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Document of

The World Bank

FOR OmCLAL USE ONLY

N I CRUtF T ( HE a:, ,ry

h'eport No. :P- 5933 IJN) Type: (PM)Title: THIR) CO)MMUINTTY HfEALT'H & tNEITRI ReportNo. P-5933-INDAutho)r: STOUJT. SFxt. :8.2!37 Rooom:A1l0015 Dept. :A3FPH

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$93.5 MILLION

TO

THE REPUBLIC OF INDONESIA

FOR A

THIRD COMMUNITY hEALTH AND NUTRITION PROJECT

December 4, 1992

Tbis document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(as of November, 1992)

Currency Unit = Indonesian Rupiah (Rp)Rp 1 million = US$4950US$1.00 = Rp 2020

ABBREVIATIONS AND ACRONYMS

BAPPENAS = National Economic Development Planning AgencyDEPKES = Departemen Kesehatan (Ministry of Health)GOI = Government of IndonesiaKabupaten = DistrictKfW = Kreditanstalt fur Wiederaufbau (German Bank for

Reconstruction and Development)PKM = Center for Health EducationPUSKESMAS = Community Health CenterPOSYANDU = Health and Family Planning Village GatheringPPAR = Project Performance Audit ReportPUSKESMAS = Health CenterREPELITA V = Fifth National Five-year Development PlanSUSENAS = National Economic Survey

FISCAL YEAR

April 1 - March 31

FOR OMCIAL USE ONLY

INDONESIA

TIURD COMIMUNITY HEALTH AND NUTRITION PROJECT

LOAN AM PROJECr SUMMARY

Borrower: The Repi-blic of Indonesia

Amount: US$93.5 million equivalent

Terms: 20 years, including five years of grace, at the Bank's standard variableinterest rate

Finandng Plan:Local Foreign Total

US$ million

Government 52.1 - 52.1KfW 2.0 16.5 18.5IBRD 45.4 48.1 ;93.

TOTAL 22S

Economic Rateof Return: N.A.

Staff AppraisalReport: Report No. 11255-IND

Map: IBRD No. 24137

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTON AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON A PRODOSED LOANTO THE REPUBLIC OF INDONESIA

FOR A THIRD COMMUNIT HEALTH AND NUTRN PRO

1. I submit for your approval the following memorandum and recommendation on a proposedloan to the Republic of Indonesia for the equivalent of US$93.5 million to help finance a ThirdCommunity Health and Nutrition project. The loan would be at the Bank's standard variable interest rate,with a maturity of 20 years, including five years of grace. The project would be co-financed by theKreditanstalt fur Wiederaufbau (KfW) for DM30 million, or about US$18.5 million. Co-financing wouldbe provided on a grant basis and would be allocated for the procurement of equipment and medicalsupplies.

Part I: COuNRY POucIEs AND BANK GROUP'S ASSISrANCE

A. Background

2. The Country Economic Memorandum, entitled "Indonesia: Growth, Infrastructure andHuman Resources" (Report No. 10470-IND), was issued to the Executive Directors in May 1992. Keyeconomic indicators appear in Annex I.

3. Indonesia's basic development goals, adopted nearly 25 years ago at the inception ofPresident Suharto's New Order government, are national stability, growth, and equity - what has beencaUed the trilogy of development. Indonesia has come a long way toward attaining these goals. The past24 years have been marked by rapid, broad-based growth leading to higher living standards andsubstantial poverty reduction. Policies also supported diversification of the economy to reducedependence on oil, especially following the collapse of oil prices in the 1980s. These achievements canbe credited largely to sound macroeconomic and sectoral development policies, to an emphasis uponachieving political consensus on important issues, and to the responsiveness of the Indonesian people -as individuals, communities, workers, and entrepreneurs.

4. Growth with Economic Stability. Indonesia started on the path of development from avery low base, with a per capita income in 1967 of only US$50, about half that of India, Bangladesh andNigeria. Indonesia has made great strides, ranking among the ten fastest growing developing economiesover the past 25 years C(able 1), with a per capita income in 1991 of about US$610. Indonesia's prudentmacroeconomic policies and strong emphasis on macroeconomic stability in the face of fluctuating oilprices are important reasons for Indonesia's rapid growth and the p-ogress made in economicdiversification. During the late 1960s, shordy after assuming power, the new Government introduced

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a stabilization and rehabilitation program in response to the severe economic disorder inherited front theprevious regime. This program was built on several measures that served tute economy well in lateryears, ir.zluding: (i) a major budget reform to restore fiscal and monetary discipline including aprohibition on domestic borrowing by the Government; (ii) gradual increases in interest rates to makethem positive in real terms; and (ii) a major currency reform to unify the multiple exchange rate system,establish the full convertibility of the Rupiah, and remove controls on foreign capital flows. Thesemeasures imposed discipline on domestic macroeconomic policy and led to improved export performance.

Table 1: KEY MACROECONOMIC VARIABS La

Actual Projected Jd1975-83 1983-89 1990 1991 1992 1992-95 1995-2000

Averaee Real Growth Rates (% g.a.)Gross domestic product (GDP) 6.5 6.0 7.3 6.8 5.2 5.6 5.9Non-oil GDP 7.0 6.5 7.8 6.5 6.2 6.5 7.0Non-oil exports 10.5 16.9 2.8 24.3 19.1 9.3 7.6Fixed Investment 10.7 1.3 19.7 10.7 7.1 5.9 7.5

Stsucture of the Economy (%) lbNon-oil manufacturingIGDP 9.9 14.1 14.9 15.5 16.2 18.4 22.8Non-oil exports/non-oil imports 37.4 87.9 71.2 77.5 86.5 93.5 97.1National Savings/GDP 21.0 21.7 22.1 22.2 22.9 24.4 25.6Fixed Investment/GDP 25.1 21.2 23.5 24.7 25.4 24.9 26.1

Macroeconomic Balances (%1 lbCurrent account/GNP -7.8jC -1.7 -3.8 -4.3 -4.0 -2.0 -2.0Overali public balance/GDP -4.31C -2.1 -0.2 -0.7 0.0 -0.2 -0.3MLT debt service/export 17.0 32.3 27.8 30.1 31.9 25.8 19.9

MemeJtem lb

GDP (US$ billions) 79.0 92.9 101.7 108.5 116.4 149.1 232.3Population (millions) 156.4 177.4 179.5 181.5 183.5 192.6 206.5

/a Balance of payments and fiscal data are for fiscal years (starting April 1).lb For the last year of multi-year period.Ic For 1982/83./d Indonesia: Grow*. Infastructue and Human Resources, Report No. 10470-IND, May 26, 1992.

5. During the oil boom of the 1970s, macroeconomic policies were used to spread theabsorption of oil windfalls across sectors, which encouraged development of the non-oil sectors. The

Government responded firmly and quickly when Pertamina, the national oil company, borrowedexc'Fssively in the mid-1970s. Indonesia adhered strictly to agreements reached with creditors,establishing its reputation as a responsible borrower, and placed strict limits on foreign borrowing,especially by public enterprises. Substantial devaluation of the exchange rate in 1978 prevented excessiveappreciation of the Rupiah and also helped to preserve the competitiveness of the non-oil economy.

6. A series of external shocks in the mid-1980s, which included a drop in oil prices fromUS$25/bbl in 1985 to US$12.5tbbl in 1986, caused a 38 percent decline in Indonesia's total exportearnings and a 27 percent drop in total budget revenues within one year. The devaluation of the USdollar and additional external borrowings contracted to cover the widening current account deficit raiseddebt service to about 40 percent of export earnings. In response to these external shocks, Indonesiamoved rapidly to stabilize the economy. The Government devalued the exchange rate and backed thisup with fiscal measures to adjust spending to reduced income. Public expenditures were sharplycurtailed, mainly through a freeze on civil service salaries and sharp reductions in large capital- andimport-intensive projects. Spending for poverty-related sectors was relatively protected. The ban ondomestic borrowing by the public sector was an important instrument in the pursuit of this policy. Taxreforms, started in 1983, aimed at building a sound income and value added tax system and strengtheningthe non-oil revenue base. The earlier deregulation of interest rates, combined with the open capitalaccount, exerted discipline on monetary policy.

7. Structural Diversification. Indonesia's macroeconomic policies complemented andreinforced sound sectoral priorities that encouraged broad-based development. This development programwas financed in large part by the oil windfalls of the 1970s. When the oil price first fell in the 1980s,and fiscal restraint was needed, Government spending cuts fell most heavily on large capital-intensiveprojects in industry and mining, permitting continued funding of essential operations and maintenanceexpenditures and of ongoing programs to develop agriculture and the rural economy. Programs in basiceducation, family planning, and other social and physical infrastructure also supported fundamentaldevelopment achievements, including sustained reduction in population growth. Within a prudentmacroeconomic framework, such programs helped establish the foundations for subsequent progress.

8. Faced in the mid-1980s with the collapse of oil as the main source of foreign exchange andbudget revenues, Indonesia introduced structural reforms and an outward-oriented growth strategy todiversify the economy and lessen the dependence on oil. Evidence of successful structural diversificationabounds. Oil revenues, which constituted 71 percent of Govermnent revenues in 1981/82, were only 36percent by 1991/92; the fall in oil's share of export proceeds during this period was even greater, from72 percent to 30 percent.

9. Deregulation was the main factor in achieving structural diversification. The shift fromimport licensing towards tariffs has been the centerpiece of trade reform. The industry sector has beenmost affected by trade deregulation, and the share of production exposed to import competition has risenfrom only 32 percent in 1986 to 68 percent by 1991. The resulting competitive pressures have helpedmake manufactured goods the fastest growing non-oil export, with average volume growth of 27 percenta year in 1986-91.

10. Financial sector deregulation has led to financial deepening and more efficient investment.The ratio of broad money to GDP grew from less than 20 percent in the early eighties to 45 percent by1991. Deregulation reduced the importance of directed (subsidized) credits from 37 percent of total credit

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in 1983 to 12 percent (with much lower subsidies) by e~arly 1992. Greater competition can be seen inthe expansion of private banking activities. The share of private banks in the assets of deposit moneybanks increased from 18 percent in 1982 to 44 percent in 1991. The reduction in distortions and greatercompetition have contributed to rising investment efficiency as seen in the decline in the economy-widefive year incremental capital-output ratio from 5.4 in 1986 to 3.3 in 1991.

11. Growth with Poverty Reduction. Perhaps the most powerful indicator of Indonesia'sprogress over the past 25 years is the degree of poverty reduction. Indonesia started the 1970s witharound 70 million, or 60 percent of the population, in absolute poverty. By 1991 the number of the poorhad dropped to about 27 million, or about 15 percent of the population. Even during the difficultadjustment period in the 1980s, poverty reduction was sustained. Othc. important indicators of higherliving standards include: reduction in the population growth rate from 2.4 percent in 1980 to 1.8 percentin 1990, a substantial drop in infant mortality, universal primary education, a rapid expansion ofsecondary and higher education, and an increase in literacy to over 80 percent. Progress in social andeconomic indicators is discussed further in the 1992 Country Economic Memorandum.

B. Recent Developments

12. Economic Performance and Prospects. Following the successful adjustment to the externalshocks of the 1980s, the Government has continued to respond to emerging development challenges,particularly the challenge of managing dynamic, private-sector led growth in an increasingly deregulatedeconomy. During late 1989 and early 1990, a powerful surge in private investment, responding to thenew opportunities opened up by deregulation, combined with an easing of monetary policy to exert strongdemand pressures. These were reflected in a surge in imports, a slowdown in non-oil exports, and anacceleration of domestic inflation. The Government responded with successive policy adjustments startingin mid-1990. The tightening of monetary and fiscal policies has dampened demand and improved thebalance of payments while maintaining about 6-7 percent growth in the overall economy.

13. Forceful actions were also taken to deal with the rapid growth of external debt and, inparticular, the large volume of foreign borrowing planned by public and publicly-related enterprises tofinance several mega-projects. In September 1991, the Government formed the Commercial OffshoreLoan Team (COLT) to coordinate access to international capital markets, deferred a number of largeprojects, and established ceilings for commercial borrowings associated with these public sector projects.'he Government adhered to its policy of maintaining a constant real effective exchange rate to maintainthe competitiveness of non-oil exports. The Government also improved tax collection and made selectivetax increases. The most recent economic data indicate the continuation of favorable trends in theeconomy: non-oil exports are growing at about 26 percent, non-oil imports are growing at about 4percent, inflation has continued to decelerate, and the current account deficit for 1992/93 now seemslikely to be lower than the 4 percent of GNP projected earlier (see Table 1).

14. The passage of major financial legislation in 1991-1992, particularly the new banking law,constitutes an important landmark in the development of the financial system in Indonesia. A numberof new banking regulations - capital adequacy requirements, conditions for bank soundness, changes toregulations regarding foreign exchange and currency swaps, and guidelines regarding foreign borrowing -- were introduced. In addition, the stock market was privatized, allowing separation of operational and

oversight responsibilities and contributing to increased investor confidence. Efforts are now focused onensuring that financial institutions abide by the new, toughened prudential regulations so as to continueto bolster investor confidence. Attention is also turning to promoting a deeper market in long-termfinancial instuments.

15. The trade reforms continued in 1991 with a reduction and rationalization of tariff rates andthe elimination of NTBs on many important agricu!tural products such as edible oils, soybean meal,poultry and other meats. As a result, the share of agricultural production protected by NTBs declinedfrom 38 percent to 30 percent, and the share of total production from 25 percent to 22 percent. In themanufacturing sector, the most significant change was the easing of controls on imports of some steelproducts. The 1992 reforms remnoved or reduced tariff surcharges on a large number of items and easedNTBs on steel inmports. Monopoly import rights on many steel products were reduced, and producerswere authorized to import many kinds of steel required in their production.

16. Prudent macroeconomic management, combined with continued implemenWation ofIndonesia's sectoral and institutional reform agenda, will enable Indonesia to meet the emergingchallenges and to continue a 6-7 percent annual growth in non-oil GDP in the medium term. This wouldpermit employment to continue to rise rapidly enough to absorb the growing labor force at higher levelsof productivity and would continue to reduce poverty.

17. External Capital and Creditworthiness. During the 1970s, Indonesia's external financingrequirements were modest, due to abundant oil revenues, and they were met largely by official assistance.Beginning in the 1980s, Indonesia's access to external capital becaire more diversified due to thecountry's increasing creditworthiness and growing attractiveness to foreign equity investors. The largefinancing requirements associated with the oil price fall of 1986, when the current account deficit leapedto 6 percent of GNP, wero met by Government borrowing from commercial sources and massive official(donor) support. Official creditors stepped up *heir commitments by US$2.4 billion between 1985 and1987. By contrast, when investment began to surge in FY89/90, leading to current account deficits ofaround four percent of GDP in FY89190-91/92, the jump in demand for external financing was metlargely by private borrowing from commercial sources and much higher foreign direct investment. Grossdisbursements of medium-term and long-term loans from private creditors rose from US$1.7 billion inFY89/90 to US$5.6 billion in FY91/92, an increase of US$3.9 billion, four-fifths of the growth in totaldisbursements. The changing balance of Indonesia's external financing is shown in Table 2.

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Table 2: INDONESIA'S ACCESS TO EXTERNAL FINANCE: FY87 - FY92(US $ billions, fiscal years)

1987 1988 1989 1990 1991 1992

Direct Foreign Invesnent 0.3 0.5 0.6 0.7 1.4 1.6Disb. Medium- and Long-term

Loans to Private Borrowers 0.7 1.0 0.9 1.7 5.6 3.9Disb. Medium- and Long-term

Loans to Public Borrowers 5.0 6.0 7.4 6.1 t. 1 6.2Other Capital (net) -0.7 0.2 -2.5 -1.5 -0.1 0.6

Memo Items:Curnent Acot. Lieficit 4.3 1.8 1.8 1.6 3.7 4.5Increase in Net Foreign Assets -2.5 0.9 -0.3 -0.1 2.9 1.4Disb. Medium- aad Long-term

Lons from Official Sources 2.3 3.4 4.4 3.9 3.8 3.9

18. Foreign Direct Investment. The growing importance of direct investment inflows stems fromthe increasing ease of investment as Indonesia has deregulated. Approvals of foreign investment projectsby BKPM (the Investment Coordinating Board) rose from US$0.9 billion In 1986 to US$4.7 billion in1989, and US$8.8 billion in 1991, while realized inflows trebled from about US$0.5 billion in 1987/88to about US$1.6 billion in 1991/92. The continuation of structural reforms and further improvementsin the business climate would allow Indonesia to remain an attractive host for foreign direct investment.Of particular importance are reforms in three areas: (i) legal and regulatory reforms to develop capitaland securities market activities and to regulate corporate behavior; (ii) enforcement of competitive biddingfor infrastructure and industrial activities open to the private sector; and (iii) increased privatization forcommercially-oriented public enterprises.

19. Offlcial Assistance. The donor community has continued to support Indonesia'sdevelopment, mainly through the Consultative Group mechanism. 1/ In 1992, commitments of officialassistance in the CGI reached US$4.9 billion (US$4.8 billion in 1991), having grown moderately aftera surge from US$2.4 billion in 1985 to US$4.0 billion in 1988. Given the strong competition for limitedaid flows, growth in official assistance is likely to be modest in coming years.

20. With the increase in official assistance accompanying the fall in oil prices in 1986, theWorld Bank's share in CGI funding has fallen from around a half (1982-85) to about a third (1992).Over the same period, support to Indonesia from the Asian Development Bank has grown steadily,

1/ Indonesia now has a Consultative Group (CGI) that is chaired by the World Bank, after 24 years duringwhich the Governnmnt of the Netherlands chaired the Intergovetnmental Group on Indonesia (IGGI). Thefirst meeting of the CGI took place in Paris during JuMy 16-17, 1992. The change in the arrangements wasat the request of the Indonesian Government and was endorsed by all of the former IGGI members.

reaching a quarter of the total in 1992. In response to Indonesia's financing needs during the adjustmentperiod in the mid 1980s, Japan emerged as the largest donor (35 percent of IGGI commitments) in 1988;subsequently Japan's share has been in the range of 25-30 percent.

21. i7oreign Borrowingfrom Commerciat Sources. Creditworthyprivate borrowers led the surgein Indonesian approaches to international financial markets in 1990-1991, which resulted in a rapidincrease in Indonesia's indebtedness and a hardening of the terms of overall debt due to the higher interestrates and shorter maturities of loans obtained from the markets. Enhanced creditworthiness of Indonesianborrowers partly resulted *om the lack of i1ternative attractive investnert opportunities, but mainlyreflected Indonesia's improved economic performance.

22. When creditworthiness indicators began to deteriorate in response to rising extemal debt,the Government successfully implemented stabilizing measures that are returnihag the current accountdeficit to more sustainable levels. Over the medium term, improving trends in the non-oil currentaccount should allow the current account deficit to stabilize at around 2 percent of GNP and the debt-service ratio to decline to a satisfactory 25 percent. With careful management, Indonesia's total debtburden should continue to easc, leading to improved creditworthiness and creating a framework forcontinued, more diversified access to international financial and capital markets. The recent (July 1992)assignment of an investment grade rating to Indonesia by Standard and Poors underlines the potential foraccessing an increasing variety of external sources of finance during this decade.

23. Past World Bank Lending. The Bank's activities have responded to Indonesia's diversifieddevelopment priorities, ranging from poverty to private sector development, while at the same timeproviding a reliable source of external financing on attractive terms, In keeping with the Bank's alreadylarge exposure to Indonesia, growth in the overall program has been moderate in the past three years andis projected to be stable in FY93-95. Comparing FY90-92 with FY87-89, however, major shifts,consistent with emerging priorities, are apparent (Table 3). The main changes are: (i) the phasing outof fast-disbursing assistance as Indonesia's need for structural adjustment assistance receded with thesuccessful implementation of the two Trade Policy Adjustment Loans and the two Private SectorDevelopment Loans; and (ii) the shift to human resource development and physical infrastructure, tocomplement the growing involvement of the domestic and foreign private sectors in directly productiveactivity.

24. The share of agriculture is basically unchanged between the two periods, but the emphasisis shifting increasingly to forestry and water conservation and to interventions that directly benefit thepoor. Expenditures on human resources have grown rapidly - as a share of the total program and inabsolute terms - with an increasing emphasis in both the education and health portfolios on the qualityof services provided and their targeting to poorer groups and regions. The rising share to industry,finance, and telecommunications reflects investments in telecommunications, in the context of the Bank'scommitment to help alleviate the severe telecommunications bottleneck to growth and following an agreedstrategy for sector restructuring and increased private participation and competition. Inadequate electricitysupply is also a major constraint to growth of efficient private activity, and the Bank continues to providesubstantial support to least-cost expansion of the power grid. Finally, a rising share for urban andtransport infrastructure recognizes the great, and growing, deficiencies in urban services and the need forbetter roads to facilitate efficient growth.

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Table 3: DSRIUTION OF BAND LENDING TO INDONESIA; FY 87-92(US$ tnillions)

FY 87-89 FY 90-92Amount Amount %

Ariculture 516 13 579 12Human Resource Development 316 8 705 14Industry, Finnme & Teecolnmmuications 687 17 1,072 22Power and Energy 917 22 1,114 23Urban and Transport nfrastructure 689 17 1,096 23Non-Project (Adjustment, TA) 950 23 292 6

Total AI7I 10 4.858 _

25. As of September 30,1992, Indonesia had received 48 IDA credits totalling US$901.6 million(net of cancellations) and 170 Bank loans totalling US$17,047.54 million (net of cancellations). Theshare of the Bank Group in Indonesia's public external debt disbursed and outstanding at the end of 1991was 23.6 percent, and the share of debt service was 20.7 percent, compared with 23.1 percent and 19.5percent, respectively, in 1990. Indonesia's share of the IBRD's portfolio in FY93 is projected at 10.7percent; given a stable lending program and the cessation of fast-disbursing assistance, the share shouldfal below 10 percent in the coming five years.

26. To date, the Operations Evaluation Departnent has evaluated 126 completed projects inIndonesia - 88 percent have been considered "satisfactory". The main factors contributing to this overallsatisfactory performance in Indonesia include the sound fiscal and economic policies adopted by theGovernment, the steady progress made in institutional capacity building through substantial investmentsin education and technical assistance, and the magnitude of the budgetlaid resources available.

27. The health of the current portfolio ic equally good. As of September 30,1992, the portfolioincluded 73 projects for a net commitment of about US$8.8 billion: including 22 projects (US$1.7billion) for agriculture; 18 projects (US$3.9 billion) for energy and industry; 14 projects (US$1.9 billion)for infrastructure; 18 projects (US$1.4 billion) for human resource development; and 1 project ($12million) for environmental institution-building. Since the completion of the last adjustment loan, theannual disbursement ratio has stabilize,d at 22 percent. The first Annual Portfolio Management Reviewin Indonesia has been initiated and sector discussions have' been very fruitful. Preliminary lessons forfuture supervision and lending are summarized in paras. 68-70.

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C. The External Environment

28. Indonesia is strongly integrated with the global economy through both its trade and capitalaccounts, and it has explicitly used its open capital account to reinforce macroeconomic discipline.Greater openness through trade and investment policy reforms has promoted b' er resource allocationin line with Indonesia's comparat;ve advantage, Increased competition, and enhanced efficiency throughtechnology trmsfer. With a more diversified economic base, Indonesia is less vulnerable to oil/gasrelated external shocks than in the past. Nevertheless, important sources of vulnerability remain,particularly: (i) fluctuations in oil prices; (ii) slow growth in world demand for Indonosia's non-oilexports; (iii) depreciation of the US dollar against major world currencies; and (iv) given the high debtstock, maintaining adequate flows of external finance from commercial sources and the donor community.These vulnerabilities motivate Indonesia's efforts to reduce the current account deficit to more manageablelevels.

29. The Government is pursuing policies to reduce external risks. The continued diversificationof the economy (non-oil exports are projected to represent three quarters of total exports by 1995) willreduce the vulnerability to oil-related shocks. 2, Stagnating OECD growth has not affected Indonesia'snon-oil growth to date. Non-oil exports are relatively diversified between Japan (18 percent), the EC (21percent), the United States (17 percent) and ASEAN (16 percent), and the outward oriented policiespursued by Indonesia are geared to maintaining competitiveness in Indonesia's major markets.

30. The recently announced plans for an ASEAN free trade zone will provide Indonesia withan added incentive to produce competitively for domestic and foreign markets and may open up attractiveinvestment opportunities for ASEAN neighbors. However, magnitudes of trade and investment flows canonly be assessed when details of the ASEAN Trade Agreement are worked out. The impact of the NorthAmerican Free Trade Agreement (NAFTA) on Indonesia's exports and flow of foreign direct investmentalso will have to be ascertained. At present, NAFTA countries account for 18 percent of Indonesia'snon-oil exports.

31. The recent buildup of foreign exchange reserves and the maintenance of external lines ofcredit with commercial banks will help the economy weather short term shocks. The Government hasalso begun to consider more active asset-liability management tools to reduce exchange rate and interestrate exposure. Having recently been assigned an investment grade in its first international credit rating,Indonesia will be well-positioned to diversify its sources of external finance. Further, the continuationof structural reforms and improvements in the business climate will be important determinants inattracting equity finance, which will curb the growth of debt.

y! Currently a US$1 decline in the price of oil implies a idl in oil/LNG net export receipts of US$340million a year or about I percent of total exports, as well as a 1 percent reduction in net budgetrevenues.

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D. Indonesia's Development Strategy and Prtiorities

32. In addition to the longer-term 25-year development plan, the Government's developmentobjectives and strategies have been articulated in a series of five-year plans (Repelitas) beginning in 1969and a number of policy statements. Indonesia's commitment to the development trilogy of stability,growth, and equity was reaffirmed forcefully in President Suharto's Independence Day speech in August1992. At the same time, renewed emphasis was given to environmental concerns as an integral part ofa broad-based strategy for sustainable growth, and to improvements in efficiency and productivity asessential for realizing growth objectives within the limits of available resources. These concerns definesome of the tough challenges facing Indonesia - improving the incentives to increase private savings andinvestment and to enhance efficiency, maintaining fiscal and financial stability, building institutions tohelp markets work better, reducing hard core poverty, and establishing the regulatory framework toprotect the environment.

33. To meet these tough challenges, Indonesia has formulated a development strategy whichincorporates the following key components: (i) maintaining a commitment to broad-based growth withmacroeconomic stability, rapid enough to raise living standards and expand employment opportunities;(ii) enhancing the opportunities for private enterprises; (iii) strengthening the instituionalframework andbiproving public sector management to provide a sound environment for private enterprise and effectivedelivery of basic services; (iv) developing infrastructure to ease constraints on private sector growth; (v)developing human resources, both to support growth and to improve opportunities and living standardsdirectly, especially for the poor; (vi) ensuring that the incentive and regulatory structure reinforcesenvironmentally sustainable growth; and (vii) integrating all these elements to reduce poverty and raisethe living standards of all Indonesians.

34. Macroeconomic Stability. Prudent macroeconomic policies have been an outstandingfeature of Indonesia's policies. The Government's commitment continues to be reaffirmed through day-to-day macroeconomic management and is reflected by the highest priority given to macroeconomicstability in the country's development plan. The Government's policies and actions in recent years andmonths attest to this commitment. The Government has coordinated monetary, fiscal and exchange ratepolicies, together with attention to external debt management and the rephasing of large capital- andim-port-intensive projects, to cool down an overheated economy. At the same time, it has moved tomobilize public resources through improved tax administration, selective tax increases and reductions insubsidies, and measures to improve the efficiency of public enterprises.

35. Private Sector Development. Based on its recent successes, the Government's strategyrecognizes that private enterprise is central to achieving satisfactory growth and that building a morediverse and robust production structure requires that the energies of Indonesia's business community andfarmers be directed towards competition in the domestic and world markets. Two sets of policies areseen as supporting a competition-oriented growth strategy. First, macroeconomic policies will ensure astable environment for private enterprise and provide adequate incentives to export. Second, structuralreforms will dismantle the remaining regulatory barriers and market interventions that hamper competitionand private initiative and distort private choices. 3/

I/ Indonesia: Developing Private Enternrise, Report No. 9498-IND, May 9, 1991.

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36. The Government's strategy is to continue deregulation and institutional reforms (see paras.38-40). The deregulation and ongoing reforms of the financial sector are seen as playing a critical rolein mobilizing and allocating resources efficiently and prudently. Consolidating the major achievementsin the financial sector is essential for sound private enterprise growth. In industry, the focus is ondeveloping a broad-based, resilient industrial structure, able to respond to changing opportunities andsupply competitive products to both the domestic and world markets. Noting that a resilient economyrequires efficient industries with the "potential and ability to compete with other countries' industries,"President Suharto has stressed that "protection cannot be provided forever" and that "in the shortestpossible time the protected industries must become mature and self-reliant."

37. Agriculture remains central to Indonesia's strategy for rapid growth and poverty reductionbecause (i) poverty is still heavily concentrated in rural areas, (ii) three-quarters of all poor people derivetheir principal source of income from agriculture, and (iii) the poor are especially vulnerable tofluctuations in food supplies and prices. However, in line with domestic progress and rapid changes inthe international environment for agricultural development and natural resource management since themid-1980s, the Government is focusing increasingly on efficiency and productivity, and thereby enablingprivate farmers to respond flexibly to changing markets.4/ In this way, diversification of agriculturealong the lines of Indonesia's comparative advantage will be encouraged. Recent trade policy reformshave eliminated NTBs on some key agricultural products to promote greater efficiency. In the forestrysector, which produces a substantial share of Indonesia's non-oil exports, a large domestic woodprocessing sector has been created, largely through the application of prohibitive restrictions on exportof raw logs and more recently, rough sawn timber. Limited forest resources and continuing deforestationnow present the Government with some serious decisions in the areas of wood pricing, sustainable forestmanagement, and community involvement.

38. Institution-Building. Sustained development of tfMicient private enterprise requires parallelinstitutional reform in two broad areas. The first area encompasses measures that strengthen theinstiutional underpinnings of efficient markets. This involves the creation of an atmosphere conduciveto wider participation, easier entry and greater competition, where the focus of government will shiftfurther from providing goods and services to helping markets work better. In addition to progress inderegulation and pricing policy, this includes: (i) building a modern legal framework (improvements incommercial, credit and contract laws and adjudication) that would provide business with a stable,predictable environment that raises confidence and reduces costs; (ii) development of the legal andregulatory framework for more effective registration and transfer of land rights and dissemination of landinformation; (iii) development of adequate accounting, auditing and disclosure standards andrequirements; and (iv) establishment of a framework for private participation in provision of publicservices. An effective, transparent administrative system will be essential, allowing the private sectorto focus on increasing output and productivity.

39. The second area focuses on public sector management, to improve the efficiency of servicedelivery. Efforts here include reforming the civil service and building capacity at all levels ofgovernment, decentralizing functions where appropriate, and managing public enterprises better. Thework recently initiated on civil service reform concentrates on streamlining organizational strictures,

4/ Indonesia Agricultural Transformation Challenges and OpRortunities, Report No. 10504-IND, September1, 1992.

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clarifying tasks, and linking compensation more clearly with identified tasks and responsibilities. Inaddition to improving efficiency and staff motivation, an important objective is to adapt the civil serviceto the changing role resulting from extensive deregulation and increasing decentralization. This roleinvolves a greater emphasis on planning, policy analysis, and advisory, monitoring and coordinatingfunctions, as many of the functions relating to the administration of direct controls have disappeared.Decentralizaton is viewed as a way to tap local initiative, foster accountability, and allow expendituresto better reflect local priorities. Over time, significant responsibilities in the provision of infrastructureand other public services are being assigned to provincial, district, and municipal authorities. Localgovernment participation is especially important in urban infrastructure, irrigation, and road transport.But the progress achieved to date reveals that effective decentralization in Indonesia still faces severalchallenges: adequate institutional capacities of local governments to take on additional tasks andresponsibilities, their ability to finance these tasks, and proper accountability.

40. In public enterprises, the Government has been evolving a policy framework for reformsince 1988. The major objectives are to: (i) reform the organization and management of enterprises thatwill remain in the public sector to improve their efficiency and reduce their burden on scarce publicresources and (ii) initiate the phased divestiture of enterprises that need not remain under publicownership. Ministerial decrees issued in 1989 set out the financial performance criteria for publicenterprises and outlined a number of options to improve their efficiency and productivity. A set ofcorporate restructuring strategies has also been identified - ranging from change in legal status, to saleof equity, to liquidation. The Government is embarking on an in-depth assessment of all publicenterprises for restructuring and divestiture, but increased momentum will be ne&erd to bring aboutsubstantial improvements.

41. Infrastructure Development. The Government's development strategy has long recognizedthe importance of infrastructure in promoting economic growth and sustaining private sector development.Infrastructure has also been seen as a tool for achieving more equitable development across regions andincome groups. Infrastructure has received consistently high priority in successive five-year plans,accounting for, on average, over 40 percent of all development expenditure. Renewed emphasis is beinggiven to increasing productivity and efficiency since available resources will be insufficient to meetprojected demand without greater efficiency. The Government intends to (i) promote efficiency in theuse of infrastructure services through appropriate pricing and adequate operations and maintenance; (ii)enhance efficiency in the supply of infrastructure services through greater private participation and betterpublic management (at central and local levels and in public enterprises); and (iii) ensure the developmentof new infrastructure capacity in accordance with well-defined priorities for power, telecommunications,transport, and water and sanitation. fI

42. The transport sector generally has been able to meet the rapidly growing needs of theeconomy at reasonable financial costs and with a reasonable level of service. The sector's regulatoryfiamework is being consolidated and extended through a set of new transport laws (road, rail, civilaviation and maritime transport) that will replace regulations issued in the 1920s and 1930s. These lawswill promote efficiency and safety and will define the authority and responsibilities of provincial andmunicipal governments. The role of the private sector has expanded significandy, and the main challenge

I/ Indonesia: A Stratejv for Infmstacture Development, Report No. 9672-IND, June 22, 1992; andIndonesia: Growth. Infiamucture and Human Resources, Report No. 10470-1ND, May 26, 1992.

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will be to institute the regulatory and institutional framework to ensure efficient participation responsiveto evo'ving demands.

43. In the energy sector, the Government's policy has been to diversify energy consumptionaway from petroleum products in order to maintain the level of its export earnings, to provide energy toindustries in a cost-effective manner, and to deliver affordable energy to households to improve theirquality of life. The management efficiency of PLN (the state electricity enterprise) will need to beimproved to enable it to meet growing demands, given the projected massive investments projected in the1990s. The Government is considering options to reorganize PLN, and private participation is beingpromoted to supplement supply and introduce competition.

44. Telecommunications constitutes a bottleneck to economic growth, and the Government hasevolved a strategy to improve sector performance by: (i) allowing private provision of non-basic services;(ii) changing the legal status of the telecommunications operator from a wholly-owned governmententerprise to a limited liability company, TELKOM, with shares (currently government-owned) to operateon commercial principles; (iii) introducing revenue-sharing agreements between TELKOM and privateinvestors for cellular telephone systems; and (iv) initiating studies of the institutional capabilities requiredto manage the sector and of the scope for further private sector involvement.

45. Human Resource Developnent. In education, the strategy is to improve quality at alllevels, through increased decentralization, institutional strengthening, targeting, and private sectorparticipation.§I The Government is committed to universalizing basic education, now defined to covergrades 1-9, by raisingjunior secondary enrollment rates. This requires improved teaching, better studentpreparation, and targeting of resources to disadvantaged and isolated schools. Steps have also been takento upgrade teacher training. Repelita V assigned the private sector a key role in the expansion of tertiaryand vocational enrollment. The 1990 Education Law consequently sets out a role for government in thecontext of rapidly growing private university enrollment, and a further decree has granted autonomy topublic universities in financial, academic, and institutional matters.

46. In health, the main priorities are to improve the quality of care by providing more effectiveprimary health care services and to deal with the long-run concerns of adjusting the health system to meetthe needs of adult and chronic diseases. In the near term, a major concern is to ensure that healthpriorities, including the provision of water and sanitation facilities, are defined at the local level andreflect local needs. Thus, fostering decentralized managerial and budgetary authority to develop andimplement local plans, together with strengthening the central government's policy and technicalassistance role, are important elements of the strategy. More and better-skilled human resources are alsorequired system-wide, together with supportive personnel policies. To deal with adult and chronicdiseases, the current health system will need substantial adjustments in medical education, the scale andsophistication of facilities, referral systems, and financing mechanisms, including the development ofhealth insurance. The agenda also includes development of an appropriate enabling environment forprivate provision of services.

fI Indonesia: EmnLonnent and Trainine. Foundations for Industrialization in the 1990s. Report No. 9350-IND, June 13, 1991.

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47. Environmental Sustainability. The pace and pattern of economic growth in Indonesia overthe past 25 years have depleted and degraded valuable environmental assets and stressed the ecologicalsystems upon which much of the country's economic activity depends. The emergence of these issueshas led to a growing awareness of the need to ensure the environmental soundness of Indonesia'sdevelopment strategy over the longer term. Key challenges include: (i) improving the management ofnatural resources (forests, land, water, and energy); (ii) protecting the urban environment (with a focuson water supply and sanitation, solid waste, and vehicle emissions); and (iii) controlling industrialpollution (by encouraging clean technology and ensuring appropriate investments in pollution abatement).To meet these challenges will require further improvements in incentives and the regulatory framework,increased investment by both ihte public and private sector, and institutional strengthening in a numberof key areas.

48. The Government has had a long-standing commitment to the basic concepts of sustainabledevelopment, and has already established a legal framework and regulatory procedures designed toimplement those concepts. Recent initiatives include: implementation of environmental impact analysis(EIA) requirements for all development projects; the preparation of a Tropical Forestry Action Plan anda National Biodiversity Action Plan; the establishment of a national environmental protection agency(BAPEDAL); new legislation on spatial planning and the establishment of an inter-ministerial commissionfor land use policy; the introduction of water user charges in the irrigation sector and the review ofoptions for improving the institutional management of water resources; and a special initiative for thecontrol of industrial pollution in the 24 most highly polluted rivers in 11 provinces. The implementationof these initiatives is constrained by limited financial resources, skills and data shortages, and institutionalshortcomings, particularly at the provincial and local levels, but the Government, with strong donorsupport, is giving high priority to overcoming these constraints.

49. Poverty Reduction. Poverty reduction remains a central goal of Indonesia's developmentstrategy, with other components of the strategy outlined above seen as contributing directly to that goal.Despite the substantial reduction in poverty achieved, about 27 million people are still living below thepoverty line and, with per capita income still only US$610, a large number of people are "near poor,"with incomes only slightly above the poverty line. There are also significant regional variations inpoverty. As poverty declines, those remaining poor are likely to constitute an increasingly "hard core,"with disabilities and problems that may make them difficult to reach. Key elements in the Government'sstrategy include: ensuring growth rapid enough to provide jobs for a labor force growing by about 2.2million people a year, while raising levels of productivity and income; providing resources to the poorerregions, particularly through the INPRES transfer programs that provide funds to local governments fora range of activities; and increasing the poor's access to basic health and education services.

50. These approaches are reflected in Repelita V, which sets out an intensified Governmenteffort to reduce poverty. 2/ First, the Government stressed its commitment to a process of growth andstructural change with an emphasis on developing an efficient manufacturing sector, supporting theagricultural sector, and providing the infrastructure necessary to support a more rapid rate of economicgrowth. Second, the Government initiated a number of new poverty-related programs and strengthenedothers. Some examples indicate the range of activities involved. It expanded the "posyandu" (integratedhealth service posts) to promote more equitable distribution of basic services, introduced village

71 Indonesia: Poverty Assessment and Strategv Report, Report No. 8034-IND, May 11, 1990.

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demonstration plots managed by women to expand the food and nutrition program, and expanded socialwelfare and non-formal education activities at the village level. It also introduced a program to providewater to lower-income groups in water-stressed urban slum areas and strengthened programs to providerural water supply and sanitation. Local level line agencies were strengthened to expand incomegenerating activities in poor villages through integrated area development projects.

E. The Bank Group's Country Assistance Strategy

51. The Bank's assistance program has supported the broad development goals and strategiesof the Indonesian Government. As outlined in this year's Country Economic Memorandum, Indonesiashould be able to maintain a reasonably rapid rate of growth, based on the Government's continuingcommitment to macroeconomic stability and to push ahead with structural reforms that encourage privateenterprise, reduce poverty, and induce environmentally sustainable development. However, to sustainsuch growth to the year 2000 and achieve middle income levels of per capita income will requiresubstantial resources and action across a wide-ranging and challenging policy, institutional, and socialagenda to convert strategic objectives into workable programs in a geographically and ethnically diversecountry.

52. The Bank's strategy is to support the Government as it formulates its next five and 25 yeardevelopment plans to deal with emerging challenges in the following areas: (i) building and adaptinginstitutions to the changing roles of the public and private sectors; (ii) improving incentives to increasethe efficiency and competitiveness of the economy (balancing deregulation with the need for newregulation); (iii) investing more in infrastructure and human resources but with increased efficiency; (iv)reducing hard core poverty; and (v) protecting the environment.

53. The Bank focuses on macroeconomic policies in the annual Country Economic Memorandumand in on-going dialogue with the Government. The basic challenge will be to increase domestic savingsto support higher investment, consistent with a gradual reduction in the current account deficit to about2 percent of GNP by 1995. Aggregate demand pressures will need to be contained through more activefiscal policy. Given the size of Indonesia's total foreign debt (US$77 billion), prudent management ofboth the composition and absolute level of external debt will have to complement macroeconomic policies.

54. The Bank supports Government efforts to improve efficiency. In this regard, we haveemphasized the importance of adjusting the prices of, or charges for, various goods and services, suchas fuel, electricity, fertilizers, irrigation, and forest products, so as to improve resource mobilization andallocation. We have also supported the Government in sustaining the momentum of trade and investmentderegulation and prudent debt management.

55. Economic and sector work will support this strategy both in sector studies and in cross-sectoral reports. For example, this year's Country Economic Memorandum examined issues ininfrastructure and human resources, and the next will focus on sustainable development, looking atsustainability in terms of the complementarities and trade-offs between growth, equity, and environmentalconservation. Sector work during the past year analyzed the agricultural transformation in Indonesia andidentified measures to enhance the flexibility of the sector to respond to changing patterns of demand inthe domestic economy and to world market opportunities, including priorities for public investment,

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deregulation, and the Government's changing role with respect to the enviroment. An infrastructurereview analyzed the volume of financial resources required to meet sectoral targets, the scope forimproved efficiency, implementation capacity restraints, and the potential role of the private sector.Future sector work will deepen the Bank's analysis on a range of issues in environmental management,forestry, industry, education, energy, transport, and telecommunications. Ongoing studies examineIndonesia's debt management in the context of changing patterns of external financing; the impact of arange of expenditure programs on the poor; and the system of land resource allocation, includingownership, pricing, and the regulatory role of the Government. Planned studies include the privateprovision of public services, public administration, and local government development.

56. Lending Activiies. During FY 93-95, we expect to maintain current lending levels. WithIndonesia's share of new Bank lending well below 10 percent, the share of Indones' . in the Bank portfoliowill fall below 10 percent within the next 5 years. As no balance of paymentz support appears to beneeded during this period, the lending program will comprise project and sector loans in agriculture,including forestry and watershed conservation activities (15 percent), human resource development (15percent), infrastructure (30 percent), and industry, energy and telecommunications (40 percent).

57. The sectoral composition, with attention to special themes such as poverty and environment,continues in line with country and lending priorities. However, the challenges of implementing the"second generation' of policy and institutional reforms to increase productivity and efficiency acrosssectors, regions, and at all levels of administration, clearly require not only policy input and concept"allyconsistent and technically correct designs, but also special sensitivity to local concerns and capacities.The paragraphs below describe the sectoral emphases of future lending, and the lessons to be incorporatedin supervision and lending from the ongoing Portfolio Management Review.

58. Poverty Alleviation. The Bank supports the Government's multi-pronged approach topoverty reduction. First, the Government's outward-oriented growth strategy benefits the poor bycreating jobs in the non-oil manufacturing sector and by continuing support to the agricultural sector,which employs 55 percent of the labor force and accounts for 26 percent of non-oil exports. In theagricultural sector, poverty alleviation will be fostered by diversified sources of growth, promoting treecrops for smallholders, particularly in the Outer Islands, increasing the role of the private sector,increasing productivity, and promoting exports. These objectives will continue to be pursued throughpolicy dialogue that aims at reducing trade and domestic distortions and through lending focused onresearch and extension services, agricultural financing, human resource development and rural services,and improved management of water, land, and forestry resources. Second, the extension of economicinfrastructure and services to the poor, both in urban and rural areas, is evidenced in the largeinfrastructure and energy programs (see Table 3 and paras. 63-66). Third, to help the Governmentimprove basic social services (education, health, nutrition, and family planning), policy studies underwayfocus on the regional dimensions of poverty through increased targeting to reach disadvantaged groupsand remote areas, increased decentralization, and private participation. Emphasis has shifted to improvingthe balance between hardware and the quality and effective delivery of services.

59. In promoting human resource development, future projects will emphasize the quality ofeducation and family planning services for previously unreached groups. In order to improve healthservice delivery, a programmatic approach is being tested by decentralizing planning and budgetingfunctions to provincial and local governments, and by improving cost recovery through service feeadjustments at local levels. A community-based approach to providing water supply and sanitation is

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being developed to encourage maximum coverage and sustainability. The role of the private sector,institutional capacity building, and central program management are also being explored.

60. Improving the quality of primary education, increasing attention to secondary and graduateeducation, and implementing new approaches to industrial skills training are expected to complement theGovernment's development strategy by raising skill levels to compete effectively in one of the world'smost dynamic regions. The concerns of women in development will continue to be addressed mostexplicitly under our population, health, and education programs. Economic and sector studies of healthmanpower issues, income generating strategies, an education sector strategy, and delivery of basicservices will support the policy dialogue and lending program.

61. Environment. Bank support for sustainable development in Indonesia has evolved rapidlyover the past several years, building on the 1989 environmental sector review.8/ Our strategy for thefuture will continue to emphasize improvements in the management of natural resources, includingeconomic and sector work and Bank lending for forestry, land, water, and energy resources, and aproposed Global Environment Facility project for the protection of biodiversity. A second environmentreport is currently being prepared to increase the emphasis given to issues of urban environmentalmanagement and industrial pollution control. Policy analysis and advice in all of these areas will focuson the incentives and regulatory framework for sustainable development. Lending operations willcontinue to strengthen institutions to improve environmental planning and management, including thecapacity for carrying out project EIAs and the involvement of community groups and NGOs in theirdesign and implementation.

62. Private Sector Development. Private sector development has been a central element of theBank Group assistance strategy and has encompassed a range of initiatives in three areas: (i) the policyframework for private sector development (extensive analytical work on the macroeconomic environment,trade and investment regime, and the financial sector), supported by a series of four policy-based loans(Trade Policy Adjustment Loans I and II and Private Sector Development Loans I and Ll) focusing ontrade reform, deregulation, and an improved environment for private enterprise; (ii) supportiveinvestments in physical and human infrastructure; and (iii) financial support to private investment(supporting industrial restructuring, export development and agroprocessing). Lending operations,particularly in infrastructure, support efficient pricing policies and a regulatory framework for privateparticipation. The recently-approved Financial Sector Development Project will support private enterpriseby laying the foundations for a sound, efficient banking system. The Bank will be working with theGovermnent to remove the remaining obstacles to private enterprise, including distortions in the incentiveand investment regimes; constraints on competition and barriers to entry; institutional, legal andregulatory constraints; infrastructure and human resource constraints; and financial system constraints.

63. Infrastructure. The strategic importance of the urban agenda to Indonesia's economic andsocial development makes a clear case for Bank support. Successful pursuit of the Government's growthand equity objectives depends in large part on adequate provision of urban services. Indeed, urbandevelopment incorporates the two main institutional priorities of the Bank - poverty alleviation (over 30percent of the poor in Indonesia now live in urban areas compared to 19 percent in 1976) and the

I/ Indonesia: Forest. Land and Water: Issues in Sustainable Development, Report No. 7822-IND,June 1989.

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environment (particularly "brown" issues). Priority support for urban development will be linked tolending for water and sanitation and integrated urban development projects.

64. Implementation of the integrated urban development concept, which is based on acquiredexperience, involves significant coordination of planning, implementation, and supervision among alllevels of governments in order to improve the delivery of urban services and enable local governmentsto assume greater responsibility for urban management. The complexity of the urban agenda requires(i) flexibility in adjusting implementation arrangements to the reality of regional capabilities and needsand (ii) implementation of sound policy measures related to the budget system, pricing, urban landmanagement, and private provision of public services.

65. The main objective of future transpor projects will be to expand capacity and emphasizeefficiency by enhancing local planning and implementation capacity. Further improvements are requiredin traffic regulations, user fees, and diesel pricing, as well as decentralized implementation. The RoadSector Study (FY94) and Intermodal Transport Study (FY95) will support the p licy dialogue and lendingoperations. Urban transport, particularly in the Jakarta area, requires substantial capital investment thatwill merit rising donor support. In this context, issues of traffic management, operations andmaintenance, efficiency, and cost recovery will have to be addressed.

66. The policy dialogue in the energy and telecommunications sub-sectors will focus onappropriate pricing policies, providing an enabling environment for private entrants, and improvingefficiency of the public enterprises. The lending program will include projects for (i) electricitygeneration, transmission and distribution, and rural electrification, (ii) gas utilization for domesticconsumption, and (iii) improvement of services from the telecommunications sector.

67. The Portfolio hanagement Review - Lessons for Future Lending and Supervision.Portfolio management has long been a concern of the Bank and the Indonesian Government, as reflectedin the establishment in 1986 of a special project implementation and monitoring unit within the NationalPlanning Ministry, BAPPENAS, to deal with procurement and disbursement problems. The newportfolio review process represents, therefore, a continuation of similar mechanisms but in a moresystematic and structured framework.

68. The existing portfolio of Bank loans is diversified by sectors, regions and institutions andsupports important policy changes and service delivery objectives. As noted in para. 26, the portfoliomeets "satisfactory" development objectives as defined by OED, leaving no doubt of its positivedevelopmental impact. The Portfolio Management Review focuses, therefore, on how to improve theimplementation of on-going projects and to better design future lending operations. Two inportant issuesemerge:

(a) The complexity of project designs - in terms of policy changes, institutional and trainingobjectives, broad geographical coverage, innovative technical solutions, and localinvolvement - are overtaxing the supervision capacities both of the Bank and ofGovernment agencies. Consequently, the results often fall short of the institution- buildingand other objectives that should be achieved.

(b) In a few cases, less than satisfactory components of otherwise economically viable projectshave not been restructured or cancelled expeditiously. At present, the restructuring or

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cancellation of two components is being discussed: one under the otherwise successfulIndustrial Energy Conservation Project (Loan 2879-IND) because KONEBA (EnergyConservation Center) has proven to be ineffective; and the other under the Fisheries SupportServices Project (Loan 2773-4ND), as inadequate technical design, land acquisitionproblems, and managerial difficulties require a downsizing of pond areas.

69. The lessons for the future are (i) to devote greater care to project design to ensure thatcomplex projects can be handled within the technical and administrative capacities of the Government andthe supervisory capacity of the Bank and (ii) to reassess doubtful project components as soon as seriousproblems are identified during supervision. Eliminating the problems associated with these lessonsinevitably will require more effective lending preparation and supervision and more regionally-targetedsupervision by Bank staff.

70. Other ways to raise the development effectiveness and quality of Bank supervision andlending include: (i) reducing chronic delays in procurement through the introduction of standard generalconditions for bidding in documents for ICB and LCB in line with Bank guidelines in other countries andreappraising projects if delays exceed reasonable targets; CiH) improving the services provided to Indonesiaby closer supervision and better decision-making with regard to technical assistance contracted underWorld Bank projects; (iii) ensuring more effective supervision of construction quality by Governmentagencies and Bank staff (periodic inspection of construction quality and verification of consistency withcontract terms should be undertaken by third party specialists); and (iv) treating land acquisition andmanagement issues and resettlement issues more realistically during project design (the Government iscommitted to address land market registration and regulation issues, but nationwide progress is bound tobe gradual).

71. IFC and MIGA Activities. Since commencement of reforms in the mid-1980s, the numberand size of IFC projects have grown rapidly. Since 1988, a total of 28 projects have been approved withan aggregate commitment of US$785 million in loan and equity. IFC's investment portfolio encompassesmany of the sectors that are contributing most to Indonesia's private sector growth, including textiles,chemicals, agribusiness, tourism, capital markets and development finance. The experience and workingrelationships that IFC has developed with a large number of corporate groups in Indonesia make it wellplaced to expand its project and capital market activities through the 1990s, with a potential forcommitments of US$200 to US$300 million a year.

72. Indonesia has been a member of MIGA since 1988. Currently MIGA has two outstandingguarantees for Indonesia totalling US$51.5 million. The country limit of US$150 million, based onexisting capital, is not expected to be a constraint for several years.

73. Cooperation with Other Multilateral Institutions. The most recent IMF Article IVConsultation, which took place in February 1992, was an interim consultation since Indonesia is now ona two-year consultation cycle. The Government has not had any standby or extended financingarrangements with the IMF since 1973. The Government's last purchase from the IMF was for SDR 463million in May 1987 under the Compensatory Financing Facility (CFF), all of which has beenrepurchased. There was close coordination with the IMF throughout Indonesia's adjustment period, andthe Fund's Executive Board strongly endorsed Indonesia's adjustment strategy, particularly the policiesundertaken to diversify the economy and accelerate export growth. Effective May 8, 1988, theGovernment has accepted Article VIII status. The Govermment makes effective use of Article IV

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Consultations and receives technical support from the IMF in several areas. Cooperation between theIMP and the Bank continues to be excellent.

74. The National Planning Ministry, BAPPENAS, has successfully led donor agencies incoordinating official development assistance. Coordination between donors on sectoral and regionalinvolvement as well as institutional mechanisms and policy issues has been close and mutually supportive(see paras. 19-20).

75. Summary Assessment. The challenges facing Indonesia are of a second generation nature:improving the incentives to increase private savings and investment (both domestic and foreign) and toenhance efficiency throughout the economy, maintaining fiscal and financial stability, building effectivepublic institutions to help markets work better, reducing hard core urban and rural poverty, andestablishing the regulatory framework to protect the environment. These challenges are increasinglyurgent for Indonesia, which faces the competitive pressures of its neighbors in one of the world's mostdynamic regions.

76. Indonesia's development strategy addresses these challenges and the Bank Group issupporting its efforts with a program that focuses on maintaining macroeconomic stability, sustaining themomentum of structr reforms in finance and trade, building institutional capabilities at central and locallevels to increase both the quality and quantity of basic services, reducing domestic pricing distortions,expanding and improving infrastructure, and enhancing overall skill levels.

77. Indonesia has a solid record of achievement, which is the best indicator of futureperformance. Continued successful performance, in the future as in the past, will be reflected in thefurther improvement of basic social and economic indicators. To attain higher living standards andmiddle income status by the year 2000 will require overall growth of 5-6 percent per annum, growth ofsome 6-7 percent per annum in the non-oil economy, increased savings and investment, and containmentof the current account deficit at sustainable levels (2 percent of GNP).

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Padt H1. TE THRD COMMUNITY HEALTH AND NurRMON PROJEcr

78. Background. Despite impressive progress since the 1960s, Indonesia still faces seriouscommunity health and nutrition challenges. Maternal mortality and morbidity remain high. An increasingproportion of infant deaths occur in the perinatal period, suggesting that the quality and effectiveness ofcare during the birth process needs to be improved. Pockets of low nutritional status are evident acrossthe country, while micronutrient deficiencies contribute to high levels of infant and child mortality,especially among the poor, and in the Eastern islands. Solutions to these problems requirc a shift awayfrom blanket programs, and the development of planning and budgeting procedures which enhance thespecificity and effectiveness of programs at the provincial and kabupaten levels.

79. Lessons from Previous Bank Operations. The principal lesson from investments inmntrition (Ln. 1373-IND) and in nutrition and community health (Ln. 2636-IND) is that carefully designedinterventions, for instance to promote better treatment of diarrheal disi..ase, can work but must bedifferentiated to reflect local geographic, economic and epidemiological conditions. Replication ofsuccessful efforts is more a matter of transferring management and design principles, rather than ofwholesale adoption of 'model' programs or interventions. The Third Health Project (Ln. 3042-IND)shows that interventions can be focused and made more effective by enhancing the authority andresponsibility of provincW and kabupaten health officials. However, increasing the'localization/specificity' of intervention planning depends on skill improvements at the local level, andadjustments in the central role, which enable staff to support, not direct local interventions.

80. Rationale for Bank Involvement. Involvement in the health sector is central to the Bank'shuman resource and poverty alleviation strategies. Further association of the Bank with GOI'scommunity health and nutrition program would facilitate replication of the positive lessons learned fromprevious operations to five more provinces of which three are in Eastern Indonesia. Utilization ofintegrated local-level planning mechanism as the basis for expenditure review and budget allocation inproject provinces, which was developed as a pilot under the Third health project (LN.3042-IND), wouldmake development and recurrent fund allocation for community health and nutrition programs moresystematic and effective. The support provided by the Bank would help improve the productivity ofcurrent staff and facilities, particularly in the Eastern region comprising some of Indonesia's poorestprovinces.

81. Project Objectives. The goal of the project is to elevate infant, child and maternal healthstatus by improving the effectiveness of community health and nutrition interventions in five provinces(West Java, Central Java, Maluku, Nusa Tenggara and Irian Jaya). This would be accomplished by(a) building provinciai capacity to plan, manage and evaluate Safe Motherhood, Child Survival andNutrition interventions, and (b) strengthening the capacity of the central Ministry of Health, primarilythe Directorate General for Community Health, to support provincial efforts.

82. Project Description. To support the above objectives, the project would have three majorcomponents:

(a) ProWncial Service Delivewy and Capacity Development, which would include assistance forSafe Motherhood, Child Survival, and Health and Nutrition Education in West Java, CentralJava, Irian Jaya, Maluku and Nusa Tenggara, through:

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(i) construction and rehabilitation of health facilities, provision of medical equipment,furniture and vehicles, drugs;

(Ii) studies, surveys and assessment for the development of service delivery strategies;and

(iii) technical assistance and training, Including NGOs and indigenous people beneficiariesof the project.

(b) A Central Support Serices and Capacky Building component wDll help the Bureau ofPlanning and the Directorate General for Community Health, the Center for HealthEducation, and the Center for Health Information to build their capacities in policydevelopment and program planning and the conduct of interprovincial programs andresearch by:

(i) constructing a training center for radio communication; and

(ii) pr;viding for instructional materials, equipment, furniture, vehicles, technicalassistance, training, fellowship and studies.

(c) Central Human Resource Support: This component would strengthen the quality andrelevance of the research and training activities in higher education through:

(i) health personnel policy studies relating ,o the role and functions of doctors,deployment of village mid-wives, health staff career path and local-level healthmanagers;

(ii) construction and rehabilitation of traiing centers and provision of instuctionsmaterials, equipment and furniture; and

(iii) training and technical assistance.

83. The project cost is estimated at US$164.1 million equivalent, with a foreign exchangecomponent of US$64.6 million equivalent (39 percent) and taxes and duties estimated at about US$6.0million equivalent. The Bank would finance US$93.5 million equivalent or (62 percent of the total costof the project, excluding taxes and reserve procurement). A breakdown of project costs and the financingplan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and thedisbursement schedule are shown in Schedule B. A timetable of key project processing events and thestatus of Bank Group operations in the Indonesia are given in Schedules C and D, respectively. A mapis also attached. The Staff Appraisal Report, No. 11255-IND dated November 25, 1992, is beingdistributed separately.

84. Project Inplementation. The proposed project would be carried out by the Ministry ofHealth. A bottom-up approach will be adopted in implementation through integrated annual planningbased on district level initiatives and through consultation with project beneficiaries. These annual plansand a systematic mid-term review of project progress will refine intervention programs and resourceallocations from year to year. Guidance and support on operational matters, intersectoral coordination

-23 -

and overall project evaluation and monitoring will be the responsibility of central-level organizations suchas the Advisory Board and the Steering Committee. A Project Secretariat which will be located in theMinistry of Health will facilitate project implementation by coordinating activities between the central andprovincial levels. A Management Advisory Group composed of internationally recruited specialists willassist the Secretariat in carrying out its functions. Provincial and district level project managers will takecare of day-to-day project activities.

85. Project Sustainability. In view of recent positive trends in budgets for recurrent costs,representing 0.3% of GDP in 1990/91, no major problem is anticipated in providing for suchexpenditures. However, there is a need to ensure significant and measurable long-term improvementsin the quality and effectiveness of community health and nutrition programs. To this end, the projectwould emphasize bottom-up planning and adjustments to expenditures after reviewing results on theground which would enable central and provincial authorities to identify which expenditures (investmentor recurrent) shoild become sustained elements of community health and nutrition programs beyond theproposed project.

86. Agreed Actions. Prior to negotiations, the Government submitted (a) detailed Terms ofReference describing the roles and functions of the Provincial Planning Units and the Dokabu in themanagement and implementation of the project, (b) an organizational chart and detailed terms of referencefor the Central Project Secretariat within the Directorate General of Community Health, includingspecification of its proposed relationships with other central units of the Ministry of Health, includingPusat Data, the Center for health Education (PKM) the Center for Research and Development and(c) Draft LCB documents for the procurement of civil works and goods and ICB documents for theprocurement of goods.

87. At negotiations, the Government provided assurances on: (a) the arrangements for projectmanagement at the central and local levels; (b) project implementation plans, monitoring and evaluation,including mid-term implementation review; (c) annual research programs; (d) carrying out anthropologicaland ethnographic studies in project areas iri:abited by indigenous people and adopting measures for healthand nutrition services delivery to indigenous people by taking into account their preferences afterconsultation with them; (e) carrying out a feasibility study to measure health outcomes; and (f) to procurefrom its own funds, the vehicles required for the project as vehicle imports to Indonesia are banned(reserve procurement).

88. A condition of loan effectiveness is that all conditions precedent to the effectiveness of theKfW Grant Agreement, other than those related to the effectiveness of the Loan Agreement, would havebeen met.

89. Environmental Aspects: The proposed project would not have any adverse impact on theenvironment. Consultation with and support for indigenous people have been incorporated in projectdesign and implementation arrangements.

90. Project Benefits. A conservative estimnate is that the safe motherhood, child survival andnutrition interventions would directly benefit approximately 1.5 million families, about 10% of thoseresident in the project areas, identified on the basis of their demographic characteristics and health needs.Services in each of these areas will be improved in quality, and their reach will be expanded throughmore efficient targeting of resources. Women in each of the provinces would be beneficiaries both as

- 24 -

recipients of better health and nutritional services, including the care necessary to assure healthy birthsand improved child health. Moreover, as health service providers, many women, including villagemidwives, puskesmas staff and traditional birth attendants, will experience improvements in job conditionsand status.

91. By the end of the project, it is expected that routine evaluation of community health andnutrition activities in each province would record significant, measurable improvements in infant andmaternal health, nutritional status and in related practices. Each of the five provinces would have adaptedoperational procedures and policies linking the management of health centers and posyandu to theparticular conditions found within their borders, and would show measurable changes in the effectivenessof programs delivered through these channels. Mechanisms for improving coordination between theprovincial government, especially in the Eastern Islands, and NGOs in health and nutritional policies andprograms would be strengthened and the knowledge base for delivery of culturally acceptable andeffective maternal and child health and nutrition programs among indigenous peoples would be improved.Province and kabupaten health management teams would have stronger planning and evaluation skills.At the center, it is anticipated that the Community Health Directorates would have significant additionalskills in planning and evaluation of safe motherhood, child survival and nutrition programs and proposalsfrom the provincial level, and in the provision of technical guidance and support to provincial andkabupaten levels. By focusing attention on the Eastern Islands, the project would also contribute to moreequitable distribution of sectoral resources.

92. Project Risks. The major risk for the project is that since provincial and kabupaten healthadministrators have not yet had sufficient experience in the preparation and implementation of specificSafe Motherhood, Child Survival and Nutrition interventions, the quality of these plans will bedisappointing, especially in the early years of the project. To address this risk, the project design callsfor a range of capacity-building and staff development interventions at the provincial, kabupaten andhealth center levels. In addition, Schools of Public Health and research and training institutions innutrition, the Academies of Nutrition and Institute for Food and Nutrition at Bogor, will adapt theirresearch and training programs to meet provincial needs. An internationally recruited and appointedPanel of Specialists will also provide technical advisory and, if necessary, specialized consultationservices to support provincial efforts and ensure cross program and cross province sharing of successfulexperiences.93. Recommendation. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank and recommend that the Executive Directors approve the proposed loan.

Lewis T. PrestonPresident

Attachments

Washington, D.C.December 4, 1992

Annex I

b~~~~~~~~~~~~~ssia ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ rwiis ~~~~~~~I t PasIa- E05UUC INDIATUS

PMU 1 OF 3Nid-1991 PxAlation oils.) 181.41991 Per Capita UP In US8: 610

A. Sharm of Gross Daustic Prcd.ct S. Orwth Rates(% per aivun)(f rom arrant price data) (fan cm tent price data)

1965 1973 1IW0 1969 1990 199l1p 1965-7 1973.80 1980-91 990 1991/p,Gross Daiwtic Prodzt M.P. 100.0 100.0 100.0 100.0 100.0 100.0 6. .W. . .

Net indirect Tame 2.3 4.6 3.3 .. .. ... 3.* ~~~~~AiriaAtUr 56.0 33.2 21.0 23.4 21.5 193i 4.8 3.8 31 2.0 1.

ifdjsry 12.6 26.5 41.7 37.1 39.3 41.2 15.2 7.3 5.9 9.7 9.9(Of bAtich Nowaniufootin) 8.4 10.6 13.0 18.1 20.3 21.3 9.0 14.7 12.3 12.2 9.8$ervices 31.4 35.2 34.3 39.5 39.1 39.5 5.0 10.1 6.7 7.3 5.8

* ~~~~Resource Balance -0.1 1.7 12.8 2.3 0.5 0.7 . .

berts of ONFI 5.3 20.3 33.0 25.4 a6.4 27. 12.6 5.8 3.9 0.5 24.3Ispert of OF 5.4 18.6 20.2 23.1 25.9 26.8 17.6 12.6 2.3 23.1 13.6

thtal Ejpeftwoliu 100.1 96.3 87.2 97.7 99.5 99.3 5.7 9.1 5.3 11.7 3.9

Totat CwA,uption 92.3 77.5 62.9 62.5 62.9 64.3 3.9 8.3 4.7 7.9 8.4prbsete Conia.aption 87.2 67.8 52.3 53.1 54.0 55.1 3.4 7.6 4.7 8.7 8.6Gerwal Ge*Twmut 5.1 9.7 10.5 9.4 8.9 9.2 9.8 13.9 4.7 3.2 7.2

Gross anstic hirassumit 7.8 20.8 243 35.2 36.6 35.1 17.5 11.9 6.91 19.8 -4.9Fixed Ihwsuont.. . . . . ... .

Charms in Stockis . . . . . * ..

Gross Doaneti wivrq 7.7 22.5 37.1 37.5 37.1 3S.7 23.8 15.9 4.4 14.3 -4.3Not Factor IrE. 1.2 -1.7 -4.1 -4.8 -4.9 -4.7 . .

Not Cwront Transfers .. 0.0 0.0 0.2 0.2 0.1 . .

Gross Natiealt Savirg ZDA0. 33.0 32.9 32.4 31.1 .. 187 . 14.1 -.5.6

In biltlions of R"ish 1965 1973 19W 1969 1990 1991(at cwmtwrt 1987 puloes) ... .. ... .. ... ..

Gross Damtic Prochct 3331 54171 O80M 141831 151694 1617W 6.6 7.2 5.6 7.0 6.6capacty to Japert 328 95 33472 2893 3237 36969 23.9 16.2 0.3 14.0 14.2Term of Trada Adj'aumnt -6202 -11879 3090 -4949 -1121 -46(66 .

Gross Osmatic Im ur 2696 42292 91182 136882 15573 1I7M 6.1 10.3 4.6 10.0 4.3Gross National Produft 312W 5092 MO 1354 14M2 1550 6.6 7.1 5.8 6.7 6.4Gross National I o 24956 39102 8544 131600 144817 ISM 6.1 10.4 4.7 9.8 4.0

C. Prce Iriew 1~7 ........... (196 a 100) ........---- inftation Ratesc% p.c.).----C. Price Ia~~icea 1960 1966 196 196 1990 199l/p 1965-7 1973-80 19809 1990 1991/p

CWWonsr POrcs (IFS 64) 54.4 91.6 108.0 1151.0 1234 135.0 34.0 16.7 8. 7.5 9.2ll atolea Prices CIFS 63) 50.1 83.9 101.9 113.9 125.4 131.8 .. 20.3 9.2 10.0 5.1lapticit GOP Oaftater 55.5 86.3 107.6 117.9 129.8 140.8 65.4 19.8 8.5 10.1 8.5Isplicit S2psdiwes DOfI. 54.5 86.2 111.2 121.6 130.7 144.9 65.6 16.6 9.4 7.4 10.9

0. Oth er uiaters: 1965-73 1973-80 1980-91

GrcsthRtOCe .a):2.4 2.3 1.8Labo rFor 2.1 2.1Gross Natt. Incon P.C. 3.6 7.9 2.9Privat Casuiptian p.c. 1.0 5.1 2.8

Import Etasticity...... ...............IWMpt CGNFS) / ShCn) 2.7 1.8 0.4 Note: Dafta in these tebles (expressa in

1987 prices) are not directlyMafgnal savinp Rates: coiparabe to the data in the text

gross NWatioa Sang .. 46.6 30.3 bhich are based on revised natiomtarass Daomtic Swi,e 42.1 49.9 33.9 accsmots in 196 prices.

lam (period awragsm): . 4.7 Grms Osmatic In4usunrt is notdissggrqated as dwaea In stools

Share Of Total 1905 1973 1960 1990 1991 1s darfhsd as a romatLt.Labwr Forc in:... .. ... ..

laoultwe 70.5 63.5 57.2 52.5 51.6; na neit aplioabemlinistr 9.0 11.1 13.1 16.4 16.9 .. n at wavtaiblservices 20.5 25.4 29.7 31.1 31.5 p a preliminaryTotal 100.0 100.0 100.0 100.0 100.0...............

tic 03-Dec1-92

Annex 1

IrdinesiaIr nsia - ECIGIC JIDICATRS...............................

PAGE 2 OF 3......... ................ .......... ................. ................ .......................... _ ................................................. .. ... _..... ........... ...............

Volue Irdax (19a7=100) Vatw at 0Armt Prices (m Itla US$).- _-.- . .....................

E. Mardiwdise Exports 1981 1987 1988 1989 1990 1991/p 1981 1987 1988 1989 1990 1991/p,,,,,,,,.,... ... ,,........... ........... .. ....... ....... ....... ....... .... ... ....... ....... ...... .... ... ....... -....... ..---...-.

oil & LUs 109.? 100.0 99.0 104.3 110.2 114.7 18124 8818 64.3 9305 12W28 10645RLher 73.7 100.0 101.8 101.6 103.8 111.6 770 1055 1236 952 902 932Coffee 79.9 100.0 116.8 144.2 150.7 149.3 343 497 572 448 366 362Palm Ofi 26.0 100.0 114.6 13.9 154.8 158.4 79 214 313 279 Z22 349lNufecture 1S.S 100.0 123.5 168.8 180.9 234.7 693 4538 922 8245 9472 12171Other Exports 105.2 100.0 94.S 89.5 86.0 88.4 2295 3199 4141 4370 4358 4958Total Exports FOB 85.9 100.0 104.7 117.3 122.8 139.0 22994 18320 19827 23598 2800 29418

F. Mardrnise lxports....................... ........................ .

Food 149.6 100.0 104.3 108.2 112.1 114.4 1673 820 1012 988 940 979Fuel and enrWgy 197.6 100.0 79.4 93.2 112.3 106.1 5407 3123 2629 3146 4006 3859Other wmurer vood 161.8 100.0 108.4 113.1 139.3 141.6 667 382 490 529 970 1000Intm fdi ate god 112.9 100.0 107.9 125.1 143.6 160.7 4831 4986 S587 6610 8014 9150Capital good 148.6 100.0 108.0 132.6 180.2 198.1 7389 5675 6497 8138 1165 13100Total fps CIF 148.6 100.0 102.1 120.1 150.4 161.5 19968 14886 16215 19411 25615 209

6. Morcwindi se Ten. of Trede 198 17 1 1989 1990 1991/p............................................... _............ ....... ....... ............... _ ... ..... .. ... ..

Nerh. Epr Prfce Index 143.5 100.0 103.4 109.8 124.5 11S.Sadh. Iporta Price Irbx 89.9 100.0 106.6 108.5 114.4 116.8

VANd:. Tem of Treb 1S9.S 100.0 96.9 101.2 188.8 9L9

U0 .itersm (at curret prices):-- - -- - ..... ......... .._..........

M. Btalnce of Paymnts /a 1980 1987 1928 1989 1990 1991/p... ..................................... .... ..... .... ..... .... ..... .. _........

Exports of Goo & NFS 22122 18271 20878 24849 29295 32282Nwerhdise (FMB) 21795 17206 19509 22974 26807 29430Nan-Fawtor Services 327 1065 1369 187S 2488 2852

Inrs of Gook a Fs 16101 16972 18S37 21749 27511 31120Merchandise (FOB) 1244 12532 13831 16310 21455 24626Naw-Factor Servie 3477 4440 4606 5439 6i16 6494

Resource oalarce 6021 1299 2441 3100 1784 1162

Not Factor Irc -3211 -364 -4092 -447 -5190 -5504(interest per eRs) 1452 3201 3564 3715 3B55 4444

Nat Crrent Trwsfes 0 86 99 167 166 130(wokes ri s) .. 86 99 167 166 130

Dirr A/C Bal Befoe Off. Grwts 2800 -2269 -1552 .1280 -3240 -212Net Official Trafer 201 171 155 172 252 13

aur A/C Bat After off. Greets 3006 -2098 -1397 -1108 -2988 -4080

LoTa-T Capital Inflow 2153 2511 1809 3016 4724 5912Direct Inwestuint 180 385 576 682 1093 1482Net LT Lon MRs dta) 1613 2334 2145 2859 5171 35nOthr LT Inflo (et) 360 -208 -912 -53 -1540 MP

Total Other Ite nat) -2553 217 -53 -1413 S15 -303Net Short Term Capital -815 970 408 -98 -229 214Cepital Fltos I.E.I. 0 0 0 0 0 0Errors d Onssias -1738 -753 -3 -1315 744 -517

Owss in Net Reserves -2606 -60 113 -495 -2251 -1529Net Credit from the UIF .. 665 -93 -15 -114 -328Odter Resees wa -2606 -1294 206 -480 -2137 -1201

As Share of (DP:Resource 8alare 7.7 1.7 2.9 3.3 1.7 1.0 Notes: Nardwdise trade dckt ofInterest PeA its 1.9 4.2 4.2 3.9 3.6 3.8 Sectic E & F is an a ffstalyurrent AccocLit Balane 3.6 -3.0 -1.8 -1.4 -3.0 -3.6 beefs.

.mrdn Itetm: p a pretimfnsy dtaResers exol. Geld (nil. US$) S392 5592 58 5454 7459 938 .. = not availableReserves frl. God (all. UW) 6M0 7095 63 65S9 8657 10358 a a Thle figue my diffe freOfficial X-Rate (LaUhS) 627 1644 1686 1770 1843 1950 tihe In th text as tho arInd Real Eff. X-R Be 1980 100.0 50.8 49.0 49.7 48.7 47.6 based on a calenkr yarGDP (alU lam fa current US) 78013 75902 84300 94452 106858 116476........................................................................................................................................ ............................................

1EC 03-Dec92

innnx 1

talcrwsia- EOliC tiDICWATW

PAW 3 OF 3....................................................................................... ............................................

ON" of DP growth RatesGevemunt Fil 1981 187 1988 19W 1990 1991/p t419148 1918 19 1990 I991/p..... ................................................................... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... .......

airrt Reewipts 20.7 17.1 16.4 17.6 213 18.2 9.6 9.3 26.0 42.6 .1.4ovt t Lrehditwes 13.7 12.3 11.8 11.9 12.2 11.1 10.8 9.6 18.4 20.8 4.8*Wrrent 8ud itblm 7.0 4.8 4.6 5.7 9.1 7.2 w re no r- n3

Capital Receipts 0.0 0.0 0.0 0.0 0.0 0.0 re "a3 naCapitat Wdies 83 7.1 T.6 6.9 7.1 7.4 11.8 22.6 6.2 21. 19.2Overalt Deficit -1.3 -2.2 -3.0 -1.2 2.0 0.2 to 13 33 1 no

Official capital arwit 0.1 0.3 0.4 0.4 0.3 0.2 45.8 .8 8.8 -7.7 -16.7btwt SorrcuiM (nat) 1.4 1.8 3.7 1.5 0.8 0.6 29.9 137.4 -52.0 -35.2 -13.5Demstic nr-B*U Bre.sii 0.0 0.0 0.0 0.0 0.0 .0 re no no re noDosti8 e Bu* Fiuwr.w .0.2 0.1 -1.1 -0.7 -3.3 -0.6 re t re n I

Not Dls Asuut (U Aie) Debt Outstading & 0lebsed (US mtllitci)

ad Debt 0urdm Rtios /a 19lO 197 19"s 189 10 1980 197 188 18o 19 1991/p.------ . .......................... .. ....... .. ....... .. ..... ....... .... ..... .... ...... .. .... .... ..... .... ..... ......

Paec & P"licly ar. LT 1611 207 19 203 613 1434 1527 408 41261 410W9 450 4800

Official CredItors 806 2#3 2951 2 209 27 24783 26552 28833 MM55 37214liti lateral 393 322 1702 1409 1116 1296 1834 9610 1078n 118 7 14266 15955

of iid h 1I 301 1006 1219 714 436 M90 1060 7391 80 8O42 9542 1097of dich MA 40 9 .5 -7 -11 -13 566 866 861 854 842 8a9

Bilateral 413 1221 120 1477 139I3S 45 77 131S8 1SMZ9 16166 1908 21259

Prive Creditors 808 -486 -I6S -4 -18 -1 54 16120 1469 126 11716 10789aliea -5 -4 -S56 - -5 -8 1568 47 4183 3048 2698 8372Finmfatl Nrket m -80 -411 -224 -8 -83 3897 1188 10564 9788 9018 8m7

Privat MMnWAWted 2 UT 160 86 4558 2136 3142 4106 4365 5091 968 11745Total LT 1613 334 2145 9l 5171 1 1819 45013 45506 4619 566 597uu Credit 0 66 -6 0 -157 -317 0 T16 63 608 490 166Net short-Tim Cpital .815 970 A0 -98 29 214 2775 6M60 6727 W 73 135 1486Total lncl. DV & Nat ST 798 3910 246 27N1 4M 3S68 204 SW209 5s6 54762 68181 AM53

Bui* awd IDA Ratios 1980 197 198g 1 1990 199/p............... .................. .... ... .... ..... .... ..... .... ..... ..... ...

NWar of Touta Law-Teong go1. tet as 2 af Touta 5.7 16.4 17.6 LS 17.5 17.72. tOI as Xof Total 3.1 1.9 1.9 1.9 1.5 1.43. tUSODA asoI Total 8.8 13 19. 20.4 19.0 19.1

dhaf LT Debt SeviCe1. I11RD 2 X of Total 4.3 13.0 13.1 13.7 15.7 15.12. MA asXof Total 0.2 0.2 0.2 0.2 0.2 0.23. UD4D as X of Total 4.4 13.2 13.2 13.9 15.9 1U.3

O-to0-Eprts Ratios......... .. !.......... _

1. Lai-TerOm Ost 81.7 37.9 212.0 180.5 1M.0 181.32. OMF Crdit/EU0t 0.0 3.8 2.9 2.4 1.7 0.53. Short-Te,udAblP tS 12.5 3A.6 313 31.2 43.6 44.24. LT*UHPfS D5/Et&r 91.2 2753 246.2 214.1 22.3 226.0

DW-to-W Ratfos...... ........ --...

1. Law-TOe DebtV/W 23.3 59N 51.0 48.9 51.2 S1.32. PW Credit/sP 0.0 0.9 0.7 0.6 0.5 0.13. Short-Tern Debt/P 3.6 .4 8o 84 12.2 12.54. LT+INFIGT DO/GP 21.9 68 6 .7 S8.0 5.8 64.0 ..................

Nt: The O at fhn t is an aDebt Savce /Sports a fiscal War osis......................

1. Ptblic l e uateed LT 7.9 30.0 32.4 27.1 223 20.7 p aprelimiary daft2. Privae waft girWtd LT 4.7 5.S 5.5 5.2 5.0 7.7 no r ot e1bIle3. Total Law-TerM Debt Svice 1L7 35.5 3.9 32.3 27.3 23.4 .. r ot a le4. IMFP Rapaaesav. Chg. 0.0 0.1 0.5 0.2 0.7 1.1 a t aludas Lfn expufln credits5. Intest enlyan ST Debt 1.2 3.0 2.9 2.8 2. 3.0 .............................................6. Totel (LTINF4ST Int.) 135 38.6 41.2 35.3 30.? 3.............................................. e.....................................................................................

Sdtedute-APage 1 of 1

ENDONESIA

TDM COIIMRJNITY HEALTH AND NUTRMON PROJECT

EffMATED COST AND FiNANCaNG PLAN(US$ million)

Local Foreign Total

Provincial Service Delivery and Capacity1. Service Delivery 30.5 20.0 50.52. Capacity Building 21.8 14.9 36.7

Subtotal 52.3 34.9

Central Support and Capacity Building1. Policy Development, Planning and

Project Coordination 6.3 2.6 8.92. Technical Services for Provinces 14.7 8.5 23.23. Inter-provincial programs and research 3.5 1.3 4.84. Capacity building 2.9 7.3 10.2

Subtotal 2A 19.7 47.1

Total Base Costs La 7975 134.3

Physical Contingencies 2.3 2.8 5.1Price Contingencies 17.5 7.2 24.7

Total Project Cost La 92 64.6 164.1

Financing Plan: Local Foreign Total

IBRD 45.4 48.1 93.5Kreditanstalt fur Wiederaufbau (KfW) 2.0 16.5 18.5Government of Indonesia 52.1 - 52.1

Total Flnancing U O MA

la Inclusive of taxes and duties estimated at US$6.0 million equivalent.

bekhedune BPage I of 1

INDONESATHRD COMMUNITY HEALTH AND NUTRITION PROJECT

SUMMARY OF PROPOSED PROCUREME ARRANGEMEM(IUS$ million)

Procurement Total costproedures including

ICB LCB Odiers La N.B.F. contingencies

Civil Works 27.4 2.0 29.4(10.8) (1.0) (11.8)

Fumniture 1.3 1.3

Equipment, boats andmediclsupplies 3.0 4.4 3.1 20.0lk 30.5

(3.0) (3.5) (2.0) (8.5)Vehicles LQ 7.0 7.0

Instructional materials 2.2 1.4 3.6(1.9) (1.0) (2.9)

Co4nsultant services 9.5 9.5(9.5) (9.5)

Research and studies 13.4 13.4(13.4) (13.4)

Fellowships 22.1 22.1(22.1) (22. 1)

Workshops and in-country traiing 28.2 28.2('19.9) (19.9)

Project management ad5.4 5.4(5.4) (5.4)

Incremental recurrent costs 13.7 13.7

Total Q 3. 85.1 42. 1641(3.0) (16.2) (74.3) (93.5)

Note: Figures in parentheses are the respective amounts financed by the Bank.N.B.F.: Not Bank-Financed.

La Includes international and local shopping, selection of consultants following Bank Guidelinesand selection of fellows using government administrative procedures acceptable to the Bank.

Lb US$18.5 million is cofinanced by KfW using Bank guidelines.LQ Res.ve procurement financed by GOI.Id Project management includes expenditures directly related to the management of the project

such as travel, consumable materials, honoraria etc., but excludes salaries.

Schedule CPage 1 of 1

INDONESIA

THIRD COMMUNITY HEALTH AND NUTRITION PROJECT

TIErABLE OF KEY PROJECT PROCESSING EVENTS

(a) Time taken to prepare the project: 23 months, August 1990-July 1992

(b) Prepared by: Government with Bank Assistance

(c) First Bank mission: July 1990

(d) Appraisal mission departure: July 1992

(e) Negotiations: November 1992

(t) Planned date of effectiveness: April 1993

(g) List of relevant PCRs and PPARs:

Credit/Loan No. Project PCR Date PPAR No.

Ln. No. 1373 First Nutrition Project June, 1985Ln. No. 1472 Second Population Project September, 1985Ln. No. 7564 Third Population Project December, 1988Ln. No. 2235 Provincial Health Project June, 1990

Cr. No. 0300 Population I 3748Ln. No. 1472 Population II 6276

Recent Sector Reports

Indonesia - Issues in Health Planning and Budgeting; Report No. 7291-IND, February 28, 1989.Indonesia -Family Planning Perspectives in the 1990s; A World Bank Country Study. Washington, DC:World Bank. April, 1990.Indonesia - Health Insurance Issues in the 1990s; Report No. 999-IND, January 9, 1992.

The project was appraised by a team led by Ms. Susan Stout and included Mr. Samuel Lieberman,Principal Economist, Ms. Fadia Saadah, Population Specialist, Mr. Harry Go, Senior ImplemenwationAdvisor, Dr. E. Iswandi, Operations Officer, Ms. Carol Ball, Operations Assistant, Professor PeterHeywood, Public Health and Nutrition Specialist, Dr. Moye Freymann, Public Health and MCHSpecialist and Mr. Terry Scott, Health Education Specialist. Ms. Christine Heimburger and Dr. Claus-Pieter Janisch appraised the project on behalf of KfW. Ms. Marianne Haug, Director (EA3DR) and Mr.C. Gilpin, Chief (EA3PH) have endorsed the project.

Schedule DPage 1 of 5

STATUS OF BANK GROUP OPERATIONS SN XNDOESja

A. iTATE1ENT OF DANX LOANS AND IDA CREDITS i

(as of September 30, 1992)

- , Amount fUSS millioniLoan/ Bank IDACredit Flscal Original Prlncipal Undis-number Year Purpose (les cancellation} burned

One-hundred-fourty-four Loans and 8,446.45 901.60fourty-eight credits fully disbursed

Of which SECALS, SALs and Program Loans _b

2780 1987 Trade Policy Adjustment 300.002937 1988 Second Trade Policy Adjustment 300.003080 1989 Private Sector Development 350.003267 1991 Second Private Sector Development 250.00

Subtotal: 1,200.00

2341 1984 Third Agricultural Training 63.30 0.152431 1984 Second Swamp Reclamation 64.00 6.612474 1985 Upland Agriculture and Conservation 11.30 2.902494 1985 Smallholder Rubber Development ir 74.00 13.402529 1985 Fourth Population 35.13 1.622542 1985 Second Bealth (Manpower Development) 38.30 5.142S43 1985 Kedung Ombo Multipurpose Dam 156.00 5.96

and Irrigation2547 1985 Second University Development 147.00 15.582560 1985 West Tarum Canal Development 41.40 0.352577 1985 National Ports Development 82.69 9.802578 1985 Transmigration V 97.00 4.062628 1986 Smallholder Cattle Development 30.00 2.482632 1986 Second East Java Water Supply 43.30 2.812636 1986 Second Nutrition & Community Health 33.17 1.322638 1986 Nusa Tenggara AgarLculture Support 33.00 12.932649 1986 Central and West Java Irrigation 166.00 1.972690 1986 Gas Distribution 34.00 12.192705 1986 Manpower Development and Training 58.10 7.312725 1986 Housing Sector Loan 200.00 2.76

A The status of the projects listed in Part A Ls described in a separate report onall Bank/IDA-financed projects Ln execution, which is updated twice yearly andcirculated to the Executive DLrectors on April 30 and October 31.

/b Approved durLng or after FY80.

Sichedule -DPage 2 of 5

Amount fUSS million Loan/ Bank IDACredit Fiscal Original Principal Undis-number Year Purpose (less cancellationl bursed

2748 1987 Third National Agricultural Extension 55.00 7.412773 1987 Fisheries Support Services 24.50 14.272778 1987 Power Transmission & Distribution 226.00 20.272800 1987 BRI/KUPEDES Small Credit 101.50 0.622817 1987 Regional Citile Urban Transport 51.00 1.122879 1988 Industrial Energy Conservation 21.00 4.462881 1988 Second Rural Roads Development 190.00 30.392891 1988 Railway Technical Assistance 28.00 6.772930 1988 Forestry Institutions & Conservation 30.00 13.642932 1988 Jabotabek Urban Development 150.00 69.922940 1988 Accountancy Development 113.00 62.742944 1988 Higher Education Development 140.30 12.032979 1988 Second Export Development 165.00 18.292992 1989 Tree Crop Human Resource Development 18.40 9.313000 1989 Tree Crop Processing 118.20 86.723031 1989 Agriculture Research Management 35.30 19.903040 1989 Industrial Restructuring 284.00 76.753041 1989 Small & Medium Industrial Enterprise 100.00 14.963042 1989 Third Health 43.50 27.573097 1989 Power Sector Efficiency 337.00 243.483098 1989 Paiton Thermal Power 354.00 240.473112 1990 Public Works Institutional 36.10 17.63

Development & Training3133 1990 Highway Sector 350.00 142.353134 1990 Professlonal Human Resource Development 117.50 72.153158 1990 Second Secondary Education 154.20 123.023180 199C Rural Electrification 329.00 254.953182 1990 Third Telecommunications 350.00 270.243209 1990 Gas Utilization 86.00 78.383219 1990 Second Jabotabek Urban Development 190.00 171.313243 1990 Second Forestry Institution 20.00 18.75

and Conservation3246 1991 Third Jabotabek Urban Development 61.00 55.393249 1991 Second BRT/RUPXDES Small Credit 125.00 82.923282 1991 Fertilizer Restructuring 221.70 105.353298 1991 FLth Population 104.00 91.923302 1991 Provincial irrigated Agriculture 125.00 115.03

Development3304 1991 East Java/BalL Urban Development 180.30 166.903305 1991 Yogyakarta Upland Area Development 15.50 13.533311 1991 Second Higher Education 150.00 127.26

Schedule DPage 3 of 5

Amount (USS million)Loan/ Bank IDACredit Fiscal Original Principal Undis-number Year Puroose fless cancellation) bursed

3340 1991 Sulawesi-Irian Jaya Urban 100.00 95.49Development

3349 1991 Power Transmission 275.00 268.543385 1991 Technical Assistance Project tor 30.00 27.00

Public and Private Provisionof Infrastructure

3392 1992 Second Irrigation 8ubsector 225.00 181.393402 1992 Agricultural Financing 106.10 104.363431 1992 Third Non-Formal Education 69.50 67.003448 1992 Primary Education Quality Improvement 37.00 35.513454 1992 BAPEDAL Development fc 12.00 12.003464 1992 Treecrops Smallholder 87.60 87.603482 1992 Fourth Telecommunications 37S.00 375.003490 1992 ICabupaten Roads III L2 215.00 215.003496 1992 Primary School Teacher Development 36.60 36.603501 1992 Suralaya Thermal Power LS 423.60 423.60

Total 17,047J4 9Q1.60of which has been repaid 3,024.39 83.17

Total now held by Bank and XDA L4,I22 818.3Amount sold 88.08of which repaid 70.10

Total undishursed 4.926.60

Le Not yet effective as of September 30, 1992

Page 4 of 5

B. STATEMNSt OX n C INVMSTM?s IN XNDONgSZA(as of September 30, 1992)

fuSs millicOnlUndisbursed

Original Total includingFiscal Comitments sold Participants'

Year Comnany Type of business Loan Eguity Total bv IC Portion

1971/74 P.T. Primatexco Textiles & fibers 4.0 0.8 4.8 - -

1971 P.?. S nitex Textiles a.fibers 2.5 0.8 3.3 0.3 -

1971/73/ P.T. Semen Cibineng Cement 46.0 5.8 51.8 - -

74/76/841971 P.T. Kabel Indonesia Cables 2.8 0.4 3.2 - -

1972/77/ P.T. Daralon Textile8 Textiles & fibers 5.8 1.S 7.3 - -

79 Hf g. Corp.1973/89 P.T. Jakarta Tourism 9.8 2.7 12.5 2.7 -

Int'l Hotel1974 P.T. Private Dev. Development - 0.5 0.5 0.4 -

Finance Co. of financeIndonesia

1974 P.T. Monsanto Electronics 0.9 - 0.9 - -

1974/77 P.T. Kamaltex Textiles 3.8 0.8 4.5 - -

1980 P.?. Papan Sejahtera Housing finance 4.0 1.2 5.2 1.2 -

1980 P.?. Supreme Indo- Dinnerware 11.1 0.9 12.0 - -

American1980/87 P.?. Semen Andalas Cement 48.6 5.0 53.6 20.9 -

1982/85 P.T. Saseka Gelora Leasing 5.0 0.4 5.4 0.4 -

Leasing1988 P.T. Bali Holiday Tourism 11.3 - 11.3 2.2 -

1988 P.T. Asuransi Jiwa Insurance - 0.3 0.3 0.3 -

1989 P.?. Monterado Mining 8.0 2.0 10.0 - -

1990/91 P.T. Astra LI Manufacturing 12.5 12.5 25.0 12.S -

1990 Federal Motor JA Manufacturing 12.5 - 12.5 ^ -

1990 Nomura Fund Ctry. Fund - 3.0 3.0 1.5 -1990 Bank Umum Nasional Dev. finance 10.0 - 10.0 10.0 10.01990 Bank Kiaga Dev. finance 7.5 - 7.S 5.0 5.01990 Raja/Pendopa Oil exploration - 3.6 3.6 3.6 1.71990 P.T. Agro Muko Plantations 10.5 2.2 12.7 12.7 5.71990/91 Indo Rama Synthetics Textiles 27.0 6.2 33.2 33.21991 P.?. Astra Manufacturing 9.9 - 9.9 - -

1991 Argo Pantes Textiles 83.0 13.0 96.0 43.0 -1991 P.?. Asahi Chemicals Chemicals 4.0 1.8 5.8 5.8 0.41991 P.T. Rimba Partikel Wood products 20.0 0.6 20.6 10.8 2.81991 P.T. Saseka GeloraL/ Leasing 20.0 - 20.0 - -

1992 P.T. Nusantara Capital markets 2.5 - 2.5 2.5 -

1992 P.T. Citra Agramas Capial markets 2.0 - 2.0 1.7 -1992 P.T. Bakrie Kasei Chemicals 125.0 9.6 134.6 39.6 44.71992 P.T. Lantai Xeramik Ceramic Tiles 15.4 1.7 17.1 7.1 17.1

Has1992 P.T. Swadharma Tourism 86.0 - 86.0 3S.0 86.0

Rerry Satya-.19g2 P.T. Mitracrop Manufacturing - 16.0 16.0 16.0 0.1

Total 611 3 93.3 204 5 268L3 173.5

la Loan subsequently cancelled.

Schedule DPage S of S

CuSS million)Undisbursed

Original Total includingFiscal Comitments Held Participants,

Year, Comanv TSve of business Loan oul,ty Total -b - TC Pbytion

Projets a=oMd but not 3e niaMed

1989 P.T. Xalteng,L lUning - 1.4 1.4 - -

1990 P.T. Rayu SIC& Wood prodncia 12.2 0.9 13.1 - -1991 P.T. Petrochemical Petrochei4cals 325.0 1S.0 340.0 90.0 340.01991 VIC Xndonesia Capital xarkets - 1.5 1.S 1.S 1.51992 P.T. BSD Beller Capital marcets - 0.6 0.6 0.6 -1992 P.!. South Pacifie Textile* S0.0 - S0.0 20.0 50.0

Viscose1992 P.T. Astra Microtronics Electronics 29.0 1.6 30.6 12.6 -1993 P.T. B8L Dhacmala Capital markets 15.0 - 15.0 5.0 5S.0

b Loan approved but subsequently dropped.

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