Number 2 53900 FAST TRACK BRIEF September 2008 About IEG-IFC IFC’s Independent Evaluation IFC in Indonesia Group (IEG-IFC) independently evaluates IFC’s investment and An Independent Country Impact Review I advisory services operations and reports its findings to IFC’s EG’s Country Impact Review (CIR) evaluates IFC’s strategies and operations, and their Independent Evaluation Group management and Board of outcome drivers in Indonesia, during fiscal year (FY) 1990-2006. The review covers the Directors. IEG-IFC is a resource period before, during (FY 1998-2000) and after the most recent economic crisis. The CIR for helping staff understand what was prepared in parallel with the IEG Country Assistance Evaluation (CAE) of the World Bank’s IFC has learned and how IFC can operations during FY 1998-2005,—both are intended to inform the next World Bank Group do better business in the future. Country Assistance Strategy (CAS) for Indonesia. About Fast Track Briefs The CIR’s main messages are: Fast Track Briefs help inform the World Bank Group (WBG) ■■ While IFC’s strategic priorities in Indonesia have been aligned with the country’s private sector managers and staff about development needs, it has made little progress in supporting a larger private sector role in infrastructure new evaluation findings and and in helping deepen the financial markets. Increased private sector participation and IFC support recommendations. The views for infrastructure development and for deepening the financial markets will depend on further expressed here are those of IEG government reforms. The CIR calls for a stronger IFC role in infrastructure and capital market and should not be attributed to the WBG or its affiliated development, including by strategically and operationally partnering with the World Bank and other organizations. The findings MDBs to help dovetail sector reforms and investments. here do not support any general inferences beyond the scope of ■■ IFC needs to strengthen the environmental supervision of its Indonesian projects. The current the evaluation, including any compliance rate on environmental aspects is significantly below the institutional average and should International Finance Corporation inferences about the WBG’s past, be improved. current or prospective overall performance. The highlights of the report include: GFCF fell from an annual average of 20.0 percent of GDP before the crisis to an annual average of 15.3 Online access Indonesia’s investment levels after percent after the crisis. Public sector GFCF fell from http://www.ifc.org/IEG the crisis for infrastructure are well an annual average of 7.6 percent of GDP before the below pre-crisis levels and are limiting crisis to an annual average of just 5.6 percent after economic growth. the crisis. Two recent World Bank reports found During the crisis of 1997-98, Indonesia suffered that Indonesia has underinvested in infrastructure the deepest economic downturn in Asia and since the onset of the crisis and needs to increase took the longest time to recover. After the crisis, such investments by the equivalent of at least two Indonesia’s annual Gross Fixed Capital Formation percentage points of GDP annually to avoid an (GFCF) averaged only 20.4 percent of GDP, infrastructure crisis, which could cripple economic compared to an annual average of 27.6 percent growth. The incomplete financial sector reform during 1990-97. Both private sector and public and the associated underdevelopment of the long- sector components of GFCF fell. The private sector term local-currency debt market are contributing factors to the insufficient infrastructure investment. IFC in INdONESIA - An Independent Country Impact Review IFC’s strategic investment priorities during the review loan investment success rates of IFC’s mature investment projects. period were mostly relevant. However, in the areas However, equity investment outcomes in Indonesia are similar to of infrastructure development and financial market the IFC-wide average. The similarity can in part be attributed to the deepening more work is needed. relatively high proportion of low-risk (or high quality) project sponsors. The environmental compliance rate of the Indonesia project portfolio IFC was successful in supporting projects in the tradable goods sector, is significantly below the IFC-wide average at the end of the review in broadening IFC’s client base to include second tier companies and period. This requires IFC environmental supervision to improve. local sponsors, and in avoiding projects associated with politically connected sponsors. However, IFC had very few infrastructure Going forward projects and had no project to develop the local bond market over Major areas of country needs are aligned with IFC’s strategic priorities the review period because of incomplete reforms in these sectors. in: After the crisis, IFC focused on SME development and supporting ■■ Infrastructure development, particularly in the provision agribusiness projects with linkages to the rural economy and small of electricity; and medium enterprises (SMEs). In our view, these post-crisis ■■ Development of a long-term local-currency bond market; priorities are appropriate given the country’s needs and objectives. ■■ Development of environmentally and socially sustainable The number and levels of IFC investments dropped extractive and forestry industries; during the crisis. ■■ Enhancing the rural development impacts of agribusiness operations; and IFC’s investment operations fell during the crisis and took several years to recover (see figure 1), mainly because of the lack of reforms. The ■■ Supporting the development of small and medium crisis also contributed to below-average development outcome and enterprises. Figure 1: IFC’s investment commitments in Indonesia post-crisis took several years to recover to their pre-crisis level 350 52 50 Pre-Crisis Crisis Post-Crisis 48 Years Years 46 300 44 42 IFC Net Commitments in US$ millions 40 38 No. of projects or IICCR rating 250 36 34 32 200 30 28 26 24 150 22 20 18 16 100 14 12 10 50 8 6 4 2 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 IFC Net Commitment (US$M) No. of Projects IICCR Note: IFC net commitments (original commitments less cancellations) are shown by approval fiscal year. Institutional Investor Country Credit Rating scores are by calendar year Source: International Finance Corporation IFC in Indonesia - An Independent Country Impact Review C o n c l u sio n s a n d reco m m e n d atio n s The main recommendations of the CIR are for IFC to: ■■ Work with the World Bank and other mulitlateral development banks (MDBs) to help the Government of Indonesia to introduce reforms in the infrastructure and in bond market development to facilitate greater private sector involvement;; ■■ Scale-up operations to support small and medium enterprises (SMEs) and agribusiness projects with strong linkages to the rural economy and SMEs; and ■■ Strengthen environmental supervision of IFC projects to improve their compliance with IFC’s environmental requirements.. IFC in INdonesia - An Independent Country Impact Review I E G p ro d u cts Studies Independent Evaluation of IFC’s Development Results 2008: IFC’s Additionality in Supporting Private Sector Development Supporting Environmental Sustainability: An Evaluation of World Bank Group Experience Doing Business, An Independent Evaluation: Taking the Measure of the World Bank-IFC Doing Business Indicators Financing Micro, Small, and Medium Enterprises: An Independent Evaluation of IFC’s Experience with Financial Intermediaries in Frontier Countries IFC Advisory Services in Eastern Europe and Central Asia: An Independent Evaluation of the Private Enterprise Partnership Program IFC in Ukraine: 1993 - 2006, An Independent Country Impact Review Independent Evaluation of IFC’s Development Results 2007: Lessons and Implications from 10 years of Experience An Evaluation of IFC’s Investment Climate Activities Extractive Industries and Sustainable Development: An Evaluation of the World Bank Group Experience Evaluation Briefs, and Evaluation Notes Improving Results in Sub-Saharan Africa IFC’s Experience and Additionality in Middle-Income Countries IFC’s Experience in the Transport Sector IFC Operations in Romania An Evaluation of IFC’s Frontier Country Strategy IFC and the Millennium Development Goals Resources Task Managers: Director-General, Director, IEG-IFC: Head of Knowledge, IEG-IFC Help Desk: Dennis T. Carpio Evaluation: Marvin Taylor-Dormond Dissemination, and (202) 458-2299 Stephen F. Pirozzi Vinod Thomas Quality, IEG-IFC: AskIEG@ifc.org Sid Edelmann