Indonesia signs new letter of intent with IMF (2)

Indonesia signs new letter of intent with IMF (2)

The following is the second and last part of the complete text
of the new Letter of Intent signed by the Indonesian government
and the International Monetary Fund on Thursday. Tables and
annexes are not included.

Memorandum of Economic and Financial Policies Medium-Term
Strategy and Policies for 1999/2000 and 2000 (continued)

54. Continued efforts will be needed to ensure that the newly
recapitalized banking system is able to operate profitably on a
sustainable basis. With these efforts, and the achievement of 8
percent CAR by end-2001, a sound banking system should be
reestablished. The government intends, thereafter, progressively
to limit the scope of the blanket guarantee, with a view to
replacing it by 2004 with a limited deposit insurance
fund financed by the banking system.

D. Corporate Restructuring, Legal Reform and Governance

55. The government has developed a strategy to give fresh
momentum to corporate restructuring with the following key
elements: (i) ensuring that IBRA plays an active role in the
workout process with the ability to engage in various forms of
debt restructuring; (ii) for non-IBRA-led cases, establishing
a procedure under which the Government may direct cases to the
Jakarta Initiative Task Force (JITF), and may refer to the
Attorney General for the initiation of bankruptcy proceedings
those debtors that refuse to negotiate in good faith in
accordance with the principles and timetables established under
the new JITF mediation procedures; (iii) strengthening the
insolvency system; and (iv) more generally, improving the
corporate governance framework, and subjecting companies to
greater market discipline. In accordance with a Presidential
Decree issued on Dec. 28, 1999, the Financial Sector Policy
Committee (The FSPC) has been established to oversee bank and
corporate restructuring. As indicated above, the FSPC, which
reports directly to the President, consists of key ministers and
will be assisted by a permanent secretariat. The FSPC will
play a central role in the strengthened corporate restructuring
strategy described below.

56. It is essential for IBRA, as a major creditor to the
corporate sector, to be able to engage in a full range of
commercially acceptable methods of debt restructuring,
including debt-for-equity conversions and, where appropriate,
debt reduction. To that end, the FSPC has announced -- and will
approve before end-January -- a set of policies and procedures
for IBRA that specify the conditions under which debt and debt-
service reduction decisions may be taken. Under these policies
and procedures, debt reduction will only be made available to
cooperating debtors where: (i) it is in the best commercial
interests of IBRA as a creditor and (ii) there is no evidence of
criminal or fraudulent activity on the part of the debtor. Also
by end-January, an FSPC decree will be issued that commits the
government to provide the officers of IBRA and the members of the
FSPC with personal legal assistance in cases where decisions
consistent with the above mentioned policies and procedures are
challenged.

57. Efforts are also underway to allow IBRA to make more
effective use of the insolvency system. Specifically, in cases
where debtors fail to enter into good faith negotiations with
IBRA in accordance with the timetable agreed upon with the
debtor, IBRA will, where appropriate, file insolvency petitions
in the Commercial Court. Two test cases have been filed as of
Jan. 20, 2000.

58. The government has also announced measures to strengthen
procedures for restructuring through the JITF's collective
negotiating framework. In accordance with a decree to be issued
shortly, the FSPC will be able to direct cases that cannot
expeditiously be led by IBRA (because, for example, IBRA is a
minority creditor) for restructuring under the JITF. A first list
of such companies will be referred to the JITF by end-January
2000. Any case being negotiated under the Jakarta Initiative
framework (including those cases that have come voluntarily to
the JITF and those directed by the FSPC) may be referred to the
Attorney General by the FSPC for the initiation of bankruptcy
proceedings against the debtor. The basis for such referrals will
be a recommendation by the JITF that the debtor has failed to
negotiate in good faith in accordance with the JITF meditation
procedures. A Government Regulation will be issued establishing
this referral authority before end-January, 2000. At the same
time, the FSPC will approve new time-bound mediation procedures
to be administered by the JITF that will provide the basis for
the exercise of the referral authority. It is recognized that the
leverage this authority provides to the JITF will also facilitate
the sale of assets by IBRA, by giving greater assurance to the
buyers that their claims can be enforced.

59. IBRA will take steps to ensure that it participates in the
Jakarta Initiative framework when such participation is necessary
for effective restructuring. The FSPC will be responsible for
ensuring adequate coordination between lBRA and the JITF.

60. The above measures recognize that the JITF has a critical
role to play in accelerating the pace of corporate restructuring.
The government is committed to provide adequate resources and the
necessary budgetary support to ensure that the JITF has the
necessary institutional capacity and will be able to fulfill its
strengthened mandate in a timely manner.

61. By end-January 2000, we will obtain the agreement of
concerned ministries and agencies to the procedures for
accelerated regulatory approval of restructurings and
will adopt and publish them. By mid-February 2000, we will make
these procedures fully operational under the Regulatory
Facilitation Group ("one-stop shop") within the JITF.

62. The government recognizes that a key incentive for debtors
to enter into negotiations with their creditors has been
ineffective, namely the threat that creditors will initiate
bankruptcy (including rehabilitation) proceedings against
recalcitrant debtors. A primary problem in this area has been the
capacity of the judiciary to implement the insolvency law,
including the perception of governance problems. To this end, a
number of measures are being implemented to strengthen the
judiciary.

63. First, in accordance with recently enacted legislation,
the President has submitted to Parliament a list of candidates to
be appointed as members of the Independent Commission for the
Audit of State Officials. The Commission includes a judicial sub-
commission responsible for obtaining information and conducting
investigations regarding the wealth of judges and referring
evidence of corruption to the Attorney General for prosecution.
Other sub-commissions will gather information regarding the
wealth of state officials. The Commission will be fully
functional by March 31, 2000, with an adequate budget and
supporting infrastructure.

64. Second, the Attorney General will, in coordination with
the Commission for the Audit of State Officials, give priority to
the investigation and prosecution of any judges and members of
the legal profession that have engaged in corrupt practices under
the newly enacted Anti-Corruption Law. For this purpose, a
Government Regulation is being issued establishing a Joint
Investigating Team which will be coordinated by the Attorney
General. The Attorney General will, in turn, issue shortly a
policy directive indicating that the Joint Investigating Team
will be initially charged with investigating and prosecuting
corruption within the court system in accordance with procedures
established under the Anti-Corruption Law. A number of reputable
professionals, including representatives from civil society, will
be appointed to this team and adequate budgetary resources will
be appropriated to ensure that it has the capacity to pursue its
mandate. The Joint Investigating Team plans to expand its
investigations of corruption into other areas as its capacity
increases.

65. Third, after considerable delays, transparent procedures
were published on Dec. 10, 1999, regarding the method by which
the appointment of ad hoc judges from the private sector by
requested by involved parties. IBRA will request ad hoc judges
for all future cases that are filed in the Commercial Court.

66. The government recognizes that the ineffectiveness of the
bankruptcy system stems from problems in implementation rather
than from the structure of the law itself. Thus, only procedural
changes in the law are anticipated in the near future (e.g.,
guidance on prepackaged bankruptcy procedures), and substantive
changes to either the liquidation or suspension of payments
(rehabilitation) chapters of the existing law are not judged
necessary.

67. Given slow progress in the past, the corporate
restructuring strategy will be kept under continuous review. The
Corporate Restructuring Advisory Committee (consisting of a
representative group of debtors, creditors, IBRA and the JITF)
has been consulted regarding the new mediation procedures to be
adopted by the JITF and will continue to be consulted regarding
the effectiveness of the strengthened strategy.

68. Finally, sustainable progress in this area requires the
adoption and implementation of a new and enhanced corporate
governance framework. Progress is being made in adopting
and implementing such a framework. The high-level committee on
corporate governance policy has made recommendations in a number
of areas related to accountability, disclosure, enforcement, and
oversight. Recommendations will be adopted by March 15, 2000 and
implemented over the next six months.

E. Reform and Privatization of State-Owned Enterprises

69. The new government has been carefully reviewing the
privatization program. We are in the process of examining all of
the completed privatization transactions, to assess whether they
were handled satisfactorily in accordance with current laws and
regulations and in line with best practice procedures. Based on
this review, we will decide, by end-January 2000, how procedures
could be further improved. The government has also been
reviewing the privatization schedule of the masterplan for state
enterprise reform and privatization. Particular attention was
given to the privatization transactions that were scheduled to be
completed during the remainder of 1999/2000; those transactions
that remain sound and feasible under current market conditions
will be expedited. Overall, we expect privatization revenue to
amount to Rp 8.6 trillion during 1999/2000.

70. Based on these reviews, and with the assistance of the
AsDB, the government has prepared a soundly based privatization
program for FY 2000, designed to yield Rp 5.9 trillion. The
program will focus on enterprises -- including small enterprises
-- operating in competitive markets where there is no compelling
case for public ownership. The government is also preparing a
liquidation plan for loss-making and heavily indebted enterprises
that have no prospect of achieving commercial viability. This
plan will be completed by end-March 2000 and fully implemented
during FY 2000.

71. Among the larger enterprises, the two publicly listed
telecommunications enterprises, PT Telkom and PT Indosat, are
strong candidates for further rapid privatization. Toward
this end, as well as to promote private investment in the sector,
we will (i) adopt a new tariff policy (by March 2000) and adopt
new network interconnection rules; (ii) finalize the implementing
regulations for the new Telecommunications law (by June 2000);
(iii) finalize modern, new licenses for major operators, and (iv)
establish an agency to provide transparent and predictable
regulation. By end-2000, the government will also strive to
reduce Telkom's and Indosat's extensive cross-ownership in the
sector, and to secure a mutually acceptable resolution of the
issues concerning the revenue-sharing contracts between PT Telkom
and its private partners (KSOs). This resolution will be
consistent with the new Telecommunications Law, and promote
competition by enabling both Telkom and Indosat to evolve into
competing full service providers.

72. The government does not plan to establish holding
companies for public enterprises, as such arrangements would
dampen competition and slow privatization. Indeed, where
appropriate, the government will unbundle monopolies and
encourage effective competition. Plans for restructuring
Pertamina and PLN are being prepared and will be accelerated. A
strategy to improve the performance of other state monopolies,
including ports, airports, telecommunications, and toll roads,
will be prepared by end-March 2000 with assistance from the AsDB
and the World Bank.

73. Concrete steps are being taken to require state
enterprises to adhere to the same standards of corporate
governance as required for listed companies. Accordingly, all
state enterprises will be required to lodge their annual reports
by June 2000. The government will also ensure that all audits of
state enterprises are disclosed to the public. For a group of 30
state enterprises, the government is preparing a plan (with the
AsDB) whereby their annual financial audits would be conducted by
independent auditors, and completed by end-2000. This plan will
be extended to a further 30 SOEs in 2001.

74. The government will continue the process of undertaking
special audits for key enterprises and taking corrective actions
in light of their results. Those with respect to Pertamina and
Bulog were previously completed and their main findings made
public. The audits for PLN and the Reforestation Fund have also
now been completed and made public. A program of remedial actions
for Bulog and the Reforestation Fund will be drawn up by January
2000, and implemented by mid-2000. Remedial actions for the
problems identified at PLN and Pertamina will be addressed as
part of the comprehensive restructuring of these enterprises. The
remedial actions will include the initiation of more narrowly
focused investigative audits where judged necessary. Claims of
subsidy payments by Pertamina, PLN, and BULOG will be audited no
later than June 30, 2000, and budgetary arrears will be
eliminated by then. Any over-statement of subsidy claims will be
investigated.

75. The government has identified a further list of major
enterprises that will be subject to the next round of special
audits which will also identify instances of corruption and other
illegal practices. These enterprises include the national
airline, the national toll road operator, the domestic
telecommunications company, the public port corporations, and the
major plantation companies. These audits will be conducted by
international auditors and by completed by June 2000. Legal
proceedings will be instigated in all cases where laws are
revealed to have been broken and public losses incurred.

F. The Energy Sector

76. The government is firmly committed to continuing and
accelerating the initiatives already underway to resolve the
deep-seated problems that are impairing the performance of the
electric power and oil/gas sectors.

77. In the electric power sector, the restructuring policy
announced in August 1998 maps out the actions needed to restore
commercial viability, improve efficiency, and attract private
investment. The government's agenda for the coming year includes
the passage of a new electricity law, establishment of an
independent regulatory agency, and adoption of a tariff
restructuring plan designed to restore tariffs progressively to
commercially viable levels while limiting the impact on the
poorer segments of society. Toward this end, the FY 2000 budget
is based on an increase in the average tariff; however, we will
shield the poor from this increase during FY 2000, and will not
raise tariffs for households with a connection of less than 450V.

78. The government will also take steps to accelerate the
corporate and financial restructuring of the electricity company,
PLN. A new ministerial level PLN Restructuring and Rehabilitation
Team was established on Dec. 31, 1999 to guide and oversee the
implementation process, as well as PLN's renegotiations with
independent power producers (IPPs). PLN is in the process of
selecting international management consultants to assist it to
implement the restructuring, and an appointment will be made by
March 2000. The government will ensure that the implementation
program incorporates appropriate corrective actions for problems
identified by the recently completed special audit.

79. The government will take steps to accelerate efforts to
negotiate solutions for reducing the massive financial burden
imposed by the power purchase obligations. It is recognized that
the handling of this issue will have ramifications that extend
beyond the energy sector. Accordingly, the government will ensure
that the new oversight team is adequately supported by competent
legal, strategy, and other specialist advisors, and that PLN
conducts negotiations on individual agreements within a soundly
based and transparent policy and strategy framework. The
oversight team will report progress to the World Bank, IMF, and
AsDB on a monthly basis.

80. In the oil and gas sector, the government is firmly
committed to the following actions: replacing existing laws with
a modern legal framework; restructuring and reforming Pertamina;
ensuring that fiscal terms and regulations for exploration and
production remain internationally competitive; allowing domestic
product prices to reflect international market levels; and
establishing a coherent and sound policy framework for promoting
efficient and environmentally sustainable patterns of domestic
energy use.

81. The draft oil and gas law that was presented to the
previous parliament will be reviewed and resubmitted with a view
to its passage during 2000. This law will provide for the
establishment of a special purpose agency to allocate acreage and
supervise exploration and production contracts; the establishment
of an independent agency to regulate monopoly elements of
downstream businesses; the enabling of effective competition in
the supply of fuels to the domestic market; and the
transformation of Pertamina into a limited liability enterprise.
In parallel, domestic fuel prices will be progressively increased
so as to encourage more efficient energy choices and to phase-out
the budget subsidy; toward these ends, an initial increase will
be implemented for FY 2000. Low income households will be
protected by targeted subsidy schemes that are being developed in
close consultation with the World Bank.

82. The government remains committed to building a world class
oil and gas industry in which a reformed Pertamina will continue
to play a key role. The recent special audit and an earlier
internal management review commissioned by Pertamina identify
clearly where performance needs to be substantially improved. The
government will require Pertamina to develop and publicize, by
March 2000, a comprehensive restructuring plan that will include
corrective actions in all problem areas identified by the special
audit.

G. Other Structural Reforms

Competition and Investment Policy

83. In March 1999, the Law regarding Prohibition of Monopoly
Practices and Unhealthy Competition (Competition Law) was
enacted. By end-March 2000, we will fully establish the
Commission for Business Supervision (CBS), which is designed to
enforce the law this will include appointing the Commissioners,
and issuing all necessary implementing regulations. After a short
period to give training to CBS staff and to disseminate
information about the law to the wider public, enforcement of the
new law will begin by end-July 2000.

84. The government places the highest importance on improving
the business environment and reviving foreign direct investment
which declined precipitously during the crisis. We have completed
a review of investment policies, with the assistance of the AsDB,
and intend to reduce the number of sectors where foreign
investment is prohibited by March 2000.

Agricultural Policy

85. Our focus in agricultural policy will be to maintain food
security and promote efficient production, processing, and
marketing of agricultural products.

86. A key aim of our rice policy framework will be to ensure
food security by promoting competition in this sector.
Accordingly, trade in all qualities of rice has been opened to
general importers and exporters. However, with the strengthening
of the rupiah and world price declines, domestic rice prices have
been declining. Thus, there is a case for providing transitional
protection to rice farmers through an import tariff, while
balancing the impact on consumers. This tariff will be set at Rp
430 per kg and will apply only through August 2000, when we will
review whether it is still needed. At the same time, we will also
assess the BULOG procurement price, which acts as a floor price
for rice.

87. We are also preparing a strategy for a broader reform of
our food security approach. Until such strategy defines future
directions, BULOG will focus on procuring rice for its special
subsidized rice program (OPK) and for emergency stocks. We expect
that BULOG will balance this procurement between domestic and
international markets, so as to strengthen demand for domestic
supply during the peak harvest period. We are also preparing a
strategy for a phased restructuring of BULOG, to follow up on the
recommendations of the recent special audit. This reform will aim
at a more transparent accounting system and efficient operating
structure for BULOG through, inter alia, a change in its legal
status.

88. Agricultural input policy will emphasize competitive,
private market delivery of fertilizers and rural credit. We will
continue to liberalize fertilizer marketing by permitting general
importers to engage in trade, by opening domestic marketing to
new participants, and by preparing by end-February 2000 a plan
for placing PT Pusri's domestic marketing capacity under
autonomous management. Increased competition and a stronger
rupiah should result in lower domestic fertilizer prices, and so
no reintroduction of fertilizer subsidies is planned. However,
for social reasons, we will continue with subsidies for
transportation and fertilizers to remote areas, as identified by
decree.

89. With a return to normal agricultural conditions, we
propose to revert as quickly as possible to meeting farmers'
credit needs through the commercial banking system. As an interim
measure, 12 domestic banks have committed to financing KUT
credits of Rp 1.9 trillion for the current planting season
(through March 2000). This constitutes the ceiling under the
scheme, and no new funds will be raised under this scheme. From
April 2000, the working capital needs of farmers will be met by
commercial banks only. Such banks will bear all the risks of
nonrepayment of principal and will be given full independence in
making credit decisions. All lending quotas and targets will be
eliminated. In parallel, we will develop a strategy jointly with
the AsDB and the World Bank to improve the rural credit system.
Work on this strategy will be completed by end-June 2000 and
implementation will begin on Sept. 1, 2000.

90. For sugar we will pursue a policy of restructuring the
domestic industry by consolidating the number of sugar factories
on Java and promoting private sector-led investment off-Java in
new capacity. To achieve this, by end-January, we will replace
the decree (expiring end-December 1999), that limits imports to
selected traders, with a 25 percent tariff to be phased down over
three years and, at the same time, open sugar trade to all
general importers. We also are committed to closing a minimum of
four sugar factories once the crushing season is completed in
2000. By June 2000, we will prepare, in consultation with the
World Bank, a plan to consolidate the rest of the Java-based
sugar industry; the plan will include detailed and time-bound
factory restructuring, privatization or closure plans, as well as
budget costs and implementation mechanisms. Firms implementing
their restructuring plans according to schedule will be provided
with adequate budgetary resources to subsidize operations and
closing costs for a limited period. We also reiterate our
commitment to farmers being free to make their own crop choices.

Forestry

91. On Nov. 9, 1999, the Ministry of Forest and Estate Crops
(MoFEC) launched a strategic planning and consultative process to
establish a National Forest Program. This process should provide
the mechanism for stake holder participation in future policy and
regulatory decisions by MoFEC. The initial design work for the
process is being carried out by two groups of stakeholders,
supported by the Consultative Group on Indonesian Forestry;
preliminary results of these proposals are expected by end-
February 2000. The government will ensure adequate support in
implementing the consultative mechanism; thus, we will convene a
high-level meeting on forestry on Jan. 26, 2000, and establish a
ministerial working group to deal with forestry issues.

92. The project to determine where forests still exist is
proceeding well, with updated maps of forest cover completed for
Kalimantan, Sumatra, and Sulawesi. Making the results publicly
available is an essential next step, to increase awareness of the
perilous state of the forests and allow interested stakeholders
make informed decisions. MoFEC has made the maps and statistics
for Kalimantan and Sumatra available to the public on its
website; it will add Sulawesi by Dec. 31, 1999 and the other
provinces as they are completed. MoFEC continues to observe its
moratorium on new forest conversion licenses. It will do so until
transparent, rules-based procedures are developed to minimize
further conversion of the remaining natural forest.

Environment

93. The government is committed to increasing urban air
quality. A high-level Steering Group chaired by the Minister of
Communications, and an Implementation Team chaired by the
Director General of Land Transport, were formally established in
June 1999 to coordinate Indonesia's conversion to cleaner vehicle
fuels. In October 1999, the government tightened vehicle fuel
specifications and mandated the elimination of lead in gasoline
by January 2003. In moving toward that objective, we will
continue with the earlier plan to convert to unleaded gasoline in
a geographically-phased manner, with Jakarta the first priority.

94. We are also accelerating the implementation of the
Environmental Management Law (Number 23 of 1999). Until now, only
four of the 19 implementing regulations had been issued, but by
Dec. 31, 2000 we will promulgate five new regulations, including
the one for water pollution control. At least five additional
regulations will be issued by Dec. 31, 2001, and the remainder
will be issued in 2002. Finally, the Reforestation Fund will only
be used for maintaining natural forests and for reforestation;
transparent criteria and budgeting procedures to upgrade this
Fund will be developed by the Ministry of Forestry and the MOF,
in consultation with the World Bank, and will be implemented
beginning April 1, 2000.

Small and Medium Enterprise Policy

95. The government is committed to empowering small and medium
enterprises (SMEs). However, we recognize that many current SME
support programs have failed to meet the needs of the SME
community. We are thus committed to reevaluating government
interventions so as to increase private sector involvement in SME
support programs.

96. A government task force is preparing a medium-term SME
strategy with the assistance of the AsDB and World Bank. An
Action Plan is being developed, which provides for the following
to be completed by March 30, 2000: (i) developing an
institutional framework for SME policy implementation; (ii)
making business development services more responsive to SME
needs; (iii) expanding access to finance for SMEs; (iv)
streamlining government regulations affecting small and medium
businesses; and (v) monitoring and evaluation of government SME
programs.

97. The role of BI in funding and administering SME credit
schemes has been eliminated. The SME credit schemes have been
transferred to BRI, PT Madani and BTN. By Dec. 31, 1999, PT
Madani has finalized plans for consolidating SME credit lines to
two, at most, and program parameters will be consolidated. Then
new credit lines will be introduced on April 1, 2000, and will be
based on commercial principles with full risks of nonpayments
being borne by participating banks. Any interest rate subsidy
will be supported by adequate provisions in the budget. In
addition, by June 30, 2000, Bank Indonesia will announce a plan
to phase out mandatory requirements on commercial bank lending to
SMEs.

98. SMEs as well as larger firms need access to Trade Finance
in order to compete in international markets. The government has
created a new institution, Bank Expor Indonesia with the aim of
expanding access to trade finance. By March 31, 2000, the
government will present the Law on Bank Expor Indonesia to
Parliament, establishing BEI as an independent Export Credit
Agency for Indonesia.