WB role in Indonesia: What else to be done?

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.