i-al 3 / fz -iivid -...

Document of

The World Bank

FOR OFFICIAL USE ONLY

I-Al 3 / Fz - IIVID .Report No. 8251-IND

STAFF APPRAISAL REPORT

INDONESIA

THIRD TELECONMUNICATIONS PROJECT

MARCH 6, 1990

Asia Country Department V

This document has a resticted ditibuton and may be used by recipents ony In the performance of || their officd duies. Its contents may not otherwise be discosed withoat Wodd Bank authrDDza

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CURRECY EQUIVALENIS(As of December 1989)

Currency unit = Indonesian rupiah (Rp)$1 = Rp 1,770

Rp 1.0 million = $565

FISCAL YEAR

Government of IndonesiaApril 1-March 31

PERUMTELJanuary 1-December 31

WEIGHI AND MEASURES

Metric system

ABBREVIATIONS AND ACRONYMS

ASEAN Association of South East Asian NationsBAPPENAS National Development Planning Agency

DGPT Directorate General of Posts and TelecommuniicationsFRG Federal Republic of GermanyGDP Gross domestic productICB International competitive biddingIDD International direct dialinglTU International Telecommunication Union

MTPT Ministry of Tourism, Posts and TelecommunicationsOECF Overseas Economic Cooperation Fund

OSP Outside plantPERUMTEL Perusahaan Umum Telekomunikasi (Telecommunicatiors

public corporation)PMC Program Management Consultant

PT CSM PT Chitra Sari Makmur-VSAT communication companyPT INDOSAT State international telecommunications company

PT INTI State telecommunications manufacturing companyPUSDLKLATrEL Telecommunications education and training center

Repelita National five-year development planUNDP United Nations Development ProgrammeVSAT Very small aperture satellite

FOR OMCIAL USE ONLY

INDONESIA

THIRD TELECOMMUNICATIONS PROJECT

Table of Contents

Page

I. INTRODUCTION ..... 1...........................

II. THE TELECOMMUNICATIONS SECTOR ........ ...... 2

Organization ............. ..................... 2Network FacDlities ......... ...................... 3Access to Service ...................... 5Demand for Service ......... .................... 7Quality of Service .......... ..................... 7Capacity Utilization ......... .................... 7Sector Objectives .......... ..................... 8Sector Constraints .......... .................... 8The Bank's Role .......... ..................... 10

m. THE TELECOMMUNICATIONS ENTITY ...... .. ....... 13

Organization and Management ...................... 13Staffing ....................................... 14Training ..................................... 14Audit . ...................................... 15Billing and Collection ............................ 15Accounting and Financial Management ..... ........... 16Management nformation System . .................... 17Institution Building ......... ..................... 18

This report is based on the information supplied by Perusahaan Umum Telekomunikasi(PERUMTEL) and on the findings of a Bank appraisal mission comprising Messrs.A. Shnmugaraiah, engineer, P. Smith, economist, T. Takama, engineer, andMs. C. Ramsay, financial analyst, which visited Indonesia in September 1989.Mr. D. Joshi, consultant, participated in project preparation.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank autnorization.

I ii

W. THE PROGRAM ANDT HE PROJECr ................. 19

Telecommunications Investment Program ............... 19Project Objectives . .............................. 20Project Description ............ ............... 20Project Cost .................................. 24Project Financing and Terms ....................... 25Procurement ............. ..................... 26Disbursement .................................. 28Implementation ................ ................ 29Performance Monitoring ...... ........................ . 31

V. FINANCLL ANALYSIS ............................ 32

Historical Financial Performance ... ........... ...... 32Financial Position ............................... 34Projected Financial Performance . .................... 35

VI. ECONOMIfC ANALYSIS .................. ....... . . 38

Least-Cost Solution ........ ...................... 38Tariffs ...................................... .3Benefits . .................................... 39Rite of Return .............. .................. 39Lnvironment and Health ....... ................... 39Project Risks ................................. . 40

VII. AGREEMENTS REACHED AND RECOMMNDATIONS ... 41

Agreements Reached ............................ 41Condition of Loan Effectiveness ..................... 43Recommendations .............................. 43

ANNEXES

1. Basic Sector Statistics2. Telephone Lines Demand and Supply3. Organization Chart4. Repelita IV Development Achievements5. Staff Composition, Productivity and Education6. Technical Assistance for Human Resource Development7. Terms of Reference for Consultancy Requirements& Repelita V Investment Program

9. Project Components10. Schedule of Disbursements11. Package of Outside Plant Components12. Implementation Schedule13. Performance Indicators14. Action Plan15. Historical Financial Statements16. Projected Financial Statements17. Assumptions Behind Financial Projections1& Summary of PERUMTEL's Tariffs19. Return on Investments20. Selected Documents and Data Available in Project File

TABLES IN THE TEXT

2.1 Satellite Facility ................................... 4

4.1 Estimated Project Cost ....... ....................... 244.2 Project Financng ........ .......................... 254.3 Procurement Arrangements ...... ..................... 27

5.1 Selected Indicators of Historical Financial Performance ........ 335.2 PERUMTEL Financial Position ........................ 345.3 Selected Indicators of Projected Financial Performance ........ 355A Forecast Sources and Application of Funds (1989-93) ......... 37

MAPS

1. IBRD No. 220752. IBRD No. 22076

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THIRD TELEOMMUNICATIONS PROJECI

Lean and Project Summa=y

Borrower Republic of Indonesia

Bencfcia Perusahaan Umum Telekomunikasi (PERUMTEL)

Amount $350.0 million equivalent

Terms Twenty years including a five-year grace period at the Bank'sstandard variable rate.

On-l:ding Terms $348 million of the proceeds of the loan will be on-lent fromthe Government of Indonesia to PERUMTEL for 20 yearsincluding a grace period of 5 years; the on-lending rate willbe equal to the Bank's standard variable interest rate plus5 percent The Government will bear the foreign exchangerisk The remaining $2 million will be made available to theMinistry of Tourism, Posts and Telecommunications (MTPI).

Project Description The project, the third Bank telecommunications operation inIndonesia, will help modernize and expand telecommuicationsfacflities during 1990-93 and assist the Government andPERUMTEL in their institutional development. Theinvestment component of the project is based on GOrsRepelita V program for telecommunications and on the designsdeveloped under the ongoing Technical Assistance Project, andthe institutional component is based on the recommendationsof the Telecommunications Sector Study completed in June1989. The proposed project would (a) provide interfaceequipment to utilize fully the current idle capacity in thenetwork and connect about 125,000 main lines, (b) modernizeand expand the local telephone network to connect about475,000 main lines, (c) provide computer systems to modernizeand improve network management systems, initialy in Jakartaand later in the six other major cities, (d) support, with UNDP,a training improvement program to upgrade training facilitiesin the central training center in Bandung and the 12 regionaltraining centers, and (e) provide technical assistance to

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(i) impreve the Government's sector management capability,(ii) help PERUMTEL to build managerial, financial andtechnical capabilities essential for efficient management andoperation of a commercially oriented entity by financing amanagerial training program and a twinning arrangementbetween PERUMTEL and a more developed telecommunica-tions entity that would provide line staff and staff training, and(iii) finance consultancy services to help PERUMTEL developin-house capabilities in, and undertake, project management andconstruction supervision.

Pioject Benefisand Risks Benefits The institutional support will improve PERUMTEIs

performance as an effective and efficient entity operating ona sound commercial basis. PERUMTEL's institutional develop-ment would be pursued in a number of ways, including on-the-job and overseas training and technical assistance toimprove managerial, financial and technical capabilities. Theinvestment component would not only satisfy part of the ummetdemand for telecommunications services but also substantiallyreduce network expansion costs per main line. Increasedavailability of telephone service and improved quality of servicewould contribute towards greater business efficiency andproductivity. The project would also develop the localconsultancy and outside plant contracting industries throughcollaboration with international firms.

Risks The project has been adequately designed and does notpresent any significant technical risks. The potential risks forthe project fall into two categories: (a) delays in procurement,and (b) PERUMTEL's limited capability to implement theproject. These risks have been recognized and actions initiatedto minimize their impact. PERUMTEL has already establisheda nucleus project implementation unit and adequate technicalassistance is provided under the project to assist PERUMTELin the implementation and supervision of construction works.Residual risks will be minimized by agreed measures to monitorproject implementation, with corrective actions initiated asnecessary.

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Estimated Prwject Cost L(Milion $)

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T. INTRODUCTION

1.1 Despite substantial assistance from several donors including Belgium, France,the Federal Republic of Germy, Japan, the Netherlands, Sweden and UNDP over thepast decade, Indonesia's telecommunications network remains inadequate. Registeredunmet telephone demand is high, access to telephone service in Indonesia is the lowestamong ASEAN countries, and network congestion, call failures and fault incidence are allhigh indicating poor service quality. PERUMTEL is overstaffed and installadons costs permain line ar close to double those of other developing countries. There is, therefore,an urgent need to increase the quantity, improve the quality and reduce the costs oftelephone services in Indonesia.

1.2 Both the ongoing technical assistance project (Loan 2757-INS) and thecomprehensive telecommunications sector study (Report 7842-INS) completed by theBank in June 1989 have identified major sector deficiencies including (a) inadequatesector management by the Government and limited participation by the private sector;(b) PERUMTELs weak insttutional capability, lack of commercial orientation, poormanagement systems and shortage of trained and motivated staff; and (c) slow andunbalanced expansion of the network, res"ting in an inability to meet growing demandwith an appropriate quality of service.

1.3 The Government desires Bank assistance in financing vital improvements intelecommunications facilities and strengthening the sector institutions in order to achievean accelerated and sustained improvement in sector performance. Accordingly, theproject will help (a) develop the Government's ability to formulate appropriate policiesand regulations to improve the operating environment and performance of the companiesin the sector, (b) expand and modernize the country's telecommunications networks witha focus on seven major cities (Bandung, Denpasar, Jakata, Medan, Semamng, Surabayaand Ujung Pandang); and (c) improve project implementation, operational efficiency andfinancial perfonnmance by upgrading technical, financial and managerial capabilities ofPERUMTEL staff. The project is expected to be completed by December 31, 1993. Theloan would be closed on December 31, 1994.

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II. THE TELECOMMUNICATIONS SECTOR

Organization

2.1 The tclecommunications sector in Indonesia is dominated by Perushaan UmumTelekomunikasi (PERUMTEL), the domestic telecommunications service provider. It isa state-owned enterprise which operates approximately 894,000 telephone lines and earnedrevenues in 1988 estimated at Rp 799 billion (approximately $452 million equivalent).All international telecommunuications services are provided through PT Indosat, a state-owned company with 1988 revenues estimated at Rp 296 billion (approximately $167 mil-lion equivalent). In addition, cellular mobile radio telephone service is provided in theJakarta-Bandung corridor by PT Rajasa Hazanah Perkasa, a private company, incooperation with PERUMTEL in accordance with a revenue sharing agreement. VSAT(mainly data) satellite private network telecommunications services are provided byPT CSM, a private company, in accordance with another interconnection and revenue-sharing agreement with PERUMTEL Besides the public network, private networkfacilities are owned and operated by the National Electricity Corporation (PLN), the stateoil company (PERTAMINA), the state railway (P1KA), the Indonesian armed forces andby other users with special requirements. In addition, many corporations lease circuitsfrom PERUMTEL to establish private networks. PT Inti, also a state-owned corporation,dominates the manufacture of telecommunications equipment in Indonesia. It manufac-tures or assembles telephone instruments, radio and multiplex equipment, satellite groundstations, and digital switching equipment based on a Siemens license.

2.2 The Minister of Tourism, Posts and Telecommunications has effective controlof the sector both by virtue of the Government's statutory authority over public tele-communications and radio licensing and as owner of the major sector entities,PERUMTEL and PT Indosat. Tariffs for telephone and telex service require ministerialapproval. Within the Ministry (MTPT), the Secretary General is responsible foradministration and coordination of the Ministry and advises the Minister on sector policyissues. The Director General for Posts and Telecommunications (DGPT) is responsible,in the area of telecommunications, for technical regulation and monitoring networkdevelopment plans. In addition to MTPT, important roles are played by the Ministry ofFinance, the National Development Planning Agency (BAPPENAS) and the State Ministryfor Research and Technology (BPPT). The Ministry of Finance is the shareholder for thegovernment-owned sector entities. It is involved in budget approvals for them andparticularly concerned with their financial performance. BAPPENAS coordinates andcontrols the government Repelita planning process and authorizes foreign exchangeallocation. BPPT has a lead role in determining the timing and introduction of the newtechnologies that are to be used. In early 1989, new telecommunications legislation waspassed. The most significant change from the previous legislation is that PERUMTEl:smonopoly in the provision of domestic telecommunications was modified to permit the

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provision of nonbasic servicesl by other public and private entities. Regulations pursuantto the new legislation that will provide for the provision of nonbasic services by otherentities are being prepared by MTPT. During negotiations agreement was reached thatthe Government will by October 31, 1990, prepare and furnish to the Bank, for its reviewand comments, a timetable for establishing a legal framework for private sectorparticipation in the provision of nonbasic telecommunications services and, subsequently,taldng into account the Bank's comments, take all such actions as shall be necessary todevelop such legal framework.

Network Facilities

2.3 Local Exchanges. Under the fourth Five-Year Plan (1984-89), a majorimprovement and modernization of Indonesia's telecommunications was achieved with theintroduction of digital technology and optical fiber cable systems. At present, 30 percentof the existing telephone exchange capacity is electroiuc digital. With an installedswitching capacity of 1.1 million exchange lines and about 894,000 main lines in service,exchange capacity utilization averages 81 percent, which is acceptable. Most exchanges,though congested (para. 2.12), are maintained reasonably well except for the 20 percentof the exchanges tiat are technologically obsolete. These would be progressively replacedover the next ten years.

2.4 Outside Plant. The poor condition of underground cables is one of the seriousmaintenance problems facing PERUMTEL. An effective program to perform the necessarytests and to plan and carry out maintenance is urgently needed. ike most otherdeveloping countries, the development of outside plant, which includes local cablenetwork and subscriber connections, lags behind other components of the network interms of capacity, quality and maintenance. As shown in Annex 1, 95 percent of allreported defects are in the outside plant. On average 70 percent of faults are clearedwithin 1 week compared to a recommended average of 80 percent by the end of the nextworldng day (i.e., in less than 48 hours). Furthermore, the average number of faultsrepaired by one line man is 1.17 per day, far below the desirable average of five per day.These shortcomings are ettributable first to poor planning and design, substandardinstallation and poor workmanship of local cable network, and second to limitedmaintenance due to lack of money, tools and spare parts, lack of prescribed standards forsystem operation, maintenance and design, and absence of a centralized network recordsystem. In fact, there is no single organization with responsibility for assigning,administering, maintaining and controlling the junction and local cable networks.Improving the maintenance and repair capability and restoring the balance of investment

I/ MBas telecmmunications services are expeced to be defined in government regulations as telephone(including cellular mobile radio telephone), tela, telegram and leased circuits; 'nonbasice services areal other network services, such as information (database) services or store-and-forward electronicmaiL

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between outside plant and other parts of the network are two of the principal goals ofthe project. An estimated 23 local cable network management centers are required toimprove maintenance and to utilize the existing and proposed facilities efficiently. Sixoutside plant maintenance centers (OPMC), three in Jakarta and one each in Medan,Surabaya and Ujung Pandang are proposed under the project (para. 4.4 (c)). At the endof the project the fault rate is expected to fall from current 8-10 faults per 100 mainlines per month to 5, and productivity will be improved to 3 faults per lineman per day.The long-term target is 1 fault per 100 main lines as achieved in developed entities.Basic data on teleconmunications services and facilities are in Annex 1.

2.5 Long Distance Network--Terrestrial. The terrestrial transmission network isbased on Trans-Sumatra, Java-Bali and East Indonesia microwave system routes and onthe Surabaya-Banjarmasir Troposcatter System. In addition, there are open wire carriersystems, VHF and HF radio links. The environment for transmission is very difficult.Geographic conditions and long distances make the use of terrestrial coaxial cables mostexpensive and use of microwave difficult. However, the country needs terrestialtransmission facilties over shorter distances for cost effectiveness and over longerdistances for security with altemate routing to guarantee services provided through thesatellite system.

2.6 Domestic Satellite. The domestic satellite system in Indonesia is currentlyoperated via the Palapa-Bl satelite. The number of tansponders and earth stations inoperation are shown in Table 2.1. Unlike the earlier Palapa Al and A2 launched in 1976and 1977 and now out of service, Palapa B satelites have given problems. With PalapaB1, there was a 70 hours break in service due to the satelite moving slightly out oforbit, while B2 went out of orbit soon after launching. This has led to some rethinkdngwith respect to a preference for increased relince on terrestrial transisson systems.IBRD Map No. 22075 shows the terrestri long-distance network and earth stations.

Table 2.1: SATELLIT FACIT:.: ...... ..... :-:E.- I..E '::::. :... .::: . :.... : .. .:. .- : . : .::..:: . :......".',-.F'.. ""i .s.. 1981::::: .:: ... ........: ....... .: :.:.. ..... .. ...: :.. ... ......:..:. .

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2.7 Unlike the case of outside plant (para. 2.4), the long distance network ismaintained efficiently by competent staff. But with the sophisticated equipment,including fiber optic transmission systems, currently being installed, PERUMTEL needs toupgrade its standard operating practices and procedures as well as establish nationwidenetwork management systems for monitoring total network performance (para. 3.15)

2.8 International Service. Indonesia is connected interationaly through twogateway exchanges located at Jakarta and Medan, via the Pacific and Indian OceanSatellites and via submarine cables to the outside world.

Access to Service

2.9 The current number of about 894,000 telephone lines for a population of175 million, corresponding to approximately 0.5 telephones per 100 persons, is by far thelowest telephone density among the ASEAN countries but comparable to India andPakistan. Furthermore, telecommunications services are concentrated in the urban areas.(Regional distribution of telephone service is given in Annex 1.) Public telecommunica-tions service is currenty available to all 27 provinces, 294 district capitals andmunicipalities and 2,869 of the 3,539 subdistricts. But about 58,000 villages with apopulation over 2,000 still have no telephone service. International direct dialing (withaccess to over 142 countries) is available to 5 percent of subscribers, while subscribertrnk dialing is available to 90 percent of subscribers. At the end of 1988 there were1,200 international circuits, up from 600 in 1984 (a growth of 15 percent p.a.).

2.10 With respect to other telecommunication services, the telex service, which isvital to the business sector, provides satisfactory levels of service quality and access. Itreaches about 15,000 subscribers nationwide, 70 percent of whom are in the major cites.Existing obsolete telex exchanges are being replaced by digital exchanges to provideadvanced services. The installed capacity is sufficient to meet demand up to 1995, andvo further increase in capacity will be required. After 1995, growth in telex subscribersand traffic is expected to decline as telex service is replaced by facsimile and data trans-mission services. A gentex service is available from more than 800 offices throughoutIndonesia. Telegram service is provided at affordable cost through a network of 660telegraph offices. Packet-switched data service, introduced in 1984, serves about 260subscribers and is available in Bandung, Jakarta, Medan, Surabaya, Padang and P. Batam.It is also connected through the facilities of PT Indosat to international packet-switchedservices in 21 counties. Public facsimile service is available in 16 provincial cities.

Demandl for Service

2.11 In the past, the telecommunications network has not grown sufficiendy tosupport the overall growth of the economy. Since 1981, the gap between expresseddemand for telephone service and available telephone lines has widened (Figure 1). Inrecent years, the waiting list for telephones has increased at an average of 14 percent p.a.

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Figure 1INDONESIA

DEMAND FOR AND SUPPLY OF TELEPHONE SERICE197687

(Thoandhe)

1200 -

1000 _- Demasmdest/

1 400 - DEs

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0 I 1976 1978 1980 1982 1984 1986

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By end-1988, unmet registered demand for telephone service had increased as a proportionof total supply from 39 percent of lines in 1982 to 70 percent. At the expansion rateachieved during 1984-89 (average 70,000 lines p.a.), it would take about 8 years to meetthe current registered demand alone. Over the next five years (1989-93), growth indemand for new services is expected to surge, fueled by expansion of export-orientedindustries and the tourism sector. On the basis of relatively conservative forecasts of GDPgrowth, the total demand for telephone service (existing subscnbers plus applications fornew connections) is expected to grow at an average rate of 15 percent p.a. (Annex 2).Over the same period, the number of main lines is projected to grow at 15 percent p.a.Therefore, despite rehabilitation and a large increase in investment, the supply oftelecommunications facilities and services will remain inadequate relative to demandthroughout the project period and beyond.

Quality of Service

2.12 Both the low successful call ratio (SCR) and the high number of faults per line(Annex 1) indicate a seriously unsatisfactoly quality of service. For example, the SCRnationwide for local, subscnber long-distanced dialed and international direct-dialed callsare 36 percent, 24 percent and 50 percent, respectively. Well-dimensioned and properlymanaged networks achieve 60-70 percent in each of these categories. Long delays (upto several hours) in manual long distance calls are a problem as are excessive noise, echoand signal attenuation. The poor quality of service is attributable to (a) poor localexchange dimensioning resulting in inefficient traffic handling, old switching equipmentand poor cable network; (b) improper traffic routing arrangements; (c) insufficient faultmonitoring, traffic measuring and traffic engineering; and (d) inadequate interfacing withexisting and newly installed equipment.

2.13 PERUMTEL's management is aware of these problems that have contributedto the poor quality of service. The program of investments during the proposed projectwill improve service quality by giving priority to replacement of old cables and switchingsystems and by rehabilitating local and long-distance networks. In addition, the actionplan (para. 4.28) contains a program, including technical assistance, for increasing thetraffic handling capacity of the system by improving traffic monitoring and engineering.These measures, in turn, will improve the quality of service and reduce operating costs.

Capacity Utilization

2.14 PERUMTEL also needs to address the problem of the large quantity of idlefacilities in the network and bring them into use through the instalation of balancingequipment and rehabilitation of systems as necessary. The idle capacity has a potentialof about 125,000 subscriber lines which cannot be connected due to poor coordinationin the execution of the various subsystems-transmission, switching and outside plant. Adetailed survey of existing facilities in the network is first necessary to assess theimbalances between different subsystems. PERUMTEL, with the assistance of

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NEPOSTEL (Dutch consultants) is expected to undertake a field inventory of plant andupdate the records of various subsystems. Based on the survey, an action plan to use fullythe current idle capacity will be completed by June 30, 1990. The project provides fundsfor the procurement of needed equipment and to hire consultants to assist PERUMTETin this task. The action plan (para. 4.28) agreed with PERUMTEL during negotiationsprovides for progress of this activity to be monitored.

Sector Objectives

2.15 The Government's strategy for economic development emphasizes (a) maxi-mizing export earnings by promoting the development of key support services to exporters,(b) expanding the opportunities for and the capacity of the private sector to participatein Indonesia's development, (c) increasing the efficiency of the public sector, and (d)promoting balanced national development by reducing the development imbalance betweenurban and rural areas and between Java and the rest of the country. A prerequisite forachieving these goals is the provision of reliable and efficient systems for the generation,transmission and processing of information, which requires an efficient countrywidetelecommunications network. Therefore, the Government's strategy for thetelecommunications sector is to:

(a) increase rapidly the quantity and quality of telecommunications services tomeet the growing demand for them cost-effectively-,

(b) increase the commercial orientation and efficiency of the entities in thetelecommunications sector,

(c) promote a well-conceived organizational structure, and management functions,systems and practices that enable PERUMTEL to operate services efficientlyand effectively, and

(d) promote sound domestic construction, consulting and, where economicallyfeasible, manufacturing industries to support the telecommunications sector.

Sector Constants

2.16 The poor performance of the telecommunications sector is due to theGovernment's inadequate overall management of the sector and the poor institutionalcapability of the principal sector entity, PERUMTEL, to expand and operate a muchlarger network.

2.17 Sector Management. As indicated in the Telecommuncations Sector Study(para. 2.22), the existing modalities of sector management, in particular the frameworkof PERUMTEL's interactions with the Government and government regulation of thesector, need to be improved. Thus, the separation in 1964 of goverm ent regulatory

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responsibilities in the telecommunications sector from the provision of service, by creatinga state telecommunications enterprise (the predecessor of PERUMTEL), was a positivestep that in many ways did not go far enough. Many management decisions continue tobe controlled in part by the Government. Moreover, on occasion, delays have occurredwhen responsibility between the Ministry and PERUMTEL for nidtating actions and takingdecisions was unclear. Other significant delays in initiating investment programs haveoccurred as a result of uncertainty concerning foreign exchange authorization.Furthermore, although telecommunications sector policies and practices are significantlymore liberalized in Indonesia than in many other developing countries, importantimprovements can be achieved with respect to the structure of charges for telecommuni-cations services and measures to extend the areas open to private-sector participation andcompetition. A strategy for increasing the effectiveness of sector management involves(a) establishing a process for the development and government approval of PERUMTEL'scorporate plan; (b) establishing PERUMTEL as a commercial, limited-liability company;(c) developing a strengthened regulatory, supervisory and policy capability within MTPT;and (d) establishing consultation mechanisms that provide the Government with theviews of users as well as those of the service providers.

2.18 PERUMTEL Capability. Significant problems exist in PERUMTEL's organiza-tional structure, organizational culture and its management systems in many areas. Thefunctional responsibilities of and interrelations among the various departments are neitherfully satisfactory nor well defined; in particular, poor coordination in the execution ofproject components results, in some cases, in idle assets (para. 2.14) and loss of revenue.Commercial and related functions need to be strengthened to handle effectively therapidly increasing number of subscribers. Furthermore, operation and maintenancecapabilities need to be built up commensurate with the large system expansion that is tobe undertaken. The main constraint to rapid network expansion is PERUMTELIs limitedcapacity to install the cable network (which connects subscribers to exchanges) and toprocess new subscribers from application to installation, commissioning and billing.During the fourth Five-Year Plan (198489), PERUMTEL achieved only 24 percent of itstarget for additional main lines (Annex 4). The shortfall was due to (a) lack of uniformdesign standards, (b) long delays in procurement and disbursement actions, (c)inadequate monitoring of progress, (d) undefined and fragmented responsibilities, and (e)poor financial control of expenditure and project costs. Under the ongoing TechnicalAssistance Project (Loan 2757-INS), the Bank has financed a program managemerntconsultancy which specifically addresses all aspects of program management. Theplanning and design standards recommended have been adopted, improved procurementmethods (such as large-scale packaging and prequalification of contractors) are beingimplemented and, currently, a computerized project implementaton, monitoring andreporting system is being established. The consultants' assistance has already yieldedpositive results, most notably in the reduction of unit investment costs for outside plantworks. However, progress in planning and project implementation is expected to be slow,both because of the magnitude of the task involved and the shortage of skilled humanresources (para. 2.19). PERUMTEL and Program Management Consultant (PMC) of

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Japan and Indonesia will continue to pay attention to improving these activities which willalso be the subject of continued Bank supervision.

2.19 Shortages of Trained Human Resources. An important factor contributing toPERUMTEL's limited institutional capability is the shortage of high-level technical,management and financial staff (para. 3.3). The shortage is becoming increasingly seriousin view of the sector's growing technical sophistication and the planned expansion of thenetwork. PERUMTEL needs to invest time and resources to train and develop managersas well as to install the systems needed to aid their decision-making. Another concern isthe inadequacy of both the level and structure of compensation for PERUMMEL's staffand the poor working conditions of lower level staff. As a government institution,PERUMTEL's salary structure and levels are substantially below those paid by privateenterprises. Although the salaries of higher level staff are supplemented by such facilitiesas cars and houses, they are still very low. Other classes of personnel must resort to asecond job. Performance at PERUMTEL suffers accordingly. Therefore, PERUMTELneeds to review and reform its compensation and reward system to enable it to attract andretain the high quality staff needed to operate and expand the enterprise in an efficientand effective manner.

The Bank's Role

2.20 Past Experience. The Bank's association with the telecommunications sectorin Indonesia started in 1971 with a credit of $12.8 million (Credit 210.IND). The mainobjective of that project were to transfer telecommunications operations from agovernment department to a separate operating entity, PERUMTEL, to help put in placeprocedures and systems for PERUMTEL to manage its then small-scale operations, andto rehabilitate and expand the network. The project was completed successfully in 1976,except for the institutional improvement component. The major lesson noted in theProject Performance Audit Report (PPAR No. 1646, dated June 22, 1977) was thatobjectives for institutional building should be realistic within the time frame of the project,and that it takes several repeater projects to achieve major results. The project was tobe followed by a second operation that was processed in 1973 but dropped afternegotiations due to disagreement between the Bank and the GOI over acquisition of adomestic telecommunication satellite and the adjustment of tariffs. Telecommunicationsin Indonesia were subsequently developed using domestic funds and with bilateralassistance from Belgium, France, Federal Republic of Germany, Japan, the Netherlands,Sweden and other donors.

2.21 In 1984 and subsequently, the GOI has requested renewed Bank assistance forthe sector. The Bank responded with a technical assistance telecommunications project(Loan 2757-INS for $14.5 million, approved in October 1986) with the objectives of(a) improving the planning and design of cable networks, tendering methods, projectimplementatic.a, and reporting and monitoring systems; (b) computerizing financialmanagement hnformation systems; and (c) increasing the capability to formulate and review

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tariffs. The project has progressed satisfactorily and, by its completior. in December 1990,will have improved selected aspects of PERUMTEl:s internal organization andmanagement. Nevertheless, it will take several more years, with consultants focusing morethan in the past on intensive training efforts designed to reach all sectors and professionallevels of PERUMTEL's staff, before PERUMTEL becomes an efficiently managed entity.

2.22 Sector Study. During 1988, at the invitation of the GOI, the Bank carried outa detailed assessment of Indonesian's telecommunications sector, identifying policy optionsand analyzing investment priorities to provide a framework for technical assistance andadvice to GOI on institutional aspects. The results have been incorporated in report No.7842-INS, June 1989. The Sector Study assessed the need for policy, legislative, regulatoryand institutional reforms, and developed a package of actionable proposals involving sectormanagement and policies, investment, procurement, financial and institutional developmentto enhance productivity and support the development of the sector. The Sector Study hascontnbuted significantly to (a) the Bank's strategy in the sector, (b) the Bank's dialoguewith the GOI with respect to measures to develop the telecommunications sector, and(c) the preparation of this proposed project.

2.23 Rationale for Bank Involvement. There are three main reasons for the Bank'scontinued involvement in the telecommunications sector in Indonesia First, the Bank'scross-country experience in the telecommunications sector in developing countries isdirectly relevant in advising the Government on sector management and organization,financing and investment planning. Multilateral as well as some bilateral donors havetended to support the lead of the Bank on policy and institutional initiatives in the sectoras they do not have their own staff capability for such work. Second the Bank can helpto maintain a necessary balance between physical and institutional development of thesector. The Bank's involvement would help alleviate key constraints which have limitedsector development. Major emphasis will be placed on improving sector organization andmanagement, developing human resources, improving corporate management, andstrengthening technical, financial and maintenance systems. Third. use of internationalcompetitive bidding for Bank-financed equipment and the promotion of competitiveprocurement for non-Bank financed equipment will result in signfficantly lower unitnetwork expansion costs than in the past. The GOI has asked the Bank to play a leadingrole in helping to rationalize sector policies, to finance investment programs, and todevelop PERUMTEILs institutional capabilities.

2.24 The Bank's strategy involves lending continuity to actions initiated under boththe ongoing TA project and the Sector Study. Through this first major telecommunicationsoperation in Indonesia, the Bank would play an important role in assisting the Governmentto improve overall management of the sector, strengthen PERUMTEL's institutionalcapability, and accelerate cost-effective implementation of a large network investmentproject, each to an extent that would be impossible without Bank involvement. The Bankrecognizes that development of the telecommunications sector will be a long-term processrequiring several repeater projects. Therefore, the Bank's strategy comprises (a) engagingthe GOI and the top management of PERUMTEL in a dialogue on overcoming sector

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constraints, (b) developing a pipeline of projects that wil emphasize institution buildig,and (c) partially financing major investment programs to accelerate expansion andmodernization of the network This approach will help ensure efficient operations andbalanced and cost-effective development of the telecommunications infrastructure bysupporting efforts to develop and modernize the network and improve the operatingenvironment and performance of companies in the sector through policy, regulatory andinstitutional reform. Given (a) that Indonesia's telecommunications sector is the leastdeveloped of the ASEAN countries, (b) the increasing importance of telecommunicationsfor participation in the international economy, and (c) the high level of umnet demand,development of the telecommunications sector will contnrbute substantially to Indonesia'seconomic growth and will complement fully the GOrs drive to deregulate its economy,raise productivity and increase non-oil exports.

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III. THE ENTITY

Orization and Management

3.1 PERUMTEL's organization chart is at Annex 4. PERUMTEL is managedby a six-member Board of Directors I headed by a President-Director. He is appointedby the President of Indonesia and reports to the Minister of Tourism, Posts andTelecommunications. The President-Director is the chief executive, empowered to issuedirectives and to supervise and guide the work of directors and other managers responsibleto him. Five directors are responsible respectively for Finance, Logistics, Development(Investment Planning and Implementation), Operattons and Engineering, and Personneland Administration. Responsibility for operations (and minor construction work) devolvesfrom the Board to 12 regional managers. Also responsible to the Board are 4 staffdepartments: Corporate Planning, Research and Development, Education and Training,and the Corporate Inspectorate, an audit unit.

3.2 Management attention is mainly concentrated on day te day operations,fulfilling government administrative requirements with respect to procurement andpersonnel, and on cumbersome internal procedures. It has been unable to respondadequately to external changes, to evolve to a service-oriented business and to meet thegrowing demand for basic telephone services. Significant problems exist in itsorganizational structure, organizational culture, and in many of its management systems(para. 2.18). The consequences of these shortcomings are evident in (a) high networkexpansion costs, (b) poor implementation of the Fourth Five-Year Plan 1984-1989(para. 2.18), (c) poor quality of construction and low reliability of the local cable andsubscriber distribution networks (para. 2.4), and (d) significant idle capacity in the system(para. 2.14). The current President Director, who assumed office in July 1988, has actedfirmly, speeded up decision making and brought some senior experienced personnel intocritical positions. However, the basic deficiencies in PERUMTEL's organization,management systems and human resources remain. To help overcome these and tosupport development of a commercial and service oriented organizational culture theproposed project would finance a management and professional development program forselected PERUMTEL staff (para. 4.9) and provide institutional support through a twinningarrangement with a sophisticated telecommunications entity (para. 4.10).

3.3 PERUIMTEls higbhly centralized management system is characterized by apreference for consensus decision malang, a practice of strictly hierarchical communicationand very limited horizontal coordination. The consequences are a heavy and growingwork load on senior managers and overdependence by regions on decisions from head-quarters. InI this regard, PERUMTEL, with the assistance of local consultants, PT Indo

I/ 'he Board is comparable to an executive management committee Each of the directors are fl-time employees.

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Consult, completed in April 1989 a review of its structure and responsibility at variouslevels. Revised job descriptions for all senior and middle level management positions wereproposed to eliminate anomalies and, in particular, to unify responsibility for all aspectsof financial control. Recommendations to implement the findings of the study areexpected to be approved shortly by MTPT, with implementation scheduled to begin inJanuary 1990. Head office staffing, currently about 4,500, is expected to be significantlyreduced during the project period and head office control of regional operations will focusincreasingly on performance measured by certain key physical and financial performanceindicators, with a consequential relaxation of detailed supervision. In preparation for agreater decentralization of management, all first and second level regional managers haveattended management courses. However, it is recognized that the pace at whichoperational responsibility can be prudently delegated may vary from one region to another.The Bank fully supports these initiatives and the technical assistance proposed under theproject would help to implement them.

Staffing

3.4 A summary of PERUMTEL's staff composition is given in Annex 5 . Withover 40,000 employees, PERUMTEL's staffing ratio of 50 staff per 1,000 main lines is highcompared with Korea (6), Malaysia (27), Singapore (15), and Thailand (20). There arealso serious staffing imbalances; for example, PERUMTEL's work force includes only 800university graduates (400 in technical subjects). That is only 2.0 percent of total staff, avery low figure for a telecommunications entity employing highly sophisticated technology.The ratio would be 5-10 percent in developed entities. Thus, PERUMTEL lacksexperienced technical and middle level managerial staff. Recently, PERUMTEL decidedto freeze recruitment of elementary dnd junior school graduates and step up recruitmentof university graduates and train them in telecommunications. Building PERUMTEL'sinstitutional capability will require both short-term and long-term measures. The proposedproject will help train PERUMTEL staff, place experts (para. 3.16) into selected positionsin PERUMTEL to train its managers and finance a Human Resource Development expertto develop a long-term human resource development plan including a training programand incentive schemes.

Training

3.4 PERUMTEI:s training department manages twelve training centers with a staffof about 667, including 175 instructors. It plays an important role in PERUMTEI'sefforts to upgrade the skills of its technical and administrative staff. During 1984-89, atotal of 49,950 employees were trained under various programs; about 33,150 receivedtraining fro.n PERUMTEL's own training centers and the remainder from programsarranged by suppliers, consultants, and overseas telecommunications entities. Details oftechnical assistance proposed and facilities available at PERUMTEI:s training centers aregiven in Annex 6. Currently the major running load is with the central training center,PUSDIKLATEI, and the potential of the regional training centers (RTCs) has been left

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undeveloped. With the demand for training at all levels, a redistribution of the trainingload between PERUMTEI:s regional and central training centers is needed. Much of thetechnical and operational training could be decentralized to RTCs, but they are currentlyill-equipped to handle it. An upgrading program for both the central training center andthe RTCs, initiated with UNDP-ITU, support I will be supported under the proposedproject through provision of training equipment for digital technology, fiber-optic systemsand modem test equipment for operations and maintenance.

Audit

3.5 PERUMTELs accounts are audited by the state auditors (BPKP) inaccordance with procedures satisfactory to the Bank. The Auditor's opinion with respectto PERUMTEL:s corporate accounts and financial statements have been qualified inrecent years. Main issues relate to procurement irregularities and overpricing of supplycontracts. In 1988, PERUMTEL revised its procurement procedures and the number ofcontracts flagged by the auditors has declined. Items highlighted in the 1988 audit reportrelate to procurement under contracts made in previous financial years. PERUMTElsnew management has placed major emphasis on obtaining an unqualified opinion from itsauditors and have reviewed the terms and conditions of most outstanding procurementcontracts.

3.6 There have been excessive delays in preparation of audited reports. Thiswas due to (a) the time taken by PERUMTEL to finalize end-of-year accounts, and (b)lengthy discussions between PERULMTEL's management and its auditors prior to final-ization of the report. PERUIMTEls efforts to improve accounting systems (para. 3.11)and procurement procedures will help to reduce these delays. Representatives of theauditor's office and PERUMTEL agreed during project appraisal that unaudited andaudited corporate and project accounts would be submitted to the Bank within fourmonths and nine months, respectively, of the close of the fiscal year. These arrangementswere confirmed during loan negotiations.

Billing and Collection

3.7 PERUMTE1:s billing is fully computerized . Processing of bills is done atregional billing centers; manual source data are prepared at the telephone offices andtransferred to the billing centers for processing. Bills are issued monthly, 15 days afterthe cut-off date, and are sent directly to the banks authorized to collect payments oftelephone bills. Subscribers obtain billing information through a dial up informationservice or from the participating banks. Previously, only six state banks were authorized

_y UNDP Project INS)9OW/AJOlQO of October 1989 for $23.2 million for upgrading ofTelecommunications Traning Center and Manpowe- DevelopmenL Projea document avilable inproject file.

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to collect payments. This has recently been expanded to allow payment at several privatebanks. A computerized file transfer scheme has also been introduced, which allowsPERUMTEL to transfer computer billing files to participating banks which will then printtelephone bills.

3.8 Collection procedures vary with the type of subscriber. Private subscribersare temporarily disconrected 30 days after the due date for nonpayment and permanentlydisconnected after 60 days. Private accounts receivable exceeding Rp 100,000 that arenot recovered within three months are turned over to a collection unit which initiateslegal procedures. Until recently, government subscriber lines were not disconnected fornonpayment. Under new procedures adopted in late 1988, PERUMTEL wil nowtemporarily disconnect government subscriber lines for nonpayment after six months anddisconnect permanently after one year.

3.9 Because of the past differences in collection policies, PERUMTEL has hadgood collection performance for private debt but poor for government debt. InWITEI IV, Jakarta, which generates about 60 percent of total revenues, the collectionratio for government debt in 1987 and 1988 was 20 percent and 24 percent, respectively,compared to collection ratios of 97 percent and 98 percent for private debt. Althoughgovernment billings represented about 16 percent of total revenues in 1988, governmentaccounts receivable were more than 50 percent of total outstanding accounts receivable.The new procedures adopted for government receivables in 1988 are expected to improvecollection ratios. During negotiations, assurances were obtained that PERUMTEL willtake all such actions as shall be necessary, including implementation of the procedures forcollection of overdue telephone bills adopted by PERUMTEL on May 26, 1988, to collectsuch overdues from all subscribers in accordance with a timetable satisfactory to the Bank.

Accounting Systems and Financial Management

3.10 In the past, deficiencies in PERUMTEL's accounting systems and proceduresresulted in inaccuracies in data and major delays in preparation of financial statements.It was difficult to obtain timely accounting data because of the lack of standardizatio1i ofdata input, incompatible data processing systems, and the manual accounting systemsprevalent in many regions. The lack of a standard format for preparing accounting dataresulted in excessive rerecording of data which affected data accuracy and hinderedeffective budgetary control by making it difficult to monitor actual against budgetedexpenditures. Additionally, nonaccrual of such balance sheet accounts as inventory,accounts payable and accounts receivable increased the time and effort required toprepare end-of-year financial statements as physical counting of assets and preparationof various additional reports were required to complement existing accounting data.

3.11 The new PERUMTEL management team, appointed in 1988, gave high priorityto improving the timeliness of accounting data and preparation of financial managementreports. A new chart of accounts based on the concept of responsibility accounting was

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introduced in early 1989 in PERUMTEI:s head office and all regional offices. Acomputerized general ledger program was also implemented in head office and threeregional offices in 1989. These initiatives have helped to reduce the time and effortrequired to prepare financial reports. In addidon to the benefits resulting fromstandardization of input data, the new chart of accounts allows identification of costs atthe subregional level and facilitates budget monitoring and preparation of regional financialstatements.

3.12 Accounting systems will be further improved over the next 18 months with theassistance of local consultants hired under the ongoing Bank Technical Assistance Project.The contract of these consultants has been modified to include assistance in developingPC-based accounting and financial management information system (MIS) to beimplemented at the subregional level. Replacing the cash-based manual accountingsystems currently used at the subregional level (telephone offices) with fully-computerizedaccrual-based accounting systems will significantly improve the timeliness and accuracy offinancial data.

3.13 Financial data have not been used effectively by PERUMTEI:s managementas a tool for operational control due to the weaknesses in PERUMTEL's internal financialsystems and a lack of analytical skills in the Finance Department. In parallel with ongoingefforts to improve accounting and financial MIS systems, the technical assistancecomponent of the proposed project will assist PERUMTEL to upgrade the skills of theFinance Department and build the capacity of PERUMTEL's management to use financialdata in the management of its operations. The project will help finance overseasfellowships and secondments to other telecommunications organizations for PERUMTELmanagers and Finance Department staff. During project preparation, a team of Finnishconsultants helped PERUMTEL to develop a corporate financial forecasting model. Inaddition, a line expert will also be provided under the project to help improvePERUMTEL's financial forecasting.

3.14 Moreover, PERUMTEL has paid insufficient attention to effective managementof financial assets and development of a strategy for securing external funds. Internalcash management needs to be improved to reduce cash in transit and levels of non-interest earning cash balances in order to increase interest income. With the expansionof its investment program, PERUMTEL also needs to diversify its financing sources. Inparticular, it needs to increase domestic financing to meet local costs. The proposedproject will assist PERUMTEL in these areas by providing a line expert in cash manage-ment and by financing consultants who will help PERUMTEL to develop a program forraisirig funds from the domestic capital markets.

Management Information System

3.15 PERUMrEL does not control its operations and use its resources as effectivelyas possible. One contrbuting factor is the lack of timely, accurate and adequate

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management information. PERUMTEL's MIS needs are enormous. It will takeconsiderable time and effort to put even the most basic system in place and to have itfully operational. PERUMTEL has recognized that it needs to adopt a carefully plannedand phased approach to its MIS needs. Accordingly, with the assistance of consultantsfinanced under the United States Trade Development Program, it would undertake astudy, by June 1990, to prepare a long range plan to identify specific informationrequirements, design the reports needed by the management and specify a schedule fortheir implementation. As part of this plan, the consultants will also assist PERUMTELto prepare the specifications for the procurement of the software and hardware for anetwork management system. Terms of reference for the study have been prepared inconsultation with the Bank. The acquisition and development of computer networkadministration systems will be financed under the proposed project (para 4.4 (c)).

Institution Building

3.16 The means of bringing about many of the necessary institutional improvementsin PERUMTEL will be through a relationship (twinning) with an experienced foreigntelecommunications operating entity which can provide broad-based technical assistancein key operational areas. This approach is expected to be a more effective means ofdelivering technical assistance and building up management and operating capabilitiesthan the alternative of a discrete technical assistance package to deal with differentdisciplines and hiring consultants to assist in its implementation. Twinning with anexperienced telecommunications entity will provide opportunities to integrate know-howtransfer and on-the-job staff training. Twinning will also keep the work program flexibleover time, and allow the possibility of a long-term cooperative relationship. Finally, ithas the advantage of sensitizing PERUMTEL staff to an experienced operatingorganization, a dimension that consultancy assignments lack. PERUMTEL staff will beexpected to be able to turn to the twinning entity as a source of information and advicefor many years after the formal contract has expired. PERUMTEl:s managementsupports the approach of receiving technical assistance through a twinning arrangementinvolving a long-term collaborative agreement. Terms of reference agreed withPERUMTEL during negotiations are in Annex 7.

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IV. THE PROGRAM AND THE PROJECT

Telecommuications Ivestment Program

4.1 PERUMTELs original investment program for calendar years 1989-1993 wasdrawn up on the basis of the Government's Five-Year Plan, Repelita V (FY89/90-FY90/94). Although all the components of the programv are required to meet demandand improve the quality of service, the program (which requires an average growth ofover 19 percent p.a.) was unlikely to be implemented on schedule and would probablyhave taken seven years to complete. Therefore, the investment program was discussedwith PERUMTEL and the GOI during preappraisal and adjusted to make targetsconsistent with the capabilities of PERUMTEL The revised program,1 estimated atRp 4,160 billion ($2,351 million equivalent). consists of ongoing works (Rp 1,340 billion),the proposed project (Rp 1,970 billion), and other works (Rp 850 billion), which areprimariily advance works for future development of the network after 1993. Ongoing workscons sts primariliy of works for (a) modernization and construction of outside plant networkfor about 120,000 lines, and (b) installation of fiber optic and microwave transmissionsystems for the interexchange junction networks in multiexchange areas and for the long-distance netwurk to carry traffic from 120,000 new subscribers under the ongoing worksand about 600,000 new subscribers to be added under the proposed project (para. 4.4).Progress on implementation of the ongoing works is satisfactory. Financing for theongoing works is secured and, subject to confirmation, arranged for the project(para. 4.16). Foreign exchange financing for the other works is still to be arranged, butany delay in execution of these works will not affect the implementation or the viabilityof the project. Full details of the program are given in Annex 8.

4.2 It is essential that the different physical components of the program be properlycoordinated and integrated to avoid repetition of past errors that resulted in a highproportion of idle assets. Considering the limited implementation capabilities ofPERUMTEL, it should not undertake any major additional investments outside the agreedinvestment program during the project period without prior consultation with the Bank.To ensure this, during negotiations agreements will be reached with GOI and PERUMTELon the following: (a) by November 15 of each year, GOI and PERUMTEL will reviewwith the Bank the following calendar year's institutional development plan and investmentprogram so that the Bank can express its views on the priorities of and balance amongthe various components, (b) GOI will ensure that PERUMTEL will have adequate fundsto finance the investments agreed with the Bank, and (c) PERUM1EL will consult withthe Bank prior to undertaking any investment costing the equivalent of $50 million ormoie in any one year not included in the investment programs furnished to the Bank.

/ Does not include revenue sharing schemes which are to be funded and implemented by the privatesector.

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Project 2Object

4.3 In line with sector objectives (para. 2.15), the objective of the proposed projectis to assist the Government to improve overall management of the sector, strengthenPERUMTEL's institutional capability, and accelerate cost-effective implementation of alarge network investment project by:

(a) assisting the Government to formulate sector policy and regulations andto develop appropriate mechanisms for its management of public tele-communications enterprises;

(b) improving PERUMTELs institutional efficiency through a program ofhuman resource development; and

(c) accelerating expansion and modernization of the telecommunicationsfacilities in the country as a whole, focusing primarily on the seven majorcities: Bandung, Denpasar, Jakarta, Medan, Semarang, Surabaya andUjung Pandang.

Poject Desciption

4.4 The project has been designed to support the above objectives. It includessubstantial technical assistance to both the MTPT and PERUMTEL in addition to supportof PERUMTELs 1989-1993 investment program for development of telecommunicationsfacilites. Specific components of the project are outlined below. Full details of thephysical components of the project and the source of financing are given in Annex 9 andillustrated in IBRD Map No. 22076.

(a) Comonent1. Technical Assistance to MTPM to:

(i) establish a process leading to the annual development, and approval bythe Government, of PERUMTEl:s corporate plan;

(ii) assist in a review of sector policies; and

(iii) develop the telecommuncations regulatoxy and analytical capability ofDOPT.

(b) Component 2. Technical assistance to PERUMTEL to achieve the institutionbuilding objectives through:

(i) a management and professional development program using a combinedprogram of academic training at foreign universities and workinginternships in selected fields at a developed telecommunications entity;

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(ii) a "twinning" arrangement with a developed telecommunications entityto enhance PERUMTEL's managerial, financial and technical capabilities;and

(iii) consultancy to develop further PERUMTELMs capability in project design,engineering, implementation, and supervision.

(c) Component 3. Support of PERUMTEL's 1989-1993 investment programcomprising provision of:

(i) interface equipment to utilize fully the existing idle capacity in thenetwork and to connect about 125,000 main lines;

(ii) switching equipment, associated cable distnbution network and subscnberterminal equipment, including 35,000 pay phones, to connect about475,000 main lines;

(iii) PCM cable and fiber-optic cable transmission facilities to provideinterexchange junction links within the multiexchange areas;

(iv) computer systems, including terminals, to establish computerized networkmanagement systems;

(v) equipment and facilities, such as testing equipment and tools to establishat least 6 outside plant maintenance centers, 3 in Jakarta (Pusat, Timurand Kota), and 1 each in Medan, Surabaya and Ujung Pandang: and

(vi) support, together with UNDP, of a training program for upgradingfacilities in the central training center in Bandung and the 12 regionaltraining centers, including 200 staff-months of lTU experts, 49 staff-month fellowships for training center staff and training equipment(para. 3.4).

Technical Assistance

4.5 Technical assistance provided under the project will assist MTPT andPERUMTEL as detafled below.

(1) I

4.6 Government-PERUMTEL Corporate Planning Process. Technical assistanceis proposed to help (i) to achieve a consensus on a specific planning process, closelylinked to governmental approval of PERUMTEL's budget, and a comnmtment to put it

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into effect (possibly by amending ministry budget regulations that apply to PERUMTEL),(ii) to ensure that the Ministry provides appropriate input into the process at differenttimes in the annual planning cycle, and (iii) to ensure that key ministry staff have a fullunderstanding of the process and the results to be expected from it. This component oftechnical assistance is proposed to involve an external consultant working with ministrystaff for 3 separate periods over 12-14 months for a total of approximately 16 weeks.The work to establish an effective Government-PERUMTEL corporate planning devel-opment and approval process will be complemented by short periods of overseas trainingfor the ministry's professional staff involving meetings with government officials performingcomparable functions in other countries. This training component is proposed for two staffmembers each year for two years for a period of three to four weeks per person.

4.7 Review of Sector Policies. The ministry would need qualified consultantsworking with its staff in order both to achieve substantive results in the analysis of prioritytelecommunication issues and to provide hands-on training in analyzing issues andaddressing regulatory needs. The project provides for such consultants to work withministry staff for approaimately two staff-years.

4.8 Strengthening the Telecommunication Regulatory and Analytical CapabWlitiesof DGPT. This proposed component consists of two elements: (i) An initial review ofthe role and organization of DGPT, particularly with respect to its role in analyzingtelecommunications sector regulatory issues for the minister. The review would involvean assessment of functions, in particular with a view to strengthening DGPT's capabilityin economic regulation of the sector involving tariff analysis, network interconnection andregulations governing the provision of competitive services, and the preparation of jobdescriptions. An external consultant would complete this work in approximately two-three months. (ii) Depending on the results of the review, overseas training forprofessional staff involved in telecommunications regulatory analysis will be proposed.This training would involve both classroom training and meetings with regulatory staff ofoverseas administrations. Given the role of DGPT as a regulator of PERUMTEL, sucha training program should be accompanied by a plan to reduce the dependence of DGPTon PERUMTEL staff. During negotiations GOI's agreement was reached on all of theseitems and that by October 31, 1990, GOI will prepare and furnish to the Bank for itsreview and comments, a timetable for the strengthening of the telecommunicationsregulatory capacity of DGPT, and subsequently, taking into account the Bank's comments,undertake such strengthening.

(2) PERUMTEL

4.9 Management and Professional Development. Given that PERUMTEL isacutely short of skilled and capable staff, technical assistance is provided under the projectfor PERUMTEL to develop in-house capabilities in all aspects of operations (through on-the-job training and teaming with the consultants) so as to reduce gradualy reliance onforeign expertise. The managerial development program will provide a total of 1,700

- 23 -

staff-months of training for about 60 middle and senior managers during 1990-93. Twoto three-year fellowships for MBA and MSc levels will use a combined program ofacademic training at foreign universities and working internships in selected fields at adeveloped telecommunications entity. During negotiations, assurances were obtained thatPERUMTEL will furnish to the Bank for review by October 31, 1990, a detailed trainingprogram identifying staff to be trained, areas of training, schedules and locations and willimplement the approved training.

4.10 Twinning. Institutional support will be provided through a twinningarrangement (para. 3.16) between PERUMTEL and an established telecommunicationsorganization. It will inolve the secondment of a number of professional personnel fromthe twinning partner into selected parallel positions (Annex 7) in PERUMTEL coupledwith the services of specialized technical personnel on short-term assignments as requiredin the areas of planning, operations and maintenance, material management, MIS, andfinancial management and planning.

4.11 Enineering and Implementation. Because the project is much larger thanany work previously undertaken by PERUMTEL, it will be necessary to provide substantialassistance in project management. The Bank will provide financial assistance forPERUMTEL to obtain the services of a comprehensive project management consultancy,that would collaborate with local consulting firms. The consultant team would compriseexperts in (a) planning and scheduling; (b) systems, methods and procedures, (c) costengineering, (d) outside plant; (e) switching; and (f) transmission. Some 620 expatriateand 1,500 local consultant staff-months of services wiUl be provided through theimplementation period. Consultant assistance would focus on (a) contract discussion,(b) postcontract engineering works, (c) coordination of implementation of different physicalcomponents of the project, and (d) physical project management.

4.12 Construction Supervision. To ensure delivery of a quality product on scheduleand in accordance with engineering documents, supervision of the construction of outsideplant works under the project will be undertaken by PERUMTEL with the assistance ofconsultants. Some 830 expatriate and 1,600 local consultants' staff-months of services willbe provided through the implementation period. Detailed terms of reference for thesetasks are included in Annex 7. During negotiations, these will be discussed and agreedupon with PERUMTEL In addition, to ensure know-how transfer through activeparticipation in the above tasks, agreement will be sought with PERUMTEL to identifycounterpart personnel for each assignment, at the time of issuance of the letter ofinvitation for proposals. During negotiations PERUMTEL agreed that it will, by October31 each year, beginning October 31, 1990, prepare and furnish to the Bank, for its reviewand comments, the proposed technical assistance and counterpart training program for theforthcoming year, such program to include objectives to be achieved. Thereafter, takdnginto account the Bank's comments, if any, PERUMTEL will carry out the program.

-24-

Project Costs

4.13 The total cost of the project is estimated at Rp 1,970.7 billion ($1,113.4 mil-lion equivalent), with a foreign component of Rp 974.5 billion ($550.5 million equivalent).Detailed project costs are given in Annex 8 and summarized in Table 4.1.

Table 4.:ESTIMATED PROJECr COST

Loca Fo -I IbTa Loal7rcg7Ibtl.oa

OS? project 531.9 ' A~.1 .916.0 30. 10 515 45.0

u4m. system 67 ~~~514 7. 2 8 "32.7 22

system . 18~l.. 28.7 474.4 063.

uiilfratlo 17.7 .17.7 354 0.A1. 20.0 1.

. ... . .... .. Z... .42. 64.4" 1.4- 24.0 3 43.

twlnnln8 ~~LI 4364 0.6 31.0 33

. ... .... . 14.2 10.6- 24.8 8..0 --6.0 14.0 1:

Ezperw 1~~.38 37.5 5 1..2.0 30 0

......... 4304. 4. 43.....4 54

...........o .. . ::...:0.. 11 :.. 375.2

DOEPQtLi xmtfo dte n ae nipredies oa ot nldVAT~ ~~~.'945 9.te ae siitdub 4otS& iin"Iac*

-25 -

4.14 The project cost estimate was prepared by PERUMTEL with the assistanceof PMC-the consultant currently assisting PERUMTEL for detailed engineerng andimplementation of outside plant works. The estimates have been prepared on the basisof contracts for goods and works with a detaied breakdown into quantities and rateswhere applicable, and based on price quotations recently obtained by PERUMTEL forsimilar works and experience in other countries. For technical assistance, average staff-month rates for similar assignments in Indonesia and other developing countries havebeen used. The cost estimates are net of duties and taxes for imported items sincePERUMTEL is exempt from them. Local costs include VAT and other taxes estimatedto be about $68.8 million equivalent.

4.15 Cntingenci. Base prices are at December 1989 levels. The prices are netof custom duties since all imports under the project are duW fiee Physical contingenciesare based on 5 percent for equipment, 1i) percent for services and ci works. Pricecontingencies for foreign costs are based on projected ncreases of 7.2 percent p.a. in 1990,and 4.4 percent in 1991 and each year thereafter. Price contingencies for local costs arebased on projected increases of 7.0 percent in 1990, and 5.0 percent p.a. in 1991 and eachyear thereafter.

Project Fimancing and Terms

4.16 The foreign costs of the project ($550.5 million) are to be financed by theBank, Federal Republic of Germany (KfW), Japan (OECF) and UNDP as detailed inTable 4.2. The Bank will partially finance outside plant (which includes supply, delivery,installation and commissioning of local cables, network materials, PCM cable, fiber-optictransmission systems) and technical assistance (which includes consutancy and training).In addition, the Bank will finance the computer systems for network management and the

Table 4.2: PROJECT FINANCING PLAN

C~~~~~~~~~~~~~~~~~~~., '-".' .. '-''.'. - .. ... .' '''. '.'' ''. ... -. .. : . .. . .1 .: .: -.. .... ... .. :

Local Foreipn Tta oe - ...... t.a..

.... ....... ... ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ................. . . .. . . ... .. -. : . ::. -...... .. .......... .. . .- ...::. ......:: ::.:.:::. ... ... ......:. -..:.

~~~~~~~~~~~~~. .. .... .. .. . . . .. . ........

Japa -: - : 28*9 2892:NP: ::- :::- 20: 20 0.2 :

;P _ - a Lz.:................1:~~~~~~~S : .:::;:-::.3 -2 . OnMd i:.: ::EUTE.. :.S::.: :'37

1 - ''' '-' ~~~~~~~............ x.. .

- 26 -

equipment for upgrading the training centers. The loan of $54.6 million from FRG,already committed, will finance part of the switching equipment. Funding of $115 mil-lion from FRG or other sources on reasonable terms will be secured for the remaining220,000 line units of switching equipment. The $28.9 million equivalent loan from Japanwill finance the cost of establishing the six outside plant maintenance centers, while thegrant of $2.0 million from UNDP wll finance part of the training component. All localcosts, including interest during construction, will ne financed by PERUMTEl:s internalygenerated funds (38 percent) and by local borrowings (14 percent). During negotiationsassurances were obtained from the Government that it will obtain not later than Janu-ary 31, 1991, the foreign currency from Japan and UNDP or other sources on reasonableterms to complete the project in accordance with the implementation program. Securingof loan from FRG ($115 million equialent) is a condition of loan effectiveness.

4.17 The proposed Bank loan will finance 64 percent of the foreign cost of theproject (30 percent of the total financing requirement). The Bank loan would be providedto the GOI for 20 years, including a grace period of 5 years, and most of the proposedBank loan will be on-lent to PERUMTEL under a subsidiary loan agreement (SLA)agreed during negotiations. The signing of the SLA is a condition of loan effectiveness.The on-lending rate will be at the Bank's standard variable interest rate plus a fee of5 percent to compensate the GOI for carrying the foreign exchange risk plus a servicecharge of 0.25 percent. The remainder of the proposed Bank loan will be made availableto MTPT to provide technical assistance and training.

Procurement

4.18 Goods and Works. All goods and works to be funded under the Bank loanwill be procured by international competitive bidding (ICB) in accordance with Bankprocurement guidelines except for the following:

(a) proprietary items totalling $12.0 million for interface equipment will beprocured from sole source by direct negotiations with original suppliers; and

(b) given the limited number of suppliers, limited international bidding (LIB)would be used to procure training equipment, test equipment and tools ($7.2million).

4.19 In the procurement of equipment, domestic manufacturers would be eligiblefor a preference in bid evaluation of either 15 percent or the import duty whichever islower. Table 4.3 summarizes the procurement arrangements. All bidding packages forcontracts estimated to cost over $300,000 equivalent for goods financed by the Bank loanwould be subject to the Bank's prior review of procurement documents provided, however,that the first 3 conracts for goods financed by the Bank, each estimated to cost over$100,000 equivalent, would be subject to the Bank's prior review of procurementdocuments. This will cover over 95 percent of total value of the Bank-financed contracts.

- 27-,

Table 4.3: PROCUREMENT ARRANGEMENTS(Million $) La

Switching - - - ~~~~~~~~~~~~:.323SL,& 323.O..S? Projec 5. 5. 1.

(260.2) tc (26.2)Cowutrie admnn-. . ..... ....

(3.9ss. (33.9),-OSP nialnenn

TelocommurdIcatiozo

capacity utiflrhdon -~~~~~~~~~ *<-~~ 24.2 24.2

TehiclAssistance%.~.Eagieertaz~st

vkes ~~~~~~~~~~~~~~~~~-.431 Id :43.

'T 'linSEqFUipmn 6 16.9

'. ..Oveties .. ..f.....

(48) (4.8).:;K~~~~~~ Experts :. ~ ~ ~ ~ ~ ~ :-.-.3.6&r 3.6-

stuton...14 3.

(294.1) (72) - ~~~(48.7) (350.0)

Peren 43.0 A1. 42. 10..Percent, of Dank.- lon 4. 2.0 . ... 14. 1.0

jft Includes contingencie . .... .. ... .& According to w-liuanclets' and UND~..... .. prour.en pr.drs(soitdlctwt

will be met from ?ERUM~~~~~~~~~~~~~..... ...n ..era .~~~ Nunibets in ,arenb.e.........&....e... represe ...n... ...e........nts . .o .. ...n.e . y the. .r.pos..B.nk

~ PERUMTEL will provide.... fro.. d'tD ........ ...r! ..... ... :....9. . .. .. -.d .

- 28-

Procurement of goods and services financed by co-financiers and UNDP would be inaccordance to co-financiers' procurement procedures. All goods and services to beprocured with PERUMTEL's own internal resources will be through local competitivebidding following the government regulations which are satisfactory to the Bank.

4.20 Technical Assistance and Consultancy. Selection of consultants and trainingservices will be according to Bank guidelines.

(a) The services of Program Management Consultants (PMC), appointed underthe ongoing Technical Assistance Project following Bank guidelines for theappointment of consultants, would be retained under the proposed project,under terms and conditions satisfactory to the Bank, to assist PERUMTELin implementation of the 1990-93 program. Under the TA project, PMC hasbeen associated with the outside plant i lIndonesia over the last three yearsduring which it has undertaken detailed engineering, designs and bid documentpreparation for the outside plant under Repelita IV. The major componentof this proposed project also involves outside plant. Because of PMC'sdetailed knowledge and experience of the network as well as ofPERUMTELIs organization, and their satisfactory past performance, PMC willbe reappointed under the project for overall program management at thesame staff-month rates as under the existing contract with adjustment forinflation. The total cost of the consultancy is estimated at $20 million ofwhich the Bank loan will finance $13.2 million and PERUMEL the balance;

(b) services in respect of (i) management training, $4.8 million (para. 4.9), and(ii) twinning arrangements, $3.7 million (para. 4.10), will be arranged throughdirect negotiations with internationally recognized entities in accordance withterms of reference satisfactory to the Bank, and

(c) selection of consultants for all other assignments will be from a short list ofat least three firms or experts for each assignment agreed by the Bank andunder terms of reference satisfactory to the Bank.

Disbursement

4.21 The proposed Bank loan will be disbursed against eligible contracts for(a) outside plant, (b) telecommunications equipment and materials, excluding switchingequipment, (c) computer systems, (d) training equipment and will cover 100 percent offoreign expenditures, 100 percent of local expenditures (ex-factory costs), and 65 percentof local expenditures for other off-the-shelf items procured locally, and (e) 100 percent offoreign expenditure for the services of consultants and training. No disbursements will bemade for expenditure prior to the loan signing. Withdrawal applications will be aggregatedin amounts of $100,000 equivalent or more, prior to submission to the Bank. Statementof expenditure and Special Accounts were considered not necessary because of the

- 29 -

packaging of procurement which comprises a small number of large contracts. Annex 10gives the disbursement schedule for the proposed loan. Disbursement under this loan isexpected to be faster than the average Bank profile in Indonesia because of the advancedstage of procurement for outside plant and consultancy assignments, major componentsof the project. The loan will be closed cn December 31, 1994.

Implementation

4.22 In the past, because of poor packaging of works, PERUMTEL experiencedconsiderable difficulties in supervising, controlling and coordinating numerous, similarsmall volumes of outside plant works. PERUMTEL has recognized the need to changeits approach radically and has decided, with the Bank's support, to reduce drastically thenumber of separate contracts and to introduce single-responsibility contracting for packagesof outside plant for the proposed project. In view of its total magnitude, the volume ofoutside plant construction has been divided into four approNitnately equal packages. Thegeographical area covered by each package, and scope of work in each package, areshown in Annex 11 and in IBRD Map No. 22076. Construction of OSP includingsubscnrber connections will be tendered in accordance with Bank guidelines for goods andworks to 15 prequalifled contractors selected in November 1989 with Bank concurrence.Other components of the project, namely, switching equipment, outside plant maintenancecenters and computer network management systems, etc., will be installed by the respectivesuppliers.

4.23 Project implementation as currently ?lanned takes note of PERUMTEl:slimitations. With the assistance of PMC consultants (para. 2.18), PERUMTEL has madegood progress on the advanced items of work for implementation of the proposed project.It has completed prequalification of contractors who would participate in the competitivebidding for OSP component, finalized bid documents and is expected to invite bids byend-January 1990. However, PERUMTEL's present organization is not tailored to dealwith the critical management problems that are associated with the construction of majorprojects. During preparation of the proposed project, the question of reorganization ofPERUMTEL:s departments for more effective project implementation was discussed. Inview of the deficiencies discussed in para. 2.18, it was agreed with PERUMTEL that, inthe interest of integration of expertise and optimal use of scarce skilled manpower,PERUMTEL should aim to unify project engineering, design, procurement andconstruction monitoring under a project implementation unit (PIU).

4.24 PERUMTEL has agreed to set up a project implementation unit (PIU)headed by a Project Director, with overall responsibility for project implementation,reporting to the President Director. Appointment of the unit head and key staff membersof the PIU has already been made. The PIU will need to be given adequate financial andadministrative autonomy to enable it to discharge its responsibilities effectively, have itsown accounting, procurement, transport, land acquisition, administrative and technicalsections, and keep separate and distinct project accounts for the Bank project as a whole

- 30 -

as well as its individual components. The critical path method will be used to coordinateUiplementation of the project in order to minimize the level of nonproducing investment.Bank-financed technical assistance (para. 4.11) is provided to assist the PIU in theimplementation and supervision of the OSP construction component. Bank-financedconsultants appointed under the ongoing TA project and who assisted PERUMTEL in thedesign of the OSP network, in the prequalification of bidders for the OSP component andin preparing the OSP bidding documents will continue to assist PERUMTEL in projectmanagement (para. 4.20 (a)). For supervision of OSP works, PERUMIEL will selectconsultants according to Bank guidelines. Based on experience gained in theimplementation of this project, plans for integration of the functions of this urit into theorganization and the optimal set-up for undertaking a large-scale investment program willbe explored during the supervision of the project. During negotiations, assurances wereobtained from the GOI and PERUMTEL that:

(a) PIERUMTEL will prepare, by the critical path method, and furmish to theBank, by June 30, 1990, a master plan for the implementation of the project,satisfactory to the Bank, which would include actions assigned to responsiblegovermnent and PERUMTEL management;

(b) the Government and PERUMTEL will take all actions, including allocationof necessary financial and administrative powers, essential to enable the PIUto maintain the project implementation schedule;

(c) PERUMTEL will maintain the PIU until project completion;

(d) PERUMTEL will continue to use PMC under terms and conditionssatisfactojy to the Bank to assist in the implementation of items (i) to (v)(para. 4.4(c)) unCer component 3 of the project; and

(e) PERUMTEL will enter into arrangements satisfactory to the Bank, with atwinning agency no later than October 31, 1990; and

(f) PERUMTEL will appoint consultants for construction supervision of OSP byOctober 31, 1990.

4.25 Site rcquisition. In view of the difficulties experienced in the past with theacquisition of sites for housing network facilities and rights of way for the cable routes,advance action has been initiated for this project. Of the 50 new buildings sites required,land has already been purchased at 31 locations. Action is under way to acquire theremaining 19 locations. No resettlement issues are expected.

4.26 Implementation Schedule. Annex 12 gives the implementation schedule. Ittakes into account PERUMTEL's current limitations and, subject to agreements in

- 31 -

paras. 4.224.24, it is realistic. The project is expected to be implemented fully byMarch 31, 1994. The closing date of the loan wfll be December 31, 1994.

Performance Monitoring

4.27 Performance indicators to monitor PERUMTEls implementation of thephysical components of the investment program, the quality of service and the financialperformance are given in Annex 13. During negotiations, the proposed performancetargets for the years 1990 and 1991 were discussed and agreed with GOI andPERUMTEL; further, assurances were obtained from GOI and PERUMTEL that theindicative targets for the years 1992 and 1993 shown in Annex 13 will be reviewed andspecific targets for each year agreed by them with the Bank by November 15 of thepreceding year.

4.28 An action plan (Annex 14) to monitor 0OI's and PERUMTEL's implementa-tion of the institutional components of the project was also discussed and agreed duringnegotiations. These components indude measures to improve PERUMTELs performancein respect of (a) accounting and financial management, (b) operations, (c) idle capacityutilization, (d) human resource development, and (e) training of staff and managers inmanagement techniques and new technology. The consultants employed for implementingthese components-program management consultants, construction supervision consultants,and the twinning partner-will be required to submit detailed monthly reports toPERUTMTEL with an executive summary. A copy of the executive summary will also besubmitted to the Bank. Based on the executive summary, the Bank and PERUMTEL willassess the actual progress against the action plan and make necessary modifications. Intheir monthly reports, the consultants will also be required, based on their experience,to make recommendations on any necessary adjustments or fine tuning of the action planand/or PERUTMEl:s organization and procedures. On completion of their assignments,each of the consultants will submit by December 31, 1993, a detailed report toPERUMTE", with a copy to the Bank on their achievements with, inter alia,recommendations of further action necessary to strengthen PERUMTEL's capabilities intheir respective areas.

4.29 During project implementation, PERUMTEL will report progress on thedifferent physical and institutional components of the project through quarterly progressreports and on the financial indicators through annual financial statements. Within sixmonths of the closing of the proposed loan, PERUMTEL will prepare and furnish to theBank a detailed Project Completion Report.

- 32 -

V. FINANCIAL ANALYSIS

5.1 PERUMTEL's financial performance over the past six years has beensatisfactory. A significant tariff increase in 1985, growth in the number of main lines anddramatically increased international traffic have allowed PERUMTEL to maintainprofitability and generate adequate cash flows despite slow growth in local traffic andinadequate controls or. operating costs. "With the proposed major expansion programplanned under Repelita V, PERUMTEl:s ability to generate adequate cash flows tofinance its investment program and to meet debt service obligations in future years is themost crucial issue. In order to strengthen PERUMTEls financial performance andincrease its cash flows, several initiatives are proposed. First, PERUMTEL plans toincrease the productivity of the existing physical plant by implementing an effectivecapacity utilization progr-am thereby increasing the number of working telephone lines andthe traffic per subscribem line (para. 2.14). Second, implementation of the components ofinvestment program will be carefully coordinated to minimize the proportion ofnonperforming assets and to ensure assets generate adequate revenues when they areplaced in service (para. 4.24). Third, financial management systems and procedures arebeing strengthened to allow adequate control of expenditures and to increase theproductivity of financial assets (para. 3.14). Fourth, and most important, tariffs wil bereviewed and adjusted periodically to moderate the real decline in PERUMTEL's tariffsthat would occur, as a result of inflation, if prices remained constant in nominal terms.With these measures, PERUMTEL is expected to remain profitable, to meet its debt-service obligations, and to generate internally an average of 39 percent of its totalfinancing requirement in Repelita V.

Historical Fnancial PerEfrmance

5.2 Selected indicators of the key aspects of PERUMTEL's historical financialperformance, profitability, cash generation and efficiency are shown in Table 5.1.Historical financial statements are provided in Annex 15. As demonstrated by theindicators, PERUMTEL has been profitable. An average 25 percent tariff increase in1985 reversed the previous two years' decline in revenue growth and operating profits.Since then, growth in international traffic, which has averaged 15 percent p.a. since 1986when international direct dialing was first introduced, has helped to moderate the effecton revenues of a substantial real decline in domestic tariffs and slower growth in localtraffic due to network congestion and inadequate utilization of the existing plant. Pooroperational efficiency also reduced growth in operating income. Cash operating expensesper main telephone line grew on average 2.5 percent p.a. in real terms between 1983 and1986. More recently, slower growth in staff levels and thus personnel costs and a declinein maintenance costs per line, the result of inadequate maintenance of the network, havereduced the growth in cash operating costs. Improved accounting systems and procedureshave also contributed to the reduction in operating expenses reflected in PERUMTE:saccounts.

* 33 -

Table 5.1: SELECTED INDICATORS OF PERUMTEL'S HISTORICAL FINANCIAL PERIORMANCE

(Rp bllion)

.: . . .: .. : : . .:- 4 i :: ..................................... . 3: .: .:: .. :. :::::.-::. . . 198:3 : . .>. :19 :: 5 18 19.8X7: :::.:1. ::l.:.:: ::

.tg~fl~jjfty . .......... . -.... .. .... .

.-: .. :. :::: '': .....~~~~~~~~~~~~~~. . . . .. . : ' .. . . : :. . . : ' :'.. ....:'::

f i"S b .... ... -- ::: ..... .-:. : ... : .-- : .. --:: .: ..:~~~~~~. .... . . ......

Oteratlng revenue ... :409 44 542 614 ::: 799O tin 0 peus:5 3 3 ... 4.0 45 S. .: .operating .ncme 7: :1 1 9 . .33 ...

.x t9 -: .-..-: .S.:4:2 ............ 98: ..-- : .-- ........ e .: o1~~~~~~~~~~~~~~~~~~~~~~~~~.......... . ........ ,Return on. asse...b..oe.::a .: : : : : 4.: .233...... :4.2 -: --.: .: .::::.: .4 ..26. :. : .......

. . -~~~~~~~.... .'.. -..::.. ..'-. .: . .:- .:...':

e h. . a * ..D- . .:..............*.T. ... .... ... 7 8 -.... , : ... .....:. .-

'Catsh -p. .... ...l~~~~~~~~~. ..: ... ... : ... . - v -D.. ' : . . ....

, : : one ~~~.. . ..... ....... t :. -.D.'. .. ' '''''- ''''''.. . ... .- .: : :::t:... . ..... . .. ... . ...... . ..... .... : 7:: ... ::

| ~~~~~~~~~~~~~~~~~~~~~~~~~. . .... ... . .. . .. ......D'D'D',:' .''''.'.D

l~~~~~~~~~~~~ ~ ~~~~~~~~~~~~~~~~ .. .e: ..' .. .:. .......... . .. .... ..... ......

hb : :' .:: .. .. ::

fl.. ......... , ..... .. . . .. .:::.::.. ................. .-XD. :'=-~~~~~~~~~. ~ ~ .. ......... . .... .. ' ' .'' . ''. - - ': '4 : 'M:. :X'''S

: : :.:.:s. - L o ..f: W S 0:.: :::.:: ::: : ..-. . >.6: .1473:: ::iiZl- ::: ..w..:6.. :::......... .........' A . .................... .. .. f.: .:. ^X :.............................. :: ::.....:: ....... . . . . .: :..:D.:.:.:::: :v.l{X:e:: .:. :~~~~~~~~~~~~~~~~. .:. : . ........ '',''* ' "'.*.* -': . . . . ...... ' ' :..'.'.'.:

' -2.: .N ..... :: :::X:-. :' .:: :. .':: .:: .:::'::', : 55 .::. . .: .. . ............. .......... . ..........................:y. 3,9.

:C B .. t.. .......*X. : :y : .. :t 7..: ... J . ::.... ........ .:.: x

... ...n. erat lon...... ... ... A

: W . ng- :~~~~~~~.:.:.. :: ... . . ............ ...... ... .- ... ..:: ..: ... ............ .. .. .. .. .. . . ....

y ' (* D ~~~~~~~~~~. '.... ........... ......X.. , 9 .5. .... ........': .' y : : S D ' . :: ~~~~.i . .. .. .. . . .. .. .. .. . .. .. .. .. . . ............

'-~~~~~~~~~~~~~~~~~~~ ... ... .: .. .. I..... .D"'''" "

. f .nvestent in th.6s 14.7 Du42.1 99.6 IV, 68eon ebt0 percentmrag2 7 o.6 3.4.. 3nu 4e 4Curen t-'IAtl . 31.1 . .

& After debt seiviw~~~~~~~..... .n .adtl .. t.btos.::::.:

onl 3Cprent atof.. budgeed ependture dueto lo prjc implementation..Most.o

- 34-

PERUMTEl:s internal funds for investments were provided through income from deferredinstallation fees, depreciation and other noncash expenditures. Retained earningscontributed relativel little to cash flows, as the current taxation rate of 35 percent,mandatory transfers to Government of 55 percent and other allocations allow PERUMTELto retain only 16 percent of pretax income.

Fmancial Position

5.4 Not surprisingly, PERUMTEL's low levels of investment over the past six yearsstrengthened its financial position. Table 5.2 provides a comparison of PERUMTEsfinancial position at end-1983 and end-1988 Levels of cash and short-term investmentsmore than tripled between 1983 and 1988 as planned inestments were not realized. Thecurrent ratio improved from 2.1 to 2.3. The ratio of debt to total capital also improved,declining from 58 percent in 1983 to 46 percent in 198& Domestic lines of creditarranged in 1985 and 1986 for financing the local component of the Repelita IVinvestment program were underutilized due to slow implementation of the program.

Table 5± PERUMTEL'S FINANCLAL POSMTION(Rp bin)

. :: .. : :.: :.: ::. :.: :::: :.:.:: -:.::- :.:: ::.:: .lY1 :: :: .::: :::.:: ::: .......................... . . ....................

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~... . ...... .. . ....:

tr t:..:.1..- .. .. .. .. ... .. ::: :

O & Di b_ld 8.'"''.''.'.'''..Y.:....:.:....... ........ .... ..............

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.... .. . .. ,,,, .. , :.v :.,::.:... . : : : ::xD .., :: :.: .:. ..... ..

...... .....:::. .. .:.:..... . .....:.: ..:: .: ,: .:, .. .. .. ::... ... .. ..: .- . ... . .- :* y*@X ,-y,,.-. X .:..:

Ia E- deb =2 _ 6-S

m~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. .. .. ...:L: . ... ...g

~~~~~qutt~~~~~~~~~~~~~~~~ 405~~~~~~~~~~~ . 1.......

Thcb*np~~~~~~~~~~~~~~~~~~~~~~~~58 ... .........../... .......

- 35-

Projected Financial Performance

5.5 During the next five years, PERUMTEL is expected both to remain profitableand to generate adequate cash flows, if appropriate measures are taken to streng;hen itsfinancial performance further. Selected indicators of projected financial performance areshown in Table 5.3. Projected financial statements for PERUMTEL are provided inAnnex 16 and the assumptions used in preparing them in Annex 17.

Table 53: SELECTED INDICATORS OF PERUMTEL'SPROJECTED FINANCIAL PERORMANCE

(Rp bin)

1- :: ... . . . .. .... .. :. : - y - .................. :............... . Fg -D6 M e 31-

-~~~~~~~. .- .. . ..:. .-. .... ,.: i... .':-...W 1 .: .1. ... . .... :..:: . ... : .... ...... . .. . .. . .~~~~~~~~~~~~~~~~.......... . .. ......... ... ....... y:,:.. .

17S4 ia onmt: brt % 1 - -: - K: : :i:4,5 .: 18 : 1::. 16:

(CurrentR~ 0.. .... ... +....

a~iet g .. :.-. II% ....... ::.:. . .. :..:':.::':.::'...... . : .... :59

w~~~~~~~~~~~~~~~~~~~~~~~~~~ .. . .. . . . . . . .. . . . .

awmge main .Ine .49 =36 318 298 Z79 2d.N . m..t: :: nc . .: ::::::: :.:::.

r i e . -. 3.............. ...... ......... -.7.

Wwo = _ ~.................. '' . .: ....,f2 .,''.. .. '. -. -. . . . . .. .. ... .. . . . . . .. . . . . . .. . . . . . . .. . ... . . ... . . . . .. . ... .... .. .

..X ....... ..... . .. .. ............ . . . ..... .2 6

............ .. ........ ... j,,,. ..... . . .,:- ......... --,w ':. ::: ':'. '. :'. :' : .. . . .. ....... .. .. . ....... . .::... ... ..... :. :. ... :- :.. , . .:--:S

........ . . ............. ... . .... .. . . . . *..., . ... .. ... .- ... .. .. .. .. . .... .. .-.

:: 4*:*^*. ... : ... . ...... .... ... .... .. *. .......N Eg.. : - ..... . ..... . . .... ..... :..:..

H~~2 48.6 ,7 6± 656, 6 y

['.' "' ........ ff.:.'::' '.':.': y:.:.'.'.':.: .:g3=: t. 9 ~~~~~~~~~~~~~~~~~~~~~~~...........t.:g>Oti .-.,::.,. . .,... .............. .... .. ... ....... .... . ...... :. = ..::.::... ::.:. :::::..:.

.... .. . m..... ...... -.. .-..: .. , e . , ....... a.....n................... . . : .:..... ............................ :

y g ............. .. . ... .''' F. .' ... ..gy ....::~~~~~~~~~~~~~~~~~~~~. . . . . : :-:. : - , %I . , g, :.,.:., 'y.:: .

- 36 -

5.6 Annual investment levels for the Repelita V program are expected to peak in1991, the most critical year from a cash flow perspective. A proposed tariff increase inmid-1990 of 11 percent on average, and an increase in the number of worldng lines asa result of the capacity utilization program and the ongoing expansion program, areexpected to generate the additional revenues and cash flow required in 1991. As well,PERUMTEL is expected to utilize remaining cash surpluses. From 1992 onwards, modestgrowth in domestic traffic (as network congestion is reduced) and significant annualsubscnrber growth are expected to provide the additional funds required. If implemen-tation of the capacity utfflization program is dclayed and the expansion program is poorlycoordinated, a second tariff increase might be required in 1992/1993. To ensurePERUMTEI:s financial health, assurances were obtained from the Government andPERUMTEL during loan negotiations that necessary measures will be taken (includingtariff adjustments) to ensure that PERUMTEL achieves a debt service coverage of 1.5 andinternal cash generation, after debt service and mandatory contributions, of not less than30 percent of the annual average of the current and the next year's investments in anyone year. Operational surpluses from previous years would be included in the calculationof internal funds.

5.7 PERUMTEL's rate of return on assets is expected to be lower than previousyears because of the large annual increases in the size of the asset base anticipated andthe lag in connection of new subscribers. Thirty percent of the total number of subscribersto be connected are expected to be connected the first year an exchange is put intoservice, 40 percent the second year and the remainder in the third year. If exchange filllevels are increased in earlier years this would improve profitability and increase cashflows.

5.8 A summary of PERUMTEl:s sources and applications of funds statementduring the project period is summarized in Table 5.4. The foreign costs of PERUMTEL'sinvestment program, about 47 percent of the total, will be financed by foreign loans. Theremaining investment costs and interest during construction will be met by PERUMTEI:sinternally generated funds and through domestic borrowings. Domestic sources of fundswill include bank loans and, from 1992 onwards, issue of bonds.

- 37 -

Table 5.4: FORECAST SOURCES AND APPLICATION OF FUNDS (1989-93)

`-Rpbn. . ... .

Fuinds from operations 3,693-0ecre-se in working cpital , 254

ILesstdebt service -1621Transfens.: -- 4113

, S ~~~~~~~~~~~~~~~. '.''.-'.- '. ,. -'- --- Ne inal cah e 1913 39-

-Forein loans 1,971- -40Lcal loans and bonds 1057 21

Total Sources - 41 . 100

ApplicationsC-apital investment.. 4161 8

: Local :: : : : 2,191 44:Forign 1,971- -- 40

Itest during construction - 779 16

Total ADplications 4.941 - 0::

- 38 -

VI. ECONOMIC ANALYSIS

Least-C0t Solution

6.1 The investment program (para. 4.1) is the least-cost solution for providingplanned service levels within the constraints imposed by the existing configuration andtechnology of the telecommunications network. The timing and dimensioning of variouselements of investment in the system as well as design and composition of alternativenetwork configurations are the results of careful analyses made by PERUMTEL in closecooperation with PMC These technoeconomic analyses are based on internationallyrecognized engineering practices.

Tariffs

6.2 Tariff Policies. Tariff policies for telecommunications services need to respondto several goals. In order to contribute to economic efficiency, tariffs should reflect costsand, where unmet demand exists, serve to ration scarce capacity. For the operating entityto achieve satisfactory financial returns, tariffs must also attain financial targets. Finally,they should be seen as reasonably equitable by the public.

6.3 PERUMTEL's tariff schedule for telephone and telex service, last revised inFebruary 1985, is summarized in Annex 18. As a result of tariff analysis undertaken byPERUMTEL with technical assistance (para. 2.21) in 1988-89, the appropriate directionof certain changes in the level and structure of charges has become clear. Telephoneinstallation charges (currently Rp 500,000 or approximately $300 equivalent in the Jakartaarea) should be increased in order to moderate the excess demand for new service.Telephone service monthly subscription charges (currently Rp 3,500 or approximately $2equivalent per month in Jakarta) are very low compared with costs and with charges inother countries. Significant increases in monthly subscription charges are thereforeappropriate, and will tend to remove the existing incentive for certain subscribers to retaintelephone service that has a very low utilization.

6.4 Telephone usage is charged at Rp 75 (SO.042) per pulse, with the length of thepulse declining from 3 minutes for local calls to 6 seconds for long-distance calls up to 100kin, and to 2 seconds for long-distance calls over 1,000 km. In other words, while localcalls are relatively inexpensive, long-distance calls, especially those over 1,000 km, arecomparatively expensive relative to tentative estimates of long-run marginal costs and toequivalent long-distance rates charged in other countries. Therefore, charges for local callsshould be increased and charges for long-distance calls over 1,000 km decreased, subjectto confirmation that the resultant long-distance traffic stimulation can be accommodatedon the network. These changes in the structure of PERUMTEl:s tarffs should beintegrated with changes to achieve increased revenue targets to be introduced in mid-1990 (para. 5.6). PERUMTEL has furnished to the Bank tariff proposals for 1990.During negotiations assurances were obtained from PERMUTEL that on November 15of each year, commencing November 15, 1990, it will furnish to the Bank for its review

- 39 -

and comments, its proposed structure and level of tariffs, and subsequently taking intoaccount Bank's comments, if any, furnish to the GOI for its consideration any proposedtariff adjustment to meet financial targets and to align the tariff with economic costs.

Benefits

6.5 The institutional support will improve PERUMTEL's performance as aneffective and efficient entity operating on a sound commercial basis. PERUMTEL:sinstitutional development would be pursued in a number of ways, including on-the-joband overseas training and technical assistance to improve managerial, financial andtechnical capabilities of its staff. The investment component would not only accelerateprovision of seivice to meet part of the unmet demand for telecommunications servicesbut also substantially reduce unit costs of investment. Increased availability of telephoneservice and improved quality of service would benefit other sectors throughcommunications-related improvements in government and business efficiency andproductivity. The project would also develop the local consultancy and outside plantsontracting industries through coliaboration with international firms.

Rate of Return

6.6 The rate of return of the project has b an estimated on the basis that, as aresult of the project (a) the decline in traffic per ine is reversed, and (b) maintenancecosts per line are reduced by 2 percent per annum in real terms, beginning in 1992. Itis further assumed that tariffs will be increased in mid-1990 by an average of 11 percentand thereafter will remain constant in nominal terms. (Further details on the estimationof the rate of return are provided in Annex 19).

6.7 Based on these assumptions, the real financial rate of return to PERUMTELis estimated at 12.6 percent. The real economic rate of return based on financial flows,which additionally reflects the value-added tax levied on telephone bills, is estimated at15.5 percent. This is a conservative estimate of the economic rate of return as it does notinclude consumer surplus, known to be high because, for example, of the widespreadwillingness to pay $1,500 or more for telephone service. An analysis was carried out ofthe sensitivity of the economic rate of return to changes in key variables. This indicatesthat a 10 percent decrease in the number of subscribers connected would decrease theERR to 13.9 percent, a 10 percent increase in capital cost would decrease the ERR to13.5 percent and a 10 percent increase in operating costs would decrease the ERR to14.4 percent.

Emvironment and Health

6.8 The proposed project will have no adverse environmental effects. However,given the magnitude of civil works related to the laying of underground cables, there islikely to be some disruption to vehicular traffic and pedestrians. This will be minimizd

- 40 -

by (a) planning and phasing of constuction of works and (b) including in constructioncontracts clauses whicb require contractors to maintain vehicle and pedestrian flows. Noresettlement issues are expected.

Project Risks

6.9 The project has been adequately designed and does not present any significanttechnical risks. The potential risks for the project fall into two categories: (a) delays inprocurement, and (b) shortfaUll in PERUMTEL institutional capacity to implement theproject. These risks have been recognized and actions initiated to minimize their impact.PERUMTEL has already established a nucleus project implementation unit and adequatetechnical assistance is provided under the project to assist PERUMTEL in theimplementation and supervision of construction works. Residual risks will be addressedthrough agreed measures to monitor project implementation with corrective actionsinitiated as necessary.

- 41 -

VII. AGREEMENTS REACHEDAND RECOMMENDATIONS

Agement Reached

7.1 During negotiations the following agreements were reached with GOI andPERUMTEL

I. G0O

(a) by October 31, 1990, will prepare and furnish to the Bank, for its review andcomments, a timetable for establishing a legal framework for private sectorparticipation in the provision of nonbasic telecommunications services and,subsequently, take all necessary action to develop such legal framework(para. 2.2);

(b) by October 31, 1990, will prepare and furnish to the Bank, for its review andcomments, a timetable for the strengthening of the telecommunicationsregulatory capability of the MTPT/DGPT, and subsequently, undertake suchstrengthening (pam 4.8);

(c) will, not later than January 31, 1991, (i) obtaining PERUMTEL financingfrom OECF or other sources on reasonable terms to establish at least sixOutside Plant Maintenance Centers, and (ii) entering into the UNDP GrantAgreement to assist in part financing the technical assistance component tocomplete the project (paras. 4.16, 4.24 (b));

(d) will on-lend part of the proceeds of the Bank loan to PERUMTEL at theBank's standard variable interest rate plus a fee of 5 percent (para. 4.17);and

(e) will take all such actions, including annual reviews and adjustments, if any,of PERUMTEL's tariffs to enable PERUMTEL to comply with II (a) and (b)below.

II. PERUMTEL

(a) will take necessary measures (including tariff adjustments) to ensure thatPERUMTEL achieves a debt service coverage of 1.5 and internal cashgeneration after debt service and mandatory contributions of not less than30 percent of the annual average of the current and next year's investmentin any one year. Operational surpluses from previous years would be includedin the calculation of internally generated funds (para. 5.6);

- 42 -

(b) on November 15 of each year, commencing on November 15, 1990 andthereafter until completion of the project, will furnish to the Bank, for itsreview and comments its proposed tariff revisions, if any, and subsequently,taking into account Bank's comments, furnish to GOI for its consideration,anyproposedtariff adjustment (para 6.4);

(c) will submit to the Bank unaudited and audited corporate and project accountswithin four months and nine months, respectively, of the close of its fiscalyear (para. 3.6);

(d) will adhere to collection procedures adopted in 1988 for governmentreceivables (paras. 3.8 and 3.9);

(e) on or before November 15 of each year, commencing on November 15, 1990,and thereafter untl the completion of the Project, will prepare and furnishto the Bank, for its review and comments, its institutional development plansand investment program for the foDowing fiscal year, and thereafter, takinginto account Bank's comments, if any, carry out such development plans andinvestment program and shall consult the Bank prior to undertaidng anyinvestment costing the equivalent of $50,000,000 or more in any one year notincluded in the Investment Programs funnished to the Bank (para. 4.2);

(f) will submit by October 31, 1990, to the Bank, for its review and comments,the management training program (para. 4.9);

(g) on October 31 of each year, commencing on October 31, 1990 and thereafteruntil the completion of the Project, wil prepare and furnish to the Bank, forits review and comments its proposed technical assistance and counterparttraining program for the forthcoming fiscal year, such program to includeobjectives to be achieved, and, thereafter, taking into account Bank'scomments, if any, carryout such program (para 4.12);

(h) will maintain the Project Implementation Unit headed by a qualified andexperienced officer, and assigned, at all times, with such power, responsibilities,funds, staffing facilities and other resources as shall be required to undertakeits responsibilities in carrying out the project (para. 4.24 (c)).

(i) will continue to use PMC for the purposes agreed with the Bank(para. 4.24 (d));

(j) will, not later than October 31, 1990, appoint construction supervisionconsultants and enter into arrangements satisfactory to the Bank, with atwinning agency for purposes of enhancing its management skills (para. 4.24(e) and (f));

- 43 -

(k) will take all measures to meet the physical and financial performanceindicators agreed at negotiations for 1990 and 1991, and will report to theGovernment and the Bank no later than six months after close of each fiscalyear. Every year, before November 15, the Government and PERUMTELwill furnish to the Bank revised set of performance indicators for 1992 and1993 (para. 4.27);

(1) will take all such action as shall be necessary to carry out such action plan,satisfactory to the Bank, for strengthening PERUMTEL's capabilities in thearea of- (i) accounting and financial management; (ii) operations; (iil) currentidle capacity utilization; (iv) human resource development; and (v) training ofstaff and managers in management techniques and new technology (para.4.28);

(m) will furnish by December 31, 1993 to the Bank for its comments, theconsultant's final report, such report to include recommendations on actionsto be taken by PERUMTEL to further improve its managerial, financial andtechnical capabilities (para. 4.28);

7.2 Conditions of Loan Effectiveness. During negotiations, agreement was reachedon the following conditions of loan effectiveness:

(a) GOI furnishing evidence satisfactory to the Bank that cofinancing from FRG($115 million equivalent) has been secured (para. 4.16); and

(b) signing the subsidiary loan agreement, satisfactory to the Bank, between GOIand PERUMTEL (para. 4.17);

Recommendation

7.3 With the above agreements, the proposed project is suitable for a loan of$350 million to the Republic of Indonesia for a period of 20 years, including a 5-yeargrace period, at the Bank's standard variable interest rate.

- 44 - Page 1

INDONESIA


Basic Sector Staisics

A. Regional Distnibution of Telephone Service(December 31, 1988)

....-. . ,,........::. W ai-... . ... .. i... ~~~~~~~~~~~~~~~~~~~~~.. -. . .. .... . . . .. .....- . . -.. . j.....

- : -:ne : % of- Popla- ofDEja Wat. % of--- : in : tota don er10 :: g worin

Witel :sennce -les C -pop. i lies

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. .: .. ... .. ;..--';

- - 64,233 75-:- 13,355 0.48 26248 II 2 6,673 :3.2Z : 6,66 0.4 1706 6391mf 38y803 468:. : 18-8 0.25: 32S1 :83.79N .: : 33.5j47.2 :: : Z .,40:.: : .- :::. X, - : 3.8i : : ......4....... ....3... 7408V: 82j277: 9.93 3308 02 6307 6.94Vrt 6-,802 r.18 .31 ,4 .. 22 o44......,269 6. . - ..-] . ' 3 8 0 3 . . . . . . . .... ... ..... v. ... v- : . , :# : , .v: .. ....

VII: : 110,766 13W36:: 3256 03 7667 69.23VIU'' ' : .': '. 26289: :. ": 3.1 .9,98 :.".0.26 ' 2,622. .10.0.7 ' .-VX . 325,1778 .3.04 8.44. 0.0 2 10 2.5

. . ~~~~~~~~~~~~~~~~~~~~~~~. . . ... .. ... . ....... . .. . .... .... . . . .... . .. ..... ... .. .... .. .. . . ... .. . ..... . .. .......... 37,547 4.~~~~~~3... 12,288 ~~~ 0,.1 . 21...3. 57.14

XI : 5,979 0.72 1,7s66: 0.D34: 1659 27.75: XII: 7,773 0.94 . .. S : . 22.98

: otal/Aw. 8 100.: .... E * 6

To*Avg.~~ ~~~~~~~~~~~~~~ ~ ~ ~ ~ ~~~~~~~~~~ ...: ..Z:: .7 .. .5.. ........1 ':' :~~~~~~~~~~~~~~~~~~~~~. -. - : -.. . . :',''. '". ', ', '' " :',

Annex IPage 2

B. Historical Data for Eistimg Facilities and Servkes, 1980-9(Deember 31 each year)

(est)1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Local t3elephone servicts.Number of telephones 512,88 584181. 699,301 717,660 788,365 717,990 804,38 89,117 938,212 1,030,000Number of main: lines 369,843 427,185 475,459 503,253 536,102 602356 658,341 759,128 828,812 894,000

Autdmati 31/7:303 375,424 420,518 44,K463 473,736 531,034 580,454 668,949 731,162 803,000S~Maual 5%1,540 51,761 S4,941 58,790 62,366 71,322 77,887 90,179 97,650 91,000

Annual connectionof main lines. 57,342 48,274 27,794 32,849 66,254 55,985 100,787 69,684 65,188

Averag growth inmain lines (% p.a.) 9.73 8.97 8.48 10.81 11.51 10.38

Number of telephonteexchangs 594 600 666 679 683 693 704 714 719 762

Automatic 127 156 163 170 175 182 195. 223 223 276 Lt Manual 457 44 503 509 S08 sit 509 S03 496 486

Insalled capacityof exchange 598,700 628,600 645,400 666,100 697,800 779,378 83,555 905,931 995,143 1,103,000.AutotatiC 524,900. 549,500 555,400 576,800 601,400 674,488 728,000 791,335 873,913 991,000'Manual 73,800 79,100 90,00 98,300 96,400 104,890 110,555 114,596 121,230 112,000

Rihageol (9( 61.7-7 67.96 73.67 75.55 76.83 77.29 78.51 83.80 83.29 81.05~Automatic ()60.83 68.32 75.71 77.06 78.7 78.7 79.73 84.53 83.67 81.03Manual'(9() 68.48 65.44 61.05 65.83 64.70 68.00 70.45 78.69 80.55 81.25.

TeeahandTeeTelegraph offices 623 627 638 639 641 659 665 662 663 664Genfte terminals 381 440 507 544 599 663 77S 8am 819 8"0Telex exchanges 25 27 27 28 29 30 34 36 36 37Installed telex capacity 11,530 12,180 12,180 12,20 12,790 13,690 16,200 17,300 17,300 20,900Telex connections' 5,307 6,740 8,105 9,292. 10,289 I1,28 12,723 13,733 14,622 15.100Average growth of telex

subscriber (96 p.a.) 18.00 23.75 11.93 10.26 9.18 7.55

Annex 1Page 3

C Telephone, Telegaph and Telex Tafic, 1980-89

(est)1980 1981 1982- 1983 1984 1985 1986 1987 1988 1989

TeLeDboneDomestic

pulses (mln) b 3,3S3.4 4,314.9 4,962.4 5S147* 5,365.6 5,504.1 S,898.0 6,781.3 7,581.9 8,607.9Long distance

calls (OO0) 10,865 10,212.6 10,632 10,0382 9,884.3 9,814* 10,726.2 11,904.9 13,068.6 n.ami*utes (O00) 6360.0 64,174.8 67,6215S 53,551.8 57,028.4 57,421.6 65,222.0 72,445.4 74,297.4 83,042.5

International-n. c 000) 1,353.4 2142.0 2,639.7 3,120.1 3,344.6 4,211.1 5,275.6 8,0572 11,062.4 nA.

i minutes (000) 8,864.4 13,025.4 16,707.1 18,793.1 20,900.6 22,9592 26,712.6 34,068.4 43,155.6 n.e

TdelrnhDomesdc

number C000) 6,455.4 6,923.7 7,141.8 7,858.9 8,418.8 9,086.7 10,3772 11,0902 11,668.1 n.e.words (mnli) 190.9 205.4 214.7 240.1 265.7 284.5 321.0 336.8 371.3 400.4

Itenaionaloi number OOO) 231.6 180.7 140.8 104.9 81.3 67.6 60.1 57.4 62.S .*Words Wmln) 6.8 5.7 4.5 3.3 2.5 22 0 1.8 1.8 na.

Domesic*ulses (min) /b 56.9 82.3 271.9 336.4 378.4 4212 435.4 471.0 512.3 576.8

Internadonal* calls '000) 2,190.5 2,830.9 3,284.6 3,656.0 4,295.8 4,221.8 4,298.3 3,850.1 3,3584 na.

minutes (000) 6,946.2 8,037.6 10,132.8 11,013.6 12,628.3 12,643.4 12,732.3 11,052.4 9,922.0 n.a.

a Includes one inteaional telex connection.b2 Represents only subscriber connection and excludes PERUvTELs use

/ Represents manual cal

Annex 1- 47 - Page 4

D. Qualiy of Service, 1985-89

1985 1986 1987 1988

Call completionrate of direct-dialed calls (%)

local 36.9 34.0 34.7 30.9long distance 19.0 22.0 21.0 28.0

' international 52.4 S4.1 52.2

Faults per 100main lines permonth 8.0 9.0 9.0 9.0

Billing complaints 0.13 0.14 - 0.08 0.09(0%b of bills)

E. Distluton of Faults Among Local Netwar Elements in the Major Cties(%)

PlantTelephone Switching Outside Plantoffice plant U/G 0/H Indoor Total

.Bandung 6.5 45.5 23.0 25S.0 100.0Jakarta 5.7 32.9 37.3 24.1 100.0Medan 2.2 10.7 41.5 45.6 .- o0.0Semara2ng -2.3 26.9 36.7 34.1 100.0Surabaya South- 4.2 31.4 37.7 26.7 100.0Surabaya North 7.8 13.9 46.3 32.0 100.0Ujung Pandang 0.4 17.4 42.0 40.2 100.0

U/G =:UndergWd 0/H = Overhead (aerial) Indoor - House wiing

-48- A1�NEX 2

- H

I

b 4 1.

1 0

w :1SRB SSS

Si

S

Sii S iiS

S

5;, IX S

S IS.

S

SSS.

S*S

S

fS

I �II

INDONESIATHIRD TELECOMMUNICATIONS PROJECT

Organzatzonal ChaOt of Ministr of lusm, Posts and lblcommunlcatons (MTPT)

S . - . .~~~~~~~~~~~~~~~~~~~~~ue . . .

w1


Repellta4V Development Achievement 1984-1989Thwusand Lies

2,000

1.500 SW O5P 1Ofl421S

1.13 1,052 U8[ ~~~~~~~~~~~~~ ~~,013 l.f|

1,000

873 922

565 ~ 58

500 445

221 189 23

:hLaL 115 -.38~~~8

84/85 85/86 86/87 87/88 88(89

Sowmi: PERUMfIE ksriWt6220dNote: Each period st ait n Apif I and endS an March. 31

INS-TEL3A-5/12-15-89 - A- n 5Page 1

INDONESIA

THERD TELECOMMUNICATIONS PROJECr

PERUMTEL Staff om , Producivity and Educatio

A. Employees by Category, 1983-88

:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.:....-.. .. .. .. ...--,--.:-.C g y . 198.3 1984 . 198. : .. ............. .

I : : -::: : ' - - ~~~~~~... ...: . - .. . . - :.. ..... M . wmd. ~~~~~~~~~......... .... -. . - .---: ... :-.....-.: ...:

..administraton ......... : 6,193 8326 8,s9630 -9,718. 10,055 10, 013 .;....Engineers . :686 .. : .:.- 663: -796: 879B%. 8.91 :.554 ..

.. T.ach.icianis : 12,020 14,879 :.15,249 ..... 17,585.7..7

Other 3,8327 04,673 74,370 ,58394 ,47

Tot&l Z28.8 35A46 a6.rn S42.893 AZ39Q

B. Ratio of Staf to Woring Line, 1983-88

"M " ~ ~.. .-::... .....- .. :,...... .. :, ~~~~~~~~~~~~~~~~.. .. .. ... . .. .. ... ... .. N..n.. .... ..p

Niu.nber.. of .... . .. .. .... ...Year emplyes lies - -main lines

on . ~ ~ . . 71 ...... .... : . .--6 8 6 ..~~ ~~ . .. . ......

1983 28,988 . : . .503,253;: . .:: .58. .:1984 . 3.5,460. ..5 .... .1985 .--. 36,211. 602,356 6---1986 - . -39,002 68 ..,341 ..... ... .... -. ..-1987 40,893 . 759,128-2. :. ....1988 . ^$2Z,: ,: ....... :.:. , .. . ,,. ,, ... ,,,,, 40,290, 800,000, .

~~~~~~~~~~~~~~~. . -. . . .... -. ... .. ...... .. .. . -.... . --. .

- 52 - Amex SPage 2

C. Employe by Edcalon (Novemb 1988)

Nmiiber ofEdkca6tio employees %

University 808 2.0iAcademy -,322 3.28Secior high school 20,658 51.27Junior high school 10,212 25.35Elementary school 7,290 18.09

,2A! . ' .'. .

-53 -Pal

INDONESIA

THRD TELECOMMUNICATIONS PROJECT

Tecnical As_sisce for PERUMTE:s Human Resou Dae L

A. Technica Assistac-Expers

1. Human resource senior expert, as a chief technical advisor to 4.0work in cooperation with national project staff, responsible foroverall project management and administaon

2. Telecommunications management-personnel senior expert to 2.0work with Pudisldattel to develop managerial taining in per-sonnel management skils.

3. Telecommunications management-technical senior expert to 2.0work with Pudisidattel to develop managerial tainig in tech-nical subject areas.

4. Telecommunications magementcorl senior expert to 2.0work with Pudisldattel to develop manageial trining in tele-communications commercial and financial subject areas.

5. Human resource information systems senior expert to work 2.0with Pudisldattel to develop management information systemsfor human resource manant.

6. Business admstration and managment senior expert to work 1.0wnth Pudisdattel to advise on business administration manage-ment taining at a top level foreign institution.

7. Management development (assesment center methodologies), 0.5senior expert to work with Pudisldattel and Peoel Dir-torate to advise on assessment center development.

8. Human resource development planning senior expert to work 0.25with Pudisilattel to advise on human resource developmentPlnng.

9. Compute-managed instruction senior ewpert to work with Pud- 0.5isklattel to advise on computer-based instruction.

10. Information systems networks--technical senior expert to work 0.5with Pudisklateel to advise on technical aspects of informationsystem networkdng including data communications.

11. Training facilites design expert to work with Pudisidattel to 0.5advise on training facilities design such as training facilitiesrequirements, training laboratories, etc.

12. Telecommunication library science expert to work with Pudis- 0.25kdattel to advise on library materials acquisition.

13. Senior expert or consultants to be determined as needs arise. 1.0

I-Old 16.5

I

I

Annex 6Page 3

B. Regional Tnining Facilities

Tele-Bac ec Lan- Switch- graph Trans- Distri- Outside

Wtel p trics guage ing adata mission bution plant Computer Trade

I X- . - - - . X _

. X - : _ _ , : * - _ _ - -.. _ --....... _

.V X X. .,,,X X ' _ - -

IVI . X . X . . ._VII -- K- -- X-- .-

IX - - a. - - - - - L

. -X X.. . X X X . .

X = Facility available.=-- FacDity not available.

;:!'

- 56 - ANpagelI

INDONESIA


Technical Asitane for PERUMTW:s Human Rource Development

A. Technical Assistance-Eperts

taff_-ya

1. Human resource senior expert, as a chief technical advisor to 4.0work in cooperation with national project staff, responsible foroverall project management and administration.

2. Telecommunications management-personnel senior expert to 2.0work with Pudisklattel to develop managerial training in per-sonnel management skills.

3. Telecommunications management--technical senior expert to 2.0work with Pudisklattel to develop managerial training in tech-nical subject areas.

4. Telecommunications managementcommercial senior expert to 2.0work with Pudisldattel to develop managerial training in tele-communications commercial and financial subject areas.

5. Human resource information systems senior expert to work 2.0with Pudisklattel to develop management information systemsfor human resource managent.

6. Business administration and ent senior expert to work 1.0with Pudisldattel to advise on business administration manage-ment training at a top level foreign institution.

7. Management development (assessment center methodologies), 0.5senior expert to work wnth Pudisklattel and Personnel Direc-torate to advise on assessment center development.

8. Human resource development planning senior expert to work 0.25with Pudisldattel to advise on human resource developmentPlnng.

ANEX7- 57 - Page 1

INDONESIA

THIRD TELECOMMUNICATIONS PROJECI

Terms of Reference for Consutapcy R remet

A. Terms of Reference for Construction Supervision

B. Terms of Reference for Management and Professional Development Program

C. Terms of Reference for Management Development and Insttutonal Support

D. Terms of Reference for Government-PERMUTEL Corporate Planning Process

E. Terms of Reference for a Review of Sector Policies

F. Terms of Reference for Strngthening the Telecommunications Regulatory andAnalytical Capabilities of DGPT

- 58 - ANNEX 7Page 2

A. Term of Refen for rucdon Supevisi

Bad ungmd

1. PERUMTEL, the Indonesian domestic telecommunications company, isexecuting a 1989-93 investment program to moderniize and expand thetelecommunications facilities in Indonesia. The investment program, esimated atUS$2,351 milion, consists of (a) ongoing works, (b) the Third TelecommunicationsProject, and (c) other works. The third project is estimated to cost about US$1,150million equivalent with foreign costs of US$587 million. A World Bank loan of US$350million is profposed in support of the project. A major component of the project is theconstruction of the outside plant network for about 500,000 new telephone lines. Thetotal cost of this component, desigated OUTSIDE PLANT PROJECT (OSP), is estimatedat US$517 million with foreign cost of about US$217 milion to be financed by theproposed Bank loan. The OSP project is divided into four packages. The number oflocations covered by each package and the approximate volume of work in each packageare shown in the table (Annex 7, page 3).

2. Because of the archipelagic nature of the country, distant locations (many onremote islands) and the earlier practice of awarding separate contracts for each individualitem (e.g., supply of cable ducts, cables and materials; laying and jointing of cables andcable ducts; construction of buildings; house wiring of subscribers premises andconnection of subscriber terminal equipment; etc.) compounded by the award of separatecontracts for each individual item and for each of the hundreds of locations to differentcontractors, PERUMTEL has, previously, experienced considerable difficulties insupervising, controlling and cordinating similar but much smaller volumes of outside plantworks. The consequent long delays in completion of such works resulted in largequantities of costly switching and ransmision equipment reaning idle (in spite of largepending demand for new lines) because of nonavailability of associated cable networks.Consequently, there was considerable loss of potental revenue to PERUMTEL, apart frompublic dissatisfaction and loss to the countrys economy, for lack of adequatetelecommunications serices. Because of its past experience, PERUMTEL has decided,with the Bank's support, to reduce drastically the number of separate contracts for theoutside plant for the Third Telecommunications Project. Since the size of the OSP workis complex and much larger than any previous work of PERUMTEL, it needs the servicesof experienced and sophisticated consultants to ensure delivery of quality standards andtimely completion of the project.

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- 60 -Page 4

3. The scope of work of the OSP includes manufacture, delivery to the site,installati, cnstdction and commissioning of the following items.

Scope of Services

4. The consultant will be responsible for the supervision of all constmctionactivities and field services. His responsibilities will include:

(a) supervision and coordination of all work progress by the client, suppliers andcontractors and other concerned agencies with reference to the critical path,so as to notify the respective bodies of delays, with advice on ways toexpedite matters;

(b) establishing and executing all necessary inspection, testng and other qualitycontrol procedures and measures;

Cc) maintainng the necessary records, progress reports and other managementinformation;

(d) maintaining as-built records, contractual variations and change orders andnegotiating settlements for changes;

(e) cerdfying acceptance of invoices and contract services completion reports;

(f) advising PERUMTEL on establishing the necessary facilties and procedures forproject commissioning and acceptance testing, and

(g) carrying out construction management training both in Indonesia and overseasfor PERUMTEL staff.

Period of Supervision

S. Supervision services are required for a period of 40 months commencingSeptember 1990.

Implemettion

6. PERUMTEL will be the implementng agency and its Project Director, TelecomHi Project, will be responsible overal for the implementaton of the project, including thework of the construction supervision consultants for the project.

of Local ConsuPig Firm

7. The foreign consultant is encouraged to promote involvement of localconsultants in carrying out his services in Indonesia and assigning maximum

- 61 - ANN-EX7Page 5

responsibilities to them. Also, he should foster technological exchange between expatriateand local engneers. The involvement of the local consultants is expected to include:

Participation in review of installation drawings prepared by the contractors,

Participation in all major meetings and preparation of reports, and

Supervision and monitoring of progress of installation works and reporting thefindings to PERUMTEL

B. Terms of Refirence for Mwnafement and Professional Deopm t P

Backrud

1. The domestic telecommunication service in Indonesia is the reponsibility of thewholly goverment-owned operating company, PERUMTEL. To meet the balanced macro-economic goals of Indonesia over the upcoming five-year (1989-93) Repelita planningperod, the Government plans more than to double the size of the existing PERUMTELtelecommunications network to meet the large and growing unmet demand, improve thequality of service and improve PERUMTEL's efficiency and productivity. The singlebiggest constraint to achievement of these goals is the lack of necessary numbers andquality of staff at all levels, in particular senior and middle management levels.

2. PERUMTEL management has recognized the urgent need to develop themanagerial skills of its staff to implement and operate projects and systems of growingsize and complexity and has therefore decided to initate a program to strengthenmanagerial and professional staff resources using a combined program of academictraining at a foreign university and a workin3 internship at a distnguished foreignoperating entity.

Objec0ves

3. The objectives of the envisaged training are:

(a) to acquire practical experience to technical management staff in their chosenfields while developig their professional and technical skills, and

(b) to upgrade the capabilities of individual managers through exposure to modemmanagerial techniques.

Method of Deivey

4. The program will be carried over four years commencing September 1990.Three types of training will be provided. First, the project will fund 60 fellowships, eachfor 2 years, to enable middle and senior levelmanagers and technical experts to acquire

-62- ANE 7Page 6

valuable experience in their chosen fields while, pursuing an academic program at themaster's degree level. By altemnating periods of academic study with similar periods ofpaid professional employment in wbich they engage in perforning productive work,participants will develop their professional and technical skills and be better able tointegrate theory with practice effectively. Second, the project wil fund short-termmanagement training for staff at director level and above and other staff expected to bepromoted to this level in 2-3 years (750 staff-months). Third, the project will fund short-term overseas training combined (50 staff-months) with on-the-job training through thetwinning organization for specialist Financial Department staff to build their capabilitiesin modem financial management (100 staff-months).

Participation

5. The selection of appropriate staff will be through PERUMTEL's system of job-performance evaluation, career development and succession planning. Candidates selectedfor master's degree programs will need to satisfy the entrance requirements for theseprograms. A mimum of 12 fellowships will be allocated to staff of the FinanceDepartment to pursue master's degree courses in business administration, with a majorin fnance.

C Tenns of Refeee for Iasttutiona Support

1. introduction

1.1 The Government of Indonesia (GOI) proposes to expand and modernize thetelecommunications facilities in the country as a whole, with focus on seven major cites--Bandung, Denpasar, Jakarta, Medan, Semarang, Surabaya and Ujung Pandang.PERUMTEL will remain responsible for the provision of all public domestictelecommunications facilites in Indonesia. PERUMTEL is a public corporation placedunder the supervision of MTPT. Since the proposed investment program would more thandouble the telecommunications network, institutional strengthening of PERUMTEL iscritical if it is to discharge its expanded responsibilities efficiendy. For this purpose,PERUMTEL intends to enter into a long-term technical and management collaboration(twinning) angent with a prominent telecommunications entty, hereinafter calledthe "pater."

1.2 The proposed twinning armngement will be characterized by a closerinvolvement between the two parties than is generally obtained in a standard client-consultant relationship. it is intended that the twinning partner identify itself fully withthe needs and objectives of PERUMTEL and provide PERUMTEL with continuing back-up services, advice and experienced personnel over a number of years.

-63- ANNEX7Page 7

1.3 The objectives of such twinning would be:

(a) to provide sustained technical, financial and managerial support aimed atstrengthening PERUMTEL to the point where it can independendy operate allaspects of a complex telecommunications system;

(b) to assist in the development and implementation of the procedures andpractices required by a commercial telecommunications entity. Specificobjectives for operational and financial systems include:

(i) establishing appropriate targets for quality of service and callcompletion rates and implementing effective measures to achieve theestablished targets;

(ii) developing technical and administrative techniques to monitor thenetworkls health and pinpoint remedial actons on a priority;

(iii) developing phased programs for practical network quality and serviceperformance upgrading including developing management reporting-summary data which identify problem areas;

(iv) implementng modern maintenance techniques and installationprocedures to enhance network reliability;

(v) developing administrative procedures and maintenance organization torestore faulty equipment more rapidly,

(vi) developing manual, semiautomatic and automatic (as appropriate)network control and network management systems;

(vii) designing market development strategies and systems including marketsuremys to improve customer responsiveness;

(viii) integrating the financial forecasting model developed with assistanceof Finnish consultants into PERUMTEL's corporate planning andbudgeting process;

cix) developing financial forecasting and planning capabilites of W1TEL andcorporate finance staff;

(x) establishing a cash management system including identification andprocurement of necessary software;

(xi) developing a plan for securing external financial reFrcuces includingmobilizng funds from domestic markets through issue of bonds; and

ANNEX 7-64- Page 8

(idi) to provide back-up support on day-to-day technical and financialoperations.

1.4 The mechanisms for achieving these objectives would include:

seconding experienced professionals from the partner organization,

providing back-up servces from the headquarters organization of the partner,

designing and implementing a comprehensve training program, includingtraining coures (as appropriate), on-the-job trang and selective assignmentof PERUMTEL's personnel to the partners organization for first-hand exposureto operations, and

providing spedalist technical personnel and services to undertake discrete tasksas required.

2. Identification of Twing Partner

2.1 PERUMTEL wfll visit two to dtree telecommunications companies that areregarded as potential candidates for a twiming agreement and will select a partner.The criteria for selection will be as follows:

Ca) The twin organization should excel in most of the following areas:Corporate planningFinancial managent and planningPersonnel magementManagement information systemsOperatons and maintenanceMarketing and customer relationsHuman resource development

(b) The organization should be business-oriented.

(c) The cultural environment of the partner should be similar to Indonesia or atleast the experience of the partner should be culturally transferable.

(d) The partner should be willing to participate and share its experience.

(e) The partner should also be willing to second six to seven persons led by asenior team leader. All of these persons could fill posts in PERUMTEL for atleast one to two years.

-65- Page 9

3. Sope of Services

3.1 General On assignment the parmer will promptly plan and render allneessary advice and assistance to PERUMTEL to achieve the objectives set forth in paras.1 and 2 above within the time frame to be specfied in the contract. Such assistance wilinclude but will not be limited to the following:

(a) back-up services from the headquarte orgaization of the partner for systemsdevelopment referred to in para. 1.3 (b);

(b) reviewing PERUMTEL's existing orgnization and submission ofrecommendadions, especially for changes as considered necessary forstrengthening the organization in the functions of (i) traffic engineering, (ii)operations and maintenance, (iii) material management, (iv) financialmanagement, (v) management information systems, and (vi) human resourcedevelopment;

(c) assistng in the implementadon of the procedures and practices referred to insection (a) above, by providing the service of well-qualified and experiencedpersonnel from the partnees own organization. Although the exact numberof such personnel will be detemined in consultation with the PERUMTEL, itis expected that at least five such personnel led by a team leader, who is anadvisor to the President Director, PERUMTEL will be posted at thePERUMT£1's head office to assist and advise PERUMTEL's management (intaffic engineeing, operations and maintenance, materials management,management information systems and human resource development). Anadditional two staff, with spedalized financial expertise, would be assignedto help PERUMTEL improve its financial management.

(d) providig, to the fullest extent possible, on-the-job training to PERUMTELsstaff at all levels, start from the level of subdirectorate downward. Theseven experts referred to in (c) above will have as counterpart the respectivesubdirector for the PERUMTEL organization responsible for his particulardiscipline. The advisors will be responsible both for the successfulinvolvement of the PERUMTEL staff at all levels in the execution of the taskand for building up the capability of PERUMTEL to disdcage efficiently thefunctions of a modern telecommunications company upon completion of theassignment-

3.2 The partner will canry out the assignment using modern techniques of thetelecomnunications industry. It will work in close cooperation with the PERUMTELrepresentative, henceforth called the "Manager," who will render aU assistance to thepartner in carrying out the assignment. The partner will render to the Manager allnecessary advice, including but not necessarily limited to, the items listed in this section,to ensure the successful implementation of the tasks.

ANNEX 7-66- Page 10

3.3 Detailed Assignments. The detailed assignments of the partner have beenspecified in relation to the tasks to be implemented under this assignment. However, inall aspects of his work, the partner will keep in ndnd the dual objectives of (a) successfilachievement of the specific tasks and (b) transferring know-how to the PERUMTEL staff.The partner will, therefore, be expected to organize the work in consultation with thePERUMTEL countepart staff and to fiuly involve the staff in the execution of theirresponsibilities, which will include but may not be limited to the following:

Task 1: TRAFFIC ENGINEERING

Objective: To strengthen the traffic group in PERUMTEL and establsh systems formonitoring the traffic performance of the network and based on the monitored datarecommending actions to improve the perfonrance of the network.

Scope of Work:

1. Review the existing organization for traffic planning and monitoring both inthe headquarters and in the regions and propose changes in staffing,procedures and practices where necessary.

2. Draw up plans for monitoring traffic flow for local, national and internatonaltraffic, including a suitable management information system.

3. Identify training needs for traffic engineering personnel and recommendsuitable courses of study.

4. Prepare and conduct initial courses in traffic engineering for

(a) exchange supervisory staff with emphasis on practical application of trafficmeasurement, monitoring and analysis in maintaining quality of service;

(b) managerial staff to be given a better understanding of the network andthe importance of traffic engineering in its planning, design andoperations.

S. Develop a new traffic forecasting methodology for national and internationalservices.

Task 2: OPERATIONS AND MAINTENANCE

Objctive: To improve the current maintenance and operations organization andprocedures.

ANNEX 7-67- Page 11

Scope of Work:

1. Review the operations and maintenance organization at headquarters andregional levels and propose suitable changes.

2. Review the maintenance and fault clearance practices and procedures forexchange equipment, outside plant, subscriber plant, domestic long distanceand interational transmission facilities and propose necessary changes in lightof new technology.

3. Reuiew existing standards of quality of service and propose realistic standards.

4. Review the equipment record keeping systems and propose suitable changesand ensure full capacity utilization.

S. Review existing test and repair facilities for switching and transmissionequipment and recommend suitable changes to ensure defective equipment isrepaired and activated in the shortest possible time.

Task 3: MATERIALS MANAGEMENT

Objectives: To establish a comprehensive and integrated materials management andcontrol that would meet the specific requirements of PERUMTEL both now and inthe future.

ope of Work:

1. Review practices and procedures for the procurement, storage and distributionof capital project and mntenance materials and propose suitable changes.

2. Review the stores management and personnel structures and propose suitablechanges including redeployment and training of staff as necessary.

3. Review the stock classification and locating policy and propose properclassification of stock and stock location codes, including remote locations.

4. Review the layout and storage of stocks and propose suitable changes to alloweasy access to frequently used items.

5. Review purchasing routines and propose suitable changes including themaintenance of stock specification files, supplier files and establish reorderlevels and quantities.

6. Review storese receipts routines and procedures and propose suitable changesincluding the maintenance of stores' record cards and stores' rejection routines.

AX7-68- Page 12

7. Assist in developing an adequate stock costing system for local purchases andproject purposes.

8. Assist in improving the computer based stock recording and valuation.

9. Review maagement information on stock levels, outstanding orders andreceipts and propose suitable changes as needed.

10. Assist in establishing proper stores issue routines and stock distibution toproject sites for remote locations.

Task 4: FINANCLAL FORECASTING AND PLANNING

Objective: To develop further the PERUMTEL financial model and to use the modelto make medium-term (five years ) and short-term (one year) plans.

Scope of Work:

1. Integrate the PERUMTEL financial model into existng managemtinfrmxaton systems and link to the budgeting and corporate planing cycle.

2. Analyze, using the model, the interactions of financing requirements andinvestment options.

3. Carry out sensitivity analyses to project the effect on financial performance ofalternative policies with respect to unit cost of investments, tariffs, financingsources, rate of program implementaton, etc.

4. Advise managment of recommended altematives and embody them in thefinancial plan.

5. Assist senior management to formulate financial objectives and subsequendyestablish appropriate performance indicators and set targets.

6. Assist functional department and WITEL managers to identify income and costfactors within their control, and how they depend on program implementation,network performance and/or staff productivity.

7. Help implement the financial model at the W1TEL level.

8. Train managers and key finance department staff in how to use the financialmodel for financial forecasting and planning.

ANNEX Z- 69 - Page 13

Task 5: CASH BUDGETING AND CASH MANAGEMENT

Qbjecrve: To develop cash budgetng procedures, specify the cash managementtasks and objectives and provide inutial assistance with cash manaagement inpractice.

Scope of Work:

1. Define cash management tasks and objectives and help establish an internalbank

2. Review PERUMTEL's requirements for cash managent software and, ifnecessary, assist with procurement.

3. Review PERUMTEL's procedures for transfer of cash and recommend anychanges required to improve control and reduce cash in transit.

4. Prepare one year cash budget based on annual budget including monthlyprojections of cash requirements.

5. Prepare two weeldy cash budgets including forecast of dafly cash requirementsand manage daily cash flow (daily liquidity) and cash balance.

6. Advise W1TEL finance staff on cash management and preparation of monthlyand daily forecasts.

7. Collect and provide information on capital markets and advise financialmanagement staff regrding financial decisions such as buying and sellingfinancial assets, short-term lendcng and borrowing, international banldng andfinancial management, and insunrng against currenc ridsks.

8. Carry out day-to-day management of short-term investments with the objectiveof mizing earnings from these sources.

Task 6: MANAGEMENT INFORMATION SYSTEMS AND COMPUTERIZATION

Obective: To develop an integrated management informaton system (MIS) and acomputerization plan to support the decision-makng process at all levels instrategic, managrial and operational functions.

ANNEX Z- 70 - Page 14

Scope of Work:

1. Formulate with PERUM`ILs management the MIS objectives in a manner thatsupports the achievement of the corporate objectives, strategies and plans,particuarly in regard to commercialization.

2. Propose organization for 'MS Steering Committee" involving key managersof principal functions to direct and monitor the planning process for MIS.

3. Devise strategies and policies to govern resource deployment in thedevelopment of an integrated and effective MIS. Specifically, propose policiesregarding such issues as: MIS structure and evolution (centralization versusdecentralization), acquisition of hardware equipment, software development(intemal versus extenal), selection of MIS applications (return on investmentand/or strategic importance), personnel training and motivation, etc.

4. Propose an MIS organization at a high managerial level to be responsible forpanning, system development, design and coordination of information systemsand computer application. Determine budget and manpower requirements.

5. Perform a system analysis to define the information needs and reportingrequirements at various operational and managerial levels within PERUMTEL.

6. Organize the information needs into a set of output reports. The reportscontent, format and detail should be determined according to the functionalneeds of each management position.

7. Specify the input data elements, processing and flows and integrate into thedesign of a management information reporting system.

8. Define the functional and technical specifications for the development of adata base to support management planning and control.

9. Identify the main functional applications for computenzation. Select prioritiesaccording to strategic relevance to PERUMTEL?s objectives and taldng intoconsideration PERUMTE`Is resource constraints.

10. Design a computer-based information system for each functional application.Define hardware and software specifications and determine organization,budget and manpower requirements.

i

ANNEX - 71 - Page 15

12. Integrate all subsystems into a master MIS plan. Formulate short-term andlogterm acton plans with particur emphasis on personnel deployment and

Talk 7: HUMAN RESOURCE PLANNING AND DEVELOPMENT

Obective: To develop moder personnel management systems and a humanresource development program consistent with PERUMTEl's commercial orientation,decentralizaton and investment plans.

Scope of Work:

1. Review PERUMTEL's existing human resource availability, skill mix, trainingand staff productivity, and identify deficiencies.

2. Assess PERUMTEL's future human resource needs requirements for (a)implementation of its investment program up to 1995, (b) maintenance andoperation of existing and new facilities to be provided, and (c) reorganizationand commercialization.

3. Formulate a human resource development program, including human resourcestrategies and policies for meeting PERUM'ELs human resource requirementsup to 1995.

4. Formulate recruitment strategy and an action plan so that the requiredmanagerial and technical human resources of appropriate skills in differentdisciplines and at all levels are available in time to execute PERUMTEL'sOngoing and future investment programs.

5. Formulate action plan for training of edsting and new technical,administrative and manageral staff for all functional disciplines and developappropriate training programs.

6. Detennine the organizational, functional and other resource requirements forimplementing the above human resource development and training programs.

7. Develop systems for (a) assessing future human resource needs to meetchanges in demand, technology and corporate strategies and objectives, (b)planning human resource development programs to meet changing needs, andCc) measuring and administenng staff productvity.

8. Assess to what extent PERUMTEL's taining centers, the Govemmenfs instituteof public administration, and other public and private training institutions canassist in the implementaton of the proposed human resource development

ANNEX - 72 - Page 16

programs, and propose steps for coordination between PERUMEL and thoseinstitutions for the human resource development.

3.4 Finncig. The Indonesian Government has requested a loan from the WorldBank to finance part of PERUMTEL's Repelita V (1989-93) investment program. Proceedsfrom the loan will be used to finance the foreign cost of this agreement. PERUMTEL willfinance the salaries and social charges of the PERUMTEL's staff, normally in localcurrency. Foreign expenditure, namely travel costs, per diem in the partner country ofthe PERUMTEL staff, the partner charges for the coordination and expenses, and thepartner staff, salary, travel cost and per diem in the Indonesia will be financed from theproceeds of the loan.

4. Asshnce to be Provided by PERUMTEL

4.1 PERUMTEL, through the Manager, will provide the following services andfacilities to the partner.

(a) adminisative assistance in obtaining visa, custom clearances and any otheradministrative permits required by the partner in the performance of hisassignment;

(b) eisting data, maps, surveys and studies;

(c) office space, secretarial and other office staff in Indonesia;

(d) transport as required within Indonesia;

(e) liaison with government and local bodies; and

(f) any other assistance not readily available that the host may reasonablyrequest.

5. Project Schedule

5.1 It is expected that at least seven staff from the partner will be seconded toPERUMTEL's head office for most of the project period. However, this core team willhave to be supported by a number of support-level staff during the implementaton ofthese tasks. Moreover, provision should be made for short-term specialized assignmentsto deal with such matters as design of MIS systems, preparation of standard manuals anddocumentaton and development of a plan for issue of bonds. The partner wfll providea work program detailing the dming of each assignment to be discussed and agreed withPERUMTEL The proposed work program should provide for a phased reduction in thesize of the partnees team assembled in Indonesia in line with the objectives of buildingself-sufficiency of PERUMTEL in all major operational areas.

- 73 -Page 17

D. Terms of Reference for the Govenent-PERUmEL Corate PlaMning Process

Introduction

The development and approval process for PERUMTEW's corporate plan shouldinvolve a number of periodic interactions both between the Govenmment and PERUMTELand within the Govenument. The plan should serve, in part, as a perfonce contractwith the government whereby PERUMTELs management would commit itself to theachievement of performance targets with respect to services, prices, costs, financial resultsand other matters, and the Government would agree to the associated investments,financing and other actions necessary to achieve the targets. The finaized plan shouldbe approved by the minister responsible for telecommunications. Significant progress hasalready been made in this area. Early in 1989, PERUMTEL submitted its corporate planto MTPT. Furthermore, in work completed in June 1989, consultants financed under theCanadian Trust Fund outlined both the contents of a summary corporate plan suitable forgovernment use and the key steps involved in the Govemment-PERUMTEL planningprocess.

Scone of Work

The objectives of the technical assistance are to help ti) achieve a consensuson a specific plannig process, closely linked to government approval of PERUMTEL'sbudget, and a commitment to put it into effect (possibly by amending ministry budgetregulations that apply to PERUMTEL), (ii) ensure that MTPT provides appropnate inputinto the process at different times in the annual plamning cycle and (iii) ensure that keyministry staff have a full underanding of the process and the results to be expected fromit. This component of technical assistance will involve an external consultant workingwith ministry staff for three separate periods over 12-14 months for a total ofapproximately 16 weeks.

Tasks to be undertaken by the consultant to achieve these objectives are:

(a) Meet with MTPT, Ministry of Finance, BAPPENAS, PERUMTEL and othergovernment officials in order to develop a sustainable consensus on a specificgovernment administrative process for the development and approval ofPERUMTEIs corporate plan

(b) Prepare appropriate briefing material for senior government ofricials on therecommended and the approved governmental administrative process for thedevelopment and approval of PERUMTEL's corporate plan.

(c) Document the corporate plannig development and approval process to aprofessional standard using readily comprehendible language and graphicformat. Provide 12 copies of such docentation in English and supervise theproduction of the corresponding documentation in the Indonesian language.

-74 - ANNEX 7Page 18

(d) In close cotaton with MTPT management, identify officials responsiblefor acdons in the administrative process referred to above.

(e) Provide over a 12-14 month period instruction and assistance to MTPToffcials involved in the administrtive process sufficient for them to fulycomprehend the process and become competent and confident in workingwith it.

(f) Monitor implementation of the administrative process during a complete plandevelopment, approval and feedback cycle.

(g) Advise MTPT on the amendment of budget or other regulations that apply toPERUMTEL, to the extent that such amendments would be desirable tocomplement, strengthen or implement the new, approved corporate planningdevelopment and approval process.

(h) Provide a detailed reporting letter at the end of each mission to Indonesiaidendfying activities and achievements with respect to these terms ofreference, issues or problems encountered, responses to such issues andproblems, and a work plan for the next m;ssion(s). The final reporting lettershall additionally provide recommendatons on further measures to improve,implement or consolidate the administrative process.

Irminng. The work to establish an effective Government-PERUMTELcorporate plan development and approval process will be complemented by short periodsof overseas training for the ministzs professional staff involving meetings withgovernment officials performing comparable fimctions in other countries. Training willbe provided for 2 staff members a year for 4 weeks for each person in each of 2 years,for a total of 16 staff weeks. The consultant shall design, propose, document in detailand facilitate a program for this training of those ministry professional staff who will beinvolved in the new corporate plan development and approval process.

E. Terms of Reference for a Review of Sector Policies

Introduction

As a result of the evolution of the telecommunications sector in Indonesia,a number of policy issues need to be reviewed and decisions taken. MTPT will need aqualified extemal consultant working with its staff on an ongoing basis both in order toachieve substantive results in the analysis of priority telecommunications issues and toprovide hands-on train in analyzing issues.

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Sco of Work

Extera consultants working with ministry staff for approximately two staff-years will address, document to a professional standard and, to the extent possible,resolve selected prionty items from the following list of policy issues:

- compensation of PERUMTEL for the provision of uneconomic services at therequest of the government;

- a divdend policy for a PT PERUMTEL;

- private-sector participation in the provision of cellular telephone service anddevelopment of a process to select t*e best corporate candidates for suchparticipation;

- interconnection aangents with cellular telephone systems and providersof nobasic services;

* an assessment of alternatives to PERUMTEL's current type of "build-operate-aunsfer" or revenue-sharing agreements whereby PERUMTEL's partners handover their investments to PERUMTEL after ten years. The ministry shouldassess the benefits of agreements that give pnivate investors -. longer-terminterest in investing in and developing the sector,

- the establishmt of a consensus within the Government of the benefit ofperiodic reviews and adjustments to the tariffs of PERUMTEL and Indosat, atleast every two years, and development of criteria to assess future tariffadjustment proposals;

- improvement of PERUMTELs tariffs to specify the conditions of service withrespect to resale of leased circuits for the provision of nonbasic services;

- the level and structure of PT IndoSat's tariffs;

- the level and structure of tariffs for cellular telephone service;

- competitive provision of terminal equipment for cellulr telephone service;

- competitive provision of maintenance of customer premises equipment;

- the criteria and conditions that will apply to licenses for the provision ofnonbasic services;

-76 - ADM= 7Page 20

a review of radio licensing policy and administrative procedures to ensure thateconomic activities are not hindered by an inappropriate failure to issue radiolicenses;

thc' development and assessment of approaches, such as subscnber bonds, toincrease private sector investment in the sector;

extension of the telecommunications service center concept into rural areas;and

technical evolution of the network including ISDN.

F. Terns of Reference for Strengthening the Telecommunications Regulatory andAnalytical Capabilities of DGPT

introduction

As PERUMTEL takes on a more commercial orientation and as competition inthe provision of nonbasic services develops, the Government of Indonesia wil need toensure adequate regulation of the telecommunications stor, in particular to ensure thatPERUMTEL does not abuse the market power it derives from its control of networkfacilities. The Government should monitor and regulate the availability of service, thequality of service, the structure and level of tariffs, access to leased lines for the provisionof nonbasic services, interconnection arangents and revenue sharing or settlementarrangeents.

Scope of Work

This proposed technical assistance component consists of two elements (i)Review of the role and organization of DGPT and (ii) training for DGPT professionalstaff.

Task 1: Review the Role and Organizaton of DGPT

Objective: To undertake a review of the role and organization of DGPT, particularly withrespect to its role in analyzing telecommunications sector regulatory issues for theminister and propose a modified organizaton and necessary staffing suitable for theevolving needs of the Indonesian telecommunications sector.

Main elements

(a) Review existng functions of DGPT;

(b) RevAew the need for both existing and new functicns to be undertaken by DGPT;

77 - ~~~~ANNEX 7-77-Page 21

(c) In light of the assessment of needs for both eidstng and new functions, and in closecomsultation with DGPT and Ministry management, propose a modified DGPTorganization, prepare job descriptions and identify skills required;

(d) Detemine staffing quirements and design a training program consistent with aplan to reduce the dependence of DGPT on PERUMTEL staff;

(e) Document analysis and all findings to a professiona standard.

This task is expected to require up to 3 staff-months of work.,

Task 2: Training for DGPT Professional Staff

Objective: To iuplement the training program designed under Task 1, item (d).

Main element

Subject to the training program developed in Task 1 (d) above, the training is expectedto involve both classroom training and meetings with regulatory staff of overseasadministrations. Training of 2 professional staff a year for 4 weeks for each person ineach of 2 years, for a total of 16 staff weeks of training, is envisaged.

ANNEX 8Page 1

INDONESIA


Repelita V Vknent Pogm(US$ '000)

1989 1990 1991 199 _ 99 TotalPon Loal Feign o Fori LOc ForeP L Foreign Local Foreign Local TotW

1. Onging WOb

Switching 0 63,823 0 0 0 0 0 0 0 .0 0 60.400 60,400Telex 4,330 317 7,400 SOO 8,900 600 0 0 0 0 20.400 1.4M0 21,800Outside plant 0 25,677 0 24,200 0 0 0 0 0 0 0 48,s50 48,500Transmission

Terrestrial 114,787 23,035 108,700 21,800 54,400 11,000 0 0 0 0 271,800 54,600 326,400Satellite 29,885 10,778 28,200 10,200 28,200 10,200 28,200 10,200 28,200 10,100 141,100 50,900 192,000

Supporting facility 0 1,902 0 1,800 0 600 0 0 0 0 0 4,400 4,400Coin telephone 0 0 4,100 1,500 7,000 3,700 9,600 2,200 0 0 20,700 7,400 28,100

Subtotal Onoint 149,002 125,532 148,400 60,000 98,500 26,300 37,800 12,400 28,200 10,100 454,000 227,600 681,600

ContingenciesPhysical 0 0 7,420 3,000 4,925 1,315 1,890 620 1,410 505 22,700 11,380 34,080Price 0 0 7,187 2,928 10,710 2,929 5,954 2,070 5,878 2,275 30,576 10,995 41,5n

Tota .kumi 4,0 2,3 63076,2 1,3 3-S4 -Q 5003 80S0,7 4,7 .S

ANNEX 8Page 2

l9Bg 99 1990121 1992 LI To , talForeign ca Foreipn P ocal Foreig Local Foreign Local Peign Loed Foreign Local Total

IL Telem M wod.

Sltthing 20,698 35,081 32,100 56,O00 30,000 15,500 34,000 16,S00 30,000 15,500 143,700 136,700 280,400OPS project 0 31,489 0 S0,400 83,200 117,600 89,200 69,5Q0 44,600 33,200 217,000 300,S00 517,500Computerised networkadminisrtion sytem 0 0 5,700 800 11,600 1,50 8800 1,100 2,800 400 28,9W0 3,M0 32,7C0

OSP Maintenance Cener 0 0 800 500 8,900 4,500 10,900 4,500 5,500 1,100 26,100 10,600 36,700Capacity utIizaton 0 0 0 0 3,500 3,500 3,500 3,500 3,000 3,000 10,000 10,000 20,000Technica assbtance

Englneehng services 0 0 4,966 2,700 7,034 3,527 7,034 3,527 4,966 2,645 24,000 12,400 36,400Cousuitany, twinning 0 0 621 131 879 171 879 171 621 128 3.000 600 3,600

Trining -EquApment 0 0 0 0 2,571 3,636 1,714 2,182 1,714 2,182 6,000 8,000 14,000Oserea felowships 0 0 0 0 1,4 909 1,143 545 1,143 545 4,O00 2,O00 6000Ezpem 0 0 0 0 857 455 571 273 571 273 a20 1,000 3,000

Subtoa Tel-ccnm II 20,698 66,570 46,086 110,531 150,257 1512m98 155,742 1011,79 93,015 58,973 464,700 485,600 90,j00

ContngendePtysiol 0 0 2,304 5,527 7,S13 7,565 7,787 S,090 4,651 2,949 23,23S 24,280 47,251SPrke 0 0 2,232 S394 16,338 16,851 24,532 16,994 19,369 13,266 62,600 52,84S 115,552

JooWhXxnM -M 20,698 66,S70 so,6a3 121,4S2 174,10? 175,713 18k061 123,882 117,064 75s,2 S50,543 562A825 1,1132367

ANNEX 8Page 3

29L9 199 1991 im1" oaForeigp Local Foreign Local Foreign Local Foreign Local Foreign Loca Foreign LOca TOWa

Ml. Odher Woikb

Switching 0 0 0 0 0 40,000 14,000 63,500 0 95,000 14,000 198,500 212,500Telex 0 0 0 0 3,000 100 2,600 300 400 100 6,000 500 6,50Outside plant 0 0 05,800 0 30,500 0 30500 0 30,500 0 97,3C 97,30Transmission

Teneulal 0 0 0 0 0 0 0 0 25,000 3,600 25,000 3,600 28,600Satellite 0 0 0 0 0 0 0 0 0 0 0 0 0

Supportdng facilitie 0 0 0 4,800 0 4,800 Q 4,800 0 4,600 0 19.000 19,000Subscriber connection 0 3,910 0 5,000 0 6,200 0 8,100 0 6,300 0 29,30 29,30

Subtotal Other 0 3,910 0 15,600 3,000 81,600 16,600 107,20 25,400 140,100 45,000 348,200 393,200

CondneniePhysical 0 0 0 780 150 4,060 830 5,360 1,270 7,005 2,250 17,410 19,660price 0 0 0 761 326 9,068 2,615 17,896 5,29 31,563 8,235 59,333 67,56

I~~L~~ Q I 12 21 2451W 4Z 2Z! 291.74 31-0253196 Lf 55.48 1=74

AN-NEX2-81 - Page 1

NDONESIA


Proect

The principal items to be instaLd during the Project period are given below.Items to be financed from the Bank loan are so indicated.

Source of FinancingForeign Local

PHYSICAL COMPONENTS

1. Local tchi. 630,000 line units of telephone switching PRG PERUMTELwill be installed in about 250 locations across the country undera separate contract with PT Inti, the local switching manufactur-ng company.

2. Outside Plant Failtie

(a) Local Cable Network This component includes expansionof local cable network in about 140 locations, representingabout 1,050,000 pairs of primary cables terminated on MDF.It consists of the following:

(i) Works related to 530,000 primary cable pairs and IBADrelocated secondary to be awarded throughinternational competitive bidding.

(ii) Works elated to 380,000 prinrry cable pairs and PERUMTELsecandary cable already awarded through locnicompetitive bidding.

(iii) About 475,00 subscriber connections will be done IBRDunder the project.

(b) T n. Provision of interexchange links in themutidexchange areas in the seven cities. It indudes thefollowing:

ANNEX 2

- 82 - Page 2

Source of FinancingForeign Local

(i) 15 PCM systems (2 megabits/second) on junction IBRDcables

(ii) 26 optical fiber cable systems operating at 34- IBRD PERUMTEL140 megabits/second

IBRD PERUMTEL(iii) 2 digital microwave radio links operating in the 8- or

17-GHz bands.

(c) If*astucure. Construction or modification of PERUMTELexisting buildings complete with aircondiong,electrical power and standby generators.

3. Computer N Administatio _Wlm Establish IBRD PERUMTELa computer-based network management system to enable PERUM-TEL to control its operations, improve its perfonnance and use itsresources effecvly. After successful implementation of the pilotproject in one of the five service areas in Jakarta, it will beextended to the rest of Jakarta and the other six major cities.

4. Outside Plant Maintenance Center (OPMC). Based on the Japan PERUMTELpilot project established in Bandung, establish at least six OPMCs,three in Jakarta and one each in Medan, Surabaya and Semarang.

S. Caacity Utilization. Bring into fill use all eisting IBRD PERUMTELtelecommunications facilities by activating the idle capacitythrough provision of balancing equipment as appropriate andrehabilitating defective network

ANNEX 2-83 - Page 3

ECHN,ICAL ASSISTANCESource of

Staff-monthsLocal Foreign Total

1. Sneering. Imnilementation andSupennision

(a) Engineernn and Implementation to 1,500 620 2,120 IBRDensure efficient implemntation of theproject.

(b) Superision of OSP Construction to 1,600 830 2,430 IBRDensure OSP construction works are exe-cuted according to engineering specifi-cations and on time.

2. Tr .

(a) Mnit of Tourism. Posts and Tele-communications (MTPT)

(i) MTPT (Secretary-enerars office)- 4 . 4 IBRD-to train Ministry staff in Gov-ernment to public enterprise cor-poration plan development andapproval process.

(ii) DGPT-to train DGPT staff in 4 4 IBRDtelecommunications regulatorymethodologies and issues

-84- ANNEX 9Page 4

Source ofStaff-mondils Enncing

Local Foreign Total

(b) PERUMTEL

0i) M m ent Stff. 1,680 1,680 IBRDand technical tin will beprovided for about 60 of PER-UMTEI:s staff to MBA/MSc levelsusing a combined program of aca-demic training at a foreign uni-versity and worldng internship inselected fields at a distngushedtelecommunications entity.

(ii) Trainig Center Staff. Training 49 49 UNDPfor course developers andinstructors.

Cc) FM= Assistance to Achieveobjectives has been tailored to theabsorptive capacity of both MTPT andPERUMTEL

Ci) fW f. Experts to assist in cor- 43 43 IBRDporate planng development,analysis and development of sec-tor policies and organizationreview.

-85 - ANPage 5

Source ofStaff-months Fina

Local Foreign Total(is) PERUMTL Assistance provided 150 150 IBRD

will enable PERUMTEL to obtainthe services of a nwuber of pro-fessional personnel to serve inselected parallel positions inPERUMTEL; as well as theservices of specialized technicalpersonnel on short-term assign-ments as required. The expertswill provide assistance in theareas of (1) planning, (2) oper-ations and maintenance,(3) material management,(4) MIS, (S) capacity utilization,(6) cash management, (7) finan-cial forecasting, and (8) sub-sciber bonds.

(iii) Eperts wil be provided to 24 198 222 UNDPstrengthen the personnel andtraining departments.

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- 98 -

'01 .....

AiNNEX 1R1- 87 - Page 1

INDONESIA

THIRD TELECO MMM CATIONS PROJECT

Packaging of Outside Plant Component

Backgoun

1. Because of the archipelagic nature of the country, distant locations (many onremote islands) and the earlier practice of awarding separate contracts for each individualitem (e.g., supply of cable ducts, cables and materials; laying and jointing of cables andcable ducts; construction of buildings; house wiring of subscribere premises andconnection of subscriber terminal equipment; etc.) compounded by award of separatecontracts for each individual item and for each of the hundreds of locations to differentcontractors, PERUMTEL, in the past, had experienced considerable difficulties insuipervng, controlling and cordinating similar but much smaller volumes of outside plantworks. The consequent long delays in completion of such works resulted in largequantities of costly switching and transmision esuipment remaining idle (in spite of largepending demand for new lines) because of nonavailability of associated cable networks.Consequently, there was considerable loss of potential revenue to PERUMTEL, apart frompublic distisfaction and loss to the countys economy for lack of adequatetelecommunications services. Because of its past experience, PERUMTEL decided with theBankes support to reduce drastically the number of separate contracts for the outside plantfor the Third Telecommunications Project.

Pacaging of Wors

2. The proposed works under the OSP (para. 1) are dispersed over 100 locations,many on small, remote islands. Because of this, PERUMTEL and the Bank consideredthat the small volume of work m remote locations would not attract good, qualifiedcontractors unless these works were combined with concentrated works in more attractivelocations, such as large urban areas of Jakarta and Surabaya. Accordingly, the worksunder OSP, other than works in Jakarta and Surabaya, were first divided into fourapproximately equal zones and one each of the tihee Jakarta zones was included in threeof the four packages; Surabaya as a whole was included in the fourth package. Thenumber of locations covered by each package and the approximate volume of work ineach package are shown in Table 1.

r-4 C44 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~4 -

. . . . . . .....~

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Is~~


Implementation Schedule

1990 1991 1992 1993 1994

2OSPFwlel ~~ ~~~~~ 2 _ 2 3 4 1 2 Ll 4 1 2 3 4 12341.8f*__

2.OSr4PP od_*Tendwr,antract*h~eWVnw*tatonu-----

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4. OSP Maiktenar_e CenterOTeniderr,ontracteProcuxementOP_ _ _ _

5. Capacily Udaltion

0 Proureenft

6. 1 _dinca Assitanc(a) Conudlt Servies

0Contact

(b) Twnning0 Contract

7. TraInng(a) Eq_-_m_t

*bid_ _ _n_ _c_

(b) Oversee FeUowsii*

*Convad__

-EkS_,-, l l - - - - - - - - - - -*b~iIemotiI_ _ _ __ _ _ _ _m _

ANE 3- 90 - Page I

INDONESIA


J nd&ator

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- 91- Page 1

INDONESIA


Ac-don Plan

Objective Plan of Implementation Target or indicator

I. Financial Manafement

1. Upgrade skills of Nominate department wrain- Implement agreed programFinance Department ing coordinator, review con- from FY90 onward. Progressstaff. sultants' recommendations to be monitored according to

and agree domestic and agreed reporting requirementsoveseas aining program. throughout the project period.

2. Develop financi fore- Integrate PERUMTEL finan- Expert to be contracted bycaing and planning. cial model into corporate December 1990. Model to be

planning & budgeting cycle. integrated into PERUMTELImplement financial model at planning by June 1990 &WMTEL leveL implemented at WITEL level

by December 1991.

3. Improve cash Reviewcash management pro- Expert to be contracted bymanagement. cedure and recommend revis- December 1990. Revised cash

ions and required software if management procedures to beappropriate. implemented by June 1991.

Progress to be monitored inaccordance with aSreedreporting requirement.

4. Diversify financial Develop plan for issue of Study TOR to be submittedsources. bonds in domestic market. for Bank review and com-

ments by December 1990.Study, in accordance withagreed TOR to be completedby June 1992 andimplementation to proceedthereafter.

5. Improveaccountingand (a) Implement CAGL Systemstobeimplementedinfinancial management accounting system and 4 additional WITELs by Juneinformation systems. SIMAK information sys- 1991 and in remaining

tems in remaining WITEL by June 1992.wrTsE.

- 92 - ANNEX 14

Page 2

Gojective Plan of Implementation Target or Indicator

(b) Implement PC-based Implementation of fit phaseaccounting and MIS by consultants to besystems at telephone completed by June 1991;offices. second phase by PERUMTEL

in June 1992.

6. Improve internal con- (a) prepare bills for internal Implement January 1991.trol of expenditures. PERUMTEL telephones

and recognize revenueand expenditure inincome statement.

(b) Provide WITELs and Implement in line withDepartnents with quar- implementation of CAGL andterly budget variance SIMAK accounting systems &reports. MIS program.

7. Reduce levels of Government telephones to be Government receivable to begovemment receivables. disconnected for nonpayment reduced by 30 percent of total

in accordance with agreed receivables by end-1991.policies.

II. Proiect Im2plementation

Further develop planning, (a) PMC to submit recom- PMC to submit report byimplementation, procurement mendauon needed for March 31, 1990.and supervision capabilities. further strengthening of

PERUMlEl:s Directorateof Development

(b) PERUMTEL and Bank to By May 30, 1990, PERUMTELreview the recom- to furnish to the Bank formendations and after comments a plan of action foragreement on the appro- fiuther strengthening of itspriateness of the planning, implementation,recommendations initi- procurement and supervisionate actions to imple- capabilities.ment those which wereacceptable.

111. Institutional Strenathening

1. Design and implement Study to assets needs, usig Study according to agreeda management inforna- technical assistance, develop TOR to be completed by Junetion systm and implementation plan of 30, 1990, & implementation

action. of the pilot project to proceedthereafter.

_ 93 _ ~~~ANNEX 1493-Page 3

Objective Plan of Implementation Target or Indicator

2. Further development Study methods using tech- Study according to TOR to betechnical operations nical assistance, develop and completed by January 31,(traffic monitoring and implement plan of action. 1991, and implementation toengineering) proceed thereafter monitored

according to agreed reportingrequirements.

IV. Human Resources Deveopment and Traininm

1. Develop a long-term Study to assess existing staff Study according to agreedhuman resource devel- resources in relation to future TOR to be completed byopment plan. skill mix requirements June 30, 1991, & initiated

including training, career action to implement agreeddevelopment and recom- recruitmentmendations June 30, 1991-December 31, 1993.

2. Increase availability of Prepare training plan. Skflls Upgrade training facilities bycompetent, trained needed in (a) digital technol- December 31, 1990. Pro-expert staff. ogy and (b) outside plant gress to be monitored through

maintenance. agreed reportingrequirements.

3. Train senior- and (a) Decide on the field and Training to commence begin-middle-level m' nagers numbers to be trained in ning September 1990.in organization and each field. Progress to be monitoredmanagement of a com- through agreed reportingmercially oriented requirements.telecommunicationsfacility.

(b) Arrange languagetraining.

(c) Execute plan forselection and trainng.

V. Onerational Performance

Further develop efficiency of (a) Set network perform- Agreed indicators given inoperation, quality of services ance targets, monitor attachment.and responsiveness to users. and review performance

compared to targets &determine correctivemeasures whereappropriate.

(b) Decentralize demand Decentralization to beginmanagement and local January 1991.cable planning to theregions.

- 94 - ANNEX 14Page 4

Objective Plan of Implementation Target or Indicator

(c) Assess idle capacity Study according to agreedusing technical TOR to be completed byassistance. June 30, 1990, and imple-

mentation to be undertakenpromptly thereafter. Progressto be monitored according toagreed reportingrequirements.

-95 -Page I

IDONESIA


PERUMEL'S Historl ame stemet(Current Rp bin, FYs ending December 31)

1"1 1982 1983 1984 198S 1986 1987 1988

Oneradnt RvenuesTelephone 203.47 285.80 354.86 379.51 463.27 52723 623.21 690.56Tdlex 24.47 .2021 2925 34.61. 44.69 47.04 53.40 56.20Telegraph 6.09 5.21 5,9 6.55 8o.3 &81 9.85 11,19Other 14.39 132S 1866 23.38. 26.38 31.11 37.55 -41.49

ToW' ee 244 4 408.72 444.05.5 614.19 222 799.43

., Per"onnAl 53.41 70.89 79.26 105.31 133.17 152.02 166.61 181.19Material & tansort 31.08 40.34 51.27 73.31 91.S 113.22 107.63 108.95Repair & maintenance 40.3S 43.06 76.38 89.31 73.43 84.6 87.33 61.33Depredon &amaidznan 72.51 104.67 125.93 12330 130.42 142.32 324.48 286.43

Oer 2.16 4.74 1.17 2.21 1.57 3.02 5.34 3.07

Total _enm 1 .1 9I.7 M&3 393.44 MM0 495.23 691.39

Operating income 48.91 60.77 74.71 50.61 112.28 21&96 32.63 15846

iInQrt & other 17.91 20.52 30.9S 30.47 25.47 34.39 31.01 25.63Nonopering Income 5.38 11.30 1828 50.94 74.15 103.40 71.40 100.75Extraodiny profior loss 31.12 -51.47

Pretx income 36.3 5155 62.04 71.08 160.96 187.97 104.13 182.11Income ta 16.37 23.14 26.12 1.27 40.13 53.79 20.66 70.38

NtiXm :20.01 28.41 35.92 MM.8 1283 134.183.7li3

GOI DevdopmentFund (S55%): 11.01 15.63 19.76 38.40. 66.46 73.80 45.91 61}45gems to empoyees (10%) 2.00 2.84 3.59 6.98 12.08 13.42 8.35 11.17.Peiion. pan (8%) 1.60 .227 2.7 5.58 9.67 10.73 6.68 894Socia objetie (2%A) 0.40 0.57 072 1.40 2.42' 2.68 1.67 2.23Retdned-eainip (23%) S.00 7.10 &98 17.45 30.21 3355 20.87 27.93

0peutlngr.d%) 80 .f.81 82 89 ...7.9 h1 95 -:fate .of rm on:book alueai (§ ) 1.1 11.5 14.1 10.0 24.5 26.9 0.04 0.18

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- 97- _NE 15* ~~Page 3

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ANNgX16

- 100- Page 3

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- 102 X-INU 17Page 2

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104 - ~~~~~~~~Page 4

1989 190419 92 93 19

BALANcE SH~~~~~~~~~~~~~~T/~~~~~UNDS PLOW~... ... ...... .... .. .. .. ..h. .. . .. . .. .. .. .. .

* (%~ashopraiug4-invaL) 10.10.0.1..10.1Mcounts receivable (days~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. ...... .... .....

tevenue) 10 10 .i:. 10~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . ... ... ..... ........

'Accounts, paydable'(%dofwJ.4 cashopcost) 10 10.v:.10.:..::s:.:.::10':..:~~~~~~~~~~~.::. .:.... .:I:..... 1.0.. ....

.. .. . . .. .. .. . .. . .. . . .. .. .. . .. . .. .. .. . .. . .+cash~~~~~~~~~~~~~~~~pcosi~~~~~~~~~~~~~~~ 15 15 15~~~~~~~~~~~~~~~~~~~~~ ... .... ..... 1.....................

debt (%) . .. 14 14 14 14 14 14~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~....... ..

Inventozywriteoff(%)~ ~~~ w1 ....:.5. .:::. :Y...... ..... ....... .........

.. .. . .d ..se ................. ....y..... . ...... ..d... .. .. . ... .. .......... ... .WiP COP) 753.44 980.52 1,20445 1,577.53 175249 1,785.86~~~~~~~~~~~~~~~~~~~~~~~~~~~~......

* Cap~~~~~ra1 invesunent ~~~~~~~~~~7.31 74~~~-0.13I. 14 .1 .... Q 7...4.78.7Local 346.94 362.00 532~~~~~~~~~~~~~~~~~~~~~~~~~.82... 47. 89 47.6.7.

ForeIgn 300.37 a~~~~~~~~~~~~~~~~&ia 516.34 449.14 ~~~~~~~~~~~~~~~~6S8 326.S~. ..... Tota .. P 1...7..706.223.1.50.5 ,5.2 545

* W P "(E 7%805 244 1 i57 .53 1724 8.61892.WlPtogrossissw 42.2 56.9 7&8710 7637 7582,141.9? 2,562.19 3,O7S~~~~~~~~~~~~..3..9.. .. ,344 450.54 57.. 91...

Retired assets~ ~ ~ ~ ~ ~~~~~~~.. ...(i,os~~~~~~~~~auew (CE) Z5~~~~~~~~~~~~~"6 ...... 37.3. ... 4:4 .... 54 ,27.9

keum44ep~~~~~~~~ciadon 1.605.31 1,901.94 2A266~~~~~~~~~~~~~~~~~~~~~.64 2........ ..... .~79 3 9. ...4........OA .8 1,74 ,8.8 7Z7199.6Z 4.

ANNEX 17Page S

- 105 -

I= ' '-~~~~~~~~~~~ . ........ .X ... ti ..... .. .... ... ... .. R.fi.. ...... .... .... ...... ......... .... ..* 1--989 1M9. 191 1992,: 1A3 19~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. L . ..-. . .... .. ............ .... ... ......

,: ~~~~~~~~~~.............. .-.'.'.'1'.':,i':':: :'' ..:.' .....

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.'': Zyt 9. "' :.'.,' ......... '-".'' ', '-''''~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . .. .. .

Net 1~ng* debt 22.93 :.:: :::,:.4 4 .04

raid d -: 79: :3 -0.28 3.1 0.0 01.0

.... .. -::.:: .:- ......... .. ... 3.5. .......3 + .......... ... .. .. ....Adtonsduing. WerAS0 0.0 0.0 040 .0 00

Am= orize dmlR ea 9.7 .70> tE9.70:C 537.48 37.4E 37.48t

L:, ~ ~~~~~~. ...... ...... .... .... ........ . ....... ......

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P r o u o s e d W o r l 4 B a n k L o a n :1 .*. ** ~.*.*.* . . . ... ... ... ...Opening balance 0A2.0 1.3 252 545 1.037

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Mdftion-''''d'rin ear 0.00 13.63 231.49 28.f73 6.52 0.00

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Cloin balnc 0*^A.00. ' i: 13;'.'3 265.1 595 71.37 711.37

': ':: :: ,::~. :.. .:.:.,...::.:. :. . . : :. , ,, ,: , ,''. : . -. . .-. -

Interest paid 74W00 -:3509. 167 4:0256 `7.

Closing balant'' '00- = 664:6 , 9:; :29.71 =:1094212 25...1. 8 -'. 15.. 75....

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it longter el3037 646 92.371 103.12158.7Iu~......... . 5.91 9.7 114 ::4 > 7.0:

106 -

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AfeiB l GbodatI (CE) 262A)1 fgl :5i7 3?79 46.8 578.07 SS 719.80 GNet 4 charges c) 199. . . . ................. 1. ' .. 9

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AMNEX 18

-107 - Page 1

INDONESIA


Sutmgmy of PERUMTELs Tariff

A. Telephone Instaation Charges

1. Categorv I of Telephone Exchae(a) Main connection 500,000(b) Branch connection 63,000

2. CateQoMM II of Telephone Exange(a) Main connection 350,000(b) Branch connection 32,000

3. Categoiy m of Telephone Exchange(a) Main connection 200,000(b) Branch connection 19,000

4. LCtegoY IV of Telephone Exchange(a) Main connection 175,000(b) Branch connection 13,000

5. Category V of Telephone Exchange(a) Main connecdon 125,000(b) Branch connection 10,000

6. Category VI of Telephone Exchange(a) Main connection 90,000(b) Branch connecdon 7,000

7. Category VIl of Telephone Exchange(a) Main connection 75,000(b) Branch connection 3,750

'See Note 1, Annex 18, p. 6.

ANNEX 18

- 108- Page 2

B. Monthly Rent of Telephone Connection

1. Automatic Telephone Exchange(a) Category I and II

(i) Main connection 3,500(ii) Branch connection 1,750

(b) Other category(i) Main connection 2,000(ii) Branch connection 1,000

2. Automatic Telephone Exchange UR to SOO Numbers(a) Main connection 1,000(b) Branch connection 500

3. Automatic Tele_hone Ex0chang Over 500 Numbers(a) Main connection 2,0005b) Branch connection 1,000

c. Teledhone Conversation Rate

1. Automatic Tele,hon(a) Local pulse of 3 minutes 75(b) Local call of 3 minutes from PCO 50gc) Intenal region per pulse 75gd) Interregion per pulse with duration 75

up to 100 km 6 seconds100-200 km 5 seconds200-300 km 4 seconds300-1,000 kn 3 secondsover 1,000 kn 2 seconds

2. Nonautomatic Telephone(a) Local Included in monthly

subscription(b) Local from PCO per call so(c) Inte region per minute 75(d) Long-distance (nonnal service):

up to 100 km 3751I-Z00 km 450200)300 km 560303-1,000 km 750ovwtr 1,000 km 1,125

(e) LUngdistance urgent service(twice the rates shown in (d) above)

ANNEX ISPage 3

- 109 -

D. Telegraph Rate

1. Presentation rate per telegram 1002. Domestic rate per word, norma service (minimum 10 words) 10

E. Telex Rate

1. Installation fee Same as telephonemain exchange

2. Monthly subscription 7,5003. Pulse rate with duration:

up to 50 km 12 seconds50-300 km 8 seconds300-750 km 6 secondsover 750 km 3 seconds

F. Private Leased Circuits

1. Installation fee per pair(inside service border area)Category I 250,000Category X 175,000Category m 100,000Cagetory IV 87,000Category V 62,000Category VI 45,000Category VII 37,500

2. Monthly Charges

(a) Telephone circuit (analog)(i) Local (per pair within one local area inside 75,000

service border area)

ANNEX 18Page 4

- 110 -

(ii) Long distance and trk

Zone Distance Goverment Business and(km) private

(Rp) (Rp)

I up to 100 900,000 2,100,000II 100-200 1,080,000 2,520,000m 200-300 1,350,000 3,150,000IV 300-1,000 1,800,000 4,200,000V over 1,000 2,700,000 6,300,000

(b) Telegraph and Data CircuitsLeased telegraph circwts are available up to a maxmumtnsmission rate of 50, 100 and 200 baud.Leased data circuits are available for nsmission ratefrom 300 bps.

0i) Witbin one local area:Printer, per pair per connection 75,000Data commucaton, per pair 100,000

ANNAEX-18Page 5

- 111 -

(a) Long distance and trunk leased circuits

Trans-mission Zone Distance Govemnment Busiess andrate private

50 baud I up to 100 180,000 420,000(ful I 100-200 216,000 504,000speed) Im 200-300 270,000 630,000

IV 300-1,000 360,000 840,000V over 1,000 540,000 1,260,300

75 baud I 198,000 462,000237,000 554000

III 297,000 693,000IV 396,000 924,000V 594,000 1,386,000

100 baud I 216,000 504,000II 259,000 604,000m 324,000 756,000IV 432,000 1,008,000V 648,000 1,512,000

200 baud 1 288,000 672,000EI 345,000 806,000m 432,000 1,008,000IV 576,000 1,344,000V 864,000 2,016,000

300 bps I 900,000 2,100,000E 1,080,000 2,520,000m 1,350,000 3,150,000IV 1,800,000 4,200,000V 2,700,000 6,300,000

112 -

NOTES

1. Location Categories

Category I Jakarta areaCategory U Medan, SurabayaCategory m Bandung, Denpasar, Palembang, etc.Category IV Yogyakarta, Bogor, Ambon, etc.Cagetory V Madiun, Sabang, Cianjur, etc.Category VI Kendal, Soingaraja, etc.Category VII Ciamis, Banjar, etc.

2. Telegraph circuits are for the following operating modes:

Half-duplexFull-duplex (4-wire connection)

ANNEX 12Page 1- 113 -

INDONESIA

THIRD TELECOMMUNATIONS PROJECr

Retur on nm

Assumptios

The assumptions made in deriving the benefit and costs streams used tocalculate the economic rate of return on investments are oudined below.

Capital Cost

PERUMTEW's investment program over the period 1990-1993 has beencategorized as investments under ongoing works, investments included in the ThirdTelecommunications Project and other works. Investments for the first two categories areclosely related, for example, installation of some of the switching equipment required forTelecom m, are included in ongoing works because of the advanced stage ofimplementation. In contrast, investments in the third category, other works, areindependent of the first two categories and, since funding is still uncertain, can beconsidered as future works although they are included as part of the Repelita V 1989-1993 program.

in assessing return on investments, the capital costs considered thereforeinclude investments under ongoing works and the Third Telecommunications project takentogether over the period 1990-1993. An estimated 70% of investments which form partof ongoing works in 1989 will remain as work in progress at the end of the year and willbe tranasfered to fixed assets in the following year. Capital investments in 1989 underthe Third Telecommunications Project represent advance payments. Therefore, pre-investments in 1989 which have been included in capital costs, comprise 70% of 1989investments for ongoing works and 100% of 1989 investments for the ThirdTlecommunications Project.

Opertng Costs

Incremental operating costs streams were derived by projecting the expectedoperating costs with and without the proposed investments.

The ewxpected changes in personnel and other operating costs resulting fromthe proposed investments have been reflected in the financial projections. For newtelephone subscbes it was assumed that personne costs and other operating costs per

ANNAX 19

- 114- Page 2

main telephone line are equivalent to the average cost per line projected for the networkas a whole.

Without the proposed investments it was assumed that (a) productivity gainsresulting from the technical assistance component of the project would not be realized,(b) the network would continue to deteriorate, thus increasing maintenance costs and(c) the overall reduction in costs per line as a result of a larger subscriber base, whichhas been assumed in the financial projections, woud not be achieved. More specifically,for existng subscribers, personnel costs per line would remain at real 1989 levels,maintenance costs per line would increase 2% p.a. in real terms from 1992 onwards, andother operating costs per line would remain constant at real 1989 levels.

Revenues

incremental revenues were derived by projectng change in revenues with andwithout the proposed investments. Incremental revenues are the result of the additionalrevenues from new telephone subscribers, including installation and rental fees and theincreased revenues from existing subscribers resulting from higher traffic due tomoderization of telecommunications facilities.

Domestic Telephone Revenues. It was assumed that for new subscribers, revenuesfrom domestic traffic would be the same per subscriber as the average projected for allsubscribers. For istin scribers it was assumed that without the project, theexpected improvement in traffic per line assumed from 1992 onward in the financialprojections as a result of modernization of the network and the capacity utilizationprogram would not be realized. Instead, traffic per line would decline at two percent perannum due to imcreasing network congestion and line faults.

International Revenues. Internatonal revenues are highly concentrated witaonly 5% of eisting subscribers (about 40,000 at end 1988) opting to have access to IDD.Most IDD subscribers are in Jakarta. About 30,000 Jakarta subscribers, the equivalentof 10% of total Jakarta subscribers, have IDD service. Replacement of obsolete exchangesin Jakarta which do not provide IDD service is expected to further increase demand forIDD in Jakarta. It was therefore assumed that 10% of new Jakarta subscribers would optfor DD). Since most of the subscribers generating high levels of intenational traffic arelikely to already be on the network, it was assumed that the average revenue from newIDD subscribers would be only 50% of the overall average for all subscribers.

cremental international revenues are assumed to be the revenues provided by thesesubs1cibers.

Telex Revenues. This reflects the revenues from additional telex subscribersand change in revenues of existing subscribers without the project. Without the project,telex traffic per subscriber is expected to remain at current levels. In contrast thefinancial projections assume that with the project, telex traffic per subscriber would

AmN 19

- 115 - Page 3

decline five percent p.a. as improvements in the telephone network increase the rate ofsubstitution of telex by fax and data.

Leased Circuits and Other. Growth in revenue from leased circuits which areprinarily used for data is related to availability of reliable crcuits. It was assumed thatwithout the network expansion and improvement in quality of crcuits expected as aresult of the project, the growth rate of revenues from this source would be 50% lessthan projected.

Tariffs

It was assumed that tariffs would be increased by an average of 11% in mid-1990. No other specific tariff adjustments have been arsumed.

Bemnfit Period

The benefit period for the project extends from 1990 to 2008 at the end ofwhich period it is estimated that on average all equipmnent provided under the projectwould have completed its useful life. From 1995 onward alt costs and benefits relatedto the 1990-1993 investments, are expected to remain constant in real terms.

input cost and revenue data used in calculating the rate of return are providedin Tables 17.1 and 17.2. The incremental costs and benefits derived by adjustingoperauing cost for corporate taxes and adding revenues denved from the value added taxare shown in Table 17.3. The net benefit stream was deflated to reflect constant 1989prices.

Based on these assumptions, the real financial rate of return to PERUMTELis estimated at 12.6%. The real econonic rate of return, which additionally reflects the10% value-added tax levied on telephone bills, is estimated at 15.5%. This is aconservative estimate of the economic rate of return as it does not reflect the consumersurplus which is high. Potential subscribers are known to be willing to pay up toUS$1500 for access to telephone service.

The results of a sensitivity analysis carried out to project the effect on theeconomic rate of return of possible changes in key variables is summarized below:

ERR

(a) 10% decrease in number of subscribers connected 13.9(b) 10% increase in capital costs 13.5(c) 10% increase in operating costs 14.1

ANX19Page 4

ERR Calculations-linput Table

2000-1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2008

Euistng.main Unes 829 0 0 0 0 0 0 0 0 0 0 0#ne wconnected lines 65 107 174 213 241 149 0 0 0 0 0 0

Of ihdch d te project 0 107 174 213 241 149 0 0 0 0 0 0

Yealy=pIe: aor. 1.00 1.07 1.12 1.18 1.24 1.30 1.37 1.37 1.37 137 1.37 1.37h~tallatift fees (ap'OW0) 333 417 .500 50 500 500 500 500 50 500 500 500

Aiwal rental fees (ROOO) 36 72 108 108 108 108 108 108 108 108 108 108

CALL ThAMC AND REVNU tkATAuaeTarwUnit

InternatIonal 0 ~~ ~~0 0 0 0 0 0 0 0 0 0 0DoMesdc autac (js ne) 0.075 0.079 0.083 0.083 0.083 0.083 0.083 0a083 0.083 0.083 0.083 0.083

Local ~~ ~~ ~~ ~~~0 0 0 0 0 0 0 0 0 0 0 0

Tot:al0 0 0 0 0 0 0 0 0 0 0 0

Aterate Traffic Units/ljineinternationa 0 0 0 0 0 0 0 0 0 0 0 0Domesdt autatc (pl ) 10,532 10,427 10,323 10,426 10,530 10,635 10,741 10,741 10,741 10,741 10,741 10,741Local 0 0 0 0 0 0 0 0 0 0 0 0

Total aw unitsAline 10,2 10.427 0.323 10.426 10.530 1 0635 1L741 10.741 411 X ISM 10.741

INCREMErAL WALFIC UtNPER MaUSTING WL

Traffic/lnVe--Network ExDansionneronal . 0 0 0 0 a 0 0 0 0 0 0 0

Longdiatance 0 0 0 0 0 0 0 0 0 0 0 0Local 0 0 0 0 0. 0 0 0 0 0 0 0

ANNEX 19Page 5

2000-1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2008

Tn.iklUe.oteiaonloten2atlonal 0 0 0 0 0 0 0 0 0 0 0Domesticautomatic .0 0 0 30 56 81 107 107 107 107 107 107ILcal 0 0 0 0 0 0 0 0 0 0 0 0

trafflc/UeRehabilttoKntqruatioz~~~~~~al 0 ~ 0 0 0 0 0 0 0 0 0 0 0

Longjdistance 0 0 0 0 0 0 0 0 0 0 0 0Local ~~ ~~ ~~ ~~~0 0 0 0 0 0 0 0 0 0 0 0

Other Reveue /aTelex (Rp mIn) 0 7,480 6,570 7A,20 7,310 7,490 7,490 7,490 ?7490 7,490 7,490 7,490International revenue & leased cicuits 0 3,870 10,710 21,010 27,710 36,000 3,880 38,880 3880 38,880 38,880 3880

Tot OW he Revnue 0 11.350 17280 28Q0 35AQ02 49 4J62 4Q d Q 4 2 4.Q SO637Q M

COgr DATACanital CostsNew inestMents (ftp min) 494,611 709,787 875,263 659,638 1,196,424 0 0 0 0 0 0 0Replacement and rehabilitation /b

OneDratn CostPemonorm costline (Rp 000) 325 316 301 288 287 287 287 287 287 287 287Other operadng costs (Rp'00) 244 248 258 268 284 276 276 276 276 276 276

Total operatina cost/line 2 S 3 559 SS6 5 5 5 S S

!A Revenue growth from leased ckcuits, tdexs, etc.4k Replacement of short-lived investments over life of project

ANNEX 19Page 6

1989 1990 19921 1992 1 1 199; 1996. 1997. 1998 1919 9 201

Rffcieny/cost chane 4dieto proe fa :Opfts_ cos treduction/ine 0 0 0 0 0 0 0 d 0 0 0 0

.(a) pesoime 0 -12 -38 -71 -102 4123 .144 .144 -144 -144 -144 -144(b) oter opeAtfg cosm 0 -10 -18 -29 40 -52 -64 -64 -64 -64 -64 -64

aiR atine Q 5~~~~0 22 -SO -100 -142 -175 -20 -0 Z0 8£ ,O

: ~~~~~~~~494.611 7 5429a385147362 226 o z

Adiwustents for ERR cackuationRenuesn 0 15,181 37,S39 61,743 68,14 99,935 93,729 93,729 93729 93.729 93,729 9%7 cocapitacos 0 0 0 .0' 0 0 0 0 0 0 O' 0 ':8

Pect of opeatIn costto be hadow piced 0% 0% 0% 0% .09 0% 0% 0% 0% 0% 0% 0%6

' mdanrd:conwion*fitor 1 1 '1 ,1 ''. 1 . 1 1. 1 1.' ''t':.s 1:', 1'

a Deel in opeatn g cos f6r exisdng subscbe witi projet vs. wkhout p:jt:

ANNEX 19Page 7

ERR Calculations--Sunmay Output Table

2000-1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2008

JNCREMENAL REVENLESIncr. rev.-Existinz DELs (Rp mln)Expansion 0 0 0 0 0 0 0 0 0 0 0 0Modemization 0 0 0 2,064 3,853 5,S73 7,362 7,362 7,362 7,362 7,362 7,362Rehabilitation 0 0 0 0 0 0 0 0 0 0 0 0

Total Incr. Rev.-Existing DELs 0 0 0 2,064 3,853 5,573 7,362 7.362 7,362 7,362 7,362 7,362

Incr. rev.-New DELs (Rp mln)Total call revenue 0 88,139 240,763 427,487 642,383 780,311 788,089 788,089 788,089 788,089 788,089 788,089Installation revenue 0 44,619 87,000 106,500 120,500 74,500 0 0 0 0 0 0Rental revenue 0 7,704 30,348 53,352 79,380 95,472 95,472 95,472 95,472 95,472 95,472 95,472

Total Rev.-New DELs 0 140,462 358,111 587,339 842,263 950,283 883,561 883,561 883,561 883,561 883,561 883,561

Other revenue (Rp mln) 0 11,350 17,280 28,030 35,020 43,490 46,370 46,370 46,370 46,370 46,370 46,370

Revenue adjusunent 0 15,181 37,539 61,743 88,114 99,935 93,729 93,729 93,729 93,729 93,729 93,729

Total Revenue 0 166.994 412.930 679.176 969.249 1.099.281 1.031. 1.031 022 1.031.022 1.031.022 1.031.022 1.031.022

Costs (tRp mln)Capital costs 494,611 709,787 875,263 659,638 1,196,424 0 0 0 0 0 0 0Operating costs 0 42,645 112,060 193,246 290,942 359,689 325,260 325,260 325,260 325,260 325,260 325,260

Total Cost 494.611 752.432 987.323 852884 1.487.366 359.689 325260 325,260 325.260 325,260 325.260 325.260

Net benefit -494,611 -547,139 -511,253 -147,250 -418,288 568,658 516,80751607 516,807 516807 51,6807 516,807

ERR 15.51%

!~~ ~ ~ ~~~~~~ i

ANNEX 20- 120 -

INDONESIA


Selected Documents and Data Available in Project File

1. Strategic Development Plan, 1986

2. JICA Long-Term Development Plan, June 1987

3. Telecommunications Network in Jabotabek Area, June 1989

4. Implementation and Administration of Foreign Loan and/or Credit, January 1987

5. Telecommunications Human Resources Development, July 1989

6. Minutes of Meeting, World Bank Preappraisal Mission, October 1989

7. Consultants Report on PERUMTEL Financial Model and Training Requirements ofPERUMTEW's Finance Department, December 1989.

8. Supporting Data for Economic Rate of Return Calculations, November, 1989.

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