World Bank Documentdocuments.worldbank.org/curated/en/798841468915049911/pdf/multi... · PPAR...

Dooment of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 10829

PROJECT PERFORMANCE AUDIT REPORT

REPUBLIC OF INDONESIA

COAL MINING AND TRANSPORTATION ENGINEERINGPROJECT (LOAN S-9-IND)

BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATIONPROJECT (LOAN 2079-IND)

COAL EXPLORATION ENGINEERING PROJECT(LOAN 2153-IND)

JUNE 30, 1992

FIL COP'

.10829 I,D TYPE:(

Atj,,,: KPUPRIVEZ, !A.Ext J17 0 9 Room

Operations Evaluation Department

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

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GLOSSARY OF ABBREVIATIONS

bcm Bank cubic meters

BWE Bucketwheel Excavator

CIDA Canadian International Development Agency

DGM Directorate General of Mines

EDC Export Development Corporation

ESS Eksplotasi Sumatra Selatan (South Sumatra Railway)

GOI Government of IndonesiaIBRD International Bank for Reconstruction and Development

KfW Kreditanstalt fUr Wiederaufbau

KEPPRES Steering Committee

MAP Maximum Austerity Program

MME Ministry of Mines and EnergyMMT Mine Management Team

mtpy Million tons per year

MW MegaWattsNAL Non-Air Laya mines

OED Office Evaluation Department

PCR Project Completion Report

PN Perusahaan Negara (National Company)

PNB PN Batubara (National Coal Company)

PK5BA Coordinating Group for Phase I project (Replaced by POKKORLAK)

PLN State Electricity Authority

PJKA Perusahaan Jawatan Kereta Api (Indonesian State Railway)PMG Project Management Group

POKKORLAK Government Coordinating Group

PPAR Project Performance Appraisal Report

PSC Project Services Contractor

PT Persero (A limited Government Company)

PTBA PT Tambang Batubara Bukit Asam (State Coal Mining Company)

PT PANN PT Pengembangan Armada Niaga Nasional (National Fleet Development

Corporation)

TAG Technical Advisor to GOI

TOR Terms of Reference

tpm Tons per month

FISCAL YEAR

January 1 to December 31

THE WORLD BANK 173R OMCIL USE ONLYWashington, D.C. 20433

U.S.A.

:e of Director-Genealeratims Evauatim

June 30, 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Performance Audit Report on INDONESIACoal Mining and Transaction Engineering Project (Loan S-9-IND);Bukit Asam Coal Mining Development and Transportation Project (Loan2079-IND): and Coal Exploration Engineering Project (Loan 2153-IND)

Attached, for information, is a copy of a report entitled "ProjectPerformance Audit Report on INDONESIA - Coal Mining and Transaction EngineeringProject (Loan S-9-IND); Bukit Asam Coal Mining Development and TransportationIroject (Loan 2079-IND); and Coal Exploration Engineering ProjectLoan 2153-IND) prepared by the Operations Evaluation Department.

i.achment

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

FOR OFFICIAL USE ONLY




BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATIONPROJECT (LOAN 2079--IND)

COAL EXPLORATION ENGINEERING PROJECTLOAN 2153-IND)

TABLE OF CONTENTS Page No.

Preface........................................................ iBasic Data Sheets.............................................. iii

Evaluation Summary................... . ........ ix

I. BACKGROUND.............................................. 1

II. BUKIT ASAM COAL MINING AND TRANSPORTATION PROJECT....... 3

A. Project Objectives................................. 3B. Role of the Bank................................... 3C. Components of the Project.......................... 4D. Project Preparation and Appraisal.................. 5E. Project Design and Organization.................... 6

Data Acquisition and Mining System Design.... 6

Selection of the Mining System............... 7Economic Analysis............................ 10

Organizational Arrangements.................. 11Schedule Constraints............. ...... 13

F. Risk Assessment and Management............ 14

G. Project Implementation..................... 15

H. The Choice of Technology................... 16

E. Grounds Investigation.............................. 17

J. Project Management................................. 18

K. Project Coord4 nation............................... 20

L. Coal Shipping...................................... 21

M. Environmental Control and Monitoring............... 21

N. Project Costs...................... ......... ........ 22

0. Project Results................ .... .............. 23

P. Project Sustainability............................. 24Q. Performance.... . ............................ 27

R. Consultant Performance. .................... 28S. Borrower Performance........ ........ ......... 29

T. Maturity, Grace Period and Exchange Risk........... 30

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed withcut World Bank authorization.

TABLE OF CONTENTS (cont.)Page No.

III. COAL EXPLORATION ENGINEERING PROJECT 31

A. Project Objectives.............. ............ 31B. Project Design and Organization............... 32C. Project Implementation................................ 32

D. Project Costs................................. 32

E. Project Results.............................. 33

F. Performance.............. ... . ................. 33

G. Maturity, Grace Period and Exchange Risk...... 34

IV. FINDINGS AND LESSONS................................... 35

ANNEX I -- FINANCIAL STATUS OF PTBA ANDMINE OPERATIONS. 37

TABLE I - INCOME STATEMENT FOR AIR LAYA MINETABLE 2 - INCOME STATEMENT FOR NON-AIR LAYA MINEfABLE 3 - PRODUCTION COST AT BUKIT ASAMTABLE 4 - SOURCE OF REVENUE FOR PTBATABLE 5 - SOURCE AND STATUS OF BORROWINGSTABLE 6 - BALANCE SHEETS FOR BUKIT ASaM OPERATIONS

ANNEX II -- ORGANIZATIONAL CHART FOR PROJECT IMPLEMENTATION 45

ATTACHMENT

Comments from the Borrower .................... .... . 46






PREFACE

1. This is a Project Performance Audit Report (PPAR) for the Bukit Asam Coal

Mining Development and Transportation Project and the Coal Exploration

Engineering Project. The International Bank for Recunstruction and Development(IBRD) granted three loans. Loans S-9-IND arid 2079-IND in the amounts of US$10million and US$185 million were approved on May 9, 1978 and January 7, 1982,

respectively, for the Bukit Asam Coal mining Development and TransportationProject. The engineering loan (S-9-1iD) was refinanced under the investmentproject loan, Loan (2079-IND). The latter loan was closed on September 30, 1989,two years behind schedule and after two extensions. The last disbursement for

the Bukit Asam project was on April 4, 1990, and a total of US$6.25 million wascancelled. Co-financing was provided by the Export Development Corporation(EDC) /the Canadian International Development Agency (CIDA) (US$133 million), theKreditanstalt fUr Wiederaufbau (KfW) (US$48 million), the Netherlands (US$2.5million), and through export credits (US$206 million). IBRD Loan 2153-IND in theamount of US$25 million was approved on June 14, 1982 for the Coal Exploration

Engineering Project. It took eight months to make the loan effective. The loanwas closed on June 30, 1988, one year behind the originally planned date, after

a total disbursement of US$19.5 million; US$5.0 million and US$0.55 million were

canceled on January 1, 1988, and September 21, 1988, respectively.

2. The PPAR was prepared by the Operations Evaluation Department (OED). It

is based on the Project Completion Reports (PCRs) for the projects, the Staff

Appraisal Report (SAR), a study of the project files, and discussion with Bank

staff. An OED mission visited Indonesia in July 1991 and discussed projectissues with Team KEPPRES 35/87, PT Tambang Batubara Bukit Asam, and officials in

other agencies within the Government of Indonesia (GOI); travelled to the Bukit

Asam mine; and gratefully acknowledges the assistance and hospitality itreceived.

Project Completion Reports: - Coal Mining and Transportation Engineering

Project (Loan S-9-IND) and Bukit Asam Coal Mining Development and

Transportation Project (Loan 2079-IND)(June 25, 1990); - Coal Exploration

Engineering Project (Loan 2153-IND) (June 23, 1989).

3. According to standard procedures, OED sent copies of the draft PPAR to theBorrower for comments. Comments received from the Department of Mines and Energyhave been taken into account in the PPAR and are attached as an Attachment to theReport.

- i -



COAL MINING AND TRANSPORTATION ENGINEERINGPROJECT (LOAN S-9--IND)


BASIC DATA SHEEI

KEY PROJECT DATA(Amounts in US$ Million)

Appraisal Actual or Actual as % ofExpectation Current Estimate Aporaieal Estimate

Total Project Cost 1,335.9 1,205 90%Date Physical

Components Completed 12/86 01/90Economic Rate of Return 12.2% 2.2%Institutional Performance Satisfactory Satisfactory

Credit/Loan Position(Amounts in US$ Million)

As of July 31, 1991Lan/Credit Original Disbursed Cancelled Reiaid Outstandine

185 185 178.7 6.3

Cumulative Estimated And Actual Disbursements(Amounts in US$ Million)

Einancial Year I M18 128 198 198 1987 128 12 12

Appraisal Estimate 30.5 67.7 122.6 176.0 184.5 185.0Actual 7.0 33.5 62.7 103.3 122.5 152.5 164.6 169.2 178.7Actual as Estimate 23.0 49.5 51.1 58.7 66.4 82.4 89.0 91.5 96.6Date of Final

Disbursement: 04/04/90

- iv - -

118Original. BRizid Ac%11Ai

Identification Preparation 03/76 03/76Pre-Appraisai 01/80 01/80Appraisal 07/77 -08/80 10412/80Post-Appraisal 06/81Loan Negotiations 10/81 11/81 11/81Board Approval 12/81 01/82 01/82Loan Signing 01/82 01/8?Loan Effectiveness 03/82 05/82Loan Closing 09/87 09/88 09/89Loan Completion 03/ S 03/89 03/90

Staff Input.(Staff Weeks)

PRE-Tsk F78 FY1 FY 9 FY80 FY81 FY82 Y FY84 I8 Zo k Z UU y882 FY89 Totgl

LENP 108.6 40.2 25.6 123.3 24.8 32LENA 100.0 46.6 14LENN 11.9 1LOP 3.0 2.8 0.1 1.0 6.2 9.7 2

22.6 35.3 29.4 28.2 34.1 30.3 20.0 28.6 0.2 22PCR 1.4 4.0PAD 0.2 1.4 1.5 0.9 1.7 1.3 1.4 1

TOTAL 111.6 43.0 25.7 124.3 131.1 91.0 36.7 31.0 29.1 35.8 31.7 21.4 30.0 4.1 46.5

Leaend: LENP - Preparation, LENA - Appraisal, LENN - Negotiations, LOP - Loan Processing,SPN - Supervision, PCR - Project Completion Report, PAD - Project Administration

-v -

Project Dates

item Original Revised Actual

Identification Preparation 07/81 07/81Appraisal 09/81 02/82 02/82Loan Negotiations 04/82 04/82Board Approval 05/82 05/82Loan Signing 06/83 06/82Loan Effectiveness 09/82 03/83 03/83Loar. Closing 06/87 06/88 06/88Loan Completion 12/87 12/88 09/88

--------------------- m------------------------------------------------Staff Inputs(Staff Weeks)

FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 TOTAL

Preparation 4.2 4.2Appraisal 23.1 23.1Negotiation 1.6 1.6Loan Processing 3.0 3.0Supervision 1.2 24.2 9.0 4.5 15.0 12.9 13.2 6.8 86.8

TOTAL 33.1 24.2 9.0 4.5 15.0 12.9 13.2 6.8118.7

----------------------------------------------------------------------MISSION DATA

Stage of Month/ No. of Days in Types ofProlect Cycle Year Persons Field Problems 2

Identification 06/81 1 10Pre-Appraisal 10/81 2 11Negotiation 04/82 3 10Supervisicn Mission 1 08/82 2 14 E,I,S,P

2 12/82 1 12 E,I,S,P3 03/83 1 9 I,S,P4 06/83 3 14 I,P5 10/83 2 18 I,S,P,F6 02/84 3 10 F7 10/84 3 15 F8 07/85 2 17 NONE9 01/86 2 16 F,PM,P

10 09/86 3 28 F11 03/87 1 13 I,PM12 06/87 2 16 NONE

2 E - Loan Effectiveness; I - Institutional; S - Implementation ScheduleP - Procurment; F - Financial (Local Budget); PM - Project Management

- vi -

OTHER PROJECT DATA

Borrower: Government of Indonesia

Executing Agencies: PT Tambang Batubara Bukit Asam (PTBA);Perusahaan Jawatan Kereta Api (PJKA);PT Pengembangan Armada Niaga Nasional (PT PANN)

Follow-On Project: Coal Exploration Engineering ProjectLoan No: 2153-INDAmount: US$25 millionBoard Date: 05/20/82

- vii -

Coal Exploration Engineering Prolect(Loan 2153-IND)

BASIC DATA SHEET

KEY PROJECT DATA(Amounts in US$ Million)

Appraisal Actual or Actual as % ofExpectation Current Estimate Appraisal Estimatq

Total Project Cost 49.5 26.7 54%Date Project Completed 09/86 09/87Economic Rate of Return - -

Institutional Performance Satisfactory Satisfactory

CREDIT/LOAN POSITION(Amounts in US$ Million)

As of Dec. 31, 1991Loan/Credit 0riginal Disbursed Cancelled Repaid Outstanding

25.0 25.0 19.4 5.55 5.37 14.09

------------------------------------------------------------------------

Cumulative Estimated and Actual Disbursements(Amounts in US$ Million)

1983 1984 1985 1986 1987 1988 1989

Appraisal Estimate 4.8 9.6 15.8 22.1 25.0Actual 0.4 2.9 6.4 11.9 16.8 19.1 19.5Actual as % Estimate 8.3 30.2 41 5 53.9 67.2 76.4 77.6Date of Final

Disbursements 09/21/88

------------------------------------------------------------------------

- viii -

Prolect Dates

Item Original Revised Actual

Identification Preparation 07/81 07/81Appraisal 09/81 02/82 02/82Loan Negotiations 04/82 04/82Board Approval 05/82 05/82Loan Signing 06/83 06/82Loan Effectiveness 09/82 03/83 03/83Loan Closing 06/87 06/88 06/88Loan Completion 12/87 12/88 09/88

Staff Inputs(Staff Weeks)

FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 TOTAL

Preparation 4.2 4.2Appraisal 23.1 23.1Negotiation 1.6 1.6Loan Processing 3.0 3.0Supervision 1.2 24.2 9.0 4.5 15.0 12.9 13.2 6.8 86.8

TOTAL 33.1 24.2 9.0 4.5 15.0 12.9 13.2 6.8 118.7

MISSION DATA

Stage of Month/ No. of Days in Types ofProject Cycle Year Persons Field Problems 2

Identification 06/81 1 10Pre-Appraisal 10/81 2 11Negotiation 04/82 3 10Supervision Mission:.1 08/82 2 14 E,I,S,P

2 12/82 1 12 E,I,S,P3 03/83 1 9 I,S,P4 06/83 3 14 I,P5 10/83 2 18 I,S,P,F6 02/84 3 10 F7 10/84 3 15 F8 07/85 2 17 NONE9 01/86 2 16 F,PM,P

10 09/86 3 28 F11 03/87 1 13 I,PM12 06/87 2 16 NONE13 02/88 2 23 I14 10/88 1 14 NONE

2 E - Loan Effectiveness; I - Institutional; S - Implementation Schedule

P - Procurment; F - Financial (Local Budget); PM - Project Management

ix




BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATION

PROJECT (LOAN 2079-IND)

COAL EXPLORATION ENGINEERING PROJECT

(LOAN 2153-IND)

EVALUATION SUMMARY

Introduction

1. This report reviews the Bukit and Transportation Project was to

Asam Coal Mining Development and assist the Government of Indonesia

Transportation Project in South (GOI) to move away from a policy

Sumatra (Indonesia) for which Loans which relied heavily on the use of

S-9-IND and 2079-IND were approved in scarce petroleum resources in the

the amounts of US$10 million and domestic sector. In this way,

US$185 million on May 9, 1978 and petroleum exports could be

January 7, 1982, respectively. The maintained, which would then

first of these loans was provided to contribute to Indonesia's development

support an engineering study program needs. Revenue from oil exports,

to assess the feasibility of played a critical role in Indonesia's

developing the Air Laya opencast mine development (although this dependen;y

to supply coal for the Suralaya I and is now reduced). Since most of the

II. The second of these loans was coal reserves in South Sumatra

part of a co-financed loan to develop consist of low quality and non-

the Air Laya mine at Bukit Asam, to tradeable coal, mining it for a

develop and/or upgrade rail and captive utility sector was considered

terminal facilities for moving coal, to be attractive and risk free.

and acquire a self-unloading ship for

transporting coal to Suralaya (Java). 4. The objective for the coal

exploration and feasibility study

2. This report also reviews a program was to inventory promising

parailel coal exploration and coal reserves in South and West

feasibility study program in South Sumatra. The Air Laya mine was

and West Sumatra for which the Bank developed for an inital production of

provided a loan of US$25 million 3 mtpy, which is just adequate to

(Loan 2153-IND) to assess the meet the fuel needs for Suralaya I

potential for development of these and 11 (2 x 400 MW) and other

resources for future power consumers in South Sumatra. It was

production. This loan was approved felt that as more units were

on June 14, 1982. developed in Java (Suralaya III andIV) more coal would be needed for

Proiect Objectives power production. The explorationand feasibility assessment program

3. The key objective of the could thus assist in identifying

Bukit Asam Coal Mining Development promising coal resources which may be

x

viably developed to supply fuel for a Project Implementationgrowing utility sector.

7. Except for the shipcomponent, the Bukit Asam coal mining

Content of the Projects and transportation projectencountered numerous implementation

5. The Bukit Asam coal mining problems and delays. Someand transportation project was an components, especially the serviceambitious undertaking involving facilities for the mine and raildevelopment in three separate sectors, were delayed by a few yearssectors. At Bukit Asam, the project (PPAR, Section G). Coal movement toconsisted of development of a 3 mtpy Suralaya at a rate of 200,000 tonsopencast mine and related per month (tpm) was achieved aboutinvestments, such as a mine facility four years after the target date.to service the equipment and a Even in 1991, the mining componenttownship to provide housing for PTBA has not met the production targetsemployees. The transportation expected according to the design.component consisted of the upgrading The project was plagued by manyof an existing 150 km rail line to implementation problems (PPAR,Kertapati near Palembang and another Section G). Some of these may be400 km line to Tarahan on the Sunda summarized as follows: poorStrait. In addition, the existing performance of local contractors;coal terminal at Kertapati on the inadequate availability of skilledMusi River was to be upgraded and a manpower; weakness of operational andnew terminal for shipping coal to management staff in implementingSuralaya was to be constructed at agencies; inadequate groundTarahan. Both the mine and rail investigations and design leading tocomponents involved significant deficiencies in mine excavationpurchase and installation of system; inadequate assessment of theequipment. The transportation appropriateness of the technology incomponent also involved the design the Bukit Asam context; deficienciesand construction of 9,200 ton DWT in organizational arrangements duringself-unloading coal ship to transport implementaton; cumbersome procurementcoal across the Sunda Strait from procedures; etc.Tarahan to Suralaya.

Results6. The coal exploration activityinvolved a drilling and resource 8. The physical components ofestimation program in several the project are in place more or lesslocations around BukiL Asam in South as designed. However, the mineSumatra and at Ombilin in West excavation system has been operatingSumatra. The feasibility study at only 60% of the design capacityprogram based on this drilling until recently. Approximately fiveprogram involved studies to years after completion, the Air Layainvestigate the feasibility of mine currently produces coal at aboutdeveloping production in the more 2.4 Mtpy, which is 20% below the 3abundant and better characterized mtpy goal. PTBA, the limited companyfields. In addition pre-feasibility set up to own the mines, is unable tostudies were also designed for a few make debt and interest payments basedof the smaller fields. on the 60:40 debt to equity ratio for

the Air Laya mine. Its output is notcompetitive. Mine Development

xi

involved 4-5 times higher investment Current non-Air Laya mines continueper ton of output than mines their superior operating performanceelsewhere (PPAR, Section G). The and new non-Air Laya mines beingprice of coal set close to planned replicate this superiorinternational market prices now is performance level.less than 30 percent of the appraisalestimate. Combined with the Findings and Lessonsdifficulties the mine has beenexperiencing in attaining production 11. The Air Laya mine developmenttargets, the cost of production of project at Bukit Asam has beenAir Laya coal is about twice that of completed with serious shortfall inthe net sale price. GOI plans to the design targets and alsoassume a higher proportion of the substantial shortfall in thedebts incurred by PTBA in developing financial area. The outcome suggeststhe Air Laya mine. GOI will also the following lessons, some of whichprovide certain other concessions to are not new.enhance PTBA's viability (PPAR, AnnexI). Together with the profitable - The appraisal based on highlynon-project coal mine operations overestimated coal revenues(non-Air Laya mines) developed by the should have been supplementedPTBA after the mid eighties and by analysis based on otheroperated through contract mining, criteria. In retrospect,PTBA is likely to operate profitably appraisal estimates of revenueafter the restructuring is completed. from coal sales for the Bukit

Asam project have proven to be9. The parallel coal exploration unrealistic. A review of thisprogram and feasibility study program project suggests that anotherto assess coal resources in South and relevant basis for appraisalWest Sumatra achieved all its was the cost of developing thisobjectives. With the successful production capacity vis-a-visconclusion of this exploration and cost of such developmentsfeasibility study program, GOI is in elsewhere.a better position to assess anddevelop coal resources in Sumatra. - Consulting services for

feasibility design andProiect Sustainability construction surpervision were

provided by a joint venture of10. PTBA is soon to be firms and subcontractors withrestructured with an equity to debt different areas of expertise.ratio of 65:35 for the Air Laya mine. In such cases, closeTogether with its very profitable supervision is necessary tonon-Air Laya mines, it is likely to eliminate any risk of bias inhave sustainable operations with the recommendations.possibilities for expanded productionin future from new mines. There are - Implementation of such largetwo other conditions for sustainable and complex projects should beoperations in future: (1) The Air preceeded by exhaustive projectLays mine continues maintaining or preparation. Data for designimproving its recent performance of the systems should belevel. Implicit for this is the acquired before the designs are

continuation of the training and man completed to avoid the se-

over development programs. (2) lection of sub-optimal oper-

xii

ating systems. In the case ofmining equipment, exhaustiveground investigations shouldprecede the selection/design ofmining equipment and systems.The lack of ground and drillingdata for the Tarahan terminalalso led to a costlydesign/construction failure atthe coal shipping terminal bythe first construction contrac-tor.

The local context should beanalyzed appropriately forevaluating the appropriatenessof a technology or design. Therisks associated with each ofthe local variables need to beassessed critically to de-termine relevance of the sys-tems to be selected. For theBukit Asam project, theappraisal failed to factor intothe analysis the implicationsof heavy rains, the inadequacyof the manpower base, anddifficulty of procuringservicing equipment.

The importance of developing anadequate organizational struc-ture for project implementationcannot be overemphasized. Theorganizational structures re-quired should provide for ef-fective action-oriented manage-ment and control. Simple, fairand expeditious procurementprocedures are also keyrequirements for successfulimplementation.






I. BACKGROUND

1.1 Revenues from petroleum export had been an important part of In-donesia's development strategy all throughout the sixties and seventies.However, domestic oil consumption grew rapidly in Indonesia in the 1970's. Evenwith the benefit of several drilling programs in collaboration with foreignexploration companies, oil production was expected to increase only to about1,800,000 from 1,600,000 barrels/day toward the late seventies. However, withincreasing domestic consumption, the net exportable oil surplus had been expectedto decline all throughout the eighties. Agencies in the Government of Indonesia(GOI) concerned with mining and oil exploration were increasingly aware in theseventies that Indonesia's proven oil reserves had not been growing. Theseestimates on oil consumption, production, and reserves were important considera-tions behind the decision during the early and mid-seventies in adopting policiesfor the development of alternative indigenous energy sources, such as naturalgas, hydropower, geothermal and coal for use in the domestic sector.

1.2 Coal has been mined in Indonesia for nearly a century, first in WestSumatra (Ombilin) and since 1920 in South Sumatra at Bukit Asam. Coal productionin Sumatra peaked at 2 mtpy in 1940 and reached a low point of 150,000 tpy in1973. Approximately half of the total coal mined in 1973 was produced in BukitAsam. Since the price was controlled to a level below that of subsidized fueloil, heavy subsidies were required to keep the state coal mining company inoperation. Because of the low price of subsidized fuel oil in relation tointernational prices, it was not possible to promote higher usage of coal withoutlarge outlays of capital from the Governement and also significant subsidies tothe mining company.

1.3 In 1973-74, the Department of Mines developed a rehabilitation programfor Bukit Asam aimed at increasing steam coal output for the South Sumatra marketestimated then at 300,000 tpy. Apart from the option of a mine-mouth power plantand possible reconversion of a small oil-fired steam plant in Palembang, powergeneration based on coal was not then considered feasible. The main reason wasthat the state electricity company, Perusahaan Umum Listrik (PLN), was suppliedwith oil by GOI at a highly subsidized rate of US$56 equivalent per ton of coal.

1.4 In 1976, a Presidential Instruction was signed requiring the maximumpossible usage of coal for electric power generation and for industrial use.Following this instruction, GOI requested the Bank to consider financing a600,000 - 900,000 tpy expansion and rehabilitation of the Bukit Asam coal mine.A review by the Bank of the prefeasibility study prepared earlier by an

- 2 -

international oil company indicated, however, that such limited output would be

far below the economic mine size based on the estimated reserves.

1.5 An earlier Bank financed Java System Development Study identified the

Suralaya Power Station Scheme in northwest Java on the Sunda Strait (PCR Part I,

para 2.2) for development to generate power for Java. Consistent with thePresidential Instruction of 1976, the initial two units, Suralaya I and II,

planned for construction with Bank assistance were to be designed with dual-

firing capability for burning oil and/or coal. The development of the Air Laya

mine at Bukit Asam was hence planned to provide coal to a captive utilityconsumer. Provided that the mine, related coal shipping terminal facilities,

rail transportation, and sea transportation options could be developed in time

and optimally, the Bank and GOI anticipated significant economic and other

advantages in the development of the Air Laya mine at Bukit Asam.

1.6 The Bank completed the appraisal of the VIII and IX power projects(Suralaya I and II) as the engineering study for the Air Laya mine was initiated

ir. early 1979. The two units at Suralaya (2 x 400 MW) were planned for com-

pletion and testing in late 1984 and mid-1985, respectively. The Air Laya mine

at Bukit Asam was planned initially to reach full production of 3 mtpy by 1987

of which 2.4 mtpy were to be shipped across the Sunda Strait to provide 100percent of the fuel for Suralaya I and II. The rest of the production from Air

Laya was intended for use at the small mine-mouth units required to supply the

mine and the community with electricity and also to supply coal to industrial

customers in South Sumatra through the Kertapati terminal on the Musi River near

Palembang.

1.7 The Suralaya Power Plant was later envisaged for expansion to aninstalled capacity of 3100 MW in the nineties. Bukit Asam production had been

expected to be doubled during a Phase II expansion in the nineties to meet the

fuel needs of Suralaya III and IV planned for completion about 3 years after the

first two units. Suralaya III and IV were also expected to have generation

capacity similar to units I and II but based exclusively on coal. Thus, the

production of about 6 mpty at Bukit Asam would have a captive utility customer,

which eliminates the marketing risk. This was an important consideration since

Bukit Asam coal is generally of low quality with no real international market.

1.8 Following completion of the appraisal of the Bukit Asam mine

development and construction project, GOI approached the Bank for assistance in

instituting a coal exploration program and a prefeasibility/feasibility

assessment program for selected locations in West and South Sumatra. The Bank,

being aware of the potential for appreciable coal resources probable in these

areas and also of the need for access to more coal resources to provide fuel for

generating more power, agreed to assist 001. The additional power units to be

constructed af:er the first two units at Suralaya were anticipated to requirecoal fuel supplies beyond those which could be produced from the Air Laya mine

at Bukit Asam.

-3-

II. BUKIT ASAM COAL MINING AND TRANSPORTATION PROJECT

(LOAN S-9 AND LOAN 2079-IND)

A. Proiect Obiectives

2.1 For the purpose of this Audit, the initial engineering loan (S-9-IND)and the follow-up investment project loan (2079-IND) are discussed together inthe Section III of this report. As described in the PCR, Part I, section 3, thekey objective of the project was to assist GOI in moving away from a mono-energypolicy to one of a multi-energy use in the domestic sect r. This could be mosteasily accomplished in the power generation and industry iectors which then hadheavy reliance on oil. The development of Bukit Asam coal mines was the firstsignificant step in the exploitation of Indonesia's coal resources which, thoughestimated to be ample, were, yet, then regarded as inadequately inventoried.Moreover, a large fraction of the coal resource base in South Sumatra, which wassomewhat better characterized, consists of the low quality lignitic variety whichcannot be exported. In substituting this resource for oil in power generationand industrial use, it was thought that Indonesia's balance of payment could beimproved by exporting its oil production.

2.2 In addition to providing coal fuel to planned power units at Suralaya,the Air Laya mine development and construction program at Bukit Asam had otherimportant benefits to Indonesia:

- The project was seen as an important vehicle and the first stepfor developing the country's coal resource base by providingopportunities for technical and managerial training, and for as-sisting in further exploration studies with a view to carry outmore coal development projects a few years downstream.

- The project was considered as a vehicle for upgrading the entireSouth Sumatra railway system by including the necessary training,management and financial assistance in re-establishing the SouthSumatra railway (Explotasi Sumatra Selatan or ESS) as anefficient railway operator.

- The project was also expected to yield significant dividendsthrough upgrading of the institutional framework for energymanagement and policies. One of the objectives was the rational-ization in the pricing of energy and power.

B. Role of the Bank

2.3 Conscious of the multi-sector nature of the Bukit Asam project and alsothe absence of experience in modern mine development for large mines inIndonesia, the Bank took a leading role in the supervision of the design/engi-neering, development and subsequent evaluation of the project. The Bank's rolein project preparation far exceeded that found in other mining projects. Duringthe construction period starting in 1981 and especially when delays and other

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execution problems plagued the project, the Bank's effort and involvement throughits supervision missions and day-to-day contact from its Headquarters and Jakartaoffices increased considerably.

C. Components of the Project

2.4 As a first coal project involving a Phase I production of 3 mtpy andtransport of 80 percent of this coal to a power station in Java through a fewtransit points, the Bukit Asam coal mining project was an ambitious undertakingfor entities that had little or no experience in developing mines andtransportation facilities for carrying such large amounts of coal. The com-ponents of the project pertained to jurisdictions in two of GOI's ministries, vizthe Ministry of Mines and Energy (MME) and the Ministry of Communication. Thephysical components of the Bukit Asam Coal Mining and Development and Trans-portation Project may be summarized as follows.

- Design, engineering and development of the Air Laya mine toproduce 3 mtpy of coal; selection and procurement of mineoperating system and equipment; construction of mine infra-structure and mine service facilities; and also procurement ofother related equipment based on design such as a fleet of trackdozers, road graders, trucks, scrapers, cranes, and other mobileequipment.

- Design, engineering and construction of a coal loading terminalat Tarahan at Lampung Bay on the Sunda Strait (420 km away fromBukit Asam) with associated coal preparation and loadingfacilities to ship coal over a distance of 100 km across theSunda Strait to Suralaya; upgrading of the coal terminal atKertapati on the Musi River at Palembang for shipping coal toindustrial and other customers, and also to serve as a temporaryloading and shipping facility for Suralaya bound coal beforecompletion of the Tarahan terminal.

- A railway component included:

-- upgrading of track and rehabilitation of bridges on the405km track to Panjang to allow 18T axle loads and construc-tion of a new 6.5 km track from Panjang to Tarahan terminal;

-- construction of new sidings and extension of existingsidings to expedite traffic and accomodate 40-car coaltrains;

-- upgrading of the signalling system and establishment of atelecommunication system needed to link the mine railway,terminals and shipping functions;

-- procurement of 15 new 1,500 hp diesel locomotives, 264 coalwagons and two auxiliary cranes, and rehabilitation of 135existing coal wagons.

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-- extension of motive power and rolling stock repair facili-

ties, and procurement of service equipment including trackmaintenance equipment

- Design, engineering and procurement of a 3 million tpy self-unloading 9,200 DWT coal ship for transporting coal across theSunda Strait from Tarahan to Suralaya on northwest Java.

2.5 In addition to the development of the mine and related transportation

facilities described above, the Bukit Asam project consisted of the development

of the Muara Tiga Kecil mine adjacent to the Air Laya mine. This small mine,

with limited coal reserves was intended to supply the existing consumers and theSuralaya plant during the initial coal burning tests, while the Air Laya mine wasbeing designed and constructed. As appraised, the project also included the

development of a new township consisting of about 1300 houses adjacent to the

mine at Bukit Asam.

D. Project Preparation and Appraisal

2.6 Following the 1976 request for rehabilitation of the Air Laya mine, theBank conducted a number of missions to review the availability and adequacy of

coal and other geological data for Air Laya mine at Bukit Asam. The Bank engagedthe services of a consultant firm specializing in mining engineering and geologyto assess the adequacy of the data for the mine to be developed in Bukit Asam.

The data to be evaluated consisted of (a) exploratory drilling data of 70boreholes carried out between 1918 and 1970; (b) 37 holes drilled by a subsidiaryof an international oil company and 4 by Indonesian Geological Survey during1974-76. A review of this data in mid 1977 disclosed that the data in category(a) and (b) contradicted each other with respect to the coal seam thickness and

was also inadequate in providing definitive information on the amount of thereserves available from this pit. There were other uncertainties in the data

especially with respect to variations in the calorific value of the coal.

2.7 The contradictory and inconclusive nature of the drilling data was a

disappointment, since all parties had assumed prior to the assessment of the data

that mine development could begin immediately. It became apparent that astructural and quality drilling control and testing program was required to provereserves, establish coal quality data, and obtain other geological anddiggability data before mine engineering/design, mining system selection andfeasibility for the project could be determined. An internal review of theproject by the Bank in July 1977 based on the available coal, geotechnical and

drilling data and other prefeasibility studies by an international oil company

led Bank staff to spell out three alternative options:

(a) To inform GOI that the project was too complex forconsideration as the first coal development project for thestate coal entity PN Batubara;

'Office Memorandum on Bukit Asam project status, July 18, 1978.

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(b) To request PN Batubara to complete the required drilling andexplcration program prior to further Bank involvement;

(c) To provide an engineering loan for the project under whichfurther drilling, mine engineering and feasibilityassessment could be concluded during an estimated 18 monthperiod.

2.8 The Bank decided to pursue the last option. The Bank felt that its im-mediate .involvement was necessary to expedite development of the mine while atthe same time preserving the Bank's influence with respect tc the formulation ofthe Terms of Reference and the implementation of the program.

E. Project Design and Organization

2.9 An engineering loan of US$10 million (Loan S-9 IND) was approved bythe Bank on May 9, 1978. This loan was to be used to complete drilling andexploration data on coal reserves/geology for the Air Laya mine and to completean engineering study to select an optimal mine excavation system and an optimalcoal transport configuration to move coal from Bukit Asam to Suralaya.

2.10 The drilling effort and ground investigations, selection of optimalmine system, mine design/engineering, choice of optimal transport options, andcomplete techno-economic study results were to be completed in a period of 18months. Contract negotiations with a Project Services Contractor (PSC) were pro-longed, since the PSC chosen was a joint-venture involving three separateconsultant firms. The engineering and feasibility study thus began only in early1979.

2.11 Decisions made during design and evaluation of the project, organi-zational arrangements made for implementation of the project, and the basis andassumptions used for feasibility analysis essentially influenced the outcome ofthis project. There are many lessons which can be learned from this experience.Selected major issues on the design, evaluation and organization of the projectare outlined as follows.

2.12 Data Acquisition and Mining System Design. The engineering phase(Phase I) of the project consisted of work to further define the extent andnature of the coal reserves as well as the mine geology, and the engineering/-feasibility study fo-- selection of the mining system for the Air Laya operationsfrom among the alternatives. The ground/resource assessments and engineeringstudy were conducted concurrently, even though coal seam characterization,geology, and diggability data remained incomplete even at the conclusion of PhaseI of this project. As a general rule, engineering and feasibility studies areusually conducted and based on total data inputs, especially if this data iscritical for selection of an operating system. The rate at which a BWE systemexcavates the overburden and coal material is dependent among many factors on thehardness of the material encountered. The repair, equipment downtime, andavailability factors for the system are very much dependent on the distributionand hardness indices of the materials encountered during excavation. The numberof BWE required to be installed, and hence the total cost of the mining system,for a certain production capacity is thus significantly dependent on the nature

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of the overburden and coal materials. In the Phase I effort, the selection of

the excavation system from alternatives was essentially completed before all dig-

gability/drilling and coal seam data became available in a conclusive way. It isdifficult to conceive how an optimal mine equip,aent system can be selected whencrucial diggability, coal quality and seam data were not adequately available.

2.13 The project files also indicate that the Bank expected additionaldrilling data with respect to the ship terminal to be constructed at Tarahan to

be obtained after the conclusion of the engineering study. The hurried method-

ology and inadequate preparation for the engineering/feasibility phase work most

probably contributed to the adverse results with respect to the Tarahan terminaland equipment, and initial operational problems with respect to the bucketwheel

excavators (BWEs).

2.14 Selection of the Mining System. The engineering/feasibility analysisand selection of the excavation system for the mine was narrowed to twoalternative options: a system based on an integrated bucket wheel excavators

(BWEs), belt-wagons, a 30 km belt conveyor system on the one hand and a shovel/-truck/belt conveyor system on the other hand. A large effort was devoted to

analysis with a view to determine the mine system to be used. Unfortunately, theexpertise base and experience with respect to evaluation and performance analysison these two alternative systems was not fully present within any singleconsulting (contractor) organization. In addition, the choice of the system for

ultimate installation in Phase II of the project was made before all data with

respect to nature of the coal/seams, diggability of soil and rock formations hadbeen acquired. The implications of operating this system in the Bukit Asamcontext were not adequatedly analyzed. Analysis did not focus on issues such as:

- Bukit Asam is remote from parts and equipment suppliers and alsoprivate sector engineering workshops which may be needed to bolster

the in-house capabilities and resources of PTBA.

- The integrated and inflexible system based on BWEs requires aninventory of 14,000 parts for adequately servicing the system to avoidunnecessary downtime due to unavailability of parts (often due toshortage of foreign currencies).

- GOI had a difficult and unwieldy multi-approval based procurement

system for importing these parts. This acquisition system could be

2 Operations staff offer the following comments with respect to the

nadequacies in ground investigations and selection of the mining system before

ompletion of the ground investigations: "generally, preliminary engineering and

quipment specifications in mining projects are completed during the final stages

f physical investigations. At Air Laya, coal resources (quantity, quality andeological disposition) were adequately known for full feasibility assessment.

ulk samples (cL:l and overburden) had been tested for diggability by equipment

uppliers startint: mid-1970s. Furthermore, suppliers had been encouraged and

iven every opportunity to undertake further tests throughout the preliminary

ngineering phase."

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expected to tax the capabilities of even highly developed andexperienced organizations.

- Tracking these parts while in storage, in the procurement and importapproval cycles involves considerable management, planning, andtracking capabilities.

- The integrated BWE system is essentially an inflexible operatingsystem requiring a high degree of work organization, planning and theavailability of sophisticated technical manpower base.

2.15 BWE-based systems had then been used in only a few locations outsideGermany, but never in the context of the over 3000 mm of precipitation per annumat Bukit Asam. A BWE had been used at Air Laya before the Bukit Asam project insupport of a small lignite production program. However, the experience waslimited since the equipment had not been used in the integrated and inflexiblemode the present BWE system operates under. The analysis assumed that thissystem would fare better under these unusual precipitation conditions than theshovel/truck/conveyer system. In view of the experience and success of thesimple and flexible shovel and truck system used at the adjacent non-Air Layamines, this assumption was essentially incorrect. Five years after installationof the system at the Air Laya mine, the excavation system is still operatingbelow the design capacity (a maximum of 60 percent of design excavation rate inJune, 1991) with significant performance deterioration during the rainy seasonin the beginning of the calendar year. The feasibility analysis for selectionof the mine excavation system showed close lignite mining production costsfigures for the two competing systems being considered, with the cost figuresslightly in favor of the BWE excavation system. However, in the absence ofcomplex and 'cfinitive diggability and ground investigation data, the risks aboutthe design, cpa.rability, and attainability of production targets were far lowerfor the shovel-truck-conveyer system. Furthermore, a bias was introduced infavor of the BWE system in the analysis by assuming that the system would achieve100% of design excavation rates within nine months of installation at the mine.It was well-known then, based on experience at other mining locations where BWEsystems had been installed outside Germany, that these systems took three to fouryears to reach full design excavation rates. This bias represents an additionalseven million tons of lignite production for the BWE during the first four yearsof production valued at a few hundred million dollars.

2.16 The final selection between the two systems was also made without astrong consensus between the main parties connected with this choice.Significant first hand operating/design experience and a concurrent disinterestedmotive were not present in any of the parties connected with this choice (PSC,technical advisor to GOI, the Bank, the BWE design sub-contractor to the PSC, andthe Bank consultant). Toward the end of the engineering study, the PSC which hadlittle first hand experience on the BWE-based system "felt that a decisionbetween the two systems was very difficult, but recommended this time thetruck/shovel/conveyor system contrary to their earlier recommendation of the BWE

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system."' One of the reasons given by the GOI's representative (P.N.Batubara's) for agreeing with the choice of the system based on BWEs is "a reluc-tance to disagree with the recommendation of their consultant (the PSC) selectedby them, without losing face." 2 However, PTBA (the limited company subsequentlyestablished by GOI to own and operate the Bukit Asam mines and coal terminals)later stated that "It was surprising, therefore, the WB's mission during themeeting in February, 1980 took a very passive interest in the crucial miningsystem decision."' The technical advisor to the Government (TAG) thought thatthe shovel/truck/conveyor based system was more appropriate; however, at thefateful MS-3 meeting for selection of the system, TAG was not ready with adetailed analysis on its position to justify its recommendation.

2.17 Beginning in 1977 the Bank had hired a consultant to assist it inevaluating the available drilling and resource data and a study put togetherearlier by an international oil company for developing coal production in BukitAsam. However, this consultant as well had no prior first hand operation anddesign experience on BWE-based mining systems. The consultant visited operationsin Germany and Neyveli (India) to observe BWE operations. In assisting the Bank,the consultant familiarized himself with German and other BWE based operations"as a matter of my own general education and experience--needless to say--Ishould not be unhappy if the Bank deemed this an appropriate part of ourassignment to the project." 5 The consultant participated in discussions onselection of the excavation system; however, the project files do not contain anydocumentation on recommendations and comments solLited from the consultant inMarch 1980 on this issue.

2.18 Early during the engineering study, after reviewing the initial shovelbased options, Bank staff had stated that: "It is very doubtful that thestripping material could be efficiently handled by belt conveyors during the

'Office Memorandum, Pre-appraisal Mission and Back-to-Office Report,arch 4, 1980.

2Off ice Memorandum on Back-to-Office and Full Report, December 19, 1979.

3"Salient Points for Project Completion Report", P.T. Tambang Batubarajkit Asam, September, 1989.

'Operations staff makes the following comments on decisions leading to theselection of the mine excavation system: " The BWE equipment selection was nothurried; the final selection of the BWE system was derived from a least-costanalysis, based on a GOI decision that with two (BWE vs. STC) mining systems of)asically equal unit production costs, the BWE alternative of higher capital butLower operating costs was preferable. The Bank had not been passive in the finalequipment selection; it encouraged all parties to undertake analyses and makerecommendations, but ultimately left the choice to the GOI. Contrary toinformation that the audit team may have been given during its field mission, P.N. Batubara selected the BWE system on the basis of prior BWE operatingexperience at Air Laya and its potential production cost savings."

5Consultant Communication with the Bank dated February 16, 1977.

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rainy season."" The operation of the 26 km belt system at Bukit Asam has beena major problem requiring a large amount of effort for maintaining and keepingthe system clean cf sticky mud and servicing/fixing the system when a breakdownoccurs because of belt-related causes. It is one of the significant sources fordowntime and under-performance for the excavation system. It is not discerniblewhy subsequent design and analysis did not further focus on the heavyprecipitation and mud sticking issues for the belt systz-. It is also notdiscernible why selection of the mine excavation system was ultimately based ontwo systems relying on extensive belt conveyor systems (25 to 30 km) instead ofa simple shovel/truck system. The shovel/truck based system was the alternativewhich was considered in the study by the international oil company which earlierobtained a concession from GOI for developing coal production for export. Thebelt conveyor proposed was also capital intensive and responsible for asignificant fraction of the investment for the mine system. A truck conveyancesystem for burden and coal would have implicitly required the construction ofgood paved roads on the mine-pit slopes. The field Audit in July 1991 found thatthe slopes of the Air Laya pit are serviced quite extensively with rock andgravel paved roads despite the use of BWE and conveyor belt system at Bukit Asam.

2.19 Economic Analysis. The analysis of the investment was dominated by thebenefit stream resulting from projections on the future price of coal. Theappraisal estimates for the opportunity cost of coal were highly inflated. Thepredicted 1991 opportunity cost of coal assumed at project appraisal was US$113when the price was observed to be US$57 in 1981. The 1991 realized price ofabout US$31 is about 28 percent of the price projected during the appraisal.International steam coal prices have actually decreased even on a nominal basiscompared to those prevailing in 1981. The Staff Appraisal Report (SAR) statedin December, 1981 that a decrease in the real price of coal is "a most unlikelyevent."7 It is not discernible in retrospect why such highly inflated andoptimistic coal price assumptions were used. Coal is an abundAnt resource in theworld; escalation in its price in the seventies was based on the perception oflimitation in reserves of gas and oil around the world. Given the sensitivityof the project to this data, an alternatives scenerio of lower coal prices shouldhave been examined for a routine analysis of downside risks. By 1980 andcertainly in 1981, new estimates on the availability of untapped, unconventionalremote and/or off-shore gas and oil resources were revised upward dramatically.The international price of coal decreased by 25 percent from its peak about 12months after the SAR.

2.20 The analysis on viability for the Bukit Asam project could have alsobeen supplemented by analysis on other bases in addition to the benefit streamanalysis. The project files contain research information on mine investment inQueensland and New South Wales, Australia. This information showed that, in1979, the investment required for developing opencast and underground coal mineswas in the range of US$25 to $48/annual ton of production, excluding the initial

6Office Memorandum, Back-to-Office and Full Report, May 17, 1979.

7"Bukit Asam Coal Mining and Development Project", SAR, December 9, 1981."

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pre-stripping cost for opencast mines.0 This is about what was spent on theproject engineering, management, and technical assistance alone. The estimatedinvestment for the Air Laya mine according to the appraisal, excluding theinvestment for rail, ship, township and terminals, was about four or five timesthe investment for the Australian mines.9

2.21 No sustained effort was made in focusing on these costs at Air Layavis-a-vis costs for mine development investment elsewhere. The project filescontain references showing that both GOI and the Bank were concerned thatexpatriate consultant manpower effort/costs were being generously provided forwhile "little attention was being paid to finding least cost solutions"10 forthe whole project. The field mission for this Audit was told that the MineService Facility at Bukit Asam is only being used to about 35 percent of thecapacity and that PTBA plans to solicit work in the future from the privatesector and other entities to increase the use of this Facility.

2.22 To evaluate the work of the PSC as well as other consultant firms, aconsultant firm was engaged by the Steering Committee to assist it and theproject management group (PMG) formed to supervise Phase I. The performance ofthe consultant firm serving as technical advisor to the Government (TAG) duringthe Phase I period was disappointing, according to both GOI and the Bank.However, when the owner's engineer was to be selected again for Phase II, the TAGitself proposed a short-list for selection of a new technical advisor to theGovernment." The list provided to the Steering Committee for selection of thenew TAG consisted of three other expatriate consultant firms and the TAG forPhase I. The TAG for Phase I was selected again as technical advisor to theGovernement for the construction phase.

2.23 Organizational Arrangements. During Phase I of the project, the Bankwas all along aware of the need for effective management, control, and monitoringof the project since the project scope was ambitious and multi-sectoral innature. Discussions with the Steering Committee were initiated early to obtain

8"The lower part of the range is the investment required for open castmines. One new cut mine to produce 4.0 Mtpy is planned now at a cost ofA$80."

' With regard to the level of investment cost per ton of production andthe revenue streams resulting from inflated coal price forecasts, OperationsStaff provide the following comments: "Justification of Air Laya unit investmentcost in the SAR was with reference to Bank investment and experience of coaldevelopment in other LDCs, bearing in mind additional technical assistance andcontingency requirements. Coal sales price forecasts were developed afterconsultation with Industry Department specialists and IEC commodity experts inline with the procedures for commodity price forecasting in the Bank. The loandocuments included a risk assessment, applying Bank traditional sensitivityanalysis methods."

loMemorandum for the Files, Meetings with- GOI officials, November 21, 1979.

"Telex from Steering Committee KP5BA, July 21, 1980.

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agreement for a strong project managment authority or a person of sufficientstature appointed full time to make critical decisions on a day to day basis onissues which do not affect overall project costs and schedules. There wereseveral reasons why the Bank was concerned about this issue. The entitiesconcerned with this project either had poor record in the past or had littleprior experience. Loose managment, control, and monitoring would tend to provideopportunities for proJ-ct entities to change scope and schedules. Finally, it

was felt that a number of previous Bank assisted projects in Indonesia had sig-

nificant execution problems and strong authority and management was required toprevent delays and other implementation problems.

2.24 In addition, the Bank was concerned about the procurement issues duringimplementation. As experienced during Phase I, the normal procurement cycles andprocedures were too long and time consuming. The Bank requested a procurement

process which had been used successfully in the construction of three earlier

fertilizer expansion projects. These procurement procedures were designed withinthe context of GOI regulations prevailing then in Indonesia.

2.25 The Steering Committee was sympathetic to the Bank's concerns and ap-

preciated the adverse effect that delays would have on the success of theproject. However, the Committee put off decisions on these issues toward the

conclusion of the Phase I work. At the conclusion of Phase I and just before

project appraisal, the Committee decided to place responsibility for execution

of parts of the project in the entities PTBA (the mine company), PKJA (therailway company), and PTPANN (shipping company), within the Ministry of Mines and

Energy and Ministry of Communication, respectively. The Committee turned down

the request for a simplified procurement procedure. Each entity was to use its

own standard procurement procedures and was to be assisted by consultants, if

there was a need for such assistance. The Committee was of the opinion that theentities would never learn to execute projects and handle procurements if theydid not do it then. The Committee also decided to set up a loose SteeringCommittee consisting of senior officials of the various Ministries and GOIentities. The Committee was to be assisted by a Government coordinating group

called POKKORLAK. The Committee was to be responsible for coordinating inter-

system policy for the project and overall schedule and policy with the StateElectricity Authority (PLN).

2.26 The coordinating group, POKKORLAK, which comprised of officials and

staff seconded from the respective entities, was to coordinate costs, budget,

schedules, and plans; resolve problems arising from interphasing of different

subsystems; and resolve common day-to-day operating problems. The coordinatinggroup and Committee was to be assisted by a monitoring contractor. The

complicated inter-relationships for the monitoring, control and managment groupsare shown in Annex 2 of this Audit.

2.27 The Bank did not condition the financing of the loan to the conclusion

of a satisfactory agreement with GO on project management, control, monitoringor procurement procedures, even though the Bank had grave concerns on the ap-

propriateness of the execution procedures for the project. A supervision mission

on the engineering loan (Phase I) had outlined a recommendation that the Bank

condition its subsequent participation to a satisfactory resolution of these

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crucial issues with the Steering Committee. However, this was not done andthe Bank went along with the arrangments which the Steering Committee had definedfor Phase II of the project.

2.28 Schedule Constraints. Preparation and planning for the Bukit Asamproject was implicitly tied to the Suralaya I and II schedules in order to supplyfuel for these units. There was a strong desire to avoid the need to importlarge quantities of coal for Suralaya. Evaluation of the Air Laya mine prior tothe initiation of the engineering study disclosed that crucial resource, drillingand diggability data for the mine were incomplete for design and appraisal of theproject. There was also realization that the multi-sectoral project wasambitious for a first coal project. The Bank realized it would have to devoteconsiderable effort to assist in preparation, planning, evaluation, andimplementation of the project. -Already between 1976 and up to the appraisal in1981, the Bank had devoted a total of 440 staff-weeks in preparing the project.

2.29 As initial evaluation, drilling, negotiation, and procurement schedulesfor the Phase I study slipped, there was more concern on schedules for minedevelopment and coal production and the completion of related sectors of theproject. The unusual methodology pursued for selection of excavation system, andcompleting conceptual designs, and relative economic studies before conclusiveand diggability data became available can be understood only in the context oftight schedules.

2.30 An assessment of the material in the project files, especially thesupervision reports following the Milestone 3 (MS-3) tasks for the engineeringphase when the mine excavation system was selected, disclosed that project staffsubsequently had rationalized decisions made earlier (on insufficient grounds).A few months or years later these assumptions were proven to be either incorrector questionable. For example: "Results from completed holes clearly indicatethat material, including interlayer B,-C seams, is diggable. It is, however, tooearly to confirm the assumed digging rates for the MS-3 report."1 It is nowknown that the interlayer B2-C seam is not diggable with the system in place atBukit Asam because it contains significant formations of sandstone and other hardmaterials for which blasting may be required.

2.31 Estimates on certain schedules prepared during Pha.;e I were clearly toooptimistic. Land acquisition for the right of way to the terminal at TarahanNorth, for the mine township, and railway service facility were supposed to beacquired within 12 to 18 months after the appraisal according to schedulesdefined for Phase II. Land for the mine service facility was acquired after adelay of two years, and there were more serious delays with respect to theacquisition of land for other components of the project.

2.32 With Bank agreement, GOI decided to avail itself of the option to havePhase I consultants continue their involvement in Phase II of the project

12Off ice Memorandum on "Project Issues Arising from Recent Mission", June

6, 1980.

13Off ice Memorandum, Back-to-Office Report, April 17, 1980.

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although numerous questions arose on the performance of some of these consultantsduring Phase I (PPAR, para. 2.82). Perhaps, there were also considerations basedon the tight schedule in the continuation of these consultants in Phase IIwithout the considerating bidding for selection of consultants.

F. Risk Assessment and Management

2.33 The appraisal for the project did not adequately weigh the risksinvolved on certain issues and decisions made on the project and proceduresagreed to for implementation. The SAR was considerably optimistic with respectto its analysis on risks in comparison to the reservations that Bank projectstaff had expressed on the contingencies probable during implementation.

2.34 The projecc assumed significant risks when execution of drilling workfor ground and resource assessment was concurrently conducted with theengineering analysis. The selection of the BWE based mining system at the endof Phase I prior to completion of drilling and diggability tests raised questionson the appropriateness of the system for the mine, performance assumptions forthe equipment, and overall conclusions of the study for the mine component. Theinadequacy of ground investigations prior to mining system design contributed tothe breakdown and cracking of parts of the BWEs when mining operations commenced(PCR, Part II, section 3.5.1). Similarly, the soil drilling tests for theTarahan terminal were not concluded by the end of Phase I and even after the oneyear "bridge" period between Phase I and II.

2.35 The Bank had then had considerable prior experience with and, as aresult, concerns on procurement delays with respect to GOI projects. The SARsignificantly understated the risks of possible delays for completing theproject, especially since simplified procurement procedures and appropriatecontrol and management mechanisms for the project were not adopted as the Bankwished. From an execution standpoint the Phase I work was simple, involvingrelatively few procurement and management related decisions. Yet, the Phase I18 month engineering study program was completed about a year after thecompletion date estimated in early 1978. The Phase II undertaking wasconsiderably more complicated. By its nature it involved much more numerousprocurement and management decisions, in addition to the supervision andexecution of work on a diverse number of physical components. Yet, even withoutan appropriate organizational framework for execution, the SAR could anticipatea probable delay of only one year for project completion.

2.36 Risk assessment with respect to technical and management capabilitiesavailable within PTBA for operating a mine with the BWE system was inadequate.The BWE-based system adopted for mining is admittedly inflexible requiringoperability of all parts of the system during excavation. Failure to service anypart of it makes the whole system inoperable, and/or perform with increased riskfor a breakdown in the whole operation. The SAR ignored risks involved on mineoperability based on servicing needs for the system and procurement of parts tokeep it operable.

2.37 Some Bank staff connected with the project were aware of the low rateof return and the risks involved in implementing the project under the proposedarrangements. The project "is at best marginal and, in our judgment, raises

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serious doubts as whether the proposed investment of close to US$1.2 billion is

a risk worth taking. A one-year's delay in the opening of the mine systemoperations, for example, is said to bring the rate of return down to 10% (from

12%). A small cost overrun would send the return expected down further."1 4 The

decision to proceed was only justified by the expectation that expansion of the

mine after 1990 to produce 5 or 6 mtpy of coal would considerably improve the

project rate of return. However, exploration work to assess resources in otherareas near Bukit Asam had yet to be commenced for accessing coal for anadditional production of 3 mtpy.

2.38 The Steering Committee's intention to develop project management,execution, and procurement capabilities for respective GOI entities is

understandable. However, to develop these capabilities in a way to increase ris+for a large project crucially interlinked with another significant project(Suralaya) did not appear to be justified. The Bank's dialogue on organizationaland procurement issues for implementation was not supplemented by adequatequantification of the risks and their probable impact on the economics of theproject. The Steering Committee could have been persuaded on organizational andprocurement arrangements if the risks had been adequately quantified with respectto those issues.

2.39 The SAR also made very generous assumptions on the opportunity cost ofcoal. An adequate risk analysis on this issue could have indicated that theproposed investment was inordinately high and viability was in question should

the opportunity cost of coal differ significantly from the one assumed for the

appraisal. Together with other risk factors viz. delays, operability of thesystem according to design, etc., this project could have been shown to bear veryhigh risk and have high probablity for negative or insufficient rates of returnon investment.

G. Project Implementation

2.40 As of July, 1991 the Air Laya mine has been able to reach only 60percent of the design based coal and burden excavation rate. The original

target for completion of the Air Laya mine and service facilities was June, 1985;however, the mine service facilities were not completed until 1990 and the mine

was initially operating without this component crucial for servicing theequipment. The continuous mine system using BWEs was originally scheduled to

reach 100% design production (18 million bank cubic metres per year) 9 months

after start-up of operations. In June 1989, 34 months later, the systemaveraged only a rate of 10.8 million bcm (60%)." According to the PCR, the

Bukit Asam coal mining project encountered serious delays and other

implementation problems in almost all sectors of project execution (PCR, Part II,Sections 3.1, 3.5). The railway transportation portions of the project were alsosimilarly and considerably delayed with the rail transport finally operating

1Off ice Memorandum on Yellow Cover Report, September 2, 1981.

15"Salient Points for Project Completion Report", P.T. Tambang Batuoara

Bukit Asam, September 1979.

- 16 -

according to target without the availability of the service facility for a long

period.

2.41 The Air Laya mine initially planned to supply the coal requirements of200,000 tpm for Suralaya by the first half of 1987 reached this production targetonly toward mid 1990. When it became clear that the Air Laya mine would miss thetargets for mine completion and coal production, PTBA on its own initiated theexpansion of production at the non-Air Laya (NAL) mines through local contractmining. Though this production was somewhat late in meeting the original targetsset for supply to Suralaya, the NAL mines became the critical domestic supplysource for meeting the coal needs for Suralaya after 1987. In 1990 and 1991 theNAL mines produced almost as much coal as the Bank assisted Air Laya mine; yet,at an average production cost of about 1/3 of that at the Air Laya mine.

2.42 The main reasons for project slippage and serious implementationproblems for the Air Laya mine development project include:

- failure in assessing fully technology-based risks during projectdesign and mine system selection

- hurried preparation, design, and appraisal of project with inade-quate ground investigations

- complex, cumbersome, and ineffective organizational arrangementsfor control, monitoring, and coordination of project

- prolonged, cumbersome and biased procurement procedures.- weakness and inadequacies in management and technical manpower

resource base within implementing entities- poor performance of local contractors and of some expatriate

contractors and staff- serious delays in land acquisition- protracted negotiations with co-financing agencies- delay in mobilizing local funds during the maximum austerity

program instituted by GOI in 1983

H. The Choice of Technology

2.43 Technology risks were inadequately explored during project preparationand feasibility analysis. By then, the Bank had considerable experience inIndonesia with regard to problems based on limitations on the available qualifiedmanpower, limitations on the execution and sustainability of projects withsophisticated technical needs, and limitations based on cumbersome procurementprocedures for acquisition of parts to service equipment. These were notadequately considered in project design as discussed in other parts of thisaudit. An integrated and inflexible technology was selected which initiallyproved to be difficult to operate and sustain in the Bukit Asam context.

2.44 Mine system selection was completed before coal resource, rock and soildiggability data were fully acquired. It was surmised from the beginning that,below the A,-A 2 and B,-B 2 seams at Air Laya, a C coal seam was also present.Since data on it was not available, the mine design during the engineering phasewas planned based on the exploitation of the C seam in the post 1995 period. Itwas rationalised that data on the C seam and the soil/rock formation between theA2 and C seam was not necessary for mine equipment system selection. Even the

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A.-A 2 and BI-B 2 seams were not fully characterized before the system to excavatethe seam was selected. There were other consequences stemming from the hurriedmethodology pursued for the engineering studies for this project. In 1984 theexploration and drilling program furded by the Bank to quantify other coalresource base in South Sumatra yielded "preliminary (inferred) findings (to)indicate that there may be large deposits of coal under a section of the landthat has been allocated as the waste dump for Air Laya."" It is not known ifthis was subsequently resolved satisfactorily.

2.45 There were other adverse consequences on the project based on themethodology for the design/engineering studies. The BWE's were designed basedon a burden hardness index of less than 4000 kPa. It was learned soon afterstart-up that significant hard rock and hard coal material exist up to the A2seam. More than 30 percent of the burden has a hardness index above 5000 kPa andsignificant sandstone is present in the interburdens having hardness index above20,000 kPa. About a year after start-up of mining, the buckets, the bucket-teeth, C-frame, ring girders, and the main slewing bearing for the BWEs begancracking because of their inadequate design. They had to be redesigned and/orreinforced by the equipment supplier at no cost for PTBA. However, the penaltyfor downtime, loss of production, and interest expense pile-up was significant.The other consequence for pursuit of this methodology for ground investigationsand design was that the BWEs are expected to perform at a lower burden removalrate in future when significant amount of hard material will be exposed.

E. Grounds Investigation

2.46 A Bank staff interviewed for this Audit disclosed that as per TORs forequipment supply "the supplier was free to acquire more drilling data for designof the BWE system." A period of 18 months for the engineering study followed byabout a year in the "bridge" period (used for preparation of specifications, TORsfor equipment) proved inadequate for acquiring all the needed groundinvestigation data. It must be questioned how effort on the part of an equipmentsupplier, even if made in good faith, could satisfactorily remove design-basedrisks in a short period available before the equipment system design iscompleted.

2.47 It is now known that the interburden between the A2 and C seamscontains a significantly large sandstone formation. For this reason it is not

feasible to use the present BWE system to recover an estimated 15 to 20 milliontons of coal present in the C seam. Even though the A and B seams are adequateto meet a 3 mtpy supply for 35 years for Suralaya, it may require the use ofanother excavation equipment system to recover the coal present in the C seam,valued at about US$500 million based on the current opportunity cost of coal.

2.48 Specifications for the Tarahan terminal project were also preparedwithout completion of adequate ground investigations and with a requirement for

the contractor to perform more soil tests. More than half way into the en-gineering/feasibility study, it was learned that "soils at Tarahan North were notinvestigated in detail because of lack of time and lack of site location

"Facsimile Transmission to Bank from RSI (Jakarta), September 13, 1984.

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definition.",7 Toward the conclusion of the engineering study, "We (the Bank)

proposed and the (PSC contractor) accepted need for five more soil borings atTarahan North site"." After the conclusion of the 18 month engineering andstudy period, the Bank supervision mission stated that drilling for an additional10 - 11 holes were required for the terminal. "This has to be startedimmediately since results form part of turnkey contract tender specifications.The mission proposed that the bridging financing fund should carry the cost.""

These repeated recommendations were not implemented.

2.49 In the beginning of 1984, excessive settlement was first observed on

terminal loadout facilities at Tarahan. Long after the expected period forsettling, the foundations still continued to sink gradually. The turnkeycontractor had elected to minimize the number of soil tests and to relysignificantly on the inadequate soil testing program completed prior to itsturnkey contract. Almost two years were spent in trying to reach an agreement

for corrective effort for the terminal, attempting to resolve the dispute todetermine responsibility for the failure, and subsequently in amicably settling

with the contractor for termination of its services when it refused to complete

the project on a guaranteed basis.' A new contractor was selected to complete

the terminal. Temporary coal handling and loading facilities had to be con-structed at Tarahan for shipping coal (PCR, Part II, Section 3.4.2) to Suralaya

in the interim period.

J. Proiect Management

2.50 This Audit concurs with the PCR (Part I, Section 5.2) that a morecandid and detailed discussion with GOI representatives should have beenconducted to obtain improved organizational arrangements for project monitoring,control, and management. The organization of the project during implementationwas such that problems in project implementation frequently were reported very

late to the Steering Committee. Instead of operating as an action oriented

17Communication from the PSC to the Bank in response to Bank telex (November12, 1979), January 4, 1980.

"Bank telex to the Steering Committee, May 5, 1980.

"Office Memorandum on Back-to-Office Report, July 2, 1980.

NWith regard to the Tarahan ground investigations and subsequentdifficulties during Phase II of the project, Operations Staff provide thefollowing information and comments: "In the case of Taharan, the approachfollowed was consistent with procedures adopted generally in turnkey contracts.

The owner undertook and initial assessment of ground conditions, informed the

bidders and through the bidding documents that the data supplied were preliminaryand advised them to ascertain the adequacy of the submitted data. The seeds forcontractual difficulties were laid when the selected bidder accepted the owner'spreliminary data without further analysis, made his bid conditional on their

adequacy, and GOI signed the contracts on this basis. Under the co-financingarrangement, this issue did not become evident until settlement and legaladvisors of the parties reviewed the contractual position."

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panel, the Committee frequently acted as if it was merely a monitoring unit sinceit frequently did not affect change or corrective action rapidly.

2.51 The procurement procedures followed were time-consuming, cumbersome,and in a number of cases biased. Critical approval steps lay within agenciesoutside the implementing agencies. These agencies, being remote and removed fromthe project, viewed the procurements according to different standards comparedto the implementing agencies. Local contractors were often selected based notso much on ability or experience but on other factors not relevant to the well-being of the project. Progress on many construction components sufferedseriously as a result, especially components involving rail line upgrading,bridge rehabilitation, mine service facilities, and rail service facilities.

2.52 On occasions the contracts were delayed seriously just to obtain priceconcessions insignificant compared to the cost of the delay. Contractor firmswith poor ability and performance record were often selected just to obtainmarginal cost benefits. It is apparent that all the concerns which the Bank hadthroughout project preparation on procurement and organizational issues foundsubstance in the project implementation phase.

2.53 The Bank had also either assumed more than it should have or did notfully reach explicit understandings with GOI on other matters crucial for thesuccess of the project. For example, it was recognized both by the Bank and GOIthat the implementing agencies, viz PKJA for the rail sector and PTBA, hadinadequate management and technical manpower resources. In the case of themining component, GOI with a strong recommendation from the Bank, converted thestate-owned mining company from a PN (Perusahaan Negara) to a PT (Persero, alimited Government Company). One of the benefits anticipated was relief fromGovernment civil service pay scales for its employees. This was viewed asnecessary for attracting qualified manpower by offering pay scales comparable tothat in the private sector. However, the Steering Committee and GOI werereluctant to meet the pay requirements until the late eighties by which time theproject was in serious trouble. Comparable private sector pay in Indonesia wasabout 200 to 300 percent higher than civil service compensation then. This Auditwas told by GOI officials that compensation issues were responsible for the poorwork ethic on the part of PTBA workers prior to 1989.

2.54 The mining and rail components of the project were generously providedin the project cost with monitoring, project management, and technical advisoryservices from expatriate consultant firms. However, by late 1987 and more than30 months after the initial project completion date, the project had notaccomplished the goals set for it for supplying Suralaya with 200,000 tons ofcoal per month. Deficiencies or limitations stemming from organizational andproject control arrangements, dearth of adequate management and technicalmanpower within the project entities, inadequacies of the technology and designin the Bukit Asam context, prolonged land acquisition schedules, and otheroperational factors threatened to postpone the accomplishment of project goalsin the Air Laya operations for a few more years (PCR Part II, sections 3.4 and3.5).

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K. Proiect Coordi.iation

2.55 In October 1987 GOI issued Presidential decree no. 35 establishing anew ministerial committee to coordinate three major areas of energy sector

development including the Bukit Aim project. The new committee, Team KEPPRES

35/87, replaced the old Steering Committee. The coordinating board POKKORLAK was

also dissolved and the project monitoring functions were taken over by theSuralaya Working Team under the coordination of Team KEPPRES 35/87. The new

Steering Committee took a more active role in identifying and encouraging the

solution of problems. It had a full time official who consistently monitored

progress, coordinated the diverse project entities, and had access to decision

makers at the ministerial level (PCR Part II, section 3.4.4.).

2.56 In 1987 the Bank carried out an analysis to identify the optimalstrategy for realizing the goals set for the Bukit Asam project and as well as

to staunch the serious looming financial deficits for PTBA. Bank analysis was

presented to the new Steering Committee on the basis of which contract mining

using an international contractor was identified as the most optimal strategy formeeting the objectives for the Air Laya mine project.

2.57 The Steering Committee instead decided to adopt a plan involving a

"mine management team" (MMT) concept and took a series of other actions to

improve project performance in all sectors of the Bukit Asam coal mining and

transportation project. These actions include the reassignment/replacement of

senior/key personnel in PTBA and the rail sector, closer alignment of plans

within the project entities through more regular consultations, and transfer of

PTBA directors to Tanjung Enim. The entities also subsequently engaged the

services of new consultants for some operations at Bukit Asam and for training

and assistance for the mine service facility. The adversorial relationship

between staff of the project entities and some former expatriate consultants was

removed by integrating PTBA technical/management staff for operations and

expatriate consultants into an integrated "management team."

2.58 The MMT concept showed noticeable improvement within a year of its

debut in conjunction with the effort, interest, and coordination activities of

the new Steering Committee. Subsequently in 1989, PTBA personnel were also given

substantial pay raises to match compensation in the private sector. This helped

in providing the necessary incentives for enhanced performance and an improved

work ethic.

2.59 In the second half of 1990 and through July 1991, the Air Laya mine has

been producing at the rate of 2.4 mtpy. In 1991 production at Bukit Asam from

the Air Laya and non-Air Laya operations has been at a rate of 4.8 mtpy. The

rail component has been able to move coal recently to Tarahan at the rate of

370,000 to 400,000 tpm recently. The hardness of the coal seams and rock is

increasing as the pit is exploited further. This was not fully anticipatedduring the design phase. Together with other operational limitations based on

local conditions not fully anticipated during the design phase, the BWE system

may not be able to operate much beyond the present 60% excavation rate.

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L. Coal Shipping

2.60 The ship component of the Bukit Asam coal mining and transportationproject was executed flawlessly and was completed without any delay. During thedesign phase, the Bank supported the project to the maximum when it was realizedthat the PSC was deficient with respect to its capabilities in the marinecomponents of the project. The Bank properly and agressively insisted that thePSC avail itself fully with other capable assistance on a sub-contract basis.During the implementation phase, the organization of this project was muchsimpler than that for other components. The owner of the ship PT PANN, a fleetdevelopment corporation partially owned by the government, acted as a projectmanager. PT PANN was assisted by a competent design consultant acting as theowner's engineer and the ship was contracted out for construction in a foreigncountry. The number of parties involved were few and thus line responsibilitieswere simple and well defined.

2.61 In mid 1985 the construction of the coal ship was completed. However,construction of the terminal at Tarahan remained in suspension because of thedispute with the turnkey contractor. Coal for Suralaya ftom the Air Layaoperations was also not available. To stem the losses in revenue for PT PANN,the Bank adviscd PT PANN to rent out the ship for hauling coal from mines inKalimantan for the export market. The ship component of the project is operatingat this time with profit. The Bank advised PT PANN to lease the ship on a time-charter basis to PTBA. PT PANN is earning Rp260 million per month whileservicing Rp 111 million of debt; PTBA covers the operating costs of the ship.

M. Environmei.tal Control and Monitoring

2.62 The potential environmental effects of the project relate mainly to themine component in the construction and mine operation phases. At appraisal, itwas recognized that the mine had to incorporate mitigating strategies to minimizedamage to acquatic resources. Thus, ditches to divert uncontaminated surfacewaters around disturbed areas were to be provided for. Contaminated surface waterwas planned to be diverted into settling ponds, and depending on the iontaminantlevels treatment was to be provided for. During negotiations for the project,PTBA agreed to prepare satisfactory guidelines as per Bank requirements on waterpollution control and to monitor and follow guidelines on pollution control atthe mine site and shipping terminal areas. PTBA also agreed to prepare asatisfactory land reclamation plan before project completion.

2.63 In the construction phase, however, little attention was given toenvironmental protection. Even though an environmental impact assessment wasmade in 1982, detailed reports were commissioned only in 1988, at which time nomeaningful plan to monitor and protect the environment particularly waterquality, existed. Environmental standards were not built into supplier andsubcontractor contracts (PCR part 2 section 3.5.13).

2.64 The field mission for this Audit found that a quantum change for thebetter had occurred on environmental issues at the main mine site. The dumpareas have been well provided with dams to prevent mud and water runoff into theEnim River. The old dump sites and excavated ground are being reclaimed. Topsoil reclaimed from other sites is being spread on reclaimed areas and

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significant planting of fast growing trees and other vegetation has occurred atthese reclaimed sites. The three settling ponds have been operatingsatisfactorily. Examination of the records for the past year show that the waterquality from the settling ponds is close to that upstream in the Enim river. Themeasurements of pH, total suspended solids content, turbidity, conductivity,nitrogen and chloride concentrations in water from mini discharge streams, andthe ponds are not significantly different from measurements for water at a pointupstream in Enim River. Monitoring of the effluent discharge is not conductedat frequent intervals since water samples have to be sent for analysis to Bandungevery month. There is considerable improvement possible in this regard. PTBAinformed the mission that it plans to establish a laboratory at Bukit Asam toenable more frequent monitoring of water quality. Approval for the laboratoryis necessary since import of lab equipment would be required. PTBA also assuredthe mission that the dissolved solids present in the water does not contain toxicspecies. However, explicit data on these were not available because laboraryfacilities are not available in Bukit Asam for analysis of water samples.

N. Proiect Costs

2.65 The PCR for this project was prepared in 1989 before the project wascompleted. Components relating to the mine and rail sectors, particularly theservice facilities, were still under construction. Hence, costs provided in thePCR do not reflect total investments for the project. This Audit estimates, thatincluding the interest during construction, the total cost for the Bukit Asamcoal mining and transportation project is c1 se to US$1,205 million. The PCRestimates the cost of the physical components and services for the project to beUS$811 million (PCR, Part I, Section 6.2). Including the interest duringconstruction (US$216 million through 1989) and the refinanced engineering loan,the total cost was US$1,051 million. This compares to the correspondingappraised estimate of US$1,266 million, excluding the working capital for theproject. The appraisal estimate included large provisions for physical and pricecontingencies in the amounts of US$81 and US$222 million, respectively.

2.66 PTBA is still to be restructured and no audited reports were availableto the Audit on the cost breakdowns. A few observations may be made on the costfor the project based on the portions of the project completed in 1989. TheTarahan terminal was completed at a cost of US$111.4 million which is 91% abovethe appraisal estimate. Most of the increase reflects the cost of redesign andconstruction by a second turnkey contractor hollowing the terminal settlementproblem with the initial contractor. The railway sector was completed late andat above the appraisal estimate of US$215 million. By 1989 the Air Laya minedevelopment cost was US$410 million compared to the appraisal estimate of US$445million. However, the mine service facility had not been completed then. It isprobable that the Air Laya mine development cost ultimately was close to theappraisal estimate. The ship component of the project was completed at a costof US$17 million which is 30% below the appraisal estimate.

2.67 The maximum austerity program instituted by GOI was instrumental inreducing project costs by either eliminating certain components, reducing thescope of others, and instituting more economies in the procurement of servicesand equipment. The development of the mine townsite project was scaled down

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significantly to encourage home ownership by workers. This reduced the cost ofthe project to US$18 million which is about 66% below the appraisal estimate.

2.68 The Rupiah costs of the project through 1989 exceeded the appraisalestimate by about 55%. Without the 64% devaluation of the Rupiah between 1982-88, the actual total project cost as of 1989 would have been higher by US$328million (PCR, Part II, Section 3.3) or US$1,389 million, which is about 9.7%above the appraisal estimate. Between the first half of 1989 and 1991, the totalproject cost increased further from US$1,051 (PCR, Part I) to US$1,205 million(Audit mission findings). A significant part of this increase may be attributedto the capitalisation of interest during-construction on the project. The Audithas not been able to obtain detailed breakdowns for this increase.

0. Project Results

2.69 The mining system for the Air Laya mine has only been able to achievean excavation rate of 10.8 million bcm against a design target of 18 million bcmexpected to be reached by December 1986. Coal production from the Air Laya mineis now at 2.4 Mtpy--still 20% below the 3 Mpty target. The initial projectobjective for shipping 200,000 tpm of coal to Suralaya through the Tarahanterminal was met in July 1989.

2.70 Failure of the Air Laya operations to meet coal supply targets forSuralaya between 1986 and 1989 forced PTBA to expand production in the non-AirLaya mines at Bukit Asam with the assistance of private sector contractors usingshovel/truck-based mining operations. The combined production for the Air Layaand non-Air Laya mines was expected to be 4.8 Mtpy in 1991, 4.4 Mtpy of itfeeding the Suralaya power units I to IV. In the first six months of 1991 therail sector (ESS) has been able to move coal to the terminal at Tarahan at a rateof 370,000 tpm (or 4.4 million tons p.a.).

2.71 Based on the original 60:40 debt to equity ratio, the coal revenue(after subtracting rail and sea transport costs) based on the Air Laya mine justcovers the interest, depreciation, and amortization expenses for Air Laya in1991. The Air Laya operations alone, which are generating losses (-12.5% onsales in FY 89-90, but -22.2% without deferred costs, and -4-7% in cash flowsover sales), are expected to have incceasing negative results in the future evenafter restructuration under a proposed 35:65 debt equity ratio and certain otherconcessions discussed elsewhere (PPAR, Annex I). Several expense items (wages,fuel, amortization of previously deferred expenses, interest expenses) haveincreased since FY89-90 and are budgeted to increase further. The opportunitycost of coal in 1991 was about 28% of the appraisal estimate. Forseeable futurecoal prices are expected to be lower on a percentage basis as compared to theappraisal estimate. The investment cost of developing the Air Lays mine andassociated facilities, exclusive of pre-stripping costs, was a few times that formines in other coal exporting countries. These factors together with the failureto reach design production targets over several years promite to yield negativefinancial rates of return for the Air Laya operations.

2.72 After the anticipated restructuring for which an understanding has re-portedly been reached with the Ministry of Finance, PTBA's combined operationsat Bukit Asam (Air Laya mine and non-project NAL mines) could operate profitably

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and with positive cash flow. This is because the NAL mines excavated throughcontract mining are highly profitable with their production cost of coal 29% (inFY89-90) of that for the Air Laya coal.

2.73 The PCR estimates that the economic rate of return for the project is2.2%, which is appreciably lower than the estimate of 12.5% at appraisal (PCR,Part I, Section 6.3). However, the 2.2% rate is based on a coal opportunity costof US$34 per ton in 1989 and an estimated investment which is appreciably lowerthan the actual cost of the completed project. In 1991, PTBA realized a priceof US$31 per ton delivered at Suralaya, which is consistent with the currentinternational prices. In the event that coal production remains at the presentlevel in future but the opportunity cost of coal slips further, the economic rateof return for the Air Laya project is actually lower than the 2.2% estimated inthe PCR given the 12.5% negative profit margin observed in FY89-90.

2.74 The Bukit Asam coal mining and transportation project has madesignificant contributions to GOI's effort in moving away from its earlier mono-energy policy. The GOI, and specifically its entities concerned with coalproduction including PTBA, have the potential for accessing valuable experiencefor the future based on two distinctly different mine development and operatingmodels at Bukit Asam. This experience may provide a basis for successfullyplanning, designing and implementing new coal mining operations at Bukit Asam infuture.

P. Proiect Sustainability

2.75 PTBA's operations at Bukit Asam comprising of the Bank assisted and co-financed Air Laya mine and the contractor operated non-Air Laya mines will befinancially viable only after a proposed debt restructuring for the Air Layaoperations The ability to sustain benefits after the restructuring will dependon a number of conditions. The non-Air Laya mining operations will have tocontinue operating on the superior basis they have performed at until recently.The Air Laya mine itself will need to produce coal at.or above the current rate,and the rail operations will also have to continue improving to ensure deliveryof PTBA's production to Suralaya.

2.76 The BWE-based mine operations are likely to operate at current orimproved rates if on-going training programs continue yielding the improvedperformances seen recently. Procurement operations and approval procedures playa critical role in the ultimate performance of the BWE system since efficientservicing is dependent on the availability of a large number of imported partsand components. At present, equipment downtime and human factors related toservicing are significant bottlenecks for achieving increased excavation rates.The small technical assistance and training program for the mine service facilityneeds to be continued to ensure sustainable operations at the Air Laya mine.

2.77 Starting in FY 1991, PTBA's operations also include the Ombilin minein West Sumatra. In the event that the eperations at Bukit Asam can bemaintained according to the conditions outlined in the two preceeding paragraphsPTBA is likely to maintain financially sustainable operations. Estimated cashflows for a restructured PTBA is presented in Table 2.1 for FY91. It shows thatthe PTBA operations comprising of the Air Laya, non-Air Laya, Ombilin and other

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operations are expected to show a net cash flow surplus of Rp 23.2 billiondespite making a provision of Rp 128 billion (USS12 million equivalent) forinvestment in long term projects for this budget year. PTBA's projections forthe period 1992-96 expect a cash flow surplus amounting to Rp 171 billion by1996, thus helping in the financing of substantial investments during thisperiod.

2.78 Because both full costs and operating costs are lower 21, the plannedexpansion of production in the non-Air Laya mines in the mid nineties may enhancePTBA's position further, if its experience in developing the non-Air Laya minesin recent years is replicated for the new mines. PTBA's operations at Air Layaare currently overstaffed by about 30 percent. The doubling of productionthrough these expansions will provide a framework for more economic use of thisavailable ard trained manpower.

21 In the first half of 1991, coal production unit costs at Air Laya wereUS$16.5 ton before interest and depreciation (Annex I, Table 3). With contractmining at the non-Air Laya mines, the production costs (including the contractorscapital costs) were US$6.5 per ton of lignite, about 40 percent of the unitproduction costs at Air Laya. Suralaya I to IV require about 4.4 Mtpy of BukitAsam coal to generate power. Even if Air Laya can produce 3 Mtpy of coal, i.e.at 100% of its design production (versus the 2.4 Mtpy it currently produces),with the same total operating cost, the unit production costs would still beabout 50 percent of the unit costs at NAL. Clearly, it makes economic sense toincrease production by using contract mining at new NAL mines in the future.

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Table 2.1

Cash Flow for Budget Year 1991for Consolidated PTBA Operations

(In Billion Rupiah)

Revenue from Operations (Air Laya,Non-Air Laya, Ombilin & other operations) 408.62

Cost of Operations(a) Air Laya, Non-Air Laya,

Terminals, Transportation& other Tanjung Enim Operations 185.14

(b) Ombilin Operations 54.51(239.65)

Net Revenue from Operations 168.97

Local Borrowing 11.00Funds on Hand 179.97

Long Term Investments:Project Investments 89.64Air Laya Mine (Box-cut) Investment 38.43

(128.07)Payments Due:

Long Term Debt 41.37Interest on Debt 33.90

(75.27)

Taxes (38.72)

Accumulated Surplus (Pre-1991) 83.38

Net Surplus/(Deficit) 23.26

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Q. Performance

2.79 Bank Performance. The Bank provided an unusually large effort inassisting GOI to identify, prepare, and appraise the project. Since this projectwas GOI's first significant mining project in the coal sector, GOI relied on theBank for guidance and expertise for developing this project. The Bank providedsignificant supporting effort to the PSC during the design phase. The Bankintervened strongly in a number of instances during the design and engineeringanalysis, especially in encouraging the PSC to seek capable assistance fromsubcontractors on the marine components of the project. The Bank alsosupplemented the PSC's expertise in matters relating to analysis during theengineering phase. During the implementation phase, especially when the projectencountered significant technical/organizational problems and delays, the Bank'sstrenuous effort tended to expedite the project. "The Aide Memoires prepared byBank missions at the conclusion of those missions were more effective in clearingmajor problem areas than the Project organizations themselves", according toPTBA.22

2.80 This Audit concurs with the PCR that the Bank did not exert adequateeffort during project preparation and negotiations to obtain agreement for properorganizational arrangements and simplified procurement procedures. The Bank hadconsiderable experience based on earlier involvement in projects in Indonesia towarrant significant concern based on these issues. The Bank's assessment ofimplementation risks were also unrealistic in the light of its failure to obtainagreement on reasonable organizational arrangements and procurement procedures.It is difficult to understand or explain why the Bank's coal price assumptionswere so flawed. As also noted in the PCR, the Bank largely ignored complianceissues on environmental matters during implementation.

2.81 The Bank provided the loan to conduct the engineering/feasibility studyand concurrently to complete the acquisition of drilling, coal resource, anddiggability data for the Air Laya mine. The Bank also accepted the mine designand mining system selection before all coal resource, drilling, and diggabilitydata were available. This haste was instrumental in selecting a less thanoptimal mine excavation system which is not usable for excavating the underlyingcoal in the C seam. The inadequate ground investigation was also probablyresponsible for inadequate design and subsequent breakdown problems for the BWEsystem during initial operations. The Bank also did not anticipate the tech-nology risks inherent in operating this inflexible and sophisticated system inthe Bukit Asam context. Actually, all parties to this project failed toappreciate the implications of selecting this inflexible technology system whosecontinued operation depended on an inventory of 14,000 parts required forservicing it and on the availability of a highly organized and technicallysophisticated manpower base. The terms of references and the tasks for the engi-neering/feasibility assessment phase were organized in a way that did notpreclude the continuation of the same contractors for the construction phase.The Bank apparently did not object to the apparent potential conflict of interest

2 2"Salient Points for Project Completion Report", P.T. Tambang BatubarnBukit Asam, September 1989.

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with respect to the involvement of these contractors during the feasibility studyand construction phases.

R. Consultant Performance

2.82 The project made extensive use of international consultant servicesduring the engineering/feasibility study and construction phases in all sectorsof the project. Performance for the consultants may be evaluated separately forthe two phases, even though a large number of the consultant firms were involvedin both phascs.

2.83 The project as a whole was admittedly complex and inter-sectoral innature. For the critical engineering/feasibility study phase, it became evidentduring preparation that it was difficult to find a single consultant firm whichcould provide satisfactory or superior expertise in all sectors of the project.A joint-venture consisting of three consultant firms was selected as PSC fromamong five short-listed groups for the engineering study (Phase I). However, thePSC was notably devoid of experience in BWE mining system design and operation.The PSC availed itself of the services of another firm having experience only onBWE systems to conduct design/engineering and economic studies for this system.The PSC also subsequently was proven to possess inadequate d6pth of experiencewith respect to the marine components of the project for which the PSC wasstrongly pressed to draw upon the services of another marine consultant firm.

2.84 Overall, the performance of the PSC was less than satisfactory duringPhase I of this project. The Bank found that the PSC "had little ability toconceptualize the issues in the complex set of choices facing the Government.(The PSC) also did not properly understand the economic optimization processcalled for.",3 GOI and the Bank on numerous occasions expressed disappointmenton the performance of the PSC. Senior GOI officials made a number ofrepresentations to the Bank on their concerns about the design and evaluation ofthe project. "They felt the project to be 'gold plated' and too little attentionwas being paid to finding least cost solutions."24 The PSC's supervision ofits sub-contractor tasked to design and analyze the BWE based mining system, thesystem ultimately adopted, had been judged by the Bank halfway into the study as"insufficient and there doubts must be raised as to the basis for therecommendation of the BWE mining system"". These drawbacks raise the questionof whether the concept of PSC was appropriate for managing the project in thefirst place.

2.85 GOI engaged the services of a consultant firm to act as technicaladvisor to the Government (TAG). The firm selected to serve as TAG failed toqualify on the short-list for selection of the PSC for Phase I of the project.With respect to a role as a PSC, the firm was considered to possess a "limitedcoal experience", even though it had strong project management experience. GOI

13Office Memorandum, April 25, 1980.

24Office Memorandum on Meetings with Top PSC officials, December, 28, 1979.

"Ibid.

- 29 -

and the Bank found the TAG's performance disappointing with respect to its rolein most of the project sectors. The following observations from a supervisionreport for Phase I exemplifies its performance on the project: "The Indonesianentities have not been satisfied with the services provided by (TAG) during thepast months. The major problem has been lack of (i) criLical assessment andadvice on (the PSC's) work, and (ii) lack of quick, on-the-spot technical advicein all sectors."16 The role of the TAG was reduced in subsequent phases of thework because of these inadequacies.

2.86 Performance of international consultants and contractors in Phase IIof the project was satisfactory for most of the contractors. The performance ofthe marine consultant firm during the design and construction of the coal shipwas outstanding. There were a few notably unsatisfactory performances. Theperformance of the first turnkey contractor for the Tarahan terminal wasdecidedly unsatisfactory. In addition, the contractor was uncooperative inattempts to resolve its differences with GOI on its role and subsequentintentions with respect to the settlement problems for the terminal. On theother hand, the performance of the consultants providing project management andmonitoring services for the mine and rail sectors was generally satisfactory withsome exceptions on individual personnel performances. There was a tendency byconsultants to provide personnel with lesser experience and qualifications forthe mine and the rail sectors of the project. Performance of consultantsadvising on the self-onloading ship was very good.

2.87 Consultant firms responsible for the crucial training programs in themining and rail sectors did not organize the training programs appropriately anddiligently in view of the critical need for qualified manpower for operationalsuccess. As noted by the PCR, there was also a "cultural gap" between expatriatepersonnel and the trainees in addition to the language barrier (PCR, Part I,Section 11.1). A genuine rapport mostly did not develop between the two sides.This is especially true in the case of the BWE mine management assistanceconsultant whose relationships were more adversorial than cooperative. Thisconsultant also had a mediocre performance overall as a mine managementassistance contractor when it was in the lead management role in the MMT phaseafter 1987. In general, the training programs progressed with greatereffectiveness after the initial contractors were replaced by new ones in 1987 and1988. The training programs were also handicapped initially by the lack ofinterest or availability of appropriate personnel at PTBA, especially in theperiod prior to the emplacement of competitive worker compensation pay scales.

S. Borrower Performance

2.88 The Borrower cooperated in every manner possible with the Bank duringproject preparation and appraisal. Since this was its first major coal sectorproject, the Borrower deferred to the Bank on most substantive matters onpreparation and appraisal in recognition of the Bank's expertise in this sector.Except for issues on organizational arrangements and procurement matters, theBorrower and the Bank reached a complete understanding on all issues on scope and

26Off ice Memorandum, Preappraisal Mission and Back-to-Office Report,March 4, 1980.

- 30-

objectives for project implementation. The Borrower's project implementingentities were totally committed to the project.

2.89 The Borrower and project entities took a number of important andcritical initiatives during implementation when the project encountered numerous

problems during construction and faced the prospect of serious revenue losses for

the future due to the falling coal prices (PCR, Part I, Section 9 and Part II,

Sections 3.2 and 3.4). The implementation of the Maximum Austerity Program (MAP)which minimized capital investment while retaining the goals and objectives for

the project is testimony to the creative initiative which the Borrower providedduring project implementation. However, MAP initiatives sometimes slowed the

implementation of the project and also resulted in the elimination of

tasks/facilites/procurements crucial for the well-being of the project. The

Borrower also had the foresight in institutin% alternative initiatives to meet

the fuel needs at Suralaya, when it became evident that the Air Laya mine would

not be able to produce coal as planned and the Tarahan terminal completion would

be long delayed. The decision to expand production in the non-Air Laya mines

through contract mining not only supplied coal to Suralaya but also significantlyreduced financial losses for PTBA.

2.90 When it became clear in 1987 that the problems in the mine and rail

sectors were more serious than had been appreciated, the Borrower took a series

of positive actions designed to address organizational, management, and technical

deficiences at PTBA and in the rail sector. The change to a mine managment team

(MMT) concept was a step which was instrumental in improving performance for theproject over the next four years. Coordination of the activities in the various

sectors of the mine and transportation project had been a major issue. The newcoordinating arrangements instituted by Team KEPPRES 35/87 improved the

performance on the project. The project could have benefited immensely if these

actions had been taken a few years earlier. This Audit concurs with other

observations made in the PCR (Part I, Sections 9.3 and 9.4) regarding lessons

which merit close evaluation by the Borrower regarding the role of management,

organizational, and procurement issues in project implementation.

2.91 The field mission for this Audit was impressed with the performance of

the non-Air Laya mines and the contributions these mines are making to PTBA's

financial health through the highly cost effective and profitable operations. The

mine operating model being used in NAL mines (shovel/truck operations and private

sector contract) is highly recommended for consideration for the new mineoperations planned at Bukit Asam in the mid nineties. Private sector contract

mine operations with performance based compensation schemes would probablyprovide the necessary incentives for meeting coal production and cost objectivesin future.

T. Maturity, Grace Period and Exchange Risk

2.93 The Loan to finance the Bukit Asam project (Loan 2079-IND) was granted

to the Government of Indonesia for 20 years of maturity, including 5 years and

4 months of grace, and with a commitment charge equal to .75% p.a. of the

undisbursed principal. The refinancing of the engineering loan (S-9-IND) was

also capitalized into the loan amount. The exchange risk is borne by the

Government's budget and the portion due to the currency-pooling system amounted

- 31 -

to US$46.15 million as of end September 1991 or 35.5% of the nominal outstandingdebt. Between January 1982 and September 1991 the Rupiah depreciated by 68.1%against the US dollar, thus adding far more to the debt-servicing burden.

2.94 From GOI's viewpoint, the availability over time of borrowed funds canbe measured by an indicator called the Average Loan Life (ALL). It is definedas: the ratio of (a) the sum, until maturity, of the loan balances (in USdollars) outstanding at the end of each year over (b) the loan amount net ofcancellations. This indicator measures the number of years during which theentire loan proceeds stay effectively at the borrower's disposal assuming up-front disbursement. The faster the disbursements and the slower the repayments,the longer the availability of loan funds. In the case of Loan 2079-IND, it hadan expected average loan life of 10.16 years at the time of appraisal. Theslower than expected disbursements reduced it to 8.99 years. The exchange riskdue to the currency-pooling system realized on past repayments (but excludingthat accumulated until September 30, 1991) 27 cut it back by 17 months to 7.56years. Assuming that the accumulated risk that disappears but does not worsen,the ALL is further reduced by 14 months to 6.38 years. This indicates that theactual terms of the Bank loan (e.g., about 6 years vs 10 years expected atappraisal) were short to finance slow-depreciated investments such as a coal mineand suggests that the sub-borrower will be effectively relying on GOI's generalbudget for its debt-servicing.

III. COAL EXPLORATION ENGINEERING PROJECT (LOAN 2153-IND)

A. Proiect Objectives

3.1 In July 1981, GOI and Bank staff jointly identified and agreed on thebenefits of further exploring coal mining areas in Indonesia. Under the BukitAsam coal mining development and transportation loan (Loan 2079-IND), US$5million was allocated to initiate coal exploration activities until the newexploration loan became effective. The Coal Exploration Engineering Project wasappraised in February 1982, and in May 1982 the Board approved a loan in theamount of US$25 million to conduct further coal resource exploration work inSumatra.

3.2 The principal objectives for the project were to evaluate coal reservesin Indonesia, to provide a coal reserve inventory of the country's major coalbearing areas, and to strengthen the Indonesian institutions' capabilities toimplement the coal expIrration and evaluation program. These objectives were tobe accomplished in three specific ways. First, an exploration and pre-feasibility/feasibility assessment effort was designed around a drilling programon known extensive coal reserve areas in South Sumatra around Bukit Asam.Second, another promising coal area (to be identified during implementation)would be investigated in a similar manner. Third, a manpower development programwould be defined to assess future manpower requirements and training needs, andto review institutional arrangements in the coal sector. In addition to the

27 Deadline for data collection for this PPAR.

- 32 -

exploration effort in South Sumatra, the project also included an investigation,through a drilling and feasibility study effort, of the economics of developinga new underground mine at Ombilin (West Sumatra). This new mine was required toreplace coal output from an existing mine at this location which was approachingthe end of its economic life.

B. Project Design and Organization

3.3 There was a good understanding between the Bank and GOI, and internallywithin relevant GOI entities, on the objectives and scope of the project. Allthe parties were clearly focused on the need to locate alternative coal areasaround Bukit Asam and to prepare pre-feasibility or feasibility studies with aview to developing alternative coal mining options for supplying 2-3 mtpy forSuralaya III and IV. Consequently, project preparation and negotiationsproceeded smoothly and expeditiously.

3.4 The project was executed by the Directorate of Coal within theDirectorate General of Mines (DG14) in the Ministry of Mines and Energy (MME).Management of exploration and feasibility work at Ombilin was provided by PerumBatubara, the state coal mining company responsible for mining operations. DGMalso established a Project Unit headed by Director of Coal to expeditiouslymanage the project. The project organization in general worked quite well.However, there were some differences of views between DGM and the local ProjectUnit Manager on project priorities and budget control matters which were resolvedby the replacement of the local unit manager. Toward the end of the projectconflicting interests also arose between GOI entities on the issue of the mostappropriate agency to execute a second coal project in South Sumatra. A decreeissued by MME shifted responsibility to PT Tambang Bukit Asam for furtherdevelopment of mines in South Sumatra.

C. Proiect Implementation

3.5 The actual implementation of the project was relatively trouble freeand the project objectives were essentially accomplished more or less in ac-cordance with the planned targets without showing major deviations. Similarly,adequate design data from exhaustive ground investigations should had beenobtained before/during the engineering phase to prevent construction failure ofthe Tarahan coal terminal by the first contractor. The project was completed infive years,one more year than scheduled. Implementation delays related mainlyto initial procurement preparation and bid evaluation; delays in theavailability/allocation of drilling equipment, other supplies and personnel; anddelays stemming from GOI budget restrictions following the Maximum AusterityProgram in 1983.

D. Proiect Costs

3.6 The total cost for the exploration project at completion was US$26.7million which is 54% of the appraisal estimate of US$49.5 million. There werethree principal reasons for the lower cost. The cost of the drilling equipmentwas lower by about US$1.9 million. The devaluation of the Rupiah (from Rp625/USS in 1981 to Rp 1700/US$ in 1988) was a major reason for the reduction oflocal operating and other costs from US$23.9 to US$7.2 million. Foreign

- 33 -

consultant costs, however, were US$15.8 million which is 37 percent higher thanthe appraisal estimate. The appraisal estimate included rather high physical andprice contingencies of US$16.5 million which were not required to complete the

project.

E. Proiect Results

3.7 When the project was completed in 1988, GOI had at its disposaldetailed feasibility studies for coal areas adjacent to Bukit Asam at Muara TigarBesar and Banko and an integrated mine-rail-port feasibility study for OmbilinII in West Sumatra. Pre-feasibility studies for coal areas at Banjasari, SouthArahan, North Suban Jeriji, and Muara Tiga Selatan in South Sumatra were alsoavailable as part of the effort. These studies concluded that only the area atBanko appears to be economically feasible for coal mining in view of the low coalprices expected for the future. These conclusions need not be final, since theanalys.. most probably closely followed assumptions and bases used for the AirLaya project. Current experience in the non-Air Lays mines show that coal canbe produced at substantially lower cost at Bukit Asam with contract mining usingsimple shovel and truck based operations (PPAR, Annex I, Table 3). Recently,PTBA has tentatively included in its plans the initiation of new mines after 1994at Muara Tiga Besar Utara (north), Muara Tiga Besar Selatan (south), and BankoBarat (west) for production of about 10 mtpy of coal by 1997. Ombilin II is alsopresently being reevaluated with assistance provided for a feasibility study bya Japanese company.

3.8 Manpower development studies supported under this project identifiedmanpower needs in the coal sector. Implementation of the recommendations ofthese studies have been followed through under a loan to DGM from the AsianDevelopment Bank. The training program comprising of on the job training withrespect to the exploration effort as well as training at consultant's homefacilities has provided significant technology transfer to entities concernedwith coal resource evaluation in MME.

3.9 Overall, the results from the project effort were satisfactory. Conse-quen-ly, entities within MME have a better appreciation of the coal resource basewhich is available for mining in Sumatra, especially around Bukit Asam. Ir timeand in conjuction with the extensive recent experiences in developing the Air

Laya an. non-Air Laya mines, PTBA and other entities within GOI would be in aposition to cha:t more effective coal development strategy in future in South andWest Sumatra.

F. Performance

3.10 Bank Performance. As stated in PCR Part I, the Bank performed wellduring the project cycle and provided valuable assistance to GOI entities inensuring that the project achieve the set objectives within a reasonable period.As also stated in the PCR, the Bank staff failed during appraisal to appreciateand benefit from their past experience in recognizing limitations with respectto the availability of qualified/experienced staff on a timely basis within theentities and delays possible in contract negotiations and procurement. The Bankunderstandably also could not predict the local budgetary restrictions whichaffected this and other projects during implementation. Difficulties in

- 34-

obtaining project a .budget accounts should also have been anticipated and moreattention should have been given initially for requiring compliance with respectto accounts and reports.

3.11 Borrower Performance. The Bocrower generally perforeed well on eostaspects of the project. The Borrower also had a clear perception of theobjectives and exercised diligence in trying to comply with the covenants. TheBorrower, however, showed some weaknesses as noted in the PCR (Part I, Section8.1). It was late in appointing qualified staff for the Project Unit. TheBorrower was not sufficiently experienced then in matters relating to contractnegotiations. Delays were experienced in obtaining the approvals for theprocurements. The Borrower also had difficulty in mobilizing and managing theannual local budget. The reporting of the project to the Bank was not alwaystimely. However, overall the Borrower's performance was satisfactory.

3.12 Consultant Performance. The use of international consultant firms onthis project was extensive and consultant fees were in excess of 60% of theproject cost. The consultants performed quite well on the exploration effort.A high level of technology transfer took place under this project. As a resultentities in GOI concerned with coal exploration and mine development are now inmuch better position to undertake future coal exploration projects and to manageand assess coal resource development projects.

G. Maturity, Grace Period and Exchange Risk

3.13 The Loan to finance coal exploration (Loan 2153-IND) was granted to theGovernment of Indonesia for 20 years and 2 months of maturity, including 5 yearsand 7 months of grace, and with a commitment charge equal to .75% p.a. of theundisbursed principal. The exchange risk is borne by the Government's budget andthe portion due to the currency-pooling system amounted to US$4.69 million as ofend September 1991 or 33.3% of the nominal outstanding debt. Between June 1982and September 1991 the Rupiah depreciated by 66.6% against the US dollar, thusadding far more to the debt-servicing burden.

3.14 In the case of Loan 2079-IND, it had an expected average loan life of9.5' years at the time of appraisal (PPAR, para. 2.95 for a definition). Theclose-to-expected disbursements reduced it to 9.25 years. The exchange risk dueto the currency-pooling system realized on past rep&yments (but excluding thataccumulated until September 30, 1991) 2a cut it back, however, by over 13 monthsto 8.13 years. Assuming that the accumulated risk disappears but does notworsen, the ALL is further reduced by 16 months to 6.77 years. This indicatesthat the actual terms of the Bank loan (e.g., almost 3 years less than expectedat appraisal) were short to finance long-range investments such as coalexploration and suggests that the sub-borrower will be effectively relying onGOI's general budget for its debt-servicing.

28 Deadline for data collection for this PPAR.

- 35 -

IV. FINDINGS AND LESSONS

4.1 The three projects under review can be considered to have assisted GOIin moving away from its earlier mono-energy policy to one involving multi-energyuse. In doing so, this project has made it possible to free scarce petroleumresource for export, and in its place utilize a non-tradeable fuel for powergeneration. The project has thus increased export earning potential. However,this development has been accomplished with Pubstantial shortfall anddifficulties in the financial field:

- The objectives for the Bank assisted Air Laya mine project haveyet to be realized fully five years after completion of mineconstruction. Substantial targets for the project may not berealizable soon or ever with the mine system in operation atBukit Asam. By mid 1991, the mine system has only been able toexcavate at the cate of about 60 percent of the design target.

- The serious shortfall and delay in production targets for the AirLaya mine forced GO to expeditiously expand production in non-Air Laya (NAL) mines adjacent to the Bank assisted mine to supplythe required amounts of coal for :he Suralaya power station.These mines continue operating at targets much beyond thoseoriginally intended and are also highly profitable.

- PT Tambang Batubara Bukit Asam (PTBA) suffered serious financialdifficulties and mounting losses on account of falling coalprices, substantial shortfall in coal production at Air Laya, andpile-up of interest for loans used to develop the mine andrelated facilities. This entity is being restructured with GOIassuming a significantly higher proportion of its debts. Withoutthe superior performance of the non-project (NAL) mines, PTBAwould have been in much worse financial condition, requiring evenlarger infusions of equity from GOI.

- Sustainability of PTBA after the restructuring is likely, ifpresent and proposed new NAL mines continue operating profitablyand the Air Laya operations maintain or exceed recent performancelevels. Sustainability of the rail and ship transportationsectors are also likely. The ship transportation sector isperforming superbly; however, this was a relatively small part ofthe Bank assisted Bukit Asam project.

- With respect to the small, but important coal exploration andfeasibility study program to evaluate other coal resource base inSumatra, the project has been an unqualified success providingGOI with an assessment on the available coal resource base inSouth and West Sumatra.

4.2 The project discussed here was the first significant coal sectorproject for 001. It relied on the expertise of the Bank for development of thiscoal project. The outcome of the project discussed here suggest the followinglessons, some of which are not new:

- 36 -

- There was a broad common outlook on the objectives and goals forthe Air Laya coal mine development and transportation projectamongst the main parties. There were differences on issuesrelating to organizational arrangements and the procurementprocedures to be used during the implementation phase of theproject. These issues were critical to the project. The Bankshould have insisted on conditionality since the Bank had abetter appreciation of the complexity of the project and theimportance of these issues for project success.

- The consultant arrangements and work were organized such that thepotential for conflict of interest was not avoided. Theengineering/feasibility and subsequent construction phases wereorganized in a way to make it possible for consultants to beinvolved with both phases of the project. Project contractorinvolvements should be arranged in a way to preclude any conflictof interest so that the best possible outcome can be ensured forthe projects.

- The appraisal, based on the inflated revenues for coal in thefuture, should have been supplemented by analysis on other bases,e.g. analysis on levels of investment for similar projects inother parts of the world. Since coal is not regarded as a scarcecommodity, such analysis would have provided indications of starkcontradictions in the conclusions. This might have led to an indepth review of the project and its subsequent revision.

- The basic data on ground investigations, coal seam, and rockformations at the mine should have been conclusively determinedbefore studies on mine design, mining equipment selection, andthe feasibility analysis were commenced and/or completed.Similarly, adequate design data from exhaustive groundinvestigations should have been obtained before/during theengineering phase to prevent construction failure of the Tarahancoal terminal by the first contractor. The conclusions of anengineering/feasibility study can only be deemed to be valid ifdata used for the analysis is conclusive, complete and consistentwith the assumptions used for the analysis.

There should have been a more rigorous and exhaustive analysis onthe appropriateness of the sophisticated technology adopted forthe Air Laya mine vis-a-vis the Indonesian context. The mineexcavation system ultimately adopted has so far failed to performadequately and with ease since technical, weather, human, and theprocurement needs for the system were not realisticallyappraised.

Risk analysis for the project was inadequate, since risks on eachof the critical issues were either poorly defined or signifi-cantly understated. A proper risk analysis would have indicateddoubts on the viability and scope for the project as designed.

ANNEX IPage 1 of 8

- 37 -






FINANCIAL STATUS OF PTBA AND MINE OPERATIONS

1. The project performance audit mission was able to access a significantamount of fin.icial and cost data for PTBA's operations. These data providesignificant insight into PTBA's coal production operations, financial position,its capitalization, and probable future sustainability. These data presented asTables 1 - 6 have been expressed on the basis of the expected restructuring forwhich an understanding has been reached with the Ministry of Finance. PTBA hasnot been viable as an entity based on the 60:40 debt to equity ratio originallyintended for the Air Laya mine operations and related facilities put into placebecause of it. It has not been able to generate cash flow to service its debtdespite the highly profitable non-Air Laya mines operated through contract miningwith the use of contractor owned equipment. The non-Air Laya mines weredeveloped outside the Bank assisted program. The impending restructuring of theAir Laya debt has the following elements: (i) The debt to equity ratio for theAir Laya mine and related facilities constructed with Bank assistance will bereduced to 35:65; (ii) The losses incurred before 1991 would be capitalizedwithin this equity and debt ratios; (iii) The GOI will assume the risks oncurrency fluctuations for PTBA's portion of the off-shore debt after therestructuring; (iv) The rate of interest on PTBA's concessional portion ofoutstanding debt will be at a rate of 8 percent plus the interest at which theconcessional loans were negotiated with the lenders.

2. Table I shows the Income Statement for the Air Laya mine for the fiscalyear 1989/90, nine month period in 1990, and the new budget year 1991 based onan expected production of 2.4 mtpy for 1991 corresponding to 80 percent of thedesign production capacity. It is apparent from this table that on its own andat current level of production, the Air Laya mine will have widening losses andincreased cash flow deficits, even on a restructured basis. For the budget year1991, the cash flow (after interest payment but before reimbursement of principalwhich may be due) is in the deficit by Rp 4,634 million.

3. Table 2 shows the Income Statement for the non-Air Laya mine operationsfor the fiscal year 1989/90, nine month period in 1990, and the new budget year1991 as planned. It is apparent that the non-Air Laya operations are highlyprofitable and generate appreciable cash flows, even after paying taxes on theprofit.

-38-

4. Table 3 shows the average production costs per ton of coal at the AirLaya mine and the contractor operated non-Air Laya mines at Bukit Asam for thefirst five months of 1991. The production cost per ton for the shovel/truckbased contractor mined coal is somewhat less than one-third of that for the AirLaya mine. Leaving aside capital depreciation in Air Lays, the ratio is still40% in favor of other mines. Two items in the cost of production for AirLaya coal merit special consideration. The cost of spare parts to service themine equipment at Air Laya is about 90 percent of the cost of production for non-Air Laya coal. This reflects the difficulty of operating the mine excavationsystem, and large dow,,time and servicing needs for the Air Lays operations. Thedepreciation cost for Air Laya coel production ic about 70 percent of theproduction cost for non-Air Laya coal. This cost item reflects the inordinatelyhigh level of capital investment for the Air Laya mine.

5. Table 4 shows the revenue contributions for the first five months in1991 from PTBA's operations in Bukit Asam. It is apparent from this table thatthe non-Air Lays operations are the primary source of net operating revenue.Overall, PTBA is slightly profitable for this period. Based on the present levelof opera.ions debt service for the restructured entity can be handled. However,the budget 1991 consolidated operations (Table 1 and 2) have been projected toshow a slight loss.

6. Table 5 describes the source of all funds for developing the mineoperations and related facilities for the Air Lays project. It is apparent thatthe delay in commencemnt of production operations and serious short-fall ofproduction for the mine has had significant adverse effect on the total interestaccumulated for the project. This table also shows the debt to equity basis forthe restructured project.

7. Table 6 shows the balance sheet statements for the nine month periodin 1990 and four fiscal year periods prior to 1990. These consolidatedstatements indicate that the long term debt for PTBA has been increasing and thedepreciation and amortization items exceed the "surplus" generated in theoperations in 1990. For the 1990 period, the non-Air Lays operations did not payany taxes for the profit these operations made (Table 2). The "surplus" wouldhave been less if taxes had been paid on the profit made. Without arestructuring of the Air Laya debt, no repayment of principal is possible andfuture long term investments for the operations cannot also be made.

29 Notwithstanding this cost ratio, Operations Staff provide the followingcomments on future costs at AL and NAL: "It needs to be recalled that full (100%)efficienry will not be required to reach full coal production. At fullproduction, (lower stripping ratio), the BWE system should be able to satisfycoal demand, until mine production should fall, and NAL operations could andshould be discontinued. NAL-type T/S operations are currently yielding someproduction, and production cost relief, but are short-term, small scale,contractor-style operations. As such, they provide limited institutional ordevelopment impact. Such small scale operations cannot be considered for areliable coal production feed to Suralaya. To replace any part of Air Laya coalproduction with NAL operations si.mply would add to the operating costs of theproject."

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Annex ITable I Page 3 of 8

Income Statement for the Air Laya Mines(in million Rp)

PT. TAMBANG BATUBARA BUKIT ASAM (PERSERO)AIR LAYA MINES-- mme-e-e--ew-mmeme---mememem-e-mememe-w-omememm---me-memememme--e--wmmeme---e

DESCRIPTION 1989/90 1990 (9 Month) Budget 1991------------------------------------------------ -------------------

Sales 128,950.80 130,770.35 158,998.00

Beginning Inventory 7,421.45 12,873.69 9,123.96Production Cost 66,006.02 72,887.32 83,201.78

Available for Sales 73,427.46 85,761.01 92,325.74Ending Inventory (12,873.69 (9,123.96) (6,121.37)

Cost of Goods Sold** 60,553.77 76,637.05 86,204.37

Gross Profit 68,397.03 54,133.30 72,793.63

Selling & AdministrativeExpenses,** 54,093.22 56,820.33 83,229.00

Operation Income 14,303.80 (2,687.03) (10,435.37)

Interest (30,400.68) (30,483.24) (39,284.00)Non Opevating Income 0.00 815.56 5,000.00Non Op?rating Expense 0.00 (5,011.98) (6,620.00)

Income Before Taxes (16,096.87) (37,366.70) (51,339.37)Taxes 0.00 0.00 0.00

Net Income/(Loss) (16,096.87) (37,366.70) (51,339.37)

---- m e me-------mem---------- mm---------------------------------mm----------

*Depreciation and amortization expenses are 22,736.00 ; 21,288.00 , and46,705.00 million Rp for the three periods, respectively. These expenses aredistributed in the items ** shown above.

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Annex IP&ge 4 of 8

Table 2

Income Statement for the Non-Air Laya Mines*(in million Rp)

PT TAMBAUG BATUBARA BUKIT ASAM (PERSERO)NON-AIR LAYA MINES

Description 1989/90* 1990 (9 Month) Budget 1991

Sales 92,332.91 91,432.04 188,088.00

Beginning Inventory 638.99 1,029.54 70.32Production Cost 25,238.38 33,587.99 46,800.00

Available for Sales 25,877.37 34,617.54 46,870.32Ending Inventory 1,029.54 (703.23) 0.00

Cost of Goods Sold 26,906.92 34,547.21 46,870.32

Gross Profit 65,426.00 56,884.82 141,217.68

Selling & AdministrativeExpenses 31,850.11 35,644.49 67,823.00

Operating Income 33,575.90 21,240.33 73,394.68

Interest Expense (13,459.20) 0.00 0.00Non Operating Income 618.02 0.00 0.00Non Operating Expense 0.00 0.00 0.00

Income Before Taxes 20,735.14 21,240.34 73,394.68Taxes 0.00 0.00 (25,682.14)

Net Income/(Loss) 20,735.14 21,240.34 47,712.54

--------------------------------------------------------------------*Depreciation and amortization expenses are 4,206.00 , 6,957.00 , and 8,913.00million Rp for the three periods, respectively.

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Annex IPage 5 of 8

Table 3

Production Cost at Bukit Asam (PTBA)(January 1 to May 31, 1991)

Ai- Laya Coal (Rp/ton) Non-Air Laya Coal (Rp/ton)--------------------------------------------------------------------

Salaries & Wages 4,656 302Fuel 659 33Electricity 2,326 0Spare Parts 11,253 85Heavy Equipment Rent 4,374 59Light Vehicle Rent 1,751 68Third Party Services 6,414 12,119*Rock Cost 540 0Other Costs 79 0Depreciation 8,336 0

TOTAL 40,389 12,666

*Contractor owns mining equipment

- 42 -

Annex IPage 6 of 8

Table 4

Source of Revenue and Costs for PTBA(January 1 to May 31, 1991)

--------------------------------------------------------------------

Production Average Produc- Total Total Total NetOperations Sale tion Production Sales Cost Contri-

Price Cost Ton in in butionsRp/Ton Rp/Ton Bil. Rp Bil. Rp Bil. Rp

-------------------------------------------------------------------

Air Laya (Coal) 48,079 40,390 969,063 46.59 39.14 7.45

Non-Air Laya (Coal)

-Muara Tiga, Klawas,A Petar 48,079 10,780 1,059,687 50.95 11.42 39.53

-Suban 58,605 55,660 46,496 2.72 2.59 0.14

Total forCoal Operations 2,075,246 100.27 53.15 47.11

Rock From Quarry 14,332 14,757 73,464 1.05 1.08 (0.03)

Sales & Administration Cost (27.43)

Interest Expense (16.37)

Surplus 3.28

-------------------------------------------------------------------

Annex IPage 7 of 8

- 43-

Table 5Source and Status of Borrowings for Air Laya

and Restructured Debt and Equity Basis(March 31,1991)*

--------------------------------------------------------------------------INTEREST(Construe-

SOURCE OF FUNDS CURRENCY LOAN tion + TOTALOn-going)

Mil. Rp Mil. Rp Mil. Rp--------------------------------------------------------------------------1. On Shore Loans1.1 GOI - BRIDGING RP 3.825.661.407.58 3.826 1.046 4.8721.2 GOI - KFW/EC DM 1.081.525.50 425 116 5411.3 GOI - RP (TRH) RP 8.822.560.170.00 8923 2.168 11,091

SUB TOTAL 13.174 3.330 16.504

1.4 BNI 1946 48.100 0 48.100

TOTAL I 61.274 3.330 64.604

2. Off Shore loans2.1 IBRD US$ 130.580.763.45 137.516 32.343 169.8592.2 KFW DM 115.066.692.65 47.460 14.154 61.6142.3 KFW - EC DM 6.128,644.50 3.253 889 4.142

2.4 JAPAN EXIM 74.525 11796 86.321(LOCAL)AMRO/NIO DFL 67.538.883.75 62 22 84

TOTAL II 262.816 59.204 322.020

TOTAL I & II 324.090 62.534 386.624

Initial Equity (PMP) 705.434Liquidated Assets (1981) 20.056

Cost of Project 1.112.116

Debt 64, 76% 386.624

Equity (PMP) 65,23% 725.492--- -----------------------------------------------------------------

*Based on Finance Minister decree dated on February 8, 1992

44 -

Annex IPage 8 of 8

Table 6

Balance Sheet Statements forPTBA Operations at Bukit Asa 1986 - 1990

(in Billions of Rupiah)

19903 1989/902 1988/891 1987/881 1986/871

ASSETS

Current Assets 228.03 207.84 194.51 105.53 70.81

Fixed Assets 522.01 515.13 484.91 329.45 221.64Accumulated Depreciation (91.68) (72.60) 176.42) (44.89) (23.12)Fixed Assets (Book Value) 430.33 442.53 408.50 284.56 198.52

Assets in Settlement 35.27 12.64 102.02 174.09 121.51

Miscellaneous Assets 594.24 553.90 421.22 288.92 272.63Accumulated Amortization (27.17) (13.73) (0.0) _.0Q)Lj .Q0)

567.07 540.17 421.22 288.92 272.63

1,260.70 1,203.19 1126.24 853.10 663.47

LIABILITIES

Current Liabilities 113.57 69.95 43.98 36.72 71.08

Long-term Debt 1,040.19 1,040.19 988.87 735.78 515.75

Other Payables 15.65

Equity 69.37 69.37 69.37 69.37 69.37

Undistributed Profit/Loss 21.92 24.25 25.02 11.24 727

1,260.70 1,203.19 1,126.24 853.10 663i4

'Audited BPKP2Draft Audit BPKP3Unaudited for the nine month period ending December 31, 1990

- 4'; -

Annex IIPage 1 of 1

ORGANIZATIONAL CHART FOR PROJECT IMPLEMENTATION

BUKIT AlAM CA. MINING ANo TRANSPORT PROJECTOh~ni Pkojet mphemunt or gmiå~iaChr

PtsCte Tamås Mam s am~

r- - - - - - - - - -wji - fW -r ---

r1

... lsF

p-ro.

an k.b~_._____

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0«8

Pen~ OEPVWA5

- 46 -ATTACHMENT

REPUBU OF INDONESIA Page 1 of 2

DEPARTMENT OF MINES AND ENRRGY*DiarCTonAr sNERAL OP MINUs

8.0471 DispU I& dals Jenderal Gatet subrote Itav. 46 Piten*s 654006Iee C 0ia* Peamb Jaksta * Indoeees P6.se I See f Ity

COMMENTS FROM THE BORROWER Jakarta; April 24, 1992

Ref a Draft rroject PerformanceAudit Report MPPAR).

To .The World Bank1618 R Street N.W.Washinston D.C. 2043U 8 AAttention a

. Mr. Tves AlbourChiet Infrastrature andRdefty DivisionOperation Zva3uation Department

Dear .Mr. Tves'Albouy.

Ith rkZaerence to the draft of ProJect Performance AuditReport. of -Coal Mining and Transportation EngineeringProJec, (Loan-S-9-IND) Bukit Aea Coal Mining' Developmentand Transportation Project (Loan 2070.- IND), and CoalExploration Englneering ProJect (Loan 2153-IND) you sentus, on behalf of the Department of Nines and Xnergy I anpleased, herewith, to put forward some comments to thedraft, as attached.

I tiank vom for your kind attention.

With best ereonal resards.

ZOSIM GANDATARUNA

Directov General of Mines

o0 a Ministr of Mines and Energys

- 47 - ATTACHMENTPage 2 of 2

COMMENTS ON

THE DRAFT PROJECT PERFORMANCE AUDIT REPORT

(AS PREPARED BY OED - WORLD BANK

FOR THE BUKIT ASAM COAL PROJECT

DATED MARCH 9, 1992)

CLOSE EXAMINATION OF THE DRAFT PROJECT PERFORMANCE AUDITREPORT (PPAP) REVEALS, THAT i

I. THE DRAFT PPAR I3 BY AND LARGE WELL STRUCTURED, CLEARLYWRITTEN, PRECISEs COMPREHENSIVE, AND COMPLETE.

2. THE DRAFT PPAR 1 ALSO WELL BALANCED IN COVERING EVERY ASPECTOF PROJECT PERFORMANCE.

3. THE DRAFT PPAR IS BASICALLY OBJECTIVE AND FAIR IN EVALUATINGTHE PROJECT PERFORMANCE INCLUDING ITS ASSESSMENT ON THEPROJECT SHORTCOMINGS AND FAILURES. IT 1 ALSO OBJECTIVE ANDFAIR IN DETERMINING WHO ARE RESPONSIBLE FOR THOSE SHORTCOMINGSAND FAILURES.

4. CONSEQUENTLY, WE COULD CONCURE TO THE DRAFT PPAR CONCLUSIONSON FINDINGS AND LESSONS TO BE LEARNED FROM THE BUKIT ASAMPROJECT.

5. ONE MINOR CORRECTION IS, HOWEVER, PROPOSED. THE FIRSTPARAGRAPH ON PAGE xii SHALL BE EXPANDED TO ALSO INCLUDE THECASE OF TARAHAN TERMINAL FAILURE AT ITS FIRST ATTEMPT, ASMENTIONED IN PPAR SECTION E. POINT 2.49, PAGE 16. FAILURE TOCOLLECT COMPLETE DATA FOR DESIGNING PROCESS HAS ALSO BEEN ONEOF THE FACTORS TO CAUSE THE FAILURE OF TARAHAN TERMINALCONSTRUCTION BY THE FIRST CONTRACTOR. IN ADDITION, THETARAHAN FAILURE HAS RESULTED IN CONSIDERABLE COST OVERRUN,WORTHWHILE TO BE AGAIN REEMPHASIZED IN THE SUMMARY.

66 THE SAME CORRECTION IS PROPOSED FOR THE FIRST PARAGRAPH ONPAGE 35.

7. LAST BUT NOT LEAST, CORRECTION IS ALSO PROPOSED FUR TABLE 5pANNEX I, PAGE 43. BASED ON THE DECISION OF THE MINISTER OFFINANCE DATED FEBRUARY 5, 1992o CONCFRNING THE FINANCIALRECSTRUCTURING OF PTBA, THE PROJECT DEBT a EGUITY RATIO OF 35165 IS TO BE APPLIED AS OF APRIL. 1, 1989, AND THEREFORE, THESAID TABLE IS TO BE REVISED TO BECOME AS ATTACHED HERETO.

JAKARTA, 24 APRIL, 1992.

DIRECTOR GENERAL OF MINESON BEHALF OF

THE MINISTER OF MINES AND ENERGY

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