Projects

Project Information

State-Owned Enterprise Governance and Privatization Program

Borrower

The Republic of Indonesia

Loan Amount and Terms

A US$400 million program loan is proposed from the ordinary capital resources of the Asian Development Bank (ADB) under ADB's LIBOR-based lending facility. The loan will have a 15-year term, including a grace period of 3 years, an interest rate determined in accordance with ADB's LIBOR-based lending facility, a commitment charge of 0.75 percent per annum, a front-end fee of 1.0 percent, conversion options that may be exercised in accordance with the draft loan agreement, the loan regulations, and ADB's conversion guidelines, and such other terms and conditions set forth in the Loan Agreement.

Program Period and Tranching

The Government will be able to withdraw funds from the program loan account during a period of three years starting from loan effectiveness up to 31 December 2004. The loan will be disbursed in three tranches. The first tranche, equivalent to US$150 million,¹ will be made available upon the Government meeting the conditions of loan effectiveness. The second tranche, amounting to US$150 million, is expected to be released by July 2003 upon satisfactory compliance with agreed upon conditions. The third tranche, amounting to $100 million, is expected to be released by July 2004 upon satisfactory compliance with agreed upon conditions.

Executing Agency

Ministry of Finance

Procurement and Disbursement

In accordance with the simplified Disbursement Procedures and Related Requirements for Program Loans,² procurement of goods and services produced in and originating from ADB's member countries will be made with due consideration to economy and efficiency in accordance with standard Indonesian public sector procedures and normal private sector commercial practices acceptable to ADB. Disbursement of the loan proceeds will be permitted.

Counterpart Funds

The counterpart funds to be generated out of the loan proceeds will be used to finance the cost of structural adjustments and activities consistent with the Program.

Risks and Safeguards

The implementation of the Program could be affected by several factors. The principal risk relates to political uncertainty and its effect on the pace of structural reforms. However, there is a firm commitment to SOE reform at the highest levels in the new Government and consequently the risk of the Program being diluted or abandoned is limited.

The second risk stems from the potential opposition of vested interests. For instance, all the members of the board of commissioners of SOEs are public servants many of whom have limited relevant skills-for whom the monetary and fringe benefits provide a considerable income. Corporate restructuring and subsequent privatization will involve significant changes in the composition of the boards of commissioners, and hence, loss of position, income, and associated social prestige. Furthermore, many line ministries have traditionally used the SOEs as an additional source of revenue to finance part of their expenditures and have enjoyed wide ranging benefits that will be withdrawn. To counter resistance from these vested interests, the proposed system of corporate governance is designed to give management greater authority and autonomy, thereby reducing their willingness to collude with incompetent supervising commissioners. Furthermore, the new appointment agreements for directors and commissioners will radically change the incentive systems for both groups by linking incentives to actual performance.

The third risk relates to the lack of capacity within the Government to effectively oversee and monitor SOE reforms and restructuring in a timely and effective manner. In particular, MOF has no principal experience in either corporate restructuring or privatization. To address this concern, ADB has provided technical assistance (TA) to enhance the Government's capacity in financial and operational analysis, corporate restructuring, legal aspects of restructuring and privatization, and corporate governance. Additional TA has been approved for support of this Program to ensure continued momentum in these capacity building efforts.