Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No.: 22265

IMPLEMENTATION COMPLETION REPORT(CPL-34820; SCL-3482A; SCPD-3482S)

ONA

LOAN

IN THE AMOUNT OF US$ 375 MILLION

TO

REPUBLIC OF INDONESIA

FOR

FOURTH TELECOMMUNICATIONS PROJECT

PROJECT ID: P003997

May 23, 2001

Private Sector Development (PSD) Sector UnitEast Asia and Pacific Region

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of January 31, 2001)

Currency Unit = Indonesian RupiahRp. 100 = US$ 0.012

US$ 1.00 = Rp. 8350

FISCAL YEARGovernment of Indonesia

April 1 - March 31

PT TELKOMJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

ASIAN Association of South East Asian MTPT Ministry of Tourism, Post andNations Telecommunications

BAPPENAS National Development Planning NCB National competitive biddingAgency

CAN Customer Access Network NBF Not Bank financedCCR Call Completion Ratios NNCC National Network Control CenterCM Construction Management OMC Operations and Maintenance

CentersCS Construction Supervision OPMC Outside Plan Maintenance

CentersDGPT Directorate General of Posts and OSP Outside Plant

TelecommunicationsDOC Department of Communications PERUM Public corporationERR Economic Rate of Return PIU Project Implementation UnitFRR Financial Rate of Return PMC Project Management ConsultantGOI Government of India PT INDOSAT State International

TelecommunicationsICB International competitive bidding PT TELKOM PT Telekomunikasi IndonesiaIDD International direct dialing QoS Quality of ServiceITU International Telecommunication SEC Securities and Exchange

Union CommissionKSO Kerja Sama Operasi with foreign SISKA Computerized Network

operatorsMOC Ministry of Communication Tc TelecommunicationsMOF Ministry of Finance UNDP United Nations Development

Programme

Vice President: Jemal-ud-din KassumCountry Manager/Director: Mark Baird

Sector Manager/Director: Loup BrefortTask Team Leader/Task Manager: Rajesh Pradhan

FOR OFFICL USE ONLY

FOROFFICIALUSEONLY

CONTENTS

Page No.1. Project Data 1

2. Principal Performance Ratings 1

3. Assessmrent of Development Objective and Design, and of Quality at Entry 2

4. Achievement of Objective and Outputs 4

5. Major Factors Affecting Implementation and Outcome 7

6. Sustainability 9

7. Bank and Borrower Performance 9

8. Lessons Leamed 11

9. Partner Comments 12

10. Additional Information 13

Annex 1. Key Performance Indicators/Log Frame Matrix 14

Annex 2. Project Costs and Financing 15

Annex 3. Economic Costs and Benefits 17

Annex 4. Bank Inputs 18

Annex 5. Ratings for Achievement of Objectives/Outputs of Components 19

Annex 6. Ratings of Bank and Borrower Performance 20

Annex 7. List of Supporting Documents 21

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

Project ID: P003997 Project Name: TELECOM IVTeam Leader: Rajesh B. Pradhan TL Unit. CITPOiCR Type: Core ICR Report Date: May 25, 2001

1. Project Data

Name: TELECOM IV L/C/TF Number: CPL-34820;SCL-3482A;SCPD-3482S

Country/Department: INDONESIA Region: East Asia and PacificRegion

Sector/subsector: CC - Telecommunications & Informatics

KEY DAT'ESOriginal Revised/Actual

PCD: 01/11/91 Effective: 10/06/92 09/02/92Appraisal: 11/15/91 MTR:Approval: 06/02/92 Closing: 12/31/98 12/31/2000

Borrower/lmplementing Agency: GOI/PT. TELKOMOther Partners: FRG (KfW), Credit Lyonnais, Sumitomo Corp./OECF, ABN-Amro Bank, Spain,

Exim Bank

STAFF Current At AppraisalVice President: Jemal-ud-din Kassum Gautam S. KajiCountry Manager: Mark Baird M. HaugSector Manager: Loup Brefort Peter R. SchererTeam Leader at ICR: Rajesh B. Pradhan A. ShanmugarajahICR Primary Author: Rajesh B. Pradhan; Tenzin

Dolma Norbhu; Marta LucilaPriftis; A. Shanmugarajah;Kashmira Daruwalla

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, FHUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability. L

Institutional Development Impact: H

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

The Fourth Telecommunications Project is the second in a series of large telecommunications investmentloans to the Government of Indonesia to support the implementation of broad-ranging sector reforms whichhad been designed and initiated under the Technical Assistance Project (Loan 2757-IND approved inOctober 1986) and the Sector Study (Report No. 7842-IND, 1990).

The project had two main objectives:

1. to improve sector performance by promoting a regulatory regime conducive to competition in theprovision of telecommunication services; and

2. to meet the growing demand for telecommunications services by enhancing the quality ofTELKOM's service, effective utilization of existing facilities, increasing system efficiency andmodernizing and expanding the networks.

The project design and objectives were consistent with the Government's policy for the telecommunicationssector of the time which called for increasing access to modem and efficient telecommunications services;increasing the commercial orientation and efficiency of the telecommunication sector; and improvingservice quality and TELKOM's productivity, among others. In order to effectively implement policy, itwas also necessary to develop the institutional and regulatory framework to increase competition in themarket.

3.2 Revised Objective:

The original objectives were not revised.

3.3 Original Components:

The project was designed to meet the above objectives through two main components: (i) an MTPTcomponent; and (ii) a TELKOM component.

The MTPT component included:

I. establishment of an environment for the functioning of competitive markets, including support forMTPT to develop effective transparent regulatory processes, and to train MTPT staff; and

2. strengthening the capacity of the MTPT to design, assess and implement a consistent set of sectorpolicies including a review of telecommunications tariffs and planning for a second domestictelecommunications operator.

The TELKOM component included:

1. further institutional capacity building for TELKOM comprising: (i) a management andprofessional human resource development program using a cooperative program of academictraining foreign universities and working internships in selected fields at developedtelecommunications entities; (ii) development and implementation of the operational andmanagerial decentralization program; (iii) enhancement of TELKOMNs capability in operational

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performance, project design, engineering, implementation and supervision; (iv) upgradingaccounting and financial policies, systems and procedures and related computerizationrequirements; and

2. support for TELEKOM's 1992-1996 investment program in Java, Bali, Nusatenggara, Kalimantanand Sulawesi comprising: (i) rehabilitation of existing switching equipment, local cable network,customer distribution network, interchange network, including the provision of spare parts,modules, tools and test equipment to repair and refurbish them as well as software packages toimprove operational efficiency and enhance traffic handling capacity; (ii) installation of switchingequipment, associated customer distribution network and customer terminal equipment (including20,000 pay phones) to connect about 600,000 new customers; (iii) installation of fiber optic cableand microwave transmission facilities to provide interexchange junction facilities in the Jabotabekarea; (iv) installation of terrestrial microwave transmission facilities (a) Java-Bali (phase I), (b)Bali-Nusatenggara phase II, (c) Trans-Sulawesi phase II and (d) cross Kalimantan phase II toimprove long distance direct-dialing service quality; (v) establishment of a modem networkmanagement system to improve network supervision and to improve traffic monitoring andmanagement; and (vi) improvement of the directory inquiry system.

3.4 Revised Components:

The above components were not revised.

3.5 Quality at Entry:

The project was not reviewed by QAG. At the time of appraisal, Quality at Entry was considered to havebeen satisfactory as the project was designed taking into account lessons learned from previoustelecommunications projects implemented in Indonesia. The potential risks identified for the project fellinto two categories: (a) delays in procurement, and (b) shortfall in TELKOM institutional capacity toimplement the project. These risks were identified and actions initiated to minimize their impact.

In order to ensure that procurement delays would not take place, preparatory work such as detailedengineering and site identification were completed before project launch. Advance procurement action wasalso required of TELKOM to ensure timely project implementation. In order to make certain that theproject would be ready for implementation upon effectiveness, the terms of reference for all consultancyrequirements were completed during project preparation to ensure that the appointment of theseconsultants, a condition for project effectiveness, was completed in a timely manner.

The shortfall in TELKOM's institutional capacity to implement the project was adequately addressedthrough the development of a detailed implementation plan and the establishment within TELKOM of anucleus project implementation unit (PIU) prior to appraisal. Adequate technical assistance was providedto the PIU to support them in project management, project implementation and the procurement process.Residual risks were addressed through agreed measures during project implementation and supervision,with corrective actions initiated as necessary.

At the time of appraisal, the 1997 financial crisis and subsequent political turmoil that hit Indonesia werenot foreseen. This was beyond the control of TELKOM and delayed project completion by two years.

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4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:

All the objectives and performance targets of the project were either met or surpassed and the overalloutcome of the project is rated as satisfactory. The Indonesian telecommunication sector has undergone anevolution in that the market structure has become more competitive; separation has taken place between theoperator and policy maker and regulator; and TELKOM has undergone further commercialization andimproved its overall performance.

The project was funded by the World Bank, eight bilateral funding agencies and TELKOM. While theBank financed about 30% of the total public sector investment in PT TELKOM, it took the lead and waseffective in securing needed policy reforms and ensuring a balanced investment program by utilizingbilateral funding for the development of TELKOM's switching and transmission networks.

The project provided adequate technical assistance to both TELKOM and MTPT. The assistance toTELKOM was utilized to strengthen its financial, operational and technical management. This set thestage for the partial privatization of TELKOM, which was funded by GOI. The TA also equippedTELKOM in strengthening its project management capacity, which was key towards the successfulimplementation of the project. Technical assistance provided to MTPT was utilized to undertake keyreform activities and for policy and regulatory strengthening. The MTPT (DGPT and DOC) took concretemeasures to establish the necessary separation between regulatory/policy maker and the operator.TELKOM's Board of Commissioners no longer has any members from MTPT. The project also reinforcedthe regulatory framework and more imnportantly provided a framework for opening the sector to privateparticipation. It set the stage for joint operation schemes (KSOs) between TELKOM and privateoperators.

The project was designed taking into account lessons leamed from previous telecommunications projectsimplemented in Indonesia and it set the stage for the next level of reforms under the ongoing TelecomSector Modernization Project. There was a productive symbiosis between the different projects. Theongoing project addresses issues such as moving forward towards the establishment of an independentregulatory body, evolution of a more competitive market structure and greater role for private sectoroperators.

Objective]: To improve sector performance by promoting a regulatory regime conducive to competitionin the provision of telecommunication services. This objective was satisfactorily achieved. GOIdemonstrated its commitment to promoting a competitive market structure by licensing seven mobilecellular operators in the country. Liberalization plans have also been moved forward. The Governmenthas announced that TELKOM's monopoly on local services will end in 2002, and on domestic long distancein 2003. Further exclusivity in international services will end in 2003. The project supported the sectoragenda to improve sector performance by promoting a regulatory regime conducive to competition in theprovision of telecommunication services.

The GOI also issued a Blueprint document in July 1999 that represents important progress in articulatingan emerging consensus on important directions for development of the sector; it addresses increasedperformance in the telecommunications sector in order to facilitate Indonesia's participation in the globaleconomy and discusses the transition of the sector from a monopolistic to a competitive environment. Italso outlines options for future KSOs and emphasizes the need to provide more opportunities to small andmedium size entrepreneurs in the telecommunications sector. It promotes increased clarity and

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transparency within the sector in order to enhance private investmnent in a multi-operator environment.

GOI enacted a new Telecom Law No. 36 in September 1999 which became effective in September 2000.The new Telecom Law provides a platform for further reform and accelerated development of thetelecommunications sector. It creates opportunity for the formation of an independent regulator; providesfor the end of statutory monopolies; and supports customer choice. While the law does not explicitlyprovide for the establishment of an independent regulatory agency, the GOI has signalled its intention toestablish a non-ministerial agency through a Presidential decree. The Telecom Law provides for equalnetwork access for service providers based on interconnection regulation and supports the concept that theIndonesian public should have equal access to telecommunication facilities (Universal Service Obligation).

Throughout most of the project implementation period, tariffs have been adequate for TELKOM to meet itsfinancial covenants, ensure large scale investment in the cellular sector, and ensure interest by majorforeign telecommunication operators to form joint ventures with TELKOM through KSO agreements andinvestments in the basic sector. In addition, substantial re-balancing of tariffs took place during the1994-98 period. The tariff adjustment formula was included in the information memorandum issued forTELKOM's initial public offering of shares on the New York and Jakarta stock exchanges. This forrnulawas also included in the KSO contracts. Nevertheless, the financial crisis in 1997 and the associateddevaluation of the Rupiah have led to a need to adjust tariffs substantially. There was a delay in obtainingthe required Govemment approval for tariff revision. Despite the recent approval by the Government fortariff increases of 45% over three years, the tariff has not fully recovered to facilitate large scaleinvestments in the sector given the high country risk.

Objective 2: To meet the growing demandfor telecommunication services by enhancing the quality ofTELKOM's service, effective utilization of existingfacilities, increasing system efficiency andmodernizing and expanding networks. This objective has been achieved by the addition of 760,000 fixedaccess lines to the telecom network, installation of 240,000 payphones, implementation of a computerizedaccess network system, switching operation and maintenance centres, national network control centre andthe modernization of directory inquiry services systems. TELKOM has experienced phenomenal growth inits capacity to provide services and today has an advanced network that is fully digitalized. TELKOM hasalso made significant progress in reducing unmet demand and improving productivity.

The overall project is rated satisfactory.

4.2 Outputs by components:

The project satisfactorily completed all components as stated in the SAR.

Establishment of an environment for the functioning of competitive markets: The achievement of thiscomponent is rated satisfactory with the issuance of the Blueprint document which establishes the roadmapfor the evolution of a competitive telecom market structure in Indonesia and the enactment of a newTelecom Law which provides for reform and development of the telecom sector. This has set the stage forthe establishment of an independent regulatory agency, which will improve operator confidence andencourage a competitive market.

Strengthening the capacity of the MTPT to design, assess and implement a consistent set of sectorpolicies including a review of telecommunications tariffs and planning for a second domestictelecommunications operator: The output of this component is rated satisfactory as the technical

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assistance under the project facilitated DGPT and DOC in strengthening its telecommunications policy andregulatory capacities and in building awareness among the various stakeholders in the sector. In addition,staff were provided with fellowships to undergo a variety of post graduate and other training programs. Asa result, their ability to understand important issues was enhanced and this enabled the DOC and DGPT tomake far reaching decisions in the policy arena. Some of these included adjustment of tariffs, promotingnew entry in the sector and issuance of the Blueprint document. A strategy and business plan was alsodeveloped for the introduction of a second domestic telecommunications operator.

Institutional capacity buildingfor TELKOM: The achievement of this component is rated as satisfactory.On the job and other training mechanisms were used to train over 100 staff, thus enhancing TELKOM'scapability in operational performance, project design, engineering, implementation and supervision. Theaccounting and budget management system was also improved under the project. As a result of thiscomponent, staff productivity increased from 87 lines per employee in June 1996 to 173 lines per employeein September 2000. Further, the technical assistance provided by the project greatly enhanced the projectmanagement capabilities within TELKOM and enabled them to implement the project well.

Support for TELEKOM's 1992-1996 investment program in Java, Bali, Nusatenggara, Kalimantan andSulawesi: The output of this component is rated as satisfactory. Over 760,000 line units of digitaltelephone switching were installed in about 120 locations which included switches for replacement ofaround 2,500 manual lines, 135,000 electromechanical and analog SPC lines. Outside plant facilities andthe junction network were upgraded and expanded. The Java-Bali, cross Kalimantan, trans- Sulawesi andNusatenggara long distance networks were expanded and extended and high capacity toll transmissionsystems were installed. Transmission systems were also expanded to over 200 remote locations to supportthe interconnection of digital exchanges. Operation and Maintenance Centres and a National NetworkControl Centre were set up to implement an Integrated Network Management System. The directoryinquiry system was also modemized. As a result, networks with total exchange capacity had grown to8,401,000 lines by 30 June, 2000 compared to 4,824,000 lines in 30 June, 1995; capacity utilizationincreased to 84.4% as of 30 June 2000; 303,217 public telephones were installed as of 30 June, 2000against the appraisal target of 219,000 payphones; quality of service greatly improved with local andnational call completion ratios at 71.35% and 64.5% respectively on 30 June, 2000 as compared to 55.25%and 47.56% in 30 June, 1995. Also, network expansion was carried out at a reduced unit networkdevelopment cost of US$ 1000 per line in 2000 compared to US$ 1,200 per line in 1994. This unitnetwork development cost is in line with intemational benchmarks.

These are all indicators of a satisfactory outcome.

4.3 Net Present Value/Economic rate of return:

Economic benefits from the project are substantial. The project benefited all sectors of the economythrough improved access to telecom facilities and improved service quality. There was increased level ofprivate participation in the sector through opening of the cellular market to increased competition andestablishment of KSO schemes. New employment opportunities were generated through the developmentof new services and the establishment of new service providers in the various market segments.

At appraisal, the economic rate of return (ERR) and financial rate of return (FRR) were calculated at 23%and 18% respectively, based on overall investments expected to be made by TELKOM. With theestablishment of the KSO scheme in 1996, investments were made by the KSOs and not by TELKOM, inall regions outside of Jakarta and Surabaya. As a result of this change, comparable calculations of ERRand FRR are not possible due to lack of KSO's revenue and cost information.

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4.4 Financial rate of return:

TELKOM's prudent financial management help minimize negative impact of the financial crisis inIndonesia on its financial performance since 1997. TELKOM was also shielded from the full impact ofRupiah devaluation as the KSO's were responsible for expansion and management of the network outsideof Jakarta and Surabaya and TELKOM continued to receive minimum revenues from the KSOs. WhileTELKOM's financial returns were affected due to the downturn in the economy, TELKOM has managed tomaintain sound liquidity and financial positions. TELKOM has met both its debt service coverage andintemal cash generation covenants throughout the project period. TELKOM's financial performanceindicators are provided in Annex 3.

4.5 Institutional development impact:

The Institutional development impact of the project was rated satisfactory.

During the initial years of the project, in-country capacity was built to implement and supervise the projectat a local level. This was key to its successful implementation and completion.

MTPT developed the capacity to assess telecommunications policies including network competition,network development strategies. MTPT, with technical assistance from the Bank was able to successfullydevelop an agenda for regulatory activities, assess, recommend and implement regulatory action on prioritymatters. MTPT, with the assistance of consultants, was able to review proposals for tariff revisions andrecornmend an appropriate tariff rebalancing mechanism. MTPT also achieved greater independence fromthe operator and was able to formulate and implement new regulations.

TELKOM staff were provided on-the-job training to develop in-house capabilities in all aspects ofoperations and thus reduce reliance on foreign expertise. Further, the accounting and financial functionswithin TELKOM were improved and strengthened. This led to TELKOM's listing on the Jakarta and NewYork Stock Exchange, indicating its achievement of commercial discipline and its ability to fully meet therequirements of the SEC.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

Indonesia has recently experienced the worst economic crisis in the last 30 years. TELKOM's results wereremarkably resilient amid Indonesia's recession. The telecommunications sector as a whole exhibitedreduced growth even as most other sectors contracted. Nevertheless, some projects under the loan weredelayed by the economic crisis. The GOI requested that the Bank cancel US$50.0 million and, in order tocomplete the on-going projects in a satisfactory manner, the GOI requested that the Bank extend theoriginal loan closing date of December 31, 1998 to December 31, 1999.

Subsequently, due to the economic and political situation, the GOI again requested the Bank to cancelUS$30.94 million and extend the Loan closing date by one year to December 31, 2000. This extension wasrequested to allow for the completion of the two customer access network contracts. A number of factorscontributed to delays in implementation. These included: (a) the political situation which caused severalperiods of disruption with staff leaving Jakarta for extended periods of time. Access to work sites was

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also difficult on several occasions and at times work was stopped for security reasons; (b) the depreciationof the Rupiah escalated the costs of locally supplied goods and services. As a result, contractors claimedescalations in unit costs, considerably in excess of what TELKOM proposed. This was satisfactorilyresolved by the Government in relation with overall price increases in all sectors. The loan cancellationspartly reflected cost savings resulting from technological impacts in the industry globally, as well aseffective planning and improved procurement practices by TELKOM.

5.2 Factors generally subject to government control:

Despite the domestic and economic upheavals that took place in Indonesia, it is important to emphasize thesteadfastness, perseverance and consistency of GOI during recent years in preparing and implementing aphased approach toward both the strengthening of the organization and the capabilities of the mainoperator, TELKOM, and in parallel initiating and pursuing the restructuring and reform of the wholetelecommunications sector in Indonesia.

These phases were designed and undertaken in close consultation and discussion with the Bank, to improveand strengthen the institutional, regulatory and organizational framework of the sector, and graduallyintroduce a competitive commercial environment for its operations and development, with increased privatesector participation through joint ventures for basic services or independent corporations for new and valueadded services. As a result, Indonesia's telecommunications sector has been transformed from that of apublic sector monopoly to a private/public multi-operator environment with competition in most segmentsof the market.

5.3 Factors generally subject to implementing agency control:

TELKOM successfully managed the complex and intricate activities related to (i) developing exceptionallylarge investment programs; (ii) implementation of these programs by connecting a very large number ofnew subscribers, and (iii) simultaneously establishing effective operation and maintenance systems for thenetwork, thus substantially improving the quality and the efficiency of the services. All this is attributableto a large extent to the setting-up of a Project Implementation Unit (PIU) which functioned efficiently andeffectively in liaison with the project planning and management department. Also, TELKOM employedconsultants for implementation of each project component in liaison with the project planning andmanagement department. Consultants were employed by TELKOM in particular for: (a) its corporateplanning process; (b) program/project management; (c) construction supervision; (d) technical aspects ofcapacity utilization, and (e) twinning arrangements for all managerial, strategic, operational, financial,commercial, human resources and training activities. All these tasks and activities were satisfactorilyperformed and completed. GOI and TELKOM evaluated the performance of consultants as satisfactory.

5.4 Costs andfinancing:

The total cost of the project was US$ 1,062.16 million as compared to the appraisal estimate of US$ 1,353million. The Bank financed US$ 288.21 million of the total project cost as compared to original Bank loanof US$ 375 million. Due to the economic crisis, the Government of Indonesia requested a cancellation ofUS$ 81.02 million. In addition, there is a saving of approximately US$ 5.77 million which was cancelled.The cancellation of the loan amount did not affect financing of the original project components to befinanced by the Bank as substantial savings were achieved due to the following: (i) use of ICB procurementprocedures; (ii) reduction in equipment prices due to advances in technology, and (iii) successful use oflocal consultants.

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Details of the project cost and financing are available in Annex 2.

6. Sustainability

6.1 Rationalefor sustainability rating:

The sustainability of the project's achievements are likely. It would have been highly likely in the absence ofthe current political and institutional uncertainties.

Sector reform achieved under the project has allowed for the entry of many new operators into theIndonesian telecommunications market. Private sector participation in the sector is now very substantialand is expected to increase. As such, reforms are continuing and there is commitment in the Government ofIndonesia to make the market structure more competitive. Competitive pressure has to some degreereduced the power of the incumbent, while its efficiency has improved. The issuance of the Blueprintdocument provides a roadmap for and demonstrates the GOI's commitment for the evolution of acompetitive market structure. These changes and developments assure the sustainability of the reformprocess.

TELKOM's ability to effectively operate, maintain and manage its expanded network is evident from thesignificant improvements in its performance over the last eight years. The listing of TELKOM's shares inthe New York and Jakarta stock exchanges, ensures its commercial and operational performance andsustainability, as it contributes towards transparency in financial reporting. All of the above shouldcontinue the progress made under the project to improve the performance of Indonesia's telecom sector.

While much progress was made it must, however, be added that the project was implemented and sectorreforms were undertaken in a very difficult country environment - political, economic and social. There is,therefore, some risk of the ongoing reforrns getting stalled in the event that there is a political or socialcrisis in the country.

6.2 Transition arrangement to regular operations:

This project has satsifactorily met its objectives. Project activities related to PT TELKOM and DGPThave been integrated into regular operations. The Telecommunications Sector Modemization Projectwhich is currently under implementation is providing continuity in dialogue on sector policy and regulatoryissues. Further, the Bank is also providing policy and regulatory advice (AAA) to the Government on thetelecommunications sector.

7. Bank and Borrower Performance

Bank7.1 Lending:

Active participation and commitment of all stakeholders during project identification, preparation andappraisal led to successful outcomes in institutional reform. The project team built on the relationshipdeveloped between the Bank and GOI during the previous projects implemented in Indonesia.

From the beginning extensive efforts were made by the Bank to involve the GOI, TELKOM and donors inan interactive process of sector restructuring and development. This resulted in broad consensus among all

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parties on the main elements of reform and the specifics of implementation. During all stages of theproject, the Bank maintained close dialogue with the GOI and TELKOM to ensure that the projectobjectives were directly in line with the client's goals for the sector. The appropriateness of staff mix andits continuity during preparation, appraisal and supervision were satisfactory.

The loan amount and project execution period was well estimated at the time of appraisal and delaysoccurred for reasons that were neither anticipated nor controllable. Several key performance indicators(Annex 1) were achieved and exceeded.

7.2 Supervision:

GOI and TELKOM have emphasized the extent of the harmonious and fruitful working relationship whichthe Bank maintained with all concerned parties under the project. The resulting positive contributions tosector and institutional developments and TELKOM operations were particularly recognized andappreciated.

The overall supervision of the project was satisfactory. Regular supervision missions were carried out anddocumentation on the project is adequate. Modifications in the project, including extension of closing dateswere processed by Bank staff in an efficient manner in order to respond to the Borrower's needs.

7.3 Overall Bank performance:

Overall Bank performance was satisfactory under the project. The closing of this project is a milestone inthirteen years of cooperation with the GOI in the development of the telecommunications sector inIndonesia, by far the largest recipient of Bank lending in this sector. As a result, many leading investmentbanks and consultant companies have offered their services in telecommunications deregulation andprivatization to the Government. The Bank gave sound advice to GOI on the need to maintain a clear andconsistent sector policy and to follow international best practice in establishing a credible and transparentregulatory framework.

Borrower7.4 Preparation:

The Borrower participated actively and with commitment in the preparation of the project. This verypositive position on the Borrower's part promoted, from the beginning, consensus on the elements of reformand the methodology of implementation.

The Project Implementation Unit (PIU) within TELKOM, responsible for overall project management, wasidentified and appointed prior to appraisal. Prior to negotiation, the Borrower had developed a detailedproject implementation plan. The quality of the borrower's commitment and contributions to thepreparation of the project were notable.

7.5 Government implementation performance:

Important steps were taken toward sector reform, institutional improvements and continued evolutiontoward sector liberalization. Given the overall progress made on sector reform during the project period(Blueprint document issued, new Telecom law, separation between regulator and operator) theGovernment's performance can be considered satisfactory.

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7.6 lInplementing Agency:

Drawing upon the best benefits from the technical assistance, consultancy and training services financedunder previous Bank operations and the third and fourth loans, TELKOM managed efficiently the complexand challenging tasks of both initiating important institutional restructuring of the sector and successfullyplanning/implementing its rapid development. TELKOM also maintained accurate and detailed financialrecords at the Project Management Unit level and submitted timely, audited corporate and project financeaccounts. The project achieved its institutional, organizational and physical/operational objectives andtargets. The partial opening of TELKOM's ownership to the international capital market providedadditional resources for ongoing and future development.

TELKOM has confronted the same challenges such as privatization, liberalization, new technologies andservices, as other operators world-wide and has undergone vast organizational and cultural transition.TELKOM has transformed itself from a nonprofit making government agency to a market and customerdriven company responsible to its shareholders.

7.7 Overall Borrowerperformance:

The Government's performances were also satisfactory and their relationship with the Bank were good andfruitful throughout the implementation of the project. GOI is in compliance with all loan covenants.Overall Borrower performance and participation in both project preparation and implementation issatisfactory.

8. Lessons Learned

Seven important lessons were learned during the implementation of the project.

First, the Bank carried out a thorough review of the sector which led to the Bank's long term partnershipwith the telecommunications sector in Indonesia. Accordingly, the Bank supported a well defined andbalanced investment in order to achieve the desired sector and corporate reforms in the telecommunicationssector.

Second, active participation and conmmitment of all stakeholders during project preparation andimplementation, as well as close coordination among the key players contributed to the success of theproject. From the very beginning, extensive and focused efforts were made by the Bank staff to involvesenior government officials, senior staff of TELKOM and donors in an interactive process to reach broadconsensus on the project goals and the specifics of its implementation. With regard to parallelco-financing, up-front commitments were made by all stake holders and this led to timely implementation ofvarious components of the project.

Third, from a development perspective, in the telecommunications sector where technology advancement isa key driver of change, it is necessary to build flexibility into the project. In Indonesia, this allowed forproject realignment when necessary, thus facilitating the redefinition of needs which drove down the unitcost of providing services.

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Fourth, the provision of adequate technical assistance at the very beginning to build good projectmanagement and implementation capacity in TELKOM greatly contributed to the success andsustainability of the project.

Fifth, providing necessary technical assistance to build capacity within TELKOM to adequately managethe procurement process and address issues related to the procurement of new technology resulted in asatisfactory procurement process.

Sixth, the project's supervisory budget was also supplemented with additional resources which enabledBank staff to provide continued sector policy and regulatory advice. The continued dialogue maintainedwith the Government facilitated the adoption of key sector reform policies.

Finally, continuity of competent and committed personnel with the correct skills mix at the Borrower,project entity and Bank and decisive leadership by the Borrower are critical in creating the trust andunderstanding necessary to resolve many sensitive issues that arise.

9. Partner Comments

(a) Borrover/implementing agency:

TELKOM has provided the Bank with a completion report for the project. The following is a summary ofthis report:

The Project and Loan Agreement for the Telecom IV Project, between Government of Indonesia (GOI) andWorld Bank, was signed in July 1992. The corresponding Subsidiary Loan Agreement (SLA) was signedbetween GOI and PT TELKOM in August 1992. In the Agreement the closing date for the loan wasDecember 1998. The loan period was extended, first to December 31, 1999, and then to December 31,2000. The reason for this was the economical and political situation in Indonesia during 1998-99.

The first objective for the project was to improve the performance of the telecommunications sector bypromoting competition in the provision of telecommunication services. The second objective was to meetthe demands for services by enhancing the Quality of Service (QoS), increasing the system efficiency andmodemizing and expanding the existing network. To achieve the two objectives, the Project was divided inthree parts. One part was administered by the Ministry of Tourism, Post and Telecommunications(MTPT), and the other two parts by TELKOM.

MTPT was to implement telecommunication sector policies, promote competition in teleconmmunicationservices, analyze existing telecommunication tariffs and undertake staff training programs.

TELKOM's first objective was the implementation of an investment program in Bali, Jabotabek, Java,Kalimantan, Nusatenggara, and Sulawesi. This included rehabilitation of existing and installation of newswitching, transmission and terminal equipment, including junction networks and payphones. It alsoincluded the installation of fiber-optic cable network and microwave transmission equipment and theimplementation of a new telecommunication network management system.

The second objective was the use of technical assistance to upgrade accounting and financial policies,systems and procedures and strengthen operations, project design, engineering, implementation andsupervision. This included training programs in management, human resource development andtelecommunications and also the introduction of an operational and managerial decentralization prograrn.

The Project was funded by the World Bank and eight bilateral funding agencies. The bilateral cofinanciers

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were ABN Amro, Sumitomo Corp., Kreditanstalt fir Wiederbau, Spanish Loan, US Eximbank, OverseasEconomic Co. Fund, Credit Lyonnais and French Protocol.

The Bank funded the Customer Access Network (CAN) component of the project, adding 640,000 CopperAccess Lines and 120,000 Wireless Local Loop lines.

For supervision of the network, a new system (SISKA) was implemented, which manages quality of servicefor 3,000,000 customers.

Other sub-projects were the implementation of a National Network Control Center (NNCC), Operationsand Maintenance Centers (OMC), Outside Plant Maintenance Centers (OPMC) in Jakarta and Surabayaand modernization of the directory system.

Contracts for construction supervision (CS) and construction management (CM) were implemented. Thescope of work was planning, scheduling, design checking, implementation and management.

Consultancy contracts were carried out to support TELKOM's Finance Directorate to improve accountingand budget management. Other areas included establishment of new processes for maintenance andnetwork operations, and to guide TELKOM in its transformation to a limited company. Training programswere also performed in administrative and technical fields and included overseas postgraduate programs.This has led to an increased percentage of university graduates in TELKOM between 1995 and 2000.

The rapid deployment of connected lines and a net decrease of staff in TELKOM improved its productivity.Installation of new systems, upgrading of old systems, new operational processes and staff training hasreduced faults, improved service quality and increased the Call Completion Ratios (CCR).

The overall operational experience of the project has been very positive. The operation has run smoothlywith only small impediments in the implementation and without any major interruptions.

With the help of World Bank, TELKOM has successfully managed the procedures of bidding,procurement, installation, and finalization of different components of the project.

The key conclusion is that all performance goals have been met and the productivity within TELKOM hasimproved significantly.

The major lesson learned in this project, is that the implementation of a project of this nature should bebased on an integrated network plan where different components are synchronized. This will lead toquicker network utilization and a faster return on invested capital.

It can also be mentioned that the support from the World Bank has been appreciated and the initiativestaken during the missions has been highly regarded. The World Bank and TELKOM's management staffmaintained always a harmonious working relationship throughout implementation of the Project.

(b) Cofinanciers:

(c) Otherpartners (NGOs/private sector):

I0. Additional Information

Not applicable

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Annex 1. Key Performance Indicators/Log Frame Matrix

Fiscal Year Ending December 31 1996 2000SAR target Actual Actual

Exchange Capacity ('000)Total TELKOM Divisions 4105.0 3586.8 4533.0Total Capacity, KSO Divisions 2756.9 3929.0

Total Exchange Capacity 4105.0 6343.7 8462.0

Lines in service ('000) 3209.0 4158.10 6662.0Subscribers

TELKOM 3209.0 2350.2 3610.0KSO 1807.9 3052.0

Quality of ServiceNumber of Faults per 1000 subsribers per year 5.00 1.55 1.31Successful Call Completion Rate (Average)

Local (%) 50.00 57.80 72.97National Long Distance (%) 42.00 53.21 65.82

Staff ProductivityTELKOM: Lines per Employee 62.5 111.2 173.03

Financial IndicatorsRate of Return on Average Equity 15.0% 15.2% 15.9%Current Ratio 1.0 1.1 2.70

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)Apprana Actua/Latost Percentage ofEstiuane Estimate, Appraial

PrIoct Cost By Component US$ mllion US$ millionSwitching Equipment 368.60 288.10 78.16Outside Plant Equipment 489.00 283.40 57.96Transmission Network 169.90 152.50 89.76Junction Network Expansion 34.10 195.40 573.02Computer Support System 40.70 14.00 34.39Spare Parts, Tools and Test Equipment 23.10 0.00 0Technical Assistance (training, consultancy, project 18.70 31.50 168.45implementation support)

Total Baseline Cost 1144.10 964.90Physical Contingencies 38.80Price Contingencies 46.20

Total Project Costs 1229.10 964.90Interest during construction 123.90 97.26

Front-end feeTotal Financing Required 1353.00 1062.16

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent)Procuremest MethodExipffture CatBOI . ICE 2 Other N.B.F. Total Cost

1. Works 0.00 000 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 604.80 0.00 23.00 575.10 1202.90(338.50) (0.00) (17.00) (0.00) (355.50)

3. Services 0.00 0.00 26.20 0.00 26.20(0.00) (0.00) (19.50) (0.00) (19.50)

Total 604.80 0.00 49.20 575.10 1229.10(338.50) (0.00) (36.50) (0.00) (375.00)

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Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 269.71 0.00 0.00 663.02 932.73(264.58) (0.00) (0.00) (0.00) (264.58)

3. Services 0.00 0.00 24.27 7.90 32.17(0.00) (0.00) (23.63) (0.00) (23.63)

Total 269.71 0.00 24.27 670.92 964.90(264.58) (0.00) (23.63) (0.00) (288.21)

"Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2 1includes civil works and goods to be procured through national shopping, consulting services, services of contracted

staff of the project management office, training, technical assistance services, and incremental operating costs related to(i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in US$ million equivalent)

Technical Assistance 19.50 6.70 0.00 23.60 3.30 10.56 121.0 49.3 0.0(Training andConsultancy)Switching Equipment 0.00 0.00 368.60 0.00 120.90 288.10 0.0 0.0 78.2Telecommunications 27.00 0.00 200.00 32.84 200.00 0.0 0.0 100.0EquipmentOutside Plant Network 289.80 199.20 0.00 250.50 86.4 0.0 0.0Computer Systems 20.20 20.50 0.00 14.01 69.4 0.0 0.0

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Annex 3: Economic Costs and Benefits

PT TELKOM - FINANCIAL DATA FOR THE YEAR ENDED 1996 - 2000

Financial Indicators 1996 1997 1998 1999 2000(Rp Million) (Rp Million) (Rp Million) (Rp Million) (Rp Million)

Operating Income 1390236.00 2149062.00 2599722.00 2943463.00 4037323.00Other Income (Expenses)

Interest income 101879.00 230766.00 595168.00 688077.00 631650.00Equity in net income o (5540.00) 24478.00 7124.00 424794.00 342876.00

associated companiesGain (Loss) on foreign exchange 11952.00 (3452.00) (965491.00) 280176.00 (11064184.00)

- netInterest Expense (318879.00) (452089.00) (980714.00) (1487430.00) (816746.00)

Others - net 108050.00 122624.00 168643.00 113633.00 327460.00Total Other Income (Expenses) 102538.00 77673.00 (1175270.00) 19250.00 (578947.00)Income Before Tax 1287698.00 2071389.00 1424452.00 2962713.00 3458376.00

Tax Expense 381292.00 568113.00 255782.00 777047.00 906204.00Income before minority 906406.00 1503276.00 1168670.00 2185666.00 2552172.00interest in net income ofsubsidiary

Minority interest in net income 467.00 13345.00 13161.00of subsidiary

NET INCOME 906882.00 1503276.00 1168670.00 2172321.00 2539011.00Net Income (Loss) per Share 106.44 161.07 125.20 225.24 251.89Net Income (Loss) per ADS 2128.79 3221.31 2504.30 4,504,89 5037.72

(20 B shares per ADS)

Current Ratio 1.10 0.90 1.40 1.90 2.70Average Collection Period (days) 56.70 48.70 44.50 45.10 47.40Operating Margin (%) 42.30 42.70 39.40 37.80 43.10ROA (%) 4.90 8.20 8.80ROE (%) 11.10 17.80 15.90EBITDA Margin (%) 69.90 71.40 72.20 68.10 65.30Total Long-Term Debt to Total 33.00 37.00 46.00 43.00 43.00Capitalization_(%)

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Annex 4. Bank Inputs

(a) Missions:Stage of Proect Cycle No. of Persons and Specialty Performan e Rating

(e.g. 2 EcQnomists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/PreparationSeptember 1991 3 Engineer, Financial Analyst, HS HS

Economist

Appraisal/NegotiationDec. 4, 1991 3 Engineer, Financial Analyst, HS HS

EconomistApril 15,1992 Engineer, Financial Analyst HS HS

Supervision1992 4 Engineer, Policy Specialist, HS HS

Fin. Analyst, Mgmt. Speelst.1993 4 Engineer, Policy Speclst., HS HS

Fin. Analyst, Mgmnt. Speclst.1994 4 Engineer, Policy Specist., HS HS

Fin. Analyst, Mgmt. Speclst.1995 2 Engineer, Fin. Analyst HS HS1996 3 Engineer, Policy Speclst., HS HS

Fin. Analyst1997 4 Engineer, Policy Speclst., HS HS

2 Fin. Analyst.1998 4 Engineer, Policy Speclst., HS HS

2 Fin. Analyst.1999 3 Engineer, Policy Speclst., S S

Fin. Analyst2000 3 Engineer, Policy Specist., S S

Fin. Analyst

ICRJuly 2000 5 Engineer, Financial

Analyst, Economist,Procurement Analyst

December 2000 3 Engineer, Financial Analyst,Economist

(b) Staff:

Stage of Project Cycle Actual/Latest Estimate________________________:__ i ::d No. Staff weeks USS cooo)

Identification/Preparation 10 30.0Appraisal/Negotiation 50 150.0Supervision 195 650.0ICR 8 30.0Total 283 880.0

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingZ Macro policies O H *SUOM O N O NAZ Sector Policies * H OSUOM O N O NAZ Physical O H * SU O M O N O NA

1 Financial O H *SUOM O N O NAX Institutional Development 0 H O SU O M 0 N 0 NAWEnvironmental O H O SUCM O N * NA

SocialZ Poverty Reduction 0 H O SU O M 0 N 0 NAEl Gender OH OSUOM ON *NAE Other (Please specify) O H OSUOM O N D NA

Z Private sector development 0 H O SU O M 0 N 0 NAZ Public sector management 0 H 0 SU O M 0 N 0 NA

Ol Other (Please specify) 0 H O SU O M 0 N 0 NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bankperformance Rating

M Lending OHS OS OU OHUM Supervision OHS OS OU OHU52 Overall OHS OS O U O Hu

6.2 Borrower performance Rating

V Preparation OHS OS O U O HUF Government implementation performance O HS O S 0 U 0 HU2 Implementation agency performance OHS OS O u O HUN Overall OHS OS 0 U O HU

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Annex 7. List of Supporting Documents

Memorandurn and Recommendation of the President of IBRD to Executive DirectorsStaff Appraisal Report (SAR)Project Aide MemoiresProject Supervision Reports(PSR)All Back to Office ReportsInformation Memoranda prepared by TELKOMBorrower's ICRTELKOM Audited Financial Statements (1997 - 2000)

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