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.