The new letter of intent between IMF and Indonesia

The new letter of intent between IMF and Indonesia

The following is the complete text of the new Letter of Intent
signed by the Indonesian government and the International
Monetary Fund on Monday. The text and tables may be found on
http://www.thejakartapost.com.

I. INTRODUCTION

1. The government has strengthened implementation of the
program set out in the Memoranda of Economic and Financial
Policies (MEFP) of Jan. 20 and May 17, 2000. At the second
review, the main achievements are (i) intensifying asset sales
and debt restructurings by the Indonesian Bank Restructuring
Agency (IBRA) and the Jakarta Initiative Task Force (JITF) under
detailed quarterly targets; (ii) recapitalizing Bank BNI and
advancing BRI's recapitalization; and (iii) adopting a detailed
implementation plan for decentralization.

II. MACROECONOMIC POLICIES

2. The macroeconomic framework for 2000 is being maintained.
Growth and price developments continue to be consistent with that
framework. Although market sentiment turned unfavorable in recent
months, we are confident that 3-4 percent growth and the other
key macroeconomic targets for 2000 can still be broadly achieved.

The President has assured that there will be clarity and
consistency in the implementation of the economic program, which
are crucial to regaining market sentiment.
Fiscal policy

3. Our efforts are directed toward fully implementing the
fiscal year (FY) 2000 budget, and avoiding shortfalls in key
social safety net and infrastructure spending and associated
foreign financing. Revenues have been more buoyant because of
higher oil prices and, were they to exceed the budget target, the
excess will be used to reduce the budget deficit. All tax laws
presently before Parliament are expected to be approved by end-
July.

4. The delayed budgetary measures remain important for medium-
term fiscal sustainability and we have taken the following
decisions: (i) the value added tax on Batam island will be
implemented on Jan. 1, 2001, giving sufficient time to prepare
for effective implementation and to ensure that bona fide
exporters are not affected; and (ii) the first adjustment under a
medium-term program for petroleum prices will be implemented in
October, supported by protection for poor consumers.
Monetary and exchange rate policy

5. Bank Indonesia (BI)'s base money program is being
maintained. As market confidence improves and risk premia fall,
BI is confident that money market interest rates could be guided
down. However, progress in this direction has been delayed by the
recent weakness in the exchange rate, which required a temporary
increase of interest rates. Meanwhile, the program floor on net
international reserves has been raised as part of prudent
monetary policy to strengthen market confidence, as well as
reflecting more rapid reserve accumulation earlier in the year.

6. We are firmly committed to the exchange system underlying
the financial program -- to a floating exchange rate and
preservation of Indonesia's historically free capital account --
as enshrined in the law on foreign exchange management that was
enacted in l999.
Financing Issues

7. We are making progress toward implementing the
restructuring agreement that was reached with official creditors
on April 13, 2000. Thus, we have reached agreement with the
bankers' steering committee to restructure the government's
obligations to its commercial creditors of about US$346 million.

8. We are committed to delivering the policy framework
underlying the budgetary support loans of the World Bank and the
Asian Development Bank (AsDB) and, thereby, avoiding shortfalls
in their disbursements in FY 2000.

III. FISCAL DECENTRALIZATION

9. In implementing fiscal decentralization, we are determined
to safeguard public service delivery, fiscal stability, and the
governance of public spending, and are being assisted by advisors
from the international community.

10. Our implementation plan anticipates that, during July-
September, we will prepare a positive list of work units and
activities to be transferred to each district/province and
estimate the costs of the decentralized activities. We will also
progressively finalize regulations on: (i) transfers of civil
servants, assets, and spending to the districts; (ii) fiscal
transfers and shared revenues required to finance transferred
functions; (iii) guidelines for local government borrowing; (iv)
accountability of local governments and financial management by
adherence to budget process; and (v) financial information
systems drawing on GFS (based on international - Ed.) guidelines.

11. We have agreed to the following safeguards to minimize the
macroeconomic risks: (i) an adequate contingency provision will
be included in the 2001 budget, and finalized in consultation
with the IMF at the nest program review; (ii) specific
regulations and rules will be established for regional government
borrowing especially from banks, to ensure consistency with the
macroeconomic framework; (iii) regulations will be established to
ensure that the transferred personnel are paid from the shared
and transferred revenue; and (iv) fiscal transfers to the local
governments will be phased in line with the transferred
functions.

12. To implement this complex program, we are making fully
operational four working groups under the Coordinating Team (CT),
and three secretariats to advise the Regional Autonomy Advisory
Council (RAAC). Local governments have elected their own local
government associations to represent their views to the central
government and to the RAAC. The RAAC was made fully operational
on July 21.

IV. BANKING SYSTEM REFORMS

IBRA Governance

13. We have adopted a new governance framework to ensure IBRA
has the independence it needs to carry out its mandate. At the
center of the framework is a new governing board, clearly
separated from the political process, and composed of independent
professionals. The board will make its first quarterly written
report to the Financial Sector Policy Committee (FSPC) by Sept.
30. Attached to the Board will be an independent audit committee.

14. The rest of IBRA's institutional framework remains intact.
in particular, IBRA will continue to report to the Ministry of
Finance, while the FSPC will set the policy guidelines and
approve sale and restructuring decisions over Rp 1 trillion (book
value).

15. Meanwhile, IBRA is continuing to improve its transparency,
as envisaged in previous Memorandums of Economic and Financial
Policies (MEFP). On June 30, the agency published the results of
a comprehensive audit of its financial position, including those
of its industrial and bank holdings, as of end-1999. This audit
raised a number of accounting and other issues which IBRA will
address in a time-bound action plan to be finalized in August,
after consultation with the World Bank. IBRA's first
comprehensive annual report will be released during the third
quarter.

IBRA Asset Recovery and Restructurings

16. IBRA's focus is to drive asset sales and debt
restructurings, return assets to the private sector quickly, and
achieve budgetary collection targets. Toward this end, by end
September, IBRA's new Board will approve a time-bound strategy
for the disposition of all assets by its sunset date of end-
February 2004. As part of this effort, international firms have
been engaged to develop specific asset disposal strategies for
all assets in the IBRA-controlled holding companies.

17. For FY 2000, IBRA announced on July 19, a quarterly
schedule of asset sales procedures and projected cash
collections, consistent with the budget target of Rp 18.9
trillion. Cash collections are estimated at over Rp 4 trillion
during the April-June quarter, and projected at about Rp 7
trillion during the September quarter, and about Rp 8 trillion
during the final quarter of FY 2000. These targets will be
realized in the following ways.

Asset Management Credits (AMC) Operations

18. In FY 2000, the AMC aims to collect at least Rp 8.8
trillion in cash mainly by restructuring many of its largest
loans, and selling them to investors or banks, and also by
outsourcing and selling smaller loans, and by collecting debt
service payments. Toward this end, the AMC aims at resolving the
loans of its 21 largest obligers (comprising over 340 debtors
with a book value of Rp 88 trillion) by end-2000. By end-June, 35
percent of the book value of these loans had been resolved, with
term sheets having been finalized for 93 debtors and legal
actions initiated against 16 debtors. By September, the ratio
should rise to around 70 percent of the loans.

19. Regarding the AMC's smaller loans: (i) all commercial
loans (Rp 5-50 billion) have now been outsourced to domestic and
foreign institutions, with the aim of putting the entire
restructured portfolio back in the banking system by September
2001; and (ii) all retail loans (under Rp 5 billion) will be sold
under open tender by December 2000.

Asset Disposal Unit (ADU) Operations

20. The ADU aims to raise about Rp 7 trillion for FY 2000, by
selling over 20 industrial and other assets, through transparent
oral competitive bidding procedures. These assets include
automotive, chemical, consumer and real estate-related concerns,
all of which were acquired by the IBRA-controlled holding
companies as part of settlements with bank shareholders. In all
cases, IBRA's aim will be to sell majority control to the private
sector. To ensure that the sales process goes smoothly, written
commitments from the shareholders have been obtained and were
publicized on July 19. International advisory firms have been
engaged for virtually all enterprises scheduled for sale this
year. In addition, all necessary legal actions have been taken to
secure clear title over the assets to be sold.

Bank Restructuring Unit (BRU) Operations

21. The BRU expects to contribute about Rp 3 trillion to
IBRA's asset recovery target in FY 2000. IBRA has announced a
timetable to complete the privatization of Banks BCA and Niaga by
December, and Parliamentary approval will be requested in August.
IBRA also expects to sell (in cooperation with the owners) some
of its shares in the private banks recapitalized with public
assistance.

22. IBRA is also advancing the reprivatization of its other
BTO banks, with the aim of fully completing the process by 2001.
The legal merger of Bank Danamon with eight other BTO banks was
completed on July 3, allowing the operational mergers to be
completed by end-October. It remains our intention to prepare
Bank Danamon for majority privatization in 2001. As for Bank
Bali, an out-of-court settlement has been reached with the
original owner, and the bank will be recapitalized in October,
following a rights issue.

Asset Management Investments (AMI) Operations

23. IBRA is enhancing its control over the pledged assets and
taking steps to preserve the value of the enterprises in the
holding companies. A new compliance team has been established
within AMI for this purpose -- to monitor individual enterprises
and identify specific problems. Based on recommendations of the
compliance team, IBRA's Board will adopt a corrective action
program by end-August. This program will include, where
necessary, changes in the management of the enterprises.

Actions Against Noncooperative Debtors and Shareholders

24. The government recognizes that the asset recovery targets
require strong action be taken against all noncooperative debtors
and shareholders. Toward this end, the interministerial Committee
for Resolving the Cases of Recalcitrant Debtors was established
on July 17. The committee will decide a coordinated strategy for
all IBRA's problem cases, including prosecutions, using IBRA's
special powers to take over debtors' assets, and imposing
administrative sanctions (such as travel bans and disbarment from
directorships).

25. IBRA is undertaking a comprehensive review of its legal
powers, and related legal actions are planned to be taken as
follows:

* The Attorney General has commenced legal action against
noncooperating shareholders from four of the 1998 BTO/closed
banks (Pelita, Deka, Centris and Istimarat), who have not reached
agreement with IBRA. The cases will be brought to court during
August.

* Shareholders of the 1999 BTO/closed banks who fail to
complete negotiations by September will be referred to the
Attorney General who will take legal action by October.

* IBRA will by September take legal actions against those
shareholders who have not complied with their Master of
Settlements and Acquisition Agreement (MSAA) or Mutual
Recognition Arrangements (MRA) agreements. Additional actions
will be promptly taken in all cases where shareholders fail to
complete their asset transfers consistent with their agreements.

* IBRA's AMC has filed legal actions against 16 noncooperative
borrowers (total debt of over Rp 6 trillion) out of about 340
companies belonging to the top 21 obligors.

State Bank Restructuring

State Bank Governance

26. A monitoring and governance unit for the state-owned and
recapitalized banks was made operational within the Ministry of
Finance at end-June 2000. The key tasks of the unit are to
conduct quarterly reviews of banks' compliance with their
performance contracts, including business plans and performance
targets; and to strengthen their management and governance
structures to ensure highly transparent operations. The unit will
closely monitor data on banks' financial activities, including
detailed information on new credit commitments and loan
restructurings. By end-August, the Ministry of Finance will also
prepare proposals for the state banks to bring their governance
in line with international best practices. The Ministry of
Finance will ensure that the annual audits of state-owned banks
are publicly tendered to international firms.

State bank restructuring and recapitalization

27. Bank Mandiri is implementing its business plan, closing
unnecessary branches, and bringing virtually all of its assets
and liabilities on-line by November 2000. The Ministry of Finance
will work with Mandiri to develop by mid-August an appropriate
strategy for reducing the bank's dependency on high-cost
deposits. Meanwhile, to ensure that the bank's new policies for
credit approval and risk management are executed efficiently,
Mandiri plans to engage, by end-September 2000, experienced
expatriate managers in senior positions and obtain institutional
assistance in these areas.

28. Bank Indonesia is currently conducting an on-site
examination of Mandiri, with a report expected in August. Any
necessary corrective actions will be developed by end-September
in close collaboration with the Ministry of Finance. The
government remains committed to beginning the bank's
privatization in 2001, and a firm strategy for this purpose will
be developed by December 2000.

29. Bank BNI's restructuring is also well underway. The second
and final tranche of recapitalization bonds (Rp 32 trillion) was
issued on July 3, after an international consulting firm verified
that the bank has complied with its interim performance contract,
and an international bank was engaged to assist in credit-risk
management and loan workouts. A further review of the bank's
performance will take place by October 2000, following the
completion of BNI's June 2000 financial audit, after which the
performance contract will be finalized.

30. Regarding Bank BRI, a new Management team was installed on
July 18, 2000, allowing its restructuring efforts to move
forward. The bank's business plan has been validated by the
Restructuring Committee, an interim performance contract signed
with the new management, and the first tranche of
recapitalization bonds issued on July 25, for 70 percent of the
bank's recapitalization needs. The second and final tranche of
recapitalization bonds should be provided by end-October, upon
verification of the bank's compliance with its interim
performance contract, and implementation of a credit risk
management function.

31. BRI's future role focuses on micro, retail, and small and
medium (SME) businesses. A detailed business strategy, as well as
a divestment plan from corporate activities, consistent with the
May 17 MEFP, will be developed by September 2000. BRI has begun
to divest its corporate loans, intending to reduce their stock to
no more than 20 percent of its total portfolio by end 2000, and
to no more than 18 percent by end-2001.

32. Regarding Bank BTN, a new management team was appointed in
May 2000 and has prepared a business plan with its international
advisors. The business plan -- refocusing the bank on mortgage
lending -- has now been approved by the Restructuring Committee.
The first tranche (70 percent of total) of its recapitalization
was also approved by Parliament on July 21.

Supervisory and regulatory framework

33. Implementation of Bank Indonesia's master plan to
strengthen the supervisory and regulatory framework for banks is
well underway. A permanent supervisory presence is being
established at each state bank and will be fully in place by
August. The central bank is monitoring, on a quarterly basis, all
banks' progress against their business plans, to ensure they
bring their financial situation into line with prudential norms,
(notably the 8 percent capital adequacy requirement) by end-2001.
In the event of non-compliance, prompt corrective action will be
taken in accordance with recently enacted criteria.

34. A detailed action plan to bring the supervision and
regulatory framework up to international norms over the next two
years, will be developed by September 2000. By the same date, a
time-bound plan for bringing the supervisory, regulatory and
governance structures of the pension and insurance industries,
finance companies and capital markets into line with
international standards will also be drawn up.

Bank Indonesia Audit

35. The publication in early July of BI's audited accounts for
end-1999, as well as of international reserves data in line with
the IMF's Special Data Dissemination Standards, attest to the
significant progress being made in improving the central bank's
accounts. The earlier Supreme Audit Agency (BPK) disclaimer on
Bl's 1999 audit has been removed, and BI's financial position at
end-1999 has been clarified. By mid-August, BI will complete due
diligence on all its subsidiaries and a plan for their divestment
by December. BI has also submitted to BPK an interim June balance
sheet. Over the coming months, BI will take further steps,
including strengthening management information and internal
control systems, to ensure that the reforms being implemented
become firmly embedded in the governance culture of BI.

Debt Management and Bond Market Development

36. The government is giving high priority to establishing
sound debt management practices and developing the domestic bond
market. The units currently involved in debt management
(including the Debt Management Unit, the Directorate of External
Loans, and the Directorate of Subsidiary Loan Management) will
work closely to consolidate existing debt management activities
by end-December. In addition, by the same date, the government
will submit to Parliament a draft act providing legal
underpinnings for debt management, including standing authority
for debt service, and authority for borrowing within the budget
cycle.

37. This framework for public debt management, as well as the
plans for bond market development, will be set out in a strategy
paper by the Debt Management Unit of the Ministry of Finance and
Bank Indonesia. This paper will be prepared for discussion in
September and published in October. Preparations are being made
to begin auctioning short-term government securities in the
primary market by December (subject to Parliamentary approval),
with the proceeds being used to retire some of the initial
issues.

V. CORPORATE RESTRUCTURING, LEGAL REFORM, AND GOVERNANCE

38. Corporate restructuring is being carried forward by two
principal institutions, IBRA and the Jakarta Initiative Task
Force (JITF), supported by the coordinating and policy oversight
role played by the FSPC. IBRA's agenda has been summarized above.
The JITF's enhanced framework for its corporate debt
restructuring efforts was put in place at the last review, as
described in the May 17 MEFP.

39. The enhanced framework aims at delivering accelerated
JITF-led restructurings. Between May 1 and July 15, the value of
debt restructured under the JITF was $3 billion bringing the
total of restructured debt to $5 billion. Provided a favorable
macroeconomic situation can be maintained, and on the basis of
the measures specified in paragraphs 42 and 43, the JITF expects
that an additional $3-5 billion will be restructured by end-
December. The strategic objective is to restructure a total of
$12 billion of debt by April 2001.

40. Toward these ends, the JITF is building its structured
mediation case load. This case load has risen from about $8
billion on May 1 to $10 billion (as of July 15); it is projected
to increase to $15 billion by end-2000 (excluding restructured
debt). The present case load includes referrals of eight cases by
the FSPC to the JITF (with a total debt of $5.5 billion); further
referrals will be made monthly. The objective is to ensure a
cumulative total of at least 12 referrals by FSPC with a minimum
debt value of $7.5 billion by end-September and a cumulative
total of at least 17 referrals with a minimum debt of $10 billion
by end-December.

41. The JITF's mediation schedules range from 3-6 months,
depending on the complexity of the case. If the established
schedule is not maintained because of debtor noncooperation, the
JITF will send the case to the FSPC. The FSPC will promptly
forward such noncooperation cases to the Attorney General for
initiating bankruptcy proceedings and, if there is evidence of
fraud, criminal investigations. Any forbearance granted by the
Jakarta Stock Exchange with respect to the continued listing of a
debtor will automatically be withdrawn upon a determination of
noncooperation.

42. The ability of the JITF to meet these objectives will
depend on the cooperation of the debtors and creditors and, in
addition, the support of other governmental agencies and
institutions. Weekly meetings between the FSPC, the JITF and IBRA
are helping synchronize referrals to the JITF where IBRA is a
minority creditor. On June 27, the FSPC issued a decree ensuring
IBRA support for JITF-led restructurings agreed by a majority of
private creditors.

43. The government is introducing additional and time-bound
incentives for JITF-led restructuring. A decree will be issued,
within four weeks of enactment of the new tax laws, providing
immediate income tax relief with respect to (i) debt forgiveness;
(ii) debt to asset settlements; and (iii) debt to equity swap. In
addition, Bank Indonesia issued a decree on June 12 easing the
divestment requirement for banks that hold equity in exchange for
debt in the context of a restructuring. Finally, the Ministry of
Finance intends to issue a decree by end-August which clarifies
that, for the purpose of calculating the minimum financial ratios
for regulated finance companies, certain types of subordinated
debt instrument will be treated as equity.

44. The JITF will complete its first survey to assess progress
in corporate restructuring by mid-August. Henceforth, such
surveys will be done on a quarterly basis.

45. Regarding the Indonesian Debt Restructuring Agency
(INDRA), in light of the stabilization that has been achieved, an
exchange rate guarantee is no longer necessary. Accordingly, the
registration period for INDRA has been terminated.

46. Progress is also being made to improve the functioning of
the Commercial Court. The President has appointed a new slate of
ad hoc judges to the Commercial Court and the government is
working with the judiciary to ensure that they are promptly
assigned to pending cases before the Commercial Court. As of July
20, 2000, ad hoc judges have been assigned to two cases filed by
IBRA. As a means of enhancing the credibility and transparency of
the Commercial Court, the government will be submitting a new law
by mid-August that will, among other things, provide for the
publication of dissenting opinions of judges sitting on the
Commercial Court. In the interim, the Supreme Court has issued a
regulation clarifying that ad hoc judges may issue dissenting
opinions that will be published.

47. The government is also implementing a broader judicial
reform strategy. As a result of a recently announced initiative,
70 percent of the judges sitting in Jakarta courts have been
replaced as of mid-July, including a number of judges of the
Commercial Court. Together with Parliament, the President is also
taking measures to appoint well-regarded jurists to the Supreme
Court, including a Chief Justice who will replace the retiring
incumbent in August. The government is also preparing amendments
to the Supreme Court law designed to enhance the credibility of
this important institution.

48. Progress has been made on two key initiatives to address
governance problems within the court system. First, the Joint
Investigating Team (JIT) -- initially focused on court corruption
and including well-respected individuals from civil society --
has become operational within the Attorney General's Office, and
investigations are underway. It is expected that a number of
cases will be referred to the JIT by the National Ombudsman
Commission, an independent body that has been established to act
upon complaints from the public regarding governance problems. In
addition, Parliament has nominated, and the President will soon
appoint, the members of the Commission for the Audit of State Of
finials, many of whom are drawn from civil society. The
Commission will become fully operational by end-August 2000.

49. Other steps being taken to address governance problems
within the court system include the preparation of an Advocate's
Law, to be submitted to Parliament in September, that will
require all court advocates to be licensed. A condition for such
licenses will be adherence to a uniform code of ethics.

VI. PUBLIC SECTOR REFORM AND GOVERNANCE

50. Public sector transparency and governance are being
carried forward in the following key areas of the program.

51. A law providing for the oversight and audit of private
foundations has been prepared, and has been sent to Parliament.
We will be working closely with parliamentary leaders toward its
passage by September.

52. We are making progress in identifying and integrating off-
budget funds maintained by government ministries and agencies:

* The Reforestation Fund was fully transferred to a special
state revenue account on July 4, and will be fully integrated in
the 2001 budget.

* In response to a Presidential Decree issued in May, a number
of ministries and agencies have reported the existence of off-
budget funds, with a total asset value of about Rp 7.7 trillion
(about US$ 860 million). The Development Finance Comptroller
(BPKP) will verify by Sept. 30 for these agencies whether there
has been misreporting, by surveying government accounts in the
banking system. Sanctions will be developed by that date and
applied on all cases of misreporting. Those agencies not
reporting existence of off-budget accounts will be audited by
BPKP by Nov. 15, 2000, and sections applied in cases of
misreporting.

53. The next stage of the exercise involves taking decisions
about the integration of the remaining off-budget funds with the
central government budget. This process will be led by the task
force already established to improve treasury management and
procedures, and their recommendations received by September. Any
funds remaining outside the budgetary framework will be subject
to regular audit by BPKP with quarterly reports to Parliament.
The task force will also complete its work regarding the
consolidation of the bank accounts of government agencies by the
same date. On this basis, detailed recommendations for improving
treasury management procedures will be implemented by December
2000. The investment funds will be integrated with the 2001
budget, and made subject to Parliamentary approval. In this way,
we expect to establish full consistency between monetary and
fiscal data by end-2000.

54. A number of key government agencies and enterprises are
undergoing special performance audits, as envisaged in the May 17
MEFP. Thus:

* The audits of the KUT (credit for farmers) program and of
the Tax Office have begun. In both cases, they will be completed
during the last quarter of 2000, and corrective actions will be
developed by December.

* BPKP has begun to use the information that has become
available upon the completion of the review of the off-budget
funds to ensure that its audits of all public institutions
(including the military) in 2000 will take account of all extra-
budgetary funding. The Minister of Defense has approved BPKP's
audit of Defense Ministry operations. BPK has also begun
examining the foundations of the military.

* The first quarterly reports on the implementation of
corrective actions by the first group of public institutions
undergoing special audits will be published by mid-August (the
National Logistics Agency/Bulog, the state electricity firm PLN,
the state oil company Pertamina, and the Reforestation Fund).
BPKP is also undertaking a special audit of all transactions
undertaken by Bulog in 2000.

* As previously agreed, the government is launching a second
round of special audits, comprising the national airline, the
national toll road company, the domestic telecommunications
company, the largest public port corporations, and a state-owned
plantation company. The audits will be carried out with the
assistance of international experts.

55. The government is beginning work on a comprehensive reform
strategy for the civil service, in consultation with the World
Bank. Preliminary recommendations will be developed by the inter-
ministerial task force (that is being led by the Minister of
State Apparatus) by September 2000, ensuring that any future wage
adjustments -- including any increase in October -- are closely
linked to civil service reform in the context of
decentralization. The plan will be finalized by end-2000, and its
implementation will begin in 2001 with decentralization.

56. Privatization and state enterprise reform are moving ahead
and the government is committed to majority divestiture on a
case-by-case basis. The FY 2000 privatization program now
includes a total of 19 enterprises, although a small number of
the planned transactions may not be completed until early FY
2001. Included in the FY 2000 group are several enterprises that
are to be totally privatized and a number of financial holding
companies that will be liquidated. The process of privatizing the
Soekarno-Hatta airport concession company is already far
advanced, and the privatization of PT Pupuk Kaltim, PT Indofarma
and PT Sucofindo will be formally launched in August.

57. A new medium-term State Owned Enterprise Reform
Masterplan, prepared with technical assistance from the Asian
Development Bank (AsDB), was published on June 29. The government
reaffirms its strong commitment to majority privatization of most
state enterprises in the medium-term, to the early and full
privatization of small and medium-sized enterprises that operate
in competitive markets, and to the conduct of asset sales for
enterprises that have no prospect of achieving commercial
viability. Towards these ends, a Ministerial level Privatization
Policy Committee will be established by Presidential decree by
the end of August. During August, new guidelines and transparent
procedures for handling different types of privatization will
also be adopted through a Ministerial decree.

58. The government continues to give priority to the rapid
restructuring and privatization of the telecommunications sector.
By August, we plan to issue implementing regulations for the 1999
Telecommunication Law, as well as a new tariff policy, network
inter-connection rules, model operator licenses, and a charter
for the planned regulatory agency. The government remains
committed to transforming Telkom and Indosat into competing full
service providers and having these companies divest their stakes
in all non-core businesses. Each company will divest its holdings
in at least two such businesses by end-2000, and all noncore
holdings will be divested by end-2001. An inter-ministerial team
on telecommunications -- established on May 30 -- will prepare a
detailed action plan by September to guide the development of the
sector.

59. As part of a two-year restructuring program, assisted by
the AsDB, 32 state enterprises have been identified to have their
accounts audited by independent auditors by end-2000; this plan
will be extended to a further 30 state enterprises in 2001.

60. The government remains strongly committed to the
comprehensive legal and policy reforms for the energy sector
outlined in the MEFP of January 2000. In particular, two new laws
concerning Electric Power and Oil and Natural Gas will be
submitted to Parliament during September. The Ministry of Mines
and Energy has prepared medium term plans to phase out fuel
subsidies and restore electricity tariffs to commercially viable
levels.

61. Further progress has been made toward resolving the
contractual disputes with independent power producers (IPPs).
Following the conclusion of several interim agreements, efforts
are now focused primarily on negotiating long-term solutions for
those plants that are already in commercial operation or far-
advanced in construction. In parallel, we are also working to
negotiate agreements in respect of projects that have not reached
financial closing.

VII. OTHER STRUCTURAL ISSUES

62. The government will shortly publish a regulation narrowing
the list of sectors that are closed to foreign investment.

63. In agriculture, there are three principal policy
initiatives underway:

* For rice, the import tariff level and the Bulog procurement
price will be reassessed and adjusted in August, prior to the
next crop season, after widespread consultations. At the same
time, we are preparing to change Bulog's legal status to permit a
more transparent accounting system and greater efficiency in the
operating structure by September.

* In the sugar sector, cane farmers were supported for this
crushing season with government funds to mills to purchase their
cane. By end-September, however, we will announce a plan to
increase the efficiency of the sugar industry by consolidating
the large number of inefficient state-owned sugar factories on
Java.

* As for KUT, from October, working capital for farmers will
be extended only through commercial banks, which will make
independent credit decisions and bear all repayment risk.