GLOBAL ENVIRONMENT FACILITY Republic of Indonesia Solar Home Systems Project Project Document ; December 1996 IU THE WORLD BANK I -~~~~~~~~~~~~~~~~~ GEF DocUmentation The Global Environment Facility (GEF) assists.dev,eloping countries to protect the -lblevrnet n4u ra:global warming, pollution of international waters,- * ~~~destruction of biodiversity, and.depletion of the ozone layer. The GEF is jointly implemented -bythe Unitedl Nations DevelopmentProgrimrne, the United Nations Environment Programme, and the World Bank. -- GEF Project Documents'- identified by a green band-- provide extended' project- specific information. The implementing agency lesponsible for each.project is identified by its logo on the cover of the dodument. - I - r - Global Environment Division * Environment-Departmneni - ---World Bank * 1818 H Street,NW Washington, DC 20433 Telephone: (20?) 473-1816 * w -. Fax: (202)522-3256 - Report No. 16238-IND Republic of Indonesia Solar Home Systems Project Project Document December 1996 Indonesia Policy and Operations Division Country Department III East Asia and Pacific Region CURRENCY EQUIVALENTS Currency Unit - Indonesian Rupiah (Rp) (As of September 1996) US$ I = Rp2,341 Rp I billion = USS 0.427 million FISCAL YEAR April I - March 31 WEIGHTS AND MEASURES I metric ton - 1,000 kilograms (kg) I liter (l) = 0.0063 barrels (bbl) I kilometer(km) - 0.6215mile(mi) I kilovolt (kV) = 1,000 volts (V) I megavolt ampere (MVA) 1,000 kilo-volt amperes (kVA) I megawatt (MW) = 1,000 kilowatts (kW) 1 gigawatt hour (GWh) I 1 million kilowatt hours (kWh) I terrawatthour (TWh) I 1 billion kilowatthours (kWh) ABBREVIATIONS BAKOREN - National Energy Board BAPPENAS - National Development Planning Agency BPPT - Agency for the Assessment and Application of Technology CO2 - Carbon Dioxide DGEED - Directorate-Generalof Electricity and Energy Development DRE - Decentralized Rural Electrification EA - EnvironmentalAssessment FCCC - The Framework Convention on Climate Change GEF - Global Environmental Facility GBHN - Garis-Garis Besar Haulan Negara (Outlines of State Policy) GOI - Govemment of Indonesia IERR - Internal Economic Rate of Return ISO - International Standards Organization LRMC - Long Run Marginal Cost LSDE - Technical Implementation Unit & Energy Technology Laboratory MME - Ministry of Mines and Energy MOC - Ministry of Cooperatives and Small Enterprises Development PERTAMINA - National Oil and Gas Company PLN - State Electricity Corporation PIP - Project Implementation Plan PSG - Project Support Group PV - Photovoltaic RE - Rural Electrification REPELITA - Five-Year Development Plan SHS - Solar Home System TA - TechnicalAssistance Actg. Vice President: Ms. Marianne Haug Director: Ms. Marianne Haug Division Chief: Mr. Peter R. Scherer Staff Member: Mr. Arun Sanghvi PART I: Project Summary i INDONESIA SOLAR HOME SYSTEMS PROJECT LOAN/GRANT AND PROJECT SUMMARV Borrower The Republic of Indonesia ImplementingAgency Private sector firms engaged in the supply and installation of solar photovoltaic home system Beneficiaries Rural households without access to grid electricity in the provinces of West Java, South Sulawesi and Lampung (Sumatera) Poverty Not applicable Loan Amount US$20.0 million equivalent Terms Standard variable interest rate for a termn of 20 years, including five years of grace for currency pool loans. CommitmentFee 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Grant Amount GEF Trust Fund Grant of SDR 16.8 million (US$24.3 million equivalent) Terms Grant Financing Plan See para 3.21 Economic Rate of Return 39% including global environmental benefits Map IBRD 26570 Project ID Number ID-PA-35544 I GEF and IBRD are financing mutually dependent activities and therefore this document is intended to meet both GEF and IBRD processing requirements. A GEF project document based on the SAR has been prepared to meet GEF Council and Public Information needs. 1. THE ENERGY AND POWER SECTORS Energy Sector Overview 1.1 Indonesia is richly endowed with diverse and large energy resources including oil, natural gas, coal, hydropower and geothermal. The oil and gas sectors continue to play a critical role in the Indonesian economy, together accounting for over 85 percent of commercial net energy consumption and for about 20 percent of the country's export receipts. 1.2 Indonesia's basic goals and policies for the future development of the energy sector are described in the Outlines of State Policy (GBHN). promulgated by the People's Consultative Assembly (MPR) in March 1993 to guide the formulation of the Sixth Medium- Term (five-year 1994/95-1998/99) Development Plan (REPELITA VI); and the Second Stage Long-Term (twenty-five year) Development Strategy (PJPT-II). The GBHN highlights the importance for Indonesia's sustained economic and social development of meeting its rapidly growing energy needs efficiently-including through conservation and diversification of primary energy resources and their more efficient utilization-and of minimizing the adverse environmental and social impacts of energy use. 1.3 In the power sub-sector, the GBHN recognizes that an adequate, reliable and reasonably priced electricity supply is essential for the country's continuing development, emphasizing its essential role in serving the productive sectors and in contributing directly to improving the living standards of the people in all regions of the country. Rural electrification (RE) is a key and integral part of the Government's rural development strategy; the long-term goal is to electrify all villages and enable the basic services provided by the modern energy form, electricity. 1.4 The Government of Indonesia (GOI) has also relied on the following policies in support of its objectives for the energy sector: (a) diversification: A central and continuing thrust of the Government's energy strategy is to slow the pace of Indonesia's transition to a net oil importer by diversifying domestic energy consumption towards alternative and more economic and indigenous energy resources that either have a non-exportable surplus (coal, natural gas), or are renewable and non-tradable (hydro, geothermal). In the power sector, a major user of petroleum fuels, the plans are to further reduce oil's share in power generation from about 15 percent in 1995/96 to about 5 percent by the end of this decade. Considerable potential exists for substituting conventional energy supplies and especially for meeting the decentralized energy needs of the rural sector, by use of cost effective renewable energy supplies, particularly mini-hydro and mini-geothermal power schemes, biomass- based power projects (including cogeneration), and solar power energy systems. The Government has been undertaking several solar photovoltaic (PV) pilot projects for demonstration purposes. (b) energy pricing: On the demand side, the Government's policy has been to maintain average petroleum product prices at or above international parity (efficiency pricing), while cross- subsidizing as necessary the price of kerosene in order to ensure its affordability, with an implicit tax on gasoline. Likewise with electricity, while periodic adjustments have generally 2 maintained the average retail price close to the long-run marginal cost of supply in Java, electricity prices have been maintained below economic cost for small residential and industrial users who account for about 40 percent of sales. The Govemment's pricing policy has also maintained a uniform price structure for electricity and petroleum products in all parts of the country. (c) private sector participation: The private sector operates significant amounts of captive power capacity, and is expected to play an increasingly important role in the supply of oil, gas and electricity. In oil and gas, Pertamina forms joint ventures with private Production Sharing Contractors (PSCs) for exploration and production; private sector participation is also being welcomed in the emerging gas transmission grid. In power, 55% (11,600 MW) of the additional grid capacity planned for Indonesia between 1994/95 and 2003/04 (excluding captive power) is projected to come from independent power producers (IPPs). To date, over 2,500 MW of IPP capacity is under construction and expected to come on line by 1999-2000. In addition, Power Purchase Agreements (PPAs) have been signed with IPPs for over 3,000 MW of capacity. Private participation in PLN, the national power utility, is also envisaged. (d) regionally balanced development: The GOI has: (i) maintained a uniform price structure for electricity and petroleum products in all parts of the country; and (ii) has plans to extend the supply of electricity in a balanced manner to all parts of the country. This policy entails the subsidization of higher cost energy supply to outside Java and to the rural population. (e) environmental protection: The GOI's environmental policies include support of greenhouse gas reduction, and development of renewable energy resources. The Basic Environment Law of 1982 provides the overall framework. The Govemment has established and utilizes uniform procedures and guidelines for the preparation, and approval of environmental impact analysis (AMDAL), for issuance of environmental clearances, as well as periodic reporting requirements on environmental management and monitoring during project implementation. Sector Institutions 1.5 The principal agency responsible for implementing Government policies in the energy sector is the Ministry of Mines and Energy (MME); which coordinates all activities in the energy sector and supervises the state enterprises in the sector: PERTAMINA (oil, gas and geothermal), P.T. Bukit Asam (coal), PGN (gas distribution) and PLN (electricity). Other ministries and agencies are also involved in the sector, for example, the Ministry of Public Works is responsible for hydropower resource surveys and the operation of multipurpose hydro plants, the National Atomic Energy commission is responsible for nuclear development, and the Ministry of Cooperatives and Small Enterprises Development (MOC) is responsible for enhancing the role of cooperatives in rural electrification. An inter-ministerial National Energy Board (BAKOREN) coordinates energy policies and development with those of other sectors. BAKOREN is supported by a Technical Committee (PTE) consisting of senior officials in different departments, chaired by the Director General of Electricity and Energy Development (DGEED). The electricity subsector is regulated by the MME through the DGEED. The Rural Electrification (RE) Steering Committee, chaired by the DGEED, is responsible to ensure inter-agency coordination and cooperation in matters related to the Government's rural electrification program. The organization chart of MME is shown in Annex 1.1. Environmental policy development is led by the State Coordinating 3 Minister for Environment and implementation is led by the national and newly enabled regional Environmental Impact Agencies. 1.6 The Agency for the Assessment and Application of Technology-BPP Teknologi (BPPT)-was established in 1978 as a non-departmental government agency directly subordinated and reporting to the President. The organization chart for BPPT is shown in Annex 1.2. Both DGEED and BPPT have responsibility for solar photovoltaics (PV) project development and implementation; one of BPPT's major responsibilities related to solar PV is the implementation of GOI's "50 MWp" program, under which about one million solar home systems will be installed in rural households. They have assisted other govemment agencies in project specification, procurement, supervision, monitoring and evaluation. The principal responsibility of DGEED's Directorate of Energy development is to set energy technology policy, although they have also implemented a number of pilot and demonstration projects using solar energy. BPPT is responsible for technology development, and its Technical Operations Unit for Energy Resources (LSDE) is responsible for R&D, demonstration and testing PV systems performance, and assisting both BPPT and DGEED in preparing PV system specifications and proposals. The photovoltaic industry is represented by its trade association, AP Surya. Electricity Subsector 1.7 The Electricity Act (Law No. 15 of 1985) defines the legal framework for electricity sector. Under this Act, PLN, the State Electricity Corporation-established by Government Regulation No. 18/1972- has both the right and obligation to supply power in Indonesia. The provisions of the Electricity Act are amplified in Government Regulation No. 17/1990 for PLN, the State Electricity Corporation; and No. 10/1989 for others. The Electricity Act permits establishment of private power producers, distributors and licensees. Presidential Decree No. 37/1992 specifically authorizes private sector participation under BOO schemes, and permits cooperatives and other legal entities to generate, transmit, and distribute power for public use. 1.8 The power sector has expanded rapidly during the 1980s and 1990s. Electricity sales of PLN grew at an average annual rate in excess of 14% between 1981/82 and 1994/95, from 7,845 GWh to 49,740 GWh. During the same period, the number of customers grew nearly six-fold, from 3.2 million to about 19.5 million. In order to meet this growth, PLN's installed capacity increased nearly five-fold from 3,032 MW in 1981/82 to over 15,000 MW in 1995. Over the same period, PLN's implementation capacity has grown significantly, whereby it is connecting over 1.5 million new customers a year, a pace unmatched by a single utility, and PLN now carries out an investment program of about US$3.5 billion annually. 1.9 Rural electrification The primary means for achieving the national development goals for rural electrification (para 1.3), is through the realization of explicit targets set for village electrification in the national Five Year Development Plans (REPELITA), starting with REPELITA III (1979/80-1983/84), and ongoing under REPELITA VI (1994/95-1998/99). The primary agent for implementing the Government's targets for RE is PLN. For nearly the last two decades, PLN has consistently met or exceeded the Government's targets for RE and the record is impressive. Starting around 1978/79, electricity access has reached over 39,000 rural villages-a ten-fold increase from the figure of 3,400 electrified villages in 1980/81-and about 12 million rural households receive PLN supply (Annex 1.3). The interregional variations in village electrification coverage reflect the Government's balancing of two 4 divergent pulls, balanced regional development on the one hand versus economic considerations on the other hand. Sector Issues and Strategy 1.10 The task ahead In spite of the rapid growth in electricity generation capacity and in coverage by PLN, there is considerable unmet demand at economic prices. Today, the majority of the households must do without electricity; many industrial establishments must rely on more expensive self generation since PLN has been unable to meet their entire consumption requirements. Electricity consumption today averages about 260 kWh per capita, a level below that in many countries with lower per capita incomes than Indonesia . Furthermore, the rapid pace of sector growth has strained PLN's institutional and management capacities to a point where customer service, and quality-service reliability, power quality and customer responsiveness-have been compromised, while costs remain stubbornly high, especially outside Java2. The rural household electrification coverage in Indonesia, about 40 percent, is considerably behind its regional peers; with Thailand reporting a coverage around 80 percent and Malaysia having a coverage of about 98 percent. Moreover, the wide disparities in coverage-urban- rural as well as across Indonesia-pose a direct challenge to the Government's objective of achieving a balanced spatial distribution of development and to reduce the inequality in quality of life. 1.11 Challenges Mobilizing sufficient resources-financial, managerial and technical-for ensuring the adequacy and reliability of power supply and at competitive prices, and quickly and efficiently expanding the access of electricity to households throughout the country, poses a formidable challenge to the continued development of the sector. Prospects for attracting the large sums of money required year- in-and-out to just one sector in Indonesia-US$ 5-6 billion per year-must also be viewed against the backdrop that in the future the Government will be hard pressed to maintain past levels of financial contributions to PLN, because of increasing demands on its resources from priority social sectors. The task of financing expansion of RE coverage is daunting, to say the least; due to the geographic dispersion and low energy demand of much of the rural population, the unit costs of conventional means of electrification by grid extension are extremely high (para 2.14). 1.12 Strategy To meet the challenges associated with the goal of enhancing service availability and reliability at competitive cost, the Government, with Bank assistance, has formulated and initiated a major reform of the sector. The four pillars of the ongoing reform are: (i) expand entry to private investors and operators to access additional management and finance capacity; (ii) decentralize, corporatize and divest PLN, to improve operating performance and customer service and reliability, and to prepare the company to directly access capital markets; (iii) reform regulatory and sectoral functions to promote high quality service at least cost; and (iv) rationalize tariff levels to strengthen sector finance, while providing incentives to PLN and the private sector to deliver performance more in line with best practices. 1.13 With respect to rural electrification (RE), the Government's strategy until recently has focused on the conventional approach of grid extensions coupled with, where necessary, deployment of isolated 1/ For exarnple, the average consumption in India is about 300 kWh per capita. 2/ Indonesia: Economic Consequences ofPower Sector Inadequacy in the ManufacturingSector, Yellow Cover Report No. 15623-IND, EA31E, World Bank, June, 1996. 5 diesel generator(s); for this purpose, GOI, with Bank assistance, has developed a Master Plan for expanding RE coverage. More recently, GOI has begun to recognize the potential role for off- grid/decentralized rural electrification (DRE), such as solar photovoltaic (PV) home systems, as a complement to the least cost grid extension program (para 2.17). Underlying the Government's longer term vision of installing one million solar home systems (the 50 MWp program) is the recognition that increasing penetration of solar PV systems in rural Indonesia will help to: (i) increase the pace of electrification coverage, at a time when PLN's "hands are full" implementing the Master Plan for grid extension; and (ii) reduce the mounting burden of financing expansion and operations of PLN supply to satisfy uneconomic rural loads. Climate Change 1.14 Indonesia has ratified the FCCC on August 23, 1994, so that it is eligible to receive GEF funds under this convention. In order to help fulfill its FCCC national commitments, Indonesia has initiated two greenhouse gas mitigation strategy studies. The Asia Least-Cost Greenhouse Abatement Strategy (ALGAS) project, financed by UNDP/GEF, examines Indonesia's GHG emission reduction options in an Asia regional context. Indonesia is also a participant in the second round of study activities financed under the U.S. Country Studies Program. Although both studies are still under preparation, the relevance of photovoltaics as a greenhouse emissions abatement option for Indonesia is clear. The country is characterized by a large, growing and dispersed rural population, a substantial fraction of whom are not electrified but who presently consume fossil fuel-based energy for lighting and radio and TV services. As a zero greenhouse gas emitting technology, the Solar Home Systems can meet these energy demands while substituting for higher polluting kerosene, diesel and grid-based options. 6 2. DECENTRALIZED RURAL ELECTRIFICATION Rural Well Being and Solar Power 2.1 The transition to electricity proceeds at a slow pace for much of rural Indonesia. On the eve of the 21st century, over 115 million Indonesians, out of an estimated 195 million, remain "in the dark", without electricity, and most with little or no hope of getting it in the near future. Most of those without electricity reside in rural areas. The entire 20th century-with its electric lights, radio, TV, recorded music and access to up to date information and communications-has passed them by. For meeting their basic lighting needs, rural households have little choice but to make do with a 19th century energy source-kerosene. This is vastly inferior, costs more and is polluting and dangerous. For example, illumination is dim and causes eye strain if reading is attempted. Further, such forms of lighting produce toxic fumes and particulate matter and pose a fire hazard. 2.2 Against this reality, the backdrop of experience overwhelmingly indicates that sustainable rural development and the accompanying benefits of increases in the quality of life and standard of living of the rural population will not occur without the presence of modem energy forms, in particular, electricity . 2.3 Continued sole reliance on the conventional mode of expanding rural electrification, i.e. grid extensions, fossil fuel generation and scattered diesel-generator operations, will neither serve the best interests of the Government and the peoples of Indonesia nor would it be globally sustainable. Even with acceleration of PLN's impressive grid extension program, and setting aside the financial challenge and environmental consequences of doing so, for many rural homes electricity service will be 30 years away. 2.4 Solar power, an environmentally friendly option and a promising renewable energy source, until recently was considered uneconomic. This has now changed. Home sized solar photovoltaic (PV) systems that convert sunlight directly into electricity (Figure 2.1), offer a fast and competitive alternative for improving the quality of life of rural households (Figure 2.2). These systems can meet the demand for the most highly valued electricityend uses: lighting, security, entertainment, and informational and educational services (Figure 2.3). An estimated 35 million people in Indonesia live on remote islands and villages and in rural households that are dispersed and outside the economic reach of a grid in the foreseeable future. For these 8 million households, solar PV systems offer a rapid means to reduce some of the inter-regional and rural-urbandifferentials in quality of life, and at a lower cost than grid supply. 2.5 Technology is no longer a barrier. Over a quarter million rural households worldwide-over 20,000 in Indonesia-are already using solar home systems (SHS). Success in catalyzing market development of SHS for rural consumers now depends primarily upon two factors: (a) implementing a commercially sustainable financing mechanism that will allow rural households to pay for their SHS on an installment basis, with the initial down payment and monthly payments set at affordable levels, and SHS suppliers/dealerswho are responsive in meeting rural household needs can expect to earn an adequate return on investment; and (b) attracting credit worthy businesses led by experienced entrepreneurs interested in this type of business. 1/ Rural Energy and Development, Improving Energy Supplies for 2 Billion People A World Bank Best Practice Paper, Report 15912-GLB, July 1996. 7 Figure 2-1 : Solar Photovoltaic Systemiis Direct Conversion of Sunlight into Electricity ~~~~~~~~~~ -w Components of a solar home systemi- * PV module (A) .s1 .;: . * *Balance of system (B & CJ . ...@w ..... .'+ * battery to store energy.. * battery charge controller * lamps, wiring, switches ;_._ * mounting hardware |' 8 Figure 2-2: A Solar Home System Sigrnificantly Improves the Quality of Life of Rural Households . A._r '*.: 9 Figure 2-3: A 50-Watt-peak Solar Home System Provides Adequate Energy for the Highest Valued Benefits of Electricity to Rural Households l 1*.. _^_ .Hrs.D' 5 Hrs/Day ; _ _1Hr D 4 Hrs/Day _ ~~~~~~12 Hrs/Day a 4 ~~~~~~~~Hrs/Day Top three appliances purchased by rural households once El they get grid supply: 1. lights 2 Hrs/Day * indoor (100%) * outdoor (85%) 2. radio (70%) 3. TV (65%) 6 Hrs/Day * Fluorescent tube light 10 The Rural Village Environment 2.6 Indonesia's efforts to provide electricity to all its citizens poses a technical and cost challenge on account of its geography. Nearly 70 percent of Indonesia's population lives in rural areas, comprising about 31 million households. The last census reported 62,000 rural villages, of which 39,000 villages outside Java and Bali are dispersed across an archipelago comprising of over 13,600 islands. These are geographically spread over 5,100 kilometers from east to west and nearly 1,800 kilometers from north to south. Not only are the rural villages often scattered wide and far, so are the rural households within a village. A rural village typically comprises a central core population of households and several scattered hamlets- individual clusters of 5 to 50 households-and isolated farmsteads within the village area boundary. This translates into average densities of about 150 households per square kilometer in Java, and 6 households per square kilometer off-Java. 2.7 Disparities in development There is now growing concern about the significant and possibly rising inequality in development across regions (i.e., Java-Bali versus other islands), across demographic groups (e.g., rural versus urban), and across ethnic groups, of which there are over 300. Average per capita monthly expenditures in rural areas are about 50 percent of comparable expenditures in urban areas, and other social development indicators are lagging as well (Table 2.1), Table 2.1 Disparities in Rural-Urban Social Development Indicators Rural Urban Under five child mortality (per thousand units) 106 59 Fertility rates (per woman) 3.2 2.3 Vaccination coverage 44 62 among children (%) Prevalence of child 38 27 malnutrition (%) Junior high school 54 78 completion rates (%) Primary school 78 89 completion rates (%) 2.8 Low electricity coverage While the vast majority of urban households have PLN supply, only about 40 percent of rural households have access to electricity. GOI's strategy for expanding RE accords priority to extensification-increasing village coverage --- over intensification, i.e., increasing household coverage. As a consequence, household electrification ratios are still very low. For example, household electrification ratios projected for year-end 1995/96, and based on the 1989/90 census data for the number II of households, are: Java-Bali (53 percent), Sulawesi (35 percent), Sumatra (32 percent), Kalimantan (36 percent), and Eastern Indonesia (20 percent). Within Eastern Indonesia, there is considerable variation; ranging from a high of 40 percent in Maluku to a low of 3 percent in East Timor (Annex 2.1). 2.9 Rural people are forced to make do with inferior service Denied access to electricity, Indonesia's rural population resorts to a variety of more expensive and inferior sources for illumination: such as candles, flashlights, and most commonly, kerosene fueled wick lamps, hurricane lanterns and 2 petromax lamps. Besides being more polluting, dangerous and more expensive, the traditional sources produce illumination that at best creates a "twilight" effect. The more affluent rural households also use car batteries to power TVs. These batteries usually must be re-charged at least once a week and at considerable time, expense, and inconvenience to the household. Typically, the heavy battery is transported to a battery charging service shop, that could be located as far as 10 to 20+ km away; and must be left there at least overnight to enable charging by an inefficient fossil fuel burning and polluting diesel generator. The household must then make a second trip for pickup or alternately make arrangements to pay another commercial transportation service for the drop off and pickup. This process can deny the household access to the TV for at least two nights a week. 2.10 Absence of proper lighting restricts far reaching economic and educational benefits to and otherwise denies the empowerment of rural peoples in significant ways By now it is well known, though perhaps not commonly appreciated by people who have become accustomed to electricity, that the quantum improvement in lighting quality made possible following the introduction of solar or grid electric lighting in rural communities, in homes, schools and streets, leads to: * a profound and positive effect on the quality of education and learning experienced by children. Faster and higher rates of homework completion as well as higher pass rates and improvements in grades are reported; * increased productivity and in-home income generation activities made possible for women by extending available hours for work; and v increased freedom of movement and ability for community participation. Street and community lighting, by affording more flexible work patterns and a sense of security, also make it possible for village residents to spend more time for socializing, and participation in community activities. 2/ An ESMAP study in Indonesia concluded that access to electricity implies a seven-to-ten fold increase in lighting (lumens), mainly because of increased efficiency of electric lights compared to kerosene lamps. For example, a 60-watt incandescent light bulb produces the same luminous flux (lumens) as about 60 candles, or 20 kerosene wick lamps, or 2 kerosene pressure lamps. Moreover in quality terms, non-electric lighting is far inferior because of a much lower lumen output level and a more limited spatial distribution. It has been estimated that without adjusting for quality difference, rural households without electricity pay a very high unit price for energy for lighting, with the equivalent cost per lumen of light output from kerosene estimated to be 8 to 20-fold or even higher than from electricity. (Source: Robert van der Plas, IENDR). 12 Limits to Expanding RE Coverage by Conventional Means 2.11 The conventional modes of expanding RE coverage by grid extension and diesel mini-grid operations are likely to prove to be too expensive to finish the remaining job of extending coverage to all households, even within the next 30 years. Presently, PLN owns and operates about 3,400 diesel plants scattered throughout Indonesia-over 2,000 MW of diesel generating capacity-as a primary means to supply power for rural electrification. These plants are to be found in: (i) the dozens of mini--grids served by one or more interconnected diesel power plants in the I to 12 MW unit size range; and (ii) about 1,000 isolated small diesel plant based operations-in the 20 to 200 kW size range-which are very high cost systems in operations, many supplying power only for a few hours in the evening and night time. 2.12 Marginal cost of supply The marginal costs of supply to rural households within proximity of a PLN grid are already very high: about 11.8 cents/kWh in Java-Bali (of which distribution network costs are about 0.8 cents/kWh); 15.5 cents/kWh in the case of regional grids off-Java (of which distribution network costs are about 2.5 cents/kWh); and 15 to 25+ cents/kWh for the scattered diesel-grid operations. These costs are orders of magnitude higher for connecting rural households that are scattered and only a few kilometers from the grid. 2.13 For example, consider Bali, which has achieved 100% village electrification,yet about 40% of rural households do not have access to electricity and a large number of them are unlikely to receive PLN supply for a considerable time, or if they do PLN will be forced to incur very high losses. This situation repeats itself in other provinces. Even in the province of West Java within 150 km of Jakarta, large numbers of rural households are to be found without access to PLN supply even though in many instances there is a grid line a few kilometers away. Typically these households are clustered in hamlets of 5 to 30, as well as isolated homesteads, and situated 2 to 5 km from the nearest connecting point to the 20 kV grid. The costs of conventional schemes for extending the grid to such dispersed clusters or installing an isolated diesel based mini-grid are extremely high. When coupled with low consumer and load densities that result in low capacity utilization, and with a high percentage of consumption during the higher cost peak hours, most such situations pose an uneconomic proposition using conventional approaches. 2.14 Mounting subsidy burden Under the present policy of the Government to maintain uniform national electricity tariffs, the cost of PLN supply to many rural households (para 2.12) is well in excess of the average revenue from the typical small rural household, about US 6.5 cents/kWh. Continued and sole reliance on the conventional approach for rural electrification in the instances highlighted by the examples above (para 2.13), will further and seriously aggravate the subsidy burden on PLN's ratepayers and the government for financing such expansion and operations and strike at the very foundations of the sustainabilityof the RE program. Government's Strategy for Decentralized RE using Solar Photovoltaics (PV) 2. 15 The Government of Indonesia (GOI) has begun to assess the suitability of various supply options for meeting the energy needs of the remaining approximately 30,000 unelectrified villages and households in a least-cost and economic sequence. One element of this assessment is the Rural Electrification (RE) Master Plan-financed under the Bank's first Rural Electrification Project (Loan 3180-IND)--which analyzed the conventional options of grid extensions and use of scattered diesel generation to support isolated mini-grid operations. 13 2.16 The Government attaches high priority to cost effective renewable-based energy supply as a means of ensuring high and environmentally sustainable rates of economic growth. Increased penetration of renewable based generation will have a significant and positive impact on the environment by reducing local pollutants such as SO2 as well as pollutants of global concern such as emissions of green house gases (GHG). To the extent that this development displaces kerosene consumption and diesel generation, it reduces the negative environmental impacts of transport, waste disposal and burning of these fossil fuels. 2.17 Beginning in 1987, the Government of Indonesia (GOI) has sponsored a series of pilot solar PV demonstration programs. The most recent initiative-"Banpres" (Presidential Aid)-is directly linked to the President of Indonesia, under which about 3,000 units were installed over 1988-1992. Today, in Indonesia about 20,000 SHS units have been installed primarily through Government programs, and more recently by commercial dealers. The Government programs have helped to demonstrate the potential of solar PV technology for meeting the electricity end-use needs that most rural households perceive to be most important. An evaluation of this experience indicates that customers are generally satisfied with the performance of their solar home system (SHS) and there is no evidence of systemic problems or high premature failure rates for critical components such as batteries, panels, and controllers. A few technical problems were reported, primarily in instances where households had modified the systems after installation. 2.18 These early and various Government-agency sponsored programs were primarily geared to technologydemonstration; as such, they did not focus on cost recovery or building a base for future product or market development, nor did they offer a means to mainstream private sector delivery and sustainability. Specifically, in Indonesia, the Government/public agency led model is best characterized as a procurement system, not as a commercial market, with the SHS units typically distributed in small lots to homes widely dispersed all over Indonesia. Such a technology distribution mechanism has proved to be incompatible with the development of cost effective and sustainable private dealer chains, given the limited scale and geographic fragmentation. 2.19 It is the GOI's goal to ensure that modem forms of energy become accessible to all rural households in a phased, least-cost manner. In recognition of the role that solar PV can play in meeting the energy needs of rural households, the Government of Indonesia has formulated the outlines of a plan to install solar PV systems with a total capacity of 50 MWp. However, there still remains a need to develop a detailed solar PV strategy and its implementation plan. A technical assistance component of the proposed project will facilitate the preparation of a Decentralized Rural Electrification (DRE) Strategy Study and SHS Action Plan (para 3.16). 2.20 The GOI recognizes that a number of different delivery and financing approaches are required in Indonesia, based on the incomes, energy requirements, and geographic location of the target population. Broadly speaking, the Government's solar PV strategy for decentralized rural electrification has two prongs: (i) Government-basedprograms targeted at the higher-costremote areas and for the poorer segments of the population, and (ii) commercially-based private sector led programs initially targeted to the relatively closer-in and more affluent segments of the rural population without PLN supply. 2.21 For example, as part of the first prong, the Government, in association with AusAID, is currently formulating a plan to install about 36,000 solar PV systems in the remote islands of Indonesia. It is recognized that a commercial approach is not appropriate for the target population; though the details of the payment schemes have not yet been finalized, it is likely that there will be a small downpayment, a long repayment period of 8-10 years, low monthly payments, and interest rate subsidies. At the same time, 14 recognizing the heavy and recurrent subsidy burden inevitably associated with such public agency programs, the Govemment is also keen to promote altemate delivery and financing approaches that are commercially sustainable, private sector based, and that offer the prospect of achieving high levels of penetration at a much faster pace than is feasible with the Govemment-based approach. In short, the GOI recognizesthatGovernment-basedprogramswill be complementaryto the commercially-basedprograms. Solar Home Systems - The Technology 2.22 A solar home system typically consist of: (i) one or more solar photovoltaic panels; (ii) battery storage; (iii) battery charge/discharge controllers; and (iv) energy-efficient appliances, such as lights and TV that are suitable for use with PV systems (see Annex 2.2). The solar PV panels produce electricity, with the amount of electrical energy produced being directly proportional to the size of the panel and the amount of sunshine falling on the panel. Full sun shine is not required for the solar PV panels to produce a current, though the output of the panel will be reduced in cloudy weather. PV panels usually are rated in Watt-peak (Wp) output, e.g., this Project will use solar PV panels with a 50 Wp rating. The Watt-peak rating of a panel is not directly comparable to the wattage associated with conventional electrical appliances, e.g., a 50 Watt- peak rating cannot be directly compared to the, say, 60-watt rating of a conventional electric light. This type of comparison is misleading, and greatly underestimates the amount of service that a SHS with a 50 Wp rating would normally provide. In particular, the SHS units to be used under this project would permit the use of 3-5 lights and a black-and-whiteTV for four to five hours a day. 2.23 Batteries similar to those used in automobiles, are used to store the electricity produced by the PV panels. The battery capacity required depends upon the daily energy load to be met as well as the prevalence of cloudy weather. Battery capacity is usually stated in Ampere-hours (Ah); in this Project, the minimum size will be a 70-Ah 12-Volt battery, which, together with a 50 Wp panel, is expected to permit normal electricity levels of usage by the consumer even when there is a string of 3-5 days of cloudy weather. An automatic cut-off switch, called a discharge controller is used to continually measure the state of the battery charge and disconnect the appliances when battery charge falls below the set limit. Further, to avoid consistent overcharging, an automatic cut-off switch called a charge controller is provided to measure battery charge and reduce or tum off charging current to the batteries before damage can occur. It is common to combine the functions of discharge and charge controllers into a single controller. Economic Potential for SHS in Decentralized Rural Electrification 2.24 Decentralized rural electrification (DRE) utilizing Solar Home Systems (SHS) offer many advantages Solar home systems offer the least cost RE solution --cheaper than conventional RE options -- for a large segment of the population, as illustrated in the following, in niche areas where households are dispersed and demand is low. Increased penetration of solar PV home systems in rural Indonesia-on a cost recovery basis-will reduce the tremendous pressures on GOI to require PLN to extend its supply to satisfy uneconomic rural loads as well as reduce the potential demand for subsidized PLN supply. Furthermore, the sale and installation of solar PV systems offer a clear path to increasing private sector participation in the energy markets, a matter of high priority for GOI as well as a matter of priority on the Bank's agenda. 2.25 Solar PV home systems are ideally suited for remote islands and villages and for dispersed households. Even in the case of electrified villages-intensification-there exist a large number of households that are situated in small clusters and scattered throughout the geographical area within the village boundary and that are more than a few kilometers from the grid. In such instances also, solar PV 15 systems provide the most cost effective solution for meeting the basic needs of the community. To illustrate the tradeoffs between a solar PV home system and grid extension in such instances, a comparative cost analysis of SHS versus conventional electrification(Annex 4. 1), shows that: (i) a SHS is less expensive than extending grid supply when household density is less than approximately 30 households per square km; and (ii) if the number of households to be served in a cluster is less than 50, then even a 3 km MV extension is more expensive than SHS, regardless of household density. To illustrate a specific cost comparison, consider a cluster of 50 households outside Java with a spatial density of 10 households per square kilometer --almost twice the average for outside Java --and situated 3 kilometers from an MV grid line. The levelized cost of conventional rural electrification by grid extension is estimated at $30 per month per household, and $26 per month per household if the cluster is serviced by an isolated diesel generator. By comparison, the levelized cost of a solar home system providing approximately equivalent service (about 15 kWh) is about $1 1 per month, based on the present prices in Indonesia. 2.26 One of the main implications of the RE Master Plan for grid extension and diesel operations is that the scope for decentralized rural electrification (DRE) as a complement to economic grid extensions is large. There are about eight million households-consisting of the isolated or scattered rural households for whom it will never be economic to provide grid-based supply, and of the households for whom the least cost supply option is grid extension, but who will not receive grid-based supply during the project duration and even beyond. These households comprise the economic potential for decentralized rural electrification by SHS, a cheaper and environmentally superior alternative to the conventional alternative of diesel-based mini-grids. A detailed study to estimate and more sharply delineate this potential by region and customer segments will be undertaken as part of a technical assistance component of the proposed project (para 3.16). 2.27 Market Potential Market surveys and extensive field visits conducted in several provinces during the course of project preparation clearly indicate that a significant segment of today's rural households, without PLN supply, have a high willingness-to-payfor energy to meet the end uses the they value the most - lighting, security, and entertainment and informational services from radios and TV. This revealed preference is reflected by survey data on out-of-pocket expenditures for kerosene for lighting, and battery charging for other uses such as TV3 (Table 2.2). The survey response data indicate that 26 percent of the houses sampled in Lampung province, that do not have PLN service, spend between $6.67 to $15 per month on kerosene for lighting and batteries and battery charging, to power radios, cassettes and TVs. Very significantly also, another 40 percent of the sample-selected randomly in areas without PLN service- spend between $ 3.33 and $6.66 per month. By way of comparative interest, a small rural household with PLN service, pays a monthly bill of about $1. Rural households in the top quintile segment identified above represent the near term market, and provide a convenient market entry segment for SHS; the size of this market entry segment is sufficiently large to enable SHS dealers establish scale economies in supply and delivery chains. Barriers to SHS Market Development 2.28 The limited sales of solar home systems taking place at present do not provide the base for broader market development, which would be based on the significant number of households who could afford a SHS, provided they can get financing. Today, consumer credit is not widely available and current credit schemes suffer from short repayment periods forcing monthly payments that are not affordable to even the households in the top income quartile. 3/ A copy of this study is contained in the Project File. 16 Table 2.2: Distribution Of Monthly Expenditures On Energy By Rural Households Without PLN Electricity Supply $/Month Lampung South Sulawesi West Java Under 3.33 34% 28% 62% 3.33 to 6.67 40% 49% 23% Over 6.67 26% 23% 15% Total 100% 100% 100% 2.29 The limited scale of dealer operations today implies that the vendors do not realize the benefits of economies of scale in the establishment of supply-and-service chains to the consumer and in the procurement and assembly of system components. At the same time, there is no possibility of diffusion of solar PV systems from urban markets into rural areas. In many instances, modem consumer goods and services are initially designed for urban mass market consumption and percolate into rural areas over a period of time, by the urban-based dealer and supplier chains linking up with rural entrepreneurs. Solar PV systems are perhaps among the very few exceptions in that they are economic and ideally suited primarily for rural and remote locations. Thus, unlike the case of consumer products such as motorcycles and TV sets, in Indonesia the urban markets for SHS units cannot provide the base for geographically driven diffusion into rural areas. In other words, the market for solar PV is singularly a rural area-based market; and its emergence will depend on removal of the major market failures/barriers unique to such markets, instead of simply waiting for urban-based expansion to arrive. 2.30 The present market conditions can be characterized as a "high price low volume" equilibrium, while an expansion of the market requires a move to a self-sustaining "low price high volume" equilibrium. Three inter-locking factors together form a barrier to market development: (i) Lack of established high-volume supplier-dealer chains. At present, there are only a limited number of supplier-dealer chains, and they operate at low volumes in limited geographical regions within and outside Java. Most of the potential customers are not being offered an opportunity to buy a SHS and therefore consumer awareness is limited; (ii) High prices. At present, the annual volume of SHS direct household sales is low, and the prices are high; at the same time, the dealers are unable to reduce their prices, given the small scale of their operations; (iii) Lack of term credit. At present, the bulk of the potential rural customers, both within and outside Java, are unable to secure the credit they need to buy the SHS. Even if banks were to extend credit for SHS, under current Indonesian banking practices, they would expect repayment over 1-2 years maximum, which would be an insufficient amortization period for the majority of potential customers. 17 2.31 What this means in practical terms is that the barriers blocking rapid, sustainable expansion of SHS in rural Indonesia are not amenable to simple, single-problem solutions. Rather, a multi-pronged strategy is required to lower the key barriers identified above simultaneously, taking into account affordability of the target market segment of rural households and the terms and conditions under which term credit would be extended by the commercial banks. For instance, by itself, without a reduction in the selling price, making credit available and stretching out the maturity/term of such credit will not eliminate the barriers that presently restrict market development. Without price reductions, affordable levels of downpayment and monthly installmentswould require installment terms of 6 to 8+ years duration, given current interest rates. However, the maximum loan duration feasible under a sustainable private sector approach, given conditions would be in the 3 to 4 year range. Amortizing the cost of an SHS over 3 to 4 years, without a price reduction, would result in monthly payments that exceed the capacity of most target households. 2.32 In light of this, for a sustainable delivery approach led by the private sector, it would be necessary to design an installment payment mechanism that addresses rural households' cash constraints and the practical system's upper limit of a 3 to 4 year amortization period. Analysis of the data from market surveys (para 2.27), indicates that for target rural households, an affordable down payment would range from $80-125, and that monthly installment payments should be close to potential customers' present monthly expenditures on energy (about $8-10). For these consumer cash flow limits to be compatible with the 3 -4 year amortization period, it would be necessary to bring down the final price to the household by a "first cost buy down". Past Bank Experience and Lessons Learned 2.33 Overview. The Bank has been active in Indonesia's power sector for twenty-five years during which time the Government has borrowed more than US$4.7 billion in Bank loans and IDA credits to undertake 25 power projects (Annex 2.3). Despite some problems with implementation,past Bank-financed PLN projects have in general been very successful and have helped strengthen PLN's capabilities in almost every aspect of its operations. Taken altogether, these projects have assisted in the expansion of generation, transmission and distribution facilities and rural electrification and institutional development of PLN. The technical assistance provided by the Bank has also strengthened PLN's technical and management capabilities in engineering, project management capabilities, distribution and rural electrification planning and management, and corporate and financial planning; as a result of these efforts, PLN's implementation capacity and operational efficiency have increased significantly. 2.34 The positive lessons from the Bank's involvement have been brought out by successive Project Performance Audit Reports (PPARs), Project Completion Reports (PCRs) and Implementation Completion Reports (ICRs). These reports attribute the success of power operations in Indonesia to the facts that: (i) there was a long-term vision for the development of the sector and this vision was shared by the Bank, Government and PLN; (ii) the vision was translated into a long-term strategy which was resolutely pursued; and (iii) a reasonable balance was struck between the physical and institutional development components of the projects. The negative lessons largely concern implementation. Most projects have suffered delays due to extended procurement cycles. Technical assistance for institutional capacity building has in some cases fallen short of expectations due to limited absorptive capacity and inadequate supervision and ownership. In recent years, beginning with the Sumatera-Kalimantan Project in 1994, the Bank and Government have shifted their emphasis towards issues of sector structure, private sector participation and regulation. The Bank is now supporting specific interventions where private sector participation is not readily forthcoming; they are transmission and distribution management and investment, sector expansion outside Java, renewable energy and demand side management, and rural electrification. 18 2.35 Experience with rural electrification. The Bank's first lending operation for rural electrification by grid extension (RE I, Loan 3180-IND), provided US$329 million to finance the bulk of the foreign exchange costs of a time slice of the RE development plan through FY 94/95, and closed in June 1995. In its evaluative memorandum OED noted that the project achieved or exceeded most of its physical objectives, in spite of some delays mainly due to procurement procedures. On the institutional side, RE planning was substantially improved by PLN's development of a RE Master Plan for grid extension to electrify the remaining villages. The project's successes prepared the ground for the more ambitious targets being pursued under the ongoing successor lending operation for grid-expansion-basedrural electrification, the Second Rural Electrification Project ( RE II, Loan 3845-IND approved FY95). The RE II project also aims to reduce the present and future unit cost of RE expansion by grid extensions, and thus address a primary constraintto the long term sustainabilityof the national RE program as implemented by PLN. 2.36 Experience with solar PV and decentralized RE Given the Bank's limited involvement in solar PV projects, there are no relevant Bank reports on past projects. Ongoing experience is limited to the IDA/GEF-supported solar PV component of the India Renewable Resources Development Project (Ln. 3544-IN/Cr.2449-IN). Key lessons learned from the India project are: (i) timely project implementation is facilitated by pipeline development, i.e., pre-identificationand preparation of sub-projects; and (ii) interest rate subsidies do not necessarily attract private sector response. Rather the private sector is far more concerned that the procedures they can use for procurement are in line with commercial business practices and that the process and disbursement of funds is simple, straightforward, and fast.. 2.37 International experience and best practice To complement the limited Bank experience solar PV projects, the experience of solar PV projects in other countries, including the Dominican Republic Mexico and Kenya, has also been reviewed with a view to improving the design of the proposed Indonesia SHS project. This review shows that in the Dominican Republic, a commercial approach has been successful in delivering SHS to rural households, but the overall scale has been restricted by the limited availability of credit, both to the SHS suppliers as well as the households. In Mexico, nearly 90% of the households are served by grid supply, and the SHS are being supplied on a subsidy basis to the remaining households for whom grid supply is uneconomic, and most of whom cannot afford to pay for the systems. Experience in other countries also points to the ability of the private sector to deliver SHS to rural households, the need for credit, and the benefits of some government involvement especially in promoting and helping ensure quality products. For example, the Kenyan private sector has successfully made cash sales of about 25,000 SHS on a purely commercial basis, but after a few years, in the absence of credit, the sales have slowed significantly, and further, in the absence of technical standards or other forms of support from government agencies, it is reported that about 25% of the systems are no longer functioning. 2.38 The proposed Indonesia SHS Project design (section 3)-central elements of which are a private sector based and market conforming supply, delivery and financing mechanisms, with a key role for the Government in raising technology awareness and promoting quality equipment and performance by setting standards and certification-builds upon the positive experience in Indonesia, while taking account of the lessons learnt from the international experience. 19 3. THE PROJECT Project Concept 3.1 The proposed Solar Home Systems (SHS) Project would assist the market penetration of solar PV systems that are "essentially commercial" but whose initial market development is delayed and constrained, for example, by high transaction costs or perceived commercial risks due to unfamiliarity with this type of investment. Such projects are also hampered by other barriers, including a lack of in-country experience in the organization and financing. Hence, the SHS project would pioneer the earlier introduction of SHS in Indonesia and catalyze the creation of a potential market with critical mass, paving the way for accelerated and wider scale adoption of Solar Home Systems, and over the longer term, an increase in the overall penetration of other types solar of PV systems and to non-residentialconsumers as well. 3.2 The project implementation strategy is to catalyze in a targeted and phased manner, regional rural markets for solar PV systems. The longer term lending program vision is one of a series of linked projects over time; each seeking to build upon the lessons learnt from the predecessor project, while broadening the regional market and product focus, enhancing the efficiency and reducing the costs of existing delivery and financing mechanisms. 3.3 The target segment for market entry, to establish the necessary initial and sustainable market base for further expans:on and broadening of the solar PV systems market, would be primarily the in-filling market segment i.e., rural households and small commercial facilities that are "electrically isolated" from the grid, but that are in reasonable geographical proximity to urban centers. The initial demand is expected to be largely for entry/starter size SHSs (e.g., 50 Watt-peak), and should be sufficient to establish the scale economies for commercial dealer chains to financially sustain themselves, and establish the initial bases in regional operations. Subsequently, and with further cost reductions that are expected-in equipment cost and in dealer operating costs and markup-the market demand for such systems would expand to a broader income base of households as well as to the small commercial facilities segment. Furthermore, once the initial market bases are established, the pace of product development would be expected to accelerate and the range of product offerings broaden considerably; with increased demand likely from the early adopters for "trading up" to larger sized systems, to meet increases in the demand for end-uses (e.g. 75 or 1 00+watt- peak systems) '. In addition, the product lines would be expected to be broadened to meet the demand from shops and to meet community needs, at competitive prices. Project Objectives 3.4 The principal national objectives of the proposed project are to: (i) provide the modem energy form of electricity to rural customers who cannot be served economically or in a timely manner by conventional rural electrification; (ii) facilitate participation by the private sector in advancing renewable energy commercialization; (iii) promote environmentally sound energy resource development in Indonesia and reduce the energy sector's dependence on fossil fuels; and (iv) strengthen Indonesia's institutional capacity to support and sustain decentralized rural electrification using solar photovoltaics. 1/ These broader product offerings would not be part of the SHS Project, which would support only the products that meet the Project's technical specifications (para 3.18). 20 3.5 Global objective The global environmental objective of the SHS project is to mitigate emissions of CO2 in Indonesia. At present, a significant portion of Indonesia's rural population satisfy their energy needs by fossil fuels in various ways, such as kerosene for lighting or diesel-based power generation, which lead to the emission of CO2. The penetration of SHS would reduce CO2 emissions by displacing the use of the fossil fuels. It is anticipated that the SHS project would directly abate about 1.3 million tons of CG2, with an additional indirect programmatic effect of about 0.9 million tons of CO2 for a total abatement of about 2.2 million tons of CO2.. Measuring Project Performance 3.6 Performance Indicators The key performance indicators for monitoring achievement of the project objectives outlined above are: (i) the number of SHS units sold per year and the cumulative number of people served by the Project, which are measures of the effectiveness of the Project in serving the rural population; (ii) C02 emissions abated, which is a measure of the extent to which the global objective has been attained; (iii) fossil fuel conserved, which is a measure of the reduction of the sector's dependence on fossil fuels; (iv) customer timely repayment rates, which is an indicator of customers' satisfaction with their SHS systems and also of the extent of cost recovery; (v) installed price, which is a measure of the cost- effectiveness of the SHS units in meeting the customers' needs; (vi) number of dealers, which is a measure of the extent of market development; (vii) number of dealers considered as having "problem loans" by participating banks, which is a measure of the extent to which the Project is successful in establishing a sustainable delivery mechanism; and (viii) timely completion of the various steps for (a) the decentralized rural electrification study and action plan, and (b) strengthening BPPT's capacity to certify the technical capabilities of solar PV systems as well as to monitor their functioning in the field. Baseline levels and future target levels for each are shown in Table I of Annex 3.1. During negotiations, agreement was reached on these performance indicators and their target levels. Project Description 3.7 The SHS project consists of two major components: (i) a credit component-comprising an IBRD loan and a GEF grant-to enable purchase of solar home systems by rural households and commercial establishments on an installment plan basis; and (ii) technical assistance including support of detailed monitoring and evaluation activities during project implementation. 3.8 Credit component The proposed project involves the provision of the modem energy form of electricity to about 1 million people in rural areas. This would be achieved by the sale and installation of 200,000 solar PV systems (10 MWp) for homes, and in commercial establishments such as small shops. The geographical scope of the SHS project is three selected regional markets-centered around the provinces of West Java, Lampung, South Sulawesi-in areas where PLN service under the least cost grid expansion plan for rural electrification (the "RE Master Plan") is not expected for at least three years, or where it will be uneconomic for PLN to provide such service. A fourth market area, North Sumatera, would be added if it is assessed during the mid-term review that this would benefit the project. 3.9 The sales of SHS units to rural households will be undertaken by private enterprises. These "SHS dealers" will take responsibility for procurement of components, installation and maintenance, and will enter into hire-purchase-contracts(HPC) with the households. The funding will broadly work as follows. The rural households purchasing solar home systems are the ultimate beneficiaries of the proposed project. They will need credit extended to them by the SHS dealers, to enable them to pay back in regular monthly installments the balance of the purchase price after subtracting the customer's down payment-determined by the dealer but typically in the range of US$ 75 to US$ 100 equivalent-and after the GEF grant payment 21 to be made on the rural household's behalf-US$ 75 per unit installed in Java and US$ 125 per unit installed in Lampung and South Sulawesi. It is expected that, in order to make monthly installment payments affordable to a sizable segment of the population, the dealers would offer loans of about four years, with the actual length of the loan to be determined by the dealers. The SHS dealers would bear the collection risk for customer payments. 3.10 To enable the SHS dealers to sell solar home systems on an installment plan basis as well as to finance their ongoing operations, the SHS dealers will require access to credit from commercial banks of their choosing-the "Participating Banks (PBs)"- for up to five years. Over the period of project implementation, successful SHS dealers will require from time-to-time and on a regular basis, credit to enable them to expand their sales on installment plans. The credit extended by a PB to a dealer would be based on the dealer's cash flow requirements as well as the PB's assessment of the dealer's performance history up to that point and credit worthiness. The loans to the dealers would be made by the PBs, at the prevailing interest rates for similar transactions, since the PBs would bear the responsibility for appraising dealer requests for credit, and for bearing the commercial risk on the credit extended to a dealer. The PBs, in turn, would re-finance 80 percent of the credit extended to SHS dealers from the IBRD credit made available to them at market rates, under onlending arrangements through the Government of Indonesia (GOI). During negotiations, agreement was reached that, except as the Bank shall otherwise agree, GOI will not provide to the SHS dealers, whether directly or indirectly, in cash or in kind, any loan, subsidy, grant, credit enhancement or financing of any kind other than the GEF grants and the credit extended by the PBs under the SHS Project. 3.11 To date, a pipeline of thirteen potential SHS dealers (subborrowersy-"Group 1"-has been identified (Annex 3.2), and it is expected that some additional potential dealers-"Group 2"-will be forthcoming over the first next twelve months. Bank-managed grant-financed local consultants have assisted the Group 1 dealers in preparing their business plans and credit applications, which have been submitted to four PBs (para 3.13) that have formally expressed interest in participating in the proposed project. All of the Group I dealers are small businesses, which have had, so far, only limited, if any at all, credit extended to them by commercial banks. Most of the Group I dealers are engaged solely in the solar PV business, mainly as suppliers to government procurement programs, with limited experience in direct household sales, while the remaining Group 1 dealers also have interests in other lines of business, such as air-conditioning, auto parts, and computers. Eight of the Group I dealers are based in Java, three in South Sulawesi, and the remaining two in Lampung; two of the Group 1 dealer businesses are owned and operated by women, one in Java and the other in South Sulawesi. 3.12 The commercial banks have evaluated these plans, and have developed preliminary estimates of credit requirements. The PBs are continuing their discussions with the dealers, and are making best efforts to refine their appraisals and assessment of credit requirements by negotiations. It is expected that in the case of 5 to 7 dealers the discussions with the respective PBs would have advanced sufficiently so as to enable financial closure between the PBs and the subborrowers shortly following loan effectiveness. It is anticipated that up to three more dealers could be added during the first twelve to eighteen months of the project implementation. 3.13 The four PBs identified to date would not be appraised by the Bank, given that these commercial banks that have been classified as financially sound by BI. These PBs have a current "sehat" classification 22 from Bl's Bank Supervision Department, and they would be required to maintain throughout the Project 2. Further, all four of these PBs are among the select group of the strongest and dynamic banks in Indonesia today. Two of these PBs are private commercial banks: Bank Niaga and Bank Bali; the other two PBs are state owned commercial banks: Bank Negara Indonesia (BNI), and Bank Ekspor Impor Indonesia (BankExim). BNI has been identified by GOI as the first among the select group of state owned commercial banks for partial divestiture. 3.14 Technical assistance The three TA components of the proposed project are individually identified by category and value in Table 3.1. Draft TORs for all three components have been prepared and agreed to with BPPT and DGEED, and are contained in the Project Implementation Plan (PIP) report (para 3.45). Table 3.1: Allocation of Technical Assistance Value Category Component $ million /a 1. Implementation Support Project Support Services 3.10 2. Policy Support Decentralized Rural Electrification Strategy Study and SHS Action Plan 0.70 3. Institutional Development Strengthening BPPT's Solar PV Testing and CertificationCapabilities 0.50 Total 4.30 /a Excludingcontingenciesand taxes (VAT) 3.15 Out of a total value of US$4.3 million equivalent, about 70 percent is accounted for by project implementation support services. A Project Support Group (PSG) will be established and would be responsible for, inter alia, (i) for dealers: verifying compliance by the dealers of the equipment installed and proper utilization of the GEF grant, establishing contacts with and assessing any new dealers who wish to participate in the Project; (ii) for customers: consumer protection, such as maintaining two-way links with prospective and actual customers (end-users), making available information about the technical and financial benefits of SHS as well as risks such as the future availability of PLN service; (iii) monitoring and evaluation of the project's progress, including an assessment of the dealers' progress and updated business plans over time; and (iv) limited training -- for selected officials from BPPT, DGEED, and BAPPENAS, as well as private sector organizations involved in the implementation of solar PV systems -- in the form of conferences, seminars, workshops and study tours, in Indonesia as well as in other countries. While the PSG will be contracted by BPPT and will work with BPPT to coordinate Project activities within the framework of the GOI's broader 50 MWp solar PV project, the PSG will report to the Rural Electrification Steering Committee (MME), which will meet on an ad hoc basis as necessary. To safeguard the role of the PSG for purposes of GEF grant related audits and verifications and in its dealings with the dealers and the commercial banks, the PSG will take instructions only from the RE Steering Committee. 2/ Any new PBs would also not be appraised by the Bank, but would be required to maintain a "sehat" rating by Bl. Annex 3.3 outlines Bl's bank rating system for monitoring and classifying the financial health and overall soundness of state as well as private commercial banks. 23 3.16 The remaining 30 percent of TA is directed to capacity building that would facilitate the design and implementationof a longer term program for solarPV penetration in Indonesia that is consistentwith a least cost and sustainable rural electrification strategy. About $0.7 million equivalent of the TA is for policy support, to assist GOI's Rural Electrification Steering Committee to develop a strategy and corresponding action plan for meeting the modem energy needs of the segments of the rural population for which solar PV systems represent the least-cost strategy. For this purpose, a "Decentralized Rural Electrification Strategy Study and SHS Implementation Plan" will be prepared, which will complement the recently completed least cost grid-based rural electrification plan ("RE Master Plan"), financed under the Bank's first Rural Electrification project (Loan 31 80-fND). The decentralized rural electrification (DRE) plan would consider a variety of technological, delivery, and financing options, and develop a 1 0-year implementation plan for solar PV in the niches for which it is best suited. During negotiations, agreement was reached that GOI will: (a) undertake and complete a study on "DecentralizedRural ElectrificationPlan ", in accordance with terms of reference and in a manner satisfactory to the Bank, andfurnish the draft final report of the study to the Bankfor review and comments by no later than September 30, 1998, and (b) based on the said study's results and recommendations and subsequent review, comments and discussions: (i) prepare a draft DecentralizedRural Electrification Plan, with a focus on the niche for solar P V, for Indonesia, (ii) furnish the said draft plan to the Bank for review and comments, by March 31, 1999, and (iii) by November 30, 1999, finalize and adopt the same taking into account the comments, if any, thereon by the Bank. Further, during negotiations, agreement was reached that DGEED, MME would form and activate, no later than November 30, 1997, a SHS Working Group, headed by the Director of the Directorate of Electric Power Planning, DGEED, with representation from other Government agencies concerned with rural electrification policy, including BAPPENAS, BPPT, MOF, Ministry of Cooperatives and Small Enterprise Development, and PLN. The SHS Working Group will report to the Rural Electrification Steering Committee, DGEED, and will be the local working counterpart to the consultants who will undertake the preparation of the Decentralized RE Strategy Study and SHS Action Plan. 3.17 About US$ 0.5 million equivalent of TA is for capacity building to assist GOI in building Indonesia's institutional capabilities for the dissemination of solar PV technology. Specifically, this componentwill help strengthen BPPT-LSDE's capabilityto technicallycertify SHS systems by carrying out type testing as well as product testing, and to monitor systems in the field; staff from DGEED's subdivision of Electricity and New Energy Testing would also benefit by participating in the training. The focus would be on testing and certifying PV systems, and not on PV module testing and qualification. The long-term goal is that, with the assistance of this TA as well as support from other sources, BPPT-LSDE would attain ISO 25 status. In order to reach this goal in a timely manner, during negotiations, agreement was reached that BPPT-LSDE would: (i) initiate and undertake without delay all steps necessary to ensure that the consultants are mobilized no later than October 31, 1997, in accordance with TOR acceptable to the Bank; (ii) submit, by no later than February 28, 1998, a time-bound action plan -- acceptable to the Bank -- including major intermediate milestones to achieve ISO 25 status by December 31, 2001, with this date subject to revision based on the consultant's report; and (iii) ensure that the TA work under this Project would be completed by no later than October 31, 1999. Technical Specifications 3.18 Each SHS system to be sold under the proposed project would consist of one or more solar photovoltaic (PV) modules with an output of 50 Wp or more, a 12 volt DC lead-acid battery (minimum capacity of 70 Ah), a battery charge/discharge controller, provision for at least three fluorescent light fixtures, and related components such as wiring, switches and mounting hardware. All SHS units supported by the project will have to meet rigorous technical specifications, which have been developed by BPPT in cooperation with solar PV dealers, reviewed by several international research laboratories, and acceptable to 24 the Bank. During negotiations, agreement was reached that the participatingSHS dealers will be required to furnish certifications -- to the PSG --from testingfacilities acceptable to the Bank, that their components meet or exceed the selected specifications. Assistance is being provided to a subset of dealers, who have reached an advanced stage in the consideration of their credit applications by the PBs, in getting their equipment certified from international laboratories. Annex 3.4 provides further details of the technical specifications and the means for verification of the selected standards. Dealer Eligibility Criteria 3.19 During negotiations, agreement was reached that a participating dealer must demonstrate an ability and intent to: (i) undertake installment payment based sales of SHS to rural customers in the target markets, including taking responsibility for collecting installment payments; (ii) offer the customers a comprehensive consumer protection package, including warranties and adequate after-sales service; (iii) agree to the establishment of an escrow account, based on the GEF grant_funds due to the dealer, to be used solely to assist the dealer's customers to whom the dealer was unwilling or unable to provide adequate service; (iv) use certified equipment and components only; (v) agree to abide by a dealer conduct code; and (vi) provide the operational and financial information required by the PSG for project monitoring and evaluation (Annex 3.5, para 3.51). The Bank, after reviewing information provided by a dealer and the PSG, would inform a PB of the dealer's choice of the dealer's eligibility to participate in the Project; the financial and credit appraisal of a dealer's business plan would be undertaken only by a PB, and not by the Bank or the PSG. Project Cost 3.20 The total project cost, inclusive of duties and taxes and price contingencies is estimated at US$ 118.1 million equivalent, with a foreign exchange cost component of US$ 85.0 million equivalent, or about 72 percent of the total, arising primarily from the direct costs of the imported solar PV panels as well as the significant imported content in locally made components such as batteries and battery controllers. Cost estimates are in June 1996 prices and utilizing an exchange rate of US$1 = Rp. 2,341. Price contingencies for foreign costs are assumed to be 2.4 percent per year during the project implementation period, and for local costs at 8.7 percent per year. A summary of the project cost estimates is presented in Table 3.2. Table 3.2: Project Cost Summary (Rp billion) (US$ million) Foreign Local Foreign Total Local Foreign Total as % of total 1. Credit Component 53.9 161.7 215.6 23.0 69.1 92.1 75% 2. Technical Assistance 4.7 10.1 14.7 2.0 4.3 6.3 68% of which - Implementation Support 2.3 7.3 9.6 1.0 3.1 4.1 76% - Policy Suppor; 1.2 1.6 2.8 0.5 0.7 1.2 58% - Institutional Development 1.2 1.2 2.3 0.5 0.5 1.0 50% Base Cost 58.6 171.8 230.3 25.0 73.4 98.4 75% Duties and Taxes 5.9 17.2 23.0 2.5 7.3 9.8 Price Contingencies (Credit Component) 13.0 10.1 23.1 5.5 4.3 9.8 Total Project Cost 77.4 199.0 276.4 33.1 85.0 118.1 72% Interest During Construction 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing Required 77.4 199.0 276.4 33.1 85.0 118.1 72% Exchange Rate US$1 = 2,341 25 Financing Plan 3.21 The financing plan is shown in Table 3.3. A proposed Bank loan of US$ 20.0 million equivalent, combined with a GEF grant of SDR 16.8 million (US$ 24.3 million equivalent), would finance about 38 percent of the project cost. The GEF grant would finance the "incremental costs" of the SHS Project (para 3.24) Table 3.3: Financing Plan (US$ million) % of Local Foreign Total Total Credit Component IBRD 0.0 20.0 20.0 17% GEF 0.0 20.0 20.0 17% Participating Banks 1.2 3.8 5.0 4% Subborrowers/Endusers 29.9 36.9 66.8 57% Subtotal 31.1 80.7 111.8 95% Technical Assistance - Implementation Support GEF 0.0 3.1 3.1 3% GOI/BPPT 0.5 0.0 0.5 0% Subborrowers/Endusers 0.5 0.0 0.5 0% Subtotal 1.0 3.1 4.1 3% - Policy Support GEF 0.0 0.7 0.7 1% GOI/DGEED 0.5 0.0 0.5 0% Subtotal 0.5 0.7 1.2 1% - Institutional Development GEF 0.0 0.5 0.5 0% GOI/BPPT 0.5 0.0 0.5 0% Subtotal 0.5 0.5 1.0 1% Total 33.1 85.0 118.1 100% IBRD 0.0 20.0 20.0 17% GEF 0.0 24.3 24.3 21% GOI/BPPT 1.5 0.0 1.5 1% Participating Banks 1.2 3.8 5.0 4% Subborrowers/Endusers 30.4 36.9 67.3 57% Note: Subborrowers are dealers, who will be providing equity and reinvested profits; endusers are the households, who will be providing the downpayments 26 3.22 The total cost of the credit component is US$ 111.8 million equivalent; of this amount, the subborrowers (SHS dealers) would provide an estimated US$ 66.8 million equivalent, consisting of equity infusions and profit reinvestmentsby the private dealers selling solar home systems and the endusers' (SHS customers) down payments. The balance of the financing of US$ 45.0 million equivalentwould be provided by: (i) a GEF grant of US$ 20.0 million equivalent, which is the incremental cost of this component (para 3.24), and (ii) with the remainder(US$ 25.0 million equivalent) provided as loans on the basis of 80 percent (US$20.0 million equivalent) from the Bank, and 20 percent (US$ 5.0 million equivalent) from the PBs. 3.23 The TA component (US$ 6.3 million equivalent) would be financed by: (i) GOI/BPPT, which would provide US$ 1.5 million equivalent, (ii) a GEF grant in the amount of US$ 4.3 million equivalent, which is the sum of the incremental costs of the implementation support, policy support, and institutional development, with the purpose of reducing the implementation barriers obstructing the wider use of solar PV systems in Indonesia, and (iii) subborrower contributions of US$ 0.5 million equivalent for implementation support. 3.24 The GEF grant would finance all the incremental costs of the proposed project. At present, which forms the baseline scenario, most of the target households for SHS units use a combination of kerosene for lighting and diesel-based battery charging for other activities such as powering a black-and-white TV. The costs of the SHS units are currently higher than those of the baseline scenario on a lifecycle basis, with the difference between the two being the incremental cost. Based on the available data, the unit incremental cost is $75/SHS in Java and $125/unit off-Java. For total project sales of 200,000, split about equally between the new Java areas and off-Java, the total incremental cost for the SHS units is $20 million. In addition, there is an incremental cost of $4.3 million associated with the TA component of the project. The detailed incremental cost analysis, with information on the costs of the baseline scenario and the GEF altemative, is presented in Annex 3.6. 3.25 Whereas the full GEF grant amount of US$24.3 million would be committed upon Board approval, disbursements would be authorized in two phases. The first phase grant amount of US$15.75 million equivalent would be available for disbursement upon loan effectiveness, and would cover grant payments for the sale and installation of 120,000 units (US$ 12 million equivalent) over the entire project duration period as well as the bulk of the TA (US$ 3.75 million equivalent). The second phase amount of US$ 8.55 million equivalent would cover the remaining 80,000 units (US$ 8 million equivalent) and the residual TA costs (US$ 0.55 million equivalent); the second phase grant funds could be disbursed only after written authorization by the GEF Chief Executive Officer, based on the outcome of the mid-term review (paras 3.52 and 3.53). Lending and Funds Allocation Arrangements 3.26 The proposed Bank loan and GEF grant would be made to the Republic of Indonesia. The Bank loan would be provided to GOI, denominated as a standard multi-currency pool loan at the Bank's standard variable interest rate, with a commitment fee of 0.75 percent per annum or such other percentage as established by the Bank on the undisbursed amount under the Loan Agreement from time to time. The term would be 20 years, including five years grace period. 3.27 The Government would channel and allocate the total loan and grant proceeds to the PBs as follows: (i) For the state-owned PBs, loan funds would be lent and grant funds channeled by MOF through a Subsidiary Loan Agreement (SLA), while for the private PBs, loan and grant funds would go in the 27 first instance from the Government to BI, through a separate SLA between MOF and BI. BI would then re-lend the loan funds and channel the grant funds to the private PBs through the respective Onlending Loan Agreements (OLAs) between BI and the respective PBs. The SLAs between MOF and the state owned PBs and OLAs between BI and the private PBs will also incorporate provisions governing the flow and use of the GEF grant. During negotiations, agreement was reached that signing of: (a) the SLA between MOF and BI; (b) at least two SLAs/OLAs between MOF/BI and the PBs, on terms and conditions acceptable to the Bank, would be conditions of loan effectiveness. Further, signing of an SLA/OLA, acceptable to the Bank, between MOF/BI and a PB would be a condition of disbursementof the IBRD loan and GEF grantfor each PB. (ii) During negotiations, agreement was reached that in the event of a PB losing its "sehat"status: (a) Bl would require the concernedPB to take remedial measures within a prescribedperiod of time to regain a "sehat" status, (b) Bf would notify the Government, and the Government would notify the Bank that a situation has arisen that may require the reallocation of the uncommitted portion of funds previously allocated to the PB; and (c) in the event the PB fails to regain "sehat" status after the prescribed period, funds which have been allocated to the concerned PB but have not been committed, would on request of GOI, be reallocated to those PBs which continue to be classified as "sehat"and which have requestsfor subloans in excess of their allocations. (iii) The loan allocation to each PB will be part of its SLA/OLA, and will be based upon the PB's estimates of its credit requirements for this Project. During negotiations, agreement was reached that: (a) MOF/BI would amend, at the request of a PB and with the Bank's approval, the amount of such PB's loan allocation once every calendar year; and (b) each PB would pay to the Government, at the same rate as the Government would pay to the Bank, commitmentfee on the portion of its loan allocation that has not been disbursedto the PB. (iv) Loan reallocations During negotiations, agreement was reached that in order to provide flexibility and to respond to unforeseenfluctuations in demandfor credi?, the Bank would approve, on the request of GOI, reallocation offunds from PBs that would not be able to utilize their allocated funds. This would happen for example, in the case of PBs that have: (a) fully committed, or are likely to fully commit, their allocation to their subborrowers; (b) used up all the loan funds available on a "first-come, first served basis"; and (c) have requests for additional subloans from their subborrowers. Further, upon the Bank's request, GOT would be willing to review the need for such reallocations. From the date of a reallocation, the PBs would be obligated to pay commitment fee on the undisbursed amount of their respective new allocations. I/ Primarily driven by variances that will unfold over time between the SHS dealers' initial business plans for the entire project implementation period and modifications thereof in response to the degree of success achieved in realizing such plans, and by the financial health of the enterprises and future prospects thereof. 28 Subproject Review 3.28 After assessing the credit application, when a PB is satisfied that it is willing to extend credit to an eligible dealer (para 3.19), the PB would submit to the Bank for review the particular subproject, along with a summary information report (Annex 3.7), as well as a copy of the subborrower's (SHS dealer's) business plan; Annex 3.8 provides details of the information required in a subborrower'sbusiness plan. 3.29 During negotiations, agreement was reached that the Bank, after reviewing the PB's submission, will approve a particular subproject, i. e., dealer, to participate in the Project, with the maximum amount of the IBRD loan to be extended to the particular subproject to be determined by the PB. The approval would be sent by the Bank to the PB and MOF. Grant Authorization 3.30 For the GEF grant, the Bank would authorize the ceiling amounts that each dealer could claim from MOF on a year-by-year basis. During negotiations, agreement was reached that: (i) For the initial calendar year, the grant authorization for each dealer would take place along with the approval by the Bank of the dealer to participate in the Project; (ii) in subsequentyears, the PSG would submit to the Bank, by no later than October I of each calendaryear, for Bank review and clearance each dealer's grant authorizationfor the next calendar year, based upon PSG's review of each dealer's historical performance and future expectations; and (iii) the Bank would inform the PBs and MOF, of each dealer's grant authorizationfor the next calendaryear. In the event that a dealer's actual claims for grant payments in a particularyear are less than the authorized amount, the unclaimed amounts would lapse and could not be carried over to the next calendar year. Onlending Terms 3.31 GOI to PBs Loan proceeds would be on-lent to the PBs in rupiahs for a term of 20 years including five years of grace. The onlending rate for the Bank loan to the PBs would reflect the market rate for domestic term funds in Indonesia. This rate will be a variable interest rate equal to BI's domestic money market certificate (Sertifikate Bank Indonesia - SBI). This rate would be adjusted on January I and July I of each year, based on the average of the 3-month SBI maturity quotations, during the preceding six months. In addition, the PBs will pay to GOI a commitment fee of 0.75 percent per annum or at such other percentage rate as the Government shall pay to the Bank on the undisbursed amount of the Subsidiary Loan from time to time. During negotiations, agreement was reached that GOI would not levy any administration fee on the IBRD loan. While the Government would bear the foreign exchange risk, it would be compensated for the cost of bearing this risk as the cost of funds from GOI to PBs includes an implicit premium reflecting market expectations regarding exchange rate changes, since deposit rates in Indonesia are market-determined and capital flows are generally unrestricted. In order to protect PBs from possibly excessive volatility in the reference rate, or otherwise, on July I of each year, commencing July 1, 1997, the basis for determining the onlending rate from GOI to the PBs would be reviewed with the objective of either ensuring that the 3-month SBI rate appropriately reflects the cost of domestic term funds or agreeing on an altemative that does reflect this cost. 3.32 PBs to subborrowers (SHS dealers) During negotiations, agreement was reached that proceeds of the Bank loan, along with financing out of the PBs own resources, would be on-lent to the subborrowers by the PBs, at market rates, using interest rate spreads chargedfor similar loans. The terms for sub-loans would be up to five years. The terms and conditions of subloans would be freely negotiated between the PBs and sub-borrowers. 29 3.33 GEF Grant During negotiations agreement was reached that no fees for administering the GEF grant would be charged by GOI and the PBs. Procurement 3.34 Procurement arrangements for the proposed project are summarized in Table 3.4. International or national competitive bidding for equipment and services-such as procurement of solar panels, batteries, light fixtures, electronic controllers-would not be feasible for the SHS dealers because the size of individual procurement would be too small, and the grouping of contracts is not practical due dispersal in time and location. All of the contract packages would be under $ 5.0 million, with the typical package in the range of $ 0.25-0.50 million. The typically small sizes of the individual procurement packages offer several advantages to the dealers: (i) just-in-timeprocurement reduces inventory carrying costs; (ii) smaller packages reduce the incremental borrowings from the PBs and the associated need for injecting fresh equity and collateral, a critical constraint; (iii) the dealers have an opportunity to buy panels on the spot market, where good deals are commonly available; and (iv) given that the prices of solar PV panels are expected to continue to decline over time, smaller packages provide an opportunity to take advantage of lower prices over time. Efficient procurement in the private sector in Indonesia is ensured through a competitive market operating in an open economy where commercial purchasers normally solicit various bids to obtain reasonable quotes (prices and terms of suppliers' credit), since it is in their best commercial interests to do so. 3.35 Although the PBs do not have formal procurement requirements, they do require their clients to justify their procurement decisions, and often require them to provide comparative price quotations. Under the proposed project, the PBs would require participating SHS dealers to show that their procedures for procuring goods and services are appropriate. The PBs would ensure that the goods and services are procured at reasonable prices, taking account of efficiency, economy, reliability, and other relevant factors such as terms of supplier credit, availability of spare parts, backup technical assistance, warranty arrangements. These procedures are consistent with the principles of Bank financing to the private sector through financial intermediaries; the Bank would conduct ex-post reviews to ensure that procurement is economic and efficient. 3.36 Technical assistance Consultants to be financed under the technical assistance component of the proposed project--Table 3.1-would be selected in accordance with the Bank Guidelines for the Use of Consultants, August 1981 and use the Bank's standard contract for Consultant's Services. All consulting services above US$ 100,000 equivalent provided by firms, and above US$ 50,000 equivalent to be provided by individuals would be subject to the Bank's prior review; further, for contracts below US$ 100,000 equivalentprovided by firms, and below US$ 50,000 equivalentto be provided by individuals, there would be prior review of: (a) the terms of reference, (b) single-source selection of consulting firms, (c) assignments of a critical nature, as reasonably determined by the Bank, (d) amendments to contracts for the employment of consulting firms raising the contract value to US$ 100,000 equivalent or above; and (e) amendments to contracts for the employment of individuals raising the contract value to US$ 50,000 equivalent or above. This would result in prior review of 100 percent of the TA contracts. 30 Table 3.4: Procurement Arrangements (US$ million) Procurement Method Other /a N.B.F. /b Total A. Credit Component 101.9 0.0 101.9 (20) (20) [20] [20] Taxes 0.0 9.8 9.8 Subtotal 101.9 9.8 111.8 (20) (0.0) (20) 1201 10.01 [201 B. Technical Assistance Implementation Support 4.1 0.0 4.1 [3.1] [3.1] Policy Support 1.2 0.0 1.2 [0.7] [0.7] Institutional Development 1.0 0.0 1.0 [0.5] [0.5] Subtotal 6.3 0.0 6.3 (0.0) (0.0) (0-0) [4.31 _ [0.01 [4.31 Total 108.2 9.8 118.1 (20.0) (0.0) (20.0) [24.31 10.01 124.31 Note: Terms in ( ) and [ are amounts financed by IBRD and GEF, respectively /a Goods and services to be procured by limited international bidding or established commercial practice /b Not Bank financed Disbursement 3.37 Table 3.5 shows the allocation of loan and grant proceeds to each Category and the percentage of expenditures to be financed in each Category. The Bank loan would be disbursed against 80 percent of the subloan amounts extended from time-to-time by the PBs to the SHS dealers. The grant would be disbursed as follows: (a) US$ 75 equivalent per SHS unit installed in Java and US$ 125 equivalent per SHS unit installed in the project areas outside Java; and (b) 100 percent of expenditures for consultancy services under the technical assistance component. Withdrawal applications for consulting firm contracts above US$100,000 equivalent and individual consultant contract cost above US$50,000 equivalent would be based on the Bank's full documentation requirements; others would be on SOE procedures. Documents supporting SOEs would be retained by the PBs, SHS dealers and DG-Budget, and made available for review by the Bank supervision missions. 3.38 In order to facilitate timely disbursement, two Special Accounts (SA) would be maintained by MOF at BI, one for the IBRD loan, in the amount of $1.4 million, and a second SA for the GEF grant, in the amount of $1.6 million, under terms and conditions satisfactory to the Bank. These SAs will be maintained in the name of Director General of Budget, Ministry of Finance, using established procedures.as discussed 31 in the following. After initial deposits by the Bank into these accounts, further replenishment would take place upon the Bank receiving applications for withdrawals from GOI/MOF. Replenishmentto the SAs will be made on a monthly basis, or when 20 percent of an SA's balance has been used, whichever comes first. Table 3.5: Allocation of Loan and Grant Proceeds Amount of Loan and Grant % of Expenditures Category Allocated (US$ mill. equiv.) to be Financed /a A. IBRD Loan - Sub-loans 20.0 Refinance 80% of the sub-loans made by participatingbanks to dealers B. GEF Grant -SHS Installation 20.0 100% /b -T.A. 4.3 100% /c /a Expendituresfinanced are exclusive of value-added-tax (VAT) b $ 75/SHS unit installed in Java, and $ 125/SHS unit installedoutside Java c In addition, GOI/BPPT will finance $1.5 million equivalent TA for implementation support, policy support and institutional development, and the subborrowers would finance $ 0.5 million equivalent for implementation support. 3.39 IBRD loan Disbursements from the SA for the IBRD loan would be triggered by the actions of the SHS dealers (Annex 3.9). The PBs would disburse subloan credit to the SHS dealers, based on a demonstration of their credit requirements, backed up by the documentation required by the PBs. The PBs would periodically submit a request for re-financing 80 percent of the subloan credit amounts to MOF, which would issue a payment authorization to BI. In turn, BI would transfer the loan funds from the SA to the PBs. MOF officials have indicated that the time from the receipt of the payment request at MOF from a PB to the time of payment by BI would be under two weeks. During negotiations, agreement was reached about the procedures and the supporting documentation to be utilized by MOF for disbursement of the IBRD loan and the GEF grant (para 3.40). 3.40 GEF grant Disbursement of the GEF grant would follow essentially the above scheme for disbursement of the IBRD loan, with one significant difference; unlike the loan, disbursement of the GEF grant would be based on the sale and installation of SHS units. During negotiations, agreement was reached that: (i) the grant would be disbursed only after the dealer has installed a SHS unit and provided documentation of acceptance of installation and a duly executed hire-purchase-contract (HPC) with the buyer; (ii) in the initial instance, grant disbursement to a particular dealer would take place only after the Bank notifies MOF that the PSG has conducted a satisfactory audit of the dealer's initial 50 installed units. The SHS dealers would submit this documentation to the PBs, along with their request for a grant disbursement. The PBs would forward this request to MOF, and ultimately, BI would transfer the grant funds to the PBs from the grant SA. For the TA, the consultants would submit invoices to BPPT, which will forward them with a payment request to MOF, which will then issue a payment authorization to BI, which will transfer the funds from the grant SA to the consultant's account. 3.41 Disbursement Schedule The estimated disbursement schedule is shown in Annex 3.10. Disbursements are expected to be relatively slow in the first two years, primarily because the SHS dealers will need to establish themselves before undertaking rapid expansion of sales in the latter half of the project. The PBs also favor this "start small, finish big" strategy, as it allows the PBs to incrementally exercise control of their risk exposure to the SHS dealers, by modulating their scale of operations and rate of growth along a trajectory outlined in the dealers' five year business plans, but at the same time conditioned as time progresses on their respective performance and creditworthiness at each future decision point on extending additional term credit. 32 Implementation 3.42 The credit component will be executed by qualified private dealers, who will take the responsibility for procurement, sales, installation and maintenance of the solar PV systems to rural customers, and who will also be responsible for collection of installment payments for the systems sold under a hire-purchase- contract arrangement. Contracting for the technical assistance components of implementation support and institutional development (Table 3.1) as well as contractor management would be the responsibility of BPPT, while DGEED would have responsibility for the technical assistance component of policy support. In particular, the Directorate of Energy Technology within BPPT would administer and provide counterpart support for the TA related to the Project Support Group (PSG), while BPPT's LSDE unit would have lead responsibility for hosting, providing counterpart support and facilities, and otherwise ensuring successful implementation of the TA on "Strengthening BPPT's Capabilities in Solar PV Testing and Certification'. 3.43 A project implementation schedule depicting major milestone dates is contained in Annex 3.11. The schedule assumes a loan effectiveness date of May 1, 1997, project completion date of October 31, 2001, and a loan closing date of April 30, 2002. A more detailed implementation schedule of the proposed project is contained in the Project Implementation Plan (para 3.45). 3.44 Accounting and Audit The project accounts of all PBs and BPPT would be audited by independent auditors acceptable to the Bank. During negotiations, agreement was reached that BPPT and the PBs would submit their project audit reports to the Bank no later than six months after the end of their respective fiscal years. Specifically, the following audit reports would be required: (i) the SOE documentation for BPPT and the SAs maintained by MOF; (ii) the SOE documentation maintained by the PBs; and (iii) the project accounts for BPPT. All PBs would provide, through MOF, the relevant information on disbursements and balances to the Project Support Group (PSG) -- see para 3.15 -- to enable the PSG to maintain the project monitoring and management information system (MIS). Project Management and Monitoring 3.45 Project Implementation Plan (PIP) A PIP has been prepared and is available in the Project files. The PIP recognizes that this Project has a number of innovative elements and risks, so that careful monitoring and, possibly, corrective actions are required for successful implementation. The PIP describes the: (i) critical success factors; (ii) strategy and implementation plan for catalyzing sales and installations of SHS units and capacity building (iii) management structure; (iv) milestones and performance indicators; (v) details of mid-term review; (vi) monitoring and reporting requirements; and (vii) procedures related to compliance by dealers of their responsibilitiesunder the Project. 3.46 Project management On an overall basis, the Rural Electrification Steering Committee (MME) is responsible for overseeing the implementation and impact of the Project. In undertaking this responsibility, the RE Steering Committee will largely rely upon the PSG (para 3.15), which will provide regular progress monitoring reports. 3.47 The PSG will have a Director, acceptable to the Bank, with substantial and relevant intemational and Indonesian experience, a Manager with local experience, and a small technical and support staff. The PSG will subcontractto NGOs and local companies much of its dissemination, audit, and business advisory services. During negotiations, agreement was reached that: (i) PSG would be established in accordance with TOR, membership, staffing and resources acceptable to the Bank; and (ii) BPPT will undertake contractingin a timely mannerso that the PSG can be mobilized no later than May 15, 1997. 33 3.48 Project monitoring The project's performance will be monitored by the PSG, the Bank's supervision missions, and a mid-term review that would be undertaken by a panel of experts (para 3.52). For this purpose, it is essential that PSG have easy and timely access to the relevant project information directly from the participating dealers and through MOF from the PBs to enable it to maintain its MIS. Some of the key elements of the monitoring would be to verify that: (i) the private dealers are using the credit and grant funds provided to them under the project in accordance with the project design, (ii) the dealers are complying with the pre-designated technical, after-sales service and consumer protection standards, and (iii) that customers are satisfied with their SHS units. The PSG would prepare an annual report and an additional report for the mid-term review (para 3.52) 3.49 Actions to be taken on non-compliance by dealers If any dealer is found to be not in compliance with the Project rules, immediate action would be taken, the nature of which would depend upon which of two categories the problem fell in (Annex 3.5). First there may be isolated and contained incidents of non- compliance, resulting, for example, from management, internal control or quality control deficiencies. For this type of non-compliance, the PSG would give the dealer an opportunity to remedy the problem within a given time period. If the PSG finds that the dealer does not meet the timetable, or if there are repeated incidents of non-compliance,the PSG may classify the non-compliance to be in the second category. 3.50 The second category of non-compliance comprises those in which the dealer has committed fraud, or has an extensive incidence of non-compliance with project rules, such technical specifications or after- sales service standards. In this case, after receiving the report and recommendations of the PSG, the Bank would take appropriate steps to exercise the remedies available to it, including suspending or terminating disbursements in respect of specific dealers. Should the Bank determine that a dealer is no longer eligibility to participate in the Project, it would immediately notify the MOF and the concerned PB. During negotiations, agreement was reached that the PBs will not make loans to dealers that are no longer eligible to participate in the Project. It is envisionedthat the concerned dealer would no longer be entitled, as of the date of notification to MOF and the concerned PB, for further grant disbursements or refinancing of the credit extended by the PB . 3.51 Escrow account An escrow account, based on the GEF grant funds due to a dealer, will be established for each dealer, with the purpose of assisting any customers who are adversely affected by a dealer's non-compliance with the Project rules (Annex 3.5). These escrow accounts would be terminated at the end of the Project, with any funds in the accounts transferred to the respective dealers. During negotiations, agreement was reached these escrow accounts would be established, utilized and terminated in the manner specified in Annex 3.5. 3.52 Mid-term review A mid-term review will be conducted to assess the Project's progress and take any corrective actions required to facilitate implementation of the Project. As part of the mid-term review, an independent panel of experts will assess the Project from the perspective of the release of second phase of the GEF grant (para 3.25). The central issue to be considered by the panel is whether there is any scenario that could be successfully implemented under which the SHS Project's target of attaining total sales of 200,00 SHS units over the life of the Project could be attained. While there may be one or more scenarios under which the target of 200,000 units would not be met, this question relates on the existence of one or more reasonable scenarios under which the target could be met, because the intent would be to focus implementation on the scenarios under which the target would be met. Hence, a positive answer to the above question would be the basis for the release of Phase 2 of the GEF grant. In the event that the panel concludes that there is no reasonable scenario under which the target of 200,000 units could be met, the panel would provide its judgment of the maximum unit sales that could occur over the life of the 34 SHS Project. The composition and terms of the reference for the independent panel as well as the manner of the processing of its report are described in Annex 3.12. 3.53 During negotiations, agreement was reached that GOI would: (i) as per agreed TOR (Annex 3.12), convene an independent technical panel that will conduct and complete a mid-term review and submit its report to the GOI by no later than June 30, 1999, (ii) submit its report to the Bank, with the independent panel's report included as an attachment, to the Bank by no later than July 31, 1999, and (iii) not disburse grants in excess of an aggregate amount of USS 15.75 million equivalent, unless notified by the Bank that the GEF Chief Executive Officer has authorized the release ofpart or all of the residual US 8.55 million equivalent. 3.54 Bank supervision The supervision schedule is shown in Annex 3.13. The supervision will be relatively heavy up to the midterm review, and will require assistance from the Bank's Resident Mission in Indonesia (RSI), specially on matters related to disbursements and audits and accounts. It is expected that this would help to reduce any implementation problems as well as ensure that the dealers' activities are in compliance with project design and standards. Environment and Resettlement 3.55 SHS are considered to be one of the most environmentally benign form of energy generation. There are no air or water emissions associated SHS; in addition, there is replacement of fossil fuels which lead to emissions of green house gases and other pollutants. Since SHS are usually located on roof tops, they avoid any environmental or resettlement impacts derived from land use, and the two dimensional flat shape of the collectors minimizes any potentially adverse aesthetic impacts. Further, the lead batteries are located inside the house and do not affect aesthetics or environment in any way. 3.56 Investigations made with the Directorate for Hazardous and Toxic Substance Management of BAPEDAL, and the Association of Waste Metal Recycling in Indonesia clearly indicate that there is recycling of used batteries in Indonesia. At present, the large scale modem battery manufacturers have to compete vigorously with small "pirate type" primitive battery recycling operations in the market of used batteries. The severe shortage of used batteries is responsible, in part, for the partial capacity utilization of the three large battery manufacturers in Indonesia. In response, the government has changed its rules (regulation PP/19) to allow, on a case by case basis, the import of used batteries. Further, the life of a battery used in the SHS is about three years, which is longer than the life of the battery under the present system of charging batteries at a central station (about two years) because the daily partial discharge/charge cycle under the SHS leads to slower depreciation than the weekly near full discharge/chargecycle common with central charging schemes. Thus, the number of batteries required under the SHS scheme will be significantly less than under the present system of centralized battery charging. 3.57 There are no resettlement issues since there will be no land transactions under this project, given that the solar PV systems will be installed on existing homes or commercial establishments. 35 4. PROJECT JUSTIFICATION Rationale for World Bank Involvement 4.1 Links to Country Assistance Strategy The Bank is committed to supporting renewable energy development in Indonesia, as stated in the Indonesia Country Assistance Strategy (CAS) that was presented to the Bank's Board on March 21, 1995, and the CAS Progress Report that was discussed on June 4, 1996. The proposed project design and implementation strategy typify the defining characteristicsof the transition that is underway in the assistance strategy for Indonesia: (i) achieving poverty reduction through increased funding for regional development, and a shift towards smaller and regionally oriented projects targeted at reducing urban-rural disparities in the quality of life; and (ii) striking the appropriate balance between public and private roles in energy distribution. 4.2 Links to Economic and Sector Work The proposed project draws upon general economic and sector work related to renewable energy as well as analyses undertaken specifically for this project. In particular, the project design and strategy are consistent with the findings and recommendations in: (i) the Bank's rural energy policy paper , (ii) an ASTAE best practices paper on solar PV2, (iii) the Bank's report on the challenges Indonesia faces in sustaining development 3, (iv) OED's review of Rural Electrification in Asia4, (v) a review of the BANPRES solar PV project in Indonesia5, and (vi) demand surveys conducted specifically for this project. 4.3 Links to ongoing Bank activities in Indonesia The Bank continues to actively support implementation of an efficient and sustainable Rural Electrification (RE) program, initiated in the Rural Electrification I project (Loan 31 80-IND) and now through the successor Rural Electrification II project (Loan 3180-IND), primarily by financing extension of the various regional grids, and related institutional capacity building. Solar home systems are one of the key elements of the overall least cost decentralized RE strategy in Indonesia, and they complement the least cost grid extension program for RE. The SHS project will provide a means to continue the Bank's dialogue with the Government of Indonesia and to influence the implementation of a sustainable and environmentally sound RE development program, while encouraging private sector participation and the creation of commercial markets for alternative energy, and continue the process of improving the policy and institutional environment, all matters of high priority on the GOI's as well as the Bank's agenda. 1/ Rural Energy and Development: Improving Energy Supplies for 2 Billion People, A World Bank Best Practice Paper, Report 15912-GLB, 1996. 2/ Cabraal, A., M. Cosgrove-Davies and L. Schaeffer, Best Practices for Photovoltaic Household Electrifcation Programs, World Bank Technical Paper Number 324, Asia Technical Department Series, 1996. 3/ Indonesia: Sustaining Development, A World Bank Country Study, 1994. 4/ Rural Electrification in Asia: A Review of Bank Experience, Operations Evaluation Department, World Bank, 1994 Report No. 13291. 5/ Wade, H., 1. H. Sejahtera, and T. Ball, Evaluation of the Indonesian Photovoltaic Household Electrification Project, Consultant report, EA31E, 1993. 36 4.4 Rationale for credit component The Project's credit component requires a combination of IBRD credit and GEF grant in order to facilitate the sale and installation of 200,00 SHS units to be paid for by rural customers on an installmentpayment basis. At present, the commercial viability of lending for SHS in rural areas has not been established, and no commercial bank has extended credit either to dealers or households for the sale of SHS. Further, the combination of current high SHS costs and the high share of initial costs in lifetime SHS costs makes it unlikely that the viability of this type of lending would be established on its own. Hence, initial Bank/GOI support is justified to demonstrate and establish the commercial viability of this type of lending. Eligibility for GEF Support 4.5 The SHS project is fully consistent with the: (i) the guidance from the Convention of the Parties (COP), and (ii) GEF Operational Strategy, in particular with Operational Program 6, which has the aim of promoting the adoption of renewable energy by removing barriers and reducing implementation costs. The barriers targeted by this project are (i) the lack of established high-volume supplier dealer chains, high prices, and (iii) lack of term credit (paras. 2.29-2.32). The SHS project is expected to help lower the unit costs of solar PV technologies in Indonesia, given the downward sloping technology cost learning curve. In addition, the SHS project is expected to set a new lower global benchmark price for SHS, thereby stimulating further penetration and global environmental benefits from abatement of GHG emissions in other countries as well. Alternatives to SHS Project 4.6 The baseline alternative to the SHS project is the business-as-usual scenario under which the households would continue to use a combination of kerosene for lighting and diesel-based battery-charging for other end-uses. The costs of this baseline alternative were used, inter alia, to develop the incremental costs (para 3.24). 4.7 The counter-factual scenario used in the least-cost analysis is the provision of electricity to the households by conventional means, i.e., grid electrification and decentralized diesel generation. The costs of this counter-factual scenario are discussed in Annex 4. 1. 4.8 Several alternatives were considered in the design of the SHS project. For the executing agency, the alternatives considered included PLN, BPPT, NGOs and cooperatives, and it was concluded that none of them offered better prospects than the private sector for an efficient delivery mechanism targeted at the commercial end of the solar PV market. In particular, PLN's "hands are full" implementing the grid-based RE program, while BPPT is focused on the non-commercial end of the solar PV potential market. Indonesian NGOs or cooperatives are not precluded from participating in this project, provided they meet the eligibility criteria (para 3.19). 4.9 For the provision of credit, the alternative of bank-financing directly to households was considered, but it was found that, even though Indonesia has a relatively well-spread rural bank network, that it would be difficult for the households to obtain bank-financing for the required term, and that there would be significant transaction costs and delays in getting whatever credit was made available. By contrast, under the dealer-financing scheme, the credit will be extended at the household's doorstep without any delays; in addition, the implicit rates of interest charged by the dealers are competitive with the rates of the organized banking sector. 37 4.10 The alternative mechanism considered for the GEF grant was to buy down the interest rate. However, this was rejected as this would introduce an unnecessary distortion, and would also provide an incentive for excessive borrowing, some of which could possibly be channeled to non-Project activities. By contrast, the proposed mechanism does not introduce any distortions, provides no incentives for excessive borrowing, and is performance-based, i.e., the grant is made available only after a unit has been installed. Fiscal Impact Analysis 4.11 Since the credit component of the proposed project is to be executed entirely by the private sector, there are no public expenditures for this purpose. While there is an element of subsidy in the project, this is being funded entirely by GEF grants. Further, the commercial risk of the subloans to the private dealers is being borne entirely by the commercial banks. Thus, the only possibility of any adverse fiscal consequences would arise from a default by a PB on its loan obligation to the GOI, which is considered unlikely since the PBs have been classified as financially sound by BI, and assessed to be among the well-managed banks in Indonesia. Hence, the proposed Project does not have any adverse fiscal consequences for the Government; further, by providing an alternative to PLN supply, the Project tends to reduce the subsidy required by PLN for conventional rural electrification (para 2.14). Project Benefits 4.12 Least-cost analysis When the SHS costs are compared with an alternative modern form of energy that provides a comparable level of service, i.e., conventional rural electrification options, there are a large number of rural households for whom the SHS costs are lower (Annex 4. 1), i.e., for the target households, 6 the SHS is least-cost in the provision of a comparable, modern form of energy . The principal reason for the cost advantage enjoyed by SHS is that, given the relatively small loads that are typical of rural households in Indonesia, it is uneconomical to extend or develop a grid even over relatively short distances (Annex 4.1). 4.13 Benefits The fundamental benefits from this project are: (i) the improvement in the quality of life of the rural households as they switch to a clean, modern form of energy for high-value end-uses such as lighting, security, and education, and (ii) global environmental benefits. Within the rural households, the primary beneficiaries of the SHS will be women and children, as the burden of the low quality, polluting lighting associated with kerosene lamps falls mainly on them. In particular, the light from kerosene lamps is far less suitable for reading than the electric lighting provided by the SHS, and the exposure to the fumes from these lights is typically higher for women and children, who tend to stay indoors (paras. 2.9-2.10). Specifically,the benefits of the proposed project are: 6/ While the present value of the expenditures of the target households on lighting and battery charging is less than the present value of the cost of the SHS, the service from kerosene and battery charging is inferior to the service from SHS (para 2.9). 38 A. Direct benefits to the households: * There would be a quantum improvement in lighting quality and quantity, which is expected to lead to: (i) a profound and positive effect on the quality of education and learning experienced by children; (ii) increased productivity and potential for in-home income generation activities, made possible by extending available hours of work, particularly for women; and (iii) increased freedom of movement and ability for community participation. * The households would have access to the information flow, and outreach provided by television, which is one of the few channels to the external world available to rural Indonesian women and children. B. Global environmental benefits: * There are global environmental benefits from the reduction in CO2 emissions (about 2.2 million tons) as a result of the switch from fossil fuels to solar energy 7. This mitigation in emissions is the rationale for the GEF grant. C. Regional development benefits: * The project scope includes two provinces (Lampung and South Sulawesi) outside Java, in view of the fact that rural household electrification ratios are particularly low off-Java, and there is an urgent need to initiate development of sustainable means of providing service to the households in these areas. Further, the higher GEF grant for SHS units installed off- Java ($125/unit for Lampung and South Sulawesi compared to $75/unit for West Java) recognizes the higher costs that have to be incurred off-Java, and thus provides an incentive for regionally-balanceddevelopmentof the solar PV market. 4.14 Cost-benefit analysis As indicated above, there are two types of benefits associated with the project: (i) global environmental benefits, which are given by the international community's willingness-to- pay (WTP) and (ii) local benefits that accrue directly to the participating households, which are given by the households' WTP. 4.15 In this analysis, in accordance with Bank guidelines8, the global environmental benefits are taken to be equal to the value of the GEF grant; this grant payment represents the international community's willingness-to-pay (WTP) for CO2 abatement as well as for the positive externalities of expected 7/ The estimates of the emissions avoided include both the emissions avoided as a result of the SHS units directly installed under the SHS project ("project effect")-about 1.3 million tons of C02,-as well as the acceleration of SHS market penetration in Indonesia ("programmatic effect") as a result of the SHS project-about 0.9 million tons of C02. With a total GEF grant of $24.3 million, the unit cost of abatement is about $1 1/ton C02, including project and programmatic benefits, and about $1 8/ton C02, when only project benefits are considered. As a point of comparative interest, in the IBRD-GEF financed India Renewable Resource Development Project (Ln. 3544-lN/Cr. 2449-IN), the unit costs were estimated to be about $ 105/ ton C02, for the windfarm component, and between $1 02-294/ ton C02, for the solar PV component. 8/ Bank OP 10.04, Paragraph 8 (revised September, 1994). 39 innovations and cost reductions in solar panels, whose production is characterized by a declining cost curve. 4.16 The typical household's WTP for the SHS is more complex to estimate. Conceptually, WTP = "actual payments made by the household" plus "consumer's surplus" While the household's actual expenditures are readily available, there are no reliable estimates available of the consumer's surplus associated with SHS. For this reason, only the household's actual expenditures on the SHS (excluding the GEF grant co-downpayment made on behalf of the consumer) are used as a measure of the household's benefits. This use of the household's expenditures as a measure of the benefits is similar to the practice in conventional power projects of treating "tariff payments" as a measure of the benefits. 4.17 In the case of SHS, over fifteen years, the household's expenditures consist of four elements: (i) the initial downpayment, (ii) the monthly payments to amortize the loan, (iii) the replacement costs for batteries, controllers, etc., depending upon their economic lives, and (iv) the routine monthly O&M expenditures, essentially for replenishing the water in the battery. The last two categories of expenditures reflect the fact, unlike in a conventional power system, the household acts as both the producer and the consumer, so that these costs are also a measure of the benefits accruing at that time to the household. 4.18 Based on this analytical framework, the internal economic rate of return (IERR), including the global environmental benefits, is 39%; if the global environmental benefits are excluded, then the IERR is 12% (Annex 4.2). These rates of return are biased downwards because of the exclusion of the consumer's surplus from the benefits. Project Risks and SensitivityAnalysis 4.19 Risks This Project faces a number of implementation risks that would adversely affect the outcomes. Specifically, Objectives A (sales of SHS to rural households) and B (establishment of dealers selling SHS to rural customers)-see Annex 3.1 for details-face the following inter-relatedrisks:10 - Market demand risk, i.e., the potential customers buy less than the target number of 200,000 systems even though the dealers are willing and able to make the sales. The resultant lower penetration of SHS could be due to lack of affordability of the SHS, lack of confidence in or information about the SHS, or concerns that PLN service would become available in the near future. * Dealer failure risk, i.e., the dealers are unable to make sales of 200,000 systems or only 2-3 dealers are able to establish themselves even though, in principle, there is sufficient demand for SHS. This could happen due to factors such as lack of management skills, or poor installment collection mechanisms. 9/ D. Anderson, "Cost Effectiveness in Addressing the 'C02' problem, with Special Reference to the Investments of Global Environmental Facility," Annual Review of Energy and Environment (1994), Volume 19, pp. 423-455. 10/ The implementation risks that would affect Objective C (capacity building of key sector institutions) have been addressed by strong participation and involvement of the concemed agencies during project preparation (para 4.23). 40 * Consumer dissatisfaction risk, i.e., the customers who buy the SHS are not satisfied with their systems. This could happen because of a number of reasons, such as a failure of the systems to function properly, poor after-sales service, an inability of the systems to meet the customers' energy needs, or a perception that SHS do not offer "good value for the money." 4.20 Steps to mitigate risks Apart from the steps that have been taken in Project preparation to mitigate these risks, the Project's supervision will be relatively heavy in the initial years (Annex 3.13), so that problems can be identified and corrective actions taken in a timely manner. The key actions already taken, or already identified for the future, are: * Facilitating sales Some of the steps taken to facilitate sales are: * Prior to the commencement of sales in a region, the PSG would undertake an informational campaign to provide the potential customers with the technical and financial information they need to make an informed decision about the purchase of a SHS. The materials for this campaign are being prepared by Bank-managed grant-financed local consultants as part of project preparation. * In case of insufficient demand in the target markets, the dealers would be allowed to operate in extended market areas, which in the first instance would be the rural areas of the adjacent districts (kabupatens) of the provinces adjoining W. Java, Lampung, and S. Sulawesi; and possibly into a fourth province (North Sumatera). * The option of adding new dealers would be kept open. - Facilitating dealer success Some of the steps taken to facilitate dealer success are: * A strategy of "good dealer" selection has been adopted by: (i) explaining the risks to the dealers, while requiring them to have a large stake in the business. This approach has led a number of potential dealers, who were not sure of themselves, to opt out from participating in the project; and (ii) asking the PBs to use their normal commercial appraisal criteria in extending credit to the dealers. This approach has led the PBs to undertake a detailed investigation of the dealers' past, present and future operations, as a result of which one of the PBs has already rejected the credit applications of some dealers. * The dealers have been encouraged to adopt a "start small, finish big" strategy so that they have sufficient time to identify and resolve any weaknesses in their management or operational systems. * The dealers are free to "seek stronger partners," whose managerial and financial strengths would assist the dealers. These partners are likely to be larger private sector firms that are interested in entering this business, or subsidiaries of multinational companies involved in renewable energy. * Facilitating consumer satisfaction Some of the key steps taken to facilitate consumer satisfaction are: 41 * The dealers are required to install only the equipment that is certified, by world-class laboratories, to meet the Project's "technical specifications," which will greatly reduce the odds of equipment failure. * The dealers are required to develop comprehensive consumer protection packages, including return policies, warranties, and after-sales service. * The PSG will maintain two-way links with the customers, including (i) auditing installations on a purposive as well as random sample basis to ensure that only the certified equipment is used and verify that there are no problems in the installation, and (ii) providing the customers convenient means of bringing any issue that they have to the attention of the PSG. 4.21 Sensitivity analysis The sensitivity of the IERR has been analyzed with respect to the three risks discussed above (para 4.19). Specifically, two alternative scenarios are considered (Annex 4.2): * Scenario A, under which sales of only 160,000 SHS are achieved, i.e., 80% of the target of 200,000 sales, which reflects both the market demand and dealer failure risks. Under a number of reasonable assumptions (Annex 4.2) related to the higher costs and prices under this scenario, the IERR is found to decline from 39% to 32%, including the global environment benefits, and from 12% to 8%, excluding the global environmental benefits. * Scenario B, under which SHS units fail to provide benefits after they have been installed, which represents the consumer dissatisfaction risk. It is assumed that the customers stop making monthly payments or incurring replacement expenditures if their SHS units fail. The analysis shows that the failure rate (i.e., these units would not provide any economic or environmental benefits at all) of the SHS units would have to be 19% for the IERR, including the global environment benefits, to fall to 10%. Such a high system failure rate has not been experienced in Indonesia's Government sponsored programs (para 2.17), and it is unlikely that failures on this scale would occur in the proposed Project, given the risk mitigation measures outlined above. Furthermore, a leading indicator of customer dissatisfaction, customer loan repayment rates, is a key performance indicator for the proposed project (para. 3.6). Post-Project Sustainability and Participation 4.22 Post-Project Sustainability In the post-project phase, when the GEF first cost buydown would end, it is expected that the dealers will be able to maintain themselves in business as a result of a combination of the following outcomes: * Cost reductions in real terms, stemming from: (i) economies of scale, particularly in sales- and-service chains and assembly of balance-of-system components, (ii) expected long-term world-wide trend reductions in solar PV panel prices, and (iii) the ending of the need to incur the high initial costs of establishingsales-and-servicechains. * Increases in consumer affordability, arising from the expected continued rapid growth of the Indonesian economy as a whole and of rural incomes in particular. 42 * Elimination of other key barriers, such as lack of commercial banks' familiarity with the SHS business, limited customer awareness of SHS, lack of an official plan for decentralized rural electrification plan that defines a clear role for solar PV products, lack of a local testing facility, and the absence of well-defined world-class technical standards specifically suited for Indonesia. 4.23 Participation Within the Government of Indonesia, the primary stakeholders in the SHS project are: the Agency for the Assessment and Application of Technology (BPPT), the Directorate-General of Electricity and Energy Development (DGEED), and the Planning Agency (BAPPENAS) These agencies have been involved to varying degrees in project preparation. In particular, BPPT has played a very active role, and has been involved in activities such as conducting market surveys, developing technical specifications, publicizing the SHS project within Indonesia, and providing office facilities for project preparation work. The SHS project would strengthen BPPT's institutional capabilities. 4.24 Within the private sector, the primary stakeholders include the Indonesian Solar Energy Association and individual solar PV systems dealers and suppliers. A number of presentationsrelated to the SHS project have been made to and extensive discussions held with the Solar Energy Association as well as all interested dealers on an individual basis. The dealers have been active participants in the process of finalizing equipment technical specifications, and the project design has benefited from their comments and suggestions. 43 5. AGREEMENTS REACHED AND RECOMMENDATION Agreements with the Borrower 5.1 The following agreements were reached during negotiations with the Government of Indonesia: (i) Terms and conditions of the BI Subsidiary Loan Agreement (para 3.27); (ii) Terms and conditions of the respective Onlending Agreements for the private PBs and Subsidiary Loan Agreements for the State owned PBs (paras 3.27 and 3.31); (iii) Terms and conditions of the Subloan Agreements between PBs and SHS dealers (para 3.32); (iv) Terms and conditions for the authorization and channeling of GEF subgrants (paras 3.27, 3.30 and 3.33); (v) Loan allocation and reallocation amounts and procedures for the PBs (para 3.27); (vi) No additional Government finance or support for the dealers (para 3. 10); (vii) SHS equipmenttechnical specificationsand certificationrequirements(para 3.18); (viii) Scope of and arrangements for mid-term review (para 3.53); (ix) Performance indicators to be utilized for monitoring (para 3.6); (x) Establishment, use and termination of escrow accounts designed to assist customers who are adversely affected by a dealer's non-compliance with Project rules (para 3.51); (xi) Borrower shall: (a) undertake and complete a study on "Decentralized Rural Electrification Plan", in accordance with terms of reference and in a manner satisfactory to the Bank, and furnish the draft final report of the study to the Bank for review and comments by no later than September 30, 1998; and (b) based on the said study's results and recommendations and subsequent review, comments and discussions: (i) prepare a draft Decentralized Rural Electrification Plan, with a focus on the niche for solar PV, for Indonesia, (ii) furnish the said draft plan to the Bank for review and comments, by March 31, 1999, and (iii) by November 30, 1999, finalize and adopt the same taking into account the comments, if any, thereon by the Bank (para 3.16); (xii) Borrower shall activate, no later than November 30, 1997, a SHS Working Group, headed by the Director of the Directorate of Electric Power Planning, DGEED, with representation from other Government agencies concerned with rural electrification policy, including BAPPENAS, BPPT, MOF, Ministry of Cooperatives and Small Enterprise Development, and PLN. The SHS Working Group will report to the Rural Electrification Steering Committee, DGEED, and will be the local working counterpart to 44 the consultants who will undertake the preparation of the Decentralized RE Strategy Study and SHS Action Plan. (para 3.16); (xiii) Borrower shall ensure that BI shall inform the Borrower, and the Borrower inform the Bank, that a situation has arisen that may require the reallocation of the uncommitted balance of funds allocated to a PB if that PB fails to meet BI's requirements for "sehat" classification (para 3.27); (xiv) Borrower shall ensure that the PBs shall: (a) utilize the specified eligibility criteria for subborrowers (para 3.19); (b) utilize the specified subproject review criteria and process (paras 3.28-3.29); (c) take reasonable steps to ensure that the goods and services procured by the subborrowers are at reasonable prices taking account of efficiency, economy, reliability and other pertinent factors (para 3.3 5); and (d) submit their project audit reports to the Bank no later than six months after the end of their respective fiscal years (para 3.44) (xv) BPPT shall: (a) With respect to the technical assistance component for strengthening BPPT-LSDE capabilities for testing and technical certification of SHS equipment, BPPT shall: (i) initiate and undertake without delay all steps necessary to ensure that the consultants are mobilized no later than October 31, 1997, in accordance with TOR acceptable to the Bank; (ii) submit, by no later than February 28, 1998, a time- bound action plan -- acceptable to the Bank --including major intermediate milestones to achieve ISO 25 status by December 31, 2001, with this date subject to revision based on the consultant's report; and (iii) ensure that the TA work under this Project would be completed by no later than October 31, 1999 (para 3.17). (b) With respect to the technical assistance consultancy contract for the Project Support Group (PSG), that: (i) PSG would be established in accordance with TOR, membership, staffing and resources acceptable to the Bank; and (ii) BPPT will undertake contracting in a timely manner so that the PSG can be mobilized no later than May 15, 1997 (para 3.47). (c) Submit its audit reports to the Bank no later than six months after the end of its fiscal year (para 3.44). 45 Condition of Effectiveness 5.2 The condition of loan effectiveness is: (a) Execution of subsidiary loan agreement between MOF and BI, and at least two SLAs/OLAs between MOF/BI and the PBs, which include provisions governing the channeling of GEF grant funds, satisfactoryto the Bank (para 3.27). Actions to be taken before Withdrawal of Loan and Grant Proceeds 5.3 The conditions of disbursement for each PB are: (a) signing of an SLA/OLA between MOF/BI and the PB, satisfactory to the Bank (para 3.27); (b) obtaining prior authorization from the Bank for the subborrower (3.29) and continuing dealer eligibility (para 3.50); and (c) obtaining prior authorization from the Bank (para 3.30 and para 3.40) for ceiling amounts on the grants to a dealer, and continuing dealer eligibility(para 3.50). 5.4 The condition for disbursement for part or all of the Phase 2 GEF grant funds is the written authorization by the GEF Chief Executive Officer (para 3.53). Recommendation 5.5 With the above agreements and conditions, the proposed project is suitable for a loan of US$ 20.0 million equivalent and a GEF grant of SDR 16.8 million (US$24.3 million equivalent), to the Republic of Indonesia. 46 Schedule A INDONESIA SOLAR HOME SYSTEMS PROJECT Estimated Costs and Financing Plan (US$ million) Local Foreign Total Credit Component 23.0 69.1 92.1 Technical Assistance 2.0 4.3 6.3 of which - Implementation Support 1.0 3.1 4.1 - Policy Support 0.5 0.7 1.2 - Institutional Development 0.5 0.5 1.0 Base Cost 25.0 73.4 98.4 Duties and Taxes 2.5 7.3 9.8 Price Contingencies (Credit Component) 5.5 4.3 9.8 Total project Cost 33 Financing Plan: IBRD 0.0 20.0 20.0 GEF 0.0 24.3 24.3 GOI/BPPT 1.5 0.0 1.5 Participating Banks 1.2 3.8 5.0 Subborrowers 30.4 36.9 67.3 Total 3801 47 Schedule B Page 1 of 2 INDONESIA SOLAR HOME SYSTEMS PROJECT Procurement and Disbursement A. Summaries of Procurement Arrangements (US$ million) Procurement Method Other /a N.B.F. /b Total A. Credit Component 101.9 0.0 101.9 (20) (20) [20] [201 Taxes 0.0 9.8 9.8 Subtotal 101.9 9.8 111.8 (20.0) (0.0) (20.0) 120.0] [0.0] '20.01 B. Technical Assistance Implementation Support 4.1 0.0 4.1 [3.1] [3.1] Policy Support 1.2 0.0 1.2 [0.7] [0.7] Institutional Development 1.0 0.0 1.0 [0.5] [0.5] Subtotal 6.3 0.0 6.3 (0.0) (0.0) (0.0) [4.3] [0.0] [4.31 Total 108.2 9.8 118.1 (20.0) (0.0) (20.0) [24.3] [0.01 [24.31 Note: Terms in ( ) and [ are amounts financed by IBRD and GEF, respectively /a Goods and services to be procured by limited international bidding or established conuercial practices /b Not Bank fmanced 48 Schedule B Page 2 of 2 INDONESIA SOLAR HOME SYSTEMS PROJECT B. Disbursement Arrangements Amount of Percentage of Expenditures Category Loan and Grat to be Financed /a Alkocated (US$ mill. equiv.) A IBRD Loan - Sub-loans 20.0 Refinance 80% of the sub-loans made by participating banks to dealers 8 GEF Grant - SHS Instalation 20.0 100% /b - T.A. 4.3 100% /c /a Expenditures financed are exclusive of value-added-tax (VAT). lb $75/SHS unit installed in Java, and S125/SHS unit installed outside Java. /c In addition, GOI/BPPT will finance S1.5 million equivalent TA for implementation support, policy support and institutional development, and the subborrowers would finance S 0.5 million equivalent for implementation support. Estimated Disbursements (Smillion) Bank Fiscal Year 1997 1998 1999 2000 2001 2002 D3RD Annual 0.3 2.2 4.5 7.0 6.0 0.0 Loan Cumulative 0.3 2.5 7.0 14.0 20.0 20.0 GEF Annual 0.3 3.5 5.2 6.2 7.3 1.8 Grant Cumulative 0.3 3.8 9.0 15.2 22.5 24.3 49 Schedule C INDONESIA Solar Home Systems Project TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare the project: 2 years' (b) Prepared by: BPPT, but mostly with assistance from Bank-managed grant financed consultants- local and foreign (c) First Bank mnission: June 1994 (d) Appraisal mission departure: May 1996 (e) Negotiations: December 1996 (f) Planned date of effectiveness: May 1997 (g) List of relevant PCRs and PPARs: Loan 31 80-IND, Rural Electrification ICR Date: December 1995, Report No. 15210 Project processing took more time than the norm for power projects in Indonesia, since preparation for this project has led the Bank's power operations into new areas -- decentralized rural electrification, renewable energy, private sector, rural markets -- that entailed the laying of considerable ground work to collect the baseline data, and to seek out stakeholder views and commitments. Furthermore, there is no single agency/Ministry that has as its mandate the filling of this preparatory void. In addition to ensuring quality at entry, the additional time was required to pre-identify several private sector dealers that would qualify for sub-loans and grants under the project; a process that could normally have been undertaken following loan effectiveness, but that would also delay actual implementation. Increased processing time also resulted from having to comply with two sets of reviews and procedures - IBRD and GEF. The report is based on an appraisal mission undertaken in June 1996 comprising Mr. Arun P. Sanghvi (Task Manager), Messrs. Subodh Mathur and Jim Finucane (consultants), and Mr. Anil Cabraal (ASTAE). Peer reviewers were Messrs./Mmes. Magdalena Manzo (SA2EI), Khalid Siraj (FSD), and Ernesto Terrado (IENPD). The GEF external technical reviewer was Mr. Scott Sklar (Executive Secretary, Council of International Solar Electric Industries Association). Mr. Javad Khalilzadeh-Shirazi, Acting VP (EAP), Mrs. Marianne Haug, Director (EA3DR) and Mr. Peter R. Scherer, Division Chief (EA3IP) have endorsed the project. MOP Schedule D Run Date: 10/16/96 IBRD Loans and IDA Credits in the Operations Portfolio Status of Bank Group Operations in Indonesia Difference Original amount in US$ millions between expected Project Loan or Fiscal and actual ID Credit No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed disbursemetite Number of Closed Loans: 147/ Credits: 48 Active Loans ID-PE-3923 1.2932 1988 GOI JabotabekUrbanTransmort 150.00 7.83 7.83 ID-PE-3946 1[3112 1990 GOI Public Works Institutional Dev. & Tmg 36.10 0.01 0.01 ID-PE-3873 [3158 1990 GOI Second Secondary Education 154.20 25.24 25.24 ID-PE-3973 [3182 1990 GOI Third Telecommunications 350.00 37.50 23.23 60.73 ID-PE-3960 [3209 1990 001 Gas Utilization 86.00 42.53 42.53 ID-PE-386S L3219 1990 001 Second labotabek Urban Development 190.00 33.07 32.11 ID-PE-3977 U3246 1991 GOI Third Jabotabek Urban Development 61.00 21.64 20.36 L ID-PE-3959 U282 1991 GOI FertilizerRestructuring 221.70 0.24 10.71 8.05 ID-PE-39S1 12302 1991 001 Provincial Irrigated Agriculture Dev. 125.00 20.50 22.70 43.20 ID-PE-3943 13304 1991 GOI EastJava/Bali Urban Development 180.30 28.01 28.01 ID-PE-3912 13305 1991 GOI YogyakartaUplandAreaDevelopment 15.50 3.51 3.23 ID-PE-3922 [3340 1991 GOI Sulawesi-lrian Jaya Urban Development 100.00 11.65 8.87 ID-PE-3975 12349 1991 GOI Power Transmission 275.00 103.40 19.24 117.14 ID-PE4002 [3385 1991 GOI Technical Assistance for Infrastructure 30.00 11.33 11.33 ID-PE-3928 [3402 1992 GOI Agricultural Financing 106.10 54.03 48.73 ID-PE-3966 L3431 1992 GOI Third Non-Formnal Education 69.50 14.17 2.47 ID-PE-3940 [3448 1992 GOI Primary Education Quality Improvement 37.00 21.20 11.90 ID-PE-4012 [3454 1992 001 BAPEDAL Development 12.00 2.16 0.66 ID-PE-3S60 .L3464 1992 GOI Treecrops Smailholder 87.60 46.19 20.09 ID-PE-3997 U3482 1992 GOI Fourth Telecommunications 375.00 222.24 42.24 ID-PE-3949 U3490 1992 GOI bhird Kabupaten Roads 215.00 5.06 5.06 ID-PE-3969 13496 1992 GOI Primary School Teach&r Development 36.60 15.34 10.04 ID-PE-3916 L3501 1992 GOI Suralaya Thermal Power 423.60 232.21 13.11 ID-PE-3970 L3526 1993 001 Financial Sector Developrnent 307.00 39.81 45.14 84.95 ID-PE-3914 L3550 1993 GOI ThirdComniunityHealth &Nutrition 93.50 50.63 7.13 ID-PE4006 L3579 1993 GOI E. Indonesia Kabupaten Roads 155.00 41.82 17.81 1| P Page 1 of 3 ONl Difference Original amount in USS millions between expected Project Loan or Fiscal and actual ID Credit No. Year Bo!rrwer Puepse IBRD IDA Cancellations Undisbursed disbursements' ID-PE4009 L3586 1993 GOI IntegratedPestManagement 32.00 23.62 13.12 ID-PE-3999 12588 1993 GOI Groundwater Development 54.00 36.53 2.73 ID-PE-401S U3589 1993 GO FloresEarthquakeReconstruction 42.10 8.96 8.96 ID-PE4007 12602 1993 GOI CirataHydroelectricPhasell 104.00 78.51 52.71 ID-PE-3990 12629 1993 GOI Water Supply & Sanitation for Low Income 80.00 57.70 22.70 ID-PE-3985 12658 1994 GOI National Watershed Mgmt and Consvation 56.50 49.37 5.07 ID-PE-3945 12712 1994 GOI SecondHighwaySectorlnvestment 350.00 244.10 74.10 ID-PE-3952 U3721 1994 GOI Skills Development 27.70 22.80 17.85 ID-PE-3998 12726 1994 GOI SurabayaUrban Development 175.00 152.34 54.24 ID-PE4020 12732 1994 GOI Fifth Kabupaten Roads 101.50 56.68 -2.81 ID-PE-4010 12742 1994 GOI Dam Safety 55.00 45.92 8.52 ID-PE-3890 12749 1994 GOI Semarang-Surakarta Urban Development 174.00 136.27 22.37 ID-PE-4017 L3754 1994 GO1 University Research for Graduation Study 58.90 47.60 6.20 ID-PE-3937 L3755 1994 GOI Integrated Swarnps 65.00 53.47 6.22 ID-PE-3910 12761 1994 GOI Sumatera&KalimnantanPower 260.50 244.36 43.86 ID-PE-3954 12762 1994 GOI Java Irrigation Improvemnents and Wtr Resource 165.70 137.29 21.49 ID-PE-3984 12792 1995 0OI Land Administration 80.00 72.66 8.64 ID-PE-4019 12801 1995 GOI SecondAccountancyDevelopmnent 25.00 22.14 9.94 ID-PE-3988 12825 1995 GOI Second Professional Resource Development 69.00 52.85 -0.16 ID-PE-3979 12845 1995 GOI Second Rural Electrification 398.00 380.29 46.63 ID-PE-3951 L3854 1995 GOI KalitnantanUrbanDevelopnent 136.00 115.77 25.27 ID-PE-3972 12886 1995 GOI Second Agriculture Research Management 61.00 61.00 ID-PE-3968 12887 1995 GOI Book & Reading Development 132.50 130.22 -2.24 ID-PE-34891 1288S 1995 GOI Village Infrastructure 72.50 39.37 5.63 ID-PEA4001 1904 1995 GOI Telecommunications Sector Modernization 325.00 325.00 1D-PE-3965 L3905 1995 GOI Fourth 11ealth 88.00 S6.72 -1.25 ID-PE-39754 12913 1995 GOI Second Technical Assistance for Infrastructure 28.00 28.00 ID-PE-3978 12972 1996 GOI Industrial Technology Development 47.00 46.00 3643.45 ID-PE4021 12978 1996 GOI Second Power Transmnission and Distribution 373.00 373.00 ID-PE4003 12979 1996 GOI Second Teacher Training 60.40 59.60 5.65 ID-PE-39643 L3981 1996 GOI STD/AIDS 24.80 24.30 1.50 ID-PE-4008 12984 1996 GOI Nusa Tenggara Agriculture Development 27.00 26.20 1.30 ID-PE4011 L4007 1996 GOI Sulawesi Agriculture Area Development 26.80 26.80 0.75 ID-PE4014 L4008 1996 GOI KerinciSeblatlCDP 19.10 19.10 ID-PE-39312 L4017 1996 GOI Second E. Java Urban Development 142.70 142.70 14.00 ID-PE-41896 L4030 1996 GOI Human Resource Capacity Building 20.00 20.00 0.51 ID-PE-37097 L4042 1996 GOI E. Java Junior Secondaraya Education 99.00 99.00 ID-PE4004 L4043 1996 GOI Higher Education Support 65.00 65.00 1.50 - un Page 2 of 3 Difference Original amount in USS millions between expected Project Loan or Fiscal and actual ID Credit No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed disbursements' ID-PE-4016 L4054 1996 GO Strategic Urban Roads 86.90 86.90 ID-PE-3987 L4062 1997 GOI C. Indonesia Secondary Education 104.00 104.00 ID-PE-41894 L4095 1996 GOI Sumatra Secondary Education 98.00 98.00 ID-PE-40521 L4100 1997 GOI Second Village lnfiastructure 140.10 140.10 TOTAL 8,443.40 0.00 201.45 5.051.13 4.791.28 Active Loans Closed Loans Total l'otal disbursed (IBRD and IDA) 3,190.83 14,219.69 17,410.52 Of whici repaid 65.78 6,159.40 6,225.18 Total now held by IBRD and IDA 8,176.16 8,082.91 16,259.07 Amount sold 0.00 88.08 88.08 Of which repiaid 0.00 82.35 82.35 Total undisbursed 5,051.12 22.63 5,073.75 a. intended disbursements to date minus actual disbursements to date as projected at appraisal. Note: Disbursement data are updated at the end ofthe first week of the month. or- Pg 3 Page 3 of 3 53 Schedule D Page 4 of 6 Indonesia STATEMENTOF IFC's Committed and Dispursed Portfolio As of 08/31/96 In Millions US Dollars Committed Disbursed -IFC IOFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1971 Unitex 0.00 .35 0.00 0.00 0.00 .35 0.00 0.00 1980 Semen Andalas 10.35 10.02 0.00 10.98 10.35 10.02 0.00 10.98 1982 Sasela Finance 0.00 .32 0.00 0.00 0.00 .32 0.00 0.00 1984 Saseka Finance 0.00 .06 0.00 0.00 0.00 .06 0.00 0.00 1986 PT Bali .44 0.00 0.00 0.00 .44 0.00 0.00 0.00 1987 Semen Andalas 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1988 Manulife 0.00 .32 0.00 0.00 0.00 .32 0.00 0.00 1989 PT Agro Muko 3.78 2.20 0.00 4.09 3.78 2.20 0.00 4.09 1989 PTAstra 0.00 11.62 0.00 0.00 0.00 11.62 0.00 0.00 1990 PT Indo-Rama 1.84 0.00 0.00 4.91 1.84 0.00 0.00 4.91 1991 LYON-MLF-lbis 2.30 0.00 0.00 2.30 2.30 0.00 0.00 2.30 1991 PTArgoPantes 16.88 13.00 0.00 26.50 16.88 13.00 0.00 26.50 1991 PTAstra 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991 PT ndaci .80 0.00 1.83 0.00 .80 0.00 1.44 0.00 1991 PTIndo-Rama 10.31 6.18 0.00 0.00 10.31 6.18 0.00 0.00 1991 PT RPMBA 8.67 .60 0.00 5.00 8.67 .60 0.00 5.00 1991 SEAVI Indonesia 0.00 1.50 0.00 0.00 0.00 1.50 0.00 0.00 1992 PT Bakrie Kasei 21.56 0.00 9.63 85.73 21.56 0.00 9.63 85.73 1992 PTKIAKeramik .94 1.70 0.00 6.18 .94 1.57 0.00 6.18 1992 PTMitracorp 0.00 15.87 0.00 0.00 0.00 15.87 0.00 0.00 1992 PT Swadharma 24.89 0.00 0.00 44.47 24.89 0.00 0.00 44.47 1992 PT Viscose 7.92 0.00 0.00 16.58 7.92 0.00 0.00 16.58 1993 PT BBL Dharmala .79 0.00 0.00 1.27 .79 0.00 0.00 1.27 1993 PT Indo-Rama 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Generated by the Operations Information System (OIS) Page I Schedule D 54 Page 5 of 6 Committed Disbursed --IFC FFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1993 PTNusantara 4.00 0.00 0.00 12.00 3.58 0.00 0.00 11.67 1993 PT Samudera 2.45 5.00 0.00 8.05 2.45 5.00 0.00 8.05 1993 Saseka Finance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 KDLC Bali 15.00 1.14 0.00 0.00 15.00 1.14 0.00 0.00 1994 Prudential Asia 0.00 6.75 0.00 0.00 0.00 4.19 0.00 0.00 1994 PAMA (Indonesia) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 PT Astra 0.00 10.67 0.00 0.00 0.00 10.67 0.00 0.00 1994 PT KIA Keramik 0.00 1.40 0.00 0.00 0.00 1.40 0.00 0.00 1994 PT Mitracorp 2.54 4.12 0.00 0.00 2.54 4.12 0.00 0.00 1994 PT PAMA 0.00 .71 0.00 0.00 0.00 .71 0.00 0.00 1994 PT Sanpuri 8.00 0.00 0.00 22.00 8.00 0.00 0.00 22.00 1995 PT Bakrie Kasei 30.00 3.00 0.00 0.00 30.00 3.00 0.00 0.00 1995 PT Bakrie Pet 12.00 2.00 0.00 0.00 12.00 2.00 0.00 0.00 1995 PT Bakrie Pipe 20.00 0.00 9.50 0.00 20.00 0.00 9.50 0.00 1995 PT Bunas Finance 10.00 0.00 0.00 6.00 10.00 0.00 0.00 6.00 1995 PT Citimas Captl 0.00 2.59 0.00 0.00 0.00 1.31 0.00 0.00 1995 PT Hotel Santika 9.00 0.00 5.00 0.00 0.00 0.00 0.00 0.00 1995 PT Indo-Rama 28.33 4.71 0.00 62.68 28.33 2.54 0.00 62.68 1995 PTKIASerpih 15.00 6.35 0.00 55.00 15.00 6.24 0.00 55.00 1995 PT Panin Finance 6.00 1.93 0.00 8.00 6.00 1.93 0.00 8.00 1995 PT Viscose 25.00 0.00 0.00 35.00 25.00 0.00 0.00 35.00 1996 PT BBL Dhannala 15.00 0.00 0.00 35.00 15.00 0.00 0.00 35.00 1996 PT Dharnala 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1996 PT Gleneagles 8.30 0.00 3.60 0.00 0.00 0.00 0.00 0.00 1996 PTKIAKeramik 25.00 6.22 0.00 81.00 9.43 .65 0.00 30.57 1996 PT Pramindo Ikat 25.00 7.35 25.00 300.00 0.00 0.00 0.00 0.00 Generated by the Operations Information System (OIS) Page 2 Schedule D 55 Page 6 of 6 Committed Disbursed IFC IFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval Pending Commitments 1997 * KSP 20.00 15.00 0.00 15.00 1996 * PANIN FINANCE II 6.00 0.00 0.00 4.00 1996 * PANIN II - BLINC 0.00 0.00 0.00 4.00 1996 * PT ASIANAGRO 40.00 0.00 0.00 40.00 1995 * PT INDO-RAMA RI 0.00 2.50 0.00 0.00 Generated by the Operations Information System (OIS) Page 3 56 ScheduleE Page I of 2 Indonesia at a glance Lower- POVERTY and SOCIAL East middle- Indonesia Asia income Development diamoind Population fd-1 995 (nIonsJ 193.3 1,709 1.154 Lde excectancy GNPpercapitalIgE(USS) 980 840 1,700 GNP 1995 (bIon USS) 190.5 1.436 1.962 Avege annual growth. 1990-95 PopuIUon( () 1.6 1.3 1.4 L boX ) 2.5 14 17 GNP .' Gron per' prumway Most nrAnt aseta (ltt year abJe since 1989) capta enroWnant Povwflr hnadountlndex ( otfpopuaion) 14 4 Urban population (6 of Wpop&iebon) 34 32 56 Lif eupsowcy at ba s (yam) 63 68 67 Infant modalty (per 1,000 in 60) 56 35 36 Child m_oion of chIMdfun undr 5) 39 17 Arcces to de water Acea to asfe wow (X ofiopoulabon) 42 67 73 llItracy (% of poputs"n age t5+) 23 16 - fndnehwa Grs primly enroWliamt ( of sc5ooa0ge populalon) 114 116 104 -Lower'-nhdeforncom group male 116 119 105 Fem_e 112 115 101 I KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1eSS 19" 19St9. Ecnomino o GDP 'bNm USS) 32.1 87.2 175.5 198.1 Gm" domIatic kwee tGOP 23.7 26.2 30.1 31.5 O of Eoo of gooda an non4sclor ssrweaaGDP 23.2 22.6 25.8 25.5 penneao economy Graa domeatic amigaD P 25.9 29.1 31.5 31.8 Gros natIonal aava'GDP 24.2 27.6 28.2 Cwi- t ameunt baWD/P 43.5 -2.1 1.9 -3.4 Swings v?T nvtmnt In t pyR.ElP 1.0 2.3 2.5 2.7 TodebtWGOP 35.8 42.1 55.3 53.6 Totd4debt 1t_vcalexports 15.1 28.8 31.5 31.0 Pro" VAl of det/GOP 51.3 Ind.bedn Preaentvad lafda ,pouts 181.8 1976.54 108-S 1334 19Uled 131644 -,1indmons (Van"ae aiw grwtl -Lotwrnrddne-incom, group GOP 7.2 7.1 7.5 8.1 8.0 GNPp r capi 4.5 5.5 5.4 6.4 6.2 Exports of good and nft -0.6 7.8 7.7 7.2 11.1 STRUCTURE of Wte ECONOMY 1378 1336 193 199 a* (% of GOfp _t_ Ag u 30.2 23.2 17.4 17.2 , I_day 33.5 35.9 40.7 41.5 " Manuiaatmng 9.S 16.0 23.5 24.3 '- SttvIces 38.3 40.9 41.9 41.3 s 0* Puivate onsumplon 65.1 59.1 80.2 59.8 9 90 91 n2 93 04 t* Gneal govenment conumption 9.0 11.8 082 8.2 2 Impo of goods aNd non-Iacor sams 21.0 19.8 23.8 24.8 175.44 195 1"4 I"&ed (Svea" aIUW i) Gro rte of experm and kupaf to Agr*adir 4.3 3.4 0.5 4.0 25 Indueey 7.1 9.4 11.2 10.3 MUnusacunng 144 10.9 12.5 11.1 I Services 9.5 8.1 7.1 7.4 ' - 10 Pivaeaconsumption 9.1 6.5 7.7 9.9 c GeneralgoVamM ntooe.epeon 11.4 4.8 2.3 3.4 ni 90 ti 92 9n .4 t4 Groaadomascent 14.5 9.6 12.2 12.5 Impou at good and non-actor aetc 9.9 7.8 12.7 15.3 -e - Gns ntoa Plodt 6.7 8.0 7.3 8.1 Note: 1995 dat we prelnltnary etsw_em The diamonds etow lout key indicator In the counby (m bold) c ompad with its incomegroup aveage. It data are miasng. the diamond wiUl be icortlpte. 57 Schedule E Page 2 of 2 PRICES and GOVERNMENT FINANCE 1975 1985 1994 1915ct o nflaton s%) Dom.sbc p ( change) 15 Consumerpntes 191 44 96 9.0 ,. ImplidtGDP deflator 11 5 4 3 6.0 5.0 5= Govrnmnt nnnce 90 9 92 93 94 N (X ofGDP) -GoPdot -_CP Cunntwet enwe 19.2 1 5.9 15.5 Cun'm budoget btce 6.0 6.6 6.0 Over1 splusdeWt . -3.2 0.3 0.8 TRADE 1975 1985 19U4 1195 *I EIxpot and lnpoutet 1s milL USS) (niWons UJSS) Total exports (fob) 18.823 42.050 46.019 Fuel 12.804 10.344 9.749 sc.occ Rubber 714 1.316 1.554 0.0c- Mauwfa9ck . 2.287 20.272 23.638 30.000 - Totl import (cOf) 14.056 37,736 44.47 20. ON 81odW2 782 942 W I 52 9 95 Fuel and energy ~~~~2.870 3.988 3.845 Ca"Ia goods 5.394 15.062 18.i35 Expotpnce indtx (1987-100) 120 135 140 Exqn am Impott pnt index (1987.100) 85 89 90 TwmrnsofVede(1987*100) . 141 153 155 BALANCE of PAYMENTS 1175 1905 1994 1995 1 (nto USS) Expor Of goods and nonw or srvics 6,91 19.371 48.899 51,644 Ceft accound balsa:a to GOP ratlo I%) indpt ofgoodsandnon-facor seres 6.775 17.840 43.392 51,052
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Indonesia - Solar Home Systems Project
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