World Bank Document · CURRItNC\' EQUIVALENTS (Decemiiber 1991) Currency Ullit = Indonesian Rupiah (Rp) $1 = Rp 1,992 Rp 1.0 million = $502 FISCAL YEAR Governmiet of Indonesia

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 RegionCountry Department IIIIndustry and Energy Operations Division

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

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CURRItNC\' EQUIVALENTS(Decemiiber 1991)

Currency Ullit = Indonesian Rupiah (Rp)$1 = Rp 1,992

Rp 1.0 million = $502

FISCAL YEAR

Governmiet of IndonesiaApril I1-March 31

PT. TEI-KOMJanuary I-December 31

WEIGhITS ANI) MEASURES

Metric system

ABBREX'IAT'IONS AND ACRONYMS

AMPS-A American Mobile Phonie Service - AnalogASEAN Association of South East Asian NationsBAPPENAS National Development Planining AgencyBPPT State Ministry for Researchl and TechnologyDGPT Directorate Gener-al of Posts and TelecommunicationsFRG Federal Republic of GermaniyGDP Gross domestic productICB International competitive biddingIDD International direct dialinigITU International Telecommlulinication UnionMTPT Ministry of TouLrism1. lPosts and TelecommunicationsOSP Outside PlantPT. CSM PT Chitra Sari MaklmuL1r--VSAT Communication CompanyPT. INDOSAT State International Telecomimilluniications CompanyPT. INTI State TelecommlnIllications Manufacturing CompanyPT. TELKOM State Domestic Telecommunllications CompanyPUSDIKLATTEL TelecommuL icationis Education and Training CenterREPELITA National Five-Year Development PlanUNDP United Nations Development ProgrammeVSAT 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 ................................. 3Sector Organization ........................... 3Network Facilities ........... .. 4Sector Performance ........................... 5Usage of Service .......... .. 7

B. The Entity .................................. 9Organization and Management .................... 9Staffing ................................... 10Training .............. . 11Audit .................................... 13Billing and Collection .......................... 13Accounting Systems and Financial Management .... ...... 13Management Information System ................... 14

C. Sector Development ............................ 15Sector Objectives ............................. 15Key Sector Issues ............................ 16

III. THE BANK'S PAST EXPERIENCE AND ROLE .............. 20

Past Experience ................................. 20Lessons Learned ................................. 21Rationale for Bank Involvement ........................ 22

This report is based on the laformation supplied by TELKOM and on the findings of a Bankappraisal mission comprising Messrs. A. Shanmugarajah (Task Manager and Engineer), P. Smith(Economist), and R. Pradhan (Financial Analyst), which visited Indonesia in December 1991. Thepeer 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, ChiefEA3IE have endorsed this report.

This document has a restricted distribution and may be used by recipients only in the performanceof 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 .23Project Objectives .24Project Description .24Technical Assistance .25Project Costs .27Project Financing and Terms .29Procurement .30Disbursements .32Implementation .33Performance Monitoring .36Project Reporting, Accounts and Audits .36Supervision Plan .36Environment and Health Aspects .37

V. FINANCIAL ANALYSIS .38

PERUMTEL's Historical Financial Performance .37TELKOM's Opening Balance Sheet .39TELKOM's Projected Financiai Performance. 40TELKOM's Projected Financing Plan .................... 42

VI. ECONOMIC ANALYSIS .43

Least-Cost Solution .43Tariffs .43Benefits .45Rate of Return. 46Project Risks .46

VII. AGREEMENTS REACHED AND RECOMMENDATION 48

Agreements Reached ..... . ........................ 48Recommendation .50

iii

ANNEXES Page No.

1. Cellular Radio Mobile Telephone Service .................. 522. MTPT Organizational Chart ........ ................... 533. Basic Telecommunications Sector Statistics ................. 544. Supply vs. Demand - Historical Data ...................... 645. Telephone Service Issues ......... .................... 666. TELKOM Organizational Chart ........................ 677. TELKOM Employee Data ........ .................... 688. International Development in oector Organization .... ......... 719. 1992 - 1996 Investment Program .75

10. Project Components .7811. Terms of Reference .8112 Procurement Packages and Schedule .10513. Disbursement Schedule .10714. Implementation Schedule .10815. Performance Indicators .11016. Action Plan .11117. Historical Financial Statements .11418. Projected Financial Statements .11819. Assumptions Used for Financial Projections .12120. Summary of TELKOM Tariffs .12321. Return on Investments .12922. Selected Documents and Data Available in Project File .133

TABLES IN THE TEXT

2.1 Key Performance Indicators ........................... 154.1 Estinated Project Cost ......... ...................... 284.2 Project Financing .................................. 294.3 Procurement Arrangements ............................ 324.4 Disbursement of Proposed Loan ......................... 345.1 Key Historical Financial Performance Indicators ............... 385.2 TELKOM'S Opening Balance Sheet ....................... 405.3 TELKOM's Key Projected Financial Performance Indicators .... .... 415.4 Forecasted Sources and Applications of Funds (1992-96) .... ...... 42

MAPS: IBRD No. 2323723404

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 standardvariable rate.

On-lending Terms : $373 million out of the proceeds of the loan will be on-lent from theGovernment of Indonesia to TSLKOM for 20 years including a graceperiod of 5 years; the on-lending rate will be at a variable interest ratepegged to Bank Indonesia's (Bl) three-month domestic money marketcertificate (Sertifikat Bank Indonesia -- SBI) plus one percent. The ratewould be adjusted on January 1 and July 1 of each year, based on theaverage of SBI three-month maturity quotations during the preceding sixmonths. The remaining $2 million will be made available to the Ministryof Tourism, Posts and Telecommunications (MTPT).

Project Objectivesand Description The project has two main objectives: (a) to improve sector performance by

promoting a regulatory regime conducive to competition in the provision oftelecommunication services; and (b) to meet the growing demand fortelecommunications services by enhancing the quality of TELKOM'sservice, effective utilization of existing facilities, increasing systemefficiency 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 promotingcompetition in, and developing the effectiveness of regulation of, thesector, (b) TELKOM in developing as a profe-ssionally-run,commercially-oriented enterprise, by supporting ongoing efforts toenhance human resources planning and development and by improvingits financial management and capacity for investment programdevelopment and implementation (through decentralization whereappropriate); (c) TELKOM in managing the implementation of theproject investments. Overseas study fellowships would be available forboth TELKOM and MTPT telecommunications staff.

(ii) Investment component, which would include: (a) provision of switchingand cable networks to connect about 600,000 new telephone lines,

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including provision of about 20,000 pay phones to serve the non-subscribing public; (b) provision of terrestrial microwave backbonetransmission network to improve telecommunications service in Java,Bali, Nusa-Tenggara, Kalimantan, and Sulawesi; (c) rehabilitation andreplacement of obsolete network facilities; (d) provision of spares, toolsand test equipment to improve maintenance and repair facilities; and(e) further computerization of TELKOM's operations such as directoryinquiry services and netwcrk management.

Project Benefitsand Risks Benefits. Institutional support will assist the government to strengthen its

regulatory capability, which is critical to the success of the liberalizationefforts of the government. It will also assist TELKOM in improving itsperformance as an effective and efficient entity operating on a soundcommercial basis. TELKOM's institutional development will be pursued ina number of ways, including on-the-job and overseas training and technicalassistance to improve managerial, financial and technical capabilities. Theinvestment component will satisfy part of the unmet demand fortelecommunications services. Increased availability of telephone service andimproved quality of service will make an important contribution to increasedbusiness efficiency and productivity. The project will also continue tofurther develop the local consultancy and outside plant constructionindustries through collaboration with international firms.

Risks. The principal risk for the project relates to TELKOM's capabilityto implement the project. However, this risk is minimized by upfrontactions by government and TELKOM wherever appropriate. In this regard,TELKOM has already shown its commitment to the project by establishinga project implementation unit to oversee all aspects of the project on a fulltime basis. In addition, adequate technical assistance is provided under theproject to assist. TELKOM in the implementation and supervision of con-struction works. Residual risks will be minimized by agreed measures tomonitor project implementation, with corrective actions initiated asnecessary.

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 & TestEquip. 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 10.3Support

Total Base Cost 492.8 1U3 1.144.1

ContingenciePhysical 24.6 14.2 38.8Price 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 estimadto 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 Frenchloans, plus the spread applicable to the onlending of each loan to TELKOM, to the avemag amount expeotd to beoutstanding 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 28.2FRG - 71.0 71.0 5.0France/Credit Lyc .nais - 52.0 52.0 4.0Japan (Sumitomo/OECF) - 100.0 100.0 7.0Netherlands (ABN-Anmro) - 84.0 84.0 6.0Spain - 50.0 50.0 3.7USA (Exim) - 75.0 75.0 6.0TlELKOM 497.4 47.5 544.9 40.0GOI 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 theavailability of adequate infrastructure facilities for both public and privatesector. Telecommunications has emerged as an important strategic component ofthese infrastructure facilities. The inadequacies of the Indonesiantelecommunication sector, both in quantity and quality, are a constraint tosustained industrial and export growth. Four key issues need to be addressedto alleviate these constraints: (i) mobilizing at least-cost the largecapital needed for massive investments to accelerate network expansion andmodernization; (ii) developing TELKOM into a modern, commerr.iallv orientedorganization capable of efficiently meeting telecommunication needs ofIndonesia; (iii) introducing appropriate competition policy to promote privatesector entry into the sector; and (iv) establishing an effective regulatoryregime to promote competition.

1.2 As part of the evolving strategy GOI has demonstrated its clearcommitment to improve sector performance by implementing a number of reformsby: (i) beginning the process of privatization by allowing private sectorprovision of non-basic services,1/ paging and customer premises equipment;(ii) introducing revenue sharing agreements between TELKOM and privateinvestors for cellular telephone systems; (iii) initiating studies tostrengthen GOI's capabilities to effectively manage the sector; and(iv) changing PERUMTEL's legal status from PERUM (an enterprise wholly ownedby government) to a PESERO (limited liability company whose capital is dividedin shares which are currently wholly owned by government)2/ now calledTELKOM to operate on commercial principles. This was a very importantmilestone in the commercialization of the sector. To improve its internalefficiency, TELKOM is restructuring its organization to operate on adecentralized mode to facilitate gradual restructuring of TELKOM into severalregional subsidiary companies under a holding company.

y/ "Basic" telecommunications services are currently defined in governmentregulations as telephone (including cellular mobile radio telephone),telex, telegram and leased circuits; "nonbasic" services are all othernetwork 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: aPERJAN which is primarily oriented to the provision of social servicesrather than profits; a PERUM (e.g. PERUMTEL) which is expected to recoverthe cost of sarvices as well as fulfil social responsibilities; a PERSERO(like P.T. Indosat) which is a limited liability company (with acommercial orientation).

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1.3 GOI recognizes the need to adopt further reforms to achieve Its moreambitious development objectives for the sector. These include:(i) developing a second carrier to provide modern telecommunications servicesin competition with TELKOM; (ii) removing remaining barriers to active privatesector participation in all non-basic services as provided underTelecommunications Law No. 3; and (iii) gradually shifting Governmentresponsibility from ownership and management to policy and regulation. Thesereforms will be supported under the proposed Fourth TelecommunicationsProject.

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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 serviceprovider. It is a limited liability company (para. 1.2) which operatesapproximately 1.2 million telephone lines. All internationaltelecommunications services are provided through PT. Indosat, also a limitedliability company wholly owned by Government. In addition, cellular mobileradio telephone service is provided in the Jakarta-Bandung corridor by PT.Rajasa Hazanah Perkasa, a private limited liability company in cooperatioIwith TELKOM in accordance with a revenue sharing agreement. And recently twoprivate limited liability companies operating on the (AMPS-A) system have alsobeen authorized to provide cellular service in Jakarta and East Java incooperation with TELKOM. Details of this service are in Annex 1. VSAT(mainlv data) satellite private network telecommunications services areprovided by PT. CSM, a private company, in accordance with anotherinterconnection and revenue-sharing agreement with TELKOM. Besides the publicnetwork, dedicated network facilities are owned and operated by the NationalElectricity Corporation (PLN), the state oil company (PERTAMINA), the staterailway (PJKA), the Indonesian armed forces and by other users with specialrequirements. In addition, many private and public enterprises lease circuitsfrom TELKOM to establish private networks. PT. Inti manufactures or assemblestelephone instruments, radio and multiplex equipment, satellite ground sta-tions, and digital switching equipment based on a Siemens license. PT. Intialso provides support services to TELKOM and Indosat in areas of exchangeplanning and the installation, testing and maintenance of switching andtransmission equipment. Recently two private sector companies in jointventures with AT&T of USA and NEC of Japan respectively have been allowed tomanufacture digital switching equipment in competition with PT. Inti. Theprice to TELKOM, reportedly averaging about US$250 to 300 per line (includingpower supply, engineering, installation, excluding taxes and duties) iscomparable to those prevailing in international markets. There are also fourprivate limited liability companies manufacturing cables and 14 smallprivately owned manufacturers of telecommunications equipment. The usercommunity is relatively unorganized and there is no national telecommunicationusers association in Indonesia at present. However, the larger businessusers, Indonesia Chamber of Commerce and computer users have begun to voice aninterest in telecommunications issues.

2.2 The GOI has effective control of the sector both by virtue of theGovernment's statutory authority over public telecommunications and radiolicensing and as owner of the major sector entities, TELKOM and Indosat. BothTELKOM and Indosat are accountable to the Ministry of Finance. However, theMinistry of Finance has delegated the authority to Ministry of Tourism Postsand Telecommunications. Tariffs for public telecommunications services mustbe approved by the Minister of Tourism, Posts and Telecommunication. The

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Secretary General of the Ministry is responsible for administration of theMinistry and advises the Minister on sector policy issues. The DirectorateGeneral for Posts and Telecommunications (DGPT) is responsible, in the area oftelecommunications, for regulation and radio licensing. Currently, theDirector General is the Chairmaii Lf the Board of Commissioners which overseesTELKOM operations and reviews its inveatment plans, budgets and tariffs. Inaddition to MTPT, important roles are played by the Ministry of Finance, theNational Development Planning Agency (BAPPENAS) and the State Ministry forResearch and Technology (BPPT). The Ministry of Finance approves budgets andoversees TELKOM's financial performance. BAPPENAS coordinates and controlsthe government five year planning process (Repelita) and approves investmentplan and funding. BPPT has a lead role in determining the timing andintroduction of the new technologies that art, to be used. The organizationchart of the MTPT is in Annex 2.

2.3 In early 1989, new telecommunications legislation was passed. Themost significant change from the previous legislation is that TELKOM'smonopoly in the provision of domestic telecommunications was modified topermit the provision of nonbasic services by other public and privateentities. Pursuant to the new legislation, regulations for the provision ofnonbasic services by other entities were published during 1991.

Network Facilities

2.4 Local Exchanges. Total installed exchange capacity in Indonesia atthe end of 1991 was 1.5 million line units, of which 1.2 million wereconnected --- giving an exchange fill ratio of 80X. Over 93X of localexchange lines are automatic, of which 50X are now digital. At the end of theproject (end 1997) the number of working lines is expected to increase from1.2 million to 3.2 million (a 167% increasL). Over 99Z of the local exchangelines would be automatic and mostly digital. To handle the additional trafficfrom increased customers and to improve the present traffic congestion(para. 2.14), a significant expansion of the interexchange network in Jakartaand other multi-exchange areas with new and large capacity tandem exchangeswill be provided under the proposed project. Existing net.ork facilities aredescribed in Annex 3.

2.5 Outside Plant Network. Outside plant network reliability needs tobe vastly improved, by upgrading technology and maintenance efficiency toexploit the potential benefits of sophisticated technology adopted for otherparts of the network such as switching and transmission. Under the ThirdTelecommunications Project (Loan 3182-IND), TELKOM will be establishing twelveout of the 27 planned outside plant maintenance centers (OPMC)--five inJakarta, two in Surabaya and one each in Denpasar, Medan, Palembang, Semarangand Ujung Pandang to offer customers in those cities significant improvementsin service provision and repair time. When these centers are completed in mid1993 and staffed with competent staff, the fault rate is expected to fall fromabout nine faults per 100 working lines per month to approximately five. Atthe same time, productivity will improve from one to three faults repaired perline-man per day and the faults cleared within 48 hours of fault occurrencewill be raised from 30 percent to about 70 percent. A similar approach also

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needs to be taken to improve the performance of the outside plant network inother cities, thereby improving the reliability and quality of servicecountrywide. TELKOM has agreed to have the remaining fifteen OPMCsestablished by 1996. Annex 3 gives data on the share of faults in the outsideplant network, speed of service restoration and OPMC expansion plan. TELKOM'starget 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 thefaults within 48 hours. The proposed project provides for rehabilitation,modernization and expansion of the outside plant network to achieve the aboveobjectives.

2.6 Long Distance Network. The long distance network in Indonesia iscomprised 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 84Xof the customers elsewhere have LDD, giving a nationwide average of 93%. Longdistance transmission systems will be augmented and expanded under theproposed project to improve LDD service quality. The existing and proposedlong distance networks are in Map 23404.

2.7 Palapa Domestic Satellite System. TELKOM presently operates twosatellites, Palapa-B2P, and Palapa-B2R, launched in 1987 and 1990respectively. The design-life time of both satellites is 8 years. Annex 3summarizes the customer base for Palapa. TELKOM has not optimized themarketing and service potential of these satellites. Therefore, the currentorganization needs to be strengthened to increase revenues from Palapasatellite services by: (a) establishing a well-developed marketingorganization and strategy for Palapa; and (b) developing capabilities to offervalue-added services with proportionally high customer value and revenueearning capacity instead of merely contracting raw transmission capacity.The ongoing Third Telecommunications Project supports a study to examine theoptions to separate Palapa operations from TELKOM and the proposed FourthTelecommunications Project would provide technical assistance to implement theagreed findings of that study (para. 2.36).

2.8 International Facilities. International telecommunications servicesin Indonesia are accessed via two international gateway exchanges located inJakarta and Medan, interconnected through submarine cables and satellitecircuits to 185 countries. At the end of 1990, there were 1619 internationalcircuits, up from 248 in 1980, a growth rate of about 20% p.a. Internationaltraffic has increased by 26% p.a. during the same period, well above the rateof growth in -he number of circuits. The majority of international traffic isbusiness 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 linesin 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

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countries (Figure 2.1). Furthermore, telecommunications services areconcentrated in urban areas. Jakarta, with only 9.4X of the population, hasabout 371 of the telephone lines. Outside Jakarta, Sumatra, Sulawesi andMaluku are better served than the rest. In 1991, penetration was 5.6 i/ per100 population in Jakarta, but averaged only 0.40 per 100 for the rest of thecountry (ranging from a high of 0.60 per 100 in the best served part to 0.33per 100 in the worst served part of the country). Regional distribution oftelephone service is given in Annex 3. Public telecommunications service iscurrently available to all 27 provinces, 55 municipalities, 236 districtcapitals and 2,869 of the 3,539 subdistricts. But only approximately 10,000villages of the 67,600 have telephone service. International direct dialingaccess 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 accessservice to the nonsubscribing public. TELKOM's target is to allocate 2.5percent of the local telephone 1.Lies to provide pay-phones which will befinanced under the proposed project. This is comparable to the standardsfollowed 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 overthe telephone network, telex is the most important non-voice service inIndonesia and accounts for approximately 41 of TELKOM's operating revenue.

i Compared with 25 in Kualalumpur and 11.8 in Bangkok.

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Only modest growth of telex lines is expected over the next five years becauseof significant substitution by fax and data. Installed telex switchingcapacity is sufficient to meet demand up to year 2000 and no further increasewill be required.

2.11 Telegraph and Data. Telegram service is provided at affordableprices through a network of 680 telegraph offices. At the end of 1990, therewere 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 DataPacket--SKDP). SKDP is also connected through the facilities of PT. Indosatto international packet-switched services in 26 countries. Service is said tobe 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-basichave been open to private operators since 1989 (para. 2.3), clear guidelinesand simple licensing procedures need to be developed to attract potential newoperators.

(b) Demand for and Supplv of Services

2.12 As of December 31, 1991, only 70X of the expressed demand (workinglines plus registered applicants) for telephones was satisfied, down from 89Zin 1980. However, the total number of registered applicants list grew from45,000 to 520,000 as the 101 p.a. cumulative average network growth failed tomatch the 13.5X growth in demand over the period. Since 1980, the gap betweenexpressed demand for telephone service and available telephone lines haswidened (Figure 2.2). These figures underestimate actual demand because manypotential residential customers do not sign up because the backlog is solarge. One factor which worsens long waiting lists in many developingcountries is low connection charges. However, Indonesia has high connectioncharges. TELKOM projects expressed demand to increase by 191 p.a. to 5.0million by 1997, with total demand estimated to reach 8 million lines. Sincethe commencement of the Third Telecommunications Project, the annual growthrate 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 isexpected to exceed 201 p.a. (Figure 2.3). At the end of 1996, 801 of theexpressed demand will be satisfied, increase from 701 in 1991 (Annex 4).

2.13 Despite rehabilitation efforts and large increases in investment andgrowth during the decade, the supply of telecommunications facilities andservices 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 trafficengineering, network rehabilitation and improved tariff structure. More,however, needs to be done. Implementation of an action program to furtherimprove efficiency will be part of the project (para. 4.30).

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(c) Oualitv of Service

2.14 Quality of telephone service is poor. Annex 3 presents thesuccessful call completion rates (SCR) which were on average 40 percent forautomatically dialed local calls and 20 percent i/ for long distance direct-dialed calls in Indonesia. Typical call completion rates of well dimensionednetworks in other countries are 80 percent and 60 percent, respectively.Issues contributing to low call completion rates and vtrategy to address theseissues are presented in Annex 5. This strategy, which is supported by theongoing Third Telecommunications Project (Ln 3182) gives priority to effectivecapacity utilization, replacement of old cables and obsolete switchingsystems, rehabilitation of local networks and increase in the traffic handlingcapacity of the system. In addition to the investment component, thetechnical assistance provided under the Third Telecommunications Project isdeveloping TELKOM capacity to perform on a continuous basis measurements,analysis and forecasting of traffic to provide a reliable data base fornetwork optimization. Much more needs to be done to improve the network'straffic handling performance. One of the key objectives of the technicalassistance provided under the proposed project (para. 4.9(c)) is to helpTELKOM to establish a suitable organization for traffic planning, networkoperation and management to detect changes in traffic flow and indicate whento 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 thesubscribers (200,000) provide 75 percent of the revenues which is comparablewith other telecommunications administrations. Until the Bank's ThirdTelecommunications Project, TELKOM did not distinguish between residential andbusiness subscribers nor revenue generation by type of user. TELKOMestablished in November 1990 in Jakarta a Customer Service Group (CSG) to givespecial attention to the needs of key customers speedily and effectively.Based on experience gained, through the CSG operation, TELKOM plans toestablish units in other regions to serve the specific needs of: corporatecustomers and major business customers. Billing data also reveals that alarge number of customers are not generating any originating pulse revenue forTELKOM. Hence TELKOM needs to examine this category and take action to adjustthe 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 ApplicantsHistorical Data in Indonesia (1980-190)

Figure 2.3: TELKOM- Annual % Growth of Actual andProjected Number of Main Lines

25-

20

PAro3ecte ProJected

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B. The Entity

Organization and Management

2.16 On September 24, 1991, the GOI changed the corporate status ofPERUMTEL to a limited liability company (para. 1.2), thereby reflecting theincreased commercial mandate and autonomy of the company. At the same timeits name changed to PT. Telekomunikasi Indonesia (TELKOM). TELKOM is managedby a Board of Directors,j/ who are appointed by the Minister of Finance andare iscountable to the Minister of Finance and headed by a President-Director.The E sident-Director has authority for all operations of TELKOM. Inaddition to the President-Director, the Board includes five other directorswith functional responsibility, respectively, for development and logistics,services, operations, finance, and human resources. Operationalresponsibility devolves to 12 regions, and responsibility for majordevelopment projects to 3 project-managers. Also reporting to the Board areseveral staff units responsible for Corporate Planning, Research andDevelopment; Education and Training; Information Technology; and the CorporateInspectorate, an internal audit-unit. TELKOM's existing organizationalstructure is shown in Annex 6. There have been no changes in the topmanagement, appointeJ in 1988, with a mandate to bring about needed reforms.The management team is dynamic and forward looking and has implemented anumber of reforms including improving staff communications, streamliningprocurement systems and improving accounting and financial systems.

2.17 As discussed in Section A of this chapter, TELKOM is expected togrow rapidly in the 1990s. Its new customer connection rate would grow fromover 15% per year at present to over 20% per year by 1996, and sustained atthat rate through to the year 2000. The rapid expansion of network capacityinvolves increasingly complex technical, financial and managerial tasks forwhich TELKOM needs to continue to strengthen its institutional capacity.Areas that need strengthening have been recognized and action programs areeither already underway or planned, in many cases with assistance from theBank. To bring about many of the necessary institutional improvements,TELKOM, under the Third Telecommunications Project, entered into a twinningarrangement in March 1991 with the Korean Telecommunications AuthorityInternational (KTAI). The areas that are being strengthened include corporateplanning, operations, finance and project implementation.

2.18 With the change in corporate status to a limited liability companyas well as the gradual introduction of competition, TELKOM management hastakeni a number of policy decisions and actions to delegate decision-makingresponsibility and accountability down to the lowest feasible levels in theorganization and to establish focused strategies for serving the needs ofdifferent customer groups. As part of these policy and organizationalchanges, TELKOM would reorganize itself into six significantly independentoperating regions and 43 strategic business units (SBU) instead of the current

5/ The Board is comparable to an executive management committee. Each ofthe directors are full-time employees.

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functional structure. Because of skill mix and staff availability factors, itis intended to implement the decentralization in phases. The first phasewould be centered on Jakarta as this account for about 40Z of TELKOM'sbusiness. Based on experience gained, TELKOM plans to extend fulldecentralization to the remaining regions over a period of four yearsbeginning 1992. The Bank fully supports the proposed restructuring and thetechnical assistance provided under the proposed lcan will help TELKOM toadopt a practical, structured approach to move towards a flexible andresponsible structure.

Staffing

2.19 A summary of TELKOM's staff efficiency and staff composition is inAnnex 7. With about 40,000 employees at the end of 1991, TELKOM's staffingratio of 32 staff per 1000 telephone lines is high as compared with Korea (6),Malaysia (20), Singapore (14), and Thailand (18). However, there have beensignificant improvements in TELKOM's staffing efficiency in recent years, asshown in Figure 2.4. This has been possible partly due to growth in thenumber of main lines connected while holding the total number of staffvirtually constant and partly due to contracting out a number of non coreservices such as local cable network design and its construction, maintenance,and janitorial services. With the very substantial quantities of highlyreliable digital equipment to be installed in the coming years, TELKOM isexpected to achieve a staffing ratio of 16/1,000, which would be comparable tothat 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 entityemploying highly sophisticated technology. This ratio would be about 10 to 15percent in developed telecommunications entities. To improve its staffingefficiency and in order to address the staffing imbalance, TELKOM, in 1991initiated a program to improve the planning and control of human resources,referred to as the Human Resource Model (HRM). Work was carried out initiallyin Jakarta to identify the actual composition of staff and the nature of theirwork, to prepare a forecast of staffing requirements by jobs and to estimatetraining and recruitment by occupational category. Preliminary findingsconfirm previous assessments that staff is unbalanced, and the organizationfaces a major task in reallocating and retraining existing personnel. Adetailed tra..ning and recruitment plan will be available for Jakarta byJune 30, 1992 when the consultant financed by TELKOM completes his assignment.

Training

2.21 To address its training challenges, TELKOM has a separate departmentfor training. This department known as PUSDIKLAT plays an important role inTELKOM's efforts to upgrade skills of its technical and administrative staffand managers. There are twelve regional training centers (RTCs) with a staffabout 667, including 175 instructors. An upgrading program for both thecentral training centre (CTC) and RTCs, initiated with UNDP-ITU cooperationand supported by the ongoing Third Telecommunications Project, is currentlybeing implemented. Under this program, TELKOM will decentralize much of

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technical, administrdtive, operational and supervision training to RTCs andrun the CTC as a resource center. In addition, in part because of the hugedistances 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-

30196 196 197 198 19 1990 19 91

2.22 In addition to reforms already underway, TELKOM4 needs to make somestrategic changes in its training program in order to move from the existingcorporate culture embedded in civil service attitudes to one which is morebusiness oriented. The main aim is to transform TELKOM staff into anefficient, educated, well-trained and motivated work force vhich will be ableto run telecommunications as a commercially oriented, efficient enterprise.Success will depend uritically on instilling new attitudes and developing newushills in all levels of management. This will be a long-run continuingprocess. Technical assistance provided under the project will support thetraining plan currently under formulation (para. 2.20). An early step inchanging TELKOMI's corporate culture would be to recruit skilled personnel from

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the private sector managers with proven management skills to some of itsmiddle and senior management positions. During negotiations an understandingwas reached that TELKOM will follow this approach and will incorporate thisinto its recruitment objectives.

Audit

2.23 As for PERUMTEL, TELKOM's accounts are required by its charter to beaudited by Government auditors. The audits are carried out followinggenerally accepted accounting practices and standards. Although PERUMTEL'saudit reports have been qualified in the past, special efforts made byPERUMTEL's management since 1988 have resulted not only in it receiving forthe first time an unqualified opinion from the auditors for the 1989 accounts,but also in finalizing the unaudited accounts within three months of thefiscal year end. Audits for the 1990 accounts were also unqualified and weresubmitted to the Bank within nine months of the close of the fiscal year asper audit covenant under the Third Telecommunications Project. Duringnegotiations, TELKOM confirmed that unaudited and audited corporate accountsfor FY 1992 and thereafter will be submitted to the Bank within four monthsand six months, respectively, after close of the fiscal year.

Billing and Collection

2.24 Computerized bills are currently prepared monthly and issued withinten days after the billing period. Overall collection performance issatisfactory with accounts receivable at the end of 1991 at 40 days of billingfor the year. This performance has been mainly due to the good collectionperformance for private customers. The collection from government users,which was poor in the past, has improved with various progressive stepsintroduced in 1990 by TELKOM. The accounts receivable for governmentsubscribers at the end of 1991 was about five months of billing. Duringnegotiations an understanding was reached with TELKOM that to further improveaccounts receivable from Government subscribers, TELKOM will continue takingactions to ensure that the amounts owed to TELKOM by all government users willnot be overdue in the aggregate by more than two months of total billing tosuch users.

Accountine Systems and Financial Management

2.25 To improve the timeliness of accounting data and preparation offinancial management reports, a new chart of accounts was introduced in early1989 in TELKOM's head office and all regional offices. A computerized generalledger program was implemented in head office and regional offices. Theseinitiatives have helped immensely to prepare timely and accurate financialreports. Consequently, since 1989 annual financial accounts have been closedwithin three months of the close of the fiscal year as compared to sevenmonths for 19d8 accounts. In addition to the benefits resulting fromstandardization of input data, the new chart of accounts allows preparation ofaccounts at the subregional level and facilitates budget monitoring andpreparation 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 forsecuring and diversifying its financing sources. Internal cash managementneeds 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'streasury function needs to be strengthened to enable it to assess the bestfinancing techniques for its development, issues securities, manage its cashand liabilities and assess foreign exchange exposure,

2.27 With the planned decentralization, TELKOM needs to review and reviseits accounting policies, systems and procedures. Areas that needs attentionare (i) budget management, (ii) financial projection, (iii) cash-flowprojection and (iv) cost accounting systems to reflect real costs.

2.28 Financial data have not been fully used by TELKOM's management as atool for operational control due to the weaknesses in its internal financialsystems, lack of adequate qualified finance staff both at the headquarters andregions and ability of management to understand financial information. Thetechnical assistance component under the ongoing Third TelecommunicationsProject, through the provision of overseas fellowships and secondments toother telecommunications organizations for TELKOM managers and finance staff,is assisting TELKOM to upgrade the skills of the Finance Directorate and buildTELKOM's management capacity to use financial data in the management of itsoperations. However, more needs to be done both in training and in improvingthe financial management systems and procedures.

2.29 During negotiations, agreement was reached to implement an actionplan (para. 4.30) to continue to upgrade and strengthen TELKOM's accountingsystems and procedures, and financial functions. The proposed projectprovides technical assistance to assist TELKOM in its efforts, especially tointroduce a cost accounting system, upgrade the management accounting systemand improve the treasury function, and provide funds for the necessary foreigntraining required and the software and hardware for computerization needs. Animportant task of the consultants to be employed under the project will alsobe to carry out a diagnostic study to identify the staffing needs and preparethe necessary training programs and provide training in their specific areas.

Management Information System

2.30 Quality of information currently available to managers needs to bevastly improved. Existing reports are primarily financial and statistical,and virtually nothing has been done to provide information tailored to theneeds of individual middle and senior executives. For example, no timely andaccurate information is readily available on performance in handling servicecomplaints or requests. The existing Personnel Information System (SIMPEG)cannot provide sufficient information on where employees work and what theydo. This information is being provided by a parallel system, the HumanResource Model (HRM). TELKOM recognizes that there is a very great need forsystems integration, and the provision of information which will allowmanagers to monitor business performance. Consultancy proposed under theproject (para. 4.9(b)) would help TELKOM with an appropriate MIS system.

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2.31 Overall, TELKOM management is aware of the institutionalshortcomings outlined here and they have significantly improved TELKOM'sperformance with the assistance of several donors, including the Bank, overthe last three years. When completed by end 1996, the ongoing program,including the proposed project, will make a significant contribution towardsalleviating the current service shortcomings and upgrading the quality of thedomestic telecommun'cation services. A summary of key performance indicatorsto 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 3.22. Call completion rate

- long distance direct dialing service 20X 42X3. Staffing/1,000 main lines 32 164. Rate of Return on Net Fixed Assets 21X 2915. 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 supportservices to exporters, (b) expanding the opportunities for and the capacity ofthe private sector to participate in Indonesia's development, (c) increasingthe efficiency of the public sector, and (d) promoting balanced nationaldevelopment by reducing the development imbalance between urban and ruralareas and between Java and the rest of the country. A prerequisite forachieving these goals is the provision of reliable and efficient systems forthe transmission and processing of information, which in turn requires anefficient countrywide telecommunications network. Therefore, the Government'sobjectives for the telecommunications sector are to:

(i) increase access to modern and efficient telecommunicationsservices in urban and rural areas, thereby contributing togrowth and efficiency of the private sector and to theachievement of the Government's social and economic objectives;

(ii) increase the commercial orientation and efficiency of theentities in the telecommunications sector;

(iii) improve service quality and TELKOM's productivity throughincreased network automation, use of modern technologies,

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improvement of organization and management, and increased stafftraining; and

(iv) promote sound domestic construction, consulting aad, whereeconomically feasible, manufacturing industries to support thetelecommunications sector.

Xev Sector Issues

2.33 To successfully meet these challenges the following key sectorissues need to be addressed: (i) How can the massive investments, required tomeet the needs of modern businesses as well as to improve access to service inboth urban and rural areas be funded? (ii) How can Indonesia most effectivelyaccess best management and operational practices? (iii) How should competitionpolicy be introduced? and (iv) What would be the most effuctive institutionalframework 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 andimplementation capacity. However, it falls short of what is needed to meetoutstanding applications for telephone lines, satisfy new demand forecast toarise in the period and initial investment for the following period.Traditional project financing from World Bank, Asian Development Bank andbilateral sources as well as TELKOM's internally generated funds will not beadequate to accelerate expansion and modernization to meet all demand by 2000.Hence, GOI/TELKOM need to actively consider complementary approaches to bringprivate sector capital into the sector (para. 2.38).

2.35 Management and Operational Practices: To provide needed operationalautonomy and improved incentives for efficient and effective management, GOIin September 1991 converted PERUMTEL from PERUM to PERSERO (i.e. to a limitedliability company). This was a very important milestone in thecommercialization of the sector. With this conversion, the new company, PT.TELKOM has the mandate to adopt a commercial (business-oriented) approach andpursue private sector equity participation in accordance with the PresidentialDecree No. 55. In a similar vein, in order to improve its institutionalefficiency and effectiveness, TELKOM has recognized the need to decentralizeoperations and management from headquarters to the regional offices andconcentrate strategic decision-making and planning, possibly under a holdingcompany structure. This will enable TELKOM's regions to progressively developinto independent operating companies with little need for day-to-day supportfrom headquarters. Such a structure would provide a basis for comparison ofperformance in terms of efficiency and service quality. Given the need forgreat improvements in performance, the ability to make such comparisons islikely to be of considerable value to TELKOM's management. In the longer termeach of the regional operators may be authorized to enter into joint venturewith reputed foreign operating companies to improve their performance andattract foreign capital. A key objective of the proposed project is to assistTELKOM to operate effectively and efficiently as a market-oriented company.Successful implementation of these massive organizational changes will requiresubstantial technical assistance which will be supported by the proposedproject (para. 4.9(a and b)).

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2.36 ComRetition and Private Sector Participation: TELKOM presentlyfaces virtually no competition in the provision of telecommunications servicesand, therefore, has not been pressed to improve performance. The experienceof other countries has confirmed the potential and power of competitivemarkets (Annex 8). Recognizing the merits of competition the GOI is keen onusing competition as a key policy tool to promote efficiency and innovation.It has already introduced competition in the provision of terminalequipment,§./ telecommunication service retail shop (WARTEL) and non-basicservices. GOI is now considering creating a second carrier, possibly withprivate equity participation of a reputed foreign telecommunications operatorto provide competitive radio-based telecommunications services. There areseveral ways of designing and implementing the second carrier which should bereviewed. In response to GOI's request, the Bank is supporting through theThird Telecommunications Project analytical work to assess the role of thesecond carrier, and to prepara business plan.

2.37 There are many ways to increase private investment in thetelecommunications sector, including authorizing increased (privatelyfinanced) competition, build/transfer (B/T) revenue-sharing schemes, issue ofdebt or equity securities by TELKOM to private investors, joint ventures withprivate investors or full privatization. At present there are significanthurdles to a full privatization. Because of constitutional, political andnational security considerations, GOI has decided to keep TELKOM in the publicsector. However, actions have already been taken in several of the othermodalities. Both terminal equipment and non-basic services can be provided bythe private sector in competition with TELKOM. Furthermore, revenue sharingagreements between TELKOM and private investors are in place for two cellulartelephone systems, a VSAT services and three local telephone network expansionprojects for about 450,000 lines.

2.38 TELKOM is actively pursuing additional sizeable infusions of privatecapital 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 networkexpansion projects referred to above have not been entirely successful andthere are some doubts about the advisability of this kind of off-balance sheetfinancing. The best prospects for large-scale private investments in thesector leading to improved sector performance are believed to be jointventures with highly credible foreign telephone companies. The merits of thedifferent approaches to the mega-financing of TELKOM's investment program isto be the subject of a study and comparative analysis, financed by the Bankunder the Technical Assistance Project for Public and Private provision ofInfrastructure (Loan 3385-IND).

2.39 The proposed project would focus on strengthening TELKOM'sorganization and management with the central objective of improving itsproductivity and efficiency and of restructuring it into a holding company

j/ Terminal equipment includes telephones, telex, facsimile, privateautomatic branch exchange (PABK).

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with regional subsidiaries (para. 2.35). This would allow TELKOM to offershares to the public and to form joint ventures with the participation offoreign carriers. But these reforms cannot take place in a regulatory vacuumand hence another objective of the proposed project is to develop Government'scapabilit.y to efficiently manage the desired sector optimization process.This is crucial. Although the Telecommunications Law was amended in 1989 toallow private sector entry in the non-basic services areas, it has notattracted investors because of cumbersome licensing arrangements and otherbarriers for private sector entry, including availability of clear guidelines.

2.40 At this time, telecommunications policy consultants engaged underthe Third Telecommunications Project are reviewing with the GOI the followingmeasures 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 foreignoperating companies;

(ii) A national long distance operating company, possibly also as ajoint venture operation similar to the regional approach; and

(iii) A cellular telephone company.

(b) Establishing a new, majority Government-owned publictelecommunications carrier (independent from TELKOH) authorized to:(i) operate all domestic satellite; and (ii) wireless based servicesin the local area including cellular; and

(c) Ensuring that the provision of value added services and customerpremises equipment are fully opened to the private sector.

2.41 During negotiations, agreement was reached with GOI that it will, byJune 30, 1993, prepare and subsequently implement, a timebound action plan toaddress structural issues in the telecommunications sector, inter alia, aimedat promoting competition and participation of the private sector (para. 4.26(a)).

2.42 Institutional Framework: As TELKOM takes on a more commercialorientation and competition is introduced, effective regulation needs to beput in place, in particular, to ensure that TELKOM does not abuse the monopolymarket-power it derives from control of network facilities. Such a regulatoryframework should comprehensively address, inter alia, the following issues;

(a) which enterprises will be permitted to compete in which marketsegments and when;

(b) how franchises and licenses (including for radio spectrum) will beawarded; and

(c) the obligations of TELKOM and other carriers to provide services,and to inter-connect, and obligations with respect to quality of

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services, tariffs, standards, protocols and interfaces, anti-competitive activities, monitoring and dispute resolution.

2.43 Telecommunications Users: Currently, there are no formalinstitutions that represent users' interest in the telecommunications sector.Development of this kind of association is an important part of the process ofcreating a constituency for effective regulation and of making TELKOM a useroriented commercial enterprise. One step towards user orientation was thecreation by TELKOM of a Special Customer Service Group (CSG) (para. 2.15) todeal with corporate customers, to identify their needs and finds ways to meetthem rapidly and efficiently. A program to further develop such an approachis part of the agreed Action Plan (para. 4.30).

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III. THE BANK'S PAST EXPERIENCE AND ROLE

Past Experience

3.1 Background: The proposed project constitutes a strategicprogression in the Bank's support to help GOI and TELKOM's management toaddress sector constraints (para. 2.34). The Bank's association with thetelecommunications sector in Indonesia started in 1971 with a credit of $12.8million (Credit 210-IND). The main objectives of that project were to(a) transfer telecommunications operations from a government department to aseparate operating entity, PERUMTEL; and (b) help put in place procedures andsystems for PERUMTEL to manage its then small-scale operations, and torehabilitate and expand the network. The physical component was completedsuccessfully in 1976, but except for establishing PERUMTEL as a separategovernment owned corporation, no significant institutional progress wasachieved as such a progress would require continued efforts through a seriesof well coordinated operations (para. 3.6). The project was to be followed bya second operation that was processed in 1973 but dropped after negotiationsdue to disagreement between the Bank and the GOI over (a) the issues relatedto GOI's decision to acquire a domestic telecommunication satellite; and(b) adjustments needed for telecommunications tariffs. Telecommunications inIndonesia were subsequently developed using domestic funds and with bilateralassistance from Belgium, France, Federal Republic of Germany, Japan, theNetherlands, Spain, Sweden, USA and some other donors. Although the manypositive contributions by individual donor countries to capacity building inIndonesia should be recognized, sector performance fell short of requirementsbecause, principally, of a lack of a consistent and coherent global strategy.

3.2 Technical Assistance Project (Loan 2757-IND): In 1984 dialogue wasresumed and subsequently, the GOI requested renewed Bank assistance for thesector. The Bank responded with a technical assistance telecommunicationsproject (Loan 2757-IND for $14.5 million, approved in October 1986) with theobjectives of (a) improving PERUMTEL's planning and design of cable networks,procurement systems and practices, project implementation, and reporting andmonitoring systems; (b) computerizing financial management informationsystems; and (c) increasing PERUMTEL's capability to formulate and reviewtariffs. The project closed on December 31, 1990 as scheduled and the projectcompletion report (No. 10247) was completed in December 1991.

3.3 This TA project has achieved all its objectives. With thestrategies developed for project implementation and procurement, PERUNTEL'scapability has been enhanced to carry out an investment program of aboutUS$600 million per year and connect over 300,000 new customers annually, whichrepresents a fivefold increase in its implementation capability compared tothe performance during the last five-year (1984-1989) development plan(Repelita IV). Furthermore, the introduction of the integrated systemapproach and competitive procurement systems introduced have not only resultedin significantly lowering unit network expansion costs but also ensured thatnew customers are promptly connected when facilities become available.Consequently, the previous problems of nonperforming assets and associatedfinancial losses have been significantly reduced. By encouraging the

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association of local consulting companies with foreign consultants, theproject paved the way to establish a reasonable base for development ofIndonesian telecommunication consulting firms to support the sector. Use ofprequalification to select competent contractors and introduction of largescale single-responsibility contracting has promoted the association ofdomestic contractors with foreign companies that can provide projectconstruction expertise and train local workers, thereby developing domesticconstruction capacity. Improvement in financial MIS is helping TELKOMmanagement to use financial data in the efficient management of its operationsand, 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 basiccapability to assess and develop tariffs.

3.4 Sector Studv. Before responding to GOI's request for Bank financingof PERUMTEL's on-going investment programs, the Bank conducted a detailedassessment of Indonesian's telecommunications sector, identifying policyoptions and analyzing investment priorities to provide a framework fortechnical assistance and advice to GOI on institutional aspects. The resultswere published in report No. 7842-INS, June 1990. The Sector Study assessedthe need for policy, legislative, regulatory and further institutionalreforms, and developed a package of actionable proposals involving sectormanagement and policies, investment, procurement, financial and institutionaldevelopment to enhance productivity and support the development of the sector.

3.5 Third Telecommunications Proiect. The review of this sector studywith GOI led to an agreement between the GOI and the Bank to implement aseries of measures to improve sector management and to expand PERUMTEL'snetwork and services. The Third Telecommunications project was approved inMarch 1990 to implement these measures. The project is progressingsatisfactorily and the Government has initiated a number of key sector reformsby: (a) allowing competition in the provision of value-added services, pagingand customer premises equipment; (b) permitting the private sector entry underrevenue sharing schemes with TELKOM; and (c) initiating studies to furtherstrengthen GOI's capabilities to effectively manage the sector. However,given the rapid international changes in telecommunications sectororganization and continued important technological developments (particularlythe rapidly declining unit costs of digital electronics, radio and opticaltelecommunications systems), GOI recognizes the need for further reforms toachieve 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 andPCR No. 10247 of December 1991, and from experience in other developingcountries are that: (a) when underpinned by comprehensive sector surveys,project interventions receive greater commitment by borrowers and donors andtheir implementation proceeds smoothly; (b) an integrated systems approachshould be adopted to ensure that all project components are tightlycoordinated; (c) financing plans should be firmed up prior to negotiations;

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(d) objectives for institutional building should be pursued in a long-termhorizon through repeater projects to achieve major results; (e) advanceactions prior to Board presentation should be initiated by the implementingagency in respect of selecting consultants, prequalifying bidders, finalizingbid evaluation; and (f) project implementation units with adequate authorityand competent staff should be established prior to project appraisal. Theselessons have been incorporated in the design of the proposed project.

Rationale for Bank Involvement

3.7 The Government recognizes the challenges to harness fully thebenefits of advanced technology and modern operating practices to improvesector performance. Based on the success of past cooperation, GOI hasrequested the Bank to (i) assist in the design of its sector optimizationprogram and in implementing it, (ii) make available to Indonesia the benefitof similar experience and best practices from other countries and (iii) totake the lead role in coordinating cofinancing from donors to ensure thatfuture sector development proceeds in an integrated and cost-effective manner.

3.8 The Bank strategy is to engage user groups, GOI and TELKOM in acontinuing dialogue to develop competition policies and reform programs thatare consistent with Indonesia's economic and political conditions and withworld market outlooks. To this end a seminar was held in December 1991 inIndonesia. It focused on international experience in using competition toaccelerate telecom sector development and promote private sector participationas well as on developing appropriate regulatory mechanisms. This seminar willbe followed up with a workshop in September 1992 to agree on modalities toimplement the conclusions of the seminar and the findings of the sectorrestructuring options study to be completed by May 1992. The Fourth TelecomProject is expected to be used as a vehicle to operationalize the agreedactions (para. 2.41).

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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$1,893million). The investments under the different components of the program andannual investments in during FY92 to FY96, are given in Annex 9.

4.2 Ongoing works comprise of: (a) the Bank's Third TelecommunicationsProject and (b) other projects which are: (i) ADB's TelecommunicationsProject; (ii) local telephone network; and (iii) long distance microwavenetwork, remote and rural area network projects supported by Germany, France,Japan, and Netherlands respectively. Progress on implementation of theongoing works is satisfactory. Financing for ongoing works is secured andactions are underway to secure financing for the proposed project. Themission reviewed the composition of the investment program and the methodologyfor determining it and was satisfied that the program was justified to meetgrowing demand (para. 2.12) and for ensuring a balanced development ofIndonesia's telecommunications facilities. Foreign exchange financing forfuture works is still to be arranged, but any delay in execution of thoseworks will not affect the implementation or the viability of the proposedproject.

4.3 To ensure satisfactory implementation of TELKOM's future investmentprogram, of which the Bank project forms one part, both GOI and TELKON haveagreed that:

(a) on or before November 15 of each year, commencing on November 15,1992, and thereafter until the completion of the Project, TELKOMwill (i) prepare and furnish to the Bank, for its review andcomments, its corporate plan, institutional development plans andinvestment program (including Revenue Sharing Arrangements) for thefollowing fiscal year; and thereafter, taking 'nto account theBank's comments, if any, carry out such plans and (ii) review and,if required, revise with prior concurrence of the Bank, the TELKOMFiscal Years 1992-1996 Investment Program;

(b) GOI will ensure that TELKOM will have access to adequate funds tofinance the investments agreed with the Bank; and

(c) TELKOM will, by November 15, 1993, prepare and furnish to the Bankits procurement practices and procedures to be followed for

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procurement of goods and services required by TELKOM in the carryingout of its operations (except for goods and services financed fromthe Loan) and thereafter incorporate Bank's comments and adapt suchguidelines to ensure least cost investments.

Prolect Obiectives

4.4 The project has two main objectives: (a) to improve sectorperformance by promoting a regulatory regime conducive to competition in theprovision of telecommunication services; and (b) to meet the growing demandfor telecommunications services by enhancing the quality of TELKOH's service,effective utilization of existing facilities, increasing system efficiency andmodernizing and expanding the networks.

Proiect Description

4.5 The proposed project which will be partly financed by the Bank is aself-contained, balanced and integrated package of high priority works tosupport TELKOM's 1992-1996 investment program. Specific components of theproject are outlined below. Full details of the project and the source offinancing 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 competitivemarkets. 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 andimplement a consistent set of sector policies including a review oftelecommunications tariffs and planning for a second domestictelecommunications operator.

(c) further institutional capacity building for TELKOM comprising:

(i) a management and professional human resource developmentprogram using a cooperative program of academic training atforeign universities and working internships in selected fieldsat developed telecommunications entities;

(ii) development and implementation of the ope.rational andmanagerial decentralization program;

(iii) enhancement of TELKOM's capability in operational performance,project design, engineering, implementaticn and supervision;

(iv) upgrading accounting and financial policies, systems andprocedures and related computerization requirements; and

(d) Support for TELKOM's 1992-1996 investment program in Java, Bali,Nusatenggara, Kalimantan and Sulawesi which would comprise:

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(i) rehabilitation of existing switching equipment, local cablenetwork, customer distribution network, interexchange network,including the provision of spare parts, modules, tools and testequipment to repair and refurbish them as well as softwarepackages to improve operational efficiency and enhance traffichandling capacity;

(ii) installation of switching equipment, associated customerdistribution network and customer terminal equipment (including20,000 pay phones) to connect about 600,000 new customer;

(iii) installation of fiber optic cable and microwave transmissionfacilities to provide interexchange junction facilities in theJabotabek 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 IIto improve long distance direct-dialling service quality;

(v) establishment of a modern network management system to improvenetwork supervision and to improve traffic monitoring andmanagement; and

(vi) improvement of the directory enquiry system.

Technical Assistance

4.6 The project provides for technical assistance to improve theoperational performance of TELKOM as well as to ensure timely implementationof the physical components of the project. Technical assistance to beprovided under the project builds on the foundations laid underTelecommunications Technical Assistance Project and the ThirdTelecommunications Project. These projects have progressed satisfactorily andhave improved selected aspects of TELKOM's internal organization andmanagement (paras. 3.2 to 3.5). Nevertheless, it will take several moreyears, with consultants focusing on intensive training efforts designed toreach all sectors and professional levels of TELKOM's staff, before TELKOMbecomes a modern, efficient, well-run business. The following paragraphsprovide the details of the technical assistance supported under the proposedproject.

(a) NTPT

4.7 The GOI's regulation of the sector has mainly operated through itsownership of TELKOM and Indosat, radio licensing, standard setting,ministerial control of tariff changes and BAPPENAS control of foreign exchangeallocations to state-owned enterprises. Regulatory mechanisms for control ofthe sector are still in their infancy. As telecommunications technologycontinues to expand the diversity and reduce the costs of telecommunicationsservices, some increasing levels of competition appears inevitable as well as

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necessary for improved sector performance. In turn, this requires a muchstronger policy and regulatory capacity in MTPT. In this context, the projectwill provide technical assistance to MTPT to:

(a) build its capacity to develop and assess telecommunicationspolicies, in particular with respect to network competition,strategy for the development of cellular and other wireless publictelecommunications systems, microwave licensing and authorizationsfor other telecommunications facilities;

(b) develop an agenda for regulatory activities, in part by assisting inthe organization of one or more users' conferences and thepreparation, if necessary, of public consultation documents;

(c) assess, recommend and implement regulatory action on prioritymatters that will include issues associated with networkinterconnection, value-added service (including access to leasedlines), customer premises equipment (including the pricing ofcellular terminals), and radio licensing policy;

(d) undertake a comprehensive analysis of TELKOM and Indosat tariffswith respect to costs, funds flow, demand factors, limited networkcapacity, international comparators and other relevant factors;assess and recommend an action plan to improve tariff structures forTELKOM and Indosat; and assess and recommend processes for periodictariff rebalancing mechanisms; and

(e) train selected MTPT staff.

4.8 Consultants are expected to be appointed by January 1, 1993. About60 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 capablestaff, technical assistance is provided under the project for TELKOMto develop full in-house capabilities in all aspects of operations(through on-the-job training and teaming with consultants) so as toreduce gradually reliance on foreign expertise. The managerialdevelopment program will provide a total of 1,700 staff-months oftraining for about 60 middle and senior managers during 1993-1996.Two to three-year fellowships for MBA and MSC levels will use acombined program of academic training at foreign universities andworking internships in selected fields at selectedtelecommunications entities.

(b) The need for technical assistance to support TELKOM to implementsuccessfully the decentralization program was discussed in(para. 2.20). Terms of reference, agreed with TELKOM are presentedin Annex 11. The consultants are expected to be appointed byOctober 31, 1992. About 160 person-months will be required for theservices; and

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(c) The existing methods of manual monitoring and control of local andlong distance networks in Indonesia are inadequate to exploit thefull potential of the modern systems currently under installation.To address this situation TELKOM will establish Integrated NetworkManagement Systems (IMS) for monitoring the performance of the localand long distance network and providing a real time surveillance andcontrol over network components so as to minimize disruption toservice 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 andstrengthen 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 projectto assist TELKOM in reviewing and recommending the necessarypolicies, systems and procedures as well as the appropriateorganization setup to carryout these functions. The team will alsobe required to assist TELKOM in implementing their recommendations.An important task of the experts would be to carryout a diagnosticstudy to identify the staffing needs, preparing the necessarytraining programs and providing training. Terms of reference forthe experts is attached in Annex 11. The consultants are expectedto be appointed by October 31, 1992. About 96 person-months will berequired for the services.

(e) TELKOM has competent engineers to undertake the engineering designand prepare bid documents for the project. However, TELKOM'srequirements for rehabilitation and expansion of thetelecommunications facilities are large and growing quickly.Therefore, TELKOM's project management capabilities need to besupplemented by the provision of technical assistance to help itcarry out these tasks. Some 400 expatriate and 500 local consultantstaff-months of services will be provided through the implementationperiod. Consultant assistance would focus on (a) contractfinalization; (b) postcontract engineering works; (c) coordinationof implementation of different physical components of the project,and (d) physical project management.

4.10 During negotiations, assurances were obtained that GOI and TELKOM byNovember 15, 1992 would furnish to the Bank for review a detailed trainingprogram identifying the staff to be trained, areas of training, schedules andlocations and that it will implement the approved training commencingSeptember 1, 1993, and a timetable, satisfactory to the Bank, to appoint theabove 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

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indirect of Rp 1,607 billion (US$806.9 million equivalent). Detailed projectcosts 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 & TestEquipment 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 ImplementationSupport 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 othertaxes 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 onUSA (Exim Bank), Netherlands (ABN-Amre Bank) and Spanish. 2.5X on Japanese; 7S average on XSW; and5.4Z 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 addingcommitment fees on the average undrawn amount of the loans.

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4.12 The project cost estimate was prepared by TELKOM with the assistanceof consultants. The estimates have been prepared on the basis of contracts ofgoods and works with a detailed breakdown into quantities and rates whereapplicable, and based on price quotations recently obtained by TELKOM forsimilar works in Indonesia and experience in other countries. For technicalassistance, average staff-month rates for similar assignments in Indonesia andother developing countries have been used. Except for a value added tax often percent of total cost, the cost estimates are net of duties and taxes forimported items since TELKOM is exempt from them.

4.13 C2ntinge_ncie. Base prices are at December 1991 levels. Physicalcontingencies Pre based on 5 percent for equipment, 10 percent for servicesand civil works. Price contingencies for foreign costs are based on projectedincreases of 3.7 percent p.a. in 1992, and each year thereafter. Pricecontingencies for local costs are based on projected price increases of 6.0percent in 1992, and each year thereafter.

Project Financino and Terms

4.14 The foreign costs of the project are expected to be financed on aparallel basis by the Bank, France (Government and Credit Lyonnais), FederalRepublic 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 28.2FRG (KfW) - 71.0 71.0 5.0France/Credit Lyonnais - 52.0 52.0 4.0Japan (Sumitomo Corp./OECF) - 100.0 100.0 7.0Netherlands (ABN-Amro Bank) - 84.0 84.0 6.0Spain - 50.0 50.0 3.7USA (Exim Bank) - 75.0 75.0 6.0TELKOM 497.4 47.5 544.9 40.0GOI 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 systemin Kalimantan and fully finance technical assistance (which includesconsultancy and training). In addition, the Bank would partially finance thecomputer systems for operations and fully finance, tools, test equipment and

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spares to effectively use the existing facilities. The loan of US$71.0million equivalent from FRG (KFW) will finance 139,50C line units of switchingequipment and remote area transmission equipment. The US$52.0 millionequivalent loan from France and credit Lyonnais will finance the cost of (i)the backbone transmission system in Bali and East Nusatenggara (US$24.5million); (ii) Trans-Sulawesi microwave system Phase II (US$10.0 million); and(iii) expansion of Java-Bali digital microwave transmission systems (US$17.5million). The loan of US$100.0 million equivalent from Japan ($71.5 millionfrom Sumitomo Corporation and $28.5 million from OECF) will finance 267,000line units of switching equipment mainly for exchanges outside Jakarta and theoptical fibre transmission network to carry the interexchange traffic in theJabotabek area. Funding from ABN-AMRO Bank, Netherlands (US$84.0 millionequivalent) 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 equipmentfor local and tandem exchanges mainly in Jakarta and Surabaya. In addition,funding from Exim Bank, USA (US$15.0 million), already effective will financecomputerized network management systems. During negotiations, assurances wereobtained from the Government that it will obtain not later than January 31,1993 the foreign exchange financing from Germany and Spain and not later thanJune 30, 1993 from France or other sources on reasonable terms to complete theproject in accordance with the implementation program.

4.16 The proposed Bank loan would finance 46% of the foreign cost of theproject (28% of the total financing requirement). The Bank loan would beprovided to the GOI for 20 years, including a grace period of 5 years, andUS$373 million of the proposed Bank loan will be on-lent to TELKOM under asubsidiary loan agreement (SLA) agreed during negotiations. The signing ofthe SLA is a condition of loan effectiveness. The on-lending will be at avariable interest rate pegged to Bank Indonesia's (BI) three-month domesticmoney market certificate (Sertifikat Bank Indonesia -- SBI) plus one percent.The rate would be adjusted on January 1 and July 1 of each year, commencing onJuly 1, 1992, and calculated based on the average of SBI three-month maturityquotations during the preceding six months; provided, however, that theinterest on the Subsidiary Loan for the period from the date of the SubsidiaryLoan Agreement through December 31, 1992, shall be determined on the basis ofthe average of the per annum interest rate of SBI three-month maturityquotations during the six months preceding July 1, 1992; provided further thaton July 1 of each year commencing on July 1, 1993, the Government and the Bankshall review the above-mentioned basis for determining that the on-lendinginterest rate under the Subsidiary Loan Agreement reflects the commercial costof 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 Bankloan will be procured by international competitive bidding (ICB) in accordancewith Bank procurement guidelines, except for items totalling US$17 millioncovering spares, software, rehabilitation of existing equipment, testequipment and tools will be procured by limited international bidding on thebasis of evaluation and comparison of bids obtained from suppliers ofeauipment currently operating in TELKOM's network.

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4.1t A total of nine contracts proposed for Bank financing is indicatedin the procurement schedule in Annex 12. In the procurement of equipmentunder ICB, domestic manufacturers would be eligible for a preference in bidevaluation of either 15 percent or the import duty whichever is lower. Allbidding packages for contracts estimated to cost over US$1,000,000 equivalentfor goods and all consultancy services and fellowship contracts financed bythe Bank loan would be subject to the Bank's prior reviews. This will coverover 95 percent of total value of the Bank-financed contracts. Procurement ofgoods and services financed by co-financiers would be in accordance to co-financiers' procurement guidelines. All goods and services to be procuredwith TELECOM's own internal resources will be through lcc-al competitivebidding following the government regulations which are satisfactory to theBank.

4.19 Technical Assistance and Consultancy. Selection of consultants andtraining services which will be following Bank guidelines are:

(a) management training, $3.5 million (para. 4.7 (e) and 4.9 (a)) whichwill be arranged through direct negotiations with internationallyrecognized entities in accordance with terms of referencesatisfactory to the Bank.

(b) selection of consultants for all assignments will be from a shortlist of at least three firms or experts for each assignment agreedby the Bank and under terms of reference satisfactory to the Bank.

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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 227.0Equipment (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 tobe financed by the proposed Bank loan.

Lk For equipment, Limited International Bidding and, for consultants, inaccordance 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 projectimplementation, TELKOM has initiated advance procurement actions to: (a)issue request for proposals for consultants for (i) construction supervisionof project works, and (ii) construction management, design and planning futuredevelopment 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 asfollows:

(a) 100X of foreign expenditures (CIF) of directly imported goods, 100Xof local expenditures (ex-factory costs) of locally manufacturedgoods, and 65X of local expenditures for other locally procureditems; and

(b) 100X of expenditures for consultants and training.

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4.22 Table 4.4 shows the category of items to be financed out of theproceeds of the loan, the allocation of the amounts of the loan to eachcategory and the percentage of expenditure for items to be financed in eachcategory. No disbursements will be made for expenditures incurred prior tothe loan signing. Withdrawal applications will be aggregated in amounts ofUS$100,000 equivalent or more, prior to its submission to the Bank. Annex 13gives the disbursement schedule for the proposed loan. Disbursements underthis loan, like the Loan for the Third Telecommunications Project, is expectedto be faster than the average Bank profile in Indonesia because of advanceprocurement arrangements initiated for major components of the project(para. 4.20). Although physical construction of the project would becompleted by end 1996, the implementation of all aspects would be completed byDecember 31, 1997. The closing date of the Bank loan would be December 31,1998.

4.23 SRecial Account. In order to facilitate disbursements, a specialaccount 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 ofUS$300,000 (equivalent to four months estimated average eligible expenditures)would be made to this account to finance expenditures under category 4(a) and5(a) (Table 4.4). However, all consultant contracts and fellowship programswill be subject to prior review by the Bank in accordance with Bankprocurement guidelines (para. 4.19).

Implementation

4.24 Contracting for packages of outside plant for the proposed projectwill be on a single-responsibility basis as followed in the ThirdTelecommunications project. In view of its total magnitude, the volume ofoutside plant construction has been divided into three packages to beimplemented in two phases. Bids for construction of Phase I, includingsubscriber connections, cleared by the Bank in August 1991, was announced inOctober 1991 to the 15 prequalified contractors. Phase II will be tendered byJuly 1992 to prequalified companies to be selected by June 1992, followingBank guidelines. Other components of the project, namely, switchingequipment, and microwave radio systems will be installed by the respectivecontractors in accordance with the implementation schedule (para. 4.27).

4.25 Project ImRlementation Unit. To ensure effective projectmanagement, track emerging issues and address them in a timely way, TELKOM hasestablished a project implementation unit (PIU) for the proposed projectheaded by a Project Director, with overall responsibility for projectimplementation, reporting to the Board of Director. The unit head and keystaff members have already been appointed. The PIU will be given adequatefinancial and administrative autonomy to enable it to discharge itsresponsibilities effectively, have its own accounting, procurement, transport,land acquisition, administrative and technical sections, and keep separate anddistinct project accounts for the Bank project as a whole as well as itsindividual components. The critical path method will be used to coordinateimplementation of the project in order to minimize the level of non-performing

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Table 4.4: DISBURSEMENT OF PROPOSED LOAN

Amount of theloan allocated(expressed in US X of expenditures

Category dollar equivalent) to be financed

(1) Outside plant 289.8 100% of foreignexpenditures, 100% oflocal expenditures (ex-factory cost) 65% of localexpenditures for itemsprocured locally.

(2) Telecommunications 27.0 100% of foreignequipment, materials, expenditures, 100% ofand software excluding local expenditures (ex-switching equipment factory cost) and 65% of

local expenditures foritems procured locally

(3) Computer systems, 20.2 100% of foreignincluding service expenditures, 100% ofarrangements local expenditures (ex-

factory cost) and 65% oflocal expenditures foritems procured locally

(4) Consultancy

(a) MTPT 2.0 100%

(b) TELKOM 14.0 100%

(5) Training

(a) MTPT 1.0100%

(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 modulationcable, optical fiber cable, transmission equipment (inclusive of microwaveequipment), subscriber connections (inclusive of house-wiring and telephoneset), and associated infrastructure.

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investment. Bank-financed technical assistance (para. 4.9(e)) is provided toassist the PIU in project implementation and supervision of the OSPconstruction component. Based on experience gained in the implementation ofthe ongoing third project, plans for decentralizing some of the functions ofthis unit to the regions and the optimal set-up for undertaking investments ona regional basis will be explored during the supervision of the project.

4.26 During negotiations, assurances were obtained from the GOI andTELKOM that:

(a) GOI by June 30, 1993 will develop and review with the Bank atimebound action plan to address the sector policy issues, promotecompetition and further strengthen regulatory capabilities andthereafter implement the recommendations agreed with the Bank(para. 2.41).

(b) TELKOM, based on final contracts to be concluded by October 31, 1992for major project components will prepare, by the critical pathmethod, and furnish to the Bank, by December 31, 1992, a master planfor the implementation of the project for each of the eight regions(para. 4.5(d)), satisfactory to the Bank, which would includeactions assigned to relevant government agencies and TELKOMmanagement; and thereafter implement the said plan as approved bythe Bank.

(c) TELKOM will appoint consultants in accordance with the agreedtimetable (para. 4.9) under terms and conditions satisfactory to theBank 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, includingallocation of necessary financial and administrative powers,essential to enable the PIU to maintain the project implementationschedule (para. 4.25);

(e) TELKOM will maintain the PIU staffed with competent staff untilproject completion (para. 4.25); and

4.27 Implementation Schedule. Annex 14 shows the project implementationschedule. It takes into account TELKOM's current limitations and, subject toagreements in para. 4.26 is realistic. The project is expected to beimplemented fully by December 31, 1997.

4.28 Site Acquisition. In view of the difficulties experienced in thepast wich the acquisition of sites for housing network facilities and rightsof 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 theproject.

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Performance Monitoring

4.29 Performance indicators to monitor TELKOM's implementation of thephysical components of the investment program, the quality of service and thefinancial performance are given in Annex 15. During negotiations, theproposed performance targets for the years 1992 and 1993 were discussed andagreed with TELKOM; further, assurances were obtained from TELKOM that theindicative 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 theBank by November 15 of the preceding year.

4.30 An action plan (Annex 16) to monitor TELKOM's implementation of theinstitutional strengthening components of the project were also discussed andagreed during negotiations. These components include measures to improveTELKOM's performance in respect of (a) accounting and financial management;(b) operations; (c) human resource development; and (d) training of staff andmanagers 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 inan agreed format to the Bank on the status of the project. This report willbe the main instrument for monitoring project accomplishments and will includethe proposed pipeline of sub-projects, and implementation status of contractedsub-projects. The PIU will maintain separate project accounts in a formsatisfactory to the Bank for annual audits. These accounts, including theSpecial Account and SOEs will be wudited annually by independent auditorsacceptable to the Bank and will include opinions on all expenditures includingthose made against SOEs. In the case of SOEs, the audit report should containa separate opinion by said auditors as to whether the statements ofexpenditure submitted during such fiscal year, together with the proceduresand internal controls involved in their preparation, can be relied upon tosupport the related withdrawals. The PIU will submit the audited accounts tothe Bank no later than six months after the close of each fiscal year to whichthey relate commencing calendar year 1992.

Supervision Plan

4.32 Supervision of this project will focus upon a nvAbet of sectoroptimization and institutional development activities. These measures willinclude: (a) continuing the ongoing dialogue with GOI to implementappropriate sector modernization and optimization to improve sectorperformance and human resource development; (b) initiate discussion onefficient usage of telephones through tariff rebalancing; (c) improving accessto telephone service through increased use of public pay phones andtelecommunication service retail shops; (d) improving emphasis on servicingcorporate customers through strengthened Customer Service Groups. Based onpast experience, front-end loading of supervision resources, particularlyduring the first two years of project implementation, is necessary to resolvebasic physical implementation issues. Three missions annually for two years,then two missions per year for the remainder of the project are foreseen as

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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 resourcespecialist; and (c) an MIS expert. A total of 80 staff weeks effort will berequired for effective supervision of this project.

Environment and Health Aspects

4.33 The proposed project will have no adverse environmental impact orhealth impacts. Indeed, the net effect of the project is expected to bepositive on both counts since it will result in a substitution ofenvironmentally benign communications for environmentally damagingtransportation. In addition, it will improve marginally the delivery ofhealth services through better communications between health units and withthe population. However, given the volume of civil works related to theinstalling of underground cables, there is likely to be some disruption tovehicular traffic and pedestrians. This will be minimized by (a) planning andphasing of construction works; and (b) including in construction contractsclauses which require contractors to maintain vehicular and pedestrian flows.No resettlement issues are expected.

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V. FINANCIAL ANALYSIS

PERUMTEL's Historical Financial Performance

5.1 PERUMTEL's audited and unaudited financial statements andperformance indicators for FY86-91 are provided in Annex 17. As shown by theindicators in Table 5.1, PERUMTEL's financial performance over FY86-91 periodremained 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 1,737.5Less: Operating Expenses /c 495.2 691.4 641.0 780.7 1,129.5 1,361.8Not 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 78XReturn on Assets (Av. NFA) 26% 5X 181 151 12X 211Return on Av. Equity 27S 13S llX 131 14X 21X

Current (Rp'000)Telephone Revenue/Av. Main Line 836 893 896 958 1,108 1,341Cash 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 1,289Cash Op Costs/Av. Main Line Id 813 682 546 546 631 649

Net Internal Cash Generationas Z of Av. 2 year Investments 41S 50X 52Z 46Z 281 411Debt 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 1.7Account Receivable (Days) 76 64 66 57 45 40Debt/(Debt Equity) 462 39S 432 432 462 542

La Although PERUMTEL was converted to TELKQM on September 23, 1991, the financial statementsare 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 internationaland domestic, improved revenue settlement on international traffic withINDOSAT and substantial improvement in labor productivity from 57 employeesper 1,000 main lines in 1986 to 32 in 1991 contributed to PERUMTEL remainingprofitable during the 1986 to 1991 period. With the increase in tariff inOctober 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 ofhistorical costs, increased from about 12X in 1990 to about 21X in 1991.

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5.3 Except for 1990, PERUMTEL's net internal cash generation after debtservice and mandatory contributions as a percentage of average two year(current and next year) investments have been higher than 40 percent. Most ofPERUMTEL's internal funds for investments are provided from deferred incomefrom installation fees, accelerated depreciation and other noncashexpenditures. Retained earnings contributed relatively little to investmentneeds as dividend payments and other allocations of its net profit allowPERUMTEL to retain only 16 percent of pre-tax income. PERUMTEL has been a netcontributor 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 theGovernment was about Rp 166 billion. With the change of corporate status, thelevel of TELKOM's annual dividend payment and allocation of its profit eachyear are decided by the Shareholder on an annual basis based on TELKOM'sperformance and funding needs.

5.4 PERUMTEL's financial position remained sound and liquidity positionwas satisfactory during the FY86-91 period. The debt equity ratio remainedbelow 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 issummarized in Table 5.2. As per Minister of Finance's Decree dated September23, 1991, the authorized capital for TELKOM is Rp 10 trillion. The paid-incapital is Rp 2 trillion. TELKOM's financial position and liquidity aresatisfactory.

40 -

Table 5,2: TELKOM'S OPENING BALANCE SHEETAS OF SEPTEMBER 24, 1991

(Rp Billion)

ASSETSCash and Bank 4« 588.7Other Current Assets 647.5Total Current Assets 1,236.2Net Fixed Assets 1,902.0

Work in Progress 874.7Other Assets 498.4Total Assets 4,511.3

LIABILITIESCurrent Liabilities 877.8Other Liabilities 182.4Long-term Debt 1,451.1Equity 2.000.0Total Liabilities and Equity 4,511.3

Current Ratio 1.4Debt: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 ofassumptions in Annex 19. These projected financial statements and thefinancial performance indicators for the period 1992 to 1996 are provided inAnnex 18 and 15, respectively, and key financial performance indicators aresummarized in Table 5.3. Financial projections are based on the networkgrowth and productivity improvements to be achieved under the Project whichare: (a) number of lines to increase from 1.2 million in 1991 to 3.2 millionby 1996; (b) annual growth in domestic and international traffic of 10 and20X, respectively; and (c) improved labor productivity from 32 employees per1,000 main line in 1991 to 16 by 1996. Domestic inflation rates of 6X perannum 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 4,303Operating Expenses 1,669 ',909 2,276 2,728 3,190Net Operating Income 510 634 838 936 1,113

Net Profit 224 280 395 433 502

Financial Ratios:Operating Ratio 771 751 731 741 74XReturn 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 1,354Cash 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 1,005Cash Op Costs/Avg Main Line 607 570 538 515 488

Net Internal Cash Generationas X of Av 2 Year Investments 431 431 42X 471 481Debt Service Coverage 2.9 2.9 3.3 3.4 3.2

Current Ratio 1.7 1.7 1.8 1.9 2.0Long Term Debt / Total Capital 52X 571 59X 601 601

5.7 Based on the overall productivity improvements (para. 5.6), TELKOMis projected to achieve adequate financial returns, meets its self financingtarget of generating internally a minimum of 40% of its annual financing needsand maintain its debt equity ratio within the government authorized limit of60:40 until the end of 1993. However, subject to a tariff review to becarried out before the end of 1993 (para. 4.7(d)), it is anticipated thatdomestic tariffs will need to be increased by about 12X effective January 1,1994 and maintained in real terms each year zhereafter, to enable TELKOM tocontinue to meet its self-financing target and maintain its debt equity ratiowithin the governments' requirement until the end of 1996. With theseadjustments in tariff, net profit is expected to increase from about Rp 187billion in 1991 to about Rp 502 billion by 1996 resulting in an increase inrate of return on net fixed assets in operation from about 21X in 1991 toabout 29% in 1996. During the forecast period, the liquidity position isexpected to remain satisfactory with current ratio of at least 1.7.

5.8 With the proposed major network expansion, TELKOM's ability togenerate adequate cash flows to finance its investment program, to maintain asound financial position and to meet debt service obligations in future yearsare the most crucial issues. During negotiations, agreement was reached withthe Government and TELKOM that all necessary measures (including tariffincreases) to achieve the agreed performance targets (para. 4.29) will betaken to ensure that TELKOM achieves a debt service coverage of at least 1.5for each year and generate net internal cash after debt service, workingcapital 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 anyone year.

TELKOM's Proiected Financing Plan

5.9 A summary of TELKOM's sources and applications of funds statementduring the period 1992 to 1996 is summarized in Table 5.4. TELKOM is expectedto self finance about 47Z of its investment program and interest duringconstruction needs during the period. The foreign loans and domesticborrowing will finance about 53X of TELKOM's total financing needs. Domesticsources of funds will include bank loans and from 1993 onwards, issue ofbonds. Local consultants financed by TELKOM are assisting it to prepare forissuance of local bonds.

Table 5.4: FORECASTED SOURCES AND APPLICATIONS OF FUNDS (1992-96)

Rupiah Billion X Of Total

SourcesInternal Cash Generation 8,013.5Less: Total Transfers 683.5Less: Debt Service 2,547.4Less: 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 90XInterest 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 developmentobjectives are to a large extent determined by the characteristics of theexisting systems and decisions taken in connection with the third project.Within these limits, the solutions chosen are likely to result in the lowestcosts regarding both initial investment and total cost over the life of newfacilities. In particular, the adoption of modern technology for the proposedproject, electronic digital technology for telephone switching and associatedremote subscriber units, optical fibre and digital microwave systems for theinterexchange network will result in considerable reduction of installationand maintenance costs and switching center space requirements.

Tariffs

6.2 Tariff Policies. Tariff policies for telecommunications servicesneed to respond to several goals. Thus, in order to contribute to economicefficiency, tariffs should reflect costs and, where unmet demand exists, alsoserve to ration scarce capacity. In addition, tariffs must be adequate topermit 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 fairby the public. In Indonesia, periodic tariff changes have reflected thesegoals. (An approach to establishing a systematic mechanism for reviewing andimplementing tariff changes is discussed in para. 6.5).

6.3 Tariff Levels. TELKOM's tariffs are shown in Annex 20. Aninternational comparison of TELKOM's tariff levels, shown in Figure 6.1,suggest that they are at reasonable levels. TELKOM's tariffs were lastincreased in October 1990 by a revenue-weighted average of about 25%. Thesetariff increases, as well as important productivity improvements being made byTELKOM, mean that the entity is projected to achieve adequate financialreturns and generate internally a minimum of 40% of its annual financing needsuntil the end of 1993. Nevertheless, it is anticipated that tariff increases(that are less than the cumulative amount of inflation since the previoustariff change) will be required during 1994 (para. 5.7). This project willsupport a tariff analysis, leading to revised tariffs, as part of the supportof the institutional development of MTPT (para. 4.6).

Figure 6.1: International Comparisonof 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 notan across the board increase, but made some important improvements to thestructure of the tariff. TeleRhone installation charges were increased bybetween 100% - 180% in different regions and are currently the equivalent ofapproximately US$500 in the Jakarta area. This high level is warranted toration the scarce supply of new telephone lines. TeleDhone service monthlyrental charges were also substantially increased, by about 300%, and are nowthe equivalent of US$5 per month in Jakarta. Telephone usage charges werealso increased. Local call charges were increased by 33%, with the price of athree minute local call set at US 5 cents. Charges for lonZ-distance callswere increased by smaller percentages and, for calls over 1000 km., chargeswere reduced by about 10%. The next tariff review is expected to find thatcontinued rate rebalancing is desirable. Thus, monthly rental charges shouldbe increased, so that even low usage subscribers will cover the incrementalcosts of network access service. It may be advisable to further increaselocal call charges to moderate demand and, therefore, alleviate networkcongestion. And to the extent permitted by network capacity and financialtargets, charges for long distance service and leased lines should beincreased in 1994 by less than the rate of inflation.

6.5 Tariff Review Mechanism. Adequate and timely adjustments of tariffsare important to ensure TELKOM's continued financial viability. At present inIndonesia, 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 arereviewed, TELKOM has approached the government with tariff increase proposals.Although this situation is not uncommon in countries where governments own themain telecommunications operator, it tends to unduly politicize tariffincreases and, in many countries, has led to underinvestment in the sector.Consultants currently ongaged by MTPT (under the Third TelecommunicationsProject) are reviewing options for systematizing the government's authoriza-tion of TELKOM tariff changes. Furthermore, as already specified under thethird project, it was agreed for this project that TELKOM will be required tofurnish to the Bank by November 15 of each year, for review and comment,tariff reviews and subsequently, taking into account the Bank's comments (ifany), furnish to the government for consideration proposed tariff changes.

Benefits

6.6 The project will make a substantial contribution to improvements inthe productivity of TELKOM. In addition, the project will make a majorcontribution to increasing the rate of average annual growth rate of connectedmain lines from about 10% p.a. to about 20% p.a. during the 1992 to 1996period, thereby increasing the penetration rate from 0.68 per 100 populationto 1.7 per 100 by 1996. Given the limited institutional capacity of TELKOMand the high demand for telecommunications services, these are major achieve-ments that will benefit almost all sectors of the Indonesian economy and thepublic. Furthermore, continued dialogue with the government on sector reformwill contribute to improve sector performance and an expansion in the range ofmodern telecommunications services available to businesses.

- 46 -

6.7 The institutional support will assist MTPT in introducing sectorreforms and TELKOM in implementing the additional measures to operate as abusiness oriented enterprise as per its new mandate. TELKOM's institutionaldevelopment will be pursued in a number of ways, including on-the-job andoverseas training and technical assistance to improve managerial, financialand technical capabilities of its staff. The investment component would notonly accelerate provision of service to meet part of the unmet demand fortelecommunications services but also substantially reduce unit costs ofinvestment. Increased availability of telephone service and improved qualityof service would benefit other sectors through communications-related improve-ments in government and business efficiency and productivity. The projectwould also further develop the local consultancy and outside plant contractingindustries through collaboration with international firms.

Rate of Return

6.8 Based on the assumptions summarized in para. 5.6 and shown inAnnex 21, the real financial rate of return (FRR) to TELKOM is estimated at18%. The real economic rate of return (ERR) based o.a financial flows butadjusted to take account of taxes including the value-added tax levied ontelephone bills, is estimated at 23%. This is a conservative estimate of theeconomic rate of return as it does not include consumer surplus, known to behigh, 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 adelayed revenue stream of 12 months. This resulted in a fall in ERRto 15%;

(b) an increase in capital as well as operating cost by 10%. Thisresulted 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 accountconsumer surplus, the real ERR is 13%. The contract for majortelecommunications equipment to be financed by co-financiers have already beenfinalized and cost estimates for major Bank financed items are based oninternational competitive prices based on recent contracts for similar itemsunder the ongoing Third Telecommunications Project. To ensure timelyimplementation of the project, single responsibility implementation approachwill be used and all major contracts will be signed by the time of loaneffectiveness.

Proiect Risks

6.9 The potential risks for the project fall into two categories:(a) delays in procurement, and (b) shortfall in TELKOM institutional capacityto implement the project. These risks have been recognized and actionsinitiated to minimize their impact. TELKOM has already established a nucleusproject implementation unit and adequate technical assistance is provided

- 47 -

under the project to assist TELKOM in the implementation and supervision ofconstruction works. Residual risks will be addressed through agreed measuresto monitor project implementation with corrective actions initiated asnecessary.

- 48 -

VII. AGREEMENTS REACHED AND RECOMMENDATION

7.1 During negotiations agreements were reached with GOI and TELKOM onthe following:

I. GOI

(a) will ensure that TELKOM has access to sufficient funds, inparticular foreign financing to cover its capital expenditures asreviewed and agreed with the Bank (para. 4.3(b));

(b) will, by November 15, 1992, prepare and furnish to the Bank, for itsapproval, 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 exchangefinancing 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 toTELKOM 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 atime-bound action plan to address the sector policy issues, promotecompetition and further strengthen regulatory capabilities, andthereafter implement the recommendations agreed with the Bank(para. 4.26(a)); and

(f) will take all such actions, including annual reviews andadjustments, if any, of TELKOM's tariffs to enable TELKOM to complywith 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 thefollowing fiscal year; and thereafter, taking into account Bank'scomments, if any, carry out such plans and (iij review, and ifrequired, revise with prior concurrence of the Bank the TELKOMFiscal Years 1992 - 1996 Investment Program (para. 4.3(a));

- 49 -

(c) on or before November 15, 1993 review with the Bank TELKOM'sprocurement practices and procedures to be followed for procurementof major goods and services required by TELKOM in the carrying outof its operations (except for goods and services financed from theLoan) and thereafter incorporate Bank's comments and adopt suchguidelines (para. 4.3(c));

(d) will, by December 31, 1992, prepare and furnish to the Bank, for itsapproval, a masterplan for the implementation of items under 4.5(d)of the Project, which masterplan to include actions to be taken byTELKOM and the relevant government agencies and thereafter implementthe said parts of the project in accordance with such plan approvedby the Bank (para. 4.26(b));

(e) will appoint consultants according to a timetable satisfactory tothe Bank (para. 4.26(c));

(f) will maintain the Project Implementation Unit for the purpose ofcarrying out items 4.5 (c&d) of the Project; the Project-Implementa-tion Unit will be headed by a qualified and experienced officer, andvested, at all times, with such power, responsibilities, funds,staffing facilities and other resources as shall be required toundertake its responsibilities in carrying out the project (pa-ra. 4.26(d&e));

(g) will take all measures to meet the physical and financialperformance targets agreed at negotiations for 1992 and 1993, andwill report to the government and the Bank no later than six monthsafter close of each fiscal year. Every year, before November 15,TELKOM will furnish to the Bank a revised set of performance targetsfor the next two years (para. 4.29);

(h) will, by November 15, 1992, prepare and furnish to the Bank for it'sapproval an action plan to strengthen TELKOM's capabilities in theareas 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 newtechnology and thereafter implement such an action plan as approvedby the Bank (para. 4.30);

(i) will take necessary measures (including tariff adjustment) to ensurethat TELKOM achieves debt service coverage of 1.5 and generates netinternal cash after debt service and contributions of a minimum of40 percent of the annual average of the current and next year'splanned investment in any one year (para. 5.8); and

(j) on November 15 of each year, commencing November 15, 1992 andthereafter until completion of the project, will furnish to theBank, for its review and comments its proposed tariff revisions, ifany, and subsequently, taking into account Bank's comments, furnishto 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 willbe a condition of effectiveness of the proposed loan (para. 4.16).

RecommendatLon

7.3 With the above agreements, the proposed project is suitable for aloan 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 interestrate.

- 51 -

INDONEIA FOURTH TELECOMiMUNICATIONS PROJECT

STAFF APPRAISAL REPORT

able of Connts

ANNEXES Page No.

1: Cellular Radio Mobile Telephone Service .... ...... 522: MTPT Organizational Chart ....... ............ 533: Basic Telecommunications Sector Statistics .... ...... 544: Supplyvs. Demand ......................... 645: Telephone Service Issues ........ ............ 666: TELKOM Organizational Chart ...... .......... 677: TELKOM Employee Data ................. 688: International Development in Sector Organization ...... 719: 1992 - 1996 Investment Program ............. .. 7510: Project Components ....................... 7811: Terms of Reference ....................... 8112: Procurement Packages and Schedule . . .10513: Disbursement Schedule . . .10714: Implementation Schedule . . .................. 10815: Performance Indicators . . . 11016: Action Plan 11...17: Hlstorical Financial Statements . . .11418: Projected Financial Statements . . . 11819: Assumptions used for Financial Projections ... 12120: Summary of TELKOM Tariffs. . 12321: Return on Investments . . 12922: 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 & MaximumTechnology Potential No.

of Subscribers

PT Rajasa Jakarta, Bogor May 1986 STKB-C, NMT 15,000 + 15,000Hazanah Puncak, Ganjur, (April, 1992)Perkasa Bandung ._.

PT TELKON Jakarta, 1988 SKTB-I, TACS 5,500l ______________ Bandung

PT Electrindo Jakarta, E. 1991 AMPS A 25,000Nusantara Java

PT Centrancindo Jakarta, E. 1991 AMPS A 25,000Panca Sakti Java(CPS)__ _ _ _ _ _ _ _

INDONESIAFOURTH TELECOMMUNICATIONS PROJECT

Minist of tourism, Posts and lblcommunlcatlons

TELCOI ADVS LE STAI OMD

SMRETMY ~~Plwanng Burau| GEN8PEcoRAL i Hmiaan Reources Bueau

FIRance BureauULw and Organizdaon Bueau

R&aD I DIRECTORATE GENERAL -Gneral AffairsBureau i - SXbb~~Stteowned Enterprises Admhi.BureauCCENTERDIECORTEOF POer AN TELECOM IR & D | ~GENERAL OF IETR ENRE

TOURISM DIRECTOR GENERALTRAINMN |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| 3IE -

- 54 -

ANUX 3Page 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 3Page 2 of 10

<~~~. ....i

* (X | W g~~.~:..::.:.

::.~~~~~ f-.';7:.::lfB.::55:.:>S' f:>l.. .'S.fA:.8.. ..

Amt)emwpulsqvnvm.WW-49MGMaBir4Qd :910NMll-,l Wll�.'�.-'Il... . ................ ..... .0M ..gm. ni 11

. ..........

go MNbD......... . ...........

zw:M..'m

............. ....

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.... .......

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 efficiencysubs/month (faults repaired)

Underground Overhead Drop wire Indoor Total per man per dayc_bt__cable cable

JKT-Tifur 7.4(7.1)* 34.1 41.8 24.1 100.0 1.0JKT-Selatan 8.0(7.8) 35.7 32.8 31.5 100.0 1.1JKT-Utara 11.2(10.3) 41.9 40.0 18.1 100.0 1.66JKT-Pusat 9.5(9.1) 35.5 29.4 35.1 100.0 1.52JKT-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 0.7SBY-Utara 13.2 36.3 22.7 11.7 29.2 100.0 1.2SBY-Selaton 14.3 38.3 9.2 31.0 21.5 100.0 2.3Ujung Pandang 5.5 14.7 12.2 20.6 52.6 100.0 0.6Semarang 7.3 18.2 5.1 41.6 35.1 100.0 0.9 1Denpssar 11.8 4.0 27.5 44.5 24.0 100.0 0.9 VIPalembwng 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 0.48Louksumw e 3.6 9.6 4.3 33.9 52.2 100.0 0.'2Padwig 5.5 36.9 3.0 27.1 32.9 100.0 0.63Pakanberu 8.6 18.0 14.7 37.7 29.5 100.0 C.86P. Sfantar 4.7 18.9 2.2 42.8 36.1 100.0 0.50Jambf 6.2 18.3 10.7 39.7 31.3 100.0 0.56Bander Lampung 6.6 17.5 18.0 31.3 33.2 100.0 0.73Yogyakarta 9.1 7.4 3.4 45.4 43.8 100.0 0.64Solo 7.5 14.1 7.5 33.8 44.6 100.0 0.82Nalang 6.8 14.9 2.4 52.0 30.7 100.0 1.17BanJarmasin 5.5 11.5 5.5 39.3 43.7 100.0 0.75Nataram 8.5 21.4 2.4 43.9 32.3 100.0 0.60Pontianak 5.7 13.1 1.3 55.0 30.6 100.0 1.34Samarinda 4.5 26.8 6.0 34.4 32.8 100.0 0.78 (Q zNanado 3.6 9.1 12.2 44.3 34.4 100.0 0.40Ambon 4.0 18.2 1.0 41.7 39.1 100.0 0.50 41Jayspura 6.1 1.0 3.9 30.2 46.9 100.0 0.45 oAverage 6.1 17.6 6.2 39.4 36.8 100.0 0.69

- 58 - ANNEX 3Page 5 of 10

INDONESI

FOURTH TELECOMMUNICATIONS PROJECT

D. Speed of Service Restoration

(Unit: X)

Within a Between 2 Between 4 Over 7 Totalday and 3 and 7 days_ _ _ _ _ _ _ _ __ days days

JKT-UtaraKota-I 29.1 19.4 22.0 29.5 100.0Kota-II 26.7 17.8 26.0 29.5 100.0TJ. Priok 23.3 15.6 34.2 26.9 100.0Ancol 18.4 12.4 30.3 38.9 100.0Elut 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 3.7 100.0SBY-Utara 63.0 17.0 13.0 7.0 100.0SBY-Selatan 54.0 28.6 12.1 5.3 100.0Ujung Pandang 81.2 17.6 1.1 0.1 100.0Semarang 53.8 37.8 6.5 1.9 100.0Denpasar 71.0 24.1 4.9 0 100.0Palembang 50.6 28.8 15.8 4.8 100.0

Average (Six 58.4 28.9 9.4 3.3 100.0cities) .

FauRTH TELECNlICATIO PROJECT

E. OPWC Lamausion PIp.

_Rg1onal No. of subscribers Fault rate Multi- 15 OMlCS sEAtablishadIsland WITEL Seeder Lampung (100 s*/s exchange WUadr con tructioaCapital Pri. at 1994 rmt) *rs Proposd In the TELEC11 Ilt

___________________ ________________ Present_It"_Pr&iect

den e 42,443 110.000 5.1 1flang Ac.h o 4.209 13.671 6.2 0 0I 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 ePatfte^rv o 5.964 16.102 *.6 o oPaembang 14,643 29,5W0 0 0

III J=bt o4,975 17.914 6.2 o oftndar Leupung o 14,390 35.000 6.6 o

J1K? - Timrv o 77.589 179.500 7.4 oJKt - Selatan 65 396 163.500 6.0 o

JKT - Utare ~~93.667 195.400 11.2oIV JKT -pust o 91.693 126.400 9.5KT - Bret o 77.326 19f,400 9.3 o

Tamrang ~~~~3.903 20.334 12.9Be .. 1 2.062 17.093 9.6 oDepok 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 0VI voy kvart o 9.052 180315 9.1 o

10.637 20.703 7.5 o

Say - Utura 26.212 179.108 13.2 2VIl 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 oTotsl _ _ _ - _ _ _ 15 13

- 60 - ANNEX 3Page 7 .f 10

INDONESIA

FOURTH TELECOMMUNICATIONS PROJECT

F. Satellite Facility

CUSTOMERS (Number) Number of Responders

Palapa-B2P PTT 2Indonesia 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 2Australia 1Free or BackuP 0

Palapa-B2R PTT 19Indonesia other 5

(3) oFree or Backup 0

- 61 -ANNEX 3Page 8 of 10

C. Successful Call Ratio in the Seven Major Cities

City Local Network Long Distance Network

Bandung 28.0 16.0Denpasar 33.0 10.0Jakarta 25.0 14.0Meden 34.0 17.0Semereng 29.0 8.0Surabaya 31.0 19.0Ujung Pandan 36.4 15.0

Average of 50 Cities 40.0 20.0

INDONESIAFOURTH 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 20Successlul Gals

IP-0 2

INDONESIA

FOURTH TELECOMMUNICATIONS PROJECTI. 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 0.992. ]Rp.500,000 - 2.56 2.21 1.66 3.77 2.12 1.80 2.19 4.39 3.00 1.59 NA 1.55Rp.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 cRp.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.300,000S. 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

INDONESIAFOURTH TELECOMMUNICATIONS PROJECTEXPRESSED DOMAD VS WAMNG APPUCANTSIHISTORICAL 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 NBCo5mm

INDONESIAFOURTH 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

INDONESIAFOURTH 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 spamesPhn Mateae oe-t s dquate 41 MaOtn

-lnadeut mate ardmoob

-Inadequate onregulations

Lack of maki sategy Undesized exchanges and Underzed ass circuits nadequate investment aN . Tminal equipmet sumcent stock levjuncions 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 andpannn 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 peroncocrdilon talegrated frmecastn orcastngappcbu)

High fault late of juncions High outage duration of isufflcdent trin_ _ _ _ _ _ _ _ _ _ _ _ ~~trunks _ _ _ _ _ _

High outage duaion of iputpundons

High outage duraion ofiunctlons

LRAMhW5WO*_..

INDONESIAFOURTrH TELECOMMUNICATIONS PROJECT

Ibikom Premnt Organizatlon Chart

* I ~~~BONROFCOW=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 7page 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 7page 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 7page 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 14Malaysia '89 1,388,000 28,041 49.5 20Thailand '88 1,005,872 17,956 56.0 18Philippines '85 477,963 13,563 35.2 28Brunei 24,612 593 41.5 24Indonesia '90 915,000 41,000 22.3 37

Pakistan 583,930 42,790 13.6 73India 3,487,908 312,303 11.2 90Saudi Arabia 1,149,100 21,067 54.5 18Hong Kong 1,988,524 14,843 134.0 7.5Korea (Republic) 8,625,000 50,700 170.1 6Japan '90 54,084,000 258,000 209.6 5Australia 6,964,661 92,487 75.3 13France 24,803,609 163,389 151.8 6.5Germany (F.R.) 27,221,756 216,020 126.0 8Canada 13,206,233 102,581 128.7 8United Kingdom 22,137,000 223,084 99.2 10

Source: ITU, "Yearbook of Common Carrier Telecommunication Statistics (16thEdition) 1978 - 1987,0 1989

Note: Data with no mark is as of 1987 year.

- 71 -

ANNEX 8page 1 of 4

IERNATIONAL EXPERIENCE INRESTRUCTURING THE TELECOMMUNICATIONS SECTOR

1. Examples of developments in restructuring telecommunications sectors in severalcountries are summarized below.

2. orth America. In the USA, the break-up of AT&T and the authorization of allkinds 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 exceptpublic switched voice telephony. Competition in this area is expected before the end of 1993.Furthermore, government-owned Teleglobe Canada (the monopoly provider of overseastelecommunications services) was privatized in 1987. As in the USA, cellular telephony isprovided 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 theintroduction of facilities-based duopolistic competition from Mercury has been followed now bygovernment proposals to authorize multiple facilities-based competitors. Moreover, the UK hasencouraged cable television companies to provide residential customers with competitive accessto the switched telephone network. In German in 1990 the commercial and regulatory activitiesof the Deutsche Bundespost were separated. Deutsche Telekom was established as a state-ownedtelecommunications corporation and a department of the Ministry of Posts andTelecommunications was given responsibility for sector regulation. There is full competitionin the provision of terminal equipment, value-added services and data communications services.Voice telephony and the provision of transmission paths are monopoly services of DeutscheTelekom. However, there is freedom to connect properties in common ownership up to adistance of 25 kms, low bit-rate satellite services are open to competition and high bit rateservices will be licensed provided they do not lead to the substitution of voice communicationsin the terrestrial networks. Germany has already licensed two competing cellular telephonenetworks and will authorize a third mobile network for innovative Personal CommunicationsServices (PCS) in 1992. Further, the German Ministry has stated its interest in seeing Telekomprivatized, in part, by 1994 or 1995. In Franc, in 1990, France Telecom was established asan independent, government-owned company outside of the Ministry of Posts,Telecommunications and Space. Subsequently, the Ministry announced liberalization of theterminal equipment and value-added markets and limited competition for mobile/satellitenetworks and services.

4. New Zealand and Australia. New Zealand has probably gone further inliberalizing its telecommunications sector than any other country. In 1987, the TelecomCorporation of New Zealand Limited was established as a state-owned limited liabilityenterprise. In 1989, the telecommunications services sector was opened to all kdnds ofcompetition. In 1990, Telecom New Zealand was completely privatize in a sale that gives acontrolling interest to a consortium headed by Ameritech and Bell Atlantic. Telecom New

- 72 -ANNEX 8page 2 of 4

Zealand was reorganized into regional subsidiaries and a long-distance subsidiary within aholding company structure. In Australia, in 1991, after an extensive sectoral review, thegovernment sold the state-owned satellite company (AUSSAT) to a private consortium withmajor foreign investors (ie. Bell South, Cable & Wireless) and awarded the consortium a secondlicense to provide a full range of domestic and international telecommunications services. Atthe 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 networkproviders.

5. Eastern Eur. In Hungay, the Government has initiated the process ofprivatization and liberalization of the telecommunications sector. In January 1990,telecommunications services were separated from postal and broadcasting services, and theHungarian 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 theHungarian commercial code and supervised by the State Property Agency, an agency establishedby Parliament to supervise and oversee the privatization of state-owned enterprises. Througha joint venture with US West, HTC provides cellular service. Under the telecommunicationsbill currently under review, up to 49% of the equity shares of HTC could be sold to the privatesector. It is expected that this will include the participation of a major internationaltelecommunications company which will act as a strategic investor in HTC. In addition, it isanticipated that certain services, such as value-added services, will be subject to competitionfrom private operators. In Poland in 1989 the telecommunications operating functions wereseparated 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 Postsand Telecommunications. With the telecommunications law that became effective in January1991, telecommunications were separated from other activities and established as a separateoperating company, TPSA. The telecommunications law also grants the Minister for Post andTelecommunications broad authorities to grant licenses, although international facilities andpublic services will remain the monopoly of TPSA. A nationwide mobile cellular license hasbeen awarded to a consortium of France Telecom and Ameritech which would own 51 % of thejoint venture. TPSA would hold the remaining 49% of the venture.

6. In Latin America, restructuring of telecommunications sectors has either beenimplemented or is under active consideration in many countries. In 1990, Argentina privatizedits poorly performing govemment-owned telecommunications entity, ENTEL, and divided it intotwo regionally separate companies. MeiQ has introduced new policies and regulations toexpand competition in the telecommunications sector. At the end of 1990, the governmentreached agreement with a consortium headed by Southwestern Bell, France Telecom and theirMexican 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 aprocess to establish a fully privatized nationwide cellular telephone system. Furthermore, inNovember 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 thetelecommunications sector is also under active consideration in Brazil, Peru and Uruguay.

- 73 -

ANNEX 8page 3 of 4

7. Asia. In Japn in the second half of the 1980s a series of measures corporatizedand privatized Nippon Telegraph and Telephone (NTT) and introduced both service-based andfacilities-based competition, while responsibility for regulation of the sector remained with theMinistry of Posts and Telecommunications. In 1990, the Ministry of Posts andTelecommunications announced that NTT would be restructured into ten or eleven separateautonomous divisions and a separate long-distance division. In Bangladesh the governmentauthorized a private company to provide cellular service, authorized there private companies toprovide rural telecommunications in respective geographic areas and established a joint-venturebetween the government-owned Bangladesh Telegraph and Telephone Board and Cable andWireless for the provision of overseas telecommunications. In Korea, the government hasannounced its' intent to privatize the major carrier, Korea Telecom, and has authorized a secondcarrier to provide competitive intemational telephone service beginning in 1992. The datacommunications and terminal equipment markets have also been substantially liberalized.

[alaysia has moved rapidly from the corporatization of Syrikat Telekom Malaysia on January1, 1987 to a partial privatization of the company in November 1990. In Sri Lanka thegovernment ha announced plans to corporatize new Sri Lanka Telecommunications Corporation.A draft new law and regulations will permit competition in the provision of terminal equipmentand in the provision of broadly defined value-added services, and would establish a regulatoryauthority in the Ministry of Communications. In Thailand, competition is permitted in theprovision of VSAT networks. Furthermore, the government announced at the end of 1909 avery large (US$5 billion) Build-Operate-Transfer deal with the British Telecom and a Thaipartner.

8. To varying degrees, the restructuring measures outlined above have heenaccompanied by significant improvements in productivity resulting from the introduction ofcommercial vs. bureaucratic management systems, a reduction in political interference, the inputof increased capital or better technical know-how, and from efficiency improving measuresintroduced in the face of the threat of competition. Table Al below gives an indication of theenormous productivity gains that have been made by Telecom New Zealand. Significant gainsresulted from extensive contracting out of installation and maintenance work previously carriedon in-house. Similarly, impressive gains in performance have been reported bv Syrikat TelekomMalaysia since its incorporation on January 1, 1987 (Table A2).

- 74 -

ANNEX 8page 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 directoryenquiries (% of responses within 85 9920 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 Totel1. 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 0.0R. 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 PROJECT1. 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 0.02. 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 0.04. 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 0.0S. 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 un8. 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 0.07. 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 48.2Physical 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 3.1Price 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 1,559.6gruzz 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 0.0B. 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 PROJECT1. 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 0.0S. 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 c8. 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 0.07. 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 1.5Price 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.8 428.5 335.6 764.2 422.8 360.1 782.93333 3 3333-X333 8=2333 3333333 S33333 3333333 33333 3==33=== 3333 333=33=3= ac3 3=33_ 3r.3=3=

- 77 -

INDONESIA Annex 9PT 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 10Page 1 of 3

INDONESIAFOITH TELECOMMUNICATIONS PROJECT

PROJECT COMPONENTS

The principal items to be installed during the project period and the source financing aregiven below.

PHYSICAL COMPONENTS SOURCE OF FINANCING

| ____________________________ _ RFOREIGN LOCAL

1. Local Switching: 745,500 Line Units ofdigital telephone switching will be installed inabout 120 locations which includes switches forreplacement of around 2,500 manual lines, 135,000electromechanical and analog SPC lines. Itconsists 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

Spainc. STDI-HI 267,000 Line Unit Japan EXIM TELKOM

(NEAX61, NEC)

2. Outside Plan Facilities

a. Local Cable Network World Bank TELKOMThis component includes replacement of32,000 paper insulated and worn cableand expansion of local cable networkin about 182 locations, representing about950,000 pairs of primary cables terminatedon MDF, 1,425,000 secondary cable pairwiring up to the customer premises andprovision of telephone set and connecting600,000 new subscribers including 20,000payphones. And part of inter exchangein Surabaya area. This consists of 2 linksOptical Fibre and 6 link Radio. Totalchannel ends would be 10,440 ch, 2 Mbpssystem.

- 79 -

ANNEX 10Page 2 of 3

PHYSICAL COMPONENTS SOURCE OF FINANCING

FOREIGN LOCAL

Constructon or modification of existingbuildings complete with air conditioning,electrical power and standby generators.

b. Junction NetworkJabotabek transmission including connection OECF TELKOMfrom the local exchange to the sub tandem ofJakarta Area, consists of 32 links OpticalFibre and 2 links radio. The total channelis 77,040 ch, 2 Mbps system.

3. Long Distance NetworkThis component provided for the expansion ofdomestic long distance telephone facilitiesto the traffic generated by local networkexpansion for service to new area in EastIndonesia. The supply, installation ofequipment and facilities and one yearmaintenance will be on a single responsibilitybasis. Supporting facilities will be providedunder a separate contract on a single responsibilitybasis. It includes the following:

a. Expansion of Java-Bali digital MW system. France TELKOM

b. Installation of Nusa Tenggara Digital MW France TELKOMsystem to provide high capacity tolltransmission capability and to providehigh capacity toll transmission system.It consists of 25 link radio transmission,180 system equivalent 5,400 channels.

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Page 3 of 3

PHYSICAL COMPONENTS SOURCE OF FINANCING

l _______________________________ _ LFOREIGN LOCAL

c. Cross Kalimantan Digital MW + IBRD TELKOMSupporting Facilities to extend the digitaltransmission system from Banjarmasin toPontianak. It consists of 21 link radio,116 system and equivalent to 3,480channel.

d. Extension of Trans Sulawesi System France TELKOM

e. Remote Area Phase III Germany TELKOMIt's included to accommodate andfacilitate the telecommunication systemwith transmission facilities in remoteareas in 200 locations to support theinterconnection of digital exchange.It consists of 5 link F.O. 162 system and68 link radio. The total channel is143.94 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 - ANNEXIIPage 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

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A. TERMS OF REFERENCETELECOMMUNICATIONS POLICY AND REGULATORY STRENGTHENING

Backgrond

At present in the Government of Indonesia, telecommunications regulation and policy is mainlythe responsibility of the Directorate General of Posts and Telecommunications (DGPT) in the Ministryof Tourism, Posts and Telecommunications (MTPT). However, on some telecommunications policytopics, 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 beforerecommendations are forwarded to the government. Much of the activity of DGPT until now hasfocused on somewhat narrow technical matters.

Several developments in recent years have created the need for a substantially increased andchanged telecommunications policy and regulatory capability in the GOI. These developments haveincluded the following:

* A sustained, high growth in demand for telephone service in Indonesia which has led toan acute shortage of telephone lines in spite of large increases in the size of the localnetwork.

3 The increasing commercialization of PT. TELKOM, as reflected in its change of statusto a limited liability company from a 'perum".

The increasing demand for specialized data, facsimile and other specialized businessservices.

The new Telecommunications Law (Law no. 4 of 1989) which permits competitiveprovision of value-added telecommunications services.

* Technological developments that create the possibility of a diversified supply oftelecommunications services, such as cellular telephony and VSAT.

These and other developments are generating regulatory and policy issues that are extremelyimportant 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 ofinterconnection agreements, and with what kind of public vs. private ownership; how can potentialmonopoly abuses be avoided; sector flnancing - how can private investment be used to acceleratesector 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 investmentand 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 largelyabsent in DGPT and (b) a much expanded regulatory role is a necessary complement to policies to

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expand competition in order to enhance the performance of the sector. Therefore, the objective of theconsultancy is to strengthen the telecommunications regulatory and policy capability of the GOI over aperiod of two (or more) years.

Approach. The consultancy will provide more or less continuous full-time on-site professionaladvice and assistance on telecommunication policy and regulatory matters. The on-site specialists willhave access to and be supported by the contractor's part-time team of telecommunications specialistswhose experience covers a wide range of telecommunications policy and regulatory issues, and whomay be based outside of Indonesia.

Tasks. Tasks to be undertaken by the consultancy on specific topics will depend ontelecommunications 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 thatwill identify regulatory issues to be resolved over a two-three year time frame, theprocess for resolving the issues, and a realistic schedule.

(b) Provide, at the request of the client, a written analysis of a series of specifictelecommunications policy or regulatory issues, an assessment of options to resolveissues and recommend plans of action.

(c) Assist with or lead activities to undertake and complete action plans to resolvetelecommunications policy or regulatory issues.

(d) Transfer knowledge of telecommunications policy and regulation analysis andimplementation by holding working meetings with counterpart staff and working in ateam 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 thedevelopment 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 byfacilities-based service providers and development of regulatory measures to minimizesuch behavior.

e Development of approaches to resolve network interconnection, revenue settlement andaccess charge issues, including issues related to the provision of leased lines to resellersand/or value-added service providers or to competitive cellular operators.

* Authorizations for customer-owned satellite terminals.

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Radiospectrum allocation for public telecommunications networks (including cellulartelephony).

(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 assesstariff proposals.

* Review of financial projections of TELKOM, INDOSAT and cellular operators anddevelopment of a capabil:ty to assess forecasts of rates of return and other financialindicators under different scenarios.

* Review of methodologies and estimates of the costs of providing telecommunicationsservices.

(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 andprocurement 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 internalrequirements (e.g. personnel, finance, contract payments, supplies).

* Development and maintenance of information systems to support regulatory activities.

PSmithmhWa:tcepol.tor

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B. TERMS OF REFERENCETARIFF STUDY

Background

1. Tariff Policies. Tariff Policies for telecommunications services need to respond to severalgoals. Thus, in order to contribute to economic efficiency, tariffs should reflect costs and, whereunmet demand exists, also serve to ration scarce capacity. In addition, tariffs must be adequate topermit the operating entity .o achieve satisfactory financial returns (including target levels ofinvestment program self-financing). Finally, tariffs should take account of demand factors and beseen as reasonably equitable by the public.

2. Tariff Levels. TELKOM's tariffs are shown in Annex 20. TELKOM's tariffs were lastincreased in October 1990 by a revenue-weighted average of about 35%. These tariff increases, aswell as important productivity improvements being made by TELKOM, mean that the corporation isprojected to achieve more than adequate financial returns until the end of 1993. Nevertheless, it isanticipated that tariff increases will be required during 1994 (para. 6.7). This study will analyzeIndonesian telecommunications tariffs, thereby providing a basis for recommendations to theGovernment to implement revised tariffs in 1994.

3. Tariff Structure. The last (October 1990) revision of TELKOM's tariffs was not an across theboard increase, but made some important improvements to the structure of the tariff. Telephoneinstallation charges were increased by between 100% -180% in different regions and are currently theequivalent of approximately US$500 in the Jakarta area. The high level is warranted to ration thescarce supply of new telephone lines. Telephone service monthly rental charges were alsosubstantially 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 theprice of a three minute local call set at US 5 cents. Charges for long-distance calls were increased bysmaller percentages and, for calls over 1000 km., charges were reduced by about 10%. The newtariff review is expected to find that continued rate rebalancing is appropriate. Thus, monthly rentalcharges should be increased, so that even low usage subscribers will cover the incremental costs ofnetwork access service. It may be advisable to further increase local call charges to moderate demandand, therefore, alleviate network congestion. And to the extent permitted by network capacity andfinancial targets, it is anticipated that charges for long distance service and leased l.nes should beincreased 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 ofoptimum tariffs, and recommend a program of staged tariff revisions that will moveTELKOM significandy towards the optimum set of tariffs within a reasonable time-frame.

- 86 - ANNEX 11Page 6 of 24

(b) Assess the structure and level of PT. IndoSat's current tariffs, international accountingrates and revenue settlements with TELEKOM, taking account of (i) long-run marginalcosts; (ii) network capacity; (iii) demand factors; and (iv) financial targets. And furtherto describe and justify the structure and level of a set of optimum tariffs and recommenda program of staged tariff revisions !hat will move PT. IndoSat significantly towards theoptimum 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 importantservices or categories of services, their evolution and recent changes. Provide ananalysis 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 forimportant services and service categories within the charges for equivalent services inMalaysia, Singapore, Korea and the USA.

(c) Estimate LRMC of important services or service categories including: km) initialconnection 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 toachieve financial targets, taking account of demand and network capacity factors to theextent 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) forthe 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 ofoptimum tariffs for TELKOM and PT. IndoSat. Recommend a program of staged tariffrevisions that will move TELKOM and Antacid significantly towards this set of optimumtariffs in a reasonable time-frame.

Om) Present study methodologies and findings in professional q4ality written reports.

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C. TERMS OF REFERENCEFOR MANAGEMENT AND PROFESSIONAL DEVELOPMENT PROGRAM

Backgrnd

1. The domestic telecommunication service in Indonesia is the responsibility of the whollygovernment-owned operating company, TELKOM. To meet the balanced macroeconomic goals ofIndonesia over the five-year period 1992-1996, the Government plans more than to double the size ofthe 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 singlebiggest constraint to achievement of these goals is the lack of necessary numbers and quality of staffat all levels, in particular senior and middle management levels.

2. TELKOM management has recognized the urgent need to develop the managerial skillsof its staff to implement and operate projects and systems of growing size and complexity and hastherefore decided to initiate a program to strengthen managerial and professional staff resources usinga combined program of academic training at a foreign university and a working internship at adistinguished 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 whiledeveloping their professional and technical skills, and

kb) to upgrade the capabilities of individual managers through exposure to modernmanagerial techniques.

Method of Delivery

4. The program will be carried over four years commencing September 1992. Three typesof training will be provided. First, the project will fund 60 fellowships, each for 2 years, to enablemiddle and senior level managers and technical experts to acquire valuable experience in their chosenfields while, pursuing an academic program at the master's degree level. By alternating periods ofacademic study with similar periods of paid professional employment in which they engage inperforming productive work, participants will develop their professional and technical skills and bebetter able to integrate theory with practice effectively. Second, the project will fund short-termmanagement training for staff at director level and above and other staff expected to be promoted tothis level in 2-3 years (750 staff-months). Third, the project will fund short-term overseas trainingfor selected Finance Directorate staff to build their capabilities in modern financial management,treasury function, and cost-accounting (100 staff-months).

- 88 - EX IIPage 8 of 24

Participatio

S. 'he sdoction of appropriate staff will be through TELKOM's system of job-performanceevauation, career development and succession planning. Candidates selected for master's degreeprograms will need to satisfy the entrance requirements for these programs. A minimum of 8feltowships will be allocated to staff of the Finance Department to pursue master's degree courses inbusiness administration, with a major in finance.

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Page 9 of 24

D. TERMS OF REFERENCETO SUPPORT DECENTRALIZATION PROGRAM

Introduction

1.1 The traditional highly centralized organization of the IndonesianTelecommunications Authority, formerly known as PERUMTEL, proved inadequate tocope with telecommunications development in Indonesia. Telephone availabilityand service quality are unsatisfactory, and the organization has a very highratio of staff to working lines. The Government has changed the legal statusof this body to state-owned limited liability corporation, PT TelekomunikasiIndonesia, or TELKOM. The management of TELKOM has taken a number of policydecisions and actions to decentralize management to empower regionale"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 decentralizedstructure TELKOM proposes to appoint an experienced consulting firm to assistit in implementing a program of Performance Improvement and Human ResourcesDevelopment. The Consultant shall be required to undertake the followingtasks:

Task A:Design and implement a system for the setting of quantitativeperformance objectives and the measurement of results;

Task B:Develop and implement Human Resources Management policies and procedures,encompassing organization, training, personal performance appraisal andpersonal development;

Task C:Extend, refine and superv-se the integration of the existing ManpowerModel, Employee Information System and Payroll System to provideinformation 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, improvementof operating and control systems, including management of supplier andcontractor relationship--, and provide training necessary for effectiveimplementation;

Task E:Develop systems, software and a TELKOM t -- to support the planning ofthe developing network capable of dealing with the issues of scoping,financing and technology evaluation and selection, providing networkarchitecture and capacity plans at two years intervals, initially through2000.

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Page 10 of 24

Human Resources Planning

1.3 In 1991 TELKOM initiated a program to improve the planning and control ofhuman resources referred to as Human Resource Model, or HRMt. Work was carriedout in Jakarta to identify the actual composition of staff and the nature oftheir work, and to prepare a forecast of staffing requirements by job andtraining and recruitment by occupational category. Preliminary findingsconfirm previous assessments that staffing is unbalanced, and the organizationfaces a major task in reallocating and retraining existing personnel. Onepreliminary forecast indicates that it should be possible to tripleproductivity by the year 2000, but this still requires the recruitment of some50,000 new workers nationally, and up to 10,000 in Jakarta. A detailedtraining and recruitment plan will be available when the consultant commenceswork.

Management Information

1.4 There is very little useful information available to managers. Existingreports are primarily financial and statistical, and virtually nothing hasbeen done to provide information tailored to the needs of individual middleand senior executives. No information is readily available on performance inhandling service complaints or requests. Statistics on faults are verygeneral, and unreliable. The existing Personnel Information System (SIMPEG)cannot provide information on where employees work and what they do. Thisinformation is being provided by a parallel system, the HRM, but the HRR atthis point is still a working prototype. As a result there is a very greatneed for systems integration, and the provision of information which willallow managers to monitor business performance.

Network Planning. Development and Maintenance

1.5 Responsibility for the network is divided between Development, concernedwith major new projects, and Operations and Engineering, responsible foroptimizing the existing network. No one is clearly responsible for dealingwith the fundamental issues of network architecture, scoping, technology andfinancing, sometimes referred to as capacity management. Various groups dealwith various aspects, and results are often incompatible. There is an urgentneed to pull together all significant aspects of network development, andmechanisms to ensure that new construction is fully specified, built tospecification, and handed over with all resources needed for ongoingmaintenance.

Scope of Work

1.6 The initial assignment will focus on Jakarta Region, which is expected tocover the enti.'e Metropolitan Jakarta area, including the West Java cities ofBekasi, Bogor and Tangerang. On this basis Jakarta metropolitan area willhave just over 50X of all working lines, a share expected to be maintainedthrough 2000. However, the consultant will, in the course of the assignment,develop a program for the rollout of the work done in Jakarta to otherregions. Rollout could commence in 1993.

1.7 TELKOM's long term goal is the strengthening of management capabilitiesand systems throughout the country. However, it is recognized that this is acomplex task, dealing with entrenched practices and cultural issues.

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Moreover, approaches which prove successful in Jakarta may not be directlytransferable to other environments. Based on past experience uniformity assuch is not an objective. Accordingly, it will be necessary for theconsultant to allocate resources to assess the question of variability, andtake it into account when submitting rollout proposals.

1.8 The details of the individual tasks in the total Scope of Work are givenbelow:

Task A: Performance Objectives and Measurement

1.9 The consultants shall review, analyze and define explicitly themanagerial functions required for the development and provision oftelecommunications services in Indonesla. In particular, the consultantshall:

a) work with TELKOM Directors and senior executives to define andarticulate the corporate mission and objectives, and the key rolesto 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 decisiveaction. The monitoring systems must encompass not only day-to-dayactivities, but also longer term or leading indicators which reflectachievement 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 isfully 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 Managementand design and implement programs to overcome existing deficiencies. Inparticular the consultant shall:

a) work with regional executives to refine the new organization inJakarta, which will also constitute an input to Task A: above;

b) lead a team of TELKOM personnel in the preparation of realistic andinformative job descriptions, which integrate with the ManpowerModel and support the process analysis work of Task D;

c) prepare a Training Needs Analysis, specifying the training inputsneeded to recycle existing personnel and cope with the very largestaff buildup currently projected;

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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 aremonitored on an ongoing basis, amd programs modified systematicallyto meet needs;

g) design and implement a realistic personal performance appraisalsystem;

h) design and implement procedures for progression planning forpotential key executives;

i) review the existing system of salary and benefits, carry out jobevaluation and grading, analyze relevant aspects of the generallabor market in Jakarta, and prepare detailed recommendations for agrading and remuneration structure;

J) taking into account all relevant information, including recycling,historic recruitment problems and media issues, prepare a programfor recruitment, in full detail for one year ahead, and quantifiedby 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 andlead the implementation of alternate methods. This should includespecialized techniques for the high volume positions, such asoutside 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 particularthe 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 toemployee work histories;

d) *set up links to the Task A performance monitoring system to providemore accurate information on work load indicators;

e) provide routines to assist "what if" analysis of options intechnology/manpower/skill tradeoffs; and

f) prepare a functional brief for the development of an integrated HumanResources Information system encompassing the Human Resource Model,SIMPEG and payroll, with links to other systems.

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Task D: Productivity and Oiality Improvement

2.2 Virtually all systems and procedures are in need of renewal andsimplification, while maintaining adequate security for the company's assets.The consultant shall:

a) proceed from the high level functional analysis of Task A, prepare adetailed 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 ofperformance standards, encompassing both volume and qualityconsiderations;

e) develop and pilot new systems initiatives in customer-impingingactivities, technical areas and internal office administration;

f) examine opportunities for subcontracting and outsourcing asalternatives to employing additional staff, and make specificrecommendations for new initiatives and needed control procedures;

g) design and deliver training needed to ensure that supervisors andmiddle managers understand the new approaches, and their own roles andmanagerial 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 capableof dealing with a range of options, determining capacities, capital costs andoperation costs. It shall also support a range of tariff options, and becapable of generating cash flow forecasts. In particular, the cor.sultantshall:

a) spe-cify and design the basic modelling system, including procurementof ioftware and hardware, and the training of key TELKOM staff;

b) work with TELKOM network planners to develop plausible options fornetwork architecture;

c) develop scenarios for 1994, 1996, 1998 and 2000;

d) work with TELKOM technical staff to identify plausible technologyoptions, including capital, staffing and operating costs;

e) carry out analysis and financial evaluation to allow selection ofoptimal architecture and technology options;

-94- ANNEX 11Page 14 of 24

f) using tariff options, examine the financial feasibility of meetingdemand 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 updateprocedures.

Time Frame for thn Consultant's Assignment

2.5 It is estimated that about 160 man-months of consulcants' serviceswould be required for the to_ai assignment of five tasks. The total timeframe 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 DevelopmentInitial development 8 monthsFollowup 1 month

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E. TERMS OF REFERENCETO INTRODUCE

INTEGRATED NETWORK MANAGEMENT SYSTEMS (IMS)

Introduction:

1.1. The existing method of manual monitoring and central of local and longdistance networks in Indonesia have proven inadequate under normal trafficconditions, and, more so under conditions of unforseen traffic loads. Toaderess this situation, TELKOM proposes to establish Integrated NetworkManagement Systems in Jakarta, Surabaya, Medan, Bandung, Ujung Pandang andBanjermasin for monitoring the performance of the local and long distancenetwork and providing a real time surveillance and control over networkcomponents so as to optimize the call carrying capacity in a network undertraffic 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 assessit in the complementation of the IMS System. The consultant shall be requiredto undertake the following three tasks:

Task A: Define and specify system requirements, and design integratedNetworkManagement System(s) for the local and the long-distance networks.

Task B: Assist TELKOM in acceptance testing of the system installed by thecontractor.

Task C: Assist TELKOM in implementation of the uperational proceduresassociated with the IMS.

ScoRe of Work

1.3 The details of the individual tasks in the total Scope of Work aregiven below:

Task A: Definition and Design of the Network Management System

1.4 Task a-i: Appraisal of the Present Network: The consultants shallreview tee TELKOM's current operational and maintenance practices andprocedures in the existing local dnd long distance networks, including linksto 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 sampleinspections and performance indicators;

c) study the current network performance targets, service objectives, designcriteria and the network engineering methodology in use;

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d) study the existing equipment types to assess the dormant facilitiesavailable and useful for network management, and identify additionalfacilities needed for providing the necessary network managementcapability, indicators and controls; and

e) analyze the existing local and long distance networks to assess theirstructures and the extent of network management and control facilitiescurrently available, the extent of their usage and their effectiveness.

1.5 Task A-2: Suitability of Existing Facilities for IMS: The consultantsshall review and analyze the existing local, tandem and long distance exchangetypes for their suitability for the IMS and recommend on the following:

a) exchange with current available facilities suitable for effective networkmanagement (NM);

b) exchanges where adequate facilities can be provided through additions ormodifications at reasonable cost;

c) trunk, tandem and key local exchanges essential to IMS which requiresignificant redesign and modifications in order to provide NM facilities;and

d) exchange types and their locations management where provision of networkmanagement facility could be deferred pending replacement of theequipment.

1.6 In respect of (b) and (c) above, the consultants shall assess therelative costs of providing add-on equipment versus modification of theexisting exchange equipment to provide the necessary IMS capability keeping inview any need for modification of proprietary equipment of the originalsuppliers, and make appropriate recommendations.

1.7 The consultants shall make recommendations in respect of thetransmission 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: Followingthe analysis of the existing networks and taking into account the plannednetwork changes (expansion and replacements) up to 1996, the consultants EnaUlmake proposals for structuring the IMS, incluaing the locations of thenational, regional, and local IMS centers. The consultants shall proposealternatives for regional, shared and hierarchical development of the IMS withrecommendations for a preferred option. TELKOM desires that the IMS should beintroduced from the highest to the lowest level in the network hierarchy, thatis, Main, Primary and Secondary centers (corresponding respectively to theTertiary, Secondary and Primary as per CCITT nomenclature) and terminalexchanges. The alternative methods proposed should be fully argued andsupported by cost-benefit and other data, and the advantages and disadvantagesof each. The IMSs proposed should minimize costs and maximize effectiveness;allow progressive evolution and improvement of the system; shall be capable ofupgradation for the ongoing digitalization of TELKOM's networks and extensionto new networks that may be established as part of the normal nationaldevelopment in future.

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1.9 With the above obi-l 'ves in view, the consultants shall undertakethe following:

a) recommend the most "ppropriate effective Ne-#ork Management System(s)arrangements for the local and long distance networks, keeping in view thecurrent Indonesian operations, including but not limited to the following:

i) details of the scope, structure, facilities for the proposed IMSsand the associated control centers;

ii) number location, type and hierarchy of the proposed local and longdistance 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 operationalprocedures fnr thAse networks; and

iv) the methodology for the incorporation of the different networks inthe first phase IMS;

b) provide cost estimates for different options for the types of IMSs withdifferent degrees of sophistication, etc. that could be introduced;

c) assess the modifications and improvements required ir. the existinglocal and long distance networks and operational procedures for successfulintroduction of network management;

d) recommend the types of data that would be needed by the IMS from theon-site maintenance, traffic, engineering and management staff; the methodsand procedures for collecting the required data (keeping in view the currentnetwork elements); and an indication of the minimum requirement for each ofthe 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 ManagementInformation System; and

f) recommend minimum functional requirements for the equipment at the IMScenters.

2.0 The consultants' recommendations for the local and long distarnce IMSs,the associated data analysis systems and for the upgradation of the existingor new Management Information Systems must be supported by a cost benefitanalysis and rate of return estimates. Adequate justification must be givenif consultants believe reliable rate of return estimates are not possible.

2.1 Task A-4: Network Modifications and New ORerational Procedures: Theconsultants shall cover the following in their proposals:

a) identify the potential problem areas in the existing local and longdistance networks which may inhibit their incorporation into the INS andspecify, where necessary and needed, the modifications to their current

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structures to make thera suitable for the proposed IMS, bu-. ensure that theseare restricted to only the most essential;

b) specify new operational procedures and techniques specific to theexisting and proposed TELKOM networks and operating procedures necessary foreffective operation cf the proposed IMS;

c) identify s ,pects of the existing organizational arrangements andoperational pro' idures which may inhibit effective operation of the proposedlocal and long distance Network Management Centers, and recommend improvementsand new equipment and facilities needed for introducing such improvements; and

d) specify responsibility and line of command for the Network ManagementCenters; 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 maintenanceorganizations 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 onthe above aspects and, after discussions with the consultants, decide on thescope and type of local and long distance Network Management Systems to beintroduced, the associated data analysis to be employed, incorporation of thedata into the existing exchanges and Management Information System, and theextent of modifications to the existing network structures and equipment itwould undertake to make them suitable for incorporation into the agreedNetwork Management Systems.

2.2.2 Thereafter, based on the consultants' estimates of the costs of theintroduction of the agreed local and long-distance Network Management Systemsand the availability of funds, TELKOM will decide on the target networks to becovered by the IMS in the initial phase which may or may not cover all thenetworks 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 ofequipment quantities.

Task B: Assistance to TELKOM in Acceptance Testing of the Installed System

2.3 The consultants shall be required to assist TELKOM in generalsupervision of the supplier's performance of the contract to ensure that thefacilities and equipment being installed are in accordance with the contract.The consultants shall also be required to assist TELKOM in the finalacceptance testing of the system as it is offered by the contractor beforecommissioning and to ensure that the performance of the equipment meets thespecified criteria, and confirm to the TELKOM that it can sign-off on theperformance guarantee provided by the contractor.

- 99 - ANNEX 11Page 19 of 24

Task C: Assistance to TELKQM Staff in Implewentation of the New OperationalProcedures associated with the Integrated Network Management Syster4

2.4 Two types of operational procedures are envisaged, for both of whichthe consultants will be required to assist TELKOM, namely (a) those thatrelate to operation of the hardware of the IMS; and (b) those that impact onthe existing organizational structure and operational procedures. The latterwould include any changes required in the existing or planned networks foreffective incorporation into the IMS. The above two requirements maynecessitate changes in the reporting procedures within the TELKOM and couldalso precipitate some organizational changes. The contractor for the hardwarewill be required as a part of his contract to assist TELKOM with the IMSoperation for 6-12 months after its commi_sioning. However, the TELKOM mayrequire the consulte.ats to assist in fine tuning the new IMS and inimplementing the new operational procedures and any changes to the TELKOM'sorganizational structure and operational framework propcsed by the consultantsand accepted by TELKOM.

2.5 It is estimated that about 100 man-months of consultant services wouldbe required for the total assignment of three tasks.

- 100 - ANNEX 11

Page 20 of 24

F. TERMS OF REFERENCETO STRENGTHEN FINANCE DIRESCTORATE

Background

1. PT Telekomunikasi Indonesia (TELKOM) was established as a governmentowned limited liability company under Notarial deed Mrs. Imas Fatimah Jakartaon September 24, 1991, with the responsibility for the planninx constructionand operation of domestic te'Lecommunications facilities. As - aitedliability company, TELKOM is accountable to the Ministry of F. nce. However,the Ministry of Finance has delegated the supervisory authority to theMinistry of Tourism, Posts and Telecommunications. TELKOM is managed by aBoard of Directors, headed by a President-Director. The President-Directorhas authority for all operations of TELKOM. The Board currently includes fiveother directors with functional responsibility, respectively, for development,engineering and operations, finance, administration and logistics.Operational responsibility devolves to 12 regions, and responsibility formajor development projects to 3 project-managers. Also reporting to the Boardare several staff units responsible for Corporate Planning, Research andDevelopment, Education and Training, Information Technology, and the CorporateInspectorate, an internal audit-unit.

2. The Finance Directorate consists of four subdirectorates, Budgeting,Financial Accounts, Treasury and Financial Administration. To improve thetimeliness of accounting data and preparation of financial management reports,a new chart of accounts based on the concept of responsibility accounting wasintroduced in early 1989 in TELKOM's head office and all regional offices. Acomputerized general ledger program was implemented in head office andregional offices. These initiatives have helped to reduce the time and effortrequired to prepare financial reports and financial accounts for 1989 and 1990were closed within three months of the end of the year.

3. Although the financial acc)unting function has improved in the pastthree years, financial data have not yet been used effectively by TELKOM'smanagement as a tool for operational control due to the weaknesses in TELKOM'sinternal financial and management systems and a lack of adequate qualifiedstaff in the Finance Departmen% both at the headquarter and regions. Currentmanagement accounts are being ,.epared in a piecemeal basis with eachsubdirectorate preparing their own management accounts and informationreports. There is no one unit under the Finance Department responsible forpreparing corporate management accounts. In addition, TELKOM does not havecost accounting system in place and therefore does not have accurateinformation on the cost of different services and activities and cannotidentify accurately the profitability of the telephone offices and theregional offices. In light of the change in status as well as the TELKOMmanagement's decision to reorganize into six independently operating regionsand 43 Strategic Business Units instead of the current functional sL.ructure,it is important that a cost accounting system be established in TELKOM. Inaddition, the treasury function in TELKOM needs to be strengthened to operateas a commercial entity so that it can assess the best financing techniques forits development, issue securities (eventually equity), manage its cash andliabilities and foreign exchange exposure.

- 101 - AEEPage 21 of 24

4. The technical assistance component under the World Bank financed ThirdTelecommunications Project is assisting TELKOM to upgrade the skills of theFinince Department and build the capacity of TELKOM's management to usefinancial data in the management of its operations through the provision ofoverseas fellowships and secondments to other telecommunications organizationsfor TELKOM managers and Finance Department staff. Financial expert has alsobeen provided under the project to help improve TELKOM's financial forecastingard management in cash management. In addition, financial consultantsfinanced under bi-lateral sources as well as TELKOM's own funds are alsoassisting TELKOM to review and develop financial systems and procedures.

5. A team of four experts will be required for a period of two years withthe possibility of a six months extension to assist TELKOM to strengthen itsmanagement accounting and treasury functions and establish a cost accoluntingsystem. The team along with key TELKOM staff will review and recommend thenecessary policies, systems and procedures as well as the appropriateorganization setup to carry out these functions. The team will also berequired to assist TELKOM in implementing the agreed recommendations.

6. One expert will be the team leader and will be responsible forcoordinating the work of the team and ensure that the tasks are carried outeffectively. The other three team members will consist of a managementaccountant, a cost accountant and treasury management expert. Each expertwill be attached to a deputy directors in the Finance Department in theheadquarters. Review and implementation of systems and procedures will becarried out with TELKOM counterparts staff from the headquarter and theregional offices. In addition, each expert will also be required to undertakeany other related tasks that the deputy directors they are assigned torequests.

Transfer of Know-how and Training

7. An essential and key element of the consultants' total assignment shallbe the upgrading and development of TELKOM's human resources through transferof know-how and training of TELKOM's staff in all aspects of the workundertaken by the consultants in Indonesia. The transfer of know-how andtraining of TELKOM's staff shall cover but not be limited to techniques andshall include mode of updating these systems and procedures.

8. The consultants shall prepare a detailed plan for transfer of know-howand 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 trainingschool and/or through on-the-job training. The training plan should bedesigned with the objective that, on completion of the consultants'assignment, the TELKOM staff shall have developed inherent capability ofimplementing independently the consultants' recommendation and managing thesystems implemented without substantial further external technical assistance.

9. The consultants shall review the availability of TELKOM's staff to actas counterparts, specify the required qualifications for each such staff,assist TELKOM in selecting such staff from within TELKOM or through outsiderecruitment and, if necessary, recommend foreign training of TELKOM staff inspecific disciplines.

- 102 - ANNEX 11Page 22 of 24

10. The specific tasks and the responsibilities associated with the threeexperts and their qualifications are set out below.

Expert 1: Team Leader

11. The team leader will be responsible for coordinating the work of theteam and ensure that the tasks are carried out effectively by the other threeteam members and report directly to Director Finance. In addition, the teamleader will be fully responsible to ensure that transfer of know and trainingof TELKOM staff are carried out effectively. The specific task andresponsibility 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 overfive years experience as a financial manager in a telecommunications entityand relevant work experience in a developing country. The assignment isexpected 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 staffdevelopment and training, candidates with a track record and/or capacities inthese areas would be preferred.

Expert 2: Management Accountant

13. Objectiye: The objective of the task is to str_.ngthen the managementaccounting system to ensure that management reporting and control systems arein place to monitor TELKOM's performance and to enable TELKOM's management totake the necessary and timely corrective actions.

14. Scope of Work: The expert will lead a group of TELKOM staff incarrying out, inter alia, the following:

- review of the budgeting proe-ess and reports and assist inimplementation of the agreed recommendations;

- review of the existing policies, systems and procedures in managementaccounting and assist in implementing the agreed recommendations;

- review the financial man.gement systems and procedures to monitor andcontrol the actual performance against budget targets:

- recommend and establish a performance monitoring system for StrategicBusiness Units for senior management;

- 103 - ANNEX 11Page 23 of 24

- review appropriate organization setup to carry out these functions andassist in the implementation of agreed recommendations;

- carry out a job analysis to identify the staffing needs to maintainmanagement accounting systems and related functions and prepare thetraining programs and provide the training;

- assist in preparing monthly, quarterly and annual operational anddevelopment management reports for senior management.

15. In carrying out the above tasks, the expert should review the workbeing undertaken as well as have been undertaken to improve the system byTELKOM and external consultants.

16. Reguirements: A qualified accountant with over ten years experienceas management accountant and relevant work experience in a telecommunicationsentity and developing country. The assignment is expected to start on January1, 1993 and be for a period of about two years. As the position requires anunusual amount of time and resources for staff development and training,candidates with a track record and/or capacities in these areas would bepreferred.

ExDert 3 - Cost Accountant

17. Objective: The objective of this task is to establish a costaccounting system to enable TELKOM to account cost by elements, differentactivities and services and regional offices and UPTs in order to carry outcost and profitability analysis and control.

18. Scope of Work: The expert will lead a group of TELKOM staff carryingout, inter alia, the following:

- review policies, systems and procedures in setting up cost accountingand assist in the implementation of agreed recommendations;

- review cost and profitability analysis and control system and assist inthe implementation of agreed recommendations;

- review appropriate organization setup to carry out these functions andassist in the implementing of agreed recommendations;

- carry out a job analysis to identify the staffing needs to establishand maintain a cost accounting system and related functions and preparethe training programs and provide the training;

- assist in preparing the cost accounting reports for seniormanagement.

- An appropriate organization setup to carry out this function needs tobe recommended and implemented

- 104 - AEX 11Page 24 of 24

19. In carrying out the above tasks, the expert will review any work beingundertaken as well as have been undertaken to setup a cost accounting thesystem by TELKOM and external consultants.

20. Requirements: A qualified accountant with over ten years experienceas cost accountant and relevant work experience in a telecommunications entityand developing country environment. The assignment is expected to start onJanuary 1, 1993 and be for a period of about two years. As the positionrequires an unusual amount of time and resources for staff development andtraining, candidates with a track record and/or capacities in these areaswould be preferred.

Expert 4: Treasury Manageme;±t Expert

21. Obsective: The objective of this task is to strengthen TELKOM'streasury function to enable it to operate as a commercial entity so that itcan assess the best financing techniques for its development, issue securities(eventually equity), manage its cash and liabilities and foreign exchangeexposure.

22. ScoRe of Work: The expert will lead a group of TELKOM staff to carryout, inter alia, the following:

- review the existing policies, systems and procedures in treasurymanagement and assist in the implementation of agreed recommendations;

- review appropriate organization setup to carry out these functions andassist in the implementation of agreed recommendations;

- carry out a job analysis to identify the staffing needs for treasurymanagement and prepare the training programs and provide the training;

- assist in preparing the reports related to the functions to becarried out for senior management.

23. In carrying out this task the expert will review work being undertakenas well as have been undertaken to improve the system by TELKOM and externalconsultants.

24. Reauirements: A qualified accountant with over five years experienceas 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 aperiod of about two years. As the position requires an unusual amount of timeand resources for staff development and training, candidates with a trackrecord and/or capacities in these areas would be preferred.

- 105 -

INDONESIA AMEX 12FOURTH TELECOMMUNICATION PROJECT page l of 2

PROCUREMENT PACKAGES AND SCHEDULE

BID PACKAGES OF 199119293

1OSP -lIst Phase RSupporting Facilities

a. Biddingb. Evaluatina. Approvald. Contract Discusson0. EDC

2PO2nd Phasea. Biddingb. Evaluationc. Approval

3 -552 K 2nd Phase Oa. Biddingb. Evaluationc. Approval4L Contract Discussion.. EDC

4Bal Nusa Tenggara Digita FRANOMW .+ Supporting FealtIea. Bikdig8. Evaluationa. ApprovalcL Contract Discussin0. EDC

Trans Suiawesi Phase 11 FRAMEa. Biddingb. Evaluationa. Approval4L Contract Discussiona. EDO

Cross Kalimantan Digita ph ii MMW + Supporting Faciltesa. Biddingb. Evaluationa. Approvald4 Contrac Discussiona. EDC

Jabotabok Transmission OCa. Biddingb. Evaluationa. Approvald4 Contiact Discussion.. EDO

Remote Area Projeca. Bidding8. Evaluationa. Approval4L Contrac Discussion*. EDO

INDONESIA ANEX12FOURTH 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 SupoivwsMrfor OSP

a. Biddingb. Evaluationa. Approvald. Conftra Discussono. EDO

10 ComputerizationORa. Biddingb. Evaluationo. Approvald. Contrac Discuso0. EDO . . . . .. . .

11 Malmntaanon Equipment mORa. BiddingInIb. Evaluationc. Approval4L Contrac Dhiscusio

12 Java -Ball ProjerFRNCMW +i Supporting Facilifes

b. Evaluationa. Approval4 Contrac DiscusinW0. EDO

I3 MS Consultana. Biddingb. Evaluationa. Approvald Contrac DiscssinWa. EDO

'4 CS for TransmissinMW.+ Suppotidng Faciltiea. Biwingb. Evaluationa. Approval4L Contrac Discussiosi.EDCIII I

isCs for Switchinga. Bkkgingb. Evaluationa. Approval4L Contro Discusoa.EDO

16 OM ford pmojegma. Biddingb. Evaluationa. ApprovalcL Contrac Discussion0. EDO

- 107 -

ANNEX 13

INDONESIA

FOURTH TELECOMMUNICATIONS PROJECT

Disbursement Schedule(US$ Million)

AsiaBank Semer Disbursement Cumulatve Telecom.FY No. Ending Semester Cumulative Sector Profile

1993 I Dec. 31, 1992 0.0 0.0 0.0 0II June 30, 1993 5.0 5.0 1.3 10

1994 I D'x. 31, 1993 5.0 10.0 2.6 141 June 30, 1994 5.0 15.0 4.0 30

1995 I Dec. 31, 1994 30.0 45.0 12.0 42II June 30, 1995 40.0 85.0 22.7 54

1996 I Dec. 31, 1995 50.0 135.0 36.0 6211 June 30, 1996 50.0 185.0 49.3 74

1997 I Dec. 31, 1996 50.0 235.0 62.7 82H June 30, 1997 50.0 285.0 76.0 86

1998 I Dec. 31, 1997 40.0 325.0 93.0 98II June 30, 1998 50.0 375.0 100.0 100

- 108 -ANNEX 14Page 1 of 2

INDONESIAFOURTH TELECOMMUNICATIONS PROJECT

Implementatlon Schedule

1. SWIlCHINGYr 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(+) +4105 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 2FOURTH TELECOMMUNICATIONS PROJECT

Implementation Schedule

3 EXPANSION OF MULTI - EXCHANGE AREAYe. 100k1 10092 1003 1004 19R16 100CodNo./Pvow l l ll lm im 120 lo l l

301 JABOTASEK 4o,+ +

4. TRANSMONYw 1901 1002 19W3 1994 1006 1

RAo' III II I I I I I I I I I IRak 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 + + +4406 RmteArmPh -M +. + +

406 CoElunlon Super4on . +

407 Supptng F .. -

L MANTENANCE NEEDSYe_ 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. COMPUTRIZAMONYaw 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 4.015Maanual Exchange Capacity 30 10 0 0 0Total Exchange Capacity (C000s) 2,045 2,525 3,015 3,515 4,015

2. Additional Auto Lines Connected 300 350 400 450 500Additional Marual Lines Connected (15) (7) 0 0 0Total Main Lines Connected ('000G) 285 343 400 450 500

3. Total Auto Main Lines 1,509 1,859 2,259 2,709 3,209Total Manual Main Lines 22 7 0 0 0Total 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 3.0Payphone ( 000s) 45.0 60.0 75.0 90.0 105.0WARTELs ('000s) 0.8 1.0 1.0 1.0 1.0

5. Quality of ServIceNo. 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 19 167. Revenues (Rp. '000)

op Revenue/Av Main Line Constant '91 1,480 1,333 1,268 1,168 1,087Current 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 1,005Current 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 1,078Cash Op Cost/Av Main Line Constant '91 607 570 538 515 488

Current 644 640 641 651 653Staff Cost/Av Main Line Constont '91 357 341 328 320 309

Current 378 383 391 404 4139. Return on Av. Net Fixed Assets 24X 26K 28K 28K 29X10. Net Internal Cash Gen./Avg 2 Years Invest. 43X 43K 42X 47X 48X11. Debt Service Coverage 2.9 2.9 3.3 3.4 3.212. Current Ratio 1.7 1.7 1.8 1.9 2.013. 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 fromDepartment staff skills. recommendations, agree on the FY92 onward. Progress to be

domestic and overseas training monitored according to agreedprogram. 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 Junep r o c e d u r e s f o r policies, systems and procedures 1992. Implement the revisionsdecentralized operation. in light of the planned required by December 1992.

decentralization.

3. Develop cost accounting Review and implement policies, Expert to be employed by Augustsystem. 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 Augustaccounting system. systems, procedures, 1992. Implement the agreed

organizational setup and training recommendations by June 1993.to improve managementaccounting system.

5. Improve accounting and (a) Implement SIMAK Systems to be implemented in 10financial management information systems in aU WITELs by December 1992 andinformation systems. WITELs. in remaining 2 WITELs by

December 1993. lmplementatio'.to be completed by Decemser1993.

(b) Convert PC-based account-ing and MIS systems at thetelephone offices to operateon main frame.

6. Develop treasury function Review and implement policies, Expert to be employed by Augustto operate on commercial systems, procedures, 1992. Implement the agreedbasis. 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 Thirdforecasting and planning. model into corporate planning and Telecommunications Project to

budgeting cycle. Implement assist TELKOM to developfinancial model at WITEL level. financial model by July 1992.

Model to be integrated intoTELKOM planning by December1992 and implemented at WITELlevel by June 1993.

8. Continue improvement in Implement phased billing. Implement phased billing in six orbilling efficiency. more locations by March 1992

and all locations by December1993.

9. R ed u c e 1e v . Is o f Continue actions taken by Reduce receivables for allgovernment receivables. TELKOM in line with government subscribers to a

Government decree to improve maximum of two months ofreceivables 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 tomanagement 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 Octoberoperations (traffic assistance, develop a plan of 31, 1992, implementation tom o n it o r i n g a n d action to improve quality of proceed thereafter and monitoredengineering) 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 Decemberresource development plan resources in relation to future skill 31, 1992 to implement agreedinitially for Jakarta. mix requirements including recommendations.

training, career development andfinalize recommendations byJune 30, 1992 to successfulyimplement decentralizationprogram.

2. Increase availability of Prepare training plan. Skills Upgrade training facilities bycompetent, trained expert needed in (a) digital technology December 31, 1993. Progress tostaff. (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 beginningsuccesion plan for the top numbers to be trained in September 1993. Progross to be100 management in each fidd. monitored through agreedTELKOM. reporting requirements.

(b) Arrange language training.Complete language training

(c) Execute plan for selection and January 31, 1993.training.

Complete selection by September30, 1992.

IV. Ooorational Porformanco

;. Further develop efficiency (a) Set network performance Agreed indicators given inof operation, quality of targets, monitor and review Annex S.services and responsiveness performance compared toto users. targets & determine cor-

rective measures wheroappropriate.

(b) Decentralizemanagementto Decentralization starting withthe regions Jakarta to begin June 1992.

2. To reduce faults on plants (c) Reduce number of 5which cause high fault faults/100 phones/month.incidents: Dropwire, DPand 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 byfor 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 andcommercially important customers by account. Surabaya. June 1993 for othercustomers. msjor cities.

(b) Improve staff skills incustomer orientation.

January 1993.

- 114 -

ANNEX 17INDONEIIA 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 1,521.0Tetlx 47.0 53.4 56.2 59.9 67.8 90.2Telegrm 8.8 9.9 11.2 11.4 14.7 18.0Leased Channel 22.3 27.2 29.5 44.4 55.9 41.8Other 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 152.0 166.6 181.2 254.4 384.1 447.3General & Administration 116.2 113.0 112.0 108.8 144.3 236.5Repair & Maintenance 84.7 87.3 61.3 55.0 62.7 81.4DeprecIation 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 arefor 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 17INDONESIA 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 83.5 111.7 103.4 129.5 187.0Depreciation 108.0 267.9 251.9 294.1 409.5 518.1Amortization 27.2 42.3 23.8 43.1 115.3 63.9ProvIsions 7.1 14.3 10.7 25.3 13.6 14.6Interest 38.7 30.6 22.3 66.7 77.1 171.0Differed 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 36.3Other Liabilities 49.7 (42.1) (33.4) 2.9 48.0 1.2Loans 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 0.0Bonus to Employees 12.3 13.4 8.3 11.2 16.5 20.7Pension Plan 9.8 10.7 6.7 8.9 2.1 2.6Social 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 ServiceInterest 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) 237.3Deffered 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 arefor PERWiTEL for the ihole fiscal year.

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ANNEX 17INDONESIA 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 AssatsCash & Banks 115.9 62.5 83.5 62.2 89.6 95.2Short Term Investment 445.7 464.5 558.6 619.6 340.3 402.2Accounts 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 52.8 104.0 164.1Advance 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 2,090.1Work 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 arefor PERIMIEL for the whole fiscal year.

_2V Assets rwvalued in 1987 end accelerated deprecfation method adopted.

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ANNEX 17INDONESIA 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 1,289Op 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 arefor PERUNTEL for the iholo fiscaL year.

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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 4,000.6Telex 89.5 89.1 99.0 104.6 111.8Tetegram 19.4 20.4 21.4 22.5 23.6Leased Chanels 46.0 50.6 55.7 61.2 67.4Other 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 1,222.8General & Adminfstration 262.5 292.8 322.5 351.7 366.8Repair & Mafntenance 106.1 144.0 194.2 259.6 343.1Depreciation & Amortization 743.2 795.0 921.7 1,073.8 1,213.1Provisions 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 196.0 220.7 235.8 280.8 368.0Non-operating Income 30.8 16.8 5.4 10.5 27.3

....... .......... ....... ........... -------...... ... ........ ...

Pre-tax Income 345.2 430.5 607.4 666.0 M7.3Income 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 74KReturn on Net Fixed Assets (Pre-tax) 24X 26X 28X 28X 29XReturn 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 224.4 279.8 394.8 432.9 502.0Deprelaetfon & Amrtlzatfon 743.2 795.0 921.7 1,073.8 1,213.1Interet 196.0 220.7 235.8 280.8 368.0Deferred 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 8.7social ObJective 3.7 4.5 5.6 7.9 8.7

...... ...... .. ...... ...... ... ...... .............. ...

Totat Transfers 84.2 101.0 125.9 177.7 194.8

Debt ServiceInterest 196.0 220.7 235.8 280.8 368.0Prineipal 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

AppiceatfonrsCapital InvestmntLocal Componrnt 811.5 653.7 676.8 853.6 842.2Fore 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) 45.5 280.3 266.0 247.2Deffered 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 344.8 296.5 346.8 390.1 402.4Accounts Recoevable 220.2 268.4 328.8 386.2 453.6Other Receivablas 87.2 127.2 202.4 274.8 322.7inventorles 250.4 305.9 367.6 433.6 502.9Prepaymnt 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 10,560.8Less 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 3,988.1Work 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 4,910.8Deferred 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 2.0Debt/(Debt + Equfty) 52X 57 59X 603 60s

- 121 -

Annex 19Page 1 of 2

INDONESIAPT 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 exchangerate of Rp. 1992 to the US dollar was used.

2. Tariffs. Tariffs schedules as shown in Annex 20 were used subject tothe following: Domestic tariffs were assumed to be increased by 12Zeffective January 1, 1994 and maintained in real terms thereafter to enableTELKOM to self finance a minimum of 40% of its financing needs andmaintain its debt equity ratio within the government limit of 60:40 through1996.

3. Future Facilities. Staffing and Ouality of Service - The number ofconnection for telephone, staffing ratio and auality of service for theprojection period are shown in Annex 15.

Incoe Statements

4. Operating Revenues. The operating revenues were calculated asfollows:

(i) Telephone and Telex - Traffic revenues are calculated bymultiplying the total traffic (pulses or minutes) by the price perpulse or minute for local, long distance and international calls.Assumption of traffic growth are as follows: domestic automaticgrow at 10% p.a, domestic manual to fall at 101 p.a. andinternational traffic to grow at 20X p.a.. For internationalrevenue projection the revenue sharing with INDOSAT is assumed at351 (to TELKOM) throughout the projection period. The rentalrevenue is calculated on the basis of existing lines and additionallines installed during each year. The installation revenue chargefor each year is calculated on new lines installed during the yearwith 501 shown as revenue for the year and rest as revenue for thefollowing 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 employeestimes average salary, including benefits, per employee. The totalnumber of employees is expected to increase, but the staffing ratiois expected to decrease as measures are taken to improve

- 122 -

Annex 19Page 2 of 2

operational efficiency. Annual salaries are projected to increasedby 10 percent p.a. in real terms, to account for increase inproportion of skilled staff and better incentives.

(ii) General and Administrative Cost is a percentage of personnel costand is projected to decrease from 50Z to 30X by 1996.

(iii) ReRair and Maintenance Cost is calculated as the average number ofmain lines times repair and maintenance (R&M) per average mainline. R&M per main line is assumed to increase by 5 per annum inreal terms.

(iv) Bad Debt Provision is a percentage of billed revenues and isprojected at 5 of outstanding accounts receivables.

(v) Depreciation is on a double declining method and is about 301 perannum on net fixed assets in operation the previous year.

(vi) Amortization of deferred charges is about 201 per annum on netdeferred charges the previous year.

Balance Sheet Items

6. Gross Fixed Assets reflect the investment program in Annex 9 andtransfers from work-in-progress.

7. Accounts Receivable is measured as the number days of total operatingrevenue. It is assumed to remain at 40 days of billing during theprojection period.

8. Inventoriel are estimated as a percentage on gross fixed assets inservice 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 andwork in progress.

11. Long-tern debt and current Rortion are based on the project financingplan and projected debt service.

12. Accounts Payable is a percentage of cash operating cost and work inprogress. It is expected to decrease to 151 of cash operating cost andwork in progress by 1993 and remain at that level.

13. Approrriation of Net Profit During the projection period, bonous toemployees, social objectives and pension plan contributions are assumed tocontinue as for PERUNTEL. Dividend payment is assumed to remain at 1992level of 251.

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Annex 20Page 1 of 6

INDONESIAPT 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 20Page 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 seconds100-200 km 5 seconds200-300 km 4 seconds300-1,000 km 3 secondsover 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 750100-200 km 1,000200-300 km 1,200300.1,000 km 1,500over 1,000 km 2.000

(e) Long-distance urgent service(twice the rates shown in (d) above)

- 125 -Annex 20Page 3 of 6

D. Telegraph Rate

1. Presentation rate per telegram 3502. Domestic rate per word, normal service (minimum 10 words) 25

E. Telex Rate

1. Installation fee Same as telephonemain exchange

2. Monthly subscription 15,0003. Pulse rate with duration: 100

up to 50 km 12 seconds50-300 km 8 seconds300-750 km 6 secondsover 750 km 3 seconds

F. Private Leased Circuits

1. Installation fee Rer Rair(inside service border area)Category I 250,000Category II 175,000Category III 100,000Cagetory IV 87,000Category V 62,000Category VI 45,000Category 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 20Page 4 of 6

(ii) Long distance and trunk

Zone Distance Government Business and(km) private

(Rp) (Rp)

I up to 100 900,000 5,062,500II 100-200 1,080,000 6,750,000III 200-300 1,350,000 8,100,000IV 300-1,000 1,800,00 10,000,000

v over 1,000 2,700,000 13,500,000

(b) Telegraph and Data CircuitsLeased telegraph circuits are available up to a maximumtransmission rate of 50, 100 and 200 baud.Leased data circuits are available for transmission ratefrom 300 bps.

(i) Within one local area:Printer, per pair per connection 75,000Data communication, per pair 100,000

- 127 -Annex 20Page 5 of 6

(ii) Long distance and trunk leased circuits

Trans-mission Zone Distance Government Business andrate private

50 baud I up to 100 180,000 420,000(full II 100-200 216,000 504,000speed) III 200-300 270,000 630,000

IV 300-1,000 360,000 840,000V over 1,000 540,000 1,260,000

75 baud I 198,000 462,000II 237,000 554,000III 297,000 693,000IV 396,000 924,000V 594,000 1,386,000

100 baud I 216,000 504,000II 259,000 604,000III 324,000 756,000IV 432,000 1,008,000v 648,000 1,512,000

200 baud I 288,000 672,000II 345,000 806,000III 432,000 1,008,000IV 576,000 1,344,000V 864,000 2,016,000

300 bps I 900,000 2,100,000II 1,080,000 2,520,000III 1,350,000 3,150,000IV 1,800,000 4,200,000V 2,700,000 6,300,000

- 128 -Annex 20Page 6 of 6

NOTES

1. Location Categories

Category I Jakarta areaCategory II Medan, SurabayaCategory 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-duplexFull-duplex (4-wire connection)

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Annex 21Page 1 of 4

INDONEUIAPT TELEKOMUNIKASI INDONESIA (TELKOM)FOURTH TELECOMM(UNT IIONS PROJECT

Return on InvestmentsAssutioU

The assumptions made in deriving the benefit and costs streams used tocalculate the economic rate of return on investments are outlined below and inTables 21.1 and 21.2.

Capital Cost

TELKOM's investment program over the period 1992-1996 has beencategorized as investments under (i) ongoing works, (ii) investments included inthe Fourth Telecommunications Project and (iii) future works. Investments forthe first two categories are closely related. In contrast, investments in thethird category, future works, are independent of the first two categories and,since funding is still uncertain are considered as future works. In assessingreturn on investments, the capital costs considered therefore include investmentsunder ongoing works and the Fourth Telecommunications Project taken together overthe period 1992-1996.

ORerating Costs

Incremental operating costs streams were specified as the expectedoperating costs with and without the proposed investments. The expectedpersonnel, repair and maintenance, other operating costs and corporate income taxresulting from the proposed investments have been reflected in the financialprojections (Annex 18) based on assumptions in Annex 19.

Without the proposed investments it was assumed that the network wouldcontinue to deteriorate, thereby leading to increased maintenance costs per linein service. More specifically, maintenance cost per line would increase lOX perannum in real terms. Staff in 1993 is assumed to increase proportionally toincrease in number of main lines added without the program and continue to remainat that level thereafter. Average staff cost per staff is expected to increaseas in the case with the proposed investments. Other operating costs woulddecrease proportionally with respect to total personnel cost.

Revenues

Incremental revenues were calculated as the difference in revenues with andwithout the proposed investments. Incremental revenues are the result of theadditional revenues from new telephone subscribers, including installation,rental and usage fees and the increased revenues from existing subscribersresulting from higher traffic due to modernization of telecommunicationsfacilities. The expected changes in revenues resulting from the proposedinvestments have been reflected in the financial projections based on assumptionsin Annex 19.

Without the proposed investments, new subscribers would continue to beconnected until 1993 and from 1993, the traffic growth for existing subscriberswould increase at a smaller rate and finally stop growing due to network

- 130 -Annex 21Page 2 of 4

congestion and line faults. Both international and domestic traffic are assumedto grow at 10 and 51 per annum, respectively, until 1994, jith no growth from1995 onwards.

Tariffs

It was assumed that domestic tariffs would be increased by an averageof 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 from1992 to 2007. At the end of this period it is estimated that on average allequipment provided under the project would have completed its useful life. From1996 onward all costs and benefits related to the 1992-1996 investments, areexpected to remain constant in real terms.

Rate of Return

Input cost and benefit data used in calculating the incremental costand benefit streams for estimating the rate financial rate of return (FRR) areprovided in Tables 21.1. The incremental costs and benefits for estimating theeconomic rate of return are derived by adjusting capital cost for 101 value addedtax, operating cost for corporate income tax and benefit stream for 101 value-added tax levied on telephone bills to telephone subscribers. The cost andbenefit streams for estimating the real economic rate of return (ERR) are shownin Table 21.2. The cost and benefit streams have not been shadow priced sincethe procurement of most items are on competitive basis, skilled labor is mainlyused and Indonesia has an open foreign exchange market. The net benefit streamwas deflated to reflect constant 1991 prices.

Based on these assumptions, the real financial rate of return to TELKOMis estimated at 18X. The real economic rate of return is estimated at 23X. Thisis a conservative estimate of the economic rate of return as it does not reflectthe consumer surplus which is high given the supply constraint. A sensitivityanalysis carried out to project the effect on the econiomic rate of return ofpossible changes in key variables is summarized below:

ERR

(a) a delay of 12 months in connection of new subscribers 15resulting 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 accountconsumer surplus the real ERR would be 13X. The contracts for majortelecommunications equipment to be financed by co-financiers have already beenfinalized and cost estimates for major Bank financed items are based on recentcontracts for similar items under the ongoing Third telecomunications Project.To ensure timely implementation of the project, single responsibilityimplementation approach will be used and all major contracts will be signed bythe 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 2,247.4Operatins Cost without Progri_ (includes Taxes) 1,046.2 1,247.3 1,497.3 1,686.4 1,845.6Incremental 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 4,303.3Revenue without Prqgre_ 2,176.9 2,296.9 2,517.0 2,614.9 2,746.6Incremental 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 1,977.1Operating 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 2,746.8Incroeental Revenu 0.0 246.2 597.1 1,049.4 1,556.4Plus: 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 InstitutionalStrengthening

MAP SECTION

IORD 23237

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