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1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY ' Report No IND Public Disclosure Authorized STAFF APPRAISAL REPORT INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Public Disclosure Authorized March 10, 1982 Public Disclosure Authorized Projects Department East Asia and Pacific Regional Office 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 CURRENCY EQUIVALENTS US$1.00 = Rp 625 Rp 100 = US$0.16 Rp I million = US$1,600 UNITS AND ABBREVIATIONS I metric ton (mt) = 1,000 kilograms or 2,204 pounds 1 hectare (ha) = acres PRINCIPAL ABBREVIATIONS AND ACRONYMS AS - Ammonium Sulphate BIMAS - Bimbingan Massal Swa Sembada Bahan Makanan - "Mass Guidance for Self-Sufficiency in Foodstuffs," a farm input credit program BULOG - Badan Urusan Logistik, "National Logistics Body" or rice procurement agency CIDA - Canadian International Development Agency cdwt - cargo deadweight tons DAP - Di-ammonium phosphate dwt - deadweight tons INMAS - Intensifikasi Massal or "Mass Intensification," a noncredit farm input program KALTIM - P.T. Pupuk Kalimantan Timur kg - Kilogram KUD - Koperasi Unit Desa, village cooperative MCD - Marine Consultants and Designers Inc., naval architects PJKA - Perusahan Jawatan Kereta Api, the state railway corporation PPK - Pusat Pelayanan Koperasi or Cooperative Service Center PUSKUD - Pusat Koperasi Unit Desa - Central Office of Village Unit Cooperative PUSRI - P.T. Pupuk Sriwidjaja Indonesia REPELITA - National Five-Year Development Plan (Repelita I, , Repelita II, , Repelita III, ) RLS - regular liner service SWANCO - Swan, Wooster Engineering Company Ltd. tpd - tons per day (metric) tpy - tons per year (metric) TSP - Triple superphosphate UPP - Fertilizer bulk reception and bagging station INDONESIAN FISCAL YEAR April 1 - March 31

3 FOR OFFICIAL USE ONLY INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Table of Contents Page No. I. INTRODUCTION II. AGRICULTURE, FERTILIZERS AND TRANSPORTATION IN INDONESIA.. 3 A. Agriculture (a) General (b) Crops and Land Areas: Regions (c) Rice Production and Imports (d) Bank Involvement in Agriculture B. Fertilizers... I (a) Application Rates, Consumption Trends and Pricing 5 (b) Pricing Strategies (c) Forecasts of Fertilizer Use (d) Projected Demand and Supply Balance and Export Prospects , (e) Bank Involvement in Fertilizer Production C. Transportation (a) General ,, (b) Problems in the Development of the Transport System 15 (c) Previous Bank Assistance in Transport Sector Development , III. NATIONAL FERTILIZER DISTRIBUTION SYSTEM A. General B. Marketing , (a) PUSRI - The Company and Its Marketing Organization 18 (b) The Credit System and Sales Programs This report was prepared by Mr. G. Bain, East Asia and Pacific Projects Department, Mrs. J. Wishart, Transportation, Water, and Telecommunications Department, and Mr. F. Chapman (Consultant). Assiatance was also provided by Messrs. E. Ohlund, J. van Holst Pellekaan, East Asia and Pacific Projects Department and J. Ward and B. Berman, consultants. 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.

4 -2- Page No. C. Distribution (a) PUSRI - Its Distribution Organization.. 21 (b) The Fertilizer Transport System..22 (c) Bagging Capacity and Fertilizer Storage (d) Roads and Railways. 25 (e) Private and Public Distribution Facilities..26 (f) Cooperatives and Cooperative Service Centers D. Recent Experience with the System.27 IV. THE PROJECT A. The Program and the Project - Purpose and Scope.28 B. Detailed Project Description.29 C. Cost Estimate and Financing Plan.37 D. Project Implementation.38 E. Procurement and Disbursement F. Environmental Aspects V. ECONOMIC EVALUATION A. Economic Rate of Return.45 B. Project Risks. 48 VI. FINANCIAL ANALYSIS.. 50 A. PUSRI, Current Financial Position B. Financial Projections for the Project C. Consolidated Financial Forecasts for PUSRI.64 D. Conclusions VII. AGREEMENTS TO BE REACHED AND RECOMMENDATION.66 TABLES IN TEXT 1.1 Projected Production, Supply and Demand of Main Fertilizers Trend in Relative Price and Consumption, Urea Fertilizer Forecasts Price Contingencies Capital Costs Estirmate (1981 Base Cost Estimate) Financing Plan Equipment and Work Schedule Disbursement Schedule

5 -3- Page No. 5.1 Reduction in Urea Transport Cost for Areas Supplied from New Plants Summary Consolidated Income Accounts Balance Sheets Fixed Assets Urea Distribution Margins PUSRI Distribution Revenues (Margins) Project Revenue and Expenses Income from Exports and Domestic Distribution (Project) Effects of Changes on Operating and Distribution Costs, Summary Sensitivity Analysis Effect of Inflationary Annual Increase of 63 10% in Working Costs Consolidated Income Accounts, Cash Flows and Balance Sheets. 65 ANNEXES 1. Previous Bank Assistance in Transport Development 2. Selected Documents and Data Available in the Project File 3. Regional Forecasts of Fertilizer Consumption 4. Basis of Economic Evaluation 5. Detail of Fertilizer Use, Subsidies, Pricing and Consumption 6. Fertilizer Storage Detail of Project Cost Estimates 8. Performance Indicators 9. Financial Tables LIST OF FIGURES 1. PUSRI Distribution Department Organogram 2. PUSRI Marketing Department Organogram 3. Schedule Distribution Project 4. Urea Flow Chart Urea Flow Chart TSP/DAP Flow Chart TSP/DAP Flow Chart Flow of Fertilizer LIST OF MAPS IBRD IBRD Indonesian Fertilizer Production and Distribution Fertilizer Distribution on Java

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7 I. INTRODUCTION 1.01 The Indonesian Government has long,favored increased use of fertilizers as one of the key means of achieving increased food production. During the 1970s, consumption of the two main foodcrops fertilizers, urea and triple superphosphate (TSP), increased at average annual rates of 15%; in 1980, their use increased by 50% over the previous year. This sudden surge in fertilizer use can be largely attributed to two factors: first, the fast spread of brown planthopper-resistant rice varieties, which require increased fertilizer application (and water) for optimum yields and permit higher cropping intensities; and second, the much more favorable ratio between paddy (unhusked rice) and fertilizer prices Indonesia is a low-cost producer of urea,/l and the Government has authorized expansion of domestic production. New urea plants now under construction have a combined annual capacity of over 1 million tons, and will begin supplying domestic and export markets in Two further plants have been approved, and should be onstream in 1984 and TSP production is to be expanded with a new plant commencing operations in The three producers currently operating fertilizer plants have a 1981 production capacity of 2,624,000 metric tons (mt) consisting of 1,979,000 tons of urea, 495,000 mt of TSP or di-ammonium phosphate (DAP), and 150,000 tons of ammonium sulphate (AS). These plants produced 2,462,000 tons in 1981 and distributed their output through the existing distribution network (paras and 3.16) which is now, in some parts, operating at about capacity. Additional production facilities under construction with Government and bilateral finance, which the proposed project will service, are: (a) one urea unit in Aceh,/2 northern Sumatera which will come on stream in mid-1983, owned by ASEAN, called ASEAN I, with an output capacity of about 513,000 metric tons per year (tpy) of which Indonesia is obliged to take 300,000 tpy and may purchase the balance if the other partners do not buy it; (b) one urea unit at Bontang, East Kalimantan owned by P.T. Pupuk Kaltimantan Timur (KALTIM) called KALTIM I, which will come onstream in late-1982 with an output capacity of about 513,000 tpy of urea and about 165,000 tpy of ammonia; (c) one unit with an output capacity of 125,000 tpy of AS and about 465,000 tpy of TSP at Gresik in East Java owned by P.T. Petrokimia Gresik (Petrokimia) which will come onstream in mid-1983 and early 1984; and /1 "Investment and Production Costs for Fertilizer," World Bank; Fertilizer Unit, Industrial Projects Department, June 1980, and Annex 2, B6. /2 This unit is financed by the Association of South East Asian Nations (ASEAN) excluding in this case Singapore, through take-or-pay undertakings under which Indonesia has an obligation to take delivery of 60% of the plant's output.

8 -2- (d) partial output, starting in 1983, of up to 400,000 tpy of urea from the 513,000 tpy PUSRI V unit known as Iskandra Muda Project, which will eventually be set-up as a separate company to be 40% owned by the largest urea producer, P.T. Pupuk Sriwidjaja Indonesia (PUSRI). This unit will be constructed in Aceh, adjacent to the ASEAN I plant. The proposed project will provide distribution facilities for the additional output from this capacity of 2,081,000 tons which, at the end of 1984, will bring Indonesian total capacity to 4,705,000 tons producing about 4,568,000 tons of product. These data for fertilizer tonnage are summarized in Table 1.1 below and detailed in Annex 5 and include 149,000 tpy of liquid ammonia which will be distributed to Petrokimia and to customers in the Philippines. Map IBRD shows the structure of the present fertilizer system and the location of new plants and Figures 4 to 7 show the current and projected flows of fertilizers. Table 1.1: PROJECTED PRODUCTION, SUPPLY AND DEMAND OF MAIN FERTILIZERS /a ('000 tons) - Opening inventory Production Capacity Existing plants 2,624 2,624 2,624 New plants - 2,868 2,769 Actual production 2,624 4,568 5,393 Imports Total supply 3,532 5,429 6,210 Domestic consumption 2,713 3,844 4,297 Exports By ASEAN plant Other plants Total demand 2,713 4,612 5,393 Closing inventory /a Excludes some 300,000 to 350,000 tons of mixed fertilizers Additional fertilizer plants with a total output of 513,000 mtpy of urea and TSP and 149,000 mtpy of ammonia are planned to commence production in By 1987, the rated capacity of fertilizer plants will have reached 5,850,000 tons and production is forecast to reach at least 5,500,000 tons,

9 -.3 - about 1,000,000 tons above the level which this project is designed to serve. PUSRI is preparing a request to the Government for further assistance to secure the assets needed to distribute this additional amount. In the meantime PUSRI has the responsibility for handling the additional total demand of about 1.9 million tons of fertilizer to be distributed in the period to The proposed project would expand distribution capacity to match production capacity of domestic plants through II. AGRICULTURE, FERTILIZERS AND TRANSPORT IN INDONESIA (a) General A. Agriculture 2.01 The major objectives of the Government's agricultural policies are: (a) to create productive employment and to raise the incomes of the rural poor; (b) to increase domestic food supply in pace with rising demand; (c) to expand agricultural exports, particularly of smallholder tree crops; and (d) to ensure productive, sustainable use of Indonesia's land, water and other natural resources Despite rising revenues from oil exports and declines in its relative share of national income and employment, agriculture remains of overwhelming importance. It provides 80% of all nonoil export revenues and employs 60% of the work force. It is the major source of income for two thirds of rural and one tenth of urban area households. (b) Crops and Land Areas: Regions 2.03 For food crops, the regional distributions of land use, production and employment reflect the traditional dominance of Java in the Indonesian economy. Java has approximately 57% of paddy land and 69% of secondary food crop areas. It produces 60% of the rice crop, employs 62% of the rural agricultural labor force, and uses 77% of domestic fertilizer Java will continue to dominate total food crop production for many years, although its share of the total will decline as agricultural development in the Other Islands expands. The rehabilitation and development of irrigation systems has concentrated heavily on Java, but now that most works are complete, under construction or in the planning stage increased attention will be placed on irrigation development outside Java. For example, projects are underway to rehabilitate and extend existing irrigation systems off Java and a number of projects are directed at the development of new projects including some in tidal swamp areas. The Government is also launching substantial transmigration and other land development projects for the production of food crops. In addition, the Nucleus Estate and Smallholders projects are stimulating agricultural development in the Other Islands. Cropping intensity, input applications (including fertilizers) and the use of

10 - 4 - modern crop varieties and farming techniques are already at a high level in many parts of Java, but have not reached comparable levels in most of the other islands with the important exceptions of areas such as South Sulawesi and Bali. Overall, the proportion of sawah rice planted to modern varieties was reported to be 57% in 1979 for the whole of Indonesia, whereas it was estimated to be about 80% on Java. Rice yields on Java are about 45% highler than on the Other Islands and fertilizer use is nearly three times the rate per hectare (ha). Although agricultural development on Java will continue to be strong, there is a substantial potential for rapid growth in the Other Islands which will bring with it rapid increases in the demand for fertilizer. (c) Rice Production and Imports 2.05 The Government has placed a high priority on increasing the production of rice, the preferred staple crop for most Indonesians, and has actively pursued the goal of self-sufficiency in food production since Rice production increased by-4.5% p.a. between 1968 and 1974, almost entirely (3.5% p.a.) /1 due to the extension of irrigated areas and higher yields following rehabilitation of irrigation systems; the remaining production growth is mainly attributable to improved fertilizer application. Between 1974 and 1977, however, growth in rice production slowed to 1.7% p.a., reflecting the combined effects of reduced fertilizer use in 1975 and 19765, during a period of restrictions on private fertilizer trade, successive seasons of untimely rainfall, and unprecedented attacks by pests and diseases, principally the brown planthopper and associated viruses In 1978 a record rice harvest was achieved, but the poor performance during Repelita II led to a downward revision of targets for Repelita III to a 3.5% average annual increase in rice production; 1980 was again a record year, and preliminary crop estimates, at around 20 million tons, are close to the target set for 1983/84. Estimates for the 1981 crop are for a record harvest of around 22.0 million tons Details permitting a comprehensive analysis of the reasons for the recent changes in production are not yet available but roughly one quarter of the growth in rice production has been due to increases in area harvested and three-quarters due to increases in yield. Factors which have made this possible include a major extension in the practice of double cropping, improved and more assured irrigation water supplies, greater use of short term modern rice varieties, fertilizer and intensive extension service efforts. One review of the changes/2 suggests that some farmers achieved three crops in /1 International Rice Research Institute estimate. /2 Peter G. Warr, The Indonesian Economy: Survey of Recent Developments, Bulletin of Indonesian Economic Studies, Vol. XVI, No. 3, November Mr. Warr estimates that about one-third of the rice production increase since 1978 can be attributed to these changes in farm practices and that about 10% of the area being double-cropped in 1978 (about 181,000 ha) on Java were triple-cropped in 1980.

11 1980. These changes in farm practice, and the potential for their extension, have been used in developing forecasts of fertilizer use (Annex 3). (d) Bank Involvement in Agriculture 2.08 Since the first irrigation project was approved in 1967, the Bank Group's agricultural lending has rapidly expanded to include estate and smallholder treecrops, sugar, livestock, fisheries, research, extension, training, seeds, transmigration, and resource survey and mapping. The Operation Evaluation Department's Sector Operations Review of Agricultural lending in Indonesia (Report No. 2166, dated August 9, 1978) concluded that despite deficiencies in some projects, the Bank's portfolio in Indonesian agriculture was of "overall good quality and likely to contribute substantially to increased production." Within the context of the Government's agricultural strategy, future Bank lending is expected to focus on (i) a diversified irrigation, flood protection, drainage and swamp reclamation program to intensify rice cropping on Java and to extend water management to the other islands; (ii) production of secondary crops, including second phase projects for agricultural research, extension and seeds; (iii) smallholder tree crop planting programs; and (iv) area development projects aimed at watershed management to conserve soil and ensure long-term productivity in the densely populated areas of Java, and transmigration. As of February 1982 there were 31 Bank Group-financed agricultural projects under supervision in Indonesia. B. Fertilizers (a) Application Rates, Consumption Trends and Pricing 2.09 From a slow beginning in the 1960s and early 1970s, fertilizer consumption has increased rapidly since about For the two major foodcrop fertilizers, urea and TSP, the average combined nutrient (nitrogen and phosphorous-n.p.) application in 1970 was 20 kg/ha; by 1979 this had reached 65 kg/ha, for an average 15% p.a. consumption growth. In 1980, associated with the record rice crop fertilizer use increased by 50% For food crops, the average nutrient application is now around 94 kg per hectare, still below the 115 kg /1 per hectare recommended in the farm credit program for inputs, called BIMAS "A" package, but higher than rates in most other southeast Asian countries. The average, however, covers a wide range of application rates with significant differences between modern and traditional farmers, and between different types of crops. Only those farmers using the recommended inputs, i.e., the BIMAS-INMAS modern /1 200 kg urea and 50 kg TSP per hectare; nutrient content 46%.

12 - 6 - sector rice farmers /1 on Java, Sumatera and Bali/Nusatenggara, apply nutrients at or above the national average rate per hectare. BIMAS-INMAS farmers cultivating wetland rice, as a group, use approximately ten times more fertilizer per hectare than traditional farmers, and secondary foodcrop farmers on Java 5-10 times more than farmers on the Other islands These variations can be mainly explained by differences in water availability, but are also related to price incentives to use fertilizers. Apart from Sulawesi and Bali, where rice-growing areas are close to major fertilizer delivery ports, fertilizer prices paid by farmers are uniformly higher off Java, whether for rice or secondary crops (Annex 5, Table 1). On Kalimantan, the region with the lowest fertilizer use, fertilizer prices average some 17% above the Indonesian average, and, for the traditional rice farming sector, are some 53% above the Java average Nationally also, the broad trends in fertilizer use have tended to follow price changes. Nutrient consumption for food crops increased by about one third in 1977 following the extension of government-subsidized prices to all farmers, leading to an effective real price decline for the non-bimas farmers. More recently, in 1979 and 1980, increases in the use of fertilizer have paralleled changes in the relative prices of fertilizers and paddy rice which have led to a substantial increase in the farmer's return from its use, as is shown in Table 2.1. /1 INMAS farmers are a rather loosely defined group of farmers includinlg those farmers not participating in the BIMAS credit program who use modern practices. BIMAS farmers are eligible to obtain the recommended inputs, a living allowance and credit. INMAS farmers are given access to the inputs but without credit for their costs and no living allowance. The Rural Bank has recently introduced a credit package for INMAS farmers.

13 -7- Table 2.1: TREND IN RELATIVE PRICE AND CONSUMPTION, UREA Price Ratio Annual increase in Paddy Rice/Urea in urea consumption (%) : : : : : : : : :1 n.a. Source: Annex 2, C Prices to farmers for domestically produced fertilizers (urea, TSP, DAP, AS and some NPK compounds) are substantially below both world market prices and domestic production costs. Urea has a variable margin below world prices and domestic production costs depending on whether the natural gas feedstock is drawn from a relatively small field capable of supplying only alternative domestic users or from a larger field, which could justify either a number of export-oriented urea fertilizer plants or capital-intensive liquification plants for processing LNG exports, where the opportunity cost of the natural gas may be higher./l For other fertilizers, domestic production costs, and economic delivered prices to farmers are above those for imported fertilizers, principally because all raw materials must be imported, and the domestic demand is too small to achieve economies, either in freight or the production process itself. The pricing structure and subsidies for fertilizer are shown in Annex 5. The current official retail prices represent a discount from world market prices averaging US$200 per ton and for urea a discount under economic production costs of US$90 per ton The Government also intervenes in retail and farm-gate markets for rice and other food crops, to support farm incomes and control food prices. The introduction of fertilizer subsidies can be traced to reluctance, since /1 But Bank calculations indicate that Indonesia could earn larger net revenues by exporting urea made from natural gas rather than exporting liquefied gas, with gas input priced at the current well-head price for gas now used in liquefaction plants.

14 - 8 - the mid-1970s, to raise fertilizer prices in the face of slower than anticipated rice production growth during Repelita II. Prior to the mid- 1970s, both rice and fertilizer prices hovered around the international levels, and immediately before the 1978 devaluation were substantially above them (Annex 5, Table 3). The subsidies were, of course, also high during the mid-1970s, when markets were disrupted by panic buying following the 1973/74 OPEC price increases and when Indonesia imported some 2.0 million tons of urea. The mid-1970s also saw a significant increase in the size of the fertilizer subsidy. At this time the low (government-supported) prices were extended to the non-bimas farm sectors at the beginning of the 1976/77 wet season, as a means of eliminating the black market and cross trading in subsidized fertilizer between the subsidized farm sectors and the unsubsidized sectors, and to ensure higher fertilizer applications In 1976 an official attempt was made to estimate the appropriate incremental benefit/cost ratio between inputs and outputs for rice farmers needed to encourage increased rice production (and hence increased fertilizer use). This ratio (2.2:1 for BIMAS farmers) was used to set prices for rice, fertilizer and insecticide, and to determine a buying program to support rice prices through the Government's agency, BULOG. Ihe attempt was not a noticeable success. Rice production continued to increase at about 3.6% p.a. during the 1970s, and fertilizer consumption changes can be explained by changes in its price to non-bimas farmers. But there is insufficient data to analyze the reasons for the poor response in rice production and/or to re-estimate a more appropriate ratio. Bank analysis /1 casts some doubt on the assumptions used on the incremental yields obtainable from the BIMAS input packages. Restrictions on private trade in fertilizer during 1976/77 when the growth of usage slowed, further complicate any analysis of the effective prices paid by farmers or the timeliness of its delivery In the last two years, farm-gate and retail rice prices have been allowed to move upwards, with the latest farm-gate price increase in early 1982 calculated to maintain 1976 purchasing power to farmers (measured against price indices for nine major commodities). Fertilizer prices of Rp 70 kg for urea and TSP have not changed, and the present rice prices provide considerable incentive to use fertilizer, particularly for the fastspreading brown planthopper-resistant varieties A minor part of the fertilizer subsidy (around US$2.50 per ton) can be traced to the transport fuel subsidy which affects all goods and passenger transport in Indonesia. Despite retail gasoline and diesel fuel price increases in 1979 and in 1980 and a further 66% increase in the diesel /1 For example, Indonesia, A Review of the Support Services for Food Crop Production, Annex 2, Report No. 2060a-IND, December 11, 1978.

15 -9- retail price in January 1982, the current diesel fuel price of Rp 85 litre is still below the world price (fob Singapore) of Rp 175 litre. During the latest full year for which data is available government payments of Rp 136 billion were needed to cover the difference between production costs and sales revenues for transport sector fuel consumption; of this fertilizer transport accounts for Rp 4 billion. About 1% or around Rp 150 million per year of the railway deficit is attributable to fertilizer transport The Government's direct subsidy payments for fertilizer are arranged so that incentives for efficient production and distribution are generally maintained. The payments are made through government purchases of factory output at prices providing an adequate financial return on plant. Fertilizer is then resold to PUSRI for distribution at prices low enough to provide adequate returns to distribution activities. However, there are two indirect effects of the pricing strategy which affect supply. First, gas producers are not compensated for the low prices at which they must sell gas to urea plants and they have, in the last few years, not supplied PUSRI with contracted volumes, resulting in variable production at Palembang. Second, while distribution between PUSRI's inland storage depots (ISDs) and villages on Java is competitive, and retail prices are often below the official prices, smaller volumes and less developed transport systems in more remote regions mean that transport costs in some of these areas are above the margin allowed in the pricing structure. Provision is made for compensation of these extra costs so that prices to farmers need not be increased, but the procedures are reportedly cumbersome and time-consuming. As a result, either farmers in remote areas pay more than the official Rp 70/kg (reported in spot checks at up to Rp 100 per kg) for urea and TSP, or distributors are unwilling to deliver fertilizer at all Although the proportion of total fertilizer consumption affected is small, the impact is felt in important growth sectors of smallholder estate development, irrigated and dryland food crop production in the Outer Islands. Detailed assessment of the effects of low prices is made difficult because data are not collected separately on fertilizer use for different food crops; all recent projections of such consumption rely on the National Fertilizer Study of 1972, financed under Credit 193. (b) Pricing Strategies 2.20 The Bank has begun a dialogue with the Government on pricing strategies, subsidies and marketing interventions in the Indonesian economy. Discussions of fertilizer pricing cut across various sectoral, social and economic interests. For example, natural gas prices have an important effect on various industrial activities other than the fertilizer industry. In addition, fertilizer prices can not be set independently of rice prices. Analysis currently available does not provide an adequate basis for firm recommendations on changes in the current fertilizer and rice pricing

16 10 - policies. Nevertheless, it is important that these issues be addressed at earliest opportunity. The widening gap between rice and fertilizer prices obviously stimulated an increase in fertilizer use for the rice production although there is some evidence that at the margin, application rates by some farmers may be uneconomic. Therefore questions have been raised as to whether the rice/fertilizer 'price rates should be increased further, or whether it needs to be as high as it is now. Answers to these questions involve considerable analysis and, as noted above, a consideration of Indonesia energy policy as a whole. Analysis of fertilizer and rice price policy is underway as part of the Food Crops Sector Study to be completedl in FY82, and a joint UNDP/Bank mission visited Indonesia in early 1981 and prepared a comprehensive energy sector review which focussed on energy pricing among other issues./l In addition the marketing study to be financed under the project will include an assessment of fertilizer supply and dermand as part of its Terms of Reference, and thus will inevitably include cons:lderation of subsidies The other issues on fertilizer pricing, availability and application rates, require more detailed study. To get a better understanding of retail level distribution activities, demand levels, and constraints, PUSRI plans to appoint market intelligence officers, trained at technician level in extension work or agronomy, to each of their regional marketing offices. About 44 such staff are planned, of which 20 have already been employed. These appointments would lead to a gradual improvement in the allocation system underlying the distribution of fertilizer to different regions, and will assist by identifying actual and potential bottlenecks at the retail level. It has also been agreed that the project will include a revision of the 1972 Fertilizer Study, particularly covering PUSRI's wider distribution responsibilities. Terms of Reference for the study, estimated to cost about US$200,000 and to be undertaken by the International Fertilizer Development Center (IFDC) will be agreed with the Bank shortly, with the objective of completing it by June 1983 (paras and 4.20). (c) Forecasts of Fertilizer Use 2.22 The project was designed by PUSRI to meet the Department of Agriculture's broad forecast that overall fertilizer consumption in Indonesia would grow by around 12% p.a. until at least However, with marked differences in their relative agricultural development potential, it is likely that growth patterns will be different for Java and the other islands, and for rice crop and other crops use. Forecasts developed for the appraisal have principally focused on the extent of these growth differentials, so that a reasonable estimate can be made of the likely regional patterns of fertilizer use in the mid-1980s. /1 Report No IND, "Indonesia Issues and Options in the Energy Sector," November 1981.

17 Forecasts for fertilizer use on rice were made in two ways. The first, using the Bank analysis and projections on land and cropping potential made in early 1979,/l forecasts of fertilizer consumption for rice growing by for rice growing applying standard application rates. The second, based on Warr's/2 estimates of the extent and potential of changes in rice farming methods in 1980, estimates growth in fertilizer use on rice crops from the potential new rice production. Both methods indicate much faster growth 27-30% p.a. - off Java, although the Java forecast differs since the 1979 analysis does not take account of potential triple cropping. The forecast adopted for the analysis shows an average growth in food crop fertilizer use arising from increased rice applications of 12% p.a., with a growth of 7% p.a. on Java and 27% p.a. on the other islands. For urea the main area of consumption is East Java which used 640,000 tons, or 43% of Java consumption, in Urea consumption in East Java is forecast to increase to 880,000 tons by 1984 and to 1,100,000 tons by 1987 (Annex 3, Table 1) Forecasts for upland rice and secondary foodcrops are based on the 1979 projections of potential cropping area and recommended fertilizer application rates. Forecasts for estate crops are based on projections of past trends in application rates per hectare and planned area expansions, modified by known requirements for estate rehabilitation or extension projects. Details of the forecasts are given in Annex 3, and the results are summarized in Table 2.2. /1 Indonesia, Supply Prospects for Major Food Crops, Report No IND, March 3, /2 Peter G. Warr, op. cit.

18 Table 2.2: FERTILIZER FORECASTS (product tons '000) Other Other Java Islands Total Java Islands Total. Foodcrops Urea 1, ,713 2, ,900 TSP/DAP AS Total 1, ,242 2,597 1,280 3,876 Estate Crops AS Urea TSP/DAP Rock phosphate MOP/KCL Kieserite Total Indonesia 1, ,677 2,851 1,751 4,601 (d) Projected Demand and Supply Balance and Export Prospects 2.25 The projected balance between planned production, domestic demand, inventories and foreign trade for domestically produced fertilizers and excess ammonia to be available from the urea plant at Bontang is shown in Annex 5, Table Since Indonesian urea plants produce at less than projected world prices, and could continue to do so even if natural gas feedstock prices were raised to the levels paid by liquid natural gas exporters, it is expected that all production in excess of domestic consumption and stocks requirement will be exported. The demand for fertilizer imports in all Far East /1 countries currently is large being more than 3 million tons of nitrogen, equivalent to the production of about 10 nitrogen plants. Between /1 Includes all developing and centrally planned economies from Pakistan eastward (Annex 2, B6).

19 demand in the Far East will rise by about 4 million tons, equivalent to an additional 12 nitrogen plants. So far, plans have been announced for four new plants to come on stream in the Near East; one in Malaysia, one in Thailand and four in Indonesia. Taking into account the potential for both acquiring existing markets as the present suppliers become less competitive and also to gain new markets as demand in the region increases, the prospects for Indonesia as a major fertilizer exporter in the Far East are excellent. Oceania also offers a further market and possibly in the future so does the West Coast of the USA The Indonesia Fertilizer Industry has demonstrated that it can operate its plants at a high utilization and efficiency and with relatively low cost feedstock; it is one of the cheapest producers in the world. Indonesia already has a major investment program for expanding fertilizer capacity and supporting infrastructure to meet domestic needs. An extension of this program to develop the ability to satisfy an export market is under consideration but would require careful planning of investments for both capacity and distribution facilities. It would also be necessary to ensure that such plans were compatible with meeting optimum domestic needs The Bank's mixed integer programming model for fertilizer is being updated and applied to the Southeast Asia Region. It will be used to determine the optimal location, timing and technology of new nitrogen capacity and the optimum distribution patterns to satisfy domestic and export markets. The Government of Indonesia will be advised of the results of this study and arrangements will be made to instruct representatives from the Indonesian Fertilizer Industry in the operation and use of the Model. Thereafter it is intended that the model be transferred to Indonesia where it can be used as an analytical tool for both operational and investment planning. The projected exports may begin in 1982, when the new plant at Bontang begins producing. Exports from the ASEAN plant, where Indonesia's partners have first option on 40% of production, will begin in The other major export will be excess ammonia produced by the unbalanced urea plant being constructed at Bontang. Some of the excess will be used in the plant at Gresik to produce DAP and AS; the remainder will mostly go to the Philippines. PUSRI is now investigating this market and has provided assurances about the disposal of excess ammonia (para. 4.14). Exports would begin in 1984 with an exportable surplus of 111,000 tons, increasing to around 250,000 tons in following years if the planned 1985 expansion of the KALTDM II plant near Bontang is also unbalanced For TSP, DAP and NPK compounds, Indonesian production costs are higher than world prices. It is intended that production will serve only the domestic users, and that surpluses will not be produced for export.

20 imports of these fertilizers would continue through 1982, after which domestic production capacity will be sufficient. Imports will continue to be needed to supplement domestic production of AS until (e) Bank Involvement in Fertilizer Production 2.31 The Bank Group has made three credits and loans to the Government, totalling US$220 million equivalent, for the expansion of urea production at the PUSRI complex at Palembang, South Sumatera./L Two of these operatiorns have been cofinanced; one with the Asian Development Bank, the United States Agency for International Development, and the Japanese Overseas Economic Cooperation Fund, and one with the Saudi Fund for Economic Development. Total project financing related to Bank Group operations totals US$406.6 million equivalent and has created one of the world's largest urea production complexes Experience with these loans has been remarkably successful because PUSRI management adopted modern project management techniques and emphas:lzed training of its personnel and delegation of authority. This has resulted in rapid completion of Bank-financed projects and in PUSRI's supplying management and operator training for all new and currently proposed urea producers in Indonesia. Further details related to PUSRI's operations are to be found in Chapters III and VI and in Annex 2, CIO. C. Transportation (a) General 2.33 Given the size of the Indonesian archipelago, the development of an extensive and efficient transportation system is especially important to the growth of a modern economy based on regional specialization and a large national market. The rapid growth of the national economy over the past decade has placed a heavy burden on the transport sector. Total transport demand is estimated to have grown about 12% p.a. during the 1970s. It is estimated that for each 1% increase in national GDP, transport demand increases by about 1.7%. Thus, there is a pressing need to improve the productivity of the existing transport system and to invest efficiently in its expansion. This project will deal with the specific problems of the fertilizer distribution system and is intended to ensure efficient utilization of ships, port installations and railways within that system. /1 Cr IND, Fertilizer Plant and Gas Conservation and Transmission Project US$30 million, June 15, 1970; Cr IND, Fertilizer Supplementary Project US$5.0 million, May 21, 1973; Loan 1089-IND, Second Fertilizer Expansion Project, US$115 million, February 20, 1974; Loan 1254-IND, Third Fertilizer Expansion Project US$70.0 million, May 20, 1976.

21 During Repelita I ( ) and Repelita II ( ), 15% to 16% of the government budget was allocated to the transport sector. Throughout the first two planning periods, emphasis was placed on rehabilitation of the existing transportation infrastructure rather than new construction and more than half of government expenditure was allocated to highway and road development. The development budget for the transport sector during Repelita III ( ) amounts to about Rp 2,998 billion (US$34.79 billion) or 14% of the total plan budget and is divided as follows: 57% for road infrastructure and the road transport industry; 8% for railways; 18% for sea transport infrastructure and the domestic shipping industry; 15% for air transport; and 2% for inland water transport. (b) Problems in the Development of the Transport System 2.35 Despite increased budget allocations and private investments the transport system's ability to meet growing demand for its services remains inadequate. The country's enormous dimensions and the uneven distribution of population and income make it extremely difficult and expensive for the Government to pursue a transport sector strategy which both responds to the rapidly increasing transport demands in the more advanced segments of the economy and seeks to improve transport services to those more isolated segments which have not yet benefitted much from national development. In its efforts to improve transport sector performance, the Government has contended with a regulatory system which causes distortions in the demand for transport and creates a considerable drain on public financial resources, inefficient utilization of existing transport resources due to poor maintenance and low-productivity operations, and uncoordinated and fragmented arrangements for transport development planning and transport system management The Government guides the development of the transport sector through its investments in infrastructure; its policies on pricing, subsidies, and taxation; its regulation of private firms; and its ownership of the railway and a large part of the domestic ship, airline, and bus companies. The three GOI agencies most responsible for the development of the sector are the Ministry of Communications (MOC), which plans, regulates, and controls all aspects of the sector except roads and highways; the Ministry of Public Works (MPW), which is responsible for the planning, construction, and maintenance of the highway and road subsector; and the National Planning Agency (BAPPENAS), which reviews sector development plans and prepares jointly with the Ministry of Finance the development budget Railways. The railway system was constructed before independence and comprises about 6,800 route-km, of which about 70% is on Java. The railway infrastructure deteriorated over the postwar years and carried diminishing amounts of traffic. A rehabilitation program was started in the

22 period with Bank assistance but was slow to be completed. Poor accounting and management records, weak administration, poor infrastructure and serious management problems were responsible for the decline in passenger and freight traffic during the 1970s, and still are problems but traffic is increasing due to growth in long-haul traffic. A large investment program and continued emphasis on proper management and planning will continue to be needed if the railway is to cope successfully with the expected increased traffic Domestic Shipping and Ports. Shipping is the major mode of interisland transport for both passengers and freight. Domestic marine dry cargo traffic has increased annually by over 12% since the early 1970s as Indonesia carried out significant programs for fleet rehabilitation. Domestic marine traffic in petroleum products and other specialized cargoes such as fertilizer, timber, and cement has increased even more rapidly. The main interisland shipping system is the regular liner service (RLS). It is inefficient and contains many obsolete and poorly maintained ships which spend too much time in ports which themselves are inefficient. However, petroleum and bulk shipping, particularly fertilizer shipping, is much more efficient. Major improvements have been made, with Bank assistance, in the main port of Tanjung Priok at Jakarta, as well as at some secondary ports. A subsidized system of pioneer shipping services to remote areas was initiated in 1974 and has been progressively expanded. The Bank has assisted in the improvement of the RLS system and is preparing an integrated maritime project to deal with some of the problems noted above Other. Road transport is the principal mode. In the mid-1970s about 93% of all goods and 99% of all passengers in Indonesia used road transportation. Domestic air transport of passengers is gaining at about 22% p.a. and air cargo at close to 100% but still accounts for a small part of total interisland transport where 95% of freight and 75% of person trips are made by sea. (c) Previous Bank Assistance in Transport Sector Development 2.40 The Bank Group initiated its lending program in the Indonesia transport sector in 1969 with its first highway credit. Since then there have been seven credits/loans for highway development. All of these projects included technical assistance and other support to strengthen the Directorate General of Highways (DGH) and to study transport policy issues. There have been two lending operations for the shipping sector designed to rehabilitate and expand the interisland shipping fleet, and one project for the development of the country's largest port, Tanjung Priok. A railway project initiated in 1975 sought to rehabilitate track, rehabilitate and acquire locomotives and rolling stock, and to strengthen the performance of the state railway, PJKA. Finally, there has been one loan for developing the capacity to distribute fertilizer output from newly constructed domestic plants. Total Bank assistance in the sector has mounted so far to

23 US$546 million, which represents about 17% of the Bank's lending program in Indonesia through the end of FY80. Major conclusions of the Project Performance Audit Reports are given in Annex 1. III. NATIONAL FERTILIZER DISTRIBUTION SYSTEM A. General 3.01 In the Indonesian context fertilizer marketing refers mainly to the functions of market identification; planning and administration of the movement of fertilizer to meet demands; reporting on crop production and other developments; proposing and administering the extent and type of agricultural credit programs; undertaking promotion of proper fertilizer use; and research related to fertilizer. Distribution includes the securing and operational management of assets needed to fulfil the marketing function and to provide the farmer with appropriate amounts of fertilizer at the right time. Both of these functions, and responsibility for exports, have been assigned to PUSRI, the organization with the most experience and success in fertilizer marketing and distribution./l 3.02 The scope of domestic fertilizer marketing and distribution extends from the producing plant, called Line I, to the bulk storage shed or bagging station (Line II), through inland storage depots (ISDs) (or Line III) to the village kiosk operated by retailers or cooperatives, (Line IV). Between these points there is a complex movement of product, in bags or in bulk, by sea or railway or truck to either bulk reception and bagging stations (UPP) or to ISDs. Figure 8 depicts the flow of fertilizer at the various stages of distribution. Most of the fertilizer is sent in bulk, by sea or railway or truck to either bulk reception and bagging stations called UPP, Line II, or to ISDs (Line III, Figure 8). Most of the facilities involved in the movement of domestically produced fertilizer are owned by PUSRI or are, like the railway, utilized by PUSRI. Imported fertilizer is moved initially through regular port facilities, acquired by PUSRI, and then inserted into the normal fertilizer marketing and distribution channels.l2 In the face of seasonal variations in usage and the need for adequate storage, PUSRI can rent private or government-owned warehouse space in /1 Minister of Trade and Cooperatives, Decree No. 56/KP/11/1979 dated February 15, 1979, as amended by Decree No. ll1/kp/kkk/81 dated March 6, /2 Exports are mainly sent in bags from production points although some have been exported from UPP located on deep water.

24 addition to using its own. As some fertilizer is sent direct by sea from Line I to Line III, and as some may move in bulk to a UPP and, after bagging, be forwarded to other UPPs or ports by ship, the total movement is complex and requires constant administration and adjustment of plans. B. Marketing (a) PUSRI - The Company and Its Marketing Organization (i) Background 3.03 PUSRI, Indonesia's first fertilizer company, was established as a government-owned company in Palembang in 1959 to manufacture urea from gas which had previously been flared. The initial small plant, PUSRI I, went onstream in 1964 and quickly achieved capacity operations - 100,000 mtpy of urea. Subsequent expansion of output to PUSRI-s current rated capacity of 1.6 million tons of urea at Palembang has been assisted by the Association and the Bank (para. 2.31) PUSRI's excellent record of high capacity operations, its effective staff development program, and its growing expertise in marketing its owm and imported fertilizers have made it the key Indonesian organization in the marketing and production of fertilizers. Executives trained at PUSRI are currently operating most of the country's other fertilizer production units. This unique position in the industry and PUSRI:s marketing abilities made it a logical choice for undertaking the marketing of all fertilizers in Indonesia when the Government faced the problem of how to market a growing output of fertilizers produced at different prices by different companies. The National Fertilizer and Pesticides Distribution Study, carried out with Bank finance under the First Fertilizer Distribution Project (Loan 1139-IND; US$68.0 million), recommended that a single fertilizer marketing organization be established. The Government agreed with this recommendation and appointed PUSRI to be the sole marketing agent for fertilizers in Indonesia Prior to this appointment there were only three companies producing mainly urea and TSP. There were also a number of government fertilizer importers and government and private fertilizer distributors. PUSRI sold imported fertilizers allocated to it as well as its own output. Because domestic and import prices differed, sometimes greatly, the Government first bought all imported fertilizer and the output of PUSRI, Kujang and Petrokimia at the factory gate, then resold it to both government and private distributors, including PUSRI. This arrangement led to many problems which the Government tried to overcome by controlling margins at every part of the distribution process. This led to delays in payments by farmers for fertilizer purchases, causing financial problems for distributors and

25 producers, and a proliferation of pricing and credit regulations. All of these problems have been resolved by the series of actions taken by the Government in 1980 to restructure fertilizer distribution in Indonesia. (ii) Organization and Management 3.06 PUSRI is generally considered to be one of Indonesia's best managed large industrial enterprises. Whenever necessary, it has relied on expert technical assistance from foreign advisers and consultants. At the same time it has developed its own staff to take key responsibilities. Today, the Government seeks its advice on all aspects of fertilizer industry development in Indonesia including the project management and initial operational responsibility for the urea producer under construction in Aceh, financed by the Association of South East Asia Nations (ASEAN). A PUSRI joint venture with the Japanese company, UNICO, is carrying out fertilizer marketing studies for Malaysia in connection with the construction of a new urea production unit in that country. The company, through a joint venture with M.W. Kellogg Inc. (P.T. Kelsri), also trains foreign fertilizer plant operators in its facilities, undertakes procurement for all Kellogg designed plants in Asia, and is assisting in the construction of two urea plants in North Sumatera, PUSRI V and ASEAN I (para. 1.03) and in the proposed project (para. 4.18). The company's subsidiary in Houston, Texas, procures all parts and chemicals for its plants The management structure of PUSRI, in keeping with Indonesia's company law, is patterned after the European two-tier model, with a supervising Board of Commissioners (Dewan Komisaris) and a Management Board (Direksi). Members of the Board of Commissioners include: (a) the Director General of Monetary Affairs (Ministry of Finance); (b) Secretary General (Department of Industries); (c) a representative of the Minister of Agriculture; and (d) the Director General of Chemical Industries. Managerial authority for PUSRI's day-to-day operations rests with a six-man Management Board, consisting of the President-Director and Directors of Production, Technology, Finance, Development, and Marketing. Members of the Management Board, as in the case of the Board of Commissioners, are appointed by the Government. In January 1981 a new President-Director was appointed for a five-year term. At the same time, the technical, financial, and marketing directors who had been with the company in those positions for the past five years, were reappointed for further five-year terms. New director positions for production and development were created and experienced PUSRI executives were appointed. The company, thus, moves into a period of further expansion of its output and greater marketing responsibilities with an experienced management team. An organizational chart of the company's marketing and distribution departments is given in Figures 1 and 2.

26 PURSI's Marketing Director and the Technical Director, who control the marketing and physical distribution functions from Jakarta have been with PUSRI for about 10 years as senior managers. The marketing department staff administer 836 marketing and distribution personnel throughout the country linked to head office by telex and radio. The marketing activities extend to 12 regional, 10 representative, and 9 subregional marketing offices in all but four provinces of the country. Each regional and representative marketing office: (a) plans and controls the supply of fertilizer to the government-assisted fertilizer users (BIMAS) and to the free market or non-bimas sectors of agriculture; (b) plans and manages the fertilizer stocks in the region, including railway and truck transportation and storage and supervises the physical movement of fertilizers by truck and railway and in the company's 175 special 30-ton capacity wagons; and (c) sells to distributors and promotes fertilizer at the village level, using its own local and Head office agronomists, ten in number. Employment of up to 44 marketing officers, to be added to marketing offices to provide closer contact with the farmers (para. 2.21) is underway. The marketing department also cooperates in and carries out research related to fertilizer usage, demonstration plots, and new types of fertilizer. The Marketing Department operates 52 inland storage depots (ISDs), of which 27 are on railway sidings,/1 and rented private storage located throughout Indonesia (see Maps IBRD and 15764) The PUSRI marketing group is involved in active cooperation with research institutes, both those under the Department of Agriculture and lhose outside Indonesia. In addition, PUSRI has experimented with sulphur coating of urea pills in order to reduce agglomeration of crystals. Production of this type of urea may be instituted in the near future. PUSRI officials attend numerous conferences where the latest fertilizer practices are discussed. (b) The Credit System and Sales Programs 3.10 The marketing function also includes the credit system, which is now limited to those sales related to the BIMAS program. PUSRI sales are made only to distributors, including a few village cooperatives or Koperasi Unit Desa (KUD) and cooperative service centers or Pusat Pelayanan Koperasi (PPK). The credit system is based on a distributor's sales contract and request submitted to PUSRI's Regional Marketing Office. After approval, the distributor pays PUSRI 25% cash and provides a post-dated check for the balance of 75%, as well as a bank guarantee or promissory note. In exchange PUSRI gives the distributor a delivery order entitling him to draw fertilizer from PIJSRI stocks. The distributor then delivers the fertilizer to KUDs where farmers, who have drawn a loan from the rural bank, Bank Rakyat /1 A further 23 ISDs with 5 on railway sidings, are currently under construction and financed by PUSRI. See also Annex 6. Additional railway wagons are being acquired (para. 3.23).

27 Indonesia (BRI), in the form of a coupon called SPPB, receive fertilizer in exchange for the SPPB. The distributor uses the SPPB to pay PUSRI the 75% outstanding balance. PUSRI then cashes the SPPB at the BRI. Currently only about 50% of fertilizer sales are made through the credit system described above. Because of the inherent difficulties associated with a rural credit system based on distribution of credit coupons by village officials, few farmers who have cash seek credit. As the cash system is so simple, and because returns to farmers are adequate, PUSRI expects cash sales to grow substantially within several years. For distributors and consumers, such as estates, which have storage capacity and could take earlier delivery of fertilizers, there is a good case to be made for PUSRI to offer cash discounts (related to the carrying cost of inventory) in order to smooth its sales pattern and reduce its need for storage. Assurances have been received from PUSRI that it will study methods to increase peak storage capacity, discuss them with the Bank, and make appropriate recommendations to the Government for any alterations of policies deemed advantageous. This study (paras and 4.20) is intended to be completed by June There is close cooperation and interaction between PUSRI and the Directorates General concerned with production (Basic Chemical Industries), import (Domestic Trade), and agriculture (Planning Bureau), cooperatives (Cooperatives), finance (Directorate of Food Affairs and Nontax Revenue), and the national rice procurement and distribution agency, BULOG. Regular meetings are held by senior PUSRI marketing and distribution executives with representatives of these organizations to coordinate activities, to resolve difficulties, and to improve policies related to sales, particularly regarding the stockpiling and pricing of rice and fertilizer, which is finally determined by the Cabinet and the President. C. Distribution (a) PUSRI - Its Distribution Organization 3.12 The distribution activities consist of a bagging and shipping division which operates four special self-unloading bulk ships, arranges for other shipping as required, and administers six bulk reception and bagging stations (UPP) at ports in Sumatera, Java, and Sulawesi During the expansion of output from 1960 to 1980 steps were taken to build a distribution system. Shipping facilities at Palembang were enlarged, warehouses were built in two ports and PUSRI enlarged its shore facilities. It became apparent, with the approval of a fourth expansion a few months after Bank approval of a loan for the third expansion, that special steps would have to be taken to provide for a much larger movement of fertilizer from Palembang than had been anticipated. Consultant studies, financed by the Bank, showed that movements of the anticipated production of over 1.0 million tons per year

28 in bags from Palembang to Java was uneconomic, and a system of bulk shipments by sea and on land was proposed. To meet these needs the Bank financed part of the foreign exchange cost of the First Fertilizer Distribution Project (Loan 1139-IND, US$68.0 million) in July This project provided expanded and new bulk reception and bagging stations at five ports, 175 special railway wagons and locomotives, four self-unloading bulk carrier ships, and 57 inland storage depots (ISDs) /1 to broaden the scope of PUSRI's distribution network and to form a system which couild be expanded should the need arise. These assets were in operation by early 1979 and materially assisted the smooth flow of fertilizers from producers to consumers as consumption grew from 931,000 tons in 1977 to 1,785,000 tons in Late in 1980 additional efficiencies were introduced by the successful use of block trains on a pilot basis in East, Central, and West Java. Currently there are unfavourable trends in railway wagon turn-around times reflecting continuing difficulties in railway operations. Steps are included in the project (para 4.21) seeking to improve the situation. Use of block trains on a regular basis during the coming years is planned by PUSRI. The Project Completion Report for the first distribution project (dated June 15, 1981) estimates the ex post rate of return from the first Fertilizer Distribution project at 24%. (b) The Fertilizer Transport System 3.15 The largest of the three fertilizer producers, PUSRI, located on the Musi River at Palembang, South Sumatera, produced 1,480,000 tons of urea in Another urea plant, P.T. Pupuk Kujang, located at Cikampek, West Java, produced 554,000 tons and the third plant, P.T. Petrokimia Gresilk, at Gresik in East Java, produced a mixture of triple-superphosphate (TSP), diammonium-phosphate (DAP), ammonium sulphate (AS) and small amounts of urea, totalling in all 655,000 tons. Of the total quantity of domestically produced fertilizer in 1980 (2,689,000 tons), 693,000 tons moved directly to markets by rail and road from the producing plants; the balance moved by ship to secondary distribution centers from which it was moved by road and rail to storage or to the farmer or to export markets (110,000 tons). About two-thirds of the ship movement (1,134,350 tons) was by four special self-unloading bulk carriers while the balance was shipped in bags by coastal vessels The flow of fertilizer from the producer to the farmer is betst described by PUSRI's distribution system. The majority of fertilizer is sent to Java in bulk by special ships to the bulk reception and bagging station (UPP) where it is unloaded, stored, and bagged. Some small amount of PUSRI fertilizer is bagged at Palembang and shipped direct to the outer islands and, on occasion, to export points which serve ships too large to reach the production point. The bagged fertilizer is sent to inland storage /1 Of which 52 were built with about the same total capacity as was provided for at appraisal.

29 depots (ISDs) from the UPP or is sold directly to distributors and groups of cooperatives centers (PUSKUD). Bagged fertilizer is shipped from the UPP either by road or by rail to the 27 ISDs located on rail sidings. As the cost of deliverv to ISDs is cheaper than truck delivery for distances of over 100 km, PUSRI intends to ship more fertilizer by rail in the future through the use of block trains, in cooperation with the state railway, PJKA. Final delivery to the farmer from the ISD is by truck to retailers, from there it is moved to the farmer by bicycle, car, motorcycle, and by hand. In the case of producers located in Java (Kujang and Petrokimia) initial shipment is by rail and truck to ISDs The equipment and facilities used to move the fertilizer from the production point to the farmer are owned by a variety of organizations and companies. PUSRI owns many of these assets such as ships, bulk reception and bagging stations, inland storage depots, and some railway wagons. A number of shipping companies move bagged fertilizer, the railway provides facilities, wagons and locomotives to move PUSRI-owned wagons, and private and state trucking companies transport bagged fertilizers. The distribution department of PUSRI administers the PUSRI-owned assets and, at the request of the marketing department, arranges ship charters for interisland distribution of bagged fertilizer. (c) Bagging Capacity and Fertilizer Storage 3.18 Those fertilizer bagging facilities attached to producing plants are normally considered to be part of the production process. In 1980 this plant-related bagging capacity amounted to about 2.7 million tpy (Palembang 550,000, Kujang 513,000 and Petrokimia 1,650,000). In that year bagging capacity also existed at the five PUSRI-owned bulk reception and bagging stations, totalling 1.4 million tpy and at a private facility at Tanjung Priok, Jakarta's harbor (0.4 million tons per year). Total capacity for bagging fertilizer in Indonesia was therefore 4.1 million tpy as a maximum theoretical three shift capacity. In 1980 these facilities bagged 2.6 million tons of all types of fertilizers with one UPP operating three shifts per day. By 1985 an additional 2.0 million tpy of bagging capacity will be constructed at new plants and at Meneng, where about half the increase will be located. Total bagging capacity in 1985 will therefore exceed 6.0 million tpy at which time consumption will be 5.1 million tons. As bagging capacity can be readily expanded at all locations except Surabaya and Jakarta, few constraints will arise from a lack of bagging capacity Fertilizer storage capacity above the village level and outside the production plant amounts to 135,500 tons of bulk and bagged storage at UPPs, 286,000 tons of PUSRI space in existing ISDs; 107,000 tons of

30 additional ISD storage capacity under construction by PUSRI and expected to be available in 1983; 293,100 tons of storage owned by P.T. Bandaragaraneksa (BGR), a government warehouse company, which is to be expanded to 405,700 tons by 1985 under a government-financed program, and 170,000 tons of private storage. Thus, there is 749,100 tons of fertilizer storage capacity at Line III in 1980 for a throughput of 2.4 million tons. By 1985 there will be at least 969,000 tons of warehouse storage available at this level for an estimated throughput of 4.3 million tons. With the growth of cement output and rice production, other warehouse capacity will be constructed so that the 1985 supply of warehousing may exceed that noted here. Much of any private warehouse space can be utilized by fertilizer, which has a different peak seasonal pattern of need than rice storage and cement use. Storage capacity at Line III (above the village kiosk) is about adequate if the appropriate ratio of storage to throughput is set at 1:4 as recommended by the National Fertilizer and Pesticides Distribution Study (para. 2.19) At the village level (Line IV) in 1980 there were 20,000 existing kiosks, able to store a total of 600,000 tons of fertilizer. The cooperative facilities construction program currently underway, financed and supervised by the Department of Finance, will increase this total to 1.3 million tons in 1988 (para. 3.22). This part of the construction program will be supplemented by another program to build 130-ton storage units at PUSKUDs which will increase storage at Line IV by an additional 149,000 tons by P.T. Pertani, one of PUSRI's distributors, owns storage amounting to about 450,000 tons throughout Indonesia which is not included in the above figures. Thus the total storage at Line IV, which was 1.1 million tons in 1980 to handle a throughput of 2.5 million tons, will increase to 1.9 millicn tons in 1985 with a throughput of 4.2 million tons. There will be virtually no change in the present ratio of throughput to storage of 2.2 if the construction program is completed in time; if not the ratio will rise toward 1: The distribution system between PUSRI-s line III storage (ISDs) and village retailers at line IV on Java, which accounts for 85% of fertilizer consumption, is competitive and working well. There are, however, possible distribution problems on the other islands because: (a) fertilizer consumption in some areas outside Java will remain low which will limit the number of deliveries PUSRI can make in full shiploads and at reasonable costs; (b) demand in other areas is forecast to grow rapidly, in some cases by 30% p.a., but there is little privately-owned storage that can be drawn into the system to cope with the surge of demand; and (c) there is some evidence that distributors are unwilling to deliver fertilizers to remote areas because of inadequate distribution margins and cumbersome cost reimbursement procedures These issues have been recognized by PUSRI, and steps are being taken to deal with them. Of the current PUSRI ISD expansion, half is being constructed off Java, so that by the end of 1981, 30% of PUSRI ISD capacity

31 will be on the other islands; PUSRI has plans to expand capacity further as required. The government warehouse company, BGR, is also expanding off-java storage and by 1983 will have provided a capacity of 130,000 tons. Both of these expansions provide long-term fertilizer storage. At the retail level, the first phase of the new program to support the development of farmercooperatives is providing storage capacity on Lombok and Nusa Tenggara. (Tenders have been let for ton stores and ton kiosks.) In this overall program to expand village storage by 710,000 tons, almost half is planned for the outer islands. Further detail is given in Annex 2, Cll and in Annex 6. Steps are also being taken to improve marketing and management. The cooperative expansion program is supported by technical assistance at the regional level in management and organization of commercial activities. Village and regional officials determine the pace of the expansion program by awarding construction tenders (subject to Ministry of Finance approval) based on simplified procurement and contractor payment procedures and on the simplified construction manual that has been prepared. PUSRI has agreed to expand its regional marketing staff to give better market intelligence services, which would identify potential bottlenecks early (para. 2.21). The adequacy of distribution margins can be addressed by realigning transport allowances between the different areas where necessary (para. 2.17). Of these developments, only the expansion of line III storage and the improvement in PUSRI market intelligence is necessary to ensure timely deliveries of fertilizer. The need to expand cooperative line IV storage depends entirely on farmers' preferences for purchasing fertilizers (and other commodities) collectively rather than individually. Individual distributors rarely need to have storage capacity, since they deliver directly to retailers from PUSRI depots. Assurances have been received during negotiations that PUSRI will review the content and recommendations of a marketing study discussed below (para. 4.20) and recommend to the Government corrective action concerning marketing margins by June (d) Roads and Railways 3.23 PUSRI owns 175 railway wagons of 30-ton capacity (compared to the 12-ton wagons of PJKA) and is supplementing these by 220 additional, similar design wagons being acquired with Canadian bilateral aid. About 200 additional similar wagons will be provided under the proposed project (para. 4.09). Current use of block trains, some with mixed wagons of PUSRI and PJKA, to move fertilizer from UPP to 27 ISDs with rail connections has been successful in a pilot project and has somewhat reduced wagon turnaround time. Assuming a target of moving 1.7 million tons per year by rail in Java in 1985 and a reasonably achievable goal of 5.8 days turnaround for PUSRI block trains, about 535 operational railway cars would be required to move 60% of this fertilizer in block trains (see para. 5.11) In 1980 only 18% of fertilizer transported on land moved by rail, at a very low level of productivity. Productivity will increase with the use of block trains. Some 606,000 tons of fertilizer (about twice as much

32 as in 1980) was scheduled to move by rail in 1981, 65% or 394,000 tons in block trains utilizing both PUSRI and PJKA wagons. Actual performance was 395,000 tons being shipped by block trains. As PUSRI-s wagon inventory increases, the block train system is expected to become more efficient but, until many more railwagons are procured and management improvements are made, heavy reliance will continue to be placed on road movement from UPP' to ISD. In 1980, 1.2 million tons was moved by road in Java and about 400,000 tons in Sumatera. All of the increase of 0.9 million tons in Sumatera arid in Java fertilizer movement, will also be accommodated by road until additional wagons arrive in 1983 (see also para. 5.10). (e) Private and Public Distribution Facilities 3.25 PUSRI is responsible for physical distribution to the farm level and sells fertilizers at ISDs direct to 43 private, 5 government and 12 cooperative federations (PUSKUDs). In 1979, 52% of sales was made to private companies, 38% to government companies, and 4% to PUSKUDs. The balance of sales went into inventory change and exports. These main distributors sold, in turn, to 714 subdistributors, of which 83.2% were located in Java and the rest in North and South Sumatera, Bali and the Lesser Sunda islands [Nusa Tenggara (NT)]. The subdistributors (kabupaten level) sold direct to farmers and retailers through 3,253 KUDs and 3,288 private retailers. In 1980, just under 77% of final sales were made in Java, 15% in Sumatera, and 8% in Bali and NT, with small amounts being sold to all other areas. (f) Cooperatives and Cooperative Service Centers 3.26 Village cooperatives have existed for many years and are an important part of government policy./l Aside from acting as suppliers of agricultural imports (fertilizer and pesticides) they now also act as buying agents for raw sugar and rice for BULOG, the government price support agency, and they sell processed sugar, cooking oil and salt. These Koperasi Unit Desa or KUDs provide services through some 20,000 kiosks and their 4,407 units are located throughout the country with just over 50% in Java, 33% in Sumatera, 12% in Sulawesi, and about 5% in Nusa Tenggara. They are served by 14,000 agricultural extension workers and 625 specialist extension workers trained in agronomy The Government has recently embarked on a well-conceived and wellexecuted program to construct improved facilities for fertilzer and rice storage and rice processing at the KUDs. The first 256 of 999 new kiosks of various sizes are under construction and much of the first phase of this program will be completed by April 1982 (para. 3.22). In order to assist further in the development of KUDs the Government is forming cooperative /1 Defined under Presidential Instruction No. 2, 1978.

33 service centers, or PPKs, which will each provide management and other assistance to groups of four or five village KUDs. A training program to staff PPKs is underway and will eventually involve 7,300 people. Additional details of the KUD improvement program is to be found in Annex 2, A2, A5, and Cll. D. Recent Experience with the System 3.28 In 1980 Indonesia used about 2.5 million tons of all types of fertilizers. Of this quantity urea accounted for 1.8 million tons and TSP for 0.5 million tons. The majority of fertilizer was produced and bagged domestically with only 0.2 million tons being imported. PUSRI s special bulk carriers, provided under the First Distribution Project, moved 1.1 million tons of urea from Palembang to six bulk bagging stations (UPP) at Belawan, Padang, Cilacap, Ujung Pandang, Surabaya and Tanjung Priok. This operation involved 275,000 tons per ship of 7,400 tons urea capacity, and 152 voyages. About 0.1 million tons moved from Palembang in small coasting ships direct to small ports. Some 0.3 million tons of TSP in bags was sent from Gresik, in Java, to other ports in small ships while the balance of 0.8 million tons was shipped from fertilizer plants to ISDs by truck. PUSRI's shipping operations have been hampered by a lack of proper central management supervision, delays in port clearances, and delays at loading and unloading ports. Total time taken in excessive delays (i.e., beyond those specifially allowed for) amounted to 243 ship days in 1980 for the four bulk ships. PUSRI and the Bank have discussed the reasons for these delays in the system and management and operational changes have been instituted. These changes should allow the shipping system to operate nearer to its designed capacity. This matter is dealt with more fully in the Project Completion Report on the Fertilizer Distribution Project (Loan 1139-IND) dated June 15, Except for a small amount shipped direct to certain large users and some imports, all of the fertilizer moved through the storage system consisting of the UPP and the ISDs. Shipments from UPP in Java in 1980 was 75% truck and 25% rail. Constraints on the railway, PJKA, arising from low locomotive availability due to poor maintenance, lack of understanding of the importance of the movement of fertilizer in block trains, and organizational problems connected with block train operation have held rail deliveries below expectations and possible achievement levels. Only toward the end of 1980 did PUSRI and PJKA make a serious attempt to introduce block trains. This was successful, if erratic in performance (para. 3.14), and indicated that larger amounts of fertilizer could move by rail if additional equipment is made available and if the proper coordination of PJKA and PUSRI activities can be achieved. With the prospect of much larger volumes of fertilizer traffic it is expected that the railway will succeed in operating block trains and that they will be used to transport up to 60% of fertilizer traffic in Java on about a six-day turn around by Much effort will be required to accomplish this and it may not be achieved for at least five years. The project includes a study of block

34 train operations for four major bulk products (para. 4.21). It is expected that the results of the first part of this study will be available within six months of its commencement. These recommendations will deal with the equipment and administrative and organizational aspects of the current block train operation and will assist PUSRI and PJKA in maintaining and improving the movement of fertilizer. Should problems occur, the study results will form a basis for the Bank and the Government to decide on appropriate action. The second part of the study, to be completed by about June 1983, will deal with the use of block trains when new equipment arrives. Because the smooth movement of fertilizer, cement, rice and oil products by railway is crucial to the success of the Government's development plans in Java, PUSRI and PJKA have agreed to cooperate in solving problems which might arise in block train operations Given the existing institutional constraints which cause ships and railways to operate below expectations, the present system up to the ISD level is operating at about its capacity. A lack of storage forward of the ISD, which will be overcome during the construction period of the project, has resulted in ISDs being used as storage rather than as transit points so that there is excess transit capacity in the ISD system. With the increase in ISDs under PUSRI's own program, ISD capacity outside Java will increase, which should ease the distribution situation in more remote areas. If PUSRI's efforts to reduce seasonal sales variations are successful, distributors will build additional storage. In general, therefore, the system constraints are to be found in the shipping, railways and UPP elements. These matters are also discussed in the Project Completion Report (June 15, 1981) which concludes that PUSRI has agreed to take all appropriate action to improve ship operations and to ensure that, to the extent possible, block trains will be operated efficiently. Additional ISDs are under construction and additional shipping capacity is included in the proposed project. IV. THE PROJECT A. The Program and the Project - Purpose and Scope 4.01 The Government has developed a program for increased food production by the proper application of fertilizers. This program involves: (a) actions to support the proper management and operation of a nationwide system of farmer cooperatives; (b) continued support of the farm-gate price of rice and holding steady the price of fertilizer so as to induce farmers to utilize it and, thus, transfer some of the benefits of increased oil revenues to the farmer; (c) finance and construction supervision of a large number of village kiosks of simple standard design to be used by cooperatives for storage of fertilizer, for the storage and processing of rice and other agricultural products, and for various social activities related to health, training and education; and (d) continued support and finance of fertilizer output and distribution facilities in the country.

35 The program is currently underway. Farmers receive Rp 4/kg bonus for selling their rice to a cooperative; the farm-gate price is drifting upward toward Rp 120/kg; and the price of fertilizer has been held at Rp 70/kg for the past four growing seasons. The Government has created a cooperative training group to operate service centers and some cooperative groups are financially sound enough to buy fertilizer direct from ISDs. The construction program of kiosks is proceeding well under the supervision of the Department of Finance, and will continue to be financed in the annual budget. The final facet of the program is continued government support for increasing the output of fertilizer, evidenced by the program of plant construction, and provision of finance for the associated distribution facilities needed to reach optimum levels of fertilizer output and usage and/or to develop an export program The proposed national fertilizer distribution project to be financed by the Bank - Part A of the Project - was prepared by PUSRI with the assistance of consultants and includes assets and services directly related to the physical movement of fertilizer from existing and from new plants now under construction and forms part of the larger program now under way and financed by the Government. Part B of the Project consists of finance for preparing port master plans and detailed engineering for three ports, detailed engineering for a second expansion of the port of Jakarta, Tanjung Priok and project preparation activities for a proposed Maritime Transport Project. B. Detailed Project Description 4.04 Part A of the project consists of: Urea Handling Facilities which include (a) construction of a bulk reception and bagging station at Meneng, East Java, with 25,000 tons of bulk and 35,000 tons of bagged urea storage capable of bagging 1,000,000 tpy of fertilizer; (b) improvement of urea bagging and handling equipment at an existing bagging station; (c) design and construction of two special urea unloading piers at the ports of Meneng and at Cilacap, where a bulk reception and bagging station exists; Railway Equipment and Works which include (d) procurement by PUSRI of 200 special railway wagons of 30-ton capacity for use in fertilizer block trains; (e) land acquisition, design and construction of a 21 km railway line extension in East Java from Kabat, near Banjuwangi, to Meneng; Shipping Facilities which include (f) procurement by PUSRI of three self-unloading bulk urea ships of 7,500 deadweight tons (dwt) similar to the four now owned and operated by PUSRI, and of one refrigerated ammonia carrier of about 4,500 dwt; (g) minor improvements to unloading and loading capacity aboard the four ships now owned by PUSRI; (h) spare parts for the ships and the bagging station; Consultant Services for (i) the design and construction supervision of the additional bulk reception and

36 bagging station and the ships; and for (j) studies to: (k) revise forecasts of fertilizer use and consumption; (ii) review the needs of the railway system to expand the use of block trains for bulk products such as fertilizer, cement, oil products, rice, sugar, etc. Part B of the Project consists of preparation of master plans and detailed engineering for about eleven ports. A detailed description of these items is given below. (a) Urea Handling Facilities 4.05 Bagging and throughput capacity at UPP at Surabaya, serving East Java, cannot be expanded beyond its present capacity of 450,000 tons p.a. due to site constraints. In view of the forecast increase of 880,000 tons of urea use in East Java (para. 2.23), PUSRI has decided, and the Bank has agreed, that further UPP expansion should take place at Meneng, about 17 km north of the town of Banjuwangi, on the strait separating Java and Bali. It is the only alternative port serving East Java which can be expanded in the time available. The port is organized under a Port Administrator reporting to the area port authorities at Surabaya. Pilotage is compulsory and the port handles about 100,000 to 150,000 tons of rice exports per year over one pier. A second pier is being planned. Adequate data on current and hydrographic conditions are available and PUSRI ship masters and the local pilot agree with the consultants (Swan, Wooster Engineering Co. Ltd. Canada [SWANCO]) that a ship up to 20,000 dwt could be berthed at the pier proposed to be built for the project and that the project ships will have no difficulty in berthing It is proposed to construct a bulk urea reception and bagging station (UPP) at Meneng with an initial capacity of 750,000 tons per year (tpy) of fertilizer but expanded immediately to 1.0 million tpy in order to provide buffer storage in case of later than anticipated completion of the railway line extension (para. 4.11). This facility is similar to five others provided under the previous project. The UPP would be linked to the main-line railway by a short rail spur. Recent studies by SWANCO indicate that sufficient area is available for the new UPP and for a special berth for discharge of fertilizer from the self-unloading ships. The site is on firm ground and soils tests have been carried out to determine the civil works design. The Directorate General of Sea Communications, which controls the port, has agreed that PUSRI may construct a berth solely for urea unloading. Land acquisition for the site of the IJPP has been completed Another special berth solely for urea unloading is required at the port of Cilacap, where a UPP is located to serve Central Java. Unloading of the urea ships at Cilacap now takes place at a general cargo berth onto which the urea reception conveyor is moved. This berth is often occupied by small general cargo ships which usually take several days to unload. The PUJSRI ship can discharge 7,400 tons of urea in 24 hours. Construction of a special caisson-type berth in an unused area of the port near the UPP is practicable and has been agreed to by the Directorate General of Sea Conmmunications and the port. Its use will markedly improve turnaround time of

37 -31 - PUSRI ships at the port where days were lost in waiting to unload in Parts of the existing conveyor system will be used to link the new pier to the UPP Due to the growth of fertilizer consumption forecast to take place in North Sumatera, additional bagging facilities are required there by It is proposed to install an additional bagging unit at the existing Belawan UPP to handle growing volumes of TSP, AS and other fertilizer which cannot use the existing urea facilities unless the bagging operation is shut down to allow for careful cleaning of the equipment, because of chemical reactions between urea and other fertilizers. The additional bagging unit will greatly increase the capacity of existing facilities and will cater to the growth of fertilizer consumption in the area. Because the general cargo berth area is used to unload the PUSRI ships and only one conveyor site is currently available, much time (41.3 days in 1980) is lost waiting to unload PUSRI ships at Belawan. With increased throughput delays are expected to increase sharply. To overcome such delays and their repercussions on the shipping system an additional mobile conveyor and associated equipment will be constructed at a second berth in the port and linked to the present conveyor system so that the PUSRI ships will have two places to unload. Design and construction supervision of these facilities, which have been agreed with the Bank, are being undertaken by PUSRI's Engineering Department and are similar to facilities provided at another port under the previous project. In addition urea and TSP loading facilities are being designed at Gresik and for the ASEAN plant at Aceh. These facilities will be able to load the project ships PUSRI has been appointed to carry bulk fertilizer from these facilities. (b) Railway Equipment and Works (i) Equipment 4.09 The project includes procurement by PUSRI of 200 railway wagons, of 30-ton capacity, specially designed to carry bagged fertilizer to ISDs. These wagons have already been designed. PUSRI now owns 175 such wagons, procured under the First Fertilizer Distribution Project, and has ordered an additional 220 financed by Canadian bilateral aid. This total of 595 wagons, including about 10% spares, is expected to be able to move 950,000-1,100,000 tons of fertilizer within Java by block trains by The existing arrangements for maintenance of these additional wagons will be continued. As the normal PJKA wagons, which are in short supply, carry only about 12 tons of bagged fertilizer, it is doubtful if the lower costs of railway bulk movement compared to trucks, could be realized without acquiring these additional, larger wagons./l Due to the shortage of modern equipment in the PJKA system /1 With fertilizer movement on Java forecast to rise to 2.1 million tons by 1985, additional wagons will have to be dedicated to PUSRI use in order for long haul economies to be achieved. Recommendations relating to future wagon requirements will be included in studies to be carried out in the project (para. 4.21). Adequate trucking capacity is available in Java.

38 and growing demand for bulk product movement, there is a tendency for any available PJKA wagons to be retained within each operating region. With additional time, acquisition of new equipment now underway, and means of centralizing wagon dispatch, PJKA may be able to allocate wagons strictly according to its customers' needs. In the meantime, PUSRI's control of the dispatch origin and the destination points of fertilizer wagons, which can only be achieved through ownership, is crucial to the timely and proper distribution of fertilizers Studies made in connection with the First Fertilizer Distribution Project (National Fertilizer and Pesticides Distribution Study) called for a fleet of 17 locomotives to be used in the block train movement of fertilizers in Java based on a two-day wagon turnaround time which is not likely to be achieved prior to Four mainline and three shunting locomotives were acquired by PJKA under the first project and additional equipment has been acquired by PJKA from other sources. With the introduction of block train operations moving larger volumes at slower rates than had been planned irl the studies referred to, there is a clear need for additional locomotives. PJKA has received funds for procurement of 62 additional locomotives for Java and should be in a good position to assign locomotives to PUSRI use. Agreement has been reached during negotiations that PJKA will acquire and assign an adequate number of shunting and main-line locomotives to ensure efficient: fertilizer distribution operations on the part of PUSRI. This would include, in the view of the Bank, allocation or procurement by PJKA of three mainline and five shunting locomotives for fertilizer transport bringing the total of locomotives to be assigned to fertilizer movement to at least 7 mainline and 8 shunting locomotives. Given a reasonably efficient operating regime, these should be sufficient for 12 block trains per day each of 510 tons or an annual movement of about 1.7 million tons per year at an 80% efficiency factor on 350 days operations (para. 5.11). During negotiations PJKA and PUSRI have agreed that efforts will be made to improve the operation of block trains by reaching specific performance targets (turnaround time) by June If such efforts are unsuccessful, the Government, PJKA, PUSRI and the Bank will review the steps to be taken in the light of the findings and recommendations of thes study of block train operations (para. 4.21). One objective of the efforts will be to try to reach a monthly average turnaround time of not more than 5.8 days by December (ii) Works 4.11 The proposed new bulk reception and bagging depot at Meneng needs to be joined to the existing railway line at Kabat, 21 km distant from Meneng. Due to the anticipated large volume of fertilizer to be received at the Meneng UPP (674,000 tpy in 1984 and 750,000 in 1987 for use in East Java alone) adequate facilities are required so that trains will not interfere unduly with the road movement of up to 300,000 tpy of bagged rice to be shipped out of the port of Meneng and the large quantity, perhaps as much as 200,000 tpy, of fertilizer which will be sent to East Java by road from Meneng. PJKA has retained local consultants (P.T. Indement Consultants, Indonesia) has surveyed the railway alignment and has organized a Project Management Group within its

39 staff to supervise construction of the proposed extension which will have 21 km of main line and 9 km of sidings. A realistic construction schedule has been included in the project and will be agreed in detail with PJKA (para. 4.28). A special budget has been approved by the Government in the amount of Rp billion (US$27.7 million) to cover part of the cost of the extension and the related engineering and design and construction supervision. The consultant's report on the engineering for the extension will be ready at the end of October Bank staff have reviewed the preliminary plans for construction and agreement has been reached for the Bank to inspect progress, obtain all relevant data, and to consult on a regular basis to determine what steps, if any, should be taken to improve progress. The Government has agreed to take the steps necessary to achieve timely completion of the railway line extension. (c) Ships (i) Urea Carriers 4.12 Each of PUSRI's four bulk urea ships transports and unloads about 280,000 tons of fertilizer per year. With the increased output and domestic distribution of fertilizers, additional ships are required. Flow diagrams (Figures 4 to 7) of fertilizer movement have been constructed and analyzed and, based on these and actual ship operations, it has been determined that a further three similar ships will be needed in order to transport fertilizer available at the end of Additional ships will be required after 1985 (para. 5.04). The ships have been designed by consultants [Marine Consultants and Designers, USA (MCD)] who were retained by PUSRI for design of the first four ships and who have been retained for design and construction supervision for the project ships In order to: (a) maintain the ability of all fleet units to load at any producing unit and unload at any port where PUSRI has a UPP; (b) maintain the commonality of ships in order to be able to rotate crews, simplify spare parts inventories and reduce maintenance costs; and (c) meet the transport needs imposed by the construction schedule of new plants and receive the ships during 1983, it has been decided to construct the three ships from the basic designs of the existing ships. One of PUSRI's four existing ships, all of which carry 7,400 tons of urea at 6 m draft, is stronger structurally than the others and can carry 9,200 tons of TSP at a draft of 7.2 m. Because the project also includes provision for loading TSP, each of the three additional ships will have this stronger structure and will be capable of carrying TSP as a backhaul cargo from Gresik to other ports in Java and Sumatera after arriving at Surabaya or Meneng with a full load. To accomplish this dual cargo carriage, special cleaning facilities and procedures will be included in the ship (see also para. 4.16).

40 (ii) Ammonia Carriers 4.14 P.T. Pupuk Kalimantan Timur (KALTIM) is under construction near Bontang, East Kalimantan, and some 800 km from East Java. The plant will produce 513,000 tpy of urea and about 150,000 tpy of ammonia (NH3). The plant is designed with a bulk and bagged urea shiploading pier and a separate pier to load NH3 as a refrigerated liquid (-50 C). The design of these facilities is acceptable to the Bank. The output of NH3 of about 500 tons per day (tpd) from the first KALTIM unit will be absorbed, to the extent of about 200 tpd, by Petrokimia to maintain output of AS at the 150,000 tpy level. The balance will be available for export to the Philippines and to other markets. Arrangements to secure sales contracts are under way and KALTIM has appointed sales agents Studies by MCD under a first phase contract which includes all activities from design to bid evaluation, have determined that one NH3 ship of about 4,500 dwt (5,600 cu m) will be the optimum size of vessel to serve both the domestic and the export market. The ship will also be able to transport refrigerated liquid petroleum gas. A second NH3 ship will be required for moving the output of KALTIM II, planned to commence production in Charter of an ammonia carrier will be undertaken on an interim basis if the plant is ready to ship product before ship construction is completed. Appropriate charters will be made to provide for product movement until the project ship is operational. (iii) Improvements to Existing Ships 4.16 PUSRI's bulk urea ships have operated for about four years. During his time the need for and possibility of certain improvements has become evident. These improvements are of two sorts. First, ones which will eliminate or reduce substantially the need for manual cleaning-up of the cargo hold now required because urea, being hygroscopic, tends to compact and adhere to vertical surfaces. Procurement of small "Bob-cat" type front--end loaders to be used in each ship to loosen urea adhering to the bottom and upper areas of the hold,/1 realignment of the paths of the scrapers which drag urea to the discharge hopper, and provision for fresh water washing of the hold and urea reclaim system is planned. Second, improvements to facilitate loading aboard the main deck of bales of polyethylene bags for fertilizer which are manufactured by PUSRI in Palembang and shipped aboard PUSRI's ships for use at the various UPPs. Extensions to existing cranes and the strengthening of the crane structure will be required. MCD will design the shipboard alterations which will be accomplished during the annual dry docking of the ship under PUSRI supervision. /1 Procurement of four additional "Bob-cats" for use aboard the four existing ships is included as part of the project.

41 (d) Spare Parts 4.17 With a fleet of seven ships and with six UPP, 595 railway cars, and 81 ISDs, PUSRI will require a large variety of spare parts to be held in inventory in order to maintain operations in the face of long procurement lead times and complicated import procedures. Spares for the ships are divided into two types; those which are retained aboard the ships (operating spares) and those which are retained at a central depot at Palembang (insurance spares) where they are available to all fleet units. Spares for UPPs are necessarily kept at each depot as are the operating spares for UPP equipment. Spare parts for the project railway wagons are kept under PUSRI control in Java and drawn by PJKA as required. The project includes appropriate additions to PUSRI spare parts stocks, based on usage records and the advice of consultants. The list of spare parts, drawn up by consultants and PUSRI, has been agreed (Annex 2, C 12). (e) Consulting Services (i) Ships and Urea Handling Facilities 4.18 PUSRI has retained consultants for preliminary design and assistance in procurement and in construction supervision of the UPP at Meneng (SWANCO) and for design and construction supervision of the four ships (MCD). These consultants were previously retained for the same functions during the first project and are acceptable to the Bank. Their contracts are effective and their work is underway. A lump-sum contract for detailed design between PUSRI and P.T. Kelsri covering the Meneng UPP is effective. (ii) Design and Owner's Engineer 4.19 PUSRI has retained a local consultant, P.T. Inconeb, which has designed piers in Indonesian ports to design and draw up tenders for the piers at Meneng and Cilacap. These will be constructed according to design criteria to be supplied by SWANCO, which will act as Owner's Engineer and supervise their construction. Design of the piers is underway and is 90% complete. Cost estimates, based on the cost of a similar adjacent pier at Meneng, are complete and have been reviewed by Bank staff. (iii) Forecast of Fertilizer Consumption, Marketing and Distribution Requirements 4.20 The rapid expansion of production of fertilizers in Indonesia, growing demand, and shifts in regional growth patterns create a need to review the various estimates which have been made about fertilizer and its distribution, including methods to increase peak storage capacity. PUSRI, with the main responsibility for fertilizer distribution, will retain IFDC (para. 2.21) to undertake such a review with the objective of completing it

42 by June Terms of reference for this study, estimated to cost US$200,000 and to require about 10 man-months of expatriate and about 40 man-months of local consultant time, will be prepared by PUSRI and IDFC and agreed to by the Bank within the next few months. The study will include, inter alia, a review of distribution problems outside Java (paras and 3.22) and will be financed by the Fifth Technical Assistance Credit (Cr. 898-IND). (iv) Use of Block Trains in Java 4.21 It has been difficult for PUSRI and PJKA to introduce the use of block trains for fertilizer movement (para. 3.29). The success of this method, new to Indonesia, is necessary if PJKA is to handle the large volumes of bulk products such as fertilizer, cement, petroleum products, rice, sugar, etc. which will be moved by railway during the next 10 years. Success involves not only equipment but also administrative control systems and communications equipment. In order to estimate the need for additional operational improvements and investment, PJKA will study the requirements for introducing the wider use of block trains and the implications of this for administration and control of railway operations. The findings of this study, expected to be completed by June 1983 may require 12 man-months of foreign and 30 man-months of local consultant time, will be done in two parts as described in para and will serve as a focus for any necessary review of the operation of fertilizer block trains (para. 4.10). Terms of reference for this study, which will be financed from the Fifth Technical Assistance Credit, have been reviewed. PJKA and PUSRI have reached agreement on a method of monitoring and controlling block train operations designed to improve efficiency during the period prior to the completion of this study. (v) Port Master Plans and Detailed Engineering 4.22 The Government has requested the Bank to assist in financing the cost of preparing port master plans and, based on agreed plans, the detailed engineering required for ports identified by the Integrated Sea Transport Study. This study was financed under the Second Shipping Loan (Ln IND). Thirty-two ports were nominated for inclusion in an interisland liner system (ILS). Master plans have ben completed for eight ports to be constructed with Dutch and Japanese aid and by proposed Asian Development Bank projects. A further 10 are to have master plans and detailed engineering undertaken by the Directorate General of Sea Communications (para. 4.23) and construction at two ports is complete. Master plans and detailed engineering for the balance of 12 ILS ports is expected to be carried out in two phases. Phase I, for which US$17.5 million is included in Part B of the proposed project, includes detailed engineering (US$6.3 million) for the second expansion of Indonesia's main port, Tanjung Priok, which is receiving assistance under the First Port Loan (Ln IND), the expansion of which is likely to cost about US$ 150 million. The proposed project also includes financing for master plans and detailed engineering (US$11.2 million) for high priority ILS ports, details of which are included in Annex 2, B.7.

43 C. Cost Estimate and Financing Plan 4.23 The total cost estimate for the project is US$185.3 million equivalent of which US$138.2 million equivalent would be foreign exchange. The proposed loan of US$66.0 million would finance about 48% of foreign exchange costs and 35.6% of total costs. The National Fertilizer Distribution Project - Part A of the Project - would require US$167.8 million equivalent of which US$126.1 million equivalent or 75% would be foreign exchange. The proposed allocation of US$48.5 million for this part of the project would finance 38% of its foreign exchange requirements. The balance of the proposed loan, US$17.5 million equivalent, would provide 100% of the finance required for the port master plans and detailed engineering and for consultant contracts. The costs for the urea bulk carrier ships, are based on a contract concluded in February Based on quotations made on the basis of outline specifications, the consultants have provided estimates of the price of the ammonia carrier. Cost estimates for equipment are based on consultant estimates and quotations from suppliers of similar equipment. Cost estimates for the piers are based on advanced engineering design (para. 4.19). The cost estimate for the railway extension is based on estimates for materials (rails, sleepers, fastenings, etc.) as determined by PJKA on the basis of the 21 km route plus 9 km of sidings. The construction costs (cut, fill, bridges and other construction) were also prepared by PJYSA. While these estimates are not based on detailed engineering, they were reviewed by Bank staff at negotiations, and subsequently in Indonesia. The phasing of work and of expenditure was considered reasonable. The land acquisition costs are based on purchases at an average price of Rp 5,000 per sq m. PUSRI has rented the land for the Meneng depot and has prepaid the rent. Costs for the railway consultants are based on information supplied by PJKA The average man-month cost of an expert, including the cost of travel, subsistence, and allowances is estimated at about US$3,000 equivalent for a local expert and ranges between US$8,500 and US$10,700 for expatriate consultants. All these estimates are reasonable, and are in line with the actual cost of consultant services in Indonesia over the four-year period of project construction. Cost for design and construction supervision for the ships is estimated at US$2.7 million if only two shipyards are selected to build two types of ships, US$3.0 million if three shipyards are selected. Costs for Indonesian consultants (P.T. Kelsri) have been based on a contract for US$387,000. All of the above cost estimates have been based on contracts for the various consultants An overall physical contingency of 13.2% of total of Part A project base costs (excluding the cost of the ships which are fixed price bids) has been arrived at by calculating reasonable physical allowances of from 5% to 35% for each item where appliccable. Details are given in Annex 7. Price contingencies for the total Part A project excluding the cost of the ships of 17.7% have been calculated on the sum of base costs plus physical contingency over the construction period as shown in Table 4.1. Price and physical contingencies of 9% have been estimated for Part B of the project. The results, which are in line with recent Bank assumptions on Indonesian inflation, are given in detail in Annex 7. The above project costs are given in Table 4.2.

44 Table 4.1: PRICE CONTINGENCIES Local Foreign (a) Financing Plan D. Project Implementation 4.26 The financing plan includes use of export credits for procuring ships. Based on an understanding among OECD countries most ship financing is for a maximum of 80% of the ships value repayable over not more than 8 years at a minimum interest rate of 8 1/2% p.a. A total of US$54.8 million cf export credits will be utilized. This amount plus the proposed loan of US$66 million will represent about 87% of total project foreign exchange costs. These loans will be made to the Government which will bear the foreign exchange risk. All funds onlent to PUSRI by the Government will be 25% equity and 75% debt at a rate of 13.5%, the current long-term lending rate by Indonesia's state development bank. The Government will finance PJKA through its budget. Funds for Part B of the project will be supplied through the budget. The financing plan is given in Table 4.3. Table 4.3: FINANCING PLAN Source Export Use credits Government Bank Total (US$ million) PJKA PUSRI Department of Communications Total

45 Table 4.3: CAPITAL COST ESTIMATE (1981 Base Cost Estimate) Million Rupiah Million US$ Per- Local Foreign Total Local Foreign Total cent Part A of the Project PUSRI Activities Urea Handling Facilities 1. Bulk reception and bagging plant, Meneng 3,563 5,375 8, Pier, Meneng , Belawan bagging facilities Belawan additional conveyor Pier, Cilacap , Railway wagons (200 of 30 tons) - 8,813 8, Wagon spares Bulk ships for Urea (3) - 27,438 27, Refrigerated ammonia Carrier (1) - 14,375 14, Improvement on urea ships and ship spares - 2,500 2, Consultant services Ship and urea handling 1,313 1,625 2, Fertilizer study up date Subtotal 6,102 62,589 68, PJKA Activities 12. Railway line extension (30 km) 5,187 7,250 12, Railway line right-of-way 5,563-5, Railway line design and supervision 938 1,250 2, Block train study, Java Subtotal 11,813 8,625 20, Contingencies Physical: 16. PUSRI 1,119 1,913 3, PJKA 2,137 1,088 3, Subtotal 3,256 3,000 6, Price Escalation: 18. PUSRI 1,125 2,694 3, PJKA 3,756 1,925 5, Subtotal 4,881 4, Total Project Cost Part A 26,050 78, , Part b of the Project 20. Detailed Engineering, Tanjung Priok Port 512 2,738 3, Detailed Engineering and Master Plans, Ports 2,319 3,469 5, Subtotal 2,831 6,207 9, Contingencies 22. Physical Price , Subtotal 593 1,307 1, Total Project Cost Part B 3,426 7,512 10, Total Project Amount 29,475 86, ,

46 (b) Implementation 4.27 The project would be implemented over a period of four years with the majority of work being completed in two years and three months (June 1984). Only the railway line construction will extend to June The planned order dates for equipment and the description of work to be undertaken is given in Table 4.4 below and an implementation schedule is given in Figure 3. A list of potential bidders covering all categories of equipment to be procured by PUSRI includes 140 firms. The contract for three urea ships was awarded after Government procedures to a Korean shipyard, which will provide a supplier credit. Part B of the Project is expected to be completed no later than December 1984, the time scheduled for the appralsal of the maritime project. The production of ammonia will start at KALTIM in mid-1983 and will be transported by chartered ships until the special ammonia carrier is delivered. Table 4.4: EQUIPMENT AND WORK SCHEDTJLE No. of Service Order date Description Location months date Dec 1981 Pier Cilacap 18 June 1983 Dec 1981 Pier Meneng 18 June 1983 July 1981 Bagging plant Meneng 24 July 1983 Oct 1981 Ship 5 18 May 1983 Ship 6 21 Sept 1983 Ship 7 24 Jan 1984 March 1982 Unloading facilities Belawan 12 March 1983 March 1982 NH3 ship 24 June 1984 Dec 1981 Bagging facilities Belawan 12 Dec 1982 June 1982 Railway wagons Java 18 Dec 1983 Sept 1981 Rail extension Meneng/Banjuwangi 45 June A time-critical item is the railway extension. 30 km railway line could be built under normal circumstances in about two and one half years, including land acquisition, but experience in Indonesia indicates that substantial delays are likely. This is due to problems of land acquisition and contracting and because of growing difficulties and delays in contract administration. A conservative schedule has therefore been projected. The survey of the railway line alignment for the extension is complete. The Government has decided to have the work managed by PJKA, assisted by local consultants, and constructed by local contractors. Completion in mid-1985 will require bagged urea to be transported by truck to a temporary railway wagon loading installation at Banjuwangi or Kabat. At volumes of over

47 ,000 tpy this transfer is more expensive than movement direct from Meneng to final destination by the proposed railway. About 575,000 tpy will have to be moved by road to a railway loading point until mid-1985 at up to about US$5.18 per ton additional cost. Delay of railway line completion beyond this date would expose PUSRI to added costs. Therefore the Government has agreed to take all steps as may be necessary or desirable to achieve timely completion of the railway extension, based on a detailed construction schedule. Until the railway extension is completed, the bagging plants at Jakarta, Cilacap, Surabaya and Meneng and at all the production plants will receive and/or bag and ship fertilizer in order to maintain factory production and fertilizer supplies to Java. Some of the fertilizer to be unloaded at Jakarta or Cilacap will have to be reshipped by rail to markets in East Java at high cost and with major organizational difficulties until the facilities at Meneng, and the railway line, are able to operate. Because timely completion of the railway extension to Meneng is critical to the proper and economic movement of fertilizer PJKA and the Government have agreed during negotiations on the need for frequent consultation on and review of progress in constructing the extension with a view to determining the steps to be taken, if any, to improve progress. (c) Executing Agencies 4.29 PUSRI would be the executing agency for procuring and putting into service the urea handling equipment, the UPP, and the ships and for procuremunt of the railway wagons. A project implementation group has been set up within PUSRI's Development Department to carry out the work. It is headed by a capable and experienced manager. The marine structures would be designed and constructed by competent local consultants and contractors selected by PUSRI on the basis of local competitive bidding procedures approved by the Bank. The contractors are also to be judged technically capable and, based on previous work, approved by the local port administrators and Directorate General of Sea Communications. Construction would be carried out under the supervision of SWANCO. PUSRI and P.T. Kelsri are now designing the Meneng UPP and SWANCO and P.T. Kelsri will act as Owner's Engineer for PUSRI in its construction and will assist in procurement and evaluation of bids. As the design is similar to the five other depots operated by PUSRI, no design or construction problems are envisaged. MCD would undertake construction supervision for the ships with a PUSRI engineer acting as Owner's Engineer for document approval. The railway locomotives and equipment for the railway line extension, and the extension itself, would be procured and executed by PJKA. The Directorate General of Sea Communications would be the executing agency for Part B of the Project.

48 E. Procurement and Disbursement (a) Procurement 4.30 The Bank loan will finance part of the foreign exchange cost of equipment and consultant services to be procured by PUSRI and consultant services for Part B of the Project. Procurement by PUSRI of all equipment (urea handling facilities, railway wagons, etc.) will be subject to international competitive bidding (ICB) from prequalified bidders and will be carried out in accordance with the Bank's Guidelines for Procurement and be subject to Bank approval. Items not financed by the Bank will be procured on the basis of competitive bidding locally advertised in accordance with government procedures satisfactory to the Bank. All equipment contracts or packages of contracts of over US$100,000 awarded by PUSRI will be subject to prior review by the Bank and this will cover about 85% of the value of Bank-financed contracts. The balance will be subject to a random post review by the Bank after award. All contracts for civil works costing US$1.5 million or more will be subject to prequalification and review by the Bank prior to award. Consultants employed under Bank finance, except for contracts negotiated prior to August 5, 1981, will be employed according to the Bank's Guidelines for use of Consultants and will be acceptable to the Bank and employed under contracts acceptable to the Bank. Procurement by PUSRI has already commenced Of the US$126.1 million of foreign cost for Part A of the Project, one contract for three urea ships and spares (US$43.9 million) has been awarded and awaits final Government approval. This contract requires 5% of the price to be paid on contract effectiveness (likely by the end of March 1982) and the balance by the delivery of each ship. No interest is charged during construction. This payment (US$2.2 million equivalent) plus minor payments to consultants and for equipment or services at Meneng and Cilacap could involve PUSRI in total payments of up to about US$3.5 million prior to loan signing on commitments of about US$50.0 million PJKA will undertake civil works utilizing competent contractors and will procure contractors on the basis of competitive bidding, locally advertised in accordance with government procedures satisfactory to the Bank. PJKA will construct the railway track using force account and local contractors. It is expected that civil works will be undertaken in a number of small contracts not of interest to foreign firms and therefore ICB is not appropriate. Consultants employed to assist with Part B of the Project will be retained by the Directorate General of Sea Communications under the procedures set out in the Guidelines for Uses of Consultants and will be employed under contracts acceptable to the Bank.

49 (b) Disbursement 4.33 Disbursement of the loan proceeds will be made over four calendar years on the following basis for Part A of the Project: (i) 100% of the foreign cost of equipment or of local expenditure for equipment manufactured locally, (ii) 75% of the local cost of imported equipment procured locally, (iii) 100% of the cost of consultants, and (iv) 100% of the cost of civil works (pier and bagging station at Meneng). Part B of the Project will finance 100% of the cost of consultant services. The expected loan disbursement schedule, based on the region-wide profile and expenditures under Part B of the project, would be as shown in Table 4.5. F. Environmental Aspects 4.34 No environmental hazards are foreseen at the bulk storage shed where existing pollution control systems are in use or will be utilized for the new terminal and sheds. Bagged storage presents no environmental hazards. Pollution controls, acceptable to the Bank and based on those proposed by the Intergovernmental Maritime Consultative Organization (IMCO), are included in the ship specifications to control oily water, garbage and sewage discharge.

50 Table 4.5: DISBURSEMENT SCHEDULE IBRD fiscal Quarter Disbursement Cumulative Percent Cumulative year ending ---- (US$ million) (%) /30/ /30/ /31/ /31/ /30/ /30/ /31/ /31/ /30/ /30/ /31/ /31/ /30/ /30/ /31/ /31/

51 V. ECONOMIC EVALUATION A. Economic Rate of Return 5.01 The economic assessment of the project investments is made on the same rationale as that for the first Bank-financed distribution project: changes in the costs of transporting fertilizer throughout Indonesia under "with-" and "without-project" scenarios. The approach accepts as common to both, the expected overall growth, and regional distribution of agricultural production which underlies forecasts of fertilizer demand. Economic rates of return are estimated separately for each project component, as well as for the project as a whole Cost savings and other benefits are measured net of: (a) the capacity of the distribution system existing in early 1981; and (b) the overall changes in fertilizer transport costs to farmers that will follow from the location of new urea plants at Bontang and Aceh. This latter effect will be a significant saving for areas now remote from factory sites and major use areas, as the following table shows: Table 5.1: REDUCTION IN UREA TRANSPORT COST FOR AREAS SUPPLIED FROM NEW PLANTS Reduction in cost per ton Rp -000 % Bontang - East Kalimantan South Sulawesi North and Central Sulawesi 7 34 South-East Sulawesi 3 15 Maluku & NTT 3 15 Aceh - D.I. Aceh 5 43 North Sumatera 2 20 West Sumatera The focus of the economic analysis is therefore the efficiency of the expanded distribution system. Costs include assets to be provided under the project itself, and those investments under the wider program of factory expansion that are necessary for the operation of bulk ships at Gresik. Overall, storage and bagging requirements are the same for any distribution system, depending on the level of production and demand rather than the

52 transport mode. In analyzing the returns on storage and bagging investments only those costs necessary for the efficient operation of the chosen distribution system, i.e., the bulk reception and bagging plant to be provided at Meneng and the improvements at Belawan and Cilacap, are included Analysis of the operation of the transport system assumes that a further expansion of distribution assets will follow, and possibly overlap, this project. The existing inter-island fertilizer bulkshipping fleet has capacity to carry 1.4 million tons of urea annually, and this will be fully utilized in The three ships to come into service in 1983 will have capacity for an additional 1.1 million tons of urea or a total of 1.2 million tons of fertilizer if TSP is carried on back-hauls. Capacity for urea with TSP back-haul will be fully utilized in 1985 and for bulk urea transport in 1986, when some 30,000 tons would need to be carried by additional new ships and/or under charter arrangements. This points to the need for rapid preparation of a follow-on expansion of fertilizer distribution facilities (para. 1.04). (a) Inter-Island Bulk Fertilizer Movements 5.05 Use of the three new ships in will provide economic cost savings over the least-cost alternative shipping system /1 (using 1,500 dwt bulk carriers) averaging Rp 5,540 per ton./2 Fertilizer handling improvements at Belawan and Cilacap ports will eliminate current delays to fertilizer ships waiting for berth space, and reduce costs for bulk shipments through these ports by Rp 516 and Rp 147 per ton. Reductions iln fertilizer handling losses for the PUSRI bulk fleet are taken at 3% compared to handling all fertilizer in small bulkships and bags. All of these benefits, extended to the end of the 15-year life of the vessels at the 1986 capacity level, give an economic return on investments for interisland bulk fertilizer movements of 25%. This is comparable to the return achieved on the First Fertilizer Distribution Project. Details of the calculations are given in Annex 2, C2 and C4. /1 See Project Completion Report, Indonesia Loan 1139, Fertilizer Distr:Lbution Project, June 15, This report updates the comparative cost studies for different shipping systems made during preparation of the Fertilizer Distribution Project and reconfirms that 1,500 dwt bulk ships are the least cost alternative to PUSRI designed bulk carriers. /2 Financial savings from using PUSRI bulk carriers are given in Annex '3, CIO, paras. 9 to 11. Ship operating costs and other transport costs used in this chapter have been adjusted to economic levels to reflecit world fuel prices of early 1981 and to exclude the 10% import tax on ships. Shadow pricing was not applied to foreign exchange or labor components of costs or benefits.

53 (b) Refrigerated Ammonia Shipments 5.06 Purchase of a specialized ship to transport refrigerated ammonia between Bontang and Gresik will result in significant savings over chartered ship costs, and export sales to the Philippines will result in additional net shipping revenues. If a ship were not purchased, export ammonia could be sold f.o.b. at Bontang, and the small domestic volume carried by chartering small pressurized carriers. It is unlikely that this would affect Indonesia's sales prospects, although storage at Bontang may be adjusted to allow for greater uncertainty on the frequency of ship calls. The small domestic transport need by itself would not justify purchase of a specialized ship The economic case for purchasing the ship therefore rests on the prospective earnings from shipping services to foreign purchasers of ammonia, and some savings in payments to foreigners for domestic shipments Charter rates for small, pressurized shipments of ammonia exports from Palembang in early 1981 were, per ton, US$ for shipments to Malaysia, US$93 to the Philippines and US$96 to South Korea. On this basis the charter rate needed to attract foreign ship owners to the Bontang- Gresik route is estimated at US$ It is reasonable to expect that regular refrigerated export shipments would earn a lower freight rate than the pressurized tonnages. Taking into account competitive vessel time charter rates and operating costs, Philippine importers could pay some US$45 per ton for ammonia exported f.o.b. from Bontang. This rate also provides a reasonable margin over costs of ownerships and operation of the project ship to allow competitive pricing responses to competition, and it has been assumed therefore that charter rates of US$45 per ton could be negotiated. Net earnings from export shipments would begin in 1984, but the capacity of the ship (186,500 tons per year) limits export shipments from 1985 on to 140,000 tons, assuming domestic ammonia requirements will be filled. The rate of return is estimated at 28%, and details are shown in Annex 4, Table 2. (c) Intra-Java Fertilizer Movements 5.10 For the intra-island movements on Java, benefits are measured as the savings for the incremental tonnages to be carried by rail compared with costs by road transport. Unit costs for fertilizer transport in block trains are well below those for road transport for long distance movements but there is insufficient rolling stock to expand rail traffic. For Meneng, the project would also provide the track, and comparison with the alternative of trucking fertilizer to the nearest railhead at Banyuwangi shows that rail transport connections to the UPP would have lower costs for all volumes above 200,000 tons per year.

54 Limited locomotive availability has been a constraint on improving block train performance, and PJKA is now in the process of acquiring 64 additional locomotives for fertilizer and other goods movements in Java. With these, and based on the findings of the study on block trains operation to be completed in 1983, it is expected that block train wagon turnarounds can be improved to 5.8 days in 1985 and to the originally targetted 3.7 days by about This would improve the capacity of the fleet to around 1.8 million tons in 1985 (see paras and 4.10) Such capacity will be insufficient for the demand. Projected urea movements for which rail is cheaper than road transport (i.e., all tonnages moving more than 100 kilometers inland, or about 75% on Java) is already 1.1 million tons. In 1982, with the completion of the rail link to the TSP plant at Gresik, unit shipments of TSP, DAP and AS will begin, and the projected potential rail tonnage will rise from 1.6 million to 2.1 million tons by This matter was discussed during negotiations and assurances obtained that PJKA will include in the block train study the development of a plan for discussion with the Bank to procure, or make available, additional railway wagons for fertilizer by The rolling stock to be provided under this project will fill only part of the capacity gap - about 297,000 tons at current turnarounds, rising to 562,000 tons with operational improvements. For fertilizer transport, benefits, measured as the difference in transport costs by road and rail, average Rp 5,350 per ton. The rail line extension to Meneng provides similar benefits to other traffic, principally rice, being shipped out of East Java through the port. BULOG estimates rice shipments through Meneng could reach 300,000 tons by 1985, and cost savings on inland transport to the port have been included from 1986 but there is likely to be substantial excess track capacity until other traffic (e.g., lumber, plywood, rice) develops. The proposed port master plan for Meneng will deal with this matter. Annex 4, Table 3 shows details of the calculations. The rate of return on the railway investments, based on the project, is 13%. (d) Overall Return 5.14 Spread over the distribution system investments the benefits provide a rate of return of 21%. Benefit and cost streams are summarized in Annex 4, Table 4. B. Project Risks 5.15 The project runs few risks from the possibilities of higher costs or lower than expected demand. By the time of negotiations, bids will have been received, and orders placed, for major project investments. The transport capacity to be provided includes only those urgent and interim

55 items needed to cope with the sudden surge in production and demand over the next few years. The expanded shipping and railway capacity will be insufficient after Unless productivity substantially improves as a result of the steps to be taken in the course of the next few years, railway capacity will be less than optimal in all years and PUSRI costs will rise as more fertilizer is shipped by truck. Should domestic demand develop more slowly, ship capacity can be diverted to export trades and the land transport systems will face less strain in handling fertilizer distribution. Should the timing of the opening of new plants be delayed, bulk ships and inland transport facilities will be needed to distribute the interim imports of fertilizer. Should demand grow more slowly than anticipated, there is a small risk of temporary over capacity for fertilizer transport, but the existing system capacity is now close to demand Delay in completing the railway line extension to Meneng will cause continued heavy costs to fall on PUSRI because of the need to utilize more expensive road transport. Continued less than optimum operation of PUSRI ships could cause severe difficulties for the delivery of urea prior to delivery of the project ships because alternative, more costly and less productive ships would have to be used. Late delivery of the project ships will also cause similar problems. The railway line construction will be monitored by the Bank and steps have been proposed to minimize the risk of delay (para. 4.28). PUSRI has undertaken to make appropriate changes in its shipping department in order to improve productivity and has sought bids for early delivery of the project ships The major risks are, therefore, those of inefficient operation of the system, including existing facilities, and of the consequent development of bottlenecks in the expanded distribution system. At negotiations, agreements will be sought on operating performance efficiency targets for ships, rail cars and inland storage depots. A list of performance targets and reporting requirements is included in Annex 8.

56 VI. FINANCIAL ANALYSIS A. PUSRI, Current Financial Position (a) General 6.01 Consolidated income accounts and balance sheets for PUSRI /1 for the past five years, , are given in Annex 9, Tables 9.1 and 9.2, and are summarized below. These show that PUSRI is in a good financial position and has consistently earned a reasonable annual return on average net fixed assets in use, varying between 7.3% (1976) and 12.8% (1977). The debt/equity ratio has improved, from a high of 55/45 in 1977, to 38/62 in 1980, and the current ratio has also improved, from 1.2 in 1976, to 1.6 in The "other income" under "marketing" includes the compensation received from the Government against losses incurred by the marketing unit./2 Such compensation was the subject of assurances received by the Bank on the occasion of loans for both the First Fertilizer Distribution Project and the Third Fertilizer Expansion Project (PUSRI IV). The rationale for including these payments in operating revenues is that, due to the Government continuing to fix low selling prices for fertilizer, and low margins for distribution, PUSRI's marketing unit is prevented from earning revenues sufficient to produce a reasonable return on assets While the production unit has earned profits, the marketing unit has consistently operated at a loss. The basic cause of the different financial results for the two units lies in the margins resulting from the prices fixed by the Government at the production and marketing levels. In addition, as noted in para. 6.05, the production unit accounts include the revenues and expenses related to shipping, bags, warehousing and handling at the production sites. Thus, to this extent production unit net income is overstated, and marketing unit net loss is overstated. Proposals to improve the accounting are discussed in para and In an attempt to ensure that PUSRI would operate profitably, while keeping the price to the farmers at a reasonably low level to encourage the increased use of fertilizer, the Government adopted a two-tier pricing formula. In effect, the Government buys urea for domestic consumption from /1 Sources: Audited statements for /2 Compensation received has been: Rp 17.6 billion; Rp 18.5 billion; Rp 11.2 billion; Rp 20.3 billion; and Rp 8.6 billion.

57 Table 6.1: SUMMARY CONSOLIDATED INCOME ACCOUNTS (in Rp billion) Production Sales and other income Production costs (60.0) (75.4) (96.5) Net income Marketing Sales and other income /a Government compensation Distribution costs (84.1) (116.8) (143.8) Total Profit Before Taxes Total Profit After Taxes Return on net fixed assets (x) Debt service coverage /a The marketing unit sells other producers fertilizer as well as PUSRI:s own product. PUSRI and other producers at a price which gives the company an adequate profit on production and a reasonable rate of return on investment. It then sells the fertilizer back to PUSRI, at a much lower price, for distribution through a chain of selling agents. In theory, the price levels at which PUSRI buys and sells fertilizer should provide an adequate margin to cover its distribution costs. In practice, this has not been so due to rising costs, owing to inflation, not being met by increases in sales margins, with the result that in each year, the marketing unit's revenues have been insufficient to cover its operating costs and overheads. The Government, in accordance with assurances made to the Bank, compensated PUSRI for these annual losses In April 1980, the Government revised the selling prices applicable to the distribution system, and in August 1980, it revised the prices to be paid for fertilizer production. The result of these revisions was to provide PUSRI-s marketing and distribution unit with a margin of

58 about Rp 10,300 a ton for urea,/l to cover costs of ISDs, inland transport, warehousing and handling (Table 6.4). In addition the price paid to production units includes a margin of Rp 21,800 /2 to cover such distribution costs as shipping, bags, warehousing and handling at the production site (Table 6.5). The combined total of these margins, Rp 32,100 a ton, is, at current cost levels, adequate and PUSRI should be able to absorb some increase in cost levels over time, and still earn a reasonable return on its distribution assets. These revisions of margins compensate for some added costs arising from PUSRI's wider responsibilities for distributing all domestic and imported fertilizers The new price structure has helped improve PUSRI's marketing and distribution unit's financial performance in 1980, as shown in the above consolidated income account (Table 6.1), with a consequent reduction in compensation needed from the Government, from Rp 20.3 billion in 1979, to Rp 5.7 billion in The return on average net fixed assets in use, 12% in 1978, declined to 9.75% in 1979, and to 9.1% in The debt service coverage in each of the three years has exceeded the minimum of 1.5 specified in the loan agreement. These financial results have been satisfactory As discussed in detail in Chapter II-B, the current fertilizer pricing policy in Indonesia implies substantial subsidies to the rice farmers. These subsidies arise from: (a) the dual fertilizer pricing system, under which fertilizer is sold at prices lower than production costs plus distribution costs; (b) urea production cost itself is subsidized by the low cost of gas; and (c) transport costs are subsidized by lower fuel oil costs than world market levels. This arrangement, which has resulted in farmers applying more fertilizer, thus increasing domestic production, is simple, and much less administratively complicated than charging farmers full prices and then trying to subsidize them directly With selling prices, both at the production and distribution levels being controlled by the Government, there is no subsidy to PUSRI or /1 The margins for other products are: TSP/DAP/NPK - Rp 18,000, AS - Rp 16,000. /2 This margin applies to urea, TSP/DAP/NPK and AS.

59 to other producers. However, in the past and present situation of inflation, where costs inevitably rise, and government action in adjusting controlled prices is tardy, occasions do arise when compensation must be paid to ensure financial viability of the producers/distributors. The Government has agreed so long as the price and distribution of fertilizer in Indonesia is controlled, that PUSRI will be allowed to earn a reasonable rate of return on its assets (para. 6.40) Annual balance sheets, given in detail for the years ended December 31, in Annex 9, Table 9.2, are summarized for the years in Table 6.2. Table 6.2: BALANCE SHEETS (in Rp billion) Current Assets Less: Current liabilities 10U Net Working Capital Noncurrent Assets Net Fixed Assets Other Assets Total Assets Long-term Debt Other Liabilities Fixed Asset Revaluation Surplus Equity Total Liabilities and Equity The debt/equity ratio, which rose to 55/45 in 1977, improved to 38/62 in The current ratio, 1.2 in 1976, has since remained within a satisfactory range of The outstanding long-term debt of Rp 97.0 billion includes Rp 20.1 billion for the marketing/distribution unit The composition of the 1980 net fixed assets figure of Rp billion is given in Table 6.3. Current assets of Rp billion include:

60 cash and letters of credit, Rp 73 billion; receivables, Rp 103 billion;/1 inventories, Rp 59 billion;/2 and others, Rp 27 billion. Table 6.3: FIXED ASSETS Total Production Marketing net value unit unit (Rp billion)- Land Buildings and other structures Plant, machinery and equipment Ships Motor vehicles, office equipment Railway wagons Gross value Less accumulated depreciation Net fixed assets in use Construction in progress Total as per Balance Sheet (b) Accounts and Audit 6.13 PUSRI has, with the assistance of consultants,/3 installed a modern, cost-center, accounting system. Periodic income and expenditure accounts, cash flows and balance sheets are regularly prepared for management use and are sent to the Bank. The income accounts show separately the results of the production unit and of the marketing/distribution unit. /1 Includes trade receivables of Rp 61.3 billion for the production uniit (almost entirely due from BRI) and Rp 31.5 billion for marketing unit. /2 Includes Rp 22.2 billion for production unit and Rp 11.4 billion for marketing unit's fertilizer stocks. Remainder is plant spares and other materials. /3 Price Waterhouse Associates (International).

61 However, certain deficiencies still remain. For instance, although section 4.03 of the Project Agreement for the first Fertilizer Distribution Project required PUSRI to prepare, on a proforma basis, yearly statements of income and expenses and balance sheets, adequate to reflect its fertilizer shipping, distribution and marketing operations, the reports given to the Bank do not contain such detailed analytical data. Because the price paid by the Government to PUSRI's production unit includes an element for bags, some bagging, shipping and handling at Palembang, the periodic income accounts show this revenue, and the relevant cost, accruing to the production unit and not to the marketing/distribution unit. Balance sheet assets and liabilities are not segregated under the two units. Therefore it is not possible to easily arrive at the true financial performance of the marketing/distribution function In addition, the management reports, while reporting financial performance, do not contain the relevant physical performance figures. Thus the unit costs of particular functions, such as shipping (bulk and RLS) bagging, ISDs, road and rail costs, etc. are not readily available. While the inclusion in the reported accounts of such costs as depreciation and loan interest under the specific functional cost headings (shipping, bagging, ISDs etc.) is needed in order to arrive at each function's cost, the expenditure side of the income statements should also be arranged to show total expenditure under type of cost, such as labor, fuel, other materials, services, depreciation, interest, etc. During negotiations agreement was reached that PUSRI will review this matter with its financial/ accounting advisors, and prepare a specific plan to improve the management reporting, and the accounting changes needed to present more truly the financial performance of the separate production and marketing units, for discussion with the Bank by June 1982 and for implementation immediately thereafter Auditing is currently carried out by an independent professional accounting firm, D.L. Pamintori S. Indonesia, in association with Coopers and Lybrand, International. Audited accounts have, in general, been received in time, as agreed. Auditing procedures have been satisfactory. PUSRI has installed an internal audit function. 1...

62 B. Financial Projections for the Project (a) General 6.17 The financial projections prepared by PUSRI, assisted by its financial consultants Price Waterhouse Associates, (and revised as needed by Bank staff) relate the incremental revenues and expenses arising from the additional fertilizer expected to be distributed over the five years , to the incremental investment needed to handle this fertilizer Forecast revenue and expenditure accounts and cash flows for the project, covering the years , are given in Annex 9, Tables 9.16 and In addition, consolidated financial forecasts for PUSRI as a whole, covering both the distribution and production aspects, are given in Tables 9.19, 9.20 and 9.21, for the same period. No forecast balance sheets are given for the project, but forecast fixed asset values are shown in Table 9.19 and forecast long-term debt applicable to the project is given in Table Similarly, in the forecast consolidated balance sheets, separate figures for production and marketing unit assets and liabilities cannot be given as PUSRI's accounting system does not, except for fixed assets, readily permit segregation of such figures (para. 6.14) The assumptions and detailed calculations supporting the project financial forecasts are given in Annex 9. Basically, it is assumed that, with inventories of urea, TSP/DAP/NPK and AS stabilizing at about 800,000 tons, PUSRI's marketing and distribution unit, aided by the additional project facilities, will be able to handle annual fertilizer throughputs rising from 2.6 million tons in 1980 to 5.4 million tons in 1986 (Annex 5, Table 4)./l Finances for the project will be provided by the government in the form of 75% debt and 25% equity. The debt is repayable over ten years, after a three year grace period, at an interest rate of 13.5% per annum. Interest during construction, amounting to about Rp 12,000 million, will be borne by the government. (b) Distribution Selling Margins (i) General 6.20 The Government buys bulk and bagged fertilizers from producers at prices sufficient to cover the cost of production, plus other costs originating at production points, such as bags, bagging, handling and shipping. It then sells the products back to PUSRI, at much lower prices, for distribution. The final price to the farmer is Rp 70,000 per ton. The difference between this and the price paid by PUSRI is intended to cover PUSRI's marketing unit costs (transportation, storage, handling, overheads) plus those relating to subdistributors and retailers. /1 Including 600,000 tons in urea exports in 1986.

63 The profitability or otherwise of PUSRIVs marketing/distribution system is very sensitive to the shipping element, given the existing total distribution margin of Rp 32,000/ton. Bulk urea carried in PUSRI's own specialized ships costs about Rp 7,130/ton, but bagged urea, carried in bulk chartered vessels costs about Rp 20,500/ton (including handling costs) and about Rp 24,300/ton by RLS vessels./l 6.22 The effect of these costs is illustrated by the following summary cost table: Using Using PUSRI chartered Using bulk bulk RLS ships ships vessels (Rp/ton) Shipping cost (including handling) 7,130 20,500 24,300 Bags/bagging cost 9,000 9,000 9,000 Rail/road costs (average est. 1985) 8,400 8,400 8,400 ISD costs Depreciation and interest Overheads 1,400 1,400 1,400 Total cost per ton 26,730 39,900 43,700 Distribution margin oer ton 32,000 32,000 32, This table shows that unless PUSRI has sufficient specialized shipping, efficiently used, and if excessive dependence is placed on chartered or RLS vessels, the profitability of the distribution system will be substantially impaired. The forecasts assume that PUSRI's fleet will, in fact, carry almost as much fertilizer in bulk as possible; however, in 1986 it appears evident that an additional bulk urea ship will be required. Table 9.16 of Annex 9 shows the consequent increased domestic shipping costs forecast for 1986./2 /1 According to PUSRI cost data; includes stevedoring into and out of the vessels, and movement from and to bag storage. /2 See also para PUSRI has prepared a project request for a followon project to involve additional ships.

64 (ii) Urea a. Domestic 6.24 The breakdown of the current (April 1980)/1 urea distribution margins is shown in Table 6.4. Certain costs (shipping and bagging in particular) are not covered (see Table 6.5). Table 6.4: UREA DISTRIBUTION MARGIN /a Rp/ton Price to farmers 70,000 Retailers' gross margin (4,000) Price at Line IV 66,000 Subdistributor's margin: Transportation, loading & unloading (Line III-IV) 3,750 Handling, rent, overheads 2,830 (6,580) Price at Line III 59,420 PUSRI's marketing margin (10,326) GOI delivery price to PUSRI marketing unit 49,094 /a Java/Bali only. Different margins apply for other areas In addition, PUSRI receives the benefit of further distribution revenues included in the price the Government pays at the production point. The current (July 1980) margin as shown in Table 6.5 is Rp 21, The overall margin available for distribution and marketing is thus Rp 32,091 (Rp 10,326 + Rp 21,765) and applies to urea sold in Java and Bali. Margins for the other islands are higher, due to higher transport costs. Where bagging is done at production points, such as Kujang, Kaltim, Aceh/ASEAN (all for urea), and Gresik (for TSP/NPK/DAP and AS), PUSRI receives a correspondingly lower margin (Annex 9, page 4). /1 These margins are currently under review by the Government and are expected to be increased to compensate for higher road and railway tariffs announced in January The effect of these increased costs has been taken into account in the financial projections (Annex 2, C.13).

65 Table 6.5: PUSRI DISTRIBUTION REVENUES (MARGINS) Rp/ton Price paid at UPP 78,584 Production cost 48,054 Fuel cost increase 1,621 Profit margin 7,144 56,819 Balance for marketing 21,765 This provides for the following costs: Shipping 8,427 Bags/bagging 11,828 Losses in bagging/storage 423 Loading 393 Fuel cost increase ,765 (iii) Export 6.27 PUSRI has been selling urea on the export market at prices ranging from US$159/ton (Rp 99,375) to US$262/ton (Rp 163,790). For the financial forecasts a figure of US$250/ton (Rp 156,250) has been adopted, which compares with the Bank-s estimates of about US$270/ton by It is also assumed that PUSRI's marketing unit will receive the margin between this figure of US$250/ton and the price at which the Government purchases fertilizer from the various producers,i.e., about Rp 77,000/ton. (iv) Other Fertilizers 6.28 For TSP/DAP/NPK and AS, the price paid at the UPP is the same (Rp 78,584/ton) as for urea, with the same margin for shipping, bagging, etc. (Rp 21,765/ton). (c) Income Projections 6.29 With no provision being made for inflation in the operating cost forecasts, the projected operating revenues are based on the current (1980)

66 production and distribution margins discussed in para The extent to which these margins may prove adequate over the period is discussed in paras and The forecast revenues and expenses for the project are given in Annex 9, Table 9.16, and are summarized in Table 6.6 below: Table 6.6: PROJECT REVENUE AND EXPENSES (Rp billion) Total distribution revenues /a Working costs Depreciation Total operating costs Interest Total distribution costs Net income before tax Income tax Net income after tax Return on net fixed assets - 9% 25% 33% 20% Debt service coverage /b /a Domestic plus export. (Note: 1986 exports lower than see Table 6.7.) /b No debt service until The annual returns on average net fixed assets shown in the above table are high. This is largely due to the fact that the tonnages distributed over the period , and attributed to the project, are utilizing some spare capacity existing at the end of 1980, in ISDs and bagging plants, and in ships, arising from expected more efficient utilization of PUSRI's existing fleet. In addition, considerable tonnages of urea are expected to be exported, at a profitable selling price./l The internal financial rate of return, 22.5% over 12 operating years, also reflects this situation. /1 Even excluding export sales, the return on net fixed assets would range from 9% in 1983 to 20% in 1985 and 13% in 1986.

67 Table 9.16 of Annex 9 splits the forecast revenues and working expenses (i.e., excluding depreciation and interest on debt) over export and domestic operations, and Table 9.10 splits annual depreciation and interest similarly. The following table (Table 6.7) summarizes the forecast income account under exports and domestic distribution: Table 6.7: INCOME FROM EXPORTS AND DOMESTIC DISTRIBUTION (PROJECT) (Rp billion) Exports Revenues Working expenses Plus depreciation Plus interest Total distribution costs Net income before tax Less income tax Net income after tax Domestic Distribution Revenues Working expenses Plus depreciation Plus interest Total distribution costs Net income before tax Less income tax Net income after tax

68 (d) Cash Flows 6.33 Forecast project cash flows for the years are given in Annex 9, Table With needed investment being financed by the Government as explained in para. 6.19, the cash generated by the project has only to pay income tax on earnings, plus debt service commencing in Thus, there will be substantial annual cash surpluses, (Rp 20.5 billion in 1984 and Rp 11.1 billion in 1985), totalling Rp 37.5 billion over the period (e) Balance Sheets 6.34 Projected balance sheets can only be given for PUSRI as a whole (Annex 9, Table 9.21), because except for fixed assets, PUSRI has not provided balance sheet data analyzed over production and marketing functions. Table 9.18 gives the annual changes in project fixed assets values (gross and net) over the period The gross value is expected to rise from Rp 1.6 billion in 1982 to Rp 70.7 billion in 1986, with net fixed assets rising to Rp 61.6 billion in 1985, falling to Rp 57.1 billion by Sensitivity Analyses 6.35 The financial forecasts have been reviewed in the light of the following variations: (a) increase of 10% in project investment cost; (b) increase of 10% in project working costs; (c) decrease in total demand of 10%; and (d) the effect of an inflationary increase of 10% p.a. in working costs. Table 9.22 of Annex 9 gives the detailed results of items (a), (b) and (c) which are summarized in Table 6.8 below These calculations show that even taking all three factors into account, the return on net fixed assets would still be satisfactory, except in 1983, and the cash surplus would still be substantial. The internal financial rate of return /1 would also be satisfactory An inflationary increase of 10% p. a. in working costs would raise total annual distribution costs by the following amounts (Table 6.9). /1 12 % after tax, 16% before tax.

69 Table 6.8 EFFECT OF CHANGES ON OPERATING AND DISTRIBUTION COSTS - SUMMARY SENSITIVITY ANALYSIS (Rp million) Effect of: 10% increase in project cost ,723 1,647 10% increase in operating cost level 1,520 2,584 5,227 7,152 7,676 10% decrease in demand /a ,668 3,907 2,641 Decrease in income after tax 1,027 1,695 3,708 6,357 5,879 Revised income after tax 1,070 (55) 7,498 13,845 6,797 Revised return on net fixed assets (%) Project return on net fixed assets (%) (as in Table 6.6) /a Net reduction in income, after tax. Table 6.9: EFFECT OF INFLATIONARY ANNUAL INCREASE OF 10% IN WORKING COSTS Year Rp million , , , , ,821 Comparing these figures with the annual net income before tax as given in Annex 9, Table 9.17, indicates that by 1985 the project would incur losses before tax in the absence of an increase in the distribution margins. In order just to break even, in these years, increases in domestic sales margin of the order of 18% would be needed in 1985, followed by a further 44% in However if, as is likely, PUSRI were to put in operation an additional bulk urea ship by 1986,/l the financial results would be much better in that year, thus requiring a lower increase in margin. /1 Table 9.5 of Annex 9 shows that in 1986, availability of an additional bulk urea ship would reduce considerably the need to use expensive chartered bulk shipping in that year.

70 C. Consolidated Financial Forecasts for PUSRI / PUSRI has prepared financial forecasts in the following form: (a) PUSRI I - IV (Production and Marketing); (b) PUSRI V (Production and Marketing); (c) Proposed National Fertilizer Distribution Project; and (d) Consolidation of (a), (b) and (c) above. The consolidated forecasts, revised as needed, are given in Tables 9.19, 9.20 and 9.21 in Annex 9. The consolidated income accounts, cash flows and balance sheets for years are summarized in Table 6.10 below. The consolidated return on net fixed assets would range between 12-20%; working capital ratios between , and debt/equity ratios 42/58 falling to 25/75, all of which are satisfactory. D. Conclusions 6.39 The proposed project is profitable and will benefit PUSRI's finances. The combined production and distribution margins are currently adequate to enable PUSRI to earn a satisfactory financial return; even should working costs increase by 10% annually, these margins would be adequate until the end of 1984 when they would have to be increased During negotiations, covenants similar to those in the first Fertilizer Distribution Project (1139-IND) agreements were obtained for PUSRI as a whole in respect of: (i) depreciation policy, (ii) incurring of additional long-term debt, (iii) the earning of a reasonable rate of return on assets in service, (iv) debt service coverage, (v) maintenance of a current ratio of at least 1.4; (vi) dividend policy, and (vii) annual audit. In addition, the undertaking by the Government under Loan 1139-IND, thalt during any period in which the sale and distribution of fertilizer in Indonesia is controlled by the Government, no action would be taken by the Government with respect to fertilizer sold in Indonesia which would prevent PUSRI from earning a reasonable return on its assets, was reconfirmed. /1 Income accounts, cash flows and balance sheets. /2 Return on assets used in production is guaranteed under the various loans made for urea production.

71 Table 6.10: CONSOLIDATED INCOME ACCOUNTS, CASH FLOWS AND BALANCE SHEETS (Rp billion) (a) Consolidated Income Accounts Revenues Working expenses Depreciation Interest Total Operating Costs Net income before tax R 45.8 Tax Income after tax (b) Consolidated Cash Flows Cash available: Income after tax Depreciation Equity from Government Long-term debt Total Cash Available Cash needed: Debt repayment Investment Increase (decrease) in working capital (1.3) 1.8 (5.7) Total Cash Needed Annual cash surplus (c) Consolidated Balance Sheets Assets: Current assets Current liabilities Net working capital Total Fixed Assets Other assets Total Assets Liabilities: Long-term debt Revaluation of fixed assets Equity and retained earnings Total Liabilities R

72 VII. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations agreement was reached: With the Government: (a) that so long as the sale and distribution of fertilizers in Indonesia is controlled by the Government, no action will be taken which will prevent PUSRI for earning a reasonable rate of return on its assets (paras and 6.40); (b) that should progress on the construction of the railway line from Kabat to Meneng fall behind an agreed schedule, the Government and the Bank will consult on steps to improve progress and the Government will take steps to ensure timely completion of the work (paras and 4.28); (c) on the basis of selection of ports for which master plans and detailed engineering are required and on the cost of studies to be carried out by consultants acceptable to the Bank (para. 4.22); With PUSRI: (d) sufficient staff trained in extension and agronomy work will be added to regional marketing staff to provide market inleiigence (para. 3.22); (e) on a detailed demand study, including a review of marketing and distribution patterns and margins outside Java, and on means of increasing peak storage capacity, will be undertaken and reviewed and discussed with the Bank with the objective of making recommendations to the Government about any necessary corrective action by June 1983 (paras and 4.20); (f) that proposals for the revision of the management accounting system will be drawn up for discussion with the Bank by June 1982 and the proposal implemented immediately thereafter (para. 6.15); (g) on appropriate financial ratios to be maintained (para. 6.40); With PUSRI and PJKA: (h) on performance and efficiency targets and on maintenance of PUSRI's railway wagons (paras and 5.17);

73 (i) the efforts will be made to improve the operation of block trains by June 1983 with the objective of reaching an appropriate turn-around time of block train wagons by December 1985, and that, if unsuccessful, the entities and the Government will review the steps needed to be taken (para. 4.10); With PJKA: (j) on a construction schedule and progress to be reviewed regularly with the Bank, for the construction of the railway line extension (paras and 4.28); (k) on the general terms of reference for a study of block train operations to be completed by June 1983 and to be reviewed by the Government, PUSRI, and the Bank to determine any necessary steps to be taken including provision of additional railway wagons, to meet the performance targets (paras and 5.12); and (1) that an adequate number of locomotives will be assigned to fertilizer block trains to ensure efficient fertilizer distribution operations by PUSRI (para 4.10); On Conditions Effectiveness: (m) that the signing of a Subsidiary Loan Agreement, acceptable to the Bank, between the Government and PUSRI would be a condition of the effectiveness of the proposed loan (para 6.19) Subject to the foregoing commitments and agreements, the Project provides a sound basis for a Bank loan to the Government of Indonesia of US$66 million for 20 years, including 5 years of grace. No retroactive financing is included.

74 ANNEX 1 Page 1 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT STAFF APPRAISAL REPORT A. Summary Description of Previous Bank Assistance in Transport Development HIGHWAYS 1. Bank Group lending for highways in Indonesia has evolved in line with the needs of the highway system. The First Highway Project for US$28 million equivalent (Credit 154-IND, June 1969) helped restore communications in Indonesia after a long period of neglect by providing equipment and materials for rehabilitation of about 3,000 km of roads. In addition, the project included finance for workshop equipment and for consulting services to improve maintenance. The project was coupled with a large technical assistance effort from UNDP (with the Bank as executing agency) which covered all aspects of highway operations. While the First Project made a significant contribution to rehabilitation of individual roads, its most important results lay in the help it provided in the management of the overall rehabilitation program and in establishing the basis for sound highway institutions at the national level (see the Project Performance Audit Report (PPAR), SecM78-524, June 20, 1978). 2. The Second and Third Highway Projects supported the next phase of Indonesia's road program: construction of selected major links in the more remote areas of the country. The Second Project for US$34 million (Credit 260-IND, June 1971) primarily helped rebuild a section of the Trans-Sunatera Highway in an area which has since become a major site for transmigration, and is being developed under the Bank's Second Transmigration Project (Loan 1707-IND - Credit 919-IND). The Third Project for US$14 million (Credit 388-IND, May 1973) helped finance reconstruction of a road to a new irrigation area in Sulawesi. Both these projects also made significant contributions toward planning future road works as they provided for studies on the trunk road between Medan and Padang in Sumatera and on the regional road system in Central and South Sumatera, and studies for road improvements on over 2,300 km of roads in various parts of Indonesia. The Third Highway Project also included an important training component which initiated courses and set up a nationwide training system for highway personnel. A combined PPAR (SecM81-4) for the Second and Third Project was issued on January 6, The Fourth Highway Project for US$130 million (Loan 1236-IND, March 1976) represented a new departure in several ways. It included a detailed review of the overall program and (i) sponsored the establishment of regional offices to evaluate, design and supervise the construction of betterment works according to uniform national criteria; (ii) supported a large-

75 69 - ANNEX 1 Page 2 scale and complex program of major construction projects; (iii) included assistance to strengthen virtually all functions of the Directorate General of Highways (DGH); (iv) helped initiate studies of other institutions concerned with highways; and (v) provided for studies of highway laws, road user charges, and vehicle weights and dimensions criteria. The Fourth Project responded to the sudden increase in the road betterment program which was made possible by the new funds available to Indonesia after the oil price rise in The results of the Fourth Project have been significant. Not only have over 1,200 km of road improvements been put under contract, with more than 600 km of these already completed, but positive changes have been effected in planning, design, budgeting, and control procedures of DGH. Studies have also been completed on major policy issues such as usercharges, vehicle weights and dimensions, and on rural roads. The feasibility study and detailed engineering for the Jakarta-Cikampek Corridor Project, which will be considered by the Board in Sept. 1981, was financed under the Fourth Highway Project. The project is about 80% completed, but because of the early delays and because one road section had to be retendered, the Closing Date of the loan has been postponed by two years to December 31, The scope of the Fourth Project was further broadened in the Fifth Highway Project (Loan 1696-IND, May 1979) to cover all important programs of DGH and of Indonesia. The Fifth Project provides finance for: (a) components of DGH's bridge replacement program; (b) some works executed by provincial public work departments; (c) measures to study and improve the highway institutions in some provincial governments; (d) upgrading road maintenance; and (e) strengthening Indonesian highway consultants and contractors. The Fifth Highways Project expands the approach adopted under the preceeding project, i.e. elaboration of design and construction metholodogies and procedures especially adapted to Indonesian conditions to enable DGH easy and quick definition of project elements to be financed under the loan (betterment works, bridge replacement and DPUP programs); promotion and development of the local consulting sector; continued technical assistance to the central and regional highway authorities, and arranging for further decentralization of highway administration functions. SHIPPING AND PORTS 6. The Inter-Island Fleet Rehabilitation Project (Credit 318-IND; June 1972) provided $8.5 million during for financing rehabilitation of ships and technical assistance to shipyards, the Indonesian ship classification organization (under German bilateral aid) and the state bank, BAPINDO, refinancing rehabilitation. Because of sharply increased costs, the total tonnage rehabilitated was only about half of the original target. A Project Completion Report (PCR) on this project was issued on April 13, 1981 which

76 ANNEX 1 Page 3 concluded that, even though the project failed to meet its objectives in the number and tonnage of ships repaired (due partly to stringent banking requirements) and in stimulating increased awareness of maritime safety within the Government, the project assisted in establishing a specialized maritime lending capability in Indonesia and achieved substantial economic returns on the ships which were repaired. 7. The Second Shipping Project (Loan 1250-IND; May 1976), initiated in 1976, provided $54 million for the further rehabilitation and expansion of the inter-island fleet through a National Fleet Development Corporation which procured and leased or sold ships to shipping companies. The project envisaged rehabilitation of about 54,000 DWT of existing ships, procurements of about 52,000 DWT of used ships and about 50,000 DWT of new ships (to be constructed with Norwegian aid), and scrapping of about 70,000 DWT of existing ships which could not be rehabilitated. In addition, technical assistance was provided for improving interisland fleet operations and planning, for training of marine officers and engineers, and for a study of future shipping requirements. Although the rate of procurement was initially much slower than had been anticipated due to ineffective implementation of the scrapping program and higher costs following devaluation, all funds for ship procurement will be committed by the end of 1981, one year later than the original closing date. Rehabilitation of ships has not proceeded according to plan and scrapping has been slowed. The program of technical assistance has been implemented successfully, although there has been slow progress on the training program. The technical assistance element of the project will be extended to the end of 1982 under an extension of the closing date in order to complete the training program and certain other contracts for technical assistance, particularly in the field of ship design and safety training. 8. The Tanjung Priok Port Project (Loan 1337-IND; November 1976) provided $32 million starting in 1977 for expanding the capacity of the country's major port in Jakarta. It included completion of 900 m of berth and associated facilities, including those for containerized cargo, construction of 545 m of berth in a new regional harbor, improvement of land access to the port, and technical assistance and consultant studies. Construction of the berths is essentially completed and construction in the Regional Harbor is progressing well. However, works required to improve land access cannot be completed on schedule and the loan closing date may be extended by one year. A revised master plan will be completed in 1981 and engineering for the works proposed to be included in a Maritime Loan (FY83) will be undertaken with finance from the proposed National Fertilizer Distribution Loan.

77 - 71 ~ ANNEX 1 Page 4 RAILWAYS 9. During , the First Railways Project (Loan 1005-IND; June 1974) provided $48 million for rehabilitation and improvement of the national railways operated by the state railway organization, PJKA. The project included rehabilitation of track, rehabilitation and procurement of locomotives and rolling stock, rehabilitation and procurement of other facilities and equipment, and technical assistance for management, training and procurement, and overseas training. Implementation of the project required two more years than scheduled, and in retrospect it appears that the total investment program was too large for PJKA to handle even with substantial assistance from foreign consultants (see the Project Performance Audit Report (PPAR) draft, March 5, 1981). FERTILIZER DISTRIBUTION 10. The Fertilizer Distribution Project (Loan 1139-IND; July 1978) initiated in 1975 and providing $68 million, helped to expand the capacity to distribute the increasing volumes of urea produced by the national fertilizer corporation PUSRI. The project, which was expanded from cost savings, included procurement of bulk carrier ships, locomotives and rolling stock for the railways, construction of three new bulk reception and bagging stations and expansion of two others and of inland storage facilities. Implementation proceeded on schedule and at anticipated costs. A Project Completion Report (PCR), dated June 15, 1981, stated that the project was successful in spite of the fact that PJKA was unable to operate block trains for fertilizer until late 1980 and that PUSRI's shipping operations were not as efficient as the company expected. In spite of these operational problems, which were being dealt with successfully in early 1981, about 20% more fertilizer moved through the distribution system than had been planned for at appraisal. B. Summary Description of Previous Bank Assistance in the Fertilizer Sector FERTILIZER PRODTJCTION 11. Fertilizer is crucial to the success of the Indonesian Government's e ffbrts to increase the production of food and cash crops. On the Inner Islands of Java and Bali, where limited additional arable land is available, increased production depends on raising yields which can be achieved through application of optimum dosages of fertilizers in combination with improved and

78 ANNEX 1 Page 5 increased irrigation water supplies, use of high yielding and disease resistant seeds, and proper application of pesticides. The Government began to produce small quantities of fertilizer in 1964 and 1965 based on fuel oil at P.T. Petrokimia Gresik, in East Java (4,5000 tons urea and 150,000 tons of AS per year) and on natural gas at P.T. Pupuk Sriwidjaja (PUSRI) at Palembang, South Sumatera, where the first plant produced 100,000 tons of urea per year. 12. The Bank Group assisted in organizing a consortium of international aid agencies to finance a modern 380,000 ton per year urea plant at Palembamg (PUSRI II) through a US$35 million equivalent credit, Fertilizer Expansion Credit (Credit 193-IND; June 15, 1970). A National Fertilizer Study was also financed. This study developed a program to expand fertilizer production, marketing and consumption. A Project Performance Audit Report (PPAR), issued on March 3, 1978, concluded that the project was highly successful even though there were substantial cost and time overruns. In 1974, as PUSRI II was nearing completion, the Government decided to construct PUSRI III, a large (513,000 tons per year) plant also as Palembang utilizing additional gas supplies available in South Sumatera. The Bank-s Second Fertilizer Expansion Project (Loan 1089-IND; February 28, 1975) provided US$115 million equivalent to cover part of the cost of this expansion. 13. With growing demand for urea fertilizers -- during fertilizer consumption i-ncreased at an average rate of 21% annually -- the Government decided to exnand toe successful PUSRI complex further prior to completion of PUSRI III. The Bank and the Saudi Fund for Development each provided US$70 million equivalent to finance part of the cost of PUSRI IV, a duplicate of the PUSRI III plant. A Third Fertilizer Expansion Project (Loan IND; May 20, 1976) was made prior to completion of the second expansion project. These plant expansions were successfully completed and operated efficiently. A Project Completion Report (PCR) dealing with PUSRI III and IV was issued on January 29, The PCR reviewed the Bank's experience with three fertilizer projects in Indonesia and concluded that they had been remarkably successful for five reasons. These were: (i) PUSRI used expatriate help from established firms for project execution and worked harmoniously with them; (ii) they used competent legal assistance to negotiate contracts, to get competent help from foreign engineering firms, and to overcome promptly any contractual problems; (iii) PUSRI had capable management with continuity, who delegated authority and this helped project implementation; (iv) PUSRI had full support from the Government; and (v) while using expatriates, PIJSRI ensured that special emphasis was given to training its own people abroad and in special training facilities constructed in connnection with PUSRI IV.

79 _ 73 - ANNEX 2 Page 1 INDONESIA STAFF APPRAISAL REPORT NATIONAL FERTILIZER DISTRIBUTION PROJECT Selected Documents and Data Available in the Project File A. General Reports and Studies on the Agricultural and Fertilizer Sectors A.1 Transport Sector Survey, October 1980 A.2 Indonesia, Fertilizer Marketing, Brian Berman, May 1981, Economics and Planning Services Overseas Ltd. A.3 Urban Sector Memorandum - East Java, June 1981 (AEPUW) A.4 Investment and Production Costs for Fertilizers, World Bank, June 1980 (Fertilizer Unit paper) A.5 Marketing of Fertilizers in Indonesia, J. Ward, June 30, 1981 A.6 Marketing, Distribution and Use of Fertilizer in Indonesia, Fertilizer Advisory, Development and Information Network for Asia and the Pacific (FADINAP), Economic and Social Commission for Asia and the Pacific, Bangkok, January A.7 The Indonesian Economy, Survey of Recent Developments, Bulletin of Indonesian Economic Studies, November A.8 The Coordination of Investments in the ASEAN Fertilizer Sector, World Bank, November B. General Reports and Studies Related to the Project B.1 Proposed National Fertilizer Distribution Project, P.T. PUSRI, August B.2 Supplementary Information on the National Fertilizer Distribution Study, January 1981 B.3 Indonesia, National Fertilizer Distribution Project, Project Brief, March 26, 1981 B-4 Decision Memorandum, National Fertilizer Distribution Project, June 19, 1981

80 ANNEX 2 Page 2 B.5 Project Completion Report, Loan 1139-IND, Fertilizer Distribution B.6 Prospects for Nitrogen Fertilizer Exports from Indonesia, World Bank B.7 Proposed Program of Port Studies C. Selected Working Papers C.1 Structural Changes in Rice Production and Fertilizer Use C.2 Ship Voyage Times, Fertilizer Distribution (by Mode and Producer) to Provinces, 1980, C.3 Data Obtained from Department of Agriculture, Jakarta, during appraisal. C.4 Fertilizer Data, , PUSRI C.5 PUSRI Sales, C.6 Shipping Operations, 1980 C.7 Block Train Operations, January-March 1981 C.8 Fertilizer Sales Plans and Realization by Cooperatives (KUD) C.9 Status of Cooperative Construction Program, April 1981 C.10 Calculations Related to the Railway (PJKA) C.11 Fertilizer Distribution Between Inland Storage Depots and Farmers C.13 Financial Data (PUSRI) C.14 Note on Part B of the Project

81 ANNEX 3 75 Page I of 9 INDONESIA NATIONAL FERTILIZER DISTRIBUTION FORECAST Regional Forecasts of Fertilizer Consumption Past Trends 1. Fertilizer consumption in Indonesia grew at an average rate of 14.5% between 1970 and 1979, with growth in use by the foodcrops sector a little faster (15% p.a.) than in the estates sector (13% p.a.). FERTILIZER CONSUMPTION IN INDONESIA (Product Tons, 000) Foodcrops ,211 1,340 1,541 Estates Total ,060 1,127 1,144 1,494 1,738 1, Much of the growth can be attributed to increased consumption since 1976, since when the average annual increase has been over 20%. For foodcrops, the principal fertilizers are those domestically produced-urea, TSP, DAP, AS and NPK compounds. For estates, there is greater reliance on imported fertilizers including potassic fertilizers and rock phosphate. By 1979, the consumption of fertilizers for the two sectors were as follows:

82 ANNEX 3 Page 2 of 9 FERTILIZER CONSUMPTION BY TYPE, 1979 (Product Tons, 000) Food Crops Estate Crops Total Urea 1, ,240 AS Other Ammonia and Nitrates , ,438 TSP Rock Phosphate DAP - Other NP Compounds 7-7 NPK Compounds MOP Other Potassium Kieserite Othe magnesium Others, incl. organic Organic Total 1, ,966

83 -77 - ANNEX 3 Page 3 of 9 3. On foodcrops, the NPK ration was 4:1:0.1, and on estates, 3:1:3. Use of potassic fertilizer's on foodcrops is minimal, but BIMAS has begun to encourage higher applications by recommending its application in the ratio of 3:1:1 in a package introduced at the beginning of the 1979/80 wet season. 4. Consumption growth patterns have been significantly different on Java, where fertilizer use has shown a fairly steady 13-15% annual increase throughout the decade, from other islands, where growth leapt from 13% p.a. in the early part of the 1970s to 36% p.a. since This acceleration of growth affected all regions except Bali/Nusa Tenggara and Kalimantan, where growth was particularly high early in the decade: FERTILIZER OONSUMPTION BY REGIONS (Foodcrops) 1970 Average % 1976 Average % 1979 Average % tons per annum tons per annum tons per annum (t000) ('000) ( 000) Java , Sumatera Bali & NT Kalimantan Sulawesi Subtotal, Other Islands , Negligible.

84 -78 - ANNEX 3 Page 4 of9 Changes in In 1980, fertilizer consumption increased by 50%, an event that has been associated with a much improved ratio between paddy and fertiizer prices, and a particularly good wet season, relatively free of pest infestation, which encouraged multiple crop planting and a record rice crop. The increase was shared amongst all regions, although growth on Java predominated. Growth was faster for TSP/DAP than for Urea: CHANGES IN FERTILIZER CONSUMPTION IN 1980 FOODCROPS (Product Tons, 000) Urea TSP Op +% p +% Java 948 1, Other Islands ,159 1, Early estimates of the 1981 crop indicate another record year, with 20.2 million tons being harvested. PUSRI's preliminary estimates of fertilizer sales show a 19% growth. These sustained high rates since 1979 imply a continuing change in the way fertilizer is being used, and forecasts are made by considering potential growth in agricultural acti-' vities rather than past consumption alone. Forecasts of Fertilizer Use 7. Forecasts are made separately for wetland rice, upland rice and other foodcrops, and estate crops. For all three groups, estimates are based on estimates of crop-lands and fertilizer application rates, and take account of major projects to improve agricultural infrastructure. Wetland Rice 8. Traditionally, wetland rice farmers are the largest users of fertilizer; although data is not available on fertilizer used in different crop sectors, fertilizer sales and average application rates are highest in irrigated rice growing areas.

85 -79 - ANNEX 3 Page 5 of 9 9. Forecasts were made on two bases. The first uses Bank projections made in 1979/1 of areas cropped under four different farming categories, with estimates of fertiizer use based on average application rates for each category. In these projections, wetland rice area cropped is forecast to increase by 1.2 million ha, or 16%, by Nearly 90% of this area increase will be off-java. As well, there will be significant changes in in cropping intensities. On Java, the projections show 64% of wetlands areas being cultivated with methods equivalent to the BIMAS Special (high dosage) recommended packages, compared with 385 in On other islands the balance will shift from three-quarters of wetlands cultivated with normal or low fertilizer applications, to three-quarters under special or intensive cultivation. With these changes, urea use on wetland rice would increase to 1.9 million tons by 1985 and TSP to 420,000, with most of the increase on other islands: FIRST ESTIMATE: FERTILIZER CONSUMPTION ON WETLAND RICE Application Rate per ha Area Fertilizer Rate per ha Area Fertilizer (kg) Cropped Consumption (kg) Cropped Consumption ha '000 Tons '000 Urea TSP Urea TSP Urea TSP Urea TSP Java Special , , Intensive , , Normal ) Low Total , ,672 1, Other Islands Special , Intensive , Normal , Low) Total , ,351 4, Indonesia ,800 1, ,023 9, /1 Indonesia, Supply Prospects for Major Food Crops, Report No.2374-IND, March 3, 1979.

86 -80 ANNEX 3 Page 6 of Taken together with similarly based estimates for upland rice and secondary food crops, the 1980 base estimates of food crops fertilizer use are consistent with sales data: Estimated 1980 Sales to foodfoodcrops con- crops sector sumption based 1980 on 1979 analysis (tons '000) (tons '000) Urea TSP Urea TSP Java 1, , Other Islands Total 1, , The second estimate made for wetland rice fertilizer consumption therefore concentrates on two aspects (a) the potential effect of changes in rice cropping intensities that occurred in 1980, and not foreseen in the 1979 analysis; and (b) a finer breakdown of future consumption patterns in other islands, necessary for the analysis of the fertilizer distribution system. 12. This estimate is based largely on a review of recent changes in rice production in Indonesia/i which estimates that: (a) in 1980, about 10% of irrigated rice land on Java that was being double-cropped in 1978, was tripple cropped; (b) ultimately, triple cropping could spread to 375,000 ha in Centra Java and 250,000 ha in East Java. 13. These changes are closely related to the use of IR36 rice varieties which have a short (90-day) growing season. In 1980 with excellent water availability and little pest infestation, many farmers shortened the gap normaly allowed to minimize the risk of pest carryover to a new crop, and achieved two wet season crops. This meant a third crop in some areas, and a second crop in areas where a dry season crop was not planted. /1 Peter G. Warr, The Indonesian Economy: Survey of Recent Developments, Bulletin of Indonesian Economic Studies, Vo. XVI, No. 3, November 1980.

87 ANNEX 3 Page 7 of The second estimates for wetland rice fertilizer use, based on these changes, are made by: (a) estimating the potential changes in land area cropped, taking triple cropping as above and assuming that all irrigated wetlands can eventually be double cropped; (b) estimating changes in rice production from the changes in cropping intensity, and the spread of IR36; and (c) estimating resulting changes in fertilizer consumption using an incremental yield ratio of 3.8 tons paddy per product ton of fertilizer. Details are given in working paper C , The timing of these changes is uncertain--depending both on uncontrollable weather and pest cycles, and on the effectiveness of extension services and irrigation improvements, particularly off-java. On Java, with favorable seasons, the changes could be expected to occur fairly quickly. If all changes are completed by 1985, and assuming the urea/tsp ratio remaains at 4:1, fertilizer consumption for wetland rice would be: SECOND ESTIMATE: FERTILIZER CONSUMPTION ON WETLAND RICE 1985 Average % p.a. growth from 1980 Product tons '000 foodcrops consumption Urea TSP Urea TSP Java 2, Sumatera Bali & NT Kalimantan Sulawesi Subtotal Other Islands Indonesia 2, This estimate confirms that growth on Java is likely to continue to be significantly lower than on other islands, even allowing for some skepticism at the rate at which the expansion in some of these regions (e.g. Kalimantan) may be achieved. The forecasts used for the appraisal uses the broad regional patterns of the second estimate, with growth modified somewhat, in the context of overall foodcrops sector consumption.

88 ANNEX 3 Page 8 of 9 Upland Rice Secondary Food Crops Projections 17. With fairly stable production patterns in these crops, projections of fertilizer consumption are based on the 1979 cropping areas projections, and split by regions according to areas forecast to be harvested for the different crops. 18. As with wetland rice, the cropping area projections foresee changes in both areas and cultivation intensities. Overall area increases are most important for secondary food crops, with an expansion of 702,000 ha (12%) foreseen. On Java, areas used for upland rice are expected to contract. A net expansion of about 7-1/2% is foreseen. Average fertilizer application rates for upland rice are similar to those for wetland cultivation, and those for secondary food crops, somewhat lower. Overall Forecasts for Foodcrops 19. The second estimate for wetland rice leads to a somewhat highaer forecast of foodcrops fertilizer use than the first, and about one-third above the Ministry of Agriculture's forecast of a 12% annual fertilizer consumption growth: COMPARISON OF ESTIMATES OF FERTILIZER CONSUMPTION FOODCROPS (Tons '000) st 2nd Ministry of estimate estimate Agriculture Urea TSP Urea TSP Urea TSP Urea TSP Java 1, , , Sumatera Bali & NT Kalimantan Sulawesi Subtotal other Islands , , Indonesia 1, , ,687 1,137 2,

89 ANNEX Page 9 of Because of the substantial agreement between the first estimate and the Ministry of Agriculture forecast, the Ministry's projection of overall foodcrops fertilizer consumption is used. The regional patterns of growth are based on second estimate for wetland rice, but imply a slower rate of change in farming practices, particularly on outer islands. Estates Crops 21. Forecasts of fertilizer consumption for estates crops are made by applying 1980 average application rates to planned areas of estates crops expansion and rehabilitation under Repelita III. A check, and appropriate adljustments, were made for the projected fertilizer requirements for Bank-financed projects in the estates sector, particularly those in regions where overall fertilizer consumption levels are low (Kalimantan and eastern Indonesia). Estates Crops, Fertilizer Consumption Tons ' Urea TSP - 7 (for cover crops) AS Kieserite Rock Phosphate MOP Total Overall Consumption 22. The overall projections for fertilizer use by reigon are given below. These are the basis for assessing the distribution system requirements for domestically produced fertilizers, and imported fertilizers used in the foodcrops sector. Fertilizer used only in the estates sector are generally imported directly by the users.

90 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Fertilizer Consumption Forecasts for Upland Rice and Secondary Food Crops Upland rice Secondary food crops Fertilizer Fertilizer Fertilizer Fertilizer Rate per Area consumption Rate per Area consumption Rate per Area consumption Rate per Area consumption Application ha (by) cropped (0Onn tons) ha (by) cropped ('000 tons) ha (by) cropped (-000 tons) ha (by) cropped ('000 tons) category Urea TSP (-000 ha) Urea TSP Urea TSP (000 ha) Urea TSP Urea TSP ('000 ha) Urea TSP Urea TSP ('000 ha) Urea TSP Java Special , Intensive , , Normal 1 27 } } - } } 2,960 } 285 } Low } 1 } } } } } Total , , Other Islands Special Intensive Normal } 27 } 10 } 860 } 23 } } 1,760 } - } Low } } } } } } Total , , , Indonesia , , , , Ir 0*x

91 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Fertilizer Consumption Forecasts (-000 product tons) 1980 (P) TSP TSP TSP TSP TSP TSP DAP DAP DAP DAP flap DAP Region UJrea NPK AB Other Urea NPK As Other Urea NPK As Other UJrea NPK( AB Other Urea NPK As Other Urea NPK As Other West Java Central Java East Java Java 1, ,46R '29 1, , , , D.I. Aceh Northn Sumatera R West Sumatera Riiu Jambi South Sumsatera Bengkulu I Lampung Sumatera Bali ' NTB Nrr Maluku.& Trian Jaya Bali &NT q l ' West Kalimantan Central Kalimantan I Is South Kalimantan q East Kalimantan 1 I Kalimantan North Sulawesi Central Sulawesi f; South Sulawesi Southeast Sulawesi is 7 8 Sulawesi S Subtotal, Other Islands Indonesia 1, , , , , , Note: (P) -preliminary;. negligible; - - nil.

92 ANNEX 4 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Basis of Economic Evaluation

93 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Fertilizer Consumption Forecasts ('000 product tons) 1980 (P) TSP TSP TSP TSP TSP TSP DAP DAP DAP DAP DAP DAP Region Ulrea NPK As Other Urea NPK As Other Ulrea NPK As Other Urea NPK As Other Urea NPK As Other Urea NPK As Other West Java Central Java n East Java Java 1, ,46R , , ,R , D.I. Aceh North Sumatera West Sumatera Ritu Jambi South Sumatera Bengkulu I Lampung Sumatera Bali NTB NTT Maluku.& Irian Jaya I I Bali & NT West Kalimantan Central Kalimantan South Kalimantan _ Eaat Kalimantan i Kalimantan _ North Sulawesi Central Sulawesi South Sulawesi Southeast Sulawesi Sulawesi Subtotal, Other Islands Indonesia 1, , , , , , Note: (P) - preliminary;.. - negligible; - - nil.

94 ANNEX 4 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Basis of Economic Evaluation

95 -87- ANNEX 4 Tabl=e INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Benefits and Costs for the Expanded Distribution System Interisland Bulk Ship Movements (i) Annual Benefits Tons, 000 Urea ,068 TSP (capacity limited) With Without Annual With Without Anpual With Without Annual With Without Annual project project benefit project project benefit project project benefit project project benefit No. voyages No. port calls , , ,Q42 Ship days At sea 177 1, , , ,291 In port , , ,490 Total 324 1, , ,700 Shipping Cost per Day, Rp DOD At sea 2,076 1,011 2,076 1,011 2,076 1,011 1,011 In port /a Capital charges /b 605 /b 605 /b 605 /b 605 Port charges per call Annual Shipping Cost, Rp aln 530 2,548 2, ,322 3,404 1,510 7,561 6,051 1,721 8,486 6,765 Port Delays to Fertilizer Vessels Belawan Days Cost, Rp mln Cilacap Days Cost, Rp mln Fertilizer Handling, Rp mln - 1,844 1,844-5,896 5,896-5,563 5,563-5,407 5,407 Total, Rp mln 530 4,474 3, ,384 9,466 1,510 13,321 11,811 I,721 14,072 12,351 (ii) Investment Costs, Rp million Bulk ships 12,688 14,063 1,500 Ship spares - 1, Meneng port bagging plant 8,481 4,019 - Belawan port facilities Cilacap port facilities Total 20,645 2,156 /a Average of costs for the year covering unloading time and other port time. /b Included in investment. Source: FUSRI and Bank Staff. February 1982

96 -88- ANNEX 4 Table 2 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Benefits and Costs for the Expanded Distribution System Ammonia Carrier Bontang-Gresik Bontang-Philippines Bontang-Gresik Bontang-Philippines (i) Benefits (capacity limited) Tons, ' Round trip, days No. trips Shipping days required Without Project Estimated charter rate US$90 per ton -- exports US$90 per ton -- exports sold sold Annual charter cost, Rp mln 2, f.o.b. 2, f.o.b. With Project Shipping revenue - US$45 per ton - US$45 per ton Annual revenue, Rp mln - 3,122 - :3,938 Shipping cost, Rp mln Fuel, port charges, maintenance (Rp 2,100/ton) Share of fixed cost including crew (Rp 1,306 mln p.a.) Total 415 1, ,268 Net revenue/cost, Rp min 415 1, ,670 Annual benefit, Rp mln 1,723 1,912 2,213 2,670 (ii) Investment Costs, Rp million , , , Source: PUSRI and Bank staff. January 1982

97 -89 - ANNEX 4 Table 3 IN_NESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Benefits and Costs of the Expanded Distribution System Railway Investments (1) Annual Benefits Wagon Performance Targets Availability 952 Turnaround, days Incremental Wagon Days Available Canadian-financed wagons (220, delivered in March 1983) 57,210 76,285 76,285 76,285 Project-financed wagons (200, delivered in 1984 and 1985) - 8,670 43,340 69,350 Incremental Wagon Capacity, Tons per Year (000) Existing fleet (175 wagons) T 232 Canadian-financed wagons Project-financed wagons Total ,413 Economic Costs for Transporting Incremental Tonnage Over 176 km (Rp mln) By truck Rp 37.3 per ton-km 1, ,418 9,276 By block Rp 6.9 per ton-km (excluding capital charges for rolling stock) ,716 Annual savings from additional capacity 1,198 2,205 3,601 7,560 Annual savings in rice transport to Meneng (300,000 tons) ,736 Total Benefits 1,310 2,205 3,601 10,296 (ii) Investment Costs, Rp million Rail wagons Canadian-financed - 9, Project-financed - - 5,500 2,206 6,606 Rail locomotives - 1,063 3, Spares Rail track extension Design and supervision , Land - 5,106 2, Main track to Meneng - 2,400 5,744 8,043 3,500 Block train study Total Costs 60 37,218 53,760 16,732 12,148 February 1982

98 90 - ANNEX 4 Table 4 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Summary of Project Benefit and Cost Streams (Rp million) Investments Benefits Bulk NH3 Rail- Super- Total Bulk NH3 Rail- Total Ships Ships way vision, Ships Ships way & training, & Year Ports etc. Ports ,919 3,188 11,777 3,094 30, ,645 9,500 19,558 1,763 51,466 3,944 3,635 1,310 5, ,156 2,375 11, ,564 9,466 4,883 2,205 24, , ,001 11,811 4,883 3,601 20, ,351 4,883 7,968 25, ,351 4,883 10,296 27, ,351 4,883 10,296 27, ,351 4,883 10,296 27, ,351 4,883 10,296 27, ,351 4,883 10,296 27, ,351 4,883 10,296 27, ,351 4,883 10,296 27, ,351 4,883 9,201 27, ,351 4,883 9,201 26, ,351 4,883 9,201 26, ,351 4,883 9,201 26, ,234 4,883 5,743 18, ,117 4,883-9,000 February 1982

99 -91 - ANNEX 5 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Detail Of Fertilizer Use, Subsidies, Pricing and Consumption The four tables below are central to the distribution system used to transport fertilizer to the farmer and set out important usage and price relationship. The consumption forecast shows the extent of the distribution problem to be faced.

100 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Fertilizer Application Ratios, 1978/79 Wetland paddy BIMAS/INMAS Traditional Total Dryland paddy Maize Cassava Sweet potatoes Peanuts Soyabeans Chemi- Chemi- Chemi- Chemi- Chemi- Chemi- Chemi- Chemi- Chemi- Region cals Manure cals Manure cals Manure cals Manure cals Manure cals Manure cals Manure cals Manure cals Manure Product kg per Hectare Java Sumatera Bali & Nusa Tenggara Kalimantan Sulawesi Subtotal other islands Indonesia Estimated Nutrient kg per Hectare /a Java Sumatera Bali & Nusa Tenggara Kalimantan Sulawesi Subtotal other islands Indonesia Average Price per kg Nutrient /b Java Sumatera Bali & Nusa Tenggara Kalimantan Sulawesi Subtotal other islands Indonesia negligible; -- nil. /a Nutrient content taken at 46% of chemical fertilizers, 4% manure. Tb At 1978/79 applications. Source: BPS. March 1981

101 ANNEX Table 2 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Fertilizer Prices and Subsidies Urea TSP ldap AS (a) (b) (a) ( Prices and Costs (US$/ton) Domestic Production 1. Ex-factory f.o.t Economic cost World Exports. f.ob. r Erope/Gulf Est., c.i.f. Indonesia Official Prices 5. At factory gate, f.o.t Retail price to farmers Consumption, 1980 ('000 tons) 1, Subsidies to Farmers (US$ million) Financial Subsidies 8. From gas producers From Government 9. Direct N/A N/A 10. Through transport fuel subsidy Economic Subsidies 11. Total , Retail vs c.i.f. import cost plus distribution Notes and Sources: 1. Prices paid by the Government to the producers which covers production cost and allows a return on plant assets for urea, based on PUSRI costs. 2. Economic cost of domestic production, being estimated by (a) adjusting the price of natural gas feedstock from US$0.65 per million BTU to US$1.75 per million BTU for those plants using gas from small fields which cannot juistify capital-intensive liquification plants for LNG exports; these are PUSRIIs plant at Palembang, and the PT Pupuk Kujang plant at Cikampek, West Java; and (b) adjusting the natural gas price to US$2.89 per million BTU for plants drawing on fields with export potential; these are the plants under construction for ASEAN at Aceh, and for PT Pupuk Kaltim at Bontang, East Kalimantan. 3. Current f.o.b. prices for fertilizer from IPD; prices (a) for TSP is the current price, price (b) is the EPD estimated long-term price. 4. Estimated ocean freight per ton of fertilizer taken at US$ Prices at which PUSRI repurchases domestically produced fertilizer for distribution. 6. Official retail price at line IV; actual prices paid vary between regions according to variations in line IV distributor-s costs and profit margins. 7. Consumption figures for 1980, from PUSRI, include both foodcrops and estate sectors. 8. Estimates the reduction in gas company revenues because of the low price urea producers are permitted to pay; calculation is based on total 1980 consumption times the differences between Line (1) and the (a) and (b) economic cost in Line (2>. 9. Total consumption times the difference between the two governnent prices in Lines (1) and (5). 10. Estimated on the basis of the 1980 distribution pattern and the subsidies on transport fuels applying after the May 1980 retail price increases. 11. Total of Lines (8)-(10); measures the national cost as the difference between the official retail price and the economic costs for domestic production and distribution. 12. Estimated national cost of the fertilizer subsidy, calculated as the difference between the official retail prices and the distributed cost for imported fertilizer.

102 ANNEX 5 Table 3 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Trends in Fertilizer and Rice Prices (US$/ton) Urea TSP Rice Indonesia, Indonesia, Indonesia retail Delivered retail Delivered (Jakarta) Imports Year BIMAS Other imports BIMAS Other imports retail c.i.f /a /a Indonesian devaluation; prices of fertilizer in Rupiah unchanged. Sources: World Bank, Commodity Trade and Price Trends, August 1980, and various appraisal reports. Indonesia, Ministry of Agriculture, and BPS IRRI, World Rice Statistics, 1980.

103 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Fertilizer Production, Consumption and Inventories (OOO product tons) TSP TSP TSP TSP TSP TSP DAP /a DAP /a DAP /a DAY /a DAP /a DAP /a Urea NPK AS NH3 Urea NPK AS NH3 Urea NPK AS NH3 Urea NPK AS NH3 Urea NPK AS NH3 Urea NPK AS NH3 Inventory at beginning of year 45? Production capacity Existing plants 1, , _ 1, , , , New plants , , , Total 1, , , ,005 1, ,518 1, ,021 1, Actual production 2, , _ 2, , , , (X of capacity) (103) (94) (121) (- (95) (100) (100) (-) (92) (100) (100) (-) (88) (53) (100) (-) (95) (58) (63) (100) (96) (65) (78) (100),D Imports Total Supply 2, , , , , ,508 1, Domestic consumption 1, , , , _ 2, , Exports ASEAN _ Other _ Total Xxports _ _ Total Demand 1, , , , , , Inventory at end of year /a Excess of on-site consumption at uarea plants. Source: PUSRI and mission estimates. Fr

104 ANNEX 6 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Fertilizer Storage

105 ANNEX 6 Table I INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Fertilizer Stora:e Location Bulk Bags Bulk Bags Bulk Bags Bulk Bags Bulk Bags Bulk Bags 1. Storage Capacity (a) Plants Palembang Xujang Gresik Kaltis ASEAN Aceh PUSRI V Subtctal Ex-factory shipments 1, , , , , , , , , , , ,671.0 Ratico (b) UPPs Tanjung Priok Surabaya Clacap Belawan Padang Ujung Panidang Meneng Subtotal UPP throuighput 1, , , , , , , , , , , ,579.0 Ratico Line III (c) ISDs Java Sumatera Sulawesi Kalimantan Other Subtotal (d) BGR (see PUSRI table) Java Sumatera Sulavesi Kalimantan Other Subtotal (e) Other (private) Line III subtotal Line III throughput - 2, , , , , ,250.0 Ratio ine IV (Tentative Program) Existing kiosks KUD Kiosks Program Java Sumatera Sulawesi KalimantAin Other Subtotal PUSKUD GLKs P.T. Pertanii Retailers (! 5 tons Line IV subtotal - 1, , , , , ,929.4 Line IV throughput - 2, , , , , ,250.0 Itatio urce: PUSRI and DG Cooperatives.

106 ANNEX 7 Page 1 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Detail of Project Cost Estimates RAILWAY ELEMENTS (a) Rail Line Extension Local Costs Percent completion Base cost, mid Physical contingency (25%) Cost escalation (%) Base cost escalated Physical contingencies escalated Total Foreign Costs Percent completion Base cost,mid Physical contingency (15%) Cost escalation (%) Base cost escalated Physical contingencies escalated Total (b) Land Costs Local Percent completion Base cost Physical contingency (15%) Cost escalation (%) Base cost escalated Physical contingencies escalated Total (c) Engioneering Consultants Local Base cost Price contingency Escalated total Foreign Base cost Price contingency Escalate total

107 D. ESTIMATE PROJECT COST (PSDV) Equipment Contingencies Total Base costs Physical Price costs Local Foreign Total Local Foreign Local Foreign Total (US mln) Urea handling facilities Meneng - bulk plant pier Belawan - bagging plant additional conveyor Cilacap - pier Railway equipment Wagons Spares for urea handling & wagons Ships and equipment Bulk carriers Ammonia ship Improvements on 4 ships and ship spares Consultant services Ship and urea handling Fertilizer study update Total ~~~~~~Q

108 -100- ANNEX 7 Page 3 DETAIL OF PROJECT COST ESTIMATE FERTILIZER COMPONENTS - PHYSICAL CONTINGENCY (US$ million) Total Contingency Equipment cost % Amount Local F'oreign Urea handling facilities Meneng - bulk plant pier Belawan - bagging plant additional conveyor Cilacap - pier Railway equipment Wagons (200) Spares Ships and equipment Bulk carriers Ammonia ship Improvements on 4 ships Ship spares } 4 Consultant services Ship and urea handling Fertilizer study update Total

109 DETAIL OF PROJECT COST ESTIMATE FERTILIZER COMPONENTS - PRICE ESCALATION (US$ million) Base/a Local costs Foreign costs Total Equipment costs costs Meneng - bulk plant 14.3 Percentage completion Base costs Physical contingency r Cost escalation p.a. (Z) Base cost escalated Physical contingency escalated Total Meneng - pier 1.8 Percentage completion Base costs n8 Physical contingency 0.06 ' Cost escalation p.a. (x) n - Base cost escalated Physical contingency escalated Total 2.32 Belawan - bagging plant/ additional conveyor 0.3 Percentage completion nn Base costs Physical contingency Cost escalation p.a. (x) Base cost escalated Physical contingency escalated > Total 0.44 X /a 1981 prices.

110 - 102 ANNFX 7 Page 5 DETAIL OF PROJECT COST ESTIMATE FERTILIZER COMPONENTS - PRICE ESCALATION (cont'd) (US$ million) Base/a Local costs Foreign costs Total Equipment costs lq costs Cilacap - pier 2.1 Percentage completion nO Base costs Physical contingency Cost escalation p.a. (X) n Base cost escalated Physical contingency escalated Total 2.62 Wagons 14.1 Percentage completion O Base costs Physical contingency Cost escalation p.a. (Z) Base cost escalated Total Wagon Spares 1.0 Percentage completion on - Base costs no - Physical contingency Cost escalation p.a. (X) Base cost escalated O.R Physical contingency escalated Total 1.12 Consultant services (ships & urea handling) 4.7 Percentage completion on on Base costs Physical contingency Cost escalation p.a. (X) n - Base cost escalated n Physical contingency escalated Total 5.? /a 1981 prices.

111 ANNEX 7 Page 6 DETAIL OF PROJECT COST ESTIMATE FERTILIZER COMPONENTS - PRICE ESCALATION (cont'd) (US$ million) Base Year -- - US million Equipment cost Total Ammonia Ship 23.0 Percent, completion (%) Base cost ($ million) Physical contingency Cost escalation p.a Base cost escalated Phys. conting. escalated Total 25.00

112 ANNEX 8 Page 1 of 3 INDONESIA APPRAISAL OF A NATIONAL FERTILIZER DISTRIBUTION PROJECT Performance Indicators The following performance indicators will be discussed with PUSRI and agreed during negotiations. The data will be forwarded to the Bank. A. Shipping Operations Quarterly - deviation of actual from standard round trip times for each voyage completed in the quarter together with a note about reasons for the deviation and action taken; - analysis of delays, by hour and cause will be shown using the current reporting format; - overall average actual loading and unloading rates per hour for each voyage completed in the quarter, by port and by ship. Annual - berth occupancy percentage at each loading and unloading port; - accumulated quarterly data B. Bulk Bagging Stations (UPP) Quarterly - tons bagged per bagging machine; - total tons received and shipped in bulk by ship type (PUSRI bulkers, chartered, export) - total tons bagged; - total tons shipped in bags by rail, truck and reshipped in bags by water; - average tons per shift loaded into rail wagons;

113 ANNEX 8 Page 2 of 3 - average tonnage per day loaded into railwagons and number of trains per day; - total tons of bagged fertilizer moved through each UPP compared to the UPP's bagged storage capacity; and - exports by export point, bulk and bagged. C. Railway Operations Quarterly - average monthly tons per day at each UPP loaded into block trains compared to the target; - percent of monthly tonnage loaded into PUSRI wagons and PJKA wagons at each UPP; - calculated turn-around time for PUSRI wagons at each UPP and graph of a four week moving average of PUSRI wagon turn-around time for all UPP (target is an average in each Region of 4 days by 1985). D. Inland Storage Depots Yearly - total tons of bagged fertilizers moved through each ISD compared to the calculated capacity of each ISD, displayed by province and for all ISDs in Java, Sumatra, and other areas; - monthly tons loaded by rail and by road with % rail/road. E. Product, Prices and Costs Quarterly - shipments ex-upp to ISD and direct to distributors by UPP; - bagged inventory on hand at UPP, ISD, rented storage, and in hands of distributors at end of each period; - bagged inventory by province (periods to be selected to relate to growing season and times of fertilizer peak storage and application); average cost of truck contracts made for shipment to distributors by province;

114 ANNEX 8 page 3 of 3 - average cost of delivery from ISD to retailer by province; - sales (tons) ex-isd to private distributors, state owned distributors, direct to cooperatives (PUSKUDs), and direct to retailers; - calculation of margins accruing to PUSRI for ships and land operations; - financial reports (income, expense, balance sheets); - transport costs (and per ton costs) for PUSRI bulk ships for urea and NH 3 and for chartered ships and exports (c.i.f.). Yearly - preliminary and audited annual accounts for PUSRI; - preliminary and audited annual accounts for shipping and for the marketing and distributing activities to conform to the requirements of the Loan Agreement; - projection of financial condition of PUSRI marketing and distribution activities for ensuing two years to show revenues, costs and calculated returns on assets utilized supported by data and assumptions.

115 _ a 07 - ANNEX 8 Attachment Page 1 I I NDONESIA APPRAISAL OF A NATIONAL FERTILIZER DISTRIBUTION PROJECT Performance Indicators A. Shipping Operations Shiping Round Trip Times, Current Total Time Backhaul - TSP Urea - ex Palembang to hours Surabaya Cilacap Belawan Tanjung Priok Padang Ujung Pandang ex Kaltim to Ujung Pandang Meneng ex Aceh to Belawan C ilacap Padang Tanjung Priok ex Gresik to Tanjung Priok Belawan Padang Ujung Pandang All these trips are based on loading at an overall 400 tons per hour and unloading at an overall 307 tons per hour except for ex-gresik where loading is estimated to be 108 tons per hour. It is anticipated that loading time can be improved by 25% by 1983 and that unloading can average 400 tons per hour by that date. Port clearance times should be reduced by half by 1985.

116 -108- ANNEX 8 Attachment I Page 2 September 6, The source for the basic times is PUSRI letter Ln-063/Dir/81 of B. Railway Operations 1. The table below shows the monthly average fertilizer block train wagon turn-around time ex-cilacap and ex-surabaya during January to October This performance is to be improved so as to reach, for both locations, an average, over a six-month period ending December 31, 1985, of 5.8 days and, ending December 31, 1987, of 3.7 days Ex-Cilacap Ex-Surabaya January February March April May June July August September October Reports will be developed to show wagon turn-around from Kujang and Meneng with the objective of reaching the turn-around times noted above for shipments from those loading points.

117 ANNEX 9 Page 1 of 8 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT FINANCIAL TABLES A. PUSRI Current Financial Position Detailed consolidated income statements and balance sheets for PUSRI covering the years are given in Tables 9.1 and 9.2. B. Forecast Distribution Revenues General 1. The financial projections have been prepared on an incremental sales, cost and revenue basis, with 1980 as the base year for production, distribution and costs. 2. Annual revenues are forecast separately for sales of urea, TSP/DAP/NPK, Ammonium Sulphate (AS) and liquid ammonia (NH3). 3. Sales are based on: "Fertilizer Production, Consumption and Inventories" (Annex 5, Table 1.4 of the Staff Appraisal Report)./l 4. After 1980, all production plus imports is assumed to be consumed domestically, except for urea of which: (a) 40% of P.T. Asean Aceh production is reserved for export to Asean nations; and (b) part will be surplus production from other plants, largely from P.T. Pusri V/Aceh which is assumed to be exported. No exports are expected for TSP/DAP/NPK or AS, even although supply indicates a surplus, due to the need for a heavy government subsidy in order to be price competitive. It has accordingly been assumed that actual production will be restricted to equal consumption. /1 This table also includes forecast import tonnages.

118 ANNEX 9 Page 2 of 8 5. Although the distribution margins, as fixed by the Government, vary with the region, the margins relevant to Region A (Java plus Bali), which consumes approximately 85% of total urea in the country, have been used for the entire throughput./l 6. The consequent revenue per ton earned by the distribution system has been calculated as follows: (i) Domestic Production and Consumption Domestic production Urea TSP/DAP/NPK AS (a) Price at U.P.P. (Gov't Decree) /a 78,584 78,584 78,584 Less cost of production (inc. profit margin and oil price increase) (56,819) (56,819) (56,819) Contribution to distribution system 21,765 21,765 21,765 (b) Price ex I.S.D (Gov't Decree) 59,420 59,420 54,520 Less purchase price for distribution (49,094) (41,402) (38,493) Contribution to distribution system 10,326 18,018 16,027 (c) Total revenue for distribution system ((a) + (b)) 32,091 39,783 37,792 Rounded off at 32,000 40,000 38,000 /a Includes provision for cost of warehousing, shipping, bags and handling. Adjustments must be made where bagging and warehousing are carried out at non-pusri UPPs (See item B.4.). NH3 revenue has been considered as freight only, by ship purchased for this purpose, as other costs and contribution are expected to be passed to the production unit. Production is assumed to commence in the first quarter of 1984, and be maintained at the same level of 149,000 tons per year there- /1 Margins for regions further from production points are larger, to allow for higher transportation costs.

119 ANNEX Page 3 of 8 after. Distribution is assumed to be: 47,000 tons to Gresik and 102,000 tons to the Philippines. The revenue (freight only) is estimated at US$35 (Rp 21,675)/ton. (ii) Imports (a) Urea - imports are minimal (1981 only) and therefore the contribution is considered equivalent to domestic, as (i) above; and (b) TSP/DAP/NPK and AS are imported and shipped directly to UPPs. Therefore the revenue for shipping cannot be considered. Also, AS is imported in bags, thus no revenue for bags/bagging can be considered. The adjusted revenues for these products are as follows (in Rupiahs/ton): Imported TSP/DAP/NPK AS Contribution to distribution system as in (i)(a) above 21,765 21,765 Less shipping/bbm cost (9,121) (9,121) Bags and bagging cost - (11,828) Adjusted contribution 12, Contribution at ISDs, as in (i)(b) 18,018 16,027 Total contribution on imports 30,662 16,843 Rounded off at 17,000 (iii) Export Revenue (urea only) 7. PUSRI has conservatively estimated a C&F export price of US$250 (Rp 156,250) per ton./l Deducting from this the UPP cost of Rp 78,584 /2 per ton, leaves a net contribution to distribution system of Rp 77,666, rounded off to Rp 77,000/ton. / The Bank's latest estimate is for about US$270/ton by /2 Includes production unit profit margin.

120 ANNEX Page 4 of 8 8. The detailed calculations of forecast annual revenues are given in tables 2.3 and 2.4 dealing with Urea and NH3 Sales and TSP/DAP/NPK and ammonium sulphate (AS) sales. C. Forecast Distribution Costs 1. Bulk Shipping Costs (a) PUSRI Owned Ships 9. PUSRI gives the following cost data (for 1980): Rp million (i) Variable Costs (Total) 6,889 Tonnage carried 1,135,000 tons.. Variable cost per ton Rp 6,070/ton say Rp 6,100/ton (ii) Fixed Costs Rp million General administration 555 Allocation of H.O. expenses 201 Insurance 81 Taxes 1 Subtotal (x) 838 Depreciation/amortization 1,380 Interest 1,813 Subtotal (y) 4,031 Total number of ships 4 Average fixed cost of: (x) per ship Rp 210 (y) per ship Rp 1,008 As depreciation and interest costs are entered separately, and in total, in the projected income accounts, only (x) is taken into account.

121 ANNEX Page 5 of 8 (b) Charter ships 10. PUSRI has been paying an average of about Rp 16,000/ton charter shipping charge for bulk fertilizers. Unloading cost is estimated at Rp 4,500/ton, making a total cost of Rp 20,500/ton. 11. R.L.S. Shipping Costs (bagged fertilizer). On the basis of actual costs for chartering Takari ships, the average shipping cost per ton has been about Rp 18,300. PUSRI's shipping department has estimated the additional loading and unloading cost to be about Rp 6,000/ton making a total cost of Rp 24,300/ton for domestic traffic. For exports, in view of the longer distances, 50% has been added giving an estimated cost of Rp 36,450/ton. 12. Rail/Road Transportation Costs. Since Java consumes almost 80% of the fertilizers distributed by PUSRI, the rail/road transport costs are projected on the basis of costs in Java. To date, rail transport of fertilizer has all been in Java. The average distance has been 200 km, for which the current PJKA tariff is now Rp 32 per ton/km, i.e., Rp 6,400/ton. For road transport the average rate is now Rp 10,500/ton. In 1980, PJKA carried 28% of the urea moved in Java (plus only 600 tons of TSP). Due to the much cheaper cost of rail transport PUSRI wishes to increase the overall proportion of rail transport to 60%, leaving 40% for road transport. In view of the difficulty expected in improving PJKA-s ability to carry such an increased traffic, in bulk trains, it has been assumed that the rail/road ratio would improve gradually from 30/70 in 1981 to 60/40 by Bagging Costs. PUSRI's 1980 financial data gives the following costs: Total UPP costs Rp 347 million Less: Interest Rp 416 million Depreciation 705 million Insurance, etc. 68 million H. Q. allocation 610 million 1,799 million Net variable costs Rp 4,548 million With 1,092,736 tons being handled at PUSRI's UPPs in 1980, the average varlable cost was Rp 4,200/ton, to which must be added the cost of bags, Rp 4,800/ton making Rp 9,000/ton in all. This financial and tonnage data refers only to PUSRI's bagging operations, i.e. it excludes operations at KUJANG, Gresik and at PGIP, Jakarta./l /1 Accordingly, the revenue projections for distribution of this fertilizer must be calculated on margins excluding the allowance for bagging at these UPPs.

122 ANNEX 9 Page 6 of Regarding fixed charges, as depreciation and interest charges will be shown separately in total, in the financial projections, they can be disregarded, thus leaving Rp 678 million as the 1980 level. Marketing Overhead Costs 15. Total Regional and Corporate marketing costs for 1980 appear in PUSR's accounts as follows: Regional Corporate Total 1. Labor costs General office costs Sales promotion Sundry expenses and share of Head Office costs Transport and travel expenses 1, ,784 Subtotal 2,610 1,284 3, Cartage and handling 19,914-19, Occupancy, storage, etc. 1, , Financial cost (interest) 160.2,552 2, Depreciation Annual total 24,395 3,941 28, Item 6 includes road/rail costs of transporting fertilizer. In the forecasts these road/rail costs are entered separately and must be excluded from overheads. 17. Item 7 includes depreciation of ISD-s, offices etc. and Item 8 includes loan interest, both of which are forecast separately on Table 9.10 and must also be excluded. 18. The remaining items include costs relating to ISDs, also forecast separately in Table 9.9, and which must be excluded.

123 ANNEX 9 Page 7 of The resulting net marketing overhead costs for 1980 are: Regional Corporate Total Annual totals as above (Rp million) 24,395 3,941 28,336 Less ISD costs (1,157) - (1,157) Road/rail costs (19,914) - (19,914) Depreciation (554) - (554) Loan interest (160) (2,552) (2,712) Net 2,610 1,389 3,999 Say 4, Overhead costs do not normally increase as fast as output or sales. However, to be conservative, the project forecasts assume that these costs will ncrease in line with total annual tons distributed A. Total tons distributed ('000) (Annex 5, Table 1.4) 2,572 2,713 3,201 3,684 4,612 5,244 5,497 B. Annual increase % C. Annual increase (cumulative) % D. Forecast project overhead costs (Rp mln): (i) 1980 cost 4, (ii) Annual increased cost due to project (D(1) x C) ,728 3,172 4,156 4,548 Rounded ,730 3,170 4,160 4,550

124 ANNEX 9 Page 8 of These costs are apportioned over project export and domestic sales in proportion to the tonnages distributed by the project Tonnages /a ('000) Export Domestic 736 1,140 1,552 2,005 2,501 Total 736 1,349 2,050 2,682 2,930 Percentage Export Domestic Overhead Costs (Rp million) Export , Domestic 980 1,730 2,410 3,120 3,870 Annual Totals 980 1,730 3,170 4,160 4,550 /a See Table Debt Service 22. PUSRI:s share of the project cost, US$117.5 million, is assumed to be be financed 75% debt and 25% equity, all from the Government. Interest on the debt is assumed to be 13.5% annually, with the Government bearing the debt burden durng construction period. Repayment would be over 13 years, including 3 years grace. D. Financial Projections, National Fertilizer Distribution Project: Forecast Increase Statements, Cash Flows and Net Fixed Assets are given in Tables 9.16, 9.17 and Consolidated Projections: Consolidated Income Accounts, Cash Flows and Balance Sheets, for PUSRI as a whole, are given in Tables 9.19, 9.20 and Sensitivity Analysis: The financial sensitivity calculations for the project are given in Table 9.22.

125 ANNEX 9 Table 9.1 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT P.T. PUPUK SRIWIDJAJA (PUSRI) Consolidated Income Statements of PUSRI, (in Rp million) Year ended December (audited) Marketing Unit Sales 35,637 46,988 72,605 96, ,442 Cost of sales 31,911 42,900 63,809 89, ,437 Gross income 3,726 4,088 8,796 6,719 21,005 Regional marketing cost 8,895 7,634 12,003 15,509 24,395 Corporate marketing cost ,871 3,941 Administration cost /b Financial cost 15,299 14,987 7, A Subtotal - balance (21,216) (19,369) (11,446) (12,661) (7,331) O)ther income (loss) (7,605) (1,247) Marketing unit loss (20,943) (18,629) (11,163) (20,266) (8,578) Government compensation 17,641 18,479 11,163 20,266 8,578 Marketing income (loss) (3,302)/a (150)/a Production Unit Sales 21,705 41,969 78,341 94, ,133 Cost of production 12,760 27,002 47,710 75,397 96,549 Gross income 8,945 14,967 30,631 19,286 21,584 Administration 2,565 3,714 4, /b Shipping 1,958 6,398 7, /b Financial cost 1, /b Subtotal-balance 3,048 4,463 18,301 19,286 21,584 Other income 2,471 5,008 3,873 3,731 4,716 P?roduction income 5,519 9,471 22,174 23,017 26,300 Consolidated Accounts Total income before tax 2,217 9,321 22,174 23,017 26,300 Tax ,330 5,587 9,462 Net income 2,217 9,198 16,844 17,430 16,838?rior year adjustment (1,535) (558) (98) (6,344) (7,696) Retained earnings (cumulative) 9,604 18,244 34,990 46,076 55,218 ]leturn on net fixed assets 7.3% 12.8% 12.0% 9.7% 9.1 Debt service coverage n/a n/a /a Loss on PUSRI marketing of certain products (e.g., NPK) on its own accounts. Government makes up only losses on products marketed on behalf of Government. /b Administration, financial and shipping costs incorporated in production and marketing costs, as of January Source: PUSRI and Bank staff.

126 -118- ~~~~~ANNEX Table INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT P.T. PUPUK SRIWIDJAJA (PUSRI) Consolidated Balance Sheets, (in Rp million) Year ended December (audited) ASSETS Current assets Cash 53,737 54,969 50,575 36,112 52,711 Letters of credit 13,748 12,163 2,394 6,049 20,261 Accounts receivable 41,623 47,827 63, , ,963 Inventories/a 57,497 40,112 39,550 47,645 59,051 Government compensation 11,262 11,065 11,954 23,366 16,062 Prepaid expenses 2,381 1,064 1,518 3,402 10,818 Subtotal 180, , , , ,866 Noncurrent assets (Project funds) , Net fixed assets Assets in service 30, , , , ,417 Incomplete construction 115,377 69,987 18,323 10,280 11,524 Subtotal 145, , , , ,941 Other assets ,172 1,327 1,663 LIABILITIES Total Assets 326, , , , ,870 Current liabilities Accounts payable 44,883 38,636 61, , ,664 Current portion of long-term debt and 794 1,186} 39,499 20,549 42,122 short-term bank loans 99,571 68,7681 Subtotal 145, , , , ,786 Long-term debt 93, , , ,144 96,959 Other liabilities Exchange loss - - 5,487 5,487 5,487 Fixed asset revaluation surplus ,945 28,945 Equity Share capital 78,118 90, , , ,475 Retained earnings 9,604 18,244 34,990 46,077 55,218 Subtotal 87, , , , ,693 Total Liabilities 326, , , , ,870 Debt/equity ratio 51/49 55/45 46,154 42,158 38/62 Current ratio /a Including noncurrent spares and materials. /b Including Rp 48 billion of bank loans secured over stocks of fertilizer and other products, repaid in Source: PUSRI and Bank staff.

127 _ ANNEX 9 INDONESIA Table 9.3 NATIONAL FERTILIZER DISTRIBUTION PROJECT Forecast Revenues - Urea and NH UREA A. Tons (000) Distributed 1. Total urea distributed ,8 2,284 2,653 3,347 3,860 3,974 + imports (i) exports (ii) (173) (252) (657) (845) (597) 2. Total domestic consumption - 1,902 2,111 2,401 2,697 3,015 3,377 Less existing consumption - (1,784) (1.784) (1,784) (1,784) (1,784) (1,784) Net for project domestic (iii) ,231 1,593 Less: bagged (Kujang) (iv)/a - - (50) (78) (78) (78) (78) bagged (Kaltim plus Aceh/Asean) (v) - - (31) (86) (110) (125) (141) Net bagged by project (vi) ,028 1, Net exports (project) B. Revenues (Rp million) Domestic distribution: Rp 32,000 x A(vi) - /b 7,872 14,496 23,040 32,896 43,968 Rlp 10,300 x A(iv) + A(v) - /b 834 1,689 1,936 2,091 2,256 Subtotal, Domestic /b 8,706 16,185 24,976 34,987 46,224 Exports distribution: Rp 77,000 x A ,799 44,275 25,179 Total Contribution to Project - /b 8,706 16,185 54,775 79,262 81,403 NH3 A. Projected Throughput (000 tons) Export Domestic Total B. Revenues (Rp million): Freight only - Rp 21,875/ton: Export ,231 2,231 Domestic ,028 1,028 Total /a Additional production at Kujang. 7b Distributed by existing system.

128 ANNEX 9 Table 9.4 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Forecast Revenues'- TSP/DAP/NPK and Ammonium Sulphate (A/S) Forecast Revenues - TSP/DAP/NPK A. Production Plus Imports ('000 tons) (1) Total production ,035 (2) Imports (bagged) Subtotal ,035 Less existing production Subtotal for project (3) Bagged by PUSRI (4) Domestic production (5) Imports Total B. Revenues (Rp million) Rp 40,000 x A(3) - - 2,960 11,640 11,480 - Rp 31,000 x A(5) - 3, Rp 28,000 X A(4) 1,148 4, ,584 14,756 Total Contribution for Project - 4,589 7,888 12,284 15,064 14, Forecast Revenues - Ammonium Sulphate (A/S) A. Production Plus Imports (O000 tons) (1) Total production (Table 1.4) /a (2) Imports (bagged) /a _ Total B. Revenues (Rp million Rp 26,000 x A(1) 3,900 3,900 6,500 8,112 8,684 Rp 17,000 x A(2) 1,819 2, Total Contribution for Project 5,719 5,991 7,214 8,112 8,684 /a See Annex 5, Staff Appraisal Report.

129 _ ANNEX 9 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Table 9.5 Forecast Bulk Shipping Costs /a Total Throughput (000 tons) (Table 9.12) 1,106 1,254 1,471 1,948 2,212 2,424 2,902 Pusri's ship capacity: - existing 1,355 1,355 1,355 1,355 1,355 1,355 - new (incl. backhaul) ,069 1,068 Balance by charter /b Total 1,254 1,471 1,948 2,212 2,424 2,902 Additional Tons (000) Transported for Project (1) Existing Pusri ships (2) New FPusri ships ,069 1,068 (3) Chartered ships Total for Project /c ,106 1,318 1,796 Bulk shipping Costs (Rp million) - Charter cost: Rp 20,500 x B(3) - 2,378 4,859 1,189-9,820 - Existing Pusri ships /d Rp 6,100 x B(1) 1,519 1,519 1,519 1,519 1,519 - New Pusri ships Variable Rp 6,100 x B(2) - - 2,172 4,874 6,521 6,515 Fixecd: Rp 210 mln per ship /e Total Costs for Project 3,897 8,760 8,212 8,670 18,484 Average Cost per Ton (Rp) 10,686 10,400 7,420 6,580 10,290 Excludes NH3. Actually bagged fertilizer carried in bulk ships. Annual total minus carried in 1980 (1,106,000 tons). Variable cost only. Excludes depreciation and interest (consolidated in Table 9.10).

130 INDONESIA ANNEX 9 Table 9.6 NATIONAL FERTILIZER DISTRIBUTION PROJECT Forecast RLS & NH3 Shipping Costs RLS Shipping Costs 1. Total Throughput (000 tons) - as per Table 9.11 A. Exports Less existing (270) (270) (270) (270) (270) (i) Subtotal - Exports B. Domestic Less existing (391) (391) (391) (391) (391) (ii) Subtotal - Domestic Total-Throughput For Project (Domestic plus Export) 2. RLS Shipping Costs (Rp m1n) (a) Liner cost: Sea freight Rp 18,300 plus hiandling Rp 6,000 = Rp 24,300/ton (b) Annual Costs (Rp million): iexports (Rp 36,450 x I.A(i) ,106 20,960 11,919 Domestic (Rp 24,300 x ].B(ii) 1, ,454 4,228 Total Annual Costs 1,118-14,106 23,414 16,147 NH3 Carrier Costs 1. Total Throughput (000 tons) - as per Table 9.11 A. Exports B. Domestic C. Totals NH3 Carrier Costs (a) Variable Costs (Rp million) Rp 2,750 x ](C) /a (b) Fixed Costs (Rp 210 million per ship) i.e. Exports DoTmestic /a Assumes similar variahle cost to that of PUSRI bulk urea ships, but increased by 10%, due to mnore sophisticated design of NH3 carrier.

131 ANNEX 9 Table 9.7 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Forecast Bagging Costs A. Throughput for Project ('000 tons) /a Urea (Table 9.11) Export Domestic ,231 1,593 TSP/DAP/NPK (Table 9.11) AS (Table 9.11) /b Total (Domestic) ,226 1,660 2,134 B. Tons ('000) Bagged by: 1. Export urea - all by PUSRI Domestic: Urea - by Kujang, etc TSP, etc. - by Gresik imported Subtotal: Other Urea - by PUSRI ,028 1,374 TSP, etc. by PUSRI (backhaul) Subtotal - PUSRI ,011 1,315 1,374 C. Bagging Costs (Rp mln) 'Variable- Rp 9,000: Export (x B.1) - - 3,483 5,175 2,943 Domestic (x B.2) 2,214 4,743 9,099 11,835 12,366 Fixed - Nil /c Total Costs 2,214 4,743 12,582 17,010 15,309 /a Excludes imports-bagged. Tb All bagged at Gresik. _c Fixed costs are depreciation and interest, included in Tables 9.10.

132 ANNEX 9 Table 9.8 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Forecast Road/Rail Transport Costs A. Throughput for Project ( 000 tons) (1) Total tons by road/rail: Urea (Table 9.12) 1,699 1,903 2,112 2,401 2,692 3,015 3,377 TSP/DAP/NPK (Table 9.12) ,035 AS (Table 9.12) Subtotal 2,405 2,714 3,029 3,432 3,806 4,250 4,746 Less existing throughput 2,405 2,405 2,405 2,405 2,405 2,405 Net Tonnage for Project ,027 1,401 1,845 2,341 B. Assumed Proportions of Rail and Road Traffic (%) Rail Road B. Forecast Road/Rail Costs (Rp mln) (1) Tons ('000) by road ,053 (2) Tons ('000) by rail ,288 Annual costs: (3) Road: Rp 10,500 x B(1) 4,263 6,468 8,096 9,692 11,057 (4) Rail: Rp 6,400 x B(2) 1,395 2,630 4,032 5,901 8,243 Total Road/Rail Cost 5,658 9,098 12,128 15,593 19,300

133 ANNEX 9 Table 9.9 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Forecast I.S.D. Costs A. Throughput Calculations ('000 tons) (i) Tons distributed (Domestic):/a Urea 1,785 1,903 2,112 2,401 2,692 3,015 3,377 TSP/DAP/NPK ,035 AS Subtotal 2,466 2,714 3,029 3,432 3,806 4,250 4,746 25% ,063 (1,187) Less existing capacity (ii) Total Throughput for Project B. ISD Costs (Rp million) Variable cost only /b Rp :2,700 x A(ii) - 1,021 1,234 1,507 1,760 2,060 2,395 /a See Annex 5, Table 4. /b Fixed costs consist of depreciation and interest, included in total fore,casts of depreciation and interest (Table 9.10).

134 ANNEX 9 Table 9.10 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Annual Depreciation and Interest (Project only) Annual Depreciation /a (Rp million) Export Traffic NH3 ship Bagging plants (share) lb Totals Rounded Domestic Traffic Bulk ships - urea - - 1,544 1,544 1,544 - NH Bagging plants (share) /b - 1, ,124 Railway - boxcars Totalo - 1,212 2,761 3,653 3,805 Rounded - 1,200 2,800 3,700 3,800 GRAND TOTAL - 1,200 3,400 4,500 4, Annual Interest (Rp million) /c Export traffic ,330 1,020 Domestic traffic ,820 5,370 Totals _ - - 7,150 6, Bagging Plants Throughput (urea) /d ( 000 tons) Exports Domestic ,011 1,315 1,374 Totals ,398 1,890 1,701 % export % domestic /a See Table /b Shared according to throughput - see item 3. /c Same proportions as for depreciation. /d As per Table 9.7.

135 ANNEX 9 Table 9.11 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Forecast Tonnages Distributed (Project Only) ( 000) Total Tonnages /a Domestic Urea 1, ,231 1,593 NH TSP/DAP/NPK AS Total Domestic 2, ,140 1,552 2,005 2,501 Exports Urea NH Total Exports GRAND TOTAL 2, ,140 2,050 2,682 2,930 % domestic % exports lonnages by RLS Shipping Annual Totals Domestic Urea TSP/DAP/NPK AS Subtotal Exports - urea Excess over 1980 Domestic Exports Annual Totals 'a Annual demand less production in 1980.

136 ANNEX Table 9.12 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Fertilizer Distribution by Mode (Total) ('000 tons) Urea Direct - Bulk 1,471 1,637 1,863 2,137 2,453 - RLS /a Road7rail Subtotal 2,284 2,653 3,347 3,860 3,974 Indirect - RLS /a Road7 7 ail 1,529 1,718 1,966 2,259 2,591 Subtotal 1,602 1,816 2,081 2,394 2,743 Totals - Bulk 1,471 1,637 1,863 2,137 2,453 - RLS /a , Road7Fail 2,112 2,401 2,692 3,014 3,377 TSP/DAP/NPK Direct - Bulk RLS Road/rail Subtotal ,035 Indirect - RLS Road/rail Subtotal Totals - Bulk RLS Road/rail ,035 AS Direct - RLS Road/rail Subtotal Indirect - Road/rail Totals - RLS Road/rail Summary Bulk shipping 1,471 1,948 2,212 2,424 2,902 RLS shipping /a ,004 1,337 1,162 Road/rail 3,031 3,432 3,806 4,249 4,746 Total 5P112 5,908 7,022 8,010 8,810 /a Includes export urea ('000 tons)

137 ANNEX 9 Table 9.13 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Project Investment Costs /a - Annual Expenditures (US$ million) Description Total 1. Meneng - bagging plant Belawan - bagging plant Belawan - bag loadout Meneng - docking facility Cilicap - docking facility Railway box cars Ship No Ship No Ship No N.H. 3 carrier Ship improvement - reclaim Ship spares Consulting services: Subtotal Urea handling and ships Fertilizer study - update B'Lock trains study Totals - US$ million /b - Rp million 26,750 30,313 10,312 7,000 74,375 La PUSR]; only. /b Shown as US$120.8 million on Annex 7 page 2. Differences due to rounding off and to slight changes in timing of expenditure affecting price contingencies.

138 ANNEX 9 Table 9.14 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Debt Service Schedule (In US$ and Rp million) Repayment Balance o/s Interest /a Total payment Year Mos. US$ Rp US$ Rp US$ Rp US$ Rp (yearly) (yearly) (yearly) , /b , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , /a Interest % p.a. on reducing balance. /b Construction period interest assumed by Government. Also three years grace period ( ) - no loan repayments.

139 ANNEX 9 Table T.15 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Project Asset Costs and Depreciation (In US$ mzillion) Assessed Net Total life Service Base Contingencies Total Residual cost for Yearly yearly depr'n Asset (years) year cost Physical Price cost value/b depr'n depr'n US$ Rp 1. Cilacap-docking facility nd qtr. 2. Meneng, docking facility Mening, bagging plant Belawan, unloading facility th qtr. 5. Existing!ships- improvements Total depreciation, , Ships 1983 Bulk urea - Ship No rd qtr Ship No th qtr Ship No Subtotal bulk urea ships N.H.3 ship /c 7. Ship spares rd qtr. 8. Belawan, bagging machine 12 4th qtr Total depreciation, , Railway, 150 box cars nd qtr. Total depreciation, Total asset costs /a E'JKA Consultants Total project costs /a Excludes re,ilway equipment belonging to PJKA (locomotives and line extension) and consultant costs. /b 10%. /c NH3 ship in service half year only; depreciation in 1984 only US$ 0.69 million (Rp 431 million) and total depreciation for 1984 Rp 3,400 million.

140 ANNEX 9 Table 9.16 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Projected Income Statement (Project Only) Rp million Revenues (i) Exports: Urea ,799 44,275 25,179 NH ,231 2,231 Subtotal Exports ,737 46,506 27,410 (ii) Dornestic: Urea 8,706 16,185 24,976 34,987 46,224 TSP/DAP/NPK 4,589 7,888 12,284 15,064 14,756 AS 5,719 5,991 7,214 8,112 8,684 NH ,028 1,028 Subtotal Domestic 19,014 30,064 45,305 59,191 70,692 Total Revenues 19,014 30,064 76, ,597 98,102 DistributLon Costs (i) Working Costs: (a) Exports: RLS shipping cost ,106 20,960 11,919 NH3 carrler cost Bagging cost - - 3,483 5,175 2,943 Share of overheads , Subtotal Exports ,499 27,599 15,966 (b) Domestic: Bulk shipping cost 3,897 8,760 8,212 8,670 18,484 NH3 shipping cost RLS shipping cost 1, ,454 4,228 Bagging cost 2,214 4,743 9,099 11,835 12,366 Rail/road cost 5,658 9,098 12,128 15,593 19,300 ISD cost 1,234 1,507 1,760 2,060 2,395 Share of overheads 980 i,730 2,410 3,1L0 3,820 Subtotal Dornestic 15,101 25,838 33,769 43,913 60,789 Total Working Costs 15,101 25,838 52,268 71,517 76,755 (ii) Other Costs: Depreciation - 1,200 3,400 4,500 4,500 Interest ,150 6,390 Subtotal Other - 1,200 3,400 11,650 10,890 Total Distribution Costs 15,101 27,038 55,668 83,167 87,645 Working Margin 3,913 4,226 23,774 34,080 21,347 Net Income Before Tax 3,913 3,026 20,374 22,430 10,457 Tax at 45% 1,761 1,362 9,168 10,094 4,706 Net Income After Tax 2,152 1,664 11,206 12,336 5,751 Return on Net Fixed Assets (%)

141 ANNEX 9 Table 9.17 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Projected Cash Flow Statement (Project Only) (Rp million) Totals Source of Funds Long--term borrowing 20,063 22,737 7,731 5,250-55,781 Equity from Government 6,687 7,576 2,581 1,750-18,594 Cash generated by project (working margin) 3,913 4,226 23,774 34,080 21,347 87,340 Increase in current liabilities 2, ,009 2,530 (4,952) 11,102 Total funds available 33,646 35,071 44,095 43,610 16, ,817 Application of Funds Debt Service Interest on L.T. debt ,150 6,390 13,540 Repayment - - 5,575 5,575 11,150 Suibtotal- Debt Service ,725 11,965 24,690 Tax on earnings 1,761 1,362 9,168 10,094 4,706 27,091 Receivables - increase 1, ,832 2,463 (625) 8,175 (decrease) Inventories - increase Investment in project 26,750 30,313 10,312 7,000-74,375 Total funds needed 30,232 32,814 23,617 32,518 16, ,312 Surplus funds 3,414 2,257 20,478 11, ,505 Debt service coverage /a /a No debt service until 1985.

142 ANNEX 9 Table 9.18 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Net Fixed Assets, (Rp million) Annual Investments: in US$ million/a in Rp million 24,438 29,062 10,188 7,000 - Cumulative cost 24,438 53,500 63,688 70,688 70,688 Less construction in progress 22,875 17,500 2, Assets in service 1,563 36,000 61,312 70,688 70,688 Accumulated depreciation /b - 1,200 4,600 9,100 13,600 Net fixed assets 1,563 34,800 56,712 61,588 57,088 Average NFA 1,563 18,182 45,756 59,150 59,338 /a As per Table 9.13, but net of consulting services. /b As per Table 9.15.

143 - 135 ANNEX 9 Table 9.19 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Consolidated Income Accounts, (Rp million) Revenues Production Revenues PUSRI I-IV 83,300 83,300 83,300 83,300 83,300 PUSRI V ,700 25,900 29,100 Marketing Revenues PUSRI I-IV 82,800 82,800 82,800 82,800 82,800 Nat'l fert. distrib. project 19,000 30,100 76, ,600 98,100 Total Revenues 185, , , , ,300 Operating Costs Working Costs Production Costs PUSRI I-IV 39,900 39,900 39,900 39,900 39,900 PUSRI V - - 9,400 10,800 12,100 Marketing Costs PUSRI I-IV 64,000 63,600 63,100 62,600 62,100 Nat'l fert. distrib. project 15,100 25,800 52,300 71,500 76,800 Subtotal working costs 119, , ,900 Depreciation PUSRI I-IV 12,000 12,000 12,000 12,000 12,000 PUSRI V ,200 15,200 15,200 PUSRI I-IV marketing 2,500 2,500 2,500 2,500 2,500 Nat'l fert. distrib. project - 1,200 3,400 4,500 4,500 Subtotal depreciation 14,500 15,700 33,100 34,200 34,200 Interest PUSRI I-IV 7,600 6,600 5,600 4,600 3,600 PUSRI V ,800 12,400 11,000 PUSRI I-IV marketing 2,400 2,200 1,900 1,700 1,400 Nat'l fert. distrib. project ,100 6,400 Subtotal interest 10,000 8,800 21,300 25,800 22,400 Total Operating Cost 143, , , , ,500 Income before tax 41,600 42,400 45,700 52,800 45,800 Tax at 45% 18,700 19,100 20,600 23,800 20,600 Income after tax 22,900 23,300 25, ,200 Relturn on net fixed assets (X)

144 ANNEX 9 Table 9.20 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Consolidated Cash Flows, (Rp million) Sources of Funds Income before tax 41,600 42,400 45,700 52,800 45,800 Depreciation 14,500 15,700 33,100 34,200 34,200 Equity from Government PUSRI V 31,900 28, Nat'l fertilizer distribution proj. 6,700 7,600 2,600 1,700 - Subtotal equity 38,600 35,700 2,600 1,700 Long-term Loans PUSRI V 59,100 35, Nat'l fertilizer distribution proj. 20,100 22,700 7,700 5,300 - Subtotal loans 79,200 58,200 7,700 5,300 Increase in accounts payable 3,000 1,300 10,100 2,600 (4,900) Total Funds Available 176, , ,600 75L100 Uses of Funds Investment in Plant and Equipment PUSRI V 91,100 56, Nat'l fertilizer distribution proj. 26,800 30,300 10,300 7,000 - Subtotal investment 117,900 86,800 10, _O Repayment of Debt PUSRI I-IV 12,300 12,200 12,300 12,200 12,300 PUSRI V ,800 11,800 11,900 Nat'l fertilizer distribution proj ,600 5,600 Subtotal repayment of debt 12,300 12,200 24,100 29, Payment of tax 18,700 19,100 20,600 23,800 20,600 Increase in receivables 1,600 2,800 4,100 2, Increase in inventory :L00 Total Funds Required 150, ,200 59,400 63,400 51,100 Annual Cash Surplus 26,300 32,100 39,800 33,200 24,000

145 ANNEX 9 Table 9.21 INDONESIA NATIONAL FERTILIZER DISTRIBUTION PROJECT Consolidated Balance Sheets, (Rp million) Assets Current Assets Cash 88, , , , ,500 Receivables 140, , , , ,200 Prepaid expenses 10,800 10,800 10,800 10,800 10,800 Inventories 59,500 59,800 60,100 60,300 60,400 Total Current Assets 299, ,800 37q, , ,900 Fixed Assets Land 5,100 5,100 5,100 5,10n 5,100 Plant and equipment 271, , , , ,700 Subtotal 276, , , , ,800 Less accumulated depreciation 110, , , , ,100 Net fixed assets 166, , , , ,700 Construction in progress 149,100 17,500 2, Total Fixed Assets 315, , , , ,700 Other assets 4,100 5,300 5,400 5,400 5,400 Total Assets 618, , , , ,000 Liabilities Current Ltiabilities Accounts payable 133, , , , ,600 Marketing loan ex B.R.I. 29,900 29,900 29,900 29,900 29,900 Current portion of LT debt 12,200 24,100 29,600 29,800 29,700 Total Current Liabilities 175, , , , ,200 Long-term debt 171, , , , ,900 Revaluation of fixed assets 28,900 28,900 28,900 28,900 28,900 Equity 154, , , , ,600 Retained earnings 87, , , , ,400 Total Liabilities 618, , , , ,000 Current ratio Debt/equity ratio 42/58 41/59 36/64 31/69 25/75

146 _ ANNEX 9 Table 9.22 INDONESIA National Fertilizer Distribution Project Effects of Inflation on Operating and Distribution Costs (Rp million) % increase in Project costs (i) Depreciation (ii) Interest (iii) Repayment of debt % increase in level of working costs 1,510 2,584 5,227 7,152 7, % decrease in total demand (i.e., decrease in working margin) ,668 3,907 2, Totals: (a) Decrease in net income before tax /a 1,868 3,081 6,741 11,558 10,689 Less tax (45%) (841) (1,386) (3,033) (5,201) (4,810) (b) Decrease in net income after tax 1,027 1,695 3,708 6,357 5,879 (c) Decrease in cash available /b 1,027 1,695 3,708 6,915 6, Return on net fixed assets: Existing net income after tax 2,097 1,664 11,206 19,486 12,141 Revised net income after tax 1,070 (55) 7,498 13,845 6,797 Revised return on net fixed assets after tax (%) /a Combined effect of items 1, 2 and 3 b Totals of 4(b) + 1(iii). Effect of Inflationary Annual Increase of 10% in Working Costs Rp million , , , , ,821

147 PT PUPUK SRIWIDJAJA DISTRIBUTION DEPARTMENT ORGANIZATION CHART JAKARTA Figure 1 TECHNICAL DIRECTOR IR KOTAN PASAMAN MANAGER DISTRIBUTION DEPARTMENT IR ZULKARNAIN MAKKI TECHNICAL DEPARTMENT PLANNING & CONTROL DEPARTMENT GENERAL ADMINISTRATION DEPARTMENT I IR SATOCHID IR HISYAM THALIB I I POERBOWO HALIMUN SHIPPING DIVISION BAGGING DIVISION CAPT SOETJIPTO D IR ARGO SUTRISNO OPERATION AGENCY SHIPS OPERATION BAGGING UNITS PGIP DEPARTMENT DEPARTMENT DEPARTMENT LIASON OFFICER CAPT SUTANDI DRS JOHANSYAH OTONG KOSASIH RIDJALUDDIN T SURABAYA - ISMAL DAUD SUTRISNO IBRAHIM ZAHIER C AA UASN SUMANTRI BRODJONEGORO PADANG - MT SIMANDJUNTAK PUSRI INDONESIA BELAWAN - RIDUAN R TALU U PANDANG - ARFAN E ZAINAL World Bank-22973

148 PT PUPUK SRIWIDJAJA MARKETING DEPARTMENT ORGANIZATION CHART Figure 2 JAKARTA COMMERCIAL DIRECTOR DALIL HASAN SE I_ MANAGER MARKETING DEPT DRS ROCHADI P REGIONAL MARKETING OFFICES MARKETING ADMINISTRATOR GENERAL INSPECTOR 1. Di ACEH -- DRS RUSLI NAZiR MULYONO DH MSC -_ ~~2. SUMATERA UTARA -SJAIFUDDIN ADJIB SE 3. SUMATERA BARAT & RIAU - TABRANI RAZAK 4. SUMSEL, BENGKULU & JAMBI - BASARUDDIN M 5. LGtMPUNG - M ZACHRIE JUNUS ZAHIER 6. JAWA BARAT & DKI JAKARTA- IR AZWAR ANWAR S _ REGIONAL INSPECTOR I 7. JAWA TENGAH & DI YOGYAKARTA - DRS ALFIAN SUPPLY DEPARTMENT DRS MUSTAFA UMAR 8. JAWA TIMUR - IR MAMAN J irhim HARDJADIKARTA 9. BALI, NIT & TIMOR TIMUR - IR MOMON DJ REGIONAL INSPECTOR II 10. NUSA TENGGARA BARAT - IR EDDY SUMARNO WAREHOUSE DEPARTMENT JUSUF THALIB 11. KALIMANTAN - IR MAHAKASTRI IR KADARKO S 12. SULAWESI, MALUKU & IRIAN JAYA - HATTA AB I I _ INSPECTOR REGIONAL III SALE DEPARTMENT IR ERAWAN A l REGIONAL INSPECTOR IV LAND TRANSPORT ERAWAN A DEPARTMENT _ 7 ~~IR R{EGIONAL INSPECTOR V GENERAL ADMINISTRATION DEPARTMENT World Bank-22974

149 SCHEDULE DISTRIBUTION PROJECT EFigure ITEM [ i M A M J A S O N F A M AS F MA M A S S MA MS JASON D SHIPS 1 BULK CARRIER ENGINEERINI;. EVALUATION CONSTRUCTIION 2 NH3 CARRIER ENGINEERING CONSTRUCTIION 3 SAGGING PLANT MENENG a. LAND ACQUISITION b. SOIL STUDY FlEPORT c. ENGINEERIN(;ISTUDY _ d. PROCURMENT. BULK SUILDING TOWERS CONVEYOR SUPPORTS BAGGE0 STO3RAGE CLADOING MECHANICAL EOUIPMENT ELECTRICAl, EQUIPMENT * CONSTRUCTION DOCUMENT PREPARATION/TENDER H- D D FOUNDATION ERECTION - BULK RUILDING AND TOWER SAG STORAGE CONVEYODR SUPPORT - MECHANICAL = _ - ELECTRICAL MARINE WHARF 4 a. LOCATION APPROVED b. SOIL TEST e. DESIGN PRECUALIFICATION d. DESIGN CRITSRIA *. TENDER FOR DESIGN I DESIGN g. TENDER N CONSTRUCTION S RAILTRACK ExTENSION a. ROUTE LOCATION b. PROPERTY ACQUISITION ENGINEERING DESIGN d. PROCURE MATERIALS TENDERS - - I CONSTRUCTION EIS/ World BanE

150 UR EA Figure 4 t;:~~~~~el\a Tonl S.lk -1.13J \2 nelaelwan 1125 Export 59.6 NTH \ umatepa y Ysm \ i \ \\ ] g ~~~~~~~~~~~~ / TASTlN ~ ~~0 \ / 7 ~~RIAU \ \ AIbTNl P oanl _ \t / SOUTH i KAIUNANLIMANTAN/ Y \ /UJAMBI EFSIAT\ J El 67 SOUTH \KALIMANTAN \ / socentral 7 UL~~~I _.40 Shippxd by R LS 81 /2371, t ~ Estiated RLS WEST JAVA- 7, M.Mng Q RegionI JAVA \ 2~~J 5pBALI <JA 291 ~ 4 WEST NUSA TENGGARA EAST NUSA TENGGARA \Wo.rd Ek

151 Figure 5 Eoport PUSRI V Export ASEAN U R E A v-& Tons Total Bulk - 2,137 CEH Total Road/Rail ,859 \ 63 g BELAWAN \ \ / 5 ~~~~~~~~~~~~~~~~~~~~~~~ 212 \\W_113\ SUM~ATE R :) \ \ \g 3 7 ~~~~~~RIAU \/ r - \ \ 336 Export < MALAYSIA SUAW/ < ) KALIMATAN 30 \ Perjang\i ( ~~~~~~~~~~WEST KALIMANTAI\r \ \_ < \ /CENTR~~~~~~~~~~CNTAL \ J fj Re 9 inal Conumptlion \ RWLA~~~LMPUNG \ew NUSUATE RA EalS A TENGRA B ES I [ El\W ULAWES44gUAWSIX \ /cqkampek / l /~~C,ka pped by Bul \LSi t; 0 _r Reqi-nal Cn-urptte- \W ESTl!e e n X_ENTRAL BALI \ jes~~~t NUSA TENGGARA EAST NUSA TENGGARA World Bank

152 tmport-20 \ B E LAG<; \ [ +~~~~~~~~~~~~~~~~~~~~~~~ \ 20 + X \ ~~~~~~~~~~~~~TSP/DAP Figure 6 / \ ~~~~~~~~~~~~~~~~~~~~ Tons / ~~~~~~~~~~~~~~~~~~T.tar \ Bulk - 0 / <> ~~~~~~~~~~~~~~~~~~~~~~~~~~~ R LS \ NORT \ XUMATE~~Rl-3 Padang[ >\( ) SUMATERA \ \ < 7 RIAU\\ /> /\\ / 2 WETKLMNA t~~~~~~~~~~~malaysia / EAST 43~ J~~~~~~~~~~~~~~~~ El /{ \ SOUTH \ \_>UTHKALIMANTAN 22.6e B SUMATERA Plembang \g 3\ /,CNTRAL \UL \[5 i3 < Z \ ~~~~ - _ ~SOUTH KALIMANTAN/ \ t^< LAMPUNG \2/s 1 SL/ LAWESI I SOUTH n N, \ E1 J / / ~~~~~~ _ \ js~~~~3.5 - resk WESTiaa J VA Mng _04b ShippedbyRLS Regional C.-smption CENTRAL BL JAVA EAST BALI ) JAVA2 _> WEST NUSA TENGGARA EAST NUSA TENGGARA World Bank

153 Figure 7 NPK/TSP/DAP Tn Total ImPort - 0 Total Bulk ALA W A N / A > ~~~~~~~~~~~~~~~~~~~~~~~~~~ R LS Ra4 15 Total Road/RadI 481 \4SUMATERAI SW A T AA E N \ 8 \ \ NO ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ / / ~ ~ ~ ~~~~~~~~~~~~~NRHSLWS ~~~~~~~~~~~~KAL MANTAN ~ ~ PaS d B n l WEk WorlNTAN B \I einl osmtombin N 30 ; ;;& \ \ {\ / ~~~~~~~KALIMANTAN \/m Su SUAEA Palemban M3 /I SULAVWESI CENTRALSOUTH KALI WES NSATEGGRAEAT USWTNGAR Shipped~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~jn Panaulk Sh ipped, bul 0 R.g..nal Cons..ption WRl Bak-S24

154 Figure 8 FLOW OF FERTILIZERS LINE I Urea Producers Urea Producres TSP Producers mport LNE I (KUJANG) (PUSRI (PETROKIMIA) import Provincial PUSRI 1. Bulk Terminal LINE II Level (Marketing Unit) 2. Mainport LINE III Kabupaten Distributors ISD Level (inland Supply Depot =~~~~Gvrmn r vat LINE IV Village and UD LIE V evel an * Sub-Distributors V ae Kiosk Estates. CONSUMERS and Farmers Farmers Transmigration B 2 VVorld Bank

155 Ca -~~~ FF7 5FF F1* 10/' oot '' "'~~~~~~~~~~~~~~~~~~~~~ 'OFF F4flF ~~~~~~~~~1 <. THFAILAND INDONESAO,nnddAud ii L9*JX \ i/, O PHILIPPINES!, ' FERTILIZER DISTRIBUTION PROJECT SRUREI ' '/ '/~~~~~~~~~~~~~~~~~~~OFOF En FFFOF O MrOF U -- F 00-i qi \ '~~~~~~~~~~0 ESOFOOFFKTlo r d _ 01000FF.,FFE0S OF 0000 VX12 *flt,a( -MALAYSIA L TF0FF9! << J, 1, MAL AY S IA ¼ ', <Uu2 SlM s : rwlr A _! 2 j < = r4-9as J / / A~~~t ~-=?i i voif 0,TFFF t 0'$ d0 / 0 5 5F l TJKRA\s< -- FAFOFOF, I 74< \FFFF, OOa t 5F~~~~~~~~~~~~~~~~~~~7 OFOCIFo FF / /6~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~A 00FF F 001FF OF 00 F AL Y SI 'F~~~~~~~M Y,~~~~~~~~~~~~~~ g A181 o fsumatra S _ M R S J w S e b y d V > >, A 2 5 I -'-. 1, ' '5GI c --., > D~~~~~~~~~~st/ 0-w>e MAtUKU & <'< t > ~~~~~fr <3 rlzloa KILDW19TE SD *ZI 2S1 abo gbo soo 3G 7PII gb~f'' < "IT FFFF 000f/-f00I0

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157 SUMATHA ArlOrlsOlI IBRD ito 0 11 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~O 1140~~~~~~~~~~~~l 1tO - :. : iindonesia '. FERTTILIZER JAVA DISRIBUTION PROJECT i ' 1, lerr67-o GAUGE DOLC8LE TRACK ELECTRIFIED tonsd 0 *-~~~~~~~~~~~~~~~~~~~~~~~~-e-- ~~~~~~~~~~~~~~~'El/les S J a <) vaanidn GAUGE DOURLE / > gf 5 TRACK t (? a, 0 I -e -t- - Rl.OEss7- - JAKAik:5:,K,L GAUGE SINGLE TRACK s d, MAIN ROADS -MAY1 191". holorere.rayoon torn stop drt b sop/. on thel porn of a WorP08 Pfnd'cg,. lst nro a nd me'nt ang rulk pidpeot se top1vroarts S \.. r3 HEGIONAL ROi tlufit' 1 eg 4- AIRPORTS ----,?.rl FERR IS rss>,, '? O- -r...dexistinr NITROGEN PLANT PHOSPHAlE PERTIL(ZER PLANT TERMINALS MARKETING OFFICES OF PUSRI - smapshtnprsorwdbr SO '', 1 WoHdB@nIt^93tef7rtO}tgi C I0 ftjtsh k0v f Cbrh. 4 ' H0 8<0 120 > ''s10. (- E~~~~t wh,, 9;...,di th,a.dj.,... t. *-.gi Ih,- ftha.p z$er. A/. C)k8 o't < tfo? 2 = * =0 1" ~F t~ Po OMTf (h. -l 0,,0 B. t Ga"E i t, om V; <>A. g ml}ssim :''2-- XriSJ!.d9 stl '::.1 ric aii -~ C ~ T>MOh - Ifn ? tio, D- 8 A1- _iv. AID M I 0) BE f t