Report No. 1497-IND Indonesia Appraisal of a Loan to the Republic of Indonesia for Industrial Financing through Bank Pembangunan Indonesia FL u rn (Third BAPINDO Project) May 9, 1977 Industrial Development and Finance Division East Asia and Pacific Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS US$1 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 = P.T. Asuransi Kredit Indonesia BAPINDO = Bank Pembangunan Indonesia DFC = Development Finance Company KfW = Kreditanstalt fur Wiederaufbau ICB = Investment Coordinating Board IDA = International Development Association IDFC = Indonesian Development Finance Company INVESTASI Investment Credit Scheme PDFCI = Private Development Finance Company of Indonesia RDB = Regional Development Bank REPELITA I = First Five-Year Development Plan REPELITA II = Second Five-Year Development Plan UNDP = United Nations Development Program FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY INDONESIA APPRAISAL OF BANK PEMBANGUNAN INDONESIA Table of Contents Page No. BASIC DATA SUIfMARY ..................................... ......... i - iv I. INTRODUCTION ................................................. 1 II. BAPINDO'S ENVIRONMENT . .. ................ .. ........ *. 2 III. PAST REORGANIZATION AND PROGRESS ................... 3 Historical Perspective ...... ................. 3 The Reorganization and Subsequent Steps ............ 4 Institutional Improvements to Date .... ............. 5 IV. REMAINING PROBLEMS AND PROPOSALS FOR IMPROVEMENT ... 7 Institutional Aspects . ........... .. ............... . 7 Portfolio Arrears ... ................................. 11 Enhancement of Developmental Impact ......... ....... 16 Assessment of Program of Action .................... 16 V. BAPINDO'S PROSPECTS ... .............................. 17 Projected Operations .... .............................. 17 Resource Requirements ....... ....................... 19 Projected Financial Position ....................... 21 Projected Financial Results ..... ................... 21 VI. OBJECTIVES AND FEATURES OF PROPOSED LOAN ........... 22 Objectives and Justification ....................... 22 Features of Proposed Loan .......................... 23 VII. AGREEMENTS REACHED DURING NEGOTIATIONS .... ......... 24 This report was prepared by Messrs. T.N. Dinh and Rainer Ullmann following their visit to Indonesia in October 1976. This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization. LIST OF ANNEXES 1. Economic, Industrial and Financial Environment Appendix 1 - Interest Rate Structure of State Commercial Banks Appendix 2 - Interest Rates Charged by BAPINDO 2. Institutional Aspects of BAPINDO A. Organization, Management and Staff B. Policies and Procedures Appendix 1 - Policy Statement Appendix 2 - BAPINDO Organization Chart 3. Cnaracteristics of BAPINDO's Operations Appendix 1 - Summary of Operations, 1972 - 1976 Appendix 2 - Summary of Term Loan Operation, 1972 - 1976 Appendix 3 - Characteristics of Industrial Loans 1973 - June 30, 1976 Appendix 4 - Characteristics of Maritime Loans 1973 - June 30, 1976 Appendix 5 - Equity Investment Portfolio as of December 31, 1976 Appendix 6 - Co-financing of Small Industry through RDBs, 1973 - 1976 4. Developmental Impact Appendix 1 - Characteristics of "A" Projects Financed under IDA Credit No. 310-IND and IBRD Loan No. 1054-IND Appendix 2 - Statement of Development Strategy for 1977 - 1978 5. Program of Action 6. Financial Record and Position A. Financial Position B. Financial Performance C. Condition of Portfolio Appendix 1 - Summarized Balance Sheets, 1972 - 1976 Appendix 2 - Summarized Income Statements, 1972 - 1976 Appendix 3 - Status of Term Loan Portfolio as of December 31, 1976 Appendix 4 - Analysis of Loans in Arrears, 1973 - 1976 -2- 7. Resources Appendix 1 - Resource Position as of December 31, 1976 Appendix 2 - Terms and Conditions of Long-Term Borrowings as of December 31, 1976 8. Prospects and Resource Requirements Appendix 1 - Projected Operations, 1977-1980 Appendix 2 - Projected Balance Sheets, 1977-1980 Appendix 3 - Projected Income Statements, 1977-1980 Appendix 4 - Projected Cash Flow Statements, 1977-1980 Appendix 5 - Projected Indicators of Financial Position and Performance, 1977-1980 9. Estimated Schedule of Commitments and Disbursements of Proposed Loan BANK PEMBANGUNAN INDONESIA BASIC DATA (As of December 31, 1976) 1. Year of Establishment: 1960 2. Ownerhip: Wholly-owned by Government of Indonesia 3. Bank Group Assistance: IDA Credits/Bank Loans 1/ Date of Credit/ Date Effective- Rate of US$000' as of Dec. 31, 1976 Loan No. Signed ness Interest 2/ Amount Authorized Disbursed Outstanding CR 310 6/7/72 8/10/72 Min. 7-1/4% 10,000 9,988 9,268 9,227 CR 318 6/28/72 10/18/72 Min. 7-1/4% 8,500 7,368 6,176 5,922 LN 1054 11/20/74 1/14/75 Min. 8% 50,000 38,326 25,402 23,348 4. Operations Rp millions Approvals 1973 1974 1975 1976 Term loans 17,015 25,853 42,358 49,389 Co-financing with RDBs 22 768 2,185 3,083 Raw-cotton loans 38,538 16,407 - - Equity investments - 1,243 286 240 Total 55,575 44,271 44,829 52,712 Commitments Term loans 12,110 25,549 34,790 32,413 Co-financing with RDBs 22 768 2,185 3,083 Raw-cotton loans 38,538 16,407 - - Equity investments - 1,243 286 240 Total 50,670 43,967 37,261 35,736 Disbursements Term loans 6,187 12,690 25,463 25,966 Co-financing with RDBs 22 707 2,231 3,101 Raw-cotton loans 17,403 37,879 - - Equity investments - 825 696 262 Total 23,612 52,101 28,390 29,329 1/ Credit 310 and Loan 1054 for industrial financing. Credit 318 for financing rehabilitation of inter-island shipping includes US$1.5 million for technical assistance. 2/ Minimum rates charged to BAPINDO by the Government. 5. Interest Rates and Charges (December 31, 1976) % p.a. Interest Rates Investment loans 12 - 15 1/ Working capital loans 18 Raw-cotton loans 18 Small industry loans through RDB's Investment loans 12 Working capital loans 15 Project Aid loans 12 Commitment Fees 1/4 - 3/4 Penalty Charges Principal in Arrears Investment loans 18 (in addition to 15%) Working capital loans 9 (in addition to 18%) Interest in Arrears 9 (overall) 6. Earnings Record (percentage) 1973 1974 1975 1976 Profit before tax to average total assets 2.9 2.7 1.5 0.7 Net profit to net worth 5.7 4.3 2.2 0.6 Income from term loans to average term loans 16.2 14.1 14.6 12.1 Cost of term debt to average term debt 5.5 5.8 8.2 8.2 Financial expenses to average total assets 1.6 1.2 2.1 3.8 Administrative expenses to average total assets 5.5 3.5 3.8 3.8 1/ Higher rates for loans exceeding Rp 100 million -3- 7. Financial Position (amounts in Rp million) 1973 1974 1975 1976 Total assets 38,259 86,954 92,108 124,907 of which loan and equity portfolio (net) 83% 81% 83% 81% Long term debt 9,126 11,648 17,773 38,520 of which from IDA/IBRD 2% 21% 29% 32% Equity 11,860 30,970 35,649 45,528 of which retained earnings/reserves 11% 6% 6% 3% Current ratio 1.2 1.4 1.3 1.3 Long term debt/equity 0.8 0.4 0.5 0.8 Total debt/equity 2.2 1.8 1.6 1.7 Debt service cover 1.26 2.13 1.41 1.24 Interest coverage ratio 2.8 3.4 1.7 2.3 Reserves and provisions as % of loan and equity portfolio 11.9 7.0 5.6 4.5 INDONESIA APPRAISAL OF BANK PEMBANGUNAN INDONESIA (BAPINDO) SUMMARY i. BAPINDO was established in 1960 as a state-owned financial interme- diary to succeed Bank Industri Negara, which had been in existence since 1951. The Bank's association with BAPINDO started in 1969, when a Bank mission, at the Government's request, undertook a preliminary examination of BAPINDO which revealed serious institutional weaknesses. In June 1970, the Government and the Bank agreed on the steps necessary to reorganize BAPINDO with the objec- tive of gradually transforming it into an effective development bank intended to be the main source of term finance for industry. After substantial pro- gress had been made toward strengthening BAPINDO, IDA made a credit of US$10 million for it in 1972 for industrial financing, and in the same year another credit of US$8.5 million for financing the rehabilitation of inter-island shipping. In 1974 a Bank loan of US$50 million followed for industrial financing. Since 1972, BAPINDO has also benefitted by a technical assistance program, which still continues although with reduced scope. That program is executed by the Bank and financed jointly by UNDP, the Bank and bilateral aid. ii. Indonesia's economic prospects remain bright. Despite recent finan- cial difficulties arising from the Pertamina crisis, the Government has man- aged to expand its investment program significantly in the last two years, and remains committed to the objectives of creating new employment opportuni- ties and improving living standards. The Second Five-Year Development Plan (April 1, 1974-March 31, 1979) aims at achieving a long-term annual growth rate of 7.5% coupled with an annual rate of employment generation of 2.3%. To this end, increasing reliance is being placed on the continued expansion of the industrial sector which is expected to grow, in terms of output, at around 12% per annum over the next several years. iii. BAPINDO's record to date, in terms of achieving the essential objec- tives which both the Government and the Bank sought in connection with the previous IDA Credit and Bank Loan, is a mixed one. BAPINDO has generally made good progress in implementing the reorganization program agreed in 1970. It has adopted a policy statement setting sound financial and operational guide- lines for its activities; established internal procedures and reorganized its departments; considerably improved its accounting and bookkeeping and manage- ment information systems; curtailed its staff surplus and its excessive net- work of branch offices; strengthened its management; and developed a nucleus of trained staff, particularly in project appraisal and follow-up. By and large, BAPINDO has developed its basic operational capability, although further specific improvements are still needed in some aspects of its operation. iv. The improvements in internal organization and operational capability, outlined above, have enabled BAPINDO to considerably expand its term-lending operations in recent years, by 52% (to Rp 25.9 billion) in 1974, 64% (to Rp 42.4 billion) in 1975, and by another 17% (to Rp 49.4 billion) in 1976, - ii - during which year BAPINDO's financing was equivalent to about 15% of approved domestic industrial investment in the country. In addition, BAPINDO has initiated since 1973 a useful program for co-financing small business enter- prises with regional development banks (RDBs). This program, as of December 31, 1976, involved 14 RDBs (out of a total of 26 operating in the country), with cumulative approvals by BAPINDO amounting to Rp 8.8 billion for over 3,600 projects or an average loan size of Rp 2.4 million (US$5,000 equivalent). BAPINDO's growing importance as a source of industrial finance is reflected in the steady increase from 18.1% at end-1973 to 31.3% at end-1975 of BAPINDO's share of total outstanding credits to the manufacturing sector under the INVESTASI program. BAPINDO's disbursements for term loans in 1975, Rp 20 billion, accounted for 5.7% of the country's total industrial investment. v. In parallel with the administrative reorganization referred to in para (iii), BAPINDO's financial position has been considerably strengthened, through massive increases in its share capital (Rp 33.4 billion in 1974-75-76), write-offs of uncollectible loans, and more adequate provisions for doubtful accounts. As of December 31, 1976, BAPINDO's total assets stood at Rp 124.9 billion, with a long-term debt/equity ratio of 0.8:1 (as against a contractual limit of 3.0:1), and a current ratio at 1.3:1. Its accounts have been audited by qualified independent accountants, whose reports from 1972 onward were with- out qualification. vi. In spite of the substantial past progress outlined in the preceding paragraphs BAPINDO still faces some important problems, the most serious of which is the continuing unsatisfactory situation of portfolio arrears. As of December 31, 1976, 69 out of 168 term loans (or 42% by number) were in arrears, with total arrears (principal and interest) amounting to Rp 5.6 billion or 8.8% of the term portfolio outstanding, arrears of principal amounting to Rp 3.1 billion or 7.8% of term loans in the repayment stage, and term loans affected by arrears accounting for one-third (by amount) of the term loan portfolio outstanding. The loan collection rate (i.e. amounts actually collected as a percentage of amounts due) was 54.3% in 1976. Further, write-offs of bad debts totalling Rp 7.0 billion had to be made for the four-year period 1973 to 1976, equivalent to 10.6% of outstanding term loan portfolio at the end of 1976. Nevertheless, the loan collection ratio and main arrears ratios have shown an improving trend since 1973. vii. Other problems still facing BAPINDO include: (a) the slow pace of appraisal work and weakness in economic and market analysis of projects; (b) inadequate developmental contribution by BAPINDO in such areas as project promotion and industrial studies; and (c) the generally low level of insti- tutional efficiency, as reflected in its high administrative cost (3.8% of average total assets in 1976) which in turn is largely attributable to BAPINDO's surplus staff and its excessive branch network. viii. Focusing on BAPINDO's current problems, as highlighted in the two preceding paragraphs, extensive discussions took place during both appraisal and negotiations, between the Government, BAPINDO and the Bank. As a result - iii - of these discussions, a comprehensive Program of Action was agreed upon, which sets out specific immediate remedial measures and those for achieving further progress by BAPINDO. The implementation of this Program, by both the Government and BAPINDO, is expected to result in gradual but substantial improvements by BAPINDO on a broad front, financially, administratively and from a developmental standpoint, but particularly in regard to the arrears situation. The more essential steps of the Program (contained in its Part A), relating to BAPINDO's financial situation, are specified as additional con- ditions to the effectiveness of the proposed loan. ix. That there remain many problems to be solved by BAPINDO reflects the fact that institution-building is a long-term process, especially in the light of BAPINDO's serious weaknesses prior to its 1971 reorganization and of the Indonesian context in which industrial expertise and business entrepreneur- ship are still scarce. While major improvements will not materialize very quickly and expectations of future progress need to be realistic, the agreed Program of Action lays a reasonable basis for overcoming BAPINDO's important current problems. x. As can be seen from paragraph (iv) above, BAPINDO is an important, indeed by far the main, institutional source of term finance for industry. Further, BAPINDO among the state banks is entrusted with the specific respon- sibility for assisting the industrial sector. A strong BAPINDO is therefore highly important for the continued development of Indonesian industry, both public and private. The Government attaches great priority to BAPINDO and is intent on strengthening BAPINDO. No other financial intermediary has, or is likely to have in the foreseeable future, the same impact on Indonesian in- dustry. By continuing its assistance to BAPINDO in terms of both finance and guidance, the Bank can play a useful role in the Indonesian economy. xi. A Bank loan of US$40 milion is recommended. Apart from replenishing BAPINDO's foreign exchange resources, it would enable the Bank to continue to assist BAPINDO in the on-going institution-building process. The loan is also justified as a means, not otherwise available, of transferring Bank re- sources to viable industrial projects in Indonesia. The proposed loan, supplemented by BAPINDO's prospective borrowing from the Asian Development Bank, is expected to cover BAPINDO's estimated foreign exchange commitments for one year or so. xii. As with previous IDA credits and Bank loans to financial intermedia- ries in Indonesia, the proposed loan would be made to the Government for re- lending to BAPINDO under a subsidiary loan agreement acceptable to the Bank. The Government would assume the foreign exchange risk. The proceeds of the loan would finance, in addition to direct imports, an agreed percentage re- presenting the foreign exchange component of domestically procured capital goods (60%) and that of locally procured vehicles and civil works (40%). The spread allowed to BAPITDO on the use of loan proceeds would be four percentage points. The long-term debt/equity limit would be maintained at 3:1. The free limit would be raised from US$0.5 million to US$1 million, with an aggregate of US$10 million. A ceiling of US$3 million would be set on the size of in- dividual subloans. An amount of US$240,000 under the loan is earmarked for - iv - financing, on a 36 man/months basis, the technical services of a general DFC advisor, a senior economic advisor and a marketing expert. The other terms and conditions of the loan would be similar to those of recent Bank loans to DFCs, including a flexible amortization schedule conforming substantially to the aggregate of the repayment schedules of subloans. INDONESIA APPRAISAL OF BANK PEMBANGUNAN INDONESIA (BAPIND0) I. INTRODUCTION 1.01 This report appraises BAPINDO and recommends a new Bank loan of $40 million to it for industrial financing. 1.02 BAPINDO was established in 1960 as a state-owned financial inter- mediary to succeed Bank Industri Negara, which had been in existence since 1951. The Bank's 1/ association with BAPINDO dates back to 1969, when a Bank mission, at the Government's request, undertook a preliminary examination of BAPINDO which revealed serious weaknesses. These included a lack of autonomy in operational decisions, poor management and staff, inadequate capability for project appraisal and a chaotic financial condition. In June 1970, the Government and the Bank agreed on a reorganization program involving an organ- izational restructuring as well as a financial strengthening of the institu- tion. After substantial progress had been made toward strengthening BAPINDO, IDA made a first (DFC-type) Credit (Cr 310-IND) of US$10 million for it for industrial financing in May 1972. At that time, BAPINDO also became the beneficiary, as part of its reorganization, of a technical assistance program executed by the Bank and financed jointly by UNDP, the Bank and the Govern- ments of Japan and Australia. Subsequently, IDA made a second Credit (US$8.5 million) for financing inter-island shipping projects through BAPINDO in June 1972, which was followed in November 1974 by a DFC-type Bank loan (1054-IND) of US$50 million for industrial financing. 1.03 It is clear from the foregoing that institution-building was a key objective in the Bank's initial involvement with BAPINDO. The Government requested thne Bank's help not merely in assisting BAPINDO financially, hut in reorganizing and strengthening it with a view to transforming it over time into an effective development finance institution, intended to be the main source of term finance for the industrial sector in the country. 1.04 BAPINDO's record to date in terms of achieving the essential ob- jectives which both the Government and the Bank sought, in connection with the previous IDA Credit and Bank Loan, is a mixed one. On the one hand, BAPINDO has made considerable progress in implementing the reorganization program referred to in paragraph 1.02 above. As of now, BAPINDO has ac- hieved a basic operational capability (including particularly the capacity for project appraisal and follow-up), and is a far more effective institu- tion than it was in 1971. On the other hand, BAPINDO still faces many prob- lems, including a continuing high level of loan arrears, slowness of appraisal work, insufficient developmental inputs and a still low level of overall institutional efficiency. In view of these problems, the proposed loan in- cludes specific arrangements for further strengthening BAPINDO financially, Aministratively, and from a developmental standpoint. _ _ _ . _- - - - - - _ 1/ The terms "Bank" and "Association" are used interchangeably in X.s report. - 2 - II. BAPINDO'S ENVIRONMENT 2.01 The economic, industrial and financial environment in which BAPINDO operates is analyzed in Annex 1. Some salient features are summarized in the following paragraphs. 2.02 The Role of Industry. Indonesia's manufacturing sector contributes only about 11% to total GNP. Value added in manufacturing grew at the rate of about 9% p.a. from 1968 to 1975, as against about 7.5% for the economy as a whole. During 1974 and 1975, the growth of the industrial sector was ad- versely affected by international developments, slowing down to 7% (in terms of output) in 1975. In 1976, however, the industrial sector has shown signs of recovery and is estimated to have grown by 14% during the year. Although in recent years a number of new types of industries have been established, such as industrial chemicals, steel products and motor vehicle and radio and television set assembly, their direct contribution to employment creation has been small. An overwhelming majority (97%) of industrial enterprises are small-scale. Geographically, manufacturing is concentrated in Java, parti- cularly in the Jakarta area. 2.03 Government incentives for industrial development include tax pri- vileges, import duty exemptions and accelerated depreciation allowances. The Government also seeks to influence the course of industrial development through the tariff system, some direct import controls and the interest rate policy. In view of the failure of the industrial sector over the past decade to sub- stantially increase employment opportunities, the Government is encouraging the development of labor-intensive small- and medium-scale industries (paras. 17-19 of Annex 1). 2.04 The Financial Sector. The Indonesian financial system is still at an early stage of its development. Over the last few years, the Government has attempted to strengthen it. With Bank Group assistance, BAPINDO was reorganized in 1971 with a view to making it the predominant source of term finance for industry, and the Private Development Finance Company of Indonesia (PDFCI) was established in 1973 with an equity participation by IFC and has since obtained an IDA credit and a Bank loan totalling US$25 million. To- gether with the Indonesian Development Finance Company (IDFC), a quasi-public intermediary specializing in small industry financing, BAPINDO and PDFCI make up the core of the Indonesian development banking system. In addition, a specialized institution, P.T. Bahana, was set up in 1973 to provide equity financing to indigenous enterprises. Short-term loans to all economic sectors are extended by the state banks and commercial banks for up to six months with the possibility of roll-over. The financial sector is dominated by the six state banks, including BAPINDO. Although there is some overlapping, the Gov- ernment has allocated to each state bank the responsibility for term financing of one or more specific economic sectors, with BAPINDO being entrusted with industry and transport (including shipping). There are 26 regional development banks (RDBs), located mostly in provincial capitals, that finance small-scale enterprises. Small business financing is refinanced (up to 80%) by Bank Indonesia under two investment credit schemes for fixed investment and work- ing capital respectively (para 16 of Annex 1). BAPINDO presently assists 14 of the 26 RDBs in financing small enterprises under these two schemes, and also provides them with some technical assistance. A Bank loan specifically for financing small-scale enterprises has been requested by the Government and the appraisal report is under preparation. With that loan, the Bank's assistance would cover the the full spectrum of Indonesian industry-large, medium and small. 2.05 Interest Rates. Interest rates applied by state banks including BAPINDO are set by Bank Indonesia. Because of the importance of the state banks in the financial system, their rates in turn determine the general level of interest rates in the economy, though private banks are free to set their own rates. At present, lending rates applied by state banks (Annex 1, Appendix 1) range generally from 12% (for term loans below Rp 100 million) to 24% p.a. (for working capital loans), with a standard lending rate of 15% p.a. for term loans above Rp 100 million. In January 1977, the Government slightly reduced deposit rates, which now range from 6% to 18% p.a., depending on the duration, thus narrowing the discrepancy between deposit rates and lending rates applied by the banking system. This represented an important step in the right direction. The Government continues to keep the interest rate structure under review, and the Bank intends to join the Government in dis- cussing this matter in the near future. The 15% standard lending rate it- self, which will also be BAPINDO's relending rate under the proposed Bank loan (para 6.06), is adequate, in relation to (a) projections of future in- flation in Indonesia (15% in 1977, and around 10% on average over the period 1977-80); and (b) the cost of borrowings from the Singapore and Hong Kong capital markets, which at present is around 10-11% (with the foreign exchange risk borne by the borrower). III. PAST REORGANIZATION AND PROGRESS Historical Perspective 3.01 BAPINDO's history up to 1970 was a checkered one. From its incep- tion in 1960 to 1965 BAPINDO was used as a mere conduit for Government funds to projects specified by the Government, not necessarily developmental, and it had no autonomy. Its resources were exhausted by 1965, and its operations virtually stopped. In 1966, BAPINDO's functions were enlarged to include com- mercial banking, but its operations continued to be severely constrained by the shortage of financial resources and by organizational problems. In October 1970, Bank Indonesia instructed BAPINDO to discontinue making term loans to new clients because of its critical financial position and organizational problems. Bank Indonesia withdrew that restriction in December 1971. 3.02 The Bank's preliminary examination of BAPINDO in December 1969 re- vealed that it was inefficient, poorly managed, and in financial difficulties. It had an unduly large staff of about 1,350 employees. Its network of branch - 4 - offices was excessive for its needs. It suffered from poor coordination at all levels. It did not have the ability adequately to appraise investment projects for term financing. It did no follow-up work on its portfolio. The standard of its bookkeeping was inadequate and its accounts had never been audited by independent accountants; consequently its financial condition and the quality of its portfolio at the end of 1969 could not be exactly ascer- tained, although both were evidently poor. The Reorganization and Subsequent Steps 3.03 On the basis of the Bank's findings summarized in the preceding paragraph, the Government and the Bank agreed in 1970 that, if BAPINDO were to effectively perform its potentially important role, namely that of a major financial intermediary in the industrial sector, it needed a drastic reconstruction and strengthening. With the Bank's cooperation, a reorganiza- tion scheme was formulated and has since been implemented by BAPINDO. That scheme involved, inter alia, the following main elements: (a) BAPINDO was to focus on development financing and to become a specialized institution providing term finance to industry. To that end it was, as soon as possible, to give up its commercial banking operations, except on behalf of its term loan clients; (b) BAPINDO was to adopt a comprehensive "Policy Statement" (Annex 2, Appendix 2) drafted in consultation with the Bank, to provide sound financial and operating guide- lines for its operations; (c) from an organizational standpoint, the following steps were adopted: (i) the appointment of a new President and enlargement of the Board of Managing Directors; (ii) the granting to BAPINDO by the Government of adequate operational autonomy; (iii) the reduction of surplus staff and of the branch network; (iv) the regrouping of existing departments and creation of new ones where needed, with a view principally to improving BAPINDO's organization and to building up an adequate capacity for appraisal and follow-up work; and (v) a technical assistance program executed by the Bank and financed jointly by UNDP, the Bank and the Governments of Australia and Japan; and (d) from a financial standpoint: (i) massive increases in BAPINDO's equity capital through both budgetary allo- cations and conversion into equity of some loans from the Government and Bank Indonesia; (ii) the write-off of uncollectible loans then representing some 16% of BAPINDO's outstanding term-loan portfolio and 14% of its short-term portfolio; (iii) relieving BAPINDO of all financial liability with respect to its loans to 19 state enter- prises; and (iv) the audit of BAPINDO's accounts by independent qualified auditors acceptable to the Bank. 3.04 Subsequent to the adoption of the above program, BAPINDO's management has initiated many steps to further improve the institution and to adapt its organization to changing operational requirements. These steps include, inter alia: (i) the creation of a new department equipped with the requisite staff and expertise to handle maritime lending operations; (ii) the use of outside consultants to undertake various organizational studies; (iii) the introduction in late 1974 of a new system for internal control and accounting (partly com- puterized) designed by outside consultants; (iv) the tightening up of project supervision work through the establishment in 1974 of a separate unit for this activity and the introduction in 1976 of a comprehensive "Follow-up Manual"; (v) expanding efforts in staff training; and (vi) the introduction in 1973 of a scheme for co-financing of small business enterprises with selected RDBs. Institutional Improvements to Date 3.05 BAPINDO's implementation of the reorganization scheme and other steps referred to in the preceding paragraphs has resulted since 1972 in substantial improvements of which the most notable are outlined below. 3.06 Administration and Organization. Annex 2 analyzes some organiza- tional aspects of BAPINDO. BAPINDO today operates as a development finance institution with adequate operational autonomy vis-a-vis the Government. Following its restructuring in February 1975 (para 2 of Annex 2), the Board of Supervision (in which the Ministry of Finance and Bank Indonesia are represented) has been providing BAPINDO with active guidance and effective supervision. The Board of Managing Directors was strengthened by the appoint- ment of a new President, Mr. Kuntoadji, in January 1971, and two additional Managing Directors in 1972; BAPINDO's Managing Directors, who were generally new to development banking when they were appointed, have since gained con- siderable experience and correspondingly reduced their reliance on the expa- triate advisors. The technical assistance program, providing BAPINDO with the services of six expatriate advisors (four for development banking, two for maritime operations) since 1971-72, has significantly contributed to BAPINDO's operational progress and staff training. BAPINDO has reduced the size of its staff by about 40% during 1972-73 to lessen overstaffing. It has curtailed its branch network, which numbered 20 branches in 1972, by closing 2 and down- grading 8 to the status of representative offices. BAPINDO's management, in consultation with its advisors, has since 1971 regrouped BAPINDO's activities among its departments, and in the process has created a number of new depart- ments/units, including a Collection Department; a Branch Supervision Department to coordinate the operations of the branches and to handle BAPINDO's work relating to the RDBs; a Project Promotion Department to work on new investment opportunities; a Follow-Up Unit within the Credit Department; and the engineer- ing staff has been concentrated in a new department instead, as previously, of being spread throughout BAPINDO. BAPINDO today is a much more effective organization than it was in 1971. - 6 - 3.07 On erational Standards and Capability. BAPINDO, which in 1971 was not equ'iTped to make adequate appraisals for term lending and follow-up work, has by ane- Large developed the basic institutional strength of a development bank, as well as a nucleus of trained and dedicated staff. The standards of its appraisal, follow-up work and bookkeeping have improved substantially in recent years. Although the quality of its appraisal work remains uneven and requires further upgrading (paragraph 4.19), some of its recent appraisal reports were quite satisfactory. 3.08 Expansion of Operations. The improvements in internal organization and operational capability noted in paras 3.06 and 3.07 have enabled BAPINDO to considerably expand its operations in recent years. BAPINDO's approvals of term loans (for both the industrial and maritime sectors) increased by 52% to Rp 25.8 billion in 1974 (from Rp 17.0 billion in 1973), by 64% to Rp 42.4 billion in 1975 and by 17% to Rp 49.4 billion in 1976. It has broadened its financing activity by starting equity investments in 1974, although these (Rp 1.8 billion outstanding in 9 companies) are still small in relation to its total portfolio. On the other hand, in line with its objective of focussing on term financing (para 3.03(a)), BAPINDO has gradually stopped making short- term raw cotton loans. In 1973, BAPINDO initiated a program for co-financing small business enterprises with selected RDBs. This useful program has ex- panded rapidly and as of December 31, 1976, involved 14 RDBs (out of a total of 26 operating in the country), with cumulative approvals by BAPINDO amount- ing to Rp 8.8 billion for over 3,600 projects or an average loan size of Rp 2.4 million (US$5,000 equivalent). BAPINDO's growing importance as a source of industrial finance is reflected in the steady increase, from 18.1% at end-1973 to 31.3% at end-1975, of BAPINDO's share of total outstanding credits to the manufacturing sector under the INVESTASI program (referred to in para 14 of Annex 1). BAPINDO's approvals of industrial term loans in 1975 (Rp 27.7 billion) were equivalent to about 15% of the amount of domestic industrial investment approved by the Investment Coordinating Board (ICB) during that year. BAPINDO's operations from 1972 up to December 31, 1976 are analyzed in Annex 3. The developmental impact of BAPINDO's lending is dis- cussed in para 4.22 and in Annex 4. 3.09 Financial Strengthening. BAPINDO's capital structure has been con- siderably strengthened in the past three years through additional cash sub- scriptions by the Government to BAPINDO's paid-in capital of Rp 18.6 billion in 1974, Rp 4.5 billion in 1975 and Rp 10.3 billion during 1976. Apart from the continuing unsatisfactory condition of the portfolio (paras 4.14 to 4.19) BAPINDO's financial position is adequate, with a long-term debt/equity ratio of 0.8:1 (as against a contractual limit of 3:1) as of December 31, 1976, a total debt/equity ratio of 1.7:1 and a current ratio of 1.3:1. BAPINDO's profitability, however, is low, with net profit averaging only about 3% of average net worth in the three-year period 1973-76 (see paragraph 4.06). Annex 6 analyzes in more detail BAPINDO's financial position and performance. 3.10 Audit. On the Bank's recommendation, the Government arranged for an independent annual audit of BAPINDO's accounts which has been in effect since 1969. BAPINDO's auditors are the firm of Drs. Utomo, Mulia and Co. (affiliated with the well-known SGV Group of the Philippines). The auditors - 7 - found that for 1969 and 1970, BAPINDO's books and records were inadequately kept, and they were therefore unable to express an opinion on BAPINDO's accounts for those two years. The auditors, in the course of their audit of BAPINDO in 1969-70, made many recommendations for improving BAPINDO's accounting and procedures, which BAPINDO implemented. From 1971 onwards, the auditors have been able to certify BAPINDO's accounts and their reports from 1973 through 1976 were without any qualification. IV. REMAINING PROBLEMS AND PROPOSALS FOR IMPROVEMENT 4.01 The substantial improvements described in paras 3.05 to 3.10 not- withstanding, BAPINDO still faces a number of current problems, of which the most serious are the continuing high level of loan arrears, the slowness of appraisal work and the generally low level of institutional efficiency. Furthermore, there is a need for enhancing BAPINDO's developmental contribu- tion to the Indonesian economy in areas such as promotional work and industry studies. The Bank has discussed these problems with BAPINDO's management and Government officials, and an agreement has been reached on specific remedial measures and on those for achieving further improvements. Those measures, the more important of which are contained in a Program of Action, (hereafter Program for short), shown in Annex 5, are discussed in the following paragraphs. Institutional Aspects 4.02 Staff Size and Allocation. In spite of the 40% reduction in staff size in 1972-73 (para 3.06), which occurred mostly at the junior level, BAPINDO's staff remains, prima facie, too large in relation to the volume of business transacted. This staff surplus is reflected, among other things, in some operational ratios (such as the amount and number of loan approvals per professional staff member) which are high compared with other DFCs associated with the Bank (para 5 of Annex 2), and in BAPINDO's high administrative cost (para 4.05). The Bank did not suggest that BAPINDO should dismiss a part of its surplus staff, in view of the undesirable social consequences that such a step would entail. In the light of the surplus, however, the Bank suggested and BAPINDO intends to: (a) gradually reduce staff surplus by attrition over the coming years (para. A-6 of Program); (b) limit recruitment of additional staff to categories of specialists in which BAPINDO is under-staffed, such as project appraisal officers, trained economists and engineers; and (c) intensify and systematize staff training in order to upgrade staff quality and to make more productive use of staff time. 4.03 There is staff misallocation, reflected in staff shortage in some critical operational units, particularly the appraisal and follow-up teams, on the one hand, and staff surplus in other units, especially some branch offices on the other hand. To correct this situation, BAPINDO intends to: (a) convert a number of support staff into operational (i.e. appraisal and supervision) staff (para. B-3 of Program); and (b) more generally to undertake - 8 - a comprehensive review of its present staff deployment with a view to effect- ing appropriate staff transfers between units so as to achieve more efficient staff allocation. 4.04 Branch Network. In spite of a reduction in 1972 (para 3.06), BAPINDO's existing branch network requires further review. Some branch offices do not appear necessary from the standpoint of the business at hand. Staff size in some branch offices is excessive in relation to the actual or propsective workload. There are both an unclear demarcation of functions and an unnecessary duplication of work (particularly in project appraisal and follow-up) between headquarters and the branch offices. 4.05 In the light of the situation described in the preceding paragraph, BAPINDO intends (para B-2 of Program) to carry out a comprehensive study of the existing branch network with a view to: (a) judging the appropriateness of location, in order to close a branch office where it is not needed or to open new ones where there is good potential for business development; (b) adjusting staff size in each branch to the volume of work; and (c) rational- izing and specifying more clearly the functions of each branch. In connec- tion with (c) above, BAPINDO also intends to: (i) centralize appraisal work for term loans at headquarters, at least until adequate appraisal ability has been built up in the branch offices; (ii) entrust the branches with greater responsibility for project supervision work; and (iii) delegate more authority to managers of selected branch offices to approve working capital loans up to a specified amount. 4.06 High Administrative Cost and Low Profitability. BAPINDO's profit- ability is low. Its net profit averaged 2.7% of net worth in the 1973-76 period. (The same ratio for the ten other DFCs in East Asia for which com- parable data are available ranged from 4% to 20% in 1975). This low profit- ability is attributable 1/ mainly to: (a) BAPINDO's high administrative expenses, 3.8% of total assets for both 1975 and 1976; and (b) the magnitude of provisions for doubtful accounts, which represented about 3.2% of total assets in the same period 1973/76. The high level of BAPINDO's administrative cost (the ratio for comparable DFCs in East Asia ranges generally from 1% to 2%), is largely attributable to the large staff size referred to in para. 4.02, and the extensive branch network noted in para 4.04. Although profitability per se is not an essential objective for a public development institution such as BAPINDO, it is nevertheless important for BAPINDO to try to achieve greater operational efficiency, by exerting a tighter control over its ex- penditures and gradually reducing the ratio of its administrative cost to total assets. BAPINDO intends to achieve this objective (para A-5 of the Program), inter alia, by reducing its staff surplus by attrition over the coming years and by closing down unnecessary branch offices. 2/ 1/ Apart from BAPINDO's low leverage, as reflected in a debt/equity ratio of only 0.7:1 (para 3.09). 2/ This step was specified as a condition of effectiveness to the proposed loan (para 7.03 (d)). - 9 - 4.07 Financial Liability in State Enterprises. As noted in para 3.03 (d) (iii) above, the Government in 1970, at the Bank's recommendation, relieved BAPINDO of the financial liability pertaining to loans to 19 state enterprises (all of whom were then in some financial difficulty), with the objective of strengthening BAPINDO's financial position. Since then, however, BAPINDO has financed other state enterprises. BAPINDO's loans to these state enter- prices can be broadly classified in two categories, namely: (a) those made by BAPINDO on its own initiative on the basis of normal project evaluation and its usual lending criteria as set out in its Policy Statement; and (b) those made by BAPINDO at the Government's behest and without a genuine and independent appraisal. 4.08 There is nothing inappropriate for the Government to direct BAPINDO, as a state bank, to make "behest loans" to some Government projects deemed by the Government to be of national importance. For these loans, the Government usually, though not always, provides BAPINDO with part or all of the funds required. Furthermore, the absence of appraisal by BAPINDO can be explained by the fact that the technical Government department (for instance, Ministry of Industry or Ministry of Telecommunications) sponsoring the project has itself usually ascertained the feasibility and/or viability of the project. However, it is inappropriate for BAPINDO to assume (as it does) the financial liability for these "behest loans", since BAPINDO's role in practice is limited to that of "administrator" of Government funds. The concept of "administra- tion" should be applied, whereby BAPINDO should be relieved of all financial liability for these loans, which should be segregated from BAPINDO 's own port- folio. The financial liability should be borne by the Government, and BAPINDO should receive a handling fee. During negotiations, the Government and BAPINDO agreed (para A-1 of Program), as a condition of loan effectiveness, that the administration concept as described above will be applied to: (a) all five existing "behest loans" totalling about Rp 11.6 billion (US$28 million) on BAPINDO's books; and (b) all future loans to state enterprises to be made by BAPINDO at the Government's behest. 4.09 Conversely, BAPINDO will continue to assume full liability for its loans to and investments in those state enterprises which it finances on its own initiative on the basis of normal project evaluation and its usual lending criteria. 4.10 Appraisal Work. It should be noted that BAPINDO began only in 1971 to build up its capability for project appraisal. Despite considerable improve- ments since 1971 in appraisal work as evidenced by the satisfactory quality of some recent appraisal reports, there is still a need for further upgrading the standards and accelerating the speed of BAPINDO's appraisal work. One serious weakness of BAPINDO's appraisal work is its slowness. A sample examination indicates that an average of 360 days (140 at the branch offices and 220 at headquarters) was required for loan processing from receipt of loan applica- tion to approval. At this pace, project appraisal can be a hindrance to, rather than an effective tool for, decision-making. Even allowing for rea- sons beyond BAPINDO's control (e.g. poor project formulation by clients, lack of adequate country statistical data, complexity of investment laws and regu- lat :>ns in the country), this slowness is excessive and should be corrected. - 10 - Other weaknesses are in economic evaluation and market analysis. Partial economic indicators of projects (such as employment created, value added, foreign exchange earnings/savings) are usually not systematically analyzed in BAPINDO's appraisal reports, and BAPINDO introduced only recently the calculation of rates of return in its appraisal work. Furthermore, the qua- lity of individual appraisal reports is sometimes uneven, which indicates the need for closer quality control at the senior level. 4.11 To speed up, and raise the standards of, appraisal work, BAPINDO intends to: (a) adopt an indicative "work flow chart" prescribing a time limit for each stage of loan processing, in order to complete the full pro- cessing cycle for an ordinary project within 150 days (para B-7 of Program); (b) expand considerably the number of its appraisal staff (para B-3 of Program); (c) concentrate term loan appraisal work at headquarters to avoid unnecessary overlapping with the branches, at least until adequate appraisal capability has been built up in some branches; (d) make more systematic use of partial economic indicators (e.g. employment, value added, export earnings and/or import savings); (e) introduce a mechanism for comparing the actual economic/ financial costs and benefits of projects in the operating stage with estimates made during project appraisal; (f) undertake the calculation of economic rates of return for all projects requiring BAPINDO's financing for $1 million equivalent or more (para B-8 of Program); and (g) create a suitably staffed Market Analysis Unit within BAPINDO's Research Department (para B-6 of Program). 4.12 Operating Policies. One unsatisfactory feature of BAPINDO's recent financing has been the trend toward larger and fewer industrial loans. While the amount of approvals for industrial loans went up from Rp 13.4 billion in 1973 to Rp 23.5 billion in 1974 and Rp 27.7 billion in 1975, the number of these loans declined steadily from 133 in 1973 to 85 in 1974 and to 80 in 1975. The number of investment (i.e. equipment, as opposed to working capi- tal) loans in particular declined from 73 in 1973 to 49 in 1974 to 37 in 1975 resulting in an increase in the average size of these loans from Rp 140 mil- lion in 1973 to Rp 380 million in 1974 and to Rp 618 million in 1975. This trend continued during 1976, when the average loan size for approved projects increased to Rp 825 million. The sharp rise in the average size of industrial loans (which exceeded the increase in industrial equipment prices) is attributable mainly to BAPINDO's financing of Government-sponsored projects (usually large-scale) which in the two-year period 1975-1976 accounted for 60% (by amount) of BAPINDO's commitments (Rp 38.9 billion out of Rp 65.1 billion) but only for 12% by number (19 out of 157). It is entirely justified for BAPINDO to finance large projects undertaken by either the public or private sector (if these projects are otherwise sound), since BAPINDO alone among the six state banks has the responsibility for providing term finance to the in- dustrial sector. On the other hand, BAPINDO, which is the predominant devel- opment finance institution in the country, should also emphasize its assistance to medium-sized, private sector, industrial projects, especially since PDFCI and IDFC (para 2.04), the two other DFCs operating alongside BAPINDO, both have limited staff and financial resources for assisting such projects. The recent concentration on financing large projects undertaken by state enter- prises did not reflect a deliberate policy on BAPINDO's part, but rather the fact that, as a state-owned institution, BAPINDO understandably (and in spite of its adequate operational autonomy vis-a-vis the Government noted in para 3.06) was under some pressure from the Government to finance these projects. - 11 - 4.13 Following discussions with the Bank, BAPINDO and the Government agreed that in future BAPINDO (para B-11 of Program) will seek to finance an increasing number of medium-sized investment projects (i.e. those requiring BAPINDO's financing for US$1 million equivalent or less). An examination of BAPINDO's project pipeline as of February 28, 1977 shows a preponderance of projects (58 out of 86 projects) requiring BAPINDO's financing not exceeding US$1 million equivalent. It is therefore expected that BAPINDO's financing in the immediate future will shift to medium-sized, as opposed to larger, projects. In addition, a ceiling of US$3 million would be set for individual subloans under the proposed Bank loan, to ensure that the loan proceeds would finance a relatively large number of medium-sized projects (para 6.09). Portfolio Arrears 4.14 Past Trend and Present Situation. A serious problem facing BAPINDO is the continuing unsatisfactory condition of its portfolio and its poor loan collection performance, in spite of some improvements in the past four years. Annex 6 (paras 6 to 12) and the relevant appendices attached to that Annex give an analysis and tabular summary of BAPINDO's arrears. 4.15 The table in Appendix 4 of Annex 6 shows that, for term loans (both industrial and maritime loans), 69 out of 168 borrowers (or 42% by number) were in arrears for over three months as of December 31, 1976. Total arrears (of both principal and interest) amounted to Rp 5.9 billion or 8.8% of the total term loan portfolio outstanding. Arrears of principal amounted to Rp 3.1 billion or 7.8% of the term loan portfolio in the repayment stage. Term loans affected by arrears amounted to Rp 22.4 billion representing about one-third of the total term loan portfolio outstanding of Rp 66.5 billion. The aging of arrears indicates that a proportion of 38% relates to arrears of more, and the balance of 62% relates to those of less, than 12 months. The loan collection rate (i.e. amounts actually collected as a percentage of amounts due) for term loans was 54.3% in 1976. Write-offs of bad debts totalled Rp 7.0 billion for the four-year period 1973-76, which is equivalent to 10.6% of BAPINDO's outstanding term loan portfolio as of year-end 1976. 4.16 BAPINDO has undertaken an account-by-account analysis of its term loan portfolio (para 4.20 (iv)), which resulted in the following qualitative classification of this portfolio as of February 28, 1977 (amounts in Rp million): - 12 - Portfolio Loans Outstanding Affected Arrears Number Amounts % Amounts % Amounts % Projects Completed: Normal 71 20,506 30 - - Bad 10 4,066 6 4,066 16 2,731 38 Problem Projects 30 7,596 11 7,596 29 2,602 36 Sub-total 111 32,168 47 11,663 45 5,333 74 Projects under Construction Normal 34 21,955 32 - - In Arrears 20 14,330 21 14,330 _ 1,871 26 Sub-total 54 36,285 53 14,330 55 1,871 26 Total 165 68,471 100 25,993 100 7,204 100 In the above table, "normal projects" are defined by BAPINDO as those servicing their debt regularly or with arrears of less than three months; "bad projects" are those for which foreclosure is undertaken and/or contemplated and those with little prospects for resuming regular repayment; "problem projects" are those requiring special attention but with reasonable prospects for resuming regular repayment. All ten "bad" loans are those made by BAPINDO prior to its 1971 reorganization, as are the majority of the 30 "problem projects." Projects already completed accounted for 74% of total arrears, those under construction for the balance of 26%. About three-fourths of arrears on proj- ects under construction relate to interest, as opposed to principal. The factors which account for BAPINDO's high level of arrears are discussed in para 4.19. In BAPINDO's view, one particularly important and common contri- buting factor is the delay encountered in the completion of projects (para 4.19 (h)), which in turn results in the borrowers' inability to meet the repayment schedules of BAPINDO's loans; this explains why 20 of 54 projects under construction (as seen from the above table) are already in arrears, and the need for BAPINDO to reschedule many of its loans. 4.17 BAPINDO's term loan portfolio, as described in the preceding para- graphs, although unsatisfactory, has generally improved in the past four years (see Appendix 4 of Annex 6), viz: (a) the ratio of term loans affected by arrears in relation to total term loans outstanding improved from 50.4% in 1973 to 45.2% in 1974 and to 29.3% in 1975 before slightly deteriorating to 33.7% in 1976; (b) the ratio of total term loan arrears (both principal and interest) to total term loans outstanding declined steadily from 39.1% in 1973 to 25.2% in 1974, 10.3% in 1975 and 8.8% in 1976; (c) the ratio of arrears of principal to total term loans in the repayment stage also declined steadily - 13 - from 14.8% in 1973 to 12.5% in 1974 to 8.7% in 1975 and 7.8% in 1976; and finally, (d) the loan collection rate (as defined in para 4.15) went up from 37.0% in 1973 to 43.4% in 1974, 47.5% in 1975 and 54.3% in 1976. The improve- ment in the above ratios is attributable partly to write-offs (totalling Rp. 7.0 billion of principal during 1974-76) and loan reschedulings (involving Rp 7.6 billion in principal in 1974-76). Most of the reschedulings made by BAPINDO were, however, justified as they were aimed either at extending unrealistically short (five years or less) original repayment schedules (para 4.19 (e)) or at taking into account frequent delays in projects' completion (para 4.18 (h)). 4.18 Arrears on short-term portfolio relate exclusively to BAPINDO's raw cotton loans. As of December 31, 1976, all raw cotton loans totalling Rp. 35.0 billion were overdue. Of this amount, however, BAPINDO's own finan- cial exposure is limited to Rp. 8.4 billion (including accrued interest of Rp 5.1 billion), with the balance of Rp 26.6 billion or 76% 1/ being financed by Bank Indonesia and another state bank (Bank Ekspor-Impor). Two large state- owned textile mills account for 94% of BAPINDO's financial exposure. A characteristic feature of BAPINDO's raw cotton financing is that it was done largely at the Government's orders. BAPINDO did not appraise these short-term loans; instead, the Government identified borrowers and indicated amounts to be lent, and BAPINDO acted merely as an agent for opening letters of credit, handling documents and collecting payments. Further, Bank Indonesia and Bank Ekspor-Impor together provided 87.5% of the funds, as stated above. Since BAPINDO's raw cotton financing was undertaken at the Government's behest and without independent appraisal, the Government in the past has been willing to compensate BAPINDO for losses arising from this financing. During negotia- tions, the Government agreed to compensate BAPINDO for its outstanding finan- cial exposure totalling Rp 7.9 billion in the above-mentioned two state-owned textile mills (para 4.21). The small balance of Rp 0.5 billion (Rp 8.4 bil- lion minus Rp 7.9 billion) representing BAPINDO's raw cotton loans to nine privately owned textile mills, is expected to be collected by BAPINDO within a year or so. 4.19 Reasons for Arrears. The unsatisfactory situation of BAPINDO's portfolio and its poor loan collection performance are attributable, inter alia, to the following factors: (a) the loan repayment record of borrowers in Indonesia has generally been unsatisfactory, owing partly to a legal system favoring borrowers vis-a-vis lenders; (b) a large proportion (above one-half) of BAPINDO's arrears relate to loans made by it prior to its 1971 reorganiza- tion, when practically no project appraisal and follow-up was undertaken; (c) the severe credit restrictions imposed by the Government since 1974 in order to control inflation, which compounded the liquidity problems of companies; (d) the Government policy requiring state banks including BAPINDO to lend only to pribumi (i.e. non-Chinese) enterprises, the majority of which are financially and managerially weak; (e) BAPINDO's term loans had unreal- istically short amortization schedules (5 years or less) as required by 1/ For the principal only (i.e. excluding accrued interest) the combined share of Bank Indonesia and Bank Ekspor-Impor is 87.5%. - 14 - a Bank Indonesia regulation that was relaxed only in 1973; (f) BAPINDO's own tendency to set unrealistically short repayment schedules with the objective of trying tc collect its loans as early as possible; (g) BAPINDO's low rate (9% p.a.) on interest in arrears, which acts as an incentive for some de- linquent borrowers not to repay; (h) delays 1/ in the completion of projects (compounded sometimes by the failure of BAPINDO's appraisal staff to estimate accurately the projects' completion schedules), which in turn resulted in these projects' inability to service their debt on schedule; and (i) the slow- ness and generally inefficient performance of PUPN, the Government collection agency through which all loan foreclosure and legal actions by state banks, including BAPINDO, must be coursed. 4.20 Proposed Measures for Improvement. Both the Government and BAPINDO's management share the Bank's concern about the serious situation of BAPINDO's portfolio arrears, and are acutely conscious of the need for achieving improve- ments. BAPINDO's management has recently endeavored to remedy the situation by tightening up considerably BAPINDO's follow-up work, with (i) the establishment in 1974 of the Follow-Up Department within BAPINDO's organization; (ii) the strengthening of the follow-up staff in the branch offices; (iii) the adoption in 1976 (para 3.04) of a comprehensive Follow-Up Manual; and (iv) an account- by-account review (which still goes on) of the portfolio in arrears with the objective of determining the repayment capacity of each borrower and steps for dealing with problem projects. 4.21 In spite of the foregoing, however, much remains to be done by both the Government and BAPINDO to substantially improve the situation of BAPINDO's portfolio. During negotiations, it was agreed that the following measures (the most important of which are included in the Program of Action) toward that objective will be implemented by the Government and BAPINDO. (a) The Government agreed to take the following measures, prior to effectiveness of the proposed loan: (i) It will relieve BAPINDO of all financial liability pertaining to existing and future loans made to state- owned enterprises at the Government's behest 2/ (para A-1 Program; see also para 4.08); 1/ Some of these delays were reportedly attributable, in recent years, to the congestion at the Jakarta port which prevented the timely clearance of imported machinery and raw materials. 2/ Five of BAPINDO's existing loans to state enterprises, totalling Rp 11.6 billion on an outstanding basis, as of Feb. 28, 1977, or 17% of BAPINDO's portfolio, were identified as "behest loans." - 15 - (ii) It will make financial arrangements to enable all state-owned enterprises 1/ borrowing from BAPINDO to settle their arrears with BAPINDO of over three months as of the date of the loan agreement (para A-2 of Program); (iii) It will compensate BAPINDO for its financial exposure totalling Rp 7.9 billion (para 4.18) in raw cotton loans to two state-owned textile mills, of which amount a first installment of Rp 3.0 billion will be paid to BAPINDO prior to loan effectiveness and the balance not later than March 31, 1978 (para A-3 of Program); and (iv) It will present to the Bank a plan outlining specific steps for improving the operation of PUPN (para 4.18 (h) above), and pending the implementation of such plan, will issue a ministerial decree requiring PUPN to take immediate action on BAPINDO's delinquent accounts transferred to PUPN by BAPINDO, instead of, as has been the practice to date, waiting until the final maturity of these loans (para A-4 of Program). (b) BAPINDO agreed: (i) to undertake a comprehensive program (to be submitted to the Bank as a condition of loan effectiveness) to deal with the portfolio arrears (para A-5 of Program), which program should include (i) setting annual collection targets for each branch office or loan collection unit; (ii) monthly review by its Board of Managing Directors with relevant staff of the portfolio situation (e.g. evaluation of arrears; reschedulings; write-offs; steps taken or con- templated to deal with overdue accounts; status of delin- quent loans transferred to PUPN); (iii) monthly reporting by BAPINDO to its Board of Supervision on the portfolio situation as detailed above; and (iv) raising the rate on interest in arrears (presently 9% p.a.) to the pre- vailing level of time deposit rates (presently 18% p.a.); and (ii) in view of the high level of existing portfolio arrears, to increase the total amount of provisions for doubtful accounts to at least 5% (as compared with about 3% at end-1976) of total outstanding portfolio by December 31, 1977, contingent upon availability of existing reserves and prospective 1977 income after taxes. (To enable this build-up of BAPINDO's provisions, the Government agreed to forsake for 1977, if necessary, a 40% divi- dend that it would otherwise receive from BAPINDO). 1/ Six state enterprises were identified as having arrears of over three months as of February 28, 1977. Their arrears totalled Rp 1.4 billion, or 19% of BAPINDO's total arrears as of that date. Of this amount Rp 434 million was paid to BAPINDO by the Government on April 22, 1977. - 16 - Enhancement of Development Impact 4.22 Annex 4 analyses BAPINDO's contribution to the Indonesian economy. Quantitatively, BAPINDO has become an important institutional source of term finance for industry. Its disbursements for both industrial and maritime loans in 1975, Rp 20 billion, accounted for 5.7% of the country's total in- dustrial investment (including the maritime sector) estimated at Rp 350 bil- lion during that year. The volume of BAPINDO's approvals for industrial term loans in 1975, amounting to Rp 27.7 billion, was equivalent to about 15% of the amount of domestic industrial investment approved by the Invesmtent Co- ordinating Board (ICB) during that year. 4.23 BAPINDO's qualitative contribution to the economy (in such areas as project promotion, industrial studies, improvements in resource alloca- tion, technical assistance to clients, influence on project design, etc.), however, has been modest. One notable developmental achievement to date has been its useful program for co-financing small business enterprises with selected RDBs, referred to in para 3.08. As the major development finance institution in the industrial sector in the country, BAPINDO is intended not just to channel funds to industry, but to make an important qualitative contribution to that sector. Having by and large succeeded in building up its basic operational capability, BAPINDO intends now to endeavor to broaden its economic role and enhance its development impact. Following discussions with Bank staff, BAPINDO has formulated a statement of "Development Strategy", along the lines of para B-12 of the Program, shown in Appendix 2 of Annex 4, outlining some specific objectives and activities (apart from its ordinary lending activity) on which it intends to put special emphasis during 1977-1978. This strategy includes, inter alia, the following elements: (a) active business identification and project promotion, which constitutes a particularly important activity for a develop- ment finance institution operating in the Indonesian context in which business entrepreneurship is scarce; (b) technical assistance to clients and the business community; (c) efforts at improving the design and formulation of projects financed by BAPINDO; (d) more systematic use of partial economic indicators of projects (e.g. employment impact, use of domestic raw materials, foreign exchange savings/earnings, etc.) in project selection; (e) providing help in upgrading the operational capability of cooperating RDBs and in monitoring the performance of small-scale projects financed jointly by BAPINDO and the RDBs; and (f) input by BAPINDO into Government policies concerning industrial investment, and close cooperation with the Investment Coordinating Board (ICB) in the formulation of investment criteria and the selection of projects approved for investment incentives. Assessment of Program of Action 4.24 The Program, which the Government, BAPINDO and the Bank agreed upon at negotiations, and the principal elements of which are outlined in the preceding paragraphs, provides a reasonable basis for BAPINDO to deal with its more important current problems and to achieve further progress, and consequently for the Bank to continue to support BAPINDO. Its implementation - 17 - should lay the groundwork for gradual but substantial progress on a broad front, particularly in the following areas: (i) the reduction in loan arrears; (ii) the quality and speed of appraisal work; (iii) further strengthening of BAPINDO's financial position, including increased provisions for doubtful accounts; (iv) the strengthening of BAPINDO's long-term resource base through advance planning and exploration of additional sources of foreign exchange borrowings; (v) a more effective operation of the branch network; and (vi) the enhancement of BAPINDO's developmental impact. Both the Government and BAPINDO's management are alert to the need to strengthen BAPINDO and to gradually transform it into an efficient, innovative, development finance institution which would make an important contribution, qualitative as well as quantitative, to the Indonesian economy. Apart from the Program, BAPINDO's management is searching for additional steps to strengthen the institution. Toward that objective, BAPINDO has commissioned a team of outside management consultants (associated with the well-known Bancom Group of the Philippines) to undertake a comprehensive organizational study and recommend measures for improvement. The consultants' work is still under way. V. BAPINDO'S PROSPECTS Projected Operations 5.01 As noted in Annex 1, the value of approved investments in the manu- facturing sector declined in 1974-75, as a result of the international reces- sion, credit restrictions imposed by the Government, and a stricter applica- tion of the "pribumi" policy. BAPINDO nevertheless expects its term financing to grow significantly in the 1977-80 period. This expectation is based on the following premises: (a) BAPINDO's share of total industrial investment is still small (5.7% in 1975) and could easily be expanded as its operational capacity and resources grow; and (b) the outlook for industrial investment is expected to improve in the next few years. BAPINDO is unlikely to face a problem of lack of demand for its financing. Its volume of business in the next few years is likely to depend essentially on resource availability and staff capacity (see para 5.03). 5.02 BAPINDO's projected volume of operations is presented in Appendix 1 of Annex 8; projected commitments are summarized below: - 18 - Projected Commitments, 1976-1980 (Rp million) 1976 1977 1978 1979 1980 (Actual) Domestic Currency Industrial loans 16,805 32,700 31,500 34,000 35,600 Maritime loans 1,864 1,700 12,700 14,200 15,000 RDB loans 3,083 3,900 6,200 7,800 9,600 Equity 240 2,000 2,000 2,500 3,000 Total 21,992 40,300 52,400 58,500 63,200 Foreign Currency Industrial loans 10,721 10,500 19,600 25,800 25,800 Maritime loans 9,174 15,700 13,700 15,500 16,700 Total 19,895 26,200 33,300 41,300 49,500 Total commitments 41,887 66,500 85,700 99,800 112,700 From 1977 through 1980, total commitments are expected by BAPINDO to grow at an average annual rate of 18%, not an unduly optimistic assumption. BAPINDO's projected commitments for 1977 (Rp 66.5 billion or US$160 million equivalent), however, appear to be on the high side, exceeding the actual level in 1976 by 59%, although they are not entirely out of line with BAPINDO's project pipeline as of February 28, 1977, which included 86 projects 1/ (at various stages of processing) which would require BAPINDO's financing totalling about Rp 61 billion or US$147 million equivalent, of which US$75 million would be for foreign currency financing. BAPINDO is likely to fall short of its projected commitemnts by as much as 20% in 1977 (i.e. Rp 53.2 billion instead of Rp 66.5 billion) and 10% in 1978 (i.e. Rp 77.1 billion instead of Rp 85.7 billion), but may be able subsequently to achieve its projected level of business for 1979 and 1980. 5.03 The prospective loan processing capacity of BAPINDO's staff taking into account the contemplated expansion in the size of the appraisal staff (by one third each year in 1977 and 1978), their growing experience, and pro- cedural improvements under way, will be adequate to enable BAPINDO to achieve the volume of operations it has projected for the next few years, provided BAPINDO obtains the required resources. 1/ Not inclusive of projects to be financed under BAPINDO's scheme of cooperation with RDBs. - 19 - Resource Requirements 5.04 Currencies. Because of the free convertibility of the Indonesian currency (para 22 of Annex 1), BAPINDO in principle can utilize its domestic currency funds for financing imports. Furthermore, all BAPINDO's foreign resources (such as previous Bank loans and IDA credits, the KfW loan and bilateral credits channelled to BAPINDO by the Government), were relent by the Government to BAPINDO in rupiahs (para 6.05), and thus can be treated as domestic currency resources in the strict sense. However, it is the Govern- ment's policy, based on balance of payments considerations, that BAPINDO should, as a rule, finance imports with foreign borrowings, not with rupiah funds. For the period prior to 1972, BAPINDO had to finance imports entirely with its rupiah resources (mainly under the INVESTASI program referred to in para 14 of Annex 1) because it had no foreign exchange resources available. From 1972, when BAPINDO obtained the first IDA Credit, it began to finance the bulk of the import requirements of its clients with foreign borrowings, but still had to continue to finance a proportion of these imports with its rupiah funds, because of the shortfall in its foreign exchange resources. Available data show that in recent years 54% of BAPINDO's total disbursements for term loans were on account of imports, whereas only 35% of these total disbursements were financed from BAPINDO's foreign exchange resources. This indicates that BAPINDO has financed imports with foreign borrowings to the extent of about 65% (i.e. 35:54), and the balance of 35% with rupiah funds. In its business projections, BAPINDO assumes (for planning purposes) that in future, financ- ing of imports will continue to account for the same proportion (54%) of its total financing, but that its foreign exchange resources will increase sub- stantially and ultimately account for about 80% of its import financing by 1980, with the balance of 20% to be financed by rupiah funds. 5.05 Domestic Currency. BAPINDO's disbursements of domestic currency from January 1, 1977 through December 31, 1980 are estimated at Rp 233.8 bil- lion. At the beginning of that period, BAPINDO had Rp 13.6 billion available for disbursement. The table below indicates how BAPINDO plans to meet its domestic currency requirements. Local Currency Resource Requirements (Rp billion) 1977 1978 1979 1980 Undisbursed Rupiah resources as of January 1 13.6 13.8 9.0 7.5 Share capital increase 6.0 - - - Bank Indonesia loans 17.8 24.8 29.3 33.9 State banks' loans 2.1 3.9 4.6 5.2 Others (including Government loans and bond issues) 12.0 15.0 22.5 30.0 Rupiah loan collections (net) 3.8 4.3 5.5 6.9 Cash generated during period 0.5 1.0 0.5 1.6 Sub-total 55.8 63.3 71.4 85.1 Less: new disbursements 42.0 54.3 63.9 73.6 Undisbursed Rupiah resources as of December 31 13.8 9.0 7.5 11.5 - 20 - As can be seen from the foregoing, rupiah loan collections I/ and retained earnings (totalling Rp 24.1 billion) are expected to finance a proportion of just over 10% of BAPINDO's rupiah requirements, and the balance of Rp 209.7 billion will have to be covered by new resources, such as loans from the Gov- ernment, Bank Indonesia and other state banks. Apart from loan collections, retained earnings and negligible deposits, BAPINDO remains completely dependent on the Government for domestic currency resources. BAPINDO is considering the issuance of domestic bonds, for which it expects to obtain from the Govern- ment the same interest subsidy as that given to state banks for time deposits (para 22 of Annex 1). 5.06 Foreign Currency. BAPINDO plans to commit about US$360 million in foreign exchange 2/ in the four-year period 1977/80. As of Dec, 31, 1976, its available foreign exchange resources consisted of the uncommitted balance of US$17.2 million of the last Bank loan (1054-IND) 3/ and a DM 22 million (about US$9 million equivalent) loan from KfW of Germany. These amounts are expected to be fully committed by BAPINDO prior to September 1, 1977, or around the expected effectiveness of the proposed loan. Apart from the proposed Bank loan of US$40 million, BAPINDO expects to obtain a first loan of US$30 million from ADB in the first quarter of 1978. These two loans, totalling US$70 mil- lion, would cover BAPINDO's foreign exchange commitments for a period of about 12 months, i.e. up to September 1978. 5.07 Resource Planning. BAPINDO's resource position as of December 31, 1976, is summarized in Annex 7. Its resource requirements over the period 1977-80 are analyzed in paras 5.05 and 5.06. With respect to domestic currency resources, the Government and Bank Indonesia have, in the past, whenever the need arose, provided BAPINDO with adequate funds (in the form of both equity and loans). There are, however, indications that in future BAPINDO may be faced with a shortage of rupiah resources owing to the Govern- ment's budgetary constraints and Bank Indonesia's restrictive credit policies. With respect to foreign currency resources, the Bank so far has virtually been BAPINDO's sole source of funds, accounting for 88% of its foreign currency resources as of December 31, 1976. The Bank has informed the Government and BAPINDO that it expects BAPINDO in the near future to mobilize additional sources of foreign borrowings so as to gradually reduce its dependence on the Bank's financing. A first step toward diversifying BAPINDO's sources of 1/ Loan collections are assumed net of repayments by BAPINDO, which borrows from Bank Indonesia and other state banks at maturities not exceeding five years (under existing Bank Indonesia regulations) and re-lends at maturi- ties averaging about eight years, thus financing with its own equity the later maturities of these loans. 2/ As stated in para 5.04, BAPINDO's shortfall in foreign exchange resources, if any, will be financed out of BAPINDO's domestic currency resources, because of the convertibility of the Indonesian currency. 3/ This balance had declined to US$8.4 million by April 30, 1977. - 21 - fo-t4gn exchange was made when the Government recently approached ADB for a US$30 million loan to BAPINDO, which is expected to materialize in early 1978 (para 5.06). During negotiations, the Government stated its intention to provide BAPINDO with adequate resources, both domestic and foreign, to sustain its future operations (para B-9 of Program). Projected Financial Position 5.08 Projected balance sheets through 1980 are shown in Appendix 2 of Annex 8, and selected financial ratios in Appendix 5 of that Annex. On the basis of its forecast volume of business, BAPINDO's total assets should increase from Rp 124.9 billion at December 31, 1976 to Rp 342.3 billion at end-1980 or at an average annual rate of about 15%. This growth is entirely attributable to the term loan portfolio which is projected to reach Rp 304.8 billion in 1980 after increasing at an average rate of 40% from its 1976 level of Rp 76.8 billion. This, and the disappearance of BAPINDO's short-term raw cotton loan portfolio by the end of 1977, will substantially modify the structure of assets; the term loan portfolio (excluding provisions for doubt- ful accounts) which accounted for only 62.5% of total assets in 1976 would represent about 85.7% of these assets in 1980, while the share of current assets would correspondingly decline from 37.6% to 10.2%. A major proportion of the increase in assets will be financed through long-term debts which will go up from Rp 38.5 billion in 1976 to Rp 275.5 billion in 1980. BAPINDO also expects the Government to make an additional capital contribution of Rp 6.0 billion before the end of 1977, thereby raising its paid-in capital to its presently authorized level of Rp 50 billion. The current ratio is estimated to range between 1.3:1 and 3.0:1 over the projection period, which would be satisfactory. The projected long-term debt/equity ratio shows an increase from 0.8:1 in 1976 to 5.0:1 in 1980, exceeding the contractural limit of 3.0:1 in 1979. In view of the continuing unsatisfactory arrears situation (para 4.12), it is recommended that this 3.0:1 debt/equity limit be maintained for the present. The Bank should not consider an increase in the debt/equity limit until BAPINDO's arrears situation has materially improved. The mainte- nance of the existing limit would require the Government to make additional cash subscriptions to BAPINDO's capital before 1979 to enable BAPINDO to incur further borrowings. Projected Financial Results 5.09 Projected income statements for 1976-80 are given in Appendix 3 of Annex 8, and indicators of financial performance, in Appendix 5. BAPINDO's profitability will remain modest, with net profit increasing from 2.7% of net worth in 1976 to 3.3% in 1980, as a result of higher leverage, and profit be- fore tax and provisions as a percentage of average total assets will increase from 2.2% to 3.7%. General and administrative expenses are projected to dec- line only marginally, from 3.8% in 1976 to 3.2% in 1980, which would still be ,igh. There is room for BAPINDO in future to try to control more tightly the rise in its administrative cost (see para 4.06; and A-6 of Program). Projected cas;L flow statements are given in Appendix 4 of Annex 8. Debt service cover is expected to decline marginally from 1.6 in 1975 to 1.4 in 1980. (Collection rat, for industrial term loans are assumed at 63% of amounts falling due in - 22 - 1977, rising gradually to 90% in 1980; for working capital loans, the corres- ponding figures are respectively 64% and 84%.) VI. OBJECTIVES AND FEATURES OF PROPOSED LOAN Objectives and Justification 6.01 Apart from replenishing BAPINDO's foreign currency resources, the proposed loan would enable the Bank to continue the institution-building process started with Credit No. 310-IND in 1972. Since then, the Bank has continued to follow BAPINDO's progress closely and to make available to BAPINDO such advice and guidance as BAPINDO considers it needs and the Bank considers it can offer. It is clear from the preceding parts of this report that, in spite of considerable progress in the past few years, much remains to be done to further strengthen BAPINDO and transform it into an efficient, innovative development finance institution. As stated in para 2.04, BAPINDO among the state banks is entrusted with the specific responsibility for assisting the industrial sector. A strong BAPINDO is therefore highly im- portant for the continued development of Indonesian industry, both public and private. While major improvements will not be achieved very quickly, and expectations of future progress need to be realistic, there is good reason to believe that BAPINDO will make substantial further progress during the period of commitment of the proposed loan, with the implementation of the measures contemplated in the Program of Action (Annex 5) and others presently under consideration by BAPINDO's management. That there remain many problems to be solved should not be construed as a failure on the part of BAPINDO, but rather to reflect the fact that institution-building is a long-term process, espe- cially in the light of BAPINDO's serious weaknesses prior to its 1971 reorga- nization, and of the Indonesian context in which industrial expertise and business entrepreneurship are relatively scarce. The Government attaches great priority to BAPINDO, and no other financial intermediary has, or is likely to have, the same impact on Indonesia's industrial sector. By conti- nuing its assistance to BAPINDO in terms of both finance and guidance, the Bank can play a useful role in the Indonesian economy. 6.02 Lending to BAPINDO is also justified as a means, not otherwise available, of transferring resources from the Bank to industrial projects in Indonesia. With the recent improvements in BAPINDO's appraisal work (para 3.07), and expected further improvements, BAPINDO is an adequate allocator of Bank funds. The subproject review process (para 6.09) should further ensure that Bank funds would go to industrial projects that are economically as well as financially viable. 6.03 Loan Amount. As stated in para 5.06, a Bank loan of US$40 million (together with BAPINDO's prospective foreign borrowings from other sources) is expected to cover BAPINDO's estimated foreign exchange commitments for a period of about one year. This represents a departure from the Bank's usual practice of lending to DFCs on a two-year basis. Although the Bank expects - 23 - BAPINDO to resolve its problems and achieve further improvements with the implementation of the Program of Action, it is deemed appropriate for the Bank at this time to limit the amount of the proposed loan to US$40 million, in view of BAPINDO's remaining problems, in particular the unsatisfactory situation of its loan portfolio. Features of Proposed Loan 6.04 Form of Bank Loan. As with other Bank loans to Indonesia, the loan would be made to the Government for relending to BAPINDO, under a sub- sidiary loan agreement acceptable to the Bank, the signing of which will be a condition of effectiveness for the proposed loan. 6.05 Utilization of Loan Proceeds. As with the previous Bank loan to BAPINDO, the proposed loan would finance, in addition to direct imports of machinery and equipment, the foreign exchange component of domestically procured capital goods estimated at 60% and that of locally procured vehicles and local civil works estimated at 40%. 6.06 Foreign Exchange Risk. The Government has expressed the wish to onlend the Bank loan to BAPINDO in rupiahs, thereby itself assuming the for- eign exchange risk. This arrangement is similar to that under previous Bank loans and IDA credits to BAPINDO and PDFCI. The Government's unwillingness to require Indonesian sub-borrowers to bear the exchange risk is based on the consideration that the Indonesian currency has been and remains relatively stable, and that most domestic enterprises (especially the indigenous ones) are not sophisticated enough to appreciate the complexities of multiple cur- rency exchange risks, whereas the better-established companies (mostly non- indigenous and joint ventures) can borrow from the Singapore and Hong Kong capital markets at an interest rate presently around 10-11% (with the exchange risk borne by the borrower). 6.07 Relending Rates. BAPINDO intends to relend the loan proceeds at an interest rate of 15% p.a. 1/, as long as this rate remains the standard rate for medium- and long-term credits charged by state banks in Indonesia. The Bank would be consulted by BAPINDO prior to any changes in the proposed relending rate. As stated in para 2.05 of this report and para 22 of Annex 1, the 15% rate would result in sub-borrowers' paying an adequate real rate in excess of 5% based on projections of future inflation in Indonesia. 6.08 Spread Limitation. The Government intends to on-lend to BAPINDO the loan proceeds (in rupiahs) at an interest rate of 11% p.a., thus giving 1/ For loans below Rp 100 million, at 12% p.a. in accordance with prevail- ing rate structure. - 24 - BAPINDO a spread of 4 percentage points 1/, which is adequate. The Govern- ment's own spread of 2.8 percentage points (11% minus the Bank's assumed lending rate of 8.2%) represents a guarantee fee for its assuming the foreign exchange risk. 6.09 Free Limit. As stated in para 3.07, BAPINDO's appraisal work has recently improved. The Program of Action includes measures for achieving further improvement. It is therefore recommended that the free limit (US$0.5 million under the previous Bank loan) be increased to US$1.0 million, with an aggregate free limit of US$10 million. The proposed increase in the free limit also takes cognizance of the substantial rise in the cost of capital goods in the past two years. With this free limit, sub-loans accounting for at least 75% (by amount) of the loan will require prior Bank approval. This should be sufficient for the purpose of effective subproject monitoring by the Bank. 6.10 Ceiling on Subloans. To ensure that the proceeds of the loan would be spread over a relatively large number of medium-sized projects, a ceiling of $3 million would be set on the size of individual sub-loans. 6.11 Financing of Technical Assistance. While BAPINDO has benefited from technical assistance provided in the past by UNDP and through bilateral aid (para 3.06), it still needs assistance from outside experts in overall development banking activity as well as economic and marketing research. Consequently, corresponding to the estimated cost for 36 man/months, in amount of US$240,000 is earmarked under the proposed loan for financing the services of three experts (36 man/months): a general DFC advisor, a senior economic advisor and a marketing expert. 6.12 Amortization Schedule. As usual with Bank loans to DFCs, the pro- posed loan would have a flexible amortization schedule conforming substan- tially to the aggregate of the repayment schedules of BAPINDO's sub-loans the maximum term for which would be 15 years including the grace period. VII. AGREEMENTS REACHED AT NEGOTIATIONS 7.01 During negotiations, understandings were reached with the Govern- ment and BAPINDO on the Program of Action, shown in Annex 5, designed generally to remedy BAPINDO's existing problems and achieve further improvements. 1/ BAPINDO's spread is reduced to 1 percentage point for sub-loans below Rp 100 million, for which it charges a lending rate of 12% p.a. Since BAPINDO is not expected to make many sub-loans below Rp 100 million, its overall spread is expected to be close to 4 percentage points. - 25 - 7.02 Agreement was reached on the following matters: (a) maintenance of the debt/equity limit at 3.0:1 (para 5.08); (b) a free limit of US$1 million with an aggregate free limit of US$10 million (para 6.09); and (c) a US$3 million ceiling on the size of individual subloans (para 6.10). 7.03 Further, the following steps (contained in Part A of the Program of Action) were specified as additional conditions to the effectiveness of the loan: (a) the Government will: (i) relieve BAPINDO of all financial liability pertaining to projects financed by BAPINDO at the Government's behest; (ii) make arrangements to enable all state enterprises to settle with BAPINDO their arrears of principal and interest of over three months as of the date of the loan agreement; (iii) compensate BAPINDO for its losses on raw cotton financing by making a partial payment of Rp 3.0 billion (with the remaining balance to be paid not later than March 31, 1978); and (iv) furnish to the Bank the review of PUPN, the official collection agency, and issue a ministerial decree requiring PUPN to take immediate action on BAPINDO's delinquent loans instead of waiting until expiry of the last maturity of these loans as has been the practice to date (para 4.21 (a); and (b) BAPINDO will furnish to the Bank plans, satisfactory to the Bank, for: (i) controlling its future administrative cost (para 4.06); and (ii) improving its arrears situation along the lines of para A-5 of the Program of Action (para 4.21 (b) (i)). ANNEX 1 Page 1 INDONESIA BANK PEMBANGUNAN INDONESIA Economic, Industrial and Financial Environment A. The Indonesia Economy 1/ 1. Background. During the First Five-Year Development Plan (April 1, 1969 - March 31, 1974), the Government's efforts succeeded in rehabilitating existing plant and infrastructure, thus setting the economy back on a devel- opment course. Real gross domestic product (GDP) grew at an average annual rate of more than 7%, with the highest growth rates being recorded in the mining (particularly oil), manufacturing and trade sectors. Gross domestic capital formation increased at an average rate of around 25 percent in real terms, and rose as a proportion of GDP from 9% in 1968 to 19% in 1973. Fol- lowing the boom in oil and other commodity exports in 1973-74, a mood of optimism prevailed at policy-making levels. It was thought that earlier resource constraints had eased sufficiently to allow a substantial increase in consumption and investment expenditures. The Government intensified its efforts to promote economic development by stepping up budgetary expenditures in line with the expected rise in oil revenue, and by raising the level of external borrowing. However, the slackening of export demand and the gradual realization, in early 1975, of the magnitude of Pertamina's financial diffi- culties have since then forced the Government to review and in many cases scale down its plans. Once again, capital resource scarcity has become the major factor hampering the economic develpment of Indonesia, a country whose long-term prospects remain otherwise promising. 2. Recent Performance. In 1975 real GDP is estimated to have grown by 4-1/2 % compared to 7.5% in 1974. The decline in the rate of GDP growth was primarily the result of a decrease in the production of major agricul- tural products and mineral exports, including oil, as a result of poor har- vests, unfavorable price development for major agricultural export products and the recession affecting Indonesia's principal trading partners. For 1976 the growth of the GDP is expected to have recovered around 1974 levels 1/ For a detailed discussion please refer to the latest basic economic report (No. 1516-IND) dated March 8, 1977. A study of public sector investment is presented in the report entitled "Public Sector Invest- ment and Financial Resources in Indonesia", No. 1187-IND, dated May 24, 1976. ANNEX 1 Page 2 and a turraround in mining due to developments in the oil sector. Prelimin- ary data si,gest that the rice harvest has risen slightly again in 1976 after no growth in 1975 while production of other primary products such as rubber, coffee, logs and timber have picked up due to favorable export prices or the pick-up of economic activities in the developed countries. Government pol- icies over the last two years were dominated by the efforts to cope with the problems caused by the Pertamina crises and to put Indonesia back on the road towards long-term development. These efforts have by and large been success- ful as the Government was able to execute the program announced in 1975: foreign borrowings have been kept well within last year's limits; the mech- anisms are in place for further sharply reducing them in the current year; public sector borrowing from the domestic banking system was cut sharply and inflation was further reduced; some planned large new investment projects and equipment purchase contracts were deferred; and tax revenue and public savings targets were reached. 3. Current Government expenditures in 1975/76 dropped (even in current terms) by about 7% after having almost doubled in 1974/75 while development expenditures increased by around 50% during 1975/76 as compared to 30% in 1974/75. The restraint on current expenditures in 1975/76 had become neces- sary because of the lower than expected growth in resources (5%) about 40% of which come from oil exports. International reserves which had started to decline in the latter half of 1974/75, further decreased during 1975/76, despite substantial capital inflows, because exports failed to increase while imports continued to climb. Debt service payments on behalf of Per- tamina also peaked (about US$1.5 billion). In 1976/77, however, reserves increased again despite a small increase in the trade deficit, because a larger share of imports was financed by long-term loans disbursed, notably of IGGI project aid (US$1.4 billion as against US$1.0 billion in 1975/76), while the large short term loans contracted by Pertamina had been repaid in the previous year. Gross investments continued at high levels in 1975/76, judging by the 100% increase in imports of capital goods, primarily on account of some large industrial projects which had been under preparation for some time; investment interest however was on a decline as for instance the approval of foreign investments by the Capital Investment Coordinating Board was sharply lower if one excludes two very large projects (mining and alu- minum). Prices continued to climb though at a reduced rate, the Jakarta con- sumer price index rising at an annual rate of around 15% in 1976 (as compared to 19% in 1975 and 40% in 1974). The inflation which was in earlier years caused by a severe drought in 1972, followed by the commodity boom of 1973 was further fuelled by continued rapid expansion of bank credits to finance public investments. Total liquidity in 1975 for instance increased by close to 40% with about half of all credits going to the public sector thus forcing some credit squeeze on the private sector. The improved financial situation of the Government in 1976 helped considerably to slow down inflation, as the Government decided to reduce sharply the public sector's use of bank credits. 4. Future Directions and Prospects for Growth. All through the recent financial difficulties caused by the Pertamina Crisis, the Government has remained committed to its objective of improving living standards and creating ANNEX 1 Page 3 new employment opportunities. As stated in the Second Five-Year Development Plan (April 1, 1974 - March 31, 1979), the aim is to achieve a long-term annual growth rate of 7.5% coupled with an annual rate of employment creation of 2.3%. Priority is being given to achieving self-sufficiency in food production; increasing industrial production; and further expanding both physical and social infrastructure. With present and projected resource con- straints, the Government's task is a difficult one. However, the attainment of a real growth rate in excess of 7% remains feasible. Continued expansion of agricultural output with a concomitant increase in real agricultural incomes, together with further public and private investment should help sustain industrial output expansion, particularly in labor-intensive indus- tries serving both the export and domestic markets. This is needed not so much as a source of foreign exchange earnings or savings, but as a source of income and employment for Indonesia's population. To ensure a stable climate for continued growth, the government is also determined to reduce the present rate of inflation. Given its policy of curbing the expansion of total liquid- ity to about 20% in 1977/78 and maintaining it at that level thereafter, the rate of inflation is expected to average around 10% for the period 1977-1980. B. The Industrial Sector 5. The Role of Industry. Over the long-term, heavy reliance is being placed on industrial expansion in achieving income and employment growth tar- gets. In view of the failure of the industrial sector, over the past decade, to provide employment opportunities commensurate with levels of investment, the Government is gradually moving away from its past policy of promoting large capital intensive projects and is encouraging instead the development of small- and medium-scale industries using more labor intensive methods of production, which are also likely to strengthen intra- and inter-industry linkages and contribute to a wider regional distribution of investment. 6. Recent Growth. Between 1971 and 1975 manufacturing and mining industry expanded rapidly, growing (at constant prices) at 15% p.a. and 11% p.a. respectively. Since over the same period the economy as a whole grew at 8% p.a., the relative share of these two sectors in GDP rose from 19% to 22% combined (manufacturing from 9% to 11% and mining from 10% to 11%). Together with the construction sector, industry accounted for 27% of GDP in 1975 and provided employment for around 8% of the total labor force. During 1974 and 1975, the growth of the industrial sector was adversely affected by international developments. Faced with higher production costs and declining demand, some sectors serving the domestic market experienced low levels of capacity utilization. This was notably the case of the textile industry which in addition had to compete with imports. Export-oriented sectors such as mining and wood-based industries suffered from the recession in the indus- trialized nations. Overall, the industrial sector's growth slowed down to an annual rate of 11% in 1974; in real terms, mining output expanded by 3%, manufacturing by 16% and construction by 22%. More recently, the industrial ANNEX 1 Page 4 sector has shown signs of recovery. Demand for oil and wood products has strengthered in export markets, and textile production is on the rise. 7. Structure. Inadequate statistics permit only a broad analysis of the structure and composition of the manufacturing sector, which, in 1975, accounted for around 40% of all industrial activity and contributed 11% of GDP. The latest surveys are out of date and can therefore only provide orders of magnitude and structural relationships. According to these surveys, four industry groups accounted for about 75% of manufacturing value added; these were food processing, tobacco manufacture, rubber products (mostly crumb rubber and sheets) and textiles. These industries were also predominant in terms of employment (85%) and number of establishments (75%). In recent years, a number of new industries have been established in such fields as industrial chemicals, steel products as well as motor vehicle, radio and television sets assembly. Their contribution to employment creation, how- ever, has been minimal. In terms of size distribution, very small-scale enterprises 1/ represent an overwhelming majority (97%); in 1972, they accounted for 64% of industrial employment and 17 percent of manufacturing value added, which suggests a very low productivity. Even within the group of establishments exceeding the definition of small-scale enterprises, small and medium sized firms (i.e. those with up to 100 employees) accounted for 90% of the number of establishments, employed around 32% of the labor force and contributed 18% to gross value added. Geographically, manufacturing activity is concentrated on Java, which has 78% of existing medium- and large-scale firms, and 86% of total manufacturing employment. It is also on Java that the largest scale of production is to be found, with an aver- age of 53 workers per plant. The Jakarta metropolitan area accounts for 11% of the number of enterprises located, and 7% of manufacturing employment in Java. Other large Javanese cities (notably Surabaya, Semarang and Bandung) are also important industrial centers. 8. Industrialization Strategy. Indonesian manufacturing is geared mainly to production for the domestic consumer market. This is attributable to an industrialization strategy which has placed heavy emphasis on import substitution, linked with the build up of capital intensive production of basic products such as steel, fertilizer and cement. The combination of an easily convertible domestic currency pegged at fixed exchange rate to the US dollar since 1971, and of a high rate of inflation which caused long-term interest rates to be negative in real terms, might also have induced manufac- turing investment to be more capital intensive than otherwise necessary. The Government has shown a growing awareness of these problems and is taking mea- sures to shift the structure of production more toward labor intensive manu- facturing. This is reflected in its present industrialization strategy which appears essentially three pronged. First, investments now underway in large projects are to be completed. These should extend downstream processing of industrial exports (e.g. mineral ore smelters, liquified natural gas plants) 1/ Small scale enterprises are officially defined as those employing 10 workers or less without power equipment, or 5 workers or less with power equipment. ANNEX 1 Page 5 or encourage domestic production of intermediate goods (steel, cement, fer- tilizer, pulp and paper). Second, medium-large projects are to be promoted, especially those aimed at developing the non-traditional export base and allowing for more integration in existing industries. Third, increasing emphasis is to be placed on fostering the growth of small industries which will address the objective of employment generation, regional dispersal of investment and production closer to raw material sources and markets. Once the heavy demand which the first group of projects which are mainly in the government sector, is placing on available financial resources has been satisfied, projects in the small- and medium-industrial category, mainly private, will have a better chance to materialize. At present, their devel- opment is seriously impaired by existing credit restrictions. 9. Policies and Incentives. The Indonesian Government's policies on industrial investment are partly reflected in the incentives it provides under the Domestic and Foreign Capital Investment Laws which are administered by the Investment Coordinating Board (ICB). These incentives usually apply equally to domestic and foreign companies but are not automatically granted as a package. They vary according to priority ranking of industry and the economic impact of the project, measured by employment creation, foreign exchange earnings, training of domestic skilled workers, degree of pribumi 1/ management, regional location, etc. The main elements of the incentive system include tax privileges, reduction or exemption from import levies, depreciation allowances and other important rights and guarantees relating to management control, transfer of profits and compensation in the event of nationalization. Other means of control at the Government's disposal are the use of protection policies, applied both through the tariff system and the imposition of direct import controls, 2/ and, to a lesser extent, the interest rate policy. These policies were originally designed to promote investment which would, over the long-term, yield the greatest returns to the economy and ensure sound resource allocation. Whether they have succeeded in doing so is difficult to determine. In certain cases (e.g. motor car assembly), these policies have resulted in the country's incurring higher foreign exchange costs. It is also alleged that ICB incentives serve to do little apart from partially countering the distortions introduced by tariffs and import controls, and that the very nature of the incentive system seems to promote capital intensiveness and, as a corollary, low capacity utilization. While this is true to a point, any recommendations on the subject must await the findings of the Bank industrial sector review mission which is expected to present its report later this year. 10. Manufacturing Investment. Information on the level and direction of investment in manufacturing is lacking. Available data pertain only to investments approved by the ICB, which do not include the large public sector industrial investments presently underway. On this basis it appears that manufacturing investment activity slackened in 1974 and has further declined 1/ Ethinic Indonesian. 2/ Overall, the level of protection is low in Indonesia, though direct import controls and high tariffs do exist for selected products. ANNEX I Page 6 since then. In 1975, the ICB approved 43 foreign investment projects involv- ing a total planned capital outlay of US$1.0 billion. Of this amount, 85% was accounted for by one large project, the Asahan aluminum plant (with cost of US$870 million), a joint undertaking between foreign private investors and the Government. If one excludes this project, the value of foreign investment approved in 1975 was substantially below its 1974 level of US$1.1 billion. This represents a continuation of the declining trend exhibited by foreign investment applications since late 1973, particularly in the manufacturing sector, and is no doubt largely due to the recessionary conditions in capi- tal exporting countries which adversely affected private industrialists' investment interest. Pertamina's financial difficulties might also have influenced prospective investors. On the domestic side, investors had reacted earlier to changed economic conditions and restrictive Government measures. The sharp decline took place in 1974 when approvals of private domestic invest- ment projects fell to Rp 230 billion for 259 projects compared to Rp 569 bil- lion for 550 project in 1973. In 1975, domestic investors maintained a cautious wait-and-see attitude. Total approvals stagnated at Rp 236 billion for 168 projects. While most of the factors presently discouraging private investment are expected to be of a short-term nature and do not reflect any changes in the long-term opportunities offered in Indonesia, others such as the stricter enforcement of the pribuminization regulations 1/, as well as administrative and bureacratic obstacles may depress the private investment climate on a longer term basis. C. The Financial Sector 1i. Overview. In terms of structure, diversity of institutions, financial services offered and the variety of financial instruments avail- able for mobilizing savings, the financial system in Indonesia is still in its early stages of development. The core of the system is a large commer- cial banking sector dominated by five State banks and regulated by the Central Bank, Bank Indonesia (BI). There are in addition a variety of spe- cialized financial institutions e.g. term-financing institutions, merchant banks, and savings institutions, some of which have only recently been estab- lished. Overall, the financial system remains essentially geared to serving short-term financing needs. This is the consequence of a regulatory environ- ment governing credit markets and interest rates which simply does not make it profitable for private institutions to mobilize long-term funds to finance long-term investments. Only Government institutions can do so, thanks to the special facilities provided to them by the Central Bank. As a result these institutions have grown rapidly (but unprofitably) in a fairly unorganized fashion. 1/ Pribumi enterprises are defined as those with at least 50% pribumi (ethnic Indonesian) ownership and with predominantly pribumi man- agement or 75% ownership if management is non-pribumi. ANNEX I Page 7 12. Over the last few years, the Government has attempted to remedy some of the shortcomings affecting the financial sector. With Bank Group assistance, BAPINDO, was reorganized with a view to making it the predominant source of medium- and long-term finance for industry. A program to upgrade the five State commercial banks was initiated and is still underway. In 1972, the Indonesian Development Corporation (IDFC) was reorganized as a joint ven- ture between the Government (through Bank Indonesia) and the Netherlands Overseas Finance Corporation, in which the Dutch Government has a majority interest. In 1973, again with Bank Group assistance, the government was instrumental in establishing a third largely privately-owned development bank, P.T. Private Development Finance Company of Indonesia (PDFCI). Apart from an equity investment of US$0.5 million by IFC, PDFCI has received an IDA credit of US$10 million and, early in 1977, a Bank loan of US$15 million. A special- ized institution, P.T. Bahana, was also set up the same year to provide equity financing and managerial assistance to financially weak enter- prises. Since the passage, in 1973, of a law governing the establishment and operations of non-bank financial intermediaries, 11 merchant banks have been set up as joint ventures between foreign and local banks. Their ope- rations are still concentrated in short-term commercial paper, but are ex- pected to include in the future long-term securities and equity investments, thus paving the way to the establishment of an active capital market. Finally to help meet the need for long-term funds, the Government has instituted two investment credit schemes, the Medium-Term Investment Credit (INVESTASI) and the Small Investment Credit (KIK and KMKP) programs, which are adminis- tered by the Central Bank and handled by the State banks. 13. Indonesia's financial sector consists of Bank Indonesia, five large State commercial banks, four national development banks (BAPINDO, PDFCI, IDFC and P.T. Bahana), 26 RDBs, 11 branches of foreign banks, 97 small private domestic commercial banks, and about 5,000 savings and small village and rural banks. There are also 11 merchant banks and a dormant Stock Exchange. 14. Short-Term Credit. Short-term credit is extended by banks for periods of up to one year; most loans are for three to six months duration and can be renewed depending upon the bank/borrower relationship. The com- mercial paper market started operating only recently following the estab- lishment of the merchant banks. 15. Medium- and Long-Term Credit. Term credit is available from most banks, though foreign banks must obtain Bank Indonesia's approval to make loans for more than one year. However, with the exception of the INVESTASI program and loans from development banks, maturities are usually limited to three years with possible rollover. The main source of term finance remains the INVESTASI program which was introduced by the Government in 1969. Under this program, term loans are available for almost all sectors from State banks and RDBs, with Bank Indonesia refinancing 65 to 80% of the loan amounts. Since the inception of this program, most loans have gone to the private sector which accounted for about 70% of cumulative loan approvals totalling Rp 224 billion as of September 30, 1975. Of this amount, Rp 104 billion (or 46%) had been approved for projects in the manufacturing sector, three- ANNEX 1 Page 8 fourths of which had been disbursed. The INVESTASI program is limited by annual budget appropriations. Loans under the program bear an interest rate ranging from 12 to 15% per annum and carry maturities of between one and five years. Their interest rate is therefore subsidized as the rate on two-year time deposits is 18% per annum. 16. Four national development banks specialize in extending term financ- ing to industry. BAPINDO is by far the most important and is the only State bank allowed to grant term loans with maturities of over five years. By year-end 1975, BAPINDO's term loans outstanding amounted to about 28% of all outstanding term loans under the INVESTASI program, and had increased al- most three-fold since 1972. BAPINDO finances industrial projects of every size (large, medium and small) in both the public and private sectors. The Indonesian-Dutch joint venture development bank, IDFC, extends term loans, participates in equity financing and provides a limited amount of technical assistance to its clients. So far, it has disbursed about US$12 million for 27 projects in such sectors as food processing, textiles, printing, tourism, shipping and farming. Because of its limited financial resources, as well as on grounds of corporate policy, IDFC concentrates on financing relatively small projects. The average size of its loans to date is Rp 165 million (US$400,000). In 1973, the Government and the Bank Group cooperated in setting up PDFCI, in which IFC organized the participation of eight foreign banks (32%), taking up itself 8% of the share capital. PDFCI is empowered to make medium- and long-term loans, invest in equity, provide guarantees, underwrite corporate equity and debt securities and provide technical, finan- cial and managerial consultancy services. One of its most important objec- tives is the identification of new projects and the promotion of new enter- prises. From 1974, when it started operations, to June 7, 1976, PDFCI ap- proved a total financing of around US$12 million, of which US$800,000 rep- resented equity investments, for 12 industrial projects. The fourth devel- opment bank, P.T. Bahana, was established by the Government in 1973 with the main objective of providing equity financing (up to 12.5% of the share capital of its clients) particularly to enterprises with a weak capital structure. All four development banks can enter into co-financing agreements but there have been few so far. 17. Financing of Small Scale Industries. Since December 1973, two cre- dit schemes are available to small entrepreneurs: the Kredit Investasi Kecil (KIK) for the financing of fixed investment, and the Kredit Modal Kerja Pena- naman (KMKP) for working capital financing. Both schemes are handled by State banks and selected RDBs, with the Central Bank refinancing 70% to 80% of the loan amounts disbursed. All productive activities (in industry, agriculture, trade and services) are eligible for KIK and KMKP financing. A limit, how- ever, has been placed on the maximum loan amount which may be approved for any single project. This limit is presently Rp 5 million (US$12,000 equivalent) under both KIK and KMKP. Maturities range from 1 to 5 years including a grace period of up to two years, and interest rates applied to sub-borrowers are 12% for KIK and 15% for KMKP loans. Unlike the INVESTASI program, loans under KIK and KMKP do not carry any minimum self-financing requirement. Similarly, the program regulations specify that the main collateral under KIK is the project ANNEX 1 Page 9 to be financed and, should this value be considered insufficient, additional collateral should not exceed 100 percent of the credit being sought. As of February 29, 1976, over 60,000 loans had been approved under both schemes for an amount exceeding Rp 65 billion (US$150 million), of which Rp 46 billion had been disbursed. Overall, both schemes have worked reasonably well, and have provided a large number of small entrepreneurs with much needed long-term funds. Difficulties experienced so far include the unfa- miliarity of State commercial banks with term-financing operations (e.g. collateral requirements exceed too often the program's guidelines), lengthy loan processing periods, and the low level of the loan ceilings which dis- qualifies a number of otherwise suitable projects. 18. In 1972, the Government established P.T. Asuransi Kredit Indonesia (ASKRINDO) to insure bank loans made to small businesses for up to 75% of the total risk. This automatic insurance was to induce State banks to pursue more vigorously their term lending to small scale enterprises. Automatic insurance, of course, has its inherent drawbacks but so far there are no signs that State banks have taken undue advantage of this facility. To date, P.T. ASKRINDO's experience has been satisfactory and few defaults have occurred. However, the KIK and KMKP programs are still fairly new and it is too early to assess their record. 19. As mentioned earlier, P.T. Bahana was set up to provide equity and technical assistance to financially weak enterprises; it also engages in lend- ing operations to a limited extent. Since most small enterprises fall into this category, P.T. Bahana's operations have focused on this sector though there are actually no size limitations which confine its lending to small scale industry. As is the case for most new institutions in Indonesia, P.T. Bahana has found it difficult to attract experienced personnel, especially in the field of management assistance to small-scale industry; its lending activ- ity has therefore been limited. 20. BAPINDO began a small industry financing program of its own in 1973, in collaboration with selected regional development banks. Under the initial agreement, BAPINDO would extend a line of credit to these banks with the understanding that it would serve to finance 80 percent of the amount approved for each individual sub-loan, the RDB financing the balance out of its own resources. This system was modified in 1974, following the introduc- tion of the KIK and KMKP programs. Under both programs, the RDB's financing share is now fixed at 10%, with the amount non-refinanceable with Bank Indo- nesia coming out of BAPINDO's own resources (i.e. 20 percent and 10% for KMKP and KIK respectively). BAPINDO also provides technical assistance to the RDBs in the form of organizational upgrading programs and staff training. As of December 31, 1976, fourteen RDBs (out of a total number of 26) had been selected by BAPINDO and had entered into co-financing agreements. Cumulative approvals granted by these participating RDBs under both the KIK and KMKP programs amounted to Rp 8.8 billion (US$21.2 million) for about 3,600 proj- ects, i.e., an average sub-loan size of around Rp 2.4 million (US$5,000) equivalent). ANNEX 1 Page 10 21. Interest Rates. Interest rates applied by the State banks are set by Bank Indonesia. Because of the importance of the State Banks in the financial system, their rates in turn determine the general level of interest rates in the economy, though private banks are free to set their own rates. Lending rates applied by State banks range from 12% for INVESTASI loans below Rp 100 million and for special short-term agricultural credits, to 24% for general loans, with a standard lending rate of 15% p.a. for term loans above Rp 100 million. Lending rates charged by private banks are slightly higher and, if loans are financed from foreign exchange sources, they usually carry a floating rate plus a fixed margin with the exchange risk being assumed by the borrower. In January 1977, deposit rates were slightly reduced by the Government and now range from 6% to 18% p.a., depending on the duration thus reducing the discrepancy between deposit rates and lending rates applied by the banking system. This represented an important step in the right direction. The Government continues to keep the interest rate structure under review, and the Bank intends to join the Government in discussing this matter in the near future. 22. Compared with deposit rates, particularly those for 18- and 24- month time deposits with State banks, term lending rates in Indonesia are low. This interest rate structure does not unduly affect the State banks finan- cially, as (i) they receive direct interest rate subsidies from Bank Indonesia for time deposits, and (ii) a substantial portion of their lending is refi- nanced by Bank Indonesia at low rates (4% to 10%). This rate structure, however, does affect the profitability for private domestic banks and their ability to compete with State banks for long-term deposits, since they are not eligible for interest rate subsidies. The high deposit rates act also as a disincentive for project sponsors to contribute a larger share of equity funds, since it is more profitable to place excess funds in deposit accounts and borrow as much as possible. 23. The convertibility of the rupiah also exerts some influence on the domestic interest rate structure. Bank lending rates (other than those applied by State banks) have remained relatively low in part because of the proximity of the Singapore and Hong Kong financial markets which are willing to lend, at least to the better established companies, at rates about 2 or 3 percentage points above the Asian dollar market rates. This in practice gave an interest rate which over the past few years has been lower than the 15% rate applied by the State banks on their industrial loans (the exchange risk, however, was borne by the borrower). In general, Indoesian companies have been willing to accept the foreign exchange risk either because this was the only way to obtain funds directly, or because the risk was perceived as not being too great in light of the stability of the rupiah. In previous borrow- ings from the World Bank for BAPINDO and PDFCI, the Government has insisted on assuming the foreign exchange risk on the grounds that the Indonesian rupiah was a relatively stable currency and because most domestic enterprises were not sophisticated enough to appreciate the complexities of multiple exchange rates. The free convertibility of the rupiah was also one of the reasons why the Government did not raise term lending rates during the recent perid of very high inflation since it was feared that this would hurt the ANNEX 1 Page 11 smaller and financially weaker enterprises (mainly indigenous) which are unable to obtain foreign exchange loans on their own, while larger and stronger companies (usually non-indigenous joint ventures) would still be able to borrow from financial markets abroad. As stated in para 2 above, the rate of inflation which stood at 40% in 1974, declined to 19% in 1975 and around 15% in 1976. With the Government's policy of curbing the expansion of total liquidity to about 20% in 1977/78, the inflation rate is projected to average around 10% over the 1977-1980 period. If this materializes, the 15% standard rate for medium and long-term credits (Appendix 1) would represent a substantial positive real rate of around 5%. AEP Projects Department January 31, 1977 ANNEX 1 Appendix 1 INDONESIA BANK PEMBANGUNAN INDONESIA Interest Rate Structure of State Commercial Banks, January 31, 1977 (Annual rates in nercent) A. CREDITS (by category and purpose) Lending Rate (i) SHORT-TERM CREDITS Group I: a. BIMAS rice credit; import and distribution of 12 fertilizer and insectides; flour mills; imports under PL480 (with the exception of food for which the rate is 6%); exports and production of export commodities. b. Rice hullers mills; sugar mills; BIMAS poultry; 15 other poultry; public transportation; textile industry; cotton, tobacco and rubber production. Group II: a. Import and distribution of supervised import com- 18 modities; sugar storage; working capital for other production activities. b. Working capital for contractors. 21 Group III: All other short-term credits 24 (ii) MEDIUM-TERM CREDITS L2 - 15 (iii) CREDITS TO SMALL-SCALE INDUSTRIES Fixed investment 12 Permanent working capital 15 B. DEPOSITS Deposit Rate Time deposits: 24 months 18 12 months 12 6 months 6 3 months 6 less than 3 months 3 Demand deposits: up to Rp 50 million 3 more than Rp 50 million 4.5 Call money 5 - 6.5 Tabanas (National Development Savings Scheme) For the first Rp. 200,000 deposited 18 On balance exceeding Rp. 200,000 9 Certificates of deposit 1 month 7.8 - 9.5 3 months 9.0 - 10.5 6 months 10.8 - 12.0 9 months 11.4 12 months 12.0 - 13.0 AEP Projects Department January 31, 1977 ANNEX -p-p ndix 2 INDONESIA BANK PEMEANGUNAN INDONESIA 'APINDOI)'a Interest Rates and Other CharRes as of January 31, 1977 (rates in percent p.a.) Interest on Loans: Rate Domestic currency loans Investment loans Industrial 12 - le' Maritime 12 - Working capital loans Industrial 18 Maritime 18 Raw cotton loans 18 Small industry loans through RDBs 2/ Fixed investment 12-= Working capital 152/ Project Aid loans 12 Foreign currency loans IDA Credit No. 310-IND 12 - 152 IDA Credit No. 318-IND (Maritime loans) 9.25 IBRD Loan No. 1054-IND 12 - Project Aid 12 Commitment Charges (on long & medium term loans): Loans up to Rp. 75 million 3/4 Loans of between Rp. 75 - Rp. 200 million 1/2 Loans above Rp. 200 million 1/4 Penalty Charges: On investment loans 18 On working capital loans 9 1/ The lower rate applies to loans below Rp. 100 millicn. 2/ Rate to sub-borrowers. AEP Projects Department Januarv 31, 1977 ANNEX 2 Page 1 INDONESIA BANK PEMBANGUNAN INDONESIA Institutional Aspects of BAPINDO A. Organization, Management and Staff 1. The Act - In 1974, the Bank, the Government and Bapindo reached an understanding that the BAPINDO Act should be amended to reflect two key requirements: (a) an increase in the authorized capital from Rp 60 million to Rp 50 billion; and (b) the delegation of the authority of the Minister of Finance and the Governor of Bank Indonesia, within BAPINDO's Super- visory Board, to qualified representatives who could devote more time to overseeing BAPINDO's operations. Both provisions were implemented, in February 1975, by Gbvernment regulations. A third undertaking by Government, namely that to explore the possibility of appointing three additional members (representing the public) to the Supervisory Board with a view to enlarging the Board's representativeness and enhancing its effectiveness, is still under consideration by the Government. This matter, however, is not pressing at this time, in view of the fact that the Supervisory Board, as presently constituted, is functioning satisfactorily ( para 2 below). 2. Supervisory Board - The BAPINDO Act designates the Minister of Finance and the Governor of Bank Indonesia as the two members of the Supervisory Board. Their preoccupation with state business, in the past, has prevented them from effectively supervising and guiding BAPINDO's operations. The Bank therefore suggested, and the Government agreed, that the abovementioned officials delegate their authority within the Supervisory Board to qualified alternates who would have more time to oversee BAPINDO's business. These alternates, appointed in February 1975, are Dr. Julianto Moeliodihardjo, Director General, Ministry of Finance, and Mr. Soeksmono Martokoesomo, Managing Director, Bank Indonesia. Following their appointment, the Supervisory Board, which now meets usually once a month, has been providing BAPINDO with active guidance and effective supervision. 3. Board of Managing Directors - With one exception, there has been no change in the composition of the Board of Managing Directors since the last Bank appraisal. Mr. Samadikun, who for the past 5 years was head of the Maritime Credit Department, was recently appointed to the Board of another State Bank. The decision on his successor has not yet been announced, Except for one Board member promoted from within, Dr. Priasmoro, all other members including the President, Mr. Kuntoadji, were new to development banking when they were appointed. Since then, they have gained considerable experience and correspondingly reduced their reliance on the expatriate advisors. Mr. Kuntoadji continues to provide BAPINDO with capable leadership. In December 1975, upon expiration of his initial term, he was reappointed for another five-year term. ANNEX 2 Page 2 4. Advisors - Of the four development banking expatriate advisors who joined BAPINDO in 1971 and early 1972, only Mr. Ronald Elms remains. Upon expiration of his term in mid-1976, BAPINDO requested and obtained a one-year extension of his contract. The three others had left between May and December 1974, upon expiration of their contracts. The develop- ment banking advisors collectively have significantly contributed to BAPINDO's institutional progress and staff training. The term of the two shipping advisors, who joined BAPINDO in late 1972, expired in October 1976. In view of its continued need for technical assistance in the shipping field, BAPINDO has requested and obtained a one-year extension of their contracts. During negotiations of the proposed loan BAPINDO requested and the Bank agreed that a small portion of the loan (US$240,000) be set aside for BAPINDO to employ outside experts to provide it with general development banking, economic and market analysis expertise. 5. Staff - BAPINDO, which faced a problem of surplus staff until the early 1970's, reduced the size of its staff by 40% during 1972-1973. Following this reduction, which occurred mainly at the junior and clerical levels, the staff has remained fairly stable and as of June 30, 1976 totalled 794, of whom about 48% are classified as professionals. Prima facie, the size of BAPINDO's existing staff is still too large in relation to the volume of business transacted. The amount-of loan approvals for each professional staff member for BAPINDO was about $0.3 million in 1975, among the lower of the 11 DFC's in East Asia for which comparative data are available. The number of loan approvals for each professional staff member, about 0.3 to 1 for BAPINDO in 1975, was the lowest among the same group of DFCs. The large size of BAPINDO's staff is also reflected in an unusually high ratio (3.8% in 1976) of administrative expenses (para 5 of Annex 6) in relation to total assets. There is also staff misallocation, reflected in staff shortages in some critical operational units, particularly the appraisal and supervision staff (para 10 below), on the one hand, and surplus staff in other units, especially some branch offices (para 8 below), on the other hand. The organization also appears somewhat top-heavy as there are 33 directors and deputies, for 32 division heads. 6. There has been a considerable improvement in staff quality, owing to the above-mentioned staff reduction (which cut into the dead wood), the resumption of term lending activity in early 1972 and training, both on-the- job by the expatriate advisors, and through more formal training programs in house and abroad. While BAPINDO offers its staff a large variety of training courses in banking operations, communications and management development (in 1976 there were altogether 60 courses or seminars attended by 323 employees from the level of junior officers to managing directors), these courses do not seem to be systematically coordinated and BAPINDO does not appear to have formulated a comprehensive training and career development program. Although BAPINDO has a nucleus of competent and dedicated staff at every level of the organization, staff training should continue to receive top priority from BAPINDO's management as the quality of staff at present is still uneven. ANNEX 2 Page 3 7. Cirganization Structure - BAPINDO's organization is shown in Appendix 2. There are 16 departments at the head office. These have been grouped according to broad functions, with each group (except for the Secretariat and Audit Inspection Department) reporting to one of the four managing directors. There have been no changes in the organizational structure since the first Bank loan apart from the transfer of the super- vision function for problem loans from the Project Promotion Department to the Credit and Follow-up Department. Appraisals of industrial loans are handled by the Credit and Follow-up Department (after screening and preliminary appraisal by the branch offices) with the assistance of the Engineering and Legal Departments. The appraisal teams are also involved in supervision work as they follow the projects through completion of construction before handing over the loans to the Follow-up Division. Maritime loans are handled by the Maritime Department which also does its own follow-up work. Supervision work involves several departments including branch offices (for loan administration), the Follow-up Depart- ment (for periodic review and nursing of problem clients), Engineering and Credit Department (for preparation of rehabilitation plans), Legal Department (for documentation) and Collection Department (for loans that have been written off). In order to further enhance BAPINDO's overall institutional efficiency, BAPINDO's management has commissioned a well- known firm of management consultants, Bancom Corporation of the Philip- pines to carry out a comprehensive organizational study. The consultant's work is still under way. 8. Branch Offices - In 1972, as part of the agreed reorganization program (para 3.03), BAPINDO reduced the scope of its branch network, which numbered 20 branches at the time, by closing two of them and down- grading eight others to the status of representative offices. The present network comprises ten branches and eight representative offices. While the geographic configuration of Indonesia in itself justifies a relatively large branch network, BAPINDO's present set-up warrants further review as staff size in some branches does not seem to relate to the actual volume of work (for instance one branch with 20 employees had 5 industrial clients under supervision while another branch with 25 clients under its jurisdiction had to operate with a total of 24 employees). In addition, there is unclear demarcation of functions and unnecessary duplication of work between head- quarters and the branch offices particularly in project appraisal and follow-up, which often leads to delays in loan processing (para 10 below) and difficulties in communications between branches and head offices. B. Policies and Procedures 9. Policy Statement - In November 1975, BAPINDO's Supervisory Board, with the concurrence of the Bank, approved an amendment to its Policy State- ment (Appendix 1) replacing the previous provision limiting BAPINDO's total debt/equity ratio to 3:1, with a less restrictive provision which limits ANNEX 2 Page 4 its long-term debt/equity ratio to 3:1. This amendment is in line with the present contractual debt limitation under the latest Bank loan agree- ment. Both the long-term debt/equity ratio and the total debt/equity ratio at present are well below the 3:1 limit (para 2 of Annex 6). 10. Appraisal - At present, the bulk of the appraisal work at head office is done by twelve appraisal teams totaling 29 officers and 19 assist- ants who in addition undertake also a share of projects supervision work (para 7 above). This number is extraordinarily small in relation to total professional staff (386) for a term lending institution and is partly responsible for the slowness of appraisal work, since too many appraisals have to be handled by one team. As to the quality of appraisal, substantial improvements in the standards of BAPINDO's appraisal since 1972 notwithstand- ing, there is room for further improvement in many areas, especially in the economic and marketing evaluation of projects. Moreover, inaccurate assump- tions on construction schedules and financing plans have often resulted in under-capitalization and insufficient working capital for projects, which is one of the reasons for the high level of arrears (see para 7 of Annex 6). The quality of appraisal reports is uneven, which indicates the need for more effective quality control at the senior level. A major weakness in BAPINDO's appraisal work is its slowness. A sample examination indicates that an average of 360 days (140 at the branch offices and 220 at the head office) was required for loan processing from the time of loan application to approval (i.e. exclusive of time spent on implementation steps such as preparation of loan documentation, etc.). Even allowing for reasons beyond BAPINDO's control (e.g. poor project formulation by clients, lack of adequate statistical data, complexity of investment laws and regulations in Indonesia), this is excessive. BAPINDO's management realizes this problem and, as a start, has recently introduced some mechanical appraisal techniques (computerized forecast models), Other actions likely to speed up the appraisal work include faster transfer of loan applications from the branches (which often lack the necessary skills) to the head office; better coordi- nation of work among the appraisal team members; transfer of the supervision function from the appraisal staff to the supervision staff at the time the loan has been approved, instead of after completion of construction as at present (para 7 above) which would enable the existing appraisal staff to devote more manpower to appraisal work; and finally the gradual improvement of appraisal capabilities, including the provision of better support services (research, economic and marketing data). 11. Follow-up - In view of the growing size of its portfolio and the high level of arrears (para 5.07), BAPINDO's management has recently endeavored to tighten up considerably its follow-up work. A separate unit (in the form of a division within the Credit Department) specifically for supervision was set up at the head office in 1974 and is headed by a staff member who underwent relevant training abroad (with PDCP in the Philippines). A Follow-up Manual has recently been put into application. ANNEX 2 Page 5 BAPINDO's management has also initiated a study on the causes of high arrears in the portfolio, which is expected to be completed early in 1977. Such a study, by shedding light on the underlying reasons for BAPINDO's unsatisfactory arrears situation and for the poor repayment performance of its clients, can provide a valuable basis for future improvements. As with its appraisal work, BAPINDO is short of follow- up staff at head office, which numbered 10 at the end of 1976. In view of the need for intensive supervision of many clients and the recent loss of well qualified personnel to the Branches, the need to further buildup and strengthen the quality of its follow-up staff whould remain of highest concern to BAPINDO's management. 12. Procurement and Disbursements - BAPINDO's procurement and disbursements procedures are satisfactory. No formal competitive bidding is required by BAPINDO, but the engineers in the appraisal teams closely review the adequacy of the proposed machinery as well as its estimated cost. Quotations from several suppliers are normally requested. Loan disbursements for imported items are made after checking appropriate documents, including suppliers' invoices and bills of lading. Loan disbursements for local expenditures are made on the basis of physical inspection and verification of documents supporting expenditures. There have been no major problems with disbursements under the existing World Bank Group loans. 13. Overall Operational Capabilities - Substantial improvements, in relation to the pre-1972 situation, are noticeable in most aspects of BAPINDO's internal operation, specifically in appraisal and follow-up work. A new internal control and accounting system, devised by SGV-Utomo and introduced in late 1974, has also improved BAPINDO's bookkeeping, accounting and internal flow of information. There is, however, scope for further, gradual improvement in the specific areas outlined in the preceding paragraphs. To that end, BAPINDO's management has commissioned a firm of outside consultants to carry out the organizational study referred to in para 7 above. Present shortcomings notwithstanding, BAPINDO has succeeded in building up its basic organizational strength, and most importantly, a nucleus of qualified and dedicated staff at every level of its organization. This should enable it to achieve significant institutional improvements in the years ahead. AEP Projects Department April 30, 1977 ANNEX 2 Appendix 1 Page 1 INDONESIA BANK PEMBANGUNAN INDONESIA Policy Statement -l The Board of Managing Directors of BAPINDO, with the approval of the Supervisory Board adopts the following policies and guidelines to be observed by BAPINDO in its operational activities. 1. Basic Policy BAPINDG is established as a development finance institution to provide, within the framework of the Government's general policy, financial and related assistance to enterprises in Indonesia which, by their activities, are expected to make a positive contribution to the economic development of Indonesia. In order to achieve this objective, BAPINDO will conform with the following guidelines: a) BAPINDO itself will build up a sound financial structure to enable it to carry on its activities and will acquire the necessary funds, mainly long- and medium-term, with which to provide the development assistance 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 expertise which will be required to carry out its duties efficiently. c) BAPINDO will give particular attention to the necessity of fostering a strong and healthy entrepreneurship and capital market in Indonesia. d) BAPINDO's assistance will take as wide a form as necessary for the fulfillment of its duties, consistent with BAPINDO's role as a development finance institution. e) In order to enhance its effectiveness as a develo- ment finance institution, BAPINDO will seek to establish firm and growing relationships with other financial and allied institutions, both domestic and foreign. 1/ As adopted by the Supervisory Board of BAPINDO on May 19, 1972. ANNEX 2 Appendix 1 Page 2 2. Field and Scope of Activities a) BAPINDO will assist in the promotion, establishment, rehabilitation, expansion and modernization of enterprises, especially in the fields of industry, tourism and transpurtation. b) The main emphasis in BAPINDO's cperations 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) BAPINDO will 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 enterprises 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 BAPINDO will select projects on as broad a geographical basis as possible. c) BAPINDO will maintain continuous contact with enterprises to which assistance has been given and will endeavor to provide any advice or guidance it feels necessary and take whatever action which may be required under particular circumstances. 4. Financial Guidelines BAPINDO's financial commitments will normally not exceed the following guidelines: a) BAPINDO's total outstanding long-term debts, including deposits and guarantees, will not exceed three times BAPINDO's net worth.1/ b) BAPINDO's participation in equities will not exceed, in total, BAPINDO's net worth. c) RAPINDO's equity participation in any single enterprise will not exceed 1C% of BAPINDO's net worth. d) BAPINDO's financial commitments (in whatever form) to any single enterprise will not exceed 20% of BAPINDO's net worth. 1/ As amended in February 1976. ANNEX 2 Appendix 1 Page 3 5. Relationship with Enterprise a) BAPIND) shall not have a controlling interest in an enterprise which would result in giving it primary/single responsibility for manage- ment of the enterprise. Therefore, it will not normally participate in more than 25% of the share capital of any single enterprise. b) To safeguard BAPINDO's interests and/or the interests of the economy, in case of jeopardy and notwithstanding 5 a) above, BAPINDO will take effective measures for providing adequate supervision and guidance for the enterprise. It may seek representation on the managing body of the enterprise concerned. c) It is recognized that as a result of its under- writing of share issues of enterprises BAPINDO may hold issued share capital of an enterprise in a ratio greater than that as mentioned in a) above. In such cases, BAPINDO will dispose of the excess portion of the share capital as soon as possible following the guidelines of 6 below. 6. Portfolio Management a) BAPINDO will conduct its operations in such a manner as to assist in the growth of a sound capital market in Indonesia. b) BAPINDO will endeavor to diversify the holding of securities in its portfolio, and to revolve the contents of its portfolio whenever possible on satisfactory terms. c) In revolving its portfolio, BAPINDO will pay due regard not only to its own interests, but also to market conditions, and to the interests of other holders of the securities and of the enterprise concerned. 7. Risks and Profitability a) Although BAPINDO's decisions to give financial assistance will be based upon its judgement of the overall prospective profitability of the enterprise, BAPINDO will obtain and secure in accordance with sound business practice, adequate security for the financial assistance it provides. ANiiNEX 2 Appendix 1 Page 4 b) BAPINDO will not carry the foreign exchange risk attendant upon its borrowing and lending activities. The risk will be passed on to its clients or covered by other suitable means. c) In order to finance its activities BAPINDO will endeavor to acquire sufficient funds of a stable nature, on as reasonable terms as possible, to be able to give financial assistance to its clients on 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 satisfactory return, after meeting all expenses, including the necessary provisions. This should also allow BAPINDO to build and maintan reserves consistent with sound financial practice and adequate legal reserves for strengthening its equity. 8. Organization and Staff BAPINDO will rapidly build an effective organization and 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 enable it to assist its clients in the formulation and implementation of their projects. 9. Revision of Policies This Policy Statement will be amended when necessary to secure BAPINDO's successful operations, and to give flexibility in its activities. 10. Transitional Policies The reduction in BAPINDO's commercial banking will be carried out gradually with as little disruption as possible to either BAPINDO or its clients. AEP Projects Department January 31. 1977 BANK PEMBANGUNAN INDONESIA ORGANIZATION CHART (As of December 31, 1976) SUPERVISORY BOARD 1, Minster of Finance Governor of Bank Indonesi- I MANAGING BOARD I PRESIDENT I, Kun-tadli MANAGING DIRECTOR I MANAGING DIRECTOR II MANAGING DIRECTOR 11l MANAGING DIRECTOR IV ADVISRS. Priasm-ro | | Sardlon- Hen-robudWyanm| Samadikun Hardlodars-no 3/ | R.H El D.M Andr- SECRETARIATL INESMET _ CREDIT & FOLLOW UP | MARITIME CREDrT Insacant ?/ l L A. Kahonomi.7 Vacant 2/ l7 Nazafrar AUDIT ; ; INSPECTIONNS l PROJECT PROMOTION | _ LEGAL & COLLATERAL J Roodoojwj ~Soloenrao Tanonrrdiaia BHt9hal | Huaia -| GENERAL SERfVICES | -| ACCOUNTING ENGINEeRinG Divitine Heady 2B 4 32~~~~~~~~-.wL~, ~Tjk .ty- TOTAL PROFESSIONAL STAF 27 C L COLLECTION Non~~~~~~~~~ Profepaend Stf 20 204IN 454Sjuon T BRANCH SUPERVISION S 10 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~~~~~~~~~~~~~~~~~~oi BRANCHESgI B~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ B REPRESETIV Head Off-c 13,.-hea/R,pre-etat-v Tot.1 OFFICE Senior Exe-t-vs 5 5 Adv,se- 3 3 D.p rt...t Heads & Deput-e 30 3 33 D,--io Heads 28 4 32 Branch Managers & Dep.ti=s _ 16 16 Officers 211 86 296 TOTAL PROFESSIONAL STAFF 277 108 385 No- P,ofe,,-.1a Staff 205 204 404 TOTAL OPERATIONAL STAFF 482 312 794 I/ The -eb-r of the S.per-.sry Hoad h-a, delegated the,r ..th-rty to the,r rep-ct-v lte-aces Dr. Jul-at. M..I,.d,h.,di, D,-et-r Gtnera, M-wisry of F--nc for Mli-te, of F--nc and Mr S-ekso--n Mart.koe--m, M-ngig D-mr,co Bank Indonesia for Governor Bank Inc-ns. 2/ WaS filled from tithin Bapm~do durm,g fi,,t quater of 1977 Wov ak9q4R . 3/ H., left Bapindo during MDrh, 1977 andi has .t yet been replaced. t ANNEX 3 Page 1 INDONESIA BANK PEMBANGUNAN INDONESIA Characteristics of BAPINDO's Operations 1. Overall Operations-- After being allowed by the Government to resume term financing in 1972, BAPINDO expanded its operations rapidly, with approvals of term loans (for both the industrial and shipping sectors) increasing by 52% to Rp 25.8 billion in 1974 (from Rp 17.0 billion in 1973) and by another 64% to Rp 42.4 billion in 1975. Approvals for 1976 grew somewhat less (by 17% to Rp 49.4 billion), mainly because of a drop in maritime loan approvals. Since 1972, BAPINDO's shipping financing has increased proportion- ately more rapidly than its industrial financing. BAPINDO began to expand its equity investment activity in 1974, although its equity investments at present (Rp 1.8 billion outstanding in 9 companies)are still small in relation to its total loan portfolio. BAPINDO's financing of small business through the regional development banks (RDBs) has also increased considerably in the past few years. On the other hand, short-term financing of raw cotton imports declined sharply in 1974 and stopped in 1975 (when no new approvals were made) in keeping with a previous understanding (in 1972) between the Bank and the Government that BAPINDO would gradually reduce its commercial banking activities and concentrate on its primary function, namely development financing. The main features of BAPINDO's recent financing are analyzed in the following paragraphs. A summary of operations for 1972 - 1976 is shown in Appendix 2. 2. Industrial Loans - Appendix 3 gives the characteristics of BAPINDO's industrial loans for the years 1973 - 1976. Approvals of industrial loans in 1975 totalled Rp 27.7 billion for 80 projects, an increase (by amount) of 17% over 1974. In 1976, BAPINDO approved 87 industrial loans of Rp 40.5 billion, an increase of 46%. There has been a noticeable improvement in the sectoral diversification of BAPINDO's industrial financing, with the share of lending to textiles (the traditional sector) declining from 55% of total industrial lending in 1973 to 29% in 1974, 13% in 1975 and further to 11% during the first half of 1976. As a result, the inter-industry distribution of BAPINDO's industrial loan portfolio is now satisfactory, with textiles accounting for 24% of the total; metal works 19%; cement, ceramics and glass 16%; pulp, paper and printing 16%; chemicals 9%; with the balance of 21% going to miscellaneous industries (light industries, pharmaceuticals, hotels, rubber, etc.). As a matter of deliberate policy, BAPINDO has begun to set longer loan maturities (averaging 8.1 years for investment loans in 1975, versus 6.4 years in 1974), which is a welcome development given that its previous practice until 1973 (imposed by Bank Indonesia) of limiting loan maturities to a maximum of 5 years was partly responsible for the high rate of arrears in its portfolio. This five-year limit on maturities of loans by other state commercial banks, however, has caused BAPINDO some problems since the Govern- ment has recently decided that all investment loans, to be refinanced by Bank Indonesia under the INVESTASI scheme (see Annex 1, para 15), above Rp 300 million (US$725,000) have to be offered to other state banks for consortium financing. Since state banks are not allowed to grant maturities exceeding ANNEX 3 Page 2 five years, BAPINDO has to take the later maturities in such consortium financing operations. BAPINDO's financing remains heavily concentrated in the island of Java, which accounts for 85% of its cumulative industrial lending for 1972 - first half of 1976. This geographical concentration, however, is not out of line with Java's share (78%) of the country's industrial investment. 3. Number and Size of Projects Assisted. A notable feature of BAPINDO's recent industrial financing has been a sharp trend toward larger and fewer loans. While approvals of industrial loans increased from Rp 13.4 billion in 1973 to Rp 23.5 billion in 1974 and Rp 27.7 billion in 1975, the number of these loans declined steadily from 133 in 1973 to 85 in 1974 to 80 in 1975. The number of investment (i.e., equipment, as opposed to working capital) loans in particular declined from 73 in 1973 to 49 in 1974 to 37 in 1975, as the average size of these loans went up from Rp 140 million in 1973 to Rp 380 million in 1974 to Rp 618 million in 1975. This trend continued during 1976 when the average loan size for approved projects increased to Rp 825 million (US$2.0 million). The sharp rise in the average size of industrial loans is attributable mainly to BAPINDO's financing of Government-sponsored projects, which in 1975 accounted for 68% (by amount) of BAPINDO's commitments (Rp 16.8 billion out of Rp 24.7 billion) but only for 17% (12 out of 70) by number. It is entirely justified for BAPINDO to finance large industrial projects undertaken by either the public or private sector (if these projects are otherwise sound), especially since BAPINDO alone among the six state banks has the responsibility for providing term finance to the industrial sector and is best able to appraise projects for long-term financing. On the other hand, BAPINDO, which is intended to be the predominant industrial financing institution in the country, should also emphasize its assistance to medium-sized, private sector industrial projects, particularly since neither PDFCI nor IDFC at present has adequate financial or staff resources significantly to assist this category of industry. The above-mentioned figures and ratios suggest clearly that BAPINDO's financing since 1973 has been increasingly skewed toward large projects undertaken by state enterprises. 4. Maritime Lending - Appendix 4 gives the characteristics of BAPINDO's maritime loans for the years 1973 - first half of 1976. After BAPINDO was designated by the Government to handle credits for the shipping sector, its maritime operations quickly gained momentum. A Maritime Credit Department was set up in 1972, operating under one of the four managing directors. BAPINDO's maritime loans fall into two main categories: (a) those for financing the rehabilitation of the existing inter-island Regular Liner Service (RLS) out of IDA Credit No. 318-IND (US$7 million)l/ and (b) those for other shipping and related activities such as dockyards, lighterage, ocean-going vessels, etc. which are financed by funds obtained by BAPINDO from other sources. From a very low base (Rp 64 million) in 1972, commitments for maritime loans increased to Rp 2.2 billion in 1973, Rp 3.4 billion in 1974, Rp 10.1 billion in 1975 and Rp 11.0 billion in 1976. As of December 31, 1976, BAPINDO's outstanding maritime portfolio stood at Rp 18.4 billion, (equivalent to about 38% of its 1/ Not inclusive of a US$1.5 million amount for technical assistance. ANNEX 3 Page 3 outstanding industrial portfolio). As of December 31, 1976, the uncommitted balance of IDA Credit No. 318-IND was about US$1.3 million. BAPINDO envisages financing RLS projects when the above-mentioned IDA Credit has been fully committed, with its other foreign currency resources, including the DFC-type lines of credits obtained from the Bank. However, the demand for BAPINDO's financing of RLS projects is likely to be limited in future in view of the recent creation by the Government of a specialized institution to finance this activity, P.T. PANN, in which BAPINDO holds a 40% share ownership and to which BAPINDO currently is providing consultancy services. (In May 1976, the Bank approved a US$54 million loan for financing RLS projects through P.T. PANN). Raw Cotton Financing 5. In 1972, the Government and BAPINDO agreed with the Bank that BAPINDO's raw cotton lending would be phased out, and that BAPINDO would concentrate on its primary business, namely term financing. In keeping with this undertaking, the Government decided in mid-1973 to divide the raw cotton business between the Bank Ekspor-Impor and BAPINDO on a 50-50 basis, and reflecting this decision, approvals of raw cotton loans by BAPINDO in 1974 declined considerably to Rp 16.4 billion from Rp 38.5 billion in 1973. In 1975, the raw cotton business was entirely transferred to Bank Ekspor-Impor with BAPINDO, however, retaining its outstanding portfolio. Outstanding portfolio of raw cotton loans declined from Rp 43.3 billion as of year-end 1974 to Rp 25.0 billion as of December 31, 1976. BAPINDO's raw cotton portfolio is expected to be liquidated by 1978. Equity Financing 6. Except for a small investment (Rp 25 million) approved in 1972, BAPINDO's equity investment operations started in mid-1974. Appendix 5 summarizes BAPINDO's equity financing as of December 31, 1976. As of that date, BAPINDO had committed a total of Rp 1,783 million in nine companies. Of this amount, P.T. PANN, the Government-owned shipping company accounts for Rp 800 million or about one-half. BAPINDO's equity investments in six privately owned companies (all unlisted on the stock exchange) were made in combination with term loans, because the equity base of these companies was too small to enable BAPINDO to give them larger loans. In four of the nine companies, BAPINDO's shareholding ranges from 40% to 81% of their respective share capital, as against a stipulation in its policy statement that "BAPINDO will normally participate in not more than 25% of the share capital of any single enterprise." As long as this 25% limit (which reflects normal financial prudence) remains on its policy statement, BAPINDO should exceed it, if at all, only for a few exceptional cases and after due deliberation. Alternatively, BAPINDO may consider reviewing the appropriate- ness of the existing policy statement limitation if it has grounds for believing that it is unduly restrictive. (An amendment to the policy statement requires the Bank's consent by virtue of the loan agreement). ANNEX 3 Page 4 7. In late 1975, Bank Indonesia set up a Participation Fund, whose business is to make share investments in foreign joint ventures. BAPINDO was appointed to manage the Fund (which is wholly-owned by Bank Indonesia), without financial liability, and with an annual management fee of 0.5% of the amount of the year-end outstanding portfolio. To date, no transaction has occurred, and it is difficult to assess the operational/financial prospects of the Fund. Co-Financing of Small Business with RDBs 8. BAPINDO introduced this scheme in 1973. Under the present arrange- ments, a participating RDB, "approved" by BAPINDO following an appraisal, is given a line of credit by BAPINDO to finance small business projects (industry, agriculture, trade and services are activities eligible for financing). Bank. Indonesia in turn refinances the loans made by BAPINDO/RDBs under the recently set up KIK program 1/ (for fixed investment) in the following proportions: 80% by Bank Indonesia, 10% by BAPINDO and 10% by the RDB; and under the KMKP 1/ (for working capital) as follows: 70% by Bank Indonesia, 20% by BAPINDO and 10% by the RDB. A limit of Rp 5 million (US$12,000 equivalent) is set on individual loans. Interest rates applied by RDBs to sub-loans are 12% for investment (fixed assets) loans and 15% for working capital loans, with BAPINDO charging the RDBs 6% and 10%, and Bank Indonesia charging BAPINDO 4% and 8% respectively. The full financial risk on loans is insured by ASKRINDO, the state-owned credit insurance institution, which charges a one-time fee of 3% borne evenly by Bank Indonesia and BAPINDO. Apart from channelling funds to the RDBs, BAPINDO also provides them with technical assistance, including staff training. 9. Since its introduction, the program has expanded rapidly. As of December 31, 1976, it involved 14 RDBs (out of a total of 26 operating in the country). Cumulative loans approved by BAPINDO for small entrepreneurs amounted to Rp 8.8 billion for over 3,600 projects, or an average loan size of Rp 2.4 million (US$5,000 equivalent). The regional distribution of financing is broadening as the number of participating RDBs increases (Appendix 6). As indicated in its operational projections, BAPINDO expects its small business co-financing to continue expanding rapidly over the next few years and ultimately to involve most of the existing RDBs. BAPINDO also envisages broadening somewhat the scope of its co-financing by extending it to selected projects requiring loans from RDBs in excess of the present Rp 5 million limit. 10. BAPINDO's co-financing with RDBs serves a useful economic purpose, and represents an innovative contribution by BAPINDO to the small business sector in Indonesia. BAPINDO's management intends to further enhance this contribution through a systematic effort by BAPINDO to help upgrade the operational capability of the participating RDBs (especially regarding project appraisal and follow-up work) and to monitor the performance of projects financed. 1/ See para 16 of Annex 1. AEP Projects Department April 30, 1977 ANNEX 3 INDONESIA Appendix 1 BANK PEMBANGUNAN INDONESIA Summary of Operatio. 1972-1976 (Rp. n millton) 1972 1973 1974 1975 1976 No. 1/ AWo_un t No. I/ Atnount Nlo. 1/ AE!ountI NO. 1/ Amount No / Aont APPROVALS 2! rerm loaois 46 2,931 175 17,015 102 25,853 110 42,358 108 49,389 Co-financing with RDBs - - - 22 3/ n.a. 768 n.a. 2,185 n.a. 3,083 Raw cotton loans 104 14,360 111 38,538 39 16,407 - - 4 Equity investments 1 25 - - 5 1,243 3 286 3 240 Total approvals 17,316 55,575 44,271 44,829 5 COMMITMENTS Term loans 56 3,038 145 12,110 105 25,549 110 34,790 89 32,413 Co-financing with RDBs - - n.a. 22 n.a. 768 n,a. 2,185 n.a. 3,083 Raw cotton loans 104 14,360 111 38,538 39 16,407 - - 4/ - - 4/ Equity investments 1 25 - - 5 1,243 3 286 3 240 Total commitments 17,423 50,670 43.967 37.261 ,736 oISBURSEMENTS Term loans - 2,144 _ 6,187 - 12,690 - 25,463 n.a. 25,966 Co-financing with RDBs - - - 22 - 707 - 2,231 n.a. 3,101 Raw cotton loans - 14,806 - 17,403 - 37,879 - - - Equity investments - - - - 825 - 696 n.a. 262 Total disbursements 23,612 52.101 28,390 29329 REPAYMENTS5- Term loans - 958 - 2,233 - 2,962 - 3,837 n.a. 5,865 Co-financing with RDBs - - - - - 31 - 361 n.a. 1,087 Raw cotton loans - - 19,693 - 9.779 _ 14,643 n.a. 3,652 Total repayments 15,501 21,.926 12,772 18,841 6/ OVTSTANDING 2i Term loans 522 15,345 454 19,300 435 29,028 312 46,351 301 66,482 Co-financing with RDBs - - n.a. 22 n.a. 698 n.a. 2,568 n.a. 4,582 Raw cotton loans 116 17,493 50 15,205 86 43,305 36 28,662 30 25,010 Equiity investments - - - - 2 825 7 7/ 1,521 9 7/ 1,783 6/ Total outstanding 32.83 34,527 73,856 79,102 97,857 1/ Number of loans/equity transactions. 2/ Industrial as well as maritime loans. 3/ Small business co-financing with RDBs was started in 1973. 4/ No new raw cotton loan was approved/committed in 1975. 5/ Inclutding write offs, BAPINDO has not yet sold any of its equity investments. 6' At end of period ' Number of companies. AEP Projects Department April 30, 1977 ANNEX 3 B NDONEMIA ApedIA BAU ,DANGt3NAMII D NESIA Simnary of Term Loan Operations, 1972-1976 L2-1976 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~17 1972 ~~~~~~~1973 1974 1975 1976o No. of No. of No. of Nmof No. of Aoas ount loans Amount loans Amount lon ot Las Mun APPROVALS Industrial Loans I/ 25 2,026 73 10,207 49 18,618 37 22,856 41 33,837 investment Loans - 17 820 60 3,197 36 4.925 43 4.809 46 6.640 Sub-total 42 2,846 133 13.404 85 23.543 80 27,663 87 40.477 Maritime Loans 3/ 2 50 3 3,308 11 2,153 21 13,386 15 8,481 Investment Loans 2 , 6 157 1 307 6 431 Working Capital Loans 2 35 7 _g3 6 5 _9 21 6 41 Sub-total 4 ~~ ~ ~~~ ~~ ~~~ ~~~85 42 3,1 17 2.210 30 14.693 2 .1 Total Approvals 46 2931 1 17015 102 25.853 110 142635 143 COW4I¶IMNTS Industrial Loans 15 32 2,275 58 7,300 46 17,037 38 19,531 32 18,344 investment Loans 5~0 3 511 3 ,3 Working Capital Loans 20 699 54 2,4 3.5 5.06 4 53 3 ,3 Sub-total 52 2,974 112 9.944 81 22.143 81 24.662 65 21,375 investment Loans 2 50 26 1,864 19 3,289 19 8,806 6 10,607 Working Capital Loans 2 14 7 302 5 117 10 1-322 6 431 Sub- total 4 ~~~ ~~~~~ ~ ~~~64 33 26624 3.406 29 10.128 24 ~ 11.038 T.ital Caositments 56 3038 6 145 105 2549 110 34.790 89 32,433 .DISBURSD4ENTS Industrial Loans 1205 281 Investment Loans - 2,059 - 3,050 - 7,704 - 12,205 - 12,821 Working Capital Loans _ 1,806 _ 2,380 - 4321 3,918 Sub-total - 2,059 _ 4,856 - 10,084 - 16,526 - 16,739 Maritime Loans / 50 _ 1,234 - 2,280 - 7,795 8,669 investment Loans 35 97 _ 326 ._ 1,142 558 Working Capital Loans _______ sub-total _ 85 - 1331 2.606 - 8,937 25966 Sub-total - 2.144 6.187 12.690~~~~~~~~~~~=L= - 25,463 2,6 Total Disbursements _ __1__ 2 5,9- REPAYMENTS Industrial Loans 1/ Industrial Loans_ - 885 - 1,607 - 1,379 - 1,740 - 2,050 Working Capital Loans 73 _ 392 - 874 _ 997 - 1,631 Sub-total _ 958 _ 1,999 - 2.253 - 2.737 - 3,681 Maritime Loans 1/ Investment Loans - 200 490 791 1,852 Working Capital Loans _ 34 - 309 _ 302 Sub-total - - - 234 - 709 _ 1,100 2,154 Total Repayments 95 2.233 2,962 _ 3,837 _ 5,865 OUTSTANDING Industrial Loans I/ 175 11,450 177 12,893 182 19,218 141 26,746 131 37,517 Working Capital Loans 315 3,318 241 4,732 199 6,238 89 8,247 90 10,534 Sub-total 490 14.768 418 17.625 381 25.456 230 34,993 31! 2/ 48,051 Maritime Loans 1/11 505 29 1,53 46 3,329 65 10289 27 17,106 Investment Loans -I 11 1,32 Working Capital Loans 5 72 7 136 8 243 17 1,069 _ 1,35 Sub-total 16 577 36 1,675 54 3 572 82 11 358 272/ 18,431 Total Outstanding 522 15,345 454 19,300 435 2928 312 46,351 158 66,482 1/ For fixed assets financing. g Bapindo makes working capital loansto term loan clients only; number shownindicates number of clients, AEP Projects Department April 30, 1977 INDONESIA BANW P" PGUNANt INDONESIA Characteristics of lndustriai Loans Comeitted. 1973-Sune 30, 1976 (lp in million) Cumulative 1972- 1971 1974 1975 First Half 1976 June 30. 1976 No. % Amount 7. No. % Anount % No. *, Amount 'h No. % Amount % No. % Amount % Size (Rp in million) A. Investment Loans_ Up to 40 26 45 472 6 15 33 318 2 8 21 156 1 1 7 8 - 65 34 1.166 2 Over 40 -20 17 29 1,042 14 12 26 828 5 8 21 587 3 6 43 491 4 50 27 3,440 6 Over 120 -200 2 3 272 4 4 9 632 4 3 8 475 3 4 29 596 5 17 9 2.667 5 Over 200 -400 9 16 2,159 30 7 15 1,995 12 6 16 1J401 7 - - - - 28 15 6.435 11 Over 400 -800 1 2 789 11 1 2 592 3 5 12 2,019 10 - - - - 7 4 3.400 6 Over 800 - 2,000 3 5 2,566 35 4 9 5,748 34 5 14 4,709 24 1 7 784 6 13 7 13,807 23 Over 2,000 _ - - 3 6 6.924 40 -3 8 10,184 52 2 14 10,699 85 8 4 27.807 47 Total 58 100 7.300 100 46 100 17,037 100 38 100 19t53o 100 14 100 12,578 100 188 100 58,722 100 Average size of loans 125.9 370.4 514.0 898.4 312.4 B. Working Capital Loans Up to 40 31 57 538 20 12 34 235 5 11 26 231 5 5 36 87 6 74 44 1,280 9 Over 40- 120 17 30 1,073 41 11 32 629 12 19 44 1,357 26 4 29 ,, 305 22 55 33 3,526 23 Over 120 -200 5 11 708 27 3 9 428 8 3 7 474 9 3 21 425 30 14 8 2,035 14 Over 200 -400 1 2 325 12 5 14 1,264 25 7 16 1,524 30 2 14 580 42 16 10 4,041 27 Over 400 -800 - - - , 3 8 1,450 28 3 7 1,545 30 - - - - 6 4 2,995 20 Over 800 - 3 1.100 22 .- _ 1 1 1.100 -7 Total 54 100 2.644 100 3 100 5.106 100 43 100 5 131 100 14 loo 1,397 100 166 100 14,977 100 Average size - r loans 490 145.9 1 99.8 90.2 . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~9. Duration (Year. ' A. T- -f g nt Loans Under 2 3 5 103 1 - - - - 2 5 U268 2 - - - - 8 4 478 1 2 - 3.9 10 17 490 7 9.. 20 359 2 2 5 155 1 2 14 93 1 35 19 1.603 3 4 - 5.9 Z. 36 1,748 24 14 30 2,476 14 S 13 642 . # 43 761 6 55 29 6,194 11 6 - 7.9 9 16 528 8 10 22 4,053 24 7 19 982 5 - - - 28 15 5,995 10 8 - 9.9 lo 17 1,657 23 7 15 6,406 38 8 21 6,298 32 5 36 11,610 92 35 19 26,623 45 10 and over 5 9 2.720 37 6 13 3743 14 17 1.186 57 1 7 114 1 27 14 17,829 30 Total 58 100 7.300 100 46 100 17.037 00 38 100 19531 100 14 100 12.578 100I 188 100 58,722 100 Weighted averae - by number 6.0 6.4 - 6.6 6.5 - by inount 8.0 7.4 9.8 8.7 9.1 B. Working Ceoltal Loans lUnder 2 6 11 191 7 6 17 258 5 2 5 267 5 2 14 29 2 26 16 981 7 2 3.9 29 55 958 36 10 29 439 9 10 23 881 17 6 43 653 47 64 39. 3.046 20 4 - 5.9 6 11 354 14 8 23 1,367 27 10 23 1,211 24 4 29 385 28 29 17 3,665 25 6 -7.9 S 9 407 1S 4 11 752 14 33 2,044 40 - - - - 23 14 3.203 21 8- 9.9 4 7 524 20 5 14 t,190 ;. 4 9 298 6 1 7 100 7 14 8 2,112 14 10 and over 4 7 210 8 2 6 1.100 21 3 7 430 8 1 7 230 16 10 6 1.970 13 Total 54 100 2.644 1oo 35 100 5.106 100 43 100 5.131 100 14 100 1.397 100 166 100 14.977 100 Weightd average - by number 4.4 4.9 5.8 4.5 4.8 - by _ount 5.6 7.1 6.0 5.4 6.3 AEP Projects Departmen t Jna,31, 1977 1973 1974 1975 First Half 1976 Cumulative 1972-June 30, 1976 No. 2 __ut _ o 7 mount 7 O . 7. A t S No. 5 Amount % No. % Amount 1 Sectoral Distribution Manufacturing Pulp, paper and printing 4 4 46 1 2 2 117 1 5 6 4,687 19 5 18 6,881 49 17 5 11,763 16 Textiles 24 21 5,427 55 13 16 6,331 29 14 17 3,298 13 7 25 1,499 11 76 21 18,116 24 Metal works 3 3 239 2 21 26 10,644 48 13 16 2,755 11 1 3 50 - 41 12 13,805 19 Cement, ceramic and glass I 1 120 1 2 2 1,978 9 2 2 9,522 40 2 7 168 1 7 2 11,788 16 Chemicals 7 6 403 4 4 5 705 3 4 5 558 2 3 11 4,325 h 31 20 6 6,369 9 Pharmaceuticals 5 4 222 2 1 1 42 - 3 4 309 1 2 7 265 2 18 5 903 1 Rubber processing 12 11 696 7 6 8 363 2- 2 2 224 1 - - - - 21 6 1,287 2 Miscellaneous industries 38 34 1,483 15 16 20 1.151 5 30 38 3.039 12 3 11 436 3 101 .41 6,406 9 Total manufacturing 94 84 8,636 87 65 80 21,331 97 73- 90 24,392 9t 23 82 13,624 97 301 85 70,437 96 Land Transportation 1 1 7 - 11 14 586 2 3 4 76 - 4 14 266 2 21 6 1,439 2 Tourism 17 15 1.301 13 5 6 226 1 5 6 194 1 1 4 85 1 32 9 1,823 2 Total 112 100 9.944 100 81 100 22,143 100 81 100 24.662 W10 28 100 13,975 100 354 100 73,699 100 Geographical Distribution I North Sumatrs 9 8 447 5 9 11 2,335 11 7 9 667 3 1 4 114 1 30 9 3,617 5 South Sumatra 12 11 1,672 17 4 -* 5 119 1 - - - - 1 4 71 - 19 5 1,913 3 West Java 35 31 3,337 34 26 -'29 8,465 38 24 29 3,527 14 16 57 2,275 16 121 34 19,359 26 Central Java 21 19 3,280 33 11 14 2.697 12 12' 15 2,711 11 3 10 220 2 62 18 9,964 14 East Java 7 6 359 3 '22 27 8,046 36 20 24 13,364 54 7 25 11,295 81 60 17 33,281 45 Kslmantan 8 7 269 3 4 5 132 1 4 5 621 3 - - - - 18 5 1,039 1 Sulavesi and Maluku ,19 17 341 3 2 2 65 - 11 14 3,586 14 - - - - 37 10 4,037 5 Nusantara I 1 1 239 ' 3 4 284 1 3 4 186 1 - - 7 2 709 1 Total tl2. 100 81 100 22,143 100 81 100 24.662 100 28 100 13,975 100 354 100 73,699 100 Status of Borrowers -/ Private sector 91 90 6,451 65 69 91 16,635 75 58 83 7,890 32 25 89 2,925 21 285 88 35,753 49 Public sector 11 10 3.493 35 7 9 5,508 25 12 17 16.772 68 3 11 11.050 79 38 12 37,946 51 Total 102 100 9.944 100 76 100 l143 00 170 24 662 100 28 100 13.975 100 323 g 100 73,h99 100 I/ inveetment and working capital loans. 2/Number of clients. ASEP Projects Department January 31, 1977 10/401 LA LANA PIMANG.01NAI,INDINE.S I. Charactcri.Li-s ci M-itL-nI Lo1> C-rtitcd 1973-i.'~ _30.L9i'f 1973 1941975 Fir.L H.If 1976 Coaul.tiv- 1972-~JosO30. 19~76 la ,.. .ut 7. (o 1 9;:2~LA_ 10_~ A Iout I~ 0 Asoont ~ . AoO 0pto 40 8 31 229 12 3 15 57 5 4 21 92 1 1 10 13 .. 10 23 440 3 0-en 40 -120 17 65 1,248 67 8 40 60 19 6 32 462 5 3 30 140 434 44 2,454 14 o Io 200 - - - - 6 33 945 29 2 it 316 4 1 L0 100 4 0 12 1,396 8 Over 200 400 1 4 389 21- -- - - - -- 2 20 705 21 3 4 1,093 6 0vt9 00- g0oo- 3 15 1,683 51t 1. 600 7 2 20 1.306 40 6 a 3,599 21 0-T 800 2, - - - - 6 31- 73136 83 1. 1.0 1.018 31l 7 9 ,354 4 Total 1~~~~~6 100 1.86 *&QO 20 100 3.289 LO 19 10 8.806 10 10 10 3 200777 100 1.1 A-.o.e L.. of 1-~ 71. 14. 463.3 33.37 316 .9 0. 11-kns, CapitSl ?oA-. Up to 4O 4 57. 62 20 4 so 67 57 5 50 97 7 1 50 30 10 15 60 '270 133 .wr4. 120 3 43 241 80 1 20 30 43 3 30 223- 17 - - - - 7 28 516 23 ov.nl120 200 - - - - 1 10 200 15 - - - - 1 4 200 10 Otr 200-400 . - --- 50 260 90 1 4 260 13 a,s.r 400-8800 I 18 800 61 - - - 2 4 800 39 Total ~ ~ ~ ~ 10 0 30 5 300 3 17 001 1. _210 2 20 29,0 100 23 1. 2.046 200 Averag. esi. of loans .. 23.4 322145 81.8 A. an.tb.ot 3O.8 .0m U den 2,0 - - - - - - - 2.0- 3,9 33 50 886 48 a 40 584 18 13' 69 4,443 51 3 30 95 2 37 48 6,010 35 4.0O - 5.9 i3 50 978- 52 11 53 2,543 -77 6 31 4,361 48 5 50 1.662 44 '37 4, 49 9,394 54 6.0 -7.9 - ,,7 ,, - 162 5 -_ 21.,, .8 53 ___912___ Sot.1 2 10 IQ f 102 19 1I2 8.0 B1 100 Lo.O- 3.302 108' 772 170 316 .)0 .ight*d A"rape - by ,ob.n . 4.3 - 3.6 4. 4. .1 - by ~~st4.0 4.7 4.0 6.0 4.5 B. W.rkI.a Capitol 1Ai5s 0nd.r~ 2.0 6 86 228 73 2 40 22 19 3 3o 177 13 2 50 260 88 13.60 701- 34 2.-. 1 1.4 i5 15 5 60 95 at 41 40 .1.120 80 - - - - 8 32 1,290 63 4.0 '-59 - - - - - - - - 1 1 25 2 1 50 30 10 2 8 53 3 6.0-7.8. -. - ... . Total 72 100 -P-j3 . 5 .10 11 100 10 100D 1.322 100 2 300 390 300 25 300 2.j.6 300 Veigbtad averag. by iusbbr 1.3 .2.2 , 2.2 3.5 2.68 -by fsa.nt 1.5 .2.6 5.8 2.3 2.7 Status 01 Oorrossrs Nftvato OC 13 39 - 986 42 16 64 2,013 59 22 76 7,147 70 12 100 5,597 100 66 65 13,729 71 1\.bli 26to 61 1.261 5o 9 36 la'1 41 7 2L4 2.9681 30 - - - - 36 35 1.635 39 Torol 55~~~~~~~~~~~L 100 2.167 le9 25 '108 1.0 10 29) Io 100 2 100 1.2 .100 3.S99 100 .102 100 19L362 2.0 R.g.l.r Liner S-ri.. (63LS) 1 12 56 1,035 48 9 36 1,145 36 7 24 503 1 5 u2 1,0Q98 31 36 35 3.839 20P .f hlk6 70E.81 I/ (11) (335 (71) (33) (4) (17) (283) (6) (-I (- ) (-) (-3 (-1 (-5 (-) (-5 (68) (172 (1,057) (51 No-RLS 21 64 1.136 52 16 64 2,263 66 22 76 9.625 95 7 58 2,499 69 66' 61 13,523 80 of ohwct VtL00 / (24) (526) (24) (3 (12) ..3.7z) Al) 4~7 I2..... J 1 .) ...S i (1)1 All) (904) ..j) Tnt.l 33 100o 2.167 100 25 402 3 406 100 29 100 10.128 100 12 100 3.597 10 102 100 19.362 0 of hi4~h 701.00 (ii95 (57) (1236) (37) (7) 8 '-I~') (19) (0 -7 -5 -) -) -) -) (2 (29) (28) (1,961) (00) 0 1/ 1flfltsot cad -oking capital Lo,-s. 2/ BAPINDO'. tiinsooin of 83. sector is eakiraly it, thse fo. of ieuo.Ment 1-as only. 3/ -ELMOr (P. T. P1yo N-sl-1s .nossa, LOt..-.d amyI th. largaSt shipping n09050y in IndonesIa. AEP P-oJ..to Sep.r-n 3--csy 31, 1577 INDONESIA BANK PEMBANGUNIN INDONESIA Equity Investment Portfolio as of December 31, 1976 (Rp. in million) Industry Year of Amount Amount disbursed Estimated BAPINDO's Operational Status of No. Name of the Company classification approval approved and outstanding book value 2J shareholding the Company 1. P.T. Bina Usaha Indonesia Consultants 1972 25 25 38 - Operating profitably 1976 25 25 38 12.5 2. P.T. Pengembangan Armada Niaga Nasional Indonesia (PANN) Maritime 1974 800 800 812 40.0 31 Operating profitably 3. P.T. Ravitex Textile 1974 285 285 - - Project initial operation 1975 200 200 485 80.7 4. P.T. Malowapati Animal feed 1974 47 47 - - Before commercial operation 1975 46 60 - - 1976 81 41 27.,3 5. P.T. Kebun Bunga Powder milk 1974 38 38 N.A. 6.2 Suffering losses 6. P.T. Delimatex Textile 1974 73 73 27 4i.2 First year of commerciat operation 7. P.T. Dainang Beverages 1975 40 40 N.A. 33,3 First 3ear of coammercial opera- t ion 8. P.T. Radjin steel Tubes 1976 65 65 117 25.0 Operating profitably 9. P. T. Bina Agro Swakarya Agro Industry 1976 150 150 N.A. 20.0 Project in initial operation Total 1,794 1,782 1/ None of the BAPINDO-invested companies is listed on the stock market. Estimated value of investment represents book value. 2/ The remaining share capital is subscribed by other state banks. 3/ The remaining 60% is subscribed the Government of Indonesia. AEP Projects Department April 30, 1977 ANNEX 3 IN4DONESIA Appendix 6 BANK PEMBANGUNAN INDONESIA Co-financing of Small Industry through Refional Development Banksl'/, 1973- 1e76 Cumulative 19732/ 1974 1975 1976 1973-1976 I. Operations Commitments 22 768 2,185 3,083 6,148 Disbursements 22 707 2,231 3,101 6,061 Repayments - 31 361 1,086 1,4783/ Outstanding (year-end) 22 698 2,568 4,583 4,583- II. Commitments by Purpose Small Investment Credit (KIK) 22 382 1,054 1,584 3,132 Permanent Working capital (KMKP) - 386 1,131 1,499 3,016 Total 22 768 2,185 3,083 6,148 lII. Regional Distribution of Commitments Aceb - - 8 62 70 North Sumatra - 94 298 784 1,177 West Sumatra - 125 216 444 875 Jakarta Raya - 3 205 340 508 West Java - 145 355 88 588 Central Java 15 195 390 569 1,170 Yogyakarta - - 1 38 39 East Java - - - 18 18 Bali 7 161 499 481 1,147 West Nusatenggara - 30 106 144 280 West Kalimantan - 15 76 86 177 South Kalimantan - - 31 52 82 South Sulawesi - - - 8 8 North Sulawesi - _ - 9 9 Total 22 768 2,185 3,083 6,148 t/ On the basis of Bapindo's share in financing. 2! Small business co-financing with RDB's was started in 1973 3/ Total credit ceiling for the 14 participating RDB's stood at Rp 8.8 billion as of December 30, 1976. AEP Projects Department April 30, 1977 ANNEX 4 Page 1 INDONESIA BANK PEMBANGUNAN INDONESIA BAPINDO'S Developmental Impact 1. Share of Investment. It is difficult to assess with precision BAPINDO's share in industrial investment in Tndonesia, because of the lack of reliable country data on this subject. Some available partial data in- dicate, however, that BAPINDO has become an important, though by no means preponderant, source of term finance for industry. Under the INVESTASI program, for instance, BAPINDO's share of total outstanding credits to the manufacturing sector has increased steadily from 18.1% at year-end 1973 to 22.0% in 1974 to 31.3% in 1975. The volume of BAPINDO's approvals for industrial term loans in 1975 (Rp 27.7 billion) was equivalent to about 15% of the amount of domestic industrial investment approved by the Investment Coordinating Board (ICB) during that year. BAPINDO's share in investment in the maritime sector is estimated to be substantially higher than its share in industrial investment. BAPINDO's disbursements for both industrial and maritime loans (for equipment and other fixed assets finan- cing) in 1975, Rp 20 billion, accounted for about 5.7% of the country's total industrial investment (including the maritime sector) estimated at around Rp 350 billion during that year. 2. Economic Benefits of Projects. It is even more difficult to assess the economic efficiency and/or benefits of BAPINDO- financed pro- jects, since (except for two projects in 1975) BAPINDO so far has not in- cluded the calculation of the economic rates of return in its appraisal work, and even partial economic indicators were not systematically given and analyzed in BAPINDO's appraisal reports. Data on the 28 "A" projects financed by BAPINDO with Bank funds (Appendix 1), however, indicate that these projects are estimated to generate a total investment of Rp 95.4 billion (including BAPINDO's financing of Rp 30.5 billion or 32.0% of the total cost of projects). These projects are, in general, highly capital intensive, with an average cost of fixed investment per worker of about US$77,000. However, excluding the seven very large Government projects, with a fixed investment cost of Rp 73.1 billion for an additional employ- ment of 658, the average cost per job would amount to US$14,600, reflecting the capital-intensiveness of industrial investments taking place in Indonesia in recent years. Most of BAPINDO's projects are oriented toward the domestic market. Of the 19 manufacturing projects covered in the above-mentioned sample (i.e. excluding 5 maritime projects and 4 hotels) 5 are export- oriented, with their annual gross exports estimated at Rp 3.6 billion (US$86 million) or 6% of the total incremental sales of these 19 projects. This also reflects the low degree of export-orientation of the Indonesian manufacturing sector at present. Ex-ante financial rates of return (FRRs) calculated by BAPINDO for 8 of the 28 projects range from 12% to 28%. Economic rates of return (ERRs), available for only 2 projects (pulp and paper) were estimated at 13% and 12%, compared with FRRs of 21% ANNEX 4 Page 2 and 20% respectively. Considering that many of the projects financed by BAPINDO are either based on domestic raw materials (glass, cement), cheap labor (printing, textiles) or basic demands (hotels, marine transportation), it appears that BAPINDO's investment decisions are leading to the establish- ment of economically worthwhile projects. 3. Promotional Work. Within the Government system, the promotion of industry is primarily the responsibility of the Investment Coordinating Board (ICB). ICB, however, being a regulatory agency, confines its pro- motional role generally to the granting of investment incentives to in- dustrial projects approved by it. BAPINDO, on the other hand, plays a rather passive role as financier. While recognizing that BAPINDO has been carrying out useful promotional work, particularly with respect to its support of RDBs, BAPINDO's management agreed, during discussions with the Bank, on the desirability of BAPINDO's getting involved much more actively in business identification and project promotion of medium sized projects. To that end, it would be appropriate for BAPINDO to reorient its Promotion Department which would, inter alia, identify business opportunities, promote new enterprises, seek out entrepreneurs, undertake feasibility studies for specific industrial activities, etc. The need for more active promotional work by BAPINDO is suggested, among other things, by the declining number of industrial projects (particularly those from the private sector) assisted by BAPINDO in the past three years (para 3 of Annex 3). 4. Future Development Strategy. As the major financial institution in the industrial sector in the country, BAPINDO is intended not just to be a channel for funds for industry, but to make an important developmental contribution to this sector. Having by and large succeeded in developing its basic organizational strength, it is now time for BAPINDO to broaden its economic role and enhance its developmental impact. To enable it to focus on its short-term developmental objectives as well as to mobilize efforts for implementing them, BAPINDO has formulated a statement of "Development Strategy" (reproduced in Appendix 2) outlining specific objectives and activities (apart from its normal lending activity) on which it intends to place special emphasis in the next two or three years, and the proposed means for fulfilling them. AEP Projects Department April 30, 1977 INDOONEIA PINiK 7!EtANGUNAtiN _MDESIA Ch.r..t.rif.toe of "A- Sub-protnot. Finapnd ande, lDA Cowdit No 310-INo and f3RD Loan No. 1054-fRI- up to JU e 30. 1976 Nftc of Sub-proq-t by Typt of2 Protect Cant BAPFNOO Fina-cnn Inc6ram.nt.l Additiono1 Additional Incr. Annual Balenne of Finaci1al rnduatnial COtpory Locatlon Pro t- Fixed Apeta W-orking Capita Total Fixed Aesefa WoAtin Capital Total Annua1 Sale. Value Added EmPlovment A-noal Payroll Croon APlot,t Pi vetr Effect Rat & Return _ (P--(Rp ,in Pillion)----------p in illion)----------- (Rp million) (Rp lli) (p llio-) (Rp nillion) (Rp million) Food and Beyetnies P T. Nrni Jak-rt. N 491 115 606 350 70 43O 2.088 435 59 17 2,088 2,056 na. P T. Mlan' Pati Sorabay. N 511 45 556 380 45 444 208 124 26 444 388 op. Sub-tot.l 1.002 160 1,162 115 645 2,532 643 183 43 253244 Te-tiler P.T. RaPit.a Palebang N 1,063 165 1,228 799 39 838 1,891 473 304 69 269 n.e P.T. Marga Sand.ng B-nduog P 357 155 512 234 155 Me9 1.197 198 18 3 - n.e.127 .b-to-ol ,420 3 1740 1,033 1 1,227 3,088 671 322 72 n . Ptip n_d Pap er Perut tertas Glow Ujung Pendang P 3,287 578 3,865 1,730 - 1,730 4,268 1,116 64 33 - n.e 21% Peru' Kt rtan BNa...ki RPahmnt B-njuwngi E 2.433 148 2.581 1.614 _ 1.614 2.115 864 32 ; 14 - n.e 207 A'S P.N, L-ce. SNrabsy. E 7.585 2.013 N 598 6 785 6.785 3 346 1,439 326 168 . n.. 177. sob-total 13,305 2,739 14Z 1 10,.i29 10i,729 3,419 422 213 n.e P.T. M.Ju Joyn Smerang E 143 20 1, 107 10 117 153 49 37 6 _ 92 n.a. Rubber Products ?.T. Tric.pl. Snr.b.y. E 61 62 123 46 62 108 141 48 - - 99 57 n P.T. United Kiigstoe Jakarta N 588 91 679 375 50 425 425 242 1164 92 ne sNb-total 647 153 802 43 112 533 36 , 290 116 4 1 99149 Ch-emi-1l. PT. Anok. G.a Surebaya R 6,023 589 6,612 3,915 350 4,265 2,346 680 - . - n.e 28% .1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i Non~-Metelic ~Mi-erai Prod-ct Clon. CV. Ge1l. Pritngan Cianj-r E 165 27 192 120 15 135 110 54 133 15 1386 n P.N. pla- SNurebaya E 3,201 260 3,461 2,G05 260 2,265 2,076 1,073 . - n.. n, Ceeent4 P,T. SNIee PFd.op padeng e 2,724 26d 2,992 2,312 1,322 1,378 A4 ; 34 9 - 604 n.e P?T. S..en Grecik Srab.y. P 47.852 3,98 51 850 2 490 2 490 31 500 19.079 200 199 n e 19% S.b-total 53, 4,113 3I49 5,936 31,C64 20,949345 n. Metal Prodopt, P.T. Akion StP l worke S.rabays N 353 374 727 265 280 545 3,140 374 110 36 _ 387 D. . P.. AlmtLco Surabays N 206 60 266 136 30 166 368 97 54 9 - 110 nte Stant Ten"% rimgnoriL N 1,033 180 1,213 670 125 795 917 447 112 40 - 193 151 P.T. Wotn.sari Jay, S.rebaya N 893 659 2.591 1200 465 1,665 2867 994 311 14 1026 n S.b-totai 3.31 1,273 42; rT w131 7,Y 1,3 2 B 2-28 Marine Transport MV Tolndo (PRliI) - R 191 _ 191 110 _ 110 1# *. ... n .. n.. MV TmPtl (PELNI) - R IB8 L 188 110 _ 110 167 cea n na. .6. n... n. MV To-ebato (PEIT) R 111 _ 111 110 110 164 n.a. n.e. .a. &. n.. a n.e. MV TcmAko (PEUt1) R P 71 - 71 66 66 173 pa. na. n.e. R.&. n..& n .. P.T. Andhik. Linen E 2.925 100 3.025 2.340 - 2 340 1.761 150~, 117 ,J ~651 27% Sob-total 37486 3 Z.66d n. n. . n n,e. Services m.l-i Hotel Jakarts E 505 21 526 340 - 340 152 72 87 12 61 61 C.v Mti-na J.gyekarta E 408 9 417 302 3 302 129 79 116 17 52 52 n.e. C'.v DOni siN Seri Sroboy N 220 18 238 94 13 107 185 150 64 21 - n Berkah Bint.og S-odern Smerang 9 775 is 790 Z- 513 J3164: 76 26 ne.n. II Sob-intoteisemor N 1.9708 33 l° 1,249 13 51.31 67' -TS ' Il ' y T33 n.e. n 4 Iotal 85,402 9.970 95,372 21,51% b,9S9' 30,467 83,888 30,05'21 2,68611 I,'tmiA 3,62l4' 6,1243 - I' P.ed o- data pro-idod in appenijal report. 2 N n w pro.jct; E; eapaontio of 0ninting project; R8 r.habilitatien Of f*leting project. 3. Tootl fer ell proj..t. for bhin, tha date re patlable. 0.0. not pvnilabl. AEf P-ojects Napartont J.Pewrv 72, 2977 ANNEX 4 INDONESIA Appendix 2 Page 1 BANK PEMBANGUNAN INDONESIA (BAPINDO) Statement of Development Strategy for 1977-1978 During the two-year period 1977-1978, BAPINDO will endeavor to broaden its economic role and to enhance its developmental impact, particularly in the specific areas outlined below. Lending Policy 1. BAPINDO will give due weight to the economic merits of projects in taking investment decisions. For that purpose, BAPINDO will: (a) make more systematic efforts at collecting and analyzing partial economic indicators of projects (e.g., employment generation, value added, degree of effective protection, foreign exchange earnings/savings, geographic dispersal, etc.) in appraisal reports; and (b) undertake the calculation of the economic rates of return for projects requiring BAPINDO's financing exceeding, say, US$1 million equivalent. 2. BAPINDO will seek to finance an increasing number of medium-sized (i.e., those requiring BAPINDO's financing not exceeding US$1 million equivalent), labor-incentive, investment projects undertaken by either the private or public sector. Project Promotion and Technical Assistance 3. BAPINDO will get involved actively in identifying new business opportunities, promoting projects, and seeking out and assisting new entrepreneurs. 4. For the purpose outlined in paragraph 3 above, the staff of the Project Promotion Department will be adequately strengthened. 5. BAPINDO intends to increase its technical assistance to clients, with a view particularly to improving the formulation and design of their projects and the organizational and managerial arrangements of their enterprises. For this purpose, the appraisal staff will be appropriately expanded. Industrial Studies and Policies 6. BAPINDO intends to undertake studies on selected industrial activities, including studies on wood, silica and cassava processing. 7. BAPINDO will endeavor to contribute to Government policies concerning industrial investment, through, among other things, close cooperation with the Investment Coordinating Board. 8. For the purpose outlined in paragraphs 6 and 7, the staff of the Research Department will be strengthened. In addition, outside consultants and experts will be used, as needed, to help BAPINDO's staff undertake industrial studies. ANNEX 4 Appendix 2 Page 2 Cooperation with Regional Development Banks (RDBs) 9. In continuing its on-going program of co-financing small enterprises with the RDBs, BAPINDO will put particular emphasis on assisting the RDBs in upgrading their operational capability (e.g., appraisal and follow-up) and on monitoring the performance of projects financed jointly by BAPINDO and the RDBs. AEP Projects Department April 30, 1977 ANNEX 5 Page 1 INDONESIA BANK PEMBANGUNAN INDUONSIA Program of Action PART A 1. BAPINDO will be relieved of the financial liability pertaining to Government projects financed or to be financed by it at the Government's behest. It will, however, continue to assume full financial liability for its invest- ments in those state enterprises which it finances on its own initiative on the basis of normal project evaluation and its usual lending criteria. The Govern- ment will determine on a case-by-case basis whether a given project falls into the former or latter category. The projects financed at the Government's behest are defined as those which the Ministry of Finance and BAPPENAS consider to be of national importance and instruct BAPINDO to finance even though if such projects do not meet the normal standards of BAPINDO. In its balance sheet, BAPINDO will segregate these projects from BAPINDO's own portfolio and will show them in a special account belonging to the Government and called "managed funds". For such "managed projects", BAPINDO will assume no financial liability and will receive a handling fee determined by the Government. 2. The Government will make financial arrangements to enable all state enterprises borrowing from BAPINDO to repay to BAPINDO their existing arrears of principal and interest of over three months as at t-h. date of the Loan Agreement of the proposed Bank Loan. 3. The Government will compensate BAPIND feor *ny losses on the out- standing raw cotton loans made to P.N. INSAN and PINDA SANDANG amounting to about Rp. 7.5 billion, including the principal and interest accrued. This amount will be paid to BAPINDO in two installments, the first Rp 3.0 billion prior to effectiveness of the proposed Loan, the balance by March 31, 1978. 4. The Government will formulate and communicate to the Bank a specific plan outlining steps for improving PUPN's operations with a view particularly to accelerating the collection and/or foreclosure of BAPINDO's delinquent accounts transferred to PUPN. One such step would be to require PUPN to take immediate action on BAPINDO's delinquent accounts transferred by BAPINDO to PUPN without waiting until the final maturity of these loans as has been the practice to date. 5. BAPI'NDO will undertake a vigorous campaign, based on a comprehensive program, to -deal with the continuing serious situation of arrears. This program will include, inter alia: (i) setting annual collection targets for each branch office or collection unit; (ii) monthly review by Board of Managing Directors with relevant staff of portfolio situation (e.g. evaluation of arrears; reschedulings; write-offs; steps taken or contemplated to deal with overdue accounts; collection performance in relation to targets; status of delinquent loans transferred to PUPN); (iii) monthly reporting by BAPINDO to the Board of Supervision on the portfolio situation as detailed above; and (iv) raising penalty rate on interest in arrears, on a selective basis, to the prevailing level of time deposit rates. 6. BAPINDO will submit to the Bank a satisfactory plan, if necessary to be prepared with the help of an outside consultant, to gradually reduce over the next few years its administrative costs in relation to total assets. This plan would include inter alia reducing staff surplus by attrition over the coming years and closing down some unnecessary branche offices. Part A of the Program of Action will be implemented prior to effectiveness of the proposed loan. ANNEX 5 Page 2 PART B. 1. BAPIXDO will entrust branch offices with greater responslbility for follow-up work and delegate more authority to managers in selected branch offices for making working capital loans up to a specified amount. 2. BAPINDO will undertake a study (to be completed prior to October 31, 1977) of the existing network of branch offices with a view to (i) closing down uneconomical and unnecessary branches; (ii) opening new branclhes where there is good potential for business development; and (iii) relating staff size to business volume in each branch office. 3. BAPINDO will expand the size of the appraisal and supervision staff by about one-third during 1977 (from the end-1976 level) and by another one-third during 1978, to the extent possible, by conversion of its existing support staff into appraisal and supervision staff 4. BAPINDO will strengthen the Project Promotion Department to become more effectively involved in project identification, development and promotion. 5. BAPINDO will strengthen the Research Department by the appoint- ment to the post of manager of an experienced economist, and the sub- sequent assembling of a small group of qualified economists within the Department, to enable it to undertake extensive economic and industrial studies. In the initial period, BAPINDO will commission outside consultants or experts, as needed, to help its staff undertake these studies. 6. BAPINDO will create a suitably staffed Market Analysis Unit withlin the Research Department in order to substantially improve this particular aspect of BAPINDO's appraisal work. 7. In order to speed up appraisal, BAPINDO will formulate and adopt (prior to June 30, 1977) an appropriate '"work flow chart" pre- cribing a time limit for each stage of loan processing, in order to complete the full processing cycle for an ordinary project within 150 days (from receipt of loan application to loan approval). 8. In order to strengthen its appraisal work, BAPINDO will adopt the following measures: (a) more systematic collection and analysis of partial economic indicators of projects (e.g. employment generation, value added, degree of protection, foreign exchange earnings/savings, geographical dispersal); (b) introduction of a mechanism for comparing the economic/ financial costs and benefits of projects in operational stage with estimates made during project appraisal; and (c) calculation of the economic rates of return for projects requiring BAPINDO's financing of $1 rmiillion or more. 9* It is the intention of the Government to provide BAPINDO with adequate resources to sustain its financing activities. The Government will explore for BAPINDO additional sources of foreign exchange other than IBRD, such as ADB, KfW, and bilateral sources. ANNEX 5 Page 3 10. In view of the high level of arrears, BAPINDO (with the Government's concurrence) will increase the total amount of provisions for doubtful accounts to at least 5% of total outstanding portfolio by the end of the 1977 fiscal year. 11. BAPINDO will seek to finance an increasing number of medium-sized investment projects (i.e. those requiring BAPINDO's financing not exceeding $1 million) undertaken by either the public or private sector. 12. BAPINDO will adopt a statement of "Development Strategy" out- lining some specific developumental objectives/activities (in addition to its normal lending activity) on which BAPINDO intends to place special emphasis, for the two years 1977-78. This shall include studies on selected industrial activities; increased technical assistance to clients (for which further development in staff capacity would be necessary); active project identification, development and promotion; increased assistance to medium-sized labor intensive industries; input into Govern- ment policies concerning industrial investments; and assistance to the regional development banks in upgrading their operational capability and monitoring the performance of projects financed jointly by BAPINDO and these banks. 13. The Government, BAPINDO and the Bank will consult with each other on specific measures for implementing the above Program of Action, and BAPINDO shall inform the Bank, on a quarterly basis, of progress, and problems encountered, toward implementing the said Program. AEP Projects Department April 30, l77 ANNEX 6 Page 1 INDONESIA BANK PEMBANGUNAN INDONESIA (BAPINDO) Financial Position, Operational Performance and Quality of Portfolio A. Financial Position 1. Summarized balance sheets for the period 1972 - 1976 are given in Appendix 1. As of December 31, 1976, BAPINDO's total assets amounted to Rp 124.9 billion (US$301.0 million). Over the fiye year period ending December 31, 1976, total assets increased 3.2 times. The term loan portfolio accounted for 60% of total assets, current assets for 38%, including 20% on account of short-term raw cotton loans (see para 11 below), and the equity investment portfolio for 2%. On the liability side, BAPINDO's capital structure has been considerably strengthened in the past three years through additional cash contributions by the Government to its paid-in share capital, of Rp 18.6 billion in 1974, Rp 4.5 billion in 1975 and Rp 10.3 billion during 1976. BAPINDO's equity now finances 36% of total assets, long-term debt 31% and current liabilities 33%. The latter include short-term Bank Indonesia loans for raw cotton financing. Of its total long-term debt of Rp 38.5 billion, 33% represented borrowings from IDA/IBRD, the remainder from the Government (2%), Bank Indonesia (48%) and other state banks (17%). 2. Apart from the continuing unsatisfactory condition of the portfolio (paras 7-12 below) and the low level of provisions (para 3 below), BAPINDO's financial condition is sound, with the long-term debt/equity ratio standing at 0.8:1 (as against a contractual limit of 3:1) as of December 31, 1976, the total debt/equity ratio 1.7:1, the current ratio at 1.3:1, a debt service coverage of 1.24 and the interest coverage ratio at 2.3 to 1. 3. Provisions - Between 1972 and 1976, BAPINDO made substantial provisions for doubtful accounts amounting to Rp 8.3 billion (US$20 million) or 10% of the term portfolio outstanding at December 31, 1976. However, write-offs during the same period were as high (Rp 8.3 billion). Thus at December 31, 1976, provisions for doubtful accounts, represented only 2.7% of the portfolio including equity investments, raw cotton loans and accrued interest. 1/ In view of the poor quality of BAPINDO's portfolio (see para 7-12 below) and the past pattern of write-offs, existing provisions for doubtful accounts are inadequate and should be further increased in relation to outstanding portfolio. BAPINDO's management, as agreed during negotiations, intends to increase these provisions to at least 5% of the outstanding portfolio by year-end 1977, existing resources and available income permitting. 1/ Excluding raw cotton loans and corresponding accrued interest, provisions stood at 3.7% of the portfolio. ANNEX 6 Page 2 B. Financial Performance 4. Appendix 2 presents BAPINDO's summarized income statements for the periods 1972 - 1976. BAPINDO's profitability has been very low, with net profits after taxes averaging only about 1.1% of average total assets and 2.7% of average net worth between 1972 and 1976. The sharp increase in gross income from Rp 4.3 billion in 1973 to Rp 6.9 billion in 1974 to Rp 9.2 billion in 1975 and Rp 9.7 billion in 1976, owing primarily to the expansion of the outstanding loan portfolio (including raw cotton loans), has not been followed by a concomitant rise in net income, which grew only moderately from Rp 608 million in 1973 to Rp 918 million in 1974 to decline again to Rp 723 million in 1975 and Rp 260 million in 19761/ The expanded gross income was absorbed largely by (a) administrative expenses which went up by 34% in 1974, 56% in 1975 and another 20% in 1976; (b) sizeable provisions for doubtful accounts of Rp 2.3 billion in 1974, Rp 2.6 billion in 1975 and Rp 1.7 billion in 1976 representing respectively 3.1%, 3.3% and 1.5% of year-end outstanding portfolio; (c) a rise in the average cost of long-term debts 2/ resulting in a reduction in the spread for long-term funds from 10.7% in 1973 to 3.9% in 1976, and, (d) finally, a drop in income from raw cotton loans in 1976, as BAPINDO stopped accruing interest on Bank Indonesia financed raw cotton loans. 5. The ratio of BAPINDO's administrative expenses to total assets, 3.8% for 1975 and 1976, (up from 3.4% in 1974) is unusually high. The ratio for some other DFCs in Asia associated with the Bank Group that are broadly comparable to BAPINDO (in terms of size, age, etc.) is generally much lower (for example: 1.0 for KDB in Korea, 1.5 for DBP in the Philippines, 1.2 for DBS in Singapore). BAPINDO's relatively high administrative cost is largely attributable to its maintenance of an extensive branch network (para 8 of Annex 2), which in turn is partly responsible for the large size of its staff in relation to total assets. For a public DFC such as BAPINDO, profitability per se is not an essential objective. Nevertheless, the foregoing ratios suggest the desirability of, and the possibility for, trying to keep the future growth of BAPINDO's administrative cost to a rate lower than that of total assets. C. Condition of Portfolio 6. The situation of arrears of BAPINDO's loan portfolio remains very unsatisfactory. For the sake of clarity, it is analyzed in the following paragraphs separately for industrial loans, maritime loans and raw cotton loans. A tabular summary of the portfolio situation is given in Appendices 3 and 4. 1/ The drop in net income in 1976 was mainly caused by a substantial reduction in income from raw cotton loans (from Rp 2.5 billion in 1975 to Rp 0.5 billion in 1976) as BAPINDO stopped, during 1976, accruing interest on outstanding raw cotton loans to two Government textile mills for which the Government agreed to settle existing arrears (see also para 4.18). 2/ From 5.5% in 1973 to 8.2% in 1976, as a result of increased draw-downs of IDA credits and the Bank loan, as well as increased time deposits and loans from State Banks, whose cost is substantially higher than that of other official funds made available to BAPINDO. At the same time the income from term loans fell in 1976 due to a higher share of Project Aid Loans for which BAPINDO only receives a handling fee. ANNEX 6 Page 3 7. Industrial Loan Portfolio. In spite of some improvements in the past four years, the situation of BAPINDO's portfolio remains unsatisfactory. As of February 28, 1977, 46 clients out of 139 (or 33% by number) were in arrears for over three months, total arrears of principal and interest amounted to Rp 4.9 billion (US$11.8 million) or 10% of total loans outstanding. Loans affected by arrears accounted for 42% of total loans outstanding. For 1976, the collection rate 1/ was 50%. About 30% (Rp 14.8 billion) of BAPINDO's portfolio are completed projects, about half of which were in arrears. The majority 2/ of these projects in arrears are on account of loans made prior to the 1971 reorganization when practically no appraisal was done, and some of these are expected to have to be written-off. The remaining portion of the portfolio, Rp 35.5 billion or 70% of loans outstanding, is on account of projects under construction. An amount of Rp 13.4 billion of these loans (or 26% of total portfolio) was in arrears, accounting for two-thirds of the affected portfolio. The incidence of arrears of projects under construction is usually caused by delays in the completion of projects (see para 12 below) and does not necessarily reflect on the viability of the projects themselves. In BAPINDO's own evaluation of its portfolio 7 clients with loans outstanding totalling Rp 2.7 billion (5 % of total loans outstanding at February 28, 1977) are considered bad, while 21 clients (Rp 4.8 billion or 10% of loans outstand- ing) are problem project clients for which BAPINDO undertakes intensified supervision. 8. Despite this unsatisfactory picture, BAPINDO has been making some progress since 1973 in reducing arrears, for instance, total arrears dropped from Rp 7.1 billion in 1973 to Rp 4.0 billion in 1976, compared to a portfolio increase from Rp 17.6 billion to Rp 48.1 billion (or from 40% of loans out- standing to 8% 3/). During the same period the affected portfolio in relation to outstanding portfolio, dropped from 53% to 37%. (At the end of 1975 the affected portfolio was even lower, 30%, but during 1976 several large loans fell into arrears because of delays in project completion, weighing heavily in the average). Also between 1973 and 1976 the loan collection rate rose from 36% to 50%. The substantial improvements in the above overall ratios, however, have to be viewed against the massive write-offs and reschedulings taking place during the same period. Write-offs (of principal and interest) between 1973 and 1976, all on account of BAPINDO's pre-1971 loans, amounted to Rp 7.0 billion or 37% of the outstanding term-loan portfolio 4/plus accrued interest at the end of 1972. Reschedulings over the last three years amounted to Rp 7.2 billion 5/ or 15% of outstanding loans at December 31, 1976. Such reschedulings (made by BAPINDO following adequate reappraisal) were by and large justified on project grounds either 1/ Collections as percent of arrears at the beginning of the year plus billings for the year. 2/ At December 31, 1975 69% of arrears were on account of pre-1971 loans. 3/ If adjusted for write-offs this ratio would decrease from 44% to 22%. 4/ Amounting to 96% of industrial loans 5/ Total principal of loans outstanding (including principal in arrears and principal not yet due). ANTEX 6 Page 4 because original repayment schedules were unrealistically short or construction schedules considerably delayed, or market conditions had adversely changed, or because of undercapitalization of client companies or the severe credit squeeze in the past few years. 9. While the above analysis shows that BAPINDO's portfolio, despite some improvements, remains unsatisfactory, BAPINDO's supervision of its portfolio has considerably improved. in particular, the creation of the Follow-up Department has enabled BAPINDO to focus on its arrears situation and to undertake a detailed account-by-account examination of the portfolio (something which was not previously done) resulting in a much more adequate knowledge of problem projects and specific remedial actions. 10. Maritime Loans. The present condition of BAPINDO's maritime loan portfolio is better than that of its industrial loans, but this may be attri- butable partly to the newness of BAPINDO's maritime loans, 80% of which were disbursed only in 1975 and 1976. As of February 28, 1977, 14 maritime borrowers (out of 26) were in arrears for over three months, with principal and interest in arrears representing 11%, and the principal affected by arrears 28% of the outstanding maritime loan portfolio. The repayment performance of maritime loans was better than that for industrial loans, with a collection rate of 63% in 1976 (compared with 50% for industrial loans). A single borrower, PELNI, the large state-owned inter-island shipping company, accounted for 36% of BAPINDO's maritime arrears and 28% of the affected maritime portfolio. On April 22, 1977, the Governrent paid to BAPINDO an amount of Rp 434 million to partially settle PE NI s arrears (totalling Rp 1,007 million at February 22, 1977), and during negotiations for the proposed loan the Government agreed to make appropriate arrangements for PELNI to repay the balance of its arrears. 11. Raw Cotton Loans. As of December 31, 1976, all raw cotton loans, totalling Rp. 35.0 billion were overdue. Of this amount, however, BAPINDO's own financial exposure is limited to Rp. 8.4 billion (including accrued interest of Rp. 5.1 billion), with the balance of Rp. 26.6 billion or 76% being financed by Bank Indonesia and another state bank (Bank Ekspor-Impor). Two large state-owned textile mills account for 94% of BAPINDO's financial exposure. A characteristic feature of BAPINDO's raw cotton financing is that it was done largely at the Government's orders. BAPINDO did not appraise these short-term loans; instead, the Government identified borrowers and indicated amounts to be lent, and BAPINDO acted merely as an agent for opening letters of credit, handling documents and collecting payments. Further, Bank Indonesia and Bank Ekspor-Impor together provided 87.5% of the funds, as stated above. Since BAPINDO's raw cotton financing was undertaken at the Government's behest and without independent appraisal, the Government in the past has shown willing- ness to compensate BAPINDO for losses arising from this financing. During negotiations, the Government agreed to compensate BAPINDO for its outstanding financial exposure totalling Rp 7.9 billion in the above-mentioned two state- owned textile mills (para 4.21). The small balance of Rp 0.5 billion (Rp 8.4 billion minus Rp 7.9 billion) representing BAPINDO's raw cotton loans to nine privately owned textile mills, is expected to be collected by BAPINDO within a year or so. ANNEX 6 Page 5 12. Reasons for Arrears. The unsatisfactory situation of BAPINDO's portfolio and its poor loan collection performance are attributable, inter alia, to the following factors: (a) the loan repayment record of borrowers in Indonesia has generally been unsatisfactory, owing partly to a legal system favoring borrowers vis-a-vis lenders; (b) a large proportion (above one-half) of BAPINDO's arrears relate to loans made by it prior to its 1971 reorganiza- tion, when practically no project appraisal and follow-up were undertaken; (c) the severe credit restrictions imposed by the Government on the economy in order to control inflation since 1974, which compounded the liquidity prob- lems of companies; (d) the Government policy requiring state banks including BAPINDO to lend only to indigenous (i.e. non-Chinese) enterprises, the majority of which are financially and managerially weak; (e) BAPINDO's term loans had unrealistically short amortization schedules (5 years or less) as required by a Bank Indonesia regulation that was relaxed only in 1973; (f) BAPINDO's own tendency to set unrealistically short repayment schedules with the objective of trying to collect its loans as early as possible; (g) BAPINDO's low rate (9% p.a.) on interest in arrears, which acts as an incentive for some de- linquent borrowers not to repay; (h) frequent delaysl/ in the completion of projects (compounded sometimes by the failure of BAPINDO's appraisal staff to estimate accurately the projects' completion schedules), which in turn resulted in these projects' inability to service their debt on schedule; and ( i) the slowness and generally inefficient performance of PUPN, the Govern- ment collection agency through which all loan foreclosure and legal actions by state banks including BAPINDO must be coursed. 1/ Some of these delays are reportedly attributable, in recent years, to the congestion at the Jakarta port which prevented the timely clearance of imported machinery and raw materials. AEP Projects Department April 30, 1977 INDONESIA ANNEX 6 Appendix ] BANK PEMBANGUNAN INDONESIA Suxmmarized Balance Sheets, 1972-1976 (Rp in million) ASSETS. 1972 1973 1974 1975 1976 Current Assets: Cash on hand and due from Banks 3,731 1,924 2,228 1,281 4,923 Due from Central Bank 1,192 1,108 7,116 3,834 4,538 Marketable securities - - - 305 595 Short term loans for raw cotton 17,752 15,205 43,305 28,662 25,010 Accrued interest on loans 2,992 2,547 5,743 8,038 10,752 Other Current Assets 222 294 521 1_002 1,137 Total Current Assets 25,889 21,078 58,913 43.122 46,995 Term portfolio: Working capital loans 3,390 4,868 6,507 9,315 13,455 Investment loans 12,498 14,433 22,547 37,035 60,050 Co-financing loans - 22 699 2.568 4,604 Total Loans Portfolio 15,888 19,323 29,753 48,918 78,109 Equity Investments - - 825 1,521 1,816 Total Term Portfolio 15,888 19,323 30,578 50,439 79,925 Deduct: Provision for doubtful accounts 2/ 3,231 2,828 3,413 2,49 8 3,173 Net tern portfolio 12.557 16,495 27,165 47.941 76,752 Fixec Assets (net): Premises and equipment 496 686 876 1,04Q 1,200 Total Assets 39,042 38,259 86.954 92,108 124,907 LIABILITIES AND EQUITY. Current Liabilities: Demand deposits 964 1,154 1,689 1,687 2,526 Time deposits 1,158 122 1,757 3,285 5,177 Short term borrowings for raw cotton 17,110 14,542 36,301 27,514 22,272 Short term loam from central Bank - 5 - 1,500 - Income tax payable - 117 581 46 475 Other current liabilities 577 1,333 4,008 4,654 10.409 Total current liabilities 19,809 17,273 44,336 38,686 40,859 Long Tern Debts: Government loans 644 100 713 594 870 Central Bank loans 9,074 8,712 8,306 10,356 18.527 State Bank loans 102 102 158 1,724 6,638 Bonds 2 - - - IDA/IBRD loans - 212 2.471 5,099 12,485 Total long term debts 9822 9,126 11,648 17,773 38,520 Total liabilities 29,631 26.399 55,984 56,459 79,379 Equity: Paid in capital 3/ 8,581 10,581 29,181 33,681 43,981 Retained earnings and reserves 830 1,279 1,789 1,968 1,547 Net Equity 9.411 11,860 30970 35.649 45,528 Total liabilities and equity 39.042 38,259 86,954 92,108 124,907 RATIOS: Current 1.3:1 1.2:1 1.4:141 1.3 1 / 1.3:1-/ Long tern debt/equity 1.0:1 1.8:1 0.4:1 0.5:1 0.8:1 Total debts/equity 3.1:1 2.2:1 1.8:1 1.6:1 1.7:1 Debt service cover n.a. 1.26 2.13 1.41 1.24 Initerest coverage ratio 1.2 2.8 3.4 1.7 2.3 Reserves and provisions as X of loan and 12.1 11.9 7.0 5.6 4.5 - equity portfolio. 1/ Audited, except for 1976. 2/ Including provision against short-term portfolio and equity investments. 3/ BAPINDO's actual paid-in capital up to December 31, 1973 was only Rp 60 million. BAPINDO's authorized capital was increased from Rp 60 million in 1973 to Rp 50 billion in 1974 when the amount subscribed by GOI over and above Rp 60 million was converted into paid-in capital. 4/ Current ratio in 1974, 1975 and 1976 is calculated after including current maturities of portfolio in current assets and current portion of long-term debts in current liabilities. Figures of current maturities for earlier years are not available. 5/ Excluding Raw Cotton Loans and "Behest Loans," for which the Government has guaranteed payments, this ratio would AEP Projects Department increase to 6.42. April 30, 1977 ANNEX 6 Appendix 2 INDONESIA BANK PEMBANGUNAN INDONESIA Summarized Income Statements, 1972-19761/ 1972 1973 1974 1975 1976 GROSS INCOME Interest on term loans 1,407 2,363 3,214 5,300 7,662 Income from raw cotton loans 1,241 2332 2,157 2,535 4663/ Other income 639 1,006 1,503 1,369 1,556 Total gross income 3,287 4,201 6,874 9,204 9,684 EXPENSES Interest and other financial expenses 706 6252,2 722 1,884 3,188 Salaries and other personnel expenses 825 1,502- 1,546 2,468 3,100 Administrative and general expenses 423 528 623 914 973 Provision for bad debts 1,233 443 2,317 2,617 1,687 Total Expenses 3,187 3,098 5,208 7,883 8,948 PROFIT (LOSS) BEFORE INCOME TAX 100 1,103 1,666 1,321 736 Provision for income tax 46 495 747 598 475 NET INCOME 54 608 919 723 260 RATIOS Percentage of average total assets: Gross income 9.2 10.9 11.0 10.3 8.9 Profit before tax 0.3 2.9 2.7 1.5 0.7 Financial expenses 2.0 1.6 1.2 2.1 2.9 Administrative and personnel expenses 3.5 5.5 3.5 3.8 3.8 Provisions 3.5 1.1 3.7 2.9 1.6 Other Ratios Net profit as °/ of average net worth 0.6 5.7 4.3 2.2 Income from term loans as 3. of average term loans 11.3 13 .4 12 .9 13 .5 12.14/ Cost of term debt as %. of average term debt 4.0 5.5 5.8 8.2 8.2 Interest spread 7.3 10.7 8.3 6.4 3.9 Gross spread 7.2 9.3 9.8 8.2 8.2 1/ Audited, except for 1976. 2/ Includes staff severence payment of Rp 415 million, an extraordinary item. 3/ The sharp drop in income from raw cotton leans was due to the discontinuation, during the year, of interest accrual to Bapindo on the portion of loans (75X) to the two state companies (accounting for 85% of the portfolio) refinanced through Bank Indonesia. 4/ The average income from term loans is distorted because of some non-interest bearing loans under project aid (about Rp 11.6 billion as of December 31, 1976). AEP Projects Department April 30, 1977 S60ono of renn Loor 9o60.foll lta_f loeo60 1, 92 ___T_IA_ 131 hL8Ali LOANS _ _ __140 LlA __ _ l1o. of I nonoC f 6n-0 2/ N, Lo 2/ 1Yt. of mt ofo. 2/ ND. of I f 0.oo 2/ A, St.t- o Loanr Ahenpsr % 7, loooooltont _ 2r orov Ind/oxtelar _ P2 . aos/clLo 7g A. Itao v efdon009,0 Urojoto ClPlete4 Under initial operation 97 23 39,243 36 - - - 97 19 39,243 29 Under none,ci.t operation 195 46 15,137 14 75 83 22,952 86 270 32 38,089 2z Fully repatd 35 8 1,838 2 3 3 253 1 38 7 2,091 2 Uritten off 32 8 I 37 7 1 Sub-tots1 364 85 57,639 53 78 96 23,205 87 442 85 80,855 60 Projeote urder dioboreement and onder con.truction 31 7 9,289 9 4 4 674 3 35 7 9,963 7 Projects approved b6t not -One6ttted 32 40,996 38 9 10 2,7 1 41 _ _3784 33 Total Losa approved 427 604 107 10 1009 26.667 100 518 1 34_602 _ 200 B. 9on1aneftnt Cosapanies under eopntrcon or tn pre-opearting stage 53 37 ,IFbD 17 i.S 72 9,049 54 71 42 17,209 27 Cmnpai.es operating profitably S1 36 33,8Z6 70 - - - - 51 30 33,826 52 Con.apinen operating et a lon. 33 23 4,697 10 7 28 7,863 46 40 24 12,560 19 Coapanina Ander or ctore to liq.ldatoo/Utlgation 6 4 36d 3 - - -- 6 _ 1,368 2 Ibta1 Portfolto 143 600 48_051 109 25 100 19912 100 1618 100 9 100 C. kepayment perfonsoan,e of ProJents Projects ond-r .o..tr-ntion, of which 52 37 35,311 70 2 8 954 5 54 33 36,265 53 repaying r-gplarly or in groc. period (34) (242 ( Z1,934) ' 44 ) - - - - ( 34 (1 ) (21,93432 in srrearl (1a) (13) (13,377) (26) (2) (8) (954) (5) (20) ( (14.331) (21) Projcre in operetio., of which 97 63 14.816 30 24 92 17,370 95 111 67 32,186 47 rmpaytig regolarly 59 3) (7,2b4) ( 7 (2 12 (46 3 13,2393 (72) 71 ) (4 ) (20, 523 (3D) in sxmears, of nbich (29) (20) (7,532) (13) (12) (46) (4, 1316 (23) (40) 24) (11,663) (17) bad loans ( 7 ) 5) (2,685) (5) (3) ( 12 ) (6t382) (98 (10) (6) (4,067) (6) sptaiel care bonn U) QŽ5) 4,84 1('') (9) 2 , 74) ( 15) (30) (6) ( 7,596) 11t) Total Portfolio 139 100 50,127 100 26 100 13,324 100 1665 19 61,451 100 11 Cunber of Loan. for A; Na-b.r of nitnet. for 3 sed C. 21 La00 approved for A, loans -ot.taoding for b and C. 3/ As of rebryar 28, 1977. dElP Proocts Dep-rtraent April 30, 1977 INDONESIA BANK PEMBANGUNAN INDONESIA Analysis of Term Loans in Arrears 1/, 1973-1976 (Rp in million) Industrial Loans Maritime Loans Total Term Loans 1973 1974 1975 1976 1973 1974 1975 1976 1973 1974 1975 1976 A. Portfolio Status Total loans outstanding 17,625 25,544 34,993 48,051 1,675 3,562 11,358 18,431 19,300 29,106 46,351 66,482 Deduct: Outstanding loans in grace period 5,781 10,458 15,666 26,777 122 502 277 361 5,903 10,960 15,943 27,138 Loans in repayment stage 11,844 15,086 19,327 21,274 1,553 3,060 11,081 18,070 13,397 18,146 30,408 39,344 outstanding amount of loans affected by arrears 9,327 12,627 10,363 17,979 393 525 3,218 4,458 9,720 13,152 13,581 22,437 Arrears Principal 3,082 2,013 2,030 1,561 241 259 602 1,515 3,323 2,272 2,632 3,076 Interest 4,045 4.922 2.006 2,474 178 149 127 308 4.223 5,071 2,133 2,782 Total arrears 7.127 6,935 4,036 4,035 419 408 729 1,823 7,546 7,343 4,765 5,858 Loans affected by arrears as percentage of total loans outstanding 52.9 49.4 29.6 37.4 23.5 14.8 28.3 24.1 50.4 45.2 29.3 33.7 Total arrears as percentage of total loans outstanding 40.4 27.1 11.5 8.4 25.0 11.5 6.4 9.9 39.1 25.2 10.3 8.8 Total arrears of principal as percentage of total loans outstanding in repayment stage 34.2 32.6 10.4 7.3 32.1 20.3 6.0 8.4 24.8 12.5 8.7 7.8 Collection rate (%) 36.0 41.5 44.1 49.8 33.4 59.7 59.2 63.0 37.0 43.4 47.5 54.3 B. Rescheduling and Write Offs Loans rescheduled 2/ during the year u.a. 2,041 2,062 3,113 n.a. 5 93 518 a.a. 2,046 2,155 3,631 Loans written off during the year 847 1,514 3,532 1,150 - - - 847 1,514 3,532 1,150 Industrial Loans Maritime Loans Total Term Loans out- out- out- standing standing standing No.2/ % loan _ Arrears 7 No.3/ % loan 7. Arrears % No.3/ % loan 7, Arrears 7 C. Aging of Loan Arrears as of December 31, 1976 3.1 - 6 months 10 20 1,876 10 1,107 27 5 25 606 14 345 19 15 22 2,482 11 1,452 25 6.1 - 12 months 18 37 11,078 62 1,267 31 8 40 1,976 44 933 51 26 38 13,054 58 2,200 37 12.1 - 24 months 11 23 3,061 17 825 21 5 25 1,724 39 408 22 16 23 4,785 21 1,233 21 over 24 months 10 20 1,964 11 836 21 2 10 152 3 137 8 12 17 2.116 10 973 17 Total 49 100 17.979 l 4.035 0I 2fl 100 4,458 100 1823 100 69 100 22,437 100 5.858 100 1/ Over 3 months. 2/ Principal only. 3/ Number of clients. AEP Projects Department April 30, 1977 AMNEX 7 Page 1 INDONESIA BANK PEMBANGUNAN INDONESIA (BAPINDO) Resources 1. Appendix 1 presents BAPINDO's resource position as of December 31 1976; the terms and conditions of long-term borrowings are summarized in Appendix 2. As of December 31, 1976, BAPINDO had total resources of Rp 182.9 billion (US$441 million) of which Rp 41.5 billion were short-term resources consisting mainly of short-term borrowings for raw cotton loans (Rp 22.2 billion), other current liabilities (Rp 11.6 billion) and deposits (Rp 7.6 billion) which BAPINDO accepts only from its clients. For the interest differential between the various time deposit rates (up to 18% p.a.) and the lending rates (12% or 15% p.a.) BAPINDO has been receiving full compensation by the Government. Of the total long-term resources of Rp 141.4 billion, 60% (Rp 109.8 billion) were from domestic sources while 40% (Rp 31.5 billion) were from foreign borrowings. 2. On the domestic currency side, BAPINDO continues, as in the past, to rely almost exclusively on the Government, including Bank Indonesia and the other state banks, for its resources. During the last three years BAPINDO's resource position has been considerably strengthened by an additional share subscription by the Government of Rp 8.6 billion in 1974 followed by Rp 4.5 billion in 1975 and Rp 10.3 billion during 1976 and borrowings from other state banks of Rp 12.2 billion. The Government has also given a firm commitment to increase the share capital by another Rp 6.0 billion during the first half of 1977, which BAPINDO is able to utilize now since against this commitment it can obtain refinancing from Bank Indonesia and other state banks. As a result, total long-term domestic currency resources rose to Rp 109.8 billion as of December 31, 1976. Against these resources, BAPINDO had, as of the same date, outstanding assets of Rp 66.1 billion, plus undisbursed commitments of Rp 31.3 billion, leaving Rp 12.4 billion of term resources available for further commitments and after accounting for Rp 6.4 billion of uncommitted approvals, Rp 6.0 billion for further approvals. However, part of these funds have been tied up through a shortfall in short- term resources of Rp 8.8 billion (mainly due to a large amount of accrued interest of Rp 10.8 billion) so that, as of December 31, 1976, BAPINDO had net available only Rp 3.6 billion for further commitment and had unfunded approvals of Rp 2.8 billion. To cover its lending in 1977, BAPINDO expects additional refinancing from Bank Indonesia both directly under the INVESTASI scheme and indirectly through consortium financing arrangements with other state banks. The payment by the Government to BAPINDO of approximately Rp 7.9 billion for the arrears of raw cotton loans of two Government textile mills (see para 4.18 ) should further improve BAPINDO's domestic currency resource position. 3. BAPINDO's cumulative foreign currency resources amounted to US$76.0 million as of December 31, 1976. Of this amount, US$67.0 million or 88% ANNEX 7 Page 2 represented Bank/IDA funds (two IDA credits, No. 310-IND and 318-IND and Bank loan No. 1054-IND), with the balance of US$9.0 million or 12% consisting of a loan from KfW of Germany, which was made through the Government of Indonesia. As of March 31, 1977, the uncommitted balance of the IDA credit for maritime financing (No. 318-IND) was US$1.3 million, which is expected to be fully committed during 1977. As of April 30, 1977 there was an uncom- mitted balance of US$8.4 million under the last Bank loan for which BAPINDO has already approved four loans which were being submitted to the Bank. In fact, BAPIND0's operations have already been slowed down somewhat during the latter part of 1976 and this year by its shortage of foreign currency resources. The Government of Indonesia has recently requested a US$30 million loan from ADB for BAPINDO which, if approved, is hoped to become effective early 1978. No new additional sources are presently in sight. AEP Projects Department April 30, 1977 ANNEX 7 Appendix 1 INDONESIA BANK PEMBANGUNAN INDONESIA Resource Position as of December 31, 1976 (Rp in million) I. LONG-TERM RESOURCES Domestic Currency: Paid-in Capital 49,981±1 Free reserves and retaired earnings 1,547 Provision for doubtful accounts 3,173 54,701 Borrowings from: Bank Indonesia 42,321 Government of Indonesia 555 State Banks 12,265 55,141 Total long term Rupiah Resources 109,842 Less: Loans outstanding 52,808 Co-financing with RDB's and other State Banks 10,323 Equity investments 1,816 Fixed assets 1,200 66,147 Resources available for disbursenent 43,695 Less: Undisbursed commitments 31,296 Resources available for commitment 12,399 Less: Uncommitted approvals 6 385 Resources available for approvals 62014 Foreign Currency Foreign currency borrowings; IDA and IBRD 27,805 KfW 740 Total foreign exchange resources 31,545 Less: Cumulative disbursements 13,691 Resources available for disbursements 17,854 Less: Undisbursed commitments 17,842 Resources available for commitments 12 Less: Uncommitted approvals Resources available for approvals 12 II. SHORT-TERM RESOURCES (Domestic currency only): Deposits 7,635 Borrowings from: Bank Indonesia (raw cotton) 18,871 Bank Ekspor-Impor (raw cotton) 3,400 22,271 other current liabilities 11,633 Total short-term loans resources 41,539 Less: Reserve requirements against deposits 2,209 Short-term loans outstanding plus accrued interest 43,242 Other current assets 4,904 50,355 Resources available for utilization (8,816) 1/ Includes firm governent commitments to increase BAPINDO' s equity by Rp 6.0 billion during 1977. BAPINDO is allowed to refinance against this government guarantee. 2/ Includes loans outstanding plus unutilized ceilings. AEP Projects Department April 30, 1977 INDONES IA BANK PEMBANGUNAN INDONESIA Terms and Conditions of Long-Term Debt Resources as of December 31, 1976 Total Amounty Date Rp. million or US$ million or Interest Rate Repayment Terms Free Limit Scope of Contracted Equivalent Equivalent Borrowing Relending For: Bapindo Sub-borrowed (US$'000) Financing SOURCES OF FUNDS I. Foreign Currency Resources IDA Credit No. 310-IND June 7, 1972 4,150 10.0 8 to 11-/ 12 to 15% Linked with Up to 15 yrs. 100 Industry sub-projects IDA Credit No. 318-IND June 28, 1972 2,905 7.0 7.25% 9.25% -do- Up to 15 yrs. 100 Maritime(RLS only) IBRD Loan No. 1054-IND Nov. 20, 1974 20,705 50.0 8 to 11% 12 to 15% -do- Up to 16 yrs. 500 Industry RfW Loan July 12, 1976 3,773 9.1 8 to 11% 12 to 15% -do- Up to 15 yrs. - SM Industry Sub-total IDA & IBRD 31,578 76.1 Project Aid (through Bank Indonesia) - 6,171 14.9 11.25% 12% 5 to 18 yrs. 5 to 18 yrs. - Industry Total foreign currency borrowings 37X749 91.0 II. Long-Tezn Domestic Currency Debt Resources Bank Indonesia: Project Aid - 1,626 3.9 10.25% 12% Linked with 5 yrs. - Industry sub-projects Joint Financing Scheme - 4.717 11.4 4 or 6% 12% 5 yrs. 5 yrs. - Industry Co-financing with RDBs - 4,014 9.7 4 or 8%°b/ 6 or 10%3-/ 5 yrs. 5 yrs. - Small scale Ind. Sub-total Bank Indonesia 10,357 25.0 Government of Indonesia - 494 1.2 Interest free Varied - Varied - No restriction State Banks - 11.913 28.7 15% 15% 5 yrs. Up to 10 yrs. - Industry Total long-term domestic currency debt resources 22,764 53.7 Total long-term debt resources 60,t3 143.7 1/ Amounts outstanding plus unutilized balances. 2/ 4% for investment loans and 8% for working capital loans; 6% and 10% respectively is the rate charged RDBs. 3/ Rates of interest paid by RDBs. Interest rates charged to the ultimate borrower are 127% and 15% for investment and working capital loans respectively. AEP Projects Department April 30, 1977 INDONESIA BANK PEMBANGLUNAN INDONESIA Projected Operations, 1977 - 1980 (Rp in million) 1976 1977 1978 1979 1980 (Actual) Appravals D omestic currency: Investment loans Industrial 21,886 21,000 21,900 22,600 22 400 Maritime 1,158 4,900 9,200 10,100 11,100 Working capital loans Industrial 6,640 6,200 10,500 12,300 14,000 Maritime 431 200 3,600 3,900 3,900 RDB loans 3,083 4,300 8,800 10,500 12,000 Equity investments 240 2 000 2.000 2,500 3,000 Slb-total 33,438 38;600 56.000 61,900 66,400 Foreign currency loans: Industrial term loans 18,102 15,800 20,200 26,500 33,600 Maritime tern loans 7,2 13.300 13.800 15.200 1,0 Ssb-total 25,425 29.100 34,000 41,700 50.300 Total approvals 58.863 67,700 90,000 103,600 116,700 Conm,itments Domestic currency Investment loans Industrial 13,774 26,400 21,300 22,000 21,900 Maritime 1,451 1,500 9,100 10,300 11,100 Working capital loans Industrial 3,031 6,300 10,200 12,000 13,700 Maritime 413 200 3,600 3,900 3,900 RDB loans 3,083 3,900 6,200 7,800 9,600 Equity investments 240 2,000 2,000 2,500 3.000 Sub-total 21,992 40,300 52.400 58,500 63,200 Foreign currency loans: Industrial term loans 10,721 11,500 19,600 25,800 32,800 Maritime term loans 19,14 15,700 13,760 16,00 Sub-total 19,895 26,200 33,300 41,300 49,500 Total commitments 41887 66,500 85,700 99.800 112.700 Disbursements Domestic currency Investment loans Industrial 14,230 28,200 21,400 25,700 29,800 Maritime 1,148 4,800 12,300 13,300 14,900 Working capital loans Industrial 3,918 3,300 8,900 10,700 12,400 Maritime 558 300 3,600 3,900 3,900 8DB loans 3,101 3,400 6,100 7,800 9,600 Equity investments 262 2,2000 2,500 3.000 Sub-total 23.253 42,000 54,300 63,900 73,600 Foreign currency loans: Industrial term loans 4,331 9,200 14,300 17,100 19,900 Maritime tern loans _85890 8,200 8,900 9.900 Sub-total 11 816 18,100 22.500 26,000 29,800 Total disbursements 35,069 61,10o 76,800 89,900 103,400 1/ BAPINDO disburces part of its foreign currency commitments in BMpiah. AEP Projects Department APril 30, 1977 INDONES IA BANK PEMBANGUNAN INDONESIA Projected Balance Sheets, 1977-1980 (Rp in mILLIOn) As of December 31, 1976 1977 1978 1979 1980 ASSETS (Actual) Current assets l/ Cash and bank deposits 10,056 1,776 1,924 1,556 1,476 Short-term raw cotton loans 25,010 9,362 - - - Accrued interest receivable 10,752 13,214 18,346 24,676 32,039 Other current assets 12137 1305 1,305 1,305 1 305 Total current assets 46,995 25,657 21,575 27,537 34,820 Loans and investments Working capital loans 13,455 20,516 27,183 34,419 41,647 Investment loans 60,050 113,172 158,561 207,230 259,523 Co-financing with RDBs 4,604 8,590 12,202 16,365 21,013 Equity investments 1,816 4,121 6,121 8,621 11,621 Less: provision for losses (3173 (9 566) (14 515) (20,965) (29 020) Total loans and investments 76, 75 136 833 189,552 245,670 304,784 Fixed assets (net) 1,200 1,520 1,834 2,163 2,730 Total assets 124,907 164,010 212,961 275,370 342,334 LIABILITIES AND EQUITY Current liabilities Deposits 7,683 5,342 5,540 5,747 5,965 Short-term borrowing for raw cotton loans 22,272 8,627 - - - Income tax payable 475 399 821 699 887 Other current liabilities 10 409 4,696 4,696 4,696 Total current liabilities 40,859 19,064 11,057 11,142 11,548 Long-term debt Foreign currency loans 12,485 43,969 68,980 97,104 129,007 GOI loans 2/ 870 776 9,276 23,776 25,776 Bi loans 3/ 18,527 31,973 45,830 56,033 78,518 State banks' loans 6.638 15,397 23,983 32,935 42 239 Total long-term debt 38,520 92,115 148,069 209,848 275,540 Paid-in capital 43,981 50,000 50,000 50,000 50,000 Reserves and retained earnings 1,547 2,831 3,835 4'380 5,246 Total equity 45,528 52,831 53,835 54,380 55,246 Total liabilities and equity 124,907 164,010 212,961 275,370 342,334 1/ Including amounts due from Bank Indonesia (BI). 2/ From 1978 onwards, includes a new GOI long-term loan of which balances outstanding total Rp 8,500 million at end-1978, Rp 23,000 million at end 1979, and Rp 25,000 at end-1980. 3/ From 1977 onwards, includes a long-term liquidity loan from BI, with following year-end balances outstanding: 1977, Rp 5,000 million; 1978, Rp 12,000 million; 1979, Rp 15,000 million; and 1980, Rp 30,500 million. a X AEP Projects Department x April 30, 1977 INDONES IA BANK PEMBANGUNAN INDONESIA Projected Income Statements 1977-1980 (Rp in million) Year ending December 31, 1976 1977 1978 1979 198" (Actual) INCOME Income from raw cotton loans 804 1,422 421 - Interest on working capital loans 1,923 3,456 4,749 6,119 7,537 Interest on investment loans 5,739 15,208 22,379 30,370 38,984 Other income 1,556 1,816 2,087 Total income 10,002 21,225 29,073 38,305 48,608 EXPENSES Interest on domestic currency borrowings: Deposits 603 556 583 611 640 Short-term borrowing for raw cotton loans 338 570 172 - _ Central Bank and Government loans 1,533 1,941 3,460 5,496 7,636 State banks' loans 15 1,855 4,585 6,068 Sub-total 2,489 4,922 7,384 10,692 14,344 Interest and commitment charges on foreign currency borrowings 1,037 3,852 6,258 9,544 12,569 Total financial expenses 3,526 8,774 13,642 20,236 26,913 Salaries and other personnel expenses 3,100 4,832 5,740 6,818 8,096 Other administrative and general expenses I/ 973 1,305 1,584 1,915 2,239 Provision for losses 1,687 4 094 4949 6,45055 Sub-total 5,760 1 12,273 15,183 18,390 Total expenses 9 286 190_0_5 2915 35,419 45,303 INCOME BEFORE INCOME TAX 736 2,220 3,158 2,886 3,305 Provision for income tax 475 999 1,421 1,299 1,487 NET INCOME 260 1,221 1,737 1,587 1,818 1/ Including depreciation expense. AEP Projects Department April 30, 1977 INDONESIA BANK PEMBANGUNAN INDONESIA Projected Cash Flow Statements. 1977-1980 (Rp in million) Year ending December 31. 1977 1978 1979 1980 SOURCES Income before corporate income tax 2,220 3,158 2,886 3,305 Add back non-cash charges (depreciation, provisions, write-offs, etc.) 4,287 5 199 6.764 8.373 Cash generated from operations 6,507 8,357 9,650 11,678 Increase in paid-in share capital 5,819 - - Increase in deposits 189 198 207 218 Draw-down on foreign currency borrowings 23,745 29,449 36,436 44,726 Draw-down on domestic currency borrowings: Government loans - 8,500 14,500 2,000 Bank Indmesia loans 16,511 18,268 16,227 29,823 State banks' loans 10,645 12,874 14,620 16,634 Sale of equity investments - - - - Loan collections: Working capital loans 3,842 5,865 7,366 9,108 Investment loans 8,632 10,839 16,339 22,250 Raw cotton loans 12,100 9,362 - - Co-financing with RDBs 1 485 2,540 3.682 4.960 Sub-total 26,059 28,606 27,387 36,318 Total sources 891.475 10625227 USES Increase in fixed assets 472 564 643 885 Disbursements of loans: Working capital loans 10,351 12,532 14,602 16,336 Investment loans 49,202 56,228 65,008 74,543 Co-financing with ROBs 4,3806 6 27,845 9 '2 Sub-total 64,359 ~ 74,912 87,455 100,487 Equity investments 1,500 2,ooo 2,500 3,000 Repayments of borrowings: Foreign currency loans 1,662 4,438 8,312 12,823 Government loans Bank Indonesia loans 2,816 4,411 6,024 7,338 Raw cotton loans 10,587 8,627 - - State banks' loans 2,890 4,288 5.668 7.330 Sub-total 17,955 21,764 20,004 27,491 Increase in receivables 3,935 5,132 6,330 7,363 Less increase in payables (264) (422) 122 (188) Payment of corporate income tax 999 1,421 1,299 1,487 Income appropriation 539 733 1,042 952 Increase (decrease) in cash and bank deposits (20) 148 (368) (80) Total uses 89,475 106.252 119,_027 141L397 AEP Projects Department o April 30, 1977 . INDONESIA BANK PEMBANGUNAN INDONESIA Projected Indicators of Financial Position atid Performance, 1977 - 1980 (Rp in million) Year ending December 31, 1976 1977 1978 1979 1980 I. Total assets 124,907 164,010 212,961 275,370 342,334 of which: term loan portfolio 78,109 142,278 197,946 258,014 322,183 equity investments 1,816 4,121 6,121 8,621 11,621 short-term raw cotton loans 25,010 9,362 - - - Long-term debts Bank Indonesia loans 18,527 31,973 45,830 56,033 78,518 Government loans 870 776 9,276 23,776 25,776 State banks' loans 6,638 15,397 23,983 32,935 42,239 Foreign currency loans 12.485 43.969 68.980 97,104 129,007 Sub-total 38,520 92,115 148,069 209,848 275,540 Equity 45,528 52,831 53,835 54,380 55,246 Long-term debt/equity ratio 1/ 0.8 1.7 2.8 3.9 5.0 Long-term debt/equity (revised formula) - 0.8 1.7 2.2 2.4 3.1 Total debt/equ4y ratio 1.7 2.1 3.0 4,1 5.2 Current ratio - 1.3 1.3 2.0 2.5 3.0 II. Profit before tax and provisions as % of average total assets 2.2 4.4 4.3 3.8 3.7 Profit after tax and provisions as % of average equity 0.6 2.5 3.3 2.9 3.3 Reserves and provisions as 7. of year-end outstanding portfolio 3/ 4.5 8.2 9.3 9.8 10.6 Financial expenses as 7. of average total assets 4/ 2.9 6.1 7.2 8.3 8.7 General and administrative expenses - as % of average total assets 3.8 4.1 3.8 3.4 3.2 Book value as % of par value 103.5 105.7 107.7 108.8 110.5 Debt service coverage (times) 1.2 1.6 1.4 1.4 1.4 Cost of term-debt as % of average term debt 8.2 10.9 10.7 10.9 10.8 Cost of total term resources as X o average total term resources 5 3.4 6.4 7.4 8.4 8.8 Income from term loan portfolio as %6/ of average term loan portfolio - 12.1 15.9 15.9 16.0 16.0 Gross earnings/average total assets 8.9 14.7 15.4 15.7 15.7 1/ With the outstanding portion of the Government subordinated loan treated as equity; this is applicable from 1978 onwards. 2/ Retained earnings and provisions for losses as % of year-end outstanding loan portfolio including short-term raw cotton loans. 3/ Personnel expenses plus general and administrative expenses (not including depreciation). 4/ Including equity. 51 Excludes short-term raw cotton loans. AEP Projects Department April 30, 1977 ANNEX 9 INDONESIA BANK PENBANGUNAN INDONESIA Estimated Commitments and Disbursements of Proposed Loan - (US$ million) Commitments Disbursements 2 Amount % Amount % FY 1978 August - September 4.4 11.0 1.3 3.3 October - December 9.7 35.3 2.0 8.4 January - March 10.4 61.3 2.7 15.1 April - June 7.0 80.3 2.6 21.5 Sub-total 32.1 80.3 8.6 21.5 FY 1979 July - September 4.8 92.3 4.2 31.9 October - December 3.1 100.0 5.6 45.9 January - March - 100.0 5.9 60.7 April - June - 100.0 5.8 75.2 Sub-total 7.9 100.0 21.5 75.2 FY 1980 July - September - 109.0 4.2 85.6 October - December - 100.0 2.6 92.0 January - March - 100.0 1.4 95.5 April - June - 1(0.0 0.9 97.7 100.0 Sub-total _ 100.0 9.1 97.7 FY 1981 July - September - 100.0 0.6 99.5 October - December - 10o.0 0.2 100.0 January - March - 100.0 - 100.0 April - June - 100.0 - 100.0 Sub-total - 100.0 0.8 100.0 Total 40.0 100.0 40.0 100.0 1/ Assuming that the loan becomes effective around August 1977, and assuming further that BAPINDO will obtain other foreign currency resources (i.e. a $30 million loan from the Asian Development Bank) early in 1978. 2/ Percentages are cumulative. AEP Projects Department April 30, 1977