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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Documtert of The World Bank FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND) JUNE 19, 1989 Industry and Energy Operations Division Asia Regional Office Report No This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 COUNTRY EXCHANGE RATES Name of Currency (abbreviation) Rupiah (Rp) Appraisal Year Average 1982 US$1 - Rp 625 Intervaning Years' Average US$1 - Rp 862 Completion Year 1986 US$1 - Rp 1,650 Average US$1 - Rp 1,138 ABBREVIATIONS AND ACRONYMS Fertilizer Companies AAF - PT ASEAN Aceh Fertilizers, Lhokseumawe, Aceh GRESIK - PT Petrokimia Gresik, Gresik, East Java KALTIM - PT Pupuk Kalimantan Timur, Bontang, East Kalimantan PIM - PT Pupuk Iskanda Muda, Lhokseumawe, Aceh PUSRI - PT Pupuk Sriwidjaja, Palembang, South Sumatra Pusri Nomenclature Line I - Point of production or import Line II - In or near port areas Line III - District level (usually storage) Line IV - Retail or village level Fertilizer TSP - Triple superphosphate DAP - Di-ammonium phosphate AS - Ammonium sulphate MOP - Muriate ^f Potash, Potassium Chloride; Potash SOP - Sulphate of Potash, Potassium Sulphate; Potash Others DGSC - Directorate General of Sea Communications dwt - Deadweight of ship, in long tons FMDSS - Fertilizer Marketing and Distribution Strategy Study GOI - Government of Indonesia ISD - Inland Storage Depot (Line III) KUD - Koperasi Unit Desa. (Village Cooperative) mt - million tons MSDP - Maritime Sector Development Plan PJKA - Perusahaan Jawatan Kereta Api. (State Railway Organization) PUSKUD - Head Office for a group of KUDs RLS - Regular Lin;r Services; the Inter-island general cargo shipping system. UPP - Unit Pengantongan Pupuk. (Port Bagging Station)

3 THE WORLD BANK Washington. DC USA FOR OMCIAIL USE ONLY Offce of DC,redto.G.neral Ope atfons (vdiihti4j June 19, 1989 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Indonesia National Fertilizer Distribution Project (Loan 2120-IND) Attached, for information, is a copy of a report entitled "Project Completion Report on Indonesia National Fertilizer Distribution Project (Loan 2120-IND" prepared by the Asia Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Yves Rovani by -am K. Chopra l Attachment i This document has a rcstric.ed distribution and may be used by recipients only in the perforrnance their official duties. Its contents may not otherwise be disclosed without World Batikc authorizalion. ~~~~~~~of

4 PROJECT COMPLETION REPORT FOR OFmFCAL USE ONLY INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND) TABLE OF CONTENTS Page No. Preface. * * *... * * * * * ** * * **... i Basic Data Sheet ii Summary and Highlights....* iii I. INTRODUCTION II. III. IV. PROJECT FORMULATION PROJECT IMPLEMENTATION AND COST... 7 OPERATIONS V. FINANCIAL ANALYSIS VI. INSTITUTIONAL DEVELOPMENT VII. ECONOMIC REEVALUATION VIII. THE ROLE OF THE BANK IX. CONCLUSIONS... is TABLES 1. Development of Production Units Summary of Expected and Actual Completion of Project Components Summary of Consultant Services... * Appraisal and Actual Costs Forecast and Actual Disbursements Projected and Actual Consumption of Urea, TSP, AS, and NH3 for the Period 1981 to Urea Bulk Carrier Performance Summarized Income Statement for Statement of Changes in Financial Position Summarized Balance Sheet......** Compliance with Loan Conditions Summary c'- Project Benefit and Cost Streams 30 MAPS IBRD 15763R(PPA)R IBRD 15764R This document has a restricted distribution and may be used by recipients only in the performance of th,:ir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

5 i PROJECT COMPLETION REPORT INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND) PREFACE This is a Completion Report on the National Fertilizer Distribution Project for which Loan 2120-IND was approved in March 1982 for the sum of US$66.0 million. The PCR was prepared by the Asia Infrastructure 5 Division and is based primarily on the draft completion report which was submitted by P. T. Pupuk Sriwidjaja, Jakarta Indonesia. The loan was closed on June 30, This PCR was read by the Operations Evaluation Department (OED). The draft PCR was sent to the Borrower on December 27, 1988, for comments by February 14, 1989, but none were received.

6 ii PROJECT COMPLETION REPOPT BASIC DATA SHEET INDOtNESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 212_-IND) KEY PROJECT DATA Appraisal Actual or Iteam expectation current estimate Total Project Cost (USS million) Underrun (2) Loan/Credit Amount (USS million) Disbursed Cancelled ) 28.4 Repaid to ) Aprl 15, _4 2.6 Outstanding to ) APril 15, Date Physical Components Completed 12/85 10/86 Proportion Completed by Above Date (2) _ 90 Pr)portion of Tiee Overrun (2) - 24 Economic Rate of Return: 215 Return on Assets (t) Institutional Performance Cood Good OTHER PROJECT DATA Original Actual or item Plan Revisions Est. Actual First Mes.tton in Files 11/29/75 / / / / Xegotiations 02/01/2 02/01/82 Board Approval 03!730i82 / / 03/30/82 Loan Agreement Date 04/05/82 04/05/82 Effectiveness Date 77/07/82 09/27/82 Closing Date 06/30/86 06/30/86 Borrover Government of Indonesla Executing Agency FT. Pupuk Srividlala (PUSRI) Fiscal Year of Borrower April 1 - March 31 Follov-on Project Name -_- - Loan Number _ Amount (USS million) Loan Agreement Date _ - MISSION DATA No. of No. of Date of Item Month, Year Weeks Persons Man-veeks Report Identification 01/ /19/80 Preparation 03/ /07/80 Preappraissl 01/ /18/81 Appraisal 04/ _ /10/82 Total Supervision I 06/ /0l/82 Supervision 1I 11/ n !26/83 Supervision III 077/8 1--T 04/05/83 Supervision IV 09/ /15/83 Supervision V /a 02/84 n.a. na n.a. 025/854 Supervision VI 07/ /06/84 Supervision VII 04/ _ /05/85 -'mpletion 07/ ,15/PR Total 754 STAFF INPUT Total Preappraisal Appraisal Negotiation Supervisior Other Total /a Desk reviev.

7 iii PROJECT COMPLETION REPORT INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND) SUMMARY AND HIGHLIGHTS PT. Pupuk Sriwidjaja (Pusri) is Indonesia's largest fertilizer producing company. In addition to distributing and marketing its own products, GOI, in 1979, assigned Pusri responsibility for distributing and marketing of all fertilizers in Indonesia. This responsibility includes both domestically produced and imported fertilizers (para. 1.2). ii. The objective of the project was to provide the additional facilities needed for distributing the products from the planned expansion of the domestic fertilizer industry during the period Fertilizer production in Indonesia more than doubled during , with an increase of almost 3.0 million tons, and domestic consumption increased by a factor of about 1.5 over the same period. The project included (i) procurement of three urea bulk carriers and one refrigerated carrier for liquid ammonia; (ii) procurement of 200 rail box wagons and construction of a 21 km railway line to Mteneng; (iii) new fertilizer bagging facilities and piers at Meneng and Cilacap; (iv) expansion of the existing bagging facility at Belawan, North sumatera; (v) improvements to existing urea ships and the purchase of ships' spares; and, (vi) consultancy services (para. 2.2). iii. The Bank loan (US$66.0 m) financed the new bagging facilities, specialized piers, railway wagons, the Fertilizer Marketing and Distribut-n Study, and the ports and maritime studies. Export credits were used to finance the four ships and Government funds were used for the railway line extension (para. 2.8). iv. No major problems were encountered during the project implementation, which was carried out well by Pusri. However, the planned backhaul of bulk TSP from Cresik did not occur. Thus, the expansion at Belawan for handling bulk TSP and improvements to the urea carriers were deleted from the project. Also, construction of the bulk terminal and bagging facilities, and procurement of the rail box wagons were delayed by the slow tender evaluation process (paras ) v. Due to the deletion of components and overestimates at appraisal, the total project cost was US$135.1 million, a reduction of some US$50.2 million from the appraisal estimates. The loan was closed as originally scheduled (06/30/88) and approximately US$28.4 m was cancelled (para. 3.9). vi. Completion of the project has left Pusri with a distribution system consisting of seven 7,500 dwt bulk fertilizee ships, one 4,500 dwt ammonia carrier, six bagging stations, 595 railway wagons, 81 inland storage depots

8 iv and a computerized linear program model to optimize shipments on the entire distribution system (para. 4.1). vii. Utilization of the bulk carriers has not been as high as was projected during appraisal as growth in the domestic consumption of urea has been less than expected. Utilization of the Meneng facility has been low, due to lower than expected demand and also to increased production at a competitive bagging plant in Surabaya. On the other hand, fertilizer consumption has been higher than expected in Cilacap's hinterland and hence the facilities have been operating well in excess of appraisal expectations. It is expected that utilization of both the Meneng facilities and the bulk ships will increase with the commissioning of the Kaltim III project in 1988 (paras ). viii. In October 1986, Pusri and PJKA began to develop fully the block train concept for fertilizer movements in Java using the 595 Pusri owned rail box wagons of which 200 were furnished under the project. Performance to date has been good and it is expected that rail shipments will exceed 95% of the 1988 target (para. 4.12). ix. Pusri's financial performance over the project period was good and key loan covenant targets were met or exceeded. Pursi has adequate funds to finance any future distribution system expansion. Also, the economic rate of return of the project was acceptable at 15% (paras ). X. Near the end of the project, part of the Bank loan was used to fund a Fertilizer Marketing and Distribution Strategy Study (FMDSS) for the period Pusri is using the results of the study to improve the existing distribution and marketing system and to prepare proposals to GOI for additional facilities needed in the future. The study identified key investment needs totalling about US$29.0 m which Pusri intends to implement (paras ). xi. The port master planning and detailed engineering financed under the project led to the ongoing National Ports Project (L-2577). Also the various project financed studies have promoted significant changes in port operations. The Directorate General of Sea Communications and the Perumpels have benefited substantially (para. 8.2). xii. Bank involvement was helpful to Pusri especially by discouraging the purchase of another bulk carrier in 1985 and also in carrying out the distribution strategy study. Due to the recommendations of this study, Pusri has recently made changes which focus primarily on the shipping, marketing and distribution functions and are intended to improve overall operating efficiency (paras ). xiii. In summary, the project helped to finance needed equipment and facilities although in retrospect some of the latter, like the pier at Meneng, were overdesigned. The project by design did not contribute much to the Bank/ Borrower macro and sector dialogue on major issues such as fertilizer subsidies. This was acceptable at the time because food self sufficiency was a key Government goal and making fertilizer available at low cost to farmers

9 v was part of the overall strategy. However, more attention could have been paid to project specific issues such as potential changes in the Government mandated safety stock requirements for fertilizers at the ISD's and the realizable nutrient application levels. As it turned out, reductions in safety stocks (from 3 months to 1 month) and usage of nutrients below Government target levels led to reduced fertilizer distribution volumes and also the resultant underutilization of some facilities.

10 PROJECT COMPLETION REPORT INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT (LOAN 2120-IND) I. INTRODUCTION 1.1 P.T. Pupuk Sriwidjaja (PUSRI) was established in Palembang, South Sumatera, in 1959 as a government owned enterprise to m&aufacture ammonia and urea fertilizers. PUSRI I, the first small plant with installed capacity of 100,000 tons per year (tpy) of urea went on stream by the end of This plant was built with assistance from the United States Agency for International Development. Subsequently, starting in 1974, regular expansion of production capacity took place and Indonesia now has (a) nine urea plants, with a total installed capacity of 4,242,000 tpy in five locations - P.T. PUSRI with four plants, P.T. Kujang, Iskander Muda and Asean Aceh with one plant each and P.T. Kaltim with two plants; (b) two triple super phosphate plants with a total caparity of 1,000,000 tpy; and (c) three ammonium sulphate plants of total capacity 645,000 tpy at Petrokimia, Gresik. Construction is in progress on a tenth Ammonia/urea plant- Kaltim III with a capacity of 570,000 tpy. Two more ammonia/urea plants of similar capacities are planned to be commissioned in 1989 and 1992 respectively, one to replace the obsolete PUSRI I and the other as the second plant of P.T. Iskander Muda. Details of production units are given in Table Regular expansion of fertilizer production and associated distribution capacity resulted from the rapid growth in domestic consumption of fertilizers which in turn was due to Government effoyts to enhance production of rice and other food crops through special intensification programs. The increased demand for fertilizers was often centered in locations which were quite far away from the plants and therefore warranted the development of an efficient distribution system to ensure that farmers get fertilizer in time and at reasonable prices. PUSRI is responsible for the distribution of all fertilizer in Indonesia. Two-thirds of it is transported by ships, including special self unloading ships, to bagging stations at several ports. From there it is forwarded by road and railway to inland storage depots (ISD). From the ISDs the fertilizer is sold through private retailers and cooperatives (KUD) to the farmers. 1.3 The Bank has actively supported the Government's expansion of fertilizer production and distribution as the following list of projects shows:

11 -2- Credit/ Approval loan Amount Project date no. (US$ m) Production Fertilizer plant expansion and gas conservation 6/15/70 C Fertilizer supplementary 5/21/73 C Third Fertilizer expansion 2/20/74 L Fourth Fertilizer expansion 5/20/76 L Distribution Fertilizer distribution 7/28/75 L National Fertilizer distribution 4/05/82 L Total In addition, PUSRI had two other fertilizer distribution projects (equipment mostly) which were partly financed by other aid agencies. 1.4 The Bank's first Fertilizer Distribution project provided the specialized equipment needed by the then existing small-scale fertilizer distribution system to absorb factory output which increased from about 366,000 tons in 1976 to about 1,780,000 tons in Much of chis increased factory output was financed by the previous Bank credits and loans for fertilizer production. The First Project included (a) expansion and provision of new bulk reception and bagging stations at five ports; (b) provision of 175 railway wagons and locomotives; (c) purchase of four self-unloading bulk fertilizer ships; and (d) construction of 57 inland storage depots (ISDs). The project was successful in providing an effective distribution system. 1.5 When the Second project was formulated, domestic fertilizer consumption was growing at about 12% p.a. nationwide but with wide regional variations from about 7.55% p.a. on Java to over 20Z p.a. on the outer Islands. Expansion of the distribution system was needed, especially to serve the outer islands and other areas, where facilities were not provided in the first project. The second project funded improvements both in sea and land transport of fertilizer. It included components for modern ships as well as for block trains for the railway authority (PJKA) and new bagging stations. 1.6 This completion report is based on a draft report submitted by PUSRI and on the findings of a supervision mission to Indonesia and was prepared by the Asia 5 Infrastructure Division.

12 -3- II. PROJECT FORMULATION Preparation Stage 2.1 The proposed project was identified in discussions between the Government and the Bank in 1980 and prepared by PUSRI and the Government with the assistance of two consulting firms. One firm (Canadian) helped PUSRI to make estimates of the facilities required to distribute the additional amounts of fertilizer to be produced, and to assist it in the design (and later on the construction supervision) of the project. The distribution system prepared under the project was based on the output of plants then (1980) under construction or existing, and on the forecasts of the Department of Agriculture about fertilizer usage throughout Indonesia. The second firm (Australian) helped to complete the financial and economic analyses of the proposed project. Project Objectives 2.2 The project was part of the program developed by the Government for increased food production by the proper application of fertilizers. The objectives of the project were to (a) assist in providing distribution capacity for the substantial projected increase in fertilizer production from new plants then under construction; and (b) prepare master plans and detailed engineering for the development of about eleven ports. Appraisal Stage 2.3 The appraisal mission, composed of an engineex, an economist and a financial analyst, visited Indonebia in April/May 1981 and reviewed the project documents. Several issues were identified; the key ones (financing, subsidies, and advance contracting) are summarized in the following paragraphs. 2.4 Project Financing. The mission had indicated that parts of the proposed maritime (ships) and railway (locomotives) components of the project could largely be financed by export credits. If this happened, then the remaining foreign exchange needs of the project would be less than the then proposed Bank loan of US$50.0 million. The mission recommended that the Government submit a complete financing plan for the project and, if necessary, that an appropriate portion of the loan be reallocated to assist in financing the civil works for the railway line construction. 2.5 Fertilizer Subsidies. The Government subsidized PUSRI directly by purchasing factory production at prices which provided an adequate financial return on plant assets and then immediately resold the fertilizer at a lower price to PUSRI so as to provide adequate returns to distribution activities. This was part of Government's strategy for increasing food production by providing cheap fertilizer at the farmgate, without penalizing PUSRI. At that time also, the Government and the Bank were entering a dialogue focused on the overall question of budgetary subsidies, including those for food, fertilizer, and energy, and progress was being made on nominal retail price increases flr some commodities. The rate at which fertilizer subsidies could be phased nut

13 -4- depended, among other things, on policy developments in the food crop sector (including returns to farmers) and on consumer prices. The mission therefore recommended that fertilizer consumption be reviewed periodically in relation to changes in the rice/fertilizer price ratio during project implementation. No conditions or loan covenants would be sought on fertilizer pricing, as it would instead remain a part of the broad Bank economic dialogue with the Government. 2.6 Advance Contracting. Consultants' contracts for supervision of ship construction, bulk reception facilities, and railway line designs were to be signed prior to loan negotiations. These contracts involved about US$5.6 million in foreign exchange liability. In addition, it was possible that PUSRI could have committed and paid about US$7.5 million on contracts for services and goods prior to the date of loan signing. The mission recommended that the loan agreement permit loan funds to be disbursed for any balance of contracts entered into by PUSRI prior to loan signature, provided such contracts have been awarded according to Bank procurement guidelines and have been approved by the Bank. No retroactive financing was proposed. 2.7 In addition to the issues, there were several conditions of negotiations which the appraisal mission asked the Government to fulfill. The major ones were (a) completion of the right-of-way survey for the railway line to Meneng and start of the required land acquisition; (b) selection of consultants both for designs and construction of the new bulk reception and bagging plant and for construction supervision for all ships; and (c) confirmation that the Petrokimia shiploader can load PUSRI ships. Negotiations 2.8 Negotiations took place in Washington during February 1-5, The focus of discussions was on an implementation schedule for the railway part of the project and the submission of a satisfactory schedule was made a condition of Board presentation. The project financing issues were resolved by having PUSRI use suppliers' credits for obtaining all four ships. The Government would finance the railway component and the Bank funds (increased to US$66.0 million) would cover the remaining PUSRI investments as well as the maritime studies which were added during negotiations. The Bank participation in the project was set at 35% of total cost. As for fertilizer subsidies, the Government emphasized the fact that increasing rice production was of paramount importance and hence decisions on fertilizer pricing would be made in the context of this concern. Finally, on advance contracting, the Government accepted the Bank's position.

14 -5- Project Description 2.9 The project as approved (total cost US$ million) consisted of two parts, A and B, as detailed below: Part A: Fertilizer Distribution 1. Ships (a) Acquisition of three shallow-draft self-unloading ships, of about 7,500 deadweight tons (dwt) each, similar in design to PUSRI's existing four bulk fertilizer ships; (b) Acquisition of one ship of about 4,500 dwt for the carriage of refrigerated ammonia; and (c) Improvement of the loading and unloading facilities aboard PUSRI's existing bulk ships. 2. Bulk Reception and Bagging Facilities and Pier (a) Construction of a bulk urea reception and bagging station at Meneng, East Java, with storage for about 25,000 tons of bulk urea and 35,000 tons of bagged urea, and capable initially of bagging 750,000 tons of fertilizer per year (tpy); (b) Expansion and improvement of the existing urea bagging and handling facilities at Belawan, Sumatera; and (c) Design and construction of a special urea unloading pier at each of the ports of Meneng and Cilacap, Java. 3. Inland Transportation (a) Acquisition by PUSRI of about 200 railway freight cars, of about 30 ton capacity each, specially designed to carry bagged fertilizer; and (b) Design and construction of about 21 km of railway line extension from the bulk urea reception and bagging station at Meneng to Kabat, linking the railhead at Banjuwangi to Meneng, East Java.

15 -6-4. Spare Parts Acquisition of spare parts, as agreed between the Borrower and the Bank, for the ships, railway freight cars and other facilities, including the facilities to be provided under the Project, used in PUSRI's fertilizer distribution system. 5. Technical Assistance (a) Design, procurement and construction supervision of the ships, and of the bulk reception and bagging facilities and piers, through technical assistance; and; (b) Technical assistance for the carrying out of the following studies: (i) to update forecasts of fertilizer use and consumption and to study needed fertilizer distribution facilities and methods to increase peak storage capacity; and (ii) to assess the needs for additional investment and operational improvements required for expanded use of block trains for transport of bulk products. Part B: Port Master Plans and Detailed Engineering 1. Preparation of port master plans for about 10 ports and detailed engineering of works; and 2. Preparation of detailed engineering of works proposed for the port of Tanjung Priok under the master plan previously prepared for that port Responsibility for project implementation was divided between PUSRI, PJKA and DGSC (the Directorate General of Sea Communications). PUSRI was responsible for Parts A.1, A.2, A.3(a), A.4, A.5(a) and A.5(b)(i); PJKA was responsible for parts A.3(b) and A.5(b)(ii); DGSC was responsible for the entire part B of the project. The Bank loan covered the PUSRI and DGSC parts of the project The appraisal report, No IND was dated March 10, The project was approved by the Executive Directors on March 30, 1982 and Loan Agreement No IND (US$66.0 million, for 20 years, including 5 years grace, with interest at 11.6% per annum) was signed on April 5, 1982 and became effective on September 27, Part of the proceeds of the loan was to be onlent to PUSRI (Project Agreement No IND of April 5, 1982) at an interest rate of 13.5% for 10 years, including 3 years of grace. The Government bore all foreign exchange risks.

16 -7- III. PROJECT IMPLEMENTATION AND COST Overview 3.1 The civil works components were completed some two years behind schedule due to delays in commencing and finalizing detailed engineering as well as in the construction itself. The ships and rail box cars were also delivered late (about one year) for similar reasons. The total project cost was considerably less (by 27%) due to over-estimation at appraisal and deletion of a few components such as the ship improvements and spares and the Belawan facilities. The ship improvements and spares were deleted because the planned backhaul of TSP from Gresik was not yet feasible for production reasons. This also meant that an additional bagging facility at Belawan, the destination, was not needed and it was also deleted. Operating results were decidedly mixed--the Meneng pier and bagging facilities are under utilized but Cilacap is fully utilized. This was due to lower than expected growth in demand for fertilizers at Meneng, because fertilizer use is already extensive in its hinterland and also it was less costly to service some of the latter's needs from Surabaya. PUSRI, however, is financially sound with profits ranging from US$15.6 million to US$53.5 million (after taxes) during the project period. Its cash and bank balances (including foreign currencies) were quite adequate and it could have financed the project on its own. Table 2 has details of estimated and actual implementation periods. Implementation 3.2 Meneng facilities. The project's major civil works consisted of the bulk receiving and bagging facilities which were.o be built at Meneng, East Java. These included (i) a special pier for receiving bulk fertilizer; (ii) a receiving conveyor of 1,000 tons per hour; (iii) reclaiming system and six bagging modules, for 50 kg bags, both with a total capacity of 1 million tpy; and (iv) five payloaders together with office buildings, maintenance shop, a 35,000 capacity bagged storage space, empty bags and spare parts store. They were to be completed by July 1983, at an appraisal estimated cost of US$22.48 million. However major delays occurred because all stages of the engineering design (selection and award of contract, site investigation, actual designs, etc.) took longer than anticipated. Contracts for the facilities and equipment were awarded on various dates (Table 3) to a group of Canadian and local consultants, ranging from detailed engineering in October 1982 to the construction of the facilities in October All construction was carried out by local contractors. The quality of the work done was very good. The actual total cost of the completed work was US$11.3 million, some 50% less than appraisal estimates. This was largely due to the imprecision of appraisal cost estimates which had been made long before designs were available. 3.3 Cilacap pier. A special pier solely for unloading urea with conveyors connecting the pier to the bagging station was included in the Project at an estimated cost of US$2.62 million. It experienced similar delays as at Meneng. The soils investigation, pier and conveyor designs were all awarded to local consultants, while the same Canadian consultant as at Meneng won the construction supervision contract. The construction contract was also awarded

17 -8- to a local firm but only in July 1984, i.e., more than one year after the original expected completion date. Construction was completed in mid-1986 at a total cost of US$2.1 million. The facility was commissioned in August 1986 and has been well utilized since then. 3.4 Rolling stock and Railway Line. The project included the purchase of 200 railway wagons of 30 tons capacity, designed to carry bagged fertilizer from the bagging stations (UPP) to inland storage depots (ISD). The contract for the wagons was awarded through ICB procedures and the winning bidder (a Korean firm) was to supply the wagons to an Indonesian firm in kit-form for local assembly. The wagons were to be put in service by December However the contract for their supply was not awarded until July The main reason for delays arose from the tender evaluation and approval process and also the slow shipping and kit assembly works. The wagons were finally put into service in October an aggregate delay of 32 months for this project component. The actual cost of the wagons and spares was US$6.4 million, which was just over one third of the appraisal estimated US$16.0 million. As for the 21 km railway line, from the Meneng pier to the mainline junction at Kabat, PJKA completed construction about 1 year behind schedule. This was due to delays in acquiring the right of way and periodic budgetary shortages. It was funded entirely by the Government and built by local contractors who were supervised by PJKA and local consultants. 3.5 Ships. Three 7,500 DWT self unloading ships were to be procured under the project to supplement the existing four ship fleet. The new ships were to be similar to the existing ones and hence the same designs prepared by an American consulting firm under the First Distribution Project (L-1139) were used. A South Korean firm won the bid and the contract dates for the ships' delivery were June 1983, October 1983 and February Deliveries were made on schedule and all ships met the specifications. The ships were capable of unloading at rates in excess ci 500 tons per hour. In addition, the three new ships are outfitted for TSP backhaul, whenever it begins. For the ammonia carrier, PUSRI used the same consultants for designs and they recommended a 4,500 dwt ship as the optimum. A West German shipyard won the bid and delivered the ship on schedule and under budget. 3.6 Studie, and Detailed Engineering. The project included funds for port master plans and detailed engineering studies and later a fertilizer marketing and distribution study was added (partly to use saved funds) which also incorporated the original block train study. The 11 ports to be studied had been identified earlier under the Integrated Sea Transport Study (L-1250 IND) and belonged mostly to the Perumpel II system. The Director General of Sea Communications (DGSC) was responsible for this project component which was largely traated as a part of the Maritime Sector Development Program. The master plans and detailed engineering for these Inter Island Liner Service (ILS) ports was to be carried out in two phases. Phase I included detailed engineering for the expansion of Tanjung Priok port, and master plans and (where necessary) detailed engineeriag for the other Perumpel II ports. DGSC used several foreign and Local consulzants for specific tasks such as the port planning, navigational and communications systems improvement, dredging improvement, container operations management, maritime safety studies, etc. DGSC managed this component well and the study findings led to the ongoing

18 -9- National Ports Project (L-2577 IND). In addition to port operations and careg handling facilities improvements at Tanjung Priok, the National Ports project also includes investments identified by the study at the ports of Teluk Bayur, Panjang, Palembang and Pontianak. 3.7 In early 1985, PUSRI discussed with the Bank the requirements for further development of the fertilizer distribution system serving Indonesia. It was agreed that a study would be undertaken to establish an overall distribution strategy covering the period for movement and handling of fertilizer by land and from the various production units or points of import to the consumption areas throughout Indonesia. Marketing and organizational aspects were also to be addressed. This Fertilizer Marketing and Distribution Strategy Study (FMDSS) was directed by PUSRI, under the guidance of an Inter- Departmental Steering Committee, chaired by the Director of Agro-Cbh-ical Industries in the Department of Basic Chemical Industries. The study was carried out by a team of foreign and local consultants working with a PUSRI counterpart team. The final report, dated August 1986, recommended strategic improvements in both sea and land distribution of fertilizers. Also, a linear programming least cost transshipment model was developed as an integral part of this study. The model can be used by PUSRI to inter alia: (a) determine least cost distribution patterns for all fertilizers throughout Indonesia; (b) assist in the identification of constraints in the proposed alternative distribution patterns; (c) assist in establishing strategies for the distribution system; and (d) determine quantities and costs of fertilizer movements on all links in the system. The study also reinforced the fact that the most efficient distribution systems is PUSRI's current "pipeline system," which is really a continuous flow process, at least down to the line III (Kabupaten and ISD) level. This system is focused on the desirable locat' n of fertilizer stocks which is at line III and IV in the marketing areas.- There is therefore emphasis on seasonality and matching of movements to immediate market requirements. The report also suggested that since Indonesia is a low cost urea producer, PUSRI should focus on developing regular, long term export markets. This would imply that some qualitative improvements to the fertilizer (lowered percentage of fines, use of anti-caking agents, etc.) might be required. 3.8 PUSRI is pursuing this and other study recommendations which also call for the investment of abc:ut US$29 m for additional facilities to cover distribution system expansion needs during the period. The facilities include a bagging station at Cirebon, upgrading Palembang bulk loading facilities to 700 totns per hour, rail sidings, warahousing, high speed bagging machines, and also pier, dredging, road improvements and a new bagging station at Semarang. PUSRI can readily finance these improvements. Also, it was recommended that additional ships should be of the 10,000 dwt size and be obtained through long term charters when required (around 1990). 1/ In PUSRI "pipeline" nomenclature Line I is the point of fertilizer production or import, Line II is in or near port areas, Line III is the district level (actually storage) and Line IV is the retail or village level.

19 Project Costs. The total cost estimate for the project at appraisal was US$185.3 million. In the absence of engineering designs at appraisal time, cost estimates were based on prevailing prices and quotations from suppliers of similar equipment. These estimates turned out t_ be between 1.5 and 2 times higher than actual costs. Also some project provisions were deleted, like the Belawan facilities and the ships' improvements and spares, leading to further cost savings. The actual total cost was US$135.1 m, some 27% below the appraisal estimate. The Bank ended up financing about 30% of the total cost of the project. Table 4 has further details Allocation of Bank Loan. The following table shows the original, revised and final allocation of the loan funds. Category Original Revised (darch 1982) (May 1984) Final US$ million Civil works Equipment Consultants services Unallocated Total The loan was closed on June 30, 1986 and approximately US$28.4 m was cancelled. Table 5 has detailed disbursements which were much slower than expected due to implementation delays and the cost overestimate. General IV. OPERATIONS 4.1 Completion of the project left PUSRI with a distribution system consisting of seven 7,500 dwt bulk fertilizer ships, one 4,500 dwt ammonia carrier, six bagging stations, 595 railway wagons and 81 ISDs. PUSRI, and PJKA to a certain extent, have so far operated the system reasonably well. This was confirmed by the Fertilizer Marketing and Distribution Strategy Study. However, operating results for the individual project elements were decidedly mixed, largely because fertilizer consumption grew neither as rapidly nor in the locations predicted by the appraisal report. By 1986, urea consumption was 2.7 mt or some 9% below the appraisal expected 3.1 mt. On the other hand, consumption of TSP and AS were both over 20% greater than appraisal expectations (Table 6). These widely varying trends have made optimization of the distribution system difficult. Also with the commissioning of new plants in 1984, urea production began to exceed domestic demand. Hence in 1985, PURSI began to export urea and 501,287 tons were exported. In

20 , exports of urea from PUSRI and other domestic producers totalled 1,218,197 tons. This also changed the operational environment as PUSRI had to consider both the domestic and export markets in its planning scenario. 4.2 Since 1982, PUSRI has devoted efforts to reducing the level of domestic stocks measured as a percent of sales. At the end of 1982, the domestic stock of fertilizers as a percentaga of sales was about 47%; by the end of 1984 the percentage had been reduced to 21%. The levelling-off of urea domestic consumption in 1985 coupled with a very long dry season (and consequent delayed wet-season planting) caused an increase in domestic stocks to 25% of sales. A large part of the domestic consumption in 1986 was supplied from the high stocks remaining from By the end of 1986, the domestic stock level was down to 22% of sales. 4.3 Two Government decisions were made in 1986 which will affect distribution system planning in the foreseeable future. The first of these was to allow a reduction in the required stock levels. Prior to 1986, PUSRI was required to maintain stock levels in the consumption areas equivalent to two months of the projected usage. Early in 1986, PUSRI was allowed to reduce the stock levels to 1 month in Java for urea and TSP, and to 1 month in Bali, North Sumatera and South Sulawesi for urea. This decision was based on the fact that the marketing and distribution system had become reliable enough to justify the reduction in stock levels. The second decision was to pay PUSRI a pre-determined lump sum amount (subsidy) on a per ton basis beginning in 1987 for marketing and distribution. Therefore, PUSRI will have to plan distribution and marketing in such a way that Lhe system is operated within the budget. The past practice of PUSRI's receiving marketing compen.'ation to offset losses was essentially discontinued. The new procedure should serve as an incentive for imp-ovements in effectiveness and efficiency throughout the total system. 4.4 Retail prices of fertilizer have been gradually increased over the years in an effort to reduce subsidies and compensate for increases in production costs. In 1982, the first year of this project, the retail price was 90 Rp/kg but by 1986, the price was 125 Rp/kg. Although, it is too early to make an accurate assessment, it seems that the price increase has not had a significant effect on fertilizer usage. Paddy prices were increa3ed at the same time such that an acceptable benefit/cost ratio was maintained for the farmers. Also, in an effort to reduce the use of credit and thus reduce marketing costs, PUSRI has concentrated efforts toward increasing cash sales. Cash sales in 1982 amount--. to only 51% of total sales but by 1986 they had risen to 80% of total ales. Operation of the Fertilizer Ships 4.5 Bulk Urea Ships. During 1984 the ships averaged 38.5 voyages each. Two of the ships operated 353 days and the last ship began operation in March and operated 275 days for the remainder of the year. Table 7 gives statistical information for PUSRI's total fleet of seven urea bulk carriers and the same information separately for the three bulk urea ships purchased during the project for the years 1984, 1985 and The total number of voyages decreased from 265 in 1985 to 239 in 1986 as a result of less domestic

21 urea stock in 1985 and increased exports of urea in This situation has resulted in under utilization of the urea bulk ships. Utilization is expected to imp-ove in 1988 when the Kaltim III urea plant is commissioned. 4.6 During appraisal, an assumption was made that backhaul of bulk TSP would be available from Petrokimia Gresik. However, due to postponing of the TSP III project, bulk loading facilities have not been installed at Gresik and the projected backhaul of TSP has therefore not taken place. Hence the three new ships, which are equipped for backhaul, are somewhat underutilized. 4.7 The second full operating year for the new ships was 1986 during which the ships made 103 voyages. Cargoes averaged 8,244 tons and total delivery to the bagging stations was 840,911 tons. The average total freight haulage cost by the 3 ships purchased under the project was relatively low as shown below: Year Rp/ton , , , /a /a This increase in freight rate was due to: (i) devaluation of the rupiah, and (ii) increase in the price of fuel oil. Operation of the Ammonia Ship 4.8 The ammonia ship began operating in August Utilization of the ship has been Less than expected during appraisal because of developments at the Kaltim I ammonia/urea plant. The Kaltim I plant is designed to produce 1,500 tpd ammonia of which 1,000 tpd is for upgrading to urea and 500 tpd is for direct sales as liquid anhydrous ammonia. The 500 tpd excess ammonia was to be transported by the bulk ammonia carrier provided under this project to both domestic (Gresik) and international destintations. However, utilization of the Kaltim I urea plant has been very low due to technical problems, and this has led to the availability of much larger quantities of excess anhydrous ammonia than planned. These larger quantities were sold to exporters who chartered larger ships than the Pusri carrier for most of their needs. The Pusri carrier was therefore used r.ainly for inter-plant shipments. However, the problems at Kaltim are being resolved and the Pusri carrier should soon be fully utilized.

22 Bulk Terminal 4.9 Operation of the Meneng Bagging Station. Operation of the Meneng bagging station began in May I j85. The Meneng UPP is the second largest bagging station in East Java.2 Utilization of the UPP and the pier have been very low, averaging 20X below the design rate. Several constraints exist which temporarily limit the utilization rate of Meneng. For example, analysis of least cost distribution patterns has so far suggested satisf)ing some of the increased demand by using Surabaya; however this is a limited option and most of the future demand increases will be met from Meneng. The Cilicap and Surabaya UPP's have both performed well above the outputs projected during appraisal. For example output from the Surabaya UPP was projected as 450,000 mtpy while actual output has reached almost 700,000 mtpy and is now at maximum capacity However, Meneng UPP is very important to PUSRI in meeting its marketing/distribution requirements in East Java, particularly during the wet season. Utilization has really been below expectations mainly during the dry season. To date, bagging production for Meneng UPP has been in accordance with the marketing plan of East Java and Bali. The peak production with 4 bagging lines operating has been 2,000 tons/day. Actual bagging and shipping at Meneng was 164,739 tons in 1985 and 244,244 tons in It is expected that utilization of Meneng's bagging capacity will increase in direct proportion to the increased demand in the East Java and Bali market areas. Bulk Receiving Pier and Conveyors at Cilacap 4.11 The bulk receiving pier and conveyors at Cilacap began operation in August Unloading rates from the bulk carriers, and ship turnaround time have both been acceptable. During appraisal, the capacity of Cilacap was estimated at 317,000 mtpy. However due to higher than expected demand for fertilizer, actual output has reached a maximum of more than 500,000 mtpy. Cilacap is therefore overutilized and may soon require further expansion. Operation of Rail Wagons 4.12 In October 1986 PUSRI and PJKA began operation of the block train system. By December 31, 1986, total rail shipments for the year were 1.03 mt or 73.6% of the target tonnage. In 1987, inland freight with the block train concept from all supply points using PUSRI's 595 rail wagons and PJKA's locomotives was about 1.4 mt or 95% of target. The fertilizer block train operation has now become one of PJKA's best run services. 2/ Surabaya is the largest and its highest annual production to date has been 746,968 tons.

23 V. FINANCIAL ANALYSIS 5.1 Audited consolidated income statements of PUSRI for the years 1982 to 1986 are given in Table 8. They show that PUSRI's earnings and financial performance were quite good over the period 5.2 One of the main contributors to this good performance has been the occasional increases in the price of urea supplied to farmers since it was fixed at Rp 70 per kg in late seventies. The increases were to Rp 90 per kg from November 1982, Rp 100 per kg from November 1984 and Rp 125 per kg from April The effect of these increases is reflected in the sales proceeds especially i.n 1985 and 1986 when revenue increased by 12.5% and 26% while total quantities sold recorded increases of only 5% and 6% respectively. 5.3 The following financial indicators show that for the period PUSRI achieved reasonable overall results although there has been a slight decline since The statement of changes in financial position (Table 9) has further details. FINANCIAL INDICATORS Net income (Rp billion) Working capital Return on average net fixed assets in use Section 4.05 of the Project Agreement inter alia stipulated that PUSRI should at all times maintain a ratio of net revenues earned to long-term debt service requirements of the next fiscal year of at least 1.5:1. The ratios achieved ranged between 2.07:1 to 3.22:1 during the years 1982 to The Agreement also specified that PUSRI shall earn each year a reasonable return, after taxes on its fixed assets in service. Returns on net fixed assets during the years 1982 to 1986 amounted to 9.7, 10.3, 25.4, 29.6 and 11.45% respectively. 5.5 Balance Sheets as at the end of the years 1982 to 1986 are given in Table 10. PUSRI's debt equity ratio consistently improved frortm 35/65 in 1982 to 21/79 in 1986 as against the 42/58 to 25/75 estimated at Appraisal. The current ratio also improved in 1986 to 2.2 while in the earlier years it was marginally lower than the estimates. Nevertheless, the lowest was 1.3 in 1983 which was still good. Debt service coverage ranged between 3.4 to 6.0,

24 confirming the financial stability of PUSRI. Cash and Bank balances progressively increased from Rp 74 billion in 1982 to Rp 238 billion in 1986 (including foreign exchange). With such large balances in its possession, PUSRI could finance the construction of a substitute new plant (PUSRI-1B) in place of the obsolete PUSRI 1 plant or other distribution system expansions. 5.6 A steep decline in credit transactions from Rp 107 billion in 1982 to Rp 70 billion in 1986 while sales have increased from Rp 195 billion to Rp 468 billion demonstrated the results of appropriate action in recovering debts as well as the restriction on credit sales. Reduction in inventories from Rp 103 billion in 1982 to Rp 94 billion in 1986 is also indicative of strict stock control. Decline in prepaid expenses from Rp 36 billion in 1982 to Rp 5 billion in 1986 showed that advances for supplies and services are adequately controlled. On the whole, the Balance Sheet reflects effective management of the finances of the companv. 5.7 PUSRI's accounting system provides inter alia appropriate Profit and Loss accounts and Balance Sheets. The Profit and Loss accounts reflect the cost of production and marketing and the earnings thereof. The formats, however, do not provide information on expenses by type such as salaries and wages, stores, and other expenses including interest and depreciation. These have to be worked out by comparing figures of previous years. It is necessary that suitable formats to provide information on expenditure by type are introduced in order to better identify costs. VI. INSTITUTIONAL DEVELOPMENT 6.1 PUSRI has during the last decade developed the capability of not only operating, maintaining and managing the four fertilizer plants set up at Palembang, but also of developing an extensive marketing network. PUSRI has also been able to implement three distribution projects, the first and th last financed substantially by the Bank and the second financed by CIDA.3 The first bank-financed project under Loan 1139-IND (July 1578) helped to expand system capacity and also supported operational improvements which enabled PURSI to handle a 20% increase in fertilizer distribution. PUSRI's managerial and technical capabilities have been further enhanced with the completion of the second Bank-financed project. Compliance with loan covenants was also quite satisfactory; Table 11 has details. 6.2 Despite delays in implementation, the overall performance of the major components indicate that PUSRI's capability to pla.. and implement projects has grown considerably. Based on the National Fertilizer Study II which was undertaken by the Department of Agriculture, PUSRI prepared proposals for studies to be added to the Project to (a) revise the forecast of fertilizer use and consumption; (b) optimize the utilization of the fertilizer 3/ A $20.0 million loan which essentially financed 220 fertilizer box wagons, of 30 ton capacity, and 127 weighing scales and spare parts.

25 distribution facilities; and (c) effect operational improvements to expand the use of block trains. 6.3 Based on PUSRI's proposal, the Bank authorized the use of loan funds and actively assisted PUSRI to initiate a comprehensive study into fertilizer distribution and marketing strategy for the ten year period The consultants' team of expatriate and local experts, drawn from different sources, were actively assisted by a counterpart team from PUSRI. This helped to improve PURSI's overall knowledge and capability and provided additional expertise to undertake major projects independently in the future. 6.4 PUSRI was compensated by the Government for marketing and distribution losses until 198E. With the recent withdrawal of subsidies by Government for marketing and distribution activities and substitution in its place of a lump sum per ton payment, PUSRI will need its experienced personnel in marketing and distribution, to ensure that the whole system operates efficiertly and at the lowest cost. To a certain extent, participation in the FMDSS has helped to prepare PUSRI for this role. This is because PUSRI's capability as an institution for managing the marketing and distribution system and for strategic planning have been strengthened significantly. 6.5 PUSRI has already taken some steps to reduce costs including relocating its main office from Jakarta to Palembang, and thus also providing the benefit of closer coordination between production, marketing and distribution functions. Currently the export division is retained in Jakarta. Since Jakarta is the capital of Indonesia and the hub of commercial activity, especially for international trade, retention of the export division in Jakarta helps in improving export trade as it facilitates coordination with the relevant Government departments such as Trade, Industry, and Agriculture and provides ready access to the international community. 6.6 PUSRI will also manage several improvement projects currently planned, including the Bank-financed optimization project for PUSRI II, III and IV ammonia units to enhance production by 20% over the original capacity. Optimization of PUSRI's urea units to increase urea production, production of melamine (using area) for supply to the plastic industry, and replacement of PUSRI I are other major projects currently planned for early implementation. VII. ECONOMIC REEVALUATION 7.1 The benefits included in the appraisal evaluation were determined on the same basis as for the First Distribution project. Benefits were expected to arise from the expected reductions in distribution costs between the PUSRI plant at Palembang and its network of ISDs. Costs savings were measured net of (a) the capacity of the distribution system existing in early 1981; and (b) the overall changes in fertilizer costs to farmers that were to follow the construction of new urea plants at Bandung and Aceh. Benefits were quantified by comparing costs with the project's new distribution equipment versus "without" the project when small bulk and regular line service (RLS) vessels would be used for interisland shipments and trucks for inland movements.

26 The overall project economic rate of return was thus estimated to be 21% at appraisal. The ex-post rate of return was similarly estimated to be 15Z (Table 12). This rate of return is quite acceptable as it is based on a continued modest average nationwide growth (4% p.a.) in fertilizer usage. The lower volumes of fertilizer distributed, as well as delays in the implementation and use of project facilities and under-utilization of the pier at Meneng also contributed to the reduced rate of return. The reasons can be summarized as follows. (a) Urea ships and pier: (i) the appraisal assumed no ship waiting at Belawan and Cilicap, instead there were some delays; (ii) 14% less urea was distributed than expected; (iii) there were no TSP backhaul benefits; and (iv) the Meneng bagging facility was underutilized. (b) NH3 ship: (i) more ammonia was available than had been expected and it was sold fob to exporters who chartered larger ships than the Pu.ri one. This is a temporary arrangement and it is expected that the ship will be fully utilized eventually. (c) Railway: (i) the delayed start of block train operations meant that the more costly land transport had to be used; and (ii) the transporting of less than expected ronnages. VIII. THE ROLE OF THE BANK 8.1 PUSRI could most likely have financed and implemented this project on its own. However the Bank did play a meaningful role by supporting planning and operational improvements. The Bank in 1985, for example convinced PUSRI to not purchase an additional bulk fertilizer ship. This would have proven to be an uneconomic investment, given the eventual slow growth in fertilizer usage. PUSRI has al_o reported that participation in the Fertilizer Marketing and Distribution Strategy study has helped inter-agency coordination and it is now working on block train improvements with PJKA. Also the study's findings on PUSRI's operations has led to the adoption of major changes in its marketing, shipping and distribution functions. PUSRI is now, for example, using the Linear Program model developed under the study to optimize both its domestic and export transhipment and distribution activities.

27 The DGSC has also benefitted from the findings of the studies financed through Loan The studies have promoted changes which aftect the way the Perumpels will operate, the customs procedures, the revision and application of maritime law, as well as the role of the DGSC itself. The benefits to the country from the improved maritime and shipping practices are quite substantial. 8.3 During supervision missions the Bank staff assisted in solving various implementation related problems, usually those dealing with procurement and PUSRI/PJKA coordination. The project received much less supervisions than normal, probably because more emphasis was placed on the MSDP studies which were also supported by other Bank loans (Loan 1250 and Loan 1337). However, by design, little or no attention was paid to the fertilizer subsidy issue during project implementation. IX. CONCLUSIONS 9.1 The project was successful and was essential to maintaining the flow of fertilizers from the factory to the farm, in support of GOI's agricultural intensification efforts. Fertilizer production more than doubled during and consumption increased by a factor of Implementation of the expansion facilities proceeded smoothly once approval was received for awarding tenders. Construction of the bulk terminal at Meneng and procurement of the rail box wagons experienced delays because of the time required to receive final approval of the tender evaluations. Procurement of the bulk carriers and construction *f the Cilacap pier were completed without major problems. The expansion ; Belawan was deleted from the project. The project was completed below appraisal cost estimates. 9.3 PUSRI and PJKA are working on programs for efficient operation of the equipment and facilities acquired under the project. Efforts are under way to improve the block train system and the results are positive. It is expected that rail shipments will attain planned targets. 9.4 PUSRI has made organizational changes using input from the strategy study which was carried our under the project. Major changes, which all have the objective of improving efficiency, have been made in the shipping, marketing and distribution functions.