Official PDF , 46 pages

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 78198-ID

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$325 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR THE

SECOND POWER TRANSMISSION DEVELOPMENT PROJECT(SCATTERED TRANSMISSION LINES AND SUBSTATIONS PHASE II)

June 4, 2013

Indonesia Sustainable Development UnitSustainable Development DepartmentEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed without WorldBank authorization.

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CURRENCY EQUIVALENTS(Exchange Rate Effective April 30, 2013)

Currency Unit = Indonesian Rupiah (IDR)IDR 1,000 = US$0.102854

US$1 = IDR 9722.5

INDONESIA- GOVERNMENT FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities kWh Kilowatt hour

Land Acquisition and Resettlement PolicyADB Asian Development Bank LARAPF FrmwkFrameworkLand Acquisition and Resettlement Action

CPS Country Partnership Strategy LARAP Plan

CRED Construction and Renewable Energy MW MegawattDirectorate

DSCR Debt Service Cover Ratio NCB National Competitive Bidding

EASIS Indonesia Sustainable Development Unit NPV Net Present Value

EMP Environment Management Plan ORAF Operational Risk Assessment Framework

ESMF Environment and Social Management PIP Project Implementation PlanFramework

ERP Enterprise Resource Planning System PMC Project Management Consultant

FD Finance Directorate PMO Regional Project Management Office

GAF Governance and Accountability PMU Project Management UnitFramework

Planning and Affiliation DevelopmentGDP Gross Domestic Product PLAD DietreDirectorate

O PT Perusahaan Listrik Negara (Persero)-(Indonesia's State-owned Power Company

International Bank for ReconstructionIBRD PSO Pubhec Service Obhigation

and DevelopmentRencana Usaha Penyediaan Tenaga Listrik

ICB International Competitive Bidding RUPTL PT PLN (Persero)- PLN Long-termExpansion PlanStrategic Procurement and Primary Energy

IFR Interim Financial Report SPPE DietreDirectorate

IPP Independent Power Producer TA Technical Assistance

IPPF Indigenous People Planning Framework VAT Value-added Tax

IPTD Indonesia Power Transmission VSL Variable-Spread LoanDevelopment Project

Regional Vice President: Axel Van TrotsenburgCountry Director: Stefan G. Koeberle

Sector Director: John A. RoomeActing Sector Manager: George Soraya

Task Team Leader: Anh Nguyet Pham

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT ................................................................................................. 1

A. Country Context ......................................................... 1

B. Sectoral and Institutional Context. ....................................... 1

C. Higher Level Objectives to which the Project Contributes ................... 4

II. PROJECT DEVELOPMENT OBJECTIVES ........................................................... 4

A. PDO........................................................ 4

B. Project Beneficiaries ..................................... ........ 4

C. PDO Level Results Indicators......................5.... ............ 5

III. PROJECT DESCRIPTION ......................................................................................... 5

A. Project Components ..................................... ........ 5

B. Project Financing ..................................... .......... 5

IV. IM PLEM ENTATION .................................................................................................. 6

A. Institutional and Implementation Arrangements ..................... ..... 6

B. Results Monitoring and Evaluation .......................... ......... 7

C. Sustainability................................................ 7

V. KEY RISKS AND MITIGATION MEASURES...................................................... 7

A. Risk Ratings Summary Table ................................... 7

B. Overall Risk Rating Explanation .............................. ...... 8

VI. APPRAISAL SUM M ARY ........................................................................................... 8

A. Economic and Financial Analyses .......................... .......... 8

B. Technical .............................................. ......... 11

C. Financial Management................11..... .................. 11

D. Procurement ......................................... ............... 11

E. Governance and Accountability Framework ..................... ....... 12

F. Social (including Safeguards) ...................................... 12

G. Environment (including safeguards) ................................. 13

Annex 1: Results Framework and Monitoring .................................................................... 14

Annex 2: Detailed Project Description.................................................................................. 15

Annex 3: Implementation Arrangements ............................................................................. 17

Annex 4: Operational Risk Assessment Framework (ORAF)..............................................30

Annex 5: Implementation Support Plan ................................................................................ 33

PAD DATA SHEET

Indonesia

Indonesia Second Power Transmission Development Project(Scattered Transmission Lines and Substations Phase II) (P123994)

PROJECT APPRAISAL DOCUMENT

EASTASIA AND PACIFIC

EASIS

Basic Information

Project ID Lending Instrument EA Category Team Leader

P123994 Investment Project B - Partial Assessment Anh Nguyet PhamFinancing

Project Implementation Start Date Project Implementation End Date

01-August-2013 30-Jun-2018

Expected Effectiveness Date Expected Closing Date

31-January -2014 31-Dec-2018

Joint IFC

No

Sector Manager Sector Director Country Director Regional Vice President

George Soraya John A. Roome Stefan G. Koeberle Axel van Trotsenburg

Borrower: Ministry of Finance

Responsible Agency: PT PLN

Contact: Murtaqi Syamsuddin Title: Director of Planning and Risk Management

Telephone 62-21-7251234 Email: [email protected].:

Project Financing Data(in USD Million)

[X] Loan [ ] Grant [ ] Other

[ ] Credit [ ] Guarantee

Total Project Cost: 346.43 Total Bank Financing: 325.00

Total Cofmancing: Financing Gap: 0.00

Financing Source Amount

Borrower 21.43

International Bank for Reconstruction and 325.00Development

Total 346.43

Expected Disbursements (in USD Million)

Fiscal 2014 2015 2016 2017 2018 2019 0000 0000 0000Year

Annual 10.00 80.00 100.00 80.00 55.00 0.00 0.00 0.00 0.00

Cumulati 10.00 90.00 190.00 270.00 325.00 325.00 0.00 0.00 0.00ve

Proposed Development Objective(s)

The development objective of the proposed project is to meet growing electricity demand and increase access toelectricity in the Project Area through strengthening and expanding the capacity of the power transmissionnetworks in the Project Area in a sustainable manner.

The Project Area includes selected parts of Java, Bali islands, East Indonesia and West Indonesia.

Components

Component Name Cost (USD Millions)

Extension and rehabilitation of 150/20 kV substations and 70/20 kV 325.00substations in Project Area and construction of new 150/20 kVsubstations in Project Area

Institutional Data

Sector Board

Energy and Mining

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation Co- Mitigation Co-benefits % benefits %

Energy and mining Transmission and 100Distribution of Electricity

Total 100

O I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this

project.

Themes

Theme (Maximum 5 and total % must equal 100)

Major theme Theme %

Financial and private sector development Infrastructure services for private sector 90development

Environment and natural resources Climate change 10management

Total 100

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X]

Does the project require any waivers of Bank policies? Yes [ ] No [X]

Have these been approved by Bank management? Yes [ ] No [X]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X]

Does the project meet the Regional criteria for readiness for implementation? Yes [ X] No I

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

Legal Covenants

Name Recurrent Due Date Frequency

Loan Agreement Section 5.01 05-Nov-2013

Description of Covenant

The Additional Condition of Effectiveness consists of the following, namely that the Subsidiary Loan Agreementhas been executed on behalf of the Borrower and the Project Implementing Entity.


Project Agreement Schedule Section L.A X Throughout Project

implementation


The Project Implementing Entity shall maintain, throughout Project implementation, the Directorate of Planningand Affiliation Development, Directorate of Finance, and Directorate of Strategic Procurement and Primary Energyand the Project Management Unit with an adequate institutional framework, functions, and resources, including

competent personnel in adequate numbers, as shall be required for the purposes of Project implementation.


Project Agreement Schedule Section I.B.3(a) X Throughout Projectimplementation

Description of CovenantAll Sub-projects need to meet the Eligibility Criteria described in the Project Agreement and in the ProjectImplementation Plan


Project Agreement Schedule Section I.B.3(b) X Throughout Projectimplementation

Description of CovenantThe Project Implementing Entity shall provide to the Bank the Project Implementing Entity's rolling investmentplan, including those activities that constitute proposed Group 2 Sub-projects no later than January 15 in each yearof Project implementation.


Project Agreement Schedule Section I.D X Throughout Project

implementation

Description of CovenantThe Project Implementing Entity shall carry out the Project in accordance with the safeguards instruments listed inthe Project Agreement, including the specific provisions to Environmental Management Plans, to Land Acquisitionand Resettlement and to Indigenous Peoples


Project Agreement Schedule Section II.A X Yearly


The Project Implementing Entity shall monitor and evaluate the progress of the Project and prepare Project Report.Each such report shall cover the period of one calendar year, and shall be furnished to the Bank no later than fortyfive days after the end of the period covered by such report.


Project Agreement Schedule Section II.B.2 X Quarterly


The Project Implementing Entity shall prepare and furnish to the Bank, interim un-audited financial reports for theProject covering the preceding quarter, in form and substance satisfactory to the Borrower and the Bank no laterthan forty five days after the end of each calendar quarter.


Project Agreement Schedule Section II.B.3 X Yearly


The Project Implementing Entity shall have its financial statements audited by independent auditors acceptable tothe Borrower and the Bank, in accordance with consistently applied auditing standards acceptable to the Borrowerand the Bank. Each such audit shall cover one fiscal year of the Project Implementing Entity and be submitted tothe Bank no later than 6 months after the end of the period.


Project Agreement Schedule Section II.B.4 X Yearly


The Project Implementing Entity shall maintain a debt service coverage ratio of 1.5 times.

Team Composition

Bank Staff

Name Title Specialization Unit

Dhruva Sahai Sr Financial Analyst Sr Financial Analyst EASWE

Sri Oktorini Program Assistant Program Assistant EACIF

Richard Jeremy Spencer Country Sector Coordinator Peer Reviewer SASDE

Leiping Wang Lead Energy Specialist Senior Energy Specialist SASDE

Cristina Hernandez Program Assistant Program Assistant EASWE

Anh Nguyet Pham Senior Energy Specialist Team Leader EASIS

Zhentu Liu Senior Procurement Senior Procurement EASR2Specialist Specialist

Mariangeles Sabella Senior Counsel Senior Counsel LEGES

Christina I. Donna Financial Management Financial Management EASFMSpecialist Specialist

Franz Gemer Lead Energy Specialist Peer Reviewer EASVS

Dayu Nirma Amurwanti GAC Specialist EACIF

Husam Mohamed Beides Lead Energy Specialist Peer Reviewer MNSEG

Melinda Good Chief Counsel Senior Counsel LEGES

Andrew Daniel Sembel Environmental Specialist EASIS

Puguh Imanto Energy Specialist Operations Officer EASIS

Hung Tan Tran Power Engineer Power Engineer EASVS

Yash Gupta Senior Procurement Senior Procurement EASRISpecialist Specialist

Marcelino Madrigal Senior Energy Specialist Peer Reviewer SEGEN

Makoto Takeuchi Senior Energy Specialist Senior Energy Specialist EASWE

Non Bank Staff

Name Title Office Phone City

Ninin Dewi Social Safeguards BandungSpecialist

Warren H. Waters Consultant Social OttawaSafeguards

Penelope Ferguson Environment Safeguards ChristchurchConsultant

Kazim Saeed Economist KARACHI

Locations

Country First Administrative Location Planned Actual CommentsDivision

I. STRATEGIC CONTEXT

A. Country Context

1. Indonesia has made remarkable progress over the last decade in terms of macroeconomicand political stability. Macroeconomic performance since the late 1990s has seen consistentoutput growth and a rapid decline in external imbalances. With inflation under control and risingincomes, Indonesians have been enjoying improving living standards and poverty levels havefallen, although many remain close to the poverty line. Indonesia was less affected by the globaleconomic downturn of 2008-09 than most economies, and by late 2009 the economy hadrecovered to grow faster than pre-crisis averages. The outlook is that Indonesia's economicmomentum will continue to build, with growth rising above 6 percent in 2011, and with scopefor growth to average 7 percent by mid-decade, despite the weaker global economic outlook.Indonesia's fiscal position also remains strong, providing the government with options forproviding additional resources for meeting infrastructure development priorities. Successfulimplementation of priority infrastructure projects will be essential for Indonesia to emerge as astrong middle income country in the coming decade.

B. Sectoral and Institutional Context

2. Indonesia's power industry experienced rapid expansion from the early 1980s to the late1990s. Although significantly weakened by the Asian Financial Crisis, the power sector has beengradually recovering, especially in the past few years. By the end of 2010, the total installedgeneration capacity of the national power system reached 31,656 megawatt (MW), making it oneof the largest in Southeast Asia. On the other hand, Indonesia's national average electricityconsumption of 629 kilowatt hours (kWh) per capita and electrification ratio of 66.5 percent in2010 is low compared with other countries in the region.

3. The geography of Indonesia as well as the distribution of population and economicactivities divides the electricity systems in Indonesia into three distinctly different parts: (i) theJava Bali interconnected power system with nearly three quarters of the country's installedgeneration capacity; (ii) over 20 isolated small power grids with generation capacity rangingfrom 12 MW to around 2,000 MW on major islands, and over a thousand isolated mini-grids inremote rural areas on Java-Bali and outer islands. The Java-Bali system is a large and modernpower system with relatively strong high voltage transmission networks, which provideselectricity to over 60 percent of the population and economic activity in Indonesia. Most of thesmall grids, on the other hand, are much less sophisticated.

4. The state owned national power company, PT Perusahaan Listrik Negara (Persero) (PLN)has the mandate for providing electricity in Indonesia. It is a vertically integrated powercompany, generating, transmitting and distributing most of the electricity in the country. PLNdominates the generation subsector with 26,895 MW of installed capacity and the 24Independent Power Producers (IPPs) account for the remaining 4,761 MW. It also acts as thesingle authorized buyer at the wholesale level in the power market and the sole provider ofelectricity transmission and distribution services in Indonesia.

1

5. Indonesia's GDP growth has been projected to reach 7 percent by mid-decade based ondomestic drivers of growth. PLN's long terms expansion plan (UPTL)1 2010-2019 projectselectricity demand growing at over 9 percent annually over the next 10 years. Huge investmentswill be required by the sector to keep pace with economic growth and significantly increaseelectricity access rates. The RUPTL envisages an annual average investment of about US$10billion for the next 10 years. Although the private sector will finance part of the capacityexpansion, PLN is expected to invest around US$5.8 billion per year, including US$1.8 billionfor the expansion of transmission systems, for which it is solely responsible.

6. The power sector is now facing the following major challenges to sustain economicgrowth and social development:

* Steep investment requirements to keep up with growth: Significant investments fromboth the public and private sectors are required to meet fast growing energy demand, andto increase access to modern, and sustainable energy solutions for all. PLN's financialviability is critical to the financial viability of the power sector and therefore the sector'sability to attract adequate amounts of capital.

* Electrification levels remain low, especially outside Java-Bali. The current nationalelectrification rate is only 71.23 percent in 2011 leaving around 70 million2 peoplewithout access to grid electricity, forcing them to resort to costly and unreliable forms ofelectricity supply. Toward the Government's target of electrifying 90 percent ofIndonesian households by 2020, electrification has not been progressing adequatelyespecially outside Java-Bali where PLN's operating costs are higher, poverty is moreprevalent and population densities are often lower. Compared with Java-Bali, PLN's costof service is typically 20-30 percent higher in the more densely populated areas of thelarger islands (Sumatra, Kalimantan, and Sulawesi) and between 50-200 percent higher inthe smaller islands (Nusa Tenggara, Maluku, and Papua).3 These higher operating costspresent a hurdle: greater electrification means a higher need for the public serviceobligation (PSO) subsidy. But it also translates into a need for reducing transmission anddistribution losses.

* Heavy reliance on oil in generation fuel mix. PLN's heavy reliance on oil meansIndonesia is paying more for power than it needs to and is largely responsible for thefinancial difficulties of Indonesia's power sector. Yet this need not be so, since Indonesiahas abundant natural resources. Coal development is concentrated in East and SouthKalimantan. Natural gas reserves and development are concentrated in East Kalimantan,Papua, and South Sumatra. Out of the 75,000MW of technically feasible hydropowerpotential, 30 percent is in Papua, 30 percent in Kalimantan, 20 percent in Sumatra, and 14percent in Java-Bali. Geothermal potential is in Sumatra and Java. Indonesia's dominantenergy demand center is the island of Java, where there are relatively few energyresources and in consequence oil represents over 27 percent of fuel for thermal power

1 Rencana Usaha Penyediaan Tenaga Listrik PT PLN (Persero) (RUPTL).2 PLN Statistics 2011.

World Bank (2011). One Goal, Two Paths: Achieving Universal Access to Modern Energy in EAP. Page 114.

2

generation which is many times more than comparator countries. A major challenge is toswitch to lower and less volatile cost sources for power generation.

* While abundant renewable resources are largely unexploited, the rapid increase of coalin the generation fuel mix may expose the country to environmental risks, both localand global. According to PLN's long-term capital investment plan, the share of coal inthe generation fuel mix will increase from around 35 percent today to roughly 70 percentby 2020. The magnitude of this expansion is raising concerns about the likely negativeenvironmental impact in the heavily populated areas of Java and Bali, and in theenvironmentally sensitive areas of some of the outer islands. Indonesia's greenhouse gasemissions will continue to grow at a much faster pace than most of its neighbors.Although Indonesia is rich in renewable energy resources, especially geothermal,hydropower and biomass, the lack of incentives and regulatory certainty, combined withthe relatively weak institutional capacity of major national and local institutions, as wellas the weak and low coverage of transmission networks has hindered the rapiddevelopment of these indigenous and clean energy resources. Furthermore, Indonesia haslarge gas resources, including unconventional gas that can be exploited for powergeneration. Other than the isolated grids in remote areas where diesel may be the least-cost fuel for power generation, renewable energy and gas must be used to serve currentdemand and support the electrification effort.

* Current electricity tariffs are insufficient to cover the cost of supply of the nationalpower utility (PLN), leading to high Government subsidies. The electricity price level,though increased by around 6 percent in July 2010, can cover only about two-thirds of thecost of delivered electricity. PLN's financial viability is reliant upon the Government'sPSO subsidy. The PSO was around US$5.8 billion or 37 percent of PLNs' total revenuesin 2010, and reached about US$10 billion in 2011, raising doubts about the long-termsustainability of this financial support mechanism. An unsuitable tariff policy means thatthose who do not need subsidy also benefit from the PSO. The availability of the PSOalso weakens incentives for PLN to reduce inefficiencies. Tariffs below cost recoverylevels are also the main barrier for improving energy efficiency in the economy at largeand for shifting energy production and consumption to a low-carbon development path.

7. The government's strategy for delivering reliable and affordable electricity focuses on:(a) facilitating private investments and increasing public financing to grow supply capacity; (b)improving the generation fuel mix based on domestic resource availability by increasing theshare of coal, natural gas and renewable energy; (c) rationalizing the electricity tariff and subsidyregime; and (d) further strengthening institutional capacity and improving the managementefficiency of PLN. Gol's effort to deliver reliable electricity and its electrification effort requirethe strengthening of transmission networks to reduce generation costs, including through theinter-connection of isolated mini-grids outside Java-Bali currently using diesel. While this istaking place, transformation capacity at the medium-voltage level also needs to be enhanced toavoid over-loading of transformers (over-loading increases technical losses). This project isintended to support these efforts.

3

C. Higher Level Objectives to which the Project Contributes

8. The Country Partnership Strategy (CPS) for Indonesia FY2013-2015 is aligned with theGovernment's development priorities in their pro-growth, pro-job, pro-poor and pro-environmentfocus. The Government is committed to accelerating infrastructure and energy development tomeet the country's economic growth target and to improve equity and poverty reduction. Theproposed project will contribute to improving Indonesia's electric power infrastructure to meetdemand, reduce its costs and increase access, and thus helping competitiveness, businessenvironment and poverty reduction.

9. The project complements other investment operations and technical assistance (TA)activities in the Bank's energy program, which is based on programmatic engagement in fourareas, notably (i) continuing to support energy infrastructure to meet demand in sustainablemanner and enhance reliability and quality of supply; (ii) scaling up support for renewableenergy and natural gas; (iii) increasing access to modem energy and (iv) improving energyefficiency. Each pillar combines TA supporting capacity building, analytical and advisoryactivities (AAA), underpinning policy dialog and specific investment operations in selectedareas.

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

10. The development objective of the proposed project is to meet growing electricity demandand increase access to electricity in the Project Area through strengthening and expanding thecapacity of the power transmission networks in the Project Area in a sustainable manner.

11. The Project Area includes selected parts of Java and Bali islands, East Indonesia andWest Indonesia.4

B. Project Beneficiaries

12. Direct beneficiaries of the project include people who receive and will receive electricitysupply directly from new additional substation capacity financed by the project, a population of29.5 million, inclusive of 15.7 million in Java-Bali, 6.3 million in Sumatra, 2.9 million inKalimantan and 4.6 million in Sulawesi. 50.1 percent of beneficiaries will be women (based on2011 population data). The project will neither directly promote nor sustain any genderinequalities in the country. Increased access to electricity will in general benefit both men andwomen, however regional and global evidence suggests that women in particular benefit.5

4 For the Project, "East Indonesia" consists of all provinces of Kalimantan island, South Sulawesi, Central Sulawesi and SouthEast Sulawesi Provinces or other provinces as may be agreed between WB and PLN. "West Indonesia" consists of all provincesof Sumatra island.5 According to the EAP Companion to the World Development Report 2012, "Toward Gender Equality in East Asia and Pacific":While lack of electricity affect both female- and male-led enterprises, evidence suggests that such constraints may be moreonerous among small and informal firms than among larger firms and, therefore, may constrain female-led enterprisesdisproportionately. In Indonesia female-led enterprises tend to be smaller, more precarious, less capital-intensive and lessproductive than male-led enterprises (Indonesia Country Gender Action Plan). Furthermore, having access to electricity extendsthe hours available for both productive and leisure activities, particularly for women and girls (World Bank, 2012).

4

C. PDO Level Results Indicators

13. Achievement of the development objective will be assessed through an increase inelectricity sales, as well as increases of availability of transformer capacity in the substationsbeing financed as a result of the strengthening and expansion the capacity of the transmissionsystems in the areas.

III. PROJECT DESCRIPTION

A. Project Components

14. The proposed project includes a single component with two parts described below(details are provided in Annex 1).

* Extension and rehabilitation of selected existing 150/20 kV substations and 70/20kV substations in the Project Area, including adding one or more newtransformers and associated equipment; and/or replacing existing transformerswith new transformers and associated equipment with higher capacity and

* Construction of selected new 150/20 kV substations in the Project Area, includinginstallation of transformers and associated equipment.

15. In parallel with the project, PLN will implement a TA program to improve its capacity tooperate the transmission and distribution systems in more efficient and transparent mannerthrough introduction of smart grid technologies. The TA program with an estimated cost ofUS$2 million will be financed by a grant provided by the Australian Government as acomplementary activity to IPTD2. The TA will be supervised together with the project.

B. Project Financing

Lending Instrument

16. PLN in agreement reached with the Ministry of Finance has selected a LIBOR basedIBRD Variable Spread Loan in US$ currency, commitment-linked, annuity-based repayment,with total maturity of 21 years including 7.5 years grace period.

Project Cost and Financing

17. Total financing requirement of the proposed project is estimated at US$346.43 million,inclusive of US$325 million by IBRD and US$21.43 million by PLN. The Bank will finance thesupply and installation of all the equipment and civil works, including contingency; and PLNwill finance land acquisition, taxes, interest during construction, the front-end fee and projectmanagement costs. Detailed information on costs and financing sources is provided in Table 1and Table 2 below.

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Table 1. Project Costs by Component and Use of Financing

Local Foreign TotalProject Cost By Component and/or Activity .omil Fomin oil

$ million $ million $ millionA. Infrastructure

Expansion, Rehabilitation & Construction of Substations 45.18 272.82 318.00B. Service

Project Management 8.00 - 8.00C. Land Acquisition and Compensation 6.30 - 6.30

Total Baseline Cost 59.48 272.82 332.30

ContingencyPhysical 0 0 0Price 7.00 7.00

Tax (VAT) 1.81 - 1.81Total Project Costs 61.29 279.82 341.11

Interest During Construction - 4.53 4.53Front-End Fee - 0.79 0.79

Total Financing Required 61.29 285.14 346.43

Table 2. Project Costs by Component and Source of FinancingPLN IBRD Total

Project Cost By Component and/or Activity ln .mil$ million $ million $ million

A. InfrastructureExpansion, Rehabilitation & Construction of Substations - 318.00 318.00

B. ServiceProject Management 8.00 - 8.00

C. Land Acquisition and Compensation 6.30 - 6.30

Total Baseline Cost 14.30 318.00 332.30

ContingencyPhysical - - -

Price 7.00 7.00Tax (VAT) 1.81 - 1.81

Total Project Costs 16.11 325 341.11Interest During Construction 4.53 4.53

Front-End Fee 0.79 0.79

Total Financing Required 21.43 325.00 346.43

Notes: Base costs are at 2012 price level.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

18. PLN will be the implementing agency. The Planning and Affiliation DevelopmentDirectorate (PLAD) of PLN will be responsible for overseeing and coordinating projectimplementation, including monitoring and reporting. A Project Management Unit (PMU) led bythe PLAD has already been established to take this responsibility. Procurement activities will bemanaged centrally by the Strategic Procurement and Primary Energy Directorate (SPPE). AProcurement Committee will be established at PLN headquarters consisting of representatives ofrelated functional departments and the respective regional project management offices (PMOs).

6

Six PMOs in Java-Bali, Sumatra, Kalimantan and Sulawesi will be directly in charge ofmanaging construction of sub-projects; three of these PMOs are experienced in working on Bankprojects. Disbursement and financial reporting will be carried out by PLN Finance Directorate(FD) with the support of the six PMOs. A Project Management Consultant (PMC) will beemployed by PLN within a month after the effectiveness of the project to support the PMU andother units to carry out their responsibilities under the project.

19. The Project Implementation Plan (PIP), prepared by PLN was reviewed by the Bank andfound satisfactory. The PIP will be adopted by PLN for the project implementation before June6, 2013.

B. Results Monitoring and Evaluation

20. PLN has maintained an adequate statistics system which provides sufficient data tomonitor the project outcomes such as electricity sales at the project areas. Project physicalprogress and the related intermediate outcome indicators will be monitored by the six regionalPMOs. The PLAD with the assistance of the PMC will compile the data and monitor overallproject implementation performance.

C. Sustainability

21. The GOI is committed to strengthening the electricity sector's institutional capacity,especially PLNs' management efficiency. The GOI is fully aware of the need to make substantialinvestments in the power infrastructure, including transmission systems and made it recently oneof its highest priority areas for public spending in coming years.

22. At the project level, PLN has demonstrated commitment through its approvals processand the preparation time. Each sub-project was identified by PLN as a priority and PLN itselfhas demonstrated commitment to improved service quality and meeting increasing demand.PLN has fully complied with the Bank's requirements in the preparation of the projectdocuments. It has also confirmed the deployment of adequate staff resources and counterpartfunds for implementing the Project.

23. Besides continued borrower commitment, the sustainability of the project relies oncontinued growth in demand for power in Indonesia and matching the transmission systemgrowth with expansion of generation capacity and pace of rural electrification. Demand growthappears robust, while the issue of increasing generation capacity and acceleration of ruralelectrification is well understood at all levels of GOI and PLN.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary

Table 3. Risk Rating Summary Table

Stakeholder Risk Rating

Implementing Agency Risk

7

- Capacity Moderate

- Governance Moderate

Project Risk

- Design Low

- Social and Environmental Low

- Program and Donor Low

- Delivery Monitoring and Sustainability Low

Overall Implementation Risk Moderate

B. Overall Risk Rating Explanation

24. This is a technically simple project to be implemented by an established power utilitywhich has successfully implemented similar projects financed by the Bank. However, the overallrisk for project implementation is rated as moderate due to possibly weak capacity of the newPMOs in Kalimantan and Sulawesi and constraints in PLN capacity in procurementmanagement. Potential risks are summarized in the Operational Risk Assessment Framework(Annex IV).

VI. APPRAISAL SUMMARY

A. Economic and Financial Analyses

Economic Analysis

25. Economic analyses were conducted to compare the projected cost/benefit stream of theno project' case (no upgrading/extension despite sub-station overloading) with those of the

'with project' case. The analysis calculated the economic internal rates of return (IRR) and thepresent value of net cash flow (NPV) for each of the six investments. The sub-projects whichinvolve additions to four inter-connected systems (Java-Bali, Sumatra, South Sulawesi and SouthKalimantan) were analyzed as aggregate investments for a time-slice of 2015-16. The twoindividual sub-projects involving the West Kalimantan and Central Kalimantan systems wereanalyzed individually. Sensitivity analyses were run on the returns and NPVs by introducingnegative impacts in three key parameters: capital investment costs rising by 15 percent, theelectricity demand growth rate falling by 50 percent, and the gap between the willingness-to-payand cost narrowing by 15 percent. Switching values for the key parameters were also calculatedto identify the value which is a threshold between project viability and unviability.

26. The results of the economic analyses (Table 4) show that the planned investments areeconomically justified and largely robust. The returns/NPVs were generally found to be robust tothe three sensitivity scenarios as well as a scenario with all three simultaneously. The detailedanalysis is available in project files.

8

Table 4. Summary of Economic Analysis

Economic Imm South South West Centralmm-----.RR by Sulawesi Kalimantan Kalimantan Kalimantanregion M

Base Case 45% 56% 55% 58% 42% 60%

Capital cost 41% 50% 51 % 55% 39% 56%increase by15%

Electricity 43% 41% 42% 40% 27% 40%demandgrowth ratefalls by 50%

Gap between 29% 47% 47% 52% 37% 54%WTP andcost narrowsby 15%

All impacts 24% 30% 34% 33% 22% 33%

Financial Analysis

27. PLN is a state-owned entity that is structured to operate on commercial principles.However due to the Government's policy of keeping electricity tariffs below the cost of powersupply for most consumer categories, PLN's financial condition continues to rely on aGovernment public service obligation (PSO) subsidy. This PSO subsidy which covers theshortfall between electricity tariffs and PLN's cost of power supply,6 and which the Governmentis legally required to pay, was Rp. 93 trillion (45 percent of PLN's revenues) in 2011, and Rp.103 trillion (44 percent of PLN's revenues) in 2012.7 The higher PSO subsidy in 2012 reflectsan 8.5 percent increase in the number of customers (3.9 million new customers), and a rise inPLN's operating costs as a result of increases in the utilization of coal, and natural gas.8

28. PLN continued to remain profitable during 2012 with a net profit of Rp. 7.8 trillion(US$0.8 billion) as compared to a net profit of Rp. 7.2 trillion (US$0.8 billion) in 2011. PLN's

6 The Government is obliged to pay a public service obligation subsidy under the State Owned Enterprise Law 19/2003 whichmandates that the Government cover any financial shortfall that would arise as a direct result of one of its policies. Thiswould include the Government having established a retail electricity tariff that is on average less than the full cost ofproviding electricity to consumers. In addition, MOF Decree No. 11 1/PMK.02/2007 ensures that the difference betweensales and cost of production is covered.PLN has advised the World Bank, that based on its adoption of an Indonesian accounting standard, ISAK 8 which is basedon IFRIC 4 (IFRS) and EITF 01-8 (US GAAP), the capacity charge component of its power purchase agreements will betreated as lease payments. PLN is preparing ISAK 8 compliant financial projections to gauge the potential implications ofthis proposed accounting treatment on PLN's financial statements. The World Bank is monitoring the situation to measurethe impact if any of the new accounting treatment on PLN's financial condition. The 2012 amounts shown in this analysishave however been adjusted to non-ISAK 8 levels to ensure consistency with PLN's historical financial statements, and itscurrent financial projections.

8 PLN's cost of gas increased from Rp. 11.4 trillion (US$1.3 billion) in 2011, to Rp. 22.4 trillion (US$2.3 bn) in 2012 due toPLN having substituted fuel oil for gas in a few of its CCGT plants and having secured LNG at approx. US$14-15/mmbtu tosupply Muara Karang. PLN's cost of coal increased from Rp. 19.2 trillion (US$2.1 billion) in 2011 to Rp. 26 trillion(US$2.7 billion) in 2012 due to the commissioning of an additional 3,798.5 MW of coal fired generation capacity during2012.

9

operating revenues (excluding PSO) increased from Rp. 115 trillion (US$12.7 billion) in 2011 toRp. 129 trillion (US$13.4 billion) in 2012. A major contributor to this increase in operatingrevenues is the approximately 10 percent increase in energy sales volume, and the uprating ofcapacity of urban customers9 resulting in higher tariff revenues from these customers. However,given the role played by the PSO subsidy in PLN's financial position, liquidity rather thanprofitability is the primary measure of PLN's financial condition.

29. PLN also remains sufficiently liquid'o and it has adequate headroom to cover its ongoinginvestment program and its operations," provided the Government continues to pay its PSOsubsidy to PLN in a full and timely manner. PLN has demonstrated the ability to borrow fromboth the local and global financial markets to meet its investment needs. 12 However, PLN'sability to leverage additional financing to cover future investments will remain contingent uponthe Government meeting its financial obligation to PLN, and its commitment to the tariff reformagenda.

30. PLN's Financial Projections. PLN expects both average annual sales revenues, andrevenues excluding Government subsidies to grow at an average annual rate of about 9.8 percentduring 2013-17. PLN's operating costs are expected to continue to be higher than its operatingrevenues excluding subsidies throughout the projection period. As a result, governmentsubsidies are expected to remain substantial averaging Rp. 93.8 trillion (US$10 billion) duringthe projection period. Net income, after taxes, is expected to average Rp. 15.4 trillion (US$1.7billion) during 2013-17 and is expected to average 5.5 percent of total revenues. This net incomelevel is attainable mainly due to the expected high sales growth, and the expected decline in theuse of fuel oil in the generation mix. PLN is also expected to remain sufficiently liquid over theprojection period with an average year-end cash balance of Rp. 13.1 trillion (US$1.4 billion).

31. Monitoring PLN's Financial Condition. In the context of the above financialprojections, the key financial measure to monitor PLN's financial viability would be its liquidity.This liquidity ensures that the company can meet its financial obligations and is able to raise thefunds needed for its capital investment program. An evaluation of PLN's 2012 audited financialstatements indicates that PLN's liquidity remained largely unchanged from 2011 to 2012. Inaddition, PLN had sufficient cash at year end 2012 to meet its financial obligations.13 OnJanuary 18, 2012, PLN received a ratings upgrade to Baa3 by Moody's, and on December 13,2011, a BBB - rating from Fitch, both of which are investment grade ratings, and are the sameratings as those accorded to the sovereign. However, PLN is also undertaking a significantinvestment program while the sector is undergoing a reform in pricing and subsidies. 14 PLN'sfinancial condition would therefore need to be monitored in the next few years to ensure that itsfinancial strategy remains relevant to keep it on a strong financial footing.

9 104,000 urban customers were uprated from 450 VA to 1,300 VA, and the proportion of new customers above 450 VA alsoincreased during 2012.

10 PLN's liquidity is estimated to remain about the same from Rp. 22 trillion (US$2.4 billion) in 2011 to Rp. 22.6 trillion(U$2.3 billion) in 2012.PLN's debt service coverage ratio is estimated to be 1.68 x during 2012 on a non-ISAK 8 basis.

12 During 2012, PLN issued a US$1 billion global medium term note (5.25% interest and 30 year maturity).13 PLN had a 2012 year-end cash balance of Rp. 22.6 trillion (US$2.3 billion).14 The Government has approved a 15 percent tariff increase during 2013 to be implemented gradually each quarter.

10

32. In view of PLN's current and projected financial information, the financial covenant ofthe debt service coverage ratio (DSCR) of 1.5 times which is the same ratio as the ongoing JavaBali Power Sector Restructuring and Strengthening project, (Loan 7758-ID), the AdditionalFinancing Loan for the Extended Deployment of an Enterprise Resource Planning System (Loan7905-ID), the Power Transmission Development Project, (Loan 7940-ID), and the UpperCisokan Pumped Storage Hydropower Project (Loan 8057-ID) is considered to be appropriatefor this project.15

33. A detailed analysis of PLN's financial condition is provided in the project files.

B. Technical

34. Feasibility studies (technical-economic reports) of the proposed sub-projects in Group 1were reviewed and found to be satisfactory. All the proposed sub-projects in Group 1 and Group2 form parts of PLN's least cost power system expansion plan. The proposed sub-projects inGroup 1 were verified through regional load flow and stability analyses to ensure that systemreliability and security requirements are met. PLN planning approach and methodology werereviewed during preparation of the IPTD project and found acceptable. Technical designapproach of individual sub-projects was also reviewed and found meeting Indonesian technicalstandards and consistent with international standards.

C. Financial Management

35. A financial management assessment was conducted by the Bank and actions to strengthenPLN's financial management capacity have been agreed upon with PLN. The assessmentconcludes that with the implementation of the actions, the proposed financial managementarrangements will satisfy the Bank's minimum requirements under OP/BP 10. The financialmanagement risk is assessed as "moderate". Annex 3 provides additional information onfinancial management implementation arrangement. The detailed financial management capacityassessment and arrangements are available in the project files.

D. Procurement

36. A procurement assessment was carried out which concludes that PLN has adequateexperience and capacity to carry out procurement activities related to the proposed project. PLNis familiar with Bank procurement procedures through its experience with the on-goinginvestment projects financed by the Bank. The assessment identified several key issues and riskswhich could arise during implementation such as (i) possible confusion between national andPLN procurement regulations and Bank's Procurement Guidelines and between differentversions of the Bank procurement guidelines applied for IPTD2 and other on-going Bank-financed projects; (ii) Uncertainty in the capacities and workload of the procurement committeeand its committee members; (iii) Complicated review procedures due to high-value contracts thatmay lead to delay; (iv) Ineffective coordination between Directorate of Strategic Procurementand Primary Energy, Directorate of Construction and Renewable Energy and Regional PMOsfor contract management Mitigation measures were discussed and agreed with PLN. The

1 PLN's debt service coverage is estimated to be 2.1x as of end 2011.

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procurement risk after mitigation is assessed as moderate. The procurement plan for the projectwas received by the Bank and found to be acceptable. It will be updated annually (or as required)to reflect the project implementation needs. A brief summary of the procurement capacityassessment and project procurement arrangement are provided in Annex 3. More details areavailable in the project files.

E. Governance and Accountability Framework

37. A Governance and Accountability Framework (GAF) was developed for the project tomitigate fraud and corruption risks. It was based on the GAF for IPTD which has proved to beeffective. The GAF summarizes the actions that have been agreed to and will be undertaken byPLN to reinforce project governance, thereby enhancing transparency of project activities,increasing public accountability, and reducing opportunities for corruption, collusion or fraud.The GAF is available in project files.

F. Social (including Safeguards)

38. The project will result in improvement of the quality and adequacy of power supply inthe project areas and therefore it has positive impacts for people and local communities. Landacquisition process, including public consultation and satisfactory compensation for thepopulation residing in the project areas, is the main social issue of the project. Since landacquisition is limited, the adverse impact is assessed as modest and manageable. No landacquisition is required for the 37 sub-projects in the first phase of investment (Group 1). Noindigenous people as defined by OP 4.10 are present in, or are collectively attached to the projectareas for the investment in Group 1 and the proposed sub-projects in the second phase (Group 2).However, as PLN can update replace or propose new sub-projects in Group 2, these sub-projectsmay be located in the areas where indigenous people are present.

39. PLN prepared a Land Acquisition and Resettlement Policy Framework (LARAPF) andan Indigenous People Planning Framework (IPPF) to guide the land acquisition process and ifapplicable, indigenous people development plan for sub-projects in Group 2 and LandAcquisition and Resettlement Action Plans (LARAPs) for two new sub-projects in Group 2. Thetwo frameworks and LARAPs were reviewed and found to meet the Banks' requirements. Theland acquisition and resettlement policy framework incorporates priorities to, inter alia, womenheaded households and; the IPPF targets that indigenous women, men and women's associationsare involved in relevant consultations. The institutional capacity of PLN and the projectimplementation arrangement has also been reviewed and is regarded as being adequate forimplementation of the social safeguards instruments.

40. All the draft final documents were disclosed on PLN website in January 2012 and thefinal LARAPF and IPPF were disclosed on PLN website in March 2013. The draft finaldocuments were also disclosed at the InfoShop in Washington D.C. in January 2012 and the finalLARAPF and IPPF were disclosed there in April 2013.

41. Due diligence was conducted to identify any potential social liabilities of the existingsubstations for which land acquisition was completed in the last couple of years and which are to

12

be rehabilitated or extended under the project. The due diligence found that the land acquisitionhas been in compliance with the national regulations and no controversial issue was recorded.

G. Environment (including safeguards)

42. The project is rated a Category B project. Environmental impacts are likely to be modest,non-sensitive and reversible and in every case, mitigation measures can be designed to reducethe negative impacts. No cultural property or natural habitat are critically impacted or will beimpacted by the sub-projects. PLN prepared an Environment Management Plan (EMP) forUpgrades for all sub-projects in Group 1, an Environment and Social Management Framework(ESMF) to guide environment management process for sub-projects in Group 2 and EMPs fortwo new substations proposed to be built under Group 2. The institutional capacity of PLN andthe environment safeguards implementation arrangement were reviewed and are regarded asbeing adequate.

43. The ESMF and EMPs were publicly disclosed in the same way and together with thesocial safeguards documents mentioned above. All draft final documents were disclosed on PLNwebsite in January 2012 and the final ESMF and EMP for Upgrades were disclosed on PLNwebsite in March 2013. The draft final documents were also disclosed at the InfoShop inWashington D.C. in January 2012 and the final ESMF and EMP for Upgrades were disclosedthere in April 2013.

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Annex 1: Results Framework and Monitoring

Project Development Objectives

PDO Statement

The development objective of the proposed project is to meet growing electricity demand and increase access to electricity in Project Area through strengthening and expanding the capacity of the powertransmission networks in the Project Area in a sustainable manner.

Project Development Objective Indicators

Cumulative Target Values Data Source/ Responsibility for

Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection

Electricity Sales in Gigawatt-hour Annually after PLN Statistics by PLN Planning & Riskproject areas for Group 1 (GWh) completion (ICR) Distribution Units Management Directorate

Growth in electricity Annually after PLN Statistics by PLN Planning &sales in project areas for Percentage 100 0 0 0 0 135 2016 and at Distribution Units Affiliation DevelopmentGroup 2 in Java-Bali completion (ICR) Directorate

Growth in electricity Annually aftersales in project areas for Percentage 100 0 0 0 0 144 2016 and at PLN Statistics by PLN Planning & AffiliateGroup 2 in East completion (ICR) Distribution Units Development DirectorateIndonesia cmlto IR

Growth in electricity Annually after PLN Planning &sales in project areas for Percentage 100 0 0 0 0 145 2016 and at PLN Statistics by Affiliation Development

Indonesia completion (ICR) Directorate

Intermediate Results Indicators

Cumulative Target Values Data Source/ Responsibility for

Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection

Progress in Procurement Project Office PLN Planning &and Contract Completion Percentage 0 25 50 75 100 100 Semi annual Projet offc Affiliation Developmentfor Group 1 Directorate

Progress in Procurement Project Office PLN Planning &and Contract Completion Percentage 0 0 25 50 75 100 Semi annual Projet offc Affiliation Developmentfor Group 2 Progress Reports Directorate

Commissioned capacity Kilovolt-Ampere Project Office PLN Planning &of transformer 0 0 0 0 2,010,000 2,010,000 Semi annual Affiliation Developmentsubstations for Group 1 (KVA) Progress Reports Directorate

Commissioned capacity Kilovolt-Ampere PLN0PlProject Office Nli g &of transformer (KA ,3,0 eiana Proget Roffc Affiliation Developmentsubstations for Group 2 (KVA) Progress Reports Directorate

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Annex 2: Detailed Project Description

1. The project includes a single component, all aimed at improving 150 kV and 70 kV sub-transmission network in Java-Bali, East Indonesia and West Indonesia. Descriptions of theproject are provided below.

2. The project will contain more than one sub-project, involving either new construction ofa 150/20 kV substation or upgrading of an existing 150/20 kV or 70/20 kV substation by addingone or more new transformer and associated equipment at each substation or by replacing one ortwo existing transformers with new transformers and associated equipment having highercapacity.

3. Each sub-project will require procurement of equipment, construction, installation andcommissioning of newly procured goods. Upgrading generally will use the existing premise butin some cases, small additional land may be required. New construction will require landacquisition; clearance of sites; construction of foundations and control house; installation oftransformers, control and protection equipment and outgoing 150 kV and 20 kV feeders. A newsubstation may require a short 150 kV transmission line (up to 5 km long) to connect thesubstation to the existing network and in a few cases, upgrading of an existing road.

4. For each sub-project, the Bank will finance the supply of goods and installation works.Other costs such as engineering, compensation, administration, taxes and interest duringconstruction will be financed by PLN.

5. The project will be implemented in phases. The first phase will consist of sub-projects(Group 1) which have been fully appraised and are ready for implementation upon approval ofthe project by the World Bank's Board of Executive Directors. The second phase will consist ofsub-projects (Group 2) which will be brought forward by PLN when their preparation iscomplete. Each sub-project of Group 2 will be appraised by the Bank's team against of a set ofeligibility criteria and will be accepted for financing only after the appraisal confirms that itmeets the criteria. Sub-projects will be financed on a first-come, first-appraised basis until allIBRD funds allocated to the project are fully committed.

6. Thirty seven sub-projects are included in Group 1. All are expansion and rehabilitation ofexisting substations with total additional transformer capacity of 2130 MVA. Seventy sub-projects are envisaged under Group 2 with total additional transformer capacity of 4130 MVA,including 27 new substations.

7. The sub-project eligibility criteria listed below were agreed by PLN and the Bank's team:

* The sub-project will contribute to the objective of the project;

* The feasibility study and technical design of the sub-project meet Indonesian TechnicalStandards;

* The sub-project should have an economic rate of return of at least 10 percent, calculatedusing a methodology acceptable to the Bank;

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* The sub-project EMPs and, if applicable, LARAPs and IPDPs have been prepared anddisclosed, satisfactory to the Bank in accordance with the respective safeguardsframeworks adopted by PLN;

* All necessary clearances/approvals for implementing the sub-project, including thefeasibility study and environmental certificate have been given by the relevantauthorities; and

* Procurement and implementation plans satisfactory to WB have been prepared and thesub-project is ready for implementation.

8. Candidate sub-projects for Group 2 have been identified. However changing prioritiesand availability of alternative sources of financing during implementation may result in changesto the list of Group 2.

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Annex 3: Implementation Arrangements

Project Institutional and Implementation Arrangements

Project Implementation Institutional Arrangement

1. PLN will implement the project through its functional directorates at its headquarters andsix regional project management offices1 6 (PMOs). The Planning and Affiliation DevelopmentDirectorate (PLAD) of PLN will be responsible for overseeing and coordinating projectimplementation, including preparation for the sub-projects in Group 2 and overall projectmonitoring and reporting. A Project Management Unit (PMU) has been established and theHead of the Corporate Planning Division of the PLAD is the chairman of the PMU (also calledthe PMU Coordinator). The Head for Construction Administration Division of the Constructionand Renewable Energy Directorate (CRED) is the Deputy PMU Coordinator. The PMU is thefocal point between the Bank team and other PLN units participating in the project.

2. Six PMOs, reporting to the Director of the CRED are responsible for land acquisition,environment management, contract management and construction supervision of their respectivesub-projects. The PMOs are also in charge of preparation of the safeguards documents for sub-projects in Group 2. Each PMO assigns its Planning and Environment division to coordinatepreparation, construction and reporting of their respective sub-projects and assigns its branchoffices at the provincial level (Unit Pembangunan Konstruksi- UPK) to handle land acquisitionand supervision of construction.

3. Construction and installation of equipment will be undertaken by contractors, who will beprocured through international competitive bidding. Procurement activities will be managed atPLN headquarters. The procurement plan and bidding documents will be handled by theProcurement Planning Division of the PLAD. Actual procurement will be managed by theStrategic Procurement and Primary Energy Directorate (SPPE). A Procurement Committee,chaired by a manager of SPPE, will be established to carry out the procurement. After contractsare signed, they will be transferred to the respective PMO.

4. PLN's Finance Directorate (FD) will handle disbursement and financial reporting withsupport from the Finance, Administration and Human Resources Divisions of the six PMOs.

Measures to address capacity constraints

5. To improve coordination among various units at PLN Headquarters and Project Officesand between PLN and the World Bank during implementation, a Project Management Consultant(PMC), consisting of at least three specialists (with technical, financial and environment/socialexperiences) will be employed by PLN within a month after the project becomes effective. ThePMC, financed by PLN funds, will report to the PMU Coordinator and provide support to PLAD

16 Project Office for Java-Bali I (Unit Induk Pembangunan V -UIP V)); Project Office for Java-Bali II (Unit IndukPembangunan VII- UIP VII); Project Office for Sumatra I (Unit Induk Pembangunan II- UIP II) ; Project Office forSumatra II (Unit Induk Pembangunan III- UIP III); Project Office for Kalimantan (Unit Induk Pembangunan X- UIPX) and Project Office for Sulawesi, Maluku and Papua (Unit Induk Pembangunan XIII-UIP XIII)

17

and other PLN units to carry out their responsibilities under the project. To improve procurementcoordination, SPPE will appoint a procurement coordinator for the project and will update theBank of any change in procurement coordination.

Financial Management, Disbursements and Procurement

Financial Management

6. The financial management assessment was conducted by the Bank and actions tostrengthen PLN's financial management capacity were agreed upon with PLN. The assessmentconcludes that with the implementation of the actions, the proposed financial managementarrangements are adequate to provide, with reasonable assurance, accurate and timelyinformation on the status of the loan required by the Bank.

7. Risks may arise from lack of coordination among project offices and the treasurydepartment located at PLN Head office, as follows (1) based on previous project experience, thiscondition has contributed to slow payment process, and (2) expenditures paid under the projectwere not accounted for in the PLN records on a timely basis. The financial specialist of thePMC will be responsible for improving financial management coordination during projectimplementation.

Budgeting and Flow of Funds

8. PLN's budget is prepared bottom-up from decentralized units before being moderatedcentrally. Any major changes in the budgets need prior approval. The IBRD loan will financeonly supplies and installation of components. Direct payment, reimbursement and specialcommitment method of disbursement will be used. Flow of funds may be affected by possibledelay in Parliament's annual approval of Sub Loan Agreement budget, which could cause delaysin availability of funds to PLN.

Internal Control

9. PLN has adequate internal controls in place on preparation and approval of transactionsand segregation of duties. Financial management procedures and policies are documented in amanual. All changes in finance/accounting policies and procedures are formalized through theissuance of circulars by the Finance Director.

10. PLN has an internal audit department at Head Office reporting to the President Director.This department and its units undertake internal audits based on an annual work program. Theproposed project will be included in the internal audit annual work program of the department.

Accounting and Reporting

11. All project transactions will follow the existing PLN system and will be included in thePLN financial statements. PLN currently uses two accounting systems. Six offices includingJakarta (Head Office) have implemented Enterprise Resource Planning System (ERP) but other

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offices are still using Magic, a DOS-based system. Due to these different systems, PLN usesexcel spreadsheets to consolidate accounts for financial reporting.

12. To have better project information on financial progress, PLN will continue to separatelyreport the project transactions to the Bank on a quarterly basis through Interim Financial Reports(IFRs). PLN will submit IFRs to the Bank no later than 45 days after the end of each calendarquarter. The PMC consultant will ensure that this will be delivered on timely basis and alltransactions therein have been accounted in the PLN book of records.

External Audit Arrangement

13. PLN will be audited by a public accounting firm. A copy of the audited financialstatements of the company, along with the auditor's opinion will be submitted to the Bank notlater than six months after the end of each year. The audited financial statement will be publiclyavailable. The auditor of PLN will provide information about the loan, use of funds and theiropinions concerning the use of funds separately within the main audit report of PLN. There is nooutstanding audit report under the existing projects. Audit report for FY 2012 was submitted tothe Bank on time.

Disbursement Arrangement

14. The disbursement methods would be (1) Direct payment and (2) Reimbursement method,and (3) Special Commitment, subject to the minimum amount per withdrawal application atUS$100,000, except the last withdrawal application. Any expenditures or invoices below theminimum amount need to be paid by PLN and consolidated for submission to the Bank forreimbursement when the amount reaches the minimum of US$100,000 equivalent. Projectexpenditures to be fully financed by the Bank are expected to come from few contracts withsubstantially high payment amounts to be claimed through direct payment or specialcommitment. Table A3.1 specifies the categories of Eligible Expenditure and the percentage ofexpenditure that may be financed out of the loan. PLN counterpart funds of $21.43 million willfully finance land acquisition, taxes, interest during construction, the front-end fee and projectmanagement costs.

Table A3.1: Eligible Expenditure

Amount of the Loan Percentage ofCategory Allocated Expenditures to be

(expressed in USD) financed(exclusive of Taxes)

Goods and works for the Project 325,000,000 100%TOTAL AMOUNT 325,000,000

15. Applications for requesting direct payment and reimbursement will be supported by: (i)list of payments against contracts that are subject to the Bank's prior-review, together withrecords evidencing eligible expenditures e.g. copies of receipts, supplier invoices; and/or (ii)statement of expenditures (SOEs) for all other expenditures. Applications for requesting directpayment and reimbursement shall be supported by records evidencing such expenditures andevidences of payments made in case of reimbursements. All documentation evidencing

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expenditures shall be retained by PLN and shall be made available to the auditors for audit and tothe Bank and its representatives if requested.

Procurement Assessment and Arrangements

16. Assessment of the agency's capacity to implement procurement. As this is a repeaterproject following the IPTD, PLN will essentially keep the same institutional arrangements as forthe IPTD.

17. An assessment of the capacity of the Implementing Agency identified several key issuesand risks concerning procurement that could arise when implementing the project, and measuresnecessary for mitigation. They are as follows:

* Uncertain capacities of committee members and workload of procurement committee.The procurement committee, which will handle all procurement activities, will beestablished annually before the project is launched, and could be constrained if they hadto simultaneously procure a large number of contracts: PLN should designate within amonth of Project Effectiveness or earlier adequate staff with sufficient expertise and planthe procurement activities in a way to balance the workload of the committee. Alsobefore the first bidding process is launched training should be provided by PLN,supported by the Bank, to the committee members to strengthen the capacity of thecommittee.

* Complicated Review Procedures due to High-value Contracts. It is expected that someof the contracts will have the value at the level of US$30 million, and therefore stringentreview procedures will be applicable by both PLN and the World Bank. This may causeadditional delay. To address this risk, it was agreed with PLN that a detailed schedule ofprocurement activities for all the contracts will be prepared. PLN will closely monitorthe progress of each procurement package against the agreed procurement plan andsubmit an updated progress report to the Bank at least on a quarterly basis.

* Delay of progress. Experience with the first transmission project shows that delay mayhappen due to inconsistencies between documents prepared by the two consultants andinadequate coordination of the procurement activities. To mitigate this risk, PLN shoulddesignate before the bidding documents for Group 1 are submitted to the World Bank forreview, specific staff (Procurement Manager) in the project team who will be responsiblefor coordinating procurement activities and monitoring progress, and the ProcurementPlanning, Engineering and Technology Division should ensure consistency of biddingdocuments.

* Coordination among Directorate of Planning and Affiliation Development, Directorateof Strategic Procurement and Primary Energy and Directorate of Construction(including regional offices) for contract management. Because procurement will becentralized at the headquarters of PLN and implementation will be managed at theregional level, there may be gaps between procurement and contract management. PLNwill ensured that the CRED (including regional PMOs) should be consulted, whererequired, on technical matters during the procurement process and be informed of the

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outcome of the completed procurement and contracting process so as to ensure smoothtransfer after contracts are signed.

* Possible confusion between different versions of World Bank Guidelines. For thisproject, the applicable World Bank Procurement/Consulting Guidelines are the versionsin January 2011, while PLN has been following the World Bank Procurement/ConsultingGuidelines of older versions for their previous projects. There may be confusions amongthe procurement staff of PLN due to different versions of the Guidelines. PLN willorganize training in early stage of the project and the World Bank team will provideassistance so as to clarify the changes under the new Guidelines.

* Strengthening transparency and accountability A Governance and AccountabilityFramework was developed and will be implemented by PLN which includes disclosure ofinformation for transparency, civil society participation for oversight, complaint handlingmechanism, sanctions and remedies, etc.

18. Based on the above analysis, the initial risk assessment for project procurement is"substantial". However, with the agreed mitigations, the procurement risk is rated as"moderate".

19. Applicable Guidelines and Thresholds. The procurement for the proposed project willbe carried out in accordance with the World Bank's "Guidelines: Procurement under IBRDLoans and IDA Credits" dated January 2011, and "Guidelines: Selection and Employment ofConsultants by World Bank Borrowers" dated January 2011; and the provisions stipulated in theLegal Agreements. The following prior-review and procurement method thresholds arerecommended:

Table A3.2 - Procurement ThresholdsPrior Review Procurement Method Thresholds (US$)Thresholds ICB NCB Shopping QCBS QBS CQS Least SSS IC

(US$) CostGoods 500,000 and >1,000,0 <1,000,000 <50,000 N/A N/A N/A N/A N/A N/A

the first NCB 00contract

Works 5,000,000 and >10 <10 <50,000 N/A N/A N/A N/A N/A N/Athe first NCB million millioncontract

Consulting100,OOOSSS:

Firms All N/A N/A N/A Default TBD <300 N/A N/A N/ACompetitive: ,000

Individuals N/A N/A N/A N/A N/A N/A N/A AllN/A N/ASSS: All

20. Procurement Plan. The project will be implemented in two groups. All the substationsin Group 1 have been identified and appraised, and those for Group 2 will be appraised withprogress of the project. At project appraisal, PLN prepared a Procurement Plan for implementingGroup 1 of the project, which provides the basis for the procurement methods and reviewrequirements by the World Bank. This plan was agreed between PLN and the Word Bank, and isavailable in the project's files. Once the project is approved, it will be made available at PLN

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and the World Bank's external website. The Procurement Plan will be updated in agreement withthe World Bank annually or as required to reflect the actual project implementation needs(including the contracts for Group 2) and improvements in institutional capacity within PLN.

21. The Procurement Plan (for Group 1) is summarized as follows:

A. Goods, Works, and Non Consulting Services

Table A3.3 - Good, works, and non-co sulting series contracts

Estimated Review ExpectedPre- Domestic by BdContract Cost Procuremen Pr- Dmsi yBid

No CotatCs rcrmn qualificatio Preference Bank(Description) (USD t Method Openingmillion) n (yes/no) (yes/no) (Prior/ Date

Post)

Supply and Installationfor Extension of 150 kVTransformer Bays forScattered Substation

SS-1 Group 1 in ICB No Yes Prior Speb- Lot 1: Java-Bali 22.07Regions- Lot 2: Outside Java- 18.15Bali Regions

Supply of 150 kVPower TransformersExtension of 150 kV

TRF Scattered Substations September-2 GroupI in: ICB No Yes Prior 2013

- Lot 1: Java-Bali 17.84Regions- Lot 2: Outside Java- 11.17Bali

Notes: Price Adjustment will be used for all contracts

B. Consulting Services

No consulting service is expected at the stage of project appraisal.

22. Frequency of Procurement Supervision. In addition to the prior review supervision tobe carried out from World Bank offices, the capacity assessment of PLN recommends oneimplementation support mission every six months during the first eighteen months. Thefrequency of procurement supervision (including special procurement supervision) will befurther defined after the first eighteen months.

Environmental and Social (including safeguards)

Project types, locations and impact assessment

23. Project types and locations. Project investments (sub-projects) are spread in variousurban, peri-urban and rural areas in Java, Bali, Sulawesi, Kalimantan and Sumatra islands. The

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project involves two types of sub-projects; (i) expansion or rehabilitation sub-projects and (ii)new sub-projects. For expansion and rehabilitation sub-projects, the key activity is to install newtransformers and associated equipment at 150 kV or 70 kV and 20 kV or to replace existingtransformers and associated equipment with new ones with higher capacity in the existingsubstations. Most of expansion sub-projects do not require land acquisition with exception ofsome which require insignificant additional pieces of land, normally adjacent to the existingsubstations.

24. For new substations, the key activity is to construct new substations which have one ortwo transformers and associated equipment at 150 kV and 20 kV, a control room and ancillaryequipment. A new substation requires an enclosed, leveled site free of any vegetation or humanhabitation (except for substation operators), typically of about two hectares of land. Newsubstations may be connected to an existing transmission line, or be part of a new transmissionline development. In case the new substation requires a short 150 kV transmission connectionand upgrading of an existing road, these structures require additional permanent and temporaryland acquisition. New sub-project sites can be, and normally are, selected flexibly within acertain area to minimize the impacts of such structures.

25. Social Impacts. The project will result in improvement of the quality and adequacy ofpower supply in the project areas. Positive social impacts to people and community in the projectareas include better electricity supply both in quality and quantity for those existing electricitycustomers and connection to the electricity grid for new customers. Access to reliable and qualityelectricity is the key ingredient for economic growth and improvement of quality of life forhouseholds and local communities. Land acquisition process including public consultation andsatisfactory compensation for the population residing in the project areas is the main social issueof the project. Since land acquisition is limited, the adverse social impact is expected to bemodest and manageable.

26. Land Acquisition and Resettlement. All 37 sub-projects in Group 1 are for expansion orupgrading of the existing substations involving no land acquisition. At the time of appraisal, 71sub-projects are proposed for Group 2 including 27 new sub-projects and 44 expansion orrehabilitation sub-projects among which 33 expansion sub-projects involving some landacquisition.

27. Indigenous Peoples. Site visits and screening undertaken by the task team hasdetermined that Indigenous Peoples as defined by OP 4.10 are not present in, nor have collectiveattachment to the project area under the proposed sub-projects of the first group. Similarly, nonatural and/or critical habitats will be impacted by the sub-projects of the first group. However,as PLN can update, replace or propose new sub-projects in the second group, these sub-projectsmay be located in areas where indigenous people/communities are present, or have impacts onnatural habitats.

28. Environmental Impacts. Environment impacts are likely modest, non-sensitive andreversible and, in every case, mitigation measures can be designed to reduce the negativeimpacts. All three components are classified as Category B as defined by paragraph 8(b) of OP4.1.

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29. The following impacts are identified during construction for rehabilitation and expansionof 150/20 kV and 70/20 kV substations: (i) increased level of dust and noise from the use andmovement of machinery; (ii) non-toxic solid waste during construction; (iii) oil spill or leakagefrom machinery or transformers; (iv) possible discovery of PCBs and (v) worker health andsafety from existing EMF. Impacts during operation include (i) oil leaks from transformers; (ii)fire and emergency preparedness; (iii) solid wastes and (iv) worker health and safety. Otherissues for equipment upgrades and additions that have been identified include managing potentiallegacy soil contamination and storage and disposal of old transformers. For new substations, inaddition to the above impacts, other issues include the management of vegetation clearance andsediment and erosion control. No long-term adverse impact is envisaged due to the projectactivities.

Key Measures taken or to be taken by the Borrower to Address Safeguards Policy Issues

30. Social Safeguards. PLN prepared the Land Acquisition and Resettlement PolicyFramework, Indigenous Peoples Planning Framework (IPPF) and the Land Acquisition andResettlement Action Plans (LARAPs) for two new sub-projects of Group 2. The frameworks andtwo LARAPs was reviewed and found to meet the Bank requirements.

31. The LARPF provides guidance for preparing and implementing the land acquisition ofthe sub-projects in Group 2. It follows general principles of land acquisition and resettlement thatconform with the World Bank's OP 4.12 on Involuntary Resettlement and include requirementsfor preparing the LARAP for sub-projects proposed for financing, including the process ofLARAP approval and implementation; socioeconomic survey and inventory of affected peopleand assets; compensation scheme and categories of affected persons; institutionalresponsibilities; monitoring and evaluation and the grievance mechanism.

32. The LARAPs of two new sub-projects which are proposed for Group 2 were reviewed.The land required for each substation is about 20,000m2 (2 hectares) and are owned by only oneland owner and four land owners respectively. No significant impact to the land owners wasfound as the lands are not used for productive purpose and none of the owners earns incomefrom the lands. Permanent land will be compensated in the form of land substitution or cash atmarket value. Crops and trees will be compensated at market value or be replaced.

33. Due diligence was conducted for Batulicin substation in South Kalimantan province, forwhich the land acquisition was completed in 2010 and the project will finance the expansion ofthe substation. The due diligence found that the land acquisition was in compliance with thenational regulations and no controversial issue was recorded.

34. Indigenous Peoples Planning Framework (IPPF) provides guidance for the preparationand implementation of Indigenous Peoples Plans in Group 2, if the proposed sub-projects areexpected to affect indigenous peoples. The Framework includes guidance for screening ofindigenous peoples in the project area, preparation of Social Assessment when necessary, themain principles to be followed, reporting, monitoring and documentation and the grievancemechanism. The Framework describes how the project implementing unit can ensure that free,

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prior and informed consultations are undertaken, in a language spoken by, and locationconvenient for, potentially affected indigenous people. The views of indigenous people are to betaken into account during preparation and implementation of any sub-project, while respectingtheir current practices, beliefs and cultural preferences. The outcome of the consultations will bedocumented into the sub-project documents.

35. Environmental Safeguards. PLN prepared an EMP for Upgrades which covers allexpansion and rehabilitation sub-projects in Group 1, an Environmental and Social ManagementFramework (ESMF) for sub-projects in Group 2 and EMPs for two new sub-projects in Group 2.The ESMF and the EMP for Upgrades were reviewed and found to meet Bank requirements.The draft EMPs for two stand-alone new substations were also reviewed and found satisfactory.

36. The ESMF provides guidance for preparation, appraisal and implementation ofEnvironmental Management Plans and the roles and responsibilities of each institution involvedin preparation and implementation of the sub-projects proposed for Group 2. In addition,Environmental Codes of Practice (ECOP- standard environmental specifications for contractors)and Chance Find Procedures have been developed for physical works as part of the EMP andESMF.

37. The EMP for Upgrades covers a large number of small, discrete substation upgrade and /or extension sub-projects across five PLN Project Offices. This approach replaces a largenumber of repetitive and identical EMPs. These projects have very small footprints, mostlywithin the boundaries of existing substations, and the severity and risk environmental and socialimpacts are low. The potential environmental and social issues of most of these sub-projects arevery similar (with few exceptions which will be separately addressed in the EMP). Furthermore,since all subcomponents will be owned by PLN, the EMP aspects of institutional arrangements,occupational health and safety, and emergency preparedness and response systems areestablished by PLN corporate policy and will be the same for all of the sub-projects.

38. The EMP contains standard mitigation and monitoring plans to cover typical impactsfrom upgrading equipment and installing new equipment at substations, including worker healthand safety, earthworks and solid and hazardous waste management. The EMP also containsstandard EMP monitoring, reporting and review processes to streamline processes across theProject Offices and the sub-projects.

39. Public Consultations and Disclosure. All social and environmental safeguard documentsmentioned above were publicly disclosed nationally and locally for at least two weeks andcomments sought from the public from December, 2011, to January, 2012. The final draftdocuments were sent for disclosure to the InfoShop in Washington D.C. in January, 2012 and thefinal safeguards frameworks and EMPs for Upgrades were disclosed there in April 2013.

40. Disclosure and consultation notices were broadcasted online and through newspapers at thelocations of the PLN Offices from December 28, 2011, to January 10, 2012. Documents wereavailable from PLN in Indonesian language (hard copies in the offices and a soft copy on thePLN website) for the public to read and comment on. Each of the PLN Provincial ProjectOffices where the sub-projects are located advertised an 'open office' for the 10 working days

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during the advertisement period where people could drop in to discuss the project with staffknowledgeable about the project. Consultation details were recorded in the final versions of thedocuments. The final draft documents were disclosed on PLN website in January 2012 and thefinal safeguards frameworks and EMPs for Upgrades were disclosed on PLN website in March2013.

41. Capacity for Implementation. PLN has experience in preparing and implementing twoon-going transmission projects financed by the World Bank. A dedicated unit within thePlanning and Affiliation Development Directorate at PLN headquarters is responsible forcoordinating environmental and social issues of the project. The unit's manager and staff whoare also coordinating other World Bank financed projects have adequate knowledge andexperience with the Bank policies. The unit was responsible for the preparation of ESMF,LARPF, and IPPF and during implementation continues to be in charge of overall coordinationand reporting.

42. All six PMOs are staffed with dedicated environment and social staff, who are familiarwith the Indonesian regulation on environment, EIA and EMP processes (called Amdal andUKL/UPL respectively) and land acquisition. The PMOs for Java-Bali and the PMO for Sumatra2 (South Sumatra) have experience with implementation of WB-financed projects. The PMOsfor Sumatra 1 (North Sumatra), Kalimantan, and Sulawesi have no previous experience with aWB project but each has competent environment and social specialists as full time permanentstaff. The PMOs are directly responsible for preparation and implementation of EMPs and, ifrequired, LARAPs and IP Plans.

43. During preparation, environmental and social staff of all six PMOs received training inEMP, LARAP and IPPF from the Bank team in October, 2011. During supervision, furthertraining will be provided to PLN staff in charge of social and environmental management.Progress of EMP, LARAP, and IP preparation and implementation will be carefully monitored.

Governance and Accountability Framework (GAF)

44. As IPTD2 is a follow up of the ongoing IPTD, this framework will reinforce measuresoutlined in the Governance and Accountability Framework of the preceding project whichpresents a regular review mechanism by PLN allowing constant evaluation of the internal riskreview and monitoring, and provides reference to improvements of the existing system which areunderway.

45. The previous Framework is built upon PLN's guidelines on Good Corporate Governance(GCG) established since 2003 and built upon the principles of transparency, accountability,responsibility, independence, and fairness. According to the GCG guidelines, the project has tobe reviewed by the Risk Management Division under the Director of Commerce andManagement of Risk and Compliance prior to being approved by the Board of Directors. Risksevaluated include those associated with the delivery of project objectives, reputational risks,social and environment risks and risks of fraud and corruption. Risk criteria have beenestablished and risk ratings are determined based on the likelihood of impacts and mitigationmeasures are proposed. A summary of the risk review discussion is to be presented to the

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shareholders as part of the quarterly management report to shareholders. PLN's own internal riskassessment and the proposed mitigation measures for the IPTD2 will complement actionsoutlined in the GAF as agreed with PLN.

46. With the changes in the corporate structure and issuance of new policies affectinggovernance, the 2003 Guideline on GCG is to be revised to include, among many, the 2008Ministry of State Owned Enterprise's GCG principles and the Stock Exchange and FinancialService Authority (OJK) disclosure requirements. PLN is required to comply with OJKregulations as it issued Global Medium Term Notes. The revised Guidelines will be finalized in2012, subject to approval by the Board of Directors and Shareholders. The Enterprise RiskManagement will be updated and enhanced, although the changes will not apply retroactively.There is both internal and external compliance audit against PLN's GCG policies, a summary ofwhich is reported annually and published online through its website, www.pln.go.id. In 2010, thecompliance rate was at 88.12 percent (subsequently PLN was awarded a Good Rating) by BPKP,acting as the external auditor. The compliance audit also produced a series of recommendations,based on which PLN will revise its Board Manual and the 2005 Code of Conduct to improveperformance evaluation and internal control.

47. The following provides a summary of the action plan. The full GAF is available in theproject files.

* Enhanced Disclosure Provisions and Transparency. As a limited corporation, PLNhas to comply with disclosure policy defining the types of information to be disclosed.Based on the Freedom of Information Act and OJK regulations, PLN has disclosedinformation including those related to the Act of Incorporation, managerial reports(financial reports, audit reports), Board of Directors and Commissioners, guidelines ongood corporate governance, corporate actions taken, and mechanism of goods andservices. The information is available online through www.pln.go.id.

* Civil Society Participation in Oversight. Enhanced participation of shareholders andproject stakeholders will also be achieved through proactive communications, includingwith local government of the five regional project offices. In March 2012, PLN signed aMemorandum of Understanding (MoU) with Transparency International (TI) tocooperate on enhancing transparency in procurement and new customer connection. WithTI's support it is envisaged that contractors, suppliers, and consultants will have to sign apact declaring that they will not engage in fraudulent and corrupt behavior.

* Complaints Handling Mechanism. A system is in place and available channels aredisplayed in the project's communication materials such as bid documents, public noticesat the project site, and PLN's website. In order to improve effective handling ofcomplaints and protection of whistleblowers, the development of a system is currentlyunderway. The first study proposing different whistleblowers' system alternatives isproposed to the Board of Directors, incorporating PLN's own experience and the practiceof other State Owned Enterprises, such as Pertamina. The system is expected to befinalized in 2012.

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* Sanctions & Remedies. Clear sanctions and remedies are an important final step in theeffort to fight against corruption. Any person (government, non-government, consultant,contractor, etc.) can be sanctioned if sufficient evidence is found for corrupt practices.In all procurement and consultant contracts, evidence of corruption, collusion ornepotism will result in termination of the relevant contract, possibly with additionalpenalties imposed (such as fines, blacklisting, etc.) and in accordance with Bank andGovernment regulations. In addition, requirements in the contract will enable PLN toterminate consultants or contractors for poor performance in accordance as stipulated inthe contracts.

* Mitigating Collusion, Fraud & Nepotism. PLN will undertake measures to build thecapacity of the five regional offices to be able to effectively apply fiduciary measuresstipulated in the internal procedures, as well as the Bank Guidelines and fiduciaryannexes under this PAD. Transparent and clear progress of project activities deliveredunder this project with appropriate oversight also will reduce the risk of poor delivery ofcontracts. Contractors will be required to take pictures of activities and/or physicalprogress as part of their report, to be uploaded on PLN's website at regular intervals. Anindependent audit of PLN will also be conducted and will include a paragraph explainingthe loan, the status of funds used and opinions on the use of the funds. The risk ofcorrupt practices arising from land acquisition and resettlement will be addressedseparately through the Bank's social safeguard framework.

PLN is also required to report and disclose conflict of interest transactions, andtransactions with related parties as required by Bapepam. The disclosure is expected tomitigate against transactions with conflict of interest situations.

Monitoring & Evaluation

48. PLN has maintained an adequate statistics system which provides sufficient data tomonitor the project outcomes. Data on electricity sales and newly connected customers arerecorded for each province by PLN regional distribution units quarterly. PMOs report to theDirector of the Construction and Renewable Energy on construction progress, contractmanagement issues and invoices handling on quarterly and annual basis. PLN FinanceDirectorate records data on disbursement progress.

49. Project physical and safeguards progress will be monitored by the six PMOs. Initiallyprogress monitoring will focus on implementation of LARAP and EMPs. After procurement iscompleted and contracts are transferred to the PMOs, construction progress and EMPs will bemonitored followed by testing and sub-project commissioning. PMOs will prepare bi-annualprogress reports to send to PLAD and the WB.

50. The PLAD with the assistance of the PMC will monitor overall project implementationprogress, including procurement and financial management. It will prepare an integratedprogress report on annual basis, incorporating data from PMO reports and data on procurementand financial management from PLN departments. The progress reports will also include updates

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of project outcome indicators on an annual basis. The cost of data collection, monitoring andevaluation will be covered by the administrative budget of PLN and no extra budget is required.

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Annex 4: Operational Risk Assessment Framework (ORAF)

Risks

Stakeholder Risk Rating Low

Risk Description: Risk Management:

To the extent that this operation might been Such concern was not an issue during preparation. The team will monitor this issue during implementation.seen as encouraging the building of new coal- Resp: Both Status: In Stage: Both Recurrent: Due 30-Jun-2018 Frequency:fired power plants or greater mining of coal for Progress Date:existing plants, there is likely to be a concernfrom environmental groups that may have theability to affect the achievement of projectdevelopment objectives.

Capacity Rating Moderate


Financial Management Financial ManagementPLN will hire a Project Management Consultant, including a financial specialist to support financial management-

Lack ofe cooinaiamn ete regiNa PQmOs related issues within a month after the effectiveness of the loan. Training will be provided to the PMOs and PLNand the Financial Directorate at PLN HQ mayresult in slow payments and poor record of staff before effectiveness of the loan and during implementation.

expenditures. Resp: Both Status: Not Yet Stage: Imple Recurrent: Due 28-Feb-2014 Frequency:Three out of six PMOs are not familiar with Due mentat Date:project administration, project payment ionverification process and Bank requirements on Risk Management:financial reporting.

ProcurementProcurement: Initial training was provided to PLN staff in charge of procurement on new procurement guidelines in beforeSome members of Procurement Committee project signing and will be repeated during implementation. PLN agreed to appoint a procurement coordinator for

the project to improve coordination with the Bank team.

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members may not be familiar with WB Resp: Both Status: Not Yet Stage: Imple Recurrent: Due 3 1-Oct-2013 Frequency:procurement. Possible confusion between Gol Due mentat Date:procurement regulations and Banks' ionprocurement guidelines and between differentversions of WB procurement guidelines. Weakcoordination with the Bank team may lead todelay in procurement process.

Governance Rating Moderate


Risk-averse attitude in regard to governance Role and responsibilities of each agency were well described in the PIP. Trainings on procurement and financialissue may lead delays in project procurement management will help to increase confidence in project procedures.and contract management. Resp: Client Status: Not Yet Stage: Imple Recurrent: Due 30-Jun-2018 Frequency:

Due mentat Date:ion

Design Rating Low


Unknown quality of subprojects in Group 2 Proposed subprojects are technically simple while PLN has adequate technical standards in line withwhich PLN will propose for financing during international practice. The Bank team will appraise each subproject against an agreed set of eligibility criteriaimplementation. before accepting for financing under the project.

Resp: Both Status: Not Yet Stage: Imple Recurrent: Due 30-Jun-2018 Frequency:Due mentat Date:

ion

Social and Environmental Rating Low


PMOs are not familiar with safeguards Training on safeguards frameworks and preparation of safeguards documents will be provided to the PMOsframeworks when prepare safeguards plans for during implementation. PLN will employ a Project Management Consultant, including an environment/socialsubprojects in Group 2. PLN Environment Unit expert to support the Environment Unit and PMOs during implementation.at the PMU is also in charge of other donor Resp: Both Status: Not Yet Stage: Imple Recurrent: Due 30-Apr-2014 Frequency:investment programs and can be overloaded. Due mentat Date:

ion

Program and Donor Rating Low

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Low risk as the donor supported component In parallel with the project, PLN will implement a TA program to improve its capacity to operate the transmissionwas removed from the project and will be and distribution systems in a more efficient and transparent manner through the introduction of smart gridimplemented as a parallel activity. technologies. The TA program with an estimated cost of US$2 million will be financed by a grant provided by

the Australian Government as a complementary activity to IPTD2. The TA will be supervised together with theproject.

Resp: Client Status: Not Yet Stage: Imple Recurrent: Due To be Frequency:Due mentat Date: determined

ion

Delivery Monitoring and Sustainability Rating Low


Demand growth in project areas may be lower Project design allows changes in the list of investments in Group 2 to meet actual demand growth in various areasthan projected which reduces the economic across the project islands. PLN has an established data collection and reporting system which the task team willviability and sustainability of the investments. rely on for project monitoring.As subprojects are scattered in five large Resp: Client Status: Not Yet Stage: Imple Recurrent: Due 31-Dec-2018 Frequency:islands, monitoring of progress can be difficult Due mentat Date:and delayed. ion

Overall Implementation Risk: Moderate

Risk Description:Moderate rating was selected for project implementation mainly because of the possibly weak capacity of the PMOs in Kalimantan and Sulawesi and limitedcapacity of PLN in procurement handling.

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Annex 5: Implementation Support Plan

Strategy and Approach for Implementation Support

1 . The phased approach of the proposed project requires a higher level of activities by bothclients and the Bank team during implementation. In parallel with implementation of the sub-projects already approved in Group 1, PLN will continue preparation of project documents forsub-projects in Group 2 before bringing them forward to the Bank team for appraisal. Thestrategy for implementation support has been developed based on this specific nature of theproject. It aims at making the support to the client for implementation of its dual functions moreefficient and focus on the implementation of the risk mitigation measures defined in the ORAF.

* Procurement: Initially, there are 2 large ICB contracts (US$30-40 million) to beprocured for Group 1 sub-projects. When Group 2 sub-projects will be fully appraisedand approved to be included in the project, another round of procurement will be carriedout. The Bank team will provide implementation support by: (a) providing training tomembers of the procurement committee and related staff in the regional project officesand PLN two engineering consultants who are in charge of preparation of procurementdocuments; (b) reviewing procurement documents and providing timely feedback to theprocurement committee; and (c) providing detailed guidance on the Bank's procurementguidelines to the procurement committee and engineering consultants; and (d) monitoringprocurement progress against the detailed procurement plan developed by PLN.

* Financial management: Supervision will review the project's financial managementsystem, including but not limited to accounting, reporting and internal controls.Supervision will also cover sub-projects on a random sample basis. The Bank team willalso work with the project management consultant to assist PLN in improvingcoordination among different departments and units for financial management andreporting.

* Environmental and social safeguards: The Bank team will supervise and providesupport to PLN for the implementation of the EMPs for Upgrades for the sub-projectsunder Group 1. In parallel, the Bank team will provide support to the regional PMOs toprepare LARAP, EMPs and IP as necessary for new sub-projects and other sub-projectsto be proposed for Group 2. Training will be provided to relevant staff from PMOs andPLN environment unit at the Headquarters for preparation and supervision ofimplementation of the safeguards plan.

* Anti Corruption: the Bank team will supervise the implementation of the agreedGovernance and Accountability Framework.

* Other issues: Some sector level risks, such as the electricity tariff issue, will not beaddressed at the project level but at the portfolio level through the Bank's policy dialoguewith the government and PLN. However, as they are tightly related to the financialviability of PLN, especially its debt service coverage ratio (DSCR), the team will watch

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these issues closely and work with PLN to examine possible remedial actions should theDSCR fall below the covenant threshold.

Implementation Support Plan

2. Most of the Bank team members, including the task team leader will be based in theIndonesia country office and other country offices in the region to ensure timely, efficient andeffective implementation support to the client. Timely monitoring and support to PLN will bemainly provided by the team members in the country offices. Formal supervision will be carriedout semiannually; field trips will be made on need basis not only for sub-projects underimplementation but also for new sub-projects proposed for Group 2. Detailed inputs from theBank team are outlined below:

* Technical inputs. Power engineering inputs are required to review of biddingdocuments and of bid evaluation reports to ensure fair competition through propertechnical specifications in the bidding documents and fair assessment of the technicalaspects of the bids. The inputs are required for at least two rounds of procurement fortwo groups of sub-projects. During construction and commissioning, technicalsupervision is required to ensure contractual obligations are met on technical grounds.Field visits by the team's power engineer will be conducted on a semi-annual basisthroughout project implementation.

* Fiduciary requirements and inputs. Upfront training will be provided by the Bank'sfinancial management specialist and procurement specialist before the commencement ofproject implementation. The team will also help PLN identify capacity building needs tostrengthen its financial management capacity and to improve procurement managementefficiency. Both financial management and procurement specialists will be based in thecountry office to provide timely support. Formal supervision of financial managementwill be carried out semi-annually, while procurement supervision will be carried out on atimely basis as required by the client. It is estimated that around two staff-weeks will berequired for the financial management specialist annually, and around four staff-weeksfrom the procurement specialist annually in the first three years of the projectimplementation, and around two staff-weeks thereafter.

* Safeguards. Inputs from an environment and a social specialist are required throughoutthe project implementation. Training will be provide to PLN staff on preparation ofsafeguards instruments following ESMF, LARPF and IPPF and on monitoring andreporting. Supervision will focus on the implementation of the agreed land acquisitionand resettlement plan. Field visits for supervision are required on a semi-annual basis.During appraisal of new sub-projects proposed for Group 2, some field trips areenvisaged. Both social and environmental specialists are country office based.

* Financial review of PLN corporate finance. Input is required from a financial specialistfor regular review of PLN's financial status to verify compliance of financial covenants.This exercise will be combined with other WB financed projects implemented by PLN.Semi-annual review and field visit will be required.

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* Operational. An operations officer based in the country office will provide day to daysupervision of all operational aspects and coordination with the client and among Bankteam members.

The main focus of implementation support is summarized below:

Time Focus Resource Estimate Partner RoleFirst Technical and procurement review of the Power engineer: 4.0 SWs; NAthree bidding documents; Procurement specialist(s): 4.0 SWs;years

Procurement training;FM training and supervision; FM specialist: 2.0 SWs

Review of LARAP for Group 2, provision of Social specialist: 4.0 SWstraining and supervision;Review of EMPs for Group 2, provision of Environmental specialist(s): 4.0 SWstraining and supervision;Institutional arrangement and project Operations officer: 8.0 SWssupervision coordination;Team leadership; Appraisal of sub-projects of IlL: 6.0 SWsGroup 2

Last two Project construction; Power engineer: 2.0 SWs NAyears Procurement specialist(s): 2.0 SWs;

Environment and social monitoring & Environmental specialist(s): 4.0 SWsreporting; Social specialist: 4.0 SWs

Financial management, disbursement and FM specialist: 2.0 SWsreporting; Operations officer: 8.0 SWs.Financial situation of PLN. Financial analyst: 2.0 SWsTask leadership TTL: 6.0 SWs

Note: SW - Staff-Week

The staff skills mix required is summarized below

Skills Needed Number of Staff Weeks Number of Trips Comments

Operations Officer 8 SWs annually Fields trips as required. Country office based

Power Engineer 4 SWs first three year, then 2 SWs Twoannually in the following years

Procurement 4 SWs annually the first three One Country office basedyears, then 2 SWs in thefollowing years

Social specialist 4 SWs annually Fields trips as required. Country office based

Environment specialist 4 SWs annually Fields trips as required. Country office based

Financial management 2 SWs annually Fields trips as required. Country office basedspecialist

Sector financial analyst 2 SWs annually one

Task team leader 6 SWs annually two Country office based

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Official PDF , 46 pages

Documents

Transcript of Official PDF , 46 pages