Indonesia - Java-Bali Power Sector Restructuring and Strengthening Project : restructuring (Vol. 1 of 2) : Main report

 Document of The World Bank Report No: 66192 v1 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF JAVA-BALI POWER SECTOR RESTRUCTURING AND STRENGTHENING PROJECT LOAN 7758-ID/4712-IND June 26, 2003 TO THE REPUBLIC OF INDONESIA December 27, 2011  ABBREVIATIONS AND ACRONYMS BKSDA Office of Natural Resources Conservation ERP Enterprise Resource Planning System FM Financial Management PLN Perusahaan Listrik Negara (Persero) PGN Perusahaan Gas Negara Perhutani State-owned Enterprise under the Ministry of Forestry ROW Right of Way Regional Vice President: James W. Adams Country Director: Stefan G. Koeberle Sector Manager / Director: Franz R. Drees-Gross Task Team Leader: Dhruva Sahai 2  INDONESIA — JAVA-BALI POWER SECTOR RESTRUCTURING AND STRENGTHENING PROJECT P063913 LOAN 7758-ID/4712-IND Restructuring Paper 1. The closing date for the Indonesia, Java-Bali Power Sector Restructuring and Strengthening Project, [Loan No 7758-ID/4712 IND], P063913 will be extended from December 31, 2011 until December 31, 2013. 2. The performance of the borrower and the implementing agency is satisfactory in general and there are no unfulfilled covenants or outstanding or qualified audit reports or financial reports, nor are there any problems with the audit or FM reports that have been submitted by the project implementing agency, PLN. The project is structured under five components (a) Power System Strengthening (500 kV transmission system), (b) Power System Strengthening (150 kV subtransmission system), (c) PLN Enterprise Resource Planning System (ERP), (d) PLN restructuring and institutional strengthening (TA), and (e) PGN restructuring and institutional strengthening (TA). The current status of these components is described below. However, for the purpose of clarity related to this request for an extension of the loan closing date, the components (a) and (b) above are re-classified under (i) transmission line works and (ii) substation works. The ongoing project work is being carried out satisfactorily except for the time delays experienced in some items as detailed below. i. Transmission line works: The main delays have been encountered in Component (i) transmission line works (package nos. 3A, and 3B) mainly on account of the difficulties in securing the rights of way (ROW) needed for construction. PLN was expected to complete seven (7) lines under packages 3A, 3B, and 6 of which two lines will have been completed by the current loan closing date of December 31, 2011 (see Table 1). Table 1: Transmission Line Works Package Completion Pending Issues Status % as of Sept. 30, 2011 3A i 150kV Bandung Selatan – Kamojang 87.7 Perhutani, BKSDA clearances pending, price escalation dispute awaiting resolution ii 150kV Wayang Windu Incomer 100 Completed. To be energized by Dec. 31, 2011 iii 150kV Kamojang - Drajat 83.5 Perhutani, BKSDA clearances pending, price escalation dispute 3  awaiting resolution iv 150kV Tasikmalaya - Ciamis 85.1 ROW negotiations ongoing with private landowners, price escalation dispute awaiting resolution 3B v 150kV Drajad - Garut 48.1 ROW negotiations complete, awaiting materials replacement vi 150kV Garut - Tasikmalaya 63.2 ROW negotiations ongoing with private landowners, awaiting materials replacement 6 vii 150kV Perak - Ujung 100 Completed It may be noted that all transmission line works involving the uprating of voltage or conductors will be completed by the current loan closing date, while those involving rights of way and land acquisition issues are being delayed. ii. Substation works: With respect to component (ii) substation works, (package nos. 1, 2A, 2B, 4, and 5) all activities are completed except for two items. Works completed include five (5) out of seven (7) 500/150kV interbus substations, as well as the entire forty two (42) of the lower voltage substations. The incomplete substation works include the 500/150kV inter-bus transformers at Mandirancan and South Surabaya where the transformers procured have been used at other locations to address system exigencies caused by transformer failures and load demand conditions. iii. Component (c) ERP System has been completed satisfactorily and the ERP system is operational and has improved PLN’s operational performance by making PLN’s business processes more transparent and by introducing internal controls. ERP has also introduced greater accuracy and timeliness of corporate information that has enhanced PLN’s capabilities for well informed decision making. In addition to strengthening PLN’s management capabilities, these initiatives have also resulted in cost savings for PLN. iv. Component (d) PLN restructuring and institutional strengthening (TA) has also been completed satisfactorily and in particular the supplementary study on the Upper Cisokan Pumped Storage Hydro Electric Power Plant. v. The activities under Component (e) Strengthening the capacity and assisting with the restructuring of PGN (TA) a state-owned gas company have been completed. PLN has therefore made substantial progress to date on all project components with many items having been completed or to be completed by the current closing date of December 31, 2011. An additional financing loan for the extended deployment of the ERP system in Sumatra and Sulawesi was also approved by the Board on June 23, 2010. Therefore, the main difficulty faced by PLN in completing all project activities by the current loan closing date relate to the delays in constructing transmission lines. 4 The physical components of the project enable the development of the 500 kV network from east to west Java and the strengthening of a number of sub transmission lines and substations. The project benefits accrue from the integrated nature of the system being developed, and the loss of individual components can significantly downgrade the expected benefits. Thus the successful completion of all the project components is essential and is highly desired. It is also advisable for the Bank to continue its oversight of outstanding works during the completion of the remaining activities. 3. The proposed extension is necessary for the purpose of completing five transmission line packages that have been delayed in execution, and the replacement of two transformers that were used at alternate locations. PLN has provided a specific action plan with identifiable milestones to complete all outstanding work. These milestones have been prepared to provide reasonable assurance of adequate monitoring and follow up so that the work can be expected to be completed by the new requested completion date. 4. The request for this extension was made by the Ministry of Finance for the Republic of Indonesia in a letter dated December 20, 2011. The project was initially restructured in June 2008 in order to remove the major sector-restructuring activities of the project because the legal basis for successfully implementing them no longer existed, to expand the deployment of the Enterprise Resource Planning System (ERP) to include the entire Java-Bali power system, and to extend the closing date of the project by one year to December 31, 2009. The loan was further extended in December 2009 by two years through December 31, 2011 to allow for the completion of outstanding project works. This will be the third extension of the project which had an original closing date of December 31, 2008. 5