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MENTERI NEGARA PERENCANAAN PEMBANGUNAN NASIONAL/KEPALA BAPPENAS
Statement of the State Minister for National Development Planning/
Chairman of National Planning Agency
at the Consultative Group Meeting on Indonesia
Jakarta, 7-8 November 2001
Effective Use of Foreign Aid
Excellencies, Ladies and Gentlemen:
When I was giv en the task to prepare a speech with the topic: Effectiv e Use of Foreign Aid I was immediately faced
with a dilemma. On the one hand, it is my duty as a gov ernment official to present to y ou our policies and progress
on the effectiv e use of foreign aid. On the other hand, I feel totally embarrassed to be confronted with the task to
justify an activ ity , which essentially amounts to begging for debt on behalf of our nation. This feeling is made ev en
worse by the fact that our total stock of debt has exceeded all limitations of sustainability and prudence, as well as the
fact that I can not promise y ou that some of this new debt will not be corrupted again as it has been in the past.
I decided to stand in front of y ou today because I know that without new lending from friendly creditor nations, our
people may hav e to endure ev er worsening hardships and pov erty .
As we all know, this forum will end with pledges from CGI members. Since the formation of IGGI, the largest
component of such pledges hav e been in the form of debt and interest pay ments that must be repaid. I would like to
make an important clarification that such pledges should be referred to as loan pledges rather than aid pledges.
There are indeed components of these pledges that will come in the form of grants which do not hav e to be repaid.
Such grants can indeed be referred to as aid. It is v ery important to make this clarification and distinction before
starting a discussion on the requirements and effectiv eness in using such loans and grants.
There is a large difference in measuring the effectiv eness of a loan and the effectiv eness of aid. Aid should be
measured by the extent to which it reaches the intended target. Aid disbursements do not hav e to be returned or
repaid. Aid also does not come with periodic interest burdens. As such, effectiv eness measurement of aid is fairly
straightforward, namely whether or not the aid reaches its intended target optimally . Aid can be used to fund
projects that do not necessarily prov ide economic added v alues. Aid does not need to produce positiv e cash flow. Aid
funding is considered effectiv e if it reaches its target without waste or corruption.
A loan or credit is v ery different than aid. A loan can only be considered effectiv e if the project funded by the loan can
produce enough positiv e cash flow to repay both the principle and interest in accordance with its agreed upon
pay ment schedule. Therefore, the funding used to repay the principal and interest of a loan on a timely basis should
be deriv ed from the added v alue generated by the relev ant project, not by simply liquidating or selling the project.
What we hav e today is a gov ernment experiencing a sev ere liquidity shortfall, y et obligated to pay the principal and
interest in accordance to international standards of gov ernment loan agreements. Because the gov ernment does not
hav e the requisite funding to pay the principal and interest due, and because there is little that the gov ernment can
do to generate liquidity , the international community has no choice but to reschedule loan principals which hav e
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come due. But what about the interest? What if the gov ernment does not ev en hav e enough money to pay interest?
Would the international community allow us to reschedule interest pay ments? In fact, this time we hav e no choice
indeed, but to request for a rescheduling of interest pay ments, and we shall eagerly wait and see how the members of
Paris Club III will respond to this request.
Let me get back to the different way s a loan can be repaid. The first way would be repay ing the loan from cash flow
generated by v alue added activ ities. In essence, the loan will be liquidated by v irtue of the projects ability to create
wealth or added v alue. The project and its ownership stay s intact and all the machines or infrastructure within the
project will continue to function productiv ely , ev en after principal and interest pay ments are facilitated. This is
consistent with a v ery rudimentary principle about loans, in that it should hav e a self-liquidating character.
But if the project funded by a loan fails to create wealth or added v alue, the project itself may hav e to be sold or
liquidated, and the proceeds used to repay the loan. This is what is currently taking place in Indonesia. Loans are now
repaid by selling or liquidating the projects funded by the loans.
I would like to use an example from the business world. Picture an entrepreneur who builds a factory funded by a
loan. After operating the factory for some time and failing to generate added v alue, the entrepreneur sells his factory
in order to repay the loan. He then obtains a new loan and starts a new factory . Again, the factory failed to create
wealth and the entrepreneur sells the factory to repay the loan. This entrepreneur will not be considered v ery adept
at running his business and may not get a new loan the next time around.
Yet, this is exactly what has happened in Indonesia, both in the priv ate sector as well as in gov ernment. We all know
the extent of the shortfall and pressure in our gov ernment budget. For decades, loans to the gov ernment of Indonesia
has not been used effectiv ely . It has not created wealth or the v alue added necessary to repay such loans. In addition,
since the crisis of 1 997 , the gov ernment has not only been burdened by its own loan repay ments, but also by the
massiv e theft and corruption performed by a handful of conglomerate owners. I dont need to detail this any further,
as I am sure y ou all are fully aware of these facts.
How could all of this hav e happened? The answer is clearly that for decades the gov ernment of Suharto has not
utilized the loans effectiv ely , the requirements and prudential principles for utilizing the loans were not followed
and, most importantly , a large portion of these loans were corrupted.
Excellencies, Ladies and Gentlemen,
I hav e spoken like this all too often. I hav e been reminded by senior economists, many of whom hav e had or still hav e
important roles in the management of our economy , that I should stop looking in the rear-v iew mirror and start
looking into the future.
Yet I refuse to take this adv ise, especially when it comes from the same economists who play ed a large role in turning
Indonesia into a nation of beggars. Your excellencies, these are the same economists that completely mismanaged our
foreign debt and drov e our country into its current hardship. In relation to this, I would like to quote President
Megawati from a speech she made during her recent trip to Toky o. She said: isnt it nice that the same people who
totally destroy ed our debt management can still giv e us all sorts of adv ise?
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A way of thinking that prev ents us from looking into the past is totally absurd and narrow. We must look into the
past often and continuously if we want to prev ent ourselv es from making the same mistakes all ov er again. It is also
important to look into the past v ery carefully and diligently if we want to find a solution to the mistakes that were
made. In order to find an appropriate solution, it is alway s useful to understand the cause of the problem. Dev eloping
economic policy without learning from history , is akin to a doctor that prescribes treatment without rev iewing the
patients medical record. It is simply a dangerous and, often, a futile exercise.
I dont look into the past to entertain my self and sadistically enjoy the suffering endured by our nation. I look into the
past to find causes and effects of problems and to find way s to prev ent similar causes and effects in the future. So it is
ultimately unfair and unjust if they who made these mistakes in the past now manage to cling to power and attempt
to bury the past. They prev ent honest and well-intentioned people to find proper remedies by properly understanding
the causes and effects of past corruption and mismanagement.
I hav e also been criticized for being too repetitiv e in pointing out the mistakes and problems of our foreign debt
management. Again, this is a criticism that I cannot simply accept. Why dont these same people criticize Coca-Cola
or McDonalds. These companies also repeat their message ov er and ov er again to improv e the sales of their products.
Isnt it much easier to understand these consumer products than the complexities of foreign debt exposure and the
resulting liquidity problems? Are they bored of the repetitiv eness, or are they afraid that repetitiv eness will
ev entually uncov er the sins of those who criticize.
Regarding our domestic debt, which has now reached at least 650 trillion rupiahs, I hav e also been criticized for
talking to much about the problems caused by such a large exposure. Again, I am suspicious that these are not
constructiv e criticisms. These are criticisms intended to cov er and bury prev ious injustices. These are also criticisms
intended to appear intelligent in order to cling to power. These criticisms come from the same bureaucrats who
allowed bank owners to repeatedly v iolate legal lending limits, channelling large sums of depositors money into their
own companies through marked-up lending. The facts are ov erwhelming. Just take a look at IBRA. The problems
that continue to persist in the Indonesian recapitalized banking sy stem is still construed by sev eral analy sts as a
ticking time bomb. Unfortunately many in our gov ernment continue to practice ostrich politics. We stick our head
in the sand when faced with difficult questions.
Off-course, what we are discussing today are not non-performing loans of the priv ate sector, but loans to the
Gov ernment of Indonesia from creditor nations who hav e gathered in this room today . Are these debts also corrupted,
so we can no longer repay them, ev en when we continue to dig a hole to close another ? For me the answer is v ery
clear. Professor Sumitro Djojohadikusumo, the founder of the School of Economics of the most prestigeous Univ ersity
of Indonesia, and thus v ery well respected guru of the gov erning technocrats, once stated that no less than 30% of the
loans prov ided to the Gov ernment of Indonesia had been stolen. This means that at least 30% of y our loans had been
stolen. So Professor Tinbergen, who was one of my famous teachers was indeed correct. As far back as the fifties he
was already worried that foreign lending has a tendency to transfer the wealth of the poor people in rich countries to
the rich people in poor countries. This is exactly what has happened in Indonesia.
The crux of all problems is of course corruption. But not limited only to corruption of embezzling money , but
corruption of logical and moral behav iour and predispositions. Among others, such predispositions hav e giv en rise to
self deceit in our gov ernment. A deficit budget is said to be balanced. Loans that hav e to be repaid with interest are
called dev elopment income. Creditor nations are called donor countries. Ev en the title of my speech that was
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giv en to me still used the work aid and not loans. Sometime back, when our debt serv ice ratio increased to 20%,
the economic ministers of Indonesia said that the debt serv ice ratio is not an appropriate benchmark any longer. A
more appropriate measure would be debt as a percentage of GDP, which was still considered low. So lending continued
to be fuelled by the corrupt mind set. New loans were used to cov er obligations of old loans. When this was no longer
possible, like it or not, we were forced to beg for the restructuring our loans. This took place in 1 999, in 2000 and
now, again, through the coming third Paris Club.
Excellencies, Ladies and Gentlemen,
If I look into the past again, the conclusion is v ery simple. The requirements for getting a new loan should be fairly
straightforward, namely stop corruption. To make the loan more effectiv e its the same simple formula: stop
corruption. Again, by corruption I dont mean simply siphoning off funds, but also allowing our mindsets and
morality to be corrupted by self deceit and cheating the public.
I fully realize that the gap between say ing stop corruption and realizing it is as large as the gap between heav en
and earth. Corruption in Indonesia has metamorphosed into a key component of the Indonesian liv elihood and
culture. Its become a way of life and has spread deep into the roots of society . I am faced with the problems of
corruption ev ery day . Nonetheless, no matter how heav y a burden and difficult it is to eradicate corruption, we must
continue to recognize that it is the primary cause of our maladies and hardships, and we must alway s continue our
attempts to stamp it out.
Indeed, eradication of corruption, or ev en a significant reduction in corruption, cannot be accomplished ov ernight.
About more than twenty y ears ago, Mohammad Hatta, one of the founding fathers of our nation, was appointed as a
member of an Anti Corruption Taskforce under the leadership of Mr. Wilopo. Back then, he already stated that
corruption in Indonesia has already become a cultural trait. In October of 1 987 , acting as the spokesperson for PDI in
parliament, I stated for the record that PDI has noted that corruption has become a serious and worrisome issue.
Besides financial losses to the nation and losses to the well being of our people, corruption has destroy ed our character,
become a way of life and ruined the mentality and morality of a large proportion of our population. From high
ranking officials to ordinary people, from adults to children, we hav e become used to falsify ing documents, bribery ,
cheating and deceit. Ev en parents take pride in how their children obtain driv ers licences by bribing the police when
they hav ent reached the qualified age.
Today , with much sorrow and regret I must say that corruption has not much improv ed since the downfall of
Suharto. In some cases, it has ev en gotten worse. So, what does this all mean? Since 1 987 , I hav e been repeating the
same theme ov er and ov er again while experiencing increasingly wild, brutal and damaging corruption. Yet, I would
like to appeal for our honest diagnosis of the problem. Corruption cannot be eradicated in a short time frame. Please
realise that the loans that y ou are about to prov ide are loans that are giv en under duress, and still prov ided in a
corrupt env ironment as we hav e today .
Excellenties, Ladies and Gentlemen,
The remainder of my speech focuses on the discussions of four specific issues which show y ou the efforts that hav e
been taken by my Department to remedy the challenges faced by our budget. The issues include : the changing
portfolio composition, coordination of foreign borrowing, fiduciary responsibility and on-lending policy . Howev er, in
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the interest of time I will stop here and leav e it up to y ou to read the remainder of the speech that will be distributed
to y ou.
Thank y ou v ery much.
The Project Portfolio:
The collaboration between the gov ernment and creditors ov er the last few y ears has resulted in a significantly
adjusted project portfolio. In particular we hav e cut many projects that no longer meet our needs. This frees up funds
and policy maker time to address other issues. Howev er, this is a dy namic process and we will hav e to continue to
adjust as decentralization continues. There is progress though and disbursements hav e improv ed and the ov erall
portfolio rating is better. Dev elopment projects are finally beginning to hav e an impact on the economy again, really
for the first time since the crisis.
Central Gov ernment Coordination:
The issue of aid coordination within the central gov ernment has been resolv ed. The Ministry of Finance will continue
to hav e responsibility for signing loan agreements on behalf of the gov ernment. Howev er, the President has
designated Bappenas the institution responsible for the coordination of foreign borrowing. Specifically Bappenas is to
work with multilateral institutions and bilateral gov ernments, executing agencies and regional gov ernments to
dev elop programs at the sector and sub-sector lev els. These sector and sub-sector programs will prov ide the guidance
for actual projects to be put together by the executing agencies, regional gov ernment institutions and the Ministry of
Finance. Executing agencies and regional gov ernments will then implement these projects.
To make this clearer lets take a hy pothetical sector, for example health. In this case within the gov ernment,
Bappenas will work with the foreign creditors and the Ministry of Health to dev elop sector priorities in prev entiv e
care, Puskesmas support, or ev en hospitals. We will agree on ov erall budgets lev els for programs and criteria on who
might qualify . The Ministry of Finance will then work with the Ministry of Health and the regions to determine
where facilities will be built or serv ices deliv ered. Finally , the regional gov ernment institutions will be responsible
for the deliv ery of serv ices.
Finally , Bappenas will continue to monitor and ev aluate on-going projects to allow us to better work with y ou on
future project dev elopment. Formal ev aluations and audits will remain the responsibility of the Ministry of Finance,
the line ministries, regional authorities and audit bodies.
Fiduciary Responsibility:
There are a number of issues related to fiduciary responsibility but the most important is the conflict ov er the use of
local gov ernment procurement rules and regulations. Some local gov ernments assume that autonomy allows them
to establish their own arrangements for procurement and financial management. Howev er, this is not so and
procurement is regulated by Keppres 1 8. There is a hierarchy of laws and Peoples assembly guideline III/MPR/2000
makes it clear that regulations do not supersede Presidential Decisions. We will insist that regional gov ernments
follow national procedures that insure best practice, equity , and accountability . Nev ertheless, regional gov ernments
must also understand that it is in their own best interest to adopt these principles. Existing procedures are designed to
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increase competition and reduce corruption but more importantly regions will not qualify for funds under foreign
assistance if they do not follow national guidelines including those laid out in Keppres 1 8.
In the longer run more is needed in to improv e procurement standards. To sy stematize the process we are working to
dev elop an umbrella institution called the National Public Procurement Office. Specifically the NPPO will be tasked
with: setting legal, regulatory and policy standards for procurement; monitoring and ev aluating compliance
nationally ; dev eloping procurement capability in the regions through professional training; and dev eloping public
campaigns and measures to induce compliance with best practice.
Finally we hope that the Partnership on Gov ernance Reform will also be able to play an effectiv e role in reducing
corruption and improv ing fiduciary responsibility . This forum links stakeholders in Indonesia including the
gov ernment, the priv ate sector and civ il society with the foreign partnerss. Your support for this process combined
with a free press and an energized civ il society should be an effectiv e weapon in reducing corruption.
On lending and decentralization:
This has been a particularly difficult and confusing area. Clearly aid agencies cannot deal directly with ov er 400
districts and prov inces. Howev er, these regions are tasked with implementing dev elopment projects that deliv er
public serv ices in their areas of responsibility . After a short transition (one y ear) we had hoped to pass these terms
and conditions through to the regions along with funds. Howev er, new loans were to be treated differently . As
regional gov ernments take part in project preparations they were expected to understand and comply with terms
and conditions including repay ments obligations. This was expected to begin in FY 2002. Howev er this timetable is
still too ambitious and we now believ e that the transition period should be extended through FY 2002. With this
regions, that qualify , will be responsible for loan terms and conditions beginning in FY 2003.
In addition we hav e decided that a blanket program can not work. Regional economic and institutional capabilities
v ary too widely . Many if not most regions are unwilling or unable to take on foreign obligations that entail exchange
risk at close to market rates. The sy stem that we put in place in FY 2003 will be rev ised. The gov ernment, under the
direction of the Ministry of Finance, will map out the economic and institutional capability in ev ery region. With
this mapping we will draw a distinction between regions that are capable of taking responsibility for on-lending
obligations and those that are not. Those that are capable will be allowed, under superv ision, to dev elop projects
based on foreign assistance and will be expected to meet all of the terms and conditions thereof. Those that are not will
work in a partnership with the central gov ernment and will hav e their obligations taken care. Ov er time the regions
in this latter category should decline as the number of capable regions grows.
Related observations
The institutional arrangement and responsibilities within the central gov ernment, between the central gov ernment
and the parliament and with regional gov ernments are still ev olv ing. Determining and clarify ing appropriate
responsibilities in this env ironment is difficult and politically contentious. While we are working to sort these issues
out, it will take time. We had sent to Parliament laws on state finance, treasury and audit designed to clarify the
situation. Howev er, in retrospect, this was premature. We are now determined to mov e slower and more carefully in
sorting out and codify ing these key relationships. We will withdraw these laws, rev ise them in line with changes in
our thinking and resubmit them later. In the meantime we ask y our patience.
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The lending community also has a responsibility . Indonesia is struggling with a difficult and painful transition to a
more democratic and just society . This process is more difficult than we thought a few y ears or ev en months ago.
New passions are ignited while old ones simmer. Ov erwhelming debt limits room to manoeuv re and policy resources
are stretched thin by crises. We must only address the highest priorities. Too often projects are driv en by creditor
needs and not Indonesian priorities. We also need terms and conditions as simple as possible as we integrate regional
institutions into our sy stems. Finally , we need to accelerate current efforts to substitute restructured pay ments for
new loans and for the most fav ourable terms and conditions on remaining new loans.

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