Report No. 1187-IND Public Sector Investment and Financial Resources in Indonesia May 24, 1976 The World Bank East Asia & Pacific Programs FOR OFFICIAL USE ONLY zm - C O Co a Co z m - - z, > 00 Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT US$1.00 = Rupiahs (Rp) 415 Rp 1.00 = $0.0024 Rp 1 million = $2,410 Fiscal Year April 1 - March 31 FOR OFFICIAL USE ONLY This report was prepared by the Resident Staff in Indonesia under the direction of Jean Baneth This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS Page BASIC DATA MAP SUMMARY OF FINDINGS AND RECOMMENDATIONS..................................i INTRODUCTION..................................************************* *1 CHAPTER I: DOMESTIC RESOURCES FOR THE PUBLIC SECTOR.....................4 Oil Revenues...................******************************** The Rate of Domestic Inflation and Monetary Financing..........6 Tax Revenues...................................................7 Routine Expenditure........................******.*********** *9 Public Savings................................................10 Savings of Public Sector Enterprises..........................12 CHAPTER II: BALANCE OF PAYMENTS AND FOREIGN RESOURCE INFLOWS...........14 The Debt-Service Ratio .................... ................... Past Borrowing Policy, and Service on Past Debt...............15 Export Projections...................j***i*** *..............15 Prudent Borrowing, Future Capital Commitment Levels and Net Resource Inflows................fl.** *............19 CHAPTER III: OVERALL PUBLIC SECTOR RESOURCE PROJECTIONS AND INVESTMENT PLANSANS................ *.** * ** ** * ** *22 Sectoral Allocation of Public Investment......................23 Investment in Agriculture and Irrigation......................25 Industry and Mining (including Pertamina).....................28 Electric Power..............*.*. * ....*. **********....... 30 Transport...................********************************* Post and Telecommunications...................................33 Regional and Local Development: The INPRES Program...........34 Investment in Education, Training and Culture.................34 Other Social Sectors...............******. ** *...............35 CONCLUSIONS3...........................*********** ******** *............37 Country L ta 5heet 1'ggC 1 Oi i1 РаСРS tипонЕаt4 - aocI ц 1ип[сетода адтв анtЕТ L4иD 4дl4 (Тн0и кнг) ------..•---------------------------------------- -.-•--.-.------ INDПЧESIв PEfEЧENCE СПUиТдIЕа (1970) Т7ТвL 190Ч,3 н09Т flЕСЕиТ 4сдtс, 279.е 196о I970 Еsтгн4ТЕ е4ив�4пЕSн Iипгв vнtl,IPVIЧEa °� .............................. --.�--°.--- °° -•-•---- °•.-•---•^ GN° РЕд СвРtТв (Uaf) ЬО,О 100,0 130,п я0,0 1tn.0 220,0 -- " ---'-.•-.•------ РО°uLвri7v ви0 vlrвG 9гетг8тiСs ..--.---•-.•.--•.-.-.-.•--.---• �DРиLвТ1Пи (нlп.rд. чlLLI7и) аS.Ч 115.6 1ги,и 7о.Ч 53д.1 зь.9 °0°иLетlПи DEЧ9IIY °ER lDПaRE ки, 50,0 b1,0 65,U и9ь,0 16Р,0 123,0 РЕд 50, кн, вGдtc�ltuд4� Lаип .. .. L26.0 .. .. .. utt►� sTe n sTlcs CRUDE R1PTM R4TF �ER ТЧП�f$вNп У3,О � Ъ Чг,0 цг,0 иа,0 3в.П 45.0 CRUOE ПЕвТи РьТЕ РЕР ТЧОUааип г1,0 в Ъ 21,0 21,n 21,0 16,0 12,0 ТиFвчТ нORT►L17Y 9лтЕ (/ТнпU) t25,0 а Ъ 1и0,0 130,п д0,0 С_1FE Е%РЕС?ви[У дТ PIRTH (rиg) 08,0 и7,0 51,0 цВ,0 50,0 56,0 GR099 дEPaП0UCT1Dv RвТЕ 2,В 3,2 3,1 3.1 г.о 3.3 oODUUTInи GДПыТм 4вТЕ (%) тптвL 2,1 2.n г,п г.7 2.3 3,0 иделч „ 7,b 3,2 .. ц.0 ц,0 гд9аи °ОРОLеТIПи (t 7F тOreLl 15.0 17,0 18.о .. 2о.п 3г.о есЕ чтРистиие (PEДCevTi п т] 1и rЕвдg ц2,1 ии,1 цц,1 „ и2,п и3,1 15 ТП ьи re4дs 55,и 53,и 53,и „ 55,0 53,ц h5 rE6R3 4Ч0 '7vER 2,5 2.5 2.5 .. 3.п 3.5 4СЕ ОЕРЕиDЕЧсУ ReTI7 О,В О,а 0,9 .. О,В 0,9 ЕС7ЧПчIС DЕРЕипЕиСУ деТl'1 1,3 .. 1,5 .. 1.2 � 1,5 �вMILM °L6NNING 4ССЕ°ТПд9 1C»yUL4TtVE, ТнОп7 „ 25о,; иРОд,г .. 1170©.0 35и,0 и3Ед9 гУ ПЕ нвивtЕ0 нпиЕи) „ „ „ „ „ R,п Ен°��УнЕчТ - ТПТл� C.4RПR EpRCE (iti7UaeND1 Зцмп0,0 „ 4D100,0 г2300,0 221000.0 � 1?300,0 :dRi1A F�дСЕ 1Ч eGRiCULT11дE (У) ЬР,О 62,0 71.0 71,0 51,0 1VFMP�ПYf.П (У nF C.4B7R ЕОдСЕ) 5,ц 2.0[а 5.ц L .. 3.0 � 7.0 7иСJчЕ nT9TpI9UTI7Ч ---- " -...-'••'---' % ;)f Р91VвТЕ 1иСпЧЕ RfC'П ВУ- ~1GЧЕ8Т 5У ПF нпи9ЕнПЕп9 ,. .. .. 16.7 Lа 25,0 /д „ aIGЧEST 20i ПF rtПи9ЕнПLп9 .. .. .. ц2,3 L 55.1 � .. �пиF.9Т 20У П/ ипи3ЕиПl09 ,. .. .. 7,9 r8 и,7 д „ �ПиЕgТ и0% Пf ЧПU3ЕнП<_U9 ,. .. ., 19.6 � 13,1 д .. J[аТд7ЧиТТПи ПЕ Lвип 7«чЕд9нТ •--•.-...-•°•--•-•-.•-•°-••- [ �ыЧЕ� ЧУ TOV 10Х 7F �иЧЕR9 иР,0 /ё .. .. 3ц•0 /е У 7ыиЕП Bv 9и4lLE3T 1пх �wuEяs 3,0 Т .. .. 1,0 Т_ .. .. ЧЕвLТн ev0 нuTдtttov .•--•••...------...•- 'ПРОLвТ(7м PER РнУ9IС1ли иlппп,0 г7ь5о,п г3вяо,п 7ьоо,о /ъ иаоо,о оПги�етlои РЕЧ vцдsiч� РЕвs0и „ Рпfп,п 696о,о 7гО3о,0 �b 511п,о �� °OPULвf[ОИ РЕП н09РF7вl нЕD 135П,П 1720,П 1ц50,0 А120,0 �� %с 1620,0 950,0 РЕ9 Св°1Т4 9UPP�Y DF - C4l'Ja1ES (У nF 4ЕОи1ЯЕ�ЕЧТS) А9,0 во,о ез,п , 9з,п ыs,о PRПTEIN (СR4н9 °Ед D4Y) и3,0 ц3,п ;q,n � 53.0 ц5,0 •рт инi[ч evlye� лип vu�aE 15,0 /с 1ц,П „ „ 16,0 22,0 )Ее7ч детЕ VТн7и) егЕВ 1-ц .. .. .. .. .. 7.0 EDJCвTiOч eq�U9IF0 FчRП�LИЕчТ 7pTS0 Рдгмвдr 9СчрПl �Ч.О :,у.0 ;ц.� 50,D /д ЬЭ.П 109.0 aECOvD4дY 3СЧ7ПL b.u 12.0 12.0 15.п L 2Р,П 4д.J УЕед9 7F 9СнППL1иG °9;7v(ПЕп (Fiд�i ли0 SЕСпип Lf�EL1 t2.0 1г,п 1?,п 1п,0 12,п 10,п v•1СеТ2пVв� ЕчдпЕlуЕVТ (У ОР SЕСПиnе�У) 2П,П /д 2•).J 2В,0 1,0 Ь,О /е 10,п /_а,Ь а0ггLт UTEдeCr 9eiE fx) и7,0 .. ь0,п /Ь .. .. .. �П iSIиГ •-Рtдsпиц °Ед АОПч (еvЕддGЕ) .. .. 1.ь 7ССиР1ЕП пиЕLСIчсs �+ftнПiг7 " " " °tPEn .аТЕи (У) ии,п /� „ „ bh,0 /Ь вССЕа9 Т'1 EIFCTRICiTV �� �� (У ,7с elL OнELL[vCS1 .. . ьи,о г3.0 /t �и4в� nлFLLIи65 С7ичЕСТЕD ' •• •• ТО ЕLЕСТд[CITY (У) .. .. 39,0 .. .. ь,0 /� СПV91чРТТ7и - • 7ebi� �ECFIVEЧS (PER tыПi1 РО°) 7,0 11и.П 6.0 21.П ц5,п 'eSSFиCc° CeRS (°Ед Т•1'иг °7Р1 l.0 2.0 З.п ЕС.Е[TNI^_ITY (КNЧ/Уо �Ед ГлР1 1c,U 2П,п 2 0 1,0 1,П Р,П чЕаа°дТчТ fкС/v9 °са Сл') 0.2 0.2 П.2 11,п 11n:S 235.0 � _ _ _ _ _ 1,2 /с SEE v�TFS еип пFCTV(tllч5 •lч дЕVЕд9Е---"-"""------'-•--'--^--'-•---•--^'-°•'°"'-'-°"------•-°-'-- C.-t-Y rt. he., of h pages Ema Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961, for 1970 Letween 196t, and 197U, and for Most Recent E.timale between 1971 &ad 1973. 'he Phi llppi",a he. been elected as an objective country for its geographical similarity and la,cause of its apparent advanced SLage of ...nomi . develop._ , . 1NDONESIA 1960 La Excludes West 1rient ; Lb 1963; /c 1961-63. 1970 /a Registered applicants for work. MOST RECENT ESTIMATE, /a Unemployed workers seeking their fir5L job; /b 10 years and over, ability to read and wri e in elLier Latin or non-latiji characters; /c Inside only. BA.NGIADESH 1970 La 1966-67, households; Lb Registered, not all practicing in Ln coutiLry; 4t Government hospital csLablisamea s only; Ld Approximate enrollment as percentage of population in 6-10, said 11-15 see groups respectively; e 1967-68. INDIA 1970 /a Ratio of population uader 15 and 60 and over to labor force age 15-5 years; Lb AID estimate of labor force in age group 15-59. IBRD report gives a figure of 180.11 mllioni based con 1912 population census. Lhe difference is cue to changes - the definitiori of a worker. In he 1971 census, persons %ere classifiec, only on the LASiS Of Locir m- activities. This led to the exclusion of several categories such as housewives; Le ftefi.,e... applilea, L. far work; Ld 1967-68; Le 1967. Pla La Ppi NES 1970 La Public education only; Lb 1967; A Imports only. ----------------------------------------------------- -- ---------------------------------------------- - ------------------------------------------------ DEFINITIONS OP SOCIAL !NDLCATORS 2 Land Area (thou km Poet H r , reing person - Population divided by number of practi- Total Total surface area comprising land area and inland waters. ci 21tiUle'Hd immale graduate nurses. "trained" or "certtftad" nurses, Agric. most recent estimate of agricultural area used temporarily or per- and auxiliary personnel with training or experience. menently for crops, pastures. market & kitchen gardens or to lie fellow. Population per hospital bed - Population divided by number of hospital bad, 111il,bl:ci public and private general and spee ialized hospital GNP per capita (US$) - GNP percapita estimates at market prices. calculated ad reb.b I lit i:n centers; excludes nursing homes and establishment, by same conversion method as World Bank Atlas (1972-74 basis). or custodial and preventive care. Per capita s,pply of calories (% of requirements) - Computed ft- Population and vital statistics energy equivalent of net food supplies available in count" per lq-Y,. million) - As of July first; if not available, average capica per day, available supplies comprise domestic production. of .P e; r estimates. imports less exports. and changes in stock, ner supplies exclude ani- I feed. scads quantities used in food processing and los... in Population density - per square Fan - Mid-year population per square kilo. di stribution, requirements were estimated by FAO based an physio- ,.,,let 1110 h:clarer) of total area. logical needs for normal activity and health considering envirom- ptijaci.r den I ty - par square km of agric. land - Computed as above for mental temperature body weights. age and sex distributions o agricultural land Only. population, and allowing 10% for waste at household level. Vital statistics P,E ,it;. ug2lj foer2l2i,p ,rr2j, E j - Protein content of per c.pf, c upl f go do" c pl, of food Is defined .. Crude birth rate per thousand - Annual live births per thousand of mid-year above; requirements for all countries established by USU, Economic P'pu""-; - ually five-year -stages ending in 1960, 1970 and 1975 for R search Services provide for a minimum allowance of 60 gram of d .. taping c a colas - total protein per day ' and '0 grams of animal and pulse protein, of Crude death rate par o...nd - Annual death. at thousand .1 id-y..r which 10 gr._ h a., d be animal protein; these to adards are twat Population; lly five-year averages ending In 1960, 1970 and 1975 for than those of 75 grams of total protein and 23 grams of animal devel op I r protein - so rage for the world. proposed by FAO in the Third cold .ad Sur , 11itmat iesithou) ey Infant met y rate - Annual deaths of infants under one year of age W per thousand live births. Per capita protein supply from animal Ed p,,Ie Protein supply of food gt birth (yra) - Average number of years of life remaining derived from, antraile and pulses in go d3,. at birth; s,a 1 ty five-year average. end ing in 1960, 1970 and 1975 for Death rate (/thou) ages 1-4 - Annual deaths per thousand In age group ' vel:ping countries. 1-4 years. to children in this age group, suggested as . 1 a d feet or Gross r Production rate -iAvlr:81 uab,.ha1.!iv, .111 be., of malnutrition. in her noram 1 reproduct v . , riZ I f P. rie c.s pr t age-specific fertility rates , usua 1 ly Five-year averages ending in 1960. 1970 and 1975 Education - prinary school - Enrollment for developing countries AdJusted enrollment ratio of a 11 go. as Po,%,t,Sn thl -,,C-p-d:.,null,g, 7Lhyr:tes of mid-year P ,centage of primary school-a3c population, includ es children Red P. tg r f_ L2 '2 as c n 6_1 §5 -6P)665-111 a d 1960 t t t e r. I year, but djast'd far 111ferent lengths of primary ad 'c'ti" (%) - urban -,Cm .ed,like . at .... tc, es w, 1h . ve a , edo ti e.d F 7 --Ea to Put grosath rate of total of a P. ti . d1f ferent definitions I a rba r as ay affect comparability since a me pupil s are 1,2: or d*,, mong ountric a. Wasted enrollment ratio - secondary so hoot - Computed as aoove: u !n Population (. t of t secondary education require, at 1, t four year, d primar, rb ,at) - Ratio of urban to torsi population, diffe- of 'pp", rent definitions of urban areas may affect comparability of data among in traction; provides gener . t n 1 eacher raloi _n "fee - in:tr.ct lot s for pupils of 12 to 17 years of age correspoodeare Ax: structure (percent) - Children (0-14 years), working-age (15-64 year,). courses are generally excluded. ,ad retired (65 years and war) as percentages of mid-year population. Yam of srMlillgcpr -!de 3 f irst and second levels) - Focal cars of Ago dependency ra tio - Ratio of pop,lation under 15 and 65 and war to those 5 c h, I I ng; t ea an a y leHl vocational instruction av be par- Bc:nl.:a:ld.1- nt"r.,.gh 6' tially or coonpletely excluded. pe '. cy ratio - R.ti. of population under 15 and 65 and Over to V oc.timal enrollment (% of secondary) - Vocational institution, ,he labor force a group of 15-64 years. include technical industrial or other programs 'iich operate inde- an. P,.r. (c .. 1.,ive' thou) - Cumulative number a f pendently o- as d P.rbaerts of secondary insLiLutiOns. acceptors of birth-control devices under auspices a f o tionsl family pla- Adult literacy rate (%) - literate adults (so le to read and wric.) as ain. program - i.e. inception percentage of total adult p P. is t,.n aged 15 years and -at family pl.nnin4 _ use rs (%gof(22rried waimen) - Percentages of married .man of child-bearing . e 15_Z4 years) who use birth-control devices to Housing all married women in same age group. Pe-ons per rom (average) - kverage number of persons per ram in Zccupied conventional dwellings in urban areas, dwellings exclude Employment an- .... . d on ... Pled parts. catty active per cas. including a tried pe-nen' 'tr ' Total labor force (thousand) - Economi ccupicd d.elfing. ilh-1 piped -ter (. - Or upied con-tion,il I,Zes,1,,.,,-ployed,bu tsexcludi.8 housewives , a cadence. ccc., d.firi- dwellings in urban and rural a.eas without inside or outside piped t I n ritais cc= rie are not cmparable. water facilities as percentage at all occupied 4weltings. Let, a' lor' ill 2grl,,,cure (%) - Agricultural labor force (I, forming Access to. clectricity (% of all dwellings) - Conventional dwellings 'are try , hatri; fishing) as percentage of total labor force. with electricity ii living quarters as percent of total dwellings Unemployed - (7, of labor force) - Unemployed are usually defined a persons in urban and rural areas. who are able and willing to take . job, to , of a job on . g I v:a day Rural dwellings conncc ed to electricity (7) - Computed a, above for rc.. ined ont of a job, and seeking work for a specified Inl,,, Period rural dwellings nl . a., exceeding -a week, may t be comparable between - an tries due to t e I tion of one of e.g.. dilfore. d f ni - p eyed and source of data mployment office are ci9tiCS S-Ple 3urvays. compulsory unemployment insurance. A vcrs (per taou pop) - 11 types of receivers tor radio broadcasts to general public per ino-and of population excludes ineme distribution - Percentage of private income (both in cash and kind) an 11ca. r .. 1,er, in .-Irle x and to 'ears when registration Of received bv richest 57. r ich_t 207.. poorest 207. and poorest 107, of -vii. s:,d w. 3 in a "ec, data for recent years mav not be c ampar- households. able since most countries abolished licensing Passenger -rs get ch ! - " "n r " comprise motor cars Distributica, of land owniership - Percentages of land Owned bv wealthiest seating less 2, ; ;ijhtp2pa .ons;'-la1- ributaaces. hearsei and 10% -1 p-res, 107. of land own.- milicarv vehicles. Else r, ' '!M"yr el E 2,, Annual llasump io:waf industrial. ca- Health and Nutrition ;.di "iv.t. le c , rielt, in k i I t, hours per P*2 li-ra, capita ,,,L,.x,,ughY' jc ian - Population di e y a .,van rat], based an prodnecian d3ta. without allo-ce for .1 filed from . medical school , ivers ty 1 v:t. 1-ae, r. erid, h ,l all owing for mports and exports of electricity. _L _ 2e_ _ M N.uaprL t kaLr - Per capita COasumpLiO,l in kilograms estimated fran domestic production plus net imports of newsprint. Country S he-t Page 3 of h oa-les ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1974 ANNUAL RATE OF GROWTH (%, constant prices) US$ M1n. % 1960 -65 1965 -70 1974 GNP at Market Prices 22479 100.0 1.9 4.9 5.6 Gross Domestic Investment 4330 19.3 3.3 11.5 19.? Gross National Saving 4251 18.9 5*8 5.1 64.8 Current Account Balance - 79 0..4 Exports of Goods, NFS (net oil) 4351 19.1 1.5 7.8 0.5 Imports of Goods, NFS 4220 18.8 0.2 10.9 33.2 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 Value Added Labor Force V. A. Per Worker US$ M1-n. m1n. Us $ % Agriculture 4221 44-8 30.5 69.0 138 65 Industry 1915 20.3 3,0 6.8 638 300 Services 3279 34.9 8.3 18.8 395 125 Unallocated - - 2.h 5.L* Total/Average *4*t* *0* GOVERNMENT FINANCE Central Government (p BIT.. I %of GDP - 1 197 1973 Current Receipts 2166 1759 17.9 15.0 Current Expenditure 1f6 1001 10.2 10.8 Current Surplus 70 739 7.7 77 Capital Expenditures 1273 966 9.8 7.3 External Assistance (net) 403 234 2.4 3.2 *Provisional estimates MONEY, CREDIT and PRICES 1970 1971 1972 1973 1974 1975 (Billion Rp. outstanding end period3- Money and Quasi Money 330 469 695 987 1452 1995 Bank credit to Public Sector 57 129 58 37 - 2) 2663 Bank Credit to Private Sector 306 451 555 936 1126) (Percentages or Index Numbers) Money and Quasi Money as % of GDP 9.9 12.8 15.2 14.6 th.8 General Price Index (Sept. 1966=100) 612 638 680 891 1253 1492 Annual percentage changes ins General Price Index 12.3 4.2 6.6 31.0 40.6 19.1 Bank credit to Public Sector - 5.0 126.3 - 55.0 - 36.2 Bank credit to Private Sector 77.9 47.L 23.0 68.6 20.3) 136.9 NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. Ccnversion at an exchange rate of Rp. 390 = US$1. 2/Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. not available not applicable Country Data Sheet nage 4of4 oages TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1973-75) 1973 1974 1975 US $ M1n % (Millions US $) Exportss 2173 4351 4778 Oil (net) 1673 39.1 Oil (net) 564 2169 2957 Rubber 416 11. Non oil 1609 2182 1821 Timber 602 16.0 Imports -2817 -42 57 Palm oil 132 35 Resource gap 2 Pay lmW T in 138 3.7 Factor service: 18 -210 -508 Coffee 99 2.6 Interest 7 2 bvestment income -.112 -146 - 284 All other commodities 907 24.1 Balance on current account - 802 - 79 -1204 Total 3i6 100,5 Direct Foreign Investment 290 462 506 EXTERNAL DEBT, DECEMBER 31, 1975 Net MLT Borrowing Disbursements 572 664 2387 US $ M1n Amortization - 8 -80 - 248 Subtotal -5 __M 2139 Public Debt, incl. guaranteed 7875 Capital Grants 52 62 ** Non-Guaranteed Private Debt Other Capital (net) 217 - 126 -2250 Total outstanding & Disbursed Other items n.e.i 83 - 261 - 174 Increase in Reserves (+) 325 3j -9r DEBT SERVICE RATIO for 1975 Gross Reserves (end year) Net Reserves (end year) 783 1425 442 Public Debt, incl. guaranteed 9*9 Non-Guaranteed Private Debt Fuel and Related Materials Total outstanding & Disbursed Imports 4 4 90 of which: Petroleum 2 1 86 Exports of which: Petroleum(net) 564 2169 2957 IBRD/IDA LENDING, (Narch 31, 19701Million US $): RATE OF EXCHANGE IBRD IDA Outstanding & Disbursed 93.8 332.0 Through JulS 1971 since Augut 1971 Undisbursed 367.2 229.8 US $ 1 00 Rp.75 US $ 1.00 = Hp. 415 Outstanding incl. Undisbursed 61.06 1.00 = us$ 1.00 = us$46.518 1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services, with oil exports on a net basis (i.e. excludine factor payments and imports of the oil companies). 4Provisional . not available . not applicable May 19, 1976 iвао 11озв 105' 110' 115' 120° ., I2Y / 130• 135' 140• xvPn i5r v-�•°�.,,,} THA1lAND �,'"у� i.., , , ' врпдп Аовn � ,,,,`J ,i l 5, ц ,.; �` � � PHILIPPINES �f / 'N��NES�A 5 � �� Brunei � /� � л 1'2 } SOUih Сh/ПО Se0 BRUj�1E��!�"� , /� � C1TiE5 OR iOWNS .,� MALAY5IA { �.L S �� � L_ � � /� . � г1„л�и-__� и.� . :1 =�--- eiveкs �а1 дОп �\ ( � / � �. ?kDV1NC1Al dOUNDдR�ES � `` =иаЮтитWг� Q 2J ` Qq � - - iNTfRNAi10NAi BOl1NnAR1f5 1 � j п а� в tl _� � / \ Г� � � ��,�� ; MALAY5IA �1 /� о tJ � �5iCa19a \ L ,r� ; 8 �-...� l о А-`suvcл.PORE �`�у�`"� i."^ г� 15 �-�-----/ / 1t b' °�т п1.п9 Риппу � �-�"'"'r `r нАТманеяА Р о с i f i с О с е о п 0• р �д � � К А 1 А N Т А N Gor� Т�1 _ 1С\ Poniipnak � � г �' ���.,��мппоьwпа Q � п,аТ�пеп �, �� Рплппу. 14 �' � ь �ц Г' 2б " в� � � 9 17 :°д !'дЛ п ' Jambi BANCxA Ф ВлliЧупрсп И/�Р.�� кеvи[диди ги[а 2'1 � � �"*� °� �у� 5 TERA g�крiр�папв 16 (,t19 �� ов� 1���.-.�.S �иьчи �очпрп,р "� /�Тпlппдрапдап � SULAWfS! �,�,`' / �`/ лГ1• � О' а} / 1� 0 Fakfak� г�% . веп иш . 10 ы��e+RRlЕг111 rurvc � сеилм ( (� •"�• �КТА и ил rA �I ш 9 Вап�агтаvп ,Kendurl вийи�л � Enoro�alf �� 13 ���111 ? � �� � s• � 2 гу кпиьпп •� i з 5. 11 ��� nrs В I те �иееlпп9 � а v а 5 е а иlппе аопеап9 )�j{ 3 //рΡ j z PRDV WCES � -f' ' ° � а 4 ЭдкдетА А V А ° о � вр.ер� В а п д о 5 е о � � � 1а 1 EASi JAVA 1з вENGKUIU t1 CirebmSemproп мдоиRл 2 сеитеА� iAVA ta wesr кА�iмАитди 3. @, /� 1 3 WESi 1AVA 15 ЕАSТ KALIMANTAN Вппдпп9 • 2 °• ' / J д 5PECIAL САРIТАТ )Ь 50UTH KALIMANTAN О.�п Suraboya � � л �/� о (/ �, � TERRITORY 1AKARTA Т7 CENTRAI KALIMANTAN 1 ,�i�/ � ''" 1 вАи тимеаwл � м Гаи ё!° 5 SPECIAL TERRITORY 1в 50UTH SULAWE51 3/ Besa BimaO ЕТовеS о ��� °�„ _"�+=у °�O ° � '��,�w YO6YAKARTA 19 CENГRAL SULAWESI , О $ АготDиа �а•�ю./�./" Ь NORTH SUMATERA 20 50UTH-EAST SULAWE51 Deпpasor � 24 � Маитеге � , io.7 1AM8i 21 NORTH SULAWESI гсмеок 25 С- о ioo аоо зоо аоо soo �0' в R1AU 22 MAIUKU woiпgapu � � 9 WЕSт SUMATERA 23 BAU /ndian Осеоп �� Кирппs ~ тiмои , м�iе5 ` ioo Эоо зоо аоо soo ьао Тао ео0 10 50UTH SUMAiERA 2а `NEST NUSA TENGGARA гимвл � 11 LAMPUNG 25 ЕАSТ NUSA TENGGARA �д �i киомеТеаS 12 5PECIAL ГERRITORY АСЕН 26 1R1AN )АУА 100° �05' 110' 115° 120° 135° 130° 135• ��"^нхтьи✓п .гГиr., °м� л� 'л• 140' iве� р><оЭв л �..., THAILAND �os° по° пs° гао° � iss� ' ио° �ц° iao° ви я, � �� � J ° вопа° поьм �1 � } _ �{ ' 1� � ,,,; �-+'� � � PHILIPPINES�✓ �� �N��NES�A 5 5l 1 Вгипег � / � 1� � SоиГh Ch/па 5ео BRUNE1i� '- /уТ � _. ппеs ов rowиs ,, MALAYSIA � � i� �i г�,�-.��-� ;' L- J мivees � • e0aп �\ % �� ;С Л �п axovwuni aouиoneies �� ` �°°klumpur D � ' oq 'l� -�- iиiERиqilOидl вOUrvoЧRiES � 1 � ` ] ь� л �� С-- ° �уΡ ' в � " MALAYSIA � ^ tJ ,� > i � ° 5ibolga / 8 _�-kS1NGAPORE � �^С.� /•"-р � `15 Меп°е + � b' °�т°пlпп9ри°п9 �`.-""""'j �у ��• ��ндсмднеяд Р а с i! г с О с е а п о. о" _о � К А ! А Т А N Gorom°1о ��, г ' \U\ Ропп°паk • ы�� � � ат°гlпдо {J(1•,у� М°nokw°п� � Роа°пе • � 14 � � � 2b � 7 9 ;е ��J-� ° а � 7 вaiikpap°п � `/� кегигАили 5иlа 22 Q �� J°mbi BANGKA b l.. �n v д ��� пВ/ � л� �ауариг° � 5 Т Е R А Pongk°lpin°п9 � б \ а У � ^��г .`�_ ,, {� т° j ngp°пеап j �, SUгAWE51 "(\ •,РоетЬ о� �� 7 � Faкiak •� � I �< 18 (!'�гz-.с-_\V`4 г и ь iиlли �А vл ш вепуипi . 1О ееигиие врпlпгппып а �^ � 1З п кепд°г� вивио � сЕглм � � епт°г°г (� 2 `--� о .rt �I з $. 5' � О 11 �� ~�i� 9°�я те ььеrеп9 J о v а 5 е а и1еп9 р°пепп9 � z о �% � Peoviиces q�дкАRтд А � А . о � �ь°s `� В о п д о 5 е о �" � f Ь }д 1 ЕдSт lдvд 13 вЕиGкиш �D сlreЬопsетпг°п млоиаа 2 CENTRAL 1AVA 14 WEST KALIMANTAN 3 • •"`��� р� а е� I 3 wESr 1дVд 15 ЕАSт кдLiмАитАN B0Пд1P1з 2 sпть°у° � �, � �1 9 I 4 SPECiA� CAPITAL 16 50UTH KALIMANTAN � "'яп I TERRITORY 1AKARTA 17 CENTRAL KALIMqNTAN 5 � gд[/ 5имвдwА � �� р Мегоиkё � 5 5PECIAL TERRITORV 1В 50UTH SULAWE51 Э Be3° eim°g Е[ОиFS о �� � �� °�'9 �„�w YOGYAKARTA 1q CENTRAI SULAWE$1 � О/ ��� At°тЬи° Гга.rидаl/ i" �� ь иоатн sимдтеед zo sоитн-ЕАSт suTAwesi � � 24 меетеге , ,- io•7 1Амвi z1 Nоетн sulAwES� °°"р°°°' гсмвок 25 r- 8 RiAU 22 MALUKU �90ре � ' о iao чао мпеs зоа аао soo �о' 9 wEST SUMATERA 23 BALi lndron Осеоп кер°� пмои SимВа о 1'оо zoo зоо аоо soo ьоа �ао воо 10 50UTH SUMATERA 20 ИгЕSТ NUSA 7ENG6ARA _р л киоме�еаs Т1 IAMPUNG 25 ЕАSТ NUSA TENGGARA � Гi 12 5PECIAL TERRITORY АСЕН 26 1R1AN 1АУА � ���° 10о' 1о5° 11о' 115' 12о' 125' 1]о° 135• пчиiлм.�гаwн��ryтi., 1по• - L - SUMMARY OF FINDINGS AND RECOMMENDATIONS i. This year's World Bank Economic Report does not deal with the short-run situation, nor with a deep analysis of the structural problems and long-term prospects of the Indonesian economy. Its scope is limited to an examination of the public sector investment program over the three years 1976/77-1978/79, which will close the period covered by RepelLta IT, the second five-year development plan. Public sector here includes not only the central government, but also public enterprises whose investments are financed partly from the central government budget, partly from the enterprises' own savings and partly by borrowing from domestic and foreign banks and from foreign suppliers. Li. Circumstances have compelled us to focus particular attention on the impact of projected financial resource availabilitLes on these public sector investment plans. However, the real aim of the examina- tion is not simply to prepare bankers' sums; it is to examine these plans in the light of the needs of Indonesia's fast expanding popula- tion, in particular, the need to provide the poorer segments of this population with growing opportunities for productive employment. Unfor- tunately, in the time available and under the prevailing circumstances, the planned examination of the investment program and of its employment and income effects could be only a preliminary one; we hope to improve and elaborate on it in the coming year. iii. The progress of Indonesia continues to be impressive in most respects. Agriculture has succeeded in providing better nutrLtLnn to a growing population, while also producing growing exports of timber, rubber, palm oil, coffee and a variety of lesser products. Where ten years ago there was practically no industry, self-sufficiency has been achieved in textiles, and can be foreseen at an early date in cement and fertilizer. Other types of manufacturing have been started and are expanding. Petroleum production has increased rapidly. Product Lon of other minerals, in addition to tin and bauxite, has started, including notably copper and nLckeL. Jakarta - one of the world's fastest ,rowing cities - and other towns have acquired some of the trappings of modern urban life, while at the same time an imaginative effort is also being made to alleviate the lot and improve the living environment of the urban poor. Irrigation, transport, electric power and other infrastrLICture facilities have been improved and expanded. 1,-,dLl(-.ItLon facilities ind school enrollment have greatly increased. iv. This advance on a broad front was facilitated by the rise of oil revenues, from $150 million in 1969 to $3 billion in 1975/76. However, there were other important contributory factors: an initially well-balanced investment program, a pragmatic approach to the exploitation of natural resources, frugality in military expenditures, and encouragement to private investment, both domestic and foreign. Certainly, all was not well in Indonesia: there was in particular justified concern about the growing pressure of population in Java; but most things were improving. v. However, below these visible and real improvements of the past seven years and despite the formulation of a well-balanced second five-year development plan, a set of difficult and unanticipated problems has accumu- lated in the past two years. Following the increase in oil prices, the official investment program was revised upwards, in keeping with the im- proved resource situation. While dynamic and fairly large, this revision was well in keeping with the Government's projected resource availabilities and by itself it created no problems. vi. These arose elsewhere. It was known that the State Oil Company, Pertamina, was also independently undertaking an investment program of its own, which - beyond the normal needs of petroleum exploration, produc- tion, refining and distribution - extended to heavily capital-intensive investments in natural gas liquifaction, petrochemicals, steel, office and hotel buildings, housing, ocean-going tankers, etc. It was the general impression that Pertamina's own resources - including what it could itself borrow abroad and service - would cover the costs of this investment program. In fact, it subsequently appeared that such was far from being the case and this resulted in serious liquidity problems. The Government stepped in to stem an incipient crisis just in time, inter alia, by undertaking to assist Pertamina in servicing its debts. Furthermore, it launched a comprehensive reexamination of Pertamina's investment programs. This disclosed that some of the Pertamina projects outside the oil sector were not carefully planned, some represented investments of doubtful merit, some were unnecessarily costly and involved incautious contractual arrangements. Some had undoubted merit but were encountering cost over- runs. Furthermore, as already said, their aggregate financial magnitude was beyond Pertamina's own financing capacity and was far greater than had until recently been appreciated by the Government. Pertamina had, in short, preempted a substantial part of the resources which the Government had expected to be available, and had planned to devote to the purposes expressed in Repelita II in the course of the coming years. vii. Following this review the Government decided to reduce, defer or abandon many of the on-going and planned Pertamina projects. It launched an effort to renegotiate contracts. This process has met with some success and is still underway. Furthermore, full Government control -iii- was imposed on all foreign borrowings of Pertamina (and of all public sector firms), and this has made it impossible for them to borrow abroad without Government approval in future. Nevertheless, principally to meet Pertamina's obligations, the Government's foreign assets, instead of growing had to be significantly depleted and substantial medium-term cash borrowings had to be arranged in private financial markets. Most of Pertamina's short-term debt has now been paid, but large resources will continue to be absorbed by already incurred foreign debt, by additional debt which must be incurred for the completion of those projects which it is not economical to stop or further reduce in size or cost, and by the domestic costs of those projects. viii. Indonesia's financial difficulties were further compounded by the fact that in 1975/76 oil revenues fell substantially short of anticipa- tions, because of the unexpected decline in consumption in Indonesia's princi- pal markets. One of the effects of this unanticipated shortfall in Government revenues was that reliance had to be placed on commercial foreign credits and on the domestic banking system to finance a considerable share of investment by public enterprises. The reliance on domestic credits contributed to an increase in overall liquidity which exceeded 40 percent despite a substantial decrease in foreign exchange reserves. This in turn contributed to inflation at the rate of about 20 percent in 1975/76, a rate higher than that prevailing in Indonesia's principal trade partners and competitors. A continuation of inflation at this rate, in addition to its undesirable domestic effects, including an adverse impact on income distribution, would result in balance of payments difficulties. ix. When these circumstances became fully known to the Government, it realized clearly that they confronted it with a number of serious and difficult problems. It had to find the resources to service the enlarged foreign debt, to complete those elements of the Pertamina program which cannot be abandoned or deferred, and to carry out as much as possible of the invest- ment program envisaged in Repelita II, so as to restore to the overall public sector investment program the intended balance. This original thrust of the program was intended to make it contribute most effectively to increas- ing the income earning opportunities, and improving the living conditions of the poorest and most underprivileged sections of the population. x. A year ago the Government and the World Bank estimated that service on the debt contracted as of the end of 1973 would amount to about $300 million in 1978, thus leaving plenty of room for further borrowing. It now appears that service on debts contracted as of the end of 1975 will peak at $1256 million in 1978, excluding obligations contracted by Pertamina on account of oil tankers which are currently being renegotiated. This enlarged debt service will, in future years,sharply reduce net resource inflows which were of the order of $500-600 million in 1973 and 1974, and well in excess of those amounts in 1975 and 1976. The Government realizes that nevertheless, in order to prevent debt service from rising beyond prudent limits, new borrowing after 1976 would need to be sharply reduced, despite buoyant export projections. - iv - xi. Confronted with these problems the Government has taken a series of important, far-reaching and difficult decisions. It has decided that foreign borrowing must be cut back sharply from the 1976 level of about $3.4 billion to $2.1 billion in 1977 and $2 billion in 1978, before being allowed to rise again to about $2.9 billion in 1980 and to $5.8 billion in 1985. Especially in the early years, it aims to effect most of the reduction through a cut in the least concessionary borrowings. This decision is dictated by the necessity to keep the debt service manageable. It reflects the hope that Indonesia will be able to borrow about $1.4 billion on concessional and semi-concessional terms in 1976 and slowly rising amounts thereafter. It also reflects the assumption that borrowing from other sources, including export credit agencies and private banks, is likely to be on much harder terms and must therefore be restricted. Even the prudent borrowing program resulting from this decision will give rise to debt service ratios approaching 20 percent in 1979 (not including the above mentioned obligations on account of tankers) and declining slowly thereafter. The Government appreciates that even with such a prudent program net foreign resource transfers will be reduced to a fraction of their earlier levels in the years 1977 through 1980. xii. The Government has also decided to increase domestic revenues in the next few years much faster than was originally contemplated and to levels much higher than those likely to result from a mere continuation of existing tax policies and procedures. It has also decided substantially to reduce the increase in net liquidity to a relatively modest annual rate of less than 25 percent, and to allot to public sector enterprises a reduced share of the increased liquidity, thus giving the private sector increasing scope for resuming its dynamic role in production and investment. xiii. Further, the Government has also decided to reduce selectively the aggregate size of the planned or proposed public sector investment program. As already mentioned, a substantial part of this reduction has already been achieved by reductions and replanning in the scope and cost of some Pertamina projects and by elimination of others. Further such reductions are planned and further renegotation of existing contracts is in progress. The Government also intends to defer or to shift more fully to private capital a number of new large capital-intensive projects which had been contemplated. It also intends very carefully to examine and where necessary and feasible, to reject or defer proposals for the purchase of costly equipment for transport, telecommunications and power. It believes that restraint on these types of investment should reduce, and perhaps even eliminate the need for reducing other planned programs. These actions have shifted and will further shift the balance of the total public sector investment program back towards greater emphasis on directly improving the income earning opportunities, productivity and living conditions of the mass of the population. Together, the actions already taken and the further set of actions decided by the Government constitute an effective response to the situation confronting it. - v - xiv. As indicated above, official concessional and semi-concessional development assistance of not less than $1.4 billion is required in the current year. International organizations should be in a position to provide half of this. Bilateral development assistance should provide the other half, of which at least $600 million should come from bilateral IGGI sources. As a substitute for harder term borrowing which will still be necessary, larger amounts of concessional and semi-concessional terms would be desirable and would be an appropriate complement to the actions the Government itself has taken and plans to take. To the extent that they can be provided, debt management would be facilitated, the immediate sharp compression of net transfers from abroad would be attenuated, and the continued expansion of the essential elements of the public sector investment program would be facilitated. In view of the projected reduction of net resource transfers in the next few years, it would also be helpful if part of the official development assistance were to take quick disbursing forms. - I - INTRODUCTION 1. This year's World Bank economic report on Indonesia does not concern itself with the short-run evolution of the economic situ- ation. That is described in the report of a recent IMF mission, with which the Bank staff has had ample discussions and with whose findings and conclusions it is in general agreement. Nor wLLL it, like last year's Basic Report, examine most of Indonesia's economic sectors and most major aspects of its development policy. This report's more modest main aim is an assessment of Indonesia's public sector investment programs over the remaining three years of the current Second Five-Year Development Plan (Repelita II), mainly from the point of view of their consistency with financial resource availabilities, and to the extent feasible, from that of their likely impact on employment. Public sector here is defined to include central government and public enterprises. Part of the public enterprise investment program has been financed from the central govern- ment's budget in the form of Government equity participation but partly also financed from bank credits and the public enterprises' own savings. 2. This concentration on public sector resources and investment is not motivated by an under-estimation of the private sector's con- tribution to development, in the past or in future. However, the public sector occupies the commanding heights of the Indonesian economy. It has command over the bulk of resources, it traces the way and provides the means of development. Direct employment creation by the public sector will not, and cannot be expected to absorb a large fraction of the six million new entrants into the labor force over the next five years; private services, labor-intensive industry, food and plantation agri- culture must bear the brunt of that burden. However, the public sector must provide vital support, both by leaving enough resources available to finance private investment, and by gearing its own investment programs to provide appropriate support and to shoulder directly part of the burden. 3. The bulk of Indonesian planning and project executing agencies have made great and effective efforts to further the second Repelita's targets, which strongly emphasized the need to provide additional incomes and employment to the poor. Vast amounts were spent on irrigation and on rural roads, on plantations and on paddy development, on schools and on rural clinics. In many such fields, expenditure and achievements during the first two years of the Plan were quite consistent with overall plan allocations. In other fields, where expenditure lagged behind targets, the time spent was nevertheless put to good use in preparing for the future expansion of the programs. Progress has been impressive. Those who doubt the testLmony of statistics can Find convincing visual evidence by travelling through Java. Furthermore, while one cannot deny that many of the rich have become richer, it also seems quite clear that most of the poor have become Less poor. - 2 - 4. The overall volume of public sector investment is impressive. In most fields of infrastructure, industry, irrigation, new facilties are being added 'to a still very low stock at a very fast rate. The cash flows of many individual enterprises and also of the public sector as a whole are influenced by the fact that investments in the process of being carried out and therefore not yet productive, are a high proportion and in many cases a multiple, of total capital stock. Conversely, however, the large stock of investment now in the process of being completed, which is the source of present difficulties, contains a promise of fast growth when the present investments mature and become productive. 5. Nevertheless, the situation is in some respects quite different from what was foreseen in the Plan document, or even last year. The outstanding feature of this divergence is that by early 1975 the public sector of Indonesia had become committed to a number of heavily capital- intensive, expensive investments in industry, in infrastructure, in administrative and service buildings. A very large part of these commit- ments was incurred by the national oil company, Pertamina. 6. The widespread impression was that Pertamina's resources would cover the financial needs of its investment programs. This assumption has proved to have been quite incorrect. The amounts of Pertamina's investments were substantial and could not be covered by its own re- sources. Even after they were sharply curtailed by cancellations and renegotiations of contracts, Pertamina's investments will amount to about US$1.1 billion in 1976/77, not including such investments as will be financed by Pertamina's own current earnings nor the settlement of large but not fully defined obligations on account of tankers (which are currently being renegotiated). Furthermore, this year's debt service payments on account of Pertamina's debt - not including payments to be made on account of tankers - amount to more than US$400 million. 7. Even if the 1975 fall in export prices and slowdown in the growth of oil revenues had been correctly foreseen, the discovery of the Pertamina burden was clearly cause enough for the Government to reexamine the investment program, the policies which help to determine resources, and overall priorities. In a first stage, before the long-term impact of the problem had been fully understood, this reexamination led to sharply increased reliance on foreign borrowings in 1975, and, because many projects are now too advanced to be conveniently stopped, also in 1976. However, the Government has decided also to increase its domestic resource mobilization effort, and beyond this, to curtail investments as much as is necessary to return to domestic equilibrium and prudent foreign borrowing. It will bring the brunt of these cuts on capital-intensive undertakings, by reducing to the minimum, in the next two to three years, new project starts in industry and new purchases of expensive equipment for transport and communications. - 3 - 8. We would have liked to examine in detail the impact of the public sector investment program on incomes and employment. This report must fall well short of this ambition for lack of data and of time. The first chapter will aim at estimating the domestic resources likely to be available for public sector investment. Chapter II will trace the out- lines of a reasonable foreign borrowing program. Chapter III will describe the overall magnitude of the public sector investment plans and programs, and their rough composition. It will also briefly examine at least in qualitative terms, their implications for Indonesia's income and employment growth rates. 9. The time horizon of this report is March 1979, the end of Repelita II. However, with respect to foreign borrowing, the present is dependent on the future; current borrowing ability is limited and determined by future repayment ability. Consequently, whatever the hazards of long-term projection exercises, particularly in fields where even the present and the past are little-known, we cannot avoid projecting certain aspects of the balance of payments until 1985. The world context assumed for these projections is that provided by the Economic Analysis and Projections Department of the World Bank: vigorous recovery of the world economy accompanied by 7 percent annual rise in international prices until 1985. 10. The domestic context is clearly dependent on the manner in which policies are conducted, but we have made the general assumption that overall GNP will grow at 7.5 percent in real terms. Part of this growth will be the outcome of past investments about to mature, and a large part should be yielded by private investment, for which the Govern- ment intends to release new resources and create additional opportunities. With proper care for the composition of the investment program, and appropriate resource allocation policies, such a growth rate is not incompatible with the likely investment by the public sector over the next three years. With proper sectoral spread of investment and reason- able income distribution policies, such a growth rate should yield very substantial benefits to the bulk of the population over the next decade. CHAPTER I DOMESTIC RESOURCES FOR THE PUBLIC SECTOR Oil Revenues 11. Oil revenues are the most important determinant of the Govern- ment's domestic resources. They provided about 20 percent of total domestic Government revenues in 1970 and 59 percent in the 1976/77 budget. During this period, Indonesia's total oil production expanded rapidly, from about 220 million barrels in 1968 to 502 million barrels in 1974. Production and exports fell in 1975, but have now recovered. Thanks to the surge of exploration and development in the early 1970s, the capacity of the Indonesian oil industry is now running well ahead of actual production. Both should continue to increase over the next few years. Export volumes will, of course, also be influenced by the growth in domestic consumption, which now amounts to about 90 million barrels and has been growing at about 15-17 percent annually. 12. Table I below gives a likely projection of oil revenues. The 1976 figure is based on the Government projection; according to the President's budget speech, it implies an increase in the Government's share of total gross revenues. Sixty percent of Indonesia's oil is produced by Caltex under "contracts of work" arrangements. The Caltex fields are old, and their output is likely to decline in future, at a rate determined by the attractiveness of secondary recovery. For 1977 and 1978, we have used recent figures for contracts of work production, which are much higher than the very prudent official projections made in 1974 (0.77 and 0.70 million bpd compared with 0.51 and 0.34 million bpd). As contracts of work production yields more per barrel in tax revenue than production-sharing output, it is assumed that this potential production will be fully realized. 13. An increasing share of future production will have to come from newer fields exploited under production-sharing contracts, which started producing in 1971. This output has continued to rise sharply, even though demand was a limiting factor in 1975, when production was much less than had been forecast a year earlier. The expansion of output depends on exploration and development, and on demand, which in turn is determined by the rate of recovery from the world recession, by world energy policies, and by the overall attractiveness of Indonesian oil to major consumers and to integrated petroleum companies - which is a function of price and of profits, but also of longer-term political considerations. Projections are necessarily uncertain, though it seems safe to assume that output will continue to rise at a fast rate. Because of their higher costs of production, "production-sharing" oil's per barrel contribution to the budget and to the balance of payment is much lower than that of Caltex. 14. The final element in oil production is Pertamina's own output. This has also been affected by external demand and, unlike production sharing, failed to increase in 1975. Part of Pertamina's production comes from old - 5 - fields, and in a recent study it was expected to peak in 1977-79 and then decline. In any case, Pertamina only accounted for 7 percent of total produc- tion in 1975. In the next few years, its revenues are likely to be absorbed by the costs of its investments not included in the investment totals given below. Table 1: Oil Revenues, Budget and Balance of Payments (Fiscal Years Beginning April 1) 1973 1974 1975 1976 1977 1978 1. Production of foreign oil companies (million bbl) 433 499 436 2. Pro rata crude for domestic market 53 54 57 3. Exports (million bbl.) 380 395 379 4. Gross income ($ million) 1556 4720 4711 5. General costs ($ million) 179 576 644 6. Operating income ($ million) 1377 4144 4067 7. Retained by companies ($ million) 542 1104 944 8. Oil revenue ($ million) 835 3040 3123 3993 4602 5376 1/ 1/ 9. Oil revenue (Rp. billion) 347 1262 1296 1657 1910 2231 P.M.: tax per barrel produced (7/1) 1.93 6.77 7.16 tax per barrel exported (7/3) 2.20 7.70 8.15 1/ Includes oil revenues withheld by Pertamina. See Table 3, p. 8 for actual receipts. 15. Future Government income is determined by the volume of exports, the price in foreign markets, and the distribution of net revenue between the Government and the oil companies. This distribution is the subject of continuing negotiations, which could be unfairly influenced by the World Bank publicly making explicit assumptions about the future sharing of oil revenues; and the implicit assumptions could easily be derived if separate export volume and revenue assumptions were shown. Consequently, Table 1 above shows separate production figures only until 1975; beyond that date, only tax revenue figures are shown. They are projected to rise from Rp. 1,300 billion in 1975/76 to Rp. 1,660 billion in 1976/77 and to Rp. 2,230 billion in 1978/79. In any case, there is some negative correlation between these factors, which makes it somewhat less difficult to project revenues, whLch are their end result, than to project each element separately. - 6 - 16. A final remark: oil prices and oil revenues have been notoriously unpredictable in the past, and there is no reason to be confident about their future behavior. The Rate of Domestic Inflation and Monetary Financing 17. One crucial consideration for determining domestic non-oil revenues (and expenditures) is the likely level of price inflation. This is also, to a considerable extent, a normative assumption: domestic price inflation is largely a policy-determined variable. 18. Between January 1, 1974 and January 1, 1976 the Jakarta cost of living index rose by about 60 percent, i.e., at an annual rate of about 25 percent. In recent months prices have been rising at annual rates of about 20 percent, but the official assumption underlying the budget is that fiscal 1976/77 prices will be about 10-15 percent over the previous year's average level. An earlier inflationary bout had been started in 1973 by a combination of crop failures and world inflation. More recently, the main cause of inflation has been the continued fast expansion of bank credits to finance public investments. Total liquidity expanded by over 40 percent in 1975/76, despite a sizeable reduction in foreign exchange reserves; and about half of new credits have gone to the public sector, thus forcing some tightening of credits to the private sector. 19. The balance of payments is the most immediate consideration when one views the costs of inflation, and the desirability of slowing it down. Indonesian prices have got increasingly out of line with those of major trading partners and competitors. Indonesia's export earnings are most strongly influenced by the export of oil, whose produc- tion costs bear little relationship to domestic price levels. Other extractive industries, including timber, are similarly little influenced by the overall relationship of domestic to foreign prices. On the other hand, imports are responsive to relative prices. The establishment of labor-intensive export industries, which are essential for future em- ployment, is also heavily dependent on the maintenance of reasonable domestic to foreign price ratios. 20. In view of its adverse impact on the balance of payments and on income distribution, the Government has decided to slow down inflation in the current year. Consequently, it is intended to reduce the expansion of total liquidity from the 40 percent and higher average annual rate of the past four years to about 22 percent in 1976/77, with inflation at about 10-15 percent, and to an annual rate falling to about 20 percent in 1977/78 and thereafter, with inflation at about 7 percent, i.e., the projected rate of world inflation. - 7 - 21. To ensure that the private sector will play the dynamic role attributed to it in Indonesian thinking, the public sector will have to preempt a declining share of the growth in total liquidity. In 1976/77 it is the Government's intention that the public sector should preempt no more than 50 percent of the growth in total liquidity, roughly the same as the exceptionally high share in 1975/76. Thereafter, its share will gradually be reduced to about one-third - still higher than its share before 1973, but one probably in line with its increased economic role. Table 2: Public Sector Enterprises Reliance on Increases in Liquidity (in billion rupiahs) 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 (estimate)-------(projection)------ Total liquidity at end period 769 1203 1583 2400 2920 3504 4204 Increase in total liquidity during 221 434 380 817 520 584 700 period of which private sector 408 260 360 448 public sector 408 260 224 252 Tax Revenues 22. The assumption about inflation has a strong bearing on public revenue projections. Apart from the tax on oil production, the main components of Government receipts are taxes on foreign trade, domestic sales and excise taxes, and taxes on income. There are two levels at which future revenues can be intelligently discussed, and neither of them is pure forecasting. One could have a purely normative discussion of the way in which revenues should be made to behave; alternatively, one could try to project how revenues are most likely to behave if no major departure is made from past tax practices. The Government of Indonesia has recently decided to make a sizeable additional revenue mobilization effort, and we reflect these decisions in our projections, which thus show much higher revenues than would result from the mere continuation of earlier tax rates, policies and collection procedures. - 8 - Table 3: Current Government Receipts, 1976/77 - 1978/79 (in billion rupiahs at current market prices) 1969/70 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 ------- Actual ------- Estimated Budget --Projected-- Corporate tax on oil 48 347 973 1227 1657 1910 2231 Taxes on income: other 43 163 260 337 425 580 745 Taxes on domestic consumption 68 169 161 236 314 431 531 Taxes on international trade 81 254 301 309 348 403 472 Non-tax receipts 3 44 62 57 58 71 96 Total Domestic Revenues 244 977 1759 2166 2802 3395 4075 + additional resource mobilization 100 2902 23. The following brief description of various taxes shows how the revenue projections are built up: Import duties. Imports rose rapidly in both volume and price in 1974 and 1975. They are assumed to rise further by 24 percent in 1976/77, and at a rate of about 15 percent in the following two years.1/ Although the value of food and fertilizer imports is falling, the ratio of dutiable imports to total imports is projected to decline slightly because of the rising share of capital goods. Average duty rates on dutiable imports are taken to remain at their recent level of somewhat over 20 percent. It is assumed that there will be a significant improvement in tax enforcement. The budget accordingly estimates that revenue from import duties will rise by 27 percent in 1976/77. Somewhat lower increases are projected for 1977 and 1978. Sales tax on imports. Sales tax on imports is assumed to yield 40 percent of the revenue from import duties, as in the 1976/77 budget. 1/ This appears roughly consistent with the export and borrowing projections made later on, and also with the offLcial balance of payments forecast for 1976/77. - 9 - Export taxes. A great decline in revenue is estimated in the 1976/77 budget, as the duties on many exports have been reduced or removed entirely. Revenue from export taxes is assumed to have lost major significance. Sales and excise taxes. In the 1976/77 budget, sales tax collections are estimated to increase by 24 percent, as against 43 percent and 56 percent in the two previous years. Tax rates have been reduced to 10 percent on services and 5 percent on a wide range of goods, to encourage consumption of domestic products. Excise revenue has been rising at about 28 percent per annum recently and this rate of growth is projected to accelerate further. These taxes apply to a range of locally produced goods, especially cigarettes, beer and spirits, and sugar. We understand that greater effort is to be made to reduce evasion, and we assume that this will more than make up for the possible reduction in the tax on sugar, and for the negative impact of slowed-down inflation. Excise and sales taxes are clearly a major potential source of additional revenue, and vigorous growth for them can be projected. Other oil revenue. In recent years, domestic prices of petro- leum products were adjusted from time to time to meet rising costs of crude oil, refining and distribution. It is assumed that for 1977 and 1978 this policy will be continued. Net revenues from this source are projected to continue at a low level. Personal and non-oil corporate income taxes. In the last two years, revenue from personal income tax has risen by 30 percent and 41 percent. For 1976/77, the budget estimates a further growth of 33 percent, reflecting a continued rise in nominal incomes and increased tax collection efforts. The tax holidays enjoyed by a number of private corporations under the investment incentive law will soon expire. This, and improved collection could make room for rising tax payments despite lower inflation rates. IPEDA. Collections from IPEDA (land tax) have been declining in real terms and no improvement is projected in the 1976/77 budget. More intensive collection and wider coverage of assessed land areas rather than a significant revaluation of land values is the basis of modest increases in revenue projected for 1977 and 1978. On balance, income taxes of all sorts, including IPEDA, are projected to continue growing by 30 percent in 1977 and again in 1978. Routine Expenditure 24. In general, current, or as they are called in Indonesia routine, expenditures have remained extremely modest. Of course, as everywhere, one can find examples of expenditures which are superfluous or excessively lavish; but on balance, there is very little that can be cut out of current expenditure without hurting development. In particular, firm control continues to be exercised over defense expenditures. Given the earlier record, we have reason to assume continued restraint over these, and only the mildest relaxation of restraints over other routine expenditures, particularly in fields where they are indispensable to social progess or economic development. - 10 - 25. In fact, these assumptions may well be overly restrictive and thus lead to overstated projections of public savings. In any case, whatever the financial situation, cuts in routine expenditures below their projected level will be impracticable. In particular, personnel expenditures - which, it is true, increased substantially in 1974/75 - are projected to decline in real terms in 1976/77, and recover only in subsequent years. Public Savings 26. Not including expenditures needed for debt service, public savings have increased from Rp. 42 billion in 1969/70 to Rp. 347 billion in 1973/74, and are projected to increase further to Rp. 2,150 billion in 1978/79. These projections are in current prices; in real terms, there were also substantial increases until 1974/75, but an actual decrease in the fiscal year just ended. 27. One cannot but be impressed by the fact that "public savings", as defined above, have increased from about 20 percent of domestic current revenues in 1969/70 to a budget level of almost 50 percent in 1976/77. True, this period saw a five-fold increase in oil revenues; but the increase in public savings did not lag much behind. Indeed, 87 percent of the corporate tax on oil was saved in 1969/70, and still over 77 percent of the much increased oil revenue in 1975/76. This is no mean achievement for a country with crying needs for current public expenditure of all sorts. Unfortunately, one must repeat the oft-made statement, that Indonesia's oil revenues are low per capita. The effort made to save them for investment is commendable, and remarkably successful; it is unfortunately not enough to provide adequate resources for investment. This is all the more so as a notable, and fast-increasing part of public "savings", as defined above, is absorbed by debt service. 28. Public savings rose in current prices only modestly in 1975/76. However,the Government has decided to renew its domestic resource mobilization efforts. This firm decision is the basis for our projection of growing revenues, which should raise public savings (before debt service) by over 60 percent in real terms over the next three years. There is no question but that this is a feasible target, and that its achievement will demand the continued exertion of technical skills and of political determination. 29. Normally, interest payments at least are added to current expenditures before deriving the current surplus. Indonesian practice has been even more conservative: both interest and principal repayments on the Government's own debt were counted as current expenditures. However, this report follows a different practice. Most of the Indonesian Government's debt service payments go to foreign lenders. When discussing resource availabilities, it seemed preferable to present foreign capital inflows on a net resource transfer basis, as well as on that of gross lending. We, therefore, excluded debt service payments from the budget, and treat them as a separate category. Table 4: Routine Government Expenditures During Repelita I and II (in billion rupiahs at current market prices) 1969/70 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 Actual Actual Actual Est. Budget Proj. Proj. Personnel expenditures 104 259 408 593 645 850 970 Material expenditures 50 109 167 257 313 360 414 Subsidies to regions 44 113 207 285 307 368 442 Other expenditures 4 149 149 86 163 85 95 Total Routine Expenditure 202 630 931 1,221 1,428 1,663 1,921 (not including debt service) Public Savings Estimates 1/ Domestic revenue 244 977 1,759 2,166 2,902 3,395 4,075 Public savings 42 347 828 945 1,474 1,732 2,154 (before debt service) Public savings 100 454 818 763 1,035 1,105 1,284 (before debt service), in real terms [indei ) N.B.: Debt service expenditures were excluded from current expenditures. 1/ Including Rp. 100 billion from additional resource mobilization effort. - 12 - 30. It is worth noting, however, that interest payments on the debt of the Government proper absorbed Rp. 76 billion resources in 1975/76, and Rp. 176 billion in the 1976/77 budget. By 1979, interest payments on the foreign debt of the public sector are projected at Rp. 265 billion equivalent; total service on public debt at Rp. 780 billion. These payments will be a first charge against public savings, thus greatly reducing the resources left available to finance investment. Savings of Public Sector Enterprises 31. The Indonesian public sector is a large one, and plays a vital role in the economy. It extends to many fields which, in some other coun- tries are the preserve of the private sector; indeed, it encompasses all fields of large-scale production activity. The public sector owns all mineral resources (though most of them are exploited under various contrac- tual arrangements by private firms); it owns and manages most of the large- scale plantation sector; it has plants operating or under construction in industries as diverse as petrochemicals and steel, textiles and cement, woodprocessing, pharmaceuticals and tourism, shipbuilding and plantations. 32. It would therefore be important to consider, and if possible to measure, the public sector enterprises' contribution to the financing of investment. Unfortunately, any such attempt runs into many difficul- ties. In particular, the accounts of some public sector enterprises were not available in time for this exercise, nor do they always allow an assess- ment of their contribution to financing the increase in the capital stock, in particular because the current value of their capital and their depreciation costs are often underestimated. Another problem is a lack of consistency in accounting for the cost of interest during the construction of new facilities. Furthermore, some public enterprise savings finance investments which are not included in the public sector program described in Chapter III. For instance, it has been estimated that such other investments of Pertamina, (i.e., those not included in the program described in Chapter III) roughly absorb Pertamina's entire current surplus. 1/ 33. On balance, as the situation stood but a few weeks ago, one could project that over the next three years public enterprises would contribute only about Rp. 150 billion to financing those of their own investments includ- ed in the overall public sector program. This is in part because of the very large size of their investment programs as compared to their current operations; and in part because in many cases, their prices or tariffs are barely enough to meet even their current operating costs. There is one large set of exceptions to this general rule: the public sector plantation industry expected its own resources to finance about 50 percent of its very considerable invest- ment program, and thus contribute about Rp. 100 billion to overall public sector resources over the last three years of Repelita II. 1/ This calculation does not take tnto account the burden of Pertamina's obligations on account of tankers. - 13 - 34. However, the recent decis[ons of Government should yield consi- derable additional savings. Steps have already been taken to make new tele- phone subscrLbers contribute about Rp. 30 billion towards the cost of this year's telecommunications program, and similar steps are expected in other fields. We are therefore project[ng the public enterprises' surplus at Rp. 100 billion in the current year, and at a total of Rp. 250 billion for the following two-year period. - 14 - CHAPTER II BALANCE OF PAYMENTS AND FOREIGN RESOURCE INFLOWS The Debt-Service Ratio 35. Foreign resource inflows, which have financed a substantial share of public sector investment in Indonesia, have a special temporal dimension. Their discussion cannot be limited to the three-year time horizon which is generally that of this report. Each year's net foreign resource availabilities are partly determined by the past, through the year's debt service burden; by the present, which bears on the state of capital markets, interest rates, the general ease or difficulty of bor- rowing; and the future, because their perception of the future debt service burden is a main determinant of lenders' willingness to lend, and should be a major determinant of the borrower's desire to borrow. 36. Nowadays conventional wisdom has it that whenever the debt service ratio is likely to reach 20 percent a more prudent external bor- rowing policy should be followed. The debt service ratio normally refers to public and publicly guaranteed debt of more than one year duration in the numerator, and to exports of goods and services (occasionally goods only), in the denominator. Also conventionally, oil exports are included net of costs, fees and profit remittances; other exports are included at their gross value. 37. The 20 percent ratio is merely a convenient convention. Its basis is the assumption that it is difficult for a country to set aside more than 20 percent of its export earnings to service public debt, without seriously reducing its ability to make other needed payments, for imports, services, private debts and profit remittances. The intensity of the difficulty naturally depends on the composition of these payments. In particular, large imports of non-essential consumer goods are easier to compress than imports of current inputs or of food. Conversely, since there are private foreign debts or direct investments, these must clearly also be serviced, and thus reduce the amount of public debt which can be conveniently serviced. In the case of Indonesia, a considerable part of the debt service will be on account of projects which directly reduce the need for imports (e.g. fertilizer and cement), and the composition of other imports renders them amenable to being further compressed in case of need. On the other hand, there are large payments to be made to private lenders and investors, which cannot be stopped. - 15 - 38. There are some contractual payments not included in our tables: these are Pertamina's obligations on account of tankers. These obligations are not pure debt service; a substantial part of them is due on account of the future cost of operating the tankers. However, the Government has decided to renegotiate these contracts, and - given their terms - there seems to be a good chance of their doing so successfully, and thus reducing their cost. Nevertheless, the future burden of tankers will remain large, and it will weigh directly on the public sector. It must be kept in mind when one traces the limits of prudent borrowing. Past Borrowing Policy, and Service on Past Debt 39. During most of the past decade, Indonesia's public bor- rowing policies were quite prudent. Only funds on favorable terms were accepted, and only in amounts which appeared to put no substantial strain on future debt servicing ability. Only a year ago, it seemed that new borrowing over each of the years 1976-78 could amount to about $2 billion annually thus leaving adequate room for additional capital inflows in the course of the next decade. 40. In fact, however, Pertamina had undertaken investment programs much in excess of its financial abilities, notably by using short-term borrowings. These borrowings coincided with an unexpected shortfall of oil revenues from earlier projections. Though many investment plans were slashed, thus reducing their costs by about $1.5 - 2 billion, nevertheless sharply increased borrowing was needed in order to consolidate short-term debt and to carry on with firmly planned projects. 41. Most of these credits came from private banks, either as cash to repay short-term debt, or as buyer's credits for equipment purchases. These loans, and the existence of Pertamina's other obligations have altered Indonesia's debt picture. Last year, our basic report projected that with adequate borrowing over the next few years, the debt service ratio would reach about 10 percent only in 1980.1/ It now seems that even if new borrowing in the period 1977-1980 is kept somewhat below the basic report's estimates,the 1980 debt service ratio will approach the 18 percent mark. Export Projections 42. Over the next decade Indonesia's export prospects are good. The country has a remarkably broad natural resource base, and policies which are on the whole conducive to the efficient and fast exploitation of those 1/ This specifically excluded service on the 1975 cash loans arranged to refinance Pertamia's short-term debt. - 16 - Table 5: Service on Past Debts (US$ million) Service on public debt contracted Service on public debt contracted before 31/12/73 before 31/12/75 1/ Interest Principal Total Interest Principal Total 1976 112 236 348 349 425 775 1977 106 225 331 419 615 1034 1978 100 206 306 422 834 1256 1979 95 197 292 380 859 1239 1980 90 207 296 322 787 1109 1985 84 231 315 196 523 718 Table Sa: Details of Public Sector External Debt Service Requirements Service on Debt Contracted Before December 31, 1975 (US$ million) Government Enterprises Government Direct Debts 2/ Pertamina Other Total 2/ P I T P I T P I T P I T 1976 108 221 329 298 117 415 19 12 30 425 349 775 1977 385 289 674 207 121 329 22 9 32 615 419 1034 1978 574 300 875 237 115 351 22 7 30 834 422 1256 1979 633 271 904 208 104 312 19 6 24 859 381 1239 1980 591 230 820 179 89 268 17 4 21 787 322 1109 1981 381 204 585 166 74 241 14 3 17 562 281 843 1982 392 187 579 165 64 229 14 2 16 570 253 824 1983 391 171 563 139 53 192 6 1 7 536 226 761 1984 405 156 561 143 42 185 4 - 5 552 199 750 1985 414 162 576 108 34 142 - - - 523 196 718 1/ Figures relate to debts contracted by the Government and public enterprises including Pertamina. Excludes certain obligations on supply contracts for which financial arrangements are not yet firm as well as Pertamina's obliga- tions on account of tankers. 2/ Includes the recent Euro-dollar financings for and on behalf of the Government. - 17 - resources. It also has abundant and hard working labor; new policies con- ducive to the growth of labor-intensive exports could cause overall export performance actually to exceed our projection. Naturally, individual com- modity projections are always chancy. On the whole though, and assuming reasonable policies, our projection is probably realistic, provided one assumes, with the World Bank's development policy staff, that world inflation at an annual rate of 7 percent will continue well into the 1980s. Even with constant volumes (and assuming unchanged terms of trade) Indonesia's export value would then double by 1985. In fact, the projected average price increase from 1975 is even higher than 7 percent. 1975 experienced the deepest world recession since the 1930s, and it is not unreasonable to assume that the prices of the raw materials which form the bulk of Indonesia's exports will recover in relative terms. - 18 - Table 6: Projection of Export Values (US$ million) Actual 1973 1974 1975 1976 1977 1978 1979 1980 1985 Agric. Products 1379 1784 1434 1607 2090 2422 2745 3077 5629 of which Timber 583 725 503 695 873 1038 1210 1413 2752 Metals/Minerals 157 281 274 322 532 844 869 954 3142 Manufactures & Misc. 73 134 113 142 169 200 246 297 658 Total 1609 2199 1821 2071 2791 3466 3860 4328 9429 excl. oil & gas Oil and Gas (Net) 563 2169 2957 3806 4395 5122 5844 6380 9814 Total Exports 2172 4368 4778 5877 7186 8588 9704 10708 19243 43. While we do not show volumes and values separately, our projections are based on the assessment of the supply prospects of individual commodities by sector specialists; to the expected volume of exports, we have applied the price projections of the World Bank's commodities division. As can be seen, the result is a four-fold increase of non-oil export values between 1975 and 1985; about half of the total increase is on account of volume growth, at the respectable rate of 9 percent. 44. Part of the expected growth will be the result of large invest- ments, particularly LNG, which will start contributing to exports in 1978, and in nickel and coal production 1/. Net oil exports are projected to grow somewhat faster than other exports until 1980, and considerably less fast thereafter. This is in part because, as domestic oil consumption grows faster than production, it will absorb a growing share of the increase in total output. 45. A last remark: except for oil and gas, all export values are projected on a gross basis. However, foreign enterprises will play a major role in developing some exports, for instance of aluminum, nickel and coal, and growing exports of such commodities will be accompanied, for a time, by growing profit remittances. 1/ LNG exports are projected net of cost, fees and profits of foreign companies. - 19 - Prudent Debt Service, Future Capital Commitment Levels and Net Resource Inflows 46. These various, and occasionally divergent, considerations must now be summarized. Despite all our reservations about any particular ratio's value as a policy guideline, it is not unreason- able to continue assuming that ratios of public debt service to total exports (merchandise + net oil) of the order of 20 percent are acceptable. However, keeping in mind the large private profit remittances and debt service, and Pertamina's obligations resulting from tanker contracts, it will be desirable to maintain towards new borrowings a somewhat more prudent posture than might otherwise be appropriate. 47. The projections clearly show that to remain within the prudent limits of borrowing, Indonesia must cut back sharply from the level of borrowing of the past two years. Such cutbacks cannot yet be imple- mented in 1976, because of loans that have already been arranged, and because of the need to finance cost overruns on several large projects. However, in future years the curtailment will have to be substantial indeed. 48. The borrowing projections presented in Table 7 are comparatively quite modest so as to enable us to state confidently that they are prudent. On this borrowing assumption, new commitments would amount to about $3.4 billion in 1976. This is probably a realistic estimate. The Government is determined to exercise great restraint in future,and it has instituted mechanisms for subjecting all public sector borrowing to central approval. It has also decided to reduce -new commitments to $2.1 billion in 1977, $2 billion in 1978, then to rise gradually and reach $2.9 billion in 1980, and $5.8 billion in 1985. Credits from governments and interna- tional organizations are projected to rise slowly from $1.4 billion commitments in 1976 to about $1.6 billion in 1980 and $2.4 billion in 1985. Various types of credits from commercial banks would make up the rest of the new commitments. To the extent that softer credits are available, their use would clearly be preferable. 49. With such a borrowing program, and assuming disbursement patterns and financial conditions which, for each category, are similar to those of the past, debt service payments would rise to $2 billion in 1980 (half on account of commitments made before December 31, 1975) and to over $3 billion in 1985. Relative to projected exports, this would mean a debt service ratio rising to over 19 percent in 1979 and then falling slowly, to about 16 percent in 1985. Keeping in mind the existence of large private debt service payments and the exclusion from the calculations of the obligations contracted by Pertamina on account of tankers, it cannot be said that these ratios point to an overly restrictive borrowing program. Nevertheless, they seem sufficiently prudent;in particular, the projected slight decline of the ratio after 1980 is reassuring. - 20 - 50. However tight this borrowing program, which in future years falls well short of the one proposed for the 1976-1980 period by last year's World Bank (basic) report, the Government is determined to keep within its bounds, at least until a revision is warranted by a firmly based revision of export forecasts. The net resource transfers corresponding to such a borrowing program will be so severely compressed as to almost disappear in certain years. 51. In 1975, gross disbursements of medium and long-term debt amounted to about $2.4 billion, according to the latest estimates. Apparent net resource transfers - i.e., these disbursements minus reported service on long-term debt - amounted to over $2 billion. True, a substantial part of these resource transfers was used for the net repayment of short-term debt, but this was also assisted by the drawdown of net foreign exchange reserves. On balance, it is most unlikely that true net resource transfers could have been less than about $1.5 billion. Apparent net resource transfers in 1973 and 1974 were $500-600 million, presumably augmented in those years by the accumulation of the short-term debt which was repaid in 1975. 52. Under the borrowing program outlined above, given the normal disbursement lags on project loans and the mounting debt service burden, net resource transfers would fall extremely sharply, to a low of $130 mil- lion in 1979, and again reach the $1 billion level only in the early 1980s. In real terms, net resource transfers would probably remain below their 1973-1975 levels in the course of the next decade. Furthermore, the contribution of net resource transfers to financing investments will be even further reduced by the need to increase foreign exchange reserves. Given current and projected import values and reserves, minimal prudence would require a $500 million addition to reserves in 1976, a further addi- tion of about $250 million in the two years 1977-1978, and growing amounts thereafter.1/ 53. A crucial part of the borrowing projections is the assumption about the amounts and terms of concessional and semi-concessional loans available to Indonesia. A sharp incrase in these forms of lending would be most desirable. Yet even if it comes, and even more if it does not come, non-concessional borrowing must be forcefully reduced well below recent past levels. As noted, the Government has both the will and the means to enforce such a reduction. I/ However sharp the decline in net resource transfers, it does not lead to an untenable situation from the point of view of import financing ability. With reasonable assumptions about direct foreign investment and profit remittances, the ratio of imports to GNP remains roughly stable. - 21 - Table 7: Foreign Borrowing Debt Service and Net Resource Transfer (US$ billion) Dis Debt Net burse- Debt Service Service Resource Commitments ments interest principal total ratio transfer 1976 3.4 2.71 .39 .43 .81 13.8 1.90 1977 2.1 1.83 .56 .63 1.19 16.6 0.64 1978 2.0 1.80 .62 .98 1.60 18.6 0.20 1979 2.4 2.02 .64 1.25 1.89 19.5 0.13 1980 2.9 2.32 .70 1.29 1.98 18.5 0.33 1981 3.3 2.66 .75 1.22 1.97 0.69 1982 3.8 3.03 .87 1.21 2.08 0.95 1983 4.4 3.46 1.00 1.35 2.35 1.11 1984 5.1 4.07 1.17 1.58 2.75 1.32 1985 5.8 4.70 1.32 1.84 3.16 16.4 1.66 N.B.: New commitments have been assumed to come from concessional, semi- concessional and non-concessional sources in proportions corresponding to those described in the text and on terms provided by such sources in the past. - 22 - CHAPTER III OVERALL PUBLIC SECTOR RESOURCE PROJECTIONS AND INVESTMENT PLANS 54. One can now add together the domestic and foreign resource availabilities of the public sector derived in Chapters I and II, and compare them with the sum totals of sectoral investment plans. Table 8: Public Sector Financial Resources and Investment Plans (in billion rupiahs at current market prices) 1976/77 1977/78 and 1978/79 Government current surplus 1474 3886 Public enterprises' savings 100 250 Bank credits for public enterprisesl/ 260 476 Total domestic financing 1834 4612 Net foreign resource transfers 789 349 Increase in foreign exchange reserves - 200 -100 Total financing 2423 4861 Public sector investment program 2501 4867 1/ Public enterprise reliance on the increase in total liquidity N.B.: Slight 1976 gap between projected investments and resources is likely to be narrowed by increased carry-over of authorized un- disbursed expenditures. 55. Table 8 above clearly shows one of the major problems con- fronting Indonesian planners over the next three years. Because of the precipitous decline of net foreign transfers, and the desire to reduce inflationary bank borrowings, the overall resources likely to be available to finance public sector investment programs will be about constant in current prices. In real terms, on an average, resources available to finance public investment in the last two years of Repelita II will be only about 80 percent of the current year's investment pro- grams. After years of fast rising public sector investment, but with enormous remaining needs for capital in all sectors, planning for such a declining investment program and enforcing it will call for great and purposeful efforts. - 23 - 56. Although investment requires both foreign exchange and local currency financing, and the respective shares of these could well be determined in advance, for macroeconomic analysis it seems unnecessary to make a sharp distinction between those. Indonesia is an open economy, and its foreign and domestic resources are essentially fungible. True, current experience of those involved with public sector investments in Indonesia is almost universally that domestic resources appear scarcer than foreign funds. By and large, foreign suppliers are still able and willing to arrange credits to finance their supplies, and therefore equipment imports are easier to finance than other investment costs. However, today's easy credits are tomorrow's resource outflow. As a consequence of large-scale credit financing of investment projects in the past few years, a large proportion of future foreign exchange resources will be absorbed by debt service, thus reducing what is available for other purposes, including current imports. 57. In order to prevent debt service from rising to unmanageable levels, future borrowing will have to be curtailed quite sharply - much more sharply even than future investment project starts. To an extent which will also greatly depend on the composition of new invest- ment, the direct foreign exchange content of new projects will most probably much exceed the amount of new borrowing that can be prudently arranged. Therefore, new borrowing will also have to be carefully budgeted and allcated, and at least part of foreign exchange costs will have to be pro)vided directly out of domestic resources. These domestic resources - a major part of which is generated by oil revenues earned in foreign exchange - must also be used to service foreign debts. At the margin, therefore, any additional foreign exchange expenditure on investment projects will :educe by an equal amount what is available to finance local costs. With increased stringency of budgeting for foreign loans, the present feelings of ind*; idual sector and project authorities that rupiahs are scarce and foreLgn exchange can always be found, should be replaceI by the perception oiat all resources are fungible and equally scarce. 58. The composition of the investment program will be heavily in- fluenced by the projects already in course of execution. Among them are those which have been started by Pertamina. As these pro-ects are completed, resources will be released for other uses; or more precisely investment in other sectors need not be compressed quite as '-verely as resources. Sectoral Allocation of Public Investment 59. The events and changes of the past two years, which so strongly determine the overall volume of future public investment programs also affect their content. Given the expected role of the private sector, both domestic and foreign, in industry, public investment in Repelita II laid specific stress on agriculture and irrigation, as well as physical and social infrastructure. This stress also seemed to be in keeping with the desire to increase opportunities for productive employment as fast as possible. - 24 - Table 9: Public Investment Programs by Sector (Rp. billion and sectoral percentages 1/) 1976/77 1977/78-1978/79 Amount % Amount % Agriculture and Irrigation 2/ 398.9 19 790.0 17 Industry and Mining 179.0 9 311.0 7 Pertamina projects 3/ 462.0 - 309.0 - Power and Gas 210.0 10 462.0 10 Communications and Tourism 490.6 24 849.0 19 Trade and Cooperatives 9.6 - 30.0 - Manpower 1.6 - 14.0 - Transmigration 27.3 1 117.0 - Regional Development 190.6 9 620.0 14 Religion 6.2 - 15.0 - Education 142.4 7 427.0 9 Health, Family Planning, Social Welfare 50.1 2 142.0 3 Housing and Water Supply 35.0 2 100.0 2 Law Enforcement 8.3 - 20.0 - Defense 42.5 - 123.0 - Information Service 47.8 - 30.0 - Science, Technology, Research 27.8 - 75.0 - State Apparatus 49.2 - 113.0 - Government Capital Participation 122.1 6 320.0 7 Total 2501.0 4867.0 1/ Percentages relate to total, excluding Pertamina projects. 2/ Includes INPRES, reforestation and subsidies for fertilizer. 3/ Includes Krakatau steel mill but excludes tankers. 60. In response to the increased resources brought about by the oil boom, government investment was accelerated in many sectors. Con- sidered alone, though, neither in emphasis nor in volume did the changes in government investment by themselves constitute an exaggerated res- ponse to changed resource prospects. However, at the same time, new and vast investment undertakings were being launched by Pertamina. 61. When Pertamina could no longer carry the cost of its invest- ment itself, financial and planning responsibility for these projects was transferred to the Government proper; it became clear that they were unduly large. They absorbed a large share of overall public sector - 25 - resources, for which other uses had been intended, thus imposing both undesirable cuts in other programs and excessive borrowings. When incor- porated into the public sector's overall program, they weighted them in an unduly capital-intensive, heavy industrial direction. They were all too often unduly costly for whatever they achieved. 62. In some cases, these plans could be immediately curtailed. Over $1.5 billion contracts have already been cancelled despite the heavy penalties often involved. In other cases, there is no choice but to carry them to completion, but as these large projects are completed, it is intended not to replace them with new project starts: thus overall emphasis will gradually shift towards less capital-intensive activities. This becomes clear when comparing the columns of Table 9. Yet it is also clear that effecting such a shift in the context of falling real investment totals is going to be a slow and painful process. Investment in Agriculture and Irrigation 63. In Repelita II, agriculture and irrigation were scheduled to absorb about 19 percent of Government total investment. Investment plans for this sector now account for a roughly similar percentage of total planned public sector investment over the next three years. Agriculture still accounts for 90 percent of non-oil exports, and 40 percent of non- oil GDP of Indonesia. More importantly still, it employs about 70 percent of Indonesia's active population; unless a very large proportion of new entrants into the labor force find employment in agriculture, unemploy- ment is bound to increase. Furthermore, domestic agriculture provides the overwhelming bulk of the food consumed in Indonesia. In the past few years it has managed to keep up well not only with the rising popu- lation but also with the growth in food demand associated with the rising per capita income. 64. The planned investment shown on Table 9 is probably a realistic estimate of what can be achieved with reasonable efficiency, provided adequate funds are made available in a timely fashion, not only for invest- ment but also to cover the current upkeep and maintenance needs of previously built systems. In the past, both remote and recent, budgetary allocations often fell short of immediate needs, or were often not made available in time, with the result that the execution of agricultural projects suffered. 65. The aims of agricultural investment can be summarized as follows: increase rice production at an annual rate of about 4.5 percent, so as to progress towards self-sufficiency; this in turn requires further rehabili- tation of irrigation networks, the extension of irrigation to about 240,000 ha. of new areas, and opening up substantial new areas of rainfed wet paddy through swamp development and conversion of upland into paddy fields. Output of other food crops is to grow even faster; in both cases, most new areas would be in the outer islands. Food crops development would account - 26 - for the largest part of the investments shown in Table 9, particularly as a considerable part of irrigation and swamp development expenditure is aimed at increasing the area under food crops. Another large share of the program would finance the agricultural and industrial costs of sugar development. 66. Despite the high density of population in the inner islands, the agricultural sector offers good prospects for contributing to the fulfillment of all these aims. However, many of these opportunities may not have been fully exploited. 67. Some particular aspects of this investment program require considerable caution. Swamp development, in particular, surely presents enormous long-run potential, when one considers that the so-called tidal swamps cover areas larger than the whole of Java. However, their soil and hydrology present problems. There have been indications that a highly equipment-intensive, fast approach to the development of swamp areas will be attempted in parts of Sumatra and Kalimantan, and, given the lack of knowledge about these areas, this may be less productive than a more carefully researched-phased approach. 68. On balance, however, there can be no doubt that the overall approach to food crop development is healthy, that the resources allocated to it can be absorbed efficiently, and that the sector can not only contri- bute to the balance of payments and the general welfare by providing better diets to a growing population, but it can also contribute to the demand for labor. While in foodcrop production, particularly in developing new cropland, private investment (notably in the form of the cultivators' own labor) has played and will continue to play a key role, public investment programs are crucial to accelerate the rate of new land development. Moreover, their employment impact compares very favorably with that of investment outside agriculture. 69. The second main thrust of agricultural investment is the estate crop sub-sector. Large and small plantations and smallholders account for the bulk of Indonesia's non-oil exports. Their future role as providers of employment is perhaps even more crucial. Tidal land development offers a major hope of new agricultural space for the future, but, as noted, a number of technical problems remain to be solved. By contrast, much of the uncultivated land in the outer islands is immediately suitable for tree crops cultivation with well-known and tested techniques, provided the resources are available for clearing land, and covering all other costs until the trees come into bearing. There are many types of tree crops, but the most important for Indonesia are rubber, whose hardiness makes it suitable for land where almost nothing else will grow, and oil palm capable of yielding more edible oil per hectare than most crops. - 27 - 70. These crops are labor-intensive. 1/ Land suitable for tree crops is still plentiful. Combined with traditional systems of shifting cultivation of food crops, rubber smallholders have developed almost two-thirds of the rubber area in Indonesia. Theirs has been a low-input/ low-output system which provid- ed little more than subsistence. With rising expectations new settlers will require more incentives than possible under the traditional systems. With better planting material, improved management and minimal infrastructure, substantially higher incomes would be possible. Utilizing the technology develop- ed by estates, a World Bank financed transmigration project provides for an investment of about $5,000 per family with prospects of providing a reasonable livelihood - roughly fulltime employment and a family income rising to about $1,000 per year - well above the current average of farm families. Given the financial constraints, the Government is also exploring other approaches to settlements, with a view towards developing lower cost systems which can reach a larger number of people. If these efforts are successful, the settlement of new land can contribute greatly to employment, at least towards the end of Repelita II, and to exports in the following period. 71. The inner islands will still contribute the bulk of the increase in food production, not so much through new tangible investment as through better cultivation methods, the application of additional fertilizer and more labor. That is where the bulk of the population and of agricultural production (particularly of food crops) are now located. The high density of rural population in the inner islands does not reduce their ability to use productively further investments of man-made capital; on the con- trary, precisely because of the presence of dense populations, there are many regions where the marginal productivity of investment will be high, in full conformity with the law of diminishing returns. With increasing incomes, new demands for higher value livestock, fruit and vegetable products should stimulate new types of production involving fuller use of rural labor. Therefore, it seems quite certain that, thanks to inten- sified cultivation methods and some investment, substantial additional labor can still be absorbed in agriculture in Java, Bali and Madura. 72. Yet about two-thirds of the area to be newly irrigated, and most of the extension of food crop cultivation, will take place in the outer islands, mainly Sumatra. More generally, for Indonesia as a whole, an even more productive line of action than combining additional capital with the abundant labor and scarce land of Java is to transfer both popu- lation and capital to parts of the outer islands devoid of both, but endowed with yet unused natural resources. These resources, though, are in forms unsuitable to the immediate application of the cultivation methods 1/ Although they require less labor per hectare than sugar or rice, land is scarcely a limiting factor in this case. - 28 - used in the inner islands. Hence the need to make haste slowly, and to combine considerable capital investment with much investigation, research and technical and management assistance to the new settlers. Because of this large investigative component, in its early days the process must be relatively slow and costly. 73. The costliness, though, is relative. The average cost of initial investment requiring one additional full-time employment is about $3,000 in the World Bank transmigration project now, as against tens, and often hundreds of thousands in some large-scale industries (the Olefin center, whose construction is being considered but is not included in the invest- ments listed on Table 9 would cost about $1.4 billion and provide permanent employment to about 2400 people, including expatriates: an average invest- ment of about $600,000 per job). 74. The Repelita II targets for transmigration were quite ambitious. The movement of families under official schemes was to be raised from an average of 10,000 per annum in Repelita I to just below 50,000 families per year in Repelita II. In fact, only about 19,000 families have "transmigrated" in the first two Plan years, with a total two-year expenditure of less than Rp 20 billion. Current targets under consideration call for a total of just over 100,000 transmigrants for Repelita II. However, given the importance of accele- rated transmigration for Indonesia's long-term development, at the same time more effort and substantive investment will have to be directed at increasing surveys and project preparation components, including more adequate basic economic and social infrastructure in the future transmigration areas. Industry and Mining (Including Pertamina) 75. As a consequence of present plans in industry and mining, urea production is to treble within the period covered by this report; cement production has already increased from less than 0.5 million tons in 1969 to about 1.8 million in the current year, and will exceed 5 million tons by the end of the Plan period, thus allowing Indonesia to approach self- sufficiency in that year. 76. The majority of public sector investment in industry will take heavily capital-intensive forms. While a standard 500,000-ton cement plant requires about 2,000 laborers during construction - say, a total of about 6,500 man-years - it employs only about 300 people for operations. Counting a present cost of about $100 million (Rp. 40 billion) for a standard plant, this means a $200-300,000 (Rp.100-130 million) investment for each new permanent employment created. In the steel, fertilizer and petrochemical industries, the capital/labor ratio is much higher still; and while the steel industry creates a considerable demand for labor during its construction, petrochemicals do not. - 29 - 77. The group of medium and large industrial projects now under construction - four fertilizer plants, four or five cement plants, a major steel plant, two LNG plants, at least one petrochemical project, not to mention private investments and joint ventures such as the Asahan project - represent a faster rate of addition to existing large-scale industrial capacity than was perhaps desirable; in any case, a faster rate than can be sustained, considering the likely evolution of resources. Consequently, the industrial plans described in Table 9 reflect mostly the completion of projects already underway. Indeed, some of these - in particular the plans for the Krakatau steel plant - have already been curtailed. Almost no new project starts are included in Table 9. Outside of the Pertamina sector, present thinking is either to defer most new project starts, or to let most or all of their costs be assumed by the private sector. This intention is commendable; even for projects which are well justified by themselves, their benefits have to be weighed against those of other, perhaps even more, severely constricted investments. 78. In the Pertamina sector, the intention is to carry out and complete only those investments which are clearly beneficial or which can no longer be conveniently reduced or stopped. Table 9 includes under "Pertamina" only such of those investments which are closely related to the oil and gas sector and Krakatau steel, all of which are parts of projects or of indentifiable programs already underway. As noted earlier, other activities roughly balance Pertamina's own income. As these other activities are gradually completed or terminated, they will leave increasing room for new investments connected to Pertamina's directly oil related activities, which must, for the time being, also be compressed. 79. The large and fast increases in industrial investment, and their limited contribution to employment, by themselves warrant a close reexamination of public sector industrial investment plans. True, at some stage of development large industrial projects are required; but once built, they must not only be provided with management and infrastructure in order to make a contribution to development; they must also be complemented with other investments, both to provide the linkages which alone can perhaps impart to heavy industry a catalytic developmental role, and to produce the incomes and employment which heavy industry cannot directly offer. 80. Some of the large projects - in particular, the LNG plants - promise to contribute directly to future export. Others, notably the cement and fertilizer plants, substitute for imports which would otherwise have been necessary. Yet even assuming substantial further investment, the projected net value of LNG exports in 1985 will fall well short of the projected value of rubber or even of palm oil exports in that year. 81. All this is not to say that Indonesia should not have invested in basic industry, nor even that it should stop making further investments there. However, given the continued shortage of capital, costly basic industrial plants can properly form only a small part of the overall development effort; they must at least be accompanied by other developments, including industries capable of directly contributing to the satisfaction of - 30 - domestic demands, exports, and to income-generation and employment for a large labor force. When the Government was considering sectors where future commitments to investment could be slowed down with relatively little harmful impact on the achievement of Indonesia's development aims, heavy industry obviously came high on the list. 82. The resources released by the late Plan years' intended decrease in public sector industrial investment will find an effective use in other sectors. Their most effective contribution will perhaps be in small and medium scale industry whose development will be stimulated by the relaxation of credit restrictions imposed by the heavy demands large-scale heavy industry is now placing on financial resources. In turn, the development of downward industrial linkages - plastics, fibers, textiles, garments, metal fabricating - and of upward linkages in simple engineering will put the further development of heavy industry on a more secure, more develop- mental basis. Electric Power 83. The investment program of the electric sector represents a substantial increase over actual past achievements. Power investments in the 1974/75 and 1975/76 amounted only to Rp. 78 billion and Rp. 169 billion equivalents. The projected expansion is very fast, no doubt motivated by the current underdeveloped state of the electric power sector whose per capita installed capacity is one of the world's lowest. Despite large captive capacities, Indonesia suffers from power shortages and suppressed demand. Consequently, it is difficult to argue that the projected investment would create capacities in excess of demand. Whether physical work can proceed at the projected rate is quite another question. In fact, some delay behind the program is likely. 84. The main obstacles are financial. Given the present rate structure and the fact that the capacity to be constructed is a multiple of capacity already operating, PLN (the national power authority) will at best be able to finance 10-15 percent of this investment program out of its revenues. More to the point, the proposed program would absorb about 10 percent of total projected public sector investment over the Plan period, as against about 7 percent in the original Plan document. 85. In some general way, the growth of the electric power sector is an essential part of the development process. Yet, many of the large industrial plants already under construction often also build their own captive power supply. While this is certainly not an efficient way of generating power in general, these arrangements must naturally be taken into account when the overall power investment program is contemplated. A large proportion - unfortunately not precisely quantified - of PLN's power goes directly to private consumers and to commercial and office establish- ments. The growth in such consumption could probably be slowed down, preferably by means of increased rates, which would also allow the PLN to finance a larger share of its investment program out of its own savings. - 31 - Transport 86. The investment projections in the transport sector involve increases in the annual levels of investment throughout the sector. Highways and bridges reflect essentially the original Repelita II projections, somewhat reduced in physical terms and revalued for price inflation. These figures may not fully take into account past delays in implementation. Investment in 1974/75 and 1975/76 lagged behind those years' targets, and for the remainder of the five-year period, too, some shortfall in accomplishments is likely. 87. Against Repelita II projections of 8,000 kms road improvements, the current sectoral plans correspond to a total of 6,000 kms completed in five years. In fact, though, it is likely that not much more than half this length of roads can be improved because of physical constraints. In new road construction, too, a shortfall - though a lesser one - is likely. Physical comparisons are less easy for bridges, but it seems that in terms of meters constructed, physical constraints may also prevent the fulfillment of the target. 88. Financial constraints aside, it is the absorptive capacity constraints that limit the volume of construction work that can be done. To overcome these constraints, large doses of expatriate consulting expertise are being injected into the highway program, notably through the recent World Bank Highways IV loan. Only if these services are really effective over the next four or five years will Bina Marga's (the public works department) own managerial and operational capacity be built up to cope with a physical road program of the size and dynamism now envisaged. 89. Clearly, a financial target can always be met, if only by undertaking too many projects at the same time. That should be carefully avoided, and amounts that cannot be used in a cost-effective manner trans- ferred to other programs. On the other hand, road communications are important enough to justify a major effort to build up organizations capable of building roads and bridges at the desired pace, In financial terms, what this means is that the Bina Marga investment program may have to be cut somewhat to reflect the past delays in gearing up for project execution, but if possible, should not be cut so much as to further hinder this gearing-up process in future. 90. For other land communications (mostly railways) and for sea communications, the situation is different. A significant part of investment in these sectors requires foreign exchange. By and large, provided money is available, it is faster to get imported equipment than to carry out civil works. Indeed, the recent and near future investment program in railway and sea communications comprise a large element of equipment purchases: locomotives, wagons, switchgear ships (not including tankers). We have no - 32 - indication of the physical targets corresponding to the financial railway investment plans. Despite the known escalation of prices, though, they are probably much in excess of the program described in connection with the 1974 World Bank-financed railway project. This is confirmed by independent information that indeed the railway authority are in the process of arranging contracts for at least some important components of such an expanded program. Deliveries of equipment by foreign suppliers can be arranged; and even credit financing for them can be obtained, if longer term financial constraints are disregarded. There is, however, a real question as to whether all equipment can be effectively installed: for instance, a large amount of track material delivered over the past year still awaits installation. 91. In sea transport, particularly inter-island transport, large new investments are scheduled. The inter-island program evaluated in the course of the appraisal of the recent World Bank shipping loan, and financed in part by that loan and in part by bilateral funds, corresponds to about 120,000- 125,000 DWT of ships for the next three years. There is also a major plan component for dockyards and shipyards, and for ports. 92. Overall, given the size of Indonesia, the diversity of its terrain, and the paucity of the existing transport network, one cannot argue that almost any level of transport investment could be excessive in an absolute sense. Indeed, large specific needs are not at all met by public sector investment, and require ongoing private transport investments, connected notably with timber. Furthermore, little provision has yet been made for the transport investment needs connected with the exploitation of new mines. For instance, the proposed Shell coal project, whose projected benefits are included in our export figures, will generate transport needs for coal amounting to many times the present volume of all Indonesian railway traffic. 93. Transport investment is in general capital-intensive. Particularly for sea and rail communications it does not give rise to much direct employ- ment. As most transport investment is not financially self-supporting, nor even do the railways and shipping lines fully cover their operating costs, it is important to take into account these associated investment costs when considering the economic and financial implications of the productive projects themselves. In other words, the overall capital costs of those projects will be seen to be even larger, and their economic return lower, than if associated infrastructure costs were disregarded. Because of the overall compression of the investment program made necessary by the resource shortage, it is currently intended to severely curtail new transport equipment purchases in the next few years. 94. Finally, it has been amply demonstrated that for many tasks it is technically feasible to substitute much more labor-intensive methods for the capital-intensive construction methods now generally used in Indonesia. Such a substitution is sufficiently desirable from the economic and social points of view to justify the major organizational effort it requires. - 33 - Post and Telecommunications 95. The telecommunications investment program is a large one - close to a billion dollars over the three last years of Repelita II, well over $1.0 billion if expenditures in 1975/76 are included. It is a sharply decreasing program. This is related to the fact that, as is also the case with most large-scale industrial investment, the telecommunications investments included in Table 9 have been quite firmly decided, contracted and financed. Thus, although some delays in execution may occur, which would, incidentally, increase its costs, the program's basic composition is already firmly determined. 96. Its main components are the installation of electronic telephone exchange facilities with capacity for 217,000 additional lines in Jakarta and 230,000 additional lines elsewhere; a 130 percent increase in new telex lines; improved long distance systems, using a variety of sophisticated transmitting equipment, including microwave and coaxial cables, a tropo- scatter, and a domestic satellite system to serve 40 locations; and consul- tancy services. The financing of the foreign exchange costs of this program has in large part already been arranged, through the conclusion of about $800 million equivalent buyers' credit agreements. 97. Indonesia has fewer telephones per inhabitant than most other countries: less than 0.25 per 100, as against 0.30 in India, 0.65 in Thailand, 3 in South Korea and 30 in West Germany. There is an acute need for additional telecommunications equipment, and the planned system will at best only meet future demand. There is even something to be said for the decision to go directly for the most modern types of equipment, instead of the more conventional ones which still serve well those countries where the telecommunications system developed gradually. Yet it is not clear that the differences between systems (which can be considerable: the electronic exchange equipment purchased by Indonesia costs 2-3 times as much as conventional, EMD and cross-bar systems) have been fully examined in the light of financial as well as technical considerations. Similarly, the decision to go in for turnkey contracts instead of competitive bidding also gained time, but at a cost. 98. Although the satellite system will probably be installed in time, the completion of the telephone exchanges and cable network may slip by about a year due to delays in the completion of buildings. According to contract terms, it does not seem that this will delay the payment schedule due on the equipment. In any case, whatever the advantages of the existing arrangements, or their possible drawbacks, existing arrangements are the key words. Their modification would involve punitive costs, and cannot really be envisaged. However, the need for any further telecommuni- cation investment during the remainder of the plan period should be very carefully weighed in the light of the overall financial situation. Indeed, current plans call for no major additional investment beyond existing arrangements. - 34 - 99. One must also note that the telecommunications system is far from self-financing; indeed, it does not even meet its current costs. The recent decision of the Government to make Perumtel finance a substantial part of its rupiah costs through advance payments of would-be subscribers is therefore particularly commendable. Regional and Local Development: The INPRES Program 100. The INPRES program is a typically Indonesian solution to a problem which, unfortunately, is not only Indonesian itself. The problem is centralized bureaucracy, which may function more or less well for defining and administering large projects and programs at the national level, but is rarely able to define, and even less to administer, programs which have a direct impact on provincial or village life. Broadly speaking, what the INPRES program does is to give money to lower level administrations, provided that they complement it with their own funds, that they use it for investment, broadly defined, and that they follow certain uniform but simple accounting and project evaluation rules. "Investment" financed by the INPRES program can include the repair and maintenance of existing facilities: this is not the program's least important advantage. These free programs account for about 60 percent of INPRES in the current year; the remainder of the funds are earmarked, notably for primary school buildings and for simple clinics, and, starting this year, for erosion control (reforestation) and for the improvement of traditional markets. 101. The INPRES program seems to have been remarkably successful in achieving its aims. It has generally used the most labor-intensive methods to produce productive assets. It has distributed wealth in the provinces and the countryside, tangible proofs of the country's unity, and of the Government's concern; and it has generally created productive assets geared to local needs. The INPRES program, in any case, needs to be preserved, and allowed to grow at least as fast as other investment. Investment in Education, Training and Culture 102. In terms of its overall costs, the development program in education is a small fraction - 10 percent - of total public sector development expenditures. In terms of its importance for the development process, it is second to none. It is therefore gratifying that, on the whole, the physical targets assigned to the sector are likely to be fully met. 103. The size and diversity of the program, and the progress already achieved, are remarkable. In terms of sheer numbers, probably no developed country matches it: 300 million books of all sorts to be produced, 800,000 teachers to receive training of some sort, almost 100,000 educational institutes of one sort or other to be built or upgraded. The program advances on course, and is continuing to receive high priority. Yet these numbers - which include the schools to be built or upgraded under the INPRES program - also hold another sort of implication; they give an indication of the size of the young generation, for whom productive work must be found tomorrow. - 35 - Other Social Sectors 104. Social welfare. The Plan called for very modest targets in terms of individuals helped, relative to the population size, for a variety of social welfare or rehabilitative activities - e.g., orphanages, aid and training for physically handicapped, aid for the destitute, etc. Progress towards these goals has also been modest during the first two years of the Plan. However, it is still planned to achieve the physical targets without significantly exceeding the planned budget. 105. People's housing. Repelita II calls for construction of 20,000 units of low cost housing and 53,000 lots - housing sites - through sites and services programs in addition to other less ambitious goals. Until now most of the preparatory activities have been geared towards land acquisition and land development and only 2,200 low cost houses have been actually built. The seemingly slow progress can be attributed to the usual teething troubles of the newly established housing development corporation. Further plans call for increased spending. This sector apparently has very high priority for the Government, especially in view of the President's strong public commitments to achievement of the targets. However, the existing organization needs to be further strengthened in order to be able effectively to execute such vastly increased tasks. One of the most interesting aspects of the program, and the one which deserves highest priority, is the "kampung" improvement program to improve the living environment and provide basic urban amenities to the poor in Jakarta and other large cities. 106. Manpower. Vocational training, in terms of persons completing the training cycle, is about 50 percent behind original targets. The Padat Karya Program to undertake labor-intensive public works is making good progress with 238 kecamatan projects underway by 1975/76, 169 scheduled for 1976/77 and 368 planned for the last two years of the Plan. Other programs (rehabilitation and construction of vocational training centers, etc.) are progressing more or less on schedule. A new modular curriculum and a program for training instructors in their use has been devised. This is being undertaken with the assistance of international organizations and bilateral donors. Progress in this area is essential not only to the successful operation of the infrastructure now being built, but also for the future development of labor-intensive industry. 107. Water supply. Plan targets for water supply include increasing the supply of water to cities by 12,000 liters per second. Programs for improvement of village and rural water supply are also to be undertaken. The cost of such programs has risen sharply from original estimates, and physical achievements to date have been less than 10 percent of the five-year target. More attention is given to village and rural water supply, which contribute a major component of the health INPRES program. The target set for Repelita II would increase the number of people served by pure water from 2.3 percent to 9.5 percent of total population and would in effect serve an additional 9 million people. - 36 - 108. Health. Sectoral goals include establishment of several major hospitals, community health centers in every kecamatan, malaria, tuber- culosis and cholera prevention program, supply of village wells and hand pumps, assignment of rural doctors and paramedics. The physical goals have already been exceeded in some cases and good progress is being made on all other items. The financial targets of the Plan are not expected to be exceeded. 109. Family planning. Indonesia's family planning program has been generally marked by successful realization of the goals set for Repelita II. The number of clinics which render family planning services has exceeded the Plan targets by more than 10 percent for the first two years of the Plan. 110. The number of clinics providing post-partum care have similarly exceeded Plan targets. For the balance of Repelita II it is planned to continue this accelerated pace of setting up such clinics. The program has been similarly successful in training manpower needed (about 20,000 out of a total of 27,000 technicians trained during 1974/75 and 1975/76). While the program's physical progress has been more than reasonable in all fields, there is widespread agreement among knowledgeable observers that, in terms of new acceptors, progress has been much better still. At least in Java, its achievements extended well into villages not yet touched by its buildings. Because of its dynamism and flexibility, and subject only to confirmation of its achievements by the planned 1976 partial census, it deserves all the financing it can use. ill. By more efficient use of the existing community health clinics for the Family Planning Program, the Government hopes to be able to meet or exceed the Plan target for acceptors without exceeding planned expenditures for this sector. In this it is likely to succeed. 112. Information and communications. Physical and financial targets for TVRI and RRI have been or will be far exceeded because of the satellite program. Foreign costs expenditures alone in 1975/76 and 1976/77 have surpassed total Repelita II estimates for the sector. For 1977/78 and 1979/80, foreign commitments will be largely ended and rupiah support for the sector will continue at more modest levels. - 37 - CONCLUSIONS 113. The large industrial and infrastructure investment programs reflect one main current of aspirations in the Indonesian development thinking, which arises from Indonsia's circumstances. Traditionally, colonial Indonesia was an agricultural country, and its level of industrial development lagged well behind that of, say, India or China. Then, after 1940, little development took place for 25 years, except in food production, which managed to keep up, albeit just barely, with population. When in the mid-sixties the reconstructon and rehabilitation effort started in earnest, it naturally concentrated on the commodity-producing sectors: food, plantation crops, petroleum, mining and timber. In this, it was remarkably successful so that by the early 1970's, the country had succeeded in providing personal incomes which were generally above abject poverty levels. Transport and telecommunication infrastructure and the industrial sector, however, remained considerably less developed than those of many a poorer country. Furthermore, in Jakarta and a few other cities, rich Indonesians and a large expatriate population amplified demands for modern amenities through their conspicuous consumption. 114. When resources became more abundant in 1974, some investments were upgraded or accelerated. There were occasional excesses, but on balance, even in retrospect, one cannot say that the accelerated program, considered by itself alone, had become excessive or diverged overly from its original aims. Indeed, had it been by itself, even the unexpected short-fall of 1975 oil revenues from earlier expectations could have been handled with ease. 115. The above Government program did not stand by itself, however. Very much part of the public sector, yet separate and almost autonomous, another program was developing. It originated in the oil sector, but was not limited to it, and extended throughout the country, to all economic sectors: to petrochemicals and steel, to hotels and air transport, to rice estates and roads. It even extended to investments overseas and on the seas. This sector undertook to create capital at a rate which was not even remotely related to its present and foreseeable future resources. The Government program, meanwhile, seems to have proceeded on the assumption that Pertamina's investment undertakings and resources were balanced. 116. It became apparent in 1975 that Pertamina was unable to carry on with its plans, and the Government took over direct responsibility. It was discovered that overall resources could not cover the total financial needs, and even after purposeful, vigorous slashing, more capital-intensive projects are left to be carried out than the Government would have liked, while future resources have been so preempted by debt service that all programs, including those which will create incomes and employment for the poor, must be restrained. - 38 - 117. This, then, is the problem. The Government appreciates it fully, and is determined to tackle it vigorously. It has the means to do so. Reducing investment is always extremely difficult, both from economic and other points of view; but even so reduced, public sector investment will be higher than could have been reasonably projected for this period, a few years ago. Raising domestic resources and controlling inflation are difficult, too; but the Government of Indonesia has confronted and carried out more difficult tasks in the past, and should be able to carry out the decisions indicated in this report, and even to exceed their aims. Finally, if the problem is tackled vigorously now; if the unavoidable cuts in investments are combined with a vigorous shift in the composition of public investment towards less capital-intensive, faster gestating forms; if new project starts are delayed just in the period when old projects are completed and start yielding their benefits; if in the meanwhile addditional resources are released for accelerated private investments: there is no reason then that this adjustment should noticeably slow down the growth of income now, and if the adjustment is vigorous enough, investment can resume its growth within the next three to four years. We have no precise measure and no model, but a sector-wise examination shows that the attainment of a real growth rate in excess of 7 percent remains feasible; and while this would not lead to a speedy solution of Indonesia's income and employment problems, it would greatly help towards it. 118. Investment is not all. Now that resources have again become scarcer, not only are investment programs being carefully reexamined, but also the overall policy context of development. Apart from the continued fostering of food production, perhaps no other aim is quite as critical as that of developing labor-intensive industries competitive enough to export and to supply the domestic market without undue protection. This is vital not so much as a source of foreign exchange earnings and savings, but as a source of incomes and employment for Indonesia's population. As yet, the present industrial structure shows few signs of being adapted to such needs. While the textile industry which requires heavy protection from imports, and the 28 assembly plants in which more makes of automobiles are assembled than in any other country (at an import cost of about 100 percent) are caricatures of the situation, they are also signs of a serious structural problem which the Government is determined to tackle. 119. Finally, one should not forget the aid community. Indonesia has the world's fifth largest population, the third among the developing countries, the second among substantial aid recipients. Through good management and some luck, it has not only turned past aid into a remark- able increase in its own welfare, but also into a remarkable contribution to world welfare through the improved exploitation of its natural resources. In terms of direct contribution to development, and in terms of improved world trade, aid buys a lot in Indonesia. - 39 - 120. Capital inflow into Indonesia is not limited by the amount of capital the developed countries can make available: there is a plethora, rather than a shortage of credits on hard terms. It is limited only by Indonesia's prudence relative to the future debt servicing burden. A return towards a softer mix of capital inflows is indispensable. Any increase in the average grant element of new aid makes it that much easier to attenuate the sharp fall of net resource transfers. Prudence, for Indonesia, will consist in reducing hard borrowing, raising more domestic resources, carefully re-examining and re-equilibrating its investment program. True prudence, for the aid community, will consist in more real aid. 121. We assume that such true prudence will indeed be exercised, and that the international community will increase its efforts to provide to Indonesia financing on concessional terms. Of course, aid givers also face economic and social limitations. Taking these into account, we have estimated that at least $1.4 billion official development aid should be provided to Indonesia in the coming year; of this amount, the bilateral members of the IGGI should contribute at least $600 million. 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