Regions and Countries

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p. 4 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2004-2006: Indonesia

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IV. Country Performance and Assistance Levels

A. Proposed Lending Program

29. Striving for greater selectivity in the program is an important objective of operations in Indonesia. This is being pursued in three ways: concentrating more on the primary focus areas of the strategy, reducing the annual number of programmed projects so that more intensified attention to design and implementation can be paid to them, and targeting projects geographically in line with the geographic focus envisaged in the CSP. This has led to a more sharply focused program both in terms of sector concentration and geographic focus (para. 9).

30. Given the evolving circumstances and challenges in Indonesia, levels of new ADB lending commitments have fluctuated considerably in recent years. At $500 million in 2001, $767 million in 2002, and prospectively $350-500 million this year, ADB’s new commitments have generally been below initial projections. As is the case with other key development partners, average new ADB commitments since the financial crisis have been on the order of about half of typical precrisis levels. Nevertheless, Indonesia’s development challenges remain large and urgent, and the Government has signaled a desire for intensified ADB engagement in the coming years. Against this background, the prospective range of $600 million – $1.2 billion for annual new ADB commitments outlined in the current CSP remains appropriate. Work continues toward resolution of some of the key transitional factors affecting new lending in the recent past. Intensive consultations with the Government have yielded agreement around a prospective new lending program of $920 million, $1.15 billion, and $1.2 billion, for 2004, 2005, and 2006, respectively. ADB’s current pipeline of operations for 2004 includes approximately $650 million regarded as probable, with significant additional ongoing work underway on further operations totaling approximately $400 million.

31. The program contains a balanced mix of poverty reduction projects and other development interventions such as economic growth. The number of core poverty intervention and poverty intervention projects totals 17 out of 30 projects (57%) and represents 48% of total programmed lending by amount. Several of these projects will attempt to integrate interventions at the regional level to obtain better synergies.

32. Given the continued fiscal stress and possible termination of the IMF program, the Government advised the CSPU mission that program lending would be required. While program loans have been included in each of the annual programs, their successful processing for approval will depend on the progress in reforms in concerned sectors.

33. Cofinancing on projects has been actively pursued (para. 25). Commercial cofinancing with use of the ADB’s partial credit guarantee can be used by the Government to augment resources for infrastructure, but legislation for assuming contingent liabilities may be required.

34. The Government has requested continued access to the Asian Development Fund (ADF). Assessment of Indonesia’s performance in the first year of the performance-based allocation exercise found it to be satisfactory. The actual size of ADF allocation to Indonesia in 2004 will be based on the performance-based allocation exercise focusing on factors such as portfolio performance, progress in the PRPA, performance of program loans, and finalization of guidelines on onlending (details may be seen in Appendix 1, Table A1.12). The actual allocation will be confirmed during the 2003 Country Program Confirmation Mission. Indonesia's access to ADF resources beyond 2004 will be considered by the ADF funding agencies in the context of ADF IX negotiations. It should be noted that the World Bank is continuing to provide access to IDA resources to Indonesia and seeking to enlarge them.

B. Proposed Nonlending Program

35. The nonlending program has shrunk from the level of earlier years due to resource constraints. Active exploration of cofinancing opportunities has relieved some of the problem, however, allowing a TA program of about $12 –14 million to be programmed annually in 2004– 2006. The CSPU envisages technical and financial assistance partnership programs with bilateral sources of funds such as DFID, AusAID, and Government of the Netherlands.

36. The advisory TA program provides valuable support to the objectives of the CSP, particularly in crosscutting areas. In governance, assistance is programmed in areas such as support to the Partnership for Governance Reform, strengthening civil society, improving monitoring capacities of oversight agencies, and for anticorruption efforts. Support in the gender area includes prevention of trafficking and protection of female migrants, strengthening government capacity in areas of gender-responsive public policy, and women’s participation at the regional level. In view of the importance of monitoring and evaluation of the CSP, several monitoring/evaluation studies have been programmed both for assessing the impact of overall operations as well as in some sector and thematic areas. Advisory TA in sectors focuses on capacity building and policy and institutional development.

C. Summary of Changes to Lending and Nonlending Programs

37. Apart from the new project preparatory TA efforts in 2006, the new rolling terminal year of this CSPU, there are five new projects that appear in the lending pipeline that were not mentioned in the CSP. These are (i) the SOE Reform Program in 2004; (ii) the Water Supply and Sanitation Project, which slipped from 2003; (iii) the Urban Air Quality SDP; (iv) the Madrasah Education Project in 2005; and (v) the Shelter (Housing Finance) Project in 2005. The SOE program builds on considerable achievements of the earlier SOE Governance and Privatization Program and will provide valuable support on commercialization of public service obligations of SOEs and other SOE reforms. The water supply project will pilot test the willingness and ability of regional governments to invest in essential infrastructure and support the MDG goals. The urban air quality project will cover policy reform in areas of urban air quality in general. The Madrasah Education Project will improve education standards in madrasah schools. The project on housing finance will attempt to resolve a dire need, particularly for the poor, and has become a priority in view of the possible beneficial impact of housing in raising the level of investment.

38. As with the lending program, more selectivity has been introduced in the nonlending program. New projects are essentially those in 2006, although some new advisory projects have been included in earlier years to provide critical support for sectors emphasized in the CSP.

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