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Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 20550

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF INDONESIA

SECOND POLICY REFORM SUPPORT LOAN(Loan No. 4470-IND)

July 26, 2000

Poverty Reduction and Economic Management UnitEast Asia and Pacific Region

This document has a restricted distribution and mnay be used by recipients only in the performance of their officialduties. Its content may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(as of July 26, 2000)

Currency Unit = RupiahI Rupiah US$ 0.00011US$1.00 = 9105

WEIGHTS AND MEASURES: Metric System

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development BankAMU - Asset Management Unit of IBRA

BAPEPAM - Securities and Exchange CommissionBAPPENAS - National Development Planning Agency

BI - Bank IndonesiaBKPM - Capital Investment Coordinating Board

BULOG - National Logistic Affairs AgencyCAR - Capital Adequacy RatioDFI - Direct Foreign Investment

FSAC - Financial Sector Action CommitteeGOI - Government of Indonesia

IBRA - Indonesian Bank Restructuring AgencyIBRD - International Bank for Reconstruction and Development

IFC - International Finance CorporationIMF - International Monetary Fund

INDRA - Indonesian Debt Restructuring AgencyLOI - Letter of Intent

MESOE - Ministry for the Empowerment of State-owned EnterprisesMFEC - Ministry of Forestry and Estate Crops

MOF - Ministry of FinanceMOIT - Ministry of Industry and TradeNGO - Non-Government Organization

Pertamina - National Petroleum CompanyPLN - National Electric Company

PRSL - Policy Reform Support LoanSCL - Single Currency LoanSME - Small and Medium EnterprisesSOE - State-owned EnterpriseTOR - Terms of Reference

UNDP - United Nations Development ProgrammeWB - World Bank

FISCAL YEAR: April 1 - March 31

Vice President : Jemal-ud-din Kassum, EAPVPCountry Director : Mark Baird, EACIFSector Director : Homi Kharas, EASPRTeam Leaders at ICR : Lloyd Mckay (field-EACIF) and

Sudarshan Gooptu (HQ-EASPR)

ICR Primary Author : Thang-Long Ton, EASPR






CONTENTS

Preface1. Project Data ........................................... 12. Principal Performance Ratings ........................................... 13. Assessment of Development Objectives and Design,

and of Quality at Entry .......................................... 24. Achievement of Objectives and Outputs .......................................... 35. Major Factors Affecting Implementation and Outcome ......................... 106. Sustainability .......................................... 117. Bank and Borrower Performance ......................................... 128. Lessons Learned ......................................... 159. Partners Comments ......................................... 1610. Additional Information ......................................... 23

Annex 1. Key Performance Indicators .24Annex 2. Project Costs and Financing .25Annex 3. Economic Costs and Benefits .26Annex 4. Bank Inputs .27Annex 5. Ratings for Achievement of Objectives/Outputs of Components 28Annex 6. Ratings of Bank and Borrower Performance .29Annex 7. List of Supporting Documents .30

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.




Preface

This is the Implementation Completion Report (ICR) for the Second PolicyReform Support Loan (PSRL) to the Republic of Indonesia. This Loan (No. 4470-IND),in the amount of US$500 million, was approved by the Board on May 20, 1999, signedon May 28, 1999, and made effective on June 18, 1999. The single tranche, releasedupon effectiveness, was fully disbursed on June 18, 1999. The loan was closed onDecember 31, 1999.

The ICR was prepared by Thang-Long Ton (Economist, EASPR) and reviewed byMr. Sudarshan Gooptu (Senior Country Economist, EASPR), Mr. Lloyd McKay(Principal Economist, EACIF), Mr. Vikram Nehru (Lead Economist, EACIF), and Mr.Homi Kharas (Sector Director, EASPR).

Preparation of this ICR was started in March 2000. It is based on material in theproject files in Washington and in the Country Office. The ICR also benefited from thecomments from the Borrower. The report was also reviewed by Japan Bank forInternational Cooperation (JBIC) which cofinanced this loan. There was no separatemission for the ICR, but field-based staff provided comments and inputs. The Borrowercommented on the ICR but did not prepare a separate evaluation. It is attached to thereport.

Project ID: P060258 Project Name: PRSL II

Team Leader: Lloyd E. Mckay | TL Unit: EACIF

ICR Type: Core ICR Report Date: July 26, 2000

1. Project Data

Name: PRSL II L/C/TFNumber: 44700

Country/Department: INDONESIA Region: East Asia and PacificRegion

Sector/subsector: ME - Economic Management

KEY DATESOriginal Revised/Actual

PCD: 11/20/98 Effective: 06/18/99 06/18/99

Appraisal: 02/21/99 MTR:

Approval: 05/20/99 Closing: 10/29/99 12/31/99

Borrower/lImplementing Agency: REPUBLIC OF INDONESIA / Financial and Economic Resilience Council

Other Partners: Japanese Export-Import Bank (JEXIM)

STAFF Current At Appraisal

Vice President: Jemal-ud-din Kassum Jean-Michel Severino

Country Manager: Mark Baird Mark Baird

Sector Manager: Homi Kharas Tamar Manuelyan Atinc

Team Leader at ICR: Lloyd Mckay (field) and Not applicableSudarshan Gooptu (HQ)

ICR Primary Author: Thang-Long Ton

2. Principal, Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: M

Bank Performance: S

Borrower Performance: S

QAG (if available) ICR

Quality at Entry: S SProject at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:This Loan was an integral part of the overall crisis-response package of external assistance that wasagreed upon by the IMF, the World Bank, the ADB, and bilateral donors at the July 1998 meeting of theConsultative Group for Indonesia (CGI). It aimed at deepening the banking and structural reforms thatwere initiated under the Bank's previous $1 billion fast-disbursing Policy Reform Support Loan (PRSL)that was approved by the Bank's Board in July 1998. A companion $600 million Social Safety NetAdjustment Loan (SSNAL) from the Bank, was also approved by the Bank's Board on the same day asPRSL II, which was geared at improving the effectiveness of social safety nets in Indonesia through bettermonitoring and targeting of these programs to ensure that their benefits reached the poor.

PRSL II focused on three pillars of Indonesia's recovery effort:* maintaining macroeconomic stability;* bank and corporate restructuring to get productive assets back to work; and* improvements in governance and transparency to help rebuild confidence and restart sustained growth.

The proceeds of the loan went towards expenditures on bank restructuring, and programs to mitigate thesocial costs of the crisis, including (i) subsidies to shield the poor and protect the social fabric; (ii) specialinitiatives to sustain education and health services to the poor; and (iii) income support programs of laborintensive public works. Without this support, it was feared that Indonesia would not be able to meet itsexternal financing needs of the budget, sustain these social expenditures and bear the costs of bankrestructuring without risking hyperinflation.

At the time when this lending operation was being prepared there was a situation of growing politicaluncertainty, a deepening of the impact of the crisis on people's lives and the economy was by no meansback on track Under these circumstances, finding the right balance between supporting policy reforms andmeeting critical financing needs was a difficult challenge. In this endeavor, the key actions for effectivenessof this loan were deemed to be the minimum set of conditions within a wider overall program of structuralreforms (as detailed in the Policy Matrix accompanying the Government's Letter of Development Policy)that were needed to maintain the momentum of institutional change towards improved governance andtransparency as well as financial and corporate restructuring efforts in Indonesia. Clearly, it is a fullagenda that will take years to complete.

3.2 Revised Objective:No revisions were made to the above-mentioned objectives.

3.3 Original Components:In accordance with the three pillars mentioned in 3.1 above, the key policy and institutional changessupported through PRSL II were the following:Maintaining Macroeconomic stability

* Realignment of public expenditures towards poverty-alleviating programs;Bank and corporate restructuring

* Empowering the Indonesian Bank Restructuring Agency (IBRA);* Progress with resolving banking problems by closing 38 private banks, nationalizing 7 banks

and identifying 9 banks for recapitalization;* Transferring loss loans to IBRA's Asset Management Unit;

Improving governance and transparencv* Parliamentary approval of the first of the new anti-corruption laws, providing for an independent

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body to investigate alleged corruption involving public officials;* Parliamentary approval of fiscal and administrative decentralization legislation;* Enactment of law to make the abuse of market power an offense; and* Forestry policy reforms.

These specific measures were an integral part of a more comprehensive structural reform agenda thatentails: aggressive privatization to improve competitiveness and more efficient service delivery; trade andmarketing reforms; investment, corporate govemance and competition policy measures; energy sectorreform and strengthening environmental management over the medium term. A reform agenda that is alsosupported by the IMF LOI process, the Asian Development Bank, the United Nations System andIndonesia's official bilateral development partners (including Japan, which co-financed PRSL II). Seeattached Matrix of Policy Actions (Annex 7).

3.4 Revised Components:No revisions were made since this was a single tranche operation that was fully disbursed uponeffectiveness.

3.5 Quality at Entry:The assessment of the PRSL II is satisfactory overall by the ICR. The project did contribute effectivelytowards stopping the hemorrhage of the Indonesian economy that was beset under the crisis with run-awayexchange rate, large capital outflows, and dire threat of social breakdown. Concurrently, the PRSL IIproceeded to set the firm foundations for economic recovery by instituting measures designed to restore andrestructure the country's banking and corporate sectors while providing a framework for the improvementin governance and transparency to help rebuild the confidence in the society and nurture sustainablegrowth. Key measures have since been implemented by the government. Other actions are beingimplemented, some although slowly, under the overall umbrella of the structural reform program under theauspices of the Asian Development Bank, the IMF and the World Bankl The actions undertaken to dateremain consistent with this program and relevant at the time of the preparation of this ICR. Thispowerfully attests to the project's quality at entry and the appropriateness of the measures designed at thebeginning of the project to address effectively both the immediate needs from the crisis and themedium-term structural reform agenda of the Indonesian Government.

The PRSL II is consistent with the CAS's paramount objective to reinforce the measures to lessen adverseimpact of the economic crisis on the most vulnerable sections of the population. This was one in a series ofBank's lending activities to assist the Government in the long road toward restoring economic stability.

Major risks to the operation were accurately highlighted as the country faced the political uncertainty andpolitical transition during the preparation, appraisal and the implementation of the program. The Bank alsosought and established an active dialogue and consultations with the civil society during the preparation ofPRSL II to explain the reform program and receive feedback from business groups, labor representatives,research institutions, and NGOs. Contact with emerging political groups on the reform program in generaland the Bank's assistance in particular was also established, necessitated by the changing politicallandscape, thus adding another positive feature in the quality at entry of the project. (A summary of theseactivities appears in Box 5 in the Project Appraisal Document for PRSL II.)

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:One of the main objectives of this loan--to maintain macroeconomic stability in the face of the crisis--was

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achieved. All macroeconomic indicators have shown remarkable stability since the last quarter of 1999 todate. By first quarter-end of 2000, inflation has been virtually eliminated, the Rupiah has traded within anarrow range, and the swap premium and domestic interest rates have fallen to pre-crisis levels. Whilecontinued strict monetary management has underpinned this macroeconomic stability, significant excesscapacity in the economy has helped. However, the country's economic recovery remains fragile anddomestic demand and investment depressed. After expanding 5.8 percent (year-on-year) in the last quarterof 1999, the GDP grew at 3.2 percent (in real terms) during the first quarter of 2000. This is mainly led byincreases in private consumption and export performance. Export earnings improved with total exportssharply higher during the first four months of 2000--higher than the previous year as well as the yearspreceding the crisis. Though the increase in oil prices has helped, there has been a rebound in non-oilexports (up 28 percent compared to last year and 19 percent higher than in the same quarter last year).Imports have recovered somewhat from their 1999 lows but remain below pre-crisis levels. Bank andcorporate restructuring to address fundamental problems of debt and non-performing loans has been slow.Political uncertainties remained and social apprehension continued to adversely affect and even underminepublic confidence.

On the fiscal side, the fiscal deficit was 1.5 percent of GDP for FYI 999/2000 (much lower than the IMFprogram target of 3.8 percent). This is partly due to improved revenue performance with high tax receiptsfrom interest income and higher oil prices. The FY2000 budget (for the nine-month period betweenApril-December) has been prepared in consultation with the IMF and the World Bank and was approved byParliament on January 20, 2000. Public expenditures are dominated by debt service payments, especiallyon the domestic debt that has had to be issued from bank restructuring. Further reforms to maintain fiscalsustainability of public expenditures over the medium term are underway. These include: rationalizingpolicies governing tax holidays and free trade zones to avoid economic distortions and reduce abuse andevasion; phasing out unnecessary tax exemptions; improving tax administration; eliminating uneconomicalspending.

Bank and corporate restructuring continues to be the critical area that needs to be addressed in order torebuild an efficiency banking sector and get the potentially productive assets back to work. The actionsinstituted under the reform program that PRSL II supported, along with the IMF and ADB, arecontributing towards:

* instilling depositor and creditor confidence,v improving governance and bank supervision,* establishing an institutional framework and program for bank restructuring,* strengthening bankruptcy and restructuring provisions,* facilitate corporate restructuring,* ensure the eventual resumption of credit flows to viable firms, and* improve corporate governance.

The task of speeding up the implementation of these measures is continuing. Section 4.2 outlines theactions that have been undertaken in this endeavor under PRSL II.

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Table 1. Selected Key Economic Indicators

1997/98 1998/99 L9-9-91o 200010

Actual Projected

Growth rates (%):

Real GDP Growth 2.1 -14.1 3.3 3.0

Exports (fob) 13.2 -13.9 10.1 10.0

Imports (cif) -3.7 -28.1 0.0 18.0

Inflation (CPI) (annual average) 12.2 64.8 8.5 4.0

Share in GDP (%)

Investment 28.3 11.7 13.5 15.3

Government deficit (-)/GDP -0.4 -3.4 -1.5 -4.8

Current account balance -1.2 4.5 4.1 3.2

Gross official reserves (month-imports) 3.6 7.6 8.9 9.3

Source: World Bank and Government of Indonesia, June 2000.

4.2 Outputs by components:Table 2 summarizes the key actions that were deemed under PRSL II to be the critical minimum set todemonstrate the government's commitment to support the reform effort and, at the same time, for the Bankto consider satisfactory to allow for project effectiveness. The table also shows that all these conditions ofeffectiveness have not been reversed to date, despite the significant political and economic uncertainties thathave prevailed since the crisis.

Banking reforms and corporate restructuring

The actions undertaken in the banking sector reform included the effective empowerment of the IndonesianBank Restructuring Agency and its Asset Management Unit. These agencies have been in full operationaccording to their mandate since 1999. The Government continued to normalize the banking systemincluding bank closures, nationalization, and recapitalization using a transparent, consistent, andinternationally acceptable standards of practice.

The Jakarta Initiative Task Force (JITF) was set up and made operational to facilitate voluntary corporateand corporate debt restructuring in Indonesia. Actions were also undertaken to facilitate corporaterestructuring by insuring tax neutrality for mergers and removing restrictions on debt-equity conversions.

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A one-stop regulatory facilitation group was also established.

Governance, Transparency, and Efficiency.

A series of laws and regulations were presented to, approved, and enacted by the Parliament coveringissues on anti-corruption, fiscal decentralization, anti-monopoly practices, and environmental managementas part of the Government's commitment to improve govemance and transparency in public resourcesmanagement. A master plan for the reform of SOEs, including initial actions and an implementationagenda, was complete and published, as part of the move toward better efficiency use of public resources.

Efficient public management of resources also covered government actions in the establishment of aframework for performance bonding for forestry concessionaires, review of the forestry royalty rate, exporttax reduction in log and saw timber. This has resulted in better forest use management and therebyenvironmental management. Further efforts in this area have been undertaken in forestry resourcesstewardship in order to generate maximum economic rents and benefits for the country while protecting andconserving the bio-diversity and ecological services of the forests. In addition, within the environmentcontext, the Government took care to establish implementation regulations for the Enviromnental Law todeal with hazardous waste management and water and air pollution control. Through other measures andadministrative steps, the Government also worked toward strengthening the overall environmentalmanagement, as detailed in the Letter of Development Policy.

Table 2. List of Conditions of Effectiveness

(taken from Schedule 3 of the PRSL Il Loan Agreement)

Program of Actions Taken by the Borrower Status at theICR

A. Maintainin2 an appropriate macro-economic volicy framework

1. An appropriate macro-economic policy framework, consistent with the No reversalobjectives of the Program, as determined on the basis of indicators agreed to bythe Borrower and the Bank, has been maintained.

2. The Fiscal Year 1999/2000 fiscal budget has been approved by No reversalParliament, with development expenditure levels and sectoral allocationsacceptable to the Bank. The Borrower has established social safety netexpenditure allocations (by program) within the framework of said budget,acceptable to the Bank.

B. Reforming the banking sector and facilitating corporate and debtrestructuring

1. The Indonesian Bank Restructuring Agency (IBRA) has been provided No reversalwithadequate financial resources and legal powers to carry out its mandate torestructureand/or resolve illiquid and insolvent banks.

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2. The Borrower has taken the following actions with respect to private No reversalbanks, excluding those banks that the Borrower formally took decisions to closein April and in August 1998 (the "frozen" banks): thirty-eight banks have beenclosed, seven banks nationalized, and nine banks have been identified as eligiblefor recapitalization, in each case using a transparent, consistent and otherwiseinternationally acceptable standards of practice.

3. IBRA has assumed management control of the ten "frozen" banks and No reversalthese banks are in the process of being liquidated. All "frozen" banks whoseshares are publicly traded have been de-listed. Sales of assets other than loanscommenced in December 1998 and legal title of all loans of the frozen banks hasbeen transferred to the Asset Management Unit (AMU) of IBRA.

4. Clear ownership of, and governance procedures for, the state banks have No reversalbeen established. A resolution plan for four state banks to integrate under BankMandiri has been adopted and the process of establishing a centralized creditrisk unit in Bank Mandiri has commenced.

5. Legal title to "Category 5" loans, with a face value in excess of 5 billion No reversalrupiah from the 7 state banks, has been transferred to the AMU.

6. The Jakarta Initiative Task Force (JITF) has been established. No reversal

7. A one-stop mechanism to facilitate approvals for corporate restructuring No reversalhas been established.

8. Restrictions on debt-equity conversions have been removed and tax No reversalneutrality for mergers has been provided to facilitate corporate restructuring.

C. Improvin2 governance and increasing transparency and efficiency

1. A draft Law about the Eradication of Corruption Criminal Acts, which No reversalprovides, inter alia, for increased penalties in the event of convictions forcriminal acts of corruption, and a draft Law regarding State Administrators whoare free from Corruption, Collusion and Nepotism, which provides, inter alia,for the establishment of a permanent body for investigating alleged corruptioninvolving public officials and the judiciary, have been submitted to Parliament.

2. Drafts acceptable to the Bank for the proposed Law regarding Fiscal No reversalEqualization between the Central Government and Regional Governments andthe proposed Law regarding Regional Administration have been submitted toParliament.

3. A master plan for the reform of state-owned enterprises has been No reversalpublished and disseminated.

4. A draft Oil and Gas Law, acceptable to the Bank, has been submitted to No reversalParliament.

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5. Export taxes on logs, sawn timber and minerals have been reduced to a No reversalmaximum of 20 percent.

6. Implementing regulations, acceptable to the Bank, for concession No reversalmanagement and operations in permanent production forest, have beencirculated for stakeholder comments; and the transparent reporting ofindependent forest operation inspection teams has been mandated in concessionareas.

7. The Monopoly Practices and Unhealthy Competition Law has been No reversalenacted.

8. Implementing rules, acceptable to the Bank, under the Environmental No reversalManagement Law of 1997 for hazardous waste management and marinepollution, have been issued.

Within the framework of improving governance, transparency and efficiency, the Government has alsoimplemented the following activities in the area of environmental sustainability, within which the forestryresource management is an important component.

Table 3. Actions on Environment Management for the PRSL II

Activity Status

General Environmental Management

Two of the implementation regulations for the Environmental Management Law(UU 12/1997):* Hazardous Wastes Management (PP18/1999) Issued* Marine Pollution Control (PP19/1999). Issued

Establishment of an Inter-Agency Committee at the Ministerial level to develop Completeda short term action plan for reducing air pollution from petroleum fuels andoversee implementation of the plan.

Forestry Sector Reform

Forestry regulation (PP6 of 1999) Signed by theThis regulation authorizes the transfer of forestry concessions by sale and President oneliminates the requirement that concessions can only be awarded to those who January 27, 1999own or commit to develop a wood-processing facility. It also lengthens theconcession period and establishes a framework for forest concessionperformance bonds to act as major new instruments of compliance withconcession management regulations.

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Mapping the remaining natural forest, using 1996 or later imagery, and Being implementedclassifying it into pernanent production, protection and conservation categories

Strong measures to identify community groupings, living in and around forest To be addressed inareas, who have legitimate cause to claim some share of the benefits of forest the National Forestuse and management: Program (below)

A consultative group has been established as a means of obtaining public Development of arecommendations for solving problems in forestry, including social forestry and National Forestbroad community participation Program in

consultation withstakeholders hasbeen initiated by theMinistry of Forestryand Estate Crops

Reduce land conversion targets to enviromnentally sustainable level. no progress

Authorize a performance bonding system for concessions Regulation issuedauthorizing system

Replace quantitative export controls on crude and processed palm oil, olein and on schedulestearin with an export tax of 40% or less, and hold regular reviews with anobjective of reducing this in stages to reach 10% by 12/31/99

4.3 Net Present Value/Economic rate of return:Not applicable

4.4 Financial rate of return:Not applicable

4.5 Institutional development impact:The PRSL II has supported the building of a firm institutional foundation for a sustained recovery throughenhanced transparency, improvements in governance and anti-corruption. The Government demonstratedits commitment to build a sound institutional framework for good governance by implementing thefollowing important actions: (i) A new and improved Bankruptcy Law is aimed at providing a crediblethreat for out-of-court settlements, while the establishment of the Indonesian Debt Restructuring Agency(INDRA) under the Frankfurt Agreement with private creditors will protect debtors and creditors againstforeign exchange risk. (ii) The first new anti corruption law -- the Law regarding State Administration whoare free from Corruption, Collusion, and Nepotism - was approved by the Parliament. This law requiressenior public officials to be able to explain changes in wealth during their time in office and includesprovisions for the establishment of a permanent body to investigate corruption involving public officialsand judges. Clear and practical provisions in the law also address the disclosure of wealth and potentialconflict of interest by public officials. (iii) The Parliament also approved fiscal and administrativedecentralization laws. (iv) An inter-ministerial team is preparing a new Construction Industry Law tostrengthen the national requirements for registration, qualification and operation of contractors, suppliersand consultants in both public and private sector construction activities. (v) A different inter-ministerialteam is redrafting procurement regulations to tighten procedures for the public sector contracting and

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improving the transparency of procurement procedures, and (vi) the Parliament has enacted the MonopolyPractices and Unhealthy Competition Law that focuses on market behavior and envisages the creation of anindependent agency to implement and enforce this law. The law applies to all enterprises, public as well asprivate.

Following the successful implementation of recommendations from a joint Government-Bank PublicExpenditure Review in the budget in July 1998, a second Public Expenditure Review -- Indonesia: PublicSpending in a Time of Change, April 2000 -- was completed and published. It focused on publicexpenditure processes and on the strategic priorities for restoring sound public finances. In this context,international auditors were appointed by the Ministry of Finance to conduct special audits for Pertamina,PLN, BULOG and the Reforestation Fund. The Ministry is expected to follow up on findings andrecommendation of these special audits. The Government has also effectively empowered the IBRA and itsAMfU and these agencies have been in full operation according to their mandate since 1999.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:By the time PRSL n was prepared, Indonesia was still going through a critical period dominated bypolitical concerns about transition, the uncertain promise of a new era of democracy and the uncertainprospects of a democratically elected coalition government. Social tension and threat of societal breakdownwere never far from the surface of the country's political life as the democratic wind was blowing throughthe political landscape, accentuated by continuing sluggish post-crisis growth, increased unemployment,and still declining real incomes. At the same time, recent violence and an uncertain economy had keptforeign investors and domestic entrepreneurs away, exacerbating the critical situation facing Indonesia.

After the dampened export response that immediately followed loan effectiveness, the external environmentthat Indonesia subsequently faced during the implementation of PRSL II was somewhat favorable, withincreasing oil prices and a recent turnaround in the neighboring countries. Investor confidence is still lowenough to inhibit significant return of flight capital or foreign direct investment inflows, although this ispartly influenced by political uncertainties within Indonesia and the slow progress implementation ofstructural reforms.

5.2 Factors generally subject to government control:Measures within the Governnent's control were laid out in the Letter of Development Policy. Satisfactoryprogress was made with respect to the key actions that the Governnent had committed to undertake underthis loan despite political uncertainties and the ongoing transformation in Indonesia towards moredemocratic freedoms in civil society, decentralization and greater transparency in government. Table 2shows that these critical actions have not been reversed to date. Additional actions that are beingundertaken are outlined in the matrix of policy actions (see Annex 7). This reform program was closelymonitored by the Asian Development Bank, the International Monetary Fund and the World Bank throughjoint reviews (under the LOI process), first monthly and then bi-monthly. The PRSL II task team memberswho were stationed at the World Bank's Office in Jakarta also maintained continuous dialogue between allstakeholders of this loan on a regular basis. Frequent policy dialogue between the Bank and the authoritieson key components of PRSL II have also continued during Bank's sectoral supervision missions toIndonesia.

On the negative side, the main concern has been with slow implementation progress in structural reforms.For instance, laws have been issued under the auspices of PRSL II but their implementation has beensluggish. The Commercial Court and the Bankruptcy Law are cases in point. The JITF was not given an

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operating budget from Government even to pay the salaries of its members/employees until eight monthsafter its creation. IBRA faced similar obstacles, such as not being able to take loan defaulters to court untilan appropriate law was issued. Political interference and allegations of nepotism, collusion and corruptionin government contributed to the instability and sluggish implementation of structural reforms.

5.3 Factors generally subject to implementing agency control:The reform program supported by PRSL II was overseen by the Financial and Economic ResilienceCouncil with implementing and monitoring responsibility. The Council was composed of competent senioradvisors with established reputation, key economic ministers and private sector representatives. TheCouncil was chaired by the President and the Coordinating Minister for Economics, Finance and Industrywas the Executive Chairman. The Minister of Planning was the Council's Secretary General who had theoverall responsibility for implementation and monitoring the program. A team of experts on the Councilworked assiduously with Bank and IMF staff. While uncertainty in the political sphere affected thepreparation and implementation of the reform program, these agencies and their officials contributedgreatly to the completion of actions within a reasonable timeframe, amid difficult working conditions anduncertainty beyond their control. Their efforts resulted in the completion of the conditions for effectivenessfor the loan.

5.4 Costs and financing:The total loan amount was US$500 million which was disbursed in one tranche on the date of effectiveness,June 18, 1999. The interest rate on the loan is the 6-month USD LIBOR fixed base rate plus 0.75 percent(LIBOR fixed total spread). There is a I percent of principal service charge paid on effectiveness and astandard commitment charge of 0.75 percent. The loan term is 15 years with five years of grace period.

6. Sustainability

6.1 Rationale for sustainability rating:As Indonesia began the year 2000, broad macro-economic indicators have shown encouragingimprovements, accompanied by indications of some return in investor confidence. However, the pace ofrecovery is still tentative. The sustainability of the overall reform program remains fragile as the majorrisks covered in the staff appraisal report remain significant. As it was the case with PRSL I, the bankingand corporate restructuring and govemance remain a risk and could still undermine the sustainability of theprogram. The sustainability of the project objectives has been somewhat enhanced by the large presence ofPRSL II team members at the Bank's Office in Jakarta which facilitated regular dialogue onimplementation progress and impediments that arose. This was further supported by the monthly (andsubsequently bi-monthly) reviews by the IMF.

PRSL II is another valuable brick in the overall foundation of economic reforms in Indonesia andcontributed further to the recovery road map. However, the project sustainability depends very much onthe continuing reforms to be undertaken and additional measures still being specified as part of an ongoingreform program package. Thus, while the reforms supported by this operation had formned a well definedrecovery path, the eventual sustainability of the program remains dependent on on-going and follow-upreforms.

6.2 Transition arrangement to regular operations.Beside bringing about immediate remedy to stabilize the economy of Indonesia, the PRSL II, as well as thePRSL I, has built a foundation for further structural reforms to be carried out by the Government. Theseries of adjustment loans (PRSL I and II, WATSAL, and SSNAL) have prepared the ground formomentum toward further restructuring programs and for Bank's future assistance to Indonesia. Since thesecond policy reform support loan was approved in May 1999 the Bank has stepped up its work on

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governance and anti-corruption in Indonesia, in close collaboration with partners. A Partnership forGovernance Reform has been established, which brings together Government, civil society, private sector,and donors to facilitate a national dialogue on governance. The Bank is leading a similar donor group onforestry sector reform. Two CGI meetings have been held since the last CAS Progress Report in whichGovernment and donors discussed progress on the governance agenda. These meetings are now open tocivil society representation.

In determining its future lending operations in Indonesia, the Bank will aim for increased partnerships,focusing its involvement on areas with close strategic fit and comparative advantage. The partnershipmodels on governance, forestry, decentralization, and legal reform are cases in point. As part of CASpreparation process that is underway, the Bank will seek a sharper delineation of its role, and urge otherdonors to take on leadership in relevant areas. Examples are privatization, corporate governance and SMEdevelopment where ADB is taking the lead.

7. Bank and Borrower Performance

Bank7.1 Lending:The Bank has maintained a close relationship with Indonesian counterparts and plays an effectivesupporting partner's role in the client country through a series of adjustment and project loans whilecoordinating the program of recovery with the international donor community (CGI), in collaboration withthe IMF. PRSL II played a vital role, in conjunction with the other adjustment operations of the Bank, inproviding the necessary resources to meet its CGI commitment to help Indonesia in its time of need at acritical phase of its crisis-recovery effort.

7.2 Supervision:The Bank supervised the project from the field, with the co-Task Team Leader (Mr. Mckay) being residentin Jakarta. This allowed for close monitoring of the effectiveness conditions of the loan and subsequentprogress in the implementation of other actions stated in the Letter of Development Policy. This modalityhas helped to sustain the momentum of loan implementation and for its satisfactory supervision.

7.3 Overall Bankperformance:Overall, the approach of the Bank in this assistance to Indonesia, coupled with the intensified coordinationand close partnership with the IMF, ADB, and bilateral donors brought about a consensus in the diagnosisand development of remedies. The distinct but mutually supportive role of the international communityalso contributed greatly in the preparation of a multifaceted assistance to the Government in implementingreforms. The Bank's interim CAS (1999) responded effectively to the rapidly changing economic andsocial situation in Indonesia. This helped the Bank prepare a program of assistance first to meet criticalimmediate needs and then to build the foundations for a return to sustainable growth.

As with the previous lending operation, Bank staff faced some uncertainty as Indonesia experiencedunprecedented political challenges and the prospects of a new democracy and subsequent changes in seniorofficials. However, the work on PRSL II clearly benefited from a well seasoned regional staff and closecoordination with headquarters staff (The project was co-task managed by one Bank Staff in WBOJ andone at Headquarters). This has resulted in the successful presentation of PRSL II to the Board in only afew months after PRSL I was completed, thus maintaining the momentum of the reform program supportedby the Bank and demonstrating the commitment of the Bank in implementing the CAS in Indonesia, despitesevere difficulties and time constraints in the preparation schedule. This operation again demonstrated thebenefits of a decentralized administration of the Bank in the field through ready presence and timelyresponse by staff to the country's needs.

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This project also facilitated extensive consultations with civil society to bring about a "buy-in" of theobjectives and measures to be undertaken under PRSL II (See Table 4). This was particularly irnportantgiven political and economic uncertainties in Indonesia and the potentially divisive nature of many policyissues.

Table 4. List of Civil Society Consultations on Reform Program Supported by PRSL II

Date Participants Issues

Sep 1998 Forestry officials, donors, and NGOs Forestry issues and policy reform options for PRSL II

Oct 1998 Government officials and NGOs To design consultations at provincial and district levelsfor WATSAL.

Oct 1998 WWF Alliance, The Nature Conservancy, Forestry management issues.and Conservation International

Nov 1998 Donors Coordination and support on proposed social safety netsand governance/anti-corruption initiatives.

Nov 1998 Forestry donors and NGOs. Forestry issues and suggestions for policy reforms inPRSL n.

Nov 1998 Leading opposition figures, thinkers, and Overall reform program and external support.student leaders.

Nov 1998 Donors on environment. Strategy and collaboration on conversion to unleadedgasoline and other clean fuels.

Nov 1998 BAPPENAS and civil society leaders. SSNAL monitoring and high-level commissions.

Dec 1998 Government General framework of bank assistance.

Dec 1998 Bilateral donors. Funding for NGO activities as part of the social safetynet.

Dec 1998 Local and international NGOs. Proposed lending operations - PRSL H, SSNAL, andWATSAL - inclusion of NGOs in decision making.

Dec 1998 Government, private sector groups and Full Day Workshop (12/09) on overall assistanceacademics. strategy and operations.

Dec 1998 Chamber of Industry and Commerce. Trade and industry policies.

Dec 1998 Water sector NGOs and water user Water sector policies.associations.

Dec 1998 Ministry of Forestry and Estate Crops and Work program for consultations on "forests for people"forestry donors. policy.

Dec 1998 Media consultation. Adjustment Operations and Country AssistanceStrategy.

Jan 1999 Business and investment community (with PRSL n1 and governance policies.IFC).

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Jan 1999 Mid-year CGI meeting with donors and Donor response to the crisis, with particular emphasisgovernment. on social sectors.

Jan 1999 NGOs and leading civil society advocates. Latest findings on social impacts of the crisis andimplications for the SSNAL.

Feb 1999 Technical level meeting with donors. Social Safety Net Adjustment Loan and Govemanceoperation.

Feb-Mar 1999 Forestry NGOs, bilateral donors, and Forestry sector reforms options, implementation andindustry. consultation process.

Mar-Apr 1999 Range of civil society and NGOs Seeking participation in Social Safety Net independentmonitoring group.

Apr 1999 Members of Urban Poor Consortium. Safety net programs, addressing problems andcomplaints.

Apr 1999 BAPPENAS consultations with NGOs. Two separate workshops with over 300 participants.

Borrower7.4 Preparation:

As a continuation of the overall stabilization, recovery, and reform program, the Government of Indonesiaplayed an active role in the preparation of the loan and its performance benefited from previous lendingoperations such as the PRSL I and other related loans.

7.5 Government implementation performance:

The Government implementation of the program was satisfactory overall during a period of politicaldifficulty and uncertainty, especially for the staff of the ministries and agencies involved in the appraisaland preparation of the loan. Because the PRSL II has only one tranche, there was enormous pressure tofulfill all the conditions prior to Board presentation and the Government had achieved them. TheGovernment also benefited from extensive public consultations held as part of the preparation of theassistance program and the adjustment operations. Given the political and economic uncertainty inIndonesia and the potential divisive nature of policy issues covered in the program, the Govemnment wassuccessful in seeking the engagement of and assistance from the civil society in its efforts to stabilize theeconomy and set the stage for economic and institutional reforms aimed toward long-term sustainablegrowth. The consultations also served as the basis for enhance transparency and governance.

7.6 Implementing Agency:The Financial and Economic Resilience Council has had a beneficial experience with the previous loan andconsidered the PRSL II an obvious continuation in support of the government's ongoing economic recoveryand reform program. It faced considerable pressures and difficulties in a difficult political environment.Its performance was greatly helped with the effort to reach out and conduct extensive consultations with thebusiness community, labor representatives, and NGOs. There were some delays in fulfilling the pre-Boardconditions (i.e., with regard to the tariff on palm oil) but the Council's overall performance wassatisfactory.

7.7 Overall Borrower performance:The Government performance is considered satisfactory in the implementation of PRSL II. The timepressure in the preparation of this lending operation was partly due to the politically difficult actions thathad to be undertaken prior to the presentation of the loan to the Bank's Board (such as the closure of 38

- 14 -

banks). This single-tranche loan, therefore, posed a significant challenge for the Government to meet thepre-Board conditions to demonstrate its commitment to the reform program. All this had to be done inconjunction with the numerous conditions that were laid out in the IMF Letter of Intent (LOI). "Adjustmentfatigue" seemed a real possibility which posed an additional risk to the success and sustainability of thereform program. This risk was sufficiently overcome by the Government.

The Government also demonstrated its willingness to work with the civil society in order to enhance thecredibility of its reform program, and thus its commitment for reforms that would be appropriate for thecountry as a whole. Official consultations were business groups, labor representatives, and NGOs duringthe loan preparation. The implementing Council for the loan also included private sector representatives.In this regard, PRSL II brought to the fore the issue of corruption and governance while helping theGovernment toward the enactment of anti-corruption laws and other regulations to enhance transparencyand efficiency in public resources management. The Public Expenditure Review and Privatization MasterPlans were published. During PRSL II preparation, and similar to the implementation of PRSL I, themaintenance of a sound macro-economic framework was a difficult challenge for the Govermment withmany factors outside its control such as the rapidly increasing debt burden. The implementation of bankand corporate restructuring to address fundamental problems of debt and non-performing loans remained

challenging for the Government, similar to the situation in other crisis countries.

8. Lessons Learned

The major lessons from PRSL are:

* Stable macroeconomic environment is essential but difficult to achieve amidst acute political

uncertainty. A stable macroeconomic environment is necessary and fundamental to structural reforns.The Government showed its commitment and has achieved some degree of macroeconomic stabilization.

* Counterpart quality is important to success. The presence of capable policy makers and

implementers is a prerequisite to a successful reform program. The responsible agencies and ministries inthe government have shown strong commitment to carry out the program by fulfilling all requiredconditions for the operation in spite of the difficulties and political uncertainties facing the Government.

* A single-tranche operation can heighten the needs to implement critical reforms within a

specified time frame. The single tranche provides an urgent incentive to implement the reforns whichneeded to be carried out on a short-time period. This was especially helpful especially when it followedPRSL I and gave a clear signal for the Government to maintain the momentum for reforms.

* Close coordination among key development partners is important during the implementation

stage. While it is important for the success of a recovery operation with multiple institutions and bilateralgovernment agencies to agree on the best course of action with an appropriate division of responsibility, itis equally important for these institutions to be supportive during the implementation of the agreedprogram. The importance of coordinating committees and teamwork between the international financialinstitutions and bilateral donors cannot be underestimated. This facilitated formal arrangements for regularinformation sharing among the stakeholders.

* Up-to-date and accurate data and analyses are necessary for good policy design and also for the

implementation of the agreed policy. With the continuously changing economic situation such as thatexperienced in Indonesia, the importance of up-to-date analyses of the current situation cannot bediscounted. At the same time, clear, open, and consistent objective communications on potential crises

- 15 -

would contribute to the ability of the decision-makers to adopt timely and sound measures to meet thechallenges. Close monitoring by the Government played a positive role in reinforcing and maintainingofficial commitment and focus to the implementation of the program.

* Close working relations between the Bank' s Headquarters and its decentralized CountryDepartment, with continuous presence of key staff in the country and its counterparts improve theimpact of World Bank assistance. PRSL II's preparation was an example of cooperation and coordinationbetween Bank staff and other stakeholders in bringing about the desired outcomes in a policy-based lendingoperation. Consultations with the private sector and the civil society were also a positive and essentialfeature that contributed to the success of the reform program during a period of political uncertainty.Intensive supervision of the loan through the Bank's country office contributed to the successful completionof the loan.

* Improvements in transparency and governance, supported by PRSL operations, have providedfirm foundation for better government. PRSL II continued to support strengthening the movement towardinstitutional transparency and better governance in the new administration.

* Attention to the overall environmental management is an important component in the matrix ofpolicy actions (Annex 7). The Government did not neglect environment issues during the economnic crisisand efforts were made to issue relevant laws and regulations to improve environmental management andreduce sources of pollution.

9. Partner Comments

(a) Borrower/implementing agency.

- 16-

N&JIONALDKVEUONWW?L&NINGC MNCV

Otur Ref. : U/3D2/2000 Jnk -na, 3:t June 2000

mr. liel Hoifmniat,risador Economist.* Rr,sirkmrn Shiff in tnsimnii -8\WA'trld Bank

Sulbject. buplemenation CompleinReporo (ICR; for Pnlicy RcfOOiiSupporl Loan T (PRSL U)

lD2;i Mr. iofiMian.

Refeoring to your lntter dahod June 29. 2000 regardtin_ Lhe subjecl ntmtinned-jtcw. we hiave several responses o te draft of the ICR as tolbllnr.

C. Re ;adiing the draft of Tih ICR for PRSL If, in principal Bappcas has no objectionIn the m tJonod ICR's diaL Bappenas is in line with tiLr Hank 'S opinion tha ihePRSL [1 has supported the stblisdaent of an isttiutional iaurnd;uion lor asustauicd rtcovy huvath haC trfusparccy, iflproWvcnfliis in oVcfLdrCC

ud anti corruption. It is indicated by lhe fulfi1fimna of the'roZrma txir3a for inchb

* re:lease

2. The stislainability of the pogram is dccminl by ilc CGvcnrnicot's strongconniinnent io the refrw. Mohnitodag nicaisnm of ilic pm:nrrm iaicplcnenitoiou

is mne of niany aspects expted to mintain such a coniniimicl and to acCelrnIle

ilic pogram implecctation. Wc beicve that tbe targc proswnce olf PRSL II LeaLTI

members at the 3ank's Office in J.ckwta, muppot by the monllyl reviews by dhI MF, has h-anced the sustainability of the project objectlves. Now. BappenUs isruiining the &ouiw Refbnw and S&t*&iy PoFaek yInfnnmgnenst 'itfles' thLt will

wssist tile Govermacto detct, anuicipat, ad report the irrrrss of the progr.anLlmm supponcd by the IMF. lb* Word Bank, te ADB, ndil 1lw .3' regulnrly. It il;hoped Kliam with supporting the systm snm problensN cotikl he followed Lip

Promptly.

3 In regard to the role of Doam in their operztions in lndaongsi±..wV uarco it incressaw

ttie prnunship bezuu t GOVWmUCDt PM Domrs la sappoTt shlrcluial4jus3tcn rdbr ix many amn of dCvelopmcnL agc¶L'L Ilmwrvrcr, foni shesavemnmt side, experimnic showsn Ihat one led to Ehc slow implemeniariospnrTess on the rebm was cuns by a lack of initiative :wtions tn iniplenmnt thA

retntr Therefbre, we suzes the Bmks ad other Donors to sutppor theRW'numrnt in mnkr. I inilintit'ut mdr nirk in pavcawng the refioni tcndu

- 17-

-Lt C-oncerning to the matrix of poftoy acCli, plet ful atiilIeIld 1h9 mfilioimililrformgtiju urd tit-tion of.a unn in lrnlootn a.

I hoe that these respoe are able to witch the ICR tvpori !ina PRSL If ancdotlher pn3mtns us well

Thrn't you Ihr your khid mwnUn Wd coopaua

t^_ -hullamniad Abdub.T Dpuy C'iifM*LS for Fit:mwC

cc. Clairman of Bappeus

- 18 -

PROGRESS REPORTSECOND POLICY REFORM SUPPORT LOAN (PRSL II)

OBJECTIVE ACTION COMPLETION REMARKS_ STATUS

B. Reforming the banking sector and facilitating corporate and debt restructuringAccomplish 1. Issued UU No. 4/1998 on Bankruptcybankingproblems ._

2. Issued Keppres No. 97/1999 as implementation of - Commercialthe UU by establishing Commercial Court at state Court in Ujung,court in Jakarta, Ujung, Pandang, Medan, Surabaya Pandang,and Semarang Medan,

Surabaya andSemarangformallyestablished onMay 8, 2000

Facilitating the 1. Issued Keppres No. 7 1/M199 on determining 4smooth process (four) Ad Hoc Judges at Commercial Courtin Commercial 2. Issued Keppres No. 108/M12000 on determining 9Court (nine) Ad Hoc Judges at Commercial CourtC. Reforming and building institutions to improve governance and to increase transparency and efficiencyIssue a draft 1. Issued UU No. 28/1999 about Clean Government,Law about the Free from Corruption, Collusion and Nepotism (UUEradication of KKN).CorruptionCriminal Act

2. Issued Keppres No. 27/1999 about Komisi - List ofPemeriksa Kekayaan Penyclenggara Negara commission's

members hasbeen submittedto theParliament

3. Issued UU No. 30/1999 about Combating ofCorruption Criminal Acts.4. Issued PP No. 19/2000 about establishing Tim - The teamGabungan Anti Korupsi (Anti-Corruption Joint Team). chaired by Adi

Andovo SH(formerSupreme Judge),its membersconsist ofrepresentativesfrom DepKumdang,Police, AttomeyGeneral &INGO.

- 19-

5. Established National OMBUDSMAN Commission - To monitorperformance ofgovemmentpersonnelrelated to KKNpractices.

Proposed Law 1. Issued UU No.43/1999 (revision of UU No.regarding 8/1974) about Government Personnel Regulation,Fiscal related to government personnel reallocation fromEqualization central to regional government.between the 2. Issued PP No. 5/1999, about prohibition toCentral and govemment personnel to be a member/managementRegional staff of political party.Government; 3. Preparing a draft of Keppres about Special Staffand Regional Appointee in government bureaucracy, as special staffAdministration in president, vice-president, minister and governor

offices.Reduce costs & I. Reduced import tariffs that are 15% or above by 5 31/12/1998increase percentage points (excl. motor vehicles & alcohol),efficiency by & reduce tariffs on all food items to 5%.increasing 2. Reduced tariffs on non-food agricultural product by 31/12/1998import 5 percentage points.competition 3. Reduce import tariffs that are 10% or below by 5 1st quarter 1999

percentage points.4. Reduce all import tariffs to a maximum of 10% 3rd qtr 1999 and(2003) excl. motor vehicle & alcohol. beyond5. Included chemicals, metal products & agricultural 31/12/1998goods in the program for further tariff reductions.6. Discontinued special tax, custom duty and credit 31/12/1998privileges granted to new imports under the NationalCar Project.7. Abolish local content regulations on dairy products. 31/12/19988. Reduce import tariff exemptions. 1st qtr 19999. Abolish local content on motor vehicles in 3rd qtr 1999 andJuly 1999. beyond10. Phase out remaining quantitative import 3rd qtr 1999 andrestrictions & other non-tariff barriers beyond(December 2000).11. Eliminate producer-importer & trade-importer 3rd qtr 1999 andlicensing except for moral hazard & security products. beyond12. Allowed all traders, including foreign direct 31/12/1998investors to compete with Bulog with importing.13. Bulog prepared a plan to sell off its wheat stocks. 1st qtr 199914. Bulog to implement plan to sell off its wheat 3rd qtr 1999stocks.

- 20 -

Remove export 1. Introduced a system of resource royalties, 31/12/1998impediments to reduce export taxes of logs, sawn timber &improve export rattan to a maximum of 30% ad-valorem &competitiveness adopted & announced a program to reduce this

to 20% by Dec. 31, 1998; 15% by Dec. 31,1999 and 10% by Dec. 31, 2000.2. Reduced export tax on logs, sawn timber, rattan & 1st qtr 1999minerals to a maximum of 20%.3. Reduce export tax on logs, sawn timber, rattan 3rd qtr 1999 and& minerals to a maximum of 10% by end-December beyond2000, & to introduce resource rent royalties asappropriate.4. Replace quantitative export control on crude & 31/12/1998processed palm oil, olefin and stearin with an exporttax of 60% ad-valorem or less, and hold regularreviews with an objective of reducing this to10%/0 by Dec. 31, 19995. Abolish export tax on leather, cork, ores & waste 31/12/1998aluminum products.6. Reduced the maximum export tax on palm oil to 1st qtr 199940%.7. Review export tax on palm oil and adopt program 1st qtr 1999for phased reduction to 10% by Dec. 1999.8. Reduce export tax on palm oil to a maximum of 3rd qtr 1999 and10% by end-Dec 1999. beyond9. Eliminate all other export restriction. 3rd qtr 1999 and

beyond.Relax 1. Removed the restrictions on foreign investment 31/12/1998investment in palm oil.restrictions to 2. Issued a shortened list of activities closed to foreign 31/12/1998encourage investorsinvestment 3. Removed restrictions on foreign investments in 31/12/1998

wholesale and retail trade.4. Reduce the number of activities reserved for 3rd qtr 1999 anddomestic investors beyond5. Reduce the number of activities reserved for 3rd qtr 1999 andsmall-scale enterprises and the number of activities beyondreserved for large-scale enterprises in partnership withsmall-scale enterprises.

- 21 -

Deregulate 1. Dissolved all restrictive marketing arrangements, 31/12/1998domestic trade including those for cement, paper and plywood.to reduce costs 2. Deregulated domestic prices of cement. 31/12/1998and increase 3. Gave traders freedom to buy, sell and transfer all 31/12/1998efficiency commodities across district and provincial boundaries,

including cloves, cashew nuts, oranges and vanilla.4. Dissolved the Clove Support and Marketing Board 31/12/1998(BPPC) and maintained the right of traders to buy andsell cloves at unrestricted prices and to transport clovesacross district and provincial boundaries.5. Prohibited provincial govemments from restricting 31/12/1998trade within or between provinces.6. Prohibited provincial or district govemments from 31/12/1998charging export taxes (retribusi).7. Permitted domestic wheat-millers to sell or 31/12/1998distribute wheat flour to any agent.8. Allowed traders to market sugar domestically. 31/12/19989. Released farmers from the formal and informal 31/12/1998requirements for the forced planting of sugar cane.10. Abolished the system of quotas that limit the sale 31/12/1998of livestock.

Establish rules 1. Prepared and reviewed draft Monopoly & 31/12/1998to maintain Unhealthy Competition Lawcompetition 2. Parliament enacted a new Monopoly Practices and 31/12/1998

Unhealthy Competition Law (MPUCL) that (i) focuseson market behavior rather than market structure; (ii) isapplied to all enterprises (public & private) and (iii)envisages the creation of an independent agency toimplement and enforce this competition law.3. Prepare a Keppres for establishing commission 1st qtr 1999and draft implementing regulations for thecompetition law.4. Implement regulations, guidelines policy 2nd qtr 1999documents consistent with intemational best practices.5. Implement a corporate compliance program and a 3rd qtr 1999 andpublic dissemination campaign. beyond6. Appoint Commissioners, commit budgetary 3rd qtr 1999 andresources and recruit professional staff for the beyond.commission to implement the MPUCL.

Issue Oil and The draft has been submitted to the Parliament.Gas LawIssue 1. The draft was reviewed by Cabinet Secretary on The ParliamentElectricity Law July 1999. and Government

2. Need for modifications conceming to new have beenRegulation Law 22/1999 (Regional Autonomy). discussing draft

of the law sinceJune 2000.

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Appoint Under review by World Bankmanagementconsultants toassist PLN withcorporate andfinancialrestructuring I

(o) Cofinanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information

- 23 -

Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

tn% 0 ca0oriMtI PiQJ0td In4 0 000st 00l05| 0 PSR A v f .st Etlm.t.Please refer to the Matrix of Policy Actions inAnnex 7

Output Indicators:

Please refer to the Matrix of Policy Actions inAnnex 7

End of project

- 24 -

Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)

: - - ~smate,.t.r- l

Proiect Cost By Cor*pont .S$ iion U liUSBOP 500.00 500.00 100

Total Baseline Cost 500.00 500.00

Total Project Costs 500.00 500.00Total Financing Required 500.00 500.00

Project Financing by Com onent (in US$ million equivlent)

I .~~. YP- 5 - - 04 -f . ....................Appraisa esahnate Actu- Latwst * .. ;ti-aP

ak GBVa' COF. nk Govt CoF..BOP 500.00 500.00 100.0 0.0 0.0

0.0 0.0 0.00.0 0.0 0.0

-25 -

Annex 3: Economic Costs and Benefits

Not Applicable

- 26 -

Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Performnce Rating

(e.g 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/PreparationSeptember - December 25 Economists: 5; Finance -3; S S1998 Corporate restructuring/PSD - 4;

Energy - 2; Environment.-1;Forestry - 2; Lawyer- 1; SocialSector - 1; Governance - 1; FMS- 1; Econ. Data - 2; ACS - 2

Appraisal/NegotiationDecember 1998 8 Economists - 2; Lawyer - 1; S S

Social Safety Nets - 1;Banking - 1; Governance - 1Forestry - 1; FMS -1;

SupervisionDone in the field by 9 Economists - 3; Lawyer - I; S SStaff in the Country Social Safety Nets - 1;Office Banking - 1; Governance - I

Forestry- 1; PSD - 1.

ICRMarch - June 2000 3 Economists - 3. S S

(b) Staff:

Stage of Project Cycle ActualLatest EstimateNo. Staff weeks USS (OO0)

Identification/Preparation 84.5 289.5Appraisal/Negotiation 4.1 35.1Supervision 3.7 15.1ICR 7.5 36.6Total 100.7 376.9

- 27 -

Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

Macro policies O H *SUOM O N O NAFSector Policies O H OSU*M O N O NA

3 Physical O H OSUOM O N * NAM Financial OH OSUOM O N O NA

Z Institutional Development 0 H O SU * M 0 N 0 NAZEnvironmental O H OSU*M O N O NA

SocialO Poverty Reduction O H O SU * M O N O NA

Gender OH OSUOM O N * NAO Other (Please specify) O H OSUOM O N O NA

I Private sector development 0 H O SU O M 0 N 0 NAO Public sector management 0 H O SU O M 0 N 0 NAOOther (Please specify) O H OSUOM O N O NA

- 28 -

Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

N Lending OHSOS OLu OHUM Supervision OHS OS OU OHUZ Overall OHS OS O U O HU

6.2 Borrowerperformance Rating

• Preparation OHS OS O U O HUF Government implementation performance O HS O S 0 U 0 HU• Implementation agencyperformance OHS OS 0 U O HUF Overall OHS OS 0 U O HU

- 29 -

Annex 7. List of Supporting Documents

1. Matrix of Policy Actions (12 pages)2. Report of the President: Second Policy Reform Support Loan3. Loan Agreement

- 30 -

MATRIX OF POLICY ACTIONS

Note: Board conditions -- in bold and italic -- have been fulfilled. Refer to Table 2. List of Conditions of Effectiveness in Section 4;Other policy actions have also been implemented or are on-going within the framework of the overall reform program supported by PRSL II.

Objective At end-December 1998 1 First Quarter 1999 1 Second Quarter 1999 Third Quarter 1999 and beyond

A. Maintain a sound macroeconomic frameworkStrengthen Tighten money supply and increased interest rates. Maintain money supply program with reducing inflation quickly and then keep it low.monetary policy.

Appointed high-level foreign advisors to BI to _assist in the conduct of monetary policy

Imposed and maintained limits on Bl credits to Bl phase out credits to public agencies and BI to eliminate all administrativepublic ageincies and public sector enterprises, public sector enterprises, in line with the resmitions on bank lending except forconsistent with the proposed new Central Bank proposed new Central Bank Law. prudential reasons or to support SMEs.Law.

Contain Sharply reduced capital-intensive development Bappenas and MOF prepared a 1999/2000 Bappenas continues to scrutinize all proposed major infrastructure projects contains onlyexpenditures and expenditure by canceling and postponing non- fiscal budget with development expenditure proposals that have high economic rates of retumsimprove their urgent large infrastructure projects level and sectoral allocations acceptable to theefficiency. Bank. This includes adequate provision for

social sector and safety net ptograms, andavoids large capital and import intensiveprojects.A 1999/2000fiscal budget was approved byParliament, with development expenditurelevels, sectoral allocations and social safetynet expenditure allocations (by programs andby region) acceptable to the Bank.

Increased average administered prices for fuel and Increased power tariff for large residential Design and implement plans for phased removal of fuel and power subsidies whilepower by 38 and 20 % respectively, with the poor consumers (Keppres 1/1999). shielding the poor.exempt from power tariff increased. Increased aviation fuel prices to international

market levels.Eliminated subsidies on sugar, wheat, wheat flour,and soybeans.Removes exchange rate subsidy on imports of rice.

Improve revenue Improved non-oil tax revenue by raising annual Completed revenue review with IMF assistance and strengthen the revenue systern.mobilization. audit coverage, developing improved VAT audit

programs and increasing coverage of tax arrears. Increase the share of profit transferred from state enterprises, including Pertamina, to the budget.Increased excise tax onI alcohol and tobacco, to MOF introduced second stage of excise tax MOF introduced second stage of excise taxreflect exchange rate and price developments, increased for tobacco, increased for alcohol

Seek external Under the umbrella of the Consultative Group for 1999 CGI meeting held to seek continuingfinancingfor the Indonesia held in July 1998, the international donor support.budget deficit. donor community pledged $7.8 billion in financial

assistance to support a budget that emphasizedI poverty alleviation and social safety nets. __

31



Objective At end-December 1998 | First Quarter 1999 | Second Quarter 1999| Third Quarter 1999 and beyond

B. Financial and corporate sector restructuring to restore effective banking services and get productive assets back to work.Establish a Guarantee program for all depositors and creditors Bl, with expert consultant support, developed Bl evaluates and decided on BI implements deposit insurance scheme.comprehensive of locally incorporated banks announced Jan 27, proposed for a deposit insurance scheme. implementation date of deposit insuranceguarantee 1998. This guarantee will be in place for at least 2 scheme in dialogue with IFIs, and draftsprogram to instill years and will not be terminated without 6 months implementing regulations.depositor and advance notice.creditor Transferred administration of guarantee schemeconfidence. from IBRA to BI (IBRA keep payment

responsibilities)Improve BI, in conjunction with the World Bank and IMF, BI prepared a strategy to rebuild a bank BI reinforces capacity of bank supervision Bl continues to reinforce supervisiongovernance and evaluated needs and provide initial supervision department in line with department to plan, execute and evaluate capacity, to implement new bankbank supervision recommendations to strengthen bank supervision. intemational standards. bank exams and off-site reporting supervision policies, provide intensiveand strengthen mechanism. training to examiners with the assistancethe policy, of IFIs and monitor progress.regulatory andinstitutionalinfrastructure

for banking. _ _

Eliminated the minimum capital requirements of Review and raise CAR to intemationalRp. 250 million on existing banks. standards.Introduced Capital Adequacy Ratio (CAR) of 4%for all banks.New asset classification, loan-loss provisioning Bl implemented new asset classification and Continue providing training in collaboration Evaluate need for further amendments toand debt restructuring regulations approved by Bt loan-loss provisions identified in the banking with IFis. banking law or regulations.

lawOn Nov, 10, 1998, enacted amendments to banking Govemment issued regulations (PP17/99) in Monitor implementation and report to IFIs.law, including provisions to eliminate restrictions support of key provisions identified in theon foreign owneTship of banks, bank secrecy, and banking law.to empower IBRA.Banks required to publish comprehensive financial B1 issued regulation on financial data Banks' publication of FYI 998 financial Review the adequacy of financial datadata quarterly. publications, results. published by banks.Central Bank Law drafted and circulated foT Draft of Central Bank Law submitted to New Central bank Law enacted by Monitor implementation of new Centralcomments Parliament. Parliament on Apr 16, 1999 Bank Law

B1 prepares and issues implementingregulations for the new Central Bank Law.

Establish an 16 banks closed (Nov. 1997) and their licenses BI continues to liquidate the 16 closed banks.institutional revoked. AG investigations to continue.framework and Attomey General (AG), in cooperation with BI,programfor publicly pursues fonner bank directors and owners.bankrestructuring.

32


Note: Board conditions -- in bold and italic -- have been fulJilled. Refer to Table 2. List of Conditions of Effectiveness in Section 4;

Other policy actions have also been implemented or are on-going within the framework of the overall reform program supported by PRSL I.

Objective 7A end-December 1998 | First Quarter 1999 Second Quarter 1999 T|hird Quarter 1999 and beyond

Creation of 1BRA on Jan 26, 1998. IBRA formally Enacted banking law amendments andbegins operations in Mar 1998. aopted andpublished implementing

regulations acceptable to the Bank toempower IBRA and its AMU (PPI 7/99) andprovided neededfunding.Rl and MOF settled the balance of theliquidity support (BLBI) transferred to MOF,and MOF issued bonds to reimburse BI, forcosts Telating to banks under IBRA's auspicesprior to Mar 1999.

55 banks places under IBRA in 1998 (including 10 Al loan assets of the 1O original BBO banks Continue with sale of non-core assets of the

frozen banks (BBO) and 4 banks taken over transferred to IBRA 's AMU. original 10 BBO banks and de-license

(BTO)). them.

Settlement with 7 owners of 11 BTO banks (Dec Placed owners' assets in holding companies1998) under IBRA's control.

Concluded settlement with the remainingowners of the BTO/BBO, or referred them tothe AG for prosecution.

Intemationally recognized audit firms completeddue diligence at 24 of 30 private IBRA banks and5 of 7 state-owned banks (Dec 1998).Intemationally recognized audit firms completed Intemational consultants completed business Concluding recapitalization, with eligible Monitor compliance with recapitalization

due diligence at 60 private banks supervised by Bl plan evaluation and BI/MOF/IBRA banks that meet thc conditions, and signing contracts at banks receiving government

(Dec 1998) under ADB loan. committees decided on which banks to govemance and regulatory contracts with capital.

Draft of bank recapitalization scheme prepared recapitalize, which to close and which to time-bound- monitorable targets for

with Bl and MOF (Dec 1998). nationalize. financial and operational improvements,Majority of BI and IBRA banks classified into 3 Closed 38 private banks (excluding banks acceptable to the Bank.

groups depending on their CAR level, B Banks (- that are already "frozen"), nationalized 7 Issue sovereign bonds for recapitalization. De-license all banks closed in Mar 1999.

25%<CAR<4%) required to prepared a business banks, and identified 9 banks eligiblefor Close or nationalize all the B banks where

plan. C banks (CAR<-25%) were given I month recapitalization. This included dosing all C contract negotiation fail.

to improve their CAR and thus become B banks. banks and B banks thatfailed the Begin liquidation process for all 38 banksIntemafional consultants hired to test the viability recapitalization test. These decisions were closed in Mar 1999, with transfer of all

of the business plans (17 business plans reviewed based on a transparent, consistent and loans to IBRA and AMU and sale of non-

as of Dec 1998). otherwise internationally acceptable standard core assets,ofpractice, as determined by the Bank. Establish within BI increased supervision

and contract monitoring.BI to issue decree an any associatedregulations on bank license revocation andliquidation.

33



Objective At end-December 1998 First Quarter 1999 I Second Quarter 1999 I Third Quarter 1999 and beyond

Announced state-owned bank restructuring plan Conclude resolition plan for the 4 state banks Concluded centralization of credit risk Complete branch resutucturing, transfer offor 4 banks under Bank Mandiri (Sep 1998). to integrate under Mandiri. unit and treasury units in Mandiri deposits and funding.Intemational bank engaged under an advisory Began implementation of centralized credit Transfer the 4 banks' non-performing Dispose of redundant staff.contract, tisk unit in Bank Mandiri. Targeted 20 largest loans to Mandiri and recapitalize up to Complete legal merger when the 4 banks

delinquent borrowers for loan recovery, 4%. assets and liabilities have been eitherforeclosure or bankruptcy. Initiateforeclosurefor bankruptcy cases. integrated or disposed off.Announced voluntary severance plan. Centralize and downsize branches per Pian privatization in a 3-5 year honzon.

geographical area.Provide govemment bonds to fund deposittransfers to Mandiri.

Established an interdepartmental planning Prepare business plans for each bank. Conclude performnance/regulatorycommittee to decide on the strategy, and to Conclude with intemational banks agreements with the management of the 3approve and monitor restructuring and twinning, management or advisory banks.recapitalization program. agreements. Implement restructuring program andPrepared a blueprint for the restructuring and Transfer loss loans for AMU. phased recapitalization according to time-recapitalization of BNI. BRI and BTN. bound and agreed upon milestones.

Intemational Review Committee (IRC) 2nd meeting of IRD held on Mar 31. 1 'report Hold meeting quarterly and publish reports.membership established. 1V meeting of IRC held prepared. IRD renamed Independent Reviewand TOR of IRC secretariat confimied. Committee and formalized by Presidential

Decree.IBRA's Asset Management Unit (AMU) chief AMU established acceptable policies and AMU to take ownership and management AMU to take over ownership andnamed; financial advisors agreed to the retained; procedures for its debt recovery, corporate and control over all loans from banks closed in management control (directly or throughI' budget approved. debt restructuring activities. Mar 1999. servicing contracts acceptable to theAMU organization chart and revised budget AMU tool legal tittle to overall loans of 10 Bank) over all loans to borrowers withprepared (Sep 1998). banks 'frozen" in April and August 1998, credits rated Group 5 (i.e., 'loss' category)

together with all category 5 loans with a face from all banks recapitalized withvalue in excess of 5 billion rupiahsfrom govemment funds, including BTOs.seven state banks.

Monitor cornpliance with servicing contracts, if anyEnsure credit BI maintained support and guarantee for trade BI and concemed Govemment agencies to Sustain adequate trade financing.flows to viable finances, and reviewed them with the IFIs. evaluate the need for, and availability of, tradeenterprises with finance.particularreference totrade financing. _I._.__

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Note: Board conditions -- in bold and italic -- have been fulfilled. Refer to Table 2. List of Conditions of Effectiveness in Section 4;Other policy actions have also been implemented or are on-going within the framework of the overall reform program supported by PRSL I.

Objective At end-December 1998 |FirstQuarter 1999 Second Quarter 1999 Third Quarter 1999 and beyond

Strengtheni Frankfurt agreement established a framework forbankruptcy and voluntary restructuring of extemal corporate debtdebt (June 4.)restructuring Officially launched the Indonesia Debtprovision. Restructuring Agency (INDRA) (Aug 3].

Completed all necessary documentation forINDRA to become fully operational. ___Bankruptcy laws strengthened to provide adequate Initiated a review of early experience with the Explore options for strengthening Adopt and implement measure agreed asprotection to debtors and creditors, and to adopt Commercial Court, involving Ministry of Conunercial Court in response to findings necessary to strengthen the Commnercialtransparent rules for evaluating reorganization Justice and other experts. of the review of early experience. Court.plans and for liquidation procedures.New bankruptcy law effective on Aug 20. Newlyestablished Commercial Court initiated first caseagainst a corporate debtor under then newBankruptcy Law (Sep 30).

Appointed ad hoc judges as provided for in the Review and adjust the salary structure for Comnmercial Court judges.Bankruptcy Law. Continue training of Conunercial Court personnel.Adopted and implemented a transparent courtfee system for the Commercial Court.

Facditate Cleared external arrears on trade finance and Provided the JITF with adequatefunding Complete a progress report in implementation of Jakarta Initiative, and status ofcorporate interbank debt (Jun 30). and sustained the efforts atfacilitating restructuring of both large and small corporations.restructuring Announced Jakarta Iniadve to facflitate voluntary restructuring.

corporate restructuring (Sep 9) and establishedJakarta Initiative Task Force (Oct 30).World Bank and JITF held conference to publicizeand disseminate information on JI (Nov. 2-3).

Provided tax neutrality for nergers. Issued implementing regulations pertaining Submitted to Parliament, legislation Review and enact new Arbitration Law.to tax neutralityfor mergers. providing for a priority registration systemRemoved restrictions on debt/equity for charges over plant, inventory andconversions, receivables.Draft of New Arbitration Law submitted to Make recommendations for strengtheningParliament. securities regulation, stock exchange listing

requirements and the company andaccounting laws.Review and assess the effect of restrictionson property ownership for corporaterestructuring.

Completed case registration and filling procedures, Made regulatoryfacilitation group (one-stop shop) operationaLalong with implementing guidelines for regulatoryfacilitation group (one-stop shop).

Designed and implemented a coherent framework and Action Plan satisfactory to the Bank for inter-institution cooperation on corporaterestructuring.

35


Note: Board conditions -- in bold and italic -- have been fulfilled. Refer to Table 2. List of Conditions of Effectiveness in Section 4;Other policy actions have also been implemented or are on-going within the framework of the overall reform program supported by PRSL I.

Objective At end-December 1998 T First Quarter 1999 | Second Quarter 1999 Third Quarter 1999 and beyond

C. Reforming and building institutions to improve governance, and in increase transparency and efficiency.Increase Launched diagnostic studies on corruption with Submitted the draft of two anti-corruption Two new anti-corruption laws enacted bytransparency in civil society. laws to Parliament, namely the Law about Parliament.general and the Evaluation of Corruption Criminal Acts Issued a Keppres to establish anpursue anti- and the Law regarding State Administrators independent commission to investigatecorruption who arefreefrom Corruption, Collusion and alleged corruption in the public sector,

Nepotism. including the judiciary.

Submitted the draft of an administrativedecentralization law to Parliament.

Establish a clear Established clear and transparent cross-sectoral Prepared further implementing guidelines Implement sectoral implementing guidelines for Keppres 7and transparent procedures for competitive tendering on the clarifying public sector procurementframeworkfor private provision of infrastructure (Keppres 7/1998 procedures.public plus implementing Ministerial Decree).procurement and Publicized Keppres 7 rules and principles andbidding on established arrangements for monitoringprojects, implementation.

Clarify the respective roles of sector Ministries, the Ministry of Finance and the Ministryfor the Empowerment of State-Owned Enterprises in relation to infrastructure policy andadministration; separating more effectively the State's roles as owner, policy maker,regulator infrastructure; and improving the transparency and targeting of subsidies forinfrastructure services.

Initiated random independent audits of public Agree on actons to strengthen pTocurement Agree on a strategy to remove anysector procurement. practices. ambiguibes and limitabons in the audit

authority of BPK, nmaking it consistentwith INTOSAI auditing precepts.

Increase Completed a review of public expenditures and Initiated a second Public Expenditure Review Completed the second Public Expenditure Review.transparency and investment, including public enterprises and focusing on public expenditure processes and Regularly review the list of public investment projects with the Bank.effciency of the strategic industries. public enterprises.budget

Submitted the draft of arfscal Prepare and issue implementing regulation for fiscal decentralization law.decentralization law to Parliament,acceptable to the BankDevelop and announce a plan for moves towards a more comprehensive budget system,unifying the recurrent and development budget.

36



Objective At end-December 1998 | First Quarter 1999 |TSecond Quarter 1999 TThird Quarter 1999 and beyond

Appointed intemational auditors to conduct special MOF appointed intemational auditors to Complete special audits of Pertamina, PLN, Completed special audits of the(efficiency and forensic) audits of Pertamina, PLN, conduct a special audit for the Reforestation and BULOG. Reforestation Fund in August 1999.and BULOG. Fund Follow up on findings and

recommnendations of Pertamina, PLN,BULOG, Reforestation Fund specialaudits.

Brought Reforestation and Investmnent Funds intothe Government budget.Discontinued budgetary and extra budgetarysupport credit privileges granted to IPTN projects.

Reform the civil Allow civil servants to freely associate with any Govemnment to identify the total number of staff employed by department and agencies outside of civil service terms and conditions,service to political party. including daily paid, contractual and 'honor' staff.increaseefficinecy__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Design and implement a strategy to monetize and raise civil service benefits.

lmprove Prepared and announce a comprehensive program Continued implementation of the adopted Submit a proposed new Electricity Law to parliament and subsequently prepareeffcikncy, for restructuring the electric power sector (Power Power Sector Restructuring Policy, and implementing regulations.transparency, Sector Restructuring policy launched in Aug 1998 prepared a draft of new Electricity Law andand and implementing plan announced in Dec 1998). implementing regulations. Prepare regulations to provide for a carefully phased transition to a new industry structureadministration of Prepares a draft of a new Oil and Natural in which Pertamina will be transformned into one or more normal state enterprises,the electric Gas Law and submitted it to Parliament. effective competition in fuel supply will be established, and key infrastructure will bepower, oil and This draft law is designed to attract increased subject to regulation designed to ensure non-discriminatory open access.gas, and private investment in exploration andtelecoms sectors. production activity, to promote accelerated

domestic use of natural gas in place of liquidfuels, and to improve the efficiency of

_ petroleum refining, transportation operations.Prepared draft of new laws and implemnenting Submit proposed new Telecoms Law to Parliament and prepare implemnenting regulations.regulations for the telecoms sector.

Reform state- Established a transparent processes for Implenment restructuring and privatization of SOEs as set out in the naster plan.owned privatization.enterprises Compleed and published a master planfor the(SOEs) to reform of SOEs, bicilding dita actions and anincrease implementation agenda.efficiency.__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Identified first cohort of 12 SOEs for restructuring Offered for sale/invite bids for shares in four Continue preparation for restructuring and preparation of the first and second cohorts ofand partial privatization by March 31, 1999, and SOEs. SOEs.began preparation process. Identified secondcohort of 6 SOEs.Divested 14% of Semen Gresik to strategicpartners. _ _

37



Objective At end-December 1998 _ First Quarter 1999 | Second Quarter 1999 Third Q'arter 1999 and beyond

Continued preparation for restructuring and Continued preparation for restructuring and Publish progress report on restructuring and privatization of SOEs, including updatedprivatization of the other II of the first cohort of privatization of the first and second cohorts of action plans and implementation agenda.SOEs. SOEs.Announced plans for preparation of second cohortof SOEs.

Strengthen land Complete issuance of implementing regulations for 1992 Spatial Management Law.management andplanning

Begin implementing the transfer of land administration to local government in accordancewith the new Decentralization Law.

To reduce costs Reduced import tariff (I15% or above) by 5 Reduce import tariffs that are 10% or below by 5 percentage points. Reduce all import tariffs to a maximum ofand increase percentage points (exc. motor vehicles and 10% (2003) excluding motor vehicle andefficiency by alcohol), and reduce tariffs on all food items to alcohol.increasing 5%.import Reduced tariffs on non-food agricultural productscompetition. by 5 percentage points.

Included chemicals, metal products and Reduce import tariff exemptions. Abolish local content on motor vehicles.agricultural goods in the program for further tariff Phase out remaining quantitative importreductions. restrictions and other non-tariff barriersDiscontinued special tax, customs duty and credit (Dec 2000).privileges granted to new imports under the Eliminate producer-importer and trade-National Car Project. importer licensing except for moral hazardAbolished local content regulations on dairy and security products.products.Allowed all traders, including foreign direct BULOG prepared a plan for selling off its BULOG to implement plan to sell off its wheat stocks.investors, to compete with BULOG by importing wheat stocks.any commodity.

Remove export Introduced a system of resource royalties, reduce, Reduced export tax on logs, sawn timber, Reduce export tax on logs, sawn timber,impediments to export taxes of logs, sawn timber, rattan to a rattan and minerals to a maximum of 20% rattan and minerals to a maximum of 10%improve export maximum of 30% ad-valorem, adopted, announced by Dec 31, 2000, and introduce resourcecompetitiveness. a program to reduce this to 20% by Dec 31, 1998, rent royalties as appropriate.

15% by Dec 31, 1999, and 10% by Dec 31, 2000.Replaced quantitative export controls on crude and Reduced the maximum export tax on palm oil to 40% Reduced export tax on palm oil to aprocessed palm oil, olefin and stearin with an maximum of 10%.export tax of 60% ad-valorem or less, and hold Eliminate all other export restriction.regular reviews with an objective of reducing thisto 10% by Dec 31, 1999.Abolished export taxes on leather, cork, ores andwaster aluminum products. _

Review export tax on palm oil and adopt program for phased reduction to 10% by Dec 1999.

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Objective At end-December 1998 | First Quarter 1999 | Second Quarter 1999 Third Quarter 1999 and beyond

Relax investment Removed the restriction on foreign investment in Reduce the number of activities reservedrestrictions to oil palm. for domestic investors.encourage Issued a shortened list of activities closed to Reduce the number of activities reservedinvestment. foreign investors. for small-scale enterprises and the number

Removed restriction on foreign investment in of activities reserved for large-scalewholesale and retail trade. enterprises if in partnership with small-

scale enterprises.Deregulate Dissolved all restrictive marketing arrangements,domestic trade to including those for cement, paper and plywood.reduce costs and Deregulated domestic prices of cement.increase Gave traders freedom to buy, sell and transfer allefficiency. commodities across district and provincial

boundaries, including cloves, cashew nuts, orangesand vanilla.Dissolved the Clove Support and Marketing Board(BPPC) and maintained the rights of traders to buyand sell cloves at unrestricted prices and totransport cloves across district and provincialboundaries.Prohibited provincial government from restricting Initiated a review of domestic provincial and Continue the review and streamlining of business licensing and regulations in response totrade within or between provinces. local government regulations and licensing findings.Prohibited provincial or district governments form restrictions.charging export taxes (retribusi).Permitted domestic wheat millers to sell ordistribute wheat flour to any agent.Allowed traders to market sugar domestically.Released farmers from the formal and informalrequirements for the forced planting of sugar cane.Abolished the system of quotas that limit the saleof livestock.

Establish rules to Prepared and reviewed draft Monopoly Practices Parliament enacted a new Monopoly Prepare a Keppres for establishing Implement regulations, guidelines policymaintain and Unhealthy Competition Law. Practices and Unhealthy Competition Law commission and draft implementing documents consistent with intemationalcompetition (MPUCL) that: (i) focuses on market behavior regulations for the competition law. best practice.

rather than market structure, (ii) is applied to Implement a corporate complianceall enterprises (public as well as private), and program and a public dissemination(iii) envisages the creation of an independent campaign.agency to implement and enforce this new Appoint Commissioners, commitcompetition law. budgetary resources and recruit

professional staff for the Commission toimplement the MPUCL.

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Objective At end-December 1998 First Quarter 1999 | Second Quarter 1999 |Third Quarter 1999 and beyond

Improve BAPEPAM reviewed methods of improving BAPEPAM will issue a report BAPEPAM to complete its review ofcorporate corporate govemance in order to further recommending actions to improve corporate accounting and auditing standards togovernance by strengthen the securities market. governance. determine where changes are needed toincreasing achieve consistency with internationalprivate sector standards.disclosure andmanagementeversight.

BAPEPAM, working with other concerned agencies, will review issues related to minorityshareholder rights and foreign ownership, and develop suggestions.

BAPEPAM to develop options for The Ministry of Justice, working withimproving the Company Law, including BAPEPAM and other relevant institutions,aspects related to mergers and acquisitions. will prepare revisions to the Company

Law for submission to Parliament.Initiate improved Issued a concession management regulations Complete analysis and draft design of an Subject to the outcome of analysis andprotection of covering operations in permanent production area-based revenue collection systemii for consultations, finialize anid implement anlforest cover and forest and applying to all legal entities concession operation. area-based revenue system.strengthenforest engaged inforest productioit, which:management and i. de-links concession holding fromprotection. requirement to own processing facilities;

ii. allows transfer of concessionrights by sale.

iii. lengthens concession periods to20 years plus the regeneration rotationlength (usually 35 years, for a total of 55years)l and

iv. requires establishment of anacceptable performance bonding system.

Prepared draft implementing regulations for Establish a system for the operation and Implement independent inspection ofthe performance bonding system, submitted transparent reporting of independent forest concession operations as part of thethem to review by the multistakeholder operation inspection teams in concession performance bond system.consultation process described below and areas.initated revisions in view of feedback. Established practical outcome-based

criteria and implementing regulations forperformance bonding.

Reduced the export tax on logs, sawn timberand rattan to a maximum of20.__Review and refine the resource rent royalty rate to ensure that it captures at least 60% ofeconomic rent.

40



Objective At end-December 1998 First Quarter 1999 | Second Quarter 1999 Third Quarter 1999 and beyond

Ensured that the reforestation fund (Dana In cooperation with the Bank, analyze and determine financial and institutional arrangements to utilize the Dana Reboisasi and otherReboisasi) is transparent and restricted for use in Government funds. The findings of the independent audit of the Dana Reboisasi will be used to improve the system of Dana Reboisasireforestation and closely related activities. collection and allocation.

Initiated a multi-stakeholder consultative process by which all proposed regulations and legislation will be publicly reviewed and discussedup to the final drafting stage.Prepared a model map to show the boundaries of existing forest cover to a 1:500,000 scale, Complete the mapping of all remainingacceptable to the Bank. This is to be used as a model to prepare maps of forest cover for all natural forest cover throughout Indonesia.provinces of Indonesia. Implement a mechanism for regularly

updating these maps.Use the above model to prepare maps of all forest areas in Sumatra, Kalimantan, Sulawesi,Maluku and Irian Jaya having 1996 or more recent satellite imagery (MOFEC) already hassuch imagery for at least 50% of this area).Make these maps publicly available (e.g., on public display at the MOFEC) as they arecompleted.Locate on the above maps as they become available, the 80 priority conservation forest areas identified in the Biodiversity Action Plan andall other conservation areas. Also locate the boundaries of protection forest (hutan lindung) and production forests.Provide an acceptable workplan and time frame for completing designation and gazetting of these areas.Until the maps referred to above are in place, implement and maintain a moratorium on:

i. conversion of state forest areas; andii. alteration of main land use patterns within state forest areas.

Any future conversion or change in land use status is to be reviewed through a transparent and consultative process which involves bothnon-government stakeholders and inter-departmental dialogue within Government. to avoid unduly penalizing those with conversionapplications presently in process, the Government will publish a list of all such applications and subject them to public review prior to finalapproval.

Implemient a mechanism for rationalizingstate forest boundaries, taking intoaccount existing forest cover.Revise concession boundaries inaccordance with the new permanentproduction forest boundaries and

.___________________________________________________ ______________________ regulatory requirements.

41


Note: Board conditions -- in bold and italic -- have been fulfilled. Refer to Table 2. List of Conditions of Effectiveness in Section 4,Other policy actions have also been implemented or are on-going within the framework of the overall reform program supported by PRSL II.

Objective At end-December 1998 TFirst Quarter 1999 Second Quarter 1999 Third Quarter 1999 and beyond- j

Initiate Using the stakeholders consultative process defined above, draft a community forcst Implement new community participationprovisionsfor participation regulation,, defining clear and transparent processes which: arrangements for forests.improved i. establish equitable representative organizations;participation by ii. establish terms and conditions for community participation in benefits from,local and management of, the forests;communities in protect the interests of local communities in forest use program.forest use andmanagementStrengthen New Environmental Law (WU23.97) issued. Established implementation regulationsfor Establish implementing regulations for at Establish all other implementingoverall priority items under the new environmental least four more functions under the new regulations for the new Environmentalenvironmental law, including hazardous waster Environmental Law, Law.management. management and marine pollution control.Ensure Restricted new imported and large domestic boats Maintain restriction until a new monitoringsustainable to the EEZ until a new monitoring and control and control system is in place.fisheries system is in place.management.Improve water Formulated National Water Resourcesresource Policy and action plan for itsmanagement implementation.

Established an apex national body forwater sector policy formulation, guidanceand strategic planning.

Improve air Established an Inter-Agency Committee to Implement pricing changes to promote usequality, develop and oversee the implementation of a of cleaner fuels.

short-term action plan for reducing airpollution *om petroleum fuels.

42