WB role in Indonesia: What else to be done?

This is the first of two articles based on a presentation by Indonesia's World Bank Country Director,Mark Baird, at a seminar on Indonesia's recovery held by the Kapital business tabloid in Jakarta on May 11.

JAKARTA: The World Bank has been active in Indonesia since 1967 and has financed close to US$25 billion worth of development projects and programs in all sectors of the economy.

This involvement was associated with one of the most impressive periods of economic development in any country of the world.

Over the 30 years to 1997, Indonesia grew on average by 7 percent per annum, poverty (by any measure) was substantially reduced, and sustained progress was made on improving social indicators, such as literacy and life expectancy.

Indonesia was considered a "model" of development success. Then the Asian financial crisis struck in mid-1997.

In the three years since then, Indonesia has been subjected to unprecedented economic, social and political pressures. Policymakers have been preoccupied with short-term policies to restore macro stability, restructure the banks and corporate sector, and protect the poor from the worst affects of the crisis.

The government's economic program has been set out in Letters of Intent with the International Monetary Fund (IMF). We have supported this program with policy advice and budget support i.e., financing the overall budget deficit rather than specific development activities. This provided fiscal stimulus in time of severe financial crisis and also helped ensure basic expenditures for the poor were protected.

At the same time, financing of new development projects and programs has virtually ceased. We have also canceled more than $1.5 billion in undisbursed commitments and redirected another $1 billion into more relevant crisis-response programs such as for school scholarships.

The crisis also raises some serious questions about the sustainability of the development process in Indonesia and the role of the World Bank.

Three sets of issues are at the forefront of this debate: debt, corruption and public participation in decision making. Our assessment and response to the current situation is as follows:

Concerning debts, total government debt rose from $51 billion in March 1998 to $147 billion today. This is equivalent to 92 percent of gross domestic product (GDP). Debt service will absorb 45 percent of government revenues in the current fiscal year.

This severely limits the capacity of the new government to borrow and spend on development programs. Note that almost all of the recent increase in debt is due to the domestic cost of recapitalizing banks. The government's external debt is now $63 billion, of which about $12 billion is due to the World Bank.

The government of Indonesia has made it clear that it will not seek debt relief (i.e., principal reduction) from official creditors.

Nor is Indonesia eligible for debt relief under the World Bank's Heavily Indebted Poor Countries initiative (for the world's poorest countries). However, the government has actively sought and obtained debt rescheduling, on favorable terms, from official bilateral creditors through the Paris Club.

We have supported these efforts. We have also canceled undisbursed commitments of the International Bank for Reconstruction and Development loans, as noted above, and renewed Indonesia's access to highly concessional International Development Assistance credits. We will also work closely with the government to ensure that any new lending by the World Bank fits well with the country's financing needs and development priorities.

Regarding corruption, although there are no hard numbers, it is widely accepted that corruption, collusion and nepotism (KKN) became rampant during the latter years of the Soeharto regime.

This seriously undermined the effectiveness of the government's development programs. Although the World Bank maintains tight controls over the use of its funds, we cannot fully isolate our operations from problems of systemic corruption.

This is a major concern to our shareholders and civil society groups in Indonesia.

Primary responsibility for implementing projects financed by the World Bank lies with the government of Indonesia. We have already been helping the government strengthen their capacity for procurement and financial management, and will intensify these efforts as we move forward.

At the same time, we are reinforcing our own efforts to monitor and enforce compliance with Bank accounting and auditing requirements, and are systematically following up on all significant audit findings with executing agencies.

We've set up a data base of complaints on procurement on World Bank projects and, when appropriate, have launched investigations which have resulted inter alia in barring of firms from participation in future procurement, refund of expenditures by the government which were ineligible for financing by the Bank, re-tendering of procurement, and sanctions by government for fraudulent advertising.

More generally, we are supporting efforts to tackle the underlying causes of corruption through judicial and civil service reform

On participation, development programs in Indonesia have been highly centralized over the past 30 years. There has been little role for local governments or opportunities for local communities to influence the design and implementation of programs.

This is now changing, with the opening up of democracy, plans for decentralization and regional autonomy, and the flourishing array of civil society and community groups involved in local development programs.

The World Bank fully supports the growth of these democratic institutions, backed by the rule of law, because they clearly add to the success and sustainability of development programs -- by broadening representation, promoting transparency, and challenging government and institutions such as the World Bank to be more accountable.

One of the best ways to control corruption is to ensure broader participation in project design, implementation and monitoring. This has now become a standard feature of many of our projects, e.g., for village infrastructure, kecamatan (district) development and urban poverty.

We are also looking at ways that we can work more directly with local governments, through projects for health, education and basic infrastructure.

Community involvement and local institutional development will be key features of our future poverty programs.

All of these factors will impact on how we work in Indonesia in the future.