CASE STUDY

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


Disbursing against results, rather than upfront expenditures, helps improve the effectiveness and efficiency of government-owned sector programs and promote good practices.

Overview

Indonesia's state electricity corporation, Perusahaan Listrik Negara (PLN), is upgrading the power transmission and distribution system in Sumatra as part of an expansion plan to strengthen the national grid.  The Asian Development Bank (ADB) is helping finance the project using the results-based lending approach for the first time in Indonesia. This is ADB's first results-based loan in the energy sector.  

This case study shares lessons from the midterm review of the Indonesia: Electricity Grid Strengthening—Sumatra Program. Disbursing against results has worked well for the program’s distribution projects that are usually small, quickly implemented, and spread over multiple urban and rural locations. This approach has enabled PLN to use ADB assistance in a flexible manner and through its own systems, but with a focus on development outcomes.


Project information


Project snapshot

  • 2015: Approval of project loan
  • 2020: Estimated project completion
  • $600 million:total financing
  • Financing
    • Asian Development Bank
    • ASEAN Infrastructure Fund
  • Executing agency
    • P.T. Perusahaan Listrik Negara (PLN)

Challenges

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.

Context

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.

Solution

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.

Results

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

Outcome

DLI 1

Number of PLN customers in Sumatra increases by an average annual rate of at least 5.6% to reach at least 13.88 million customers by 2019.

DLI 2

Residential energy sales grow by an average annual rate of at least 8.5% to reach at least 21,931 GWh by 2019.

DLI 3

Number of medium-voltage feeder permanent interruptions per 100 kilometers maintained at 2014 baseline level or improved.

Output

DLI 4

Cumulative length of 150 kV transmission lines reconductored.

DLI 5

Additional number of distribution transformer units installed annually.

DLI 6

Additional length of medium-voltage distribution lines installed annually.

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.

Lessons

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.

Resources

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.

Ask the Experts

  • Ira Palupi
    Senior Project Officer (Infrastructure), Indonesia Resident Mission, Asian Development Bank

    Ira Palupi works as Senior Project Officer (Infrastructure) at ADB’s country office in Indonesia, handling energy project implementation. Before joining ADB, she has been 10 years with the United Nations Industrial Development Organization in charge for energy and environment project development and monitoring, in addition to several years previous engagement with research institutions and consulting firm.

  • Andrew Fransciscus
    Programs Officer, Indonesia Resident Mission, Asian Development Bank

    Andrew Fransciscus works as programs officer at ADB’s country office in Indonesia. Prior to this role, he was the project analyst supporting energy project implementation and the portfolio management unit of Indonesia Resident Mission. Before joining ADB, he worked with large consulting firms for 6 years and served multinational clients from various sectors, including energy and mining.

     

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   Last updated: January 2020



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  • Ira Palupi
    Senior Project Officer (Infrastructure), Indonesia Resident Mission, Asian Development Bank

  • Andrew Fransciscus
    Programs Officer, Indonesia Resident Mission, Asian Development Bank