Document of The World Bank FOR OFFICIAL USE ONLY M1CRoFICHE COPY Report No. 10345-IND Report No. 10345-INL) Type: (-'AR) SHANMUGARA/ X82692 / F9 015/ ASTIF STAFF APPRAISAL REPORT INDONESIA FOURTH TELECOMMUNICATIONS PROJECT MAY 1, 1992 East Asia and Pacific Region Country Department III Industry and Energy Operations Division This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRItNC\' EQUIVALENTS (Decemiiber 1991) Currency Ullit = Indonesian Rupiah (Rp) $1 = Rp 1,992 Rp 1.0 million = $502 FISCAL YEAR Governmiet of Indonesia April I1-March 31 PT. TEI-KOM January I-December 31 WEIGhITS ANI) MEASURES Metric system ABBREX'IAT'IONS AND ACRONYMS AMPS-A American Mobile Phonie Service - Analog ASEAN Association of South East Asian Nations BAPPENAS National Development Planining Agency BPPT State Ministry for Researchl and Technology DGPT Directorate Gener-al of Posts and Telecommunications FRG Federal Republic of Germaniy GDP Gross domestic product ICB International competitive bidding IDD International direct dialinig ITU International Telecommlulinication Union MTPT Ministry of TouLrism1. lPosts and Telecommunications OSP Outside Plant PT. CSM PT Chitra Sari MaklmuL1r--VSAT Communication Company PT. INDOSAT State International Telecomimilluniications Company PT. INTI State TelecommlnIllications Manufacturing Company PT. TELKOM State Domestic Telecommunllications Company PUSDIKLATTEL TelecommuL icationis Education and Training Center REPELITA National Five-Year Development Plan UNDP United Nations Development Programme VSAT Very Small Aperture Satellite Terminal FOR OFFICIAI, USE ONLY INDONESIA FOURTH TELECOMMUNICATIONS PROJECT Table of Contents Page No. LOAN AND PROJECT SUMMARY ............ .. ........... iv I. INTRODUCTION .................................. 1 II. THE TELECOMMUNICATIONS SECTOR ................. 3 A. Background ................................. 3 Sector Organization ........................... 3 Network Facilities ........... .. 4 Sector Performance ........................... 5 Usage of Service .......... .. 7 B. The Entity .................................. 9 Organization and Management .................... 9 Staffing ................................... 10 Training .............. . 11 Audit .................................... 13 Billing and Collection .......................... 13 Accounting Systems and Financial Management .... ...... 13 Management Information System ................... 14 C. Sector Development ............................ 15 Sector Objectives ............................. 15 Key Sector Issues ............................ 16 III. THE BANK'S PAST EXPERIENCE AND ROLE .............. 20 Past Experience ................................. 20 Lessons Learned ................................. 21 Rationale for Bank Involvement ........................ 22 This report is based on the laformation supplied by TELKOM and on the findings of a Bank appraisal mission comprising Messrs. A. Shanmugarajah (Task Manager and Engineer), P. Smith (Economist), and R. Pradhan (Financial Analyst), which visited Indonesia in December 1991. The peer reviewers for this project were Messrs. B. Wellenius, D. Joshi (ASTIF), Y. Takano (CFSPS), Stefan Alber-Glanstaetten (LA4TF), Mrs. M. Haug, Director EA3, and Mr. Peter R. Scherer, Chief EA3IE have endorsed this report. 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. Table of Contents (Cont'd) !Ag& No. IV. THE PROGRAM AND THE PROJECT ................... 23 Telecommunications Investment Program .23 Project Objectives .24 Project Description .24 Technical Assistance .25 Project Costs .27 Project Financing and Terms .29 Procurement .30 Disbursements .32 Implementation .33 Performance Monitoring .36 Project Reporting, Accounts and Audits .36 Supervision Plan .36 Environment and Health Aspects .37 V. FINANCIAL ANALYSIS .38 PERUMTEL's Historical Financial Performance .37 TELKOM's Opening Balance Sheet .39 TELKOM's Projected Financiai Performance. 40 TELKOM's Projected Financing Plan .................... 42 VI. ECONOMIC ANALYSIS .43 Least-Cost Solution .43 Tariffs .43 Benefits .45 Rate of Return. 46 Project Risks .46 VII. AGREEMENTS REACHED AND RECOMMENDATION 48 Agreements Reached ..... . ........................ 48 Recommendation .50 iii ANNEXES Page No. 1. Cellular Radio Mobile Telephone Service .................. 52 2. MTPT Organizational Chart ........ ................... 53 3. Basic Telecommunications Sector Statistics ................. 54 4. Supply vs. Demand - Historical Data ...................... 64 5. Telephone Service Issues ......... .................... 66 6. TELKOM Organizational Chart ........................ 67 7. TELKOM Employee Data ........ .................... 68 8. International Development in oector Organization .... ......... 71 9. 1992 - 1996 Investment Program .75 10. Project Components .78 11. Terms of Reference .81 12 Procurement Packages and Schedule .105 13. Disbursement Schedule .107 14. Implementation Schedule .108 15. Performance Indicators .110 16. Action Plan .111 17. Historical Financial Statements .114 18. Projected Financial Statements .118 19. Assumptions Used for Financial Projections .121 20. Summary of TELKOM Tariffs .123 21. Return on Investments .129 22. Selected Documents and Data Available in Project File .133 TABLES IN THE TEXT 2.1 Key Performance Indicators ........................... 15 4.1 Estinated Project Cost ......... ...................... 28 4.2 Project Financing .................................. 29 4.3 Procurement Arrangements ............................ 32 4.4 Disbursement of Proposed Loan ......................... 34 5.1 Key Historical Financial Performance Indicators ............... 38 5.2 TELKOM'S Opening Balance Sheet ....................... 40 5.3 TELKOM's Key Projected Financial Performance Indicators .... .... 41 5.4 Forecasted Sources and Applications of Funds (1992-96) .... ...... 42 MAPS: IBRD No. 23237 23404 iv INDONESIA FOURTN TELECOMMUNICATIOYNS PROJECT Loan and Project Summar Borrower : Republic of Indonesia Benefidiary : PT. Telekomunikasi Indonesia (TELKOM) Amount : $375.0 million equivalent Terms : Twenty years including a five-year grace period at the Bank's standard variable rate. On-lending Terms : $373 million out of the proceeds of the loan will be on-lent from the Government of Indonesia to TSLKOM for 20 years including a grace period of 5 years; the on-lending rate will be at a variable interest rate pegged to Bank Indonesia's (Bl) three-month domestic money market certificate (Sertifikat Bank Indonesia -- SBI) plus one percent. The rate would be adjusted on January 1 and July 1 of each year, based on the average of SBI three-month maturity quotations during the preceding six months. The remaining $2 million will be made available to the Ministry of Tourism, Posts and Telecommunications (MTPT). Project Objectives and Description The project has two main objectives: (a) to improve sector performance by promoting a regulatory regime conducive to competition in the provision of telecommunication services; and (b) to meet the growing demand for telecommunications services by enhancing the quality of TELKOM's service, effective utilization of existing facilities, increasing system efficiency and modernizing and expanding the networks. It consists of both (i) technical assistance and (ii) investments: (i) Technical assistance will help: (a) the Government in promoting competition in, and developing the effectiveness of regulation of, the sector, (b) TELKOM in developing as a profe-ssionally-run, commercially-oriented enterprise, by supporting ongoing efforts to enhance human resources planning and development and by improving its financial management and capacity for investment program development and implementation (through decentralization where appropriate); (c) TELKOM in managing the implementation of the project investments. Overseas study fellowships would be available for both TELKOM and MTPT telecommunications staff. (ii) Investment component, which would include: (a) provision of switching and cable networks to connect about 600,000 new telephone lines, v including provision of about 20,000 pay phones to serve the non- subscribing public; (b) provision of terrestrial microwave backbone transmission network to improve telecommunications service in Java, Bali, Nusa-Tenggara, Kalimantan, and Sulawesi; (c) rehabilitation and replacement of obsolete network facilities; (d) provision of spares, tools and test equipment to improve maintenance and repair facilities; and (e) further computerization of TELKOM's operations such as directory inquiry services and netwcrk management. Project Benefits and Risks Benefits. Institutional support will assist the government to strengthen its regulatory capability, which is critical to the success of the liberalization efforts of the government. It will also assist TELKOM in improving its performance as an effective and efficient entity operating on a sound commercial basis. TELKOM's institutional development will be pursued in a number of ways, including on-the-job and overseas training and technical assistance to improve managerial, financial and technical capabilities. The investment component will satisfy part of the unmet demand for telecommunications services. Increased availability of telephone service and improved quality of service will make an important contribution to increased business efficiency and productivity. The project will also continue to further develop the local consultancy and outside plant construction industries through collaboration with international firms. Risks. The principal risk for the project relates to TELKOM's capability to implement the project. However, this risk is minimized by upfront actions by government and TELKOM wherever appropriate. In this regard, TELKOM has already shown its commitment to the project by establishing a project implementation unit to oversee all aspects of the project on a full time basis. In addition, adequate technical assistance is provided under the project to assist. TELKOM in the implementation and supervision of con- struction works. Residual risks will be minimized by agreed measures to monitor project implementation, with corrective actions initiated as necessary. vi Estimated Project Cost La BY ITEMS LOCAL FOREIGN TOTAL --------------- (US$ MILT TON) 1. Switching Exchange 36.6 195.7 232.3 - Expansion 40.8 95 5 136.3 - Rehabilitation 2. Outside Plant Network (OPN) - Expansion 343.3 117/.9 461.2 - Rehabilitation 18.0 9.8 27.8 3. Transmission - Expansion 15.7 103.9 119.6 - Rehabilitation 13.8 36.5 50.3 4. Junction Network - Expansion 8.4 25.7 34.1 5. Computer Support System 5.7 35.0 40.7 6. Spare Parts, Tools & Test Equip. 6.1 17.0 23.1 7. Technical Assistance (i) Capacity building - MTPT 0.6 1.2 1.8 - TELKOM 0.5 3.0 3.5 (ii) Training - MTPT 0.2 0.8 1.0 - TELKOM 0.6 1.5 2.1 (iii) Project Implementation 2.5 7.8 10.3 Support Total Base Cost 492.8 1U3 1.144.1 Contingencie Physical 24.6 14.2 38.8 Price 38.8 7.4 46.2 Total Project Colt 556.2 672 9 .1,229.1 Interest during construction ,l 76.3 47.6 123.9 Iota! Financine Requird 6 5 72 1353m0a La TE1 OM is exempted from duties and taxes on imported items. Local cosbt include VAT and olher ta estimad to be about S111.8 million equivalent. 1b Interest during construction is calculated by applying the interest rates of 7.73% on Bank, 3.5% on USA (Exim Bank), Netherlands (ABN-Amro Bank) and Spanish, 2.5% on Japanese; 7% average on KfW; and 5.4% avere on French loans, plus the spread applicable to the onlending of each loan to TELKOM, to the avemag amount expeotd to be outstanding in each year of construction and by adding commitment fee on the averae undrawn amount of tho loans. vii Financing Plan LOCAL FOREIGN TOTAL % OF ---------------US$ MILLION----------------- TOTAL TELKOM COMPONENT Bank - IBRD 134.0 241.0 375.0 28.2 FRG - 71.0 71.0 5.0 France/Credit Lyc .nais - 52.0 52.0 4.0 Japan (Sumitomo/OECF) - 100.0 100.0 7.0 Netherlands (ABN-Anmro) - 84.0 84.0 6.0 Spain - 50.0 50.0 3.7 USA (Exim) - 75.0 75.0 6.0 TlELKOM 497.4 47.5 544.9 40.0 GOI 1.1 - 1.1 0.1 Total 632.5 720 1,3530 100,0 Estimated Disbursements (Million $) IBRD FY 1993 1994 1995 1996 1997 1998 Annual 5.0 10.0 70.0 100.0 100.0 90.0 Cumulative 5.0 15.0 85.0 185.0 285.0 375.0 Economic Rate of Return: 23 percent INDONESIA FOURTH TELECOMMUNICATIONS PROJECT I. INTRODUCTION 1.1 One of the key prerequisites for a sound economic development is the availability of adequate infrastructure facilities for both public and private sector. Telecommunications has emerged as an important strategic component of these infrastructure facilities. The inadequacies of the Indonesian telecommunication sector, both in quantity and quality, are a constraint to sustained industrial and export growth. Four key issues need to be addressed to alleviate these constraints: (i) mobilizing at least-cost the large capital needed for massive investments to accelerate network expansion and modernization; (ii) developing TELKOM into a modern, commerr.iallv oriented organization capable of efficiently meeting telecommunication needs of Indonesia; (iii) introducing appropriate competition policy to promote private sector entry into the sector; and (iv) establishing an effective regulatory regime to promote competition. 1.2 As part of the evolving strategy GOI has demonstrated its clear commitment to improve sector performance by implementing a number of reforms by: (i) beginning the process of privatization by allowing private sector provision of non-basic services,1/ paging and customer premises equipment; (ii) introducing revenue sharing agreements between TELKOM and private investors for cellular telephone systems; (iii) initiating studies to strengthen GOI's capabilities to effectively manage the sector; and (iv) changing PERUMTEL's legal status from PERUM (an enterprise wholly owned by government) to a PESERO (limited liability company whose capital is divided in shares which are currently wholly owned by government)2/ now called TELKOM to operate on commercial principles. This was a very important milestone in the commercialization of the sector. To improve its internal efficiency, TELKOM is restructuring its organization to operate on a decentralized mode to facilitate gradual restructuring of TELKOM into several regional subsidiary companies under a holding company. y/ "Basic" telecommunications services are currently defined in government regulations as telephone (including cellular mobile radio telephone), telex, telegram and leased circuits; "nonbasic" services are all other network services, such as E-mail, Voice-mail, information services e.g., weather, share prices. 2/ There are three categories of state-owned enterprises in Indonesia: a PERJAN which is primarily oriented to the provision of social services rather than profits; a PERUM (e.g. PERUMTEL) which is expected to recover the cost of sarvices as well as fulfil social responsibilities; a PERSERO (like P.T. Indosat) which is a limited liability company (with a commercial orientation). - 2 - 1.3 GOI recognizes the need to adopt further reforms to achieve Its more ambitious development objectives for the sector. These include: (i) developing a second carrier to provide modern telecommunications services in competition with TELKOM; (ii) removing remaining barriers to active private sector participation in all non-basic services as provided under Telecommunications Law No. 3; and (iii) gradually shifting Government responsibility from ownership and management to policy and regulation. These reforms will be supported under the proposed Fourth Telecommunications Project. - 3 - II. THE TELECOMKNU-ICATIONS SECTOR A. Back&round Sector Or&anization 2.1 The telecommunications sector in Indonesia is dominated by PT. Telekomunikasi Indonesia (TELKOM), the domestic telecommunications service provider. It is a limited liability company (para. 1.2) which operates approximately 1.2 million telephone lines. All international telecommunications services are provided through PT. Indosat, also a limited liability company wholly owned by Government. In addition, cellular mobile radio telephone service is provided in the Jakarta-Bandung corridor by PT. Rajasa Hazanah Perkasa, a private limited liability company in cooperatioI with TELKOM in accordance with a revenue sharing agreement. And recently two private limited liability companies operating on the (AMPS-A) system have also been authorized to provide cellular service in Jakarta and East Java in cooperation with TELKOM. Details of this service are in Annex 1. VSAT (mainlv data) satellite private network telecommunications services are provided by PT. CSM, a private company, in accordance with another interconnection and revenue-sharing agreement with TELKOM. Besides the public network, dedicated network facilities are owned and operated by the National Electricity Corporation (PLN), the state oil company (PERTAMINA), the state railway (PJKA), the Indonesian armed forces and by other users with special requirements. In addition, many private and public enterprises lease circuits from TELKOM to establish private networks. PT. Inti manufactures or assembles telephone instruments, radio and multiplex equipment, satellite ground sta- tions, and digital switching equipment based on a Siemens license. PT. Inti also provides support services to TELKOM and Indosat in areas of exchange planning and the installation, testing and maintenance of switching and transmission equipment. Recently two private sector companies in joint ventures with AT&T of USA and NEC of Japan respectively have been allowed to manufacture digital switching equipment in competition with PT. Inti. The price to TELKOM, reportedly averaging about US$250 to 300 per line (including power supply, engineering, installation, excluding taxes and duties) is comparable to those prevailing in international markets. There are also four private limited liability companies manufacturing cables and 14 small privately owned manufacturers of telecommunications equipment. The user community is relatively unorganized and there is no national telecommunication users association in Indonesia at present. However, the larger business users, Indonesia Chamber of Commerce and computer users have begun to voice an interest in telecommunications issues. 2.2 The GOI has effective control of the sector both by virtue of the Government's statutory authority over public telecommunications and radio licensing and as owner of the major sector entities, TELKOM and Indosat. Both TELKOM and Indosat are accountable to the Ministry of Finance. However, the Ministry of Finance has delegated the authority to Ministry of Tourism Posts and Telecommunications. Tariffs for public telecommunications services must be approved by the Minister of Tourism, Posts and Telecommunication. The -4- Secretary General of the Ministry is responsible for administration of the Ministry and advises the Minister on sector policy issues. The Directorate General for Posts and Telecommunications (DGPT) is responsible, in the area of telecommunications, for regulation and radio licensing. Currently, the Director General is the Chairmaii Lf the Board of Commissioners which oversees TELKOM operations and reviews its inveatment plans, budgets and tariffs. In addition to MTPT, important roles are played by the Ministry of Finance, the National Development Planning Agency (BAPPENAS) and the State Ministry for Research and Technology (BPPT). The Ministry of Finance approves budgets and oversees TELKOM's financial performance. BAPPENAS coordinates and controls the government five year planning process (Repelita) and approves investment plan and funding. BPPT has a lead role in determining the timing and introduction of the new technologies that art, to be used. The organization chart of the MTPT is in Annex 2. 2.3 In early 1989, new telecommunications legislation was passed. The most significant change from the previous legislation is that TELKOM's monopoly in the provision of domestic telecommunications was modified to permit the provision of nonbasic services by other public and private entities. Pursuant to the new legislation, regulations for the provision of nonbasic services by other entities were published during 1991. Network Facilities 2.4 Local Exchanges. Total installed exchange capacity in Indonesia at the end of 1991 was 1.5 million line units, of which 1.2 million were connected --- giving an exchange fill ratio of 80X. Over 93X of local exchange lines are automatic, of which 50X are now digital. At the end of the project (end 1997) the number of working lines is expected to increase from 1.2 million to 3.2 million (a 167% increasL). Over 99Z of the local exchange lines would be automatic and mostly digital. To handle the additional traffic from increased customers and to improve the present traffic congestion (para. 2.14), a significant expansion of the interexchange network in Jakarta and other multi-exchange areas with new and large capacity tandem exchanges will be provided under the proposed project. Existing net.ork facilities are described in Annex 3. 2.5 Outside Plant Network. Outside plant network reliability needs to be vastly improved, by upgrading technology and maintenance efficiency to exploit the potential benefits of sophisticated technology adopted for other parts of the network such as switching and transmission. Under the Third Telecommunications Project (Loan 3182-IND), TELKOM will be establishing twelve out of the 27 planned outside plant maintenance centers (OPMC)--five in Jakarta, two in Surabaya and one each in Denpasar, Medan, Palembang, Semarang and Ujung Pandang to offer customers in those cities significant improvements in service provision and repair time. When these centers are completed in mid 1993 and staffed with competent staff, the fault rate is expected to fall from about nine faults per 100 working lines per month to approximately five. At the same time, productivity will improve from one to three faults repaired per line-man per day and the faults cleared within 48 hours of fault occurrence will be raised from 30 percent to about 70 percent. A similar approach also -5- needs to be taken to improve the performance of the outside plant network in other cities, thereby improving the reliability and quality of service countrywide. TELKOM has agreed to have the remaining fifteen OPMCs established by 1996. Annex 3 gives data on the share of faults in the outside plant network, speed of service restoration and OPMC expansion plan. TELKOM's target for year 2000 is to achieve one fault per 100 working lines, productivity of five faults cleared per line-man per day and repair 90% of the faults within 48 hours. The proposed project provides for rehabilitation, modernization and expansion of the outside plant network to achieve the above objectives. 2.6 Long Distance Network. The long distance network in Indonesia is comprised of 260 trunk exchanges interconnected through microwave, satellite, optical fibre, coaxial cables and open-wire systems. Long distance direct- dial service is available to most but not all automatic local subscribers. All customers in Jakarta have long distance direct-dialing (LDD) but only 84X of the customers elsewhere have LDD, giving a nationwide average of 93%. Long distance transmission systems will be augmented and expanded under the proposed project to improve LDD service quality. The existing and proposed long distance networks are in Map 23404. 2.7 Palapa Domestic Satellite System. TELKOM presently operates two satellites, Palapa-B2P, and Palapa-B2R, launched in 1987 and 1990 respectively. The design-life time of both satellites is 8 years. Annex 3 summarizes the customer base for Palapa. TELKOM has not optimized the marketing and service potential of these satellites. Therefore, the current organization needs to be strengthened to increase revenues from Palapa satellite services by: (a) establishing a well-developed marketing organization and strategy for Palapa; and (b) developing capabilities to offer value-added services with proportionally high customer value and revenue earning capacity instead of merely contracting raw transmission capacity. The ongoing Third Telecommunications Project supports a study to examine the options to separate Palapa operations from TELKOM and the proposed Fourth Telecommunications Project would provide technical assistance to implement the agreed findings of that study (para. 2.36). 2.8 International Facilities. International telecommunications services in Indonesia are accessed via two international gateway exchanges located in Jakarta and Medan, interconnected through submarine cables and satellite circuits to 185 countries. At the end of 1990, there were 1619 international circuits, up from 248 in 1980, a growth rate of about 20% p.a. International traffic has increased by 26% p.a. during the same period, well above the rate of growth in -he number of circuits. The majority of international traffic is business related and mostly to Japan, Singapore, and USA. Sector Performance (a) Access to Service 2.9 Telephone. At the end of 1991 there were 1.2 million working lines in operation in Indonesia, giving a density 0.68 lines per 100 population, which compares poorly with other countries and is the lowest in the ASEAN - 6 - countries (Figure 2.1). Furthermore, telecommunications services are concentrated in urban areas. Jakarta, with only 9.4X of the population, has about 371 of the telephone lines. Outside Jakarta, Sumatra, Sulawesi and Maluku are better served than the rest. In 1991, penetration was 5.6 i/ per 100 population in Jakarta, but averaged only 0.40 per 100 for the rest of the country (ranging from a high of 0.60 per 100 in the best served part to 0.33 per 100 in the worst served part of the country). Regional distribution of telephone service is given in Annex 3. Public telecommunications service is currently available to all 27 provinces, 55 municipalities, 236 district capitals and 2,869 of the 3,539 subdistricts. But only approximately 10,000 villages of the 67,600 have telephone service. International direct dialing access to 185 countries is available to 7 percent of subscribers in 28 cities. 407 telephone service retail shops and 14,000 public pay-phones provide access service to the nonsubscribing public. TELKOM's target is to allocate 2.5 percent of the local telephone 1.Lies to provide pay-phones which will be financed under the proposed project. This is comparable to the standards followed by other telecommunication administrations. Flgure 2.1: Main LinelOG persons *low 60. 40f __ __ _I_ Jill I 20 i im_ _ _ _ 10 ' 1111 _ _ _ __ _ _ _ _ _ _ _ m.~~ ,l , I t9 /tRt/// . 2.10 Telex. Aside from telecopier (facsimile) that is transmitted over the telephone network, telex is the most important non-voice service in Indonesia and accounts for approximately 41 of TELKOM's operating revenue. i Compared with 25 in Kualalumpur and 11.8 in Bangkok. -7- Only modest growth of telex lines is expected over the next five years because of significant substitution by fax and data. Installed telex switching capacity is sufficient to meet demand up to year 2000 and no further increase will be required. 2.11 Telegraph and Data. Telegram service is provided at affordable prices through a network of 680 telegraph offices. At the end of 1990, there were almost 2,300 voice and about 500 data leased circuits in the country. There are approximately 260 subscribers in Bandung, Jakarta, Medan, Surabaya, Padang and Batam to TELKOM's packet-switched data service, (Sambungan Data Packet--SKDP). SKDP is also connected through the facilities of PT. Indosat to international packet-switched services in 26 countries. Service is said to be slow and unreliable due to poor quality of the outside plant network (para. 2.5). Although a number of value-added services that are defined as non-basic have been open to private operators since 1989 (para. 2.3), clear guidelines and simple licensing procedures need to be developed to attract potential new operators. (b) Demand for and Supplv of Services 2.12 As of December 31, 1991, only 70X of the expressed demand (working lines plus registered applicants) for telephones was satisfied, down from 89Z in 1980. However, the total number of registered applicants list grew from 45,000 to 520,000 as the 101 p.a. cumulative average network growth failed to match the 13.5X growth in demand over the period. Since 1980, the gap between expressed demand for telephone service and available telephone lines has widened (Figure 2.2). These figures underestimate actual demand because many potential residential customers do not sign up because the backlog is so large. One factor which worsens long waiting lists in many developing countries is low connection charges. However, Indonesia has high connection charges. TELKOM projects expressed demand to increase by 191 p.a. to 5.0 million by 1997, with total demand estimated to reach 8 million lines. Since the commencement of the Third Telecommunications Project, the annual growth rate in working lines has increased from about 81 in 1989 to 181 in 1990. Over the period 1990 - 1996, the annual rate of growth of working lines is expected to exceed 201 p.a. (Figure 2.3). At the end of 1996, 801 of the expressed demand will be satisfied, increase from 701 in 1991 (Annex 4). 2.13 Despite rehabilitation efforts and large increases in investment and growth during the decade, the supply of telecommunications facilities and services will remain inadequate relative to demand throughout 1990s. Therefore measures to improve the efficiency of network use are critical. Such measures were begun as a part of the Third Telecommunication Project (paras. 2.5 and 2.14). They include improved repair time, improved traffic engineering, network rehabilitation and improved tariff structure. More, however, needs to be done. Implementation of an action program to further improve efficiency will be part of the project (para. 4.30). -8- (c) Oualitv of Service 2.14 Quality of telephone service is poor. Annex 3 presents the successful call completion rates (SCR) which were on average 40 percent for automatically dialed local calls and 20 percent i/ for long distance direct- dialed calls in Indonesia. Typical call completion rates of well dimensioned networks in other countries are 80 percent and 60 percent, respectively. Issues contributing to low call completion rates and vtrategy to address these issues are presented in Annex 5. This strategy, which is supported by the ongoing Third Telecommunications Project (Ln 3182) gives priority to effective capacity utilization, replacement of old cables and obsolete switching systems, rehabilitation of local networks and increase in the traffic handling capacity of the system. In addition to the investment component, the technical assistance provided under the Third Telecommunications Project is developing TELKOM capacity to perform on a continuous basis measurements, analysis and forecasting of traffic to provide a reliable data base for network optimization. Much more needs to be done to improve the network's traffic handling performance. One of the key objectives of the technical assistance provided under the proposed project (para. 4.9(c)) is to help TELKOM to establish a suitable organization for traffic planning, network operation and management to detect changes in traffic flow and indicate when to take actions to prevent network congestion and service degradation. Usage of Service 2.15 An analysis of the billing data (Annex 3) shows that 20% of the subscribers (200,000) provide 75 percent of the revenues which is comparable with other telecommunications administrations. Until the Bank's Third Telecommunications Project, TELKOM did not distinguish between residential and business subscribers nor revenue generation by type of user. TELKOM established in November 1990 in Jakarta a Customer Service Group (CSG) to give special attention to the needs of key customers speedily and effectively. Based on experience gained, through the CSG operation, TELKOM plans to establish units in other regions to serve the specific needs of: corporate customers and major business customers. Billing data also reveals that a large number of customers are not generating any originating pulse revenue for TELKOM. Hence TELKOM needs to examine this category and take action to adjust the monthly rental so that all lines cover at least their incremental costs (para. 6.4). i/ Compared to Japan 71, Malaysia 50, Singapore 70. Figure 2.2: Expressed Demand vs. Waiting Applicants Historical Data in Indonesia (1980-190) Figure 2.3: TELKOM- Annual % Growth of Actual and Projected Number of Main Lines 25- 20 PAro3ecte ProJected - 10 - B. The Entity Organization and Management 2.16 On September 24, 1991, the GOI changed the corporate status of PERUMTEL to a limited liability company (para. 1.2), thereby reflecting the increased commercial mandate and autonomy of the company. At the same time its name changed to PT. Telekomunikasi Indonesia (TELKOM). TELKOM is managed by a Board of Directors,j/ who are appointed by the Minister of Finance and are iscountable to the Minister of Finance and headed by a President-Director. The E sident-Director has authority for all operations of TELKOM. In addition to the President-Director, the Board includes five other directors with functional responsibility, respectively, for development and logistics, services, operations, finance, and human resources. Operational responsibility devolves to 12 regions, and responsibility for major development projects to 3 project-managers. Also reporting to the Board are several staff units responsible for Corporate Planning, Research and Development; Education and Training; Information Technology; and the Corporate Inspectorate, an internal audit-unit. TELKOM's existing organizational structure is shown in Annex 6. There have been no changes in the top management, appointeJ in 1988, with a mandate to bring about needed reforms. The management team is dynamic and forward looking and has implemented a number of reforms including improving staff communications, streamlining procurement systems and improving accounting and financial systems. 2.17 As discussed in Section A of this chapter, TELKOM is expected to grow rapidly in the 1990s. Its new customer connection rate would grow from over 15% per year at present to over 20% per year by 1996, and sustained at that rate through to the year 2000. The rapid expansion of network capacity involves increasingly complex technical, financial and managerial tasks for which TELKOM needs to continue to strengthen its institutional capacity. Areas that need strengthening have been recognized and action programs are either already underway or planned, in many cases with assistance from the Bank. To bring about many of the necessary institutional improvements, TELKOM, under the Third Telecommunications Project, entered into a twinning arrangement in March 1991 with the Korean Telecommunications Authority International (KTAI). The areas that are being strengthened include corporate planning, operations, finance and project implementation. 2.18 With the change in corporate status to a limited liability company as well as the gradual introduction of competition, TELKOM management has takeni a number of policy decisions and actions to delegate decision-making responsibility and accountability down to the lowest feasible levels in the organization and to establish focused strategies for serving the needs of different customer groups. As part of these policy and organizational changes, TELKOM would reorganize itself into six significantly independent operating regions and 43 strategic business units (SBU) instead of the current 5/ The Board is comparable to an executive management committee. Each of the directors are full-time employees. - 11 - functional structure. Because of skill mix and staff availability factors, it is intended to implement the decentralization in phases. The first phase would be centered on Jakarta as this account for about 40Z of TELKOM's business. Based on experience gained, TELKOM plans to extend full decentralization to the remaining regions over a period of four years beginning 1992. The Bank fully supports the proposed restructuring and the technical assistance provided under the proposed lcan will help TELKOM to adopt a practical, structured approach to move towards a flexible and responsible structure. Staffing 2.19 A summary of TELKOM's staff efficiency and staff composition is in Annex 7. With about 40,000 employees at the end of 1991, TELKOM's staffing ratio of 32 staff per 1000 telephone lines is high as compared with Korea (6), Malaysia (20), Singapore (14), and Thailand (18). However, there have been significant improvements in TELKOM's staffing efficiency in recent years, as shown in Figure 2.4. This has been possible partly due to growth in the number of main lines connected while holding the total number of staff virtually constant and partly due to contracting out a number of non core services such as local cable network design and its construction, maintenance, and janitorial services. With the very substantial quantities of highly reliable digital equipment to be installed in the coming years, TELKOM is expected to achieve a staffing ratio of 16/1,000, which would be comparable to that of the ASEAN countries. 2.20 There are also serious imbalances in the mix of TELKOM employees. For example TELKOM's work force includes only 1,800 university graduates. That is only 4.5 percent of total staff, a very low figure for an entity employing highly sophisticated technology. This ratio would be about 10 to 15 percent in developed telecommunications entities. To improve its staffing efficiency and in order to address the staffing imbalance, TELKOM, in 1991 initiated a program to improve the planning and control of human resources, referred to as the Human Resource Model (HRM). Work was carried out initially in Jakarta to identify the actual composition of staff and the nature of their work, to prepare a forecast of staffing requirements by jobs and to estimate training and recruitment by occupational category. Preliminary findings confirm previous assessments that staff is unbalanced, and the organization faces a major task in reallocating and retraining existing personnel. A detailed tra..ning and recruitment plan will be available for Jakarta by June 30, 1992 when the consultant financed by TELKOM completes his assignment. Training 2.21 To address its training challenges, TELKOM has a separate department for training. This department known as PUSDIKLAT plays an important role in TELKOM's efforts to upgrade skills of its technical and administrative staff and managers. There are twelve regional training centers (RTCs) with a staff about 667, including 175 instructors. An upgrading program for both the central training centre (CTC) and RTCs, initiated with UNDP-ITU cooperation and supported by the ongoing Third Telecommunications Project, is currently being implemented. Under this program, TELKOM will decentralize much of - 12 - technical, administrdtive, operational and supervision training to RTCs and run the CTC as a resource center. In addition, in part because of the huge distances in Indonesia, distance learning techniques are also being developed. Computer-based training is in the early stages of development. STAFF PRODUCTIVITY (Staff per 1000 malnilnes) eo -........._ 65 50 -" 45 __- 40- 30 196 196 197 198 19 1990 19 91 2.22 In addition to reforms already underway, TELKOM4 needs to make some strategic changes in its training program in order to move from the existing corporate culture embedded in civil service attitudes to one which is more business oriented. The main aim is to transform TELKOM staff into an efficient, educated, well-trained and motivated work force vhich will be able to run telecommunications as a commercially oriented, efficient enterprise. Success will depend uritically on instilling new attitudes and developing new ushills in all levels of management. This will be a long-run continuing process. Technical assistance provided under the project will support the training plan currently under formulation (para. 2.20). An early step in changing TELKOMI's corporate culture would be to recruit skilled personnel from - 13 - the private sector managers with proven management skills to some of its middle and senior management positions. During negotiations an understanding was reached that TELKOM will follow this approach and will incorporate this into its recruitment objectives. Audit 2.23 As for PERUMTEL, TELKOM's accounts are required by its charter to be audited by Government auditors. The audits are carried out following generally accepted accounting practices and standards. Although PERUMTEL's audit reports have been qualified in the past, special efforts made by PERUMTEL's management since 1988 have resulted not only in it receiving for the first time an unqualified opinion from the auditors for the 1989 accounts, but also in finalizing the unaudited accounts within three months of the fiscal year end. Audits for the 1990 accounts were also unqualified and were submitted to the Bank within nine months of the close of the fiscal year as per audit covenant under the Third Telecommunications Project. During negotiations, TELKOM confirmed that unaudited and audited corporate accounts for FY 1992 and thereafter will be submitted to the Bank within four months and six months, respectively, after close of the fiscal year. Billing and Collection 2.24 Computerized bills are currently prepared monthly and issued within ten days after the billing period. Overall collection performance is satisfactory with accounts receivable at the end of 1991 at 40 days of billing for the year. This performance has been mainly due to the good collection performance for private customers. The collection from government users, which was poor in the past, has improved with various progressive steps introduced in 1990 by TELKOM. The accounts receivable for government subscribers at the end of 1991 was about five months of billing. During negotiations an understanding was reached with TELKOM that to further improve accounts receivable from Government subscribers, TELKOM will continue taking actions to ensure that the amounts owed to TELKOM by all government users will not be overdue in the aggregate by more than two months of total billing to such users. Accountine Systems and Financial Management 2.25 To improve the timeliness of accounting data and preparation of financial management reports, a new chart of accounts was introduced in early 1989 in TELKOM's head office and all regional offices. A computerized general ledger program was implemented in head office and regional offices. These initiatives have helped immensely to prepare timely and accurate financial reports. Consequently, since 1989 annual financial accounts have been closed within three months of the close of the fiscal year as compared to seven months for 19d8 accounts. In addition to the benefits resulting from standardization of input data, the new chart of accounts allows preparation of accounts at the subregional level and facilitates budget monitoring and preparation of regional financial statements. - 14 . 2.26 Moreover, for TELKOM to effectively operate as a commercial entity, it needs to efficiently manage its financial assets and develop a strategy for securing and diversifying its financing sources. Internal cash management needs to be improved in order to reduce cash in transit and reduce non- interest bearing cash balances. In order to carry out these tasks, TELKOM's treasury function needs to be strengthened to enable it to assess the best financing techniques for its development, issues securities, manage its cash and liabilities and assess foreign exchange exposure, 2.27 With the planned decentralization, TELKOM needs to review and revise its accounting policies, systems and procedures. Areas that needs attention are (i) budget management, (ii) financial projection, (iii) cash-flow projection and (iv) cost accounting systems to reflect real costs. 2.28 Financial data have not been fully used by TELKOM's management as a tool for operational control due to the weaknesses in its internal financial systems, lack of adequate qualified finance staff both at the headquarters and regions and ability of management to understand financial information. The technical assistance component under the ongoing Third Telecommunications Project, through the provision of overseas fellowships and secondments to other telecommunications organizations for TELKOM managers and finance staff, is assisting TELKOM to upgrade the skills of the Finance Directorate and build TELKOM's management capacity to use financial data in the management of its operations. However, more needs to be done both in training and in improving the financial management systems and procedures. 2.29 During negotiations, agreement was reached to implement an action plan (para. 4.30) to continue to upgrade and strengthen TELKOM's accounting systems and procedures, and financial functions. The proposed project provides technical assistance to assist TELKOM in its efforts, especially to introduce a cost accounting system, upgrade the management accounting system and improve the treasury function, and provide funds for the necessary foreign training required and the software and hardware for computerization needs. An important task of the consultants to be employed under the project will also be to carry out a diagnostic study to identify the staffing needs and prepare the necessary training programs and provide training in their specific areas. Management Information System 2.30 Quality of information currently available to managers needs to be vastly improved. Existing reports are primarily financial and statistical, and virtually nothing has been done to provide information tailored to the needs of individual middle and senior executives. For example, no timely and accurate information is readily available on performance in handling service complaints or requests. The existing Personnel Information System (SIMPEG) cannot provide sufficient information on where employees work and what they do. This information is being provided by a parallel system, the Human Resource Model (HRM). TELKOM recognizes that there is a very great need for systems integration, and the provision of information which will allow managers to monitor business performance. Consultancy proposed under the project (para. 4.9(b)) would help TELKOM with an appropriate MIS system. - 15 - 2.31 Overall, TELKOM management is aware of the institutional shortcomings outlined here and they have significantly improved TELKOM's performance with the assistance of several donors, including the Bank, over the last three years. When completed by end 1996, the ongoing program, including the proposed project, will make a significant contribution towards alleviating the current service shortcomings and upgrading the quality of the domestic telecommun'cation services. A summary of key performance indicators to be achieved at the end of the project period is given in Table 2.1. Table 2.1: KEY PERFORMANCE INDICATORS Fiscal year ending December 31 1991 1996 1. Total Main Lines (millions) 1.2 3.2 2. Call completion rate - long distance direct dialing service 20X 42X 3. Staffing/1,000 main lines 32 16 4. Rate of Return on Net Fixed Assets 21X 291 5. Net Internal Cash Generation 41X 481 C. Sector DeveloRment Sector Objectives 2.32 The Government's policy for economic development emphasizes (a) maximizing export earnings by promoting the development of key support services to exporters, (b) expanding the opportunities for and the capacity of the private sector to participate in Indonesia's development, (c) increasing the efficiency of the public sector, and (d) promoting balanced national development by reducing the development imbalance between urban and rural areas and between Java and the rest of the country. A prerequisite for achieving these goals is the provision of reliable and efficient systems for the transmission and processing of information, which in turn requires an efficient countrywide telecommunications network. Therefore, the Government's objectives for the telecommunications sector are to: (i) increase access to modern and efficient telecommunications services in urban and rural areas, thereby contributing to growth and efficiency of the private sector and to the achievement of the Government's social and economic objectives; (ii) increase the commercial orientation and efficiency of the entities in the telecommunications sector; (iii) improve service quality and TELKOM's productivity through increased network automation, use of modern technologies, - 16 - improvement of organization and management, and increased staff training; and (iv) promote sound domestic construction, consulting aad, where economically feasible, manufacturing industries to support the telecommunications sector. Xev Sector Issues 2.33 To successfully meet these challenges the following key sector issues need to be addressed: (i) How can the massive investments, required to meet the needs of modern businesses as well as to improve access to service in both urban and rural areas be funded? (ii) How can Indonesia most effectively access best management and operational practices? (iii) How should competition policy be introduced? and (iv) What would be the most effuctive institutional framework to promote system efficiency and responsiveness? 2.34 Investment and Financing. TELKOM's 1992-1996 investment program (para. 4.1) is the maximum feasible given the financial resources and implementation capacity. However, it falls short of what is needed to meet outstanding applications for telephone lines, satisfy new demand forecast to arise in the period and initial investment for the following period. Traditional project financing from World Bank, Asian Development Bank and bilateral sources as well as TELKOM's internally generated funds will not be adequate to accelerate expansion and modernization to meet all demand by 2000. Hence, GOI/TELKOM need to actively consider complementary approaches to bring private sector capital into the sector (para. 2.38). 2.35 Management and Operational Practices: To provide needed operational autonomy and improved incentives for efficient and effective management, GOI in September 1991 converted PERUMTEL from PERUM to PERSERO (i.e. to a limited liability company). This was a very important milestone in the commercialization of the sector. With this conversion, the new company, PT. TELKOM has the mandate to adopt a commercial (business-oriented) approach and pursue private sector equity participation in accordance with the Presidential Decree No. 55. In a similar vein, in order to improve its institutional efficiency and effectiveness, TELKOM has recognized the need to decentralize operations and management from headquarters to the regional offices and concentrate strategic decision-making and planning, possibly under a holding company structure. This will enable TELKOM's regions to progressively develop into independent operating companies with little need for day-to-day support from headquarters. Such a structure would provide a basis for comparison of performance in terms of efficiency and service quality. Given the need for great improvements in performance, the ability to make such comparisons is likely to be of considerable value to TELKOM's management. In the longer term each of the regional operators may be authorized to enter into joint venture with reputed foreign operating companies to improve their performance and attract foreign capital. A key objective of the proposed project is to assist TELKOM to operate effectively and efficiently as a market-oriented company. Successful implementation of these massive organizational changes will require substantial technical assistance which will be supported by the proposed project (para. 4.9(a and b)). - 17 - 2.36 ComRetition and Private Sector Participation: TELKOM presently faces virtually no competition in the provision of telecommunications services and, therefore, has not been pressed to improve performance. The experience of other countries has confirmed the potential and power of competitive markets (Annex 8). Recognizing the merits of competition the GOI is keen on using competition as a key policy tool to promote efficiency and innovation. It has already introduced competition in the provision of terminal equipment,§./ telecommunication service retail shop (WARTEL) and non-basic services. GOI is now considering creating a second carrier, possibly with private equity participation of a reputed foreign telecommunications operator to provide competitive radio-based telecommunications services. There are several ways of designing and implementing the second carrier which should be reviewed. In response to GOI's request, the Bank is supporting through the Third Telecommunications Project analytical work to assess the role of the second carrier, and to prepara business plan. 2.37 There are many ways to increase private investment in the telecommunications sector, including authorizing increased (privately financed) competition, build/transfer (B/T) revenue-sharing schemes, issue of debt or equity securities by TELKOM to private investors, joint ventures with private investors or full privatization. At present there are significant hurdles to a full privatization. Because of constitutional, political and national security considerations, GOI has decided to keep TELKOM in the public sector. However, actions have already been taken in several of the other modalities. Both terminal equipment and non-basic services can be provided by the private sector in competition with TELKOM. Furthermore, revenue sharing agreements between TELKOM and private investors are in place for two cellular telephone systems, a VSAT services and three local telephone network expansion projects for about 450,000 lines. 2.38 TELKOM is actively pursuing additional sizeable infusions of private capital through consideration of the following: (a) issuing bonds; (b) requiring new subscribers to buy subscriber bonds; (c) joint ventures; and (d) large-scale revenue sharing (B/T) schemes. The B/T local network expansion projects referred to above have not been entirely successful and there are some doubts about the advisability of this kind of off-balance sheet financing. The best prospects for large-scale private investments in the sector leading to improved sector performance are believed to be joint ventures with highly credible foreign telephone companies. The merits of the different approaches to the mega-financing of TELKOM's investment program is to be the subject of a study and comparative analysis, financed by the Bank under the Technical Assistance Project for Public and Private provision of Infrastructure (Loan 3385-IND). 2.39 The proposed project would focus on strengthening TELKOM's organization and management with the central objective of improving its productivity and efficiency and of restructuring it into a holding company j/ Terminal equipment includes telephones, telex, facsimile, private automatic branch exchange (PABK). - 18 - with regional subsidiaries (para. 2.35). This would allow TELKOM to offer shares to the public and to form joint ventures with the participation of foreign carriers. But these reforms cannot take place in a regulatory vacuum and hence another objective of the proposed project is to develop Government's capabilit.y to efficiently manage the desired sector optimization process. This is crucial. Although the Telecommunications Law was amended in 1989 to allow private sector entry in the non-basic services areas, it has not attracted investors because of cumbersome licensing arrangements and other barriers for private sector entry, including availability of clear guidelines. 2.40 At this time, telecommunications policy consultants engaged under the Third Telecommunications Project are reviewing with the GOI the following measures to introduce limited competition and private sector participation: (a) Establishing TELKOM as a holding company with five subsidiaries: (i) Three regional companies in joint venture with foreign operating companies; (ii) A national long distance operating company, possibly also as a joint venture operation similar to the regional approach; and (iii) A cellular telephone company. (b) Establishing a new, majority Government-owned public telecommunications carrier (independent from TELKOH) authorized to: (i) operate all domestic satellite; and (ii) wireless based services in the local area including cellular; and (c) Ensuring that the provision of value added services and customer premises equipment are fully opened to the private sector. 2.41 During negotiations, agreement was reached with GOI that it will, by June 30, 1993, prepare and subsequently implement, a timebound action plan to address structural issues in the telecommunications sector, inter alia, aimed at promoting competition and participation of the private sector (para. 4.26 (a)). 2.42 Institutional Framework: As TELKOM takes on a more commercial orientation and competition is introduced, effective regulation needs to be put in place, in particular, to ensure that TELKOM does not abuse the monopoly market-power it derives from control of network facilities. Such a regulatory framework should comprehensively address, inter alia, the following issues; (a) which enterprises will be permitted to compete in which market segments and when; (b) how franchises and licenses (including for radio spectrum) will be awarded; and (c) the obligations of TELKOM and other carriers to provide services, and to inter-connect, and obligations with respect to quality of - 19 - services, tariffs, standards, protocols and interfaces, anti- competitive activities, monitoring and dispute resolution. 2.43 Telecommunications Users: Currently, there are no formal institutions that represent users' interest in the telecommunications sector. Development of this kind of association is an important part of the process of creating a constituency for effective regulation and of making TELKOM a user oriented commercial enterprise. One step towards user orientation was the creation by TELKOM of a Special Customer Service Group (CSG) (para. 2.15) to deal with corporate customers, to identify their needs and finds ways to meet them rapidly and efficiently. A program to further develop such an approach is part of the agreed Action Plan (para. 4.30). - 20 - III. THE BANK'S PAST EXPERIENCE AND ROLE Past Experience 3.1 Background: The proposed project constitutes a strategic progression in the Bank's support to help GOI and TELKOM's management to address sector constraints (para. 2.34). The Bank's association with the telecommunications sector in Indonesia started in 1971 with a credit of $12.8 million (Credit 210-IND). The main objectives of that project were to (a) transfer telecommunications operations from a government department to a separate operating entity, PERUMTEL; and (b) help put in place procedures and systems for PERUMTEL to manage its then small-scale operations, and to rehabilitate and expand the network. The physical component was completed successfully in 1976, but except for establishing PERUMTEL as a separate government owned corporation, no significant institutional progress was achieved as such a progress would require continued efforts through a series of well coordinated operations (para. 3.6). The project was to be followed by a second operation that was processed in 1973 but dropped after negotiations due to disagreement between the Bank and the GOI over (a) the issues related to GOI's decision to acquire a domestic telecommunication satellite; and (b) adjustments needed for telecommunications tariffs. Telecommunications in Indonesia were subsequently developed using domestic funds and with bilateral assistance from Belgium, France, Federal Republic of Germany, Japan, the Netherlands, Spain, Sweden, USA and some other donors. Although the many positive contributions by individual donor countries to capacity building in Indonesia should be recognized, sector performance fell short of requirements because, principally, of a lack of a consistent and coherent global strategy. 3.2 Technical Assistance Project (Loan 2757-IND): In 1984 dialogue was resumed and subsequently, the GOI requested renewed Bank assistance for the sector. The Bank responded with a technical assistance telecommunications project (Loan 2757-IND for $14.5 million, approved in October 1986) with the objectives of (a) improving PERUMTEL's planning and design of cable networks, procurement systems and practices, project implementation, and reporting and monitoring systems; (b) computerizing financial management information systems; and (c) increasing PERUMTEL's capability to formulate and review tariffs. The project closed on December 31, 1990 as scheduled and the project completion report (No. 10247) was completed in December 1991. 3.3 This TA project has achieved all its objectives. With the strategies developed for project implementation and procurement, PERUNTEL's capability has been enhanced to carry out an investment program of about US$600 million per year and connect over 300,000 new customers annually, which represents a fivefold increase in its implementation capability compared to the performance during the last five-year (1984-1989) development plan (Repelita IV). Furthermore, the introduction of the integrated system approach and competitive procurement systems introduced have not only resulted in significantly lowering unit network expansion costs but also ensured that new customers are promptly connected when facilities become available. Consequently, the previous problems of nonperforming assets and associated financial losses have been significantly reduced. By encouraging the - 21 - association of local consulting companies with foreign consultants, the project paved the way to establish a reasonable base for development of Indonesian telecommunication consulting firms to support the sector. Use of prequalification to select competent contractors and introduction of large scale single-responsibility contracting has promoted the association of domestic contractors with foreign companies that can provide project construction expertise and train local workers, thereby developing domestic construction capacity. Improvement in financial MIS is helping TELKOM management to use financial data in the efficient management of its operations and, more importantly to complete its audit reports in a timely manner (para. 2.23). With regard to the tariffs review, TELKOM has now a good basic capability to assess and develop tariffs. 3.4 Sector Studv. Before responding to GOI's request for Bank financing of PERUMTEL's on-going investment programs, the Bank conducted a detailed assessment of Indonesian's telecommunications sector, identifying policy options and analyzing investment priorities to provide a framework for technical assistance and advice to GOI on institutional aspects. The results were published in report No. 7842-INS, June 1990. The Sector Study assessed the need for policy, legislative, regulatory and further institutional reforms, and developed a package of actionable proposals involving sector management and policies, investment, procurement, financial and institutional development to enhance productivity and support the development of the sector. 3.5 Third Telecommunications Proiect. The review of this sector study with GOI led to an agreement between the GOI and the Bank to implement a series of measures to improve sector management and to expand PERUMTEL's network and services. The Third Telecommunications project was approved in March 1990 to implement these measures. The project is progressing satisfactorily and the Government has initiated a number of key sector reforms by: (a) allowing competition in the provision of value-added services, paging and customer premises equipment; (b) permitting the private sector entry under revenue sharing schemes with TELKOM; and (c) initiating studies to further strengthen GOI's capabilities to effectively manage the sector. However, given the rapid international changes in telecommunications sector organization and continued important technological developments (particularly the rapidly declining unit costs of digital electronics, radio and optical telecommunications systems), GOI recognizes the need for further reforms to achieve its more ambitious development objectives for the sector (para. 2.33). These objectives will be supported under the proposed Fourth Telecommunica- tions Project. Lecsons Learned 3.6 The lessons learned through Bank operations in the telecommunica- tions sector Indonesia, as reflected in PPAR No. 1646, dated June 22, 1977 and PCR No. 10247 of December 1991, and from experience in other developing countries are that: (a) when underpinned by comprehensive sector surveys, project interventions receive greater commitment by borrowers and donors and their implementation proceeds smoothly; (b) an integrated systems approach should be adopted to ensure that all project components are tightly coordinated; (c) financing plans should be firmed up prior to negotiations; - 22 - (d) objectives for institutional building should be pursued in a long-term horizon through repeater projects to achieve major results; (e) advance actions prior to Board presentation should be initiated by the implementing agency in respect of selecting consultants, prequalifying bidders, finalizing bid evaluation; and (f) project implementation units with adequate authority and competent staff should be established prior to project appraisal. These lessons have been incorporated in the design of the proposed project. Rationale for Bank Involvement 3.7 The Government recognizes the challenges to harness fully the benefits of advanced technology and modern operating practices to improve sector performance. Based on the success of past cooperation, GOI has requested the Bank to (i) assist in the design of its sector optimization program and in implementing it, (ii) make available to Indonesia the benefit of similar experience and best practices from other countries and (iii) to take the lead role in coordinating cofinancing from donors to ensure that future sector development proceeds in an integrated and cost-effective manner. 3.8 The Bank strategy is to engage user groups, GOI and TELKOM in a continuing dialogue to develop competition policies and reform programs that are consistent with Indonesia's economic and political conditions and with world market outlooks. To this end a seminar was held in December 1991 in Indonesia. It focused on international experience in using competition to accelerate telecom sector development and promote private sector participation as well as on developing appropriate regulatory mechanisms. This seminar will be followed up with a workshop in September 1992 to agree on modalities to implement the conclusions of the seminar and the findings of the sector restructuring options study to be completed by May 1992. The Fourth Telecom Project is expected to be used as a vehicle to operationalize the agreed actions (para. 2.41). - 23 - IV. THE PROGRAM AND THE PROJECT Telecommunications Investment Program 4.1 TELKOM's FY 92-96 investment program comprises the following: (a) ongoing works; (b) proposed Fourth Telecommunications Project; and (c) future works. The total investments under this program are estimated at Rp. 7,610 billion (US$3,820 million) with a foreign component of Rp. 3,772 billion (US$1,893 million). The investments under the different components of the program and annual investments in during FY92 to FY96, are given in Annex 9. 4.2 Ongoing works comprise of: (a) the Bank's Third Telecommunications Project and (b) other projects which are: (i) ADB's Telecommunications Project; (ii) local telephone network; and (iii) long distance microwave network, remote and rural area network projects supported by Germany, France, Japan, and Netherlands respectively. Progress on implementation of the ongoing works is satisfactory. Financing for ongoing works is secured and actions are underway to secure financing for the proposed project. The mission reviewed the composition of the investment program and the methodology for determining it and was satisfied that the program was justified to meet growing demand (para. 2.12) and for ensuring a balanced development of Indonesia's telecommunications facilities. Foreign exchange financing for future works is still to be arranged, but any delay in execution of those works will not affect the implementation or the viability of the proposed project. 4.3 To ensure satisfactory implementation of TELKOM's future investment program, of which the Bank project forms one part, both GOI and TELKON have agreed that: (a) on or before November 15 of each year, commencing on November 15, 1992, and thereafter until the completion of the Project, TELKOM will (i) prepare and furnish to the Bank, for its review and comments, its corporate plan, institutional development plans and investment program (including Revenue Sharing Arrangements) for the following fiscal year; and thereafter, taking 'nto account the Bank's comments, if any, carry out such plans and (ii) review and, if required, revise with prior concurrence of the Bank, the TELKOM Fiscal Years 1992-1996 Investment Program; (b) GOI will ensure that TELKOM will have access to adequate funds to finance the investments agreed with the Bank; and (c) TELKOM will, by November 15, 1993, prepare and furnish to the Bank its procurement practices and procedures to be followed for - 24 - procurement of goods and services required by TELKOM in the carrying out of its operations (except for goods and services financed from the Loan) and thereafter incorporate Bank's comments and adapt such guidelines to ensure least cost investments. Prolect Obiectives 4.4 The project has two main objectives: (a) to improve sector performance by promoting a regulatory regime conducive to competition in the provision of telecommunication services; and (b) to meet the growing demand for telecommunications services by enhancing the quality of TELKOH's service, effective utilization of existing facilities, increasing system efficiency and modernizing and expanding the networks. Proiect Description 4.5 The proposed project which will be partly financed by the Bank is a self-contained, balanced and integrated package of high priority works to support TELKOM's 1992-1996 investment program. Specific components of the project are outlined below. Full details of the project and the source of financing are given in Annex 10 and illustrated in Maps No. 23237 and 23404. The project includes the following components: (a) establishment of an environment for the functioning of competitive markets. This will include support for MTPT to develop effective, transparent regulatory processes, and to train XUPT staff; (b) strengthening the capacity of the MTPT to design, assess and implement a consistent set of sector policies including a review of telecommunications tariffs and planning for a second domestic telecommunications operator. (c) further institutional capacity building for TELKOM comprising: (i) a management and professional human resource development program using a cooperative program of academic training at foreign universities and working internships in selected fields at developed telecommunications entities; (ii) development and implementation of the ope.rational and managerial decentralization program; (iii) enhancement of TELKOM's capability in operational performance, project design, engineering, implementaticn and supervision; (iv) upgrading accounting and financial policies, systems and procedures and related computerization requirements; and (d) Support for TELKOM's 1992-1996 investment program in Java, Bali, Nusatenggara, Kalimantan and Sulawesi which would comprise: - 25 - (i) rehabilitation of existing switching equipment, local cable network, customer distribution network, interexchange network, including the provision of spare parts, modules, tools and test equipment to repair and refurbish them as well as software packages to improve operational efficiency and enhance traffic handling capacity; (ii) installation of switching equipment, associated customer distribution network and customer terminal equipment (including 20,000 pay phones) to connect about 600,000 new customer; (iii) installation of fiber optic cable and microwave transmission facilities to provide interexchange junction facilities in the Jabotabek area. (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 Kalimanten phase II to improve long distance direct-dialling service quality; (v) establishment of a modern network management system to improve network supervision and to improve traffic monitoring and management; and (vi) improvement of the directory enquiry system. Technical Assistance 4.6 The project provides for technical assistance to improve the operational performance of TELKOM as well as to ensure timely implementation of the physical components of the project. Technical assistance to be provided under the project builds on the foundations laid under Telecommunications Technical Assistance Project and the Third Telecommunications Project. These projects have progressed satisfactorily and have improved selected aspects of TELKOM's internal organization and management (paras. 3.2 to 3.5). Nevertheless, it will take several more years, with consultants focusing on intensive training efforts designed to reach all sectors and professional levels of TELKOM's staff, before TELKOM becomes a modern, efficient, well-run business. The following paragraphs provide the details of the technical assistance supported under the proposed project. (a) NTPT 4.7 The GOI's regulation of the sector has mainly operated through its ownership of TELKOM and Indosat, radio licensing, standard setting, ministerial control of tariff changes and BAPPENAS control of foreign exchange allocations to state-owned enterprises. Regulatory mechanisms for control of the sector are still in their infancy. As telecommunications technology continues to expand the diversity and reduce the costs of telecommunications services, some increasing levels of competition appears inevitable as well as - 26 - necessary for improved sector performance. In turn, this requires a much stronger policy and regulatory capacity in MTPT. In this context, the project will provide technical assistance to MTPT to: (a) build its capacity to develop and assess telecommunications policies, in particular with respect to network competition, strategy for the development of cellular and other wireless public telecommunications systems, microwave licensing and authorizations for other telecommunications facilities; (b) develop an agenda for regulatory activities, in part by assisting in the organization of one or more users' conferences and the preparation, if necessary, of public consultation documents; (c) assess, recommend and implement regulatory action on priority matters that will include issues associated with network interconnection, value-added service (including access to leased lines), customer premises equipment (including the pricing of cellular terminals), and radio licensing policy; (d) undertake a comprehensive analysis of TELKOM and Indosat tariffs with respect to costs, funds flow, demand factors, limited network capacity, international comparators and other relevant factors; assess and recommend an action plan to improve tariff structures for TELKOM and Indosat; and assess and recommend processes for periodic tariff rebalancing mechanisms; and (e) train selected MTPT staff. 4.8 Consultants are expected to be appointed by January 1, 1993. About 60 person-months will be required for thes,e tasks. (b) TELSOM 4.9 Technical assistance for TELKOM includes: ia) Given that TELKOM is still acutely short of skilled and capable staff, technical assistance is provided under the project for TELKOM to develop full in-house capabilities in all aspects of operations (through on-the-job training and teaming with consultants) so as to reduce gradually reliance on foreign expertise. The managerial development program will provide a total of 1,700 staff-months of training for about 60 middle and senior managers during 1993-1996. Two to three-year fellowships for MBA and MSC levels will use a combined program of academic training at foreign universities and working internships in selected fields at selected telecommunications entities. (b) The need for technical assistance to support TELKOM to implement successfully the decentralization program was discussed in (para. 2.20). Terms of reference, agreed with TELKOM are presented in Annex 11. The consultants are expected to be appointed by October 31, 1992. About 160 person-months will be required for the services; and - 27 - (c) The existing methods of manual monitoring and control of local and long distance networks in Indonesia are inadequate to exploit the full potential of the modern systems currently under installation. To address this situation TELKOM will establish Integrated Network Management Systems (IMS) for monitoring the performance of the local and long distance network and providing a real time surveillance and control over network components so as to minimize disruption to service during periods of traffic overloads or facility failures. Terms of reference agreed with TELKOM are presented in Annex 11. The consultants are expected to be appointed by October 31, 1992. About 100 person-months will be required for the services. (d) Technical assistance will be needed to further improve and strengthen the accounting systems and financial function (para. 2.29). A team of experts in cost accounting and management, and treasury management, will be employed under the proposed project to assist TELKOM in reviewing and recommending the necessary policies, systems and procedures as well as the appropriate organization setup to carryout these functions. The team will also be required to assist TELKOM in implementing their recommendations. An important task of the experts would be to carryout a diagnostic study to identify the staffing needs, preparing the necessary training programs and providing training. Terms of reference for the experts is attached in Annex 11. The consultants are expected to be appointed by October 31, 1992. About 96 person-months will be required for the services. (e) TELKOM has competent engineers to undertake the engineering design and prepare bid documents for the project. However, TELKOM's requirements for rehabilitation and expansion of the telecommunications facilities are large and growing quickly. Therefore, TELKOM's project management capabilities need to be supplemented by the provision of technical assistance to help it carry out these tasks. Some 400 expatriate and 500 local consultant staff-months of services will be provided through the implementation period. Consultant assistance would focus on (a) contract finalization; (b) postcontract engineering works; (c) coordination of implementation of different physical components of the project, and (d) physical project management. 4.10 During negotiations, assurances were obtained that GOI and TELKOM by November 15, 1992 would furnish to the Bank for review a detailed training program identifying the staff to be trained, areas of training, schedules and locations and that it will implement the approved training commencing September 1, 1993, and a timetable, satisfactory to the Bank, to appoint the above consultants was also discussed and agreed (para. 4.26(c)). Project Costs 4.11 The total cost of the project is estimated at Rp 2,449 billion (US$1,229 million equivalent), with a foreign component both direct and - 28 - indirect of Rp 1,607 billion (US$806.9 million equivalent). Detailed project costs are given in Annex 9 and summarized in Table 4.1. Table 4.1: ESTIMATED PROJECT COSIi BY ITEMS LOCAL FOREIGN TOTAL LOCAL FOREIGN TOTAL ------- (Rp MILLION) -- --- ------ (US$ MILLION) ------- 1. Switching Equipment 72.9 389.8 462.7 36.6 195.7 232.3 - Expansion 81.3 190.2 271.5 40.8 95.5 136.3 - Rehabilitation 2. Outside Plant Network (OPN) - Expansion 683.8 234.9 918.7 343.3 117.9 461.2 - Rehabilitation 35.9 19.5 55.4 18.0 9.8 27.8 3. Transmission - Expansion 31.2 207.0 238.2 15.7 103.9 119.6 - Rehabilitation 27.4 72.7 100.1 13.8 36.5 50.3 4. Junction Network - Expansion 16.7 51.2 67.9 8.4 25.7 34.1 5. Computer Support System 11.4 69.7 81.1 5.7 35.0 40.7 6. Spare Parts, Tools & Test Equipment 12.2 33.9 46.0 6.1 17.C 23.1 7. Technical Assistance (i) Capacity building - HTPT 1.3 2.4 3.7 0.6 1.2 1.8 - TELKOM 1.0 6.0 7.0 0.5 3.0 3.5 (ii) Training - MTPT 0.4 1.6 2.0 0.2 0.8 1.0 - TELKOM 1.2 3.0 4.2 0.6 1.5 2.1 (iii) Project Implementation Support 5.1 15.5 20.6 2.5 7.8 10.3 Total Bass Cost 981.7 1.297.4 2,279.1 492.8 651.3 1,144.1 ContingenCieS Physical 49.1 28.3 77.4 24.6 14.2 38.8 Price 77.4 14.7 92.1 38.6 7.4 46.2 Total Project Cost LA 1,108.2 1.340.4 2.44.86 556.2 67Z.9 1J229.1 Interest during construction Lk 152.0 94.8 246.8 76.3 47.6 123.9 Total FinancinR Reauired 1.260.2 1.435.2 2.695.4 632.5 720.5 1,353.0 LI TELKOM is exempted from duties and taxes on imported items. Local costs include VAT and other taxes estimated to be about $111.8 million equivalent. /b Interest during construction is calculated by applying the interest rates of 7.731 on Bank, 3.5 on USA (Exim Bank), Netherlands (ABN-Amre Bank) and Spanish. 2.5X on Japanese; 7S average on XSW; and 5.4Z average on French loans, plus the spread applicable to the onlending of each loan to TELKDM, to the average amount expected to be outstanding in each year of construction and by adding commitment fees on the average undrawn amount of the loans. - 29 - 4.12 The project cost estimate was prepared by TELKOM with the assistance of consultants. The estimates have been prepared on the basis of contracts of goods and works with a detailed breakdown into quantities and rates where applicable, and based on price quotations recently obtained by TELKOM for similar works in Indonesia and experience in other countries. For technical assistance, average staff-month rates for similar assignments in Indonesia and other developing countries have been used. Except for a value added tax of ten percent of total cost, the cost estimates are net of duties and taxes for imported items since TELKOM is exempt from them. 4.13 C2ntinge_ncie. Base prices are at December 1991 levels. Physical contingencies Pre based on 5 percent for equipment, 10 percent for services and civil works. Price contingencies for foreign costs are based on projected increases of 3.7 percent p.a. in 1992, and each year thereafter. Price contingencies for local costs are based on projected price increases of 6.0 percent in 1992, and each year thereafter. Project Financino and Terms 4.14 The foreign costs of the project are expected to be financed on a parallel basis by the Bank, France (Government and Credit Lyonnais), Federal Republic of Germany (KfW), Japan (Sumitomo Corporation and OECF), Netherlands (ABN-Amro Bank), Spain and USA (Exim Bank) as detailed in Table 4.2. Table 4.2: PROJECT FINANCING PLAN LOCAL FOREIGN TOTAL X - US$ MILLION---------- OF TOTAL TELKOM COMPONENT Bank - IBRD 134.0 241.0 375.0 28.2 FRG (KfW) - 71.0 71.0 5.0 France/Credit Lyonnais - 52.0 52.0 4.0 Japan (Sumitomo Corp./OECF) - 100.0 100.0 7.0 Netherlands (ABN-Amro Bank) - 84.0 84.0 6.0 Spain - 50.0 50.0 3.7 USA (Exim Bank) - 75.0 75.0 6.0 TELKOM 497.4 47.5 544.9 40.0 GOI 1.1 - 1.1 0.; Total 632.5 720.5 1.353.0 100.0 4.15 The Bank would partially finance outs'de plant and microwave system in Kalimantan and fully finance technical assistance (which includes consultancy and training). In addition, the Bank would partially finance the computer systems for operations and fully finance, tools, test equipment and - 30 - spares to effectively use the existing facilities. The loan of US$71.0 million equivalent from FRG (KFW) will finance 139,50C line units of switching equipment and remote area transmission equipment. The US$52.0 million equivalent loan from France and credit Lyonnais will finance the cost of (i) the backbone transmission system in Bali and East Nusatenggara (US$24.5 million); (ii) Trans-Sulawesi microwave system Phase II (US$10.0 million); and (iii) expansion of Java-Bali digital microwave transmission systems (US$17.5 million). The loan of US$100.0 million equivalent from Japan ($71.5 million from Sumitomo Corporation and $28.5 million from OECF) will finance 267,000 line units of switching equipment mainly for exchanges outside Jakarta and the optical fibre transmission network to carry the interexchange traffic in the Jabotabek area. Funding from ABN-AMRO Bank, Netherlands (US$84.0 million equivalent) and Exim Bank, USA (US$60.0 million), already effective, and Spain (US$50.0 million) will finance 339,000 line units of the switching equipment for local and tandem exchanges mainly in Jakarta and Surabaya. In addition, funding from Exim Bank, USA (US$15.0 million), already effective will finance computerized network management systems. During negotiations, assurances were obtained from the Government that it will obtain not later than January 31, 1993 the foreign exchange financing from Germany and Spain and not later than June 30, 1993 from France or other sources on reasonable terms to complete the project in accordance with the implementation program. 4.16 The proposed Bank loan would finance 46% of the foreign cost of the project (28% of the total financing requirement). The Bank loan would be provided to the GOI for 20 years, including a grace period of 5 years, and US$373 million of the proposed Bank loan will be on-lent to TELKOM under a subsidiary loan agreement (SLA) agreed during negotiations. The signing of the SLA is a condition of loan effectiveness. The on-lending will be at a variable interest rate pegged to Bank Indonesia's (BI) three-month domestic money market certificate (Sertifikat Bank Indonesia -- SBI) plus one percent. The rate would be adjusted on January 1 and July 1 of each year, commencing on July 1, 1992, and calculated based on the average of SBI three-month maturity quotations during the preceding six months; provided, however, that the interest on the Subsidiary Loan for the period from the date of the Subsidiary Loan Agreement through December 31, 1992, shall be determined on the basis of the average of the per annum interest rate of SBI three-month maturity quotations during the six months preceding July 1, 1992; provided further that on July 1 of each year commencing on July 1, 1993, the Government and the Bank shall review the above-mentioned basis for determining that the on-lending interest rate under the Subsidiary Loan Agreement reflects the commercial cost of borrowing to TELKOM. The government would bear the foreign exchange risk. Procurement 4.17 Goods and Works. All goods and works to be funded under the Bank loan will be procured by international competitive bidding (ICB) in accordance with Bank procurement guidelines, except for items totalling US$17 million covering spares, software, rehabilitation of existing equipment, test equipment and tools will be procured by limited international bidding on the basis of evaluation and comparison of bids obtained from suppliers of eauipment currently operating in TELKOM's network. - 31 - 4.1t A total of nine contracts proposed for Bank financing is indicated in the procurement schedule in Annex 12. In the procurement of equipment under ICB, domestic manufacturers would be eligible for a preference in bid evaluation of either 15 percent or the import duty whichever is lower. All bidding packages for contracts estimated to cost over US$1,000,000 equivalent for goods and all consultancy services and fellowship contracts financed by the Bank loan would be subject to the Bank's prior reviews. This will cover over 95 percent of total value of the Bank-financed contracts. Procurement of goods and services financed by co-financiers would be in accordance to co- financiers' procurement guidelines. All goods and services to be procured with TELECOM's own internal resources will be through lcc-al competitive bidding following the government regulations which are satisfactory to the Bank. 4.19 Technical Assistance and Consultancy. Selection of consultants and training services which will be following Bank guidelines are: (a) management training, $3.5 million (para. 4.7 (e) and 4.9 (a)) which will be arranged through direct negotiations with internationally recognized entities in accordance with terms of reference satisfactory to the Bank. (b) selection of consultants for all assignments will be from a short list of at least three firms or experts for each assignment agreed by the Bank and under terms of reference satisfactory to the Bank. - 32 - Table 4.3: PROCUREMENT ARRANGEMENTS ------------------ US$ million La -------------- ICB Other /b NBF Total Switching Equipment - 368.3 /c 368.3 Outside Plant Network 566.6 - - 566.6 (308.3) (308.3) Telecommunications 12.0 23.0 192.0 /c 227.0 Equipment (10.0) (17.0) (27.0) Computer Systems 26.2 - 14.8 /c 41.0 (20.2) (20.2) Technical Assistance - 26.2 - 26.2 (19.5) (19.5) Total 604.8 49.2 575.1 1.229.1 (338.5) (36.5) (-) (375.0) ,'a Includes contingencies. Numbers in parentheses represents the amounts to be financed by the proposed Bank loan. Lk For equipment, Limited International Bidding and, for consultants, in accordance with Bank guidelines on the use of consultants. _c (N.B.F.) Non-Bank Financed items following procedures of the cofinanciers. 4.20 Advance Procurement Action. To ensure timely project implementation, TELKOM has initiated advance procurement actions to: (a) issue request for proposals for consultants for (i) construction supervision of project works, and (ii) construction management, design and planning future development works; (b) announce bids for outside plant works, Phase I; and (c) prequalify contractors for outside plant work, Phase II. Disbursements 4.21 Disbursements from the proceeds of the proposed loan would be as follows: (a) 100X of foreign expenditures (CIF) of directly imported goods, 100X of local expenditures (ex-factory costs) of locally manufactured goods, and 65X of local expenditures for other locally procured items; and (b) 100X of expenditures for consultants and training. - 33 - 4.22 Table 4.4 shows the category of items to be financed out of the proceeds of the loan, the allocation of the amounts of the loan to each category and the percentage of expenditure for items to be financed in each category. No disbursements will be made for expenditures incurred prior to the loan signing. Withdrawal applications will be aggregated in amounts of US$100,000 equivalent or more, prior to its submission to the Bank. Annex 13 gives the disbursement schedule for the proposed loan. Disbursements under this loan, like the Loan for the Third Telecommunications Project, is expected to be faster than the average Bank profile in Indonesia because of advance procurement arrangements initiated for major components of the project (para. 4.20). Although physical construction of the project would be completed by end 1996, the implementation of all aspects would be completed by December 31, 1997. The closing date of the Bank loan would be December 31, 1998. 4.23 SRecial Account. In order to facilitate disbursements, a special account for MTPT will be opened in Bank Indonesia by the Ministry of Finance. The accounts would be maintained in US dollars and an initial deposit of US$300,000 (equivalent to four months estimated average eligible expenditures) would be made to this account to finance expenditures under category 4(a) and 5(a) (Table 4.4). However, all consultant contracts and fellowship programs will be subject to prior review by the Bank in accordance with Bank procurement guidelines (para. 4.19). Implementation 4.24 Contracting for packages of outside plant for the proposed project will be on a single-responsibility basis as followed in the Third Telecommunications project. In view of its total magnitude, the volume of outside plant construction has been divided into three packages to be implemented in two phases. Bids for construction of Phase I, including subscriber connections, cleared by the Bank in August 1991, was announced in October 1991 to the 15 prequalified contractors. Phase II will be tendered by July 1992 to prequalified companies to be selected by June 1992, following Bank guidelines. Other components of the project, namely, switching equipment, and microwave radio systems will be installed by the respective contractors in accordance with the implementation schedule (para. 4.27). 4.25 Project ImRlementation Unit. To ensure effective project management, track emerging issues and address them in a timely way, TELKOM has established a project implementation unit (PIU) for the proposed project headed by a Project Director, with overall responsibility for project implementation, reporting to the Board of Director. The unit head and key staff members have already been appointed. The PIU will be given adequate financial and administrative autonomy to enable it to discharge its responsibilities effectively, have its own accounting, procurement, transport, land acquisition, administrative and technical sections, and keep separate and distinct project accounts for the Bank project as a whole as well as its individual components. The critical path method will be used to coordinate implementation of the project in order to minimize the level of non-performing - 34 - Table 4.4: DISBURSEMENT OF PROPOSED LOAN Amount of the loan allocated (expressed in US X of expenditures Category dollar equivalent) to be financed (1) Outside plant 289.8 100% of foreign expenditures, 100% of local expenditures (ex- factory cost) 65% of local expenditures for items procured locally. (2) Telecommunications 27.0 100% of foreign equipment, materials, expenditures, 100% of and software excluding local expenditures (ex- switching equipment factory cost) and 65% of local expenditures for items procured locally (3) Computer systems, 20.2 100% of foreign including service expenditures, 100% of arrangements local expenditures (ex- factory cost) and 65% of local expenditures for items procured locally (4) Consultancy (a) MTPT 2.0 100% (b) TELKOM 14.0 100% (5) Training (a) MTPT 1.0 100% (b) TELKOM 2.5 (6) Unallocated 18.5 Total 375.0 The term "Outside Plant" means the supply, delivery, installation and commis- sioning and supervision of local telephone network, pulse code modulation cable, optical fiber cable, transmission equipment (inclusive of microwave equipment), subscriber connections (inclusive of house-wiring and telephone set), and associated infrastructure. - 35 - investment. Bank-financed technical assistance (para. 4.9(e)) is provided to assist the PIU in project implementation and supervision of the OSP construction component. Based on experience gained in the implementation of the ongoing third project, plans for decentralizing some of the functions of this unit to the regions and the optimal set-up for undertaking investments on a regional basis will be explored during the supervision of the project. 4.26 During negotiations, assurances were obtained from the GOI and TELKOM that: (a) GOI by June 30, 1993 will develop and review with the Bank a timebound action plan to address the sector policy issues, promote competition and further strengthen regulatory capabilities and thereafter implement the recommendations agreed with the Bank (para. 2.41). (b) TELKOM, based on final contracts to be concluded by October 31, 1992 for major project components will prepare, by the critical path method, and furnish to the Bank, by December 31, 1992, a master plan for the implementation of the project for each of the eight regions (para. 4.5(d)), satisfactory to the Bank, which would include actions assigned to relevant government agencies and TELKOM management; and thereafter implement the said plan as approved by the Bank. (c) TELKOM will appoint consultants in accordance with the agreed timetable (para. 4.9) under terms and conditions satisfactory to the Bank to assist in the implementation of items a, b, c and d(v) (para. 4.5) of the proiect. (d) the Government and TELKOM will take all actions, including allocation of necessary financial and administrative powers, essential to enable the PIU to maintain the project implementation schedule (para. 4.25); (e) TELKOM will maintain the PIU staffed with competent staff until project completion (para. 4.25); and 4.27 Implementation Schedule. Annex 14 shows the project implementation schedule. It takes into account TELKOM's current limitations and, subject to agreements in para. 4.26 is realistic. The project is expected to be implemented fully by December 31, 1997. 4.28 Site Acquisition. In view of the difficulties experienced in the past wich the acquisition of sites for housing network facilities and rights of way fir the cab'le routes, advance action were initiated for this project. As a result TELKOM has acquired all the 87 building sites required for the project. - 36 - Performance Monitoring 4.29 Performance indicators to monitor TELKOM's implementation of the physical components of the investment program, the quality of service and the financial performance are given in Annex 15. During negotiations, the proposed performance targets for the years 1992 and 1993 were discussed and agreed with TELKOM; further, assurances were obtained from TELKOM that the indicative targets for the years 1994, 1995, 1996 and 1997 (shown in Annex 15) will be reviewed and specific targets for each year agreed by them with the Bank by November 15 of the preceding year. 4.30 An action plan (Annex 16) to monitor TELKOM's implementation of the institutional strengthening components of the project were also discussed and agreed during negotiations. These components include measures to improve TELKOM's performance in respect of (a) accounting and financial management; (b) operations; (c) human resource development; and (d) training of staff and managers in management techniques and new technology. Proiect.ReRortine. Accounts and Audits 4.31 The PIU will be required to prepare and submit a quarterly report in an agreed format to the Bank on the status of the project. This report will be the main instrument for monitoring project accomplishments and will include the proposed pipeline of sub-projects, and implementation status of contracted sub-projects. The PIU will maintain separate project accounts in a form satisfactory to the Bank for annual audits. These accounts, including the Special Account and SOEs will be wudited annually by independent auditors acceptable to the Bank and will include opinions on all expenditures including those made against SOEs. In the case of SOEs, the audit report should contain a separate opinion by said auditors as to whether the statements of expenditure submitted during such fiscal year, together with the procedures and internal controls involved in their preparation, can be relied upon to support the related withdrawals. The PIU will submit the audited accounts to the Bank no later than six months after the close of each fiscal year to which they relate commencing calendar year 1992. Supervision Plan 4.32 Supervision of this project will focus upon a nvAbet of sector optimization and institutional development activities. These measures will include: (a) continuing the ongoing dialogue with GOI to implement appropriate sector modernization and optimization to improve sector performance and human resource development; (b) initiate discussion on efficient usage of telephones through tariff rebalancing; (c) improving access to telephone service through increased use of public pay phones and telecommunication service retail shops; (d) improving emphasis on servicing corporate customers through strengthened Customer Service Groups. Based on past experience, front-end loading of supervision resources, particularly during the first two years of project implementation, is necessary to resolve basic physical implementation issues. Three missions annually for two years, then two missions per year for the remainder of the project are foreseen as - 37 - adequate supervision for this project. The total estimated staff inputs are (a) telecommunications regulation and policy specialist; (b) telecommunica- tions engineer; (c) financial analyst; (d) organization and human resource specialist; and (c) an MIS expert. A total of 80 staff weeks effort will be required for effective supervision of this project. Environment and Health Aspects 4.33 The proposed project will have no adverse environmental impact or health impacts. Indeed, the net effect of the project is expected to be positive on both counts since it will result in a substitution of environmentally benign communications for environmentally damaging transportation. In addition, it will improve marginally the delivery of health services through better communications between health units and with the population. However, given the volume of civil works related to the installing of underground cables, there is likely to be some disruption to vehicular traffic and pedestrians. This will be minimized by (a) planning and phasing of construction works; and (b) including in construction contracts clauses which require contractors to maintain vehicular and pedestrian flows. No resettlement issues are expected. - 38 - V. FINANCIAL ANALYSIS PERUMTEL's Historical Financial Performance 5.1 PERUMTEL's audited and unaudited financial statements and performance indicators for FY86-91 are provided in Annex 17. As shown by the indicators in Table 5.1, PERUMTEL's financial performance over FY86-91 period remained satisfactory. Table 5. 1: KEY HISTORICAL FINANCIAL PERFORMANCE INDICAICRS Fiscal Year Ending December 31 1986 1987 1988 1989 1990 1991 /a Profitability: (Rp Billion) Operating Revenue a 614.2 724.0 799.4 929.4 1,292.8 1,737.5 Less: Operating Expenses /c 495.2 691.4 641.0 780.7 1,129.5 1,361.8 Not Operating Income 119.0 32.6 158.5 148.7 163.2 375.8 Net Profit 134.2 83.5 111.7 103.4 129.5 187.0 Financial Ratios: Operating Ratio 81X 951 801 84Z 87X 78X Return on Assets (Av. NFA) 26% 5X 181 151 12X 211 Return on Av. Equity 27S 13S llX 131 14X 21X Current (Rp'000) Telephone Revenue/Av. Main Line 836 893 896 958 1,108 1,341 Cash Op Costs/Av. Main Line Ld 560 526 460 506 631 675 Constant '90 Prices (Rp '000) Telephone Revenue/Av. Main Line 1,215 1,158 1,064 1,035 1,108 1,289 Cash Op Costs/Av. Main Line Id 813 682 546 546 631 649 Net Internal Cash Generation as Z of Av. 2 year Investments 41S 50X 52Z 46Z 281 411 Debt Service Coverage 3.4 4.8 4.6 3.8 2.1 2.3 Current Ratio 3.2 3.9 2.7 1.7 1.5 1.7 Account Receivable (Days) 76 64 66 57 45 40 Debt/(Debt Equity) 462 39S 432 432 462 542 La Although PERUMTEL was converted to TELKQM on September 23, 1991, the financial statements are for PERUMTEL for the whole fiscal year. /b Tariffs were increased substantially effective October 1990. /c Depreciation method used changed in 1987 from straight line to double declining. /d Salaries were increased by an average of about 952 and 262 in 1990 and 1991. respectively. 5.2 Growth in the number of main lines, traffic growth in international and domestic, improved revenue settlement on international traffic with INDOSAT and substantial improvement in labor productivity from 57 employees per 1,000 main lines in 1986 to 32 in 1991 contributed to PERUMTEL remaining profitable during the 1986 to 1991 period. With the increase in tariff in October 1990 (para. 6.3), PERUMTEL's financial performance improved in 1991. The rate of return on net fixed assets in operation, valued on the basis of historical costs, increased from about 12X in 1990 to about 21X in 1991. - 39 - 5.3 Except for 1990, PERUMTEL's net internal cash generation after debt service and mandatory contributions as a percentage of average two year (current and next year) investments have been higher than 40 percent. Most of PERUMTEL's internal funds for investments are provided from deferred income from installation fees, accelerated depreciation and other noncash expenditures. Retained earnings contributed relatively little to investment needs as dividend payments and other allocations of its net profit allow PERUMTEL to retain only 16 percent of pre-tax income. PERUMTEL has been a net contributor to the Government treasury through (i) corporate income tax, (ii) value added taxes on subscriber bills and PERUMTEL's procurement, and (iii) dividend payment. In 1990, the net contribution from PERUNTEL to the Government was about Rp 166 billion. With the change of corporate status, the level of TELKOM's annual dividend payment and allocation of its profit each year are decided by the Shareholder on an annual basis based on TELKOM's performance and funding needs. 5.4 PERUMTEL's financial position remained sound and liquidity position was satisfactory during the FY86-91 period. The debt equity ratio remained below 60:40 and current ratio was 1.5 or higher. TELKON's ORening Balance Sheet 5.5 TELKOM's opening balance sheet as of September 24, 1991 is summarized in Table 5.2. As per Minister of Finance's Decree dated September 23, 1991, the authorized capital for TELKOM is Rp 10 trillion. The paid-in capital is Rp 2 trillion. TELKOM's financial position and liquidity are satisfactory. 40 - Table 5,2: TELKOM'S OPENING BALANCE SHEET AS OF SEPTEMBER 24, 1991 (Rp Billion) ASSETS Cash and Bank 4« 588.7 Other Current Assets 647.5 Total Current Assets 1,236.2 Net Fixed Assets 1,902.0 Work in Progress 874.7 Other Assets 498.4 Total Assets 4,511.3 LIABILITIES Current Liabilities 877.8 Other Liabilities 182.4 Long-term Debt 1,451.1 Equity 2.000.0 Total Liabilities and Equity 4,511.3 Current Ratio 1.4 Debt:Equity Ratio 42:58 La Includes short-term investments. TELKON's Prolected Financial Performance 5.6 TELKOM's financial statements are projected on the basis of assumptions in Annex 19. These projected financial statements and the financial performance indicators for the period 1992 to 1996 are provided in Annex 18 and 15, respectively, and key financial performance indicators are summarized in Table 5.3. Financial projections are based on the network growth and productivity improvements to be achieved under the Project which are: (a) number of lines to increase from 1.2 million in 1991 to 3.2 million by 1996; (b) annual growth in domestic and international traffic of 10 and 20X, respectively; and (c) improved labor productivity from 32 employees per 1,000 main line in 1991 to 16 by 1996. Domestic inflation rates of 6X per annum were assumed during the period. - 41 - Table 5.3: TELKOMIS KEY PROJECTED FINANCIAL PERFORnANCE INDICATORS Fiscal Year Ending December 31 1992 1993 1994 1995 1996 ----------------- Forecast --------------- Profitability: (Rp. Billion) Operating Revenue 2,179 2,543 3,114 3,664 4,303 Operating Expenses 1,669 ',909 2,276 2,728 3,190 Net Operating Income 510 634 838 936 1,113 Net Profit 224 280 395 433 502 Financial Ratios: Operating Ratio 771 751 731 741 74X Return on Net Fixed Assets 24X 26X 28X 28 29X Current (Rp'000) Telephone Revenue/Av Main Line 1,405 1,347 1,373 1,354 1,354 Cash Op Costs/Avg Main Line 644 640 641 651 653 Constant '91 Prices (Rp'000) Telephone Revenue/Av Main Line 1,325 1,198 1,152 1,072 1,005 Cash Op Costs/Avg Main Line 607 570 538 515 488 Net Internal Cash Generation as X of Av 2 Year Investments 431 431 42X 471 481 Debt Service Coverage 2.9 2.9 3.3 3.4 3.2 Current Ratio 1.7 1.7 1.8 1.9 2.0 Long Term Debt / Total Capital 52X 571 59X 601 601 5.7 Based on the overall productivity improvements (para. 5.6), TELKOM is projected to achieve adequate financial returns, meets its self financing target of generating internally a minimum of 40% of its annual financing needs and maintain its debt equity ratio within the government authorized limit of 60:40 until the end of 1993. However, subject to a tariff review to be carried out before the end of 1993 (para. 4.7(d)), it is anticipated that domestic tariffs will need to be increased by about 12X effective January 1, 1994 and maintained in real terms each year zhereafter, to enable TELKOM to continue to meet its self-financing target and maintain its debt equity ratio within the governments' requirement until the end of 1996. With these adjustments in tariff, net profit is expected to increase from about Rp 187 billion in 1991 to about Rp 502 billion by 1996 resulting in an increase in rate of return on net fixed assets in operation from about 21X in 1991 to about 29% in 1996. During the forecast period, the liquidity position is expected to remain satisfactory with current ratio of at least 1.7. 5.8 With the proposed major network expansion, TELKOM's ability to generate adequate cash flows to finance its investment program, to maintain a sound financial position and to meet debt service obligations in future years are the most crucial issues. During negotiations, agreement was reached with the Government and TELKOM that all necessary measures (including tariff increases) to achieve the agreed performance targets (para. 4.29) will be taken to ensure that TELKOM achieves a debt service coverage of at least 1.5 for each year and generate net internal cash after debt service, working capital needs, and dividend payments and contributions, of a minimum of 40 - 42 - percent of the annual average of the current and next year's investment in any one year. TELKOM's Proiected Financing Plan 5.9 A summary of TELKOM's sources and applications of funds statement during the period 1992 to 1996 is summarized in Table 5.4. TELKOM is expected to self finance about 47Z of its investment program and interest during construction needs during the period. The foreign loans and domestic borrowing will finance about 53X of TELKOM's total financing needs. Domestic sources of funds will include bank loans and from 1993 onwards, issue of bonds. Local consultants financed by TELKOM are assisting it to prepare for issuance of local bonds. Table 5.4: FORECASTED SOURCES AND APPLICATIONS OF FUNDS (1992-96) Rupiah Billion X Of Total Sources Internal Cash Generation 8,013.5 Less: Total Transfers 683.5 Less: Debt Service 2,547.4 Less: Change in Working Capital 811.3 Net Internal Cash Generation 3,971.3 47X Loans 4151.93 Total Sources 8,483.2 100l Applications: Capital Investment 7,609.6 90X Interest During Construction 873.6 lOX Total Applications 8,483.2 100l - 43 - VI. ECONOMIC ANALYSIS Least-Cost Solution 6.1 The technical means to achieve the FY92-96 service development objectives are to a large extent determined by the characteristics of the existing systems and decisions taken in connection with the third project. Within these limits, the solutions chosen are likely to result in the lowest costs regarding both initial investment and total cost over the life of new facilities. In particular, the adoption of modern technology for the proposed project, electronic digital technology for telephone switching and associated remote subscriber units, optical fibre and digital microwave systems for the interexchange network will result in considerable reduction of installation and maintenance costs and switching center space requirements. Tariffs 6.2 Tariff Policies. Tariff policies for telecommunications services need to respond to several goals. Thus, in order to contribute to economic efficiency, tariffs should reflect costs and, where unmet demand exists, also serve to ration scarce capacity. In addition, tariffs must be adequate to permit the operating entity to achieve satisfactory financial returns (including target levels of investment program self-financing). Finally, tariffs should take account of demand factors and be seen as reasonably fair by the public. In Indonesia, periodic tariff changes have reflected these goals. (An approach to establishing a systematic mechanism for reviewing and implementing tariff changes is discussed in para. 6.5). 6.3 Tariff Levels. TELKOM's tariffs are shown in Annex 20. An international comparison of TELKOM's tariff levels, shown in Figure 6.1, suggest that they are at reasonable levels. TELKOM's tariffs were last increased in October 1990 by a revenue-weighted average of about 25%. These tariff increases, as well as important productivity improvements being made by TELKOM, mean that the entity is projected to achieve adequate financial returns and generate internally a minimum of 40% of its annual financing needs until the end of 1993. Nevertheless, it is anticipated that tariff increases (that are less than the cumulative amount of inflation since the previous tariff change) will be required during 1994 (para. 5.7). This project will support a tariff analysis, leading to revised tariffs, as part of the support of the institutional development of MTPT (para. 4.6). Figure 6.1: International Comparison of TELKOM's Tariffs (1989. US$) US$ 1000 800 600 400 -~ 200- 0 U.S. U.K. Australia New Zealand Indonesia =-Annual Service Price ED Usage Charges Sources: OECD, IBRD. Booz-Allen Analysis 1. Anmd price of evies Is urmd entd chwrgo p- 20% eonnection dwargs or reudentid users. 2. UW chre are based on en aerage usge baket for residentil uswer. 3. Pdo or Indoenn r the current (1992) chug.. in Jakawt IPT TELKOM's mnaor mafket). 4. Pde h other oountdes wil hve Increed by approxmtly S-1S% over the perod 1989-1992. f 4 - 45 - 6.4 Tariff Structure. The last (October 1990) tariff revision was not an across the board increase, but made some important improvements to the structure of the tariff. TeleRhone installation charges were increased by between 100% - 180% in different regions and are currently the equivalent of approximately US$500 in the Jakarta area. This high level is warranted to ration the scarce supply of new telephone lines. TeleDhone service monthly rental charges were also substantially increased, by about 300%, and are now the equivalent of US$5 per month in Jakarta. Telephone usage charges were also increased. Local call charges were increased by 33%, with the price of a three minute local call set at US 5 cents. Charges for lonZ-distance calls were increased by smaller percentages and, for calls over 1000 km., charges were reduced by about 10%. The next tariff review is expected to find that continued rate rebalancing is desirable. Thus, monthly rental charges should be increased, so that even low usage subscribers will cover the incremental costs of network access service. It may be advisable to further increase local call charges to moderate demand and, therefore, alleviate network congestion. And to the extent permitted by network capacity and financial targets, charges for long distance service and leased lines should be increased in 1994 by less than the rate of inflation. 6.5 Tariff Review Mechanism. Adequate and timely adjustments of tariffs are important to ensure TELKOM's continued financial viability. At present in Indonesia, there is no systematic mechanism for implementing telecommunica- tions tariff changes, suC'& as rate of return regulation or price caps. Thus, from time to time, as financial projections and investment programs are reviewed, TELKOM has approached the government with tariff increase proposals. Although this situation is not uncommon in countries where governments own the main telecommunications operator, it tends to unduly politicize tariff increases and, in many countries, has led to underinvestment in the sector. Consultants currently ongaged by MTPT (under the Third Telecommunications Project) are reviewing options for systematizing the government's authoriza- tion of TELKOM tariff changes. Furthermore, as already specified under the third project, it was agreed for this project that TELKOM will be required to furnish to the Bank by November 15 of each year, for review and comment, tariff reviews and subsequently, taking into account the Bank's comments (if any), furnish to the government for consideration proposed tariff changes. Benefits 6.6 The project will make a substantial contribution to improvements in the productivity of TELKOM. In addition, the project will make a major contribution to increasing the rate of average annual growth rate of connected main lines from about 10% p.a. to about 20% p.a. during the 1992 to 1996 period, thereby increasing the penetration rate from 0.68 per 100 population to 1.7 per 100 by 1996. Given the limited institutional capacity of TELKOM and the high demand for telecommunications services, these are major achieve- ments that will benefit almost all sectors of the Indonesian economy and the public. Furthermore, continued dialogue with the government on sector reform will contribute to improve sector performance and an expansion in the range of modern telecommunications services available to businesses. - 46 - 6.7 The institutional support will assist MTPT in introducing sector reforms and TELKOM in implementing the additional measures to operate as a business oriented enterprise as per its new mandate. TELKOM's institutional development will be pursued in a number of ways, including on-the-job and overseas training and technical assistance to improve managerial, financial and technical capabilities of its staff. The investment component would not only accelerate provision of service to meet part of the unmet demand for telecommunications services but also substantially reduce unit costs of investment. Increased availability of telephone service and improved quality of service would benefit other sectors through communications-related improve- ments in government and business efficiency and productivity. The project would also further develop the local consultancy and outside plant contracting industries through collaboration with international firms. Rate of Return 6.8 Based on the assumptions summarized in para. 5.6 and shown in Annex 21, the real financial rate of return (FRR) to TELKOM is estimated at 18%. The real economic rate of return (ERR) based o.a financial flows but adjusted to take account of taxes including the value-added tax levied on telephone bills, is estimated at 23%. This is a conservative estimate of the economic rate of return as it does not include consumer surplus, known to be high, given the supply constraint. In testing the sensitivity of ERR esti- mates, the effects of the following scenarios were considered: (a) a delay of 12 months in connection of new subscribers resulting in a delayed revenue stream of 12 months. This resulted in a fall in ERR to 15%; (b) an increase in capital as well as operating cost by 10%. This resulted in a fall in ERR to 20%; and (c) combining (a) and (b). This resulted in a fall in ERR to 13%. Even under the most improbable scenario, (c), and without taking into account consumer surplus, the real ERR is 13%. The contract for major telecommunications equipment to be financed by co-financiers have already been finalized and cost estimates for major Bank financed items are based on international competitive prices based on recent contracts for similar items under the ongoing Third Telecommunications Project. To ensure timely implementation of the project, single responsibility implementation approach will be used and all major contracts will be signed by the time of loan effectiveness. Proiect Risks 6.9 The potential risks for the project fall into two categories: (a) delays in procurement, and (b) shortfall in TELKOM institutional capacity to implement the project. These risks have been recognized and actions initiated to minimize their impact. TELKOM has already established a nucleus project implementation unit and adequate technical assistance is provided - 47 - under the project to assist TELKOM in the implementation and supervision of construction works. Residual risks will be addressed through agreed measures to monitor project implementation with corrective actions initiated as necessary. - 48 - VII. AGREEMENTS REACHED AND RECOMMENDATION 7.1 During negotiations agreements were reached with GOI and TELKOM on the following: I. GOI (a) will ensure that TELKOM has access to sufficient funds, in particular foreign financing to cover its capital expenditures as reviewed and agreed with the Bank (para. 4.3(b)); (b) will, by November 15, 1992, prepare and furnish to the Bank, for its approval, a training program for the MTPT staff, and, thereafter, implement the training program as approved by the Bank para (4.10); (c) will obtain, not later than January 31, 1993, the foreign exchange financing from Germany and Spain and, not later than June 30, 1993, from Credit Lyonnais or other sources on reasonable terms to com- plete the project in accordance with the implementation program (para. 4.15); (d) will on-lend $373 million out of the proceeds of the Bank loan to TELKOM under terms and conditions satisfactory to the Bank (para. 4.16); (e) on or before June 30, 1993 will develop and review with the Bank a time-bound action plan to address the sector policy issues, promote competition and further strengthen regulatory capabilities, and thereafter implement the recommendations agreed with the Bank (para. 4.26(a)); and (f) will take all such actions, including annual reviews and adjustments, if any, of TELKOM's tariffs to enable TELKOM to comply with II (i) below (para. 5.8). II. TELKOM (a) will submit to the Bank audited corporate and Statement of Expendi- tures accounts, within six months of the close of its fiscal year (para. 2.24); (b, on or before November 15 of each year, commencing on November 15, 1992, and thereafter until the completion of the Project, will (i) prepare and furnish to the Bank, for its review and comments, TELKOM's corporate plan, institutional development plans and invest- ment program (including Revenue Sharing Arrangements) for the following fiscal year; and thereafter, taking into account Bank's comments, if any, carry out such plans and (iij review, and if required, revise with prior concurrence of the Bank the TELKOM Fiscal Years 1992 - 1996 Investment Program (para. 4.3(a)); - 49 - (c) on or before November 15, 1993 review with the Bank TELKOM's procurement practices and procedures to be followed for procurement of major goods and services required by TELKOM in the carrying out of its operations (except for goods and services financed from the Loan) and thereafter incorporate Bank's comments and adopt such guidelines (para. 4.3(c)); (d) will, by December 31, 1992, prepare and furnish to the Bank, for its approval, a masterplan for the implementation of items under 4.5(d) of the Project, which masterplan to include actions to be taken by TELKOM and the relevant government agencies and thereafter implement the said parts of the project in accordance with such plan approved by the Bank (para. 4.26(b)); (e) will appoint consultants according to a timetable satisfactory to the Bank (para. 4.26(c)); (f) will maintain the Project Implementation Unit for the purpose of carrying out items 4.5 (c&d) of the Project; the Project-Implementa- tion Unit will be headed by a qualified and experienced officer, and vested, at all times, with such power, responsibilities, funds, staffing facilities and other resources as shall be required to undertake its responsibilities in carrying out the project (pa- ra. 4.26(d&e)); (g) will take all measures to meet the physical and financial performance targets agreed at negotiations for 1992 and 1993, and will report to the government and the Bank no later than six months after close of each fiscal year. Every year, before November 15, TELKOM will furnish to the Bank a revised set of performance targets for the next two years (para. 4.29); (h) will, by November 15, 1992, prepare and furnish to the Bank for it's approval an action plan to strengthen TELKOM's capabilities in the areas of: (i) accounting and financial management; (ii) operations; (iii) capacity management of both physical and human resources; and (iv) training of staff and managers in management techniques and new technology and thereafter implement such an action plan as approved by the Bank (para. 4.30); (i) will take necessary measures (including tariff adjustment) to ensure that TELKOM achieves debt service coverage of 1.5 and generates net internal cash after debt service and contributions of a minimum of 40 percent of the annual average of the current and next year's planned investment in any one year (para. 5.8); and (j) on November 15 of each year, commencing November 15, 1992 and thereafter until completion of the project, will furnish to the Bank, for its review and comments its proposed tariff revisions, if any, and subsequently, taking into account Bank's comments, furnish to GOI for its consideration, any proposed tariff adjustment (para. 6.5). - 50 - Condition of Loan Effectiveness 7.2 Signing of the subsidiary loan agreement between GOI and TELKOM will be a condition of effectiveness of the proposed loan (para. 4.16). RecommendatLon 7.3 With the above agreements, the proposed project is suitable for a loan of $375 million to the Republic of Indonesia for a period of 20 years, including a 5-year grace period, at the Bank's standard variable interest rate. - 51 - INDONEIA FOURTH TELECOMiMUNICATIONS PROJECT STAFF APPRAISAL REPORT able of Connts ANNEXES Page No. 1: Cellular Radio Mobile Telephone Service .... ...... 52 2: MTPT Organizational Chart ....... ............ 53 3: Basic Telecommunications Sector Statistics .... ...... 54 4: Supplyvs. Demand ......................... 64 5: Telephone Service Issues ........ ............ 66 6: TELKOM Organizational Chart ...... .......... 67 7: TELKOM Employee Data ................. 68 8: International Development in Sector Organization ...... 71 9: 1992 - 1996 Investment Program ............. .. 75 10: Project Components ....................... 78 11: Terms of Reference ....................... 81 12: Procurement Packages and Schedule . . .105 13: Disbursement Schedule . . .107 14: Implementation Schedule . . .................. 108 15: Performance Indicators . . . 110 16: Action Plan 11... 17: Hlstorical Financial Statements . . .114 18: Projected Financial Statements . . . 118 19: Assumptions used for Financial Projections ... 121 20: Summary of TELKOM Tariffs. . 123 21: Return on Investments . . 129 22: Selected Documents and Data Available in Project File . . 133 - 52 - ANNEX 1 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT Cellular Radio Mobile Telephone Service Company Area Starting Date Name & Maximum Technology Potential No. of Subscribers PT Rajasa Jakarta, Bogor May 1986 STKB-C, NMT 15,000 + 15,000 Hazanah Puncak, Ganjur, (April, 1992) Perkasa Bandung ._. PT TELKON Jakarta, 1988 SKTB-I, TACS 5,500 l ______________ Bandung PT Electrindo Jakarta, E. 1991 AMPS A 25,000 Nusantara Java PT Centrancindo Jakarta, E. 1991 AMPS A 25,000 Panca Sakti Java (CPS)__ _ _ _ _ _ _ _ INDONESIA FOURTH TELECOMMUNICATIONS PROJECT Minist of tourism, Posts and lblcommunlcatlons TELCOI ADVS LE STA I OMD SMRETMY ~~Plwanng Burau | GEN8PEcoRAL i Hmiaan Reources Bueau FIRance Bureau ULw and Organizdaon Bueau R&aD I DIRECTORATE GENERAL -Gneral AffairsBureau i - SXbb~~Stteowned Enterprises Admhi.BureauC CENTERDIECORTEOF POer AN TELECOM I R & D | ~GENERAL OF IETR ENRE TOURISM DIRECTOR GENERAL TRAINMN |i CENTER | * I > 8~~~~~~~~~~~~ECRETAROF -Planrdng DM"si DIRECTOATE~ II DIRETORATEOF I I DIRECTORATE O IETRT O GENERAL -Personvnel DhXslon -Rnanc Dsion M-r MDsioDhn -Gewal " X" ..... ....... . ........ ... ...... .. .. . . -- - - - - - - - - - - - - - - - - - -! | AN IR FITE lPT. T F ENOM PT. SD0 DrA T IIZ~~~~Z Z| 3I E - - 54 - ANUX 3 Page 1 of 10 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT Basic Statistics A. Data of Switching Capacity, Subscribers and Public Telephone B. Regional Data of Switching Capacity, Subscribers and Public Telephone C. Share of Faults in Outside Plant and Productivity 1D. Necessary Days for Repair E. OPMC Expansion Plan F. Satellite Facility G. Successful Call Ratio H. Call Loss Structure for Long Distance Direct-Dialing I. Profile of Subscribers in Each WITEL by Charges Per Line Per Month _55 _ANNEX 3 Page 2 of 10 <~~~. ....i * (X | W g~~.~:..::.:. ::.~~~~~ f-.';7:.::lfB.::55:.:>S' f:>l.. .'S.fA:.8.. . . Amt)emwpulsqvnvm.WW-49MGMaBir4Qd :910N Mll-,l Wll.'.-'Il ... . ................ ..... .0M .. gm. ni 11 . .......... go MN bD ......... . ........... zw: M..'m ............. ....  ne, .... ....... M. 511: gr M.9 XYM INDONESIA FOURTH TELECOMMUNICATIONS PROJECT C. Share of Faults in Outside Plant Fault Rate/100 Share of Faults in Ouside Plant (X) Working efficiency subs/month (faults repaired) Underground Overhead Drop wire Indoor Total per man per day c_bt__cable cable JKT-Tifur 7.4(7.1)* 34.1 41.8 24.1 100.0 1.0 JKT-Selatan 8.0(7.8) 35.7 32.8 31.5 100.0 1.1 JKT-Utara 11.2(10.3) 41.9 40.0 18.1 100.0 1.66 JKT-Pusat 9.5(9.1) 35.5 29.4 35.1 100.0 1.52 JKT-Barat 9.3(7.1) 48.6 33.3 18.1 100.0 1.16 Average CJKT) 9.2(8.4) 39.7 36.1 24.2 100.0 1.3 Bandung-OPMC 6.5(5.6) 15.3 5.1 48.5 31.1 100.0 2.4 Peden 5.1 19.7 5.3 32.9 42.1 100.0 0.7 SBY-Utara 13.2 36.3 22.7 11.7 29.2 100.0 1.2 SBY-Selaton 14.3 38.3 9.2 31.0 21.5 100.0 2.3 Ujung Pandang 5.5 14.7 12.2 20.6 52.6 100.0 0.6 Semarang 7.3 18.2 5.1 41.6 35.1 100.0 0.9 1 Denpssar 11.8 4.0 27.5 44.5 24.0 100.0 0.9 VI Palembwng 8.5 36.5 23.3 15.7 24.5 100.0 1.0 Average 9.4 24.0 15.0 28.3 32.7 100.0 1.1 Bands Aceh 6.2 24.8 6.5 37.4 31.3 100.0 0.48 Louksumw e 3.6 9.6 4.3 33.9 52.2 100.0 0.'2 Padwig 5.5 36.9 3.0 27.1 32.9 100.0 0.63 Pakanberu 8.6 18.0 14.7 37.7 29.5 100.0 C.86 P. Sfantar 4.7 18.9 2.2 42.8 36.1 100.0 0.50 Jambf 6.2 18.3 10.7 39.7 31.3 100.0 0.56 Bander Lampung 6.6 17.5 18.0 31.3 33.2 100.0 0.73 Yogyakarta 9.1 7.4 3.4 45.4 43.8 100.0 0.64 Solo 7.5 14.1 7.5 33.8 44.6 100.0 0.82 Nalang 6.8 14.9 2.4 52.0 30.7 100.0 1.17 BanJarmasin 5.5 11.5 5.5 39.3 43.7 100.0 0.75 Nataram 8.5 21.4 2.4 43.9 32.3 100.0 0.60 Pontianak 5.7 13.1 1.3 55.0 30.6 100.0 1.34 Samarinda 4.5 26.8 6.0 34.4 32.8 100.0 0.78 (Q z Nanado 3.6 9.1 12.2 44.3 34.4 100.0 0.40 Ambon 4.0 18.2 1.0 41.7 39.1 100.0 0.50 41 Jayspura 6.1 1.0 3.9 30.2 46.9 100.0 0.45 o Average 6.1 17.6 6.2 39.4 36.8 100.0 0.69 - 58 - ANNEX 3 Page 5 of 10 INDONESI FOURTH TELECOMMUNICATIONS PROJECT D. Speed of Service Restoration (Unit: X) Within a Between 2 Between 4 Over 7 Total day and 3 and 7 days _ _ _ _ _ _ _ _ __ days days JKT-Utara Kota-I 29.1 19.4 22.0 29.5 100.0 Kota-II 26.7 17.8 26.0 29.5 100.0 TJ. Priok 23.3 15.6 34.2 26.9 100.0 Ancol 18.4 12.4 30.3 38.9 100.0 Elut 2 _ _ _ 32.1 2__ 1 Average 25.1 16.8 28.8 30.2 100.0 JKT-Puwat 8.4 39.6 30.6 21.4 100.0 Average (JKT) 21.5 20.0 29.2 29.3 100.0 Landung-OPMC 45.1 43.6 7.5 3.8 100.0 Medan 35.5 48.7 12.1 3.7 100.0 SBY-Utara 63.0 17.0 13.0 7.0 100.0 SBY-Selatan 54.0 28.6 12.1 5.3 100.0 Ujung Pandang 81.2 17.6 1.1 0.1 100.0 Semarang 53.8 37.8 6.5 1.9 100.0 Denpasar 71.0 24.1 4.9 0 100.0 Palembang 50.6 28.8 15.8 4.8 100.0 Average (Six 58.4 28.9 9.4 3.3 100.0 cities) . FauRTH TELECNlICATIO PROJECT E. OPWC Lamausion PIp. _Rg1onal No. of subscribers Fault rate Multi- 15 OMlCS sEAtablishad Island WITEL Seeder Lampung (100 s*/s exchange WUadr con tructioa Capital Pri. at 1994 rmt) *rs Proposd In the TELEC11 Ilt ___________________ ________________ Present_It"_Pr&iect den e 42,443 110.000 5.1 1 flang Ac.h o 4.209 13.671 6.2 0 0 I Loehkswwe o 3.54 11.67t 3 36 2 P. Siantar 4.201 *.000 4.7 o e zI Padaag 9.7a4 33.070 5.5 e Patfte^rv o 5.964 16.102 *.6 o o Paembang 14,643 29,5W0 0 0 III J=bt o4,975 17.914 6.2 o o ftndar Leupung o 14,390 35.000 6.6 o J1K? - Timrv o 77.589 179.500 7.4 o JKt - Selatan 65 396 163.500 6.0 o JKT - Utare ~~93.667 195.400 11.2o IV JKT -pust o 91.693 126.400 9.5 KT - Bret o 77.326 19f,400 9.3 o Tamrang ~~~~3.903 20.334 12.9 Be .. 1 2.062 17.093 9.6 o Depok 2.264 11.377 9.3 o V Bandung o 4.270 6.109 6.5 _ Sogor o .000 31.943 n.a. o Sem_rangr 24,195 65.403 7.3 0 VI voy kvart o 9.052 180315 9.1 o 10.637 20.703 7.5 o Say - Utura 26.212 179.108 13.2 2 VIl sOY - Slatan o 4".686 14.3 o Malang 15.001 35.234 6.8 0 0 Nusa Tonaar a VillI Dennasar o 19 SS 29.500 11.8 _ Kalimantan IX Banjarmasin o 7.832 21.200 .5 0 o Sulawesi X U-1una Pandana o 19.912 40.000 S. 0 0 lb oZ Maluku Xi _ O X Irian Java _ Xll_ O o Totsl _ _ _ - _ _ _ 15 13 - 60 - ANNEX 3 Page 7 .f 10 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT F. Satellite Facility CUSTOMERS (Number) Number of Responders Palapa-B2P PTT 2 Indonesia other 3.5 (7) Macau 1 (1) Malaysia 2.5 (1) New Zealand 1 (2) Papua New Guinea 1 (1) Philippines 3 (4) Thailand 6.75 (8) Vietnam 0.25 (2) USA 2 Australia 1 Free or BackuP 0 Palapa-B2R PTT 19 Indonesia other 5 (3) o Free or Backup 0 - 61 - ANNEX 3 Page 8 of 10 C. Successful Call Ratio in the Seven Major Cities City Local Network Long Distance Network Bandung 28.0 16.0 Denpasar 33.0 10.0 Jakarta 25.0 14.0 Meden 34.0 17.0 Semereng 29.0 8.0 Surabaya 31.0 19.0 Ujung Pandan 36.4 15.0 Average of 50 Cities 40.0 20.0 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT Call Loss Structure In Indonesia for LDD Calls Tandem Exchange Tandem~~~- Oerlade Losses: - No Dial Tone - Netwh % Congeslion - Overoaded - ParUW Dialing - Register lime Out Exchange - Incomplete Diaing - Called Party Connected Calls per 100 Cali Attempts: - No Answer Atempts 20 Successlul Gals IP- 0 2 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT I. Profle of Subscriber Lines in Each WTrEL by Charges per Month (%) Staus: December 91 I . Rtp. l ,000,000 - 1.75 NA 0.78 2.96 1.08 1.00 1.13 4.15 2.00 0.68 NA 0.99 2. ]Rp.500,000 - 2.56 2.21 1.66 3.77 2.12 1.80 2.19 4.39 3.00 1.59 NA 1.55 Rp.1,000,000l 3. Rp.300,000 - 3.34 2.89 2.62 4.44 1.84 2.80 3.05 5.00 4.00 2.26 NA 2.99 c Rp.500,000 4. Rp. 100,000 - 12.57 12.77 12.01 17.06 12.59 11.90 13.60 15.90 14.00 10.63 NA 11.93 Rp.300,000 S. ltp.0 - Rp. 100,000 80.83 81.38 82.93 71.74 81.35 82.50 NA 70.56 77.00 85.30 NA 82.54 . ~ ~ ~ ~ ~ ~ .. ~~ ~ I YUZ%. ...>~V ~ .'A W***U * * .aa~ - - .~~~~~~~~~~~~~ Z~~IU~JXYIF1~A~ ~~ ~" 3M '~ V'~ ~Yi. VIII' !~~ ~.A …~~~~~~~~~~~~~~~ 1. Rp1,000000 1.75 A 0.8 2.9 1.0 1.00 1.13 4.15 .00 .68 N 0.9 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT EXPRESSED DOMAD VS WAMNG APPUCANTS IHISTORICAL DATA IN INDONESIA (1980 -1990) (THOUSAND) (MILWON) App Susrbers 600 3.0 SW00 2.5 400 2.0_ War0ngAWWm 300 1.5/ Exressed Demand 100 . Year 19 BO 1981 198 198 144 1485 1986 1987 1988 1989 1990 N BCo5mm INDONESIA FOURTH TELECOMMUNICATIONS PROJECT (melon) Iblephone Lines Demand and Supply ACTUAL A PROJECTION 20 Arnual Growth - 30% 10 5 peseots namae Dednd - - - . c >P ~~~~~~~~~ ~25Y e 20Ye 0.1 t 1980 1985 1i0 1995 2000 Ni 6ht Hbw onf Id il % e d . OQ bt13 0 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT TELEPHONE SERVICE ISSUES M.~~~~~~~~~~~~~.~ Short of cables and Un High tafi pr DEL ULnderized tunk swithin Complty of notwrk % in local etwork Lack of spames Phn Mateae oe-t s dquate 41 MaOtn -lnadeut mate ard moob -Inadequate on regulations Lack of maki sategy Undesized exchanges and Underzed ass circuits nadequate investment aN . Tminal equipmet sumcent stock lev juncions and trunks financng planning -Ack of spares __ _ __ -b ison Irsuficient local nwr Age of EMb exhage Absnce of trsMf Lack of management V Exchane adequa tratport and pannn Absn of sysematc bt measwrem and analysb -A ED tools _u and -alys- 4ack of Spares sucient pRect hadequate kal trfic hadequate STD taff Lack of died peron cocrdilon talegrated frmecastn orcastng appcbu) High fault late of juncions High outage duration of isufflcdent trin _ _ _ _ _ _ _ _ _ _ _ _ ~~trunks _ _ _ _ _ _ High outage duaion of iput pundons High outage duraion of iunctlons LR AMhW5WO*_.. INDONESIA FOURTrH TELECOMMUNICATIONS PROJECT Ibikom Premnt Organizatlon Chart * I ~~~BONROF COW=NS I WITELI WIlTELY I | WIELI WNi LV WI1.3 WEL IX | I WlTELIV WITEL LX I | WIELV F fEL XI l r WITELVI WITE LXI I~m DwCr IM I C Pn Ic C- Proec_t_H V b*n~CIr. l S Proei hP a ~HI BOMOO - 68 - ANNEX 7 page 1 of 3 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT TELKOM Staff Composition, Productivity and Education A. Emplovees by Category- 1985-1991 i W G W ? ..:r. j j: " 7 ":~xI -A! W B. Ratio Staff to Working Lines, 1985-1991 A A '1%...~. ~~~~~. otbttz~~t/ ~ 370 4588 4~924 4,4~7 4,398 .' 2 4,556 4,463 -69- ANNEX 7 page 2 of 3 C. EmDloyees by Education (December 1991) Education No. of Employees _ University 1,796 4.54 Academy 2.065 5.23 Senior High School 23,006 58.21 Junior High School 7,413 18.76 Elementary School 5,240 13.26 Total 39,520 100.00 - 7n - ANNEX 7 page 3 of 3 INDONSSIA FOURTH TELECOMNUNICATIONS PROJECT The Number of Subscribers and Employees Country No of No of Subscribers/ Employees/ subscribers employees employee 1,000 subscribers Singapore 875,672 11,989 73.0 14 Malaysia '89 1,388,000 28,041 49.5 20 Thailand '88 1,005,872 17,956 56.0 18 Philippines '85 477,963 13,563 35.2 28 Brunei 24,612 593 41.5 24 Indonesia '90 915,000 41,000 22.3 37 Pakistan 583,930 42,790 13.6 73 India 3,487,908 312,303 11.2 90 Saudi Arabia 1,149,100 21,067 54.5 18 Hong Kong 1,988,524 14,843 134.0 7.5 Korea (Republic) 8,625,000 50,700 170.1 6 Japan '90 54,084,000 258,000 209.6 5 Australia 6,964,661 92,487 75.3 13 France 24,803,609 163,389 151.8 6.5 Germany (F.R.) 27,221,756 216,020 126.0 8 Canada 13,206,233 102,581 128.7 8 United Kingdom 22,137,000 223,084 99.2 10 Source: ITU, "Yearbook of Common Carrier Telecommunication Statistics (16th Edition) 1978 - 1987,0 1989 Note: Data with no mark is as of 1987 year. - 71 - ANNEX 8 page 1 of 4 IERNATIONAL EXPERIENCE IN RESTRUCTURING THE TELECOMMUNICATIONS SECTOR 1. Examples of developments in restructuring telecommunications sectors in several countries are summarized below. 2. orth America. In the USA, the break-up of AT&T and the authorization of all kinds of equipment, resale and facilities-based competition are well-known. In Canada, facilities-based competition has been permitted for many years for almost all services except public switched voice telephony. Competition in this area is expected before the end of 1993. Furthermore, government-owned Teleglobe Canada (the monopoly provider of overseas telecommunications services) was privatized in 1987. As in the USA, cellular telephony is provided by a maximum of two competitive service providers in each franchised area. 3. Western Europe. In the .UK, the privatization of British Telcom in 1984 and the introduction of facilities-based duopolistic competition from Mercury has been followed now by government proposals to authorize multiple facilities-based competitors. Moreover, the UK has encouraged cable television companies to provide residential customers with competitive access to the switched telephone network. In German in 1990 the commercial and regulatory activities of the Deutsche Bundespost were separated. Deutsche Telekom was established as a state-owned telecommunications corporation and a department of the Ministry of Posts and Telecommunications was given responsibility for sector regulation. There is full competition in the provision of terminal equipment, value-added services and data communications services. Voice telephony and the provision of transmission paths are monopoly services of Deutsche Telekom. However, there is freedom to connect properties in common ownership up to a distance of 25 kms, low bit-rate satellite services are open to competition and high bit rate services will be licensed provided they do not lead to the substitution of voice communications in the terrestrial networks. Germany has already licensed two competing cellular telephone networks and will authorize a third mobile network for innovative Personal Communications Services (PCS) in 1992. Further, the German Ministry has stated its interest in seeing Telekom privatized, in part, by 1994 or 1995. In Franc, in 1990, France Telecom was established as an independent, government-owned company outside of the Ministry of Posts, Telecommunications and Space. Subsequently, the Ministry announced liberalization of the terminal equipment and value-added markets and limited competition for mobile/satellite networks and services. 4. New Zealand and Australia. New Zealand has probably gone further in liberalizing its telecommunications sector than any other country. In 1987, the Telecom Corporation of New Zealand Limited was established as a state-owned limited liability enterprise. In 1989, the telecommunications services sector was opened to all kdnds of competition. In 1990, Telecom New Zealand was completely privatize in a sale that gives a controlling interest to a consortium headed by Ameritech and Bell Atlantic. Telecom New - 72 - ANNEX 8 page 2 of 4 Zealand was reorganized into regional subsidiaries and a long-distance subsidiary within a holding company structure. In Australia, in 1991, after an extensive sectoral review, the government sold the state-owned satellite company (AUSSAT) to a private consortium with major foreign investors (ie. Bell South, Cable & Wireless) and awarded the consortium a second license to provide a full range of domestic and international telecommunications services. At the same time, the government merged its overseas carrier (OTC) with its domestic carrier. After 1997, the government has announced there will be no restriction on the number of network providers. 5. Eastern Eur. In Hungay, the Government has initiated the process of privatization and liberalization of the telecommunications sector. In January 1990, telecommunications services were separated from postal and broadcasting services, and the Hungarian Telecommunications Company was established as a separate state-owned enterprise. HTC is in the process of being transformed into a joint stock company operating under the Hungarian commercial code and supervised by the State Property Agency, an agency established by Parliament to supervise and oversee the privatization of state-owned enterprises. Through a joint venture with US West, HTC provides cellular service. Under the telecommunications bill currently under review, up to 49% of the equity shares of HTC could be sold to the private sector. It is expected that this will include the participation of a major international telecommunications company which will act as a strategic investor in HTC. In addition, it is anticipated that certain services, such as value-added services, will be subject to competition from private operators. In Poland in 1989 the telecommunications operating functions were separated from regulatory functions, with the operating functions vested in the Polish Post, Telegraph and Telephone and the regulatory functions vested in a new separate ministry of Posts and Telecommunications. With the telecommunications law that became effective in January 1991, telecommunications were separated from other activities and established as a separate operating company, TPSA. The telecommunications law also grants the Minister for Post and Telecommunications broad authorities to grant licenses, although international facilities and public services will remain the monopoly of TPSA. A nationwide mobile cellular license has been awarded to a consortium of France Telecom and Ameritech which would own 51 % of the joint venture. TPSA would hold the remaining 49% of the venture. 6. In Latin America, restructuring of telecommunications sectors has either been implemented or is under active consideration in many countries. In 1990, Argentina privatized its poorly performing govemment-owned telecommunications entity, ENTEL, and divided it into two regionally separate companies. MeiQ has introduced new policies and regulations to expand competition in the telecommunications sector. At the end of 1990, the government reached agreement with a consortium headed by Southwestern Bell, France Telecom and their Mexican partners to sell a controlling interest in the Mexican telephone company, TELMEX. In Cbile, Compania de Telefonos de Chile was privatized in 1988. Venezuela has opened a process to establish a fully privatized nationwide cellular telephone system. Furthermore, in November 1991, the government agreed to sell the state-owned telecommunications company (CANTV) in a consortium led by GTE and which includes AT&T. Reform of the telecommunications sector is also under active consideration in Brazil, Peru and Uruguay. - 73 - ANNEX 8 page 3 of 4 7. Asia. In Japn in the second half of the 1980s a series of measures corporatized and privatized Nippon Telegraph and Telephone (NTT) and introduced both service-based and facilities-based competition, while responsibility for regulation of the sector remained with the Ministry of Posts and Telecommunications. In 1990, the Ministry of Posts and Telecommunications announced that NTT would be restructured into ten or eleven separate autonomous divisions and a separate long-distance division. In Bangladesh the government authorized a private company to provide cellular service, authorized there private companies to provide rural telecommunications in respective geographic areas and established a joint-venture between the government-owned Bangladesh Telegraph and Telephone Board and Cable and Wireless for the provision of overseas telecommunications. In Korea, the government has announced its' intent to privatize the major carrier, Korea Telecom, and has authorized a second carrier to provide competitive intemational telephone service beginning in 1992. The data communications and terminal equipment markets have also been substantially liberalized. [alaysia has moved rapidly from the corporatization of Syrikat Telekom Malaysia on January 1, 1987 to a partial privatization of the company in November 1990. In Sri Lanka the government ha announced plans to corporatize new Sri Lanka Telecommunications Corporation. A draft new law and regulations will permit competition in the provision of terminal equipment and in the provision of broadly defined value-added services, and would establish a regulatory authority in the Ministry of Communications. In Thailand, competition is permitted in the provision of VSAT networks. Furthermore, the government announced at the end of 1909 a very large (US$5 billion) Build-Operate-Transfer deal with the British Telecom and a Thai partner. 8. To varying degrees, the restructuring measures outlined above have heen accompanied by significant improvements in productivity resulting from the introduction of commercial vs. bureaucratic management systems, a reduction in political interference, the input of increased capital or better technical know-how, and from efficiency improving measures introduced in the face of the threat of competition. Table Al below gives an indication of the enormous productivity gains that have been made by Telecom New Zealand. Significant gains resulted from extensive contracting out of installation and maintenance work previously carried on in-house. Similarly, impressive gains in performance have been reported bv Syrikat Telekom Malaysia since its incorporation on January 1, 1987 (Table A2). - 74 - ANNEX 8 page 4 of 4 Table A. 1: TELECOM N ZEALAND PRODUCTIVITY IMPROVEMENT 1987 1990 Total staff 25,600 15,530 Customer lines/per employee 65 120 Digital switching 20% 90% Table A.2: SYRIKAT TELEKOi MALAYSIA 1987 1990 Exchange lines per employee 40 50 Operator response for directory enquiries (% of responses within 85 99 20 seconds) . INDOESIA Amex 9 PT TELEKOHUIIKASI INDONESIA (TELKON) Pas 1 of 3 .................................... FCRTH TELECIUUUICATIONS PSoJECT ................................. 1nveatm nt Progr_ (1992-96) CRWIdm Billion) By ltz ear ------19992- 93 ------1994------ ....--14- ------ ------1996 -.-- -------- . ---Local Foreign Total Local Foreign Total Local Foreign Total Locat forefgn Total Local Foreign Totel 1. ONIOING POGRAN ..... ..... ....... ..... ..... .... ..... .... ...... ... ....... ..... A. Tetecom III ProJect 194.1 155.4 349.4 102.9 93.0 195.9 89.1 96.2 185.3 10.4 10.8 21.1 0.0 0.0 0.0 R. other aigoing Projects 369.3 239.5 606.8 191.5 225.4 416.9 109.0 201.8 310.9 7.5 85.9 93.4 2.6 20.6 23.1 Toetl Cost Oagolni Program 563.4 394.9 958.3 294.4 318.4 612.8 198.1 298.0 496.2 17.9 96.7 114.5 2.6 20.6 23.1 It. TELECON IV PROJECT 1. switching Exchge - Expqnion 41.9 136.1 177.9 18.5 146.0 164.6 12.S 107.8 120.3 0.0 0.0 0.0 0.0 0.0 0.0 - tdh bltitatlon 64.5 53.6 118.1 9.8 78.7 88.5 6.9 58.0 64.9 0.0 0.0 0.0 0.0 0.0 0.0 2. outside Plnt Network (ONP) 0.0 0.0 0.0 0.0 - Expinsion 107.3 45.2 152.5 221.2 73.5 294.7 180.1 61.6 241.7 141.4 44.0 185.4 33.9 10.6 44.5 - R hablitation 3.6 1.0 4.6 15.2 9.4 24.5 10.0 5.6 15.6 7.2 3.6 10.7 0.0 0.0 0.0 3. Transmission - Expmlsion 1.4 13.7 15.1 17.3 109.0 126.2 11.9 77.1 89.0 0.7 7.2 7.9 0.0 0.0 0.0 - Rehabilitation 0.0 0.0 0.0 16.4 43.8 60.3 11.0 28.9 39.9 0.0 0.0 0.0 0.0 0.0 0.0 4. Jumction Network 0.0 0.0 0.0 10.1 30.7 40.8 6.7 20.5 27.2 0.0 0.0 0.0 0.0 0.0 0.0 S. Integrated Nanrgement System 1.2 12.0 13.1 7.4 41.2 48.6 2.7 16.5 19.3 0.0 0.0 0.0 0.0 0.0 0.0 un 8. sparo Parts Tools wnd Test Eqpt. 7.3 20.3 27.6 4.9 13.5 18.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7. Tecdmical AsiIstanc 0.0 0.0 0.0 0.0 - NTPT 0.3 0.4 0.7 0.3 0.6 0.9 0.3 0.6 0.9 0.2 0.4 0.6 0.2 0.4 0.6 - TELIo 1.4 6.6 8.0 1.2 4.4 5.6 1.2 4.4 5.6 1.3 4.8 6.0 0.9 1.4 2.3 8. Training - NTPT 0.1 0.5 0.6 0.1 0.3 0.4 0.1 0.3 0.4 0.1 0.2 0.3 0.1 0.2 0.3 - TELKoN 0.4 0.9 1.3 0.2 0.6 0.9 0.2 0.6 0.9 0.2 0.4 0.6 0.2 0.4 0.6 l e Cost 229.4 ; 0.2 519.6 322.6 551.8 874.4 243.6 381.9 625.5 150.9 60.6 211.5 35.2 13.0 48.2 Physical Contingency 11.5 5.5 16.9 16.1 8.9 25.0 12.2 7.3 19.5 7.5 5.3 12.9 1.8 1.3 3.1 Price Contingency 7.2 1.4 8.6 20.6 3.8 24.5 23.7 4.1 27.8 19.9 4.1 24.0 5.9 1.2 7.1 . ....... ....... ....... ....... ....... .......... ....... ....... ....... ....... ----.--- --------...... . Total Project Cost TELCON IV 248.1 297.1 545.2 359.4 564.5 923.8 279.5 393.3 672.8 178.4 70.0 248.3 42.9 15.5 58.4 III.FUTUME PROGRAM 0.0 0.0 0.0 0.0 0.0 0.0 199.2 119.5 318.7 657.4 502.0 1,159.3 796.8 681.3 1,478.1 ... .... ....... .......... . . ... .. ....... ....... ..... .. . . .. .... ....... ..... ... ....... ....... ........... ....... ...... . TOTAL PROGRU4 COST 811.5 692.0 1.503.5 653.7 882.9 1,536.6 676.8 dlO.9 1.487.7 853.6 S68.6 1.522.2 842.2 717.4 1,559.6 gruzz a = 2= ---= --= 5r5 2=3=== =5555==== == 3====3. ===eUz 3======-== == ==5 ===5==== ====== ======= tVDOLESIA ---ESIA --Amex 9 PT TELEKoIKuAISI INDONESIA (TELKO) ........ *;; ............................... Page 2 of 3 f TN TELECIIUSUICATIOUS PROJECT inNestuent Progrem (1992-96) (C Nilliun) ey ItwTeeS r.---- 1992 ----- --- -19 3 ----- ......1994- ------1995------ ......1996------ --------. Local ForeIgn Total Local Forelgn Total Loeal forelgn Total Local Foreign Total Local Foreign Total 1. ;i .... ...... ..... .....- ...... ...... .....- ..... ....... -- - - -- - -- - ----- ..... ....... ..... A. T-' .m III Project 97.4 78.0 175.4 51.6 46.7 98.3 44.7 48.3 93.0 5.2 5.4 10.6 0.0 0.0 0.0 B. Other Onoins Projecte 185.4 120.2 305.6 96.1 113.1 209.3 54.7 101.3 156.1 3.8 43.1 46.9 1.3 10.3 11.6 ....... ....... ....... ....... ....... ....... ....... ------- ....... ....... ....... ....... ....... ....... ....... Total Cost Or4ing Progrme 282.8 198.2 481.1 147.8 159.6 307.6 99.5 149.6 249.1 9.0 48.5 57.5 1.3 10.3 11.6 It. TELECo IV PROJECT 1. Smdtcbiog Exchuue - Expansion 21.0 68.3 89.3 9.3 73.3 82.6 6.3 54.1 60.4 0.0 0.0 0.0 0.0 0.0 0.0 - Rehabilitation 32.4 26.9 59.3 4.9 39.5 44.4 3.5 29.1 32.6 0.0 0.0 0.0 0.0 0.0 0.0 2. Outside Ptnt Network (WN) - Expansion 53.9 22.7 76.6 111.1 36.9 148.0 90.4 30.9 121.3 71.0 22.1 93.1 17.0 5.3 22.3 - Rehabilitation 1.8 0.5 2.3 7.6 4.7 12.3 5.0 2.8 7.8 3.6 1.8 5.4 0.0 0.0 0.0 3. Trnsaimisson - Expansion 0.7 6.9 7.6 8.7 54.7 63.4 6.0 38.7 44.7 0.4 3.6 4.0 0.0 0.0 0.0 - Rehabilitation 0.0 0.0 0.0 8.3 22.0 30.3 5.5 14.5 20.0 0.0 0.0 0.0 0.0 0.0 0.0 4. Junctlon Network 0.0 0.0 0.0 5.1 15.4 20.5 3.3 10.3 13.6 0.0 0.0 0.0 0.0 0.0 0.0 S. Intgrated Negemant System 0.6 6.0 6.6 3.7 20.7 24.4 1.4 8.3 9.7 0.0 0.0 0.0 0.0 0.0 0.0 c 8. We Parts, Tools md Test Eqpt. 3.7 10.2 13.9 2.4 6.8 9.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7. Technical Assistance * NTPT 0.1 0.2 0.3 0.1 0.3 0.4 0.1 0.3 0.4 0.1 0.2 0.3 0.1 0.2 0.3 - TELKON 0.7 3.3 4.0 0.6 2.2 2.8 0.6 2.2 2.8 0.6 2.4 3.0 0.5 0.7 1.2 S. TraIning * hTPT 0.1 0.2 0.3 0.0 0.2 0.2 0.0 0.2 0.2 0.0 0.1 0.1 0.0 0.1 0.1 - TELKON 0.2 0.5 0.6 0.1 0.3 0.4 0.1 0.3 0.4 0.1 0.2 0.3 0.1 0.2 0.3 ....... ....... ....... .... .. ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... _ese cost of Project 115.2 145.T 260.9 161.9 277.0 438.9 122.3 191.7 314.0 75.8 30.4 106.2 17.7 6.5 24.2 Physical Continrency 5.8 2.7 8.5 8.1 4.5 12.6 6.1 3.7 9.8 3.8 2.7 6.5 0.9 0.7 1.5 Price Contingency 3.6 0.7 4.3 10.4 1.9 12.3 11.9 2.1 14.0 10.0 2.0 12.0 3.0 0.6 3.6 ... . . . . . . ..... . . ... . ....... ... . .... . ...... Total Project Cost TELCON IV 124.5 149.1 273.7 180.4 283.4 463.8 140.3 197.4 337.8 89.5 35.1 124.7 21.5 7.8 29.3 IiI.fUTURE PROGRAN 0.0 0.0 0.0 0.0 0.0 0.0 100.0 60.0 160.0 330.0 252.0 582.0 400.0 342.0 742.0 ....... ....... ....... . . ....... ------- ....... ....... ....... ....... ....... ....... ------- ....... TOTAL PROGIM COOT 407.4 347.4 754.7 328.2 443.2 771.4 339.8 407.1 7U.8 428.5 335.6 764.2 422.8 360.1 782.9 3333 3 3333-X333 8=2333 3333333 S33333 3333333 33333 3==33=== 3333 333=33=3= ac3 3=33_ 3r.3=3= - 77 - INDONESIA Annex 9 PT TELEKOIJNIKASI INDONESIA (TELKO) FOURTH TELECOMMUNICATIONS PROJECT Page 3 of 3 Investment Program (1992-1996) TOTAL TOTAL (Rupiah Billion) CUSS Mill) By Items --------- 1992-96 --------- --------- 1992-96 --------- -------- Local Foreign Total Local Foreign Total 1. ONGOING PROGRAM A. Telecom III Project 396.4 355.4 751.8 199.0 178.4 377.4 B. Other Ongoing Projects 680.0 m7.2 1,453.2 341.3 388.2 729.5 ... .... ....... ........... ....... ........... ....... .. Total Cost Ongoing Program 1,076.4 1,128.6 2,204.9 54G.3 566.6 1,106.9 11. TELECOM IV PROJECT 1. Switching Exchange - Expansion 72.9 389.8 462.8 36.6 195.7 232.3 - Rehabilitation 81.3 190.2 271.5 40.8 95.5 136.3 2. Outside Plant Network COPEN - Expansion 683.8 234.9 918.7 343.3 117.9 461.2 - Rehabilitation 35.9 19.5 55.4 18.0 9.8 27.8 3. Transmission - Expansion 31.2 207.0 238.2 15.7 103.9 119.6 - Rehabilitation 27.4 72.7 100.1 13.8 36.5 50.3 4. Junction Network 16.7 51.2 67.9 8.4 25.7 34.1 5. Integrated Management System 11.4 69.7 81.1 5.7 35.0 40.7 8. Spare Parts, Tools and Test Eqpt. 12.2 33.9 46.0 6.1 17.0 23.1 7. Technical Assistance - NTPT 1.3 2.4 3.6 0.6 1.2 1.8 - TELKOM 6.1 21.5 27.6 3.0 10.8 13.8 8. Training - MTPT 0.4 1.6 2.0 0.2 0.8 1.0 - TELKOM 1.2 3.0 4.2 0.6 1.5 2.1 ....... ......... . ....... . ..... .. ....... ......... Base Cost 981.7 1,297.4 2,279.2 492.8 651.3 1,144.2 Physical Contingency 49.1 28.3 77.4 24.6 14.2 38.8 Price Contingency 77.4 14.7 92.0 38.8 7.4 46.2 Total Project Cost TELCOM IV 1,108.2 1,340.4 2,448.6 556.3 672.9 1,229.2 III.FUTURE PROGRAM 1,65S.4 1,302.8 2,956.1 830.0 654.0 1,484.0 ....... .......... ....... ........... ....... .......... ............... TOTAL PROGRAM COST 3,837.9 3,771.7 7.6C9.6 1,926.7 1,893.4 3,820.1 3.33.33 3333333 33.3333 3333333 33-.33 a3 33an - 78 - ANNEX 10 Page 1 of 3 INDONESIA FOITH TELECOMMUNICATIONS PROJECT PROJECT COMPONENTS The principal items to be installed during the project period and the source financing are given below. PHYSICAL COMPONENTS SOURCE OF FINANCING | ____________________________ _ RFOREIGN LOCAL 1. Local Switching: 745,500 Line Units of digital telephone switching will be installed in about 120 locations which includes switches for replacement of around 2,500 manual lines, 135,000 electromechanical and analog SPC lines. It consists of the following: a. STDI-I Phase Vl a: 139,500 Line Unit Germany TELKOM (EWSD, SIEMENS) b. STDI-II 339,000 Line Unit US EXIM TELKOM (5ESS, AT&T) Nederland Spain c. STDI-HI 267,000 Line Unit Japan EXIM TELKOM (NEAX61, NEC) 2. Outside Plan Facilities a. Local Cable Network World Bank TELKOM This component includes replacement of 32,000 paper insulated and worn cable and expansion of local cable network in about 182 locations, representing about 950,000 pairs of primary cables terminated on MDF, 1,425,000 secondary cable pair wiring up to the customer premises and provision of telephone set and connecting 600,000 new subscribers including 20,000 payphones. And part of inter exchange in Surabaya area. This consists of 2 links Optical Fibre and 6 link Radio. Total channel ends would be 10,440 ch, 2 Mbps system. - 79 - ANNEX 10 Page 2 of 3 PHYSICAL COMPONENTS SOURCE OF FINANCING FOREIGN LOCAL Constructon or modification of existing buildings complete with air conditioning, electrical power and standby generators. b. Junction Network Jabotabek transmission including connection OECF TELKOM from the local exchange to the sub tandem of Jakarta Area, consists of 32 links Optical Fibre and 2 links radio. The total channel is 77,040 ch, 2 Mbps system. 3. Long Distance Network This component provided for the expansion of domestic long distance telephone facilities to the traffic generated by local network expansion for service to new area in East Indonesia. The supply, installation of equipment and facilities and one year maintenance will be on a single responsibility basis. Supporting facilities will be provided under a separate contract on a single responsibility basis. It includes the following: a. Expansion of Java-Bali digital MW system. France TELKOM b. Installation of Nusa Tenggara Digital MW France TELKOM system to provide high capacity toll transmission capability and to provide high capacity toll transmission system. It consists of 25 link radio transmission, 180 system equivalent 5,400 channels. - 80 - ANNEX 10 Page 3 of 3 PHYSICAL COMPONENTS SOURCE OF FINANCING l _______________________________ _ LFOREIGN LOCAL c. Cross Kalimantan Digital MW + IBRD TELKOM Supporting Facilities to extend the digital transmission system from Banjarmasin to Pontianak. It consists of 21 link radio, 116 system and equivalent to 3,480 channel. d. Extension of Trans Sulawesi System France TELKOM e. Remote Area Phase III Germany TELKOM It's included to accommodate and facilitate the telecommunication system with transmission facilities in remote areas in 200 locations to support the interconnection of digital exchange. It consists of 5 link F.O. 162 system and 68 link radio. The total channel is 143.94 ch, 2 Mbps system. 4. Computerization of Operations a. Integrated Network Management System US Exim TELKOM b. Modernizing the directory enquiry system World Bank TELKOM 5. Maintenance Needs World Bank TELKOM a. Spare parts b. Tools, software c. Test Equipment d. Exchange and traffic handling equipment 6. Technical Assistance for MTPT and TELKOM World Bank TELKOM -81 - ANNEXII Page 1 of 24 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT Terms of Reference for Consultancy Requirements A. Terms of Reference for Telecommunications Policy and Regulatory Strengthening B. Terms of Reference for MTPT C. Terms of Reference for Management and Professional Development D. Terms of Reference to Su !port Decentralization Program E. Terms of Reference to Introduce Integrated Network Management Systems F. Terms of Reference to Strengthen Finance Directorate - 82 - ANNEX 11 Page 2 of 24 A. TERMS OF REFERENCE TELECOMMUNICATIONS POLICY AND REGULATORY STRENGTHENING Backgrond At present in the Government of Indonesia, telecommunications regulation and policy is mainly the responsibility of the Directorate General of Posts and Telecommunications (DGPT) in the Ministry of Tourism, Posts and Telecommunications (MTPT). However, on some telecommunications policy topics, the Minister is advised by the Secretary General of MTPT. Furthermore, in some cases, discussions take place between MTPT, the Ministry of Finance and other ministries before recommendations are forwarded to the government. Much of the activity of DGPT until now has focused on somewhat narrow technical matters. Several developments in recent years have created the need for a substantially increased and changed telecommunications policy and regulatory capability in the GOI. These developments have included the following: * A sustained, high growth in demand for telephone service in Indonesia which has led to an acute shortage of telephone lines in spite of large increases in the size of the local network. 3 The increasing commercialization of PT. TELKOM, as reflected in its change of status to a limited liability company from a 'perum". The increasing demand for specialized data, facsimile and other specialized business services. The new Telecommunications Law (Law no. 4 of 1989) which permits competitive provision of value-added telecommunications services. * Technological developments that create the possibility of a diversified supply of telecommunications services, such as cellular telephony and VSAT. These and other developments are generating regulatory and policy issues that are extremely important for the development of the telecommunications sector in Indonesia. These issues include: competition poli - how much competition can be permitted, in what ways, subject to what kind of interconnection agreements, and with what kind of public vs. private ownership; how can potential monopoly abuses be avoided; sector flnancing - how can private investment be used to accelerate sector development while protecting the public interest in the quasi-monopoly areas; tariff policy - what are appropriate mechanisms for periodic tariff adjustments that give incentives for investment and efficient operations. Objectives. Anproach and Tasks Objectiv. Consultants, financed by the Bank under the Third Telecommunications project, have indicated that (a) the capacity to deal with new regulatory and policy issues (para. xx) is largely absent in DGPT and (b) a much expanded regulatory role is a necessary complement to policies to - 83 - ANNEX 11 Page 3 of 24 expand competition in order to enhance the performance of the sector. Therefore, the objective of the consultancy is to strengthen the telecommunications regulatory and policy capability of the GOI over a period of two (or more) years. Approach. The consultancy will provide more or less continuous full-time on-site professional advice and assistance on telecommunication policy and regulatory matters. The on-site specialists will have access to and be supported by the contractor's part-time team of telecommunications specialists whose experience covers a wide range of telecommunications policy and regulatory issues, and who may be based outside of Indonesia. Tasks. Tasks to be undertaken by the consultancy on specific topics will depend on telecommunications policy decisions that may be taken by GOI over the next 6-12 months. Therefore, a detailed list of tasks is to be prepared closer to the time of bidding. Nevertheless, consultancy tasks will include the following: (a) Assist the GOI in developing and up-dating a telecommunications regulatory agenda that will identify regulatory issues to be resolved over a two-three year time frame, the process for resolving the issues, and a realistic schedule. (b) Provide, at the request of the client, a written analysis of a series of specific telecommunications policy or regulatory issues, an assessment of options to resolve issues and recommend plans of action. (c) Assist with or lead activities to undertake and complete action plans to resolve telecommunications policy or regulatory issues. (d) Transfer knowledge of telecommunications policy and regulation analysis and implementation by holding working meetings with counterpart staff and working in a team with GOI staff on specific issues where requested by the client. The consultancy is expected to be involved in some of the following activities: (a) Regulatory Policy * Authorizations for the operation of public telecommunications networks, including the development of carrier obligations. * Authorizations for resellers and value-added service providers, including the development or revision of applicable conditions. * Identification of potential anti-competitive or unduly discriminatory behavior by facilities-based service providers and development of regulatory measures to minimize such behavior. e Development of approaches to resolve network interconnection, revenue settlement and access charge issues, including issues related to the provision of leased lines to resellers and/or value-added service providers or to competitive cellular operators. * Authorizations for customer-owned satellite terminals. - 84 - ANNEX 11 Page 4 of 24 Radiospectrum allocation for public telecommunications networks (including cellular telephony). (b) Price. Cost and Financial Analysis * Development and application of criteria for the review and approval of tariff proposals. * Develpment of standardized techniques to monitor tariffs and to analyze and assess tariff proposals. * Review of financial projections of TELKOM, INDOSAT and cellular operators and development of a capabil:ty to assess forecasts of rates of return and other financial indicators under different scenarios. * Review of methodologies and estimates of the costs of providing telecommunications services. (c) Ouality of Service. Investment Program. Technical Standards and Terminal Eguipment ? Performance indicators and systems to monitor results. * Assessment of TELKOM's and INDOSAT's investment program, depreciation and procurement policies. * Technical standards for networks and terminal equipment. (d) Administrative, Legal and Information Systems * Development of improved administrative systems for both externally-oriented needs (e.g. processing of authorization applications, regulatory proceedings) and internal requirements (e.g. personnel, finance, contract payments, supplies). * Development and maintenance of information systems to support regulatory activities. PSmithmhWa:tcepol.tor - 85 - ANNEX ll Page 5 of 24 B. TERMS OF REFERENCE TARIFF STUDY Background 1. Tariff Policies. Tariff Policies for telecommunications services need to respond to several goals. Thus, in order to contribute to economic efficiency, tariffs should reflect costs and, where unmet demand exists, also serve to ration scarce capacity. In addition, tariffs must be adequate to permit the operating entity .o achieve satisfactory financial returns (including target levels of investment program self-financing). Finally, tariffs should take account of demand factors and be seen as reasonably equitable by the public. 2. Tariff Levels. TELKOM's tariffs are shown in Annex 20. TELKOM's tariffs were last increased in October 1990 by a revenue-weighted average of about 35%. These tariff increases, as well as important productivity improvements being made by TELKOM, mean that the corporation is projected to achieve more than adequate financial returns until the end of 1993. Nevertheless, it is anticipated that tariff increases will be required during 1994 (para. 6.7). This study will analyze Indonesian telecommunications tariffs, thereby providing a basis for recommendations to the Government to implement revised tariffs in 1994. 3. Tariff Structure. The last (October 1990) revision of TELKOM's tariffs was not an across the board increase, but made some important improvements to the structure of the tariff. Telephone installation charges were increased by between 100% -180% in different regions and are currently the equivalent of approximately US$500 in the Jakarta area. The high level is warranted to ration the scarce supply of new telephone lines. Telephone service monthly rental charges were also substantially increased, by about 300%, and are now the equivalent of US$5 per month in Jakarta. Telephone usage charges were also increased. Local call charges were increased by 33%, with the price of a three minute local call set at US 5 cents. Charges for long-distance calls were increased by smaller percentages and, for calls over 1000 km., charges were reduced by about 10%. The new tariff review is expected to find that continued rate rebalancing is appropriate. Thus, monthly rental charges should be increased, so that even low usage subscribers will cover the incremental costs of network access service. It may be advisable to further increase local call charges to moderate demand and, therefore, alleviate network congestion. And to the extent permitted by network capacity and financial targets, it is anticipated that charges for long distance service and leased l.nes should be increased in 1994 but an amount less than the cumulative rate of inflation since the last tariff increase. Objectives 4. Objectives of the consultancy are to: (a) Assess the stiicture and level of TELKOM's current tariffs taking account of (i) long- run marginal cosLs (LRMC); (ii) scarce network resources; (iii) demand factors; and (vi) financial targets. And further to describe and justify the structure and level of a set of optimum tariffs, and recommend a program of staged tariff revisions that will move TELKOM significandy towards the optimum set of tariffs within a reasonable time- frame. - 86 - ANNEX 11 Page 6 of 24 (b) Assess the structure and level of PT. IndoSat's current tariffs, international accounting rates and revenue settlements with TELEKOM, taking account of (i) long-run marginal costs; (ii) network capacity; (iii) demand factors; and (iv) financial targets. And further to describe and justify the structure and level of a set of optimum tariffs and recommend a program of staged tariff revisions !hat will move PT. IndoSat significantly towards the optimum set of tariffs within a reasonable time-frame. (c) Transfer to DGPT and local consultants know -how in undertaking tariff analysis. Scope, of Wortk 5. In order to achieve these objectives, the consultants will undertake the following tasks: (a) Describe the present tariff structure of PT TELEKOM and PT. IndoSat for all important services or categories of services, their evolution and recent changes. Provide an analysis of these tariffs for a five-year period in terms of (i) real (inflation-adjusted) vs. nominal Rupiah; (ii) US$ equivalent. (b) Provide, for a five-year period a comparison of TELKOM and IndoSat charges for important services and service categories within the charges for equivalent services in Malaysia, Singapore, Korea and the USA. (c) Estimate LRMC of important services or service categories including: km) initial connection to the network; (ii) on-going network access; (iii) local call services; (iv) domestic long-distance; and (v) international call service. (d) Using financial forecasting models, estimate the mark-up above LRMC necessary to achieve financial targets, taking account of demand and network capacity factors to the extent appropriate. (e) Estimate, for reference purposes, a cost-based revenue settlement (or access charge) between TELKOM and IndoSat for the exchange of traffic. (f) Estimate, for reference purposes, a cost-based revenue settlement (or access charge) for the exchange of traffic between TELKOM and cellular telephone systems. (g) Based on the above analysis, describe and justify the structure and level of a set of optimum tariffs for TELKOM and PT. IndoSat. Recommend a program of staged tariff revisions that will move TELKOM and Antacid significantly towards this set of optimum tariffs in a reasonable time-frame. Om) Present study methodologies and findings in professional q4ality written reports. - 87 - ANNEXI 1 Page 7 of 24 C. TERMS OF REFERENCE FOR MANAGEMENT AND PROFESSIONAL DEVELOPMENT PROGRAM Backgrnd 1. The domestic telecommunication service in Indonesia is the responsibility of the wholly government-owned operating company, TELKOM. To meet the balanced macroeconomic goals of Indonesia over the five-year period 1992-1996, the Government plans more than to double the size of the existing TELKOM telecommunications network to meet the large and growing unmet demand, improve the quality of service and improve TELKOM's efficiency and productivity. The single biggest constraint to achievement of these goals is the lack of necessary numbers and quality of staff at all levels, in particular senior and middle management levels. 2. TELKOM management has recognized the urgent need to develop the managerial skills of its staff to implement and operate projects and systems of growing size and complexity and has therefore decided to initiate a program to strengthen managerial and professional staff resources using a combined program of academic training at a foreign university and a working internship at a distinguished foreign operating entity. 3bjectives 3. The objectives of the envisaged training are: (a) to acquire practical experience to technical management staff in their chosen fields while developing their professional and technical skills, and kb) to upgrade the capabilities of individual managers through exposure to modern managerial techniques. Method of Delivery 4. The program will be carried over four years commencing September 1992. Three types of training will be provided. First, the project will fund 60 fellowships, each for 2 years, to enable middle and senior level managers and technical experts to acquire valuable experience in their chosen fields while, pursuing an academic program at the master's degree level. By alternating periods of academic study with similar periods of paid professional employment in which they engage in performing productive work, participants will develop their professional and technical skills and be better able to integrate theory with practice effectively. Second, the project will fund short-term management training for staff at director level and above and other staff expected to be promoted to this level in 2-3 years (750 staff-months). Third, the project will fund short-term overseas training for selected Finance Directorate staff to build their capabilities in modern financial management, treasury function, and cost-accounting (100 staff-months). - 88 - EX II Page 8 of 24 Participatio S. 'he sdoction of appropriate staff will be through TELKOM's system of job-performance evauation, career development and succession planning. Candidates selected for master's degree programs will need to satisfy the entrance requirements for these programs. A minimum of 8 feltowships will be allocated to staff of the Finance Department to pursue master's degree courses in business administration, with a major in finance. - 89 - ANNEX 11 Page 9 of 24 D. TERMS OF REFERENCE TO SUPPORT DECENTRALIZATION PROGRAM Introduction 1.1 The traditional highly centralized organization of the Indonesian Telecommunications Authority, formerly known as PERUMTEL, proved inadequate to cope with telecommunications development in Indonesia. Telephone availability and service quality are unsatisfactory, and the organization has a very high ratio of staff to working lines. The Government has changed the legal status of this body to state-owned limited liability corporation, PT Telekomunikasi Indonesia, or TELKOM. The management of TELKOM has taken a number of policy decisions and actions to decentralize management to empower regional e"acutives to play more effective roles in planning and providing service, improving quality, and lifting productivity and overall performance. Obiective 1.2 To support the move coward a flexible and responsible decentralized structure TELKOM proposes to appoint an experienced consulting firm to assist it in implementing a program of Performance Improvement and Human Resources Development. The Consultant shall be required to undertake the following tasks: Task A: Design and implement a system for the setting of quantitative performance objectives and the measurement of results; Task B: Develop and implement Human Resources Management policies and procedures, encompassing organization, training, personal performance appraisal and personal development; Task C: Extend, refine and superv-se the integration of the existing Manpower Model, Employee Information System and Payroll System to provide information support to other tasks and to line management; Task D: Develop and implement a program of productivity and quality improvement, encompassing critical analysis of existing working methods, improvement of operating and control systems, including management of supplier and contractor relationship--, and provide training necessary for effective implementation; Task E: Develop systems, software and a TELKOM t -- to support the planning of the developing network capable of dealing with the issues of scoping, financing and technology evaluation and selection, providing network architecture and capacity plans at two years intervals, initially through 2000. - 90 - ANNEX 11 Page 10 of 24 Human Resources Planning 1.3 In 1991 TELKOM initiated a program to improve the planning and control of human resources referred to as Human Resource Model, or HRMt. Work was carried out in Jakarta to identify the actual composition of staff and the nature of their work, and to prepare a forecast of staffing requirements by job and training and recruitment by occupational category. Preliminary findings confirm previous assessments that staffing is unbalanced, and the organization faces a major task in reallocating and retraining existing personnel. One preliminary forecast indicates that it should be possible to triple productivity by the year 2000, but this still requires the recruitment of some 50,000 new workers nationally, and up to 10,000 in Jakarta. A detailed training and recruitment plan will be available when the consultant commences work. Management Information 1.4 There is very little useful information available to managers. Existing reports are primarily financial and statistical, and virtually nothing has been done to provide information tailored to the needs of individual middle and senior executives. No information is readily available on performance in handling service complaints or requests. Statistics on faults are very general, and unreliable. The existing Personnel Information System (SIMPEG) cannot provide information on where employees work and what they do. This information is being provided by a parallel system, the HRM, but the HRR at this point is still a working prototype. As a result there is a very great need for systems integration, and the provision of information which will allow managers to monitor business performance. Network Planning. Development and Maintenance 1.5 Responsibility for the network is divided between Development, concerned with major new projects, and Operations and Engineering, responsible for optimizing the existing network. No one is clearly responsible for dealing with the fundamental issues of network architecture, scoping, technology and financing, sometimes referred to as capacity management. Various groups deal with various aspects, and results are often incompatible. There is an urgent need to pull together all significant aspects of network development, and mechanisms to ensure that new construction is fully specified, built to specification, and handed over with all resources needed for ongoing maintenance. Scope of Work 1.6 The initial assignment will focus on Jakarta Region, which is expected to cover the enti.'e Metropolitan Jakarta area, including the West Java cities of Bekasi, Bogor and Tangerang. On this basis Jakarta metropolitan area will have just over 50X of all working lines, a share expected to be maintained through 2000. However, the consultant will, in the course of the assignment, develop a program for the rollout of the work done in Jakarta to other regions. Rollout could commence in 1993. 1.7 TELKOM's long term goal is the strengthening of management capabilities and systems throughout the country. However, it is recognized that this is a complex task, dealing with entrenched practices and cultural issues. - 91 - ANNEX 1 Page 11 of 24 Moreover, approaches which prove successful in Jakarta may not be directly transferable to other environments. Based on past experience uniformity as such is not an objective. Accordingly, it will be necessary for the consultant to allocate resources to assess the question of variability, and take it into account when submitting rollout proposals. 1.8 The details of the individual tasks in the total Scope of Work are given below: Task A: Performance Objectives and Measurement 1.9 The consultants shall review, analyze and define explicitly the managerial functions required for the development and provision of telecommunications services in Indonesla. In particular, the consultant shall: a) work with TELKOM Directors and senior executives to define and articulate the corporate mission and objectives, and the key roles to be played; b) on this basis, define the key accountabilities and performance; c) develop a management reporting system which focuses on key issues, and provides information needed to support quick a-d decisive action. The monitoring systems must encompass not only day-to-day activities, but also longer term or leading indicators which reflect achievement in long-term development; d) lead a TELKOM team in the implementation of the system; e) work with senior executives to ensure that the reporting system is fully understood and used in practice; and f) identify and implement modifications found to be necessary. Task B: Human Resources Management Policies and Procedures 2.0 The consultant shall review all aspects of Human Resources Management and design and implement programs to overcome existing deficiencies. In particular the consultant shall: a) work with regional executives to refine the new organization in Jakarta, which will also constitute an input to Task A: above; b) lead a team of TELKOM personnel in the preparation of realistic and informative job descriptions, which integrate with the Manpower Model and support the process analysis work of Task D; c) prepare a Training Needs Analysis, specifying the training inputs needed to recycle existing personnel and cope with the very large staff buildup currently projected; - 92 - ANEX 11 Page 12 of 24 d) design and detail programs to deliver the training needed; e) lead the TELKOM team charged with delivering the new training; f) set up processes to ensure that training needs and results are monitored on an ongoing basis, amd programs modified systematically to meet needs; g) design and implement a realistic personal performance appraisal system; h) design and implement procedures for progression planning for potential key executives; i) review the existing system of salary and benefits, carry out job evaluation and grading, analyze relevant aspects of the general labor market in Jakarta, and prepare detailed recommendations for a grading and remuneration structure; J) taking into account all relevant information, including recycling, historic recruitment problems and media issues, prepare a program for recruitment, in full detail for one year ahead, and quantified by quarters to the limit of the manpower planning horizon; and k) examine existing recruitment methods, including advertising, forms, processing of applications, testing and interviewing, and design and lead the implementation of alternate methods. This should include specialized techniques for the high volume positions, such as outside plant technicians. Task C: Human Resource Management Model 2.1 The existing prototype provides needed basic information on employees, but requires considerable development to meet all key needs. In particular the consultant shall: a) update the existing Human Resources Dictionary; b) set up links to the job descriptions prepared in Task B; c) work with Information Technology Center staff to sot up links to employee work histories; d) *set up links to the Task A performance monitoring system to provide more accurate information on work load indicators; e) provide routines to assist "what if" analysis of options in technology/manpower/skill tradeoffs; and f) prepare a functional brief for the development of an integrated Human Resources Information system encompassing the Human Resource Model, SIMPEG and payroll, with links to other systems. - 93 - ANNEX 11 Page 13 of 24 Task D: Productivity and Oiality Improvement 2.2 Virtually all systems and procedures are in need of renewal and simplification, while maintaining adequate security for the company's assets. The consultant shall: a) proceed from the high level functional analysis of Task A, prepare a detailed functional analysis down the level of physical work; b) lead a team of TELKOM personnel to prepare detailed process charts, task identification, workload estirates and performance standards; c) review and redesign project management and control systems, encompassing contract administration procedures; d) initiate and maintain an ongoing process for the refinement of performance standards, encompassing both volume and quality considerations; e) develop and pilot new systems initiatives in customer-impinging activities, technical areas and internal office administration; f) examine opportunities for subcontracting and outsourcing as alternatives to employing additional staff, and make specific recommendations for new initiatives and needed control procedures; g) design and deliver training needed to ensure that supervisors and middle managers understand the new approaches, and their own roles and managerial responsibilities; and h) monitor performance and guide managers to take necessary actions. Task E: Network Planning and Development 2.4 The consultant shall develop a computer-based modelling system capable of dealing with a range of options, determining capacities, capital costs and operation costs. It shall also support a range of tariff options, and be capable of generating cash flow forecasts. In particular, the cor.sultant shall: a) spe-cify and design the basic modelling system, including procurement of ioftware and hardware, and the training of key TELKOM staff; b) work with TELKOM network planners to develop plausible options for network architecture; c) develop scenarios for 1994, 1996, 1998 and 2000; d) work with TELKOM technical staff to identify plausible technology options, including capital, staffing and operating costs; e) carry out analysis and financial evaluation to allow selection of optimal architecture and technology options; -94- ANNEX 11 Page 14 of 24 f) using tariff options, examine the financial feasibility of meeting demand within various time frames; g) detail and document the top-ranking options for decisions at policy- making level; and h) set up procedures for and train TELKOM staff in annual update procedures. Time Frame for thn Consultant's Assignment 2.5 It is estimated that about 160 man-months of consulcants' services would be required for the to_ai assignment of five tasks. The total time frame for each of the five tasks are assessed by TELKOM as follows: Task A: Performance Objectives and Measurement 15 months Task B: HR Management Policies and Procedures 24 months Task C: Manpower Management Model 21 months Task D: Productivity and Quality Improvement 21 months Task E: Network Planning and Development Initial development 8 months Followup 1 month - 95 - ANEX 11 Page 15 of 24 E. TERMS OF REFERENCE TO INTRODUCE INTEGRATED NETWORK MANAGEMENT SYSTEMS (IMS) Introduction: 1.1. The existing method of manual monitoring and central of local and long distance networks in Indonesia have proven inadequate under normal traffic conditions, and, more so under conditions of unforseen traffic loads. To aderess this situation, TELKOM proposes to establish Integrated Network Management Systems in Jakarta, Surabaya, Medan, Bandung, Ujung Pandang and Banjermasin for monitoring the performance of the local and long distance network and providing a real time surveillance and control over network components so as to optimize the call carrying capacity in a network under traffic overload or facility failures. 1.2 Obiectives To meet the above obJectives, TELKOM has decided to adopt the ATT (MFOS) system, and now proposes to appoint an experienced consulting firm to assess it in the complementation of the IMS System. The consultant shall be required to undertake the following three tasks: Task A: Define and specify system requirements, and design integrated Network Management System(s) for the local and the long-distance networks. Task B: Assist TELKOM in acceptance testing of the system installed by the contractor. Task C: Assist TELKOM in implementation of the uperational procedures associated with the IMS. ScoRe of Work 1.3 The details of the individual tasks in the total Scope of Work are given below: Task A: Definition and Design of the Network Management System 1.4 Task a-i: Appraisal of the Present Network: The consultants shall review tee TELKOM's current operational and maintenance practices and procedures in the existing local dnd long distance networks, including links to the international gateway exchanges. In particular, the consultants shall: a) study the existing organizational structure and operational procedures, with particular reference to the network management needs; b) study the actual traffic performance of the network from sample inspections and performance indicators; c) study the current network performance targets, service objectives, design criteria and the network engineering methodology in use; - 96 - ANNEX 11 Page 16 of 24 d) study the existing equipment types to assess the dormant facilities available and useful for network management, and identify additional facilities needed for providing the necessary network management capability, indicators and controls; and e) analyze the existing local and long distance networks to assess their structures and the extent of network management and control facilities currently available, the extent of their usage and their effectiveness. 1.5 Task A-2: Suitability of Existing Facilities for IMS: The consultants shall review and analyze the existing local, tandem and long distance exchange types for their suitability for the IMS and recommend on the following: a) exchange with current available facilities suitable for effective network management (NM); b) exchanges where adequate facilities can be provided through additions or modifications at reasonable cost; c) trunk, tandem and key local exchanges essential to IMS which require significant redesign and modifications in order to provide NM facilities; and d) exchange types and their locations management where provision of network management facility could be deferred pending replacement of the equipment. 1.6 In respect of (b) and (c) above, the consultants shall assess the relative costs of providing add-on equipment versus modification of the existing exchange equipment to provide the necessary IMS capability keeping in view any need for modification of proprietary equipment of the original suppliers, and make appropriate recommendations. 1.7 The consultants shall make recommendations in respect of the transmission equipment in the local inter-exchange networks and in the long- discance networks for their effective integration in the IMS. 1.8 Task A-3: Recommendations on Network Management Structure: Following the analysis of the existing networks and taking into account the planned network changes (expansion and replacements) up to 1996, the consultants EnaUl make proposals for structuring the IMS, incluaing the locations of the national, regional, and local IMS centers. The consultants shall propose alternatives for regional, shared and hierarchical development of the IMS with recommendations for a preferred option. TELKOM desires that the IMS should be introduced from the highest to the lowest level in the network hierarchy, that is, Main, Primary and Secondary centers (corresponding respectively to the Tertiary, Secondary and Primary as per CCITT nomenclature) and terminal exchanges. The alternative methods proposed should be fully argued and supported by cost-benefit and other data, and the advantages and disadvantages of each. The IMSs proposed should minimize costs and maximize effectiveness; allow progressive evolution and improvement of the system; shall be capable of upgradation for the ongoing digitalization of TELKOM's networks and extension to new networks that may be established as part of the normal national development in future. - 97 - ANNEX 11 Pag. 17 of 24 1.9 With the above obi-l 'ves in view, the consultants shall undertake the following: a) recommend the most "ppropriate effective Ne-#ork Management System(s) arrangements for the local and long distance networks, keeping in view the current Indonesian operations, including but not limited to the following: i) details of the scope, structure, facilities for the proposed IMSs and the associated control centers; ii) number location, type and hierarchy of the proposed local and long distance IMS centers, including the relationship between them; iii) the effect of the proposed IMSs on the current and planned local, long distanc- and international networks and the existing operational procedures fnr thAse networks; and iv) the methodology for the incorporation of the different networks in the first phase IMS; b) provide cost estimates for different options for the types of IMSs with different degrees of sophistication, etc. that could be introduced; c) assess the modifications and improvements required ir. the existing local and long distance networks and operational procedures for successful introduction of network management; d) recommend the types of data that would be needed by the IMS from the on-site maintenance, traffic, engineering and management staff; the methods and procedures for collecting the required data (keeping in view the current network elements); and an indication of the minimum requirement for each of the data sets; e) recommend the method and degree of data analysis and dissemination, including the modification of the existing or the need for a new Management Information System; and f) recommend minimum functional requirements for the equipment at the IMS centers. 2.0 The consultants' recommendations for the local and long distarnce IMSs, the associated data analysis systems and for the upgradation of the existing or new Management Information Systems must be supported by a cost benefit analysis and rate of return estimates. Adequate justification must be given if consultants believe reliable rate of return estimates are not possible. 2.1 Task A-4: Network Modifications and New ORerational Procedures: The consultants shall cover the following in their proposals: a) identify the potential problem areas in the existing local and long distance networks which may inhibit their incorporation into the INS and specify, where necessary and needed, the modifications to their current - 98 - ANNEX 11 Page 18 of 24 structures to make thera suitable for the proposed IMS, bu-. ensure that these are restricted to only the most essential; b) specify new operational procedures and techniques specific to the existing and proposed TELKOM networks and operating procedures necessary for effective operation cf the proposed IMS; c) identify s ,pects of the existing organizational arrangements and operational pro' idures which may inhibit effective operation of the proposed local and long distance Network Management Centers, and recommend improvements and new equipment and facilities needed for introducing such improvements; and d) specify responsibility and line of command for the Network Management Centers; techniques and responsibilities for coordination; procedures (normal, for planned bearer outages and for unplanned outages); and organization. (Note: The consultants should keep in view the existing maintenance organizations and procedures when proposing new arrangements). 2.2 TELKOM's Review of Ccnsultants' Proposals under Task A 2.2.1 TELKOM will review the consultants' proposals and recommendations on the above aspects and, after discussions with the consultants, decide on the scope and type of local and long distance Network Management Systems to be introduced, the associated data analysis to be employed, incorporation of the data into the existing exchanges and Management Information System, and the extent of modifications to the existing network structures and equipment it would undertake to make them suitable for incorporation into the agreed Network Management Systems. 2.2.2 Thereafter, based on the consultants' estimates of the costs of the introduction of the agreed local and long-distance Network Management Systems and the availability of funds, TELKOM will decide on the target networks to be covered by the IMS in the initial phase which may or may not cover all the networks specified in para. 10 above or that recommended by the consultants (para.ll). Based on this decision, the consultants shall proceed with Task B, namely the preparation of the technical specifications and schedule of equipment quantities. Task B: Assistance to TELKOM in Acceptance Testing of the Installed System 2.3 The consultants shall be required to assist TELKOM in general supervision of the supplier's performance of the contract to ensure that the facilities and equipment being installed are in accordance with the contract. The consultants shall also be required to assist TELKOM in the final acceptance testing of the system as it is offered by the contractor before commissioning and to ensure that the performance of the equipment meets the specified criteria, and confirm to the TELKOM that it can sign-off on the performance guarantee provided by the contractor. - 99 - ANNEX 11 Page 19 of 24 Task C: Assistance to TELKQM Staff in Implewentation of the New Operational Procedures associated with the Integrated Network Management Syster4 2.4 Two types of operational procedures are envisaged, for both of which the consultants will be required to assist TELKOM, namely (a) those that relate to operation of the hardware of the IMS; and (b) those that impact on the existing organizational structure and operational procedures. The latter would include any changes required in the existing or planned networks for effective incorporation into the IMS. The above two requirements may necessitate changes in the reporting procedures within the TELKOM and could also precipitate some organizational changes. The contractor for the hardware will be required as a part of his contract to assist TELKOM with the IMS operation for 6-12 months after its commi_sioning. However, the TELKOM may require the consulte.ats to assist in fine tuning the new IMS and in implementing the new operational procedures and any changes to the TELKOM's organizational structure and operational framework propcsed by the consultants and accepted by TELKOM. 2.5 It is estimated that about 100 man-months of consultant services would be required for the total assignment of three tasks. - 100 - ANNEX 11 Page 20 of 24 F. TERMS OF REFERENCE TO STRENGTHEN FINANCE DIRESCTORATE Background 1. PT Telekomunikasi Indonesia (TELKOM) was established as a government owned limited liability company under Notarial deed Mrs. Imas Fatimah Jakarta on September 24, 1991, with the responsibility for the planninx construction and operation of domestic te'Lecommunications facilities. As - aited liability company, TELKOM is accountable to the Ministry of F. nce. However, the Ministry of Finance has delegated the supervisory authority to the Ministry of Tourism, Posts and Telecommunications. TELKOM is managed by a Board of Directors, headed by a President-Director. The President-Director has authority for all operations of TELKOM. The Board currently includes five other directors with functional responsibility, respectively, for development, engineering and operations, finance, administration and logistics. Operational responsibility devolves to 12 regions, and responsibility for major development projects to 3 project-managers. Also reporting to the Board are several staff units responsible for Corporate Planning, Research and Development, Education and Training, Information Technology, and the Corporate Inspectorate, an internal audit-unit. 2. The Finance Directorate consists of four subdirectorates, Budgeting, Financial Accounts, Treasury and Financial Administration. To improve the timeliness of accounting data and preparation of financial management reports, a new chart of accounts based on the concept of responsibility accounting was introduced in early 1989 in TELKOM's head office and all regional offices. A computerized general ledger program was implemented in head office and regional offices. These initiatives have helped to reduce the time and effort required to prepare financial reports and financial accounts for 1989 and 1990 were closed within three months of the end of the year. 3. Although the financial acc)unting function has improved in the past three years, financial data have not yet been used effectively by TELKOM's management as a tool for operational control due to the weaknesses in TELKOM's internal financial and management systems and a lack of adequate qualified staff in the Finance Departmen% both at the headquarter and regions. Current management accounts are being ,.epared in a piecemeal basis with each subdirectorate preparing their own management accounts and information reports. There is no one unit under the Finance Department responsible for preparing corporate management accounts. In addition, TELKOM does not have cost accounting system in place and therefore does not have accurate information on the cost of different services and activities and cannot identify accurately the profitability of the telephone offices and the regional offices. In light of the change in status as well as the TELKOM management's decision to reorganize into six independently operating regions and 43 Strategic Business Units instead of the current functional sL.ructure, it is important that a cost accounting system be established in TELKOM. In addition, the treasury function in TELKOM needs to be strengthened to operate as a commercial entity so that it can assess the best financing techniques for its development, issue securities (eventually equity), manage its cash and liabilities and foreign exchange exposure. - 101 - AEE Page 21 of 24 4. The technical assistance component under the World Bank financed Third Telecommunications Project is assisting TELKOM to upgrade the skills of the Finince Department and build the capacity of TELKOM's management to use financial data in the management of its operations through the provision of overseas fellowships and secondments to other telecommunications organizations for TELKOM managers and Finance Department staff. Financial expert has also been provided under the project to help improve TELKOM's financial forecasting ard management in cash management. In addition, financial consultants financed under bi-lateral sources as well as TELKOM's own funds are also assisting TELKOM to review and develop financial systems and procedures. 5. A team of four experts will be required for a period of two years with the possibility of a six months extension to assist TELKOM to strengthen its management accounting and treasury functions and establish a cost accolunting system. The team along with key TELKOM staff will review and recommend the necessary policies, systems and procedures as well as the appropriate organization setup to carry out these functions. The team will also be required to assist TELKOM in implementing the agreed recommendations. 6. One expert will be the team leader and will be responsible for coordinating the work of the team and ensure that the tasks are carried out effectively. The other three team members will consist of a management accountant, a cost accountant and treasury management expert. Each expert will be attached to a deputy directors in the Finance Department in the headquarters. Review and implementation of systems and procedures will be carried out with TELKOM counterparts staff from the headquarter and the regional offices. In addition, each expert will also be required to undertake any other related tasks that the deputy directors they are assigned to requests. Transfer of Know-how and Training 7. An essential and key element of the consultants' total assignment shall be the upgrading and development of TELKOM's human resources through transfer of know-how and training of TELKOM's staff in all aspects of the work undertaken by the consultants in Indonesia. The transfer of know-how and training of TELKOM's staff shall cover but not be limited to techniques and shall include mode of updating these systems and procedures. 8. The consultants shall prepare a detailed plan for transfer of know-how and training which is a major task of their assignment. The transfer of know- how can be through training courses to be conducted in TELKOM's training school and/or through on-the-job training. The training plan should be designed with the objective that, on completion of the consultants' assignment, the TELKOM staff shall have developed inherent capability of implementing independently the consultants' recommendation and managing the systems implemented without substantial further external technical assistance. 9. The consultants shall review the availability of TELKOM's staff to act as counterparts, specify the required qualifications for each such staff, assist TELKOM in selecting such staff from within TELKOM or through outside recruitment and, if necessary, recommend foreign training of TELKOM staff in specific disciplines. - 102 - ANNEX 11 Page 22 of 24 10. The specific tasks and the responsibilities associated with the three experts and their qualifications are set out below. Expert 1: Team Leader 11. The team leader will be responsible for coordinating the work of the team and ensure that the tasks are carried out effectively by the other three team members and report directly to Director Finance. In addition, the team leader will be fully responsible to ensure that transfer of know and training of TELKOM staff are carried out effectively. The specific task and responsibility will include, inter alia, the following: - coordinate the work of the team; - prepare and coordinate the transfer of know and training and ensure it is carried out successfully; - prepare the monthly/quarterly progress reports for the assignment, with targets and achievements, problems and future targets; - other related work to ensure successful implementation of the tasks of the team; - other related work as assigned by the Director Finance. 12. Requirements: A qualified accountant or an MBA graduate with over five years experience as a financial manager in a telecommunications entity and relevant work experience in a developing country. The assignment is expected to start on January 1, 1993 and be for a period of about two years. As the position requires an unusual amount of time and resources for staff development and training, candidates with a track record and/or capacities in these areas would be preferred. Expert 2: Management Accountant 13. Objectiye: The objective of the task is to str_.ngthen the management accounting system to ensure that management reporting and control systems are in place to monitor TELKOM's performance and to enable TELKOM's management to take the necessary and timely corrective actions. 14. Scope of Work: The expert will lead a group of TELKOM staff in carrying out, inter alia, the following: - review of the budgeting proe-ess and reports and assist in implementation of the agreed recommendations; - review of the existing policies, systems and procedures in management accounting and assist in implementing the agreed recommendations; - review the financial man.gement systems and procedures to monitor and control the actual performance against budget targets: - recommend and establish a performance monitoring system for Strategic Business Units for senior management; - 103 - ANNEX 11 Page 23 of 24 - review appropriate organization setup to carry out these functions and assist in the implementation of agreed recommendations; - carry out a job analysis to identify the staffing needs to maintain management accounting systems and related functions and prepare the training programs and provide the training; - assist in preparing monthly, quarterly and annual operational and development management reports for senior management. 15. In carrying out the above tasks, the expert should review the work being undertaken as well as have been undertaken to improve the system by TELKOM and external consultants. 16. Reguirements: A qualified accountant with over ten years experience as management accountant and relevant work experience in a telecommunications entity and developing country. The assignment is expected to start on January 1, 1993 and be for a period of about two years. As the position requires an unusual amount of time and resources for staff development and training, candidates with a track record and/or capacities in these areas would be preferred. ExDert 3 - Cost Accountant 17. Objective: The objective of this task is to establish a cost accounting system to enable TELKOM to account cost by elements, different activities and services and regional offices and UPTs in order to carry out cost and profitability analysis and control. 18. Scope of Work: The expert will lead a group of TELKOM staff carrying out, inter alia, the following: - review policies, systems and procedures in setting up cost accounting and assist in the implementation of agreed recommendations; - review cost and profitability analysis and control system and assist in the implementation of agreed recommendations; - review appropriate organization setup to carry out these functions and assist in the implementing of agreed recommendations; - carry out a job analysis to identify the staffing needs to establish and maintain a cost accounting system and related functions and prepare the training programs and provide the training; - assist in preparing the cost accounting reports for senior management. - An appropriate organization setup to carry out this function needs to be recommended and implemented - 104 - AEX 11 Page 24 of 24 19. In carrying out the above tasks, the expert will review any work being undertaken as well as have been undertaken to setup a cost accounting the system by TELKOM and external consultants. 20. Requirements: A qualified accountant with over ten years experience as cost accountant and relevant work experience in a telecommunications entity and developing country environment. The assignment is expected to start on January 1, 1993 and be for a period of about two years. As the position requires an unusual amount of time and resources for staff development and training, candidates with a track record and/or capacities in these areas would be preferred. Expert 4: Treasury Manageme;±t Expert 21. Obsective: The objective of this task is to strengthen TELKOM's treasury function to enable it to operate as a commercial entity so that it can assess the best financing techniques for its development, issue securities (eventually equity), manage its cash and liabilities and foreign exchange exposure. 22. ScoRe of Work: The expert will lead a group of TELKOM staff to carry out, inter alia, the following: - review the existing policies, systems and procedures in treasury management and assist in the implementation of agreed recommendations; - review appropriate organization setup to carry out these functions and assist in the implementation of agreed recommendations; - carry out a job analysis to identify the staffing needs for treasury management and prepare the training programs and provide the training; - assist in preparing the reports related to the functions to be carried out for senior management. 23. In carrying out this task the expert will review work being undertaken as well as have been undertaken to improve the system by TELKOM and external consultants. 24. Reauirements: A qualified accountant with over five years experience as a treasury manager and relevant work experience in a developing country. The assignment is expected to start on January 1, 1993 and will be for a period of about two years. As the position requires an unusual amount of time and resources for staff development and training, candidates with a track record and/or capacities in these areas would be preferred. - 105 - INDONESIA AMEX 12 FOURTH TELECOMMUNICATION PROJECT page l of 2 PROCUREMENT PACKAGES AND SCHEDULE BID PACKAGES OF 199119293 1OSP -lIst Phase R Supporting Facilities a. Bidding b. Evaluatin a. Approval d. Contract Discusson 0. EDC 2PO2nd Phase a. Bidding b. Evaluation c. Approval 3 -552 K 2nd Phase O a. Bidding b. Evaluation c. Approval 4L Contract Discussion .. EDC 4Bal Nusa Tenggara Digita FRANO MW .+ Supporting FealtIe a. Bikdig 8. Evaluation a. Approval cL Contract Discussin 0. EDC Trans Suiawesi Phase 11 FRAME a. Bidding b. Evaluation a. Approval 4L Contract Discussion a. EDO Cross Kalimantan Digita ph ii M MW + Supporting Faciltes a. Bidding b. Evaluation a. Approval d4 Contrac Discussion a. EDC Jabotabok Transmission OC a. Bidding b. Evaluation a. Approval d4 Contiact Discussion .. EDO Remote Area Projec a. Bidding 8. Evaluation a. Approval 4L Contrac Discussion *. EDO INDONESIA ANEX12 FOURTH TELECOMMUNICATION PROJECT page 2 of 2 PROCUREMENT PACKAGES AND SCHEDULE BID PACKAGES 5OFRI 1911*1i93~ FUD12 3145617151101111 121341516781011 t2 1283 5 7 00 112 0 Construcion SupoivwsMr for OSP a. Bidding b. Evaluation a. Approval d. Conftra Discusson o. EDO 10 ComputerizationOR a. Bidding b. Evaluation o. Approval d. Contrac Discuso 0. EDO . . . . .. . . 11 Malmntaanon Equipment mOR a. BiddingInI b. Evaluation c. Approval 4L Contrac Dhiscusio 12 Java -Ball ProjerFRNC MW +i Supporting Facilifes b. Evaluation a. Approval 4 Contrac DiscusinW 0. EDO I3 MS Consultan a. Bidding b. Evaluation a. Approval d Contrac DiscssinW a. EDO '4 CS for Transmissin MW.+ Suppotidng Faciltie a. Biwing b. Evaluation a. Approval 4L Contrac Discussio si.EDCIII I isCs for Switching a. Bkkging b. Evaluation a. Approval 4L Contro Discuso a.EDO 16 OM ford pmojegm a. Bidding b. Evaluation a. Approval cL Contrac Discussion 0. EDO - 107 - ANNEX 13 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT Disbursement Schedule (US$ Million) Asia Bank Semer Disbursement Cumulatve Telecom. FY No. Ending Semester Cumulative Sector Profile 1993 I Dec. 31, 1992 0.0 0.0 0.0 0 II June 30, 1993 5.0 5.0 1.3 10 1994 I D'x. 31, 1993 5.0 10.0 2.6 14 1 June 30, 1994 5.0 15.0 4.0 30 1995 I Dec. 31, 1994 30.0 45.0 12.0 42 II June 30, 1995 40.0 85.0 22.7 54 1996 I Dec. 31, 1995 50.0 135.0 36.0 62 11 June 30, 1996 50.0 185.0 49.3 74 1997 I Dec. 31, 1996 50.0 235.0 62.7 82 H June 30, 1997 50.0 285.0 76.0 86 1998 I Dec. 31, 1997 40.0 325.0 93.0 98 II June 30, 1998 50.0 375.0 100.0 100 - 108 - ANNEX 14 Page 1 of 2 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT Implementatlon Schedule 1. SWIlCHING Yr 1991 1992 1993 1994 1996 1996 CodeNo./Pft i i i i i i i i I I i i I I i i I I i i l l I l 101 8TD1-11Dg.P1LVIIA + + -+ + + 102 LTG -O(IgIdThmk) + 4.+ + + + 103 10-2 (OMTRA) + + + + 104 sT 2(+) +4 105 ST - 3 (NUM) + + + + (.) :biui ~m EOC) . OSP (Looal Network Junctions + Supporting Facdlles) v.,, 1991 1992 1993 1994 1996 1996 00d No. /Pralad !II I i i i i i i i iii ii i ii i i i:i /p ~ ~~ () _________ _ _ _____r_r_ 20tfme 1BeR& NuSa Two *Is) O + + +'+ + (bdo + ( 202 K _Antut + *(l (+,* + + + (b () ,+ 203 Sulsw,e Malw & klan J. + (t) (+ + + + ancd + ) ,+ 24 SuWpmig + E + + + n. c_nsudIn SUPaHn + '+ For201.202.& 203 + mm=% - 109 - ANNEX 14 INDONESIA Page 2 of 2 FOURTH TELECOMMUNICATIONS PROJECT Implementation Schedule 3 EXPANSION OF MULTI - EXCHANGE AREA Ye. 100k1 10092 1003 1004 19R16 100 CodNo./Pvow l l ll lm im 120 lo l l 301 JABOTASEK 4o,+ + 4. TRANSMON Yw 1901 1002 19W3 1994 1006 1 RAo' III II I I I I I I I I I I Rak i i i fi ! i i i i r i i ! i i I T - ! 401 nd Jga-BdfExPIn + + + 402 o - Nt-aTaWguPh - I * + + 403 TS_ ,-6uiu h-U + + + 404 Cm" Ka m u I Ph - 11 + + +4 406 RmteArmPh -M +. + + 406 CoElunlon Super4on . + 407 Supptng F .. - L MANTENANCE NEEDS Ye_ 1001 1992 1003 1004 1006 1006 I , I I, I I , , , , , I 1111, -I,-, ---,-,fI-,l,-- Ye lm r |{| l 'lll' lo lo"r w spwoP + f + + + S02 Toole * ) + + + + 803 Toot Ew nw' + + S. COMPUTRIZAMON Yaw 11 192 103 10"4 19 19 JIl J IIII II IlII I III I I I I 1 601 T d * hwagMam New* (MS + + + O2 hoayInqib 4 + ) SyUsm Upade + + 4. 4 7. TECHNICAL ASSISANCE 0 99 93lo o o , W > N t^ s",100 1002 100 100 10699 Yew I I I I I I I I I I I I I I I I I 1 1 1 1 1 1 1 - 701 Fdaw pl/TM g + + + 702 Coeuiwi Se,l , , + 703 D Oa4mks-.n __ 0:) Tondaulfig ;: hpmuwt.on ai - 110 - Annex 15 INDONESIA PT TELEKOUNIIKASI INDONESIA (TELKOM) .......... ,....................... FOURTH TELECOMMINICATIONS PROJECT Performance Indicators Fiscal Year Ending December 31 1992 1993 1994 1995 1996 1. Automatlc Exchange Capacity 2,015 2,515 3,015 3,515 4.015 Maanual Exchange Capacity 30 10 0 0 0 Total Exchange Capacity (C000s) 2,045 2,525 3,015 3,515 4,015 2. Additional Auto Lines Connected 300 350 400 450 500 Additional Marual Lines Connected (15) (7) 0 0 0 Total Main Lines Connected ('000G) 285 343 400 450 500 3. Total Auto Main Lines 1,509 1,859 2,259 2,709 3,209 Total Manual Main Lines 22 7 0 0 0 Total Main Lines Exc. RSA (C000s) 1,531 1,866 2,259 2,709 3,209 4. Other Services Data Subscribers ('000s) 1.0 1.5 2.0 2.5 3.0 Payphone ( 000s) 45.0 60.0 75.0 90.0 105.0 WARTELs ('000s) 0.8 1.0 1.0 1.0 1.0 5. Quality of ServIce No. of Faults 6.5 6.0 5.8 5.5 5.0 (per 100 sub/month) Effective Call Comqpletion Rate (X) Jakarta - Local 30X 35X 42X 48X 50X - National Long Distance 25X 30X 35X 39X 42K 6. Staffing/ 1,000 Main Lines 27 23 21 19 16 7. Revenues (Rp. '000) op Revenue/Av Main Line Constant '91 1,480 1,333 1,268 1,168 1,087 Current 1,569 1,497 1,510 1,475 1,454 Telephone Rev./Av Main Line Constant '91 1,325 1,198 1,152 1,072 1,005 Current 1,405 1,347 1,373 1,354 1,345 8. Costs (Rp. '000) Op Cost/Av Nain Line Constant '91 1,134 1,000 927 870 806 Current 1,202 1,124 1,104 1,098 1,078 Cash Op Cost/Av Main Line Constant '91 607 570 538 515 488 Current 644 640 641 651 653 Staff Cost/Av Main Line Constont '91 357 341 328 320 309 Current 378 383 391 404 413 9. Return on Av. Net Fixed Assets 24X 26K 28K 28K 29X 10. Net Internal Cash Gen./Avg 2 Years Invest. 43X 43K 42X 47X 48X 11. Debt Service Coverage 2.9 2.9 3.3 3.4 3.2 12. Current Ratio 1.7 1.7 1.8 1.9 2.0 13. Debt/(Debt.Equity) 52K 57K 59 60K 60K - lil - ~~~ANNEX 160 INDONESIA FOURTH TELECOMMUNICATIONS PROJECT Action Plan Objective Plan of Implementation Target or Indicator I. Accountine Systems and Financial Management 1. Up grad e F i nanco Based on ongoing consultants' Implement agreed program from Department staff skills. recommendations, agree on the FY92 onward. Progress to be domestic and overseas training monitored according to agreed program. reporting requirements throughout the project period. 2. Develop accounting Review and implement revisions Review the accounting policies, policies, systems and to the existing accounting systems and procedures by June p r o c e d u r e s f o r policies, systems and procedures 1992. Implement the revisions decentralized operation. in light of the planned required by December 1992. decentralization. 3. Develop cost accounting Review and implement policies, Expert to be employed by August system. systems, procedures, 1992. Implement the agreed organizational setup and training recommendation by June 1993. for a cost accounting system. 4. Improve management Review and implement policies, Expert to be employed by August accounting system. systems, procedures, 1992. Implement the agreed organizational setup and training recommendations by June 1993. to improve management accounting system. 5. Improve accounting and (a) Implement SIMAK Systems to be implemented in 10 financial management information systems in aU WITELs by December 1992 and information systems. WITELs. in remaining 2 WITELs by December 1993. lmplementatio'. to be completed by Decemser 1993. (b) Convert PC-based account- ing and MIS systems at the telephone offices to operate on main frame. 6. Develop treasury function Review and implement policies, Expert to be employed by August to operate on commercial systems, procedures, 1992. Implement the agreed basis. organizational setup and training recommendations by June 1993. to improve treasury function. - 112- ANNEX 16 Objective Plan of Implementation Target or Indicator 7. D eve lop fi nan c i a 1 Integrate TELKOM's financial Expert employed under the Third forecasting and planning. model into corporate planning and Telecommunications Project to budgeting cycle. Implement assist TELKOM to develop financial model at WITEL level. financial model by July 1992. Model to be integrated into TELKOM planning by December 1992 and implemented at WITEL level by June 1993. 8. Continue improvement in Implement phased billing. Implement phased billing in six or billing efficiency. more locations by March 1992 and all locations by December 1993. 9. R ed u c e 1e v . Is o f Continue actions taken by Reduce receivables for all government receivables. TELKOM in line with government subscribers to a Government decree to improve maximum of two months of receivables from Government billing for the year from 1993. subscribers. HI. Institutional StrenatheninF 1. Design and implement a Study to assess needs, using Study according to agreed TOR to management information technical assistance, develop and be completed by June 30, 1993, system. implementation plan of action. & implement pilot project in Jakarta to proceed thereafter. 2. Further develop technical Study methods using technical Appoint consultants by October operations (traffic assistance, develop a plan of 31, 1992, implementation to m o n it o r i n g a n d action to improve quality of proceed thereafter and monitored engineering) service. according to agreed reporting requirements. III. Human Resources Development and Trainine 1. Develop a long-term human Study to assess existing staff Appoint consultants by December resource development plan resources in relation to future skill 31, 1992 to implement agreed initially for Jakarta. mix requirements including recommendations. training, career development and finalize recommendations by June 30, 1992 to successfuly implement decentralization program. 2. Increase availability of Prepare training plan. Skills Upgrade training facilities by competent, trained expert needed in (a) digital technology December 31, 1993. Progress to staff. (b) outside plant maintenance and be monitored through agreed (c) network management. reporting requirements. - 113 - ANNEX I Objective Plan of Implementation Target or Indicator 3. Develop a career (a) Decide on the field and Training to commence beginning succesion plan for the top numbers to be trained in September 1993. Progross to be 100 management in each fidd. monitored through agreed TELKOM. reporting requirements. (b) Arrange language training. Complete language training (c) Execute plan for selection and January 31, 1993. training. Complete selection by September 30, 1992. IV. Ooorational Porformanco ;. Further develop efficiency (a) Set network performance Agreed indicators given in of operation, quality of targets, monitor and review Annex S. services and responsiveness performance compared to to users. targets & determine cor- rective measures whero appropriate. (b) Decentralizemanagementto Decentralization starting with the regions Jakarta to begin June 1992. 2. To reduce faults on plants (c) Reduce number of 5 which cause high fault faults/100 phones/month. incidents: Dropwire, DP and Indoor Facilities. (d) Reduce the time for repair. 80% within 48 hours of reporting. (e) Provide intensive training. S/1000 working lines. (f) Prepare network masterplan Draft plan to be completed by for Ropelita VI. October 7, 1992 and final plans to be completed by April 30, 1993. 3. To improve service to (a) Prepare list of (CIC) January 1993 for Jakarta and commercially important customers by account. Surabaya. June 1993 for other customers. msjor cities. (b) Improve staff skills in customer orientation. January 1993. - 114 - ANNEX 17 INDONEIIA Page 1 of 4 PERUSAKAAN WIN TELEKOQUNMtKAI (PERWITEL) FOURTH TELECONUtNICATIONS PROJECT ................................. Historical Income Statements (Current Rp. Billions) Fiscal Year Ending December 31 1986 1987 1988 1989 1990 1991 1/ Operating Revenue:_2/ Telephone 527.2 623.2 690.6 792.3 1,038.2 1,521.0 Tetlx 47.0 53.4 56.2 59.9 67.8 90.2 Telegrm 8.8 9.9 11.2 11.4 14.7 18.0 Leased Channel 22.3 27.2 29.5 44.4 55.9 41.8 Other Revenues 8.8 10.3 12.0 21.5 116.2 66.5 Total Revenue 614.2 724.0 799.4 929.4 1,292.8 1,737.5 Operating Expenses: 4 Personnel 152.0 166.6 181.2 254.4 384.1 447.3 General & Administration 116.2 113.0 112.0 108.8 144.3 236.5 Repair & Maintenance 84.7 87.3 61.3 55.0 62.7 81.4 DeprecIation 3/ 108.0 267.9 251.9 294.1 409.5 518.1 Amortization 27.2 42.3 23.8 43.1 115.3 63.9 ProvisIons 7.1 14.3 10.7 25.3 13.6 14.6 Total Expenses 495.2 691.4 641.0 780.7 1,129.5 1,361.8 Net Operating Income 119.0 32.6 158.5 148.7 163.2 375.8 Interest-LTD 38.7 30.6 22.3 66.7 77.1 171.0 Net Non-Operating Income 91.5 71.0 97.4 88.9 107.6 83.0 Extra OrdInary Gain (Loss) 16.2 31.1 (51.5) (9.7) 1.7 Pre-tax Income 187.9 104.1 182.1 161.3 195.4 287.8 Income Tax 53.8 20.7 70.4 57.9 66.0 100.8 ........... ....... ....... .... ....... ....... .... ....... ....... ... ........... . Net Incom 134.2 83.5 111.7 103.4 129.5 187.0 _1/ Althought PERtITEL was converted to TELKOM on September 23. 1991, the ffnancial statements are for PERUhTEL for the whole fiscal year. .2/ Tariffs were Incressed substantialty effective October 1990. .3/ Depreciation ethod used changed in 1987 from straight line to double declinfng. - 115 - ANNEX 17 INDONESIA Page 2 of 4 PERUSAHAAN UMUN TELEKONUNIKASI (PERUNTEL) ......................................... FOURTH TELECOUIUNICATIONS PROJECT ................................. Historecal Sources and Use of Funds (Current Rp. Billions) Fiscal Year Ending DOceber 31 1986 1987 1988 1989 1990 1991 1/ SOURCES: Not Income 134.2 83.5 111.7 103.4 129.5 187.0 Depreciation 108.0 267.9 251.9 294.1 409.5 518.1 Amortization 27.2 42.3 23.8 43.1 115.3 63.9 ProvIsions 7.1 14.3 10.7 25.3 13.6 14.6 Interest 38.7 30.6 22.3 66.7 77.1 171.0 Differed Installation Charge 22.2 25.4 21.4 4.5 (50.0) 38.9 .............. ...................... ....... ........... ....... ........... ....... Internal Cash Ceneratfon 337.4 464.0 441.8 537.1 694.9 993.4 Equity & Reserves 18.2 176.1 120.6 84.6 157.5 36.3 Other Liabilities 49.7 (42.1) (33.4) 2.9 48.0 1.2 Loans 118.7 237.1 313.0 355.4 560.4 1,005.3 .. ............. .......... ....... ........... ....... ........... ... ....... . TOTAL SOURCES 524.0 835.1 842.0 980.0 1,461.0 2.036.2 =m-uu-M s 5-- 8 3.3 33333 3.33333 APPLICATIONS: Capital Investment 211.4 504.6 568.9 518.3 842.3 1,134.7 001 Development Fund 67.5 73.8 45.9 61.5 56.8 0.0 Bonus to Employees 12.3 13.4 8.3 11.2 16.5 20.7 Pension Plan 9.8 10.7 6.7 8.9 2.1 2.6 Social ObjectIve 2.5 2.7 1.7 2.2 2.1 2.6 ,.................. ........ ...... ......... ...... ......... ...... Total Transfers 92.0 100.6 62.6 83.8 77.5 25.9 Debt Service Interest 38.7 30.6 22.3 66.7 77.1 171.0 Principal 60.1 65.7 73.6 75.1 261.8 253.1 ....... ....... ... ....... ....... . ... ....... ........... ... .................. ... Total Debt Service 98.9 96.3 95.9 141.8 338.9 424.1 Change In Working CapItal 101.4 10.6 70.3 (6.1) (65.7) 237.3 Deffered Charges 20.3 122.9 44.3 242.1 268.1 214.1 ....... ....... ... ....... ....... . ... ....... ........... ... .................. ... TOTAL APPLICATIONS 524.0 835.1 842.0 980.0 1,461.0 2,036.2 _/ Althought PERtITEL was converted to TELKOM on Septeeber 23, 1991, the fInancaf. statements are for PERWiTEL for the ihole fiscal year. - 116 - ANNEX 17 INDONESIA Page 3 of 4 PERUSAHAAN UNU TELEKONUNIKASI CPERUNTEL) FOURTH TELECONMUNICATIONS PROJECT .... ........... ........................ Historical Balance Sheets CCurrent Rp. Billion) Fsca l Year Ending December 31 1986 1987 1988 1989 1990 1991 _1/ Current Assats Cash & Banks 115.9 62.5 83.5 62.2 89.6 95.2 Short Term Investment 445.7 464.5 558.6 619.6 340.3 402.2 Accounts Receivable 129.9 129.5 147.4 146 160.2 192.5 Other Receivables 45.0 106.9 117.0 13.0 3.7 53.9 inventories 83.1 69.7 60.6 52.8 104.0 164.1 Advance Payments 53.5 69.3 65.9 159.2 368.9 496.6 Total Current Assets 873.1 902.4 1,033.0 1,053.1 1,066.6 1,404.5 Gross Fixed Assets._2/ 1,028.8 1,943.4 2,256.3 2,740.8 3,568.5 4,472.2 Less Actumulted Deprecfstfon_2/ 586.6 1,106.1 1,358.2 1,644.5 2,044.7 2,382.0 ................................ ....... .......... ....... .......... ....... Net Fixed Assets 442.2 837.4 898.1 1,096.3 1,523.8 2,090.1 Work in Progress 316.7 458.3 714.5 740.5 745.8 796.1 Deferred Charges 48.0 128.7 149.2 348.1 500.9 651.3 TOTAL ASSETS 1.680.1 2,326.8 2,794.8 3,238.2 3,837.2 4,942.0 Current Liabilities Accounts Pryabtes 75.7 94.2 128.9 135.0 271.4 299.8 other Peyabte 130.0 144.5 180.7 226.2 182.6 269.3 Current Portion LT debt 65.7 73.6 75.1 261.8 253.1 263.2 Total Current Liabilities 271.4 312.3 384.8 622.9 707.1 832.3 Long term Debt 563.8 727.4 965.2 1,058.9 1,366.2 2,108.4 Deferred lncomeClnstall. Charge) 63.8 89.2 110.6 115.1 65.1 103.9 Other Long Tern LiabiLities 107.5 65.5 32.0 34.9 83.0 84.2 Total Llabilities 1,006.5 1,194.3 1,492.6 1,831.8 2,221.3 3,128.8 Equity Government Equvty 471.4 565.9 1,190.0 1,153.0 1,310.2 1,418.2 Reserves & Retafned Earnings 202.1 566.6 112.2 253.4 305.7 395.0 Total Equity 673.6 1,132.5 1,302.2 1,406.4 1,615.9 1,813.2 TOTAL LIABILITIES & ECUITY 1,680.1 2,326.8 2,794.8 3,238.2 3,837.2 4,942.0 _1/ ALthought PERUNTEL was converted to TELKON on September 23, 1991, the financial statements are for PERIMIEL for the whole fiscal year. _2V Assets rwvalued in 1987 end accelerated deprecfation method adopted. - 117 - ANNEX 17 INDONESIA Page 4 of 4 PERUSAHAAN UIM TELEKOIUNIKASI (PERUKTEL) FOURTH TELECOMIUNICATIONS PROJECT Historicel Perforamnce Indicators _~~~--- - - - - - - - uuu.uu Fiscal Year Ending Deceaber 31 1986 1987 1968 1989 1990 1991 _1/ Revenuer: (Rp. '000s) Telephone/Av Main Line (Current) 836 893 896 958 1,108 1,341 Constant '90 Prices 1,215 1,158 1,064 1,035 1,108 1,289 Op Revenuv/Main Line (Current) 974 1,037 1,038 1,124 1,380 1,532 Constant '90 Prices 1,416 1,346 1,232 1,214 1,380 1,473 Costs: CRp. '000.) Cash Op Cost/Av Main Line (Current) 560 526 460 506 631 675 Constant '90 Prices 813 682 546 546 631 649 Staff Cost/Av Main Line (Current) 241 239 235 308 410 394 Constant '90 Prfces 350 310 279 332 410 379 Staff Cost/Cash Op Cost CX) 43X 45X 51X 611 65X 58X Operating Ratio 81X 95X 80X 84X 87X 78X Rate of Return on Av NFA 26X 5X 18X 15X 12X 21X Transfer to GOI 130.6 104.9 129.8 244.2 323.2 274.6 Equity from GOI 19.2 81.8 602.1 0.0 157.2 0.0 Net Transfer to 001 111.4 23.1 (472.3) 244.2 166.0 274.6 Transfer to GOI X of Equity 19X 92 10X 17X 201 15X Net Transfer to GOI X of Equity 17X 22 -36X 17X 102 151 Net I1C/Av 2 Years Investments 411 502 52X 462 282 412 Debt Service Coverage 3.4 4.8 4.6 3.8 2.1 2.3 Current Ratio 3.2 2.9 2.7 1.7 1.5 1.7 Account Receivable (Das") 76 64 66 57 45 40 Debt/(Debt + Equity) 46X 392 432 43U 46X 54X 1/ Althought PERUNTEL was converted to TELKOM on September 23, 1991, the financial statements are for PERUNTEL for the iholo fiscaL year. - 118 - INDONESIA Annex 18 PT TELEKONUNIKASI INDONESIA (TELKON) Page 1 of 3 ... ................................. FOURTH TELECOMMUNICATIONS PROJECT Projected Income Statements (Current Rp. Billions) Fiscal Year Ending December 31 1992 1993 1994 1995 1996 .......---------- Forecast ------------------------------- Operating Revenue: Telephone 1,955.7 2,302.9 2,852.2 3,383.5 4,000.6 Telex 89.5 89.1 99.0 104.6 111.8 Tetegram 19.4 20.4 21.4 22.5 23.6 Leased Chanels 46.0 50.6 55.7 61.2 67.4 Other Services 68.2 80.1 85.9 92.5 99.8 Total Revenue 2,178.9 2,543.1 3,114.1 3,664.3 4,303.3 Operating Expenses: Salaries and Wages 525.0 650.6 806.2 1,004.8 1,222.8 General & Adminfstration 262.5 292.8 322.5 351.7 366.8 Repair & Mafntenance 106.1 144.0 194.2 259.6 343.1 Depreciation & Amortization 743.2 795.0 921.7 1,073.8 1,213.1 Provisions 31.8 26.3 31.8 38.1 44.5 TotaL Expenses 1,668.6 1,908.7 2,276.4 2,728.0 3,190.2 Operatfng Income 510.3 634.3 837.7 936.3 1,113.1 Interest-LTD 196.0 220.7 235.8 280.8 368.0 Non-operating Income 30.8 16.8 5.4 10.5 27.3 ....... .......... ....... ........... -------...... ... ........ ... Pre-tax Income 345.2 430.5 607.4 666.0 M7.3 Income Tax 120.8 150.7 212.6 233.1 270J3 Net Income 224.4 279.8 394.8 432.9 502.0 Ratios: Operating Ratio) 77X 75n 73n 74K 74K Return on Net Fixed Assets (Pre-tax) 24X 26X 28X 28X 29X Return on Net Fixed Assets (After Tax) 20X 20X 21X 21X 23X - 119 - IMDONESIA Annex 18 PT TqLEKOsJNIKASI INDONESIA (TELKOM) Page 2 of 3 .................................... FOURTH TELECOIUNICATIONS PROJECT ProJected Sources and Us of Funds (Current Rp. Bfillons) Fiscat Year Ending Deceeber 31 1992 l 9 3 1994 1995 196 .................. Forecat ----------------------- ams. . . _.. ...ua Sources: Not Income 224.4 279.8 394.8 432.9 502.0 Deprelaetfon & Amrtlzatfon 743.2 795.0 921.7 1,073.8 1,213.1 Interet 196.0 220.7 235.8 280.8 368.0 Deferred Instatlation Charges (Nat) 18.1 17.0 33.8 29.4 33.2 ,.......... ....... ........... ....... .......... ............... internal Csh Ceneratfon 1,181.6 1,312.5 1,586.1 1,816.9 2,116.3 001 Development Fuwd 46.8 56.1 70.0 98.7 108.2 Sonus to Eaployses 29.9 35.9 44.8 63.2 69.3 Pension Plan 3.7 4.5 5.6 7.9 8.7 social ObJective 3.7 4.5 5.6 7.9 8.7 ...... ...... .. ...... ...... ... ...... .............. ... Totat Transfers 84.2 101.0 125.9 177.7 194.8 Debt Service Interest 196.0 220.7 235.8 280.8 368.0 Prineipal 207.6 234.6 242.8 259.3 302.0 ... ........ ....... .......... ....... .............. .......... Total Debt Servieo 403.5 455.2 478.6 540.1 670.0 ....... .......... ....... .......... ....... ..................... Net Internat Csh Generatfon 693.9 756.3 981.6 1,099.1 1,251.6 Loans 918.6 972.9 943.6 876.2 800.6 ....... .......... ....... .......... ....... ..................... TOTAL SOURCES 1,612.5 1,729.2 1,925.2 1,975.3 2,052.2 Appiceatfonrs Capital Investmnt Local Componrnt 811.5 653.7 676.8 853.6 842.2 Fore gn Coexonent 692.0 882.9 810.9 668.6 717.4 ....... .......... ....... .......... ....... ..................... Total 1,503.5 1,536.6 1,487.7 1,522.2 1,559.6 Change In Working Capital (27.6) 45.5 280.3 266.0 247.2 Deffered Charg N IOC) 136.7 147.1 157.2 187.2 245.3 ....... .......... ....... .......... ....... ..................... TOTAL APPLICATIONS 1,612.5 1,729.2 1,925.2 1,975.3 2,052.2 Ratios: Net Internal Cah/ Av 2 Year Investm nts 431 43X 42X 47X 48X Debt Service Coveraev 2.9 2.9 3.3 3.4 3.2 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 120 - INDONESIA Anmex 18 PT TELEKONUNIKASI INDONESIA (TELKON) Page 3 of 3 FOURTH TELECOMU NICATIONS PROJECT Projected BWaance Sheots (Current Rp. Siltions) Fiscal Year Ending Decdber 31 1992 199 1994 1995 1996 ............... Forct --------------------- - - - - - - - - - -.aum u Current Assets: Cash and Short Term Investment 344.8 296.5 346.8 390.1 402.4 Accounts Recoevable 220.2 268.4 328.8 386.2 453.6 Other Receivablas 87.2 127.2 202.4 274.8 322.7 inventorles 250.4 305.9 367.6 433.6 502.9 Prepaymnt 544.7 635.8 M7.5 916.1 1,075.8 Total Current Assets 1,447.2 1,633.8 2,02(.1 2,400.8 2,757.4 Gros Fixed Assets 5.258.0 6,424.5 7,719.5 9,105.4 10,560.8 Less Accamalated Depreciation 3,027.5 3,719.0 4,530.6 5,487.3 6,572.8 Net Fixed Assets 2,230.4 2,705.6 3,188.9 3,618.1 3,988.1 Work in Progres 1,379.7 1,749.8 1,942.5 2,078.8 2,183.1 Net Deferred Charges 690.3 733.9 781.0 851.0 968.? ....... .......... ....... .......... ....... ..........................X TOTAL ASSETS 5,747.7 6,823.0 7,936.5 8,948.8 9,897.3 Current Liabilities: Accownts Payablet 360.4 44S.1 511.1 577.5 643.2 Other Payablts 240.3 296.7 340.7 385.0 428.8 Current Portion LT Debt 234.6 242.8 259.3 302.0 331.8 ....... .......... ....... .......... ....... ..................... Total Current Liabilities 835.2 984.6 1,111.1 1,264.5 1,403.7 Long Term Debt 2,453.4 3,183.4 3,867.7 4,442.0 4,910.8 Deferred Revenue 233.6 250.6 284.4 313.8 347.0 Total Liabilfties 3,522.2 4,418.6 5,263.2 6,Lt.2 6,661.5 Equity: Governn nt Pald-in-Capftal 2,000.0 2,000.0 2,000.0 2,000.0 2,000.0 Resrves & Retained Earfngs 225.5 404.4 673.3 928.5 1,235.7 ....... .......... -... ......... ....... ...................... ... Total Equity 2,225.5 2,404.4 2,673.3 2,928.5 3,23S.7 ....... .......... ....... .......... .... .... .......... TOTAL LIABILITIES & EGUITY S,747.7 6,823.0 7,936.5 8,948.8 9,897.3 Ratios: Current Ratio 1.7 1.7 1.8 1.9 2.0 Debt/(Debt + Equfty) 52X 57 59X 603 60s - 121 - Annex 19 Page 1 of 2 INDONESIA PT TELEKOMUNIKASI (TELKOM) FOURTH TELECONMUNICATIONS PROJECT Assumptions Used for Financial Projections Price Levels and Tariffs 1. Prices. The foreign and domestic inflation rates of 3.71 and 6.0% p.a., respectively, were assumed for the projection period. The exchange rate of Rp. 1992 to the US dollar was used. 2. Tariffs. Tariffs schedules as shown in Annex 20 were used subject to the following: Domestic tariffs were assumed to be increased by 12Z effective January 1, 1994 and maintained in real terms thereafter to enable TELKOM to self finance a minimum of 40% of its financing needs and maintain its debt equity ratio within the government limit of 60:40 through 1996. 3. Future Facilities. Staffing and Ouality of Service - The number of connection for telephone, staffing ratio and auality of service for the projection period are shown in Annex 15. Incoe Statements 4. Operating Revenues. The operating revenues were calculated as follows: (i) Telephone and Telex - Traffic revenues are calculated by multiplying the total traffic (pulses or minutes) by the price per pulse or minute for local, long distance and international calls. Assumption of traffic growth are as follows: domestic automatic grow at 10% p.a, domestic manual to fall at 101 p.a. and international traffic to grow at 20X p.a.. For international revenue projection the revenue sharing with INDOSAT is assumed at 351 (to TELKOM) throughout the projection period. The rental revenue is calculated on the basis of existing lines and additional lines installed during each year. The installation revenue charge for each year is calculated on new lines installed during the year with 501 shown as revenue for the year and rest as revenue for the following year. (ii) Telegraph - It is forecast to growth at 5 percent per annum. 5. Operating Expenses. The operating expenses are assumed as follows: (i) Personnel Cost is calculated as the average number of employees times average salary, including benefits, per employee. The total number of employees is expected to increase, but the staffing ratio is expected to decrease as measures are taken to improve - 122 - Annex 19 Page 2 of 2 operational efficiency. Annual salaries are projected to increased by 10 percent p.a. in real terms, to account for increase in proportion of skilled staff and better incentives. (ii) General and Administrative Cost is a percentage of personnel cost and is projected to decrease from 50Z to 30X by 1996. (iii) ReRair and Maintenance Cost is calculated as the average number of main lines times repair and maintenance (R&M) per average main line. R&M per main line is assumed to increase by 5 per annum in real terms. (iv) Bad Debt Provision is a percentage of billed revenues and is projected at 5 of outstanding accounts receivables. (v) Depreciation is on a double declining method and is about 301 per annum on net fixed assets in operation the previous year. (vi) Amortization of deferred charges is about 201 per annum on net deferred charges the previous year. Balance Sheet Items 6. Gross Fixed Assets reflect the investment program in Annex 9 and transfers from work-in-progress. 7. Accounts Receivable is measured as the number days of total operating revenue. It is assumed to remain at 40 days of billing during the projection period. 8. Inventoriel are estimated as a percentage on gross fixed assets in service and are projected to remain at 5X. 9. Othier Bceivables are assumed to remain at 51 of operating revenue. 10. Prepayzent are assumed to remain at 251 of cash operating cost and work in progress. 11. Long-tern debt and current Rortion are based on the project financing plan and projected debt service. 12. Accounts Payable is a percentage of cash operating cost and work in progress. It is expected to decrease to 151 of cash operating cost and work in progress by 1993 and remain at that level. 13. Approrriation of Net Profit During the projection period, bonous to employees, social objectives and pension plan contributions are assumed to continue as for PERUNTEL. Dividend payment is assumed to remain at 1992 level of 251. - 123 - Annex 20 Page 1 of 6 INDONESIA PT TELEKOMUNIKASI (TELKOM) FOURTH TELECOMMUNICATIONS PROJECT S-mmary of TELKON's Tariff A. Telephone Installation Charges 1. Category I of TeleRhone Exchange (a) Main connection 1,000,000 (b) Branch connection 63,000 2. Category II of TeleRhone Exchange (a) Main connection 750,000 (b) Branch connection 32,000 3. Category III of TeleRhone Exchange (a) Main connection 500,000 (b) Branch connection 19,000 4. Category IV of Telephone Exchange (a) Main connection 350,000 (b) Branch connection 13,000 5. Category V of TeleRhone Exchange (a) Main connection 300,000 (b) Branch connection 10,000 6. Category VI of Teleghone Exchange (a) Main connection 250,000 (b) Branch connection 7,000 7. Category VII of TeleRhone Exchange (a) Main connection 225,000 (b) Branch connection 3,750 8. Category VIII of TeleRhone Exchange 200,00 9. Catemory XI of TeleRhone Exchange 175,000 10. Category X of Telephone Exchange 150,00 - 124 - Annex 20 Page 2 of 6 B. Monthly Rent of TeleRhone Connection 1. Automatic Telephone Exchange (a) Category I, II, III and IV (i) Main connection 10,000 (ii) Branch connection 5,000 (b) Category V, VI, VII and VIII (i) Main connection 7,500 (ii) Branch connection 3,500 (c) Category IX and X (i) Main connection 5,000 (ii) Branch connection 2,500 2. Automatic Telenhone Exchange UR to 500 Numbers (a) Main connection 1,000 (b) Branch connection 500 3. Automatic TeleRhone Exchange Over 500 Numbers (a) Main connection 2,000 (b) Branch connection 1,000 C. TeleRhone Conversation Rate 1. Automatic Teleghone (a) Local pulse of 3 minutes 100 (b) Local call of 3 minutes from PCO 50 (c) Internal region per pulse 100 (d) Interregion per pulse with duration 100 up to 100 km 6 seconds 100-200 km 5 seconds 200-300 km 4 seconds 300-1,000 km 3 seconds over 1,000 km 2 seconds (e) Card telephone per pulse 75 2. Nonautomatic Telephone (a) Local Included in monthly subscription (b) Local from PCO per call 50 (c) Internal region per minute 35 (d) Long-distance (normal service): up to 100 km 750 100-200 km 1,000 200-300 km 1,200 300.1,000 km 1,500 over 1,000 km 2.000 (e) Long-distance urgent service (twice the rates shown in (d) above) - 125 - Annex 20 Page 3 of 6 D. Telegraph Rate 1. Presentation rate per telegram 350 2. Domestic rate per word, normal service (minimum 10 words) 25 E. Telex Rate 1. Installation fee Same as telephone main exchange 2. Monthly subscription 15,000 3. Pulse rate with duration: 100 up to 50 km 12 seconds 50-300 km 8 seconds 300-750 km 6 seconds over 750 km 3 seconds F. Private Leased Circuits 1. Installation fee Rer Rair (inside service border area) Category I 250,000 Category II 175,000 Category III 100,000 Cagetory IV 87,000 Category V 62,000 Category VI 45,000 Category VII 37,500 2. Monthly Charges (a) Telephone circuit (analog) (i) Local (per pair within one local area inside 600,000 service border area) - 126 - Annex 20 Page 4 of 6 (ii) Long distance and trunk Zone Distance Government Business and (km) private (Rp) (Rp) I up to 100 900,000 5,062,500 II 100-200 1,080,000 6,750,000 III 200-300 1,350,000 8,100,000 IV 300-1,000 1,800,00 10,000,000 v over 1,000 2,700,000 13,500,000 (b) Telegraph and Data Circuits Leased telegraph circuits are available up to a maximum transmission rate of 50, 100 and 200 baud. Leased data circuits are available for transmission rate from 300 bps. (i) Within one local area: Printer, per pair per connection 75,000 Data communication, per pair 100,000 - 127 - Annex 20 Page 5 of 6 (ii) Long distance and trunk leased circuits Trans- mission Zone Distance Government Business and rate private 50 baud I up to 100 180,000 420,000 (full II 100-200 216,000 504,000 speed) III 200-300 270,000 630,000 IV 300-1,000 360,000 840,000 V over 1,000 540,000 1,260,000 75 baud I 198,000 462,000 II 237,000 554,000 III 297,000 693,000 IV 396,000 924,000 V 594,000 1,386,000 100 baud I 216,000 504,000 II 259,000 604,000 III 324,000 756,000 IV 432,000 1,008,000 v 648,000 1,512,000 200 baud I 288,000 672,000 II 345,000 806,000 III 432,000 1,008,000 IV 576,000 1,344,000 V 864,000 2,016,000 300 bps I 900,000 2,100,000 II 1,080,000 2,520,000 III 1,350,000 3,150,000 IV 1,800,000 4,200,000 V 2,700,000 6,300,000 - 128 - Annex 20 Page 6 of 6 NOTES 1. Location Categories Category I Jakarta area Category II Medan, Surabaya Category III Bandung, Denpasar, Palembang, etc. Category IV Yogyakarta, Bogor, Ambon, etc. Cagetory V Madiun, Sabang, Cianjur, etc. Category VI Kendal, Soingaraja, etc. Category VII Ciamis, Banjar, etc. 2. Telegraph circuits are for the following operating modes: Half-duplex Full-duplex (4-wire connection) - 129 - Annex 21 Page 1 of 4 INDONEUIA PT TELEKOMUNIKASI INDONESIA (TELKOM) FOURTH TELECOMM(UNT IIONS PROJECT Return on Investments AssutioU The assumptions made in deriving the benefit and costs streams used to calculate the economic rate of return on investments are outlined below and in Tables 21.1 and 21.2. Capital Cost TELKOM's investment program over the period 1992-1996 has been categorized as investments under (i) ongoing works, (ii) investments included in the Fourth Telecommunications Project and (iii) future works. Investments for the first two categories are closely related. In contrast, investments in the third category, future works, are independent of the first two categories and, since funding is still uncertain are considered as future works. In assessing return on investments, the capital costs considered therefore include investments under ongoing works and the Fourth Telecommunications Project taken together over the period 1992-1996. ORerating Costs Incremental operating costs streams were specified as the expected operating costs with and without the proposed investments. The expected personnel, repair and maintenance, other operating costs and corporate income tax resulting from the proposed investments have been reflected in the financial projections (Annex 18) based on assumptions in Annex 19. Without the proposed investments it was assumed that the network would continue to deteriorate, thereby leading to increased maintenance costs per line in service. More specifically, maintenance cost per line would increase lOX per annum in real terms. Staff in 1993 is assumed to increase proportionally to increase in number of main lines added without the program and continue to remain at that level thereafter. Average staff cost per staff is expected to increase as in the case with the proposed investments. Other operating costs would decrease proportionally with respect to total personnel cost. Revenues Incremental revenues were calculated as the difference in revenues with and without the proposed investments. Incremental revenues are the result of the additional revenues from new telephone subscribers, including installation, rental and usage fees and the increased revenues from existing subscribers resulting from higher traffic due to modernization of telecommunications facilities. The expected changes in revenues resulting from the proposed investments have been reflected in the financial projections based on assumptions in Annex 19. Without the proposed investments, new subscribers would continue to be connected until 1993 and from 1993, the traffic growth for existing subscribers would increase at a smaller rate and finally stop growing due to network - 130 - Annex 21 Page 2 of 4 congestion and line faults. Both international and domestic traffic are assumed to grow at 10 and 51 per annum, respectively, until 1994, jith no growth from 1995 onwards. Tariffs It was assumed that domestic tariffs would be increased by an average of 12X on January 1, 1994 and maintained in real terms in 1995 and 1996. Time HorilMo The time horizon for the project cost and benefit streams extends from 1992 to 2007. At the end of this period it is estimated that on average all equipment provided under the project would have completed its useful life. From 1996 onward all costs and benefits related to the 1992-1996 investments, are expected to remain constant in real terms. Rate of Return Input cost and benefit data used in calculating the incremental cost and benefit streams for estimating the rate financial rate of return (FRR) are provided in Tables 21.1. The incremental costs and benefits for estimating the economic rate of return are derived by adjusting capital cost for 101 value added tax, operating cost for corporate income tax and benefit stream for 101 value- added tax levied on telephone bills to telephone subscribers. The cost and benefit streams for estimating the real economic rate of return (ERR) are shown in Table 21.2. The cost and benefit streams have not been shadow priced since the procurement of most items are on competitive basis, skilled labor is mainly used and Indonesia has an open foreign exchange market. The net benefit stream was deflated to reflect constant 1991 prices. Based on these assumptions, the real financial rate of return to TELKOM is estimated at 18X. The real economic rate of return is estimated at 23X. This is a conservative estimate of the economic rate of return as it does not reflect the consumer surplus which is high given the supply constraint. A sensitivity analysis carried out to project the effect on the econiomic rate of return of possible changes in key variables is summarized below: ERR (a) a delay of 12 months in connection of new subscribers 15 resulting in a delay in revenue of 12 months; (b) 101 increase in capital and operating costs; 20 (c) a delay of 12 months in connection of new subscribers 13 101 increase in capital and operating cost. Even under the most improbable scenario, (c), and without taking into account consumer surplus the real ERR would be 13X. The contracts for major telecommunications equipment to be financed by co-financiers have already been finalized and cost estimates for major Bank financed items are based on recent contracts for similar items under the ongoing Third telecomunications Project. To ensure timely implementation of the project, single responsibility implementation approach will be used and all major contracts will be signed by the time of loan effectiveness. - 131 - TABLE 21.1 Financial Rate of Return (Rupfih lillion) Fisct Year Ending Decebr 31 1992 1993 1994 1995 1996 1997-2007 Deflator 1.06 1.12 1.19 1.26 1.34 Capitat Expwndfture 1,03.5 1,536.6 1,160.0 362.8 61.6 Operating Cost with Progrm (includs Taxes) 1,046.2 1,264.4 1,567.2 1,6t7.3 2,247.4 Operatins Cost without Progri_ (includes Taxes) 1,046.2 1,247.3 1,497.3 1,686.4 1,845.6 Incremental Operating Cost 0.0 17.1 69.9 200.9 351.9 Revenua with Progrem 2,178.9 2,543.1 3,114.1 3,664.3 4,303.3 Revenue without Prqgre_ 2,176.9 2,296.9 2,517.0 2,614.9 2,746.6 Incremental Revenu 0.0 2V6.2 597.1 1,049.4 1,556.4 Net Incremental enotfit C1,503.5)(1,307.6) (641.7 465.7 1,123.0 1,204.6 Net Incroemntel lenetft (1991 Term) C1,416.4)C1,165.7 (536.6) 384.7 639.2 900.1 Financalt Rate of Retumn a 1 ,~~~~~~~~~~~~~~~~~~~~~- - - - - - 132 - TABLE 21.2 Economic Rate of Ratrun (Rupish Billion) Fiscal Year Ending December 31 1992 1993 1994 1995 1996 1997-2007 Deflator 1.06 1.12 1.19 1.26 1.34 Capital Expenditure (Net Of VAT) 1,366.8 1,396.9 1,062.7 329.9 74.1 Operating Cost with Program 925.3 1,113.8 1,354.6 1,654.2 1,977.1 Operating Cost without Program 925.3 1,108.9 1,278.0 1,434.7 1,608.6 Incremental Operating Cost 0.0 4.8 76.6 219.5 368.5 Rev nu with progrm 2,178.9 2,543.1 3,114.1 3,664.3 4,303.3 Revnue without Progrm 2,178.9 2,296.9 2,517.0 2,614.9 2,746.8 Incroeental Revenu 0.0 246.2 597.1 1,049.4 1,556.4 Plus: Value Added Tax (10%) 0.0 24.6 59.7 104.9 155.6 Net Incremental Benefit (1,366.8)(1,130.9) (482.5) 604.9 1,269.5 1,343.6 Net Incremntal BenefIt (1991 Term) (1,289.4)(1,006.5) (405.1) 479.2 948.6 1,004.0 Economic Rate of Return m 23% 3!3 u33_33_33_ _33333_3_s - 133 - ANNEX 22 INDONESIA FOURTH TELECOMMUN'CATIONS PROJECT Selected Documents and Data Available in Project File 1. TELKOM Corporate Plan 1992-1996 2. Report on WITEL VIII Management and Operation 3. Final Report on Sumatra Telecommunications Project 4. Pelita V Development Program February 1991 5. Pelita V Development Program May 1991 6. Pelita V Development Program September 1991 7. Network Performance in Jakarta MultiExchange Area 8. Study Report on Java Second Fiber Optic System 9. Supporting Documents for Telecom IV Project 10. Strategic Plan for Organization Through 2000 11. Fourth Telecommunications Project Outside Plant Component Planning 12. TELKOM Manpower Master Plan 1992-1996 13. Contract with Booz Allen Hamilton for DGPT Institutional Strengthening MAP SECTION IORD 23237 INDONESIA t TH ąD PHILIPPINE PACKAGING OF OSP PROJECT SOUTH CHINA PACKAGE I < , ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~PACKAGE II ~~ s > }f-/ \ ~~~SEA 'I-L, ,,= a P Ke III ADE PACKAGE ha \ 1 A _ BRUN g L _~ I I COVERED UNDER ON-GOING PROJECT AREA R3M *NCo*lXpa PACIFIC MALAYSIA nJjNATrIMALCAYATAL OCEAN \ -J C iLGwORE NOM"TIONAL \ 5/ _0 r < <- R ONBOUNDAESv 3# - V~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~/ S. INDLAN~~~~~~~~~~ ACA iI M A N rAN _IUi,flS i ;. _ \ A , IA N ININOCEANv- kb$. VI ~~~octz~V I Ir a, Zr) ir{>'U ~~~~~~~~~~~~~~~~~AUSTALIA MARCH 1 92 ITRO 2340 PHIOIPPINE5 S ii I 5W Rodo Ach 4,,-" r:.~ ,Qa INDONESIA BRUNEI.> EXISTING AND PLANNED TERRESTRIAL LONG DISTANCE NETWORK AND EARTH STATIONS WIThLI. / 0 * /I * * . . MALAYSIA f a. r. -, e~in * -S-. SINGAPORE p HALAHE-A . I kokobor .:t ' Ut 4gdin * I'^S-rsot/< 1 WITEL IX S_ v E L 111 , / j Palonkorayag * r *'<6alran / Y' ITEL x < v 9 oFa is S . . ITEL XllITEL X9Jr / / >Pobrrbun~PIl liUG.* i-; ,- 2Xrto SULAWESI I iiS R I A N J A Y A 3ELTvN 0 au .lu(r Scs SL3rxnjarmgsin / ronhrer;3 o., egKndcri |t WITELA-onin rindb 4L~ --,, * p a> * WI -P.. nI - r -o --TEL. ' d,. WT- EXISIING UNDER CONSTRUCTION SLII TE I g ._ MICROWAVE ROUaES oDIGITA ---- MICROWAVE ROnTES tDi@TAL) K.p-n ICARACITYEIIeNGO"DeC FUTURE -MIICROWAVE ROUTES (ANALOG) - - S3AAINE OPTICAL FIBER CABLE =7 I Ao MCROWAVEWES ROUTESNDIGIYA --TROPOSCAFTER ROUTES - PK$SINDOSAT i^_ rF-h C10SS SUMATERA PROFOSED ~~~~~~~~SUBMARINE OPTICAL FIBER CABLE ; v- _ OPTICAL F13ER ROUTES ---MICROWVAVE ROUTE ID