Countries and Regions

	Table of Contents
p. 3 of 6 BACK | NEXT I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB’s Development Experience IV. ADB’s Strategy V. ADB’s Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program Update 2002-2005: Indonesia

---

III. ADB’s Development Experience

35. ADB lending to Indonesia began in 1969. As of 31 December 2001, ADB had approved 256 public sector loans totaling $18.3 billion, and 12 private sector loan and equity investments amounting to $105.7 million. Of the public sector loans, 49 totaling $1.2 billion are from the Asian Development Fund (ADF), and 207 amounting to $17.1 billion are from ordinary capital resources (OCR). The two largest sectors of ADB assistance were social infrastructure (38%) and agriculture and natural resources (30%). ADB's annual lending to Indonesia in the years before the crisis was about $1-1.2 billion. Lending commitments increased substantially, to $1.8 billion in 1998 and $1.5 billion in 1999, reflecting quick-disbursing assistance to support the Government's structural reform program and to provide vitally needed budgetary assistance. Reforms were supported in areas of financial governance, power sector restructuring, industrial competitiveness, SME development, and decentralization. Crisis-related assistance also included support to continue basic health and education services, especially for the poor (Table 3).

36. As of the end of December 2001, ADB had approved about $181.9 million for 427 TA projects, 191 of which were advisory, reflecting the importance of institution building and sector-oriented studies in ADB operations. TA to institutions was wide-ranging. Agriculture and natural resources had the largest number of TAs, followed by social infrastructure. Together, these sectors received 61% of the total TAs and the cumulative TA funds approved.

A. Past Assistance Strategy

37. In March 2001, a COS was finalized and discussed with the ADB Board to replace the interim operational strategy (IOS) utilized during the crisis. The strategic visions of the COS and CSP are similar, and the intervening period between them is too small to meaningfully assess the impact of the COS.⁵ The IOS was intended to provide immediate support in the wake of the crisis, in coordination with other international funding agencies. Special attention was devoted to the needs of the poor through social safety nets in health, nutrition, and education. Innovative channeling mechanisms enabled assistance to reach local levels quickly and efficiently, minimizing the scope for corruption. Much of the program was devoted to the financial sector, complemented by reforms in sectors such as trade, industry, and energy. Foreshadowing a later focus on improving governance, the IOS strongly supported good governance. A special evaluation study of ADB's response to the crisis found that (i) the support loans had provided needed liquidity through program lending (although some tranche releases were delayed), (ii) the social protection program helped substantially to ameliorate the costs of the crisis, and (iii) the nonlending support addressed relevant issues. More broadly, the focus of ADB’s support strategy has been largely consistent with the country’s needs, and where it has not been particularly effective is examined below.

B. Portfolio Status

38. As of 31 December 2001, ADB’s active Indonesia portfolio consisted of 62 public sector loans covering 54 projects, including 5 program loans. It comprised total commitments (net of cancellations of $7.4 billion, with $2.6 billion in program loans. Exposure to Indonesia was 19.7% of ADB's total cumulative lending to all Developing Member Countries (DMCs). A variety of different statistics can be used to measure the "health" of the portfolio. For instance, using the ratio of undisbursed loan balances to total net commitments, ADB’s Indonesia portfolio is little different than the average for all DMCs (48% for Indonesia against the ADB average of 49%). Measures of portfolio health using disbursement ratios are sensitive to a number of factors such as the average stage of implementation for projects, which can vary between countries. In Indonesia, such measures have also been affected recently by slow program loan disbursement. Absorption of program assistance in recent years has been slower than expected due to failure to meet tranche release conditions, reflecting problems in implementing reforms. Disregarding program loans, disbursements for project loans achieved 125% of the annual target in 2001. By September 2002, major reforms linked to previously delayed program releases had been accomplished, suggesting that disbursement measures in 2002 will look robust.

39. While portfolio indicators based on flow of funds against targets do not suggest problems in 2002, a careful analysis of project implementation—in administration or completion reviews— shows reason to be concerned. As of 31 August 2002, 31.7% of the loans to Indonesia were considered projects “at risk,” compared with the ADB-wide average of 20.8%.⁶ The largest concentration of projects at risk is in agriculture and natural resources, although the percentage is about average for ADB. General problems identified as responsible for poor performance across a broad range of projects are highlighted in the next section. Details of sector-specific implementation problems are in Appendix 3. Efforts to eradicate corruption in ADB projects are discussed in Box 2.

C. Conclusions and Lessons for the CSP

40. ADB’s experience in Indonesia over the long term and during the challenging years since the crisis offers important lessons that will be crucial to ensure improved effectiveness over the CSP period.

1. Stronger implementation capacity. Across sectors, significant obstacles arise from weak capacity in central Government agencies, especially with respect to monitoring and evaluation mechanisms, delaying start-up, provision of funds, and implementation. These obstacles are often addressed through targeted TA; for instance, for training. However, experience has shown that in the absence of good governance and administrative stability, these efforts have little overall impact on capacity. Investment projects will not be pursued in sectors or regions where weak administrative capacity threatens implementation.
2. Stronger local ownership. The centralized, top-down approach to public decision making in the past decades was relatively inflexible and unresponsive to local needs, resulting in a lack of local ownership. Decentralization should reduce this problem. ADB will continue to support decentralization, developing mechanisms to work constructively with regional governments.
3. Stronger governance. Poor governance exacerbates weak capacity. The need to strengthen governance in project implementation may be especially important at the local level, as evidenced recently by severe problems in urban sector projects implemented by municipalities. Projects will not be pursued in sectors or regions where poor governance puts projects at risk.
4. Supportive policy environment. In some areas, policy dialogue has been relatively unsuccessful in bringing about reforms. ADB did not always provide the economic or sector analysis needed, but the problems often stemmed from poor governance or a lack of a political consensus in favor of needed reforms. Across many sectors, for instance, the efforts towards cost recovery were incomplete. Consistent with its obligation to ensure that assistance will provide significant benefits, ADB will not work in areas characterized by severe policy failure.

____________________

Back II. The Government's Development Strategy	Next IV. ADB’s Strategy