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Implementation Completion Report (ICR) Review - Indonesia Railway Efficiency Project


  
1. Project Data:   
ES Date Posted:
07/28/2005   
PROJ ID:
P004026
Appraisal
Actual
Project Name:
Indonesia Railway Efficiency Project
Project Costs(US $M)
 207.4  130.9
Country:
Indonesia
Loan/Credit (US $M)
 105.0  57.6
Sector, Major Sect.:
Railways,
Transportation
Cofinancing (US $M)
 62.2  68.1
L/C Number:
L4106      
   
Board Approval (FY)
  96
Partners involved
Government of Australia, Government of Netherlands 
Closing Date
09/30/2002 12/30/2004
         
Prepared by: Reviewed by: Group Manager: Group:  
Peter Nigel Freeman
Christopher D. Gerrard Alain A. Barbu OEDSG

2. Project Objectives and Components:

a. Objectives

The general development objective was to improve the economic efficiency and service quality of the borrower's railway subsector. Specific objectives were:

  1. To carry out subsector policy reform by restructuring the railway state enterprise (Perumka), reforming the relationship between it and the Government of Indonesia (GOI), and creating the foundations for expanded private participation;
  2. To rationalize subsector capital investments;
  3. To improve subsector management and operations;
  4. To increase the physical capacity of the Jakarta-Bandung corridor.

b. Components

  • Policy Reform:establishing a mechanism to compensate Perumka for its public service obligations; (b) establishing a mechanism to compensate Perumka for infrastructure maintenance and operation; (c) establishing a system of track access charges; (d) transforming Perumka into a limited liability company; (e) developing a framework and strategy for expanded private sector participation. Original base cost US$ 4.3 million (2.4% base project cost); actual US$ 0.2 million.
  • Improvements to the Jakarta-Bandung corridor: (a) modern centralized traffic control signal system; (b) double-tracking 27.7 km of line; (c) remodeling station trackage for a number of stations; (d) replacing 24 km of partly-worn rail (which would itself be redeployed on lower tonnage, lower speed lines elsewhere); (e) technical assistance for project management and training. Original US$ 121.3 (66.6%); actual US$ 98.4 million.
  • Track upgrading and maintenance system: (a) renewal of 100 km of main track; (b) partial restoration of 160 equivalent km of track; (c) establishment of a modern track maintenance system on Java; (d) training and supportive studies. A critical component of the maintenance system was to establish a rail reclamation yard for the preparation of continuously welded new and relay rail. Original US$ 37.5 million (20.6%); actual US$ 12.0 million.
  • Diesel electric locomotive unit exchange maintenance system on Java. Consisted of establishing an on-time preventative maintenance system with unit exchange. This would provide ready-for-use components to exchange when similar components had to be removed for overhaul. Original US$ 15.0 million (8.2%); actual US$ 19.5 million.
  • Strengthening Perumka's management: development of stronger institutional capability through (a) a bridge management system; (b) improved signal and train operating regulations and related training programs; (c) network simulation models used in capital investment planning; (d) capacity building to assess long term demand for railway services. Original US$ 4.0 million (2.2%); actual US$ 0.9 million. Note: above cost figures exclude contingencies of US$ 25.3 million.

  • c. Comments on Project Cost, Financing and Dates
    Several subcomponents were canceled and the loan agreement was amended four times: (i) August, 1998 when US$ 20 million was canceled from the loan and some reallocations were made; (ii) September, 2002 when US$ 27.3 million was canceled and the closing date extended; further amendments (iii) & (iv) were mainly to extend the closing date again.The final closing date was December 30, 2004, 27 months after the original target; the extensions were to allow for corrective works following landslides. The loan was suspended for a seven month period between December 1998 and July 1999 due to lack of progress on the reform components.


    3. Achievement of Relevant Objectives:

    Subsector Policy Reform. (Not achieved). The key components of reform were not undertaken.
    Rationalize Subsector Capital Investments (Not achieved). The models are not being used.
    Improve Subsector Management and Operations (Partially achieved). The locomotive maintenance system was moderately successful and some institutional capacity was created in respect of bridge management systems. However, the rail reclamation yard was never established and attempts to estimate long term demand and subsector needs, as well as improvements to investment and operational planning, were not successful.
    Increase the capacity of the Jakarta-Bandung Corridor (Partially achieved). Although the physical improvements to this corridor increased capacity as envisioned, the ERR was strongly negative due to a drop in demand following the Asian crisis. The electronic signaling system was canceled resulting in a loan cancelation of US$ 20 million, but this component was later resuscitated and subsequently financed by the Netherlands without consultation with the Bank. This subsequently complicated implementation arrangements. A massive landslide followed by heavy rains triggered the collapse of a tunnel on an alternative route. This tunnel has not been reopened.

    4. Significant Outcomes/Impacts:

    Perumka was transformed into a state-owned limited liability company or Persero.
    • The locomotive maintenance system has led to some improvements and some facilities were established. For example, the washing time for a locomotive gearbox has improved from 3 days to 3 hours.
    • Staff at Persero and the Restructuring Task Force have continued to work on restructuring despite the closure of the loan.
    • Knowledge and skills were transferred throughout design and implementation, and network simulation models were established - although not yet used.

    5. Significant Shortcomings (include non-compliance with safeguard features):

    Although Perumka was re-organized, this was not done on the basis of business principles. Public service obligations, track access charges and infrastructure and maintenance agreements were not put in place. The company's assets were not revalued, tariff rationalization plans were not carried out and a framework for private sector participation was never adopted. Following the Asian crisis the government had higher priorities and there was a lack of commitment to the project.
  • The failure to provide the envisaged track maintenance system meant that the planned partial restoration of 160 km of track under the project did not take place.
  • Locomotive maintenance facilities lacked sufficient running costs, some machines broke down and had not been repaired and the repair process was delayed by inadequate training of staff.
  • The desired improvement in financial performance of Persero did not occur because the key reforms were not undertaken. The debt coverage ratios are not predicated on a proper basis as the financial statements do not reflect the actual costs incurred. The lack of implementation of user charges on the competing highway also made financial viability difficult.
  • There were frequent changes in leadership and senior management in the Persero, the Inter Agency Coordination Committee, the Ministry of Communications and the Restructuring Task Force. This severely affected progress.
  • Rail clip fasteners which had not been tested in accordance with international standards were used (without consulting the Bank) and later had to be replaced.
  • Civil works were delayed by excessive micromanagement.
  • 6. Ratings:ICROED ReviewReason for Disagreement/Comments
    Outcome:
    UnsatisfactoryUnsatisfactory
    Institutional Dev.:
    SubstantialModestWhile knowledge and skills were transferred and the notion of the need for reforms has been planted, to say that a "substantial" impact has been achieved is optimistic considering the lack of progress overall.
    Sustainability:
    UnlikelyUnlikely
    Bank Performance:
    SatisfactorySatisfactory
    Borrower Perf.:
    UnsatisfactoryUnsatisfactory
    Quality of ICR:
    Satisfactory

    7. Lessons of Broad Applicablity:

    Policy reform needs a realistic time-frame and nearly always takes longer than anticipated.
    • During the preparation of a policy reform project, potential resistance to change by stakeholders needs to be clearly identified and the risk of failure realistically addressed. Mitigation measures and awareness programs may be appropriate.
    • When major exogenous factors such as the 1997 Asian crisis severely impact a policy reform project, consideration should be given to restructuring the project objectives.

    8. Audit Recommended?  Yes

              Why?  Although this project was unsatisfactory the timing was unfortunate because of the Asian crisis and it is possible that the reform process which the project was supposed to support will still continue and that demand in the Jakarta-Bandung corridor will pick up. There are also some interesting lessons on rail projects that could usefully be considered in more detail.

    9. Comments on Quality of ICR:

    The ICR was well-written and thoughtfully analyzed. It was also very candid and realistic about the project. The report could probably have been a bit shorter.

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