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Document of FILEOOPY The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. P-3412-IND REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE Public Disclosure Authorized INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO $300.0 MILLION TO THE REPUBLIC OF INDONESIA Public Disclosure Authorized FOR A TWELFTH POWER PROJECT November 22, 1982 Public Disclosure Authorized 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. CURRENCYEQUIVALENTS Currency Unit - Indonesian Rupiah US$1 = Rp 625 Rp 100 = US$0.16 Rp 1 million = US$1,600 WEIGHTS AND MEASURES 1 metric ton = 1,000 kilograms (kg) 1 liter (1) = 0.0063 barrels 1 kilometer (km) = 0.6215 miles (mi) 1 kilovolt (kV) = 1,000 volts (V) 1 megavolt-ampere = 1,000 kilovolt-amperes (kVA) 1 kilovolt-ampere = 1,000 volt-ampere (VA) 1 megawatt (MW) = 1,000 kilowatts (kW) 1 gigawatt hour (GWh) = 1 million kilowatt hours (kWH) TCF = Trillion cubic feet ABBREVIATIONS AIP - Accelerated Investment Program of the National Electricity Authority (1982/83-1984/85) BAKOREN - The National Energy Board BATUBARA - National Coal Entity BWI - Beca-Worley International of New Zealand DGEP - Directorate-General of Electric Power, Ministry of Mines and Energy GENZL - Geothermal Energy of New Zealand GOI - Government of Indonesia LNG - Liquified Natural Gas LRMC - Long Run Marginal Cost MME - Ministry of Mines and Energy MONENCO - Montreal Engineering Company of Canada PLN - National Electricity Authority PERTAMINA - National Oil and Gas Company REPELITA - National Five-Year Development Plan (Repelita I, 1969-74, Repelita II, 1974-79, Repelita III, 1979-84) GOVERNMENT OF INDONESIA FISCAL YEAR April 1 - March 31 FOR OFFICIAL USE ONLY INDONESIA TWELFTH POWER PROJECT Loan and Project Summary Borrower: Republic of Indonesia Beneficiary: Perusahaan Umum Listrik Negara (PLN), the National Electricity Authority Amount: $300.0 million equivalent (including capitalized front- end fee) Terms: Repayable in 20 years, including 5 years of grace at the standard variable rate. Onlending Terms: The proceeds of the loan will be onlent from the Govern- ment to PLN at an interest rate at least equivalent to that of the Bank loan plus an appropriate administrative cost, for 20 years including a grace period of 5 years. The Government will bear the foreign exchange risk. Project The main objectives of the project are to diversify the Description: sources of electricity production mainly through the use of geothermal energy and coal, improve the operational efficiency of PLN's distribution networks, reduce PLN's system losses, and provide a training and consultancy program for the continued institutional development of PLN. The project will consist of: (a) construction of a 110 (2 x 55) MW extension of the Kamojang geothermal station in West Java and substation equipment to interconnect with the existing transmission system; (b) construction of the third 400 MW, coal-fired, generating unit at the Suralaya thermal station in West Java, and step-up substation extensions to connect it with the 500 kV system under construction including engineering of the third and fourth generating units; (c) distribution system improvements in Java, North Sumatra and South Sulawesi; This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - (d) a mini-hydro development program in North Sumatra; and (e) training facilities and services to assist PLN's manpower development program. There are no unusual risks associated with this project. The inherent risks associated with geothermal developments, viz. of assured steam supply have been minimized by extensive investigations, and adequate advance production drilling. Estimated Costs:/l Local Foreign Total ------ ($ millions) ----- Kamojang Geothermal 11.0 69.3 80.3 Suralaya Unit 3 38.6 204.0 242.6 Distribution subproject 175.0 350.0 525.0 Mini-hydro Project 4.9 7.6 12.5 Training Program 12.4 8.7 21.1 Base Cost 241.9 639.6 881.5 Physical contingencies 24.2 59.5 83.7 Price contingencies 94.9 129.5 224.4 Total Project Cost 361.0 828.6 1,189.6 Interest during const- truction Bank loan - 127.7 127.7 Others - 149.2 149.2 Front-end fee on the Bank loan - 4.4 4.4 Total Financing Required 361.0 1,109.9 1,470.9 /1 Project costs are exempt from direct taxes and duties. - iii - Financing Plan: Local Foreign Total ------ ($ million) -------- Bank Power XII - 300.0 300.0 Power VI (1365-IND) - 2.3 2.3 ADB Firm - 69.5 69.5 Planned - 26.0 26.0 Export Credit (Firm) - 182.0 182.0 Export Credit/Others/l (Planned) - 253.2 253.2 GOI/PLN 361.0 276.9 637.9 Total 361.0 1,109.9 1,470.9 Estimated Disbursements: Bank FY 1983 1984 1985 1986 1987 1988 ------------ ($ million) ------------- Annual 12.0 36.7 105.1 88.1 30.9 27.2 Cumulative 12.0 48.7 153.8 241.9 272.8 300.0 Economic Rate of Return (on the PLN Investment Program): 12% Staff Appraisal Report: No. 4046-IND, dated November 3, 1982. /1 "Others" include possible bilateral aid. REPORT AND RECOMMENDATIONOF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF INDONESIA FOR A TWELFTH POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Indonesia for the equivalent of $300.0 million (including the capitalized front-end fee) to help finance a Twelfth Power Project. The loan would have a term of 20 years, including five years of grace, at the standard variable interest rate. The proceeds of the loan would be onlent to Perusahaan Unum Listrik Negara (PLN), the Nhtional Electricity Authority, at an interest rate at least equivalent to that of the Bank loan plus an appropriate administrative cost, for 20 years including a grace period of 5 years. The foreign exchange risk will be borne by the Government of Indonesia (GOI). In addition to the Bank loan, the project would also involve loans from Asian Development Bank and export credits (and other possible bilateral aid) amounting to about $95 million and $435 million respectively. PART I - THE ECONOMY /1 2. A basic economic report, "Indonesia: Growth Patterns, Social Progress and Development Prospects" (No. 2093-IND dated February 20, 1979), was distributed to the Executive Directors on February 26, 1979, and a country economic memorandum has been prepared in each subsequent year. The latest of these, titled "Indonesia: Financial Resources and Human Development in the Eighties" (No. 3795-IND dated May 3, 1982) was distributed to the Executive Directors on May 6, 1982. Annex I gives selected social and economic indicators for the country. Background 3. The Republic of Indonesia is a highly diverse country spread across an archipelago of more than 13,000 islands with a land area of about two mil- lion sq km. It now has a population of over 150 million, growing at about 2.2% p.a., and is the world's fifth most populous nation. The country has a highly diversified resource base, with plentiful primary energy resources, significant mineral deposits, large timber potential and a developed system of agricultural commodity production and export. A high proportion of these primary resources are located on the sparsely populated islands of Sumatra and Kalimantan, while two-thirds of the population live on Java which has areas with some of the highest rural population densities in the world. About 20% of the population live in urban areas in both Java and the Outer Islands, and /1 Substantially unchanged from the President's Report on the Central Java Pulp and Paper Engineering Project (No. P-3377-IND), circulated under cover of R82-263, dated September 1, 1982, and approved by the Executive Directors on September 21, 1982. - 2 - the current rate of urban population growth is over 4% p.a. The 1981 estimate of GNP per capita is $520, which places Indonesia for the first time amongst middle income countries./l Macroeconomic Developments and Resource Management 4. The economy has now been growing at almost 8% p.a. for over a decade. This has been associated with rapid increases in public expenditures, total investment and savings. The initial impetus for this occurred in the period of recovery from the turbulence of the mid-60s. The Government took effective action to restore macroeconomic stability, liberalize the economy, rehabilitate infrastructure, and provide incentives for domestic and foreign private investment. However for the last decade the dominant external influence has been the huge expansion, and significant variability, in foreign exchange earnings from oil. Net exports from the oil and gas sector rose from $0.6 billion in 1973/74 to $10.8 billion in 1980/81, when the current account enjoyed a surplus of $2.5 billion. Oil receipts also provide about 70% of Central Government receipts and have helped finance the sustained increase in demand via the budget. In 1981/82 depressed international markets, combined with continued rapid expansion in demand for imports, :Ledto a $5 billion turnaround in the current account, which registered a deficit of $2.5 billion. However, the economy appears remarkably resilient in the face of this change: growth was maintained at an estimated 8% in 1981, the reserve cover is more than adequate and the country is highly creditworthy. The reason for this macroeconomic resilience can in part be attributed to effective management of the oil-related resource windfalls.