ReportNo. 526a-IND FILECP YlD Appraisalof BankPembangunan Indonesia

Public Disclosure Authorized (Bapindo)

October 22, 1974 East-Asiaand PacificProjects Departments

Not for PublicUse Public Disclosure Authorized Public Disclosure Authorized

Document of the InternationalBank for Reconstructionand Development InternationalDevelopment Association Public Disclosure Authorized

This report was preparedfor official use only by the BankGroup. It may not be published,quoted or cited without BankGroup authorization.The BankGroup does not accept responsibilityfor the accuracyor completenessof the report. CURRENCYEQUIVALENTS

US$1 a Rp 415 Rp 1 = US$0.0024 Rp 1 million = US$2,410 Rp 1 billion - US$2.41 million

ABBREVIATIONS

ADB - Asian Development Bank ASKRINDO - Asuransi Credit Indonesia BAPINDO - Bank Pembangunan Indonesia BI - Bank Indonesia BMI - Belgique Maatschappij voor Investeering EXIM - Bank Ekspor-Impor Indonesia GOI - Government of Indonesia ICB - Investment Coordinating Board IDA - International Development Association IDFC - Indonesian Development Finance Company INVESTASI - Investment Credit Program KfW - Kreditanstalt fur Wiederaufbau MCD - Maritime Credit Department PANN - National Fleet Development Corporation PDFCI - Private Development Finance Company of Indonesia PELNI - Pelayaran Nasional Indonesia PWCL - Permanent Working Capital Loan RDB - Regional Development Bank REPELITA I - First Five-Year Development Plan REPELITA II - Second Five-Year Development Plan RLS - Regular Inter-Island Liner Service UNDP - United Nations Development Program WBG - World Bank Group

FISCAL YEAR

January 1 - December 31 INDONESIA

APPRAISAL OF BANK PEMBANGUNANINDONESIA (BAPINDO)

Table of Contents

Page No.

BASIC DATA

SUMMARY,RECOMMENDATIONS, AND UNDERSTANDINGSREACHED .... i - iii

I. INTRODUCTION ...... 1

II. ECONOMIC, INDUSTRIAL AND FINANCIAL ENVIRONMENT ...... 2

Economic Environment ...... 2 Industrial Environment ...... 3 Financial Environment ...... 5 Financing for Small-Scale Industry ...... 7 I.nflation ...... 7 Interest Rates ...... 8

III. INSTITUTIONAL ASPECTS ...... 9

BAPINDO Act ...... o ...... 9 Policy Statement ...... -.... . 9 OrganizationStructure ...... 9 Supervisory Board, Management, and Staff ...... 10 Procedures ....o ...... 12

r,V. OPERATIONS AND FINANCIAL CONDITION ._o...... 13

Summary of Operations ...... 13 Industrial Loans ...... 14 Maritime Sector Loans ...... o ...... 16 Raw Cotton Loans ...... 17 Equity Financing ...... o_ ...... 17 Resources ...... 18 Financial Position ...... 18 Profitability ...... 18 Quality of Portfolio ...... 19

This report was prepared by Messrs. Zamir Hasan, Promodh Malhotra, and Rainer 11. Ullmann, following their appraisal mission to BAPINDO in April 1974. -2-

Page No.

V. PROSPECTS ...... 21

General Outlook ...... 21 BAPINDO's Business Forecasts ...... 22 Resource Requirements ...... 23 Projected Financial Position ...... 24 Proposed Loan ...... 24

LIST OF ANNEXES

1. Approvals and Implementation of Foreign Investment Projects by Sector, 1967-1973

2. Approvals of Domestic Investment Projects by Sector, 1968-1973

3. Medium-Term Investment Credit Program (INVESTASI)

3a. Medium-Term Credits (INVESTASI), 1970 - January 1974

3b. Medium-Term Credits (INVESTASI), Approvals and Outstandings by Sector, 1970-1974

4. Development Banks in Indonesia

5. The Money and Capital Market in Indonesia

5a. List of Merchant Banks (Investment Finance Companies)

6. Interest Rate Structure of State Commercial Banks

7. Policy Statement

S. Summary of Loan Operations, 1971-1973

9. Investment Loan Commitments by Industry, 1971-1973

10. Analysis of Medium- and Long-Term Loan Commitments, according to Size, Location and Maturity

11. Permanent Working Capital Loan Commitments by Industry, 1971-1973

12. Small Business Co-Financing with Regional Development Banks

13. Maritime Sector Loan Commitments, 1971-1973

14. Summarized Audited Balance Sheets, 1970-1973

15. Summarized Audited Income Statements, 1970-1973

16. Analysis of Loan Arrears as of December 21, 1972 and 1973 17. Analysis of Medium/Long-TermLoan Portfolio as of December 31, 1973

18. Forecast of Approvals,Commitments and Disbursements,1974-1978

19. Projected Balance-Sheets,1974-1978

20. Projected Income Statements, 1974-1978

21. Projected Cash Flow Statements, 1974-1978

22. Projected Financial Ratios, 1974-1978

23. Schedule of Estimated Disbursements

CHARTS

OrganizationChart Location of Branches

BANKPEMBANGUNAN INDONESIA

BASIC DATA

(as of December 31, 1973)

1. Year of Establishment: 1960

2. Ownership: Government of Indonesia - 100%

3. Bank Group Assistance:

IDA Credits

Date of Credit Date Effect- Rate of In thousands of dollars as of 9/30/1974 No. Signed iveness Interest Amount Authorized Disbursed Outstanding (variable)

310-IND 6/7/1972 8/10/1972Min. 8% 10,000 9,906 3,712 3,712 /1 318-IND 6/28/1972 10/18/72 Min.7-1/4X8,500/---1,438 1,349 1,349

4. Loan Operations: In millions of Rupiah

Approvals 1971 1972 1973

Domestic Currency 14,617 17,156 52,933 Foreign Currency - 84 2,170 Total 14,617 17,240 55,103

Commitments

Domestic Currency 16,523 17,113 49,187 Foreign Currency - 84 1,524 Total 16,523 17,197 50,711

Disbursements

Domestic Currency 7,690 24,830 17,492 Foreign Currency - 65 1,087 Total 7,690 24,895 18,579

5. Interest Rates (effectiveApril 9, 1974)

Project Aid 12 - 15% p.a. Raw Cotton loans 12 - 15% p.a. Small Industries: Investment Loans 12% p.a. Permanent Working Capital Loans 15% p.a.

/1 Including $1.5 million for technical assistance, of which $1.2 million had been spent as of 9/30/1974. -2-

Interest Rates (Contd.)

IDA: 310-IND 12% and 15% p.a. IDA: 318-IND 9-1/4% and 12% p.a. Commitment Charge 3/4 of 1% p.a. Penalty Charges: Investment Loans 18% p.a. Permanent Working Capital 9% p.a.

6. Earnings Record: 1971 1972 1973

Profit before tax and provision as % of average total assets 6.11 3.44 3.70

Profit after tax and provison as % of average equity - 0.64 5.71

Cost of term debt as % of average term debt 2.58 3.95 5.50

Financial expenses as % of average total assets 10.63 5.00 2.56

Administrative expenses as % of average total assets 3.29 3.22 3.88

7. Financial Position (as of December 31): 1971 1972 1973

Current ratio 1.51 1.47 1.50 Total debt/equity ratio 3.34 3.14 2.22 Long-term debt/equity ratio 1.24 1.04 0.76 Reserves and provision as % of loan portfolio 13.47 12.07 11.89 INDONESIA

APPRAISAL OF BANK PEMBANGUNANINDONESIA (BAPINDO)

SUMMARY,RECOMMENDATIONS, AND UNDERSTANDINGSREACHED

i. The World Bank Group's (WBG's)association with Bank Pembangunan Indonesia (BAPINDO)dates back to 1969. A detailed examinationin December of that year, made by a Bank mission at the request of the Government (GOI), revealed that BAPINDO was organizationallyweak, grossly under-capitalized, with a portfolio of dubious quality, and with unacceptablylow standardsof appraisal and follow-up. In June 1970, GOI and WBG agreed on a reorganization and financial restructuringof BAPINDO, as part of a rationalizationof the institutionalarrangements for providing long-termcapital for industry. BAPINDOwas to become the main domestic source of long-termcapital for the private sector.

ii. Since June 1970 considerableprogress has been made in implementing the agreed reorganization,helped by close cooperationamong the Government, WBG, and BAPINDO. BAPINDO's management was strengthened;its capital base was improved by the conversionof Government loans into equity, and by fresh infusions of cash; its portfoliowas analysed, a part was transferredout of BAPINDO's responsibility,and substantialprovisions were made against doubt- ful debts on the remainder; and its accounts were audited by outside in- dependent auditors. BAPINDO also engaged six Advisors, selected and recom- mended by WBG. In December 1971, after sufficient progress had been made, Bank Indonesia (BI) rescinded its earlier prohibitionagainst BAPINDO's making loans to new clients, and in May 1972 the InternationalDevelopment Association (IDA) made a Credit of $10 million to BAPINDO. In June 1972 IDA made a second credit of $8.5 million 1/ for the rehabilitationof inter-island regular liner service (RLS), when the Government designated BAPINDO the bank for handling credits for the shipping sector.

iii. Progress made by BAPINDO since the first Credit was made has been remarkable. The Board of Managing Directors,with the help of the Advisors and continuingadvice from WBG, has worked hard to streamline the organization, improve appraisal standards,bring order into the portfolio inherited from the past and, particularlyfrom the second half of 1973, to increase the volume of new business. For its part, GOI has continuedits active help and cooperation;since the first Credit was made, GOI has paid an additional amount of Rp 11.3 billion into BAPINDO's capital to strengthen its equity, and to enable it to undertake a growing volume of business. Two of the more significantdevelopments in 1973 were a retrenchmentof about 40% of its staff (from 1263 to 750), and the closing of 8 uneconomic branches (out of a total of 18), and their conversion into representativeoffices; both these actions represented implementationof understandingsreached earlier with WBG.

1/ This amount included $1.5 million for technical assistance. - ii -

iv. As a result of the improvementsbetween 1971 and 1973, BAPINDO is now a far more effective institutionthan it was in 1969, with a sense of corporate purpose and direction, and growing confidence in its ability to ful- fill its role. For the first time in BAPINDO's history, external auditors gave it an unqualified report on its azcounts,(for the year ended December 31, 1973). During 1973, it committed 163 loans for a total of Rp 50.7 billion. More significantly,the proportionof long-term loans to total commitments increasedsubstantially. BAPINDO's commitmentsin 1974 have shown further growth, and with the transfer of raw cotton loan business to Bank Ekspor- Impor, BAPINDO will now concentrateon providing long-term capital, the role conceived for it by GOI and WBG in 1970.

v. Notwithstandingthe remarkable progress already made by BAPINDO, there is both scope and need for further improvement. BAPINDO's Board of Supervisors needs to be enlarged and made more effective;and BAPINDO's authorized capital needs to be increased in view of its growing operations. Internally, appraisal standards need to be improved further, particularly to analyze more fully the economic aspects of projects. BAPINDO also needs to institute an effective system of project supervision. These and other weaknesses are recognizedby the management and remedial actions are being taken. Currently the emphasis is on staff training and improvement,and recently three senior officials received training for up to three months each in three of the more experiencedDFCs associatedwith WBG; the training programs were arranged by the Bank.

vi. The economic, industrial,and financial environmentin which BAPINDO operates offers good prospects for BAPINDO's continued growth. The investment needs of the private sector are large and continuing, and the shortage of long-term capital continues. BAPINDO estimates that its commitments for the three years, ending December 1976, would amount to Rp 151 billion, including an estimated Rp 53 billion for foreign exchange commitments for the last two quarters of 1974, 1975 and 1976. These foreign exchange commitments,the equivalentof US$100 million, would involve imports. The estimated commitments, although justified and achievable if viewed from the demand side, may appear somewhat optimistic from the point of view of BAPINDO's current processing capacity. vii. BAPINDO's domestic currency resources would be provided principally by GOI in the form of equity, loans and refinance,and also through net col- lections and retained earnings. Foreign currency needs in the immediate future would be met from the proposed Bank loan, as BAPINDO does does not have any other foreign currency resources. The Bank has suggested,and BAPINDO is exploring,raising loans from other sources, includingKfW, which is consideringmaking a DM 22 million loan. viii. The proposed Bank loan would continue the Bank Group's support of the industrialsector in Indonesia. It would also provide continuity in WBG's institution-buildingrole which began in 1969, and which will continue to be - iii - important notwithstandingthe very substantialprogress made by BAPINDO. In view of the foregoing, a Bank loan of $50 million is recommended,to be made to GOI, and on-lent to BAPINDO. ix. During negotiations the following understandingswere reached:

(a) GOI will raise BAPINDO's authorized capital to Rp 50 billion by December 31, 1974 (paragraph 3.01);

(b) GOI will, if legally possible, arrange for delegation of the authority of the Minister of Finance and the Governor of Bank Indonesia to qualified representatives, as it relates to their membership of BAPINDO's Super- visory Board. GOI will also investigate the possibility of appointing three additional members to the Board (paragraph 3.02);

(c) GOI will assume the exchange risk on the proposed loan. BAPINDO's spread will be restricted to a maximum of 4% per annum on sub-loans. The difference, if any, between BAPINDO's lending rate and the sum of the rate charged by GOI to BAPINDO (the Bank's current rate), and the maximum spread of 4% would be passed on to GOI as a fee for assuming the exchange risk (paragraph 2.28);

(d) BAPINDO's free limit for individual sub-projectsshould be raised to $500,000,with an aggregate limit of $15 million on all free limit projects (paragraph 5.10);

(e) The debt equity ratio should be set at 3:1, and the definition of debt should exclude short-term debt, as is the case with most development finance companies (paragraph 5.10);

(f) In order to maintain continuity of WBG financing, with- drawals by BAPINDOaggregating the equivalent of up to $3 million should be allowed under the proposed loan for expendituresrelating to sub-loans made on or after July 1, 1974 (paragraph 5.11);

(g) the definition of eligible expendituresshould be the same as in the first IDA Credit (paragraph 5.09).

INDONESIA

APPRAISAL OF BANK PEMBANGUNANINDONESIA (BAPINDO)

I. INTRODUCTION

1.01 Since 1969 the World Bank Group (WBG) has worked with the Govern- ment of Indonesia (GOI) to improve the institutionalarrangements for the provision of finance for medium- and long-term investmentin the industrial sector in Indonesia. The government-ownedBank PembangunanIndonesia (BAPINDO)has been and remains an important focal point of the joint efforts of the Government and the WBG. By May 1972 progress in reorganizingand strengtheningBAPINDO had reached the stage at which the Associationwas able to make BAPINDO a Credit of $10 million. It was followed in June 1972 by an additional Credit of $8.5 million to finance a rehabilitationprogram for inter-islandshipping.

1.02 The WBG has continued,since the first two Credits were made, to follow BAPINDO's progress closely and to assist it whenever possible. As will be detailed later in this report, BAPINDO's progress has been remark- able, although there still remains room for much improvement. The WBG intends to continue to make available to BAPINDO such advice and guidance as BAPINDO considers it needs and the WBG considers it can offer. On the basis of the WBG's experiencewith BAPINDO over the past five years, there is good reason to believe that BAPINDO will make substantial further pro- gress. The effects of that progress should carry beyond BAPINDO itself. Paragraphs 2.24, 4.06 and 4.07 below, with respect to BAPINDO's appraisal of and lending to Regional DevelopmentBanks in Indonesia, give an interesting insight into the "multiplier"effect that the WBG's transfer of expertise to an important financial institution in a member country can have. Since the quality of the advice that BAPINDO is able to offer to the Regional Development Banks will depend on the standards of performanceBAPINDO is able to achieve for itself, the continuance of BAPINDO's close association with the WBG should have far-reaching,beneficial effects.

1.03 The recent growth of industry in Indonesia has exceeded expectations, and the combined efforts of Indonesian term lending institutionshave not been adequate to meet the growing demand for investment funds. As a result, foreign financial sources have been called on for significant investmentin Indonesia. In 1973, GOI decided that BAPINDO should henceforth concentrate primarily on making loans to medium- and large-scaleindustrial enterprises, and made arrangementsfor BAPINDO's lending to small-scaleenterprise to be supplementedby other sources of finance. With these considerationsin mind, and on the basis of the appraisal contained in this report, a Bank loan for BAPINDO of $50 million is recommended. -2-

II. ECONOMIC,INDUSTRIAL AND FINANCIAL ENVIRONMENT

Economic Environment

2.01 The performanceand prospects of the Indonesian economy were described in: "The Indonesian Economy: Recent Developmentsand Prospects for 1974/75",November 26, 1973, 286-IND. A Basic Economic Mission assessed Indonesia's longer term development prospects and policies during October 1974; its findings are not yet available.

2.02 Repelita I. The First Five-Year Development Plan (Repelita I) ran from April 1, 1969 to March 31, 1974. During this period, substantial im- provementswere made in rehabilitatingthe infrastructure,laying the founda- tion for further development of the economy. GDP rose at an average rate of 7% per annum. The share of the agriculturalsector fell from 47.7% to 40.2% of GDP, while the industrial sector's share rose from 9.3% to 9.8% of GDP. The agriculturalsector grew by 3% per annum, mainly because of increased rice production; the industrial sector grew at over 11% per annum, following large domestic and foreign investment. Gross domestic capital formation increased at an average rate of around 25% in real terms (34% at current prices). The share of gross investment in GDP increased from 8.8% in 1968-69 to 17.7% in 1973-74, and foreign resources made a significant contributionto this growth.

2.0:3 Repelita II. The Second Five-Year DevelopmentPlan (Repelita II) which will run from April 1, 1974 to March 31, 1979, aims at a more equit- able distributionof developmentbenefits through the expansion of social welfare activities, and the creation of greater employment opportunities. Real GDP is projected to rise at 7.5% per annum, and per capita income by about 5.7% per annum, despite an estimatedpopulation increase of 2.3% per annum. Total investment is expected to rise by 13.2% per annum in real terms (23.4% at current prices). The proportion of gross investment to GDP will rise from 17.7% in 1973/74 to 22.9% in 1978/79. Agriculture is expected to grow at 4.6% per annum, but its contributionto GDP will fall from 40.2% in 1973/74 to 35.6% in 1978/79. The industrial sector is expected to grow at 13%, and its share of GDP will rise from 9.8% in 1973/74 to 12.5% in 1978/79.

2.04 Further expansion is projected for industrieswhich process domestic raw materials, effect import substitutionor are export-oriented. The small- scale sector will receive special attention because of its potential for increasing employment. Exports of crude oil, timber, agriculturalproducts and other minerals are expected to continue their recent rapid growth. Import policies will give priority to capital goods and industrial raw materials. Substantial expenditureswill be made on regional development to achieve a more balanced growth. Policies relating to foreign and domestic investment will aim at encouraging the growth of local industries,especially in the small scale sector. -3-

2.05 A total investmentof Rp 11,023.4billion is expected to be made; the contributionof foreign resources to total investmentis expected to decline from 39% in 1974/75to 22% in 1978/79. Governmentdevelopment ex- penditureswill rise to 45.6% of total investmentin 1978/79,compared with 42.7% in 1974/75. Some of these figures and targetshave, however, been rendered obsolete by the jump in export earnings from oil, which already totalled $1.724 billion for the first five months of 1974, exceeding the $1.708 billion earned from oil exports during the entire year 1973. The Plan's basic strategy,which was designed to reduce dependenceon foreign aid will, however, remain intact.

IndustrialEnvironment

2.06 Features of Industrialization. Indonesiais still at the thresh- old of industrialization. The manufacturingsector is relativelyundeveloped; its share of GDP is lower than that usual in a country at a similar stage of development,and of a comparabledomestic market size. The estimatedannual value-addedper capita by this sector is only $5.88; and the industrymix is still dominated by consumer goods. Indonesia'sindustrialization process exhibits the followingbroad features: (a) a domestic market orientation, encouragedby a large population; (b) increasingparticipation by foreign private capital, followinggenerous incentivesand a favorable investment climate; (c) an apparent persistenceof excess capacity in certain sectors such as textiles,cigarettes and matches, due to such problems as input shortages,shortage of working capital, and lack of effectivedemand; (d) low efficiencyand productivityof public sector manufacturingenterprises, primarilydue to poor management; (e) a geographicalconcentration in Java, particularlyin and around Jakarta; and (f) a small but heavily promoted indigenousmanufacturing sector. There is a new sense of urgency, shared by both GOI and the private sector, in stepping up the pace of industrial development,and large investmentshave been made during recent months which will greatly extend the size and range of the manufacturingsector.

2.07 IndustrialStructure. Reliable statisticaldata are not easily available. Some light was shed on the broad structure of the industrial sector by the 1970 IndustrialSurvey, which found consumer goods, particularly food products (includingtobacco), contributing 62% of total manufacturing output in 1969. The food processing,textiles, apparel, footwear and trans- port equipment (assemblyand repair) industriespredominated. Intermediate and capital goods industriesare only recently making their appearance. Industrialchemicals, including fertilizer and petro-chemicals,are in an early stage of development. Several small steel mills exist, producing items mainly for the constructionindustry; additional steel capacity is being mobilised.

2.08 According to the 1970 Survey of Large- and Medium-ScaleManufac- turing Industries,medium- and large-scaleenterprises 1/ numbered 17,900 in 1/ The Survey defined "large" establishments as those having 100 workers or more without power equipment or 50 workers or more with power equip- ment. The "medium" establishments were defined as those having 50-99 workers without power equipment or 5-49 workers with power equipment. -4-

1969. Large-scale firms accounted for only 11% of total industrial establish- ments. Firms in the 'food and beverage' industry accounted for 35%, and those in the 'textile'industry for 27%, of the total number of large- and medium- scale enterprises. No reliable data are available regarding the structural characteristicsof the small-scale sector.

2.09 In 1969, medium- and large-scale firms in the food processing in- dustry employed more than one-third of the total labor force in the medium- and large-scale sectors. Tobacco and textile industrieswere next in im- portance. Medium- and large-scaleenterprises together employed 849,000 workers, or about 3.7% of Indonesia's total labor force. Large-scalefirms employed on average 302 workers per plant, while medium-scalefirms averaged about 16 workers per plant. As stated earlier (paragraph 2.07), intermediate and capital goods industries are only recently making an appearance; their contributionto employment and output is still small.

2.10 Industrialdevelopment is concentratedon Java, which has 782 of existing medium- and large-scale firms, and 86% of total manufacturingem- ployment. Java also has the largest scale of productionwith an average of 53 workers per plant. Jakarta accounts for 11% of firms located, and 7% of total industrialemployment, in Java. Industrial activity also tends to be concentratedin and around large cities elsewhere in the Indonesian archipelago.

2.11 IndustrialInvestment. From January 1967 through December 1973 the value of approved foreign investmentprojects, in sectors other than petroleum and banking, amounted to $3.1 billion. 1/ Major shares were as follows: $1.2 billion or 38.7% in manufacturing,$959.9 million or 30.6% in mining and quarrying, and $497.8 million or 15.8% in forestry. In 1973 the value of foreign investmentsapproved reached $615.8 million, compared with $522.0 million in 1972. Approvals in the manufacturingsector rose sharply to $455.5 million, mainly due to a $235.1 million share for the textile and leather industries. The "implementation"of approvals (expenditures)at end 1973 was, however, estimated at only $1.1 billion, or 35'cof total approvals. Implementationdropped to $319 million in 1973, compared to $344 million in 1972, mainly due to projects with slow gestation in the mining and quarrying sectors. To improve efficiency,GOI set up the Investment CoordinatingBoard (ICB) in June 1973, replacing the Technical Committee on Capital Investment,and its subcommittees,the Foreign Investment Board and the Domestic Investment Board. Various concerned ministries are representedon ICB, and applicantsboth foreign and domestic need now deal only with one agency.

2.12 Domestic investment approvals also grew rapidly; 1816 projects, envisaging a total investment of Rp 1,236 billion, were approved from November 1968 through December 1973 2/. In 1973 total approvals reached

1/ See Annex 1. 2/ See Annex 2. - 5 -

Rp 569.4 billion, compared with Rp 297.6 billion in 1972. The share of domestic investmentapprovals in total approvalsrose from 28% in 1972 to 69% in 1973.

2.13 Some importantinvestment regulations were amended in early 1974. New foreign investments are allowed only in the form of joint ventures, on the understandingthat the Indonesianshare be increasedto 51% within a specified period, usually ten years. Some tax incentiveshave been reduced, the list of industries closed to foreign investorsexpanded, and a larger number o' Indonesiansare to be employed in foreign or joint-ventureenter- prises. Regulationsregarding domestic investment were also revised to en- sure greater participationby "indigenous"Indonesians. Effective February 1974, only indigenousor "pribumi" 1/ enterprisesare allowed access to the medium-termcredit facilitiesunder the INVESTASIprogram 2/. It is too early to assess the effects of these changes on both foreign and domestic investment,but the momentum of industrialgrowth is not expected to be significantlydiminished.

2.14 Obstacles to Further Growth. There have been marginal improve- ments in removing the followingmajor impedimentsto further rapid industrial growth: (a) the lack of adequate public infrastructureof all kinds; (b) the scarcity of entrepreneurship,and of a broad range of business and manage- ment skills; (c) administrativeand bureaucracticobstacles which cause in- vestors considerabledelays and difficultiesin getting decisions and obtain- ing interpretationof laws; and (d) the scarcity of equity capital and of finance for current assets. The Governmentrecognizes these impediments and remedial actions on a broad front have been taken or are being taken. However, these are basic problems and solutionswill emerge only over a long period.

FinancialEnvironment

2.15 Banking Structure. The banking network consists of the Central Bank, Bank Indonesia (BI); five large state-ownedcommercial banks; a state DevelopmentBank (BAPINDO);two joint-venturedevelopment banks, 3/ Indonesian DevelopmentFinance Company (IDFC) and the Private DevelopmentFinance Com- pany of Indonesia (PDFCI); 26 regional developmentbanks; 128 small domestic private banks; and branches of 11 foreign banks. There are also about 9,000 savings and village banks, but their assets are relativelyinsignificant. BI and the state banks predominate,accounting for almost 90% of total outstand- ing bank credit; domestic and foreign private banks account for the larger

1/ Indigenousor "pribumi"enterprises are those companies in which in- digenous entrepreneurscontrol either 75% of the equity, or 50% of the equity and key managementpositions. 2/ See Annex 3 for a descriptionof the INVESTASIProgram. 3/ See Annex 4 for details of ownership. -6- part of the remainder. Foreign bank branches have grown rapidly in the last few years, and are now larger and more important than local private banks.

2.16 The five State commercialbanks have for historical reasons specialized in providing finance for particularsectors, although there is some overlapping 1/.

2.17 Money and Capital Markets. Money and capital markets are in a very early stage of development. G0I created the Agency for Money and Capital Market Development in January 1972, which is currentlyworking on, among other proposals, the establishmentof a securities and exchange ad- ministration. Nine merchant banks (joint-venturesbetween foreign and local banks) were given licenses during 1973/74 to help develop the money and capital market. It is too soon to say how successful they will be in meeting their objective 2/. At present they deal in short-term commercial paper, real estate, and act as local agents for their parent banks in ob- taining foreign currency loans for their clients. There is a small stock exchange that deals mainly in shares of previously Dutch-owned pre-war en- terprises, now largely owned by the State and recently converted into limited liability companies. An importantobstacle to rapid development of the capital market is the weak financialposition of most Indonesian companies.

2.18 Short-Term Credit. Short-term credit is extended by banks for periods of up to one year; most loans are for three or six months duration, and can be renewed depending upon the bank/borrowerrelationship. There is no broad, well-developedbill market for discounting trade paper, and working capital is generallyhard to obtain.

2.19 Medium- and Long-Term Credit. Term credit for industrial projects is available from all banks, although foreign banks must obtain BI's approval to make loans for more than a year. No state banks, except BAPINDO, can make loans for periods beyond five years. Term finance, except that part extended by local institutionsout of foreign currency lines of credit, is largely extended under the INVESTASI program (Annex 3) introducedby the Government in 1969. The total amount of loans approved under this program up to January 31, 1974 was Rp 167.8 billion, and total disbursementsstood at Rp 116.1 billion. The private sector received Rp 91.1 billion or 78.5% of total disbursements,and Rp 25.0 billion or 21.5% went to the public sector.

1/ Bank Negara Indonesia, 1946 (industry,transport, agriculture and export); Bank Bumi Daya (mining, export, estates); Bank Rakjat Indonesia (agriculture,rural projects); Bank Dagang Negara (mining and exports); Bank Expor-Impor Indonesia (exports, imports).

2/ For a fuller treatment of the money and capital market, see Annex 5. -7 -

2.20 One of the major institutionaldevelopments during 1973 was the setting up, with active WBG assistance,of P.T. Private DevelopmentFinance Company of Indonesia (PDFCI), a privately-owneddevelopment finance company. PDFCI, in addition to making term loans, will actively seek equity invest- ments and will also play a role in promotingnew enterprises.

2.21 With the establishmentof PDFCI there are now three domestic specialized institutionsfor providing long-term capital. BAPINDO is by far the largest. PDFCI's initial resources amount to $21 million equivalent, and it is yet to enter the operational phase; IDFC had total outstanding resources of less than $10 million equivalent. BAPINDO is, and will continue to be, the principal domestic source of medium- and long-term capital for the private industrial sector.

Financing for Small-Scale Industry

2.22 Until early 1973 most loans under the INVESTASI scheme had been directed to medium or large industrial enterprises. In April 1973 the Government announced that 65% of future assistance under the INVESTASI program would be reserved for small loans. During 1973, the Government also established a new agency, P.T. Bahana, for making equity investments in, and providing management assistance to, small businesses. The Govern- ment had also earlier set upP.T. Asuransi Kredit Indonesia (ASKRINDO) to insure bank loans made to small business up to certain limits, to encour- age banks to increase their lending to this sector.

2.23 ASKRINDO's program was expanded in December 1973; medium-term and working capital loans to small industry are now automaticallyinsured up to 75% of total risk. This change accompanied an expanded INVESTASI program of assistance to small businesses, under which an amount of Rp 12 billion was set aside for such loans made through the state banks, including BAPINDO. An overall limit of Rp 2 billion was initially set for each state bank. Maximum amounts that can be borrowed by each customer are Rp 5 million for investment loans, and a similar amount for permanentworking capital.

2.24 To reach a larger number of small borrowers and to improve the institutionalarrangements for financing small borrowers, BAPINDO instituted a new co-financingscheme with selected Regional Development Banks (RDBs). Under this program BAPINDO appraises the RDBs, and extends them a line of credit. The agreement provides for BAPINDO's financing in each sub-project to be limited to 10% of the total loan for fixed assets, and 20% of the total loan for working capital; BI provides 80% and 70% respectively,and the balance of 10% is provided by the RDBs. BAPINDO has appraised and entered into agree- ments with 8 RDBs. BAPINDO's plans call for 5 more appraisals during 1975.

Inflation

2.25 Indonesia achieved a remarkable degree of price stability during 1969-71. However, the inflation rate which had declined to 2.6% in 1971 shot -8-

up to 25.7% in 1972, largelybecauseof an increase in rice prices following a serious drought. Strong inflationarypressures continued during 1973 and the early part of 1974, caused by domestic demand, fueled by a sizeable credit expansion, the strong rise in export prices (particularlyoil) and the increase in prices of imported goods and raw materials used by domestic industries. The Jakarta consumer price index rose by 27% during 1973, and by a further 16% in the first quarter of 1974. Prices rose by 472 over the twelve-monthperiod ended March 1974, compared to a 21% increase in the previous comparable period. Alarmed by the rapid inflation, the Government announced a package of strong anti-inflationarymeasures on April 9, 1974, including credit rationing and changes in interest rates. The inflation rate for the period April-July 1974 has already been contained to about 5.6%, and the months of August and September have shown a further reduction.

Interest Rates

2.26 Current interest rates and changes made in the recent past are given in Annex 6. Interest rates for all state banking institutionsare prescribedby BI.

2.27 In the 60's when inflation in Indonesia was very high, the Government followed a policy of high interest rates as part of the economic stabilization program. By the beginning of the new decade, GOI was able to bring inflationary pressures under control, and interest rates were reduced across the board in May 1972 and again in April 1973. However, the long-term lending rate, already low, remained unchanged at 12%. When inflationarypressures developed once again in 1973 and the early months of 1974, the Government increased interest rates on most loans and deposits. The term lending rate was also increased to 15% p.a. (The rate for loans not exceeding Rp. 100 million, however, remained unchanged at 12%). In relation to inflation during the last 12 to 15 months, the interest rate for term loans is negative. Simply raising the interest rate would not help, however, because policy objectives are complex and would be affected differentlyby such a change. Formulation of an interest rate policy is made more difficult by the fact that the country has a free foreign exchange system, and medium-term capital is freely available from overseas capital markets, currently at rates around 12%. These foreign markets have been tapped mainly by joint-venturecompanies and Indonesianbusinessmen of Chinese origin who have long established contacts overseas. This causes political and social strains since indigenousentrepreneurs are at a dis- advantage,paying rates of interest on locally borrowed funds higher than those available to competitorswith access to foreign capital markets. All factors considered,the 15% rate appears reasonable. If the recent containment of price pressures proves short-lived,and inflationarytrends re-emerge,GOI will need to review its interest rate policy. In the past, the Government has been quite sensitive to monetary developmentswhich threaten price stability.

2.28 In 1972 and 1973, when IDA made the first Credits to BAPINDO and PDFCI, GOI insisted on assuming the exchange risk itself on the grounds that -9- the Indonesian Rupiah was a relatively stable currency, and that most sub- borrowers were not sophisticatedenough to understand the complexitiesof multiple currency exchange risks. The Bank has accepted GOI's view that it, rather than the ultimate borrower, should assume the exchange risk under the proposed loan. However, the spread allowed to BAPINDO would be restricted to a maximum of 4%, as in the case of the first Credit. The difference,if any, between the final on-lending rate and the sum of the rate charged by GOI to BAPINDO (the Bank's current rate) and the maximum spread of 4%, would be passed on to GOI as a fee for assuming the exchange risk.

III. INSTITUTIONALASPECTS

BAPINDO Act

3.01 The draft of a new BAPINDO Act had been agreed upon by the Associa- tion, GOI and BAPINDO in 1972. Two key provisions were: (a) increasing the authorized capital from Rp 60 million to Rp 20 billion, and (b) expanding the Supervisory Board to a minimum of four members, including persons with expe- rience in industry and finance. The new Act was expected to be passed promptly by the legislature. In the event, the revised Act has not yet been passed by the legislaturebecause of a crowded schedule. GOI has now concluded that the procedure of using a separate Act of Parliament to establish or amend the charter of a state bank is too cumbersome, and that it should control the functions of banks like BAPINDO through the provisions of the existing Banking Act. GOI, therefore, does not intend to press Parliament for passage of the draft BAPINDO Act, but will take administrativesteps to implement the main changes contained in the Act. BAPINDO's authorized capital will be increased to Rp 50 billion by end December 1974. Arrangementswill also be made for appropriate changes relating to BAPINDO's Supervisory Board (see paragraph 3.06).

Policy Statement

3.02 BAPINDO's operations are guided by a policy statement 1/, drafted in consultationwith the Association,adopted by its Board of Managing Directors, and approved by the Supervisory Board early in 1972. It is similar in most respects to policy statements adopted by other development finance companies associated with the WBG, and is acceptable to the Bank. No change has been made in the statement since its adoption, and none appears necessary at the present time.

OrganizationStructure

3.03 Head Office. In mid-1971, the Association agreed with the Govern- ment and BAPINDO on a scheme for a radical reorganizationof BAPINDO. By early 1972, sufficient progress had been made to justify a first Credit to

1/ See Annex 7. - 10 -

BAPINDO. BAPINDO's capital structure had been greatly improved, the senior management had been strengthenedand BAPINDO had engaged four competent Advisors recommendedby WBG. The selection of managers for, and allocation of staff to, different departmentshad been completed, except for the Maritime Credit Department (MCD) which became operational in mid-1973; two additional Advisors, recommended by WBG, were also attached to MCD. Since then, the departmentshave settled down and are working fairly smoothly. Better inter- action is needed between the Research Department,which does the economic work for BAPINDO, and the Credit and Follow-Up Department,and BAPINDO's management is seeking to bring about the required improvement. The Project Promotion Department spends most of its time supervisingproblem loans, instead of doing its stated job of project promotion. This anomaly has been recognized, and BAPINDO's management expects that a modest beginning in project promotion will be made in the near future, without detriment to the supervision of pro- blem loans.

3.04 Branches. In 1972 BAPINDO had agreed with the Association that it would close down uneconomic branches. During 1973, 8 out of 18 branches were transformedinto RepresentativeOffices, each with a reduced staff. These offices will concentrate on developing new business and supervisingexisting projects.

3.05 General performance at the branches has been weak. The best avail- able talent has become concentratedat Head Office, although the branches still perform important operationalwork. The weakness of the branches slows down the overall pace of activity. The branches also feel isolated from the broad currents of activity at Head Office. BAPINDO is trying to correct the situation through a systematic training program conducted at the Head Office for staff from the branches, regular rotation of assignments,and by frequent Head Office staff visits to the branches. This approach seems appropriate and should gradually bring about improvement in the efficiency of the branches.

Supervisory Board, Management and Staff

3.06 SupervisoryBoard. The present BAPINDO Act designates the Minister of Finance and the Governor, Bank Indonesia, as the two members of the Super- visory Board. The preoccupationof its members with state business has prevented them from effectively supervising,and providing policy guidance to, BAPINDO's Board of Managing Directors. GOI has agreed that, if legally possible, the Minister of Finance and the Governor of Bank Indonesiawill delegate their authority to qualified representativeswho will have more time to oversee BAPINDO's operations. GOT will also investigatethe possibility of appointing three additional members to the Board, under the provisions of the original BAPINDO Act. An enlarged, effective, SupervisoryBoard would better represent BAPINDO's interests in the councils of Government,as also in the financial and business communities.

3.07 Board of Managing Directors. BAPINDO's Board of Managing Directors is composed of a President and four Managing Directors. Except for one mem- ber promoted from within, all other members, including the President,were new to development banking, when they were appointed. They drew heavily on Advisors (see the following paragraph) and outside consultants for specific tasks, and on the WBGfor advice. They have all worked hard and learned quickly, gaining experience and with it confidence. During 1972 and 1973 their attention was focussed on implementing the reorganization and improv- ing internal procedures, so that BAPINDO could effectively take on new business. This preoccupation with internal reorganization, required by BAPINDO's specific situation, resulted in insufficient attention to long- range planning and operational planning systems. The management has now started to remedy these deficiencies, in particular in the area of longer- term financial planning. The WBGwill continue to assist BAPINDO's manage- ment in whatever way it can.

3.08 Advisors. As part of the reorganization, four Advisors were appointed, in 1971 and early 1972, togrovide support to BAPINDO's new management. Two more advisors were appointed in late 1972 when the Maritime Credit Department was established. All the Advisors were selected and recom- mended to BAPINDOby the WBG. The contracts of all the Advisors were due to expire between May and October 1974, prompting, earlier this year, a thorough evaluation of their performance. BAPINDOand the WBGconcluded that the Advisors had collectively contributed significantly to BAPINDO's development and improved performance. It was agreed with BAPINDO that the time had come to start a gradual reduction in the number of Advisors. Accordingly, the contract of one Advisor was allowed to expire in May 1974, and that of another was renewed until December 1974. The contracts of two others have been extended, one to expire in the summer of 1975 and the other in 1976. Required changes in the terms of reference have been agreed upon. The contracts of the Maritime experts will be renewed for one more year up to October 1975; the need for continuing their services beyond this period will be reviewed in summer 1975. UNDP and the Governments of Japan and Australia have contributed towards meeting the cost of these technical experts.

3.09 Staff. One of BAPINDO's achievements during 1973 was a 40% reduc- tion in total staff, both at Head Office and at the branches (from more than 1,263 to 750). The retrenchment mainly covered clerical and lower support staff, whose numbers were bloated beyond BAPINDO's needs in the past. BAPINDO handled the reduction imaginatively and compassionately, in close cooperation with the Department of Manpower. Major results of this staff reduction have been a general organizational streamlining, a sense of renewed purpose among the retained staff, and marked improvement in efficiency.

3.10 BAPINDO's staff at the professional level is generally well quali- fied. Following the resumption of lending activity in early 1972, technical assistance from the Advisors, the Association's extension of two Credits in 1972, adoption of systematic training methods, a significant reduction in staff numbers, and improvements in compensation, staff morale and motivation have improved visibly. BAPINDO needs to hire some economists (see paragraph 3.12) and engineers, particularly in the Maritime Credit Department. BAPINDO's - 12 -

Personnel Department has drawn up a long-termstaff developmentplan and, significantly,the training budget for 1974 was increasedby 80%, reflecting the high priority accorded this activity.

Procedures

3.11 Appraisal. BAPINDO's appraisal standards have improved consider- ably over the last two years, in part because of the efforts of the Advisors, and in part because of the priority BAPINDO'smanagement assigned to staff- training in project appraisalwork. Appraisals are now undertaken in a systematic manner, and the financial and technical aspects are usually handled satisfactorily. The Management and Advisors are conscious of the need to continue improving appraisalwork, and two senior officials from BAPINDO made 4-month visits this year to the IndustrialMining and DevelopmentBank of Iran and the Korea Development Finance Corporation,under a UNDP project for which the Bank is Executing Agency, for further study in appraisal techniques.

3.12 BAPINDO's appraisals are less satisfactoryin covering marketing and economic aspects. Reliable statistics are hard to come by in Indonesia, and this problem is compounded by the fact that most of BAPINDO's clients are not sophisticatedenough to undertake detailed market studies on their own. Emphasis in BAPINDO's economic appraisal is given to partial indica- tors and effective rates of protection,but economic rates of return are not calculated. BAPINDO has agreed to upgrade its capability in this area, and to develop a suitable methodologywith the WBG's assistance.

3.13 Supervision. A separate division to concentrateon supervision activity was not set up until late 1973. Follow-up work done so far has been largely in conjunctionwith processing of applicationsfor reschedulingold loans, or making additional loans to old customers. One of the major diffi- culties encounteredwas inadequate past appraisals. Supervisionwork must now be concentratedat the branches; this is where the actual supervision takes place. BAPINDO is currently actively engaged in drawing up a practical supervisionmanual, and has sent one of its senior officials to the Private Development Corporationof the Philippines to study its supervisionprocedures, at the WBG's suggestion.

3.14 Procurement and Disbursement. BAPINDO's guidelines for procurement appear satisfactorybut implementationin the past was not strict, (e.g. for imported items the requirement that the applicant obtain several quotations was not always followed), and depended on the initiative of the engineer concerned, varying considerably from project to project. Branch staff were lax in following procedures, but the Engineering Advisor has now worked out clearer procedures which are expected to make procurement more efficient. IDA's comments on subprojects also helped tighten procedures.

3.15 Loan disbursements for imported items are made after checking appropriate documents, including suppliers' invoices and bills of lading. - 13 -

Loan disbursements for local expenditures are made on the basis of physical inspectionand verificationof documents supportingexpenditures. Disburse- ment proceduresare satisfactory,and no problems exist in followingWBG procedures.

3.16 Internal Control and Accounting. BAPINDO hired outside consultants to improve its internal control and accounting systems. Their recommendations received in August 1973 are currentlybeing implementedthroughout the organi- zation. The shift to the new system was completedat Head Office and Jakarta branch by August 1974, and should be in place throughoutthe institutionby mid-1975. Retrainingof staff and upgradingof procedures is proceeding simultaneously. The transitionto the new system has been smooth and imple- mentation is currentlyahead of schedule.

IV. OPERATIONSAND FINANCIAL CONDITION

Summary of Operations

4.01 BAPINDO's operations fall into three distinct categories: (i) in- dustrial loans, (ii) maritime sector loans, and (iii) short-term raw cotton loans. Industrial lending was BAPINDO's original function, with the emphasis alternating between medium-term lending and short-term lending. Within the design of institutionalfinancing arrangements agreed upon by GOI and the WBG, BAPINDO was to concentrateon medium- and long-term financing; it, therefore, gave up short-term lending in 1972. It has however continued to financeper- manent working capital and to make short-term loans to its term loan clients. Maritime sector lending commenced in 1972 when BAPINDO was designatedas the channel for foreign credits to the maritime sector. Lending for raw cotton started in 1967 when BAPINDO was designated administratorfor importing raw cotton under US PL 480 agreements,for distributionto selected spinning mills, at prices subsidized by GOI.

4.02 Except for making raw cotton loans, BAPINDO was relatively inactive during 1971, because GOI had stopped it from making new loans in late 1970, and before that it did not have adequate resources. It restarted operations in 1972, after the reorganizationhad made some progress. A summary of BAPINDO's loan operations is given in Annex 8, and commitmentsfor 1972 and 1973 are shown below: - 14 -

Commitments (Amounts in Rp. millions)

1972 1973 No. Amount No. Amount

IndustrialLoans/1 44 2,773 105 9,933

Maritime sector loans 3 64 40 2,244

Raw cotton loans 19 14,360 18 38,538

Total 66 17,197 163 50,715

/1 Including Investmentand Permanent Working Capital Loans.

During most of 1972 BAPINDO was still preoccupiedwith reorganizingand sorting out the weak portfolio inherited from the past. It was not until 1973 that BAPINDO began to operate more normally, and was better geared to handle an increasingvolume of new business.

IndustrialLoans

4.03 InvestmentLoans. -/ BAPINDO made commitmentsfor 53 investment loans for Rp 7.3 billion in 1973, compared with 26 loans for Rp 2.1 billion in 1972. Total commitments as of December 31, 1973 amounted to 165 loans totallingRp 19.5 billion. Textile projects took 41% of cumulativecommit- ments, reflecting the predominanceof this sector in Indonesia'sindustrial structure. The next largest sectors were rubber processingwith 14% and tourismwith 13% of total commitments. Most loans for rubber processing were made between 1969 and 1971, when BAPINDO was administratorof'a spe- cial GOI loan program for this sector.

4.04 The average size of BAPINDO's commitmentsin 1973 was Rp 133 mil- lion 2/ ($320,000),a substantial increase over the comparable figure of Rp 80 million ($193,000)in 1972. The larger size of loans mainly reflected worldwide inflation,and involvementin textile projects of relativelylarger size. The average loan size, other than textiles, rose only marginally from Rp 61 million to Rp 68 million between 1971 and 1973. About 60% of BAPINDO's loans were below $200,000 equivalent,and only 5 out of a total of 165 invest- ment loans were for more than the equivalentof $1 million. 70% of cumulative

1/ Data on Investment Loan Commitments by size, duration, geographical location, and by industry are shown in Annexes 9 and 10.

2/ Because BAPINDO finances, on average, about 75% of total project cost, its share reflects a total average project cost of about Rp 177 million. - 15 -

commitmentsat year-end 1973 were made to clients in Java, reflecting the geographic concentrationof 78% of all medium- and large-scaleenterprises in that island. Within Java, however, commitmentsin Central Java rose to 21% of total commitments in 1972 and 1973 compared to 8%in 1971. BAPINDO's loans committed during 1973 had an average repayment period of between five and six years, while nine out of a total of 53 loans were made for more than an eight-year period. There has been a visible lengthening of loan maturities, which is par'tlya result of comments made by the WBG on BAPINDO's generally over-optimisticestimates of the repayment capacity of sub-projectsit pro- posed to finance.

4.05 Permanent Working Capital'Loans(PWCL). -/ BAPINDO's PWCL's are extended to its term loan clients, and accounted for about 25% of total industrial lending in 1973 (52 loans for Rp 2.6 billion). Until mid-1973, PWCLs were usually made for one year and were renewed every year. Since mid-1973, however, repayment schedules have been fixed according to the estimated debt servicing capacity of customers. In 1973, PWCLs had an average repayment period of between four and five years. The industrial distribution of PWCLs was similar to that of equipment loans, with textiles accounting for 51% of cumulative commitments. PWCLs were also concentrated in Java (69%). In 1973, the average size of PWCLs was Rp 50 million, double the 1971 size, but only half the average size of investment loans.

4.06 Small Business Co-Financingwith Regional Development Banks. A good example of BAPINDO's growing confidence and ability to innovate is the co-financingscheme set up with selected Regional DevelopmentBanks (RDB's) 2/. BAPINDO has been actively concernedwith increasingits assist- ance to small-scale industry. In 1973, two pilot projects were set up with the RDB's of Central Java and Bali jointly to finance small-scale enterprises. BAPINDO set up lines of credit of Rp 50 million each, to be used by the RDB's to extend investment loans and PWCLs not exceeding Rp 5 million each for individual customers. Arrangementswere made for,P.T. ASKRINDO to insure 80% of the loan risk, the balance being borne by BAPINDO and the RDB in proportion to their share in the sub-loan. Following changes in the constitutional structure of the RDB's late in 1973, which freed them from direct interference by provincial Governors, Bank Indonesia brought this co-financingscheme within the ambit of the INVESTASI program (see Annex 3). This provided BAPINDO with a welcome additionalsource of funds. By April 1974, BAPINDO had added three more RDB's to this scheme, and revised its earlier agreements to bring its total lines of credit to,RDB's to Rp 1.05 billion. Four more agreements have been signed since that date.

1/ Data on PWCLs by size, duration, geographicallocation and by industry are shown in Annexes 10 and 11. 2/ Further details of this scheme are provided in Annex 12. - 16 -

4.07 Before extending lines of credit to the RDB's, BAPINDO made care- ful appraisals of each institution. A program for correcting organizational deficiencieswas agreed upon with each RDB's management. Selected RDB offi- cials are already attending training courses at BAPINDO, and officials from BAPINDO are expected to be deputed for tours of duty with the RDB's. BAPINDO does not involve itself in sub-projectappraisals, but those exceeding Rp 2 million require ASKRINDO's prior approval.

Maritime Sector Lending -/

4.08 The MCD, establishedin 1972, started with a portfolio of four short-term and nine medium-term loans of Rp 513 million. Three loans amounting to commitments of Rp 64 million were made in 1972. MCD operations quickly gained momentum and 40 loans for Rp 2.2 billion were committed in 1973, or 17% of BAPINDO's total commitmentsfor that year. MCD is now an important factor in BAPINDO's lending operations.

4.09 Although the use of funds from Credit 318-IND is limited to financing the rehabilitationof the existing inter-islandRegular Liner Service fleet (RLS), BAPINDO also makes loans for other shipping sectors using funds obtained from other sources. At the end of 1973, non-RLS loans exceeded RLS loans, both in number and amount, as shown below:

(Rupiah Millions)

PELNI /1 OTHER TOTAL No. of No. of No. of Loans Amount Loans Amount Loans Amount

RLS 11 710 6 271 17 981 Non-RLS 11 642 9 447 20 1,089

TOTAL 22 1,352 15 718 37 2,070

/1 The wholly Government-ownedshipping corporation,Pelayaran Nasional Indonesia (PELNI).

BAPINDO's largest shipping client is PELNI, which accounts for about 25% of the total tonnage of Indonesia'sRLS fleet, and received 65% of MCD's total commitments. BAPINDO expects that PELNI's predominantshare in its portfolio will decline as the RLS rehabilitationproject is completed, and other fi- nancing areas such as new ships, dry-docks, shipyards and terminals are cov- ered. The average size of MCD's shipping loans in 1973 was Rp 56 million. More than 80% of commitmentsmade in 1973 had a maturity of between three and five years.

1/ Details of commitmentsup to December 1973 are shown in Annex 13. - 17 -

Raw Cotton Loans

4.10 The unsettled state of BAPINDO's organizationduring 1971-72 did not affect its raw cotton business,because it did not appraise these short-term loans. GOI identifiesborrowers, indicates amounts to be loaned, and BAPINDO acts only as an executing agency, concernedwith opening LC's, handling documents,and collectingrepayments. Bank Indonesiaprovides BAPINDO with the major part of funds for financing the import of cotton. BAPINDO finances freight and other local currency costs from its own funds (about Rp 10.5 billion or 20% of ttal raw cotton loans in 1972 and 1973). The raw cotton loans are usually for a period of one year.

4.11 Raw cotton commitmentstotalled 11 loans for Rp 13,062 million in 1971, 10 loans for Rp 14,360 million in 1972, and 18 loans for Rp 38,538 million in 1973. The sharp increase in average loan size from Rp 755 million in 1972 to Rp 2,141 million in 1973, reflected increasedworld market prices for cotton, and reduction (subsequentlyabolition in 1973), of government exchange rate subsidies for raw cotton imports.

4.12 In 1972, the Associationhad agreed with GOI and BAPINDO that raw cotton lendingwould be phased out and that BAPINDO would concentrateon making medium- and long-term loans. A sudden terminationof.raw cotton lend- ing was not envisaged,as this would have affected BAPINDO's-profitability adversely. Term lending operationshave now developed sufficientlyso that an end to raw cotton lending should not seriously impair BAPINDO's financial stability. GOI has decided to transfer, by the end of 1974, the raw cotton import lending to Bank Ekspor-Impor (EXIM)with which BAPINDO already shares this business. One textilemill importer'saccount will remain with BAPINDO, because it is also a long-term loan client.

Equity Financing

4.13 BAPINDO had not made any equity investmentsbefore mid-1974, when it agreed to invest up to 40% of the proposed equity of the newly established National Fleet DevelopmentCorporation (PANN). The WBG did not earlier encourage such investmentsbecause BAPINDO had still to demonstrate the organi- zational competence to undertake an adequate appraisal of such operations inherentlymore risky than lending. With the recent improvementsin its organizationalstructure and appraisal capability,it should now consider making modest equity investments. It should thus play a role in implementing GOI's decision to encourage the growth of "pribumi"entrepreneurs. One way of converting"non-pribumi" customers t a "pribumi"status would be for BAPINDO to buy a share of the equity of such companies, for later resale to Indonesian private individualsor companies. GOI also plans to use BAPINDO as a channel for equity investmentsin joint-venturecompanies to ensure that such com- panies achieve the required minimum Indonesianparticipation. BAPINDO is not expected to assuimethe risk for such investments,and will be supplied with the required funds by GOI. Guidelinesfor such investmentsare presently being formulatedby GOI. - 18 -

Resources

4.14 For the bulk of its domestic currency resources BAPINDO is, and will continue to be, dependent on the Government. Funds are provided in the form of increases in its share capital, through'Bank Indonesia in the form of refinance facilities (INVESTASI), and through long-term loans. During 1973 when BAPINDO's liquidity position was good, Bank Indonesia withdrew the refinance facility; but this will be restored in late 1974 with the quickening pace of BAPINDO's commitments.

4.15 BAPINDO's foreign exchange resources consist of the two IDA Credits made in 1972. The general industrial credit has been almost fully comnitted; the maritime credit had an uncommitted balance of $5.6 million as of September 30, 1974. Because BAPINDOcontinues conditionally to approve projects which it plans to finance from the proposed Bank loan, it has asked for a relaxation of the "90 day rule", covering commitments made prior to the effectiveness of the loan. The request is acceptable since it is desirable to maintain the continuity of Bank Group financing (paragraph 5.11).

Financial Position

4.16 BAPINDO's December 31 summary balance sheets for 1970, 1971, 1972 and 1973 are given in Annex 14.

4.17 In the two years following the lifting of the restriction on term lending in 1971, BAPINDO's total assets grew by 16.8%. Significant changes were a 15.3% increase in the raw cotton loan portfolio to Rp 15.2 billion, and a 29.5% increase in the portfolio of medium- and long-term investment loans to Rp 14.4 billion. BAPINDO's loan portfolio, including investment loans, raw cotton loans and working capital loans, rose from 80.8% of total assets in 1971, to 84.1% of total assets in 1973. The loan portfolio and total assets grew in spite of massive write-offs amounting to Rp 1.86 billion during 1972 and 1973. Write-offs of such magnitude are not expected in the future.

4.18 BAPINDO's financial position has improved significantly during the last two years, mainly due to the conversion of Rp 6.5 billion GOI loans into equity in 1971, and the receipt of cash towards additional equity of Rp 4 billion during 1972 and 1973. The Government paid in an additional amount totalling Rp 9.3 billion during the first quarter of 1974. The provision for doubtful debts is now considered adequate by BAPINDO's auditors; for the first time in its history, BAPINDO's 1973 financial statements received an unqualified opinion and clean report from its auditors. As of December 31, 1973, BAPINDO's debt/equity ratio was 2.2:1, well within the maximum 3:1 stipulated in the IDA Project Agreement.

Profitability

4.19 Summary income statements for the years ended December 31, 1970, 1971, 1972 and 1973, are given in Annex 15. BAPINDOhad a spread of about - 19 -

7% on its loan operations in 1972 and 1973. Despite the high spread, its profitabilitywas poor. In 1973 it made a net after-tax profit of Rp 608 million, as compared to a negligibleprofit of Rp 54 million in 1972. The 1973 profit would have been Rp 1,023 million, but for the extraordinaryex- pense of Rp 415 million, incurred on severance pay under the massive re- trenchment program. The poor profit performance in the past was largely due to sizeable provisions for losses on the older portion of its loan port- folio, and also to its administrativeand personnel expenses, high in rela- tion to a somewhat stagnant portfolio. These factors will be less impor- tant in coming years, because the staff has already been considerablyre- duced and the loan portfolio will grow rapidly.

4.20 The raw cotton loan portfolio has been crucial to BAPINDO's profitability. Thp income from this activity was Rp 832 million in 1973; without it BAPINDO would have made a loss of Rp 577 million for the year. It is expected that increasing income from the fast growing medium- and long-term portfolio,will adequately compensatefor the loss of income from raw cotton loan operations after 1974.

4.21 BAPINDO is not expected to pay dividends to its sole owner, GOI, and profits, after adjustments,will be retained.

Quality of Portfolio-

4.22 In assessing the quality of BAPINDO's loan portfolio,due consid- eration has to be given to the fact that the loan repayment record has been generally unsatisfactory in Indonesia. All financial institutions suffer from this problem; some seriously. In BAPINDO's case, the situation has improved considerablysince 1972, although arrears 2/ are still quite high, as the following table shows:

1/ Annex 16 gives an analysis of BAPINDO's loans in arrears. 2/ BAPINDO considers loans to be in arrears on the day an instalment becomes due, and no allowance is made for a grace period or for a transit period between branches and Head Office. In measuring the quality of BAPINDO's portfolio, arrears of more than six months have been considered. If arrears of more than 3 months were to be con- sidered, the 1973 percentageswould change from 15% to 20% and 36% to 53% for medium- and long-term loans, from 59% to 61% and 60% to 62% for short-term loans. Percentages for raw cotton loans would remain unchanged. - 20 - As percentage of total loans outstanding Loans Outstanding Principal Principal Outstanding (Rp million) In Arrears Affected by Arrears 1972 1973 1972 1973 1972 1973 December 31

Medium & long-term 13,118 16,193 28 15 62 36

Short-term industrial loans /1 704 386 74 59 74 60

Maritime loans 576 1,810 53 11 75 13

Raw cotton loans 17,752 15,295 5 1 33 24

Total 32,150 33,684 16 12 46 30

/1 These loans were made before 1971 (BAPINDO no longer makes short-term loans), and BAPINDO does not have any leverage unless a new loan is sought. These clients are still being pursued with the hope that some part of these loans may be recovered.

4.23 The maritime and raw cotton loan portfolios are in much better condition than the industrial loan portfolio. The maritime portfolio im- proved dramaticallyafter PELNI, the largest maritime client, cleared its arrears, following a reorganizationrequired by BAPINDO as a condition of continued financial assistance. Raw cotton loan clients always had a strong incentive not to default, in order to remain eligible for the following year's cotton quota; textile mills are also relatively more profitable. In the industrial loan portfolio, textiles, tourism and pharmaceuticalsprojects had relatively good records; while metal works, pulp, paper and printing, transportationand rubber processingwere among the group of troublesome projects.

4.24 As of December 31, 1973, BAPINDO undertook an account by account analysis which resulted in the followingqualitative classificationof the total medium- and long-term loan portfolio: - 21 -

(% of total amount outstanding)

Good loans /a 36.9 Slow loans lb 16.7 Problem loans /c 34.6 Bad loans /d 11.8

100.0

/a Payments regular and on time. /b Payments regular, but often late. /c Projects needing special attention,with active BAPINDO involvment aimed at improving repayment records. /d Companies in, or close to liquidation,with no reasonablehope of resump- tion of regular payments.

One of the more important reasons for high arrears is inadequatepast appraisalswhich stipulated unrealisticallyshort repayment schedules, since the INVESTASI program did not allow a repayment period exceeding 5 years. Many customers,with otherwise satisfactorygrowth and pr4fit performance, found themselvesunable to repay term debt without adversely affecting opera- tions, because of a general shortage of working capital. Some arrears also resulted from genuine financial difficultiesdue to technical,marketing or management reasons.

4.25 BAPINDO is acutely conscious of the need to upgrade the loan port- folio through both better appraisalsand greatly strengthenedsupervision work at Head Office and branches. The arrears situation should improve substantiallyas a result. However, following the recent imposition of a severe credit squeeze as part of GOI's anti-inflationarymeasures, a slowdown in repaymentsmay result for the entire banking system, and BAPINDO cannot hope to be an exception. The provision for bad debts, however, appears to be adequate.

V. PROSPECTS

General Outlook

5.01 Indonesia's overall economic prospects remain bright. During Repelita II (see paragraph 2.03) total gross investment is expected to rise from Rp 1,100 billion or 17.7% of GDP in fiscal 1974 to Rp 3,150 billion or 23% of GDP in fiscal 1979. The share of the industrialsector is expected to grow from 9.8% of GDP in fiscal 1974 to 12.5% in fiscal 1979; the growth rate of the industrial sector is expected to average 13% annually during the Plan period. Within the industrialsector, GOI is committed to a policy of giving - 22 - full scope and encouragementto the private sector, and to developing indigenous Indonesian enterprise. Despite the obstacles mentioned in paragraph 2.14, the recent growth of industry has resulted in an investment demand which the local term lending institutionshave not been able to fulfill; reliance has had to be placed on private external financial institutionsto make up the difference. In the foreseeable future, as in the past, BAPINDO's business will be limited by its own processing capacity rather than by a lack of demand; the needs for long-term capital are large and continuing.

BAPINDO's Business Forecasts

5.02 A forecast of BAPINDO's approvals, commitmentsand disburserents is given in Annex 18; estimates of commitments are summarized below (in millions of Rupiah): 1973 1974 1975 1976 1977 1978 (Actual) Industrial Loans 9,933 28,312 36,900 41,800 47,300 52,100 (of which Project Aid) (2,146) (5,000)(6,000)(7,000)(8,000)(9,000) Maritime Sector Loans 2,244 6,250 9,134 15,146 18,775 19,995 Raw Cotton Loans 38,538 4,720 8,100 8,500 9,000 9,500 Equity Investments - 720 1,090 880 940 1,080 Total 50,715 40,002 55,224 66,326 76,015 82,675

The above estimates of commitmentsmaybe reclassifiedaccording to domestic currency/foreigncurrency operations as follows (in millions of Rupiah): 1973 1974 1975 1976 1977 1978 (Actual) Domestic Currency Loans Short-term 41,474 11,977 16,700 19,400 22,200 24,700 Medium/long-term /a 6,458 11,926 17,794 19,976 22,780 24,660 (of which Project Aid) - (858) (2,000) (2,400) (2,800) (3,200) (3,600) sub-total 47,932 23,q93 34.494 39,376 44,980 49,360 Foreign Currency Loans Medium/long-term / 2,783 15,379 19,640 26,070 30,095 32,235 (of which Project Aid)-(1,288) (3,000) (3,600) (4,200) (4,800) (5,400) sub-total 2,783 15,379 19,640 26,070 30,095 32,235 Equity Investments (domestic currency) - 720 1,090 880 940 1,080 Total 50,715 40,002 55,224 66,326 76,015 82,675

/a Project Aid projects are those which are assigned to BAPINDO by GOI for administration. GOI provides the resources and bears the credit risk. - 23 -

5.03 BAPINDO's past performance is not a good indicator of its potential for the future. The above projectionsappear optimisticbut are fully justifiable from the point of view of the demand, and are backed up by a strong pipeline of pending loan applications (Rp 61 billion as of April 1, 1974). The projections indicate that the proportion of short-term loans in total commitmentswill decline significantly,from about 75% in 1973 to about 30% throughout the projected period. This is because while medium- and long-term loans increase much more rapidly than in the past, (a) raw cotton loan business is being transferredto EXIM and (b) BAPINDO has restricted short-term lending to its term clients. With the single exception noted in paragraph 4.13 above, BAPINDO has not made equity investments in the past but expects to make a start in 1974. Maritime sector operationswill account for 20-25% of total estimated commitments. An analysis of the pipeline indicates that the textile industry could account for about a third of BAPINDO's industrial lending followed by the chemical industry (about a fourth) in the next two years.

Resource Requirements

5.04 Domestic Currency. Other than retained earnings, deposits and collections,BAPINDO is completely dependent on the Government for domestic currency resources. As of January 1, 1974, BAPINDO had a surplus of Rp 2.8 billion on a disbursementbasis. However, BAPINDO had a deficit of Rp 3.8 billion if undisbursedcommitments are also taken into account. Domestic currency resources needed to meet new commitments,including Project Aid projects, stated in paragraph 5.02 would amount to about Rp 98 billion for 1974, 1975 and 1976. Including the deficit as of January 1, 1974, total resource requirements for the three years 1974-76would be about Rp 102 billion (including Rp 7 billion for Project Aid projects) on a commitmentbasis. Of this amount, Rp 20 billion are estimated to be provided by net collections, deposits and internal cash generation. The balance of Rp 82 billion would have to be provided by the Government. BAPINDO has assumed that its capital will be increasedby Rp 20 billion during 1974-76, and that the balance will be provided in the form of loans and INVESTASI refinance facility. Consider- ing the amounts of funds provided by the Government in the past, it is not unrealistic for BAPINDO to expect Rp 82 billion in a three year period. Early in 1974 GOI paid more than Rp 9 billion in equity funds. During the negotia- tions for the proposed loan, understandingwas reached with GOI that it would continue to provide BAPINDO with the rupiah resources needed by the latter, either in the form of equity or loans, to allow it to effectively carry out its rations.

Foreign Currency. BAPINDO's only foreign currency resources are two IDA Credits made in 1972. Credit 310-IND is almost fully committed; Credit 318-IND still has a balanc?'o75.6 million but its use is restricted to financing of RLS clients. For its estimatedcommitments during remaining months of 1974, 1975 and 1976, BAPINDO would need about Rp 53 billion equivalent (includingabout Rp 11 billion for Project Aid projects). The Bank has informed BAPINDO that it cannot continue to be its sole source of - 24 - foreign exchange funds. Kreditanstalt fur Wiederaufbau (KfW)will send an appraisal mission to BAPINDO in late November this year for a proposed DM 22 million loan. BAPINDO is also exploring the possibility of securing financial assistance from Belgique Maatschappijvoor Investeering(BMI) and the Asian DevelopmentBank (ADB). It is recommended that the Bank consider $50 million for the proposed loan which would account for about one-half of BAPINDO's foreign exchange resource requirements(excluding Project Aid projects for which the Government provides the needed resources) for the period ending December 1976.

Projected Financial Position

5.06 Forecast Balance Sheets, Income Statements, Cash Flow Statements, and Financial Ratios are given in Annexes 19, 20, 21 and 22 respectively. The projected Balance Sheets show a rapidly rising medium- and long-term loan portfolio: from Rp 14.4 billion at the end of 1973, an estimated Rp 31.9 billion at the end of 1974, to Rp 164.4 billion at the end of 1978; the rate of growth of foreign currency loans will be much faster than that of domestic currency loans. The short-term loan portfolio will decline relatively from being greater than the medium- and long-term loan portfolio at at the end of 1973 and 1974 to being less than one-third of it at the end of 1978, indicating the emergence of BAPINDO as an institution principally providing long-term capital.

5.07 BAPINDO's profitabilityremained depressed in recent years because of high salary and administrativeexpenses and massive provisions for doubtful loans. The profit will be low in 1974 because of a significant increase in salary and other personnel expenses (from Rp 1.1 billion in 1973 to Rp 2.5 billion in 1974) following a justified improvement in pay scales. Profitability improves to satisfactorylevels from 1975 onwards and is expected to return 9.4% on equity in 1978. Correspondingto a rapid rise in the medium- and long-term loan portfolio, the income from this source will account for an increasinglyhigh proportion of total income (68% in 1978). Income from equity investments is not expected to be significant. BAPINDO is not expected to pay any dividends to the Government.

5.08 With the Government providing the needed resources as projected by BAPINDO, its equity base should continue to be strong. The total debt to equity ratio is expected to rise from 2.57:1 in 1974 to 3.65:1 in 1978; the ratio of long-term debt to equity is estimated to rise from 1.2:1 in 1974 to 3.2:1 in 1978. The debt service cover (calculated by including short-term operations) is expected to remain satisfactory throughout the period of projections;the lowest will be 1.2 in 1974.

Proposed Loan

5.09 As stated in paragraph 5.05, a loan of $50 million to be made to GOI, and on-lent to BAPINDO is recommended;the proceeds would be utilized to finance the import of machinery and equipment,mainly in the industrial - 25 - and transportationsectors, and for meeting the estimated foreign exchange component of expenditureson "off-the-shelf"purchases (60%) and local civil constructionexpenditures (40%) as was the case with the first Credit. In the selection of projects, BAPINDO will give priority to import substitution, export oriented and labour intensive projects, to projects which result in the development of indigenous enterprise,and to projects which generally conform to the Government'spriorities. The Bank would continue to help the growth of the industrial sector in Indonesia, through the proposed loan. It will also provide continuity in the institution-buildingrole of the WBG which began in 1969, and which is still important notwithstandingthe very substantialprogress made by BAPINDO.

5.10 In view of the improvementsin BAPINDO's appraisal standards, an increase in the present free limit from $100,000 to $500,000 is justified and is proposed. The Bank should still expect to receive projects requiring its prior approval accounting for about 70-80% of the total loan amount. As a safeguard, however, an aggregate free limit of $15 million is also proposed. At the time the Credits 310-IND and 318-IND were made, BAPINDO's short-term lending and commercial banking operations were significant and therefore the debt/equity ratio was defined to include all liabilities. The short-term loans and deposits have declined in relative importance and are expected to decline further (see paragraph 5.06). 'Debt' for the purposes of debt/equity ratio should now be defined to include only loans of more than 1 year's maturity, as is the case with most other DFCs associatedwith WBG. With this change in the definition of 'debt', the present ratio of 3:1 should be retained. A schedule of estimated disbursementsis given in Annex 23.

5.11 In order to maintain continuity of WBG financing,withdrawals by BAPINDO aggregating the equivalent of up to $3 million should be allowed under the proposed loan for expendituresrelating to sub-loans made on or after July 1, 1974.

5.12 Other terms and conditions of the proposed loan would be substantially similar to those in recent Bank loans to development finance companies, in- cluding the standard commitment fee. BAPINDO's repayments to GOI would conform substantiallyto the aggregate schedule of individual repayment schedules of BAPINDO's sub-loans.

ANNEX1

BN P2XBANGUNJiINDONESIA

Approvals and Inplementation of Foreign Investment Projects by Sector. 1967-1973 (In millions of US dollars)

Number of Approvals Iriplesntation Sector Projects 1967-69 1970 1971 1972 1973 Total 1967-69 1970 1971 1972 1973 k/ Total

Agriculture 56 21.9 53.5 2.9 3.7 4.3 86.3 9.2 1.3 2.2 3.0 7.1 22.8

Forestry 81 351.8 40.1 17.7 51.0 37.1 497.7 14.1 32.2 30.6 37.6 30.5 145.0

Fishing 14 14.6 7.8 3.5 2.0 4.1 32.0 3.1 3.8 6.7 6.5 '4.8 24.9

Mining and quarrying 19 623.7 75.0 81.7 179.5 - 959.9 4.7 34.4 101.6 93.7 11.7 246.1

Manufacturing 397 156.7 142.3 244.1 212.4 . 1.2u. 31.4 435 81.0 194.5 240.7 591.1

Food 53 31.7 14.8 20.4 23.5 23.0 113.4 7.4 12.7 15.1 19.5 22.8 77.5 Textiles end leather 65 31.9 29.5 124.3 123.3 235.1 544.1 2.4 9.0 34.9 72.8 129.8 2148.9 Wood and wood products 10 - 0.5 1.2 0.3 6.4 8.4 - - - - 0.3 9.3 Paper & plaer products 13 3.0 2.1 3.3 4.9 2.4 15.7 0.3 0.8 3.1 2.9 2.6 9.7 Chemical & rubber'i 106 42.0 27.6 26.5 22.4 68.9 187.4 6.6 8.9 12.6 31.0 26.3 85.4 Nomretalic minerals 19 3.9 32.3 30.1 7.8 45.3 119.4 0.6 0.8 1.3 17.2 5.4 25.3 Basic metals 29 8.6 6.8 12.4 11.7 31.4 70.9 - 0.1 1.8 13.8 12.0 27.7 Metal products 90 32.8 27.5 23.1 16.9 43.0 143.3 11.8 8.8 11.0 35.6 36.5 103.7 Other 12 2.8 1.2 2.9 1.5 - 8.4 2.3 2.4 1.2 1.7 5.0 12.6

Construction 44 10.2 914 6.0 13.5 36.4 75.5 0.3 1.4 1.2 1.1 2.7 6.7

Trade and hotels 15 4.8 3.6 55.8 _33.5 6.6 104.3 1.5 _._ 6.3 -.18 -15.4 33.3

Wholesale trade 3 3.7 7.1 - 0.6 11.3 - 0.3 0.5 1.0 8.1 9.9 Hotels 12 4.8 - 48.7 33.5' 6.0 93.0 1.5 4.0 5.8 4.8 7.3 23.4

Transpo¢t & Commmicationsd9 10.6 0.5 4.2 3.0 15.2 33.5 4.3 1.6 0.9 0.7 1.1 8.6

Transportation 18 4.5 0.5 4.2 3.0 15.2 27.4 0.3 1.2 0.7 o.6 1.1 3.9 Comaunications 1 6.1 - - - - 6.1 4.0 0.4 0.2 0.1 - 4.7 Social & personal services41 38.3 12.2 5.9 23.3 56 5 136.2 2.6 2 1.8 1.1 5.0 12.8

Total2 686 1232.7 344.4 421.6 522.0 '3.136. 71.2 124.8 232.3 344.0 319.0 1.091.3

I/ Classification according Xo "International Standard Industrial Classification of all Economic Activities". (Statistical Office of the United Nations, Statistical Paper, series M, No. 4). Excludes investment in the petroleum and banking sectors. i/ Investments approved by the Foreign Investment Board (up to June 1973), and thereafter, by the Investment Coordinating Board.

/ Implementation is the recorded disbursement on approved projects ba[sed upon cash inflows, customs data on imported capital equipment, and the conversion of foreign claims under the DICS Scheme.

!/ Incomplete data.

Source: Data provided by the Indonesian authorities. ! EAP Projects Department September 9, 1974 BANK PEMBANGUNAN INDONESIA

Approvals of Domestic Investment Projeots by Sector. 1968-1973 (in billions of Rupiah)

Nov. 1968-71 1972 1973 Total (1968-1973) 1973 Number of Intended Number of Intended Number of Intended Number of Intended Projects in Sector Projects Capital Projects Capital Projects Capital Projects Capital Operation

Agriculture, fisheries and livestock 118 34.9 39 29.4 48 32.1 205 96.4 63 Forestry 82 59.5 31 25.9 63 62.7 176 148.1 68 Mining 4 18.6 1 023 1 0.3 6 19.2 5 Industry 525 190.0 322 192.0 391 340.5 1,238 722.5 269

Transportation 1/ 52 29.2 7 28.7 21 27.8 80 85.7 38 Tourism 55 31.9 16 17.2 22' 33.9 93 83.0 19

Housing 2 2S 4 3.5 3 71.1 9 77.1 1

Infrastructure 7 2.4 1 0.6 1 1.0 9 4.0 I

Total: 8 369.0 hL 297.6 a8O 569.4 66 6

/ Includes services not included elsewhere. / Includes office buildings. 3/ As of the end of April 1973.

Source: Data provided by the Indonesian authorities.

EAP Projects Department September 9, 1974 BANKPEIBANGlUiAR INDONESIA ANNEX 3

Medium-Term Investment Credit Program (INTESTASI) Page 1 of 4

Description of Program

1. A medium-terminvestment credit program (INVFSTASI),wasintroduced in April 1969, to providethree to five year developmentloans, mainly through Indonesia's state-owned banks and the Regional Development Banks, at a concessional interest rate of 12% per annum. It is the main domestic source of investment finance, other than the government development budget and private equity investment. The specific financing arrangements have been changed several times since 1969. Prior to April 1970, the development budget provided a third of total resources, at no cost to the participating banks, while Bank Indonesia charged a rate of Ii%per annum on the portion that it provided.. Since 1970 no budget funds were committed to the program . In January1971 the financing arrangements were changed, and INqVESTASIloans were financed 80% by Bank Indonesia (BI) and 20% by the state banks. 2. Coincidingwith a major revisionof interestrates on April 12, 1973, changeswere announcedmaking the programpotentially more beneficial to the small business sector in Indonesia,which previouslyenjoyed no special concessionsunder the scheme. A summaryof the revisedscheme follows:

3. Investmentcredits were classi-iedinto four broad groups,on the basis of the amount of credit extendedper project:

Group I up to Rp. 25 million Group II : Rp. 25 millionand up to Rp. 100 million Group III : Pp. 100 millionand up to Rp. 300 million Group IV : Rp. 300 million and above

4. At the start of each fiscal year, the total amount of investment credit to be made availableto the statebanks would be fixed. The relative allocationfor the groups mentionedin paragraph3 would be as follows:

Group I : 30% Group II : 35% Group III 20% Group IV : 15%

5. Borrowers in the variousgroups, would have to providethe following proportionof the overallinvestment cost of individualpriority 1/ projects from their own resources: Group I : 25% Group II : 25% Group III : 25% Group IV : 35% All the groupswould, however, have to put up 50% for non-priorityprojects.

6. The state bank concernedwould act as the "executorbank" for each approved credit, and funds would be jointly provided with BI

I/ Priority projects include among others those in the field of basic industry, infrastructure, tourism, transportation, agriculture, fisheries, exportss, pharmaceuticals and nine essential commodities. ANNEX3 Page 2 of 4

in the following proportions:

Group I BI-80% and state bank-20% Group TI : BI-75$'%and state bank-25% Group III : BI-70% and state bank-30% Group IV : BI-65% and state bank-35%

7. State banks could extend loans under the scheme with a maximum maturity of five years, but for the first time loans with longer maturities could be extended by Bank Pembangunan Indonesia (BAPINDO).

8. On December 1h,1973 the following changes were made in the program for medium-term investment credits made to small businesses in the urban/rural sectors, for amounts not exceeding Rp. 5 million each:

(a) the amount to be provided by the borrower was not specifically indicated, and was to depend on the "real" capacity of the borrower)

(b) there would be no collateralrequired in additionto the assets of the proposedprojects;

(c) the interest rate would remain at 12%;

(d) Bank Indonesiawould provide 80% of the amount of the credit,with the state bank providing the remaining 20%.

9. Credits for permanent working capital would also be made available to small business under the following terms:

(a) the amount of the creditwouldnot exceed Rp. 5 million;

(b) the periodwouldnot exceed three years;

(c) the interestrate to be 15% p.a.;

(d) Bank Indonesiawould provide 70% of the credit and the state bank the remaining 30%.

A slightly different ratio was worked out for loans made jointly by BAPINDO and the ReRional Development Banks (RDB's). 1For investment loans BI would provide 80% BAPINDO10/' and the RDB 10%; while for loans for permanent working capital BI would provide 70%, BAPINDO20% and the RDB 10%.

10. From December 18, 1973, medium-term credits were no longer available to units in the building material industry,using fully me^..aalized production systems.

11. From January 1, 1974,medium-termcredits aboveRp. 300 million to any one customer could only be financed by consortiums of state banks, and on March 1, 1974 similarconsortiums were requiredfor credits aboveRp. 500 million to any one borrower,for permanentworking capital.

12. On February 22, 1974,itwas announcedthat henceforthstate banks ANNEX3 Page 3 of 4 would only make loans under the INVESTASI scheme to "pribumii" borrowers, who were defined as enterprises where at least 75% of the equity was owned by indigenous individuals, or at least 50( of the equity was owned by and the majority of operating management was composed of, indigenous indivuduals.

13. Loans under the INVESTASI program have been used mainly for financing capital goods, both for modernizing and rehabilitating existing projects, and for setting up new ones. As of January 197h, net approvals amounted to Rp. 167.8 billion, and net disbursementsto Rp. 116.1 billion, an increase of 18.1$ and 23.4% respectivelyover the figures at the end of December 1972. The ratio of disbursements to approvals was 69.2%, as of January 1974,compared to 65.2OJ as of December 1972. During 1973, disbursements on a net basis were about Rp. 17.8 billion, at about the same level as in 1972. But the rate of net approvals dropped from Rp. 27.0 billion in 1972 to Rp. 25.2 billion in 1973. A breakdown of the credits extended under the program (see Annex 4a); shows that about 78% of credits disbursed went to the private sector, and the remainder to state enterprises. Since larger repayments under the program began to be m-ade to Bank Indonesia and the Government during 1973, the proportion of outstanding credit financed by the banks rose from 23% at the end of 1972 to 33%at the end of 1973. 14. The allocation of credit to various sectors under the program detailed in Annex 4b, shows that the share of agriculture in total approvals fell sharply from 25.5% in 1970 to 10.2% in 1973; the share of manufacturingrose from 42.9% to 49.2% and the share of communicationand tourism rose sharply from 29.8% to 35.14 in the same period. Outstanding credit to agriculture as a percentage of total outstandingsfell from 28.7% in 1970 to 7.6% in 1973; outstandingcredit to manufacturinggrew from 37.4% to 5h.6%, while communication and tourism grew from 32.0% to 34.2% in the same period. The drop in loans to agriculturereflects partially provision of credit through alternative special programs of agricultural credit. The lower share of loans to the manufacturing sector in 1973,appearsmainly due to a larger proportion of term credit being raised from external lenders denominated in foreign currency, and not reflected in the INVESTASI statistics.

Achievementsand Problems

15. Seen from the broad national perspective,the INVESTASIprogram provided sorely needed investment funds, when they were not easily available from other sources at reasonable terms. It also introducedthe banks in the state sector to term lending, an area which was relatively new to most of them. However, some major problems still remain and need to be solved to improve the effectivenessof the program.

16. Among the major drawbacks of the scheme is the low and subsidized interest rate of 12% per annum for smaller borrowers and 15% per annum for larger borrowers (loans over Rp. 100 million), which prevents the normal development of a market for long-term funds, since these rates are lower than those offered for one-year deposits, and charged for short-term loans. Central bank refinance is the only major source of funds for the INVESTASI program. A large volume of arrears has developed variously estimated at between 30 to 45% of total outstandinrsi due largely to inadequate appraisals by the state banks. Due to a shortage of trained staff state banks depended too heavily on project reports of consultants whose competence was open to question. The ar- tificial maximum limit of five years for repayment hurt borrowers whose normal ANNEX3 Page ) of 4

cash generation did niot allow them to repay within this period. A general weakness also exists in calculating realistic working capital requirements, which often prevent projects from producing at adequate capacity levels for profitable operations, due to a shortage of working funds. There was also a relative concentration on large borrowers,which has been largely redressed through changes in the program described earlier.

16. Despite these problems, the DIVESTASI program has made and will continue to make an important contribution to the rapid economic developnent of Indonesia, and to the manufacturing sector, in particular.

EAP Projects Department September 9, 1974 ANNEX 3a

BANK PEMBANGUNANINDONESIA

Medium-Term Credits (INVESTASI),1970 - January 1974 (in billionsof Rupiah)

Total Disbursements Financed by Quarterly Public Private Bank Govern- State Approvals Sector Sector Total Indonesia ment Banks

1970

March 31.6 5.5 11.1 16.6 9.1 5.5 2.0 June 41.8 7.0 17.3 24.3 13.5 7.7 3.1 September 50.2 7.8 25.3 33.1 17.4 8.5 7.2 December 63.9 911 31.3 40.4 24.1 7.2 9.1

1971

March 77.7 10.6 38.5 49.1 30.8 7.1 11.2 June 87.0 12.9 45.5 58.4 36.0 7.4 15.0 September 100.4 16.3 51.2 67.5 45.7 7.6 14.2 December 114.4 18.8 54.5 73.3 51.1 7.7 14.5

1972

March 115.0 16.7 60.0 76.7 53.3 8.2 15.2 June 124.6 18.6 63.1 81.7 56.2 7.6 17.9 September 132.1 19.4 67.8 87.2 60.5 7.8 18.9 December 141.4 20.7 71.5 92.2 64.1 7.3 20.7 1973

March 146.7 21.5 75.3 96.8 64.o 7.4 25.4 June 153.0 21.7 78.8 100.5 65.0 7.2 28.3 September 159.7 23.2 84.4 107.6 66.9 5.0 35.7 December j 166.6 24.5 89.3 113.8 72.3 4.5 37.0

1974

January / 167.8 25.0 91.1 116.1 73.7 4.3 38.1

Estimsates.

Source: Bank Indonesia

EAP Projects Departmebt Septemner 9, 1974 ANNEX 3b

]3A1KPEBtANGULNAW INDONESIA Hediim-TenriCredits (UVESTASI) Approval- and Outstan(Ungs by Sector,1970-74 (in millions of Rapiah)

1/ CreditApp7ovals.9i0 1] 1972 1973

Agrict%*-ture 16,293 25.5 31,256 28.4 12,231 8.7 16,300 10.2 Msnufacturing 27,432 42.9 48,767 39.8 73,221 51.8 79,000 49.2 Mining 259 0.4 136 0.1 465 0.3 500 0.3 Corf1liUTation J'-ourism 19,055 29.8 32,766 29.8 50,772 35.9 56,900 35.4 Other 905 1.4 2,146 1.9 4.670 303 800 4.9 TOTAI 63 244 100.0 110,072 100.0 141 359 100.0 1 100.0 Credit Outstanding

Agricul-ture 11,594 28.7 1 I,33' 2ko0 7,723 8.4 8,300 7.6 Manufacturing 15,132 37.4 32,94 4 .9 55,958 60.7 59,700 54.6 ininf 108 0.3 109 0.2 270 0.3 200 0.2 Communication & Tourism 12,958 32.0 2 ,266 29.0 26,483 28.7 37,500 34.2 Other -. . JJ7 1.9j 0 Other ~~~~~~~~647L.6 68 0.9 n,732 1)9 ,700 . TOTAL 4° 4 100l0 73.302 100.0 12,166 100.0 10-9700 100.0

_/ UJptoKOtoher 1973.

EAP Projects Department September 9, 1974 BANKF-,1BANGUNAN INDONESIA ANNEE 4

List of Developcacnt Banks in Indonesia Name Equity Share

1. BANKPEMBANGUTAN INDONESIA (BtJ-INDO):

- Government of Indoiiesia 100%

2. P.T. PRIVATE DEVELOPMENTFINANCE COMPANY OF INDONESIA(PDFCI):

International Finance Corporation (IFC) 8%

Irving International Financial Corporation 8%

The Nippon Fudosan Bank Ltd. 8%

The Bank of Nova Scotia 4$ DarlingHoldings Ltd. 4%

Lloyds & Bolsa InternationalBank Ltd. 2%

Credit Lyonnais 2%

Banco di Roma Holding 2%

WestdeutscheLandesbank Girozentrale 2

P.T. Gading Mas 12%

P.T. Pan IndonesiaBank 8%

P.T. Tri Usaha. Bhakti 4.2%

PoTo Intrada 3.2%

PoTo B.P.D. Jaya 1.6%

P.T. Metropolitan Kencana 1.6%

P.T. Samudra Indonesia 1.6%

Julius Tahija 1.6%

Ak Bakrie 1.6%

Bank Indonesia 24.6% 6C%

3. P.To INDONESIMNDEVELOPMENT FINANCE CORPORATION(IDFC):

Bank Indonesia 50%

Nederlandse Financiering Maatschappijvoor OntwikkeliLgslanden N.V. (FMO) 50%

EAP ProjectsDepartment Settember 9, 1974 ANNEx5 Page 1 of 3

BANKPENBANGUNAN INDONESIA

The Monea and Capital Market in Indonesia

Present Stage of DeveloPment 1. Money and capital markets are in a very early stage of development in Indonesia. In January 1972, the Government created the Agency for Money and Capital market Development, which is currently working on, among other, proposals, setting up a securities and exchange administration. - - 2. The Jakarta Stock Exchange is a relatively small operation and deals mainly in shares of previously Dutch-owned pre-war enterprises, now owned largely by the State and recently converted into limited liability companies. It also lists goVernment bonds and state bank debentures. The Exchange recently began small trading in bonds issued by US and Dutch firms to state banks. These include bonds issued by Musi-Mortgage Edison Company, American Electric Railway Company, Canadian Pacific Railway Company, Koninklijke Olie, and Unilever. Stock brokerage activity has not attracted sufficient talent or capital in recent years, although if the number of issues traded increases substantially, this deficiency could be overcome. 3. An inter-bank call market has recently become active in Jakarta, involving mainly the branches of foreign banks, the larger state commercial banks, and some of the newly established merchant banks (or so-called investment finance companies). St:ructural Problems

4. The major hurdle facing a rapid development of the capital market is the weak financial position of most Indonesian companies, particularly the meiium and small-scale "pribiLmit companies, owned by indigenous Indonesians. There is a serious overall shortage of equity capital, which continues to act as a strong brake on the normal development of the private sector in Indonesia. This problem is accentuated by the recent trend of rising prices of cspital goods, which tends to raise total project costs, straining the already relatively weak debt-equity ratios commonin Indonesia. In 1973 the Government set up P.T. Bahana to help provide a portion of the equity needed by small and medium- scale industries. Its initial resources (about $5 million) are clearly inadequate for meeting the larger needs for equity capital in the burgeoning economy. The financial weakness of most Indonesian companies, therefore, makes them less credit-worthy, and eventually less attractive to investors. Another major difficulty that prevents a more rapid growth of capital ma-rkets is the widespread unreliability and unavailability of company financial s-taements. This is partially due to lack of financial ac --ng know-how, (thaere is a serious shorgage of trained accountants in Indonesia), and ageneral fear of divulging information that can be used by the tax authorities. Even the so-cal ed'lon-pribuml' companies, generally controlled by Indonesians of Chinese extractiorL, are weak in this area; the only significant exceptions being the so- called joint venture companies, that require financial statements prepared according to international standards set by their parent companies. Bank Indonesia has tried to solve this problen by introducing several measures, including a require- memt that any credit application exceeding the equivalent of US$25,000,made to financial institutions, be accompanied by financial statements, audited by ANNEx5 Page 2 of 3

recognized independent auditors. Since many companies promote new projects, and, therefore, have no historical financial statements, applications are usually accompanied by feasibility studies prepared by firms of consultants who may not be objective,because they are paid on the basis of a percentage of the project cost, and often only if the application is approved.

IFC Recommendations 6. In p73, at the request of the Ministry of Finance, the International Finance Corporation (IFC) prepared a long-term policy plan for the development of the securities market, which included recommended changes in the legal frame- worlc, and the strengthening of financial expertise in the banking and investment sectors. An important part of the program is the establishment of a new institute of accounting, and more stringent auditing standards. These projects are,however, making very slow progress.

Nerchant Banks

79 The GOI had at firlst looked towards the foreign banks operating in Indonesia, with their sophisticated expertise, for assistance in the development oJ' the money and capital markets. After 1968 when inflation was brought under control and time deposits regained their popularity, First National City Bank introduced certificates of deposit into the market, an example soon followed by the State commercial bancs, the most successf.ul being Bank Bumi Daya. The foreign banks operating in Jakarta had wanted to set up their own merchant banks, but the Government,wanting to increase the number of foreign financial institutions involved in Indonesia's development, decided that only foreign banks not already operating in Indonesia would be allowed to set up local merchant banks. These institutions would be companies registered in Indonesia, with local banks as par-tners. Control of equity capital and management was to be transferred to Indonesian hands within ten years. INine merchant banks applied for operating licences, their names and details of share ownership are shown in Annex 5a. S. r¢erchant banks are not allowed to accept deposits from the public, and are also rot allowed to make term loans directly to Indonesian enterprises. At the present time,they largely deal in short-term paper, and some have entered vigorously into real estate development activity. They are actively engaged in channelling long-tern credit opportunities to their parent banks abroad, involving the largest companies in Indonesia, particularly Pertamina (the State- owned oil corporation). They are also wooing the major state-owned mining and logging firms. Due to the absence of an active stock exchange,some have taken equity positions of a venture-capital nature in local companies. The merchant ba7nksare very interestedin leasingoperations, but the legal and tax questions on whichthe profitabilityof this type of businessdepends, have not yet been sortedout; they have also expressedinterest in providinga range of financial servicesto industrial clients. It is too early to judge the performance of the merchant banks, but they are a welcome addition to the rather thin supply of j7inancial institutions in Indonesia. ANNEX 5 Page 3 of 3

i'uture Development

9. -oince early 1974 the entire financial community, with strong official direction, has been geared to strengthening the ?Ipribiinj t? companies in Indonesia. They wvill receive credit in a preferential manner', and most existing credit schemes have been revised to ensure this objective. Banks are also expected to provide assistance in improving the financial expertise of their borrowers. The development of the capital market in Indonesia will gain momentum when local cormorate managements realize that they will profit by improving their financial operations, End begin hiring adequate numbers of financial experts on their staff. The conscious combined efforts of the Covernment, commercial banks, merchant banks and the industrial and business community should hasten the modernization of the capital market.

EAP Projects Department September 9, 1974 BANK PEB24ANGUNANINDONESIA PageX-5a Page 1 of 3 indone-sia: t - s t- oIhf{iks investmnt tfm5iffe s)

Name Equity Share 1. P.T. MERCHANTINVESTMENT CORPORATION (MERINCORP):

Morgan Guaranty International Finance Corporation 36%

The Sumitomo Bank Ltd. 34%

Bank Mees & Hope N.V. 20%

Bank Ekspor Impor Indonesia (local) 10%

2 * P .T. INDONESIANINVESTMENT INTERNATIONAL (INDOVEST):

First Chicago Ltd. 35%

The Mitsubishi Bank Ltd. 20%

Nikko Securities Company Ltd. 10%

The National Bank of Australia Ltd. 10%

Bank Dagang Negara (local) 25%

3. P.T. FIRST INDONESIANFINANICE & INVESTMENTCORPORATION (FICORINVEST)s

Pierson Heldring & Pierson 8.5%

Rothschild International Bank Ltd. 7.5%

The Industrial Bank of Japan Ltd. 7.0%

Bank of Montreal 7.0%

Banque Lambert 5.°%

Amfas Group N.V. (Dutch) 5.0%

First City InternationalCorporation of Texas 5.0%

Seattle First InternationalCorporation 2.5%

National City Cleveland International Corporation 2.5%

P.T. Bina Usaha (local) 50.0% ANNEX 5a Page 2 of 3

4. P..T. MUTUALINTERNATIONJAL FINANCE CORPORATION(MIFC):

Fuji Bank A.G. 20.0%

CrockerInternational Development Corporation 17.0%

The Commercial Bank of Australia 15.0%

The Fuji Bank Ltd. 6.0%

P.T. Mutual Promotion Corporation (local) 34.5%

P.T. Pan Indonesia Bank 7.5%

5. P.T. ASIAN AND ETRO-AMERICANCAPITAL CORPORATION(ASEAM):

Goldman, Sachs & Company 8 1/3%

Dai Ichi Bank Ltd. 8 1/3%

Kleinwort Benson Ltd. 8 1/3%

Dresdner Bank A.G. 8 1/3%

Banque de Paris et des Pays-Bas 8 1/3%

Union Bank of Switzerland 8 1/3%

Bank Bumi Daya (local) 50%

6. P.T. FINANCE CORPORATIONOF INDONESIA (FINCONESIA):

The Ncqura Securities Ltd. 19%

The MitMUi Bank Ltd. 17%

Manufacturers Hanover International Corporation 17%

Barclays Bank International Ltd. 17%

Commerzbank A.G. 10%

Banque Francaise du Commerce Exterieur 10%

Bank Negara Indonesia 1946 (local) 10% kNNEX 5a Page 3 of 3

7. P.T. INTTERPACIFICFINANCIAL CORPORATION:

Continental Bank S.A. 45.0%

The Sanwa Bank Ltd. 41. 0

Credit Commercial de France 4.0%

Bank Rakyat Indonesia 10.0%

8. P.T. LD30NESIANFINANCING & INVESTMENTCOMPANY:

(Shareholder list not available)

9. The name of this bank had not been decided, and a list of

shareholders was not available. The local partner will be Bank

Central Asia.

EAP PtOjects Department September 9, 1974 ANNEX$

BANKPEMBANGUNAN INDONESIA

Interest Rate Structure of State Commercial Banks (In annual percentage rates)

Previous Rates Current Rates (Effective (Effective (Effective _1.1/72) h/18/73) 4/9/74)

Lending Rates Category and Purpose I. Food iports under PL 480 6 6 6 Nonfood imports under PL 480, fertilizer import and dis- tribution, wheat flour mills, and BIMAS rice credit 12 12 12 Kedinm-tera credits (Rp 100 million or less) 12 12 12 Medium-term credits (over Rp 100 million) 12 12 15 BIMAS pouJtry 15 15 15

I]:.Rice hullers/mills, sugar mills livestock, and textile industry 21 18 18 Public transportation 24 15 18 Import and distribution of controlled goods 21 15 18 Export and production of super- vised export commodities 21 15 18 Export and production of other export commodities 18-21 1/ 15 21 Other production 24 18 21 Domestic trade 24-36 18 21

III.All other credits 21-36 2 18-24 24 Deposit Rates

De2osit Period 24-month time deposits - - 30 18--monthtime deposits - - 24 22-month time deposits 18 15 18 6-month iime deposits 15 12 12 3-month time deposits 12 9 9 Time deposits of less than 3 months 9 6 6 Tabanas savings deposits exceeding Rp 100,000 12 9 9 Tabanas savings deposits below Rp 100,000 18 15 18 Demand deposits exceeding Rp 50 million 9 4.5 4.5 Demand deposits under Rp 50 million 6 3 3

/ Thase included production of crumb rubber and exports of Java tobacco, 1 per cent;production of all other export commodities, 21 per cent.

/ These includedt agriculture, animal husbandry and fishery, 21 per cent; all other, above 24 up to 36 per cent.

Source: Bank Indonesia

- AF EAP Projects Department -Q 107), ANNEX 7 PAGE T of 4

BANKPEMIBANGUNAN INDONESIA

Policy Statement

The Board of Managing Directors of BAPINDO, with the approval of the Supervisory Board adopts the following policies and guidelines to be observed by BAPINDOin its operational activities.

1. Basic Policy

BAPINDO is establishedas a developmentfinance institution to provide, witnin the framework of the Government'sgeneral policy, financial and related assistance to enterprisesin Indonesiawhich, by their acti- vities, are expected to make a positive contributionto the economic develop- ment of Indonesia. In order to achieve this objective, BAPINDO will conform with the following guidelines:

a) BAPINDO itself will build up a sour,dfinancial stnrcture to enable it to carry on its activities and will acquire the necessary funds, mainly long- and medium-term,with which to provide the developnmentassistance required. It will assure that the maturities of its assets are appropriate to those of its liabilities.

b) BAPINDO will build up a sound organizational structure and the high level of expertisewhich will be required to carry out its duties efficiently.

c) BAPINDO will give particular attention to the necessity of fostering a strong and healthy entrepreneurshipand capital market in Indonesia.

d) BAPINDO's assistance will take as wide a form as necessary for the fulfillment of its duties, con- sistent with BAPINDO's role as a development finance institution.

e) In order to enhance its effectivenessas a develop- mert finance institution,BAPINDO will seek to establish firm and growing relationshipswith other financial and allied institutions, both domestic and foreign.

2. Field and Soope of Activities

a) BAPINDOwill assist in the promotion, establishment, rehabilitation, expansion and modernization of enterprises,especially in the fields of industry, tourism and transportation. -2- AhNEX 7 Page2 I_..

b) The main emphasis in BAPINDO's operations will be on medium- and long-term loans. The proceeds of such loans may be used for financing of permanent working capital.

3. Basis for Investment Decisions

a) BAPINDOwill make its decisions to assist only on the basis of sound investment criteria and will set the terms of its loans according to the needs of the projects financed. Therefore BAPINDO will give assistance only to enter- prises which are soundly managed and organized and which are judged to be viable after careful economic, financial, marketing and engineering appraisal.

b) Subject to 3 a) above BAPINDOwill select pro- jects on as broad a geographical basis as possible.

c) BAPINDOwill maintain continuous contact with enterprises to which assistance has been given and will endeavour to provide any advice or guidance it feels necessary and take whatever action which may be required under particular circumstances.

4. Financial Guaidelines

BAPINDO's financial commitments will normally not exceed the following guidelines:

a) BAPINDO's total outstar.dingdebts, including deposits and guarantees,will not exceed 3 times EIPINDO'snet worth.

b) BAPINDO's participationin equities will not exceed, in total, BAPINDO's net worth.

c) BAPINDO's equity participationin any single enterprise will not exceed 1O0J of BAPDIDO's net worth.

d) BAPIIDO's financial commitments (in whatever form) to any single enterprise will not ex- ceed 20% of BAPIMDO's net worth. -3 ANNEX7 Page 3 of 5. RelationsiipEwith Enterprise

a) BAPINDOshall not have a controlling interest ir an enterprisewhich would result in giving it primary/single responsibilityfor managementof the enterprise. Therefore,it will not normally participatein more that 25% of the share capital of any single enterprise.

b) To safeguardBAPINDO's interests and/or the itterestsof the economy,in case of jeopardy and notwithstanding5 a) above, BAPINDO will take effectivemeasures for providingadequate supervisionand guidance for the enterprise.It may seek representa- tion on the managing body of the enterprise concerned. c) It is recognized that as a result of its underwritingof share issues of enterprises BAPINDOmay hold issuedshare capital of an enterprisein a ratio greaterthan that as mentioned in a) above. In such cases, BAPINDO will disposeof the excessportion of the share capital as soon as possible following the guidelines of 6 below.

6. Porttf2o Nanagement a) BAPINDOwill conduct its operations in such a manner as to assist in the growth of a sound capital market in Indonesia. b) BlAPINDOwill endeavour to diversify the hold- ing of securities in its portfolio, and to revolve the corntents of its portfolio w'nenever possible on satisfactory terms.

c) In revolvingits portfolio,BAPINDO will pay due regardnot only to its own interests, but also to market conditions,and to the interests of other holders of the securitiesand of the enterpriseconcerned.

7. Risks and Profitability

a) Although BAPfl>DO'sdecisions to give financial assistance will be based upon its judgment of the overall prospectiveprofitability of the enterprise,BAPINDO will obtain and secure in accordancewith sound businesspractice, ade- quate security for the financialassistance it provides. 4 - A@NNEX7 Page ho2l h4

b) BAPINDOwill not carry the foreign exchange risk attendant upon its borrowing and lend- ing activities. The risk will be passed on to its clients or covered by other suitable means.

c) In order to finance its activitiesBl.PINDO will endeavour to acquire sufficient furds of a stable nature, on as reasonable terms as possible, to be able to give financial assis- tance to its clients ori terms which will allow a healthy growth in the economy.

d) In carrying out its activities,BAPINDO will adopt level of charges which will allow it a satisfactoryreturn, after meeting all expenses, including the necessary provisions. This should also allow BAPINDO to build and maintain re- serves consistent with sound financial practice and.adequate legal reserves for strengthening its equity.

8. Organizationand Staff

BAPINDO will rapidly build an effective orgarizationand develop an adequate well-trained staff in the fields of financial,marketing, economic, engineering,accounting and legal services in order to discharge effectively its duties and to er.ableit to assist its clients in the formulation and implementationof thleirprojects.

9. Revision of Policies

Th-isPolicy Statement will be amended when necessary to secure BAPIIEDO'ssuccessful operations,and to give flexibility in its activities.

10. Transitional Policies

The reduction in BAPIl;DO's commercial banking will be carried out gradually with as little disruption as possible to either BAPI)DO or its clients.

EAP Projects Department September 9, 1974 BANK PEMBANGUNAN INDONESIA

Summaaryof Loan Operations1971 - 1973 (in millions of Rupiah)

1971 1972 1973 Approvals No. Amount No.. Amount No. Amoun-t

Long- and medium-termindustrial loans 63 1,555 39 2,816 126 12,945 of which for permanentworking capital 20 734 17 819 60 3,197 Maritime Credit Department loans - - 3 64 52 3,620 Raw Cottonloans 11 13,062 19 14,360 18 38,538 /

Commitments

Long- and medium-termindustrial loans 88 3,461 44 2,773 105 9,933 of which for permanentworking capital 19 683 18 694 52 2,640 Maritime Credit Department loans - - 3 64 40 2,240 Raw Cottonloans 11 13,062 19 14,360 18 38,538 /

Disbursements

Long- and medium-termindustrial loans 3,104 2,059 5,227 of which for permanent working capital n/a n/a 2,151 Maritime Credit Department loans - 64 1,394 Raw Cottonloans 4,586 22,836 11,958

2/ Since September 1973 BAPINDO shares the cotton import business with EXIM BANK. The amount shown includes EXIM BANK'sshare of Rp. 4,378 million.

EAP Projects Department September9, 1974 BANK PEMEANGUNAN INDONESIA

InvestnentLoan Coimitmentsby_Industry, 197. - 1973 (in millions of Rupiah)

Comnitment of Loans Out- Cumulative to standingat 12/31/71 1972 1973 12/31/73 No. Amount No. Amount - No. Amount % No. Amount

Industries

Pulp, Paper & Printing 7 144 1.6 1 32 1.5 2 23 0.3 8 261 1.3 Textile 26 2,857 23.6 9 1,006 48.3 11 4,312 59.1 33 7,911 40.5 Metal Work Industries & Infrastructure equipment 8 1,014 8.4 1 66 3.1 5 260 3.5 11 1,109 5.6 Chemical 13 1,489 12.3 2 470 22.6 3 411 5.6 9 1,985 10.5 Pharmaceutical 3 143 1.1 4 17 0.8 1 46 o.6 4 194 0.9 Light Industries 49 2,o056 17.0 4 98 4.7 15 917 12.5 45 2,324 11.9 Transportation 33 569 4.7 2 50 2.4 1 6 0.5 16 358 1.8 Tourism 16 1,112 9.2 2 335 16.1 11 1,219 16.7 18 2,599 - RubberProcessing 21 2,673 22.1 1 3 0.5 4 94 1.2 21 2,771 14.2

Total 176 12,061 100.0 26 2,079 100.0 55 7,292 100.0 165 19,517 100.0

EAP Projects Department September9, 1974 ANNEX10

BANKPEMBANGUNAN INDONESIA

Analysis of Medium and Long-Term Loan Commitments 2/according to Size, Location and Maturity (in millions of Rupiah)

Cumulative Commit- ments of Loans Out- 1972 1973 standing at 12/31/73 No. Amount %_ No. Amount - No. Amount Size Distribution

Below Rp 20 21 160 5.8 27 274 2.7 61 461 2.7 Rp 20 - Rp 39.9 8 153 9.1 28 741 7.5 46 1,2)40 5.2 Rp 40 - Rp 74.9 6 349 12.6 21 1,137 11.4 45 2,527 10.6 Rp 75 - Rp 149.9 2 242 8.7 16 1,636 16.5 51 5.696 23.8 Rp 150 - Rp 299.9 5 1,044 37.6 8 1,757 17.7 26 6,258 26.2 Over Rp 300 2 726 26.2 5 4,388 44.2 12 7,522 3.5

Total 44 2,774 100.0 105 9,933 100.0 241 23,884 100.0

Location Distribution

North Sumatra 3 28 1.0 9 446 4.5 27 2,303 9.6 South Sumatra 2 51 1.9 12 1,672 16.8 19 2,408 10.0 West Java 16 1,365 49.2 33 3,336 33.6 90 10,609 44.4 Central Java 12 1,051 37.9 17 3,278 33.0 33 5,148 21.6 East Java 5 217 7.8 7 359 3.6 16 1,075 4.5 Kalimantan 2 17 o.6 8 270 2.7 23 1,381 5.8 Sulawesi and Malulu 4 45 1.6 18 333 3.4 31 700 2.9 Nusatenggara - - 1 239 2.4 2 260 1.1

Total 44 2,774 100.0 105 9,933 100.0 241 L3.884 100.0

Term Loan Maturities

Under two years - - - 2 61 0.8 8 236 1.2 2 to 3.9 years 10 120 5.8 14 538 2.4 56 2,516 12.9 4 to 5.9 years 12 1,013 48.7 19 1,322 18.1 77 10,279 52.7 6 to 7.9 years 2 623 30.0 9 892 12.3 13 1,683 8.6 8 years and over 2 323 15.5 9 4,480 61.4 11 4,803 24.6 Total 26 2,079 100.0 53 7,293 100.0 165 19,517 100.0

FWC Loan Maturities

Under two years 13 511 73.5 6 172 6.5 17 525 12.0 2 to 2.9 years 5 184 26.5 26 888 33.6 38 1,221 88.o 4 to 5.9 years - - - 7 442 16.8 8 641 14.7 6 to 7.9 years - - - 5 4o6 15.4 5 921 21.1 8 years and over - - - 8 732 27.7 8 1,058 24.2

Total 18 695 100.0 52 2,640 100.0 76 4,367 100.0

2 Including Investment and PermanentWorking Capital (PWC) Loans.

EAP Projects Department September9, 1974 BANKPEMRANGUNAN TNDONESIA

Permanent Working Capital Loan Cormmitments by Industry, 1971-1973 (In millions of Rupiah)

Total Commitments Cumulative to as at 12/31/71 1972 1973 12/31/73 No. Amount % No. Amount % No. Amount X No. Amount _

Industries

Pulp, Paper & Printing 4 53 3.2 - _ _ _ 2 16 o.6

Textiles 17 741 44.8 7 555 79.9 11 1,135 42.9 20 2,216 50.7

Metal works and infrastructure equipment - - - - - 1 66 2.4 1 66 1.4

Chemicals 2 31 1.8 - _ 1 15 0.5 3 30 o.6

Pharmaceuticals 1 16 1.2 2 42 6.o 4 176 6.6 4 239 5.4

Light Industries 27 537 32.4 7 66 9.5 22 54 20.6 32 882 20.1

Transportation 6 43 2.6 1 15 2.3 - - 2 16 o.6

Tourism 2 46 2.7 - - 4 82 3.6 3 106 2.4

Rubber processing 5 187 11.3 1 15 2.3 9 620 23.4 8 796 18.2

Total 64 1,654 100.0 18 694 100.0 52 2,640 100.0 76 4,367 100.0

EAP Projects Department September 9, 1974 ANNEX 12 Page 1 of 2

BANKPEMBANGUNAN INDONESIA

Small Business Co-Financing with Regional Development Banks

1. BAPINDOhas been actively concerned with increasing its assistance to small-scaleindustry. In 1972, following a study by its Research Department, it decided to associateitself with selectedRegional DevelopmentBanks (RDBs) in making joint loans for investment and working capital purposes,to this sector.

2. A pilot project was started with the RDB of Semarang in Central Java in April 1973, with an initial limit of Rp. 50 million. BAPINDOwould provide 80% of the funds, and the RDB the balance 20%. In August 1973, a similar scheme was set up with the RDB in Bali. Both the schemes provided for a maximum sub-loan amount set at Rp. 2 million, (increasedto Rp. 5 million on April 4, 1974) with a maximum three year term. Arrangements were simultaneously made with P.T. ASKRINDOto insure 805 of the loan risk, the balance being borne pari-passu by the lenders. During April 1974, additional agreements were signed with the following RDBs: (a) West Java (Bandung); (b) West Sumatra (Padang) and (c) North Sumatra (MIedan). All these agreements run for an initial period of one year, but containprovisions for further renewals.

3. Following changes in the constitutionalstructure of the RDBs, late in 1973, which freed them from direct interferencein their operationsby the Provincial Governors, and granted them a reasonabledegree of autonomy, Bank Indonesia agreed to bring the co-financing scheme within the abhit of the INVESTASI scheme. This provided BLAINDOwith an additional source of funds for its operations under the co-financing program.

4. The following is a brief summary of BAPINDO's arrangements with the five RDBs, as at the end of April 19741: (Rp millions)

Credit Limit Credit Limit for Name of for Invest- Permanent Working Total Credit (a) RDB ment Loans Capital Loans (PWC) Limit

West Java 150 100 250 Central Java 150 100 250 North Sumatra 100 100 200 Bali 100 100 200 West Sumatra a X 1 575 474 1,~~~~~~~~~~.050

(b) Rate of Interest: 12 15d

(e) Share of Loan: Investment Loans PWCLoans

Bank Indonesia 80% 70% BAPINDO 10% 20% RDB 10% 10% ANNEX 12 Page 2 of 2

5. Ceilings for each type of credit facility (investment or permanent working capital) have been set at Rp. 5 million per customer. P.T. ASKRINDOcovers 80% of the credit risk. The RDB's have"free limits" of Rp. 2 million,(except North Sumatra, which is not yet considered to have a fully competent appraisal staff). Loans above this limit require ASKRINDO'sprior approval. 6. BAPINDOundertook a careful appraisal of each RDBbefore setting up the co-financing arrangements. A program of correcting organizational deficiencies has been agreed upon with each RDB's management. Special attention is being paid to Dpgrading the capabilities of the Nor-h Sumatra RDB. Selected officials of the RDB's are already attending training courses at BAPINDO,and it is also intended to depute BAPINDOofficials for tours of duty with the RDB's.

7. Four more agreements are expected to be signed with the following RDB's in 1974: (a) East Java; (b) North Sumatra; (c) West Kalimantan; and (4)West Nusatenggara. Technical assistance arrangements are already being discussed between BAPINDOand these RDB's, in anticipation of the signing of the formal agreements.

EAP ProjectsDepartnent September9, 1974 BANK PEMEANGUNANINDONESIA

Maritime Sector Loan Coimmitments,1972-73 (In millions of Rupiah)

Cumulative to 1972 1973 12/31/73 No. Amount % No. Amount % No. Amount %

Medium and long-term loans

Non R.L.S 2 50 78.1 18 1,039 46.3 20 1,089 47.2 of whichfor PELNI ( 2) ( 50) (78.1) (16) ( 894) ( 39.8) (18) ( 944) (40.9)

R.L.S. - - - 17 981 43.7 17 981 42.5

of which for PELNI - - - 11 ( 710) ( 31.6) (11) ( 710) (30.8)

Short-termloans 1 14 21.9 5 224 10.0 6 238 10.3

Total 3 64 100.0 40 2,244 100.0 43 2,305 100.0

EAP Projects Department September 9, 1974 ANNEX14

BANK PEMBANGUNAN INDONESIA

Summarized Audited Balance Sheetsi 1970-1973 (In millions of Rupiah)

ASSETS 1973 1972 1971 19i7 Current

Cash on hand and due from banks 1,924 3,731 497 1,668 Due from Central Bank 1,108 1,192 2,571 1,274 Short-term working capital loans 4,868 3,390 4 ,084 5,967 Short-term loans for raw cotton 15,205 17,752 13,191 5,079 Accrued interest on short-term working capital loans 607 1,195 1,295 836 Accrued interest on short-term loans for raw cotton 90 264 158 208 Accrued interest on medium-term loans 1,850 1,533 1,523 1,903 Other current assets 294 486 223 653 25.946 294279 2 Term Loans Investment Loans 14,433 12,498 11,160 13,757 Co-financingLoans 22 - - - 17,W 1-2 ,T9T 11,160 13,757 Fixed Assets (Net)

Bank premises and equipment 686 496 462 547 Total Assets 10 4 351 31,890 LIABILITIES AND EQUITY Current Demand deposits 1,154 964 1,171 2,237 Tine deposits 122 1,158 1,067 2,418 Short-term obligations for raw cotton 14,542 17,110 12,621 4,798 Short-term loans from Central Bank 5 - 75 2,856 Other current liabilities 1,071 577 410 1,023 Income Tax 117 - 202 -

Customers' Deposits on L/C's 262 -- _ 17,273 19,809 1 1 13,332 Term Debts Government loans 100 644 610 8,405 Central Bank loans 8,712 9,074 8,485 6,633 State banks loans 102 102 102 102 Bonds - 2 3 5 IDA 212 - - - 9,126 9 9 1 Provision for Bad Debts 1/ 2,828 3,231 3,016 1,693 Equity Paid up capital 60 60 60 60 Additional paid up capital 2/ 10,521 8,521 6,521 - General reserve 134 134 134 5 Unappropriated earnings 1,145 696 2 .655 11,860 9,411 7,397 1,720 Total Liabilities and Equity 41,087 42.273 35.164 31.890

1/ See footnotes (1), (3) and (4) to Annex 15. 2/ Represents amounts paid-in by the Government which will be formally capitalized as soon as the new BAPINDO Act is passed by the Parliament.

EAP Projects Department September 9, 1974 ANNEX 15 BANKPEMRANG&NAN TNDQNESIA

S-ummarized Audited Income Statements, 1270-1973 (In millions of Rupiah)

19tj 1972 1971 212. OPERATINGINCOME

Interest on short-term working capital loans 856 541 1 1,559 2,006 Interest on short-termloans for raw cotton / 832 1,241I/ 497 325 Interest on medium-term loans 1,507 866 / 1,626 1,582 Other l.OG6 516 672 860 Total 4.201 34

OPERATING EXPENSES

Interest on deposits 102 325 550 816 Interest on Central Bank refinancing on short-term loans 1 5 125 418 Interest on Central Bank term loans 465 360 315 110 Loan commitment fees/Interest on IDA Credits 57 16 _ _ 62-5 76990

Salaries and other personnel expenses 1,087 825 743 694 Administrative and general expenses 451 344 282 325 Depreciation 77 79 81 66 Provision for bad debts i/443 1,233 2,577 1,111 Write off of bad debts - - 0 - Total 20 31872

PROFIT (LOSS) BEFORE EXTRAORDINARYITEMS AND INCOMETAX 1,518 ( 23) (528) 1,234 Extraordinary profit (loss) ( 415 __236/ _-:

Income (less) before income tax 1,103 100 (528) 1,234 Provision for income tax 495 46 316 120 Net income (loss) for the year 608 8) 1.114

2 The figures for 1972 and 1973 are net of interest accrued on uncollectibleloans, and not comparable with 1970 and 1971, when interest on uncollectible loans was still accrued. / Net of interest paid to the Central Bank on correspondingborrowings. j The amount from 1972 is relatively small because interest considered uncollectable stopped being accrued.

L Write o-fs amounting to Rp 25 million were charged to the provisions for bad debts in ]970, 1,254 Rp million in 1971, Rp 1,018 million in :aidRp 847 million in 1973. / Severance payment. / Gain on sale of bank premises.

EAP Projects Department September 9, 1974 BANK PEMBANGUNAN INDONESIA

Analysis of Loan Arrears as of December 31, 1972 and 973 (in millions of Rupiah) (3) (2) Principal Out- (2) (3) (1) Principal standing of As As Loans Outstanding In Arrears Over -Loans in Arrears Percentage Percentage 12/31/72 12 31773 Six Months Over Six Months Of (1) _ of (1) 1972 1973 1972 1973 1972 1973 1972 1973 1972 1973

Mediumi,Long-term Industrial Loans i 13,118 16,193 3,699 2,447 8,106 5,891 28 15 62 36

Short-termLoans 704 386 520 227 520 233 74 59 74 60

Maritime Loans 576 1,810 308 202 432 242 53 11 75 13

Raw Cotton Loans 17,752 15,295 814 216 5,775 3,602 5 1 33 24

Total 32,150 33,684 5,341 2,876 14,883 9,968 16 9 46 30

Total (excludingRaw Cotton Loans) 14,827 18,389 4,527 3,092 9,o58 6,366 31 17 63 5

2/ IncludingPermanent Working Capital Loans.

EAP Projects Department September 9, 1974 ANNEX 17

BANKPEMBkNGUNAN INDONESIA

Analysis of Medium/Long-Term Loan Portfolio and Industrial Distribution As of December 31,1973

(In millions of Rupiah)

Interefs t as % Nuj ber Principal Interest Total of Outstar.dings Amaount % Amount % Amount % Princioa3 Total.

Good Loans / 09 5,501 43.2 386 11.9 5,887 36.9 7.0 6.6

Slow Loans / 25 2,375 18.7 288 8.9 2,663 16.7 12.1 10.8

Problem toan 448 3,701 29.1 1.825 56.4 5,526 34.6 49.3 33,0 bad Loans 4/ 2I0 736 2208 1,8L lh-R 64.2 39.1

TOTAL: 165 12,724!100.0 3,235 100.0 15.959 100.0 _Z!4 20.3

1/ Payments rei).ar and on time. 2/ Payments regular, but often late. 3/ BAPINDOpays special attentionto these projects, with active involvementto improve repayment records. I Companies in, or close to liquidation,with no reasonable hope of resuription of regular repayments.

EAP Projects Department September 9, 1974 ANNEX18

BANKPEMBANGUNAN INDONESIA

Forecast of Approvals, Commitments and Disbursements, 1974-1978 (in millions of Rupiah)

Years Ending December 31 1974 1975 1976 1977 1978 Approvals:

DomesticCurrency Loans Short-term 11,420 16,700 19,400 22,200 24,700 Medium/long-term 1/ 12,900 18,020 19,900 23,200 24,900 ForeignCurrency Loans- Short-term ------Meldium/long-term 16,500 20,300 27,000 30,700 32,600 EquityInvestments (local) 720 1,090 880 940 1,080 TotalApprovals 41,540 56,110 67,180 77,040 83,280 Commitments:

DomesticCurrency Loans Short-term 11,977 16,700 19,400 22,200 24,700 Medium/long-term 1/ 11,926 17,794 19,976 22,780 24,660 ForeignCurrency Loans1 Short-term Medium/long-term 15,379 19,640 26,070 30,095 32,235 Equity Investments (local) 720 1,090 880 940 1,080 TotalCommitments 40,002 55,224 66,326 76,015 82,675

Disbursements:

Domestic Currency Loans Short-term 36,384 16,089 18,400 21,170 23,820 Medium/long-term 8,772 15,961 19,881 22,215 23,980 Fore-ign Currency Loansi8

Short-term ------Medium/long-term 11,908 17,860 24,715 28,910 31,365 EquityInvestments (local) 720 1,090 880 940 1,080 Total Disbursemnents 57,784 51,000 63,876 73,235 80,245

1/ Rupiah equivalent.

EAP Projects Department SepteiDer 9, 1974 ANNEX19 BANKPDNANOUNAN INWNESIA Page 1 of 2

Projected Balance-Sheets, 1974-1978 (in millions of Rupiah)

ASSETS 74 175 1976 1977 1978 Current Cash on hand and due from banks 8,373 3,732 9,309 8,023 16,189 Due from Central Bank 1,630 1,690 1,75 1,810 1,870 Short-term loan9: Industrial 7,853 13,091 18,659 24,651 31,133 Maritime 276 1,014 2,475 4,875 8,125 Raw cotton 25,505 15,605 6,105 6,605 7,105 Co-tinancing (RDB's)V 560 1,420 2,720 4, 440 6,560 Accrued interest on short-tan loans 1,143 1,488 1,406 1,626 2,392 Accrued interest on mewn-term 'oans 748 1,578 2,728 3,952 5,101 Other currentaset8 400 500 600 700 800 Totalcurrent awsets 46488. 40,118 45,752 56,682 79,275 Term Loans

Domestic durrency Industrial 14-,o39 20,586 27,941 34,462 40,526 Maritime (RLS)W 1,261 1,596 3,042 5,057 6,195 Maritime (non-RLS) 1,560 4,144 6,309 8,054 9,052 Project aid 1,939 4,142 6,739 9,685 12,687 Co-financing (RIB's) 662 .149o 2,$66 3,862 _5,278 194461 31,958 46k597 61,120 73,738 Foreign currency Industrial 5,670 15,970 28,100 40,694 52,804 Maritime (RLS) 1,782 2,527 4,125 6,148 7,194 Maritime (non-RLS) 2,568 4,876 8,777 11,763 13,628 Project aid 2 464 5,856 9,851 379 17,069 12,484 29,229 50,853 69,984 90,695 Total term loans L1,945 61,187 97,450 131,104 164,433

Equity Investments 720 1,810 2,690 3,630 4,710 FiuwdAsse".(net) Bank premises and equipment 846 926 1,016 1,066 1,041 Total Aasets 79 999 104,o41 146,908 192,482 249,459

1/ RDB Regional Development Bank. 2/ RLS = Regular Liner service EAP Projects Department Septermber 9, 1974 ANNEX19 Page 2 of 2 BANK PEMBEAUNAN INDONESIA

ProjectedBalance Sheets, 1974-1978 (in millions of Rupiah)

LIABILITIES 1974 1975 1976 1977 1978

Current

Demanddeposits 1,500 1,550 1,600 1,650 Time deposits 600 800 1,000 1,200 1,400 Raw cotton loans - Central Bank 23,297 14,882 6,807 7,232 7,657 Raw cotton loans - Bank Exim 2,879 1,754 ______Co-financing (RIB's) - Central Bank 397 1,391 3,295 6,403 10,995 Other current liabilities 1,000 1,200 1,400 1,600 1,800 Provision for income-tax 24 195 3549 913 Total current l1abilitKies 29,697 21,772 14.452 18.634 24,465

Term Debt

Domestic currency Co-financing (RDB's) - Central Bank 512 1,178 2,042 3,082 4,218 INVESTASI refinance - Central Bank 9,907 15,30.7 21,597 28,464 36,948 Project aid 1,939 4,142 6,739 9,685 12,687 Government loans 213 213 9,213 21 15.713 12.S71 20,870 39.591 526 6 Foreign Currency IDA: 310 4,150 3,978 3,806 3,634 3,462 IDA: 318 1,782 2,460 1,776 1,092 408 Other 4,o88 16,892 36,218 55,899 73,449 Projectaid 2 464 -5,856 9,851 115379 17 06 12,484 29,186 51.651 72.00 24311 Total term debt 21.0f 50.056 21.4 1 Provisionfor Bad Debts 3,969 4,978 6,266 7,766 9,43d Net. Worth Paid-up capital 60 19,881 19,881 19,881 19,881 Additional paid-up capital 19,821 5,000 11,000 17,000 20,500 General reserve 134 134 134 134 134 Retained earnings 1,263 2,220 3,933 6,619 11,087 Total net worth 21,278 27,235 634 51,602

Total liabilities 79,999 104,041 146,908 192,482 249,459

EAP ProJects Department September 9, 1974 ANNEX20

BANK PEMBANGUNAN INDONESIA

Projected Income Shatements..1974-1978 (in millions of Rupiah)

Years EndingDecember 31 1974 1975 1976 1977 1978

Operating Income

Intereston short-termloan8 1,170 2,253 3,670 5,362 8,333 Intereston raw cottonloans 3,405 3,700 1,954 1,144 1,234 Intereston term loans: Domesticcurrency 2,058 3,317 5,183 7,180 9,015 Foreigncurrency 2,995 5,731 8,629 11,360 Total interestihcome 7,569 12,265 16,538 22,315 29,972 Other income 1,250 1,500 1,750 2,000 2,250 Dividends -- -- 158 208 Total income 8,819 13,765 18,288 24,473 324 OperatingExpense

Intereston deposits 106 190 172 206 240 Intereston raw cottonrefina.ncing 2,392 2,962 1,591 912 967 Intereston CentralBank short- term loans 19 84 222 460 826 Interest on Central Bank term loans 752 1,190 1,840 2,574 3,404 Interest on IDA loans 295 597 . 580 499 416 Intereston projectaid loanxs domestic 14919 387 708 1,077 1,477 Intereston projectaid loans - foreign 177 539 1,030 1,398 1,879 Intereston otherforeign currency loans 199 1,027 2,601 41,512 6,337 Intereston Goverrunentloans 8 8 184 368 498 Commitmentfees 109 121 165 191 227 Total interestexpense 4,206 7,105 9,093 12,197 16,271 Provisionfor bad debts 1 009 1,288 l,Xo 1,672 Total financialexpense 7 10,381 17,643 Salariesand other personal expenses 2,473 3,091 3,863 4,828 5,120 Administrative and general expenses 675 700 800. 925 1,100 Depreciation 110 120 11 140 14 Total administrative expenses 3,258 3,911 4,793 .5,893 6J f65 Total expense ,605 12,025 15,1741 19,590 24. 38 Profit (Loss)Before Income Tax 214 1,740 3,114- 4,883 8,122 Income-tax 96 783 1,,401 2,197 3,654 Net Income(Loss) for theYear 118 957 1,713 2,686 41,468 - ~~~~~~~~~ -- EAP Projects Departaent September 9, 1974 ANNEX 21

AN PEMBANGUNANINDDNESIA

Projected Cash Flow Staterment, 1974 - 1978 (in aillions of Rupiah)

Years Ending December 31 1974 1975 1976 1977 1978

Cash on hand and due from banks, beginning 1,924 80373 3,732 9,309 8,023 Receipts:

Increase in share capital 9,300 5,000 6,000 6,ooo 3,500 Net income before tax 214 1,740 3,114 4,883 8,122 Non-cash charges: Depreciation 110 120 130 140 145 Provision for bad debts 1.,141 1,009 1,288 1,500 1,672 Drawdown on foreign currency credits 11,908 17,860 24,715 28,910 31,365 Loan collections Foreign currency 28 1,115 3,091 6,779 11,594 Domestic currency (short-term) 22,263 19,153 19,571 10,558 11,,468 Domestic currency (term) 3,162 3,464 5,242 7,692 11,362 Domestic currency borrowings 38,348 18,137 31,081 26,036 36,432 Increase in deposits 824 250 250 250 250 Increase (decrease)in other liabilities (333) 200 200 200 200 Increase (decrease) in provision for income-tax U2~ 171 155 199 364 Total Receipts 86,872 68,219 94,837 93,147 116,474

Disbursements

Increase in fixed assets 270 200 220 190 120 Increase in Central Bank deposits 522 60 60 60 60 Loan disbursements: Foreign currency 11,908 17,860 24,715 28,910 31,365 Domestic currency (short-tern) 36,384 16,089 18,400 21,170 23,820 Domestic currency (term) 8,772 15,961 19,881 22,215 23,980 Equity investments 720 1,090 880 940 1,080 Repayments of borrowings: Foreign currency 28 1,158 2,250 5,557 9,921 Domestic currency (short-term) 20,475 16,425 17,054 7,225 7,650 Domesticcurrency (term) 1,798 1,959 3,231 4,425 4,643 Increase (decrease)in accrued interest/otherassets (550) 1,275 1,168 1,544 2,015 Income tax paid 96 783 1,401 2,197 31654 Total Disbtrsements 80,423 72,860 89,260 94,433 108,308 Cash on hand and due from banks, ending 8,373 3,732 9,309 8,023 16,189

EAP Projects Department September 9, 1974 ANNEX22

BANKPEBMIGUNAN IN TONSIA

Projected Financial Ratios 1974 1978 (in millionsof Rupiah)

)1974 1975 1976 1977 1978

Total debt/equity 2.57 2.63 3.02 2.80 3.65

Long-term debt/equity 1.17 1.83 2.61 2.80 3.17

Currentratio 1.56 1.84 3.16 3.o4 3.24

Profit before tax and provision as percent of average total assets 2.23 2.98 3.50 3.76 4.43

Profit after tax and Provision as percent of average equity 0.71 3.94 5.50 6.83 9.38

Earnings from term loans as per- centage of average term debt 17.51 16.80 15.44 14.70 14.24

Cost of term debt as percent of average term debt 9.88 10.30 10.06 9.93 9.94

Reserves and provision as percent of portfolio 8.11 7.94 8.11 8.45 9.50

Reserves and provision as percent of total portfolio 8,02 7.78 7.94 8.28 9.30

Financial expenses as percent of average total assets 8.83 8.81 8.27 8.07 8.12

Administrativeexpenses as percent of average total assets 5.38 4.25 3.81 3.47 2.88

Debt service cover 1.28 1.67 1.63 1.55 1.65

EAP Projects Department Septenber 9, 1974 ANNEX 23

BANKPROMMUMN INONESIA

Estimated Disbursement Schedule of Proposed Loan

(in millions of US dollars)

1975 January7-arch 3.00 April-Jime 3.00 July-September 3.00 October-December .. sub-total 1400

1976 January-March 5.40 April-June 4.60 July-September 6,80 October-December 7 sub-total

1977 January-March 4.98 April4June 4.54 July-September 1.81 Octobet'-December O.37 sub-total 11.70

1978 January4March 0.30 sub-total 0.30

TOTAt 50.00

-/ Asauming that the proposed loan becomes effective eai-lyin the first quarter of 1975.

EAP Projects Department September 9, 1974 BANK PEMBANGUNANINDONESIA ORGANIZATION CHART (asof April 30, 1974)

SUPERVISORY BOARD Minister of Finance, Prof. Dr. Alli Wardhana Governor of Central Bank, Drs. Rachmat Saleh

PRESIDENT Ir, Kuntoadji

BOARD OF MANAGING DIRECTORS

MANAGING DIRECTOR I MANAGING DIRECTOR IIf MANAGING DIRECTOR III MANAGING DIRECTOR IV | Priasmoro | | Sardiono _ | Hendrobudiyanto Samadikun Hardjodarsono

SECRETARIAT RESEARCH PROJECT PROMOTION CREDIT & FOLLOW UP MARITIME CREDIT Insan Kamil A. Kahono Daulat Siahaan Mas Prapansya Nazahar

AUDIT& INSPECTION PERSONNEL F & LEGAL & COLL J. Rondonuwu RELATIONSSuhariman Soekahar Luhutan Lubis

GENERAL SERVICES BRANCH SUPERVISION ENGINEERING Sutomo Ismangil Marsaid Tjuk Setyono

2 PLANNING l gCOMMERCIAL BANKING 1 0 BRANCHES COLLECTION NG 8~~~~~~~~~~~Representative Sjwn Roespandi Pratanata Offices Sujuwon

TE: STAFF ANALYSIS BY GRADE Head Office Branches/Representa- Total tive Offices Senior Executives 5 - 5 Department Heads and Deputies 30 3 33 Division Chiefs 25 4 29 Branch Managers and Deputies _ 16 16 Officers 118 59 177 TOTAL PROFESSIONAL STAFF 178 82 260 World Bank-7812(R) Non Professional Staff 259 231 490 TOTAL OPERATIONAL STAFF 437 313 750

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