The World Bank

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FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 7851

PROJECT COMPLETIONREPORT Public Disclosure Authorized INDONESIA

NATIONAL FERTILIZERDISTRIBUTION PROJECT (LOAN 2120-IND)

JUNE 19, 1989 Public Disclosure Authorized

Industry and Energy OperationsDivision Public Disclosure Authorized Asia Regional Office

Thisdocument has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization. COUNTRYEXCHANGE RATES

Name of Currency (abbreviation) Rupiah (Rp)

Appraisal Year Average 1982 US$1 - Rp 625 Intervaning Years' Average 1983-85 US$1 - Rp 862 Completion Year 1986 US$1 - Rp 1,650 Average 1982-86 US$1 - Rp 1,138

ABBREVIATIONS AND ACRONYMS

Fertilizer Companies

AAF - PT ASEAN Aceh Fertilizers, Lhokseumawe, Aceh GRESIK - PT Petrokimia Gresik, Gresik, East Java KALTIM - PT Pupuk Kalimantan Timur, Bontang, East Kalimantan PIM - PT Pupuk Iskanda Muda, Lhokseumawe, Aceh PUSRI - PT Pupuk Sriwidjaja, Palembang, South Sumatra

Pusri Nomenclature

Line I - Point of production or import Line II - In or near port areas Line III - District level (usually storage) Line IV - Retail or village level

Fertilizer

TSP - Triple superphosphate DAP - Di-ammonium phosphate AS - Ammonium sulphate MOP - Muriate ^f Potash, Potassium Chloride; Potash SOP - Sulphate of Potash, Potassium Sulphate; Potash

Others

DGSC - Directorate General of Sea Communications dwt - Deadweight of ship, in long tons FMDSS - Fertilizer Marketing and Distribution Strategy Study GOI - Government of Indonesia ISD - Inland Storage Depot (Line III) KUD - Koperasi Unit Desa. (Village Cooperative) mt - million tons MSDP - Maritime Sector Development Plan PJKA - Perusahaan Jawatan Kereta Api. (State Railway Organization) PUSKUD - Head Office for a group of KUDs RLS - Regular Lin;r Services; the Inter-island general cargo shipping system. UPP - Unit Pengantongan Pupuk. (Port Bagging Station) FOROMCIAIL USEONLY THE WORLD BANK Washington.DC 20433 USA

Offce of DC,redto.G.neral Ope°atfons (vdIIhti4J

June 19, 1989

MEMORANDUMTO THE EXECUTIVEDIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Indonesia National Fertilizer Distribution Project (Loan 2120-IND)

Attached, for information, is a copy of a report entitled "Project Completion Report on Indonesia National Fertilizer Distribution Project (Loan 2120-IND" prepared by the Asia Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time.

Yves Rovani

by -am K. Chopra

Attachment

This document has a rcstric.ed distribution and may be used by recipients only in the perforrnance i ~~~~~~~oftheir official duties. Its contents may not otherwise be disclosedwithout World Batikcauthorizalion. FOR OFmFCALUSE ONLY PROJECT COMPLETIONREPORT

INDONESIA NATIONAL FERTILIZERDISTRIBUTION PROJECT (LOAN 2120-IND)

TABLE OF CONTENTS

Page No.

Preface. * * * .....* * * * * * * * * * *...... i Basic Data Sheet...... ii Summaryand Highlights...... * iii

I. INTRODUCTION ...... 1

II. PROJECT FORMULATION...... 3

III. PROJECT IMPLEMENTATIONAND COST...... 7

IV. OPERATIONS...... 10

V. FINANCIALANALYSIS ...... 14

VI. INSTITUTIONALDEVELOPMENT ...... 15

VII. ECONOMIC REEVALUATION...... 16

VIII. THE ROLE OF THE BANK...... 17

IX. CONCLUSIONS...... is TABLES

1. Developmentof ProductionUnits ...... 19 2. Summary of Expected and Actual Completionof Project Components...... 20 3. Summaryof ConsultantServices ...... * 21 4. Appraisal and Actual Costs ...... 22 5. Forecast and Actual Disbursements. 23 6. Projected and Actual Consumptionof Urea, TSP, AS, and NH3 for the Period 1981 to 1986 24 7. Urea Bulk Carrier Performance...... 25 8. SummarizedIncome Statement for 1982-86. 26 9. Statementof Changes in Financial Position 27 10. SummarizedBalance Sheet ...... **...... 28 11. Compliancewith Loan Conditions. .... 29 12. Summary c'-Project Benefit and Cost Streams 30

MAPS IBRD 15763R(PPA)R IBRD 15764R

This documenthas a restricteddistribution and may be used by recipientsonly in the performance of th,:ir officialduties. Its contents may not otherwise be disclosedwithout World Bankauthorization. i

PROJECT COMPLETIONREPORT

INDONESIA NATIONAL FERTILIZERDISTRIBUTION PROJECT (LOAN 2120-IND)

PREFACE

This is a Completion Report on the National FertilizerDistribution Project for which Loan 2120-IND was approved in March 1982 for the sum of US$66.0 million.

The PCR was prepared by the Asia Infrastructure5 Division and is based primarily on the draft completion report which was submittedby P. T. Pupuk Sriwidjaja,Jakarta Indonesia. The loan was closed on June 30, 1986.

This PCR was read by the OperationsEvaluation Department (OED). The draft PCR was sent to the Borrower on December 27, 1988, for comments by February 14, 1989, but none were received. ii

PROJECT COMPLETION REPOPT BASIC DATA SHEET INDOtNESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 212_-IND)

KEY PROJECTDATA

Appraisal Actual or Iteam expectation current estimate

Total Project Cost (USS million) 185.3 135.1 Underrun (2) - - 27.1 Loan/Credit Amount (USS million) 66.0 37 .6 Disbursed - 37 .6 Cancelled ) 28.4 Repaid to ) Aprl 15, 1988 4_4 2.6 Outstanding to ) APril 15, 198 61.6 35.0 Date Physical Components Completed 12/85 10/86 Proportion Completed by Above Date (2) _ 90 Pr)portion of Tiee Overrun (2) - 24 Economic Rate of Return: 215 Return on Assets (t) 20 12 Institutional Performance Cood Good

OTHER PROJECT DATA

Original Actual or item Plan Revisions Est. Actual

First Mes.tton in Files 11/29/75 / / / / Xegotiations 02/01/2 02/01/82 Board Approval 03!730i82 / / 03/30/82 Loan Agreement Date 04/05/82 04/05/82 Effectiveness Date 77/07/82 09/27/82 Closing Date 06/30/86 06/30/86

Borrover Government of Indonesla Executing Agency FT. Pupuk Srividlala (PUSRI) Fiscal Year of Borrower April 1 - March 31 Follov-on Project Name -_-__ _- Loan Number _ Amount (USS million) ___ Loan Agreement Date _ -

MISSION DATA

No. of No. of Date of Item Month, Year Weeks Persons Man-veeks Report

Identification 01/80 .0 1 1.0 02/19/80 Preparation 03/80 2. 1 0 -. 04/07/80 Preappraissl 01/81 2.0 1 2.0 02/18/81 Appraisal 04/81 3. 0_ 4 12.0 03/10/82 Total 8.6 17.0

Supervision I 06/82 1.0 1 1.0 08/0l/82 Supervision 1I 11/82 1.0 n.5 0.5 01!26/83 Supervision III 077/8 _____ 1--T 04/05/83 Supervision IV 09/83 1.0 1 1.0 10/15/83 Supervision V /a 02/84 n.a. na n.a. 025/854 Supervision VI 07/84 1.0 1 1.0 09/06/84 Supervision VII 04/85 1.0 3 _ 3.0 05/05/85 -'mpletion 07/87 1.0 1 1.0 06,15/PR Total 754°

STAFF INPUT

1981 1982 1983 1984 1985 1986 1987 1988 Total

Preappraisal 13.5 13.5 Appraisal 37.3 30.3 67 .6 Negotiation 0.7 15.1 15.8 Supervisior 1.9 5.0 3.3 5.4 3.9 1.7 12.1 33.4 Other 7.1 3.5 10.6

Total 58.5 50.8 5.0 3.3 5.4 3.9 1.7 12.1 140.9

/a Desk reviev. iii

PROJECT COMPLETIONREPORT

INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND)

SUMMARYAND HIGHLIGHTS

PT. Pupuk Sriwidjaja(Pusri) is Indonesia'slargest fertilizer producingcompany. In addition to distributingand marketing its own products, GOI, in 1979, assigned Pusri responsibilityfor distributingand marketing of all fertilizersin Indonesia. This responsibilityincludes both domesticallyproduced and importedfertilizers (para. 1.2). ii. The objective of the projectwas to provide the additional facilitiesneeded for distributingthe products from the planned expansion of the domestic fertilizerindustry during the period 1982-1986. Fertilizer productionin Indonesiamore than doubled during 1982-1986,with an increase of almost 3.0 million tons, and domestic consumptionincreased by a factor of about 1.5 over the same period. The project included (i) procurementof three urea bulk carriers and one refrigeratedcarrier for liquid ammonia; (ii) procurementof 200 rail box wagons and constructionof a 21 km railway line to Mteneng;(iii) new fertilizerbagging facilitiesand piers at Meneng and Cilacap; (iv) expansionof the existing bagging facility at Belawan, North sumatera;(v) improvementsto existing urea ships and the purchase of ships' spares; and, (vi) consultancyservices (para. 2.2). iii. The Bank loan (US$66.0m) financedthe new bagging facilities, specializedpiers, railway wagons, the FertilizerMarketing and Distribut-n Study, and the ports and maritime studies. Export creditswere used to finance the four ships and Governmentfunds were used for the railway line extension(para. 2.8). iv. No major problems were encounteredduring the project implementation, which was carried out well by Pusri. However, the planned backhaul of bulk TSP from Cresik did not occur. Thus, the expansionat Belawan for handling bulk TSP and improvementsto the urea carrierswere deleted from the project. Also, constructionof the bulk terminal and bagging facilities,and procurementof the rail box wagons were delayed by the slow tender evaluation process (paras.3.2-3.8) v. Due to the deletion of componentsand overestimatesat appraisal, the total project cost was US$135.1 million, a reduction of some US$50.2 million from the appraisal estimates. The loan was closed as originally scheduled(06/30/88) and approximatelyUS$28.4 m was cancelled (para. 3.9). vi. Completionof the project has left Pusri with a distributionsystem consistingof seven 7,500 dwt bulk fertilizeeships, one 4,500 dwt ammonia carrier, six bagging stations,595 railwaywagons, 81 inland storage depots iv and a computerizedlinear program model to optimize shipments on the entire distributionsystem (para. 4.1). vii. Utilizationof the bulk carriers has not been as high as was projectedduring appraisalas growth in the domestic consumptionof urea has been less than expected. Utilizationof the Meneng facility has been low, due to lower than expected demand and also to increasedproduction at a competi- tive bagging plant in Surabaya. On the other hand, fertilizerconsumption has been higher than expected in Cilacap'shinterland and hence the facilities have been operatingwell in excess of appraisal expectations. It is expected that utilizationof both the Meneng facilitiesand the bulk ships will increasewith the commissioningof the Kaltim III project in 1988 (paras. 4.5- 4.11). viii. In October 1986, Pusri and PJKA began to develop fully the block train concept for fertilizermovements in Java using the 595 Pusri owned rail box wagons of which 200 were furnishedunder the project. Performanceto date has been good and it is expected that rail shipmentswill exceed 95% of the 1988 target (para. 4.12). ix. Pusri's financialperformance over the project period was good and key loan covenant targets were met or exceeded. Pursi has adequate funds to financeany future distributionsystem expansion. Also, the economic rate of return of the project was acceptableat 15% (paras.5.1-5.7).

X. Near the end of the project, part of the Bank loan was used to fund a FertilizerMarketing and DistributionStrategy Study (FMDSS) for the period 1986-1995. Pusri is using the results of the study to improve the existing distributionand marketing system and to prepare proposals to GOI for additionalfacilities needed in the future. The study identifiedkey investment needs totallingabout US$29.0m which Pusri intends to implement (paras.6.3-6.6). xi. The port master planning and detailed engineeringfinanced under the project led to the ongoing National Ports Project (L-2577). Also the various project financed studies have promoted significantchanges in port operations. The DirectorateGeneral of Sea Communicationsand the Perumpels have benefitedsubstantially (para. 8.2). xii. Bank involvementwas helpful to Pusri especiallyby discouragingthe purchaseof another bulk carrier in 1985 and also in carrying out the distributionstrategy study. Due to the recommendationsof this study, Pusri has recentlymade changes which focus primarily on the shipping,marketing and distributionfunctions and are intendedto improve overall operating efficiency(paras. 8.1-8.3). xiii. In summary, the project helped to finance needed equipmentand facilitiesalthough in retrospectsome of the latter, like the pier at Meneng, were overdesigned. The project by design did not contributemuch to the Bank/ Borrowermacro and sector dialogue on major issues such as fertilizer subsidies. This was acceptableat the time because food self sufficiencywas a key Governmentgoal and making fertilizeravailable at low cost to farmers v was part of the overall strategy. However, more attentioncould have been paid to project specific issues such as potentialchanges in the Government mandated safety stock requirementsfor fertilizersat the ISD's and the realizablenutrient applicationlevels. As it turned out, reductionsin safety stocks (from 3 months to 1 month) and usage of nutrientsbelow Governmenttarget levels led to reduced fertilizerdistribution volumes and also the resultant underutilizationof some facilities. PROJECT COMPLETIONREPORT

INDONESIA NATIONAL FERTILIZERDISTRIBUTION PROJECT (LOAN 2120-IND)

I. INTRODUCTION

1.1 P.T. Pupuk Sriwidjaja(PUSRI) was establishedin Palembang,South Sumatera,in 1959 as a governmentowned enterpriseto m&aufactureammonia and urea fertilizers. PUSRI I, the first small plant with installedcapacity of 100,000tons per year (tpy) of urea went on stream by the end of 1963. This plant was built with assistancefrom the United States Agency for Inter- national Development. Subsequently,starting in 1974, regular expansion of productioncapacity took place and Indonesianow has (a) nine urea plants, with a total installedcapacity of 4,242,000tpy in five locations- P.T. PUSRI with four plants, P.T. Kujang, IskanderMuda and Asean Aceh with one plant each and P.T. Kaltim with two plants; (b) two triple super phosphate plants with a total caparity of 1,000,000tpy; and (c) three ammonium sulphate plants of total capacity 645,000 tpy at Petrokimia,Gresik. Constructionis in progress on a tenth Ammonia/ureaplant- Kaltim III with a capacity of 570,000 tpy. Two more ammonia/ureaplants of similar capacitiesare planned to be commissionedin 1989 and 1992 respectively,one to replace the obsolete PUSRI I and the other as the second plant of P.T. IskanderMuda. Details of productionunits are given in Table 1.

1.2 Regular expansion of fertilizerproduction and associated distribution capacity resulted from the rapid growth in domestic consumptionof ferti- lizerswhich in turn was due to Governmenteffoyts to enhance production of rice and other food crops through special intensificationprograms. The increaseddemand for fertilizerswas often centered in locationswhich were quite far away from the plants and thereforewarranted the developmentof an efficientdistribution system to ensure that farmers get fertilizer in time and at reasonableprices. PUSRI is responsiblefor the distributionof all fertilizerin Indonesia. Two-thirdsof it is transportedby ships, including special self unloading ships, to bagging stationsat several ports. From there it is forwardedby road and railway to inland storage depots (ISD). From the ISDs the fertilizeris sold through private retailers and cooperatives(KUD) to the farmers.

1.3 The Bank has actively supported the Government'sexpansion of fertilizerproduction and distributionas the followinglist of projects shows: -2-

Credit/ Approval loan Amount Project date no. (US$ m)

Production Fertilizerplant expansionand gas conservation 6/15/70 C-193-1 30.0 Fertilizersupplementary 5/21/73 C-193-2 5.0 Third Fertilizerexpansion 2/20/74 L-1089 115.0 Fourth Fertilizerexpansion 5/20/76 L-1254 70.0

Distribution Fertilizerdistribution 7/28/75 L-1139 68.0 National Fertilizerdistribution 4/05/82 L-2120 66.0

Total 354.0

In addition,PUSRI had two other fertilizerdistribution projects (equipment mostly) which were partly financed by other aid agencies.

1.4 The Bank's first FertilizerDistribution project provided the specializedequipment needed by the then existing small-scalefertilizer distributionsystem to absorb factoryoutput which increasedfrom about 366,000 tons in 1976 to about 1,780,000tons in 1980. Much of chis increased factoryoutput was financedby the previous Bank credits and loans for fertilizerproduction. The First Project included (a) expansionand provision of new bulk receptionand bagging stationsat five ports; (b) provision of 175 railwaywagons and locomotives;(c) purchase of four self-unloadingbulk fertilizerships; and (d) constructionof 57 inland storage depots (ISDs). The project was successfulin providingan effectivedistribution system.

1.5 When the Second projectwas formulated,domestic fertilizerconsumption was growing at about 12% p.a. nationwidebut with wide regional varia- tions from about 7.55% p.a. on Java to over 20Z p.a. on the outer Islands. Expansionof the distributionsystem was needed, especiallyto serve the outer islandsand other areas, where facilitieswere not provided in the first project. The second project funded improvementsboth in sea and land transportof fertilizer. It includedcomponents for modern ships as well as for block trains for the railwayauthority (PJKA) and new bagging stations.

1.6 This completionreport is based on a draft report submittedby PUSRI and on the findings of a supervisionmission to Indonesiaand was prepared by the Asia 5 InfrastructureDivision. -3-

II. PROJECT FORMULATION

PreparationStage

2.1 The proposed project was identifiedin discussionsbetween the Governmentand the Bank in 1980 and prepared by PUSRI and the Governmentwith the assistanceof two consultingfirms. One firm (Canadian)helped PUSRI to make estimatesof the facilitiesrequired to distributethe additionalamounts of fertilizerto be produced,and to assist it in the design (and later on the constructionsupervision) of the project. The distributionsystem prepared under the project was based on the output of plants then (1980) under con- structionor existing,and on the forecastsof the Departmentof Agriculture about fertilizerusage throughoutIndonesia. The second firm (Australian) helped to complete the financialand economic analysesof the proposed project.

ProjectObjectives

2.2 The projectwas part of the program developedby the Government for increasedfood productionby the proper applicationof fertilizers. The objectivesof the projectwere to (a) assist in providingdistribution capacity for the substantialprojected increase in fertilizerproduction from new plants then under construction;and (b) prepare master plans and detailed engineeringfor the developmentof about eleven ports.

AppraisalStage

2.3 The appraisalmission, composed of an engineex,an economistand a financialanalyst, visited Indonebiain April/May 1981 and reviewed the projectdocuments. Several issues were identified;the key ones (financing, subsidies,and advance contracting)are summarizedin the following paragraphs.

2.4 Project Financing. The mission had indicatedthat parts of the proposedmaritime (ships)and railway (locomotives)components of the project could largely be financed by export credits. If this happened,then the remainingforeign exchangeneeds of the project would be less than the then proposedBank loan of US$50.0 million. The mission recommendedthat the Governmentsubmit a complete financingplan for the project and, if necessary, that an appropriateportion of the loan be reallocatedto assist in financing the civil works for the railway line construction.

2.5 FertilizerSubsidies. The Governmentsubsidized PUSRI directly by purchasingfactory productionat prices which provided an adequate financial return on plant assets and then immediatelyresold the fertilizerat a lower price to PUSRI so as to provide adequate returns to distributionactivities. This was part of Government'sstrategy for increasingfood productionby providingcheap fertilizerat the farmgate,without penalizing PUSRI. At that time also, the Governmentand the Bank were entering a dialogue focused on the overallquestion of budgetarysubsidies, including those for food, fertilizer, and energy, and progresswas being made on nominal retail price increasesfLr some commodities. The rate at which fertilizersubsidies could be phased nut -4- depended,among other things,on policy developmentsin the food crop sector (includingreturns to farmers) and on consumer prices. The mission therefore recommendedthat fertilizerconsumption be reviewed periodicallyin relation to changes in the rice/fertilizerprice ratio during project implementation. No conditionsor loan covenantswould be sought on fertilizerpricing, as it would instead remain a part of the broad Bank economic dialogue with the Government.

2.6 Advance Contracting. Consultants'contracts for supervisionof ship construction,bulk receptionfacilities, and railway line designs were to be signed prior to loan negotiations. These contracts involved about US$5.6 million in foreign exchange liability. In addition, it was possible that PUSRI could have committedand paid about US$7.5 million on contracts for servicesand goods prior to the date of loan signing. The mission recommended that the loan agreementpermit loan funds to be disbursed for any balance of contractsentered into by PUSRI prior to loan signature,provided such contractshave been awarded accordingto Bank procurementguidelines and have been approved by the Bank. No retroactivefinancing was proposed.

2.7 In addition to the issues, there were several conditions of negotiations which the appraisalmission asked the Governmentto fulfill. The major ones were (a) completionof the right-of-waysurvey for the railway line to Meneng and start of the required land acquisition;(b) selection of consultants both for designs and constructionof the new bulk receptionand bagging plant and for constructionsupervision for all ships; and (c) confirmation that the Petrokimiashiploader can load PUSRI ships.

Negotiations

2.8 Negotiationstook place in Washingtonduring February 1-5, 1982. The focus of discussionswas on an implementationschedule for the railway part of the project and the submissionof a satisfactoryschedule was made a conditionof Board presentation. The project financingissues were resolved by having PUSRI use suppliers'credits for obtainingall four ships. The Governmentwould finance the railway componentand the Bank funds (increased to US$66.0million) would cover the remainingPUSRI investmentsas well as the maritime studies which were added during negotiations. The Bank participation in the projectwas set at 35% of total cost. As for fertilizer subsidies,the Governmentemphasized the fact that increasingrice productionwas of paramountimportance and hence decisionson fertilizerpricing would be made in the context of this concern. Finally, on advance contracting,the Govern- ment accepted the Bank's position. -5-

Project Description

2.9 The project as approved (total cost US$185.31 million) consistedof two parts, A and B, as detailed below:

Part A: FertilizerDistribution

1. Ships

(a) Acquisitionof three shallow-draftself-unloading ships, of about 7,500 deadweight tons (dwt) each, similar in design to PUSRI's existing four bulk fertilizer ships;

(b) Acquisitionof one ship of about 4,500 dwt for the carriage of refrigeratedammonia; and

2. Bulk Receptionand Bagging Facilitiesand Pier

(a) Constructionof a bulk urea receptionand bagging station at Meneng, East Java, with storage for about 25,000 tons of bulk urea and 35,000 tons of bagged urea, and capable initiallyof bagging 750,000 tons of fertilizerper year (tpy);

(b) Expansionand improvementof the existing urea bagging and handling facilitiesat Belawan, Sumatera; and

3. Inland Transportation

(a) Acquisitionby PUSRI of about 200 railway freight cars, of about 30 ton capacity each, specially designed to carry bagged fertilizer;and

(b) Design and constructionof about 21 km of railway line extensionfrom the bulk urea receptionand bagging station at Meneng to Kabat, linking the rail- head at Banjuwangito Meneng, East Java. -6-

4. Spare Parts

Acquisitionof spare parts, as agreed between the Borrower and the Bank, for the ships, railway freight cars and other facilities,including the facilitiesto be provided under the Project, used in PUSRI's fertilizer distribution system.

5. TechnicalAssistance

(a) Design, procurementand constructionsupervision of the ships, and of the bulk receptionand bagging facilitiesand piers, through technicalassistance; and;

(b) Technicalassistance for the carrying out of the followingstudies: (i) to update forecasts of fertilizeruse and consumptionand to study needed fertilizerdistribution facilities and methods to increase peak storage capacity;and (ii) to assess the needs for additional investmentand operational improvementsrequired for expanded use of block trains for transportof bulk products.

Part B: Port Master Plans and Detailed Engineering

1. Preparationof port master plans for about 10 ports and detailed engineeringof works; and

2. Preparationof detailed engineeringof works proposed for the port of Tanjung Priok under the master plan previously prepared for that port.

2.10 Responsibilityfor project implementationwas divided between PUSRI, PJKA and DGSC (the DirectorateGeneral of Sea Communications). PUSRI was responsiblefor Parts A.1, A.2, A.3(a), A.4, A.5(a) and A.5(b)(i); PJKA was responsiblefor parts A.3(b) and A.5(b)(ii);DGSC was responsiblefor the entire part B of the project. The Bank loan covered the PUSRI and DGSC parts of the project.

2.11 The appraisal report,No. 3609-INDwas dated March 10, 1982. The projectwas approved by the ExecutiveDirectors on March 30, 1982 and Loan AgreementNo. 2120-IND (US$66.0million, for 20 years, including5 years grace, with interest at 11.6% per annum) was signed on April 5, 1982 and became effectiveon September27, 1982. Part of the proceeds of the loan was to be onlent to PUSRI (ProjectAgreement No. 2120-IND of April 5, 1982) at an interestrate of 13.5% for 10 years, including3 years of grace. The Governmentbore all foreignexchange risks. -7-

III. PROJECT IMPLEMENTATION AND COST

Overview

3.1 The civil works componentswere completed some two years behind scheduledue to delays in commencingand finalizingdetailed engineeringas well as in the constructionitself. The ships and rail box cars were also deliveredlate (about one year) for similar reasons. The total project cost was considerablyless (by 27%) due to over-estimationat appraisaland deletion of a few componentssuch as the ship improvementsand spares and the Belawan facilities. The ship improvementsand spares were deleted because the planned backhaul of TSP from Gresik was not yet feasible for production reasons. This also meant that an additional bagging facilityat Belawan, the destination,was not needed and it was also deleted. Operating results were decidedlymixed--the Meneng pier and bagging facilitiesare under utilized but Cilacap is fully utilized. This was due to lower than expected growth in demand for fertilizersat Meneng, because fertilizeruse is already extensive in its hinterlandand also it was less costly to service some of the latter's needs from Surabaya. PUSRI, however, is financiallysound with profits ranging from US$15.6 million to US$53.5 million (after taxes) during the projectperiod. Its cash and bank balances (includingforeign currencies) were quite adequate and it could have financed the project on its own. Table 2 has details of estimatedand actual implementationperiods.

Implementation

3.2 Meneng facilities. The project'smajor civil works consisted of the bulk receivingand bagging facilitieswhich were .o be built at Meneng, East Java. These included (i) a special pier for receiving bulk fertilizer;(ii) a receivingconveyor of 1,000 tons per hour; (iii) reclaimingsystem and six bagging modules, for 50 kg bags, both with a total capacity of 1 milLion tpy; and (iv) five payloaders togetherwith office buildings,maintenance shop, a 35,000 capacity bagged storage space, empty bags and spare parts store. They were to be completed by July 1983, at an appraisalestimated cost of US$22.48 million. However major delays occurred because all stages of the engineering design (selectionand award of contract, site investigation,actual designs, etc.) took longer than anticipated. Contracts for the facilitiesand equipmentwere awarded on various dates (Table 3) to a group of Canadian and local consultants,ranging from detailed engineeringin October 1982 to the constructionof the facilities in October 1984. All constructionwas carried out by local contractors. The quality of the work done was very good. The actual total cost of the completedwork was US$11.3 million, some 50% less than appraisalestimates. This was largelydue to the imprecisionof appraisalcost estimateswhich had been made long before designs were available.

3.3 Cilacap pier. A special pier solely for unloading urea with conveyors connectingthe pier to the bagging station was included in the Project at an estimatedcost of US$2.62 million. It experiencedsimilar delays as at Meneng. The soils investigation,pier and conveyor designs were all awarded to local consultants,while the same Canadian consultant as at Meneng won the constructionsupervision contract. The constructioncontract was also awarded -8-

to a local firm but only in July 1984, i.e., more than one year after the original expected completiondate. Constructionwas completed in mid-1986 at a total cost of US$2.1 million. The facility was commissionedin August 1986 and has been well utilized since then.

3.4 Rolling stock and Railway Line. The project included the purchase of 200 railway wagons of 30 tons capacity,designed to carry bagged fertilizer from the bagging stations (UPP) to inland storagedepots (ISD). The contract for the wagons was awarded through ICB proceduresand the winning bidder (a Korean firm) was to supply the wagons to an Indonesianfirm in kit-form for local assembly. The wagons were to be put in service by December 1983. However the contractfor their supply was not awarded until July 1984. The main reason for delays arose from the tender evaluationand approval process and also the slow shipping and kit assembly works. The wagons were finally put into service in October 1986--an aggregatedelay of 32 months for this project component. The actual cost of the wagons and spares was US$6.4 million, which was just over one third of the appraisalestimated US$16.0million. As for the 21 km railway line, from the Meneng pier to the mainline junctionat Kabat, PJKA completed constructionabout 1 year behind schedule. This was due to delays in acquiring the right of way and periodic budgetaryshortages. It was funded entirely by the Governmentand built by local contractorswho were supervisedby PJKA and local consultants.

3.5 Ships. Three 7,500 DWT self unloading ships were to be procured under the project to supplementthe existing four ship fleet. The new ships were to be similarto the existing ones and hence the same designs prepared by an American consultingfirm under the First DistributionProject (L-1139) were used. A South Korean firm won the bid and the contract dates for the ships' deliverywere June 1983, October 1983 and February 1984. Deliverieswere made on scheduleand all ships met the specifications. The ships were capable of unloadingat rates in excess ci 500 tons per hour. In addition, the three new ships are outfittedfor TSP backhaul,whenever it begins. For the ammonia carrier,PUSRI used the same consultantsfor designs and they recommendeda 4,500 dwt ship as the optimum. A West German shipyardwon the bid and deliveredthe ship on scheduleand under budget.

3.6 Studie,and Detailed Engineering. The project included funds for port master plans and detailed engineeringstudies and later a fertilizer marketingand distributionstudy was added (partly to use saved funds) which also incorporatedthe original block train study. The 11 ports to be studied had been identifiedearlier under the IntegratedSea TransportStudy (L-1250 IND) and belonged mostly to the Perumpel II system. The Director General of Sea Communications(DGSC) was responsiblefor this project componentwhich was largely traatedas a part of the Maritime Sector DevelopmentProgram. The master plans and detailed engineeringfor these Inter Island Liner Service (ILS) ports was to be carried out in two phases. Phase I included detailed engineeringfor the expansion of Tanjung Priok port, and master plans and (where necessary)detailed engineeriAgfor the other Perumpel II ports. DGSC used several foreignand Local consulzantsfor specific tasks such as the port planning,navigational and communicationssystems improvement,dredging improvement,container operations management, maritime safety studies, etc. DGSC managed this componentwell and the study findings led to the ongoing -9-

National Ports Project (L-2577 IND). In addition to port operations and careG handlingfacilities improvementsat Tanjung Priok, the National Ports project also includesinvestments identified by the study at the ports of Teluk Bayur, Panjang,Palembang and Pontianak.

3.7 In early 1985, PUSRI discussed with the Bank the requirementsfor further developmentof the fertilizerdistribution system serving Indonesia. It was agreed that a study would be undertaken to establish an overall distribution strategy covering the period 1986-1995for movement and handling of fertilizerby land and from the various productionunits or points of import to the consumptionareas throughout Indonesia. Marketing and organizational aspectswere also to be addressed. This FertilizerMarketing and Distribution StrategyStudy (FMDSS)was directed by PUSRI, under the guidance of an Inter- DepartmentalSteering Committee,chaired by the Director of Agro-Cbh-ical Industriesin the Departmentof Basic Chemical Industries. The study was carriedout by a team of foreign and local consultantsworking with a PUSRI counterpartteam. The final report, dated August 1986, recommendedstrategic improvementsin both sea and land distributionof fertilizers. Also, a linear programmingleast cost transshipmentmodel was developedas an integral part of this study. The model can be used by PUSRI to inter alia: (a) determine least cost distributionpatterns for all fertilizersthroughout Indonesia; (b) assist in the identificationof constraintsin the proposed alternative distributionpatterns; (c) assist in establishingstrategies for the distribution system; and (d) determinequantities and costs of fertilizermovements on all links in the system. The study also reinforcedthe fact that the most efficientdistribution systems is PUSRI's current "pipeline system," which is really a continuousflow process, at least down to the line III (Kabupatenand ISD) level. This system is focused on the desirable locat' n of fertilizer stocks which is at line III and IV in the marketing areas.- There is therefore emphasis on seasonalityand matching of movements to immediatemarket requirements. The report also suggested that since Indonesia is a low cost urea producer,PUSRI should focus on developing regular, long term export markets. This would imply that some qualitativeimprovements to the fertilizer(lowered percentageof fines, use of anti-cakingagents, etc.) might be required.

3.8 PUSRI is pursuing this and other study recommendationswhich also call for the investmentof abc:utUS$29 m for additional facilitiesto cover distributionsystem expansionneeds during the 1986-95 period. The faciLities includea bagging station at Cirebon, upgrading Palembangbulk loading facilitiesto 700 totnsper hour, rail sidings, warahousing,high speed bagging machines,and also pier, dredging, road improvementsand a new bagging station at Semarang. PUSRI can readily finance these improvements. Also, it was recommendedthat additional ships should be of the 10,000 dwt size and be obtained through long term charters when required (around 1990).

1/ In PUSRI "pipeline"nomenclature Line I is the point of fertilizer production or import,Line II is in or near port areas, Line III is the district level (actuallystorage) and Line IV is the retail or village level. - 10 -

3.9 Project Costs. The total cost estimate for the project at appraisal was US$185.3million. In the absence of engineeringdesigns at appraisal time, cost estimateswere based on prevailingprices and quotations from suppliersof similar equipment. These estimates turned out t_ be between 1.5 and 2 times higher than actual costs. Also some project provisionswere deleted, like the Belawan facilitiesand the ships' improvementsand spares, leadingto further cost savings. The actual total cost was US$135.1 m, some 27% below the appraisalestimate. The Bank ended up financingabout 30% of the total cost of the project. Table 4 has further details.

3.10 Allocationof Bank Loan. The following table shows the original, revised and final allocationof the loan funds.

Category Original Revised (darch 1982) (May 1984) Final ------US$ million ------

Civil works 19.0 19.0 10.4 Equipment 15.0 22.3 7.2 Consultantsservices 20.0 20.0 20.0 Unallocated 12.0 4.7 -

Total 66.0 66.0 37.6

The loan was closed on June 30, 1986 and approximatelyUS$28.4 m was cancelled. Table 5 has detailed disbursementswhich were much slower than expected due to implementationdelays and the cost overestimate.

IV. OPERATIONS

General

4.1 Completionof the project left PUSRI with a distributionsystem con- sisting of seven 7,500 dwt bulk fertilizer ships, one 4,500 dwt ammonia carrier, six bagging stations,595 railwaywagons and 81 ISDs. PUSRI, and PJKA to a certain extent, have so far operated the system reasonablywell. This was confirmedby the FertilizerMarketing and DistributionStrategy Study. However, operatingresults for the individual project elements were decidedlymixed, largely because fertilizerconsumption grew neither as rapidly nor in the locationspredicted by the appraisal report. By 1986, urea consumptionwas 2.7 mt or some 9% below the appraisalexpected 3.1 mt. On the other hand, consumptionof TSP and AS were both over 20% greater than appraisalexpectations (Table 6). These widely varying trends have made optimizationof the distributionsystem difficult. Also with the commission- ing of new plants in 1984, urea productionbegan to exceed domestic demand. Hence in 1985, PURSI began to export urea and 501,287 tons were exported. In - 11 -

1986, exports of urea from PUSRI and other domestic producers totalled 1,218,197tons. This also changed the operationalenvironment as PUSRI had to consider both the domestic and export markets in its planning scenario.

4.2 Since 1982, PUSRI has devoted efforts to reducing the level of domesticstocks measured as a percent of sales. At the end of 1982, the domestic stock of fertilizersas a percentagaof sales was about 47%; by the end of 1984 the percentage had been reduced to 21%. The levelling-offof urea domestic consumptionin 1985 coupled with a very long dry season (and consequentdelayed wet-seasonplanting) caused an increase in domestic stocks to 25% of sales. A large part of the domestic consumptionin 1986 was suppliedfrom the high stocks remaining from 1985. By the end of 1986, the domestic stock level was down to 22% of sales.

4.3 Two Governmentdecisions were made in 1986 which will affect distribution system planning in the foreseeablefuture. The first of these was to allow a reduction in the required stock levels. Prior to 1986, PUSRI was required to maintain stock levels in the consumptionareas equivalent to two months of the projectedusage. Early in 1986, PUSRI was allowed to reduce the stock levels to 1 month in Java for urea and TSP, and to 1 month in Bali, North Sumatera and South Sulawesi for urea. This decision was based on the fact that the marketingand distributionsystem had become reliable enough to justify the reduction in stock levels. The second decision was to pay PUSRI a pre-determinedlump sum amount (subsidy)on a per ton basis beginning in 1987 for marketingand distribution. Therefore,PUSRI will have to plan distribution and marketing in such a way that Lhe system is operated within the budget. The past practice of PUSRI's receivingmarketing compen.'ationto offset losses was essentiallydiscontinued. The new procedureshould serve as an incentivefor imp-ovementsin effectivenessand efficiency throughout the total system.

4.4 Retail prices of fertilizerhave been gradually increasedover the years in an effort to reduce subsidiesand compensate for increases in production costs. In 1982, the first year of this project, the retail price was 90 Rp/kg but by 1986, the price was 125 Rp/kg. Although, it is too early to make an accurate assessment,it seems that the price increasehas not had a signi- ficant effect on fertilizerusage. Paddy prices were increa3edat the same time such that an acceptablebenefit/cost ratio was maintained for the farmers. Also, in an effort to reduce the use of credit and thus reduce marketingcosts, PUSRI has concentratedefforts toward increasingcash sales. Cash sales in 1982 amount--.to only 51% of total sales but by 1986 they had risen to 80% of total aLes.

Operationof the FertilizerShips

4.5 Bulk Urea Ships. During 1984 the ships averaged 38.5 voyages each. Two of the ships operated 353 days and the last ship began operation in March and operated 275 days for the remainder of the year. Table 7 gives statisticalinformation for PUSRI's total fleet of seven urea bulk carriers and the same informationseparately for the three bulk urea ships purchased during the project for the years 1984, 1985 and 1986. The total number of voyages decreasedfrom 265 in 1985 to 239 in 1986 as a result of less domestic - 12 - urea stock in 1985 and increasedexports of urea in 1986. This situationhas resulted in under utilizationof the urea bulk ships. Utilizationis expected to imp-ove in 1988 when the Kaltim III urea plant is commissioned.

4.6 During appraisal,an assumptionwas made that backhaul of bulk TSP would be availablefrom PetrokimiaGresik. However, due to postponingof the TSP III project, bulk loading facilitieshave not been installedat Gresik and the projectedbackhaul of TSP has thereforenot taken place. Hence the three new ships, which are equipped for backhaul,are somewhat underutilized.

4.7 The second full operatingyear for the new ships was 1986 during which the ships made 103 voyages. Cargoes averaged 8,244 tons and total delivery to the bagging stationswas 840,911 tons. The average total freight haulage cost by the 3 ships purchased under the project was relativelylow as shown below:

Year Rp/ton

1984 21,067.75

1985 17,496.78

1986 21,169.33 /a

/a This increase in freight rate was due to: (i) devaluationof the rupiah, and (ii) increase in the price of fuel oil.

Operationof the Ammonia Ship

4.8 The ammonia ship began operating in August 1984. Utilizationof the ship has been Less than expected during appraisalbecause of developmentsat the Kaltim I ammonia/ureaplant. The Kaltim I plant is designed to produce 1,500 tpd ammonia of which 1,000 tpd is for upgradingto urea and 500 tpd is for direct sales as liquid anhydrous ammonia. The 500 tpd excess ammonia was to be transportedby the bulk ammonia carrier provided under this project to both domestic (Gresik) and internationaldestintations. However, utilization of the Kaltim I urea plant has been very low due to technicalproblems, and this has led to the availabilityof much larger quantitiesof excess anhydrous ammonia than planned. These larger quantitieswere sold to exporterswho charteredlarger ships than the Pusri carrier for most of their needs. The Pusri carrier was thereforeused r.ainlyfor inter-plantshipments. However, the problems at Kaltim are being resolved and the Pusri carrier should soon be fully utilized. - 13 -

Bulk Terminal

4.9 Operation of the Meneng Bagging Station. Operationof the Meneng bagging station began in May I j85. The Meneng UPP is the second largest bagging station in East Java.2 Utilizationof the UPP and the pier have been very low, averaging20X below the design rate. Several constraintsexist which temporarilylimit the utilizationrate of Meneng. For example, analysis of least cost distributionpatterns has so far suggestedsatisf)ing some of the increaseddemand by using Surabaya; however this is a limited option and most of the future demand increaseswill be met from Meneng. The Cilicap and Surabaya UPP's have both performedwell above the outputs projectedduring appraisal. For example output from the Surabaya UPP was projectedas 450,000 mtpy while actual output has reached almost 700,000mtpy and is now at maximum capacity.

4.10 However, Meneng UPP is very importantto PUSRI in meeting its marketing/distributionrequirements in East Java, particularlyduring the wet season. Utilizationhas really been below expectationsmainly during the dry season. To date, bagging production for Meneng UPP has been in accordance with the marketingplan of East Java and Bali. The peak productionwith 4 bagging lines operatinghas been 2,000 tons/day. Actual bagging and shipping at Meneng was 164,739 tons in 1985 and 244,244 tons in 1986. It is expected that utilizationof Meneng's bagging capacity will increase in direct proportion to the increaseddemand in the East Java and Bali market areas.

Bulk ReceivingPier and Conveyors at Cilacap

4.11 The bulk receivingpier and conveyorsat Cilacap began operation in August 1986. Unloadingrates from the bulk carriers,and ship turnaround time have both been acceptable. During appraisal, the capacity of Cilacap was estimatedat 317,000 mtpy. However due to higher than expected demand for fertilizer,actual output has reached a maximum of more than 500,000 mtpy. Cilacap is thereforeoverutilized and may soon require further expansion.

Operationof Rail Wagons

4.12 In October 1986 PUSRI and PJKA began operation of the block train system. By December 31, 1986, total rail shipmentsfor the year were 1.03 mt or 73.6% of the target tonnage. In 1987, inland freight with the block train concept from all supply points using PUSRI's 595 rail wagons and PJKA's locomotiveswas about 1.4 mt or 95% of target. The fertilizerblock train operationhas now become one of PJKA's best run services.

2/ Surabaya is the largest and its highest annual productionto date has been 746,968tons. - 14 -

V. FINANCIALANALYSIS

5.1 Audited consolidatedincome statementsof PUSRI for the years 1982 to 1986 are given in Table 8. They show that PUSRI's earnings and financial performancewere quite good over the period

5.2 One of the main contributorsto this good performancehas been the occasionalincreases in the price of urea supplied to farmers since it was fixed at Rp 70 per kg in late seventies. The increaseswere to Rp 90 per kg from November 1982, Rp 100 per kg from November 1984 and Rp 125 per kg from April 1986. The effect of these increases is reflected in the sales proceeds especiallyi.n 1985 and 1986 when revenue increasedby 12.5% and 26% while total quantitiessold recorded increases of only 5% and 6% respectively.

5.3 The followingfinancial indicators show that for the period 1982-- 1986 PUSRI achieved reasonableoverall results although there has been a slight decline since 1986. The statementof changes in financialposition (Table 9) has furtherdetails.

FINANCIAL INDICATORS

1982 1983 1984 1985 1986

Net income (Rp billion) 17.6 53.5 40.5 16.3 15.5

Working capital 44.3 69.1 119.7 63.4 85.7

Return on average net fixed assets in use 11.4 29.9 25.5 10.3 9.8

5.4 Section 4.05 of the Project Agreement inter alia stipulatedthat PUSRI should at all times maintain a ratio of net revenues earned to long-term debt service requirementsof the next fiscal year of at least 1.5:1. The ratios achieved ranged between 2.07:1 to 3.22:1 during the years 1982 to 1985. The Agreementalso specifiedthat PUSRI shall earn each year a reasonablereturn, after taxes on its fixed assets in service. Returns on net fixed assets during the years 1982 to 1986 amounted to 9.7, 10.3, 25.4, 29.6 and 11.45% respectively.

5.5 Balance Sheets as at the end of the years 1982 to 1986 are given in Table 10. PUSRI'sdebt equity ratio consistentlyimproved frortm35/65 in 1982 to 21/79 in 1986 as against the 42/58 to 25/75 estimatedat Appraisal. The current ratio also improved in 1986 to 2.2 while in the earlier years it was marginally lower than the estimates. Nevertheless,the lowest was 1.3 in 1983 which was still good. Debt service coverage ranged between 3.4 to 6.0, - 15 -

confirmingthe financialstability of PUSRI. Cash and Bank balances progressivelyincreased from Rp 74 billion in 1982 to Rp 238 billion in 1986 (includingforeign exchange). With such large balances in its possession, PUSRI could finance the constructionof a substitutenew plant (PUSRI-1B)in place of the obsolete PUSRI 1 plant or other distributionsystem expansions.

5.6 A steep decline in credit transactionsfrom Rp 107 billion in 1982 to Rp 70 billion in 1986 while sales have increasedfrom Rp 195 billion to Rp 468 billion demonstratedthe results of appropriateaction in recovering debts as well as the restrictionon credit sales. Reduction in inventories from Rp 103 billion in 1982 to Rp 94 billion in 1986 is also indicativeof strict stock control. Decline in prepaid expenses from Rp 36 billion in 1982 to Rp 5 billion in 1986 showed that advances for supplies and services are adequatelycontrolled. On the whole, the Balance Sheet reflects effective managementof the finances of the companv.

5.7 PUSRI's accounting system provides inter alia appropriateProfit and Loss accountsand Balance Sheets. The Profit and Loss accounts reflect the cost of productionand marketingand the earnings thereof. The formats, however, do not provide informationon expenses by type such as salaries and wages, stores,and other expenses including interestand depreciation. These have to be worked out by comparing figures of previous years. It is necessary that suitable formats to provide informationon expenditureby type are introducedin order to better identify costs.

VI. INSTITUTIONALDEVELOPMENT

6.1 PUSRI has during the last decade developed the capabilityof not only operating,maintaining and managing the four fertilizerplants set up at Palembang,but also of developingan extensivemarketing network. PUSRI has also been able to implement three distributionprojects, the first and th last financed substantiallyby the Bank and the second financed by CIDA.3 The first bank-financedproject under Loan 1139-IND (July 1578) helped to expand system capacity and also supportedoperational improvements which enabledPURSI to handle a 20% increase in fertilizerdistribution. PUSRI's managerialand technicalcapabilities have been further enhanced with the completionof the second Bank-financedproject. Compliancewith loan covenantswas also quite satisfactory;Table 11 has details.

6.2 Despite delays in implementation,the overall performanceof the major componentsindicate that PUSRI's capability to pla..and implement projectshas grown considerably. Based on the National FertilizerStudy II which was undertakenby the Departmentof Agriculture,PUSRI prepared proposalsfor studies to be added to the Project to (a) revise the forecast of fertilizeruse and consumption;(b) optimize the utilizationof the fertilizer

3/ A $20.0 million loan which essentiallyfinanced 220 fertilizerbox wagons, of 30 ton capacity,and 127 weighing scales and spare parts. - 16 - distributionfacilities; and (c) effect operational improvementsto expand the use of block trains.

6.3 Based on PUSRI's proposal, the Bank authorizedthe use of loan funds and actively assisted PUSRI to initiate a comprehensivestudy into fertilizer distributionand marketing strategy for the ten year period 1986-1995.The consultants'team of expatriateand local experts, drawn from different sources,were actively assisted by a counterpartteam from PUSRI. This helped to improve PURSI's overall knowledgeand capability and provided additional expertiseto undertakemajor projects independentlyin the future.

6.4 PUSRI was compensatedby the Government for marketing and distributionlosses until 198E. With the recent withdrawalof subsidies by Governmentfor marketingand distributionactivities and substitutionin its place of a lump sum per ton payment, PUSRI will need its experiencedpersonnel in marketingand distribution,to ensure that the whole system operates efficiertlyand at the lowest cost. To a certain extent, participationin the FMDSS has helped to prepare PUSRI for this role. This is because PUSRI's capabilityas an institutionfor managing the marketing and distribution system and for strategicplanning have been strengthenedsignificantly.

6.5 PUSRI has already taken some steps to reduce costs including relocatingits main office from Jakarta to Palembang,and thus also providing the benefit of closer coordinationbetween production,marketing and distribution functions. Currently the export division is retained in Jakarta. Since Jakarta is the capital of Indonesiaand the hub of commercialactivity, especiallyfor internationaltrade, retention of the export division in Jakarta helps in improvingexport trade as it facilitatescoordination with the relevantGovernment departments such as Trade, Industry,and Agriculture and provides ready access to the internationalcommunity.

6.6 PUSRI will also manage several improvementprojects currently planned, includingthe Bank-financedoptimization project for PUSRI II, III and IV ammonia units to enhance productionby 20% over the original capacity. Optimizationof PUSRI's urea units to increaseurea production, productionof melamine (using area) for supply to the plastic industry,and replacementof PUSRI I are other major projects currentlyplanned for early implementation.

VII. ECONOMIC REEVALUATION

7.1 The benefits included in the appraisal evaluationwere determined on the same basis as for the First Distributionproject. Benefitswere expected to arise from the expected reductionsin distributioncosts between the PUSRI plant at Palembang and its network of ISDs. Costs savings were measured net of (a) the capacity of the distributionsystem existing in early 1981; and (b) the overall changes in fertilizercosts to farmers that were to follow the constructionof new urea plants at Bandung and Aceh. Benefits were quantified by comparingcosts with the project'snew distributionequipment versus "without"the project when small bulk and regular line service (RLS) vessels would be used for interislandshipments and trucks for inland movements. - 17 -

7.2 The overall project economic rate of return was thus estimated to be 21% at appraisal. The ex-post rate of return was similarlyestimated to be 15Z (Table 12). This rate of return is quite acceptableas it is based on a continuedmodest average nationwide growth (4% p.a.) in fertilizerusage. The lower volumes of fertilizerdistributed, as well as delays in the implementation and use of project facilitiesand under-utilizationof the pier at Meneng also contributedto the reduced rate of return. The reasons can be summarized as follows.

(a) Urea ships and pier:

(i) the appraisal assumed no ship waiting at Belawan and Cilicap, instead there were some delays;

(ii) 14% less urea was distributedthan expected;

(iii) there were no TSP backhaul benefits;and

(iv) the Meneng bagging facility was underutilized.

(b) NH3 ship:

(i) more ammonia was available than had been expected and it was sold fob to exporterswho chartered larger ships than the Pu.ri one. This is a temporaryarrangement and it is expected that the ship will be fully utilized eventually.

(i) the delayed start of block train operationsmeant that the more costly land transporthad to be used; and

(ii) the transportingof less than expected ronnages.

VIII. THE ROLE OF THE BANK

8.1 PUSRI could most likely have financed and implementedthis project on its own. However the Bank did play a meaningful roLe by supporting planningand operationalimprovements. The Bank in 1985, for example convincedPUSRI to not purchase an additionalbulk fertilizer ship. This would have proven to be an uneconomic investment,given the eventual slow growth in fertilizerusage. PUSRI has al_o reported that participationin the FertilizerMarketing and DistributionStrategy study has helped inter-agency coordinationand it is now working on block train improvementswith PJKA. Also the study's findings on PUSRI's operationshas led to the adoption of major changes in its marketing, shipping and distributionfunctions. PUSRI is now, for example, using the Linear Program model developedunder the study to optimizeboth its domestic and export transhipmentand distribution activities. - 18 -

8.2 The DGSC has also benefitted from the findings of the studies financedthrough Loan 2120. The studies have promoted changes which aftect the way the Perumpelswill operate, the customs procedures,the revision and applicationof maritime law, as well as the role of the DGSC itself. The benefits to the country from the improvedmaritime and shipping practicesare quite substantial.

8.3 During supervisionmissions the Bank staff assisted in solving various implementationrelated problems, usually those dealing with procurementand PUSRI/PJKA coordination. The project received much less supervisionsthan normal, probably because more emphasis was placed on the MSDP studieswhich were also supportedby other Bank loans (Loan 1250 and Loan 1337). However, by design, little or no attention was paid to the fertilizer subsidy issue during project implementation.

IX. CONCLUSIONS

9.1 The project was successfuland was essentialto maintainingthe flow of fertilizersfrom the factory to the farm, in support of GOI's agricultural intensificationefforts. Fertilizerproduction more than doubled during 1981- 86 and consumptionincreased by a factor of 1.5.

9.2 Implementationof the expansion facilitiesproceeded smoothly once approvalwas received for awarding tenders. Constructionof the bulk terminal at Meneng and procurementof the rail box wagons experienceddelays because of the time required to receive final approval of the tender evaluations. Procurementof the bulk carriers and construction*f the Cilacap pier were completedwithout major problems. The expansion ; Belawan was deleted from the project. The project was completed below appraisal cost estimates.

9.3 PUSRI and PJKA are working on programs for efficientoperation of the equipmentand facilitiesacquired under the project. Efforts are under way to improve the block train system and the results are positive. It is expected that rail shipmentswill attain planned targets.

9.4 PUSRI has made organizationaLchanges using input from the strategy study which was carried our under the project. Major changes, which all have the objectiveof improvingefficiency, have been made in the shipping, marketingand distributionfunctions. - 19 -

Table I

INDONESIA

NATIONAL FERTILIZERDISTRIBUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETIONREPORT

Developmiatof ProductionUnits

Capacity Unit Commissioned Design Cumulative ------1,000 tons/yr -----

Urea PT Pusri I 1963 100 100 PT Pusri II 1974 380 480 PT Pusri III 1976 570 1,050 PT Pusri IV 1977 570 1,620 PT Kujang 1978 570 2,190 Asean Aceh 1983 570 2,760 PT Kaltim I 1984 570 3,102 PT IskandarMuda I 1984 570 3,672 PT Kaltim II 1984 570 4,242

Planned PT Kaltim III 1988 570 4,812 PT Pusri IB 1989 570 5,282 PT IskandarMuda II 1992 570 5,852

TSP P.T. PetrokimiaGresik TSP I 1980 500 500 TSP II 1983 500 1,000

AS P.T. PetrokimiaGresik AS I 1972 195 195 AS II 1984 250 445 AS III 1986 200 645

Projected Caprolactam 1989 200 800 INDONESIA

NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETION REPORT

Summary of Expected and Actual Completion of Project Components

Appraisal estimate Actual completion Tender No. of Service Tender No. of Service Description Location date months date date months date Delays

Pier Cilacap Dec 1981 18 Jun 1983 Jul 1984 9 Aug 1986 38 months Apr 1986 2

Pier Meneng Dec 1981 8 Jun 1983 Sep 1983 12 0

Bagging plants Meneng Jul 1981 24 Jul 1983 Oct 1982 6 Oct 1984 5.5 May 1985 22 months Oct 1985 4

Unloading facilities Belawan Mar 1982 12 Mar 1984 Deleted

Ships Ship 5 Mar 1982 18 May 1983 - - Jun 1983 1 month Ship 6 " 21 Sep 1983 Mar 1982 - Oct 1983 1 month Ship 7 " 24 Jan 1984 - - Feb 1984 1 month NH3 ship " 24 Dec 1982 Feb 1982 Delivered Operated 18 months Jun 1984 Aug 1984

Bagging facilities Belawan Dec 1981 12 Dec 1982 Deleted -

Railway wagons Java Jun 1982 18 Dec 1983 Jul 1984 15 Jul 1986 31 months

Rail extension Meneng/ - 45 Jun 1985 - - Aug 1986 14 months X Banyuwangi I INDONESIA

NATItJNAL FERTII 1%HRDISTRISUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETION REPORT

Summary of Consultant Services

Description Scope of work Contract dated Total cost (USS) Completion date

Pt. kellogg sriwidjaja - Design consultants for bagging terminal Meneng and CIlacap, and conveyor. November 10, 1981 3H6,669.08 September 24, 1984

Mdrine consultant and designer - Consultants for design and ron- - LN.018/DIR/9) lan. 10, 81 2,466,945.16 October 1984 struction supervision of three - LN.021/DIR/9l April 7, 81 bulk self-dischadrging vessels - LN.078/DIR/81 Nov. 8, 81 and one ammunia cairrier. - LN.08l/DIR/81 Nov. 2, 8l - LN.033/l)IK/83 March 24, 83 - LN.034/DIR/83 March 24, 83

PT. PWA. S1IIIK. - Review Pusri's findncial Infor- Octuber 1982 99,953.81 October 5, 1984 mition system

SWANCo - Preliminary design, assistance - LN.006/DIR/81 Feb. 1(1, 81 in procurement and construction - LN.070/Dir/82 March 1, 82 511,087.58 April 1984 supervision of bagging station at Meneng.

LAPI ITH - Design of wbarf at Cilacap - 2016/SP/i)IR/IV/J-83 17,699.93 November 29, 1984 12 April 1983

INCDNEB - I)esign for Pier Meneng - 52O/SP/DIl/XII/81 17,631.57 October 29, 1984 2 November 1981

PT. Soilens - Soil investigation at Meneng October 27, 1981 14,229.13 January 13, 1982

Fertilizer Marketing and Distribution Study

PT PWA SIDIK - Development of management reporting sybtem for FMI)SS August., 1, 1985 45,040.83 August 31, 1986

Halcrow, Fox and associates - Consultant fo,r FMDSS November 15, 1985 39,344.99 December 13, 1985

1FI)C USA - Consultant for FMDSS July 25, 1985 87,822.59 August 31, 1986

Institut II.MU-ILMU Mana - Services for computerization April 28, 1986 12,153.29 August 31, 1986 Jemen Indonesia basic data FMDSS

I.A. WARD - Consultauit for FMNISS August 10, 1985 2(,590.52 December 1'), 1985 D

. . . _ . _ . . _ . . . _ _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. - 22 -

Table 4

INDONESIA

NATIONALPERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND) a PROJECT COMPLETIONREPORT

Appraisal and Actual Costs

Appraisal cost Final cost Actual cost estimate estimate as a proportion of Item LC FC TC LC PC TC forecast amount 1

Bank Financed Section of P:oject

f4eneng: Pier and conveyor 0.9 1.4 2.3 0.7 1.4 2.1 Fertilizer handling/bagging facilities 8.5 11.7 20.2 2.4 6.8 9.2

Subtotal 9.4 13.1 22.5 3.1 8.2 11.3 50.2 Belavan: Fertilizer handling facilities 0.3 0.6 0.9 -(Deleted)- Cilacap: Pier and conveyor 1.1 1.5 2.6 0.7 1.4 2.1 Rolling stock: 200 boxcars - 14.9 14.9 0.6 5.3 5.9 Spares - 1.1 1.1 0.1 0.4 0.5

Subtotal - 16.0 16.0 0.7 5.7 6.4 40.0

Ship improvements -. z spares - 4.4 4.4 --(Deleted)--

Consultant services: PUSRI (a) Project supervision and (b) Fertilizermarketing study 2.5 3.0 5.5 1.5 3.1 4.6 PJKA: Railway block train study 0.3 0.3 0.6 0.1 0.4 0.5 DGSC: Maritime sector development 5.5 12.0 17.5 4.6 10.7 15.3

Subtotal 8.3 15.3 23.6 6.2 14.2 20.4 86.4

Total Bank Financed 19.1 50.9 70.0 10.7 29.5 40.2 57.4

Export Credit Financed Part of Project

3 Urea bulk ships - 43.7 43.7 2.2 41.8 44.0 100.6 1 Refrigeratedammonia carier - 25.0 25.0 1.1 20.5 21.6 86.4

Total Export Credit Financed - 68.7 68.7 3.3 62.3 65.6 95.5

PJKA Financed Part of Project

Railway extension: Design and supervision 1.8 2.4 4.2 1.0 0.3 1.3 Rightof way 12.1 - 12.1 5.4 - 5.4 Construction 14.2 16.1 30.3 9.1 13.5 22.6

Total PJKA (Gov't) Financed 28.1 18.5 46.6 15.5 13.8 29.3 62.9 GRAND TOTAL 47.2 138.1 185.3 29.5 105.6 135.1 72.9 - 23 -

Table 5

INDONESIA

NATIONALFERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETION REPORT

Forecast and Actual Disbursements

IBRD Fiscal Appraisal Actual disbursementsas Year/Quarter estimate Actual % of appraisalestimate

82 - IV 1.0 0.0 0

83 - I 2.8 0.0 0 II 5.7 0.0 0 III 10.3 1.9 18 IV 15.4 2.5 16

84 - I 21.5 3.0 14 II 28.1 5.2 18 III 34.7 10.0 24 IV 41.4 13.v) 31

85 - I 49.4 14.8 30 II 55.0 16.3 30 III 59.2 20.1 34 IV 62.0 28.0 45

86 - I 63.5 28.2 44 II 65.0 28.2 43 III 66.0 35.0 53 IV 35.6 54

87 - I 37.6 57 II 37.6 57 III - 24 -

Table 6

IN-DONESIA

NATIONAL FERTILIZER DISTRIBUTIONPROJECT (LOAN 2120-IND)

PROJECT COMPLETIONREPORT

Projected and Actual Consumptionof Urea, TSP, AS and NH3 for the Period 1981 to 1986 ('000 tons)

Appraisalestimate Actual consumption Year Urea TSP AS NH3/a Total Urea TSP AS NH3 Total

1981 1,902 573 238 - 2,713 2,139 724 282 47 3,192

1982 2,111 660 257 - 3,028 2,039 713 331 88 3,171

1983 2,401 758 273 - 3,432 2,381 834 354 179 3,748

1984 2,692 822 292 38 3,844 2,609 959 408 251 4,227

1985 3,015 923 312 47 4,297 2,607 1,048 475 290 4,420

1986 - - - - - 2,751 1,181 476 301 4,709

/a Excess of in-plant consumption.

Source: Appraisal Report and FMDSS. INDONESIA

NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETION REPORT

Urea Bulk Carrier Performance

1984 1985 1986 Three Three Three lescription new ships Total ships new ships Total ships new ships Total ships Remarks

-tal tonnage 817,281 1,808,799 1,035,787 2,097,418 840,911 1,875,545 otal ships 2.7* 6.7 3 7 3 7 * Last ship, MV. Abusamah operat- otal voyages 104 237 123 264 103 239 ing from early ' 1984 verage cargo carried per ship 302,696 269,970 344,929 299,631 280,303 267,935 qerage cargo carried per voyage 7,858 7,632 8,353 7,994 8,244 7,847 verage total operating days per year per ship 327 - 365 - 340 - - 26 - Table 8

INDONESIA

NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETION REPORT

Summarized Income Statement for 1982-86 (in million Rupiah)

Year ended December 31st 1982 1983 1984 1985 1986

Marketing Unit Operation Net sales 194,626 287,432 326,841 368,797 467,703 Cost of sales 145,324 216,243 237,445 206,413 281,608

Gross Income 49,302 71,189 89,396 162,384 186,095

Operating Cost Sales expenses 47,971 62,734 104,703 178,572 153,389 Administration& overhead expenses 14,069 22,590 5,884 6,449 18,703

Total Operating Cost 62,040 85,324 110,587 185,021 172,092

Operating Income (12,738) (14,135) (21,191) (22,637) 14,003

Other income 622 1,095 1,712 2,232 1,209 Other expenses 5,440 11,329 10,188 6,979 17,545

Total Other Income & Expenses (4,818) (10,234) (8,476) (4,747) (16,336)

Marketing loss (17,556) (24,369) (29,667) (27,384) (2,333) Government compensation 17,556 24,369 29,667 27,384 2,333

Production Unit Operation Net sales 151,502 185,629 192,646 138,939 134,312 Cost of sales 121,324 136,043 150,341 141,267 134,677 Gross income (loss) 30,178 49,586 42,305 (2,328) (365) Other income 5,573 35,113 26,199 30,155 30,704 Other expenses 3,872 20,509 6,224 4,596 12,996

Total Other Income & Expenses 1,701 14,604 19,975 25,559 17,708

Production Unit Net Income 31,879 64,190 62,280 23,291 17,343

Income Before Taxes 31,879 64,190 62,280 23,231 17,343

Estimated taxes 14,283 10,653 21,717 6,905 1,769

Total Net Income of Company 17,596 53,537 40,563 16,326 15,574 - 27 -

Table 9

INDONESIA

NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETION REPORT

Statement of Changes in Financial Position (in million Rupiah)

Year ended December 31st 1982 1983 1984 1985 1986

Source of Funds From the Company's Operations Total net income of company 17,596 53,537 40,563 16,327 15,573 Depreciationof fixed assets 26,823 22,206 37,221 36,757 40,990

Total 44,419 75,/43 77,784 53,084 56,563

From Other Sources Additional capital 1,588 6,223 17,895 5,513 35,051 Increase (decrease) in long-term liabilities 829 5,943 34,199 (7,987) (29,639) Decrease in long-term advances - - (1,824) - - Sales of fixed assets - - - 1,657 192 Adjustment of previous year (2,455) (3,262) (15,247) 2,479 73 Decrease in deferred taxes - (15,553) 6,903 8,649 - Change in foreign exchange rate - - - - 23,471

Total (38) (6,648) 41,927 10,311 29,150

Total Working Capital Provided 44,381 69,095 119,711 63,395 85,713

Use of Funds Acquisition of fixed assets 10,143 47,670 17,198 37,725 42,619 Increase (decrease) contribution 18,913 (10,677) 14,900 (14,270) (16,258) Increase (decrease) in project funds (6,554) 2,886 7,176 (16,708) 4,699 Increase in investment 3,342 7,293 7,510 1,607 (145) Increase of deferred charges 209 (1,240) 798 3,612 (1,480) Payment of dividends 17,347 6,891 10,894 12,715 6,530

Total Working Capital Used 43,400 52,823 584478 24,682 35,995

Change in Working Capital 981 16,272 61,232 38,713 49,718 - 27 -

Table 9

INDONESIA

NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETION REPORT

Statement of Changes in Financial Position (in million Rupiah)

Year ended December 31st 1982 1983 1984 1985 1986

Source of Funds From the Company's Operations Total net income of company 17,596 53,537 40,563 16,327 15,573 Depreciationof fixed assets 26,823 22,206 37,221 36,757 40,990

Total 44,419 75,/43 77,784 53,084 56,563

Total (38) (6,648) 41,927 10,311 29,150

Total Working Capital Provided 44,381 69,095 119,711 63,395 85,713

Total Working Capital Used 43,400 52,823 584478 24,682 35,995

Change in Working Capital 981 16,272 61,232 38,713 49,718 - 29 -

Table 11

INDONESIA

NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETION REPORT

Compliance with Loan Conditions

Action required Action Taken

Section 3.01. The Borrower shall make available to PUSRI the Complied with funds required by PUSRI for carrying out Parts A.1, A.2, A.3 (a), A.4, A.5 (a) and A.5 (b) (i) of the Project, under a financing agreement to be entered into between the Borrower and PUSRI, under terms and conditions which are satisfactory to the Bank.

Sef!tion3.04. The Borrower shall cause PUSRI and PJKA to Complied with estaTflsh and thereafter maintain arrangements satisfactory to the Bank for the proper operation and maintenance of PUSRI's railway stock by PJKA.

Section 4.03. The Borrower shall take or cause to be taken Delays in land acqui- all such action as shall be necessary to acquire as and when sition affected proj- needed all such land and rights in respect of land as shall be ect implementation required for carrying out the Project. Without limitation to the foregoing, the Borrower shall cause cause DGSC to make available to PUSRI in a timely fashion land suitable for: (i) the site of the proposed bulk urea reception and bagging station at Meneng included in Part A.2 of the Project; and (ii) the sites and access for the piers to be used for the unloading of urea which piers shall be for the sole use of PUSRI at Meneng and Cilacap.

Section 4.04. The Borrower through PJKA and in close Block trains being cooperation with PUSRI shall improve the operation of fertilizer operated at about 95% block trains in accordance with performance indicators agreed with of target levels the Bank. Such performance indicators shall, inter alia, provide for a specific monthly average turnaround timeots- u-F~Elock trains from each major loading point. If the improvements provided for in the performance indicators are not effected by the time Part A.5 (b) (ii) of the Project is completed, the Borrower through PJKA and PUSRI and the Bank shall promptly review the block train operations and, taking into account the findings and recommendations of the consultants under Part A.5 (b) (ii) of the Project, shall agree upon the action to be taken to improve block train operations.

Section 4.05. The Borrower shall cause PJKA, not later than Complied with June 3U, IY84, to make available at all times sufficient mainline and shunting locomotives to ensure efficient fertilizer distribution operations on the part of PUSRI.

Section 4.06. During any period in which the sale and Complied with distribution of fertilizer in Indonesia is controlled by the Borrower, or any of its agencies or instrumentalities, the Borrower shall not take any action with respect to fertilizer sold in Indonesia which would prevent PUSRI, operating efficiently, from earning a reasonable return, after taxes, on its assets (except fixed assets not yet in service). - 30 - Table 12

INDONESIA

NATIONAL FERTILIZERDISTRIBUTION PROJECT (LOAN 2120-IND)

PROJECT COMPLETIONREPORT

Summary of Project Benefit and Cost Streams (Rp million)

Investments Benefits Super- Bulk vision, Bulk ships NH3 Rail- training, ships NH3 Rail- Year & ports ships way etc. & ports ships way Net

1981 102 (102)

1982 21,919 1,848 765 (24,532)

1983 28,183 9,240 1,276 (38,699)

1984 6,263 7,392 848 1,021 (15,524)

1985 4,242 1,021 15,306 (866) 2,854 12,031

1986 3,394 918 8,552 (1,284) 4,390 7,347

1987 10,000 900 4,918 15,818

1988 10,000 1,230 5,510 16,740

1989 10,000 1,680 6,174 17,854

1990-99 10,000 1,800 6,918 18,718

Economic Rate of Return is 14.8% IBRD15763R(PPAIR

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