Documentof The World Bank
FOR OFFICIAL USE ONLY
/S 32Z?2- /0 Public Disclosure Authorized Reort No. 8333-IND
STAFF APPRAISAL REPORT
INDONESIA Public Disclosure Authorized
FERTILIZER RESTRUCTURINGPROJECT
NOVEMBER26, 1990 Public Disclosure Authorized
Industry aid Energy OperationsDivision Country DepartmentV Public Disclosure Authorized Asia Region
lfhis domnent has a resrcted disribution and may be used by recipients only in theperfomanoe of their offlial duties. Its contents may not otherwise be disdosed whout World Bak aulhoulzioid CURRENCY EQUIVALENTS (As of June 1, 1990)
Currency Unit = Indonesian Rupiah (Rp)
US$1.00 = Rp 1,830 Rp 1 billioni = US$0.546 iilllion
WEIGHTS AND MEASURES
1 British Thermal Unit (Btu) = 0.252 Kilocalories (Kcal) 1 Metric ton (t) = 1,000 kilograms (kg) 1 Metric ton (t) = 2,209 pounds (lb) 3 1 Cubic meter (m ) = 35.32 Cubic Feet (cuft) 1 Standard Cubic Foot (SCF) of Natural Gas = 1,000 Btu
FISCAL YEAR
Government of Indonesia - April 1 - March 31 Fertilizer Companies - January 1 - December 31
ABBREVIATIONS AND ACRONYMS
AAF - P.T. ASEAN Aceh Fertilizer APPI - Indonesian Fertilizer Producers' Association AS - Ammonium sulfate ASEAN - Association of South-East Asian Nations BAPPENAS - National Development Planning Board BI - Bank Indonesia BPKP - Financial and Development Supervisory Board BNI - Bank Negara Indonesia 1946 EKUIN - Minister Coordinator for Economics, Financial and Industrial Affairs, and for the Supervision of Development GOI - Government of Indonesia Gresik - P.T. Petrokimia Gresik ICB - International competitive bidding IKPT - P.T. Inti Karya Persada Tehnik Kaltim - P.T. Pupuk Kalimantan Timur KC1 - Muriate of potash, or potash, or potassium chlloride KLH - Ministry of Population and the Environment KONEBA - P.T. Konservasi Energy Abadi Kujang - P.T. Pupuk Kujang Mr4SCFD - Million Standard Cubic Feet per day MMBtu - Million British Thermal Unit MOA - Ministry of Agriculture MOI - Ministry of Industry MOF - Ministry of Finance PERTAMINA - National Oil and Gas Company PFE - Participating fertilizer enterprises PIM - P.T. Pupuk Iskandar Muda PUSRI - P.T. Pupuk Sriwidjaja REPELITA V - Fifth Five-Year Development Plan, 1989/90-1993-94 SBI - Sertifikat Bank Indonesia (BI Domestic Money Market Certificate Rate) SCB - State Commercial Bank SLA - Subsidiary Loan Agreement tpd - Tons per day tpy - Tons per year TSP - Triple superphosphate INDONESIA
FERTILIZERRESTRUCTUIRING PROJECT
Loan and Proiect Summary
Borrower: Republic of Indonesia
Beneficiaries: Five State-ownedFertilizer Manufacturing Companies: Gresik, PIM, Kaltim, Kujang and PUSRI.
Amountt $221.7 million equivalent
Lending Terms: The proposed loan would be made at the Bank's standard variable interest rate for a term of 20 years including5 years of grace.
Onlending Terms: The proceeds of the loar would be onlent to the five fertilizercompanies for periods of either 10 or 15 years, includingrespective grace periods of three and five years, at a variable interest rate reflectingthe market rate for domestic term funds. The five fertilizer companieswould also pay commitmentfees equal to those payable by the Governmentto the Bank under the loan. The Governmentwould bear the foreign exchange risk.
Project Description: The overall objectivesof the Projectwould be to: (a) assist the Government in implementingan agreed Statementof FertilizerSector Policies; (b) support an industry-wideinvestment program; (c) identify the scope for improvedefficiency in marketing and distribution;and (d) assess the industry'senvironmental impact and standards,and prepare an environmentalmanagement program. The Project'scomponents would be: (a) building a new ammonia/ureafacility at Gresik, with a capacity of 1,350 tons per day (tpd) of ammonia and 1,400 tpd of urea, to provide low-cost ammonia to existing operationsand to supply low-cost urea in East Java, and modernizationof Gresik's existing plants; (b) undertakingoptimization investmentsin four fertilizerplants (LskandarMuda, Kaltim, Kujang, and PUSRI) to realize productivitygains, energy savings, environmentalimprovements and product diversification;and (c) supportingpreparation of a marketing and distributionstudy and of an overall fertilizerindustry assessment of environmentalimpacts, includingidentification of long-termobjectives for environmentalimprovement and an action program to ensure that the industrymeets appropriatestandards.
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - il -
Benefits: The main project benefits would be an improvementin the industry'sperformance, a reductionof budget subsidies, and minimizationof the adverse environmentalimpact of fertilizerproduction.
Risks: The investmentsto be supportedunder the Project do not present significantrisks. The timely availabilityof natural gas to the Gresik ammonia/ureaplant is a potentialrisk. To account for this risk no disbursements would be made for expendituresunder the Gresik RestructuringComponent until a contract,satisfactory to the Bank, for the provisionof the required natural gas to Gresik has been executed onibehalf of Gresik and PERTAMINA. The main sector-widerisks are that domestic ex-factoryprices may not be increased to border prices as anticipatedand that internatiGnalfertilizer prices may not be in line with Bank forecasts. The first risk is niinimizedby the Government'sstated objectivein the Policy Statement to bring ex-factoryprices to their economic levels. The latter risk is acceptable,since the industry has a relativelylow variable cost structureand even at significantlylower prices it would remain financiallyviable.
EstimatedCost: Local Foreign Total ----- (US$ million)…
Gresik Restructurlng/a 118.5 135.1 253.6 Optimiization 16.3 75.8 92.1 - Studies 0.2 0.7 0.9 N
Base Cost (June 1990) 135.0 211.6 346.6
Physical contingencies 0.9 4.2 5.1 Expected price increases 1.2 6.6 7.8
Interest during construction 64.8 - 64.8 Workingcapital 20.0 - 20.0
Total FinancingRequired 221.9 222.4 444.3
/a Includes iheuitifiabletaxes oniservices estimatedat $4.0 million. - iii-
Financing Plan: Local Foreign Total ----- (USS million) -----
Enterprises' equity 143.8 0.7 144.5 IBRD / - 221.7 221.7 Medium-term borrowing (BNI) /b 58.1 - 58.1 Slhort-termborrowing (BNI) /b 20.0 - 20.0
Total 221.9 222.4 444.3
/a Includes retroactive financing of up to $22.2 million for eligible expenditures incurred by the fertilizer enterprises after January 15, 1990, to cover advanced procurement of imported equipment and services. /c Bank Negara Indonesia 1946.
Estimated Disbursements:
Bank FY 1991 1992 1993 1994 1995 1996 1997 ------$ million) ------
Annual: 22.2 55.1 65.0 37.0 25.0 13.0 4.4 Cumulative: 22.2 77.3 142.3 179.3 204.3 217.3 221.7
Economic Rate of Return: Gresik anmonia/urea plant: 21 percent. - iv .
INDONESIA
FERTILIZER RESTRUCTURING PROJECT
Table of Contents
Page No.
I. THE FERTILIZER SECTOR ...... 1
A. Structure and Performance ...... 1 Structure and Organization ...... 1 Fertilizer Consumption Trends ...... 1 Distribution and Marketing ...... 4 Fertilizer Pricing.. . 5 Fertilizer Production . . . 6 Investment Program ...... 8 B. The Policy Framework.... 9 C. The Sector and the Natural Environment ...... 10
II. THE BANK'S PAST LENDING, STRATEGY AND RATIONALE FOR INVOL'iEMENTIN THE SECTOR ...... 12
A. The Bank's Past Lending in the Fertilizer Sector . . . . . 12 B. The Bankle Strategy and Rationale for Involvement in theSector ...... lS
III. THE PROJECT ...... * .. .. 15
A. Objectives and Description ...... 15 B. The P.T. Petrokimia Gresik Restructuring Component . . . . 15 Gresik's New Ammonia/Urea Plant ...... 15 Modernization of Gresik's Existing Fertilizer Plants . 16 C. The Optimization Component ...... 17 D. The Studies Component ...... 19 E. Project Organization and Implementation ...... 20
IV. PROJECT COST, FINANCING PLAN AND LOAN FEATURES ...... 23
A. Project Cost ...... 23 B. Financing Plan ...... 26 C. Features of the Loan ...... 27 Onlending Arrangements ...... 27 Loan Administration .. 30
This report is based on the findings of an appraisal mission to Indonesia in March/April 1990. The mission consisted of J. Gamba (AS5IE), H. Murphy (AS5IE) and C. Escudero (LEGAS). D. Brown (ASTIF), K. Constant (ASTIF) and S. Venkataraman (Consultant) also participated in project preparation. - v -
V. FINANCIAL, ECONOMIC, AND ENVIRONMENTAL ANALYSIS, AND PROJECT RISKS .,...... 33
A. Financial Analysis ...... 33 B. Economic Analysis ...... 37 C. Environental Analysis .n.y.i.s...... 39 D. Project Risks ...... 41
VI. UNDERSTANDINGS AND AGREEMENTS REACHED ......
TABLES IN THE TEXT
1.1 Indonecia - Historical Growth in Fertilizer Consumpcion 1.2 Indonebia - Projected Fertilizer Consumption ...... 1.3 Estimated Fertilizer Economic Subsidies ...... 1.4 Fertilizer Production Capacity and Output in 1989 ...... 8 2.1 Bank Operations and Evaluation of Project Performance in the Fertilizer Sector ...... 13 4.1 Project Cost Summary ...... 23 4.2 P.T. Petrokimina Gresik Restructuring Component - Capital Cost Estimate ...... 24 4.3 Optimization Component - Capital Cost Estimate ...... 25 4.4 Studies Component - Cost Estimate ...... 26 4.5 Financing Plan ...... 27 4.6 Initial Allocation of Loan Proceeds to Participating Fertilizer Enterprises .2.8...... 28 4.7 Procurement Arrangements ...... 30 4.8 Allocation of Bank Loan ...... 32 5.1 Gresik - Historical Financial Data ...... 33 5.2 Gresik - Projected Financial Data With Project . . . . . 35 - 5.3 P.T. Petrokimina Gresik Ammonia/Urea Plant - Summary of Financial Rates of Return ...... 37 5.4 P.T. Petrokimina Gresik Ammonia/Urea Plant - Summary of Economic Rates of Return ...... 39
ANNEXES
1. Government of Indonesia Statement of Policy 2. Fertilizer Sector - Statistical Data and Analysis 3. Terms of Reference A. Fertilizer Marketing and Distribution Studies B. Development of Fertilizer Industry Environmental Improvement Program 4. Project Cost and Financing Plan 5. Detailed Capital Cost Estimates 6. Estimated Disbursement Schedule for Bank Loan 7. Financial and Economic Analysis 8. Key Implementation Indicators and Supervision Plan 9. Selected Documents Available in the Project File
MAP IBRD No. 22141R1 I. THE FERTILIZERSECTOR
A. Structureand Performance
Structureand Organization
1.1 During the past two decades, Indonesiahas successfullydeveloped and implementeda policy of promotingfood self-sufficiency,particularly in rice, and includingsupport for all agriculturalinputs such as fert4 lizers, extension,seeds, irrigation,and research. The major agriculturalj.F.ograms for this purpose have been developedand managed by the Ministry of Agriculture(MOA). The fertilizersector, in all aspects of productionand marketing,has been managed by the Ministry of Industry (OI) as an important element contributingto the above programs. A large investmentprogram has been planned and implementedin the public sector to produce and deliver fertilizersfrom domestic plants, which primarilyproduce urea based on domesticnatural gas resources,to minimize risks that farmers may face from the uncertaintiesof imported fertilizersupplies and highly fluctuating internationalfertilizer prices. Large marketing and distribution infrastructurefacilities have been built, mostly in the public sector, to ensure timely and adequate delivery of fertilizersto the farmers at affordableprices. The farmgate fertilizerprices have been maintainodat low and uniform levels countrywide through a system of price subsidiesmanaged directlyby the Government. The Governmentis aware of the negative impacts of these subsidiesand has taken steps and will continue to adopt measures to sustain a more economicallyefficient fertilizerindustry (Annex 1). The current structureof the Indonesianfertilizer sector should be viewed in this broad context.
1.2 At present, the Indonesianfertilizer industry consists of six government-ownedcompanies (PUSRI,Kujang, Gresik, Kaltim, Iskandar Muda, and Aceh--the last owned Jointlywith the ASEAN partners)with a total installed capacity of 5.0 million tons per year (tpy) of urea, 1.2 million tpy of triple superphosphate(TSP) and 0.65 million tpy of ammonium sulfate (AS). The total fertilizerrequirements of the Indonesianfarmers are obtained essentially from the above producers,supplemented as required through imports, and provided to the farmers through a fertilizerdistribution network solely managed by PUSRI. There has been concern,however, that the absence of competitionin the domestic marketplacehas preventedall achievable efficienciesfrom being reached.
FertilizerConsumption Trends
1.3 The historicalconsumption of the four major fertilizerproducts is presented in Annex 2-1 and summarizedin Table 1.1 below. - 2 -
Table 1.1: INDONESIA - HISTORICALGROWTH IN FERTILIZERCONSUMPTION (thousandtons of product)
Year Urea TSP AS KW1 Total
1975 676 235 94 34 1,039 1980 1,776 494 330 123 2,723 1985 2,607 1,048 475 290 4,420 1986 2,715 1,165 473 238 4,591 1967 2,686 1,191 553 270 4,700 1988 2,930 1,219 585 496 5,230 1989 (Estimated) 3,065 1 514 653 635 5,867
Annual Growth Rate (Percentage)
1975/85 14.5 16.1 17.6 23.9 15.6 1980/85 8.0 16.2 7.6 18.7 10.2 1984189 3.3 9.6 9.9 20.3 6.8
1.4 Indonesia'sfertilizer c3nsumption is characterizedby heavy reliance on nitrogenousfertilizers--mosuly urea--for rice cultivation. But the share of urea has fallen in recent years, from about 65 percent in 1975 to about 52 percen. in 1989, as urea dosages approachedsaturation and applicationlevels of TSP and potash rapidly increased. The share of Java in total fertilizerconsumption is about 75 percent of urea, 64 percent of TSP, and about 86 percent of AS, but only about 28 percent of potash. which is mostly used for plantationand commercialcrops. The importanceof fertilizer supplies to the foodcrop sector is reflectedby the share of fertilizer consumed in foodcropproduction in recent years--about95 percent of urea and TSP, but only about 15 percent of potash. The rapid growth in fertilizer consumptionand the present high levels of applicationare due to high fertilizersubsidies resulting in favorablefarmgate fertilizerprices relative to paddy support prices. Until the mid-1970s,Indonesia depended for fertilizersupplies nearly entirely on imports--exceptfor a small contributionfrom PUSRI I commissionedin 1963. Since the 1970s, substantial capacities--totalingabout 6.8 million tpy--havebeen added, mostly for urea. As a result, Indonesianow meets its entire domestic urea requirementsand is a major exporter of urea. However, all the potash and increasingrequirements of TSP will continue to be imported,since Indonesiadoes not possess the r'w material base for their competitiveproduction.
1.5 Most of the increase in fertilizerconsumption took place from 1975 onward. The growth rate in consumptionduring the last five years has only been 3.3 percent for urea, 9.6 percent for TSP, 9.9 percent for AS, and 20.3 percent for muriate of potash (KC1). Various studieshave estimated that to maintain rice self-sufficiency,rice productionin Indonesiawill have to increaseannually b- about 2.5 percent. However, the present levels of fertilizerapplication are already high for the varieties of paddy seeds now available,as reflectedin the declininggrowth rate of urea consumption. The required increase in rice productioncannot, therefore,be achieved mainly - 3 - through increasedfertilizer application. Urea consumptiongrowth rates can, therefore,be expected to remain at somewhat low levels. TSP and KC1 conrucip- tion growth will be higher than the growth in urea consumption. The lneasures, now being consideredby the Government,to improve fertilizerapplication efficiencywould also reduce the need for additionalfertilizers for ach1Ueving the same production targets. These measures include the use of urea briquettesplaced appropriatelybelow the soil, more selectiveuse of AS and potash, and use of partiallyacidulated phosphate rock where appropriate. Based on these considerations,the fertilizerccnsumption projections in this report reflect growth rates of 3.5 percent, 6.5 percent, 7.5 percent, and 7.5 percent, respectively,for urea, TSP, AS, and potash for the Repelita V period and 3.0 percent, 6.0 percent, 7.0 percent, and 7.0 percent, respectively,for the Repelita VI period. As seen in Table 1.2 below and in Annex 2-2 these projectionsare somewhat lower than those prepared by MOA and MOI, but are judged to be more appropriatefor capacity planning purposes.
Table 1.2: INDONESIA- PROJECTED FERTILIZERCONSUMPTION (thousandtons of product)
Year Urea TSP AS KCI Total
1988 (actual) 2,930 1,219 585 496 5,230 1989 (est.) 3,065 1,514 ¢53 635 5,867
A. Second National FertilizerStudy - Revision (ii)
1995 5,132 2,366 1,095 664 9,257
B. Ministry of Industry
1994/95 4,913 2,342 1,067 N.A. N.A. 1999/2000 6,422 2,989 1,670 N.A. N.A.
C. World Bank Estimate
1995 3,770 2,210 1,010 980 7,970 2000 4,370 2,960 1,450 1,410 10,190
N.A.: Not available.
1.6 Except in the case of urea, the domestic productionof fertilizer will be short of requirements. Some AS capacitymay become availableas a coproduct, should Indonesiaproceed with a caprolactamplant. The additional requirementsof fertilizerproducts other than urea will be met through imports. According to the estimatescontained in Annex 2-9 if all the investmentprograms now under considerationare implementedas scheduled,the projectedurea productionwill be about 6.4 million tpy by 1995. The requirementof urea for industrialpurposes--mainly for the productior;c resins for the plywood industry--willbe about another 0.3 million tr. 1995. The planned capacitiesfor additionalurea productionwill, t--. Disttibution and Marketing 1.7 Since 1979 the Governmententrusted to PUSRI the total responsibi- lit,ie,for dListlibutingand morketing all types of fertilizers--bothdomes- tically produced and imported. During the past ten years, PUSRI has mobilized and arranged for an impressiveinfrastructure to fulfill that responsibility; its marketingunit works as an independentcost center. To support its fertilizermarketing operations, PUSRI maintainsa centralmarketing office in Jakarta, regionalmarketing offices in each of the 25 provinces,six ferti- lizer baggIng units, and 92 fertilizerwarehouses located throughoutthe country. Tbe company owns such transportfacilities as railway wagons, fertilizervessels, and one ammonia tanker. In addition,the companyhires and uses similar facilitiesowned by such other agencies as the state and private railways. Three of the fertilizerbulk carriers and one of the bagging plants now being used by PUSRI are privatelyowned. PUSRI also uses the large fleet of trucks owned and operated in the private sector for fertilizermovement. Increasingly,the additionalfertilizer warehousing facilitiesrequired are being obtained through hiring of privatelyowned storage facilities. 1.8 The flow of fertilizerproducts in the presentmarketing system is shown in Annex 2-3. PUSRI obtains its fertilizersupplies either from the domestic producersor through imports (Line I). For each agriculturalseason, starting from October, the MOA estimatesthe fertilizerrequirements of its planned agriculturalprogram. Taking into account expected domestic production,imports are planned, as appropriate,through the Ministry of Trade. The imported fertilizersare taken over by PUSRI at the erntryport. The annual strategyto minimize distributioncosts is developedby PUSRI and discussedwith all concerned. Based on the agreed plans, an amount of the domestic productionis reserved for domestic use. The producersare then free - to export their extra productionat internationalprices. PUSRI transports the products from the plants or the importingports (Line I) to bulk terminals/portsat the provinciallevel (Line II). The bulk material is bagged and then shipped to inland supply warehousesat the district levels (Line III). Fertilizersare sold from these warehouses to the dealers,who market them to the final consumers (Line IV). In the past the dealers could be governmentinstitutions, cooperatives, or private agencies;ho.'ever, in 1988 the Governmentdecided that the marketing of fertilizersto the farmers in rural areas would be done only through the village cooperativeunits, known as Koperasi Unit Desa (KUDs). At present, except for sales to plantations, which can still be made through governmentinstitutions and private dealers, all retail marketing of fertilizersis through the KUDs. As a result, the share of KUDs in the marketing of fertilizershas increasedsubstantially-- from 13 percent in 1'84/85 to 64 percent in 1988189. Thers are concerns that this restraintof compecitionhas caused efficiencylosses. A Fertilizer Marketing and DistributionStudy, to be supportedunder the Project,will evaluate the scope for efficiencyimprovements in a competitiveenvironment and recommendan action plan to implementsuch improvements. -5- FertilizerPricing 1.9 Fertilizerprices at the farmgateand ex-factorylevels are set by the Government. The differentiulfrom this two-levelprice setting is funded by the Government in the form of a budgetary fertilizersubsidy. In general, farmgate fertilizerprices are set annually from October 1 of each year, keeping in view the need to promote adequate Fertilizerapplication, to ensure that the levels of farm incomes are not unduly eroded, and to maintain rice self-sufficiency.Fertilizer is sold to farmers throughoutthe country at the same price; the extra cost of delivery to remote locationsis borne as a subsidy by the Government. Until October 1988, all the fertilizerproducts-- u.ea, ?SP, AS, and KCl, were sold at the same product price irrespectiveof nutrient content and farm economics. From October 1988, the Governmenthas started to change this situation. At present, deliveredprices of TSP and KC1 (Rp 260 per kg) are somewhat higher thar.the prices of urea and AS (Rp 210 per kg). Also, since the fertilizerpricing (and subsidy) system covers only the four major single nutrient products (urea, TSP, AS, and KCl), manufacturers are reluctantto diversifyand provide the farmerswith a wider range of non- subsidizedproducts, that would have to be sold at higher market prices. 1.10 Ex-factoryfertilizer prices are set annually by the government, taking into account the actual costs for the two previous years and the indi- vidual fertilizerenterprise's budget for the coming year. The pricing proposals,prepared by the enterprisesas part of their annual budget process, are reviewed by an interministerialcommitte--MOA, MOI, Ministry of Finance (MOF) and EKUIN--andbecome applicable from January 1. The ex-factoryprices provide for depreciationand interestcharges but do not includea provision for return on -quity. The rpoducers, subject to fulfillingcertain performancetargets, are entitled to a profit of Rp 5,000 per ton of product irrespectiveof the capital employed. 1.11 Natural gas, the major input for all the urea plants, is priced uniformlyat $1.0 per million British thermalunit (MMBtu),thus indirectly subsidizingurea production at some locations. The breakdownof the present ex-lactoryfertilizer prices is presentedin Annex 2-4 for urea and Annex 2-5 for TSP and AS. In the case of urea, the productioncosts (excluding depreciationand interest)range from Rp 92,026/ per ton for Kujang to Rp 100,375/ per ton for Kaltim. The higher productioncosts at Kaltim are mainly due to the higher energy consumptionof Kaltim I, a situationbeing addressedunder the proposed Projoct'sOptimization Component. The capital- related costs of Kaltim and PIM are higher due to their recent plant vintages. 1.12 The fertilizeris deliveredby the producersto PUSRI against letters of credit. The producersare paid against despatch an amount equal to the distributioncosts allowed to PUSRI for supplies from the particular producer. The producer issues claims on the Governmentfor the difference between the agreed ex-factoryprice and the payment already received from PUSRI. In the case of Kujang, there is a negative receipt from the Government. In the case of PUSRI, about 80 percent of the ex-factoryprice of urea is receivedagainst despatches. In the case of PI'iand Kaltim, the receiptsagainst despatchesamount to about 70 percent of the productioncosts of bulk urea, excludingcapital-related costs. Gresik, however, receivesonly 40 percent of the production costs (excludingcapital relatedcosts) for TSP and 64 percent for AS against despatch. Gresik thus faces a cash crtunchif there are delays in the receintof the Government'sshare of the ex-factory price. The Governmenthas recently assured the PFEs that these paymentswill be made within 90 days and that, in case of defaults, the companieswill be reimbursedinterest charges. 1.13 FertilizerSubsidy. As mentionedabove, fertilizersare delivered to the farmersat prices well below costs. The differencebetween the cost of deliveringthr fertilizersto the farmers and the price realized through sales is borne by the Governmentas a budgetary subsidy. With the growth in the agriculturalprogram, the increase in fertilizerconsumption and the higher fertilizerprices, the size of the fertilizersubsidv has been steadily increasing,from Rp 219 billion in 1981 to an estimatedRp 721 billion in 1989. In 1988(89 subsidieson agro-inputsother than fertilizer,like those on pesticides,have been eliminated. 1.14 The actual budgetary fertilizersubsidy for any particularyear has to be adjusted for carrying forward some expenses from other years, interest charges and taxes. For purposes of evaluatingthe impact of various policy options on the fertilizersubsidy, the subsidy accruingwithin anv particular year has been estimatedexclusive of the above adjustments. Details of such estimates for 1988, 1989, and 1990 are containedin Annex 2-6, Annex 2-7 and Annex 2-8 and are summarizedin Table 1.3 below. The 1988 estimatesare based on actual sales and costs. The 1989 estimatesare based on actual sales up to August 1989 and on projectionsfor the rest of the year. The 1990 estimates are based on i989/90 fertilizersales, as projectedby the MOA and at the present price levels. The fertilizereconomic subsidy has been split into "production"and "farmgate"subsidies using economic deliveredcosts based on border prices. In the case of urea, where Indonesia is competitivelyplaced for exports, the border price is the export-parityprice. In the case of TSP, AS, and KCI, for which Indonesiais not a competitiveproducer, the border price is the landed cost. 1.15 Table 1.3 indicatesthat the Indonesianurea producers -re internationallycompetitive and are being paid ex-factoryprices well below export prices. For TSP and AS, domestic competitivenessis very sensitive to internationalrelative prices of fertilizerproducts, raw materials, and intermediates. The competitivenessof AS productionis also partly affected by the high-cost of fuel oil-basedammonia produced to enable operationof one of Gresik's AS plants. The economicproduction cost of TSP tends to be mar- ginally higher or lower than the landed cost dependingon the prevailing internationalprices. FertilizerProduction 1.16 Fertilizerproduction in Indonesiastarted with the commissioningof PUSRI I in 1963, with an installedcapacity of 100,000 tpy of urea. By 1989 the fertilizercapacity had reached a total of 6.870 million tpy. The capacitiesof the existingplants and those being planned are summarizedin Annex 2-9. At present, domestic fertilizerproduction meets the entire requirementsof urea and AS, and most of the requirementsof TSP. Indonesia is now an exporter of ammonia (0.24 million tons in 1987) and of urea (1.04 million tons in 1988). The recent exports of ammonia and urea, and the major importersof Indonesianurea, are given in Annex 2-10. Table 1.3: ESTIMATEDFERTILIZER ECONOMIC SUBSIDIES (Rp billion) Urea TSP AS KC1 Total A. 1988 Deliveredcost 646 464 161 152 1,422 Sale realization 418 177 84 80 759 Subsidy Total (Budgetary) 228 287 77 72 664 Production (314) 14 53 __ (247) FaLmgate 542 273 24 72 911 B. 1989 (est.) Deliveredcost 702 684 188 171 1,745 Sale realization 518 285 110 111 1,024 Subsidy Total (Budgetary) 184 399 78 60 721 Production (364) 53 51 __ (260) Farmgate 548 346 27 60 981 C. 1990 (est.) Deliveredcost 811 620 195 169 1,795 Sale realization 665 294 125 133 1,217 Subsidy Total (Budgetary) 146 326 70 36 578 Production (436) 54 53 -- (329) Farmgate 582 272 17 36 907 1.17 Most of the recent additionsto fertilizerproduttion capacity have been for urea, based on the abundant natural Pas resourcesof Indonesia. The only domestic plant (at Gresik) for the productionof TSP and AS relies on imports of sulfur, rock phosphate, and phosphoricacid. All the potash requirementsare met by imports. Annex 2-9 and Annex 2-11 contain details about domestic fertilizerproduction capacity and output. 1.18 The fertilizerplants in Indonesiahave, in Sr-'eral,stabilized production at high levels soon after commissioning. Many of them have also carried out optimizationinvestments to improveplant reliabilityand stream efficiency. For example, such investmentsin Kujang have enabled it to be one of the best-run plants in the world. Similarly,optimization investments on Kaltim I, which had encounteredserious initial commissioningand operation problems,have enabled the plant to stabilizeits operations. The overall good performanceof the Indonesianfertilizer plants is reflectedby their high capacity utilization,as seen in Table 1.4 below for the year 1989. -8- Table 1.4: FERTILIZERPRODUCTION CAPACITY AND OUTPUT IN 1989 Capacity Plants Capacity Output Utilization --- (thousandtons) ---- (percent) Urea PUSRI II, III, & t! 1,520 1,445 95 Kujang 570 542 95 ASEAN Aceh 650 618 95 Kaltim I, II, & III 1,710 1,454 85 IskandarMuda 570 542 95 Total Urea 5,020 4,601 92 TSP Gresik I & II 1,200 1,200 100 AS Gresik I, II & III 650 650 100 InvestmentProgram 1.19 The Government's1990-95 investmentprogram in the fertilizersector includesboth investmentsfor new capacity and for performanceimprovements, ; followingthe recommendationsof the Fertilizer Industry Sector Report, prepared by the Bank in 1988. The estimatedtotal cost of this program is about $1.0 billion. Three projects for capacity additionshave been prioritizedand are in advanced stages of planning. These include the PUSRI Ib project, which will add a 1,350 tpd capacity ammonia plant and a 1,750 tpd capacity urea plant to the PUSRI facilitiesat Palembang. The surplusammonia will be convertedto urea in the optimizedPUSRI II urea plant, to be funded under the proposed Project. The contractingarrangements for the PUSRI Ib facilitiesand the financingarrangements have been finalized. The second large capacity additionwill be the Gresik ammonia/urea complex proposed for financingunder the Project. Kujang has been authorized by the Government to finalizearrangements with a private partner for a Kujang II ammonia/ureaproject, with majority private financing. This project will add 570,000 tpy of urea capacity,half of which will be reserved for exports. A fourth company, IskandarMuda is also consideringexpansion with a private partner. As a result of energy audits and feasibilitystudies, optimization investmentswill be undertaken in severalplants and supportedunder the proposed Project. These investmentswill aim for, inter alia, energy savings, increasedcapacity, upgrading of technology,amelioration of industrial pollution,and safety. The impact of the above investmentswill be to increaseurea capacity in Indonesiato 6.9 million tpy, which will make availableabout 4.4 million tpy of urea to meet domestic requirementsup to the year 2000. No addition to TSP capacity is being planned, beyond optimizationinvestments, since the economic viabilityof domestic production from new investmentshas not been established. No additionaldirect capacity for AS production is planned. B. The Policy Framework 1.20 The successfuldevelopment of the Indonesiafertilizer industry has been associatedwith: (a) controlledand heavily subsidizedfertilizer prices at the farmgate (the economic subsidy is forecast at about $317.0 million for 1990), which have promoted intensiveand possibly inefficientuse; (b) natural gas and ex-factory fertilizerprices that differ from economic prices and have resulted in production inefficiencies(for TSP and AS) and inappropriatelylow returns to equity; (c) regulationson product distributionand marketing that have constrainedcompetition and efficiency;and (d) inadequateassessment and monitoring of the environmentalimpact of '.ertilizerproduction. 1.21 The Government is aware of the impact of the above existing distortionson its budget and on the overall economic efficiencyof the fertilizer industry. As it has demonstratedits determinationto deal with similar problems by undertakingsubstantive deregulations in trade, industry, and the financialsector, the Governmenthas also decided to redress the above distortions. In May 1990, the Governmentissued a new deregulationpackage which covers reduced import restrictionson fertilizerbut introduceda marginal increase in tariffs coupledwith temporarysurcharges to offset the eliminationof some import restrictionsand assist producers to adjust to the new regulations. These measures will mainly affect imports of TSP and potash. During the past two years, the Governmenthas raised AS prices at the farmgate to their economic level, and has made some upward adjustmentsin the farmgate prices of urea and TSP, the prices of which are still about 47 percent and 33 percent lower, respectively,than their economic levels. Because of the concern to maintain rice production in line with domestic demand and to protect farm incomes, the G(vernment intends to make the remaining fertilizer farmgateprice adjustmentstoward their economic level gradually,but within the Repelita V period (1989/90-1993/94),as indicatedin the Policy Statement issued prior to negotiations. The Statement,which is satisfactoryto the Bank, is attached as Annex 1. In addition,the Governmentplans to: (a) replace the cost-plusformula for setting ex-factoryprices for fertilizer by linking the ex-factoryprice of urea to its export parity and the ex- factory prices of all other fertilizersto their import parities (these adjustmentswill also be phased in during Repelita V, togetherwith the adoption of an appropriatedividend policy for fertilizerenterprises; (b) establish the price of natural gas to the fertilizerindustry between a floor correspondingto the economic cost of the resource and a ceiling correspondingto its netback value, and eliminateeconomically unjustified price differentialsamong natural gas users; (c) open up the marketing and distributionsystem to wholesalersand retailersto foster competition, improve efficiency,and provide better service to farmers on the basis of a study to quantify efficiency improvementsand to recommendan action plan; and (d) prepare an environmentalmanagement and monitoring plan for the fertilizer industry,on the basis of a study of the current and projectedenvironmental impacts and of environmentalstandards and targets. - 10 - C. The Sector and the Natural Environment 1.22 Since 1986, in accordancewith Indonesian laws and regulations, sponsors of major industrialprojects, such as those proposed under the Project,must prepare environmentalimpact analyses. The policies, regulationsand review proceduresof environmentalmatters in Indonesiaare the responsibilityof the Ministry of Populationand the Environment(KLH), which is not a line ministry but advises operatingministries, for example MOI. Thus, all activitiessupported by the project will be in accordancewith environmentalguidelines stipulated by KLH and executed by MOI.11 The environmentalreview procedurescovering the Gresik RestructuringComponent and the OptimizationComponent of the proposed Project consist of the followingsteps. A PreliminaryEnvironmental Evaluation Report (PEL) for the proposed activity is submittedby the sponsor to the EnvironmentalPlanning Commission,either at the central governmentlevel or at the provincial government level, dependingon the size of the project. Terms of reference, outliningthe scope and procedure for conductingthe project'sEnvironmental EvaluationStudy (SEL) are then drawn up by the sponsor and approved by the EnvironmentalPlanning Commission. The completedstudy is submittedfor approval to the Commission along with an environmentalmanagement plan (RKL) and an environmentalmonitoring plan (RPL). Under the Gresik Restructuring Component,a SEL has been drawn up for the Gresik ammonia/ureaplant and found satisfactoryto the Bank (para. 5.18). In the Optimizationcomponent, a satisfactoryenvironmental impact analysiswould be a conditionof the Bank's approval of each subproject. 1.23 Sites and Activities. The Indonesianfertilizer industry consists of two groups. First, there are the ten ammonia/ureaplants--including the ASEAN plant at Aceh--, in five locations,with three additionalplants under constructionor planning,to be added over the next 5-10 years. Second, there is the large TSP and AS complex at Gresik, near Surabaya. The fertilizer plants in Indonesiahave adopted the latest proven technologiesavailable when they were built, taking into account both technologicaladvancements and environmentalrequirements. The Government,at both central and provincial levels, and plant management are also increasinglybecoming aware of the need to minimize adverse environmentalimpacts from industrialplants. There are, however, still inadequaciesin standards,monitoring, and management. Provisionsare includedunder the Project to assist the Governmentand the fertilizerindustry to remove these inadequacies. 1.24 Ammonia/UreaPlants. The two major effluent streams in these plants are the liquid effluent stream,which contains ammonia and urea, and the gaseous effluent from the urea prilling tower, which contains urea dust. Most plants built before 1985 adopted bag filters for the urea prilling tower exhaust,which are not as effective in urea dust removalas technologies developedlater. The more recent plants use scrubbersfor more complete removal combinedwith hydrolyzersto decompose the urea to ammonium and then to recover the ammonia. Whereas the earlier vintage plants have liquid l/ In June 1990, a presidentialdecision formed an EnvironmentalImpact Control Board as part of KLH. The Board will serve to further strengthen eavironmentalimpact analysis,pollution control standards,monitoring and enforcement. - 11 - effluent streams containingabout 200-450 parts per million (ppm) cf ammonia. the more recent urea technologiesreduce the ammonia content in the liquid effluentsto below 5 ppm through the use of hydrolyzer-strippers. 1.25 The industryhas alreadymade some progress in pollutioncontrol. Water treatmentdesigns have been changed to eliminatethe use of chromium, and some plants have adopted energy-savingschemes to reduce use of natural gas. New technology is being adopted to reduce ammonia effluents,although at a slow pace for existing units. All new plants are being designedwith state- of-the-arttechnology that will lower ammonia effluentsto under 5 ppm. Kaltim II & III, built after 1985, have achieved such levels, and the company is also consideringinstalling a hydrolyzer-stripperplant for Kaltim I to reduce its effluent to under 5 ppm. The environmentalanalysis carried ovt for the Kujang II plant has proposed the setting up of facilitiesat Kujang to degrade the effluent biologically,converting the ammonia into nitrogen,also to under 5 ppm. The 5 ppm standard is an achievableand desirable standard for ammonia effluent. The MOI and KLH are currently reviewingthe standards for the nitrogen industry. The proposed industry-wideenvironmental study to be implementedunder the Project will assist the government in developing appropriatestandards and management systems to ensure complianceon a sustainedbasis. A reasonableapproach would be to impose a strict (but technicallyachievable) standard for new construction--i.e.,5 ppm maximum-- for ammonia, and to give existing industry a reasonabletime to reach similar standards,taking into account technologyand overall contributionto effluent levels. 1.26 Safety is an importantpart of industrialoperations in the fertilizerindustry, particularly in ammonia plants. Each company has a well- establishedsafety departmentthat reviews safety programs and manages a safety awarenesspregram. It is common practice internationallyto design fertilizerfactories with safety in mind, and this was the case with all such plants in Indonesia. The safety program is fully supportedby the MOI and the emphasis on safety has paid off. For example, the two oldest facilities, PUSRI and Gresik, have never had a work-relatedfatality, and both have operated for over three years without a lost-timeaccident. 1.27 The industryalso maintains a good record with regard to social programs. Most facilitieswere installedin remote, unpopulatedareas and needed a comprehensiveprogram of housing, health, schools, and other urban infrastructureto attract and keep staff. In two locations, (Palembangand Gresik), nearby urban-industrialdevelopment has increased sufficientlyto make the companiesconsider urban developmentin their corporate planning. This issue is being addressedin the environmentalassessment programs of the Project. There have been no reported problemswith regard to resettlementsor local claims. Several factorieswere built on agriculturalland but the improvedproductivity resulting from increasedfertilizer availability more than offsets this loss. 1.28 With regard to fertilizeruse, inadequateattention has been given to any adverse environmentalimpact. The emphasis has been on increasing supply at a uniform low price to ensure rice self-sufficiency.Although no serious environmentalissue has emerged, there is some concern that subsidized fertilizerprices may lead to overuse, resultingin ground water contamina- tion, and that the right type and specificationfor fertilizersare not being - 12 - used. Some decisionshave already been taken that have a positive environ- mental effect: (a) nitrates are not used; (b) productionis moving closer to consumption;(c) phosphate specificationchanges are being considered;(d) use of urea briquettes is being tried; and, perhaps most important, (e) the fertilizerpricing subsidy is being phased out. 1.29 From an environmentalviewpoint, the fertilizersector is in transition. While overall performanceis good, there is a need to develop a comprehensiveplanning system to ensure that minimal environmentalimpact is achieved. To support this objective,the Project will provide support to environmentalimpact analyses and appropriateaction plans for each of the PFEs and to a sector-wideenvironmental study that will develop an environmentalmanagement program for the sector, to be monitoredby the Government. II. THE BANK'S PAST LENDING, STRATEGY,AND RATIONALE FOR INVOLVEMENTIN THE SECTOR A. The Bank's Past Lending in the FertilizerSector 2.1 Bank involvementin the Indonesia fertilizersector began in 1970. Since then, two credits and four loans have been completed, and another loan is being implementedfor a total amount of $375.0 million (Table 2.1). During 1970-76 the Bank made four credits/loans,all to PUSRI, that enabled this company to expand urea productionto 1.4 million tpy by 1979. These operationsconcentrated on expandingcapacity, on ensuring gas supplies to the plants, and on improvingoverall management capabilityin the areas of project design and implementation,procurement, finance, and marketing. Although the approachwas largely project-specific,it resulted in Indonesia developing competentmanagement capability that enabled the industry to evolve successfully. Many of the early PUSRI staff are now successful senior managers scatteredthroughout the industry and the Government. 2.2 In the mid-1970s, seriousconstraints began to appear in the distributionnetwork, given that most of the productionwas concentratedin one location (PUSRI,Palembang) and consumptionmostly in Java, and that other islandsneeded supply. The Governmentthen decided to expand productionat other locationsand to improve the distributionsystem. During 1975-85, the Bank assisted in upgrading the fertilizerdistribution system through two operationsdesigned to improve the physical infrastructure,including maritime, rail, and road systems,plus storage and bagging facilties. With Bank support, Indonesia took a lead in promotingbulk transport .f fertilizer in developingcountries. At present, about 75 percent of output is transportedin bulk, up to the retail level. These operationswere also directed at improvingmanagement of the marketing system, which is also under PUSRI's responsibility. During this period, other expansionsof supply took place without Bank assistance. Both groups of Bank-supportedoperations were highly successful. Fertilizerconsumption and production increasedfourfold and eightfold, respectively,during 1970-85. PUSRI is widely recognizedas a world leader in fertilizerproduction. Distributionefficiency has improved, includingthe ability to handle the larger volumes produced. Today, Indonesia is a competitiveproducer and exporter of nitrogen fertilizer. - 13 - Table 2.1: SAN OPERATIONSAND EVALUATIONSOF PROJECTPERFORMANCE IN THE FERTILIZERSECTOR Approval Credit/Loan Amount Project date No. (8 million) Status Production FertilizerPlant Expansion and Can Conservation 6/16/70 C-193-1 a0.0 Completed Fertilizer Supplementary 6/21/73 C-193-2 5.0 Completed Third Fertilizer Expansion 2/20/74 L-1009 116.0 Completed Fourth Fertilizer Expansion 6/20/76 L-1264 79.0 Completed Distribution Fertilizer Distribution 7/10/76 L-1189 68.0 Completed National Fertilizer Distribution 4/05/92 L-2120 66.0 Completed Industrial Energy Conservation 11/09/87 L-2879 21.0 Ongoing Total 876.0 Sustainabilitv of Prolects - Review of Experiencein the Fertilizer Subsector; Report No. 6078, OperationEvaluation Department, February 26, 1986 Indonesil - Fertilizer Industry Sector Report; Report No. 7184-IND, February 18, 1988. Project Performance Audit Reports (PPARs) No. 1948 Credits 193-1/-2 No. 6419 Loans 1089-IND; and 1264-IND No. 4256 Loan 1139-IND Prolect CompletionReports (PCRs) No. 7861 Loan 2120-IND 2.3 By the mid-1980s,several problems developed in the sector that needed urgent attention and required a broader sectoral perspective: (a) increasingsubsidies due to price controls; (b) industrialefficiency lagging behind internationalstandards, also in part because of price contrals; and (c) some economicallyunjustified investment decisions. During 1985-88, the Bank undertook two activitiesto assist the Government in resolvingthese issues: an IndustrialEnergy ConservationProject and a FertilizerSector Strategy Study. The IndustrialEnergy ConservationProject (Loan 2879-IND),currently under satisfactoryimplementation, concentrates on optimizingenergy consumption,the key variable in urea production,within existing fertilizerplants at PUSRI. This project is enabling PUSRI to upgrade for energy savings arndincreased output and profitability. It has also helped establish an IndustrialEnergy ConservationCenter (Koneba)to build up expertise in energy efficiencyin the fertilizerand other sectors. 2.4 The Fertilizer Sector Strategy Study prepared during 1987/88was designed primarily to assist the Government to develop a strategy for removing price distortionsand reducing subsidies,and to prepare a viable investment program. This work too has been very successful. Through discussionsof the sector report and project preparationactivities, the Governmenthas developed a good understandingboth of the adverse effects of price controls and - 14 - subsidiesand of the investmentpriorities. As a result, it has adopted an investmentstrategy (para. 1.19) and has moved towards a comprehensivepolicy reform program (para. 1.21) that should enable the sector to maintain and enhance its internationallycompetitive position. During Project preparation two other areas of concern for the fertilizerindustry emergeds its environmentalimpact and the distributionand marketing efficiency. The proposed Project provides for studies that will assist in the resolutionof the main issues in these areas. 2.5 Project CompletionReports (PCRs) and Project PerformanceAudit Reports (PPARs)as well as the OED's Review of rxperience in the Fertilizer SubsectorReport, listed in Table 2.1, have attributedsuch favorable performanceof Bank-assistedoperations to the followingmain elements: (a) firm commitmentby the Governmentand the fertilizerenterprises to attain the projects' objectives; (b) presence of a competent, strong, and stable management core at the fertilizerenterprises, assisted by capable technical support for project implementation;(c) use of competentand highly experiencedlicensors and engineeringfirms; (d) comprehensivearrangements to facilitateprocurement; and (e) provision of on-the-job training opportunities for fertilizerenterprises' staff. The reports also noted, however, that these operations focussed on the developmentof physical aspects of the industrybut did not attempt to address fertilizerpolicy issues. Experience from Bank-financedfertilizer projects in other countrieshas identifiedother lessons: (a) the choice of optimizationinvestments should be based on both economic considerationsand expected improvementsin operatingcosts, avoiding optimisticimplementation sc&edulee; (b) project activities should be integratedwith normal plant operationsto ensure their timely execution; (c) the effective transfer of technologyand the skill upgradingof managerial and technical staff should be assessed carefully. The above elementshave played a central part in the design of the proposed Project. In addition,a key message from the implementationexperience of Bank-supportedfertilizer optimizationinvestments is that their complexityhas put heavy demands in terms of supervision. Therefore,the proposed Project supervisionstrategy would be carefullyplanned to ensure the adequate allocation and effective utilizationof resourcesfor this purpose. B. The Bank's Strategy and Rationalefor Involvementin the Sector 2.6 Bank strategy in the sector has evolved over the past two decades from an emphasis on increasingsupply, principally through financing selected investments,to a broad, policy-basedstrategy to attain the sector developmentobjectives detailed in para. 1.21. The main rationale for Bank involvementwith the proposed Project is to ensure that the continuing evolution of policy reforms is implementedin a consistentand timely fashion to support the developmentof the fertilizersector. The proposed Project conforms well with this strategyby building upon an establishedpolicy dialogue and assisting the Government to implementkey policy reforms agreed ujponby the Government and the Bank (para. 1.21). Moreover, the proposed Projectwill apply importantlessons learnedunder previous Bank-assisted activities. The main thrust of the proposed Project is on economic efficiency,distribution and marketing improvements,and pollution abatement. - 15 - III. THE PROJECT A. Obiectivesand Description 3.1 The primary objectivesof the proposed Project would be to: (a) assist the Governmentin implementingsignificant sector reforms, already initiatedand reflected in the draft Government Statementof Policy, that will sustain the continueddevelopment of the fertilizersector on an economically efficientand environmentallysound basis; (b) support an industry-wide priority investmentprogram; (c) identifythe scope for improved efficiencyin marketing and distribution;and (d) assess the industry'senvironmental impact and standards,and develop an environmentalmanagement program. 3.2 To achieve these objectives,the Project includes: (a) a Gresik RestructuringComponent to provide financialassistance to P.T. Petrokimia Gresik for the constructionof a new ammonia/ureaplant and for modernization of Gresik's existing fertilizerplants; (b) an OptimizationComponent to support investmentsin four participatingfertilizer enterprises (PFEs)-- IskandarMuda, Kaltim, Kujang and PUSRI--torealize energy savings, capacity and productivitygains, and pollutioncontrol improvements;and (c) a Studies Component to undertake analyses of the scope for improvedefficiency in fertilizermarketing and distributionand of the environmentalimpacts of the fertilizerindustry, including identification of long-termobjectives for environmentalimprovement and preparationof an environmentalmanagement program to ensure that the industrymeets appropriatestandards. B. The P.T. PetrokimiaGresik RestructuringComponent 3.3 This componentwill comprise: (a) building a new ammonia/ureaplant at Gresik,with a caDacity of 1,350 tpd of ammonia and 1,400 tpd of urea, to provide low-cost ammonia to existing operationsand to reduce urea distributioncosts in East Java, includingprovison of engineeringservices and licenses therefor; (b) supportingmodernization investments in Gresik's existing fertilizerplants to increase output of phosphoricacid and improve performanceof the AS facilitiesand ameliorateenvironmental pollution. Gresik's New Ammonia/UreaPlant ($305.4million) 3.4 The new ammonia/ureaplant to be built at Gresik will be based on natural gas and have a capacity of 1,350 tpd of ammonia and 1,400 tpd of urea. The Gresik complex already contains a range of plant facilities,mainly for the productionof TSP and AS. Half of the phosphoricacid--amounting to about 151,000 tpy, required for TSP production--isobtained from the company'sown facilities,and the rest is imported. The TSP facilitiesrequire imported phosphate rock, phosphoricacid, and sulfur. The productionof phosphoric acid, by the sulfuric acid acidulationof rock phosphate,generates about 750,000 tpy of gypsum,which needs to be either utilized or disposed of. The local pollutioncontrol requirementsdo not permit the dischargeof gypsum into the sea. About 335,000 tpy of the gypsum is utilized for the production of cement retarder sold to Indonesiancement plants. The company exports about 65,000 tpy of purified gypsum and uses the rest of the gypsum, about 350,000 tpy, for the productionof AS. This AS plant also requiresboth ammonia and carbon dioxide as raw materials. The company, therefore, - 16 - continues to operate a 72,000 tpy capacity, fuel-oil-basedammonia plant at the minimum level to generate the carbon dioxide requirementsof AS production plus a small amount of carbon dioxide for industrialsales. The high cost of this ammonia adverselyaffects the economicsof AS production. Another existingAS plant produces 400.000 tpy of AS by direct neutralizationof ammonia and sulfuric acid; the latter in turn is produced from imported sulfur. The ammonia requirementsfor this plant are purchased from Kaltim. 3.5 The proposed new plant will use, to the extent possible, the utility and infrastructurefacilities already availablein the complex. The company has finalizeda contractwith two well-knownammonia and urea licensors,and the plant will thereforebe based on one of the proven, energy-efficient technologieswith environmentalconsiderations consistent with present internationalstandards. The size of the plant is large enough to achieve economiesof scale, and at the same time is in the well-provencapacity range to avoid undue technical risks. The plant will be located-within the existing Gresik complex, and land has already been cleared for the purpose. The new ammonia plant will allow the existing ammonia plant to be closed, replace purchased ammonia, and maintain sales of industrialcarbon dioxide. 3.6 Natural gas for the project will be provided by Perusahaan PertambanganMinyak dan Gas Bumi Negara (Pertamina)under a contract to be signed with Gresik. The contractwill provide for a normal daily supply of 48 million standardcubic feet per day (MMSCFD)with a maximum of 60 MMSCFD, starting from 1993. The gas will have a gross calorificvalue not below 950 MMBtu per SCF and not above 1,200 MMBtu per SCF, and it will be deliveredat the plant site at a fixed price of $2.00 per MMBtu. This contractualgas price is within the economic cost of supply,which has been tentatively estimatedby the Bank at $l.77-2.21/MBtu on the basis of the long run marginal cost of supply, includingrisk and depletionpremiums. The gas will be deliveredfrom the Pegerunganreserves of the Kangean Block--locatedacross Madura Island and north of Bali and developedby Atlantic RichfieldBali North Inc. (ARBNI)and Britoil (Alpha)Ltd. (Britoil)along with Pertamina. According to present indications,the above reservestotal abctt 2,500 billion standardcubic feet (BSCF) consistingof 2,300 BSCF proven and 200 BSCF probable. The gas contractorsintend to build an appropriatelysized pipeline--about255 miles long, based on delivery of 180 MMSCFD to the PLN Gresik thermal power plant, 60 MMSCFD to the Gresik ammonia/ureaplant, and about 90 MMSCFD for domestic and other industrialuse in the Surabaya/Gresik area. A feasibilityreport on the routingand sizing of the pipelinewas prepared by P.T. Bimantara,the Indonesianpartner of the contractors. All contractualarrangements are being finalizedand the pipeline would be completed in time for the commissioningof the ammonia/ureaplant. Modernizationof Gresik's Existing FertilizerPlants ($15.8million) 3.7 Gresik produces about 1.2 million tpy of TSP, partly with its own but mostly with imported phosphoricacid, and 650,000 tpy of AS. At present the phosphoric acid plant, with an installedcapacity of 171,400 tpy, produces only about 151,000 tpy due to equipmentproblems. The company is already changing some equipmentto reduce productioninterruptions. It should be possible to increasephosphoric acid producti3nfurther through modernization of the facilities,including increased output of phosphoricacid and changing product specificationsin the TSP plant. To the extent additionalphosphoric - 17 - acid can be produced, sulfuric acid that will be convertedto AS will be reduced. Feasibilitystudies will also assess utilizationof waste calcium carbonate in the adjacent cement factory and improvementsin the performance of the AS productionfacilities, including improved ammonia recovery and minimizing ammonia and sulfur dioxide (SO2) discharges into tih environment. To address the above issues Gresik, assistedby consultantsand process licensors,is evaluatingan investmentprogram which will be supportedunder the proposed Project. C. The OptimizationComponent ($122.2million) 3.8 The Indonesianfertil'zer industry has an ongoing strategyto modernize its facilitiesto current levels of proven technolcgyand to enhance efficient operationsto maintain an exportablenitrogen surplus and to minimize costs of the local supply of fertilizers. A major part of that optimizationwork is being supportedunder the IndustrialEnergy Conservation Project, Loan 2879-IND. The OptimizationComponent of this proposed Project will support the next phase of modernizationof the sector, covering four PFEs: IskandarMuda, Kaltim, Kujang, and PUSRI. It will support investments for energy and raw material efficiency,enhanced output, and improved environmentalperformance of the plants. These investmentsare well defined at this stage, but require additionaldetailed feasibilitywork prior to implementation. All subprojectswill be reviewed and approved by the Bank, on the basis of their technical,managerial, financial and economic viability, as well as on the assessmentof their environmentalimpact. 3.9 P.T. Iskandar Muda Ammonia/UreaOptimization Subproject. PIK facilitiesin Aceh, North Sumatra, includea 1,000 tpd ammonia plant and a 1,725 tpd urea plant. The facilitieswere commissionedin 1984 and have been operatingconsistently above rated capacities. The present energy consumption is about 38 M4Btu per ton of ammonia,which indicatesfurther scope for energy savings through appropriateinvestments. An energy audit of the facilities has been carried out by Koneba. PIM is also examining several product diversificationschemes, includingindustrial chemicals such as hydrogen peroxide,and maintenance improvements. The various possibilitiesare being put together by PIM in a feasibilitystudy for inclusionwithin the Project. 3.10 Kaltim I Ammonia/UreaOptimization Subproject. Kaltim operates three ammonia/ureaplants in Bontang,East Kalimantan. Kaltim II and III operate extremelywell. Kaltim I ammonia and urea plants were originally designed as a ship-bornefacility capable of being moved to differentoffshore gas fields. This concept proved nonviable,however, and a decisionwas made in 1975 to locate the plant on land at Bontang. Constructionof the plant was completed,and commissioningstarted, in 1983. Because of the long storageof equipmentunder less than ideal conditionsand inappropriatedesign specifica- tions, the plants could not operate at rated capacitieson a sustainedbasis. A study by the original process designers,recommended a rehabilitationscheme that was carried out in 1984-85. Following its implementation,stable operationscould be achieved,and in 1988 productionfactors of 88 percent for ammonia and 82 percent for urea were achieved. Kaltim I is now reported to be operatingat an annual average capacity of over 90 percent, and running for sustainedperiods above rated capacity. Ho-wever,the plant continuesto have problems. Some of the equipment is still unreliable,thereby affecting sustainedproduction. The energy consumptionper ton of ammonia is 44 t4mBtu - 18 - per ton--indicatingstrong potentialfor achievingenergy savings. There is also scope for improvingeffluent quality. 3.11 on the basis of an energy audit carried out by Koneba, conceptual studiesundertaken by process engineeringcompanies, and Kaltim's own experiencewith the plants, the company has developedan optimizationprogram with fourfold objectives: to improve efficiency,to achieve better reliability,to expand capacity,and to improvemaintenance. The studies indicate that the Kaltim I ammonia plant capacity can be increasedby up to 20 percent, if the existing ammonia converteris replacedwith a larger- capacity modern, low-pressure,radial-type converter. The capacity of the urea plant would be increasedby about 10 percent. Kaltim I will utilize this extra urea capacity to produce melamine,under a joint venture with a company from The Netherlands. 3.12 Kuiang Ammonia OptimizationSubproject. Kujang facilitiesat Ciampek in West Java consist of a 1,000 tpd ammonia plant and a 1,725 tpd urea plant commissionedin 1979. From direct operatingexperience and followinga consultant study carried out in 1980, certain plant modificationshave been carried out. As a result, the plant produced 391,500 tpy of ammonia and 645,500 tpy of urea in 1986, correspondingto 119 percent and 113 percent, respectively,of original rated capacity. The objectivesof this optimization subprojectare to: (a) increaseammonia availabilityat Ciampek to support product diversificationschemes; (b) reduce energy consumptionby about 2.67 MMBtu per ton of ammonia through energy-savinginvestments; (c) maintain plant reliabilityafter a decade of operations;and (d) decrease ammonia effluents to a Fatisfactorylevel. After joint analysis by Kujang and Koneba, seven energy conservationopportunities were identifiedand further studied by Koneba in consultationwith the various process owners. The present Kujang optimizationproposals are based on the March 1989 Koneba study. These proposalswere selected based on a gas price of $1.00 per MMBtu. Since the economicvalue of natural gas at Kujang (located in Java) would be higher (likelyabout $2.00 per MMBtu), Kujang is evaluatingfurther modifications that could be just.fiedby the higher gas price. The subproject'sscope will be finalizedon the basis of these studies. 3.13 PUSRI II Urea Optimizationand Effluent TreatmentFacility Subproject. PUSRI has four ammonia/ureaplants at its production:acilities in Palembang, South Sumatra. PUSRI II facilitiesconsist of a 660 tpd ammonia plant and a 1,150 tpd urea plant that have been in operation since 1974. The performanceof these plants has been good, but serious problems have occurred since 1983 because of deteriorationof the titanium lining of the urea reactor. Its replacementis necessary for the continued operationof the PUSRI II urea plant on a sustainedbasis. PUSRI II has a urea prilling tower of the same size as those in PUSRI III and IV, capable of processingup to - 1,725 tpd of urea. As a result of the optimizationof the PUSRI II, III, and IV ammonia plants--nowbeing carried out under the Bank-financedIndustrial Energy ConservationP-oject (Loan 2879-IND)--thetotal ammonia output at PUSRI will go up by about 315 tpd, with a reductionin energy consumptionfrom an average of 41.5 MMBtu per ton to 37.2 MMBtu per ton. Also, the decision to build a larger 1,350 tpd ammonia plant as part of PUSRI Ib while building only a 1,750 tpd urea plant will generate an additionalammonia surplus of 350 tpd. Its locationand the draft limitationsat its jetty will make it difficultfor PUSRI to export the 220,000 tpy of ammonia surplus that will become available - 19 - when FUSRI Ib is commissioned. The PUSRI scheme is to convert part of the surplus ammonia to urea by optimizingthe PUSRI II urea plant, taking advantageof the surplus carbon dioxile availablefrom PUSRI Ib. The additionalurea will go mostly to the domesticmarket via coastal ships of medium size. 3.14 PUSRI has invited proposalsfrom internationalfirms and has evaluated alternativeoptimization options, taking into account not only technicaland economic featuresbut also reliabilityand commerciallyproven processes. The optimizationsubproject is now proposed to be based on the MTC/TEC (Japan)Aces Process. The proposedmodifications will include: (a) replacementof the synthesissection--including the old titanium-lined reactor; (b) additionalhigh-pressure recycle-solution feed pumps; (c) replacementof the carbon dioxidebooster compressorand driver; (d) an additionalevaporator/coaidenser; and (e) modificationsto the prilling section,which will also alm to reduce air and water contamination. In addition,PUSRI has prepared, assistedby consultants,an investmentfor installationof a wastewater treatmentplant, which would also be supported under this subproject. D. The StudiesComponent ($900,000) 3.15 The proposed Project includesprovision for undertakingstudies to: (a) identify the scope for improved efficiencyin fertilizermarketing and distribution;and (b) assess the environmentalimpact and standardsof the fertilizerindustry, including identification of long-termobjectives for environmentalimprovement and preparationof an environmentalmanagement program. 3.16 Stud) of FertilizerMarketing and Distribution($400,000). There is general consensuswithin Indonesiathat the present system is performing reasonablywell, mainly becatse fertilizeris deliveredto farmers at a set price and on time. However, this system is characterizedby PUSRI's monopoly at the wholesale level and cooperatives'monopoly at the retail level (paras. 1.7 through 1.9). As a result, there is a lack of domestic competitionthat has constrainedimproved efficiency and, coupledwith high distributioncosts and controlledfertilizer prices has led to an increasedbudgetary and economic subsidy. The proposed Project includesprovisions for a study that will identifymeans of improvingfertilizer distribution and marketing efficiencyin a competitiveenvironment. The study will comprise two parts. The first, to be undertakenby PUSRI, will cover: (a) updating the data contained in the 1986 Distributionand Marketing Study done by PUSRI; (b) assessing the current distributionsystem for both local sales and exports, in terms of ownershipand operationcosts; (c) preparinga ten-year forecast of fertilizersupply and demand; and (d) evaluatingthe logistical and physical changes required in the distribu-tionnetwork over the next ten years. The second part, to be undertakenby a team comprisingprimarily foreign experts,will include: (a) identificationof the existing marketing inefficienciesand constraints;(b) a compa-ativeanalysis of the cost- effectivenessof the Indonesianmarketing b,stem with that in other countries in the Asia Region; (c) an assessmentof the impacts of changes in policy and fertilizeruse--product types and applicationprospects--on the marketing system and on the natutal environment(para. 1.30); and (d) a recommendedplan - 20 - of action to improve the competitivenessand efficiencyof the fertilizer marketing system. Detailed terms of referenceare given in Annex 3-A. 3.17 Developmentof an EnvironmentalManagement Program for the Fertilizer Industry ($500,000). The Governmentis committedto implementa program of environmentali-provement within the coantry. A system of laws and regulationshas been adopted,but some key issues remain unresolved. For the fertilizer industry: (a) inadequatestandards and targets; (b) lack of an environmentalmanagement program; (c) absence of an environmentalmonitoring program and enforcementarrangements; and (d) lack of a priority investment program to meet the proper standardsand targets. To assist in the resolution of these issues,provisions have been incorporatedunder the Project to undertake a study, to be done by a team composed of local and foreign consultants,with the followingmain objectives: (a) to assess Indonesian environmentalstandards for the industryand recommendchanges, includinga target-based,phased implementationprogram of compliance;(b) to assess the environmentalimpact of current and planned fertilizerproduction facilities, including safety performance,and to recommendmeasures to bring these into compliancewith the revised targets and standards; (c) to recommendan investmentprogram to accomplish (b) above; (d) to develop an environmental management program for the industry;and (e) to assess environmental monitoring and enforcementpractices and recommendspecific improvements. Detailed terms of referenceare in given Annex 3-B. E. Project Organizationand Implementation Policy-relatedActions 3.18 Overall, the proposed Projectwill be implementedin accordancewith the principles stated in the GovernmentStatement of Policy, as detailed in para. 1.21 and in Annex 1. An assuranceto this effect was obtained during negotiations. During negotiations,the followingunderstandings were reached: Ca) that the revised farmgate fettilizerprices for 1991 adopted by the Government,as agreed during the exchange of views on these prices in September1990, between the Governmentand the Bank, representa satisfactory progress in bringing these prices ultimatelyto their economic levels; (b) that the Governmentwill, by October 1 of each year, commencingnot later than October 1, 1991, review the farmgateand ex-factoryprices of fertilizers,exchange views with the Bank on the results of the review, and thereafter,if required,revise such prices taking into account the principles set forth in the Statement;and (c) that actionswill be taken during Repelita V (1993-94)to bring the prices of fertilizerproducts graduallyto their economic level and eliminate the associatedsubsidy payments from the Government'sbudget. The Gresik RestructuringComponent 3.19 The New Ammonia/UreaPlant will be built by Gresik within the boundaries of its existing complex. The plant will be constructedthrough a fixed-priceturnkey contract,based on commerciallyproven and energy efficient technology. Gresik will be responsiblefor overall project coordinationand for the supply of utilities. A local firm, P.T. Inti Karya Persada Tehnik (IKPT)has been appointedas General Contractor. IKPT was selected by Gresik, in consultationwith MOI, after reviewingIKPT's extensive - 21 - experiencein industrialdesign and plant construction,which includesone large ammonia/ureaplant. The provisionof the ammonia and urea facilities has been contractedfrom internationallyexperienced licensors, following InternationalCompetitive Bidding (ICB) procedures. In August 1989, Gresik, with prior agreementof the Bank, prequalifiedsix firms (three for ammonia and three for urea) and prepared the invitationto bid and draft contracts. All these documentshave been reviewed and found satisfactoryby the Bank. Bids were opened on February 28, 1990. The prequalifiedengin.jering/licensor firms submittedproposals covering basic engineeringand technology,offshore equipmentand materials supply, supervisionof implementationand commissioning,and operationalperformance guarantees, all under a subcontract with IKPT. IKPT submitteda bid for onshore equipmentand materials supply, detailed engineering,project management and procurement,and erection services. Gresik will be responsiblefor overall managementand supervision, land preparation,and supply of selected equipment (i.e.,water cooling tower, water demineralizationplant, electric substationsand other equipment)based on licensors'specifications. Gresik completedthe bid evaluationon June 5, 1990, and proposed to award the contract to the lowest evaluatedbids: Kellog Overseas Corporation (USA) as the ammonia licensor,and Toyo Engineering Corporation (Japan)as the urea licensor. The Bank reviewed the bid evaluation report and provided a no-objectionfor Gresik to proceed with contract negotiationswith IKPT and the two licensors. The contract, satisfactoryto the Bank, was signed on September7, 1990. 3.20 Constructionof the ammonia/ureaplant started on October 4, 1990, and would take 36 months to complete, including3 months for commissioning. The Governmenthas indicatedto the Bank that constructionof the gas pipeline that will supply natural gas to the plant will have startedby January 1, 1991, and that it is scheduledto be completedby December 31, 1993, which is satisfactory. It would be a conditionof disbursementfor the Gresik RestructuringComponent that a contract for the provisionof the required natural gas to Gresik has been executed on behalf of Gresik and PERTAMINAand found satisfactoryto the Bank. 3.21 Modernizationof Gresik's Existing FertilizerPlants will be the responsibilityof Gresik. For these investments,Gresik will prepare an appraisal report and an environmentalimpact analysis,which will be submitted to the Bank for review and approval. Gresik, assisted by foreign consultants, is currentlypreparing these documents,which are expected to be completednot later than June 30, 1992. For implementationpurposes, Gresik will set up a project management team and will be using the services of local contractors, foreign licensorsand engineeringfirms, as required. 3.22 For purposes of project implementation,Gresik will require the assistanceof highly qualifiedengineering services. These serviceswould be provided by fertilizerengineering experts, for a period of about three years, to be financed under the loan. .hese expertswill be internationally recruitedin accordancewith Bai.kguidelines. The terms of referencefor the consultants,to be appointednot later than May 1, 1991, were agreed during negotiations. Gresik will set up a project managementteam composed of its own experiencedstaff and supplementedby staff to be hired from other domestic fertilizerenterprises, as required. - 22 - The OptimizationComponent 3.23 The implementationof this componentwill be the responsibilityof each of the four PFEs concernedwith these investments. Three enterprises, Kaltim, Kujang, and PUSRI, have prepared preliminaryproposals that were reviewed during appraisal. Detailed feasibilitystudies are under way and are expected to be completedby March 1991. PIM has started to develop a proposal,assisted by Koneba, which would also be fully appraisedby March 1991. In addition,each PFE will prepare an environmentalimpact assessment of these investments. Appraisal reportsand environmentalassessments will be submitted to the Bank, not later than June 30, 1992, for review and approval. These investmentsare expected to be implementedduring a period ranging from 1 to 3 years. PIM, Kaltim, Kujang and PUSRI will, not later than May 1, 1991, appoint consultantsto assist them in the imp'ementationof their respectiveoptimization subprojects, under terms of referencesatisfactory to the BAnk and procured in accordancewith Bank Guidelines for the Use of Consultants. The Studies Component 3.24 The Distributionand Marketing Study will be managed by the DirectorateGeneral of Chemical Industry of the MOI; this Directoratewill entrust PUSRI with the distributionpart, and will appoint a team of foreign and local consultantsfor the marketing part. Both parts would be undertaken under terms of referenceacceptable to the Bank. For the marketing part of the study, the above Directoratewill employ qualifiedand experienced consultants. To coordinateand supervisethe implementationof this study, the Government,not later than May 1, 1991, will establisha Steering Committee comprisingrepresentatives from MOI (Director-Generalof Chemical Industry as Chairman);EKUIN; MOA; the Ministry of Trade; the Ministry of Cooperatives;and the IndonesianFertilizer Producers' Association (APPI). The study is scheduledfor completionby March 1, 1992. The Governmentand the Bank will review the recommendationsof the Distributionand Marketing Study, not later than 60 days after this completion,and agree on an action plan to implementthem. Assurancesto the above effectswere obtained during negotiations. 3.25 Developmentof an EnvironmentalManagement Program for the FertilizerIndustrv will be undertakenby a team of qualified and experienced foreign and local consultants,(to be appointedby the Directorate-Generalof Chemical Industry of the MOI), under terms of referenceacceptable to the Bank. The Governmentwill set up, not later than May 1, 1991, a Steering Committee to coordinateand supervisethe implementationof this study, chaired by the MOI's Director General of Chemical Industry and composed of representativesfrom EKUIN, MOA, KLH and APPI. The study is scheduledfor completionby March 1, 1992. The Governmentand the Bank will review the recommendationsof this study, not later than 60 days after this completion, and agree on an action plan to implementthese recommendations. Assurancesto the above effects were obtained during negotiations. - 23 - Project Implementationand Supervision 3.26 Overall Project monitoring and coordinationwill be the responsibilityof the DirectorateGeneral for Chemical Industry of the MOI. A set of key implementationindicators is given in Annex 8, SectionA. The Projectwill require about 10 staff-weeksof Bank staff annually for supervision,comprising mainly enginteering,financial, environment and project management expertise. A Project supervisionplan is at Annex 8, Part B. IV. PROJECT COST, FINANCINGPLAN, AND LOAN FEATURES A. Project Cost 4.1 The total financingrequired for the Project is estimated at $444.3 million equivalent,including $222.4 million in foreignexchange (50 percent), as detailed in Annex 4 and summarizedin Table 4.1 below. The estimates include appropriatephysical contingencies,expected price increases,interest during construction,and incrementalworking capi-l. The total installed cost for the new Gresik ammonia/ureaplant is based on the actual contract price, and thereforeno contingencieshave been added for this investment. The base-cost estimatesfor the optimizationsubprojects were prepared by the various PFEs and have been reviewed and adjusted to mid-1990 prices. Price escalationshave been estimatedusing the expenditureschedules prepared by the PFEs. The price contingenciesare based on: (a) domestic inflationof 6.5 percent in 1990 and 1991, and 6 percent in the subsequentye'.rs; and (b) internationalinflation rates of 3.6 percent in 1990 and thereafter. The Rupiah costs have been convertedto U.S. dollars using an exchange rate of $1.0 = Rp 1,830 for the life of the Project. Interest during constructionhas been calculatedusing an interest rate of 18.0 percent per annum. Table 4.1: PROJECTCOST SUMMARY /a Foreign Percent of Component Local Foreign Total Local Foreign Total Exchange Total Base - Rp billion------S million Percent Cost Gresik Restructuring L 216.9 247.2 464.1 118.6 185.1 258.6 sa 78 Optimization 29.8 188.7 168.5 16.8 76.8 92.1 82 27 Studies 0.4 1.2 1.6 0.2 0.7 0.9 78 - Total Base Cost 247.1 887.1 684.2 185.0 211.0 846.6 61 100 Physical Contingencies / 1.8 7.7 9.8 0.9 4.2 5.1 82 1 Expected Price Increases /c 2.2 12.0 14.2 1.2 6.8 7.8 84 2 Interest During Const. 118.6 - 118.6 64.8 - 64.8 - 19 Working Capital 36.6 - 86.0 20.0 - 20.0 - 6 Total Prolect Cost and Financing Requirod 408.1 406.8 612.9 221.9 222.4 444.8 S0 128 /a 81.00 = Rp 1,830 Lb Includes identifiable taxeson services estimatedat 84.0 million. Lc Applicable only to the Gresik Modernization SubproJect andthe Optimization Component. - 24 - 4.2 The P.T. Petrokimia Gresik Restructuring Component. This component, with a total cost of $321.2 million, comprises two subprojects: the new amnonia/urea plant and the modernization of Gresik's existing plants. The new Gresik ammonia/urea plant would cost a total of $305.4 million, including incremental working capital ($20.0 million) and interest during construction ($42.6 million). The capital cost is based on firm price bids and assumes that the natural gas feedstock will be delivered by Pertamina at the plant premises at the agreed tariff ($2.0 per MMBtu), with all pipeline facilities owned and operated by Pertamina and with no gas transmission capital costs required of Gresik. The total direct foreign exchange requirements of the new ammonia/urea plant are estimated at $126.3 million. Details of the capital costs are given in Annex 5-1 and are summarized in Table 4.2. The proposed ammonia/urea plant will be located within the existing Gresik complex near Surabaya and will share the already existing plant infrastructure such as the port, water supply, power generation, and maintenance facilities. Capital costs are therefore considerably lower than a comparable 'greenfield facility," and the subproject is much less likely to experience capital cost Table 4.2: P.T. PETROKIMIA GRESIK RESTRUCTURING COMPONENT - CAPITAL COST ESTIMATE ($ million) Local Foreign Total 1. Ammonia/Urea Plant Ammonia process licensor 93.1 93.1 Urea process licensor - 32.5 32.5 Civil works and erection 100.5 - 100.5 Gresik-supplied equipment and services 16.0 0.7 16.7 Subtotal 116.5 126.3 242.8 Working Capital 20.0 - 20.0 Interest During Construction 42.6 - 42.6 Total Subproject Cost 179.1 126.3 305.4 2. Modernization of Fertilizer Plants Subtotal 2.0 8.8 10.8 Physical contingencies 0.1 0.4 0.5 Expected price increases 0.1 0.6 0.7 Subtotal 2.2 9.8 12.0 Interest during construction 3.8 - 3.8 Total Subproject Cost 6.0 9.8 15.8 Total Component Cost 185.1 136.1 321.2 - 25 - overruns and constructiondelays. The capital cost of the Gresik moderniza- tion subnrojectis estimatedat $15.8 million, includingcontingencies; $9.8 million is in foreign exchange,and $3.8 million in interest during construction. Details of the capital costs and expected operatingbenefits and costs are being prepared by Gresik and would be fully developedbefore the subprojectis submittedto the Bank for review and approval. 4.3 OptimizationComponent. The estimatedfinancing requirements of the various schemes being consideredfor inclusionin the OptimizationComponent of the Project amount to $122.2 million equivalent,including total foreign exchange requirementof $85.6 million equivalent. The estimate includes adequate provisions for physical contingencies,price escalation,and interest during construction. Table 4.3 summarizesthe financing requirementsof the individualcomponents that would be includedin the OptimizationComponent, and details for some of these investmentsare given in Annex 5-2 through Annex 5-4. Table 4.3: OPTIMIZATIONCOMPONENT - CAPITAL COST ESTIMATE ($ million) Local Foreign Total Base Cost Estimate Pusri II Urea 7.8 19.7 27.5 Pusri Effluent TreatmentFacilities 0.8 2.3 3.1 Kaltim I AmmonialUrea 3.9 32.8 36.7 Kujang Ammonia 2.0 11.4 13.4 PIM Ammonia 1.8 9.6 11.4 Total Base Cost Estimate (BCE) 16.3 75.8 92.1 Physical contingencies 0.8 3.8 4.6 Expected price increases 1.1 6.0 7.1 Total ComponentCost 18.2 85.6 103.8 Interest during construction 18.4 - 18.4 Total FinancingRequired 36.6 85.6 122.2 4.4 Capital cost estimatesof the optimizationcomponent have been prepared by the individualcompanies. In the case of PUSRI II urea optimiza- tion the company has invitedproposals from the major urea process licensor and has evaluated them for both technicaland cost considerations. The capital cost estimatesare based on the selectedproposals, which include details of the proposed plant modificationsand the expected cost estimates. The PUSRI effluent treatmentsubproject includes a package of schemes aimed to improve effluent quality, and the estimateshave been prepared by PUSRI from in-house information. The scope and cost estimates for the Kaltim I optimizationproject have been determined in-houseby the Kaltim technical - 26 - staff. This subprojectenvisages consultant studies to evaluate and firm up the various options; the cost estimates should, therefore,be considered preliminary. The potentialoptions arising from this study are being further evaluatedby Koneba to determinethe scope and cost estimates for the Kuiang ammonia optimizationsubproject. PIM has contractedKoneba to evaluate optimizationoptions for the IskanderMuda ammonia plant. The present estimates for the PIM ammonia optimizationproject--based on similar schemes in other plants--shouldbe consideredpreliminary, to be firmed up when the Koneba studies are completed. 4.5 StudiesComponent. This component includes support for the preparationof the two studies: a marketing and distributionstudy, and developmentof an EnvironmentalManagement Plan for the FertilizerSector. The cost of the two studies (Table 4.4) has been estimatedin consultation with the Indonesianauthorities, considering the scope of the studies and the local and foreign expertiserequired to implementthem. Table 4.4: STUDIES COMPONENT- COST ESTIMATE ($ million) Local Foreign Total Marketing and Distribution 0.1 0.3 0.4 Developmentof EnvironmentManagement Plan for the FertilizerSector 0.1 0.4 0.5 Total Cost 0.2 0.7 0.9 B. FinancingPlan 4.6 The financingplan is presented in Table 4.5. Overall, the Bank loan of $221.7 million would finance 50 percent of project costs and almost all (over 99 percent) of the estimated foreign exchange requirements. The PFEs would provide $144.5 million, or 33 percent of project costs. Local cost loans from Bank Negara Indonesia1946 (Bank BNI) to P.T. PetrokimiaGresik would provide $78.1 million, or 17 percent of project costs. - 27 - Table 4.6: FINANCINGPLAN Local Foreign Total X of total (l m-illion)… Gresik RestructurinaComponent Equity (Gresik) 107.0 - 107.0 24 LT borrowing - World Bank - 136.1 186.1 81 MT borrowing(Bank BNI) 68.1 - 68.1 18 ST borrowing(Bank BNI) 20.0 - 20.0 4 Subtotal 186.1 180.1 821.2 72 Optimization Component Equity (four fertilizer companies 36.6 - 86.6 9 LT borrowing - World Bank - 86.6 86.6 19 Subtotal 86.6 865.6 122.2 28 Studies Component Equity (five fertilizer companies) 0.2 0.7 0.9 - Subtotal 0.2 0.7 0.9 Total Financina Equity 143.8 0.7 144.6 88 LT borrowing - World Bank - 221.7 221.7 S0 MT borrowing (Bank BNI) 68.1 - 68.1 1S ST borrowing (Bank SNI) 20.0 - 20.0 4 Total FinancingRequired 221.9 222.4 444.3 100 C. Features of the Loan OnlendingArrangements 4.7 Lending and AllocationArrangements. The proposed Bank loan of $221.7 million would be lent to the Republic of Indonesiaat the Bank's standard variable rate and on standardcountry terms: 20 years, includinga grace period of 5 years. The MOF would act as the Government'sagent. During negotiationsan agreementwas reached that the Governmentwould allocate the proceeds of the loan as detailed below: (a) Each of the PFEs will subscribe to a portion of the loan, based on the amount of funds it expects to utilize for its respective components. The allocationsare shown in Table 4.6. (b) The Governmentwould charge the PFEs a commitmentfee on the undisbursedbalance of their respectiveloan allocationsequal to the commitment fee payable by the Governmentto the Bank. - 28 - Table 4.6: INITIALALLOCATION OF LOAN PROCEEDS TO PARTICIPATINGFERTILIZER ENTERPRISES PFE Amount ($ million) Gresik RestructuringComponent P.T. PetrokimiaGresik: Ammonia/UreaPlant 126.3 Modernizationof Existing Plant 9.8 Subtotal 136.1 OptimizationComponent P.T. Pupuk Sriwidjaja 25.1 P.T. Pupuk KalimantanTimur 37.1 P.T. Pupuk Kujang 12.7 P.T. Pupuk IskandarMuda 10.7 Subtotal 85.6 Total 221.7 (c) Funds to the PFEs will be lent by MOF through SubsidiaryLoan Agreements (SLAs)with each institution. Loan proceeds onlent to Gresik for the new Gresik ammonia/ureaplant would be for a fixed term of 15 years, including5 years of grace. Loan proceeds onlent to the PFEs for the OptimizationComponent and the Gresik moderniza- tion subprojectwould be for a fixed term of 10 years, including3 years of grace. At negotiations,the Governmentand the Bank reviewed the draft SLAs between MOF and the PFEs. All PFEs would sign a Project Agreementwith the Bank outlining their obligations in implementingthe proposed Project. Signing of SLAs between MOF and the five PFEs, on terms and conditionsacceptable to the Bank, for undertakingof the respectiveproject componentswould be a conditionof loan effectiveness. (d) To ensure that the onlending rate for Bank funds reflects the market rate for domestic term-fundsto Indonesianenterprises, the onlending rate to the five PFEs will be at a variable interest rate pegged to BI's three-monthSBI (until the introductionof a six- month certificatein June 1990, this was BI's SBI of longest tenor). This rate would be adjusted on January 1 and July 1 of each year, based on the average of SBI three-monthmaturity quotationsduring the preceding six months plus one percentagepoint. While the Governmentwould bear the foreign exchange risk, this formula for establishingthe cost of funds from the Governmentto the PFEs includes an implicitpremium reflectingmarket expectations regardingexchange rate changes. Since deposit rates in Indonesia are market-determinedand capital flows are generallyunrestricted, this approachwould result in a rate that approximatesthe market rate for prime industrialenterprises borrowing from local financial - 29 - institutions. To protect the PFEs from possibly excessive volatility in the referencerate, the onlending rate would not exceed the average of end-of-dayquotations of the five SCBs' three- month time deposits during the same preceding six-mcnthperiod plus one percentagepoint. (e) Gresik, for its modernizationsubproject, and the other PFEs, for their optimizationsubprojects, will, not later than June 30, 1992, submit to the Bank for review and approval a SubprojectAppraisal Report and an snvironmentalimpact assessmentof the subproject, includingan Executive Summary of the latter (in English). The subprojectappraisal reports would include: (i) subproject objectivesand description;(ii) estimatedcost, local and foreign, includingphysical and price contingencies,incremental working capital, and interest during construction(if applicable); (iii) proposed financingplan; (iv) procurementmethod; (v) subprojectorganization and management; (vi) benefits; (vii) financialand economic analysis, includingFRR and ERR and sensitivityanalysis; (viii) environmentalanalysis (summary of the EIA and proposed remedial actions, as appropriate);(ix) risks; and (x) detailed implementationschedule. EnvironmentalImpact Assessmentswould include: (i) an executive summary (not to exceed 10 pages) of the environmentalassessment (in English) includingthe significantfindings and recommendedactions; (ii) baseline data (not to exceed 10 pages) of the study area's existing relevant physical, biologicaland socio-economicconditions, including the relevant governmentenvironmental regulations pertaining to the subprojectand the status of any environmentalassessment required by governmentauthorities; (iii) a descriptionof the potential environmentalimpacts, positive and negative, direct and indirect resultingfrom the subproject;(iv) the proposed feasible,cost effectivemitigation plan for the subproject,outlining the measures to reduce any significantadverse impactson the environmentto acceptablelevels; and (v) the environmentalmonitoring and management plan for the subproject,including how it will be implementedand by whom. Assurancesto the above effectswere obtained during negotiations. Conditionsof disbursementfor these subprojectswould be that each subprojectappraisal report and environmentalimpact assessmentwill have been found satisfactoryto the Bank. 4.8 RetroactiveFinancing. The Governmenthas requestedretroactive financingof up to $22.2 million to cover advanced procurementof imported equipment and services incurredby the PFEs. Such advanced procurementis necessary to avoid Project implementationdelays due to the long lead time required to purchase certain items of equipmentand to appoint key engineering services,for which there is no other source of financinga'ailable. Procurementof the equipment and servicescovered by the retroactivefinancing would be in accordancewith Bank Guidelines. Retroactivefinancing would be limited to 10 percent of the Bank loan and restrictedto costs incurred after January 15, 1990. - 30 - Loan Administration 4.9 Procurement. The procurementarrangements for the Project are summarizedin Table 4.7. Equipmentand materiale as well as engineering Table4.7: PROCUREMENTARRANCEUENTS (- m1 ion)I /s Project Components Total and Elements ICB LIB LCB Other N.A. Cost A. Gresik Restructuring (a) Amnmonia/UreePlant Ammonia Process Equipmentand Materials 62.1 10 0 - 8.2 80.8 (12 1) (10-0) (8.2) (80 3) EngineeringServices and 12)8 ( - - 12.8 Licenses (12.8) (12 8) Urea Process EquIpmentand Materials 12 4 8 0 - B.1 2386 (12.4) (8.0) (8.1) (23.5) EngineeringServices and 9 -0 - - 9.0 Licenses (9.0) (9.0) Civil Works, Erectionand Commissioning - - 26.0 7656 100.5 Gresik SuppliedEquipment - - 14.0 2.0 18.0 (b) Plant Modernization Equipmentand Materials 6.8 0.6 - 1.e 9.0 16.7 - ( .0(.8))Q8 EngineeringServices and (.87) (0.8) -(0.4) 02.7 Licenses (1.7) (1.7) (c) Consultantsfor: (i) Ammonia/UreaPlant - - - 0.7 0.7 (0.7) (0.7) (ii) Plant Modernization - - - 0.8 0.3 (0.8) (0.3) S. Optimization Equipmentand materialsfor: i)Iskander Muds 8.0 0.8 - 2.2 11.0 (ii)Kaltim .6(2) -01 37.8 92.4) 10 - 2.0 (88.6) (iii) Kujang 2.4 1(0) 2.0 12.4 ~94) (10) f0:8) (11.2) (iv) PUSRI f4 2 0 1 (80.6 (18 4) (2.0) (0.8) (21.2) EngineeringServices and Licensesfor: (l) IskanderMuds 1.25 - - 0.26 1.50 (1.25) (1.25) (ll) Kaltim 8.25 - - 0.86 8.60 (8.25) (8.25) (lli) Kujang 1.26 - - 0.95 2.20 (iv) PUSRI (1.26) (1.26) (lv) PUSRI 3:~865 - - 0.85 4.00 (8.65) (8.85) Consultnntsfor: (i) IsksnderMuds - - - 0.26 0.25 (0.25) (0.25) (li) Knitim - - - 0.26 0.26 0.25 (0.25) (iii)Kujang - - - (025 0.26 (iv)PUSRI - - - (0.26025) (0.25)0.26 (0.26) (0.26) C. Studies Consultants - - - 0.9 0.9 D. Others /b - - - - 84.8 84.8 Total 175.6 24.4 89.0 120.6 84.8 444.8 (176.6) (24.4) - (21.8) - (221.7) Figures In parenthesisare the respectiveamounts to be financedunder the Bank loan. ZE Comprisesworking capitel and Interestduring constuction. _ 31 - services and licenses,with a total value of $142.6 million equivalentwill be procured through ICB in accordancewith Bank guidelines. Exceptionsto ICB will be made for: (a) equipmentproprietary to the process design,with an estimatedvalue of $19.8 million, to be procured by direct purchase from original supplierseligible under the Bank guidelines; (b) contractswith an estimatedvalue of less than $400,000 each (about $24.4 million) to be procured under limited internationalbidding procedures (LIB) after solicitationof quotationsfrom at least three supplierseligible under the Bank guidelines;and (c) contractswith a value of less than $100,000 each (in total about $9.0 million) to be procured by internationalshopping procedures acceptable to the Bank. The aggregateof equipmentcontracts financed under the Bank loan to be procured under LIB and internationalshopping procedures will not exceed $32.0 million equivalent. To the maximum extent possible, identicalor similar items would be grouped together r purposes of bidding and procurement. For purposes of evaluationand comparisonof bids for the supply of goods under ICB, qualifieddomestic supplierswill be allowed a preferenceof 15 percent of the c.i.f. price or the applicableimport duty, whichever is lower. Contracts for equipmentand materials exceeding $1.0 million and all contractsfor engineeringand consultancyservices financed under the loan will be subject to the Bank's prior review of procurement documentation,resulting in a coverage of about 70 percent of the total estimatedvalue of Bank-financedcontracts. Other contracts for equipmentand materialswill be reviewed by the GovernmentProcurement Control Units, as required,and by the Bank on a sample basis, subsequentto their award. 4.10 Ci-iilworks contracts totaling $25.0 million, to be financedwholly by the PFEs, will be awarded through local competitivebidding (LCB). None of these civil tiorkscontracts will exceed $1.5 million, and they are not likely to attract interest from foreign bidders. Contracts for consulting services financed by the Bank ($2.0 million) will be awarded in accordancewith the Bank Guidelines for the Use of Consultants. A General ProcurementNotice for the Project has been published. Disbursements 4.11 Disbursementsof the proposed Bank loan would be made as shown in Table 4.8. Disbursementswill be made against full documentation. The estimatedschedule of disbursementsfor the Bank loan (Annex 6) has been made on the basis of the disbursementprofiles of industry projects in Indonesia and the Asia Region. It is anticipatedthat the loan would be conmitted by June 30, 1996, and fully disbursedin seven years; thus the Project is expected to be completedby June 30, 1997, and the loan closing date will be December 31, 1997. - 32 - Table 4.8: ALLOCATIONOF BANK LOAN ($ million equivalent) Component/Category Amount Percentof Coststo b Financed (I million) A. GresikRestructuring (a) Equipmentand Materialsfor: 1OOXof foreignexpenditures for (i Ammonia/UresPlant 103.8 directlyiuported items: 90 of local (ii) Modernization 7.8 expenditurefor locallymanufactured items(ex-factory costs); and 60! of otheritems procured locally. Subtotal 111.6 (b) EngineeringServices and Licensesfor: (i) Ammonia/UreaPlant 21.8 (li) Modernization 1.7 Subtotal 28.5 100% of expenditure. (c) Consultantsfor: (i) Ammonia/UreaPlant 0.7 (ii)Modernization 0.8 Subtotal 1.0 1OOXof expenditures. S. Optimization (a) Equlpmentand Materialsfor: (I IskanderMuds 9.2 100X of foreignexpenditures for (ii Kaltim 88.6 directlyImported Items; 90% of local (ii Kujang 11.2 expendituroefor lo-illymanufattured (iv PUSRI 21.2 tems (ex-factory..sts); and 6OX of otheritems procured locally. Subtotal 76.2 (b) Engineeringand Servicesand Licensesfor: (I IskanderMuds 1.26 *ii)Kaltim 8.26 (ili Kujang 1.26 (iv PUSRI 8.66 Subtotal 9.40 100l of expenditures. (c) Consultantsfor: I) IskanderMuda 0.26 (ii) Kaltim 0.26 (iii) Kujang 0.26 (Iv PUSRI 0.26 Subtotal 1.00 1OOXof expenditures. Total 221.70 4.12 Auditing and Reporting. The financialaccounts of the PFEs would be audited by the Financialand DevelopmentSupervisory Board (BPKP),which is acceptable to the Bank. Each PFE would submit to the Ba-:.;the report of BPKP (in English) no later than six months after the end of its fiscal year. All PFEs woul be required to submit semiannualprogress reports (in English), acceptableto the Bank, covering their respectiveoperations under the Project. These auditing and reportingarrangements have been confirmedat negotiations. The Project CompletionReport will be prepared by the DirectorateGeneral of Chemical Industry in MOI. - 33 - V. FINANCIAL,ECONOMIC, AND ENVIRONMENTALANALYSIS AND PROJECT RISKS A. FinancialAnalysis FinancialAnalysis of Gresik Ammonia/UreaPlant 5.1 Past FinancialPerformance. Gresik's past financialperformance has been satisfactoryand reflects the combined effect of the steady output of its two principal products,TSP and AS, Government-controlledprices, and a good volume of sales of industrialchemicals. In the four-yearperiod 1986-89, sales have increasedby an average of 13 percent p.a. The productionvolume of TSP has increasedat a rate of only 2 percent p.a., while AS productionhas increasedby 4 percent p.a. during 1986-89. Earnings throughoutthe four-year period have been consistentlypositive, althougn at times marginal,primarily as a result of steadily increasingcosts due to inflationand sporadic Governmentprice adjustments. In 1988, fertilizerprices were reduced by an average of 2 percent; as a consequence,after-tax net income declined to only Rp 2.4 billion in 1988 comparedwith Rp 37.8 billion in 1987. Net income levels were satisfactoryat Rp 18.5 billion in 1989, representinga 6.9 percent return on equity or a 3.5 percent return on total assets. Gresik's current financialcondition is sound, with a total long-term debt/equityratio averaging1:1 for 1986-89. The current ratic is favorable, at 1.4 times for year-end 1989. Debt service coverage has ave_aged a satisfactorv2.4 times over the past four years. Gresik's recent operating performanceand key financialindicators are summarizedin the Table 5.1. Detailed financialassumptions and data are shown in Annexes 7-1 through 7.4. Table 5.1: GRESIK - HISTORICALFINANCIAL DATA (Rp billion, unless otberwise stated) Item 1986 1987 1988 1989 /a Sales 451.1 533.7 537.9 631.4 Net income 39.0 37.8 2.4 18.5 Accounts Receivable 239.0 314.0 590.1 456.0 Internal cash generationlb 71.1 71.6 37.6 54.8 Net income/sales,(percent) 8.6 7.1 0.4 2.9 Net income/totalassets, (percent) 6.8 5.9 0.3 2.3 Current ratio 1.6 1.5 1.3 1.4 Debt/equityratio 1/1.7 1/2.1 1/2.0 1/2.6 Debt service coverage,times 3.2 2.5 1.8 2.0 Net income/equity,(percent) 17.2 15.2 1.0 6.9 Accounts Receivable/Sales 0.5 0.6 1.1 0.7 /a Unaudited. /b Net income plus depreciation. 5.2 ProductionVolumes and Unit Prices. During 1986-89,Gresik's TSP volume increased from 1,120,000tons in 1986 to 1,200,000tons in 1989, an - 34 - average annual '^creaseof 2 percent, while its production of AS increased from 577,000 tons in 1986 to 632,000 tons in 1989, a 4 percent per year increase. Unit prices for AS during the same period declined by an average of 2 percent from Rp 215,000 per ton in 1986 to Rp 211,000 per ton in 1988 but reboundedto Rp 226,500per ton in 1989, an increase of 7 percent. TSP unit prices, in contrast,increased by an average of 12 percent per year, from Rp 276,600 per ton in 1986 to Rp 307,100 per ton in 1988, and in 1989 were further raised to Rp 381,000per ton, an increase of 24 percent. 5.3 OperatingCosts and Margins. In contrast to the modest increases in productionvolumes and unit prices, operatingcosts (not includinginterest charges) increasedan average of 14 percent per year during 1986-88. Consequently,gross profit and operatingprofits (on sales)were reduced from the 19 percent gross profit and 9 percent operating profit experiencedin 1986 to a 5 percent operating loss in 1988. In 1988, however, income from subsi- diaries and outside income from Gresik's metal fabricationfacilities turned the operatingloss into a modest profit of F.-2.4 billion. In 1989, Gresik showed an operating profit of Rp 15.6 billion, representinga 2.5 percent return on sales. 5.4 FinancialStructure. Gresik's level of long-termdebt to equity is very conservative(1989 long-termdebt/equity ratio was 1:1), and no additionalpaid-in capitalwould be required during the constructionperiod for the new ammonia/ureaplant. Projectedlong-term debt to equity (paid-in capital plus retained earnings)is not expected to exceed 1:1 during 1990-99. Gresik markets its two principalproducts, TSP and AS, through PUSRI's marketing and distributionsystem. This sales arrangementresults in Gresik carrying on its balance sheet an accounts receivablethat in the past four years has averaged nine months of sales--veryhigh for an enterprise producing a baa' commodity such as fertilizer;comparable commercial enterprises would be expected to carry receivablesof from 60 to 90 days of sales. Some of the receivablescan be offset by withholdingor delaying payments to creditorsor suppliers (accountspayable), but purchasesof imported raw material or payroll obligationsmust be met on time. The Governmentoffers interim financingof 80 percent of Gresik's receivablesfrom PUSRI at a nominal interest rate of only 3 percent. Thkeconsequent high receivablesand payables result in a balance sheet that con3istsmainly of current accounts (four-year average: 70 percent). 5.5 Financialand OperatingStrategy of the Gresik AmmoniajUreaPlant Subproject. The constructionphase of the new ammonia/ureaplant would take an estimated 36 months from start to production. At completion,Gresik's total assets will be more than doubled. Under the subproject,the production levels of TSP and AS would remain at the pre-projectlevels of 1,220,000tons for TSP and 650,000 tons of AS, but a cleaner,more efficientnatural gas conversion plant would substitutefor the existing and aging fuel-oil conversion plant that is now used to produce ammonia. In addition, the new ammonia plant would supply feedstockto an urea plant (also built as part of the subproject)with an annual capacity of 460,000 tons of urea. Because the ammonia/ureaplant is scheduledto commence commercialproduction in late 1993, only 190,000 tons of urea would be produced in 1993. Frouma financial standpoint,the subproject,because of lower unit productioncosts, would enable Gresik to adjust its fertilizerunit prices to border prices by 1994 while obtaininga satisfactoryreturn on assets and stockholders'equity. - 35 - Without the new ammonia/ureaplant, Gresik's earningswith border prices would not be sufficientto cover even routinelyneeded equipment replacements. 5.6 Comparisonof ProductionVolumes and Gross Profits. Projections, shown in Annex 7-5, compare, in 1989 values, the "with" and "without"project productionvolumes and gross profits with border prices. As seen, with border prices and no urea production,Gresik's gross profit from its main products (TSP and AS) would be significantlyreduced. It is only with the addition of by-product revenue that Gresik would show a minimal gross profit (Rp 12.9 billion) that would result in a break-evensituation when administrative, marketing,and other charges are added. However, 'with project" at border prices for urea, gross profit would double from Rp 42.5 billion in 1989 to Rp 88.3 billion at full productionin 1994, before by-product revenue. 5.7 ProjectedFinancial Performance. Under the Project,with current prices and projectedborder prices for the main products,all financial parameters are forecast to remain favorable. During construction,financial ratios (such as net income to sales) will increase from the 2.9 percent in 1989 to 6.5 percent by 1994, due primarily to the reducedvariable costs caused by the switch from oil to natural gas and the inclusionof urea production at border prices. The same trend holds for net income to assets (1989: 2.3 percent; 1994: 5.0 percent). Current ratios are projected to remain at 1.3 or above during the project period. Debt service coverage averages an adequate 2.2 times during 1990-94. Net income to equity yields a satisfactory15.5 percent at full production (1994). A summary of Gresik's financialperformance under the project is shown in Table 5.2 and in more detail in Annex 7-4. Table 5.2: GRESIK - PROJECTEDFINANCIAL DATA WITH PROJECT (CurrentRp billion, unless otherwisenoted) Item 1990 1991 1992 1993 1994 Sales 677.0 754.6 791.3 896.6 981.7 Net income 27.6 46.8 39.9 79.7 64.3 Internal cash generation 63.9 76.9 71.5 118.4 105.2 Net income/sales,(percent) 4.1 6.2 5.0 8.9 6.5 Net income/totalassets, (percent)3.2 4.2 3.2 6.2 5.0 Net income/equity,(percent) 9.6 14.9 12.5 21.3 15.5 Current ratio 1.4 1.4 1.3 1.4 1.4 Debt/equityratio 1/2.3 1/1.0 1/0.8 111.0 1/1.4 Debt servicecoverage, times 2.3 2.5 2.2 2.1 1.8 OptimizationComponent 5.8 Summary financialstatements for PUSRI, Kaltim, Kujang, and PIM are shown in Annexes 7-6 through 7-9. These four PFEs are generally lightly leveraged,with long-termdebt/equity ratios ranging in 1989 from no long-term debt in the case of Kujang to a still conservative,long-term debt/equity ratio of 1.9 for PIM. Another structuralcharacteristic of the four urea/ - 36 - ammonia-producingenterprises is their high percentageof current assets to total assets (average45 percent in 1989). In the case of PUSRI, the percentageof current assets to total assets is 73 percent,which is explained by its marketingand distributionresponsibilities, whereby it must maintain relativelylarger proportionsof working capital and inventory. The remaining three have no requirementor facilitiesfor keeping extensive inventories,and the major portion of current assets consists of cash, short-termsecurities, and receivables,indicating a slow payment practice by the Government in settling accounts. The PFEs have adapted to this payment procedure by keeping a sizablecushion of cash and short-termsecurities on hand (1989 average for Kaltim, Kujang, and PIM: 27 percent of annual sales). All four of the urea/ammonia-producingenterprises have ample capacity to take on the equity and debt requirementsof the optimizationsubprojects. Each subproject representsa much smallerproject in terms of the ratio of new assets acquired to existing assets compared with the proposednew Gresik ammonia/ureaproject, in which Gresik's total assets will more than double. By contrast,the investmentrequirements of the Kaltim subproject (the largest optimization subprojectat $41.4 million), representonly 6 percent of Kaltim's total assets at year-end 1989. All of the four PFEs carry equity investmentson their balance sheets, ranging from only $0.2 million in the case of PIM to $16 million for Kujang. Kujang has invested in several downstreamchemical operations. 5.9 Past FinancialPerformance. Past financialperformance of the four current ammonia/ureaproducers has been satisfactory,but returns have been relativelylow in terms of net income to total assets or total capital (equity). In 1989, the four enterprisesreturned a 5.4 percent average of net income to assets and an 8.2 percent average return on capital. Net income to total sales performancehas been consistentlypositive, with an average for the four PFEs in 1989 of 9.8 percent (a high of 10.9 percent for Kaltim and a low of 4.9 percent for PIM). FinancialRate of Return (FRR) and SensitivityAnalysis 5.10 New Gresik Ammonia/UreaPlant. The base FRR of this subprojectof the Gresik RestructuringComponent has been calculatedusing constant 1990 price levels for costs and 1990 border price levels for the urea production (Table 5.3). Under the base situation,the subprojectshows a 16.6 percent rate of return over a period from 1990, the start of construction,until 2006. Annex 7-10 is a summaryof the incrementalcosts and revenues of the base case which is derived from the income statementand sources and applicationof Gresik projected in 1990 values (Annex 7-3). Sensitivityanalyses were based on projectedborder prices, current domestic ex-factoryprices, reducedborder prices, lagged constructionschedules, and 20 percent capital cost overruns. - 37 - Table 5.3: P.T. PETROKIMIA GRESIK AMMONIA/UREAPLANT SUMMARYOF FINANCIAL RATES OF RETURN (1990 prices) Item FRR (percent) Base case - at projected1993 border price for urea ($155/ton) 16.6 /a Border price projectionsfor urea 20.1 80 percent of border price projectionsfor urea 15.3 Capital costs increasedby 20 percent 13.6 Constructionperiod extended by five months (until 1994) 15.1 Lengthenedconstruction period with 20 percent increased capital costs 12.3 At 1990 domestic ex-factoryprices for urea ($125/ton) 12.2 /a Landed, bagged price per ton (1990 prices): 1993 1994 1995 1996 1997 1998 1999 2000 Base case 155 155 i55 155 155 155 155 155 Border price projection 155 176 195 192 189 186 183 180 80Z of border price projection 124 1V41 156 154 151 149 146 144 5.11 OptimizationComponent. The subprojectsof the Optimization Component that have been worked out in detail all show satisfactoryfinancial returns. The PUSRI optimizationsubproject (Annex 7-11) shows a FRR of 32 percent using 1990 border prices. Using projected border prices, the return is even higher. The same is true for the Kaltim optimizationcomponent (Annex 7-12), which has a base FRR of 37 percent. Relativelyhigh capital costs and a relativelymodest increase in productionlimit the Kujang subproject (Annex 7-13) to 16 percent using 1990 border prices. PIM has not yet completedall the financialprojections required for its subproject. Each of the subprojectswill be subject to further review and approvalwhen submittedby the PFEs to the Bank. B. Economic Analysis 5.12 Economic Costs and Benefits. The principalassumptions used in the economic analysis of the various componentsof the Project are described in Annex 7-14. The economic costs and benefits of internationallytraded items have been valued at border prices. Wherever possible,prices have been obtained from the latest commodityprice forecast revisionsof the Bank's CommodityStudies and ProjectionsDivision. In all other cases, price projectionshave been derived by maintainingan appropriaterelationship among the differentprices. Ammonia and urea, in which Indonesiais in a competitiveposition and is already a significantexporter, have been valued at border export prices. Other items have been valued at landed costs. - 38 - Natural gas has been valued at fuel-oilequivalent at Gresik and Kujang, since at these locationsthere is a significantdemand for gas for alternative energy uses. At Kaltim and PIM, natural gas has been valued in economic terms at the present deliveredcost of $l.OO/MMBtu. All prices have been expressed in constant 1990 U.S. dollars. Since no duties and taxes are applicableon capital investmentsin the fertilizerindustry, the economic capital costs are the same as the financialproject costs, less price escalationsand interest during construction. Conservatively,local currency costs have been converted to U.S. dollars at an exchange rate of $1.00 = Rp 1,830, without further deflation. 5.13 The major economic benefits from the various subprojectsunder the Project are: (a) for the new Gresik ammonia/ureafacility, additional pro- duction of urea and replacementof ammonia (para. 3.5); (b) for PUSRI II urea optimization,additional urea productionconverting a part of the surplus ammonia becoming available from the ammonia optimizationproject and PUSRI Ib new ammonia/ureafacility; (c) for Kaltim I optimization,additional urea production,partly in granular form, and reductionin energy consumption;and (d) for Kujang ammonia optimization,additional ammonia productionand a reductionin energy consumption. For PUSRI effluent treatment,PIM ammonia optimization,and Gresik plant modernizationsubprojects, no economic analysis has been carried out because, in the first case, the benefits are not quantifiableand, in the other two cases, the subprojectsare still in the preparationstage. 5.14 New Gresik Ammonia/UreaPlant Subproject. Since the ammonia produced from the project will substitute(a) ammonia and carbon dioxidenow being provided from the existing fuel-oil-bas-iammonia plant for gypsum-based AS productionand (b) ammonia delivered from Kaltim, the impact of the project on the overall economicsof the complex is assessed on the basis of the entire complexwith and without the project. The base ERR of the new Gresik ammonia/ureaplant, consideringthe subprojectas an integralpart of the complex, is calculatedat 19.5 percent (Annex 7-15). 5.15 The sensitivityanalysis containedin Table 5.4 indicatesthat the ERR of the subprojectremains adequate,over a wide range of project risks. The switching-valueanalysis indicatesthat the capital cost has to go up by more than 75 percent, and the urea price has to come down by more than 28 percent, before the subproject'sERR will go below 10 percent. Such large changes due to one or a combinationof the risks are unlikely to occur, and the project will thereforebe economicallyviable over a range of unfavorable conditions. - 39 - Table 5.4: P.T. PETROKIMIAGRESIK AMMONIA/UREAPLANT - SUMMARYOF ECONOMIC RATES OF RETURN (1990 prices) ERR (percent) Base Case (total complex basis) 20.7 SensitivityTests (total complex basis) Capital cost up by 20 percent 17.6 Constructionperiod extended to four years 17.4 Drop in urea price by 20 percent 16.2 Gas price up by 20 percent 18.4 SwitchingValues for 10 percent Economic Rate of Return Capital Increase by 98 percent Urea price Decrease by 43 percent 5.16 OptimizationComponent. On the basis of the cost and benefit streams for the PUSRI II urea optimizationcontained in Annex 7-16, the subprojectwill have an ERR of 37.2 percent. If adjustmentsare made for a part of the investmentfor the above subproject,such as replacementof the existing titanium-linedurea reactor (whichwill in any case be necessaryfor the continuedoperation of the existing PUSRI II urea plant), the subproject's ERR will be even higher. The cost and benefit streams for the Kaltim I optimizationcontained in Annex 7-17, show that the subprojectwill have an ERR of 57.1 percent, based on an economic value of natural gas of $1.00 per MMBtu. Since the increase in gas requirementsafter the optimizationis very small, the ERR changes only marginally,even though the economic value of gas is taken as $2.00 per MMBtu. 5.17 Foreign Exchange Earnings. The total Project, includingall its components,has a foreign exchange investmentrequirement of about $220.0 million. The projectwill contributean additionalurea output of about 820,000 t, of which about 119,000 t will be in granular form. At border prices per ton of urea (prill)of $150, urea (granule)of $160, and ammonia of $110, the additionaloutput could contributeabout $135 million per year as incrementalnet export income. C. EnvironmentalAnalysis 5.18 Gresik FertilizerComplex. In June 1990, Gresik completeda SEL 2/ (para. 1.23) for the Gresik complexwhich has been approved by the Central EnvironmentalCommission (CEC). The SEL has been reviewed by the Bank 2/ Study of EnvironmentalEvaluation of PetrokimiaGresik IndustrialArea, by PPKL Lemlit Unair, June 1, 1990. - 40 - and found satisfactory. The principal environmentalproblems outlined in the SEL relate to gaseous NH3 and S02 emissions from various parts of the complex and to liquid effluentscontaining dissolved NH 3, chemical oxygen demand (COD) and biochemicaloxygen demand (BOD) from the wastewatertreatment facility. 5.19 Gaseous Effluents. Emissions of NH3 and S02 in excess of local or accepted internationalstandards originate from four locationsin the Gresik complex: the present ammonia plant (NH3 and NO.). the sulfuric acid plant (SO2), the power generationfacility (SO2), and the AS plants (NH3). Under the proposed Project, the old ammonia plant will be permanentlyclosed and dismantled,thus eliminatingthe existing hazardous gaseous NH3 emissions. The power generationfacilities at Gresik would be convertedto natural gas under the Project, thereby eliminatingSO 2 emissions from that source. Gresik has two sulfuric acid plants. One is a modern facility and the S02 emission levels are acceptable. The other sulfuric acid plant was built in 1972 and is relativelyinefficient with regard to energy and sulfur recovery. SO2 emission levels of 2,400 ppm compare with the locally acceptablelevel of 2,100 ppm and the internationalstandard of 2 kg S02 per ton of acid produced. Ambient SO2 levels are acceptable(less than 0.2 ppm SO2). Gresik has held up retrofittingor renlacingthe older plant with less polluting technologies until the overall demand for sulfuric acid would justify the investment. The dispositionof the old sulfuric acid plant will be assessed under the Gresik plant modernizationsubproject. Gaseous effluentsof the AS operationsat the complex contain from 40 ppm to 70 ppm of NH3 and are scrubbed to reduce the ammonia. The environmentalimpact study identifiedthe scrubbingoperations as areas requiringimprovement. Another potential source of toxic gaseous emissions is the phosphoricacid plant, which produces fluoride gas that is i recoveredand processedeffectively into aluminum fluoride,a valuable by- product. 7 5.20 Liquid Effluents. At present the Gresik complex utilizes a centralizedwastewater treatment plant that collects and processesall runoff and other liquid effluents for discharge into the sea. The environmental impact study notes that, during periods of high throughput(high rainfall), effluen: from the treatmentplant exceeds local and internationalstandards for NH3, COD, and BOD. The liquid effluents from the new ammonia/ureaplant will contain less than 5 ppm NH3 and will lower the total NH3 effluentsthough total liquid volume will be larger. In its environmentmanagement plan, Gresik will incorporatea provision for increasingthe capacity of the centralizedwastewater treatmer.. plant to reduce total effluent discharge, includingmaximum flows to meet internationalstandards for all contained pollutants. 5.21 Solid Waste. Problemswith solid wastes at the Gresik complex relate to the proper managementand locationof landfillsfor unwanted by- products,precipitated sludge, and spent catalysts. The plan to sell the by- product calcium carbonate to an adjacent cement manufacturerto substitute partially for natural limestonehas not materialized,and calcium carbonateis stockpiledin areas adjacent to the complex. The waste liquid effluents from the various parts of the complex containhigh amounts of fluorine (up to 4,000 ppm). These are collectedand treatedwith lime in the centralizedwastewater treatmentplant to precipitateas a sludge containingcalcium silicofluoride. The sludge is thickened,filtered, and then landfilled. The water effluent contains virtuallyno residual fluoride. Many of the chemical processes in - 41 - the complex utilize catalystscontaining heavy metals such as chromium and vanadium. At present, the spent catalystsare disposed of routinely in a landfill whereas they should be recycledand subsequentlytreated as hazardous materials. 5.22 The anvironmentalimpact of the new ammonia/ureaplant to be funded under the Projectwould be to reduce NH, emissionsto 5 ppm (well within acceptable standards)and eliminateS0 2 discharges from the existing ammonia and power generationoperations. In addition,to overcome the principal problems identified in the environmentalimpact study that would not be directly remediedby the installationof the proposed new ammonia/ureaplant, Gresik agreed at negotiationsto develop,not later than November 30, 1991, an environmentalmanagement plan to include: (a) the treatmentof high S0 2 emissions from the existing sulfuric acid plant; (b) the treatment of gaseous NH3 discharge from he AS operations;tc) increasingthe capacity of the present wastewater treatmentfacilities to cope with overload conditionsand the proposed new nmonia/ureaplant; and (d) providing for the safe treatment, recycling, storage, and disposal of solids includingcalcium carbonate, wastewater treatmentplant sludge, and spent catalysts. Gresik is studying these possibilitiesfor inclusionunder the modernizationof their existing fertilizerplant subproject. D. Project Risks 5.23 The Project is not expected to encounterany major technical or managerial risks because the technologiesto be used in the several components are commerciallyproven, and because Indonesiahas considerableexperience in constructionand operationof modern fertilizerfacilities. The new Gresik ammonia/ureaplant is substantiallyidentical to two other recent projects in Indonesia. Each of the PFEs has considerableexperience, and each has an extensive training program to develop new staff and to retrain existing personnel. The timely availabilityof natural gas to the Gresik ammonia/urea plant is a potential risk. The offshore gas supplies are proven, but completion of the pipeline could be delayed. To account for this risk, no disbursementswould be used for expendituresunder the Gresik Restructuring Component until a contract, satisfactoryto the Bank, for the provision of the required natural gas has been executed on behalf of Gresik and PERTAMINA. 5.24 The main sector-widerisks are that domesticex-factory prices may not be increasedto border prices as anticipated (para. 3.18) and that internationalfertilizer prices may not be in line with the level projected in the Bank's commodity forecast. The first risk is minimized by the Government- stated objective in the Policy Statementto bring these prices to their economic level by actions taken during Repelita V. The latter risk is acceptablebecause the industry as a whole has a relativelylow variable cost structureand so should be able to maintain a reasonablefinancial viability even with prices significantlylower than the present forecast. In fact, the proposed Project is in part designed to enhance Indonesia'salready favorable competitiveposition with regard to nitrogen exports, and to improve substantiallyGresik's present cost structure. - 42 - VI. UNDERSTANDINGSAND AGREEMENTSREACHED 6.1 During negotiations,agreements were reachedwith the Governmenton the following: (a) that th6 Projectwill be implementedin accordancewith the Policy Statement (para. 3.18); (b) that the studies of FertilizerDistribution and Marketing,and of the Developmentof an EnvironmentalManagement Program for the FertilizerIndustry will be prepared by March 1, 1992, under terms of referencesatisfactory to the Bank and by qualified and experiencedconsultants, and that for each of these studies MOI will establish,not later than May 1, 1991, a Steering Committee (paras.3.24 and 3.25); (c) that the Governmentand the Bank will review jointly the recommendationsof the two studiesmentioned in (b) above and supportedunder the Project,not later than 60 days after their completion,and agree on Governmentaction plans to implement these recommendations(paras. 3.24 and 3.25); (d) that the arrangementsfor the allocationof loan proceeds and the onlendingterms to the PFEs will be as indicated in para. 4.7; 6.2 During negotiations,the followingunderstandings were reachedwith the Government: (a) that the revised farmgate fertilizerprices for 1991 adopted by the Government,as agreed during the exchange of views on these prices in September1990, between the Governmentand the Bank, represent a satisfactoryprogress in bringing these prices ultimatelyto their economic levels (para. 3.18); (b) that the Governmentwill, by October 1 of each year, commencingnot later than October 1, 1991, review the farmgate and ex-factory prices of fertilizers,exchange views with the Bank on the results of the review, and thereafter,if required,revise such prices taking into account the principlesset forth in the Policy Statement (nara. 3.18); and (c) that E tions will be taken during Repelita V (1993-94)to bring the prices of fertilizerproducts graduallyto their economic level and eliminate the associatedsubsidy payments from the Government'sbudget (para. 3.18). 6.3 During negotiations,the followingagreements with the PFEs were reached: (a) that Gresik will, not later than May 1, 1991, appoint consultantsto assist in the implementationof the ammonia/ureaplant and of the modernizationsubproject (para. 3.22); (b) that PIM, Kaltim, Kujang and PUSRI will, not later than May 1, 1991, appoint consultantsto assist them in the implementationof their respectiveoptimization subprojects (para. 3.23); (c) that Gresik, for its modernizations¶tbproject, and the other PFEs, for their respectiveoptimization subprojects, will, not later than June 30, 1992, submit to the Bank for review and approval a - 43 - subprojectappraisal report and an environmentalimpact assessment of the subproject,including an Executive Summary (in English) (para. 4.7(e));and (d) that Gresik will, not later than November 30, 1991, develop an EnvironmentalManagement Plan to overcome the main environmental issues identifiedin the EnvironmentalImpact Study of the Gresik complex and not dealt with as part of the implementationof the new ammonia/ureaplant to be built under the Project (para. 5.22). 6.4 A conditionof loan effectivenesswould be the signingof Subsidiary Loan Agreementsbetween MOF and the five PEFs for undertakingof the respectiveproject components,on terms and conditionsacceptable to the Bank (para. 4.7(c)). 6.5 Conditionsof disbursementwould bet (a) for the Gresik RestructuringComponent that a contract for the provisionof the required natural gas to Gresik has been executed on behalf of rresik and PERTAMINAand found satisfactoryto the Bank (para. 3.20); and (b) for subprojectsunder the OptimizationComponent and for the Gresik modernizationsubproject that the appraisal report and the EnvironmentalImpact Assessment for these investments by each PFE will have been found satisfactoryto the Bank (para. 4.7(e)). 6.6 With the above agreementsand understandingsreached at negotiations,the proposed Project would be suitable for a loan of $221.7 million equivalent to the Republic of Indonesiafor 20 years, includinga grace period of five years, at the Bark's standardvariable interest rate. - 44 - ANNEX1 Pagei 1 REPUBLICOF INDONESIA NAIlONALDEVELOPMENT PLANNING AGENCY JAKARTA,INDONESIA 10 October 1990 Mr. Attila Karaosmanoglu Vice-President Asia Regional Office The World Bank 1818 H Street, N.W. Washington, D.C 20433 USA. Dear Mr. Vice President: I. The Government of Indonesia has requested assistance from the World Bank to support a program of restructuring in the fertilizer sub sector.This letter providesinfornation on the latest measurestaken by the Governmentto strengthenthe industrialpolicy framework, particularly as it affectsthe sub sector, and on the directionof plannedpolicy actionsto be implementedduring Repelita V. 2. The Government's main policy objectivesin the area of trade and industryare di-ectedto: maintaininga competitiveexcchange rate; removing non-tariff barriers; rationalizing tariffs; and simplifying domestic regulations. To maintain the momentumof ongoing trade and industrial policyreforms, we intendto continueto employa comprehensiveapproach that will give priority to: (i) removingmore non-tariffbarriers, especially those that will have the greatest impact on increasing efficiency and reducing cost; (ii) rationalizingtariffs further to lower the average tariff level and its dispersion;(iii) further reducingthe remainingconstraints on investment;and (iv) reviewinga numberof other regulations,with a view to eliminatethose that no longerserve a positivepurpose or have the effect of raisingproduction costs. - 45 - ANWE 1I Page 2 3. These initiativesare being supportedby a comprehensivereform of financial sector policies, with the objectives of increasing resource mobilization, improving efficiency and lowering costs in financial intermediation, and ensuring greater availability of term funds for investment.The Governmentis also committedto promotingtechnological upgrading and strengthening technical and managerial capabilities in the industrialsector. 4. During the past two decades, the fertilizer industry has achieved impressive result. Nevertheless, there remain problems that need to be overcome in order to ensure a sustaineddevelopment of this industry.The problems relate, among others, to how to improve the currently used technology,pricing of fertilizer product (at farmgate and ex-factory levels) and feedstockand the distributionand marketingsystem. The Government has already taken steps and will continueto take furithermeasures to ensure an economically more efficient fertilizer industry. This objective will be supportedunder the Proposed fertilizer project through investmentsin new productionfacilities, optimizationof existingplants, and studies which will address marketing,distribution, and environmentalissues. 5. With regard to the pricing of fertilizer products, the Government has begun and will continueto adjustthese prices so that they will gradually reflect economic prices. A major outcome of this adjustment wiil be the gradual elimination of the associated subsidy payments from the Governmentbudget. 6. With regard to the marketing and distribution system, the L-overnmentwill continue to make efforts to improve efficiency of the existing system and service to farmers. Thus, a study will be prepared for conmletdonbefore the end of November 1991, to develop recommendations and appropriate timing for introducing increased competition at wholesale and retail levels. 7. The Government is concerned about the environmental impact of industrial activities, including fertilizer enterprises, and has adopted comprehensive legislation for environmental protection. In this regard a special study in conjunctionwith the proposedferdlizer project will also be ANNEX1 - 46 - Page 3 undisgtakn,for completionbefore the end of November1991, to asss the environmentalimpact of the fertilizerindustry. The studywill alsoreview the appropriateness of environmental standards in line with existing regulations,in order to recommendan environmentalmanagement plan that wouldbe implementedby ferdlizerenterprises. 8. To improvethe efficiencyof the fertilizerindustry the Government will continue to pursue policy reforms in this sector. Weconsider the proposed fertilizerproject will assistenterprises to respondeffectively to changingpolicy through the provisionof technicaland financialsupport. The successfulimplementation of the projectshould lead to essentialgains in technical,financial and economicefficiency and to proper management and monitoringof the environmentalimpact of this importantindustrial sub sector. Your sincerely, SalehAflif State Ministe for Natonal Development PlanmninCbarmanof BAPMNAS - 47 - ANNEX 2-1 INDONESIA FERTILIZER RESTRUCTURING PP.RJJECT Historical Growth in Fertilizer ConsumPtion (thousand tons of product) Year Urea TSP AS KC1 Total 1975 676 235 94 34 1,039 1976 686 211 122 24 1,043 1977 962 183 140 69 1,354 1978 1,080 205 155 109 1,549 1979 1,240 268 196 122 1,826 1980 1,776 494 330 123 2,723 1981 2,139 724 282 46 3,191 1982 2,039 713 331 88 3,171 1983 2,381 834 354 179 3,748 1984 2,609 959 408 252 4,228 1985 2,607 1,048 475 290 4,420 1986 2,715 1,165 473 238 4,591 1987 2,686 1,191 553 270 4,700 1988 2,930 1,219 585 496 5,230 1989 (Est) 3,065 1,514 653 635 5,867 Growth Rate (Percentage) 1975/1985 14.5 16.1 17.6 23.9 15.6 1980/1985 8.0 16.2 7.6 18.7 10.2 1984/1989 3.3 9.6 9.9 20.3 6.8 AS5IE March 1990 - 48 - ANNEX 2-2 Page 1 of 2 INDONESIA FERTILIZER RESTRUCTURING PROJECT Projected Growth in Fertilizer Consumption (thousand tons of product) Year Urea TSP AS KC1 Total A. Revision (ii) of Second National Fertilizer Study 1988 (actual) 3,172 1,323 584 373 5,452 1989 3,400 1,438 639 405 5.882 1990 3,642 1,562 699 439 6,342 1991 3,702 1,698 765 477 6,642 1992 4,180 1,844 837 518 7,379 1993 4,476 2,004 916 563 7,959 1994 4,793 2,177 1,002 594 8,566 1995 5,132 2,366 1,095 664 9,257 Growth Rate (Percentage) 1988/1995 7.1 8.7 9.4 8.6 7.9 B. Estimates of the Ministry of Industry 1989/90 3,508 1,600 680 1990/91 3,765 1,739 744 1991/92 4,042 1,889 814 1992/93 4,339 2,053 890 1993/94 4,657 2,230 974 1994/95 4,913 2,342 1,067 1995/96 5,183 2,459 1,166 1996/97 5.468 2,582 1,275 1997/98 5,769 2,711 1,395 1998/99 6,087 2,847 1,526 1999/2000 6.422 2,989 1,670 Growth Rate (Percentage) Repelita V 7.34 8.66 9.40 Repelita VI 5.50 5.00 9.40 - 49 - ANNEX 2-2 Page 2 of 2 C. Staff Appraisal Report Proiections 1988 (Actual) 2,930 1,219 585 496 5,230 1989 (Est) 3,065 1,514 653 635 5,867 1990 3,190 1,630 705 690 6,215 1995 3,770 2,210 1,010 980 7,970 2000 4,370 2,960 1,450 1,410 10,190 Growth Rate (Percentage) 198911995 3.5 6.5 7.5 7,5 5.2 1995/2000 3.0 6.0 7.0 7.0 5.0 AS5IE March 1990 - 50 - ANNEX 2-3 INDONESIA FERTILIZERRESTRUCTURING PROJECT Flow of Fertilizersin Marketing System Urea Own Urea TSP/AS Imported Producers Production Producer Fertilizers Kaltim,AAF, at IskanderMuda Pusri Petrokimia TSP, Potash Kujang Gresik LINE I LINE II Provincial Marketing Unit 1. Bulk Terminal Level PUSRI 2. Main Ports LINE III Kabupatan (Inland Supply Level Distributors Warehouse) Government Agencies KUDS and Private Companies LINE IV Village KUD Level Village Kiosk Estates r Consumers and Farmers Plantations AS5IE March 1990 - 51 - ANNEX 2-4 INDONESIA FERTILIZER RESTRUCTURING PROJECT Breakdown of Ex-Factory Urea Prices (Rp per ton) Pusri Kujang PIM Kaltim A. Production (in '000 tons) Bulk Urea 800.7 545.0 1,209.7 Bagged Urea 579.3 570.0 25.0 340.0 B. Variable Costs Natural Gas 63,048 60,131 58,683 63,928 Catalysts & Chemicals 2,969 4,317 3,561 2,745 C. Fixed Costs Salaries & Wages 15,850 13,726 16,640 14,072 Spares& Maintenance 8,722 6,181 6,545 8,544 Insurance 1,688 1,989 2,323 2,243 Admin. Overheads 3,045 4,575 5,395 5,846 Other Costs 570 1,107 2,781 2,997 D. Production Cost - Bulk Urea 95,892 92,026 95,928 100,375 E. Capital related Costs Depreciaton 15,910 19,492 23,858 33,130 Interest 1,233 1,211 24,657 9,482 F. Total Cost of Production 113,035 112,729 144,443 142,987 G. Cost of Bagging 13,273 13,280 13,550 13,450 H. Cost of Production Bulk Urea 113,035 112,729 144,443 142,987 Bagged Urea 126,308 126,009 157,993 156,437 AS5IE March 1990 - 52 - ANNEX 2-5 INDONESIA FERTILIZERRESTRUCTURING PROJECT Breakdownof Ex-FactoryTSP/AS Prices (Rp per ton) TSP AS A. Production (in '000 tons) Bagged TSP/AS 1,200 600 B. Variable Costs PhosphoricAcid 262,339 Rock Phosphate 54,789 LSFO 195 51,795 Ammonia (Kaltim) 37,830 Sulfur 63,842 Catalysts& Chemicals 550 6,223 Electricity 4,576 1,500 Others 4,073 211 C. Fixed Costs Salaries & Wages 8,983 14,571 Spares & Maintenance 6,824 14,682 Insurance 825 978 Admin. Overheads 1,299 1,748 Other Costs 485 576 D. Capital related Costs Depreciaton 7,557 9,475 Interest 15,470 9,727 E. Total Cost of Production 367,965 213,158 F. Cost of Bagging 13,025 13,300 H. Cost of Production (Bagged) 380,990 226,458 AS5IE March 1990 I - 53 - A3NNEX2-0 INDONESIA FERTILIZERRESTRUCTURING PROJECT FertilizerSubsidies By Company - 1988 Average based on 1988 Prices Uresa TSP AS Potash PUSRI Kujang Kaltim AAF PIM Gresik Import Total A. 1988 Dom. Sales ('000tons) 1,040 481 814 120 468 1,220 698 664 6,298 B. Prices (Rp.000 per ton) 1. Ex-Fuctoryexcluding Profit 105 118 147 242 1J9 S07 211 204 2. Profit to Producers 6 6 6 6 6 6 3. Form Gate Price 143 143 143 143 143 146 143 142 4. MarketingCosts 87 46 100 98 98 67 58 e6 5. Pusri marketingOverhead 1 1 1 1 1 1 1 1 6. Border Price (USS/mt) 146 146 146 146 146 180 76 122 7. Border Price (Rp.000/mt) 242 242 242 242 242 801 126 204 C. ProductionSubsidy - Econ. 1. Per ton Subsidy (Rp.000) (81+.2-87) (182) (119) (90) - (98) 11 91 - 2. Ratio as X (81.2)/B) 46 61 es - 69 104 172 - 3. Annual Subsidy in Rp.Bill. (A x C1) (187) (67) (78) - (46) 14 68 _ (246) D. FarmgateSubsidy - Econ. 1. Econ. Del. Cost (Rp'000) (87.84.65) 830 288 348 841 886 369 184 270 2. Per ton Subsidy (Rp.000) 197 146 200 198 198 224 41 128 S. Annual Subsidy in Rp.Bill (A x D2) 195 70 168 24 90 278 24 72 811 E. Total Budgetary Subsidy 1. Del. Cost In Rp.'O0O/te 814B2+B4+69 198 169 253 841 288 380 276 270 2. Retail Price in Rp.OOO/te I8 143 148 148 148 148 146 148 142 3. Per ton Subsidy in Re'O00 E1-E2 65 26 110 198 96 286 132 128 4. Annual Subsidy in Rp.Bt!l. (A x ES) 67 12 90 24 46 287 77 72 664 ------Ur-s ------Local Local KCI Total TSP AS Total Subsidy excl. transfersetc. 228 287 77 72 664 Gas Subsidy In Rp.Bil1. 69 69 Return Foregone in Rp.Bill. 47 6 1 68 Total Subsidy Other than taxes and transfers U88 293 78 72 776 ASSIE March 1990 - 54 - ANNEX 2-7 INDONESIA FERTILIZER RESTRUCTURINGPROJECT FertilizerSubstdies By Comnany - 1989 Average based on 1989 Prices Urea TSP AS TSP Potash PUSRI Kujang Kaltim AAF PIM Gre-Ik Import Import Total A. 1989 Dom. Sales ('000tons) 1,117 440 928 120 460 1,200 653 314 S65 6,867 B. Prices (Rp.'O0Oper ton) 1. Ex-Factoryjxcluding Profit 118 126 146 261 146 J81 226 342 227 2. Profit to Producers 6 6 6 6 6 6 3. Farm Cate Price 169 169 169 169 169 188 169 188 176 4. Marketing Costs 85 46 96 96 106 73 67 78 42 S. Pusri marketingOverhead 1 1 1 1 1 1 1 1 1 6. Border Price (US/mt) 146 146 145 146 146 190 85 190 128 7. Border Price (Rp.'000/mt) 261 261 261 261 261 842 163 842 227 C. ProductionSubsidy - Econ. 1. Per ton Subsidy (Rp.'00O)(81+82-87) (138) (180) (110) - (111) 44 78 - - 2. Ratio as % (81+82)/B7 47 50 58 - 5. 118 151 - - g. Annual Subsidy in Rp.Bill. (A x C1) (154) (67) (102) - (61) 58 61 - - (261) D. FarmgateSubsidy - Econ. 1. Econ. Del. Cost (Rp'000) (9784+.86) 847 307 368 857 867 416 211 416 270 2. Per ton Subsidy (Rp.000) 178 138 189 188 198 228 42 228 94 3. Annual Subsidy in Rp.8ill (A x D2) 199 e1 176 23 91 274 27 72 SO 982 E. Total BudgetarySubsidy 1. Del. Cost in Rp.000/te 81+82+94+86209 177 248 357 268 460 289 416 270 2. Retail Price in Rp.'000/te83 169 169 169 169 169 188 169 188 176 3. Per ton Subsidy in Re'000 E1-E2 40 8 79 188 87 272 120 228 94 4. Annual Subsidy in Rp.Bill. (A x ES) 46 4 78 28 40 827 78 72 6o 721 ------Urea ------)Local Local Imp. KCI Total TSP AS TSP Total Subsidyexcl. transfersetc. 184 827 78 72 60 721 Gas Subsidy in Rp.Bill. 62 62 Return Foregone in Rp.Bill. 49 6 1 56 Total SubsidyOther than taxes and transfers 295 838 79 72 60 888 AS6IE March 1990 - 55 - ANNEX2-8 Page 1 ot a INDtONESIA FERTILIZERRESTRUCTURING PROJECT FertilizerSubsidiea 8Y Commany- 1990 Averagebased on 1989 *nd Prices Ures TSP AS TSP Potashi PUSRI Kujang Keltim AAF PIM Oresik Import Import Total A. 1990 Dom. Sales ('000tons) 1,400 640 1,082 120 460 1,220 674 181 68a 6,800 B. Prices (Rp.'000 per ton) 1. Ex-Factory excluding Profit 117 126 145 261 144 881 228 342 227 2. Profit to Producers 6 6 6 6 6 5 3. Farm Gate Price 186 185 185 186 16 210 186 210 210 4. Marketing Costs 84 46 94 95 110 81 S6 61 89 6. Pusri marketing Overhead 1 1 1 1 1 1 1 1 1 8. Border Price (US/mt) 146 146 146 146 145 190 85 190 126 7. Border Price (Rp.000/mt) 261 261 261 281 281 842 168 842 227 C. Production Subsidy 1. Per ton Subsidy (Rp. 000) (81+82-97) (189) (180) (111) - (112) 44 78 - - 2. Ratio as % (B1 B2)/97 47 SO 67 - 57 118 161 - - 3. Annual Subsidy in Rp.1111. (A x C1) (195) (70) (120) - (50) 64 53 - - (828) D. Farmgate Subsidy 1. Econ. Del. Cost (RpOOO) (97+.8456) 848 807 8S6 867 872 406 211 405 267 2. Per ton Subsidy (Rp.'O00) 161 122 171 172 197 195 26 196 57 a. Annual Subsidy in Rp.8111 (A x D2) 225 66 186 21 84 238 18 36 86 908 E. Total Budgetary Subsidy 1. Del. Cost in Rp.'OOO/te B1.929445B6 207 177 246 867 260 449 289 406 267 2. Retail Price in Rp.000/te 98 186 185 185 186 186 210 186 210 210 3. Per ton Subsidy in Re'000 E1-E2 22 (8) 60 172 76 289 104 196 67 4. Annual Subsidy in Rp.B1il. (A x Ea) 81 (4) es 21 84 291 70 as 38 578 ------Ure ------> Local Local Imp. KCI Total TSP AS TSP Total Subsidy excl. trsnsfers etc. 146 291 70 8S a8 678 Gas Subsidy in Rp.Bill. 78 73 Return Foregone in Rp.Bill. 58 6 1 84 Total Subsidy Other than taxes and transfers 276 297 71 86 S8 716 AS6IE March 1990 - 56 - ANNEX 2-8 Page 2 of 3 INDONESIA FERTILIZERRESTRUCTURING PROJECT FertilizerSubsidy - Estimate for 1990 Assumptionsused in the Estimates 1. The subsidyestimates have been prepared using the following assumptionsto provide the base for testing the impact of various options on the subsidy level. The estimatesdo not include subsidy on products other than the four considered,taxes and transfersto next year and from previous years. 2. The fertilizerconsumption in 1990 has been assumed to be the same as the GOI estimates for the agriculturalyear 1989-90 i.e., a total of 6,300 thousand product tons, consistingof 3,592 thousand tons of urea, 1,401 thousand tons of TSP, 674 thousand tons of ammonium sulphateard 633 thousand tons of potash. In view of the measures being adopted by the GOI to improve fertilizeruse efficiency,the actual consumptioncould be somewhat lower. 3. The ex-factoryprices of the domesticallyproduced fertilizershave been assumed to remain at the present level, effective from January 1, 1989 even though these are due for revision from January 1, 1990. 'An appropriate part of the deliverieshas been assumed to be bagged nd the rest in bulk. The ex-factoryprice for each plant has been estimatedbased on weighted average of bagged and bulk supplies. 4. The profit margin of Rp 5,000 per ton availableto the producershas been added as a separate line item under "Prices'for all domestic supplies except from Aceh. 5. Supplies from Aceh are assumed to be availableat projected1990 urea price. Imported supplies of TSP and potash are assumed to be available at landed cost even though a part of the potash supplies are obtained with grant funds. 6. The border prices are based on estimatesof projected1990 internationalprices, on FOB basis for urea and on landed cost basis for TSP, ammonium sulphate and potash. TSP border prices used are somewhathigher than the present likely deliveredcost from US Gulf, but the Indonesianstandards on water solubilityrequire import of higher water solubilitymaterial from other sources at a higher price. The sole purpose of using the border prices has been to split the total subsidy into productionand farmgate subsidiesand the assumed values do not have any impact on the size of the total budgetary subsidyexcept in the case of imports. 7. Farmgate prices are assumed to remain at the present levels of Rp 185,000 per ton of urea and ammonium sulphate and Rp 210,000per ton TSP and potash,which have been effectivefrom October 1989. These prices are due for revision from October 1990. - 57 - ANNEX 2-8 Page 3 of 3 8. Marketing and distributioncosts are assumed to remain at the present levels effective from April 1, 1989. An amount of Rp 1,100 per ton of product sold has been added as a separate line item to cover payment to Pusri towardsmarketing margin. 9. Gas subsidyhas been calculatedon the basis of an average of 35 million BTU average gas consumptionper ton of urea and assuming that the average economicvalue of natural gas in Indonesiais about $1.60 per million BTU against the present cost of $1.00. 10. The return foregonehas been calculatedat 15 percent on the normativeequity base of a typical plant of average vintage at Rp 21,600 per ton of urea, Rp 10,000 per ton of TSP and Rp 6,000 per ton of ammonium sulphate less Rp 5,000 per ton now provided to the producers. AS5IE March 1990 - 58 - ANNEX 2-9 INDONESIA FERTILIZERRESTRUCTtMING PROJECT Fertilizer Production Capacity ('000 tons per year) 1980 1981 1982 1988 1984 1985 1988 1987 1988 1989 1990 1991 1992 1m 1994 199 A. Urea Pusri I 100 100 100 100 100 100 100 Pusri lb 670 670 Pusr; II 0aso8ao 8so 8so 8so aso 8so a8o a8o 8o 9so 8so 880 670 670 570 Pusri III 5T0 670 670 570 670 670 670 670 570 670 670 670 670 670 570 670 Pusri IV 670 570 670 670 670 670 570 670 670 670 570 670 670 670 670 570 Total Pusri 1,820 1,620 1,620 1,620 1,620 1,820 1,620 1,520 1,520 1,520 1,520 1,520 1,520 1,710 2,280 2,280 Kaltim I 570 570 570 670 670 670 670 670 670 681 681 631 Kaltim II 670 570 670 570 570 670 670 670 670 670 670 670 Kaltim III 570 670 670 670 670 670 670 Total Keltim 1,140 1,140 1,140 1,140 1,140 1,710 1,710 1,710 1,710 1,771 1,771 1,771 Kujang I 570 570 670 670 670 670 670 670 670 670 670 670 570 670 670 570 Kujang II 670 670 Total Kujang 670 670 670 570 670 670 670 670 570 670 670 670 670 670 670 1,140 Isker.aarMud. 670 670 670 670 570 670 670 670 670 670 570 670 670 Aceh 570 670 670 670 670 670 650 860 860 860 860 650 650 Gresik 460 460 Total Urea 2.190 2.190 2.190 2.760 4.470 4.470 4.470 4,870 4.870 6.020 6.020 6,020 6.020 6.271 6.401 6.871 8. TripleSuparphosphate (TSP) Gres k I- 500 500 500 500 500 500 600 600 60 600 60 60 600 600 600 Gresik II S00 500 6So 6oo 6oo 6oo 6oo 6oo 60o 6oo 6oo 600 Total TSP 500 500 600 500 L.O00 1.000 1.200 1.200 1.200 1.200 1.200 1,200 1.200 1.200 1.200 1.200 C. Ammonium Sulfate (AS) GreslkI 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 Grestk II 260 260 260 260 250 250 260 250 260 260 260 250 GresikIII 200 200 200 200 200 200 200 200 200 200 Total AS 200 200 200 200 450 450 650 650 650 650 650 650 650 650 860 650 ASSIE March 1990 - 59 ANNEX 2-10 INDONESIA FERTILIZER RESTRUCTURINGPROJECT Expgrts of Amseeonisand Urea ('000 tons) 1982 1988 1984 1936 1096 1967 1988 A. Ammonia Pusri 16.0 NA Kujang Kaltim 168.2 197.6 264.4 225.6 NA PIM Acesh 0.8 1.6 1.0 1.2 NA Tota 164.0 199.2 216.4 242.6 NA 8. Urea Pusri 56.0 254.0 11.0 601.0 760.0 827.0 158.8 Kujang 20.0 62.0 217.0 74.0 94.8 KlttAm 59.8 78.7 216.9 PIM 104.0 106.0 181.9 Aceah 172.2 288.6 296.6 468.8 421.7 Total 75.0 816.0 188.2 784.6 1,486.9 1,048.0 1,028.0 C. Urea Exports by Country China 199.1 870.7 841.7 India 21.4 126.0 - Phillipines 75.0 160.9 50.0 126.8 286.9 160.2 Mataysea 66.2 118.0 165.1 29.4 62.6 Thailand 2.2 20.0 69.7 176.7 189.5 NA Singapore 19.4 80.6 106.4 28.8 Vietnam 85.9 165.0 98.1 Others 77.8 0.2 86.8 288.6 217.8 Total 76.0 816.0 1JB.2 784.6 1,486.9 1,048.0 ASSIE March 1990 - 60 - ANNEX2-11 INDONESIA FERTILIZER RESTRUCTURINGPROJECT Fertilizer Production Post ond Prolactod ('000 tons per year) 1982 1988 1984 1985 1986 1987 1088 1989 190 1991 1M 1998 1994 1m A. Urea Puort 1,480 1,621 1,688 1,677 1,528 1,480 1,881 1,445 1,445 1,446 1,445 1,626 2,082 2,160 Kaltim 141 400 580 858 1,009 1,454 1,611 1,540 1,540 1,540 1,60 1,650 KuJsng 514 578 s7s 494 646 S52 582 542 542 542 U42 542 542 618 Iakender Muds 566 687 589 602 542 542 542 542 542 642 542 Aesh 68 549 548 629 572 576 618 618 618 618 618 618 6S1 Orealk 280 410 Total Urea 1,944 2,265 2,906 8,586 4,020 4,046 4,149 4,601 4,658 4,687 4,687 4,868 5,664 6,898 8. TrIple SuporphosDhote 577 784 1,002 1,007 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 C. Amonium Sulfate 210 208 804 475 578 674 574 650 660 650 660 e60 650 060 ASSIE March 1990 I - 61 - ANNEX 3-A Page 1 INDONESIA FERTILIZERRESTRUCTURING PROJECT FERTILIZERMARKETING AND DISTRIBUTIONSTUDlES Ternmsof Reference A. Background Consumption 1. Agricultureis an importantpart of the Indonesianeconomy and its performancein recent years has been impressive. Agricultureoutput during the past 15 years has grown almost twice as fast as the population. The governmenthas developedpolicies to promote food self-sufficiency,including subsidiesfor key inputs such as fertilizerand rural infrastructure Fertilizerconsumption in 1987 totaled 2.3 million nutrient tons versus only 0.6 million tons ten years previously. By keeping farm fertilizerprices low and increasing'.he supply of fertilizer,Indonesia has been successfulin promoting food self-sufficiency,particularly in rice. However, the subsidy system has contributedto an increasingbudgetary deficit as well as to inefficienciesin the fertilizerindustry. Location and Capacity of ProductionUnits 2. Productionof fertilizerin Indonesiaoccurs at six locations throughoutthe country. The end product from five of these productionsites is urea (a total of about 4.3 million tpy). A smalleramount of ammonia is also shipped from the R!kltimsite. The sixth site produces triple superphosphate(TSP) ar-dammonium sulfate (AS); about 1.2 million tpy and 0.65 million tpy, respectively. A summary of the productionfacilities is given in Table 1. - 62 - ANNEX 3-A Page 2 Table 1: INDONESIANFERTILIZER PRODUCTION UNITS Estimated General Number of annual Productionsite location Type of plant plants capacity ('000 mtpy) Asean Aceh North Sumatra Ammonia/urea 1 650 urea IskandarMuda North Sumatra Ammonia/urea 1 570 urea PUSRI South Sumatra Ammonia/urea 3 /a 1,520 urea Kujang West Java Ammonia/urea 1 570 urea Kaltim Kalimantan Ammonia/urea 3 330 ammonia 1,710 urea Gresik East Java Ammonia/urea/b 1 -- ammonia/c TSP 2 1,200 TSP AS 3 650 AS /a Does not includePUSRI I, which is being phased out. lb Urea plant shut down. /c Quantity of ammonia uncertain. All is converted to AS. Marketing and Distribution 3. The disLributionof fertilizerhas been the responsibilityof PUSRI, one of the country's largestnitrogenous fertilizer producers. Since 1988, the cooperatives(KUDs) handle all of the retail sales. Until 1988 fertilizerswere sold to farmers at a single fixed price for all products. Price differentiationaccording to nutrient content has been recognizedas desirable,but so far only modest changes in value by nutrient have been introduced. Prices are still uniform (freightequalized) throughoutthe country. Although only 26 percent of the fertilizerproduct tons are TSP, 46 percent of the cost of the subsidynationwide is for TSP. The situationwith urea is reversed. Undoubtedly,the similarprice for all fertilizersresults in a differentproduct mix than what market forces would dictate. Exports from the nitrogen industry have been quite successfulin improvingindustrial perforn,aace;the high cost of TSP and AS importshave offset many of the benefits achieved by the nitrogen industry. However, two nitrogen companies, PUSRI and Kujang, are among the lowest-costproducers in the world, while Kaltim, Asean Aceh and IskandarMuda are higher-costproducers due to various conditions. The cost of deliveringfertilizers to the farmers is high compared with other developingcountries (in part because of geography)and contributesto the cost of subsidies. Steps such as allowingKujang *nd Gresik, which are well situated,to distributefertilizer could reduce distributioncosts. The costs of subsidiesand whether they should be completelyor partiallyeliminated in some or all locationsand for some or all products are major issues. Closely related issues are how much impact prices would have in changing the product mix and how to reduce the high costs of distribution. Should market forces dictate prices, or should prices be set to encourageuse of certain products? The solution to these issues is comple:x - 63 - ANNEX 3-A Page 3 because of the Government'sobjectives to maintain food self-sufficiencyand maintain farm income. 4. In addition to the basic productionunits shown in Table 1, a fully integrated,largely state-ownedphysical distributionsystem is used to move all products from the factory to the farm. The present system for urea is primarilybased on ocean-goingbulk carrierswith a capacity of 7,500 tons each. These bulk carriers deliver fertilizerto eight strategicallylocated bagging stationswhere the fertilizeris bagged and dispatchedby rail and truck to inland storage and distributiondepots and then sent to rail delivers and onward to individualfarmers (see Map). The same basic system is used for TSP and AS, with the exceptionthat all bagging of these products occurs at the oroductionsite (Gresik)and the bulk carriers are not used. Summary of PrincipalIssues 5. The principalissues in fertilizermarketing and distributionare: 1. High distribution cost. 2. Impact of subsidy removalon demand and cost to government. 3. Pricing policy and productmix. 4. Use of importsversus domestic production 5. Controlledversus free marketing. 6. Appropriaterole of governmentand private sector. B. Terms of Reference: Distribution Objectives 6. The main objectivesof the distributionstudy are to (a) prepare an update of the 1986 PUSRI/IFDCstudy; (d) prepare an assesjmentof the current distributionsystem and the costs by component; (c) prepare a ten year forecast of demand and supply; and (d) assess any physical changes needed in the distributionnetwork over the next ten years. Detailed Terms of Reference 7. PUSRI should prepare a concise update of the 1986 PUSRI/IFDC fertilizerdistribution study that would describe and assess in detail (a) the present system for distributionof each area; (b) the ownershipand operation of each componentof the network; and (c) the roles of the private sector, cooperatives,and the Ministry of Agriculture. 8. The update should also includea detailed analysis of how exports are handled, includingcosts, from each factory. Issues should be addressed such as how to minimize export earnings and how to minimize transportcosts, includingthe links with domestic distribution. Specifically,can a system for "productswap" be arranged that would improve efficiency and maintain each - 64 - ANNEX 3-A Page 4 company'spresent incentiveto maximize profits through export sales linked to high productionefficiency? 9. A ten year supply/demandforecast should be prepared that takes into account the proposed removal of subsidies,recent consumptiontrends, agriculturalinformation such as cropping patterns,land use and availability, irrigation,manEgement, etc. The supply forecast should also take into account recent shifts in productiontoward the market areas, plus a realistic assessmentof the impact of supergranularurea and other product changes on the demand pattern. 10. An assessment should be made of the future requirementsin the distributionnetwork based on the above supply/demandforecast and assessment of present system. Personal Requirementsand Costs of the Study 11. The distributionstudy would be undertakenby P.T. PUSRI, at its own cost. C. Terms of Reference: Marketing objectives 12. The main objectivesof the marketing study are to (a) appraise the present fertilizermarketing system in Indonesia for determining inefficienciesand constraints;(d) compare it with marketing systems in other countriesthat may provide useful guidelines for improvement(c) recommenda marketing system(s)that will make the appropriatefertilizers available on a timely basis to farmers in the most cost-effectivemanner; (d) determinethe advantagesof having a competitivefertilizer marketing system; and (e) determine the infrastructureneeds required for the recommendedfertilizer marketing system. In addition,the study would assess the impact of changes in fertilizerprices on use of fertilizerand also analyze the recommended changes in the appropriatefertilizer mix, includingtypes, specificationetc. 13. A marketing system should be prepared that would (a) promote competitionat wholesale and retail levels and minimize the cost of fertilizer delivery to the farmer; (b) facilitatethe ongoing policy action of subsidy removal; (c) eliminatethe need for administrativecontrols on storage and distribution;(d) accommodatethe freightequalization policy to the maximum extent possible: and (e) promote market developmentfor the most appropriate fertilizers,grades, specifications,etc. Detailed terms of Reference 14. Part 1: Appraisal of present fertilizermarketing system in Indonesia. (a) Review of the existing fertilizerdemand, utilizing the PUSRI update of the 1986 PUSRI-IFCFertilizer Distribution Study (see Section B, paras. 7-9). - 65 - ANNEX 3-A ISage5 (i) Where data permit, assess the trends and patterns of fertilizeruse in Indonesiaover the past ten years for each district by differentecological zones and by crops. (ii) Establish demand by seasons and months. (iii) Review the currentmethod of demand forecastingused at local and national levels as identifiedin the PUSRI update. (b) Review appropriatenessof fertilizersfor differentcrops grown. (i) Review fertilizerrecommendations against latest fertilizer research and determineif fertilizerproducts being used are the most appropriateones available. (ii) Compare nutrient cost at selected retail levels for the major fertilizersused i..principal cropping areas. (iii) Estimate the economic incentiveto farmers for using fertilizerfor majer crops by determiningvalue/cost ratios by using Indonesia'ssystem of output prices. (c) Evaluate the current fertilizerpricing policy of the governmentand the methodologyused in determining: (i) product prices; (ii) nutrient prices; (iii) marketing cost; (iv) marketingmargins; (v) subsidy determinationand cost to government;and (vi) buffer stocks. (d) Review the present fertilizermarketing system and: (i) identify the marketing organizationalstructure employed by PUSRI at all levels incrl.dingprivate, KUDs (cooperatives), estates, etc.; (ii) determine the individualorganizations and the role of each, with special attentionto authority,responsibility, and accountability; (iii) assess adequacy of the credit system as it relates to fertilizersales; (iv) assess the capabilityof the key staff in fertilizer marketing; - 66 - ANNEX 3-A Page 6 (v) assess the operationalefficiency of the fertilizerwarehouse and distributionsystem and determine its ability to serve retailers,availability of supply, and logisticplanning; (vi) determinecurrent level of buffer stocks; (vii) identify the principalconstraints to efficientmarketing by categoriesof marketing function includingproduct pricing, buffer stocks,distribution, promotion, timeliness, etc.; (viii) review the presentmonitoring system for quality control, pricing, supply and demand, and market coverage employed by the government,PUSRI, and other manufacturers,and other marketing channels;and (ix) compare the cost effectivenessof the present marketingand distributionsystem with India, Pakistan, and Bangladeshor other mutually agreed countries. (e) Prepare an environmentalassessment of: (i) impact of price changes resultingfrom subsidy removalon fertilizeruse; (ii) present and recommendedchanges in product types and grades (i.e., PAPR, P205 water solubilityin TSP, DAP, NPK, sulfur- enhanced products); (iii) product applicationpractices (i.e., urea prill vs. granules). The consultant should work with the Ministry of Agricultureto develop a long-termprogram for monitoringground water contaminationfrom fertilizeruse. Part 2: Determining a recommended fertilizer marketing system(s). (a) Visit and assess the potential capability of the basic manufacturing units and other suppliers to market its products. (b) Identify the markets each basic unit could potentially serve. (c) Identify the marketing channels required to serve the markets. (d) Diagram the organizational structure required for each production unit to carry out the marketing functions. (e) Develop a fertilizer pricing plan for the recommended marketing organization(s) incorporating the government's plan for elimination of the subsidy over a five-year period: (i) factory gate price (uniform,free, or other); (ii) transportation (subsidy or actual) cost; - 67 - AN4EX 3-A Page 7 (iii) warehousing (subsidyor actual); and (iv) pricing policy by region (or subregion). (f) Identify adequacy of credit programs required for fertilizersales: (i) current nonpaymentproblems; and (ii) identifyneeds for further study. (g) Determine institutionallinkages and the role of each in the new system: (i) role of government; (ii) role of private sector; (iii) research; (iv) Ministry of Agriculture; (v) Ministry of Industry;and (vi) Ministry of Cooperatives. (h) Determine governmentpolicy and actions necessary for successfully implementingthe new system(s): (i) quality control; (ii) pricing; (iii) supply and demand; (iv) market coverage; (v) efficiencyof manufacturingand marketing;and (vi) buffer stocks. (j) Determine the staff requirementsby positions required for each of the rscommendedfertilizer marketing organizations: (i) training requirements;and (ii) staff cost. (k) Describe quantitativelythe impact of the new recommendedfertilizer marketing system(s)on: (i) prices; (ii) supply; - 68 - ANNEX 3-A Page 8 (iii) product mix; (iv) fertilizeruse; (v) crop production;and (vi) anticipatedmarketing cost of new system versus cost of old system. (1) Develop a time-framedplan of action for implementingthe recommended marketing system(s): (i) governmentacceptance; (ii) governmentpolicy and actions; (iii) changeoverto new systems; (iv) removal of subsidy; (v) new pricing policy; and (vi) personnel requirements. Part 3: The advantage of the recommendedfertilizer marketing systems. (a) Assess the recommendedfertilizer marketing system(s)for introducing and transferringrecommended and proven new technologies: (i) new and improved fertilizersand product mix, e.g., briquettingof urea, nitrogen and phosphateproducts mixed with sulfur, and partial acidulatedphosphate rock (PAPR);and (ii) ability to complementthe extensionservice in advising farmers and recommendedpractices. (b) Ability of new system(s)to lower fertilizercost for the farmer and subsidy cost for the government. (c) Ability of new system(s)to mobilize private capital. (d) Ability of new system to make the appropriatefertilizers more timely available to farmers. (e) Ability of new system(s)to increasemarket coverage. PersonnelRequirements and Costs of the Marketing Study 15. It is estimatedthat the total cost of the study would amount to US$400,000,of which US$300,000would be in foreign exchange. Estimated personnel and time requirementsfor the marketing study are shown in Table 2. - 69 - ANNEX 3-A Page 9 Table 2: PERSONNELAND TIME REQUIREMENTS National Field Report Expatriates counterparts study preparation Total ------(weeks)------ Marketing specialists: - Systems Same 10 6 16 - Prices Same 10 6 16 Agriculturaleconomist Same 10 4 14 Agronomist Same 4 4 8 Engineer Same 4 4 8 Total 38 22 62 - 70 - ANNEX 3-B Page 1 INDONESIA FERTILIZERRESTRUCTURING PROJECT DEVELOPMENTOF FERTILIZERINDUSTRY ENVIRONMENTALIMPROVEMENT PROGRAM Terms of Reference A. Background 1. The Governmentof Indonesiahas undertakena program of environmentalimprovement within the country. An extensive system of regulationshas been developed,although there are discrepanciesbetween the national and local levels. Monitoringand enforcementare also lacking. The present system requires that an environmentalimpact assessment (EIA) be prepared as part of the approval process for any new investment. A major investmentrequires a cormprehensiveEIA (calledan AMDAL) covering all related and surroundingareas and facilities;a smalleroptimization investment requires a scaled-down,less comprehensiveEIA called a PEL. 2. The fertilizerindustry consists of six major products (five nitrogen, one nitrogen/phosphate)throughout the country. The industry also produces a variety of industrialchemicals to be covered under this study. A sunmnaryof the production facilitieswas given in Table 1 of-Annex 9-A. There is a continuingprogram of optimizationand technologyupgrading within the industry, includingan increasingawareness of the importanceof environmental factors. A part of the ongoing optimizationprogram is being supportedby the Bank, includingwork at five of the six companies. Two full EIAs have been prepared, and three scaled-downEIAs are under preparation. Local consultants have developed some capabilityin the preparationof EIAs. 3. The work under this assignmentwill utilize existing material and undertake additionalwork as required to develop a comprehensiveenvironmental improvementprogram for the fertilizersector. B. Terms of Reference Objectives 4. The objectivesof the assignment involve assistingthe Government and the industry in: (a) developinga comprehensiveenvironmental improvement program for the sector includingrevised standards; (b) improvingthe safety performanceof the industry; (:) evaluatingcurrent effortswithin the Ministry of Environment (KLH) and Ministry of Industry (MOI) to improvemonitoring and compliance, includingproposals regardingincentives and penaltiea for enforcement; - 71 - ANNEX 3-B Page 2 (d) identifyingadditional optimization programs and investmentsneeded to enable the industry to meet the revised standards; (e) developing an environmentalmanagement program within the enterprisesand the MOI to implementthe environmentalimprovement program; and (f) assessing the long-termdevelopment prospects for the industry in regard to environmentalimpact, land use, resource base, resettlement,and social issues. Detailed Terms of Reference 5. The work program will include: (a) reviewingexisting national and local standardsapplicable to the fertilizerindustry--on the basis of current technology, internationalindustry standardsand guidelineswithin selected, relevant industrialcountries, recommendany desired revisionsin Indanesianstandards and, if appropriate,a schedule for implementingthose standards; (b) evaluatingthe performanceand suggestingany improvementsin the institutionalrequirements of MOI and KLH in managing the EIA process and the proposed environmentalimprovement program; (c) undertakingan air, water, and solid waste generation survey in the industry to identify the major source of waste, includingenergy at each unit within each factory (this survey will include a detailed material and energy balance for each unit); (d) identifyingand evaluatingappropriate steps to minimize waste generationand maximize recyclingto achieve the recommended effluent star.dards(these steps could include different process technology,process optimization,and new procedures); (e) evaluatingexisting safety programs includinganalysis of hazardous materials and handling hazardousemergencies in comparisonwith appropriateinternational standards and propose any upgrading deemed necessary. (f) developinga system for environmentalmanagement within the enterprisesnd MOI that would includemonitoring and implementation of the environmentalimprovement program; (g) preparinga survey of land use (existingand future)to assess impact of the industry on surroundingenvironment, the need for revegetationand green belts, protectionof any critical flora/ faunalhabitat,impact of encroachingurbanization on existing factoriesand townships,need for resettlementand its impact,and making appropriaterecommendations; - 72 - ANNEX 3-B Page 3 (h) recommendinga training program, if desired, to provide for long- term environmentalneeds for the sector. 6. Specific areas for attentionunder the study include: (a) storage ureas (ammonia,sulfur, acids, rock, and TSP) to minimize losses,dust, and gaseous dischargesuch as F, NH3S; (b) calcium carbonate,to reassess recyclingto cement; (c) total F, NO and SO2 air emissions; (d) metal content in water treatment (Cr. P20.); (e) optimizinguse of power and natural gas; (f) alternativeproducts such as lower-gradephosphate and sulfur- containingproducts and industrialchemicals; and (g) any toxic materials used in the industry. Approach and Implementation 7. The followingteam of expertswill be required: (a) three expatriate specialists(one of which would be the team leader): (i) an industrialenvironmental specialist with specific experience in phosphatelsulfuricacid industry; (ii) an industrialenvironmental specialist with specific experience in the nitrogen fertilizerindustry, including safety; (iii) an environmentalspecialist with specific experiencein regulatorysystems, institutions,environmental management and training,land use, and resettlement; (b) three local consultantswith experiencein fertilizer industry and in preparationof EIAs and full knowledgeof local environmental regulationsand institutions. 8. The consultantteRm will prepare a comprehensivelong-range environmentaldevelopment strategy for the fertilizerindustry in Indonesia, including (a) long-terr.development strategy, (b) revisednational environmentalstandards, (c) specific investmentsand other measures needed to achieve these standards, (d) upgraded safety program, (e) managementsystem for implementingthe recommendedenvironmental programs, and (f) a monitoring system to assess progress. 9. A three-stageapproach is suggested. In the first stage, the consultantteam leader should prepare a detailedwork program and a list of internationaland local referencematerial to be used as a basis for the work. - 73 - ANNEX3-B Page.4 The team leader would undertakea short visit to Indonesiato agree with MOI on the selectionof the local consultantsthat will form part of the team. The team leader should prepare a detailed questionnaireto be given to each enterprisebefore the second stage. MOI will also designate its environmental support staff during this time, who will come from the fertilizercompanies concerned. 10. The second stage will include a field visit of about eight weeks, to work with MOI, KLH, and the fertilizerenterprises in preparing the evaluation and recomrendationsconcerning environmental improvement in the industry, includingand interim report to be submittedto the Government and the Bank before leaving Indonesia. That reportwould include a specific program to be agreed within Indonesiaover the followingthree months by the relevant Indonesianentities. An action programwould also be included,which the Indonesia authoritiescould begin implementingimmediately. The Bank would submit its comments on the draft interim report to Governmentwithin one month. 11. The third stage would includea three-weekvisit to Indonesia,after an interval of about three months, to assess progress and prepare an updated analysis and recommendations,as well as to complete a long-rangeplan for implementingthe various recommendationsmade. Following this final mission, a final report should be submittedto Governmentand the Bank within three months. 12. The phased approachwill require an elapsed time of about 9 months to complete, includingreport writing, and would involve about 25 man-months of external consultanttime plus about _ man-months of local consultants, plus travel expenses,plus report writing. The total budget is estimatedat US$470,000,as shown below. - 74 - ANNEX 3-B Page 5 ESTIMATED COST (US$) First and Second Phases - External Consultants 200,000 (15 man-months) - Local Consultants 45,000 (12 man-months) - Travel 10,000 Local 20,000 Foreign Subtotal 265,000 Third Phase - External Consultants 110,000 (8 man-months) - Local Consultants 25,000 (6 man-months) - Travel 10,000 Foreign 20,000 - Report writing Subtotal 175,000 30,000 Contingencies Total 470,000 Summary Local Foreign Total 80,000 390,000 470,000 - .75 - ANNEX3-B Attachment Page 1 PRODUCTIONTECHNOLOGY AND ENVIRONMENTALISSUES ProductionTechnology 1. Ammonia/Urea. The ammonialureaplants utilize a mixture of process technologiesincluding, but not limited to, H.W. Kellogg (UnitedStates), Lurgi (Germany),Haldor Topsoe (Denmark),Mitsui Toatsu (Japan),and Stamicarbon(Netherlands). Natural gas is the common fuel and feedstock; however, the ammonia plant in the Gresik complex is based on gasificationof low sulfur fuel oil using technology suppliedby B.P.M./Shell(Netherlands). The ammonia/ureaunit at Gresik is due to be replacedwith anew, large-scale unit (1,350 tpd ammonia/1,400tpd urea) based on natural gas. 2. With the exceptionof one small (350 tpd) unit at the PUSRI site (PUSRI I), all urea is prilled. The PUSRI I unit was retrofittedwith granulationcapability in 1979; however, the granulationunit is currentlynot being operated,and the entire PUSRI I unit is either shut down or in the process of being phased out. PUSRI I is expected to be replacedwith a new unit (PUSRI V) tentativelyscheduled for completion in 1992. 3. TSP and AS. Tbs Gresik facility is dedicatedto the production of TSP and AS. However,within thL cemplex, a large number of intermediate process units based on a variety of technologiesexists including (1) ammonia (a mix of at least four technologies),(2) sulfuricacid (Monsanto), (3) phosphoric acid (Nissan),(4) gypsum conversionto AS and chalk (Merseberg),(5) AS by direct neutralization(two units), (6) granular TSP based on stream granulationof run-of-pilematerial (Chimico/Spie Batignolles). In total, process technologiesfrom approximatelysix countries are representedin the major productionunits at the Gresik site. Levels (Generation)of Technology 4. Indonesia'sfertilizer industry has evolved over a period of about 25 years, beginningwith the formationof Gresik and PUSRI I in the mid-1960s but most of the plants came onstream after the mid-1970s. The early plants (PUSRI I and II and Gresik) were very small by today's standards,having a capacity equivalentto only about 100,000-300,000tpy urea. The Gresik plant produced even less urea because much of the ammonia discharged from the once- through or partial recycle urea plant was used to produce AS. 5. Today, Indonesiaproduces about 5.0 million tons of urea, 1.2 million tons of TSP, and 0.65 million tons of AS. This growth in capacity has also been accompaniedby several improvementsin the process technology, making the latter plants more energy efficientand less polluting than the earlier units. Furthermore,retrofitting of certain process units (for example, the ammonia converter)to improve the operatingefficiency of some of the older plants has occurred or is under consideration. The conversionof waste phosphogypsumfrom the Gresik phosphoricacid unit to AS is another example of innovationsthat have occurred over the years. - 76 - ANNEX 3-B Attachment Page 2 Potential Sources of Pollution 6. The fertilizer industry of Indonesia is quite representative of the industry worldwide because it is basic in nitrogen production and, except for not mining phosphate rock, in phosphate fertilizer production. Potash, if needed, is imported in the finished form. Potash may also be used at the Gresik facility as an intermediate to produce certain NPK products; however, this is currently not done. 7. The following is a summary of the major effluents (pollutants) that may be discharged into the environment by the Indonesian fertilizer industry: Production Unit(s) Potential Effluents (Pollutants) Nitrogen complex Thermal (in cooling water) Ammonia Ammonia Urea Sulfur particulate Sulfur compounds Nitrogen oxides Zinc oxide (desulfurization) Waste catalyst Methanol Carbon monoxide Carbon dioxide Oil (compressors) Miscellaneous hydrocarbons Particulate (primary reformer) Urea particulate (prill tower) Various (due to process leaks) Plant site rainwater runoff Phosphate complex Thermal (in cooling water) (Gresik only) Sulfur particulate Sulfuric acid Sulfur oxides Phosphoric acid Fluorine TSP Ammonia AS Waste catalyst Particulate (phosphate rock, sulfur, TSP, AS) Gypsum stack runoff and particulate Heavy metals Radon Various (due to process leaks Plant site rainwater runoff In addition, some pollution in the form of dust, spillage, and rainwater runoff is associated with the physical distribution system (plants, bagging stations, and warehouses) and the raw material unloading operations at Gresik. - 77 - ANNEX 3-B Attachment Page 3 8. On the basis of the foregoingprofile and a preliminaryassessment of work, the followingmajor issues should be considered. Issue 1. RELEVANCE OF EXISTING OR PROPOSEDENVIRONMENTAL QUALITY STANDARDS (NATIONALAND PROVINCIAL)AS INFLUENCEDBY (1) THE LOCATION OF THE PRODUCTION FACILITY, (2) TEH 'YPESOF POLLUTIONEMITTED, AND (3) THE INTERNATIONAL STANDARDS. To illustrate,the Kujang urea and the Gresik TSP/AS facilitiesare located in densely populated or intensivelycultivated agricultural areas, while the other four nitrogen facilitiesare located in areas more remote from major populationcenters. Should the environmentalquality standardstake population density, plant location,type of process (natureof effluents),and internationalstandards into consideration? Issue 2. DIVERSITYOF AGE (GENERATION)OF PROCESS TECHNOLOGYUSED AT THE VARIOUS PRODUCTION SITES. The wide diversityand age (old versus state-of-the-art)of technologyused in Indonesia, togetherwith the large number of intermediateprocess plants (steps)within a given production complex,will have major impact on the scope of the plant survey activity and on the formulationof an investmentstrategy that will bring the units into compliancewith standardsthat are ultimately formulated. Should the survey work be limited to only those plants that are not expected to be phased out in the near future? Should the formulationof standardstake into account the age of the plant? Issue 3. SETTING ENVIRONMENTALQUALITY STANDARDSTHAT ARE PRACTICALAND ENFORCEABLE. There is a general lack of published area about actual pollution from various fertilizerproduction units. Worldwide, these data, even if known, are viewed as confidentialbi' most producersand are generallynot available. Data regardingpotential pollution sources and quantitiespublished by process licensorsare generallynot routinelymonitored and confirmedin most production units unless there are well-enforcedstandards (laws) in place. The existence of a standard is no assurance that a plant is in compliance. In some cases, the technologyrequired for accuratelymeasuring and routinely monitoring certain process streams may not be available. For example, specializedtechniques may have to be developedto measure the particulate (dust) and ammonia emissionsfrom the large flow of air exiting the urea prilling towers. Issue 4. QUANTIFYINGTHE INFLUENCEOF MANAGEMENT OF POILUTION. The environmentalimpact of a processingunit is not only determinedby the process technology. Management,especially as it pertains to operationsand maintenance,often has a significantimpact on the level of pollution. Thus, the survey work must also include an evaluationof the relative impact of technologyand management on the level of pollution observed at each unit. Attac,ament Page 4 Issue 5. CURRENT LEVEL OF LOCAL ACTIVITY IN ENVIRONMENTALPROTECTION. The level of existing expertiseand current level of pollutionmonitoring and control activitiesin Indonesiamust be determinedduring the design of the overall program. This will help to determine the level of expatriate expertiseneeded to perform the initial survey of effluentsdischarged from the production sites. Issue 6. IMPACT OF INVESTMENTCOSTS ON PRODUCTIONCOSTS. Modificationof existing technologiesor installationof new technologiesto eliminate or reduce the level of pollutionmay increasecapital and operating costs. The recovery of these costs during the life of a project will increase productioncosts unless these environmentallysafe technologiesare fully or partially subsidized. A profile of productioncosts resultingfrom new technologiesshould be developed. Tradeoffsbetween investmentcosts and levels of pollutionshould be assessed througha sensitivityanalysis to identify the least-costprocess for a given level of pollution. Issue 7. SEQUENCINGAND PHASING OF ACTION AND INVESTMENTPROGRAM. Having determinedthe least-costprocess for an acceptablelevel of pollution, and its impact on production costs, the issues related to the implementation of such programs should be addressed. Special attentionshould be paid to capital and manpower requirementsand the timing of implementationof these programs. 'age INDONESIA FERTILIZER RESTRUCTURINGPROJECT PROJECT COST AND FINANCING PLAN Local Foreign Total ----- Million---- I. Project Cost Gresik RestructuringComponent Ammonia/UreaPlant la Ammonia Process Licensor (Kellogg) - 93.1 93.1 Urea Process Licensor (T.E.C.) - 32.5 32.5 Civil Works & Erection (IKPT) 100.5 - 100.5 Gresik Supplied Equipment & Services 16.0 0.7 16.7 Subtotal 116.5 126.3 242.8 Plant Modernization 2.0 8.8 10.8 Subtotal Gresik Restructuring 118.5 135.1 253.6 Optimization Component PUSRI II Urea 7.8 19.7 27.5 PUSRI Effluent Treatment 0.8 2.3 3.1 Kaltim I Ammonia/Urea 3.9 32.8 36.7 Kujang Ammonia 2.0 11.4 13.4 PIM Ammonia 2.0 9.6 11.4 Subtotal Optimization 16.3 75.8 92.1 Studies Component Marketing and Distribution 0.1 0.3 0.4 Development of Fertilizer Sector EMP 0.1 0.4 0.5 Subtotal Studies 0.2 0.7 0.9 Total Base Cost Estimate (BCE) 135.0 211.6 346.6 Physical Contingencies Gresik RestructuringComponent lb 0.1 0.4 0.5 OptimizationComponent 0.8 3.8 4.6 Subtotal 0.9 4.2 5.1 Expected Price Increases Gresik RestructuringComponent lb 0.1 0.6 0.7 OptimizationComponent 1.1 6.0 7.1 Subtotal 1.2 6.6 7.8 Interest During Construction Gresik RestructuringComponent 46.4 - 46.4 OptimizationComponent 18.4 - 18.4 Subtotal 64.8 - 64.8 Working Capital /c Gresik RestructuringComponent 20.0 - 20.0 Total Project Cost 221.9 222.4 444.3 - 80 - ANNEX 4 Dage 2 II. PROJECT FINANCING PLAN (SUMMARY) Equity 143.8 0.7 144.5 LT Borrowing - World Bank - 221.7 221.7 Medium Term Borrowing (BNI 46) /d 58.1 - 58.1 ST Borrowing (BNI 46) 20.0 - 20.0 Total Financing Required 221.9 221.4 444.3 III. DETAILED FINANCING PLAN Gresik Restructuring Component Equity (Gresik) 107.0 - 107.0 LT Borrowing - World Bank - 136.1 136.1 Medium Term Borrowing (BNI 46) 58.1 - 58.1 ST Borrowing (BNI 46) 20.0 - 20.0 Subtotal 185.1 136.1 321.2 Optimization Component Equity (Four Fertilizer Companies) 36.6 - 36.6 LT Borrowing - World Bank - 85.6 85.6 Subtotal 36.6 85.6 122.2 Studies Component Equity (Five Fertilizer Companies) 0.2 0.7 0.9 Subtotal 0.2 0.7 0.9 Total Financing Required 221.9 222.4 444.3 la Based on prill alternative. lb Contingencies only on modernization of Gresik's existing plants. /c Incrementalworking capital for optimizationcomponent negligible. /d Bank Negara Indonesia 1946. AS5IE October 1990 I INDONESIA FERTILIZERRESTRUCTURING PROJECT Potrokimia Gresik Restructuring Component Detailed Cost Estimtes (t million) Total Year a Year 4 Year I Year 2 Foreign Total Foreigr Total Local Foreign Total Local Local Foreign Total Local Foreign Total Local 1. Petrokisis Gresik Ammonia/ - 93.1 98.1 Urea Facilities - 22.3 22.8 - 4.0 4.0 - 11.0 11.0 - 65.8 55.8 32.5 32.5 Amonis prccess liconsor - 8.7 8.7 - - - - a.8 3.8 - 20.0 20.0 100.5 - 100.5 Urea processlicensor 25.3 - 26.8 3.4 - 3.4 12.2 - 12.2 E9.6 - 59.8 18.o - 16.0 Civil works and erection 5.0 6.0 - e.o - - - equipmnt 5.0 - 5.0 6.0 - - - 0.7 0.7 Creelk-supplied 0.8 0.8 - 0.2 0.2 - - Consulting service - 0.2 0.2 - 3.4 4.1 7.5 118.5 126.3 242.8 84.6 78.1 140.7 31.3 31.1 62.4 Subtotal 17.2 15.0 82.2 20.0 0 - - - - 20.0 - - 20.0 - 20.0 - - Capital - - - 12.6 42.8 - 42.6 Working - 9.6 19.2 - 19.2 12.6 Interest during constr. 1.8 - 1.3 9.6 179.1 126.8 305.4 170.8 S0.5 31.1 81.8 1S.9 4.1 20.0 Total CostL! 18.5 16S0 a3.5 94.2 7e.1 2. Petrokimis Greslk Plant 2.0 8.5 10.6 Modernization 7.0 1.0 2.6 3.6 - - - works - - - 1.0 8.0 - 0.3 0.8 Equipmsntand Civil 0.1 0.1 - - - ConsultingServices - 0.2 0.2 - 0.5 0.1 0.1 - - - 0.1 0.4 - - - 0.1 0.8 0.4 - 0.1 0.6 0.7 Physical Contingency 0.3 0.3 0.1 0.8 0.4 - - - Price Contingency - - - - 2.2 9.8 12.0 1.1 6.7 7.8 1.1 2.9 4.0 - Subtotal - 0.2 0.2 3.8 - 3.8 0.8 1.5 - 1.6 1.7 - 1.7 Interestduring constr. - - - 0.8 - - 1.7 6.0 9.8 15.8 1.7 8.7 8.4 2.6 2.9 .S 1.7 Total Cost - 0.2 0.2 17.6 4.1 21.7 es.L 136.1 321.2 96.9 82.8 178.7 53.1 34.0 87.1 Total Component Cost 18.5 15.2 33.7 to firm price contracts. Lf No pric, or physical contingenciesduo ASSIE October 1990 - 82 - ANNEX 5-2 INDONESIA FERTILIZERRESTRUCTURING PROJECT PUSRI II Urea OptimizationProject - Capital Cost Estimates (millionUS$) Local Foreign Total Equipment,mat?rials and spares 1.00 15.16 16.16 Freight, handl.ng and insurance - 1.07 1.07 Subtotal 1.00 16.23 17.23 License and engineeringservices - 3.19 3.19 Erection and commissioning 6.29 - 6.29 Other costs 0.53 - 0.53 Consultantsservices 0.25 0.25 Total Base Cost Estimate (BCE) 7.82 19.67 27.49 Physical contingency 0.39 1.12 1.51 Price contingency 0.62 1.72 2.34 Total InstalledCost 8.83 22.51 31.34 Interestduring construction 4.97 - 4.97 Total FinancingRequired 13.80 22.51 36.31 AS5IE October 1990 - 83 - ANNEX 5-3 INDONESIA FERTILIZERRESTRUCTURING PROJECT PUSRI Effluent TreatmentFacilities (million US$) Local Foreign Total Equipment,materials and spares 0.80 2.30 3.10 Total Base Cost Estimate (BCE) 0.80 2.30 3.10 Physical contingencies - 0.11 0.11 Expected price increases - 0.17 0.17 Total InstalledCost 0.80 2.58 3.38 Interest during construction 0.6q - 0.64 Total FinancingRequired 1.44 2.58 4.02 AS5IE October 1990 - 84 - ANNEX 5-4 INDONESIA FERTILIZERRESTRUCTURING PROJECT Kaltim I OptimizationProject - Capital Cost Estimates (million'IS$) Local Foreign Total Equipment,materials and spares 3.46 26.98 30.44 Freight, handling and insurance 0.35 2.61 2.96 Subtotal 3.82 29.59 33.41 Consultants Services - 0.?5 0.25 License and engineeringservices 0.05 2.94 2.99 Total Base Cost Estimate (BCE) 3.87 32.78 36.65 Physical contingency 0.19 1.67 1.86 Price contingency 0.30 2.61 2.91 Total InstalledCost 4.36 37.06 41.42 Interest during construction 7.80 - 7.80 Total Financingkeq[uired 16.16 37.06 49.22 ASSIE October 1990 - 85 - ANNEX 5-5 INDONESIA FERTILIZERRESTRUCTURING PROJECT Kujang OptimizationProject - Capital Cost Estimates (million US$) Local Foreign Total Ammonia convertermodification 0.53 1.95 2.48 Hydrolyzer - 1.50 1.50 Steam superheater - 0.40 0.40 Stack heat recovery - 2.10 2.10 Carbonate flash - 0.50 0.50 Air compressor - 1.00 1.00 Reformer tube replacement 1.30 3.70 5.00 Reformer lining 0.20 - 0.20 ConsultantsServices 0.25 0.25 Total Base Cost Estimate (BCE) 2.03 11.40 13.43 Physical contingency 0.10 0.55 0.65 Price contingency 0.08 0.74 0.82 Total InstalledCost 2.21 12.69 14.90 Interest during construction 2.53 - 2.53 Total FinancingRequired 4.74 12.69 17.43 ASSIE October 1990 - 86 - ANNEX 5-6 INDONESIA FERTILIZERRESTRUCTURING PROJECT PIM OptimizationProject - Capital Cost Estimates (millionUS$) Local Foreign Total Equipment,materials and spares 0.57 8.01 8.58 Subtotal 0.57 8.01 8.58 License and engineeringservices 0.31 1.19 1.50 Erection land commissioning 0.90 0.15 1.05 Consultants services - 0.25 0.25 Total Base Cost Estimate (BCE) 1.78 9.60 11.38 Physical contingency 0.09 0.44 0.53 Price contingency 0.13 0.66 0.79 Total InstalledCost 2.00 10.70 12.70 Interest during construction 2.50 - 2.50 Total FinancingRequired 4.50 10.70 15.20 ASSIE October 1990 - 87 - ANNEX 6 INDONESIA FERTILIZERRESTRUCTURING PROJECT EstimatedDisbursement Schedule for Bank Loan la (USS million) Standard Profile for Asia Region - Bank Disbursement IndustrialProjects FY semester Semester Cumulative Percent Percent FY91 I II 22.2 22.2 10 0 FY92 I 25.1 47.3 21 3 II 30.0 77.3 35 6 FY93 I 30.0 107.3 48 14 II 35.0 142.3 64 26 FY94 I 20.0 162.3 73 46 F II 17.0 179.3 81 58 FY95 I 15.0 194.3 76 70 II 10.0 204.3 92 78 FY96 I 8.0 212.3 96 86 II 5.0 217.3 98 91 FY97 I 3.0 220.3 99 98 II 1.4 221.7 100 100 /a CompletionDate: June 30, 1997 Closing Date: December 31, 1997 - 88 - ANNEX 7-1 INDONESIA FERTILIZERRESTRUCTURING PROJECT FinancialProjection Assumptions Gresik Ammonia/UreaInvestment 1. Financialprojections have been estimatedat two basic price levels: (a) the base case, with and without project (Annjxes7-2 and 7-3) with 1990 prices; and (b) with 1990 prices escalated,with project (Annex 7-4) as follows: 2. Productionestimates are as follows: 1989 1980 1991 1m 1993 1994 1996+ …------tons ------ TSP 1,200,000 1,200,000 1,220,000 1,220,000 1,220,000 1,220,000 1,220,000 AS 882,000 600,000 660,000 660,000 660,000 660,000 660,000 Urea (begged) ------10,000 460,000 460,000 _ 3. Main product base case prices (Annex 7-3) are as follows: (Actual) 1989 1990 1991 1992 1993 1994 1995+ ------(US$/ton) ------ TSP 215 215 215 215 215 203 203/a AS 128 128 128 128 128 117 1177i Urea (bagged) ------No production------145 145 1457h /a Assumes border prices used as basis for 1994 and 1995+. 7h Border prices used as basis for 1993. Price for subsequentyears maintainedat 1993 border price. 4. Main product 1989 escalatedprices (Annex 7-4) assume the same unit prices as above, but have been escalatedat 5 percent per year. 5. Projectionsof operatingcosts are based on Gresik's 1989 actuals. Natural gas is priced at US$2.0 MHBtu. 6. Escalated projectedfinancial statements of Gresik (Annex 7-4) have been inflatedat 6.5 percent for 1990 and 1991, anc 6 percent thereafterfor local costs, and 3.6 percent for foreigncosts except for fixed charges such as depreciationand interest. INDOESIA - FERTILIZER RESTRUCTURING PROJECT PT PETROKIHIA CRESIK ACTUAL AND PROJECTED INCOME STATREWST 1986-1999 I1THOUT PROJECT (Rp Billion) PROJECtED------CUL------1993 1996 1995 1996 1997 19M 1999 S 1967 19 6t 1969 1990 1991 1992 ------__ ----_ _ ---- _-- _ ---- _. _. ---- .... ---- 674.5 674.5 676.5 614.5 631.6 677.0 719.1 711.9 717.9 616.5 674.5 let *.1. 451.S 533.7 537.9 588.2 588.2 5"6.' 5"8.2 *5S.7 522.0 545.3 563.2 561.6 566.5 513.6 508.2 Of Good. Sold 353.2 '0'.0 _ __ cost ------_------_ ------____. ------__ _ -----_ __ 66.3 66.3 16.3 131.7 155.9 156.3 151.6 100.7 66.3 86.3 Crsos Fgotls 114.9 129.7 19.2 109.6 4perat es Lupeoea 15.1 15.1 13.6 15.1 15.1 15.1 15.1 15.1 15.1 gEapeme 6.6 6.7 11.6 11.2 12.6 Nbr.tLaS 20.3 20.3 20.3 OD 9.6 15.6 16.4 18.9 19.8 20.3 20.3 & Ai n. 11.7 11.9 13.0 11.3 ^.nsrsl 20.2 19.5 16.9 16.6 I 35.0 29.6 27.0 25.3 23.8 22.3 21.0 Interest bapeas. 25.9 3S.0 66.3 6.3 6.3 6.3 6.3 36.3 36.3 30.1 31.6 27.4 20.5 6.3 Depreclatien 32.1 53.6 35.2 77.7 62.7 61.9 61.2 64.6 60.3 93.6 87.7 *6.1 80.6 85.2 Total Opecatlas 3mpg.w. 76.3 61.4 104.1 24.6 25.1 25.7 26.0 15.6 66.0 69.6 67.9 66.2 23.0 23.6 let 4ecrat1ag InoSs 56.6 42.3 -24.9 10.3 10.5 11.1 11.6 14.1 7.5 6.9 6.3 6.7 9.1 9.6 Ostht iPwl.1tI-Loss 6.6 11.4 27.3 37.6 76.9 32.1 33.2 34.4 35.6 36.8 53.7 2.6 29.7 51.5 76.7 76.2 E nbLps 2 fer. Tames 63.0 11.6 12.0 12.5 12.9 13.2 11.2 16.0 26.8 26.7 26.2 11.2 1m 6 .0 15.9 0.0 21.6 22.4 23.1 23.9 24.6 2.6 16.5 33.5 49.9 69.5 68.7 20.9 Samiasa After Tame. n 9.0 37.6 0 s 0I 1/ projected in 1990 values. 4 in 1994 with tsp end *r. Without project. no escalation, border prices starting L}FPI8 INDONESIA - FERTILIZER RESTRUCTURING PROJECT PT PETROKINlA GRESIK - WITHOUT PROJECT ACTUAL AND PROJECTED FUNDS FLOW STATEIIENT 1986-1999 (Rp Billion) PROJECTED-11------ACTUAL------1995 1996 199 199 1999 1989 1990 1991 1992 1993 1994 SCUICES 190 1967 1906 22.' 23.1 23.9 24.4 18.5 33.5 49.9 49.5 '8.7 20.9 21.6 MNt nom after tax 39.0 37.6 2.4 27.4 20.5 6.3 6.3 6.3 6.3 6.3 3S.2 36.3 36.3 30.1 31.6 Depreclation 32.1 $3.6 35.3 Paid-la Capital 1.6 24.5 4.8 LAoq& Tero Debt 27.9 28.7 29.4 30.2 30.? 0 71.7 54.8 69.8 60.0 81.1 76.1 41.4 Total souace* 72.9 96.1 - - - o - - _ -_ - - - _ - - APPLICATION 6.7 0.8 2.1 0.1 lve*t at 1.6 6.4 7.0 7.0 7.0 1.0 7.0 1.0 17.4 5.9 7.0 7.0 6.6 7.0 Pixed *asets 8.0 9.5 Inaoece tn Cmatwuct iot (4.4) 1.9 to ?Posweaa 0.6 1.1 (0.5) (2.0) (1.6) Iocreane to Otbhe Aasare. 0.6 6.6 8.3 4.1 18.0 15.7 15.6 13.9 9.7 8.3 is,Loon term Debt 6.6 13.7 24.0 Door"" 7.8 8.1 8.4 8.S 11.7 17.5 17.3 17.0 7.3 7.6 Diwidenad,Doi2smae 7.5 39.0 31.8 1.9 22.9 23.1 19.2 15.4 IS.1 32.5 38.8 40.3 41.5 36.3 24.0 Sub total 24.9 76.5 57.0 5.0 5.6 10.2 14.8 15.2 22.3 31.0 39.7 39.6 39.8 17.4 Incaro Iin orking Capital 48.0 19.6 20.7 41.4 27.9 28.7 29.4 30.2 30.7 77.7 54.8 69.8 80.0 61.1 76.1 Total Application 72.9 96.1 s--' - ' _------_,_. O% " 11 PRCJLCtED IN 1990 VALUES BRWPSA IIDOIESIA - FERTILIZER RESTRUCTURING PROJECT PT PETROKINIA GRESIK ACTUAL AND PiOJECTED BALANCE SUREM 1986-1999 - WITHOUT PROJECT (Rp BILion) ------ACT------L------PROJECTED-/ 1997 1e 1Y99 1990 1991 1992 199 1994 1995 1996 ASSETS 19 193" 1988 1989 Current assets 206.1 221.2 42.5 83.2 124.4 160.5 178.2 184.3 188.9 191.1 Cash 0.6 S.) 6.3 1.3 440.0 440.0 440.0 440.0 440.0 440.0 440.0 440.0 140.0 cmivablea 239.5 314.0 590.1 456.0 410.0 7.2 7.2 7.2 7.2 7.2 7.2 1.2 7.2 7.2 prcepad epenses 5.9 9.1 11.4 7.2 7.2 153.2 153.2 153.2 153.2 153.2 153.2 153.2 153.2 153.2 hvanterles 82.0 $9.1 101.4 153.2 153.2 821.6 724.8 760.9 778.6 784.7 789.3 791.8 806.5 totel current assets 331.0 412.7 709.2 617.7 642.9 683.6 32.2 $2.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2 laveat_mte 11.2 17.6 24.2 25.0 lVIsd Assets 12.4 12.4 12.4 12.4 12.4 12.1 12.4 12.4 12.4 12.4 LOW 12.2 12.1 12.4 12.4 Ppeporty. plant *28.1 1.5.1 370.1 37.1 1 384.1 393.4 400.1 406.1 414.1 *21.1 a 9"&pUoat 326.7 336.0 355.4 361.1 -405.1 -263.0 -294.0 -325.6 -393.0 -373.5 -379.8 -386.2 -392.7 -396.5 Lessai4preltalan -121.5 -153.2 -193.4 -226.8 42.4 95.8 71.2 52.8 39.0 38.7 40.3 40.8 *1.7 Nbt f1ud *asets 219.4 195.2 177.1 141.0 119.6 1.6 1.6 o 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 C.nstructlon in Progcros 4.9 6.0 1.7 3.6 12.3 12.A 12.3 12.3 12.3 12.3 12.3 12.3 12.3 12.3 Other Assets 6 0 12.0 12.3 10.3 894.3 910.1 803.6 8008.8 825.5 862.1 859.8 863.7 869.5 8S5.7 818.1 Total Ascsto 52.5 644.3 924.8 ..... _ ...... _ _ - . _ . ,,,,, ,,,,, _ , ,, ,.I._ ._, I Z~~~~~~~~~~~~~~~~~~~~~~~M LI*DILITIES i EQUITV Curteat Llablities 212.9 275.1 SSO.S 437.2 *37.2 437.2 437.2 *37.2 437.2 437.2 437.2 431.2 4)7.2 437.2 Loms Tenm Debt Is.0 119.) 124.2 100.1 83.5 67.8 S2.2 38.3 28.6 20.3 12.0 Share Capital 150.6 150.0 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 165.2 bitimed Eaminga 16.6 99.9 64.6 101.1 122.9 155.3 187.5 219.1 232.7 246.8 261.3 276.3 291.9 301.1 Sub-totalBquity 226.6 249.9 249.6 266.3 268.1 320.5 352.7 384.3 397.9 412.0 426.5 441.5 457.1 472.9 _ _ _ ------ Totol Liablhities.Equity 572.5 644.3 924.8 603.6 808.8 625.5 842.1 659.8 863.7 869.5 87S.1 678.7 *94.3 910.1 ° 1i Projocted data in 1990 values OS P-014 lbN INDONEsIA- FwILUU Es SIEUS USJ11 Pi PETIRSCIIA GV.IM ACtUALAM FPJECTID ICOIE STATST@81914-109 - WITH FIOECT (R-LDi I I ion) ------F @ 11ECE-/------.----.-.-- ACwA ------194 19115 1996 I97 190 199 1_W loI7 19 1 1990 1901 1992 193 ... ---_ ---__ _ __--- .__._. ------_----____ - --- _..___. --- __. . S04 0 719.1 711.9 771.9 604.0 604.0 604.0 004.0 604.0 No$ Sales 41. 1 M.7 647.0 63.4 677.0 we 0 6s3.2 6S1.6 5317.s 63.0 60.0 606.0 60.0 6060 Cost 6 am" Sold SM. 491.9 463.6 832.0 546.3 0 16. 9 156 3 234.1 211.0 196.0 196.0 196.0 196.0 596 o0ee P,fit 117.0 111.6 02.4 109.4 131.7 Opraime Empeao 159 14.3 Is.9 i5.9 15.9 16.9 1.9 15.9 IS 9 Shrh.tle ESpesee 4.6 *.7 I1.$ 10.0 U3.0 18.4 59.3 20.3 21.3 21.3 21.3 21.3 21.3 21.3 Omoral * Adeil. £3.0 14.7 16.2 12.6 1a.7 16.4 27.0 26.3 28.8 22.3 21.0 20.2 19.5 56.9 jebevt Eaee 25.9 0S.0 44.S 6.0 20.4 22.5 1.3 4.2 16.1 36.5 56.4 47.6 37.6 30.7 26.6 Add 1.6 W 30.1 3l.6 36.7 40.9 27.7 27.7 27.7 27.7 27.7 woeciatie, 32.1 33.6 6.2 3.8 86.6 506.0 96.7 *4.0 110.4 137.1 136.6 136.6 122.6 115.1 110.4 Toloe 1eretlie Ebpee"e 76.4 4I.2 107.3 ".4. 61.9 45.9 97.0 64.2 62.6 73.6 61.0 86.7 90.1 No rtie Income 31116.6 42.8 -24.9 16.6 86.0 11.6 7.9 8.3 6.7 9.1 9.6 10.0 10.5 11.1 O*e P.od&/_-IO, 4.4 11.4 27.8 14.1 7.6 69.8 64.2 106.7 63.3 72.2 ".6 . 91.6 9.6 101.? Eaue1_ llefor* Tome 48.0 53.7 2.4 29.7 42.6 24.4 19.0 S7.0 22.2 26.3 29.2 32.0 33.9 36S Tlm., 4.0 1. 9 0.0 11.2 14.9 Otl1r Tomes 66.1 45.4 36.2 U.7 41.1 46.0 64.S S9.5 42.9 Earaiee After Tomes 19.0 37.6 2.4 16.6 27.6 0.06 'V 0.06 0.05 0.09 0.06 0.06 0.07 0.07 0.00 AfWte Te1nbbelege/Sel.e 0.09 0.07 0.00 0.06 0.04 0.11 D 0.09 0.06 0.13 0.07 0.06 0.09 0.10 0.11 l OerallagIncomes/lm, 0.0o 0o.01 -o.0o0 0.02 0.06 3.7 4 1 X 3.6 4.2 3.0 3.3 2.3 2.6 2.0 3.4 1le*ret Covereg 8.9 3.7 1.6 2.9 a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- ~ ~ ~ ~ ~ O ONUI"~~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ INDONESIA- FERTILIZERENRLS1RALIN PROJECT PT PEIROKINIA RlESIK - WITH PRJECT ACTUAL AM PROJECTEDROS FLOWSTATElT £86- 19 (R0 IlXi in) ------~~~~ ~~ ~ __ ------FROETDlO /- --- __ ------_ _ _ _ _ ------_ 1999 10,2 1£93 1994 1a99 196 19"? M9 lw low 1a la Iow lin 64.3 69.5 62.9 66.1 3*.. 27.0 45.4 3S.2 6.1 41.1 40.9 atA icoam, after ea .0 87.0 2.4 27.7 27.7 27.1 21.7 U.1 3.3 z0.1 31.6 30.7 40.9 27.7 eprociatia U1.S U.O 5.2 ais-l Copital 1. U.S 3. L_e Ters Sub 4.0 27.0 IJ7.0 64.0 7.4 1= to" 1_7.3 31.0 33.6 21.9 "W. Te LMa 30.0 *bA. Cap. I e I 32.0 07.2 00.6 3.0 04. 100.2 20.3 104.4 in.7 32.0 74.0 Total inrcea 72.9 9S.1 77.7 0.7 2.1 g1wa _te* 1. .4 0.7 1.0 7.0 i.0 7.0 7.0 7.0 7.0 7.0 0.0 4311.0 7.0 fi m* Amate 0.0 9.1 17.4 30.0 263.3 112.3 -4-.6 locrea_s ir Camusttic 0.6 1.1 -4.4 -I.e umeem_i. other A-i 0.0 0.0 -0.5 0.3 0.3 4.1 0.0 0.0 22.0 *0.0 16.7 16.5 13.9 9.7 Suer. is aietia. LT et J.0 13.7 22.7 22.7 22.7 22.7 22.7 Seer. i1 i_ Los 31.3 37.3 0.0 B r. O d. Tie L*"e 36.0 Saee. is V.C. Low 14.4 16.4 19.0 20.0 220 23.1 37.0 2.J a.7 19.a 36.6 23.9 Owwide . 0.a.se.Cap. lat 7.0 36.0 07.0 54.0 51.7 62.620 r.# 1.0 295.3 172.1 6.0 ft.4 91.7 Sub bateS 24.0 76.3 e7.0 X 309 4.0 -15.7 51.1 13.0 -37.1 -. 0 22 45.0 19.6 20.7 37.2 16.4 -16.0 _ laecross is Wabilg Capital -- --- .... ------... _ ~ ~~ ~~ _ - - --- L 74.6 2 0 67 2 90 6 93 6 54.0 106.2 280.3 156 4 133.7 33.0 Total Applieatieo 72.9 96.1 77.7 ...... 5... .5...... la lo9 pricee 7 364 6 122.0 168.1 147.7 192.5 219.2 249.7 286.0 323 _um calcuaeti,a r.e. bhsiaim 101.1 68.7 41 1 46.9 54.3 59.5 62 6 66.1 not iacoe 27.4 45.4 35.2 -23 1 -19.9 -35.6 -23.9 -14.4 -1U.4 -19.0 -20.S -22.0 jd,.,deede. hagu. cm*. ik. -6.7 407 5 148.1 141.7 192.5 219.2 249.7 265.0 323.7 364.6 .NW .E. 122.0 0 16 '.P, INDONESIA- FRTILIZE3 AESTSJCTlfi1 FRlOJiT PfT PETWIDIZAWIESIK ACP.ML NO PROJECTED1AA1CE 1EET 19611-199 - ITH iOJECT (RH ail I ion) ASE ______------__-----,------I'ROJECTiD-1/ ------536 69W 19w 199 l9o0 1991 IC92 1994 199 to"6 A99 1996 1997 Currool. Asms. Cook from OperaIiou 0.6 0.5 6.S 1.S 2.9 -16.1 16.7 -12.9 -131.5 -49.6 -S6.6 -26.9 12.7 63.6 Receles. 31.1 814.0 tO.1 46611.0 475.0 476.8 475.6 41n.6 46.0 476.6 417.0 415.8 415 6 4756 Prwead Elap... S.. *.1 11.4 7.2 4.8 1.6 7.2 1.2 1.2 1.2 11.4 11.4 It 4 it 4 Iav.ebr).e 1.0 6.1 301.4 116.2 160.9 11S.9 1n.a 200.3 220.s. 220.o 320.3 2.3 2.3 220.3 Tol.I Carr"% Ase" S1U.0 412.7 706.2 S17.7 66S.4 6M.4 621.6 670.4 665.6 6W.7 646.7 60.6 720.2 761.1 NO 11.2 17.4 24.2 26.0 82.1 32.1 82.1 S2.1 82.1 82.1 82.1 32.1 82.1 32.1 Fined hos Load 12.2 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 12.4 Pro..tv. P1.14 A aw515 M.r 6.0 116.41 861.4 166.4 871.4 64.0 821.0 M.0 816.0 042.0 69.0 816.0 663.0 L_,esIAu 0.pr.cimki.a -121.6 -186.2 -110.4 -M.4 -2-.1 -298.2 -824.6 -862.4 -0.1 -417.0 -44.6 -41.2 -600.9 -52m.6 lbs fined _mbe 216.4 I66.2 711.4 147.0 117.1 94.6 n1.6 471.0 561.8 42.4 06.9 8.2 67.56 346. C_uetruc* 1. Prla r_se 4.9 6.0 1.7 8.6 46.8 816.6 426.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 *t&., AS. 6.0 12.6 12.8 10. 10.3 10.8 10.810.3810..8 10 0.8 10.3 10. 10. Total AseS. 512.5 64.3 924. 608.61 672.0 1060.0 1161.6 1165.4 1141.6 1127.7 1102.0 1113.2 1132 1 1152 3 eas ---. ace .a... a... .. a ...... ease. .e. Ce. _ae 5555...... UW U* *__- LIABILITIES A EWIIW CurreB L;ubilt;.ee 212.9 27S.1 560.0 4)7.2 459.1 459.1 459.1 459.1 459.1 459.1 459.1 459 1 459.1 459.1 Lme Tore 0*1 18.0 119.3 124.2 100.1 1268. 315.6 39.6 369.0 236.0 25.7 192.7 165.2 143.2 120 5 Shote Cw&a.l 1.0M. SU6.1166.2 I66.2165.2 165.2 165.2 165.2 165.2 165.2 165.2 365.2 16.2 165.2 ose IA" Eformias 76.0 61.6 36.4 103.1 122.0 140.1 147.7 192.5 219.2 24.9 205.0 323.7 3 6 407.5 Sub-T5el lueiu 20.6 9.0 246.0 216.8 207.2 313.3 312.9 357.7 30.4 414.9 430.2 400.9 529.3 5711. Tot.l Liabilities. fjuit, 612.5 344.0 05.0 05.6 072.0 1010.0 1161.4 1105.0 1141.5 1127.7 1102.0 1113.2 1132.1 1162.3 1 CurtainS m.,.IejCulrr. imb. 1.0 1.5 1.3 1.4 1.4 1.4 3.4 3.5 1.2 1.4 1.4 I.5 1.6 I 1 04%/Equity Relic 0.001 0.471 0.497 0.370 0.440 1.007 1.245 1.02 0.776 0.011 0.420 0.338 0.270 0.230 is low0 prie, With Project 05 LA IMINESIA - VFRllNIZI RESTMUCTUlIN# PRfOJECT PT PEIAOKIHIA 0K ACTUAL AD PROJECTED INCOME STATMENT 1986-1999 - WITH 'HOFJT (Re DiIIion) --- / ------'------lO JEC1 ED-I _____ L _ __-- _-_- __-_-_--_-_-.- 1994 1995 196 1991 199s 1999 J1 SWo lw Iwo8 1990 1991 1992 1993 ------_ -___------_-- ... _--- ... _ ---____ 754.6 101 3 096. 980.? 1030.0 1001.5 1136.6 1192.3 12619 Not Seles 4*1.1 683.7 ur.9 "I.4 677.0 590.0 620.5 6US.9 122.1 175.9 015.4 GM.7 897 4 943.0 Coo of cood Sold 54.1 401.2 43.5 5.0 045.8 164.4 170.0 260.7 219.0 264.1 265. 278.9 294 9 30D.1 c. Profi tI 17.0 322.5 09.4 19.4 151.7 I ELp.eoom operalime % 19.2 20.1 21.1 22.2 23.3 24.6 23.1 21.0 hrboting E*pema. 5.6 5.7 11.6 10.0 33.0 I5.0 21.4 26.7 26.4 29.0 $1.3 3J.9 34.5 36.3 CGaeral i Adiag. 13.0 14.1 16.2 12.1 I6.7 19.9 25.X 21.6 22.3 21.0 20.2 19.6 31 9 10.6 Interet. Sapema 23.0 82.0 44.3 35.0 29.4 27.0 18.3 3S.5 85.4 41.6 a7.6 30.7 26 5 22.5 Addd l 1.3 9.2 31.5 S0.7 40.9 27.7 21.7 27.7 27.? 21.7 Depre.ci.ioe 82.1 38.5 36.2 86.3 86.8 30.1 100.5 117.7 145.0 169.2 145.8 139.9 186.2 133.4 132.2 TSol Opreli lEapegee 15.4 0.2 101.8 93.0 99.7 54.0 18.1 11.0 *9.a 305.0 121.2 143.1 361.6 116.9 Me iaeseife g ome 1111.5 42.3 -24.0 16.5 86.0 7.9 0.3 *.7 9.1 9.5 10.0 10.1 11.1 11.5 DIMr Profi&-L.e 4.4 11.4 27.3 14.1 7.5 107.5 42.6 71.0 61.4 i22.6 95.9 116.4 105.2 164.2 312.6 bare motorsie tea.. 48.0 03.7 2.4 ".7 S6 25.2 21.6 42.9 34.6 40.4 47.3 64.0 60.4 ZecomeTear 4.0 16.9 0.0 11.2 14.9 O Ier Temo 112 2 121 9 21.6 45.0 39.9 79.7 64.8 75.0 *7.9 100.2 £Erfie5 Aflt. Team 99.0 87.5 2.4 U.5 a_. _ _. an a.. n. Sa a.. _ _. __n me~~sam Sal'.. {~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~143 h$^ 0 09 0 09 0 10 a a 0.04 0.06 0.05 0.09 0.07 0.07 0.0 After Tax Ernings/Sol"- 0.09 0.07 0.00 0.03 0 14 0.06 0.07 0.18 0.09 0.10 0.12 0.13 0 14 0.eratine Incoe./Selee 0 09 0.0 -0.05 0.02 0.0 4.6 5 4 6 2 3 6 3 8 3 1 3.6 2.3 9.1 3.8 Inf l.r fCoverego 3 9 3 7 1 8 2.9 10a 1/ S-l. A.o.no.es cosat of good, maid and oparating apxPns0. deprclt.on 08 4calal.* afl, 19809 IffO&SIA - EiEtiLlIHN k51141KRAIC MI1JLCT P1 PElRflIIIA WWSIK ACTlAu AN1 PlOJECl) FRlWS fLOW STATEIEAIT1906-1999 - WIT" FROJfCT stop 0.11sa) 19 3914 i9 1996 I97 199 M99 14 NW to " 909 1eow I99l 1992 ... --- ... . ------_ ~~ ~ _- ~ ~ ~ ------100 2 112 2 124 9 27.6 4 S 39.9 79.7 6.3 71.0 67 9 Ns% ;_m ofttr ta. 8.0 $7.0 2.4 10.5 27 7 27 7 27.7 36.3 30.1 316 36.7 40.9 27.7 27.7 0..roiatio' S2..1 88.1 88.2 16.8 Paid-la Caital 1.0 060 81.5 Lane. 1.,.- Sub 4.0 21.0 187.0 56.0 7.4 NW Laos 17.8 81.0 33.6 21.9 Mud. Ter- Law 36.0 wk. Cap. La" 139 9 1b2 6 1.2 261.7 161.1 147.7 101.2 102.7 115.6 127.9 To1 l aur." 72.9 96.1 77.7 ".0 '0 AMVLICATNN lawebewto 1.0 6.4 6.7 5.T 2.1 7.0 7.0 7.0 7.0 0.6 437.0 7.0 7.0 7.0 7.0 Fida" es" 0.0 9.5 17.4 7.0 S .0 263.3 112.3 (42.6) lireew is Cmaostructik 0.6 1.1 (4.4) (1.0) mcImer to1ge Aoeute 0.6 6.0 (0.1) 4.1 0o0 00 10.0 I1.7 15.6 1s.9 9.7 0.3 8.3 Suer. i. Suietiu LT Debt 0.6 13.7 22.0 22.1 22.7 22.7 22.7 22.1 S . i W Lae. 87.3 37.3 80.0 Ducr, i. Mud. Te Law 36.0 DScr. Is W.C. Le. 43.7 39.a 55.6 2a.9 22.1 26.3 30.0 81.1 39.3 DiVliuead. SmA.... Ca. m1 7.5 s9.0 W7.0 2.8 0.7 M60 13 4 0*: 295.3 112.1 88.6 76.5 101.6 96.6 60. t'i Sub ta.I 24.9 70.1 17.0 07.6 91.6 0 I 36.0 b9.0 t09 79 2 17.2 to.4 (130) (t 10) 62.1 26.7 1.2 lacs... i. Working CPital 40.0 19.6 20.7 ---- -, - -- . . - - ...... C b2 6 261.7 161 1 141.7 106.2 102.1 116.6 127 9 139 9 Total pplicatich 72 9 96.1 77.7 "4.6l 10.2 1/ fLacelad after 1909. hLuSEO A - Fim ILIM IlESlIUCTlUIS MJET PT FfIRMmIN*OMSK ACTUL0MO tJKCIW 9ALA8EOM 1966-1OW - VITNPAJKCT ______,,____, ___, __ .______-----__------' ASMSE 3_ 3W am l 1969 l99 91 1Ola 1993 1994 190 1n l"9 1 1990 I99 Ciurrent AmsIs Coo fm O ti. 0. 0. .8 1.8 7.6 11.3 00 38.5 8.8 12.7 17.71 .2 s 4 144. .i.gbl.e 84.0 M.8.3 48.0 478.8 460.0 40.6 1.0 &42.3 861.8 66.0 664. 701 4 1428 P'mid I * 8.1 a3-4 7.2 8.8 6.6 7.2 7.2 7.2 7.2 11.4 11.4 11.4 38.4 love O 8.0 6.3 33.4 38.3 1£80.9 181.3 11. 1£90.1 Z0. 128.8 242.9 2.0 281.1 X18 1 .,__. .. _. .,_._ ------...... -- __ - _ ------ Total Correa AiM. 81.0 411.7 708.3 611.? 6831 680.4 874.4 719., 118.8 812.7 874.0 'I3.7 1089 11,0.0 Iwmvuem.s. 81.2 17.6 24.2 16.0 So.a 88.3 I.1 0.8 8.1 82.1 S7.1 S7.1 8.1 8.1 Fi" mo Ass* L"12.27 U .4 92.4 U2.4 12.4 12.4 U2.4 12.4 12.4 82.4 12.4 12.4 12.4 12.4 A ffi_~ M.7 *.O M.4 W1.4 M.4 37S.4 m4.O W1.0 .- 0 .0 1420 s.0 &"- 86.0 D_1_eciatie -Ul.& -* -&W.4 -M. -U. a -2.2 -XI4.8 41.4 40. -417.6 -441- -475.2 -00.1 -21.9 "A fi so Mean 2U9.4 196.2 177.4 U47.0 117.7 04.4 71.4 401. 4|0. 4a.4 em.* M.2 MY.& 34.0 0 C_abnib& ioPooe 4.0 4.0 1.7 3. 4I.~ *14.9 45§.3 2.0 2.0 2.0 2.0 2.0 2.0 2.0 0b As* 6.0 12.0 U2. 10.8 10.3 10.3 10.3 10.1 10.3 I*-& 10.3 10.3 10.3 10.3 T lAe" * n 2. $0.3 4.0 M.S sn2. s 2.3 1214.7 127.2 1271.3 .7- 1S".3 13.S U470.0 INI 2 I* p . 4p, N . . Pl... 50.1 81.4 87.9 MA8. 61.2, 4.9 670.2 712.1 C.ereatL Lmbgil; Os 212.9 215. "0.X 437.2 469.1 462.0 369.5 U9.0 2".0 21. 7 1U2.7 16.9 148.2 120.5 Laos Ter4 b 1.* 116.5 124.2 100.1 126.6 815.6 16.2 16.2 166.2 34.2 16.2 stso copilot Ml. 1.0 .2 1".2 *68.2 16.2 165.2 66.2 *65.2 111.6 209.5 250.2 291.7 54.2 410.8 402.2 51S.4 *'@ rf_ h7*o. .0 04.6 101.l 122.0 140.5 452.9 510.4 604.6 46.4 116.4 s.s-;.Tau.jas, m*1.e 16.0 1.6 26.8 9.2 814.7 319.0 874.* 415.4 1112.8 1214.7 1271.2 1271.8 180.5 1217.3 15.3 1471.6 1871.2 1.e1 Liabilil,10. ;i%P .5 .4 M$. M . 1.4 1.8 1.4 1.4 I 4 1.4 1 8 1.6 1.1 Carrea 4_eto/cWr. limb. 1.6 1.5 1.8 1.4 1.4 0 1.n CM 0.711 0.66 0..11 0.04 0.210 0.16 0.b oI# bUs O.601 0.410 0.407 0.1 0.440 1.0 1/Pable. taelableo. I.weatwiroo *Aeuseae . o Veer aftr 31dw. WIShgrjeet. eewae". bSehrdr w p*e " atrtle tt" #or war mdis 104 Pe Mo a_. S.. 1.S. - 102 - ANNEX 7-5 Page 1 INDONESIA FERTILIZER RESTRUCTURING PROJECT Petrokimia Gresik Ammonia/Urea Fac t !ities Project Comparison of Production Volumes, Prices, Costs and Gross Profits Full Full (1989) production production Base without with year project project 1. Gross Profit Comparison Production (tons) TSP 1,200,000 1,220,000 1,220,000 AS 632,000 650,000 650,000 Urea -- -- 460,000 Total 1,832,000 1,870,000 2,330,000 Unit Prices (Rp/ton) /a TSP 380,991 363,370 363,370 AS 226,458 209,430 209,930 Urea -- -- 256,650 Revenues (billion Rp) TSP 457.2 443.3 443.3 AS 143.2 136.1 136.1 Urea -- -- 118.1 Total 600.4 579.4 697.5 Total Revenues/Ton (Rp/ton) 327,729 309,840 299,356 Cost of Production (billion Rp) /b 557.9 566.5 609.2 Cost of Production/ton 304,530 302,941 251,202 Gross Profit (billion Rp) 42.5 12.9 88.3 Gross Profit/Ton 23,198 6,898 26,137 By-Products Gross Profit (billion Rp) 41.8 63.0 63.0 GROSS PROFIT (ALL PRODUCTS) 84.3 75.9 151.3 (a Expressed in 1989 values: USS per Ton (Bagged) 1989 Current Price 1989 Border Price (At Full Production) TSP US$215 US$203 AS US$128 US$117 Urea US$116 US$145 /b See page 2 for detaiis. - 103 - ANNEX 7-5 Page 2 a. Comparison of Costs of Production (billionRp) (1989) (1994) (1994) Full Production Full Production Cost of Production /a Base Year Without Project With Project Natural Gas e US$2.OIMMBTU - - 70.8 Ammonia 31.2 32.8 - Fuel oil 21.9 21.9 - Rock Phosphate 151.2 151.2 151.2 Sulfur 77.0 77.0 77.0 PhosphoricAcid 186.1 193.0 193.0 Other chemicals 9.3 9.3 8.0 Maintenancematerials 20.3 20.3 20.3 Wages 17.0 17.0 17.0 Bagging 19.5 19.5 25.0 Other costs (Depreciation) 24.4 24.4 46.9 Total 557.9 566.5 609.2 /a Expressed in terms of 1989 values. 3. Cash Costs of Production Cost of Production 557.9 566.6 609.2 Less Depreciation (24.4) (24.4) (46.9) Cash Costs 533.5 542.1 562.3 Difference 20.2 Escalated to 1990 values 21.2 EquivalentUS $ (millions) 11.8 - 104 - ANNEX 7-5 Page 3 4. Calculationof Revenues - With Proiect Production (Tons) 1990 1991 1992 1993 1994+ TSP 1,200,000 1,220,000 1,220,000 1,220,000 1,220,000 AS 600,000 650,. 9 650,000 650,000 650,000 UREA ------190,000 460,000 Unit Prices (US$/ton)- 1989 Prices TSP 215 215 215 215 203 AS 128 128 128 128 117 UREA ------(No Production)------145 145 Unit Prices (US$/ton)- Current Prices TSP 226 237 249 262 260 AS 134 141 147 155 150 UREA ------(No Production)------179 187 Revenues (US$ millions) - 1989 Prices TSP 258.0 262.3 262.3 262.3 247.7 AS 76.8 83.2 83.2 83.2 76.0 UREA ------27.5 66.7 By-products 24.5 35.0 35.0 35.' 35.0 Total 359.3 380.5 380.5 408.0 425.4 (Rp billion) 646.7 683.7 683.7 734.4 765.7 Revenues (US$ millions) - Current Prices TSP 271.2 289.1 3CJ.7 319.6 317.2 AS 80.4 91.6 95.6 100.7 97.5 UREA ------34.0 86.0 By-products 24.5 38.5 40.3 42.6 44.7 Total 376.1 419.2 439.6 496.9 545.4 (Rp billion) 677.0 754.6 791.3 896.6 981.7 - 105 - ANNEX 7-5 Page 4 5. Calculationof Revenues - Without Project Production (Tons) 1990 1991 1992 1993 1994+ TSP 1,200,000 1,220,000 1,220,000 1,220,000 1,220,000 AS 600,000 650,000 650,000 650,000 650,000 UREA ------ Unit Prices (US$/ton)- 1989 Prices TSP 215 215 215 215 203 AS 128 128 128 117 UREA ------ Unit Prices (US$/ton)- Current Prices TSP 226 237 249 262 260 AS 134 141 147 155 150 UREA ------ Revenues (US$ millions) - 1989 Prices TSP 258.0 262.3 262.3 262.3 247.7 AS 76.8 83.2 83.2 83.2 76.0 UREA ------_ By-products 24.5 35.0 35.0 35.0 35.0 Total 359.3 380.5 380.5 380.5 358.7 (Rp billion).646.7 683.7 683.7 683.7 642.4 Revenues (US$ millions)- Current Prices TSP 271.2 289.1 303.7 319.6 317.2 AS 80.4 91.6 95.6 100.7 97.5 UREA _ _ __ By-products 24.5 38.5 40.3 42.6 44.7 Total 376.1 419.2 439.6 462.9 459.4 (Rp billion) 677.0 754.6 791.3 833.2 826.9 - 106 - ANNEX 7-6 Page 1 INDONESIA FERTILIZER RESTRUCTURINGPROJECT F.T. PUPUK SRIWIDJAJA Balance Sheet - 1986, 1987, 1988, 1989 (Unaudited) (Rp billion) As at December 31 1986 1987 1988 1989 (Unaudited) Assets Current Assets Cash & S.T. Securities 238.3 371.8 398.1 437.7 Other Current Assets 248.5 291.3 311.5 310.8 Subtotal Current Assets 486.8 663.1 709.6 748.5 Investments . 24.4 24.4 25.0 Fixed Assets (net) 163.9 288.3 248.3 230.4 Other Assets 34.4 7.6 6.7 15.2 Total Assets 685.1 983.4 989.0 1,019.0 Liabilities & Capital Liabilities Current Liabilities 213.8 344.5 306.9 305.7 Other Liabilities 62.6 9.1 5.6 2.9 Long-term debt 97.2 59.3 47.5 33.2 Subtotal Liabilities 373.6 412.9 360.0 341.8 Capital Paid-in capital 219.2 261.0 261.0 500.0 Retained earnings 12.3 309.5/a 368.0/a 177.2 Subtotal Capital 311.5 570.5 629.0 677.2 Total Liabilities & Capital 685.1 983.4 989.0 1,019.0 Ratios Net income/assets,2 2.2 5.4 7.8 10.0 Net income/capital,Z 5.0 9.4 12.3 15.0 L.T. debt/equity ratio 113.2 1/9.6 1/3.2 1/20.4 /a Includes asset revaluationsurplust 1987: 172.2; 1988: 171.7. - 107 - ANNEX 7-6 Page 2 INDONESIA FERTILIZER RESTRUCTURING PROJECT P.T. PUPUK SRIWIDJAJA Income Statement - 1986, 1987, 1988, 1989 (Unaudited) (Rp billion) 1986 1987 1988 1989 (Unaudited) Marketing Unit Operation Sales 467.7 536.2 683.7 815.7 Cost of goods sold 281.6 330.1 438.3 572.1 Gross Profit 186.1 206.1 245.4 243.6 Marketing expenses 172.1 187.0 214.2 236.4 Operating Protit 14.0 19.1 31.2 7.2 Other income (expense) (16.3) 8.0 3.4 (1.7) Government compensation 2.3 - - - Marketing unit profit - 2;'.1 34.6 5.5 Production Unit Operation Sales 134.3 168.9 174.2 204.4 Cost of goods sold 134.7 178.0 188.3 183.5 Gross Profit (loss) (0.4) (9.1) (14.1) 20.9 Other income (expense) 17.7 52.9 78.7 (0.5) Production unit profit 17.3 43.8 64.6 20.5 Head Office Income - - - 94.4 Consolidated Profit Before Taxes 17.3 70.9 99.2 120.4 Income Taxes 1.8 17.2 21.8 18.7 Net Income 15.5 53.7 77.4 101.7 Ratios Net incomelsales, Z 2.5 7.6 9.0 10.0 - 108 - ANNEX 7-7 Page 1 INDONESIA FERTILIZERRESTRUCTURING PROJECT P.T. PUPUK KALIMANTAN TIMUR Balance Sheet - 1986; 1987, 1988, 1989 (Unaudited) (Rp billion) As at December 31 1986 1987 1988 1989 (Unaudited) Assets Current Assets Cash & S.T. Securities 8.9 9.5 16.5 10.0 Other current assets 89.9 137.9 187.3 257.2 Subtotal Current Assets 98.3 145.2 198.8 267.2 Investments - 0.2 0.2 - Fixed Assets (net) 687.9 743.0 843.7 771.9 Other Assets 117.8 113.1 95.1 126.2 Total Assets 904.5 1,006.5 1,137.8 1,165.3 Liabilities& Capital Liabilities Current Liabilities 94.1 106.6 132.6 155.2 Long-term debt 351.5 124.7 200.1 309.0 Subtotal Liabilities 445.6 231.3 332.7 464.2 Capital Paid-in capital 458.5 763.9 774.3 655.0 Retained earnings 0.4 11.2 30.8 46.1 Subtotal Capital 458.9 775.2 805.1 701.1 Total Liabilities & Capital 904.5 1,006.5 1,137.8 1,165.3 Ratios Net income/assets, Z - 1.1 2.1 2.4 Net income/capital, 2 0.5 1.4 3.8 4.1 L.T. debt/equity ratio 1/1.3 1/6.2 1/4.0 1/2.3 - 109 - ANNEX 7-7 Page 2 INDONESIA FERTILIZERRESTRUCTURING PROJECT P.T. PUPUK KALIMANTAN TIMUR Income Statement- 1986, 1987, 1988, 1989 (Unaudited) (Rp billion) 1986 1987 1988 1989 (Unaudited) Sales 84.2 166.0 232.3 259.6 Cost of goods sold 51.9 107.9 129.2 141.7 Gross Profit 32.3 58.1 103.1 117.9 Operatingexpenses 16.6 36.4 60.6 80.1 Interest expenses 23.8 12.9 14.4 16.5 Operatingprofit (3.1) 8.8 28.1 21.4 Other income (expense)net 3.3 2.3 3.6 8.4 Extraordinaryincome (expense) 2.5 - (1.2) (1.3) Net Income Before Taxes (2.3) 11.1 30.5 28.5 Taxes - 0.3 6.7 - Net Income (2.3) 10.8 23.8 28.5 Ratios Net income/sales,Z (0.2) 6.5 10.2 10.9 Operatingprofit/sales, 2 (9-6) 5.3 12.0 8.2 .~~~ - 110 - ANNEX 7-8 Page 1 INDONESIA FERTILIZER RESTRUCTURING PROJECT P.T. PUPUK KUJANG Balance Sheet - 1986, 1987, 1980, 1989 (Unaudited) (Rp billion) As at December 31 1986 1987 1988 1989 (Unaudited) Assets Current Assets Cash & S.T. Securities 72.4 55.9 41.2 40.8 Other current assets 51.6 53.4 65.4 54.2 Subtotal Current Assets 124.0 109.3 106.6 95.0 Investments 5.3 9.1 23.8 28.8 Fixed Assets (Net) 36.3 30.2 36.1 37.5 Other Assets 14.1 16.3 11.5 8.4 Total Assets 179.7 164.9 178.0 169.7 Liabilities and Capital Liabilities Current liabilities 28.2 22.6 25.7 17.9 Long term debt 6.6 - - - Other liabilities 0.1 1.3 1.5 2.0 Total Liabilities 34.9 23.9 27.2 19.9 Capital Paid-in capital 75.0 75.0 75.0 75.0 Retained earnings 69.8 66.0 45.8 74.8 Total Capital 144.8 141.0 150.8 149.8 Total Liabilities & Capital 179.7 164.9 178.0 169.7 Ratios Net Income/Assets 13.2 2.4 7.1 4.9 Net Income/Capital 16.4 2.8 8.4 5.5 L.T. Debt/Equity Ratio 1/10.6 0 0 0 - 111 - ANNEX 7-8 Page 2 INDONESIA FERTILIZERRESTRUCTURING PROJECT P.T. PUPUK KUJANG Income Statement- 1986, 1987, 1980, 1989 (Unaudited) (Rp billion) 1986 ;987 1988 1989 (Unaudited) Sales 70.7 68.6 80.3 83.1 Cost of goods sold 53.5 57.7 62.5 68.1 Gross Profit 17.2 10.9 17.8 15.0 Marketing expense 2.3 - - - Gen. and Administrative 7.6 7.8 10.4 13.9 Interest expense 1.5 1.1 1.8 0.5 OperatingProfit 5.8 2.0 5.6 0.6 Other income (expense)net 8.4 8.2 10.5 8.9 Extraordinaryincome 11.9 Net Income Before Taxes 26.1 10.2 16.1 9.5 Taxes 2.4 6.3 3.4 1.2 Net Income 23.7 3.9 12.7 8.3 Ratios Net income/sales,Z 33.5 5.7 15.8 10.0 Operatingprofit/sales, 2 8.2 2.9 7.0 0.7 - 112 - ANNEX 7-9 Page 1 INDONESIA FERTILIZER RESTRUCTURING PROJECT P.T. PUPUK ISKANDAR MUDA (PIM) Balance Sheet - 1986, 1987, 1988, 1989 (Unauidited) (Rp billion) As at December 31 1986 1987 1988 1989 (Unaudited) Assets Current Assets Cash & S.T. Securities 51.5 52.2 101.3 65.3 Other Current Assets 12.3 13.3 16.4 15.5 Subtotal Current Assets 63.8 68.5 117.7 80.3 Investments - 0.1 0.2 0.3 Fixed Assets (net) 237.5 228.1 221.2 211.5 Other assets 24.9 23.5 22.5 25.3 Total Assets 326.2 320.2 361.6 317.9 Liabilities & Capital Liabilities Current liabilities 49.1 34.6 64.4 20.3 Long-term debt 119.7 92.2 98.2 99.6 Total Liabilities 168.8 126.8 162.6 119.9 Capital Paid-in capital 152.3 184.4 184.4 184.3 Retained earnings 5.1 9.0 14.6 13.7 ! Total Capital 157.4 193.4 199.0 198.0 U Total Liabilities & Capital 326.2 320.2 361.6 317.9 Ratios Net Income/Assets, 1 0.6 1.7 2.6 1.5 Net Income/Capital. X 1.3 2.8 4.8 2.4 L.T. Debt/Equity Ratio 1/1.3 1/2.1 1/2.0 1/1.9 - 113 - ANNEX 7-9 Page 2 INDONESIA FERTILIZERRESTRUCTURING PROJECT P.T. PUPUK ISKANDARNUDA (PIM) Income Statement- 1986, 1987, 1988, 1989 (Unaudited) (Rp billion) As at December 31 1986 1987 1988 1989 (Unaudited) Sales Urea - Bulk 80.9 74.2 75.8 69.4 Urea - Bagged 8.8 16.6 20.2 25.4 Total 89.7 90.8 96.0 94.8 Other fertilizersales 2.7 2.0 1.9 2.2 Total Gross Sales 92.4 92.8 97.9 97.0 Cost of goods sold 54.4 54.7 56.0 63.5 Gross Profit 38.0 38.1 41.9 33.5 Marketing expense 3.9 3.2 2.9 3.6 Administrativeoverhead 30.6 29.6 28.7 26.7 Subtotal Overhead 34.5 32.8 31.6 30.3 Other income (expense)net 1.3 0.2 1.5 1.6 Extraordinary income (expense) (2.7) - (2.3) - Net Income Before Taxes 2.1 5.5 9.5 4.8 Taxes - - - - Net Income 2.1 5.5 9.5 4.8 Ratios Net Income/Sales,Z 2.3 5.9 9.7 4.9 Operating Profit/Sales,2 3.9 5.8 10.5 3.3 - 114 - ANNEX 7-10 INDONESIA FERTILIZER RESTRUCTURING PROJECT GRESIK AMMONIA/UREA FACILITY Incremental Cash Flow for Financial Rate of Return (US$ million in 1990 prices) 1995 to 1990 1991 1992 1993 1994 2006 Incremental Production (tons) Urea (Bagged) 190,000 460,000 460,000 Unit Price (US$/ton) 155 155 155 Incremental Revenues (US$ million) 29.4 71.3 71.3 Incremental Cash Cper. Costs 2.0 (8.0) 11.8 11.8 Capital Costs Investment 32.2 140.7 62.4 7.5 Working Capital 20.0 Subtotal 32.2 160.7 64.4 7.5 Net Cash Flow (32.2) (160.7) (64.4) 29.9 59.5 59.5 Financial Rate of Return (FRR) - 16.6 X (base) (1993 urea border price = $155/ton) IBRD price projections for Urea - 20.1Z 80Z of IBRD price projections = 15.3Z Construction period extended by five months (until 1994) = 15.1? Capital costs increased by 20Z 13.6Z Lengthened construction period and capital costs increased by 20? = 12.3Z Existing (1990) internal prices ($125/ton) for urea = 12.2Z AS5IE October 1990 - 115 - ANNEX 7-11 INDONESIA FERTILIZER RESTSRUCTURING PROJECT PUSRI OPTIMIZATION SUBPROJECT Incremental Cash FLows for Financial Rates of Return (US$ million in 1990 prices) 1995 to 1990 1991 1992 1993 1994 2006 Incremental Production (Tons) Urea - Bulk 120,500 130,000 180,000 180,000 Unit Prices (US$/ton) Urea - Bulk 125 125 125 125 125 125 Ammonia (Input) 100 100 100 100 100 100 Incremental Revenues (US$ million) 15.1 22.5 22.5 22.5 Incremental Oper. Costs (US$ million) Ammonia 6.6 22.5 22.5 22.5 Utilities 0.2 0.2 0.2 0.2 Maintenance 0.8 1.5 1.5 1.5 Subtotal 7.6 11.6 11.6 11.6 Capital Costs (US$ million) 7.8 14.0 9.3 Net Cash Flow (7.8) (14.0) (1.8) 10.9 10.9 10.9 Financial rate of Return (FRR) = 321. AS5IE October 1990 - 116 - ANNEX 7-12 INDONESIA FERTILIZER RESTRUCTURING PROJECT KALTIM AMMONIA/UREA OPTIMIZATION SUBPROJECT Incremental Cash Flow for Financial Rate of Return (US$ million in 1990 prices) 1995 to 1993 1991 199)2 1993 1994 2006 Incremental Production (tons) Urea (Prill & Bulk) 126,225 126,225 126,225 Unit Prices (US$/tonW l Urea (Bulk) 131 131 131 131 131 131 Incremental Revenues *US$ million) - - - 16.5 16.5 16.5 IncrementalOper. Costs - - - 0.7 0.7 0.7 Capital Costs 1.1 10.4 17.5 12.4 Net Cash Flow J(.0) (10.4) (17.5) 3.4 15.8 15.8 Financial Rate of Return (FRR) - 37Z ASSIE October 1990 - 117 - ANNEX 7-13 INDONESIA FERTILIZER RESTRUCTURING PROJECT KUJANG AMMONIA OPTMIZATION SUBPROJECT Incremental Cash Flow for Financial Rate of Return (USS million in 1990 prices) 1995 to 1990 1991 1992 1993 1994 2006 Incremental Production (tons) Ammonia 30,000 30,000 30,000 Unit Prices USS/ton 100 100 100 100 100 100 Incremental Revenues (USS million) 3.0 3.0 3.0 Incremental Oper. Costs 0.2 0.2 0.2 Capital Costs - 6.5 8.4 Net Cash Flow - (6.5) (8.4) 2.8 2.8 2.8 Financial Rate of Return (FRR) = 162 AS5IE October 1990 - 118 - ANNEX 7-14 Page 1 INDONESIA FERTILIZERRESTRUCTURIN. PROJECT AssumptionsUsed in EconomicAnalysis A. Capital Cost Estimate 1. The economic capital cost for the various componentsof the Project have been derived from the financialcapital cost (in constant 1990 prices) by excludingthe price escalationand interestduring construction. There are no duties and taxes included in the financialcapital costs and as such there are no adjustmentsfor them in developingthe economic capital costs. The estimatesuse, conservatively,a standardconversion factor of cne and exchange rate of $1 = Rp 1,830 for convertinglocal costs in US dollar equivalent. B. Working Capital 2. In the case of the optimizationcomponent, the incrementalworking capital would be very small and has been ignored for the analysis. For the PetrokimiaGresik ammonia/ureafacilities project, working capital requirementshave been derived from the financialprojections of current assets and liabilitieswith the project, assuming adequate operatingcash balances and inventoriesand are estimatedat $20.0 million. C. Revenues 3. The incrementalrevenues for the Projectwill come mainly through sales of additionaloutputs of ammonia and urea. The Gresik ammonia/urea projectwill, however, provide ammonia to the existing facilities, substitutingammonia now being obtained from a small fuel oil based plant. The revenues of the existing Gresik facilitiesare obtained from the productionand sales of TSP and ammonium sulfate. The economic prices of the above products have been derived from the October 19, 1989 revision of the commodity forecastsof the Bank's Commodity Studies and ProjectionsDivision. Since Indonesiais a significantnet exporter of ammonia and urea, the economic prices of these two products are based on projectedexport (FOB) prices. In the case of TSP and ammonium sulfate,Indonesia is not a competitiveproducer and is also a significantnet importer of TSP. The economic prices of these two products have been derived on landed cost basis. The ammonia price has been taken as 80 percent of the bulk urea price obtained by deducting$20 per ton for bagging from the bagged FOB urea price. The FOB ammonium sulfate price has been derived, on nutrient basis from the bulk urea prices, a premium of 25 percent added to reflect consumer preferenceand the presence of secondarynutrient sulfur. Additions have then been made for freight, landing costs and bagging. All the product prices are expressed in 1990 dollar terms. - 119 - ANNEX 7-14 Page 2 Economic Prices of FertilizerProducts ($ per ton in 1990 prices) 1990 1995 2000 Urea Bagged FOB 125 195 180 Avionia Bulk In ship 84 140 128 TSP Bagged Landed 194 243 257 AS Bagged Landed 102 138 131 D. OperatingCosts 4. The economic value of natural gas for the Gresik ammonia/urea project and the Kujang ammonia optimizationhas been assumed to be equivalent to its fuel oil value. At the projectedcrude oil prices (in 1989 dollars)of $15.5 in 1990, $15.4 in 1995 and $22.8 in 2000, the economic gas price for the above two projectswill be $2.2/MMBtuin 1990, $2.2/MMBtuin 1995 and $3.2 in 2000 and afterwards. The existingGresik facilitiesuse purchased sulfur, rock phosphate and phosphoricacid. The projectedrock phosphate prices have been obtained from the Bank's latest commodityprojections. The economic prices of the other inputs have been derived taking into account price linkagesamong the various inputs and outputs and are summarized in the table below. In most cases, power and steam are obtained from captive facilities and their operatingcosts are reflectedin the natural gas consumption. The financialcosts of other inputs have been suitablyadjusted to reflect economic costs. Economic Costs of Major FertilizerInputs ($ per unit in 1990 prices) 1990 1995 2000 Crude oil FOB Bbl 15.5 15.4 22.8 Natural gas MMBtu 2.2 2.2 3.2 Rock Phosphate Landed ton 71.0 76.0 78.0 Sulfur Landed ton 135.0 229.0 241.0 PhosphoricAcid Landed ton 530.0 612.0 633.0 AS5IE June 1990 IMONESIA FERTILIZERRESTRUCTURING PROJECT Gresik A onla/Urma Proi ct Int.arar L coaDl-X -conomic Rat of Return tua miI Iionin 1vw prices) 1990 1991 1992 1998 1994 1995 1906 1997 1999 1999 2000 2006 to 2007 I. Input/Output Prices Ur"aFOB 125 128 140 1s5 176 196 192 189 186 la 1S0 180 Aumonia FOB 84 s6 96 110 125 140 188 186 183 180 128 128 Landed 109 1ll 121 1as 1S0 165 le8 16O 1s8 1SS 1ss 158 Rock Phosphate Landd 74 75 75 76 78 76 76 77 77 78 78 78 Sulfur Landed 136 1S0 170 199 214 229 231 284 286 238 241 241 Phos. Acid Londed 530 548 562 579 895 612 617 620 f26 627 688 683 A. Sulfato Landed 102 109 116 128 18o la8 18 184 1a8 182 131 lal TSP Landed 194 201 208 220 282 243 24E 248 251 154 257 267 Natural Gas 2.2 2.2 2.2 2.2 2.2 2.2 2.4 2.6 2.8 8.0 8.2 8.2 II. With the Project - Flow of Economic Resources 1. Capital Resources Used Capital cost (32.2) (140.70 (2.4) (7.6) (19.2)2 Working Capitol (10.7X (2.7) Total (82.2) (160.7) (62.4) (7.5) (21.8) 2. Economic Valuo of Production TSP 282.8 241.2 249.6 264.0 278.4 291.6 294.0 297.6 301.2 804.8 308.4 806.4 Am. Sulfate 66.3 70.9 76.5 80.0 84.5 89.7 88.4 87.1 86.5 85.8 85.2 85.2 Urea 80.0 64.8 89.7 88.8 s8.9 85.6 84.2 82.8 82.8 Others 15.8 15.8 15.8 16.8 16.8 16.8 16.8 15.8 16.8 16.8 16.8 16.8 Total 814.9 827.9 841.9 389.8 448.5 4sj.e 486.6 487.4 489.1 490.8 492.2 492.2 8. EconomicVariable Costs Fuel oil 19.8 19.8 19.8 12.0 NaturalGas 12.2 29.9 87.4 40.8 44.2 47.6 61.0 64.4 64.4 Amonis 18.2 18.5 14.7 9.8 Sulfur 88.5 87.2 42.2 49.4 53.1 56.8 57.8 58.0 68.5 59.0 59.8 59.8 Rock Phosphate 88.6 87.8 87.8 87.8 88.9 88.9 88.9 90.1 90.1 9to.1 91.8 91.3 PhosphoricAcid 127.7 182.1 135.4 189.6 148.2 147.6 148.7 149.4 150.6 161.1 152.6 162.6 Alumna 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 03 Utilities 7.7 7.7 7.7 7.7 11.4 11.4 11.4 11.4 11.4 11.4 11.4 11.4 go Chmicals .6. 6.6 6.6 6.6 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.4 m Bagging 13.8 18.8 18.8 14.6 15.6 16.0 16.0 16.0 16.0 16.0 16.0 16.0 X Total 811.4 821.0 880.5 842.0 851.1 a87.0 872.1 878.1 383.2 3s7.8 394.5 894.5 ___* * 1995 1996 1997 1998 19m 2000 2008 1990 1991 1992 1998 1994 to 2007 4. EconomicFixed Costa 18.8 18.8 18.8 18.8 14.1 ¶4.1 14.1 14.1 14.1 14.1 14.1 14.1 Maintenance 15.1 15.1 15.1 15.1 15.1 15.1 15.1I 15.1 15.1 Salaries and wages 15.1I 15.1I 15.1 7.5 7.6 7.6 Other costa 7.6 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 86.7 Total 85.9 85.9 86.9 85.9s 8.7 86.7 86.7 86.7 86.7 86.7 86.7 81.0 82.8 S. Nat Rosoure Flow 84.6) (189.7) (86.9) 4.4 55.7 88.1 77.7 72.6 69.2 66.8 III. WIihou tn-rro-lct - Flow of EconomicRt-urces - 1. EconomicVolua of Production 282.8 241.2 249.8 264.0 278.4 291.6 294.0 297.8 801.2 804.8 808.4 808.4 TSP 84.5 89.7 88.4 87.1 s8.6 85.8 86.2 86.2 Am. Sulfate 66.8 70.9 76.4 80.0 15.8 15.8 Others 15.8 15.8 15.8 15.8 15.8 15.6 15.8 15.8 15.8 15.8 409.4 Total 814.9 827.9 840.8 859.8 878.7 897.1 898.2 400.6 40a.6 408.4 409.4 2. EconomicVariable Costs 19.8 19.8 19.8 19.8 19.8 19.8 21.6 28.4 25.2 27.0 28.8 28.8 Fuel Oil 20.0 19.9 19.4 19.2 18.8 18.8 18.6 Amonia 18.2 18.5 14.7 10.4 18.2 59.8 59.8 Sulfur 88.5 87.2 42.2 49.4 58.1 56.8 57.8 58.0 58.5 59.0 86.6 87.8 87.8 87.6 88.9 88.9 88.9 90.1 90.1 90.1 91.8 91.8 Rock Phosphato 148.7 149.4 150.6 151.1 152.8 162.6 PhosphoricAcid 127.7 182.1 185.4 189.5 148.2 147.6 2.6 2.6 AlumIno 2.6 2.6 2.8 2.6 2.6 21.6 2.8 2.6 2.6 2.6 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 Utilities ~~~~6.57.7 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 Chemicals 13.8 18.8 eggingls 18.8 18.8 18. 18.8 1868 18.8 18.8 18.8 18.8 18.8 Total 811.4 821.0 880.5 848.5 858.8 868.6 a.9 870.9 874.2 878.6 861.7 861.7 4. EconomicFixed Costa 18.8 18.8 18.8 18.8 18.8 18.8 18.8 18.8 18.8 18.8 a8.8 18.8 Maintenance 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 15.1 SlarIesand wages 7.5 7.5 Othercosts 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.56 7. 7.5 85.9 86.9 Total 86.9 86.5 85.9 86.9 85.9 85.9 86.9 86.9 86.9 86.9 ) (8.2) B. S. Net ResourceFlow (82.4 29 C (26.8) (19.§) (11.0) . 2.4)11J.1 (S.) (e.§) (Sl. IV. Net IncrementalCash Flow Due to Prolect (82.2)(160.7) (61.8) 24.0 86.7 85.5 82.8 78.9 75.8 72.4 69.2 91.0 ' A Economic Rate of Return of the investment on the total complex - 20.7X. I. ASSIE O 1 October 1990 LFh 5~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~' INDONESIA FERTILIZER RESTRUCTURINGPROJECT PUSRI Urea II Urea Optimization Project CashFLows for £conomic Rate of Return (US2 million in 1990 prices) 1990 1991 1992 1998 1994 1996 1998 1997 1998 1999 2000 2000 to 2007 I. Inout/OutrutPrice. Urea FOB - bulk 106 108 120 188 156 175 172 169 168 168 160 160 Ammonia FOB 84 66 96 110 126 140 188 18S la 180 128 128 I. Capital Resources Used Capital Cost (7.8) (18.1) (8.7) 2.8 Total t(7.8) (13.1) (.7) 2.8 III. EconomicValue of Production Ures 18.7 23.8 28.6 29.9 29.4 28.9 28.4 27.8 27.8 27.8 Total 18.7 28.6 28.6 29.9 29.4 28.9 28.4 27.8 27.8 27.a IV. EconomicProduction Costs Ammonia 8.8 10.9 12.4 18.9 18.7 18.4 18.2 12.9 12.7 12.7 Utilities 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Maintenance 0.8 1.6 1.5 1.6 1.5 1.5 1.5 1.6 1.5 1.6 Total 7.8 12.8 14.1 16.6 16.4 16.1 14.9 14.6 14.4 14.4 V. Net ResourceFlow (7.8) (1.l) (2.8) 11.0 12.5 14.8 14.0 13.8 13.5 13.2 12.9 16.7 Base EconomicRate of Return - a7.2x. ASSIE October 1990 INDONESIA FERTILIZER RESTRUCTURINGPROJECT KALTIM I Ammonia/UreaProiect Cash Flows for Economic Rate of Return (USf million in 1990 prices) 2000 2008 1992 1993 1994 1996 1996 1997 1998 1999 1990 1991 to 2007 1. Input/Output Prices 160 138 166 176 172 169 166 183 160 Urea Prill FOB bulk 10S 108 120 170 148 166 18S 182 179 176 173 170 Urea Granules FOB bulk 115 118 130 128 128 96 110 125 140 138 135 133 130 Ammonia FOB 84 86 N) II. With the Project - Flow of Economic Resources 1. Caoital Resources Used 3.8 Capital Cost (1.0) (9.7) (16.4) (11.6) 3.8 Total (1.0) (9.7) (16.4) (11.6) 2. Economic Value of Production 120.3 134.7 132.5 130.1 127.9 125.6 123.3 123.3 Total Output 62.6 64.2 71.6 97.1 3. Economic Production Costs 19.7 19.7 19.7 19.7 19.4 19.4 19.4 18.3 19.7 19.7 19.7 19.7 Natural Gas 1.4 1.4 1.4 1.4 1.1 1.1 1.3 1.4 1.4 1.4 1.4 Catalysts etc. 1.1 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 Maintenance 10.0 10.0 10.0 10.0 10.0 10.0 10.0 overhead 10.0 10.0 10.0 10.0 10.0 Operating 2.6 2.5 2.6 2.5 2.6 2.5 2.5 2.5 Indirect costs 2.5 2.S 2.5 2.5 34.8 36.3 38.3 36.3 36.3 36.3 36.3 36.3 36.3 Total 35.7 36.7 36.7 90.8 50.7 84.0 98.4 96.2 93.8 91.6 89.2 87.0 4. Net Resource Flow 25.8 18.8 19.4 III. Without the Proiect - Flow of Economic Resources 4 1. Economic Value of Production 0 O 95.3 82.1 92.9 104.2 102.5 100.6 98.9 97.0 95.3 Total Output 62.5 64.2 71.5 92.9 104.2 102.5 100.6 98.9 97.0 95.3 95.3 Total 62.5 64.3 71.5 82.1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2008 to 2007 2. EconomicVariable Costs Natural gas 19.4 19.4 19.4 19.4 19.4 19.4 19.4 19.4 91.4 19.4 19.4 19.4 Catalysts etc. 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 Maintenance 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 Operating overheamd 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 Indirect costs 2.6 2.6 2.6 2.6 2.6 2.5 2.6 2.5 2.6 2.6 2.6 2.6 Total 35.7 35.7 35.7 36.7 86.7 35.7 85.7 35.7 36.7 36.7 86.7 36.7 3. Net Resource F!ow 26.8 28.6 a6.8 46.4 57.2 88.5 86.8 84.9 83.2 61.3 69.6 59.6 IV. Net Incremental Cash Flow Due to Proiect (1.0) (9.8) (16.4) 4.3 28.8 29.9 29.4 28.9 28.4 27.9 27.4 31.2 I' EconomicRate of Return of the investment - 67.1X ASSIE October 1990 0 0I - 125 - ANNEX 7-17 Page 3 of 3 P.T. Pupuk KalimantanTimur, Bonang, Indonesia Economic Evaluationof Kaltim - I OptimizationProject 1990 1991 1992 1993 on Assumptions Production- Without Optimizationin '000 tons Product Price ($/ton) Urea Prills 459.60 459.60 459.60 459.60 Urea Prills 140.00 Ammonia 170.00 170.00 170.00 170.00 Urea Gran. 150.00 Production - With Optimizaiton - in tons Ammonia 100.00 Urea Prills 459.60 459.60 512.30 512.30 Gas Price (I/MMBTU) 1.00 Urea Granules 55.70 118.80 Gas usage (MMBTU/ton Ammonia (in tons) 170.00 170.00 165.00 165.00 Before optimizaiton Gross Revenue (in million US$) Ammonia 44.00 Without optimization 81.34 81.34 81.34 81.34 Urea 26.00 With optimization 81.34 81.34 96.58 106.05 After optmization Through optimization 0.00 0.00 15.24 24.70 Ammonia 37.0C Urea 21.50 OperatingCosts - Without Optimization Catalyst ($ per ton) Natural gas 19.43 19.43 19.43 19.43 Ammonia 2.50 Catalysts & chemical 1.11 1.11 1.11 1.11 Urea 1.50 Maintenance 2.70 2.70 2.70 2.70 Investment (in mill $) 41.00 Operating overheads 10.00 10.00 10.00 10.00 Cash Cash Indirect costs 2.50 2.50 2.50 2.50 Flow Flow OperatingCosts - With Optimization 1990 (14.35) 31.2 Natural gas 19.43 19.43 18.32 19.67 1991 (20.50) 25.0 Catalysts & chemical 1.11 1.11 1.26 1.36 1992 10.05 55.6 Maintenance 2.70 2.70 2.70 2.70 1993 24.21 69.8 Operatingoverheads 10.00 10.00 10.00 10.00 1994 24.21 69.8 Indirect costs 2.50 2.50 2.50 2.50 1995 24.21 69.8 1996 24.21 69.8 Net Revenue (in million US$) 1997 24.21 69.8 Without optmization 45.60 45.60 45.60 45.60 1998 24.21 69.8 With optimization 45.60 45.60 61.80 69.81 1999 24.21 69.8 Due to optimization 0.00 0.00 16.20 24.21 2000 24.21 69.8 2001 24.21 69.8 Investment 2002 24.21 69.8 (in million US$) 14.35 20.50 6.15 2003 24.21 69.8 2004 24.21 69.8 Net Cash Flow (in million USS) 2005 24.21 69.8 With optimization 31.25 25.10 55.65 69.81 2006 24.21 69.8 Due to optimization (14.35) (20.50) 10.05 24.21 Economic Rate of Return from Optimization 471 NPV with Optimizationat 15Z (millionUS$) 346 - 126 - ANNEX 8 Page 1 INDONESIA FERTILIZER RESTRUCTURINGPROJECT A. Key Impl mentationIndicators Action Responsibility Target Date A. Loan Effectiveness Government/Bank May 1991 B. Policy Measures (a) Annual consultations Government/Bank Not laterthan October 1991,and th-reafter C. Gresik Restructuring (a) Ammonia/ureaplant: - start construction Greslk/Contractor/Licensors October 4, 1990 - constructionand Gresik/Contractor/Licensors January 1994 commissioningcompleted (b) Plant Modernization Gresik/Consultants Not laterthan - FeasibilityStudy and June 80, 1992 EIA (c) Preparationof EMP Gresik Not laterthan November80, 1991 D. OptimizationSubprojects - FeasibilityStudies and PFEs/Consultants Not laterthan EIAs June 30, 1992 E. Studies (a) Marketingand Distribution - Setting up Steering GOI/MOI Not laterthan May 1, 1991 Committee - Start GOI/MOI/PUSRI/Consultents June 1, 1991 - Completion Consultants March 1, 1992 - Agreementon follow-up GOI/Bank May 1, 1992 actions by GOI (b) Developmentof EMP for the FertilizerSector - Setting up Steering GOI/MOI Not later than May 1, 1991 Committee - Start GOI/MOI/Consultants June 1, 1991 - Completion Consultants March 1, 1992 - Agreementon follow-up GOI/Bank May 1, 1992 actions by GOI - 127 - ANiNEX8 Page 2 B. SupervisionPlan Bank SupervisionInput 1. The total Bank supervisioninput is estimatedat about 10 staff- weeks (SW) during FY91, 12 SW during FY92 and 10 SW annually from FY93 through FY97. The field supervisionschedule is given in the table below. GOI's Contributionto Supervision 2. Project Monitoringand Coordinationwill be the responsibilityof the DirectorateGeneral of Chemical Industryof the MOI. This Directorate will be responsiblefor coordinatingwith the participatingfertilizer enterprises(PFEs) arrangementsfor Bank supervisionmissions and for providing informationrequested by the Bank. 3. All PFEs will submit semi-annualprogress reports (in English), generallyfollowing the format being used for Loan 2879-IND (IndustrialEnergy ConservationProject) and covering their respectiveoperations under the Project. FIELD SUPERVISIONSCHEDULE Approximate Dates Activity Expectedskill requirements SW 02/91 Project Start-up Engineering,procurement, project 4.0 management 06/91 Progressreview: A/U construc- Engineering,procurement, environment, 4.0 tion, optimizationsubprojects financialanalysis, project management APR.and EIAs. 11/91 Progressreview: A/U construc- Engineering,procurement, financial 4.0 tion; optimizationsubprojects; analysis,project management, studies;Gresik's EMP. environment 02/92 Progressreview: A/U construc- Engineering,procurement, financial 4.0 tion; optimizationsubprojects; analysis,project management studies 06/92 Progressreviow: A/U construc- Engineering,procurement, financial 4.0 tion; optimizationsubprojects; analysis,project management reviewof studies and agreement on follow-upactions by 001. 11/92 Progress review: A/U construc- Engineering,financial analysis, pro- 4.0 tion; optimizationsubprojects ject management 1993 to Two supervisionmisisons Engineering,financial analysis, pro- 4.0 1997 annuallyfor progressreview; ject management each last mission to assistMOI in preparationof PCR. - 128 - ANNEX 9 INDONESIA FERTILIZERRESTRUCTURING PROJECT Selected DocumentsAvailable in the Project File A. P.T. PetrokimiaGresik - EnvironmentalImpact Study of PetrokimiaGresik IndustrialArea - Executive Summary, June 1990. - Annual Reports, 1986, 1987, 1988. - Unaudited FinancialStatements, 1989. - Invitationto Bid, Gresik Ammonia/UreaFacilities, October 1989. - Bid EvaluationReport, Gresik Ammonia/UreaFacilities, June 1990. B. P.T. PUSRI - Annual Reports, 1986, 1987, 1988. - Unaudited FinancialStatement, 1989. C. '.T. Pupuk Iskandar Muda - Annual Reports 1986, 1987, 1988. - Unaudited FinancialStandards, 1989. D. P.T. Pupuk KalimantanTimur - Annual Reports, 1988. - Summary Financial Statements,1986, 1987. - UnauditedFinancial Statements, 1989. E. P.T. Pupuk Kuyang - Summary Financial Statements,1986, 1987, 1988. - UnauditedFinancial Statements, 1989. F. Indonesia - FertilizerRestructuring Project ParticipatingFertilizer Enterprises: Status and Performance Report prepared by S. Gangophadyay(Consultant) during Project pre-appraisal;November 1989, AS5IE MAPSECTION tBRD2214AIR _ ~~ teA ~THAiLAND dRIPINDONESIAIM21R /F' I so's ) N', ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~PHILIPPINESINOSA-HILIP FERTILIZER RESTRUCTURING PROJECT , K -. UUIJNE \ ( \ t E~~~~~~~~~~~~~~~~~~~~~~~~~~~RUNEIC eTI1S PAT MALAYSIA _ U - I K) BKHFFLAFKFFKUrclA UFFICF OFPeuKK < g S > r u-TERM NALS S E I8R > 114S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..1 F.. ',la e \MALAYS A I B 60FOKU-B ..U""-SINCGAPORE FF KOK'FA-- / U'" _ rJ XHAIMA#FER > x FO< - - - INTER~ATIO^t BOUNDA-IER U' \ , U RA}U 5$ U'I A WA / ,_s - / R /A ~ A r I..- F'o,OFOFF FHKFHF KHK,H 14/~~~~~~~~~~~~IRANJAOA TESo 10. 1e;0 \\ v ts \~~~~~~~AC/CL/FU/C K)nr ,, \ 0 f'EAM -'O ½b.-.\ \,\/ \I oUU o B SO0'FOoHF F_rtKFlerOlanL KOFF f | t tOFOFO ShooF D00FF KUJANc. IFFF b tUM WA MJAW KFIOHF. Fi, KOJSUUF.C KOFO KFU,o' Fe.KF Be9rKOFO BOtt ' . 1 'l l ' NOVEMBERl9f(~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~NOEER19