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ASIAN DEVELOPMENT BANK PCR: INO 31604

PROGRAM COMPLETION REPORT

ON THE

POWER SECTOR RESTRUCTURING PROGRAM (Loan 1673-INO)

IN

INDONESIA

July 2004

CURRENCY EQUIVALENTS

Currency Unit – rupiah (Rp)

At Appraisal At Program Completion February 1999 December 2002

Rp1.00 = $0.000125 $0.000112 $1.00 = Rp8,000 Rp8,940

ABBREVIATIONS ADB – Asian Development Bank CFP – consultative framework plan DGEEU – Directorate General for Electricity and Energy Utilization EMSA – Electricity Market Supervisory Agency IPP – independent power producer JBIC – Japan Bank for International Cooperation JBTC – Java-Bali Transmission Company PLN – PT Perusahaan Listrik Negara (State Electricity Enterprise) PPA – power purchase agreement PCR – project completion review REC – regional electricity company SBU – strategic business unit TA – technical assistance

WEIGHTS AND MEASURES kWh (kilowatt-hour) – unit of energy, equal to 1000 watts GWh (gigawatt-hour) – equal to 1 million kWh MW (megawatt) – unit of power, equal to 1 million watts TWh (terawatt-hour) – equal to 1,000 GWh

NOTE

In this report, “$” refers to US dollars.

CONTENTS

Page

BASIC DATA i I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2

A. Relevance of Design and Formulation 2 B. Program Outputs 3 C. Program Costs 8 D. Disbursements 8 E. Program Schedule 8 F. Implementation Arrangements 8 G. Conditions and Covenants 9 H. Related Technical Assistance 9 I. Consultant Recruitment and Procurement 10 J. Performance of the Borrower and the Executing Agency 10 K. Performance of the Asian Development Bank 11

III. EVALUATION OF PERFORMANCE 11

A. Relevance 11 B. Efficacy in Achievement of Purpose 11 C. Efficiency in Achievement of Outputs and Purpose 11 D. Preliminary Assessment of Sustainability 12 E. Environmental, Sociocultural, and Other Impacts 12

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13

A. Overall Assessment 13 B. Lessons Learned 13 C. Recommendations 14

APPENDIXES 1. Policy Matrix 16 2. List of Perusahaan Listrik Negara’s Strategic Business Units and Subsidiaries 22 3. Perusahaan Listrik Negara Income Statements, 1999–2004 23

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BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Program Completion Report Number

Indonesia 1673-INO Power Sector Restructuring Program Republic of Indonesia Ministry of Finance $380 million PCR: INO 31604

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years)

7 December 1998 5 February 1999 18 February 1999 25 February 1999 23 March 1999 23 March 1999 23 March 1999 23 March 1999 0 30 September 2000 11 December 2002 4 Pool-based variable lending rate up to 2 December 2002 and converted into London interbank offered rate-based lending facility on 2 December 2002 15 3

8. Disbursements a. Dates Initial Disbursement

23 March 1993

Final Disbursement

11 December 2002

Time Interval

44 months

Effective Date

23 March 1999

Original Closing Date

30 September 2000

Time Interval

18 months

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b. Amount ($ million)

Category or Subloan

Original

Allocation

Last Revised

Allocation

Amount

Canceled

Net Amount Available

Amount

Disbursed

Undisbursed

Balance OCR 380 0 380 380 0

Total 380 0 380 380 0 OCR = ordinary capital resources. C. Program Data

1. Program Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 780 780 Total 780 780

2. Financing Plan ($ million)

Cost Appraisal Estimate Actual ADB-Financed 380 380 JBIC-Financed 400 400 Total 780 780

ADB = Asian Development Bank, JBIC = Japan Bank for International Cooperation. 3. Program Performance Report Ratings

Ratings

Implementation Period Development Objectives

Implementation Progress

From 31 March 1999 to 31 March 2000 HS HS From 1 April 2000 to 30 September 2000 S S From 1 October 2000 to 31 March 2001 S PS From 1 April 2001 to 31 December 2002 S PS HS = highly satisfactory, S = satisfactory.

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D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Members

Reconnaissance Mission 1 10–13 March 1998 3 12 b, g, h Consultation Mission 11–13 May 1998 1 3 g Reconnaissance Mission 2 10–13 July 1998 1 4 g Fact-Finding Mission 5–26 Aug 1998 7 147 a, b, c, e, g, h, j Pre-Appraisal Mission 7–18 Dec 1998 5 55 a, d, e, g, h Appraisal Mission 1–5 Feb 1999 7 35 a, b, d, e, g, h, j Inception Mission 12–16 April 1999 2 8 e, g Review Mission 1 31 Aug–8 Sep 1999 2 18 e, g Review Mission 2 10–17 July 2000 2 2 e, g Review Mission 3 11–13 Sep 2000 3 12 g, i, j Review Mission 4 19–23 March 2001 4 8 e, g, h, j, Power Sector Mission

3–21 Sep 2001 4 63 a, e, g, h

Review Mission 5 19–23 Nov 2001 3 15 e, g, h Review Mission 6 1–3 Oct 2002 2 6 g, h Program Completion Review 9–20 Feb 2004 1 10 a a = power engineer, b = financial analyst, c = counsel, d = economist, e = procurement consultant or specialist, f = control officer, g = program officer, h = Indonesia Resident Mission officer, i = director, j = manager.

I. PROGRAM DESCRIPTION

1. The Asian Development Bank (ADB) approved the Power Sector Restructuring Program (the Program) to the Republic of Indonesia (the Government) for $380 million on 23 March 1999.1 The objective of the Program was to improve the economic efficiency of the power sector in the Java and Bali region (Java-Bali) by establishing a competitive electricity market. The Program identified five key areas of activity necessary to achieve the objective: (i) restructuring the power sector and creating an environment enabling a competitive electricity market; (ii) establishing competition in the supply of bulk electricity in Java-Bali, initially with a single buyer and by 2003 with multiple buyers and multiple sellers; (iii) adjusting electricity tariffs to ensure financial viability of PT Perusahaan Listrik Negara (PLN), the State Electricity Enterprise, and the newly created subsidiaries during the transition period; (iv) increasing private sector participation; and (v) strengthening the regulatory environment, including protecting the interest of the end consumers. The Government confirmed its commitment to the program objective through its development policy letter dated 24 February 1999 and the attached policy matrix (Appendix 1) outlining the actions and the timetable for achieving these. A technical assistance (TA) loan for $20 million accompanied the Program to strengthen the capacity of the Government and related agencies in anticipation of the introduction of the competitive markets.2 The Japan Bank for International Cooperation (JBIC) also approved a loan of $400 million to cofinance the Program. 2. The Government has long been concerned with pursuing the most appropriate policy in the power sector, given its high capital requirements and importance for the overall economy. Various strategic options had been examined in this regard through studies financed by ADB and the World Bank.3 The need for power sector restructuring became more urgent in the context of the 1997–98 Asian financial crisis. A power sector restructuring policy paper was issued by the Government in 1998 based on the recommendations of these studies. ADB’s policy for assistance in 1999, formulated in response to the crisis, also placed emphasis on supporting governments in implementing major economic policy and institutional reforms. These considerations provided the rationale for the program loan, to provide balance of payment and fiscal support to the Government. 3. Initially, the Program was to be implemented within a period of 18 months (up to 30 September 2000) for restructuring the power sector and commencement of competition in generation using the single-buyer model. In the Java-Bali region, competition was to evolve further moving to a multiple-buyer multiple-seller model by December 2003 and retail-level trade by December 2006. This road map for establishing a competitive market was, however, revised during program implementation. The new Electricity Law enacted in September 2002 stipulates, without mentioning any specific region, that one region should establish competition in generation by 2007.

1 ADB. 1999. Report and Recommendation of the President to the Board of Directors on Proposed Loan to the

Republic of Indonesia for the Power Sector Restructuring Program. Manila. 2 ADB. 1999. Technical Assistance Loan INO 1674: Capacity Building for Establishment of a Competitive Electricity

Market. Manila. 3 ADB. 1995. Technical Assistance to the Republic of Indonesia for Strategic Planning Study for Indonesia Power

Sector. Manila (approved by ADB in 1995 complemented by a World Bank funded study on Power Sector Regulatory Reform and Development of Private Power).

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II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. The power sector in Indonesia has been going through a process of reform and restructuring since the early 1990s. A Presidential Decree formulated in 1992 encouraged private sector participation in power generation. PLN was corporatized in 1994, and in 1995, the power generation operations of PLN in Java-Bali were separated into two subsidiaries, i.e., Power Java-Bali (PJB) I with 9,072 megawatts (MW) capacity and PJB II with 5,738 MW capacity. An office of electricity business supervision was established within the Directorate General for Electricity and Energy Utilization (DGEEU) in 1997, as a first step toward creating an independent regulatory agency. 5. PLN made reasonable operating profits until 1997, but the Asian financial crisis resulted in higher costs for foreign currency-linked debt service, natural gas purchases, and power purchases. The economic slowdown, however, reduced power demand growth and offered an opportunity to introduce basic reforms in the sector. The Government announced the Power Sector Restructuring Policy in August 1998, which was the basis for the Program. The policy aimed at restoring financial viability of PLN, establishing competition, and increasing the benefits of private sector participation. Such restructuring was vital for attracting the new investments needed for the future expansion of the power sector. 6. The policy was formulated after a series of consultations with key stakeholders in the electricity sector. The implementation plan for the reforms was also discussed in a workshop held in December 1998, which was attended by representatives from consumer groups, independent power producers (IPPs), industry, and multilateral and bilateral aid agencies. The design of the Program was consistent with this policy objective and implementation strategy and hence reflected wide stakeholder participation and government ownership. The Program design was also consistent with ADB’s Energy Sector Policy approved in 19954 and ADB’s operational strategy to deal with situations arising out of the crisis. 7. The design of the Program was fairly well conceived as it rightly recognized the need for (i) changes in the legal and regulatory framework; (ii) a phased approach for establishing competition, including a different restructuring strategy for the power system outside the Java-Bali region; (iii) financial viability of PLN during the transition period; (iv) early rationalization of power purchase agreements (PPAs) with IPPs; (v) safeguarding the interests of employees of PLN; (vi) protection of consumer interests; and (vii) timely notification of regulations and codes. The framework for implementation had well delineated and clearly monitorable actions. However, the time schedule for completing the legislative and policy actions was tight5 and as such had to be modified subsequently. The changes were also necessary to make the Program conform to new legislation.

4 ADB. 1995. The Energy Sector Policy. Manila. The policy envisaged that the focus of assistance in power sector

restructuring would be to (i) identify the optimal structure for the sector, (ii) prepare the legislative framework needed to establish independent energy regulatory boards, (iii) formulate an appropriate compensation and benefit package to stem the exodus of skilled staff as well as to soften the impact on staff identified for severance, and (iv) carry out restructuring work in an agreed time frame.

5 ADB. 2001. ADB’s Crisis Management Interventions in Indonesia. Manila. This special evaluation study prepared by the Operations Evaluation Department, which reviewed this Program along with four other loans, considered that the time frame was overambitious and recommended a review of the implementation schedule.

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8. An essential prerequisite to implementation of the restructuring program and introduction of competitive markets was adequate capacity building. This had been noted at program formulation and the TA loan (footnote 2), still ongoing at the time of the program completion review (PCR) mission, was provided to support this. 9. Overall, the Program was highly relevant to the country’s overall development needs at the time of appraisal and at the time of completion. B. Program Outputs

10. The output expected from the Program was a competitive market for electricity in the Java-Bali region. Specifically, the outputs as identified in the policy matrix include (i) restructuring the power sector, (ii) progressive introduction of competition, (iii) ensuring financial viability of PLN, (iv) increased private sector participation, and (v) strengthening of regulation. Although the program objectives and the areas of activity have remained unchanged since loan appraisal, some changes in the actions and time frame became necessary during program implementation. 11. Restructuring the Power Sector. The establishment of a sound legal and regulatory framework was an important component of the restructuring. At the appraisal stage, the Government thought it prudent to first amend the existing law to create an independent regulator, and to follow this up by enacting a new law to unbundle PLN and establish a competitive electricity market. The House of Representatives, however, required the Government to prepare a comprehensive new law instead of enacting amendments to the existing law. There was considerable delay in enacting the new Electricity Law, primarily due to the need for wide-ranging consultations and heavy legislative workload following the installation of a new Government. The new Electricity Law was promulgated and enacted on 23 September 2002. The Law provides for establishing (i) an electricity market wherein the generation companies and electricity sales companies and agencies will trade bulk electricity on a competitive basis; (ii) a system and market operator, initially within the transmission company; (iii) a transmission company that will allow open access to all market participants; and (iv) an independent regulatory body to supervise the market. The implementing regulation for the establishment of the regulatory body, the Electricity Market Supervisory Agency (EMSA), was issued in November 2003. However, at the time of the PCR mission, the EMSA had not been established. Commissioners for the EMSA are now expected to be appointed by the Government by the end of 2004. 12. Reorganization of PLN into different functional units and distinct legal entities has been ongoing since 1995. At the time of the PCR mission, PLN had established six subsidiary companies, 24 strategic business units (SBUs), and four supporting SBUs (Appendix 2). The SBUs6 are proposed to be spun off as separate legal entities when they can stand on their own. There are several ownership options, i.e., jointly owned by central, provincial, and regional governments, interested private sector partners, employees, or a wide public shareholding. 13. As part of the Program, it was originally envisaged that there would be one regional electricity company (REC) for all regions outside Java-Bali. This approach was changed

6 Each SBU is headed by a general manager who is assisted by four managers. They are selected by PLN from

within, based on a competitive process. The SBUs have to sign a performance contract with PLN management and operate within the budget approved by PLN.

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following enactment of two new laws after approval of the Program.7 It is now proposed to organize stand-alone regional electricity companies in all areas that are either islands or neighboring provinces sharing common resources. At present, based on Government instructions, PLN is carrying out a study internally on the financial and organizational aspects of separating the Java-Bali region from the rest. As regards restructuring of PLN, especially in the Java-Bali region, to operate as separate legal entities, the required studies are still in progress and their results are expected to be presented to the Government by July 2004. In the meantime, three groups, including the Employee Union of PLN, have approached the Constitutional Court for judicial review of the new law.8 The decision of the court could also influence the progress of restructuring. 14. Introduction of Competition. At the appraisal stage, it was envisaged that competition in generation would start by December 2001 using a single-buyer model, while a fully competitive bulk electricity market using the multiple-buyer multiple-seller model would be introduced by December 2003. Retail-level competition was expected to start by December 2006. This approach was modified following the enactment of the new Electricity Law. In accordance with the new Electricity Law, a more gradual introduction of competition has been proposed. Implementation of competition would evolve depending upon the preparedness of the region concerned to operate in a competitive market. Preparedness is taken to include (i) sales price of electricity relative to its economic value, (ii) competition among primary energy sources, (iii) establishment of the EMSA, (iv) preparation of rules required to ensure fair competition, (v) preparation of infrastructure (software and hardware) for the electricity system, (vi) equal opportunities for companies involved in competition, and (vii) other requirements stipulated by the EMSA. Designation of regions that will apply competitive market will be through government regulation. The new Electricity Law requires that competition in generation should start in at least one region by September 2007. 15. In the blueprint for implementation of the new Electricity Law,9 the Government underlined the need to adopt a cautious approach since the concept of a competitive electricity market is new to Indonesia. Competition should therefore be started in a “sizeable and controllable area”. Accordingly, it proposed to start with the Batam region (Batam First) and then move on to Java-Bali. An internal team was established in DGEEU to prepare Batam for competition and DGEEU has further proposed that when the EMSA is launched, a government regulation designating Batam as a competitive region would be issued. Further, the blueprint targeted competition (in generation) to start in 2007 in Java-Bali. PLN took up preparatory work in this regard, including a study on the separation of Java-Bali from the rest of PLN (para. 13). However, the EMSA is now expected to be in place only by December 2004 and the studies relating to Batam and Java-Bali are still ongoing (footnote 2). 16. Thus while the Government has shown commitment to develop a competitive market, a realistic road map has still to emerge from the blueprint. In the meantime, PLN is preparing itself to face a single-buyer market system and has established internal regulations such as grid 7 The Law on Regional Autonomy (Law no. 22/1999) and the Law on Balance of Central and Regional Finances

(Law no. 25/1999). 8 The first group included three nongovernment organizations, namely, Asosiasi Pengacara Hukum Indonesia

(Association of Indonesia Lawyers), Perhimpunan Bantuan Hukum Indonesia (Indonesia Legal Aid Forum), and Yayasan 324 (Foundation 324); the second group was the Serikat Pekerja SP-PLN (Employee Union of PT PLN); and the third was the Ikatan Keluarga Pensiunan Listrik Negara (IKPLN/Association of PLN retired employees). The main theme of the claims raised by these groups is that the new Electricity Law No. 20 violates the Indonesian Constitution.

9 Ministry of Energy and Mineral Resources. 2003. Blueprint for the Development of National Electricity Industry 2003–2020. Jakarta.

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code, bidding rules, and settlement systems. The effectiveness of the competitive market would, however, be somewhat constrained initially since the IPPs would not be directly participating in the competitive market through tariff bidding. 17. Adjusting Tariffs to Ensure Financial Viability during Transition. The Government and PLN have made continual efforts to convince Parliament and consumers to increase the electricity tariff and allocate national budgets to restructure PLN financially. With ADB’s assistance, seminars and workshops were also organized in different regions to explain to important consumer groups the need for tariff increases.10 It was, however, not possible to implement any tariff increase in October 1999 and February 2000, as envisaged in the policy matrix, because of the slow economic recovery. A sharp tariff increase would have generated protest from consumers and made it difficult to collect payments, particularly from the large number of smaller consumers. The Government started to increase the average electricity tariff by 29% from 1 April 2000, and by 17% in two steps from 1 July and 1 October 2001. In order to offset lower tariffs to small households, Rp6.7 trillion in subsidy was transferred to PLN in 2001. The tariff increases, along with subsidy support from the Government, continued through 2002 and 2003. Overall the Government managed to increase the average tariff by 70% from around 4 US cent/kWh in April 2002 to 6.8 US cent/kWh in October 2003 almost reaching its target of 7 US/kWh fixed for the end of 2005. To minimize the impact on poor residential consumers, the Government provided subsidies to PLN for the targeted customers. With the Government’s support, PLN is applying a lifeline tariff for those consumers who consume 30 kWh/month or less. The current lifeline tariff is Rp. 169/kWh (or US cent 1.8/kWh). 18. Under the Program, PLN’s financial performance has been progressively improving. The income statements of PLN for the period 1999–2003 are given in Appendix 3. The electricity sales increased from 65.3 terawatt-hours (TWh) in 1999 to 101.1 TWh, while the average revenue increased from Rp 210/kWh to Rp591/KWh. This improvement was achieved through tariff increases (para. 17) and the Government’s strong support. In June 2001, the Government, as PLN’s shareholder, approved a financial restructuring package that financed PLN’s accumulated liabilities over 1998–2000 including the unpaid principal (Rp5.3 trillion) was converted into a new 20-year loan including a 2-year grace period with an annual interest rate of 4% and the unpaid interest and penalty (Rp15.7 trillion and Rp13.0 trillion, respectively) into equity. These measures helped PLN earn a nominal net income of Rp181 billion in 2001. At the end of 2002, PLN’s assets were revalued to reflect the fair value of the assets appropriately in its financial statements. In the process, the asset value increased from Rp54 trillion to about Rp185 trillion. This attracted a one-time tax, to be spread over 5 years. The annual depreciation went up by over Rp13 trillion. As a result, PLN incurred losses in 2002 and 2003.

19. Increased Private Sector Participation. As part of the Program, PLN held discussions with 27 IPPs to renegotiate the PPAs. This was a complex exercise and had advantages and disadvantages for both the Government and the IPPs. The Government’s interests were reducing the power purchase price, sustaining and promoting private sector investment, ensuring planned capacity additions, and meeting (at least partly) public criticism on the IPP deals. Its concern primarily related to likely lack of investor confidence in the context of renegotiations of the contracts. From an IPP’s perspective, a successful renegotiation was important (i) to ensure that the money spent was not lost or locked up due to legal disputes and that the project started yielding revenue as early as possible; and (ii) because of the strategic

10 ADB. 1999. Technical Assistance for to the Republic of Indonesia for Assisting in Building Acceptance of Electricity

Tariff Increases. Manila. (TA Loan 1674-INO: Part G)

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need to operate in the country that has high growth potential. IPPs’ concerns primarily related to the likely reduction in returns and the sanctity of contracts. 20. Renegotiation of PPAs was led by a high level team formed by Presidential Decree 133/2000. This team was chaired by Coordinating Minister of Economics, and members included Minister of Finance, Minister of Energy and Mineral Resources, Minister of Foreign Affairs, and Chairman of BAPPENAS, assisted with renegotiation team from PLN. The renegotiations started with projects that were already at an advanced stage of construction, and continued subsequently with others. Out of a total capacity of 11,300 MW for the 27 PPAs, 5,690 MW is being continued by original developers (14 PPAs), 4,490 MW terminated (6 PPAs),11 900 MW acquired by Government, PLN, and Pertamina (6 PPAs), and 220 MW (one PPA) is in legal dispute. Renegotiation of power purchase agreement with IPPs generally yielded with the power purchase price and payment schedule that are acceptable to both PLN and the IPPs. The electricity produced by continuing IPPs is being dispatched and paid for according to new agreements. The renegotiations have resulted in accumulated long-term savings of $6.2 billion. However, the IPPs would not be operating as merchant power plants (i.e., power plants without long-term power purchase commitments) and directly participating in the market through competitive tariff bidding. PLN is therefore examining the feasibility of establishing an independent IPP trader, who would interface with the IPPs and the single buyer.12 21. At the time of PCR mission, the share of private sector owned generation capacity represents 13.8% of the country’s total capacity (excluding captive plants for self uses). As part of the efforts to increase private sector participation, the Government also originally envisaged to divest majority shares in Java-Bali Transmission Company (JBTC) and generation and distribution companies by December 2003. However, issues relating to restructuring of the SBUs in Java-Bali into different legal entities (needed to ensure competition) are being studied and the outcome of these studies could influence the future course of restructuring (para. 13). It is also noted in this context that the new Electricity Law mandates that preference is to be given to state enterprises in the transmission and distribution business.13 Divestment of shares in transmission and distribution does not therefore appear likely in the near future. In the meantime ADB, JBIC, and the World Bank have initiated a joint effort to hold a series of stakeholder consultation meetings to promote private sector participation in the Indonesian power sector. 22. Strengthening Regulation. As per the policy matrix, six actions were to be completed to strengthen regulation, two prior to ADB Board presentation, three prior to the release of the second tranche, and one during the program period. Apart from the two conditions prior to Board presentation that were satisfied on time, there were delays in satisfying the other four conditions due to delay in enactment of the new Electricity Law and consequent changes in the implementation schedule. The status of these at the time of preparation of the program completion report is given in Table 1.

11 In case of discontinued projects of Tanjung Jati C (1,320 MW) and Serang, Banten (450 MW), PLN has agreed to

give priority status to the developers in future bidding. Further, PLN has acquired the land of Cilacap (450 MW) project and a joint venture with Chinese investors (for a 2x300 MW plant) is planned.

12 It is envisaged that the independent trader will buy power from the IPPs according to PPA terms. The power thus purchased will be aggregated and bid for sale in the market by the trader, competing with the prices being offered by other PLN generators.

13 The new Electricity Law No. 20 (Articles 18 and 19) states that state enterprises have priority and right of first refusal to operate transmission and distribution businesses. It adds, however, that if state enterprises cannot finance new investments on their own, they can cooperate with other enterprises under a partnership arrangement. The Government’s blueprint for power development (footnote 9) does not discuss any divestment strategy.

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Table 1: Status of Actions Related to Strengthening of Regulation Action Status 1. Prepare regulatory guidelines specifying the

responsibilities assigned to the regulator under the new Electricity Law.

Regulatory guidelines were issued in November 2003.

2. Notification of codes including (i) grid code, (ii) trading rules, and (iii) tariff code.

Codes have been drafted; the approval by EMSA and formal notification is expected by 2007 prior to the operation of the first competitive market in Batam.

3. Complete the consultative framework plan to address the changes in the power sector and provide a forum for stakeholders to learn about the proposed changes, and to influence the process of tariff reform, restructuring, and privatization.

Final report of the consultative process completed and a consultative committee was formed in August 2001.

4. Preparation of social protection plan for PLN employees.

Social protection plan was submitted in November 2001, which will be implemented in case of PLN’s privatization. In the meantime, PLN introduced a human resource management system for the restructured PLN.

EMSA = Electricity Market Supervisory Agency, PLN = Perusahaan Listrik Negara. Source: Program Completion Review Mission, 9-20 February 2004 23. Perusahaan Listrik Negara Operating Performance. PLN has been able to expand its service coverage with 4.4 million new connections completed from 1998 to 2003. Although PLN has been able to adequately meet the country’s electricity demand during the Program implementation period, there has been no significant improvement in PLN’s operational performance. By the end of 2003, PLN and its subsidiary companies owned and operated generation units with about 21,341 MW total installed capacities, of which 15,741 MW (74%) was installed in the Java-Bali system. Gross energy sales in 2003 were 90,188 gigawatt hours, an increase of about 1% over the previous year. Only about 13.6% of electricity is generated from hydro and geothermal sources, and the rest is still produced by hydrocarbon fuels. Among PLN’s fuel costs in 2002, the majority was for diesel oil (52.4%), gas (23.5%), coal (18.8%), and geothermal supplies (5.3%). However, transmission and distribution losses have been increasing since 1999 and reached 17.4% in 2003 (Table 2). The sharp increase in distribution losses was mainly caused by increasing non-technical losses (e.g. unpaid bills, thefts, and mistakes in metering and billing). Moreover, under the difficult post-crisis economic conditions, much of PLN’s operational expenses are spent for increasing fuel costs, and less are spent on maintenance in generation, transmission and distribution lines, resulting in degrading lines conditions. Responding to these deteriorating losses, PLN has designed an action plan to improve its operation and maintenance systems in order to limit the distribution losses within 12% in 2004.

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Table 2: Perusahaan Listrik Negara Operational Performance

Item 1999 2000 2001 2002 2003Generation Own-Use (%) 4.00 4.05 4.19 4.20 —Transmission Losses (%) 2.59 2.56 2.38 2.59 2.59Distribution Losses (%) 9.63 9.08 11.14 13.87 14.81 Total Losses (%) 12.22 11.65 13.52 16.45 17.40SAIDI (hours/customer) 14.00 13.90 13.24 14.35 —SAIFI (times/customer) 18.49 18.10 15.12 14.17 —

— = not available. SAIDI = system average interruption duration index (hours/customer), SAIFI = system average interruption frequency index (times/customer). Source: PLN C. Program Costs

24. ADB and JBIC provided $780 million to cover the program costs. The Government’s assistance to the Program was substantially higher than this. During 1998–2000, the Government absorbed the default in payments by PLN of $3.8 billion toward principal and interest charges on government loans as well as the penalty on them. D. Disbursements

25. Disbursement of the loan was linked to actions identified in the policy matrix. The first tranche of $200 million was released on 23 March 1999 on the loan becoming effective as all nine conditions prior to the Board presentation were completed. By November 2002, seven out eleven tranche release conditions were fully met. As the Board approved the waiver of three conditions that had been substantially or partly met and waiver of one condition that had become irrelevant, the second and final tranche of $180 million was released on 11 December 2002. The loan was closed on 11 December 2002. E. Program Schedule

26. At the appraisal stage, it was anticipated that commencement of operation of the bulk electricity market using a single-buyer model would start by December 2001, and that retail-level companies would be allowed to trade power by December 2006. One of the critical activities in the early phase of implementation was the enactment of a new Electricity Law. This was delayed by 30 months due to the lengthy consultation and legislative process. The new Electricity Law also necessitated some changes in the approach and pace for establishing a competitive market. The activity relating to adjustments of tariff was also delayed because of the slow economic recovery. Taking a pragmatic view of these developments, ADB approved the waiver of three conditions that were substantially met or partly met, and one condition that became irrelevant. ADB also agreed to revise the implementation schedule and extended the closing date of the program loan to 11 December 2002. Activities relating to establishment of a competitive market in Java-Bali are continuing in accordance with the Government’s blueprint for implementation of the new Electricity Law. F. Implementation Arrangements

27. The Executing Agency for the Program was the Ministry of Finance (MOF) and the focal point for policy reforms was DGEEU. An electricity sector restructuring team was responsible for

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the effective administration of the Program. The team, chaired by the Director General of DGEEU, was also concerned with preparation of the new Electricity Law and development of the blueprint for implementation. Reports were periodically submitted to ADB by DGEEU. These implementation arrangements are considered satisfactory. G. Conditions and Covenants

28. The policy matrix identified 30 actions to be implemented under the Program (Appendix 1). The actions scheduled during the early stages were linked to Board consideration of the Program (9 actions) and release of the second tranche (11 actions). The implementation of the Program continued after the release of the second tranche, with another 10 actions to be completed until the launch of a competitive electricity market. The release of the second and final tranche of the loan was held up due to the delay in the compliance with the conditions. 29. A detailed review undertaken by ADB in November 2002 indicated that seven out of the 11 conditions had been fully met, two had been partly met (issuing implementing guidelines of the new Electricity Law and the creation of JBTC), one had been substantially met (preparation of a social protection plan), and one (creation of REC) had become irrelevant due to the laws on decentralization. It was concluded that the delay was mainly on account of the parliamentary consensus over the revised time frame for establishing a competitive electricity market. It was also proposed that the compliance with the two partly met and one substantially met conditions be waived and would be monitored during future ADB interventions in the power sector. The Board approved the waiver of these conditions and the release of the second tranche in December 2002.14 Since the second tranche release, ADB has had regular follow-up policy dialogue on power sector restructuring.15 As a result, further progress has been made with the Government issuing the blueprint for the implementation of the new Electricity Law and the guidelines for the regulatory body. Among the 10 actions to be completed after release of the second and final tranche, one has been fully met (PLN to maintain a positive cash flow) and actions are being implemented to meet the other nine policy conditions by the end of 2007 when the first competitive market is expected to start its operation in Batam. H. Related Technical Assistance

30. The accompanying TA Loan (footnote 2) that provides consultancy services to strengthen regulation had eight components. The status of the consultancy assignments at the time of the PCR mission is given in Table 3. As per the revised implementation schedule, Part D is to be carried out between July 2003 and December 2006, i.e., after the original closing date of the TA loan. The scope of Part D has therefore been deferred from TA loan 1674 and included in another project loan approved in 2002.16 Part F was canceled, since the September 2001 ADB Mission noted that the USAID-funded capacity-building consultant was carrying out most of the tasks included in this part. The Government made a formal request for these changes and ADB agreed. This resulted in a saving of $10,376,000 in the sanctioned TA loan.17 A separate PCR will be prepared on completion of this TA loan in 2006.

14 ADB. 2002. Progress Report on the Power Sector Restructuring Program in Indonesia. Manila. 15 Follow up missions by ADB have been fielded on a quarterly basis. 16 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Republic of Indonesia for the Power Transmission Improvement Sector Project. Manila. 17 Part of the savings is now being used to study feasibility of implementation of competition in Batam. The study is

expected to be completed by December 2004.

10

Table 3: Technical Assistance Loan Implementation Status

Component Status Part A: Developing a Competitive Electricity Market—Market Rules

Final report submitted

Part B: Developing a Competitive Electricity Market—Financial Settlement

Completed on 30 September 2003

Part C: Developing a Competitive Electricity Market—Software Specifications

In progress; expected to be completed by August 2004

Part D: Developing a Computer Software for Operation of a Competitive Bulk Electricity Market

Excluded from scope (para. 30)

Part E: Providing support for the Development of Power Sector Regulatory Capabilities

Completed on 31 October 2002

Part F: Providing Support for the Power Sector Restructuring Secretariat

Covered under USAID assistance (see para. 30)

Part G: Assisting in Building Acceptance of Electricity Tariff Increases

Tasks completed

Part H: Strengthening Consumer Participation in a Competitive Electricity Market

Final report submitted on 31 October 2002

USAID = United States Agency for International Development. Source: Program Completion Review Mission, 9-20 February 2004

31. In spite of the delay in the implementation of the TA, the TA loan has been instrumental in strengthening DGEEU’s institutional capacity for the power sector restructuring. Under the TA loan and other bilateral assistance, the following rules, codes, and regulations have been drafted: Market Rules, Grid Codes, Distribution Codes, Tariff Codes, Procurement and Competitive Tendering Codes, Financial Settlement Codes, and Software Specification of System/Market Operator. These rules, codes, and specifications are expected to be approved and issued by EMSA by 2007 prior to the operation of the first competitive market in Batam. I. Consultant Recruitment and Procurement

32. There was no recruitment of consultants or procurement under the program loan. The recruitment of the consultants for the associated TA loan was through competition among short-listed qualified firms in accordance with ADB’s Guidelines on the Use of Consultants. J. Performance of the Borrower and the Executing Agency

33. The implementation of the Program has seen significant delays, but these are mainly attributable to exogenous factors, beyond the control of the Government. For example, the delay in the promulgation of the new Electricity Law is attributable to the prolonged deliberation process within the Indonesian Parliament. Notable achievements were implementations of tariff increases, fairly successful renegotiations with IPPs, and enactment of the new Electricity Law. The Government also absorbed defaults in PLN payments while financially restructuring PLN’s balance sheet. Progress reports were submitted periodically and ADB was kept informed about the progress in legislating the new Electricity Law. Although the Government has remained committed to the Program and made substantial progress in power sector restructuring, the implementing rules of the new Electricity Law has not been issued, the independent regulatory body has not been established and the necessary codes and rules for the electricity markets are still in draft forms. Moreover, the borrower did not submit its own program completion report to ADB at the time of the PCR mission. In overall terms, the performance of the borrower and the Executing Agency is considered satisfactory.

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K. Performance of the Asian Development Bank

34. Seven review missions were fielded during 1999–2002. ADB closely monitored the implementation of the Program through progress reports and review missions. It also closely followed the developments during the processing of the new Electricity Law. These helped in early identification of problem areas and of where modifications in design and implementation would be required. ADB also took a flexible and pragmatic approach in releasing the second tranche of the loan. Similarly, simultaneous monitoring of the program loan and the progress under the TA loan helped realize some savings in the TA loan by avoiding overlap of funding efforts with USAID and by rescheduling the TA outputs to suit the needs of the Program. ADB liaised closely with the other international funding agencies that were helping Indonesia through the financial crisis. JBIC, which had cofinanced the Program loan, also participated in several review meetings that ADB had with the Government. The performance of ADB in program implementation was thus highly satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

35. The Program has continued to be highly relevant, from conceptual design stage until now, to the Government’s goal of improving the efficiency of the power sector and to ADB’s power sector strategy for the country. Two major changes were made in the design during implementation; one relating to reorganization of PLN, and another to the schedule for introducing competition. Both were required to ensure conformity with timetable and substance of the new legislative framework. The revised strategy for establishing a competitive market is considered more pragmatic in view of international experience. B. Efficacy in Achievement of Purpose

36. As detailed above, various actions relating to the adoption of a new Electricity Law, tariff adjustments, financial restructuring of PLN, private sector participation, and strengthening of regulation have been completed or initiated (para. 11). The financial restructuring and tariff increases under the Program have helped improve the financial performance of PLN. These are important milestones in achieving the objectives of the Program and its wider development goal. However, the new regulatory body has not been established and the road map for establishing a competitive market in Java-Bali is still to be determined based on the experience of the Batam First project. Considering this and despite the fact that (i) competition has to evolve gradually and (ii) it is not an end in itself but only a means to achieve the objective of improved sector efficiency, the Program is considered less efficacious in achievement of purpose. C. Efficiency in Achievement of Outputs and Purpose

37. Implementation of the Program presented challenges on four main fronts: (i) the country was mitigating the short-term challenges of the Asian financial crisis, and witnessing major political and administrative changes when the power sector and other legislative process to bring in the requisite changes to the legal and regulatory framework was initiated, (ii) the Executing Agency had very little control on the duration of the legislative process, which involved consensus building across a wide cross-section of stakeholders, (iii) the ensuing legislation could influence the approach to establishing competition and the time frame for implementation, and (iv) effecting tariff increases required the approval of the House of

12

Representatives. ADB and the Government managed these constraints fairly effectively in a pro-active manner through close monitoring and consultation. Several joint meetings were also held with JBIC, which was co-financing the loan. These helped reach agreement with the Government on an extended timetable and make suitable adjustments in the implementation schedule of a few covenants of the Program. ADB also made efforts to link the pending actions of the Program to future loan approvals for the power sector in Indonesia. The efforts made by the Government and ADB are therefore considered efficient. D. Preliminary Assessment of Sustainability

38. Restructuring of the power sector as envisaged in the Program, and mandated through the new Electricity Law, is crucial to the socioeconomic development of Indonesia. The proposed changes are also mandated through the new Electricity Law. The blueprint for implementation of the new Electricity Law elaborated the implementation strategy. The Government is about to reach its targeted tariff level (para. 17). Viewed in this context, the progress made so far is encouraging and the Government has high stakes in ensuring the success of the Program. The potential for its sustainability is, therefore, likely to be high. However, in order to ensure future sustainability it is necessary that (i) implementing guidelines of the new Electricity Law are issued early, (ii) studies relating to unbundling are completed early, (iii) EMSA is established and functions as a credible and competent body, (iv) there is continued emphasis on capacity building and consumer participation in the reform efforts, (v) generation and transmission infrastructure is built up as per a long-term plan and a greater number of generators directly participate in the market, (vi) the financial health of PLN and its successor entities is protected, and (vii) there is effective coordination between central and regional government agencies for the implementation of power sector policies. Interventions by ADB, through its ongoing lending program to the country’s power sector, could also help in this regard. E. Environmental, Sociocultural, and Other Impacts

39. The environmental implications of the Program were reviewed at the time of appraisal and the Program was classified as category C. The PCR mission confirmed that there were no significant adverse environmental impacts. 40. The social impacts envisaged at the appraisal stage related to (i) tariff increases, (ii) inability of small consumers to capture the gains of competition, (iii) service to consumers outside the Java-Bali region, and (iv) safeguarding interests of PLN employees in the context of restructuring and eventual privatization. 41. Implementing steep tariff increases was a challenging task, especially when the country was passing through a serious financial crisis. It also had high political sensitivity. However, the Government managed to implement the tariff increases gradually in a fairly successful manner. There were some sporadic protests but these were effectively contained and did not adversely impact program implementation, which is expected to have a long-term positive social impact. The increase in electricity tariff has however affected consumers’ ability to pay, which in turn led to increases in non-technical losses of PLN. To minimize the impact on poor residential consumers, a lifeline tariff is applied (para.17). 42. In order to address the concerns of small consumers and those outside the Java-Bali region, it was proposed at the appraisal stage to create a social development fund. Consistent

13

with this requirement, the new Electricity Law has made specific provision for subsidy support from the Government for this purpose.18 43. Implementation of the restructuring program required PLN to plan and execute staff relocation to make the organization compatible with the reformed business requirements. There was a possibility of groups of employees becoming redundant in this process. The social protection plan was targeted to these groups to ensure that their rights and needs were well catered to during the power sector restructuring and privatization process. The plan has been submitted, but its formal approval and application has been deferred because privatization of PLN may not happen for another 5 years at least. In the meantime, PLN is implementing a human resources management system, which provides for negative growth of employee numbers19 without affecting the rights and benefits of the employees. It is also expected that some of the employee-related issues will be addressed when the Constitutional Court examines the appeal of the Employee Union of PLN (para. 13).

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

44. The Program was conceived and designed consistent with the prevailing lending policy of ADB at the time of appraisal and the long-term vision of the Government for the development of the power sector in the country. During program implementation, the strategy for restructuring and the schedule of implementation were revised with regard to prevailing sociopolitical conditions. This did not change the objective of the Program and these changes were pragmatic in view of international experiences in industrial and developing countries. The Program has been instrumental in initiating important measures long held in abeyance by the Government, such as tariff increases and the resultant lessening of PLN’s financial burden. It has also provided impetus to unbundling PLN, renegotiations of PPAs to prevent further loss of investor confidence, and formulation of the new Electricity Law. The Program is also expected to result in a competitive market in power generation in Java-Bali. While some progress has been made toward this, an independent regulatory body has not been established and a realistic road map has still to emerge. The outcome of the studies on PLN unbundling and the Batam First project is crucial in this regard. In this context it is felt that these studies should have been completed in the early stages of the Program. In overall terms, the Program is therefore considered partly successful. B. Lessons Learned

45. Implementing a program of power sector reforms leading to full competition is a complex task and involves a number of actions over a long period of time. Significant changes in the political, social, and economic environment during the implementation period would influence the strategy and time schedule. Further, the Executing Agency does not have full control over actions relating to legislative changes. Thus it is difficult to prepare a highly realistic implementation schedule at the appraisal stage. However, to maximize chances of success,

18 Article 7 of the Law states that “The Government and Regional Government shall provide funds for the

development of electricity supply facilities in order to help the underprivileged groups, development of electricity supply facilities in underdeveloped areas, development of electricity in remote areas, and development of electricity in rural areas.”

19 In accordance with the decision taken at the meeting of PLN’s Board of Commissioners (Commissioners are Government appointees to represent Government as PLN’s shareholders) in 2003, only 50% of the vacant posts resulting from retirement and resignations will be filled up.

14

thorough policy research and design, adequate assessment of implementation arrangements, and full government ownership should be ensured at the time of program formulation. 46. A cautious approach is needed while moving from a monopolistic and government owned and regulated market structure to a competitive one. The Government needs to study upfront the implications of different restructuring options and prepare the sector to operate in a market environment before the introduction of competition. Evolution of competition to the retail level would depend on how the sector develops further and on socioeconomic conditions. These considerations underline the need for flexibility in the design of the program. 47. The power sector restructuring program should include components and/or covenants to improve the operational performance of the government owned power utilities during the transition period prior to their privatization. Simultaneous monitoring of loans that are interlinked in realizing an objective (for example this program loan, the TA loan and other investment loans provided to PLN) can improve the effectiveness of program implementation. C. Recommendations

1. Program Related

48. Smooth implementation of the new Electricity Law is crucial in realizing the objectives of the Program. It is therefore recommended that ADB closely monitor the progress of all policy actions of the Program and ensure their compliance in spite of the closure of the program loan. The Government’s blueprint for implementation and the implementing guidelines as updated from time to time may be used as a reference framework for this purpose. 49. Considering the need for flexibility in design, it is recommended that program loans of this nature adopt a cluster approach, i.e., are structured into two successive loans each with one or two tranches. For example, the first loan could cover all activities up to the enactment of new legislation. It should also include all preparatory studies on the reform model and requisite capacity building. At the end of this first program period, the trajectory of further evolution of reform should become clearly defined. Taking this as the basis, the second program loan could be formulated to provide support for establishing a competitive market and its successful operation for a period of about 2 years. Capacity building to operate in the new regulatory environment would merit special emphasis in this context. It would also be necessary to ensure that the Government creates in the meantime the required physical infrastructure (transmission, distribution, load dispatch, etc.) for realizing a competitive market. If necessary, support may be provided through project loans. 50. As the Government has learned important lessons in the process of IPP renegotiations, it may be requested to document these, while respecting the confidentiality of the agreements reached. This could be of use to Government or PLN in negotiating new contracts and could apply as well to other developing member countries with similar problems. The Government should also continue its efforts to see that the constraints in the PPAs are gradually removed and that the IPPs start operating in a fully competitive market. 51. Future Monitoring. The financial health of PLN and its successor entities should be monitored by Government (as PLN’s sole shareholder) and the EMSA in the coming years. The covenants in the Program Agreement should be maintained in their existing form within the repayment period of the program loan.

15

52. Future ADB Assistance. The Government plans to raise the electrification ratio in Indonesia from 53% in 2002 to 70% in 2010, with about 13 million new customers connected. It is estimated that 75% of Indonesian regions need additional capacity, especially in South and Southeast Sulawesi, East Kalimantan and Java-Bali. To meet the growing electricity demand, it is expected that 13,000 MW of installed capacity and associated transmission and distributing lines would have to be constructed from 2003 to 2010, with the total investment requirements of about $28 billion (of which $14 billion for power generation, $5 billion for transmission and $9 billion for distribution). Of which at least $15 billion would have to be sourced from private sector. With the assistance of ADB and other multilateral financing institutions, the Government is undertaking a series of consultations with stakeholders to promote private sector participation. The initial results of the consultations show that the private sector is showing renewed interests in Indonesian power sector. It is noted however, that during the transition period, i.e., while the rules and regulations required to implement the new Electricity Law are not in place, the private sector investors will still require some form of Government undertaking to provide necessary comfort. In this context, ADB should consider providing further assistance to the Government. 53. Continuity and sustainability of the Program are contingent on additional assistance from ADB. ADB should support the Government for the preparation of infrastructure development plans, particularly an integrated gas and power sector planning, and optimization of an energy mix for the country. Specifically in the power sector, additional assistance can be considered in (i) strengthening the regulatory framework to ensure a conducive environment for private sector investors; (ii) providing political risk guarantees or other forms of credit enhancement to attract private sector investment in the power sector; (iii) funding transmission projects, rural electrification using new and renewable energy sources, and other investments that are not covered by or attractive to the private sector, and (iv) preparing an energy sector development program to address key power sector issues such as the unbundling of PLN into separate legal entities, and the expansion of competition beyond Java-Bali. 54. Timing of Program Performance Audit Report Preparation. It is recommended that the program performance audit report be undertaken by end-2006.

2. General

55. The service of staff consultants with direct experience in reform programs (in countries having similar features as the one in Indonesia) would be useful in the design, implementation, and review stages of such programs.

16 Appendix 1

POLICY MATRIX

Completion Action Planned Prior to Board Consideration

Prior to Second Tranche

During Program

Status and Remarks

A. Restructure the Power Sector

1. Accord Government approval for, and announce the Power Sector Restructuring Policy (the Policy).

X Met prior to loan approval. The policy sought a move to a competitive electricity market in Java-Bali, which is now required under the new Electricity Law.

2. Deliberate the timetable for restructuring at the implementation workshop and prepare the action plan for restructuring.

X Met prior to loan approval. The time frame has now been changed to align it to the new Electricity Law.

3. Enact the amended electricity law.

X Met (new Electricity Law was adopted in September 2002).

4. Enact the new electricity law and issue implementing regulation.

X Partly met. The new Electricity Law was promulgated and enacted on 23 September 2002; a blueprint for the implementation of the new Electricity Law was issued in April 2003; the implementing regulations for the regulatory body had been issued by November 2003, but the regulatory body is yet to be established.

5. Incorporate regional electricity company (REC) as a wholly owned subsidiary of the State Electricity Enterprise (PLN) for operations outside Java-Bali.

X Not relevant. The REC became irrelevant because of the laws on decentralization. However, strategic business units (SBUs) have been created as predecessors to regional power companies outside Java-Bali.

Continued on next page.

Appendix 1 17

To Be Met Status and Remarks Action Planned Prior to Board Consideration


During Program

6. Incorporate Java-Bali Transmission Company (JBTC) as a wholly owned subsidiary of PLN.

X Partly met. PLN’s transmission unit has become an SBU, and it will be separated as JBTC at the same time as the generation and distribution companies (December 2005).

7. Adopt the recommendations of the consultants engaged to determine configuration of generation and distribution companies to be created out of PLN's assets in Java-Bali.

X In progress. A World Bank-funded consulting firm has carried out the study. Recommendations are being considered.

B. Establish Competition

1. Commence operation of the bulk electricity market using the single-buyer model, based on competitive bids submitted by generation companies and independent power producers (IPPs), and bulk supply tariffs for power sold by the single buyer.

X In progress. Competition will start with Batam region (Batam First) and then move on to Java-Bali.

2. Make the bulk electricity market fully competitive using the multiple-buyer multiple-seller model by removing the provision of bulk supply tariffs and allowing all buyers to participate in the market.

X In progress. Will start in September 2007 with competition for power generation, with supply ventures purchasing directly from generation companies.

3. Allow entry of retail companies to trade power in the bulk electricity market and provide services to end customers; allow contracts that are structured to mitigate commercial risks between buyers and sellers.

X In progress. Medium- and high-voltage consumers will be supplied with power by supply agencies and will be open to competition. The supply agencies are allowed to sell to low-voltage consumers also, after obtaining approval of the regulatory body. The new Electricity Law allows such supply agencies to obtain the license when the competition for power generation has started.

POLICY MATRIX—Continued


18 Appendix 1



During Program

C. Adjust Tariffs to Ensure Financial Viability During Transition

1. Complete the study of direct and indirect impact of the proposed tariff increases.

X Met prior to loan approval.

2. Maintain PLN's cash balance. X Met. PLN’s cash balance has remained positive.

3. Complete building acceptance of the tariff increase plan and implement the first tariff increase of 18%.

X Met. Average electricity tariff was increased by 29% on 1 April 2000.

4. Implement a tariff increase of 20% as the first of two tariff increases necessary for 2000.

X Met. Average electricity tariff was increased by 17% in two parts, on 1 July and 1 October 2001. Further, the tariff was increased by 6% every quarter in 2002.

5. Create social electricity development fund and establish mechanism for providing subsidy required for supply of power to poor consumers, and develop the power sector outside Java-Bali.

X In progress. The new Electricity Law provides for collection of additional charges on transmission and distribution that will be available for subsidizing supply outside Java-Bali. The structure of the fund will be determined after 2007.

6. Enable PLN to break even after debt service payments.

X Met. PLN reported breakeven in 2001. It reported losses because of higher revaluation-related costs in 2002 and 2003, and again broke even in 2004.

7. Achieve a rate of return of at least 8% on PLN's assets from 2001 onward.

X In progress. PLN will get an 8% rate of return from 2005.



Appendix 1 19



During Program

D. Increase Private Sector Participation

1. Issue Government regulation making it mandatory to adopt competitive bidding procedures for implementation of all public sector projects, including selection of private sector developers.


2. Constitute PLN's restructuring and rehabilitation team to oversee financial and organizational restructuring of PLN and to resolve problems associated with PLN's power purchase agreements.


3. Finalize a policy framework and guidelines, satisfactory to the Asian Development Bank, and prepare a transparent and equitable process for renegotiations.


4. Appoint consultants to commence formal renegotiations of power purchase agreements.


5. Initial new agreements with willing IPPs. In cases where discussions are continuing, at least one meeting with minutes should have taken place; prepare a status report listing pending issues and plans for further discussions. In cases where a mutually acceptable outcome could not be reached and IPPs pursue their rights under existing contracts, prepare a status report.

X Met. Renegotiations completed with the 26 IPPs, while one IPP is still in legal dispute with the Government. Of the 26 IPPs, 14 are to continue, 6 are to be acquired, and 6 are to be discontinued (para. 19). Electricity from operating private sector power plants is being dispatched and paid for according to new agreements.

6. Initiate studies for privatization strategy of JBTC, and generation and distribution companies.

X In progress. Will start in March 2006 because of the revised implementation schedule.



20 Appendix 1



During Program

7. Divest majority shares in JBTC, and generation and distribution companies.

X In progress. Divestment will start in January 2010 because of the revised implementation schedule.

E. Strengthen Regulation

1. Create secretariat for power sector restructuring to coordinate all the activities under the Program.

X Met prior to loan approval

2. Constitute the working group on participation comprising Government officials and at least six representatives from civil society (including consumer groups and nongovernmental organizations) to develop a power sector consultative framework and plan.

X Met prior to loan approval

3. Prepare regulatory guidelines specifying the responsibilities assigned to the regulator under the amended electricity law, defining the procedures to be used by the regulator (explaining how transparency will be achieved), listing the sources and use of funds (ensuring financial independence), describing service rules governing the regulator and its personnel (ensuring administrative independence), and outlining the requirements for new entrants in the sector (ensuring full competition and transparency).

X Met. The guidelines for regulatory body were issued in November 2003.

4. Approve the codes to define the regulatory requirements of the power sector, including (i) grid code, (ii) trading rules, and (iii) tariff code.

X Partly met. Draft codes prepared for approval by regulatory body when it is established.



Appendix 1 21



During Program

5. Complete the consultative framework plan to address the changes in the power sector, and provide a forum for stakeholders to learn about the proposed changes and to influence the process of tariff reform, restructuring, and privatization.

X Met. Consultative framework plan was submitted.

6. Start the preparation of the social protection plan to mitigate any adverse social costs that may be associated with the change in employment pattern of restructured power sector.

X Substantially met. Social protection plan was submitted but considering that the privatization is scheduled later, the plan will be reviewed and updated during the ensuing period.

Summary of Individual Actions and Tranche Conditions

Conditions precedent to Board presentation Conditions prior to second tranche release Other actions during the Program

Total: 30 Conditions

9

11

10

All met 8 fully met, 1 substantially met, 1 partly met, 1 became irrelevant 1 fully met, 9 in progress


Source: Program Completion Review Mission, 9-20 February 2004.

22 Appendix 2

LIST OF PERUSAHAAN LISTRIK NEGARA’S AND STRATEGIC BUSINESS UNITS’

SUBSIDIARIES A. Operating Strategic Business Units 1. PT PLN Java-Bali Transmission Company 2. PT PLN Nanggroe Aceh Darussalam Region 3. PT PLN North Sumatra Region 4. PT PLN West Sumatra Region 5. PT PLN Riau Region 6. PT PLN South Sumatra, Jambi, and Bengkulu Region 7. PT PLN Bangka Belitung Region 8. PT PLN Lampung Region 9. PT PLN West Kalimantan Region 10. PT PLN South and Central Kalimantan Region 11. PT PLN East Kalimantan Region 12. PT PLN North and Central Sulawesi and Gorontalo Region 13. PT PLN South and Southeast Sulawesi Region 14. PT PLN Maluku and North Maluku Region 15. PT PLN Papua Region 16. PT PLN West Nusa Tenggara Region 17. PT PLN East Nusa Tenggara Region 18. PT PLN East Java Distribution 19. PT PLN Central Java and Yogjakarta Distribution 20. PT PLN West Java and Banten Distribution 21. PT PLN Greater Jakarta and Tangerang Region 22. PT PLN Bali Distribution 23. PT PLN Northern Sumatra Generation and Transmission 24. PT PLN Southern Sumatra Generation and Transmission B. Supporting Strategic Business Units 1. PT PLN Electrical Engineering Services 2. PT PLN Education and Training Services 3. PT PLN Engineering Services 4. PT PLN Services and Productions C. Subsidiaries 1. PT Indonesia Power 2. PT Java-Bali Generation Companies 3. PT Batam National Electricity Services 4. PT Tarakan National Electricity Company 5. PT Indonesia Comnet Plus 6. PT Prima Layanan Nasional Enjineering

Appendix 3 23

PERUSAHAAN LISTRIK NEGARA INCOME STATEMENTS, 1999–2004 (rupiah billions)

Item 1999 2000 2001 2002 2003 Operating Revenue Energy Revenue 15,671.00 22,142.50 28,276.00 39,018.00 50,631.00 Consumers Contribution 222.00 242.00 266.00 302.00 348.00 Other Revenue 104.00 175.00 83.00 123.00 346.00 Subtotal 15,997.00 22,559.50 28,625.00 39,443.00 51,325.00Operating Expenses Fuel and Lubricating Oil 9,692.00 10,376.00 14,007.00 17,957.00 21,601.00 Diesel Rent 567.00 Power Purchase 5,083.00 9,395.00 8,717.00 11,169.00 10,359.00 Personnel Expense 1,336.00 1,802.00 2,086.00 2,583.00 3,668.00 O&M Materials and Service 1,498.00 1,610.00 2,630.00 3,589.00 4,598.00 Others 670.00 802.00 1,094.00 1,421.00 1,999.00 Subtotal 18,279.00 23,985.00 28,534.00 36,719.00 42,792.00 Depreciation 3,224.00 3,230.00 3,404.00 15,626.00 12,819.00 Subtotal 21,503.00 27,215.00 31,938.00 52,345.00 55,611.00Operating Income (5,506.00) (4,656.00) (3,313.00) (12,902.00) (4,286.00) Other Income Other income / Interest income 775.00 399.00 364.00 665.00 669.00 Other Expense / Net (662.00) (1,197.00) (526.00) 346.00 (79.00) Exchange Rate Gain / Loss 3,454.00 (5,500.00) (459.00) 2,726.00 1,273.00 Subtotal 3,567.00 (6,298.00) (621.00) 3,737.00 1,863.00Targeted Consumer Subsidies 0 0 6,735.00 4,739.00 3,759.00 Earning before Interest and Tax (1,939.00) (10,954.00) 2,801.00 (4,426.00) 1,336.00 Interest 9,429.00 13,655.00 2,620.00 2,152.00 2,097.00 Interest on Revaluation Tax 932.00 Net Income Before Tax (11,368.00) (24,609.00) 181.00 (6,578.00) (1,693.00) Tax 0 0 0 1,815.00 0 Net Income before Extraordinary Income (8,393.00) (1,693.00) Extraordinary Income 2,333.00 0 Net Income after Tax (11,368.00) (24,609.00) 181.00 (6,060.00) (1,693.00) Operating Ratio (%) 134.40 120.60 111.60 132.70 108.40 Return on Operating Assets (%) (4.40) (2.75) 0.17 1.47 4.59 Return on Equity (%) (89.60) (132.10) 0.90 (4.00) (1.10)

O&M = operation and maintenance Source: PT Perusahaan Listrik Negara.

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