Indonesia seen as bankable

Indonesia seen as bankable

By Sri Pamoedjo Rahardjo

JAKARTA (JP): The recent pledge amounting to a US$5.3 billion-
loan announced by the Consultative Group on Indonesia (CGI) has
been viewed as strong recognition of Indonesia's credibility in
national development.

Despite the presence of irritants in international relations
such as trade, human rights and most recently, allegations of
siphoning off loan funds into the bureaucracy, the total pledged
was still higher than last year.

A prominent Indonesian economist said that the increase was
purely a banking business consideration.

In other words, Indonesia is bankable.

The writer feels that loan pledges will not have great impact
on development without sound loan project administration.

There are a number of critical stages in a loan cycle that
need to be understood, particularly by the implementing agencies.

The first stage is project preparation where serious dialog
between the donor and the government is essential.

The outcome of these consultations is expected to define the
project scope, approach, loan size and counterpart funds.

In practice, the government may have to adjust the project's
scope to meet the donors' specific interests, resulting in the
uptake of parallel funds from similar projects funded by other
agencies which would affect the availability of government
counterpart funds.

The second stage is during loan negotiations when the donor
seeks agreement with the government on the latter's capacity to
complete the project as planned, comply with proposed covenants
and adhere to the schedule of loan payments and necessary
counterpart funds.

Government negotiators must understand legal terms and
financing systems, and seek legal and financial advice -- to help
review the intricacies of legal language used in the loan
agreements as drafted by donors and understand the complexities
of financing schemes including possible penalties.

Another critical stage is when the loan is declared effective.

To ensure prompt project implementation, relevant units
involved in project administration must already be established
with a full complement of staff.

The terms of reference, project guidelines and inter-sectoral
coordination for planning, budgeting and implementation must be
in place.

This is extremely important to prevent delays in commencing
the project.

Most projects are not this prepared even long after the loan
is declared effective.

On average project commencement delays are two years to three
years with dire implications.

Delays increase the cost of goods and services.

As a project is usually appraised two years before the loan is
declared effective, a two-year delay spells a four-year gap
between project conception and implementation.

Consequently, unit costs that were set four years before may
no longer be valid.

Even as the completion date is extended, or the loan value is
depreciated to offset delayed implementation, the government is
still faced with two problems.

If the government plans to maintain the original project
scope, it will have to increase its share of local currency to
cover its overruns.

Otherwise, it will have to reduce the project input and
output.

Then, the issue is whether the project is still relevant to
the intended beneficiaries.

Extended delays also increased commitment charges.

This penalty is supposed to stimulate the timely disbursement
of loan funds.

As it often turns out, it is not a deterrent, and it has
resulted in significant earnings for donor agencies.

It is very possible that revenue from commitment charges
imposed on delayed projects, would be more than enough to support
the entire operations of a lending agency annually.

Hence, the recent allegation of siphoning off loan funds into
the bureaucracy seems to overlook Indonesia's loss in payments to
the donor, even if the intended project suffers from increased
costs due to inflation and depreciated value of the local
currency.

Another critical stage in the loan cycle is project
implementation.

Mediocre project performance implies the following
possibilities.

Loan disbursement is so closely integrated with Indonesia's
planning and budgeting system (known by the Indonesian acronym
DIP) that even slight revisions can have grave consequences,
creating a chain effect on loan disbursements.

More complications arise when project implementation units are
decentralized to provincial or district governments, creating
extended levels of hierarchy.

Indonesia's planning and budgeting scheme is often not
understood by funding agencies, whose limited understanding of
Indonesia's public administration prevent them from being
responsive to the country's operating system.

When projects are delayed, fingers are pointed at the
bureaucracy.

But during planning, no adequate provisions are made to
anticipate these constraints.

As a result, even a well-designed project is bound to fail.

Poor project performance may also be due to the quality of
human resources and the structure of the secretariat handling the
project.

Ideally, this office should be managed by high caliber
administrators with sufficient authority and autonomy.

In some cases, the secretariat is run by personnel with
inadequate managerial skills and inadequate DIP funds.

It is no surprise that the secretariat is able to attract only
inexperienced juniors to manage foreign-assisted projects.

In addition, they are usually overseen by part-time senior
government officials.

To fill the gap, a full-time domestic consultant is usually
sought from among internally recruited senior retirees. And to
bolster a weak secretariat, administrative tasks are often
delegated to international or domestic consultants diluting their
technical roles thereby affecting their work performance.

On the other hand, direct involvement of structural personnel
in project implementation could be counterproductive. Additional
responsibility could limit their valuable time.

Last but not least in the project cycle is the evaluation
period.

Both donor and government officials tend to minimize reporting
of uncomplimentary findings in order to maintain a congenial
donor-borrower relationship and promote a favorable climate for
continued assistance.

Objective assessment of the project management does not get as
much attention as the impact of the project itself.

Yet, it provides valuable lessons that need to be passed on to
offices involved in project development.

A number of factors influence project performance.

It is obvious that efficient and effective project management
plays a significant role in successful project completion.

To facilitate this type of management, it is imperative that
both the government and the funding agency understand each
other's culture and systems.

Government officials must realize that project delays could
result not only in paying penalties and additional interest but
also reduce the project's relevance for its intended
beneficiaries.

But donor officials must understand and anticipate the
intricacies of Indonesia's planning, budgeting and implementation
systems to avoid these pitfalls.

The writer is a social and economic observer and a former
regional development bank officer.

Window A: To ensure prompt project implementation, relevant units
involved in project administration must already be established
with a full complement of staff.

Window B: Both donor and government officials tend to minimize
reporting of uncomplimentary findings in order to maintain a
congenial donor-borrower relationship and promote a favorable
climate for continued assistance.