FILE COPY. Document of The World Bank FOR OFFICIAL USE ONLY. Report No. P-2081-IND REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF INDONESIA FOR A THIRD BAPINDO PROJECT May 17, 1977 Report No. P-2081-IND This docment has a restrieted distribution and may be used by recipients only In the performnce of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS US$1 Rp 415 RP 1 US$ Rp 1 million - US$2,410 Rp 1 billion - US$2.41 million ABBREVIATIONS BAPIDO - Bank Pembangunan Indonesia DFC - Development Finance Company KfW - Kreditanstalt fur Wiederaufbau ICB - Investment Coordinating Board IDA - International Development Association IDFC - Indonesian Development Finance Company INVESTASI - Investment Credit Scheme PDFCI - Private Development Finance Company of Indonesia REPELITA I - First Five-Year Development Plan REPELITA II - Second Five-Year Development Plan UNDP - United Nations Development Program FISCAL YEAR OF THE REPUBLIC OF INDONESIA April 1 - March 31 BAPINDO's FISCAL YEAR January 1 - December 31

3 FOR OFFICIAL USE ONLY INDONESIA THIRD BAPINDO PROJECT Loan and Project Summary Borrower: Beneficiary: Amount: Terms: Relending Terms: The Republic of Indonesia Bank Pembangunan Indonesia (BAPINDO) $40 million equivalent in various currencies The loan carries an interest rate of 8.2% per annum. The amortization schedule will be adjusted to conform substantially to the aggregate of the repayment schedules of subloans made by BAPINDO, whose maturities will not exceed 15 years, including 3 years of grace. The Government would make available the proceeds of the proposed loan to BAPINDO at a rate of 11% to allow BAPINDO a spread of 4 percentage points. BAPINDO would relend to ultimate borrowers at an interest rate of 15% per annum. Free limit: $1.0 million equivalent for individual subprojects with an aggregate limit of $10 million equivalent. Project Description: A line of credit for financing specific development projects and services of three experts. The man-year cost of each expert is estimated at $80,000. Final Date for Subproject Submission: September 30, Estimated Disbursements: Bank FY ($ million) Annual Cumulative Appraisal Report: Appraisal Report No IND, dated May 9, 1977 East Asia and Pacific Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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5 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF INDONESIA FOR A THIRD BAPINDO PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Indonesia for the equivalent of $40 million for relending to a development finance company, Bank Pembangunan Indonesia (BAPINDO). Interest on the loan would be 8.2% per annum. The proceeds of the proposed loan would be onlent to BAPINDO at an interest rate of 11%. The amortization schedule will be adjusted to conform substantially to the aggregate of the repayment schedules of subloans made by BAPINDO, whose maturities will not exceed 15 years including 3 years of grace. PART I - THE ECONOMY /1 2. The last economic report on Indonesia, "Indonesia: Recent Developments and Medium-Term Perspective," of March 8, 1977 (1516-IND) described the recovery of the economy from the world recession and the financial troubles of Pertamina, the state oil company, and examined some of the important development issues which the country faces in the next few years. 3. During Indonesia's First Development Plan period (1969/ /74)/2, the rehabilitation of the Indonesian economy was almost completed. Transport, power, irrigation works and other infrastructure facilities, after years of neglect, were greatly improved and strengthened. Agricultural output expanded at an average rate of 4.5% a year and foundations of modern industry - fertilizer, cement, etc. - were laid. During this period, the annual rate of economic growth exceeded 7.5%; domestic savings and investment also rose rapidly. With the start of the Second Development Plan period (1974/ /79), the Government expected that rehabilitation would be completed and a start made on a course of long-term development which would assure not only a satisfactory rate of economic growth but also a wider distribution of income. The first two years of the Plan were dominated by the developments in the oil sector - the sharp increase in the price of oil and Pertamina's serious financial difficulties. The latter arose from Pertamina's undertaking of a large and diversified investment program without arranging satisfactory financing. With the onset of the world recession, bank credit became much more restrictive. Pertamina was unable to roll over its shortterm debt and failed to meet the financial obligations which were falling due. In the event, the Government stepped in and undertook to honor the oil company's obligations. The repayment of these obligations, along with the fall in export earnings as a result of the recession, necessitated large foreign commercial borrowing, seriously strained the Government's budgetary resources and Indonesia's balance of payments, and led to a sharp decline in the foreign exchange reserves. /1 This part is identical to that contained in the corresponding section of the President's Report No. P-2075-IND dated May 10, 1977 for the Teacher Training Project. /2 Indonesian fiscal year April 1 to March 31.

6 4. During 1976/77 Indonesia's exports recovered strongly following improvements in the world economy, and rose to a level higher than expected earlier. Imports continued to increase rapidly, but the rate of price increase slowed down and Indonesia's terms of trade improved. Most of Pertamina's short-term debt had been repaid by the end of 1975/76, and disbursements on foreign borrowing continued to be high in 1976/77. As a result, Indonesia's foreign exchange reserves rose to a more comfortable level, i.e. $1.2 billion at the end of 1976 (and even higher levels in recent months) corresponding to about two months of imports. 5. The Government's budgetary position was also much better in 1976/77. With the boost in oil exports and a further renegotiation of oil contracts, oil revenues rose by close to 40%. Non-oil revenues also rose over and above the amounts budgeted, mainly as a result of Government efforts to curb smuggling and a more rigorous collection of customs duties. The additional revenues together with continued restraint in increasing current expenditures enabled the Government not only to increase development expenditures substantially but also to repay the debt to Bank Indonesia, which it had incurred in the previous year. This helped to neutralize the monetary expansion on account of the accumulation of foreign exchange reserves. The rate of inflation over the year decreased, from a high of 17% in the first quarter to only a modest increase in the last two quarters of 1976/77, giving an average increase of less than 15% for the year as a whole. 6. In 1976, the domestic economy recovered in other respects also. The available indicators suggest that industrial output and private investment rose faster than in the previous two years. The output and prices of tree crops rose with foreign demand, thus raising the incomes of the producers. This provided a welcome relief to the small producers, who had suffered from the declining foreign prices of their produce combined with rising domestic prices of consumer goods. However, the production of food crops slackened and rice output failed to rise appreciably for the second year in succession. The domestic price of rice was kept stable by means of very substantial imports, which reached 1.6 million tons (about 10% of domestic consumption) in 1976/77. Early in the year floods, and later on drought, affected both the wet season and dry season harvests. More importantly, a pest infestation afflicted large areas in Java, particularly those planted with the high yielding varieties of rice, and the area under BIMAS and INMAS (the two credit extension schemes for rice growers) remained fairly constant over the last three years following a rapid increase during the First Development Plan period. Rice output also failed to increase because the use of fertilizer did not rise despite ample availability. The Government has now relaxed controls on the distribution of fertilizer and set its fertilizer/rice price ratio at a level that should encourage fertilizer use. 7. The large increase in the oil revenues over the past three years has been invested, not consumed. Government development expenditures more than quadrupled over this period and in 1976/77 amounted to Rp 2 trillion (or about $5 billion); even after allowing for the high rate-of inflation development expenditures rose in real terms by 35% a year. Rough estimates indicate that at present more than 20% of GNP is being invested in Indonesia.

7 The effect of the high level of investment expenditures, however, cannot yet be seen in the growth of the Indonesian economy. In fact, the economic growth in the first three years of Indonesia's Second Development Plan, i.e. 1974/ /77, has been somewhat slower than the observed long-term trend rate of 7.5% a year. The world recession, uncertainties following the Pertamina crisis and domestic inflation (which made certain domestic industries uncompetitive with imports), all had a dampening effect on the growth of the economy. Indonesia's growth rate also failed to accelerate because the economic benefits from investments in recent years have been slow in coming and because the growth in the private sector slackened. New investment has been concentrated on relatively capital-intensive industrial and infrastructure projects with long gestation periods; some projects, such as Krakatau steel and the LNG, have been further delayed by slow implementation. Moreover, the realization of economic benefits from investments in such sectors as transportation, telecommunications, etc. depends on the growth in demand which in turn is determined by the growth of the rest of the economy, which in Indonesia is mostly the private sector. Unfortunately, the private sector seems to have failed to provide the necessary momentum of growth. The indications are that investments in this sector, because of the Government's attempts to control domestic inflation or because of the world recession, rose only modestly in the first two years of the Plan. 9. The orientation of the public sector investments was partly affected by the Government's takeover of Pertamina's projects in the non-oil sector, but was also a result of its attempt to raise investment rapidly in response to the sharply rising oil revenues. It was easier and quicker to develop capital-intensive projects; plans for several of them in fact existed even before the improvement in public finances. On the other hand, new projects in such sectors as rural development, transmigration, health and education generally required not only innovation but also setting up new institutions. Nevertheless, the Government views the orientation of its investment program with some concern. As part of its efforts to rescue Pertamina from bankruptcy, it initiated a careful review of all public sector investment proposals and strengthened its control over the direction of investments. Where practicable, the Government rejected or scaled down costly proposals. The budget for 1977/78 provides for a larger share of development expenditures in such sectors as agriculture, health, family planning, education and regional development. 10. Reliable data on the recent trends in employment are not available. The labor force has been increasing at a rate of more than one million persons a year, but the current level of unemployment and the extent of underemployment are not known. While considerable investment activity and general economic prosperity is in evidence in urban and rural areas of Indonesia, there is no indication that the labor market has tightened or that the wages of unskilled workers have more than kept pace with domestic inflation. However, the Government's efforts at family planning appear to have yielded impressive results. Preliminary estimates from an inter-censal survey in 1976 indicate that since 1971 the birth rate in Java and Bali has significantly declined. 11. The long-term consequences of the Pertamina crisis remain in the form of large foreign debt and burdensome unfinished investment projects.

8 - 4 - The heavy foreign borrowing in the last two years has raised the level of debt service, which is now expected to reach $1.87 billion by 1980 or close to 17% of the projected export earnings compared to 13% in This does not take account of the contingent liabilities incurred with regard to the hire-purchase of tankers, the exact amount of which is subject to litigation. 12. The prospects for Indonesia's export are generally good; the principal constraint is expected to be quantities available for export rather than foreign demand. Indonesia's export earnings, at least over the next five years, are expected to rise rapidly and it should not be difficult to meet the debt service obligations and still to finance essential imports of consumer, intermediate and capital goods. However, to maintain the pace of development, Indonesia will continue to need a substantial inflow of foreign assistance on concessional terms. In order to keep the debt service burden manageable, resort to commercial borrowing in the next few years will have to be kept to a minimum. It is estimated that Indonesia will need $2.1 billion in new external financing commitments in 1977, and about the same amount next year, of which no more than one-third should be on commercial terms. At the meeting of the Inter-Governmental Group on Indonesia (IGGI) in April 1977, aid pledges of over $500 million from bilateral sources were made. The likely commitments from those IGGI donor countries which did not pledge, from the multilateral agencies and from OPEC and East European countries should raise the total of official development assistance to $1.5 billion. 13. The heavy foreign debt service requirements will also reduce the public sector resources available for investment. The net resource transfers from abroad are expected to decline from $1.56 billion in 1976/77 to about $640 million in 1980/81, or from about 5% to 1% of GNP. In order to maintain the high rate of domestic investment already reached, the Government would need to raise substantial additional revenue over the next few years, the bulk of which would have to come from non-oil sources. The additional revenue raising effort is also necessary to keep inflation under control. The Government has already taken steps in this direction; income tax procedures have been simplified and import duties are being more strictly enforced. These measures as well as some additional ones need to be vigorously pursued. 14. The medium-term outlook of the Indonesian economy is good. Over the last eight years, GNP rose at an average rate of 7.5% a year, and food production expanded in step. This rate of growth could be maintained in future if the rate of investment continues to be high and the orientation of investments is shifted to less capital-intensive forms. Thus the Government's efforts in mobilising domestic resources and careful investment planning would be crucial in maintaining the relatively high rate of economic growth and creation of employment opportunities. The Government would also need to pay special attention to the production of rice, and food crops generally, so that the recent setbacks remain a temporary phenomenon. PART II - BANK GROUP OPERATIONS IN INDONESIA 15. The discussion in Part I of this report underscores the need for a development program which provides productive work opportunities (with

9 - 5 - resultant increased incomes) for Indonesia's presently underemployed and growing labor force. Major efforts are needed to increase labor-intensive employment and programs directed towards improving the incomes of the poor and their living standards. To assist the Government in attaining its goals, the Bank is planning to increase its commitments to Indonesia and in particular to support projects designed to: improve agricultural credit; rehabilitate and expand irrigation systems; assist transmigration and other land development outside Java and Bali for and by smallholders; increase nonagricultural employment in the rural areas and small towns through the establishment of smallscale industries, rural credit schemes as well as vocational and nonformal education programs; develop the electric power system; construct urgently needed water supply and transport facilities; and expand the national family planning program. 16. As of March 31, 1977, Indonesia had received 37 IDA credits totaling $561.8 million and 23 Bank loans amounting to $1,155.5 million. At that date, IFC investments totaled $59.7 million. The share of the Bank Group in Indonesia's total external debt (disbursed) outstanding at the end of 1976 was about 6% and the share of debt service was less than 1%. By 1978 these ratios are expected to increase to around 12% and 5%, respectively. A summary statement of IDA Credits, Bank Loans and IFC Investments as of March 31, 1977, as well as notes on the execution of ongoing projects are contained in Annex II. 17. To date, agriculture accounts for just over one third of all Bank lending to Indonesia, including four IDA credits for estate rehabilitation, seven Bank loans and IDA credits for the rehabilitation and expansion of the irrigation systems, two for fisheries, and one each for seeds production, beef cattle, sugar, smallholder tea, smallholder rubber, agriculture research, food crop extension services, transmigration and nutrition development. The Operations and Evaluation Department of the Bank is undertaking a study of Bank Group lending in the agricultural sector. In the industrial sector, the Bank has assisted in three projects to expand PUSRI's fertilizer production and distribution capacity, three for development finance companies (Governmentowned and private) which play a major role in fostering the growth of industrial enterprises, and one for the Pulo Gadung industrial estate. Loans and credits have also been extended to the education (including technical and agicultural education, textbook production, vocational and civil service training), telecommunications, tourism, power generation and distribution, transportation (including highways, inter-island shipping, railroads and ports), population, urban and water supply sectors. Also a loan was extended for a national resource survey and mapping project and four credits for technical assistance to aid the Government in preparing and formulating its development programs and projects. 18. Bank lending to Indonesia started with an IDA Credit in 1968 for irrigation rehabilitation; lending on Bank terms began in June Disbursements on loans and credits are now at satisfactory levels. The Indonesian authorities have become increasingly aware of the cost to the country of the delays in project execution caused by cumbersome procedures and of the need to establish an effective control system in BAPPENAS (the National Development Planning Agency). At the Government's request, the Bank arranged in 1974 for assistance under the Fourth Technical Assistance Credit

10 - 6 - (Credit 451-IND) to help set up a monitoring and control system. It is hoped that the system which is due to commence operation shortly will lead to better project administration. 19. Nine Loans have been made to Indonesia this fiscal year prior to the proposed loan, and the proposed loan would bring this fiscal year's total lending to $415.5 million. Projects for nucleus estates and smallholder development, population, small enterprise credit, rural credit and non-formal education are expected to be ready for presentation in the next several months. Progress Under Previous DFC Projects 20. Prior to the proposed loan the Bank has financed five DFC projects in Indonesia. BAPINDO has been the beneficiary of a credit of $10 million (Cr. 310-IND) in 1972 and a loan of $50 million (Ln IND) in 1974 and the Private Development Finance Company of Indonesia (PDFCI) of a credit of $10 million (Cr. 436-IND) and a loan of $15 million (Ln IND) in 1974 and 1977, respectively. All these credits and loans were made for financing industrial subprojects. BAPINDO is also executing an inter-island fleet rehabilitation project financed under a separate credit of $8.5 million (Cr. 318-IND) which was made in Credits 310-IND and 436-IND have been fully committed and as of April 30, 1977, the uncommitted balance of Cr. 318-IND and Ln IND was about $1.3 million and $8.4 million respectively. The latter balance is expected to be committed by the end of the second quarter of Loan 1363-IND was approved on January 25, 1977, and became effective on April 21, Both BAPINDO and PDFCI have contributed to the sound development of industry in Indonesia and considerably strengthened their own institutions. Further improvements are, however, necessary and are expected to materialize gradually in the next few years as the operational experience of these companies grows. Particularly, BAPINDO requires to improve its arrears situation, to speed up its appraisal work and to control its administrative costs. A program of Action has been formulated and agreed with the Bank, which should help BAPINDO cope with these problems (see paras. 40 and 41). PART III - THE INDUSTRIAL SECTOR AND INDUSTRIAL FINANCE The Role of Industry 22. In Indonesia, heavy reliance is being placed on industrial expansion to achieve income and employment growth targets. In view of the necessity for the industrial sector to provide substantially increased employment opportunities, the Government is attempting to encourage the development of small- and medium-scale industries using labor-intensive methods of production. 23. Indonesia's manufacturing sector contributes only about 11% to total GNP. Value added in manufacturing grew at the rate of about 9% p.a. from 1968 to 1975, as against about 7.5% for the economy as a whole. During 1974 and 1975, the growth of the industrial sector was adversely affected by

11 - 7 - international developments, slowing down in terms of output to 7% in In 1976, however, the industrial sector has shown signs of recovery and is estimated to have grown by 14% during the year. 24. Although in recent years a number of new types of industrial enterprises have been established, such as industrial chemicals, steel products and motor vehicle and radio and television set assembly; their direct contribution to employment creation is still small. Small-scale enterprises /1 represent an overwhelming majority (97%) of the number of industrial firms; in 1972, they accounted for 64% of industrial employment even though they were responsible for only 17% of value added in manufacturing. Within the group of larger establishments, firms with less than 100 employees accounted for 90% of the number of such establishments, employed around 32% of the labor force and contributed 18% of value added in manufacturing. Geographically, manufacturing activity is concentrated in Java, particularly in the Jakarta area. 25. The Government's industrial investment policies are partly reflected in the incentives it provides under the Domestic and Foreign Capital Investment Laws which are administered by the Investment Coordinating Board (ICB). These incentives usually apply equally to domestic and foreign companies but are not automatically granted as a package. The main elements of the incentive system include initial tax holidays, reduction or exemption from import levies and accelerated depreciation allowances. The Government also influences the course of industrial development through the tariff system, direct import controls and, to a lesser extent, its interest rate policy. The Financial Sector 26. In terms of structure, diversity of institutions, financial services offered and the variety of financial instruments available for mobilizing savings, the financial system in Indonesia is still in its early stages of development. Indonesia's financial sector consists of Bank Indonesia, 5 large state commercial banks, 4 national development banks (the Governmentowned Development Bank (BAPINDO), the Private Development Finance Company of Indonesia (PDFCI), the Indonesian Development Finance Corporation (IDFC) and P.T. Bahana) 26 regional development banks (RDBs), 11 branches of foreign banks, 97 small private domestic commercial banks, and about 5,000 savings and small village and rural banks. There are also 11 merchant banks and a dormant stock exchange. Overall, the financial system remains principally geared to serving short-term financing needs. 27. Over the last few years, the Government has attempted to strengthen the financial sector. BAPINDO was reorganized with Bank Group assistance, with a view to making it the predominant institutional source of medium- and long-term finance for both public and private industry. It is the only state /1 Defined by the Government As those employing ten workers or less without power equipment, or five or less with power equipment.

12 - 8 - bank allowed to grant term loans with maturities of over five years. A program to upgrade the five state commercial banks was initiated and is still underway. In 1972 IDFC was reorganized as a joint venture between the Government (through Bank Indonesia) and the Netherlands Overseas Finance Corporation, in which the Dutch Government has a majority interest. IDFC specializes in assisting small industries and extends term loans, participates in equity financing and provides a limited amount of technical assistance to its clients. In 1973, again with Bank Group assistance, the Government was instrumental in establishing a third, largely privately-owned development bank (PDFCI), which is empowered to make medium- and long-term loans, invest in equity and provide technical and managerial consultancy services. The same year (1973) a specialized institution, P.T. Bahana, was set up to provide equity financing and managerial assistance to financially weak enterprises. Since 1973 when a law was passed governing the establishment and operations of nonbank financial intermediaries, 11 merchant banks have been set up as joint ventures between foreign and local banks. Finally, to help meet the need for term financing and assist in small-scale industrial development, the Government has instituted two investment credit schemes, the Medium-Term Investment Credit (INVESTASI) and the Small Investment Credit program, administered by Bank Indonesia and handled by the state banks including BAPINDO. Both types of credits have a maximum term of five years. 28. The main source of medium-term credit (up to five years) is the INVESTASI program which was introduced by the Government in Under this program, term loans are available for almost all sectors from state banks and RDBs, with Bank Indonesia refinancing 65-80% of the disbursed loan amounts. Loans under the program bear an interest rate ranging from 12-15% per annum depending on the size of the loan and carry maturities of between one and five years. 29. The Small Investment Credit Program consists of two credit schemes, the Kredit Investasi Kecil (KIK) for financing fixed investment and the Kredit Modal Kerja Penanaman (KMKP) for working capital financing. Both schemes are handled by state banks and selected regional development banks, with Bank Indonesia refinancing 70-80% of the disbursed loan amounts. All productive activities in industry, agriculture, trade and services are eligible for KIK and KMKP financing. A limit is placed on the amount of individual loans which may be approved for any single project. It is presently Rp 5 million ($12,000 equivalent) each under KIK and KMKP. Maturities range from one to five years including a grace period of up to two years, with interest rates of 12% for KIK and 15% for KMKP loans. World Bank support for these credit schemes has been requested by the Government, and a project has been appraised. Interest Rates 30. Interest rates applied by state banks are set by Bank Indonesia, while private banks are free to set their own rates. Deposit rates were reduced in December 1974 and January 1977 and at present, range from 3% per annum for 1 month time deposits with state banks, and for demand deposits with private banks, to 18% for time deposits up to 24 months. Lending rates applied by state banks range from 12% for INVESTASI loans below Rp 100 million and for special short-term agricultural credits, to 24% for

13 - 9 - other short-term loans. The standard lending rate for term loans above Rp 100 million is 15% per annum. The Government is aware of the anomalies in the structure of the interest rates and is giving active consideration to further steps for reducing and ultimately eliminating these anomalies. These issues are being discussed between the Government and the Bank. 31. The Government did not raise term lending rates during the recent period of very high inflation since it feared that this would hurt the smaller and financially weaker enterprises (mainly indigenous) which are unable to obtain offshore loans on their own, while larger and stronger companies (usually nonindigenous joint ventures) could borrow from financial markets abroad, i.e. Singapore and Hong Kong, at rates which are at present about 10-11% (with the foreign exchange risk borne by the borrower). 32. The rate of inflation was 40% in 1974 but declined to 19% in 1975 and 15% in As a result of curbs on the expansion of money supply and other policies to combat inflation, the Government expects to reduce the rate of inflation further to an average of about 10% over the period. If their efforts are successful the 15% standard rate being charged by BAPINDO for medium- and long-term credits would represent a positive real rate of at least 5%. PART IV - THE PROJECT Background 33. The project was appraised in October 1976 and negotiations were held in Washington on April 20-26, 1977; the Government was represented by Mr. Julianto Moeliodiarjo, Director General of Monetary Affairs, Ministry of Finance, and BAPINDO by its President Director, Mr. Kuntoadji. The appraisal report dated May 9, 1977 is being circulated separately to the Executive Directors. Past Reorganization and Progress 34. BAPINDO was established in 1960 as a State-owned financial intermediary. The Bank's association with BAPINDO started in 1969 when a Bank mission, at the Government's request, undertook a preliminary examination of BAPINDO. Strengthening of BAPINDO's organization and management has been a key objective of the Bank's involvement with BAPINDO from the outset. The Government requested the Bank's help not merely in assisting BAPINDO financially but in reorganizing and upgrading the institution with a view to enabling it to perform its intended role as the principal financial intermediary in the industrial sector. In June 1970, the Government and the Bank agreed on a plan to reorganize BAPINDO. Through the implementation of this plan, BAPINDO has achieved considerable institutional improvements. It has focused its activity on development financing by gradually shedding its commercial banking operations. In consultation with the Bank, it has adopted a policy statement providing appropriate financial and operational guidelines for its activities. It has reduced its surplus staff and

14 excessive network of branch offices, strengthened its management, established internal operating procedures and, to a large extent, rationalized and streamlined its organization to develop the basic operational capability of a development bank. With the assistance of foreign advisors financed by UNDP, bilateral aid and the Bank, it has built up a nucleus of trained staff including an adequate capability for project appraisal and follow-up work. 35. These improvements in internal organization and operational capability have enabled BAPINDO to considerably expand its term-lending operations which rose by 52% (to Rp 25.9 billion) in 1974, by 64% (to Rp 42.4 billion) in 1975, and by another 17% (to Rp 49.4 billion) in Since 1973, BAPINDO has also initiated a program for co-financing small business enterprises with 14 of the 26 regional development banks (RDBs) operating in the country. As of December 31, 1976, under this program, BAPINDO had financed jointly with the participating RDBs an amount of Rp 8.8 billion for over 3,600 projects, or an average of Rp 2.4 million ($5,000 equivalent) per loan. BAPINDO's growing importance as a source of industrial finance is reflected in the steady increase from 18.1% at end-1973 to 31.3% at end-1975 of BAPINDO's share of total outstanding credits to the manufacturing sector under the INVESTASI program. In 1975, BAPINDO's financing was equal to about 15% of industrial investment in the country approved by the Investment Coordinating Board and BAPINDO's disbursements for term loans in 1975, Rp 20 million, accounted for 5.7% of the country's total industrial investment. 36. In parallel with its administrative reorganization, BAPINDO's financial position has been considerably strengthened, through large increases in its share capital (Rp 3:3.4 billion in ) and more adequate provisions for doubtful accounts. As of December 31, 1976, BAPINDO's total assets stood at Rp billion, with a long-term debt/equity ratio of 0.8:1 (as against a contractual limit of 3.0:1), and a current ratio at 1.3:1. Its accounts have been audited by qualified independent accountants, whose reports from 1973 onward were without qualification. Remaining Institutional Problems 37. In spite of the past progress outlined in the preceding paragraphs, BAPINDO still faces some major problems, the most serious of which is the continuing unsatisfactory situation of portfolio arrears. As of December 31, 1976, 69 out of 168 term loans (or 42% by number) were in arrears, with total arrears (principal and interest) amounting to Rp 5.9 billion or 8.8% of the term portfolio outstanding, arrears of principal amounting to Rp 3.1 billion or 7.8% of term loans in the repayment stage, and term loans affected by arrears accounting for one third (by amount) of the term loan portfolio outstanding. The loan collection rate (i.e. amounts actually collected as a percentage of amounts due) was only 54.3% in Further, write-offs for bad debts totalling Rp 7.0 billion had to be made in the four-year period 1973 to 1976, equivalent to 10.6% of outstanding term loan portfolio at the end of The loan collection ratio and arrears ratios have shown a slight improving trend since 1973, but more significant improvement is needed.

15 The factors contributing to the high level of arrears and poor loan collection performance were inter alia: (a) existing regulations favor borrowers vis-a-vis lenders; (b) more than half of BAPINDO's arrears relate to loans BAPINDO had made prior to its reorganization in 1971 when no project appraisal and follow-up was undertaken; (c) restrictive credit ceilings imposed by the Government since 1974 which compounded the liquidity problems of companies; (d) BAPINDO's low penalty rate (9%) on interest in arrears acts as an incentive for some delinquent borrowers not to repay; (e) the Government policy requiring lending only to indigenous companies most of which are managerially and financially weak; (f) short maturities (less than 5 years) required under Bank Indonesia regulations and unrealistically short repayment schedules set by BAPINDO; (g) delays in the completion of subprojects; and (h) the poor performance of the official loan collection agency (PUPN) which among other things, awaits the expiry of the final maturity of loans before it takes action on delinquent accounts transferred to it by BAPINDO. Some of these factors are beyond BAPINDO's control and require corrective measures by the Government. 39. Other problems on which there have been improvements but which require further efforts from BAPINDO include: (a) the slow pace of appraisal work and weakness in economic and market analysis of projects; (b) inadequate developmental work in such areas as project promotion and industrial studies; and (c) the still generally low level of institutional efficiency, as reflected in its high administrative cost (3.8% of average total assets in 1976) which in turn is largely attributable to BAPINDO's surplus staff and its excessive branch network. Proposals for Further Improvement - The Program of Action 40. The Bank reviewed BAPINDO's current problems with the Government and BAPINDO during both appraisal and negotiations. As a result, a comprehensive Program of Action was agreed upon. This program includes specific remedial measures to deal with major problems and related matters. The implementation of this Program is expected to result in appreciable improvements by BAPINDO on a broad front, financially, administratively and from a developmental standpoint, but particularly in regard to the arrears situation. 41. In order to deal effectively with BAPINDO's existing problems, the Government and BAPINDO have agreed to complete the following essential steps of the Program of Action prior to the effectiveness of the proposed loan (Section 6.01(c) and (d) of the draft Loan Agreement): (a) to relieve BAPINDO of all financial liability pertaining to such projects as are financed by BAPINDO at the Government's behest; (b) to enable all state owned enterprises to make payments of principal and interest in respect of arrears which are overdue to BAPINDO in excess of three months at the date of the Loan Agreement (accounting for about 20% of the total arrears); (c) to partially compensate BAPINDO by paying to it an amount of Rp 3.0 billion for BAPINDO's losses on raw cotton loans (the remaining amount of Rp 4.5 billion, to compensate BAPINDO for its total losses on such loans, will be paid by the Government not later than March 31, 1978); (d) to undertake a review of the loan collection procedures of the official loan collection agency (PUPN), furnish to the

16 Bank the results of this review, and pending implementation of the measures recommended by the review, issue a ministerial decree requiring PUPN to take immediate action for the enforcement of foreclosure on delinquent accounts transferred to PUPN by BAPINDO without waiting until the expiry of the final maturity of the loans. Furthermore, prior to the effectiveness of the proposed loan, BAPINDO will submit to the Bank comprehensive plans, satisfactory to the Bank: (a) to control its administrative costs and (b) to improve the position of arrears (Section 6.01 (e) of the draft Loan Agreement). 42. Technical Assistance. While BAPINDO has benefited from technical assistance provided by UNDP and through bilateral aid, it still needs assistance from outside experts in overall development banking activity as well as economic and marketing research. Consequently, an amount of $240,000 is earmarked under the proposed loan for financing the services of three experts for 36 man-months: a general DFC advisor, a senior economic advisor and a marketing expert. 43. That there remain many problems still to be solved by BAPINDO reflects the fact that institutional improvement and strengthening is a long process, especially in cases with as serious problems as BAPINDO faced prior to reorganization in Also, in Indonesia, industrial expertise and business entrepreneurship are still scarce. The agreed Program of Action lays a reasonable basis for dealing promptly with BAPINDO's most serious and immediate problems. Organization and Type of Operations 44. BAPINDO has a Supervisory Board and a Board of Managing Directors. The Supervisory Board is composed of the Minister of Finance and the Governor of Bank Indonesia. Its role is to supervise BAPINDO's affairs and to provide policy guidance to the Board of Managing Directors. The Board of Managing Directors is composed of a President and four Managing Directors and is responsible for BAPINDO's day-to-day management. As of June 30, 1976 BAPINDO had staff of about 800, about one-half professionals, working in 16 departments at headquarters, 10 branch offices and 8 representative offices. 45. BAPINDO's operations include: capital loans in foreign and domestic currency, working capital loans in domestic currency and investments in equity shares. These operations cover activities in manufacturing, land and maritime transportation and tourism sectors; operations used to include also short-term financing of raw cotton imports, but BAPINDO stopped this activity in BAPINDO's Prospects and Resource Requirements 46. BAPINDO expects its term financing to grow at an annual rate of 18% in the period. On a disbursement basis its share of total investment in Indonesia is still small (5.7% in 1975) and could easily be expanded as BAPINDO's operational capacity and resources grow. Also the outlook for industrial investment is expected to continue to improve in the next few years. With the strengthening of BAPINDO's financial organization and procedures

17 through the implementation of the Program of Action, BAPINDO should have adequate operational capacity to achieve the projected volume of operations provided it obtains the required financial resources. These are estimated to amount to Rp 214 billion in domestic currency and $360 million in foreign exchange, for the four-year period In the past, the Government and Bank Indonesia have been willing to provide BAPINDO with adequate rupiah funds as needed to sustain its operations. BAPINDO is also considering the issue of domestic bonds, for which it expects to obtain the same interest rate subsidy from the Government that is given to other state banks on their time deposits. In regard to foreign exchange, BAPINDO has since 1972 relied almost exclusively on the Bank except for a DM 22 million loan from Kreditanstalt fur Wiederaufbau (KfW) of Germany. In the future BAPINDO expects to finance part of its expanding foreign exchange requirements from sources other than the Bank; apart from the proposed Bank loan of $40 million, BAPINDO hopes to obtain a first loan of $30 million from the Asian Development Bank (ADB) in the next year or so. Together with the uncommitted balance of $8.4 million (as of April 30, 1977) under Loan 1054-IND these resources would cover BAPINDO's foreign exchange commitments up to about September Projected Financial Position 47. On the basis of its forecast volume of business, BAPINDO's total assets are expected to increase from Rp billion at December 31, 1976 to Rp billion at end-1980 or at an average annual rate of about 15%. The liquidation of the short-term raw cotton portfolio by March 31, 1978 will substantially modify the structure of assets; the term portfolio which accounted for only 62.5% of total assets in 1976 would represent 85.7% of these assets in 1980, while the share of current assets would correspondingly decline from 37.6% to 10.2%. BAPINDO is planning to finance a major proportion of the increase in assets through long-term debts which would rise from Rp 38.5 billion in 1976 to Rp billion in BAPINDO also expects the Government to make an additional capital contribution of Rp 6.0 billion before the end of 1977, thereby raising its paid-in-capital to the presently authorized level of Rp 50 billion. The current ratio is estimated to range between 1.3:1 and 3.0:1 over the projection period, which would be satisfactory. In view of the continuing unsatisfactory portfolio arrears situation the present 3.0:1 debt/equity limit would be maintained; this would require the Government to make addditional cash subscription to BAPINDO's capital before 1979 in order to enable BAPINDO to incur additional debt. Projected Financial Results 48. As a result of higher leverage, BAPINDO's net profit iq expected to increase from 2.7% of uct worth in 1976 to 3.3% in 1980, which is still modest. Profit before tax and provisions as a peroentage of average total assets will increase slightly from 2.2%, to 3.7%. General and administrative expenses are projected to decline only marginally from 3.8% of total assets in 1975 to 3.2% in 1980 which would be still high. Debt service coverage is expected to decline marginally' from 1.6 in 1975 to 1.4 in Loan collection rates for industrial term loans are assumed to grow from 63% in 1977 of amounts due to 90% in Projected financial position and results are satisfactory.

18 Objectives of Proposed Loan 49. Apart from partly replenishing BAPINDO's foreign exchange resources, the proposed loan would contribute to the sound development of Indonesian industry by providing finance on suitable terms and further strengthen BAPINDO's organization and management and improve its operations, a process started with the first credit (Credit 310-IND) in In spite of past progress achieved by BAPINDO, much remains to be done before it becomes an efficient and innovative financial intermediary. Within the Indonesian financial system, BAPINDO is the state bank entrusted with the responsibility for assisting the industrial sector and no other institution has, or is likely to have in the foreseeable future, the same overall impact on this sector. The Government and the Bank agree that a strong BAPINDO is highly important for the sound development of Indonesian industry, both public and private. While major improvements will not materialize quickly and expectations of future progress need to be realistic, there is good reason to believe that with the Implementation of the Program of Action agreed with the Bank and other measures presently under consideration by BAPINDO's management, BAPINDO will make substantial further progress during the period of commitment of the proposed loan. As the predominant industrial finance institution in Indonesia, BAPINDO is also by far the most important channel for Bank funds to the industrial sector. Although further progress is needed, BAPINDO has an adequate appraisal capability and is a suitable allocator of Bank funds. By continuing its assistance to BAPINDO, the Bank can play a useful role in the Indonesian economy. 50. As in the case of the previous credits and loans for BAPINDO and PDFCI, the Government has requested that the loan be made to the Government for relending to BAPINDO. The proceeds of the loan would be made available by the Government to BAPINDO under a subsidiary loan agreement, satisfactory to the Bank. The signing of the subsidiary loan agreement will be a condition of loan effectiveness (Section 6.01 (b) of the draft Loan Agreement). BAPINDO would pay interest at the rate of 11% per annum to the Government and would relend the proceeds at 15% per annum. This would allow BAPINDO a spread of four percentage points which is adequate. The Government would assume the foreign exchange risk. The 15% interest rate to be charged by BAPINDO for local currency loans to medium-size companies appears reasonable in light of the rate of 10-11% currently paid by the better established companies (mostly non-indigenous and joint ventures, which include foreign partners) when they obtain foreign exchange loans from the Singapore and Hong Kong markets. 51. The proposed loan would be disbursed against 100% of the foreign exchange cost of imports, 60% of the total expenditures for machinery and equipment procured in Indonesia, 40% of total expenditures for civil works and locally procured vehicles and 100% of the costs of experts. 52. As BAPINDO has recently improved its appraisal work and further progress is expected in this respect under the proposed Program of Action, BAPINDO would be able to assume greater responsibility for appraisal. It is therefore recommended that the free limit of $0.5 million under Loan 1054-IND be increased to $1.0 million, with an aggregate free limit of $10 million.

19 The proposed increase in the free limit is also justified because of the substantial rise in the cost of capital goods in the past two years. Subloans amounting to about 75% of the proposed loan amount are still expected to require prior Bank approval, which would be sufficient for the purpose of effective subproject review and monitoring by the Bank. 53. As usual with Bank loans to DFCs, the proposed loan would have a flexible amortization schedule conforming substantially to the aggregate of the repayment schedule of BAPINDO's subloans which would have maximum maturities of 15 years including grace periods not exceeding 3 years. PART V - LEGAL INSTRUMENTS AND AUTHORITY 54. The draft Loan Agreement between the Republic of Indonesia and the Bank, the draft Project Agreement between the Bank and BAPINDO, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank and the text of a draft Resolution approving the proposed loan are being distributed to the Executive Directors separately. 55. Special conditions of the Project are listed in Section III of Annex III of this Report. Additional conditions of effectiveness of the Loan (Section 6.01 of the draft Loan Agreement) include: i) making satisfactory arrangements to relieve BAPINDO in respect of loans made at the Government's behest, payment of arrears by the state enterprises and partial compensation in respect of raw cotton losses; ii) iii) a review of the operations of the Government collection agency PUPN including issuance of a ministerial decree enabling PUPN to take immediate action on delinquent accounts; and preparation by BAPINDO of a comprehensive plan to improve its arrears and to reduce its administrative costs. 56. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 57. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments Washington, D.C. May 17, 1977

20 I

21 TABLE 3A LAND THOU AREA KMJ~iN8ONESI.A SOCIAL INDICATORS OATA SHEET ANNIff I Page I of 4~ pages TOTAL... IRoA.3*,OST PECENT A SpIE FST1IMATE BA&GLADE$,, Io I"'I GNP PER CAPITA (USS)$* 1. A) O* 1(.~ ~ IIL 'P0 POPULATION AND VITAL STATISTICS POPULATION C4TD.YR, 4ILLION) 9S.4 1) ,6 70.A 507.A POPULATION OENSITY PER SGUARE.KM s.0bq*o( 00* i20*{' PER SQ. KM. AGRICULTURPAL LAND 3A5,O a0i ~ VITAL STATISTTCS ;RUDE BIRTH RATE (/T400, AV) I86*0 o 5,9 42, CRUDE DEATH RATE (/THOU,AVI lb.q INFANT mortality RATE (/THOU) /a.b *. luo0 * eo, 0 LIFE EAPECTANCY AT airth (YR I: GROSS REPRODUCTION RATE?.P I i POPULATION GROWTH RATE CZ) TOTAL' /a 2.P /a U RB8A h. /a ? URBAN POPULATTON CR OF TOTAL) 18a. 9 l?7. 5 / A 1W.? I9.A 27.6 AGE STRUeTURE CPEBCENTi 0 TO 18 YEARS.2.1 Ia 0.0 o 3.9 /b IS TO 6A YEARS S 53.67F SI VEARS AND OVER 2 A S AGE DEPENDENCY RATIO 0 A /a o i. 09 ECONOMiC DEPENDENCY RATIO I /c 1.6 /b ll. FALMILY PLANNING ACCEPTORS (CUMULATIVE, THOUJ) /c /d Is 4 0 USERS CR OF MARRIED WOMEN) EMPLOYMENT7 OTLLORFORCE (THOUSA-n) A /c L.ASOR FORCE IN AGRICULTURE CR) ?.0/c 71.0 b0 5 1 / UNEMPLOYED CR OF LABOR FORCE) ,*e.. 70 INCOME DIS-TRIBUTION % OF PRIVATE TNCOME REC5D SY- HIGHEST 5% OF HOUSEHOLDS /c f I 5.l /c 25." /b '41GHEST 20% OF HOUSEHOLDS "t o2 3/ 7 3 I A LOWEST 2 0 OF HOUSEHOLDS. 6.A72'7 '.9 It.I LOwEST AD% OP HOUSEHOLDS.. 7 3?.I/ f 19, f0 c I3.1 DISTRIBUTION OF LAND 2CNERsHIp S OWNED BY TOP ICR OF 0sNERS AH0~. 34*0 /d B OWNED BY SMALLEST 10R O.'JERS 3.0 /b..., HEALTH AND NUTRITION POPULATION PER PHYSICIAN 413A0.O A o.0o 7h09),n. 0 OAOU. 89 POPULATION PER NURSING PERSON k? 0 O 3 0 :0/ / POP'ULATION PER HOSPITAL RED I b 0 I640.M 10450o F.' Y5 0* PER CAPITA SUPPLY OF CALORIES CR OF RE2u!RE4ENTS) mg.,) R.0 93.n PROTEIN (GRAMS PER DAY) M3.n OF-WHICH ANIMAL: AND PULSE O.0.., DEATH RATE C/THOU) AGES EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL, 59.0n 69) /Z 108P.Y SECONDAPY SCHOOL n YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) c 10.0 VOCATIONAL ENROLLMENT (I OF SECONDARY) 2o.' c Q. /dc, ADULT L-ITERACY RATE f , D * 33, HOUSING PEDSO;NS PER ROOM (URBAN)... 6b, 2.1I OCCUPIED DWELLINGS OITHOUT PIPED WATER (t 7h... ACCESS TO,ELECTRICITY CS OF ALL DWELLINGS) o RURAL DAELLINGS CONNECTED TO ELECTRICITY CR......(I CONSUMPTION RATO RECEIVERS (PER TH~OU POP) aq.0 /. 6.0?l.0 us.o PASSENGER CARS (PER TM0U POP) ,0 1.0 F.( ELErCTRICITY (KWH/YR PER CAP) ,0 205.f NEwSPRINT (KG/YR PER CAP) 0.2 0, SEE NOTES AND nefinitii'ns ON REVERSE

22 SPNNEX I Page 2 of 4 pages NOTES Un1les ohr.brise noted, data for 1960 refer to any year betweeo 1959 and 1961, for 1970 between 1968 and 1970, and for Moot Recent intimate between 1973 and o Inclding West Ilian.. vsthe Philippines has been neiected as an objection country for its, geoagraphicl1 similarity and heca-se of its appareet advancd stage of eccon-ic INDONESIA 1960 Iainlloden Went Irian; /b i962; Ic i951-5b; Id i961-63; le 10 yearn and oner, ability to red or write in either Latin or non-latin chacactern /a ; lb 1971; Ic 1968 to 1970; /d Including midwives; /e Total. hospital bed ieccoopiete. MOS AFf. NT~ ESTIMATE: I i970-75) lb 1976; Ic i971; /d 1968 to 1975; In Mostly -eenplaoyd worbern n.eebog their first jab; /f Intone recipientn; IL including nidw,iven; /h 1972; /i ii yearn and over. ability to read or write in either Latin or non-latin character; Li Rot cumparable with R*A_I. AIiiR E 1970 Ia T'he pspuiation growtb rate is abmorseall law due to the effects of the war of independence and noon populatlion movements acros the herders during that period. Presently, the averuge population growth rate is estimated at 37. per anma; /b Ratio of population under 15 and 65 and over to total labor force; ;c ; Id ; /n Registered, nor all practicing in the country; /f Government hospital establishmets only; _.a Appronimate enrollment as percentage of populatian in 6-10 and age grosups. DIA;I 1970 /a Ratio of popalation under 15 and 65 and over to labor force age 15 and over; lb 1967-is; Ic Inclu~ding midwives;,d P9;LTPP1NES 1970 IaAs percentage of employment; /h list including private vocationol schools. R126, May 5, 2/177 DPEFTNITIONS OP 1OCtAL INDICATORS Land urn It,on ke2t Population pee rnursing person - Popolatian divided by number fi pracicing Total1 Total surfac area caprisig land area and inland waters, male and fe-ule graduate nueses, 'trained' or ctertified' nurses, and 0ur_ie M- a recet etmt f agriculturl1 area saed temporarily or perma- asailisry persanne1 wish training or enperisnon. nently for craps. p-atur-s. -arhet & bitches gardena or to lie fallow. Pp.elation per haspitsi bed - Pe-polatine diolded by camber of hospitl1 beds available in public and primate generl1 and speciali.ed hospital and CliP pne -apita (fil) - GNP per capita ast.tlaaes at ucrest market prices, rehabilitation centees;.. sniades nuesing hones and establishments toe..caluclacd by sane -one-i-s -ethad as World Bank Atlas ( basis);. tusedial and preventive ears. 19i0; 1970 and 1975 data. Per capita aupply of nlalries (% of reasirements) - Ca,pated fete energy squivalent nf net fmad supplies available in cauntry per esp1to per day; aoi-latoe ard vital statistic. avilabla supplies nospri.a dasuti Production., Lmpaetu lest espoers. and eneul1ti-n (mid-near mitileal Au or July first: if sat available, average changes in cinc; net supplies e-ciuds anlsal feed, seeds, quantities used of -w end-yea. stmte 1,160, 1970 and 1975 data. in foad pesnea.ing and leases in distribution; requirements wer estimated by FAO based an physiological needs for mnual1 activity and health c onuid- Pooc,latlon dessity - per sqsare km - mid-year population per square kil=ueter ering envirarsmental temperature, hody weights, age and see distribu,tions of 1100 het.a..t) of total area. pap,ulatise, and allowing 10%7 for caste at househald leve... PoP,,lation d-nit t- pee amuars im of agrie. land - Cosputad as above for Per.. pit. sneely of protein (grams par day) - Protein noncant of p-r capita agiutrl.lad only. met suipply of food par day; net eapply of food is defined as above; reqsirenest m.fr all casetries established by PRSD EICooiic Renearch Seirvies fita1 tutaiacics provide for a miniesan alownne of 60 grms of total protein per day, and Crude birth rat "per thouisand, average - Annual live births per thousad of 20 grams of animal and pulse protein, of which IS grams should be aia nid-yac popsl1ation; tee-year aritlmstic aserges ending in 1960 end 1970, protein; these Standards are lacur than those of 75 grams af total proreic a-d iive-ye..r. averge ending ie 1975 fee oatra...t estimete. and 23 grams nof animal prosaic as an overage for the world, proposed by FAn Crude death rate per thoasan d, average - Asnual deaths per thausand of mid-year in the Third Waeld rood lurvey. papslacion ; ten-year arithmetic avrgsending is 1960 and 1970 and five- Per capita protein supply iron animal and pu1ac - Protein supply of fend year avrge.. ending is 197 fa ne.".st recent estimate. derimed fete ai alend pulses in, grams pee day. cfant mortaity rate (1/hod - An..saI deathn of infants under one year of age Death rate (lthoul ages Ascual deaths per thnusamd in ags group I-S. per thousand I!vebirth-. years, to children in this age groap; suggeneed as an indicat-r of Life epoctascy tc hith lyre) - Average samber of years of life remaining at mialentrition. birth; usually five-year aver. ags ending in 1960, 1970 and 1975 for developing countries. Ed.eation Gross rprcducti.ncrata -oe-agesumhar of ILiv daughters a conan will bear Adiusted enrollment ratio - primary sch-a1 - f,,roliment of all agee as perin her ncema reproductive parlad if She noperiences present age-specific centage of primary school-age population; inclu,dem children aged 6-Il yeers fertility eaten; usualy fiva-yea- averages aending is 1960, 1970 and 1975 huit adjusted for different lengths of Primary edocation; far coutries with icr developing c-ntries. universal education, enrollment may emceed 100% sinesi sea.pupls are below Papulation growth rate (%) - total - Cnpound annal growth rates af msid-year or above the official School age. pspulation far , and Adjusted enrollmnt ratio - secondary school - Campotad as above; secondary Population uronth rate (%I - urban - Conp,,ted like growth rate of total edacetion requires at least four years of approved primary instruction; populatian; different defisitiona of reban arnas nay affect camprarbility of provides general, vocational or teacher training instractioss for pspils dat a a..ng countries. of 12 in 17 years of age; carreapondence courses are generally... ciuded. Urban pspulation (. of total) - Raetio of urban in total population; different Rears of schooling provided Ifirst and Second leveis) - Total years of defirnitions of urban areas may affect conperebility nof data.. mang countries, schooling; at Secondary level, vocatienal instruction may he partially or campletely emcluded. Age ltr-c tre (percent) - Childres (0-14, ye.ar), working-age (15-64 years), vo..atisnal enrallimeot (7. of seondary) - oainlinstitutions inclnde and reilrd (65 yeart and none) as percentages of mid-year popuilation, techn,ical, indukstrial me othee programa which operate independently or as Agc dependency ratio - Ratio of popula.tio.nisder 15 and 65 and over ta these departm-tr of Secondary insitui,tion.. of ages I thro-gh is.. sdulr literacy rate (%) - Litelrae adults (able to read and write) as peeicocmic opedenc rato -Ratio of popu,lation -nd- 1) and 65 and over to centage of total adslt population agnd 1) year Sond over. ti,r lao fares is age grocp of 15-i4 years. fa1il planoino - accoptorm (cuultie,than) - C_mslative number of aceapsars Sousing of birth-cotrol devices andes auspice of national familly planning program Persons pee roam (urban) - Average number of pers ons per roam in occpied since iocnptiom. con~~~~~~~~~vectional dwellings is urban areas; dwellings -nclde non-permanen family planningl --aner (7I of married w--e) - Pnrencatges of married wonen of Steuciteesand unoccupied parts child-bearin,g age, (15-44 yeara) who, use birth-cotrol devicos to all mar ried Occupied dwellings without plead cater (%) - Scoupind canoes iosa dwellings t-nc isi uann aga gr-op. in urban aed rural areas irasinside or outside piped w-tcr facilities E.pl.y-.t f -11~~~~~~~~~~~~~~asprcnag l occupied dwellings. TEmp1loymen cni"iy-tv ar. ild Access-)- to eietricity ft of all dwellingn) - Convetional d-11lgs with Tota laor frce(thosan) - conmicaly ctiv pesons is lug armed electricity in living quarters as percent of total dwellings is -rha. and forces and unemployed but esclnding houcewives, students, etc.; definitionsmea areas. in various countries are mat camparable. eara1 dwellings connected to electricity -toputed C%) us abase for corli Labor forc isngiutr (%) - AgelcuItral labor force (ic farming, forestry, dwellings only. hunting asd fishing) as percenrege of ntetl labor farce. U... played (% of labor farce) - inemploynd are usuially defined as persona who Consumption are able and willing in tabs a Job, oat of a job on a gives day. remaimed car eadia receivers (per th-c pop) - All types of receivers for radio broadcats of a job, and aseeing w-rh foe a specified msinimum periad sot e-eeding one to general public pee thousand of popu,lation; enclodes unlicensed recei..scr weeb; may net be camparable between coc-tri- due to different definitions isnonre and in years she. registration of radio mere was in effect; of uneployed and Source of data, e.g., employnur affice SStaiscics, semplo data far recast years may not be ocaparable inse moat... scri- abolished survys, conpuisory unemployment insu'race. licens ing. Passe:nger c1ars p'er, thou pop) - Pa..nesger cars conprise motor tell seating Intone distribstios - Percentage of pricate intone (boib is cash and bind) les hs eigh persons.; ecludes ambulances hearses and military received by richest 57., richest 20%. poorest 20%, and pooresc 40%. of hous- vehicles. holds. Electricity (kwh /Yr pee cap) - Annual conoseaptian of industrial, c-e-1see1a DiaLlib.ti- of ini~~~~~~~~~~~~~pblic and private electricity is kilowatt hoors per capita, generally liutriuticeofilad owership - Percentages of land owed by wealthies 0 based nn production data,,ith-ut allowace for losses. in grids b,,t allowand p..o..at 107, of land one,nrs, ing foe imparts and -eparte of electricity. Health and N.rrition ~~~~~~~~~~~Newsprint' Poesl.ib and Nutriiona Popaatin pr pysiian- Populai.Ion divided by number of practicing physicians qualified frca a medical schol at university leoe. (b/y ee cr - Per capita annual cnupinin bilogram esim.ated iron domestit prod-ction pi.s net imports of newsprint.

23 ANNEY 1 Pagp 3 of 4 nages INDONESIA ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1975 ANNUAL RATE OF GROWrH (%, constant prices) US$ Mil % GNP at Market Prices 28, Gross Domestic Investment 6, Gross National Saving 5, Current Account Balance -1, Exports of Goods, NFS 4, Imports of Goods, NFS 5, OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 Value Added -/ Labor Force2/ V. A. Per Worker US$ Mil M Nil _U$ Agriculture 4, Industry 1, Services 3, Unallocated Total/Average 9, loo.o GOVERNMENT FINANCE Central Government (Rp Bil.) % of GDP 1976/77* 1975/ Current Receipts 2,904 2, Current Expenditure 1,613 1, Current Surplus 1, Capital Expenditures 2,070 1, External Assistance * Provisional estimates. MONEY, CREDIT and PRICES (Billion Rp outstanding end period) Money and Quasi Money ,452 1,995 2,645 Bank credit to Public Sector ,637 1,752 Bank Credit to Private Sector ,163 1,353 1,690 (Percentages or Index Numbers) Money and Quasi Money as % of GDP General Price Index (Sept = 100) ,028 1,370 1,640 1,873 Annual percentage changes ins General Price Index Bank credit to Public Sector ** Bank credit to Private Sector * NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 1/ Conversion at an exchange rate of Rp 390 = US$1. 2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. not available not applicable East Asia & Pacific Programs April 30, 1977

24 ANNEX I Pase 4 of 4 nages TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE ) US $ Mil % (Millions US$) Provisional Exports: Oil (net) Oil (net) Rubber Non oil Timber Imports Palm oil Resource gap Tin Factor service: Coffee Interest Investment income All other commodities Balance on Current Account - 79 * Total Direct Foreign Investment EXTERNAL DEBT. DECEMBER Net MLT Borrowing Disbursements US $ mil Amortization Subtotal Public Debt, incl. guaranteed 10,140 Capital Grants Non-Guaranteed Private Debt Other Capital (net) Total outstanding & Disbursed Other items n.e.i _375il 1/ Increase in Reserves (+) DEBT SERVICE RATIO for Gross Reserves (end year) Net Reserves (end year) Public Debt, incl. guaranteed 13.1 Non-Guaranteed Private Debt Fuel and Related Materials Total outstanding & Disbursed Imports of which: Petroleum Exports bf which: Petroleum IBRD/IDA LENDING,{arch 31, 1977Y Million US$ RATE OF EXCHANGE IBRD IDA I~~~Aul 1971 Since August 1971 ~~~~~~~~Outstanding & Disbursed Thr ul Since. August 1971 Undisbursed US 1.00 R 37 US $ l- = Rp 415 Outstanding incl. Undisbursed 1, Rp 1000 US$2.67 Rp 1000 = US$2.41 1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services, with oil exports on a net basis (i.e. excluding factor payments and imports of the oil companies). not available not applicable East Asia & Pacific Programs April 30, 1977

25 ANNEX II Page 1 THE STATUS OF BANK GROUP OPERATIONS IN INDONESIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1977) Loan/ US$ Million Credit Fiscal Amounts (less cancellations) Number Year Purpose Bank IDA Undisbursed Ten credits closed Agricultural Estates Second Agricultural Estates Second Irrigation Rehabilitation Third Irrigation Rehabilitation Seeds Tea Second Highway Second Education Fourth Irrigation Rehabilitation Population Development Finance Co. (BAPINDO I) Inter-Island Fleet Rehabilitation Fourth Agricultural Estates Second Electricity Distribution Beef Cattle Development North Sumatera Smallholder Development Third Education Third Highway West Java Thermal Power Smallholder and Private Estate Tea Sugar Industry Rehabilitation Pulo Gadung Industrial Estate Private Development Finance Co. of Indonesia (PDFCI) Fourth Technical Assistance Bali Tourism Fisheries Credit Jatiluhur Irrigation Extension

26 ANNEX II Page 2 Loan/ (US$ Million) Credit Fiscal Amounts (less cancellations) Number Year Purpose Bank IDA Undisbursed Railway Jakarta Urban Development Five Cities Water Supply Development Finance Co. (BAPINDO II) Second Fertilizer Expansion Sixth Irrigation Fourth Power Fertilizer Distribution Agricultural Research and Extension National Resource Survey and Mapping Fourth Highway Fourth Education Second Shipping Third Fertilizer Expansion Fifth Power National Food Crops Extension Seventh Irrigation Transmigration & Rural Development Second Urban Development Tanjung Priok Port Second Private Development Finance Co. of Indonesia (PDFCI-II) /a 1977 Sixth Power Nutrition Development Total 1, ,039.4 of which has been repaid Total now outstanding 1, Amount sold 0.1 of which has been repaid Total now held by Bank & IDA /b 1, Total undisbursed ,039.4 /a Not yet effective. /b Prior to exchange adjustment.

27 ANNEX II Page 3 B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1977) Fiscal US$ Million Year Loan Equity Total 1971 P. T. Semen Cibinong Cement P. T. Unitex Textiles P. T. Primatexco Indonesia Textiles P. T. Kabel Indonesia Cable P. T. Daralon Textile Manuf. Corp. Textiles P. T. Jakarta Int. Hotel Tourism P. T. Semen Cibinong Cement P. T. Primatexco Indonesia Textiles P. T. Monsanto Pan Electronics P. T. PDFCI Devl. Fin. Co P. T. Kamaltex Textile P. T. Semen Cibinong Cement P. T. Semen Cibinong Cement P. T. Daralon Textile Manuf. Corp. Textiles Total Less: sold or repaid and cancelled Total held by IFC Undisbursed (including participants portion)

28 ANNEX II Page 4 C. PROJECTS IN EXECUTION /1 Cr. No. 155 Agricultural Estates: US$16 Million Credit of June 20, 1969; Effective Date: December 10, 1969; Closing Date: December 31, 1976 The credit is fully committed. Cr. No. 194 Second Agricultural Estates: US$17 Million Credit of June 15, 1970; Effective Date: February 9, 1971; Closing Date: June 30, 1977 Project progress is good in the oil palm group which has surpassed the appraisal report target for new planting by 100%. Progress in the rubber group has been unsatisfactory with only 50% of the appraisal report target for new planting achieved. Planting costs are excessive and investment planning weak. The project has suffered from management deficiencies and shortage of funds for investment. The Minister of Agriculture has recently made the necessary changes in management of the rubber group and the Government is expected to review its financial policies, particularly with regard to dividends. Cr. No. 195 Second Irrigation Rehabilitation: US$18.5 Million Credit of June 15, 1970; Effective Date: December 31, 1970; Closing Date: November 30, Progress has been delayed first by initial difficulties in equipment procurement and civil works execution, and later, by rising construction costs. Project completion will therefore be about 2-1/2 years behind schedule. The rehabilitated and new facilities are technically sound and hydraulically adequate. The quality of maintenance of completed works is improving with the availability of operation and maintenance funds substantially higher than previous levels. The credit is about 96% disbursed and the remaining funds will finance all outstanding civil works. The estimated project cost has more than doubled since appraisal due to high inflation rates and increases in contract quantities, but the estimated economic rate of return remains satisfactory because rice prices and yields have been higher than those projected during appraisal. /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

29 ANNEX II Page 5 Cr. No. 220 Third Irrigation Rehabilitation: US$14.5 Million Credit of November 6, 1970; Effective Date: May 28, 1971; Closing Date: December 31, Overall project completion is expected by October 1977, about two years behind schedule. The problems which caused this delay - difficulties in preparation of contract documents, late financial allocations, heavy rains in the 1973 construction season and, more recently high inflation rates and consequent civil works cost overruns - have been mainly overcome, but time lost cannot be regained. The quality of maintenance of completed works is improving with the availability of operation and maintenance funds substantially higher than previous levels. The estimated project cost is about twice the appraisal estimate, but rice prices and yields substantially higher than those projected at appraisal enable the project to achieve an estimated economic rate of return of over 20%. Cr. No. 246 Seeds: US$7.5 Million Credit of May 19, 1971; Effective Date: December 7, 1971; Closing Date: September 30, Construction of the irrigation infrastructure and the seeds processing plant has been completed satisfactorily. Land development at Sukamandi will be limited to about 1,600 ha (65% of appraisal estimates) by the Closing Date to enable the project authorities to consolidate production and other operations. Significant results for 1976/77 are expected to be: (a) area under production - 1,800 ha (58% of the appraisal estimate), (b) yields of rice seed tons per ha (87%), and (c) production of certified seed - 4,900 tons (42%). Due mainly to the delay in the development of irrigation infrastructure, and partly to overly optimistic assumptions during appraisal, the targets for per ha yield and certified seed production will not be achieved by September Due to cost escalation and implementation difficulties, only one seed multiplication district, out of the three planned at appraisal, has been developed. Based on present levels of production the National Seeds Corporation (NSC) is not commercially viable and will need continued financial support from the Government. The future of the project and of NSC depend on Government policy for the further development of the seed industry. Cr. No. 259 Tea: US$15 Million Credit of June 24, 1971; Effective Date: September 17, 1971; Closing Date: June 30, Agricultural achievements to date have far exceeded appraisal expectations necessitating construction and rehabilitation of three additional factories. Project completion, estimated for December 1977, can probably be advanced. Rising costs are creating pressure on available funds and the main challenge for the two PTPs will be to reduce working capital requirements, as well as overhead and indirect costs, and improve labor productivity.

30 ANNEX II Page 6 Cr. No. 260 Second Highway: US$34 Million Credit of June 24, 1971; Effective Date: August 10, 1971; Closing Date: December Quality of work is satisfactory and cost overruns have been relatively small despite sharp price increases due to efforts to reduce construction quantities, and to cost savings for consulting services. Construction work is completed; however, postponement of the Closing Date to December 31, 1978 has been agreed to permit payments for the completion of detailed engineering of the Padang-Medan Road, the initiation of which was delayed to reconsider road design standards in relation to those recently developed for the highway betterment program and to take into account IDA's recommendations regarding standards for urban portions of the road. Cr. No. 288 Second Education: US$6.3 Million Credit of March 9, 1972; Effective Date: June 7, 1972;' Closing Date: March 30, The project is about 12 months behind schedule because of late appointment of consultant architects and lack of funds to meet cost overruns. The main causes of delay have been overcome and significant progress is being made. All civil works are expected to be completed by September Furniture and equipment are being delivered. The expert services are virtually completed. Progress of the fellowship program and teacher training is satisfactory. The Government has made budgetary provisions to meet the cost overruns. Disbursements have improved. Delayed implementation required postponement of the Closing Date by 15 months to March 30, Cr. No. 289 Fourth Irrigation Rehabilitation: US$12.5 Million Credit of March 9, 1972; Effective Date: May 5, 1972; Closing Date: June 30, The construction program has escalated in cost by 190% over the appraisal estimate due to an increase in the magnitude of the works and price escalation due to unexpected inflation. The bulk of the remaining work will be accomplished largely witlh Government funds. Completion of the project is expected by September The Government has therefore, requested that the Closing Date be postponed to December 31, Feasibility studies included in the project have been completed and groundwater investigations are nearing completion. Cr. No. 300 Population: US$13.2 Million Credit of April 20, 1972; Effective Date: November 2, 1972; Closing Date: June 30, 1978 The national family planning program, of which the project is an integral part, is expanding in terms of the numbers of new acceptors recruited annually and now covers about 15% of all married women in the reproductive age group. Implementation of the civil works component is now on schedule; because of the shift in strategy from static to mobile services, and because of a large scale Government--financed program to construct and rehabilitate

31 ANNEX II Page 7 Maternal and Child Health/Family Planning centers, the Government has requested a reduction in the number of centers to be constructed under the project, to which IDA and the United Nations Fund for Population Activities (as partners in jointly financing the project) have agreed. Cr. No. 310 Development Finance Co. (BAPINDO I): US$10 Million Credit of June 7, 1972; Effective Date: August 10, 1972; Closing Date: August 31, Prior to the original Closing Date which was December 31, 1976, about $700,000 remained undisbursed and the Closing Date has been postponed.to August 31, 1977 to allow time for BAPINDO to submit documents for reimbursement. Cr. No. 318 Inter-Island Fleet Rehabilitation: US$8.5 Million Credit of June 28, 1972; Effective Date: October 19, 1972; Closing Date: September 30, At the request of the Government the Closing Date has been postponed to September 30, 1978 in order to provide for several new projects of ship rehabilitation. It is expected that the Credit will be fully disbursed by the new Closing Date but that, due to sharply increased costs, just over half the tonnage of shipping expected at appraisal will have been rehabilitated. Cr. No. 319 Fourth Agricultural Estates: US$11 Million Credit of June 28, 1972; Effective Date: January 30, 1973; Closing Date: June 30, Physical progress of the project which is being executed by PNP X, a Government-owned estate group, continues to be satisfactory, with plantings of rubber and oil palm ahead of appraisal estimates and in excellent condition. Coffee is a promising crop, and cloves planted in 1974 are growing well. A hybrid coconut seed garden has been established, the first in Indonesia. PNP X management needs to pay more attention to cost control and financial planning. Substantial cost increases have taken place largely due to an expansion in the size of the program compared with appraisal estimates. The Government has agreed to provide part of the shortfall in project funding and discussions with the Government are proceeding on a proposed increase in the budgetary allocation. PNP X is participating in the execution of smallholder development under the Transmigration and Rural Development Project (Loan 1318-IND) and the proposed Nucleus Estates and Smallholders Project. Cr. No. 334 Second Electricity Distribution: US$40 Million Credit of September 29, 1972; Effective Date: March 12, 1973; Closing Date: December 31, The Jakarta distribution program financed from Credits 165-IND and 334-IND (together $55 million) encountered implementation delays due to procurement problems and cumbersome management procedures. As a result the project is

32 ANNEX II Page 8 two years behind the original schedule. These difficulties have been resolved and recent progress is encouraging and no further delays are expected. The Closing Date has been postponed from December 31, 1976 to December 31, Cr. No. 355 Beef Cattle Development: US$3.6 Million Credit of January 31, 1973; Effective Date: May 30, 1973; Closing Date: March 31, Several problems have seriously delayed project implementation. Government's budget allocation has been insufficient, and financial management and coordination have been weak. The last supervision mission undertook a thorough project review and its recommendations, which include major changes in project scope and objectives, are being prepared for consideration by the Executive Directors. Cr. No. 358 North Sumatera Smallholder Development: US$5 million Credit of February 14, 1973; Effective Date: August 13, 1973; Closing Date: December 31, 1981 The project's goals of oil palm and rubber plantings by smallholder participants should be completed by the end of 1977 at the present rate of progress, which is now ahead of schedule. Costs of the project have increased from $10 million estimated at appraisal to about $26 million by completion date. However, higher than anticipated output of and prices for rubber and palm oil and changes in project development techniques have more than compensated the cost increases, and the project's return to the economy is likely to be higher than anticipated at appraisal. No effective mechanism for the credit-assisted portion of the project has yet been developed. Cr. No. 387 Third Education: US$13.5 Million Credit of June 1, 1973; Effective Date: August 29, 1973; Closing Date: December 31, 1981 The project finances the production and distribution of 138 million primary school textbooks, and related in-service training for 350,000 primary school teachers. Distribution of the first 31 million textbooks has been completed and they are beginning to be used in schools this year. Production of 49 million textbooks scheduled for 1976 is well under way. Book delivery has been improved and teaching equipment has been procured and delivered. Teacher training continues to proceed on schedule. Project management has been strengthened by addition of Indonesian staff to a reorganized project unit, and by recruitment of specialists under a technical assistance contract signed with UNESCO. Cr. No. 388 Third Highway: US$14 Million Credit of June 1, 1973; Effective Date: June 25, 1973; Closing Date: June 30, ln the Construction work on the two North Sulawesi road sections included roetwsasere4giygsg3xfger1x A i2p 18 ti#p6fnekss fie gsagjqg

33 ANNEX II Page 9 and extra amounts of unforeseen work. The project is 50% complete and the Closing Date will probably have to be postponed by one year. Project costs are likely to exceed original estimates by 80% mainly due to sharply escalated prices. As a consequence, the disbursement rate for construction is now in the process of being lowered. The training program has been successfully completed. Feasibility studies and detailed engineering for the road betterment program are nearing satisfactory completion. Cr. No. 399 West Java Thermal Power: US$46 Million Credit of June 22, 1973; Effective Date: August 28, 1973; Closing Date: June 30, Bids received for the first two 100 MW units at Muara Karang were about 65% higher than estimated at the time of appraisal. This, together with construction cost increases, has resulted in an increase in the total project cost of more than 100%. Government will provide the additional funds required. PLN has satisfactorily met the initial targets in its financial recovery plan provided for under the terms of the Credit Agreement. Cr. No. 400 Smallholder and Private Estate Tea: US$7.8 million Credit of June 22, 1973; Effective Date: November 30, 1973; Closing Date: March 31, Fewer than anticipated credit applications have necessitated scaling down project targets from 10,000 ha to about 6,000 ha for smallholder tea and from 3,500 ha to 2,300 ha for estates tea. The demand by farmers for technical assistance has been encouraging. Over 3,000 farmers have been instructed in tea cultivation at village level courses and at the Project Management Unit (PMU) training center. The project spin-off has been excellent; about 2,000 ha of tea were replanted or rehabilitated using funds outside the credit program but still under the influence of the PMU. A marketing study indicates that tea consumption in Indonesia increases by 5% yearly and all of the tea produced by the project will be consumed domestically. Tea prices at farm level are well above appraisal estimates which is part of the reason why farmers have been reluctant to apply for long-term credit. Cr. No. 405 Sugar Industry Rehabilitation: US$50 Million Credit of June 26, 1973; Effective Date: April 22, 1974; Closing Date: June 30, The scope of the project has been reduced by the deletion of six minor rehabilitations from the project description due to cost overruns. The revised project consists of the major rehabilitation of two factories and the construction of a new factory together with associated agricultural development, sugar research and technical assistance components. Due to late project start-up and delays in arranging consultancy services, project completion will be delayed by one year. Factory construction and rehabilitation is progressing satisfactorily.

34 ANNEX II Page 10 Cr. No. 428 Pulo Gadung Industrial Estate: US$16.5 Million Credit of September 14, 1973; Effective Date: November 13, 1973; Closing Date: December 31, The estate is developing satisfactorily. Of 430 ha earmarked for the project, about 270 ha had been acquired by September 1976, and 128 ha had been developed for occupation. Seventy-four factories are located on the estate of which 37 are operating and 37 are in various stages of construction or commission. Factory employment is 16,275 and an estimated 1,400 are employed on average in both factory construction and land development. Overall, operations are profitable. Cr. No. 436 Private Development Finance Company of Indonesia (PDFCI): US$10 Million Credit of November 2, 1973; Effective Date: March 6, 1974; Closing Date: December 31, Despite a long start-up period and difficulties in recruiting qualified staff, the project has progressed satisfactorily. The Credit is almost fully committed. Cr. No. 451 Fourth Technical Assistance: US$5 Million Credit of January 2, 1974; Effective Date: February 15, 1974; Closing Date: December 31, Progress under the project is satisfactory. Cr. No. 479 Bali Tourism: US$16.0 Million Credit of June 14, 1974; Effective Date: December 4, 1974; Closing Date: August 31, Project implementation has improved after initial difficulties. The evaluations of project tenders have been approved by IDA. Infrastructure construction started in July 1976 and completion is scheduled for October Budgetary allocations as requested by the Bali Tourism Development Corporation for FY76/77 are satisfactory. Preliminary discussions with three potential hotel investors are underway. Promotional efforts to attract additional investors and tourists have been intensified, and additional flights from Sydney and Hong Kong to Bali have been approved by the Minister of Communications and Tourism. Cr. No. 480 Fisheries Credit: US$6.5 Million Credit of June 14, 1974; Effective Date: January 8, 1975; Closing Date: June 30, After some initial delays, the project as a whole has generally been progressing satisfactorily. Construction of shore facilities at Ambon is

35 ANNEX II Page 11 nearing completion. Boat construction is underway and the contract for equipment has been awarded. The quality of lending for fishpond development needs to be improved although lending for this component in terms of the number of subborrowers and area covered had met targets envisaged during appraisal. Bidding for ice plant construction should start soon. The justification for the trawler subproject is being reviewed by the Government. Cr. No. 514 Jatiluhur Irrigation Extension: US$30 Million Credit of October 3, 1974; Effective Date: January 10, 1975; Closing Date: December 31, Initial organizational difficulties and a delay in awarding the first construction contract caused a delay of about 18 months in the project schedule. The first construction contract was awarded in February 1977, the next four are scheduled for November 1977, and the last two for May From a revision of bid prices for the first contract, the total cost of civil works is now estimated to be about 40% higher than at the time of the last review of project progress. The total project cost has increased about 130% since appraisal in May Loan No Railway: US$48.0 Million Loan of June 14, 1974; Effective Date: August 16, 1974; Closing Date: December 31, Procurement of material and equipment, which had been slow due to poor organization and inadequate budget allocation, has now improved. The bulk of the contracts have been signed. Passenger traffic in 1975 was slightly lower than in 1974, but still higher than forecast; freight traffic has continued to decline due mainly to poor maintenance and inadequate motive power. Efforts are being made to strengthen the effectiveness of the technical assistance program and to more closely monitor project developments. Although tariffs were raised in May 1975, increasing passenger revenues by about 25% and freight revenues by about 10%, the operating ratio is likely to deteriorate further, as operating costs have continued to rise at an even faster rate. Loan No Jakarta Urban Development: US$25 Million Loan of September 27, 1974; Effective Date: January 15, 1975; Closing Date: December 31, The kampung improvement part of the project is substantially complete. Some 2,080 ha have been upgraded as compared with the original plan of 1,980 ha. The sites and services component is about 15 months behind schedule. This is primarily due to land acquisition problems encountered in the early stages of the project. Project costs are expected to be about 7% above the appraisal estimate. The allocation of plots and core houses is expected to begin in July. Some problems have arisen with regard to the procedures to be utilized in allocating the plots, and these are being reviewed currently by the Government.