Achieving Value for Money in Indonesia’s Geothermal Project
Senior Procurement Specialist and Huong Mai Nguyen, Energy Specialist
Pertamina Geothermal Energy (PGE) is a leading geothermal developer in Indonesia that has been in business since 1974. When the World Bank decided to support Government of Indonesia in geothermal energy in 2010, PGE was a partner of choice. Seven years later, the Project has consistently maintained Satisfactory status, and demonstrated that having an appropriate procurement strategy, effective contract management, pragmatic decision-making and a strong sense of ownership are key ingredients for successful management of large and complex infrastructure projects.
Under the Indonesia Clean Energy Investment Project, the Bank provided US$300 million – with US$175 from International Bank for Reconstruction and Development (IBRD) and US$125 from Clean Technology Fund (CTF) – to develop 150MW of geothermal capacity. This includes a 2x55 MW power plant in Ulubelu, Sumatera and 2x20MW plant in Lahendong, Sulawesi. By its completion, the Project is expected to contribute to an avoided emission of 3,000 ton of nitrogen oxides; 5,400 ton of sulfur dioxide; 2,500 ton of total suspended particles; and 1,100,000 ton of carbon dioxides compared to conventional coal-based power plant.
Effective implementation of the two subprojects in Ulubelu and Lahendong has been underpinned by good procurement and project management practices by PGE and the value for money, economy and efficiency it exemplifies. The Engineering, Procurement and Construction (EPC) contract for Ulubelu Project was signed in August 2014 for US$ 178 million and that for Lahendong project was signed in December 2014 for US$ 80 million. Both the contracts have been successfully implemented and projects commissioned on or ahead of schedule.
Photos by Muchsin Qadir
What led to the success of project?
- Appropriate Procurement Strategy: In selection of good contractors, a two-step approach with pre-qualification in first step by setting up appropriate pre-qualification criteria, and invitation of bids in second step from pre-qualified bidders on a single-responsibility basis laid a solid foundation for the success of the Project. Furthermore, the bidding processes for the two EPC contracts were sequenced so as to incorporate lessons from the bidding process for the Ulubelu project into that for Lahendong. This led to the improved quality of specifications, reduced number of pre-bid clarifications and deviations in the bids, and consequently faster turnaround throughout the procurement process for Lahendong. The total time from opening of bids to the signing of contract was reduced from eight-and-a-half months for Ulubelu to less than four months for Lahendong. A clear methodology for bid evaluation also provided the incentive for bidders to propose better delivery schedule, thus improving on overall project completion schedule.
- Client's ownership: As this was the first project with the Bank, PGE did not have any experience in World Bank's procurement procedures. Complementing PGE's professionalism was the enhanced implementation support provided by Bank staff for PGE's better understanding and implementation of the procurement processes for such large and complex procurement packages. This included explaining all aspects of bidding provisions and interpretations of contractual clauses at each stage of procurement process – from advertising to preparing responses to the bidders' queries, undertaking bid evaluation, pre-contract discussions and contract implementation stages. The excellent collaboration between the teams in PGE and the World Bank as well as the strong ownership and support from PGE's management has resulted in the successful conclusion of the contracts for both Ulubelu and Lahendong projects.
- Effective Contract Management: With Bank support, PGE proactively ensured effective supervision of both EPC contracts. With meticulous planning and prior coordination with the contractors on issues such as bank guarantees and release of advances, both EPC contracts were made effective from the date of signing – a most welcomed (and rare) achievement. PGE further ensured effective monitoring of progress in design and engineering, delivery of major equipment, and sufficient resource mobilization from the contractor early on. This allowed PGE to minimize delays that have been encountered in similar projects in Indonesia.
- Pragmatic Decision-Making for Better Outcomes: During contract implementation, PGE wanted to commission the second unit of the Lahendong power plant by December 2016, nearly three months ahead of the contracted schedule. As the contract did not provide for any bonus for early completion, this required stronger cooperation with the contractor. In view of the requirement for additional resource deployment by the contractor, PGE, in consultation with the Bank, implemented a contract variation, which in turn enabled the generation of 20MW to the grid nearly three months ahead of schedule. The economic benefits associated with revenue generation due to early commissioning of the plant, benefits to the households and industry through electricity supply, and greater greenhouse gas reduction have outweighed and well justified the nominal additional cost. This speaks volume of the understanding and considerations that PGE and the Bank together demonstrated in realizing the best value for money.