Lessons from Using Results-Based Financing to Upgrade a Power Grid

Indonesia’s electric power system is made up of separate island grids, comprising eight interconnected networks and 600 isolated grids. Sumatra, a large island in western Indonesia, has the second-largest electricity system with an installed capacity of about 6,000 megawatts (MW) in 2013. However, it suffers from an average power deficit of 250 MW.

By 2019, PLN is targeting for Sumatra an additional 9 gigawatts (GW) of power generation, total installed capacity of 15 GW, and 2.85 million new customers connected to the grid. The government and PLN however will not be able to meet the investment needs on their own. The funding gap will have to be borne by other financing sources, such as the private sector, commercial banks, and development partners.

Sumatra accounts for about 25% of Indonesia’s gross domestic product. The government is keen to boost Sumatra's productivity and develop it as the next industrial center after Java, enhancing regional growth and connecting it to both Java and Peninsular Malaysia by 2020.

The project in Sumatra is part of a plan to expand power generation capacity across Indonesia by an additional 35 GW from 2015 to 2019 to achieve 7% economic growth and alleviate existing grid constraints.

Approved in 2015, the Electricity Grid Strengthening—Sumatra Program supports the government's 35 GW power generation expansion program. ADB will fund a portion of PLN’s broader program on grid upgrade and expansion investments in Sumatra from 2015 to 2019, which are estimated at $10.8 billion. This will help Sumatra achieve an electrification rate of 90% by 2019 and support the overall government target of achieving universal access to electricity by 2024.

The Sumatra program is taking a results-based lending programmatic approach to ensure long-term continuous engagement for the strengthening of the power grid and reliable and uninterrupted provision of electricity. Strengthening the electricity grid involves many relatively small-scale, discrete activities and expenditures. This is best supported using an approach that focuses not on inputs but on delivery of specific and measurable results through effective strategic planning, systems strengthening, optimal resource allocation, systematic implementation, and monitoring and evaluation.

Results-based lending also helps lower transaction costs for PLN and helps ADB to rely on and strengthen PLN practices, systems, and institutional capacity. Moreover, this approach encourages other development partners to join the program.  The World Bank is providing parallel financing of $500 million for Sumatra using its program-for-results modality, which is similar to results-based lending. ADB and the World Bank have coordinated their due diligence assessments and have harmonized key disbursement-linked indicators to support a common results framework for the program.

On electricity transmission, the program is financing reconductoring of 150-kilovolt transmission lines. On the distribution side, work is being carried out to expand the medium-voltage distribution lines and installation of new transformers. This is expected to increase the number of PLN customers, increase growth of residential energy sales, and reduce medium-voltage feeder permanent interruptions and the technical complaints from the customers. The program will also provide capacity building and institutional strengthening for PLN.

This program is part of a larger medium-term package of ADB support for strengthening Indonesia’s electricity grid, which is expected to include lending assistance for Java-Bali and the Eastern Indonesia regions between 2016 and 2019.

PLN achieved most disbursement-linked indicators (DLIs) and non-DLI targets up to June 2019, except for DLI 2 (residential energy sales growth).  The number of PLN customers has increased, but there is a decreasing trend in the annual residential energy sales growth as more customers conserve energy. The DLIs are in-line with PLN’s key performance indicators, which support the company’s targeted level of infrastructure development. These indicators include an increased number of customers and energy sales, improvement on the number of medium-voltage feeder permanent interruptions as well as transmission lines reconductoring, additional transformers and medium voltage lines.

As of 30 June 2019, the number of PLN customers in Sumatra has reached 14.54 million, while residential energy sales were at 9,909 gigawatt hours (GWh). Transmission lines reconductoring has completed 2,437.64 circuit kilometers (ckm), while 3,226 transformers and 2,817.26 ckm medium voltage lines were installed.

Overview

Disbursement-Linked Indicators (DLIs) – updated figures as of mid-term review

Both PLN and ADB set very conservative targets during project processing. These were easily achieved. In the midterm review of the program, ADB and PLN have agreed to amend the loan to set more ambitious targets that will better reflect the status, achievements, and future of the program.

Efficient and effective procurement process

The project involves numerous individual contracts for civil works, reconductoring of transmission lines, distribution materials, and installation works, among others. By using results-based lending, ADB focuses on the aggregate output as opposed to monitoring each contract and thus is able to support PLN in an effective programmatic manner. For its part, PLN can follow its own procurement processes and quickly respond to any changing requirements and needs.

Strong engagement toward institutional strengthening

By using DLIs, non-DLI targets and program action plans, the program has mechanisms to encourage performance improvements from PLN on both the technical and administrative areas.

The program has 26 program action plans including environment and social safeguard practices, procurement processes, monitoring and evaluation, and financial management. Warehouse waste management is one of the priority issues identified in the action plans. The project team found additional areas for improvement, particularly in hazardous waste management, compared to the initial assessment conducted during project processing. PLN developed hazardous waste management action plans to address the risks and ADB is jointly monitoring the implementation.

Continuous feedback cycle

Through its Indonesia Resident Mission (IRM), ADB ensures that lessons learned from each subprogram stage are used to help inform the design of the next stage, including the need to adjust DLI targets and verification protocols.

Setting realistic Targets

There is a need to set realistic DLIs and baseline targets during project preparation. Lessons learned from this project, including the current performance of PLN, should contribute to more accurate target setting in future results-based lending projects.

Asian Development Bank (ADB). Indonesia: Electricity Grid Strengthening—Sumatra Program.

ADB. 2015. Perusahaan Listrik Negara Electricity Grid Strengthening, Sumatra Program Phase 1: Report and Recommendation of the President. Manila.