World Bank Documentdocuments.worldbank.org/curated/pt/806601468771657954/...CURRENCY EQUIVALENTS (As...

Document of

The World Bank

Report No. 15646-IND

STAFF APPRAISAL REPORT

REPUBLIC OF INDONESIA

RAILWAY EFFICIENCY PROJECT

October 17, 1996

Infrastructure Operations DivisionCountry Department IIIEast Asia and Pacific Region

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CURRENCY EQUIVALENTS(As of March 1996)

Currency Unit = Indonesian Rupiah (Rp)

US$1.00 = Rp. 2,330Rp. I million = $442

WEIGHTS AND MEASURES

Metric Units

FISCAL YEAR

Government of Indonesia April I - March 31Perumka .January I - December 3 1

TERMS AND ACRONYMS USED

APBN Central Government Annual Development BudgetBAPPENAS National Development Planning AgencyBOT Build-Operate-TransferCAS Country Assistance StrategyCTC Centralized Traffic ControlCWR Continuous Welded RailDGLC Directorate General of Land CommunicationsGBHN State Development Policy GiuidelinesGOI Government of IndoniesiaIACC Inter-Agency Coordination CommitteeICB International Competitive BiddingJABOTABEK Greater Jakarta Metropolitan RegionLTDP Study Land Transport Developmeint Program StuidyMgt Million Gross TonMOC Ministry of CommunicationsMOF Ministry of FinanceMPW Ministry of Public WorksNCB National Competitive Bidding (formerly LCB or Local Competitive Bidding)NPV Net Present ValueO&M Operations & MaintenancePersero State-Owiled Limited Liability Company (PT)Perum ka Railway State EnterprisePiP Project Implementation PlanPIU Project Implementationi UnitsPJKA Railway Departmental AgencyPMUP Project Management Unit PerumkaPSO Public Service ObligatiolnRepelita Indonesian National Five Year Development PlanRTF Restructuring Task ForceSBD Standard Bidding DocumentsSOE Statemenit of Expenditure or State-Owned EnterpriseTEU Containier - Twenty Foot Equivalent UnitVAT Value-Added Tax

REPUBLIC OF INDONESIA



LOAN AND PROJECT SUMMARY

Borrower: Republic of Indonesia

Implementing State Railway Corporation (Perumka)Agencies: Ministry of Communications

Poverty: Not Applicable

Amount: US$105.0 million

Terms: Payable in twenty years including five years of grace, at the standardinterest rate for LIBOR-based US Dollar single currency loans

Commitment Fee: Standard

Onlending Terms: From the loan proceeds, US$ 19.8 million equivalent will be onlentby GOI to Perumka for 20 years; the subsidiary loan will bedenominated in equivalent US dollars and the on-lending rate willbe under the same terms as the Bank's loan plus 0.5 percent perannum. Perumka will bear the foreign exchange risk.

Financing Plan: See Table 4-2

Economic Rate of 20.9%Return:

MOP: P-6939-IND

Maps: IBRD 27873, IBRD 27874

Project ID No.: ID-PE-4026

Regional Vice President: Mr. Javad Khalilzadeh-Shirazi (Acting), EAPDirector: Ms. Marianne Haug, EA3Division Chief: Mr. Anuparn Khanna, EA31NStaff: Mr. Joris Van der Ven, Sr. Transport Economist

EA31N

REPUBLIC OF INDONESIARAILWAY EFFICIENCY PROJECT


TABLE OF CONTENTS

1. ECONOMIC AND SECTOR SETTING ......................................................... IA. THE ECONOMY AND THE TRANSPORT SECTOR ......................................................... I

B. TRANSPORT SECTOR INSTITUTIONAL, POLICY AND LEGAL SETTING ................................................... 3

2. PAST BANK INVOLVEMENT AND LESSONS LEARNED ....................................................... 6A. PAST BANK INVOLVEMENT ......................................................... 6B. MAIN LESSONS LEARNED .......................................................... 7C. BANK SECTOR STRATEGY AND RATIONALE FOR BANK INVOLVEMENT ............................................... 8

3. THE RAILWAY SUBSECTOR ......................................................... 9A. ORGANIZATION, MANAGEMENT AND REGULATION ..................... ..................................... 9B. RAILWAY NETWORKS, ASSETS AND TRAFFICS ................ .......................................... I IC. OPERATIONS .......................................................... 1 4D. FINANCIAL ASPECTS .......................................................... 15E. SUBSECTOR INVESTMENT PLANNING .......................................................... 17F. PERUMKA CORPORATE PLANNING ......................................................... 19G. PRIVATE PARTICIPATION ......................................................... 20H. KEY ISSUES .......................................................... 201. THE GOVERNMENT'S RESTRUCTURING AGENDA ................. ........................................ 23

4. THE PROJECTA. OBJECTIVES ......................................................... 27B. PROJECT DESCRIPTION ......................................................... 27C. LAND ACQUISITION AND RESETTLEMENT ......................................................... 33D. ENVIRONMENTAL IMPACTS ......................................................... 34E. COST ESTIMATES ......................................................... 34F. FINANCING PLAN ......................................................... 35G. PROCUREMENT ARRANGEMENTS ......................................................... 36H. DISBURSEMENT ......................................................... 371. IMPLEMENTATION ......................................................... 38J. PERFORMANCE INDICATORS, MONITORING AND SUPERVISION ......................................................... 39K. AUDITING ......................................................... 40

5. ECONOMIC EVALUATION ..................................... 41A. BENEFITS, BENEFICIARIES AND FISCAL IMPACT ..................................... 41B. JAKARTA-BANDUNG CORRIDOR IMPROVEMENT ..................................... 42C. TRACK MAINTENANCE SYSTEM ..................................... 44D. LOCOMOTIVE UNIT EXCHANGE MAINTENANCE SYSTEM ...................................... ................... 44E. RISKS AND SENSITIVITY ANALYSIS .................................................. 45

6. FINANCIAL EVALUATION .......................................................... 47A. INTRODUCTION .......................................................... 47B. PERUMKA'S FINANCIAL FORECAST UNDER THE NEW POLICY FRAMEWORK .................. ................... 47C. SENSITIVITY ANALYSIS .......................................................... 49

7. AGREEMENTS REACHED AND RECOMMENDATION ........................................................ 52

TABLES, FIGURES AND BOXES

TABLE 3-1: SUMMARY OF PERUMKA'S FINANCIAL PERFORMANCE 1991-1995 .............. ..................... 16TABLE 4-1 PROJECT COST SUMMARY ............................................................. 35TABLE 4-2: FINANCING PLAN (US$ MILLION) ................ ............................................. 36TABLE 4-3: PROCUREMENT ARRANGEMENTS (US$ MILLION) ............................................................. 36TABLE 4-4: ALLOCATION OF LOAN PROCEEDS ............... .............................................. 38TABLE 5-1: NET PRESENT VALUES AND ECONOMIC INTERNAL RATE OF RETURNS ........... .................. 42TABLE 5-2: RESULTS OF SENSITIVITY ANALYSIS ................... .......................................... 46TABLE 6-1: SUMMARY FINANCIAL PROJECTIONS AND INDICATORS ..................................................... 48TABLE 6-2: FLOW OF FUNDS BETWEEN GOI AND PERUMKA ............................................................. 49TABLE 6-3: SENSITIVITY ANALYSES ............................................................. 50

FIGURE 1-1: INTERURBAN FREIGHT AND PASSENGER MOVEMENTS (JAVA + SUMATRA) .I

FIGURE 3-1; REVENUE SHARES BY REGION AND TRAFFIC CATEGORY .12FIGURE 3-2: TRAFFIC GROWTH BY REGION AND TRAFFIC CATEGORY .13

BOx 4-1: DESCRIPTION OF JAKARTA-BANDUNG CORRIDOR .29

ANNEXES

3.1 PERUMKA ORGANIZATION CHART

3.2 RAILWAY TRAFFIC, FINANCIAL AND OPERATIONAL INDICATORS 1985/86-19953.3 PERFORMANCE AND COMPARATIVE STATISTICS

3.4 INVESTMENT PLAN

3.5 GOALS AND POLICIES FOR THE DEVELOPMENT OF THE RAILWAY TRANSPORT SUB-SECTOR

3.6 ACTION PROGRAM FOR RAILWAY SECTOR RESTRUCTURING

3.7 PUBLIC/COMMUNITY SERVICE OBLIGATIONS

4.1 ON TIME PREVENTIVE MAINTENANCE SYSTEM WITH UNIT EXCHANGE

4.2 CONSULTANCY SERVICES

4.3 PROJECT COST

4.4 FINANCING PLAN

4.5 ESTIMATED DISBURSEMENT SCHEDULE

4.6 PROJECT IMPLEMENTATION SCHEDULE

4.7 KEY PERFORMANCE INDICATORS

4.8 SUPERVISION PLAN

5.1 ECONOMIC EVALUATION

6.1 FINANCIAL EVALUATION

8.1 DOCUMENTS AVAILABLE IN THE PROJECT FILE

This project was prepared by a team consisting of P. Anderson (Sr. Railway Specialist), D. Bullock (RailwaySpecialist, Consultant), A. Byl (Task Manager until November 1995), S. Guggenheim (Sr. Social Scientist) D.Hawes (Transport Specialist), D. Liu (Economist), M. Rasheed (Financial Analyst), R. Scouller (Operations Officer,from April-September 1996), J. Van der Ven (Sr. Transport Economist, Task Manager from November 1995) andT. Walton (Sr. Environmental Specialist). Peer Reviewers are: L. Thompson (Sr. Railway Advisor, TWUTD) andH. Deboeck (Sr. Financial Analyst, EA2TP). Ms. Marianne Haug and Mr. Anupam Khanna, the Director andDivision Chief respectively, have endorsed this project.

CHAPTER 1

ECONOMIC AND SECTOR SETTING

A. THE ECONOMY AND THE TRANSPORT SECTOR

1.1 Economic and Sector Setting. Indonesia, the world's largest archipelagic nation, extendssome 5,000km across the equator. It comprises several thousand islands, the largest of which areJava, Sumatra, Kalimantan, Sulawesi and Irian Jaya. The country is endowed with considerablenatural resources. Until the early 1970s agriculture and forestry constituted the mainstay of theeconomy and were the main source of foreign exchange. Since the 1980s the Government hassuccessfully implemented policies aimed at developing and broadening the manufacturing base ofthe economy.

1.2 The distribution of population is uneven and is mainly concentrated on Java which accountsfor 59% of the population on 7% of the land area. Economic activity is largely determined by thediffering factor endowments of the islands. Mining activities and oil production are concentrated onSumatra and Kalimantan. Food production and manufacturing are located predominantly on Java.The country's transport system and transport flows have been shaped by the economic resource baseof the islands and the distribution of population.

1.3 All transport modes - road, rail, coastal shipping, civil aviation and inland waterways - play arole in Indonesia's transport system. Overall, the modes tend to complement one another, with eachserving specific market needs. Java and Sumatra are the only islands that feature rail transport andonly in Java and in a few other transport corridors on other islands is there intermodal competition.Java also has the most highly developed and best integrated transport system and is also the islandwhere elimination of capacity constraints and congestion are becoming key concerns.

1.4 While sea transport is moving large quantities of bulk oil and coals carried on own accountby the oil and coal industry, general cargo movements by sea are comparatively small. Thus, if seatransport is ignored, road is by far the dominant land transport mode, accounting for some 93% of allland transport on the islands of Java and Sumatra. Interurban passenger transport is alsopredominantly by road accounting for 93% of total passenger transport on Java and Sumatra (SeeFigure 1-1).

Figure 1-1: Interurban Freight and Passenger Movements (Java + Sumatra)

Freight PassengerSea: Gen l

Cargo Air6% 2%

RailRoad 5%41 %

Road

93% 0I Sea: Bulk

50%

ail

_%

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1.5 Economic and Transport Sector Performance and Challenges. Over the past ten years,the Indonesian economy has grown at more than 6% per annum. Non-oil manufacturing hasprovided the engine of growth with an average annual growth rate of 11.5% per annum. In theprocess the share of manufacturing in GDP increased from 14.6% in 1984 to 23.9% in 1994, whilethat of agriculture declined from 22.7% to 17.4% over the same period. This strong performance ineconomic activity was accompanied by rapid growth in transport, which increased by about 7% perannum. Under the Sixth Five Year Development Plan (FYs 1994-95/1998-99) and beyond, GDP istargeted to continue to grow at a rapid pace, exceeding 7% per annum. Growth in demand fortransport would continue to be at least 7% per annum and is expected to be particularly rapid in theindustrializing areas.

1.6 In broad terms, the transport system has been able to meet the rapid growth in transportdemand with road playing the major role. The two main reasons for this performance were: (i) thatGOI, in its successive five-year plans, consistently devoted considerable resources for transport andfor road improvement in particular; and (ii) that initially as new roads were being built or upgradedthe road system had considerable spare capacity. Despite these achievements, many transportcorridors are increasingly congested as spare capacity has been exhausted. This is affecting bothroad and rail transport and is presenting the sector with the challenge of creating major new capacityon critical parts of the network within a relatively short period of five to ten years. However, incontrast to the majority of the traditional upgrading and rehabilitation investments which can beprepared and implemented within a short time period, the new capacity expansion investments inboth road and rail require much longer preparation times owing to the time needed for detailedplanning studies, for dealing with environmental impacts and acquiring the necessary right-of-way.

1.7 For the short to medium term, road transport, owing to its greater efficiency and flexibility,will need to provide most of the additional capacity to meet the continuing rapid growth in overalltransport demand. While there is already an extensive rail network on Java, the development andquality of rail services has been impeded by a policy and institutional environment that has providedmore opportunities and flexibility for road transport and inhibited efficiency and innovation inrailway operations. This in turn has constrained rail investment, with the consequence that manysections of the predominantly single track network are now operated at capacity while manypassenger services are achieving load factors far above 100%. Vigorous implementation ofappropriate sectoral policies, in particular policies aimed at setting the modes on an equal footingregarding infrastructure investment and cost recovery hardly change the relative market shares ofroad, rail and coastal shipping in the near term because of the time needed to fully implement thepolicies and the long lead times - on the order of five to ten years - before policy changes and newinvestments will translate into noteworthy shifts in market shares.

1.8 Future Role of Rail. In the longer term, however, rail has the potential to play a muchexpanded role in meeting the inter-city passenger transport needs of Java. The island has apopulation which exceeds 120 million, at 840 persons per sq. km the highest population density inthe world, a low level of motorization which is increasing rapidly, and a geography and patterns ofurbanization and industrial development which define high density transport corridors that are wellsuited to efficient passenger railway operation.

1.9 Given these geographic and population features, continued economic growth and theaccompanying rise in demand for passenger transport, in the longer term sustainable growth on Javawill hinge on this potential role being fully exploited. Without further development of the railwaysthe rapid growth in inter-city passenger travel on Java would have to be met entirely by road

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transport which would not be sustainable as it would cause unacceptable environmental and socialimpacts. Serious capacity constraints are already occurring on the road network even though vehicleownership at 23 vehicles per 1000 persons is only a fraction of that in countries such as Japan (510vehicles per 1000) and South Korea (142 vehicles per 1000) with similar geography but lowerpopulation densities. Road transport activity is already a major contributor to worsening airpollution in Java, while a high road traffic accident rate is causing considerable human and materiallosses. Moreover, expansion of the road network's capacity is already necessitating the loss ofvaluable agricultural land and, in the vicinity of major cities, the displacement of large numbers ofpeople.

1.10 If Java were to follow a pattern of transport system development based on a continuingheavy reliance on road and corresponding vehicle ownership levels comparable to those observed inmore industrialized countries, i.e. on the order of 500 vehicles per 1000 persons at GDP per capitalevels greater than, say US$ 20,000, the vehicle population on Java would rise to be in excess of 60million. This would not be a feasible transport system for an economic space with the characteristicsof Java. This is illustrated for example, by the fact that the road space needed to just park - let alonedrive - these vehicles would amount to a total of 240.000 lane km or about three times the currentlength of the classified network on Java. This parking space would be equivalent to 240 lanes ofroads stretching all the way 1000 km from east to west across Java, or almost a km wide band ofroad space across Java. Clearly, an efficient railway system which plays a much greater role in theoverall transport system, comparable as a minimum to the role played by rail in Japan, where publictransport accounts for some 35% of passenger travel will, therefore, be a crucial element ofsustainable transport on Java.

1.11 On Sumatra, with a population density one-tenth of Java's and an economy that is heavilydependent on primary industry, rail's potential role within the transport system is quite different.The main drivers for its development are major mining projects, such as the planned expansion ofthe Bukit Asam coal mine, and other large-scale industrial projects (e.g., cement) for which railtransport can have an economic role. Expansion of the three Sumatra railway systems should,therefore, depend on the phasing of such projects rather than on the growth of passenger and freighttraffic in general. The required investments should be evaluated and justified as an integral part ofthese projects on a commercial basis.

B. TRANSPORT SECTOR INSTITUTIONAL, POLICY AND LEGAL SETTING

1.12 Institutions. The principal Government of Indonesia (GOI) agencies involved in shapingthe development and regulating the functioning of the transport sector are:

* the Ministry of Communications (MOC), which is responsible for sector policy andstrategy formulation, for the technical and economic regulation of land, sea, and airtransport, for the provision and management of some transport infrastructure (notably smallports and airports), and for the technical guidance and supervision of 17 state-ownedenterprises (SOEs) including Perumka, the state railway corporation;

* the Ministry of Publics Works (MPW), which has primary responsibility for the planningand management of the public road network, and which is also responsible for the technicalguidance and supervision of several SOEs including PT Jasa Marga, the state toll roadcompany;

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* Bappenas, the National Development Planning Agency, which has primary responsibilityfor formulating the country's five-year development plans (Repelita) and, in conjunctionwith the Ministry of Finance. for determining the allocation of expenditures under the StateDevelopment Budget;

* the Ministry of Finance (MOF), which, in addition to its responsibilities for shaping theState Routine and Development Budgets, also represents GOI's interests as owner of thestate owned enterprises (SOEs)'.

1.13 Policy Framework. The basic guidelinles for the development of the transport sector arecontained in the Outline of State Goals and Policies (Garis-Garis Besar HalLian Negara or GBHN).The GBHN is formulated by the People's Consultative Assembly at five-yearly intervals and instatus is subordinate only to the Constitution. The GBHN serves as the mandate for the incomingPresident and Cabinet and forns the basis for the subsequent Repelita plan, which elaborates targetsand policies and defines development programs for their realization.

1.14 Since the mid-1980s, there have been significant changes in transport sector policies. Thegeneral thrust of these reforms has been to reduce economic regulation and the extent of governmentinterventions in the functioning of transport markets, and to enable and promote increased privateparticipation in the provision of transport services and infrastructure. Attention focused initially onthe maritime transport subsector, where higih costs, poor services and long delays were cripplingdomestic and international trade. Two major deregulation packages - known as Inpres 4/1985 andPaknov 1988 - redefined the role of'government and resulted respectively in dramatic improvementsin port management and productivity and in the effticiency and quality of shippilig services.

1.1 5 Reforms in the other transport subsectors have been less dramatic - in part because theproblems were less severe and less amenable to solution by radical measures - and commencedsomewhat later. In the road subsector, where economic regulation of the industry was alreadyrelatively light, the primary focus has been on establishing appropriate road use regulations,upgrading enforcement, strengthening the planning and implementation of road infrastructure works,improving safety and reducing vehicle overloading, and increasing the recovery of infrastructurecosts from road users. In the civil aviation subsector, the reforms to date hiave resulted in increasedand more effective private competition to the two state-owned airlines. In the railway subsector, theinitial reforms included converting the state railway agency, PJKA, into a public corporation(Perumka), relaxing government controls over fare and rate setting, and enabling increased privateparticipation.

1.1 6 Private Sector Participation. In parallel with the above sector-specific reforms, GOI hasbeen moving to increase private participation in SOEs, with the twin aims of improving efficiencyand mobilizing the financial and technical resources required for their future growth. This is beingaccomplished through the partial divestiture of enterprises that have already attained the status oflimited liability shareholder companies,2 and through the promotion of joint ventures with private

MOF has recently established a separate Directorate General of State Enterprise Development. The Ministerof Finance also assigns certain of his SOE oversight responsibilities to the ministers responsible for technicaloversight.

There are now two forms of state enterprise in Indonesia, namely Persero and Perum. The Persero form isbased on the same legal code as private limited liability (PT) companies, and there is no legal restriction onGOI divesting shares to the public. The Perum is based on a separate legal code that applies only to state

partners. In recent years, there have been four partial divestitures, all involving industrial andtelecommunications enterprises. The fields of business of these four enterprises-PT Semen Gresik(cement), PT Timah (tin mining), PT Indosat (international telecommunications), and PT Telkom(domestic telecommunications)-are characterized by their not involving extensive loss-making'social" missions.

1.17 GOI is now planning the phased partial divestiture of SOEs in other sectors, and MOF isevaluating and prioritizing the more than 180 candidate enterprises. The pace of divestitures will bedetermined by factors including the perceived institutional capacity of the GOI agencies concernedand the absorptive capacities of the domestic and overseas share markets, while the choice ofenterprises will be influenced by their financial performance and by the nature and extent of their"social" missions.' It is currently envisaged that there will be around three simultaneous listings oninternational and domestic each year tor the next few years. PT Garuda Indonesia Airlines and PTJasa Marga have been tentativelv identified as the first priorities for listings among the transportsector enterprises.

1.18 Concerted efforts are also being made to secure private participation in infrastructureprovision through build-operate-transfer (BOT) and similar concession agreements between privateconsortia and the concerned SOEs. While these initiatives have attracted considerable privateinterest, lack of clarity in sector strategies and lack of transparency in solicitation and negotiationprocedures has resulted in progress being slow and--in at least some instances--in costs beingunnecessarily high. Only a few major schemes involving foreign commercial financing have so farachieved--or come close to--financial closure, with the electric power and telecommunicationssectors being at the forefront. In the transport sector. initiatives are most advanced with respect totoll roads. One toll road concessioni involvinig foreign commercial financing is now nearingfinancial closure, albeit after more thani seven years of planning and negotiation.

1.1 9 Legal Framework. The basic legal framework for the sector comprises four modaltransport laws concerning respectively railways, road traffic and transport, civil aviation, andmaritime transport. These were enacted in 1 992 to replace old regulations that mostly dated back tothe I 920s and 1 930s. These ftour new laws, wlhich complement a law on road infrastructure enactedin 1980, provide a more explicit legal basis for the policy reforms outlined above. They aredesigned to be implemented by government regulations (GRs) and subordinate ministerial decrees, aprocess which is almost completed for the road traffic and transport law. For the other modes,including rail, the planned GRs have now been drafted by MOC and are being discussed with otherconcerned agencies.

owned enterprises, and that does not provide for ownership of equitv to be divisible into shares. The Perseroform is the more autonomous, and is used for those enterprises that are required to be profit-oriented. ThePerum forn is used for enterprises that are assigned significant social missions and that are required to covercosts but not necessarily to seek profits. A third and still less autonomous form, the Perjan or departmentalagency, ceased to exist following the transformation of the railway enterprise, PJKA (PerJan Kereta Api), intoPerumka (Perum Kereta Api).

Article 33 of the Constitution states that branches of production that are important for the State and that affectthe lives of most people shall be controlled by the State. This article explains the extensive state participationin sectors such as transport and provides a basis for assigning social missions to SOEs.

CHAPTER 2

PAST BANK INVOLVEMENT AND LESSONS LEARNED

A. PAST BANK INVOLVEMENT

2.1 The Bank has been substantially involved in Indonesia's transport sector during the past twodecades. Projects financed include four in the maritime sector (two for shipping and two for ports),two fertilizer distribution projects, fifteen roads projects and two railway projects. At present fourroads projects are under implementation. Implementation Completion Reports prepared in recentyears include those for the Highway Betterment Project (Ln. 2404-IND), the Highway Maintenanceand Betterment Project (Ln. 2717-IND), the Second Rural Roads Development Project (Ln. 2881-IND), the Railway Technical Assistance Project (Ln. 2891 -IND) and the Highway Sector Project (In.31 33-IND). The last report by the Operations Evaluation Department (OED) was a combined auditreport for the Highway Betterment and the Highway Maintenance and Betterment Projects.

2.2 The thrust of Bank lending has been in the road sector which is the dominant mode, and hasbeen directed at three broad objectives: (i) improving the quality of the road network throughmaintenance, rehabilitation, improvements (e.g. minor widening) and new road construction; (ii)developing the capability of the road agencies at central and regional level through technical supportand training and through improvements in planning and programming systems, in road constructiontechnologies, and in procedures for preparing, implementing and monitoring road works; and (iii)improving key land transport sector policies and strengthening the capacity for transport and roadsector policy formulation and implementation. The latter is aimed at ensuring that the differentmodes can play their proper role in the transport system.

2.3 Railway Projects. In the railway sector Bank involvement has been less sustained, withonly two projects: the First Railway Project (1974) and the Railway Technical Assistance Project(1987). The first project was designed to arrest the decline in the railway's share in land transportand to increase its capacity and efficiency through a program of rehabilitation and modernization,including a substantial amount of technical assistance and practical training. The project made avaluable contribution and succeeded in its immediate objectives but had limited impact in improvingthe institutional set-up. While passenger traffic increased, low tariffs resulted in continued lossesand the financial situation of the railway did not improve. The second project was more successful.It aimed at beginning to restructure the railway and at strengthening management in a broad range ofareas including: information systems, costing, inventory control, train scheduling, rationalization ofmechanical and track maintenance, container operations and intermodal traffic. The project waseffective in providing practical training in modern railway management practices for a group ofmiddle-managers from whom many of the current top-level managers have been drawn.

2.4 Involvement in State Enterprises. The Bank has also had extensive involvement withstate enterprises in the energy and telecommunications sectors. Recent energy andtelecommunications projects have aimed at sectoral and institutional restructuring, at creating theconditions for effective private sector entry and participation and at establishing and improving theregulatory structures. These projects have been instrumental in bringing about needed reforms as

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evidenced by the Telecommunications Sector Modernization Project of 1995 which supportedsectoral legal and regulatory reform and expanded private participation.

B. MAIN LESSONS LEARNED

2.5 The main lessons leamed from the two railway projects in Indonesia are that turning arounda railway cannot be achieved on a piecemeal basis and requires addressing the many problems thataffect its performance. Efforts should not only cover institutional changes, operationalimprovements, and tariff revisions, but should be complemented by priority investments in track androlling stock. Furthermore, assuring the railway's financial viability requires setting in place robustarrangements for governing the financial relationship between the railway and government and forcompensating the railway for public service obligations imposed on it by government.

2.6 An OED review in 1993 of Bank railway lending found that implementation of railwayprojects generally fell short of expectations. The principal reasons for the shortcomings were: (i)management's lack of sufficient authority over rates and other key matters; (ii) lack of a commercialapproach to the transport market; (iii) resistance to change in railway management, labor unions, andgovernment institutions; (iv) inefficient operations; (v) a lack of realism in forecasting traffic andfinancial performance; (vi) reluctance by the Bank to penalize failure to comply with loancovenants; and (viii) excessive reliance on loan covenants to achieve goals. The review emphasizedthe need to reshape the railway as an institution, through disengagement from the government,greater managerial autonomy and private participation in operations and management.

2.7 A review of the evolution of the World Bank's railway lending and of the railwayrestructuring experience worldwide conducted in 1994 by the Transport Water and UrbanDevelopment Department (TWUTD) concluded that change is possible and that the Bank can beinstrumental in the reform process. A key lesson is the need for a strong commitment to reform atthe highest levels of Government and the railway enterprise. Other important lessons from railwayreform in developed countries were that: (i) the functions of the railway need to be clarified anddivided into market-driven and socially driven (public service obligations) components; (ii) therailway should be organized in profit centers along its lines of business; (iii) the railway needseffective incentives and clear authority; (iv) there must be appropriate changes in regulation andother government intervention; (v) barriers to change, such as redundant labor, excessive debt,uneconomic trackage, or unsustainable retirement obligations, need to be removed; (vi) civil servicerestrictions should be eased or lifted; (vii) reforms proceed better when a professional outside partyassists in the analysis and the development of proposals. Additional lessons from recent railwayreform efforts in developing countries are that: (i) adequate resources for planning and managementare essential as the administrative capability of the government can be overwhelmed by the manycomplex railway restructuring issues; (ii) the Bank can not impose restructuring through loanconditionality; and (iii) the western management model of assigning clear authority andresponsibility combined with delegation of decisions to the lowest feasible level may not beappropriate in all cases.

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C. BANK SECTOR STRATEGY AND RATIONALE FOR BANK INVOLVEMENT

2.8 Bank Strategy. In transport the Bank's strategy is to assist GOI in developing an efficienttransport system capable of meeting the challenges of a rapidly growing economy, through: (i)policy and institutional reforms which ensure that the transport modes play their proper role and witheffective private participation; (ii) rationalization of the sectoral investment programs andimprovements in operations; and (iii) the introduction of improved planning, programming andimplementation procedures in the context of projects financing a part of the sector investmentprograms on a programmatic basis or by way of selective investments.

2.9 With regard to SOEs in key sectors of the Indonesian economy the Bank's strategy hasfocussed on sectoral institutional and regulatory reform with the emphasis on privatization issues inrecent years. In the power and telecommunications sectors, a main objective is to establish animproved regulatory framework for private sector participation, inter alia, by developing systemsand mechanisms for evaluating, regulating and managing entry of the private sector.

2.10 Rationale for Bank Involvement. GOI is strongly committed to rail transport playing amuch expanded and more efficient role in the intercity transport system and to reducing its ownfinancing of the subsector's development. The former commitment is reflected in the amounts that itplans to invest in the subsector during Repelita VI. The latter is evidenced by the compressedtimetable that it has adopted for the subsector restructuring agenda and the strong emphasis onincreased private participation.

2.11 GOI has asked the Bank to assist it with the reform of the sector. It considers the Bank to bebest equipped to provide such support given its considerable international experience with railwayrestructuring and privatization, its extensive past and ongoing involvement in Indonesia's transportsector, and its having supported the first phase of railway subsector restructuring through theRailway Technical Assistance Project. The government, particularly Bappenas, and other lendingagencies also expect the Bank to assist in rationalizing the railway investment program.

2.12 The proposed project is an integral part of the Bank's support for land transportinfrastructure and is fully consistent with the Country Assistance Strategy (CAS) which was lastdiscussed on March 21, 1995, and the Progress Report discussed on June 4, 1996, which emphasizecontinued lending for infrastructure development and the need to maintain a substantial presence inland transport to consolidate gains in operational efficiency and sector management. A keyobjective of railway sector lending is the establishment of an improved regulatory framework forprivate sector participation.

CHAPTER 3

THE RAILWAY SUBSECTOR

A. ORGANIZATION, MANAGEMENT AND REGULATION

3.1 Background. Prior to 1991, the Indonesian state railways were managed as a departmentalagency (Perjan) of MOC. Although classed as a state-owned enterprise, PJKA was not a separatelegal entity and its mission was considered to be primarily social. Its management was accordedvery limited autonomy, its budget formed part of MOC's budget, its annual targets were definedprimarily in terms of production rather than financial performance, and the tariffs for most serviceswere regulated at levels well below long-run variable cost.

3.2 During the latter years of Repelita IV (1984/85-1988/89), GOI recognized that fundamentalchanges would be needed to enable rail transport to play its proper role in an efficient andcompetitive transport system. Preparations for corporatization and commercialization commencedand, with effect from January 1991, PJKA was transformed into Perumka.4 As a Perum enterprise,Perumka is required to earn revenues sufficient at least to cover its costs. In making thetransformation, GOI retained ownership of the "main railway infrastructure" - principally the trackand signals and the land on which they stand - while Perumka was assigned ownership of therolling stock, stations, and other assets, including valuable inner city land. Perumka was chargedwith operating freight and passenger railway services, and also maintains and operates the mainrailway infrastructure on behalf of GOI.5

3.3 This institutional structure is reflected in the recently enacted railway law, Law 13/92, whichdefines the respective roles and responsibilities of government and state and private enterprisesbroadly as follows:

a) responsibility for guiding and supervising the development of railway transportation, and forproviding, maintaining and operating the main railway infrastructure is vested in GOI;

b) responsibility for operating railway services is vested in a railway management entity (orentities), which must be a state-owned enterprise;

c) responsibility for developing, maintaining and operating the main railway infrastructure may bedelegated by GOI to a state-owned enterprise; and

d) private entities may participate in railway-related activities by entering into cooperativearrangements with the management entity.

4 The transformation was effected by Government Regulation 57 of 1990 (GR 57/90).

GOI retained ownership of the main infrastructure so as to place rail transport on a similar footing to roadtransport, and to avoid Perumka's having to pay tax on the land upon which the track is laid. Responsibilityfor main infrastructure maintenance and operation is implicitly delegated to Perumka by Minister ofCommunications Decree 8 of 1991, although this decree does not stipulate which agency should be responsiblefor the associated costs.

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There are some ambiguities in the Law's definitions and provisions, and also some inconsistenciesbetween these and the definitions and provisions of GR 57/90. These include differing definitions ofwhich assets are encompassed in the main railway infrastructure, and imprecise delineation ofresponsibility for associated maintenance and operation costs.

3.4 As a Perum enterprise, Perumka is legally permitted to borrow from domestic financialinstitutions, to issue bonds, and to enter into cooperative agreements (based on revenue sharing) withprivate entities. It is not, however, permitted to establish subsidiaries or to own shares in a jointventure company.

3.5 Organization and Lines of Reporting. Perumka's basic internal organization structure andlines of reporting to GOI are defined in GR 57/90 and reflect the provisions of the various laws and

6regulations governing state-owned enterprises. The corporation, which is headquartered at Bandungin West Java, is managed by a Board of Directors, comprising a Chief Director and four Directors.The latter four are responsible for the directorates of Finance, Engineering, Operations, andPersonnel and Administration. Also reporting to the Chief Director are the heads of three otherheadquarters units - Planning, Research and Development, Education and Training, and InternalAudit - together with the heads of the Java Commercial Region (Wilayah Usaha) and the threeSumatra Operating Regions (Wilayah). A chart summarizing Perumka's current organizationalstructure is contained in Annex 3.1.

3.6 The Minister of Communications is charged with providing guidance to the Board of Directorsin the areas of general policy and planning, and with supervising its implementation. The Minister isassisted in this task by a Board of Supervisors, comprising a Chairman plus up to four othermembers, which reports through the Director General of Land Communications.' The principaltasks of the Board of Supervisors are to evaluate Perumka's proposed annual workplan and budget,and to monitor their implementation, and to identify where performance needs to be improved. TheBoard of Supervisors is also required to report regularly to the Minister of Finance on matterspertaining to Perumka's financial performance. The Perumka directors also communicate directlywith MOC's Secretariat General and DGLC on planning matters, and with MOF and Bappenas oninvestment financing and budgeting matters.

3.7 Both the Board of Directors and the Board of Supervisors are appointed by the President on therecommendation of the Minister of Communications, which is required to be made in consultationwith the Minister of Finance. The members of the Board of Supervisors are required to begovernment officials, with at least one representative each from the Ministries of Communicationsand Finance.

3.8 Regulation. Pending the promulgation of the implementing regulations for Law 13/92 (para1.19), Perumka continues to be subject to numerous regulations issued under the umbrella of the

6 These most important of these are: Government Regulation 57 of 1990, which established Perumka; Law 13 of1992 concerning Railways; Law 9 of 1969 concerning State-Owned Enterprises; and Government Regulation3 of 1983 concerning the Guidance and Supervision of State-owned Enterprises.

The Director General of Land Communications is currently also the Chairman of the Board of Supervisors.

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previous law. The main basis for the economic regulation of railway services is contained in GR57/90 and Minister of Communications Decrees KM 3/90 and KM 8/91.

3.9 Law 13/92 empowers the Minister of Communications to regulate tariffs for certain classesof passenger service, having regard to the opinion of the Minister of Finance.8 The currentclassification of passenger services - Executive, Business, Economy, Urban, and Special (e.g.,tourism charter) - is stipulated in KM 3/90. Economy and urban services are classified as "non-commercial", and fares are subject to regulation by the Minister. All other passenger services andfreight services are classified as commercial. This decree also stipulates that the number of seatsprovided for Executive, Business, and Special classes may not exceed 40% of total seat capacity.

3.10 In practice. Perumka currently has less autonomy over fare and rate-setting than theregulations imply. Although empowered to set the fares for Executive and Business class services,planned increases have been deferred on at least one occasion.9 Moreover, while freight rates are notsubject to regulation, Perumka's main freight customers are SOEs and GOI agencies, some of whichhave been able to exert strong pressure for "strategic commodities" to be carried at less-than-commercial rates.

B. RAILWAY NETWORKS, ASSETS AND TRAFFIC

3.11 Indonesia has four unconnected railway systems, one on Java and three others on Sumatra.Their combined length of track in operation is some 5,040 km, of which Java accounts for some3,700 km. All are 1067 mm (3'6") gauge, and except for short double-track sections in the vicinityof Jakarta and other major cities, the networks are single-track. Some sections in the greater Jakartametropolitan region (JABOTABEK) have been electrified to enable operation of suburban commuterservices by electric railcars.

3.12 Only some 19% of rail in the main tracks of Java is of the heavier weight type; 11% is 54 kg/mand 8% is 50 kg/m. All this heavier rail has been laid since 1982. The lighter rail is 42 kg/m and 33kg/m; the former accounts for about 50% of rail in the main tracks of Java and the latter 31%. Thelighter rail is quite old, some of it dates back to 1913 and none has been purchased since the 1970s.Because the rail has not had sufficient maintenance, much of the older rail is in very poor condition.Rail ends at the joints are often badly battered, some of which are beyond repair. There are otherdefects as well, such as engine burns and corrugation, which should be repaired.

3.13 There are 13 different types of locomotives on Java ranging from 340 hp to 1825 hp. The totalfleet, excluding Jakarta's commuter services, consists of 381 locomotives, 227 of which are dieselhydraulic and the rest being diesel electric. Except for 20 GE locomotives model CC201 (purchased

8 Law 13/92 stipulates that railway transport is to be developed and managed in the public interest as an integralpart of the national transport system with the goal of serving those passenger and freight traffics for which rail issuperior to other modes, having regard to factors such energy-use efficiency, land-use efficiency, safety, andpollution.

The limits on seat shares for the higher class services have not been rigidly applied, and Perumka has, forexample, been permitted to operate executive class urban services whose tariffs are not stipulated by theMinister. More generally, Perumka is now being encouraged to freeze the capacity of its economy servicesand to introduce new higher fare "economy plus" services.

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in 1992) and some 30 Henschel diesel hydraulic models BB303 and BB306 (purchased in 1978 and1984, respectively), the rest of the fleet on Java is all more than 20 years old. The average fleet ageis approximately 30 years. The combination of ineffective scheduling, operational demand, a lack ofparts and inadequate skills has led to low availability rates (70% for some types) and high failurerates (some 60 failures per one million kilometers). The taking of components or parts from onelocomotive to install on another is widespread.

3.14 There is a mix of mechanical and modern signaling systems on the main lines. Themechanical systems were developed some 60 years ago. Maintenance has been reasonable for theinside equipment, but not for the outside equipment. The condition of the wiring is very bad,causing difficult operation of levers and confusing and unsafe signals (e.g., signal armns in halfposition). The modern systems include the older model DRS60, which was installed in somestations in the early 70's, and newer ones such as Genesis, MIS 801, VPI/CTC, SSI andWestrace/CTC. Investments were made in such different systems because of the opportunitiesprovided under bilateral financing. This has created great difficulties for proper maintenance andoperation because staff must learn different technologies and systems and a large variety of spare partsis required.

3.15 Perumka's total operating revenues amounted to Rp. 592 billion (about US$262 million)in 1995 (Annex 6.1, Table 1). It is primarily a passenger railway, with passenger servicesaccounting for 66% of operating revenues. In 1995, Perumka as a whole carried 129 millionpassengers over an average distance of 121 km and 17 million tons of freight over an average haul of244 km. Over the period of 1988/89 to 1995, passengers grew at an average rate of 15.7% per year,and passenger-kilometers grew at 11.8% per year. Over the same period, freight tons increased at anaverage rate of 8. 1 % per year and ton-kilometers increased at 9.2% per year.

3.16 Revenue contribution and traffic composition vary significantly among the four railwaysystems (Figure 3-1). The Java Railway contributes about 75% of Perumka's total revenues. It isprimarily a passenger railway, with passengers accounting for 83% of its revenues. The SouthSumatra (S.S.) Railway generates some 20% of Perumka's total revenues, of which freight accountsfor 90%. The West Sumatra (W.S.) and North Sumatra (N.S.) railways contribute only 2% and 3%of Perurnka's total revenues, of which freight accounts for 99% and 60%, respectively.

Figure 3-1: Revenue Shares by Region and Traffic Category

Revenue Shares by Region Revenue Shares by Traffic1994 1994

Perumka l 100% Perumka

Java , 75% Java 631/0

S. S. 20%

W. S. 2% -N. S. 4U/o

N.S. n 3%f Lt 1 0% o Passenger oFreightl 100%

0% 100% . -

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3.17 The Java Railway's core passenger traffic is intercity, long distance services, such as Jakarta-Surabaya (820 km) and Jakarta-Yogyakarta (510 kmn), and medium distance services, such asJakarta-Bandung (180 km) and Jakarta-Cirebon (200 km). These services carried a total of 25.6million passengers over an average distance of 380 km in 1994. They achieved a growth rate of9.0% per year in passenger-kilometers from 1988/89 to 1994 and maintained high seat occupancyrates, over 80% for executive and business classes and over 100% for many economy classes. Theexecutive and business classes serving the Jakarta-Bandung Corridor have proved particularlysuccessful. Competing with road transport, the two classes carry some 2.5 million passengersannually with high quality services at premium tariffs, enjoying growth rates of 12.1% for theexecutive class and 8.4% for the business class from 1987 to 1995. The Java Railway also carriessuburban passenger traffic. This segment has been growing especially fast, at an average rate of21.2% per year in passenger-kilometers from 1988/89 to 1994 (Figure 3-2). The rapid growthexperienced in the intercity and suburban rail passenger traffic has been driven by the steadily risingurban population and income and deteriorating road congestion and pollution. As these forcesshould remain dominant in the future development, this traffic is expected to continue to growstrongly.

3.18 The freight traffic moved by the Java Railway consists mostly of petroleum fuel, fertilizer,cement, coal, and containers, totaling 1.4 billion ton-kilometers in 1994. Some 85% of this traffic isfrom state-owned enterprises at less than commercial rates. Due to the short hauls and intense waterand road competition, the rail freight traffic grew only at about 2.3% per year in ton-kilometers over1988/89 to 1994. While there will still be scope for large volume point-to-point flows, e.g., fertilizer,cement, etc., the growth potential is limited as privatization and commercial reform proceeds amongan increasing number of state enterprises and as railway freight tariffs move to compensatory levels.

Figure 3-2: Traffic Growth by Region and Traffic Category

Passenger Traffic Annual Growth Freight Traffic Annual Growth1988/89-1994 I 1988/89-1994

Perumka ; i 1 8.7% 2Perumka 95%

Java .I0% 21.2% Java 2.3%

W S. p o60/35% S. S. 18.2%

N. S. 0 4.8% W. S. 4.4%N. S. 1 .8%

0% ( Mainline Pass-km 25%

a Local Pass-km 0% a Freight Ton-km 20%

3.19 The South Sumatra Railway's dominant traffic is coal, which is moved from the Bukit Asammine at Tanjung Enim to Tarahan (for onward shipment to the Suralaya power station on Java) andto Kertapati (Palembang). Growing at over 20% per year from 1988/89 to 1994, this traffic reached1.9 billion ton-kilometers in 1994, higher than the total freight traffic moved over the Java railwayand accounting for 48% of the total freight carried by Perumka. There are plans to significantlyexpand the capacity of the Suralaya power station during the next decade.

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3.20 Freight traffic on the other two Sumatra railways, West and North, registered small growthrates, 4.4% and 1.8%, respectively, per year from 1988/89 to 1994 (Figure 3-2). The West SumatraRailway carries mostly coal and cement. Coal is moved from the mines at Ombilin (Parambahan) tothe terminal at Teluk Bayur and to the cement plant at Indarung. Bulk cement is moved fromIndarung to Teluk Bayur. The North Sumatra Railway's main traffic is crude palm oil, most ofwhich is carried on behalf of several state plantation companies to the tank farm at Belawan port.The growth potential for these two railways is limited.

C. OPERATIONS

3.21 As part of project preparation, Perumka's railway operations were studied by consultants.Key findings include the following:

* Economic Role of the Railway. Valuable rail transport capacity is being used to meetdemand in markets which are unable and unwilling to pay compensatory prices for rail services.Thus, money-losing freight traffic on Java consumes nearly half the capacity of the track and thelocomotive fleet.

* Safety of Operation. Based on field inspections of various track sections, the consultantfound that "parts of the system are not safe." This is partly due to deferred maintenance; theestimated backlog of track maintenance is Rp.75 billion (US$34 million). But maintenance fundsare not being applied as effectively as they could be.

* Proper Allocation Between Investment and Maintenance. When Perumka was formed,the appropriate compensation mechanism for infrastructure use and maintenance was not set up, sothat incentive is lacking for cost effective maintenance of assets to realize their full economic life.For example, instead of a one-time investment of Rp. 211 billion (US$96 million) in trackrehabilitation, the consultant recommended that Perumka's annual track maintenance budget beincreased by Rp. 50 billion (US$23 million). Rolling stock maintenance also has been underfunded,leading to uneconomic proposals for rehabilitation of locomotives, for example.

* Management, Supervision, and Organization. Responsibilities, authorities, andaccountabilities of managers and supervisors need to be more clearly defined, and the Java operatingorganization needs to be simplified. In addition, extensive changes are required in operating andmaintenance regulations and rules, in investment prioritization, and in marketing. If these changesdo not accompany the proposed reforms at the institutional level and the investments, Perumka willnot be able to handle the anticipated growth in traffic and play an expanded role in the growingtransportation market.

3.22 Perumka's combined operations on Java and South Sumatra have been compared to therailways of Thailand, Sri Lanka, Austria, and Belgium for 1994 (Annex 3.3). The overall conclusionof the analysis is that Perumka ranks relatively high in terms of physical measures of assetutilization. But mainly due to low passenger fares, the revenue earnings of its physical assets areinadequate and significantly lower than the railways in Austria and Belgium. Perumka's low revenuerelative to its assets is significant since most of the investment and repair cost of track, locomotives,and multiple unit power cars consists of material that is at least as expensive in Indonesia as it is inAustria and Belgium. Labor productivity compares more favorably: Perumka's combined annual

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passenger and ton kilometers per employee is lower than that of Thailand but significantly betterthan that of the other three comparators.

D. FINANCIAL ASPECTS

3.23 Accounting and Auditing. Until 1990, the railway was a departmental agency (Perjan)(para 3. 1), with its incomes and expenditures treated as part of the State Income and ExpenditureBudget. As part of its conversion to a Perum, the major part of the railway infrastructure remainedthe property of the Government, with Perumka retaining only that part associated with servicebuildings (workshops, depots, etc.), housing, facilities such as telecommunications, electricity andwater and the related land. This had two financial impacts on the railway: (i) the introduction of anannual payment from the Government to Perumka to contribute to the cost of maintaining theGovernment-owned infrastructure; and (ii) a large reduction in the infrastructure-related assets andan associated reduction in the depreciation and interest charges.

3.24 Perumka uses the double-entry accounting system. During the late 1980s a new andimproved accounting system was progressively introduced and in 1990 the fiscal year was changedfrom April/March to January/December. The classification of accounts was revised to integrate costand financial accounting. As a result costs can be analyzed by type of expenses (material, labor, andgeneral), by cost center (e.g., locomotive depot) and by operating function (e.g., locomotivemaintenance). Wages are allocated to activities according to data recorded on time-sheets/rosters.The reporting system has been computerized and the reporting formats have been suitably designed.The upgraded accounting system follows generally accepted accounting principles and practices.With financing under the Bank's Railway Technical Assistance Project, a traffic costing system wasintroduced and some management/cost accounting is now undertaken. However, the scope and levelof analysis could be improved and this is recognized by Perumka. For example, the costs onlyinclude direct and indirect operating costs and the calculation of depreciation charges should be basedon replacement costs.

3.25 Perumka's accounts are audited annually by the Financial and Development Supervisory Boardof the Government (Badan Rengwas Keerangan dar Pembangunan - BPKP). The auditors areregarded as independent auditors using generally accepted auditing rules and standards. Perumka'saudited accounts, however, are issued as late as nine months after the end of the fiscal year. This istoo long a delay for management review to enable it to take remedial actions when necessary.Closing of the books and their auditing need to be accelerated so as to produce the audited report notlater than six months after the close of the fiscal year. During negotiations, agreement was reachedthat Perumka 's audited accounts for FY1996 and 97 will be produced by September 30, 1997 and1998 respectively, andfor subsequent years by June 30 of each year (para 4.51).

3.26 Perumka's Financial Performance. Financial statements for 1991-95 are presented andevaluated in Annex 6.1, tables I and 2. Key results are summarized in Table 3-1 below.

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Table 3-1: Summary of Perumka's Financial Performance 1991-1995(Rp. Billion)

Item 1991 1992 1993 1994 1995

Operating Revenues .' 323 393 471 508 592Operating Expenditures 33 1 398 469 503 582Net Operating Revenue (Loss) (8) (5) 2 5 11Total Revenues (8) (4) 0 6 13

Performance Ratios:Operating Ratio 102% 101% 100% 99.0% 98%Current Ratio 7.8 4.8 7.5 9.5 8.2Acid Test Ratio 5.2 3.4 5.5 6.2 5.0Debt/Equity Ratio 6.6 12.7 22.3 29.9 35.5

v Operating revenues include GOI's annual contribution of Rp. 22.0 billion for 1991 and Rp. 31.5 billion per yearfor 1992 to 1995 for infrastructure maintenance and operation.

3.27 Perumka's financial performance has shown some improvement. Revenues have covered orcome close to covering its recorded operating costs, with revenue increases during the period beingclosely matched by cost increases. Consequently, the operating ratio has improved slightly from102% in 1991 to 98% in 1995. Without further improvement, Perumka would not be able to serviceits debt obligations and pay taxes and dividends to the Government. Also, in considering theseresults, it must be noted that: (a) GOI's contribution towards the costs of infrastructure maintenance(which is delegated to Perumka) is inadequate; (b) maintenance of rolling stock has beenunderfunded; and (c) Perumka's depreciation charges are based on the historical cost of assetacquisition.

3.28 The slow improvement in the operating ratio masks some significant changes that haveoccurred during the five years since Perumka was established. On the cost side, labor productivityhas increased by 51%,IO due to the combination of traffic growth and reduction in total staffnumbers." However, this has been offset by personnel costs having doubled during the same perioddue to a combination of general and specific wage and salary increases. Consequently, labor costincreased from 31% of working costs in 1991 to 36% in 1995. Despite these increases, the salarylevels for middle and senior level staff remain below those in the private sector. Other costs havegenerally increased in line with domestic inflation which has been in the range of 7.5%-10% perannum over the period.

IC Traffic units (passenger-km + freight ton-km) per staff member has risen from 306,000 in 1991 to 462,000 in1995.

A reduction in PJKA's staffing was covenanted in the Loan Agreement for the Railway Technical AssistanceProject (Loan 2891-IND). OED Report 13914 dated March 6, 1995 discusses the importance and difficulty ofright-sizing the railway labor force.

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3.29 On the revenue side, Perumka has for various reasons been unable to raise tariffs to levelsthat would cover its variable costs computed on a commercial "going concern" basis. The LandTransport Phase 11 Study (LTDP) in 1992 estimated cost recovery for various categories of trafficand the findings remain generally valid. Tariffs for economy passenger services covered short-runavoidable costs but fell short of covering the costs of renewing track and rolling stock (long-runavoidable costs) 2. Under "efficient" operations, passenger revenues would cover fully distributedcosts but still would make only a nominal contribution. For commercial passenger traffic thesituation is much better with first class passengers covering full costs, including a return on assets.

3.30 Freight revenues. by contrast, fail to cover even short-run avoidable costs. Perumka's latestanalyses find that the only freight traffic covering variable costs and some contribution to fixedcosts are Suralaya coal in South Sumatra and fuel to Solo in Java. The only traffic covering directcost (train operations, fuel and rolling stock maintenance) are other coal in South Sumatra,containers to and from Bandung, fuel to Cepu and steel from Cilegon to Surabaya. All other traffic(including fertilizer, cement and sand) are not covering direct costs.

3.31 Since 1991, average revenue for passenger services has increased overall by 43.0% from Rp.15.1 per pass-km 1991 to Rp. 21.6 per pass-km in 1995, reflecting a mix change, since the increasefor economy class services was only 26.5%. Aggregate price inflation over the same period totaled35.3%.

3.32 Perumka's inability to increase tariffs is due to a combination of: (a) explicit regulation offares for economy and suburban passenger services, which are in general now below the fares ofcompeting bus services; (b) implicit regulation of fares for premium passenger services andnegotiated rates for bulk freight services, for which market conditions would in many instancespermit significant increases; and (c) non-competitiveness of many low density short and mediumdistance passenger services and of general and small volume bulk freight services.,3 So, while thereis potential to increase tariffs on a number of services if Perumka were able to market and price itsservices on purely commercial grounds, such a commercial approach would also bring it todiscontinue many services that are non-remunerative.

E. SUBSECTOR INVESTMENT PLANNING

3.33 Since the late 1960s, GO] has adopted a centralized and highly structured system ofdevelopment planning which has been subject to progressive improvement and refinement over time.Development plans are prepared for the long-term (25 years) and the medium term (five years), and

12 Short-run avoidable costs (SRAC) comprise the operating and maintenance costs that would be saved if theservice were to be withdrawn. This is an appropriate measure to use where there is excess capacity ininfrastructure and rolling stock. Long-run avoidable costs (LRAC) comprise SRAC plus the costs of rollingstock provision and infrastructure renewals. This is an appropriate measure to use when there is spare capacityin infrastructure but not rolling stock. "Efficient" costs are the costs that would be achieved if best practiceswere employed to operate the system.

13 To bridge the gap between rising costs and inadequate tariffs, passenger fares were increased by 28% foreconomy class and 14% for executive and business class effective early April 1996.

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are designed to realize the goals and implement the policies outlined in the GBHN. The plans arecompiled by Bappenas and promulgated by Presidential Decree.' 4

3.34 The development planning process combines top-down and bottom-up approaches. The top-down framework is provided by the GBHN, and by initial macro-economic projections and outlinesectoral and regional goals, strategies, and parameters developed by Bappenas in consultation withthe concerned line ministries and regional authorities. Individual ministries, SOEs, and regionalgovernments then draft more specific targets and strategies for their respective sectors, subsectorsand regions, and formulate draft development programs for their realization. In the final stages,these draft goals and programs plans are integrated through intensive inter-agency discussions.During this process, the initial investment proposals are usually cut back and amended to align withprojected financing capacity and refined sectoral and regional priorities.

3.35 The resultant development plans are static in the sense that targets are not subject to revisionduring the plan period and are considered binding on the government agencies and SOEs chargedwith their implementation. While they are intended to provide a framework for both the public andprivate sectors, the nature and content of development programs naturally differs considerablybetween sectors such as industry, where new investment is mostly private, and public works, whereGOI finances the major share.

3.36 Up until the end of Repelita V, all investment in the railway subsector was financed by GOI.The Repelita VI plan envisages increased private participation in the railway subsector, and theinvestments estimated to be needed to achieve the plan's overall traffic growth target rate of 14% peryear are expected to be financed by GOI, Perumka and the private sector . The developmentprogram for railway transport accordingly includes specific physical targets and associated costestimates for the various categories of investments." The total investment needs are estimated atjust under Rp 3 trillion in nominal prices (equivalent to US$1.3 billion at current exchange rates). 6

Most of this is allocated for main infrastructure development, including for the further developmentof the JABOTABEK commuter network, and the remainder is for rolling stock.

3.37 As of March 1996, the Repelita VI investment plan for the railways (1994-95 through 1998-99) consists of Rp. 2,963 billion of projects for which the financing has already been arranged.These projects are committed to be carried out and represent the "core" of any investment plan forRepelita VI. The committed projects include Rp. 1,347 billion of projects for JABOTABEK

April 1994 marked the start of the Second Long-Term Development Plan (PJP-II) and the Sixth Five-YearDevelopment Plan (Repelita VI). Their preparation formally commenced in April 1993 following thequinquennial meeting of the Peoples Consultative Assembly (MPR), whose activities culminated in March1993 with the issue of the GBHN and the election of the President. The plans and the first-year budgets wereprepared according to a schedule that enabled implementation to commence in April 1994.

15 The main categories comprise: construction of new track; improvement and rehabilitation of existing track;improvement and rehabilitation of bridges; modernization of signaling; procurement and rehabilitation oflocomotives, coaches, and railcars and wagons; and feasibility and engineering studies.

16 Perumka estimates that a significantly higher level of investment is needed to achieve these traffic growthtargets.

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suburban services (45%), Rp. 571 billion of signal modernization projects on Java outsideJABOTABEK (19%), and other projects (Annex 3.4).

3.38 A significant percentage of the committed projects for Repelita VI, especially in thecategories of signal modernization and locomotive rehabilitation, may have less economicjustification than other projects for which funds have not been committed. For this reason there ismerit in taking a more integrated "corridor" or "systemwide" approach in the future to planning forthe expansion and modernization of railway capacity.7

3.39 In planning for infrastructure investments GOI and Perumka have already initiated a "corridor"approach. Under this approach corridor development is prioritized based on traffic volumes andprojections and all future investments and actions to increase capacity in a corridor are planned in acoordinated manner in particular as regards the sequencing of signaling and track investments. Thisapproach will be further strengthened and improved, inter alia, through careful evaluation of likelytraffic demand and capacity and its development will be supported under the project.

3.40 At negotiations agreement was reached with GOI that it will annually: (i) furnish to the Bankby September 30 a draft "core" railway infrastructure investment plan, prepared using cost/benefitanalyses carried out on a corridor approach and taking into account Perumka 's corporate plan; and(ii) finalize the "core "plan taking into account the Bank's comments.

F. PERUMKA CORPORATE PLANNING

3.41 Perumka maintains a rolling medium-term (five-year) Corporate Plan. This is updatedannually taking account of objectives and constraints set by GOI. The plan is comprehensive anddetailed, and reflects a sound understanding of the passenger and freight transport markets in theregions served by rail, of the factors that influence mode choice, and of the costs of its services.

3.42 The usefulness of the current plan is, however, limited. Firstly, the externally imposedobjectives and constraints are inconsistent inasmuch as it is not possible to meet the traffic growthand profit goals with the permitted tariffs and expected investment levels. Secondly, the plan doesnot constitute an agreement between Perumka management and GOI, as GOI has not committeditself to making the projected investment financing available, nor has it permitted the assumed tariffincreases. 18Consequently, Perumka's management cannot be held accountable for delivering theplan outputs.

3.43 The shortcomings of the corporate plan, are attributable to the nature of the Repelitaplanning process to which it is linked. In common with other subsectors, growth targets tend to be

17 The railway corridor is a convenient way to group the railway resources that can be associated with the varioustransport markets between pairs of origins and destinations. The market-oriented "corridor" approach torailway planning was taken by GOI and Perumka in planning the improvements in the Jakarta-BandungCorridor under this project. In addition to corridor-based projects, there also are projects whose planningrequires a systemwide approach, and two examples are the development of a track maintenance system and alocomotive unit exchange maintenance system under this project.

18 Perumka updates its Corporate Plan annually, but not all updates are subject to review by GOI. The last planreviewed was that covering the Repelita VI period (1994/95-1998/99).

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set initially using optimistic assumptions about the availability of investment financing, but then arenot revised downwards when financing allocations are reduced. Repelita targets cannot be amendedby Perumka or MOC as they are established by Presidential Decree, and corporate plans areexpected to provide for their realization. Perumka accordingly maintains an alternative planscenario based on what it considers to be feasible assumptions. This forms the basis for the "CorePlan" underlying the financial projections of Chapter 6.

3.44 In future years this "Core Plan" will not only need to be updated but may be subject to majormodification on account of: (i) the implementation of the government's policies for the sector: (ii)the implementation of Perumka's emerging business strategy developed by taking into account thecomparative advantage of railway transport compared to other modes; (iii) the impact of efficiencyimprovements; and (iv) the impact of possible private participation. At negotiations agreement wasreached that Perumka will annuallv (i) furnish to the Bank/fbr its review and c-mment by September30 its draft corporate plan and associated core investment plan, preparedl taking into account itsfinancial situation, updated ira,ffic forecasts, operational efficiency, available rolling stock and otherpertinent factors; and (ii) finalize and carry out the corporate plan and associated core investmentplan taking into account the Bank's commentsv.

G. PRIVATE PARTICIPATION

3.45 Since the early 1990s, GOI has actively encouraged private participation in the railwaysubsector, and Perumka in consultation with MOC has developed basic procedures for processing alimited range of private proposals.' 9 More recently, GR 20/94 has permitted foreign investment inthe subsector. The forms of participation so far permitted are joint operations (with profit-sharingbased on assets), contract management, concessions (principally for shop and other servicebusinesses at stations), and leases/rentals of Perumka property. Specific reference is made to Built,Operate and Transfer (BOT), Build, Own and Operate (BOO), and Build, Operate and Lease (BOL)schemes, but only in the context of commercial property development of Perumka land.

3.46 No attempt has yet been made to solicit private proposals for specific well-defined projects,but numerous unsolicited expressions of interest have been received. Most of these involvedevelopment of Perumka's inner city land assets, and there have so far been few well developedproposals for investments in the provision of railway services or in supporting businesses. Thoseservices and businesses that have attracted private interest mostly have monopoly characteristics,although Perumka is currently operating one train service in cooperation with a private group.20

H. KEY ISSUES

3.47 While the overall performance of the inter-city railway system has improved significantlysince 1990, when the initial subsector reforms commenced, GOI recognizes that much still remainsto be done if railway transport is to play its proper role within an efficiently functioning transport

These are set out in Board of Directors Decree KA/UP/21458/91 of August 1991.

20 This is the recently commenced daily container train service between Jakarta and Surabaya. It has involved acomparatively small private investment and, unlike most proposed private projects, faces intense competitionfrom road and Ro-Ro shipping.

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system. Accordingly in 1995, DGLC commissioned railway management consultants to evaluate theadequacy of the current institutional and regulatory framework and to recommend improvements. Inparallel, Perumka commissioned a consultant team to review and recommend improvements to themedium-term performance improvement and investment plan.2 '

3.48 The consolidated findings of these studies and of Bank missions confirm that a combinationof inter-linked external and internal problems outside the control of Perumka's directors areconstraining the efficiency and quality of railway services and impeding growth. The moreimportant of these are described briefly below.

3.49 Interfaces between GOI and Perumka. The interfaces between GOI and Perumka arepoorly structured and defined, particularly on matters involving regulation, financing, andinfrastructure development and management. Consequently, accountability is diluted and Perumka'sdirectors and senior managers must devote excessive time to meetings in Jakarta with the many GOIagencies involved.

3.50 Subsector Corporate Structure. Indonesia's railway system does not lend itself to beingmanaged effectively as a monolithic Perum corporation. The four railway networks are widelyseparated geographically and the nature and sizes of the markets they serve are very different. TheJava Railway alone is a large and diversified enterprise whose main businesses include freightservices, interurban passenger services, JABOTABEK commuter services, and urban propertydevelopment.

3.51 Perumka Internal Organization. Perumka's organization structure has too many layersand compartments. Work practices are outdated and lines of reporting and accountability are poorlydefined in many areas. Headquarters and regional offices are structured along functional rather thanbusiness lines, and responsibility for some key activities, such as locomotive maintenance, is divided

22between directorates. The individual railways are managed essentially as cost centers, and there islittle incentive for entrepreneurial initiative. The result is a production-oriented culture in whichonly the Principal Director has a clear profit responsibility.

3.52 Staffing. Perumka has more staff than needed for its current level of activity, althoughcontinued fast traffic growth coupled with natural attrition is helping to address this. At the sametime, it has insufficient qualified and experienced technical and managerial personnel. Thuspersonnel remain in positions that should have been eliminated following investments in electronicsignaling and centralized train control, but recruiting and retaining technicians to maintain this

21 "Further Institutional Development of Indonesia's Railway Subsector" (Executing agency: DGLC; Consultant:CPCS et al), and "Review and Prioritization of the Performance Improvement and Investment Plan for theIndonesian State Railways" (Executing Agency: Perumka; Consultant: CANAC et al). Both studies werefinanced under the Technical Assistance Project for the Public and Private Provision of Infrastructure (Loan3385-IND).

22 The top level organization of Perum corporations has, by established convention, been along functional lines.While some changes to PJKA's top-level structure were made at the time of its transformation to Perumka, thelower level structure remained largely unchanged. The organization of locomotive maintenance, whereby theDirector of Engineering is responsible for workshops and the Director of Operations for line depots, has itsorigins in the era of the steam locomotive.

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equipment have proven difficult. These problems stem both from limited managerial autonomy onstaffing and personnel compensation measures and from outdated operating regulations and workpractices.

3.53 Economic Regulation and Public Service Obligations. Explicit and implicit regulation ofpassenger fares and freight rates results in the revenues for most rail services being below the costsof provision. While fares for long distance economy services generally cover short-run avoidablecosts, they do not cover the costs of capital renewal. On the freight side, only a few bulk freightservices and one container train service currently cover short-run avoidable costs (paras 3.29-30).GOI does not provide direct compensation to Perumka for losses incurred, but has in the pastfinanced most rolling stock investments through equity increases.

3.54 Infrastructure Provision. Blurred responsibilities for most aspects of railway infrastructure23

provision result in poor investment and maintenance decisions. Responsibility for planning newinvestments is shared between DGLC and Perumka and is conducted in a fragmented manner.Consequently, many proposed projects appear premature, sub-optimal in concept, or otherwise notwell justified. GOI finances all main infrastructure investments, and has contributed a fixed annualamount (Rp. 31.5 billion or around US$14 million at current exchange rates) towards the costs ofoperation and maintenance. Perumka is permitted to use the infrastructure free of charge, but isrequired to bear the balance of the operation and maintenance (O&M) costs.

3.55 Financing of Maintenance Expenditures. Systematic under-funding of maintenance isaccelerating the deterioration of track and rolling stock, reducing rolling stock availability andproductivity, and ultimately requiring GOI to finance premature rehabilitation or replacementinvestments. Perumka is required to earn a profit and, with limited powers to increase tariffs, isforced to cut costs. Maintenance is the budget item that is most readily cut and, rather than beingcomputed on the basis of needs, is now necessarily treated as a balancing or residual item.

3.56 Technology Choices. Railway investment decisions are often driven by suppliers who areable to arrange concessional financing, rather than by soundly based plans and appropriate technicalstandards. This has resulted in the acquisition of assets that are not truly needed or well suited totheir purpose, in higher capital costs, and more generally in a proliferation of equipment types. Thus,for example, there are now three different families of electronic signaling systems installed in Java,thereby exacerbating maintenance problems and potentially posing increased safety risks.

3.57 Corporate Planning. The shortcomings in Perumka's corporate plans have been touchedupon above. The main problem concerns inconsistencies in the externally imposed objectives andconstraints rather than Perumka's corporate planning approach, which is basically sound.

3.58 Competition. GOI's transport sector policies are essentially sound, but shortcomings intheir application and enforcement are tilting the playing field of inter-modal competition. Thedistortions sometimes work in opposite directions, but are not necessarily self-canceling. Thus, slowimplementation of GOI's adopted road user charges policy and lax enforcement of vehicle weightand dimension limits enable truck operators to secure heavy freight traffic that would be more

23 Average annual expenditure on infrastructure development in the Repelita VI plan totals around Rp. 375billion per year.

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efficiently moved by rail. Conversely, low regulated fares coupled with compensating capitalsubsidies from GOI have enabled rail to carry short- and medium-distance low density passengertraffic that would be better served by bus.

1. THE GOVERNMENT'S RESTRUCTURING AGENDA

3.59 These findings and the associated recommendations were considered by MOC and Perumkain a series of high level meetings held during the latter half of 1995. There was early generalagreement on the diagnosis, and attention focused mainly on defining measures for overcoming theidentified problems. This process culminated in the formulation of a policy framework, consistentwith GBHN and Law 13/92, to govern the second phase in the subsector's restructuring (Annex 3.5).

3.60 GOI (the Coordinating Ministry for the Economy and Finance (Ekkuwasbang), MOC, MOFand Bappenas) has developed a time-based action plan for implementing these policies (Annex 3.6).An Inter-Agency Coordinating Committee (IACC) was established in March 1996 to guide andmonitor the implementation of the policies and, concurrently, to act as the Steering Committee forthe Railway Efficiency Project. Subsequently, a Restructuring Task Force (RTF), reporting to theCommittee, to manage the preparations for Perumka's conversion to Persero status was alsoestablished. The policy framework and action plan for restructuring the railway sector with the viewof increasing its efficiency are sound and appropriate. They provide the basis for the project and willbe supported by the project. Key actions in the main areas are outlined below.

3.61 Compensation for Public Service Obligations. GOI will in future compensate Perumkadirectly and transparently for the "public service obligation" (PSO) or "non-commercial" traffics -principally economy class passenger services - which it is required to operate at regulated fares andrates (Annex 3.7). In parallel, GOI will cease financing Perumka's investments in rolling stock andother assets. GOI is concerned to ensure that PSO compensation does not subsidize inefficiency orenable Perumka to continue operating services that would be more economically served by othermodes. Accordingly, compensation amounts will be carefully negotiated on the basis of theregulated tariffs and well-supported estimates of load factors and efficient operating costs.

3.62 The first PSO compensation payment will be made to Perumka under the 1997/98 StateBudget. Perumka has been instructed to: (a) develop and discuss with MOC, MOF and Bappenas, aproposed methodology and parameters for computing PSO compensation payments; and (b) prepareand present a draft budget proposal for the 1997/98 payment based on the agreed methodology andparameters. GOI has also decided that in subsequent years: (a) Perumka will be required to prepareby June 30 a report evaluating the implementation of the PSO mechanism; (b) proposals for PSOcompensation will be subject to very rigorous scrutiny and be developed in the light of experienceduring previous years; and (c) tariffs and rates should in general be raised to commercial levels anduncompetitive services withdrawn as rapidly as is practicable so as to quickly reduce the need forPSO compensation. These arrangements were confirmed at negotiations.

3.63 Compensation for Infrastructure Maintenance and Operation Costs. GOI will in futurecompensate Perumka through the State Budget for the costs it incurs in improving, maintaining andoperating the main railway infrastructure on GOI's behalf. The amount of the annual infrastructuremaintenance and operation budget will be carefully computed on the basis of the estimated efficientcosts of specific works needed and/or of maintaining and operating the infrastructure to

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appropriately defined standards. Perumka will be accountable for demonstrating that the funds soprovided have been used effectively and efficiently for the purposes intended.

3.64 The first infrastructure maintenance and operation payment will be made to Perumka underthe 1997/98 State Budget. Perumka has been instructed to: (a) develop and discuss with MOC, MOFand Bappenas, a proposed methodology and parameters for computing infrastructure maintenanceand operation costs; and (b) prepare a draft budget for the 1997/98 payment based on the agreedmethodology and parameters. In subsequent years: (a) Perumka will be required to prepare by June30 an annual report evaluating the implementation of the mechanism; and (b) the maintenance andcompensation payment will be carefully developed in the light of experience during previous years.These arrangements were confirmed at negotiations.

3.65 Financing of Perumka Investments. GOI is already requiring Perumka to finance somerolling stock investments from internal sources and borrowings. This policy is now being mademore stringent and Perumka will be required in future to finance all new investments from internalsources and borrowings. Any foreign funds provided by GOI for the financing of Perumka assetsunder loan agreements will be on-lent to Perumka on commercial terms. At negotiations agreementwas reached that GOI shall not provide to Perumka, whether directly or indirectll, any funds orfinancing other than.' (i) loans on terms no more favorable than those availahle from commerciallenders; and (ii) payments in accordance with the public service obligation compensation and theinfrastructure maintenance compensation mechanisms.

3.66 Track Access Charges System. In parallel to the above compensation mechanisms, GOIwill implement a system of track access charges, to apply equally to Perumka and private operatorsof railway services, for the recovery of infrastructure provision costs. Perumka has been instructedto prepare proposals for the design and phased implementation of a track access charges system.Following the review and, if necessary, amendment of these proposals. GOI will arrange for itsimplementation to commence from April 1, 1997. In subsequent years: (a) Perumka will berequired to prepare by June 30 a report evaluating the implementation of the system; and (b) thelevel of track access charges imposed will be increased progressively, having regard, among otherfactors, to the level of road user charges and the experience gained during previous years. Thesearrangements were confirmed at negotiations.

3.67 Corporate Restructuring of Perumka/Interfaces with GOI. GOI will arrange forPerumka to be transformed into a more autonomous, streamlined and commercially focused limitedliability (Persero) company structured along "line-of-business" principles. The top-levelorganization of the new company (PT KA) will be designed with a view to its subsequentlybecoming a holding company, some of whose subsidiaries would become candidates for earlyprivatization.

3.68 The 'interfaces" between GOI and the new company will be made simple and clear. The newbudgeting mechanisms described in the proceeding subsections, coupled with the associated changesin the financing of Perumka's investments and the introduction of track access charges representimportant initial steps in this direction. In addition, GOI has already moved to separate the budgetfunds provided to Perumka under the State Budget from the MOC budget.

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3.69 GOI recognizes that transforming Perumka into PT KA requires careful preparation andplanning to ensure that it is more than a change of name. This applies especially to areas such as:

a) the design of a streamlined corporate structure that increases commercial/profit orientationthroughout the enterprise, eliminates unnecessary management layers. simplities lines ofreporting, increases management accountability, and facilitates the subsequeLIt conversion ofbusiness units into subsidiary companies capable of attracting private investimenit;4

b) the restructuring of the balance sheet, together with the revaluation of needed assets(including land) and the write-off and disposal of obsolete and redundant assets,

c) the restructuring of the work-force and the improveinent of huinan resource managemenit.development and compensation policies along lines that would enable PT KA to operatefrom the outset with a correctly-sized and motivated work-force;

d) the development of improved and better integrated management, planning and budgetinigsystems and processes that are aligned to the new corporate structure and mission, thatenable effective decision-making and control at all levels, and that provide a basis for"'performance contracts" between GOI and the corporation; and

e) the amendment of outdated operating regulations and working procedures that impedeefficiency and prevent full realization of the benefits of investments in modern tcchinology.

It is estimated that 18 months will be required to advance these and other necessary activities to astage where conversion to Persero status would be feasible and appropriate.

3.70 GOI has adopted January 1, 1998 as the target date for PT KA to commence operation, andhas given the IACC, assisted by the RTF, responsibility for managing the necessary preparations.The RTF will be chaired by the Principal Director of Perumka and will report to the IACC. Itsduties will encompass developing proposals for restructuring the GOI - PT KA interlfce and, inconsultation with the Jakarta Urban Mass Transit Project Team, preparing detailed proposals for thefinancial and managerial separation of the Jabotabek and Java inter-city systems. A/ negolialionsagreement was reached that GOI will: (i) furnish the above proposals to the Bank for its review;(ii) by February 28, 1997 implement the financial separation of the Jabotabek and .Iava inter-ulrbanrail systems; (iii) develop and furnish to the Bank/for its review b y October 31, 199'7 i p)rogram forthe restructuring of Perumka into a limited liability company and a detailed proposval fbr the7managerial separation of the Jabotabek and Java inter-urban rail systems; an (i v) taking intoaccount the Bank's comments, establish PT KA and implement the proposal Wit/h C/c cI of.lunuarv 1,1998.

3.71 Private Participation. GOI considers expanded private participation essenitial for thesuccessful development of the railway subsector. Consideration is already being given to a widerange of options, ranging from out-sourcing of services, through concessioning of existing railwayoperations and investments in new railway businesses, to development of land and property assetsand partial divestiture of future PT KA subsidiaries. Importance is attached to private participation

Early attention needs to be given to the separation. both financial and physical, of the Jabotabek commuterrailway from the Java intercity system.

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being secured through transparent procedures that provide for competition where possible and thatsafeguard adequately the interests of all stake-holders.

3.72 The RTF has been instructed: (a) by September 1997, to identify and evaluate commercialopportunities for railway development in Java and Sumatra and for exploiting Perumka's urban landassets; and (b) by October 31, 1997 to formulate guidelines and procedures for soliciting andnegotiating private participation through concession and other arrangements. In parallel with theabove, it has also been charged with evaluating unsolicited private proposals in terms, inter alia, oftheir consistency with the planned future sector structure and of the proposed allocations of risks andrewards. Agreement was reached that GOI will furnish the guidelines and procedures to the Bankfor its review and comment and thereafter, finalize and adopt the guidelines taking into account theBank's comments.

3.73 Implementation of Law 13/92. The RTF has been instructed to review the current draftGovemment Regulations for implementing Law 13/92 (para 1.19); to furnish the results of thereview to the Bank by February 28, 1997; and to prepare final drafts that are fully consistent with theadopted subsector policies and, more generally, with GOI deregulation policies. Agreement wasreached that the Bank will be afforded the opportunity to comment on the revised draft; that the finaldraft will be prepared taking into account the Bank's comments; and that all measures will be takenfor its issuance.

3.74 Environmental Management and Occupational Health and Safety. GOI has instructedPerumka to expand and strengthen its existing Quality Assurance Unit to incorporate anenvironmental management and occupational health and safety capability by June 1996, and toensure that this unit is actively involved in the implementation of the proposed Project. It hasfurther instructed that the status and capabilities of this unit be enhanced as part of Perumka'stransformation to PT KA. At negotiations agreement was reached with Perumka on theimplementation of these decisions.

3.75 Action Plan Implementation Arrangements. At negotiations agreement was reached withGOI that it will (i) maintain the inter-agency Coordinating Committee (IACC) to guide and monitorthe implementation of the railway sector restructuring and, concurrently, to act ay the SteeringCommittee for the project; and (ii) cause Perumka to maintain the (RTF), reporting to theCommittee, to manage the preparations for Perumka 's conversion to Persero status.

CHAPTER 4

THE PROJECT

A. OBJECTIVES

4.1 With the general objective of improving the economic efficiency and service quality ofIndonesia's railway subsector, to position it to play its proper role within the transport system, theproject aims specifically at: (a) railway subsector policy reform by restructuring the railwaycorporation, reforming the relationship between it and government and creating the foundations forexpanded private participation; (b) rationalizing railway subsector capital investments; (c) improvingrailway subsector management and operations; and (d) increasing the physical capacity of animportant railway corridor.

B. PROJECT DESCRIPTION

4.2 The project consists of five components:

a) Policy reform involving restructuring of Perumka into a persero and reform of government-corporate interfaces;

b) Improvements to the railway between Jakarta and Bandung (170 km) to expand capacity,shorten passenger journey times, and improve safety in this important passenger and freightcorridor;

c) Implementation of a modern track maintenance system on Java;

d) Implementation of a diesel electric locomotive unit exchange maintenance system on Java;and

e) Strengthening of Perumka's management.

4.3 Policy Reform. With the view of improving the efficiency of the railway subsector, GOIhas developed a set of policies and an action plan (paras. 3.59, 3.60 and Annexes 3.5 and 3.6) forrestructuring the railway corporation and for realigning GOI's and Perumka's respectiveresponsibilities for subsector development. The action plan provides for: (a) the establishment of amechanism to compensate Perumka for its public service obligations; (b) the establishment of amechanism to compensate Perumka for infrastructure maintenance and operation costs; (c) theestablishment of a system of track access charges; (d) the transformation of Perumka into a limitedliability company (Persero) structured on "line of business" principles; and (e) the development of aframework and strategy for expanded private participation.

4.4 The IACC which has been established by the Minister of Communications to guide andsupervise the implementation of these reforms and to oversee implementation of the other projectcomponents will require the part-time services of an expert individual advisor to assist it with thestrategic aspects of the restructuring agenda. A total of 12 person-months input is required to beprovided over a period of 24 months through six to eight periodic visits. These services are required

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to start as soon as possible and will be financed under the ongoing Second Tecihical AssistanceProject for Public and Private Provisioni of hIfrastructur-e (Loan 391 3-IND).

4.5 Responsibility for preparing proposals for the transformation to Persero status. tor the reformof the Government-corporate interfaces and the associated review of the dratt (iRs for Law 1 3/92.and for expanding private participation has beenl assigned to the RTF. 'I'This is headedi b y Perulnka'sPresident Director and its memlibers comprise otlhel- Peunlilka directol-s and sciior personinlel. TheRTF reports to the IACC and will be supported by sever-al working groups compr-ising Perumkapersonnel and, where necessary, consultants/expert advisors. The l'ive main workinog groups whichwill require specialist assistance are: (a) the Corporate RestruIctuLinlg W\horking Group, which willrequire the part-tine services of an advisor for ten person-months to assist with the preparation ofdetailed proposals for restructurinig, of' an advisor t'or six person-miionithis to assist with thedevelopment and implemiienitationl of an appropr-iate corporate planning methiodology for therestructured company. and of a le-al advisor for a period of two personi-milonithis to assist with thereview and revision of the draft GRs: (b) Fixed Assets Working G(roup, whici will require theservices of' consultants ( 15 person-mlionlths) to assist with the review and rcvaluationi of' Perumka'sfixed assets and preparation of a scrapping/sales plan for redundanit/obsolete items, (c) ManpowerPlanning Working Group, wvhich will require the services of an advisor for 12 person-monithis toassist it with the preparation of a preliminiiary stat'ting plan for the new corporation; (d) Processesand Information Systems Working Group, which wkill requirc the part-time services ot' systemsanalysis consultants for 40 person-milonithis to assist with the design and implemicritation of' improvedmanagement informationi systems to support the new corporate structure aiid processes; and (e)Private Participation Working Group, which will require the services of consultanits to conductsurveys and studies to identify opportullities and mechianiisins for securing expanded and efficientprivate participation in the future developmenit of the Java and Sulimatra railway systems and in theexploitation of Perumka's tirbatn land and property assets (total 55 person-mliolithis).

4.6 Perumka's Finance Director has been charged with proposing methodologies for the publicservice obligations compensationl and hifrastructure mainitenanice and operation budgets and for thetrack access charges system. together with dral't budgets lor FY 1997/98. Two in-lhouse teams havebeen established to unider-take these tasks. The part-time services of an expert advisor are requiredfor five person-months over a period of ten months to assist these teamis. The services are requiredto start as soon as possible. In the three subsequent years. follow-on advisory services of about twoperson-months per year would be required to assist in reviewing the experienice with thecompensation mechanisms and charges system and in making f'urthier refiinements. The totalrequirement for consultancy services to the RTF is 151 personi-milonths. Most of these services willbe required to commence before the project becomes effective and will be tinaniced trom theongoing Loan 3913-4ND2 .

4.7 Jakarta-Bandung Corridor Development. The project provides improvemenits to therailway in this corridor to increase capacity in terms of the number of trains operated, reducepassenger journey times, and increase service reliability and safety. Improvemenits would include amodern centralized traffic control signal system between Bekasi, Cikampek, Bandung, andGedebage (156 km); 27.7 km of new second main track; remodeling of station trackage; and 24 km

25 The services for corporate planning, the preparation of a stafling plan and the development of an MIS will befinanced under the proposed proJect.

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of new rail to replace partly-worn rail which would be relaid on lower tonnage and lower speed Javamain lines for the balance of the rail's useful life. The project also provides consultancy services forproject management and training of Perumka project management and operating and maintenancestaff.

4.8 The Jakarta-Bandung Corridor (170 km) consists of several distinct sections described inBox 4-1. The 56 km section between Bekasi and Cikampek is the most important intercity railwayline in Java, carrying all trains to and from points east of Jakarta, not just those to and fromBandung.

Box 4-1: Description of Jakarta-Bandung Corridor

Gambir-Manggarai (4 km) Carries Jakarta-Bogor suburban services as well as intercity trains.Now double-tracked, electrified, and equipped with modern signals. Manggarai is an importantjunction and may become the future Jakarta terminus for intercity trains.

Manggarai-Bekasi (20 km) Also part of the JABOTABEK suburban system. Now double-tracked,electrified, and equipped with modern signals.

Bekasi-Cikampek (56 km) Now double-tracked with mechanical signals. Would be equipped withmodern signals under the project.

Cikampek-Purwakarta (19 km) Now single-tracked with mechanical signals. Would be double-tracked and equipped with modern signals under the project.

Purwakarta-Padalarang (56 km) Now single-tracked with mechanical signals. Unlike othersections which are relatively straight and flat, it contains many sharp curves and traverses hillyterrain cut by deep valleys spanned by high bridges. Under the project, three sections of about 3 kmeach would be double-tracked, and the entire section would be equipped with modem signals.

Padalarang-Bandung (15 km) Now double-tracked with mechanical signals. Would be equippedwith modem signals under the project.

4.9 Perumka and its consultants analyzed the options for meeting future expected passenger andfreight demand in the Jakarta-Bandung Corridor. They found that most of the feasible short termmeasures already have been implemented by Perumka. The proposed project would therefore focuson medium term improvements to enable Perumka to handle the forecast growth in passenger andfreight traffic up to the year 2020. This will require both higher train frequencies and longer trains,increased infrastructure capacity, improved punctuality through centralized control of trainmovements, and a reduction in the traveling time of the Gambir-Bandung Parahyangan trains to 2 hr22 min with existing locomotive-hauled trains or 2 hr 18 min with new diesel multiple unit rail cars.

4.10 Proposed improvements were evaluated by Perumka and its consultants by use of computersimulation models. This resulted in recommendations for a cost effective plan of station remodeling,

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double tracking, and signaling improvements. The proposed project would implement the followingrecommendations:

a) Improve track quality by tamping, by upgrading rails by continuous welding and grinding,and by renewal or replacement of switches;

b) Remodel track layouts of selected stations between Bekasi and Bandung;

c) Install double track Cikampek-Purwakarta (17.5 kim) and at three locations (total 10.2 km)between Purwakarta and Padalarang;

d) Install a modern signal system between Bekasi and Bandung, with electronic interlocking,automatic block signals with intermediate blocks, and centralized traffic control (CTC);

e) Upgrade track and existing signals on the alternate route via Bogor for detour of containertrains at night, to provide time for project construction and maintenance on the Corridor;

f) Provide training to the track, signaling, and rolling stock maintenance personnel and othersaffected by the new signaling and other equipment, starting with a pilot project;

g) Adapt the local maintenance and operating organization to reflect the changes caused by themodernization of the Corridor and the increased traffic levels of the future;

h) Replace and modernize operating rules governing train operations to benefit fully from theintroduction of the new signaling system and its inherently greater safety,

i) Conduct an in-depth study of bridge fatigue lives;

j) Study the anticipated capacity problem on the line between Manggarai and Bekasi, whereintercity trains now share a double-tracked line with JABOTABEK electrified suburbantrains; and

k) Study the long term needs of the Jakarta-Bandung Corridor to identify cost effective ways toincrease capacity, reduce travel time, and improve punctuality and service quality.

4. I1 The study by Perumka and its consultants was an integrated corridor approach to investmentplanning that should be applied throughout Indonesia in the future before railway signaling and othermajor projects are undertaken. The recommended approach is similar to the one being applied inChina and India, where network computer simulation models are helping to evaluate capacityexpansion proposals within an individual corridor and to compare proposals for corridors across theentire railway network. The proposed project provides assistance to continue the application ofsimilar network analysis tools in Indonesia.

4.12 While the study by Perumka and its consultants was underway, a contract financed by theAustralian Government was signed for installation of modern signals on the Bekasi-Cikampeksection and the Padalarang-Bandung-Gedebage sections. Since financing was available, GOIdecided to proceed with this part of the capacity expansion investment in advance of Bank appraisal

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of the overall Corridor project because of an urgent need to improve safety and control trainoperations on those sections.

4.13 In addition to the Australian contract which has already been let, the Jakarta-BandungCorridor improvements would be carried out mainly under the following contracts:

a) An ICB contract financed by GOI and the Bank for detailed design of new second main trackand station remodeling; procurement of miscellaneous track materials (other than new rails,sleepers and fasteners, and turnouts); and construction of earthworks and track;

b) Separate ICB supply contracts financed by the Bank for new rail, sleepers and fasteners, andturnouts;

c) An ICB contract financed by GOI and the Bank for detailed design and installation of thenew signal system for the middle part of the Corridor between Cikampek and Padalarang:and

d) A contract financed by GOI and the Bank with consultants for project management andsupervision, and for training of Perumka project management staff and operating andmaintenance staff ("learning by doing").

4.14 By separately contracting for the supply of long lead time items such as rail, turnouts, andsleeper and fastener assemblies, several months' time can be saved and the actual work under thetrack and station design and construction contract can proceed more quickly. The objective is toallow completion of all necessary track and station changes between Bekasi and Cikampek inadvance of the installation of the new signal system under the ongoing Australian-financed contract.

4.15 Track Upgrading and Maintenance System. This component consists of renewal of 100km of main track, partial restoration of 160 equivalent km of track and establishment of a moderntrack maintenance system on Java. The project provides new rail, concrete sleepers, other trackmaterials, a rail reclamation yard, facilities and equipment, and project management services andtraining.

4.16 The two critical elements of the component are (i) consultant services to assist Perumka tobetter plan and carry out improved track maintenance in the field, and (ii) the investment in the railreclamation yard for the preparation of continuous welded (CWR) new and relay rail. From the railreclamation yard, the new CWR would be transported to the field site by specially equipped trains inlengths of at least 300 meters. The rail removed from the track then would be relaid or "cascaded"to less important lines. This rail cascade system first would involve transport of the rail on thespecially equipped trains to the rail reclamation yard for processing and welding into relay CWR.The relay CWR then would be transported on the rail trains to other locations on Java. In addition tothe computer-based data base of measurements of track geometry and wear and the more extensiveplanning to exploit this data base, the project would establish new field maintenance procedures(including on-site hand welding and small-machine grinding of worn rail) in order to extend theuseful life of rail, turnouts, and other track components.

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4.17 The most important resulting benefit is the extension of rail life. There also should be asignificant reduction of rolling stock maintenance costs due to better track, a reduction in traindelays due to less track slow orders, and a reduction of train accidents caused by less track-relatedcauses. The intent is that the improved maintenance techniques would be progressively extendedthroughout the Perumka network (not just on Java), starting with the most heavily traffickedsections (i.e., there will not be immediate system-wide benefits). As this happens, annualexpenditures for replacement rail should decline significantly.

4.18 Project management and training required to successfully implement this component will beprovided under a consulting contract which will include five tasks: (1) rail management, includinginstallation of new and relay CWR; (2) track rehabilitation and sub-grade stabilization; (3) trackrestoration; (4) standard track maintenance procedures; and (5) welding and grinding training.

4.19 Locomotive Unit Exchange Maintenance System. The component consists of establishingan "on-time preventive maintenance system with unit exchange" for diesel electric locomotives onJava. The system would encompass both the locomotive workshop at Yogyakarta and the twolocomotive "running maintenance" depots at Semarang and Bandung (Annex 4.1). The projectprovides initial quantities of critical spare parts and components and consultant services and training.For the unit exchange maintenance system to be successful and minimize locomotive maintenancedowntime, the two locomotive depots would be managed and operated literally as extensions of thelocomotive workshop, where the workshop would manage the various pools of unit exchangecomponents to assure their necessary supply and quality to the depots as well as to the workshopitself.

4.20 Project management and training required to successfully implement this component will beprovided under a consulting contract which will include three tasks: (I) workshop and depotsupervision and implementation support; (2) preparation of a rolling stock maintenance master plan;and (3) Yogyakarta Workshop Quality Assurance Program.

4.21 Because of budget constraints on the procurement of spare parts, it can be difficult forrailways to implement a unit exchange maintenance system. The tendency has been for railways tofirst consume components and spares which were procured as capital assets for the unit exchangepools, and then to fail to promptly repair or replace the worn or defective components and return

26 Rather than in years, rail life is measured in terms of the aggregate tonnage it has carried. Rail has a finite

life which can depend on many factors, including its chemical and physical properties, the volume oftraffic and the axle loads passing over it, the quality of maintenance of the roadbed as well as the track,whether it is laid on tangent or curves, and (in some cases) the climate. Rail is replaced either because itreaches wear limits for safe operation or nears the end of its fatigue life. The repeated application of forcesby passing trains gradually leads to the formation of microscopic fatigue cracks inside the rail thatultimately cause the rail to fail at the end of its fatigue life. On many railways of the world, even whereaxle loads are twice those operated on the Jakarta-Bandung Corridor, high quality rails have been laid andrail profile grinding and other modem rail maintenance methods are used. In such cases, rail fatigue ratherthan rail wear often determines when rail must be changed. However, on Java it is rail wear that apparentlydetermines when it must be replaced, with the average life of main line rail estimated at only 160 milliontons, a fraction of what its life could be given its good physical and chemical properties. The key toachieving longer rail life is the successful implementation of the track maintenance system under theproject.

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them to the unit exchange pools in usable condition. To help insure against this risk, agreement wasreached at negotiations that procurement of the initial stock o(f unit exchange components andspares financed by the proposed loan will be divided into three tenders, with Bank approval to floatthe second and third tender to be hased on the tdetermination by the consultant assisting Perumka inthe implementation of this component that satisrtactorv progresS has been made in establishment of adiesel electric locomotive unit exchange system.

4.22 Institutional Development. This componenit aims at developing the institutional capabilityof the railway in railway operations and in planning to meet future transport demand focusing onfour areas:

a) Development and establishment of a bridge mainltenianice management system, including aGeographic Information Systein (GIS) (30 staff' monlths of foreign and 20 staff months oflocal consultants);

b) Development and introduction of improved signal and train operating regulations and relatedtraining programs (30 staff months of foreign and 20 staff months of local consultants);

c) Refinement and operationalization for purposes of capital investment planning of networksimulation models for capacity planning (eight staff moniths of foreign and four staff monthsof local consultants; and

d) Development of the railway's capability for assessing the long term demand for railwayservices, including the conduct of multimodal ridership studies, using the Jakarta-BandungCorridor as a case study (30 staff months of foreign and 1 00 staff months of localconsultants).

C. LAND ACQUISITION AND RESETTLEMENT

4.23 The partial double tracking of the section of line between Cikampek and Padalarang will affect256 households whose dwellings have been constructed on posted land owned by GOI. All thoseaffected have signed yearly rental agreements with Perumka under which they agree to move when theland is required in exchange for a nominal rental payment. There are no squatters. Perumka hasprepared a draft resettlement action plan in accordance with World Bank policy on resettlement (OD4.30). This draft has been reviewed and is being finalized taking into account the Bank's comments.Implementation will be monitored independently with quarterly reports provided to Perumka and theBank.

4.24 For purposes of safety, implementation of the double tracking will also require the acquisitionof narrow (+/- 2 meter) strips of land along some short rural sections where the width of the existingGOI-owned land is slightly less than the desired right-of-way width. The requirement is for 53 piecesof land totaling 1.6 ha. No displacement is involved. This land acquisition will also be handled inaccordance with Bank guidelines.

4.25 The costs of Rp 1.8 billion associated with the RAP and land acquisition (including a 10%contingency) are included in the project cost estimates. At negotiations, agreement was reached withPerumka that (i)for purposes of carrying out the resettlement and rehabilitation of affected persons,the resettlement and the land acquisition will be implemented in accordance with the plans agreed

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with the Bank, and (ii) that upon completion of the resettlement and land acquisition it willfurnishto the Bank an evaluation report documenting the process and the outcome.

D. ENVIRONMENTAL IMPACTS

4.26 The project will not have any major adverse environmental impacts and is classified ascategory "B". The partial double-tracking of the Cikampek-Padalarang section under the Jakarta-Bandung Corridor development component is straight-forward and does not involve the constructionof major structures and or pose risk of damage to environmentally sensitive areas. Appropriatemitigation measures designed to safeguard drainage structures and minimize dust, traffic disruption,workplace hazards and other impacts of the construction work will be included in the conditions ofcontract.

4.27 The locomotive maintenance component entails only the limited upgrading of existingworkshop and depot buildings and equipment. Specific provision is made for preventing workshopand depot operations affecting the surrounding environment, in particular through measures designedto contain and enable satisfactory disposal of spilled or waste fuel and lubricants. The project willalso contain measures to eliminate or reduce identified environmental problems. The draftenvironmental management and monitoring plans for the Jakarta-Bandung Corridor component havebeen reviewed by the Bank and are being finalized taking into account the Bank's comments. Atnegotiations, agreement was reached with Perumka that it will: (i) implement the environmentalaction and monitoring plans; and (ii) incorporate appropriate environmental mitigation measures inthe conditions of contract for the Jakarta-Bandung track works contract.

E. COST ESTIMATES

4.28 Cost estimates are based on feasibility studies and preliminary designs that have been carriedout by Perumka's consultants and modified where appropriate by Perumka and the Bank. Costestimates include project management and supervision and assume that detailed design of works inthe Jakarta-Bandung Corridor would be the responsibility of the contractors responsible forconstruction and installation of trackwork and signaling.

4.29 The estimated project cost, exclusive of duties and taxes but including a 1 0% physicalcontingency on all components and a price contingency to cover estimated price inflation during theplanned five year implementation period, is US$207.3 million (Rp. 573 billion). Estimated directand indirect foreign cost is US$163 million. Price inflation in terms of US dollars was assumed at3.3% p.a. for 1996 and 2.4% p.a. thereafter. Price inflation in terms of Indonesian rupiahs wasassumed at 8.7% p.a. Table 4-1 summarizes cost estimates by major project component in January1996 prices based on an exchange rate of Rp. 2,331 per US$. Details are provided in Annex 4.3.

4.30 The Government of Australia already has financed a contract for A$78.5 million (US$56million), which was executed in July 1995, for a portion of the signal system for the Jakarta-

27 Value added taxes (VAT) on the portion of contracts financed from domestic sources (GOI/Perumka) is tobe paid and provision for such payments must be included in the relevant budgets. Likewise, income taxon the GOI/Perumka financed portion of contracts for services and for goods/works is payable and shouldbe budgeted for.

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Bandung Corridor. The cost of this contract has been included in the project cost since the signalsystem is integral to the Jakarta-Bandung Corridor component of the project and its implementationwill be the responsibility of the project management and supervision organization.

Table 4-1 Project Cost Summary

Rupiah billion US$ million Foreign asLocal Foreign Total Local Foreign Total % of total

1. Policy reform 2.0 7.9 9.9 .9 3.4 4.3 802. Jakarta-Bandung

Corridor 47.5 235.3 282.8 20.4 100.9 121.3 833. Track upgrading and

maintenance system 29.2 58.3 87.5 12.5 25.0 37.5 674. Locomotive unit

exchange maintenancesystem 4.4 30.5 34.9 1.9 13.1 15.0 87

5. Institutional development 1.9 7.4 9.3 0.8 3.2 4.0 806. Base cost 85.0 339.4 424.4 36.5 145.6 182.1 80

Physical contingencies 8.5 20.9 29.4 3.6 9.0 12.6 71Price contingencies 36.8 82.0 118.8 3.9 8.8 12.7 69

Total project cost 130.3 442.3 572.6 44.0 163.3 207.3 79

F. FINANCING PLAN

4.31 The policy reform component as well as the study of long term demand in the Jakarta-Bandung corridor would be financed by GOI under the ongoing Technical Assistance Project forPublic and Private Provision of Infrastructure (Ln. 3385-IND) and the Second Project (Ln. 3913-IND) and in part with funds under the proposed project. GOI, who is the owner of the railways'infrastructure (track and signaling), would finance the improvements to the Jakarta-BandungCorridor and the track upgrading and maintenance system component (including the consultant'sservices for project management and training related to the latter) by using funds from an existingAustralian loan, the proposed IBRD loan, and the APBN Rupiah budget. Perumka would finance thelocomotive unit exchange maintenance system, the consultant's services for project management andtraining related to the Jakarta-Bandung corridor component and the remaining three items under theinstitutional development component using funds from the onlent portion of the proposed IBRDloan, internal sources, and domestic borrowings. Agreement was reached with GOI duringnegotiations that GOI will onlend Perumka 's share of the proceeds of the proposed Bank loan to itunder the same terms as the Bank loan to GOI plus 0.5 percent. As a condition of effectiveness, asubsidiary loan agreement, satisfactory to the Bank, shall have been signed between GOI andPerumka.

4.32 The financing plan is summarized in Table 4-2 and detailed in Annex 4-4. The proposedBank loan to the Republic of Indonesia, ongoing Loans 3385-IND and 3913-IND, and the Loan fromthe Government of Australia would finance direct and indirect foreign cost of investments andtechnical assistance totaling US$161 million. GOI and Perumka would finance local costs totalingUS$44 million. The Bank loan would be US$105 million and financing from Loans 3385-IND and3913-IND would be US$2.4 million.

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Table 4-2: Financing Plan (US$ million)

Source of Financing Local Foreign Total %

IBRD proposed loan - lent to GOl 85.2 85.2 41IBRD proposed loan - onlent by GOI to Perumka 19.8 19.8 10

Total IBRD Loan 105.0 105.0 51

Loans 3385-IND and 3913-IND (Policy Reform) 2.4 2.4 1IBRD total 107.4 107.4 52

GOI 39.7 0 39.7 20

Perumka 4.2 0 4.2 1Government of Australia - lent to GOI (infrastructure) 0 56.0 56.0 27

Total 43.9 163.4 207.3 100

G. PROCUREMENT ARRANGEMENTS

Table 4-3: Procurement Arrangements (US$ million) a/

Note: Figures in parentheses are respective amounts to be financed under the proposed loan.

ICB NCB Othier b/ NBF c/ Total

1. Works 24.1 3.0 13.4 d/ 40.5

(7.2) (1.8) (9.0)2. Goods 85.7 0.1 62.2 e/ 148.0

(83.5) (0.1) (83.6)3. Consultants 15.5 15.5

(12.4) (12.4)4. Land Acquisition & 0.9 0.9

ResettlementTotal 109.8 3.0 15.6 76.5 204.9

(90.7) (1.8) (12.5) (105.0)a/ Excluding taxes and interest during construction but including contingenciesb/ Direct contracting and consulting servicesc/ NBF indicates "not Bank-financed".dl Force account workse/ Australian-financed signaling (US$ 56 million equivalent) and ballast (US$6.2 million)

4.33 General. Procurement arrangements for the proposed project are summarized in Table 4-3above. Goods and works shall be procured in accordance with the provisions of the "Bank'sGuidelines for Procurement under IBRD Loans and IDA Credits" of January 1995 and revised inJanuary 1996. Civil works contracts estimated at US$3 million equivalent or above would beprocured following International Competitive Bidding (ICB) procedures (this would involve one ortwo contracts). Previous experience in Indonesia indicates that foreign contractors would not bid forcontracts estimated to cost less than this amount. Civil works estimated to cost less than US$3million per contract, up to an aggregate amount not to exceed US$3 million may be procured underNCB procedures acceptable to the Bank. This involves environmental upgrading of and repairs tobuildings and facilities at seven sites and the reconstruction of one bridge. These works would bepackaged in two to three contracts. Goods will be procured under ICB, except for goods which mustbe purchased from the original supplier to be compatible with existing equipment or of a proprietary

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nature, up to $100,000 equivalent, which, with the Bank's prior agreement may be procured underdirect contracting. Forthe procurement of good and works under ICB, the Bank's standard biddingdocuments will be used. Qualifying local manufacturers competing for the supply of goods underICB procedures would be eligible for a preference in bid evaluation of 15% of the CIF price or theimport duty, whichever is lower.

4.34 Perumka has been involved in a number of major procurements, including works andequipment procurement for the JABOTABEK urban railway system and the South Sumatra railway.Procedures followed were those of GOI and/or foreign lenders. Staffing for major procurements ison a project basis. Procurement under the Bank's Railway T1echnical Assistance Project wassatisfactory. The Project Management Unit which will be responsible for procurement under theproject will be strengthened with consultants experienced in project management.

4.35 Review. All works bid packages (a total of three to five) will be reviewed by the Bank. Bidpackages for goods to be financed by the Bank loan estimated to cost over US$200,000 equivalent(over 90% of the procurement volume) would be subject to the Bank's prior review. All consultingservices estimated at or above US$100,000 equivalent to be provided by firms, and at oraboveUS$50,000 equivalent to be provided by individuals, also would be subject to the Bank's priorreview (over 90% of the procurement volume). Contracts for consultants' services estimated to costless than US$100,000 equivalent for firms, or less than US$50,000 for individuals will not be subjectto prior review. However, the following will be subject to prior review by the Bank: (a) terms ofreference for such contracts; (b) single-source selection of firms; (c) assignments of a critical natureas determined by the Bank; (d) amendments to contracts with firms raising the contract value toUS$100,000 equivalent or above; and (e) amendments to contracts for individuals raising thecontract value to US$50,000 equivalent or above. Contracts awarded below the prior reviewthreshold or on the basis of SOEs would be few and would be subject to random ex-post review bythe Bank's Project Implementation Unit in Indonesia using established sampling procedures.

4.36 Consultants will be selected and engaged in accordance with the Bank's "Guidelines for theUse of Consultants", using the Bank's Standard Form of Contract for Consultants' Services. Thelist of consultancy services is shown in Annex 4.2 and includes: (i) policy reform; (ii)implementation support and training; and (iii) institutional development.

H. DISBURSEMENT

4.37 The proposed Bank loan would be disbursed against approved contracts as follows: (a) 30%of expenditures for the Jakarta-Bandung Corridor track construction works, including improvementof level crossings, and for replacement of Bridge 433 on the alternative route via Bogor; (b) 60% ofexpenditures for the civil works (including pollution abatement equipment) at Yogyakarta, Bandungand Semarang for locomotive maintenance facilities; (c) 90% of expenditures for the aggregateamount of the Cikampek-Padalarang signal construction contract; (d) 100% of C.I.F. for directlyimported equipment and materials and 100% of ex-factory expenditures for locally assembledimported equipment and materials; and (e) 80% of all contracted consulting services expenditures.Category 5, Unallocated, equals the project physical and price contingencies financed by theproposed loan (Table 4-4).

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Table 4-4 Allocation of Loan Proceeds

Allocation ofCategory Loan (US$ % of Expenditures to be Financed

million)

I. Civil works for Jakarta-Bandung 6.9 30% of contract expendituresCorridor

2. Civil works for locomotive unit 1.3 60% of contract expendituresexchange

3 Jakarta-Bandung Corridor signal 21.5 90% of contract expendituressupply and installation

4. Equipment and materials 47.7 100% of foreign and 100% of local(ex-factory) expenditures

5. Consultants' services 9.9 80% of all expenditures6. Unallocated 17.7

Total 105.0

4.38 Special Account. In order to facilitate disbursements, a Special Account will be establishedin an amount of US$7 million. This amount will be deposited in Bank Indonesia on terms andconditions satisfactory to the Bank. This Special Account will be held in the name of the DirectorGeneral of Budget, Ministry of Finance, following established procedures. Replenishment of theSpecial Account will be made on a monthly basis, or when 20 percent of the initial deposit has beenused, whichever comes first.

4.39 Withdrawal applications would be fully documented for all expenditures against which loandisbursements would be made, except for materials and equipment valued at less than US$200,000,and consulting contracts valued at less than US$100,000 for firms and US$50,000 for individualsthat would be disbursed on the basis of statements of expenditures (SOE). Documents supportingthe SOEs would be retained by the respective project implementing agencies and would be madeavailable for review as requested by Bank missions. The estimated disbursement schedule for theproposed Bank loan is shown in Annex 4.5.

4.40 The project is expected to be completed by March 31, 2002, and the loan closing date isSeptember 30. 2002.

1. IMPLEMENTATION

4.41 Overall responsibility for coordinating and guiding the project's implementation will bevested in the IACC which has already been established by Ministerial Decree. This Committee willbe assisted by the RTF on which Perumka is represented at director level. The project's policycomponent will be implemented through this structure. At negotiations, agreement was reached thatGOI will maintain. (i) the IACC to guide and monitor the implementation of the railwayrestructuring, and concurrently to act as the Steering Committee for the project, and (ii) the RTF tomanage the preparation of Perumka's conversion to Persero status.

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4.42 Technical management of the Jakarta-Bandung Corridor, track upgrading and maintenance,and locomotive maintenance components, together with the Perumka institutional strengtheningcomponent will be vested in a Project Management Unit to be established within Perumka (PMUP).Project implementation is scheduled to require five years.

4.43 Reporting to the Project Management Unit Perumka (PMUP) would be three ProjectImplementation Units (PIUs) staffed full-time by Perumka personnel:

a) PIU for Jakarta-Bandung Corridor improvements and track maintenance system, includingrelated training. Both the Jakarta-Bandung Corridor improvements and the track maintenancesystem would be the responsibility of one PIU in order to plan and coordinate trackconstruction and rail installation in the Corridor and elsewhere on Java;

b) PIU for Locomotive Unit Exchange Maintenance System, including related training; and

c) PIU for Perumka institutional development.

4.44 Consultants financed by GOI and the Bank would assist the PMUP and the PIUs inimplementing the project, and their appointment would be a condition of Bank approval of theassociated construction and equipment procurement contracts. At negotiations agreement wasreached that Perumka will maintain the Project Management Unit and the three ProjectImplementation Units with staffing satisfactory to the Bank. Because of the complexity of theinterfaces between the various activities and the need for careful scheduling, the consultants shouldbe assisting the PIUs right from the start. Thus, for the Jakarta-Bandung Corridor Development andthe Track Upgrading and Maintenance System components, Bank approval of the contracts for trackworks, supply and installation of signaling, and supply of new rail will be contingent upon theconsultants assisting Perumka in the implementation of these components having been appointed.

4.45 Perumka has prepared a Project Implementation Plan (PIP) which was reviewed by the Bank.This document is part of the project file. The PIP contains the following principal elements for eachcomponent of the project: project description, organizational arrangements, project managementstructure, time bound implementation plan including procurement schedule, milestones andperformance indicators, and TORs for the technical assistance components. The projectmanagement and implementation schedule is presented in Annex 4.6.

J. PERFORMANCE INDICATORS, MONITORING AND SUPERVISION

4.46 Monitoring of achievement of the project objectives will cover six main areas: (a) PolicyReform Implementation; (b) Progress in Rationalization of Capital Investments; (c) OperationalPerformance; (d) Financial Performance; (e) Capacity in the Jakarta Bandung Corridor; and (f)Quality of Service (Annex 4.7). Achievements in the area of policy reform will be tracked by thedates of key actions of the action plan. The rationalization of capital investments will be monitoredin terms of the percent of investments in the updated core plan which has been developed usingeconomic/financial analyses. Operational and financial performance will be monitored using somekey performance indicators routinely produced by Perumka for which targets will be agreed withPerumka each year for the two following years. The result of the development of the JakartaBandung Corridor will be monitored in terms of the theoretical capacity and actual capacityutilization.

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4.47 Project component implementation performance will be monitored primarily against theimplementation plan and schedule (Annex 4.6).

4.48 At negotiations agreement was reached with GOI and Perumka that. (i) achievement of theproject's objectives will be monitored in accordance with performance indicators and targetssatisfactory to the Bank; (ii) by September 30 of each year a report will be prepared on theachievement of the project objectives and performance targets, including any measures to achievethe objectives, and if necessary in the light of progress achieved and other developments, proposals

for revisions to the targets for the subsequent two years; and (iii) the report will be reviewed withthe Bank, and thereafter all measures necessary will be taken for the completion of the projectcomponents and their objectives and the achievement of the performance targets taking into accountof the Bank's comments. For project component implementation, Perumka would submit to the Bankquarterly progress reports showing the progress of procurement and construction and the executionof the technical assistance against the time bound implementation schedules. These progress reportswould be sent to the Bank within 10 days after the close of each quarter. Within six months ofcompletion of the project, Perumka will furnish to the Bank a completion report on theimplementation of the project.

4.49 The project supervision arrangements are described in Annex 4.8. During the first threeyears, two supervision missions are scheduled each year. Subsequently, one supervision mission isscheduled every nine months. Supervision will focus on: (a) progress with Perumka restructuring;(b) Perumka's financial and operational performance; (c) the railway infrastructure and Perumka'sinvestment plans; (d) implementation issues affecting the investment components; and (e) technicalassistance and training issues. Supervision will require expertise in institutional development,organizational restructuring, marketing and other commercial issues, project management, railwayinfrastructure and rolling stock maintenance and rehabilitation, and financial analysis. Staff input isbudgeted for 95 staff-weeks for the five-year implementation period.

K. AUDITING

4.50 The PMUP will be responsible for collecting and consolidating the project accounts andfinancial reports, including for disbursements under SOE procedure, in respect of the projectcomponents. At negotiations agreement was reached with GOI and Perumka that the projectaccounts, including documentation for payments on the basis of SOEs, will be audited every year byindependent auditors acceptable to the Bank; and that the consolidated audit reports would besubmitted to the Bank within six months of the end of the fiscal year.

4.51 At negotiations agreement was reached with Perumka that it shall maintain records andaccounts adequate to reflect in accordance with sound accounting practices its operations andfinancial condition, and that it shall have its records, accounts and financial statements for eachfinancial year audited, in accordance with appropriate auditing principles, by independent auditorsacceptable to the Bank; andfurnish the audited accounts to the Bank within six months of/the end ofthe financial year, except for FYs 96 and 9 7 as noted in para. 3.25 above.

CHAPTER 5

ECONOMIC EVALUATION

A. BENEFITS, BENEFICIARIES AND FISCAL IMPACT

5.1 The policy reform and investmenits under the project will bring about a wide range ofbenefits. First, the improved interface between GOI and Perumnka, through establishment ofmechanisms for compenisationi of PSO and track maintenanice and of the track access chargessystem. will make Perumka financially more independent, create incentives for GOI and Perumkato achieve an efficient balance between track investments and mainiteniance, and provide aframework for introducing private participation and competition in track maintenance and trainoperations. Second. the development of a business-oriented organizational structure, a morerationalized investment and naintenance planniing and budgeting process, improved workforcemanagement, and modernized operating procedures, will eniable Perumka to better understand theneeds of its customers and focus on providing those services that are competitive with other modes.It will also improve allocation of scarce resources, increase labor and capital productivity, andimprove railway services in terms of availability, reliability, safety and affordability. Third, theimprovements in the Jakarta-Bandung corridor will increase throughput capacity, improve controland safety of train operations and service reliability, and better satisfy demand for travel by railand relieve traffic on roads. The results will be lower vehicle and road capital and maintenancecosts, less air pollution and environmenital damage, and less highway and urban congestion.Fourth. the improved track mainitenanice procedures, including greater use of CWR, will extendrail life, generate savings in track mainiteniance costs, improve safety of trainl operations and reducetrain operating costs. Fifth, the locomiotive unit exchange maintenance system will reducelocomotive mainitenance down timle and allow the existing locomotive fleet to be available forservice a greater portion of time, tlLus generating savin gs in locomotive investment andmaintenance costs.

5.2 The benefits from the expected efficiency improvements in capital spending, maintenanceand operation will accrue to railway passengers and freight shippers. The Indonesian governmentand taxpayers in general will also benefit following the plhasing out of subsidies. In terms of fiscalimpact the annual flow of funds between GOI and Perumka is expected to turn from a net negativeflow to a net positive flow in favor of GOI (Table 6-2). In addition, the expected railway serviceimiprovemiienits and cost reductions will induce an environmiiientally more sustainable modaldistribution between rail and road. Better railway services and lower costs will benefit users of alltransport modes and the economy at large. A cleaner enivironlment and fewer accidents will alsobenefit most members of the society.

5.3 An economic analysis has been carried out of the tlhree investmiienit componienits: Jakarta -Bandung corridor improvements, track maintenance system, and locomotive unit exchangemaintenance system, whiclh together represent over 967 of total project costs. The estimated netpresent values (NPV) and economic internal rate of returnis (ERR) for each component aresummarized in Table 5- 1. The results show that the proposed investmiienits are economicallyjustified. The investmenits yield a total NPV of Rp.348 billion, or US$155 million. The overallERR is estimated at 20.9%.

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Table 5-1: Net Present Values and Economic Internal Rate of Returns(in Rupiah billion)

Investment Components NPV @ 12% ERR (%)

Jakarta-Bandung Corridor Improvement 80.9 14.9 %Track Maintenance System 228.2 34.8 %Locomotive Unit Exchange Maintenance 38.6 26.3 %Total NPV and Overall ERR 347.7 20.9 %

B. JAKARTA - BANDUNG CORRIDOR IMPROVEMENTS

5.4 The Jakarta-Bandung Corridor connects two urban agglomerations totaling some 20 millionpeople and is one of the most important intercity passenger transport markets in Java. The corridoris served by rail, road and air. The rail passenger services transport over 3.5 million people peryear (2.5 million by executive and business classes and I million by economy class), capturingabout 17% of the total passenger traffic between Jakarta and Bandung. Some 50% of thepassengers travel by car, 33 % by bus, and less than I % by air.

5.5 Executive and business rail traffic has enjoyed a strong growth, averaging 12. 1 % and 8.4%respectively per year from 1987 to 1995. This has been led by the rapid urbanization and steadilygrowing economy and personal income. It is also due to the higher quality of the rail passengerservices relative to the available car or bus transport. It takes about two hours and 45 minutes totravel between Jakarta and Bandung by rail, but some three to four hours by car and nearly fivehours by bus. Rail travel is also more comfortable and much safer than road travel. Road trafficaccidents are a serious problem in Indonesia. Average fatality rates are about ten times higher thanin most industrialized countries. The Jakarta-Cikampek toll road, which is the first section of theroad link between Jakarta and Bandung, has a particularly high traffic accident rate. On themountainous section between Purwakarta and Bandung, the road is narrow, twisting and on fairlysteep gradients. Trucks hold up traffic going up hill and poorly tuned engines cause pollution.Buses travel at high speeds downhill. Construction of the new toll road between Cikampek andPadalarang, which is scheduled to start in 1996 and to be opened to traffic in 2000, is expected toimprove the road traffic condition and reduce travel time to between two and half to three hours.

5.6 Freight transport between Jakarta and Bandung is served by rail and road. Containerscarrying general cargo - mostly manufactured consumer goods such as textiles, tea and garmentsfor export - from Gedebage to Tanjung Priok are the most important traffic by rail in the Jakarta-Bandung Corridor. The expansion of consumer goods export has led to an impressive growth incontainer transport between Bandung and Jakarta. From a modest start of 2,600 containers (inTwenty Foot Equivalent Units TEUs) in 1987, the traffic reached some 60,000 TEUs in 1993.Due to a variety of factors such as strong road competition, rail capacity constraints, andcumbersome terminal processing at Gedebage dry port, rail container traffic has been steady on60,000 TEUs per year from 1993 to 1995.

5.7 Alternatives. During the past several years a number of alternative investments designed tocope with growing traffic in the Jakarta-Bandung corridor have been under consideration. Thisincludes proposals analyzed in 1988 (under French financing), in 1993 (under Japanese financing)and most recently in 1995 (under Dutch and World Bank financing). The investments proposedunder the project are a sca!ed down version of these earlier more ambitious proposals. They are

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minimum "no regrets" investment which were formulated on the basis of simulations of alternativeinvestment scenarios aimed at meeting traffic demand up to the year 2020 in thie corridor in themost cost effective manner (para 4.10-4.11). Funds are included under the project to replicatesuch corridor investment optimization studies for capacity planning on a wider scale and to assessinvestment requirements in the Jakarta-Bandung Corridor beyond the year 2020.

5.8 For the economic evaluation of proposed investments, the base case scenario represents thesituation where a minimum level of track maintenance investment is made which is necessary tosustain the current level of rail services. The project case scenario represents the situation wherethe proposed investments are fully implemented by 2001. For purposes of defining the investmentcosts of the project case it is to be noted that the double track railway line between Jakarta andCikampek (Box 4. 1) serves not only traffic to and from Bandung, but also carries all trains to andfrom points east of Jakarta, such as traffic to and from Surabaya, Solo, Yogyakarta, Cirebon andSemarang. Thus, the investments in the Jakarta-Cikamapek section of the corridor will benefit alltrain operations east of Jakarta and not only those to Bandung. Accordingly, the economic andfinancial evaluation considers only the traffic flows to/from Jakarta with Bandung as theirorigin/destination on the one hand, and all investments on the line between Cikampek and Bandungand a proportion of the investments on the Jakarta-Cikampek line on the other.

5.9 On the basis of the historical trend and the expected growth in urbanization, economicactivities and personal income, and taking into account the effects of competition from road andtariff increases, it is projected that total executive and business passenger traffic would reach some11 million by 2017, when the track's capacity, which is expanded by the proposed investment,shall be reached. From the start of project implementation in 1997 to the end of the 20-yearevaluation period, 2021, the passenger traffic is expected to grow at an average rate of 6% peryear. For container transport, no growth is assumed during the project implementation period.Upon completion of the project, traffic is projected to grow slowly, averaging less than 3% peryear over the evaluation period, and approach 120,000 TEUs by 2021.

5.10 The economic analysis compares total costs between the base case and the project case.The costs considered include rail and road capital and maintenance costs, rail rolling stock andvehicle ownership and operating costs. Investment costs under the project case include a 10%physical contingency. Because the Jakarta-Bandung traffic flow accounts for some 35 % of the totaltraffic between Bekasi-Cikampek (Box 4.1) 40% of the investments within the Bekasi-Cikampeksection (mainly the Australian financed signaling works28) are apportioned to the costs of theproject case. The ERR of the investment is 12.3%. When estimates of savings in transit timecosts (using a value of time of Rp. 1,400 per hour), and air pollution and accident costs are takeninto account the ERR is 14.9%.

5.11 A financial analysis has also been carried out to examine whether the proposedimprovements are financially sound. The analysis compares net rail revenues between the basecase and the project case. The financial IRR is estimated at 11.7%.

28 Even though this investment in signaling had been firmed up independently of the projeci - the contract hadbeen signed before the evaluations for the capacity improvements under the project had been completed - it istreated as integral part of the corridor development investments because: (i) it is aimed at addressingexisting capacity constraints in the Jakarta-Bandung corridor; and (ii) its implementation needs to be veryclosely coordinated with the Bank financed investment.

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C. TRACK MAINTENANCE SYSTEM

5.12 Rail has a finite life which depends among other factors, on the quality of its maintenance,and the quality of roadbed and track maintenance. Under the project Perumka would implement,with the assistance of consultants, an improved track maintenance system on Java. Key elementsinclude: (i) the use of continuous welded rail (CWR) for both new and relay rail, whereby partworn rail will be reprocessed in a new rail reclamation yard and then be relaid in secondary maintrack and yards; and (ii) new field maintenance procedures, including on-site hand welding andsmall-machine grinding of worn rail, will be introduced to extend the life of rail, turnouts, andother track components.

5.13 Alternatives. During project preparation alternative maintenance equipment options wereconsidered and those that were not found cost effective or incompatible with Perumka's absorptivecapacity were not retained (e.g. acquisition of a rail grinding train). The improved procedures tobe introduced under this component were developed based on a review of rail life achieved undercurrent procedures and practices on the one hand and good international best practice in trackmaintenance and Perumka's institutional capacity on the other.

5. 14 With the improved maintenance system in place and operational, it is expected that the raillife will be extended by a factor of three. This means significant savings in annual track capitalcosts, amounting to some two thirds (60%) of current levels. Additional benefits include thereduction of rolling stock maintenance costs, fewer slow running orders and rail failures, andlower associated delay and accident costs.

5.15 The economic analysis compares the net investments and track capital and maintenance costbetween the base case and the project case. The expected savings in rolling stock maintenance andoperating costs are not included. Since the new rail and track materials would be provided in thebase case as well as in the project case, the net investment costs between the two cases consistmostly of costs of the rail reclamation yard, rail train, and consultant services. The savings intrack capital costs are assumed to materialize over a period of seven years, as the improvedmaintenance system spreads gradually over the whole Java network. The rail and trackmaintenance costs under the improved maintenance system are assumed to increase over the projectperiod to twice the current level. The NPV of the this project component is estimated at Rp.228billion and the ERR at 34.8%.

D. LOCOMOTIVE UNIT EXCHANGE MAINTENANCE SYSTEM

5.16 A diesel locomotive consists of a frame and some twenty five major components, such asdiesel engine, generator, compressor, traction motors, etc. Currently, these components are notoverhauled at their individual most cost effective intervals but when the locomotives get theiroverhauls (a semi-overhaul every two years and a general overhaul every four years). As a result,some components are overhauled too early, wasting service time and spare parts, while others areoverhauled too late, leading to early and more frequent failures or a costly repair or replacement.The on-time preventive maintenance system under this project is designed to address this problemby overhauling a locomotive component when the component is due, rather than when thelocomotive is due for an overhaul.

5.17 Overhauling a component takes a long time during which the locomotive does not provideany services. In order to eliminate the locomotive down time when a component is taken off the

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locomotive for an overhaul, this project component also introduces a unit exchange system, whichwill provide a ready-for-use pool of spare components that can be immediately installed to replacethe overhauled component. The practice of combining on-time maintenance system with a unitexchange system has been practiced successfully in many countries including India and Malaysia.

5.18 Alternatives. During project preparation, alternative investment scenarios for rolling stockmaintenance were examined and sub-components that were found not viable (e.g. upgrading of thewagon and coach workshops) were not retained. The component has been designed following areview of Perumka's locomotive maintenance procedures and practices on the one hand and goodinternational practice, lessons of experience and Perumka's institutional capacity on the other. Theimplementation arrangements include measures to safeguard against the most common risks offailure to implement a unit exchange maintenance system.

5.19 On time maintenance, rather than maintenance at the time of component failure, is expectedto lead to fewer locomotive failures. From the present 60 failures per million kilometers - thewithout project case, the failure rate is expected to decrease to around 10 failures per millionkilometers (i.e., 1/6 the current level) - the with project case. On average about 140 failures ayear in locomotives result in locomotives being sent to the workshop for major repair work and alocomotive remains in the workshop for an average of 30 days. Therefore, about 4,200 locomotivedays annually are lost due to failures. With the program carried out and the failure rate lowered toone sixth the current level, some 3,500 locomotive days are put to operational use, which isequivalent to adding about 10 locomotives to Perumka's fleet.

5.20 Using readily available exchange components from the exchange unit pool, the program isalso expected to shorten locomotive downtime, resulting in higher locomotive availability.Locomotive availability is expected to increase from the present 70%, the without project case, toabout 80%. Given the existing fleet of 142 diesel electric locomotives on Java, this 10% increasemeans an additional 14 locomotives available for train service.

5.21 As the quality of maintenance improves, the need for daily checks will diminish. Almostimmediately, current daily checks, the without project case, will be replaced by checks every otherday. Total elimination of daily checks by checks every other day is expected to come within a yearand monthly inspections could come to replace checks every other day within two years (the withprogram case). This would save some 37,000 locomotive hours per year, or an equivalent of fouradditional locomotives.

5.22 In total, the program can add an equivalent of 28 locomotives to the current fleet of 142 onJava. The economic analysis assumes that the full extent of the locomotive savings would begradually realized over a period of six years. The analysis shows that the program will yield aNPV of Rp.39 billion and an ERR of 26.3%.

E. RISKS AND SENSITIVITY ANALYSIS

5.23 With regard to the policy component, a main risk is resistance to needed rail subsectorreforms from some quarters within GOI. While senior officials at MOC, BAPPENAS andEkuwasbang have strongly endorsed the project, resistance by reform averse groups withingovernment and outside is possible. This risk is recognized by those in GOI who are stronglycommitted to continuation of the reform process. BAPPENAS can be expected to take a lead rolein securing timely implementation of the policies. To manage this risk, at negotiations agreement

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would be reached on specific and monitorable actions of the reform agenda and annual review ofprogress.

5.24 Regarding rationalization of investments, a risk is that influences from outside the railwaywould stand in the way of sound capital investnents and prudent management of the assets of therailway. There may be pressure to purchase rolling stock from favored foreign or domesticsuppliers or there may be directed decisions regarding asset disposal. This risk would be managedby fostering a clear and transparent governance structure related to capital investment and financingthrough annual reviews of the investment program and the financial projections.

5.25 While the three investment components would be insulated from the above risks theirimplementation entails component specific risks. The main risk relating to the Jakarta-Bandungcorridor component and track maintenance component is that implementation could suffer delaysdue to the need to work within short "windows" when the line is available. To mitigate this risk,one integrated implementation unit would be established for these two components to plan,coordinate and monitor track construction and rail installation. The risk relating to the locomotiveunit exchange maintenance system is that the spare parts procured would be used for consumptionrather than for unit exchange maintenance pools. For this component to be successful, thelocomotive depots must be operated as extensions of the locomotive workshop, and the workshopmust be reorganized to provide sufficient repaired and new components and parts to replenish theunit exchange pools.

5.26 If the above delays and adverse events would materialize, costs would increase and savingswould be reduced. Other possible adverse events include lower than predicted traffic and savingsin transit time and pollution and accident costs. These risks were assessed through a series ofsensitivity analyses. The results, presented in table 5-2, show that the investments yield robusteconomic returns. Even under the scenario for the Jakarta-Bandung corridor component whereboth passenger and freight traffic are 20% below forecast, project cost is overrun by 25% andcompletion delayed by 2 years, the ERR is still 9.9%.

Table 5-2: Results of Sensitivity Analysis

Project Components and Scenarios NPV @12% IRR(Rp billion) (%)

Jakarta-Bandung Corridor ImprovementBase scenario 80.8 14.9 %

(a) Passengers 20% lower than base case 32.2 13.3 %(b) Freight 20% lower than base case 76.6 14.8 %(c) Scenarios (a) and (b) combined 27.9 13.1 %(d) 25% cost overrun and completion delayed 2 years 61.6 14.1 %(e) Scenarios (a), (b) and (d) combined 7.4 12.3 %(f) Exclude transit time savings 62.8 14.3 %(g) Exclude pollution and accident cost savings 26.5 13.1 %(h) Scenarios (f) and (g) combined 8.5 12.3 %(i) Scenarios (a), (b), (d), (f) and (g) combined -51.2 9.9 %Track Maintenance System

Base scenario 228.3 34.8 %(a) Project cost overrun 25% 224.6 33.8 %(b) Total cost savings 25% lower than base case 167.6 33.4 %Locomotive Unit Exchange Maintenance

Base scenario 38.6 26.3 %(a) Project cost overrun 25% 33.0 22.4 %(b) Total cost savings 25% lower than base case 23.3 21.3 %

CHAPTER 6

FINANCIAL EVALUATION AND FORECAST

A. INTRODUCTION

6.1 The restructuring of Perumka and the reforms in its relationship with Government to beimplemented over the next several years will have far reaching consequences for Perumka'sfinances. It is, therefore, necessary to set out the main elements of the framework underlying thefinancial projections and evaluation. First, the financial projections are developed using key inputsfrom Perumka's "core" corporate plan (para. 3.43). Second, they are predicated on the financialrelationship between the Government and Perumka being reformed as outlined in Chapter 3 with theintroduction of the PSO and track maintenance compensation mechanisms and the track chargessystem with effect of 1997. Third, they are based on the objective that the corporation shouldbecome financially self-sufficient and will need to finance its investments from internally generatedresources and borrowing.

6.2 While the "core" corporate plan provides the most realistic starting point possible forevaluating Perumka's financial situation and outlook, it needs to be recognized that during thisperiod of transition to a fundamentally different corporate and financial environment the "core"corporate plan and financial projections will not only need to be updated annually, but may have toundergo major modifications in future years owing, inter alia, to: (i) a rationalization in lines ofbusiness whereby only those unprofitable services which are explicitly required by government andfor which compensation is provided under the PSO mechanism will be continued; (ii) the impact ofefficiency improvements; and (iii) private participation schemes being implemented.

B. PERUMKA'S FINANCIAL FORECAST UNDER THE NEW POLICY FRAMEWORK

6.3 The Objective of Financial self-sufficiency. This objective is to generate funds sufficient tocover operating costs, all financial obligations including debt service charges, and contribute towardfuture investments for renewal and expansion of assets. The review of Perumka's operations andpast financial performance in Chapter 3 indicated that tariff increases for potentially profitableservices and discontinuation of unprofitable services will be essential if it is to achieve the objectiveof financial self-sufficiency.

6.4 The base year for the financial projections is 1996. The main variables are derived from the"core" corporate plan which differs from Perumka's approved budget in that the assumptions oncapacity, traffic growth, tariff increases and investments have been adjusted so as to make theminternally consistent. The year 1997 will be a transition year as the key elements of the newfinancial relationship between GOI and Perumka will come into effect in that year. These elementsand the main parameters include:

a) Introduction of the PSO compensation mechanism with effect of the FY97/98 GOI budgetyear. The unit compensation (per passenger/km and ton/km) is assumed to decline in linewith productivity improvements and fare/tariff increases;

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b) Introduction of the infrastructure maintenance compensation mechanism with effect of theFY97/98 budget year. The compensation is to be based on efficient costs for maintaining theinfrastructure to defined standards and to comprise outlays for materials, direct labor, generalstaff and an administrative expenses component. For 1997 the payment was estimated toamount to Rp 182 billion. This compares to an actual payment of Rp 31.5 billion for 1995;and

c) Introduction of a track access charges system whereby Perumka would pay GOI for the useof the track. This charge has been estimated at 2.1 Rp/gtkm.

6.5 Moreover, other key assumptions used to develop the financial projections include thattraffic will continue to grow in line with past trends (i.e. initially 8.5% per year for executive andbusiness class reducing to 7.5% by 2001, and 5% per year for economy class), that Perumka willadjust its tariffs taking into account costs and market conditions and that selective investments willbe carried out to replace existing rolling stock and/or to meet growing demand. Productivityincreases were also adopted for fleet utilization and locomotive utilization. Major assumptions andnotes underlying the financial forecast are described in Annex 6.1. Details of calculations and otherinformation are in the Project file.

6.6 Financial Projections for Perumka. The Projected Income Statement, Cash FlowStatement and Balance Sheet are shown in Tables 3, 4 and 5 of Annex 6.1. The main results andfinancial performance indicators are summarized below:

Table 6-1: Summary Financial Projections and Indicators

1996 1997 1998 1999 2000 2001 2002(Rp. Billion in Current Prices)

Operating Revenues 696 991 1,134 1,270 1,425 1,611 1,828Operating Costs 676 910 1,074 1,192 1,325 1,470 1,648Net Operating Revenues 20 81 60 78 100 141 180Interest Charges 4 28 46 66 68 86 105Income Tax 5 16 4 4 9 17 23Revenue After Tax 12 37 9 8 22 39 53

of which:Dividend to GOI 6 20 5 5 12 21 29Retained by Perumka 6 17 4 3 10 18 24

Performance IndicatorsWorking Ratio (%) 90 85 83 82 82 81 80Operating Ratio (%) 97 92 95 94 93 91 90Return on NF Assets (%)1 2 6 2 2 3 4 5Debt Service Cov. Ratio 10.3 3.4 2.8 2.2 2.2 2.0 2.1Self Fin. Ratio (3 yr avg.)(%) 28 27 42 39 39 36 40Current Ratio 3.1 2.9 2.9 2.7 2.6 2.5 2.8Debt/Equity Ratio (%) 3 13 11 14 17 20 23

1/ From 1998 on revalued assets.

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6.7 The above indicators show encouraging financial development for the corporation. Theoperating ratio improves from 97% in 1996 to 90% in 2002. The return on net fixed assets (revaluedin 1998) improves from 2% to 5% over the same period. Perumka will be able to accumulate a cashsurplus of Rp. 233 billion by 2002 (Annex 6.1, Table 4). The Self-Financing Ratio will be 27% in1997 and thereafter will gradually rise to 40% in 2002. The Debt Service Coverage Ratio willremain within a comfortable range of 2.0 to 3.4 from 1997 to 2002. GOI's net cash outflow toPerumka will gradually decrease from a high of Rp. 95 billion in 1998 to Rp. 32 billion in 2000, andthereafter, it will begin to experience a net fund in-flow from Perumka (Table 6-2). This indicatesthat the railway operations will become a source of income for GOI.

Table 6-2: Flow of Funds between GOI and Perumka

1996 1997 1998 1999 2000 2001 2002 Total

Funds from Perumka to Govt. 11 206 203 237 288 345 414 1,706

Funds from Govt. to Perumka 37 276 298 306 320 339 360 1,936

Net from Perumka to Govt. (25) (70) (95) (69) (32) 6 55 (231)

6.8 The projected Balance Sheet results (Table 5, Annex 6. 1) indicate that the Current Ratio,Acid Test Ratio and the Debt/Equity Ratio would remain at acceptable levels. However, Perumkawill need to monitor closely its high debt service obligations caused by substantial but much neededinvestments. The projections indicate that Perumka should be able to achieve financial self-sufficiency provided: (i) the financial relationship between GOI and Perumka is reformed inaccordance with the arrangements for introduction of the PSO and track maintenance compensationpayments and the track access charges system outlined above: and (ii) productivity improvementsand fare/tariff increases materialize. More precise evaluations and cost estimates to firm up the PSOand track maintenance compensation and the track charges for 1997 are being carried out with theassistance of consultants. Accordingly, the actual payments in 1997 and subsequent years could bedifferent from those underlying these financial projections. Perumka will, therefore, need to monitorclosely and update its financial projections and key financial indicators to reflect the outcome of theestimates for the compensation and charging mechanisms, in particular for the first year, and take allnecessary action to maintain its financial self-sufficiency.

C. SENSITIVITY ANALYSIS

6.9 To assess the risks attached to the above financial projections, sensitivity analyses werecarried of the key parameters likely to impact on Perumka's financial outlook. These include: thecompensation payments to Perumka and track access charges paid by Perumka, the timeliness andadequacy of tariff adjustments, the realization of productivity and traffic increases, and the level ofnew investment. Sensitivity analyses were carried under the following scenarios: (a) tariff increasesare only half those of the base case assumptions; (b) the compensation mechanism for PSO andinfrastructure maintenance and the track access charges system are not implemented; (c) Perumkadoes not achieve any productivity increases; and (d) traffic growth is reduced by 20%, The resultsare shown in Table 6.3.

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Table 6-3: Sensitivity Analyses

1996 1997 1998 1999 2000 2001 2002

Base CaseSelf Financing Ratio (%) 28% 27% 42% 39% 39% 36% 40%Debt Service Coverage Ratio 10.3 3.4 2.8 2.2 2.2 2.0 2.1

Return on Net Fixed Assets(%) 2% 6% 2% 2% 3% 4% 5%

Sensitivity Analysis

a) If tariffs increased by 50% over base case:Self-Financing Ratio 28% 21% 22% 6% 0% -9% -15%Debt Service Coverage Ratio 10.3 3.3 2.0 1.2 1.0 0.8 0.7Return on NF Assets (%) 2% 5% 1% 1% 1% 0% 0%

b) If no PSO and track maintenance payments and no access charges:Self-Financing Ratio 28% 6% 14% 18% 30% 34% 40%Debt Service Coverage Ratio 10.3 1.3 1.5 1.5 1.8 1.8 2.1Return on NF Assets (%) 2% -1% -1% 0% 1% 3% 5%

c) If no productivity improvements by Perumka:Self-Financing Ratio 20% 16% 15% 2% -3% -10% -13%Debt Service Coverage Ratio 10.3 2.3 1.5 1.1 0.9 0.8 0.8Return on NF Assets (%) 2% 5% 1% 1% 1% 1% 1%

d) If traffic growth is 20% less than base case:Self-Financing Ratio 31% 32% 52% 51% 53% 50% 55%Debt Service Coverage Ratio 10.3 3.8 3.3 2.8 2.9 2.7 2.8Retur on NF Assets (%) 2% 5% 2% 2% 3% 3% 4%

l/ Based on revalued assets for 1998.

6.10 The above results indicate that Perumka's financial viability is highly sensitive to tariffadjustments and productivity improvements. If these unfavorable scenarios were to materialize, netcash flow would become negative which would make it impossible for Perumka to meet the debtservice obligations and to contribute to future investments. While under scenario b) (thecompensation payments and track access charges are not implemented), Perumka's financialsituation initially deteriorates, it is comparable to the base case by the year 2002. This is becausethe loss of the maintenance payments is more than compensated by the non-payment of accesscharges.

6.11 These evaluations also show that Perumka should monitor closely and update annually itsfinancial performance indicators (Table 6-1). Because of the uncertainty of the impacts ofPerumka's restructuring to a commercially and financially autonomous enterprise on its financialperformance, key targets should be reviewed annually and revised if deemed necessary in the light ofexperience and remedial actions taken or to be taken when targets are not being met. Given thecritical importance of appropriate PSO and track maintenance compensation payments andappropriate track access charges for: (i) introducing a commercial approach in performing services;(ii) distinguishing between market-driven and socially driven services; (iii) providing incentives foroperational efficiency; (iv) providing incentives for appropriate maintenance; and (v) compensating

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GOI for track usage, at negotiations agreement was reached with GOI that it will establish andmaintain these arrangements in place and refine them in the light of experience (paras 3.60-66).

6.12 Furthermore, agreement waxi reached with Perumka that it will:

a) take all such measures, including but not limited to tariff adjustments, controlling costs,improving productivity and developing new services or discontinuing unprofitable services,as shall be required to generate each year funds from internal sources sufficient to coveroperating costs, debt service charges and other financial obligations and to achieve a selffinancing ratio of not less than 20% during 1997 - 2000 and not less than 25% thereafter ofthe annual average capital expenditures incurred, or expected to be incurred, for that year,the previous year and nextfollowing year;

b) incur additional debt only if the iniernal cash generation would provide a minimum debtservice coverage ratio of 1.5 times during the forecast period,

c) by September 30 of each year review and report on the progress in meeting the aboverequirements and if deemed necessary in the light of its achievements in meeting the targets,propose remedial actions and/or new targets for the current year and the next following yearfor the Bank's comments; and

d) establish revised targets taking into account the Bank's comments.

6.13 Perumka's assets are recorded at historical costs. With the view of its transformation into alimited liability company as per I January 1998, Perumka plans to carry out a revaluation of itsassets by December 31, 1997. At negotiations, agreement was reached with Perumka that it will:(i) prepare proposals for a revaluation of its assets by September 30, 1997 for review by the Bank;(ii) finalize the revaluation of assets taking into account the Bank 's comments; and (iii) record therevalued assets in its books as of January 1, 1998.

CHAPTER 7

AGREEMENTS REACHED AND RECOMMENDATION

Agreements reached with the Government

7.1 At negotiations agreement was reached with GOI that it will:

a) annually (i) furnish to the Bank by September 30 its draft core railway infrastructureinvestment plan, prepared using cost/benefit analyses on a corridor approach and taking intoaccount Perumka's corporate plan; and (ii) finalize the core plan taking into account theBank's comments (para. 3.40);

b) (i) establish a mechanism for compensating Perumka for its PSO with effect of FYI 997/98;(ii) cause Perumka to prepare annually by June 30 a report on the PSO compensation duringthe previous year; and (iii) maintain the mechanism in operation during subsequent years andrefine it in the light of experience (para. 3.62);

c) (i) establish a mechanism for compensating Perumka for the costs it incurs for railinfrastructure maintenance and operation with effect of FY1997/98; (ii) cause Perumka toprepare annually by June 30 a report on the compensation mechanism during the previousyear; and (iii) maintain the mechanism in operation during subsequent years and refine it inthe light of experience (para. 3.64);

d) not provide to Perumka, whether directly or indirectly, any funds or financing other than: (i)loans on terms no more favorable than those available from commercial lenders; and(ii) payments in accordance with the PSO compensation and infrastructure maintenancecompensation mechanisms (para. 3.65);

e) (i) prepare by December 31, 1996 proposals for the design and phased implementation of atrack access charges system; (ii) establish the system with effect of FY1997/98; (ii) causePerumka to prepare annually by June 30 a report on the operation of the system during theprevious year; and (iv) maintain the system in operation during subsequent years and refine itin the light of experience (para. 3.66);

f) (i) implement by February 28, 1997 the financial separation of the Jabotabek and Java inter-urban rail systems; (ii) furnish to the Bank by October 31, 1997 a program for therestructuring of Perumka into a limited liability company (Persero) and a proposal for themanagerial separation of the Jabotabek and Java inter-urban rail systems; and (iii) taking intoaccount the Bank's comments, establish such company and implement the proposal witheffect from January 1, 1998 (para. 3.70);

g) (i) by June 30, 1997 identify and evaluate commercial opportunities for railway developmentin Java and Sumatra and for exploiting Perumka's land assets; (ii) by October 31, 1997formulate guidelines and procedures for soliciting and negotiating private participationthrough concession and other arrangements; (iii) furnish the guidelines and procedures to theBank for its review and, thereafter, taking into account the Bank's comments finalize theguidelines (para. 3.72);

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h) review the current draft GR for implementing Law 13/92; prepare final drafts taking intoaccount the Bank's comments; and issue the GR thereafter (para. 3.73);

i) maintain (i) the Inter-Agency Coordinating Committee to guide and monitor theimplementation of the railway sector restructuring and, concurrently, to act as the SteeringCommittee for the project; and (ii) the RTF to manage the preparations for Perumka'sconversion to Persero status (paras. 3.75 and 4.41);

j) onlend Perumka's share of the proceeds of the proposed loan to Perumka under the sameterms as the Bank loan plus 0.5 per cent per annum (para. 4.31);

k) (i) monitor implementation of the restructuring program (as set out in Annex 4.8) agreedunder the project, (ii) annually by September 30 report on progress and make proposals forany measures to achieve the objectives or for revisions to the targets; and (iii) take allmeasures to complete the restructuring program and achieve its objectives taking intoaccount the Bank's comments (para. 4.48).

Agreements reached with Perumka

7.2 At negotiations, agreement was reached with Perumka that it will:

a) annually (i) furnish to the Bank by September 30 its draft corporate plan and associated coreinvestment plan, prepared taking into account its financial situation, updated traffic forecasts,operational efficiency, available rolling stock and other pertinent factors; and (ii) finalize andcarry out the corporate plan and associated core investment plan taking into account theBank's comments (para. 3.44);

h) annually prepare and furnish to GOI and the Bank by June 30, reports evaluating theimplementation of: (i) the PSO mechanism; (ii) the infrastructure maintenance compensationmechanism; and (iii) the track access charges system (paras 3.62, 3.64, 3.66);

c) maintain its Quality Assurance Unit and strengthen its capabilities in the environmental,occupational health and safety areas (para. 3.74);

d) for purposes of carrying the resettlement and rehabilitation of affected persons, implementthe RAP agreed with the Bank, and furnish to the Bank an evaluation report upon completionof the resettlement and rehabilitation (para. 4.25);

e) implement the environmental action and monitoring plans and incorporate appropriateenvironmental mitigation measures in the conditions of contract for the Jakarta-Bandungtrack works contract (para. 4.27);

f) maintain the Project Management Unit (PMUP) and the three Project Implementation Units(PIUs) with staffing satisfactory to the Bank (para 4.44);

g) (i) monitor implementation of the project components and achievement of its objectives inaccordance with agreed indicators and targets; (ii) annually by September 30 report onprogress and make proposal for any measures to achieve the objectives or for revisions to thetargets; (iii) take all measures to complete the project and achieve its objectives taking intoaccount the Bank's comments; and (iv) within six months of completion of the project,furnish a project completion report to the Bank (paras. 4.48 and 6.12 c) and d));

- 54-

h) take all measures, including but not limited to tariff adjustments, controlling costs,improving productivity and developing new services or discontinuing unprofitable services,as shall be required to generate funds during each of its financial years sufficient to coveroperating costs, debt service charges and other financial obligations and to achieve a self-financing ratio of not less than 20% during 1997 - 2000 and not less than 25% thereafter ofthe annual average capital expenditures incurred, or expected to be incurred for that year, theprevious financial year and the next following year (para. 6.12 a));

i) shall not incur any debt unless the internal cash generation would provide a minimum debtservice coverage ratio of 1 .5 times during the forecast period (para. 6.12 b)); and

j) shall carry out a revaluation of fixed assets by December 31, 1997 and record the revaluedassets in its books as of January 1, 1998 (para. 6.13).

Condition of Effectiveness

7.3 A condition of effectiveness would be that a subsidiary loan agreement, satisfactory to theBank, has been signed between GOI and Perumka (para. 4.31).

Recom mendation

7.4 With the above agreements and conditions, the proposed project is suitable for a loan ofUS$105.0 million to the Republic on Indonesia, for a period of 20 years including a grace period of5 years, at the standard interest rate for LIBOR-based US Dollar single currency loans.

-55-

ANNEXES

INDONESIARAILWAY EFFICIENCY PROJECT

PERUMKA ORGANIZATION CHART

ChiefDirector

HeadInternal Audit

Finance Operations & Technical Personnel &Director Marketing Director General Affairs

Director Director

Head HeadEducation & -- Planning & R&D

Training Center Center

Head Head Head HeadNorth Sumatra West Sumatra South Sumatra Java Commercial

Region Region Region Region

>x

IndonesiaRailway Efficiency Project

Railway Traffic, Financial and Operational Indicators 1985/86 - 1995PJKA Perumka Annual Growth

19851861 19861871 1987/881 1988/891 19891901 1990 19911 19921 1993- 19941 1995 85/86-1990 1990-95

TrafficPassenger-km (m) 7,289 7,535 7,755 7,996 8,594 9,342 9,767 10.510 12,377 13,421 15,551 5 1% 10 7%

First Class 380 409 398 442 470 486 503 554 586 637 873 5.0% 1244%Second Class 1.122 1,271 1,350 1,450 1,672 1.657 1,681 1,763 1.883 2,247 2,704 8 1% 10 3%Third Class a) 5,787 5.855 6,007 6,104 6,452 7,199 7,583 8,193 9,908 10,537 11,974 4 5% 10.7%

Freight net ton-km (m) 1,355 1,575 1,901 2,244 2,976 3,190 3,469 3,781 3,955 3,989 4.173 18.7% 5 5%

Operating IncomeTotal Revenues 122.105 133.791 161,092 188,586 222,868 | 196,355 323,482 393,314 470,483 507,700 592,400 100% 24 7%Total Expenses 197,622 218.146 219,333 256,488 302,835, 263,685 331,222 397,946 468,452 502.500 581.700 5 90% 17 1%Operating Income (75.517) (84.355) (58,241) (67,902) (79,967)1 (67,330) (7.740) (4.632) 2,031 5,200 10,700 n m n.m._

|Working Ratio b) l 128%| 127%| 103%1 106%| 108%| 101%0 94%1 94%1 92% 90% 89%1 -4 5% -2.6%Operating Ratio c) 162%[ 163% 136% 1360/ 136%1 134% 102% 101%/ 100%0 99%/ 980/ -37%/ | -61%

Real Unit Revenues (in tems of Rp 1995)Passenger (Rpipkm)

FirstClass 550 484 438 49.3 494 60.9 687 867 106.4 912 894 21% 80%Second Class 34.2 31.3 30.0 32.2 31.8 33.9 36 0 43 0 46.0 43 1 39 3 -0 2% 3 0%0ThIrd Class 18.9 17.3 15 1 14.6 15.8 14.5 13 9 14.3 13.8 139 132 -52% -1 9% '.0

Freight (Rp/ntkm) 51.5 48 5 42.9 435 41.1 42.1 429 43.7 430 41 0 38.8 -40% -1.6%

Real Unit Costs (in terms of Rp 1996)Rp/Traffic Unit d) 39.6 37 61 31.51 33.31 33 91 31.61 31.21 33 31 31 01 28 81 29 5| -4 4% -1.4%

|Rp/Traffic Unit e) J 32.0 298 24 3 246_ 24.3 22.9 223 239 22.7 214 223 -6.5% -05%

Availability (%)Locomotive n a na n a | 701 751 746 76 761 761 761 791 42 0.8%Coach na na. na 80 78 74 79 82 78 811 82 -38% 2 .1 %Wagon | n.a na. na. 80 75 66 74 77 78 841 85 -92% 52%

Utilization (kminday)nLocomotive n a na n a 279 327 3311 3381 3721 3481 3681 3791 89%0 27%

iCoach | na. n a. n.a 423 416 372 386 488 435 443 451 -. 2% 3 9%|Wagon n.a n.a. na. 52 71 48 43 58 80 86 87 -3.9% 126%

ProductivityFreight (net tonitrain) n a n a.1 n a | 196 2431 2241 2291 2451 2491 3031 n a | 6.9% 7.8%

lWagon Turnround (day) n.a n a. na. 861 68 7.6 7.1 4.9 4.1 4.0 391 -6.0%/ -12 5%/

a) Includes Jabotabek commercial passengersb) Operabng expenses, less depreciation, divided by operating revenuesc) Operating expenses divided by operating revenuesd) Traffic unit=passenger-km+net ton-km IDe) Traffic unrt=passenger-km+2 5-nel ton-km (reflecting relative cost) Hn.a not available, n.m. not meaningful


PERUMKA PASSENGER TRAFFIC 1994 & 1988/891994 AV ANNUAL GROWTH 1988/89-1994

SYSTEM TRAFFIC PASS PASS-KM REVENU AV.HAULI AV. REV PASS PASS-KM REVENU {AV.HAULj AV. REV(10A3) (10A6) (RpxiOA6 (Km) (Rp/PKm) (%) (%) (%) (%) (%)

JAVA CLASS ! 1,544 618 53,035 400 85.8 11.1% 6.9% 33.2% -3.8% 24.5%CLASS 11 5,383 2,019 82,890 375 41.1 9.6% 11.0% 28.0% 1.3% 15.3%CLASS III 18,688 7,079 104,462 379 14.8 5.2% 8.6% 17.1% 3.2% 7.8%SUBTOTAL 25,614 9,715 240,387 379 24.7 6.4% 9.0% 23.3% 2.5% 13.2%LOCAL MAINLINE 21,840 857 9,253 39 10.8 10.6% 9.4% 16.7% -1.1% 6.7%LOCAL BRANCHLIN 563 22 274 39 12.6 1.1% 1.3% 11.9% 0.2% 10.4%JABOTABEK 65,646 2,245 18,461 34 8.2 28.2% 29.0% 30.4% 0.6% 1.0%SUBTOTAL 88,050 3,124 27,988 35 9.0 21.9% 21.2% 24.6% -0.6% 2.8%TOTAL 113.664 12.840 268,375 113 20.9 17.2% 11.3% 23,5% -5.0% 10.9%

S.SUMATRA CLASS I 35 14 880 385 65.1 ICLASS 11 390 134 4,975 345 37.0 -3.6%1 -4.1%1 10.0% -0.5% 14.7%CLASS III 628 208 2,885 331 13.9 6.6% 9.2% 18.5% 2.4% 8.5%TOTAL 1.053 356 8.740 338 24.6 2.6% 35 15.1f%li 0.8% 11.2%

W.SUMATR CLASS ! 2 0 5 50 61.3CLASS III 27 1 45 50 33.0 -1.4% -0.5% 29.0% 0.8% 29.6%TOTAL 29 1 5 50 34.5 -0.2% | .% 31.7% 0.% 30.8%

N.SUMATRA CLASS I 26 5 347 200 66.5CLASS 11 433 94 2,650 218 28.1 0.1% 1.5%j 21.3% 1.4% 19.4%CLASS III 915 125 1,948 137 15.6 3.0% 6.7%1 17.5%! 3.6%; 10.1%TOTAL 1.374 224 4.946 163 22.0 2.4% 4.8%! 21.3% 2.3% 15.8%

PERUMKA CLASSI 1,606 637 54,268 396 85.2 12.0%1 7.6% 33.8% -4.0% 24.4%CLASS 11 6,206 2,247 90,515 362 40.3 7.6%1 9.2% 26.3%! 1.5%1 15.7%CLASS III 20,258 7,413 109,340 366 14.7 5.1%! 8.6% 17.1%1 3.3% 7.9%SUBTOTAL 28,070 10,297 254,1231 367 24.7 6.0%1 8.7% 22.9%! 2.5% 13.2%LOCAL MAINLINE 21,840 857 9,253 39 10.8 10.6%! 9.4% 16.7%! -1.1% 6.7%LOCAL BRANCHLIN 563 22 274! 39 12.6 1.1% 1.3% 11.9%! 0.2% 10.4%JABOTABEK 65,646 2,245 18,461 34 8.2 28.2% 29.00% 30.4%| 0.6%/ 1.0%0/SUBTOTAL 88,050 3,124 27,988 35 9.0 21.9% 21.2%! 24.6%| -0.6% 2.8% xTOTAL 1_16__1 13.421 282i1 116 21.0 16.7% 19 2A3. -4.9% 11.0% b

-61- Annex 3.2Table 3


PERUMKA FREIGHT TRAFFIC 1994 & 1988189

1994 AV ANNUAL GROWTH 1988189-1994SYSTEM TRAFFIC TONS | TON-KM REVENU AV.HAUL AV. REV TONS TON-KM REVENU AV.HAUL AV. REV

(10A6) | (106) (Rpxl0A6) (Km) (Rp/TKm) (%) (') (%) (%) (%)

JAVA PETROLEUM FUELS 1.468 184.634 13,964 126 75.6 7 4% 6.9% 25.6% -0.5% 17.5%FERTILIZER 0.996 208.140 5,888 209 28.3 -5 0% -8 4% -3.0% -3.7% 5.9%CEMENT 0.909 237.954 6,942 262 29 2 11.5% 11.9% 20.5% 0.4% 7.7%COAL 0.994 160 011 5,043 161 31 5 7.0% 7.0% 12.8% 0.0% 5 4%STEEL 0.160 124.675 2,977 781 23.9 6.5% 7.3% 17.8% 0.8% 9 7%SAND 0.004 1.216 40 290 32.9 -64.6% -63.9% -58 0% 1 9% 16.4%SUBTOTAL 4.530 916.630 34,853 202 38.0 0.5% -1.6% 10.5% -2.0% 12.2%CONTAINERS 0.641 122.670 7,272 191 59.3 1OTHER 1.190 315.935 9,378 265 29.7 12.2% 5.8% 16 1% -5.6% 9.7%PARCELS 0.053 23.899 3,720 451 155.7 -4.5% | 9.9%SUBTOTAL 1.884 462.504 20,370 245 44.0 20.6% 14.2% 24.7% -7.1% 18.7%TOTAL 6.415 1.379.134 55.224 1 400 4.5% 2.3% 14.6% -2.3% l%

S.SUMATRA PETROLEUM 0.294 64.411 4,804 219 74.6 9.5% 9.1% 27.7% -0.3%' 17.0%FERTILISER 0.013 3.798 93 283 24.4 -0.6% -1.8% -3.4% -1.2% -1.7%CEMENT 0.416 80.275 2,579 193 32.1 -2.7% -3.4% 4 9%1 -0.7% 8.5%COAL 5.106 1,865.321 63,615 365 34.1 19.4% 21.2% 24 3% 1.5% 2.6%SUBTOTAL 5.829 2,013.805 71,091 345 35.3 16.0% 18.7% 23.2% 2.3% 3.8%OTHER 0.356 113.969 3,588 320 31.5 10.6% 9.4% 1900%| -1 1% 8.7%PARCELS 0.021 12.078 679 570 56.2 5.8% 14 9%SUBTOTAL 0.377 126.047 4,266 334 33.8 10.3% 11.7% 18.3% -0.2% 10.3%TOTAL 6.207 2.139.852 7535 345 352 15.6% 12% 22.9% 2% 4-%

W.SUMATRA CEMENT 1.907 32.203 2,901 17 90.1 15.7% 14.2% 20.0% -1.3%Y 5 1%COAL 0.922 144.046 6,070 156 42 1 2.8% 2.7% 11.5%| -0 1% 8.5%PALM OIL 0.014 0.966 351 67 363.4SUBTOTAL 2.844 177.215 9,322 62 52.6 10.5% 4.4% 14.7% -5.5% 9.8%OTHER 0.007 0.167 28 25 165.3 41.2% -1.5% 68.0% -30.2% 70.6%PARCELSSUBTOTAL 0.007 0.167 28 25 165.3 38.3% -1.5% 61.3% -30.2% 70.6%TOTAL 2.851 177.382 9.349 2 52.7 10.6% 4.4% 14.8% -L55% iI9%

N.SUMATRA PETROLEUM 0.140 22.010 1,654 158 75.2 -3.5% -4.6% 12.5% -1.1% 17.9%FERTILISER 0.035 7.786 492 222 I 63.1 -12.2% -10.2% 10.6% 2.4% 23.1O%PLANTATION PRODUC 0.500o 91 938 4,174 184 45.4 -1.6% -1 3% 5.5% 0.3% 6.9%SUBTOTAL 0.674 121.734 6,320 181 51.9 -2.8% -2.6% 7.5% 0.1% 10.4%OTHER 0.216 34.804 1,111 161 31.9 49.9% 47.6% 24.7% -1 5% -15.5%PARCELS 0.005 0.8801 123 162 139.7 9.1% 23.7%SUBTOTAL 0.221 35.684 1,234 162 34.6 47.1% 48.4%1 24.6% -1.5% -14.2%TOTAL 28 157.418 z4 176| 4j 2.1% .%n 9 4%/ 4'% 7.7%

PERUMKA PETROLEUM FUELS 1.902 271.055 20,422 143 75.3 6.6% 6.1/o 24.6% -0.5% 17.5%FERTILIZER 1.044 219.724 6,472 210 29.5 -5.2%1 -8.4% -2.3% -3.4% 6.7%CEMENT 3.232 350.432 12,422 108 35.4 10.9% 7.2% 15.9% -3.4% 8.1%COAL 7.022 2,169.378 74,727 309 344 14.2% 17.8% 21.9% 3.2% 3.5%STEEL 0 160 124.675 2,977 781 23.9 6.5% 7.3% 17.8% 0.8% 9.7%SAND 0.004 1.216 40 290 32.9 -64.6% -63.9% -58.0% 1.9% 16.4%PLANTATION PRODUC 0.514 92.904 4,525 181 48.7 -1.0% -1 1%/ 7.2% 0 0% 8.4%SUBTOTAL 13.878 3,229.384 121,586 233 37.6 7.4%1 8.7% 17.1% 1.2% 7.7%CONTAINERS 0.641 122.670 7,272 191 59.3OTHER 1.769 464.875 14,105 263 30.3 141% 80% 174% -5.3% 8.7%PARCELS 0.080 36.857 4,522 463 122.7 -1.6% 10.9%SUBTOTAL 2.490 624.402 25,899 251 41.5 20.0% 14.6% 23.5% -4.5% 7.8%

TOTA ~~~~16.368 3.853.786| 147.484 235 au 8 9 % I- 18.1%1 0 4%1 I m

-62- Annex 3.2Table 4


PERUMKA REVENUES BY REGION AND TRAFFIC 1994

1994System Traffic Revenue a) Revenue Shares

By Region PerumkaJAVA PASSENGER 268,375 82.9% 62.5%

FREIGHT 55,224 17.1% 12.9%

SUB-TOTAL 323,599 100.0% 75.3%

S.SUMATRA PASSENGER 8,740 10.4% 2.0%FREIGHT 75,357 89.6% 17.5%SUB-TOTAL 84,097 100.0% 19.6%

W.SUMATRA PASSENGER 50 0.5% 0.0%FREIGHT 9,349 99.5% 2.2%

SUB-TOTAL 9,399 100.0% 2.2%

N.SUMATRA PASSENGER 4,946 39.6% 1.2%FREIGHT 7,554 60.4% 1.8%SUB-TOTAL 12,500 100.0% 2.9%

PERUMKA PASSENGER 282,111 65.7% 65.7%

FREIGHT 147,484 34.3% 34.3%

TOTAL 429,595 100.0% 100.0%a) does not include govemment compensation and other revenues

-63-Annex 3.3Pagze of 5


PERFORMANCE AND COMPARATIVE STATISTICS

I1. Perumka's combined operations on Java and South Sumatra have been compared to the railwaysof Thailand, Sri Lanka, Austria, and Belgium for 1994. Perumnka's lines in West and North Sumatrawere excluded from the comparisons shown in Figures I through 8 of this aniex and are summarizedbelow:

* Perumka's physical utilization of assets is good measured against its four comparators. Forexample, its Java and South Sumatra railways have the highest traffic density in terms ofcombined annual passenger arid ton kilometers per kilometer of main track (Figure I ).

* However, Perumka's finanlcial return on assets is poor because its US dollar revenues perpassenger kilometer and per ton kilometer are low. For example, its annual revenue perkilometer of main track is much lower than that of railways in Austria arid Belgium, which are 5and 3 times higher, respectively (Figure 2). The low revenue is a significant indicator ofPerumka's unprofitability since most of the track investment and repair cost consists of materialthat is at least as expensive in Indonesia as it is in Austria and Belgium.

- Perumka's utilization in terms of passenger kilometers and ton kilometers per locomotive andmultiple unit power car is lower than Thailand's but better than the others (Figure 3).

- Perumka's annual revenue per locomotive and power car is lower thani Thailanid's, but Austria'sand Belgium's are 3.1 and 1.5 times higher, respectively (Figure 4). As with track, Perumka'slow revenue is a significant indicator of unprofitability since most of the investment and repaircost of locomotives and multiple unit power cars consists of material that is at least as expensivein Indonesia as it is in Austria and Belgium.

* Another utilization measure is annual passenger kilometers per coach aiid passenger rail car.Perumka's physical utilization is 88% of Thailand's but better than the others (Figure 5).Perumka's financial return from these assets (not shown) is less than for Thailand, Austria, andBelgium due to its lower revenue per passenger kilometer.

* Perumka's physical wagon utilization in terms of annual ton kilometers per wagon comparesfavorably to the others (Figure 6). But its financial returm is lower than for Thailand, Austria,and Belgium due to lower revenue per ton kilometer.

* Perumka's combined annual passenger and ton kilometers per employee is lower than that ofThailand but significantly better than that of the other three comparators (Figure 7).

* The ratio of revenue yield per passenger kilometer to revenue yield per ton kilometer can be arelative indicator of cross subsidy, especially where freight rates have beeii raised to offset lowpassenger fares while attempting to achieve profitability overall. This appears to be the case forPerumka and Thailand (Figure 8), which indicates a significant cross subsidy.

2. The overall conclusion of the analysis is that Perumka ranks relatively higih in terms of physicalmeasures of asset utilization. But mainly due to depressed passenger fares, the revenue earnings of itsphysical assets are inadequate and significantly lower than the railways in Thailand, Austria, andBelgium.

- b S - Annex 3.3Page 2 of 5

Figure 1 - Passenger KM + Ton KM per Route KM, millions4.5

4-

3.5-

3

2.5-

2 -

1.5 -

1

0.5

0

Figure 2 - US$ Revenue per Route KM, thousands240

220-

200-

180-

160-

140-

120-

100

80

60-

40-

20-

0

EMIndonesia EMThailand Sri Lanka Austria Belgium

-65- Annex 3.3Page. 3 of 5

Figure 3 - Passenger KM + Ton KM per Locomotive & Power Car, millions40

35 -

30 -

25 -

20-

15-

10

5

Figure 4 - US$ Revenue per Locomotive & Power Car, millions1.1

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

MMIndonesia Thailand Sri Lanka E1 Austria rz7iBelgium

-66- Annex 3.3Page 4 of.5

Figure 5 - Passenger KM per Coach, Power & Trailer Car, millionsa

7

6

Figure 6 - Ton KM per Wagon, thousands450

40-

30-

25-

10

0

MM ndn Figurh6ilTnd KM pr W agon t hustand

450nsaTaln KaSiLna1\zAuti /z egu

-67- Annex 3.3Page 5. of 5

Figure 7 - Passenger KM + Ton KM per Employee, thousands700

600 -

500 _

400 -

300-

200-

100

0D

Figure 8 - Ratio of Passenger Revenue Yield to Freight Revenue Yield1.4

1.3-

1.2 -1

1.1

0.9

0.8

0.7-

0.6-

0.5

0.4-

0.3-

0.2-

0.1 A

0

MMIndonesia EMThailand 2 Sri Lanka E=Austria Belgium


CORE INVESTMENT PLAN FOR INDONESIAN STATE RAILWAYSRepelita VI - 1994/95 through 19 8/99 (Ruplahs, millions)

Total Repellta VI 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999Total Local Foreign Local Forelgn Local Foreign Local Foreign Local Foreign Local Foreign

I. Jabotabek ServicesA. New lines

Phase VIII 140,275 7,136 133,139 33,993 2,692 49,573 2,500 49,573 1,944Phase IX 346,265 17,975 328,290 17,995 4,725 103,425 6,500 103,435 6,750 103,435Duri-Tangerang ST 158,144 43,144 115,000 658 15,538 23,000 15,000 46,000 11,948 46,000Depok-Bogor DT 71,935 25,366 46,569 5,762 6,074 2,200 40,495 17,404Subtotal 716,619 93,621 622,998 6,420 58,061 25,155 216,494 41,404 199,008 20,642 149,435

B. Track rehabilitationC. Bridge rehabilitationD. Signal modernization 2,663 363 2,300 304 1,150 59 1,150E. New locomotivesF. Rehabilitate locomotives

vG. New rolling stock 541,946 129,105 412,841 j { 82,568 15,000 82,568 54,105 82,568 35,000 82,568 25,000 82,568H. Rehabilitate rolling stock 86,656 0 86,656 ' 28,007 29,325 29,325I. Other (studies, misc.)J. Total 1,347,884 223,089 1,124,796 6,724 169,786 40,214 329,537 95509 310,901 55,642 232,003 25,000 82,568II. Other ServicesA. New lines

Cikampek-Cirebon DT 50,716 2,634 48,082 2,701 2,161 634 21,610 2,000 21,610Citayam-Cibinong ST 0 0 0Subtotal 50,716 2,634 48,082 2,701 2,161 < 634 21,610 2,000 21,610

B. Track rehabilitationTrack maint. equipment 21,388 0 21,388 21,388200 switches 22,976 50 22,926 7,642 25 15,284 25290 switches 7 7 0 3 4Cigading-Serpong 197,134 112,288 84,846 4,921 82,204 21,200 2,643 32,167 31,000 23,000Subtotal 241,505 112,345 129,161 4,921 103,592 21,200 10,285 32,192 15,284 31,028 23,004

C. Bridge rehabilitationNorth Line Java I 46,585 3,495 43,090 8,514 8,644 2,250 8,644 80 8,644 1,165 8,644 NNorth Une Java II 39,305 3,000 36,305 3,890 1,500 10,805 1,500 21,610 oj -Java-Sumatra bridges 84,213 53,868 30,345 9,268 17,850 24,400 6,248 20,200 6,248 XSubtotal 170,103 60,363 109,740 8,S14 8,644 11,518 30,384 25,980 25,697 22,865 36,502

Source: Mission and Perumka estimates.


CORE INVESTMENT PLAN FOR INDONESIAN STATE RAILWAYSRepelita VI - 1994 /95 throu h 1998/99 (Rupiahs millions)

Total Repelita VI 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999Total Local Foreign Local Foreign Local Foreign Local Foreign Local Foreign Local ForeignD. Signal modernization

Cirebon-Kroya-Yogya 207,775 858 206,917 69,008 858 69,008 68,901Bekasi-Bandung 144,798 4,675 140,123 28,025 2,000 56,049 2,675 56,049Tasikmalaya-Kroya 162,170 0 162,170 32,433 64,868 64,868Pekalongan-Semarang 56,486 10,206 46,280 6,062 23,140 2,000 23,140 2,144Subtotal 571,228 15,739 555,489 69,008 6,920 152,606 4,000 212,958 4,819 120,917

E. New locomotives12 locos 47,050 5,745 41,305 5,745 6,056 35,24915 locos 61,585 7,900 53,685 7,900 7,405 23,140 23,140Subtotal 108,634 13,645 94,990 5,745 6,056 7,900 42,654 23,140 23,140

F. Rehabilitate locomotives25 Krupp BB301 65,400 3,000 62,4yu 12,480 1,500 24,960 1,500 24,9606 Henschel BB303 13,484 3,500 9,934 ' 1,500 4,992 2,000 4,99215 Henschel BB303 44,928 0 44,928 14,976 14,976 14.976Tract mtrs & generators 4,839 605 4,235 605 833 3,402Spare parts 6,660 941 5,718 941 5,718Subtotal 135,311 8,046 127,265 1,546 833 21,600 3,000 44,928 3,500 44,928 14,976G. New rolling stock80 coal wagons 31,865 5,623 26,242 1,400 3,937 4,223 11,153 11,15160 bolsterless bogies 25,183 3,200 21,983 3,200 4,397 8,793 8,793Subtotal 57,048 8,823 48,225 4,600 8,334 4,223 11,153 19,U4 8,793

H. Rehabilitate rolling stock 0 0 01. Railway Efficiency ProJect 265,622 123,613 142,009 15,938 13,442 45,871 53,826 61,804 74,741J. Other (studies, misc.)

TAP -41 tech assistance 6,484 1,000 5,484 1,550 1,000 3,934High speed study 4,685 200 4,485 805 150 1,840 50 1,840Bandung metro study 3,821 0 3,821 764 1,528 1,528Subtotal 14,990 1,200 13,790 2,315 1,000 6,267 150 3,368 50 1,840

J. Total 1,615,158 346,407 1,268,751 16,812 198,652 41,243 255,909 66,798 365,610 111,881 300,751 109,673 147,829Total Investment, plan 2,963,042 569,496 2,393,546 23,536 368,438 81,457 585,446 162,307 676,511 167,523 532,754 134,673 230,397 DPercent 100% 19% 81% ______ m

Source: Mission and Perumka estimates.

-72- Aninex 3.5

I;e pt.' of 7

Govcrnnment of IndonesiaMinistry of ComTunI]icationIs

INDO NESIA


GOALS AND P'OLICIES FOR THE DEVELOPl\iENT

Rcised Concept

Baclkground

1. The broad goals and policies for the future development of Indonesia's transport sectorand, within this the railway transport subsector, are set out in the Outlines of State Policy (Garis-Garis Besar Haluan Negara or GBHN) adopted by the Peoples' Consultative Assembly (MPR) inMarch 1993. This important document, which provides the foundadionis and framework for theSecond Long-Term (Twenty-Five Year) Development Plan (PJP-I1) and the Sixth Five-YearDevelopment Plan (Repelita VI), highlights the critical importance of forging a reliable, efficient,safe, orderly and well integrated national transport system with the capacity and coverage tosupport sustained rapid economic growth and industrialization, to promote the strengthening ofnational unity through the more equitable distribution of national development benefits, and toaccelerate the development of Indonesia's more remote regions. It also emplhasizes the need forconsistency between policies for the development of the national transport system and those forother key sectors and areas, including land-use and spatial planning, protection of theenvironment, and energy conservation and djv¢;sification.

2. The Repelita VI plan, covering the -iiod 1994/95 - 1998/99, attaches high priority tocompleting the integrated modernization of the- transport sector legal and regulatory framework.This process commenced in the late 1980s and culminated in 1992 in the passage of four newlaws to govern road traffic and transport, railways, shipping and civil aviation. It also focuseson improving transport sector productivity, on stimulating increased participation by the privatesector and cooperatives in the provision of transport services, on extending and consolidating thesectoral deregulation and debureaucratization initiatives introduced under Repelitas IV and V,and on strearmlining the organization and management of government agencies and publicenterprises with transport sector responsibilities. Particular importance is placed on developingintermodal transport, both through improved transshipment facilities and through a moreappropriate regulatory framework, and on meeting the enormous human resource developmentchallenges posed by the need to satisfy rapidly growing and evolving transport demands whileadopting new and more complex technologies and integrating into increasingly sophisticatedglobal transport systems.

3. Within this sectoral context, the Government attaches very high priority to consolidatingand continuing initiatives to improve the performance and expand the capacity of railwaytransport. The initial steps taken under Repelita V included the conversion of the State Railway

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Agency (Perjan Kereta Api or PJKA) into a more autonomous anid comnimerciallv-oriented PublicRailways Corporationi (Perulim Kereta Api or Perumnka), an(d thc eniactmicnt ot' a niew Law onRailwlays (UU13/1992). This f'irst phiase in the corporatization and cormmerc ialization of therailways hias beenl successt'ul in arresting and revcrsing the steadly deceriorationi in ttheiroperational and financial condition. Passenger and frehg-tt traffic grew rap idly during theRepelita V period despite increasing conmpetition from other modes, the quality of' rail transportservices and die public image of the railways improved signitficaintly, and Perunika recordedsignificant improvements in its productivity and financial results.

4. These steps form part of an ongoing process that will be*ccelerated under Repelita VI,including through the issue of the implementing regulations for UU13/1992, the furtherstrengthening of railway management capacities and svstems, the modernization of railwayoperating regulationis and practices, and the expanded involvemenit of the privaite sector. Thespecific issues to be addressed as part of this second phase of the corporatization andcoinmercialization of the subsector will include:

- roles of governmcnit and state and private enterprises;

- corporate structure, organization and staffing;

* tariff-setting and compensation for non-commercial services;

* operating procedures and regulations;

* corporate planning, budgeting and financing

* private sector participation;

* human resource development;

* environment, health and occupati6nal safety.

5. The policies that will guide the initiatives in these areas during the Repelita VI period areoutlined below following a brief overview 'of the basic legal framework for the railwaysubsector.

The Basic Legal Framework

6. UU13/1992 requires that railway transport be developed and managed in the publicinterest as an integral part of the national transport system, with the goal of serving thosepassenger and freight traffics (in terms of type, volume, and distance) for which rail is superiorto other modes when account is taken of factors such energy-use efficiency, land-use efficiency,safety, and pollution. It also outlines the respective roles to be played by government and stateand private enterprises in realizing this goal.

7. Overall responsibility for guiding and planning the development (pembinaan) of railwaytransportation is vested in government, while responsibility for implementation (pelaksanaan) isvested in a management entity (badan penyelenggara), whichi is required to be a state-ownedenterprise (badan usaha milik negara) established in accordance with applicable laws andregulations. Other parties are permitted to participate in railway-related activities throughcooperation (kerjasama) with the management entity.

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S. IJUU13/1992 stipulates that responsibility tr railway infrastructure (prasarIna) provisionand malintenanice is vested in government but nmay be delegated to tlie ianagement cntity.Responsibility for the operational managmcincti ot railway iliastiliuctureC tor [tle provisior andmiainitenance ot rollingstock and otlier flacilities, and foI ithe operation of ralillway serviceS isassigned to the railway management entity. Provision is mlade for private cnter-prises tocooperate with the mainalgerie nt cntity in raillway-relaited activities.

Rolcs of Goveriiinent and State and Private Enterl2rises

9. During the IRepelita VI period, UU13/1992 will be elborated through GovernmlientRegulations (Peraturan Penieriintalh) and / or Decrees of the Minister responsible for railways(NMinister of Commilullicatiolls). These implemiienitinig regulationis will def-ine in greater detail therespective roles of government, the management entity, and othler eni[erprises. Thle principlesthat will guide their preparation are summarized below.

10. GnxoverniuLmt: UU13/1992 assigns to government several important and distinct roles inrelation to the railways, namely those of policy-makler, owner of the railway management entity,owner of the railway infrastructure, and regulator.

11. Within this context, the core role of government is to establish a policy and legalframework that permits and promotes the effective and efficient development and management ofLhe railway subsector while adequately safeguarding the public interest. This encompassescreating an environment which enables railway transport to play its proper role within anefficient national transport system, which fosters and facilitates the participation of public andprivate enterprises in the subsector, and which establishes appropriate standards and safeguardswith respect to safety, public liability, and control of market power. Primary authority in theseareas is vested in the Ministry of Communicat;ions (MOC).

12. The government, as owner of the ~ihway infrastructure, has delegated technical andadministrative responsibility for provision andmaintenance to the management entity (Perumka),but retains the responsibility for the associated costs and the authority for reviewing andapproving proposals for its extension and upgrading. Government also retains the power toimpose charges for the use of infrastructure (track charges), and will give consideration to thephased introduction of such charges in concert with the phased implementation of its adoptedpolicy with respect to road user charges. Authority for coordinating the implementation ofpolicies in these areas is vested in MOC.

13. The government, as owner of the management entity, has the power to appoint itsdirectors. It also has the power to guide and approve its corporate plans, annual budgets andwork plans and supervise their implementation, to appoint its financial auditors, and moregenerally to review proposed major investment and other decisions from the standpoint of theircommercial soundness. Primary authority in this area is vested in the Ministry of Finance andimplemented through the Board of Supervisors (Dewan Pengawas).

14. The government's role as subsector regulator is concerned with ensuring that thedevelopment and management of the subsector is undertaken in full conformity with the adoptedpolicy and legal framework. Broad in scope and complex in nature, it encompasses four main

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aspects: (a) monitoring of compliance with appliciable safeLy. environmiental1, health and olierteclhnical standards and tile investigation of incidients relatilg to suchi aspects: (h) ensuri'n thaltthe management entity; as railway service operator does not abuse its nmrkct powcr by clhartlingexcessive tarifls; (c) reviewving, proposals f'or tihe provisioni of railway services at tarist'S lowerthian associated costs and arranging for the management entity to he appropriately compensatedtor suclh public ser-vice obli,gations; and (d) enlsuring that tthe participation ot' privaztce eniterprisesin thle subsector is secured in a manner that promotes efficiec1zy and enables the benet'its of suchefficiency to be shared with the management entity and hence with tlie users of railway services.Primary authority in tlhese is vested in NOC.

15. As authority ftor these dift'erenit roles must be executed through dit't'erent channels,effective inter-agency communication and coordination wvill be crucial to ensure overallconsistency in the subsector's management. Careful consideration will be given to thlis informulating the implementing regulations for UU13/1992.

16. Managemenint Entity: The state corporation' designated as railway managernent entitywill be empowered and required to operate at arm's length from government as an autonomous,entrepreneurial, profit-oriented transport corporation (s).

17. The three main revenue generating businesses of the corporation(s) will be the operationof railway transport services, the management of railway infrastructure on behalf of government,and the management of its property assets in a manner that maximizes their net worth to thecorporation while satisfying the needs of efficient train operation. It will be expected to employbest commercial and technical practices in conducting these businesses so as to provide qualityservices efficiently and economically in line with users' needs (a Quality, Cost, Delivery or QCDfocus).

18. Other Enterprises: The participation.f other enterprises in railway-related businesses ispermitted and encouraged as a means of ¢iproving efficiency through the mobilization ofmanagerial and technical skills not available within the management entity and as a means ofaccelerating development through the mobilization of private financial resources. The types ofbusiness open for participation by othe; enterprises comprise the operation of rail transportservices, the provision and / or maintenance of infrastructure, the provision of supportingservices, and development of property owned by the management entity.

Corporate Structure. Organization and Staffing

19. The government is cornmitted to ensuring that the future structure, internal organizationand staffing of the railway management entity will enable it to respond efficiently and effectivelyto increasing demands and evolving requirements in the many different transport markets itserves in the face of strengthening competition from other modes.

20. Proposals are now being prepared for the early conversion of Perumnka into a state-owvned limited liability company (Persero). It is envisaged that the internal organization of the

All references to "the railway management entity" should be interpreted as rcferring to one or morc stated-owned corporations that are empowered to manage railway infrastructurc and services.

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Perserso company woitldd be structured on geographic a1nd strateg,'ic busine.ss linzes, anid thlatceratain of tihese buisinless units ivould later be trantsformtied into subsidiary Persero comlpanlies. -

1in evaluatinlg possibleL' organization mtiodlels, the government w,ill gXive p)articular cittetntionr to theLopporturnutiees the; create for expanded antid iniore effrctive pri cite pairtici.pait)ztio ini tlhe s.ubsector.

21. The mana-ement entity wvill also be empowered anid requir-edl to streamline its lower-level

organization structure so as to eliminate unnecessary managenient layers and facilitate improved

communication and coordination between units. It will also be expect to align its staffing to its

busilness needs, and will be required to prepare a programi for increasing labior productivity to

appropriate "best practice" levels and for recruiting suftcicieht appropriaitely trained and

experieniced personinel to maintain and operate its increasingly sophisticated technical and

manageinent systenis satisfactorily. Accordingly, the management entity will be granted

increased autonoiny with respect to personnel remuneration policy. Thie government recognizes

that these changes will lilkely necessitate some reduction in the size of the work-force, and will

bear responsibility for compensatin, personnel whose positions are so af'fected.

Tariff Settino, and Compensationi for Non-Commercial Services

22. The management entity will in general be empowered to set the tariffs and rates for

railway services at levels that will enable it to cover the associated financial costs of provision,

including track charges if and when levied, and to earn a reasonable return on assets employed.

The calculation of the capital charge component of the computed service costs will take account,

inter alia, of whether the assets employed are suitable for use in operating other types of services

and of whether further investment in such assets is envisaged.

23. The government as regulator may require the management entity to operate services at

tariffs less than those required for normal comrmercial operation. Such decisions will be taken on

a case by case basis, with the governmentpThyiding direct compensation to the management

entity through an appropriately structured p-lb iC service obligation financing mechanism. For

these purposes, management entity will be reqiuired to provide government with such market and

cost data as it may reasonably require for the purposes of evaluating the case for fixing tariffs at

less than commercial levels, of computing the appropriate level of compensation, and of

monitoring the actual costs and benefits of such subsidies.

Coraorate Planning. Budgeting and Financing24. The increased commercial autonomy to be given to the management entity will be

balanced by a requirement that it become more accountable to government, as owner, for its

performance.

Consideration is being given to the creation of separate subsidiarics for Java and Sumatra, and to thereplacement of the current "functional" top-level management structure with one designed on strategicbusiness units. Thus, for example, a Java subsidiary could have directors responsible inter-urban passengerservices, urban passenger services, freight services, property, and operations support. Key support businessunits, such as infrastructure maintenance and rollingstock provision, could be reorganized as profit orinvestment centers and later considered as candidates for corporatization.

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25. Medium-termii corporate planning and annual budgeting and work planning will be thle keymecthaniiisnms throughl which increazsed accountability is achieved. Corporate pl.lns and budgetswill be required to elaeonopaiss activities related to infrastructure provision aind mainlten-c aswcll as to the operation of railway services, an1d henice to incorporate associated financialtransfers fronm government.

26. The Supervisory Board will require evidence that all investmnent proposals have beensubject to appropriate financial analyses and are consistent with the commercial objectives of themanagement entity, and that operating plans provide for ettficient and productive use ofrollinnstock and other resources to provide services that will yid a satisfactory retuin whcnaccount is takien of public service compensationi payments. Approved corporate plans andbudgets will be viewed as being contracts betweeni the management enitity and the government asits owner.

27. The government for its part will commit to providing financing in line with the levelsindicated in approved corporate plans and stipulated in annual budgets. In addition to bearing thecapital costs of infrastructure provision and the recurrent costs of infrastructure maintenance andpublic service obligation compensation, government will in the medium term also continue tofinance part of the needed investments in rollingstock and other management entity facilities.Once the public service obligation financing mechanism is in place, such financing will be in theform of loans rather than increased equity participation.

Operating Regulations and Procedures

28. The government will ensure that the regulations and operating procedures for the railwaysubsector are amended in line with current best practices. The changes made will be designed toenable the benefits of investments in new teihnology to be maximized, the life-cycle costs oftrack and other assets to be minimized u-gi timely maintenance, and to ensure that thedevelopment and operation of railways is co6T6cted with due regard to protecting the safety andhealth of the public and railway personnel and to containing adverse environmental and socialimpacts.

Strategy for Expanded Private Sector Participation

29. The government will foster increased opportunities for the private sector to participate inthe railway subsector, including in the operation of train services, in the conduct of supportingbusinesses, and in the development of the property assets of the management entity. Suchparticipation will implemented through cooperation agreements with the management entity andwill be solicited in a manner consistent with the intent of UU13/1992 and other applicableregulations. It will be based on an equitable sharing of risks and rewards and will have dueregard to safeguarding the public interest. The mechanisms for securing such participation,which will be designed to promote competition where possible, will be elaborated in GovernmentRegulations and other supporting implementing regulations as required by UU13/1992.

30. In the longer term, the government may consider involving the private enterprises in therailway subsector in ways that extend beyond those provided for in UU13/1992. The planned

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corporatization of the subsector and shiort ternm initiatives to involve private participation in itsdevelopmenit will designed so as not to preclude desirable longeir-cerni changes.

Hiumiian Resource Development

3 1. The government recognizes that upgrading the skills of' railway managenient andtechnical personnel is a prerequisite for the creationi of an eff-icienit modc-rn railway capable ofhandling rapid growth in demand through the effective utilization of increasingly sophisticatedtechniologies and systenis. Accordingly, high priority will be giveni to establishing a hunianresource developmenit masterplan for the railway subsector andl to,+naking availlble the resourcesrequired for the initial phases of its implemilentationi.

EInvironmenit, Healthi and (Occuipational Safeta

32. The government is concerned to ensure that the developimienit and operation of railways ismanaged in a manner that minimizes adverse impacts on the environnient and tile community andthat protects the health and safety of those employed in the railway subsector. Accordingly, thegovernmnet will require that the maanagement entity establish a competent unit to-guide andoversee the implementation of appropriate construction and operating standards and practices.

Implementation of the Policy Framework

33. A comprehensive and carefully integrated plan for the implementation of these policiesduring the remainder of the Repelita VI period is being developed by the concerned agenciesunder the overall coordination of the Minister of Communications. Particular attention will begiven to the phasing of the component activities having careful regard both to the times requiredto conduct the necessary planning and analysis-and, where needed, to amend existing regulations,and to the need to proceed with due sensitivity and care in making changes that will havesignificant social impacts.

[NI)NDONNESIA1,A11 WA\' I*:HicfII:NC\' P IZOJ iCC'!1

("Y'l 1()N I' T()(.1A N-1li'() I� FORAIL,\VWAY S i.( ) J1()IZ l..Z 1 I J( I I

No. Action Agencies Dates Comments

A. Establish Policy Implementation ArranigementsA.1 Establish Inter-Agency Coordinating Committee Minister of 3/96 Decree issued 3/29/96. IACC comprises

(IACC) and Working Group. Communications Asmenko Economy and AsmenkoInfrasiructure and Services (Ekkuwasbang),DG Budget and DG State EnterpriseDevelopment (MOF). Deputy forInfrastructure (Bappenas), SecretaryGeneral and DG Land Transport (MOC),andJ Perumka Chiief Director

A.2 Establish Restructurfiig Task f-orce (RTF) Minister of 8/96 NU vwill prepare proposals to tACC on the-. Communications / restructurinig of Perumka, on its conversion

^ .¢j; [. IACC to Persero status, ani on other related-matters

A.3 Appoint expert advisor to IACC IACC 11/96

B. Compensation for Public Service Obligations (PSO)

B.1 Confirm intent to introduce PSO compensation Ekkuwasbang. 2/96 Intent confirmed at Wrap-Up) I'Meting ofmechanism. MOC. MOF, February 1906 Railway fv155sioir

Bappenas _

B.2 Propose and agree PSO compensation budget Perumka / MOC, 8/96 PSO compensation should not subsidizemethodology MOF, Bappenas inefficiency or services tihat are not Justifled

on economiiic groun(is.B.3 Propose and negotiate draft budget for 97/98 Perurnka / MOC, 10/96

MOFE Bappenas _

BA. Commence implementation of PSO MOF. Bappenas 1/97compensation budget

B.5 Review 97/98 PSO budget outcome Perumnka 6/98 Revievj will contribute to preparation of la9U/99 budget. Report to be sUblitllitted to

B.6 Propose and negotiate PSO budget for 98/99 Perumika / MOC, 10/97 Slhould reflect lessons learned fruot 9/ 98 MOF. Bappenas experience. __|.-

a>w


C. Financing of Perumka Investinents

C. 1 Perumka to finance all new investments in rolling Ekkuwasbang, From 4/96 Intent conifirmied at Wrap-Up Meeting ofstock and olher assets from internal sources or MOF. Bappenas, February 1996 Railway Missionborrowings. MOC

C 2 GOI to on-lend foreign loan / grant furnds Ekkuwasbang, From 41/9G Interit confirnmed at Wrap-Up Meeting ofallocated for Perumka investments. MOF, Bappenas, February 1996 Railway MissionI MOC

D. Compensation for InfrastrUcture Improvenment, Maintetiancc, and Operation (IIMO) CostsD 1 Confirm intent to introduIce IIMO compensationi Ekkuwasbang, 2/96 Intient confirined at Wrap-Up Meelinig of

MOC, MOF, February 1996 Railvway MilssionBappenas

D.2 Develop and agree IIMO compensation budget Perumka / MOC, 8/96 IIMO compensation to based on efficientmethodology MOF, Bappenas costs for maintainiing infrastruclure toappropriate standards

D.3 Propose and negotiate IIMO budget for 97/98 Perumka / MOC, 10/96$ --IVIMOF, Bappenas |

0A4 Commence implementation of IIMO -- MOF, Bappenas 4/97compensation budget

D.5 Review 97/98 IIMO budget outcome Perumka 6/98 Review will contribute to preparation of98/99 budget. Report to be submiitted toGOI.

D.6 Propose and negotiate IIMO budget for 98/99 Peumka / MOC, 10/97 Should reflect lessons learned fiorn 97/98MOF, Bappenas experience.

E. Track Access Charges

E.1 Confirm intent to introduce track access charges Ekkuwasbang MOC, 2/96 Intenit confirmed at Wrap-Up tvleeling of| MOF, Bappenns _ February 199G Railway MissiornE.2 Propose and agree methodology for computinrg Perumka / MOC, 12/96 Account to be taken ot intrastructureand paying track access charges MOF, Bappenas charges levied for road / other modesE.3 Agree arrangements and rates for initial period of MOC, MOF, 2/97

implementation BappenasEA4 Implement track access charges MOC, MOF 4/97E.5 Review 97/98 track access charges Perumka 6/97 Report to be subimitted to GOI. lbimplementation

0E.6 Propose and agree refinefnenis to track access Perumka / MOC, 10/97 Sliould reflect lessons learned froi 97/98charges for 98/99 MOF, Bappenas experience.


F. Corporate Restructuring of Perumka

F.1 Confirm intent to restructure Perumka on 'line-of- Ekkuwasbang, 2/96 Intent confirmed at Wrap-Up Meeting ofbusiness' principles, to transform to Persero MOC, MOF, February 1996 Railway Missionstatus, and to amend appropriately existing drafts Bappenasof Government Regulations for implementing Law13/92 on Railways

F.2 Prepare revised drafts of Government Regulations RTF 2/97 Current drafts need revision to reflect fullyfor Law 13/92 GOI's railway sector and deregulation

policies. IACC to provide guidance andreview.

F.3 Implement the financial separation of the RTF 2/97 Requires consultation vwitfl the JakartaJabotabek and Java inter-urban rail systems Urban Mass Transit Project Team IACC to

review proposals.F.4 Prepare detailed proposals for transforming RTF 10/97 Includes. design of nevw corporate structure,

Perumka into a Persero enterprise structured on restructuring of balance sheet andline-of-business principles, and for streamlining revaluation of assets, restructuring of workthe GOI:corporate interface force and development of compensation

! . ~~~~~~~~~policies-. designi of Improved manage-nieiitprocesses, modernization of outdatedoperating regulations IACC to provideguidance and review proposals

F.5 Transform Perumka into a Persero (limited liability) MOF, MOC 1/98 Envisaged that the railwvay will operate as acompany. Persero from January 1, 98.

G. Private Participation

G.1 Formulate guidelines and procedures for private RTF 10/97 RTF to prepare proposals for review byparticipation, including through franchising, IACC.concessions, outsourcing, and otherarrangements

G.2 Identify and evaluate commercial opportunities for RTF 9/97 RTF to prepare proposals for review byrailway development in Java and Sumatra and for IACC. 'exploiting Perumka's urban land assets X _

G.3 Evaluate unsolicited private proposals for RTF As RTF evaluations to be subject to review by wL_____cooperation with Perumka submitted IACC 0

,-,. L

wa a

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INDONESIAIRAILWVAY EFFICIENCY PROJECT

PUBLIC/COVIMUNITY SERVICE, OBLIGlATIONS

I1. The term Public Service Obligation (PSO) or Communitly Service Obligation (CSO)is used to describe services or products that enterprises are requilcd by governments to

provide at tarifts or prices that arc not commercially attractive.' SucIh obligations arecommon in the transport sector, withi the losses on requircd noy-commercial services (e.g.rural rail and late night bus services) havinig traditionally becel oltset by internal cross-subsidy from other highly profitable services (c.g. trunk routc and peak periodl services). Insome instances, such as Indonesia's railways, governimients havc provided indirect subsidiesfor such scrviccs through the injection of capital or the under-recovery of intrastructure orother costs.

2. The concept of governmeits providing explicit direct compensation lor imposedpublic service obligations is not new, although their systematic application is compar.ativelyrecent. During the 1930s, for example, the New South WValcs State Railways developedsome rural branch lines in fringe agricultural districts in return for negotiated subsidies fromthe State Treasury designed to compensate for the associated operating losses. Very similararrangements were applied much earlier in India, with private railways receivingcompensation (through guaranteed dividends) up until their take-over in early 1900s.

3. tviore recently, PSOs achieved widespread prominence in the EEC, when it wasdecided that subsidies to nationalized steel and other industries should be madc explicit. Oneof the best known examples of their recent app!ication in the transport sector was in the UKfollowing the Beeching Report on British Railways (BR). In the latc 1960s, the Governmentelected to provide explicit compensation t,i.'in return for its continuing to operate a rangeof uneconomic services that were consi&red politically necessary. Compensation wasprovided by central government on a ser'vice-by-servicc basis, in part because certainsuburban services also received compensation from local governments through regionalPassenger Transport Executives.

4. The BR PSO compensation payments were computed using what becamc known asthe "Cooper Brothers Formula", which was essentially a marginal costing approach. Asmore services became eligible for PSO compensation, however, BR was forced to cover itsresidual fixed infrastructure costs from a declining number of "commercial" services. Thisnecessitated amending the approach, with each section of infrastructure being assigned to anominal "owner" who was responsible for funding the fixed costs and who reccived PSOcompensation towards these. The costing procedures wcre reasonably straight-forward, andtheir implementation was subject to vcry careful audit.

PSO is used herc as a gencric tcrmn for all forms or explicit direct compcnsation 1rom govcrnments to enterprisesin respect of the obligatory provision of non-cconomic scrvices that would not othenvise be ofTcred by acommercially-oricntcd cntity.

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5. Thc usc of Pso compensation f'or rail andf for other intrastrctftird sctors ncrcascdconsiderably f'roml tie micl- I 9SOs in line with increased pressures f'or thec corporatization anidprivatization1 of' pLiblic services. In Australia, it has becn applicd extensively in the railwayscctor, i1cludinL. tor ALustralian Nationazl (passen-cr services). I'or New,, South1 Wales StateRailvways (fre igiht services, in:cludlhgm an experi mental -bounty'' I;Or :,\tcrnial road costs savecdby having freight moved by rail), and Queensland Rail (to compensate f'or the removal of'theprcvious cross-subsidy from coal export trat'tfic to passenger services). I'SO comrpcelsaltionl isalso providcc for rural services in scctors such as posts and telccommILunicaltionls.

6. In New Zealand, local authorities have provided explicit compensation tor non-commercial suLburbani services in Auckland and Wellington. Tly.sc havc bcen continIued ascomiliercial contraLcts following the recent privatization of New Zealanid Rail. in Malaysia,PSO compcnsation is providcd for some ot' now-corporatized KTN'l's passengcr serviccs.Likewise Indonesia has for several years becn providing PSOs tor conitracted pioneer air andshipping services, some of which are provided by private operators.

7. The approachcs used to compute PSO compensation payments vary considerably. Insome instances, amounts are calculated on the basis of defined marginal or avcragc costprinciples, in others block grants are provided to enable providers to achieve a satisfactory"bottom line", and in some payments are determined by the competitive selectioni of serviccproviders through a tendering process in which compensation amount is the bidding variable.

8. The provision of PSO compensation has two important advantages over moretraditional forms of indirect and often hidden subsidy. Firstly, it enables governments toweigh the perceived benefits of subsidized services against the financial costs it must bear inorder to maintain them. Secondly, it opens the door to justified non-commercial publicservices being provided more efficiently by the private sector.

i.._ .

f-

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IN )ON NES I AIRAILWN'AY EFFICIENCY PROE.ICT

ON TIM1;E 1"IrEV'ENTI'VE MAINTENANCF, SYST1E1M WVITII U XNIT ClX0ANGI.

1. \A dicsel locomotive consists of a fraimc and somc twenty live inajor comiiponicilts,inclUdin'g the main diesel enginc, the traiction oencrator or alternator, the coinpressor, thetraction motors, and many others. All componients have ditffierit timie intervals betweensucccssivc overhauls. At present, Peruiiiika loconiotive com)polineits are overhaauled whenlocomliotives are overhiauled (a senmi " overhauil Occurs cver,\) two years and a gencraloverlhaul occurs every four years).

2. Since components actually have expected service lives corresponding to time periodsbetween successivc overhauls of one to eight years, many componients are not beingoverhauled at thcir most cost effective interval. Some componcnts get their overhiaul tooearly, whichi results in inefricient use of time and spare parts. Some componients gct theiroverhaul too late, which may result in an in-service failure and a more costly overhaul interms of time and spare parts. The components that get their overhaul late have a"higherprobability of failure in service. Thus, their reliability is low. These components also runthe risk of being damaged beyond repair, which results in a costly replacement program.

3. If each and every component on a locomotive is overhauled when it is duc, an ONTIME PREVENTIVE MAINTENANCE SYSTEM is in place. When a component is thusoverhauled on time, in-service failures should decrease, and the reliability of eachcomponent should increase. With the increase in reliability of components, the reliability ofthe locomotive itself should increase. This:jn turn will improve the reliability of service ofthe railway. Moreover, the availability of the locomotive for use will incrcasc, raising itsproductivity.

4. Under the current maintenance system on Perumka, when a component is ready to beoverhauled, it is taken off the locomotive. Once off the locomotive, the component is takenapart, parts changed, serviced, reassefnbled, and tested. After overhaul the component isreinstalled on the locomotive, and only then is the locomotive ready to pull trains. Theprocess of overhauling a component takes a considerable length of time. During all that timethe locomotive is out of service and does not perform any service. It is not earning anymoney.

5. To shorten the out of service time of the locomotive, the UNIT EXCHANGEMAINTENANCE SYSTEM is also introduced. In essence, thc unit exchange systemprovides a ready-for-use component beforc a similar component is removed from alocomotive for overhaul. The exchange unit can be installed immcdiatcly when thecomponent to be overhauled is taken off the locomotive. This process shortens thelocomotive maintenance down-time and increases its availability for service.

6. During a locomotive general overhaul at the worklshop, all components arc taken offand overhauled. On Perumka at present (without a unit exchange maintenance system) thegeneral overhaul lasts about 70 days. With a unit exchange maintenancc systcm, thc

-37-

P';, 2 ol 4

o%crhanlLI tinic can bc rceLdLCClt to betwecen 24 ndl 3 () JIIS s, b.1scd on (XC1utul cxpc penen. onlother rail wvays.

7. Withl a proper uLtil exch ccma ntcnance systcIll It Call bc c unxprat 'Cdly cxpecdthalt the availabilitv ot thc ('Crunika dicscl clectric IocomIotivc llcet Oil Java1 couLld bincreased from about 70 0/, to S5 %/0. \Vith the curreint flect of 142 loconmotives. tilis wouldmeain an increasc of about 2 I ready-to-rull locomotives, without incrcasin,g the size ol thefleet. This Would result in a saving in the ownership cost and in the fixed maiililnaclilc costper locomotive owned of 2! locomotlives.

S. Apart from the benctfis of the Unlit exchangc mnaint&zince systenm, the on-tilmepreventiLve maintenance svstem11 also can lead to miore serviceable locomotives in the lleetduLe to less downtime tor ml;aintenianice. And with the anticipated im1provemllent in locomotivereliability, the currenit daily routine checks ol locomotives which are necessitated by the highcomponent failure rates can be eliminatod, resulting in more cost savings. It is estinmated thatPerumk-a's total beneFit from the Oni-time Preventivc Maintenance System vitht UnitExchangc should be the equivalent of adding 25 to 30 locomotives to the fleet, an increaseequal to one-fifth of the fAect.

9. Under the proposed project, unit exchange of most components would be done in theSemarang or Bandung locomotive depots or running shops. Exchange of diesel engines andmain generators would be done in Yogyakarta Workshop. General overhauls, which occurevery 6 to 8 years, also would be accomplished in the Yogyakarta Workshop.

I0. After components are taken off locomotives in the Semarang and Bandung depots,they would be sent to Yogyakarta Workshop for overhaul. The workshop would repair andoverhaul the components, maintaining a pool of ready-to-use components for dispatch to thedepot when needed in exchange for defectiec components removed from locomotives. Byconcentrating the repair of componerir- n Yogvakarta Workshop, the quality ofworkmanship should improve.

11. Yogyakarta Workshop manages the unit exchange pools, but both depots and theworkshop must know at any time where the status of various components (including those onlocomotives) and when they are due for overhaul. To monitor all 3,600 components in afleet of 142 locomotives, a master locomotive maintenance schedule must be prepared andkept up to date. This is best done by a computer system to provide adequate monitoring,with a data base that includes serial numbers and names of components, their location andstatus, and their overhaul date. With a computer in the workshop linked on line and in realtime with similar computers in each depot, the system should provide all necessaryinformation for managing the unit exchange maintenance system. Each depot would knowwhat component on which locomotive must be exchanged when. The workshop also wouldknow the stock levels of components in the depots and be able to anticipate the depots' needsas well as its own for repaired components. With the information system, YogyakartaWorkshop also can monitor the overhaul workload of its various shops and plan theavailability of parts and materials along with the shop loading.

-83-.-\nnexl 4.1I'lPat'e 3 ot 4

12. \Althou-1h tilhc 01 aiT'le PreVenti vc N1intenance liste with lnit Exchalin ir

fairly straigZhtforvard. there are nany aspects to the svstcim thait halie to he a1deqluatelyaddressed c it its to be SLIccCSSulIov timpleCInientdCi. Perulinkai \ill rcCed to estaLblishi anImplementation leamn that consists ol knowiccldeable. pro-;icti[ rrrla:ars and en1emincers.vnitlh [IhC ,Liil sUpport ot ulppcr niznagcrnent. Experiecc hais sho%%Il thI,t ti1c ImpIemICen1clitationTeami will needc to proper-lv riianage all of the foIlowirln aspects, or- the new mintenanccsystciini v not be successtul

a) How ma livy coin lpo(enlits arc require(I to SL pport unit exchalin.oc" Iix[crpcicc hasshown that 3 to 5 %/ of thIe nulmber of e ach coriiponieit in tie cuit ire lleet is rcqUired.For inistince, wtit a flcet 1 20 Gcnic ;il Elettric gciicratort, theCre is a1 riCCed t;Or aboLut 4serviccabie generators in the Ulit exchlamr,e pool. TIe exacNt [percentagw ,e wvoLild becalculaLted from data for Mean 'Mice 3ceween FIailures, iMea1 ilime lo Repair, andother Ibactors relating to thc workshop.

b) Hows n yian depots arc required? Perumkia now has about 25 dcpots on Java, whichis far too many for a unit exchange maintenance systemn. 'ossibly twenty depots willhave to bc closed.

c) What equipment, facilitics, and manpower arc required by the depots toperformii the exchange of components properly, safely, and in the shortestpossiblc time?

d) What equipment, facilities, and manpowvcr are required bv YogyakartaWorkshop? The work-shop will need some additional machinery and rearrangementto improve work tlow. Cleaning, de-fueling, and dce-oiling facilities, located outsidethe shop buildinas, will be needed to help keep the shops clean. A dirty shop is notconducive to the performance of accuirate and high quality work, such as is requiredfor engine, governor, and bearing airs.

e) WVhat will be required to insure proper quality? The depots and the workshopwill need an operational Quality Control Organization to help ensure that overhauledcomponents are in an as-new condition when they leave the workshop for the depotand that the components installed by the depot are aligned properly.

f) What is needed to secure adequate supply to the vorklshop of piarts andmaterials for component repair and replacenient? An leficient parts supply(including purchase authorization and funding) must be put in place to insure theavailability of parts when needed by the workshop and to ensure the prudent usc ofspare parts' funds.

g) What training is needed? Training must be provided for maintcnancc craftsmen,quality control inspectors, supervisors, and managers to make things happcn in theproper manner. Especially important is that the training of craftsmen must involvchands-on training based on step-by-step shop procedures wvhich are now almost non-existent.

-89-Annex 4.1

1'Pl,,ce 4 ot 4

hl) VNWIIhat sIiouIdI be t he. role ot htc locoriotive cii>i, IiiecC (d rive c r)? ic, \ nov\ are p;`rtot' the illaintc e ila ort_ alizaztion, bLIL thlC ConsiltalTlt hlaLs recominienddc that thev bemo'.cd to the Operating Department. In thC ILiturc, loconiotiVC C ye ,iles should notbc rccaruliteld fromll Lthe a1reaCdL sCarrce nlulimiber ol'maliltennce technicialls.

i) Iloow sheliili tic nma inten.anec cft'eort be or,a inized 'I'hc Temaintenlance org,anizationmust be chail-ed so that tile depots and Yogyakarta \W'orkshop are ulidcer a sinlcdivision or department hcad. l'hc prescit orglanization puts dCp0ots and( the vworkshopin two separate directorates, so that coordination and interchange of' mcthodls andskills are not easily achieved. This arrangerment wnould not be workable tiIndicr a1 unitcxchangc system of locomotive maintenance.

INDONESIARAIl AY lF:lICIENC'Y l'ROJ l:CT

CONSULTANCY SERVICES

List or T A implementing Esl. Cost va Stalling a/ Service Sul;im u l')Ucurliruzrt 1 xpCCICLContract/Activity Agencies (USSO0O) I'oreign L.ocal Dur;rtion lP epar;niuon bl Shirt

--- (Sla f lhl10110)---- (h1i nll) T1'0R Slior lit Li:l DeA. Policy Reform

IACC Advisor IACC/R'I'I' Nov-96RTF Consultants IACC/I'II'

Corporate Restructuring M; y-97Corporate l'lanning Jil-97Legal I)cc-96Fixed Asset lRevaluation Ma;ry-97Manpower and Staffing Oct-97MIS Oct-97P'rivate Plarticipation .. - Aug-97

I'SO Compensation and TrackAccess Charges Advisor NI;iy-96

B. Implementation Support & Training

Jakarta Bandung Corridor IlPMU/J-Il I'IU J 1-97

Track Upgrading and Maintenance I'hvlU/J-l I'IU Oc -97

Locomotive Maintenance PhIU/Loco l'IU Oct-97

C. Institutional Development I'MlU/I.D. IPIUCapacity Planining Sc -97'I'rack and Bridge MIS Scp-97Signal and Train Sep-9 7

Operating Regulations ,Jakarta-Bandung Corridor Sclp-97Study

a/ indicative for cost estimatinig purpose onlybl For monitoring purposes

Annex 4.3, Page 1INDONESIA

RAILWAY EFFICIENCY PROJECTPROJECT COST

Rupiahs, millionsPhysical contingencies on Base Cost: 10% ] Prices as of January 1,1996Exchange rate (Jan. 1, 96), Rup_ahs_US$: 2,331 | Loan effective: January 1997 _

I - GOl financed infrastructure (other 1997 1998 1999 Items to be linanced bY Perunmka Local Foreign Total Local Foreign Total Local Foreign Total

A. Policy reform # 397 1,588 1,985 397 1,588 1,985 397 1,588 1.985B. Jakarta-Bandung Corridor# 1. New second main track and stabons 2,501 2,331 4,832 4,501 3,497 7,998 6,993 2,331 9,324# 2. New rail (combined with 100 track km) 0 3,497 3,497 0 1,070 1,070 0 0 0# 3. Sleepers and fasteners 0 2,331 2,331 0 2,590 2,590 0 0 0# 4. New tumouts 0 6,993 6,993 0 4,800 4,800 0 0 0# 5. Alternative route via Bogor 3,497 240 3,737 1,774 11 1,785 0 0 0# 6. New signaling, ongoing contract 0 93,240 93,240 0 37,296 37,296 0 0 0# 7. Cikampek stadon remodeling 0 0 0 0 0 0 0 0 0# 8. New signaling, Cikampek-Padalarang 0 0 0 1,399 9,324 10,723 1,399 13,986 15,385

9. Land acquisition and resettlement 699 0 699 1,007 0 1,007 0 0 0# 10. Miscellaneous 0 699 699 699 2,098 2,797 1,632 2,331 3,963

11. Project managementand tralning 244 974 1,218 244 974 1,218 244 974 1,218 .Total, Jakarta-Bandung Corddor 6,941 s g0,305s117,246 9,624 61,659 71,283 10,267 19,622 29,889

C. Track maintenance system# 1. New and relay mil program 0 2,331 2,331 2,331 10,490 12,821 4,662 10,490 15,152# 2. Main track restoration 0 117 117 233 932 1,166 1,864 932 2,797# 3. Rail reclamation yard and rail train 466 2.098 2,564 513 3,263 3,776 239 241 480# 4. Project management and training 234 935 1,168 234 935 1,168 234 935 1,168

Total, track maintenanco system 700 5,480 6,180 3,311 15,620 18,930 6.999 12,598 19.596D. LocomoUve unit exchango

1. Yogyakarta Workshop 35 466 501 699 1,166 1,8§5 466 2,331 2,7972. Bandung and Semarang Depots 117 0 117 117 1,166 1,282 117 1,166 1,2823. Environmental protection works 233 117 350 233 699 932 233 233 4664. Unit exchange component parts 0 0 0 0 2,331 2,331 0 4,662 4,6625. Project management and training 191 763 954 191 763 954 191 763 954Total, locomoUve unit exchange system 575 1,346 1,921 1,240 6,124 7,364 1,007 9,155 10,161

El. Institutional development 175 702 877 175 702 877 175 702 877E2. Institutional development * 195 779 974 195 779 974 195 779 974Base cost 8,983 120,200 129,184 14,941, 86,473 101,414 19,040 44,444 63,484

Physical conUngencies (except Une 2F) 898 2,696 3,594 1,494 4,918 6,412 1,904 4,444 6,348Price contingencies (except Une 2F)

% peryear 8.7 8.7 8.7 8.7 8.7 8.7% compounded 13.4 13.4 23.3 23.3 34.0 34.0Amount 1,324 3,974 5,298 3,829 12,604 16,433 7,121 16,622 23,743 u

Total project cost 11,206 126,870 138,076 20,265 103,995 124,259 28,065 65,510_ _93575 -

Annex 4.3, Page 2INDONESIARAILWAY EFFICIENCY PROJECT

PROJECT COSTRupiahs, millions

- GOI financed infrastructure (other 2000 2001 TotalItems to be financed by Perumka Local Forei n Total Local Foreign Total Local Foreign Total

A. Poficy reform # 397 1,588 1,985 397 1,588 1,985 1,985 7,941 9,926B. Jakarta-Bandung Corridor# 1. New second main track and statons 4,662 2,331 6,993 8,349 1,083 9,433 27,007 11,573 38,580# 2. New rail (combined with 100 track km) 0 0 0 0 0 0 0 4,567 4,567# 3. Sleepers and fasteners 0 816 816 0 1 1 0 5,737 5,737# 4. New tumouts 0 3,277 3,277 0 1 1 0 15,071 15,071# 5. Alternatve route via Bogor 0 0 0 0 0 0 5,271 251 5,522# 6. New signaling, ongoing contract 0 0 0 0 0 0 0 130,536 130,536# 7. Cikampek stabon remodeling 1,632 4,196 5,828 201 81 282 1,833 4,277 6,110# 8. New signaling, Cikampek-Padalarang 1,399 16,317 17,716 1,363 10,406 11,769 5,559 50,033 55,592

9. Land acquisition and resettlement 0 0 0 0 0 0 1,706 0 1,706# 10. Miscellaneous 932 2,331 3,263 1,659 880 2,538 4,922 8,339 13,26111. ProJect management and training 244 974 1,218 244 974 1,218 1,218 4,872 6,090 £Total, Jakarta-Bandung Corridor 8,868 _"F0.U42, 39,111 11,816 13,427 25,243 47,516 235,256 282,772

C. Track maintenance system# 1. New and relay rail program 4,662 10,490 15,152 9,121 11,091 20,212 20,776 44,890 65,666# 2. Main track restoration 1,825 731 2,556 2,125 431 2,556 6,047 3,143 9,191# 3. Rail reclamation yard and rail train 0 0 0 0 0 0 1,218 5,603 6,821# 4. ProJect management and training 234 935 1,168 234 935 1,168 1,168 4,673 5,841Total, track maintenance system 6,720 12,155 18,875 11,480 12,457 23,936 29,210 58,309 87,519D. Loco motive unit exchange

1. Yogyakarta Workshop 466 3,497 3,963 319 1,118 1,43k 1,985 8,577 10,5622. Bandung and Semarang Depots 117 1,166 1,282 21 601 622 487 4,097 4,5843. Environmental protection works 117 233 350 159 179 338 974 1,462 2,4364. Unit exchange component parts 0 4,662 4,662 0 916 916 0 12,571 12,5715. Project management and training 191 763 954 191 763 954 954 3,816 4,769Total, locomotive unit exchange system 890 10,320 11,210 689 3,577 4,266 4,401 30,522 34,923El. Institutional development 175 702 877 175 702 877 877 3,508 4,385

E2. Institutional development # 195 779 974 195 779 974 974 3,897 4,872Base cost 17,246 55,787 73,033 24,752 , 32,530 57,282 84,962 339,434 424,39GPhysical contingendes (except Une 2F) 1,725 5,579 7,303 2,475 3,253 5,728 8,496 20,890 29,386Price contingendes (except Line 2F)

% per year 8.7 8.7 8.7 8.7% compounded 45.6 45.6 58.3 58.3 39.4 35.7 36.8Amount 8,651 27,983 36,633 15,874 20,861 36,735 36,799 82,044 118,843 ruTotal proiect cost 27,621 89,348 116,969 43.101 56,644 99,745 130 257 442,3_7 572,62 4 24

INDONESIA Annex 4.3, Page 3RAILWAY EFFICIENCY PROJECT

PROJECT COSTUS Dollars, thousands

- GOI financed infrastructure (other 1997 1998 1999items to be fnanced by Perumka Local Foreign Total Local Foreign Total Local Foreign TotalA. Policy reform # 170 681 852 170 681 852 170 681 852B. Jakarta-Bandung Corridor#1. New second main track and stabons 1,073 1,000 2,073 1,931 1,500 3,431 3,000 1,000 4,000# 2. New rail (combined with 100 track km) 0 1,500 1,500 0 459 459 0 0 0#3. Sleepers andfasteners 0 1,000 1,000 0 1,111 1,111 0 0 0# 4. New tumouts 0 3,000 3,000 0 2,059 2.059 0 0 0#5. Alternatve route via Bogor 1,500 103 1,603 761 5 766 0 0 0# 6. New signaling, ongoing contract 0 40,000 40,000 0 16,000 16,000 0 0 0# 7. Cikampek station remodeling 0 0 0 0 0 0 0 0 0# B. New signaling, Cikampek-Padalarang 0 0 0 600 4,000 4,600 600 6,000 6,6009. Land acquisition and resettlement 300 0 300 432 0 432 0 0 0# 10. Miscellaneous 0 300 300 300 900 1,200 700 1,000 1,70011. Project management and training 105 418 523 105 418 523 105 418 523 wTotal, Jakarta-Bandung Corridor 2.978 47t321. 50,299 4,129 26,452 30,580 4,405 8,418 12,823C. Track maintenance system# 1. New and relay rail program 0 1,000 1,000 1,000 4,500 5,500 2,000 4,500 6,500# 2. Main track restoration 0 50 50 100 400 500 800 400 1,200# 3. Rail reclamation yard and rail traln 200 900 1,100 220 1,400 1,620 103 103 206# 4. Project management and tralning 100 401 501 100 401 501 100 401 501Total, track maintenance system 300 2,351 2,651 1,420 6,701 8,121 3,003 5,404 8,407D. Loco motive unit exchange

1. Yogyakarta Workshop 15 200 215 300 500 8ao 200 1,000 1,2002. Bandung and Semarang Depots 50 0 50 50 500 550 50 500 5503. Environmental protection works 100 50 150 100 300 400 100 100 2004. Unit exchange component parts 0 0 0 0 1,000 1,000 0 2,000 2,0005. Project management and training 82 327 409 82 327 409 82 327 409Total, locomotive unit exchange system 247 577 824 532 2,627 3,159 432 3.927 4,359El. Institutional development 75 301 376 75 301 376 75 301 376E2. Institutional development # 84 334 418 84 334 418 84 334 418 vBase cost 3,854 51,566 55,420 6,410, 37,097 43,507 8,168 19,0GG 27,234 z.Physical contingendes (except Une 2F) 385 1,157 1,542 641 2,110 2,751 817 1,907 2,723Price condngencies (except Une 2F)% peryear 2.4 2.4 2.4 2.4 2.4 2.4% compounded 3.6 3.6 6.1 6.1 8.6 8.6Amount 153 458 611 430 1,416 1,846 773 1,804 2,576 oTotal project cost 4,392 53,181 57,572 7,481 40,622 48,103 9,758 22,777 32,534

INDONESIA Annex 4.3, Page 4INDONESIA

RAILWAY EFFICIENCY PROJECTPROJECT COST

US Dollars, thousands

- GOI financed infrastructure (other 2000 2001 Total BankItems to be financed by Perumka Local Foreian Total Local foreign Total Local Foreign Total FinanceA. Policy reform # 170 681 852 170 681 852 852 3,407 4,258 3,407B. Jakarta-Bandung Corridor# 1. New second main track and stations 2,000 1,000 3,000 3,582 465 4,047 11,586 4,965 16,551 4,965# 2. Nev rail (combined vwth 100 track km) 0 0 0 0 0 0 0 1,959 1,959 1,959# 3. Sleepers and fasteners 0 350 350 0 0 0 0 2,461 2,461 2,461# 4. New tumouts 0 1,406 1,406 0 0 0 0 6,465 6,465 6,465# 5. Alternatve route via Bogor 0 0 0 0 0 0 2,261 108 2,369 108# 6. New signaling, ongoing contract 0 0 0 0 0 0 0 56,000 56,000#7. Cikampek stabon remodeling 700 1,800 2,500 86 35 121 786 1,835 2,621 1,835# 8. New signaling, Cikampek-Padalarang 600 7,000 7,600 585 4,464 5,049 2,385 21,464 23,849 21,4649. Land acquisition and resettlement 0 0 0 0 0 0 732 0 732# 10. Miscellaneous 400 1,000 1,400 712 377 1,089 2,112 3,577 5,689 3,5771 1. Project management and training 105 418 523 105 418 522 523 2,090 2,613 2,090 s

Total, Jakarta-Bandung Corridor 3,805 !:2,974 16,779 5,069 5,760 10,829 20,384 100,925 121,309 44,925C. Track maintenance system -# 1. New and relay rail program 2,000 4,500 6,500 3,913 4,758 8,671 8,913 19,258 28,171 19,258# 2. Main track restoration 783 314 1,096 912 185 1,097 2,594 1,348 3,943 1.348# 3. Rail reclamation yard and rail train 0 0 0 0 0 0 523 2,403 2,926 2,403# 4. Project management and training 100 401 501 100 401 501 501 2,005 2,506 2,005

Total, track maintenance system 2,883 5,215 8,098 4,925 5,344 10,269 12,531 25,015 37,546 25,015D. Locomotivc unit exchange1. Yogyakarta Workshop 200 1,500 1,700 137 479 6-46 852 3,679 4,531 3,6792. Bandung and Semarang Depots 50 500 550 9 258 267 209 1,758 1,967 1,7583. En%ironmental protectionworks 50 100 150 68 77 145 418 627 1,045 6274. Unit exchange component parts 0 2,000 2,000 0 393 393 0 5,393 5,393 5,3935. Project management and training 82 327 409 82 327 409 409 1,637 2,046 1,637Total, locomotve unit exchange system 382 4,427 4,809 296 1,534 1,830 1,888 13,094 14,982 13,094El. InstituUonal development 75 301 376 75 301 376 37G 1,505 1,881 1,505 ?

E2. Insttutional development 1 84 334 418 84 334 418 418 1,672 2,090 1 672Base cost 7,399 23,933 31,331 10,619g 13,955 24,574 36,449 145,617 182,066 89,617Physical contngendes (except Une 2F) 740 . 2,393 3,133 1,062 1,396 2,457 3,645 8,962 12,607 8,962Price contingencies (except Une 2F)

% peryear 2.4 2.4 2.4 2.4%compounded 11.2 13.9 13.9 9.7 8.9 9.1 8.9Amount 912 2,948 3,860 1,624 2,134 3,757 3,891 8,760 12,650 8,760Total project cost 9,050 29,274 38,324 13,304 17,484 30,789 43,984 163,338 207,323 107.338

Annex 4.4INDONESIA

RAILWAY EFFICIENCY PROJECTFINANCING PLAN

Rupiahs, millionsFinanced by 1997 1998 1999 2000 2001 Total %

Local costs - GOI financed 9,093 16,650 25,963 25,525 41,172 118,402 21%IBRD TAP41 loan - GOI financed 1,981 2,154 2,341 0 0 6,476 1%IBRD proposed loan - GOI financed 27,880 53,965 47,205 70,135 47,497 246,682 43%Australia loan - GOI financed 93,240 37,296 0 0 0 130,536 23%

Subtotal - GOI financed 132,194 110,065 75,509 95,660 88,669 502,097 88%

Localcosts - Perumkafinanced 2,113 3,615 2,101 2,097 1,929 11,855 2%IBRD loan - Perumka financed 3,769 10,580 15,964 19,213 9,146 58,673 10%

Subtotal - Perumka financed 5,882 14,195 18,066 21,310 11,076 70,528 12%

Total 138,076 124,259 93,575 116,969 99,745 572,624 100%Percent 24% 22% 16% 20% 17% 100% n

US Dollars, thousandsFinanced by 1997 1998 1999 2000 2001 Total

Local costs - GOI financed 3,564 6,146 9,027 8,363 12,709 39,809 19%IBRD TAP41 loan - GOI financed 776 795 814 0 0 2,386 1%IBRD proposed loan - GOI financed 10,927 19,922 16,412 22,979 14,661 84,901 41%Australia loan - GOI financed 40,000 16.000 0 0 0 56,000 27%

Subtotal - GOI financed 55,267 42,863 26,253 31,342 27,370 183,095 88%

Local costs - Perumka financed 828 1,335 731 687 596 4,176 2%IBRD loan - Perumka financed 1,477 3,906 5.551 6,295 2,823 20,052 10%

Subtotal - Perumka financed 2,305 5,240 6,281 6,982 3,419 24,227 12%

Total 57,572 48,103 32,534 38,324 30,789 207,323 100% xxPercent 28% 23% 16% 18% 15% 100%

Soufce: Perumka and mission estimates

Annex 4.4

Page 2

INDONESIA


FINANCING PLAN - SUMMARY

(USS million)Source of Financing Local Foreign T otal %

IBRD proposed loan - lent to GOI 85.2 85.2 41

IBRD proposed loan - onlent by GOI to Perunika 19.8 19.8 10

Total IBRD loan 105.0 105.0 51

Loans 3385-ND and 3913-lND (Policy Reform) 2.4 2.4 1

IBRD total 107.4 107.4 52

GOI 39.7 0 39.7 19

Perumka 4.2 0 4.2 2

Government of Australia - lent to GOI 0 56.0 56.0 27

Total 43.9 163.4 207.3 100Note: Due to rounding the above summary financing plan which was agreed atnegotiations differs marginally from the detailed plan shown on the previous page.

oo

4S

-97- Annex 4.5

INDONESIA


ESTIMATED DISBURSEMENT SCHEDULE /a

(US$ Million)Cumulative

Bank FY Semester Semester Cumulative % of Loan1997 1 0 0 0

11 3 3 31998 1 3 6 6

11 8 15 141999 1 13 27 26

11 13 40 382000 1 13 53 50

11 13 65 622001 1 13 78 74

11 13 90 862002 1 9 100 95

11 3 103 982003 1 2 105 100

/.a Based on standard Bankwide profile for railway projects modified from30 to 28 quarters.

-99-Annex 4.6


PROJECT IMPLEMENTATION PLAN AND SCHEDULE

1. Overall responsibility for coordinating and guiding the project's implementation willbe vested in the IACC which has already been established by Ministerial Decree. ThisCommittee will be assisted by the RTF on which Perumka is represented at director level.The project's policy component will be implemented through this structure (Chart onImplementation Arrangements).

1. Technical management of the Jakarta-Bandung Corridor, track upgrading andmaintenance, and locomotive maintenance components, together with the Perumkainstitutional strengthening component will be vested in a Project Management Unitestablished within Perumka (PMUP).

3. Reporting to the Project Management Unit Perumka (PMUP) will be three ProjectImplementation Units (PIUs) staffed full-time by Perumka personnel:

a) PIU for Jakarta-Bandung Corridor improvements and track maintenance system,including related training. Both the Jakarta-Bandung Corridor improvements and thetrack maintenance system would be the responsibility of one PIU in order to plan andcoordinate track construction and rail installation in the Corridor and elsewhere onJava.

b) PIU for Locomotive Unit Exchange Maintenance System, including related training.

c) PIU for Perumka institutional development.

4. Consultants financed by GOI and the Bank would assist the PMUP and the PIUs inimplementing the project, and their appointment would be a condition of Bank approval ofthe associated construction and equipment procurement contracts. Because of the complexityof the interfaces between the various activities and the need for careful scheduling, theconsultants should be assisting the PIUs right from the start. Thus, for the Jakarta-BandungCorridor Development and the Track Upgrading and Maintenance System components, Bankapproval of the contracts for track works, supply and installation of signaling, and supply ofnew rail will be contingent upon the consultants assisting Perumka in the implementation ofthese components having been appointed.

5. The project management and implementation schedule is shown in the following.


IMPLEMENTATION ARRANGEMENTS

Inter-Agency

CoordinatingCommittee

Railway Inter AgencyManagement Working

Advisor - Group

Restructuring ProjectTask ManagementForce Unit

_ __ ___ ______ ____ _____ X ___ _ _____ ___ ______ ________

Corporate Fixed Manpower * Processes Priv. Sector Jakarta-Bandung Locomotive InstitutionalRestructuring Assets Planning/HRD & MS Participation /Track Maintenance Development

Working Group Working Group Working Group Working Group Working Group P PIU l

Note: Preparation of proposals for the PSO and IMO budgets and for the track changes system is treated as a structural responsibility of Perumka's Finance Directorand is not shown in this chart.


Implementation Schedule

1995 1996 T 1997 1998 1999 2ID Task Name Duration Start Finish 02 Q3 Q4 Q1 Q2 03 Q4 0 1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 01 021 BOARD TO EFFECTIVENESS 81.19d 11/12/96 3/17197 __ _

2 1. Board Presentation lh 11/12/96 11/12/96

3 2. Loan Signing 30m 12/10/96 12110/96

4 3. Effectiveness Oh 3/17/97 3/17/97 3/17

5

6 CONSULTANT FOR PMU 652d 5/01/96 11/09/98

7 1. PSO Advisor (TAP41) 230d 5/01/96 3/28/97

8 2. Preparation of bidding documents 196d 11/01/96 8/12197

9 3. Restructuring Advisor 520d 11/01/96 11/09/98 _

10

11 PROJECT MANAGEMENT UNIT 1237d 6/01/95 3/07/00 _

12 1. Resettlement & Land Acquisition 520d 11/01/96 11/09/98

13 2. PIU - Track Works 836d 9/02/96 11/24/99 _ |

14 3. PIU - Signalling 1237d 6/01/95 3/07/00 _

15 4. PIU - Workshop & Depot 591d 9/02196 12116/98

16 5. TA - Institutional Development 330d 6/02/97 9/03/98

17

18 TRACK WORKS 870d 9/02/96 1/11/00

19 1. Management, SPN & Training 870d 9/02196 1/11/00

20 a. PMU prepares TOR & Shortlist 30d 9/02/96 10/11/96

21 b. WB reviews and issues NOL 14d 10/15/96 11/01/96

22 c. Preparation of proposals 30d 11/04/96 12/13/96 I23 d. Evaluate proposals 14d 12116/961 1/14/97 Page1 of|

Page I of 6~ ~ ~ ~~~~~~~1



1995 1996 1997 1998 1999 1 2ID Task Name Duration Start Finish 02 | Q3 I Q4 | Q1 02 | 03 04 Ql 02 Q3 Q4 Q1 Q2 Q3 04 Q| Q2 03 04 01 02

24 e. WB issues approval of award 14d 1/15/97 2/03/97

26 f. GOI (MOC) gives approval 14d 4/01/97 4/18/97

26 g. Hold negotiations & sign contract 14d 4/21/97 5/08/97

27 h. WB reviews and approves contra 7d 5/19/97 5/27/97

28 i. Consultants mobilize 21d 5/28/97 6/24/97

29 j. Implementation period 665d 6/25/97 1/11/00 . -. I30

31 2. New Rail Supply 298d 9/02/96 10/31/97 . _.

32 a. Prepare bidding documents 14d 9/02/96 9/19/96

33 b. WB reviews docs & issues NOL 14d 10/01/96 10/18/96 -

34 c. Bidding period 30d 10/21/96 11/29/96 .o

35 d. Evaluation of bids 21d 12/02/96 1/09/97 .

36 e. WB issues approval of award 7d 1/10/97 1/20/97

37 f. GOI (MOC) approves 14d 1/21/97 2/07/97

38 g. Hold negotiations & sign contract 14d 2124/97 3/13/97

39 h. WB approves contract 7d 3/14/97 3/24/97

40 i. Manufacturing & shipping 160d 3/25/97 10/31/97

41 Delivery #1 60d 3/25/97 6/15/97

42 Delivery #2 100d 6/16/97 10/31/97

43._

44 3. New Turnouts Supply 305d 9/02/96 11/11197


46 b. WB reviews docs & issues NOL 14d 10/01/96 10/18/96.

Page 2 of 6



1995 | 1996 1997 1998 1999 2ID Task Name Duration Start Finish Q2 Q3 Q4 01 02 03 04 0 1 02 Q3 4 Q1 Q2 Q3 Q4 01 Q2 Q3 04 Q1 0247 c. Bidding period 30d 10/21/96 11/29/96

48 d. Evaluation of bids 21d 12/02/96 1/09/97

49 e. WB issues approval of award 6d 1/10/97 1/17/97 .

50 f. GOI (MOC) approves 24d 1/21/97 2/21/97 .


52 h. WB approves contract 7d 3/14/97 3/24/97 - 153 i. Manufacturing & shipping 167d 3/25/97 11/11/97 _

54 Delivery #1 89d 3/25/97 7/24/97

55 Delivery #2 - 78d 7/25197 11/11(97

56

57 4. Concrete Sleeper & Fastener Suppi 8d 11/28/97 w


59 b. WB reviews docs & issues NOL 13d 10/01/96 10/17/96

60 c. Bidding period 30d 10/18/96 11/28/96

61 d. Evaluation of bids 21d 11/29/96 1/08/97

62 e WB issues approval of award 7d 1/09/97 1/17/97



65 h. WB approves contract Bd 5/19197 5/28/97

66 i. Manufacturing & shipping 116d 6/20(97 11/28/97

67 Delivery #1 56d 6/20/97 9/05/97

68 Delivery #2 60d 9/08/97 11/28/97

69 : :

Page 3 of 6ON~



1995 1996 1997 1998 | 1999 2ID Task Name Duration Start Finish 02 Q3 Q4 Q1 Q2 Q3 Q4 Q 2 Q3 Q4 Q1 02 Q3 04 3Q4 1 Q270 5. Track Upgrading & Rail Works 690d 4/14/97 12/02/99 _ _

71 a. Preparation of bidding documents 36d 4/14/97 6/02197

72 b. WB reviews & issues NOL 15d 6/03/97 6/20/97

73 c. Bidding period (3-4 packages) 30d 6/23/97 8/01/97

74 (1) Station (remodel/re-layout) 30d 6/23/97 8/01/97

75 (2) Double track, partial track 30d 6/23/97 8/01/97

76 (3) Rail management program 30d 6/23/97 8/01/97

77 d. Bid evaluation 14d 8/04/97 8/21/97

78 e. WB approves award 14d 8/22/97 9/10/97


80 g. Negotiations & signing of contract 21d 10/13/97 11/10/97 Co


82 i. Design & construction period 438d 3/31/98 12/02/99

83

84 6. Alternative Route Boo-Sl-PDL 304d 9102196 1110197 : _ _

85 a. Preparation of bidding documents 31d 9/02/96 10/14/96

86 b. WB reviews and issues NOL 14d 10/15/96 11/01/96

87 c. Bidding Period 14d 11/04/96 11/21/96

88 (1) Replace Bridge 433 14d 11/04/96 11/21/96

89 (2) Upgrading track, structures 14d 11/04/96 11/21/96

90 d. Evaluate bids 14d 11/22196 12/11/96

91 e. WB approves award 7d 12/12/96 12/20/96


Page 4 of 6


Implementatlon Schedule

1995 1996 1997 1998 1999 2ID Task Name Duration Start FInish Q2 Q3 04 Q1 Q2 Q3 Q4 01 Q2 Q3 Q4 01 Q2 Q3 Q4 01 Q2 Q3 Q4 01 Q293 g. Negotiations & contract signing 20d 4121/97 5/18/97


95 i. Design & construction period 120d 5/28/97 11/10/97

96

97 7. Perumka Force Account Task (Trac 700d 3/03/97 11/04/99 .

98

99 SIGNALLING 1279d 6101/95 5/04100

100 1. Signalling BKS-CKPIPDL-GDBG 795d 6/01/95 6126198

101 2. Signalling BKS-CKP (Modiflcations) 357d 8/01/96 12123197 *102 a. GEC-ALSTHOM Re-design signal 209d 8/01/96 5/30/97

103 b. Perumka re-design sta. track 86d 8/01/96 11/28/96

104 c. Perumka Project construct 88d 4/01/97 7/30/97

105 d. GEC-ALSTHOM Install Modified 148d 6/02/97 12123/97

106 3. Signalling CKP-PDL 800d 4114/97 5/04100

107 4. Perumka Force Acct: Design & Inst 970d 8101/96 4/28/00

108

109 WORKSHOP & DEPOT 627d 9/02196 2/04/99

110 1. Consultants: Mgmt, SPN, TRG 355d 9/02/96 1/20/98

111 2. Civil Works & Installation 223d 5/06/97 3/11/98

112 a. Yogyakarta Workshop 223d 5/06/97 3/11/98

113 b. Bandung Depot 223d 5/06/97 3/11/98

114 c. Semarang Depot 223d 5/06/97 3/11/98

115 3. Machinery Purchase 345.94d 9/02/96 1/07/98

Page 5 of 6



1995 1996 1997 [ 1998 1999 2ID Task Name Duration Start Finish Q2 Q3 Q4 02 03 04 0 Q1 02 03 0 Q4 Q01 Q2 0 03 0 Q4 01 Q2 Q3 Q4 Q-i| Q2116 a. Yogyakarta Workshop 345d 9/02/96 1/06/98

117 ~~b. Bandung Depot 345.94d 9/02/96 1/07/98 ___ ___ __ ___ __ _ ___R-

118 c. Semarang Depot 345.94d 9/02/96 1/07/98

119 4. Unit Exchange Component Supply 409d 5/06197 11/26/98

120 a. Tender Part 1 | 350d 5/06/97 9/04/98 -121 b. Tender Part 2 348d 6/17/97 10/15/98

122 c. Tender Part 3 348d_ 1 7/29/97 11/26/98

123 5. Perumka Force Account Task I 475d 4/14/97 2/04/99 .

124 4 6. Comm-issioning 1 BOd 11/13/98 2/04/99

Task Summary IV,Rolled Up ProgressProject: INDONES!A: Railway Efci Progress Rolled Up TaskIDate- 10/03/96

Milestone Rolled Up Milestone

INI)ONESIA - IRAILWAY EFFICIENCY PROJECTKEY PERFORMANCE INDICATORS

Base Year Full IiipactObjective Indicator Unit 1995 1997 1998 1999 2000 2001 20(2 Year

I. Polic) Reform a. Aclioll Plan ImplemIen1tationII % completed n.a.on schedule

2. Capital Investnieit a. Annual revisioni of infrastiuctiure sulbmIitted c.na.Rationalizattion investmenlt plan on timie

b. Financial evaluation of Pertinikii Rp billion nI; I U 0.5 0.5 0.5 0 5investment projects greatcr thani

3. Operationial a. Loco availability at lBandiung 9% available 80 8 1 83 85 85 85 85Performiiance and Semarang

b. Loco availability at other Java % available 82.3 82.5 83 85 85 85 85depots

c. Java maini track kilometers with lJnit per day 35 35 35 35 35 30 30temporary speed restrictions

d. Java main track kilometers with km 960 940 920 900 880 860 890track quality below standard

c. Total Perunika labor productivity IOOotlI Pcrsoli 520 575 630 675 720 770 825t. Java locomiiotive fleet utilizaltionl t I0)0rtJHAt ) X187 208 245 285 315 32 5 330

b. km per day 350 434 493 524 545 560 570g Java intercity coach fleet tU00 I jiACI) 35 35 37 3'9 46 50 53

utilizaitioln4. Financial a. Self-financing ratio Decimal n,dtio (t 27 0.42 0.39 0.39 0.36 0.40

Performancc b. Debt service coverage Decimal r.tio 3.4 2.8 2.2 2.2 2.0 2.1c. Returni on net assets I/ 6 2 2 3 1 5

5. Jakarta-Lanldunig a. Peak period Capacity available No. trainis ocr 3 3 3 3 3 S 5Corridor Performanice hour

b. Peak period capacity utilized No. trainis per 2.5 2.5 2.5 2.5 2.5 3 4hou r

c. Passenger and freight train delays Minutes perdurinig constructiomt/imiiplemenitation day >

6. Quality ofSerivice a. Java passenger train punctuality % of traiins 35 38 40 42 45 45 45(trains less than 15 minutes late) operated x

b. Java container train punictuality %O of' rai ns 2s '.5 25 3(0 30 35 35 >(triins less than 30 minutes late) operaled

TU = 'I'raffic Unit ALD = Available Loco Day ACI) - Available Coachi Dayti based on revalued assets 1rom 1998

-109-

Annex 4.8


SUPERVISION PLAN La

MissionTiming Main Activities Skills Required SWs

Oct 1996 INITIAL MISSION to review status concerning loan Task manager 5effectiveness conditions, project management, railway Railway specialistpolicy reforms, and procurement Functional specialists

Apr 1997 SUPERVISION covering overall project, including Railway specialist 5performance indicators and status of policy reforms, Resettlement specialistinvestment components, and procurement Financial specialist

Functional specialists

Oct 1997 INTERIM SUPERVISION covering status of policy Railway specialist 4reforms, investment components, and procurement Resettlement specialist


Apr 1998 SUPERVISION covering overall project, including Railway specialist 6performance indicators and status of policy reforms, Resettlement specialistinvestment components, and procurement Financial specialist


Oct 1998 INTERIM SUPERVISION covering status of policy Railway specialist 3reforms. investment components, and procurement Functional specialists

Apr 1999 MID TERM REVIEW Transport economist 7Railway specialistResettlement specialistFinancial specialistFunctional specialists

Jan 2000 INTERIM SUPERVISION covering status of policy Railway specialist 3reforms, investment components, and procurement Functional specialists

Oct 2000 SUPERVISION covering overall project, including Transport economist 4performance indicators and status of policy reforms, Railway engineerinvestment components, and procurement Functional specialists

Jul 2001 INTERIM SUPERVISION covering status of policy Railway specialist 3reforms, investment components, and procurement Functional specialists

Apr 2002 ICR mission to review all aspects of project Transport economist 4implementation and to assess overall project performance Railway specialist

Financial specialistResettlement specialistFunctional specialists

/a Total planned supervision staff weeks in headquarters and field are 25 in the first year, 20 in the second andthird year, and 15 on the last twvo years.

-lll-Annex 5.1

Page 1 of 5

ECONOMIC EVALUATION

A. Jakarta -Bandung Corridor Improvements

1. Definition of the Corridor: This investment component involves the corridor Jakarta-Cikampek-Bandung. The double track railway line between Jakarta-Cikampek serves not only traffic to and fromBandung, but also carries all trains to and from points east of Jakarta, such as traffic to and fromSurabaya-Solo-Yogyakarta-Cirebon. and Surabaya-Semarang-Cirebon. The investment plans for thecorridor infrastructure improvements are based on the total train operations over the Jakarta-Cikampek-Bandung corridor. The economic and financial evaluation considers only those traffic flows to/fromJakarta with Bandung as their origin/destination and the corresponding investments that contribute only tothese traffic flows (See the subsection "Investments" below).

2. Base Case and Project Case: Base case scenario represents the case where a minimum level ofinvestment is made which is necessary to maintain the present situation and provide the train services thatare now being offered. Project case scenario represents the situation in which the proposed project isinitiated in 1997 and fully implemented by 2001.

3. A 20-year period after project completion (year 2001) is taken as the evaluation period, i.e., from2002 to 2021.

4. Tariffs: For the base case, no future tariff increase is assumed for either rail passenger orcontainer services. For the project case, a 10% increase for rail passenger service is assumed for 2002, thefirst year after project completion, but no tariff increase for rail container service is assumed over theevaluation period.

,. Passenger Traffic Forecast: Based on the historical trend and the expected growth inurbanization, economic activities and personal income, a growth rate of 8% per year is assumed for bothexecutive and business passengers.

6. Price elasticity of executive class is assumed to be -0.5. and for business class it is -0.7.

7. When the toil road between Cikampek and Padalarang opens in 2000, it is assumed that 10% ofexecutive passengers and 15% of business passengers will switch to road.

8. For the base case, it is projected that total executive and business passengers would reach 4.0million by 2003, using up the available track capacity. For the project case, track capacity, which isexpandcd by the proposed project, is projected to be reached in 2017, when the total passengers areestimated to approach 11 million.

9. Number of trains per day is estimated on the basis of average daily passenger demand plus an extra10% for peak demand. One type of train composition is with 8 coach/400 seat capacity, another with 12coach/640 seat capacity, both assuming 85% occupancy rate.

10. Container Traffic Forecast: For the rail container transport, no growth is assumed during theproject implementation period. After project implementation, the traffic between Gedebage and TanjungPriok is projected to grow at 4% per year and approach 120.000 TEUs by 2021, averaging 2.8% per yearfrom 1997 to 2021, and the traffic between Cibungur and Tanjung Priok is projected to grow at 1%initially, then at 2% per year, averaging 1.4% per year from 1997 to 2021.

11. When the toll road between Cikampek and Padalarang opens in 2000, it is assumed that 10% of thecontainer traffic will be diverted to road.

12. Number of container trains is estimated by assuming 33 containers (20 foot) per train with 90%occupancy rate (i.e., 30 containers per train).

-112- Annex 5.1

Page 2 of 5

13. For the base case, track capacity is reached at the current level of four trains per day per directionand no additional container trains can be transported from then on. For the project case, the expandedtrack capacity is sufficient to accommodate container traffic over the evaluation period.

14. Investments: Because the Jakarta-Bandung traffic flow accounts for only 35% of the total trafficrunning between Bekasi-Cikampek, 40% of the proposed investments within the Bekasi-Cikampek sectionare allocated to the Jakarta-Bandung traffic flows. A 10% physical contingency allowance is included inthe total investment cost.

15. For the project case, a 10% efficiency improvement is assumed for rolling stock utilization as aresult of reduced turnaround time.

16. Expected life of infrastructure and rolling stock are assumed as follows: 25 years for signaling andtelecommunications, 30 years for track and bridge, 25 years for locomotive, and 40 years for coach andwagon. The investment residual values (infrastructure and rolling stock) are treated as positive revenues atthe end of the evaluation period.

17. Operating Costs: Operating costs are separated into (fixed) infrastructure maintenance costs,which is independent of traffic volume, and (variable) direct operational costs, which is dependent on trafficvolume.

18. Infrastructure maintenance costs are estimated to increase by RpO.9 billion due to tamping and todecrease by RpO.7 billion due to installation of continuously welded rail. Maintenance of modern signalingis estimated to be 1% of investments in the first three years and 3% after that. The maintenance costs inthe current situation, RpO.3 billion, is subtracted.

19. Direct operational costs consist of rolling stock maintenance costs, fuel and lubricants costs, andpersonnel costs. They are estimated as follows:

Unit costs (Rp/train-km) Personnel Fuel MaintenanceI locomotive and 8 coaches 560 1,200 3,6362 locomotives and 12 coaches 900 2,400 6,1291 locomotive container train 280 1,160 7,4792 locomotive container train 280 2,320 11,556

Sources: "The Jakarta-Bandung Railway Corridor," by Railplan, et al, 1995.

20. For the project case, the operating costs are assumed to be 10% lower than those above due toreduced trip time.

21. Economic and Financial Analysis: The economic analysis compares total costs between the basecase and the project case. The estimated total costs include rail and road capital and maintenance costs,rolling stock and vehicle ownership and operating costs, transit time costs, and air pollution and accidentcosts.

22. For the base case where the rail capacity will be reached in 2003, road provision and maintenancecosts and vehicle operating costs are estimated assuming that the additional rail passengers that would havetraveled by rail will have to travel by road due to lack of rail capacity. For the project case, these roadcosts are zero because the passengers will be able to travel by rail.

23. Three types of passenger road vehicles are considered: car, small bus and large bus. Averageoccupancy is assumed as 1.5 for car, 15 for small bus, and 30 for large bus. Modal shares for those whoswitch from rail to road are assumed as 50% for car. 30% for small bus, and 20% for large bus.

-113-Annex 5.1

Page 3 of 5

24. For container transport by road, it is assumed that 50% of the trucks carry one 20 foot container,and the other 50% carry either one 40 foot container or two 20 foot containers. It is further assumed thatcontainers, combining full and empty, on average hold 10 tons per 20 foot container.

25. Unit road provision and maintenance costs and VOCs are assumed as follows:

(Rp/vehicle-km) Vehicle operating costs Road provision and maintenancecosts

Car 244 131Small bus 374 216Large bus 728 284Large truck 977 466

Sources: 'Expansion of Highway Capacity: Warrants for Upgrading," Working Paper, Indonesian Road SectorStudy, the World Bank, 1996, and 'Land Transport Development Plan, Technical Appendix IE, Vol1, by Halcrow Fox and Associates, et al, 1992.

26. Transit times between Jakarta city center to Bandung city center for vehicles before and after theopening of the new toll road between Cikampek and Padalarang and for rail before and after theimplementation of the proposed project are assumed as follows:

Average Transit Time between Jakarta-Bandung(City Center - City Ce nter)

Before toll road After toll roadCar 3 hours 30 minutes 2 hours 30 minutesSmall bus 4 hours 30 minutes 2 hours 45 minutesLarge bus 5 hours 3 hours

Before project After projectRail 3 hours 2 hours 30 minutesSources: 'The Jakarta-Bandung Railway Corridor," by Railplan, et al, 1995, and 'Land Transport

Development Plan, Case Study No. 3, Passenger Services between Jakarta-Bandung," byHalcrow Fox and Associates, et al, 1992.

27. On the basis of a survey on rail passengers (executive and business classes) between Jakarta andBandung (carried out in 1991 for the Land Transport Development Plan study), a time value placed by theexecutive and business travelers is estimated at Rp 1,400 per hour. The survey also showed that over 40%of the passengers travel for business/official purposes, and that nearly 70% of the passengers own at leastone car. Separate analyses with and without transit time cost savings are conducted in order to assess theimpacts of this factor.

28. Air pollution and accident costs are also considered. The unit costs are assumed as follows:

Air Pollution and Accident Costs

Passenger Rp/pass-km Freight Rp/ton-km

Car 132.8 Truck 123.8

Bus 123.8 Rail 9.0

Rail 20.3

Source: 'External Costs of Transportation," S. Mauch and W. Rothengatter, et al, Zurich/Karlsruhe, 1994, astudy estimating external costs of transportation in 17 European countries.

-1 1 4-Annex 5.1

Page 4 of 5

29. The cost difference betweeni road and rail is calculated. Accountinlg for data uncertailnties anddifferences between levels of economic development, only 50% of the difference is counted in thebenefit calculation. Moreover, separate analyses with and without air pollution and accident costs areconducted in order to assess the impacts of these factors.

30. A financial analysis has also been carried out. The analysis compares net rail reveniues (railrevenues minus rail and rolling stock investmenit and maintenance costs and train operating costs)between the base case and the project case and no road infrastl-uctLure and vehicle costs are i'ivolved inthe calculation. Assumptions about rail infrastructure and rolling stock costs and tiaini operatinig costsare the same as those in the economilc analysis.

B. Track Maintenance Svsteni

3 1. Investments: Because new rail will need to be installed regardless of thle project, for the basecase, the investments would consist of: i) new and secondary rail installation: and ii) main trackrestoration. For the project case, the investmenits would include two additional componienits finanicedlulider the project, i.e.: iii) the rail reclamation yard and rail train; and iv) the techniical assistance andtraining. Furthermore, it is assumed that under the new procedures introduced throughl the project, thecosts incurred under items i) (new and secondarv rail) and ii) (main track restoration) would be someI 0% higher than under the base case.

32. Track Capital and Maintenance Costs: Current annual track capital investmilncit andmainlten1ance costs for Perumka (including Java and Sumatra networks) are estinated at US$1 19 millionand US$43 million, respectively.

33. For the base case, the costs on the Java network are estinated on the basis of track lengtlh. Thletrack on Java is 3,671 km long, while the total track lengthl under Perumka is 5,040 km. It follows thatthe base case track capital investment and maintenance costs for the Java network are at US$86.7 nillionand US$3 1.3 million per year, respectively.

34. For the project case, the improved maintenance system is assumed to spread over the whole Javanetwork over a period of seven years, from 1997 to 2003. As the main benefit of the system is to extendthe life of rail, up to three times the current level, the corresponding track capital costs would decreaseaccordingly as the improved maintenance system gradually spreads over the Java network. When thenew system reaches the whole Java network, the annual track capital costs would be just one third of thecurrent level. The assumptions on the specific percentages of track under the improved maintenancesystem and the corresponding track capital costs are given as follows:

Year % of Track % of Track Annual Track Capital CostUnder Improved Under Current (US$ millioll)Maintenance Maintenance

1997 10 % 90 % (IO% /3+90%)*86.7=80.91998 25 % 75 % (25%/3+75%)*86.7=72.21999 40 % 60 % (40%/3+60%)*86.7=63.62000 55 % 45 % (55%/3+45%)*86.7=54.92001 70 % 30 % (70%/3+30%)*86.7=46.22002 85 % 15 % (85%/3+15%)*86.7=37.62003 100 % 0 % (100%/3+0%)*86.7=28.9Later years are assumed the same as year 2003

-115-Annex 5.1

Page 5 of 5

35. Track maintenance costs under the improved maintenance system are assumed to increase over theproject implementation period to twice the current level. The specific assumptions are as follows:

Year % of Track Maint Track MaintenanceCost Increase Over Costs (US$ million)Current Level

1997 60 % (1+60%)*31.3=50.11998 70 % (1+70%)*31.3=53.21999 80 % (1+80%)*31.3=56.42000 90 % (1+90%)*31.3=59.52001 100 % (1+100%)*31.3=62.6

Later years are assumed the same as year 2001

36. Economic Analysis: The economic analysis compares the net investment costs and savings intrack capital and maintenance costs between the base case and the project case. Expected savings in rollingstock operating costs are not considered. A 40-year period is assumed as the evaluation period. Longerperiods would not affect the results due to a discount rate of 12% and the high intemal rate of returns.

C. Locomotive Unit Exchange Maintenance Program

37. As discussed in the main text, the proposed unit exchange program combined with the on-timepreventive maintenance system is expected to add an equivalent of 28 locomotives to the current dieselelectric locomotive fleet in Java, as a result of improved locomotive reliability and availability, andreplacement of daily and every other day checks by monthly checks. The benefits are the avoidedlocomotive capital costs and maintenance costs. Locomotive unit cost is estimated at US$1.5 million perunit and annual maintenance cost is at US$75,000 per year. Total annualized savings are estimated atRpl4 billion (US$6.2 million) per year. This saving is assumed to realize gradually over a period of sixyears, beginning at the fourth year of the project implementation and reaching the full extent four yearsafter project completion. A life of 30 years is assumed for locomotives.

-11 7-Annex 6.1

Pagze I of 3


FINANCIAL EVALUATION

Background

I. The Indonesian railways up until December 31, 1990 was owned and controlled bythe Government of Indonesia. The book value of fixed assets on December 31, 1990 wasRpl,336 trillion (US$700 million), together with inventories of Rpl24 billion ($65 million)and the cash and receivable of Rp177 billion ($93 million).

2. On January 1, 1991, GOI converted the railways from a departmental agency (Perjan,PJKA) whose income and expenses were treated as part of the state budget to a separate legalentity as a state corporation (Perum, Perumka). With this change, GOI transferred theownership of workshops, depots, telecommunications facilities, motive power and rollingstock, and related land to Perumka while retaining the ownership of major part of the railwayinfrastructure (rails, buildings, signals, terminals, bridges, land crossings and overheadelectric lines). The value of fixed assets in Perumka accounts was reduced by Rp554 billion($290 million) representing the written down value of track assets which remained with GOT.

Accounting, Budgeting and Auditing

3. In late 1980s PJKA progressively introduced a new double entry accounting system(System Acontasi Baru, SAB). The fiscal year was changed from April-March to January-December. An improved classification of accounts was introduced. The costs are nowanalyzed by type of expenses (material, labor and general), by cost center and by operatingfunction. Staff costs are now being allocated to various activity centers.

4. Perumka regularly prepares a five-year corporate plan with detailed annual budget.The most recent corporate plan covers the five-year period of 1995-99.

5. Perumka accounts are annually audited by the Financial and DevelopmentSupervisory Board of GOI (Badan Rengawas Keerangan dar Pembangunan, BPKP). Theauditors are regarded as independent auditors using generally accepted auditing rules andstandards. The Bank has accepted them for other projects. The same auditors will be usedfor the proposed project. The audit reports for Perumka are generally late by nine months.This does not help the management for taking prompt remedial actions.

Costing

6. With the help of consultants financed by the Bank's Railway Technical AssistanceProject (Loan 2891-IND), a computerized railway traffic costing system was satisfactorilyestablished, in which the key concept of railway's long-run variable costs was introduced.Perumka staff was trained in all aspects of the costing as per the Project Completion Report(No.13914) of January 19, 1995. The costing system is now used for investment analysisand tariff adjustments. Some improvements are necessary in the following areas:

a) The cost analysis includes only direct and indirect costs but excludes the generalcosts. Many of the general cost items are either partially or fully variable with trafficand should be included in the cost analysis so that tariffs adequately reflect costs;

-118-

Annex 6.1Page 2 of 3

b) Although the management accounting concept is now being used, its scope and levelshould be expanded and improved;

c) The reliability and timeliness of the statistical and financial data need to beimproved. At present there is no direct responsibility assigned to any particulardivision of Perumka for collection of required data;

d) Some technical advice is needed in rationalization and identification of non-remunerative railway services, budgeting, PSO calculation and tariff restructuring.

e) a computerized financial management information system should be set up so thatreliable, relevant reports can be prepared and submitted to the management on time.A direct computer link between the headquarters and regional offices wouldsubstantially reduce the transmission of information from origin to destination.

Past and Present Financial Performance

7. The removal of major railway infrastructure from Perumka's accounts has helpedPerumka improve its financial accounts for the following reasons: (i) GOI pays Perumka anannual contribution toward repairs and maintenance of GOI owned infrastructure; (ii) asubstantial reduction in depreciation and interest charges on infrastructure assets transferredto GOI; and (iii) all railway revenues are shown in Perumka's accounts. The net incometherefore improved immediately by about Rp8O billion (Rp3O billion from GOI for trackrepairs and maintenance and Rp5O billion saved by Perumka for depreciation and interestcharges for track). For Perumka, however, the track maintenance still has a substantialbacklog and there is under-funding by Perumka for maintenance of motive power and rollingstock.

8. Perumka's financial statements for 1991-95 are shown in Tables I and 2. Ananalysis of key financial items indicates the following:

Traffic Trends. Perumka's traffic has been growing steadily, especially the passengertraffic on Java (Annex 3.2). The passenger revenue share to total revenues increasedfrom 51% in 1991 to 62% in 1995.

Inflation Inflation was 7.5% in 1992, 9.2% in 1993, 9.6% in 1994 and 9.0% in 1995.The cumulative effect was 35.3% from 1991 to 1995.

Revenues and Costs The average passenger revenues per passenger-kilometerincreased by 43% from 1991 to 1995, with the increases for economy class servicesbeing 26.5% and executive and business class services 60%. The average freightrevenues per ton-kilometer increased by 21.8% over the same period.

9. Perumka's 1995 revenue and cost analysis indicates that although Perumka's overallrevenues are slightly higher than the operating costs, the revenues from economy classpassenger services cover only 20% to 75% of the corresponding costs, while the revenues forexecutive and business class services cover some 150% to 240% of the associated costs.Consequently, while the economy class passenger services represent some 77% ofPerumka's total passenger traffic in terms of passenger-kilometers, they generate only about46% of the total passenger revenues. The executive and business class services, on the otherhand, represent only 23% of the total passenger traffic but generate 54% of the totalrevenues. This indicates that the economy class tariffs are very low.

-119-Annex 6.1

Page 3 of 3

10. With the exception of the Suralaya coal traffic and the fuel traffic to Solo, freighttrains usually fail to recover their operating costs which are grossly understated due to:(i) reasons given in para. 7. and (ii) the depreciation is understated as it relates only to bookvalues. The average freight revenue covers 9% to 95% of the costs on various train runs.

11. Perumka Staff. The total staff (permanent and contracted) has been reduced from47,000 in 1988 to 41,446 in 1995. The wages and salaries, on the other hand, have increaseddue to general as well as specific increases (e.g. special premiums to operating staff,incentive award to higher productivity and extra emolument to maintenance personnel). As aresult, the overall staff cost nearly doubled from 1991 to 1995 and the labor cost shareincreased from 31% of total operating costs in 1991 to 35% in 1995. While the staff costshave been an extra burden on railway finances, the salary levels are only slightly higher thanthe government salary scale and much lower than the private sector.

Financial Forecast

12. The financial forecast incorporates the proposed investment plan, traffic growth,tariff adjustments, inflation, policy reforms, and productivity improvements. Assumptionsunderlying the financial forecast are described in the attachment 1. Income and funds flowstatements and balance sheets for the period of 1996 - 2002 are given in Tables 3, 4 and 5

13. It is projected that the operating ratio, incorporating the revaluation of assets in 1998,will improve from 97% in 1996 to 90% in 2002. The return on revalued net fixed assets willimprove from 2% to 5% for the same period. The internal cash generation will be sufficientto cover interest and repayments and to contribute toward future investments. TheGovernment's net out-flow of funds to Perumka will gradually decrease from a high of Rp.95 billion in 1998 to Rp. 32 billion in 2000. From 2001, this net out-flow will change to anet in-flow of Rp. 6 billion in 2001 and Rp. 55 billion in 2002 from Perumka. This indicatesthat from 2001, the railway operations will become a source of funds to the Government

14. The minimum self-financing ratio will be 27% in 1997 but thereafter will graduallyrise to 40% in 2002. The debt service coverage ratio will remain at the acceptable levels of2.0 to 3.4 during 1997 to 2002. The balance sheet indicates that the current ratio, acid testratio and the debt/equity ratio would remain at safe levels.

-121-Attachment I

Page I of 2

MAJOR ASSUMPTIONS AND NOTES UNDERLYING PERUMKA'S FINANCIALFORECASTS

1996-2002

A. General The financial projections are prepared:

I. in current prices using the Bank guidelines and adjusting to prevailingconditions;

2. incorporating committed policy reforms on compensations for PSO and trackmaintenance and track access charges;

3. using preliminary "core" investments plan based on Perumka's 1995 and 1996corporate plan as well as the traffic growth performance;

4. based on the financing plan indicating loans from World Bank, local and foreignsources and Government contribution;

5. without capitalizing the interest and commitment charges during constructionperiod as these payments are relatively small during the project implementation;

6. with 8.7% annual inflation from 1996 to 2002;7. with 2.5% annual increase in real unit labor cost from 1996 to 2002;8. with an exchange rate of Rp.2,330 per US$1.0 in 1996 and 6.3% annual

depreciation from 1996 to 2002; and9. with risks of foreign exchange rates to be borne by Perumka.

B. Revenues Revenues are calculated using the following assumptions on traffic andtariffs:

I. Traffic Growth:

Traffic Growth %

Year 1996 1997 1998 1999 2000 2001 2002

Passengers

Executive 8.0 8.5 8.5 8.5 8.5 7.5 7.5

Business 8.0 8.5 8.5 8.5 8.5 7.5 7.5

Economy 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Local Economy 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Jabotabek Commercial 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Jabotabek Economy 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Freight Tons

Suralaya Coal 21.7 37.3 20.6 8.7 0.3 2.9 0.3

Other Contract 7.5 5.0 5.0 5.0 5.0 5.0 5.0

Non-Contract 7.5 5.0 5.0 5.0 5.0 5.0 5.0

-122-Attachment I

Page 2 of 2

2. Tariff Increases:

Current Tariff Growth (%)

Tariffs 1996* 1997 1998 1999 2000 2001 2002

Passengers Rp/pkm

Executive 87.3 0.0 0.0 15.0 12.0 10.0 10.0 10.0

Business 39.9 0.0 00 15.0 12.0 10.0 10.0 10.0

Economy 15.5 0.0 0.0 9.0 9.0 9.0 9.0 9.0

Local Economy 10.5 0.0 0.0 9.0 9.0 9.0 9.0 9.0

Jabotabek Commercial 40.3 0.0 0.0 9.0 9.0 9.0 9.0 9.0

Jabotabek Economy 7.0 0.0 0.0 9.0 9.0 9.0 9.0 9.0

Freight Rp/tkm

Suralaya Coal 33.5 0.0 0.0 0.0 0.0 0.0 10.0 12.0

Other Contract 43.7 0.0 5.0 15.0 10.0 10.0 10.0 12.0

Non-Contract 42.6 0.0 5.0 15.0 10.0 10.0 10.0 12.0

* Tariff increases of 28% for economy passenger services, and 14% for executive and businesspassenger services were in effect in April 1996. These are equivalent to increases of 21% and10.5%, respectively, over the twelve-month period.

C. Loan Interests For the World Band loan on-lent to Perumka for its own portion ofthe project cost, the forecast uses the same lending terms as that of the World Bank loan(i.e. 7% interest for 20 years with five years of grace and commitment charges of 0.75%p.a. on undisbursed balance of the loan).

For local loans, interest rates are 20% for 1996 and 1997, 15% for 1998 and 1999,and 12% for 2000, 2001 and 2002.

D. Income Tax 10% for net profit of up to Rp. 10 million, 15% for net profit of Rp. 10to Rp.50 million, and 30% for net profit above Rp.50 million.

-123-Annex 6.1

Indonesia Table 1Railway Efficiency Project

Table 1: Perumka's Consolidated Income Statement 1991 - 1995(Rp Billion) a)

1991 1992 1993 1994 1995Revenues

Operating RevenuesPassengers 155 192 254 292 354Freight 110 133 153 151 166Other 7 2 1 1 2

Government Compensation 22 31 32 32 32Other Revenues 30 35 31 32 38

Total Revenues 324 393 471 508 592

ExpensesDirect Operating Expenses

Personnel 25 35 43 47 53Fuel/Power/Lubric 38 44 56 60 70Rolling Stock Maintenance 49 70 77 85 94Rolling Stock Depreciation 20 21 26 32 40Train Supporting Activities 10 11 16 14 14Subtotal 142 181 218 238 271

Indirect Operating ExpensesInfrastructure Maintenance 37 52 51 51 68Infrastructure Depreciation 1 1 2 5 5Personnel 17 21 29 30 37Accidents 1 1 1 1 1Stations & Yards b) 3 26 28 35 38Subtotal 59 101 111 122 149

General ExpensesStaff 52 46 57 62 69Administration 68 60 67 70 80Depreciation 5 6 8 9 11Other 3 4 7 2 2Subtotal 128 116 139 143 162

Total Expenses 329 398 469 503 582

Operating Income (5) (5) 2 4 10

Extraordinary Income 1 2 1 2TaxesNet Income after Tax (5) (4) 4 5 12

Working Ratio c) 94% 94% 92% 90% 89%Operating Ratio d) 102% 101% 100% 99% 98%

a) For 1991 to 1994 the figures are audited; for 1995 the audit is in process.b) Including personnel cost since 1992.c) Operating expenses, less depreciation, divided by operating revenuesd) Operating expenses divided by operating revenues

-124-Annex 6.1

Table 2

Railway Efficiency ProjectTable 2: Perumka's Consolidated Balance Sheet 1991 - 1995

(Rp Billion) a)

1991 1992 1993 1994 1995AssetsCurrent Assets

Cash and Deposits 182.3 211.0 247.1 202.1 188.7Accounts Receivable 37.4 55.7 72.3 105.9 113.1Inventories 110.6 109.1 117.6 163.4 190.4Subtotal 330.3 375.8 437.0 471.4 492.2

Fixed AssetsOriginal Book Value 850.8 976.4 1,250.3 1,415.6 1,679.7Less: Accum Depreciation 182.1 208.7 242.5 288.3 344.7Net Book Value 668.7 767.7 1,007.8 1,127.3 1,335.0

OtherAssets 172.5 190.0 110.4 132.9 117.4Pension Funds 42.6 52.0 58.3 63.8 71.8Total Assets 1,214.1 1,385.5 1,613.5 1,795.4 2,016.4

Liabilities and EquityLiabilities

Current Liabilities 42.6 77.0 57.9 49.7 60.0Long-term Debt 74.9 159.2 334.3 503.0 669.0Pension Obligations 42.6 52.0 58.3 63.8 71.8Subtotal 160.1 288.2 450.5 616.5 800.8

EquityOpening Contribution 1,059.0 1,059.0 1,059.0 1,059.0 1,059.0Capital from GOI 2.7 50.0 118.0 127.2 151.2Retained Earnings/Losses (7.7) (11.7) (14.0) (7.3) 5.4Subtotal 1,054.0 1,097.3 1,163.0 1,178.9 1,215.6

Total Assets and Liablities 1,214.1 1,385.5 1,613.5 1,795.4 2,016.4

Current Ratio 7.8 4.9 7.5 9.5 8.2Acid Test Ratio 5.2 3.5 5.5 6.2 5.0Cash Ratio 4.3 2.7 4.3 4.1 3.1Debt/Equity Ratio 6.6% 12.7% 22.3% 29.9% 35.5%

-125-Annex 6.1

Table 3


Table 3: Perumka's Consolidated Income Statement 1996 - 2002(Rp. Billion I Current Prices)

1996(a) 199 1998 1999 2000 2001 2002Volume (billion)

Passenger (pass-km) 14,997 15,246 15,916 16,715 17,625 18,540 19,503Freight (ton-km) 4,723 5,808 6,412 6,537 6,668 6,805 6,924Total converted ton-km (1:1) 19,720 21,054 22,327 23,252 24,293 25,345 26,427

RevenuePassenger 430 435 509 594 693 804 932Freight 189 229 270 292 318 359 412Other 46 64 74 84 96 109 125GOI: Infrastructure Maintenance 32 182 203 225 249 275 305GOI: PSO Compensation 0 79 78 75 70 64 55Total revenue 696 991 1,134 1,270 1,425 1,611 1,828

ExpenditureStaff cost 245 251 273 295 319 345 372Materials 193 227 254 284 319 357 408Fuel and energy 78 78 90 100 111 124 138Other 110 121 128 140 154 169 186Track access charge 0 170 194 229 267 307 363

Working cost 625 847 939 1,048 1,169 1,302 1,467

Depreciation 51 63 135 145 156 168 181Operating Cost 676 910 1,074 1,192 1,325 1,470 1,648

NetOperating Revenues 20 81 60 78 100 141 180Interest charges 4 28 46 66 68 86 105

Net Revenue before Tax 16 53 14 12 31 55 75Income tax 5 16 4 4 9 17 23

Net Revenue after Tax 12 37 9 8 22 39 53

Distribution of net revenue:- Div. to GOI (Dev. Fund) 55% 6 20 5 5 12 21 29- Perumka: - Gen. Reserve 20% 2 7 2 2 4 8 11

- soc. benefits 20% 2 7 2 2 4 8 11- specific jobs 5% 1 2 0 0 1 2 3

Performance Ratios- Working ratio (%) 90% 85% 83% 82% 82% 81% 80%- Operating ratio (%) 97% 92% 95% 94% 93% 91% 90%- Return on net fixed assets in use

Net fixed assets 1,373 1,569 3,420 3,543 3,696 3,859 4,027Av. fixed assets (NFA) 1,348 1,471 3,336 3,481 3,619 3,777 3,943Return on NFA (%) 2% 6% 2% 2% 3% 4% 5%

(a) 1996 is a revised forecast which differs from Perumka's approved budget

Source - PerumkaSeptember, 1996

-126-Annex 6.1

Table 4


Table 4: Perumka's Consolidated Funds Flow Statement 1996 - 2002(Rp. Billion / Current Prices)

1996 1997 1998 1999 2000 2001 2002Sources of Funds

Internally Generated Net Rev 16 65 56 74 90 124 158Depreciation 51 63 135 145 156 168 181Govern't Equity Contribution 5 15 17 7 1 0 0World Bank Loan 0 2 9 14 16 5 0Foreign Loans 0 0 10 10 10 0 0Local Bank Loans 51 196 169 129 164 208 212

Total Sources 122 341 396 379 438 505 551

Applications of Funds

Investments 102 259 303 268 309 331 349Dividend to Government 6 20 5 5 12 21 29Perumka use 3 9 2 2 6 10 13Debt Service Charges

World Bank Loan Interest 0 0 1 1 3 3 3World Bank Loan Repayment 0 0 0 0 0 3 4Other Loan Interest 5 27 45 64 66 82 101Other Loan Repayment 2 10 22 32 42 54 51

Total Applications 118 326 378 372 437 505 551

Cash at Beginning of Year 189 193 208 225 232 233 233Cash from Current Year 4 15 17 7 1 0 0Cash at End of Year 193 208 225 232 233 233 233

Debt Service Coverage Ratio 10.3 3.4 2.8 2.2 2.2 2.0 2.1Self-Financing Ratio 28% 27% 42% 39% 39% 36% 40%

Notes: 1. As per Perumka, about Rp 687 billion have been spent during 1991-1995 for rolling stock, stations, etc,which were funded from foreign loans and Perumka anticipates government paying this.

2. Although the subsidiary loan has been increased from US$19.4 million to US$19.8 million, the change has not beentaken into account due to very small amount.


-12 7-Annex 6.1

Table 5


Table 5: Perumka's Consolidated Balance Sheet 1996 - 2002(Rp. Billion / Current Prices)

1996 1997 1998 1999 2000 2001 2002AssetsCurrent Assets

Cash 200 207 238 231 227 223 220Receivables 73 79 66 72 78 88 101Inventories 123 121 123 124 123 120 116Subtotal 396 407 427 427 427 431 437

Fixed AssetsGross Book Values 1,819 2,078 2,380 2,648 2,957 3,288 3,636Revaluation adjustment 1,683 1,683 1,683 1,683 1,683Less: Accum Dep 446 509 644 788 944 1,112 1,293Net Book Value 1,373 1,569 3,420 3,543 3,696 3,859 4,027

Total Assets 1,770 1,976 3,847 3,969 4,123 4,289 4,464

LiabilitiesCurrent Liabilities

Short Term Debts 2 10 22 32 42 57 55Payables 80 85 85 90 90 90 90Other 45 45 40 35 30 25 12Subtotal 127 140 147 157 162 172 157

Long Term Debts 49 237 403 524 673 828 986Equity (incl retained earnings) 1,594 1,599 3,297 3,288 3,288 3,289 3,322

Total Liabilities 1,770 1,976 3,847 3,969 4,123 4,289 4,464

Current Ratio 3.1 2.9 2.9 2.7 2.6 2.5 2.8Acid Test Ratio 2.2 2.0 2.1 1.9 1.9 1.8 2.0Cash Ratio 1.6 1.5 1.6 1.5 1.4 1.3 1.4Debt/Equity Ratio 3% 13% 11% 14% 17% 20% 23%


-128-Annex 8.1


DOCUMENTS AVAILABLE IN THE PROJECT FILE

1. Modernization/Capacity Study, Corridor Jakarta - Bandung, Holland Rail Association,January, 1994.

2. Further Institutional Development of Indonesia's Railway Subsector, CPCS Ltd, September,1995.

3. Review and Prioritization of the Performance Improvement and Investment Plan for theIndonesia State Railways, CANAC International Inc, August, 1995.

4. The Jakarta - Bandung Railway Corridor, Analysis of Short and Medium TermDevelopment Options, Railplan, July 1995.

5. Resettlement Action Plan, Perumka, August 1996.

6. Environmental Management and Monitoring Plan, Perumka, August 1996.

7. Aide Memoire of December 1993 Identification Mission

8. Aide Memoire of September 1994 Preparation Mission

9. Aide Memoire of May 1995 Preparation Mission

10. Aide Memoire of February 1996 Preparation Mission

11. Aide Memoire of July 1996 Appraisal Mission

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