Government plans Indonesian Recovery Fund

Tantri Yuliandini and Kornelius Purba, The Jakarta Post, Jakarta

The government is planning to launch a joint fund with foreign institutions early next year to provide Indonesia with much needed investment to boost the corporate sector and to provide jobs for the people, according to Minister of Industry and Trade Rini Soewandi.

Rini said on Friday that the fund, to be called the Indonesian Recovery Fund, would be similar to the one in Thailand, which implemented the plan a year after it was hit by the 1997 regional financial crisis.

"We have proposed the setting up of the Indonesian Recovery Fund ... which will invest at home to help create more jobs," she told reporters following a Cabinet meeting, adding that the plan had been approved by the Cabinet.

Rini said that initial funding for the fund was expected to reach US$200 million in which the government may have to contribute $10 million.

She said that this would also be a type of trial to see how interested foreign investors were in putting their money back into Indonesia.

"We hope to be able to attract reputable institutions such as the IFC, so that it would draw other investors to put in their money," Rini said, referring to the International Finance Corporation, the investment arm of the World Bank.

The stakeholders would determine how the fund is managed and, taking into consideration the government's priorities, they would also determine which industries it would invest in.

"The government would act as advisor," Rini said.

But she said that details of the fund would still have to be discussed with the Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti and Finance Minister Boediono.

She explained that Thailand had invited foreign institutions such as the IFC, the Asian Development Bank (ADB), and Merryl Lynch, to put money in the joint fund, after which the fund used the money to invest in various corporations in the country.

"It (the fund) succeeded in Thailand, and it has withdrawn about US$1.6 billion (from it)," she said.

However, Rini did not explain why Indonesia waited for such a long time before setting up such a fund.

The recovery fund in Thailand was initiated in 1998 following the fourth annual meeting of the Thailand-U.S. Business Council.

Among of the investors in the Thailand fund are ADB, Japan Bank for International Cooperation (JBIC), Kreditanstalt fur Wiederaufbau (KfW) of Germany, and State Street Corporation of the United States.

The fund invests in companies which are expanding or restructuring and, to a limited extent, in start-up companies.

Since the Asian financial crisis, many small and medium-sized enterprises have limited access to financing for expansion or restructuring. The fund helped to address this problem and assisted in restoring investor confidence in the Thai economy.

Amid the global economic recession and depressed sentiment at home, Indonesia would need a significant boost in foreign investment to help meet the 2002 economic growth target of around 4 percent.

Foreign investors have largely shunned Indonesia since the country experienced a combination of economic and political woes in 1998.

During the first nine months of 2001, foreign direct investment dropped by more than 50 percent to $6.05 billion compared to the same period last year due to various uncertainties.

Rini stressed the need for the Indonesian Bank Restructuring Agency (IBRA) to quickly restructure the debts of some 350 exporting companies.

"The largest absorption of workers is from export-oriented companies ... many of these are still under IBRA," she said, adding that she hoped that after IBRA finalizes the restructuring of these companies they could work for expansion.

Export-oriented companies include those in textiles and garments, footwear, electronics, wood and wood products, also crude palm oil (CPO) and its derivatives.

Without debt restructuring, the companies would have difficulty obtaining credit lines to finance operations.

Rini said that Bank Indonesia Governor Syahril Sabirin, who also attended the Cabinet meeting, would study a credit scheme for the financing of capital goods such as machinery to replace outdated machinery.

"We hope the machinery will be supplied by local producers," she said.

Indonesian banks have been reluctant to resume lending activities due to a combination of weak capital and high risk associated with lending to local companies.