RESTRICTED

Report No. PTR-119

This report is for official use only by the Bank Group and specificaly authorized organizationsor persons. It may not be published, quoted or cited without Bank Group authorization. TheBank Group does not accept responsibility for the accuracy or completeness of the report.

INTERNATIONAL BANK POR RECONSTRUCflON AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF A PROJECT FOR THE REHABILITATION

INTER-ISLAND FLEET

INDONESIA

June 12, 1972

Transportation Projects Department

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Currency Equivalents

Except where otherwise stated all figuresare quoted in US Dollars (US$5. The projectcost estimate is shown both in US$ and inRupiahs (Rps9).

US$1 = Rps 410Rps 1 US$0.002439Rps 1 million = US$2,,439Rps 1 billion = US$2,,439,OO0

Weights and Measures

Except where otherwise stated, all tonnagesare expressed in metric tons. Weight-carryingcapacity is expressed in deadweight tons (dwt).

Fiscal Year - Government of Indonesia

April 1 - March 31

Abbreviations

ADB - Asian Development BankBAPINDO - Bank Pembangunan IndonesiaBAPPENAS - National Planning CouncilBKI - Biro Klasificasi IndonesiaBOPBERPAN - Joint Operational Body of Inter-

Island ShippingGL - Germanischer LloydIDFC - Indonesian Development Finance

ConmpanyINSA - Indonesian National Shipowners'

AssociationMCD - Maritime Credit DepartmentPELNI - P. N. Pelajaran Nasional Indonesia

(a major shipping company)PRODJASMAR - Directorate General of Marine

ProductionR1S - Regular Liner ServiceSEACOM - Directorate General of Sea

CommunicationsTCAS - Transport Coordination Advisory

ServicesTSKT - Team Shipping Kerdjasang Teknik

(Netherlands Shipping Team)

DONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THE INTER-ISLND FLEST

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS i-iii

I. INTRODUCTION 1

II. BACKGROUND 2

A. Economic Setting 2B. Transportation 2C. Transport Policy and Coordination 5D. The Banking Structure 6

III. ORGANIZATIONS INVOLVED IN THE PROJECT 6

A. Goverrment 6B. Indonesian National Shipowners' Association (INSA) 7C. Joint Operational Body of Inter-Island Shipping

(BOPBERPAN) 7D. Biro Klasifikasi Indonesia (BKI) 8D. Bank Pembangunan Indonesia (BAPINDO) 8

IV. THE PROJECT 9

A. Project Description 9B. Cost Estimates 11C. Procurement 12D. Disbursement 12E. Project Execution 12

V. ECONOMIC EVALUATION 14

A. General 14B. Traffic Projection 15C. Fleet Forecast and Rationalization Program 16D. Economic Return 17

VI. FINANCIAL EVALUATION 18

A. General 18B. Present State of the RIS Shipping Companies 18C. Effects of Investment in Repair and Re-equipment 20

VII. AGREEMENTS REACHED AND RECOMMENDATION 22

This report was prepared by Mrssrs. T. Asser (lawyer), G. Bain (port special-ist), H. Brandreth (economist), J. Burns (financial analyst), A. Johnsen(oonasultant - engineer), R. Roberts (economist)s Mr. Rowat (financial analyst)and T. Saunders (financial analyst).

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ANNBXES

1. Registration and Classification of Ships in Indonesia2. Organization Chart for Ministry of Comwunications3. Organization Chart for Directorate General of Marine Production4. Organization Chart for Directorate General of Sea ComunicationsChart 6730(R) - Bank Pembargunan Indonesia Organization Chart5. Schedule of Estimated Disbursements6. Bank Pembangunan Indonesia Policy Statement7. RIS Fleet Forecast Methodology

TABLES

1. Area and Population of the Main Islands2. Estimated Composition of Indonesian Merchant Marine3. Passenger and Cargo Traffic Projection4. RIS Fleet Forecast5. Registered RrS Fleet - Composition by Age and Tonnage Class6. Savings Calculation7. Performance Ratios by Class of Vessel and for Fleet Before and

After RehabilitationA. Comparison of Earnings per Vessel Before and

After RehabilitationB. Comparison and Analysis of Revenue Flows to the

RLS Fleet Before and After RehabilitationC. Comparison and Analysis of Vessels' Annual

Operating Costs Before and After Rehabilitation8. Projected Cash Flows for Vessels Rehabilitated from January 1, 1976

MAP

IBRD 3420R - Indonesia Major Ports

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THE INTER-ISLAND FLEET

SUMMARY AND CONCLUSIONS

i. Indonesia has progressed towards economic recovery after more thana decade of stagnation and rampant inflation. Confidence in Government econ-omic policies has been regained and output and investment have substantiallyincreased in the last three years, but formidable problems remain. In thisnation of 3,000 widely dispersed islands, an effective transport infra-structure is vital to effective administration and economic progress. Overthe past decade the transport system was neglected and consequently becameobsolete, ill-maintained and disorganized. The inter-island shipping ser-vices, which form the vital trunk links in the transport system, were partic-ularly affected. Through administrative neglect, the licensing system col-lapsed, the tariff structure was abused, and safety regulations were ignored.Additional ships were permitted to operate without regard for their technicaland operational suitability or traffic needs. Shipping became an adjunct ofsmuggling, private trading and lucrative port terminal operations. An over-supply of vessels resulted while efficiency deteriorated and operating costsrose. Investments declined as profits dwindled and, without enforcement oftechnical standards, maintenance was neglected. The Regular Liner Service(RLS) became costly, unreliable and unsafe. Furthermore, port operationsand facilities deteriorated, limiting vessel access and slowing cargo-handlingand ship turnaround. The shipyards also suffered from lack of management,maintenance, investment and supplies.

ii. Over the past two years the Government, with considerable bilateralassistance, has started studies of the shipping industry in an effort toembark on a rehabilitation program for the RLS and domestic shipping servicesgenerally. The telecommunications and navigational aids are being restored.Studies have been completed of the major ports, their operations analyzed andcommitments made for investments and technical assistance. The shipyards aresimilarly being improved. A large part of the RLS fleet has been physicallysurveyed to determine its condition and requirements. Arrangements have beenmade to bolster the organization responsible for establishing and enforcingship technical and safety standards with foreign expertise. Studies have beenmade of the traffic currently moving on the RLS routes and the vessel andservice standards required, and studies relating to future requirements areproposed.

iii. The next vital step is the rehabilitation of the RLS fleet to bringit to acceptable standards of safety and operational efficiency and reliability.Such is the state of maintenance throughout the fleet that nearly all RLS

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ships currently in use would become ineligible for service if reasonable stan-dards were applied. Scope must be provided for the repair and re-equipmentof those RLS ships which can be rehabilitated at reasonable cost and whichhave a remaining economic life expectancy sufficient to warrant the expendi-ture required.

iv. The proposed project is designed to offer this scope. The Associ-ation would provide the foreign exchange element of the funds needed forjustifiable RLS ship repair and re-equipment. The funds lent to the Govern-ment would be relent through a specially-created Maritime Credit Department(MCD) of an established state banking institution (Bank Pembangunan Indonesia- BAPINDO) to shipowners lacking resources to effect the necessary repairs.The loans, suitably secured by mortgages on the borrower's ships and otherappropriate assets, would be repaid over a period of up to five years, in-cluding one year's grace. Once repaid, the foreign exchange funds would bereturned to the Government accounts and would not reside with BAPINDO forrelending. The more substantial of the proposed shipping loans will be sub-ject to prior scrutiny and approval by the Association for an initial period.

v. BAPINDO, which will receive technical assistance for this projectin the form of three shipping experts to be financed by the UNDP or failingthis, through the proposed credit, would be competent to appraise and managethe proposed loans. The organization has been carefully examined by theBank Group over the past two years, resulting in suitable changes in itscapital structure, administration and operating procedures. As a result,BAPINDO received a US$10 million credit from the Association in June 1972.

vi. At the present time, the financial records maintained by theshipping firms are not adequate to permit proper appraisal of their resourcesor operating results. The Government will arrange, through bilateral aidsources, the UNDP or the proposed credit, to attach a three-man team of man-agement, operations and accounting experts to the Indonesian National Ship-owners' Association (INSA) to assist the operators to improve their account-ing standards and operating statistics. The Government has requested thisassistance from Norway and the request is currently being considered. Theseexperts will not only enable shipowners to demonstrate the extent of theircreditworthiness for the proposed loans but will also assist them generallyin improving operational efficiency.

vii. Provision of funds and facilities for the repair and re-equipmentof ships must be coupled with the enforcement of suitable technical regulationsif the project is to succeed, for the shipowners must be convinced that shiprehabilitation is not only desirable, but also necessary. Further, whileship rehabilitation is, in itself, economically justifiable since it reducesvessel repair and maintenance costs and improves safety and reliability ofservice, it also permits substantial increases in ship utilization. The rootcause of the present state of the RLS fleet is the oversupply of vesselswhich has resulted in intense competition and much idle ship time. Thereis, then, little prospect of realizing the potential benefits of increased

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fleet productivity unless the surplus fleet capacity is reduced by eliminatingobsolete and inefficient ships from the RLS and the remainder are re-assignedin accordance with traffic needs. This is the responsibility of the Director-ate General of Sea Communications (SEAOM)N which must establish the necessarystandards and procedures and see that they are enforced. A program for theseactions includes two major elements:

(a) technical - the enforcement of ship classificationstandards throughout the RLS fleet. These standardsare the responsibility of the Biro KlasificasiIndonesia (BKI), the national ship classificationsociety (Annex 1). Enforcement is a SEACOM function,applied at the local level by the harbor mastersand other Government administrative staff.

(b) economic - the planning and implementation of a coordinatedthree-year (1973-75) ship repair and fleet rationalizationprogram and the initiation of longer-term studies oftraffic, fleet capacity, vessel types and tariff struc-tures, together with a review of regulatory controls andprocedures, followed by an agreed program to implementthe results. This will be done by SEACOM itself.

viii. A project of this complexity involves obvious risks. If the en-forcement of regulations designed to reduce surplus fleet capacity and im-prove safety and operational standards is not undertaken vigorously by SEACOM,there will be no incentive for the shipowners to repair and rehabilitatetheir ships, in which case the loan will not be drawn down. On the otherhand, the enforcement procedures must be carefully phased and coordinatedwith licensing revisions, lest service to the public suffer. Even if theincentive for ship repair is clearly established, there is the possibilitythat the financial situation of the shipowners will make it difficult forthem to borrow funds for ship rehabilitation. Every effort has been made,in formulating this project, to minimize these risks by reaching agreementwith the Government on a three-year fleet rationalization program dovetail-ing the enforcement of regulations with ship rehabilitation, and by provid-ing expert advisers for both the lending institution and the shipowners.Provision has been made for intensive supervision, with a full-time appointeeto the Resident Mission in Indonesia who will also serve on the Government'sCoordinating Committee.

ix. Given the elimination of surplus, unsafe and uneconomic fleet units,the remaining vessels, repaired and re-equipped as necessary, should be ableto operate profitably and effectively on RLS routes. The repair and rehabili-tation program itself will yield an economic return of 24% plus importantsafety and reliability benefits. The concurrent rationalization of theshipping services, with provision for further refinements after additionalstudies have been completed, will yield substantial further benefits whichcannot, at present, be measured in absolute terms. The project is suitablefor an IDA credit of US$8.5 million equivalent, incorporating US$7 millionfor ship repairs and the balance for consultants' services.

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THE INTER-ISLAND FLEET

I. INTRODUCTION

1.01 The Government of Indonesia has asked the Association for a creditto help rehabilitate the Regular Liner Service (RLS) which carries the bulkof the inter-island traffic. The project will consist of:

(a) the repair and re-equipment of a proportion of the RLS fleet;

(b) a three-year (1973-75) RLS fleet rationalization program coupledwith a long-term study of the RLS fleet requirements; and

(c) consulting services and technical assistance for shipyards andthe various organizations involved in the project.

The repair and re-equipment of the vessels will be incorporated in, and formthe core of, the fleet rationalization program. Most of the proposed credit,US$7 million equivalent, will be made available to RLS shipowners for neededrepairs through a specially created Maritime Credit Department (MCD) for BankPembangunan Indonesia (BAPINDO). The proposed credit will also finance tech-nical assistance to the shipyards and, to the extent that UNDP and bilateralassistance should not materialize, that required for BAPINDO and the IndonesianNational Shipowners' Association (INSA). An amount of US$1.5 million equivalenthas been provided for technical assistance, the unused balance of which wouldeither be reallocated to ship repairs or cancelled. The total credit willtherefore be US$8.5 million.

1.02 This will be the first project in the Indonesian maritime sectorand the third in the transport sector. Two credits for highway projectshave been approved, one in 1969 for US$28 million (Credit 154-IND) and onein June 1971 for US$34 million (Credit 260-IND). Credit 260-IND is proceed-ing satisfactorily but local currency disbursements of Credit 154-IND havebeen delayed due to administrative difficulties. In addition, other proj-ects of the Agricultural and Industrial Projects Departments include provisionfor engineering for a fishing wharf (Credit 211-IND) and for the construc-tion, in association with the Asian Development Bank (ADB), of a naturalgas gathering and distribution system to supply a fertilizer plant (Credit193-IND).

1.03 This report is based on the findings of missions composed ofrepresentatives of the Transportation Projects Department, the Legal De-partment and the Development Finance Companies Department which visitedIndonesia in December 1971 and March 1972. It was prepared byMessrs. T. Asser (lawyer), C. Bain (port specialist), H. Brandreth (economist),

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J. Burns (financial analyst), A. Johnsen (consultant - engineer), R. Roberts(economist), M. Rowat (financial analyst) and T. Saunders (financial analyst).

II. BACKGROUND

A. Economic Setting

2.01 Indonesia is an archipelago of more than 3,000 islands stretching5,000 km along the equator. The land area, 70% of which consists of thefour major islands of Java, Sumatra, Kalimantan and Sulawesi, is about 1.9million km2 . (See Map 3420R.) The population in 1970 was about 121 million,growing at the rate of 2-1/2% per annum (Table 1). Population pressure isintense in Java where almost 80 million people live in an area of only132,000 km2, but vast areas of other islands are underpopulated. TheGovernment is encouraging migration from Java and Bali to other islands,but with only limited success. Urbanization is accelerating and the popula-tion in the capital, Djakarta, now approaches 5 million.

2.02 The economy has recovered from the past decade of stagnation andrapid inflation. During 1969 and 1970, output and investment substantiallyincreased in all major sectors. The return to stability has establishedconfidence in Government economic policies and provided an environment con-ducive to economic growth. The Government's commitment to developmentthrough free market policies and free access to foreign exchange also hasstimulated a high inflow of both public and private foreign capital.

2.03 The recent expansion of economic activities has strained the infra-structure, which has been inadequately maintained. Therefore, rehabili-tation and improved maintenance continue to rate high priority in presentGovernment policies; public investments will concentrate mainly on infra-structure facilities which support and stimulate growth of the private sector.Emphasis is being placed on the transport sector, where worn-out facilities,high costs and inefficient operations hinder the economy's development. Highpriority is being given to rehabilitation of the run-down inter-island fleet,because of its vital function as a link between the widely dispersed islandsof the archipelago. Construction of new transport facilities, particularlyroads, is necessary to provide access to producing areas presently isolatedfrom their potential markets, and to underdeveloped interiors of the largerislands. The current Five-Year Development Plan (1969-73) specified a totalinvestment target of Rps 200 billion (US$488 million) in the transport sector,or about 19% of total public investment.

B. Transportation

(a) General

2.04 Marine transport services, linking the island network, form themajor trunk system in Indonesia. Roads and railways provide the secondary

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system, linking the interiors of islands with their ports, and connectingsurplus and deficit areas. Air transport volume is still very small, buthas increased rapidly in the last few years. Very little transport dataexist. No reliable data on distribution of traffic by modes, general trans-port costs or tariffs are available.

(b) Highways

2.05 There are about 82,000 km of roads of which about 15,000 km arepaved. The national roads, about 10,000 km, are the country's trunk roads;there are about 22,000 km of provincial roads; and the county roads, about50,000 km, comprise the remainder. In addition, agricultural estates andoil companies construct and maintain roads outside the system.

(c) Railways

2.06 The Indonesia State Railways tPNKA) consists of six separate systemswith 7,200 km of track. The road bed, track and operating equipment are inpoor condition as a result of over-age and inadequate maintenance. Speedsand loads are severely restricted and load factors and equipment utilizationare extremely low. Management deficiencies and overstaffing combine with theoperational difficulties to produce deficits in spite of recent tariff in-creases.

2.07 The potential of PNKA is limited by the short-haul, low-volumenature of available traffic which is vulnerable to road competition. Consul-tants (DECONSULT, Federal Republic of Germany) are studying the traffic poten-tial, costs and tariffs, managerial improvements and investment requirements.Although some scope now exists for modest rehabilitation projects, furtheranalysis of the benefits of such investments relative to those of competingmodes is required.

(d) Air Transport

2.08 Air transport is currently not significant in freight traffic, andaccounts for only about 1% of total passenger traffic, but it is growing inimportance as a rapid means of linking the islands and of opening the other-wise inaccessible interiors of some larger islands. Garuda Airlines is thenational flag carrier, with a fleet of 37 aircraft in 1970. As a result ofthe 1970-71 modernization program, conventional propeller aircraft havebeen replaced by jets. In terms of passenger seat-kilometers, Garuda's fleetcapacity should be sufficient to absorb domestic traffic growth for the nextfew years.

2.09 At most domestic airports, length and bearing strength of runways,and navigational aids are inadequate. To permit efficient use of new typesof aircraft, improvements to runways and other facilities are scheduled for18 airports in the next few years.

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(e) Ports

2.10 Indonesia has about 300 ports, but only 20 can serve ships of over500 deadweight tons (dwt) at quayside and only 10 handle significant volumesof cargo. The major ports for dry cargo, Tandjung Priok and Surabaja on Javaand Belawan on North Sumatra, each have approximately 2,000 ship calls peryear by powered vessels. The major port for petroleum products is Palembangon Sumatra, where about 3,200 ships (of which 1,900 are tankers) call annually.Port capacities are generally adequate to handle existing traffic, but infra-structure and service facilities need rehabilitation, and the efficiency ofport operations needs improvement. Substantial ship delays occur because ofpoor cargo-handling, warehousing, forwarding and customs clearance procedures.Consultants (NEDECO, Netherlands) have made recommendations for the moderni-zation and operational improvement of the ten major ports and the Governmenthas formed an inter-departmental committee to carry out certain of the re-commendations. The ADB has made a loan of US$5.3 million to finance themodernization of the major port, Tandjung Priok, and will appraise the portof Surabaja in June 1972. The Netherlands Government is considering finan-cial and technical assistance for improving the other eight ports.

2.11 Siltation is reducing the depth of most entrance channels andharbor basins, and the dredging backlog is about 15 million m3. Existingdredges must be repaired and operations improved to meet this requirement,and a detailed rehabilitation program has been drawn up by the Governmentassisted by a United Nations Dredging Adviser and a team of consultants fromthe Netherlands.

(f) Shipping

2.12 The Indonesian ocean-going merchant marine consists of 102 generalcargo vessels totalling 532,000 dwt which operate on foreign routes beyondSingapore and Malaysia. These are supplemented by a fleet of specializedcargo ships carrying oil, bauxite, salt and other bulk products both withinthe archipelago and to foreign ports (Table 2).

2.13 Indonesian coastal navigation law, like that of most countries, re-serves domestic trade for vessels owned and operated by Indonesian shippingcompanies; in addition, the Government has reserved half of the trade betweenIndonesia and Singapore/Malaysia for Indonesian ships.

2.14 Domestic shipping services are divided into inter-island andcoastal. The inter-island fleet consists of 355 ships each of over 350 dwt,totalling 450,000 dwt. Of these, 277 vessels of 320,000 dwt are licensedto operate on RLS routes and the rest are tramp ships. At the end of 1970,only 187 RLS ships (242,000 dwt) were operative, with the remainder unservice-able. Those in service are in poor condition.

2.15 RLS fleet productivity is very low. Port time is high (70-80% oftotal operating time); speeds are slow. Shipping management and financial

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control are poor: lack of maintenance results in frequent breakdowns; lackof shipboard spare parts increases breakdown delays; sailings are delayedto accumulate additional cargo; there is widespread rebating from the offi-cial freight rates.

2.16 Approximately 17,000 sailing and small motorized craft, ranging insize from 50 to 350 dwt, operate in the coastal trade, providing feederservices between small island ports. These compete, in certain instances,with RLS services, as do a number of vessels owned by the Government and themilitary.

C. Transport Policy and Coordination

2.17 The current Five-Year Development Plan (1969-73) includes aRps 100 billion (US$244 million) investment target for roads and road trans-port, Rps 46 billion (US$112 million) for marine transport, Rps 33 billion(US$80 million) for railways, and Rps 21 billion (US$51 million) for aviation.The allocation among modes was prepared without adequate information and isonly a rough framework for investment. Current trends in the Governmentdevelopment program indicate that actual investments for the whole sectorover the Five-Year Plan period are likely to be close to the original targetof Rps 200 billion, but substantial departures from the original allocationsamong modes are expected in view of the knowledge and experience accumulatedsince the basic Plan was formulated.

2.18 Project and budget preparation for the transport sector originatein the Directorates General of the Ministry of Communications and in theDirectorate General of Highways in the Ministry of Public Works and Power.Project proposals are reviewed by planning bureaus within these Ministriesand subsequently by the Communications and Infrastructure Division of theNational Planning Council (BAPPENAS), which is responsible for coordinatinginvestments and determining the total budget for the sector. However, theoriginal presentations are such that comparisons of projects even within onetransport mode are difficult. Neither the Ministries nor the Planning Councilhave qualified staff to prepare or evaluate investment proposals and lack ofadequate data makes it difficult to determine priorities. Foreign expertsprovided under bilateral and multilateral aid agreements are assisting inthe identification, analysis and preparation of specific projects in thefields of water, road, rail and air transport. These investment proposalsare being evaluated by the UNDP-financed Transport Coordination AdvisoryServices (TCAS). The Bank Group's Resident Staff are also assisting in trans-port planning and coordination. To improve these efforts the Bank Group willassign a staff member concerned with marine transportation to its ResidentStaff so that maritime transport as well as land and air transport will besupervised. These joint efforts are leading to improvements. However, itis likely that continued technical assistance will be required in the fore-seeable future because progress is slow in training local personnel.

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D. The Banking Structure

2.19 The banking system consists of Bank Indonesia (Central Bank), fivestate commercial banks, BAPINDO (the State Development Bank), the IndonesianDevelopment Finance Company (IDFC), a joint Netherlands-Indonesian develop-ment bank, and over 120 small private commercial banks as well as 11 branchesof foreign banks. At the end of 1970, Bank Indonesia and the state banksaccounted for 91% of total outstanding bank credits.

2.20 Each state commercial bank nominally provides funds for specificsectors, though their activities often overlap. Bank Rajkat Indonesia dealswith the agricultural sector; Bank Export-Import Indonesia, with exports andestates; Bank Negara Indonesia 1946, with industry, transport, agricultureand exports; Bank Bumi Daya, with estates, mining and exports; Bank DagangNegara, with mining and exports. All provide medium-term loans (up to 5 years)to their clients along with commercial banking services.

2.21 BAPINDO specializes in providing long-term finance for the indus-trial and transport sector, though in earlier years it was also engaged incommercial banking operations which it is now phasing out. IDFC, establishedin 1972 as the successor to the Development Bank of Indonesia, has made com-mitments to only three projects (US$1.4 million) to date.

2.22 Bank Indonesia determines the interest rates for state commercialbanks and BAPINDO. These range from 12% per annum for medium-term investmeitloans to 30% for short-term working capital loans. Private banks, free toset their own interest rates, charge between 3% and 6% per month.

III. ORGANIZATIONS INVOLVED IN THE PROJECT

A. Government

3.01 The Ministry of Communications is the ministry responsible for themaritime sector. Within the Ministry there are Directorates General forAir, Land, and Sea Communications (SEACOM) and for Marine Production andServices (PRODJASMAR). 1/ (See organization charts, Annexes 2-4.)

3.02 PRODJASMAR undertakes capital dredging and maintenance of thedredging fleet and supervises the operations of the major Government-ownedshipyards, which are expected to undertake most of the proposed repair andre-equipment work in the proposed project. These shipyards are, at present,poorly operated and managed. The Netherlands Government has recommended adetailed plan for technical assistance and equipment to rehabilitate them.Equipment provided by bilateral aid is now being installed in the shipyardsand is adequate for the project. Technical assistance to adequately improveoperations and management in included in the proposed project (para. 4.03).

1/ A plan to reorganize the structure of the Ministry of Communications isunderway. As a result it is likely that PRODJASMAR will become a depart-ment of SEACOM.

3.03 SEACOM, which is responsible for all marine operations, is dividedinto directorates of shipping, ports, inspection, regulations and registration,navigational aids and communications, and training. The Director General ofSEACOM and the directors of the various branches are able and experienced.Since the present Director General took office in early 1971, the agency hasbegun to attack the basic problems of the RIS. A Dutch technical assistanceteam which has been advising SEACOM for the past three years has providedmuch needed assistance in planning and analysis of RLS operations. WhileSEACOM will be able to implement the three-year fleet rationalization pro-gram associated with this project (para. 5.08), in the longer term its middlemanagement in the field of regulation and enforcement will require strengthen-ing. SEACOM's organizational requirements will be reviewed under the long-term study of the RIS incorporated in this project (para. 4.05).

3.04 SEACOM has set up a Coordinating Committee to coordinate aid to themaritime sector on which various Government departments concerned - Trade,Finance, Communications and Plafnning - are represented. This body will havethe ultimate responsibility for coordinating the actions of the various agen-cies and entities in the implementation of the proposed project and the Asso-ciation is satisfied that it can fulfill this task efficiently.

B. Indonesian National Shipowners' Association (INSA)

3.05 Any Indonesian shipping company can join INSA and all RLS companiesare members. The organization's primary function is to represent its members'interest in discussions with the Government and with other trade associations.In addition, it may take disciplinary action against a member for an infringe-ment of RLS regulations, although this is rarely done.

3.06 In order to improve the management skills of RLS shipping companies,the Government is seeking technical assistance from Norway, particularly inthe fields of accounting and shipping operations, for INSA members. Suchimprovements, particularly in accounting and financial control, will be anecessary feature of the proposed project, for without them most RLS companieswould not be able to demonstrate their creditworthiness for ship repair loans.The Association has reviewed progress in obtaining the technical assistancerequired and is satisfied that it will be available by September 1972 at thelatest either through the UNDP or bilateral sources or as a technical assis-tance element of the proposed project. Funds have tentatively been allottedin the proposed credit for this purpose. These funds would be reallocatedfor contingencies or cancelled if not required.

C. Joint Operational Body of Inter-Island Shipping (BOPBERPAN)

3.07 BOPBERPAN, formerly a SEACOM agency, now administers the RIS regula-tions under the authority of INSA. It establishes RLS routes and sailingschedules and issues operating licenses, subject to SEACOM's approval. Thereal responsibility for regulating the RLS rests with SEACOM, and BOPBERPAN'srole is limited to administrative details.

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D. Biro Klasifikasi Indonesia (BKI)

3.08 Indonesian law requires that every ship over a certain tonnage andwith specific equipment be registered with the Indonesian ship classificationsociety, BKI, and meet its standards; effectively all ships except smallcoastal motor and sailing craft must be so classified. Indonesia is a signa-tory of a number of international maritime conventions concerned with shipstrength, machinery, and safety at sea. Special Indonesian conditions areallowed for through accession only to those conventions considered to beappropriate. BKI standards are not recognized by organizations outside Indo-nesia. As a result, re-insurance abroad is very expensive or unobtainable.The technical personnel of BKI are naval architects, adequately trained butlacking experience. To rectify this the Federal Republic of Germany is toprovide four technical experts from the ship classification society,Germanischer Lloyd (GL), to assist in training personnel and in carryingout the classification needed in connection with the rehabilitation program.It is intended that a dual classification (BKI/GL) be granted to ships financedunder the proposed credit in order to assure reasonable insurance accommodation.The Association has reviewed progress in this area and is satisfied thatthe proposed classification program will proceed expeditiously.

E. Bank Pembangunan Indonesia (BAPINDO)

3.09 A detailed review and appraisal of this Government-owned developmen.bank is contained in the Bank's Appraisal Report, DB-90a, dated May 8, 1972.Established in 1960 to succeed Bank Industri Negara, BAPINDO was initially achannel for Government funds to finance projects, which were not alwaysdevelopmental.

3.10 In 1969, at the Government's request, the Association began a de-tailed examination of BAPINDO which, over a two-year period, has resulted insubstantial reforms in its capital structure, management and organization,and appraisal and operating procedures (see organization chart, No. 6730(R),following Annex 4). In addition, BAPINDO's management has been strengthenedand four advisers, who are expected to remain for at least two more years,have been seconded to BAPINDO by the Bank Group. BAPINDO was granted anIDA credit (US$10.0 million) in June 1972 to provide medium- and long-termloans to the industrial sector. The Association-'s industrial credit toBAPINDO provides for a minimum re-lending rate of 9-1/4% p.a. with no maxi-mum, with the foreign exchange risk being borne by the Government.

3.11 As of December 31, 1971, BAPINDO had total assets of Rps 35.1 bil-lion and had outstanding Rps 11.1 billion in medium-term loans, the balanceconsisting of short-term assets, particularly short-term loans for raw cotton(Rps 12.6 billion). As of June 30, 1971, some 46% of its medium-term loanswere divided equally between textiles and rubber processing, while loans forthe transportation sector accounted for 10%. Over 90% of the loans by numberwere for amounts less than Rps 150 million, while 58% by number were concen-trated in Java. BAPINDO's medium-term resources consist primarily of loansat 4% from Bank Indonesia (Rps 8.5 billion).

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3.12 In November 1971, the Government of Indonesia selected BAPINDO asthe financial intermediary to be used to channel the proposed IDA credit tothe maritime sector for ship repair and re-equipment. BAPINDO has agreed toset up a separate Maritime Credit Department (MCD) with its own accounts, tobe used exclusively for maritime lending. A Managing Director for the MCDhas been appointed, and is satisfactory to the Association. The Governmenthas asked the UNDP to finance technical assistance to BAPINDO's MCD to pro-vide three maritime experts as advisers. UNDP has agreed to broaden thescope of assistance already arranged for BAPINDO to include these expertsbut as final arrangements have not yet been made, it is included as a con-tingent item in the project costs. These funds will be reallocated forcontingencies or cancelled if not required. The Association would act asexecuting agency and would secure the experts.

3.13 BAPINDO has an existing shipping portfolio which at the end ofDecember 31, 1971 amounted to about Rps 535 million in long-term and Rps 94million in short-term loans. Twelve of the 13 long-term loans (99.8% byamount of the shipping portfolio) were in arrears (principal and interest)at that date, though only two (11% by amount) for more than a year. In thecase of the short-term portfolio, all 16 loans were in arrears (principal andinterest), with 7 loans (58% of portfolio) in arrears for more than one year.The situation reflects the previous weak appraisal standards of BAPINDO andthe poor financial condition of the shipping industry as discussed in detailin this report. Most of the shipping companies presently in BAPINDO's port-folio will probably require repair and re-equipment loans. BAPINDO hasagreed to review its existing portfolio with a view to rescheduling loanswhere appropriate.

IV. THE PROJECT

A. Project Description

4.01 The project consists of:

(a) the repair and re-equipment of those vessels in the RLSfleet (approximately 119) which, though in poor conditionthrough neglect or inadequate maintenance, still have auseful economic life expectancy;

(b) a three-year (1973-75) RLS fleet rationalization programdesigned to eliminate the surplus capacity and to reassignvessels in accordance with traffic requirements, coupledwith a long-term study of the RLS fleet requirements; and

(c) the provision of consulting services and technical assis-tance for shipyards, BKI, BAPINDO and INSA.

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4.02 The Association will provide up to US$7 million equivalent inforeign exchange for the repair and re-equipment element of the projectthrough a credit to the Government which will lend the proceeds to BAPINDO,which in turn will relend the funds to shipowners. In addition, BAPINDOwill provide up to US$4.4 million in local currency from its own resourcesto shipowners requiring financial assistance to make the necessary repairs.If the resources of BAPINDO and the shipowners prove to be insufficient tomeet the local currency costs of the project, Bank Indonesia has agreed tomake the additional funds available to BAPINDO. 1/ The repair and re-equipment program is expected to cover a period of three years, 1973-1975inclusive.

4.03 Based on surveys of the shipyards undertaken by the Netherlandsconsultants (para. 3.02) and by Association staff and consultants, it hasbeen determined that four shipyards will be sufficient to carry out the pro-ject. Technical assistance for one shipyard has been provided by the Gov-ernment of Japan. The Government has agreed that the technical assistancerequired (up to three teams totalling up to 16 men) for management and pro-duction advice will be included in the credit. Several proposals which aresatisfactory to the Association to provide the assistance are in hand.

4.04 Funds have been included in the credit for technical assistanceto BAPINDO (para. 3.12) and for INSA (para. 3.06) on a contingency basis.If not required, they will be reallocated or cancelled.

4.05 The Government has approved a concurrent three-year phased programfor the reduction of the surplus capacity in the RLS fleet by eliminatingover-age or economically unrepairable vessels (paras. 5.07 and 5.08). Theprogram, prepared by SEACOM, incorporates the results of a recently-completedsurvey by SEACOM, with bilateral technical assistance, of current RLS trafficmovements in relation to route and service structure. The Government hasalso accepted a proposal drawn up by Netherlands technical assistance expertsin cooperation with the Association for a long-term study of RIS services.This study will be designed to relate service standards and ship types andsizes to forecast traffic movements in order to produce a program for thedevelopment of an effective, economic RLS network. The study will include,in addition to economic forecasts, reference to: (i) the cost and revenueaspects of the required services and, hence, the tariff structure; (ii) therequired shore facilities and services; and (iii) the regulatory functionof the Government, together with Government capabilities in this respect.Agreement has been reached on the specific terms of reference for this studyand confirmation sought that the study will be adequately funded from bi-lateral aid sources and that it will be completed by January 1, 1974. TheAssociation and the Government will consult and agree on a program to imple-ment the recommendations of the study as mutually considered appropriate,incorporating, as necessary, modifications to the ongoing three-year programfor reducing the RLS fleet.

1/ In the event that this was accomplished under the Joint FinancingScheme (see para. 3.14 of Appraisal Report DB-90a, dated May 8, 1972),the 25% contribution cost normally required of the sub-borrower, inthis case the shipping company, will not be required.

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B. Cost Estimates

4.06 Actual physical surveys of 143 RLS ships under 21 years of age havebeen completed satisfactorily by experienced Indonesian, Dutch and Japanesemarine surveyors. Cost estimates were prepared on a basis acceptable to theAssociation, and the resulting average cost per dwt (US$56.64 equivalent),incorporating devaluation of the rupiah up to December 1, 1971, has beenapplied to the estimated fleet tonnage requiring repair or re-equipping(168,000 dwt) to produce a project cost. The survey also indicated that theforeign exchange component of the works would approximate 62% of the total.

Rupiahs (Million) US$ (Million)Local Foreign Total Local Foreign Total %

1. Ship Repair andRe-equipment

a. Hull - 996 996 - 2.4 2.4 18b. Machinery - 748 748 - 1.8 1.8 13c. Radio/Navigation - 374 374 - .9 .9 7d. Class Fee 124 - 124 .3 - .3 2e. Labor/Dock 1,411 290 1,701 3.4 .7 4.1 30

Sub-total 1,535 2,408 3,943 3.7 5.8 9.5 70

Contingencies:

Physical 5% andPrice 15% 291 497 788 .7 1.2 1.9 14

Sub-total 1,826 2,905 4,731 4.4 7.0 11.4 84

2. Consulting andAdvisory Services

a. Shipyard Teams 124 332 456 .3 .8 1.1 9b. BAPINDO /1 42 124 166 .1 3 .4 3c. INSA Advisers /2 41 83 124 .1 .2 .3 2

Contingencies:

Price 15% 42 83 125 .1 .2 .3 2

Sub-total 249 622 871 .6 1.5 2.1 16

Total 2 5602 5.0 8.5 13.5 100

/1 Para. 3.12.T2 Para. 3.06.

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4.07 The modest physical contingency reflects the detailed nature of thesurveys and allows for additional repairs which may be identified at the timeof drydocking. A price contingency of 15% is based on the assumption of 8%per annum inflation in the domestic component and 5% per annum inflation inthe foreign component estimated on the average outstanding balances duringa three-year disbursement period.

C. Procurement

4.08 The specialized nature of the specific ship repairs, the smallnumber of parts items required to be secured from specific manufacturersat any one time, and the limited size of each repair job (averaging lessthan US$100,000 equivalent per ship, as against an average ship replacementvalue of about US$720,000 equivalent) would make international competitivebidding procedures impracticable. Procurement of material and equipment willbe undertaken by shipyards and shipowners in accordance with commercialcriteria. A review of procurement will be undertaken by BAPINDO's MCD priorto disbursement in order to ensure that costs are competitive.

D. Disbursement (Annex 5)

4.09 The Association will disburse 60% of each BAPINDO loan for shiprehabilitation undertaken in Indonesian shipyards. This is estimated toapproximate the foreign exchange component of the work, assuming that BAPINDOlends the full cost of rehabilitation. For rehabilitation undertaken out-side of Indonesia, the Association will disburse 100% of each BAPINDO loan.Disbursements will only be made against itemized documents indicating thatthe loan funds had been fully disbursed by BAPINDO and that the repair orre-equipment work has been completed. It is estimated that the averagerepair or re-equipment job will take 2-3 months.

E. Project Execution

(a) BAPINDO's Lending Term

4.10 BAPINDO's lending criteria for loan applications for RLS shipoperators will, aside from directives outlined in its Policy Statement ofJune 1, 1972 (Annex 6), be based primarily on:

(a) the current and potential financial viability of theborrower; and

(b) a survey of the vessel or vessels to determine the exactextent of repairs necessary, together with an assessmentof the life expectancy of the vessel.

4.11 With the technical support provided through UNDP (para. 3.12),BAPINDO's MCD would be capable of adequately appraising loan applications.Nevertheless, loan proposals for sums over US$50,000 equivalent will be

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subject to Association approval. This limit will be reviewed after the firstten loans (all of which will be submitted to the Association) have been madeand, if necessary, adjusted as mutually agreed by BAPINDO and the Association.Project documents for all loans will be forwarded to the Association for in-formation or approval and for disbursement.

4.12 Vessel surveys will be undertaken by BKI or by such other competentmarine surveyors as BAPINDO may approve. BAPINDO will require a statementof work completion before release of the vessel from the shipyard and a surveyof the vessel to ensure its compliance with classification standards. Thiswill be carried out by BKI and GL.

4.13 BAPINDO's lending terms will extend up to five years, including upto one year's grace. The Government will lend the proceeds of the credit toBAPINDO at an interest rate which would provide a sufficient spread betweenBAPINDO's borrowing and lending rates to adequately provide for BAPINDO'sadministrative costs. The interest rates and spread are similar to thosenegotiated for the industrial credit. The foreign exchange risk related tothe loans and sub-loans will be borne by the Government.

4.14 Loan repayments to BAPINDO will be repaid to Government accounts,and will not remain with BAPINDO for relending. This complies with normalBank Group lending procedures for DFC operations.

4.15 The Government has agreed that during the period covered by thisproject BAPINDO will be the sole state-owned source of loans for RLS shiprepair work and permanent working capital and that lending operations toRLS shipowners by other state-owned banks will be limited to working capitalloans.

4.16 The Government has agreed that BAPINDO loans will be available forrepair work outside Indonesia (e.g. Singapore) where it can be agreed amongthe dockyards, the Government and the shipowner that the work in questioncould not be done in Indonesia or in a reasonable amount of time. Sincethere is free movement of capital, there can be no guarantee that shipownerswill apply for loans from BAPINDO instead of seeking aid in Singapore andHong Kong. However, the terms to be offered by BAPINDO will be sufficientlyattractive to make it unlikely that RLS companies will seek aid from Indonesianprivate banks or from other sources abroad.

(b) Other Aspects of ProJect Execution

4.17 In accordance with the standard practice for DFC lending operations,the Association will require that BAPINDO have its accounts and financialstatements audited each fiscal year by independent auditors acceptable to theAssociation. In addition, BAPINDO will be required to furnish to the Associa-tion within a specified time all information that the latter reasonably re-quests concerning the operations and financial condition of BAPINDO and itssubsidiaries.

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4.18 The BKI will be responsible for reviewing the classification ofrepaired ships, designating ships that must be retired from service throughinability to meet class requirements in accordance with international conven-tions. In accordance with the agreed three-year plan (para. 4.05) SEACOMwill be responsible for enforcing retirement from service of over-age orunsafe ships. Enforcement of Indonesian laws will rest to a great degree uponthe harbor masters at the 10 major ports who have, but do not now effectivelyuse, the power to prevent ships sailing illegally. Enforcement procedureshave been reviewed with the Government and agreement has been reached thatcontinued improvement, to be reviewed by Resident Staff and supervisionmissions, will be sought to ensure that regulations will be enforced at alladministrative levels.

4.19 Improvements in RLS operations and the utilization of vessels onthese services depend to some degree on improvements in port operations tospeed cargo movements and, hence, ship turn-arounds. Technical assistanceis to be provided by the Netherlands for port operations improvement atthe most important ports, including the two major ports. ADB has madea loan (US$5.2 million) from its special funds for the improvement and mod-ernization of the port of Tandjung Priok, also including technical assistancefor streamlining the financial management of the port. This, combined withGovernment efforts, fleet reduction and service rationalization, will in-crease ship utilization and reduce operating costs.

4.20 Coordination of the Government action to improve port operationsis being undertaken through a "Streamlining Committee" appointed by thePresident and representing all interested parties. The Association hasreviewed the work of this committee and is satisfied that considerableprogress is being made in improving the efficiency of port operations atTandjung Priok. The lessons learned there will be applied to other portsin due course.

V. ECONOMIC EVALUATION

A. General

5.01 The project contains two distinct elements:

(a) the repair and re-equipment of suitable RLS ships;

(b) the reduction of the surplus capacity in the RLS fleet,principally by eliminating from service those vesselswhich are unsuitable for repair and cannot meet classi-fication standards.

These two elements are interdependent to the extent that, on the one hand,the benefits accruing to ship rehabilitation cannot be fully realized unless

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the fleet surplus is reduced while, on the other, it would be impracticableto attempt to reduce the fleet surplus in the manner described above withoutmaking provision for ship rehabilitation since virtually none of the shipsnow in service can meet acceptable safety and technical standards.

5.02 Nearly all the project costs are related to the repair and re-equipment of RLS ships. From these, several types of benefits ensue. Themost immediate and obvious is a reduction in ship repair and maintenance costs.The next is an increase in ship utilization stemming from increased operatingspeeds and reduced in-port time for running repairs. Finally, ship rehabilita-tion will increase vessel safety, with economic savings from reduced loss anddamage to traffic, and increase RLS service reliability, with obvious thoughsomewhat intangible economic and social benefits.

5.03 This economic evaluation uses, as quantifiable benefits, onlyexpected reductions in ship repair and maintenance cost of rehabilitatedvessels. It omits, therefore, the substantial saving derived from elim-ination of the operating costs of those vessels which will be scrapped.Total fleet costs for repairs, maintenance, stores, insurance (as a proxyfor loss and damage to cargo) and fuel will be substantially reduced, atthe expense of a slight increase in costs per ship of the rehabilitatedvessels, reflecting their much more intensive utilization. The internalrate of return thus produced is, therefore, extremely conservative. Thereasons for this limited approach are threefold. First, traffic data forthe RLS services available to the Association are extremely sketchy and donot lend themselves to reliable estimates of probable results from fleetrationalization or vessel improvements. Secondly, vessel and fleet datapermit only a global approach to the RLS system and thus a very generalizedestimate of increased utilization. Thirdly, many complex business andeconomic factors will influence the numbers and types of vessels which willbe withdrawn from service and the manner in which the fleet balance willshift as a result. The rationalization program utilized in this reportrepresents one conceptual approach which may only approximate actual results.

B. Traffic Projection

5.04 Usable traffic data for inter-island trade are available for onlyone year, 1969. Since no analysis of past trends is possible, there is nofirm statistical base for traffic projections. In order to provide a workinghypothesis for assessing future RLS fleet needs, cargo traffic has been fore-cast to grow at from 5% to 10% per annum to 1979 in terms of ton-miles withthe most likely level estimated to be 7% per year. Passenger traffic hasbeen forecast on the same basis (Table 3).

5.05 An assumption of an overall growth in traffic of from 5% to 7%annually in inter-island trade is reasonably conservative in view of theAssociation's projection of an annual growth rate in Indonesia's GDP of 7%to 8% for 1970-80.

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C. Fleet Forecast and Rationalization Program

5.06 From the current traffic data and knowledge of RLS fleet operations,only a rough approximation of future fleet requirements can be prepared atthe present time. However, based on estimated ship productivity after re-habilitation, a 30-35% decrease in deadweight tonnage over the proposed three-year ship rehabilitation program period - 1973 to 1975 inclusive - would prob-ably result in a reasonable balance of fleet capacity and traffic require-ments. This could be achieved, in approximate terms, by retiring from ser-vice those vessels reaching the end of their economic life-span of 20 yearsby the end of this period (Tables 4 and 5). Analysis of the productivity ofthis rationalized fleet shows that, commencing in 1976, additions would berequired annually to keep pace with anticipated traffic growth and to replaceships which become over-age. A forecast of the RLS overall fleet requirementto 1979 is shown in Table 4 and summarized hereunder:

1970 1973 1974 1975 1976 1977 1978 1979

Deadweight ('000 tons)

Start of Year 242.4 217.8 193.2 168.7 177.7 186.6 195.9Additions - - - 9.0 30.4 30.8 31.3Retirements 24.6 24.6 24.5 - 21.5 21.5 21.5End of Year 242.4 217.8 193.2 168.7 177.7 186.6 195.9 205.7

Details of the methodology used in the fleet forecast are contained in Annex 7.

5.07 A practical three-year program for RLS fleet reduction in concertwith the proposed repair and re-equipment program, therefore, could be basedon:

(a) the enforced retirement from the RLS of all ships over 20years old (by 1975), which do not currently meet acceptableclassification standards, on the universally-acceptablegrounds that they are no longer economic to operate, andare, therefore, not worth rehabilitating;

(b) the rehabilitation to meet established classifica-tion standards of all RLS ships needing repair andre-equipment which, with such rehabilitation, wouldhave a remaining economic life of at least 4 years(not over 16 years of age at the time of repair); and

(c) the enforced retirement of all other RLS ships whichare beyond economic repair.

Provision might have to be made for exemptions for some ships in the over-ageor "unrepairable" groups because they possess certain unique and temporarilyirreplaceable operational or structural features necessary to a certain routeor service.

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5.08 SEACOM has drawn up a 1973-75 fleet rationalization program reflect-ing this approach and providing for phased implementation with due regard for:

(a) the impact of the program upon specific routes and servicesand the need for fleet redistribution to cover possibledeficiencies which may occur through ship retirement; and

(b) the capacity of the shipyards for ship rehabilitation work.

The program includes a methodology for the redistribution of fleet units amongroutes and services as necessary to make up deficiencies which may occur throughvessel retirements.

5.09 The precise number and mix of vessels which will actually be re-paired and re-equipped is currently unpredictable. Since few, if any, shipsin RLS can meet acceptable technical standards, it has been assumed that re-habilitation will apply to all vessels which will be under the age of 21 yearsin 1975. The benefits accruing from a three-year rehabilitation program onthis basis are shown in Table 6 (Alternative No. 1).

5.10 Benefits will vary considerably from ship to ship, and globallythey are sensitive to a change in the mix of vessels. Alternative No. 2 inTable 6 illustrates this by assuming the mix of vessels rehabilitated corres-ponds to that of the vessels already surveyed (para. 4.06) rather than to theoverall fleet, as in Alternative No. 1.

D. Economic Return

5.11 The internal rate of return for the project, with quantified benefitslimited to repair and maintenance cost reductions, is estimated to be 24% onthe basis of Alternative No. 1, declining to 17% if a less favorable rehabili-tation mix in accordance with Alternative No. 2 is assumed. These returns aresatisfactory, particularly since it may safely be assumed that they will becomplemented by substantial other benefits relating to improved fleet pro-ductivity (higher load factors coupled with increased time at sea) accruingfrom fleet reduction and rationalization, and reductions in cargo damage andloss.

5.12 The rate of return range, calculated on this minimum basis, offersreasonable assurance that the proposed ship loans will prove attractive tothe shipowners, provided that the surplus fleet capacity is reduced as planned.The economic return, based on ship repair and maintenance cost reductions,closely parallels the financial return. However, in present conditions ofsurplus fleet capacity, the benefits from ship repairs are limited by lowship utilization, and the financial return is prqbabhlvlower than tcost of borrowing. Th± c ains the r temV ect of the flee Underte opto ject, the minimum econoic (or fin ll exceedthe cost of borrowing for dition,I o eyon s o e Io-ftrh

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5.13 The net_benefits relating to lower operating costs a_nd_iDsreasedvessel productivity wou d'ncrfuie tothe not likels bepassed on to the R in the form of l triffs.The effective

tariffs are uprofltan an ~ovemeA~ inroutit 1tari ln 7ct v-it-y"andomar ept-able retutn L>cital. Tariffs may, in the fina e in-

,cre and, to the extent that cd as part of therat onalization ffectivE~Wts to the consumer may actually riseas a function of this project and its Iding conditions. This would not,however, be alA_ggonomic cost to the nation but simply a transfer aymentreflect D^W2Sle eliminat n of a subsidy enJoedb t e7-p enseof hipping nutry which has-resulted in an intolerable decay o ht!S system. e co r would, o ~ re- enefits from ed

se1,Vr reliability an ~~

VI. FINANCIAL EVALUATION

A. General

6.01 Adequate financial results from the project are contingent upon areduction in the RLS fleet according to a three-year phased program (para.4.05) and the enforcement of regulations necessarv to stabilize operatingpractices in the fleet. Based on these assumptlons, the financial returnto the owners of ships larger than 500 dwt is likely to provide a satisfac-tory return on equity after meeting all operating and capital costs.

6.02 Given the restrictions on borrowing from state-owned banks andlending institutions proposed in para. 4.15, RLS shipping companies' require-ments for rehabilitation loans can be met by BAPINDO on terms and conditionsagreed with the Association.

6.03 After completion of this first stage in rehabilitating and rational-izing the RLS fleet, the improvement in the financial resources of the com-panies will enable them to provide from internally generated funds a reasonableshare of the capital required for further improvements and expansion, ifnecessary.

B. Present State of the RLS Shipping Companies

6.04 Of the 45 RLS shipping companies, three own about 40% of the totalfleet tonnage. The largest, P.N. Pelajaran Nasional Indonesia (PELNI), ownedby the Government, has 43 vessels in RLS totalling about 50,000 dwt, whilemany firms have only 2 or 3 ships. With the contemplated overall fleetreduction, mergers or liquidations, particularly among the smaller operators,may be advisable and, since this is likely to improve RLS service, SEACOMhas agreed to encourage and assist such moves. The Government has reduced

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the ship registration transfer tax, applied on the sale of a ship and payableby the new owner, to 1% of the value of the ship. The previous level of 10%discouraged transfers and the Government agreed with the Association'sview that it tended to prevent mergers and that it was no longer a sourceof revenue.

6.05 Financial management by the operators is inadequate, accountingpractices are unsatisfactory and only very rudimentary costing and informa-tion systems are in use. Of the companies examined by the Association onlyPELNI retains independent auditors, who have been helping PELNI to developsound accounting procedures.

6.06 The shipping companies' administration expenses, according to theDutch consultants Team Shipping Kerdjasang Teknik (TSKT), are higher thannecessary and the Association concurs in this conclusion. In addition toinefficiency, a number of "invisible" 1/ payments are met from office expen-ses each year (one company put these as high as 12% of its total expenses in1970). The RLS companies have only recently begun to regard depreciation asan operating expense; thus reported profits have in the past been overstated.

6.07 Revenues, although generally being quickly realized in cash,are insufficient to meet regular commitments, resulting in a shortage ofworking capital and a tendency to postpone all but the most essentialexpenditures. Since there is a shortage of long-term finance as a resultof the stringent terms upon which capital is raised, short-term financingis being used for long-term outlays. This imbalance in the capital structureof the RLS companies must be corrected if companies are to meet debt servic-ing commitments.

6.08 A number of RLS companies already have loans outstanding from statebanks, particularly BAPINDO. The security for these loans is in the form ofmortgages on ships or other company assets. These encumbrances on theirassets will limit the amount of extra funds which can be borrowed.

6.09 The low or negative return on investment in the RLS has resultedin virtually no new ships being bought in the past 8 years, and in the run-down condition of the present fleet. In addition, the stock of sparescarried on ships for running repairs has not been replenished. Becauserealistic depreciation policies have not been followed, almost all capitalrequired for new ships or the rehabilitation of existing ships has beenraised from outside the companies.

6.10 Other activities, particularly terminal operations, in which RLScompanies are engaged should assist some of them in meeting BAPINDO's lend-ing criteria. Since legal requirements limit the operation of terminals toIndonesia ship-owning companies, theme terminals, with at least a 40% netmargin on revenue, enable RLS companies to remain in shipping and areresponsible for enabling many to survive.

1/ Additional payments to customs, security, ship personnel and stevedoresfor services rendered.

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6.11 The shipping companies are frequently reluctant to divulge factsabout their business because they fear increased taxes. This fear may bemisplaced, however, as a number of companies have been paying taxes onprofits which in fact do not exist. Taxes are assessed on the revaluationsof assets (some at 20% and some at 50%). As unpaid taxes have priorityover ship mortgages, companies applying for loans will be investigatedcarefully for tax liabilities past, present and future.

6.12 The Government has confirmed that the provisions of the DomesticInvestment Law (No. 6 of 1968) will apply to the rehabilitation of the RLSfleet, financed by BAPINDO under the proposed credit. This law providesfor freedom from import duties for equipment and for tax exemptions forapproved investments in expanding or rehabilitating enterprises in trans-portation and other specified industries.

C. Effects of Investment in Repair and Re-equipment

6.13 To show the effects of rehabilitation, the estimated results for1970 have been compared with the forecast earnings for 1976 (by which timethe repair program would be completed). Vessels have been divided into thesize classes used by TSKT. Operating costs for 1970 are based upon thecosting data developed by TSKT, while those for 1976 have been altered toshow the effects of repair and re-equipment. Revenues are based upon thedata developed to show the 1969 traffic levels and the 1970 tariff levels.Traffic is assumed to grow by 7% p.a. Tariff levels are assumed to remainconstant at the 1970 level. While too much reliance should not be placedon the absolute levels, the figures indicate order of magnitude benefitsfrom the repair program. It is not possible at this stage to relate thesebenefits to specific company performance. This will follow once the stepstaken to improve administrative, accounting and credit procedures are effec-tive.

6.14 Operating results and performance ratios for vessels of threeselected sizes (Table 7) are summarized below:

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(Rps Millions)

1970 1976

Vessel Size (dwt): 500 Average 3,500 500 Average 3,500(1,450) (1,575)

Revenue 16.0 40.5 96.7 33.3 95.4 202.6

Operating Expenses

Fixed Costs 33.2 40.0 74.4 19.0 29.0 50.0Variable Costs 2.6 6.5 14.3 2.8 8.1 17.9

Depreciation 6.6 16.5 35.0 6.6 17.3 35.032.4 63.0 123.7 28.4 54.4 102.9

Operating Profits(Loss) (16.4) (22.5) (27.0) 4.9 41.0 99.7

Interest 8.0 19.8 42.0 5.4 14.1 28.1

Net Profit (Loss) (24.4) (42.3) (69.0) (0.5) 26.9 71.6

Operating Ratio 202% 155% 128% 85% 57% 51%

Return (Loss) onCanital (12.4%) (6.4%) (3.9%) 3.7% 11.9% 14.5%

Return (Loss) onEquity (assuming20% Equity) (92.4%) (64.1%) (49.3%) (1.9%) 39.0% 51.3%

On the foregoing basis all vessels show operating losses in 1970 and operat-ing profits in 1976. The larger vessels can be seen to be more profitablethan the smaller vessels. In practice, there are bound to be significantvariances from the average for each size group and from the overall average.Apart fror the smallest size vessel (500 dwt), all ships would earn a netprofit in 1976. These figures indicate that either the tariff requiresrestructuring to reflect the cost of services to shallow harbors, or thatthe smaller vessels should be replaced by larger vessels.

6.15 An indication of the financial return on the project can be gaugedby comparing the return on capital invested in the average-sized vessel inthe years 1970 and 1976 (before and after rehabilitation). There is an im-provement in the return from a negative 6.4% to a positive 11.9%. Thereturn on the owner's equity, by reflecting leverage, shows an even greaterimprovement (from a negative 64.1% to a positive 39.0%).

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6.16 Sensitivity checks were carried out for changes in traffic levelassumptions. If the annual rate of growth in traffic is limited to 5% thenthe return on capital falls to 8.6% whereas if the growth rate is 10% itincreases to 17.6%. Likewise, the return on shipowner's equity fails to22.57 or rises to 67.6%.

6.17 The projected cash flows for 1976 through 1980 for vessels ofthree selected sizes (Table 8) are given below:

(Rps Millions)1976 1977 1978 1979 1980

500 dwt Vessel

Cash outflow 24.3 30.3 29.7 29.0 28.5Cash inflow 33.3 33.4 33.6 34.0 34.3Surplus 9.0 3.1 3.9 5.0 5.8

Average Vessel (1,575 dwt)

Cash outflow 40.0 47.2 46.5 45.7 45.1Cash inflow 95.4 97.1 99.0 101.2 104.2Surplus 55.4 49.9 52.5 55.5 49.1

3,500 dwt Vessel

Cash outflow 74.5 90.6 89.1 87.4 85.7Cash inflow 302.6 200.2 213.3 227.3 226.0Surplus 128.1 119.6 124.2 139.9 140.3

VII. AGREEMENTS REACHED AND RECOMMENDATION

7.01 During negotiations confirmation was obtained thlat:

(a) technical assistance for INSA members in the fields ofaccounting and shipping operations is forthcoming or, ifnot available from other sources, will be accepted underthe proposed credit (para. 3.06);

(b) BAPINDO's existing portfolio of shipping loans will bereviewed with a view to rescheduling them where appropriate(para. 3.13);

(v) the Gbvernment policy regarding foreign shipyard competitionwill not delay or frustrate the project (para. 4.16).

- 23 -

7.02 During negotiations agreement was reached that:

(a) technical assistance will be provided by the UNDP, with theAssociation as executing agency, for three experts to adviseBAPINDO's MCD (para. 3.12);

(b) technical assistance consisting of up to three teams of up toa total of 16 experts for shipyard management and operationswill be provided under the proposed credit (para. 4.03);

(c) the terms of reference for the long-term study are satis-factory to the Association and implementation will bearranged (para. 4.05);

(d) a concurrent three-year program for phasing out over-ageor uneconomic vessels from the RLS fleet has been preparedby SEACOM and its implementation arranged (paras. 4.05,5.08);

(e) the Association will approve loan proposals for sums overUS$50,000 equivalent subject to a review of this limitafter ten loans have been submitted to and approved by theAssociation (para. 4.11);

(f) the proceeds of the proposed credit will be lent to BAPINDOby the Government and relent by BAPINDO to shipowners onterms similar to those negotiated for BAPINDO's industrialcredit with the foreign exchange risks being borne by theGovernment (para. 4.13);

(g) BAPINDO will be the sole source of ship repair and permanentworking capital loans from state-owned lending institutionsto shipowners licensed to operate in the RLS (para. 4.15).

7.03 The proposed project is suitable for an IDA credit to the Governmentof US$8.5 million equivalent, incorporating US$7.0 million equivalent for shiprepair, and the balance for technical assistance.

June 12, 1972

ANNEX IPage 1

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THli INTER-ISLALND LWT

Registration and Clas ification of

Ships in Indonesia

1. Registration of Indonesian ships and their classification areinterrelated through a number of laws and regulations. The IndonesianCommercial Code requires that ships of greater than 20 cu m capacity(about 110 Gross Tons) be registered (Book II, Articles 31, 319). Var-ious regulationsl/ also refer to ship registration. Classification ofships is also provided for under Indonesian regulations.2/

2. In addition, Indonesia has subscribed to a number of inter-national conventions dealing with shipping. Among these are the Conven-tion on the Inter-Governmental Maritime Consultive Organization, 1948;Safety of Life at Sea Convention, 1960; Prevention of Collisions at SeaConvention, 1960; and the SIMLA Rules, 1931. These conventions makereference to certain structural and equipment requirements related tosafety and the assignment of tonnage measurement. In order to providefor special Indonesian conditions adaptations have been made to Dutchregulations (which were themselves derived from international conventions)concerning ship measurement and construction.

3. Responsibility for initial and continued compliance with thevarious national and international rules is assigned to Government inspec-tors and to BKIo Under th load lines regulations, the responsibility formaking the assignment is entrusted to the classification society designatedby the Government (in this case BKI). The regulations state that the shipwill be judged by the highest standards of that classification society.

4. The validity of the Indonesian load-line certificate and theresponsibility to maintain marine safety equipment to the minimum standardsset out in the safety conventions, are reviewed prior to each departurefrom an Indonesian port by the harbor master. If acceptable, the ship isissued a pass or clearance, which must be recorded in the port of destina-tion by the next harbor MAster.

1/ Ship's Registration Ordinance, 1933; Ship's Ordinance, 1935; ShipImplementation Regulations, 1935; Marine Letters and Ship's Certifi-cate Decree, 1934 (and ibid., Ordinance, 1935); ImplementationRegulations, Marine Letters and Ship's Certificate Ordinance, 1935.

2/ Minister of Communications Decree Th.l/17/h and Thl/17/2, Sept. 26,1964.

ANX IPage 2

5. The BKI classification standards are based closely on those ofGermanischer Lloyd (GL). The regulations or rules make specific allow-ance for Indonesian conditions in certain areas such as required spareparts. However, all classification societies have developed technicalrules dealing with corrosion ands for example, the percentage of wastingof hull plate thickness allowed prior to replacement. Nearly all ofthese technical rules are similar and represent minimum technical stan-dards. There is, therefore, no reason to believe that the technicalstandards are excessive for Indonesian conditions.

6. Ship classification, and the creation of classification soci-eties, developed from the commercial need to establish standards accept-able to insurance organizations. Most insurance for large risks (insur-ing all or part of the Indonesian fleet would be an example) is partlyreinsured by the original insurer. Thus, in Indonesia, insurance regu-lations stipulate that 75% of the insurance liability must be issued byIndonesian companies and 25% may be insured abroad. In order to reinsureabroad, the ship must bear the appraisal of a classification society wellknown to the foreign markets. Such is not the case with BKI.

7. To enable Indonesian ships to obtain reasonable insurancepremiums or to obtain insurance at all (for rates are set on factorsother than solely technical ones), it is necessary to improve the accep-tance of the BKI classification. In order to accomplish this a two-stepdevelopment is proposed:

(a) the assignment of a joint classification with GL; and

(b) the eventual constitution of BKI as an entirely indepen-dent body.

8. Other relevant Indonesian laws, regulations and rules are:

(a) Ship registration:

(i) Indonesian Commercial Code, 1847, as amended andrevised, Book II.

(ii) Ship's Registration Ordinance, 1933 (Regelingteboekstelling van Schepen, Ordonnantie 1933 No. 3848, S. 1933 Jo. S. 1938 No. 32)o

(iii) Registration Fee Ordinance, 1924 (De Ordonnantieop het recht van Overschrijving S. 1924 No. 291Jo. S. 1949 No. 43)0

(iv) Ordinance on the conveyance of ownership of un-movable properties and the registration of mort-gages of the same in Indonesia (Conveyance ofProperties Ordinance), S. 1934 No. 27.

ANNEX 1Page 3

(b) Sbip mortgages:

(i) Indonesian Civil Law, 1847, as amended and revised,Book II Chapter XXI, Ari4cles 1168; 1169; 1171(3), (Li; 1175; 1176 (2); 1177; 1178; 1180;1186; 1187; 1189; 1190; 1193; 1197; 1199-1205; 1207; 1224-1227i

(ii) and the above-mentioned laws/regulations.

(c) Ship classification:

(i) Government RXgulatiot No. 28g964, August 24, 1964,concerning the *establiabs 't of the Indonesianclassification bureAu (BKI).

(ii) Minister of Sea Conxnicationls Decree No. Dn.1/13/2,July 21, 1965, concerning general provisions on con-ferment of ahip certificates and ship inspection incompliance with Ship's Ordinance, 1935.

(iii) Ship's Ordinance and its Implementation Regulation,1935 (based on SOIAS, 1929).

(iv) Marine Letters and Ship's Certificates Regulation,S. 1934 No. 78.

(v) Indonesian Shipping Law, 1936.

(Ti) Existing National Regulations concerning tonnagemeasurements, ship construction, load line, etc.(originally Dutch regulations based on internationalconventions).

(vii) BKI rules and regulations, Uhich are basically basedon National Law/Regulations and International (IMCO)Conventions and Internal Regulations of GL:

a. Regulation on ship classification and construc-tion, 1968.

b. Regulation on ship machine classification andconstruction, 1968.

c. Regulation on material, 1967.

d. Regulation of weld/electric arc of ships, 1967.

e. Dictionary of Ships Construction, 1967.

f. Regulation on ship classification, 1968.

ANNEX 1page 4

g. Regulation on wooden ahip conatruotion, 1971.

h. Register Book, 1972.

June 12, 1972

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THIE INTER-ISLAND FLEET

Organization Chart for Ministry of Comamunicattons

Mini sterFrans eda Drs, Ec.

an| Shiprngnn||Policyland PlanPingt

I _ Court l D~~~~~~~~~~~~~~~~~~~~~~~isciplineSecuri ty.

c Inspector General Drt G era trry Gener Ge

for- allDe artes ._

6nd Pcr60nrel | j L0 Soial ||Secretariat|

Legal|

I~ ~ ~ ~ ~~~~o Gaeco eraal i Crnncto6| otlTLcOmntt1 Director General !Lrector General

Land Commtunications DirSea eMnirati- At l'ar:le Production Tourism

(Admiral Nimpuno) and Services

Directorate Directorate Directorate Directorate Directorate Directorate

(See Annex 4) (See Annes 3)

.June 12, 1972

IN-NCSA

N-FMAT,,I "F A )JECT FP R THE PEH3ITLTTATI N

.- iI . S I -. Ym R .T

Organization Chart for Directorate General of Marine Producion

Director Genera;l(Mr. oekarton)

Secretary

,r. Partana)

Planning and

Research

Organizat ionand Personnel

Administration and

Pub lic Relations

fL I 11 T' r T 0 A T T'

Marine Product Services Marine Production |E priseFromtioZj

Maintenatnce and ShipbuildingRe airs

{alvage Engines andVessel s' Equipment

Evaluation | I val aion 1

S OATE ENTERPRISES

I Dock } 1 1 IPPA I | Alit § [ Ko'j Bar e Duc a

TaPrik ng Pakinl Gaja Barul Meodjajal jjj Surabaja|

INDONESIA

APPRAISAL OF A PROJECT FOY THE RENABILITATION

OF 0THE _NTER-ISIAND FLEET

OrRanization Chart for Directorate General of Sea Communications

Director Generai(Admiral Nim, no

Secretary(Mr. SapLa Adgi)

Planning and |Developent I

and PersonneM

|Finance|

Law t

Pealth|Adm,ni8Rtrattion and

D) I R E C T O R A T E

Sea Marine Nvigation Z Harbors and IShip-building aterils and EducationalTransportation Services Dredging Sivply Institute

STATE ENTERPRISES

Pilotas ge ano and | L_II guides I g Ports and | I PELNI_|_ Djakarta I IBio k llVrn

________ Elasiikasioa

KIndonesia | p Tirtaka

_,n Mari e

.Regions|

Tone 12, 1972

BANK PEMBANGUNAN INDONESIAORGANIZATION CHART

Supervisory

Board

Board of ManagingDirectors

President sor

Audit and SecretariatInspection I I

(Managing Director I) (Advisor) (Managing Director 11) (Advisor) (Managing_Director IBA) (Advisor) (Managing Director IV) (3Advisors)

1 Credit and Finance andMLtmGeneral Services lFollow-up lAccountingd

Research | Po1

< . ~~~~~~~~~~~CommercialPlanning Engineering Banking

Legal and BranchPersonnel 18 Branch Offices Coll|ateral Supervision

World Bank-6730 (Ri

ANNEX 5

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THE INTER-ISLAND FLEET

Schedule of Estimated Disbursements

Cumulative Disbursement at End of Quarter

(USO000)

IDA Fiscal Year

and Quarter Ship Repairs Consultants Total

1972/73

December 31, 1972 20 20

March 31, 1973 ° 190 260

June 30, 1973 210 380 590

19731/74

September 30, 1973 560 570 1,130

December 31, 1973 910 760 1,670

March 31, 1974 1,610 950 2,560

June 30, 1974 2,450 1,050 3,500

1974/75

September 30, 1974 3,850 1,130 4,980

December 31, 1974 4,900 1,230 6,130

March 31, 1975 5,390 1,300 6,690

June 30, 1975 6,160 1,500 7,660

1975/76

September 30, 1975 6,790 8,290

Decemnber 31, 1975 6,860 8,360

Marcri 31, 1976 7,000 8,,500

June 30, 1976

June 12, 1972

ANNEX 6Page 1

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THE INTER-ISLAND FLEET

Bank Pombangunan Indonesia

Policy Statement

The Board of Managing Directors of BAPINDO, with the approvalof the Supervisory Board, adopts the following policies and guidelinesto be observed by BAPINDO in its operational activities.

1. Basic Policy

BAPINDO is established as a development finance institution toprovide, within the framework of the Government's general policy, financialand related assistance to enterprises in Indonesia which, by their acti-vities, are expected to make a positive contribution to the economicdevelopment of Indonesia. In order to achieve this objective, BAPINDOwill conform with the following guidelines:

(a) BAPINDO itself will build up a sound financialstructure to enable it to carry on its activitiesand will acquire the necessary funds, mainly long-and medium-term, with which to provide thedevelopment assistance required. It will assurethat the maturities of its assets are appropriateto those of its liabilities.

(b) BAPINDO will build up a sound organizationalstructure and the high level of expertise whichwill be required to carry out its dutiesefficiently.

(c) BAPINDO will give particular attention to thenecessity of fostering a strong and healthyentrepreneurship and capital market in Indonesia.

(a) BAPINDO's assistance will taKe as wide a form asnecessary for the fulfillment of its duties, con-sistent with BAPINDO's role as a developmentfinance institution.

(e) In order to enhance its effectiveness as a develop-ment finance institution, BAPINDO will seek toestablish firm and growing relationships with otherfinancial and allied institutions, both domesticand foreign.

ANNEX 6Page 2

2. Field and Scope of Activities

(a) BAPINDO will assist in the promotion, establishment,rehabilitation, expansion and modernization ofenterprises, especially in the fields of industry,tourism and transportation.

(b) Tne main emphasis in BAPINDO's operationswill be on medium- and long-term loans.The proceeds of such loans may be used forfinancing of permanent working capital.

3. Basis for Investment Decisions

(a) BAPINDO will make its decisions to assist onlyon the basis of sound investment criteria andwill set the terms of its loans according tothe needs of the projects financed. ThereforeBAPINDO will give assistance only to enter-prises which are soundly managed and organizedand which are judged to be viable after carefuleconomic, financial, marketing and engineeringappraisal.

(b) Subject to 3 (a) above BAPINDO will select pro-jects on as broad a geographical basis aspossible.

(c) BAPINDO will maintain continuous contact withenterprises to which assistance has been givenand will endeavour to provide any advice orguidance it feels necessary and take whateveraction which may be required under particularcircumstances.

4. Financial Guidelines

BAPINDO's financial commitments will normally not exceed thefollowing guidelines:

(a) BAPINDO's total outstanding debts, includingdeposits, and guarantees, will not exceed 3times BAPINDO's net worth.

(b) BAPINDO's participation in any singleenterprise will not exceed 10% of BAPINDO'snet worth.

ANNX bPage 3

(c) BAPINDO's equity participation in any singleenterprise will not exceed 10% of BAPINDO'sneb worth.

(d) BAPINDO's financial commitments (in whateverform) to any single enterprise will not ex-ceed 20% of BAPINDO's net worth.

5. Relationship with Enterprise

(a) BAPINDO shall not have a controllinginterest in an enterprise which wouldresult in giving it primary/singleresponsibility for management of theenterprise. Therefore, it will notnormally participate in more than 25% ofthe share capital. of any single enterprise.

(b) To safeguard BAPINDO's interests and/orthe interests of the economy, in case ofJeopardy and notwithstanding 5 (a) above,BAPIND0 will take effective measures forproviding adequate supervision and guidancefor the enterprise. It may seek representa-tion on the managing body of the enterpriseconcerned.

(c) It is recognized that as a result of itsunderwriting of share issues of enterprisesBAPINDO may hold issued share capital of anenterprise in a ratio greater than that asmentioned in (a) above. In such cases, BAPINDOwill dispose of the excess portion of theshare capital as soon as possible followingthe guidelines of 6 below.

6. Portfolio Management

(a) BAPIND0 will conduct its operations in sucha manner as to assist in the growth of asound capital market in Indonesia.

(b) BAPINDO will endeavour to diversify the hold-ing of securities in its portfolio, and torevolve the contents of its portfolio wheneverpossible on satisfactory terms.

(c) In revolving its portfolio, BAPINDO will paydue regard not only to its own interests, butalso to market conditions, and to the interestsof other holders of the securities and of theenterprise concerned.

AM=EI 6Page 4

7. Risks and Profitability

(a) Although BAPINDO's decisions to give financialassistance will be based upon its judgment ofthe overall prospective profitability of theenterprise, BAPINDO will obtain and secure inaccordance with sound business practice, ade-quate security for the financial assistanceit provides.

(b) BAPINDO will not carry the foreign exchangerisk attendant upon its borrowing and lend-ing activities. The risk will be passed onto its clients or covered by other suitablemeans.

(c) In order to finance its activities BAPINDOwill endeavour to acquire sufficient funds ofa stable nature, on as reasonable terms aspossible, to be able to give financial assis-tance to its clients on terms which will allowa healthy growth in the economy.

(d) In carrying out its activities, BAPINDO willadopt charges which will allow it a satis-factory return, after meeting all expenses,including the necessary provisions. Tnis shouldalso allow BAPINDO to build and maintain re-serves consistent witn sound financial practiceand adequate legal reserves for strengtheningits equity.

8. Organization and Staff

BAPINDO will rapidly build an effective organization and develop anadequate well-trained staff in the fields of financial, marketing, economic,engineering, accounting and legal services in order to discharge effectivelyits duties and to enable it to assist its clients in the fomulation andimplementation of their projects.

9. Revision of Policies

This Policy Statement will be amended when necessary to secureBAPTNDO's successful operations, and to give flexibility in its activities.

10. Transitional Policies

Tne reduction in BAPINDO's commercial banking will be carried outgradually with as little disruption as possible to either BAPINDO or itsclients.

June 12, 1972

ANNi9 7

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THE INTER-ISLAND FLEET

RLS Fleet Forecast Methodology

1. The fleet forecast shown in Table 4 is based on an analysis ofthe RLS fleet as at the end of 1970, broken down into deadweight and four-year age groups (Table 5).

2. The forecast of retirements assumes about a 20-year economiclife for ships. It further assumes that the first retirements arisingout of this project will occur in 1973 and that by 1975 vessels whichwere 17 or more years old in 1970 will have been retired. Similarly,vessels which were 13 to 16 years old in 1970, and have had their normallife extended by rehabilitation, will have been retired by 1979.

3. So long as the present excess of shipping tonnage continuesthere will be little or no incentive to new investment. However, as theprogram of rationalization proceeds and capacity utilization and profita-bility improve, the incentive to invest in new vessels will increase. By1976, as the financial evaluation indicates (paras. 6.15-6.16), the prof-itability of most classes of vessel should have improved substantially,even given the present level of freight rates. Accordingly, new vesselsare shown entering the fleet in 1976.

h. New vessels are forecast to enter the fleet at a rate which willresult in a net increase, after retirements, of 5% per annum in fleet dead-weight. This is a rate which, given the forecast increase in demand of 5-10% per annum, yields an acceptable load-factor (cargo ton-miles as a per-cent of deadweight ton-miles) in each of the years 1976 through 1980, asfollows:

1976 1977 1978 1979 1980

Deadweight ton-miles (millions) 6,210 6,i541 6,869 7,212 7,573Cargo ton-miles - 10% growth rate (millions) 2,462 2,709 2,980 3,278 3,605Cargo ton-miles - 5% growth rate (millions) 1,863 1,956 2,054 2,156 2,264LI:ad-factor - 10% growth rate (%) 40 41 43 45 48Load-factor - 5% growth rate (%) 30 30 30 30 30

A load-factor of 50% of deadweight is probably close to the practicalmaximum for Indonesian conditions, taking account of the type of cargo and thiinevitable light-loaded return trips. If the load factor were to fallsignificantly below 30% it is doubtful if there would be much incentive toinvest.

June 12, 1972

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF TTUE INTER-ISLAND FLEET

Area and Population of the Main Islands

Area /2 (population in thousands) %Island (Ng mi) 1961 1962 1964 1966 1967 1968 1969 1970 1971 total

Kalimantan 208,286 4,120 4,220 4,433 4,661 4,782 L4,907 5,037 5,172 5,312 4.3

Sumatra (incl. sur-rounding islands) 182,859 15,803 16,189 17,003 17,879 18,343 18,823 19,322 19,840 20,387 16.4

Sulawesi 72,986 7,109 7,283 7,649 8,043 8,251 8,468 8,692 8,925 9,167 7.4

Java and Madura 51,032 63,226 64,661 67,690 70,943 72,660 74,440 76,286 78,201 80,187 64.5

Other Islands/1 220,218 7,129 7,303 7,670 8,o67 8,275 8,)192 8,717 8,951 9,195 7.L

Total 735,381 97,387 99,656 1o4,445 109,593 112,311 115,130 118,054 121,089 124,248 100.0

Rate of Increase (%) - - 2.32 2.39 2.45 2.48 2.51 2.54 2.57 2.61

/1 Includes Halmahera, Ceram, Sumbawa, Timor, Flores, Bali, Lombok and West Irian.

12 These projections are based on the assumption that the rate of population increase for Java and Madura was 2.24% in 1961;progressing linearly to 1971 according to the equation: r - 2.24 + 0.03t (where r is the rate of increase and t the numberof years since 1961). For the other islands the equation is: r = 2.41 + 0.0-3t.

Source: Central Bureau of Statistics

June 12, 1972

TABLE 2INWONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

CF THE INTER-ISLAND FLEET

Estimated Composition of Indonesian Merchant Marine

No. Approx.Type of Employment Ships dwt Notes

A. Domestic Tradess general cargo

1. inland and local sailing craft n/a n/a (a)2. Local craft, under 250 dwt 800 100,000 (b)3. Barges, estimated minimum 35 10,000 (a)4. Inter-island - under 3,500 dwt 240 235,ooo (c)

- over 3,500 dwt 5 40OOO0 (c)

B. Overseas Shipping, general cargo

5. Short-range and inter-island- under 3,500 dwt 13 35,000 (d)- over 3,500 dwt 12 45,000 (d)

6. Ocean-going - under 3,500 dwtto over 10,000 dwt 60 475,000 (e)

C. Tankers - Inter-island, Ocean

7. Under 1,000 dwt barges 20 15,000 (f)d. 1,000 dwt - 7,000 dwt 20 75,000 (f)9. Over 7,000 diwt 33 715,000 (f)

D. Ore and Bulk Carriers (6) (24,000) (g)

E. Goverrnent FleetUnder 500 dwt to over 3,500 dwt 85 105,000 (h)

Notes

(a) No reliable data. Economic mission noted 17,000 sailing craft.(b) 200 enterprises registered with 500 vessels totalling 70,000 dwt; not

registered, about 175 enterprises with some 500 vessels totalling 30,000 dwt.(c) 56 enterprises. Excludes Singapore-based ships in inter-island trade -

about 35 vessels totalling 35,000 dwt.(d) Three enterprises. Of the 25 ships, five are chartered totalling 20,000 dwt.(e) Nine enterprises. Of the 60 snips, 15 totalling 120,000 dwt are chartered.(f) PERTAMINA fleet, 40 owned, 21 on hire purchase, 12 chartered.(g) Self-unloading colliers only. No data on other such ships.(h) Army, navy, police etc. About 40% are engaged in inter-island trade

officially, but a further 30-35% is also thought to be engaged in suchtrading.

June 12, 1972

TABLE 3

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THE INTER-ISLAND FLEET

(1)Passenger and Cargo Traffic Projection

Year Pass(ng( rs Cargo Tons(1000) Annual Ton-miles (Millions)

-7% rowth (3) 7% Growth (3) 10i Growth A) 7S Growth (3) 57 lrowt.h

1969 n.a. 2,850 1,390 1,390 1,390

1970 450 3,050 1,529 1,487 1,460

1971 480 3,260 1,682 1,591 1,532

1972 520 3,490 1,850 1,703 1,609

1973 550 3,740 2,035 1,822 1,690

1974 590 4,000 2,239 1,950 1,774

1975 630 4,280 2,462 2,086 1,863

1976 680 4,580 2,709 2,232 1,956

1977 720 4,900 2,980 2,388 2,054

1978 t70 5,240 3,278 2,555 2,156

1979 830 5,600 3,605 2,734 2,264

(1) Passengers based on estimate for 1970; cargo based on 1969 actual, including50% of Singapore/Malaysia traffic.

(2) Assumes 7% growth in cargo tons plus 3% growth in average trip miles.

(3) Most likely growth rate.

(4) Assumes 5% growth in cargo tons and no growth in average trip miles.

Source: Bank Staff

June 12, 1972

I NL'O N ESIA

A?PRATSAL OF A PROJECT FOR THE REHABILITTAION

OF THE INTER-ISLAND FLEET

RLS Fleet Forecast

VESSEL SIZE (DEADWEIGHT)

500-750 750-1000 1000-1500 1500-2500 2500-3500 TVessels Dlt Vessels Dwt Vessels Dwt Vessels Dwt Vessels Dwtotal Fleet

Composition of Fleet - end 1972(1) 67 41,200 26 23,600 33 40,400 45 91,800 16 45,400 187 242,400

1973 - Additions- (Retirements) _ (7,570) - (570) - (12370) _ (7.170) _ (3,900) _ (24,580)

Composition of Fleet - end 1973 54 33,630 25 23,030 28 35,030 41 84,630 14 41,500 162 217,820

1974 - Additions- (Retirements) _ (7,570) - (570) - 30) _ 7,170) __ (3900) _ (24,580)

Composition of Fleet - end 1974 42 26,060 24 22,460 24 29,660 37 77,460 13 37,600 140 193,240

1975 - Additions- (Retirements) _ (7,560) _ (560) - 360) _ (7160) _ (3,900) _ (24,540)

(3)- 710 390

Composition of Fleet - end 1975 30 18,500 24 21,900 20 24,300 33 70,300 12 33,700 119 168,700

1976 - Additions 1,500 1,000 1,500 2,500 2,500 9,000- (Retirements) _ - - - -

Composition of Fleet - end 1976 32 20,000 25 22,900 21 25,800 34 72,800 13 36,200 125 177,700

1977 - Additions 4,270 2,000 1,500 12,370 10,300 30,440

- (Retirements) _ (3,270) __ (930) - ±3) _ (8,400) (8,600) _ (21.540)

Composition of Fleet - end 1977 34 21,000 26 23,970 27 26,960 36 76,770 13 37,900 131 186,600

1978 - Additions 4,270 2,000 1,500 12,670 10,400 30,840

- (Retirements) _ (3,77 _- (940) (330) _ (8.400) _ (8,600) _ (21,540)

Composition of Fleet - end 1978 36 22,000 27 25,030 23 28,130 38 81,040 13 39,700 137 195,900

1979 - Additions 4,360 2,000 1,500 12,960 10,500 31,320

- (Retirements) _ (3,260) -_ (930) (330) _ (8,400) _ (8,600) _ (21,520)

Composition of Fleet - end 1979 37 23,100 28 26,100 'i3 29,300 40 85,600 14 41,600 142 205,700

Notes: (1) Assumes no change from end 1970.(2) Retirements assume a 20-year economic life.(3) On completion of the rehabilitation program.(4) Assumes that rehabilitation has extended vessels' economic life by at least four years - i.e. those rehabilited in 1973

will not be retired before 1977.(5) Additions are calculated to provide a 5% net annual increase in deadweight.

Source: Bank staff

June 12, 1972

APPRAISAL 00 A P5 0J00T 000 THE OROANFLI TATTOOl

OF THO INTER-ISIAND FL~ET

Registered RIO Fleet Cn,Pnsltlsn b Age and Tonnag Class. Red I-(Number and '000 dat)

(a Naber and P..e,netage nof Ennh Tnngs Grasp by Age Class

500- 750 750 -100,0-1,,500 1.500 - 2,5oc 2.500 - 3.500 T.ta1

Age , n -Na. N3r dZw Na. d s Na. N dat % tie. 9 dat NNa N An

0-. years 2 3.0 1.0 2.1 - - 2 1' 1.0 0. 1

5- 0year 1 1.5 0.7 1.7 10 38.5 5.0 30.1 9 27.3 11.6 20.1 5 -1.1 11.0 12.0 - - - -25 '3.t 30.3 13.3

9 12 years 11 i6.4 7.0 17.0 11 42.3 10.1 o2.8 10) 30.3 11.7 29.0 15 33.1 31.1 3-.' 3 10.- 0 1. 50 25?- 70.8 2-.2

13 - 6 year i6 23.9 0.0 23.0 3 11.5 2.0 11.0 1 3.0 1.0 2.5 17 20.9 25.2 27.5 1 3.0 10.5 p. c 71.1 50.6 21.0

172-00 years 20 Li .0 17.3 10.0 2 7.7 1.7 7.2 A 21.2 10.1 25'.0 2 1.. 3.73 1.o 2 '2.5 6.o 1 3.2 27 02.5 30.0 10.2o

21 Years and avr 9 13.1 5.4 13.1 - - - - 5 15.2 0.0 11.0 10 72.2 17.8 10.1 .1 25.0 ''., 25.0 28 11.0 10.0 16.9

T.tn1 67 100.0 11.2 100.0 20 100.0 23.0 100.0 33 100.0, lob 100.0 15 102000.0 100 lo.3 13 '00.0 1,5.1 00o.0 100 100.0 7o2.a 100.0

(b) Nnber and Percen tage af Eanh 5ge GraP by T-nngs Clans

Class 0 - I Year 5 - 0 Tear 9 ,- 17 Years,o 13 - 16 Yearn 1- - 20 Years 21 Years aM Ose FeTtal

Na. N Al N= T N N9. I. N dt n d,,t N1 En. ~dat N No. % dt Nr Mn. 7. AnI

500 -750 2 100.0 1.0 100.0 1 1.0 0.7 7.1 I1 27.0 7.0 q0. 16 LO.C 0.0 16. 20 -0. .3 'L.". 32.' 5.0 13.2 67 35.0 11.2 17.0

750-1,o0o - - - - 10 40.0 P.0J 27.0 11 22.0 10.1 11.0 3 '.0 2.0 1.0 2 -. '. 4.3 - - - - 26 13.9 23.6 9.7

1,000 - 1, 500 - - - - 9 36.0~ 11.6 35.o 10 20.0 11.7 10.5 1 2.5 '.o -'.0 'O., 70.0 S -, .c 141? 33 17.6 10.1 16.7

1,500 - 2,500 - - - - 5 20.0 11.0 31.1 iS 30.0 341. aOl2 13 32.5 25.2 13.3 2 .0 3. -. 5 '0 35. '.0 13.5 45 21.2 91.0 30.9

2,500 -3,5to- . - - - - 0. 0 7.' 11.0 .''U2'Z. 33.0f 2 3. - L 'i,.3 11.3I 20.0 16 0.5 15.1 10.7

Tatn1 2 100.0 1.0 100.0 25 100.2 32.3 100.0 50 100C.0C 70.0 100.0 -1 00O.0 50.0, '00.c a? 1 001 .0 P.0'0 ~. 0 28 10. , 101O0.0 '07 1 00.0, 212.1 100.0

Sonn'ne Diletarate Gersra sof Sea Caseinatinalan

Jane 12, 1972

INDONESIA

APPRAISAL OF A PROJECT FOR THE REIABILSTATION

OF THE INTIR-ISLAND FLEET

Savings Calnlotior. (Rpn Millions)

lessn Sine llD-d-ioht) Total Fleet500-750 750-lOSS 1000-1500 1500-2500 2500-3500

Annual Repairs and maintenancr Costs per Vessel - Without Rehabilitation 5.3 7.4 13.1 19.2 23.3- With Rebabilitotion 2_1 2.3 2.8 3.5 4.2- Saving 3_i2 10.3 15

ALTERNATIVE #1

Estimated Number of Vessels Rehabilitated3 1

30 24 20 33 12

Annual Saving - First 4 years following rehabilitative 96 0 22.4 206.0 518.1 229.2

Estiontod Nunber of V-ssels benefitting for a farther period of 4 years 14 21 19 20 3

An.nal Saving - Seond 4-year period 44.8 107.1 195.7 314.0 57.3Loss extra annn -oo ts(

4.6 .9 1.2 1.8 3.0

Nrt Saving - Second 4-y-ar pooid 44.2 106.2 194.5 312.2 54.3 711.4

ALTERNATIVE #2

Estioated Nveber uf Vessels Rehabilitated3

2 47 22 18 30 2

Annual Saving - First 4 years following r-habilitation 150.4 112.2 185.4 471.0 38.2 957.2

BENEFITS BY YEARAlternative #l Alternative #2

Iet 4 years 2Od 4 yeats Total ist 4 years 2nd 4 years Total

1973 - One-third 3of bsenfits 390.6 - 390.6 319.1 - 319.11974 - Two-thitrd (

3)of benefits 781.1 _ 781.1 638.1 - 638.1

1975 - Thaee-thirds of benefits 1,171.7 - 1,171.7 957.2 - 957.21976 - 'hree-thirds nf benefits 1,171.7 - 1,171.7 957.2 - 957.21977 - Two-thirds of benofits for 1st 4 yeats plus .on-third nf benefite fin 2nd 4 yeats 781.1 237.1 1,018.2 638.1 237.1 875.21978 - One-third of benefits for let 4 y.aro pins two-,hird of benefits for 2nd 4 years 390.6 474.3 864.9 319.1 474.3 793.41979 - Three-thirds of benefit. fon 2nd 4 years - 711.4 711.4 - 711.4 711.41980 - Three-thirds of benefits fon 2nd 4 years - 711.4 711.4 - 711.4 711.41981 - Two-third of benefits fur 2nd 4 years _ 474.3 474.3 _ 474.3 474.31982 - One-third of benefits fee 2nd 4 years - 237.1 237.1 237.1 237.1

Rate of Ruetn 24.' 17%

Notes (1) Assumes n. .esels rehabilitated whfic will be over 20 years aId in 1975.(27 Assumes only those vessels already surveyed will be rehabilitated.(3) Ass.wes that this proportion of the rehabilitation has bees effected.(4) Nased on 2% of capital tests spread over the 4-year period.

Jane 12, 1972

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHABILITATION

OF THE INTER-ISLAND FLEET

Performance Ratiosby Class of Vessel and for Fleet Beforr and After Rehabilitation

Before Rehabilitation (1970) After Rehabilitation (1976)

Average Averagefor for

Vessel Size (dwt): Fleet 500 700 1,500 2,500 Fleet 500 750 1,500 2,500

Operating Ratios

A 155 202 147 171 149 128 57 85 58 66 54 51B 158 204 149 174 151 130 65 97 66 75 61 58C 152 198 143 168 141 125 47 71 49 55 4L 42

Return on apitalInveste3d7Negative)

A (6.4) (12.4) (6.8) (7.8) (5.8) (3.9) 11.9 3.7 12.6 7.9 12.2 14.3B (6.6) (12.5) (6.9) (8.0) (5.9) (4.0) 8.6 0.7 9.0 5.1 9.0 10.8

C (6.2) (12.0) (6.4) (7.6) (5.5) (3.6) 17.6 8.8 18.9 12.8 17.7 20.3

Return on Shv ownersEquity (Negat

A (64.1) (92.4) (63.8) (68.9) (58.8) (49.3) 39.0 (1.9) 42.9 19.1 40.8 51.3B (65.0) (93.2) (64.9) (69.7) (59.6) (50.2) 22.5 (16.8) 24.9 5.2 24.9 34.0C (62.9) (90.9) (62.2) (67.7) (57.5) (47.8) 67.6 24.0 74.4 43.5 88.5 101.3

Interest Coverage Ratios

A - _ - _ _ _ 2.9 0.9 3.1 1.9 3.0 3.5B _ _ - _ _ _ ?.l 0.2 2.2 1.2 2.2 2.7C - - - - - - i .3 2.2 4.6 3.1 4.3 5.0

A: Assumes a growth rate in traffic from 1969 onward of 7% (most likely).B: Assuwes a growth rate in traffic from 1969 onward of 5% (minimum).C: Assumes a growth rate in traffic from 1969 onward of 10% (maximum).

Source: Bank Staff

June 19, 1972

INDONESIA

APPRAISAL OF A PROJECT FOR TBE REHABILITATION

OF TIIE INTER-ISLAND FLEET

Comparison of Earnings Per Vessel Before and After Rehabilitation

Before Rehabilitation - 1970 (Rps millions) After Rehabilitation - 1976

Average Average

for for

Vessel Size (dwt): Fleet 500 750 1,500 2.500 3.500 Fleet 500 750 1.500 2.500 3,500

A. "Most Likely" Growth Rate in Traffic(i.e. 77. per annum)

Revenue (Appendix B)

Cargo 30.6 12.1 20.6 29.7 49.5 73.1 72.2 25.3 43.6 63.5 111.4 153.4

Passengers 9.9 3.9 6.7 9.6 15.9 23.6 23.2 8.0 14.0 20.5 35.9 49.2Total Revenue 40.5 16.0 27.3 39.3 65.4 96.7 95- 77 77 5( 8U ZT7 147.

Expenses (Appendix C)

Fixed Costs 40.0 23.2 26.9 41.6 59.4 74.4 29.0 19.0 20.3 28.5 39.4 50.0

Depreciation 16.5 6.6 9.4 17.9 27.7 35.0 17.3 6.6 9.4 17.9 27.7 35.0

Variable Costs 6.5 2.6 3.7 7.7 10.2 14.3 8.1 2.8 4.0 9.4 12.5 17.9

Total Expenses 63.0 32.4 40.0 67.2 97.3 123.7 54.4 28.4 33.7 55.8 79.6 102.9

Operating Profit (Loss) (22.5) (16.4) (12.7) (27.9) (31.9) (27.0) 41.0 4.9 23.9 28.2 67.7 99.7

Less Interest 19.8 8.0 11.3 21.4 33.2 42.0 14.1 5.4 7.7 214.6 22.5 28.1

Net Profit (Loss) Before Tax (42.3) (24.4) (24.0) (49.3) (65.1) (9.0) 26.9 5 36 45.2 71.6

B. Minimum Growth (57. per annum)

Total Revenue (Appendix B) 39.9 15.8 26.9 38.7 64.5 95.4 84.0 29.3 50.8 714.1 129.7 178.5

Total Expenses (Appendix C) 63.0 32.4 40.0 67.2 97.3 123.7 54.4 28.4 33.7 55.8 79.6 102.9

Operating Profit (Loss) (23.1) (16.6) (13.1) (28.5) (32.8) (28.3) 29.6 0.9 17.1 50.1 75.6

Less Interest 19.8 8.0 11.3 21 4 33 420 14.1 57 7 7 _4.2 1

Net Profit (Loss) Before Tax (42.9) (24.6) (24.4) (49.9) (66.0) (70.3) 15.5 (4.5) 9.1 3.7 17.5

C. Maximum Growth (10%. per annum)

Total Revenue (Apppndix B) 41.3 16.4 27.9 40.1 66.8 98.8 115.1 40.2 69.5 101.4 177.6 244.5

Total Expenses (Appendix C) 63.0 32.4 40.0 67.2 97.3 123.7 54.4 2S.4 33.7 55.8 79.6 102.9

Operating Profit (Loss) (21.7) (16.0) (12.1) (27.1) (30.5) (24.9) 6. 1. t 6 F 1 9

Less Interest 19.8 8.0 11.3 21.4 33.2 42.0 14.1 5.4 7,7 14.6 22.5 28.1

Net Profit (Loss) Before Tax (41.5) (24.0) (23.4) (48.5) t7) (66.9) TT 0.. b14 5FU15 1L. T

-iSm

Sourre: Bank Staff X|

1'ne 1 972

INON'S: A

AFPRAISAL OF A PRUJECT F.R; THE REHAfTLTTATTInN

OF THE INTER-ISLAND FLEET

Comparison and Analysis of Revenue Flows to the RLS Fleet Before and After Rehabilitation

Before Rehabilitation (1970) After Rehabilitation (1976)

Vessel Sise (dwt): Total 500 750 1,600 2,500 3,500 Total 600 750 1.500 2,500 3,500

Number of Vessels 187 67 26 33 45 16 119 30 24 20 33 12

A. AssusinR ostLikey"An oth a of 7% ;V

Cargo Ton-Miles (millions) 1,1487.0 210.9 139.4 254.5 578.3 303.9 2,232.0 197.0 272.0 330.0 955.0 478.0Cargo Revenue (Rps milll,ons)2/ 5,724,9 811.9 536.6 979.9 2,226.5 1,170.0 8,593.2 758.4 1,047.2 1,270.5 3,676.8 1,840.3Passengers (thousands)3/ 450.0 63.8 42.2 77.0 175.0 92.0 674.o 59.0 82.0 100.0 289.0 144.0Passenger Revenue (Rps millions)4/ 1,845.0 261.7 172.9 315.8 717.6 377.0 2,763.4 2t,1.9 336.2 [.10.0 1,184.9 598..

Total Annual Revenue (Rps millions) 7,569.9 1,073.6 709.5 1,295.7 2,94hL. 1,547.0 11,356.6 1,000.3 1,383.4 1,680.5 4,861.7 2,430.7

Average

Annual Revenue per Vessel (Rps millions) 40.5 16.0 27.3 39.3 65.4 96.7 95.4 33.3 57.6 84.o 147.3 202.6

B. Assumin Minimum Annualroth Raof Total

Cargo Ton-Miles (millions) 1,460.0 207.1 136.8 249.9 567.8 298.4 1,956.0 172.0 236.0 290.0 837.0 419.0Cargo Revenue (Rps millions) 5,621.0 797.2 526.9 962.1 2,186.1 1,118.7 7,530.6 662.2 916.3 1,116.5 3,222.5 1,613.1Passengers (thousands) 450.0 63.8 42.2 77.0 175.0 92.0 603.0 53.0 74.0 89.0 258.0 129.0Passenger Revenue (Rps millions) 1,845.0 261.7 172.9 315.8 717.6 377.0 2,472.3 217.3 303.4 368.9 1,057.8 528.9

Total Annual Reverue (Rps millions) 7,466.o 1,o48.9 699.8 1,277.9 2,903.7 1,525.7 10,002.9 879.5 1,219.7 1,4181.4 4,280.3 2,112.0

Average

Annual Revenue per Vessel (Rps millions) 39.9 15.8 26.9 38.7 64.5 95.4 81.0 29.3 50.8 74.1 129.7 178.5

C. Assimiin Maximum Annual

Cargo Ton-Miles (millions) 1,529.0 216.8 143.3 261.7 594.7 312.5 2,709.0 239.0 330.0 401.0 1,159.0 680.oCargo Revenue (Rps millions) 5,886.7 834.8 551.8 1,007.5 2,289.6 1,203.0 10,429.6 920.0 1,270.5 1,543.8 4,462.1 2,233.0Passengers (thousands) 450.0 63.8 42.2 77.0 175.0 92.0 797.0 70.0 97.0 118.0 341.0 171.0Passenger Revenue (Rps millions) 1,845.0 261.7 172.9 315.8 717.6 377.0 3,267.7 287.0 397.7 M83.8 1,398.1 701.1

Total Annual Revenue (Rps millions) 7,731.7 1,096.5 724.7 1,323.3 3,007.2 1,580.0 13,697.3 1,207.2 1,668.2 2,027.6 5,860.2 2,934.1

Average

Annual Revenue per Vessel (Rps millions) 43.3 16.4 27.9 40.1 66.8 98.8 115.1 40.2 69.5 101.4 177.6 244.5

1/ See Traffic Forecasts, Table 3.7/ Assumes revenue at rate of Rps 3.85 per ton-mile.3/ Estimate for 1970 from report of Indonesia Maritime Mission, June 14, 1971. Assumes growth at same rate as cargo traffic.1/ Assumes average revenue per passenger of Rps 4,100.

Source: Bank Staff

Joas 12, 1972

INDONESIA

APPRAISAL OF A PROJBCT FOR THE REHABILITATION

OF THE INTER-ISLAND FLEET

Comparison and Analysis of Vessels' Annual Operating CostsBefore and After Rehabilitation

(Rps millions)

Before Rehabilitation (1970) After Rehabilitation (1976)

Vessel size - deadweight tons: Average 500 750 1.500 2.500 3.500 Average 500 750 1.500 2.500 3,500

Fixed Costs

Wages and Benefits 6.9 6.9 9.3 13.2 18.6 6.9 6.9 9.3 13.2 18.6

Victualling 2.7 2.7 3.9 5.3 5.9 2.7 2.7 3.9 5.3 5.9

Stores and Sundry 2.1 2.1 2.9 3.9 4.3 2.1 2.1 2.9 3.9 4.3

Repairs and Maintenance 5.3 7.4 13.1 19.2 23.3 2.1 2.3 2.8 3.5 4.2

Insurance 2.6 3.8 7.2 11.0 14.0 1.6 2.3 4.4 6.8 8.7

Management 3.6 4.0 5.2 6.8 8.3 3.6 4.0 5.2 6.8 8.3

Total Fixed Costs 40.0 23.2 26.9 41.6 59.4 74.4 29.0 19.0 20.3 28.5 39.4 50.0

Depreciation 16.5 6.6 9.4 17.9 27.7 35.0 17.3 6.6 9.4 17.9 27.7 35.0

Variable Costs

Port Costs 1.1 1.3 1.8 2.3 2.9 0.9 1.0 1.4 1.8 2.2

Fuel Costs in Fortl/ 0.5 0.9 1.3 1.8 2.2 0.4 0.7 1.0 1.4 1.7

Fuel Costs at Sea2/ 1.0 1.5 4.6 6.1 9.2 1.5 2.3 7.0 9.3 14.0

Total Variable Costs 6.5 2.6 3.7 7.7 10.2 14.3 8.1 2.8 4.0 9.4 12.5 17.9

Total Operating Costs 63.0 32.4 40.0 67.2 97.3 123.7 54.4 28.4 33.7 55.8 79.6 102.9

Interest 19.8 8.0 11.3 21.4 33.2 42.0 14 .1 5.4 7. L 4.c 22.5 28.1

Total Annual Costs 82.8 40.4 51.3 88.6 130.5 165.7 o8.5 33.8 h1. 7.oh 102.1 130.o

1/ Days in port per year assumed at 260 before rehabilitation and 203 after rehabilitation.

2/ Days at sea per year assumed at 90 before rehabilitation and 137 after rehabilitation.

3/ Assumes an interest of 15% per annum before rehabilitation and 10.2% per annum after rehabilitation.

Source! Tank Staff

June 12, 1972

to

"'ABT E 8

INDONESIA

APPRAISAL OF A PROJECT FOR THE REHARILITATION

OF TIHE INTER-ISLAND FLEET

Projected Cash Flows for Vessels Rehabilitated from January 1, 1976

(Rps Millions)

Average Vessel 500 Dwt Vessel1976 1977 197$ 1979 1980 1976 1977 1978 1979 1980

Cash OutflowFixed Costs 29.0 29.0 2 9.0 29.0 29.0 19.0 19.0 19./ 19.0 19.0Variable Costs 8.1 8.1 8.1 8.1 8.1 2,8 2.8 2.8 2.8 2.8Operating Costs (Excluding Depreciation) 37.1 37 1 37 1 37.1 37.1 21.8 21 8 21.8 21 8 21.8

Intere . n Loan for Rehabilitation 1/ 2.9 2.9 2,2 1.4 0,7 2.5 2.5 1_9 1_2 0.ORepayment of Loan for Rehabilitation 2/ - 7.2 7.2 7.Z 7.3 - 6.0 6.0 6.0 6.1Total Cash Ouftflow 40.0 47.2 46.5 45.7 45,7 24.3 30.3 29, 7 29.0 28.5

Cash InflowCargo and Passenger Revenues 3! 95.4 97.1 99.0 101.2 104.2 33.3 33.4 33.6 34.0 34.3

Surplus (Deficitl 4/ 55.4 49.9 52.5 55.5 49.1 9.0 3.1 3.9 5.0 5.8

750 Dwt Vessel 1,500 Dwt Vessel1976 1977 1978 1979 1980 1976 1977 1978 1979 1980

Cash OutflowFixed Costs 20.3 20.3 20.3 20.3 20.3 28.5 28.5 28.5 28.5 28.5Variable Costs 4.0 4.0 4.0 4.0 4.0 9.4 9.4 9.4 9.4 9.4Operating Costs (Excluding Depreciation) 24.3 24.3 24.3 24.3 24.3 37.9 37.9 37.9 37.9 37.9

Interest on Loan far Rehabilitation 1/ 2.5 2.5 1.9 1.3 0.6 2. 6 2.6 1.9 1.3 0.7Repayment of Loan for Rehabilitation 21 - 6.1 6.1 6.1 6.1 - 6.4 6.4 6.5 6.5Total Cash Outflow 26.6 32 9 32.3 31.7 31.0 40.5 46.9 46,2 45.7 45,l

Cash InflowCargo and Passenger Revenues 3/ 57.6 59.0 60.6 62.4 64.2 84.0 85.5 87.2 89.1 94.9

Surplus (Deficit) 4/ 30.8 26.1 28.3 30.7 33.2 43.5 38.6 41.0 43.4 49.8

2.500 Dwt Vessel 3,500 Dwt Vessel1976 1977 1978 1979 1980 1976 1977 1978 l97S 1980

Cash OutflowFixed Costs 39.4 39.4 39.4 39.4 39.4 50.0 50.0 50.0 50.0 50.0Variable Costs 12.5 12.5 12.5 12.5 12.5 17.9 17.9 17,9 17.9 17.9Operating Costs (Excluding Depreciation) 51.9 51.9 51.9 51.9 51.9 67.9 67.9 67.9 67.9 67.9

Interest on Loan for Rehabilitation 1/ 4.0 4.0 2.9 2.0 1.0 6.6 6.6 5.0 3,3 1l6Repayment of Loan for Rehabilitation 21 - 9.8 9.8 9.9 9.9 - 16.1 16.2 16.2 16.2Total Cash Outflow 55.9 65.7 64.6 63.8 62.8 74.5 90.6 89.1 87.4 85.7

Cash InflowCargo and Passenger Revenues 3! 147.3 152.6 154.1 156.1 158.5 202.6 200.2 213.3 227.3 226.0

Surplus (Deficit) 4/ 91.4 86.9 89.5 92.3 95.7 128.1 119.6 124.2 139.9 140.3

1/ Assumes i -erest rate of 10.2% ner ascou on t8e ou,tstanding balance of the loan.2/ Assumes (a) that loan is repayable, after one year's grace, over a four-year period.

(b) that loan is reduced by amount received from scrapping unrehabilitatable ships (scrap value O Dwt x 0.4 x US$20.00).3/ Assumes that all of each year's revenue is realized in that year.4/ (a) Before taxes.

(b) Before any other payments of interest or capital on loans negotiated before the rehabilitation of the vessel.

Source: Pan- Staff

June 12, 1972

1100 120000 lO 18RD 3B420R

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