Pidato CGI 2 (dalam bahasa Inggris)
MENTERI NEGARA PERENCANAAN PEMBANGUNAN NASIONAL/KEPALA BAPPENAS
EFFECTIVE USE OF FOREIGN AID
Minister of Development Planning/Head of Bappenas
Pre-CGI Meeting in Jakarta on June 12, 2002
Ladies and Gentlemen:
In preparation of today’s gathering, I was asked to say a few words on the effective use of foreign aid. I subsequently discovered that the World Bank together with my staff at Bappenas had already assembled a committee to prepare a full speech. I have reviewed this speech. I believe it is a good speech, it is useful and it provides good accountability of the government’s efforts in maximising the effectiveness of loan disbursements or what is often coined as “aid disbursements”. The speech also provides balanced explanations for the achievements reached and the challenges that the government continues to face as a result of regional decentralization and autonomy initiatives. The speech also clearly displays the work of those people in the “field” who are much more knowledgeable than I am in technical matters.
I would like to say thank you to the team who prepared the speech. In the interest of saving time, I will distribute a hardcopy of this speech for all of you to read.
I must say, however, that I am still somewhat disturbed by the use of the word “aid” for instruments that are in fact “loans.” In my speech at the CGI forum on the 8th of November 2001, I discussed at length the difference between “aid” and “loans”, with all the implications for effective utilization of these instruments. That speech was also titled “Effective Use of Foreign Aid,” the same title that was given to me for my speech today. My basic views on the effective use of foreign “aid” and foreign “loans” remain the same as that of 7 months ago.
Therefore, rather than repeating myself, please allow me to spend a few minutes to address a much more fundamental issue, one which has a much higher impact on the effectiveness of foreign loans, the issue of corruption.
There are essentially two major drivers for the effectiveness of loan disbursements. The first one is the organizations responsible for the loan disbursements along with its systems, procedures and operating processes. The second driver is the motivation, competence and integrity of the people within the organization. It is of little use to build and structure institutions and organizations, along with systems, procedures, planning and monitoring, if the people that operate and work in these institutions are morally, as they say here in Indonesia, “corrupt to the bone.”
As I mentioned in my November 8 speech, corruption in Indonesia is not only limited to stealing and embezzling money. The entire mental and moral disposition, or the “way of thinking,” is corrupt. Therefore, the accountabilities mentioned in the speech that was prepared by my team could be deemed incomplete and perhaps even irrelevant since it doesn’t address how to reduce corruption. I would myself not dare to postulate the elimination of corruption entirely, which I think is practically impossible. But if we can reduce corruption significantly, we will have come a long way. Everybody talks and argues about the elimination of corruption, including the corruptors themselves, but nobody has ever proposed a comprehensive and practical solution that addresses the root cause of the problem, which is how to motivate or force people to shy away from corruption.
If we want to be honest with ourselves, a concept to fight corruption is not complex and we can learn from many examples, even from our nearby neighbours. Singapore has been very successful in eradicating corruption, and China is already making serious headways. Both places use a “carrot and stick” approach. In my opinion, civil servants with positions of power and influence should be paid enough to sustain a comfortable and dignified lifestyle in order to prevent them from commercialising their positions. But if they are proven to steal or fulfil their own self-interest at the expense of the state and the people of Indonesia, then they should be punished severely. If necessary, proven corruptors should be sentenced by the death penalty such as in China.
Having said that, with over 4 million civil servants, such a straightforward concept would not be easy to implement in Indonesia. The government simply does not have enough money to increase all their wages to a level that is effective to prevent corruption. Even if the government has such means, it would still not be rational move. This is because ever since the founding of the nation 57 years ago, the government has never performed any analysis or introspection to determine if such a large number of government employees are justifiable and optimal. A “carrot and stick” approach would only be effective if implemented together with comprehensive reforms and streamlining of the bureaucracy and civil service.
We have never heard of audits performed to determine if the organization of government departments and units are structured to meet the objectives and goals of these departments and units. We often wonder if the structures of government departments follow the strategic objectives of these departments or whether it is the other way around, whereby strategy follows structure. In my experience, not only is it the other way around, but drawing organization boxes and lines have become a habit and a “reflex” of newly installed Ministers and Department Heads. These reflexes almost seem as an instant fulfilments to their needs to exercise newfound power.
In Indonesia, the “strategy follows structure” phenomena can be seen in every government department. Even worse, current policies dictate that all structures, systems, procedures, communication protocols and controls must be uniform among all departments, irrespective of the varying functions and objectives among different government departments. One Minister recently made a remark on this policy with an analogy. He said that if we assume the structures, systems and procedures of an organization to be clothing, and the objectives of the organization to be a person, then the new policy dictates that everyone must wear the same size shirt, no matter how skinny, fat, tall or short the person is. How could this be possibly effective?
These types of issues have never been addressed sufficiently by international creditors and are not even stipulated in the Letter of Intent to the IMF. This brings me to another topic.
Lately, there has been much public exposure about my views and wishes to end Indonesia’s engagement with the IMF. In this forum, I would like to take the opportunity to explain my position. I must first emphasize that I do not wish to quit the IMF program mid-way, let alone state “go to hell with IMF” as was insinuated in the press. What I want is that both the IMF and the Government of Indonesia honour the contract, which I understand is to end in November 2002.
If the Government decides to extend the contract for one more year, I am convinced that the IMF will force the sale of all banks owned by IBRA and the Government, even when these banks still hold substantial amounts of government re-capitalization bonds (“recap bonds”). Each time such a bank is sold to the private sector, the bank’s ownership of recap bonds, which is an obligation for the government to pay interest and principal, will automatically be transfered to private hands. In my opinion, the government must first clean up and fix these banks so that they can operate without continuous government infusion. Before being sold to private hands, the government must first remove the recap bonds from the banks’ balance sheets.
Why do I mention this to you in this forum? Because there is no point pondering about how to effectively utilize the loans from the nations that you represent, if we have to spend between 25 to 175 times the annual new loan disbursements to service the recap bonds. You can be rest assured that the day will come when the government will not be able to service these recap bonds without either printing new money or rolling over principal payments.
We all know that during the crisis many banks that should have been closed were not closed because the Government could not afford to shoulder the liquidation costs. Massive amounts of cash money would have been required to pay back depositors and to cover severance payments for employees. Instead, these banks were kept “alive” by large injections of recap bonds, thereby ensuring positive capitalization of these bankrupt banks. The amounts of recap bonds injected during the re-capitalization program were measured to achieve a minimum capital adequacy ratio (CAR) of 4% at the time. With interest-bearing recap bonds booked as assets in their balance sheets, these re-capitalized banks instantly became profitable.
The idea was to keep these banks afloat by stopping the bleeding. The program was not meant to enrich the banks or the management of these banks. Instead, it was meant to buy time while waiting for the economy and the banking sector to improve, which would in turn improve the health of these banks. One may ask, what is the definition of a healthy bank? My answer is that a healthy bank is one that is capable of effectively channelling deposits into loans while earning a positive interest spread. Government re-capitalized banks can only be considered healthy once their recap bonds have been redeemed and they no longer depend on the interest income from the recap bonds. One way to redeem these bonds is through accumulation of profit into capital while returning the bonds to the government when CAR levels exceed regulatory requirements. Once the banks no longer contain substantial amounts of recap bonds and have normal loan to deposit ratios, then they could be sold to the private sector.
These kind of considerations were proposed by Mr. Stanley Fisher and Mr. Hubert Neiss to Mrs. Megawati in a discussion before she became Vice President. Mr. Laksamana Sukardi and I accompanied Mrs. Megawati during this discussion. So what I am saying today is nothing new. As a matter of fact, I heard it directly from Mr. Stanley Fisher himself.
But then the Government sold BCA with over Rp. 60 trillion of recap bonds in its balance sheet. BCA was already capable of producing over Rp. 3.1 trillion in net profit, but the bank was sold with a valuation of Rp. 10 trillion. In essence, the buyer gets the benefit of Rp. 60 trillion in recap bonds for paying only Rp. 10 trillion. For as long as the bonds remain in the balance sheet, the government must pay approximately Rp. 10 trillion per year to service these bonds. The government gets Rp. 10 trillion from selling the whole bank, but must pay Rp. 10 trillion per year to service the debt. Meanwhile, the government has lost ownership of BCA, which before the sale already had a CAR of 34.2%. If, for example, the government was prepared to reduce the CAR to 8% before the sale, it could have redeemed approximately Rp. 4.8 trillion in bonds. But such a consideration was never given any thought, and I think this is an irresponsible act by the IMF.
The IMF also reneged on their promise to follow an agreed upon sale methodology. What I had agreed with Mr. Anoop Singh was a transparent open tender process with a minimum price. This minimum price was supposed to be sealed in an envelope and kept by a notary public. If none of the bids exceeded the minimum price, then the sale would be cancelled. But this was not done. Instead, the sale process was messy and flawed with political lobbying by potential “strategic partners”. Mr. Hubert Neiss, who had since left the IMF and joined Deutche Bank, ended up lobbying on behalf of the Farralon consortium, which we all know won the bid.
Clearly, this was not what the IMF had in mind under the direction of Messrs. Stanley Fisher, Hubert Neiss and Anoop Singh. But now, with Ms. Ann Krueger, Mr. Horiguchi and Mr. Daniel Citrin in command, all IBRA banks must be sold using the same methodology as the BCA sale.
Recap bonds in the banking sector today amount to approximately Rp. 430 trillion in total. These bonds have different maturities and while waiting for them to mature, the government must pay interest. The total interest payments before the scheduled maturity dates of these bonds amount to Rp. 600 trillion. If all the principals are paid upon maturity, then the total outlay of the government will be Rp. 1,030 trillion. This is the best-case scenario. But if the government cannot afford to pay the principal when it is due and decides to rollover the principal or issue new bonds, then automatically the interest burden will increase. For example, if all the outstanding bonds were rolled over once with the same tenor, then the obligation of the government to pay principal and interest will balloon to Rp. 7,000 trillion. By assuming an exchange rate of Rp. 9,000, we can see that the government’s obligation to pay principal plus interest is anywhere between US$ 111 billion and US$ 778 billion assuming that all bonds are rolled-over once. If they are rolled-over more than once, then the amount will reach numbers that are almost unimaginable. These figures are based on the calculation done by IBRA and were published in their bulletin titled “Analisa Ekonomi” in April of this year.
This morning I received a letter without name and address of the sender. The content is a follow up “Economic Review” bulletin by IBRA, which is prohibited by the management to be distributed. It is dated May 2002. It said that if we take the indexation of the bonds against inflation, the payment obligation by the governemnt can grow up to Rp. 14.000 trillion (US $ 1.400 billion) in the worst case scenario.
These numbers are shocking in and by themselves. But what is even more shocking is that the IMF forces the Indonesian government to sell these recap bonds to the private sector without considering the long-term implications on the government budget. BCA has been sold with Rp. 60 trillion of bonds in it. Bank Niaga must be sold before the end of this year using the same methodology as that of the BCA sale, again without first removing/reducing Rp. 9 trillion of recap bonds from Bank Niaga’s balance sheet. In the latest draft of the LoI, there is a list of all the banks that must be sold in the same way, including Bank Danamon, Bank Lippo, Bank Mandiri, etc. All of these banks hold substantial amounts of recap bonds
I mentioned before that banks which should have been liquidated were not liquidated because the Government had no cash to pay depositors and severance payments of the employees. But how much would this have cost us, perhaps hundreds of trillions of Rupiah? Yet now the Government is on the hook for over Rp. 1,000 trillion, but the IMF assumes that we will have the means to pay this amount.
How can the Government ever be expected to pay back the loans from CGI if we have to pay such high interest and principal payments to service the recap bonds? This is the reason I fought hard to cancel the sale of BCA, but in the end I lost. I am now fighting again to cancel the sale of Bank Niaga. But rather than focusing all my energy on fighting these silly and illogical sale programs, I decided to also focus my attention on the source of the problem, which is the IMF contract with the Government of Indonesia.
I believe our Government should amicably and in a gentlemen-like manner end the contract with the IMF when it expires in November this year. This contract was signed by then-President Soeharto and Mr. Michael Camdessus from the IMF. To my knowledge, this contract was supposed to end in November of this year. Of course, I was saddened and shocked when I heard rumours that the IMF contract is now valid until 2003. When I inquired to see a copy of the signed contract, I was told by my staff that this contract is nowhere to be found. I still wonder if I made a mistake in assuming that the contract ends in 2002 or is it possible that this contract was extended for one more year without my knowledge?
Given my views and positions, does it mean that the re-capitalized banks should never be sold? Of course not. These banks must be sold, but only when they are already healthy, which means that they can operate profitably without continuous government infusion. It also means that they will be sold to the private sector after recap bonds have been removed from the balance sheets of these banks. We must start thinking creatively and innovatively to find a solution to remove these bonds as quickly as possible. Bappenas together with several independent financial experts have already started to develop alternative scenarios. I just hope that when these alternative solutions are complete, they can be accepted and executed by the relevant government departments.
Some people have warned me about the possible consequences of not extending the contract with the IMF. Of particular concern is the potential reaction from CGI creditor nations and from other international agencies, specifically as it relates to the possible disruption in loan disbursements that Indonesia needs. But this will all depend on you in this forum today. Therefore, in this opportunity, I would like to encourage you all not to shy away from Indonesia even when we no longer work with the IMF. The engagement with the IMF was from the start designed to end in January 15, 2001, and then extended by President Wahid until November 2002. November 2002. I am suggesting to honour the contract until completion and not to extend it. I don’t believe that this should be taken as a sign of rebellion against CGI creditor nations.
I have concluded that Indonesia no longer needs to engage the IMF in order to maintain and improve its economic recovery programs. The money that the IMF provides to Indonesia is of little benefit since it can only be used when the reserves of the Central Bank are completely depleted. But the reserves of the Central Bank have been stable and the outlook is also stable. Going forward, the programs in the Letter of Intent will also have little impact. This is because the IMF only seems to be concerned with the mechanical implementation of decisions without considering the impact of such decisions and without considering whether these decisions have positive and lasting outcomes.
I experienced this myself when the IMF directed my department to perform investigative audits on BULOG, Pertamina, PLN and the use of reforestation funds, and to publish the results to the public. When I asked about the benefit of doing this, the IMF responded that by publishing the results we could expect some form of social control. Moreover, if there is proven fraud, the police and the office of the attorney general can be expected to take action, to follow up with an investigation and to punish those that are guilty. This way, law enforcement will take place. I have done exactly as instructed, and together with the IMF distributed the results of expensive investigative audits to the press. But not a single word was printed, and nobody read the documents, not even the police and the attorney general’s office. But the IMF did not make a fuzz of this fact and everything was considered completed as per the LoI.
This example and many more gave me the impression that the formation of the LoI boils down to a mechanical “cut and paste” word processing effort, by using LoIs of other countries as templates. If I postulate the potential that the Bank Niaga sale is part of a conspiracy to sell the bank to predetermined investors with a financial engineering that is very damaging to the interest of IBRA, no one believes me. What is important to the IMF is that Bank Niaga gets sold before a specific deadline, no matter at what price and never mind the fact that it still contains Rp. 9 trillion in government bonds.
There are also strange behaviours among a group of Indonesian economists. In the year 2000, a minister stated that the Indonesian economy is recovering with a GDP growth rate of 4.8%. This minister was mocked and laughed at by the new order economists for providing this assessment. They remarked that the Indonesian GDP growth at the time was consumer driven, which is meaningless and not sustainable. But then later when Alan Greenspan mentioned that improvements in the US economy was driven by consumer demand, these same economists imitated Mr. Greenspan and stated that the Indonesian economy is also improving because of consumption. Now they are even saying that the Indonesian economy is already on the right path. Meanwhile, statistics show that capital expenditures are still on a downward trend. Why do they change their mind ? If we believe that the Indonesian economy is already on the right path which I agree as from 1999 and especially in the year 2000, then a question looms large in our minds : if we are already on the right path, then why do we need to extend the IMF program?
In closing, I would like to summarize as follows:
1. Technical arguments on the effective use of foreign loan have been presented in a paper prepared jointly by the World Bank and Bappenas. This paper will be distributed to you as an attachment to the text of my speech today.
2. I have not changed my overall point of view on the effectiveness of loans and aid. This point of view was presented and distributed in the CGI forum on November 8, 2001.
3. In essence, I believe that any effort of reform by the World Bank, ADB and other international institutions will be useless without addressing the main cause of the problem, namely the morally and mentally corrupt predisposition of the individuals.
4. I question the logic for continuous assistance from the CGI, amounting to additional loans of US$ 4 billion per year, if the government is forced by the IMF to honour principal and interest payments on recap bonds that amount to a minimum of US$ 111 billion and god knows what amount if we keep rolling over the principals.
5. I request for the IMF and the Government of Indonesia to honour the existing contract until the end of its term in November this year. Thereafter there will be no need for an extension given that the economy is already recovering on the right path. If the IMF continues to demand for the government to sell government recap banks, our calculations show that Indonesia will be pushed into a disaster of extraordinary proportions, potentially even including social disturbances if at the end of the day the Government cannot fulfil payments of principal and/or interest on the recap bonds. This is especially a realistic scenario if the creation of a market for trading bonds becomes a reality. Hundreds of thousands of people holding these recap bonds may face the risk that the government end up defaulting on these bonds.
6. It is important to remind ourselves that during the 32 years of Soeharto’s rule, the government never borrowed money from the people. The development budget was always funded by foreign borrowing from IGGI and CGI countries. As I understood it, the reason for the government to avoid domestic borrowing was to prevent crowding out the private sector in utilizing public savings. But now that public savings is even thinner than during the Soeharto era, the very same economists feel that it is allright to utilize public savings amounting to thousands of trillion of rupiahs. I find this difficult to digest and it is clearly logically indefensible.
In all, many may consider me to be naïve or even incompetent, but I believe I owe it to this country to serve my duty as Minister by speaking the truth and providing early warnings when called for.