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Pidato CGI 1 (dalam bahasa Inggris)


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 given the task to prepare a speech with the topic: “Effective Use of Foreign Aid” I was immediately faced with a dilemma. On the one hand, it is my duty as a government official to present to you our policies and progress on the effective use of foreign aid. On the other hand, I feel totally embarrassed to be confronted with the task to justify an activity, which essentially amounts to begging for debt on behalf of our nation. This feeling is made even 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 you 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 you today because I know that without new lending from friendly creditor nations, our people may have to endure ever worsening hardships and poverty.

As we all know, this forum will end with pledges from CGI members. Since the formation of IGGI, the largest component of such pledges have been in the form of debt and interest payments 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 have to be repaid. Such grants can indeed be referred to as “aid”. It is very important to make this clarification and distinction before starting a discussion on the requirements and effectiveness in using such loans and grants.

There is a large difference in measuring the effectiveness of a loan and the effectiveness of aid. Aid should be measured by the extent to which it reaches the intended target. Aid disbursements do not have to be returned or repaid. Aid also does not come with periodic interest burdens. As such, effectiveness measurement of aid is fairly straightforward, namely whether or not the aid reaches it’s intended target optimally. Aid can be used to fund projects that do not necessarily provide economic added values. Aid does not need to produce positive cash flow. Aid funding is considered effective if it reaches its target without waste or corruption.

A loan or credit is very different than aid. A loan can only be considered effective if the project funded by the loan can produce enough positive cash flow to repay both the principle and interest in accordance with its agreed upon payment schedule. Therefore, the funding used to repay the principal and interest of a loan on a timely basis should be derived from the added value generated by the relevant project, not by simply liquidating or selling the project.

What we have today is a government experiencing a severe liquidity shortfall, yet obligated to pay the principal and interest in accordance to international standards of government loan agreements. Because the government does not have the requisite funding to pay the principal and interest due, and because there is little that the government can do to generate liquidity, the international community has no choice but to reschedule loan principals which have come due. But what about the interest? What if the government does not even have enough money to pay interest? Would the international community allow us to reschedule interest payments? In fact, this time we have no choice indeed, but to request for a rescheduling of interest payments, 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 ways a loan can be repaid. The first way would be repaying the loan from cash flow generated by value added activities. In essence, the loan will be liquidated by virtue of the project’s ability to create wealth or added value. The project and its ownership stays intact and all the machines or infrastructure within the project will continue to function productively, even after principal and interest payments are facilitated. This is consistent with a very rudimentary principle about loans, in that it should have a “self-liquidating character”.

But if the project funded by a loan fails to create wealth or added value, the project itself may have 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 value, 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 very 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 private sector as well as in government. We all know the extent of the shortfall and pressure in our government budget. For decades, loans to the government of Indonesia has not been used effectively. It has not created wealth or the value added necessary to repay such loans. In addition, since the crisis of 1997, the government has not only been burdened by its own loan repayments, but also by the massive theft and corruption performed by a handful of conglomerate owners. I don’t need to detail this any further, as I am sure you all are fully aware of these facts.

How could all of this have happened? The answer is clearly that for decades the government of Suharto has not utilized the loans effectively, 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 have spoken like this all too often. I have been reminded by senior economists, many of whom have had or still have important roles in the management of our economy, that I should stop looking in the rear-view mirror and start looking into the future.

Yet I refuse to take this advise, especially when it comes from the same economists who played 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 drove 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 Tokyo. She said: “isn’t it nice that the same people who totally destroyed our debt management can still give us all sorts of advise?”

A way of thinking that prevents us from looking into the past is totally absurd and narrow. We must look into the past often and continuously if we want to prevent ourselves from making the same mistakes all over again. It is also important to look into the past very 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 always useful to understand the cause of the problem. Developing economic policy without learning from history, is akin to a doctor that prescribes treatment without reviewing the patients medical record. It is simply a dangerous and, often, a futile exercise.

I don’t look into the past to entertain myself and sadistically enjoy the suffering endured by our nation. I look into the past to find causes and effects of problems and to find ways to prevent 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 prevent honest and well-intentioned people to find proper remedies by properly understanding the causes and effects of past corruption and mismanagement.

I have also been criticized for being too repetitive in pointing out the mistakes and problems of our foreign debt management. Again, this is a criticism that I cannot simply accept. Why don’t these same people criticize Coca-Cola or McDonalds. These companies also repeat their message over and over again to improve the sales of their products. Isn’t 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 repetitiveness, or are they afraid that repetitiveness will eventually uncover the sins of those who criticize.

Regarding our domestic debt, which has now reached at least 650 trillion rupiahs, I have also been criticized for talking to much about the problems caused by such a large exposure. Again, I am suspicious that these are not constructive criticisms. These are criticisms intended to cover and bury previous 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 violate legal lending limits, channelling large sums of depositors money into their own companies through marked-up lending. The facts are overwhelming. Just take a look at IBRA. The problems that continue to persist in the Indonesian recapitalized banking system is still construed by several analysts as a “ticking time bomb.” Unfortunately many in our government 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 private sector, but loans to the Government of Indonesia from creditor nations who have gathered in this room today. Are these debts also corrupted, so we can no longer repay them, even when we continue to dig a hole to close another ? For me the answer is very clear. Professor Sumitro Djojohadikusumo, the founder of the School of Economics of the most prestigeous University of Indonesia, and thus very well respected guru of the governing technocrats, once stated that no less than 30% of the loans provided to the Government of Indonesia had been stolen. This means that at least 30% of your 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 behaviour and predispositions. Among others, such predispositions have given rise to self deceit in our government. A deficit budget is said to be “balanced.” Loans that have to be repaid with interest are called “development income.” Creditor nations are called “donor countries.” Even the title of my speech that was given to me still used the work “aid” and not “loans.” Sometime back, when our debt service ratio increased to 20%, the economic ministers of Indonesia said that the “debt service 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 cover 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 1999, 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 very simple. The “requirements” for getting a new loan should be fairly straightforward, namely “stop corruption”. To make the loan more “effective” it’s the same simple formula: “stop corruption”. Again, by corruption I don’t 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 saying “stop corruption” and realizing it is as large as the gap between heaven and earth. Corruption in Indonesia has metamorphosed into a key component of the Indonesian livelihood and culture. It’s become a way of life and has spread deep into the roots of society. I am faced with the problems of corruption everyday. Nonetheless, no matter how heavy 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 always continue our attempts to stamp it out.

Indeed, eradication of corruption, or even a significant reduction in corruption, cannot be accomplished overnight. About more than twenty years 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 1987, 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 destroyed 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 have become used to falsifying documents, bribery, cheating and deceit. Even parents take pride in how their children obtain driver’s licences by bribing the police when they haven’t reached the qualified age.”

Today, with much sorrow and regret I must say that corruption has not much improved since the downfall of Suharto. In some cases, it has even gotten worse. So, what does this all mean? Since 1987, I have been repeating the same theme over and over 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 you are about to provide are loans that are given under duress, and still provided in a corrupt environment as we have today.

Excellenties, Ladies and Gentlemen,

The remainder of my speech focuses on the discussions of four specific issues which show you the efforts that have 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. However, in the interest of time I will stop here and leave it up to you to read the remainder of the speech that will be distributed to you.

Thank you very much.

The Project Portfolio:

The collaboration between the government and creditors over the last few years has resulted in a significantly adjusted project portfolio. In particular we have cut many projects that no longer meet our needs. This frees up funds and policy maker time to address other issues. However, this is a dynamic process and we will have to continue to adjust as decentralization continues. There is progress though and disbursements have improved and the overall portfolio rating is better. Development projects are finally beginning to have an impact on the economy again, really for the first time since the crisis.

Central Government Coordination:

The issue of aid coordination within the central government has been resolved. The Ministry of Finance will continue to have responsibility for signing loan agreements on behalf of the government. However, the President has designated Bappenas the institution responsible for the coordination of foreign borrowing. Specifically Bappenas is to work with multilateral institutions and bilateral governments, executing agencies and regional governments to develop programs at the sector and sub-sector levels. These sector and sub-sector programs will provide the guidance for actual projects to be put together by the executing agencies, regional government institutions and the Ministry of Finance. Executing agencies and regional governments will then implement these projects.

To make this clearer let’s take a hypothetical sector, for example health. In this case within the government, Bappenas will work with the foreign creditors and the Ministry of Health to develop sector priorities in preventive care, Puskesmas support, or even hospitals. We will agree on overall budgets levels 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 services delivered. Finally, the regional government institutions will be responsible for the delivery of services.

Finally, Bappenas will continue to monitor and evaluate on-going projects to allow us to better work with you on future project development. Formal evaluations 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 over the use of local government procurement rules and regulations. Some local governments assume that autonomy allows them to establish their own arrangements for procurement and financial management. However, this is not so and procurement is regulated by Keppres 18. There is a hierarchy of laws and People’s assembly guideline III/MPR/2000 makes it clear that regulations do not supersede Presidential Decisions. We will insist that regional governments follow national procedures that insure best practice, equity, and accountability. Nevertheless, regional governments must also understand that it is in their own best interest to adopt these principles. Existing procedures are designed to 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 18.

In the longer run more is needed in to improve procurement standards. To systematize the process we are working to develop 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 evaluating compliance nationally; developing procurement capability in the regions through professional training; and developing public campaigns and measures to induce compliance with best practice.

Finally we hope that the Partnership on Governance Reform will also be able to play an effective role in reducing corruption and improving fiduciary responsibility. This forum links stakeholders in Indonesia including the government, the private sector and civil society with the foreign partnerss. Your support for this process combined with a free press and an energized civil society should be an effective weapon in reducing corruption.

On lending and decentralization:

This has been a particularly difficult and confusing area. Clearly aid agencies cannot deal directly with over 400 districts and provinces. However, these regions are tasked with implementing development projects that deliver public services in their areas of responsibility. After a short transition (one year) we had hoped to pass these terms and conditions through to the regions along with funds. However, new loans were to be treated differently. As regional governments take part in project preparations they were expected to understand and comply with terms and conditions including repayments obligations. This was expected to begin in FY 2002. However this timetable is still too ambitious and we now believe 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 have decided that a blanket program can not work. Regional economic and institutional capabilities vary 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 system that we put in place in FY 2003 will be revised. The government, under the direction of the Ministry of Finance, will map out the economic and institutional capability in every 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 supervision, to develop 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 government and will have their obligations taken care. Over 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 government, between the central government and the parliament and with regional governments are still evolving. Determining and clarifying appropriate responsibilities in this environment 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. However, in retrospect, this was premature. We are now determined to move slower and more carefully in sorting out and codifying these key relationships. We will withdraw these laws, revise them in line with changes in our thinking and resubmit them later. In the meantime we ask your patience.

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 years or even months ago. New passions are ignited while old ones simmer. Overwhelming debt limits room to manoeuvre and policy resources are stretched thin by crises. We must only address the highest priorities. Too often projects are driven by creditor needs and not Indonesian priorities. We also need terms and conditions as simple as possible as we integrate regional institutions into our systems. Finally, we need to accelerate current efforts to substitute restructured payments for new loans and for the most favourable terms and conditions on remaining new loans.

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One response to "Pidato CGI 1 (dalam bahasa Inggris)"

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