$ Report No: RES00346 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF Development of Pumped Storage Hydropower in Java Bali System Project APPROVED ON 10-Sept-2021 TO Republic of Indonesia Energy & Extractives East Asia And Pacific Regional Vice President: Manuela V. Ferro Regional Director: Sudeshna Ghosh Banerjee Country Director: Carolyn Turk Practice Manager: Jie Tang Task Team Leader(s): Puguh Imanto, Hiroaki Yamada, Nicolas Jean Marie Sans, Nicolas Jean Marie Sans The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) ABBREVIATIONS AND ACRONYMS AIIB Asian Infrastructure Investment Bank C-ESMPs Contractors Environmental and Social Management Plans DPSH Development of Pumped Storage Hydropower Project E&S Environmental and Social ESCP Environmental and Social Commitment Plan ESIA Environment and Social Impact Assessment ESP Environment and Social Panel ESS Environment and Social Standards FM Financial Management GHG Greenhouse Gas GWh Gigawatt hours IBRD International Bank for Reconstruction and Development MoF Ministry of Finance MPSP Matenggeng Pumped Storage Project MtCO2e Metric ton of CO2 equivalent MW Megawatt OMP Operation and Maintenance Plan PDO Project Development Objective PLN PT Perusahaan Listrik Negara (Persero) PRP Project Review Panel UCPS Upper Cisokan Pumped Storage WB World Bank The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) @#&OPS~Doctype~OPS^dynamics@restrhybridbasicdata#doctemplate BASIC DATA Product Information Operation ID Operation Name Development of Pumped Storage Hydropower in Java P172256 Bali System Project Product/Financing Instrument Geographical Identifier Investment Project Financing (IPF) Indonesia Approval Date Current Closing Date 10-Sep-2021 30-Jun-2028 Environmental and Social Risk Classification (ESRC) High Organizations Borrower Responsible Agency Republic of Indonesia PT Perusahaan Listrik Negara (PLN) @#&OPS~Doctype~OPS^dynamics@restrhybridoperationstatus#doctemplate OPERATION STATUS Project Development Objective (DO) Original Development Objective The objective of the Project is to support Indonesia’s energy transition and decarbonization goal by: (i) developing the first large-scale pumped storage hydropower to improve power generation peaking and storage capacity of the Java- Bali grid; and (ii) strengthening PLN’s capacity for hydropower development and management. Disbursement Summary (in USD million) Source of Funds Net Commitment Disbursed Undisbursed % Disbursed i The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) IBRD 380.00 1.66 378.34 0.44 IDA -- -- -- 0 Grants -- -- -- 0 Policy Waivers Does this restructuring trigger the need for any policy waiver(s)? No @#&OPS~Doctype~OPS^dynamics@restrhybridmpa#doctemplate @#&OPS~Doctype~OPS^dynamics@restrhybridmpa#doctemplate ii The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) TABLE OF CONTENTS I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING ........................................................................................1 II. DESCRIPTION OF PROPOSED CHANGES ....................................................................................................................4 III. PROPOSED CHANGES ................................................................................................................................................7 IV. DETAILED CHANGE(S) ...............................................................................................................................................7 The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. PROJECT STATUS 1. Project background and brief history: The Project aims to support Indonesia’s energy transition and decarbonization goal by developing a first large-scale pumped storage hydropower, the Upper Cisokan Pumped Storage (UCPS) Plant, which will provide power generation peaking and storage capacity necessary for integration of variable renewable energy such as solar and wind into the national energy system. In 2011, the World Bank (WB) approved the “Upper Cisokan Pumped Storage Hydro-Electrical Power Project (IBRD loan Number 8057-ID, the “UCPS Project”)” to support the development of the UCPS. However, the previous UCPS Project faced significant delays related to land acquisition, resettlement, finalizing the mapping of biodiversity important areas, as well as timely hiring of the owner’s engineer and completion of the UCPS plant design, which led to cancellation of the major part of the loan in 2017. While given the importance of the plant in the grid, after two years, PLN requested WB support again on the development of UCPS under the new IBRD loan. The Development of Pumped Storage Hydropower in Java Bali System Project (DPSH or the DPSH Project) was approved by the World Bank’s Executive Directors in September 2021 to continue the activity for the design and construction of UCPS. Further explanation of the project history is provided in Paras 3 to 7. 2. Project Objectives and Description. The Project Development Objective (PDO) of the DPSH Project is “to support Indonesia’s energy transition and decarbonization goal by (i) developing the first large-scale pumped storage hydropower to improve power generation peaking and storage capacity of the Java-Bali grid; and (ii) strengthening PT Perusahaan Listrik Negara’s (PLN) capacity for hydropower development and management”. The Project finances three parts: Part 1: Development of the UCPS Plant; Part 2: Environmental and Social Impact Management for the UCPS Plant; and Part 3: Provision of Technical Assistance and Capacity Building Activities. These activities are expected to result in: (i) commissioning of 1,040 MW capacity power plant and construction of two double-circuit transmission lines; (ii) mitigation of adverse environmental and social (E&S) impacts of the UCPS Plant; and (iii) preparation of detailed design, tender documents, and E&S documentation for the Matenggeng Pumped Storage Plant (MPSP) and Poko Hydropower Plant and carrying out of a long-term capacity expansion planning of the Java-Bali power system1. 3. Background. The development of the UCPS Plant was previously financed by the WB under the Upper Cisokan Pumped Storage Hydro-Electrical Power (1040 MW) Project (the UCPS Project). The Loan Agreement (IBRD Loan Number 8057- ID) for the previous UCPS Project was signed between the Republic of Indonesia (RoI) and the World Bank on November 29, 2011, and became effective on May 1, 2012. The previous UCPS Project’s development objectives were to significantly increase peaking capacity of the power generation system in Java-Bali in an environmentally and socially sustainable way and strengthen the Project Implementing Entity, PLN’s institutional capacity in hydropower planning, development, and operation. The previous UCPS Project consisted of three Parts: Part 1 – Development of the UCPS Plant, Part 2 – Social and Environmental Impact Management and Part 3 – Feasibility Study and Preparation of Design and Bid Documents for Matenggeng Pumped Storage Power Project and Related Capacity Building. 4. Under the IBRD Loan Number 8057-ID and in order to meet the development objectives of the previous UCPS Project, PLN, as the Project Implementing Entity, procured and signed the following contracts for main construction and consulting services and initiated corresponding activities: 1 The works for these investments are not financed under the current Project. Page 1 The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) Table 1. Contracts initiated under the UCPS project and continued under the DPSH project that are still pending withdrawal applications. No. Contract Description Contract Date 1. Package 1 Lot 1A: Upper and October 9, 2015 Lower Dams 2. Package 1 Lot 1B: Waterways, October 9, 2015 Powerhouse, Switchyard, and Building Works 3. Package 4: Hydraulic Metal March 31, 2016 Works 4. Project Review Panel Expert May 1, 2021 for Seismic Hazard Assessment 5. Project Review Panel Expert December 30, 2021 for Engineering Geology, Rock Mechanics and Geotechnical Engineering 5. On May 2, 2017, the World Bank partially canceled the previous UCPS Project with respect to the portion which finances activities related to the development of UCPS Plant because of the lack of implementation progress and corresponding lag in disbursement. 6. On December 28, 2018, the previous UCPS Project was accordingly restructured to revise the project’s development objectives and limit the scope of the project activities to only support activities under Part 3 – Feasibility Study and Preparation of Design and Bid Documents for Matenggeng Pumped Storage Power Project and related capacity building. The previous UCPS Project continued to finance Consulting Services for Environmental & Social Impact Assessment (ESIA) and Pre-Feasibility Study Update and Feasibility Level Design study contracts for the preparation of the Matenggeng Pumped Storage Power Plant project. The previous UCPS Project was closed on December 31, 2021. 7. Following resolution of all on-going contractual issues with the contractors on the project and a request from the Government of Indonesia to the World Bank to re-mobilize financing for the development of the UCPS Plant (i.e., the Parts that had been cancelled under the previous UCPS Project), this DPSH Project was accordingly prepared by PLN for co-financing by the World Bank and the Asian Infrastructure Investment Bank (AIIB). This DPSH Project was approved by the Board of IBRD on September 10, 2021, and AIIB on April 13, 2022. This approval was then followed up by the signing of the Loan Agreement (IBRD Loan Number 9278-ID) between the RoI and the World Bank dated December 17, 2021, and the Loan Agreement (AIIB Loan Number L0512A) between the RoI and AIIB dated June 23, 2022. 8. Project Procurement Strategy. A Project Procurement Strategy for Development (PPSD) for the DPSH Project has been prepared and finalized by PLN, which forms the basis for the procurement plan (PP) for the contract packages that remain to be procured under the Project. The PPSD concluded that the most suitable and fit for purpose option is to continue with the contracts awarded under the previous UCPS Project (details in table 1). The Project is therefore being developed with the multi-package contract strategy that was started under the previous UCPS Project. Three Page 2 The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) construction contracts were awarded and signed under the previous loan: i) Package 1 – Lot1A and Lot1B for the two dams and civil works, and iii) Package 4 - hydraulic metal works. Two contracts for individual consultants for the Project Review Panel were also signed. These contracts have been considered as advance procurement, provided for in the Procurement Regulations, and because the procurements were carried out following Bank guidelines and using the Standard Bidding Documents (SBDs), they were considered meeting the requirement and consistent with the principle with Sections I, II and III of the Procurement Regulations and aligned with the Procurement Principles. Package 2 Pumped Turbine equipment as well as the transmission lines still need to be tendered. 9. Project Implementation Status. Since the loan effectiveness on March 17, 2022, PLN has continued its efforts on the early Project implementation and achieved major progress including the signing of the contract amendment agreements for civil works Lot 1A and Lot 1B, which is a crucial milestone for the Project. Additionally, after months of reviews and discussions with PLN and its contractor, the Main works Contractor’s Environmental and Social Plans (C-ESMPs) have received non-objection from the World Bank in June 2023, one of the conditions to allow the start of main works on site. The Dispute Board for Contract Package 1 and the Project Review Panel (PRP) as well as the Environmental and Social Panel (ESP) are now fully mobilized on the Project. In December 2023, PLN decided to cancel the on-going bidding process related to Package 2 Pump Turbine, Generator-motor & Auxiliary Equipment. The updated bidding documents, incorporating the decision taken by PLN to include variable speed unit technology in the design of the Pump Turbine, have been finalized and the procurement process is in progress with a bid submission date of November 29, 2024. 10. Disbursement and Implementation Progress. The Project is facing significant disbursement issues, particularly on those contracts listed in Table 1 which were initiated under the previous UCPS Project, due to government’s regulatory concerns. Ministry of Finance (MoF) raised the issue of compliance with regulation PP No. 10 / 2011 Article 75 indicating that “Contracts for the procurement of goods/services for activities financed by Foreign Loans or Grants shall be executed after the Foreign Loan or Grant Agreement comes into effect”. The Government interpretation on the regulation has been preventing PLN to release payments to consultants and contractors concerned. To date, no disbursement has been possible on these contracts, despite the progress of activities by the contractors under the respective assignments. This has deep adverse consequences on the Project implementation. 11. Ratings and overall performance. Following the Implementation Support Mission in May 2024, the achievement of the PDO and the overall Implementation Progress ratings were maintained as Moderately Satisfactory given the decision to retender Lot 2 - Pumped Storage Plant equipment which might lead to delays in implementation for the Project. This is reflected in Development of the UCPS Plant component rating, which is rated Moderately Satisfactory as it suffered from delays in access road rehabilitation works and activities of the main contractor on site for Main Works. 12. FM Rating. The FM rating is Moderately Satisfactory mainly due to disbursement delays. Meanwhile PLN maintains the FM arrangements as agreed during preparation. The audit reports have been submitted to the Bank on time with clean opinions. To date there are no overdue audit reports. 13. Procurement Rating. Procurement rating is currently Moderately Satisfactory as the Implementation Unit is lacking capacity to handle complex procurement processes and this leads to significant delays in contractualization of key activities financed by the Project. 14. E&S performance. Overall, the Environmental and Social Standards (ESS) performance during these initial phases of implementation is Moderately Satisfactory, while the team is closely monitoring the increase of activities on site and Page 3 The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) compliance with the final suite of C-ESMP cleared in June 2023 and the borrower’s commitments, as translated in the Environmental and Social Commitment Plan (ESCP). 15. Risk rating. The overall risk associated with the Project remains high, due to the high E&S risk rating. The key environmental risk is mainly related to the contribution to ongoing degradation of critical forest habitat for several critically endangered species identified in the UCPS project area. The key mitigation measure is having an integrated catchment management approach to restoring 3,800 hectares of forest to achieve net gain of critical habitat. The high social risks are related to the land acquisition, resettlement, and livelihood restoration for 2,063 households and the risks of an imported labor workforce and camp followers in the communities for over five (5) years. A community- based Forest Partnership Framework has been prepared to support livelihoods at risk from the forest restoration activities. The Macroeconomic, Sector Strategies and Policies, Institutional Capacity for Implementation and Sustainability, and Fiduciary risks are rated substantial. Mitigation measures to address these risks have been incorporated in the Project design and are being followed during implementation. 16. Reconfirmed PDO relevance and rationale for the World Bank’s involvement. The PDO namely: "To support Indonesia’s energy transition and decarbonization goal by (i) developing the first large-scale pumped storage hydropower to improve power generation peaking and storage capacity of the Java-Bali grid; and (ii) strengthening PT Perusahaan Listrik Negara’s (PLN) capacity for hydropower development and management” remains highly relevant, achievable and continues to have a strong ground for the World Bank’s involvement. The Project is compliant with the legal covenants, FM requirements, and policies for Environment and Social matters. 17. Former restructurings. The proposed restructuring would be the first restructuring for this Project since approval. B. RATIONALE FOR RESTRUCTURING 18. The proposed restructuring follows a series of meetings with PLN and the MoF on the disbursement delay, and a request from the MoF No S-137/MK.8/2024 dated August 9, 2024. A project restructuring is proposed to amend the loan agreement to specifically reference the activities undertaken under the contracts listed in Table 1, which were initiated under the previous UCPS Project, as eligible activities for financing under the DPSH Project. MoF has also requested the removal of retroactive financing under the project (to date, no withdrawals have been made for payments of expenditures made prior to the Signature Date of the loan agreement). These proposed amendments to the loan agreement are envisaged to help enable the disbursements under the DSPH project. 19. In response to the MoF’s request, the proposed restructuring would provide for an amendment to the project description of components 1.1 (a) and 1.2 (c) of the Project set forth in Schedule 1 to the IBRD Loan Agreement for the Project, to specify more explicitly that the scope of the Project includes those activities initiated under the contracts procured and financed under the Previous Project (Table 1 above), in line with the provisions of the Loan Agreement. The provisions of the Loan Agreement permitting retroactive financing would also be deleted. It should be noted that similar changes are expected to be made in AIIB Loan Agreement. II. DESCRIPTION OF PROPOSED CHANGES Page 4 The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) 20. The Project changes proposed are described as follows: • Part 1.1 of the Project Description in Schedule 1 to the Loan Agreement shall be amended to read as follows: “1.1. Preparation, construction, and commissioning of the UCPS Plant, including: (a) one upper dam on the Cirumamis River, one lower dam on the Cisokan River, waterways connecting the two dams, an underground powerhouse, and an outdoor switchyard, as such activities shall include activities initiated pursuant to the UCPS Project Initiated Contracts procured and financed under the UCPS Project, which shall continue to be carried out and financed under this Project; and (b) two double circuit transmission lines.” • Part 1.2 of the Project Description in Schedule 1 to the Loan Agreement shall be amended to read as follows: “1.2. Provision of technical assistance, including for: (a) the independent supervision of the UCPS Plant, including through the services of an independent construction supervision consultant; (b) the preparation of an operation and maintenance plan and an emergency preparedness plan, and the provision of training on these plans, sediment management, long-term asset management and dam safety; (c) the establishment and operation of the Project Review Panel, including the dam safety experts, as such activities shall include activities initiated pursuant to the UCPS Project Initiated Contracts procured and financed under the UCPS Project, which shall continue to be carried out and financed under this Project; and (d) the strengthening of the Project Implementation Unit’s capacity.” • Section III.B.1(a) of Schedule 2 to the Loan Agreement shall be amended to read as follows: “(a) for payments made prior to the Signature Date; or” • Finally, the following new definitions are proposed be added to the Appendix of the Loan Agreement: “38. “UCPS Project” means the project described in Schedule 1 to the Loan Agreement for the Upper Cisokan Pumped Storage Hydro-Electrical Power (1040 MW) Project between the Borrower and the Bank dated November 29, 2011, as subsequently amended and restated, and closed on December 31, 2021 (Loan No. 8057-ID). 39. “UCPS Project Initiated Contracts” means: (i) with respect to Part 1.1(a) of the Project: (a) the contract dated October 9, 2015, for Package 1 Lot 1B, Waterways, Powerhouse, Switchyard and Building Works of the UCPS Project, as amended on July 7, 2022; (b) the contract dated October 9, 2015, for Package 1 Lot 1A, Upper and Lower Dams, as amended on July 7, 2022; and (c) the contract for Package 4, Hydraulic Metal Works; and (ii) with respect to Part 1.2(c) of the Project, the two (2) contracts for the Project Review Panel; as each such contract may be subsequently amended in accordance with its terms.” 21. All other elements of the Project shall remain the same. The disbursement schedule is proposed to be updated to reflect the implementation delays experienced to date, with the assumption that based on the proposed changes, disbursement will resume when the changes come into effect. 22. It should be noted that the Project’s results framework has been retrofitted through an omnibus approach to map the existing indicator of “women in technical roles in PLN Cisokan” to the new corporate scorecard indicator of Page 5 The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) “millions of people benefitting from greater gender equality.” Similarly, the corporate scorecard indicator of “renewable energy capacity enabled” has also been added as a standalone corporate indicator. These changes will allow the Project’s results framework to have a closer alignment with the Bank’s new corporate scorecard, under the evolution process. The Bank team will provide technical support to ensure adequate reporting of these indicators in upcoming project reports. The proposed restructuring does not need to include changes in the result framework. Summary of Performance of E&S Risk Compliance 23. In October 2024, the Bank team visited UCPS construction sites, including some sections of the permanent access road under repair, temporary access roads, Conventional Concrete Batching Plant #1, Upper Dam, quarry etc. E&S performance is rated as Moderately Satisfactory due to (i) quality of the regular reporting (ESCP Item A) and (ii) delays in recruitment of Independent Environmental and Social Management (IESM) consultant. The Contractor's Environmental and Social Management Plan (C-ESMP) and the Biodiversity Management Plan (BMP) are generally being followed. Social risks and impacts are managed well through implementation of the social instruments including the Social and Community Management Plan (SCMP), Land Acquisition and Resettlement Policy Framework (LARPF), Forest Partnership Framework (FPF) and the Contractor's Environmental and Social Management Plan (C-ESMP). The GRM is fully functional and considered effective to receive and process grievances from the community and workers. The grievance task force holds regular meetings to monitor and report on the complaint resolution progress. Describe any E&S issues and impacts associated with the change in project design. Identify and describe any potential large scale, significant and/or irreversible impacts. NA Describe any potential indirect and/or long-term impacts due to anticipated future activities in the project areas. NA Describe any project alternatives (if relevant) considered to help avoid or minimize adverse impacts. NA Describe measures taken by the borrower to address E&S policy issues. Provide an assessment of borrower capacity to plan and implement the measure described. NA Identify key stakeholders and describe the mechanism for consultation and disclosure on E&S policies, with an emphasis of potentially affected people. NA Page 6 The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) @#&OPS~Doctype~OPS^dynamics@restrhybridsummarychanges#doctemplate Summary changes III. PROPOSED CHANGES Operation Information Proposed Changes Operation Information Proposed Changes Disbursements Estimates Yes Loan Closing Date Extension No Disbursements Arrangements Yes Loan Cancellations No Development Objective No Reallocations No Summary Description No Financial Management No (Operation Abstract) Legal Operational Policies No Procurement No MFD/PCE No Institutional Arrangement No Results No Implementation Schedule No Risks No Legal Covenants No Conditions No Implementation Modalities No DDO No Clients No Appraisal Summary No Components No @#&OPS~Doctype~OPS^dynamics@restrhybriddetailedchanges-disclose#doctemplate IV. DETAILED CHANGE(S) COSTS & FINANCING Private Capital Facilitation Is this an MFD-Enabling Project (MFD-EP)? Is this project Private Capital Enabling (PCE)? LOANS Page 7 The World Bank Development of Pumped Storage Hydropower in Java Bali System Project (P172256) DISBURSEMENTS Operation Dates & Projection Details Reasons to change the full Disbursement date and/or the projection Implementation Start Date Operation Closing Date 10-Sep-2021 30-Jun-2028 Projected Date for Full Disbursement 29-Sep-2027 Expected Disbursements (in US $) (Absolute) Original Estimation at Preparation Actual Year Revised Estimation (Approval Package – 10 Sep 2021) FY2022 33,333,333.34 0.00 0.00 FY2023 45,000,000.00 0.00 0.00 FY2024 70,000,000.00 1,000,000.00 966,995.28 FY2025 100,000,000.00 60,000,000.00 693,838.23 FY2026 80,000,000.00 100,000,000.00 0.00 FY2027 45,000,000.00 219,000,000.00 0.00 FY2028 0.00 0.00 0.00 ENVIRONMENTAL & SOCIAL Environmental & Social Assessment According to the E/S Specialist are there changes proposed to the operation’s design that No would impact the Bank’s E&S assessment?” Page 8