INTERNATIONAL DEVELOPMENT ASSOCIATION

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY Report RESTRICTED No. P-846 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF INDONESIA FOR A TELECOMMUNICATIONS EXPANSION PROJECT June 24, 1970

2 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RBCOI3f0EDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPlMENT CREDIT TO THE REPUBLIC OF INDONESIA FOR A TELECOMMUNICATIONS EXPANSION PROJECT 1. I submit the following report and recommendation on a proposed credit to the Republic of Indonesia in an amount in various currencies equivalent to US$12.8 million for a telecommunications expansion project. PART I - HISTORICAL 2. In September, 1969, the Government of Indonesia asked the Association to assist in the financing of a telecommunications development program to improve and extend the existing telecommunications facilities. In November/December 1969 an appraisal mission reviewed the program in the field and identified a project suitable for Association financing. 3. Negotiations were held in Washington from May 5 through May 19, Representing the Government were: Brig. General Soehardjono, Director General of Post and Telecommunications, Department of Communications; Mr. Atmono Surjo, Minister Counselor, Embassy of Indonesia; Mr. Suhono Sumobaskoro, Head, Planning Division, Department of Communications/ National Planning Agency (BAPPENAS); Mr. Bahdar Djohan, Chief, Planning Division, Directorate General of Posts and Telecommunications, Department of Communications; and Mr. Rasjidi, Director of State Investment, Department of Finance. 4. If approved, this would be the Association's first credit to the Telecommunications sector, and together with a proposed credit for a Fisheries project to be considered today, would bring the number of IDA credits to Indonesia to ten. The following is a summary of the status of earlier credits. Disbursements are shown for credits effective as of May 31, 1970: Credit Amount ($ mlllions) No. Year Borrower Purpose IDA Undisbursed Indonesia Irrigation Rehabilitation Indonesia Technical Assistance Indonesia Highway Rehabilitation Indonesia Estates Rehabilitation Indonesia Electricity Distribution Indonesia PUSRI Fertilizer Plant Expansion 1/ Indonesia Second Agricultural Estates Project 1/ Indonesia Second Irrigation Rehab. Project 1/ / Not yet effective $131.5 $63.4

3 The status of disbursements of the various credits has been described in my report and recommendation on the PUSRI Fertilizer Project, dated April 30, Since that date, disbursements under Credit No. 155 have begun, and Credit No. 165 has become effective on June 1; the situation is othernwise the same. PAR?T II - DESCRIPTION OF THE PROPOSED CREDIT 6. Borrower: Republic of Indonesia Beneficiary: Purpose: Amount: Amortization: Service Charge: Relending Terms: Perusahaan Umum Telekomunikasi (PM-U-ITEL) Improvement and expansion of telecommunications facilities and reorganization of PEPLUPiTEL. Various currencies equivalent to USql2.8 million In 50 years, including a 10-year period of grace, through semi-annual installments of 1/2 of 1 from December 1, 1980 through June 1, 1990 and 1-1/2O from Decermber 1, 1990 to June 1, /1h of 1,J per annum The Government will relend to PERUIWTEL the proceeds of the credit at 12% interest per annum for 20 years including a grace period of 4 years. This relending vill be expressed in U.S. dollars. PER.T II - TINE PROJECT 7. A detailed description of the project is given in the attached appraisal report, entitled "Appraisal of the Telecommunications Expansion Project of the Perusahaan Umum Telekomunikasi (PUTT4iTEL) - Indonesia" (PU-39a) dated June 1, PERUI4EL, a state-tmed corporation, faces a number of problems. The present long distance network is not reliable, is of poor transmission quality,.nd falls far short of meeting the demand for telecommunications services. Operating costs are high; over 50 percent of the exchanges are manually operated and maintenance of equipment, whiclh due to a long period

4 of neglect in telecommunications development has become obsolete, is very costly. Lacking an effective accounting system, little information is available to management for informed decision making. Billings and collections are erratic and incomplete. 9. With the help of a technical mission provided by the Australian Government, PERIMTEL has drat'm up a five-year ( ) development program. The main elements in the program are an increase of about 65,000 telephones from 197,000 telephones now in use, extension of the long distance network by installation of microwave links in Java and Sumatra, a troposcatter link betwxeen Java and Kalimantan, subscriber trunk dialing (STD) switching equipment, extension of the telex network and construction of operating, administrative and training center buildings. Its estimated cost is equivalent to $81.5 million, including foreign exchange expenditures of $9 9.4 million. Financing is being sought from various sources. 10. The project proposed for financing by the Association forms part of the program, but does not depend on the implementation of the full program to be viable. The project consists of (i) a trans-sumatra microwave system linked to that of Java. (ii) a tropospheric scatter system between Surabaja in East Java and Bandjarmasin in Kalimantan; (iii) extensions to the telex networks; (iv) cables to meet part of the immediate requirements for extension oi the telephone distribution networks) (v) STD switching, terminal and operator dialing equipment) and (vi) management consulting services. 11. The Island of Sumatra is rich in natural resoarces and contributes 60 percent of Indonesia' total exports. Kalimantan also contributes to exports and has a vast potential for development. Reliable long distance coimmunications through and within Sumatra and f:rom Nalirmiantan to DjakaIta in Java - the latter the administrative and business center of Indonesia - are of vital im=ortance to the oconomy of the country. 12. The consultants (whose terms of reference are annexed to thea-ppraisal report) wiould examine PZlU1T2EL' s organization and operations, and make recommendations in a number of areas, including 2IURTfl3Ts financial position, tariff levels and structures and accdunting procecures. In addition, three e-perts provided by the United 1aingdom under the Colombo Plan would participate in the consultants' work and wjould help in the implementation of their recmmendations for about two years after the consultants' departure. 13. The total cost of the project is estimated at US$22.6 million equivalent, including foreign exchange expenditures of USMLh.l million of which the Association credit-would provide US$12.8-million. Tile Government of Australia has agreed to provide US1,.2 millionto finance the Import of STD suitching and operator dialing equipment, and the balance of U3'O.l iillion for survey and engineering w7ork is being provided oy Japan. 3ridence that this supplementary finance will be made available has been made a condition of effectiveness of the proposed credit.

5 14. PER=lfTEL's financial viability is safeguarded by a rate covenant and by a debt limitation covenant in the Development Credit Agreement. Under the rate covenant PERUMTEL wjould undertake to charge tariffs calculated to cover operating expenses and debt service and a reasonable portion of capital expenditure and, after 1972, to earn a minimum rate of return of 10 percent on its net fixed assets. PEREUVTEL would not incur any debt other than tlhat incurred to finance the project unless total debt service would be covered 1.3 times by net revenues earned. 15. Although, as stated in paragraph 8 above, PERUNTI's service faces a number of problems, some progress in the provision of better facilities is being made and a microwave arterial system is being installed, financed through bilateral aid, linking the principal cities of Java ijith each other and wiith Den Pasar in Bali. The microwiave and troposcatter systems proposed under the project would extend the availability of good long distance communication to the principal cities and towns of Sumatra and to Bandjarmasin in Kalimantan. The installation of local distribution cables wiould remove local congestion and enable 5,000 new telephones to be connected in Djakarta. The installation of a 100 line telex exchange at IIedan and teleprinters would permit business and market information to be speedily transmitted and exchanged in print. The incremental rate of return on the investment in the project is calculated to be 16.8 percent per annum. PART IV - LEGAL 111STRUMIETS AND AUTHORITY 16. The draft Development Credit Agreement between the Republic of Indonesia and the Association, as wjell as the recommendation of the Conmittee provided for in Article V, Section l(d) or the Articles of Agreement of the Association and the text of a Resolution approving the proposed Credit, are being distributed to the Executive Directors separately. 17. In addition to the standard requirements of the General Conditions, the following conditions precedent to the effectiveness of the Development Credit Agreement have been agreed upon: (i) the execution of the Subsidiary Loan Agreement between the Republic of Indonesia and PERU1TEL; (ii) the retention of management consultants by PERUIE'; (iii) the establishment of day rates on the manual long distance and STJservices equal to the prevailing "urgent" rate; and (iv) tvaeconclusion ofisatisfactory arrangements for financing the foreign exchange requirements of the project other than those covered by the proposed credit.

6 PEART V - THE ECONOIf 18. The most recent comprehensive report on the economic position and prospects of Indonesia (DAP-lOa) was issued on November 14, 1969, and has since been supplemented by a special report, "Current Investment Activity in Indonesia" (EAP-14a dated ilarch 27, 1970) which more specifically discusses the 1969/70 development program, the role of project aid and the inflow of private foreign investment. Basic data on the economy are given in the Annex. 19. The recent economic performance of Indonesia has been satisfactory. The Government has succeeded in reducing markedly the rate of inflation and, in the new conditions of relative stability, has made a substantial start on programs for rehabilitation and development. Basic exchange reforms, which included the unification of the exchange rate except for a special rate for program aid, iwere introduced in April Proposals by the "Paris Club" of W4estern creditors and Japan for the settlement of Indonesia's pre-1967 debt amounting to some $2.1 billion, were also accepted in April. The 1970/71 development program will be larger than last year's, and more of it will be financed from Indonesia's own resources. The effort to expand the hitherto very low! levels of public saving and foreign and private domestic investment has been impressive, and an increase of 36 percent in domestic revenues is planned, to follow a similar expansion in 1969/70. At the meeting of the Inter-Governmental Group on Indonesia on April 20-21, conmitments of aid for 1970/71 approached the $600 million requested by the Government of Indonesia and endorsed by the IGGI at its previous meeting. 20. Nevertheless, the process of repairing the damage to the economy and its institutions during the Sukarno regime is still in its early stages. The effects on the infrastructure were particularly severe, and substantial investments are required to restore and expand basic public sector services. Government organizations and institutions also require much technical and managerial assistance to reach more satisfactory levels of efficiency. Progress in the economy as a wjhole will depend in part on the rate at which the infrastructure can be rehabilitated and improved. 21. If sound economic policies are maintained, administrative capacity growns, and the necessary amount of financial resources, both foreign and domestic, can be obtained, the rate of growth of about 5 percent per annum implicit in the Five-Year Plan ( ) appears feasible. The Plan gives highest priority to agriculture, both for domestic food production and export crops. The main target is self-sufficiency in rice. Total rice imports approached 900,000 tons in 1969/70, about 45 percent under commercial arrangements and the rest in aid. Balance-of-payments constraints on the development program are likely to remain serious. Indonesia's net foreign exchange position is still negative, and increased overseas earnings will be required in future to service old and new debt. In these circumstances there is a strong case for aid on concessional terms.

7 - 6 - PLRT VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 22. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 23. I recommend that the Executive Directors approve the proposed Development Credit. WIashington, D.C. June 24, 1970 Robert S. McNamara President

8 BASIC DATA Area 735,381 square miles Land use as percentage of total area: Estate agriculture Smallholder agriculture Food crops (9-30) Cash crops (3.80) Population (1969) million Density per square mile 161 Rate of growth ( ) 2.6% p.a. Density of main islands (per square mile) Java and Madura 1,495 Sulawesi 119 Sumatra (and adjacent islands) 106 Kalimantan 24 Other islands 4o Political Status: Unitary Republic, Member of the United Nations and the Association of South-East Asian Nations (ASEAN) Gross Domestic Product (1969) Rp. 3,100 billion Per Capita GDP $ 80 Money and Credit 1/ % Change December 1968 (Rp. billion) December (Rp. billion) December December 1969 Total Money Supply Time Deposits 12.0 h Total Bank Credit2/ Price Index (September 1966 = 100) / Provisional. 2/ Excludes credit to Government and for rice procurement.

9 - 2 - Public Sector Operations (Rp. billion) 1969/ / Revised Preliminary Actual Estimates Estimates Government Receipts Revenue l Other Government Expenditure Routine Development Public Savings Ecternal Assistance to the Public Sector a. Counterpart funds b. Project aid _ External Public Debt ($ million) Outstanding principal of guaranteed debt at December 31, 1969 after rescheduling through ,750 Total debt service in 1969 on guaranteed debt (after rescheduling through 1969) 59.6 Debt service Ratio (1969) (after rescheduling) 8.3 percent Balance of Payments ($ million) % Actual Prov. Actual Change Exports f.o.b. (oil net) Imports c.i.f Services (net) Trade Balance Commodity Concentration of Exports (1968) Rubber Oil (net) 27.0 percent 12.1 percent Foreign Exchange Reserves ($ million) (Central Bank only) December 1968 December 1969 Gross Net

10 Exchange Rates (April 30, 1970) General Rate Program Aid Rate 1 Rtapiah $.0026 $ Dollar Rp. 378 Rp. 326