Documcnt of The World Bank

FOR OMCAL USE ONLY

Public Disclosure Authorized Report No. 8820

PROJECTCOMPLETION REPORT

REPUBLICOF INDONESIA Public Disclosure Authorized

COALMINING ANDTRANSPORTATION ENGINEERING PROJECT (LOANS-9-IND)

AND

BUKIT ASAMCOAL MINING DEVELOPMENTAND TRANSPORTATION PROJECT (LOAN2079-IND)

JUNE 25, 1990 Public Disclosure Authorized

Energy Division TechnicalDepartment Public Disclosure Authorized Asia RegionalOffice

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizton. LIST OF AioBREVIATIONS

BACOMDAT Bukit Asam Coal Mining Development and Transportation GOI Government of Indonesia IBRD International Bank for Reconstruction and Development IDC Interest During Construction MAP Maximum Austerity Program PCR Project Completion Report FOR OMCIALUSE ONLY THEWORLD SANK Washington.DC 20433 U.SA

Ohke di OwtwmGowat awm vluit

June 25, 1990

MEMORANDUM TO THE EXECUTIVEDIRECTO0t AND THE PRESIDENT

SUBJECT: Project Completion Report on Indonesia Coal Mining and TransportationEngineering Project and Bukit Asam Coal Mining Development and TransportationProject (Loans S-9 and 2079-IND)

Attached, for information,is a copy of a report entitled "Project Completion Report on Indonesia - Coal dining and Transportation Engineering Project (Loan S-9-IND) and Bukit Asam Coal Mining Developmentand Transportation Project (Loan 2079-IND)" prepared by the Asia Regional Office with Part II of the report contributedby the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time.

Attachment

This document hu a resuicted distribution and may be used by reciintu only in the petformance of their officialduties. Its contenu may not otherwise be disclosedwithout World Bank authoriruion. FOR OFFIMCALUSE ONLY

REPUBLICOF INDONESIA

PROJECT COMPLETIONREPORT

COAL W.NING AND TRANSPORTATIONENGINEERING PROJECT (LOANS-9)

BUKIT ASAM COAL MINING DEVELOPMENTAND TRANSPORTATIONPROJECT (LOAN 2079-IND)

TABLE OF COhTENTS

Page

Preface...... iv EvaluationSummary ...... v

PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE...... 1

1. Project Identity...... 1 2. Background...... 1 3. ProjectObjectives and Description...... 2 4. ProjectDesign and Organization...... 3 5. Project Implementation...... 4 6. ProjectResults ...... 6 7. Project Sustainability...... 7 8. Bank Performance...... 7 9. Borrower Performance...... 8 10. ProjectRelationship ...... 9 11. ConsultingServices ...... 10 12. ProjectDocumentation and Data...... 10

PART II. PROJECT REVIEW FROM BORROWER'SPERSPECTIVE ...... 11

Preface...... 12 Highlights...... 12

1. Introduction...... 14

2. ProjectBackground ...... 15 2.1 Objective.15 2.2 Scope.15 2.3 Schedule...... 16 2.4 System Design. 17 2.5 Location.17 2.6 Organization.17

This document has a restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (Cont.)

Page No.

3. Project Implementation...... 19 3.1 Project Master Schedule ...... 19 3.2 Technical Deviations...... 20 3.3 Capital Costs ...... 20 3.4 Notable Successes ...... 22 3.4.1 Decision on Development of Non-Air Laya Mines ..... 22 3.4.2 Decision on Interim Coal Movement and Facility .... 22 3.4.3 Operational Constraints and Equipment Deficiencies 22 3.4.4 Decision to Restructure the Coordinating Body ..... 23 3.4.5 Management of Entities...... 23 3.4.6 Blanket Insurance...... 23 3.4.7 Decision on Second Tarahan Turnkey Contract...... 24 3.5 Problem Issues...... 24 3.5.1 Inadequate Survey and Investigation...... 24 3.5.2 Inaccurate Technical Design ...... 25 3.5.3 Land Acquisition ...... 25 3.5.4 Procurement...... 25 3.5.5 Insufficient Rupiah Financing...... 26 3.5.6 Delay of Offshore Financing...... 26 3.5.7 Poor Contractor Performance...... 26 3.5.8 Ineffective Use of Consultants...... 27 3.5.9 Inadequate Project Coordination...... 27 3.5.10 Problems in Training Design and Application ...... 27 3.5.11 Problems in Staffing and Recruiting...... 28 3.5.12 Train Traffic Management Problems...... 28 3.5.13 Lack of Attention to Environmental Issues...... 28 3.5.14 Deviation in Coal Price Forecast...... 29 3.5.15 Delay on Coal Sale and Transportation Agreements.. 29 3.5.16 FinlancialPerformance ...... 29

4. Bank Peforman^ee...... 30

5. Conclusion and Lessons to be Learned ...... 31 5.1 Conclusion...... 31 5.2 Lessons to be Learned .. 31 5.2.1 Technical Design ...... 31 5.2.2 Maximum Austerity/Valua Engineering...... 32 5.2.3 Project Preparation Team ...... 32 5.2.4 Project Organization Structure...... 32 5.2.5 Responses to Change in Project Master Schedule .... 32 5.2.6 Recruitment, Staffing and Training Program...... 32 5.2.7 Procurement Procedures...... 33 5.2.8 Time Value of Money ...... 33 TABLE OF CONTENTS (Cont.)

Page No.

PART III. STATISTICAL INFORNATION...... 34

1. Related Bank Loans and/or Credits . .34 2. Project Timetable .. 34 3. Loan Disbursements (Cumulative) US$million . . 34 4. Project Completion .. 35 5. Project Costs and Financing .. 35 A. Project Costs .35 B. Project Financing.36 6. Project Results .. 36 A. Direct Benefits.36 B. Economic Impact.37 C. Financial Impact.37 7. Status of Covenants .. 38 8. Use of Bank Resources .. 41 A. Staff Inputs.41 B. Missions .42

4 REPUBLIC OF INDONESIA

COAL MINING AND TRANSPORTATIONENGINEERING LOAN

AND

BUKIT ASAM COAL MINING DEVELOPMENTAND TRANSPORTATIONPROJECT (LOAN 2079-IND)

PROJECT COMPLETIONREPORT

PREFACE

This is the Project CompletionReport (PCR) for the Coal Mining and TransportationEngineering Loan and for the Bukit Asam Coal Mining Developmentand TransportationProject in Indonesia,for which Loans S-9 and 2079-IND in the amounts of US$10 millOn and US$185 million respectively,were approvedon May 9, 1978 and January 7, 1982, respectively. The engineeringloan was refinancedunder the project loan. The project loan was closed on September30, 1989, two years behind schedule.The last disbursementwas on April 4, 1990, and US$5.11 million was cancelled (excludingUS$1.14 million cancelledin August 1986) during April 1990.

The PCR was prepared by the Energy Division of the Technical Departmentof the Asia Region (Preface,Evaluation Summary, Parts I and III), and the Borrower (Part II).

Preparationof this PCR was started during the Bank's final supervisionmission in May/June 1989 and is based, inter alia, on the Staff Appraisalreport; the Loan and ProjectAgreements, supervision reports; correspondencebetween the Bank and the Borrower;and internalBank memoranda. - ii -

REPUBLICOF INDONESIA

COALMINING AND TRANSPORTATIONENGINEERING PROJECT M S -9)

MUKITAZAM COAL MINING DEVELOPMENTAND TRANSPORTATIONPROJECT 1LQ"V`179-IND)

PROJECTCOMPLETION RRPYD

EVAL'UATIONSUNY

Objective

The key objectiveof the Bukit Asam Coal Mining Developmentand TransportationProject was to assist the Governmentof Indonesia (GOI) to move away from a mono-energypolicy and to invest in an alternative(coal) energy developmentto free scarce petroleumresources and increaserelated foreign exchange earnings (para.3.1).

Enginepringand ImplementationExperience

Engineeringstudy work undertakenunder Loan S-9 was effectivein providing the technicaland financialbasis for Bank appraisalof the complex integrated (mine-rail-terminal-ship)project (para. 4.1). The engineeringstudy phase took longer to complete than anticipateddue to the complexnature of rhe project scope.

Project implementationwas dogged by delays, compoundedby organizationaldeficiencies, with the result that the original target date for coal movement to Suralaya slippedover four (4) years. Arrangements for project controlwere ineffective(paras. 4.2 and 4.3). Project constructionfaced many delays occasionedby inadequatequalifications of staff in the implementingagencies, cumbersome and biased GOI procurement procedures,poor performanceof local contractors,protracted GOI negotiationswith cofinancingagencies, land acquisition,mobilization of local currency,and inadequateground investigatior.s(paras. 5.1 and 5.2). Initial operationswere disappointing.Mine developmentwas slower than anticipateddue primarilyto poor performanceof main mine equipment(para. 6.3) and unsuccessfultraining campaigns (para. 11.1). Coal transportfrom initialmine operationswas slow to develop due to incompleteconstruction, rail operationsplanning deficiencies,and settlementdifficulties experiencedat the terminal site.

ProQect-Results

However, project objectiveswere eventuallyreached, which is a tribute to the dedicationof the implementingagencies (para.4.4). - ifi - Internationalcoal prices,which governed the sales price of project coal outk.utand the revenue of the mine implementingagency, did not follow the increasespredicted at appraisal (para. 5.4). As a covqequenceand compoundedby project implementationdelays, the mining company faced financialdistress. GOI, with Bank agreement,will restructurefinar-ially the implementingage-icy, reducing its debt/equity ratio to 35:65 (para. 6.3).

Project Sustainability

Followingthe proposed financialrestructuring of the mining company, the project is likely to sustainan acceptablelevel of net benefits throughoutits economic life. Main risks to sus...ainabilityare developmentof maintenancefacilities at the mine and rail components, which remain to be completedand manned with fully trainedpersonnel (para. 7.1).

Findings and Lessons to be Learnt

Implementationof such a complex integratedproject has proved a monumental task for the relativelyinexperienced implementing agencies, compoundedby inadequateproject organizationand control arrangementsput in place by GOI. Although ultimately,physical project objectiveshave been reached, project benefits in terms of financialresults can and will only be reached by substantialfinancial restructuring of the implementing agency. This has been necessitated,inter alia, by falling international coal prices not anticipatedby the Bank (para. 5.4).

The critical importanceof developingan adequate organizational structurefor project implementationthat focuseson establishmentof effectiveproject coordinationand monitoringcannot be overstressed(para. 9.4). Streamlinedprocurement procedures are critical to the implementationof high capital cost and complex integratedprojects (para. 9.4). In cases where implementingagencies have limited experienceof developmentof advanced technologyand complex projects,turnkey contract options should be consideredas an alternativeimplementation arrangement (para. 9.5).

Although there are minor differencesin focus and presentation format between Parts I and II, the Bank and the Borrower are in agreement regardingthe definitioi,and analysis of major implementationissues; project results; Bank and Borrowerperforman-e; and lessonsto be learnt. PROJECTCCOMPLETION REPORT

REPU4LICOF INDONESIA

COAL MINING AND TRANSPORTATIONENGINEERING PROJECT (LOAN S-9)

BUKIT ASAM COAL MINING DEVELOPMENTAND TRANSPORTATIONPROJECT (LOAN2079-IN)

Part I

1. Project Identity

ProjectName - Bukit Asam Coal MitlingDevelopment and TransportationProject Loan No. - 2079-IND RVP Unit - Asia Country - Indonesia Sector - Energy Sub-sectors - Coal and Transpo-

2. Background.

2.1 Prior to 1945, Indonesiarelied to a large extent on coal and hydroelectricenergy for its commercialernergy. owever,subsequent availabilityand exploitationof indigenousoil ' I the country to develop a petroleum-basedenergy sector, and domestic coal production,which had previouslyexceeded 2 million tonnes per year (mtpy),slumped to less than 0.5 mtpy through the 1970's. The oil crises of the 1970's and the resultantgreatly increasedopportunity cost of utilizingindigenous oil, promptedthe Governmentof Indonesia(GOI) to formulatea strategyof developingalternative energy sources. Repelita III (the third Five-Year plan period) gave first priority in the energy sector to the d- elopmentof a more balanced domestic energy cors'imption,encouraging the developmentof coal for internalconsumption wherever technicallyand economically feasible. In 1976, a PresidentialInstruction was issued requiringthe maximu..possible utilizationof coal for future domestic electricpower generationand industrialuse.

2.2 A comprehensiveJava (ElectricPower) System DevelopmentStudy financedby the Bank under the Third Power Project (Credit399-IND, signed June 1973) identifiedthe SuralayaPower Scheme in West Java. The selectionof Suralayaas the major center for power developmentin West Java followedBank-financed feasibility assessment under the Fourth Power Project (Credit1127-IND, signed June 1975). Constructionof the first phase SuralayaUnits I and II was undertakenwith Bank assistanceunder the Eighth and Ninth Power Projects (Loans 1708-INDand 1872-IND,signed June 1979 and June 1980 respectively). To accord with the 1976 Presidential instruction(para. 2.2), the power units (initially2 x 400MW) were designed to burn oil and/or coal (dual-fired). - 2 - 2.3 In 1976 and followingthe PresidentialInstruction, the State Coal Mining company requestedBank assistanceto rehabilitatethe Bukit Asam coal mining operationsin South Sumatra. InitialGOI thoughts for rehabilitationwere modest and through Bank financed technicalassistance (EngineeringLoan S-9, signed May 1978), a series of studieswere undertakento investigaterehabilitation of the Bukit Asam coal area to develop to a coal productionlevel of 3.0 mtpy to feed the Suralayapower units I/HI (2.4 mtpy) and to serviceother domesticindustry coal requirements(0.6 mtpy). The studies effectivelyaddressed major physical issues relating to assessmentof availablecoal reservesand coal quality, mine system and technologyselection, and the selectionof an optimal transportsystem to carry coal throughSouth Sumatraand across the Sunda Straits to West Java and the Suralaya site.

2.4 With the growth of domestic demand for oil outpacingthe increase in oil productionir. the late 1970's and oil exports showinga declining trend, GOI recognizedthe urgent need to increase investmentin the dsvelopmentof other energy sources,particularly coal, to ensure continued and, if possible,increased petroleum export earnings critical to Indonesia'seconomic position. GOI and Bank staff identified(1978/79) the benefits of developingthe Bukit Asam coal mine and of developirgand integratingrelated transportationto carry the coal to Suralaya. The componentsof the projectwere appraisedin Octooer and December 1980 and a post-appraisalmission was undertakenin June/July 1981. Funds (US$5 million)were provided to initiatecoal explorationaround Bukit Asam and elsewherein Indonesia. Utilizationof these funds is referencedin the ProjectCompletion Report dated May 4, 1989 for the Coal Exploration Project (Loan 215$ IND).

3. ProjectObiectives and Descrixtion.

3.1 The key project objectivewas to assist GOI to move away from a mono-energypolicy and to invest in an alternative(non-tradeable coal) energy developmentto free scarce petroleumresources and increaserelated export earning potential.

3.2 The developmentof the Bukit Asam Coal Mining and Transportation Project - involvingthe developmentof the Bukit Asam coal mine in South Sumatra, rehabilitationand renewal of rail facilities,development of a coal terminal,and provision f a ship to transportcoal to the Suralaya power plant on Java - was a first-stepin meeting this objective.The key project componentswere:

(i) engineering,procurement, and constructionof an openpit coal mine, and relatedmine infrastructure,to produce 3.0 mtpy coal to feed SuralayaUnits I/II and local industrialconsumers;

(ii) engineeringand procurementfor rehabilitationand renewal of 405 km. of rail track from the mine to a proposed coal terminal on the southern coast (Tarahan)of South Sumatra;

(iii) turnkeyengineering, procurement and constructionof a coal terminalat Tarahan; and (iv) engineeringand procurementof a self-unloadirg9,200 DWT coal ship to transportcoal across the Sundra Straits to Suralaya.

3.3 Other project componentsincluded development of a mine townsite, rehabilitationof the existvig coal terminal at Kertapati (Palembang) throughwhich coal delivery to Suralaya could be initiatedpending completionof Taral-an,and develnpmentof a short-termMuara Tiga mine adjacent to Bukit Asam that could genereteearly coal pending full coal productionat Air Laya (BukitAsam).

4. ProjectDesign and Organization

4.1 The conceptualfokindation for the project design was developed through extensivepre-feasibility and feasibilitystudy programs prepared by internationalconsultants and financedunder the EngineeringLoan S-9. These studieswere reviewedby Bank staff and GOI agencies and the concepts were shared and understoodmutually by all concernedparties. The scope and scale of the project were appropriateand particularlytimely in light of the objectiveof supplyingcoal to the Suralayapower plant and local consumers.

4.2 The roles and responsibilitiesof the governmentinstitutions and agencies responsiblefor the project were clearlydefined and understood. However, the Bank and the Borrowerwere not in full agreement,at the time of appraisaland at loan negotiations,regarding the most appropriate institutionalstructure for project control, coordination,and monitoring (see also paras. 8.2 and 9.3). Bank staff held the view that gc.vernment should place the project under the direct controland supervisionof a senior governmentofficial or Authorityin order to ensure full coordinationacross the mining and transportsector componentsof the project, and to ensure that overallproject implementationwas effectively controlledand that any implementationissues received the attentionof personnel in a position to make valued and quick correctivedecisions. GOI preferred to permit individualentities (mine, rail, terminal and ship) to control their own implementationactivities including schedule and costs, and that overallproject coordinationbe placed in the hands of a Steering Committee,chaired by the SecretaryGeneral of Communicationswith the DirectorGeneral of Mines as Deputy Chairman,and assistedby a government ProjectMonitoring Group that would track progressby individualentities and ensure integratedscheduling and efficientcost control, thus providing an early warning system in the event scheduleslippage or cost overruns developed. This arrangementwas acceptedby Bank management.

4.3 In practice,this organizationalstructure was ineffective: projectmonitoring and cost control analysis,which depended on monthly reports from individualentities, was typically3-4 months behind time and, therefore,of little value in quickly identifyingimplementation difficultiesand issues;reports on monitoringwere informativerather than issue- and action-oriented;and the SteeringCommittee, although attentive to the concerns of Bank supervisionmissions regardingimplementation issues,was ineffectivein controllingthe project and ensuring that correctiveaction was quickly taken or that issueswere raised to a high enough level in Governmentto ensure rapid resolutionof them. - 4 -

4.4 It was the above aspect of project organizationand design that mainly delayedproject implementation.The eventualattainment of the primaryproject objectiveof supplying200,000 tonnes of coal per month to Suralaya is a tribute to the dedication of successivePresident Directors of the individualproject entities.

5. Project Implementation

5.1 The most notablevariance between planned and actual project implementationwas the progressivecumulation of project delays. The original target date for full coal movement from Bukit Asam to Suralayawas June 1985, a target that was achievedonly in July 1989, an overallproject implementationdelay of 49 months. Even by that date, project construction was not completed (criticalmine and rail workshopsand warehouses remained in construction)and the Bukit Asam (Air Laya) mine will need to be augmentedby coal productionfrom adjacentcontract mine areas (not included in the project scope or cost) until at least end 1990. Project delays were many and varied, and dogged the project from the outset of implementation,and throughoutconstruction and early years of operations. The main reasons for project slippage included:

o deficienciesin project control,coordination and monitoring o inadequatequalifications of project entity staff o cumbersomeand biased procurementprocedures o poor performanceof local contractors o protractednegotiations with cofinancingagencies o delayed land acquisition o delays in mobilizinglocal currency o inadequateoriginal ground investigations

5.2 A more candid dialoguewith governmentrepresentatives during loan negotiationscould have led to improvedorganizational arrangements for Project control and therefore,improved project implementation(para 8.2). At appraisal,project staff recognizedthat project entitieswould need to upgrade the qualificationsand experienceof key staff by appropriate recruitmentand trainin-. Unfortunately,implementation was plagued by the inabilityof project entities to recruitpersonnel with the requisite skills to assimilateproject technology. Proposalsdeveloped by the entitiesand their internationalconsultants to facilitaterecruitment efforts by the developmentof appropriatecompensation packages for the project, more in line with private sector packages,were not in line with existingMinisterial scales and were found unacceptableby GOI. During appraisal,allowances were made for the likelihoodof Drocurementdelays but the lengthydeliberations and apparentbias of the GOI central procurementagency (SEKNEG),and its complexprocedures, were not anticipatedby project staff or indeed,by project entities. Local contractorswere frequentlyselected on other than a lowest evaluated basis, and unit contractrates were frequentlynegotiated downward, with the result that many local contractorswere selectedthat lacked the requisitephysical, human, and financialresources to undertaketheir work program. A more thoroughreview of governmentprocedures and approval processesfor local procurementwould have sharpenedBank appreciationof this issue and led Bank staff to initiatediscussions with GOI regarding - 5 the benefits of streamliningprocuLement and bid evaluationprocedures to preserveproject benefits. GOI incurredvarious implementationdelays throughdrawn-out cumbersome negotiation with cofinanciers. Initially, many delays were occasionedby developmentof a GOI Counter Purchase Policy. At the inceptionof the project, a 10 month delay occured in finalizingthe Tarahan contractand the project master schedulehad to be substantiallyrevised at this early stage of *lementation. Similar delays occured subsequently. Land acguisitii.twas a major issue during the early years of the project. At both the mine and rail sites, cumbersome and time-consur.^ inventorizationand compensationprocedures led to substantiale...tlys -n completion of mine service facilitiesand development of a rail con -:ii. into Tarahan. OI faced increasingbudget constraints throughoutprc.J,.t implementatior and scheduledequity and local budget injectionsinto; the mine and rail componentsof the project were typically delayed or deferred. Project entitiesrepeatedly felt obliged to defer local works and the mining companywas obliged to seek commercialloans at interestrates not included in project costs. Deferral of study of bridge abutment conditionsby the rail companycontinue, to this day, to impact the timely and efficienttransport of coal from Bukit Asam to Tarahan. Project implementationidentified weaknesses in original ground investigations.At the mine site, a major mine equipment (excavator) redesignwas requiredbecause of the unexpectedconditions of overburden and coal and major equipmentdowntime, not anticipatedor scheduledby project consultantsox Bank staff, occured. Serioussettlement problems at Tarahan were experiencedby the originalTarahan contractor. This resulted in a protractedsoil investigationand legal investigationthat finally led to GOI dismissingthe contractorand to the procurementof a second turnkey arrangement. The project cost of the terminalconsequently exceeded estimatesby US$34 million equivalent.

5.3 Projectrisks were defined at appraisal. These related to anticipatedproblems in project coordinationand management,procurement delays and availabilityof local funds. The definitionof these risks was accurate,in principle,but their impact, in retrospect,was underestimated. Technicalrisks were consideredfew due to the well-known technologiesinvolved. However, the high technologicalnature of the mine sub-systemsselected, proved to require a substantiallylonger learning curve than predictedand proposedby project consultantsor allowed for in the Bank appraisal. Sensitivityanalysis undertaken at appraisal identifiedthe impact of various factors (delay,project costs and prices) but did not adequatelyconsider the impact of extendeddelays and a substantialdeterioration of internationalcoal prices, or the possibility of a combinationof these factors,which the project actually incurred.

5.4 A seriousproject risk, inadequatelyaddressed auring appraisal, was that the opportunitycost of importingcoal might not develop in accordancewith officialBank projections. The sensitivityanalysis undertakenby Bank staff did not fully quantify the risk that falLing internationaloil and coal prices would seriouslyaffect financial projectionsand projectviability.

5.5 A number of aspectsof the project design contributedto project implementationdelay. First, the project design was of a complex integratednature involvingmine development,railway rehabilitationand renewal, constructionof a coal terminaland design and procurementof a coal ship. Such 'aproject configurationwas ambitiousand more complex than any other project previouslyimplemented by GOI. The design of the mine sub-systemselected from alternativeselaborated by project consultantswas technologicallycomplex compared to alternativesystems. In addition,the mine sub-systemhad not been successfullyoperated in other LDC's within the time frame envisagedby the consultants. Organizational arrangementsfor the railway sub-systemwere complex involvingtwo parts, one for which the State Railway retainedresponsibility and another, for which the State Railway retainedresponsibility but supportedby extensive technicalassistance. This arrangementled to confusionof responsibilitiesand inconsistentimplementation arrangements. Although the design and constructionof the Tarahancoal terminalwas placed in the hands of a turnkeycontractor, unforeseen ground conditionsled to severe settlement,necessitating long investigationsand the eventual dismissalof the contractorand the appointmentof a second turnkey contractor. This constructiondelay was the longestsingle project slippageof 41 months.

6. ProjectResults

6.1 The primary project objectiveof developingthe Bukit Asam mine and related transportinfrastructure to supply fuel requirementsof Suralaya power plant was met in July 1989, with the start of delivery of 200,000 tonnes coal per month to the power plant. The major variance between planned and actual project implementationschedule occurred due primarilyto delays occasionedby sub-optimalorganizational arrangements, procurementdifficulties and delays,delays in mobilizationof local funds, delays in railway track upgrading,and settlementproblems at Tarahan terminal (Section5).

6.2 The installedproject cost at project completionis estimatedat US$811 million, 28% below the appraisalestimate of US$1123.9million. The three principalreasons for the cost reductionare devaluation(cumulative 186%) of the local currency against the US$ over the project implementation period; competitivecosts for importedequipment, obviating the need to utilize US$ 140.9 million physicaland price contingencies;and a maximum austerityprogram initiatedby GOI during detailed engineering.

6.3 However, despite the project cost reduction,delays in project implementation,slower than plannedbuild-up of coal productionand transportto Suralaya and other domesticconsumers, and a continuingweak internationalcoal market which depressesthe price for project coal, the project financialrate of return is estimatedar 3.4%.I/ This compares with the estimate at appraisalof 11.7%. Similarly,the economic rate of

J/ The Borrowerhas calculateda financialrate of return "in the neighbourhoodor 6%" (Part II, para. 3.5.16). This calculationwas based on an allocationof part of the capitalcosts of the railway componentof the Project to a "withinthe Project" scenario. This procedurefollows that of the Bank's SAR but, due to the quite arbitrarynature of the investmentsplit, was not includedin the Bank's calculationof the estimatedFRR at Project completion. - 7 -

return is estimatedat 2.2% compared to the appraisalestimate of 12.2%. The financialdistress that the project caused to the State Mining Company led the Bank and Governmentto review the company'sfinancial structure. GOI propose to reduce the debt/equityposition of the company from the originallyproposed 60:40 to 35:65 by the assumptionof certain of the debt incurredthrough project development. The Bank has supportedthis proposal,in principle,which will enable the company to operate in a positive cash environmentin the future without further subsidy. A final financialstructure will be reviewedby GOI at project completionwhen full project costs are evaluated.

6.4 Even recognizingthe lower than anticipatedfinancial and economic benefits of the project and the need for GOI to restructurefinancially the mining company, the project has facilitatedGOI's move away from its earliermono-energy policies. Through recognitionof the reasons for the lower than anticipatedproject benefits, GOI remains committedto the utilizationof coal for thermalpower generationand, supportedby the Bank in this position,is continuingto encouragespecific public and private sector plans for expansionof coal mining, subject only to financialand economicviability, and domesticcoal market requirements.

6.5 The project has contributedto human and regional resource developmentproviding substantialemployment and training opportunities. Although the technologyselected for the projectwas relativelycomplex, project entities committedthemselves to its effectiveoperation and maintenance,and this has raised Indonesia'stechnological capacity in both the mining and transportsub-sectors. Strengtheningof state mining and transportentities has been considerableand the capabilityof these entities to undertake similarprojects with much reduced technical assistancehas been considerablyenhanced. The critical importanceof effectiveproject organizationand project coordinationand monitoringof complex integratedprojects is now more fully appreciatedby GOI agencies.

7. Proiect Sustainabilitv

7.1 Followingfinancial restructuring of the mining company, the project is likely to sustainan acceptablelevel of net benefits throughout its economic life. The ability to sustainnet benefits is the main risk factor and depends on completionof mine and rail maintenancefacilities and the fine-tuningof mine, rail and coal terminal operationalplanning practices. Technicalassistance is still being provided to secure this position. Planned expansionof the Bukit Asam project to supply future phases of power development,if financiallyviable and competitivewith alternativedomestic and internationalsources of coal, could enhance the position of the project entities.

8. Bank Performance

8.1 The main strengthsof the Bank performancewere in assistingGOI thoroughlyto identify,prepare and appraise the project; to provide, through its supervisioneffort, constructiveassistance during project constructionand initialoperations to define implementationissues and options for their quick resolution;and to ensure that critical implementationissues were escalatedwithin GOI to expedite their resolution.

8.2 Ths main weaknessesof the Bank's performancerelate to (i) inadequateemphasis during appraisaland loan negotiationson the importanceof effectiveorganizational arrangements for project control and coordination,(ii) an inadequateassessment of the sensitivityof internationalcoal price projectionsduring appraisal,and (iii) an inadequatefocus on environmentalmatters during project supervision. In relation to (i) above, Bank staff and regionalmanagement should have pressed, during negotiations,for project monitoringand control arrangementsthat would have expeditedproject implementation,rather than acceptingGOI preferences.The Bank has a considerableamount of experience in this critical area which should have been capitalizedon. In relation to (ii) above, greater care should have been exercised in undertaking sensitivityanalyses of Bank commodityprice projections,particularly in light of establishedrelationships between the supply/demandand pricing of oil and coal. In relationto (iii) above, supervisionmissions should have been planned to includeenvironmental specialists to assist to define and implementaction programs to ensure controlledmine drainage,effluent discharge,and recontouring/reafforestationof mine excavationareas.

9. Borrower Performance

9.1 The Borrower'sperformance during project preparationand appraisalwas one of total commitmentand led to fundamentalagreement on project scope and the need for extensivetechnical assistance. Project entities were totallycommitted to ensure their thoroughunderstanding of the project componentsand of implementationissues that could be anticipated.

9.2 The Borrowerand project entities took a number of successful initiativesat critical stages of project implementation,the most notable of which were (i) the GOT decision in 1983, faced by deterioratingoil prices and an increasinglyhigh debt serviceburden, to review the benefits of contiuingor delaying the project and to implementa MaximumAusterity Program, which effectivelyminimized capital requirementswhile retaining the basic project objectiveand targets; (ii) the developmentof interim coal loading facilitiesat Tarahan to enable initial coal movement to be undertakenfollowing settlement at the main terminal site that seriously delayed completionof permanentfacilities; (iii) recognitionof delays in mine technologydevelopment and implementationof contractmining around Bukit Asam to ensure timely initialcoal delivery to Suralaya;(iv) recognitionof seriousconstruction and trainingdelays in the development of mine workshop and materialsmanagement facilities and decision to recruit additional internationalassistance to expediteoperational status; (v) recognitionof deficienciesin the developmentof rail operations planning and recruitmentof additionalinternational assistance to ensure sustainablefull coal transport;and (vi) GOI recognitionof deficiencies in project coordinationand monitoringand establishmentof a new and action-orientedSteering Committee(Team Keppres 35/87) in 1987. - 9 -

9.3 The main weaknessesof the Borrower'sperformance were (i) lack of initialrecognition of the importanceof developingan effectivestructure for project controland coordinationthat would have enabled issues to be identifiedquickly and resolved; (ii) cumbersomeand bureaucratic procurementprocedures within the project entities and ineffective processingwithin the GOI procurementsystem; (iii) cumbersomeand biased GOI decisionmaking in relation to procurementissues and lack of appreciationof the time-valueof money; (iv) difficultiesin recruiting staff of adequate qualificationsand experience,particularly to be assigned as counterpartsfor internationaltechnical assistance groups and for operationaltraining, and (v) a lack or focus on environmentalmatters.

9.4 There are two main lessonsof experiencefor the Borrower regardingthe implementationof high capital cost and integratedprojects. First, the critical importanceof developingan organizationalstructure for project implementationthat focuseson the establishmentof an effectiveproject coordinationand monitoringbody that can refer issues to a high enough level in GOI so that implementation,procurement and other key issues can be addressedand resolvedwithout delay. Secondly,a thorough review of governmentprocurement procedures is critical to ensure that procurementprocessing focuses on the benefits of the selectionof competentlocal contractorsand their expeditiousselection, rather than minimizingunit costs. In addition,the importanceof thoroughproject preparationand preliminaryengineering, particularly in relation to necessaryground investigations,cannot be overstressed.

9.5 In retrospectand in the event GOI would consider a future project involvingcomplex technologyand cross-sectorcomponents, some benefit might be gained by a full turnkeyor BOT (Build,Operate, Transfer) contract arrangement. Alternatively,considerable care would need to be taken in the futureby GOI and any supportinglending institutionsto review complex technologythat has not been proven in an LDC environment and to simplifyproject componentsand projects of an integratednature. The importanceof effectiveorganizational arrangements for project control cannot be overstatedand is probably the key lesson to be learnt from the Bukit Asam project

10. ProjectRelationshiR

10.1 The main strengthof the Bank-Borrowerrelationship during project implementationwas the continuingmutual desire to identifyaction plans for the resolutionof implementationissues. Unfortunately,the main weakness of that relationshipwas the difficultyin identifyingmechanisms within the governmentsystem to implementaction plans quicklyand to escalate decisionmaking to a level within governmentwhere the importance of early resolutionof issues could be fully appreciated.

10.2 The Bank and GOI agenciesmaintained close working relationships with key cofinancierswho typicallyparticipated constructively in project preparationand appraisaland in Bank supervisionof the project. - 10 -

11. ConsultingServices

11,1 Consultantsplayed a substantialrole during project preparation, financedunder Loan S-9, taking lead responsibilityfor all feasibility study assessments. The consultantsperformed well, particularlybearing in mind the complex and inter-sectoralnature of the project Engineering companiesplayed a major role during project implementation,participating in the engineering,procurement, construction, and initial operationsof the mine and rail components;acting as owner'sengineer in supervising constructionof the Tarahan terminal;engineering of the caal ship; and project monitoring. Generally,their performancewas satisfactory. However, trainingcomponents of the constructionand operationsphase of the projectwere not as successfulas anticipated. On the one hand, project entities faced difficultiesin providingpersonnel of adequate backgroundand experiencewho could benefit from the trainingprograms; on the other, engineeringcompanies did not organize their training efforts appropriatelyfor a project of this size and complexity. In a number of cases, consultantsfailed adequatelyto bridge the "culturalgap" with the implementingagencies. The general implicationof the involvementof consultants,engineering companies, contractors and supplierswas positive, and resulted in a considerabletransfer of technology;nroject entities are now so positionedthat similarprojects could be implementedwith a lower level of internationalsupport.

12. ProjectDocumentation and Data

12.1 Legal agreementsfor the project were adequate throughoutthe implementationperiod and no particularlesson can be learnt from this aspect of the project

12.2 The Staff AppraisalReport proved an invaluablereference document throughoutproject implementation,especially for project entities,and in view particularlyof the complexand cross-sectoralnature of the project. This documentenabled the Borrower and the Bank to maintain a clear focus on the project objectivesand to identifyprogressively, conceptual difficultiesthat bad not and, in many cases, could not have been foreseen.

12.3 Data relevant to the Project CompletionReport were readily available. However,because of the complexityof the project and the time scale from project preparationthrough project completion,considerable time was necessaryto assimilatetechnical and cost project data. - 11 -

REPUBLIKINDONESIA TIM PENGARAH PROYEK PENGEMBANGAN PEMBANGKIT TENAGA LISTRIK (TIM KEPPRES35/87)

PROJECT COMPLETION REPORT PART 11

BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATIONPROJECT

Preparedby: SuralayaWorking Team PTDA PT PelayaranBahtera Adhiguna PJKA PT PANN

Assisted by: REDECONI

GedungPatra st Floor,J. Jend.Gatot Subro 32-34Jakart 1210 Phone:(021) 510215;511821.511824; 513927. Fax:(021) 515133, Telex: 82182 REWOCN IA - 12 -

PREFACE

This paper is Part II of the Bukit Asam Coal Mining D-elopment and Transportation (BACOMDAT) Project Completion Report 'ared by the Government of Indonesia (GOI) as the Borrower to fulfill .. obligation in accordancewith Loan Agreement2079-IND between the GOI and the World Bank (IBRD). This report describesthe implementationand the initial operation of the Project, the cost summary,the benefitsderived or to be derived from the Project, the performance of the Borrower and the Bank, and the attainment of the loan's objectives. The GOI appreciatesthe contributionmade by all parties in the preparation of this report. It is the GOI's intentionthat this report is to be used as a reference by all GovermnentAgencies involved in similarprojects and by the IBRD as it exercises its supervisoryactivities on projectsin Indonesia.

HIGHLIGHTS

The BACOMDATProject is an integrated projectwhose main objectiveis to supply 2.4 MTPY of coal to the SuralayaSteam Power Plant Units 1 and 2. To meet this objective,the coal mine at Bukit Asam was to be developedto produce another 2.4 MTPY of coal in addition to the present 0.6 MTPYBukit Asam had been producing for the local market, the 420 km railroad between the mine and coast was to be upgraded to sustain unit trains with an 18 tonne axle load, a coal terminal was to-be built to receive and ship the coal, and a 9,200CDWT self-unloadingbulk carrier vessel was to be purchased to transport 2.4 MTPY coal from Tarahan across the Sunda Strait to Suralaya. The Project's objectivesare in line with the GOI's policyon energy diversification. These goals are to shift from the use of mono-energybased on oil to poly-energy based on coal, natural gas, hydro power, geothermal, solar, and other appropriate sources. It is a complexproject in terms of its costs,the diverse sourcesof fnanci9g, and the necessitythat many Government agencies,regulatory bodies, State owned companies, contractors and suppliers integrate their activities and timetables to meet the Project'sobjectives. The GOI and IBRD originally agreed that the Project infrastructure would be completed and that Suralayawould begin receiving2.4 MTPYof coal in June 1985, however full production was not achieved until July 1989 and the remaining infrastructure i.e. mine service facilities, railway workshops and permanent telecommunicationssystem will not be complete until January 1990. The Project was forecasted to cost Rp.319 billion and JS$674million. Project delays have increased costs, however the increased costs were offset, in part, by the Government's MaximumAusterity Program (MAP). The Project is now forecasted to cost at completion (not includingdeferred costs or costs of substitute fuel for Suralaya) Rp.532 billion and US$519million. The delays in the Project are due to the followingfactors: - 13 -

- Lack of project coordination and project control. - Poor performance of contractors and consultants. - Inadequate survey, design and technology selection. - Governmental regulations and bureaucracy. - Constraints on local funding due to the condition of the National Economv. - Failure to recruit and train qualified personnel. - Inadequate preparation for the system's operation. In spite of the delavs, the Project has been completed and the GOI has derived the following benefits:

- A working prototype of an integrated system for supplying power p'ant steam coal; - The development of a 'state of the art' continuous coal mining system using Bucket Wheel Excavators; - A modern terminal facility capable of handling more than 3.0 MTPY of coal; - 420 km of 18 tonne axle load railroad track; - A 9,200 CDWT self-unloading vessel to transport 2.4 MTPY of coal to the Suralaya Steam Power Plant; - Coordinating teams and regulatory bodies experienced in planning and managing major development projects; and - A work force trained in the construction and operation of an integrated coal mining and transportation system. With additional investment, relatively small compared to original investment, these facilities and resources can be easily upgraded to supply 4.4 to 5.1 MTPY of coal to Suralaya Steam Power Plant Units 1 through 4. The experience gained on. the BACOMDAT Project is directly transferable to other development projects in Indonesia and abroad. - 14 -

1. INTRODUCTION

This report compares what was achieved by the BACOMDAT Project to the initial plans. Tlh,e report is issue oriented rather than a chronological description. The issues were selected for their ultimate influence on the Project's scope of work, schedule, costs, and financial performance. The issues are categorized as "Problem Issues"and 'Notable Successes'. This report is based on data collected from the principal Project entities PTBA, PJKA, and PT PANN, the Project Monitoring Group and Steering Committee, and Project records. The contents have been reviewed carefully by all Project entities, the IBRD, and the steering committee to ensure that it is comprehensive and accurate. This report is organized f"ifollows: o The Introductiondescribes the purpose and the methodology of the veport; o The Project Description presents background material to explain the Project's origin and objectives; o The Project Implementationfocuses on the negative and the positive issues of the Project; and finally, o The Conclusion consists of a summary of the report and a description of the key elements which should be applied to other projects in Indonesia. - 15 -

2. PROJECTBACKGROUND

The BACOMDAT Pro ect is a continuation of the IBRD Engineering Loan S-9, which was included in IBRD Loan No. 2079-IND. The scope of work of Loan S-9, as quoted from MCS Project Services Contract, is ".... a feasibilitystudy and the designand partial engineeringof an optimizedrining and transportationsystem for the development of Bukit Asam coal mines located at Tanjung Enim on South Sumateraand the deliveryof its product by rail and sea to Sura!ayaon the western tip of Java." Loan 2079-INDwas signed on January 22, 1982 followinga 1980 feasibilitystudy and a 1981IBRD appraisalreport. 2.1 Objective The BACOMDATProject is an integrated projectwhose main objectiveis to supply 2.4 MTPYof coal to the SuralayaSteam PowerPlant UIidts1 and 2. To meet this objective,the coal mine at Bukit Asam was to be developedto produce another 2.4 MITY coal in addition to the present 0.6 MTPY coal Bukit Asam had been producingfor the local market, the 420 km railroadbetween the mine and coast was to be upgraded to sustainunit trains with an 18 tonne axle load, a coal terminalwas to be built to receive and ship the coal, and a 9,200 CDWT self-unloadingbulk carrier vessel was to be purchas(d to transport2.4 MTPYcoal fromTarahan across the Sunda Strait to Suralaya. 2.2 Scope The scope of work is based on the 1980 Feasibility Report and the 1981 IBRD Appraisal. The Project was implementeaby three entities whichwere divided into seven sub-systems.The three entities are the mine (PTBA),the railway(PJKA) and the sea transport (PT PANN). PTBA,a governmentowned coal miningcompany was to establishor upgrade,own and operate the Air Lya Mine, Muara Tiga Mine, Mine Townsite, Tarahan Terminal, and Kertapati Terniinal. PTBA'sScope of Work was as follows: Air Wva Mine Purchase and install five BWE's, supporting belt wagons, two spreaders, one stacker/reclaimer, one train load out facility,approximately 30 km of belt conveyor, and supporting facilities. Construct the Mine Service Facility and purchase and stall its equipment.Construct a stockpilefacility. Exploreand mine coal from the Muara Tiga Kecilmine. Mine Iowniake Construct approximately2460 houses, 96 dormitories and, power and water supply facilitiesfor PIA employees. TarabanTeriminal Construct and install the rotary car dumper structure, pri nary and secondary crusher, stockpile area, coal jetty, and purchase and install a shiploaderand its belt conveyor. Kehabati Terminal Rehabilitate the coal handlingequipment and construct the terminal building. - 16 -

PJKA (the Indonesian state railway) was to improve and operate the railway in South Sumatera; its scope of work was as follows: Rehabilitate and renew 420 km of railway track and strengthen the railway bridges to sustain 18 tonne axle loads. Const. uct the mine and terminal rail loops. Purchase and install a permanent telecommunications system and construct towers for the telecomnmunicatiornssystem. Purchase 259 coal wagons (assembled in Indonesia) and 15 locomotives with 18 tonne axle load and construct wagon and locomotive maintenance facilities. The above scope of work will be carried out by PJKA's project management called KP3BAKA and the operation of the coal transportation from Tanjung Enim to Tarahan will be executed by South Sumatera Region of Indonesian State Railway (ESS). PT PANN, the National Fleet Development Corporation was to purchase the self- unloading vessel and lease it to PT Pelayaran Bahtera Adhiguna for operation. 2.3 Schedule The original Project Master Schedule of the Project was approved by POKKORLAKin July 1982 and issued in MCS Overall Project Implementation Report - August 1982. This Schedule stated that the system should be ready for coal movement to Suralaya through Tarahan in June 1984 and come into full design capacityoperation (produceand transport200,000 TPM of coal) in June 1985. The key completiondates for the Projectwere as follows: Original Sub-system KeyActivities Schedule Air Laya Mine: - Ready to begin operation 01 Jun 1984 of coal load-outstation - Start operation of 01 Oct 1984 first mine sub-system - Mine Service Facilities complete Muara Tiga Mine: - Begincoal production 01 Jan 1984 Tarahan Terminal: - Readyto receive 01 Jun 1984 and stockpilecoal - Ready to start operation 01 Aug 1984 (handlingcapacty of 200,000tonnes/month) Kertapati Terminal: - Completeterminal upgrading 01 Nov 1983

Mine Townsite: - Complete2460 houses, 19882) 96 dorms and townsitefacilities

Railway: - Ready to begn coal 01 Jun 1984 transport to Tarahan - Commenceoperation at 01 Apr 1985 200,000tonnes/month - 17 -

Sea Transport: - Self-unloadingcoal 01 Aug 1984 carrier available Suralava: - Commence Unit 1 on 15 Aug 1984 Project coal at 100,000 tonnea/month Note: 1) Not included in Original Schedule. 2) Original Schedule did not specify month. 2.4 System Design An IBRD financed engineering study (Loan S-9) was completed in 1980. The main purpose of the studv was to find alternative for rminingsystem to optimize the development Bukit Asam coal mines (BWE vs shovel and truck) and, railway transportation route i.e. northern route (via Kertapati/Palembang) vs southern route (Lampung bay). The proposed design was accepted by GOI and IBRD had no objection to the proposed design. The accepted design was then used as a benchmark during the construction stage. The design consists of four major items: o Use 5 Bucket Wheel Excavators in a continuous mining system to mine the Air Laya coal deposit. o Transport the coal to the coast by the southern route using 4 sets of train per day, each carrying 40 wagonmioaded with 50 tonnes of coal and hauled by 2 locomotives. o Construct a coal terminal in Tarahan consisting of a rotary car dumper, a set of belt conveyors and a ship-loader. 3 Purchase a specially designed self-unloading coal vessel which fits the coal jetty in Suralaya. 2.5 Location The Air Laya coal deposit in the Bukit Asam area, TanjungEnim, South Sumatera was seiected for development. This decisionwas based on previousstudy performed by PN Batubara and Shell MinjbouwN.V. in June 1975. This studyproved that Air Laya mine contain massive deposits capable of producing up to 3.0 MTPYof coal for more than 30 years. The location for coal terminal was selected in Tarahan, approximately7 kms south of Panjangharbour in Lampung. 2.6 Organization Prior to the project implementationof engineeringstudy (Phase I) the Department of Mines and Energy and Department of Communicationsagreed to set up a Steering Committee with the Secretary General of the Depacament of Communicationsas its chairman. Twentyeight memberswere selected representing all Government agencies involvedin the Project. This committee'scharter was to establish guidelinesfor Project implementation. Hence, the SteeringConnittee swt up an implementingbody called KP5BAto coordinate the engineenng studywhose member consists of representatives from the Department of Mines anid Enzqgy. Departmer.t of Communications,state owned Coal Miningcompany called PNTB and PJKA and other respective government agencies. Ater the compietion of engineering study, KP5BA was replaced by POKKORLAKand the chairman of KP5BAbecame the Permanent Secretaryof POKKORLAK The main assignment - 18 - of POKKORLAK was to coordinate the activities of the Project's sub-systems, to identify and assist the entities to resolve problems, and to act as Project monitor. This included tracking Project progress and costs against budgets, schedules and technical specifications. The members of POKKORLAK consisted of the President Directors from the newly created state owned Bukit Asam Cola Mining Company (PTBA), the railway, and the sea transport entities. The position of POKKORLAK chairman was rotated every 6 months among the President Directors of the entities. Daily work was handled by a Permanent Secretary assisted by 7 professional staff. In October 1987 the original Steering Committee was replaced by a new Steering Committee called Team KEPPRES 35. Following the creation of Team Keppres 35/87, the Department of Communications and the Department of Mines and Energy dissolve POKKORLAK. Team KEPPRES 35/87 is headed by the Minister of Research and Technology, and consists of 6 ministers. The Steering Conumittee's responsibility has been expanded to include the coordination and supervision of Indonesia's power plant projects and the management of their fuel sources. Team KEPPRES 35/87 set up three working teams which are coordinated bv the Secretary of Team KEPPRES. These working teams are Suralaya Working ream, Paiton Working Team, and Gresik Working Team. The Suralaya Working Team, replacing the previous coordinating body of POKKORLLk is responsible for the Suralaya Steam Power Plant which includes the Bukit Asam Mine, railway and ship as the plant's irtain source of coal. - 19 -

3. PROJECTIMPLEMENTATION

3.1 Project MasterSchedule The first contractor was on site and working in the last quarter of 1981. The effective date of the IBRD loan was April 1982. Th( original Project Master Schedule (PMS), dated August 1982,stated that the system should be readv for coal movement to Suralaya through Tarahan in June 1984 and come into full design capacity operation in June 1985. However, as a result of a 10 month delay in *.he procurement of the first Tarahan Turnkey Contract due to lengthy financing negotiation, the PMS was revised effective August 1983. The revised schedule called for coal movement to Suralaya to start April 1985 and full d(.sign capacity coal movement on 01 June 1986. The actual completion of the key activities as compared with the revised Project Master Schedule is as follows: Revised Sub-System Activity Schedule Actual

Air Laya Mine: - Ready to begin operation 10 Dec 1984 26 May 1986 of coal load-out station - Start operation of 01 May 1985 01 Nov 1985 first mine sub-system - Mine Service 01 Jun 1985 Jan 1990 1) Facilities complete Muara Tiga Mine: - Begin coal production 01 Jun 1985 01 May 1986 Tarahan Terminal: - Ready to receive 04 Apr 1985 15 Aug 1988 and stockpile coal - Ready to start operation 04 Jun 1985 01 Nov 1988 2) (200,000 tonnes/month) Kertapati Terminal: - Complete terminal 15 Mar 1985 01 Oct 1986 upgrading

Mine Townsite: - Complete 2460 houses, 1989 31 Jul 1989 3) 96 dorms and townsite facilities Railway: - Ready to begn coal 04 Apr 1985 01 Jun 1986 transport to Tarahan - Completionof 18 tonne 29 Dec 1987 axle load - Transport200,000 01 Jun 1986 01 Jul 1989 tonnes/month Sea Transport: - Self-unloadingcoal 01 May 1985 01 May 1985 carreravailable - 20 -

Suralaya: - Commence Unit I full commercialoperation on: 'Project coal 01 Jul 1985 01 Jul 19874) 'Non-Project coal 15 Nov 1985 - Commence Unit 2 full commercialoperation 'Project coal 01 Jun 1986 01 Jan 19895) 'Non-Project coal - 07 May 1986 Note: 1) Forecastcompletion. 2) Actual coal throughputof 200,000tonnes/month was achieved in July 1989 3) The revisedschedule did not specitf the month. The scope of workwas reducedand onlly275 houses were built. 4) Receive 100.000connes/month of Project coal. 5) Receive 200,000tonnes/month of Project coal. 3.2 TechnicalDeviations The original technical specificationshave been modifiedseveral times over the life of the Project. Certain of the modificationsare technical deviationswhich reflect additional informationon physicalconditions, others are managementdecisions to compensate for problems and delays elsewhere in the Project, while other modificationsreflect tight financial constraints imposed by the GOI's Maximum AusterityProgram (MAP). The principalmodifications are listed below. O Develop and expand Muara Tiga Mine to supply coal during construction and initial coal movementof Air Laya Mine. o Decrease the number of townsitehouses to be built and implement a home ownershipprogram. O Eliminate the ballast plant for the railway. o Eliminate the concrete sleepers plant. O Rearrange mine mud removalcontracts. O Revise the dumper pit foundation and relocate it to the other side of the Tarahan Terminal rail loOp. o Implementan interim coal movementprogram. In 1983 the GOI implemented its MAP followinga major drop in world oil prices. Portions of the Project dependent on Rupiah financingwere reexaminedand in many cases reduced, delayed or eliminated. For example,the decisionsto eliminate the concrete sleeper and ballast plants and to reduce the number of townsitehouses were based on a MAP analysis. Other deviations from the original technical specificationswere in response to the availabilityof additional informationand to compensatefor delayselsewhere in the project. 3.3 Capital Costs The foreign portion of the capital costs for the Project is lower than originally projected; however, the Rupiah portion is higher. In equivalent dollar terms, the total Project cost has decreased by approxmately US$393.7million or 33.2%. This deviation is due in part to the transfer of budget items such as PTBA spare parts from foreign currency loans to Rupiah loans (USS10.0million), the GOrs MAP - 21 -

(US$12.2 million), transfer of certain capital costs to start-up operating accounts (USS43.2 million), and devaluation of the Rupiah (US$328.3 million). A comparison of original estimates to current forecast is shtownbelow.

PROJECT COST REPORT Original Current Deviation Description Budget Forecast (%)

Mine Townsite LOC 54,981.00 31,605.00 42.52% FOR 1,179.00 0.00 -100.00% TOT 32,596.71 18,060.00 Air Lava Mine LOC 127,455.00 201,718.00 58.27% FOR 405,248.00 260,842.00 -35.63%' TOT 478,079.43 376,109.43 Tarahan Terminal LOC 22,868.00 32,885.00 43.80% FOR 43,656.00 89.500.00 105.01 TOT 56,723.43 108.291.43 Kertapati Terminal LOC 1,018.00 6,190.00 508.06% FOR 2,480.00 3,042.00 22.66% TOT 3,061.71 6,579.14 Muara Tiga Mine LOC 636.00 13,867.00 2,080.35% FOR 25,367.00 0.00 -100.00% TOT 25,730.43 7,924.00 PTBA Management LOC 4,912.00 18,780.00 282.33% FOR 0.00 280.00 TOT 2,806.86 11,011.43 Total PTBA LOC 211,870.00 305,045.00 43.98% FOR 477,930.00 353,664.00 -26.00% TOT 598,998.57 527,975.43 Railway LOC 103,460.00 186,741.00 80.50% FOR 161,319.00 132,343.00 *17.96% TOT 326,855.00 239,052.14 Sea Transport LOC 1,404.00 1,249.00 -11.04% FOR 31,293.00 16,710.00 -46.60% TOT 32,095.29 17,424.71 Project Monitoring LOC 2,462.00 2,430.00 -1.30% FOR 3,636.00 5,357.00 47.33% TOT 5,042.86 6,745.57

Total Project Cost LOC 319,196.00 495,465.00 55.22% FOR 674,178.00 508,075.00 -24.64% TOT 1184,892.00 791,197.86

NOES: LOC (Local Financin&) = Million Rp FOR (Foreign Financmg) = Thousand USS (1 US$ = Rp.1750) TOT (otal inancing) = Thousand USS (1US$ - Rp.1750) - 22 -

3A Notable Successes The BACOMDAT Protect was not without problems. However the GO0, the IBRD, and the Project s management staff were able to minimize the negative effects of many of these problems. Notable Successes describes the way in which many of these problems were handled. 3.4.1 Decision on Development of Non-Air Laya Mines As it became apparent that production from the Air Laya Mine would be delayed, it was recommended that other coal resources should be developed to fulfill coal demand for the first four years of the Project. Therefore, a sub-system called Muara Tiga Mine (later called Non-Air Laya Mine) was set up to produce up to 1 MTPY of coal. This arrangement provided coal ior the Suralaya Steam Power Plant in 1984, two years before the Project w as able to deliver coal at design capacity via the Tarahan Permanent Facilitv and five years before the Air Laya mine would be able to produce 200,000 TPM. - This arrangement has been expanded to include cnal from Kelawas Mine and Air Petai Mi;ne.which were later included in the Non-Air Laya Mine. 3.4.2 Decision on Interim Coal Movement and Facility In September 1985, as a result of settlement problem in Tarahan Terminal, Project management agreed to implement a program on Temporary Coal Mining, Transportation and Handling Facilities. The program was to build a temporary facility at Tarahan to handle coal shipments until the Tarahan Terminal Permanent Facility could be completed, installation of wooden sleepers on the bottom of coal wagons to carry 60% of the design capacity weight, and adjustment of Muara Tiga Mine coal production to meet this program. The temporary facility consisted of a car unloading station, a set of belt conveyors connecting the unloading site to a stockpile and the shiploader, and a stockpile with a capacity of 60,000 tonnes. This facility could handle a maximum of 100,000 tonnes per month and received coal on 13 tonne axle load trains from the Non-Air Laya Mline. The Project was able to move approximately 60,000 tonnes/month through the temporary facility for a total of 1.8 MT coal from June 1986 to September 1988. This arrangement was running for more than two years before the commencement of full design capacity operation. After the completion of Tarahan Terminal Permanent Facility, with small modifications, the equipment was used for an expansion of Suralaya oil jetty to become coal jetty. This decision, coupled with the decision to develop the Non-Air Laya Mine, reduced the amount of coal purchased for Suralaya from non-Indonesian sources and was a major source of MA revenue during constructionL 3.4.3 Operational Constraints and Equipment Deficiencies The Mine implemented an action plan on Operational Constraints (OC's) and Equipment Deficiencies (ED's) in May 1987. The plan identifies 26 areas operational constraintand 7 equipment deficiencies. The priority of this task was to resolve the problem of the lake mud removal contract, completion of mine service facilities, award of additional contracts for auxilliary overburden removal/removal of old dump material/removal of overheight material, improve recruitment and staffing, and reduce break-downs of bucket wheel excavators. This program was - 23 - instrumental in overcoming problems with the poor performance of the rnine's main equipment. Problems with the lake mud remova; contract and other delayed contracts were resolved by reducing the incompetent contractor's scope of work and appointing a new contractor to complete the remaining work. This action plan is still being followed. 3.4.4 Decision to Restructure the Coordinating Body The Government's decision to change the composition and responsibility of the coordinating body has improved management response to changes in Project progress. The Committee for Indonesian Coal Development Program, which acted as Steering Committee for BACOMDAT Project, was replaced by a new Steering Comnmittee,Team KEPPRES 35/87 consisting of 6 ministers. The coordinating board, POKKORLAKwas dissolved and the Project coordinating function was taken over by the Suralava Working Team under the coordination of the Team KEPPRES 35/87 Secretary. The new steering committee takes a more active role in identifying problems and encouraging the implementation of solutions. However, the restructuring of the coordinating body was taken place after most of the construction work has been completed. The advantage of the new arrangement is the existence of an official who consistently monitors Project progress, coordinates the Project entities and has direct access to decision makers at the ministerial level. However, the steering committee still needs the optimal support provided by full time staff and consultants. 3.4.5 Management of Entities The early overall Project implementation has been adversely affected by the performance of key personnel in each of the Project's entities. Some Directors of PTBA have been reassigned and PJKA has replaced key personnel in KP3BAKA and ESS. The changes have increased management effectiveness in both organizations and have contributed to an improvement in Project performance. The new coordination system by the new management of PTBA and PJKA improved the cooperation between the entities in implementing the coal transportation. The new coordination system held two regular monthly meeting i.e., task force meeting and management meeting. This meetings has improved relatonship between entities and increase coal transportation from Tanjung Enim to Tarahan significantly. 3.4.6 BlanketInurance PTBA elected to carry blanket insurance protecting both PTBA and its contractors from substantial loss due to non-performance. This blanket insurance covers all of PTBA construction activities both in the mine as well as the Tarahan Terminal. This decision has proved to be sound as evidenced by the problem of the first Tarahan Turnkey contractor. PrBA and the turnkey contractor filed claim to the insurance company and received compensation for the losses due to settlement problem with the terminal. - 24 -

3.4.7 Decision on Second Tarahan Turnkey Contract The settlement was first detected in the beginning of 1984. Hence, major construction delays were caused by an inability to resolve a dispute over the responsibility for redressing the effects of ground subsidence during the initial phases of the Tarahan Terminal construction. PTBA's decision to terminate the old contract and appoint a new contractor was a significant event on the Project. Contract termination was agreed by PTBA and the first contractor on 4 February 1987. The new contract was signed on 21 August 1986, but the construction started in February 1987 due to delay in financing negotiation between GOI and the Dutch government. The terminal design was revised and the new contractor did an excellent job completing the second Tarahan turnkey contract on schedule.

3.5 Problem Issues Problem Issues are broader than the ones successfullydealt with in Notable Successes.The problemsdescribed in this section tend to be institutionalizedin the GOI's bureaucratic practices and in many cases were outside the control of the Project's managers. We believe that the inabilityto deal with the followingissues stems in large measure from the lack of a central entity responsiblefor managingall aspectsof the Project. 3.5.1 Inadequate Surveyand Investization In general, the Survey and Investigation for the engineering design was not adequately performed. This deficiency caused unexpected problems during constructionand during the initial operation of the Project. Surveyand investigationon soil conditionsin the mine was inadequate. The Project was based in part on mine soil conditiondata from an earlier coal explorationstudy. However, minimalsite surveyand investigationwas performed to support the data. BWE design specificationswere not applicableto the hard soil and coal conditions and seasonal changesat the mine site. The BWE's required extensiveredesign as a consequence. The originalTarahan turnkey contractor elected to minimizethe number of soil test holes drilled before construction. The spread footingsystem selected proved to be inadequate and failed to prevent settlement of loadout facilities. Eventually,the contract wascanceled at a significantcost to the Project. Funding for the survey of the bridges' sub-structurecondition was eliminated early in the project. Cracked piers and abutments were found on 92 bridges during the initial operation. These will require repair or replacement which wiUhave to be funded out of the railroads operaing costs, and which are expected to be a disruption to efficientcoal movementfor years to come. - 25 -

3.5.2 Inaccurate Technical Design Several of the Project's subsvstems and technical designs have been found to be inappropriate curing the initial operation, though they were selected based on a *ariety of factors such as soil conditions. weather, and personnel availabilitv. For example, the BWE's experienced more problems than anticipated and the operators required a longer training pe ' d than planned before becoming proficient. Major adjustments and modifications uiad to be done during initial operation such as reinforcement of BWE's bucket, C-frame and ring girders, and redesign of BWE bucket teeth. Simiar problems occurred with railway sub-svstem, for example the need to grease rail track curves, reinforcing the coal wagon's center plates, upgrading wheei bearings, and the revision of wheel sDecificationsto Compensate the roundness and material problemrsdue to faults in technical design. 3.5.3 Land Accuisi The land acquisition for Panjang extension rail track to Tarahan North was time consuming and was compounded by the time taken for evacuation. The local government's disagreement with the original plan necessitated the redesign of the route and additional time to acquire the land, which contributed to the delay in the completion of the railway. The problem of land acquisition in the mine sub-system was occured in some portion of mining area, i.e. the acquisition for the main mine equipment stockyard. The delay of land acquisition in the mine did not affected the overall Project schedule, but the total costs were increased because PTBA had to provide temporary stockyard for the incoming main mine equipment. 3.5.4 Procurement Prior to Project implementation,the World Bank identifiedpossible problems with procurement for supply and service contracts. GOT Counter Purchase Policy, procurement procedures, centralized governmental bid reviews involving price negotiationswith non-lowestbidders, and poor bid specificationpreparations were some of the problems that were identified. In general, the adverse effects of the procurement procedure were greatest during Project start up. Inappropriate procurement practices added significantly to the delays of the Project, thus Increasing both direct and indirect costs. An "Early Warning System" was set up by the Project to monitor the progress of supply and service contract procurement. This system flagged contracts for managementaction which had exceededa six month period from tender issue to the target effectivedate. This systemdid not work becauseProject managementdid not react to wamings from the system and were unable to implement effective procurement actions to correct the delays. Few contracts completed the procurementprocess in a timelymanner. Thc. financial aspects of procurement/contracting process contributed to the 10 month delay before the first Tarahan Terminal turnkey contract became effective. The delay caused the revisionof the originalProject Master Schedule. - 26 -

The centralized governmentalbid reviewpolicy involvingprice negotiationswith non-lowestbidders created problemsfor a number of supplyand service contracts. For example, the railway sub-systemballast and wooden sleeper suppliers were forced to decrease their unit price below the market price. Consequently,the supplierswere unable to completethe contractwhich contributed to the delayswith trackwork. 3.5.5 InsufficientRupiah Financing The Project was not able to draw sufficientRupiah from the GOI during the implementation phase to finance its local contractors. PTBA obtained a commercialbank loan on 5 June 1984to financecritical tasks, and was forced to postpone several other works projects which were dependent on local financing. PJKA had to delay several work projects and was finally forced to obtaining a subsidizedloan from the Bank Of Irndonesia. 3.5.6 Delayof Obfsore Finang Some of the offshorefinancing institution followed time consumingprocedures and required cumbersomeconditions. This caused a delay ir. the start up of several offshore contracts. The first Tarahan Turnkey Contract was delayed ten months becauseof the proceduresfollowed by one of the lendinginstitution; and the second Tarahan Turnkey Contract was delayed four month for the same reason. The potential savingsthat may have resulted from the protracted negotiationswere far outweighedby Project delay costs such as PTBA's loss of revenue from coal sales, the cost of the negotiations,and increasedIDC fees. 3.5.7 Poor Contractor Performance Contractor performance was critical to overall BACOMDAT Project success, unfortunatelyseveral contractors failed to complywith either the conditionsof the contract or with good businesspractices. Contractswere awardedto firms who had little applicableexperience, and inadequate resouices. The bidding process did not allow tor an adequate system of liquidated damages or a bonus system to reward timely or early completion of project tasks. The Project entities and their consultants did not consistenlsy practice effective supervision of contractor performance,and in most cases failed to intervene promptlywhen key performance indicatorswere missed. Intervention to assist delinquent contractorswas generally done only after the contractor was so far behind that there was little hope of ever meeting deadlines. In the mine subX-tem, the performance of Mine Service Facility contractor is a glaring example. The contractors have incurreda total 55 month delay thus far due to both constructionand equipment rehabilitation (forecast completion in January 1990). The delay caused by SE/SW Lake mud removal contractor sloweddown the movementof bucket wheelexcavator and forcedmodifications of the mine plan. In the railway sub-system,the supply of ballast and wooden sleepers for trackwork was assigned to a contractor who had insufficientresources or incentive to meet contractual deadlines. The failure of this contractor caused the trackwork contractor, who was dependent upon these key materials, to fall behind schedule. The net effect was a delay in the Project'sability to operate at 18 tonne axle load. - 27 -

3.5.8 IneffectiveUse of Consultants The supervisionof the PMS implementationrelied heavilyon the performanceof the Project's consultants. Both the mine and the railway used consultantswith varyingdegrees of success. The mine sub-systemretained a project managementconsultant to manage the engineering procurement and constructionof the subsystem. Several ongoing aspects of the Project were turned over to the owner'sstaff on contract completion. TIhe consultant and owner had not adequately prepared for this transfer, consequentlymaterials managementand purchasingremain a problem area which mayadversely affect mine production. The railwaysub-system retained a consultantfor the trackworkprogram both as a project control and engineeringconsultant. However,the Project arrangementwas confusingand the railwaysub-system did riotuse the consultanteffectively. 3.5.9 InadequateProietCoordination Both PTBA and PJKA's initial management organization structures were not designedfor constructionproject management. Responsibilityand authority were not clearlyallocated, consensus on relativelystraight forwarddecisions was difficult to obtain and to implement. No single institutionwas fullyresponsible or could be held accountablefor overall Project performance. The coordinatingbody set up in the beginningof the Project to synchronizeProject implementationdid not perform effectively. Nor did the Project monitoringteam that was installedto assistthe coordinatingboard. Project monitoringreports submitted two months late were of little use in identifyingand resolvingpressing problems. Furthermore,the coordinatingboard wasnot giventhe responsibilityand authoritv to define and resolve problems and was not able to maintainan effectivecommunication between the two Ministries. The replacement of the original Project Monitoringstructure with a more unified arrangement has produced promisingresults and appears to be a better model for Project coordination. However, the Team Keppres 35/87 is required to be supported by profesionalconsultants. 3.5.10 Problemsin Training Designand Application The long term success of the Project rests on the effective application of newly implemented technology throughout the Project's entire coal mining and transportationsystem. The mine sub-system'straimng programsuffered from basic defects in design and application. People were selected Fortraining programsfor the wrong reasons, received the wrong training, were given inappropnate role models on how the new technologywas to be applied, and were not given adequate time to become'proficient before assumingfull responsibilityfor production. ProjectmaLi-gement frequently adopted short term solutions to the long term trainingand developmentproblems. TMerewas not a consistentmanagement policy to guide consultants' training and to ensure that all PIBA employees and local contractors benefited from the unique opportunities for technologytransfer. The consultants' performance varied widelyas there were few incentivesfor them to do more than make a superficialeffort to complywith contractualtraining obligations. - 28 -

Additionaltraining is still required before mine sub-sector'spersonnel willbe able to makeefficient use of the Project'smining system. The longunit train transportationsvstem is the first to be operated in Indonesiaand it is operated outside Java in a former low traffic area. Long unit train operation requires high disciplir' from section managers,train operator and other support staff. The recruitment and training programsthat have been followed may not providethe high levelof technologicalexpertise and disciplinerequired. 3.5.11 Problemsin Staffingand Recruiting The Mine sub-svstemwas plagued by an inabilityto recruit personnel with the requisite skills to assimilaterapidly the new technologyand acceptresponsibility for the new systems. The official policv was 'o keep P'TA's saiaries low and increase them only after the orgasization had proved it was financiallyviable. This policv was compounded by the problems inherent in recruiting good personnel for assignmentin a remote location. Surveysconducted erly in the Project nighlighted these issuesas well as a basic image problem that coal mining had with the target employee population. Once new personnel were selected, training and promotion was often based on loyaltyto employeesof the old organizationand nepotismrather than PTBA'slong term needs. The mine's employeesfelt that there was a wide imbalancebetween wages paid and responsibilityheld, especiallyin the case of the personnel charged with operating and maintainingthe main mine equipment. MBAstaffing and recruiting initially fell far behind schedule disrupting contract management and training schedules. To resolve this problem, PTBA hired a consultantfor recruitment,and extendedthe mine constructionconsultant's contract withan operational and training assistance(OTAS) contract. Howeverthis was not a satisfactory solution as no one consultant was fully responsible for carry out recruiting,staffing, and development. 3.5.12 Train TrafficManagement Problems PJKA is responsiblefor the staff developmentas well as the operation of the coal transportationssystem. In the beginingof operation, one of the key position i.e., traffic control managementin ESS required more training. In addition, the delayof completion of telecomunication installation caused a more hurdle in traffic operation. However,this problem will be resolvedat the time the training and the telecommunicationinstallation completed. 3.5.13 Lack of Attention to EnvironmentalIssues An environmentalstudy was conductedfor the mine sub-sectionin the beginningof the Project, but received little attention during the construction phase. The informationcontained in the follow-upreport is not supported by an environmental action plan, a trained staff and an operating budget. The principal area of concern is water quality standardsat the mine. Environmentalstandards were not built into supplier and subcontractorcontracts. For example, PTBA lacked the means to properly ensure that the mud removal contractors providedadequate safeguards. - 29 -

3.5.14 Deviationin Coal Price Forecast At the beginningof the Project, forecasts were made which now appear to have been extremelvoptimistic. Coal prices followedoil prices as they dropped. The price differencebetween forecasted and actual is now approximately50%. This has had a drastic effect on the overallfinancial performance of the Project,especially as it concernsthe Government'sability to recoup the originalinvestment. In addition, delavshave reduced TBA'searnings and the abilityto pay for basic servicessuch as the transportationtariff to PJKAand PT PelayaranBahtera Adhiguna. 3.5.15 Delay on C;oalSales and TransportationAgreements The coal sales and transportationagreements are as follows:

- Coal Sales Agreement between PTBA and PLN, - Coal TransportationAgreement between PTBA and PJKA,and - Coal TransportationAgreement between PTBA and PT Pelayaran Bahtera Adhiguna. * Lease agreementbetween PT PANNand PT PelayaranBahtera Adhiguna. These agreements are short term and were signed after the coal has been transported from Tanjung Enim to Suralaya, either via Kertapati or the Tarahan Terminal Temporary Facility. At the time of Project completionthe railwaytariff calculationshad not been refined. 3.5.16 FinancialPerformance FTBA'sfinancial position is much worse than onriginallyforecasted. This is due to the substantial drop in coal prices and the long delayin Project completion,in terms of both loss of revenue and additional costs such as coal transportation tariff, interest accrued, etc. Much of the interest is at commercialrates rather than the preferred rate included in the forecast. The Interest During Construction(IDC) is nowestimated at around 20% of the total Project costs. The IDC willbe e principal cause of PTBAlong term financialproblems. The Project'sfinancial rate of return, in real terms, is now calculated in the neighborhoodof 6% compared to 11.7% calculated in the IBRD Staff Appraisal Report October 1981. However,the GOI has agreed to restructure PTBA debt/equ position from 60:40 to 35:65. Furthermore, consideringthe GOI intention to increase the capacityof the project to transport 4.4 milliontons/year of coal to supplySuralaya Power Plant unit 1 thru 4, the long term financialperformance of this project willbe improved. The Project's financial performance would be much worse if the cost of imported coal required by Suralaya to make up for PMBAshortfalls were included in the calculations. - 30 -

4. BANKPERFORMANCE In general, the Bank's performance through the SupervisionMission has been positive. The focusof their efforts has been to identifyproblem areas and workwith the respective Governmnentorgarizations to identify and implement constructive solutions. The current coal price is approximately50% lower than the coal price forecastin the IBRD Staff AppraisalReport. This has resultedin significantproblems with the mine sub-sector'sinternal rate of return. The IBRD SupervisionMissions has been effective in reducing the short term effects of the problemnsstemming from the difference in coal price. The Bank's support to MA financial restructuringand willingnessto participate in Phase II of the project is indicativeof their long term support for the Project. - 31 -

5. CONCLUSION AND LESSON TO BE LEARNED

5.1 Conclusion The GOI has acquired an integrated systemfor feeding 2.4 MTPY of coal to the SuralayaSteam Power Plant. Tis systemis comprisedof a continuouscoal mining systembased on BWE technologycapable of producing3.0 MTPYof coal for more than 30 years;a 420 km railroad track with 18 tonne axle loads;and a 9,200CDWT self-unloadingbulk carrier vessel to transport coal from Tarahan Terminal across the Sunda Strait to Suralaya. All stages of the Project were completed behind schedule. Overall Project completionwas delayedby more than 2 years, increasingthe fuel cost for Suralaya and the cost of the Project. The financialviability of the Project wasalso reducedby the drop in worldenergy prices and the effect on the economyof Indonesia. The delaysin Project completionwas due to severalfactors, principally procurement delays,poor contractor and consultantoerformance, insufficient Rupiah financing, delaysin offshorefinancing, Project management'sinability to anticipate and make timelyreactions tO deviationsin the PMS,an inadequate systemfor Projectcontrol, nd insufficientsite surveyand investigation. The Project's poor financial performanceis a direct result of delaysin completing the Project, higher investmentcosts including interest, problems with production and transportation, and coal prices far below those projected. However,the efect was mitigatedthrough restructuringthe debt equity ratio to become35:65. The initial systemestablished for the Project's managementwas cumbersomeand lacked the means to make timely changes in schedules, budgets, procedures, contractors,and personnel. However,this deficiencyhas been resolvedby forminga more action oriented project coordinatingboard. 5.2 Lessonsto be Learned The following elements were selected as Lessons as their inclusion in the Project design and managementmethodology would have prevented manyof the delaysand reduced associatedcosts. 5.2.1 Technial Design The Government of Indonesia makes every effort to advance industrialtechnology, howeverthe preparation to receive the new technologywas inadequate. The delay in construction of Mine Service Facilitiesand Mine Townsitehas proved to be the inadequate preparation of the Project. Manpowerrecruitment and training should be performed prior to the arrival of the equipment. Other infrastructurefacilities i.e. workshop and housing for the workers should be ready at the same time the miningequipment ready to operate. - 32 -

5.2.2 MaximumAusterity / Value Engineering The MAP has proved to be an effective way to maintain a sound economic conditionduring Indonesia's recent recession. However,the economicimpact of this austenrtyprogram to the project should be evaluated on a case by case basis. Majorcurtailments of programs,such as eliminationof concretesleepers and ballast plant, and reduction the number of houses to be built, should be first evaluatedby reasonableValue Engineeringprograms which might includematerial substitution, technical redesign, and other methods to achieve major cost savingswithout the sacrificeof the entire program. 5.2.3 Project Prartion Team Projects of this size and complexityshould be prepared by a team consistingof competentgovernment officials supported by competentnational and international engineering construction firms with extensive experience in mining and transportationand in workingin a third world country. This team should be able to forsee the availabilityof manpower,training and other resources. 5.2.4 Proiect OrganizationStructure The Project definition should be inclusive of all associated elements if possible. Under ideal conditions the Suralaya Power Plant should be included in the BACOMDATProject unlike the previousorganization structure where the Suralaya Power Plant is separate from the BACOMDATProject. Project Management should have an unified organizationstructure with a single chain of command, so that resourceand scheduleconflicts can be readilyresolved by the next highestlevel in the organization. In addition, Project managementcan be extended to carry on the responsibilityof managingthe entire coal supplyrequired by the SuralayaPower Plant. Overall management responsibilitymay rest with a keyvGovernment official who oversees multiple projects, however day-to-day management responsibility should be assigned to one decision maker supported by an experienced project management staff. Project audits and monitoring should be done by an outside orgamzation, independent from project management but responsible for timely input to problem identificationand resolution. 5.2.5 Response to Changes in the Project Master Schedule Management by exception procedures should be set up and followed for all deviationsfrom the Project Master Scheduleand budget. Sensitivityanalysis should be incornorated into the process to anticipate the ripple effect of delays and proposed remedies. Decisionsshould be evaluated in terms of the effects on the project schedule,project costs,and on the post-constructionoperating requirements. 5.2.6 Recruitment.Selection and Traininy Programs Project staffing and training must be a critical path activityon all projects with a high technologytransfer content. Human resource studiesare an important part of project feasibilityphase enabling Govermnent officials to evaluate the long term cost of labour and the probabilityof recruitingqualified staff for the project and to be trained to operate the mine once it has been completed. The contractors' ability and willingnessto trair.must be included as an important part of the contractor selection criteria. Consultants and contractors have a responsibilityto ensure that the personnel selected for training art, capable of learning and applyingthe relevant - 33 -

skills. Project management must be notified when agreed upon selection criteria is changed and when personnel who have been trained are not assigned to the jobs for which they are qualified. Ultimately the contractor and consultant's performance must be evaluated based on the ability of the client's staff to assume responsibility for the operation of the mine. 5.2.7 Procurement Procedures Projects of this size and complexity may require special regulatory mechanisms to expedite the selection of contractors, consultantc and suppliers; finalize purchasing agreements for materials and services; and which comply with World Bank guidelines on procurement. Exception procedures should be prepared which will trigger prompt intervention by senior government officials to resolve impasses between government entities and curtail protracted negotiations. 5.2.8 Time Value of Money The BACOMDAT Project Managers, consultants, contractors, and suppliers appeared to make a good faith effort to comply with project schedules and contractual obligations on an incremental basis. However, there was not a correspondingeffort to ensure that the collectiveentities, supportingGovernment agenciesand lending institutionsadhered to the aggregateobjectives defined by the Project Master Schedule. The net effect was that financialand schedulingdecisions were made at the individualcontractor and transactionlevel with little regard for optimizingthe overall project activities and costs. Examplescited in the Problem Issues section include training programswhich were forced to start on time but without qualified trainees due to a lack of decisionson compensationpolicy, sub contracts negotiated with no bonuses for timely completionor safeguards against inferior work and delays, key materials supplier contractsfinalized with no margin of profit thus no incentivefor completion,and protractednegotiations over tenths of a percent which cost the Project tens of thousandsof Dollarsin delays. The key elements common to most of the Project'sproblems appears to have been an inabilityto recognizethe significanceof any and all delays;to build in protective mechanismsfor anticipatingand identifyingproblems which will create delays; to quantify the full cost of all delays; and to take timelycorrective actions which are optimal for the entire Project. - 34 -

PROJECT COMPLETIONREPORT

REPUBLICOF XNDONESIA

COAL MINING AND TRANSPORTATIONENGINEERING PROJECT (LOAN S-9) and DUKIT ASAM COAL MINING DEVELOPMENTAND TRANSPORTATIONPROJECT (LOAN 2079-IND)

PART III

1. Related Bank Loans and/or Credits

Loan/Credit Year of Title Purpose Approval Status Comments

CR 399-IND Third Power Project 1973 Completed - CR 1127-IND Fourth Power Project 1975 Completed - LN 1708-IND Eighth Power Project 1979 Completed - LN 1872-IND Ninth Power Project 1980 Completed - LN 2153-IND Coal ExplorationProject 1982 Completed -

2. Proiect Timetable

Date Date Date Item Planned Revised Actual

Identification/Preparation 03/76 N/A 03/76 Pre-Appraisal 01/80 N/A 01/80 Appraisal 07/77 08/80 10&12/80 Post-Appraisal N/A N/A 06/81 Loan Negotiations 10/81 11/81 11/81 Board Approval 12/81 01/82 01/82 Loan Signing 01/82 N/A 01/82 Loan Effectiveness 03/82 N/A 05/82 Loan Closing 09/87 09/88 09/89 Loan Completion 03/88 03/89 03/90

3. Loan Disbursements(Cumulative) USS million

FinancialYear 1982 1983 1984 1985 1986 1987 1988 1989 19O

AppraisalEstimate 30.5 67.7 122.6 176.0 184.5 185.0 Actual 1J// 7.0 33.5 62.7 103.3 122.5 152.5 164.6 169.2 178.7 Actual as % Estimate 23.0 49.5 51.1 58.7 66.4 82.4 89.0 91.5 96.6 Date of Final Disbursement 04/04/90

1/ US$1.139million cancelled08/86. 2/ US$5.107 million cancelledat loan closing 04/90. - 35 -

4. Proiect Completion

Indicators ADDrrisalEstimate Actual/PCREstimate

AvailableFunds 1 2 Project Management 1 2 DevelopmentImpact 1 1 Overall Status 1 1

5. Project Costs and Financing

A. Proiect Costs (US $ million)

--AppraisalEstimate------Actual------

Local Foreign Local Foreign Costs Costa Total Costs Costs Total

Air Laya Mine 136.3 308.6 444.9 151.5 258.1 409.6 Muara Tiga Development 3.8 11.4 15.2 7.8 - 7.8 Mine Townsite 39.8 12.0 51.8 17.7 - 17.7 KertapatiTerminal 1.1 2.9 4.0 4.0 3.0 7.1 Tarahan Terminal 19.0 39.2 58.2 21.9 89.5 111.4 Railway/Communications 79.5 136.8 216.3 90.9 143.1 234.0 Ship 1.4 22.5 23.9 0.0 16.7 16.7 ProjectMonitoring 3.4 3.2 6.6 1.4 5.8 7.1

Total Base Cost 284.3 536.6 820.9 295.2 516.2 811.4

Physical Contingencies 44.3 37.0 81.3 - - - Price Contingencies 117.8 103.9 221.7 - - InstalledCosts 446.4 677.5 1123.9 295.2 516.2 811.4

Refinancingof S-9 Loan - 10.0 10.0 - 7.0 7.0 Working Capital 41.3 8.4 49.7 13.4 - 13.4 Interest During Construction 27.3 125.0 152.3 69.3 143.3 212.6

Total FinancingRequired 515.0 820.9 1335.9 377.9 666.5 1044.4

Comments:

1. Incrementalworking capital for PTBA only. Breakdown into foreignand local costs not available. 2. Installedcost of US$811.4 million is approximately2.5% higher than that computedby the Borrower (Part II, para. 3.3). This factor and specific differencesin individualforeign and local cost elements are attributableto (i) differingtreatment of foreignand local costs; (ii) differentexchange rates for the conversionof local costs into US dollars; and (iii) the transferof certain capitalcosts into start-upoperating costs in Part II. - 36 -

B. Proiect Financing (US $ million)

Planned Loan Sources Agreement Final

Equipment 51.1 54.1 Consultants'Services 75.7 114.9 & Training Coal Exploration 5.0 2 2.7 & Engineering Refinancingof S-9 Loan 10.0 7.0 Unallocated 43.2 _

Subtotal 185.0 178.7 Other ExternalSources 389.2 508.2 3 Domestic Sources 766.7 360.1 Total Financing 1340.9 1047.0

Comments:

I/ Allocated the Coal ExplorationEngineering Project (Loan 2153-IND).

21 Includes US $0.5 million financedunder IBRD Loan 1250.

6. Proiect Results

A. Direct Benefits

Estimate Estimate Appraisal at at Full Indlcators Estimate Closina Date Develement

Project Coal Production 3.1 mtpy 2.0Dtpy^' 3.1 + Rail Transportto Suralaya 200,000 tonslmonth 270,000 tonsbmonth_ 200,000 tons/month+ Coal Terminal throughput 200,000 ton3smonth 200,000 tonsimonth 200,000 tonslmonth+ Ship Transport 200,000 tonslmonth 200,000 tonslmonth 200,000 tonslmonth+ Project Revenue_l US$260 millionlI US$73 million US$88 million a/ Supplemnted by in excess of 1.0 mtpy contractminimn of non-projectcoal. kb Facilitated by rolling stock procured for project expansion to 400,000 tonslmonth. c/ Based on coal sales to Suralaya only. _i Based on US$108 per tonne (1989) estimated at appraisal. - 37 -

B. Economic Impact

Appraisal Estimate Actual

EconomicRate of Return 12.2 2.2

Assumptions

Incrementalbasis Yes Yes

Same cost streamsused for financialrate of return Yes Yes

Exclusionof import duties Yes Yes

Shadow pricing of diesel and electricity Yes Yes

No shadow pricing of labor and other local costs Yes Yes

Benefit stream based on the cost of coal import from Australiaadjusted for differencein calorificvalue Yes Yes

C. FinancialImpact

Estimate Appraisal at Estimate Completion

FinancialRate of Return 11.7 3.41/

Other FinancialIndicators

FY89 Bukit Asam Coal Sales (mt) 3.0 2.3

FY89 Coal Price for Delivered at Suralaya (US$/t) 108 34 FY89 Coal Sales Revenue from Bukit Asam (US$ million) 312 72

FY89 Cash OperatingCosts (Rp bil) 129 116

1/ Borrower'scalculations indicate an FRR in the neighbourhoodof 6% (Part I, footnote to para. 6.3, and Part II, para 3.5.16). - 38 -

7. Statusof CoverAnts

Covenfnt Subioet Status

Ltom As: PT Buklt Asa

3.01 Prompt provision of dequate funds to PTBA, PT Pann, PJKA In Compliance

3.02 Coal sales to Suralaya according to specifled price meclanism

3.03 Ensure interlm power supply

3.04 Ensure timely land acquLsition

3.05 Hire consultants per Bank guldellnes U

3.06 Provide adequate insurance for foreign goods, use restriLtions of goods to Project for Bank-financed goods

3.07 Reportlng requirements:

(a) Provlde plans, speclfLcations, reports, contract documents and construction and procuremcet scheduless S (b) MaLntaLn records for monitoring, allow Bank supervision of Bank- financed aspects, provide Bank regular reportsl S (c) Provide Bank with procurement LnformatLon on awarded contracts; (d) Prepar. completion report.

3.08 MaLatain records in accordance with acceptable and consistently S applied ccounting princLples

4.01 Bank loan is safeguarded against other loans and liens U

Project -Ar,

2.01 Due diligence in carrying out Project in Compliance

2.02 Employ consultants accordLng to Bank guidelinest (a) Sr. Technical Advisor and TeobnLcal service advisorst (b) Project Management Consultants (c) Owner's Engineers for terminalst (d) PMC for townsite

2.03 Procurement of Bank-financed goods accordlng to Bank guidellnes

2.04 Provide insurance for foreign goods; use restrictions of Sank- financed goods to Project - 39 -

Covenant Sub ect Status troeet Aar. 8ukittAsam (Cont'd)

2.05 Reporting requirements: (a) Provide plans, speclflcations, reports, contract documents and construction and procurement schedules In Compllance (b) Maintain records for monitoring, allow Bank supervisLon of Bank- financed aspects, provide 8ank regular reports (c) Provide Bank with procurement informatlon an awarded contracts

(6) Prepare completion report (e) Allow Bank supervisLon of all facilitLes, records

2.06 Comply with Subsidiary Loan Agreement S

2.07 Exchange views with Bank on ProJect progress and inform Bank of a foreseen difficulties

3 01 Maintain suffLeLent project insurance a

3.02 Provide Bank wlth operations assLstance contract at least 12 months before estimated operational acceptance of flrst mLuLng subsystem v

3.03 Prepare vater pollution control guLdelines nd monltor environmental Inadequately aspects of Project addressed

3.04 Prepare land reclamation plan

Pro-lectAstr, PJKA (ESS)

2.01 Due diligence in carrying out Project In Complance

2.02 Employ consultants according to Bank guidelines: (a) to a implement financial and management accountLng system In ESS (b) PNC for management, training and operational assistance S

2.03 Use restrictLon of Bank-ftnanced services to Project a

2.04 Reportlng requirements- (a) Provide plans, specifLcations, reports, contract documents and construction and procurement schedules S (b) Maintain records for moanltoring, allow Bank supervision of Bank-financed aspects, provide Bank regular reports 5 (c) Provide Bank with procurement information on awarded contracts a (d) Prepare completion reports S (e) Allow Bank supervlsion of all facilitLes, records S

2.05 Exchange views with Bank on Project progress and inform Bank of foreseen difficulties - 40 -

Cven nt Sublect Status

ProjsetAr PJKA (ESS tCcnt'd)

2.06 Implement finuncial end mcaagement accounting system by April 1, 1983 In Compliance

2.07 Review level of coal beiAg transported and take steps to ensure timely and efficlent operations

3.01 Maintain sufficient project insurance

3.02 Beginning April 1984, maintain minimum operating Inventories and cash balances of at least 16S of previous year's working expenses

S Enter Into coal transportcontract vith PTBA a

4.01 Maintain records in ccordance with acceptable and consistently applied accountingprinciples a

4.02 Provide Bank n--nl audited financial statements not later than 6 mnths after the end of each fiscal year, and supplementary financial data as requested a

4.03 (a) During 1984-86, set railway tariff at not less than 251 of N delivered price of coal at Suralaya Cb) From 1987 onwards, set annual tariff to allow ESS to obtain Tarlff in line annual rates of return on net fixed (project) assets of not with overall less than 132 Project FRR

Pro ect Aar. PT Pan

2.01 Due diligence in carrying out Project In Compliance

2.02 Employ consultants according to Bank guidelines for design, construction and delivery supervision, and training 0

2.03 Use restrictions of Bank-financed goods to Project a

2.04 Reporting requirements: (a) Provide plans, specification, reports, contract documents and construction and procurement schedules N (b) Maintain records for manitoring, allow Bank supervision of Bank-finaned aspects provide Bank regular reports 6 (c) Provide Sank with procurement information on awarded contracts S (d) Prepare completion report a (e) Allow Bank supervision of all facilities, records

2.05 Comply with Subsidiary Loan Agreement

2.06 Exchange views with Bank on Project progress and inform Bank of foreseen difficulties a - 41 -

Subiect Statu

Protet Agr. PT Panm (Cont'd)

2.07 Lease ship to ship operator acceptable to the Bank In Compliance

3.01 Maintain sufficient project insurance

4.01 Maintain records in accordancewith acceptable and consistently applied accounting principles

4.02 Provlde Bank annual audited financial stateinmts not later than 6 months after the end of each fiscal year, and supplementary flnanci-a data as requested

8. Use of Bank Resources

A. Staff nvuts

IX&k m 8x ms mI r MO XL l M&8 -81 FY84 MS PY86 FY89 FY0 TOTAL

L8SP 108.6 40.2 25.6 123.3 24.8 322.5 LEM 100.0 46.6 146.6 12DI 11.9 11.9 LOP 3.0 2.8 0.1 1.0 6.2 9.7 22.9 SPY 22.6 35.3 29.4 28.2 34.1 30.3 20.0 28.6 0.2 228.7 PCR 1.4 4.0 5.4 PAD 0.2 1.4 1.5 0.9 1.7 1.3 1.4 8.5

TOTAL111.6 43.0 25.7 124.3 131.1 91.0 36.7 31.0 29.1 35.8 31.7 21.4 30.0 4.1 746.5

Lahnd

LEP - Preparation -IMA- Appraisal LENl- Negotiations LOP - Loan Proceasing SPN - Supervision FCR - Project CompletionReport PAD - Project Admiulstration 42 -

Stage of Month/ humber of Days SpecialisatLon Performance Rating Types of PZiuuse Cycle -sta. Personsa Fileld Rflveaented ai Status b/ c1pblem

Through Appraisal 03/76 2 - H 06176 3 - M.P 09/76 1 - M 03/77 5 - t,F,P 05/77 6 - N,H4E 08177 3 - M,F 06/78 4 - t,F 09/78 3 - M,F,ME 02179 1 - HE 05/79 3 - M,F,)IE 06/79 6 - M,F,R,ME 12/79 6 - H,F,SA,R,NE 01/80 6 - M,F,SA,R,ME 03/80 6 - M,F,SA,R,ME 05/80 2 - FA,R Appraisalthrough Board Approval 10/80 7 - X,F,R,L 12/80 1 - ME 01/81 1 - H 06181 5 - H,F,SA,R Board Approval through Effectlvess 03182 3 12 X,SA,R 2/1 E,S,P,C

Supervision Mission 1 08/82 5 12 M(2),F,E,R 2/2 S,P,C 2 12/82 1 12 H 2/2 S,P,LA,CF 3 06/83 4 14 M(2),F,R 2/3 S,P,LA 4 11/83 3 is m(2),R 2/3 S,P,LA,F S 03/18 3 16 X(2),P 2/3 S,P,LA 6 12/84 1 4 M 3/3 S,P,LA 7 03/85 1 5 M 2/1 P 8 07/85 3 13 H,P,R 1/2/2/2 P 9 02/86 3 15 H,SA,R 2/2/2/3 P.? 10 09/86 5 23 M,F,SA,R,L 1121212 PM,1 11 03/87 1 8 M - S,P,Pl,I 12 06/87 2 9 M,P 1/4/3/4 S,P,PM,F 13 02/88 2 21 M,F 1/3/3/3 S,PH,F 14 0588 1 8 M - S 15 10188 2 13 H,P 1121212 S,F 16 12188 1 14 M 2/2/2/1 8,P,F 17 05/89 4 20 N(2),F,R 2/1/111 F

a/ H - Mlning Engineer; F - Financl Analysts E - Economists 8^ - Staff Assistant,; R - Railvay/Port Engineer L - Lawyers P - Power Engineers HE - Marne Engineer. ki Through 3/85, performance rating is Trend/Status, through 12/88 rating are Available Funds/Project Management/Development Impact/Overall Statust 1989 rating is Overall Status/Project Development/Compllance with Loan Covenants/Project Man-gement/AvaLlabillty of unds. £t B - Loan Effectiveness; 8 - Implementation Schedule; P - Procurements C - Project Costs; LA - Land Acquisition, CP - Cofinancing F - Financiai; PH - Project Manageentg I - InstLtutional.

Energy Division AsLa Technical Department June 1990