ ._, ......... .....

I Z~~~~~~~~~~~~~~~~~~~~~~~M

LI*DILITIES i EQUITV

Curteat Llablities 212.9 275.1 SSO.S 437.2 *37.2 437.2 437.2 *37.2 437.2 437.2 437.2 431.2 4)7.2 437.2

Loms Tenm Debt Is.0 119.) 124.2 100.1 83.5 67.8 S2.2 38.3 28.6 20.3 12.0

Share Capital 150.6 150.0 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2

bitimed Eaminga 16.6 99.9 64.6 101.1 122.9 155.3 187.5 219.1 232.7 246.8 261.3 276.3 291.9 301.1

Sub-total Bquity 226.6 249.9 249.6 266.3 268.1 320.5 352.7 384.3 397.9 412.0 426.5 441.5 457.1 472.9_ _ _ ----- ----- ----- ----- ----- ----- ----- ----- -----

Totol Liablhities. Equity 572.5 644.3 924.8 603.6 808.8 625.5 842.1 659.8 863.7 869.5 87S.1 678.7 *94.3 910.1 °

1i Projocted data in 1990 values

OS

014P-

lbN

INDONEsIA - FwILUU Es SIEUS USJ11

Pi PETIRSCIIA GV.IM

ACtUAL AM FPJECTID ICOIE STATST@8 1914-109 - WITH FIOECT

(R-LDi I I ion)

.----.-.-- ACwA ----------------- ---------------- ----- - ------------- F @ 11ECE- /--------- ----- ----- ---- --- ----- -- ----- -

1_W loI7 19 1 1990 1901 1992 193 194 19115 1996 I97 190 199

- --- --- _..___. __. . .__._. --- --- --- ... --- --- --- _----____ _ __ _ __

No$ Sales 41. 1 M.7 647.0 63.4 677.0 719.1 711.9 771.9 604.0 604.0 604.0 004.0 604.0 S04 0

Cost 6 am" Sold SM. 491.9 463.6 832.0 546.3 6s3.2 6S1.6 5317.s 63.0 60.0 606.0 60.0 6060 we 0

o0ee P,fit 117.0 111.6 02.4 109.4 131.7 16. 9 156 3 234.1 211.0 196.0 196.0 196.0 196.0 596 0

Opraime Empeao

Shrh.tle ESpesee 4.6 *.7 I1.$ 10.0 U3.0 14.3 Is.9 i5.9 15.9 16.9 1.9 15.9 IS 9 159

Omoral * Adeil. £3.0 14.7 16.2 12.6 1a.7 18.4 59.3 20.3 21.3 21.3 21.3 21.3 21.3 21.3

jebevt Eaee 25.9 0S.0 44.S 6.0 20.4 27.0 26.3 28.8 22.3 21.0 20.2 19.5 56.9 16.4

Add 1.6 1.3 4.2 16.1 36.5 56.4 47.6 37.6 30.7 26.6 22.5

woeciatie, 32.1 33.6 6.2 3.8 86.6 30.1 3l.6 36.7 40.9 27.7 27.7 27.7 27.7 27.7 W

Toloe 1eretlie Ebpee"e 76.4 4I.2 107.3 ".4. 96.7 *4.0 110.4 137.1 136.6 136.6 122.6 115.1 110.4 506.0

No rtie Income 31116.6 42.8 -24.9 16.6 86.0 61.9 45.9 97.0 64.2 62.6 73.6 61.0 86.7 90.1

O*e P.od&/_-IO, 4.4 11.4 27.8 14.1 7.6 7.9 8.3 6.7 9.1 9.6 10.0 10.5 11.1 11.6

Eaue1_ llefor* Tome 48.0 53.7 2.4 29.7 42.6 69.8 64.2 106.7 63.3 72.2 ".6 . 91.6 9.6 101.?

Tlm., 4.0 1. 9 0.0 11.2 14.9 24.4 19.0 S7.0 22.2 26.3 29.2 32.0 33.9 36S

Otl1r Tomes

Earaiee After Tomes 19.0 37.6 2.4 16.6 27.6 45.4 36.2 U.7 41.1 46.0 64.S S9.5 42.9 66.1

AfWte Te1n bbelege/Sel.e 0.09 0.07 0.00 0.06 0.04 0.06 0.05 0.09 0.06 0.06 0.07 0.07 0.00 0.06 'V

l Oerallag Incomes/lm, 0.0o 0o.01 -o.0o0 0.02 0.06 0.09 0.06 0.13 0.07 0.06 0.09 0.10 0.11 0.11 D

1le*ret Covereg 8.9 3.7 1.6 2.9 3.6 4.2 3.0 3.3 2.3 2.6 2.0 3.4 3.7 4 1 X

a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-ONUI" ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ O

INDONESIA - FERTILIZER ENRLS1RALIN PROJECT

PT PEIROKINIA RlESIK

ACTUAL AM PROJECTED ROS FLOW STATElT £86- 19 - WITH PRJECT

(R0 IlXi in)

__ - ------ _ _ _ _ _ _ __ ---------- ----------------- - -------- FROETDlO /- --- -- ---- ----------------------------------- ~ ~~~ ~~ ~

lw low 1a la Iow lin 10,2 1£93 1994 1a99 196 19"? M9 1999

atA icoam, after ea .0 87.0 2.4 3*.. 27.0 45.4 3S.2 6.1 41.1 40.9 64.3 69.5 62.9 66.1

eprociatia U1.S U.O 5.2 U.1 3.3 z0.1 31.6 30.7 40.9 27.7 27.7 27.7 27.1 21.7

ais-l Copital 1. U.S 3.

L_e Ters Sub 4.0

1= to" 27.0 IJ7.0 64.0 7.4

"W. Te LMa 1_7.3 31.0 33.6 21.9

*bA. Cap. I e 30.0

Total inrcea 72.9 9S.1 77.7 04. 100.2 20.3 104.4 in.7 32.0 74.0 32.0 07.2 00.6 3.0 I

g1wa _te* 1. .4 0.7 0.7 2.1

fi m* Amate 0.0 9.1 17.4 7.0 7.0 7.0 0.0 4311.0 7.0 1.0 7.0 i.0 7.0 7.0

locrea_s ir Camusttic 0.6 1.1 -4.4 30.0 263.3 112.3 -4-.6

umeem_ i. other A-i 0.0 0.0 -0.5 -I.e

Suer. is aietia. LT et J.0 13.7 22.0 *0.0 16.7 16.5 13.9 9.7 0.3 0.3 4.1 0.0 0.0

Seer. i1 i_ Los 22.7 22.7 22.7 22.7 22.7

B O r. d. Tie L*"e 31.3 37.3 0.0

Saee. is V.C. Low 36.0

Owwide . 0.a.se.Cap. lat 7.0 36.0 37.0 2.J a.7 19.a 36.6 23.9 14.4 16.4 19.0 20.0 220 23.1

Sub bateS 24.0 76.3 e7.0 r.# 1.0 295.3 172.1 6.0 ft.4 91.7 07.0 54.0 51.7 62.6 20

laecross is Wabilg Capital 45.0 19.6 20.7 37.2 16.4 -16.0 -15.7 51.1 13.0 -37.1 -. 0 22 309 4.0 X

_ ~ ~ ~ ~ ~~ - - --- --- --- --- --- ... --_

--- .... --- _

Total Applieatieo 72.9 96.1 77.7 54.0 106.2 280.3 156 4 133.7 33.0 74.6 2 0 67 2 90 6 93 6 L

.5. .... .... .... .... ..... . 5... ... . ...

la lo9 pricee

_um calcuaeti,a r.e. bhsiaim 101.1 122.0 168.1 147.7 192.5 219.2 249.7 286.0 323 7 364 6

not iacoe 27.4 45.4 35.2 68.7 41 1 46.9 54.3 59.5 62 6 66.1

jd,.,deede. hagu. cm*. ik. -6.7 -19.9 -35.6 -23.9 -14.4 -1U.4 -19.0 -20.S -22.0 -23 1

NW . .E. 122.0 148.1 141.7 192.5 219.2 249.7 265.0 323.7 364.6 407 5

0

P,16

'.

INDONESIA - FRTILIZE3 AESTSJCTlfi1 FRlOJiT

PfT PETWIDIZA WIESIK

ACP.ML NO PROJECTED 1AA1CE 1EET 19611-199 - ITH iOJECT

(RH ail I ion)

ASE

______ - - -------------- --------------__-----,----- --------I'ROJECTiD-1/ -----------------------------------------

536 69W 19w 199 l9o0 1991 IC92 1994 199 to"6 A99 1996 1997

Currool. Asms.

Cook from OperaIiou 0.6 0.5 6.S 1.S 2.9 -16.1 16.7 -12.9 -131.5 -49.6 -S6.6 -26.9 12.7 63.6

Receles. 31.1 814.0 tO.1 46611.0 475.0 476.8 475.6 41n.6 46.0 476.6 417.0 415.8 415 6 4756

Prwead Elap... S.. *.1 11.4 7.2 4.8 1.6 7.2 1.2 1.2 1.2 11.4 11.4 It 4 it 4

Iav.ebr).e 1.0 6.1 301.4 116.2 160.9 11S.9 1n.a 200.3 220.s. 220.o 320.3 2.3 2.3 220.3

Tol.I Carr"% Ase" S1U.0 412.7 706.2 S17.7 66S.4 6M.4 621.6 670.4 665.6 6W.7 646.7 60.6 720.2 761.1

NO

11.2 17.4 24.2 26.0 82.1 32.1 82.1 S2.1 82.1 82.1 82.1 32.1 82.1 32.1

Fined hos

Load 12.2 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4

Pro..tv. P1.14

A aw515 M.r 6.0 116.41 861.4 166.4 871.4 64.0 821.0 M.0 816.0 042.0 69.0 816.0 663.0

L_,esIAu 0.pr.cimki.a -121.6 -186.2 -110.4 -M.4 -2-.1 -298.2 -824.6 -862.4 -0.1 -417.0 -44.6 -41.2 -600.9 -52m.6

lbs fined _mbe 216.4 I66.2 711.4 147.0 117.1 94.6 n1.6 471.0 561.8 42.4 06.9 8.2 67.56 346.

C_uetruc* 1. Prla r_se 4.9 6.0 1.7 8.6 46.8 816.6 426.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0

*t&., AS. 6.0 12.6 12.8 10. 10.3 10.8 10.8 10 0.8 10.3810..8 10.3 10. 10.

Total AseS. 512.5 64.3 924. 608.61 672.0 1060.0 1161.6 1165.4 1141.6 1127.7 1102.0 1113.2 1132 1 1152 3

eas ---. ace .a... a... .. a .... .. .. . . ease. .e. Ce. _ae 5555.. .. .. ....UW

U * *__-

LIABILITIES A EWIIW

CurreB L;ubilt;.ee 212.9 27S.1 560.0 4)7.2 459.1 459.1 459.1 459.1 459.1 459.1 459.1 459 1 459.1 459.1

Lme Tore 0*1 18.0 119.3 124.2 100.1 1268. 315.6 39.6 369.0 236.0 25.7 192.7 165.2 143.2 120 5

Shote Cw&a.l M. 1.0 SU6.1 166.2 I66.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 365.2 16.2 165.2

ose IA" Eformias 76.0 61.6 36.4 103.1 122.0 140.1 147.7 192.5 219.2 24.9 205 .0 323.7 3 6 407.5

Sub-T5el lueiu 20.6 9.0 246.0 216.8 207.2 313.3 312.9 357.7 30.4 414.9 430.2 400.9 529.3 5711.

Tot.l Liabilities. fjuit, 612.5 344.0 05.0 05.6 072.0 1010.0 1161.4 1105.0 1141.5 1127.7 1102.0 1113.2 1132.1 1162.3 1

CurtainS m.,.IejCulrr. imb. 1.0 1.5 1.3 1.4 1.4 1.4 3.4 3.5 1.2 1.4 1.4 I.5 1.6 I 1

04%/Equity Relic 0.001 0.471 0.497 0.370 0.440 1.007 1.245 1.02 0.776 0.011 0.420 0.338 0.270 0.230

is low0 prie, With Project

05

LA

IMINESIA - VFRllNIZI RESTMUCTUlIN# PRfOJECT

PT PEIAOKIHIA 0K

ACTUAL AD PROJECTED INCOME STATMENT 1986-1999 - WITH 'HOFJT

(Re DiIIion)

_____ L _ __-- _-_- __-_-_--_-_-.- ---- '-------------- - ----- - lO JEC1 ED-I / - - ---- - ---- --- -- -- -- -- -- - ---- -- - ---- ---

J1 SWo lw Iwo8 1990 1991 1992 1993 1994 1995 196 1991 199s 1999

_-- ... ... --- --- _--- _ ____ _ -___-- --- --- ---- ---- ---- --- -- - - -

Not Seles 4*1.1 683.7 ur.9 "I.4 677.0 754.6 101 3 096. 980.? 1030.0 1001.5 1136.6 1192.3 12619

Coo of cood Sold 54.1 401.2 43.5 5.0 045.8 590.0 620.5 6US.9 122.1 175.9 015.4 GM.7 897 4 943.0

c. Profi tI 17.0 322.5 09.4 19.4 151.7 164.4 170.0 260.7 219.0 264.1 265. 278.9 294 9 30D.1

operalime ELp.eoom I

hrboting E*pema. 5.6 5.7 11.6 10.0 33.0 I5.0 19.2 20.1 21.1 22.2 23.3 24.6 23.1 21.0 %

CGaeral i Adiag. 13.0 14.1 16.2 12.1 I6.7 19.9 21.4 26.7 26.4 29.0 $1.3 3J.9 34.5 36.3

Interet. Sapema 23.0 82.0 44.3 35.0 29.4 27.0 25.X 21.6 22.3 21.0 20.2 19.6 31 9 10.6

Addd l 1.3 9.2 18.3 3S.5 85.4 41.6 a7.6 30.7 26 5 22.5

Depre.ci.ioe 82.1 38.5 36.2 86.3 86.8 30.1 31.5 S0.7 40.9 27.7 21.7 27.7 27.? 21.7

TSol Opreli l Eapegee 15.4 0.2 101.8 93.0 99.7 100.5 117.7 145.0 169.2 145.8 139.9 186.2 133.4 132.2

Me iaeseife g ome 1111.5 42.3 -24.0 16.5 86.0 54.0 18.1 11.0 *9.a 305.0 121.2 143.1 361.6 116.9

DIMr Profi&-L.e 4.4 11.4 27.3 14.1 7.5 7.9 0.3 *.7 9.1 9.5 10.0 10.1 11.1 11.5

bare ie motors tea.. 48.0 03.7 2.4 ".7 42.6 71.0 61.4 i22.6 95.9 116.4 105.2 164.2 312.6 107.5

Zecome Tear 4.0 16.9 0.0 11.2 14.9 25.2 21.6 42.9 34.6 40.4 47.3 64.0 60.4 S6

O Ier Temo

£Erfie5 Aflt. Team 99.0 87.5 2.4 U.5 21.6 45.0 39.9 79.7 64.8 75.0 *7.9 100.2 112 2 121 9

_ _. __n a_. _ _. an a.. n. Sa a..

Sal'.. me~~sam

h$^ {~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~143

After Tax Ernings/Sol"- 0.09 0.07 0.00 0.03 0.04 0.06 0.05 0.09 0.07 0.07 0.0 0 09 0 09 0 10 a a

0.eratine Incoe./Selee 0 09 0.0 -0.05 0.02 0.0 0.06 0.07 0.18 0.09 0.10 0.12 0.13 0 14 0 14

Inf l.r fCoverego 3 9 3 7 1 8 2.9 3 6 3 8 3 1 3.6 2.3 9.1 3.8 4.6 5 4 6 2

1/ S-l. A.o.no.es cosat of good, maid and oparating apxPns0. 10a

deprclt.on 08 4calal.* afl, 19809

IffO&SIA - EiEtiLlIHN k51141KRAIC MI1JLCT

P1 PElRflIIIA WWSIK

ACTlAu AN1 PlOJECl) FRlWS fLOW STATEIEAIT 1906-1999 - WIT" FROJfCT

stop 0.11sa)

14 NW to " 909 1eow I99l 1992 19 3914 i9 1996 I97 199 M99

_ ~ ~ ~ ~ ~ ~ - - --- -- - --_-

---- ... . -- - - - - - ... ---

Ns% ;_m ofttr ta. 8.0 $7.0 2.4 10.5 27.6 4 S 39.9 79.7 6.3 71.0 67 9 100 2 112 2 124 9

0..roiatio' S2..1 88.1 88.2 16.8 36.3 30.1 316 36.7 40.9 27.7 27.7 27 7 27 7 27.7

Paid-la Caital 1.0 060 81.5

Lane. 1.,.- Sub 4.0

NW Laos 21.0 187.0 56.0 7.4

Mud. Ter- Law 17.8 81.0 33.6 21.9

wk. Cap. La" 36.0

To1 l aur." 72.9 96.1 77.7 ".0 1.2 261.7 161.1 147.7 101.2 102.7 115.6 127.9 139 9 1b2 6

'0

AMVLICATNN

lawebewto 1.0 6.4 6.7 5.T 2.1

Fid a" es" 0.0 9.5 17.4 7.0 7.0 7.0 0.6 437.0 7.0 7.0 7.0 7.0 7.0 7.0

lireew is Cmaostructik 0.6 1.1 (4.4) S .0 263.3 112.3 (42.6)

mcImer to 1ge Ao eute 0.6 6.0 (0.1) (1.0)

Suer. i. Suietiu LT Debt 0.6 13.7 22.0 10.0 I1.7 15.6 1s.9 9.7 0.3 8.3 4.1 0o0 00

S . i W Lae. 22.1 22.7 22.7 22.7 22.1

Ducr, i. Mud. Te Law 87.3 37.3 80.0

DScr. Is W.C. Le. 36.0

DiVliuead. SmA.... Ca. m1 7.5 s9.0 W7.0 2.8 0.7 39.a 55.6 2a.9 22.1 26.3 30.0 81.1 39.3 43.7

Sub ta.I 24.9 70.1 17.0 07.6 91.6 295.3 112.1 88.6 76.5 101.6 96.6 60. M60 13 4 0*:t'i

lacs... i. Working CPital 40.0 19.6 20.7 17.2 to.4 (130) (t 10) 62.1 26.7 1.2 36.0 b9.0 t09 79 2 0 I

--- , -- - - - . . - - . .. .... C

Total pplicatich 72 9 96.1 77.7 "4.6l 10.2 261.7 161 1 141.7 106.2 102.1 116.6 127 9 139 9 b2 6

1/ fLacelad after 1909.

hLuSEO A - Fim ILIM IlESlIUCTlUIS MJET

_____ _______,,____, ___, __ .__ ____ __ ___-----__-------------------------------------- --------- '

PT FfIRMmIN* OMSK

ACTUL 0MO tJKCIW 9ALA8E OM 1966-1OW - VITN PAJKCT

ASMSE

3_ 3W am l 1969 l99 91 1Ola 1993 1994 190 1n l"9 1 1990 I99

Ciurrent AmsIs

Coo fm O ti. 0. 0. .8 1.8 7.6 11.3 00 38.5 8.8 12.7 17.7 1 .2 s 4 144.

.i.gbl.e M.8 84.0 .3 48.0 478.8 460.0 40.6 1.0 &42.3 861.8 66.0 664. 701 4 1428 P'mid I * 8.1 a3-4 7.2 8.8 6.6 7.2 7.2 7.2 7.2 11.4 11.4 11.4 38.4

love O 8.0 6.3 33.4 38.3 1£80.9 181.3 11. 1£90.1 Z0. 128.8 242.9 2.0 281.1 X18 1

.,__. .. _. .,_._ ----- ----- ----- ----- ---- .... ..... -- - -- - -----__ _

Total Correa AiM. 81.0 411.7 708.3 611.? 6831 680.4 874.4 719., 118.8 812.7 874.0 'I3.7 1089 11,0.0

Iwmvuem.s. 81.2 17.6 24.2 16.0 So.a 88.3 I.1 0.8 8.1 82.1 S7.1 S7.1 8.1 8.1

Fi" mo Ass*

L"12.27 U .4 92.4 U2.4 12.4 12.4 U2.4 12.4 12.4 82.4 12.4 12.4 12.4 12.4

A ffi_~ M.7 *.O M.4 W1.4 M.4 37S.4 m4.O W1.0 .- 0 .0 1420 s.0 &"- 86.0

D_1_ eciatie -Ul.& -* -&W.4 -M. -U. a -2.2 -XI4.8 41.4 40. -417.6 -441- -475.2 -00.1 -21.9

"A fi so Mean 2U9.4 196.2 177.4 U47.0 117.7 04.4 71.4 401. 4|0. 4a.4 em.* M.2 MY.& 34.0

C_abnib& ioPooe 4.0 4.0 1.7 3. 4I.~ *14.9 45§.3 2.0 2.0 2.0 2.0 2.0 2.0 2.0

0b As* 6.0 12.0 U2. 10.8 10.3 10.3 10.3 10.1 10.3 I*-& 10.3 10.3 10.3 10.3

T lAe" * n 2. $0.3 4.0 M.S sn2. s 2.3 1214.7 127.2 1271.3 .7- 1S".3 13.S U470.0 INI 2 I*

0

p .

4p,

N . . Pl...

C.ereatL Lmbgil; Os 212.9 215. "0.X 437.2 469.1 462.0 50.1 81.4 87.9 MA8. , 61.2 4.9 670.2 712.1

Laos Ter4 b 1.* 116.5 124.2 100.1 126.6 815.6 369.5 U9.0 2".0 21. 7 1U2.7 16.9 148.2 120.5

stso copilot Ml. 1.0 .2 1".2 *68.2 16.2 165.2 66.2 *65.2 16.2 16.2 166.2 34.2 16.2

*'@ rf_ h7*o . .0 04.6 101.l 122.0 140.5 111.6 209.5 250.2 291.7 54.2 410.8 402.2 51S.4

s.s-;.Ta u.jas, m*1 .e 16.0 1.6 26.8 9.2 814.7 319.0 874.* 415.4 452.9 510.4 604.6 46.4 116.4

1.e1 Liabilil,10. ;i%P .5 .4 M$. M . 1112.8 1214.7 1271.2 1271.8 180.5 1217.3 15.3 1471.6 1871.2

Carrea 4_eto/cWr. limb. 1.6 1.5 1.8 1.4 1.4 1.4 1.8 1.4 1.4 I 4 1.4 1 8 1.6 1.1

0.b oI# bUs O.601 0.410 0.407 0.1 0.440 1.0 1.n CM 0.711 0.66 0..11 0.04 0.210 0.16 0

1/ Pable. taelableo. I.weatwiroo *Aeuseae . o Veer aftr 31dw.

WISh grjeet. eewae". bSe w hrdr " p*e atrtle tt" #or war mdis 104 Pe Mo a_.

1 .S.. S.

- 102 -ANNEX 7-5Page 1

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Petrokimia Gresik Ammonia/Urea Fac t!ities ProjectComparison of Production Volumes, Prices, Costs and Gross Profits

Full Full(1989) production productionBase without withyear project project

1. Gross Profit ComparisonProduction (tons)

TSP 1,200,000 1,220,000 1,220,000AS 632,000 650,000 650,000Urea -- -- 460,000

Total 1,832,000 1,870,000 2,330,000

Unit Prices (Rp/ton) /aTSP 380,991 363,370 363,370AS 226,458 209,430 209,930Urea -- -- 256,650

Revenues (billion Rp)TSP 457.2 443.3 443.3AS 143.2 136.1 136.1Urea -- -- 118.1

Total 600.4 579.4 697.5

Total Revenues/Ton (Rp/ton) 327,729 309,840 299,356

Cost of Production (billion Rp) /b 557.9 566.5 609.2

Cost of Production/ton 304,530 302,941 251,202

Gross Profit (billion Rp) 42.5 12.9 88.3

Gross Profit/Ton 23,198 6,898 26,137

By-Products Gross Profit (billion Rp) 41.8 63.0 63.0

GROSS PROFIT (ALL PRODUCTS) 84.3 75.9 151.3

(a Expressed in 1989 values:USS per Ton (Bagged)

1989 Current Price 1989 Border Price (At Full Production)

TSP US$215 US$203AS US$128 US$117Urea US$116 US$145

/b See page 2 for detaiis.

- 103 -ANNEX 7-5Page 2

a. Comparison of Costs of Production (billion Rp)

(1989) (1994) (1994)Full Production Full Production

Cost of Production /a Base Year Without Project With Project

Natural Gas e US$2.OIMMBTU - - 70.8Ammonia 31.2 32.8 -Fuel oil 21.9 21.9 -Rock Phosphate 151.2 151.2 151.2Sulfur 77.0 77.0 77.0Phosphoric Acid 186.1 193.0 193.0Other chemicals 9.3 9.3 8.0Maintenance materials 20.3 20.3 20.3Wages 17.0 17.0 17.0Bagging 19.5 19.5 25.0Other costs (Depreciation) 24.4 24.4 46.9

Total 557.9 566.5 609.2

/a Expressed in terms of 1989 values.

3. Cash Costs of Production

Cost of Production 557.9 566.6 609.2Less Depreciation (24.4) (24.4) (46.9)

Cash Costs 533.5 542.1 562.3

Difference 20.2

Escalated to 1990 values 21.2

Equivalent US $ (millions) 11.8

- 104 -ANNEX 7-5Page 3

4. Calculation of Revenues - With Proiect

Production (Tons)

1990 1991 1992 1993 1994+

TSP 1,200,000 1,220,000 1,220,000 1,220,000 1,220,000AS 600,000 650,. 9 650,000 650,000 650,000UREA -- -- -- 190,000 460,000

Unit Prices (US$/ton) - 1989 Prices

TSP 215 215 215 215 203AS 128 128 128 128 117UREA --------- (No Production) --------- 145 145

Unit Prices (US$/ton) - Current Prices

TSP 226 237 249 262 260AS 134 141 147 155 150UREA --------- (No Production) --------- 179 187

Revenues (US$ millions) - 1989 Prices

TSP 258.0 262.3 262.3 262.3 247.7AS 76.8 83.2 83.2 83.2 76.0UREA -- -- -- 27.5 66.7

By-products 24.5 35.0 35.0 35.' 35.0

Total 359.3 380.5 380.5 408.0 425.4(Rp billion) 646.7 683.7 683.7 734.4 765.7

Revenues (US$ millions) - Current Prices

TSP 271.2 289.1 3CJ.7 319.6 317.2AS 80.4 91.6 95.6 100.7 97.5UREA -- -- -- 34.0 86.0

By-products 24.5 38.5 40.3 42.6 44.7

Total 376.1 419.2 439.6 496.9 545.4(Rp billion) 677.0 754.6 791.3 896.6 981.7

- 105 -ANNEX 7-5Page 4

5. Calculation of Revenues - Without Project

Production (Tons)

1990 1991 1992 1993 1994+

TSP 1,200,000 1,220,000 1,220,000 1,220,000 1,220,000AS 600,000 650,000 650,000 650,000 650,000UREA -- -- --

Unit Prices (US$/ton) - 1989 Prices

TSP 215 215 215 215 203AS 128 128 128 117UREA -- -- -- -- --

Unit Prices (US$/ton) - Current Prices

TSP 226 237 249 262 260AS 134 141 147 155 150UREA -- -- -- -- --

Revenues (US$ millions) - 1989 Prices

TSP 258.0 262.3 262.3 262.3 247.7AS 76.8 83.2 83.2 83.2 76.0UREA -- -- -- -- -_

By-products 24.5 35.0 35.0 35.0 35.0

Total 359.3 380.5 380.5 380.5 358.7(Rp billion). 646.7 683.7 683.7 683.7 642.4

Revenues (US$ millions) - Current Prices

TSP 271.2 289.1 303.7 319.6 317.2AS 80.4 91.6 95.6 100.7 97.5UREA _ _ __

By-products 24.5 38.5 40.3 42.6 44.7

Total 376.1 419.2 439.6 462.9 459.4(Rp billion) 677.0 754.6 791.3 833.2 826.9

- 106 - ANNEX 7-6

Page 1

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

F.T. PUPUK SRIWIDJAJABalance Sheet - 1986, 1987, 1988, 1989 (Unaudited)

(Rp billion)

As at December 311986 1987 1988 1989

(Unaudited)

AssetsCurrent AssetsCash & S.T. Securities 238.3 371.8 398.1 437.7Other Current Assets 248.5 291.3 311.5 310.8

Subtotal Current Assets 486.8 663.1 709.6 748.5

Investments . 24.4 24.4 25.0

Fixed Assets (net) 163.9 288.3 248.3 230.4

Other Assets 34.4 7.6 6.7 15.2

Total Assets 685.1 983.4 989.0 1,019.0

Liabilities & CapitalLiabilitiesCurrent Liabilities 213.8 344.5 306.9 305.7Other Liabilities 62.6 9.1 5.6 2.9

Long-term debt 97.2 59.3 47.5 33.2

Subtotal Liabilities 373.6 412.9 360.0 341.8

CapitalPaid-in capital 219.2 261.0 261.0 500.0Retained earnings 12.3 309.5/a 368.0/a 177.2

Subtotal Capital 311.5 570.5 629.0 677.2

Total Liabilities & Capital 685.1 983.4 989.0 1,019.0

RatiosNet income/assets, 2 2.2 5.4 7.8 10.0Net income/capital, Z 5.0 9.4 12.3 15.0L.T. debt/equity ratio 113.2 1/9.6 1/3.2 1/20.4

/a Includes asset revaluation surplust 1987: 172.2; 1988: 171.7.

- 107 - ANNEX 7-6Page 2

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

P.T. PUPUK SRIWIDJAJAIncome Statement - 1986, 1987, 1988, 1989 (Unaudited)

(Rp billion)

1986 1987 1988 1989(Unaudited)

Marketing Unit OperationSales 467.7 536.2 683.7 815.7Cost of goods sold 281.6 330.1 438.3 572.1

Gross Profit 186.1 206.1 245.4 243.6

Marketing expenses 172.1 187.0 214.2 236.4

Operating Protit 14.0 19.1 31.2 7.2

Other income (expense) (16.3) 8.0 3.4 (1.7)

Government compensation 2.3 - - -

Marketing unit profit - 2;'.1 34.6 5.5

Production Unit OperationSales 134.3 168.9 174.2 204.4Cost of goods sold 134.7 178.0 188.3 183.5

Gross Profit (loss) (0.4) (9.1) (14.1) 20.9

Other income (expense) 17.7 52.9 78.7 (0.5)

Production unit profit 17.3 43.8 64.6 20.5

Head Office Income - - - 94.4

Consolidated Profit Before Taxes 17.3 70.9 99.2 120.4

Income Taxes 1.8 17.2 21.8 18.7

Net Income 15.5 53.7 77.4 101.7

RatiosNet incomelsales, Z 2.5 7.6 9.0 10.0

- 108 -ANNEX 7-7Page 1

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

P.T. PUPUK KALIMANTAN TIMURBalance Sheet - 1986; 1987, 1988, 1989 (Unaudited)

(Rp billion)

As at December 311986 1987 1988 1989

(Unaudited)

AssetsCurrent AssetsCash & S.T. Securities 8.9 9.5 16.5 10.0Other current assets 89.9 137.9 187.3 257.2

Subtotal Current Assets 98.3 145.2 198.8 267.2

Investments - 0.2 0.2 -

Fixed Assets (net) 687.9 743.0 843.7 771.9

Other Assets 117.8 113.1 95.1 126.2

Total Assets 904.5 1,006.5 1,137.8 1,165.3

Liabilities & CapitalLiabilitiesCurrent Liabilities 94.1 106.6 132.6 155.2

Long-term debt 351.5 124.7 200.1 309.0

Subtotal Liabilities 445.6 231.3 332.7 464.2

CapitalPaid-in capital 458.5 763.9 774.3 655.0Retained earnings 0.4 11.2 30.8 46.1

Subtotal Capital 458.9 775.2 805.1 701.1

Total Liabilities & Capital 904.5 1,006.5 1,137.8 1,165.3

RatiosNet income/assets, Z - 1.1 2.1 2.4Net income/capital, 2 0.5 1.4 3.8 4.1L.T. debt/equity ratio 1/1.3 1/6.2 1/4.0 1/2.3

- 109 - ANNEX 7-7Page 2

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

P.T. PUPUK KALIMANTAN TIMURIncome Statement - 1986, 1987, 1988, 1989 (Unaudited)

(Rp billion)

1986 1987 1988 1989(Unaudited)

Sales 84.2 166.0 232.3 259.6

Cost of goods sold 51.9 107.9 129.2 141.7

Gross Profit 32.3 58.1 103.1 117.9

Operating expenses 16.6 36.4 60.6 80.1Interest expenses 23.8 12.9 14.4 16.5

Operating profit (3.1) 8.8 28.1 21.4

Other income (expense) net 3.3 2.3 3.6 8.4Extraordinary income (expense) 2.5 - (1.2) (1.3)

Net Income Before Taxes (2.3) 11.1 30.5 28.5

Taxes - 0.3 6.7 -

Net Income (2.3) 10.8 23.8 28.5

RatiosNet income/sales, Z (0.2) 6.5 10.2 10.9Operating profit/sales, 2 (9-6) 5.3 12.0 8.2

.~~~

- 110 -ANNEX 7-8Page 1

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

P.T. PUPUK KUJANGBalance Sheet - 1986, 1987, 1980, 1989 (Unaudited)

(Rp billion)

As at December 311986 1987 1988 1989

(Unaudited)

AssetsCurrent AssetsCash & S.T. Securities 72.4 55.9 41.2 40.8Other current assets 51.6 53.4 65.4 54.2

Subtotal Current Assets 124.0 109.3 106.6 95.0

Investments 5.3 9.1 23.8 28.8

Fixed Assets (Net) 36.3 30.2 36.1 37.5

Other Assets 14.1 16.3 11.5 8.4

Total Assets 179.7 164.9 178.0 169.7

Liabilities and CapitalLiabilitiesCurrent liabilities 28.2 22.6 25.7 17.9Long term debt 6.6 - - -Other liabilities 0.1 1.3 1.5 2.0

Total Liabilities 34.9 23.9 27.2 19.9

CapitalPaid-in capital 75.0 75.0 75.0 75.0Retained earnings 69.8 66.0 45.8 74.8

Total Capital 144.8 141.0 150.8 149.8

Total Liabilities & Capital 179.7 164.9 178.0 169.7

RatiosNet Income/Assets 13.2 2.4 7.1 4.9Net Income/Capital 16.4 2.8 8.4 5.5L.T. Debt/Equity Ratio 1/10.6 0 0 0

- 111 -ANNEX 7-8Page 2

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

P.T. PUPUK KUJANGIncome Statement - 1986, 1987, 1980, 1989 (Unaudited)

(Rp billion)

1986 ;987 1988 1989(Unaudited)

Sales 70.7 68.6 80.3 83.1

Cost of goods sold 53.5 57.7 62.5 68.1

Gross Profit 17.2 10.9 17.8 15.0

Marketing expense 2.3 - - -Gen. and Administrative 7.6 7.8 10.4 13.9Interest expense 1.5 1.1 1.8 0.5

Operating Profit 5.8 2.0 5.6 0.6

Other income (expense) net 8.4 8.2 10.5 8.9Extraordinary income 11.9

Net Income Before Taxes 26.1 10.2 16.1 9.5

Taxes 2.4 6.3 3.4 1.2

Net Income 23.7 3.9 12.7 8.3

RatiosNet income/sales, Z 33.5 5.7 15.8 10.0Operating profit/sales, 2 8.2 2.9 7.0 0.7

- 112 -ANNEX 7-9Page 1

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

P.T. PUPUK ISKANDAR MUDA (PIM)Balance Sheet - 1986, 1987, 1988, 1989 (Unauidited)

(Rp billion)

As at December 311986 1987 1988 1989

(Unaudited)

AssetsCurrent AssetsCash & S.T. Securities 51.5 52.2 101.3 65.3Other Current Assets 12.3 13.3 16.4 15.5

Subtotal Current Assets 63.8 68.5 117.7 80.3

Investments - 0.1 0.2 0.3

Fixed Assets (net) 237.5 228.1 221.2 211.5

Other assets 24.9 23.5 22.5 25.3

Total Assets 326.2 320.2 361.6 317.9

Liabilities & CapitalLiabilitiesCurrent liabilities 49.1 34.6 64.4 20.3

Long-term debt 119.7 92.2 98.2 99.6

Total Liabilities 168.8 126.8 162.6 119.9

CapitalPaid-in capital 152.3 184.4 184.4 184.3Retained earnings 5.1 9.0 14.6 13.7 !

Total Capital 157.4 193.4 199.0 198.0 U

Total Liabilities & Capital 326.2 320.2 361.6 317.9

RatiosNet Income/Assets, 1 0.6 1.7 2.6 1.5Net Income/Capital. X 1.3 2.8 4.8 2.4L.T. Debt/Equity Ratio 1/1.3 1/2.1 1/2.0 1/1.9

- 113 - ANNEX 7-9

Page 2

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

P.T. PUPUK ISKANDAR NUDA (PIM)Income Statement - 1986, 1987, 1988, 1989 (Unaudited)

(Rp billion)

As at December 311986 1987 1988 1989

(Unaudited)

SalesUrea - Bulk 80.9 74.2 75.8 69.4Urea - Bagged 8.8 16.6 20.2 25.4

Total 89.7 90.8 96.0 94.8

Other fertilizer sales 2.7 2.0 1.9 2.2

Total Gross Sales 92.4 92.8 97.9 97.0

Cost of goods sold 54.4 54.7 56.0 63.5

Gross Profit 38.0 38.1 41.9 33.5

Marketing expense 3.9 3.2 2.9 3.6Administrative overhead 30.6 29.6 28.7 26.7

Subtotal Overhead 34.5 32.8 31.6 30.3

Other income (expense) net 1.3 0.2 1.5 1.6

Extraordinary income (expense) (2.7) - (2.3) -

Net Income Before Taxes 2.1 5.5 9.5 4.8

Taxes - - - -

Net Income 2.1 5.5 9.5 4.8

RatiosNet Income/Sales, Z 2.3 5.9 9.7 4.9Operating Profit/Sales, 2 3.9 5.8 10.5 3.3

- 114 -ANNEX 7-10

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

GRESIK AMMONIA/UREA FACILITYIncremental Cash Flow for Financial Rate of Return

(US$ million in 1990 prices)

1995 to1990 1991 1992 1993 1994 2006

Incremental Production (tons)Urea (Bagged) 190,000 460,000 460,000

Unit Price (US$/ton) 155 155 155

Incremental Revenues (US$ million) 29.4 71.3 71.3

Incremental Cash Cper. Costs 2.0 (8.0) 11.8 11.8

Capital CostsInvestment 32.2 140.7 62.4 7.5Working Capital 20.0

Subtotal 32.2 160.7 64.4 7.5

Net Cash Flow (32.2) (160.7) (64.4) 29.9 59.5 59.5

Financial Rate of Return (FRR) - 16.6 X (base) (1993 urea border price = $155/ton)

IBRD price projections for Urea - 20.1Z

80Z of IBRD price projections = 15.3Z

Construction period extended by five months (until 1994) = 15.1?

Capital costs increased by 20Z 13.6Z

Lengthened construction period and capital costs increased by 20? = 12.3Z

Existing (1990) internal prices ($125/ton) for urea = 12.2Z

AS5IEOctober 1990

- 115 - ANNEX 7-11

INDONESIA

FERTILIZER RESTSRUCTURING PROJECT

PUSRI OPTIMIZATION SUBPROJECTIncremental Cash FLows for Financial Rates of Return

(US$ million in 1990 prices)

1995 to1990 1991 1992 1993 1994 2006

Incremental Production (Tons)Urea - Bulk 120,500 130,000 180,000 180,000

Unit Prices (US$/ton)Urea - Bulk 125 125 125 125 125 125Ammonia (Input) 100 100 100 100 100 100

Incremental Revenues (US$ million) 15.1 22.5 22.5 22.5

Incremental Oper. Costs (US$ million)Ammonia 6.6 22.5 22.5 22.5Utilities 0.2 0.2 0.2 0.2Maintenance 0.8 1.5 1.5 1.5

Subtotal 7.6 11.6 11.6 11.6

Capital Costs (US$ million) 7.8 14.0 9.3

Net Cash Flow (7.8) (14.0) (1.8) 10.9 10.9 10.9

Financial rate of Return (FRR) = 321.

AS5IEOctober 1990

- 116 - ANNEX 7-12

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

KALTIM AMMONIA/UREA OPTIMIZATION SUBPROJECTIncremental Cash Flow for Financial Rate of Return

(US$ million in 1990 prices)

1995 to1993 1991 199)2 1993 1994 2006

Incremental Production (tons)Urea (Prill & Bulk) 126,225 126,225 126,225

Unit Prices (US$/tonW lUrea (Bulk) 131 131 131 131 131 131

Incremental Revenues*US$ million) - - - 16.5 16.5 16.5

Incremental Oper. Costs - - - 0.7 0.7 0.7

Capital Costs 1.1 10.4 17.5 12.4

Net Cash Flow J(.0) (10.4) (17.5) 3.4 15.8 15.8

Financial Rate of Return (FRR) - 37Z

ASSIEOctober 1990

- 117 -ANNEX 7-13

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

KUJANG AMMONIA OPTMIZATION SUBPROJECTIncremental Cash Flow for Financial Rate of Return

(USS million in 1990 prices)

1995 to1990 1991 1992 1993 1994 2006

Incremental Production (tons)Ammonia 30,000 30,000 30,000

Unit Prices USS/ton 100 100 100 100 100 100

Incremental Revenues (USS million) 3.0 3.0 3.0

Incremental Oper. Costs 0.2 0.2 0.2

Capital Costs - 6.5 8.4

Net Cash Flow - (6.5) (8.4) 2.8 2.8 2.8

Financial Rate of Return (FRR) = 162

AS5IEOctober 1990

- 118 -ANNEX 7-14Page 1

INDONESIA

FERTILIZER RESTRUCTURIN. PROJECT

Assumptions Used in Economic Analysis

A. Capital Cost Estimate

1. The economic capital cost for the various components of the Projecthave been derived from the financial capital cost (in constant 1990 prices) byexcluding the price escalation and interest during construction. There are noduties and taxes included in the financial capital costs and as such there areno adjustments for them in developing the economic capital costs. Theestimates use, conservatively, a standard conversion factor of cne andexchange rate of $1 = Rp 1,830 for converting local costs in US dollarequivalent.

B. Working Capital

2. In the case of the optimization component, the incremental workingcapital would be very small and has been ignored for the analysis. For thePetrokimia Gresik ammonia/urea facilities project, working capitalrequirements have been derived from the financial projections of currentassets and liabilities with the project, assuming adequate operating cashbalances and inventories and are estimated at $20.0 million.

C. Revenues

3. The incremental revenues for the Project will come mainly throughsales of additional outputs of ammonia and urea. The Gresik ammonia/ureaproject will, however, provide ammonia to the existing facilities,substituting ammonia now being obtained from a small fuel oil based plant.The revenues of the existing Gresik facilities are obtained from theproduction and sales of TSP and ammonium sulfate. The economic prices of theabove products have been derived from the October 19, 1989 revision of thecommodity forecasts of the Bank's Commodity Studies and Projections Division.Since Indonesia is a significant net exporter of ammonia and urea, theeconomic prices of these two products are based on projected export (FOB)prices. In the case of TSP and ammonium sulfate, Indonesia is not acompetitive producer and is also a significant net importer of TSP. Theeconomic prices of these two products have been derived on landed cost basis.The ammonia price has been taken as 80 percent of the bulk urea price obtainedby deducting $20 per ton for bagging from the bagged FOB urea price. The FOBammonium sulfate price has been derived, on nutrient basis from the bulk ureaprices, a premium of 25 percent added to reflect consumer preference and thepresence of secondary nutrient sulfur. Additions have then been made forfreight, landing costs and bagging. All the product prices are expressed in1990 dollar terms.

- 119 - ANNEX 7-14

Page 2

Economic Prices of Fertilizer Products($ per ton in 1990 prices)

1990 1995 2000

Urea Bagged FOB 125 195 180Avionia Bulk In ship 84 140 128TSP Bagged Landed 194 243 257AS Bagged Landed 102 138 131

D. Operating Costs

4. The economic value of natural gas for the Gresik ammonia/ureaproject and the Kujang ammonia optimization has been assumed to be equivalentto its fuel oil value. At the projected crude oil prices (in 1989 dollars) of$15.5 in 1990, $15.4 in 1995 and $22.8 in 2000, the economic gas price for theabove two projects will be $2.2/MMBtu in 1990, $2.2/MMBtu in 1995 and $3.2 in2000 and afterwards. The existing Gresik facilities use purchased sulfur,rock phosphate and phosphoric acid. The projected rock phosphate prices havebeen obtained from the Bank's latest commodity projections. The economicprices of the other inputs have been derived taking into account pricelinkages among the various inputs and outputs and are summarized in the tablebelow. In most cases, power and steam are obtained from captive facilitiesand their operating costs are reflected in the natural gas consumption. Thefinancial costs of other inputs have been suitably adjusted to reflecteconomic costs.

Economic Costs of Major Fertilizer Inputs($ per unit in 1990 prices)

1990 1995 2000

Crude oil FOB Bbl 15.5 15.4 22.8Natural gas MMBtu 2.2 2.2 3.2Rock Phosphate Landed ton 71.0 76.0 78.0Sulfur Landed ton 135.0 229.0 241.0Phosphoric Acid Landed ton 530.0 612.0 633.0

AS5IEJune 1990

IMONESIA

FERTILIZER RESTRUCTURING PROJECT

Gresik A onla/Urma Proi ctInt.arar L coa Dl-X -conomic Rat of Return

tua miI Iion in 1vw prices)

1990 1991 1992 1998 1994 1995 1906 1997 1999 1999 2000 2006to

2007

I. Input/Output Prices

Ur" aFOB 125 128 140 1s5 176 196 192 189 186 la 1S0 180Aumonia FOB 84 s6 96 110 125 140 188 186 183 180 128 128

Landed 109 1ll 121 1as 1S0 165 le8 16O 1s8 1SS 1ss 158Rock Phosphate Landd 74 75 75 76 78 76 76 77 77 78 78 78Sulfur Landed 136 1S0 170 199 214 229 231 284 286 238 241 241Phos. Acid Londed 530 548 562 579 895 612 617 620 f26 627 688 683A. Sulfato Landed 102 109 116 128 18o la8 18 184 1a8 182 131 lalTSP Landed 194 201 208 220 282 243 24E 248 251 154 257 267Natural Gas 2.2 2.2 2.2 2.2 2.2 2.2 2.4 2.6 2.8 8.0 8.2 8.2

II. With the Project - Flow of Economic Resources

1. Capital Resources Used

Capital cost (32.2) (140.70 (2.4) (7.6) (19.2) 2Working Capitol (10.7X (2.7)

Total (82.2) (160.7) (62.4) (7.5) (21.8)

2. Economic Valuo of Production

TSP 282.8 241.2 249.6 264.0 278.4 291.6 294.0 297.6 301.2 804.8 308.4 806.4Am. Sulfate 66.3 70.9 76.5 80.0 84.5 89.7 88.4 87.1 86.5 85.8 85.2 85.2Urea 80.0 64.8 89.7 88.8 s8.9 85.6 84.2 82.8 82.8Others 15.8 15.8 15.8 16.8 16.8 16.8 16.8 15.8 16.8 16.8 16.8 16.8

Total 814.9 827.9 841.9 389.8 448.5 4sj.e 486.6 487.4 489.1 490.8 492.2 492.2

8. Economic Variable Costs

Fuel oil 19.8 19.8 19.8 12.0Natural Gas 12.2 29.9 87.4 40.8 44.2 47.6 61.0 64.4 64.4Amonis 18.2 18.5 14.7 9.8Sulfur 88.5 87.2 42.2 49.4 53.1 56.8 57.8 58.0 68.5 59.0 59.8 59.8Rock Phosphate 88.6 87.8 87.8 87.8 88.9 88.9 88.9 90.1 90.1 9to.1 91.8 91.3Phosphoric Acid 127.7 182.1 135.4 189.6 148.2 147.6 148.7 149.4 150.6 161.1 152.6 162.6Alumna 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 03Utilities 7.7 7.7 7.7 7.7 11.4 11.4 11.4 11.4 11.4 11.4 11.4 11.4 goChmicals .6. 6.6 6.6 6.6 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.4 mBagging 13.8 18.8 18.8 14.6 15.6 16.0 16.0 16.0 16.0 16.0 16.0 16.0 X

Total 811.4 821.0 880.5 842.0 851.1 a87.0 872.1 878.1 383.2 3s7.8 394.5 894.5

___* *

1990 1991 1992 1998 1994 1995 1996 1997 1998 19m 2000 2008to

2007

4. Economic Fixed Costa

Maintenance 18.8 18.8 18.8 18.8 14.1 ¶4.1 14.1 14.1 14.1 14.1 14.1 14.1Salaries and wages 15.1I 15.1I 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1I 15.1 15.1Other costa 7.6 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.6 7.6

Total 85.9 85.9 86.9 85.9 s 8.7 86.7 86.7 86.7 86.7 86.7 86.7 86.7

S. Nat Rosoure Flow 84.6) (189.7) (86.9) 4.4 55.7 88.1 77.7 72.6 69.2 66.8 81.0 82.8III. WIihou tn- rro-lct - Flow of Economic Rt-urces -

1. Economic Volua of Production

TSP 282.8 241.2 249.8 264.0 278.4 291.6 294.0 297.8 801.2 804.8 808.4 808.4Am. Sulfate 66.8 70.9 76.4 80.0 84.5 89.7 88.4 87.1 s8.6 85.8 86.2 86.2

Others 15.8 15.8 15.8 15.8 15.8 15.6 15.8 15.8 15.8 15.8 15.8 15.8

Total 814.9 827.9 840.8 859.8 878.7 897.1 898.2 400.6 40a.6 408.4 409.4 409.4

2. Economic Variable Costs

Fuel Oil 19.8 19.8 19.8 19.8 19.8 19.8 21.6 28.4 25.2 27.0 28.8 28.8

Amonia 18.2 18.5 14.7 10.4 18.2 20.0 19.9 19.4 19.2 18.8 18.8 18.6Sulfur 88.5 87.2 42.2 49.4 58.1 56.8 57.8 58.0 58.5 59.0 59.8 59.8

Rock Phosphato 86.6 87.8 87.8 87.6 88.9 88.9 88.9 90.1 90.1 90.1 91.8 91.8Phosphoric Acid 127.7 182.1 185.4 189.5 148.2 147.6 148.7 149.4 150.6 151.1 152.8 162.6Alum Ino 2.6 2.6 2.8 2.6 2.6 21.6 2.8 2.6 2.6 2.6 2.6 2.6Utilities 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7

Chemicals ~~~~6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5

eggingls 18.8 18.8 18. 18.8 1868 18.8 18.8 18.8 18.8 18.8 13.8 18.8

Total 811.4 821.0 880.5 848.5 858.8 868.6 a.9 870.9 874.2 878.6 861.7 861.7

4. Economic Fixed Costa

Maintenance 18.8 18.8 18.8 18.8 18.8 18.8 18.8 18.8 18.8 18.8 a8.8 18.8SlarIes and wages 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1

Other costs 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.56 7. 7.5 7.5 7.5

Total 86.9 86.5 85.9 86.9 85.9 85.9 86.9 86.9 86.9 86.9 85.9 86.9

S. Net Resource Flow (82 .4 29 C (26.8) (19.§) (11.0) . 2.4) 11J.1 (S. ) (e.§) (Sl. ) (8.2) B.

IV. Net Incremental Cash Flow Due to Prolect(82.2) (160.7) (61.8) 24.0 86.7 85.5 82.8 78.9 75.8 72.4 69.2 91.0

Economic Rate of Return of the investment on the total complex - 20.7X. ' A

ASSIE I.

October 1990 O 1

LFh

5~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

PUSRI Urea II Urea Optimization ProjectCash FLows for £conomic Rate of Return

(US2 million in 1990 prices)

1990 1991 1992 1998 1994 1996 1998 1997 1998 1999 2000 2000to2007

I. Inout/Outrut Price.

Urea FOB - bulk 106 108 120 188 156 175 172 169 168 168 160 160Ammonia FOB 84 66 96 110 126 140 188 18S la 180 128 128

I. Capital Resources Used

Capital Cost (7.8) (18.1) (8.7) 2.8

Total t(7.8) (13.1) (.7) 2.8

III. Economic Value of Production

Ures 18.7 23.8 28.6 29.9 29.4 28.9 28.4 27.8 27.8 27.8

Total 18.7 28.6 28.6 29.9 29.4 28.9 28.4 27.8 27.8 27.a

IV. Economic Production Costs

Ammonia 8.8 10.9 12.4 18.9 18.7 18.4 18.2 12.9 12.7 12.7Utilities 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2Maintenance 0.8 1.6 1.5 1.6 1.5 1.5 1.5 1.6 1.5 1.6

Total 7.8 12.8 14.1 16.6 16.4 16.1 14.9 14.6 14.4 14.4

V. Net Resource Flow (7.8) (1.l) (2.8) 11.0 12.5 14.8 14.0 13.8 13.5 13.2 12.9 16.7

Base Economic Rate of Return - a7.2x.

ASSIEOctober 1990

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

KALTIM I Ammonia/Urea ProiectCash Flows for Economic Rate of Return

(USf million in 1990 prices)

1990 1991 1992 1993 1994 1996 1996 1997 1998 1999 2000 2008to

2007

1. Input/Output Prices

Urea Prill FOB bulk 10S 108 120 138 166 176 172 169 166 183 160 160

Urea Granules FOB bulk 115 118 130 148 166 18S 182 179 176 173 170 170

Ammonia FOB 84 86 96 110 125 140 138 135 133 130 128 128

II. With the Project - Flow of Economic Resources N)

1. Caoital Resources Used

Capital Cost (1.0) (9.7) (16.4) (11.6) 3.8

Total (1.0) (9.7) (16.4) (11.6) 3.8

2. Economic Value of Production

Total Output 62.6 64.2 71.6 97.1 120.3 134.7 132.5 130.1 127.9 125.6 123.3 123.3

3. Economic Production Costs

Natural Gas 19.4 19.4 19.4 18.3 19.7 19.7 19.7 19.7 19.7 19.7 19.7 19.7

Catalysts etc. 1.1 1.1 1.1 1.3 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4

Maintenance 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7

Operating overhead 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0

Indirect costs 2.5 2.S 2.5 2.5 2.6 2.5 2.6 2.5 2.6 2.5 2.5 2.5

Total 35.7 36.7 36.7 34.8 36.3 38.3 36.3 36.3 36.3 36.3 36.3 36.3

4. Net Resource Flow 25.8 18.8 19.4 50.7 84.0 98.4 96.2 93.8 91.6 89.2 87.0 90.8

III. Without the Proiect - Flow of Economic Resources

1. Economic Value of Production 4

0 O

Total Output 62.5 64.2 71.5 82.1 92.9 104.2 102.5 100.6 98.9 97.0 95.3 95.3

Total 62.5 64.3 71.5 82.1 92.9 104.2 102.5 100.6 98.9 97.0 95.3 95.3

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2008to

2007

2. Economic Variable Costs

Natural gas 19.4 19.4 19.4 19.4 19.4 19.4 19.4 19.4 91.4 19.4 19.4 19.4Catalysts etc. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1Maintenance 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7Operating overheamd 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0Indirect costs 2.6 2.6 2.6 2.6 2.6 2.5 2.6 2.5 2.6 2.6 2.6 2.6

Total 35.7 35.7 35.7 36.7 86.7 35.7 85.7 35.7 36.7 36.7 86.7 36.7

3. Net Resource F!ow 26.8 28.6 a6.8 46.4 57.2 88.5 86.8 84.9 83.2 61.3 69.6 59.6

IV. Net Incremental Cash Flow Due to Proiect

(1.0) (9.8) (16.4) 4.3 28.8 29.9 29.4 28.9 28.4 27.9 27.4 31.2 I'

Economic Rate of Return of the investment - 67.1X

ASSIEOctober 1990

0

0I

- 125 - ANNEX 7-17

Page 3 of 3

P.T. Pupuk Kalimantan Timur, Bonang, IndonesiaEconomic Evaluation of Kaltim - I Optimization Project

1990 1991 1992 1993 on Assumptions

Production - Without Optimization in '000 tons Product Price ($/ton)Urea Prills 459.60 459.60 459.60 459.60 Urea Prills 140.00Ammonia 170.00 170.00 170.00 170.00 Urea Gran. 150.00

Production - With Optimizaiton - in tons Ammonia 100.00Urea Prills 459.60 459.60 512.30 512.30 Gas Price (I/MMBTU) 1.00Urea Granules 55.70 118.80 Gas usage (MMBTU/tonAmmonia (in tons) 170.00 170.00 165.00 165.00 Before optimizaiton

Gross Revenue (in million US$) Ammonia 44.00Without optimization 81.34 81.34 81.34 81.34 Urea 26.00With optimization 81.34 81.34 96.58 106.05 After optmizationThrough optimization 0.00 0.00 15.24 24.70 Ammonia 37.0C

Urea 21.50Operating Costs - Without Optimization Catalyst ($ per ton)

Natural gas 19.43 19.43 19.43 19.43 Ammonia 2.50Catalysts & chemical 1.11 1.11 1.11 1.11 Urea 1.50Maintenance 2.70 2.70 2.70 2.70 Investment (in mill $) 41.00Operating overheads 10.00 10.00 10.00 10.00 Cash CashIndirect costs 2.50 2.50 2.50 2.50 Flow Flow

Operating Costs - With Optimization 1990 (14.35) 31.2Natural gas 19.43 19.43 18.32 19.67 1991 (20.50) 25.0Catalysts & chemical 1.11 1.11 1.26 1.36 1992 10.05 55.6Maintenance 2.70 2.70 2.70 2.70 1993 24.21 69.8Operating overheads 10.00 10.00 10.00 10.00 1994 24.21 69.8Indirect costs 2.50 2.50 2.50 2.50 1995 24.21 69.8

1996 24.21 69.8Net Revenue (in million US$) 1997 24.21 69.8

Without optmization 45.60 45.60 45.60 45.60 1998 24.21 69.8With optimization 45.60 45.60 61.80 69.81 1999 24.21 69.8Due to optimization 0.00 0.00 16.20 24.21 2000 24.21 69.8

2001 24.21 69.8Investment 2002 24.21 69.8

(in million US$) 14.35 20.50 6.15 2003 24.21 69.82004 24.21 69.8

Net Cash Flow (in million USS) 2005 24.21 69.8With optimization 31.25 25.10 55.65 69.81 2006 24.21 69.8Due to optimization (14.35) (20.50) 10.05 24.21

Economic Rate of Return from Optimization 471

NPV with Optimization at 15Z (million US$) 346

- 126 -

ANNEX 8Page 1

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

A. Key Impl mentation Indicators

Action Responsibility Target Date

A. Loan Effectiveness Government/Bank May 1991

B. Policy Measures

(a) Annual consultations Government/Bank Not later than October1991, and th-reafter

C. Gresik Restructuring

(a) Ammonia/urea plant:- start construction Greslk/Contractor/Licensors October 4, 1990

- construction and Gresik/Contractor/Licensors January 1994commissioning completed

(b) Plant Modernization Gresik/Consultants Not later than- Feasibility Study and June 80, 1992EIA

(c) Preparation of EMP Gresik Not later thanNovember 80, 1991

D. Optimization Subprojects

- Feasibility Studies and PFEs/Consultants Not later thanEIAs June 30, 1992

E. Studies

(a) Marketing and Distribution- Setting up Steering GOI/MOI Not later than May 1, 1991Committee

- Start GOI/MOI/PUSRI/Consultents June 1, 1991- Completion Consultants March 1, 1992- Agreement on follow-up GOI/Bank May 1, 1992actions by GOI

(b) Development of EMP for theFertilizer Sector- Setting up Steering GOI/MOI Not later than May 1, 1991Committee

- Start GOI/MOI/Consultants June 1, 1991- Completion Consultants March 1, 1992- Agreement on follow-up GOI/Bank May 1, 1992actions by GOI

- 127 -

ANiNEX 8Page 2

B. Supervision Plan

Bank Supervision Input

1. The total Bank supervision input is estimated at about 10 staff-weeks (SW) during FY91, 12 SW during FY92 and 10 SW annually from FY93 throughFY97. The field supervision schedule is given in the table below.

GOI's Contribution to Supervision

2. Project Monitoring and Coordination will be the responsibility ofthe Directorate General of Chemical Industry of the MOI. This Directoratewill be responsible for coordinating with the participating fertilizerenterprises (PFEs) arrangements for Bank supervision missions and forproviding information requested by the Bank.

3. All PFEs will submit semi-annual progress reports (in English),generally following the format being used for Loan 2879-IND (Industrial EnergyConservation Project) and covering their respective operations under theProject.

FIELD SUPERVISION SCHEDULE

ApproximateDates Activity Expected skill requirements SW

02/91 Project Start-up Engineering, procurement, project 4.0management

06/91 Progress review: A/U construc- Engineering, procurement, environment, 4.0tion, optimization subprojects financial analysis, project managementAPR. and EIAs.

11/91 Progress review: A/U construc- Engineering, procurement, financial 4.0tion; optimization subprojects; analysis, project management,studies; Gresik's EMP. environment

02/92 Progress review: A/U construc- Engineering, procurement, financial 4.0tion; optimization subprojects; analysis, project managementstudies

06/92 Progress reviow: A/U construc- Engineering, procurement, financial 4.0tion; optimization subprojects; analysis, project managementreview of studies and agreementon follow-up actions by 001.

11/92 Progress review: A/U construc- Engineering, financial analysis, pro- 4.0tion; optimization subprojects ject management

1993 to Two supervision misisons Engineering, financial analysis, pro- 4.01997 annually for progress review; ject management each

last mission to assist MOI inpreparation of PCR.

- 128 - ANNEX 9

INDONESIA

FERTILIZER RESTRUCTURING PROJECT

Selected Documents Available in the Project File

A. P.T. Petrokimia Gresik

- Environmental Impact Study of Petrokimia Gresik Industrial Area -Executive Summary, June 1990.

- Annual Reports, 1986, 1987, 1988.- Unaudited Financial Statements, 1989.- Invitation to Bid, Gresik Ammonia/Urea Facilities, October 1989.- Bid Evaluation Report, Gresik Ammonia/Urea Facilities, June 1990.

B. P.T. PUSRI

- Annual Reports, 1986, 1987, 1988.- Unaudited Financial Statement, 1989.

C. '.T. Pupuk Iskandar Muda

- Annual Reports 1986, 1987, 1988.- Unaudited Financial Standards, 1989.

D. P.T. Pupuk Kalimantan Timur

- Annual Reports, 1988.- Summary Financial Statements, 1986, 1987.- Unaudited Financial Statements, 1989.

E. P.T. Pupuk Kuyang

- Summary Financial Statements, 1986, 1987, 1988.- Unaudited Financial Statements, 1989.

F. Indonesia - Fertilizer Restructuring ProjectParticipating Fertilizer Enterprises: Status and Performance

Report prepared by S. Gangophadyay (Consultant) during Projectpre-appraisal; November 1989, AS5IE

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