Indonesia Consultative Group Meeting
Tokyo, October 17-18, 2000
Statement of
Amitava Banerjee
Manager and Regional Representative for Indonesia
International Finance Corporation
Mr. Chairman, Minister Rizal Ramli, distinguished members of the Indonesian Delegation, Excellencies, Distinguished Delegates, Ladies and Gentlemen:
Thank you for the opportunity to speak here in front of this distinguished audience with a strong commitment to the future of Indonesia. We join our colleagues in thanking the Government of Japan for their hospitality in hosting this meeting and the World Bank for the excellent arrangements and for its continuing leadership of the CGI.
First and foremost, we would like to assure the Government of Indonesia and the Donor Community that IFC, as the private sector arm of the World Bank Group, remains deeply committed to Indonesia. We continue to believe that despite the considerable risks to the challenges before the authorities in emerging from the economic crisis, Indonesia has extraordinary potential — including a considerable resource base, extensive productive assets and most importantly a hardworking and committed people.
This meeting is important not only because of the amount of funds that it will help mobilize — particularly for Indonesia's poorest people — but because it will also send a strong signal to private investors about the continued commitment of the donor countries and the multilateral organizations represented here to the recovery of the Indonesian economy.
Over the past three years, the Indonesian government and people have adopted a comprehensive political, economic and reform agenda. We welcome the Indonesian government's emphasis on sound fiscal policy, its continued efforts in restoring the health of its banking and corporate sectors and on improved management of natural resources. We commend the plans to change the legal system and the bureaucracy, the greater involvement of civil society, the efforts for decentralization and the continued interest in SME development. We hope that the successful implementation of this agenda will boost domestic and international investor confidence.
While the funds being pledged in this CGI are important in meeting the financing needs for the budget for FY2001, I am sure that we can all agree that over the medium-term, the needs of the Indonesian economy are much larger than any amount that can be provided by the official donors. Restoration of private sector flows is crucial to the recovery of the economy and to the alleviation of poverty. But restoring private sector flows will depend not only on the signals this meeting will give, but also on the ability of the Indonesian authorities to substantially enhance the confidence of the domestic and foreign private sector in the Indonesian economy and in the country's institutions. While in this regard we appreciate the efforts of the authorities to implement their economic and reform agenda, we also recognize that progress in these areas has been uneven. The steps outlined by the Indonesian government are essential for a sustainable recovery of the Indonesian economy and it is vital that the implementation of these reforms is transparent, equitable and fair - and is perceived to be so. Consistency and predictability are therefore key elements in establishing a stable and supportive environment for businesses, large and small.
In the medium-term, besides political commitment to reform and sound economic management, investors are concerned about legal and judicial process, decentralization, the law and order situation, and corporate governance. The Government is rightly concerned about expanding opportunities for small and medium enterprises (SMEs); these are areas that can make a huge difference, leveling the playing field for small firms.
The Bankruptcy Law, in effect since August 1998, has been a useful tool in assisting the enforcement of creditor's rights. But although the legal framework for the bankruptcy law is broadly satisfactory, its implementation remains weak. As a result, the rulings of the commercial courts have been capricious. In this regard, we welcome the recent court decision in August this year favoring IBRA against a non-cooperating debtor. The court decision, involving use of ad-hoc judges, was the first one with favorable outcome to IBRA. Much work still needs to be done to provide comfort to creditors that their rights will be protected in Indonesia. Unless investors have confidence in a professional and non-corrupt judicial system, there is little hope of attracting significant foreign direct investment.
The investment community is watching with great interest the plan for Decentralization, its implementation and its impact. If well managed, the country stands to gain much, as it is now unusually centralized for its size and diversity. Moreover, there is a strong political imperative to decentralize, and counter the centrifugal forces within the country. We broadly welcome the decentralization plan of the Government of Indonesia, but are concerned on the effects decentralization may have on resource based industries, especially mining, oil and gas and agriculture. It is imperative that the regulations of the individual provinces and districts are consistent with national regulations to enable companies to operate effectively within their concessions. Investors are also concerned that the current limited local tax base could induce local governments to seek more informal ways of raising revenues, which among other things will have a significant impact on SMEs.
The deteriorating law and order situation in the provinces is also of concern to investors. Preservation of law and order have an important bearing on investments in the mining, agriculture and forestry sectors and the increase in illegal mining and logging and the encroachment on agricultural plantations has limited investments in these areas. In addition, illegal activities pose a serious threat to the environment — deforestation due to illegal logging, mercury contamination due to illegal gold mining, and destruction of partially degraded forest cover within plantations.
Indonesia also needs to strengthen corporate governance and transparency across both the private and public sectors and improve its investment environment by promoting competition, removing trade and investment barriers, dismantling government-supported sectoral monopolies and curbing the power of cartels. It is hard to understate how important these issues are not just to large firms, but to the smaller domestic firms which do not have recourse to special treatment and therefore face an uneven playing field. Corporate governance needs a public-private partnership of regulators, self-regulatory organizations, accounting and legal professions, banks, corporate issuers, shareholders and managers. Benchmarking Indonesian corporate governance practices to international standards and the creation of institutions focusing on improved corporate governance, such as an Institute of Corporate Directors, are important steps in building confidence in this area.
IFC invested heavily in Indonesia in the 1990s and continues to have an important role in Indonesia in financing the private sector. Our first priority since the inception of the crisis has been to defend our portfolio of 40 or so existing investments in Indonesia and to support our clients, many of whom have continued to service their obligations, despite the tremendous burdens imposed on them as a result of the crisis. This is important because our clients employed over 200,000 people before the crisis and we have invested about $ 1 billion dollars in their development, of which $ 0.5 billion was for our own account and the rest for the account of foreign participant banks.
We appreciate the Indonesian Government's reconfirmation of the tax immunities for participants in IFC B Loan program. The IFC B Loan program leverages IFC's limited resources and encourages commercial banks to lend in countries which might otherwise not seem attractive to them – a matter of great importance in crisis-hit countries like Indonesia.
Protecting our portfolio remains a major objective. Like the portfolio of all financial institutions operating in Indonesia, ours too has been affected by the crisis. Some of our clients could not service their scheduled obligations and we have had to work with them to resolve their temporary difficulties. In at least 5 projects, many with strong foreign partners and clearly viable business plans, we have concluded reschedulings. We have successfully completed four restructurings totaling about $110 million or about a third of problem projects.
We are currently discussing about 10 restructurings and reschedulings. In many of these cases, we hope to reach satisfactory agreements, based on the sponsors' commitment to the principle of equitable burden sharing, which is an essential condition — to us and the other lenders — for a successful restructuring. Unfortunately, we also have had to deal with some difficult situations, where the sponsors of the projects have not negotiated with us in good faith and where consequently, restructuring will not be possible. In two cases we have approached the commercial courts filing for bankruptcy. We may add that it is becoming increasingly clear to us, that many uncooperative borrowers will be unwilling to shoulder their fair share of the burden, until they perceive that the prospects for legal redress have improved for their creditors.
Let me now turn to our assistance program as we see it emerging for the coming years. The basis of our program are investment projects in banking, export oriented manufacturing concerns, mining, agri-business (especially palm oil) infrastructure, SMEs, education and health.
IFC is actively working to develop a pipeline of projects for new investments and for corporate restructuring in Indonesia. We are targeting investments of around $170 million for FY2001 for its own account, a substantial increase on expected approvals in FY00. But we must hasten to add that while IFC's investments for FY 2001 can rise sharply, the uncertainty on IFC's tax immunities, government performance and the effect of the decentralization plan, means that the prospects for investment are volatile. IFC has a strong pipeline in mining agriculture and financial sector projects and can play an important role in attracting additional foreign investment. We are actively assisting export oriented clients address their working capital requirements, given the tight liquidity situation. We are considering, for example, financing for two textile client which successfully exports the majority of its production to some 60 countries. We are also pursuing the extension of trade finance facilities to other internationally competitive companies. We are looking to further develop our pipeline of SME-related investments, including the possibility of a credit bureau, and more involvement with the micro-finance sector and supply-chain development.
However, the Proposed New Income Tax Law jeopardizes this pipeline of future investments. The Law, which was recently passed in the Parliament, adversely affects the tax immunities of IFC and some other multi-lateral agencies in Indonesia. This is a retrograde step. Unless IFC has clear and unequivocal confirmation of its tax immunities, it cannot work on developing a pipeline of projects to assist the Indonesian private sector. IFC currently enjoys tax immunities in all its member countries, including Indonesia, and this has been an important factor in its assistance to its developing member countries. Three weeks ago in Prague, IFC's senior management discussed this issue with Ministers Rizal Ramli and Priadi Prapto Suhardjo. While we welcome their assurances that these matters will be worked out to our mutual satisfaction, it is critical that this issue is resolved before the new tax law comes to effect from January 1, 2001.
Beyond our investment activities, we will continue to pursue technical assistance initiatives, particularly for small and medium enterprises (SMEs), because we believe that these initiatives have become even more relevant as a result of the crisis. Let me mention two of these initiatives. Last year, IFC utilized a $1.6 million PHRD Grant from the Government of Japan to identify potential corporate restructuring candidates who are internationally competitive. McKinsey of Japan completed the study in the middle of this year and now IFC is working with a number of corporate clients identified to assist them in the restructuring process.
With the support of the Australian authorities, IFC has initiated a feasibility study for the establishment of a Small Business Facility, which would provide direct assistance to SMEs and the support institutions that serve them. The Facility would focus on: improving the flow of information to SMEs; providing technical know-how; expanding access to finance, and linking SMEs with new domestic and foreign buyers. It would aim to do so in a manner that emphasizes collaboration with other donors and partners, and creates sustainable local capacity to deliver these services . We believe that this initiative could also make a useful contribution to the national economic recovery process.
In conclusion, Mr. Chairman, Indonesia has always been an important country for us and we believe in its future. We are confident that the current crisis will be overcome; that the reforms underway will provide a stronger and sounder base for its future development; and that the authorities will do everything possible to enhance private sector confidence. As a member of the World Bank Group, we stand ready to work closely with the Government of Indonesia and all of you to speed up the transformation and recovery process of the Indonesian economy.
Thank you.