Project Name. PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB5610 Indonesia Power Transmission Development Project

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1 Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB5610 Indonesia Power Transmission Development Project Region EAST ASIA AND PACIFIC Sector Power (100%) Project ID P Borrower(s) REPUBLIC OF INDONESIA Implementing Agency Pt. Perusahaan Listrik Negara (PLN) Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared February 12, 2010 Date of Appraisal N/A Authorization Date of Board Approval May 25, Country and Sector Background A. Country Context Public Disclosure Authorized Public Disclosure Authorized 1. A decade after the Asian financial crisis, Indonesia is emerging economically and fiscally stronger than many had imagined. Real GDP has been growing at 5-6 percent annually since 2003, reaching 6.1 percent in Despite the global financial crisis, the country s GDP growth rate reached around 4.2 percent in 2009, one of the highest in the region. Its fiscal position also remains strong, providing Indonesia with options to respond to the global financial crisis as well as providing additional resources for meeting infrastructure development priorities. The successful implementation of priority infrastructure projects will be essential for Indonesia to emerge as a strong middle income country in the coming decade. B. Sectoral and Institutional Context 2. Although the power sector underwent rapid expansion between the early 1980s and late 1990s, it was significantly weakened by the East Asian financial crisis of the late 1990s. For about a decade thereafter, from the late 1990s to 2007, investments in the power sector were below the level needed to ensure reliable supply. As a result, Indonesia still has the lowest per capita electricity consumption and electricity access rate among all of the Bank s middleincome member countries in the East Asia region. Most parts of the country are currently experiencing serious power shortages. 3. The power sector is facing the following challenges to sustain economic growth and social development: Electrification rates remain low, while robust and sustained economic growth is driving the demand for electricity to grow at an annual rate of over seven percent. There is tremendous pressure on the sector to keep pace with economic growth due to

2 the strong correlation between energy and GDP growth. 1 In addition, around 70 million 2 people still do not have access to electricity, or electricity supply is unreliable. To reach the Government s target of electrifying 90 percent of the population by 2020, the power sector will need to connect roughly two million new subscribers annually, double the rate of the past few years. The current electricity tariffs are insufficient to cover the national power utility - PLN s - cost of supply leading to unsustainable Government subsidies to provide PLN with financial support. PLN s financial condition was negatively impacted upon the removal of petroleum fuel subsidies in 2005, the suspension of electricity price increases since 2004, and the increase in fuel prices. The company s financial viability is reliant upon the Government s public service obligation (PSO) subsidies which reached US$ 7.2 billion or 48 percent of the total revenues in 2008, and was US$ 5.6 billion or 37 percent of total revenues in 2009, raising doubts about the longterm sustainability of this financial support mechanism. The restructuring and institutional reform of PLN remains in flux, weakening the Government s ability to provide public financing for power sector development. Although the Government of Indonesia (GoI) started to pursue decentralization, unbundling, corporatization, and restructuring of PLN as early as 1993, progress has been inconsistent and slow as a result of the East Asian financial crisis of the late 1990s and the ongoing legal uncertainty regarding PLN s future. The effective institutional restructuring and strengthening of the sector is critical for facilitating the Government s ability to attract private finance and to improve the efficiency of the power sector. While abundant renewable resources are largely unexploited, the rapid increase of coal in the generation fuel mix may expose the country to environmental risks, both locally and globally. According to PLN s long-term capital investment plan, the share of coal in the generation fuel mix will increase from around 35 percent today to roughly 70 percent by The magnitude of this expansion is raising concerns of the likely negative environmental impact in the heavily populated areas of Java and Bali, and in the environmentally sensitive areas of some of the outer islands. Also, Indonesia s greenhouse gas emissions will continue to grow at a much faster pace than most of its neighbors. Although Indonesia is rich in renewable energy resources, especially geothermal, hydropower and biomass, the lack of incentives and regulatory certainty, combined with the relatively weak institutional capacity of major national and local institutions has hindered the rapid development of these indigenous and clean energy resources. 4. After the successful completion of the general election in July 2009, the new administration was established in October Although the new government is still re-defining its energy sector policy priorities, the emerging energy sector strategy is focusing on (a) facilitating private investments and increasing public financing to grow supply capacity; (b) improving 1 Elasticity of electricity sales growth to GDP growth was on average greater than 1.5 in the past 15 years. 2 World Bank, Electricity for All, 2006.

3 the generation fuel mix by developing coal fired and renewable energy, especially geothermal and hydropower generation; (c) rationalizing the electricity tariff and subsidy regime; and (d) further strengthening institutional capacity and improving the management efficiency of PLN. 5. In line with the Bank s Country Partnership Strategy (CPS) and GoI s strategic priorities, the Bank is supporting a large investment lending program to finance: (a) public sector power infrastructure projects, especially renewable energy, to sustain economic growth; (b) development policy lending programs to support GoI s efforts to establish a sustainable policy environment for infrastructure project development and move the energy sector towards a low-carbon development path; and (c) technical assistance to rationalize the electricity tariff and subsidy regime, establish incentives for geothermal resource development, and strengthen the capacity of national state-owned companies in the energy sector. 2. Objectives A. PDO 6. The development objective of the proposed project is to help meet growing electricity demand and improve reliability of electricity supply in Java and south-central Sumatra by strengthening the power transmission system. B. Beneficiaries 7. Direct beneficiaries of the project include people who directly benefit from the electricity supply from all the substations financed by the project, a population of 56.2 million (49.0 million in Java and 7.2 million in south-central Sumatra). Indirect beneficiaries include people who are not directly connected to the substations financed by the project but connected to the power grids indirectly supported by the project, a population of 74.6 million in Java and Bali, and 8.4 million in south-central Sumatra. This indirect support will improve the security of supply and reduce losses of the power grids as a whole. C. PDO Level Results Indicators 8. Achievement of the development objective will be assessed through increases in electricity sales, as well as reductions in transmission interruptions and transmission losses through the strengthening of transmission systems in Java and south- central Sumatra. 3. Rationale for Bank Involvement 9. The proposed project will form an integral part of the Bank s assistance program to the energy sector to rapidly eliminate the bottlenecks in major transmission systems. It will strengthen the main transmission system in Java-Bali and upgrade the main transmission system in south and central Sumatra. When implemented successfully, the proposed project

4 will play an important role in supporting economic growth in both islands over the medium to long term. 10. The proposed project is also consistent with the objective of the Country Partnership Strategy for Indonesia FY , which inter alia, supports the building of effective and accountable institutions in the power sector. It will contribute to the country program by: (a) improving the business climate by better meeting the increasing demand for electricity - in line with Core Engagement 1 for supporting private sector development; and (b) strengthening the technical, managerial and operational capacity of PLN to implement large scale investment projects (in line with Core Engagement 2 for support for infrastructure development). 4. Description 11. The Project has two components with a total investment cost estimated at $254.1 million, of which $225 will be financed by IBRD. Each component is described below. Java Bali Transmission Substation Expansion and Construction (a) Expansion of four (4) existing 500 / 150 kv and twenty-two (22) existing 150 / 20 kv substations through the installation of new transformers and associated equipment. (b) Construction of one (1) new 150 / 20 kv substation, including two (2) 60 MVA transformers, and installation of associated equipment South Central Sumatra Transmission Substation Upgrading and Expansion (a) Upgrading of five (5) existing 150 kv substations through the installation of new transformers and associated equipment. 5. Financing (b) Expansion ˆ š ƒ Š Š Š ƒžžƒ ˆ ƒ ˆ ƒ ƒ ƒ Source: ($m.) Borrower 29.1 International Bank for Reconstruction and Development Total Implementation A. ƒžƒ Ž ƒ ƒ

5 12. PLN will be the implementing agency. The Planning and Technology Department (PTD) of PLN will be responsible for overseeing and coordinating project implementation including monitoring and reporting. A project coordinator will be appointed to take on this responsibility. A project implementation plan (PIP) has been developed and will be adopted for project implementation. Procurement activities will be managed from PLN headquarters by the Strategic Procurement Department (SPD). A Procurement Committee, chaired by a manager of SPD, will be established to carry out procurement of goods and works under the project. 13. Under the guidance of the Department for the Operation of the Java-Bali Region and the Department for the Operation of the West Indonesia Region, the two regional project offices in Java Bali and in Sumatra (Pktring JBN at Semarang in Java and Pktring SBS at Palembang in Sumatra) will be directly in charge of supervising the construction of their respective components. Disbursement and financial reporting will be carried out by PLN s Finance Department (FD). A Project Management Consultant (PMC), will be employed by PLN to provide support to (a) the PTD on project coordination, monitoring and reporting; (b) the FD on financial management reporting and disbursement issues; (c) the Procurement Committee for preparing bid documents and bid evaluation; and (d) the two regional offices for project reporting. The PMC will be on board before project effectiveness. B. Ž ƒ ƒž ƒ 14. PLN maintains a good statistical system with sufficient data to monitor most of the outcomes of the project e.g., electricity sales in the project areas, and reliability statistics for transformers. Project progress will be monitored by the regional project offices in Java and south-central Sumatra. With the assistance of the project management consultant, PLN s PTD will compile the data and monitor the performance of project implementation. 7. Sustainability 15. Sustainability of the proposed project will ultimately be determined by the sustainability of the power sector, and at the project level, by the proper implementation and operation of the proposed project by PLN. 16. GoI is committed to strengthening the electricity sector s institutional capacity along with PLN s management efficiency. It is also taking key measures to rationalize the electricity tariff and subsidy regime to improve the financial sustainability of PLN and improve the sector s investment climate. The need to make substantial investments in the power transmission system is well understood by the GoI after the recent failure of several high voltage substations supplying the Jakarta region, which resulted in widespread power interruptions across the capital. 17. At the project level, PLN has demonstrated a high level of commitment to the project through its accelerated project preparation and already well established operational capacity. Sustainability of the project is further supported by robust electricity demand growth in the country.

6 8. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Indigenous Peoples (OP/BP 4.10) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) * [ ] [X] 9. List of Factual Technical Documents N/A 10. Contact point Contact: Leiping Wang Title: Sr Energy Spec. Tel: (202) Fax: lwang3@worldbank.org 11. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) pic@worldbank.org Web: * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

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