Report No. 14006-IND Indonesia Improving Efficiency and Equity Changes in the Public Sector's Role July 24, 1995 Country Operations Division Country Department IIl East Asia and Pacific Region ,,l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~. CURRENCY EQUIVALENTS Before November 15, 1978, US$1.00 = Rp.415 Annual Average 1979-1992 1979 US$1.00 = Rp.623 1980 US$1.00 = 1p.627 1981 US$1.00 =p.632 1982 US$1.00 = Rp.661 1983 US$1.00 = Rp.909 a 1984 US$1.00 = Rp.1,026 1985 US$1.00 = Rp.1,111 1986 US$1.00 = Rp.1,283 b 1987 US$1.00 = Rp.1,644 1988 US$1.00 = Rp.1,686 1989 US$1.00 = Rp.1,770 1990 US$1.00 = Rp.1,843 1991 US$1.00 = Rp.1,950 1992 US$1.00 = Rp.2,030 1993 US$1.00 = Rp.2,079 1994 US$1.00 = Rp.2,160 June 2, 1995 US$1.00 = Rp.2,237 FISCAL YEAR Government April 1 to March 31 Bank Indonesia - April 1 to March 31 State Banks January 1 to December 31 O On March 30, 1983 the Rupiah was devalued from US$1.00 = Rp.703 to US$1.00 = Rp.970. b On September 12, 1986 the Rupiah was devalued from US$1.00 = Rp.1,134 to US$1.00 = Rp.1,644. ! / ABBREVIATIONS, ACRONYMS AND DEFINITIONS AFTA ASEAN Free Trade Area AIDS Acquired Immune Deficiency Syndrome AMDAL Environmental Impact Assessment APEC Asia Pacific Economic Cooperation ARI Acute Respiratory Infection ASKES Public Employee Health Insurance BANI National Arbitration Board BAPEPAM Capital Market Supervisory Agency| BAPINDO Indonesia Development Bank BIS Bank for International Settlements BKKBN National Family Planning Coordination Board BKPM Investment Coordinating Board BOO Build-Own-Operate BOT Build-Own-Transfer BPD Regional Development Bank BPN National Land Agency BPS ' Central Bureau of Statistics BTN National Savings Bank CAMEL Capital Asset Quality Earnings and Liquidity CDC Control of Communicable Diseases CEPT Common Effective Preferential Tariff CGI Consultative Group for Indonesia COLT The Commercial Offshore Loan Team CPI Consumer Price Index CPO Crude Palm Oil CSIs Contractual Savings Institutions DGWRD Directorate General of Water Resource Development DIPS Local Infrastructure Investment DKI Special Administrative Region DPT3 Diptheria, Polio, Tetanus (three doses) ECO Expanded Cofinancing GATT General Agreement on Trade and Tariffs GBHN State Policy Guidelines GDP Gross Domestic Product GNP Gross National Product GOI Government of Indonesia IDHS Indonesia Demographic and Health Survey IDT Left-behind Village IFC International Finance Corporation IHH Forestry Concession Fee INPRES President's Instruction IPO Initial Public Offering JAMSOSTEK Labour Social Security JICA Japan International Cooperation Agency JSE Jakarta Stock Exchange Kandep Central Departmental District Office KUDs Local Cooperatives LNG Liquified Natural Gas LPG Liquified Petroleum Gas MCH Maternal and Child Health MIGA Multilateral Investment Guarantee Agency MLT Medium and Long Term MOF Ministry of Finance MOH Ministry of Health NGO Non-Governmental Organization NIC Newly Industrialized Countries NTBs Nontariff Barriers OECF Overseas Economic Cooperation Fund OPIC Overseas Private Investment Corporation Pakto93 The October 1993 Deregulation Package PDAM Regional Public Drinking Water Company PERTAMINA State Oil Company PERUNKA , State Railways Company PEs Public Enterprises PJP2 The Second Long-term (25 year) Development Plan PLN State Electricity Company PNG Publicly Non Guaranteed PP20 Government Regulation No. 20 PP51 Government Regulation No. 51 PPA Power Purchase Agreement PT Limited Company PTP Agricultural Estate Companies PUSKESMAS Health Center R&D Research and Development RENSALITA Five Year State Company's Strategic Plan REPELITA Five Year Development Plan RUKN National Electrification Plan RWA Risk Weighted Assets SBI Bank Indonesia Certificate SBPU Central Bank Monetary Instrument SIUP Ordinary Business License STD Sexually Transmitted Disease SUSENAS National Social Economic Survey UNICEF United Nations Children's Fund VAT Value Added Tax WDR World Development Report WDT World Debt Table WSSSLIC Water Supply and Sanitation Services for Low Income WTO World Trade Organization INDONESIA: IMPROVING EFFICIENCY AND EQUITY-CHANGES IN THE PUBLIC SECTOR'S ROLE CONTENTS Executive Summary Bahasa Indonesia Translation ......................... vii Executive Summary . ........................................... xv 1 Macroeconomic Developments and Policies ........................... 1 A. Overview ................................ ............. 1 B. Recent Economic Developments ............................... 4 Domestic Developments: Growth, Inflation and Wages .... .......... 4 External Developments: Balance of Payments .................... 8 External Developments: Exchange Rate Movements .... ........... 14 C. Monetary and Fiscal Policy in 1994/95 .15 Monetary Policy and Related Developments .15 Institutionaj Developments in the Banking Sector: Dealing with Bad Debts .17 Issues in Development of the Nonbank Financial Sector .20 Fiscal Policy and Related Developments .21 External Debt Management .24 D. External Risks .................................... 25 E. Medium-Term Prospects and Policies . ............................ 27 F. The Priority Macroeconomic Policy Agenda ........ ............... 31 Avoiding Overheating .................................. 31 Managing External Debt ............................ 33 Maintaining Confidence ............ ............... 33 This report was prepared by a team led by Dipak Dasgupta. The principal authors were Timothy Condon (Competitive Markets), Dipak Dasgupta (Health, Exports, Labor Markets), James A. Hanson (Infrastructure), Edison Hulu (Exports, Labor Markets), Farrukh Iqbal (Competitive Markets), and Lloyd Kenward (Macroeconomics, Exports, Financial Sector). Yasmine Hamid prepared the Statistical Annex and graphics. Major contributors to the report were Oscar de Bruyn Kops (Public Enterprises), James Douglas (Forestry), George Fane (Effective Protection), David Hawes (Infrastructure), and Peter Midgley (Urban). The report acknowledges background inputs and other support from Basilius Bengoteku, Robert Boydell, David Clark, Sean Foley, Jorge Garcia- Garcia, Scott Guggenheim, J. Vernon Henderson, Chita Jarvis, Frida Johansen, Iswandi Kartowisastro, Melody Kemp, Samuel Lieberman, Darius Mans, Himelda Martinez, Aki Nishio, Sonia Pahwa, Sita Ramaswami, Aftab Raza, Arun Sanghvi, Peter Scherer, Haneen Sayed, A. Shanmugarajah, Anthony Somerset, Cyrus Talati, Sachi Takeda, Thamrin Nurdin, Joris Van der Ven, and Stuart Whitehead. Jessica Ardinoto, Inneke Herawati, Datty Sembodo, Ester Tjahyadi and Danielle Tronchet were responsible for document processing. Contents Technical Annex I to Chapter 1: Indonesia's Revised National Accounts .... ...... 35 2. The Government's Role in Competitive Markets .... 37 A. Overview ... 37 B. Trade Reform ................... ...................... 38 The May 1995 Package ..39 Unfinished Trade Reforms ..41 Removing Export Restrictions ..44 C. Promoting Domestic Competition ................. ............ 45 D. Privatizing Public Enterprises .50 E. Regulation and Rules of the Game ..55 1. Financial Sector Regulation ..55 2. Managing the Environment ..59 a. The Regulatory/Incentive Framework ..59 b. Investing in Environmental Protection ..62 3. Setting thde Rules of the Game ..62 a. The Commercial Legal System ..63 3 Managing Infrastructure ...................................... 67 A. Overview .67 B. The Role of Government in Infrastructure, Past and Present .69 C. Indonesia's Infrastructure and the Proposed Investment Program .70 D. Regulatory Frameworks to Maximize the Benefits of Private Infrastructure Finance.. 80 Overview .80 The Growth of Private Finance for Infrastructure .82 Developing a Clear, Competitive Framework for Concessions .83 Managing Risk Sharing .86 Unbundling Public Sector Services .89 Relying on Domestic Saving: Self Finance and Capital Markets .89 E. Managing the Infrastructure Program: Adequate Pricing .91 F. Improving Public Infrastructure Services .95 G. Giving Stakeholders a Voice: Decentralization and Participation .98 Annex to Chapter 3: Urban Infrastructure: A Case Study . .102 Contents iii 4 Transition Challenges in the Health Sector .. 109 A. Introduction ...... 109 B. The Government's Role in Health ........................... 110 C. Public Spending on Health ............................... 112 D. Health Condition, and Outcomes ............................ 115 E. The Delivery of Health Services .................. ..... 121 F. Improving The Quality and Effectiveness of Health Services ........... 124 Bibliography ................................................. 129 Statistical Annex ............................................ 135 TABLES IN TEXT 1.1 Indonesia: Summary of Principal Macroeconomic Indicators .............. 6 1.2 Indonesia: Balance of Payments, 1985/86-1994/95. 8 1.3 Indonesia: Non-Oil Merchandise Trade .11 1.4 Indonesia: Factors Affecting Reserve Money; Money & Credit Growth .18 1.5 Indonesia: Outstanding Issues on the Capital Market .20 1.6 Indonesia: Sunmmary of Central Government Fiscal Operations .23 1.7 Indonesia: Medium- and Long-Term (MLT) Debt Indicators 1990-1998. 25 1.8 Indonesia: Projections of Key Macroeconomic Indicators .28 1.9 Indonesia: Savings-Investment Balances, 1993-1998 .29 1.10 Indonesia: Projected External Financing .30 2.1 The Average Tariff plus Surcharge .40 2.2 The Negative Investment List .40 2.3 Coverage of Nontariff Barriers .41 2.4 Restrictions on Domestic Competition in Indonesia . 46 2.5 Concentration and Export Orientation .50 2.6 Overview of Public Enterprise Financial Performance, 1989-94 .52 3.1 Indonesia: Major Infrastructure Sectors: Proposed Investment 1995-98 and Capacity Targets in Repelita VI Compared to Repelita V .... ....... 71 3.2 Infrastructure Privatizations in Developing Countries and Offshore Bond and Equity Sales 1988-93 .83 3A. 1 Indonesia: Estimated Public Urban Infrastructure Spending .105 iv Contents 4.1 Comparative Expenditures on Health-1990 ..................... 112 4.2 International Comparisons of Under Five Mortality Rates .... ........ 119 4.3 Indonesia: Mortality Differentials By Background Characteristics, 1991 .120 FIGURES IN TEXT 1.1 Trends of Inflation: Consumer Price Index . ................. .. 5 1.2 Real Wage Trends in Manufacturing, 1982-1994. . . 7 1.3 Quarterly Non-Oil Trade, 1988-1994 .. . .. 9 1.4 Changing Composition of Foreign Investment Approvals, 19+0-1994 ....... 13 1.5 Exchange Rate Indicators ................................... 14 1.6 Rupiah Interest Rates ...................................... 16 1.7 De Facto Privatization of Indonesia's Banking Sector-Share of Outstanding Loans (%) ................................... 17 2.1 Financial Soundness of Public Enterprises, 1990-1994 ................. 53 3.1 Infrastructure Capital and GDP (Pur. Power Parity), 1990 ................ 70 3.2 Power: Capa6ity & Sales per 1000 Persons ........................ 73 3.3 Telephones: Lines per 1000 Persons ............................. 73 3.4 Safe Water: % Population with Access .......................... 73 3.5 Paved Roads per 1000 Persons ................................. 73 3.6 Countries with Decentralized Road Maintenance Have Better Roads .... ..... 99 4.1 Indonesia: Public Spending on Health 1984-92 Real (1984) $ per Capita, and % of GDP ............................ 113 4.2 Health Spending By Different Sub-Sector, 1984-92 ................ 114 4.3 Indonesia-Major Causes of Child Deaths ..................... 116 4.4 Indonesia-Share of Overall Mortality By Age Group ............... 118 4.5 Household Sources of Drinking Water ........................ 118 4.6 Child Mortality By Mother's Education, Indonesia (1991), and Thailand and Sri Lanka (1987/88) ........................ 121 4.7 Health Services Utilization By the Poor, 1978-92 .................. 121 4.8 Indonesia-Monthly Contact Rate at Public Health Centers, Conditional on Illness, By Income Group, 1992 ................... 123 4.9 Proportion of Those Ill, Visiting Different Providers, 1992 .... ........ 123 BOXES IN TEXT 1.1 Lessons from Mexico's Peso Woes ..... ................ . 3 1.2 Jakarta's Property Sector Boom ...... ................. . 7 1.3 The Slump in Non-Oil Exports in Early 1994 ...................... 10 1.4 Indonesia's Stars of Non-Oil Exports in 1994 ...................... 12 1.5 A Financial Check-up on Indonesia's Banks ........................ 19 Contents v 2.1 Indonesia's GATT and APEC Commitments Require Little Action Now ... .. 42 2.2 Local Levies Crimp Shrimp Exporters in South Sulawesi ............... 48 2.3 Self-Regulation Requires.Information Disclosure To Be Effective .... ...... 58 2.4 Simnpler Is Not Always Better-Land Acquisition, Location Permits, and Pakto93 60 3.1 The Power Sector ........................................ 75 3.2 The Transport Sector ...................................... 78 3.3 Urban Water ........................................... 79 3.4 Indonesia's Telecoms Sector: Indosat and Beyond .................... 84 3.5 World Bank Group Guarantees ................................ 88 3.6 The Gas Sector ......................................... 90 3.7 Giving Urban Citizens a Smoother Ride .......................... 94 3.8 Delivery of Rural Infrastructure in Indonesia Through Participation: WSSSLIC and Infrastructure for Lagging Behind Villages .101 Map No. IBRD 26570 I Ringkasan Eksekutif vii RINGKASAN EKSEKUTIF INDONESIA: PERBAIKAN EFFISIENSI DAN PEMERATAAN -PEROBAHAN DALAM PERANAN SEKTOR PEMERINTAH Tiuauan Umum Indonesia telah berhasil dengan baik peranan keuangan dan produksinya, dan dalam mempertahankan pertumbuhan ekonomi sejalan dengan itu lebih mengandalkan sektor yang tinggi dan mengurangi kemiskinan serta swasta. Banyak pemerintah (di dunia) sedang menempati posisi pada kelompok negara melakukan pergeseran kebijaksanaan kearah berpenghasilan menengah. Untuk ini. Khususnya, kemajuan yang berkelanjutan mempertahankan kemajuan yang telah dicapai akan tergantung pada stabilitas ekonomi ini, Indonesia harus dapat mengatasi sejumlah makro yang berkelanjutan, perbaikan dalam tantangan. Pertama, pertumbuhan ekonomi pasar dan perangkat peraturan-perundangan, yang cepatpada waktu akkir ini, menunjukkan pengandalan yang lebih besar pada dunia pula tanda-tanda pemanasan ekonomi usaha serta peningkatan efisiensi investasi (overheating). Kenaikkan yang diperkirakan pemerintah dan pelayanan umum. dalam pembelanjaan pembangunan prasarana dan investasi dalam negeri dapat 1) Mempertahankan dasar ekonomi memperburuk peristiwa pemanasan ekonomi makro yang kokoh. Untuk mempertahankan ini. Kedua, pemberi pinjaman luar negeri stabilitas, mengelola hutang dan meningkatkan mengamati kebijaksanaan pemerintah lebih keyakinan investor, maka langkah-langkah seksama sejak terjadinya krisis (keuangan) yang utama adalah: Meksiko. Pemberi pinjaman menaruh perhatian pada kebijaksanaan dasar ekonomi * Membatasi pembelanjaan pada tingkat makro yang kokoh dan pengelolaan hutang anggaran yang tersedia dan luar negeri yang berhati-hati, tetapi juga mengurangi belanja non-budgetair; dalam memperhatikan kerangka kerja yang * Mengketatkan kebijaksanaan fiskal menjamin bahwa pinjaman digunakan secara untuk menutupi kenaikkan biaya suku efisien dan membantu pelunasan pinjaman luar bunga luar negeri yang terjadi sebagai negeri. Ketiga, persaingan di pasar ekspor akibat perobahan nilai tukar mata dunia semakin ketat. Indonesia harus uang; menggunakan penerimaan yang bersaing di pasar seperti ini untuk berasal dari penjualan equity mempertahankan pertumbuhan yang tinggi perusahaan milik negara kepada dalam ekpor non-migas, yang diperlukan untuk swasta untuk pra-pembayaran hutang pertumbuhan ekonomi dengan basis yang lebih luar negeri; luas dan untuk pengurangan beban hutang * Meningkatkan penerimaan dalam luar negeri yang besar. negeri dengan penyelenggaraan administrasi perpajakan yang lebih Untuk mengatasi tantangan-tantangan baik dan penerimaan IHH (Iyuran ini, Pemerintah seyogyanya mendorong Hasil Hutan) yang lebih besar serta efisiensi dan pemerataan yang lebih besar. menaikkan pajak kekayaan perkotaan; Hal ini mengharuskan penekanan yang lebih * Menyempurnakan penetapan harga besar pada peranan pengaturan dari oleh pemerintah untuk tanah, air, Pemerintah, dengan pengurangan tekanan energi dan transportasi, yang akan (tetapi lebih efisien dan merata) dalam turut meningkatkan efisiensi dan viii Ringkasan Eksekutif kualitas lingkungan; merugikan eksportir dan produsen * Mengikuti suku bunga internasional yang miskin; secara cermat dan mentargetkan suatu * Mempercepat reformasi peraturan- jumlah yang tepat dari cadangan perundangan, peraturan dan devisa; kelembagaan untuk memperkuat pasar * Memperkuat sistem perbankan; dalam negeri yang kompetitip, menyediakan dukungan yang memadai termasuk sektor keuangan (lihat di bagi penanggulangan pinjaman yang atas); macet, meningkatkan keterbukaan, dan * Melakukan deregulasi perusahaan melaksanakanpeningkatanpermodalan milik negara yang beroperasi di pasar yang terencana; kompetitif, * Meningkatkan penerapan peraturan- * Menjamin pembangunan yang lebih perundangan dan keterbukaan di berkelanjutan dengan beralih kepada sektor keuangan bukan bank, guna penetapan harga berdasarkan sistem mendorong pengembangan instrumen pasar untuk tanah, hutan, dan baru dan untuk menjamin air;mengembangkan penerapan pembangunan sektoryang berhati-hati, kegiatan pemukiman kembali yang terutama investasi dana pensiun; lebih baik; menyempurnakan - Memperkuat Tim Koordinasi pemberian ijin penggunaan tanah dan Penglolaan Pinjaman Komersial Luar kebijaksanaan tataguna tanah untuk Negeri (Tim PKLN) dan meneruskan proyek swasta; memperkuat penegakkan pagu pinjaman luar negeri pengendalian pencemaran industri; serta pengelolaan yang berhati-hati dan melakukan investasi terutama atas pinjaman pemerintah dan semi pada pelayanan kebutuhan dasar pemerintah. perkotaan. 2) Memperbaia pasar. Paket deregulasi 3) Pembangunan perangkat peraturan- Mei 1955 merupakan langkah utama untuk perundangan yang jelas untuk parhsipasi memperbaiki pasar, yaitu menurunkan tarif dunia usaha di sektor infrastruktur, sebagai secara bearai pada tahap awal dan pengganti pendekatan "perjanjian sepotong- menetapkan sejumlah peraturan untuk sepotong" untuk mendorong aliran investasi pencapaian tanf yang menyeluruh dan secara berkelanjutan dan biaya infrastruktur seragam pada tahun 2003. Dengan paket ini, yang lebih rendah seperti yang dilakukan di Indonesia meneruskan keterbukaannya dalam Indonesia sendiri dan di Philipina. Untuk pasar bagi perdagangan dan investasi, yang mendukung pertumbuhan yang tinggi, merupakan tindak lanjut PP-20 Tahun 1994 hambatan infrastruktur yang sangat maupun hasil pertemuan APEC di Bogor. menentukan, meminta pemecahannya Untuk menunjang kemajuan selanjutnya, sementara itu tetap mempertahankan stabilitas Indonesia perlu untuk: ekonomi makro. Ini berarti efisiensi yang lebih tinggi, terutama pengandalan yang lebih * Mengurangi hambatan non-tarif, besarpada peranan sektor swasta seperti yang terutama pada komoditi pertanian dicantumkan dalam REPELITA VI. yang akan menaikkan upah rnil * Menghapuskanpembatasan ekspordan * Melakukan investasi yang rasional di pembatasan perdagangan dalam sektor listrik/energi, dengan tekanan negeri, karena jarang sekali dapat yang lebih besar pada transmisi dan mendukung pencapaian maksud dari distribusi; hasil yang diperoleh dapat pembatasan tersebut, dan akan meningkatkan 15 persen penjualan Ringkasan Eksekutif ix dari kapasitas tersedia saat ini; membahas sektor kesehatan, sebagai suatu Menyiapkan perangkat peraturan- contoh dari tantangan yang berobah dalam perundangan yang transparan dan memperbaiki sumber daya manusia. kompetitip, serta tender/lelang untuk hak pengusahaan yang diberikan * Meningkatkan anggaran belanja sektor kepada swasta dalam sektor listrik, kesehatan pemerintah, yang menitik gas alam, telkom, jalan bebas beratkan pada pelayanan kesehatan hambatan dan air minum; dan penduduk miskin; * Mengelola secara berhafi-hatijaminan * Meningkatkan pelayanan umum untukc pemerintah yang sifatnya implisit dan penduduk miskin, den gan eksplisit serta jaminan kerugian yang neningkatkan pembiayaan puskesmas belum dapat diperkirakan; dan puskesmas pembantu, * Menetapkan harga atas jasa pelayanan menyediakan insentif untuk staf umum yang lebih baik untuk efisiensi kesehatan untuk mengobati penduduk yang lebih besar dan untuk miskin, dan lebih menjadi lebih pemerataan; tanggap terhadap kebutuhan setempat; * Mengelola fasilitas umum yang lebih * Meningkatkan kualitas dan efisiensi baik, melalui perbaikan penetapan dalam pelayanan Pemerintah dengan harga dan pelayanan umum yang memperbaiki pengelolaan, sumber lebih berdasarkan sistem pasar di daya, insentif, dan jaminan kualitas sektor seperti air minum, limbah cair, padafasilitas kesehatan di garis depan dan limbah padat serta angkutan dan mendorong kegiatan jangkauan perkotaan; kesehatan; * Menitik-beratkan investasi pemerintah * Mendorong upaya sektor swasta pada bidang dimana minat sektor dengan mendukung pemberian swasta kecil dan dampak pelayanan oleh badan tidak mengejar pemerataannya besar. Iaba; mengurangi biaya obat-obatan; dan men-deregulasi asuransi dan 4) Pengembangan sumber daya manusia pelayanan kesehatan swasta. merupakan kunci bagi perbaikan jangka * Meningkatkanpelatihan danpenetapan panjang dalam kemampuan bersaing dan baku mutu. pemerataan yang lebih baik. Laporan ini x Ringkasan Eksekutif A. Pembangunan Ekonomi Sekarang 1995 menurunkan tarif impor rata-rata pada tahap awal sekitar 15 persen, suatu i. Indonesia menempati posisi pemotongan hampir 25 persen yang tingkat kelompok negara berpenghasilan menengah rata-rata mendekati Malaysia. Paket tersebut bagian bawah (menurut klasifikasi Bank juga menetapkan program yang berdasarkan Dunia) pada 1993, yang mengikuti peraturan untuk pemotongan tarif yang akan pertumbuhan PDB rata-rata per tahun sebesar datang, yang akan mengurangi rata-rata tarif 6 persen, selama satu dekade. Dalam 1994 menjadi 7 persen dan akan mengurangi pendapatan per kapita mencapai suatu dispersi tarif pada tahun 2003. Hal ini perkiraan US$884 (menurut perhitungan menunjukkan perluasan dan pendalamnan tekad pendapatan nasional yang baru dari BPS). Indonesia bagi pengurangan tarif yang Sektor manufaktur merupakan sektor yang multilateral, yaitu melebihi janji yang telah terbesar sumbangannya dalam PDB. Ekspor diberikan kepada GATT. non-migas dan pajak merupakan penyumbang ekspor dan penerimaan pemerintah yang iv. Namun demikian, keberhasilan terbesar (memperagakan keberhasilan tahun lalu diikuti oleh tanda-tanda adanya diversifikasi ekonomi dari penerimaan pemanasan ekonomi. Inflasi hampir mencapai minyak). Perluasan kesempatan kerja 10 persen untuk dua tahun berturut-turut, dan bertambah dengan cepat, dan pekerja wanita 4,8 persen pada empat bulan pertama tahun telah mengambil bagian penting dalam 1995, yang terutama didorong ke atas oleh angkatan kerja. Hasilnya, prosentase harga makanan dan perumahan serta penduduk miskin turun dari 30 persen pada pertambahan aggregate demand. Tekanan 1987 menjadi 14 persen pada 1993, yaitu tingkat upah bertambah (terhadap aggregate berdasarkan perhitungan resmi. demand), hal mana bersumber pada kenaikkan yang besar dalam upah minimum resmi yang ii. Sebagai lanjutan dari periode besar pada 1993 dan 1994. Transaksi berjalan pendinginan ekonomi pada 1992 dan mengalami kemunduran hampir $1,5 milyard, permulaan 1993, semua sektor utama meskipun defisit neraca pembayaran tetap perekonomian tumbuh dengan cepat pada rendah ($3,5 milyard atau 1,9 persen PDB) 1994, kecuali sektor pertanian. PDB tumbuh karena perkiraan penerimaan migas yang sebesar 7,3 persen menurut cara perhitungan tinggi. Impor non-niigas tumbuh dengan cepat baru (perobahan tahun dasar) dari pendapatan (21 persen), yang mencermninkan impor nasional. Pertumbuhan dituntun oleh sektor makanan dan barang-barang konsumsi lainnya, konstruksi dan manufaktur yang berorientasi sedangkan ekspor non-migas mencapai 16,5 pasar dalam negeri. Pertanian mengalami persen, yang menunjukkan suatu kemajuan kemunduran dalam dua tahun berturut-turut, dibandingkan pada triwulan pertaina dari yang mencerminkan musim kemarau panjang. 1994. Pergerakan nilai mata uang dalam jumlah besar pada akhir ini, ditambah dengan iii. Deregulasi berlangsung terus sejak hutang baru, telah mendorong hutang luar tahun lalu. Dengan paket pertengahan tahun negeri mencapai sekitar US$100 milyar. 1994 (PP-20 Tahun 1994), Indonesia mengurangi hambatan terhadap investasi asing v. Pada 1994, persetujuan penanaman langsung ke tingkat yang salah satu terendah modal asing naik hampir 200 persen di kawasan ini. Sebagai tuan rumah (mencapai US$24 milyar), sebagian pertemuan APEC bulan Nopember (1994) di mencerminkan deregulasi tahun lalu dari Bogor, Indonesia memberikan dukungan kuat investasi asing berdasarkan PP 20 tahun 1994. bagi pasar terbuka untuk perdagangan dan Tambahan lagi, jumlah tersebut tidak termasuk investasi. Paket deregulasi pemerintah Mei proyek gas alam Natuna sebesar US$34 milyar Ringkasan Eksekutif xi yang ditanda-tangani pada awal 1995. berarti dari devisa. Di sektor perbankan Persetujuan penanaman modal dalam negeri Pemerintah mulai menangani masalah kredit naik sebesar 50 persen. Pemerintaji sedang macet dengan memperkuat peraturan dan mempersiapkan pula sekitar US$15 milyar pengawasan bank. Demikian pula, tuntutan proyek investasi prasarana swasta. yang keras terhadap pelanggaran yang terjadi Pengelolaan yang seksama atas proyek ini di BAPPINDO merupakan suatu kasus dan diperlukan untuk menjamin bahwa aggregate contoh yang baik. Tetapi, pengelolaan yang demand dan neraca pembayaran luar negeri seksama dari sektor (perbankan) ini masih berada pada tingkat yang aman. diperlukan, terutama bagi pinjaman untuk real estate yang berkembang pesat. vi. Kebijaksanaan fiskal dalam 1994/95 menerapkan anggaran belanja secara hati-hati, viii. Pemerintah mengelola dengan baik dan Indonesia diperkirakan pada akhir tahun tingkat nilai tukar dan menyesuaikannya anggaran dengan surplus yang menyeluruh selama 1994 dan 1995 untuk mempertahankan yang kecil; yang berarti setengah persen dari kompetisi eksternal. Hal ini telah melindungi PDB lebih ketat dari pada anggaran 1993/94. rupiah dari dampak penularan krisis Meksiko Namun, anggaran 1995/96 tampaknya kurang dengan menaikkan tingkat suku bunga bersifat kontraktif. Anggaran tersebut domestik dan hanya menjual cadangan valuta meningkatkan biaya pegawai sebesar 19 persen asing dalam jumlah kecil. termasuk kenaikkan 10 persen gaji pegawai negeri. Sebagai perbandingan, anggaran ix. Dalam perkembangan lainnya, tersebut meningkatkan belanja barang modal program deregulasi Indonesia mulai dengan hanya sebesar 12 persen. Pertumbuhan penuh kesungguhan. Suatu saham minoritas penerimaandirancang untukdiperlambat (yang pada PT INDOSAT, suatu perusahaan mencerminkan pemotongan tingkat pajak telekomunikasi internasional, dijual di pasar pendapatan sekitar sepertiga dari yang modal. Sekitar US$750 juta dari uang hasil direncanakan untuk menjadikan administrasi penjualan saham digunakan untuk pembayaran pajak yang lebih kompetitip). Permintaan pinjaman berbunga tetap dari bank pembiayaan yang lebih tinggi dan tabungan multilateral. Pemerintah telah mengumumlan pemerintah yang lebih rendah yang pula niatnya untuk mengdakan listing PT diproyeksikan, akan menambah, dan bukannya Telkom (perusahaan telepon), PLN mengurangi, tekanan permintaan yang (perusahaan listrik negara), PT Jasa Marga meningkat dari sektor swasta. (jalan toll), Bank Negara Indonesia (bank), PT Aneka Tambang dan PT Timah. Tambahan vii. Bank Indonesia menaikkan tingkat lagi, Pemerintah telah menanda-tangani suku bunga secara aktif selama paruh kedua "power purchase agreement" (PPA) yang 1994 dan permulaan 1995, yaitu menanggapi mendorong sebagian besar investasi secara efektif atas kenaikkan tingkat suku pembangkit tenaga listrik, dan mendorong bunga internasional dan krisis Meksiko. Pada partisipasi swasta dalam pembangunan awalnya, pada paruh pertama 1994, sejumlah prasarana lainnya (seperti telekomunikasi dan faktor, seperti kenaikkan tingkat suku bunga jalan bebas hambatan). Amerika Serikat, perpindahan secara internasional investasi terhadap munculnya B. KebUaksanaan Ekonomi Makro pasar baru dan faktor-faktor yang bersifat lokal, menyebabkan pengaliran modal ke luar. x. Indonesia dapat memperuhankan Faktor-faktor ini dan tanggapan Bank pertumbuhan ekonomi sebesar 7 persen Indonesia yang terlambat terhadap kenaikkan setahun jika dapat mempertahankan stabilitas suku bunga menyebabkan kerugian yang ekonomi makro dan memecahkan masalah xii Ringkasan Eksekutif efisiensi jangka panjang. Pertumbuhan pada waktu yang akan datang perlu diketatkan untuk tingkat tersebut akan menaikkan pendapatan menutupi kenaikkan beban pelunasan hutang per kapita melebihi US$1.000 sebelum akhir luar negeri pemerintah yang berpangkal dari abad ini. Pertumbuhan kesempatan kerja dan perobahan nilai mata uang secara silang akhir- pendapatan akan mengurangi kemiskinan dan akhir ini. menaikkan tingkat hidup secara subtansial. Sementara peningkatan investasi swasta yang xii. Untuk memelihara cadangan devisa diperkirakan menyebabkan tekanan demand yang aman dan dukungan atas kebijaksanaan tetap tinggi, indikator kunci ekonomi makro ekonomi makro yang berhati-hati, yang berarti akan menjadi baik dalam perjalanan waktu. diperlukan kebijaksanaan moneter yang lebih Inflasi akan turun, dan defisit transaksi ketat. Bank Indonesia perlu terus mengikuti berjalan akan berkurang di bawah 2,5 persen perobahan suku bunga internasional secara dari PDB (dibandingkan dengan perkiraan 2,7 seksama, dan menaikkan suku bunga lebih persen dalam kurun 1995/96 - 1996/97). tinggi lagi jika keadaan menghendakinya. Pembiayaan akan datang sebagian besar dari Untuk mencegah spekulasi jangka pendek dan masuknya investasi (equity) asing langsung pengalihan resiko nilai tukar dari bank sentral dan dari pinjaman swasta. Untuk mencapai kepada pasar, Bank Indonesia dapat tingkat pertumbuhan yang berlanjut ini, melebarkan "spreads" dalam pasar valuta asing Pemerintah perlu mempertahankan stabilitas apabila pasar valuta asing internasional telah dengan mengetatkan kebijaksanaan fiskal dan menjadi lebih tenang. moneter, mengelola hutang luar negeri secara berhati-hati, dan menjaga kepercayaan para xiii. Dengan pengendalian demand yang investor. lebih ketat dan pulihnya kondisi sektor pertanian, inflasi dapat dikurangi menjadi 6 Bl. Stabilitas Ekonomi Makro sampai 7 persen per tahun. Tetapi kecermatan diperlukan dalam menaikkan upah minimum xi. Kebijaksanaan fiskal adalah yang resmi. Pasar tenaga kerja yang lebih instrumen yang efektif untuk mengelola lentur akan membantu tenaga kerja, agregate demand dalam konteks neraca modal kesempatan kerja, dan daya saing yang lebih (capital account) Indonesia yang bersifat baik. Untuk menjaga pertumbuhan terbuka. Dengan arahan menyeluruh yang kesempatan kerja yang cepat dan berlanjut, diletakkan dalam anggaran 1995/96, dan Pemerintah seyogyanyatidakmenetapkanupah demand sektor swasta yang bertambah dengan minimum pada tingkat yang mendekati upah cepat, Pemerintah perlu membatasi tingkat rata-rata di berbagai sektor ekonomi, atau penganggaran, menghindari belanja non- tingkat upah yang menghendaki kenaikan budgetair, dan menyempurnakan administrasi produktivitas yang besar untuk perpajakan. Penerimaan akan dapat ditingkat mempertahankan daya saing secara lebih lanjut dengan menaikkan iuran di internasional. subsektor kehutanan (Iuran Hasil Hutan, IHH), menaikkan penilaian dan pajak xiv. Deregulasi selanjutnya akan kekayaan perkotaan dan penetapan harga memberikan pula sumbangan untuk pelayanan prasarana yang lebih baik. menurunkan inflasi dan memperbaiki Pembelanjaan untuk prasarana perlu pula pemerataan, disamping merangsang dirasionalisasikan (lihat alinea xxxiv dan pertumbuhan yang lebih efisien (lihat xxxv). Dana hasil partisipasi atau kelebihan bagian C). Paket deregulasi Mei 1995 telah penerimaan dari yang dianggarkan harus menyebabkan penurunan harga beberapa digunakan untuk membayar kembali, seperti barang (misalnya kendaraan bermotor). kasusnya PT INDOSAT. Akhirnya, anggaran Menurunkan hambatan non-tarif dan tarif atas Ringkasan Eksekutif xiii komoditi kunci, terutama di sektor pertanian, investasi swasta melakukan kegiatan yang akan mengurangi tekanan pada harga kompetitif secara internasional. Pemerintah konsumen, dan menaikkan upah riil dari dapat melanjutkan peningkatan efisiensi konsumen berpenghasilan rendah tanpa dengan men-deregulasi hambatan non-tarif dan mengurangi daya saing. tarif di sektor pertanian, mengurangi berbagai hambatan yang masih ada terhadap ekspor dan B2. Kebijaksanaan Hutang Luar Negeri peningkatan kompetisi pasar domestik. Bersama-sama dengan paket Mei 1995 dan PP xv. Investor asing semakin mengamati No. 20 Tahun 1994 tentang deregulasi pinjaman luar negeri, tidak saja dalam jumlah, investasi asing langsung, hal ini akan sesudah krisis Meksiko, tetapi juga dalam mendorong pertumbuhan ekspor non-migas penggunaannya yang efektif. Perhatian ini yang diperlukan untuk mengurangi beban adalah relevan untuk Indonesia, dimana hutang pembayaran hutang luar negeri. Suatu luar negeri cukup besar. Perkiraan Bank perangkat peraturan yang dapat diterapkan Dunia adalah bahwa hutang jangka pendek untuk investasi prasarana swasta, termasuk melebihi US$20 milyar dan debt service ratio pemberian hak pengusahaan yang jelas dan (DSR) melebihi 30 persen. Tambahan pula, bersaing dalain perolehan hak melalui investasi prasarana yang besar dan pembiayaan tender/lelang dan fungsi BUMN yang tidak proyek-proyek besar akan meningkatkan majemuk untuk memungkinkan persaingan hutang luar negeri swasta. berdasarkan mekanisme pasar (untuk menurunkan biaya investasi yang langsung xvi. Pemerintah perlu mengelola hutang atau tidak langsung), akan memberikan saham (luar negeri) secara teliti dalam suatu kerangka untuk meningkatkan kapasitas pembayaran yang terkoordinasi dan menyeluruh. Tim hutang luar negeri (Bagian C). PKLN (Tim Koordinasi Pengelolaan Pinjaman Komersial Luar Negeri) perlu diperkuat, dan B3. Keyakinan Investor pagu pinjaman harus membatasi pinjaman pemerintah dan semi-pemerintah ke tingkat xviii. Dasar-dasar ekonomi makro yang yang aman untuk beberapa tahun yang akan sehat adalah landasan dari keyakinan investor. datang ini. Pemerintah juga seyogyanya "Credit rating" Indonesia yang naik baru-baru menghindarkan jaminan yang diberikan kepada ini ke tingkat BBB mencerminkan keberhasilan proyek swasta dan pemberi pinjaman mereka. masa lalu di dalam hal keyakinan ini. Tetapi Kredit komersial di Bank Indonesia kebijaksanaan ini saja belum cukup untuk seyogyanya disiapkan untuk melindungi melepaskan Indonesia dari berbaliknya secara terhadap kejadian eksternal yang tidak mendadak yang antara lain terjadi dalam diperkirakan sebelumnya, dan tidak digunakan pilihan portfolio investasi setelah krisis mata untuk belanja non-budgetair. Terdapat uang peso Meksiko. Untuk mengurangi kemungkinan untuk pembiayaan kembali dan keadaan yang kurang menguntungkan ini, pembayaran hutang eksternal yang mahal. hutang jangka pendek perlu dipantau secara cermat, cadangan devisa dipertahankan pada xvii. Untuk me-maksimal-kan tingkat yang memadai untuk menjaga penggunaan yang efisien dari pinjaman luar goncangan masuknya kapital, dan suku bunga negeri Pemerintah memerlukan pasar yang yang disesuaikan dengan perkembangan terbuka dan pangaturan yang dapat diterapkan. internasional. Jika perlu, kebijaksanaan Paket deregulasi Mei 1955 akan meningkatkan moneter yang ketat dan kebijaksanaan fiskal efisiensi pinjaman luar negeri. Paket tersebut yang konservatif akan mengurangi bahaya akan membantu untuk menjaga bahwa pengaliran kapital ke luar negeri. xiv Ringkasan Eksekutif xix. Kemajuan selanjutnya dalam sektor Pemerintah dalam pasar dan prasarana, dan keuangan juga menentukan. Terlepas dari cara-cara untuk meningkatkan pelayanan keberhasilan di tahun yang lampau, banyak umum dalam prasarana, pendidikan dan bank masih dibebani dengan "non-performing kesehatan, temasuk pengandalan yang lebih assets". Adalah sangat penting bagi besar pada sektor swasta. laporan ini Pemerintah dan Bank Indonesia untuk bertahan membahas masalah pada sektor kesehatan, dengan kebijaksanaan untuk memperbaiki sebagai suatu contoh dari tantangan yang sistem perbankan (dibicarakan pada bagian C berobah dalam perbaikan sumber daya di bawah ini). Masalah penting tambahan manusia dan peranan dari sektor pemerintah. lainnya adalah memperkuat peraturan dari sektor non-bank, terutama keamanan investasi Cl. Meningkatkan Hasil Pasar Kompetitip dan batas penggunaan dana pensiun dan asuransi. Peraturan yang hati-hati sifatnya, xxi. Dengan hampir semua pertumbuhan terutama yang menyangkut kepada pensiun dan masa depan berasal dari sektor swasta, perusahaan asuransi serta perusahaan Indonesia memerlukan lebih dari hanya suatu pembiayaan non-bank, adalah penting untuk tingkat investasi swasta yang tinggi. menjaga stabilitas sistem keuangan, dimana Dikehendaki pula penggunaan investasi terjadi investasi produktif dan dimana tersebut secara produktif. Pemerintah perlu Pemerintah tidak dihadapkan kepada kewajiban untuk menyediakan perangkat insentif yang yang tidak dapat dibiayai bagi para pensiunan. mendorong perusahaan swasta yang efisien dengan melembagakan kebijaksanaan dan C. Mendorong Efisiensi dan Pemerataan penegakkan peraturan yang menjamin keterbukaan yang lebih besar kepada xx. Pertumbuhan jangka panjang di perdagangan, kompetisi pasar dan Indonesia akan tergantung pada stabilitas kelembagaan. Efisiensi yang ditingkatkan makro ekonomi, tetapi juga pada akan terjadi melalui penjualan saham BUMN, meningkatnya produktivitas dan efisiensi di terutama pada sektor yang bersaing. Efisiensi perekonomian yang swasta yang berlandaskan yang lebih baik sangat menentukan untuk pasar, menyediakan prasarana yang lebih baik, membangkitkan pertumbuhan ekspor non- dan memperkuat sumber daya manusia. migas yang diperlukan untuk pencapaian Perobahan dalam peranan Pemerintah, pertumbuhan yang luas dan mengurangi beban terutama perbaikan dalam pasar dan perangkat hutang. Deregulasi dengan basis luas akan peraturan, lebih mengandalkan pada sektor membantu untuk memajukan perusahaan swasta, investasi dan pelayanan pemerintah berskala kecil dan menengah, mendorong yang lebih efisien, merupakan faktor-faktor petani kecil, dan menghasilkan manfaat yang penentu dalam upaya ini. Perobahan tersebut substansial bagi konsumen, termasuk menghendaki pula pencapaian tujuan konsumen yang berpenghasilan rendah. pemerataan lebih lanjut. Laporan ini tidak menyediakan perlakuan yang rinci dari semua xxii. Men-deregulasi Perdagangan Luar aspek dari perobahan peranan sektor Negeri. Keterbukaan terhadap pasar luar pemerintah. Misalnya, laporan ini membahas negeri membantu perekonomian untuk pembangunan daerah dan desentralisasi dari mencapai produktivitas yang lebih tinggi dan pelayanan pemerintah hanya secara ringkas. pertumbuhan yang lebih cepat, pertumbuhan Juga, masalah kebijaksanaan sektor ekspor yang lebih tinggi. Dengan paket pendidikan, tidak dibahas, karena pengkajian deregulasi Mei 1995, Indonesia telah yang sedang berlangsung. Laporan ini mengambil langkah penting menuju suatu menitik-beratkan pada perobahan yang program yang berlandaskan peraturan dari diperlukan dalam peran pengaturan dari pemangkasan tarif, yang sangat menonjol Ringkasan Eksekutif xv sesudah 1991. Hal ini akan mendorong suatu dua pertiga dari ekpor pertanian. Pembatasan pemindahan sumber daya ke sektor yang seperti itu membatasi produsen dan sukar paling produktif, dan menciptakan kompetisi sekali mencapai sasaran yang mereka nyatakan yang lebih besar dalam perekonomian. untuk meningkatkan kualitas, memajukan industri hilir yang efisien, atau menstabiLkan xxiii. Paket reformasi perdagangan Mei pangsa pasar domestik. Pembatasan tersebut, 1995 mengurangi tarif rata-rata sampai dengan memang (secara peragaan) menahan 15 persen dengan pemotongan tarif dari 4,500 pertumbuhan ekspor. Menghilangkan jenis sebesar 5 persen, 1.050 jenis dengan 10 pembatasan eskpor ini akan merangsang persen, dan 500 jenis dengan antara 15 sampai ekspor hasil-hasil pertanian dan menaikkan dengan 35 persen. Tambahan lagi, paket pendapatan petani kecil, terutama di luar Jawa. tersebut mengurangi tarif dan mengeluarkan suatu rencana untuk menurunkan tarif rata-rata xxvi. Oleh sebab itu penghapusan secara sebesar 7 persen selambat-lambatnya tahun menyeluruh pembatasan ekspor adalah dapat 2003. dipertanggung-jawabkan untuk semua komoditi kecuali tekstil yang sekarang terbentur dalan xxiv. Tetapi, paket deregulasi Mei 1995 kuota Multi-Fiber Arrangement, dan untuk belum menyentuh ekspor dan perdagangan jenis tanaman/satwa langka. Pada subsektor hasil-hasil pertanian belum tersentuh. kehutanan, peningkatan bea penebangan kayu Menghilangkan hambatan non-tarif pada akan mendorong produksi yang berkelanjutan, produk seperti gula, gandum dan tepung meningkatkan anggaran pendapatan dan terigu, serta bungkil kedele, akan menurunkan menggugah industri yang berbasis kayu yang harga bahan makanan dan menguntungkan lebih efisien. (Pada tingkat eksploitasi konsumen, terutama konsumen yang sekarang dan dengan penebangan dan praktek berpenghasilan rendah, dan menaikkan upah industri yang tidak efisien dewasa ini, pasok riil tanpa menaikkan biaya industri. Hal ini kayu bulat berukuran komersial akan menjadi akan menurunkan pula biaya tinggi pengolahan berkurang pada 2010 atau lebih awal). hasil pertanian yang menggunakannya sebagai input. Akhirnya, tindakan itu juga akan xxvii. Meningkatkan Kompetisi mengurangi distorsi. Misalnya, pembatasan Domestik. Deregulasi yang berarti dari pada gula menjurus kepada alokasi yang keliru pembatasan investasi dan prosedur perijinan sekitar 2 persen lahan pertanian untuk tebu, perusahaan asing dan dalam negeri, dan dengan biaya dipikul oleh program deregulasi hambatan perdagangan luar negeri swasembada pangan dan efisiensi nasional telah menambah kompetisi atau persaingan. (Harga beras Indonesia lebih dekat ke tingkat Namun, banyak pembatasan pada perdagangan harga pasar dunia dibandingkan dengan gula). domestik masih menghambat efisiensi dan menyebabkan ekonomi biaya tinggi, seperti XXV. Ekspor Indonesia juga diatur dan adanya kartel, pengendalian harga, dikendalikan, terutama ekspor produk pengendalian entry dan exit, perijinan yang pertanian. Terdapat larangan ekspor bagi 72 ekslusif, dominasi sektor publik, proses tender produk khusus, dan 1.827 produk yang dan pengadaan barang pemerintah yang belum sebelumnya terkena peraturan khusus dapat transparan dalam memilih perusahaan atau diekspor oleh eksportir yang diakui. Ekspor industri tertentu. Beberapa pembatasan sebanyak 105 produk dilakukan dibawah dilakukan oleh Pemerintah Pusat, dan lainnya pengawasan/bimbingan yang memerlukan ijin, oleh Pemerintah Daerah, serta selebihnya oleh dan 80 produk dikenakan pajak ekspor khusus. assosiasi perdagangan industri yang Berdasarkan nilai, pengawasan mempengaruhi mendapatkan pengakuan pemerintah. setengah dari ekspor non-migas dan hampir xvi Ringkasan Eksekutif xxviii. Terdapat beberapa arahan suatu program reformasi perusahaan yang kebijaksanaan dapat diikuti oleh Pemerintah komprehensif, menitik-beratkan pada untuk mendorong kompetisi dalam pasar penjualan saham perusahan yang beroperasi di domestik yang lebih besar. Suatu pendekatan pasar kompetitif. Dalam kompetisi antar yang berdasarkan peraturan deregulasi sektor, terutama jika ditingkatkan melalui perdagangan dalam negeri diperlukan (seperti langkah-langkah yang disarankan di atas, akan halnya dalam deregulasi perdagangan luar menjamin pelayanan yang lebih baik pada negeri). Pemerintah seyogyanya biaya yang lebih rendah. Sering sekali, menghapuskan monopoli yang disetujui atau BUMN menyediakan perlindungan bagi yang disponsori Pemerintah yang mengendalikan kurang efisien. Deregulasi melalui penjualan pemasaran dan distribusi komoditi 'strategis" saham di pasar saham saja tidak cukup. Mitra dan lainnya, serta membuka distribusi kerja swasta yang berkemampuan diperlukan perdagangan besar dan eceran untuk investasi untuk mengelola perusahaan, dan prosedur asing. Kebijaksanaan perdagangan domestik yang transparan dan kompetitif disyaratkan ini harus dapat memperagakan bahwa untuk menarik kehadiran mitra swasta pembatasan dalam perdagangan domestik tersebut. Akhirnya, pengaturan yang adalah minimal. Suatu ijin usaha biasa, terkendali membutuhkan perbaikan bagi misalnya, bukan keanggotaannya dalam perusahaan yang tetap berada di dalam lingkup assosiasi perdagangan atau komoditi, pemerintah. Langkah yang penting adalah seharusnya merupakan ijin yang diperlukan. penunjukkan pengelola dan badan komisaris Deregulasi perdagangan domestik harus yang profesional, memberikan otonomi yang mengikuti penurunan tarif dan penghapusan lebih luas kepada pengelola (terutama hambatan non-tarif untuk impor dan ekspor. pengendalian dan campur tangan departemen Pajak barang khusus, retribusi pemerintah teknis), dan melembagakan suatu sistem daerah dan hambatan perdagangan lainnya pemantauan kinerja yang bertanggung jawab seyogyanya dihapus. Tujuan utama dari kepada suatu badan yang tunggal dan peraturan perundangan yang mendorong dan independen (seperti badan komisaris mempertahankan kompetisi, adalah perusahaan). memberikan manfaat kepada konsumen. Kontrak pemerintah, termasuk kontrak xxxi. Mengembangkan Aturan BUMN, seharusnya mengikuti peraturan dan Permainan Yang Erisien. Perbaikan dalam ketentuan yang disyaratkan oleh tender yang aturan permainan akan mendorong kompetitif dan prosedur yang transparan. kelangsungan, dan pertumbuhan yang Pembatasan terhadap keterbukaan bank yang digerakkan oleh sektor swasta yang efisien. berkaitan dengan kelompok bisnis sebaiknya Pemerintah mempunyai peranan penting dalam ditegakan, seperti yang direncanakan. berbagai hal sektor pembiayaan, karena mekanisme pasar saja tidak dapat memberikan xxix. Deregulasi dan Reformasi BUMN. perlindungan yang mremadai bagi keselamatan BUMN tertinggal dari pesaing swastanya dan ketepatan sistem, lingkungan karena dalam hal keuntungan usaha dan kualitas ekternalitas yang besar, dan perangkat pelayanan. Kinerja (performance) yang peraturan/perundang-undangan, dimana sistem kurang baik dari PTP (PT Perkebunan) adalah penegakkan hukum yang modern dibutuhkan salah satu contoh. Tambahan lagi, kinerja untuk bekerjanya pasar yang kompetitif. BUMN merosot pada kurun waktu 1990 dan 1994. * Mengatur Sektor Keuangan. Meskipun perangkat peraturan/perundang-undangan xxx. Untuk meningkatkan kinerja untuk sektor perbankan telah mengalami BUMN, Indonesia perlu mengembangkan perbaikan, kemajuan yang lebih besar Ringkasan Eksekutif xvii lagi adalah suatu keharusan. sistamatik mengenai hak, pemindahan hak, kebijaksanaan harus diperkuat untuk hipotek tanah, dan sistem untuk membayar tunggakan pinjaman yang pendaftaran dan penegakkan jaminan melebihi waktu, memperkuat pengawasan hutang. Arbitrase komersial dan mem- bank, meningkatkan keterbukaan informasi fungsikan sistem pengadilan membutuhkan dengan mensyaratkan publikasi yang lebih pula perhatian yang seksama. Sementara sering dari neraca yang telah di-audit, inisiatif sedang dipersiapkan, dunia usaha mengurangi hubungan bank yang terbatas akan mendapat manfaat dari sejumlah kepada beberapa kelompok nasabah reformasi yang cepat, seperti mendirikan tunggal, melebur bank yang kuat dengan pengadilan ekonomi khusus, penerbitan yang lemah, dan meningkatkan kapasitas keputusan pengadilan, dan memperbaiki untuk menangani likuiditas bank. Ketika undang-undang dan prosedur arbitrase. kondisi keuangan meningkat, Pemerintah Peraturan yang mencegah penyalah-gunaan seyogyanya menyiapkan bank komersial kekuatan pasar akan mendukung lembaga pemerintah yang kuat untuk menjual pasar. Untuk meningkatkan berfungsinya sahamnya. Lembaga keuangan bukan pasar uang, perlindungan pemegang saham bank (misalnya sewa beli, pembiayaan minoritas dan peraturan pengambil-alihan konsumen, dan lainnya), yang kegiatannya (menurut Undang Undang Perusahaan tumbuh dengan cepat, membutuhkan yang baru) perlu ditegakkan. Akhirnya, peraturan yang lebih berhati-hati, terutama rancangan undang undang pasar akan keterbukaan informasi keuangan yang memberikan suatu dasar kelembagaan akurat kepada para investor. Rencana untuk pengembangan pasar modal. pensiun dan asuransi membutuhkan perhatian untuk menjaga bahwa investasi * Mengelola Lingkungan. Terdapat faktor yang produktif dilaksanakan dan bahwa saling menunjang antara kebijaksanaan Pemerintah tidak ditinggalkan dengan ekonomi yang baik dan suatu strategi yang hutang besar yang tidak tersedia dana efektif untuk pertumbuhan berkelanjutan. pembayarnya. Tambahan pula, Pemerintah perlu untuk menyusun suatu perangkat Merumuskan Peraturan Untuk Kegiatan peraturan/insentif yang memadai untuk Pasar Swasta. Indonesia yang belum perilaku yang bertanggung jawab terhadap mempunyai peraturan yang transparan, lingkungan. Hal ini karena pasar yang yang dapat diperkirakan, dan yang dapat tidak dikendalikan sering gagal ditegakkan untuk pembangunan dunia mencerminkan biaya lingkungan dari usaha, telah menempatkannya pada kegiatan perusahaan. Dalam persaingan yang tidak menguntungkan dan kebijaksanaan pertanahan, menciptakan (kurang mendukung entry dan kompetisi), pasar tanah yang transparan dan hak milik mengurangi efisiensi. karena itu, yang memadai adalah penting, yaitu meningkatkan lingkungan hukum mereformasi proses pemberian ijin merupakan suatu unsur kunci pada pertanahan untuk developer, menuju program pemerintah. Pengesahan Undang kepada mekanisme harga berdasarkan Undang Perusahaan baru-baru ini adalah pasar bagi tanah milik pemerintah langkah penting. Tetapi undang-undang (ternasuk pelelangan yang terbuka), kredit dan pengamanan (seperti jaminan kebijaksanaan pemukiman kembali yang kredit) juga perlu untuk diperbaharui, memadai untuk pengadaan tanah termasuk pengakuan dari suatu keragaman pemerintah, dan kegiatan perencanaan tata yang lebih luas dari keamanan yang guna tanah yang terarah dan sederhana. berlandaskan hukum, peraturan yang lebih Dalam subsektor kehutanan, iuran hasil xviii Ringkasan Eksekutif hutan (IHH) yang tinggi terhadap penting dalam prasarana, tetapi titik beratnya pemegang hak dan perlindungan lebih pada pengelolaan yang meningkat dari masyarakat setempat sangat menentukan program investasi yang menyeluruh, yang untuk menjaga terjadinya keberlanjutan. terdiri dari investasi pemerintah dan investasi Pengelolaan air akan memperoleh manfaat swasta, pengaturan, dan prasarana umum. pula dari penetapan harga yang lebih baik, Hal iti menuntut rasionalisasi program dan pengelolaan daerah aliran sungai yang investasi dan menyeimbangkan interaksi lebih ditingkatkan. Pengembangan pemerintah-swasta, mengembangkanperangkat perkotaan menghendaki peranan yang lebih peraturan-perundangan yang jelas dan besar untuk kekuatan pasar dan kompetitif untuk memaksimumkan pembentukan kelembagaan yang lebih baik pemanfaatan pembiayaan sektor swasta dan (dibahas lebih lanjut pada bagian prasarana kegiatan pemerintah yang tidak terpilah-pilah di bawah ini). Di sektor industri, upaya sehingga pemanfaatan yang lebih baik dari pengendalian pencemaran membutuhkan partisipasi dan investasi sektor swasta. Unsur sasaran yang ditetapkan, kapasitas penting lainnya adalah penetapan harga jasa kelembagaan pemantauan dan penegakkan pelayanan umum yang meningkat, pendapatan peraturan yang diperkuat, dan pencemaran yang dapat menutup pengeluaran, membiayai yang akan datang yang berkurang, adalah perluasan kapasitas, mengelola demand, dan penting dengan menitik-beratkan pada mendorong peningkatan efisiensi. Untuk penilaian lingkungan dan pengurangan meningkatkan kualitas pelayanan umum, pencemaran bagi pabrik baru. Sebagai Pemerintah memerlukan mengoperasikan tambahan kepada masalah BUMN seperti suatu perusahaan swasta, pengaturan/insentif ini, investasi pemeritah tanggap terhadap konsumen, memperjelas (dan swasta) yang lebih besar diperlukan tanggung jawab secara kelembagaan di dalam dalam upaya perbaikan lingkungan. pemerintahan, dan melakukan desentralisasi dan peningkatan partisipasi setempat. C2. Mengelola Pelayanan Prasarana xxxiv. Rasionalisasi Investasi dan Perbaikan xxxii. Pertumbuhan industri yang cepat Penggunaan Kapasitas. Usul investasi dan urbanisasi yang berkaitan dengan itu mulai prasarana swasta dan pemerintah adalah 50 membebani prasarana. Walaupun kapasitas persen lebih besar (sebagai prosentase telah meningkat secara substansial, perbaikan terhadap PDB) dari REPELITA V. Jika lanjutan dibutuhkan untuk menunjang tingkat investasi tidak dirasionalisasikan, maka hidup yang menaik, persaingan internasional, terdapat kecenderungan bahwa defisit transaksi dan perbaikan pemerataan. berjalan akan melebar. Tentu saja rencana belum tentu menjadi realisasi investasi xxmim. Dengan kehati-hatian seluruhnya, terutama dalam keadaan pasar kebijaksanaan ekonomi makro yang membatasi modal dunia yang ketat. Jadi, Pemerintah volume investasi prasarana, peningkatan seyogyanya mengemudikan ekonomi secara efisiensi dalam investasi prasarana adalah berhati-hati antara pemanasan ekonomi dan penting untuk mencapai tujuan ini. Partisipasi tepian kapasitas (prasarana) yang rendah. sektor swasta yang meningkat, dengan Untuk melakukan ini, Pemerintah me- perangkat peraturan-perundangan yang dapat rasionalisasi-kan investasi sektoral atas dasar diterima, akan menaikkan efisiensi dan hal ini efisiensi. Investasi Pemerintah perlu dititik- tercantum dalam program REPELITA VI. beratkan pada daerah yang menentukan Pemerintah akan tetap mempunyai peranan dimana investasi swasta yang cenderung rendah, dan dampak pemerataannya tinggi. Ringkasan Eksekutif xix xxxv. Misalnya, tekanan lebih diberikan dan hutang yang belum diperhitungkan pada transmisi dan distribusi tenaga listrik sebelumnya. (yang merupakan penyebab dari rendahnya pelayanan tenaga listrik) daripada xxxvii. Pemilahan fungsi sektor pembangunan pembangkit listrik (dimana pemerintah yang tidak meluas, dalam suatu kapasitas yang berlebih secara substansial perangkat peraturan yang lebih kompetitif terdapat di Jawa-Bali). Penggunaan yang dan memadai, dapat mendorong partisipasi lebih baik dari kapasitas yang tersedia serta swasta yang efisien dan memberikan hasil pengelolaan kapasitas yang lebih efisien, akan untuk konsumen. Langkah pertama yang meningkatkan penjualan 15 persen lebih dari mudah yang mengurangi biaya adalah kapasitas pembangkit yang tersedia sekarang mendorongperusahaanBUMN, meng-kontrak- ini. Pembangkit tenaga listrik dan kan pemeliharaan, penagihan, pengelolaan, telekomunikasi dapat lebih mengandalkan pada konstruksi, dan pelayanan yang bukan inti investasi swasta, bahkan dapat melampaui secara kompetitif. Suatu yang lebih rumit sasaran REPELITA VI jika perangkat (tetapi akhirnya tugas yang merupakan suatu peraturan meningkat. Akhirnya, Pemerintah keharusan untuk meningkatkan efisiensi perlu untuk melanjutkan investasi yang berbentuk pemilahan produksi, transmisi, dan direncanakan di sektor yang rendah distribusi pada tenaga listrik, gas, dan air. pelayanannya untuk memperbaiki pelayanan Hal ini akan membuka kemungkinan untuk yang vital seperti itu, misalnya pasokan air perolehan efisiensi melalui kompetisi langsung perkotaan, sanitasi dan angkutan serta akses (sebagai tambahan kepada yang bersifat tidak kepada pelayanan tersebut bagi daerah langsung), dan kompetisi penawaran untuk pedesaan. mendapatkan hak pengusahaan. Pemilahan akan mengijinkan perusahaan untuk menjual xxxvi. Mengembangkansuatuperangkat tenaga listrik, gas atau air melalui sistem grid peraturan yang jelas dan kompetitif untuk langsung kepada pemakai. Akhirnya, me-maksimum-kan manfaat pembiayaan perangkat peraturan sektoral dibutuhkan. sektor swasta dan meningkatkan efisiensi. Dalam hal ini, adalah penting untuk Arus investasi swasta yang mantap dari memisahkan fungsi pengaturan pemerintah dari investasi swasta (pada tingkat biaya yang dapat perusahaan BUMN untuk mencegah konflik diterima), akan tergantung pada suatu kepentingan. perobahan dari pendekatan perundingan yang bersifat sepotong-sepotong menjadi suatu * Tenaga Listrik. Dewasa ini, perusahaan perangkat peraturan yang kompetitif dan jelas. swasta diharapkan untuk membangkit dan Langkah pertama adalah memperjelas hak menjual listrik kepada PLN atas kontrak pengusahaan di tahap awal, dan "take-or-pay contracts". Kontrak ini menetapkannya melalui transparansi serta umumnya telah di-negosiasi dengan penawaran yang kompetitif (dengan penawar yang terseleksi dan bukan persyaratan khusus yang tergantung pada melalui penawaran yang kompetitif. sektor masing-masing). Pendekatan ini telah Dalam hubungannya dengan posisi mengurangi biaya di Filipina dan di Indonesia keuangan PLN dan kebutuhan untuk sendiri. Perangkat tersebut perlu untuk memusatkan sumber daya pada transmisi mengelola resiko secara berhati-hati dengan dan distribusi, sektor swasta seyogyanya meng-alokasi-kannya kepada pihak-pihak yang didorong untuk menawarkan secara mempunyai kemampuan untuk mengelolanya, kompetitif untuk semua pembangkit baru, dengan mengelola secara cermat dan yang juga tergantung pada akses yang menetapkan harga yang memadai terhadap ditingkatkan terhadap pasokan gas. jaminan kredit sektor pemerintah yang langka Perusahaan swasta seyogyanya pula xx Ringkasan Eksekutif didorong untuk menjual langsung swasta yang lebih besar melalui kepada pemakai mnelalui grid. Hal kompetisi, dan transparansi prosedur ini akan mengurangi resiko seleksi, akan menurunkan biaya. kapasitas berlebih yang melekat pada "take-or-pay contracts", dan * Air. Untuk mencapai sasaran REPELITA memulangkan sebagian resiko VI, perusahaan (air minum) perlu komersial dari perkiraan demand dioperasikan secara perusahaan swasta, kepada sektor swasta. dengan titik perhatian pada pelayanan air. Hal ini menuntut pemeliharan dan * Telekomunikasi. PT Telkom sedang pengurangan yang lebih baik dari mengalami reorganisasi menjadi 7 tunggakan pembayaran, tarif yang tinggi perusahaan, yang 5 diantaranya memasuki pada kebanyakan daerah, penetapan biaya usaha patungan dengan perusahaan yang per satuan yang lebih baik, dan dioperasikan oleh swasta, yang akan pengelolaan operasi dan keuangan yang mengelola sistem telepon regional dan ditingkatkan. Tindakan ini akan membangun instalasi 2 juta sambungan menghasilkan penghasilan untuk telepon. PT Telkom akan mengelola memperbaiki akses, terutama melalui sistem telepon Jakarta dan Surabaya, yang investasi dalam distribusi dan kualitas air. membangun instalasi 3 juta sambungan. Struktur kelembagaan menghendaki PT Indosat telah menjual sebagian perbaikan dengan penugasan yang jelas sahamnya di pasar modal dan listing PT tentang tanggung jawab dan pertanggung Telkom direncanakan. Pada pelayanan jawaban yang lebih besar bagi menejer internasional, dan telepon genggam, PT dan menghapuskan transfer penghasilan Satelindo diberikan hak untuk itu dan kepada Pemerintah (Daerah). Perusahaan Deutsche Telekom membeli seperempat air minum yang kecil perlu hak perusahaan sebesar US$586 juta. dikelompokkan untuk meningkatkan Masalah yang penting adalah untuk viabilitas secara ekonomi dan memperkenalkan kompetisi lebih lanjut di meningkatkan pengelolaan sumber air. semua segmen dari sektor tersebut dan Akhirnya, pemberian hak bagi partisipasi menganut pendekatan yang terstruktur swasta seyogyanya dipertimbangkan, terhadap persoalan tarif dan peraturan seperti yang dipraktekkan di banyak yang bersifat sektoral untuk menjamin negara di dunia. suatu penerusan efisiensi yang diperoleh kepada konsumen. xxxviii. Menetapkan harga untuk efisiensi dan pemerataan. Penetapan harga yang * Gas. Konsesi perlu dibuka untuk memadai adalah penting untuk mengelola mengembangkan lapangan gas skala kecil. pelayanan prasarana yang lebih baik, apakah Suatu penetapan harga yang baik dan milik pemerintah maupun swasta, dan untuk perangkat peraturan dibutuhkan untuk meningkatkan ketersediaannya. Unsur-unsur mendorong pengembangan dan perluasan kunci adalah lebih kecil dan subsidi dengan jaringan transmisi dan distribusi dengan sasaran yang mengena dalam tenaga listrik, partisipasi swasta, untuk memanfaatkan air, kereta api dan angkutan umum; tarif harga bahan bakar yang biayanya murah dan air yang lebih tinggi; pungutan iuran untuk bersih lingkungan. Industri ini harus penggunaan jalan yang padat; dan persaingan dipilah-pilah untuk membentuk suatu untuk menurunkan harga pembangkit listrik struktur produsen ganda yang menjualnya dan telekomunikasi dalam perjalanan waktu. melalui suatu grid transmisi, untuk Cost recovery yang buruk men-subsidi yang pembeli yang ganda pula. Partisipasi berpenghasilan tinggi karena penduduk miskin Ringkasan Eksekutif xxi tidak mempunyai akses terhadap pelayanan. (lihat di atas) untuk meningkatkan kinerjanya. Sumber daya yang dikerahkan oleh penetapan Desentralisasi akan ineningkatkan efisiensi harga yang memadai dapat digunakan untuk dalam banyak hal, karena kebanyakan memperluas akses kepada pelayanan, yang prasarana (seperti jalan lokal, air, saluran akan memberikan manfaat kepada penduduk limbah cair, pembuangan limbah padat, dan miskin. Masyarakat umum, termasuk pencegahan banjir) menghasilkan manfaat di penduduk miskin, bersedia untuk membayar tingkat lokal. Misalnya, menghubungkan akses yang lebih baik terhadap pelayan yang pelayanan perkotaan lebih dekat ke pada berkualitas. Tetapi, pengandalan yang penerimaan pendapatan melalui retribusi dan mekanistis pada penetapan harga berdasarkan pajak kekayaan yang lebih tinggi atau biaya akan mengurangi efisiensi dan penilaian (asset) yang lebih baik (yang, selain persaingan internasional. Tujuan utama adalah Jakarta, adalah Iterendah di negara untuk meningkatkan cara penetapan harga di berkembang) akan meningkatkan tanggung suatu pasar yang kompetitif. jawab dan kualitas pelayanan, serta akan meningkatkan ketersediaan sumber daya yang xxxix. Me-rasionalisasi-kan pengelolaan diperlukan untuk perluasan pelayanan. sektor, mengurangi kerumitan Dimana pasar tidak sesuai dengan permintaan kelembagaan, dan pemberian tanggung pelayanan dan cost effective, Pemerintah perlu jawab yang lebih baik dengan klarifikasi melibatkan si pemakai dan mereka yang peran, fungsi, dan kewenangan, terutama pada berkepentingan di dalam proses pengambilan pelayanan perkotaan. Fragmentasi dan keputusan untuk meningkatkan efisiensi tumpang tindih tanggung jawab pada keadaan investasi. sekarang ini akan menjurus kepada perumusan kebijaksanaan yang kurang tepat, investasi D. Meningkatkan Kapital Manusia- yang kurang efisien, kurang rasa tanggung Tantangan Yang Berubah di Sektor jawab, dan kesulitan dalam partisipasi swasta. Kesehatan Sebagai tambahan untuk memisahkan peran pengaturan dari fungsi lainnya, Pemerintah xli. Indonesia telah membuat kemajuan Pusat seyogyanya menyerahkan pelaksanaan yang substansial dalam pengembangan sumber kepada tingkat pemerintah bawahan, BUMN daya manusianya dalam beberapa dekade yang dan sektor swasta, kecuali sebagai jaminan lalu. Diperlukan peningkatan labih lanjut dengan pengelolaan yang berhati-hati dari dalam sumber daya manusia, seperti pinjaman pemerintah. Sebagai penggantinya, dicanangkan dalam REPELITA VI, untuk Pemerintah menitik-beratkan pada perumusan meningkatkan kesejahteraan penduduknya dan kebijaksanaan dan perangkat sektor, untuk bersaing secara efektif di pasar pengembangan standar keuangan dan teknis internasional. Laporan ini membahas sektor serta prosedur, dan memberikan bimbingan kesehatan, sebagai suatu tantangan yang dan bantuan teknis kepada Pemerintah berubah dalam meningkatkan sumber daya bawahan. manusia dan peranan sektor pemerintah. Untuk peningkatan pelayanan kesehatan, xl. Memberikan pelayanan umum Pemerintah seyogyanya perlu untuk: (a) sebagai usaha, yang tanggap kepada mempelajari kembali anggaran belanja dan konsumen. Lembaga pemerintah proritas; (b) meningkatkan efisiensi dan membutuhkan tujuan umum yang lebih kecil, kualitas pelayanan, terutama untuk penduduk yang menitik beratkan pada kualitas miskin; dan (c) meningkatkan peranan pelayanan, dan otonomi pengelolaan dan pengaturan dan pemberian dukungan terhadap tanggung jawab yang lebih besar, serta pemberian pelayanan umum oleh sektor pengandalan yang lebih pada sektor swasta swasta. xxii Ringkasan Eksekutif xlii. Salah satu peranan penting xliv. Daerah ketiga yang penting untuk Pemerintah adalah dalam membiayai pelayanan perbaikan adalah peranan pengaturan dan kesehatan dasar. Penyediaan secara tersebar penunjangan Pemerintah dalam pelayanan dari sistem pelayanan kesehatan pemerintah kesehatan swasta. Pembelian obat-obatan dalam bentuk puskesmas, klinik dan rumah adalah bagian yang terbesar dari belanja sakit, telah menyediakan akses kepada runiah tangga, dan penyakit yang mudah pelayanan kesehatan yang sifatnya esensial. disembuhkan dengan obat-obatan sering tidak Indonesia telah berhasil pula dalam dapat ditangani karena biayanya yang tinggi menyediakan pelayanan penting seperti dan pasokannya dan penyebaran yang tidak imunisasi anak secara masal, pemberian gizi merata. Produsen farmasi swasta tampaknya unsur mikro, dan pelaksanaan keluarga menikmati tingkat proteksi yang tinggi dan berencana. Namun, belanja secara tidak adanya persaingan. Pelayanan kesehatan keseluruhan dari kesehatan masyarakat umum swasta yang tumbuh pesat juga tampaknya masih rendah (jika dibandingkan dengan memberikan pelayanan dengan kualitas yang negara yang sedang berkembang lainnya). belum memadai. Pemerintah mempunyai Dibutuhkan untuk pembiayaan kesehatan peranan penting dalam meningkatkan kualitas masyarakat yang lebih besar pada pelayanan tenaga kesehatan dengan menyediakan kesehatan dasar dan unsur penunjangnya pelatihan, akreditasi dan baku mutu yang lebih seperti investasi yang memadai dalam air baik. minum dan sanitasi, untuk menyediakan suatu tingkat yang diinginkan minimum dan kualitas xlv. Dengan perbaikan di daerah-daerah dari pelayanan (kesehatan) yang esensial, tersebut di atas, dimungkinkan bagi Indonesia dengan titik berat pada penduduk miskin. untuk mencapai kemajuan yang substansial lebih lanjut dalam hasil-hasil di sektor xliii. Walaupun Pemerintah telah kesehatan. Laporan ini menyarankan bahwa meningkatkan pelayanan kesehatan danjumlah Pemerintah: petugas kesehatan secara substansial, penggunaan pelayanan kesehatan masyarakat * Meningkatkan anggaran pelayanan (misalnya rata-rata kunjungan ke puskesmas) kesehatan masyarakat, mentitik- masih rendah. Penggunaan pelayanan beratkan pada pelayanan kesehatan kesehatan oleh penduduk miskin juga penduduk miskin. Anggaran belanja tampaknya turun antara 1987 dan 1992, yaitu pemerintah untuk kesehatan rendah menurut data SUSENAS. Salah satu faktor (sekitar 0,7 persen PDB, dibandingkan dalam rendahnya penggunaan tampaknya dengan 2,0 persen dari PDB pada semua berkaitan dengan rendahnya kualitas pelayanan negara berkembang). Pemerintah perlu kesehatan. Terdapat laporan mengenai menyediakan anggaran belanja lebih besar perawat kesehatan dengan pelatihan yang untuk kesehatan untuk menjamin suatu belum memadai, kecerobohan pemeriksaan tingkat perbaikan kualitas pelayanan dan fisik, tidak konsistennya antara diagnosa dan sarana pendudkung (misalnya air minum resep, dan praktek pasien yang belum baik. dan sanitasi). Pemerintah menyadari Dengan demikian, perhatian yang lebih besar kebutuhan ini, dan bermaksud untuk diperlukan terhadap perbaikan kualitas menaikkan anggaran belanja secara pelayanan kesehatan masyarakat, yang progresif. dibedakan menurut kondisi kesehatan yang khusus daerah tertentu, dan menitik-beratkan * Meningkatkan pelayanan kesehatan pada rumah tangga dan daerah miskin. untuk penduduk miskin, dengan lebih Ringkasan Eksekutif xxiii tanggap terhadap kebutuhan lokal dan meningkatkan kualitas petugas kesehatan; anggaran belanja puskesmas dan klinik yang menyiapkan secukupnya untuk deregulasi meningkat yang sangat efektif menjangkau pelayanan kesehatan swasta untuk penduduk miskin. Penyediaan kartu memungkinkan entry praktek dokter pemeliharaan kesehatan yang gratis untuk internasional dan tenaga profesional penduduk miskin tidak cukup; insentif yang pengelola kesehatan ke dalam praktek lebih baik untuk petugas kesehatan untuk dokter swasta. melayani penduduk miskin diperlukan pula. E. Pembiayaan Eksternal dan Bantuan * Meningkatkan kualitas dan efisiensi Luar Negeri pelayanan masyarakat, dengan meningkatkan pengelolaan fasilitas xlvi. Kebutuhan pembiayaan eksternal kesehatan garis depan, menyediakan jangka menengah indonesia akan dapat dengan dana, memperbaharui insentif dipenuhi jika langkah kebijaksanaan kunci petugas kesehatan, membentuk program seperti yang digariskan di dalam bagian-bagian jaminan kualitas dan mendorong terdahulu dilakukan Pemerintah secara tepat jangkauan masyarakat yang lebih luas. waktu. Keperluan pembiayaan secara garis Dalam hal petugas kesehatan, besar akan bertambah secara nyata pada kebijaksanaan seharusnya ditujukan untuk 1995/96, dengan menggantungkan pada memenuhi kebutuhan dan permintaan investasi yang lebih besar oleh sektor swasta lokal, dengan kewenangan yang lebih (yang impornya memperlebar defisit transaksi besar diberikan kepada pemerintah berjalan), yang menaikkan pembayaran bunga setempat dan pengelola fasilitas umum dan pinjaman pokok, (berkaitan dengan bertanggung jawab atas pelayanan di perobahan nilai tukar lintas mata uang). daerah. Penempatan petugas pada Tambahan lagi, kepekaan dalam pasar uang fasilitas kesehatan pedesaan yang terpencil internasional menunjukkan bahwa diinginkan memerlukan perhatian yang seksama, untuk meningkatkan cadangan devisa pada demikian pula persyaratan penerimaan, tahun anggaran 1995/96. Pembiayaan yang seleksi dan pelatihan tenaga bidan. meningkat berasal terutama dari sektor swasta, yaitu investasi langsung asing yang lebih tinggi * Meningkatkan pasokan obat-obatan dan pinjaman swasta yang berkaitan untuk fasilitas kesehatan masyarakat dan dengannya. melembagakan cara distribusiannya; meneruskan untuk melakukan deregulasi xlvii. Selama kurun waktu jangka perdagangan farmasi untuk mengurangi menengah, transaksi berjalan cenderung untuk biaya obat-obatan. menyempit sebagai suatu prosentase dari PDB, yang mencerminkan langkah-langkah untuk * Mendorong Praktek Dokter Swasta menghindari pemanasan ekonomi, tetapi dengan mengijinkan dan mendorong pembayaran kembali hutang luar negeri akan organisasi lembaga swadaya masyarakat meningkat dan cadangan devisa akan dan swasta lainnya, lembaga tidak terakumulasi dalam tahapan yang berhati-hati. mengejar laba untuk memberikan Sebagai akibatnya, kebutuhan pembiayaan total pelayanan kesehatan; mendorong asuransi akan terus naik, sebesar kira-kira US$2 milyar swasta dan bukan asuransi kesehatan yang per tahun. Kenaikkan jangka menengah dalam disediakan Pemerintah; meningkatkan kebutuhan pembiayaan iui akan dipenuhi mekanisme yang ada dalam penilaian seluruhnya oleh sektor swasta (yaitu oleh fakultas kedokteran, mempelajari investasi langsung asing, pinjaman jangka kurikulum, dan ujian mahasiswa untuk menengah dan panjang dan pemasukan yang xxiv Ringkasan Eksekutif berkaitan dengan perdagangan jangka pendek). kemungkinannya dapat disetujui, komitmen Pencairan dana bantuan resmi tetap tidak bantuan pembiayaan (termasuk hibah) dari berobah, sementara pinjaman pemerintah dari Consultative Group for Indonesia (CGI) yang sumber swasta akan menaik sedikit. sama dengan angka tahun lalu diharapkan sebesar US$5,2 milyar. Setelah xlviii. Terlepas dari peningkatan memperhitungkan dana yang belum cair pentingnya sektor swasta dalam pembiayaan (pipeline of assistance), akan hal ini eksternal Indonesia, bantuan resmi akan terus menghasilkan pencairan dana berjumlah lebih memainkan peranan yang strategis. Pertama, dari US$4 milyar, termasuk dana hibah. Sisa bantuan resmi adalah cara atau jalan yang kenaikkan dalam kebutuhan pembiayaan dalam konkrit bagi Pemerintah asing dan badan tahun anggaran 1995/96 akan dipenuhi dari internasional memberikan tanda dukungan pencairan dana yang berasal dari sumber lain. mereka untuk kebijaksanaan pembangunan Indonesia. Kedua, ketersediaan jumlah yang 1. Seperti diketahui oleh kedua pihak memadai bantuan luar negeri menjamin suatu Pemerintah Indonesia dan donor pada transisi yang berjalan secara teratur menuju pertemuan CGI dalam bulan Juli 1994, sumber pembiayaan yang beragam. Ketiga, kebutuhan prioritas Indonesia menghendaki bantuan resmi tersebut menjamin penyediaan komposisi bantuan ini yang menekankan pada yang mencukupi untuk bidang pembangunan pengembangan sumber daya manusia, yang bukan merupakan minat sektor swasta, pengurangan kemiskinan, dan penyediaan misalnya, pengembangan sumberdaya manusia prasarana fisik yang merupakan hambatan bagi dan beberapa bidang prasarana atau fasilitas sektor swasta. Perkembangan sejak pertemuan umum. Akhirnya, persyaratan dan resiko CGI tahun lalu, mencatat minat sektor swasta diversifikasi yang berkaitan dengan bantuan dalam meningkatkan secara nyata dalam resmi meningkatkan struktur pembiayaan bentuk pembelajaannya pada investasi eksternal; hal tersebut juga membantu untuk prasarana. Dengan demikian, daerah prioritas mempertahankan akses Indonesia kepadapasar untuk bantuan yang baru adalah uang internasional dan meningkatkan daya pengembangan sumber daya manusia, tarik negeri ini sebagai tujuan bagi investasi pengurangan kemiskinan, perlindungan langsung asing. lingkungan, dan penyediaan prasarana fisik yang menunjang kegiatan sektor swasta. xlix. Atas dasar perkiraan disajikan pada Bab 1, dan tersedianya proyek yang Executive Summary xxv EXECUTIVE SUMMARY INDONESIA: IMPROVING EFFICIENCY AND EQUITY -CHANGES IN THE PUBLIC SECTOR'S ROLE Overview Indonesia has done well in sustaining 1) Maintain strong macroeconomic rapid economic growth and reducing poverty, fundamentals. To maintain stability, and moved into the lower middle-income manage debt and improve investor group of countries. To maintain progress, confidence, the key steps would be: Indonesia must deal with a number of ., challenges. First, recent rapid economic . Limit spending to budgeted levels and growth is generating signs of overheating. curtail off-budget spending; Projected rises in infrastructure spending and * Tighten fiscal policy to cover the increase foreign and domestic investment could worsen in external debt service arising from cross- these pressures. Second, international lenders currency movements; use privatization are scrutinizing countries' policies more receipts to prepay external debt; carefully since the Mexico crisis. Lenders are . Raise more domestic revenues from better interested in strong, macroeconomic tax administration and higher forestry fundamentals and prudent external debt (IHH) and urban property taxes; management, but also in frameworks that . Improve public pricing policies (land, ensure that borrowings are put to efficient use water, energy, transport), which would also and will help service external debt. Third, benefit efficiency and the environment; . Track international interest rates closely international markets are becoming more competitive. Indonesia must be competitive in and target a prudent increase in these markets in order to maintain the rapid international reserves; Strengthen the banking system. Provide increases in non-oil exports that are needed highest-e supotno reoverofbd fo- otne radbsdgot n highest-level support for recovery of bad for continued broad-based growth and debts, improve disclosure, strengthen reduction of the large external debt burden. regulation, and carry out the programmed increases of capital in all banks, to cover To meet these challenges, the higher provisions against classified assets; Government must improve efficiency and I. mprove regulation and disclosure in the equity. This will entail greater emphasis on non-bank financial sector, to encourage the Government's regulatory role, less development of new instruments and to emphasisut more efficiency and equity- in ensure prudent development of the sector, its financing and production roles, and particularly investments of pension funds; correspondingly greater reliance on the . Strengthen the Commercial Offshore Loan private sector. Governments are making this Team and continue strict enforcement of shift the world over. Specifically, sustaining external borrowing ceilings and prudent progress will depend on continuing management of public and quasi-public macroeconomic stability, improving markets debt. and regulatory frameworks, relying more on the private sector, and increasing the 2) Improve markets. The May 1995 trade efficiency of public investments and services. deregulation package represents a major step to imnprove markets: it reduces tariffs substantially up-front, and sets a rules- xxvi Executive Summary based program for reaching a low, fairly gains could lead to 15 percent more sales uniform multilateral tariff by 2003. With from existing generation capacity; this package, Indonesia continues . Establishing transparent and competitive progress towards open market in trade regulatory frameworks and tenders/bidding and investment, following up on last for private concessions-in power, natural year's PP-20, which significantly reduced gas, telecoms, toll-roads and water; barriers to foreign investment, and its . Prudently managing explicit and implicit hosting of the APEC meeting in Bogor. public guarantees and contingent liabilities; To sustain further progress, Indonesia . Pricing public services better, for greater needs to: efficiency and equity; Managing public services better-through improved pricing, and more customer- agreducntare, e .ti biers, partvculal on oriented public services, in sectors such as agriculture, which will improve real wages; wae,swrg n at ipsl n * Eliminate export restrictions and domestic uanteransport trade restrictions, since they rarely serve urban transport; stated objectives, and hurt exporters and . Focusing public investment on areas where small-scale producers; private investment interest is low and equity * Expedite legal, regulatory and institutional impacts are high. reforms to strengthen domestic competition, 4) Human resource development will be a including thefinancial sector (see above); to longerce impropment in Privatize public enterprises operating in key to longer-term improvements in competitive markets; competitiveness, and better equity. The * Ensure more sustainable development by Report discusses the health sector, as one shifting to market-based pricing for land, example of the transition challenges in forests, and water; develop better improving human resources. resettlement practices; reform land permits and land-use policies for private projects; . Increase public health spending, focused on strengthen industrial pollution control; and essential health services and the poor; invest more in basic urban services. * Improve health services for the poor, by increasing spending on health centers and 3) Establishment of clear, competitive sub-centers, providing incentives for regulatory framework for private health personnel to treat the poor, and by participation in infrastructure sectors, being more responsive to local needs; instead of a "deal-by-deal' approach, . Improve the quality and efficiency of basic would lead to sustained investment flows public services, by improving the and lower infrastructure costs (as in the management, resources, staff incentives, Philippines). Critical infrastructure and quality assurance in front-line health bottlenecks will need to be relieved while facilities, and encouraging community maintaining macroeconomic stability in outreach activities; order to maintain rapid growth and . Encourage private services, by supporting improve access to services. This means non-profit agencies' delivery of services; greater efficiency, in particular greater reducing medicine costs; and deregulating reliance on the private sector as proposed private health insurance and medical in REPELITA Vi, through: services; improve training and standard-setting. Rationalizing investment in the power sector, with greater emphasis on transmission & distribution; the resulting Executive Summary XVii A. Recent Economic Developments for future tariff-cuts, which will reduce the average tariff to 7 percent and greatly reduce i. Indonesia moved into the lower tariff dispersion by 2003. This represents a middle-income group of countries (as significant broadening and deepening of classified by the World Bank) in 1993, Indonesia's commitment to multilateral tariff following a decade of about 6 percent per reduction, going well beyond GATT annum average growth in GDP; in 1994, its commitments. per capita GNP reached an estimated USS$884 (according to the new national iv. Last year's successes were, however, accounts from the Central Bureau of accompanied by some signs of overheating. Statistics). Manufacturing is now the largest Inflation was nearly *0 percent for the second sector in GDP. Non-oil exports and taxes consecutive year, and totaled 4.8 percent in account for the bulk of total exports and the first four months of 1995, pushed up by Government revenues-demonstrating the higher food and housing prices, and rising economy's successful diversification away aggregate demand. Wage pressures have from oil. Employment has grown rapidly, increased, to which the large increases in and women have entered the labor force in official minimum wages in 1993 and 1994 large numbers. As a result, the percentage of contributed. The non-oil trade balance for the population in poverty fell from about 30 1994/95 deteriorated by nearly US$1.5 percent in 1987, to about 44 percent in 1993, billion, although the current account deficit according to official estimates. remained low (US$3.5 billion or 1.9 percent of GDP) because of strong oil revenues. Non- ii. Following a cooling-off period in oil import growth was rapid (21 percent), 1992 and early 1993, all major sectors of the reflecting food and other consumption goods economy have expanded rapidly, except imports, while non-oil exports growth agriculture. In 1994, GDP growth was 7.3 exceeded 16.5 percent, an appreciable percent according to the new, rebased national improvement after the slowdown in the first accounts. Growth was led by construction quarter of 1994. The recent large cross- and domestically-oriented manufacturing; currency movements, plus some new agri-culture suffered a second consecutive borrowings, have pushed external debt up to year of weakness, reflecting the severe dry about US$100 billion. season. v. In 1994, foreign investment iii. Deregulation proceeded strongly approvals rose nearly 200 percent (to nearly over the past year. With the mid-1994 US$24 billion), in part reflecting last year's deregulation package (PP-20), Indonesia deregulation of foreign investment under PP- reduced barriers to direct foreign investment 20. Moreover, the total excludes the US$34 to among the lowest in the region. As host of billion Natuna natural gas project signed early the November APEC meeting in Bogor, in 1995. Domestic investment approvals rose Indonesia provided strong support for open by 50 percent. The Government also has markets for trade and investment. The underway some US$15 billion of private Government's May 1995 deregulation package infrastructure projects. Careful management lowered average import tariffs up-front to of these projects will be needed to ensure that about 15 percent, a cut of nearly 25 percent aggregate demand and the balance of that puts the average rate close to Malaysia's. payments remain at prudent levels. The package also sets a rules-based program xxviii Executive Summary vi. Fiscal policies in 1994/95 were rates and sold only a small amount of budgeted to be appropriately cautious, and reserves. Indonesia is estimated to have ended the year with a small overall surplus; this fiscal out- ix. In other developments, Indonesia's turn was about one-half percent of GDP privatization program began. A minority tighter than in 1993/94. However, the share in PT INDOSAT, an international 1995/96 budget appears to be somewhat less telecommunication firm, was sold off in the contractionary. The budget boosts personnel stock markets. About US$750 million of the spending by 19 percent including a 10 percent proceeds were used to pre-pay older, high rise in civil service salaries. By comparison, fixed-interest loans from multilateral banks. it increases capital spending by only The Government has also announced its 12 percent. Revenue growth is budgeted to intention to list PT Telkom (domestic slow, reflecting cuts to income taxes of about telephones), PLN (the state electricity one-third that were designed to make the tax company), PT Jasa Marga (tollroads), regime more competitive. The projected PT Garuda Indonesia (the national airline), higher financing requirements and lower Bank Negara Indonesia (banking), and PT Government savings will add to, rather than Aneka Tambang (tin) and PT Timah (tin). In offset, rising demand pressures from the addition, the Government signed power private sector. purchase agreements (PPAs) that will account for a substantial portion of power generation vii. Bank Indonesia raised interest rates investments, and is advancing private agilely during the latter half of 1994 and early participation in other infrastructure sectors 1995, responding effectively to rising (e.g., telecommunications, toll-roads). international interest rates and the Mexico crisis. Earlier, in the first half of 1994, a B. Macroeconomic Policy Agenda number of factors-the increase in US interest rates, the worldwide shift of portfolio capital x. Indonesia can sustain economic against emerging markets and local growth of about 7 percent a year if it factors-led to some capital outflow. These maintains macroeconomic stability and factors and Bank Indonesia's slower response addresses longer-term efficiency issues. in raising interest rates contributed to a Growth at that rate would raise per capita substantial loss of net foreign assets. In the income to over US$1,000 before the turn of banking sector, the Government is moving to the century. Employment and earnings address the problem of bad debts by growth would reduce poverty and raise strengthening prudential regulations and average living standards substantially. While banking supervision. Also, the strong the projected private foreign investment boom prosecution of the BAPINDO fraud case set a will temporarily keep demand pressures high, good example. However, cautious manage- key macroeconomic indicators would improve ment of the financial sector is needed, over time. Inflation would fall, and the particularly as real estate lending has grown current account deficit would decline to under rapidly. 2.5 percent of GNP (compared to an expected 2.7 percent in 1995/96-1996/97). Finance viii. The Government managed the will increasingly come from much larger exchange rate well during 1994 and 1995 to direct foreign investment (equity) inflows and maintain external competitiveness. It protected from private borrowing. To achieve this the rupiah from the contagion effect of the Mexico crisis by raising domestic interest Executive Summary xxix sustained rate of growth, Government will conditions, inflation can be reduced to 6 to 7 need to maintain macroeconomic stability by percent a year. But caution is needed in tightening fiscal and monetary policy, increasing official minimum wages. More managing external debt prudently, and flexible labor markets and attention to other improving investor confidence. cost elements would serve labor, employment, and export competitiveness better. To ensure B1. Macroeconomic Stability continued rapid employment growth, the Government should not set minimum wages at xi. Fiscal policy is the most effective levels that approach average wages in many instrument for managing aggregate demand in sectors of the economy, or that would require the context of Indonesia's open capital overly large productivity increases to remain account. With the overall direction already inter-nationally competitive. set in the 1995/96 budget, and private demand rising rapidly, the Government will need to xiv. Further deregulation would also limit spending to budgeted levels, avoid off- contribute to lower inflation and improve budget spending and improve tax equity, besides spurring more efficient growth administration. Revenue could be increased (Section C). The May 1995 deregulation further by raising forestry fees (luran Hasil package has already resulted in some price Hutan, (IHH)), raising urban property taxes declines (e.g., automobiles). Lowering non- and assessments, and pricing infrastructure tariff and tariff barriers on key commodities, services better. Spending on infrastructure especially agricultural products, would reduce also needs to be rationalized. (See paras. pressure on consumer prices, and raise the xxxiv and xxxv). Privatization proceeds or real wages of low-income consumers without higher-than-budgeted revenues should be used reducing competitiveness. to retire high-cost external debt, following the INDOSAT example. Finally, future budgets B2. External Debt Policy will need to be tightened to cover the increase in public external debt servicing costs xv. International investors are resulting from recent cross-currency increasingly concerned about countries' movements. external borrowings-not only the volume but, in the wake of the Mexico crisis, their xii. To maintain prudent international effective use. These concerns are relevant for reserves and support a cautious macro- Indonesia, where external debt is large. economic stance, tighter monetary policies World Bank estimates are that short-term debt also will be required. Bank Indonesia will exceeds US$20 billion and the debt service need to continue to follow international ratio exceeds 30 percent. Moreover, higher interest rate movements closely, and raise infrastructure spending and the financing of interest rates beyond that if circumstances other large projects will increase private warrant. To deter short-run speculation and external debt further. transfer more exchange-rate risk from the central bank to the market, Bank Indonesia also could widen spreads in the foreign exchange rate market when international exchange markets become calmer. xiii. With tighter demand management and the return of better agricultural ztx Executive Summary xvi. The Government needs to manage upgrade of Indonesia's credit rating to BBB debt carefully within an overall, coordinated reflects past successes in this area. However, framework. The Commercial Offshore Loan these policies alone might not be sufficient to Team's role needs to be strengthened, and insulate Indonesia from sudden adverse shifts ceilings should limit public or quasi-public in portfolio preferences (as happened to some external borrowings to prudent levels over the degree after the Mexican peso crisis). To next few years. The Government also should reduce this vulnerability, short-term debt avoid providing guarantees to private projects needs to be carefully monitored, international and their associated external lenders. reserves maintained at higher levels to guard Commercial lines of credit at Bank Indonesia against the increased volatility of capital should be set aside to protect against flows, and interest rates adjusted agilely in unforeseen adverse external events, and not light of international developments. If used for off-budget finance. There is scope necessary, a forceful tightening of monetary for refinancing and pre-paying expensive policy and significant fiscal action would external debt. minimize the danger of major capital outflows. xvii. To maximize the efficient use of external borrowing the Government needs xix. Further progress on the financial both open markets and a sound regulatory sector also will be crucial. Despite progress framework. The May 1995 deregulation over the past year, many banks are still package will improve the efficiency of burdened by non-performing assets. It will be external borrowings, by helping ensure that vital for the Government and Bank Indonesia private investment goes into more to persist with policies to improve the banking internationally competitive activities. The system (which is discussed below in Government could further improve efficiency Section C). An additional important issue is by deregulating non-tariff and tariff barriers in to strengthen regulation of the non-bank agriculture, removing the still numerous sector, particularly of the security of invest- barriers to exports and improving domestic ments and the exposure limits of pension and competition. Together with the May 1995 insurance funds. Prudential regulations, package and last year's PP-20 deregulation of particularly with regard to public pension and direct foreign investment, this would promote insurance companies and non-bank finance the growth in non-oil exports necessary to companies, are important to ensure the reduce the debt service burden. A sound stability of the financial system, that regulatory framework for private productive investments are made and that the infrastructure investment, including clear, Government is not left with large unfunded competitive bidding for concessions and obligations to pensioners. unbundling of public enterprise functions to allow more market-based competition, will C. Encouraging Efficiency and Equity lower costs of investment and, directly or indirectly, will contribute improved debt xx. Long-term growth in Indonesia will servicing capacity (Section C). depend on macroeconomic stability but also on increasing productivity and efficiency in B3. Investor Confidence the private, market-based economy; providing better infrastructure; and xviii. Continued sound macroeconomic strengthening human resources. Changes in fundamentals are the foundation of investor the Government's role, in particular confidence. Standard and Poor's recent improvements in markets and the regulatory Executive Summary xxxi frameworks, greater reliance on the private economies achieve higher productivity and sector, and more efficient public investment faster growth, including exports. With the and services, will be critical to these efforts. May 1995 deregulation package, Indonesia These changes would also further equity has embarked on a rules-based, pre-announced objectives. This Report does not provide an program of tariff cuts, the most significant exhaustive treatment of all aspects of a since 1991. The package will encourage a changing role of the public sector. For shift of resources to sectors where they are the example, it treats regional development and most productive, and produce greater decentralization of public services only competitive pressures in the economy. briefly. Also, education sector policy issues are not discussed, as the necessary analysis is xxiii. The May 1995 trade reform package still ongoing. The Report focuses on the reduces the average tariff to 15 percent with changes needed in the regulatory role of the cuts of tariffs on 4,500 items by five Government in markets and infrastructure, percentage points, on 1,050 items by ten and ways to improve public services, percentage points, and 500 items by 15-35 including greater reliance on the private percentage points. In addition, the package sector. It discusses issues in the health sector, reduces surcharges and sets out a schedule for as one example of the transition challenges in reaching a 7 percent average tariff by 2003. improving human resources and the role of the public sector. xxiv. However, the May 1995 deregulation package left agricultural trade and exports C1. Enhandcng Conpetitive Market Outcomes largely untouched. Eliminating non-tariff barriers on products such as sugar, wheat and xxi. With most future growth to come wheat-flour, and soybean processing, would from the private sector, Indonesia will require lower food prices and benefit consumers, more than a high rate of private investment. especially low income consumers, and raise It must also use investment productively. The real wages without raising industrial costs. It Government will need to provide an incentive would also reduce the high costs of framework that encourages efficient private agricultural inputs for agro-processing. enterprise by instituting policies and enforcing Finally, it would reduce distortions. For regulations that ensure greater openness to example, sugar restrictions lead to a trade, and improved domestic market misallocation of about 2 percent of rice land competition and institutions. Improved to sugar, at a cost to the rice self-sufficiency efficiency also would come from privatization program and national efficiency-Indonesian of public enterprises, particularly in rice is much closer to international competitive sectors. Greater efficiency will competitiveness than is sugar. be critical to generating the non-oil export growth needed to achieve broad-based growth xxv. Indonesian exports also are and reduce the debt burden. Broadly based regulated and controlled, especially deregulation can also help promote small and agricultural exports There are now export medium-enterprises, encourage agricultural bans on 72 specific products, and another smallholders, and produce substantial benefits 1,827 products are regulated exports, which for consumers, including low-income consumers. xxii. Deregulating International Trade. Openness to international trade helps xxxii Executive Summary can only be handled by approved exporters. Government-sanctioned industry and trade Another 105 products are supervised exports associations. that require approval, and 80 products are subject to special export taxes. By value, xxviii. There are several policy directions controls affect fully half of all non-oil exports that the Government can follow to encourage and nearly two-thirds of agricultural exports. greater domestic competition. A rules-based Such restrictions inhibit producers and rarely approach to domestic trade deregulation, as in achieve their stated objectives of raising the case of external trade deregulation, is quality, promoting efficient down-stream needed. The Government should eliminate industries, or stabilizing domestic supplies. any Government-sponsored or sanctioned They do, demonstrably, deter export growth. monopolies controlling marketing and Eliminating these export restrictions would distribution of "strategic" and other stimulate agricultural exports and raise commodities, and open the distribution smallholder incomes, especially in the outer (wholesale and retail) sector to foreign islands. investment. It can make sure that restrictions on engaging in domestic trade are minimal. xxvi. An across-the-board elimination of An ordinary business license, for instance, export restrictions is thus warranted for all rather than membership in commodity or trade commodities (except textiles, which are now associations, should be the only permit locked into Multi-Fiber Arrangement quotas, required. Domestic trade deregulation should and endangered species). In forestry, higher also follow the lowering of tariffs and the logging fees would encourage more elimination of non-tariff barriers to imports sustainable practices, raise budgetary revenues and exports. Commodity-specific taxes, and encourage more efficient wood-based provincial Government levies (retribusi) and industries. (At current rates of exploitation taxes on trade, and other trade restrictions and with today's inefficient logging and should be eliminated. The main objective of industry practices, supplies of commercially competition law should be to promote and sized logs will come into short supply by the maintain competition, to benefit consumers. year 2010 or earlier). Public contracting, including that by public enterprises, should follow regulations and xxvii. Increasing domestic competition. rules requiring competitive bidding and Significant deregulation of foreign and transparent procedures. Limits on bank domestic investment restrictions and licensing exposure to related business groups should be procedures, and the deregulation of external enforced, as scheduled. trade barriers have increased competition. However, many restrictions on domestic trade xxix. Public enterprise reform and still hinder efficiency and contribute to a high- privatization. Public enterprises lag behind cost economy: industry cartels, price their private competitors in both returns to controls, entry and exit controls, exclusive assets and quality of service. Moreover, licensing, public sector dominance, non- public enterprise performance deteriorated transparent Government bidding and between 1990 and 1994. procurement processes, and Government intervention in favor of specific firms or xxx. To improve the performance of industries. Some restrictions are imposed by public enterprises, Indonesia needs to develop the national Government, others by sub- a comprehensive program of enterprise national Governments, and still others by reform, focusing on privatization of firms operating in competitive markets. In these Executive Summary xxxiii sectors competition, particularly if increased improves the Government should prepare through the measures recommended above, the stronger state commercial banks for could ensure better service at lower cost. Too privatization. Non-bank fmancial often, the public firms end up providing an institutions (e.g., leasing, consumer- umbrella for inefficiency. Partial privatization finance, and other), whose activities are through the stock market alone is unlikely to growing very fast, need better prudential do the job. Competent private partners are regulations, particularly more disclosure' needed to manage the firms, and transparent of accurate fmancial information to and competitive procedures are required to investors. Public pension and insurance attract their entry. Finally, oversight schemes need particular attention to ensure arrangements would need improvement for that productive investments are made and enterprises that remain in the public fold. that the Government is not left with large Major steps will be appointment of unfunded liabilities. professional managers and boards, granting of greater autonomy to managers (especially * Setting the Rules for Private Market from sectoral ministry oversight and Activities. Indonesia's present lack of interventions), and instituting a performance transparent, predictable and enforceable monitoring system accountable to a single, rules for business puts it at a competitive independent body (such as a public enterprise disadvantage and, by discouraging entry board). and competition, reduces efficiency. Improving the legal environment is xxxi. Developing Efficient "Rules of the therefore a key item on the policy agenda. Game". Improvements in the rules of the The recent enactment of Company Laws game would promote sustainable, and efficient is an important step. But credit and private sector led growth. The Government security (e.g., collateral) laws also need to has a major role in these areas: the fmancial be updated, including the recognition of a sector, because market mechanisms alone wider variety of legal security, more cannot adequately protect the soundness and systematic rules for the titling, transfer, safety of the system; the environment, and mortgage of land, and a system for because of large externalities; and the legal registering and enforcing collateral. framework, where a modern enforceable Commercial arbitration and the system is needed for competitive markets to functioning of the court system also needs work. urgent attention. While initiatives are underway, business would benefit from a * Regulating the Financial Sector. few expeditious reforms-such as setting Although the legal and regulatory up specialized commercial courts, framework for the banking sector has publishing court decisions, and improving improved, more progress is necessary. arbitration laws and procedures. Rules Policies should be strengthened to recover preventing the abuse of market power overdue loans, strengthen banking would also help support market supervision, improve disclosure by institutions. To improve the functioning requiring more frequent publication of of capital markets, protection of minority audited balance sheets, reduce banks' shareholders and takeover regulations exposure to single-client groups, merge (following the new Company Law) need weaker banks with stronger ones, and to be enforced. Finally, the draft capital improve the capacity to handle bank markets law will provide a better liquidation. As their fmancial condition xtJiv Executive Summary institutional foundation for capital market xxxii. Rapid industrial growth and associated development. urbanization are beginning to overload Indonesia's infrastructure. Although capacity Managing the Environment. There is has increased substantially, further improve- strong cornplementarity between good ments are needed to sustain rising living economic policies and an effective strategy standards, international competitiveness, and for environmentally sustainable growth. equity improvements. Moreover, the Government also needs to set an appropriate regulatory/incentive xxxiii. With macroeconomic prudence framework for environmentally limiting the volume of infrastructure responsible behavior. This is because investment, increased efficiency in unregulated markets often fail to reflect infrastructure investment and operation is the environmental costs of firms' actions. essential to achieving these goals. Increased In land policies, creating a transparent private participation, under a sound regulatory land market and adequate property rights framework, would contribute to increased is essential: reforming the process of efficiency and is programmed under granting land permits to private REPELrrA Vi. The Government will continue developers, moving to market-based prices to have a major role in infrastructure, but one for state lands (including transparent that focuses less on investment and more on public auctions), adequate resettlement irnproved management of the overall policy for public land acquisition, and investment program, public and private; of the simple, focused land-use planning regulatory framework; and public activities. In forestry, higher concession infrastructure. This will entail: rationalizing fees (IHH) and better regulation over the investment program and balancing concessionaires and protection of local public/private interactions, developing a clear communities are critical to ensure and competitive regulatory framework to sustainability. Water management will maximize the benefits of private finance, and also benefit strongly from better pricing, unbundling public activities so that better use and improved river basin management. can be made of private sector participation and Urban development will require a larger investment. Another important element is role for market forces and better improved pricing of services, to recover costs, institutional arrangements (discussed finance capacity expansion, manage demand further in the infrastructure section and encourage more efficiency. To improve below). In industry, pollution control the quality of public services, the Government efforts need to be targeted and institutional needs to run public enterprises more like a capacity for monitoring and enforcement service business, responsive to consumers, strengthened. Reducing future pollution clarify institutional responsibilities within the requires focusing on environmental Government, and decentralize and increase assessments and pollution abatement for local participation. new plants. In addition to these regulatory/incentive issues, more public xxxiv. Rationalizing Investment and (and private) investment in improving the Improving Capacity Utilization. Proposed environment will be needed. infrastructure investment, public and private, is about 50 percent larger (as a percentage of C2. Managing Infrastructure Services GDP) than during REPEUTA V. Unless investment is rationalized, it is likely that the current account deficit will widen. Of course, Executive Summary xxxv proposals may not turn into actual competent to manage them, and by managing investments, particularly in the context of prudently and pricing appropriately scarce tighter world capital markets. Thus the public sector credit guarantees and contingent Government must steer a careful course liabilities. between overheating and undercapacity. To do this, it must rationalize sectoral xxxvii. "Unbundling" public sector investments on the basis of efficiency. Public functions, within a framework of more investment will need to be concentrated on competition and appropriate regulation, critical areas where private investment is could encourage efficient private likely to be low, and equity impacts high. participation and produce gains for consumers. An easy first step that would xxxv. For example, more emphasis should reduce costs would be to encourage public be put on power transmission and distribution firms to contract-out maintenance, billing, (which is the underlying cause of poor power management, construction, and other non-core delivery) rather than on generation (where services competitively. A more complicated, substantial excess capacity already exists on but eventually necessary task to improve Java-Bali). Better use of existing capacity efficiency, would be to split-up (unbundle) depends primarily on improving transmission production, transmission, and distribution in and distribution; together with more efficient power, gas, and water. This would open up management of capacity, this could permit possibilities for efficiency gains through direct about 15 percent more sales from existing competition, in addition to the indirect, generation capacity. Power generation and bidding competition for concessions. telecommunications could rely more on Unbundling would also permit firms to sell private investment, perhaps even going power, gas or water through grids directly to beyond REPELITA VI guidelines if the users. Finally, sector regulatory frameworks regulatory framework improves. Finally the will be needed. In this regard, it will be Government needs to follow through on important to separate public regulatory planned investments in underserved sectors to functions from public enterprises to prevent improve such vital services as urban water, conflicts of interest. sanitation and transport, as well as access to services in the rural areas. * Power. Currently, private firms are expected to generate and sell electricity to xxxvi. Developing a clear, competitive PLN on "take-or-pay" contracts. These regulatory framework to maximize the contracts generally have been negotiated benefits of private finance and increase with pre-selected bidders rather than being efficiency. A steady flow of private put out to open competitive bidding. In investment, at reasonable cost, will depend on light of PLN's financial position and the a switch from the negotiated deal-by-deal need to concentrate resources on approach to a clear, competitive regulatory transmission and distribution, the private framework. The first step is to define the sector should be encouraged to concessions clearly, up-front, and award them competitively bid for all new generation through transparent, competitive bidding (with plants, which will also depend on specific conditions depending on the sector). improved access to gas supplies. Private This approach has lowered costs in the firms should also be encouraged to sell Philippines and in Indonesia itself. The directly to users through the grid framework also needs to manage risks (wheeling). This would reduce the risks prudently by allocating them to parties most of excess capacity that are inherent in xxxvi Executive Sunuary take-on-pay contracts, and return some of improved financial and operational the commercial risk of projecting demand management. These measures will to the private sector. generate the resources to improve access, particularly by investment in distribution * Telecommunication. PT Telkom is being and water quality. The institutional reorganized into 7 regional companies, 5 structure needs to be revamped, with of which are entering into joint operating clearer assignment of responsibilities and ventures with competitively chosen private greater accountability for managers and operating companies, to manage regional elimination of transfers to local govern- phone systems and install 2 million phone ments. The smaller water companies need lines. PT Telkom will manage the Jakarta to be regrouped to enhance economic and Surabaya systems, installing another 3 viability and improve water basin million lines. PT INDOSAT has already management. Finally, concessions for been listed on the stock market and PT private participation should be considered, Telkom's listing is planned. In as is used in nmany parts of the world. international services, and cellular phones, PT Satelindo was given franchises and xxxviii. Pricing for efficiency and equity. Deutsche Telekom recently bought a one- Adequate pricing is critical to manage quarter interest in the company for infrastructure services better, whether private US$586 million. Important issues will be or public, and to increase access. Key to introduce further competition in all elements are smaller, better-targeted subsidies segments of the sector and to adopt a more in power, water, rail and public buses; higher structured approach to tariff issues and average water tariffs; fees for road use and sector regulation that ensure a pass- congestion; and competition to lower power through of efficiency gains to consumers. generation and, telecommunications prices over time. Poor cost recovery largely * Gas. Concessions need to be opened up subsidizes the better-off, because the poor to develop small gas fields. A better lack access to services. The resources that are pricing and regulatory framework is mobilized by better pricing could be used to needed to encourage development and expand access to services, which would expand the transmission and distribution benefit the poor. The public, including the network with private participation, in poor, are willing to pay for better access to order to make better use of this clean, quality services. However, mechanical low-cost fuel. The industry should be reliance on cost-plus pricing will reduce unbundled to form a structure of multiple efficiency and international competitiveness. producers that sell, through a transmission The basic aim is to emulate pricing in a grid, to multiple buyers. Greater private competitive market. participation, through competitive, transparent selection procedures would xxxix. Rationalizing sector management, reduce costs. reducing institutional complexity and assigning responsibilities better by * Water. To reach REPELITA VI targets, the clarifying roles, functions, and authority, companies need to be run more like especially in urban services. The current service businesses, focused on delivering fragmentation and overlap of responsibilities water. This will entail better maintenance leads to poor policies, inefficient investments, and reduction of unbilled water, higher lack of accountability, and difficulties in tariffs in most areas, better billing and private participation. In addition to separating Executive Summary xxxvii the regulatory role from other functions, the D. Improving Human Capital-Transition central Government should shed Challenges in the Health Sector implementation to lower levels of Government, public enterprises and private xli. Indonesia has made substantial operators, except as warranted by prudent progress in human resource development over management of public borrowing. Instead, it the past decades. It needs to improve its should focus on establishing policies and human resources further, as called for in sectoral frameworks, developing technical and Repelita VI, to enhance the welfare and equity financial standards and procedures, and giving of its citizens and to compete more effectively technical guidance and assistance to lower in world markets. The Report discusses the levels of Government. health sector, as one example of the transition challenges in improving human resources and Running public services as businesses, the role of the public sector. To improve responsive to consumers. Public institutions health services, the Government needs to: (a) need fewer goals, focused on the quality of re-examine public spending needs and services, and more managerial autonomy and priorities; (b) improve public service accountability, as well as more reliance on the efficiency and quality, especially with regard private sector (see above) to improve their to basic services for the poor; and (c) improve performance. Decentralization would its regulatory and enabling role with regard to improve efficiency in many cases, since most private sector provision of services. infrastructure (such as local roads, water supply, sewerage, solid waste disposal, and xlii. One key role of the Government is in flood control) yields largely local benefits. financing basic health services. The public For example, linking urban services more health system's widespread provision of local closely to revenues through user charges and health centers, clinics, and district hospitals higher property taxes/better assessments has ensured reasonable access to essential (which, other than in Jakarta, are among the services. Indonesia has also achieved success lowest in developing countries) would in providing key services such as universal improve accountability and service quality; it child immunization, micronutrient supplemen- also would generate the resources needed for tation, and family planning acceptance. service expansion. Where markets do not However, overall spending on public health is match service demands and costs effectively, still low (compared to other developing Governments need to involve users and countries). There is need for more public stakeholders in the decision-making process to spending on basic health services and improve investment efficiency. complementary inputs such as adequate investment in safe water and sanitation, to provide a minimum desirable level and quality of essential services, especially focused on the poor. xliii. Although the Government has expanded public health services and health personnel substantially, the utilization of public health services (e.g., average visit rates xxaviii Executive Summary at health centers) remains low. The use of spend more on health, to assure an health services by the poor is also low, and improved level and quality of services and appears to have dropped between 1987 and complementary inputs (e.g., safe water 1992, according to SUSENAS data. One factor and sanitation). The Government is aware in low utilization and demand for services of these needs, and intends to raise appears to be related to the low quality of spending progressively. existing health services. There are indications of nurses with inadequate training, of * Improve health services for the poor, by perfunctory physical examinations, of being more responsive to local needs, and inconsistent diagnoses and prescriptions, and increasing spending on health centers and of poor client practices. More attention is clinics that are most effective in reaching thus needed on improving the quality of public the poor. Providing free health care cards health services, differentiated by area-specific to the poor may not be enough; better health conditions, and focused on poor incentives for health personnel to treat the households and regions. poor are also needed. xliv. A third key area for improvement is * Improve the quality and efficiency of the Government's regulatory and enabling role basic public services, by improving the in improving private health services. management of front-line health facilities, Purchases of medicines are a large part of providing them with more resources, household expenses for health, and diseases changing staff incentives, establishing that are easily treatable with medicines often quality assurance programs, and go untreated because costs are too high and encouraging more community outreach public supplies and dispensing practices are programs. In regard to health staffing, poor. The private pharmaceutical producers policies should be geared to meeting local appear to enjoy high rates of protection and to needs and demands, with more authority lack competition. Private medical services, given to local governments and public which are growing rapidly, also appear to be facility managers responsible for district of low quality. The Government has an services. Adequate staffing of remote and important role in raising the quality of health rural facilities will need attention, as will manpower by establishing better training, entry requirements, selection and training accreditation and standards. of bidan desa (village midwives). xlv. With improvements in the above * Improve supplies of medicine to public areas, it should be possible for Indonesia to facilities, and institute better dispensing make further substantial progress in practices; continue to deregulate the improving health outcomes. The Report pharmaceutical trade to lower costs of recommends that the Government: medicines. * Increase public health spending, focused * Encourage private medical practice and on essential health services and the improved standards by allowing and poor. Public spending on health is low encouraging non-profit organizations to (about 0.7 percent of GDP, compared to deliver public health services; 2.0 percent of GDP in all developing encouraging private rather than countries). The Government needs to Government-provided health insurance; improving the existing mechanisms of assessments of medical schools, Executive Sumnmary xrxix curriculum reviews and student xlviii. Despite the rising importance of the examinations to raise the quality of private sector in Indonesia's external medical personnel; and preparing financing, official assistance will continue to appropriately to deregulate private health play several strategic roles. First, official services to permit the entry of foreign assistance is the concrete means by which medical practitioners and health foreign Governments and external agencies management professionals into medical signal their support for Indonesia's practice. development policies. Second, the availability of adequate amounts of assistance ensures an E. External Financing and Foreign orderly transition to more diversified sources Assistance of financing. Third, it ensures adequate provision of financing for those areas of xlvi. Indonesia's external financing needs development that are not of interest to the over the medium-term can be met provided private sector, for example, human resource key policy steps as outlined in the preceding development and some areas of public sections are taken by the Government on a infrastructure. Finally, the term and risk timely basis. Gross financing requirements diversification associated with official would expand appreciably in 1995/96, owing assistance improves the structure of external to higher investment by the private sector (the finance; it also helps to maintain Indonesia's associated imports widen the current account access to international capital markets and deficit), rising interest and principal improves the country's attractiveness as a repayments, (related in part to cross-currency destination for foreign direct investment. movements). In addition, recent volatility in international currency markets suggests that it xlix. On the basis of the projections would be desirable to build-up reserves in presented in Chapter 1, and the availability of FY1995/96. Increased financing would come sound projects, commitments of financing largely from the private sector, that is, higher assistance (including grants) from Indonesia's foreign direct investment and associated Consultative Group (CGI) similar to last private lending. year's US$5.2 billion would be desirable. After allowance for the existing pipeline of xlvii. Over the medium-term, the current assistance, this would result in disbursements account would tend to narrow as a percentage of over US$4 billion, including grants. The of GDP, reflecting steps to avoid overheating, rest of the rise in financing needs in but repayment of debt would increase and FY1995/96 would be met by disbursements international reserves would continue to be from other sources. accumulated at a prudent pace. Consequently, total financing needs would continue to rise, 1. As recognized by both the by roughly US$2 billion per year. This Indonesian Government and donors at the CGI medium-term rise in financing needs would be Meeting of July 1994, Indonesia's priority met entirely by the private sector (that is, by needs favor a composition of this assistance foreign direct investment, medium-and long- that emphasizes human resource development, term lending and short-term trade related poverty reduction and the provision of inflows). Disbursements of official assistance physical infrastructure that eliminates would remain approximately unchanged, bottlenecks to private sector. Developments while public borrowing from private sources since last year's CGI Meeting have would increase only slightly. underscored the interest of the private sector in significantly increasing its financing of xl Executive Sumnary development of Indonesia's infrastructure. for new assistance are human resources Accordingly, the priority areas development, poverty reduction, protection of the environment, and the provision of physical infrastructure complementary to activities of the private sector. Macroeconomic Developments and Policies 1 MACROECONOMIC DEVELOPMENTS AND POLICIES A. Overview 1.1 Indonesia has a solid track-record of US$1.5 billion as a result of rapid import macroeconomic management. During the past growth, although the overall deficit on current two decades incomes have risen appreciably; account widened only slightly owing to strong the incidence of poverty has fallen oil receipts. significantly; the Government has dealt successfully with a broad range of 1.4 To contain these strains, monetary macroeconomic difficulties; and the strong policy tightened towards the middle of growth of recent years has raised Indonesia 1994-principally by following rising into the category of Lower Middle-Income international interest rates. Initially, Bank Countries.' These results are all the more Indonesia lagged behind the rise in impressive given the country's large, diverse international rates, which combined with other population and its late start in development. factors to produce large capital outflows from However, as the Government is aware-and February to May of 1994. By contrast, intends to achieve-much more is possible. interest rate adjustment by the Central Bank Continued prudent macroeconomic was very prompt later in the year. Similarly, management, the subject of this Chapter, is a fallout from the end-1994 Mexican crisis was pre-condition for such progress. well-managed, with only a small capital oufflow taking place in early 1995. For its 1.2 Following a cooling-off period in 1992 part, fiscal policy was budgeted to be tight in and early 1993, all major sectors of the FY1994/95, and the estimated outturn appears economy (excluding agriculture) have expanded to be a very modest overall surplus, which rapidly. In 1994, GDP grew by 7.3%, represents about half a percentage point of according to the new, rebased National GDP improvement over the previous year's Accounts (see Annex I). Growth was led by outcome. The Budget for FY1995/96 is less construction and domestically-oriented contractionary, largely reflecting the income manufacturing. Agriculture suffered a second, tax cuts announced last September. consecutive year of weakness, on this occasion stemming from a severe dry season. 1.5 Medium-term prospects for the Indonesian economy are excellent, provided 1.3 However, the successes of last year policies are tightened and measures are taken to were tarnished by emerging signs of improve efficiency (see Chapters 2-4). The inflationary pressure in 1994 and early 1995. May 1995 deregulation package represents a In 1994 inflation was near 10% for the second major step in this direction; it reduces tariffs consecutive year and in the first four months of substantially up-front, and sets a rules-based 1995, it was 4.8 %. The pattern of price program for reaching a low, fairly uniform increases suggests that inflationary pressures multilateral tariff by 2003. With this package, were partly a consequence of continued strong Indonesia continues progress toward open demand growth. Also, real wages have been markets in trade and investment, following up rising rapidly, an indicator of widening on last year's PP-20, which significantly inflationary pressures. In addition, the non-oil reduced barriers to foreign investment, and its trade balance deteriorated by almost hosting of the APEC meeting at Bogor. 2 Chapter 1 1.6 Sustained economic growth of around public infrastructure services. In addition, 7 % per annum should allow per capita incomes extra tightening will be needed to offset higher to reach US$1,000 before the turn of the debt servicing costs resulting from recent century, generating the rapid employment and cross-currency movements; privatization income growth that is vital to reducing poverty. receipts and any other exceptional increases in Concurrently, non-oil exports would continue revenues should be used to pre-pay public debt. to expand at a healthy pace and other key macroeconomic indicators would strengthen. 1.9 To complement fiscal policy, monetary However, to attain these outcomes, it will be policy will likely need to be tightened further necessary for the Government to: (a) maintain (see below). Deregulation policy should macroeconomic stability, especially in the light intensify, to keep pace with Indonesia's of possible overheating; (b) maintain investor international peers and to avoid losing the confidence (including by strengthening and leadership established by PP-20, the APEC adding depth to the financial system); and, (c) Declaration of Bogor, and the May 1995 manage external debt prudently. package. Furthermore, the Government needs to proceed cautiously with increases in 1.7 Policies to Maintain Macro minimum wages. Wages are only one of many Fundamentals and Avoid Overheating. After costs of doing business, but the impact of rapid two years of strong growth, some signs of increases in legislated minimum wages on overheating seem to be re-emerging. To be labor-intensive industry will be counter- sure, caution in international markets following productive if the resultant cost increases cannot the Mexico crisis may provide a brake on be offset by productivity growth. activity. Nevertheless, the non-agricultural sector is currently booming; inflation and 1.10 Policies for Maintaining Confidence. import growth are already high; and some Continued sound macroeconomic policies are supply bottlenecks are being encountered. the foundation for investor confidence and Tighter policies would also help to contain future growth, as reflected in Standard & demand pressures from the anticipated major Poor's recent upgrade of Indonesia's rating to rise in foreign investment and spending on BBB status. However, large amounts of short- infrastructure. term external debt (20% of the total) make Indonesia vulnerable to sudden adverse shifts in 1.8 Fiscal policy should take the lead in investors' portfolio preferences. Indonesia containing any tendency towards overheating; managed well through the year-end Mexican monetary policy should provide support and peso crisis, but international markets remain aim at a healthy rise in official international turbulent and are nervous about developments reserves. However, the Budget for FY1995/96 such as the early-1995 appreciation of the yen. is somewhat looser than the FY1994/95 One immediate implication is that governments Budget, owing to the income tax cuts now have significantly less margin for error is announced last September and rapid expansion setting their financial policies. Another is that in routine spending. In this context, it will be international investors are more concerned over important for the Government to tighten in both the size of borrowings and the quality of those fiscal areas where it still has flexibility, the resulting investment in terms of generating for example: maintenance of strict control over a stream of debt service (see Box 1. 1). off-budget spending; improved tax administration; higher non-tax revenues; 1.11 As protection in this regard, the increasing forestry (IHH), luxury, excise and Government needs to further strengthen its urban property taxes; and efficient pricing of international reserves; closely follow Macroeconomic Developments and Policies 3 Box 1.1: Lessons from Mexico's Peso Woes As 1994 drew to a close, investors sharply accelerated their pullout from Mexico, which brought on a severe payments crisis. In one week alone, the peso lost 40% of its value against the dollar. A definitive post-mortem is unlikely to be available for some time, but lessons are emerging: * Prudence in fundamentals matters. In hindsight, the crisis may have been inevitable. Mexico ran very large current account deficits (about 7 to 8% of GDP over 3 years); much of the off-setting capital inflows financed consumer spending; and economic growth was low. Mexico's commitment to a nominal exchange rate target-adopted as an anti-inflationary device-led to a large overvaluation of the peso. Inflation was brought down, but at the cost of unsustainable current account deficits, which widened from US$6 billion in 1990 to US$25 billion in 1994. Finally, in the run-up to the 1994 election, fiscal and monetary policy loosened. * Short-term debt raises vulnerability. To make matters worse, much of Mexico's financing was short-term, eg, by replacing peso bonds with dollar-indexed bonds (tesobonos) in early 1994, as the Mexican Government attempted to hold down borrowing costs. But short-term capital can (and will) flee at short notice, in rational response to uncertainty, stemming perhaps from bad luck, shocks or imperfect information (such as that on the Central Bank's level of official reserves). Short-term capital is also particularly susceptible to contagion effects and "herd behavior", which heightens the potential for instability. * Foreign funds must be used productively. Much of the increase in Mexico's external borrowing financed a surge in consumer spending, not internationally competitive investments. As a result, economic growth was low and falling, and there was little additional output to service the rise in debt. * Social-governance issues are important. Investor confidence was further undermined by social and political discontent at the grassroots level, as reflected in the Chiapas uprising and the assassinations of key political figures during the run-up to Presidential elections. These signalled a failure on the part of the Government to meet basic social needs, especially in the poorer, rural regions. * Restoring confidence requires large reserves and credible policies. To sustain investor confidence, large reserves are not sufficient. In the case of Mexico, early 1994 provided an early warning when capital outflows accelerated in the wake of a rise in US interest rates and internal political uncertainties. But instead of tightening monetary and fiscal policy, the Government used foreign reserves to defend the peso. As a result, reserves plummeted, from over US$26 billion to less than $5 billion by year end, further damaging investor confidence. * Prudent debt management is vital. Much of Mexico's borrowing was private and did not appear in the official budget statistics. In part, this was driven by the eagerness of foreign portfolio investors to lend; but from the country's perspective, the important issue is the sustainability rather than the availability of financing. Strict supervision of all public and quasi-public borrowing, and raising the costs of moving "hot money" (for example, by widening exchange rate bands) would have helped to curb excessive reliance on short-term borrowing. * Financial systems must be strong. Many of the smaller banks had weak portfolios; these put upward pressure on interest rates and contributed to loss of investor confidence. In the aftermath of Mexico's problems, international lenders may maintain a lower exposure to developing countries for some time. They will also be scrutinizing borrowers' policies more closely-and especially the policies of other large debtors. movements in international interest rates; avoid 1.12 Despite significant progress in 1994, any expansion in liquidity from domestic the domestic banking sector remains a concern. sources; and counter any sudden adverse shifts The Government will need to persist with in sentiment by tightening policy aggressively. recovering overdue loans, strengthening 4 Chapter 1 banking supervision, reducing banks' exposures 1.14 In the medium-term, reliance upon to single-client groups or risky sectors, foreign savings (that is, the deficit on current merging banks, privatizing the state banks, and account of the balance of payments) needs to developing a capacity to liquidate banks. be reduced to around 2% of GDP. With few Prudent development of the growing non-bank direct instruments to raise private savings, sector, including improved regulation, would increased public resource mobilization, through also be helpful in deepening financial fiscal measures noted above, will be a key. intermediation. Finally, strong deregulation (Chapter 2) and development of a clear, 1.15 The other vital policy objective in this competitive regulatory framework for private area is to ensure that domestic and foreign infrastructure (Chapter 3) will ensure savings are used to maintain the growth of non- productive use of investment funds. oil exports. As noted, this entails continuing trade policy deregulation, which enforces the 1.13 Policies to Manage External Debt. discipline of the international marketplace, and The nation's large external debt remains a putting in place a clear, competitive regulatory major constraint on economic development. framework for infrastructure. Preliminary indicators suggest that currency re- alignments in 1994 and early 1995 further 1.16 In addition, the Government needs to inflated external debt substantially. To manage continue its practice of avoiding public this burden and to improve the country's guarantees of private debt. The Government creditworthiness, the Government needs to should re-assert, at every opportunity, that it persist with careful macroeconomic maintains a strict dichotomy between its own management to hold down its borrowing liabilities and those taken on by the private requirements. Additional steps would also be sector. helpful. For instance, the Commercial Offshore Loan Team, COLT, should be 1.17 The remainder of this Chapter reviews strengthened and ceilings should limit public macroeconomic developments and policies in and quasi-public external borrowing to prudent 1994, and provides some suggestions for levels over the next few years, including off- continued success. Recent economic balance sheet liabilities, such as guarantees. developments are reviewed in Section B; Also, commercial lines of credit should be set monetary and fiscal policy are studied in aside to protect against external shocks, not Section C; and there is a brief discussion of used for off-budget financing. Moreover, there External Risks in Section D. Section E is further scope for pre-paying and re-financing outlines the medium-term prospects for the expensive external debt. Finally, public economy, including an estimate of external enterprise borrowing on the domestic capital financing needs for the comning year. The market needs closer surveillance. Chapter closes with Section F, which summarizes priority items on the macroeconomic agenda. B. Recent Economic Developments Domestic Developments: Growth, Inflation pace of expansion, of 7.3% (see Annex I). and Wages The non-agriculture economy expanded even more rapidly (by 8.9%), which appears to be 1.18 Continued Strong GDP Growth. In markedly above the two previous years. 1994, the overall economy maintained a rapid Among the various sectors, construction grew Macroeconomic Developments and Policies 5 by nearly 15%, which marks several fixed investment which rose by 12.6%. consecutive years of double digit growth (see Private consumption rose by 5.8% while Box 1.2). Manufacturing, the other booming exports of goods and services expanded by sector, also continued to expand at a double only 7.3%, largely indicative of the weakness digit pace led by domestically-oriented in non-oil exports in the first quarter of production (e.g., automobile production which calendar year 1994 (see Box 1.3). Reflecting was up about 50%) and some exports (e.g., the strength of domestic activity, imports of electronic goods and tourism). Among other goods and services soared by 13.3% in real sectors of the economy, strength was fairly terms. widespread, encompassing mining and quarrying (principally coal, nickel and tin), 1.20 Inflation: Remains Near 10%. For utilities, and virtually all private services. The the second consecutive year, consumer prices only significant weakness was in agriculture, rose by nearly 10% (measured on a December- where the severe dry season in much of Java over-December basis). Food prices, which and Sumatra caused rice production to drop by increased by almost 15% during the year approximately 4%; agriculture as a whole (versus 5.1% during 1993), accounted for a barely increased, apparently by even less than substantial portion the inflation. Within food, in 1993 when growth was held down by the largest contributor was rice prices which extensive floods. increased by more than 20%, owing to the drought noted earlier. Rice prices surged 1.19 On the expenditure side of the national despite large drawdowns of Bulog's buffer accounts, much of real growth in 1994 was stocks and imports of roughly 500,000 tons of accounted for by domestic demand, particularly rice towards the end of the year. Some Figure 1.1: Tmnds of Inflktion: Consumnr Price Index (12-month pscmr nhe) J M M J 8 N J M M J O N J M M J 8 N J MU MJ 8 N J M el 92 es 94 e5 Trends of Infhn: Traded s Trsnds of flWton: Adrnistered and Non-Tlrded Consumer Pda Non-Adminstmd Consunor Price (12-month pw_~ dngp) (1 2-mnth p ntege oh-nge) 4% 0$~~~~~~~~~~~~~~~1% 4 .4 . . .. 94 - Serom: DPL : on. 6 Chapter 1 Table 1.1 Indonesia: Summary of Principal Macroeconomic Indicators Average Average Average 1973-82 1983-85 1986-88 1989 1990 1991 1992 1993 1994 Domestic Outcomes (% p.a. except where noted)2 GDP 7.5 6.0 5.4 7.5 7.2 6.9 6.4 6.5 7.36 Non-oil GDP 4.1 5.3 6.6 8.2 7.6 6.5 8.4 7.8 7.86 Non-agric. GDP 8.4 4.7 6.2 8.6 8.6 8.2 6.4 7.6 8.96 Inflation (CPI) 18.2 9.0 8.6 6.5 7.4 9.2 7.5 10.2 9.6 Gross Fixed Inv. (% real GDP) n.a. 23.4 24.3 26.5 28.4 28.3 27.9 26.36 27.66 External Sector ($ billion, except where noted) Oil & Gas Exports 2 9.9 15.0 8.2 8.7 11.1 10.9 10.7 9.7 9.7 Oil price ($/bbl., avg OPEC price)418.7 27.9 15.0 18.2 20.2 16.8 15.9 14.4 13.9 Non-oil & Gas Exports 2 3.5 5.6 8.9 13.5 14.6 18.2 23.3 27.1 30.4 Curr.Acct.(FY, % of GDP)' 26 -1.7 -3.4 -3.8 -1.6 -3.2 -3.3 -1.8 -1.8 -1.9 Net Official Reserves (FY, end period)n.a. 5.8 5.3 5.7 9.6 10.5 12.0 12.7 13.3 Net Foreign Assets of Bank Indonesia (end period; Rp. trillions) n.a. 8.5 10.6 10.8 17.1 24.4 33.8 38.8 37.3 Policy Variables (% p.a. except where noted) Broad Money Growth ' 31.9 27.9 23.4 38.5 45.3 17.0 20.2 22.2 19.7 Fiscal Balance (FY, % GDP)46 n.a. -2.4 -2.9 -0.2 1.9 -0.3 -1.3 -0.6 -0.1 Govt. Expend. (FY, % GDP)46 n.a. 20.8 18.7 18.3 17.5 16.9 17.4 17.1 16.1 Deprec.in Real Exch. Rate 3 n.a. 2.9 15.9 1.4 2.0 2.3 3.8 -2.9 3.2 Chg. Ext. Pub. Dbt.($ bit.)5 1.4 2.8 4.3 -0.2 3.9 3.7 0.7 3.0 4.04 Sources: ' BI; 2 BPS; I IMF, Inter. Fin. Stat.; 4 World Bank staff estimate; 5 World Debt Tables. 6 Based on new re-based National Accounts, which are only available publicly for 1993 and 1994; see Annex I. estimates indicate that allowing private imports Figure 1.1). During the first four months of would have dampened the impact of the 1995, consumer prices increased by 4.8%. drought on consumer prices, despite higher international rice prices (see Chapter 2). 1.22 Two important categories of the CPI Among other food prices, soaring international are of particular note. First, the "core prices pushed up the prices of other inflation" category of non-food, non-energy commodities that are consumed locally. For was 8.1 % during 1994, with the bulk of the instance, international prices of coffee and increase coming after mid-year. Second, crude palm oil (which is widely used in housing prices increased at an annual rate of cooking oil) rose by roughly 100% and 40% more than 13% during the second half of the respectively during the first half of the year. year, reflecting movements in land prices in Jakarta, capacity constraints in the cement 1.21 Although these special factors are industry and rising real wages (see immediately important, there are also signs that domestic below). Also, an element of indexation was overheating began to appear in 1994 and early built into electricity prices last October, when 1995. For example, virtually all major the Government announced its intention to breakdowns of the consumer price index (CPI) increase electricity tariffs every three months in accelerated during the second half of the year line with developments in fuel prices, depre- and were approaching 10% by year-end (see ciation of the rupiah and the country's Macroeconomic Developments and Policies 7 inflation rate. The increase is subject to Manufacturlng, 1992-1994 approval by the President of the Republic. 40 1.23 Real Wages on the Rise. Reliable wage data are in short supply in Indonesia. 0 E However, such information as does exist suggests that real wages have increased significantly in recent years (see Figure 1.2). ,Q 20 w Following several years in the 1 980s when real wages remained virtually unchanged, real Femde la earnings in manufacturing are estimated to have 0 10 - mtrnn /b jumped in 1990 and to have climbed fairly FE steadily upwards since then. U X 4 U U ? U U 0 S1 S2 U U4 Ia is" b puUy abfm 08mn. )A Avimp of mgod ndiina wgm. Soure: CBS. Box 1.2: Jakarta's Property Sector Boom During the past few years, Jakarta and much of West Java have experienced a major property boom. Developers are putting up integrated residential zones (complete with their own luxury hotels, schools, hospitals and recreational facilities) at a rapid pace all around the city. On the north Jakarta waterfront, plans are in place to eventually reclaim some 6,000 hectares. Further afield, recreational resorts are springing-up from the mountains in the south, to the beaches in the west and towards the national park in the southwest. Most striking are the high-rise apartment buildings, which were an oddity in Jakarta even five years ago; today, they are mushrooming across the city's skyline. Demand for the apartments has been strong, much of it financed by a rapid rise in credit from the banking system (see para 1.43 of the main text). Buyers may be gambling on a large capital gain; although the evidence is mixed, as of today many of the new units appear to remain unoccupied. There are many reasons why investors are betting on large capital gains. At the most basic level, the price of land on a small, crowded island like Java is likely to go up rapidly during periods of strong economic expansion. Also, real estate prices in choice areas are judged to have doubled every few years during the past decade. Moreover, the recently introduced "strata titles" have contributed to increased demand, and foreigners may be permitted to purchase in due course. Nonetheless, the 1994 pace of expansion looks excessive, and activity in the volatile property sector would be one of the first to feel the impact of a slump in overall economic activity, of higher interest rates, or of supply bottlenecks. Recognizing the potential dangers, the Government has already taken some actions. For example, the 1995 Budget levied a 5% capital gains tax on certain land transactions and a 10% tax on luxury residences; targets for overall credit expansion have been lowered for the coming year; and the Central Bank is monitoring sectoral credit more closely. These measures may be sufficient to keep growth in this sector running at a sustainable pace, but the Government will need to continue to monitor the situation carefully to judge whether further measures are needed. 8 Chapter 1 Table 1.2: Indonesia: Balance of Payments, 1985/86-1994/95 1985/86 1990/91 1992/93 1993/94 1994/95 (in billions of US dollars) Gross merchandise exports 18.8 28.1 35.3 36.5 42.0 Oil & LNG 12.8 12.7 10.4 9.4 10.3 Non-oil 6.0 15.4 24.8 27.2 31.7 Gross imports (cif) -14.1 -25.8 -30.2 -32.3 -38.2 Oil and LNG -2.9 -4.2 -3.8 -4.2 -4.1 Non-oil -11.2 -21.6 -26.4 -28.1 -34.0 Trade Balance 4.8 2.3 5.1 4.2 3.9 Net Non-Factor Services -2.4 -0.5 -1.4 -1.2 -0.9 MLT Interest Payments -2.2 -3.4 -3.7 -4.1 -4.2 Other Factor Services and Transfers -1.9 -2.0 -2.5 -1.9 -2.3 Current Account Balance -1.7 -3.7 -2.6 -2.9 -3.5 Oil/LNG current account 6.2 6.0 4.1 2.7 3.5 Non-oil/LNG current account -8.0 -9.7 -6.6 -5.7 -7.0 Capital Account Balance 1.9 9.0 7.3 3.2 2.1 Net Disbursements of Public MLT Debt 1.2 0.6 2.5 1.2 0.8 Disbursements 4.0 5.2 7.7 6.8 6.9 Amortization -2.8 -4.6 -5.2 -5.7 -6.2 a Direct Foreign Investment 0.2 1.4 1.7 2.0 2.5 Other Capital (net) 0.5 7.0 3.1 0.0 -1.2 Change in Net Foreign Assets (- = increase) -0.1 -5.2 4.8 -0.3 1.4 Memo items: Official Reserves 5.8 9.6 12.0 12.7 13.3 Net Official Reserves (in months of imports) 4.9 4.4 4.8 4.7 4.2 Total BI NFA (in months ot imports) 6.2 5.2 7.3 6.9 5.4 Current Account/GDP (%) -2.0 -3.2 -1.8 -1.8 -1.9 Non-Interest Current Account/GNP (%) b 0.9 0.2 1.4 1.3 1.2 MLT Debt Service/Exports (%) b 25.9 29.3 28.9 31.3 29.3 a Includes debt prepayment with receipts from Indosat privatization. b Based on new National Accounts (see Annex I). Source: Bank Indonesia, BPS and World Bank staff estimates. 1.24 In 1994, minimum wages also Ministry of Manpower issued a decree making increased markedly: by 40% in January for it compulsory for all private and state Jakarta and West Java; and by 15-50% in April companies to pay an annual bonus equivalent to for 16 other provinces, including East Java, one month's basic salary plus fixed allowances, Bali, Kalimantan, Sulawesi and parts of in advance of particular religious holidays. Sumatra. In the remaining nine provinces (including Aceh and North Sumatra), the daily External Developments: Balance of Payments minimum wage was raised by 21%-38% with effect from early August. Effective April 1, 1.25 In 1994/95, the current account deficit 1995 the Governent increased minmum remain roughly unchanged as a percentage of wages by a further 10-35%. In a related GDP. However, this outcome conceals some development, in September of 1994 the diverse movements. Non-oil imports grew Macroeconomic Developments and Policies 9 Figure 1.3: Quarterly Non-Oil Trade, 1988-1994 (US$ billions) 10 8 8. ~ ~~~~Non-i Imors L 4 - ,NnOI Exponts 2 Non-OIl Trade Balance -2 1 1 'L 'am 1988 1989 1990 1991 1992 1993 1994 1995 Source: BPS. Data on customs basis. considerably faster than envisaged in markedly in subsequent quarters. For 1994/95 REPELITA VI, but this was partly offset by as a whole, nominal growth reached 16.7% (or strong oil receipts. Non-oil exports rose in 5.2% in real terms; see Table 1.3), fully in line with the REPELITA VI expectation of line with the target of REPELITA VI. Like 16.8%. many recent years, manufacturing exports were the strongest category, although strength was 1.26 Non-oil Merchandise Trade. Non-oil somewhat more balanced among major exports have been the driving force behind components in 1994 (see Box 1.4). This is an Indonesia's growth of the past several years, encouraging indication of diversification that is averaging 21% per annum in value terms serving to offset the weakness in textiles & between 1985 and 1993 (see Table 1.3). garments and plywood. Indonesia's continued However, in the first months of calendar year success in this regard will largely depend upon 1994 their level dropped-off sharply in nominal maintaining price competitiveness in world terms, causing the quarterly trade balance to markets; making the most of Indonesia's slip back into deficit for the first time in abundant human resources; improving supply several quarters (see Figure 1.3). Much of this capacity (especially as regards infrastructure); decline in the early months of 1994 was and sustaining momentum in the policy of accounted for by a drop-off in textiles & deregulation (see Dasgupta et. al.). As a garments and plywood, which is discussed in longer-term strategy for maintaining growth in Box 1.3. Although growth picked-up non-oil exports, Indonesia should be looking to subsequently, the episode prompted legitimate follow the successes of countries such as concern that Indonesia's non-oil export drive Malaysia and Thailand. Attempts to force the was stalling, one important factor that pace at which Indonesia is climbing the motivated the deregulation packages of May technology ladder would probably constitute a and June 1994 (see Chapter 2). costly mistake. 1.27 After this hesitant start to calendar year 1994, growth of non-oil exports picked-up 10 Chapter 1 Box 1.3: The Slump in Non-oil Exports in Early 1994 Despite Indonesia's success in export diversification during the past decade, the country continues to be fairly reliant upon the fortunes of a relatively narrow range of products. Especially noteworthy are textiles & garments and plywood, which taken together account for almost 40% of non-oil exports in recent years (see accompanying&Table). But as 1993 drew to a close, exports of both these industries slumped and the situation tendedf to deteriorate into 1994, prompting concern that Indonesia's non-oil export drive had stalled. The experience also raised structural issues surrounding the prospects for continued growth in these sectors. The non-oil drive subsequently rebounded (see Box 1.4), but understanding the reasons for this slump are important for assessing the implications for Indonesia's economic outlook. Indonesia: Exports of Selected Commodities 1993 1994 Ql Q2 Q3 Q4 Q] Q2 Q3 (in millions of US dollars) Total Non-oil Exports 6.40 6.57 6.83 7.30 6.30 7.60 8.10 Manufacturing: 5.50 5.60 5.70 6.10 5.40 6.50 6.70 of which Textile & Garments 1.60 1.60 1.50 1.40 1.10 1.60 1.51 Volume a 153 154 193 100 160 194 185 Price 10.46 10.39 7.77 14.00 6.88 8.25 8.16 Plywood 0.80 1.20 1.20 1.00 1.10 0.90 0.89 Volume ' 1.40 1.59 1.51 1.30 1.50 1.40 1.20 Price 571 755 795 769 733 643 742 ' In thousands of tons. Source: BPS. Data on a customs basis. Textiles & garments have been one of Indonesia's great success stories. According to official statistics, exports increased by a factor of ten during the seven years ending 1992; profitability was high owing to the combination of rising export prices, indonesia's low-cost labor and deregulation policy. This is an impressive record, although the numbers may be inflated by attempts to take advantage of a subsidized export scheme (WESEL EKSPOR), which was active until May 1993. But change was in the wind in the early 1990s. New investment in the textiles & garments industry appears to have peaked in 1991 and export prices flattened out in 1992 and 1993 before dropping off sharply in 1994. Adding to the industry's troubles, in mid-1992 a duty-drawback scheme was chanped in a way that increased the administrative costs to producers (the process now applies to individual import shipments rather than a consolidated application at end-of-period). Add to these, sharply higher minimum wages since 1990 plus competition from new low-cost producers (for example, China, India and Viet Nam), and the economic fundamentals for a slowdown look to be in place. Moreover, the image of the industry in Indonesia was damaged in 1994 by controversy surrounding a failed textile factory im Central Java. Despite these various pressures, the volume of textile & garment exports held up reasonably well during the recent slump. In the first three quarters of 1994, volumes were up by a healthy 13% relative to the same period a year earlier. However, the value of exports was down about 10%, owing to a drop of almost 20% in export prices. As regards plywood, exports flattened-out in the third quarter of 1993, before declining sharply in the first half of 1994. As reported by the Central Statistics Bureau, this decline was due to aTdrop-off both in volume and prices through mid-1994. These declines apparently stem from various sources, including marketing strains that developed among both suppliers and uyers in 1994. Among the suppliers, there have been accusations of dum ing, and Indonesia's system of marketing has come under increasing fire. On the side of the buyers =iy Jpan and Korea), construction growth appears to have slowed (at least prior to the Kobe earthquake an there seems to have been substitution away from Indonesian sourcing, to Brazil, Malaysia, China and Russia. Other long-term structural factors, such as sustainability, are beginning to constrain Indonesia's plywood industry. continued ... Macroeconomic Developments and Policies 11 continuation from Box 1.3 What lessons are to be learned from the early-1994 downturn? There are solid economic policies that can assist these sectors to grow at a more sustainable pace. First, the slow-moving bureaucratic systems for allocation of quotas and BAPEKSTA are long-standing complaints among garment & textile producers. Second, lower duties on inputs would raise exports and obviate the need for BAPEKSTA. By contrast, textile & garments exports would suffer from increased up-stream protection of the petro-chemicals industry, which would drive-up the cost of synthetic fibre. Third, forestry exports will suffer from overcutting, and projected pulp and paper plants will only accelerate that process; unless cutting is reduced to a sustainable level, forestry-based exports will fall sharply within the next ten years. On the other hand, with sustainable forestry management, exports would drop-off in the short-run (by roughly US$300 million) but eventually rise again, albeit gradually. From a longer-term perspective, there needs to be broader recognition that the heady years of 25 to 30% non-oil export growth are probably over. Growth at a more modest pace, say 15 to 20% per annum (as laid out in REPELITA VI), would be more sustainable and adequate for progress towards national goals, provided imports increase a bit slower. 1.28 The growth in non-oil imports in by more than 35% in nominal terms. An extra 1994/95 reflected the booming domestic boost was provided by completion of the economy and weakness in the agricultural Chandra Asri petro-chemicals project, which sector. Following two years of weakness when accounted for roughly US$1/4 billion in growth averaged just over 8% per annum in imports last year. nominal terms, it jumped to 21 %in 1994/95; roughly half of this acceleration reflected 1.29 Oil/LNG. Indonesia is the third oldest larger volumes (see Table 1.3). The oil producer in the world (after the United composition of non-oil imports is indicative of States and Russia). However, the relative the breadth of the strength of the booming importance of this sector peaked in the early economy; all major categories increased 1980s. Oil export earnings have declined as rapidly, although the increase was pronounced domestic consumption has risen while in the case of consumer goods (especially food production has been virtually stagnant. and automobile components), which increased Declining oil exports have been partly off-set Table 1.3: Indonesia: Non-Oil Merchandise Trade Real Growth Rates (% Per annum) Current Value (in Billions of USS) 1990/91 to 1992/93 to 1993/94 to 1985/86 1990/91 1993/94 1994/95 1992/93 1993/94 1994/95 Non-oil Exports 6.0 15.4 27.2 31.7 30.4 12.1 5.2 Agriculture 2.9 3.8 5.0 6.1 13.2 9.2 5.8 Metals & Minerals 0.8 2.9 4.8 5.3 48.7 -7.0 2.2 Manufactures 2.3 8.6 17.4 20.3 30.5 11.4 12.3 Non-oil Imports 11.2 21.6 28.1 34.0 15.0 11.3 17.5 Consumer goods 1.2 1.0 1.8 2.5 34.4 10.0 35.6 Intermediate goods 14.6 10.4 13.8 17.1 16.6 10.8 20.4 Capital goods 5.4 10.3 12.6 14.4 11.2 12.1 11.7 Source: Bank Indonesia and World Bank staff estimates. 12 Chapter 1 Box 1.4: Indonesia's Stars of Non-oil Exports in 1994 Despite the downturn in some key products in early 1994 (see Box 1.3), non-oil exports recorded respectable growth of more than 12 % in 1994. Certain characteristics of this growth are important. For example, in contrast to several previous years when manufactures led the growth in non-oil exports, the growth in 1994 was more balanced among the major components, including agriculture and metals & minerals, which taken together still account for approximately 15% of total non-oil exports. The commodity price boom of 1994 gave a strong boost to several agricultural exports. Export prices for coffee and cocoa surged by 163% and 29% respectively, while shrimp and pepper prices jumped, too. Mining exports also expanded rapidly, especially coal and copper, the two main products in this area, but the increase stemmed mainly from higher volumes. Indonesia: Selected Non-oil Exports 1993 - 1994 Value Volume 1993 1994 % change 1993 1994 % change (in billions of US$) (in thousands of tons) Total Non-oil Exports 27.08 30.36 12.1 106,386 143,478 34.9 Agriculture 2.30 2.82 22.7 1,759 1,606 -8.7 Coffee 0.30 0.70 128.5 308 267 -13.3 Cocoa 0.17 0.21 28.8 200 200 0.2 Metals & Minerals 1.46 1.80 23.1 29,267 36,253 23.9 Copper 0.69 0.86 23.5 923 1.076 16.5 Coat 0.64 0.82 27.6 18,717 25,364 35.5 Manufactures 23.9 25.70 10.3 24,512 24,466 -0.2 Electrical goods, etc. 1.67 2.38 42.4 173' 208 20.1 Gold bars 0.23 0.72 214.9 1,034 545 -47.3 Footwear 0.52 0.60 14.9 871 1,089 25.0 'Other" manufactures 1.66 1.89 13.7 161 173 7.4 ' In tons. Source: BPS. Data are on a customs basis. In 1994, manufactures (which includes several resource-based products, such as plywood, pulp and paper and base-metal products) continued to diversify rapidly in 1994, and several products moved up the value added ladder. One of the brightest spots is electronics (including appliances and audio-visual equipment) whose value rose by 42%. Diversification is underscored by another twenty-five or so smaller categories, which rose in value by at least 30%, albeit from a low base in many cases. Sales of footwear, which now account for 7% of manufactures, continue to show strong growth, expanding by 15% in value terms. Also, the residual "other manufactures" category continues to record high growth rates. Indonesia's world market share in most manufactures is small, and the main constraint to further growth is competitiveness. by rapid expansion in exports of natural gas higher export prices, owing in part to the fillip (LNG and LPG). Indonesia is now the world's in international prices around mid-year. Oil leading exporter of LNG. Many of these long- imports increased only a little. Consequently, term trends continued in 1994/95. The volume the surplus on oil trade widened appreciably, of oil and LNG exports declined a little, but from US$5.2 billion in 1993/94 to US$6.2 this decline was more than fully offset by billion in 1994/95. Macroeconomic Developments and Policies 13 1.30 Transactions on Services Account. Figur 1.4: Changlng The deficit on services continued to widen in Compositlon of Forelgn FY1994/95 to US$7.4 billion, compared with Investment Approvals, US$7.2 billion in 1993/94. Interest payments 1990t1994 increased, reflecting rising levels of public and 1990-1994 private debt, higher international interest rates and the rise in the value of the yen relative to USA 5% USA 40 the US dollar; factor service payments on foreign direct investment also increased s. Korea 6% \K appreciably. The impact of these negative \ S. Korea 8% factors was partly offset by strong tourism Singapore 7% inflows; the tourism sector has been booming for some time, and it has now become the 1s% largest single source of non-oil foreign Japan exchange earnings. 1.31 The Capital Account of the Balance of Payments. Transactions on capital account apan 6% consist of rising levels of foreign direct investment, often-volatile flows of short-term capital, and large gross flows of public debt (see later in this Chapter for developments concerning debt). The net inflow of foreign 19901993 1994 investment in 1994/95 was US$2.5 billion, Source: BKPM. compared with US$2 billion in 1993/94 and US$1.7 billion the year before. This is a origin,2 exceptionally strong inflows originated substantial rise, but minor in comparison to the in Taiwan and the U.K. The emergence of extraordinary increase of 190% in the value of Taiwan and the re-emergence of Hong Kong as foreign investment projects that were approved major investors are notable new developments in 1994. Approvals, which totalled US$23.7 (see Figure 1.4). billion for the year, surpassed the previous record level by July. (It should be noted that 1.32 At the end of 1994/95, official the value of investment approvals covers the international reserves stood US$13.3 billion entire cost of a project; foreign direct (equivalent to 4.2 months of imports), up from investment measures only the foreign equity US$12.7 billion at the end of FY1993/94 component of a project.) Seven large projects (4.7 months of imports). However, there were (4 oil refineries, 2 power plants and 1 steel large fluctuations in the course of the year, mill) accounted for more than 1/3rd of these mirroring the swings in capital flows. During approvals; but even excluding these projects, it the first five months of the year, there were was still a strong year, and approvals continued substantial outflows of capital that reversed at a record pace into 1995. Moreover, in 1994 inflows of the previous year, causing Bank the strength by industry was pretty much Indonesia to sell large amounts of net foreign across-the-board in the primary and secondary assets. By end-May, official reserves were sectors (excepting textiles): the tertiary sector down to US$11.7 billion, compared with was roughly flat. Geographically, much of the US$12.7 billion at end-March 1994 and US$12 planned activity is in West and East Java, Riau billion at end-FY1992/93. By the end of the (Batam) and South Kalimantan. By country of year, official reserves had recovered to 14 Chapter 1 US$13.3 billion. However, net foreign assets throughout 1994. In the case of the nominal were still down somewhat in rupiah terms effective rate, the total decline amounted to despite the appreciation of the yen. some 9%. This decline stemmed in roughly equal measure from a gradual decline (of 1.33 As mentioned, the year-end currency 4 1/4%) in the value of the rupiah relative to crisis in Mexico led to a short-lived run on the the US dollar, and from a decline in the value rupiah and other Asian currencies in early of the dollar vis-a-vis third currencies (see 1995. These outflows reflected a portfolio Figure 1.5). However, the real effective rate shift on the part of foreign investors, who declined by only 3%, as Indonesia's inflation became nervous about the prospects for differential offset most of the depreciation in emerging markets. Similar outflows occurred the nominal effective rate. Viewing these throughout much of South-East Asia, and their developments in a longer-term perspective, impact depressed stock markets in the region. Indonesia's real effective exchange rate at the Confidence in the rupiah was restored in short end of 1994 had depreciated by about 12% order by a combination of market intervention relative to its value inmmediately after the 1986 by the Central Bank, modest interest rate devaluation (see Figure 1.5). increases (of 50 basis points on Bank Indonesia's monetary instruments), and strong 1.35 Giving the Market More Room to public commitments by the Government to the Work. Twice during 1994, Bank Indonesia existing exchange rate regime. Above all, widened the exchange rate band (the so-called recognition of Indonesia's strong economic bid-offer spread) of the rupiah. On the first fundamentals prevailed. occasion, effective January 1, 1994, the band was widened from 10 to 20 rupiah; as follow- External Developments: Exchange Rate up, in September 1994 Bank Indonesia widened Movements the band further from 20 to 30 rupiah. These actions, which were well-executed, are 1.34 Both the real and nominal effective significant in two respects. First, the wider exchange rates of the rupiah depreciated band provides more room for monetary policy FIgure 1.5: Exchange Rate Indicators (Jan 16 - Sep 1994) Index Y.nI* 205 I205 i3 148 Nomii ffulysRea (jawL 9M-i00 IS5 . 90 66 67 66 89 90 91 92 93 94 Sou: IVF. Macroeconomic Developments and Policies 15 to work, and for price adjustment in the potential magnitude and volatility of foreign exchange market to absorb often- Indonesia's short-term capital flows. For volatile short-term capital flows. And second, example, the band around the Chilean peso allowing more price adjustment gives more (relative to the US$) is 20% and the band room for private market-makers, which between the Deutsche Mark and most other transfers more exchange rate risk from the European currencies is 15%; the band between central bank to foreign exchange speculators. the Dutch Guilder and the Deutsche Mark This helps deter short-term speculation. (currencies regarded as fixed against each However, it is doubtful whether the current other) is 2 1/4%. It would seem advisable for band of 30 rupiah (the equivalent of less than the authorities to further widen the bands when 1 1/2% of the currency's value) provides an the turbulence on international foreign adequate absorptive margin, considering the exchange markets has calmed. C. Monetary and Fiscal Policy in 1994/95 Monetary Policy and Related Developments 1.38 Prompt Adjustment Subsequently. Since June, Bank Indonesia raised interest rates 1.36 Three inter-related developments quickly on three occasions following the US dominated monetary policy and the financial Federal Reserve Board and avoided any sector during 1994: i) rising international widening of interest rate differentials that might interest rates through most of the year; ii) the have sparked another capital outflow. Between outflow of international reserves early in the mid-July and late August, SBI and SBPU rates year; and, iii) the bad debts situation, were raised by 50 and 100 basis points, especially at the state banks. respectively, compensating for movements abroad during the same period. The impact of 1.37 Delayed Interest Rate Increases the Central Bank's' quick moves on interest Contribute to Capital Outflows Early in rates was probably reinforced by continued 1994. In early 1994 several factors came strong oil prices and favorable assessments of together to cause a substantial capital outflow. the deregulation packages. In mid-November There was labor unrest in Medan; expectations and in February 1995, Bank Indonesia moved of an accelerated depreciation brought on by even more decisively, within days raising SBI statements of public officials; investor reactions and SBPU rates by 75 and 25 basis points to unfolding revelations of malfeasance at respectively, approximately matching similar BAPINDO; and a negative report by Standard increases by the U.S. Federal Reserve. and Poor's on the Indonesian banking sector. Also, international interest rates turned 1.39 Changes in deposit rates at commercial upwards in early 1994, after more than a year banks have reflected these rate movements on at sustained low levels (see Figure 1.6). monetary instruments with a short lag. By Initially, Bank Indonesia resisted the upward contrast, lending rates declined marginally in pressure but, as the nominal spread between the early part of 1994, and were approximately rupiah and foreign rates narrowed, capital flat through the end of the year when they rose began to flow out of the country in substantial by 50 basis points or so. With deposit rates amounts. The selling pressure on the rupiah rising appreciably, banks' interest rate margins abated by early June, when the combination of are being squeezed. Unless offset by rising higher domestic interest rates, strengthening fees and other income, the impact on international oil prices, and the May/June profitability could be substantial in 1995, deregulation packages stemmed the outflows. especially on the state banks where volumes of lending are barely rising. 16 Chapter I Figure 1.6: Ruplah Interest Rates (annual percent) 90. 25 A 20 10 -,,,,,, .,Oveirn 5 ~~~~~UBOR/a '---^--,,...,, O. ............................................................ i M J 8 N J M M J S N J M U J S N * M M J 8 N J M U J a N J S I J a N J la S, US dolln.e. lb 3-mul. Souro. BSz Indone 1.40 Monetary and Credit Growth 1.41 In early September, Bank Indonesia Decline. For operational purposes, one of relaxed the limit on net open external positions Bank Indonesia's primary concerns is interest of financial institutions. Under the new rates. It also keeps a close eye on the growth regulations, banks should not maintain a of money and credit aggregates, but these consolidated net open position (including both aggregates are difficult to manage in the on- and off-balance sheet assets and liabilities) context of Indonesia's open economy, owing to of more than 25 % of capital. Previously, the interest-elastic capital flows that tend to offset limit was 20%. In effect, this change allows open market operations (see Chapter 1 of banks to borrow more off-shore. World Bank 1994a). In the course of 1994, the rate of expansion of the monetary 1.42 De Facto Privatization of the Banking aggregates and broad measures of credit came System. Private banks' share of commercial down somewhat (see Table 1.4). By early bank credit has been increasing rapidly in 1995, the 12-month growth rates of all the recent years, in line with the expanding role of major monetary aggregates were a few Indonesia's private sector. In 1994, the share percentage points below their peaks in 1994; of private banks' in total outstanding loans the growti of total liquidity was 18.5% versus exceeded 50%, well above the 25% share of a 22.2% around mid-year, reflecting a similar decade ago (see Figure 1.7). By way of drop-off in the growth of narrowly-defined example, in September of 1994 the 12-month money supply. Likewise, reserve money growth in the private banks was 36 % compared growth was down to 22% from a peak near with 12 % at the state banks. The private 30% just half a year earlier. On the asset side banks' success in this regard reflects several of the monetary accounts, credit expansion has factors. The private banks have been quick to slowed in similar fashion. move into new areas of lending and they are Macroeconomic Developments and Policies 17 price-competitive. By contrast, credit growth FIgr 1.7: Do Facl PriatIzUon of at the state banks has been held down by For1 g SetorPSanof efforts to resolve bad debts and to meet % Outs_dlng Loam exposure limits. Furthermore, the too developments at BAPINDO probably have slowed down credit growth at all state banks. ,0,s bbbks/1 1.43 Changes in the Sectoral Composition ,. 4 of Credit. Real estate credit has been increasing rapidly, reflecting the factors described in Box 1.1. During the period January to September of 1994, real estate- Prav bmks related financing by private banks expanded at an annual rate of 65% (from a small base), with its share of total loans estimated to have.. . . . 1994 risen from 8 1/4% to 9 1/2%. This shift in the composition of private banks' asset portfolios so,,,,,o*, ban towards longer term assets,3 has not been accompanied by a commensurate shift in liabilities. Time deposits-virtually all of i) For the banking system as a whole, a which are less than one year's maturity-still stronger institutional foundation has account for one-third of private banks' funding, been put-in-place (see Chapter 2, with the rest concentrated in very short-term Section E); liabilities including savings and demand deposits as well as some borrowing in the ii) Portfolios and capital of the state banks inter-bank market. For those banks extending are being strengthened, and a strategy of credit at fixed-rates, the resulting mismatch in partial privatization is being maturity structures leaves them vulnerable to a implemented (also see Chapter 2, squeeze on interest margins, if deposit rates Section E and Box 1.5 on developments continue to rise. For those banks with variable related to bad debts); rate loans, the higher cost to borrowers of rising rates, would increase default risk of iii) Concerning the private banks, progress banks' loans. Also, it may be difficult to is also being made on bad debts, Bank rollover short-term deposits, forcing them to Indonesia's banking supervision is being rely excessively on borrowing in the inter-bank improved, and problem banks are being market, or to borrow more abroad. However, addressed on a case-by-case basis (see funding from abroad is already expanding Chapter 2 for details). rapidly, which increases the potential for banks' currency risk.4 1.45 Some Positive Results From the Strategy. Despite the high-profile nature of Institutional Developments in the Banking BAPINDO's portfolio problems in 1994, Sector: Dealing with Bad Debts positive results have accrued from the Government's strategy. As concerns the state 1.44 The Government's strategy to improve commercial banks, targets for exposure limits the depth and financial health of the fmancial are at (or being brought to) Bank Indonesia's sector involves three main elements, which mandated levels, and good progress is being support defacto privatization mentioned above: made towards re-capitalization of the banks 18 Chapter 1 Table 1.4: Indonesia: Factors Affecting Reserve Money; Money & Credit Growth (in trillions of rupiah, at end of period) 1993 1993 1994 1994 1994 1994 1995 Mar. Dec. Mar. Jun. Sep. Dec. Mar. Net Foreign Assets 37.2 38.8 38.9 34.0 35.7 37.3 36.9 BI Domestic Credit 6.8 7.3 5.4 5.9 6.9 7.7 5.8 Net Claims on Public Sector -10.0 -6.9 -11.1 -10.7 -10.6 -9.8 -11.4 Net claims on govt. -10.3 -7.6 -11.8 -11.5 -11.4 -10.6 -12.5 NetclaimsonPEs 0.3 0.7 0.7 0.8 0.8 0.8 1.1 Claims on private sector 0.8 0.5 0.5 0.5 0.5 0.5 0.5 Claims on banks 16.1 13.7 16.0 16.2 17.0 17.0 16.7 Liquidity credits 13.4 12.3 12.6 12.9 13.6 13.2 12.6 New BI facilities 2.6 1.4 3.4 3.3 3.4 3.8 4.1 Net other items -28.3 -28.5 -25.2 -20.8 -21.5 -22.7 -19.6 SBIs -23.0 -23.4 -19.8 -15.2 -14.1 -15.1 -11.2 Other -5.3 -5.1 -5.5 -5.6 -7.5 -7.7 -8.4 Reserve Money 15.7 17.6 19.0 19.2 21.0 22.2 23.2 Currency outside banks 13.1 14.4 15.5 15.8 17.6 18.6 19.1 Currency & deposits of banks 2.4 2.8 3.2 3.0 3.1 3.2 3.7 Other deposits 0.2 0.4 0.3 0.4 0.3 0.3 0.3 Memo Items: % Change (over previous 12 months) Reserve money 7.3 19.5 20.8 27.2 29.5 26.1 22.0 Narrow money (Ml) 11.9 28.7 25.7 27.1 21.0 23.2 18.7 a Broad money (Ml +quasi-money) 22.1 22.3 21.2 22.2 19.1 19.7 18.5 a Net domestic credit of banks 11.4 26.0 26.4 25.2 24.3 20.6 22.3 a Bank credit to business 10.8 23.4 25.9 23.7 23.7 21.7 22.2 a February 1995. Source: Bank Indonesia (see Box 1.5). In addition, there are good healthier institutions. These are all significant prospects for at least one state banks to "go achievements that deserve more recognition, public" within the next year or so. In the notwithstanding the large remaining challenges private banking community, potentially serious in this sector (see below). crises (e.g., those connected with Bank Duta and Bank Summa) have been contained with no 1.46 But a Challenging Task Remains. noticeable disruption to overall financial Notwithstanding the progress of the past year activity. Also, noteworthy consolidation or so, the Government faces a challenging task (including several mergers, acquisitions and to return the financial sector to good health. assistance to management) of private banks Most obviously, BAPINDO remains a major took place during 1994 and early 1995. headache for the Government. At other state Moreover, efforts continue to effect commercial banks, bad debts continue to be a consolidations of several other banks with large problem (see Box 1.5), and certain other Macroeconomic Developments and Policies 19 Box 1.5: A Financial Check-up on Indonesia's Banks Many Indonesian banks have weak portfolios. Generally speaking, this problem has two dimensions: i) by international standards, banks carry large amounts of "classified" assets (that is, loans classified as "substandard", "doubtful" and "loss") relative to total credit and capital; and ii) portfolios frequently exceed "legal lending limits" as banks' exposures are overly concentrated in a few borrowers or groups of borrowers. Indonesia: Developments in Classified Credits Loans (in trillions of Rv) Composition in percent) Oct.93 Dec. 93 Mar.94 Dec.94 Oct.Y3 D1ec.93 Mar.94 Dec.Y4 All Banks Total credits 170.6 177.5 185.8 217.0 100.0 100.0 100.0 100.0 Current 143.5 152.3 159.4 190.9 84.1 85.8 85.8 88.0 Classified 27.1 25.1 26.4 26.2 15.9 14.2 14.2 12.1 State banks /a Total Credrit 92.4 94.1 96.9 104.1 100.0 ioo.o 100.0 100.0 Current 72.8 75.5 77.5 84.7 78.8 80.2 80.1 81.4 Classified 19.6 18.6 19.3 19.4 21.2 19.8 19.9 18.6 Private Banks Total credit 74.6 79.8 85.4 108.7 100.0 100.0 100.0 100.0 Current 68.2 74.0 79.1 102.8 91.4 92.1 92.6 94.6 Classified 6.4 5.8 6.3 5.9 8.6 7.3 7.4 5.4 Includes BAPINDO and BTN; excludes regional development banks (BPDs). Data Source and Definitions: Bank Indonesia. The overall situation of the banks has improved since late 1993, as the ratio of classified loans to total credit has declined from almost 16% of total credits in late 1993 to nearly 12% by December 1994. Progress has occurred at both the state and private banks (see tabulation above). However, two points are notable. First, the state banks (including BAPINDO) continue to carry much more classified assets than the private banks, for example, 18.6 % of credits versus 5.4 % in December 1994. And second, all the progress has been the result of growth in credit. Indeed, the total amount of outstanding classified assets actually increased by more than Rp. 1 trillion during 1994. This increase partly reflects better information on the true situation at some of the banks. But it also suggests that momentum may be slowing, and that greater effort is needed if these banks are to resolve their asset problem by improved collections (see Chapter 2). In the meantime, parts of the banking system are still expanding rapidly (e.g., real estate development at some private banks). At the five state commercial banks, the Govenmment is aiming to raise capitalization to minimum intemational (Bank for Intemational Settlements) standards, that is, to 8% of risk-weighted assets (RWA) by end-1996. In this area, there has been notable-albeit mixed-progress among the five banks. For example, after a slow start in 1992, classified assets (including off-balance sheet liabilities) came down during FY1993- 94 by more than 1 1/2 percentage points when measured in relation to either total assets or RWA. In addition, after taking into account the shortfall in provisioning for these non-performing loans, existing capital has increased significantly over the same period. Nevertheless, the existing level of classified assets (more than 20% of RWA) is still high by intemational standards. Moreover, after taking into account the shortfall in provisioning for these non-performing loans, existing capital is only about 2 1/2% of RWA for the state banks as a group. Two actions will be important in this regard: i) raising the capital of these banks to a level that makes adequate allowance for provisioning of classified assets; and ii) strictly adhering to the envisaged schedule, especially in the light of delays that have already been encountered. It should be noted that these actions are equally important for a number of private banks that are under-capitalized and that carry weak portfolios. On exposure limits, detailed information is highly confidential. However, as of March 1994 all five state banks had met the Government's targets. To be sure, some of these targets still exceed limits set out in the Bank Act of 1992 and various decrees, which are to be observed by March 1997, with interim targets set for 1995. Broadly speaking, the state banks are on-track in this area of the Govermnent's Action Pians to improve their respective financial positions, mainly owing to syndication of loans, risk-sharing among banks, pre-payment of large exposures, reductions in facilities and increases in capital. 20 Chapter 1 fundamental issues remain unresolved (see engaged in factoring and consumer finance Chapter 2, Section E). On the private banks, increased from virtually nil in the mid-1980s to there is a danger that the Government's 76 and 77, respectively, by the end of 1992. strategy may not be sufficiently fast-acting to avoid bank failures; more mergers and stronger 1.48 This sector has substantial potential for exit procedures are needed (also see mobilizing additional amounts of financing, Chapter 2). Prudent development of the non- provided supportive policies and an appropriate bank sector would also help in deepening regulatory framework are put-in-place (see financial intermediation (see Chapter 2). Chapter 2). These are particularly important because of the strong linkages between banks Issues in Development of the Nonbarnk and non-banks, the sector's potential Financial Sector vulnerability to external shocks, and the need to protect the growing volume of pension fund 1.47 Indonesia's nonbank financial sector assets. includes capital markets (stocks and bonds) and a diverse array of financial intermediaries: 1.49 Developing Capital Markets. The insurance companies; private and state-owned Government has taken a number of important pension funds; venture capital companies; steps to develop capital markets since the late factoring/leasing/finance companies; mutual 1980s. Most notable among these are: a funds; and JAMSOSTEK, a compulsory stronger legal foundation; permitting foreign workers' insurance, pension and health ownership of up to 49 % of the voting shares of scheme. In general, this sector is at an early Indonesian companies; and transforming the stage of development, but it has been growing Jakarta Stock Exchange (JSE) into a private very rapidly, despite a lackluster bond market member-owned organization. Issues for further in 1994 (see Table 1.5, noting that another development of the capital markets can be US$2.6 billion was placed in international bond broadly categorized as: regulatory (see issues). By way of examples in this regard, Chapter 2); and, market structure (i.e., a the value of contracts of leasing companies narrow investor base, the role of foreign increased by almost 20% per annum between investors, and a weak secondary market). On 1988 and 1992; and, the number of companies market structure, trading on the JSE is still Table 1.5: Indonesia: Outstanding Issues on the Capital Market Bonds on Stock Exchan2e Stocks on Stock Exchanee Parallel Bourse Year Companies Value Companies Value Companies Value (number) (trillions (number) (trillions (number) (trillions of Rp.) of Rp.) of Rp.) 1988 6 0.9 24 0.2 0 0.0 1989 17 1.4 51 1.7 8 0.1 1990 20 1.9 124 13.1 8 0.1 1991 21 2.2 139 27.6 6 0.1 1992 25 1.8 153 24.8 10 1.2 1993 28 2.5 172 69.3 13 3.5 1994 31 2.9 217 103.8 18 3.7 Source: Bank Indonesia Macroeconomic Developments and Policies 21 very thin and heavily dependent upon foreign 1.52 Outturn for FY1994/95. Fiscal policy investors. To assist in this regard on the was significantly tighter in FY1994/95 than in demand side, open-ended mutual funds should FY1993/94, although it was more expansionary be permitted and a secondary market for bonds than had been budgeted (see Table 1.6). developed. On the supply side of the market, Revenues rose roughly in line with privatization of state enterprises through the expectations. As usual, non-oil taxes were the JSE would be helpful. strongest component of revenues, rising rapidly as a result of the booming non-agriculture 1.50 Contractual Savings Institutions. economy and higher-than-expected inflation. Issues in this area may be conveniently For their part, oil revenues benefitted from the categorized into four main areas: i) financial fillip in international oil prices just before mid- (that is, the quality of financial control; year. On expenditures, personnel spending solvency issues and the extent of funding for was well-contained during most of the year, long-term liabilities); ii) regulation (see but other expenditure categories, including Chapter 2); iii) systemic (which is to say, the subsidies and off-budget spending,5 increased quality of supporting infrastructure, human and by somewhat more than programmed. In otherwise); and iv) the quality of design of addition, the decision (in the FY1995/96 individual schemes. A special word is in order Budget, see discussion below) to award a pay as concerns JAMSOSTEK, which has the increase to some civil servants effective in potential to become by far the largest January 1995 pushed personnel spending a little contractual savings fund in Indonesia. In light over-budget. of the potential for financial liability of the Government for health care and pensions, as 1.53 Reflecting these various factors, the well as the large amount of assets that could be overall balance in FY1994/95 is estimated to built up (one government agency has estimated have narrowed by more than 1/2 percentage Rp.20 trillion by the year 2000), it is vital that point of GDP (from a deficit of 0.6% of GDP responsible financial control is maintained and in FY1993/94 to virtual balance in that strict oversight be exercised by the FY1994/95). In FY1994/95, financing was Ministry of Finance (see Chapter 2). provided by net external borrowing in the amount of Rp.0.2 trillion and by privatization Fiscal Policy and Related Developments receipts (from the partial sale of Indosat; see below) in the amount of Rp. 1.7 trillion. On 1.51 In the wake of the drop in oil prices at the side of domestic financing, there was a the end of 1993, the Budget for FY1994/95 large build-up in government bank deposits, adopted a restrictive stance (see Table 1.6), as which constitutes negative financing, of described in last year's Economic Report. The Rp.2. 1 trillion. overall fiscal balance was expected to shift from a modest deficit (equivalent to 0.6% of 1.54 The Tax Reforms of 1994. On GDP) in FY1993/94 to a small surplus (of September 3, the Minister of Finance proposed 0.3% of GDP) in FY1994/95; expenditures large cuts to direct taxes, as well as other were to decline in real terms while revenues significant changes to Indonesia's tax system, would rise appreciably faster than inflation. As the first since tax reform was enacted in 1983. one part of this fiscal prudence, there was no Parliament passed a new tax law in October general pay increase awarded to the civil 1994 with effect from 1 January 1995; its main service in 1994. features include: 22 Chapter I i) basic deductions were approximately right of appeal to the Administrative doubled and direct tax rates were cut Court. by roughly one-third;6 1.55 Assessment of the Tax Package. As ii) relatively restrictive tax incentives announced by the Government, the tax package were introduced for certain investments was intended to make Indonesia's tax rates in export activities or remote regions competitive vis-a-vis other countries in the (such as eastern Indonesia), and tax region and to promote investment and growth deductions are allowed for in the more remote regions of the country. expenditures on training, R&D and These are worthwhile goals (however, see the environmental protection; following two paragraphs). Also on the positive side, there are several specific iii) the tax base was widened somewhat measures that can be praised in this package. by, inter alia: imposing a 15 % tax on Most of the steps to broaden the tax base are off-shore deposits placed through useful, as they seem likely improve the Indonesian or foreign banks operating economy's tax yield without much additional in Indonesia; levying a 5 % capital administrative cost. Also, the 5% capital gains gains tax on certain land transactions; tax on some land transactions as well as the and by imposing a 0.1 % tax on the 10% tax on luxury residences are welcome as sale of shares and other certificates in they may help to keep the booming real estate stock market transactions (founder sector under control. Furthermore, the shareholders of listed companies are administrative improvements are an important subject to an additional 5% tax); step forward, especially the provisions for broadening the Tax Authority's powers to iv) a 10% luxury tax is to be imposed on audit. the selling price of luxury residences (excluding land).7 The applicable 1.56 However, the tax package also raises range of the luxury tax was increased larger issues. Most importantly, the cuts to from 10-35% to 10-50%; direct taxes are large (the changes to tax rates and deductions are estimated at more than vi) a property tax exemption (formerly of 1/2% of GDP) and their expansionary impact Rp.7 million, and applicable only to comes at a time when the economy is already buildings) was raised to Rp.8 million, booming. In addition, Indonesia's economic but coverage was widened to apply to successes since the tax reform of 1986 suggest both buildings and land; and that higher tax rates and the absence of tax incentives have not been a significant v) important administrative steps were impediment to new investment; other policies, taken to increase compliance. For such as further deregulation, could sustain example, fines were increased for economic growth, at no financial cost to the non/late-filing of VAT and direct tax Government. returns, and certain Tax Regulations were replaced by MOF Decrees, which 1.57 As specifically concerns tax incentives, broadened the Tax Authority's power these are generally an ineffective instrument of to audit for compliance, and not just regional economic policy, as their track record for assessment. Also, a new Tax is highly questionable (see Boadway and Shah, Court will be established (no date has and World Bank 1994a). In addition, they been specified), and there will be no involve serious definitional problems and open the door to abuse. Macroeconomic Developments and Policies 23 Table 1.6: Indonesia: Summary of Central Government Flscal Operations1 (in trillions of rupiah) 1992/93 1993/94 1994/95 1995/96 Budget Actual Budget Estimate Budget Revenue & Grants 45.5 54.8 54.2 60.2 60.1 65.5 Oil/LNG taxes 15.3 15.1 12.8 12.9 13.4 13.3 Non-oil taxes 27.4 33.8 34.2 40.1 40.7 45.0 Non-tax revenues 2.3 5.4 6.7 6.8 5.5 6.7 Grants b 0.6 0.5 0.5 0.5 0.5 0.5 Current Exoenditures c 28.5 31.5 33.3 35.2 35.5 40.3 External interest 5.5 6.1 6.3 7.1 6.7 7.2 Subsidies d 1.2 1.8 1.7 0.2 0.5 0.1 Other, of which: 21.8 23.7 25.2 28.0 28.4 33.0 Personnel ' 14.4 16.5 18.2 19.7 19.8 23.3 Capital Expenditure 20.6 f 22.1 23.0 f 24.0 24.4 f 26.9 Total Expenditure 49.1 53.6 56.3 59.2 60.0 67.2 Overall Fiscal Balance -3.6 1.2 -2.0 1.0 0.2 -1.7 Financina 3.6 -1.2 2.0 -1.0 -0.2 1.7 External (net) 1.3 -1.2 1.8 -1.0 0.2 0.5 Disbursements 11.2 9.1 12.6 9.5 12.1 11.2 Amortizations 9.9 10.3 10.8 10.5 11.9 10.7 Domestic (net financial drawdown) 2.3 0.0 0.3 0.0 -2.1 1.28 Exceptional: privatization receipts 0.0 0.0 0.0 0.0 1.7 0.0 (as % of GDP) h Revenue & Grants 16.1 16.6 16.4 16.0 15.9 15.4 Current Expenditures 10.1 9.6 10.1 9.3 9.4 9.5 Capital Expenditure 7.3 a 6.7 7.0 a 6.4 6.5 a 6.3 Total Expenditure 17.4 16.3 17.1 15.7 15.9 15.8 Government Savings 6.0 7.1 6.4 6.6 6.5 5.9 Overall Fiscal Balance -1.3 0.4 -0.6 0.3 0.0 -0.4 This table presents Central Government fiscal accounts in the standard format used by the IMF's Government Financial Statistics, which differs from the format used in the Government of Indonesia's Budget. Tables in Section 5 of the Statistical Annex present the fiscal accounts in the Government's format. b Estimated grant component of external financing. c Includes spending of a current nature clasified as development expenditure in the Government's Budget (fertilizer subsidy, defence expenditure, O&M expenditure). d Includes fertilizer and petroleum subsidies. e Central Government's personnel spending plus transfers to regional governments for personnel expenditure. f Derived as the sum of government savings (revenues less current expenditures) and net financing (external plus domestic). Derived residually in this manner, these estimates of capital expenditure include net off-budget transactions. s Drawdown of off-budget government deposits (reforestation funds). h Based on new National Accounts (see Annex 1). Source: Ministry of Finance and World Bank Staff esdmates. 24 Chapter 1 1.58 The Budget for FY1995/96. In higher personnel costs stem from the 10% framing the Budget for FY1995/96, the general pay increase and another 8% for Government faced difficult decisions. On the growth in the civil service, promotions, grade- one side of the coin, it was aware that the inflation, etc. As noted in past Bank Reports, economy might be giving off early signs of an increase of 8% per annum in personnel overheating. But, on the flip side of this coin, costs that is not visibly linked to productivity the Government had already announced the tax or incentives seems excessive, and underscores cuts described above, and pressures were the need for the Government to undertake a building for increased spending-for example, wide-ranging program of civil service reform. a sizable across-the-board wage increase for the By contrast, budgeted development spending civil service. With little flexibility left on the (measured in relation to GDP) would be down side of income tax rates (and deductions), the marginally from actual spending in FY1994/95. Government acted to limit the expansionary (See the further discussion of issues related to effect, emphasizing: additional measures in the fiscal policy in Section F). area of non-tax revenues; improved administration to boost collections of property, External Debt Management excise and value added taxes; better efficiency and absorption to accelerate disbursements of 1.61 At end-1993, Indonesia's external debt foreign aid; and prioritization of development was the fourth largest in the developing wqrld, spending in favor of infrastructure, especially after Mexico, Brazil and India (World Debt in the least-developed regions of the country. Tables, 1994-95), and it now totals about The general salary increase to civil servants US$100 billion. This debt burden represents a was limited to 10%.8 major on-going constraint upon the flexibility of development policy in Indonesia (see 1.59 The FY1995/96 Budget (which was Sections D and E). Nonetheless, an fmalized before the large cross-currency unblemished debt-servicing record has been movements of early 1995) is summarized in one of the hallmarks of Indonesian macro- World Bank/IMF format in Table 1.6. The economic policy since the 1970s. overall fiscal position is budgeted to be in deficit amounting to 0.4% of GDP in 1.62 At the end of 1993, Indonesia's total FY1995/96 compared to a small surplus external debt was estimated at US$89.5 billion (equivalent to 0.3% of GDP) that was budgeted (World Bank Debt Tables, 1994-95), of which for FY1994/95 and an estimated outturn of a US$52.5 billion was public and publicly very modest surplus for that year.9 The guaranteed. Medium- and long-term debt of FY1995/96 deficit would be financed by net the private sector at end-1993 was estimated at external borrowing of Rp.0.5 trillion and a US$16.4 billion; debt of short-term maturity budgeted drawdown of off-budget government was put at another US$20.7 billion. During deposits (re-forestation funds) in the amount of 1994, there was some additional net external Rp.1.2 trillion. borrowing. More imnportantly, the appreciation of the yen and European currencies have 1.60 Budgeted revenues would drop sharply significantly raised the dollar value of in relation to GDP, reflecting the secular Indonesia's external obligations, to around decline in Oil/LNG revenues and the impact of US$100 billion. Indicators of Indonesia's the September cuts to direct taxes. At the indebtedness (Table 1.7) show a notable shift same time, current expenditures would rise a in the composition of debt towards more little in relation to GDP owing to higher private debt and less public debt. This change personnel costs and material purchases. The is particularly important as techniques to Macroeconomic Developments and Policies 25 Table 1.7: Indonesia: Medium- and Long-Term (MLl) Debt Indicators 1990-1998 (% at year-end) 1990 1994 1995 1998 Estimated Projected Projected Debt Outst. & Disb.(MLT DOD)/GNP a 53.6 45.0 45.2 40.9 Public 44.2 34.7 35.2 30.6 Private 9.4 10.3 10.0 10.3 MLT DOD/Exports b 185.2 153.2 152.1 124.7 Public 152.7 118.1 118.6 93.2 Private 32.6 35.1 33.5 31.5 MLT Debt Service/Exports b 29.3 29.3 27.9 22.5 Public 23.5 19.0 16.9 12.8 Private 5.8 10.3 11.0 9.7 MLT Interest/Exports b 10.8 8.6 8.6 6.5 Public 8.9 6.5 6.1 4.3 Private 1.9 2.1 2.5 2.2 Includes non-recourse debt. a GDP is based on new National Accounts (see Annex 1). b Denominator is gross exports of goods and services. Source: Bank Indonesia and World Bank staff estimates manage private debt are markedly different of Indosat to pre-pay expensive foreign debt. from those appropriate for public debt, which In total, the Government pre-paid about has been one of Indonesia's fortes in the past. US$ 3/4 billion of debt to the Asian In addition, a higher proportion of private debt Development Bank and the World Bank, which implies higher interest costs and a shortening dated from the early 1980s and carried high, maturity structure. fixed interest rates. Even allowing for the pre- payment fee, this was a significant cost-saving 1.63 Sustaining its track record on external move by the Government. However, the debt management, Indonesia took another outstanding amount of Indonesia's debt remains significant step in the second half of 1994 very large, as the operation paid-off only about when the Government appropriately used its 1 1/4% of Indonesia's total outstanding official share of the capital proceeds from privatization debt, and about 3/4 of 1 % of total debt. D. External Risks 1.64 Despite strong fundamentals and the depreciation of the US dollar against the yen progress of the past several years, Indonesia and the DM. These developments leave the remains vulnerable to a wide range of potential Indonesian authorities with significantly less external disturbances. In particular, room for maneuver in policy-making. As international financial markets remain turbulent discussed below, the risks they face may be as the Mexico crisis has been followed by the conveniently grouped into those originating in 26 Chapter I the country's large external debt, or a sudden the yen has strengthened. It is currently drop in international commodity prices, estimated that a 10% depreciation of the US especially oil. dollar relative to the yen (close to the actual change during 1994 and substantially less than 1.65 Risks Associated With Debt. As that which occurred during the first few months mentioned, Indonesia's total external debt is of 1995), adds approximately US$1/2 billion estimated to be about US$100 billion. Nearly per year to Indonesia's debt servicing costs. half is private and one-quarter is short-term. Of this amount, roughly 40% is interest Of the public debt, roughly 50% is payments, and 60% is amortization. denominated in yen or linked to the yen in multiple currency loans. These characteristics 1.68 Risks From the Side of Commodity leave Indonesia exposed to risk from several Prices. Indonesia is still a large exporter of directions, most notably: primary commodities, and many of their prices were on the upswing in 1994. But, these * loss of confidence, causing inability to prices are subject to a great deal of volatility, roll over the short-term credits; and they could turn downwards unexpectedly. By far the most important commodities to - rising international interest rates, Indonesia are oil and LNG/LPG, which still which push up debt servicing costs in contribute roughly 20-25% to Indonesia's fiscal both the fiscal and balance of payments and external accounts. As rules of thumb'in accounts; this regard, each dollar decline in oil prices causes a net deterioration of around $330 - further depreciation of the US dollar, million in the balance of payments, and of relative to the yen, which pushes up $280 million in the Government's fiscal debt servicing costs in dollars (which is balance (assuming a constant domestic price). the currency of denomination of The impact of other commodity prices is more virtually all Indonesia's exports); and, difficult to quantify. As one rough measure, non-oil commodity exports (comprising mineral * external shocks could trigger a switch and agricultural products, including plywood) from domestic financial assets into still account for almost 30% of non-oil exports. foreign exchange. A downturn in the prices of these commodities, would have a proportionate first-round impact 1.66 The Government is aware of these on the balance of payments, as evidenced by possibilities and is prepared to take quick the effect of the decline in plywood and textile action, as demonstrated in early 1995. & garment prices in early 1994 (see Box 1.3). 1.67 Much of Indonesia's debt taken on in 1.69 Policy Implications. To protect the 1980s was at variable interest rates. For against these risks, Indonesia needs-above example, in the early 1990s, some 30% of all-to continue its sound economic public debt was at variable rates. Also, fundamentals and to focus on the key policy roughly 40% of public debt is denominated in issues discussed in Section F. However, yen and another 10% is linked to the yen, certain other policy implications also bear mainly through multiple currency loans from mention. First, the Government needs to the ADB and World Bank. Although these adjust to the higher servicing costs of external yen-denominated loans have relatively low debt that were brought on by recent currency interest rates, Indonesia carries the associated re-alignments, by tightening fiscal policy exchange rate risk, which has proved costly as accordingly. Second, a strong international Macroeconomic Developments and Policies 27 reserve position is the first line of defense Government will need to act decisively to against many of the risks mentioned above. maintain the confidence of lenders, especially The Government fully recognizes this, and has as regards monetary and fiscal policy. built up official reserves to a prudent level; Appropriately rapid action would avoid but, this level will need to be increased further, sparking a secondary round of capital flight at least in line with rapidly-growing imports. and further speculation against the rupiah. Windfall revenues (for example, accruing from privatization or from a temporary surge in oil 1.71 Under almost any scenario, it would be prices) could be set aside to assist in building undesirable for Indonesia to undertake a international reserves; they could also be used sustained increase in external commercial to pre-pay further amounts of expensive borrowing; there is simply not enough room external debt. for maneuver in this quarter, given the existing debt burden. 1.70 In the event of a sustained drop-off in oil (or other) commodity prices, the E. Medium-Term Prospects and Policies 1.72 Indonesia has excellent prospects for sharply, from some 12% per annum in the sustained medium-term economic growth, early 1990s to 8% per annum over the given prudent policies (summarized in medium-term. The Oil/LNG sector would be Section F) and adept handling of the risks virtually stagnant; any real growth in the outlined above. Per capita income should Oil/LNG sector would stem from LNG. reach US$1000 before the turn of the century. This will generate the rapid employment 1.74 The rise in direct foreign investment growth that is necessary to absorb the and private infrastructure development is expanding labor force at higher levels of projected to raise imports, which would widen earnings and to reduce poverty. the current account deficit in 1995/96 to about 2.6% of GDP, from 1.9% in 1994/95 (Table 1.73 Summary of Macro Prospects. 1.8). This investment-led rise in imports Medium-term projections, which are consistent would be partly offset by an assumed, policy- with the effective policy actions of Section F, induced slowdown in the imports to contain the are summarized in Table 1.8. Growth is impact of the current economic boom. In the projected to rise in 1995 to around 7.5%, medium-term, with tighter monetary and fiscal before slowing over the medium-term to a policies, the current account deficit is projected more sustainable 7% or so. Growth will to decline to 2% of GDP or so. Throughout continue to be driven by the non-oil, non- the period, the current account deficit remains agricultural sector,'0 which would expand by modest by international standards-for over 8% per annum during the coming decade. example, it is always much less than half the The leading sectors would be (non-oil) size of deficits in Malaysia and Thailand at the manufacturing, mining, and electricity present time-reflecting the need for prudence generation, which would all grow by an given Indonesia's large external debt. average of around 10% per annum. In the case of manufacturing, this pace would be a 1.75 Under this projection, non-oil exports little below the 12% recorded during the past are projected to continue rising at over 16% decade or so. The pace of expansion of per year with non-oil imports averaging a bit construction would also come down, but more less, roughly 15% per year. Direct foreign 28 Chapter I investment is projected to rise about 20% per do not include any receipts from privatization; annum, and other private medium- and long- it is assumed that these would be used to term borrowing also expands rapidly, as would reduce public external debt. Second, if private be expected. Public external borrowing rises foreign finance is more buoyant than assumed, in 1995/96, but it drops-off fairly markedly in then investment could be larger than projected subsequent years (see also Table 1.10). This and the current account deficit could pattern reflects tightening in the public sector, temporarily widen more than indicated. in part to offset the rise in debt service caused However, the Government should avoid by the recent cross currency movements. The financing any additional widening of the economy would accumulate a prudent volume current account deficit by larger public of reserves over the projection period as the borrowing or reserve losses; the private sector private sector fiances its imports of investment should provide its own financing. equipment with direct investment and private borrowing. 1.77 Projections of Savings and Investment Balances. These balance of 1.76 Two points should be especially noted payments projections are echoed in the about these projections. First, the projections projected savings and investnent balances. Table 1.8: Indonesia: Projections of Key Macroeconomic Indicators Estimated Projected 1994 1995 1996 1997 1998 Average real growth rates (% p.a.) GDP 7.3 7.4 7.1 7.3 7.4 Non-oil GDP 7.8 8.0 8.0 8.0 8.0 Gross Fixed Investment 12.6 10.5 7.5 7.0 7.3 Prices Oil (US$/bbl, average OPEC price) 14.3 15.6 16.1 16.6 17.1 Non-oil Terms of Trade (1983/84=100) 102.2 103.6 103.5 103.1 102.9 Balance of Payments (in billions of US$) Fiscal Years Merchandise Exports (fob) 42.0 46.0 51.8 59.2 67.1 of which Non-oil 31.7 36.8 42.8 50.0 57.7 Merchandise Imports (cif) -38.2 -43.0 -49.1 -56.1 -63.6 of which Non-oil -34.0 -39.4 -45.6 -52.4 -59.7 Interest Payments (MLT) -4.2 -4.7 -4.7 -4.9 -5.1 Current Account Balance -3.5 -5.0 -5.9 -5.7 -5.6 Public MLT Loans (net) 0.8 a 1.7 1.2 0.7 0.5 Direct Foreign Investment 2.5 3.0 3.6 4.3 5.2 Other Capital (net) -1.2 a 2.1 3.7 4.2 5.1 Use of Foreign Assets (- = increase) 1.4 -1.8 -2.6 -3.5 -5.2 Memo Items: Net Official Reserves (in billions of US$) 13.3 16.1 21.3 24.3 29.1 - Months of Imports 4.2 4.5 5.2 5.2 5.5 Current Account/GDP (%) -1.9 -2.6 -2.8 -2.5 -2.2 Non-interest Current Account/GNP ( b 1.2 0.7 0.3 0.5 0.6 a Includes debt prepayment/offshore receipts from Indosat privatization. b Based on new National Accounts (See Annex I). Source: Central Bureau of Statistics, Bank Indonesia and World Bank Staff estimates. Macroeconomic Developments and Policies 29 Table 1.9: Indonesia: Savings-Investment Balances, 1993-1998 a (% of GDP at current prices) 1993 1994 1995 1996 1998 Gross investment 27.8 29.1 29.9 30.0 29.9 Fixed investment 26.3 27.6 28.4 28.5 28.4 Change in stocks 1.5 1.5 1.5 1.5 1.5 Gross national savings 26.0 27.2 27.4 27.2 27.6 Savings-investment gap b -1.8 -1.9 -2.4 -2.7 -2.3 Public Sector Gross investment 9.7 9.5 9.5 9.6 9.6 Public savings 8.5 8.7 8.4 8.6 9.1 Savings-investment gap -1.2 -0.8 -1.1 -1.0 -0.5 Private Sector Gross investment 18.1 19.6 20.4 20.4 20.3 Fixed investment 16.6 18.1 18.9 18.9 18.8 Change in stocks 1.5 1.5 1.5 1.5 1.5 Savings 17.5 18.5 19.0 18.6 18.5 Savings-investment gap -0.6 -1.1 -1.3 -1.7 -1.8 All data converted to calendar-year basis. As a result, the data on the current account deficit and the public sector deficit differ slightly from other tables. GDP data are based on the new National Accounts (see Annex I). b The deficit on current account of the balance of payments expressed in calendar years. Source: Central Bureau of Statistics, Bank Indonesia and World Bank Staff estimates. Gross domestic investment is projected to rise needed to make room for the large, envisaged a little in relation to GDP (Table 1.9). The rise in private investment while reducing the rise would originate in the private sector, external current account deficit. probably incorporating a shift in composition away from residential construction in favor of 1.78 Projections of External Financing plant and equipment. Prudent financing of this and the Role of Foreign Assistance. No investment spending implies reduced reliance unusual difficulties are anticipated in meeting upon foreign savings (from around 2.7% of Indonesia's external financing needs over the GDP in 1996 to a target of about 2% within a medium-term (see Table 1.10), provided few years), owing to large, existing levels of certain key steps are taken on a timely external debt. Consequently, national savings basis-for instance, ensuring that: growth of need to grow faster than GDP to replace aggregate demand is held within prudent foreign savings. Strong capital market bounds; private projects are sound and efficient development and new savings instruments (see Chapter 2); and, an improved framework would help raise private saving rates. for infrastructure investment increases services However, the main policy action needs to take while lowering costs (see Chapter 3). place on the side of public saving and However, gross financing needs will increase investment. Specifically, the gap between temporarily, owing to: rapid expansion of public investmnent and public savings needs to investmnent by the private sector (which narrow substantially. Such action will be increases the current account deficit); rising 30 Chapter 1 Table 1.10: Indonesia: Projected External Financing (in billions of US$) Actual Estimated Proiected 1993/94 1994/95 1995/96 1996/97 1997/98 Uses of Financing 12.3 12.3 17.3 19.4 21.1 Current account deficit 2.9 3.5 5.0 5.9 5.7 (of which, MLT interest payments) (4.1) (4.2) (4.7) (4.7) (4.9) Principal repayments 9.1 10.2 b 10.5 10.9 11.9 Increase in net foreign assets 0.3 -1.4 1.8 2.6 3.5 Sources of Financing 12.3 12.3 17.3 19.4 21.1 Direct foreign investment (net) 2.0 2.5 3.0 3.6 4.3 Private MLT loans 3.6 4.9 5.5 6.9 7.5 Other (net) -0.1 -2.0 1.2 1.9 2.1 Public MLT loans 6.8 6.9 7.6 7.0 7.2 CGI assistance a (3.5) (3.7) (3.9) (3.9) (3.9) Other, incl. non-concessional (3.3) (3.2) (3.7) (3.1) (3.3) a Excludes grants, which are included in transfers in the current account, following standard methodology. b Includes debt prepayment/offshore receipts from Indosat privatization. Source: Bank Indonesia and World Bank Staff estimates. debt service due to cross currency movements; strategic roles. First, official assistance is the and the need to build-up official reserves, concrete means by which foreign governments particularly in the light of the recent volatility and external agencies signal their support for in international currency markets. Indonesia's development policies. Second, the availability of adequate amounts of assistance 1.79 Looking further ahead, the current ensures an orderly transition to more account would tend to narrow (reflecting steps diversified sources of financing. Third, it to avoid overheating), but repayment of debt ensures adequate provision of financing for would increase and official international those areas of development that are not of reserves would be accumulated at a faster pace. interest to the private sector, for example, Consequently, total financing needs would human resource development and some areas continue to rise, by around US$2 billion per of public infrastructure. Finally, the term and year. This rising financing need would be met risk diversification associated with official entirely by the private sector-foreign direct assistance improves the structure of external investment, private lending, and moderate assistance; it also helps to maintain Indonesia's growth of short-term capital. Disbursements of access to international capital markets and official loan assistance would remain improves the country's attractiveness as a approximately unchanged, while public destination for foreign direct investment. borrowing from private sources would increase from current levels, through REPELITA VI 1.81 On the basis of the projections and beyond. presented in the previous Sub-Sections, disbursements of financing assistance from 1.80 Despite the rising importance of the Indonesia's Consultative Group (CGI) would private sector in Indonesia's external financing, need to exceed US$4 billion (including grants) official assistance will continue to play several in 1995/96. After allowance for the existing Macroeconomic Developments and Policies 31 pipeline of assistance and considering the poverty reduction and the provision of physical availability of sound projects, achieving this infrastructure that eliminates bottlenecks to goal would imply a level of new commitments private sector. Developments since last year's (loans and grants) from the Consultative Group CGI Meeting have underscored the interest of for Indonesia similar to last year's US$5.2 the private sector in significantly increasing its billion. The remainder of the rise in financing financing of development of Indonesia's needs in FY1995/96 would be met by infrastructure (see Chapter 3). Accordingly, disbursements from other sources. the priority areas for new assistance are human resource development, poverty reduction, 1.82 As recognized from both the protection of the environment, and the Indonesian and donors' sides of the CGI provision of infrastructure complementary to Meeting of July 1994, Indonesia's priority activities of the private sector (see Chapters 3 needs to favor a composition of this assistance and 4). that emphasizes human resource development, F. The Priority Macroeconomic Policy Agenda 1.83 Achieving the medium-term prospects any cool-down of the economy, nor will it help of Section E requires that three important, to generate the savi gs that are needed to overlapping policy issues be addressed i) finance rising private and public investment. avoiding the danger of overheating; ii) This step taken, the containment of off-budget maintaining control over Indonesia's external spending is one of the remaining policy levers debt; and, iii) sustaining external confidence, for countering overheating and for meeting the especially in regard to the soundness of the additional debt service costs occasioned by financial system. cross-currency movements since the Budget was finalized. To this end, strict control needs Avoiding Overheating to be exercised over off-budget spending, and the aim should be to bring such spending on- 1.84 As noted at the outset of this Chapter, budget to contain slippages. The commercial the Government is aware of the need to lines of credit should not be used to finance maintain macroeconomic stability as a such spending, but be maintained effectively as precondition of further economic and social additional official reserves. Also, the progress. At the present time, the main danger Government should aggressively pursue those to Indonesia's financial stability seems to arise revenue items in the Budget that are targeted from the possibility of overheating, bearing in for increased collections: non-tax revenues; mind that the impact of the Mexico crisis may improved administration; and taxes on land and slow economic activity somewhat. If present real estate transactions. Moreover, there is trends continue following the Mexico crisis and much more room for increased revenues from the yen appreciation, a more contractionary forestry (1HH), luxury, property and excise balance of financial policies is likely to be taxes, including on gasoline. needed to reduce the danger of overheating. 1.86 Over the medium-term, the ratio of tax 1.85 Fiscal Policy. The thrust of fiscal collections to GDP, which is low in Indonesia policy during the coming year will largely be by standards of lower middle-income countries, determined by the Budget for FY1995/95, needs to be substantially increased, mainly by which was less contractionary than the previous improved administration and broadening the tax year's. As such, it will not contribute much to base. Such domestic resource mobilization 32 Chapter 1 efforts will be vital in maintaining below). The second complicating consideration macroeconomic stability and in funding needed concerns the state of Indonesia's banking investments in infrastructure and human sector; in some quarters there are doubts as to resource development. Other useful steps the capacity of some of Indonesia's banks to include: improved tax administration; raising withstand a significant, extended tightening of forestry revenues (MIH) and bringing them on- monetary policy. These two complicating budget; raising urban property taxes and factors point towards the need for more balance assessments; and better pricing of public in the use of monetary and fiscal policies to infrastructure services (including congestion cool-down the economy. Also, they taxes). Fiscal policy also needs to be more underscore the importance of institutional "contra-cyclical". In Indonesia's balanced policies to improve the depth and health of budget setting, this would mean running small Indonesia's financial system (see Chapter 2). overall surpluses at time of cyclical upturns and strictly earmarking these "surpluses" to 1.89 Other Policies To Avoid Overheating. underfunded long-term liabilities, such as the As discussed in Chapter 2, deregulation has an civil servants pension funds or debt important role to play in spurring growth in prepayments. Indonesia. However, deregulation policies can also contribute to a cool-down of the 1.87 Monetary Policy. With the direction economy. For example, in the near term, of fiscal policy essentially determined for the opening more sectors to imports and lowering time being, a sizable part of the burden of any tariffs on key commodities would take some cool-down will fall on monetary policy. immediate pressure off consumer prices. During the past year or so, international Similarly, greater private sector involvement in interest rates have been on the rise, and rice trading would help to dampen fluctuations aligning domestic rates with international rates in rice prices. Furthermore, more deregulation has slowed monetary and credit aggregates of the agricultural sector would lower the somewhat. If international rates continue to consumer price of key commodities, such as rise and if Indonesia continues to maintain noodles, which are a substitute for rice. close alignment between domestic and international interest rates, it will be relatively 1.90 Over the medium-term, implementation easy to achieve Bank Indonesia's targets for of the deregulation program will increase the monetary and credit expansion during the supply responsiveness of the economy, coming fiscal year. However, tighter policy resulting in less inflation in the face of supply- and commensurately higher interest rates would or demand-side shocks to the economy. Also be needed to contribute in a significant way to over the medium-term, other policies can be any necessary cooling-off, which will require used to increase the supply capacity of the courage, especially if international rates economy; for instance, public expenditure decline. policy that removes key infrastructural bottlenecks (see Chapter 3). 1.88 The conduct of monetary policy during the coming year is likely to be complicated by 1.91 Caution is also needed as concerns the two additional considerations. First, Indonesia Government's policy of rapid increases in is vulnerable to contagion effects from events legislated minimum wages. To ensure such as the end-1994 Mexico crisis and the continued strong employment growth, it will be early-1995 dollar depreciation, which could important not to set minimum wages at levels make it difficult for Indonesia to rollover short- that approach average wages in many sectors. term credits (see Maintaining Confidence Also, the pace of increase in such wages Macroeconomic Developments and Policies 33 should not exceed the capacity of other policies sustain the growth of non-oil exports. If (e.g., deregulation, de-bureaucratization, borrowed funds are not used effectively, they productivity growth, and nominal exchange rate will add to the country's already large debt policy) to offset the cost impact of higher burden, without contributing to the nation's minimum wages. repayment capacity. The best means to ensure effective use of borrowed funds is to undertake Managing External Debt further trade policy deregulation measures, which expose the economy to international 1.92 Notwithstanding the prepayments of competitive pressures, and to use a clear debt in 1994, Indonesia's external debt remains competitive framework for allocating a heavy burden on the nation's economic infrastructure concessions. development. To maintain control over this critical element of Indonesia's financial Maintaining Confidence stability, the Government's own external financing needs must be strictly contained. But 1.94 The most important ingredient to some further steps would also be important. maintaining investor confidence is the visible For instance, the Commercial Offshore Loan maintenance of policies that emphasize strong Team, COLT, should be strengthened and fundamentals. However, these policies alone ceilings should limit public or quasi-public might not be sufficient to insulate Indonesia external borrowing to prudent levels over the from a sudden, unexpected shift in investor next few years, including off-balance sheet sentiment, perhaps brought on by developments liabilities, such as guarantees. Also, unrelated to Indonesia's own policies (for commercial lines of credit should be set aside example, further rapid depreciation of the US to protect against external shocks, and not used dollar). In the face of uncertainty, portfolio for off-budget financing. In addition, public managers rationally flee to safe havens at very enterprise borrowing on the domestic capital short notice; economic fundamentals can take market needs closer surveillance (see a back seat for a time. In addition, the Chapter 3). Moreover, the scope for pre- potential for such effects is likely to increase in payment of expensive debt has not been the future as rupiah-denominated assets become exhausted, and there seems to be room for a better-known investment among off-shore cost-saving through re-financing. portfolio managers. 1.93 In a related area, more attention needs 1.95 As a strategic matter in this regard, it to be given to the implications for Indonesia's should be borne in mind that the capital flight debt burden of the mega-projects underway in of early 1995 was small relative to the total the area of infrastructure. Many of these amount of money that could flee the country projects will be highly leveraged and much of should a serious crisis of confidence develop. the debt component will be counted against In such an event, some re-enforcement of Indonesian debt ceilings (see Chapter 3). Indonesia's strong fundamentals would likely Moreover, the Government needs to re- be needed, in the form of: a stronger official assert-at every opportunity-that it firmly reserves position; a forceful tightening of maintains a clear distinction between private monetary policy; and significant fiscal action. debt and publicly-guaranteed debt. Finally, the Accelerated delivery of a strong deregulation key to managing Indonesia's debt burden package might also be useful. Even then, continues to lie in efficient use of borrowed additional support from the aid donor funds (public and private, including those community might prove necessary. associated with foreign direct investment) to 34 Chapter I 1.96 As on-going insurance against major this regard by continuing to address those loss of confidence, Indonesia should be issues that many observers believe are hurdles prepaf ed to demonstrate-in a highly visible to Indonesia's long-term development, such as and convincing way-that it will continue to deregulation. It will also be important to manage its economic affairs prudently. In follow policies that strengthen the structure of addition to maintaining strong fundamentals, the economy; in this area, the financial sector the country can demonstrate its commitment in is widely regarded as the most critical. Macroeconomic Developments and Policies 35 Technical Annex I to Chapter 1 Indonesia's Revised National Accounts 1A. 1 In early 1995 the Indonesian Central growing sectors assumptions were replaced by Bureau of Statistics (BPS) released new new information on certain products. national accounts statistics for 1993 and 1994. Examples in this regard would include: These incorporate three significant changes: i) cashews in Agriculture; non-bank fmnancial estimates of real output were re-based from services and new forms of entertainment (e.g., 1983 to 1993 prices; ii) estimates of 1993 karaoke) in Services; private short-courses nominal output (Gross Domestic Product, (e.g., for language training) in Education; and GDP) and expenditure were revised upwards telecommunications, private electricity by some 9.2% as a result of improved companies and geo-thermal power generation in estimation procedures; and, iii) sectors were different types of Utilities. In other sectors, re-classified and some sub-sectors were made BPS improved estimates of activity, for more detailed. example in Construction (where more detailed information suggests under-reporting in 1A.2 Re-Basing to 1993 Prices. Re-basing previous years), Forestry (where data on of the national accounts is a statistical exercise manufacturing input is now being used, rather that countries undertake periodically to reflect than output data recorded by other government a more up-to-date structure of the economy, in agencies), and Manufacturing. At present, this case 1993 versus 1983. Effectively, it these revised data are publicly available only means deriving estimates of national output by back to 1993. using the prices and sectoral outputs in a more recent year as the basis for weighting growth 1A.4 Sectoral Reclassifications. The rates of real output in sub-sectors and sectors. revised national accounts incorporate a new As a general rule, the re-based data yield sectoral classification that totals twenty-six sub- higher estimates of growth because faster- sectors (nine major sectors) compared with growing sectors have a larger weight in the re- twenty-one sub-sectors (eleven major) based estimates. For example, the 1994 GDP previously. In Agriculture, a new sub-sectoral growth measured in 1993 prices was 7.3%; in classification stresses the distinction between 1983 prices, it was 6.8%. food and non-food crops. A few simple forms of processing of agricultural crops (e.g., sun- IA.3 Historical Revisions to Nominal dried coffee and fish), were transferred from GDP. The level of nominal GDP in 1993 was Agriculture to Manufacturing. revised upwards based on the results of the latest (1990) Input-Output Table, which was IA.5 Implications for Per Capita Income. up-dated to 1993. The revisions also The new national accounts raise the encompassed improvements in BPS's Government's estimate of per capita income in methodology. For instance, in some rapidly- Indonesia by about 9% in 1993 (see below). GDP GNP GDP per capita GNP per capita (RP.. trillions) (RD., trillions) . L$US $ 1993 Nominal, 1983 Base 302.3 285.8 746 705 1993 Nominal (& Real), 1993 Base 329.8 317.2 814 782 1994 Nomninal, 1993 Base 377.5 363.0 919 884 1994 Real, 1993 Base 354.0 341.5 . ... Source: BPS 36 Chapter I Endnotes 1. In conjunction with the revised National Accounts (see Annex I), the Indonesian Bureau of Statistics (BPS) released its estimate of income per capita for 1994, which was US$884. The official World Bank estimate will not be available until August 1995. 2. Data on country-of-origin should be treated with a degree of caution as there appears to be a certain amount of arbitrariness in the choice of country designations and there is a large residual, "joint" category. 3. Mortgage loans to cover this expansion may be for 90% (or more) of the purchase value of the property (the proportion for existing housing loans tends to be lower, say 70%) with a long maturity structure, of 5-15 years; interest rates may be fixed or variable. There is no secondary mortgage market in Indonesia. 4. These problems are of less concern as regards banks' business loans, which comprise the bulk of loan portfolios, because these are predominantly short-term working capital credits. Of course, banks remain exposed to normal credit-risk on the business loan side of their business, which would be heightened by any sharp, lasting rise in interest rates. 5. The term "off-budget" applies to both revenues and expenditures. This concept is aimed at capturing fiscal transactions outside the framework of the annual Budget. For example, on the side of revenues, this concept captures reforestation funds, which accrue directly to the Forestry Ministry and are not recorded as a revenue in the Budget. On the expenditure side, the concept encompasses extra-budgetary spending financed out of the Government's financial accounts. Limits of the concept should also be noted-such transactions can only be estimated indirectly on a net basis; little is known about the size of the underlaying gross revenues and expenditures. 6. Rates were cut from 15%, 25% and 35% to 10%, 15% and 30%, and the ranges were changed from Rp.0-10 million, 10-50 million and over 50 million, to Rp.0-25 million, 25-50 million and over 50 million. 7. Alternatively, the tax is 10% of half of the sales price of the house and the land. 8. The pay increase was phased, with lower echelons of the civil service receiving the increase with effect from January 1995. Upper levels received the increase effective April 1995. 9. On a Govermment of Indonesia (GOI) basis, the budget is balanced (that is, a zero deficit), as always. The difference between the GOI accounting framework and the budgeted deficits noted in the text, is strictly presentational. As mentioned in the main text, in 1994 the deficit measured in a World Bank/IMF basis stems from two components: i) foreign borrowing from the aid donor community (in the amount of Rp.0.5 trillion, or 0.1% of GDP), which is counted as a development revenue in GOI format; and, ii) domestic financing from government forestry accounts (in the amount of Rp. 1.2 trillion, or 0.3 % of GDP), which is counted as a Non-Tax Revenue in GOI format. 10. A key swing sector in the medium-term outlook will be agriculture, most notably production of rice. Production of this commodity has grown less than long-term trends for the past 4 years, and output has suffered an outright decline each of the past 2 years. Weather conditions have played a key role in the past 2 years. But they are not the whole story: gains from technological improvements (higher-yielding strains, better irrigation, pesticides, etc.) have fallen-off; agricultural land has been converted to other, more productive uses; and, prior to 1994 (when producer prices jumped because of the drought), relative prices to producers were on the decline. On the economic policy side, pricing will be the key decision in the next few years. It will be an important factor in determining whether Indonesia follows the high- priced, domestically-oriented route of Japan, or the outward-looking, growth-generating policies of Thailand. The Government's Role in Competitive Markets 37 2 THE GOVERNMENT'S ROLE IN COMPETITIVE MARKETS A. Overview 2.1 The private sector's increasing role in agenda includes also eliminating restrictions on the Indonesian economy requires changes in the exports. Over half of nonoil exports are Government's role to maximize efficiency. subject to some form of export restriction. This chapter analyzes some of the key changes Export restrictions run counter to the objective that will be needed. The overarching need is of promoting nonoil exports. They serve to rely more on markets and deregulation to various objectives including promoting promote efficiency. But markets must be as domestic processing activities and improving competitive as possible if the economy is to average export quality but for the most part rely on them to allocate resources efficiently they are inappropriate instruments for these and improve consumer welfare. This means objectives. Section B also elaborates the that the Government must emphasize its remaining trade reform agenda. regulatory role and eliminate the barriers to competition, including trade barriers, while 2.4 Increasing domestic competition is also reducing its directly productive role. of major importance. Indonesia's previous, inward-oriented development strategy involved 2.2 The first area of change is trade a plethora of domestic regulations and deregulation. Beginning in 1985, significant restrictions on entry. Subsequent deregulation trade reforms improved the profitability of of investment, however, introduced significant exports and reversed the period of inefficient, competition. Still, a significant Government inward-oriented growth (World Bank 1994a). presence remains in the production and In 1991-1994, piecemeal trade reform had distribution of "essential commodities" in some success in making the structure of competitive sectors, which reduce efficiency protection less distortionary. In May 1995 and offer no special protection for consumers. Indonesia took a large step in further There also have been cases of re-regulation deregulating trade. The nearly 25 % cut in the since the opening-up reforms began. average tariff, to 15% (roughly Malaysia's Marketing of cloves, soybean meal and citrus level), is the most significant since 1990. in East Kalimantan are examples. The easing Moreover, the preannounced tariff cuts will of restrictions on international trade will free reduce the average tariff to 7% by 2003. up domestic competition in markets for many Strong pro-competitive forces should flow from goods and services. But domestic trade this initiative, which is discussed further in restrictions remain large in number and form, Section B. and diverse in objectives. For this reason a rules-based approach to deregulating domestic 2.3 The significant steps taken in the May competition also is warranted. This package highlight the need to deregulate the recommendation is elaborated in section C. parts of the economy that remain insulated from competitive pressure by restrictions on 2.5 With the emergence of a dynamic trade. The remaining restrictions will exert a private sector there is little rationale for growing drag on the economy. Elimination of maintaining the Government's presence as a nontariff barriers that provide high protection producer in the competitive sectors of the to a few producers at the expense of consumers economy. Thus, another change in the is a deregulation priority. The deregulation Government's role is to privatize public 38 Chapter 2 enterprises operating in the competitive sectors help prevent problems in one bank from of the economy and concentrate scarce spilling over into a systemic problem. financial and managerial resources where they Regulation of financial institutions can be are most needed. In Indonesia as in other improved by information disclosure and countries the evidence is solid that, where they Government-mandated reporting requirements. compete, the private sector outperforms the Government regulation of exposure and public sector. This evidence is reviewed in capital-higher capital requirements-also section D. discourages bank owners from risking depositors' funds by investing unwisely. There 2.6 A competitive climate for business also is a direct role for Government as an includes rules of the game to ensure that legal owner of commercial banks in collecting more contracts will be enforced. Where these rules forcefully overdue loans. These issues are are absent other institutions such as negotiating discussed in more detail in section E. The and deal making evolve to facilitate business. section also touches on the need for regulation Mark-ups and invisible costs are the price of in the increasingly important non-bank financial negotiating and deal making and the lack of a sector to reduce its vulnerability, ensure that clear framework for enforcing contracts. resources are used productively and the Section E analyzes reforms of the commercial Government is not left with unfunded pension law system aimed at creating a transparent and obligations. predictable environment for business. 2.8 The Government's regulatory role also 2.7 The Government also has a regulatory extends to protecting the environment because role in some markets arising because of private firms do not bear the environmental externalities or asymmetries of information. costs of their actions and, thus, may Government regulation of the financial sector overpollute or underinvest in environmental is needed because the market may be slow to protection. The Government's role requires develop mechanisms for providing accurate, both the creation of a regulatory framework to reliable and timely information to the public on encourage sustainable exploitation of the the riskiness of investments. In addition, environment as well as forceful implementation because of the high leverage of financial of these rules. It also calls for investments in institutions and their role in managing the pollution control. These tasks also are payments system, Government regulation can described in section E. B. Trade Reform 2.9 There are many good reasons to opening markets. Third, heightened global increase competition by deregulating competition-Indonesia's competitors have international trade. First, Indonesia will grow accelerated the pace of liberalization-needs to faster. Indonesia's GDP growth accelerated be met in kind. Fourth, deregulation of after the trade liberalization reforms began in international trade will improve equity. Trade 1985. Second, progress in multilateral trade restrictions raise costs, including the domestic negotiations argues for pressing ahead with prices of food items, which disproportionately reforms to open up the economy. The taxes the poor. The restrictions also cost jobs momentum following the recent successful by insulating less efficient activities from multilateral and regional trade liberalization competitive pressure. By lowering domestic initiatives-the Uruguay Round of GATT prices of protected items, trade deregulation negotiations, the APEC leaders' Bogor summit, raises real wages and enhances competitiveness and the progress toward the ASEAN free trade and growth. area-will be lost without concrete steps toward The Government's Role in Competitive Markets 39 2.10 The May 1995 deregulation package 2.13 By lowering tariffs on over 6,000 resulted in a significant reduction in the items, the May package will put downward average tariff, the first since 1991 and the pressure on prices. The average 5% tariff cut largest since 1990. The package marks a will lower the consumer price index by an departure from the previous piecemeal estimated one percentage point by the end of approach to reform. The authorities also 1995. This is a welcome development in view issued a schedule for future tariff reductions to of the nearly 5 % rise in the consumer price 2003. In essence the authorities unilaterally index in the first four months of 1995 (Chapter extended the tariff cuts scheduled under the 1). Restraining inflation is important because ASEAN Free Trade Area (AFTA) Common inflation adversely affects the poor especially. Effective Preferential Tariff (CEPT) scheme on a most-favored nation basis. Adherence to this The May 1995 Package trade reform schedule would result in more improvement in the structure of protection by 2.14 The main trade reforms in the May 2003 than has occurred since the opening-up package include a five percentage point (ten reforms began. percentage points for tariffs of 40%) nearly across-the-board reduction in import duties. 2.11 The May package also is significant as Thus, tariffs on 4,500 items were reduced by a response to an enhanced pace of deregulation five percentage points, tariffs on 1,050 items in competitor countries. Malaysia, for by ten percentage points, and tariffs on 500 example, cut tariffs on over 2,600 items in items by 15-35 percentage points. According 1994. Thailand's deregulation, announced in to the schedule for future tariff reform, tariffs 1994, will cut the average tariff by half over below 20% will be reduced to 5% by 2000 and two years, replace nontariff barriers with tariffs tariffs in excess of 20% will be reduced to on 22 agricultural products in advance of 20% by 1998 and to 10% by 2003. Thailand's GATT commitments, and deregulate foreign investment. In 1994 India reduced its 2.15 There are some exceptions to the maximum tariff by two-thirds, lowered tariffs across-the-board cuts. In the automotive on capital goods to 25 %, cut nontariff barriers, vehicles sector very high tariffs are being and introduced measures to stimulate textile reduced according to a separate timetable in and garment exports. The May package was which greater percentage point reductions needed to keep from falling behind the correspond to smaller proportional reductions. competition. Tariffs on chemical and metal products are being reduced according to a separate schedule 2.12 With the May package Indonesia also that will bring tariffs to a maximum of 10% by helps sustain the momentum of multilateral 2003. Finally, tariffs on alcoholic beverages trade reform. 1994 saw important steps taken are not being reduced. On the other hand toward a more open world trading system. tariffs on some items were reduced by more There was the successful completion of the than five percentage points and tariffs on 249 Uruguay Round of GATT negotiations, items were eliminated. The items include Indonesia's hosting of the APEC leaders' paper, cooking oil, wood and wood products, Bogor meeting with its commitment to free tiles and ceramics and glass and glassware. trade and the ASEAN Economic Ministers' endorsement of acceleration of the time-frame 2.16 In addition to tariff cuts, the May for the realization of the AFTA CEPT to ten package includes the "tariffication" of nontariff years from 15 years. Continued multilateral barriers on 69 items-mostly high carbon steel lowering of trade barriers will benefit the entire strips-by replacing restrictive import licenses world. with tariff surcharges of 5% or 10%. Tariff 40 Chapter 2 surcharges on 45 items were abolished and and import-weighted averages also fell by one- another 50 surcharges were reduced. fifth and one-quarter respectively (Table 2.1). The dispersion of tariff protection dropped to 2.17 The immediate effect of the May 17% from 20%. High dispersion, a persistent package reforms is to reduce the average tariff feature of the Indonesian system of protection, plus tariff surcharge to 15% (Table 2.1), about is bad because is allows inefficient, high cost the same as Malaysia. This is a cut of over but protected activities to survive and compete four percentage points or nearly 25%, the first with internationally competitive but unprotected significant drop since 1991. The production- activities for resources. Table 2.1: The Average Tariff plus Surcharge (percent) Pre-1985 1990 1991 1992 1993 1994 1995 Unweighted 37 22 20 20.0 19.7 19.5 15.0 Weighted by: import value a 22 11 11 11.9 13.7 12.5 9.5 1987 production 29 17 15 11.8 10.9 10.4 8.2 a 1991 import weights for 1990 and 1991 and 1992 import weights thereafter. Source: World Bank staff estimates. 2.18 The May package also altered the ownership." Eight sectors are included in this negative investment list. Ten sectors were category: operation of ports; production, dropped from the list and five were added. transmission and distribution of electricity to Thus, a total of 34 sectors remain on the the public; provision of public negative investment list (Table 2.2). The main telecommunication services; shipping; changes included the addition of a new provision of drinking water; public railways; category, "Sectors closed to 100% foreign nuclear power; and advertising. Table 2.2: The Negative Investment List Category Number of Sectors I. Sectors closed unless certain requirements are met 9 II. Sectors closed to foreign investment 6 IH. Sectors closed to 100% foreign investment 8 IV. Sectors absolutely closed 11 TOTAL 34 2.19 The May 1994 investmnent deregulation of the company. The May 1995 package opened the first seven of these, which are relaxes the requirement that 5% of the capital classified as "important to the country," to be owned by Indonesians, stipulating only that foreign investment provided that Indonesian foreigners may not own 100% of the capital. partners owned 5 % of the entire paid-up capital The Government's Role in Competitive Markets 41 2.20 Ten sectors were dropped from the 2.22 As the structure of tariffs improves the negative foreign investrnent list for the stated losses from the remaining distortions will grow purposes of increasing business opportunities, over time. Elimination of nontariff barriers on domestic supplies of the affected products, imports and export restrictions are the principal value added and technology transfer. The unfinished elements in Indonesia's program of sectors affected are: cooking oil; block board; trade reform. unfinished and semi-finished rattan; utility boilers; motor vehicles; machines for 2.23 The May package made little progress producing white cigarettes; disposable gas in reducing the production coverage of lighters; prescription medicines; aircraft repair; nontariff barriers (Table 2.3). Restrictive and advertising (though 100% foreign import licensing requirements continue to ownership is prohibited-see above). Finally, protect large shares of agriculture and nonoil for environmental protection reasons, five manufacturing production. The restrictions on sectors were added to the list of sectors closed trade in the important commodities regulated totally to investment: manufacture of finished by Bulog, the state logistics agency-rice, or semi-finished mangrove wood; cyclamate sugar, wheat, wheat flour, soybeans and and saccharine; sulfite-based pulp production; soybean meal-were not touched and the chloro-alkali industries using mercury authorities stated that they will be deregulated processes; and chloro-fluorocarbon industries. in line with Indonesia's commitments under the Uruguay Round of the GATT/WTO. However, Unfinished Trade Reforms Indonesia's commitments under the Uruguay 2.21 Implementing the tariff cuts Round do not require much action to be taken programmed in the May package would before 1998 (Box 2.1). The most likely improve the structure of protection by more channel for deregulating the trade restrictions than has occurred since trade liberalization on the Bulog commodities is through unilateral reforms began. The implementation of the trade liberalization, just as occurred in the May May package scheduled tariff reforms would package. reduce the average statutory tariff to 7% and lower its standard deviation to 4%. Table 2.3: Coverage of Nontariff Barriers (percent of 1987 production protected by restrictive import licensing) Sector 1986 1990 1991 1992 1993 1994 1995 Agriculture (excl. Forestry, 69 39.1 35.5 35.5 35.5 35.5 35.5 Hunting and Fishing) Manufacturing (excl. Oil refining) 46 31.7 31.1 31.4 31.2 30.6 30.3 Source: World Bank staff estimates. 2.24 Nontariff barriers keep domestic sugar fluctuated with world prices between 40% and prices too high. Domestic sugar prices are 80% in the 1980s (Nelson and Panggabean controlled and Bulog has the monopoly right to 1991) and a quality-adjusted price differential import sugar. A restricted number of traders of 37% was observed for sugar in 1992/93. A are eligible to purchase sugar directly from sharp rise in world prices beginning in the Bulog. The gap between the domestic price of second half of 1994 more than offset a small sugar and the price of competing imports increase in the local price to growers-the 42 Chapter 2 "provenue" price-and reduced the price fraction of their income on food, is higher. differential to 17% in 1994. Sugar accounts for approximately 3.3% of total expenditures by the poor in Indonesia. The 2.25 High domestic sugar prices are like an 17% fall in sugar prices that would result from indirect tax. Such taxes are passed on to deregulating trade in sugar would lead to a consumers. When food items are taxed the 0.6% increase in real expenditures on other burden for the poor, who spend a larger goods and services by the poor. Box 2.1: Indonesia's GATT and APEC Commitments Require Little Action Now Indonesia's Uruguay Round commitments do not require any trade taxes to be reduced or NTBs to be eliminated immediately. Indonesia offered to increase tariff bindings-commitments to keep tariffs below the bound maximum rates-to 95% of tariff items from under 10% now. But the offer did not include any tariff line with a tariff higher than the ceiling tariff level. Most notable among the excluded items are motor vehicles and parts, which are protected by tariffs of up to 125%. Thus, the increase in tariff bindings is a commitment not to raise tariffs in the future, rather than a commitment to lower them (now or later). Indonesia also agreed to eliminate import surcharges-another name for import taxes-on bound items within ten years. But, again, this requires no action since all combined tariffs and surcharges on items covered by this commitment already are below the ceiling bindings. Thus, Indonesia could replace the surcharges that are to be eliminated with higher tariffs and meet its commitment without lowering total taxes on imports. Indonesia's commitment to abolishing NTBs on bound items over ten years covers 98 manufacturing tariff lines (half of all manufacturing lines protected by NTBs but excluding motor vehicles and iron and steel products). The June 1994 deregulation package reduced this number by nine. In agriculture, the tariff binding agreement covers all tariff lines, but no agriculture tariffs must be reduced because all bindings exceed existing tariffs. The only NTBs that the Indonesian Government will have to abolish are the local content schemes protecting soybean cake used in animal feed (over three years) and dairy products (over ten years). Bulog (the State Logistics agency) monopoly import licenses are unaffected by the commitment since, under GATT rules, these are not regarded as NTBs but rather as legitimate practices that state trading enterprises may perform. Indonesia, as host to the 1994 APEC summit at Bogor, has been a prominent supporter of APEC. The APEC leaders made a commitment to free trade at Bogor. That commitment is ambiguous as to whether APEC would become a vast free trade area with barriers to trade with outsiders or, alternatively, an agreement based on "open regionalism" in which APEC members would abolish their barriers to trade with each other and with non-APEC countries. Drawn from Trade Policy Review Indonesia 1995 General Agreement on Tariffs and Trade, Geneva (February 1995) and the APEC Economic Leaders' Declaration of Common Resolve. 2.26 The May package also left untouched millers-there are only three, two huge mills the nontariff barrier protecting domestic wheat owned by a single private company and a small flour production. Since 1987 the only things state-owned mill-which process the wheat in that have changed are the domestic transfer exchange for a processing fee. The flour prices, which the Ministry of Finance sets, and subsequently is transferred back to Bulog. The world prices. Bulog has the sole right to miller retains the bran by-product of milling, import wheat-none is grown in Indonesia. which it sells to feed producers. The wheat is transferred to the wheat flour The Government's Role in Competitive Markets 43 2.27 Although high domestic wheat flour 2.29 The restrictions on soybean imports prices are not as much of a problem as in the permit the domestic price of soybeans to case of sugar-higher world prices reduced the exceed the landed price of competing imports. gap between the domestic wheat flour price In 1994 the margin was 40%. This over the estimated world price to only 4% in disadvantages small soybean cake producers 1994-restrictive dealing arrangement between that purchase soybeans on the open market. Bulog and the flour millers has adverse The cooperatives are less disadvantaged consequences for downstream users of wheat because Bulog sets the soybean price for them flour. Lack of competition in flour milling and below the domestic open market price. In the fixed price structure limit incentives to 1994 it was 5% above the landed import price. produce a wider variety of flours, including The producers of soybean cake and fermented higher qualities. Bakery needs for specialized soybeans are squeezed by the high price of flours are not reflected in market signals. The domestically-grown soybeans. baking industry complains about the quality of Indonesian flour and its inconsistent baking 2.30 The soybean crusher is not characteristics. This is especially a problem disadvantage by a high soybean price. Bulog for small and medium industries that lack sets its price below the landed import price for testing equipment and must rely on trial runs. soybeans. In 1994 the subsidy was 23%. In If a product turns out poorly, they incur addition, and unlike the case of wheat flour, additional costs by having to hire technical help Bulog sets its soymeal purchase price above the to analyze the flour. Deregulation of wheat landed import price of soymeal. Although and wheat flour trade would give a boost to higher world prices resulted in a margin of 5 % Indonesia's bakery industry and to small and in 1994, it has been measured as high as 50% medium industries. since the control of soybean and soymeal trade began in 1988. 2.28 Restrictions on soybean and soybean meal trade raise the domestic price of soymeal 2.31 High-priced soymeal disadvantages above the import-competing price, inhibit the downstream users, particularly feed mills. development of small and medium industries Their response has been to substitute less and reduce exports. Soybean processing has desirable sources of protein such as corn meal been re-regulated since the onset of the for soymeal, which has impeded the opening-up reforms. With the opening of a development of an efficient poultry industry. large domestic soybean crushing plant in 1988 The Government has responded to the private imports of soybeans were banned and, problems of the feedmillers and the poultry to protect the crusher, imports of soymeal were producers by relaxing the restrictions on restricted by a licensing requirement. The soybean and soymeal trade. And, as noted Government introduced a qualitatively identical above (Box 2.1), under Indonesia's Uruguay scheme to the arrangement between Bulog and Round commitments to the GATT, the local the wheat flour miller for milling wheat into content restrictions protecting the soymeal flour and bran. The main structural difference producer will be phased out by 1998. An from the wheat flour scheme is that the acceleration of that date, accompanied by the soybean crusher is not a monopsony buyer of elimination of restrictions on the import of soybeans. Manufacturers of soybean cake and soybeans, would stimulate the poultry industry soysauce, primarily small industries, and in which Indonesia has a comparative producers of fermented soybeans, primarily advantage. Soybean deregulation also would small cooperative factories, account for two- reduce the domestic price of soybean cake and thirds of soybean purchases. fermented soybeans, important sources of protein in the Indonesian diet. 44 Chapter 2 2.32 In addition to Bulog's sole right to Where necessary the protection afforded by the import the above items, other agricultural nontariff barriers could be replaced by goods that are subject to restrictive import temporary import surcharges. licensing include milk and dairy products, onions, garlic and cloves. In industry the main Removing Export Restrictions items protected by restrictive import licensing include alcoholic beverages, salt, including 2.36 Indonesian exports remain subject to iodized salt, fertilizers, propylene copolymers, considerable regulation and control. Export printed matter, iron and steel tubes, hand tools, restrictions cover half of total non-oil exports. motor vehicles and motorcycles and keyboard The export restrictions take four forms: instruments in a completely knocked-down Export Bans (72 products), Regulated Exports, condition. which can only be exported by exporters approved by the Ministry of Trade (1,827 2.33 The rationale for protecting some of products), Supervised Exports, which require these items is transparent. Attempts to develop approval by the Ministry of Trade (105 the domestic automobile industry through local products), and Export Taxes (80 products). content schemes and high tariff and nontariff Most of these restrictions are directed toward barriers extend back to the 1970s. A measure agricultural exports. By value, nearly two- of their lack of success is that prior to the May thirds of agricultural exports, including all the package parts of the automobile sector were large cash crops-rubber, palm oil, coffee, and protected by taxes on imports of up to 275%; copra-are subject to some form of export the sector remains a high-cost enclave. In the restriction. Trade associations also affect the May package the highest tax was reduced to marketing of some, primarily agricultural, 200% and it is scheduled to decline to 90% by commodities. 2003. 2.37 Five reasons are officially cited for 2.34 The rationale for other nontariff using export restrictions: (i) to deal with barriers is less transparent. Iodine deficiency quotas imposed by importing nations; (ii) to is a problem in some parts of Indonesia. conserve natural resources and endangered Although it is not clear that liberalizing iodized species; (iii) to promote higher value added salt imports would solve the public health downstream industries; (iv) to raise the quality problem, the restriction is questionable. The of the exported products; and (v) to regulate rationale for restricting imports of hand tools domestic supplies. Export restrictions with also is unclear. These nontariff barriers keep competitive bidding for quota rights are an domestic prices above the price of competing appropriate instrument for controlling exports imports. For example, the domestic wholesale subject to quotas in importing countries. price of a hand pump was 164% higher than Export restrictions also are appropriate in some the comparable price in Singapore in 1993. instances to protect endangered species. There appears to be an inconsistency between However, they are not appropriate instruments policies that raise the domestic price of hand for the other objectives. They have negative tools and the objective of promoting small and side effects, encouraging smuggling and, most medium industry. importantly, depressing nonoil exports. 2.35 Nontariff barriers are a significant 2.38 Export restrictions on inputs are an source of high costs in the Indonesian economy inappropriate means of promoting downstream and one that has yet to be attacked in a industries. They lead to resource misallocation concerted way. An across-the-board from under-production of the input and over- elimination of nontariff barriers is warranted. production of the processed good. For The Government's Role in Competitive Markets 45 example, export restrictions on logs and low valorem export tax that would be phased out log royalties have contributed to an over a limited, pre-announced period. unsustainable pace of logging and a lack of efficiency in the wood processing industry. 2.40 In competitive markets, export restrictions are unnecessary for regulating 2.39 Qualitatively identical restrictions to domestic supply. The Minister of Trade those on logs are imposed on raw rattan. In supervises the export of some 1988 the Government banned the export of raw comrnodities-salt, cement, fertilizer, pulp and rattan (the bans were replaced by prohibitive paper, crude palm oil-in order to ensure export taxes in 1992). After the ban the price sufficient domestic availability. For example, of rattan logs fell. This provided an initial in September 1994 the Government, through a stimulus to the rattan furniture industry, at the Ministry of Trade decree, imposed an export expense of rattan cutters. Over time rattan tax on crude palm oil to keep the domestic cutters have left the industry to pursue more price of cooking oil down. This taxes CPO lucrative opportunities-in Sulawesi, a main producers to the benefit of consumers. source of rattan, many rattan cutters reportedly However, this kind of intervention reduces the switched to cultivating cocoa, which is much expected profitability of investing in the CPO less regulated-and raw rattan supplies industry, which, over time, will cause exports dropped. As a result raw rattan prices have of CPO to be lower than in the absence of risen, though they remain 50% below the Government intervention. Export restrictions smuggling price (which in turn is below the on cement, fertilizer, salt, and pulp and paper price that would prevail in the absence of are only one part of a regulatory framework restrictions). Rattan furniture exporters cannot whose aim is to ensure adequate supplies of pass higher raw materials prices on to buyers these "essential commodities" for the domestic in the highly competitive furniture export market. Indonesia's greater openness has made market and profitability in the domestic these regulations unnecessary. furniture industry has declined. The number of rattan furniture makers has shrunk and further 2.41 An across-the-board elimination of consolidation appears likely. In January 1995 export restrictions is warranted for virtually all an interministerial team (Tim Koordinasi commodities subject to export restrictions Industri Hasil Hutan) was formed to guarantee except those on textiles, which are justified adequate supplies of raw rattan for the while they remain subject to Multi-Fiber furniture industry. However, the surest way to Arrangement quotas, and the export bans on do this is to allow raw rattan cutters a endangered species. Where the restrictions reasonable price by eliminating the export taxes have encouraged large investments in on raw rattan. Efficient processors may need processing activities, their progressive time to adjust to higher raw rattan prices. This elimination over a limited time period could be could be accommodated by replacing the considered. specific export taxes on raw rattan with an ad C. Promoting Domestic Competition 2.42 Deregulation of restrictions on exclusive licensing, public sector dominance, international trade will expose many of the and ad hoc interventions by Government in most highly protected activities in the economy favor of specific firms and sectors. Some to competition. But restrictions on domestic restrictions are imposed by the national competition take many forms, including cartels, Government, others by sub-national price controls, entry and exit controls, Governments, and still others by trade and 46 Chapter 2 business associations (often with official based approach to deregulating barriers to sanction). Some of the restrictions on domestic domestic competition is needed. trade are summarized in Table 2.4. A rules- Table 2.4: Restrictions on Domestic Competition in Indonesia Type of Restriction Sectors in Which Prevalent Cartels Cement; Plywood; Paper; Fertilizer Price Controls Cement; Sugar; Rice Entry and Exit Controls Plywood; Retail Trade Exclusive Licensing Clove Marketing; Wheat Flour Milling; Soymeal Public Sector Dominance Steel; Fertilizer; Refined Oil Products 2.43 The myriad restrictions on domestic because the cartel rules prevent price competition reflect myriad objectives. Some competition within the sector from driving the commodities are termed "essential" and it is inefficient firms into bankruptcy. This is the said that their distribution is too important to case, for example, in the cement and paper and be left to the market (for example, cement, pulp industries. The cost of supporting fertilizer). In the cement and fertilizer inefficient firms is passed on to consumers in industries regulation of domestic distribution is the form of higher average prices for the goods accompanied by a significant state presence in produced by the relevant industry. Often, production. For other products restrictions on Government supports the cartel arrangements domestic competition are used along with because they protect high-cost state-owned restrictions on international trade to promote enterprises in the sector. infant industries or promote value added in processing activities (for example, wheat flour, 2.45 Exclusive dealing arrangements restrict soymeal). For still other products, the marketing of a variety of products. Continuing restrictions are instruments for exploiting the example of wheat flour, Bulog's agent, a Indonesia's power in world markets (plywood). large, well-connected wheat flour miller, In other cases, restrictions on domestic undertakes the importing of wheat on behalf of competition are second-, third- or fourth-best Bulog and, in exchange for a fee, processes the policies for correcting problems that have wheat into wheat flour. Although restrictions arisen due to existing distortions (rattan). on investments in the wheat flour industry were Finally, local revenue raising is another lifted in 1993, new investors still would have objective behind some controls on domestic to buy wheat from Bulog-in practice, through competition. the agent-and export 65% of their output, which have depressed interest in the sector. 2.44 Some Indonesian industries are organized as cartels with controls on prices, 2.46 Fertilizer is an "essential" commodity outputs, entry and exit enforced through trade whose distribution is controlled by a state- associations (often with Government sanction). sanctioned monopoly. One of the state-owned Most such industries are characterized by a fertilizer producers has the monopoly right to sharp dichotomy with relatively efficient firms distribute and market all subsidized fertilizers at one extreme and inefficient, high cost firms in Indonesia. A set of allowed distribution at the other. The two are able to co-exist charges for the company are negotiated each The Government's Role in Competitive Markets 47 year with the Ministry of Finance. The that intervention is necessary to protect allowed charges compensate the company for consumers of these commodities. The costs incurred but do not provide any pressure development of a national market with for efficiency improvement. The lack of competitive private traders allows the competition or pressure for greater efficiency Government to rely on the private sector for raises distribution costs. The potential for cost their production and distribution. savings has been estimated at 15-50% of current cost levels, which translates into 2.50 Not all marketing monopolies affect savings of up to $100 million annually (World essential commodities as the continued Bank 1995b). existence of the clove marketing monopoly attests. In the latest development with this 2.47 Cement is another essential commodity troubled monopoly, new regulations were whose distribution is tightly regulated. promulgated in 1994 requiring clove cigarette Distribution quotas are established monthly for manufacturers to increase the clove stocks in each cement producer at meetings involving their warehouses to help the clove marketing officials from the Ministry of Trade, Ministry monopoly run down its clove stocks. Although of Industry, Ministry of Transportation and the the monopoly announced publicly that it was Cement Producers Association of Indonesia. returning farmers' compulsory savings, it Each producer is assigned delivery quotas to simultaneously introduced administrative particular regions based on plant location and procedures defining farmers' eligibility to the cement market situation in each of the 27 obtain their money that in practice limit provinces. An objective of the distribution of withdrawals. The clove marketing monopoly quotas is to ensure that each market is serviced serves neither the smallholder clove farmers, by two or more producers. the kretek cigarette manufacturers, nor the taxpayers at large. It should be wound up. 2.48 The cement industry is characterized by periodic, annual shortages and there is 2.51 The recent (January 1995) resuscitation widespread dissatisfaction with it on the part of of the idea of granting monopoly rights to consumers and producers. The distribution distribute rattan in Java is a more recent regulations are largely to blame. At times example of an exclusive dealing arrangement producers must service distant markets whose for a non-essential commodity. This privilege reference price is based on transport costs from would be conferred by the members of the a nearer plant. Excessive freight absorption Indonesian Furniture and Handicraft Industry reduces cement industry profitability, and its Association, the main buyers of semi-processed capacity for financing investments (Plunkett rattan. Its objective is to increase the supply of and Pasinringi 1995). Although BKPM has rattan to processing plants located in Java. approved 30 new cement plant investments in Further administrative restrictions on rattan the past three years, realization of these trade are not the solution to the structural investments has been poor and in October 1994 problems in the rattan industry. A more BKPM announced it planned to revoke 23 of advisable course would be to eliminate the licenses. completely all restrictions on domestic and international trade in rattan. Since the 2.49 Deregulation of distribution controls domestic price of cut rattan likely would along with privatization of publicly-owned double (to the smuggling price) some relief in plants (see section D), would increase the form of a temporary, declining ad valorem competitive pressure in the cement and export tax on raw rattan could help efficient fertilizer industries. For this to occur the processors adjust. It seems likely that the Government would have to abandon the idea tangled knot of interventions in rattan 48 Chapter 2 marketing-central Government restrictions, provinces, which has created the anomalous provincial Government restrictions (see situation whereby exports of raw rattan from below)-will only be cut by strong action from Central Sulawesi to foreign countries are the central Government. permitted (in principle; they are subject to prohibitive export taxes) but exports to Java are 2.52 Sub-national Governments also restrict banned. In South Sulawesi, a provincial trade in various ways. Strictly speaking, sub- Government decree forces rattan traders to national Governments are prohibited from purchase cut rattan only from the local imposing commodity taxes without prior cooperatives (KUDs), which levy a fee on approval from the central Government. purchases by traders. The difficulties posed by However, "user charges" (retribusi) can be local road use fees for shrimp traders in South implemented with approval of only the Sulawesi are described in Box 2.2. The provincial Government and these are used to motivations for these levies and controls vary tax trade. The province of Central Sulawesi and include raising revenue and promoting bans the export of raw rattan to other cooperatives. Box 2.2: Local Levies Crimp Shrimp Exporters in South Sulawesi Locally-levied transport fees are holding back the development of the shrimp and prawn industry in South Sulawesi. Shrimps and prawns are an important new crop in South Sulawesi. Most production comes from small farmers on the eastern coast of the province, a nearly ideal location for their production. The coast faces a large sea with little shipping traffic, and is largely covered by mangrove swamps that naturally provide proper salinity levels required for shrimp production and protect the coast from wave activity. Exporters buy shrimp from farmers on a regular basis, and must transport the product to Ujung Pandang quickly, as all cold storage facilities are located there and the product is highly perishable. Local administrative "fees" reportedly are not much of a problem-exporters negotiate stable fee levels with local officials for transporting local product out of the kabupaten. However, problems arise when they try to transport the product back to Ujung Pandang and have to pay informal road use fees. It is common practice in the province for local Governments to raise money by charging vehicle fees. The fees are supposed to pay for the upkeep of the road, but in fact go into a general fund for local use. Any level of Government can charge these fees. All they have to do is station two people on the road, often with some sort of barriers to stop passing traffic. Fees are usually higher for commercial vehicles than for private cars, although tourist buses seem to be exempt. The problem is not the existence of the fees, but their unpredictability and variability. When exporters send a truck back to Ujung Pandang, they cannot predict how many times the truck will be stopped. Separate negotiations consume valuable time as the product deteriorates on its ice bed in the back. The bottom line is that costs vary from week to week. The uncertainty in transit costs and time has held back the fish and shrimp farm development on the east coast. Source: Trade Implementation and Policy Project, Ministry of Trade. 2.53 Trade taxes appear to be attractive producer incomes. Despite central Government vehicles for raising revenue. This is a false efforts to dissuade sub-national level perception. Although they appear to tax Governments from taxing trade, such "someone else" (consumers in other provinces interventions are pervasive. or countries), the most common result is that those consumers have substitutes and the main 2.54 Ad hoc interventions by Government in impact of trade taxes is to depress local favor of large or otherwise influential business The Government's Role in Competitive Markets 49 groups also occur in Indonesia. Such 2.58 When the data are disaggregated to the interventions take the form of Government 3 digit level, the most concentrated subsectors equity participation in large commercial are: measuring instruments, transport projects with one favored group or another, equipment, electrical machinery, iron and steel, favoritism in the procurement practices of structural clay, cement, glass, porcelain, public enterprises, or the outright grant of industrial chemicals, paper, tobacco and exclusive licenses to produce, import, and sell beverages. This accords broadly with popular in certain regions. Often, the stated perceptions. justification for such interventions is the need to build a strong domestic private sector that 2.59 Theory suggests that the lack of can compete internationally. Unfortunately, competition results in lower economic such interventions typically have the opposite efficiency. It is difficult to demonstrate effect. By decreasing domestic competition empirically this link because accurate sectoral they promote inefficient firms. By providing efficiency data (such as total factor productivity large benefits to a few, they generate rent- measures) are not available for Indonesia. seeking behavior in the private sector. However, an indirect method may be employed. This is to examine the correlation 2.55 There also are many examples of non- between export orientation and concentration transparent transactions between Government by sector. Export orientation provides a and elements of the private sector. In the defensible measure of efficiency since exporters textile and paper industries, private groups have to compete in unfettered international have been allowed to buy public enterprise markets. Those who succeed are likely to be assets at low prices without an open and those who are most efficient and keep close to transparent divestiture process. The converse international best practice in their product and also has happened: the public sector has process technologies. Table 2.5 below shows purchased private assets at significantly inflated that there is a broad negative correlation prices (relative to the market). between export orientation and concentration. Sectors with above-average concentration tend 2.56 Cartels, exclusive licensing, entry and not to be heavily engaged in exporting. exit controls, and non-transparent transactions Conversely, subsectors with low concentration between the public and private sectors have ratios are among those with the highest export resulted in significant pockets of monopoly and orientation. ' Regression analysis confirms this oligopoly in the Indonesian economy. While it pattern in a statistically more rigorous fashion: is difficult to document this empirically for the the higher the concentration level, the lower economy as a whole or for all the major the export orientation (at the 5 digit level). sectors, it is possible to do so for the manufacturing sector. 2.60 In view of the number and variety of restrictions on domestic competition and their 2.57 The average level of concentration in myriad objectives, a rules-based approach to Indonesian manufacturing is high. deregulation is warranted. This approach Concentration is lower than 25% in only two would dissolve Government-sponsored or subsectors (textiles/footwear and wood sanctioned monopolies controlling marketing products). The weighted average of 47% is and distribution of "essential" and other high by international standards, very high commodities and open the distribution (retail compared with developed countries (22% in the and wholesale trade) sector to foreign United Kingdom and 36% in the United investment. The rules-based approach would States). Indonesia's ratio is even higher than include legislation ensuring that an ordinary that of Malaysia (45% in 1990). business license or SIUP (Surat Izin Usaha 50 Chapter 2 Perdagangan) be the only permit required for consideration would need to be given to the exporting and/or engaging in domestic trade development of new ways of mobilizing and that membership in commodity or trade revenue. To ensure a strong supply response, associations be voluntary, not a condition for domestic trade deregulation should be done in engaging in these activities. It also would tandem with measures to open the economy to include repealing and outlawing commodity- international trade-reduction of nontariff specific taxes and retribusi. In localities where barriers and elimination of export restrictions. revenues from such taxes are important, Table 2.5: Concentration and Export Orientation High Export Orientation Low Export Orientation Food (15,62) Paper (15,50) High Concentration Chemicals (19,50) Non-metallic Minerals (11,58) Basic Metals (24,72) Machinery (18,57) Low Concentration Textiles/Footwear (34,24) Wood Products (55,16) Note: Numbers in parentheses refer to the ratio of exports to total output in 1992 and the four- firm concentration ratio in 1991, respectively, both expressed in percent. High concentration refers to cases where the concentration ratio is greater than the overall weighted average of 47 %. High export orientation refers to cases where the share of exports in total output is greater than 25 %. D. Privatizing Public Enterprises 2.61 The Indonesian constitution requires the higher priority activities. In addition to raising economy to be overseen (dikuasaz) by the efficiency, privatization also could be used to Government. The emergence of a dynamic spread the ownership of productive assets private sector in the competitive sectors of the among a larger number of Indonesians. economy means that the oversight role can be fulfilled by ensuring a level playing field for 2.63 In Indonesia the evidence is clear that, business through the establishment of where the two compete, private sector transparent, enforceable rules of the game. enterprises outperform their public sector The Government need no longer devote its counterparts. One reason is that it is extremely limited financial and managerial resources to difficult for the Government to be an effective the production of goods and services in the owner. Businesses need wide latitude if they competitive sectors of the economy. are to innovate. Government employees who try to be innovative in overseeing public 2.62 Privatization of Government enterprises enterprises are likely to be thwarted. For this operating in the competitive sector would free reason, Government enterprises will rarely be up scarce Government resources for use in as effectively overseen as privately owned The Government's Role in Competitive Markets 51 enterprises and privatization should not be PT Indosat). Although seven public enterprises delayed by trying to set up better "governance" were sold fully or in major part to the private procedures.2 sector or to public enterprise employees during 1989-93, twelve new public enterprises were 2.64 Another reason is that public sector formed. Progress in winding up loss-making enterprises have multiple objectives that public enterprises also has been slow. Only interfere with providing good service to four public enterprises have been fully consumers at the lowest cost. In Indonesia liquidated; other liquidations took the form of these social objectives include promoting small mergers. and medium industries, promoting cooperatives, and providing employment to the 2.67 The financial performance of greatest number. Too often a by-product of Indonesian public enterprises generally is using enterprises in the productive sectors to inferior to the private sector's. The average pursue non-commercial objectives is low return on public enterprise assets is, not efficiency and poor financial performance. surprisingly, considerably lower than the average return on assets in the private sector. 2.65 The public enterprise sector in The pre-tax return on public enterprise assets Indonesia consists of some 180 enterprises (excluding the state banks and Pertamina) fell across all economic sectors, including industry to 4.1% in 1994 from 5.6% in 1989, and (38), agriculture (35), finance (30), public return on equity to 7.8% from 10.4% works (19), transportation (17), and ten other (Table 2.6). In comparison, the after tax sectors (41). These figures represent return on equity of private enterprises-proxied enterprises in which the State has a direct by those listed on the Jakarta Stock majority ownership, including joint-ventures. Exchange-was 8.8% in January-September They exclude subsidiaries of PEs and 1994. enterprises owned by local governments. Their 2.68 The poor and declining performance of production represents an estimated 15% of public enterprises is borne out by Ministry of GDP, the book value of their total assets is Finance calculations. The Ministry of Finance about Rp.295 trillion ($140 billion in 1994) and classifies public enterprises by their level of they employ 1.14 million (1.4% of the labor financial and operational soundness based on an force). While the number of public enterprises assessment of profitability (profits before has remained roughly stable, their share in the tax/operating assets at book value), liquidity economy has declined as a result of strong (current assets/current liabilities), solvency private sector growth. (total assets/total liabilities), and of technical indicators specific to subsectors in which public 2.66t Progreshas ieen prow.vatszi puc a enterprises operate. According to this enterprises has been slow. Based on a assessment, the share of "less sound" (kurang Presidential Decree in 1988, an assessment was sehat) and "unsound" (tidak sehat) public made of the financial soundness of each public ente ind from 46% toha4% durin enteprie, nd prgramdevlopd fr teir enterprises increased from 46 % to 54 % during enterprise, and a program developed for their 1990-94 (see Figure 2.1). At the same time, restructuring The restructuring programs the share of "very sound" (sehat sekali) firms introduced in 1989 were ambitious, but dropped from 32% to 22%. implementation has been slow and well below expectations. The shortfall in privatizing 2.69 The problems of overseeing public public enterprises is especially large. The plan enterprises and the underperformance of public was for 52 public share issues but by end-1994 enterprises compared with private sector only two had been realized (including the much-publicized partial privatization of 52 Chapter 2 sectors. In the financial sector, for example, account for less than half of outstanding credit, the lack of effective oversight permitted serious state banks have 75% of classified loans abuse in the state banks. Although they (Box 1.5 in Chapter 1). Table 2.6: Overview of Public Enterprise Financial Performance, 1989-94 1989 a 1990 b 199, b 1992 a 1993 c 1994 d All Public Enterprises 1. Number of Enterprises 187 188 187 186 186 182 2. Total Assets (Rp.trillion) 144.5 177.7 200.5 236.5 268.8 285.9 3. Pre-tax Profit/Assets (%) 4.6% 4.5% 3.7% 3.1% 2.8% 2.8% 4. Pre-tax Profit/Sales (%) 13.9% 12.8% 10.8% 9.6% 9.2% 9.3% 5. Pre-tax Profit/Equity (%) 16.2% 18.1% 14.0% 11.5% 10.6% 9.5% 6. Total Losses/Total Assets -0.12% -0.17% -0.25% -0.25% -0.11% -0.14% 7. Number of Loss Maker 28 28 29 33 30 23 8. Total Debt/Total Assets 71.7% 75.1% 73.7% 73.2% 73.9% 70.8% Excl. Banks & Pertamina 1. Total Assets (Rp.trillion) 51.6 59.4 69.9 87.1 102.2 113.4 2. Pre-tax Profit/Assets (%) 5.6% 5.4% 5.2% 4.2% 4.0% 4.1% 3. Pre-tax Profit/Sales (%) 12.6% 12.9% 12.4% 11.0% 10.6% 11.3% 4. Pre-tax Profit/Equity (%) 10.4% 10.7% 9.7% 9.9% 8.0% 7.8% 5. Total Debt/Total Assets 49.4% 49.8% 46.8% 47.0% 49.7% 46.6% Public Estates (PTPs) 1. Total Assets (Rp. trillion) 5.1 5.5 5.8 6.2 6.3 6.2 2. Pre-Tax Profit/Total Assets (%) 5.9% 5.5% 5.2% 8.1% 6.3% 8.1% 3. Pre-Tax Profit/Sales (%) 15.0% 13.0% 12.0% 15.6% 11.8% 13.5% 4. Pre-Tax Profit/Equity (%) 11.2% 10.3% 9.4% 14.7% 11.1% 13.2% 5. Total Debts/Total Assets 46.9% 47.3% 44.8% 45.2% 42.9% 38.7% a 98% audited b 99% audited c 85% audited d 5 % audited Source: Ministry of Finance 2.70 The Government estate companies or whose area nearly doubled between 1980 and PTPs are another case in point.3 Like public 1992. The capital expenditure requirements of enterprises as a group, PTPs' financial this expansion were excessively debt-financed. performance is inferior to that of private The average PTP debt-total assets ratio shown estates. Declining commodity prices in the in Table 2.6 masks dangerously high debt 1980s explain part of the worsening financial levels in tree crop PTPs, which are offset by a performance. More significant is the ill- low ratio for sugar PTPs. Debt management is conceived expansion of traditional estates, a serious financial problem for some PTPs. The Government's Role in Competitive Markets 53 Figure 2.1 2.73 Consolidating loss-making and profitable PTPs is unlikely to raise their overall efficiency to that of the private sector. The F1r.1daJSamdnmofPuLdbEntqublss,1UO.1U consolidation fails to address the fundamental problems plaguing the PTPs, and may reduce vmysoaz the efficiency of the profitable PTPs. 70X IL; ~ =: S Consolidation only forestalls the need for 70x swifurther budgetary support from the Ministry of I:. Finance as long as intra-group profits are zx ||||||||||| Lo Sound sufficient to cover losses. However, the x "reform-financial distress-reform" cycle will Io No Soubi not be broken until the PTPs are privatized. 2.74 Merging state-owned enterprises in the fertilizer and cement industries into holding companies is explicitly aimed at enhancing 2.71 The operational performance of PTPs their performance. But poor performance in also lags that of the private sector (World Bank some of these companies cannot be traced to 1994g). For example, the costs of oil palm problems that consolidation will correct. In development in PTPs are from one-quarter to fertilizer, for example, triple super-phosphate one-third higher than those of private estates and ammonium sulfate production is not and the cost of a PTP crude palm oil mill is efficient-urea production is-and costs are 40% higher than a private mill. Comparative considerably above import equivalent prices. analyses based on Best Demonstrated Practices However, this is due to outdated technology showed significant performance gaps between and high-cost raw materials. Consolidation the public and private estates in terms of will not solve these problems. Failure to production per hectare, unit production costs privatize the fertilizer producers also hampers and gross margins. The private sector Indonesia's nonoil export drive. Urea consistently outperformed the public sector in production is efficient and there exists oil palm and rubber productivity. Crop yields significant export potential. However, of the PTPs have been stagnant compared with exploiting this potential will require significant the improvements in average productivity of investment to maintain competitiveness and smallholders and private estates. Crop expand capacity. The policy of phasing out technology in PTPs lags that of Malaysia by capital support to public enterprises means that five to ten years, in particular on selection of the capital expansion plans will require planting materials and fertilizer application. significant private financing. The Government would be better advised to accelerate the 2.72 Repeated Government interventions to privatization of the fertilizer industry rather try and resolve PTPs' financial problems than consolidate production units. generally have taken the form of mergers, management changes, debt write-offs and 2.75 Consolidation of units and changes in reschedulings and the occasional liquidation. the legal status of public enterprises are The latest reform was the 1994 reorganization unlikely to produce meaningful improvement in of 32 state plantation companies, including the performance unless accompanied by a change PTPs, into nine groups. The objective of this in their ownership. This is not to say that consolidation was to enhance economies of Government should not try to oversee its public scale and integrate better the plantations with enterprises better-clearly it should. There are processing units. several measures that could be implemented: 54 Chapter 2 Increase professionalism of oversight continued and all public enterprise financing arrangements by: (i) consolidating public should be at market rates. enterprise supervision in the Ministry of Finance or a separate agency with professional 2.77 At the same time, greater emphasis on management, and phasing-out the supervisory quickly privatizing public enterprises is role of the various sector ministries, which warranted. Developing a comprehensive would eliminate conflicts of interest; (ii) focus strategy for privatizing public enterprises could the boards of commissioners on strategic rather help. This would be in line with the than control functions; (iii) improving the diminished role of public enterprises as agents management compensation and public of development, the demonstrated ability of enterprise performance evaluation systems to private firms to outperform public enterprises, increase the motivation of managers to perform and the need for Government to phase-out to highest industry standards; and (iv) funding of future upgrading and expansion of improving the quality and application of public public enterprises. In addition to improving enterprise corporate plans and work programs. their efficiency, privatization of public The regulations that apply to public enterprise enterprises would free Government operations should be reviewed to determine resources-particularly scarce capital and what improvements can be made to enhance management talent-for priority areas such as management autonomy and flexibility of education and primary health care. The decision making. Consideration should be Government's role would need to switch from given to applying the principles of regulation direct management of public enterprise no. 55/1990, which free publicly listed public activities to providing an appropriate policy and enterprises from special Government regulatory framework, as discussed in the regulations, to all public enterprises. To the following section. extent possible public enterprises also should be relieved of their non-commercial objectives 2.78 The strategy for privatizing public to place them on an equal footing with private enterprises could start by developing a public firms. enterprise policy reform framework. The current case-by-case approach followed by the 2.76 In addition to trying to improve various sector ministries risks creating oversight of public enterprise the Government uncertainty and delays and, potentially, could can help raise efficiency in state owned firms lead to conflicts. Public enterprise reform through supply side deregulation-as discussed should try to attract managerial expertise and in sections B and C-to reduce costs and create capital for future upgrading and expansion. a supportive economic climate. Further The development of such a reform agenda deregulation of markets for public enterprise should be directed by a central agency. products and services would make it easier to Privatization could be accelerated by assess the performance of public enterprises by classifying public enterprises along different pushing domestic prices toward border prices, criteria such as: the nature of public enterprise the standard for efficiency. The practice of markets (natural monopoly, potentially providing below-market interest rate financing competitive, currently competitive); enterprise to public enterprises has largely been size and financial condition; the "strategic" discontinued. That process should be nature of the public enterprise, based on a clear justification for any special status; and the potential for breaking-up ("unbundling," see Chapter 3) larger public enterprises into viable and non-viable units, competitive and non- The Government's Role in Competitive Markets 55 competitive activities, including divesting "non- drawback of IPOs is that they typically attract core" assets as separate concerns. Public passive investors who collectively may have an enterprises in commercial markets (for interest in effective management oversight but example: those in industry, the PTPs and other individually may not-the free rider problem. agricultural public enterprises) could be Thus, the immediate impact of a public listing privatized early. on improving enterprise management may be small. "Core" strategic investors are investors 2.79 There also is a need to broaden the with a sufficient stake to overcome the free approach to privatizing public enterprises. The rider problem and who, because of in-depth Government has focused its efforts on public sector knowledge, management expertise, and listings (initial public offerings) on domestic access to markets, can help improve enterprise and overseas stock exchanges.4 This method management more directly. The Government has the advantage of being fully transparent could develop transparent procedures for and promoting wider share ownership. But attracting core investor(s), including through most public enterprises cannot meet the competitive private placements and joint- stringent listing requirements of minimum size ventures. or financial health and performance. Another E. Regulation and Rules of the Game 2.80 Although the Indonesian Government's of regulation is to ensure soundness of the role in direct production is too large and needs banking system. Despite last year's scandal at to shrink through privatization, it has BAPINDO, progress was made in this regard considerable work to do in developing the rules in 1994 (see below). Nevertheless, the stock of the game to promote sustainable, private of bad loans remains high, which increases the sector-led growth. The Government has a role sector's vulnerability to high interest rates. in the regulation of the rmancial sector because the market may be slow to develop 2.82 Government regulation of the banking mechanisms for providing accurate, reliable system has improved since the financial system and timely information to the public on the deregulation of 1988. Prudential regulations, riskiness of investments, and may have to including licensing procedures, operational extend credit to weak banks for various guidelines and bank rating criteria are tighter, reasons. The Government also has a role to the legal framework is more up to date (the play in protecting the environment because the Bank Act of 1992) and the human capital base private sector may not perceive the broader has improved through manpower and environmental impact of its actions and, thus, institutional development programs at Bank may overpollute or underinvest in Indonesia, the Central Bank. These include the environmental protection. The Government formation of special Credit Supervision Teams also is responsible for introducing modern, (separately for the state and private banks, enforceable rules of the game for competitive respectively) to monitor progress in settling enterprise, including protecting consumers problem debts. There also was an important from the abuse of market power by firms re-organization of Bank Indonesia's bank operating in less than vigorously competitive supervisory departments in August 1994, and markets. a further tightening of banking regulations in early 1995.5 1. Financial Sector Regulation 2.83 The main task ahead is not simply one 2.81 The Banking Sector. A main objective of adding more regulations. Rather, it is one 56 Chapter 2 of continuing to manage problems in the though, for the group, total capital adjusted for banking system, particularly overseeing the the shortfall in provisions against classified orderly workout of the bad loan problem. The assets remains below the BIS standard (Box 1.5 Government's strategy in this regard has three in Chapter 1). There also are good prospects prongs. for at least one state bank to "go public" within the next year or so. i) Institutional development, including better prudential regulations, an 2.85 For the private banks, there has been improved legal framework and no serious threat of crisis in the past year and manpower/institutional development there has been notable consolidation, generally programs at Bank Indonesia. facilitated by Bank Indonesia. ii) Strengthening the state banks with a 2.86 Looking ahead, the most pressing task view to eventual privatization. The is to build on the progress achieved so far. particular case of BAPINDO required For the state banks this includes deciding what exceptional measures, including legal to do with BAPINDO. In addition, delinquent action against management and a borrowers who are able but unwilling to pay borrower, and contracting an need to be forced to repay their loans. Cost- established international bank as cutting measures could also help make room management advisor. The sight of for loan write-offs, for example: consolidating BAPINDO's top management being branches, activities and physical assets; jailed on corruption charges has reducing staff; and cutting managerial salaries. strengthened the incentive for better Also, merging or liquidating state banks should management in the rest of the state not be ruled out. banks. 2.87 The arguments for privatizing the iii) Improved banking supervision to public enterprises operating in the competitive identify and resolve problems at private sectors of the economy apply with equal force banks on a case-by-case basis, in in the commercial banking sector. There is accordance with Article 37 of the little economic, social or financial justification Banking Act of 1992. Issues related to for not privatizing the state banks. the existing stock of bad debts are being addressed through a monitoring 2.88 For private banks, the most important committee internal to Bank Indonesia, issue is ensuring appropriate incentives for which is operating with a commitment bank owners and managers, and providing from the Supreme Court to time-bound depositors with some assurance regarding prosecution of cases. To avoid future portfolio exposures. Adequate capital is bad loans, Bank Indonesia is attempting needed to ensure that owners/managers are to improve banks' credit analysis risking some of their own funds and to protect procedures and to strengthen internal deposits somewhat. For these reasons, the audit practices at private banks. Government needs to ensure provisioning to the Basle standard, on the envisaged schedule. 2.84 As mentioned in Chapter 1, the strategy Going beyond that, higher minimum capital has produced positive results. The state banks requirements would help force mergers and meet or are approaching Bank Indonesia's reduce risk by allowing greater diversification. targeted legal lending limits. They also have The Government also needs to continue to made some progress in reducing classified enforce exposure limits strictly through assets in relation to risk weighted assets supervision, to reduce risk and non-arms-length The Government's Role in Competitive Markets 57 transactions. In this regard penalties for understanding of current best practice in credit exceeding exposure limits should be reviewed analysis. with an eye to increasing them, if appropriate. 2.92 The bank examination process is also 2.89 Another major issue for the private too protracted.7 The final review given to banks is improving mechanisms for taking over examined banks-a management review at problem banks. Problem resolution at banks Bank Indonesia headquarters-normally is not proceeds on a case-by-case basis, in accordance held until 9 to 12 months after completion of with legal provisions of the Bank Act of 1992. the exam, by which time the bank and peer Bank Indonesia provides technical assistance, data are likely to be stale. Shortening this time including by facilitating mergers with other span is a high priority, and more work is banks or inviting new shareholders.6 Other needed for planning the deployment of human mechanisms for assisting troubled banks resources in examinations. Also, bank include providing liquidity through discounted examiners need to move further away from commercial paper at Bank Indonesia and their traditional "checklist" approach to concerted interbank lending from other private examination. In particular, there needs to be banks. greater willingness on the part of examiners to make qualitative judgements about the health of 2.90 This approach to problem private sector financial institutions. The adoption of the banks has worked. It has the advantage of CAMEL system was an important step in this being flexible; its disadvantage is that it makes direction. large demands on Bank Indonesia's management. Procedures for liquidating 2.93 The re-organization of Bank problem banks in a way that protects the Indonesia's banking supervision departments in interests of depositors and the general public August 1994 helped coordinate on- and off-site could reduce the burden on Bank Indonesia examinations. The new organizational staff. Stronger exit procedures, especially to structure facilitates communication between liquidate banks and recover collateral, would Bank Indonesia and the commercial banks. To help progress toward a regulatory system that avoid the examiners getting too close to the is less Government- and more market-driven. banks they supervise-so called regulatory Some positive steps in this direction are current capture-banks should be shifted periodically initiatives toward more public disclosure, to different teams. Bank Indonesia's internal fostering independent credit organizations and auditing staff need to be alert to the dangers of meeting prudent provisioning requirements. conspiracy, and statistical surveillance techniques should be developed to signal bank 2.91 Further improvement of bank ratings that are inconsistent with basic data. supervision is another issue. Bank Indonesia has made progress in this area. Senior staff at 2.94 Bank Indonesia expects commercial Bank Indonesia are professional and aware of banks to formalize in writing their strategic the need to follow-up supervision with direction. It would be helpful if Bank consultation, with cease and desist orders and, Indonesia were to do the same. Such a in extreme cases, revoking licenses. However, statement should incorporate the view that the the financial world continues to innovate and current system of regulation is too generate new products, such as derivatives, that Government-directed. More reliance on pose difficult problems even for seasoned bank market forces would be appropriate. A deposit supervision teams. In training field insurance scheme with low coverage limits examination staff, the greatest single challenge could be an element of a market-based is to keep them conversant with on-going approach to regulation (see also Box 2.3). financial innovations, and to achieve a better 58 Chapter 2 2.95 The Non-bank Financial Sector. trading in May 1995. But there have been Indonesia has a highly diverse non-bank some delays in implementation and gaps financial sector that has developed over a short remain, including tightening of regulations period of time (see Chapter 1). The capital governing prospectus issue and listing markets are regulated by BAPEPAM, which requirements for securities issues; toughening has successfully developed institutional controls against insider trading and illegal infrastructure needed by the market, such as market practices, defaults and insolvencies; rules, regulations and guidelines for disclosure introduction of minimum capital standards for of information. A new Capital Market Law is securities firms; and the introduction of expected to be effective in 1996, and the bankruptcy procedures to protect securities Jakarta Stock Exchange shifted to computerized holders. Box 2.3: Self-Regulation Requires Information Disclosure To Be Effective One of the most effective forms of supervision is market discipline, where reward or punishment is administered by the market in terms of credit lines, financing cost and share prices. This can only be effective if the market receives sufficient information on the activities of institutions to make a meaningful assessment. Transparency of financial risk entails meaningful disclosure of risks as well as management performance. In the case of banks, better disclosure procedures, through frequent publication of higher-quality audited statements, could provide better information for large depositors. For securities, the Government has a role in educating investors about risks. Standardized accounting rules and clear disclosure requirements provide information needed by investors. The quality of issues traded in the market can be maintained through listing standards or by establishing objective guidelines (minimum criteria in terms of profits, revenues, assets or net worth) for new issues. Market forces can be relied on to price efficiently when these conditions are in place. Supervision of the market trading systems is needed to prevent market manipulation and to ensure that insiders do not use privileged information to the disadvantage of public investors. Indonesia's commercial bank requirements include some disclosure, for example to publish financial information on a regular basis. Bank Indonesia has also been emphasizing the importance of banks' self- regulation and internal audit, while checking periodically on compliance. 2.96 BAPEPAM's extensive responsibilities Government, it would be able to compensate already have stretched its resources to the better than the Government pay scale and limit. Its staff is fully occupied processing compete more effectively with the private company registrations of securities to be floated sector for skilled professionals. BAPEPAM and listed. Very little capacity is available for needs to expand its staff training activities to market surveillance, oversight of brokers and develop the levels of skills required to dispatch dealers and other sensitive activities. The its obligations. stock exchange and other organizations are not yet effective as self-regulators, and unless they 2.98 To assist with the issue of over- are made so, BAPEPAM will be overwhelmed. stretched staff resources, BAPEPAM need not undertake a major increase in personnel. 2.97 A first priority for BAPEPAM is Rather, more reliance on self-regulatory further staff development and training. If mechanisms is needed. For example, if the BAPEPAM were an autonomous agency of new capital markets law were to require The Government's Role in Competitive Markets 59 associations of stockbrokers, underwriters and management skills, suitable systems 'for the similar market professionals to be licensed by regular receipt of payments and record BAPEPAM, a basis for self-regulation would keeping; and the soundness of community be established. BAPEPAM's role could be facilities for the maintenance of order and such limited to ensuring public disclosure, approving things as fire fighting, these being crucial to associations rules and practices, and overseeing the management of general insurance risks. the associations' enforcement of their rules and practices. 2. Managing the Environment 2.99 Contractual savings institutions (CSIs) 2.102 The environment-land, air, water, are another part of the non-bank financial forests and energy sources-serves both as a sector. Raising their involvement in long-term source of natural resources, and as a "sink" for financing depends upon a number of waste. Pressures on the environment are preconditions. These include an adequate and growing rapidly in Indonesia. There is a role effective system of prudential regulation, for Government in managing these pressures. supervision and enforcement and a system of There is a complementarity between good investor protection which includes accounting economic policy and an effective strategy for and information disclosure to investors. In environmentally sustainable growth. Moving to addition, operating efficiency and freedom market prices for key natural resources like from investment controls that use CSI's as land, water, forests and energy, for example, captive sources for funding Government debt will simultaneously reduce wasteful or politically motivated projects are essential. consumption, and improve macroeconomic Growth in CSIs is also dependent on the efficiency (and hence competitiveness). growth, level and distribution of income. However, this alone will not be enough. Many environmental problems are caused by the 2. 100 Investments by CSIs, particularly failure of markets to take into account pension and insurance companies, require "externalities." The Government needs to set regulation beyond ensuring timely and accurate an appropriate regulatory and incentive disclosure of financial information. Chief framework for environmentally responsible among these are regulations defining fiduciary behavior and increase investment in responsibility and limiting investment exposure environmental protection. to closely linked firms. In the case of JAMSOSTEK, the compulsory health insurance a. The Regulatory/Incentive Framework and pension scheme for workers, closer costing, managing, and supervision is 2.103 It will not be possible for Indonesia to warranted (see Chapter 1). Because of the take on every environmental issue all at once. potentially large Government liability, strong A World Bank study (World Bank, 1994d) financial oversight of JAMSOSTEK should be identifies five priorities: (a) land management; exercised by the Ministry of Finance. (b) forest management; (c) water management; (d) urban pollution management; and (e) 2.101 Another precondition for the realization industrial pollution control-particularly on of substantial development in long-term Java. fiancing in Indonesia through growth in CSI's is adequate infrastructure for the smooth 2.104 Land Management. Creating a more operation of fiancial arrangements in an transparent land market and establishing environment of confidence on the part of transferable property rights is essential. investors. There are many components of such Ensuring that land resources are sold, leased infrastructure, including communications, the and taxed at market prices also would raise availability of legal, accounting, actuarial and Government revenue. The following changes 60 Chapter 2 are needed: (a) simplification and lokasi. Both give private developers the improvement of land laws and regulations; (b) indefinite monopsonistic right to purchase land acceleration of land titling and registration they desire to develop. Land purchase under the Government's announced 25-year regulations need to incorporate local program for land registration; and (c) greater environmental issues (Box 2.4). Formal sales public access to BPN's land information, which prices of state land, tanah negara, often are would promote land titling and fair sales less than one-quarter of the market price. prices. The extension of the national geodetic Moving to market-based land transactions will network by the National Mapping Agency and require steps to eliminate barriers to market the public sale of those maps also would prices. A pilot project of public land auctions increase public information about land use and could be considered. Requiring a realistic ownership. resettlement plan to be developed as a part of the feasibility analysis/project preparation 2.105 Regulations increase the complexity and work, within the context of a national transactions costs of registering or selling land resettlement policy, would lessen social and distort land prices. Two permits are tensions and promote equity. needed for land purchase: izin prinsip and izin Box 2.4: Simpler Is Not Always Better-Land Acquisition, Location Permits, and Pakto93 After being approved by BKPM, the Investment Coordinating Board, to buy land, a developer still needs a location permit (izin lokasi), which gives a developer the exclusive right to purchase the land it covers. But in Indonesia, the land market is not well developed and property rights are poorly defined and enforced. Developers have been clumsy and even ruthless in evicting semi-legal residents. In other instances, where developers and landowners have been unable to agree, tracts of valuable land sit idle, still covered by a location permit. To compound these problems, the October 1993 deregulation package (Pakto93) shifted authority for issuing the location permit from local Governments to district-level offices of BPN, the National Land Agency, which led to a rush on location permits. In Bandung Regency, for example, the pace of location permit issuance (in terms of average area covered per year) has increased nearly 35 times since Pakto93, to about 2,580 hectares during 1994. In Bekasi Regency, location permits covering about 7,700 hectares were issued during the ten months period between November 1993 and August 1994. Permits are being issued in a rush, without taking account local plans for land use, enviromnental issues, or social concerns. But when most of the 3,344 hectares covered by 77 location permits recently issued in North Bandung was found to be situated in a protected watershed area (Decision of the Governor of West Java 181/1/1982), Parliament became involved. In this case, official debates were organized and experts from the Institute of Technology in Bandung were asked to investigate. Similar problems have arisen in East Java, notably in the Greater Surabaya area. East Java's Governor has therefore mobilized a special task force to develop appropriate land development controls and has protested the negative impact of Pakto93 to the central Government. In centralizing the authority to grant location permits, Pakro93 sought to streamline the investment approval process. But as the example in North Bandung demonstrates, local interests must be adequately addressed to make the permit issuing process effective as a regulatory tool. Local Governments need to review the environmental implications and service requirements of new industrial facilities before location permits are granted. Environmental impact assessment (AMDAL) requirements under PP51 of 1993 should be enforced. The Government may also wish to consider alternatives to the location permit system but the most obvious measure for improving the process-that is, developing the appropriate legal and institutional framework to regulate the land market-will take time. The Government's Role in Competitive Markets 61 2.106 Simple, focused land use planning rapidly over the coming decades, both to meet would improve land management. In the existing backlog of demand and to cope Indonesia, land use planning activities are with the rapidly expanding urban population scattered among different agencies at different and its environmental loads. Within the next levels of the Government. The Law for two decades, well over half of Indonesia's Spatial Development, which was passed by the GDP will be produced in cities. The pricing, Parliament in September 1992, was supposed cost-recovery, and institutional policies to to lead to such planning. The Law's ensure coordinated urban development are provisions for local participation, disclosure of discussed in Chapter 3. information and assessing environmental risks should be implemented. 2.110 Industrial Pollution. There are two key issues of industrial pollution control facing 2.107 Forest Management. Mispricing of Indonesia's policy makers: (a) what to do forest resources is a major policy failing that about the pollution from existing firms; and (b) leads to excessive use of logs in industry and how to "delink" future pollution loads-and the wasteful logging practices on concessions, as damage they may cause-from the rapid noted earlier in this Chapter. In 1991, expansion of industrial output. A major issue Indonesian plywood mills used 25% more in both cases is how to achieve the optimal logs-3 million cubic meters-than the most level of pollution control at the least cost. technically efficient factories in other countries. Although estimates vary, significant amounts of 2.111 Reducing pollution from existing firms commercial wood are left damaged in the forest requires: (a) policies that encourage greater during logging operations. efficiency (increased domestic competition, market-based prices for natural resources, and 2.108 Water Management. Like land and "full-price" cost recovery for investments in forests, water is substantially mispriced, supportive infrastructure-particularly urban leading to low prices and excessive use by services); (b) carefully targeted pollution some groups (chiefly farmers and middle and control efforts-by area, by pollutant, and by upper class urban householders) and high industry-focusing on the worst polluters and prices and scarcity for others (chiefly the urban most damaging pollutants in the most poor). Chapter 3 outlines the need for pricing threatened areas; (c) strengthened institutional reform for water in the cities, especially where capacity for pollution monitoring and low charges for groundwater are leading to enforcement, especially at the provincial level; rapid exhaustion of deep aquifers and the (d) encouragement of "clean technology," associated low charges on piped water that including "pollution prevention pays" preclude the maintenance of adequate service campaigns and industry-specific technical levels. Pricing reforms need to be supported assistance; and (e) extensive reliance on the with better institutions. Efforts to establish power of publicly available information. river basin management authorities, reorganize DGWRD and recodify the byzantine mass of 2.112 Reducing future industrial pollution is laws, regulations and ordinances governing critical because by the year 2010 existing firms water into a new Water Code are fundamental. will account for only about 15% of total industrial output and, by the year 2020, less 2.109 Urban Environmental Issues. than 8 %. The highest priority, therefore, Protecting the urban environment will require should be given to minimizing pollution a larger role for market forces and an loads-and damage costs-from newly appropriate regulatory framework. In addition, established and expanding firms. The obvious investments in urban services will need to grow place to start is at the investment approval 62 Chapter 2 stage. The suggested strategy involves three 2.115 Private Sector Investments in key elements: (a) use existing environmental Pollution Abatement. The cost to existing impact assessment (AMDAL) procedures, but firms of pollution abatement will depend on the ensure professional and expeditious reviews, level of abatement desired and the policies and including through "contracting out" with instruments used to achieve it. The "unit experienced foreign firms; (b) expand the costs" of abatement rise with the proportion of review to include issues of technology choice; total pollution eliminated, increasing rapidly in and (c) for major or highly polluting projects, the higher ranges. World Bank staff estimates ensure local Government input on location of the aggregate abatement costs for existing issues, and encourage the location of medium- firms in Indonesia indicate a range from $275 and larger-scale firms in industrial estates. million to reduce pollution by 30%, to $1.5 billion for a 70% reduction, and $5.7 billion to b. Investing in Environmental Protection reduce pollution by 90%. Abatement costs 2.113 Incentives and regulations are the also vary by pollutant and by industry, and for Governments' main instruments for promoting firms within the same industry they depend on environmentally sustainable growth. But they differences in scale, the age and type of won't be enough by themselves. Ensuring technology, and its efficiency of use. Market- environmental protection also will require an based instruments, such as a system of increase in public expenditures. It should be pollution charges and rebates, that encourage possible to cover most of these costs through a firms with lower abatement costs to generate combination of pricing and cost-recovery most of the reduction, offer the potential for policies and increased fiscal revenue from the lower total costs-by one estimate, as much as environment-related policy reforms, especially 30% less-than a regulatory system that higher revenues from timber, land and imposes the same abatement standard on all domestic fuel sales. Pushing ahead the Polluter firms. Applying the goals of Indonesia's Clean Pays Principle, embodied in Indonesia's 1984 Rivers Program, Prokasih, to all industrial Environmental Law, through the use of polluters-a 50% reduction standard-would pollution charges, also would provide an lead to total costs of about $700 million. important source of revenue for public Amortized over 10 years, this would be $70 expenditures on pollution abatement.8 million per year, or less than 0.04% of current GDP. Based on the experience of other 2.114 Public Expenditures for countries, abatement costs borne by new or Environmental Protection. Investments in expanding firms would range from 2-5% of urban water supply, sewerage and sanitation, total investment, but this would be less than solid waste management and urban transport 0.5% of sales and about 1% of value added. will need to expand substantially (see Chapter 3) as will outlays for forestry 3. Setting the Rules of the Game management and biodiversity protection. Additional expenditures will be required for 2.116 Firms and industries, and not nations, strengthening environmental institutions and compete with one another. But Government- improving existing information and set national economic policies condition the management systems, but most of this increase business environment in which these firms and (for example, for staffing and staff industries compete. The enterprise climate in development) will involve recurrent budget Indonesia lacks supporting institutions for a expenditures. modern business sector. This includes a well- functioning legal system to provide a level playing field for enterprise. The Government's Role in Conmpetitive Markets 63 a. The Commercial Legal System 2.120 Beyond the short term, Indonesia could consider establishing on a pilot basis a 2.117 Investors need confidence that specialized court to handle commercial matters. agreements are enforceable. The most modern Also, a panel group of judges could be laws are of little practical value unless there regularly assigned to handle commercial cases are adequate means of enforcing them. so that they develop deeper knowledge in commercial law. The Central District Court in 2.118 The Court System. The Indonesian Jakarta and a few other District Courts in areas court system is widely perceived by investors with a high concentration of commercial and creditors to be inadequate. Procedures are activity (such as Surabaya or Medan) deal with slow with the result that cases often take too a larger number of-and more long to resolve. The courts are overburdened complex-commercial cases than other courts. and understaffed; there is little specialization, The Government could initially concentrate its with all types of cases going to general courts efforts on selection of personnel, training, and and judges; enforcement of credit, security and performance in these selected courts. copyright interests is difficult; and there is a lack of confidence in the fairness of the trial 2.121 Arbitration. Arbitration provides an process. The courts are governed by the Basic alternative to the court system. It has the Law on the Judiciary, No. 14 of 1970, which advantage that a dispute can be settled quickly emphasizes the principle of independence and by specialists knowledgeable in the technical seeks to prohibit all outside interference in areas, rather than judges who are trained in judicial matters. The administration of the general aspects of law. Arbitration also avoids court system is under the jurisdiction of the the confrontational aspects of a court trial and Ministry of Justice, which controls the budget, encourages settlement. Under Indonesian law, posting, transfer and promotion of judges. As all disputes of a commercial nature can be in most civil law systems, judges are career submitted to arbitration, including disputes with civil service employees, beginning as clerks Government agencies and enterprises. and working their way up to judges. Arbitration proceedings follow procedures similar to those found in the Civil Procedure 2.119 There is a clear need to strengthen the Code, but they are not required to. The format court system for commercial law. A basic step of the arbitral award is simple, and it must be is to increase the technical competence of rendered within six months of submission. The judges to handle complex, modern commercial enforcement of a domestic award in principle cases, through a combination of training and is not cumbersome and appeals are limited to improved compensation. In the short term, certain matters. An arbitration board (Badan salary increases could be linked to the Arbitrase National Indonesia, "BANI") was objectives of a just and speedy settlement. established in Jakarta in 1977 by the Indonesian There could be targets set for courts to reach National Chamber of Commerce and Industry decisions reasonably quickly. Publishing court as a private arbitration institution. However, decisions would promote consistency in judicial its services are neither frequently utilized nor decisions. Another short-term measure that highly publicized. Recently, it has handled would help raise confidence in the justice only 5-10 cases a year. The failure to utilize system would be for Indonesia to make it BANI more fully despite the shortcomings of possible for its courts to enforce foreign courts' the formalized court system suggests the need judgements. At present, while joint ventures for improvement in the existing arbitration can submit disputes to foreign courts, the framework. awards are not legally binding in Indonesia. 64 Chapter 2 2.122 Several steps could be considered to various forms of monopoly and monopsony strengthen the arbitration process. First, the which is harmful to the society and in list of arbitrators should include specialists in contradiction with the ideal of social justice. " different areas, with diverse technical skills and However, the Constitution does not prohibit business experiences. At present, BANI's monopoly. A monopoly may be permitted if it arbitrators, although competent individuals, are is for the general welfare of the people and/or drawn mainly from the ranks of former judges is controlled by a state institution. A hallmark and professors, in contrast to the much wider of the role of Government in modern market use of businessmen and professionals in other economies is a framework for competition countries. Second, a few highly qualified and policy that establishes legitimacy for respected resident foreigners should be competition, deters anti-competitive conduct, included in the list of arbitrators. This would and protects consumer welfare. give confidence to foreign investors that the Government and the local business community 2.124 Experts within the Government of are serious about settling disputes in a manner Indonesia are developing a draft competition perceived to be fair by all parties. The use of law. The principal objective of competition non-nationals as arbitrators in commercial cases law should be to maintain and encourage is quite common throughout the world. Third, competition as a vehicle to promote economic concerns about the enforceability of foreign efficiency and maximize consumer welfare. A arbitral awards in Indonesia need to be focal point of the law should be the actual and addressed. Until recently, Indonesian courts potential business conduct of firms in a given refused to recognize foreign awards in spite of market and not on the absolute or relative size treaty commitments to the contrary. The of firms. This requires that the authorities Supreme Court has issued a circular that sets assess whether a firm (or firms) can exercise out a procedure for applying to the Court for market power-the ability to raise price or recognition of a foreign arbitral award. The otherwise affect the market so as to earn supra- contents of the circular and the procedure it competitive profits over a sustainable period of requires still need to be publicized to the time. The draft competition law contains business community. Indonesia also could provisions relating to business activity and reaffirm its commitment to the 1958 New York conduct to help assess these aspects of business Convention on Recognition and Enforcement of behavior. Foreign Arbitral Awards; while Indonesia is a party to this convention, there has not been a 2.125 Developing the Legal Profession. In single successful enforcement of a foreign Indonesia, as in most countries, a substantial arbitral award in Indonesia. responsibility for interpreting laws in commercial areas falls on the private legal 2.123 Regulating Anticompetitive Practices. profession. While the State has the major role Competition Policy broadly consists of in criminal cases, the private sector litigants, Government regulation of domestic and lawyers, notaries and other specialists ease the international trade and investment and burden in the commercial area. Properly competition and antitrust law, which affect trained legal professionals can assist a court or industry structure and business behavior. arbitration panel in reaching a reasoned, proper Indonesia lacks a specific competition law decision, which may avoid the need for the aimed at anticompetitive practices by firms. issue to reach the court. The Government, in The 1945 Constitution contains provisions that cooperation with the private sector and promote "economic democracy," create a universities, can help develop the legal "national economy with a high competitive profession through improving legal training, power," and avoid "unsound competition... in including in relevant subjects outside the law; T'he Government's Role in Competitive Markets 65 expanding opportunities for overseas training; Commercial Code; publishing court decisions; improving the foreign language skills of the compiling and publishing rule-making and profession; and allowing entry of more foreign policy decisions systematically; and improving legal professionals, by easing the strict work the sale and distribution of Government permit system. publications. 2.126 Legal Information. The Indonesian 2.127 The Law Reform Project. The public's access to legal information is severely Government recognizes the need to develop the limited, posing a major barrier to the effective commercial legal framework. It initiated a development and implementation of the major commercial law reform project in 1992, commercial legal framework. There are two and the last State Policy Guidelines (GBHN) main problems. First, many laws, regulations, place strong emphasis on legal system judicial decisions, procedures, and other legal development. Full implementation of the legal information are unavailable or difficult to reform agenda will necessarily take time; obtain. Second, although considerable effort however, the steps recently taken by the goes into fashioning legal rules and procedures, Government-the establishment of an the effort is undermined by the way they are Administrative Court, the promulgation of new presented to the public. A systematic official laws in the financial sector and the new method of bringing regulations into existence company law-attest to the urgency and within a reasonable time is lacking. Steps to seriousness with which the Government is now disseminate legal information more effectively taking up this agenda. A welcome feature of include: establishing a daily Gazette to notify the law reform project is the involvement of new laws and regulations, and expanding the the legal profession and the private business scope and size of the Berita Negara (State community. Reports); authorizing official translations of the 66 Chapter 2 Endnotes 1. Wood products may be an exception. Although it is an export-oriented sector, its largest subsector, plywood is dominated by a cartel that controls entry and prices both in domestic and international markets. All sales to the international market, for example, must be made through the cartel. The sector is not characterized by competition despite its low concentration ratio (0.13 at the 5 digit level). 2. The necessary oversight need not come from equity holders alone. In developed countries creditors also can provide monitoring. But not all creditors have the incentive to monitor borrowers. State banks suffer the same problem as state enterprises and cannot oversee enterprises well. Even ostensibly private banks would not have strong incentives unless their private owners bear the risk, which may not be the case if portfolio losses, even unrecognized, exceed the bank's equity and/or deposits are insured. Care is needed before relying on creditor monitoring. 3. There are 27 PTPs supervised by the Ministry of Agriculture. Roughly half of total public enterprise employees work in PTPs. 4. In infrastructure, Government also has used build-own-operate (BOO), build-own-transfer (BOT), and joint ventures schemes to introduce private sector participation (see Chapter 3). 5. In January 1995 Bank Indonesia (BI) issued four new regulations specifying supervision policy, the broad guidelines of which were set in February 1991. The new regulations are intended to strengthen commercial bank management (by providing character guidelines for ownership, management and membership on banks' Boards of Directors and by extending BI's supervisory authority to include banks' credit analysis and corporate strategies); to improve the quality of credit information; and to standardize certain accounting systems. 6. The tax reform measures (see the discussion of Fiscal Policy in Chapter 1) include a provision to encourage bank mergers. The new law allows banks to pay lower taxes when merging due to wide differences between the market price and the book value of assets. 7. The lead examiner gives an oral report of findings to the examined bank's management on the final day of an on-site exam. 8. The Polluter Pays Principle was first adopted by OECD countries in the 1970s as a basis for the formulation of environmental policies. The principle holds that polluters should bear the full costs of the goods they produce, including the social costs that they impose on the public in using land, water and air as a sink for wastes. By forcing these costs back onto the polluter better decisions on the use of scarce natural resources will result. Managing Infrastructure 67 3 MANAGING INFRASTRUCTURE A. Overview 3.1 Rapid industrial growth and associated distribution would permit about 15% more urbanization are beginning to overload Indonesia's sales from existing generation capacity. infrastructure. Although capacity has increased substantially since 1970, further improvements in * Develop a clear, competitive regulatory infrastructure are needed to sustain rising living framework to maximize the benefits of standards and international competitiveness and to private finance and increase efficiency. A improve equity. Macroeconomic prudence limits large, steady flow of private investment, at the rise in investment that can be made. Thus, reasonable cost, will depend on a switch Indonesia needs more efficiency in infrastructure from the negotiated deal-by-deal approach to investment and operation, to reduce costs while a clear, competitive regulatory framework. improving service. The first step is to define concessions clearly, up-front and award them through transparent, 3.2 Greater private sector investment and competitive bidding. (Specific conditions participation can improve efficiency, and is would depend on the sector.) This approach targeted in REPELITA VI. The Government will has lowered power costs in the Philippines nonetheless continue to have a major role in and in Indonesia itself. The framework for infrastructure. That new role will focus less on contracts also needs to manage risk direct investment and service provision and more prudently, by i) developing contracts that on improved management of the private and allocate risks to parties most competent to public investment program (and related debt), manage them and that ensure private sector and of the regulatory framework and public efficiency gains are passed on to consumers, infrastructure, to improve services and access. and ii) managing prudently and appropriately pricing scarce public sector credit, guarantees 3.3 The main recommendations are: and contingent liabilities. * Rationalize Investment and Improve Capa- * Encourage private sector participation by city Utilization. The infrastructure program's splitting-up ("unbundling") public sector size and sectoral allocations are issues. functions; use a market-based, competitive Proposed investments are about 50% larger (as approach and sectoral regulatory frame- a percentage of GDP) than in REPELITA V; works to increase efficiency gains and pass they probably would widen the current account them on to consumers, including the poor. deficit by 2% of GDP if carried out. However, An easy first step that would reduce costs actual investment may be less, due to slow- would be to encourage public firms to downs in external finance and domestic saving contract-out maintenance, billing, growth, and to implementation difficulties. management, construction, and other non- Thus, the Government needs to tread a narrow core services competitively. A more path between avoiding excessive imports/debt complicated, but in many cases desirable, and ensuring sufficient capacity growth. step to improve efficiency would be to Public investment should focus on areas of low unbundle production, transmission and private interest, e.g., Eastern Islands, urban distribution in power, gas and water. This and feeder roads. Power is a major issue: too would open up possibilities for efficiency much new generation would add to the large gains through direct competition of multiple existing over-capacity: better transmission & firms in a market (e.g. generation), in 68 Chapter 3 addition to indirect, bidding competition for difficulties in private participation. In concessions. Unbundling also would permit addition to separating the regulatory role firms to deal directly with users (e.g. from other public functions, the central "wheeling" of power or gas through grids), government should shed implementation to which would reduce the government's role in lower tiers of government, public enterprises, transactions and encourage the private sector and private operators, except as warranted by to take more of the commercial risks of prudent management of public borrowing. capacity creation. Thus, service contracts, The central government should focus on leases, and concessions can be used raise establishing national policies and sectoral efficiency through increased private sector regulatory frameworks, developing technical participation, with or without ownership. and financial standards and procedures, and Finally, arrangements for sectoral regulatory giving technical assistance and guidance to frameworks will be needed where it is lower tiers of government. difficult to introduce competition. The regulatory function should be taken out of the * Make public services more business-like public enterprises to prevent conflicts of and responsive to consumers. Public interest. institutions need fewer goals, which are more focussed on service provision; more I Improve infrastructure pricing to recover managerial autonomy and accountability; and costs, rmance investment, manage demand more reliance on the private sector (see and encourage efficiency. Adequate pricing above) to improve performance. Decentral- is critical to private participation and improved ization would improve efficiency in many public sector performance. Key elements are cases, since most infrastructure yields largely smaller, better targeted subsidies in power, local benefits. For example, linking urban water, rail and public buses; higher average services more closely to revenues through water charges; fees for road use and user charges and higher property taxes/better congestion; and competition to lower power assessments would improve accountability generation and telecommunications prices. and service quality, as well as generate Poor cost recovery largely subsidizes the resources for service expansion. Where better-off, because the poor lack access to markets do not match service demands and services. The public, including the poor, are costs effectively, because of externalities, willing to pay for better access to quality governments need to involve users and services. Greater resources would finance stakeholders in the decision-making process capacity expansion, including greater access by to improve investment efficiency. the poor. However, mechanical reliance on cost-plus pricing will reduce efficiency and 3.4 The rest of this Chapter discusses the international competitiveness. The basic aim management of infrastructure to increase is to emulate pricing in a competitive market. efficiency in more detail. Section B provides an overview of the role of the Government in * Rationalize sector management, reduce infrastructure and the worldwide shift to private institutional complexity and assign services. Section C discusses the management responsibilities better by clarifying roles, of the investment program in the context of that functions and authorities. The fragmentation shift and the need to maintain macroeconomic and overlap of investment, operational and stability. The Chapter then turns to improving: regulatory responsibilities leads to poor policy the framework for private finance of infra- definition, inefficient investment, capacity structure (Section D); pricing of infrastructure imbalances, unclear assignment of (Section E); and public sector services especially responsibility and accountability, and by unbundling to increase private participation Managing Infrastructure 69 (Section F) and by decentralization (Section G). at the end of this chapter discusses the cross Summary discussions of the main infrastructure sectoral issues of urban infrastructure. sectors are contained in Boxes. The annex at the B. The Role of Government in Infrastructure, Past and Present 3.5 The public sector has long been the main without. Natural monopoly arguments have lost infrastructure supplier in developing countries. intellectual acceptance and real world To some degree, this reflects efficiency applicability in the context of poor public considerations related to non-market spillovers and services and alternatives arising from technical concerns about "natural monopolies". To a much change (in mid-20th century, trucks instead of greater extent, however, the public sector's large railroads; more recently, cellular instead of role reflects a response to political pressures. The conventional telephones). need for infrastructure has been substantial, requiring considerable capital, entrepreneurship 3.8 To respond to these dissatisfactions and and advanced technology. The related contracts changed circumstances, governments are shifting and operations were capable of generating large to a more private sector/market- oriented rents. Uncertain regulatory frameworks have approach to infrastructure, particularly in Latin inhibited/raised the cost of private investment. America and East Asia. In addition to Also, for many years, finance through public efficiency, finance has become a major borrowing seemed cheaper than private capital. consideration: governments can sell-off parts of Finally, the prevailing development philosophy public firms and fund new investment more provided intellectual backing for public supply by easily, because of financiers' interest in suggesting that government could succeed where "emerging markets". markets appeared to fail and that foreign investment was exploitative. As a result, 3.9 Indonesia is no exception to these new governments engaged in major infrastructure trends. However, to get the most out of the building programs funded with taxes and external new model, Indonesia's Government must put loans, and often nationalized private greater emphasis on its role as manager of infrastructure. infrastructure to maximize efficiency. In this role, governments at all levels must manage the 3.6 Indonesia, using the prevailing public infrastructure program, concentrating on five sector model, expanded infrastructure at one of key elements: (i) rationalization of the overall the world's most rapid rates in 1970-90. Power and sectoral investment program, with the public generation capacity increased twelve-fold, paved sector focussing on areas where there is low roads and phones increased five-fold, and irrigated private interest and equity can be improved acreage doubled. Water and sewerage expansion substantially; (ii) setting up a clear competitive were, however, much less rapid. framework for private finance and ownership; (iii) pricing; and improving public services 3.7 Worldwide, despite its initial successes, through (iv) unbundling to permit greater the public sector model has generated growing competition and private participation and (v) dissatisfaction. Unmet demands and poor quality greater decentralization and participation. If services are becoming bottlenecks to growth. The governments' management along these lines poor usually lack access to services. does not improve efficiency, and the potential Infrastructure has been expensive and benefits of private participation and ownership inefficient-high cost contracts, excess capacity, are dissipated in high prices and rents, then the inadequate maintenance, and "lost" output. Users new model is unlikely to be successful or long- are forced to substitute high cost alternatives or go lived. 70 Chapter 3 C. Indonesia's Infrastructure and the Proposed Investment Program 3.10 Capital Stock. Indonesia's estimated Indonesia, appear to have grown more rapidly infrastructure capital stock (in power, roads, than other regions with less infrastructure. telecoms, water, and irrigation) is about what might be expected in an East Asian country of its 3.11 Proposed infrastructure investments per capita income.' Indonesia's stock per capita total about $56 billion (about 6.8% of the new, is below Malaysia's and Thailand's, but upwardly revised GDP) in power, proportionately so is Indonesia's per capita telecommunications, transport, water and income. This suggests that Indonesia has been irrigation during the rest of REPELITA VI (See investing about the same percentage of GDP in Table 3. 1).2 Investments are concentrated in infrastructure as the other East Asian economies power (43%) and transport (33%), as is typical (Indonesia has a higher share of irrigation than the in developing countries (Ingram and Fay, others (Ingram and Fay) and its power figures Kondury). Indonesia needs large transport neglect the large amount of private self-generation investments to serve the archipelago and (See Box 3.1)). Compared to the worldwide encourage industrial decentralization to reduce relation between infrastructure and GDP, the concentration in Jabotabek that is generating Indonesia's stock is somewhat lower than might diseconomies. However, the proposed share of be expected. However, the East Asian countries, power investment appears to be high compared including to other developing countries (Ingram and Fay). $ Figure 3.1 Infrastructure Capital and GDP (Pur. Power Parity), 1990 10000 World * Japan Relationship ast Asia QL 1000 \d /4 Middle and High Income Lj * /X" Malasi Relationship* !* Indla //haland 03fi100 /; ndlppneec 2 Lo 'excludes Singapore and HK. 52 10 , $ 100 1000 10000 100000 GDP per capita 1990 (PPP, 1985 base) Adopted from Wodld Bank, World Development Report 1994. Fig. 1, p. S. Managing Infrastructure 71 Table 3.1: Indonesia: Major Infrastructure Sectors: Proposed Investnent 1995-98 and Capacity Targets in REPELffA VI Compared to REPELrrA V . Proposed Investment Selected Targets Selected Indicators 1995-1998 of Add. Capacity of Add. Capacity (US$ bil. current) (%) REPELJTA VI (& Proposals) REPELITA V Total 56.3 a 100.0% (Private) (18.4) (32.9%) Power 24.1 42.8% Generation 17.0 9522 MW d 4600 MW d Private 9.1 b,d (2900 MW b, d) d Public 7.9 c (8700 MW C) 4600 MW Trans. & Dist.(Pub.) 7.1 c 30,000 MVA & 7,500 MVA & 133,000 KMC 55,000 KMC Telecoms 6.8 10.9% 5 mil.lines 3 miL.lines Private 3.1 2 mil.lines Public 3.7 3 mil.lines 3 mil.lines Roads & Rail roads 15.3 27.2% Private (Toll Rds.) 3.1 5.5% 310 KM 115 KM Public 12.2 21.7% Most spending for improvement Air & Sea 3.1 e 5.5% Multiple Indicators Multiple Indicators Water 5.0 f 8.9% 30,000 1./s. 20,000 1./s. Irrigation 2.0 3.6% Multiple Indicators Multiple Indicators a Excludes urban sewerage, and drainage, and kampung improvement targets, estimated to cost $5 bill.; planes and ships estimated at $6-7 bill.; and mass transit. b See PLN, RENSALITA (1995). The spending includes proposals for about 5600MW that, with further invest- ment, is expected to be completed in REPELrrA VII. Costs were estimated at $120 mill./IOOMW for coal, $80 mill./lOOMW for combined cycle plants, except where cost figures were available; recently prices have fallen. c Based on PLN RENSALITA (1995); includes spending for capacity coming on line in REPELITA VII. d Excludes private purchases of generators for self-generation. e Excludes ships and planes estimated at $6-7 bill. f Includes $2 bill. private investment. An alternative project list totals $7.8 bill. See Gov. of Indonesia 1994a. Sources: Staff estimates, REPELrrA VI, Gov. of Indonesia (1994a, FY1994/95 Budget), PLN RENSALITA 1995. 3.12 Private infrastructure investment is capacity in REPELITA VI, plus starts on a expected to account for over $18 billion (33%) of roughly 5600 MW of capacity that would come the proposed investment program in the main on line in REPELITA VII. Toward the end of sectors in 1995/96-1998/99, according to REPELITA VI, private generation investment is Government projections. The Plan includes expected to become larger than PLN's. Also, explicit reliance on substantial private the Government has announced plans to infrastructure investment. Projected private privatize partially major infrastructure investment is concentrated in power generation, enterprises (Section D). Nonetheless, most telecoms, toll roads and water. The highest infrastructure is expected to remain public. concentration is in power generation, where the Even in power, about 62 % of investment will be proposed increase would account for 27% of public, including all transmission & distribution. 72 Chapter 3 (Progress in privatization is discussed in Section investment rates shown in Table 1.9. This D, and Boxes 3.1 (Power), 3.2 (Water), and 3.5 investment should be financeable with higher (Telecoms). The success and contribution of the domestic saving, based largely on better cost privatization program will depend heavily on the recovery, and the projected increase in foreign establishment of a sound regulatory framework debt. (Section D)). 3.16 Some rationalization has occurred 3.13 Rationalizing the Investment Program already-PLN has cut back its generation target to Maintain Macroeconomic Stability. If 10% and private power start-ups have been implemented, the proposed investment program delayed. More reductions may occur- would reduce bottlenecks and push Indonesia well financing issues could delay or even stop some above the East Asian trend line in Fig. 3.1. investments, public and private. (Chapter 1). Proposed investment is about 50% higher than the The deal-by-deal approach may delay projects estimated rate of investment during REPELITA V and reduce investor interest. Institutional in the same sectors (World Bank 1994a, p. 52).3 problems and implementation delays may The proposed rate is also 40-70% higher than the continue to slow investment in the water sector. rates in the same sectors in most East Asian The Government will need to monitor the countries-in China, Korea, and Thailand situation and make adjustments as needed in infrastructure investment was 4-5% of GDP in critical sectors. Should overheating develop, the 1990-92-and the rates in a 25 country sample, in Government will need to stretch-out the program the same sectors (See Kondury and Ingram and or even cut it further. On the other hand, Fay, p. 14). Finally, the proposed rate is about should lack of finance begin to cut-back 10% higher than a recent World Bank estimate of infrastructure investment excessively, the the cost of meeting needs in the same sectors Government will need to improve further the (World Bank 1992b). Building capacity too soon, regulatory climate and make investments critical as well as too late, is costly. The proposed to international competitiveness, financed with investment program may exceed what is efficient higher public and private saving. intertemporally. 3.17 In making these adjustments, it is 3.14 More importantly, the proposed important to examine the efficiency of the investment implies a rise in investment that would sectoral/sub-sectoral investments. It is also be associated with an estimated $35 billion of important to examine the projected private imports and external borrowing, and likely lead to sector investments-to what extent they are a rise in the current account of deficit of about likely to receive financing, to what extent that 2% of GDP, and higher inflation. The widening financing will add to Indonesia's external debt, of the current account and higher inflation could and to what extent they depend on Government be avoided only if domestic saving rose or other guarantees, explicit or implicit, that may prove investment demands fell by the same amount. costly (See Section D). Finally, alternative Such a rise in the current account deficit is likely programs will be needed, in case investments to be unsustainable in the current international are deferred by lack of finance and growth of environment (Chapter 1). demand for services does prove strong. 3.15 The proposed investment in these five 3.18 Sectoral Issues. Figures 3.2-3.5 show sectors thus needs rationalization to what is the rapid growth of the four types of financeable under current conditions without infrastructure in the last two REPELITAS, the overheating-roughly 80% of the level shown in projected acceleration in REPELITA VI, and Table 3.1.4 This would translate into the comparable data for Malaysia and Thailand. Note that Indonesia's power figures exclude Managing Infrastructure 73 Figure 3.2 Power: Capacity & Sales per 1000 Figure 3.3 Telephones: Lines per KWh/1000 persons Persons VA Mfg. LinsI000 porSons 1000 Pomona Log cale Log scale LOG sale 100 Malaysia ___ Capacity * 1990 Malaysla 1990 0 Rep. VI Malaysia Thalland 1990 1980 A Malaysla Thailand Prol. Pub.&PrIv. 1980 a 1990 Thailand 1960 , Re~.VI 1993/94 Indonesia 500 ,199~~~ ~~ ~~3/94 x10/ ThailandInoea Caa'Hlst. trend 1980 .600 19"89 //ale _ ' , ~~~~~~~~.300 , VA manufactuing , ' p.c. (ase year 50 , 1983) 100 1 1980 1985 1990 1995 2000 1900 1965 1990 1995 2000 Soure: Rpeilh VI Stbdk hdoneeI4 WDR 19K Source: Repelm VI, Slbk hdonf u. Wr 1W4.t Figure 3A Safe Water: % Pop. wlth Flgure 3.5 Paved Roads per 1000 Per cent Access KM/1 000 porsons Persons 90 Log scaleo 80 Malayla 1980 80. a ~~~~~~~~~Rep. VI 70 . Thailand 1960 Malaysia 1980 60 ' Thailand 19 .1993194 Malaysia _0. 19 Indonesla Malaysia low 01990~~~98 40 1 30 1093/94 Rep. VI 20. T ialland - 114ind Indonesia 10. 1980 1990 11O - , , ,,, A | 8 /84 1980 1986 1990 1995 2000 1980 1965 1990 1995 2000 Source: VDR 194 Irdon. ciahabd from 1900 bas. Source: WDR 194 Rep. Vi, Stk Indord. 74 Chapter 3 full-time, private self-generation equivalent to In the current international markets, financing about 50% of capacity at end-1992 and fill-in may take time to mobilize. Actual private capacity equivalent to another 30% (Box 3.1) investments thus may be 70% or less of the Factoring in this self-generation lifts Indonesia's programmed total. Since most of the private power figures substantially. Indonesia's telecoms sector projects are long-gestation coal plants, and power (including self-generation) are about 10 much of the private sector's generation capacity years behind Thailand and 15 years behind is unlikely to be in place before REPELITA VII. Malaysia; in water the gap is somewhat larger. In the public sector, PLN faces resource Indonesia's roads per person (or per km of land constraints that may limit its real resources to area, not shown) are about the same as Thailand's levels similar to REPELITA V, when only about but much less the Malaysia's. This comparison 1/2 of the REPELITA VI generation target was overstates Indonesia's transport network capacity; installed and transmission & distribution lagged. the vast archipelago requires air and sea PLN's internal resource mobilization finances connections, as well as roads on each island. much less of investment than its 30% target. Development budget transfers and external 3.19 The Power sector will require substantial borrowing are likely to grow slowly in real Government management. If the program terms, because of the Government's appropriate materializes, then generation capacity would prudency regarding spending and external debt. increase by a very large 96%. (The program also Some domestic borrowing is possible, but it is would form the basis for a further increase of unlikely to be enough to allow PLN to meet all about 16% in capacity early in REPELITA VII.) its targets, unless PLN's profitability increases. The proposed growth in generation is very high Moreover, domestic borrowing by PLN would compared to past trends and planned growth, entail a public guarantee, will be costly in terms especially given the excess reserve margin of over of rates, and will crowd out other investments 50% in the Java-Bali grid (versus 20-25% in unless saving rises in response to capital market efficient grids). The proposed increase also seems development (Section D). rapid relative to Malaysia and Thailand (Box 3.1) and Korea 1966-76 (World Bank 1979). 3.22 In this context, the Government will need to guard against under- as well as over- 3.20 Indonesia's targets for transmission & investment in power, and manage carefully distribution capacity are appropriately intra- and inter-sectoral issues. First, the high-doubling or more. Slow growth of trans- Government should continue the policy of not mission & distribution has been a major enhancing PPAs with guarantees-additional bottleneck in the growth of demand and a major guarantees should reduce the cost of a PPA and factor in Indonesia's frequent power outages. would lead other investors to ask for Demand growth cannot come close to projected renegotiations, delaying the whole program. levels unless transmission & distribution targets Second, the Government should encourage PLN are fulfilled. Fulfillment will depend on increased to focus its limited resources on transmission & efforts by PLN, relative to REPELITA V, and distribution. With better transmission & substantial funding for transmission & distribution distribution, generation capacity could be investments. utilized more fully. Increased utilization of generation capacity, from the current 80% of 3.21 The actual power sector investment is Malaysia's and Thai-land's to 90%, would allow likely to be much less than the program, however. 15% more sales, with an avoided cost of $2 In the private sector, aside from the Paiton billion in generation capacity. This should be project, potential investors still have not finalized feasible given Indonesia's large reserve margin. financing or are negotiating with the Government. Managing Infrastructure 75 Box 3.1: The Power Sector Page 1 of 2 Power generating capacity has grown rapidly since 1984 (12.1 % p.a.). However, demand for power grew even faster, particularly with industry growing very rapidly after deregulation began. (According to the national accounts, value added in manufacturing grew 9.1 % p.a. 1984-93, and recent BPS work suggests that growth actually was much faster). To help meet this growing demand, the Government authorized duty-free import of captive generation equipment. By end-1992/93, captive generating capacity was estimated at about 5500 MW and 3000 MW backup (World Bank 1994c), compared with PLN's capacity of 10,900 MW. In addition, in April 1990, the Government invited private participation in the sector. In February 1994, PLN initialled the first power purchase agreement (PPA) for the coal-fired Paiton I, BOO project, at a reported $0.083/kwh (levelized in 1998 prices), including common facilities for other plants and local procurement obligations. Generation capacity currently is estimated to have a reserve margin more than 50 % over peak load in Java-Bali, compared to 20-25% that would be possible with a system operated at efficiencies similar to Malaysia and Thailand. A 96% capacity increase is progranuned for Repelita VI (See Table 3.1). PLN expects to build 8700 MW, almost twice the increase in Repelita V. With PLN in effect reserving most gas plants for itself, the private sector has been focussed on coal and geothermal plants-2900 MW by end-Repelita VI and another 5600 Repelita Vll. Once the Government appeared ready to accept take-or-pay contracts of $0.075/kwh (levelized in 1998), with higher tariffs early in production. Private sector interest in the program grew rapidly and many companies submitted unsolicited proposals. The Government is now negotiating both the solicited and unsolicited proposals. The PPAs also have included fuel supply commitments-generally coal. The program's status is as follows: PLN completed about 1300 MW in 1994, and has 1770 MW in its Super Crash Program, aimed at fulfilling the National Electrification Plan (RUKN). PPAs have been signed for about 3500MW and negotiations are continuing on an additional 4300 MW, which is expected to come on-line early in Repelita VII. The Paiton I financing agreements were completed in April, with $680 million equity, and $1.82 billion borrowed, largely guaranteed by the Japanese Export-Import Bank ($900 million) and US EX-IM ($500 million) and the US OPIC providing a $200 million loan for construction. Other private operators are seeking financing. Large transmission & distribution capacity increases (50-100%) are also part PLN's Repelita VI targets. Transmission and distribution have lagged generation, growing only 6-7% p.a. for most of Repelita V. New plants, such as Paiton and Tanjung Priok, are running much below capacity, because of inadequate transmission. Indonesia's has more frequent outages and brownouts than Malaysia and Thailand, despite a much higher reserve margin over peak load, mainly because of transmission & distribution problems. Power tariffs are set by Presidential decree, with the objective of achieving an 8% rate of return for PLN. In 1994, the Government adopted an automatic tariff adjustment mechanism, with quarterly changes based on a formula that includes changes in fuel prices, power purchases, general prices and the Rp./$ exchange rate. Connection fees were reduced recently. There are 24 different tariff categories and the schedule is uniform across the country, despite considerable cost differences. Peak load tariffs are not an issue now, given excess capacity, but could be used to manage demand at a later date. Cross subsidies for residential consumers are considerable, estimated at about $250 million in 1992, with less than 10% reaching the poor (WB1992, p. 94). PLN's Revenues finance less than 30% of its investments, with the rest of investment funding coming from Government transfers (usually borrowed externally) and PLN's own borrowing. In the first two years of Repelita VI, PLN's annual financing has been similar to Repelita V, raising the question of whether it can double both its generation and transmission & distribution investment. PLN's restructuring and partial divestiture are planned during Repelita VI. The Java-Bali grid, the largest sub-system, would be unbundled into generation, transmission, and distribution companies, with equity to be sold on stock markets or privately placed. The Government recognizes that restructuring requires a separation of PLN's commercial and social missions (e.g. rural electrification and the Eastern Islands), but has not yet decided on how to achieve it. The Govermnent also recognizes the need for a clearer regulatory framework. Concerns and Risks: If executed, the proposed investment program is likely to lead to substantially more overcapacity in generation early in Repelita VII. A 14% p.a. growth in generation would be very high by international or historic standards (see Table Box 3.1), even allowing for output growth somewhat higher than targeted. Self- generators are unlikely to be induced back into the grid unless (i) distribution improves, and (ii) power tariffs are below their operating costs, and (iii) connecting charges are low. The main bottleneck in the system continues to be transmission and distribution, not generation. PLN will need great efforts to meet the transmission and distribution targets and avoid worsening the bottlenecks. If demand growth is less than the high projected rates, then the take-or-pay contracts will force PLN to buy from the private plants while reducing generation from its lower cost hydroelectric and conal operations as has occurred in the Philippines. 76 Chapter 3 Page 2 of 2 Box 3.1: Table Ratio of Power Growth to Output Growth in Selected E. Asian Countries. Ratio Capac. Growth Ratio Demand Growth to Growth in to Growth in GDP GDP Mfgs. GDP GDP Mfgs. Indonesia Repelita Vl(proj.) 1.86 1.23 2.61 1.72 Pub. + Pvt.(proj.) 2.24 1.47 Repelita V (actual) 1.30 0.9 2.29 1.55 Malaysia 1980-90 1.28 1.06 1.57 1.16 1970-80 1.27 n.a. 1.41 n.a. Thailand 1980-90 1.13 0.92 1.44 1.17 1970-80 1.63 1.22 1.80 1.34 Source: WDR 1994. Some take-or-pay PPAs also appear to be high and front loaded, compared to recent agreements in the Philippines and Thailand (Gunaratne 1995), although exact comparisons are difficult because of differences in plant type, tax concessions, fuel costs, local content requirements, etc., and assumptions regarding load factors and site costs. The Government's defacto adoption of a $0.075/KWh (1998 prices) as a benchmark to speed up negotiations, led to a sharp upsurge in interest, including many unsolicited bids. In contrast, the recent, more competitive bidding for the Cilegon concession led to an estimated price of $0.061/KWh (1998 prices) and pushed down the benchmark for other bids. Any increase in over-capacity and any PPAs above PLN's generation cost would translate into higher costs for PLN in the late 1990s. This, in turn, would require a politically unpopular jump in power tariffs, or a substantial Government subsidy to avoid the jump. Related concerns over PLN's obligations could complicate financing for the private projects and PLN's privatization. These problems would be worsened by the unbundling of the system, to the extent that industrial and commercial users, who currently pay the highest tariffs would be allowed to buy low cost power from third parties, and escape the burden of cross-subsidies. At the same time, PLN's tight financial situation may make it difficult for PLN to achieve its targets for new capacity in generation and transmission & distribution. The proposed privatization will need a prior resolution of the issues of cross-subsidies and PLN's low rate of return, as well as obligations on existing and new bonds. In addition, the proceeds of the proposed privatization will be affected by the outstanding volume of PLN bonds and these bonds and the proposed privatization will compete with the financing of private power investments. In sum, it would be desirable to re-examine the demand projections and the potential for both PLN and the private sector to carry out proposed investments, in light of financing conditions post-Mexico crisis. The Government should defer signing of any new PPAs or initiation of any new PLN plants until appropriate. The Government should avoid enhancing PPAs, especially government guarantees of private debt. No new plants should be reserved for PLN; all projects should be opened to private participation. The Government also should use a clearer, more competitive framework in allocating new private capacity, a procedure that has lowered costs in other countries and in Indonesia. It should encourage PLN to focus its limited resources on improving transmission & distribution and consider ways to rely more on the private sector for additional generating capacity. Finally, the Government should increase gas supplies to private power suppliers (Box 3.6), and encourage the private sector to sell into the grid and to large consumers through the grid ("wheeling") and to enter transmission (by unbundling the Java-Bali grid) and distribution. Existing excess capacity, on-going construction, and the ability to build gas plants fairly quickly, particularly if the private sector could access gas more easily, provide an insurance margin while a clear transparent framework for private investment is developed, even if demand were to grow rapidly. Managing Infrastructure 77 Further increases in generating capacity, when roads, will be their economic feasibility. needed, should not be considered reserved for Private financing also will depend on the PLN. The private sector should be allowed to bid development of a clear, transparent framework on such increases, but the bidding procedures for bidding on the concessions and for operating should be made more competitive (See Section D). the roads. The private sector's ability to carry out more of the revised generation program would be furthered 3.26 In the water sector, there is a risk of by better access to gas supplies. under-investment because of institutional undercapacity. The investment program is 3.23 Figure 3.3 indicates a large, but reachable appropriately high, but is likely to prove target in telecoms. Substantial private investment optimistic unless strong implementation efforts is part of the commitment of the five joint venture are made. This critical sector has continually concessionaires, chosen from twelve pre-selected lagged Plan targets. About 40% of projected bidders. (Box 3.4) Substantial public funding investment is assumed to be private. However, through the budget also will be needed-the private interest is likely to be limited to a few public sector's annual target for installations is projects, in high income areas, and more in about the same as the highest annual increase production than distribution. This reflects the during REPELITA V. However, the ongoing complicated regulatory framework in the sector, process to privatize PT Telekom will generate including the problems of dealing with capital revenues that will permit further retirement numerous water distribution companies that are of high interest external debt. subject to local political interests and lack technical skills. In order to meet plan targets, 3.24 Transport investments seem appropriate the Government may need to finance more and reasonable, with the major issue being investment than planned, and rely on private increasing their efficiency. Roads carry the bulk participation to carry out and manage them. (See of traffic and, appropriately account for the bulk Box 3.3). of public expenditure in transport. Figure 3.5 indicates additional road extension is low; much 3.27 Urban Infrastructure Investment has of the spending on roads will go to rehabilitate been very low in Indonesia, about 0.4% of GDP and upgrade local roads, and to increase the or under $10 per urban resident during capacity and quality of roads and bridges, as is REPELITA V. The consensus is that Indonesia's required. The program in ports and airports urban water, sewerage, solid waste management seems well under way and is urgently needed. and transport services have not kept pace with Achieve-ment of the desired economic and social the most rapidly growing urban population in returns from these investments will depend on East Asia, especially on Java/Bali and in consolidating the many funding sources and Jabotabek, now the world's fifth largest channels, especially for roads, greater attention to metropolitan area, in particular. Future growth feasibility studies, and improvements in criteria and industrialization will depend on cities that and procedures for allocating and disbursing work well internally. To provide the necessary funds. (See Box 3.2) infrastructure, it will be necessary to at least carry out the REPELITA VI investment program. 3.25 Toll roads, although small relative to the This would represent over three times as much total, will improve the interurban network, and in real investment per capita as during REPELITA Jakarta, the urban network. However, in some V, when implementation was much below cases, traffic forecasts are low. Reaching the planned levels, in part because of limited local targets for toll roads will, of course, depend on resources. In addition, implementation of the the availability of private financing. A key recently announced mass transit investments in element here, as well as in the productivity of the Jakarta could add $2-3 billion to the 78 Chapter 3 Box 3.2: The Transport Sector Indonesia's transport sector faces major challenges: the country's vast geographic expanse, archipelagal structure, population distribution, and the structural change brought about by rapid growth. The transport network is the major factor in developing an efficient city system that will maintain Indonesia's international competitiveness. An efficient network will allow industry to decentralize away from Jakarta and Surabaya into medium and small cities with lower land and wage costs. Moreover, decentralization will mitigate congestion and pollution costs in Jakarta, that otherwise will approach Bangkok's levels. Substantial capacity expansion is needed, particularly in the congested key transport corridors of North Java. The growth of export-oriented manufacturing, and rising living standards, place an increasing premium on the reliability of transport services and efficient integration of transport modes. Careful analysis and strategic planning are also needed to avoid creating environmental and social problems, and severe fiscal drains. It also is worth noting that the private sector owns a significant part of the sector's capital-cars, trucks, and ships and planes. Thus, pricing, policies, and the regulatory framework and its enforcement are critical in efficient transport development. Road transport is dominant transport mode within Indonesia, and will remain so. In addition to upgrading the inter-city network of highways as planned, the Government will need to increase maintenance and develop incentive contracts with the private sector to take on this work (See Section F). Road use fees could be improved by linking them better to fuel consumption axle configuration, and vehicle weight, to recoup maintenance costs. In addition, overloading and safety restrictions need strict enforcement. Over the next 5-10 years, investment in capacity expansion will need to grow. A critical factor is the economic feasibility of the major investments, and the associated several year lead time to carry out the corridor studies, undertake land acquisition, and design measures to counter adverse environmental and social impacts. Institutional improvements, which would more clearly assign responsibilities and reduce the number of funding sources and criteria and improve disbursement patterns, would improve sectoral performance. Development of toll roads will be important to relieve congestion in some of the major corridors, but the success of the program will depend on the clarity of the regulatory framework under which these roads are developed. Requests to finance roads through the state banks should be resisted, to avoid a return to directed type credits; roads that are economically justified can find commercial financing. Given the high population density and rapid growth on Java, rail has a future in selected corridors and freight commodities. Improvements in operational efficiency would be facilitated by Perumka's greater autonomy and clarification of institutional relationships with the Ministry of Communications. Interest in private participation is on the rise, including development of urban tracts, some passenger and cargo services, and building and maintenance of locomotives. While private participation holds the promise of improved efficiency and lower costs to consumers, translating that framework into reality will involve a substantial improvement in the regulatory framework for private participation. If privatization arrangements are not clear, and competitive, then the country runs the risk of turning over valuable assets at low cost, with no benefit to consumers. Regarding the rolling stock, needs must be carefully specified: Indonesia needs mostly light, high horsepower locomotives for its mainly passenger business, but current plans are for heavy freight locomotives, produced locally. These will be costly and unsuited for the traffic. Sea and air transport are important for some inter-country commodities and the only means of inter- island and export/import trade. Additional port capacity is clearly needed to support the export boom. Achieving cost-effective results will depend on a clear strategy and an effective regulatory framework for private participation. Finally, given the goal of stimulating transport between the island, care should be taken in protecting local ship-building. Protected production will mean higher costs for ships, and correspondingly increase the cost of inter-island sea journeys. Managing Infrastructure 79 Page 1 of 2 Box 3.3: Urban Water Indonesia's urban water problems are similar to most developing countries'-low coverage, large losses, institutional weaknesses and poor tariff policy. Lack of clean water is an important factor in the high incidence of water-borne disease and child mortality (Chapter 4). Most urban residents consider water pollution a serious problem, according to surveys. Moreover, urban plus agricultural demands for water are beginning to exceed supply during the dry season, indicating a need for water basin management. Urban access to "clean water" (65%) is slightly less than in China or Thailand, and much less than the Philippines (93%) or Malaysia (100%) Wells and vendors account for almost 70% of access. Piped water is used by only about 35% of households, and about 10% of that comes from vendors who resell piped water. Access to piped water has improved only slightly since 1980, when it was 27%, because lower-than-planned spending during Repelita V barely kept up with urban growth. Piped water is often of poor quality because of treatment problems, and contamination of pipes, standpipes and transport. Limited access to piped water has led to a boom in wells, but a (small) survey suggests many shallow wells are contaminated (JICA). "Unaccounted for water" (production that earned no revenue) is 35-50 % of production in the largest cities. In Jakarta, losses reached 50% in 1993 when a new source came on line. If Jakarta were to cut that figure in half, to reach the efficiency attained in Seoul, nearly 50% more customers could be served (assuming adequate distribution capacity). Local (level II) public enterprises, PDAMs, provide the piped water. They depend on the Public Works Ministry and provincial governments for projects and funding; they report to the Home Affairs Ministry and their board of directors is supervised buy local leaders, who have a say over tariffs. Moreover, PDAMs are required to share their revenues with local governments when cash flow is positive, according to a 1985 Ministerial decree. Local consultants and contractors are given preferential treatment in projects. Directors and staff are poorly paid, have poor career prospects, and tum over rapidly. Most PDAMs are unable to break-even financially, maintenance spending is 20-30% below necessary levels, and capital replacement is lacking (in part because of access to borrowing from the Government, the cost of which is deducted before distribution of cash surpluses to local governments). Water tariffs are based on a standard national structure (1992) which is progressive by user category and consumption. The average tariff in 1990 was Rp. 277/in3, with a range from Rp. 532/m3 for industry, 341 Rp./m3 for Government, Rp. 219/m3 for households to Rp. 170m3 for standpipes. This compares with Rp. 3000-5000/m3 from vendors. However, tariffs vary substantially from the standard. Jakarta's PDAM charged about Rp. 2000/m3 on average in 1993, more than many US cities, but households using less than 15 m3 paid only Rp. 350/in3. In addition to the tariffs, there are monthly charges of Rp. 800 for administration and meter rental, and an official connection fee of Rp. 81,000 (which is reported to be increased by over Rp. 100,000 unofficially). Cross-subsidization of consumers by industry hurts competitiveness and encourages firms to use well water, which depletes aquifers and leads to salinization. The subsidy to consumers goes mainly to the better-off; more than 91 % of the households with expenditures over Rp. 700,000/mo. had piped water connections versus only 10% of the households with expenditures below Rp. 100,000, according to 1992 data. Standpipe subsidies are often appropriated by custodians, who take advantage of water scarcity to charge Rp. 1000-1500/m3. In order to achieve the Government's economic and social objectives, and even come close to reaching the Repelita VI targets, a comprehensive revamping of the urban water supply and sanitation sector is needed. This would address investment, incentives, and institutional constraints. In investment, the balance has to shift to improving distribution and increasing connections for piped water. Reliability and quality of distributed water also needs improvement. The Government must take action now on waste-water disposal and sanitation (including sewerage in selected cities) in line with increased water supply, to reduce contamination. ./2 80 Chapter 3 Box 3.3 (Cont.) Page 2 of 2 To improve water supply and expand access to the poor, the PDAMs must be run more like service businesses. Among the most important recommendations along these lines are: (a) tariffs: raise the average tariff in most cases and reduce the number of rates to 4 or 5, lower tariffs to industry and remove of household subsidies above 10m3-as noted, most households with water connections have above-average incomes and actual standpipe charges are typically above official rates, set up a clear and transparent subsidy for low income consumers that could be paid by the Government; (b) improve billing and collection: establish more offices, employ private firms for meter reading and collection based on contracts with incentives for improved collections, publicize disconnections and penalties and the Government's low rate of payment; (c) reduce water losses: in addition to better billing and collections, raise spending on maintenance, ensure that businesses have reliable bulk water meters and connections, use more private contractors for pipe repairs and maintenance with incentive contracts for based on French and UK models; (d) focus on improved water distribution; (e) improve the firms: publish financial accounts, improve career prospects and employee training, encourage private sector participation through management; (f) consider broad concessions to private sectorfirms in the major cities, with carefully specified bidding rules and contracts, for example, in Jakarta. On the institutional front, there are too many actors in the sector with unclear or overlapping responsibilities and without agreed understandings on policies. A clear assignment of responsibility at the national level is needed to develop appropriate policies, technical standards, and financial procedures; to provide technical assistance to water utilities, and to regulate the activities carried out by service enterprises, including private operators. At the level of individual firms, greater focus is needed on the basic objective of expanding access to safe water. Elimination of profit transfers to local governments and increased community involvement in planning water supply and managing standpipes would allow additional revenues to be use for capacity expansion and distribution improvement. Secondly, to enhance economic viability and water basin management, smaller water enterprises should be regrouped. One way would be to separate ownership from management, with municipal governments retaining ownership of assets, but companies managed by professional firms. In addition to increased efficiency, this would improve the transparency of finances and be an important ingredient for encouraging private participation in the sector. investment program. A key area for increase is improvement in service delivery could be water supply, where the projected private sector achieved through improved public sector investment may prove difficult to achieve in light performance, greater reliance on the private of the prevailing regulatory framework and the sector for service contracts, leases, and low technical capacity of urban water companies, concessions under appropriate regulatory as noted. To carry out urban public investments frameworks, and resolution of some insti- will require a substantial increase in local tutional issues, the most pressing of which are revenues, from taxes and fees. In addition, land titling and traffic management. (Annex substantial Chapter 3 discusses urban issues.) D. Regulatory Frameworks to Maximize the Benefits of Private Infrastructure Finance Overview the cost of power in the Philippines, and in Indonesia recently, demonstrate the benefits of 3.28 A clear, competitive regulatory competition among concessionaires for framework will increase the benefits from the transparent contracts. increased availability of private finance for infrastructure, compared to the current deal- 3.29 The increased availability of finance by-deal approach. Such a framework would reflects international markets' higher demand for yield greater efficiency and lower costs to infrastructure investments in emerging markets. consumers, better management of risks and the This demand is likely to remain high, although country's direct and contingent liabilities, and a growth of demand had slowed even before the more stable, larger flow of finance. The cuts in Mexico crisis. Infrastructure finance has gone Managing Infrastructure 81 mainly to telecoms, power, gas and water, areas 1980s debt crisis. Finally, standard take-or-pay where contracts can be written to deal, contracts effectively make many infrastructure imperfectly, with the risks from imperfect projects quasi-public, through guaranteed sales regulatory frameworks. to/purchases from the public sector, even if the project's debts are not publicly guaranteed 3.30 The Indonesian Government has raised explicitly. Such contingent liabilities are less capital revenues from (partial) divestiture and onerous than an equal amount of debt, because expects to raise more; it also hopes to use private even in the worst case they will involve only finance to fund part of the proposed large increase shut-downs of lower cost capacity. However, in infrastructure. This finance will include some they do absolve private firms of the commercial equity but mostly will be borrowing by the firm risk of projecting demand and can lead to costly doing the project. Funding through equity and overcapacity if the public sector's demand private debt, rather than public debt, are benefits projections prove too optimistic. given Indonesia's already-large public debt. Nonetheless, the project-based structure of finance 3.33 The framework for managing these risks will increase Indonesia's total external debt, public and contingent liabilities prudently involves and private, unless the borrower is located three parts: management of the increase in offshore and has large off-shore assets. external debt and investment quality, discussed Moreover, the typical, take-or-pay contract creates in Chapter 1; development of contracts that a contingent liability (See para 3.60). Higher consciously take into account risks and risk saving, including greater resource mobilization by pricing; and unbundling public sector activities infrastructure firms and governments and by to allow the private firms to deal directly with domestic capital market development, is needed to users and absorb more of the commercial risk of reduce reliance on external funding. demand forecasting and capacity management. 3.31 In general, the framework to maximize 3.34 Contracts need to allocate risks to parties the benefits of private finance will involve clear, most competent to manage them, take into up-front specification of the conditions, clear account the costs of risk shifting and ensure that bidding procedures, and selection of the bidder risk shifting does not reduce incentives for offering the highest payment to or lowest cost to efficiency. For example, countries often take the Government. In addition it is desirable to the risks of macro-economic policy. Investors separate regulatory functions from the public may take exchange rate risk, and other enterprise, to reduce conflicts of interest. Specific macroeconomic risks, but this certainly conditions would depend on the sectors. This increases the contract's cost. In some cases framework would reduce post-contract insurance is available against these risks, for a renegotiations and charges of favoritism, and fee. Contracts that include guarantees of private increase international interest; it also would yield external debt are not only equivalent to public direct benefits to the consumer and ensure debt in the market's view, they reduce the international markets that the borrowing is being incentives for project evaluation and efficiency. used efficiently. Hence, great care must be taken before such contracts are extended, including careful 3.32 The Government also needs a sound evaluation of the benefits they might entail framework to manage the inflows to mega-projects relative to alternatives such as private and to allocate risk and liability efficiently participation through incentive contracts for between itself and investors. The size, efficiency construction and operation. The Government's and financing of the mega-projects affects the contracts need to rationing and price macroeconomy and external debt. Moreover, it appropriately scarce public sector credit, should be recalled that some private off-shore guarantees, and contingent liabilities, bearing in borrowings often became public debts during the mind that concessions to one investor usually 82 Chapter 3 must be given to all. This process will be rights-certificates issued by a depository bank facilitated by careful up-front specification of that pay dividends based on shares held by a contracts and bidding for the contracts. custodian bank in the home country), mutual funds, pension funds, and new institutions such 3.35 A second important element involves as infrastructure investment funds (See unbundling public sector activities. For example, Gunaratne 1994). The demand from these by separating-unbundling- production, markets not only has funded new infrastructure, transmission and distribution in power, water, and it has allowed Governments to sell-off part or all gas, it is possible to set up markets in which of existing firms. Moreover, the development private firms compete to provide supplies at of domestic capital markets also has mobilized minimum costs, and distribute services to resources, especially in Malaysia and, recently, consumers, either directly or through transmission India and Thailand. Of course, part of the facilities (for a fee). Unbundling thus returns funds raised in domestic markets typically come some of the commercial risk of forecasting from off-shore investors. demand to private producers and encourages them to provide low cost, high quality services through 3.38 In 1988-93, developing East Asian a market-based environment. Unbundling also economies mobilized about $9 billion of private permits greater reliance on the market to regulate infrastructure finance, on- and off-shore. This sectors. However, in cases where markets are is about one-half the total that went to Latin weak, a regulatory framework will need to be America. East Asia's higher saving rates and developed. better fiscal performance translated into lower borrowing needs than Latin America. The Growth of Private Finance for Moreover, Asian public infrastructure typically Infrastructure was better run than in Latin America. Finally, much of the recent flow to Latin America was 3.36 Private offshore finance for infrastructure associated with the country-specific regularizing in developing countries has grown sharply in of Argentina's and Mexico's large external debt- recent years (Table 3.2 and WDT 1994), overhangs. In contrast to the Latin American reflecting higher supply and demand. Supply has approach of full divestiture of public firms, the grown as international markets have recognized East Asian approach typically has been partial the potential returns in developing country privatization, mostly in telecoms. infrastructure.5 Demand also has grown as developing countries need infrastructure, and lack 3.39 In the last two years, the East Asian funding capacity because of inadequate cost economies' growing needs for infrastructure recovery, limits on public borrowing capacity and investment and easier market conditions also aid flows, and, in some cases, macroeconomic have led to a growth in private projects finance. problems. Most of the project investment in East Asia has gone into power plants (China, Malaysia, 3.37 In addition to traditional sources of Thailand, and Philippines) and highways private offshore fiance such as direct foreign (Malaysia). Projects also exist in water & investors and international commercial and sewerage (Malaysia), and urban transport investment banks, funds for infrastructure have (Malaysia, Philippines and Thailand). About come from offshore bond and stock markets (often 150 projects worth over $100 billion were using new instruments such as depository estimated to be under consideration at end-1994 (WDR 1994). Managing Infrastructure 83 Table 3.2: Infrastructure Privatizations in Developing Countries and Offshore Bond and Equity Sales 1988-93 Privatizations Bond & EAuitv 1988 1989 1990 1991 1992 1993 1993 Total ($ Billion) 0.4 2.3 4.3 6.3 8.3 3.8 5.2 By Region 100 100 100 100 100 100 100 Latin Amer. 100 9 79 95 74 38 44 East Asia 0 91 20 4 25 25 55 Other 0 0 1 1 1 37 1 By Sector 100 100 100 100 100 100 100 Telecoms 75 9 94 90 35 35 17 Power 25 91 0 5 36 46 58 Gas 0 0 0 0 23 2 11 Other 0 0 6 5 6 17 14 Note: Privatizations include sales in local markets, bonds & equity refer only to international markets. Excludes airlines, shipping, and road transport. Source: WDR 1994, WDT 1994, Sader. 3.40 The project-linked finance typically is will include the obligation to supply 2 million raised by a local entity, based on the project's new telephone lines. (Box 3.5) In power, in potential revenues not provided by a parent, 1994, Indonesia signed purchase agreements for offshore corporation. Debt:equity ratios of 75:25, about 3500 MW of privately supplied power or higher, are typical. To the extent that the local from two coal-fired two gas-fired, and four entity borrows off-shore, its debt would be geothermal plants. The Government is actively counted as part of the country's private sector negotiating with a number of potential power external debt. suppliers, that could supply an additional 4300MW. Finally the Government also 3.41 Indonesia has followed the East Asia announced its intention to privatize partially PT pattern. The public toll road company, Jasa Telkom, PLN, Jasa Marga, and Garuda. Marga, has jointly built and operated toll roads with private sector firms; local partners have Developing a Clear, Competitive Framework included Humpuss and Citra Marga. In 1994, for Concessions. Indonesia partially privatized the public international telephone service, PT Indosat, and 3.42 Indonesia can reduce the costs and gave a franchise for international service to increase the benefits of private infrastructure Satelindo, a joint venture of the PT Bima Graha participation and investment by maintaining a Telekomindo consortium (60%), PT Telekom stable macroeconomic environment and insti- (30%), and Indosat (10%); it also is offering tuting an appropriate regulatory framework concessions to private firns that 84 Chapter 3 Box 3.4: Indonesia's Telecoms Sector: Indosat and Beyond A minority share in Indosat, Indonesia's public international telecommunications company was sold off in stock markets in October 1994. The Government sold 25 % of its equity through the form of American Depository Rights (listed on the New York Stock Exchange), raising $830 million; the net proceeds were used to retire high interest rate ADB and World Bank loans. In addition, Indosat's equity was increased 10% by stock sales in the Jakarta and Surabaya markets, which raised the equivalent of $332 million; the net proceeds were retained by Indosat for investment. Merrill Lynch and P.T. (Persero) Danareksa coordinated the issues, the largest global equity offering in Asia up to that time. PT Telkom (Persero), the public monopoly serving the domestic market is setting up seven regional companies. Five of these companies will enter into Build/Joint Operation/Transfer Schemes with five consortia (competitively chosen from among 12 pre-selected firms) that will manage the regional phone systems to specified quality targets and install 2 million new lines by 1999. PT Telkom will retain the other two companies, in the Jakarta and Surabaya regions, respectively, and install the new phone lines in those areas. PT Telkom also is slated for partial privatization during Repelita VI, with Goldman Sachs, Merrill Lynch, S. G. Warburg, and Lehman Brothers as the global co-coordinators. These changes are expected to improve service quality and speed-up connections. Reaching REPELITA VI's target of 5 million new lines will increase capacity 62% compared to end- REPELTTA V. The Government also has authorized new entrants into telecommunications. A franchise to provide additional international telecommunications service (through a separate access number) was given to PT Satelindo, a joint venture with 60% equity held by the PT Bima Graha Telekomindo consortium (60%) that in turn is linked to the Bimanatara and Artha Graha groups, 30% by PT Telkom and 10% by Indosat. In the cellular phone market, where service has lagged and prices are high, PT Telkom is facing competition from Satelindo (1993) and a subsidiary of Indosat (August 1994). PT Ratelindo also has been authorized to provide telecoms service. In February 1994, Satelindo sold 25 % of its equity to Deutsche Telekom AG for $586 million; their participation should help improve service for concessions. The up-front issues are i) restrictions on other potential or actual increasing the transparency and competitiveness of suppliers. transactions in order to lower costs, and ii) dealing with risk: country, currency, sectoral and 3.44 Using financial markets to partial or fully commercial/project risk. privatize existing firms tends to be fairly transparent and maximize cash yields. Price is 3.43 Increasing Transparency and largely determined by a competitive market, Competition in Bidding and in Services For any although to a small degree (1-2%) it depends particular privatization transaction, benefits are also on the management of the competition likely to be greater/and costs lower, the clearer among underwriters for the issue. In order to and more competitive the transaction. In addition, divest through financial markets, particularly the benefits to the country/users also are directly off-shore markets, firms need to have related to the degree of competition implied in the reasonably transparent books and disclose concession-high prices can be obtained for a financial results, subsidies, tariffs, etc. In the concession, to the detriment of users and case of Indonesia, PT Semen Gresik's efficiency, if the contract also provides the preparation for its sale of shares on the domestic concessionaire shelter from competition through market is generally regarded as improving Managing Infrastructure 85 accounting and performance. However, partial water supply), belies this view. The absence of privatization and spreading share issues among a suitable benchmarks with which to evaluate the large number of small investors may not generate proposals adequately, and the difficulty of a large, sustained improvement in efficiency, maintaining adequate transparency (which although it can provide a counterweight to creates pressures for efficiency), tend to potential political interventions. In contrast, increase the costs of the deal-by-deal approach private placements, or bids for majority control, substantially. Moreover, without an up-front may improve management but they also may announcement of the parameters of the contract, increase economic concentration and result in a Indonesia can be subjected to pressures to lower sale price. enhance the deal. Finally, experience has shown that poor preparation and the deal-by-deal 3.45 With capital revenues the main benefit of approach tends to lead to protracted negotiation, partial divestiture, the transaction's benefit negating one of the major benefits of private depends on how these capital revenues are participation, rapid construction. An example is invested. If the partially privatized firm keeps the the expansion of the Tanjung Priok container revenue it may not yield the highest net return for port, where changes in the site and the the country. Retirement of high interest rate debt, concessionaire have delayed project completion as Indonesia did with most of the Indosat and led to congestion in the port that has raised revenues, appropriately matches reduction of exporters' costs. public assets with reduction of public debt, and ensures a high payoff from partial divestiture. 3.49 The World Bank's worldwide experience (World Bank 1992a) suggests that complicated 3.46 Most privatization transactions in contracts are likely to prolong negotiations. Indonesia are likely to involve project Complicated contracts and other lack of concessions, rather than market based divestiture, transparency also tend to reduce the number of however. Indonesia has only a few firms that bidders for a concession and raise costs, which could be readied for market placement. Moreover can then lead to over-leveraging and markups in its main strategy for private participation is for loan applications, all of which tends to reduce joint ventures (telecoms, toll roads) with the benefits to the country from the sale of a investment commitments or individual projects. concession and to increase costs that have to be passed on to the public. Finally, World Bank 3.47 Developing a clear, competitive experience also suggests that perceptions of framework for these project-related transactions unfair dealing and favoritism can threaten the would improve the benefits to the country, privatization process and even reform in compared to the current deal-by-deal approach. general. (The same holds true for private participation without finance discussed in Section F). 3.50 All this means the Government should be more transparent than other sellers in order to 3.48 It is occasionally suggested, incorrectly, maximize the benefits of private finance. that a carefully prepared and structured Experience suggests that competition among competitive process for inviting bids from the potential suppliers, on a very few, if possible private sector is too costly in terms of time and one variable, and selection of the low bid, can money. It is sometimes said that a deal-by-deal lead to substantial benefits to the country. approach or responding to unsolicited proposals Bargaining with a sole source rather than by interested private sponsors is faster and competitive bidding is likely to raise costs of a cheaper. However, experience worldwide and in given project. Although in almost all countries Indonesia itself (e.g. ports, power, toll roads, and initial contracts have been negotiated 86 Chapter 3 on a transactions basis, the examples of the maintaining a sound macroeconomic framework. Philippines (Gunaratne 1995) and Indonesia in Of course achieving a sound reputation takes power recently suggest that competition can time. In the case of Indonesia, a reasonably reduce costs significantly. stable macroeconomic framework has been maintained for some time, the capital account 3.51 To encourage transparency and has been open since 1970 and the last large competition, bidding documents must carefully devaluation was in September 1986. However, define the main parameters of the project, for the large external debt overhang continues to example service quality; investrnent if any; and concern investors. pricing formulas. Introducing too many parameters/restraints can reduce the bidders' 3.55 Investors can insure against some risks of ability to provide service at the lowest costs. In expropriation, block4d currencies and non- particular, requirements on local content, such as payment, for a fee with bilateral agencies and often are included in Indonesian contracts, are multilateral agencies (e.g. Multilateral undesirable because they raise the cost of services. Investment Guarantee Agency, affiliated with The process should entail clear and simple the World Bank). Recently bilateral agencies selection criteria for winning bids; a clearly- have begun to extend guarantees without a defined, competitive bidding procedure; and government counter-guarantee. Governments disclosure of the winning bid. have attempted to reduce currency risk by offering concessions that include payment in 3.52 The importance of careful preparation and foreign currency or its equivalent. Government specification of contracts in the bidding documents guarantees of the investor's debt can reduce is illustrated by the Mexican toll roads case. The borrowing costs, but (a) this lower cost needs to contracts failed to make the sponsors responsible be reflected fully in lower tariffs; (b) there no for construction time and costs. Flexibility in the longer is any benefit to the country in terms of concession period allowed the sponsors to shift the reduction in public external debt burden; and (c) costs onto road users or the Government. incentives to evaluate the project and perform Creditors, mainly state banks, did not appraise effectively are reduced. and monitor the projects with sufficient diligence. Typical contract specifications for toll roads now 3.56 Commercial risk is a major issue and remedy many of these problems. private management of that risk often can represent a major saving for the economy. For Managing Risk Sharing example, commercial risk of constructing and operating projects often is assumed by private 3.53 All projects' cost are affected by risks investors. This can save substantial amounts if that raise the premium that investors require, private investors can construct facilities more over-and-above the international interest rate, to quickly, which, with appropriate contracts, can compensate them for risks. To minimize these reduce costs to service users. However, if costs, contracts should allocate risks to parties contracts are based on cost of construction, the most competent to bear them at low cost. At the incentive to construct quickly, and at lowest same time, the contracts need to avoid risk cost, are reduced, as was the case with the sharing that reduces incentives to efficient Mexican toll roads. Similarly, restrictions performance. requiring use of local, rather than lowest cost, inputs can substantially reduce the benefits of 3.54 Country and currency risk reflect the risk private management of commercial risk, as of expropriation, or that an investor will not be noted above. Private firms typically have lower paid or will be repaid in a blocked currency, or a staff costs that public firms. Private firms also depreciated one. Such risks can be reduced by have less "lost" output and unbilled services, although use of private contractors can reduce these problems in public firms (Section F). Managing Infrastructure 87 3.57 The importance of risk and the sometimes these are accompanied by contracts approaches for dealing with it explain why private for similarly fixed input prices. Toll roads can infrastructure investment has concentrated in three be more complicated but contracts can define the sectors: telecoms, power generation, and, to a quality of road to be constructed and lesser extent, toll roads. In the absence of well- maintained, with well-defined tolls; in Mexico defined overall "regulatory" framework, private traffic volumes were also guaranteed, making investors view these sectors as being more stable the Mexican toll road contracts much like take- and less subject to political intervention. Other or-pay power contracts. The risks to the sectors, such as urban transport and, recently, investor are the ability to meet these contractual water have attracted investor attention, but risks obligations and the possibilities of non- remain. An example of the problems that can fulfillment by the government, and arise in these politically sensitive sectors is the inconvertibility of pro-its or nationalization of Bangkok Expressway. A disagreement over the concession, both of which can be covered by revenue sharing delayed its opening, and then led bilateral or multilateral insurance. to the public's "taking over" the road. Eventually, a consortium of Thai investors, led by 3.60 These contracts mitigate investor risk by a politically well-connected firm, bought-out the transferring it back to the public sector; making foreign investors and took over operations. the projects quasi-public because of the implicit guarantees that may end-up as costs to the 3.58 The private sector views power and public, even though the projects are privately telecoms favorably because sectoral conditions owned and have no publicly guaranteed debt. facilitate contracts that can mitigate investor risks. For example, in the take-or-pay power contract, In telecoms, concessions can be awarded for the investor takes only the technical risk of certain areas, with well defined levels of services building and running a plant, and the risk that (interruptions, call connections, and installations) the public sector will not honor the contract. to be provided at well-defined prices, and with The private producers do not have to deal well-specified amounts of new investment to be directly with consumers (in many cases the made. A critical issue, given the rapidity of regulatory framework limits sales to technological change in telecoms is the definition consumers), nor worry about power tariffs; they of prices. Fixed, cost-plus, or rate-of-return are guaranteed sales at the agreed-upon price based prices tend to result in higher even if demand is lacking at that price. costs/inefficiencies to users, even if the Government recoups part of these losses through 3.61 The state power company or the competitive bids for the contracts. Government thus takes two risks that would be the investor's responsibility in a different 3.59 In power, take-or-pay power purchase regulatory environment: forecasting demand agreements (PPAs), in some cases rate-of-return and setting prices for the concession. based, have been used to set prices (usually in Overestimating demand/building too much foreign currency equivalent) for private plants to capacity and setting/accepting too high prices sell fixed volumes of electricity into the grid; increases costs to the public, even if there is no explicit public guarantee of debt. In these case, even though the quasi-public projects may be technically efficient, they would be macroeconomically inefficient and reduce the 88 Chapter 3 Box 3.5: World Bank Group Guarantees Private sector participation in infrastructure projects often depends on the availability of long-term finance at reasonable rates. Private sector investment also often depends on contractual obligations from the Government or the public entities as regulator, supplier of inputs, or purchaser of output; while equity and debt investors may be willing to bear the commercial risk associated with projects, the risk of failure to fulfill these obligations can be a major constraint to mobilizing private financing on reasonable terms. World Bank group guarantees can be used to cover a portion of the financing-normally the longer end of the maturities beyond what the market is willing to provide- or to cover risks of failure to fulfill public sector obligations. Such guarantees can play a catalytic role in helping developing countries mobilize private participation in infrastructure, and help the borrower mobilize larger financing on better terms and conditions. I World Bank group guarantees are irrevocable commitments to third parties that have loaned funds to a borrower in a Bank member country that the guaranteed portion of the loan will be paid, if, under specified conditions, the borrower does not. The International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) can support private investments without a government guarantee, which means they remain the preferred sources of support for the private sector. In particular, MIGA offers insurance against broadly-categorized political risks such as currency convertibility and expropriation to investors in its member countries. World Bank guarantees require a government counter-guarantee and complement IFC and MIGA efforts in terms of covering different risks and addressing financial gaps that exceed their operational limitations. Since 1989 five guarantees were extended under the Bank's ECO program, including three in 1994 - China Yang-zhou Thermal Power ($350 million), the Philippines Leyte-Luzon Geothermal Power Project ($100 million), and the Jordan Telecommunications Project ($50 million). In September 1994, the Bank's Board approved a wider use of guarantees, which included broadening country eligibility; using guarantees to mobilize private finance for individual investment projects, expanding risk sharing with the private sector, allowing stand-alone and project-linked guarantees, modifying the fee structure, and streamlining procedures. economy's overall competitiveness. And, they did not materialize in the face of high tariffs would burden the country with a large additional (WDR 1994, pp. 99), in part related to cost debt that would have to be paid, one way or overruns in construction. In Indonesia, take-or- another, by the public. pay gas contracts have forced PLN to pay for gas it could not use, because lack of 3.62 These risks are not hypothetical. In the transmission & distribution facilities limited use Philippines, power shortages have quickly turned of gas-fired, power generation capacity. into over-capacity in some areas such as Mindanao, with the public being charged for 3.63 To rely more extensively on the private plants operating at only part-capacity. In sector, while mininizing the risks of over- Malaysia last year, the public power utility also capacity, the Government of Indonesia needs to had to pay private generators for power it couldn't encourage private suppliers to deal with use. In the U.S., the state of California consumers directly. This is the case in the encouraged excess generating capacity when it telephone network expansion, and could be done required the grid to buy power at what it thought in power, water and gas, if procedures allowed was long run marginal cost. In Mexico, the private suppliers to deal directly with government was forced to adjust toll road consumers, through distribution networks, and contracts when hastily prepared forecasts of traffic services were unbundled into generation, volumes transmission, and distribution. Managing Infrastructure 89 Unbundling Public Sector Services through the grid (for a fee), in order to minimize variation in their costs. Competition 3.64 Splitting-up (unbundling) of services for these contracts, and for the concessions and introduction of more market-based when they are renewed, would reduces costs. competition, along with sectoral regulation as necessary could improve Indonesia's 3.66 In Indonesia, plans are underway to infrastructure services further. In many cases unbundle power. Private generating firms are public supply of infrastructure has been justified expected to come on stream toward the end of by "natural monopolies". However, the degree of REPELITA VI. Plans are being made to split up natural monopoly differs greatly in many services. PLN's generating plants into multiple, partially For example, in power, gas, and water, the privatized firms. Improvements arrangements services of generation, transmission and for sale into the grid by self-generators with distribution differ greatly in their degree of natural excess power would increase use of the monopoly. The three services could be supplied generators and improve their efficiency. by different firms, and some of the services could Transmission is likely to remain in a few, public be supplied by more than one firm, allowing firms, but distribution could be opened up to competition to develop. Nor is it obvious that a competition. Allowing private producers to sell single firm should supply all of Indonesia. "directly" to users through the grid ("wheeling") Natural monopolies also have been reduced by for a fee, also would improve efficiency and technological change. For example, cellular reduce risks to the government. In gas, phones can substitute for telephones; competition unbundling has not made much headway. and service quality can be improved if different Pertamina/PNG basically remains a monopoly enterprises run the different services. producer and seller. Because Pertamina's main business is oil and LNG, not domestic gas sales, 3.65 Unbundling in power and gas this sector has been neglected, particularly production, transmission, and distribution would development of small fields and transmission produce three types of firms. First there would and distribution to supply urban areas with be suppliers of the basic service into the cheap, clean power (Box 3.6). transmission system. These could include public and private firms and in the case of power, firms 3.67 Unbundling of services provides more both dedicated to electricity production and self- competitive or contestable markets for some generators with excess capacity. (In the UK, services. In these areas it is possible to rely power is sold competitively into the national grid more on market-based solutions and less on on a half-hourly basis). Competition between regulation to achieve efficiency. However, in these firms will drive the costs down. Second, other areas, e.g. transmission, a sound there would be transmission firms; usually there regulatory framework will be needed. As noted are few of these firms and competition may be above, it will be desirable to separate the difficult to establish-the Government may need regulatory function from the provision of to operate, or at least regulate these finms. Third, services, to avoid conflicts of interest. there would be firms that take supplies from the transmission firms and sell to users; there often Relying on Domestic Saving: Self Finance and can be competition, at least geographically, among Capital Markets these suppliers, which can reduce costs to users. Moreover, these distributors may enter directly 3.68 The Mexico crisis probably will worsen into long term contracts with producers for supply the slow-down in off-shore funding for investment that already was occurring in 1994 90 Chapter 3 Box 3.6: The Gas Sector Indonesia has substantial gas reserves in formations that are too small to support LNG exports. Development of these reserves would help meet the nation's energy needs in an environmentally friendly manner. It also would allow more oil output to be exported. However, gas provides only a small, and declining fraction of domestic energy use. Pertamina's tight regulation of gas concessions, pricing, and purchase/sale have stifled potential investment in gas exploration, production, transmission and distribution for the domestic market. Deregulation and greater reliance on the private sector would stimulate a more dynamic, competitive domestic gas industry. Appropriate deregulation would lead to several sellers supplying the power sector, industrial users and gas distribution companies through an open access transmission grid. This structure has emerged as the most efficiJnt in gas-producing countries such as Argentina, Chile, US, and UK. By liberalizing the sector and permitting the emergence of competition throughout the gas chain, only a light-handed approach to regulation would be required. A more dynamic domestic gas industry depends on reducing Pertamina's role in deciding on the allocation of gas to consumers, which fields can be developed and at what price. The Government should encourage open, competitive bidding for concessions, liberalize gas prices and permit direction negotiation of prices/supply between producers and buyers. These measures would encourage exploration and production of gas for the domestic market. It also would improve the efficiency and environmental aspects of power generation (see Box 3.1). Development of a national transmission and distribution grid also would be essential. Private participation in the ownership, management and financing of PGN should be encouraged to tap the financial strength and technical expertise of international gas utilities as partners in helping build the network. Private participation in PGN should be sought through a competitive, transparent selection process. And the roles of Pertamina and PGN need to be clarified. In addition, just as competition needs to be encouraged in gas exploration and production, investors also should be encouraged to enter and provide competition in gas trading and gas distribution, and perhaps transmission as well. Of course any such concessions should avoid any arrangements that would prevent evolution of an open-access transmission grid. (WDT 1994). Even private borrowers for Breaking this constraint was one of the projects in fundamentally sound countries like attractions of offshore finance. Indonesia may encounter a temporary decline in funding. As an alternative, Indonesia's rapidly 3.70 Domestic saving can, of course be developing domestic capital market could well increased, making more resources available for provide some infrastructure finance, but amounts infrastructure investment. First, as noted in are likely to be limited and the Government will Chapter 1 and discussed in Section D of this have to manage the process closely, to avoid a chapter, better cost recovery, through number of pitfalls. appropriate pricing and efficiency improvements, would allow more self fmance. 3.69 Investment finance through the domestic Indonesia generally has a long way to go in this market faces a fundamental constraint -domestic regard-although PT Telekom finances about saving. Infrastructure investment can get one-half of its investment domestically, PLN additional domestic resources only if it "crowds- typically has fuianced less than one-quarter of out" other investment, or if domestic saving rises. its investment internally. Managing Infrastructure 91 3.71 Second, development of domestic capital mobilized about $300 million at end of 1994, markets can encourage more saving, and make but this was only one of few issues in the year. more resources available, especially long-term resources. In the last three years, Indonesia's 3.73 In mobilizing funds in the domestic stock exchange has grown rapidly. New issues capital market, the Government will need to pay and warrants reached about Rp. 11.4 trillion close attention to a number of issues. First, as (about $5.7 billion) in 1994. Bonds are much less regulator of the capital market and ultimate common, as is typical in countries with inflation guarantor of public enterprise borrowing, the around 10% p.a.6; new issues in 1994 were about Government will need to ensure that terms and Rp. 900 billion (about $500 million). It is worth conditions of new public enterprise issues are noting that much of the capital market growth not out of line with the markets', that distribution came from external investors, whose withdrawal of issues are compktitive, and that the of funds has depressed East Asian markets (See enterprises have the capacity to repay. This is Chapter 1). particularly true since with Indonesia's open capital account, off-shore purchasers are 3.72 Strengthening of the ongoing institutional important factors in the market. Second, new and regulatory frameworks would further the capital issues must be coordinated with the growth of these markets, as would investment of prospective partial privatizations of some of the pension and insurance funds under strong companies, to avoid over-burdening markets prudential regulation. Mearnwhile, some funds with issues from particular companies. Finally, could be mobilized in the domestic market, but obligations on existing debt and arrangements not substantial amounts. The local placement of for issues of new liabilities will need to be well- Indosat, $300 million, was one of the largest defined as part of the regulatory framework for issues in 1994. PLN's 1993 bond issue, privatizing firms. attractively prices at 2 percentage points above SBI rates, E. Managing the Infrastructure Program: Adequate Pricing 3.74 Better pricing of services, to cover costs formulas should not be simply cost-plus; they adequately, provide for greater self-financed need to replicate competition by putting investment, and encourage cost reduction, would pressures on producers to make and pass on cost improve Indonesia's infrastructure services. savings; this is necessary to avoid simply Adequate pricing is the basis of private sector passing on high costs to users. Finally, participation, good quality public services and, adequate pricing generates economic efficiency, most importantly, efficiency. The private sector by providing signals that encourage users to will not provide services unless prices cover costs manage their demands in line with the true costs and yield a reasonable rate of return. For the of producing the goods. public sector, adequate pricing is no less important. Reasonable, predictable revenues 3.75 Improving services by decentralizing permit service expansion, quality improvement, revenues and user charges. In the case of and payment for private sector involvement. local public works, which provide mainly local Revenues that are linked to usage through benefits, services can be improved by linking metering and collection improve accountability. them to funding from local revenues. This link Moreover, these revenues reduce the need for encourages more efficiency in service delivery budgetary transfers. In turn, this reduces the and accountability through the political process, likelihood that Government will impose additional as compared with centrally funded and provided objectives on firms and divert managers from the services (See Section F and Oates, Tiebout). main goal of quality service supply. Pricing The link also is important for equity reasons, 92 Chapter 3 since many of the benefits of many local services the poor, the connection fee can be spread-out go to higher-income residents (See Box 3.2 and in monthly bills. Annex to Chapter 3). The local revenues can be local taxes, "valorizations" that link charges to the 3.78 Tariff Structures also can be used to properties that are expected to benefit (used improve efficiency and manage demand. For effectively in Colombia but less so in Indonesia), example, rate structures that vary by tirne-of-use and/or charges on developers that cover the cost encourage efficiency. Peak-load charges force of their demands on the infrastructure (Korea, peak-load users to bear their share of the costs US). In poorer areas, such as Eastern Indonesia, of capacity that will be idle most of the time. potential revenues may not cover costs fully. They also encourage rationalization of demand Nonetheless, the local areas can be encouraged to and, thereby reduce the need for additional pay part of the costs of locally based capacity. Peak-load bharges are desirable not infrastructure, or contribute labor, as occurs in only for power, but for urban roads. Such road many Indonesian villages and institutions such as congestion charges put a tax on road users for the Mexican Solidarity Fund (WDR 1994 p. 74). the extra costs they impose on other users at The benefits, in terms of better service delivery rush hour. This spreads out peak use on and accountability are likely to be greater than any existing roads. It also helps avoid the usual distribution benefits from larger central transfers. problem of new roads' filling-up at rush hour and going empty at other times by penalizing 3.76 User charges can link services to drivers who switch their trips back into the rush revenues even more closely. Charges linked to hour. Such charges already are used in gasoline and road use often finance highway Singapore and technological advances are construction and maintenance (e.g., Latin making them easier to apply (see Hau). America, US, Japan, Korea, Philippines). Bridge However, in Jakarta, where traffic is heavy use charges are applied in many cities and urban most of the day, peak load pricing may provide road charges are beginning to be made possible by only limited relief. technological advances (cities such as Houston, Texas, and Singapore are using such systems and 3.79 Tariffs to encourage cost savings and capability is developing in Hong Kong, the pass them along to users are even better than Netherlands, Scandinavia, and the U.S. See Hau). tariffs that guarantee costs will be covered. In devising such schemes, care must be taken to Such formulas are particularly important in distinguish user charges from taxation or industries where rapid technological change is congestion charges, and to vary the user charge as taking place, such as telecommunications. returns on maintenance and new capacity decline. Competitive market structures tend to encourage If fees can be closely related to use, for example such cost/price cutting. For this reason, it is tolls, then they can form the basis of private desirable to introduce competition into as many provision of the infrastructure. infrastructure services as possible (See below). Government price setting in contracts should 3.77 Connection fees also are used by utilities clearly be indicated as maximum prices, with no to reflect both the actual cost of connection and penalties for lower prices. Unfortunately, any scarcity premium for access. Connection Government's setting of prices may encourage fees/charges need to be high enough to eliminate overcapacity-if the price is set too high, then any demand for access that cannot be met quickly. cost recovery formulas pass on the costs of Keeping fees low encourages excess demand for overcapacity to the consumer (See Box 3.1 and access and yields little real benefit to consumers; Section D). When competition is difficult to the firm's personnel are likely to appropriate the enforce, bidding to provide the services over a scarcity rent by charging additional fees limited time frame, (with construction possibly themselves. To ease the burden of payment by provided by other suppliers) can recoup some of Managing Infrastructure 93 the cost reductions. If possible, the proceeds of additional charges: (i) structuring road user such bidding should be funneled back to the users. charges to reflect the relative impacts of vehicles on the roads and (ii) adding charges reflecting 3.80 Indonesia stacks up reasonably well on the environmental impacts of the various user charges, although some adjustments would be vehicles and fuels. Regarding user charges, desirable for efficiency reasons and will become higher diesel prices could be used to reflect the necessary as privatization proceeds. Indonesia's impact of truck use on roads. Vehicle fees also telecoms tariffs have recovered costs, including should be differentiated to reflect vehicles capital costs, reasonably well. As recent, rapid impacts on roads. Regarding environmental capacity growth has increased access, connection fees, a surcharge should be put on diesel to fees have been reduced. The tariff schedules for reflect the substantial particulate pollution it the privatized firms will need to incorporate generates. Similarly, surcharges on leaded fuel downward adjustments to take into account prices would reflect the increase in lead in the technological improvements in the rapidly atrnosphere. Finally, congestion charges are changing industry. another issue in road pricing. Toll road charges are, if anything, too high to allow them to 3.81 Electricity tariffs are similar, on average provide sufficient relief from urban congestion. to Malaysia and Thailand. These tariffs covered Congestion charges are becoming increasingly PLN's operating costs but financed much less than feasible and should be considered over the the target of 30% of its investment during longer-term (Box 3.7). REPEL1TA V (WB1994a). Consumers and governments receive subsidies at the expense of 3.83 In other areas of transport, international industrial users, and consumers in the Eastern port and airport service charges are reasonable, Islands are subsidized by the uniform national but domestic services need some adjustment to tariff. The issues of full cost recovery, including cover full costs more closely. Passenger and a much higher rate of return on capital, and cross freight services are generally in line with costs. subsidization, will need to be addressed as PLN is The exceptions are urban commuter railroads privatized. Pressures to reduce cross and public bus service. Charges for these subsidization will increase if, as is efficient, services need to be adjusted more frequently. power suppliers are allowed to sell directly to Although a subsidy may be retained for the large users through the grid. Peak load pricing is basic service level, higher prices for the higher not now an issue because of excess generating service levels would be desirable to improve capacity. cost recovery from the better-off. 3.82 In transport, charges relating to road 3.84 In water, average tariffs cover less than transport raise a number of issues. The basic fuel operations and maintenance costs in many areas. prices were raised to international levels in 1993, Moreover, water is becoming scarce in the dry increasing efficiency as well as raising revenue. season. The poor quality of water and the Efficiency could be further served by two simple attempt to provide a large cross subsidy to consumers, most of whom are better-off than average (Box 3.3), has led industrial 94 Chapter 3 Box 3.7: Giving Urban Citizens a Smoother Ride Efficient development of Jabotabek and the other major population and industrial centers will depend on development of an efficient interurban transport network, to encourage efficient decentralization, and on efficient, non-polluting transport within the cities, particularly Jabotabek. Otherwise congestion and pollution costs in Jabotabek will rise to Bangkok's levels. To improve urban transport, the Government could: (a) Improve urban traffic management-spend more on traffic management, remodel one-way systems, install synchronized lights, provide/enforce bus lanes, and require parking in new developments. (b) Introduce urban congestion tolls, and provide adequate parking at commercial rates, to reduce congestion on existing and new roads. (c) Encourage the use of cleaner fuels, through higher prices of diesel fuels, increased supply of non-leaded gasoline and taxes on leaded fuels, establishment of stations for compressed natural gas, taxing/banning of new 2 cycle engines/vehicles, and enforcement of emission exhaust standards. (d) Improve urban sidewalks and routes for non-motorized vehicles to improve traffic management and provide for pedestrians and bicycles, transport modes that are used heavily by the poor. (e) Privatize public sector bus operations that now absorb large subsidies to do what is already done reasonably by private services. Increase the autonomy of urban railroads. (t) Adjust bus and railroad tariffs more frequently, raise tariffs for higher quality services. (g) Encourage development of private and joint venture toll roads through greater competition and transparency in bidding for contracts: better prequalification, clearly stated criteria for award of contracts, reduced constraints on bidders' supply sources, indication of government's contribution, and announcement of the winning bid. (h) Develop an effective mass transit system in Jabotabek, based on careful examination of economic viability and fiscal aspects. and other users to rely on deep wells. This in 3.85 Subsidies. Less-than-full cost recovery turn has generated negative externalities in terms are often justified as protection for the poor. of sinking of land salinization and overexploitation However, study after study shows that the of aquifers. Fees for well use are low and not better-off are the main beneficiaries of low enforced. Improved water service typically will infrastructure tariffs-the poor generally are not require higher average tariffs to consumers, with connected to the subsidized services and are a subsidy retained only for a minimum, "lifeline" forced to use high cost/poor quality consumption, preferably financed by the Central alternatives-for example, candles and kerosene Government. At the same time, charges to rather than electricity and gas, public standpipes industry could be reduced, accompanied by or water vendors rather than piped water. For collection of much higher fees on well use. Better this reason, the poor often are willing to pay metering of water use could reduce "unaccounted much more than the going tariff for good for water" and encourage conservation, as service. A classic example is water m occurred in Bogor, with no apparent effects on Indonesia. The better-off usually have health. household connections while the poor do not; the poor are forced to resort to higher cost Managing Infrastructure 95 supplies from vendors or from shallow wells that 3.87 Subsidies are best funded by direct, may be contaminated (See Box 3.3). transparent, budgetary grants. This ensures that the amount of subsidy is well-known. Using 3.86 Carefully targeted subsidies can indeed cross subsidies in tariffs to fund subsidies, as is protect the poor. The critical issue is to ensure done in many countries including Indonesia, is that the subsidies really benefit the poor, rather easier, but it is much less desirable. Cross than the middle and upper class, or the providers subsidies have negative effects on transparency of the goods. One approach is a low tariff for and economic efficiency. In particular, the minimal use (lifeline tariffs), and a much higher distortion caused by raising tariffs above service tariff for anything above this minimum. Linking cost contributes to inefficiency. For example, it low tariffs only to the lowest use targets the poor encourages inefficient use of resources to create more effectively than across-the board subsidies or alternative supplies, such as the reliance on multiple, gradually rising tariffs, such as used in wells instead of the water distribution network. Indonesia. Access could be improved by allowing low income users to pay connection charges over time, as part of monthly fees. F. Improving Public Infrastructure Services 3.88 Indonesia's Governments will continue to and water sectors mean that capacity utilization play a major role in infrastructure services for is low (Boxes 3.1 and 3.3). Over-staffing and some time. In some areas, externalities are lack of maintenance are common complaints. important. In many other areas, private capital Delays in purchasing, related to the annual will not be interested for some time, in part budget cycle/DIPs process, mean that because of the lack of a clear regulatory construction often is undertaken during the rainy framework and the time it will take to establish a season, and quality suffers. Bidding processes regulatory reputation. Most importantly, the are not transparent and low bids are not public sector's enormous presence will not necessarily selected; bidding processes usually disappear overnight. Governments therefore, include local content restrictions that raise costs. must deliver higher quality public infrastructure services in order to ensure efficient growth and 3.90 Responsiveness to users could be reduce poverty. Achieving this goal will depend improved. Access is limited and service quality on abandoning the standard public sector model of poor in power, telephones, and, especially, infrastructure provision. Governments at all water. However, access is improving in power levels must treat services as a commercial activity and telephones as a result of increased capacity, responsive to consumers, with revenues that cover reduced connection charges, and public phones. costs and greater autonomy and accountability, not Lack of access/poor quality, and attempts to as a bureaucracy. Services can be further provide cross subsidies, have led to dependence improved by greater reliance on the private sector on more-expensive self-generation of power and encouragement of competition, and by (Box 3.1) and water from wells and vendors providing greater voice for stakeholders in cases (Box 3.2). In telecoms, the public sector has where the market is ineffective (Section G). moved slowly to expand cellular and wireless alternatives, until recently. To some extent, the 3.89 Indonesia's public sector performance lack of access and poor quality reflect lack of has been better than in many countries. resources, which in turn reflects prices that do Nonetheless it suffers from many problems that not recover full costs and attempts to provide are common worldwide. Inefficiencies in power cross subsidies. 96 Chapter 3 3.91 The poor suffer particularly from many of rather than a few well defined objectives such as these problems. Low tariffs for household use of user coverage and quality of service; ii) limited water and power reduce the companies' incentives autonomy over input and output costs and to expand services to poor households, or to personnel that limits managers ability to respond maintain connections. Lack of resources, as well to incentives; and iii) financial problems related as inefficiencies, limit the expansion and the to inefficiencies and politically motivated limits quality of piped water, forcing poor households to on tariff adjustments (Section E), according to rely on expensive vendors or shallow wells that World Bank studies. (WDR 1994, p.39). Thus, often are contaminated. Lack of public phones a first step to improve these entities' limits the poor's access to phone service. performance would be to focus them on few, well-defined and measurable objectives, related 3.92 To reduce these problems and encourage to service delivery; give them greater autonomy the public sector to deliver high quality in setting prices, buying inputs, and deploying infrastructure services, more investment is not resources to achieve these objectives; and hold enough. Institutions and incentives must be their managers responsible for achieving the changed. Four main recommendations have been objectives. identified (WDR 1994 p.2): 3.94 Corporatization of government Treat infrastructure as a service business that departments, as was done in Indonesia and responds to consumer demand on commercial Malaysia with ports, represents a further step. principles; the great willingness to pay, as shown As corporations, the entities' activities are by reliance on high cost alternatives, means that subject to corporate, rather than civil service even the poor are willing to pay higher prices if rules, and to more commercial accounting they receive reasonable quality service. procedures. These changes can help reduce labor problems and improve managerial and Encourage more competition and involve the labor performance, as well as provide a clearer private sector, to ensure users have low cost picture of financial problems and the level and alternatives and put pressure on suppliers to targeting of subsidies. However, these changes reduce costs and employ best practices. are far from cure-alls. Corporatization typically takes time as the Indonesian port case shows. Give users and other stakeholders greater voice Gains in efficiency have varied with Malaysia's and responsibility, where externalities are ports showing one of the largest improvements important or the discipline of the market/the legal (Galal et al). All government departments may system does not ensure accountability, in the not be easily "corporatized", although New planning, operation, and regulation of Zealand has even corporatized highway infrastructure services. spending. Improve policy, regulatory, and legal frameworks 3.95 Performance agreements could be used to protect the public interest, the poor, and the as a further step toward improving performance environment and to coordinate cross-sectoral and for entities that remain in the public sector. sub-sectoral interactions, whether the services are Performance agreements were first used in public or private, with priority emphasis on areas France and applied in the developing world in where markets are weak. Korea, Brazil, Mexico and Africa. An information system generating quantitative 3.93 Conimon reasons why government indicators such as profitability, productivity, department and public sector firms perform poorly physical outputs and coverage must be as service businesses are: i) numerous, vague developed. The system is then used to evaluate objectives, which are sometimes inconsistent, performance; the managers and workers in the Managing Infrastructure 97 highest performing entities receive public offer little incentive for improvements.) The recognition, bonuses and advancement, while poor contracts have been most successful where the performers can be terminated. Clearly, many of manager has autonomy over a broad range of these rewards will depend on the firms being decisions and compensation; they often fail outside the civil service. Korea probably has where autonomy is limited. Such contracts may achieved the most success with this approach. serve as an interim to fuller reliance on private (WDR 1994, p. 43). In Indonesia, there are some participation. Such contracts could be tried in examples of performance-based rewards that could Indonesian water and sewerage operations. be extended. In South Sulawesi, foremen are given responsibility for maintaining a fixed stretch 3.98 Public Works by Private Contractors. of provincial road, and prizes are given annually Indonesia has used private contractors for for the best maintained. Indonesia's well- construction contracts for some time. Public publicized competition for the cleanest city has firms compete for contracts with private firms. had a noticeable success in encouraging local This represents a major improvement over officials to keep the streets clean. construction by a public works monopoly. However, Indonesia's system could be improved 3.96 Unbundling Public Enterprise further. Contracts sometimes are not offered to Functions. Public enterprises have taken on low bidders. The contracts could make better many activities that are not natural monopolies use of penalties for overruns and poor quality, and are related only marginally to their basic and bonuses for early completion. The business. For example, publishing, health care Government also could reduce costs by not and recreation for employees, equipment supply, requiring contractors to buy from particular construction, etc., all could be supplied by private suppliers. Public payments on contracts need to firms. Unbundling these services and allowing be more timely; a reputation for slow public them to be supplied under more competition payments will lead to higher bids (to compensate would improve efficiency. First, the public sector firms for their borrowing costs). Surveys firm could then concentrate on basic functions, suggest that the Government may pay more than and not be distracted by peripheral activities. the private sector for similar construction, in Second, while in some cases efficiencies may part because of its slow payment record. result from the combination of activities (economies of scope), generally speaking 3.99 Greater use of leases/concessions of unbundling activities can increase competition in "natural monopolies" and other public the unbundled sectors, which reduces costs to services is possible in Indonesia. With leases, consumers and provides better quality services. the leaser bears the risks of operation, but not Finally, unbundling can make transparent the investment. The leaser is, however, required to cross subsidies that exist within the firm, allowing return the capital in reasonable condition. With these cross subsidies to be evaluated better, and to a concession, the concessionaire also could be be focussed more narrowly on the poor. obligated to make certain investments. Leases/concessions of one sort or another are 3.97 Operations and maintenance contracts now being used in thirty-seven countries (WDR are one way that many countries have used to 1994, p. 60). Ports, toll roads, and bus services unbundle services and improve quality at lower are a common type of concession, in countries cost. This approach has been used in France, the as diverse as Argentina, Hong Kong, Malaysia Philippines and many African countries, for and Mexico. In the water sector, concessions example, in water and sewerage (WDR 1994). and leases have been used in Africa and, The contracts usually base compensation on recently, in Argentina; as well as service improvements in specified indicators. (Fixed fee contracts for meter reading and billing (Chile) arrangements are similar to consultancies and and management contracts (see above) (WDR 98 Chapter 3 1994, p. 61). Concessions are being used in performance levels and penalties for non- Indonesia for telecoms and leasing or concessions performance, ii) maintenance of the leased could be used in the water sector. The main capital stock, and iii) competitive bidding for the issues are i) appropriate specification of lease/concession. G. Giving Stakeholders a Voice: Decentralization and Participation 3.100 For most goods, markets provide a way are lowest when systems are decentralized under of matching demands and costs efficiently. central coordination; a Bank review of road However, for some infrastructure goods, markets maintenance found that decentralized do not work well. Externalities like pollution are maintenance of local roads reduced backlogs and not reflected in market prices. Or it may be hard improved road conditions. In Mexico, the to charge (non-excludability) for the services. Solidaridad program executed projects locally at These classic "public goods", need group decision one-half to two-thirds the cost of state or federal making on the amount/type of infrastructure, projects (WDR 1994, p. 74). pricing, and operations and maintenance in order to ensure efficiency. Centralized public sector 3.102 Decentralization is not a cure-all, bureaucracies usually have not provided these however, its benefits depend on how it is done. goods efficiently. Services are too much or too The most important principle is that little, too early or too late. Local conditions are decentralization of services must be done to a neglected in design. And maintenance often is level that captures most of the externalities. For neglected. The closer the decisions to the main example, local roads, and local flooding need beneficiaries, the more likely the infrastructure input from villages. Intra-village roads, water will match consumer demands. supply and waste disposal may also need provincial input because the spillovers may go 3. 101 Decentralization often can improve beyond individual villages. Water basin provision of local infrastructure services, because management and intra-provincial roads require it gives a greater voice to the users and national management. Decentralization to stakeholders. Closer proximity to the main government levels that are so small that they do beneficiaries and closer links between costs and not encompass all the benefits of "local public benefits, raise efficiency, improve service delivery goods", or so large that they go for beyond the and increase accountability. Experience in a beneficiaries, may not yield much improvement number of countries-Bolivia, Ecuador, in delivery. In addition, for complex investment Philippines, Mexico-suggests that such projects, the benefits of decentralization tend to decentralization can be effective. For example, decline, because the costs of training all levels Bank studies suggest that water cost of government to handle very complex projects would be inefficient. Managing Infrastructure 99 Figure 3.6: Countrils with to carry out that scrutiny may limit the ability of Decentralized Road Maintenance decentralization to adjust to local needs, and have Bettr Roads therefore the benefits of decentralization. Peroenuge of road In poor condlUon 0 10 20 30 3.104 In Indonesia, the Government is ! | s | decentralizing many responsibilities to the provinces and kabupatens. Central Government rols transfers are increasingly provided on a block grant basis. The Central Government has eliminated its share of property tax revenues, P Z -- retaining only a 9% collection fee. Under a rods recent pilot initiative, Central Government bureaucracies are moving down into 26 kabupatens. All Central Departmental district lDecentrlzed aCenntrzd offices (KANDEP) are being dissolved and their Soum: World Bank daft kr 42 dwW*ngauthority transferred to the concerned local office (DINAS). The "mayors" and district 3.103 Efficiency gains from decentralization also heads thus will become the focal points of are affected by how investments are linked with government in these kabupatens. The revenues. To be efficient, decentralization must Government plans to monitor these pilots and entail a decentralization of revenues that are use the lessons to eventually decentralize in linked to the services. To the extent that other areas. Despite these efforts, however, beneficiaries do not pay full costs, they may provinces and kabupatens lack resources to demand costlier services to be paid for by the carry out their own programs and to maintain general tax payers, to the detriment of economy- central projects that are turned over to them (in wide efficiency. This tendency is confirmed by part because of low per capita income). some studies. For example, in the review of road Moreover, infrastructure project design, maintenance cited above, the decentralized implementation, and procurement remain central systems tended to have more paved roads. government functions in many sectors. An Moreover, to the extent that local officials can example of the way things work is roads: induce non-local residents to pay for typically a department in public works takes a services-nicknamed the "grantsman" approach to decision to build based on some discussions, local government finance in Chile (World Bank usually one-way, with local officials and some 1993a)-local officials spend their time raising input of data, based on standard central designs. money outside the locality, rather than ensuring There is no second round of local feedback, nor efficiency of services. Another example is India, are kabupaten officials well prepared for the where periodic lobbying associated with Finance impacts that these roads will have local Commissions' awards to state governments is a development. These problems are complicated major activity of governors. These problems can by the lack of clear land titles in most areas. be eased to the extent that local areas pay part of the costs-a signal of demand and an incentive to 3.105 In Jabotabek, on the other hand, use funds (at least local funds) more carefully. decentralization has fragmented jurisdictions. Even in poor areas, a link is important to improve DKI Jakarta is a level 1 government that service quality and accountability, because of their contains non-autonomous level 2 governments. lack of resources. (See Annex to Chapter 3). Surrounding areas are level 2 kabupaten Local "grantsmen" can be limited by Central governments, with structures and capabilities Governments' scrutiny of projects that use geared to rural not urban development and the "national funds". However, the bureaucratic rules level 1 West Java government has many other interests including Bandung and Cirebon. Overlaying these problems are the above 100 Chapter 3 mentioned problems of Central Government savings. In Indonesia, traditionally strong ministries dealing with kabupatens in the regions. village organizations are given various options Coordinating bodies do exist, but do not appear to under the Water Supply and Sanitation Services be functioning well. The Central Government is for Low Income Communities project concerned with rural and regional development (WSSSLIC See Box 3.8). Third, it means outside Jabotabek, but it cannot find a obtaining local contributions, in cash or kind, as coordinating body to deal with issues that should a signal of commitment and to reduce be region-wide such as mass transit, roads, land "grantsmanship". Examples are WSSSLIC and use, sewerage and solid waste management, and Mexican irrigation, where conversion of water basin management. In these areas, irrigation management from a state company to individual governments such as DKI Jakarta can water user associations led to users' voluntarily take decisions, but cross region externalities are raising assessments to improve maintenance and not taken into account fully. The Central more efficient water use (WDR 1994, p. 78). Government typically ends up heavily involved In Indonesia, on the other hand, irrigation with the decisions, such as mass transit. maintenance is largely provided centrally. Resolving the need for a strong, regional authority Although maintenance has improved, estimates to deal with these issues would yield substantial suggest it is probably still too low. benefits but will be very difficult, if experience elsewhere is any guide. 3.108 As with decentralization, participation is not a cure-all; benefits depend on how it is 3.106 Participation and public accountability done. It is most effective with small scale increase the benefits of decentralization. Studies projects that are initiated, or have strong support by the World Bank and other donors show that from small, well-defined communities that "without local participation, projects either have receive most of the benefits and have limited floundered at the implementation stage or were spillovers. Works that benefit larger groups, not maintained and failed to produce substantial such as construction or maintenance of feeder benefits. " (WDR 1994, p. 76). With participation roads, as opposed to access roads, require much of beneficiaries, project performance is much more effort to organize and mobilize larger better. This is particularly true for rural projects. groups. Support may be hard to generate and But participation, combined with technically sustain because of the wider diffusion of innovative solutions, has led to benefits even in benefits. Village works that have negative locally-focused urban sewerage projects such as spillovers into neighboring villages, such as the Orangi Pilot project in Karachi, Pakistan waste disposal and sewerage, require (WDR 1994, p. 83). governments to manage the inter-village costs and benefits. Works that require technologically 3.107 Participation has three key elements. complex design benefits and implementation are First, it means involving beneficiaries, not just not well suited to local participation. Indeed, consulting with officials and voluntary even village works such as access road usually organizations. (In a study of water supply can benefit from design suggestions by projects, participation was strongly correlated with technically trained personnel. Recent programs project performance, while consulting solely with to improve infrastructure in "lagging" villages in officials and voluntary organizations did not seem Indonesia have made conscious efforts to deal to improve project performance much). (WDR with the design issue in a participatory way (See 1994, p. 76-77). Second it means reaching early Box 3.8). Finally, there are risks that special consensus on user needs, which can improve interests, local elites, or powerful minorities can consumer satisfaction and reduce capital costs as capture the process for their own benefit. well as improve maintenance. For example, studies of rural roads in Korea indicate significant Managing Infrastructure 101 3.109 Participation also requires substantial detailed description of design and delivery changes in approach and is far from costless. systems to broad principles of service delivery, Technological innovations may be needed, such as with the details to be developed on-site. with the water pumps designed by UNICEF for Participation also depends on substantial inputs operation in contaminated pools of water. of time, to interact with the local organizations, Governments and donors often have to modify explain the technological options, mediate their approach, for example switching from disputes, and monitor and adjust programs. Box 3.8: Delivery of Rural Infrastructure in Indonesia Through Participation: WSSSLIC and Infrastructure for Lagging Behind Villages. Indonesia's strong rural village organizations have a tradition of providing and maintaining simple infrastructure. Government infrastructure programs are beginning to use these organizations to improve the quality of local public goods. The Water Supply and Sanitation Services for Low Income Communities (WSSSLIC) program, supported by the World Bank, is the first large project that is community based and demand driven. The design builds on the experience of NGOs and Government grant activities. Under the WSSSLIC program, village water and sanitation committees act as decentralized water utilities. The committees dialogue extensively with project staff. They choose alternative levels of water and sanitation services from a set of tested technical solutions. The choice depends on the amount the village is willing to contribute over and above the basic funding provided by the Government under the program. The village committee is expected to manage the water and sanitation system on a sustainable basis, using community resources. The project now covers 1440 low income villages in 6 provinces and is expected to invest $120 million over five years. A new Government program will provide infrastructure to "lagging" (IDT) villages, with support from the World Bank, ADB, and OECF. The programs rely on participation in various ways; on Java, the village committees choose the type of small infrastructure projects that they need most-access roads, suspension bridges, water, sanitation, etc. An engineer, assigned to a number of contiguous villages, provides the agreed-upon design following basic technical manuals, authorizes disbursements from local banks, certifies project quality and helps with training for future maintenance. Information about the project has been broadcast widely on rural radio stations and, when the project starts, accounts will be posted in the village. The Government provides a grant for each village, disbursed against work performed. An incentive fee encourages villagers to contribute their labor and help the grant go further. The program complements the Government's on-going IDT grant program of Rp. 20 million per village. 102 Chapter 3 Annex to Chapter 3 Urban Infrastructure: A Case Study 7 3A. 1 Overview. The dimensions of the population density is among the world's urban challenge facing Indonesia are well highest. known. Although, like most other Asian countries, the share of urban population is still 3A.4 The Government has a major role to not as high as in other parts of the world, the play in the urban setting. On the institutional pace of urban growth is very rapid. At 5.4% side it regulates land use. On the infrastructure p.a. during the 1980's, it is among the highest side water, waste management, flood control, in Asia; the 1990 census reported 55 million and roads traditionally have been government people living and working in urban areas and functions because of their externalities, in this figure is likely to reach 90 million by the terms of pollution and negative spillovers, and end of the decade. Population in settlements the difficulties of charging for the services around major cities, are growing at explosive (non-exclusion) in some cases. Since the costs double-digit rates. Rural-urban migration is and benefits of these market failures are largely only part of the story as in-situ urbanization of local, efficiency considerations suggest that previously rural areas is equally significant, at local governments and institutions should play least in Java. a major role in these services. 3A.2 With only 32% population in urban 3A.5 The Government has invested areas, compared to an average of 62% for low significant amounts in urban infrastructure middle income countries, a rapid pace of during the last decade but found it difficult to urbanization is not only inevitable but also keep pace as cities and towns absorbed some intimately related to the high rates of economic 70% of the total population growth during the growth and diversification in Indonesia. There 1980's. As a result, and compounded by is considerable scope for urban development to inadequate maintenance, service levels could support, indeed promote, productivity not improve much. Only about 20% of urban enhancing economic activities and to improve households have piped water; public sewerage the quality of life. However, this positive coverage and solid waste management are linkage between urbanization and negligible; drainage and flood control remain improvements in productivity and welfare is problems; and transport facilities are beginning to fray under pressure in several inadequate. parts of the country. 3A.6 International comparisons suggest that 3A.3 Urban concentration, with its attendant urban access in Indonesia to safe water and diseconomies, is already excessive in some sewerage is much lower than in the areas. Jabotabek ranks as the world's fifth Philippines, Thailand or Malaysia, although largest metropolitan area. Between 1980 and these cross-country indicators are not fully 1990, it grew the fastest of the ten largest comparable (WDR 1994, WB1993b). Indonesian cities. Jabotabek has an unusually Moreover, as individuals have relied on the high percentage of the country's urban private solutions of wells, septic tanks, rivers population (30%) and of industry (34%) by and canals, negative externalities are international standards. Within the Jabotabek developing. Ground water and rivers are metropolitan area, over half the population live increasingly contaminated-in Jakarta a (small) outside Jakarta, while in Jakarta's center recent survey showed many shallow wells were contaminated with fecal coliform (JICA, Managing Infrastructure 103 WB1994f). Sea water intrusion is affecting 3A.8 To continue to grow rapidly, Indonesia coastal cities' aquifers. Competition for needs to develop an efficient city network and groundwater in the dry season is developing cities that work well internally. The between residential and industrial and fundamentals for this are: a) a transport agriculturaluses(WB1993b, 1994f). Industrial network that links the cities together; b) a and solid waste disposal is also handled substantial increase in urban infrastructure privately. However, it is often dumped into investment; c) a corresponding increase in local canals and rivers where it causes clogging that resources: property and other taxes and leads to flooding and contamination of improved use of fees for services, which also groundwater, rivers and bays, or transferred would improve efficiency; d) improvements in to uncontrolled dumps where chemicals leach public sector performance and more reliance on into ground water and burning pollutes the air the private sector; e) institutional development, (WB1993b, 19940. In transport, although including decentralization, reduced complexity, inter-urban rush hour speeds are similar to and clearer assignment of responsibilities; and corresponding East Asian cities (WB 1993b), all f) resolution of other institutional issues, the these cities are developing well-known most important of which are governance of transportation, congestion and air pollution Jabotabek and land titling. problems. Particulate air pollution exceeds WHO standards 173 days a year in Jakarta 3A.9 The Second Long-term (25 year) versus an average of 153 days in 15 Asian Development Plan (PJP2) and REPELITA VI cities (WB1993b, 1994f); 2 cycle motorcycles emphasize sustainable urban development and diesel vehicles are major culprits. Lead through improvement in the quality of the pollution may be becoming an issue in some of living environment, support for economic the larger cities, as it did in Mexico City. growth, reduction in regional imbalances and poverty alleviation. In addition to the 3A.7 Currently, the benefits of urban fundamental requirements of an efficient infrastructure largely go to the upper half of transport network linking population the income distribution. For example, piped settlements and a substantial increase in urban water currently is available to 91 % of infrastructure investment, the Government's households spending more than Rp. 700,000 p. aims translate into the following five mo., compared to only 10% of households operational objectives. spending less than Rp. 100,000 p. m.(WB 1993b). And much of the benefit of (1) Poverty Alleviation through reduction in standpipes, which are intended to serve the the large backlog in the provision of urban poor, may be siphoned off by caretakers or infrastructure services, both by expanding vendors. Road investment tends to benefit car access and capacity as well as by owners, who are much wealthier than average, improving the efficiency of utilization of and industry, particularly since sidewalks are existing assets through better management, neglected. Air pollution and lack of good improved maintenance, correction of piped water tends to harm the poor more, imbalances, and waste reduction (e.g. because of where they live and their unaccounted-for-water). dependence on shallow wells or high cost vendors. All this suggests that while urban (2) An Improved Urban Environment which infrastructure services are important for will reverse the deterioration that is now growth, it also is important that beneficiaries occurring at a quickening pace particularly pay for them, for distributional as well as in larger urban centers, much of it related efficiency reasons, and that greater efforts are to water, sanitation and waste disposal. needed to improve the access of the poor to Air pollution is also increasingly serious, services. particularly due to rapidly rising levels of motorization and road congestion. 104 Chapter 3 (3) Enhanced Urban Productivity, 3A.11 Spending during REPELITA V appears especially aspects related to to have been much less than planned. Central agglomeration economies, is being Government spending was less than projected, threatened by traffic congestion, and reflecting tight budgets, lack of local requires better integration of economic counterpart funds, and implementation and social functions of cities in their problems. Local Govermnents were unable to spatial organization and the transport finance the large increase projected in their networks within and around them. spending-60% of the spending compared to 25 % in REPELITA IV. This was to come from (4) Substantial and Sustained Increase in leveraging local borrowing (initially Financial Resources is necessary both constrained by limits on borrowing) on a for investment as well as maintenance. projected large revenue increase. In actuality, Notwithstanding possible increases in local governments financed about the same central government funding, more portion of (the lower actual) investment as in efficient spending, and the scope for REPELITA IV. Finally, projected private water greater private sector participation, this investment did not materialize. requires more effective municipal finance policies and mechanisms to mobilize 3A. 12 Projected (real) urban investment in resources and recover costs effectively REPELITA VI represents a needed, massive and equitably. increase over REPELITA V outcomes and the sectorai distribution appears reasonable. A (5) Institutional Development particularly substantial increase in maintenance spending at sub-national levels, which is perhaps also is needed; persistent under-spending on the biggest challenge because the scale maintenance has resulted in short lives for and complexity of the urban effort is so investments. However, the Central vast that the central government can do Government's tight budgetary situation is likely little more than set policies and maintain to limit its funding of local infrastructure. In a broad oversight role. More effective any case, for reasons of efficiency and equity, decentralization requires further discussed above, it would desirable for local articulation of policies, clearer definition governments and institutions to provide more of functional responsibilities and of their own funding. Hence, a major, on- relations between different agencies and going constraint to needed higher investment tiers of government, greater balance appears to be local institutions' financing and between resources and responsibilities, implementation capacity. Although borrowing adequate management systems and constraints have been eased, this is only a procedures, as well as accumulation of temporary solution unless local governments' requisite skills through training and and PDAMs' revenues increase sharply. The experience. other major issue is the large proposed private participation in water, which is hindered by 3A. 10 Public investment in urban lack of a clear legal framework and difficulties infrastructure was only about 0.4% of GDP in of negotiation between most PDAMs and the REPELITA V, less than 10% of total potential bulk water suppliers. infrastructure investment.8 This represents an average of less than $10 per capita in urban 3A. 13 Local revenues are low, limiting local areas per year. Real expenditures rose sharply governments' ability to invest and provide with increased foreign assistance for urban counterpart funds. The main source of local projects in the late 1980s, but then slowed as tax revenue in most countries, property taxes, these loans completed disbursement. have a low effective rate of only 0.1 % of self- Managing Infrastructure 105 Table 3A.1: Indonesia: Estimated Public Urban Infrastructure Spending (trillion Rps.) REPELITA V REPELITA VI Planned Actual a (indicative proj.) Total 10.9 4.5 22.6 Water Supply 4.5 c 1.5 10.0 I Roads e 2.7 1.6 2.5 Flood Prevent.& Drnge. 1.9 1.2 3.6 Sewerage & Waste 1.2 .. 5.4 Kampung Impr.(KIP) 0.7 0.2 1.1 Memo: Ave. Expenditure p.a., b 34 12 37 (000 1990 Rp. per person living in urban areas) a Includes local spending, estimated at about 20% of total. b Estimated at middle year of plan period. I Includes projected Rp. 500 billion private investment. d Included in Table 3.1. Includes projected Rp. 4 trillion private investment. e Excludes toll roads, includes the urban portion of Central Govermment spending in Table 3. 1. Source: WB 1994a, p. 45; WB 1993b, pp. 47, 132. assessed value in Indonesia.9 Because of low be a doubling of the assessment rate, which can assessments and the low rate, taxes on urban be done administratively. Next, improved property amount to only 0.1 % of GDP. Taxes assessments are needed particularly outside per capita are about $17 in Jakarta and $2-3 in Jakarta; the estimated urban base is at least other cities, the latter is very low compared to twice as large as the self-assessed base (Shah the average of $17 in selected municipal areas and Qureshi, p. 125). The administrative in developing countries (See Bahl and Linn). reforms under the Sistem Management Obyek The term property tax is something of a Pajak and the Nomor Obyek Pajak are likely to misnomer, however; the tax is largely a tax on improve the base. It also would be helpful to mining, which represents over 50% of the develop well-publicized standards for valuing revenues, versus 26% for urban property. and annually adjusting market values of Even Jakarta receives 10% of its revenues property. Closer coordination between from mines! (Qureshi and Shah). property tax collection and the agencies/institutions concerned with 3A. 14 Higher property taxes, a simple, acquisition, transfer, construction and lending although politically difficult, measure, would for property also would improve the base. raise revenues to more closely match For example, audited properties could be infrastructure needs on a decentralized basis. required to produce loan documentation from Higher property taxes also would have some their bankers, a process that also would help macroeconomic efficiency benefits, since urban cut down on overvaluation of properties for property currently is undertaxed relative to borrowing purposes. other sources of income. The first step could 106 Chapter 3 3A. 15 Another solution, betterment levies reflect vehicles' impacts on roads and divided for small urban works, has been used in between the province and kabupatens based on Bogota Colombia and with less success in maintenance requirements. Congestion Jakarta and Korea. The levy's performance charges/parking fees should be imposed to could probably be improved by greater reduce congestion. participation/consultation with property owners on the improvements, developing and 3A. 17 Improvements in public sector urban publicizing a system to provide quick infrastructure services, will depend on running construction for those ready to contribute, and these services more like commercial firms, direct payments of the levy to banks (to reduce focussing on providing services to users. In the opportunity for collusion) with appropriate water, raising fees will help. Firms also need sanctions beginning with publicity for non- to focus more on distribution, maintenance, payment. (See Shah and Qureshi and and reducing water loss (see below). Firms Sukarman) need to improve access of standpipe users, for example by stimulating participation of local 3A. 16 Better pricing/cost recovery, would users and agreeing to remove the custodian improve efficiency as well as raising revenues. (and lower charges accordingly) provided the Water firms' need to raise their charges and local users group pays the charges and simplify their rates. Subsidies should be manages the standpipe. Maintenance reduced sharply, they currently go largely to expenditures need to be increased substantially the better-off because access is limited and the and transfers to local governments from the poor have to pay vendors high prices for their firms need to be redefined to permit much water (Box 3.3). At most, a "lifeline" higher levels of capital spending and consumption of the first 10 or 15 m3 could be maintenance. Personnel policies need to be subsidized. Moreover, any subsidies would improved, by raising salaries, training, and probably best be funded centrally, through better career opportunities. Finally, as transparent, well-defined and focussed discussed below, greater reliance on the private transfers. Competition from well water puts an sector could be used to improve service, upper bound on what can be charged, and has provided costs can be covered. In urban some externalities (depletion of aquifers, transport, a classic public sector area because salinization) so the fees for groundwater usage, of externalities of urban roads, improved particularly for large, deep-well users, should maintenance is needed and greater attention be raised substantially and enforced much could be paid to upgrading. This could be better. Charges for standpipes should be raised furthered by allowing fund transfers from to eliminate scarcity values that now often go central and provincial governments to be used to the custodian (See Box 3.3). Connection for these purposes. Substantial returns also charges should be raised (to eliminate the could be obtained from better traffic current scarcity value that now often goes to management-more resources, remodeling of employees), better publicized, and spread out one-way systems, more synchronized light in the first monthly payments. To improve the systems, more bus lanes, and requirements on efficiency of transport pricing, taxes on fuels parking availability in new developments. should be imposed to reflect costs of Finally, the railroads serving urban areas could maintaining the road network and be given greater autonomy and "corporatized". environmental damage by raising diesel prices substantially-diesel powered vehicle generate 3A. 18 The private sector could play a much substantial particulate pollution and account for larger role in urban infrastructure, which, if most the deterioration of roads. Motor vehicle managed effectively could improve service taxes on motor vehicles could be adjusted to delivery substantially. In water, use of Managing Infrastructure 107 incentive contracts for services and sector management, reducing institutional management, as well as leasing and complexity and assigning responsibilities better concessions could handle billing and collection, by clarifying roles, functions and authorities. water losses and operations and maintenance. The central government should shed Private operators could be used more for water implementation to lower tiers of government, production, again through appropriately public enterprises, and private operators, designed contracts. In transport, it would be except as warranted by prudent management of desirable to privatize the remaining public public borrowing. The central government urban bus services. Incentive contracts might should focus on establishing national policies be used to privatize maintenance. Greater use and sectoral regulatory frameworks, developing of transparent bidding for road construction technical and financial standards and would help lower costs. Toll roads may procedures, and giving technical assistance and relieve some congestion for intra-urban trips, guidance to lower tiers of government. although they also tend to increase suburbanization that leads to "peak-load" 3A.20 Poor land titling is a major problem. problems on urban roads. Bidding on toll Without better land titling, markets (land, roads could be improved by greater use of credit) cannot function well and improved prequalification, clearly stated criteria for property taxation will be difficult. Individuals award of contracts, fewer constraints on are subject to uncompensated expropriation and bidders' supply sources, and clearly indicating collateral becomes a problem for mortgages. Governments' contributions. The private Taxes cannot easily be imposed. (However, sector could also participate in mass transit, smallholders often try to pay taxes to develop again through transparent bidding processes. titles in the absence of existing titles.) Lack of titles also have strong negative implications for 3A. 19 Major institutional issues include efficiency of cities. Without titles a spatial institutional complexity and under mismatch is likely to develop as industry responsibility, land titling and governance in decentralizes and workers cannot sell off their Jabotabek. The institutional complexity assets to follow jobs. As the central city loses inherent in the current fragmentation and employment, wages will fall. Residents will overlap of investment, operational and demand infrastructure to connect them to the regulatory responsibilities leads to poor policy new job locations, leading to higher definition, inefficient investment, capacity investment, longer commuting times, and imbalances, unclear assignment of increased congestion. The Government needs responsibility and accountability, and to perform its basic function of providing difficulties in private participation. security of property by providing land titles to Improvements would come from rationalizing urban residents as soon as possible. 108 Chapter 3 Endnotes 1. The figure is based on the 1983 base income; with the 1993 base, Indonesia would move to the right, but still remain close to the East Asia trend line. 2. These are the sectors for which comparable data is available over time and across countries. As noted, Repelita V figures exclude private power investment for self generation. In addition to these sectors, urban sewerage, flood prevention and kampung investments are projected at about $5 billion and there may be spending for Jakarta mass transit (See Annex Chapter 3). For cross country comparability, the transport figures reported here exclude new ships and planes as do the sources cited; adjustments were made in World Bank sources on Indonesia to exclude ships and planes. 3. Estimates in this paragraph are based on Indonesia's new 1993 based national accounts, which is about 10% higher than the old GDP in 1993; ratios to Indonesian GDP in previous years are estimated downward by 10% for comparability. All estimates exclude ships and planes, and urban investment other than water and roads, to maintain comparability across countries. 4. This figure allows for full implementation of urban sector investment (Annex Chapter 3). 5. Infrastructure investment was of course financed off-shore in many earlier periods. In the 19th century, British markets provided finance for canals and railroads in the US, Canada, and elsewhere; British and US markets provided finance for Latin American infrastructure. Foreign investors controlled much of Latin America's electric power and telecommunications well into the 20th century. In the 1970s, bank loans to developing countries supported investment after the first oil price rise (WDR 1985). 6. Domestic currency bonds must bear competitive interest rates that reflect expectations of inflation, and in open capital accounts such as Indonesia, depreciation, plus a premia for risk. The premia for risk is even greater if the bond bears a fixed interest, which shifts the interest rate risk to the lender. Under these circumstance, floating rate bonds often develop. Indexed bonds such as are used in Chile, or foreign currency bonds (which effectively are indexed to depreciation) also may develop, to reduce the up-front cash flow problem that high nominal interest rates entail. However, borrowers may not want to issue fixed interest rate bonds because of their the large up front cash flow cost implied by inflation, depreciation, and risk, while lenders may not want to buy fixed interest bonds, because of the risk of default. Not surprisingly, fixed rate bonds are scarce in such societies, or bear below-market rates and are absorbed by public pension funds as an effective tax on the pensioners. 7. Based on WB 1993b. 8. Estimation of urban investment is difficult because it is not separately identified in the Budget and Budget categories have changed over time. The Central Government provides resources for local infrastructure investment through direct investments (DIPS) and transfers to the local governments under the general INPRES' program and the Special Purpose INPRES for local roads. (Local personnel costs are largely covered by SDOs). Recently, the Central Government has shifted its transfers toward bulk grants, giving provincial and local governments greater latitude in allocating funds. Local government's and PDAM's resources come from taxes, fees and borrowing from either the Regional Development account or subsidiary loan agreements with foreign donors, both administered by the Ministry of Finance. The Home Affairs Ministry imposes borrowing guidelines on the local governments and PDAMs to avoid excess borrowing. Of course, the fundamental limit to borrowing capacity is limited revenue generation. Finally, the Central Government and the local institutions fund operations and maintenance. 9. Property taxes are assessed and collected by the Central Government. The Central Government keeps 9% for collection costs and returns the rest to the provinces (18%) and local govermments (73%). The tax is 0.5% on 20% of self-assessed values, the lowest legal assessment ratio. Transition Challenges in the Health Sector 109 4 TRANSITION CHALLENGES IN THE HEALTH SECTOR A. Introduction 4.1 The health sector provides an example twentieth that in Switzerland, have nearly the of the transition challenges in improving same life expectancy at birth as those in human resources and the role of the public Switzerland (78 years). sector. Good health is vital to well-being. It also contributes to greater productivity and 4.3 This Chapter dis,usses the role of the economic growth. Better health reduces Government, and the main public health production and income losses caused by priorities in Indonesia, in Section B. The illnesses, increases the ability of children to trends in the level of public health spending, attend school and learn, and reduces the costs and their allocation, are then discussed in of treating illnesses. For the poor, gains Section C. The main causes of deaths and from better health are even more important. diseases, and comparative outcomes on health They face a much larger burden of illness, are highlighted in Section D. The health depend on daily labor and have little savings delivery system is analyzed in Section E. The to cushion income losses from illness. last section, Section F, discusses ways to improve the quality of public health services, 4.2 The Government has important roles the public health workforce, medicine pricing in ensuring better health. The three most and availability, and private health services. important are to: (a) provide preventive health services which have large positive 4.4 The main messages of the Chapter are: externalities; (b) provide a minimum essential package of clinical health services, especially * Increase public health spending, targeted at the poor, of reasonable quality, focused on essential health services and affordability and responsive to needs; and (c) the poor. Public spending on health is encourage more efficient private services, by low (about 0.7% of GDP, compared to appropriate regulatory and supporting 2.0% of GDP in all developing countries). policies. If these roles are effectively The Government needs to spend more on undertaken, the gap in better health does not health, to assure an improved level and need to be as large as it currently is. Health quality of basic services and outcomes in Indonesia, as measured by life complementary inputs (e.g., safe water expectancy (of about 62 years), child mortality and sanitation). The Government is aware and maternal mortality-key indicators of of these needs, and intends to raise community health-are poor. Most of the spending progressively. causes of deaths and diseases would be preventable by more effective health services. * Reach the Poor. Health services for the Sri Lanka or China, countries with per capita poor need to be improved. Spending on incomes of less than US$500, have achieved health centers and sub-centers, that are a life expectancy at birth of about 70 years, more effective in reaching the poor, needs which is only slightly less than that in the to be increased, and incentives for public United States (76 years). Costa Rica, or health personnel to treat the poor need to Chile, with per capita incomes nearly one- be improved. 110 Chapter 4 *Inprove the quality and efficiency of facilities. Better dispensing practices also basic public services. Reforms in the need to be considered. Private producers functioning of front-line health facilities need to be encouraged to become more are needed-towards improving their competitive, by continued deregulation of management, providing them with more the pharmaceutical sector to lower costs of resources, changing staff incentives, medicines to consumers. establishing quality assurance programs, and encouraging more community * Encourage private medical services and outreach programs. In regard to health improve standards. Private medical staffing, policies should be geared to services should be encouraged through meeting local needs and demands, with greater use of non-profit organizations to more authority given to local governments deliver public health services; private and public facility managers responsible health insurance, rather than for district services. Adequate staffing of Government-provided health insurance remote and rural facilities will need should be encouraged; existing regulatory attention, as will entry requirements, mechanisms of accreditation, assess- selection and training of bidan desa ments of medical schools, curriculum (village midwives). In addition, the reviews, licensing and student contract doctor scheme may need re- examinations should be used to raise the evaluation. The Government's promise quality of medical personnel; and the not to compel recruits to serve in remote Government should prepare appropriately areas may conflict with the current use of to deregulate private health services to the mechanism to guarantee an adequate permit the entry of foreign medical supply of doctors in the Eastern Islands. practitioners and health management professionals. The Government has * Improve supplies of medicine. More recently announced that it will permit medicine supplies (and lower-cost public joint ventures with foreign partners to procurement) are needed in public establish private hospitals. B. The Government's Role in Health 4.5 Governments in developing countries collection; monitoring and evaluating key typically account for about one-half of total health outcomes; planning and establishing spending on health, and private health services responsive health systems; investing in water account for the balance. Its role, however, supply and sanitation; establishing extends beyond financing, and has profound communicable disease control programs; effects on people's health. undertaking public immunization, nutrition and universal child and maternal care 4.6 Three principal rationales justify the (including family planning) programs; and Government's role. The first is that it should policies and information campaigns against carry out those essential activities that the smoking and abuse of drugs, and for adequate private sector cannot or will not do: some standards of occupational safety. types of health investment may have large positive externalities, and these investments 4.7 A second key rationale is equity. The may be undersupplied in the absence of public poor face the greatest burden of ill-health, and investment. There are a number of such are least able to afford the cost of healthcare. activities, such as epidemiological data Governments have a fundamental respon- Transition Challenges in the Health Sector 111 sibility for ensuring universal access to an high rates of immunization, reduction of essential package of clinical or individual micro-nutrient deficiencies, and falling health services, especially for the poor. Five fertility rates. groups, or clusters, of clinical interventions are likely to be the most important in every 4.10 However, the public health system has country's essential clinical package: pre-natal some failures. First, public health spending is and delivery care; family planning services; low (see Section C). Indonesia started with treatment of the sick child; treatment of very low levels of spending, which have now tuberculosis; and management of sexually increased to about 0.7% of GDP, but this transmitted diseases (STDs) including AIDS level is still below the average of 2.0% of prevention. These risks affect the largest GDP for all developing countries. Hospitals numbers of people in countries such as account for one-half of Ithe total public health Indonesia, and the poor are at much higher spending, and such spending has been rising. risks than most ( WDR 1993). Given relatively low levels of overall spending on health, a higher level of spending on 4.8 The third rationale is market failures hospitals means fewer resources for health in private health financing, and information. interventions in other more important areas. In lower middle-income countries, as in Public services also need to emphasize Indonesia, private health insurance tend to preventive public health activities. Moreover, cover only high-income and low-risk complementary investments in safe water and populations (i.e., "adverse selection" public sanitation, provided by infrastructure problems); alternatively, in Government-run agencies, are low (see Chapter 3) and often health insurance programs, there may be neglect needs of the poor and isolated areas. excess demands for health services and hence lead to rationing and services mainly for the 4.11 Second, public health services privileged ("moral hazard" problems). utilization by the poor have dropped between Failure of information makes matters worse. 1987 and 1992, and are now similar to the People who are ill have far less information levels in 1978, despite a large increase in than private health service providers, and the medical personnel and facilities (see latter may provide costly or wrong treatment, Section E). About one-half of those who are in the absence of adequate public information ill do not visit any health services, and the and standards. The Government's role should coverage of the poor is especially low. be to encourage more health insurance systems, higher standards of care in private 4.12 Third, the above also appears to be services, and more public information. directly related to the quality of public health (see Section D): (a) health outcomes, as 4.9 Measured against the above objectives, measured by child and maternal mortality Indonesia does better on some accounts, but rates-a key indicator of overall community poorly against others. The areas where the health-are poor and the pace of their Government has done relatively well are: (a) improvement slowed in the 1980s; (b) visit the spread of a basic public health rates to public health centers, or hospital bed system-through the expansion of public occupancy rates are far lower than in most health centers and sub-centers, village health- countries; and (c) micro-level studies suggest posts, and district hospitals; and (b) a host of contributory factors, such as lack of reasonable success in child immunization, standard safe practices (e.g., hygiene micro-nutrient supplementation, and family practices), inadequate nurses' knowledge and planning programs-as measured by relatively practices (e.g., re-use of syringes), target- 112 Chapter 4 driven approaches, lack of community out- 4.14 Major reforms are necessary in the reach, and the frequent unavailability of public health system: essential drugs and medicines. a Spend more on health, focusing on 4.13 Fourth, treatment of most diseases essential services and on the poor. There could be improved by better availability of is also room for greater efficiency and medicines. Public supplies are often effectiveness of public health spending; unavailable because of inefficiencies, and * Address the needs of the poor, and step- dispensing practices (e.g., "three-day" limits up investments to reach the poor more on supply, and preference for injectibles) effectively; often lead to inappropriate dosage and/or deter * Improve the quality of health services in effective treatment. The pharmaceutical puskesmas and puskesmas pembantus, the sector also has high rates of effective first-line of primary health services; protection, and low competition (see * Increase the supply of essential and low- Section F). Finally, private health services cost drugs and medicines, by need to be improved. Private health insurance deregulating private medicine trade and is undeveloped, partly because the improving the efficiency of public drug Government dominates the provision of health procurement and distribution practices; insurance, and partly because public health * Encourage private health services. charges for the non-poor, especially at hospitals, are heavily subsidized. C. Public Spending on Health 4.15 Spending on Health. Among spending, at about 0.7% of GDP annually, is developing countries, Indonesia devotes a low especially low (see Table 4.1). level of national resources on health. Public Table 4.1: Comparative Expenditures On Health--1990 Health Expenditure Health Expenditure Country Per Capita ($J as % of GDP Total Public Private Indonesia 12 2.0 0.7 1.3 India 21 6.0 1.3 4.7 Bangladesh 7 3.2 1.4 1.8 Sri Lanka 18 3.7 1.8 1.9 China 11 3.5 2.1 1.4 Philippines 14 2.0 1.0 1.0 Thailand 73 5.0 1.1 3.9 Malaysia 67 3.0 1.3 1.7 Korea 377 6.6 2.7 3.9 Asia (excl. India & China) 61 4.5 1.8 2.7 Sub-Saharan Africa 24 4.5 2.5 2.0 Latin America 105 4.0 2.4 1.6 Middle East 77 4.1 2.4 1.7 Developed Countries 1860 9.2 5.6 3.5 World 323 8.0 4.9 3.2 Source: World Development Report, 1993-Health. Transition Challenges in the Health Sector 113 4.16 The Government is aware of the low civil servants, including health workers. level of health spending, and has sought to Since then, public health spending has increase spending. Indonesia started in the imnproved, reaching about 0.7% of GDP in 1970s with a very low level of health 1992/93, and about 4% of total Government spending, about 0.2% of GDP in 1975, which expenditures. There is also scope for increased to about 0.5% of GDP by the early improving the efficiency and effectiveness of 1980s (see Figure 4.1). During the period of public health spending (see discussion below). falling oil prices, 1986-88, health spending The Government intends to assess the needs declined; expenditures on health fell to about for further rises in spending and raise overall 2.5% of total Government expenditure, spending levels, focusing on basic health compared to about 3.5% in 1985. Much of services for the poor and isolated areas. this was the result of lower real salaries for I Figure 4.1: Indonesia: Public Spending on Health 1984-92 Real (1984) $ per Capita, and % of GDP 4 3.5 2.5 $/caitla 2~~~~~~~~~~~~~~~~~- b 1% GDPI 0I 0.6 _-X - - - - - X. X - X - - - - X. X --X 1984 1985 1986 1987 1988 1989 1990 1991 1992 Source: Ministry of Finance; Staff Estimates 4.17 Allocation of Public Spending. The per capita health subsidies than does Nusa largest single expenditure is on hospitals Tenggara Barat, even though per capita (Figure 4.2). Its share in total spending incomes and private health services are far increased from about 42% in 1984, to nearly greater in Jakarta. 50% in 1991. However, this is inefficient spending, and in the context of low overall 4.18 Public spending on health centers and spending on health, a high proportion going to sub-centers has increased in absolute terms in hospitals means that other services are heavily recent years, with the higher levels of overall constrained. Each hospital bed in Indonesia public spending on health. The Government costs about US$5000 per year. Given low has tried to increase the operational resources occupancy rates, the cost per day of an for these centers. However, the relative share inpatient stay in a hospital is about US$29 a of spending on health centers and sub-centers day, versus average fees of about US$6-14 has lagged. Its share fell from about 40% of per day-implying a very high subsidy. total public health spending in 1984, to about Moreover, the poor use hospital services far 35% in 1991. The decline in relative spending less. The pattern of hospital spending is also on health centers and sub-centers-which has regressive, since more hospitals tend to be the largest potential impact on the poor and on located in richer and urbanized provinces. primary health services-is a matter of For example, Jakarta receives twice as much concern. Subsidies in health centers and sub- 114 Chapter 4 centers are low, only about US$1-2 per visit 4.19 Control of communicable diseases (compared to US$4 per hospital outpatient (CDC) has a very low share of spending, visit, and US$15-23 per day for hospital in- about 5%. However, in 1992, expenditures patient stay, and over US$100 per person per on CDC apparently doubled to about 10% of episode of hospitalization). Low-income total spending. If this is accurate, it would families use health centers and sub-centers far mark a significant improvement from past more than hospitals (World Bank, 1993d). patterns. Other expenditures-on health Increased spending on health centers and sub- administration, family planning, and centers in the future could focus on poor and nutrition-have been declining slightly, in isolated areas, such as in the Inpres Desa relative terms (partly because of declining Tertinggal (IDT) villages. allocations, needs and reduced externally financed programs in the investment budget). Figure 4.2: Health Spending By Different Sub-Sectors, 1984-92 s0 45 40 1 |_ 35 E = m U Hospital 30 -Health Centers % 25 Disease Control 20 - -te 16 10 O 1984 1986 1986 1987 1988 1989 1990 1991 1992 Source: Ministry of Finance; Staff estimate 4.20 Routine spending-mostly for 4.21 Private Spending on Health. As salaries-accounts for about 55% of total noted in Table 4.1 above, private spending on health sector spending. Routine expenditures health is estimated to be about 1.3% of annual have been fast rising in real terms in recent GDP. Surprisingly, rural households appear years, because of rapidly growing personnel. to spend relatively more (as a percentage of Civil service employment data show that their expenditures) on health than urban employees under the Ministry of Health households-related to the higher costs of (MOH) have grown from 159,000 in 1986 to healthcare in rural areas. The relatively larger 266,000 in 1992 (i.e., a 9.0% p.a. increase). spending by private households, compared to However, since 1992, a general "freeze" on public spending, and the preference of private further expansion of the civil service is being households for private sources of medical applied, which will restrain growth in assistance suggest that there is no need for the employment, and permit more resources for Government to play an increasing role in other essential spending-such as more curative services, except for those who cannot incentives to health workers to improve afford it. Given high elasticities of demand service quality, and community health for health, private spending on health as a activities ratio of GDP is likely to rise steadily. Transition Challenges in the Health Sector 115 4.22 Public Pricing Policies. Currently, extra-budgetary revenues. The increase in public health centers and sub-centers achieve a revenues derived from user fees is expected to 10% recovery of costs, and public hospitals reduce the need for direct subsidies, and achieve a 30% recovery of costs. Studies potentially permit the Government to suggest that there is a potentially difficult reallocate such resources to other programs. revenue-equity trade-off in charging more for Operationally, the new policy implies that services at health centers and sub-centers, hospitals can set their own fees for their unless the poor can be protected from higher services. costs. Different methods of providing subsidies only for the poor, rather than for all, 4.24 While Lembaga Swadana is, in have been suggested: geographic price principle, a movement towards improved discrimination in rural areas, and self- pricing, the efficiency lnd equity aspects are selection in urban areas (i.e., charge least for unclear. First, while Lembaga Swadana health sub-centers, and most for hospital hospitals are mandated to collect 40% of their outpatients). The Government has recently costs through user fees, it is not clear whether adopted a more direct method: granting free these new revenues will add to existing health cards to the poor. subsidies, or substitute for them. If they substitute, than public resources would be 4.23 Pricing policy improvements are saved, but not otherwise. Second, while needed in hospitals. Korea has full-cost Lembaga Swadana hospitals are mandated to recovery for hospitals (with a separate system set lower prices for the poor, the mechanisms of medical assistance for the needy). Thailand for setting these fees and identifying the poor achieves a 50% cost-recovery at public are undefined. Given that hospitals are to hospitals (with free health cards for the poor). retain the fees, there is no incentive for them The self-selection method offers the best to support the poor. Consequently, the prospects for raising revenues from the better- Government needs to set clearer equity off. The highest classes of services at guidelines, and monitor the Lembaga Swadana hospitals should charge full-cost for such program carefully. services, at a minimum; it could even set charges higher still. Recently, the Govern- 4.25 In addition to the above, those with ment has introduced a new hospital financing access to health insurance should be charged program entitled "Lembaga Swadana" full-costs--especially the ASKES civil-service (literally, "self-supporting institution"). employee members. At current prices, Under the program, Government hospitals ASKES members are charged only 65% of the which have received the bulk (approaching costs normally charged to uninsured users, 80%) of their operating revenues as direct and have much higher visit rates and inpatient Government subsidies, will be increasingly use of public hospitals. responsible for significantly raising their D. Health Condition, and Outcomes 4.26 Although significant epidemiological/ leading causes of child mortality and demographic changes are underway in morbidity are acute respiratory illnesses, and Indonesia-towards more constitutional diarrhea. Significant malnutrition is also diseases and deaths in an older age present, and is associated with high rates of group-infectious diseases of children and child deaths and diseases. Maternal mortality women in reproductive age groups are still the rates are very high-signaling poor health and most important public health issues. The nutrition of mothers. Regional patterns show 116 Chapter 4 wide variations in public health conditions, malnutrition to be a cause of child mortality, with especially poor conditions in remote/poor because malnutrition is rarely certified as a provinces in the outer islands. Lack of cause of death. But a recent analysis progress in environmental conditions-i.e., in (Pelletier, et. al., 1993, and UNICEF) argues access to safe water and sanitation-is an that about 40% of infant mortality and 60% especially serious public health issue. of child mortality in Indonesia could be attributed to underlying malnutrition, mostly 4.27 According to a Indonesian health associated with mild malnutrition (70-80% of survey (Ministry of Health, 1985), infectious the standard weight for age). While data on diseases were the leading cause of death morbidity patterns are very sparse, existing accounting for about 53% of all deaths, and information suggests that the prevalence of was much higher than that in other developing ARI (i.e., a cough with rapid breathing, which countries (36%). Circulatory diseases were should require hospitalization) was about the second-leading cause of deaths-about 9.8% among under five children-which was 10% of all deaths (compared to an average of very high (IDHS, 1991; UNICEF, 1994). 20% in all developing countries). Pregnancy Diarrhea was relatively less frequent, and low and neonatal problems were the third leading by international standards, but gastrointestinal cause of death-about 7% of all deaths parasites (related to poor sanitation) affect (compared to 8 % in all developing countries). about 80% of all children. 4.28 Child Mortality and Morbidity. 4.29 Maternal Mortality and Morbidity. Child mortality accounted for about 30% of all Maternal mortality rates are very high. The deaths in Indonesia. The major causes of immediate causes of death were hemorraghia child death are acute respiratory diseases (in turn, aggravated by high rates of anemia), (ARI) and diarrhea, and malnutrition-which toxemia, infection, obstructed labor and together probably account for over 80% of all abortion. The risk factors were age, low child mortality (Figure 4.3). The immune- income, rural residence, anemia, and lack of preventable diseases are a smaller cause of ante-natal care and delivery assistance death, but tetanus still accounts for 10% of (UNICEF, 1994). A heavy workload and infant mortality, and measles, diphtheria and poor nutrition (e.g., dietary energy intakes pertussis for 9% of child mortality. The during pregnancy and lactation range between household health survey did not find 50-80% of recommended levels) among the Figure 4.3: Indonesia-Major Causes of Child Deaths 46 40 3011 onths 3Source years 30 %26 20 15 10 6 0 Undefined AR] Diarrhea DPMT Source: UNICEF, 1994 Transition Challenges in the Health Sector 117 majority of women are also cited to be 4.31 Access to safe water and sanitation common factors. Cultural food taboos were are two powerful environmental determinants common amongst pregnant women, as was the of health across countries. In a crowded and practice that colostrum (which provides vital densely populated island area such as Java- antibodies to babies) is commonly thrown Bali-which has one of the highest population away and the baby given water for the first 24 densities in the world-this is an especially hours. Exclusive breastfeeding on demand up serious hazard. More spending on safe water to 4 months or more is practiced only by a and sanitation is urgent, as discussed further minority of women. below (paragraphs 4.32-4.33). Public spending on safe water and sanitation is low, 4.30 The Epidemiological Transition, and implementation has been a problem, and there Regional Patterns. Although a large part of are a number of pricing and institutional the current mortality and morbidity burden is reforms that are needed in the sector to concentrated on young children and accelerate the delivery of services. These mothers-and this will continue to be the issues have been examined in Chapter 3. predominant health issue-dropping fertility There also needs to be better integration of the rates portends some changes in the coming investment program in these sectors (under- decades. Slower growth in child population, taken largely by the infrastructure agencies), and declining mortality rates will lead a rapid and public health priorities. increase in the adult and aging population. As a consequence, the health needs of this 4.32 Cultural practices in Java-Bali already population will be increasing. Infectious distinguish carefully between different sources diseases and malnutrition which now exact a of water-for drinking, and those for other high mortality and morbidity among children purposes such as bathing and washing. It is and adult women, will be progressively reported that in a survey of two districts, 98% replaced by degenerative and man-made of respondents reported always using boiled diseases among an older age group (e.g., drinking water (UNICEF, 1994). heart diseases, cancer, strokes), and new Nevertheless, dug wells continue to be the diseases (e.g., AIDS) (Figure 4.4). This main source of water, followed by surface transition is already evident regionally. In waters, mechanical or electrical pumped Java-Bali, where the fertility decline has been water, and last by piped water (Figure 4.5). the steepest, child mortality now accounts for All sources are subject to increasing fecal and 22% of all deaths, whereas in the poorest- bacterial contamination, and water quality is a remotest outer island provinces, child serious problem. Approximately 30% of mortality still accounts for some 55% of all urban and 19% of rural groundwater sources deaths (e.g., in Maluku, Irian Jaya, East are located less than 10 meters from a septic Timor), and some 44 % in East and West Nusa tank or latrine leaching pit, and most open dug Tenggara and West Kalimantan. wells have some fecal coliform from surface Correspondingly, estimated life-expectancy at contamination. Surface waters are increasingly birth is highest-averaging about 67 years-in heavily polluted with industrial effluents and 5 urban-rich areas (e.g., DKI Jakarta, domestic waste. Piped water analysis shows Yogyakarta, Bali, North Sumatra), whereas that 58% of sample failed to meet Ministry of they are lowest in six remote-poor provinces, Health standards-because raw water quality averaging about 57 years. intake has deteriorated, and because of contamination from leaks. 118 Chapter 4 Figure 4.4: Indonesia-Share of Overall Mortality By Age Group 48 40 38 30 n99 28 20 02000-8 18 10 8 0 0-W years 8-15 years 1P40 yrs 60+yrs Source: Staff estimate Figure 4.5: Household Sources of Drinking Water JO Rural hosngaea n ra lctin hv spi chlde Urbans fteasneo ia 40 % 30 20 10 0 Wells Surface Pumpend Piped Source: Unicef 4.33 Safe excreta disposal may be a greater number of years that a person born in a given problem (UNICEF, 1994). The sanitation year could expect to live, given the age coverage is only 47% nationa5iy-74% in specific mortality rates for that year. urban areas and 35% in rural areas. However, much of what is known about Moreover, much of existing sanitation is mortality in the developing world, and in simple pit latrines. Only the wealthier Indonesia is limited to the mortality of housing areas in urban locations have septic children because of the absence of vital tanks. A few public sewerage systems are statistics and registration of births and deaths, under development in the central cities of and has come from a series of standardized Jakarta, Bandung, Yogyakarta, Cirebon, and internationally funded demographic surveys. Surabaya, but the coverage of such systems is Life expectancy at birth is derived from the only about 5 % of households in urban areas. child mortality rates in a given year, combined with assumptions about the relationship 4.34 Child Mortality Trends. Gains in between child and adult mortality based on public health can be measured in terms of two country-specific projections. The child broad indicators: (a) life expectancy; and (b) mortality rate is, thus, a key indicator of the child mortality. Life expectancy at birth is the status of public health. Transition Challenges in the Health Sector 119 Table 4.2: International Comparisons of Under Five Mortality Rates Countries Under 5 Mortality Rate of Fall Per Cap. GNP (per thousand), 1991 (% p. a., 1980-91) US$ 1991 Bangladesh 127 4.2 220 Myanmar 113 2.1 220 Zaire 188 0.7 230 India 124 3.0 330 Kenya 74 3.5 340 Sri Lanka 19 8.4 500 Egypt 55 9.9 610 Zimbabwe 86 3.2 650 Ivory Coast 124 3.1 690 Cameroon 117 3.3 850 Guatemala 76 4.8 930 Morocco 61 7.2 1030 Peru 65 5.8 1070 Colombia 20 8.9 1260 Costa Rica 16 4.9 1850 Chile 18 4.9 2160 Iran 58 6.5 2170 Mexico 33 7.5 3030 East Asia: China 43 3.4 370 Indonesia 110 1.2 650 Philippines 60 1.2 730 Thailand 33 5.1 1570 Malaysia 19 6.6 2520 Korea 9 5.3 6330 Source: UNICEF, 1994. 4.35 Although there are some data times as high as in Malaysia. In this respect, comparability issues, it appears that after a the child mortality rate in Indonesia was closer large decline in the 1970s (from 215 in 1960 to the average for South Asian countries (an to 151 in the mid 1970s), the rate of child average of 135, excluding Sri Lanka), than to mortality in Indonesia has begun to stagnate at the East Asian countries (an average of 35 for a relatively high level in the 1980s and early China, Philippines, Thailand and Malaysia). 1990s.1 The most recent available data Moreover, the rate of decline in child (Table 4.2) suggests that the under five mortality in Indonesia between 1980-91 mortality rate in Indonesia in 1991 was 110 slowed to about 1.2% per annum, which was births per thousand live birtis-i.e., more about the slowest in the world (Table 4.2). than 1 child in 10 dies before reaching the age Elsewhere in the developing world, the rate of of 5. The child mortality rate in Indonesia decline in child mortality in developing was more than double that in China, nearly countries accelerated to more than 5% per twice as high as in the Philippines, nearly annum in the 1980s (World Development three times as high as in Thailand, and five Report, 1993). 120 Chapter 4 4.36 Indonesia's public health situation and 4.37 Table 4.3 below reports child trends in the 1980s, as measured by child mortality differentials by background mortality rates above, is a matter of concern. characteristics of mothers. As evident, better The reasons for higher child mortality are not education, or better medical care lowers child well understood, and need more research. mortality rates significantly. But still, the data One possible reason for Indonesia's poor suggests it would take all mothers to have health situation could be the relatively low some secondary education before the average incomes of the country (UNICEF, 1993). But expected child mortality in Indonesia would a recent paper (Dasgupta, 1994) suggests that decline to about the average levels in East when other proximate determinants of child Asian countries, which could be some decades health-such as rates of female education, away. A comparison with Thailand and Sri food availability, access to public health Lanka (Figure 4.6) suggests that reducing facilities, child immunization, poverty child mortality rates quickly in Indonesia may incidence, and female fertility rates-are taken have much more to do with ensuring near into account (in addition to per capita income), universal prenatal and antenatal care (i.e., the actual child mortality rate (i.e., about 110 effective public health inputs to all); improved per thousand) for Indonesia was about double environmental factors (e.g., safe water and the rate that would be otherwise predicted sanitation), health care targeted at high-risk (i.e., about 52). cases, and effective health education. Table 4.3: Indonesia: Mortality Differentials By Background Characteristics, 1991 Background Characteristic Under Five Mortality Education: -No Education 131.1 -Some Primary 125.1 -Completed Primary 102.1 -Some Secondary 46.8 Medical/Maternity Care: -No antenatal/delivery care 159.8 -Either antenatal or delivery care 82.4 -Both antenatal and delivery care 51.5 Source: IDHS, 1991, op. cit. Transition Challenges in the Health Sector 121 Fig 4.6: Child Mortality By Mother's Education, Indonesia 140 (1991), and Thailand and Sri Lanka (1987/88) 120 ( * Indonesi 120 N Sri~~~~~~~~~~* Lanka 100 aThalland 80 60 40 20 0 No Education Primary Secondry Source: IDHS; Griffin, 1990 E. The Delivery of Health Services 4.38 Public health services have expanded health services by the poor, after improving dramatically in Indonesia-with a network of sharply 1978-87 from 39% to 54%, appear to health centers and sub-centers that cover have fallen since then to about 44% (see virtually all the population, and within Figure 4.7). reasonable access, except in a few remote and low-population density provinces. The 4.40 Of those who do visit a health care numbers of medical personneldoctors, provider, less than one-half use the extensive nurses, midwives and paramnedics-have also public health facilities, and the utilization of expanded rapidly. Private services have public health facilities, by the poor is very correspondingly increased. However, the low. Hospital services largely cater to the utilization of health services remains very low, well-off, while health centers and sub-centers especially among the poor. are used more by the poor than the well-off. The causes of low demand for health services 4.39 About 46% of those who are ill do not in Indonesia are as yet not well understood. visit a health care provider; and among the In part, behavioral issues may be important. poorest quintile, about 56% of those who are However, in part, they also appear to be ill do not visit a health care provider related to the low quality of health services. (SUSENAS, 1992). The utilization of modern Figure 4.7: Health Services Utilization by the Poor, 1978-92 s0 U Java-Ball 60 OOuterlslandsl 40 |Tobl % 30 20 10 0 1978 1937 1932 Source: Susenas; staff estlimates 122 Chapter 4 4.41 Public Health Services. Public health the public health centers more in Java-Bali and services in Indonesia are delivered through a in the eastern islands. Overall, rural and variety of sources. The locus of services urban residents made only 1 visit to a public today is the health center (puskesmas), which health center for preventive or curative have expanded from 4353 to 6588 between purposes in a year. By contrast, public health 1978-93, so that each of the 3,400 districts centers in Malaysia are contacted, on average have at least 1 health center. Each puskesmas, per person, more than 5 times a year. covering about 30,000 people, has at least 1 doctor (and sometimes 2 or 3), sometimes a 4.43 Why are visit rates to public health dentist, 6 nurses and midwives, 9 auxiliary centers low? A cross-kabupaten analysis health workers, and several administrative suggests that the most significant factor workers. The senior doctor is the primary influencing visit rates was the availability of medical authority and administrator. The medical drugs and materials, and only to a health center provides curative, outpatient care small extent, the increased availability of and undertakes preventive health activities. doctors and nurses (World Bank, 1994d). Below and linked to the health centers are Micro-level studies of puskesmas operations 18816 (up from 6636 in 1978) village level also suggest quality issues: (a) process-related health sub-centers (puskesmas pembantu), deficiencies in treating patients-e.g., lack of each covering about 7000 people, which offer standard safe practices, perfunctory physical limited curative and preventive care, including examination, and inconsistent diagnoses and vaccinations. They are generally headed by a prescriptions, etc.; and (b) poor client nurse or midwife, and total staff are generally services-e.g., short effective operating less than 3. The health centers directs those hours, inadequate knowledge and procedures needing inpatient treatment to district level of nurses, target-driven practices, and lack of (class C and D) referral hospitals, which have community-reach, etc. (World Bank, 1994d). increased from 260 in 1978 to 298 in 1993. 4.44 Maternal and child health (MCH) and 4.42 Even though the spread and ease of family planning services are delivered through access to public health facilities are now good the primary health care system, and is in most places-the average distance to a coordinated between the Ministry of Health medical facility is about 2.8 kms, 1 km in (MOH) and the National Family Planning urban areas and 3.7 kms in rural areas-the Coordination Board (BKKBN). The BKKBN utilization of public health facilities is low. (and MPH) provides support to a community Bed occupancy rates for all classes of public outreach program, through village-level health hospitals fell between 1984-92, and averaged posts, or posyandus, that provides MCH, less than 60% (World Bank, 1994d). immunization, diarrhea control, and family Recourse to health centers for curative planning and nutrition (child weighing and purposes and preventive care was also very nutrition supplementation) programs. Despite low. As shown below in Figure 4.8, only concerns whether the village health posts about 25% of those who reported ill, visited a actually reach a significant proportion of public health center or sub-center. children and mothers, they appear to be an Households in the remote/poor eastemmost important point of contact-perhaps because of islands-East and West Nusa Tenggara, the free distribution of nutrition supplements, Maluku, Irian Jaya and East Timor-tended to such as Vitamin A. For the nation as a whole, use public health centers more (i.e., nearly the average number of visits to posyandus by one-third of those reporting illnesses) than in children under age 5 within the previous 6 the other provinces. The poor tended to use months ranged from 2 in the poorest quintile Transition Challenges in the Health Sector 123 to 3 for the richest quintile. Overall, about immunization rates are reported to be high 50% of all children under 5 years old made at (e.g., over 90% for DPT3). However, least 1 visit to a posyandu within the previous maternal care services remain very low 6 months (SUSENAS, 1992). As a result, child (UNICEF, 1994). Figure 4.8: Indonesia-Monthly Contact Rate at Public Health Centers, Conditional on illness, by Income Group, 1992 35 30 25 O Poorest d %20 13Richest 1 5 MOverall 1 0 5 0 Java-Bali Sumatra Kalimantan Sulawesi Oth.lslnds Source: SUSENAS 92 4.45 Private Health Services. A larger allowed to) conduct private practice after the role is played by private services (World close of official work day (i.e., after 2 pm). Bank, 1994). About 34% of those who are ill Most (about 80%) public service doctors also seek such private services (see Figure 4.9), practice privately, and those working in health compared to 26% who visit public facilities centers report the most private practice-for 6 (and nearly 40% are self-treated or seek no days a week and up to 4 hours a day-but medical assistance), even though such private their fees are lower than other doctors. visits cost (Rp. 15,000 for treatment and drugs Doctors charge significantly more in rural in 1991 for a private doctor's service) many areas than in urban areas (Rp.5,600 per visit times more than the public health center versus Rp.4,500 a visit). Private practice charges (Rp.1200 for treatment and drugs). accounted for about 70% of total earnings for Government doctors and nurses (are officially specialists, and 25-70% for rural health center physicians. Figure 4.9: Proportion of Those ill, Visiting Different Providers, 1992 45 40 35 E Public 30 1I Pvt.Doctorl 25uc Pvt.Nurse %20 l ,Other 1 0 I 0 Java-Ball Sumiatra Kallmnantan Sulawesi Otherlslds Source: 1992 Health Survey, MOH 124 Chapter 4 F. Improving The Quality and Effectiveness of Health Services 4.46 While Indonesia spends a relatively performance and preventive health services. low level of resources on public health, Research is needed on what are the "best increased public spending is not the only practices" and factors behind successful issue. The Philippines and Egypt-not puskesmas activities, how to improve the particularly better achievers in public quality of public health services, and how to health-achieve better child mortality make health-centers more responsive to client outcomes with about the same level of public needs. Similarly, major differences in local spending as in Indonesia. China spends in epidemiological conditions need to be clearly absolute terms less per capita on health (about identified through systematic local health US$11) than Indonesia does (about US$12 per surveys, and the results conveyed to local capita), but achieves far better outcomes-life health service delivery institutions. Public expectancy is about 8 years higher, and child investment in safe water and sanitation, mortality about half the level in Indonesia combined with greater local community (Griffin, 1990). How Government funds are participation needs to be accelerated. Instead spent relative to health problems, and the of a focus on these activities, more policy efficiency and quality of such spending, are attention and resources are going into curative crucial issues. So are issues relating to the activities (e.g., in hospitals) and input-driven pricing and availability of essential drugs and public supply programs (i.e., so many health medicines, and the role of the private sector. centers, application of standard staffing norms, etc.). 4.47 Re-orienting Public Health Interventions. The Government has 4.50 Second, attention needs to be paid to expanded public health services and health high child and maternal mortality, which are personnel. While poor regions and poor the most serious public health issues. Given villages are less well served, the coverage of falling birth rates, and the extensive coverage health services is reasonably comprehensive. of the public health system, it should be The main policy issues are: (a) the demand for possible for public health system personnel to public health services is low; (b) the low make a visit to each birth that takes place in a quality of services is apparently a major factor given local setting-at least in the high child which leads to the underutilization of public mortality districts-so that high-risk cases are services; (c) the poor do not use public identified and followed-up, advice provided on services intensively; and (d) the overall health preventive medical steps, and improved outcomes-i.e., the effectiveness of health maternal care, child birth and child survival services-remains low. services provided the next time around. The public health system is now planning an 4.48 A rethinking of the management of accelerated program to add more bidan desa public health services is, thus, urgent. A or village midwives-employing new, recent report (World Bank, 1994d) and inexperienced, and young midwives who ongoing implementation of health would have little support systems to count on, improvement projects suggest the following or engender much confidence amongst their key elements of public health reform. potential clients (especially relative to traditional birth attendants). The entry 4.49 First, more policy attention and requirements, selection procedures and investment is needed on health system training activities for bidan desa will need to Transition Challenges in the Health Sector 125 be improved, if they are to be accepted and The most important generic recommendation function effectively in the villages (World is to make the work force responsive to local Bank, 1994d). public health needs and more selective and cognizant of market forces and opportunities. 4.51 Third, attention needs to be paid to the Policy no longer needs to be driven by gap- ability and motivation of front-line health filling imperative, characterized by detailed managers and staff to deliver higher quality, and rigid staffing norms, nor on extensive and more accessible health services. The key subsidization of medical education and to this is to make reforms at the individual training or conscription. Instead, policy needs facility level-i.e., health centers and sub- to be demand sensitive. One way to do this centers. One part of the reform package will would be to make public facility managers, need to focus on decentralization and of including the district health officer, develop management. The puskesmas doctor in realistic service priorities and decide on the charge will need to be given full responsibility appropriate staffing, skill mix and task for all health processes and outcomes in assignments in health centers and hospitals, his/her local area, together with requisite and give them greater authority over personnel financial resources to carry out the matters. With work force needs in public responsibilities. Another part of the reforms facilities determined in this bottom-up fashion, will need to focus on appropriate incentives there will also be less need for setting targets for staff for better performance (together with for numbers of trained graduates, or to a monitoring system). A third essential heavily subsidize medical education. package will need to focus on monitoring health outcomes, establishing quality- 4.54 Government health workers still tend assurance mechanisms and incentives (see to be concentrated in urban and some rural para. 4.65 below), and providing in-service areas. This has resulted in continuing training on management to improve quality shortages of key staff in some districts, and equity. whereas other localities are overendowed with workers. The contract doctors scheme 4.52 Fourth, a low and declining use by the represents a special issue and may need re- poor of public health services needs attention. evaluation to be sustainable. Given a large Tlhe Government has recently started an increase in output of doctors, the absorbtion accelerated program of providing health cards of all of them in public service is no longer to poor families to entitle them to free health possible. An answer to this problem was the care in public facilities. The program needs to 1992 decision to hire newly drafted medical be carefully monitored. However, free health graduates on three-year, non-renewable cards may not by itself ensure that the poor contracts rather than as civil servants. The receive adequate health care, unless outreach contract scheme may however prove to be and community services by public health staff problematic because the Government has to reach poor families are accelerated, and promised not to compel recruits to serve in incentives for health staff to treat the poor are remote areas. This pledge may have made it put in place, and made an integral part of the more difficult to use this mechanism to health system's objectives. guarantee a supply of doctors in the Eastern Islands. Therefore, consideration needs to be 4.53 Public Health Work Force Issues. given to other incentive-based mechanisms to For public health services to be effective, the ensure an adequate supply of doctors in public health work force will need attention. remote areas. 126 Chapter 4 4.55 Medicines. Purchase of medicines for 4.57 The pharmaceuticals industry carries treatment are a large part of household an average about 20% nominal protection, and expenses for health. It is estimated that the per 60% effective protection. Competition in the capita expenditures on drugs and medicines industry, especially in distribution, is also was about US$4.5 in 1994, or about one-third low. Consequently, prices of most essential of total expenditures on health. Yet, this large drugs (e.g., antibiotics) are relatively high. A expenditure on drugs and medicines "buys" price comparison for a common antibiotic far fewer quantities of actual medicines than in (e.g., ampicillin 500 mg) suggested that the most countries. Griffin (1990) estimates that domestic price under the INPRES program from international comparisons of the quantity was 240% (or, more than twice as expensive) and prices of medical care, Indonesians as the UNICEF published price (World Bank, consumed (per capita) about one-sixth the 1987). The retail price of the same, but quantities of pharmaceuticals in India or the branded, product sold through an "apotik"- Philippines, and less than one-twentieth that in the price facing the consumer-may have been Sri Lanka, but paid twice as high a price for about 4 times higher than the INPRES public these medicines as the other countries. The procurement price. On average, the prices of very high prices of pharmaceuticals relative to 40 essential drugs in the INPRES program health services (the ratio of the price of were about twice as expensive as UNICEF list pharmaceuticals relative to medical personnel prices, and retail prices were presumably services was estimated at about 11:1 in many times higher still. It should be noted Indonesia, versus 5:1 in India, and 1:1 in Sri that the UNICEF prices are based on Lanka) results in substitution of medical international competitive tendering, which services (i.e., more health personnel) for lowers prices. A separate study (Ministry of pharmaceuticals, but with far less Health, 1987), in contrast, suggests that effectiveness. average INPRES procurement prices were not much higher than average international prices 4.56 Most of the causes of child mortality from a mix of sources. in Indonesia can be addressed effectively by the use of appropriate medicine-selected 4.58 However, both these analyses are antibiotics, vaccines, vitamins, and others. dated, and a more careful recent evaluation of The adequate supply of medicines could cut drug pricing, marketing, distribution, import the child mortality rate by one-half, according tariffs and competition policies is urgently to one study (Ministry of Health, 1987). needed to ascertain if, indeed, medicine costs INPRES funds provide for the supply of 178 are unusually high and a deterrent to effective essential drugs through the public health health care in Indonesia. Better medicine system, for a relatively nominal cost to dispensing practices, and greater availability patients. However, a "three-day" rule limits of essential drugs in public health centers are dispensing quantities to three days supply also needed in the public health system (e.g., (encouraging sub-therapeutic doses of multiple as noted earlier, the availability of medical products), there is a strong preference for supplies seemed to be a far more important injectable medicines by public providers and statistically significant determinant of (raising public costs to high levels and health center visits, than the availability of dissuading patient treatment), and public health staff-doctors and nurses). health facilities are frequently out of stock of prescription drugs. As a result, privately 4.59 Private Health Services. The third purchased drugs are the most common source part of the answer to improving health of medicines. services is to encourage private health Transition Challenges in the Health Sector 127 services. Here, the role of the Government (JAMSOSTEK), financed by a mandatory remains critical with regard to its regulatory, payroll tax, and administered by a public pricing and standard setting roles in several monopoly. It would be better if private areas. employers are encouraged to buy alternative private health insurance for their workers, and 4.60 Higher userfees for curative services to allow private service providers to provide at public facilities are one key element. As health services under such insurance schemes, already discussed, hospital fees should be to avoid burdening the public budget and raised to reduce subsidies for the better-off. public health system for the non-poor. Even in health centers and sub-centers, price discrimination (e.g., by self-selecting 4.63 A fourth key element would be to methods, or geographic targeting) by charging encourage better quality of services in the higher fees for the better-off should be private sector. Improvements in standards can explored and encouraged. Higher fees for the come from basically three main sources: (a) better-off would lead them to opt for private better pre-service education and training; (b) services and provide a tool for targeting higher standards in public services; or, (c) Government subsidies to those patients who more inputs in quality of services from outside are least able to pay. In major urban areas professionals. and in relatively more prosperous provinces, there are few grounds for subsidizing public 4.64 The pre-service education and training curative health services heavily. system needs to be further improved, and there is an important role of the Government 4.61 A second element would be to in this regard. The quality of such education encourage private voluntary services (e.g., remains uneven. Three mechanisms- NGOs) to provide public services in primary assessments of medical schools, curriculum health care. There are many NGOs who are reviews, and student examinations-that can already providing effective community health be used to achieve higher standards need to be services. It does not matter whether public or strengthened. As regards nurses, midwives private providers deliver such services, and paramedic workers, current arrangements provided that the costs and quality of private for school accreditation, curriculum reviews, provision are the same or better than a examinations, licensing and scholarships comparable public facility. Consequently, remain underutilized. These regulatory such private NGO activities should be mechanisms can be used to achieve qualitative encouraged with explicit financial support improvements in worker standards and from the Government, to provide more performance (World Bank, 1994d). alternatives and competition to public service provision. 4.65 While better pre-service education and training are needed, improvements in in- 4.62 A third element would be to encourage service standards are likely to be more private health insurance. It would bring inmmediately effective. One of the important benefits in terms of resource management tools to achieve this is to mobilization, smooth health care payments encourage the adoption of quality assurance across times of good health and ill health, and programs in public health services. This reduce the burden on the Government. At would be expected to have an important present, the Government is seeking to provide impact on the quality of private health health insurance coverage for workers as part services, because much of the private medical of the new Social Security Law services now being provided come from 128 Chapter 4 doctors, nurses and paramedics who are in expert committees, and outcomes measured public employment, and provide private (de Geyndt, 1994). services outside official hours. Even those fully in private practice are often trained in 4.66 Another potentially important source public health services. Quality assurance of improving the quality of private medical programs focus on the process of providing services, and which might have spillover health services-i.e., what is actually done to benefits for public services, would be to and for the patient in giving and receiving deregulate medical services, and allow the care. It includes the patient's activities in entry of health practitioners and health seeking care and carrying it out, as well as the management professionals from abroad. The practitioner's activities in making a diagnosis Government has recently announced that it and recommending or implementing a intends to allow joint ventures in hospitals. treatment. Process indicators are chosen by Endnotes 1. The preliminary report of the 1994 Indonesia Demographic and Health Survey (IDHS) suggests a reduction in child mortality, after relative stagnation in the late 1980s. The full results of the survey, however will only be available in September 1995. The comparability of the IDHS data over time, and with other surveys results are also not known. The Govermnent's REPELITA VI document suggests a lower level of child mortality than that in the IDHS. Bibliography 129 Bibliography Akin, J.S., D.K. Guilkey, C. C. Griffin, B.M. Popkin, 1985. The Demand for Primary Health Services in the Third World, Rowman and Allenheld, New Jersey. Bahl, Roy and Johannes Linn, "Urban Public Finance in Developing Countries", World Bank, Oxford Univ. Press, 1992. Barro J. B., and J. Lee, 1993. Losers and Winners in Economic Growth, Annual Bank Conference on Development Economics, The World Bank, 1993. Biro Pusat Statistik, 1992. SUSENAS survey, Government of Indonesia. Boadway, R., and A. Shah, 1992. "How Tax Incentives Affect Decisions to Invest in Developing Countries", Policy Research Working Paper #1011, World Bank. Dasgupta, D., 1993. "Why Some Regions Do Better Than Others" in R. O'Brien ed. 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I Statistical Annex 135 INDONESIA COUNTRY ECONOMIC REPORT STATISTICAL ANNEX a List of Tables Population and Employment 1.1 Population and Growth Rates by Province, 1930-1990 1.2 Distribution of Population by Age Group and Sex, 1961-1990 1.3 Employment by Main Industry, 1971-1990 1.4 Population Distribution by Province and Urban & Rural, 1980-1990 National Income Accounts 2.1 Gross Domestic Product by Industrial Origin at Current Market Prices, 1983-1994 2.2 Gross Domestic Product by Industrial Origin at Constant Market Prices, 1983-1994 2.3 Expenditure on GDP at Current Market Prices, 1983-1994 2.4 Expenditure on GDP at Constant Market Prices, 1983-1994 2.5 Distribution of GDP at Current Market Prices, 1983-1994 2.6 Distribution of GDP at Constant Market Prices, 1983-1994 International Trade & Balance of Payments 3.1 Balance of Payments, 1983/84-1993/94 3.2 Non-oil Exports, 1984/85-1993/94 3.3 Value of Exports by Principal Country of Destination, 1983-1994 3.4 Value of Imports by Principal Country of Origin, 1983-1994 External Debt & Capital Flows 4.1 Summary of External Debt Data, 1981-1993 4.2 External Public Debt Outstanding as of December 31, 1993 4.3 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt, 1980-2005 4.4 Development Assistance Flows, 1987-1992 Public Finance 5.1 Central Government Budget Summary, 1983/84-1995/96 5.2 Central Government Receipts, 1983/84-1995/96 5.3 Central Government Expenditures, 1983/84-1995/96 a With the exception of the tables on External Debt, the Statistical Annex is a compilation of official data from Govemment sources. In some instances, these data may differ from data in the main text due to different Bank definitions and methodologies in constructing the statistical series. 136 Statistical Annex 5.4 Development Expenditures, 1983/84-1995/96 5.5 Development Expenditures by Sector, 1983/84-1995/96 5.6 Project Aid by Sector, 1983/84-1995/96 Monetary Statistics 6.1 Money Supply, 1982-1994 6.2 Changes in Factors Affecting Money Supply, 1982-1994 6.3 Consolidated Balance Sheet of the Monetary System, 1982-1994 6.4 Banking System Credits by Economic Sector, 1982-1994 6.5 Banking Credits Outstanding in Rupiah and Foreign Exchange by Group of Banks, 1982-1994 6.6 Investment Credits by Economic Sector, 1982-1994 6.7 Outstanding Bank Funds in Rupiah and Foreign Exchange by Group of Banks, 1982-1994 6.8 Interest Rates on Deposits at Commercial Banks, 1982-1994 Agricultural Statistics 7.1 Principal Agricultural Products by Subsectors, 1982-1993 7.2 Production of Major Crops by Type of Estate, 1982-1993 7.3 Rice-Area Harvested, Production and Yield, 1982-1994 7.4 Area Covered Under Rice Intensification Programs, 1982-1993 Industrial Statistics 8.1 Index of Manufacturing Production by Selected Industry Group, 1986-1994 8.2 Production of Minerals, 1982-1994 8.3 Crude Oil Production by Company, 1981-1994 8.4 Petroleum Product Supply and Demand, 1981-1994 8.5 Domestic Sales of Petroleum Products, 1981-1994 Prices 9.1 Consumer Price Index, 1979-1994 9.2 Indonesia Wholesale Price Index, 1983-1994 9.3 Domestic Prices of Petroleum Products, 1984-1994 Investment Statistics 10.1 Approved Foreign Investment by Sector, 1981-1994 10.2 Approved Domestic Investment by Sector, 1981-1994 Statistical Annex 137 Table 1.1 INDONESIA COUNTRY ECONOMIC REPORT Popudation And Growth Rates by Province, 1930-1990 Region Popubtion ('000) Average growth rate (% p.a.) 1930 1961 /a 1971 /a 1980 1985 1990 1910-61 1961-71 1971-80 1980-85 1985-90 Jea 41,718 63.059 76.086 91,270 99,852 107.528 1.3 1.9 2.0 1.8 1.5 D1i Jakartt 811 2.973 4,579 6,503 7,885 8,225 4.3 4.4 4.0 3.9 0.8 West Java 10,586 17,615 21,624 27,454 30,830 35,380 1.7 2.1 2.7 2.3 2.8 Central Java 13,706 18,407 21,877 25,373 26,945 28,519 1.0 1.7 1.7 1.2 1.1 Dl Yogjakfrte 1,559 2,241 2,489 2,751 2,930 2,915 1.2 1.1 1.l 1.3 -0.1 East Jva 15,os6 21,823 25,517 29,189 31,262 32,490 1.2 1.6 1.5 1.4 0.8 Sumara 8,255 15.739 20,809 26.017 32.603 36,436 2.1 2.8 3.4 3.1 2.2 Lampung 361 1,668 2,777 4,625 5,905 6,006 5.1 5.2 5.8 5.0 0.3 Bengkulu 323 406 519 768 943 1,181 0.7 2.5 4.5 4.2 4.6 South Sumata 1,378 2,773 3,441 4,630 5,370 6,278 2.3 2.2 5.4 3.0 3.2 FRau 493 1,235 1,642 2,169 2,548 3,283 3.0 2.9 3.1 3.3 5.2 Jambl 245 744 1,006 1,446 1,745 2,016 3.6 3.1 4.1 3.8 2.9 West Suratra 1,910 2,319 2,793 3,407 3,698 4,001 0.6 1.9 2.2 1.7 1.6 North Sffratra 2X542 4,965 6,622 8,361 9.422 10,254 2.2 2.9 2.6 2.4 1.7 Areh 1,003 1,629 2,009 2,611 2,972 3.417 1.6 2.1 3.0 2.6 2.8 Kllmnarten 2.170 4.102 5.15 6,723 7.722 9.111 2.1 2.3 3.0 2.8 3.4 We stKalm tin 802 1,581 2,020 2,486 2,819 3,237 2.2 2.5 2.3 2.5 2.8 Central Kllimwantn 203 497 702 954 1,118 1,398 2.9 3.5 3.5 3.2 4.6 South Kalmmntln 836 1,473 1,699 2,065 2,273 2,599 1.8 1.4 2.2 1.9 2.7 East 14Irnnntan 329 551 734 1,218 1,512 1,877 1.7 2.9 5.8 4.4 4.4 Sulawesi 4.231 7.079 8.528 10409 11554 12.519 1.7 1.9 2.2 2.1 1.6 Central Sulawesi 390 693 914 1,290 1,511 1,705 1.9 2.8 3.9 3.2 2.4 North Suaweesl 748 1,310 1,719 2,115 2,313 2,480 1.8 2.8 2.3 1.8 1.4 South Sulwsl 2,6S7 4,517 5,181 6,062 6,610 6,983 1.7 1.4 1.8 1.7 1.1 Soudthast SLiawesi 436 559 714 942 1,120 1,351 0.8 2.5 3.1 3.5 3.8 Other Iskands 4219 7.106 8.630 11.071 12.316 13.654 1.7 2.0 2.8 2.2 2.1 B:ll 1,101 1,783 2,120 2,470 2,649 2,779 1.6 1.7 1.7 1.4 1.0 We stNusa T.nggwra 1,016 1,808 2,203 2,725 2,995 3,371 1.9 2.0 2.4 1.9 2.4 East Nusna Tenggara 1,344 1,967 2,295 2,737 3,061 3,270 1.2 1.6 2.0 2.3 1.3 Maluku 579 790 1,089 1,410 1,609 1,853 1.0 3.3 2.9 2.7 2.9 Irlan Jaya 179 758 923 1,174 1,371 1,631 4.8 2.0 2.7 3.2 3.5 East Timor n.M n.a n.a 555 631 750 n.a n.a na 2.6 3.5 T o t a I Irndormsh mm 75 119.208 147,490 164.047 179.245 L1 Li Id la LA /a Includes adJustmernt for the xcludion of rual rklan Jaya. Souce Central Bureau of Stltistis, Populaon Census Reports, 1961,1971,1980 and 1990; Statistical Yearbook Of Indonia, 1984; and StlPAS 1985. INDONESIA COUNRY ECONO*C REPORT Dldlbum at Po.ubdio. by Aso Grum and Sax. 10t1-1 0La 1961 1971 1 980 1 965 1990 Age Group Male Femcal ToWl Mal Female Total Male Femal Toal Male Female Total Mae Female Total 0-4 on29 S,649 17,178 9.675 9560 1925 10,n 10,422 21,294 11,006 10,543 21,551 10,766 10,120 20,867 5-9 1,744 7,701 1,445 9,593 9,5I2 14695 10,9 10,446 21,35 11.379 10,739 22,118 11,791 11,290 23.061 10-14 43 392 6245 7,406 6575 14281 9,179 4525 17.704 10,783 10,113 20,896 10,996 10,43 21,437 15-19 3s65 3.9D5 7,770 5,627 5,779 11.406 7.532 7,806 15,358 S,335 4232 16,567 9,553 9,367 1s920 20-24 S,46 4,373 7,s3 3627 4,461 SUo 6,010 7,055 13,065 6,35 7.903 14,28 7,662 5,446 16,148 25-34 1,392 6610 16,102 7,722 9.226 16946 9,665 9.920 19,605 12,026 12,442 24,468 13,962 14,770 26,732 35-44 5,765 5,406 11,171 7,062 7,119 14,181 7.876 6.172 16,04 5538 8,465 17.023 9,776 9,475 19,25 45-54 353s7 3,511 7,096 4,36 4,213 657 5,761 5,856 11.617 6,416 6,514 12,932 7,036 7,4 14,320 55-64 1913 1,865 3.778 2,224 2,373 4597 3.237 3554 6,651 4,150 4,474 5,624 4,615 4,57 9,502 65+ 1,183 1.245 2,428 1,45D 1,539 2.989 2,20 2,59 4,7 2,619 2,954 5,573 3,213 3,749 6,962 Not statd 60 57 117 7 a 15 11 9 20 4 s 7 3 5 a ToWl 47.S71 49.214 97.05 5.753 6QX455 119.206 73.S32 74,158 147.490 51.645 S2402 164.047 69.376 89.872 179248 Pwcentai dhutton 0-4 17.5 17.6 17.7 16.5 15.1 16.1 14.8 14.1 14.4 13-5 12.6 13.1 12.0 11.3 11.7 5-9 16.2 15.6 15.9 1&3 15.4 15.9 14.8 14.1 14.5 13.9 13.0 13.5 13.2 12.6 12.9 10-14 9.1 7.9 .5 12.6 11.4 12.0 12.5 115 12.0 13.2 12.3 12.7 12.3 11.6 12.0 S5-19 &. 7.9 8o 9.6 9.6 96 10.3 10.5 10.4 10.2 10.0 10.1 10.7 10.4 1O0 20-24 7.3 6.9 a 6.2 7A 6.8 82 9.5 8.9 7.S 9.6 67 as 9.4 9.0 2s-34 15.4 17.5 16.5 13.1 15.3 14.2 13.2 13.4 13.3 14.7 15.1 14.9 15.6 16.4 16.0 35-44 12.0 11.0 11.5 12.0 11.8 11.9 10.7 11.0 10.9 10.5 10.3 10.4 10.9 10,5 10.7 45-s4 7,S 7.1 7.3 7.4 7.0 7.2 7.9 7.9 7.9 7.9 7.9 7.9 7.9 8.1 6.0 55-64 4.0 3.1 3.9 3,6 3.9 3.9 4.5 4.5 4.5 5.1 5.4 5.3 5.2 5.4 5.3 65+ 2.5 2.5 2.5 2.5 2.5 2.5 3.0 3.5 3.2 3.2 3.6 3.4 3.6 4.2 3.9 Not sated 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TOWal 100 ID00 100.0 10.0 D, 100.0 100.0 100.0 100.0 100.0 10.O j0,9 100.O 100.0 M, Source: Central Bureau of Statcs, Census Reports, 1961, 1971, 1080, and 190; Intercensal Populaon Survoy, 1985. INDONESIA COUNTRY ECONOMIC REPORT Employment by Main Industry 1971-1990 /a 1971 1980 1982 1985 1990 Main Industry millon % milton % million % milEon % million % Agriculture, forestry, hunting & fishery 26.5 64.2 28.0 54.8 31.6 54.7 34.1 54.6 35.5 50.1 Mining and quarrying 0.1 0.2 0.4 0.7 0.4 0.7 0.4 0.7 0.7 1.0 Manufacturing 2.7 6.5 4.4 8.5 6.0 10.4 5.8 9.3 8.2 11.6 Electricity, gas & water 0.0 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 Construction 0.7 1.6 1.6 3.1 2.2 3.7 2.1 3.4 2.8 4.0 Wholesale and retail trade & restaurants 4.3 10.3 6.6 12.9 8.6 14.8 9.4 15.0 10.6 15.0 Transportation, storage & communications 1.0 2.3 1.5 2.9 1.8 3.1 2.0 3.1 2.7 3.8 Finance, insurance, real estate & 0.1 0.2 0.2 0.4 0.1 0.2 0.3 0.4 0.5 0.7 business services Public services 4.1 10.0 7.7 15.1 7.1 12.3 8.3 13.3 9.7 13.7 Others 1.9 4.6 0.7 1.4 0.0 0.0 0.1 0.1 0.0 0.0 Total 41.3 100.0 51.2 100.0 57.8 100.0 62.5 100.0 70.8 100.0 /a Refers to population 10 years of age and above who worked during the week previous to the census. Source: Central Bureau of Statistics, Statistical Yearbook of Indonesia, 1975,1982,1985 and 1990 Census. 140 Statistical Annex Table 1.4 INDONESIA COUNTRY ECONOMIC REPORT Population Distribution by Province and Urban & Rural. 1980-1990 1980 1990 Growth Rates (% p.a.) Region Urban Rural Urban Rural Urban Rural Java 22.926.377 68.290.593 38.335297 69.182.666 5.28 0.00 DKI Jakarta 6,071,748 408,906 8,222,515 0 3.08 0.00 West Java 5,770,868 21,678,972 12,208,176 23,170,307 7.78 0.67 Central Java 4,756,007 20,611,337 7,694,539 20,822,247 4.93 0.10 DI Yogyakarta 607,267 2,142,861 1,294,056 1,618,555 7.86 (2.77) East Java 5,720,487 23,448,517 8,916,011 23,571,557 4.54 0.05 Sumatera 5.481.488 22.S14,439 9.293.747 27.128.739 5.42 1.88 Lampung 576,872 4,047,366 747,327 5,256,782 2.62 2.65 Bengkulu 72,492 695,496 240,192 938,759 12.73 3.04 South Sumatra 1,267,009 3,360,710 1,839,492 4,438,453 3.80 2.82 Riau 588,212 1,575,684 1,047,454 2,233,592 5.94 3.55 Jambi 182,846 1,261,630 432,727 1,581,327 9.00 2.28 West Sumatra 433,120 2,973,012 807,983 3,190,694 6.43 0.71 North Sumatra 2,127,436 6,223,514 3,638,832 6,613,479 5.51 0.61 Acch 233,501 2,377,027 539,740 2,875,653 8.74 1.92 Kalimantan 1.441.300 5275,596 2.506.657 6.596249 5.69 2.26 West Kalimantan 416,923 2,067,968 642,989 2,592,377 4.43 2.29 Central Kalimantan 98,257 855,919 245,249 1,150,612 9.58 3.00 South Kalimantan 440,901 1,622,326 702,950 1,893,697 4.78 1.56 East Kalimantan 485,219 729,383 915,469 959,563 6.55 2.78 Sulawesi 1.654.190 8.746.358 2.761.021 9.750.142 5.26 1.09 Central Sulawesi 115,472 1,169,056 281,134 1,422,196 9.31 1.98 North Sulawesi 354,607 1,760,215 564,795 1,913,151 4.76 0.84 South Sulawesi 1,096,075 4,963,489 1,685,443 5,295,146 4.40 0.65 Southeast Sulawesi 88,036 853,598 229,649 1,119,649 10.06 2.75 Other Islands 1.342.474 9.659.008 2.494.449 11.150.256 6.39 1.45 Bali 363,336 2,106,388 734,237 2,043,119 7.29 (0.30) West Nusa Tengpara 383,421 2,340,257 582,180 2,789,519 4.26 1.77 East Nusa Ten8gara 205,457 2,531,531 372,242 2,895,677 6.12 1.35 Maluku 152,944 1,255,507 352,438 1,498,649 8.71 1.79 Irian Jaya 237,316 869,975 395,131 1,233,956 5.23 3.56 East Timor 0 555,350 58,221 689,336 0.00 2.18 T o t a I Indoneria 32.845.829 114.48S.994 55.391.171 123.908.052 Source: Central Bureau of Statistics INDONESA i- COUNTRY ECONOSC REPORT Grmn Dom-dic Product by Inrdubi Ordin atCurnt Mwmt Prkas. 1063-1094 /a (RIp. bibr 1983 barnssSbs 1963 1984 1985 1986 1987 1988 1989 1990 1901 1992 1903 1993 1994 1. AsLubra. ueskc. 17.3643 20.419.7 22.2512 24.6703t 29.131tO 342779 39,1 ES 42.146.7 44,720.6 50,7S3.1 55,745. || 5s.9e3A 658521.1 Foeanlry and FIdwiwI s.Famfnfoodcrops 11,1259 12,891 13,8t02 15S04.9 17,540.2 21.123.8 24,491.9 25,907.5 28,149.2 29,443.0 31,403.6 fl 32,093.4 34,739.9 b. Non-food crops /b 2,6702 3,331.7 3,893.1 4,224.7 5,118.8 5,633.5 6,196.7 6,866.8 7,604.1 8,717.1 9,422.0 II 9,014.8 10,135.4 c. Uvestock products 1,754.3 2,084.1 2,427.0 2,839.6 3,014.a 3.544.6 3,814.0 4,368.0 5,1262 6,040.7 7,0259 6,202.7 7210.5 d.Forestry 994.2 939.0 938.0 1,000.6 124t.8 1,448.3 1,834.7 1,854.6 2,016.0 2,179.6 2,541.4 I 6,267.6 7,461.6 e.Flsiry 1220.1 1,373.1 1,594.0 1D021.1 2,195.6 2,527.5 3,026.6 3,352.0 3,823.3 4,352.7 5,352.7 II 5,384.9 6,283.7 2. Mnia t & amiwbin 1t1.10714 16t937S 13J571 11110JA 17.2tDD 17.161.8 21.f5 26.119.0 31,402.6 29,907.2 30,749.6 31.497.3 31S 11.0 a.OUi&naturalgas 15,103.0 15,916.7 12,583.8 10,501.8 15.979.4 15,524.7 19,283.0 21,7692 26,126.1 23.383.9 23,168.6 fl 23,120A. 21,223.0 b. Oth.mining &quarrying 1,004.4 1,020.9 987.0 1,001.0 1,287.4 1,637.1 2,539.5 4,329.8 5,276.5 6,523.3 7,581.0 8,376.5 10,156.0 3. engdadabrlna 9.eo 13.112S 15,50.4 17.184.7 21.150.4 26a252A4 30323.3 38.9102 4765.5 58.541.6 67.441.4 73.558A 902063 a.Reflneryoil 358.9 1,012.7 1,863.7 1,915.4 1,819.7 2,025.9 2,148.1 3.575.0 3,808.5 4,321.8 5,210.7 fl 5,540.5 5,742.7 b. LNG 1,8712 2,706.7 2,423.7 1,966.5 2,097.3 2,948.2 3,298.9 3,714.8 4,714.4 4,383.6 4,253.3 4,253.3 4,483.9 c. Non-oil& gasmfg. 7,666.3 9,393.5 11,218.0 13,300.8 17,233.4 21,278.3 24,876.3 31,820.6 39,144.6 47,836.4 57,977.4 l 63,712.5 79,980.2 4. E.racbl. gass& a 3133S 354.2 395.9 147.1 746.9 80.0 1.006.3 1258.1 13750.2 2.147.7 23714.5 3290.2 3,12.6 11 5. Conamfon 45972 43J56. 5.301.6 5S313.7 p67.4 7.10b2 4.2 10.748.5 12,902.1 15.3062 18.1399 22.512A 27.9422 11 6. Traed HaWt&RbAnnt 11416.7 1S.4345 15.416A 17.121J 21.0463 24,3792 2S.855!5 32.9D97 38.953A 42.731.5 49.709.4 55297.S 62.561.5 a.Retail&wholesdetrade 9,810.5 11,371.4 12,952.2 14,235.3 17,5612 20,388.5 24,441.0 27,711.7 30,769,. 35,845.3 41,496.1 fl 44,804.8 49,751.5 b.Hotels&Rest. 1,6082 2,083.1 2,454.6 2,686.5 3,467.1 3,990.7 4,414.5 5268.0 6,184.0 7,0862 8,293.3 fl 10,692.8 12,810.0 11 7. Tranept i Communklmo 4n.1 5.050.8 6.100.3 0.40 7.442J 5.13g.7 9,305.5 10.999.8 13,906.0 17.0093 20,72a.2 ( 23.248A 21.927.0 a. Transport 3,693.7 4,811.3 5,538.5 5,769.7 6,838.8 7227.2 8,280.1 9,693.5 12,327.4 15,133.2 18,183.1 fl 20,101.2 23,018.7 b.Communicatlions 404A 439.5 561S 6372 803.8 912.5 1,025.4 1,306.1 1,580.8 1,986.1 2,545.1 3,147.7 3,908.3 6. Bmts & Fhrnas 2J3531. 3. 3,496 41131. 4.796.1 5322.4 6S6AM.? 8287.1 10157S 12.49.7 15,256.6 fl 14.005.3 16.6712 9. O Id d D _of 23556 2572J 2775.0 2976.0 3349.1 8736.0 4151.1 48gO9 5924.7 65953 7610J | 905.1 11239.0 ReAl EvIl kf I 10.0t Smverlcan 8,712.8 10.167A I1S2S.7 12,6213 13,8143 14.7973 17,003.7 19.2855 22,084. 26.3233 833842.4 II 37.70es 40,401.7 a.Public 5,711.5 8,4899 7,925.1 8,307.3 8,911.6 9,4462 11,1742 12,801.4 14,621.8 17,309.4 22.458.0 fl 22,458.1 22,817.7 b.OtherPrivate&Services/d 3,000.8 3,717D 3,998.6 4,314.6 4,902.5 5,351.1 5,829.5 6,434.1 7,443.3 9,013.9 11,384.4 15,250.8 17,674.0 Onas Daostl Pra&uc 77A& 0. 1.1 95,9 A 1022.2 124.61639 142.104A 1a7.14.7 195.59727450.11 2596435 302.01739 329.775A3 77.3543 /in 1905.theGomecnentreaednnatilaccountssrias usings 1993barn,basadonsnup-dasofthe 1990oInput-OutputTableandrdined etimatesof omesub-sectors. lb. rhvdn theformew emalolder end eaS food crops undr the National Accounts with 1983 bars. kc. Using 1983 bas, thi khe rdars only to Owarhp d DwelIngs. Udng the new bas, it hIudes Reel EsAtes. Id. twkldas Butane Sevices. Sowos: Cental Bue3au o Statiutfcs. INDONESIA COUNTRY ECONONC REPORT Gros Donaec Product by Indutrl OrkIn at Constant Mhlmt PrIces. 19S3-1994 h (Rp. blSbn) 1983 base 1993 base 1983 1984 19865 1988 1987 98M 1989 1990 1991 1992 1993 1993 1994 1. Alrksre.L Livestock. 17.764J7 111512.8 19OOA 19.799.1 20223J 21213.7 21.918.0 22fl(.9 22,714J8 24.225.5 24.589.3 M.9S3.4 59.153S ForusV and Fishr i a.Farmfoodcrops 11,125.9 11,680.2 11,965.6 12,286.6 12,415.4 12,974.0 13,488.7 13,558.2 13,484.2 14,526.7 14,355.9 32,093.4 31,226.9 b. Non-food cropsa - 2.870;2 2,794.8 3,088.5 3,142.3 3,257.8 3,458.1 3.549.2 3.723.6 3.924.0 4,111.2 4.350.7 9,014.8 9,480,. c.LUvestockproducts 1,754.3 1,890.1 2,038.5 2,063.7 2,110.8 2,211.7 2,243.7 2,327.7 2,468.3 2,e84.5 2,813.5 II 6,202.7 6,515.2 d. Forestry 994.2 894.4 860.7 888.7 967.9 1,013.0 973.8 1,002.7 1,002.9 980.4 998.6 6e,27.8 8,309.6 a. Fishery 1,220.1 1,253.1 1,340.7 1,417.8 1,471.8 1,556.9 1,862.6 1,744.7 1,835.4 1,942.7 2.052.6 S,384.9 S5621.5 2. Mkba & Ouwryling 16.107A 17.120.1 15.480.4 16308,A 16,365.5 158.92A9 11.63.1 17.531.7 19,317.0 18,957.7 19.370.3 fl 31.497.3 33,172.4 a.Oil&nattralgas 15,103.0 16,188.9 14,512.8 15,237.0 15,219.3 14,691.6 15,390.7 16,029.5 17,512.6 16,719.2 16,866.5 I 23,120.8 23,651.6 b.Oth. mining& quarrying 1,004.4 933.2 967.8 1,071.6 1,146.2 1,201.3 1,273.1 1,502.2 1,804.4 2,238.5 2,703.8 fl 8,376.5 9,520.8 3. MInubmftcb a 9£8.1A 12.0788 13.430A 14378.1 11235,3 18.18a23 19.855.7 22DA.9 24,585O 2n.963.6 29.484.4 73s58.3 61.690.3 a. Reflneryoil 358.9 625.6 788.6 927.2 937.7 981.2 990.0 1,094.2 1,136.7 1,202.3 1,18.8 i I 5,540.5 5,685.8 b.LNG 1,671.2 2,790.2 2,916.5 2,922.8 3,233.2 3,594.5 3,685.1 4.093.1 4,433.1 4,662.7 4,753.3 4,253.3 4,600.2 c. Non-oil & gas mfg. 7,866.3 8,863.0 9,745.5 10,828.1 12,084.4 13,806. s 15,180.8 17,140.6 19,015.2 21,098.6 23,544.3 IJ 83,762.5 71.404.3 4. Eblnicfrt. gas wabr 313.9 324.0 60.0 4290 494.6 548.9 61S.6 725.7 8423 928.2 1.022,3 3202 ,S.707.4 11 5. Conlucton 4S97M2 4,3938 450t 4.609.0 4S1029 5259.1 5.878.0 6.6722 7,423.7 8a22SA n ZJ I | 22S 12,9 25.824J6 11 6. Tr-dS HotMl& Restaurant 11.418.7 l11D,11h 1233 1306S 14,362 ISASA '17,33S.1 1S.588.6 19.5762 21,001.11 2291 55297J 80.581.0 a. Retall & wholesle trade 9,810.5 10,028.0 10,412.0 11,238.0 12,004.9 13,035.4 14,448.8 15,425.3 16,213.5 17,405.8 16,968.8 I 44,604.8 48,559.4 b. Hotels& Rest. 1,608.2 1,783.0 1,986.6 2,180.5 2,351.3 2,621.4 2,891.3 3.143.3 3,362.7 3,603.3 3,861.3 10,692.8 11,821.8 7. Transport I Communcations 4,098.1 4,443.1 4.487,0 4.868,5 4S8A 52115 5S8115 a.367s 6,869.4 7S54 8e.3022 I23f248.9 25.0142 a.Transport 3,693.7 4,008.1 4,031.8 4,178.2 4,393.7 4,626.0 5,151.3 5,596.4 6,002.7 6,601.3 7,192.1 20,101.2 21,228.6 b. Communications 404.4 435.0 455.2 490.3 544.8 585.S 660.2 771.5 866.7 953.8 1,110.1 II 3,147.7 3,785.6 11 6. Banks & Financ 2.SStA 2.119 3.0203 3,483.1 3.659, 3.7522 4290.7 4.893S 5,535.1 6255-7 7.089A 14.005.3 15.732.7 11 9. OwnershipotDullinas 2,355 2,4115 2.400S 2545.1 2.6 .7 23622 2Jl77.7 2.91 3.119.7 3249S 3.411.1 9,695.1 10.0886 Real Estas /c 10.Othr8Sernts 87123 9.1135 9.635s3 10.1803.7 103882 11,5019 12.187.7 123784.1 13241.5 13.8172 14,405.3 II 37,708.9 392102 a. Public 5,711.5 5,996.7 6.455.1 6,862.1 7,368.1 7,932.1 8,396.9 8,783.3 9,052.1 9,320.0 9,508.8 22,458.1 22,903.7 b.OtherPulvate&Services/d 3,000.8 3,118.8 3,180.2 3,298.8 3,422.1 3,569.8 3,790.8 3,980.8 4,189.4 4,497.2 4,896.5 15,250.8 18,306.5 GrovesDonellcProducts nS22J8 83,037.4 858.;0 90.080S 94S17. 998115 101.438.8 115217.3 1232252 131.184.8 139,707.1 1 329.775.9 353.973.4 /a. In 1995, the Government released natbnal accounts series using a 1993 base, based on an up - dalb of the 1 990 Input - Output Table and refined estimates of some sub - sectors. /b. Includes the former smaliholder and estate ood crops under the National Acoounts with 1983 base. /c. Using 1983 base, this line raefrs only to Ownership of Dwrillngs. Using the new base, it includes Real Estates. /d. Includes Businress Services. Source: Contrl Bureau of StatisUrs. COUNMWEGCNOMCOEPKT EximuMmilm an GM atuffed Unap 1hU3-IUM oa - 199 booii iGam 19S3 1984 1965 1966 1967 198S 1989 1990 1991 1992 1993 i! 19 1994 11 1. Privvtemqmdm 47,063.0 54,0665 57,20L4 63,3553 71,96.9 Sl,0453 88,752.3 106,3123 125,035.8 135,S80.3 158,340 I- 1I3,530.5 213,2565 2. G _emuicM _=c 8,77.3 9,1 10,893.1 11.327 11,763.5 12,755.8 15,697.6 17,576 20,784.6 24,7313 29,756.7 !! 29,756.7 31.014.0 3. Groafisd inwegu 19,467.9 20,36.1 22,366.9 24,781.9 30,9602 36876 45,659.8 55,6334 6,893.9 70,820.2 78,243.2 8 S6,667.3 104,22D.7 4. a ingcckk 2,793.5 3,406.4 4,8367 4,243.0 8,165.8 8o6.9 13,171.0 15.0715 16,847.8 22,4049 28,2863 I 22,90D2 24,105.7 5.SX=ptU ofgoods ud nOMCkir Mae 19,847.0 22,9993 2153n9 20OD9.9 29,8743 34,665.6 42,505.0 51,953.1 62,26.8 76.384.4 5,4543 | 85,296.2 94,5374 ,auimw fhym 19,625.9 19,844.7 19,835.2 21,36.2 27,955.8 31714 3846D01D 50,945.7 61375.7 70,66 7S,64.7 7830 89,780D0 (k D P 77,.113 I 9 1= f6 124J16.9 14.AL 167.1847 19M597.2 27AM2 2S95 3DZP07.8 I329775.9 3 la. in 1995, the Govare,nf I_uhd 1ad n ut s senis u_ a 1993 bu4 banedan a aup-dte d the 1990 Inpt-Output Table areined edimaes f j e wb-setai /h Indudese fm own olde and euds foo aqu Lr tba NahdIA1 wih 1983 bas k. afils Buss&hyias f krm mrl t INDONESIA COUNTRY ECONOMIC REPORT Exp*ndlwe on GOP at Constant Uwk.t Prices, 1908 - 19041/ (Rp. billion) 1983 base | 1993 base 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 I l 1993 1994 11 Privateconsumption 47,063.0 48,942.2 49,448.0 50,530.0 52,200.4 54,225.0 56,475.7 62,053.2 66,584.0 68,484.5 72,476.2 j 183,530.5 194,185.2 11 Governmentconsumption 8,077.3 8,353.0 8,991.2 9,241.3 9,225.7 9,924.3 10,965.3 11,317.3 12,112.7 12,819.0 12,829.7 I 29,756.7 30,608.6 Gross fied invedment 19,467.9 18,296.6 19,615.8 21,421.7 22,596.8 25,200.9 28,568.1 32,731.5 34,867.2 36.589.3 38,671.2 | 86,667.3 97,582.8 11 Changes in stock /c 2,793.5 4,4519 6,641.3 6,332.8 5,049.1 1,119.9 1,417.1 3,302.8 1,990.4 2314.2 3,403.7 I 22,908.2 28,900.0 Ezpot of goods and II nonfactor servrcs 19,847.0 21,144.9 19,494.7 22,460.3 25,744.8 26,015.5 28,733.2 28,862.8 34,600.0 39,674.8 42,296.8 85,296.2 91,517.3 LAss: Imports of goods II and nonfactor servree 19,625.9 18,151.2 19,109.1 19,905.6 20,299.0 16,504.2 18,7229 23,0503 26,929.1 28,697.0 29,970.5 I 78,383.0 88,820.7 11 Groes Domestic Product 77,622.3 S3,037.4 85,0S1.9 90,060.5 94.517.8 99.931.4 107,436.5 115,2173 123,225.2 131.184.8 139,707.1 || 329,77S.9 353,973.2 11 _ _ _ _ _ _ _ _ _ _ _ _ _ _ /a. In 1995, the Government released nstional accounts series using a m3 base, based on sn up-date of the 1990 Input-Output Tabe and refined estimates of some sub-sectors. /b. Indudes the former snsflholder and estate food crops under the National Accounts with 1983 base. /c. Indudes Busime Servfrs. Source: Centnl Bureau of Statistics. (. . INDONESIA COUNTRY ECONOMIC REPORT Dlstrlbuilon of ODP at Current Market Prices. 1083-1904 la ) II 19U3 base| 1993 base 1983 1984 1 98S a I9 1987 1988 l989 19C0 1991 1992 1993 1 1 199S 1994 Ecomic set_s II Agrcilatre. frorestry, II ishery and ivestock 22.9 22.7 23.2 24.2 23.3 24.1 23.4 21.5 19.7 19.5 18.5 II 17.9 17.4 Mhinf&quwrrying 20.8 18.8 14.0 11.2 13.8 12.1 13.1 13.4 13.8 11.5 10.2 1I 9.6 8.3 Manuihturig 12.7 14.6 16.0 16.7 16.9 18.5 18.1 19.9 21.0 21.8 22.3 1 22.3 23.9 Elecricily. gas and watr 0.4 0.4 0.4 0.6 0.6 0.6 0.6 0.6 0.8 0.8 0.9 II 1.0 1.0 Construction 5.9 5.3 5.5 5.2 4.9 5.0 5.3 5.5 5.7 5.9 6.0 6 0.8 7.4 Trport & comnwnicationa 5.3 5.6 6.3 6.2 6.0 5.7 5.6 5.6 6.1 6.6 6.9 II 7.0 7.1 Otihr srvices 32.0 32.5 34.7 35.8 34.5 33.9 33.9 33.4 33.0 33.9 35.3 1 1 35.4 34.8 1 1 Gross Domestic Product jflflj 100.0 100 .0 jflQ 1 100.0 100.0 100.0 J.22_ Jlo _M1__lg j_ 1__ 100.0 11 11 Exp-nditure cateaories Private consumption 60.6 80.2 59.0 61.7 57.7 57.0 53.1 54.4 55.0 52.3 52.4 1 1 55.7 56.5 Government consumption 10.4 10.1 11.2 11.0 9.4 9.0 9.4 9.0 9.1 9.5 9.9 I1 9.0 8.2 Gross dometic invetment 28.7 26.2 28.0 28.3 31.4 31.5 35.2 36.1 35.5 35.9 35.3 1 1 33.2 34.0 Not eports 0.3 3.5 1.8 -1.0 1.5 2.5 2.3 0.5 0.4 2.3 2.4 1 1 2.1 1.3 1 1 Gros5s gSDomes Produc Mfi J 2100.0 10 10.0 0 fn 1000 100 jj 100.0 I 100.0 100.0 /a. In 1995, thc Government reldaed national accounts series using a 1993 base, based on an up - date of the 1990 lnput- Output Tabe and refined estimates of some sub - sectors. Source: Central Bureau of Statistics. MONESZ COLuR ECONOL REPOR Disbudion of GOP at Condmet Mmkt Pric". 1963 - 1994 h () 1983base H 1993bmn 1983 1964 1985 1986 1987 1968 1989 1990 1991 1992 1993 Ii 1993 1994 46iCIih.r5 ,fexosty, I I fkhhryand iEedock 22.9 22.3 22.7 22.0 21.4 21.2 20.4 19.4 18.4 18.5 17.6 1I 17.9 16.7 Mhkf&qquarrng 20.8 20.6 18.2 18.1 17.3 15.9 15.5 15.2 15.7 14.5 13.9 II 9.6 9.4 hMwaAwkLing 12.7 14.5 15.8 16.3 17.2 18.2 18.5 19.4 20.0 20.6 21.1 || 22.3 23.1 Ebkctiity, gm aidwater 0.4 0.4 0.4 0.5 0.5 0.5 0.6 0.6 0.7 0.7 0.7 || 1.0 1.0 CongIrucifln 5.9 5.3 5.3 5.1 5.1 5.3 5.5 5.8 6.0 6.3 6.6 | 6.8 7.3 Trwqport & commonm atiors 5.3 5.4 5.3 5.2 5.2 5.2 5.4 5.5 5.6 5.8 5.9 II 7.0 7.1 OCt rsvkcm 32.0 31.5 32.3 32.8 33.3 33.7 34.2 34.0 33.7 33.8 34.2 ii 35.4 35.4 Gross mesiSc Product 100.0 LjCk_ ,100.20 10. 100.0 M0j 0 1.000 100.0 10. 1W.0 1W.0 II M.AR 100.0 Ex2wwumie. categoris II PrheW consuptbion 60.6 58.9 58.1 56.1 55.2 54.2 52.6 53.9 54.0 52.2 51.9 I 55.7 54.9 GoWrrmnnI.oMTonuption 10.4 10.1 10.6 10.3 9.8 9.9 10.2 9.8 9.8 9.8 9.2 II 9.0 8.6 Grossdomesticinwmenet 28.7 27.4 30.9 30.8 29.2 26.3 27.9 31.3 29.9 29.7 30.1 f 33.2 35.7 Net ePorts 0.3 3.6 0.5 2.8 5.8 9.5 9.3 5.0 6.2 8.4 8.8 II 2.1 0.8 Grom Domestic Product 1000.0 00.0 100.0 1.0g 100.0 1 00.0 . 0 100.0 100.0 100.0 100.0 100.0 Ia In 1995. fteGovernmetreeased ntiooxd accountswserbs using a 1993base, based onan uip-date of the 1990 Input-OulputTable and refined estimatesof some sub-sedors. Souirc;e Centr Bureau of Statistics. .. 2 EDONESIA COUWTRY ECONOMIC REPORT Bahlne of Pa _mm,. 1IS4 - 193/94 (U8$ mom"b) 1983/84 1984/85 1985/86 198"7 1987/88 1988/89 1989/90 1990/91 1991V92 1992/93 1993/94 /c 1. Net oil e=orts 6D16 5.845 4.004 1.426 2,334 1.535 2,311 2.882 2.158 1.327 319 2. Net LNG exportx/a 1.355 1,971 2.119 1.158 1.426 1.525 1.60 3,128 2.404 2.188 2,215 3. Non-oilexorts (net) -11522 -9784 -7955 -6635 -5466 -4919 -5510 -9751 -8914 -6076 -5474 Exports, fob 5.367 5,907 6.175 6,731 9,502 12,184 14,493 15,380 19,008 24,823 27,170 Imports, cif -14346 -12921 -11186 -10385 -11763 -13586 -16478 -21609 -24066 -26390 -26157 Services (nonfmight) -2543 -2770 -2944 -2981 -3205 -3517 -3525 -3522 -3856 -4509 -6487 4. Curre A%2co&nt 1+2+31 -4151 - ; ,405 - 2 -1599 - -4352 02561 6 5. Official carpital disbursements 5.793 3.519 3,432 5.472 4,575 6.588 5.516 5.006 5.600 5,755 6.195 IGGI 4,255 3,189 2,751 3,978 4.368 5,603 4.698 4,929 5,292 5.567 5,795 Specl ssistanee 2,169 1,807 1,542 1,069 886 0 Proglmm aid 84 52 38 48 30 23 6 0 0 0 0 Project aid 4,171 3,137 2,713 3,930 4,338 3,411 2,885 3,387 4,223 4,681 5,795 ODA 1,902 1,442 1,332 1.932 2,807 2,406 2,300 2,766 3,165 3,078 3,921 Non-ODA 2.269 1,695 1.381 1,99M 1,531 1,005 585 621 1,058 1,603 1,874 Non-IGGI 1.538 330 681 1,494 207 985 818 77 308 I 400 Csh loan 0 0 0 0 0 0 0 0 0 0 0 6. Amortisntion -1010 -1292 -1644 -2129 -3049 -3763 -3686 -4082 -4182 -4840 -5132 7. Other capital (net) 1,191 499 572 1.232 1.709 -211 575 5,856 4.133 4.284 4,64 Direet investment 193 245 299 252 544 585 722 1424 1,531 1,705 1,971 Oil sector ns. na na ni nA na nz nas n.a n.a ns Others 998 254 273 980 1165 -796 -147 4,432 2,602 2.579 2,677 S. TotI l1b18 4 1823 75 tru 8 ZS L529 E 1t3D 1.1 LO 9. Errors and omissons 247 -91 -498 -1262 57 -1432 -558 263 -218 -1199 -2044 10. Monelarymovementslb -2070 -667 -30 738 -1586 677 -248 -3302 -981 -1439 -727 H /a Gross exports lss imports of goods and services of the oil snd LNG sector respectively. /b A negtive amount refers to an accumultion of assets. Source: BankIndonesia. - 148 Statistical Annex Table 3.2 INDONESIA COUNTRY ECONOMIC REPORT Non - oil Exports, 1 II4/S5 - 1 993114 Valuh (US S mifion) 1984/l 5 1985/86 1986/87 19S7/18 1986/89 1989/90 1990/91 1991/92 1992/93 1993/94 Agricultural 6 3 635 4 493 5.764 6,927 7.027 7.262 7.815 8.684 11.313 Timber 1,167 1,217 1,586 2,461 2,884 3,465 3.452 3,732 4,343 6,374 a Log 135 2 0 0 0 6 5 10 13 7 b. Plywood 697 548 1,160 1,851 2,095 2,438 2,764 2,86 3,270 4.745 c. Sawn timber 320 349 321 483 592 600 90 90 93 163 d. Other 16 18 105 127 197 421 593 764 967 1,459 Rubbe 856 714 749 1.037 1,229 956 887 932 1,054 1,003 Palm oil 95 170 114 214 313 279 284 349 495 518 Coffse 568 659 753 499 577 452 371 362 264 392 Tea 211 134 106 119 137 1I1 154 145 143 156 Tobacco 44 55 72 47 43 44 72 65 79 72 Pepper 66 82 152 158 144 94 78 69 55 59 Copra cake 18 35 34 41 43 51 56 51 63 59 Tapioca 31 42 52 93 154 97 121 99 119 74 Rattan 96 80 99 162 37 235 230 295 298 355 Hides 40 37 45 59 68 70 58 43 43 44 Other foodstuff 98 122 122 153 202 250 324 304 341 418 Animal products 219 274 390 488 839 781 1.076 1,150 1,266 1,499 of which shrimps 183 228 297 352 541 520 711 810 745 W8 Othefs 155 14 221 234 258 72 100 120 202 216 Mineral 775 799 719 1L112 1.556 1582 1.4 1692 2.195 2.109 Tin 252 248 156 143 165 213 147 146 145 132 Copper 132 133 144 186 238 321 447 528 719 650 Nickel 121 139 112 152 438 404 326 289 283 260 Aluminum 205 223 201 245 301 267 202 159 199 192 Granite 9 8 8 6 6 9 14 - - - Others 53 49 98 379 407 368 304 570 849 875 Manufactured 1.469 1.739 1.519 2.626 3.701 5.384 6.678 9.501 13.744 14.119 Textiles 418 577 713 1,128 1,S71 2,219 2,731 4,011 5.876 5,763 1 Handicraft 116 30 30 67 184 250 357 489 605 645 Electrical app. 134 109 46 55 105 176 259 544 1,100 1,2 Cement 14 23 47 54 85 128 69 68 104 60 Fertilizer 31 109 97 117 136 167 214 291 147 166 Othors 757 892 585 1,205 1,619 2,944 3,049 4,098 5,912 6,262 Unclassified 0 0 0 0 0 0 0 0 0 0 Total Non-oil Exoorts _ M 24 .731 19.18 LIM 2 7.54 M Source: Bank Indonesia (based on PEB Export Declaration Form). INDONESIA O COUNTRY ECONOMIC REPORT Value of Exports by Princinal Country of Destination, 1983-1994 (US$ million) Counties 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Asean 3476 2,487 1,982 1,515 1,703 2,079 2,429 2,515 3,197 4,360 4,746 5.704 Malaysia 58 98 77 82 94 184 220 253 342 488 586 738 Thailand 49 98 81 83 87 151 234 189 267 353 468 401 Philippines 242 166 199 108 71 87 149 161 168 181 285 365 Singapore 3,128 2,126 1,626 1,239 1,449 1,653 1,818 1,902 2,410 3,314 3,372 4,150 Brunei 0 0 0 2 3 4 8 11 10 25 35 50 Honakona 182 261 348 345 420 554 549 618 703 881 901 1.321 Japan 9,678 10,353 8594 6,644 7,393 8,018 9,321 10.923 10 767 10,761 jL.172 10,929 OtJw Asia 801 1,2- 1,475 1,170 1,869 2415 2,934 4.035 5,540 6,567 6,980 7,645 Africa - 79 140 160 179 15D 272 217 199 394 419 463 638 USA 4,267 4." 4.040 ,9 3,349 3.074 3,497 3,365 35-9 4.419 5,230 s,2 Canada 28 46 46 60 94 101 108 139 172 289 304 322 Oter America 1015 1f031 326 182 48 47 50 102 184 328 469 562 Australia 208 275 149 159 310 293 387 403 628 746 774 705 Oter Oceania 264 236 81 83 43 31 59 84 39 53 78 67 EEC 953 1,036 1.113 1,340 1.541 2,152 2,338 3c028 3,742 4.843 5,295 5.M United Kingdom 199 168 191 197 212 349 384 517 654 844 1,005 1,038 Netherlands 289 332 392 453 493 646 681 723 838 1,1(X 1,086 1,324 West Germany 252 246 255 334 361 456 493 750 907 978 1,178 1,263 Belgium & L.uxemburg 33 63 45 91 109 177 173 210 258 401 366 409 France 53 49 71 93 102 164 209 286 386 495_ 50 426 Denmark 4 6 3 6 13 20 36 54 74 97 98 110 Ireland 1 4 2 2 7 17 22 35 43 46 40 37 Itay 120 167 152 152 175 221 234 276 382 583 615 661 Greece 1 1 3 6 3 2 4 9 18 29 46 63 Portugal 0 0 0 7 10 22 24 17 14 16 29 39 Spain 0 0 0 0 55 78 80 152 169 255 333 454 Soviet Union 50 59 78 52 82 38 100 81 40 70 125 91 Oters in Euiope 145 206 194 174 133 144 171 183 229 231 288 417 Z Total 21146 2Lsss 18587 14.805 17136 19219 22 159 25 675 29 142 33,967 36,823 40053 !41 Source: Central Bureau of Statstics. INDONESIA COUNTRY ECONOMIC REPORT Value of Imports by Principal Country of Oriain, 1983-1994 (USS million) Countries 1983 1984 /a 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 /b Asean 3915 1,948 962 1121 1,244 1 305 1765 2,430 2,4 2,592 2,604 2,928 Maaysia 60 86 52 50 139 276 369 326 407 525 517 579 Thailard 209 55 48 72 75 96 210 183 278 345 235 407 Philippines 182 15 23 28 82 36 63 649 81 52 57 65 Singapore 3,465 1,791 839 969 947 896 1,122 1,272 1,699 1,670 1,793 1,877 Brunei 0 0 0 1 0 1 2 0 0 1 1 0 Hongkorn 65 86 53 94 104 133 179 273 232 229 247 241 Japan 3,793 3,308 2.644 3,128 3,596 3,386 3,767 5.300 6,327 6,014 6.248 7,734 Other Asia 2,220 2,338 1,727 1681 1,924 2,266 3,203 4.633 5,156 5,496 5.972 6,870 Africa 135 171 160 103 153 201 202 170 195 213 140 332 USA 2,534 2560 1,721 1L483 1,415 1,736 2,218 2,520 3,397 3,822 3.255 3,594 Canada 186 319 198 214 303 274 311 407 354 459 410 497 Other America 129 139 191 174 211 224 455 519 597 488 625 755 Australia 402 372 461 413 463 578 925 1,186 1378 1L413 1,399 1,542 Other Oceania 72 78 69 71 80 96 98 115 118 136 161 186 EEC 2,234 2,062 1,706 1,796 2,353 2,510 2,575 4,061 47_04 5,401 5,652 5,827 United Kingdom 364 297 300 342 325 340 360 440 603 719 782 710 Netherlnds 257 266 215 189 316 258 248 550 505 507 626 564 West Germany 741 820 677 719 836 887 920 1,502 2,061 2,141 2,072 2,473 Belium & Luxembutg 124 102 101 89 142 159 167 232 254 324 340 292 France 591 432 284 281 392 465 406 643 544 816 853 786 Denmark 21 20 18 26 26 22 31 61 49 - 124 158 106 Ireland 8 8 9 4 6 6 8 74 13 23 21 22 Itly 125 113 101 144 237 248 348 410 536 558 523 670 Greece 3 4 0 0 2 3 3 6 5 8 12 26 Portugal 0 0 0 2 6 3 2 6 4 2 2 4 Spain 0 0 0 0 66 120 82 136 131 178 262 174 Soviet Union 25 12 3 5 16 45 51 53 48 47 97 220 Others in Ejpwe 641 490 365 435 510 494 611 764 899 969 1.517 1,264 Totad 1A,2 13.882 10.239 10,719 12,370 13.249 16,360 22.431 25.869 27,279 28.328 31,989 /a Since 1984, excludes the vlue of processing deals in the oil sector. Souce: Central Bureau of Statistics. Statistical Annex 151 Table 4.1 INDONESIA COUNTRMY ECONOS iREPORT Srmumv d Eenal bt iDst. tOu -9S 1981 1982 1983 1984 1985 1988 1987 1988 1989 1990 1991 1992 1993 EYwrncl dnbt date (USS millbn) Disbursed and outetndinoz debtI Dis e aN 15,908 18,318 21,4 22.28 20,777 32,34 40.98 41,241 41.C92 44.979 48,732 49,342 52,33 BIllter/muflibtrs 10,098 10,913 11,818 12,2D3 15,053 18.s5s 24,788 28,552 28,258 33,313 37,738 40,C92 44,278 Other k 5.813 7,40c 9,878 10,03 11,714 14,089 10,120 14,89 12,838 11,879 10,994 9,250 8,087 Tdai debt cUtstandina. Inrludha undisbud (TDO) 28,9s3 32,C08 35,a 38,352 U,784 50,089 80448 0.078 59.71 85e 154 89,151 88.ea8 71,813 Blltranumultlil 17,705 19,328 20,556 21,408 25,359 29,480 37,334 38,904 41,454 47,430 53,340 54,842 59,081 Other k 9,248 12e82 14,741 14,585 17,45 20,8039 23,114 21,0C3 18,281 17,724 15,811 13,54 12732 Cofmftments 4.951 7.070 s,e87 4.818 4838 4.103 5,9C eoe8 7,188 8,327 8U143 S 2a 8335 BiIaternmutlbterd 2,157 2,593 2,294 2,745 2.421 2,004 4,791 4,779 5,752 5,257 8,321 5,092 5,723 Other ft 2,795 4,477 3,398 2,071 2,217 2,099 1,2C2 1,308 1,413 1,070 1,822 1,175 2,812 Gros disburwsmnts 2.872 3.9_1 4 979 3 890 3 553 4 240 5 483 8 423 8 472 4 771 8.333 8,245 5.9W BllateraL/Owltikerl 1,3t2 1,5Im 1,737 1,937 1,825 1,9W 3,894 4,287 4,285 4,183 5.012 5,004 4,483 Othe k 1,310 2,35 3,24 1,953 1,928 2,340 1,789 2,138 2,208 eo7 1,321 1,241 1,4t9 Nd dlsbursernents t1a 2,847 3,e 2,20 1.223 1,18 2057 1 9Xi 2038 848 2,151 1534 723 Blidwallmuftlkter. 985 1.128 1,188 1,3t5 1,010 1,007 2,543 2,952 2,890 2,529 3,204 2,982 2,294 Othe f 833 1,721 2,503 922 212 811 (488) (98e (854) (1,884 (1,05, (1,449) (1.572) Notreourcetraraemr 828 1,715 2458 88 (420) (454) (218) L54) (4l5) {jJ8f (4971 (1,201) (2159) BliaterafLutitteral 854 732 733 802 314 81 1,402 1,43 1,495 932 1,413 988 48 Other ft (28) 983 1,723 (141) (733) (535) (1,877) (2.1q (1.sC (2,821) (1.91I (2,18w (2,205) Pubic debt sevice 2 045 2 238 2 523 32 3 972 4 894 s 879 8983 8 93e 8 O8 80 7 44e .091 Amotdlzeton 1.054 1,104 1,290 1,80m 2,330 2.822 3,408 4,438 4,436 4,125 4,182 4,711 S,210 Interet 991 1,132 1,233 1,829 1,643 2,072 2,273 2,525 2,501 2,535 2,848 2,73 2,881 PLibic debt servic 2045 2235 2523 3229 3,972 4es4 5.879 e9se .935 ee8o 883W 73448 8.091 Blliaral/multloteral 708 883 1,004 1,135 1,311 1,819 2,232 2,845 2,770 3.232 3,599 4,037 4,417 Other ft 1,330 1,373 1,519 2,093 2,88 2,87 3,447 4,319 4,183 3,425 3,231 3,40c 3,874 Dlsbuewu dt Irndass (%) UndlsbursedddbTDOfb 41 43 39 39 37 35 32 31 31 31 30 28 27 Blletrdmullbss 43 44 43 43 41 37 34 32 32 30 29 27 25 Othe /a 37 42 34 32 33 32 30 30 30 34 30 32 38 Grossdlsbumnwrftommlt. 54 so 88 81 77 103 91 108 90 75 78 100 71 BliatwaaInultlkesI 83 82 78 71 87 95 77 90 74 79 79 98 78 Othw kf 47 53 98 94 87 111 147 183 188 57 73 108 58 Gros dlsbursernanivundlsbursed debt ndoommltmet Id 21 24 38 28 24 27 22 28 32 9 20 22 20 SlIsterl/multlutersl 14 14 18 18 13 15 21 25 23 21 23 25 22 Otherw 21 24 38 28 24 27 22 28 32 9 20 22 20 Nddlt sbumntslr/ro dlsbs. 81 72 74 59 34 38 38 31 31 14 34 25 12 BlIaSerallmUtlbtal 72 71 88 71 82 53 89 89 88 81 84 80 51 Other f 48 73 77 47 11 28 (27) (45) (39) (310) (80) (117) (107) Nd reource transfers/oroes dIsb. 23 43 49 17 (12) ) D) LA) CD (40) Lai (19 ( Blautersimlbteli 4 48 42 41 19 4 40 38 35 22 28 19 1 Other ft (2) 42 53 (7) (38) (23) (95) (102) (89) (485) (145) (175) (150) /s Dae in this sectorrd r to pLblo medium and long term loarns. Loas with a maturity oiIo than one year, credits for LNG uparalon, IPG and persylarae prelcts, and grwnt are riotd Irnrldad. /b End dywr. ft SLpplr credits, loa trom tfinanoW Inrtuttrs, eport credits, bonds and nMlnal:zat1on only. /d Gros disburnsem n a pernbtgo d undisbursad debt (TDO-DOD) at beginning d yer plus commitmenht dulring the year. Soutwe: IBFt) Debtor Rporting Systwn based on date prodded by Sank Indonneia 152 Statistical Annex Table 4.2 Page 1 of 2 INDONESIA COUNTRY ECONOMIC REPORT External Public Debt Outstandina as of December 31. 1993 (US$ '000) Type of creditor/ Debt outsatnding T Major reported creditor country Disbursed Undisbursed Total new commitments Jan 1 -Dec 31 1993 Suopliers' Credits Finland 8,707 8,707 0 France 33 33 0 Hong Kong 156,460 156,460 0 Japan 1,733,600 674,895 2,408,495 241,140 Korea, Republic of 1,197 1,197 0 Pakistan 1,268 1,268 0 Switzerland 1,102 1,102 0 Total suppliers' credits 1,902,367 674,895 2.577,262 241,140 Financial Institutions France 48,873 48,873 0 Germany, Fed. Rep. of 0 0 0 Hong Kong 679,331 700,000 1,379,331 0 Italy 1,218 1,218 0 Japan 1,574,753 867,689 2,442,442 6,387 Multiple Lenders 0 0 0 Netherlands 0 0 0 Slngapore 26,822 - 26,822 0 United Kingdom 43,934 - 43,934 0 United States 0 160,000 160,000 0 Total financlal Institutions 2,374,933 1,727,689 4,102,620 6.387 Bonds Germany, Fed. Rep. of 0 0 0 Netherlands 0 0 0 Switzerland 0 0 0 United Kingdom 0 0 0 United States 98,500 98,500 0 Total bonds 98,500 0 98,500 0 Nationalizatlon Netherlands 87,176 87,176 0 Total nationalization 87,176 0 87,176 0 Multilateral Loans Asian Dev. Bank 5,522,580 3,558,079 9,080,659 2,064,623 EEC 4,135 4,135 0 IBRD 11,283,401 4,329,189 15,612,590 924,100 IDA 796,191 796,191 0 Intl. Fund Agr. Dev. (IFAD) 73,790 7,911 81,701 0 Islamic Dev. Bank 165 165 0 Nordle Invest. Bank 144,370 60,862 205,232 72,855 Total mulfilateral loans 17,824.632 7.956,041 25,780,673 3.061,57 Statistical Annex 153 Table 4.2 Page 2 of 2 INDONESIA COUNTRY ECONOMIC REPORT Exbtrmd Public Dbt Outstendc - of Decenber S1, 1993 (Us$ 00l) Type of oradltor/ Debt outstanding Major reporbd creditor oountry Disbured Undlsbursed Total new oommitments Jan t-Dec 31 199S INDONESIA COUNTRY ECONOMIC REPORT Exlternl Public Debt Oultandno - of December S 199S (Us$ 00o) Type of cradHor/ Debt outstanding Major reporbtd credtor oountry Disbured Undisbursed Total new commitments Jan 1-Dec31 1003 Bilateral Loans Auslralb 449,288 24,804 473,908 23,905 Austrla 12,423 - 12,423 0 Belgium 80,272 37,575 117,847 7,237 Brunel 100,000 100,000 0 Bulgaria 884 884 0 Canada 338,408 232,828 589,232 239,851 China 15.374 29,749 45,123 29,749 Czeholovalaa 22,80 22,808 0 Denmark 34,50e 21,251 55.757 0 Egypt, Arab Republic of 955 955 0 France 829,143 137,589 988,732 2,107 GermanDnm Rep. 18,758 18,758 0 Gormary, FedRapof 2,177,550 1,293,802 3,471,352 778,642 Hungary 5.889 5,880 0 Inda 3,884 - 3.864 0 Italy 138,122 54,71 192,88e 0 Japan 18,012,429 4,829,332 22,841,781 1,527,232 Korea, Republic f 11,923 32,858 44,581 11,025 Kuwalt 58,277 8,702 84,979 0 Netherlands 1,000,722 11,210 1,011,932 0 New Zealand 844 844 0 Norway 0 23,878 23,878 0 Other 20,000 20,000 0 Pakdaten 2,322 2,322 0 Poland 32,034 32,034 0 Romanba 4,591 4,591 0 SaudiArabia 72W83 28,100 101o383 0 Spain 75,848 84,800 160,44 40,432 Swltrrland 27,187 - 27.187 0 UnitedArabEmirabe 1,932 1l932 0 Unltsd lCngdom 54,379 14,181 68,580 0 United Ststss 2,478,088 185,989 2.884,054 3,280 USSR 334,247 334,247 0 Yugoslavia 38,308 38.398 0 Total bilateral loans 28,451.817 e848e8 33,300,498 2,861.231 Export Credit Austria 478,030 193,295 871,334 182,142 Belgium 163,333 21,788 175,119 0 Denmark 390W 87,894 96,774 0 Finland 19,835 732 20,387 0 Francs 1,088.038 615,85 1e883,802 351,115 Gormary, Fed.Rep.of 77,344 17,883 95,007 0 HongKong 125,08 53,585 179,191 71,162 Japan 240,850 31,810 272,8O6 8,40 Netherlands 178,201 85,053 261,254 85,327 Norway 0 0 0 Singapom 0 17,310 17,310 17,310 Spaln 35,482 35,4e2 0 Sweden 106,181 108,181 0 Switerland 143,651 197,415 341.086 0 UnitedKlngdom 637,783 741,408 1,379,191 1,1589183 United Stze_ 322,517 209,082 531,579 531,579 5823897 Tobsl eort credits 3.e23.898 2,242.689 5 80a.387 2114f4i Totbl externl public debt 2312t 194074 71813a a4774 Soure: IBRD Debtor Reportng System, based on date provided by Bank Indonesel. INDONESIA COJNTRY ECONOMIC REPORT Service Payments. Commitments. DisbwsemenXt and Outstnding Amounts of Extermnl Public Debt (USs 'aGO) Debt oulstanding at Transacto duing period Other Changes enid of period_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Dtsbxsod Including Commit- Disburse- Service Payments Cancel- Adjust- only Undisbursed ments merts Principal lnterest Total Mations ment/a Actua 1980 15,027,314 24,509,975 4,277,373 2,550,505 939,494 823,811 1,763,305 118,261 - 1981 15,908,458 26,953,145 4,951,129 2,672,429 1,054.106 990,708 2,044,814 163,286 -1,290,566 1982 18.317,545 32,007,959 7,069,817 3,951,336 1,104,100 1,132,291 2,236,391 5,472 - 1983 21,493,904 35,297,509 5,686,879 4,979,024 1,289,872 1,233,096 2,522,968 197,669 -909,788 1964 22,264,983 36,350,948 4,816,038 3,889,587 1,599.785 1,628,692 3,228,677 25,234 - 1985 26,761,715 42,768,087 4,637,815 3,552,669 2,344,003 1,642,728 3,986,731 514,815 4,638,142 1986 32,616,897 50,072,359 4,104,406 4,238,493 2,621,052 2,071.629 4,692,681 184,999 6,005,918 1987 40,838,571 60,428,369 5,992,347 5,420,542 3,407,650 2,273,105 5,680,755 635,419 8,406,732 1988 41,176,463 60,092,203 6,109,657 6,396,090 4,422,041 2,525,596 6,947,637 491,962 -1,431,819 1989 41,032,480 59,683,292 7,131,022 6,472,955 4,436,037 2,501,373 6,937,410 303,892 -2,800,002 1990 44,979,155 65,153,754 8,327,116 6,770,666 4,125,282 2,534,999 6,660,281 900,518 4,169,147 1991 48,732,284 69,150,957 8,143,214 6,333,065 4,181,855 2,648,255 6,s3,110 2,005,318 2,041,162 1992 49,341,886 68,305,498 6,267,700 6,244,584 4,711,099 2,734,865 7,445,964 1,381,146 -1,020,891 1993 52,363,115 71.813,092 8,334,n72 5,932,353 5,209,781 2,881,427 8,091,208 626,476 1,009,078 Projected 1994 53,717,205 65,471,620 - 5,977,833 4,622,608 2,855,840 7,478,448 1,717,729 -1,133 1995 54,070,957 60,970,864 - 4,854,507 4,500,756 2,876,171 7,376,927 - 1996 52,846,776 56,595,075 - 3,151,620 4,375,800 2,798,601 7,174,401 - 11 1997 50,412,609 52,308,941 - 1,851,973 4,286,141 2,660,640 6,946,781 - 7 1998 47,043,383 47,901,284 - 1,038,489 4,407,715 2,481,259 6,888,974 - 49 1999 43,081,496 43,514,327 - 425,100 4,386,987 2,257,651 6,644,638 - -88- 2000 39,100,486 39,307,474 - 225,973 4,206,983 1,998,371 6,205,354 - 130 2001 35,013,683 35,149,948 - 70,724 4,157,527 1,759,049 5,916,576 - 1 2002 31,298,787 31,428,625 - 4,428 3,721,324 1,532,056 5,253,380 - 1 2003 27,746,132 27,877,197 - 773 3,551,428 1,328,364 4,879,792 - - 20o4 24,497,692 24,628,747 - - 3,248,440 1,138,384 4,386,824 - -9 rn 2005 21,568,026 21,699,079 - - 2,929,666 978,417 3,903,083 - -1 /a This column shows the amounit of arilhmetic imbalances In the amourt outstanding, including undisbursed, from one year to the next. The most common causes of imbabnce are changes in exchange rates and tansfers of debts from one category to another in the table. Sou*ce: IBFR) Debtor Reporting System, based on datm provided by Bank Indonesih. DIDONIMA, COmWrrY ECONOMIC REPORT DEVE WOPMET ASSISIANCE PLOWS. 1967-1992 l. (US$ aMM) 19JS ~~~~ ~~~~1999 1990 1991 1992 a COI)NU ComM lb Disb. /c Com 1 /b Disb. /c Comn/ lb Disb. /c Comm. /b Disb. /c Comm. lb Disb. /c Gross Nead Gross Nei/d Gross Ne/d Gross Nea/d Gross Net/d CGI ambr, AUSTRALIA 84.0 71.7 71.7 106.2 83.1 83.1 62.8 77.4 77.4 105.7 72.9 72.9 99.4 77.0 77.0 AUSTRIA 19.2 10.5 6.9 20.7 15.7 4.4 26.8 34.3 21.2 124.1 49.3 36.1 149.5 121.6 104.8 BELGIUM 11.9 13.3 6.2 10.7 10.7 10.7 6.5 6.5 (1.6) 6.5 42A 37.6 6.5 8.2 2.5 CANADA 88.9 43.3 40.1 81.7 38.4 33.4 37.6 51.9 48.4 14.1 454 42.7 37.7 40.1 33.6 FRANCE 137.2 67.6 57.1 28&9 115.3 10&9 209.7 136.0 12Z4 41.8 141.6 126.5 77.4 185.3 16&8 GERMALNY 151.4 190.2 97.6 179.4 138. 52.4 26&2 211.4 99.0 621.8 253.8 135.8 293.8 261.4 116.4 ITALY 8.1 2S8 1.3 48.4 21.2 17.5 0.5 113 9.8 18.0 15.8 14.3 130.9 13.8 12.5 JAPAN 1,701.0 1,264.7 984.9 1,455.2 1,407.1 1,145.3 1,500.9 1,131.9 867.8 1,500.9 1,3825 1,065.5 1,50&7 1,696.5 1,356.7 NEIIERLANDS 2546 186.5 156.2 2222 191.0 161.5 20Z6 22&4 190.1 234.6 180.5 139.4 13.2 56.1 8.0 NEW ZEALAND 2.4 2.3 2.3 - 2.2 2.2 33 3.1 3.1 1.8 2A 2.4 2.9 2.6 2.6 SPAIN - - - - 0.1 - - 23.2 23.2 - 215 21.5 50.0 9.5 9.5 SWrIZERLAND 8.3 28A 28A 7.0 21.4 21.4 19.6 19.4 19.4 53.4 13.8 13.8 23.5 29.7 29.7 UNrrEID GDOM 35.6 21.7 17.2 45.2 18.2 14.5 317.0 264 22.4 103.0 42.9 38.9 103.0 36.6 32.7 UNITED STATES 79.8 86.0 22.0 64.4 97.0 31.0 54.2 101.0 31.0 69.4 83.0 18.0 59.8 84.0 (1.0) Other DAC cutria: DENMARK - 1.1 0.6 3.4 11.5 11.1 0.6 5.7 4.9 0.8 3.0 2.2 12.0 5.9 3.7 FINLAND 8.9 33 3.3 0.6 5.8 5.8 3.9 2.7 2.7 1.7 3.1 3.1 1.9 1.8 1.8 IRELAND - - - - - - - - - 0.0 - 0.0 0.0 0.0 0.0 NORWAY - 22 2.0 - 1.2 0.5 - 0.3 (0.2) 0.3 0.8 (0.2) 12.3 12.6 11.8 SWFDEN - - - - - - - 0.1 0.1 0.0 0.2 0.2 0.0 0.4 0.4 ARAB COUNTRIES 19.7 27.9 9.1 - 20.5 1.9 0.7 39.2 23.0 0.4 23.1 9.0 5.5 22.5 13.0 SUBTOTAL 2,611.0 2,0235 1,506.9 2,534.0 2,199.2 1,705.6 2,714.9 2,110.2 1,564.1 2,89&3 2,37&0 1,779.7 2,5880 2.665.6 1,9845 MV7LTA3RBAL ASD.B. 561.1 530.4 470.1 6949 700.7 631.1 1,049.6 7781 667.8 990.0 655.0 446.1 0.0 55.6 453.0 E£E.C. 2.9 8.3 8.3 1.2 13.9 13.9 26.1 13.9 12.4 27.7 12.0 12.0 45.0 13.0 13.0 IBRD 1,066.9 1,647.9 1.219.2 2,007.4 1,256.4 783.4 1,565.2 9S7.3 4364 1,533.0 1,39&0 790.0 1,256.3 1,003.4 32h6 IDA - 1.3 (4.8) - 1.1 (7.0) - - (11.2) - - 0.0 0.0 0.0 0.0 IFAD 0.3 12.2 10.8 _ 12.6 10.1 21.9 12.8 8.6 - 9.6 4.4 0.0 9.6 4.4 U.N. AGENCIES 47.2 40.6 40.6 53.6 45.2 45.2 51.6 43.3 43.3 58.4 49.2 49.2 0.0 58.4 58.4 UNDP - 20.6 20.6 - 19.1 19.1 - 17.0 17.0 - 172 17.2 0.0 19.0 19.0 UNTA - 3.7 3.7 - 5.2 5.2 - 4.3 4.3 - 6.7 6.7 0.0 sr'f 5.8 UNICEF - 11.9 11.9 - 11.3 11.3 - 10.0 10.0 - 11.3 11.3 0.0 14.8 14.8 UNRWA - - - - - - - - - - - 0.0 0.0 0.0 0.0 WFP - 2.7 2.7 - 7.6 7.6 - 8.0 S.0 - 7.6 7.6 0.0 14.7 14.7 UNHCR - 1.7 1.7 - 2.0 2.0 - 4.0 4.0 - 6.4 6.4 0.0 4.1 4.1 OlHER MULIILATERAL - 6.7 6.7 - 10.0 10i0 - 8.4 8.4 - 9.3 9.3 0.0 S.0 8.0 ARAB AGENCIES - 0.3 (1.4) - - (1.0) - - (2.0) - 1.6 1.3 5.0 2.2 13.0 SUBBTOTAL ,67&4 2,247. 1,749.5 2,7571 2,039 1,485.7 2,714.4 1843. 1,163.7 2.609d 2,134.7 1,313 1306.3 1,1502 876.4 TOTAL 4.259A 421.2 35,294 5,291.1 4,239.0 3.1915 5.4293 3,954.0 2727. 5,507.4 4k5127 3.09 3J94.3 3,815. X860-9 /a Clendaryar. A /b Commknents. /c risburemntsm. /d Nd of repayments of prindpal. Source: OECD: YGeopshical Disribuion of FLadsialFlows to DewvlopingeCountrie or Spain. AsD.B, IBRD sd IDA: Debtor ReportingSystem, World Bak. k- 0% INDONESIA COUNTRY ECONOMIC REPORT Cntral Government Budget Summry. 1983/84-1995/96 (Rp. billion) Adual Budpt 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1. Domestic revenues 14,433 15,906 19.253 16,141 20,8W 23.004 28,740 39,546 41,585 47,453 52,280 59,737 66,265 2. Routine expenditures /a 8,412 9,429 11,952 13559 17,482 20,739 24,331 29,998 30,228 34,031 38,799 42,351 47,241 3. Government saving (1-2) 6,021 6,477 7,301 2.581 3.322 2,265 4,409 9,549 11,357 13,421 13481 17,386 19.025 4. Developmentexpenditures 9,899 9,952 10,873 8,332 9,477 12,251 13,834 19,453 21,764 24,135 25,661 27,398 30,784 5. Balance (-41 (3.878) (3A5 U.5n2) 4&5-75l L6§56) (9.5 (926! (9Q905) (207) (10,713) (12,181 (10,01 2) (11.75) Financed by: 5. Program aid 15 69 69 1,958 728 2,041 1,007 1,397 1,563 512 441 0 0 7. Project aid 3,868 3,409 3503 3,795 5,430 7,950 8,422 8,508 8,846 10,204 9,931 10,012 11,759 8. Change in balances (- = increme) (4) (3) (1) (2) (2) (5) (4) (0) (2) (2) 1,809 0 0 /a Includes debt sarvice payments. Source: Ministry of Finance. -.i WDONESIA COUNTRY ECONOMIC REPORT Cenkal Govwnuent Riecieksli. 1S63/54 - i1065 a (Rp. billione) 1983/84 1984/85 1985/86 198657 1987/88 1988Y89 1989/90 199091 1991/92 1992/93 1993/94 1994/95 1995/96 Taxes on income 11.605 12.847 13.625 8,798 1 13,901 17.330 25.278 25.494 28.344 29.315 33.323 34.43S Income tax 399 451 675 2,271 2,663 3,949 5,488 6,755 9,580 11,913 15,273 18,843 19,239 Corporate tax /a 757 1,670 1,638 Corporate tax on oil /b 9,520 10,430 11,144 6,338 10,047 9,527 11,252 17,712 15,039 15,330 12,508 12,851 13,276 Witholding tax /b 628 IPEDA/property tax /c 132 157 168 190 275 424 590 811 875 1,101 1,534 1,629 1,923 Others /d 168 138 Tax_ on domestic consumption 1,392 1510 3.479 5.156 4.719 6.187 7.589 9,624 11,452 13455 16.168 18.662 21749 Sales/value added tax 575 637 2,327 2,900 3,390 4,505 5,837 7,463 8,926 10,714 12,282 13,239 16,655 ExCmeS 773 873 944 1,056 1,106 1,390 1,477 1,917 2,223 2,381 2,560 2,623 3,299 Othwr oil revenues /e 0 0 0 1,010 0 0 0 0 o 0 1,041 2,519 1,475 Miscllaneous levies 44 0 208 190 223 292 276 244 303 360 285 282 319 Taxes on international tade 916 862 658 L039 L122 1348 1759 2.530 2,152 2.661 2,2 3.460 3.588 Import duties 557 530 607 960 938 1,192 1,587 2,486 2,133 2,652 2,588 3,443 3,543 Sals tax on imports /f 255 241 Export tax 104 91 51 79 184 156 172 44 19 9 14 16 44 Nontax receipts 520 687 1.492 1.147 1,977 1569 2,062 2,115 2,487 2,993 3,895 4.293 6,491 Domestic revenue 14,433 15906 19,253 16.141 20,803 23,004 28.740 3,546 41,585 47453 52,280 59.737 66,265 Developmertfunds 3,882 3,478 3.573 5,752 6,158 9991 9429 905 10,49 10716 10,372 10012 11,759 Program aid 15 69 69 1,958 728 2,041 1,007 1,397 1,563 512 441 0 0 Project aid /g 3,868 3,409 3,503 3,795 5,430 7,950 8,422 8,508 8,846 10,204 9,931 10,012 11,759 Total revenues 1315 19.384 22.825 21,893 26,961 32.995 38.169 51,994 58.168 62.652 6249 78.024 /a Since 1986/87 included in income tax. /b Since 1984/85, witholding tax eliminated as separate category and combined with income tax /c Since January 1988, Ipedareplaced by land and building tax. /d Clrniflication changed to other tax (included in miscellaneous levies which consist d other taxes and stamp duty). /e Oil subsidies shown as Governmerit expenditures from 1977/78 (see Table 5.3). /I Since 1984/85 classification changed to value-added tax and tax on luxury goods. /g Includes commercial bank and suppliers' credits for development projects. Sorce: Ministry of Finance. CD INDONESIA t 00 COUNTRY ECONOMIC REPORT Central Government Expenditures, 1983/84 - 1995/96 (Rp. billion) Actual Budget 1983/84 1984/85 1985/86 19S6/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 Personnel expenditures 2.757 3.047 4,018 4,311 4,617 4.998 6.202 7.054 S,103 9,466 11.214 13,011 15347 Wages and salaries 1.996 2,207 3,073 3,330 3,561 3,833 4,826 5,571 6,299 7,533 9,167 10,456 12,416 Rice allowance 346 407 402 406 451 518 588 640 922 888 905 1,039 1,140 Food allowance 261 271 300 288 299 327 373 382 393 473 498 783 835 Other 88 90 161 177 176 185 243 264 279 313 342 392 511 External 66 72 82 110 130 135 171 198 209 259 302 341 445 Mabrial expenditures 1.057 1,183 1 367 1.366 1,329 1.492 1.702 1,830 2,373 2 870 3,042 3,751 4,745 Dorestic 1,007 1,134 1,310 1,294 1,239 1,378 1,569 1,670 2,217 2,681 2,848 3,526 4.457 External 50 49 58 73 90 114 133 160 155 189 194 225 288 Subsidies to region a 1.547 1,883 2.489 2,650 2,816 3,038 3,566 4,237 4,834 5,283 6,796 7,095 8,409 Irian Jaya 42 0 0 0 0 0 0 0 0 0 0 0 0 Other region 1,505 1,883 2,489 2,650 2,816 3,038 3,566 4,237 4,834 5,283 6,796 7,095 8,409 Debt service payments 2,103 2.777 3,323 5,058 8205 10,940 11,939 13,395 13,434 15,217 17.288 17,970 18,215 Internal 30 39 20 0 39 78 149 250 251 275 121 317 319 External 2,073 2,737 3,303 5,058 8,166 10,863 11,790 13,145 13,183 14,942 17,167 17,652 17,896 Other expenditures 948 540 754 174 515 271 923 3,483 1,484 1,195 459 /d 525 524 Food subsidy 0 0 0 29 0 0 0 0 - 0 0 0 0 Oil subsidy 928 507 374 0 0 0 0 0 - 692 0 0 0 Others/b 20 33 380 145 515 271 923 3,483 - 503 459 525 524 Routine expenditures 8.412 9,429 11,952 13,559 17,482 20.739 24331 29.998 30,228 34031 38,799 42351 47,241 Development expenditures/c 9899 9,952 10,873 8.332 9.477 12,251 13,834 19,452 21,764 24,135 25,661 27.398 30,784 Total expenditures 18.311 19_381 22,825 2L1.89 Z.26.5 32.990 38165 49.5 5L.992 58.166 64,460 69.749 78.0 /a Since 1984/85, this item is sub- divided intD wage/salary and non wage/salary expenditures without identifying regions. /b This line shows debt service transfers to PERTAMINA (1976877 - Rp. 31.0 billion, 1977078 - Rp. 86.4 billion), PERTAMNA subsidy (1979/80 - Rp. 81.0 billion) and expenditures on the general election (1976077 - Rp. 37.0 billion, 1981/82 - Rp. 81.0 billion, 1985/86 - Rp. 40.0 billion). /c For details see Tables 5.4 and 5.5. /d Included oil subsidy. Source: Ministry of Finance. e CD tn -E INDONESIA g COUNTRY ECONOMIC REPORT 94 Development Expenditures. 1983/84 - 1095 /a 2 (Rp. billion) Aaual Budget 1983/84 19U4I5 1985/S6 1986/87 1987/U8 1988189 1989/90 1990191 1991t92 1992/93 1993/94 1994t95 1995/96 1. D_e_umemu 3.220 3.474 4.467 2,C04 2.113 1.861 2.509 4 854 5.971 7,858 S.560 9,946 AM 2. Gonid INPRESprog 539 540 575 568 656 714 706 1.058 1.407 1 853 2.198 4.449 4,702 Subddiestoprovu 253 253 287 293 290 334 324 486 574 701 783 1,219/b 1,277 SubiditoDkabuptem 194 195 189 1I8 263 267 270 392 5S3 825 1,025 2,418/c 2,525 SuWbedi toilaps 92 93 99 86 102 112 112 181 250 327 390 813 /d 900 3. Sedcd INPRES oram 771 824 754 721 451 429 536 t.282 1t83 2.296 2.535 891 868 Primxyuscools 549 572 526 496 193 131 100 374 521 655 699 498/e 499 Health 87 65 111 108 74 99 122 193 269 320 377 393 370 Markets 11 26 4 12 3 3 3 3 2 2 4 0 0 Replantingreforeratoi 59 61 43 31 16 17 17 33 75 95 104 0 0 Raub 65 101 70 75 164 IS0 295 679 972 1,225 1,352 0 0 4. PBB/b 132 157 168 171 223 344 478 657 709 892 1.243 1.42 /f 1,750 5. rian Jav and Eaut 1tor 5 4 7 7 5 0 0 0 0 0 0 0 0 Total (2-5Z: Trmufer to loail anvenmentas 1448 1526 L503 1.467 1334 1L486 1720 2.998 3S953 5.040 5.976 6.822 7.320 6. Fertmr aubidy 324 732 477 467 756 200 278 265 301 175 265 175 143 7. Govenmentcaitalrticipaticn (PMP) 592 336 412 86 336 125 141 323 470 150 126 50 50 8. Othera 449 475 511 514 515 629 765 505 722 708 803 393 601 9. Deloment expenditures in resere s 2.000 1500.0 - _ _ _ Total (I -8 6.032 6.543 7.370 4 5.054 4.301 0 Q944 12.919 13.931 15,730 17.386 19.025 9. Prolt aid 3.86 3.409 3.503 3.795 4A423 7.950 8,422 S,50 8,84 10204 9.931 10.012 11,759 Total (1 - 9 9.8 9952 10.873 3 9.477 12.251 13U835 1945 21t764 24.135 25.661 27.398 30Q784 /a EAudSngproecs aid in Rupiah. /b Induded ubidies afrestraic and ubsidies road development (proinces). /c Induded abides for rural hing, stubidies to market reaomtructicn and development, subeidia reforestra4cm, subidies forprimary school remtruction. and subaias road development (regmaies); /d Inchded subsidies to backwaxd villagm. /e Induded subidies for prehmmary schoo remtruction (amodated to subidies to rgenides). n 91 percent fran total land and lAding tax revemuc Source: finat of FinanDe. 160 Statistical Annex Table 5.5 wr- (*4 Cn r^ _ 4r S~~~ ~~~~ a 8 I,oe f ;; 8 ^ 6 9^ ffi A s E n Ia I S n a °o ~~~~21 IL~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -, C; - F > fi n o02b 2 § a i E ^-- " W ^ S < n "7 > > ffIL _ l l i |; E a - " S s a > p _ f | g 21 9~~~~ | w8ig-c--lS X l^ c B g X. U g ~~~~n 2s 9 fi .9 3E0 a| fi$ _ e]~~~~~~~~~~~~~~~~~~~~~~~~~ ; { l i§ t }| l ! INDONESIA 5 COUNTRY ECONOMIC REPORT . Proiect Aid by Sector, 1983/84 - 1995/96 (Rp. billion) Actual Budget 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993194 1994/95 1995/96 Agriculture and irrigption 155 472 180 237 576 1,087 1.345 1,513 1.763 2,169 1,801 1,205 1,605 Industryand mining 1,051 671 668 632 267 327 240 409 454 709 516 338 380 Electric power 1,182 653 1,172 791 769 1,783 1.269 1,314 1,830 2,400 2,550 2,746 2,967 Trannporltion and tourism 889 601 688 729 845 1,424 2,174 1,976 1,507 1,388 1,786 2,271 3,003 Manpower and trsnamigtion 45 76 36 123 62 98 83 91 83 52 52 146 137 Regioral development 7 1 8 25 4 45 121 155 240 22 122 266 425 Education 211 180 59 346 718 1,236 1,085 957 1,045 1,204 1,142 703 751 Popuktion & Health 37 78 56 100 38 99 177 188 188 32 132 260 240 Houaing and water supply 51 84 77 139 273 400 351 444 514 648 461 419 588 General public services 152 255 186 257 350 382 566 471 567 728 629 664 722 Government capital participation 45 160 203 185 168 213 419 100 116 235 180 0 0 Others /a 42 179 171 231 355 855 594 890 539 616 560 995 941 Total proiect aid /b 3.867 3,409 3.503 3,795 4.423 7,950 8.422 8,508 8.846 10,204 9.931 1,1 11,759 /a Since 1979/80 includes natural resourmcs development and environment. /b Includes commercal credits for development progrann/projects. Source: Miaistry of Finance. 162 Statistical Annex Table 6.1 INDONESIA COUNTRY ECONOMIC REPORT Money Supply, 1982 - 1994 (Rp. billion) End of Total Currency Demand deposits Change over period Amount (%) Amount (S) Amount (%) 1982 7,121 2,934 41 4,187 59 635 10 1983 7,569 3,333 44 4,236 56 448 6 1984 8,581 3,712 43 4,869 57 1,012 13 1985 10,104 4,440 44 5,664 56 1,523 18 1986 11,677 5,338 46 6,339 54 1,573 16 1987 12,685 5,782 46 6,903 54 1,008 9 1988 14,392 6,246 43 8,146 57 1,707 13 1989 20,114 7,426 37 12,688 63 5,722 40 1990 23,819 9,094 38 14,725 62 3,705 18 1991 26,342 9,346 35 16,996 65 2,523 11 1992 28,779 11,478 40 17,301 60 2,437 9 1993 37,036 14,431 39 22,605 61 8,257 29 1994 45,622 18,637 41 26,985 59 8,586 23 Source: Bank Indonesia. Statistical Annex 163 Table 6.2 INDONESIA COUNTRY ECONOMIC REPORT Changes in Factors Affecting Money Supply, 1982-1994 (Rp. billion) Public Sector Claims Net claims on official Total change in Net on entities Claims on Net Money Supply End of foreign Central & public business & other Amount Percentage period assets Government enterprises individuals items (%) 1982 -1,237 129 689 2,260 -591 635 10 1983/c 1,180 -1,286 -42 2,183 815 448 6 1984 3,531 -3,359 190 3,646 882 1,012 13 1985 1,750 -214 511 3,333 -115 1,523 18 1986 /d 1,870 469 252 4,547 -2496 1,573 16 1987 2,444 1,538 728 625 -4710 1,008 9 1988 -549 247 659 11,069 -3053 1,707 13 1989 409 -939 1,444 22,132 -2370 5,722 40 1990 -2171 -4113 -920 35,809 -6126 3,705 18 1991 7,430 -1356 104 20,263 -10795 2,523 11 1992 7081 -1291 492 15,227 -1546 2,437 9 1993 (23) 804 916 31,138 -6289 8,257 29 1994 -4160 -4606 1141 36,463 -560 8,586 23 /a Refers to government accounts blocked for special purposes. /b Does not include revaluation adjustment to foreign exchange balances resulting from the rupiah devaluation of November 15, 1978. The adjustments amount to Rp. 650 billion in net foreign assets; Rp. 46 billion in net claims on Central government; Rp. 551 billion in claims on official entities; Rp. 164 bilion in blocked account; Rp. 41 billion in claims on businesses and individuals; Rp. 83 billion in time and savings deposits; and Rp. 1,041 billion in net other items. /c Does not include revaluation adjustment to foreign exchange balances resulting from the rupiah devaluation of March 30, 1983. The adjustments amount to Rp. 1,962 billion in net foreign assets; Rp. 131 billion in net claims on Central government; Rp. 146 billion in claims on official entities and public enterprises; Rp. 106 billion in blocked account; Rp. 148 billion in claims on businesses and individuals; Rp. 620 billion in time and savings deposits; and Rp. 1,399 billion in net other items. /d Includes revaluation adjustment due to devaluation on September 12, 1986. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Consolidated Balance Sheet of the Monetary System, 1982-1994 (Rp. billion) End of period 1982 1983 /a 1984 1985 1986 /b 1987 1988 1989 1990 1991 1992 1993 1994 Net foreign assets 5,565 8,837 12368 14.119 15989 18433 17,884 18,293 16,122 23,552 30,634 30611 26,451 Domestic credit 8.846 9.744 10.345 14.325 19.323 26,729 39.802 62131 93142 112,154 126,612 159,470 192.469 aaims on public sector Central government -4,193 -5,739 -9,098 -9319 -8798 -8366 -7036 -8309 -12202 -13582 -14873 -14069 -18675 aaims on official entities and public enterprises 4,979 5,040 5,230 6,034 5,993 6,725 7,381 8,825 7,904 8,009 8,501 9,417 10,559 Government-blocked account -252 -240 -116 -52 -81 -84 -66 -40 -24 0 0 0 0 Caims on private enterprises and individuals 8.312 10.683 14329 17.662 22.209 28.454 39,523 61,655 97,464 117,727 132,984 164,122 200,585 Loans 7,995 10,184 13,550 16,392 20,409 26,072 36,502 55,933 90,109 105,599 115,190 138,880 178,017 Other claims 317 499 779 1,270 1,800 2,382 3,021 5,722 7,355 12,128 17,794 25,242 22,568 Assets = liabilities 14,411 18,581 22,713 28,444 35,312 45,162 57,686 80,424 109,264 135,706 157,246 190,081 218,920 Import deposits 300 242 218 268 402 424 684 632 1,048 966 890 1,321 679 Net other items 3,036 3,676 4,558 5,291 7,651 11,277 15,688 21,087 23,586 35,681 37,303 43,161 43,922 Monevand quasimonev 11,075 14.663 17937 23153 2 33,885 41998 58,705 84,630 99,059 119053 145,599 174,319 Money 7,121 7,569 8,581 10,104 11,677 12,685 14,392 20,114 23,819 26,342 28,779 37,036 45,623 Currency 2,934 3,333 3,712 4,440 5,338 5,782 6,246 7,426 9,094 9,346 11,478 14,431 18,637 Demand deposits 4,187 4,236 4,869 5,664 6,339 6,903 8,146 12,688 14,725 16,996 17,301 22,605 26,985 Quasi money 3,954 7,094 9,356 13,049 15,984 21,200 27,606 38,591 60,811 72,717 90,274 108,563 128,696 /a Includes changes resulting from the exchange rate adjustment of March 30, 1983 from Rp. 702.50 to Rp. 970 per USS. /b Includes changes resulting from the exchange rate adjustment on September 12,1986 from Rp 1,134 to Rp 1,644 per USS. Souree Bank Indonesia. INDONESIA Sq COUNTRY ECONOMIC REPORT Banking System Credits by Economic Sector, 1982-1994 a2 (Rp. billion) Sectors 1982 1983 /f 1984 1985 1986 /g 1987 1988 1989 1990 1991 1992 1993 1994 Auriculture 1.025 1226 1.318 1,656 2,097 2,657 3,648 5,350 7,368 8,465 10281 12.074 13,815 In rupiah 1,025 1,226 1,318 1,656 2,097 2,631 3,610 5,281 7,176 7,979 9,173 10,432 12,049 In hreign exchange 0 0 0 0 0 26 38 69 192 486 1,108 1,642 1,766 Minina lb 1.472 806 384 258 394 381 144 591 615 743 762 752 752 In rupiah 1,472 806 384 258 394 371 124 456 570 614 605 408 346 In hreign exchange 0 0 0 0 0 10 20 135 45 129 157 344 414 Manufacturing industry /c 3,923 5,27 6,667 7,592 9,005 10,912 14 956 20,333 305 33131 37,458 49,608 57.993 In rupiah 3,429 4,595 6,205 7,069 8,839 10,503 13,994 17,654 25,002 24,828 26,197 35,309 41,048 In foreign exchange 494 612 462 523 166 409 962 2,679 5,500 8,303 11.261 14,299 16,945 Trade /d 4,129 5.132 6,344 7.255 8,399 10,247 13,88 20,109 2737 33049 342,94 37.271 43,695 In rupiah 4,009 4,781 6,299 7,214 8,329 10,065 13,682 19,342 27,267 28,842 28,100 31,148 36,391 In foreign exchange 120 351 45 41 70 182 206 767 2,470 4,207 4,844 6,123 7,304 Service rendering industrv Is 1867 227Z 3,169 4,183 4,345 5,460 7,382 10424 17,867 20,066 25,S99 35,486 50253 In rupiah 1,860 2,253 3,088 4.047 4,130 5,151 6,917 9,600 14,913 16,683 21,979 30,228 42,337 In foreign exchange 7 24 81 136 215 309 465 824 2,954 3,383 3,920 5,258 7,916 Oters 606 651 931 1.213 2,162 3,87 3721 1,866 11,709 17371 15,574 13.107 22059 In rupiah 606 651 929 1,210 2,156 3,143 3,667 1,709 11,197 16,326 14,653 13,094 22,051 In freign exchange 0 0 2 3 6 44 54 157 512 1,045 921 0 8 iTota 13.022 15299 18.813 22,157 26,402 32,844 43,739 58,673 97,798 112.825 122,918 148,298 188.575 In rupiah 12,401 14,312 18223 21,454 25,945 31,864 41,994 54.042 86,125 95,272 100,707 120,619 154,222 In foreign exchange 621 987 590 703 457 980 1,745 4,631 11,673 17,553 22,211 27,679 34,353 /a Credits outstanding end of period. Includes investment credits, KIK and KMKP. Excludes interbank credits, credits to central gover nment and to nonresidents, and foreign exchange component of project aid. /b Includes credits to PERTAMINA for repayment of foreign borrowing. Since March 1979, credit in foreign exchange to PERTAMINA has been converted to rupiah credits. /c Processing of agricultural products is classHfied under manufacturing industry according to Internabonal Standard Industial Classification (ISIC 1968). Starting 1980, credits for construction which were previously included in manufacturing industry are now included in service-rendering industry. /d Includes credits for food procuzement and hotel projects. CD /e Credits for electricity, gas and water supply are included in service-rendering industry sector. 0> _ /n Includes foreign exchange revaluation amounting to Rp. 251 billion. 4v t. /g Includes revaluation adjustment due to the devaluabion of September 12, 1986. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Banking Credits Outstanding in Rupiah and Foreign Exchange by Group of Banks, 1982-1994 /a (Rp. billion) 1982 1983 /b 1984 1985 1986 /c 1987 1988 1989 1990 1991 1992 1993 1994 Bank Indonesia direct credits /d 2.771 2,356 870 964 1.144 1,347 1.547 696 718 783 771 949 958 In rupiah 2,771 2,356 870 964 1,144 1,347 1,547 696 718 783 771 949 958 Inforeign exchange 0 0 0 0 0 0 0 0 0 0 0 0 0 State commercial banks/e 8.031 9,787 13,345 15,374 17,78 21,676 28,631 39,579 55,82 59,861 68,236 71,760 80.224 In rupiah 7,474 8,910 12,959 14,925 17,711 21,225 27,614 37,151 50,648 52,628 58,133 59,955 68,299 In foreign exchange 557 877 386 449 71 451 1,017 2,428 5,178 7,233 10,103 11,805 11,925 National Private Banks /f 1.554 2,294 3.552 4.746 6,272 8,423 11,910 20,216 34,975 44,452 45.352 63,976 93,034 In rupiah 1,534 2,279 3,480 4,631 6,061 8,175 11,536 18,955 31,458 39,467 39,685 55,363 79,339 In foreign exchange 20 15 72 115 211 248 374 1,261 3,517 4,985 5,667 8,613 13,695 Foreign Banks 666 862 1,046 1073 1,204 1,406 1,913 3.115 6,177 8,512 9330 11,612 14,359 In rupiah 622 767 914 934 1,029 1,122 1,559 2,173 3,039 3,177 2,889 4,352 5,626 In foreign exchange 44 95 132 139 175 284 354 942 3,138 5,335 6,441 7,260 8.733 Total 15.299 18.813 22157 6402 2,52 44001 63,606 9 j1368 123.689 185 In rupiah 12,401 14,312 18,223 21,454 25,945 31,869 42,256 58,975 85,863 96,055 101,478 120,619 154,222 In foreign exchange 621 987 590 703 457 983 1,745 4,631 11,833 17,553 22,211 27,678 34,353 /a Credits outstanding at end of period. Includes investment credits, KIK and KMP. Exdudes interbank credits, credits to Central Government and to non-residents, and foreign exchange component of project aid. >. /b Includes foreign exchange revaluation amounting to Rp. 251.0 billion. H /c Includes revaluation adjustment due to devaluation on September 12, 1986. /d Exdudes liquidity credits, includes credits to Pertamina for repayment for foreign borrowing. X z /e Includes state development bank and liquidity credits. . 3 /f Includes liquidity credits. National private banks refer to national private commercial banks and regional development banks. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Investment Credits by Economic Sector. 1982-1994 /a (Rp. billion) End of period 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 kc 1994 Credits approved /b 2.679 3.900 4.509 5.898 7.966 9.814 13500 18,263 26.450 32.906 42,333 50.544 55.266 Agrictlture 467 734 809 1,402 2,274 2,584 3,393 5,009 6,811 9,788 11.534 12,844 13,194 Miring 54 57 179 229 363 382 495 481 502 517 525 298 216 Manufacturing industry 1,369 1,983 2,374 2,765 3,253 3,540 5,182 7,615 10,742 11,774 16910 17,758 21,160 Trade 134 129 237 277 369 355 536 1,012 2,298 3,375 4,475 8,611 6,798 Service rendering industry 641 986 866 1,173 1,638 2,900 3,788 4,021 4,914 6,336 7,724 11,020 134890 Others 14 11 44 52 69 53 106 125 1.183 1,116 1,165 13 8 Credits outstanding lb 2,099 2.861 3.802 5,471 6.486 7.635 10.422 14,292 19.961 25.748 35.994 42,352 46,861 AgricLiture 322 477 555 948 1,292 1,690 2,284 3,357 4,361 5,450 7,050 8,777 9,890 Miring 34 49 178 224 367 342 372 358 372 459 459 296 175 Manufacturing industry 1,095 1,635 2,102 2,781 3,098 3,567 42817 6,424 8,866 10,484 15,416 16,459 18,572 Trade 120 115 168 396 443 435 632 1,022 1,859 3,372 4,099 7,004 5,966 Service rendering industry 519 576 770 1,098 1,215 1,560 2,249 3,010 4,060 5,032 7,896 9,803 12,250 Others 9 9 29 24 71 41 68 121 443 951 1,074 13 8 /a Excludes investment credits from Bank Indonesia; includes State Development Bank and Local Development Banks. Data with the same clasalfication prior to 1980 are not available. /b Excludes Small Scale Investment Credts, investment credits to the Central Government and foreign exchange components of project aid. /c Asot November 1993. Source: Bank Indoneda. INDONESIA COUNTRY ECONOMIC REPORT Outstandina Bank Funds in Rupiah and Forehan Exchange by Group of Banks. 1962-1994 la (Rp. billion) 1982 1963 1964 1965 1966 1967 1988 1989 1990 1991 1992 1993 1994 Deposits State Banks 6,169 8,381 10q35 17,916 15,193 18,111 22,527 29,731 40,638 41,812 52,600 61,683 64,23 Private Banks 1,84 2,119 3,020 4,550 5,435 8,040 11,167 19,655 33,951 43,143 51,079 67,395 88,498 Regional Development Banks 411 498 700 825 797 954 1,300 1,674 2,550 3,228 3,697 4,773 6,183 Foreign Banks 1,OD4 1,398 1,743 1,883 2,086 2,226 2,516 3,315 6,016 6,935 7,474 8,095 9,983 Total 8.88 12.M 15.498 2aX74 23.511 29331 37.510 54.375 83.155 95118 114.50 141.946 16&947 Share in Total Deposits State Banks 69.6 67.6 64.8 64.0 64.6 61.7 60.1 54.7 48.9 44.0 45.8 43.5 38.0 Private Banks 14.5 17.1 19.5 22.6 23.1 27.4 29.8 36.1 40.8 45.4 44.5 47.5 52.4 Regional Development Banks 4.6 4.0 4.5 4.1 3.4 3.3 3.5 3.1 3.1 3.4 3.2 3.4 3.7 Foreign Banks 11.3 11.3 11.2 9.3 8.9 7.6 6.7 6.1 7.2 7.3 6.5 5.7 5.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Annual Growth Rate in Deposits State Banks 2.2 30.6 18.0 25.2 16.2 17.6 21.8 27.7 31.3 2.9 25.8 17.3 4.2 Private Banks 40.0 50.1 35.4 41.0 17.8 39.2 32.9 56.5 54.7 27.1 18.4 31.9 31.3 Regional Development Banks 16.1 19.2 34.0 16.4 -3.4 18.0 30.9 25.3 4Z1 26.6 14.5 29.1 29.5 Foreign Banks 27.2 33.1 22.1 7.7 6.5 6.5 12.2 27.6 59.6 15.3 7.8 8.3 23.3 Total 10.2 33.5 22.3 26.4 22.1 22.1 24.6 37.1 42.5 14.4 20.7 23.6 19.0 /a Total funds are the sum of demand, time and savings deposits. Figures differ from the monetary survey because these include Central Government accounts. Rural credit banks are excluded. Source: Bank Indonesia. 0' B INDONESIA COUiNTRY ECONOMIC REPORT Intwest Rabe on Deoss at CommerIaEl Banks. 19112-11994 / (% pA) Time Daposits TABANAS TASKA Certfi- End of Demand SAvings Savings cate of State Bank Private National Bank/a Period Deposits Deposits Deposits Deposits Less than 3 a 12 24 LCss than 3 8 12 24 /b /c /d /r 3 moo /I moo moo mos mos 3 mos /I moo mos mos mos 1982 1B8-3 o-15 9.0 12.5 7.7 8.e C.0 9.0 12-15 18.9 17.1 18.5 19.3 18.8 1983/9 1B8-3 12-15 9.0 15.4 14A 14. 13.1 17.5 12.5 18.7 17.4 18.5 19.7 19.3 1984 1.8-3 12-15 9.0 18.5 15.1 17.1 172 18.7 172 19.8 20.7 20.7 20.4 21.0 1985 1.8-3 12-15 9.0 14.5 13.4 14.8 16.0 17.8 18.3 14.8 15.9 17.8 19.8 21.3 198t 1.8-3 12-15 9.0 14.0 13.3 14.2 14.7 15.2 18.0 14.8 15.5 15.2 17.3 20.1 1987 1.8-3 15.0 9.0 1S.0 15.5 17.0 17.3 17.0 17.4 17.3 18.8 19.3 19.1 19.9 1988 1.8-3 15.0 9.0 15.9 15.8 18.1 18.4 18.7 18.8 20.2 20.1 20.3 20.2 20.9 1989 n.a n.a n.a 18.3 15.1 18.2 17.2 18.7 18.8 17.0 18.0 18.8 19.7 20.5 1990 n.a n.a n.a 15.9 20.5 20.7 20.7 20.5 20.0 20.9 21.3 21.3 21.2 21.0 1991 8.9 n.a n.e 19.0 20.0 21.3 22.3 22.5 21.0 21.8 22.8 23.3 23.4 18.8 1992 7.2 n.a n.a 15.7 14.8 15.7 17.3 18.8 20.7 18.5 17.7 1a.9 19.8 1e8. 1993 5.3 n.a n.e 16.1 8.3 9.3 12.3 13.5 15.9 11.3 12.8 14.0 14.5 18.5 1994 4.9 n.a n.e 15.1 11.2 10.8 12.4 11.9 13.5 15.4 15.4 14.8 14.1 17.9 la Weighted average rats of interest at selected banks. /b From March 1983. 3% for amounts above Rp. 50 million, 1.8% for Rp. I to 50 miliion. and Individually datermined for amounts less than Rp. 1 million. /c "TABANAS' or *Tabungan Prmbangunan Nasionar (Nalonal Deveiopment Savings) is an ordinary savings account sponsored by 'Bank Tabungan Negara- (State Saving Bank) and offered by all stats owned and some private national commerclal banks, and post offices. Until June 1, 1983:16% or amounts d Rp. 200,000 or less; 6% above Rp. 200,000. From June 1983:15% fOr Rp 1 million or lose; 12% for more than Rp. 1 million. From July 1987 to November 1989 :15% for all denominations. Thereafter left to banks descretion. /d TASKA or 'Tabungan Asuransi Berjangka * (Insured Time Deposits) Is an ordinary lime deposits sponsored by Bank Tabungan Negara' and offered by the same Institutions described In (c) above. /s Midpoint of range tor six months rates. /i One month time daposits rate used as representative rate. /g Ceiling on tImo deposit Interest rates at state banks removed on Juna 1, 1983. 12% legal minimum rate starting In June 1983 for 24 months Stale Bank tkne deposit. Soirca: Bank tndonesla. .0 170 Statistical Annex Table 7.1 :f |e {: i C4 4 §ggi f f p a -- ~ ~ Ek | QB ! - R 4 R B;B : - .o..O E ~ ~ ~~ ffiI~. -! - f f if f . .. g 1§fi 8g i$j ;gjS::Sge $ff1 ' i E n %5 - 5| |e : gi 3 $ S .B U ! C -4 -4 : t wgiaMS!§_ gB v - I - X{ 13iS ita} l i i-ia Statistical Annex 171 Table 7.2 INDONESIA COUNTRY ECONOMIC REPORT Production of Lkior Crops by Type of Esvtt. 1982-1993 (000 torns) Product 1982 1983 1954 1985 1986 1987 1988 1989 1990 1991 1992 1993 h Smaliholders Rubber 586 673 704 720 763 795 839 853 913 919 1,030 1,041 Coconut/copra 1,707 1,590 1,737 1.905 2,098 2,055 2,117 2,193 2,313 2,317 2,426 2,450 Coffee 262 287 291 288 316 359 362 377 384 390 409 410 Clove 32 40 48 41 53 57 59 53 64 82 70 65 Tea 17 23 24 30 31 25 26 25 31 32 32 32 Sugar 1,373 1,249 1,397 1,450 1,417 1,744 1,499 1,621 1,609 1,610 1,653 1,669 Tobacco 97 100 104 156 159 110 113 77 152 157 110 112 Pepper 34 46 46 41 40 49 56 68 70 69 65 59 Cotton 13 14 12 45 53 48 40 38 33 13 13 14 Palm oil 0 0 0 0 0 0 0 0 0 0 0 0 Palm kernel 0 0 0 0 0 0 0 0 0 0 0 0 Privat estates Rubber 125 133 121 124 150 135 143 141 145 146 163 164 Coconut/copra 11 14 13 15 16 20 22 15 19 20 29 29 Coffee 6 8 9 10 10 8 10 11 13 13 11 14 Cloves 0 1 1 1 2 1 2 2 2 2 2 2 Tea 16 17 18 17 18 21 23 26 29 30 28 28 Sugar 72 88 83 106 106 109 103 181 204 257 178 281 Tobacco 0 0 0 0 0 0 0 0 0 0 0 0 Popper 0 0 0 0 0 0 0 0 0 0 0 0 Cotton 0 0 0 0 0 0 0 0 0 0 0 0 Palm oil 285 269 329 339 385 352 435 597 789 884 1.077 1,370 Palm kernel 47 68 69 71 73 76 87 119 179 181 172 209 Government estates Rubber 189 201 208 211 196 200 194 215 217 219 205 208 Coconut/copra 0 0 0 0 0 0 0 0 0 0 0 0 Coffee 13 10 15 13 13 13 14 13 16 16 17 18 Cloves 0 0 0 0 0 0 0 0 0 0 0 0 Tea 61 70 84 80 87 80 88 90 95 97 94 95 Sugar 182 291 330 343 371 323 316 306 306 386 476 521 Tobacco 9 9 4 5 5 3 3 4 4 4 2 3 Pepper 0 0 0 0 0 0 0 0 0 0 0 0 Cotton 0 0 0 0 0 0 0 0 0 0 0 0 Palm oil 599 713 818 904 965 1,154 1,365 1.368 1,624 1,774 2,189 2,051 Palm kernel 110 98 178 187 193 243 273 274 325 370 388 393 Total Rubber 900 1,007 1,033 1,055 1,109 1,130 1,176 1,209 1,275 1,284 1,399 1,413 CoconuVcopa 1,718 1,604 1,750 1,920 2,114 2,075 2,139 2,208 2,332 2,337 2,455 2,479 Coffee 281 305 315 311 339 380 386 401 413 419 437 442 Cloves 32 41 49 42 55 58 61 55 66 84 73 67 Tea 94 110 126 127 136 126 137 141 155 159 154 154 Sugar 1,627 1,628 1,810 1,899 1,894 2,176 1,918 2,108 2,119 2,253 2,307 2,471 Tobacco 106 109 108 161 164 113 116 81 156 161 112 115 Pepper 34 46 46 41 40 49 56 68 70 69 65 59 Cotton 13 14 12 45 53 48 40 39 33 14 13 14 Palm oil 884 982 1,147 1,243 1.350 1,506 1,800 1.965 2,413 2,658 5,266 3,422 Palm kernel 157 166 247 258 266 319 360 393 504 551 559 602 /a Prelminaryfigures. Source: Supplement to President's Report to Parlament, August 18, 1994. Statistical Annex Table 7.3 INDONESIA COUNTRY ECONOMIC REPORT Rice - Area Harvested. Production and Yield. 1982-1994 Area Average Paddy Rice Year harvested yield output output /a Growth ('000 ha) (tons/ha) ('000 tons) ('000 tons) (%) 1982 8,988 3.74 33,584 22,837 2.5 1983 9,162 3.85 35,302 24,006 5.1 1984 9,764 3.91 38,134 25,933 8.0 1985 9,902 3.97 39,033 26,542 2.3 1986 9,988 4.00 39,726 27,014 1.8 1987 9,923 4.04 40,078 27,253 0.9 1988 10,138 4.11 41,676 28,340 4.0 1989 10,531 4.25 44,726 29,072 2.6 1990 10,502 4.30 45,179 29,366 1.0 1991 10,282 4.35 44,689 29,048 -1.1 1992 11,103 4.34 48,240 31,356 7.9 1993 11,013 4.38 48,181 31,318 -0.1 1994 10,646 4.34 46,245 30,059 -4.0 /a Estimated on the basis of a conversion factor of 0.68 from paddy into rice for the years prior to 1989, and a factor of 0.65 for the yean 1989 and following. Source: Central Bureau of Statistics. Statistical Annex 173 Tabk 7. INDONESIA COUNTRY ECONOMIC REPORT Area Covered Under Rice Intensification Promrams. 1982-1998 ('000 ha) Year BIMAS INMAS Total Of which /a /b INSUS /c 1982 1,296 5,047 6,343 2,9U 1983 1,30W 5,387 6,695 3,477 1984 434 6,936 7,369 3,806 1985 200 7,461 7,661 4,100 1986 258 7,533 7,791 4,480 1987 na n.a 8,035 4,922 1988 n0. na 8,283 5,837 1989 n0a n.a 8,826 6,847 1990 na n.a 8,876 7,260 1991 na n.a 8,734 7,162 1992 n0a n0a 9,396 7,870 1993 n.a n.a 9,460 8,007 /a BIMAS - Bimbippn mul (Ma rice planing guidame program). /b iNMAS - Intenflui numi (Ma inten ficatico progamn). k INSUS - Intenifikai khugu (Special intensifimtion program). Souce: Supplement to the Peident's Report to Paliament, Augut 16, 1994. N INDONESIA COUNTRY ECONOMIC REPORT Index of 1anulaurin Production by Selected Indstry Group, 1988-1994 a (1983 = 100) Code of Industry Descriptionlb 1988 1987 1988 1989 1990 1991 1992 1993 1994/c/d Group 311 21 Condensed and dried milk, creamery and processed butter, fresh and preservedcream (6) 87.5 94.0 123.3 122.5 142.2 154.1 160.6 215.6 119.6 31330 MhKaliquorandmaHt(5) 94.4 113.2 116.4 117.2 146.8 160.1 142.0 173.5 129.7 31420 Clove cigarettes (80) 147.4 166.5 177.7 196.2 226.4 165.5 165.3 176.2 122.3 31430 Other cigarettes (13) 78.8 81.9 79.2 78.2 80.7 95.4 111.3 87.1 106.6 32111 Ywrnandthread(53) 129.9 130.5 169.0 196.2 253.5 273.7 313.1 312.0 101.5 32112 Weaving mills (except jute weaving products (409) 130.7 144.3 172.9 187.6 216.9 215.0 238.2 236.3 107.4 32114 Batik (65) 95.8 81.8 83.9 111.1 144.0 218.5 190.0 176.5 137.6 32130 Knitting mills (73) 219.2 233.3 239.8 312.8 347.2 449.2 332.0 324.4 160.8 32400 Footwear (32) 113.1 91.5 111.2 184.9 208.2 230.4 324.5 355.2 112.4 33113 Plywood (40) 139.3 192.7 242.1 266.2 256.7 273.7 295.7 268.0 98.8 34111 Paper manufacture (all kinds) (23) 159.2 159.7 242.0 251.5 298.1 292.2 429.8 459.2 89.4 35110 Basic chemicals (exceptfertilrzer) (50) 119.0 156.4 139.0 152.9 174.0 189.5 151.8 178.1 117.4 35120 Fertilizer (10) 166.0 121.8 129.7 143.7 158.1 158.1 152.1 153.6 114.9 35210 Paint varnish, and lacquers (25) 135.6 126.5 91.2 129.9 136.6 127.2 182.6 283.7 112.6 35232 Matches (8) 108.7 142.3 175.5 154.4 167.3 178.5 216.0 113.6 102.6 35510 Tyresand tubes (22) 109.5 79.2 109.7 141.2 157.4 205.6 223.8 220.2 68.6 36210 Ghtss and ghlss products (21) 178.0 149.3 124.6 145.2 163.3 254.6 236.8 265.8 114.5 36310 Cement (7) 144.4 150.9 149.8 198.1 206.4 217.9 244.9 300.7 158.4 37100 Basic ironand steel industries (16) 154.9 147.1 167.4 199.0 259.1 476.5 427.1 552.6 112.7 38130 Structural metal products (59) 110.2 118.7 125.7 180.6 224.4 190.9 210.4 202.3 244.4 38312 Drycell batteries (7) 123.9 115.5 158.6 179.1 192.6 158.7 174.1 190.8 140.4 38320 RadiA TVs, cassettes, other communication equipmentandapparatus (23) 90.6 86.9 118.1 153.9 180.6 114.7 111.2 113.1 112.4 38430 Motor vehiclesassembly and manufacture (23) 114.7 126.8 115.8 13Z5 200.0 212.9 116.0 98.0 192.5 38440 Motor cycles and three wheel motor vehicles, assembly and manufacture (1 1) 98.0 81.3 76.8 106.0 104.9 187.5 252.1 322.7 91.5 General index 128.4 143.5 164.2 184.1 209.4 232.3 257.9 286.8 120.5 /a The annual figtres shown here are calculated as the average of quarterly indoes. H lb Figues in brackets *( )- inicate the number of establishments covered in that group. /c Second quarter 1994. /c 1993 = 100. 00 a Source: Central Bureau of statistics. INDONESIA COUNTRY ECONOMIC REPORT Production of Minerals, 1962-1994 Ti Copper ore Nickel Iron sand Natural Year Petroleun concentrate concentrate ore Bauxite Coal concentrate Gold /a Silver /a gas (min bbls) ('000 tons) (kg) (kg) (mct) 1982 488.2 33.8 223.7 1,640.9 700.2 588.0 144.5 222.7 3,057.9 1,111.9 1983 490.5 26.6 205.0 1,27&0 777.9 648.2 132.9 2.391.5 35,293.1 1,186.4 1984 516.5 23.2 190.3 1,066.8 1,003.2 1,46&2 83.0 2,247.1 38,584.7 1,521.5 1985 483.8 21.8 223.4 961.9 830.5 1,942.1 130.9 2,604.4 38,075.2 1,580.0 1986 507.2 24.0 251.2 1,533.1 648.8 2,572.3 153.3 2,947.5 44,075.1 1,62&9 1987 479.0 26.1 259.8 1,825.7 635.3 2,813.5 194.0 3,116.7 49,046.2 1,732.1 1988 484.7 30.6 294.7 1,733.2 505.8 4,094.6 202.7 3,877.0 57,603.0 1,846.9 1989 514.2 31.3 331.5 2,020.9 862.3 9,246.7 142.7 4,624.5 63,597.2 1,96&3 1990 533.6 30.4 398.6 2,217.4 1,205.7 10,461.5 145.4 9,355.3 62,158.4 2,82a2 1991 581.2 30.4 656.5 2,300.3 1,406.1 14,143.0 173.2 13,889.1 63,452.0 2.465.8 1992 550.7 28.2 906.7 2,511.6 803.5 23,120.5 287.8 37,986.0 65,117.9 2,586.3 1993 547.4 28.6 928.2 1,975.8 1,320.4 27,584.4 341.3 41,575.8 90,285.4 2,663.9 1994/b 507.5 25.3 841.1 1,902.0 1,215.0 22,455.2 273.4 36,173.0 84,011.5 1,915.6 /a Since 1983, production of gold and silver incdaling private enterprses. /b Jan - Nov 1994 erept for Petroleum and Natural Gas, Jan - Aug 1994. H Source: Central Bueau of Statiaca. 00 INDONESIA COUNTRY ECONOMIC REPORT Crude Oil Production by Company, 1981 -1994 ('000 bbis) Production Average Contract of work sharing daily PERTAMINA LEMIGAS Caltex C & T Stanvac Subtotal contract Total output 1981 29.515 175 255.515 1,799 13,141 270.455 284,693 584,838 1,602 1982 27,375 195 175.928 1,422 13,214 190,564 270,055 488,189 1.338 1983 /a 26,947 233 191,307 1,411 11,766 204,484 286,384 518,048 1,419 1984 31,002 203 - 1,533 4.372 5,905 513,652 550,762 1,505 1985 30.071 170 - 1,358 5,130 6,488 453,190 489.919 1.342 1986 29,328 193 - 1,228 6,085 7.313 478,078 514.912 1,411 1987 26,775 210 - 1.236 8,354 9590 475.854 512,429 1,404 1988 24,789 /b - 1,368 13,413 14,781 451.941 491,511 1,343 1989 25,567 /b - 2,044 13,233 15,277 473,341 514,185 1,409 1990 24,483 /b - 1,972 10.587 12,559 496,664 533,706 1,462 1991 24,989 /b - 1,462 8.845 10,307 545,937 581,233 1,592 1992 24,722 /b 1,401 8,136 9,537 516,409 550,668 1,505 /c 1993 26,427 /b 1,327 5.304 6,631 518,121 551,179 1,510 /c 1994 23,826 /b - - - 527,416 551,242 1,510 /c /a Sine May 1983, contat of work data he been conacidated. n-HZ /b sin 1988, lem saa daR hve been induded in Peramina. /c Nonber and Deumber reconifiation. Scuae: Mbinisy of Mine. and EneW, Directonte Gail Oil & Gaa. . Statistical Annex 177 * | 1 -4 -4 -4 r n nI n~ ~ ~ ~~ * r.j. "a0 fl r a dn. M W t "r r w r ffi ~ . a. ° a ,^ r - R . - a 'l - 3 a au n. n VI - -i r t- o.0 a a .B " a *~r r. -4- r- . .i | sw - n " i D -4 ~I3 ° r e~~~ ~ ~ ~ *1 -l rl *1 - f fji 3 i r- - - w " ol /2 9 G# 3l I. ACEH C19 I AKALMANTAN BARAT HW}AKBTA if-,.,1. 6 5KAJRAANTAN RELGATA i w®-, ? 7KCAUAMQANTTAAN 75IM6ATkA s-,. 0~b70CAcg . IS SULAWERI T5NGAHYgoo1$.&5 1M , $z ~ 19 SLLAWESIU1rARA 20 ULWRSELATANo Q . J '' 2' 22 BAli oonna..cdoyDOlO AOa' Iru 23 NUSA TRNGGARABLARAT oO.Inon,n. oh-o 23 2 24 NUA TRQOAA OSMU ,,M 00.n poI *1 INDIAN OCEAN Kpnl 150 25 R4$UKU 1, o0 Sak Onp.o§.' 27 AUSTRALIA DEC EMBER 1994 I i 1. H A k.'-' Ni'-" t - , , ! . . p i . ; i... . - .. i i I I ! . il ; -1 O I -11 1, , ,