Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4286-1ND STAFF APPRAISAL REPORT INDONESIA BANK PEMBANGUNAN INDONESIA (BAPINDO) V April 13, 1983 Regional Projects Department East Asia and Pacific Regional Office This doctimen)t has a restricted di.stributionand may be used by recipients only in the perforrnance of theiT official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 4286-1ND
STAFF APPRAISAL REPORT
INDONESIA
BANK PEMBANGUNAN INDONESIA (BAPINDO) V
April 13, 1983
Regional Projects DepartmentEast Asia and Pacific Regional Office
This doctimen)t has a restricted di.stribution and may be used by recipients only in the perforrnance oftheiT official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
US$1 = Rupiah (Rp) 700 /1Rp 1 = US$0.0014
Rp 1 million = US$L,428
GOVERNMENT OF INDONESIA FISCAL YEAR
April 1 - March 31
BAPINDO's FISCAL YEAR
January 1 - December 31
PRINCIPAL ABBREVIATIONS AND ACRONYMS USED
ADB = Asian Development BankASKRINDO = PT Asuransi Kredit Indonesia (Credit Insurance Company of
Indonesia)BAPINDO = Bank Pembangunan Indonesia (Development Bank of Indonesia)BI = Bank IndonesiaBKPM = Badan Koordinasi Penanaman Modal (Investment Coordinating
Board)IDFC = Indonesian Development Finance CompanyKELAYAKAiN = Feasibility-based Credit ProgramKfW = Kreditanstalt fur WiederaufbauKIB = Kredit Investasi Besar (Large Investment Credit Program)KIK = Kredit Investasi Kecil (Small Investment Credit Program)K1MKP = Kredit Modal Kerja Permanen (Small Permanent Working Capital
Credit Program)MOF = Ministry of FinanceMOI = Ministry of IndustryMOT = Ministry of Trade and CooperativesPDFCI = Private Development Finance Company of IndonesiaRDB = Regional Development Bank
/1 This staff appraisal report is based on an exchange rate of Rp 700 tothe US dollar. On March 30, 19835 after negotiations for the proposedloan were completed the Government announced the devaluation of theRupiah from 700 to 970 per dollar. While it is too early at this stageto completely assess all the effects of this decision, an initialevaluation of the impact of this decision on the project shows that itsfeasibility will not be adversely affected.
This report is based on the findings of an appraisal mission to Indonesiain August 1982. Mission members were Rogelio G. David (Mission Leader),Carlos Basterra, Vinod Goel, Sarath Rajapatirana, Khalid Siraj and Edgar Su.Mr. Hans Lesshafft assisted the mission in preparing parts of the report.
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
Table 1: BAPINDO's Lending Rates as of December 31, 1982Table 2: Summary of Operations, 1978-82Table 3: Characteristics of Industrial Loans, 1978-82Table 4: Equity Investment Portfolio, as of December 31, 1982
6. BAPINDO½s Finances:Table 1: Summarized Balance Sheets, 1978-82Table 2: Summarized Income Statements, 1978-82Table 3: Analysis of Term Portfolio in Arrears 1980-82Table 4: Resource Position as of December 31, 1982
7. BAPINDO½s Projected Operations and Finances:Table 1: Projected Operations, 1983-87Table 2: Projected Income Statements, 1983-87Table 3: Projected Balance Sheets, 1983-87Table 4: Projected Indicators of Financial Position and
Performance, 1983-87Table 5: Projected Cash Flow Statements, 1983-87Table 6: Estimated Commitments and Disbursements of the Proposed Loan
8. Selected Documents in Project File
CHART: Organization of BAPINDO as of December 31, 1982
MAP: IBRD 11166 RI - Branch Locations
INDONESIA
BANK PEMBANGUNAN INDONESIA
BASIC DATA
1. Year of Establishment: 1960
2. Ownership: Wholly owned by the Government of Indonesia
3. Bank Group Assistance:
Date of Rate of $ million as of December 31, 1982Credit/ Date effec- interest /a Loan Com- Dis- Outstand-Loan No. signed tiveness (%) Amount mitted bursed ing lb
Total Outstanding /d 115.2 168.5 208.7 372.9 578.2
/a Minimum rates charged to BAPINDO by the Government./b Refers to the balance in BAPINDO's accounts./c Includes syndications with other banks./d As of December 31, net of provisions for losses and excluded portions of
other banks.
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Interest Rates and Charges (% p.a. as of December 31, 1982)
5. Interest RatesInvestment loans 10.5 - 13.5 /aWorking capital loans 13.5Small scale industry loans:Investmeot loans (KIK) 10.5Working capital loans (KMKP) 12.0
Export credit loans 6.0 - 9.0
Commitment Fees 0.25 - 0/75 /a
6. Financial Position and Performance
1978 1979 1980 1981 1982
Financial Position (as of December 31)Total assets (Rp billion) 144.8 196.9 258.2 423.9 657.7Of which loan and equityportfolio (net) 79% 86% 81% 88% 88%
Total equity (Rp billion) 63.4 64.7 75.8 89.0 101.7Of which retained earnings/reserves 5.4% 7.3% 7.6% 10.2% 21.3%
Current ratio 1.5:1 1.6:1 1.4:1 1.0:1 1.3:1Long-term debt/equity 1.0:1 1.7:1 1.7:1 2.8:1 4.3:1Total debt/equity 1.3:1 2.0:1 2.4:1 3.8:1 6.0:1
Debt service cover 1.7 1.3 1.4 1.7 1.6
Provisions for losses as % of loanand equity portfolio 4.3 3.4 4.7 3.0 3.7
Financial Performance (%)Gross income to average total assets
(ATA) 12.8 12.2 13.5 12.9 13.3Financial expenses to ATA 5.0 4.6 5.9 5.6 5.7Administrative expenses to ATA 3.7 3.4 3.4 2.7 2.5Provisions to ATA 2.6 2.8 2.4 2.5 2.8Profit before tax to ATA 1.5 1.4 1.8 2.1 2.3Net profit to average net worth 1.8 2.2 3.0 5.0 7.3
/a Depending upon size of loan.
INDONESIA
BANK PEMBANGUNAN INDONESIA (BAPINDO) V
I. SECTORAL BACKGROUND
The Industrial Sector
1.01 Role in the Economy. In the aftermath of the first oil boom in1973, the industrial sector, including mining and energy, has been thefastest growing sector of the economy. From 1971 to 1980, the industrialsector grew at an average annual rate of 11% (manufacturing grew by 14%),compared with about 8% for the economy as a whole. Industry now-accountsfor about 33% of Gross Domestic Product (GDP), compared with 14% in 1960 and20% in 1970. Manufacturing, however, which typically is the most dynamiccomponent of the industrial sector, represented only 9% of GDP in 1980, alow proportion when compared with Malaysia (23%), Thailand (20%), thePhilippines (26%) and Singapore (28%). Manufactured exports, which duringthe past five years have grown rapidly from a low base, now constitute only14% of norr-oil exports or about 5% of total exports. Only about 12% ofthe labor force is employed in industry.
1.02 Structure and Performance. The latest census of manufacturingindustries shows less than 1% of the number of establishments comprisingmodern, capital-intensive industries produced over four-fifths of output,value added and wages; while the vast majority of manufacturing firms, usingtraditional, labor-intensive technology, employed nearly 90% of manufacturingworkers and generated only a fifth of output and value added. Industrialpolicies have been oriented towards promotion of import substitution to meetlarge and growing domestic demand, and are characterized by a high level ofprotection by tariffs, quantitative restrictions and government sponsoredlarge capital investments. As a result, the industrial growth that tookplace in the 1970s was, for the most part, concentrated in largecapital-intensive, mostly import-substituting industries, such as cement,fertilizers, steel and paper in the public sector. Public sector investmentin industry and mining grew by 17.5% p.a. in 1975-80 outpacing the growth ofgross domestic investment of 8.9% p.a. during the same period. Given itshigh protection and capital intensity, the industrial sector that emerged,while impressive in terms of its early growth, was not overly successful ingenerating a large number of employment opportunities or export revenues.The Bank recently completed an industrial sector report (dated July 15,1981) which focussed on specific problems related to the trade regime,regulatory climate, financial policy environment and policies towards
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private foreign investment./l The report made a number of recommendationsfor improving the policy and institutional environment for stimulatingindustrial activity. The needed restructuring effort in the industrialsector that this study identified requires significant policy changes forthe economy to meet the challenges of the 1980s.
1.03 The Future Industrial Structure. Given Indonesia's broad resourcebase, a large labor force, low real wages compared to other countries inthe region, and access to foreign investment, there is potential for higherindustrial growth rates, employment and exports. Improved performanceshould be based on (a) the rapid growth of labor-intensive, export-oriented industries and (b) the selective development of resource-basedindustries where Indonesia has a natural comparative advantage. Theselatter activities will be related, for example, to oil, fertilizer, cementand wood processing.
1.04 Moreover, the industrial sector must provide a formidable productcontribution to GDP growth to sustain the high real rates of GDP growth ofthe 1970s. With the labor force expected to grow at about 3% per year inthe 1980s, the industrial sector must begin to absorb an increasing share ofemployment and to generate more export revenues to replace the expecteddecline in oil exports. In this context, Indonesia's Third Five-YearDevelopment Plan (1979/80-1983/84), places greater emphasis than previousplans on the manufacturing sector. It aims at 11% p.a. growth for thesector as a whole. Within this overall growth target, the Government hasbeen giving priority to four objectives: deepening the structure andpattern of industry; generation of employment opportunities; protection ofthe economically weak enterpreneurs; and the promotion of labor-intensive,manufactured exports.
1.05 Industrial Policy Issues. Achieving the above objectives, in theoverall context of industrial efficiency, will require substantial improve-ments in the overall policy environment for industry. Specifically, actionis needed to reverse the existing bias toward production for the protecteddomestic market and against exports, to attract more foreign investments, tostrengthen industrial planning and project appraisal capability and tostreamline Government licensing and other procedures. Some progress hasrecently been made in these areas; however, much remains to be done.
1.06 So far, the area where the Government appears to be making themost concerted effort to improve policy is in the trade sector. The recentRupiah devaluation of 38% should reduce the bias against export industries.In addition,the Government is taking a number of steps to encourage exportpromotion. In January 1982, the Government legislated a major policyinitiative in the areas of export finance, guarantees, credit and
/1 "Indonesia: Selected Issues of Industrial Development and TradeStrategy," Report No. 3182-IND, July 15, 1981.
insurance. Key provisions of this new export policy include liberalizing
terms of payment for exports, automatic access of all exporters, direct andindirect, to preferential working capital finance, mandatory governmentguarantee of export finance, and establishment of a pre- and post-shipmentexport credit and insurance system. The details for implementing thesereforms are currently being worked out.
1.07 In addition to this major policy reform, the Government is alsoactive in other areas of trade policy. For instance, the Government hasemployed consultant services to help improve its duty rebate scheme and tostrengthen its delivery of technical and promotional services to exporters.The-Government also intends to stimulate exports by establishing free tradezones and estates. To this end, it has employed consultants to recommenda program of export zones/estate development. The Government has alsorecently taken action to improve customs procedures. It has also requestedBank assistance in upgrading the quality of major export commodities. TheGovernment is also planning a major improvement in port facilities whichhave been a considerable constraint on export development.
1.08 In other areas, progress has been much more limited. In the areaof tariffs, the Government has prepared a first round overall reform and isactively recruiting a team of technical experts to advise on further detailedreforms. However, the first stage of tariff reforms have not yet beenimplemented due to the increasingly difficult balance of payments position andthe lack of clear consensus in Government that tariff reduction is justifiedat this time. Similarly, a substantial simplification of licensing andregulatory procedures remains to be undertaken. In both these areas, theGovernment seems concerned about the possible adverse impact broad reformsmight have on existing industries and movement on these issues is likely tobe gradual. In this context, a number of detailed subsector studies arebeing undertaken or proposed in such subsectors as engineering industries,pulp and paper, textiles, steel, cement and wood processing. These studiesare being given high priority by the Government and will explicitly addresspolicy issues at the subsector level. Thus, the impact of tariffs, traderestrictions, regulations and local content laws will be assessed andrecommendations made on how to improve the policy framework for theefficient development of the subsector. Further, these studies willcarefully assess the role of public investment in the subsector and togetherwith a program of technical assistance to the Investment Coordinating Boardstrengthen the capacity of Government agencies to evaluate large complexprojects. As part of this technical assistance program, the Governmentplans to send a selected number of officials for overseas training inmanagement of complex projects, export promotion and export financing. TheBank has agreed to supervise and finance a number of these studies andrelated training. For that purpose, $5.6 million including $200,000 fortraining is included in this project (para. 5.01).
1.09 Although immediate across-the-board reforms are not likely inthese broad policy areas, it is not unreasonable to expect the Government,during the next 3 or 4 years, to implement the initial steps of a phased
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program of reform. Such steps could include: further improvement in theexport credit and duty drawback system; implementation of a first roundtariff cuts reducing some of the high and redundant nominal tariffs; basedon the outcome of the subsector studies and work of the technical team ontariffs, further specific tariff cuts aimed at evening and reducing levelsof effective protection across subsectors; major simplification ofGovernment procedures in specific subsectors; some improvement in theGovernment-s project evaluation and promotion procedures; and implementationof initial steps to streamline regulations for the whole industrial sector.The Bank will be working closely with the Government in many of these areasand will closely monitor performance.
The Financial Sector
1.10 Financial Institutions. The Indonesian financial sector comprisesa commercial banking system dominated by six state-owned banks including:the state development bank, Bank Pembangunan Indonesia (BAPINV0); BankIndonesia (BI), the central bank; 79 private national commercial banks; 10foreign banks; three development finance companies; and 26 RegionalDevelopment Banks (RDBs). As of end-1981, the aforementioned commercial anddevelopment banks (excluding rural banks) had a total of more than 1,000branch offices. Private commercial banks account for only about 5% of thetotal gross assets of financial institutions. Currently, the assetstructure of the financial system is characterized by a dearth of long-termcredits; short-term credits of less than one year maturity account forapproximately 75% of all credits to the manufacturing sector. The paucityof long-term instruments has led to substantial rollover (between 70% and90% of total) of short-term credits, particularly by state commercial banks.To help meet the need for long-term funds, the Government, through BI,directly finances certain large-scale priority investments in the publicsector and provides rediscount facilities for other industrial investmentsto state banks through various Government-sponsored credit programs, e.g.,the medium-term investment (KIB) credit program for medium- and large-scaleenterprises and the small investment/working capital (KIK/KMKP) creditprogram for smaller enterprises./1 The five state commercial banks andBAPINDO are the major channels of these term credits. BAPINDO accounts forabout a third of outstanding term loans to the industrial sector. Since thereactivation of the Jakarta Stock Exchange in 1977, a capital market began
/1 The Kredit Investasi Besar (KIB) program provides credits of up to15 years at 10.5% to 13.5% p.a. rate of interest depending on loan size;BI refinances 65-80% of loan amounts. The Kredit Investasi Kecil (KIK)program, which BI refinances up to 100% of loan amounts, provides small(up to Rp 15 million) investment credits of up to 10 years, at 10.5%p.a. rate of interest, while KMKP loans for permanent working capitalare extended for up to three years at 12% p.a.
to develop, but it is still small; only 13 companies have gone public andthere is little activity in bonds. The roles of the major financialinstitutions in industrial financing are described below.
1.11 Bank Indonesia plays an important role in Indonesia-s financialsystem. In addition to its usual central bank functions, BI provides directcredit to a number of state enterprises for priority projects and refina-'facilities for banks under the Government-sponsored credit programs notedabove. Of the total credits outstanding as of December 31, 1981, directcredits provided by BI to specific priority projects accounted for $4.2 bil-lion, or over 25%. BI has also played a promotional role in the creation ofthe specialized financial institutions, such as the Private pevelopmentFinance Corporation of Indonesia (PDFCI), the Indonesian Development FinanceCompany (IDFC), P.T. ASKRINDO (a credit insurance company) and P.T. BAHANA(a venture capital company).
1.12 The five state commercial banks dominate the banking system and,as of end-1981, held nearly 80% of all assets of deposit money banks and hada network of nearly 700 branches. These banks have charters for differentsectors, but, in practice, there is much overlap of functions andactivities. Lending and deposit rates of state banks are fixed by BankIndonesia except demand deposit rates for deposits less than six months.Deposits with state banks are guaranteed by the Government. The overalllevel of their lending both for working capital and investment financing, aswell as their lending priorities, are determined by Bank Indonesia. Incontrast, private banks, which are subject to countrywide credit ceilingsand limits on foreign borrowing, are free to set their own lending anddeposit rates. Public enterprises are required to bank with state banks,assuring the latter a large command over deposits. Moreover, in carryingout the credit programs on behalf of the Government, state banks rediscountwith BI at relatively low nominal and effective interest rates. The statebanks also provide full foreign exchange facilities and services.
1.13 BAPINDO was established in 1960, reorganized with Bank assistancein 1971 and now represents a major source of medium- and long-term financefor the industry and maritime sectors. In 1981, BAPINDO's term loans andinvestment approvals for the industrial sector, amounting to Rp 249 billion($377 million), financed about 17% of domestic industrial investmentsapproved by the Investment Coordinating Board; its term lending andinvestment operations in the same year represented 32% of total state bankloan approvals. Like state commercial banks, its interest rates for lendingoperations and deposits, as well as its priorities, are determined by theGovernment.
1.14 In addition to BAPINDO, there are 26 regional development banks(RDBs) located in the provinces. Their capital shares are owned by regionalgovernments. Although designated as development banks, they have, up to the
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present, largely provided commercial banking services and treasury-typefunctions to regional governments. The quality of these banks varies widelyand their capital base remains narrow. In recent years, they have under-taken term lending under the auspices of the KIB and KIK/KMKP programs,but much needs to be done to transform them to proper development banks.Inadequate staff and absence of strong internal organization are someof the constraints to their emergence as development banks. Since early 1980,Bank Indonesia has been implementing a program to upgrade the operations ofthese banks. The two-year upgrading program was completed in October 1982.However, it is now realized that the program should be continued over the next2-3 years with emphasis placed on RDB staff training and further improvementof term lending operations (para. 3.r-4).
1.15 There are three nonbank financial institutions that are principallyengaged in granting medium- and long-term credit and taking equity partici-pations. They are PDFCI, IDFC and PT BAHANA. Nine other nonbank financialintermediaries are classified as investment-type institutions, of which fiveare joint ventures between the five state commercial banks and foreignshareholders. These institutions deal mainly in commercial paper andpromissory notes and provide services of a merchant banking nature. Inaddition, there are four private savings banks, one state-owned savings bank,3,550 village banks, 2,143 paddy banks and 152 market banks. The role ofthese secondary banks in the country s financial sector is small due to theirlimited resources.
1.16 The Policy Environment. Current objectives of Indonesian finan-cial policy are: (a) the maintenance of price stability; (b) allocation ofcredit to specific sectors in accordance with predetermined priorities;(c) support for the weaker economic groups; and (d) promotion of institutionsto fill perceived gaps in the financial structure. The main monetary instru-ments used by the Government to pursue these objectives have been mandatedinterest rates, credit ceilings and the discount window.
1.17 The current interest rate structure for state banks which has beenin effect since 1978 is characterized by an interlinked network of lending,deposit and rediscount rates regulated by the Government and BI. Lendingrates for short-term credits range from 9% to 21% p.a. with their weightedaverage equal to 15% p.a. Interest rates on term credits vary from 10.5% to13.5% p.a. for maturities from one to ten years, depending on loan size.Deposit rates range from 3% to 15% p.a. depending on the type and maturityof deposit (Annex 1). Over the period 1975-80, the level of lending rateshas consistently lagged behind domestic inflation rates, leading to negativeor low positive real interest rates. Since 1981, however, when the annualinflation rate fell to 7.1%, both lending and deposit rates became positiveand remained positive through 1982. With price adjustments in domestic oilproducts, power tariffs and passenger fares, the domestic price level isexpected to increase. Domestic inflation is now projected to range from
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11-13% p.a. in 1983-85. /1 As a consequence, the current lending and
deposit rates could become marginally negative at least in the short run.Such low interest rates contribute to misallocation of resources, lead toincreased subsidies from Bank Indonesia to support the operations of state
banks, and discourage savings.
1.18 With fixed and low interest rates, credit ceilings became necessaryto control the expansion of credit. While such ceilings may be necessary ata time of inordinate price increases, their existence at times of moderateprice increases lead to substantial resource costs. The existence ofceilings create biases in favor of large and official borrowers at the expenseof new entrants to the credit market. As a result,, the state bank dominatedcredit system favors well established, large public enterprises that arecapital intensive. Moreover, at times of increased liquidity, as in 1973 and1979, when oil prices escalated, the combination of credit ceilings and fixedinterest rates has encouraged state banks to hold larger deposits abroad. Atpresent, however, current account deficits in the balance of payments havenecessitated a repatriation of these deposits. To encourage the repatriationof state bank deposits, Bank Indonesia is offering them deposit ratescomparable with foreign deposit rates.
1.19 The emerging balance of payments deficits are an additional reasonto adjust interest rates to help prevent short-term capital outflows.Indonesia-s open foreign exchange system with fixed exchange rate regime hasserved the country well in the past. Its continuance at a time of largebalance of payments deficits requires, among other policy actions, a movementon the domestic interest rate front.
1.20 The third policy instrument to channel credit to different sectors,keep onlending rates low and to provide adequate margins for onlendinginstitutions has been the discount window. Under the present provisions,credit is channeled to different activities by creating differentialincentives for financial intermediaries through the discount rate and discountproportions. Some 23 different discount categories are provided through thediscount window (Annex 1). Such a selective approach has become toocumbersome to administer and supervise, and, given the fungibility of money,desired objectives for use of funds have not always been reached. BI has beenaware of these problems and, in October 1982, eliminated the rediscountingfacilities for working capital credits at lending rates of 13.5% and above.
1.21 Financial Policy Reforms. The Bank has had discussions with theauthorities on the need for reforming the current financial regime at themacroeconomic level both in the context of the overall policy environmentand in relation to industrial finance. The recent reduction in oil revenueshas led to a much nore difficult and constrained balance of payments andbudgetary position and the Government has become increasingly aware in
/1 These projections will be adjusted following the March 30, 1983 devalu-ation.
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recent months of the need to take fundamental measures to mobilize savingsand improve the allocation of increasingly scarce resources. Along with theraising of lending and deposit rates, other reforms are required to bringabout a consistent and effective policy framework to replace the presentsystem. These would include the replacement of the system of prescribedceilings by a more demand determined credit system, reduction in the creditsubsidies given through the discount window and liberalizing of the creditallocation mechanism to lead to a price determined system.
1.22 The Government is likely to follow a gradual and phased approachto reform. As noted above, one action the Government recently tookwas to eliminate the rediscount facilities for loans that are extended atinte\rest rates of 13.5% p.a. This has affected a4.out a third of the creditsextended by state banks and has created some pressure to raise the lendingrates of the state banks, although no change has taken place as yet. Inaddition, the current balance of payments deficits and the Government'srecent moves to establish a bond market will necessitate serious considera-tion of the current interest rate structure and the associated financialregime. The Bank is currently discussing these and other policy issues inthe context of the broader adjustments that may be necessary in response tothe rapidly changing international and domestic circumstances describedabove. In connection with the proposed loan to BAPINDO, the appraisalmission discussed the effect of the present interest rate regime on BAPINDOand quantified the cost to the Government of the subsidies being provided toBAPINDO./l This issue was again discussed with the representatives of theGovernment and BAPINDO at negotiations to illustrate some of the costsinvolved in the present interest rate regime and to provide support for thebroader policy dialogue which is currently under way.
Bank-s Role in the Industrial and Financial Sectors
1.23 The Bank's Past Industrial Lending. The Bank's involvement in theIndonesian industrial sector, so far, has been aimed at: (a) supporting theGovernment's investment program in key industries such as fertilizer; (b)promoting strong development finance companies (DFCs) to provide termfinance for investments in the private sector; (c) delivering financial andtechnical assistance to SSEs; and (d) helping develop local capability forestablishing and operating industrial estates. To date, the Bank Group hasprovided a total of $557.5 million to the Indonesian industrial sectorcomprising six DFC loans made to BAPINDO ($157 million) and the PrivateDevelopment Finance Company of Indonesia ($18 million), three loans forfertilizer production ($220 million), two loans for small enterprise develop-ment ($146 million) and one loan for industrial estates ($16.5 million).
/1 The overall subsidy rate estimated as the difference between theopportunity cost of capital including that of cost of intermediationand the lending rates of BAPINDO amounted to 12.5% p.a. in 1982. Onthis basis, total subsidies for 1982 were about Rp 64.3 billion and areexpected to increase to Rp 333.8 billion by 1987, if the currentinterest rate structure is maintained.
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1.24 Performance Under Bank Group Projects. Since 1972, when the firstIDA credit was made to it, BAPINDO has made substantial progress in terms ofits institutional development. The specific areas where improvements are mostnotable are: (a) substantial operational autonomy given by the Government toBAPINDO; (b) strengthening of BAPINDO's management; (c) adoption of a "PolicyStatement' to provide sound financial and operating guidelines to BAPINDO'soperations; (d) streamlining of the organization and internal procedures;(e) improved portfolio; (f) re-establishment of BAPINDO's creditworthinessthrough massive capital increase, reduction of overheads, write-offs ofuncollectable loans, collections from large state enterprises and independentaudit of accounts; and (g) upgrading of BAPINDO's capabilities for projectpromotion, appraisal and supervision through staff training and recruitmentand improved operating procedures. As a result, BAPINDO has since emerged asthe country's most important development finance institution with establishedexperience in term lending.
1.25 The Project Performance Audit Report (No. 2563, dated June 29,1979), covering the first credit to BAPINDO (Credit 310-IND), stressed theneed for continued strengthening of BAPINDO's institutional capability,project appraisal and supervision procedures and the need to maintainBAPINDO's operational autonomy. These points had been taken into account inBAPINDO IV (Loan 1703-IND) and are also fully reflected in the design of theproposed BAPINDO V project. There have not been any major delays in thedisbursement of Bank funds. Proceeds of the BAPINDO IV loan are fullycommitted and disbursements are expected to be completed on schedule bySeptember 30, 1983.
1.26 Apart from the significant institutional improvements noted above,BAPINDO's lending under the Bank loans has financed substantial investmentsleading to significant economic benefits being generated in the industrial andmaritime sectors. As of December 31, 1982, foreign exchange proceeds of theBAPINDO IV loan (Loan 1703-IND) were extended to 54 subprojects with a totalcost of Rp 138 billion ($208 million). Incremental jobs created under thesesubprojects numbered 7,551 at an investment cost per job of about $46,000.Although this capital/labor ratio suggests an increasing capital intensity inBAPINDO's operations, it is also indicative of the Government's emphasis onlarge-scale, resource-based industries during the Third Five-Year Plan (para.1.03). BAPINDO, however, has continued to cater to labor-intensive industriesunder separate credit programs (KIK/KMKP) which are partly funded with Bankassistance (para. 1.27). Under the BAPINDO IV loan, 22 of the 54 subprojectsfall under this category with capital/labor ratios averaging $5,800 per jobcreated. Average ERR per subproject was estimated at 23.1% and FRR at 20.1%which compare favorably with average ERR of 20.1% and FRR of 17.4% of sub-projects financed under the BAPINDO III loan (Loan 1437-IND). On the whole,BAPINDO's development impact under the Bank loans has been satisfactory.
1.27 Performance under other industrial development projects has alsobeen generally good. The fertilizer projects have been successfully imple-mented so that the domestic production of fertilizer was able to meet domestic
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demand. Operational capabilities of PDFCI (Cr. 436-IND and Loan 1363-IND)are under severe pressures at the moment due to weak management, higharrears and its inability to raise sufficient term resources for itsoperations. The implementation of the Pulo Gadung Industrial Estate Project°(Cr. 428-IND) has been slow, but the basis of a soundly run estate, whichcould be replicated elsewhere, has been established. To support theGovernment s small credit programs (KIK/KMKP), a credit and a loan were madeby the Bank Group in 1978 and 1981 respectively. The proceeds have beeneffectively used to finance projects which have had a significant impact onthe development of small-scale industrial enterprises.
1.28 Future Lending Strategy. The Bank is developing a policy-basedstrategy that would address key industrial and financial sector issues,as discussed in the 1981 Industrial Sector Report, with detailed technicalassistance on specific policies and subsectors. Under this strategy, theBank would continue to be involved in policy issues, particularly in areasnoted in paras. 1.05-1.09, where progress can be made and the lendingoperations, to the extent possible, would be designed in a way whichsupports Bank-s policy objectives. The Bank plans to use three types ofinstruments to implement its lending strategy in the industrial sector. Thefirst type is industrial development loans that will be related primarily totrade policy reforms; a first such project will focus on export promotion.The second type will involve loans to financial institutions (such as theone now proposed for BAPINDO) that will be related to developinginstitutional capacity and provide a forum for keeping open and hopefullygradually expanding the dialogue on financial sector reform. The third typeis subsector loans that will focus on policy issues at the subsector level;loans are planned for the pulp and paper and engineering industries.Technical assistance designed to build up institutional capability ofproject agencies would continue to be stressed in all industrial developmentprojects.
1.29 Project Objectives and Justification. The principal objectives ofthe proposed project are to: (a) provide foreign exchange needed tofinance viable medium- and large-scale industrial projects; (b) continuethe Bank-s ongoing technical assistance to upgrade BAPINDO-s staff andimprove its organization to meet the rapid expansion of its operations; and(c) provide financing for sectoral and policy studies leading to policyrecommendations, preparation of industrial projects and other technicalassistance in support of industrial development in the next Five Year Plan.During the past decade, the Bank has provided BAPINDO with advice and has closelymonitored its progress in implementing various institution-building efforts andfinancing development projects. BAPINDO has performed well with the Bank'sassistance, but, given the fact that institutional development is a long-termprocess, much remains to be done to transform BAPINDO into a more dynamicand self-sustaining institution. Moreover, as it has entered a new phase offast growth and more complex operations, the problems it faces in themedium-term are also different from the ones encountered in the 1970s. To
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meet these new challenges, BAPINDO would need to continue ongoing institu-tional reforms and further strengthen its institutional capability in anumber of areas discussed in Chapter II. The proposed Bank loan wouldenable the Bank to maintain continuity in its ongoing financial andtechnical assistance to a key financial institution (BAPINDO) and to step upits involvement in important financial and industrial development issues inIndonesia.
II. INSTITUTIONAL DEVELOPMENTS
Institutional Perspectives
2.01 Since the Bank last (1978) appraised BAPINDO in conjunction withthe Fourth Loan (Loan 1703-IND), BAPINDO's annual loan and equity investmentapprovals have expanded dramatically (Chapter III). The number of projectsfinanced increased from 123 in 1978 to 1,303 in 1982. BAPINDO-s operationshave also become more diversified as its involvement increased in largeDrojects (cement, textile, plywood, paper and maritime industries) whichrequired complex financing and technical assistance packages. At the sametime, its lending to a large number of small industries under special creditprograms also expanded beginning in 1980. During the period of rapid growth,BAPINDO's professional staff increased by only 13% p.a. Staff training hasnot been able to increase the number of skilled personnel in line with theexpanding volume of operations. While there have been significantimprovements in staff efficiency and productivity in the past, particularlyafter the Program of Action in 1977 was instituted, the rapid growth ofBAPINDO's operations over the last several years has placed considerablestrains on the institution as a whole, and a need for a further reform wasfelt to be urgently needed to help the institution adjust to its expandedvolume of operations.
2.02 Recognizing these problems, BAPINDO engaged a management consultingfirm to advise on all aspects of BAPINDO's organization, operations andprocedures with a view to improving its operational efficiency. Based in parton the consultant's recommendations, a General Improvement Program (GIP) wasinstituted on March 1, 1981, covering far reaching changes in the organiza-tional structure, streamlining of operational procedures and staff training.As discussed in the following sections, the implementation of the GIP posed anumber of difficulties which still need to be ironed out. The principalbottlenecks include the lack of coordination among the newly establishedunits, inadequate staffing and lack of clear operational responsibilitiesamong operational units and branches. BAPINDO has now decided to intensifyits institution-building efforts to address these problems. For this purpose,it has decided to implement a new Action Program in 1983 and 1984.
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Action Program 1983/84
2.03 In 1982, a review of BAPINDO-s progress under the GIP led to a newAction Program for implementation in 1983/1984 (Annex 4). The proposedprogram calls for specific measures, supported by appropriate technicalassistance, designed to: (a) strengthen BAPINDO's project appraisal andsupervision by reducing overlaps and streamlining of procedures within theHead Office and the hranches (para. 2.07); (b) intensify staff training anddevelopment (paras. 2.09-2.10); (c) improve BAPINDOs planning process andmanagement information system (MIS) (paras. 2.11-2.12); and (d) improveinternal communication and liaison with outside agencies including, in
,_particular, its technical assistance to RDBsgj(para. 3.14). The proposedAction Program, which would address institutional bottlenecks of BAPINDOnoted in para. 2.02, constitutes an important component of BAPINDO'sDevelopment Strategy for 1983-85 (Annex 3), which gives, in specific terms,BAPINDO's plans (and actions it contemplates) in the areas of operations,resource mobilization, staff development, training, planning, research/promotion, computerization procedures, etc. The Development StrategyStatement, as approved by BAPINDO-s Supervisory and Managing Boards, wouldnot be amended without prior Bank approval. Specific milestones andobjectives to be achieved particularly during 1983 are set out in BAPINDO'sAction Program for 1983/84 and are satisfactory to the Bank. Progress onthese measures will be monitored by the Bank.
Organization
2.04 Management Structure and Process. BAPINDO's management structurehas remained unchanged since 1972. A two-man Supervisory Board representingthe Minister of Finance and the Governor of the Central Bank (BI) advisesBAPINDO on policy matters, provides guidelines on development priorities,approves BAPITIDO-s financial operations and budget and acts as an essentiallink between the Government and BAPINDO. Directly bhelow this tier is thefive-man Board of Managing Directors, headed by the President Director, whohas held that position since 1971. The President has provided continuity atthe top level and this has been an important factor contributing toBAPINDO's growth over the past decade. Each of the other four ManagingDirectors supervises four departments and a portion of the branches.Replacement of two Managing Directors who retired from service in 1980 and1981 by experienced professional managers (one from within BAPINDO and theother from Bank Indonesia) has further strengthened the Board's decision-making process. At the middle-management level, BAPINDO is managed by agroup of experienced technocrats at the Head Office, supported generally bya strong group of branch managers, many of whom have risen from the ranks.BAPINDO's management is generally effective, although some adiustments arenow needed to delegate decision-making power so that management can givemore of its attention to BAPINDOTs future directions and developmentalstrategy.
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2.05 Head Office. Following the adoption of the GIP on March 1, 1981,BAPINDO made a number of organizational changes. At the Head Office: (a) aseparate department (Credit Department III) was set up to handle specialcredits for small firms, a function formerly handled by the Credit andBranches Supervision Department; (b) a new Funds Department was establishedto be primarily responsible for resource mobilization, formerly handled bythe Finance and Accounting Department; (c) supervision of projects in diffi-culties was transferred from the Credit and Branches Supervision Departmentto a new Special Debtors Supervision Department; (d) the training functionwas separated from the Personnel Department and a new Education and Trainingunit was created; (e) electronic data processing formerly handled by thePlanning Departmen_t was transferred to a new unit; and (f) the ,unit handlingtechnical matters was abolished and its functions transferred to the ResearchDepartment. In addition, a new Planning and Budget Committee was formed toconsolidate and screen annual work programs and budgets before presentation tothe Board. The main change at the branch level associated with thisreorganization was the upgrading of eight subbranches to branches (para.2.07). The reorganization raised the number of Head Office Departments from14 at the end of 1980 to 18 by March 1981, and the number of full-fledgedbranches from 10 to 18 during the same period (see Organizational Chart).The responsibilities of the credit departments and supervision departmentshave been streamlined. Credit Department I handles lending to industries inJava and Bali; Credit Department II is responsible for lending to industriesoutside Java and Bali and to the entire maritime sector; and Credit Depart-ment III is involved in lending to small industries. The Credit and BranchSupervision Department supervises the loan portfolio and the Equity Invest-ment Department supervises the equity portfolio, both with the support ofthe branches. The Special Debtors Supervision Department deals with problemprojects. During the early stage of project identification, the ProjectPromotion Department plays an important role. The Research Department iscalled upon to assist in both project identification and project appraisal.BAPINDO's management expects that with the reorganization, BAPINDO would bebetter prepared to handle its growing volume of operations, maintain ahigher level of operational efficiency, develop resource mobilizationcapability and minimize administrative costs over time. The general andadministrative expenses, while increasing in absolute amounts each year, areprojected to decline as a percentage of total assets (from 2.5% in 1982 to2.1% in 1987).
2.06 The process of BAPINDO-s reorganization has given rise to a numberof problems, a feature not unusual for a far-reaching reorganization of thiskind. The reorganization meant changes in managers of 15 of the 18 depart-ments and appointments of several new branch managers through transfers orpromotion from the Head Office. The problem of securing adequate numbers ofskilled staff for the new departments has been particularly difficult.Although the functions of the new units had been defined prior to the
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reorganization, detailed job descriptions and operational guidelines had notbeen sufficiently clarified. This resulted in some overlapping of functionsbetween the Head Office and branches, particularly in project appraisal.Delegation of approval authority within the Head Office and to the newlycreated branches has been effected, but its implementation could be furtherimproved. BAPINDO would address these problems under its proposed ActionProgram for 1983/84 (para. 2.03).
2.07 Branches. The upgrading of eight subbranches to full-fledgedbranches, though in line with BI policy, appears to have aggravated theoverall problem of staffing and coordination within BAPINDO. To enable thesebranches to undertake their newly acquirred appraisal and follow-up functions,existing staff had to be trained and supplemented with more experienced ones,transferred from the Head Office and other branches. In retrospect, this movehas had a negative impact on overall staff productivity, as adequatereplacements could not be found immediately through recruitment or training.Since the GIP-s long-term objective is to transform branches into independentproduction and profit centers, there is a need to strengthen existing branchcapability before further expansion is considered. In its Action Program for1983/84, BAPINDO plans to address these problems by: (a) strengthening HeadOffice monitoring of and assistance to branches; (b) clearly defining branchoperational responsibilities vis-a-vis the Head Office; (c) accelerating thetraining of branch staff over the next two years; and (d) simplifying periodicreporting requirements. While these measures are being undertaken, BAPINDOwill not open any new branch, with the exception of three new branches alreadyplanned to be opened in early 1983. Specific measures to be taken by BAPINDOto achieve the above objectives for branch improvements are set out in theproposed Action Program for 1983/84.
Staffing
2.08 As of December 31, 1982, BAPINDO's total staff numbered 892, ofwhich 532 were professionals. Of the 892 staff, 550 were in the Head Officeand 342 in the branches. During 1978-81, its staff grew at an annual rate of13%. BAPINDO plans to increase its staff in line with the growth of opera-tions. The ratio of operational to non-operational staff will be maintainedat 65:35. The staff turnover rate has been low at around 3% p.a. during theperiod. To obtain maximum benefit from the projected staff growth (tenta-tively set at 12% p.a. during 1983-87), BAPINDO plans to formulate awell-balanced recruitment plan, supported by appropriate skills-relatedtraining and reassignment policies.
2.09 The quality of BAPINDO staff has improved over time. However,there is a need for more trained and experienced project officers at thebranch level, and a need for longer-term career planning and staffdevelopment programs. Staff evaluation procedures, taking into accountefficiency and productivity, need to be systematized. BAPINDO plans to
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rectify these problems by recruiting more economists, financial analysts andengineers for operational units and by extensive training and reassignments.Under the project, a four-man management consultant team will be provided,including an advisor who would be engaged to assist BAPINDO in implementingappropriate staff development policies and streamlining BAPINDO's personnelmanagement policies and procedures (para. 2.17).
Training
2.10 BAPINDO offers in-house training on basic project financing, projectappraisal and supervision, but its overall training capability is constrainedby insuSficient planning, scarce availability of expe'-ienced trainers,inadequate course materials and to some extent lack of training facilities anddevices. External training courses conducted locally at such institutions asthe University of Indonesia and the Training Institute for Banking run by BIcan accommodate only a limited number of staff and cover general bankingsubjects and loan officers courses. Overseas training on specialized bankingtopics has also been limited only to a few staff. In 1981, 311 staff attendedsome form of training, including training overseas for 25 managerial staff.BAPINDO's training program has not kept pace with its changing needs andshould be planned more systematically. As a first step to remedy theseproblems, BAPINDO established a separate training unit in 1981. After areview of its training policy, BAPINDO has recently adopted a new trainingsystem which, in contrast with the past, aims at linking training - in-houseand external - to operational performance. Under this system, trainingobjectives will be determined in close consultation with the PersonnelRelations Department which is responsible for evaluating individual staffperformance and career objectives. Training courses will be offered inprogressive phases covering prerequisite skills in management, marketing,accounting and project analysis (1st Phase); critical issues in projectappraisal, implementation, supervision and general principles of management(2nd Phase); and specialized topics on bank management (organization, humanrelations, communication and corporate planning) will constitute the highestphase to be offered to selected higher-level staff. In 1983, BAPINDO plans totrain 30 staff members under the first phase of the program, 60 under thesecond and another 30 under the third level. In addition, 50 selected staffwill be sent overseas (another 50 in 1984) for more specialized training invarious aspects of development banking. While these targets appear lowcompared with previous years, and in light of present training needs, they arereasonable considering that in the first year of the program, BAPINDO wouldneed to build up its full-time training faculty (from 8 to 14), expandtraining facilities, develop new course materials and acquire additionaltraining equipment and devices. To ensure coordination between personneland training policies, the same advisor mentioned in the previous paragraphwould help BAPINDO carry out the detailed training plan for 1983/84 anddevelop appropriate course materials. Financing for a limited amount($300,000) of specialized training materials and devices would also beprovided. In addition, the project would finance overseas short- andlong-term training (up to two years each) for 100 selected staff (para. 5.01).
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Corporate Planning
2.11 So far, BAPINDO½s planning exercise has concentrated on settingoperational targets and budget on an annual basis. The current 5-Yearcorporate plan still has to be linked effectively to manpower and organiza-tional aspects so that it could be used effectively as a management tool.There is a need to monitor and evaluate overall performance against agreedannual and five-year targets. The Planning Department should bestrengthened by additional staff and procedural reform. As of December 31,1982, the Planning Department group had only eight staff including twosupport staff. BAPINDO recognizes the weakness of its planning process andplans to strengthen it by training and assignment of new staff to strengthenits operational and personnel planning capability.+ One of the fourconsultants to be provided under the project would assist the Planningand other departments in formulating an integrated corporate plan andrecommend to the Board the necessary institutional arrangements andoperational guidelines to implement and monitor the plan. The planningadvisor would be attached to the Board of Managing Directors.
Management Information System (MIS)
2.12 Over the years, BAPINDO has developed a comprehensive system ofreporting from branches and departments. However, reports have becomeoverly descriptive and long, making it difficult for various levels ofmanagement to evaluate and utilize them as a tool for management control.Starting in mid-1983 BAPINDO plans to conduct a thorough review of internalreporting procedures with a view to simplifying the reports and improvingthe system of processing reports and providing feedback both to and from topmanagement. Part of this review will focus on the availability and applica-tion of existing computers, the need for additional equipment, programs andstaff training. By August 31, 1983, BAPINDO management will have a prioritylist of areas that would need to be computerized during the next two years.Following these preparatory steps, BAPINDO proposes to draw up, with thehelp of a full-time consultant, an overall computerization plan to beimplemented in the next two years. Under the project, a managementinformation systems consultant with strong computer background will adviseBAPINDO on various alternatives of doing this and assist it in streamliningand computerizing its management information procedures.
Operating Policies
2.13 The 1960 BAPINDO Act and 1972 Policy Statement constitute the basisof BAPINDO's operational policies and guidelines. These policies are supple-mented by implementing regulations issued by the Board of Managing Directorsfrom time to time, reflecting largely BI-s regulations and the Government sdevelopment priorities. Besides defining broad guidelines for the basiccharacter and thrust of BAPINDO-s development assistance, the PolicyStatement limited BAPINDO-s outstanding long-term debt to three times itsequity; restricted its exposure in a single enterprise to 20% of its equity;limited its equity investments in any single enterprise to 10% of its equity;required that its total equity investments should not exceed its own total
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equity; and prohibited BAPINDO from assuming the foreign exchange risk offoreign currency loans. With few exceptions, which were approved by itsSupervisory Board, BAPINDO has complied with its Policy Statement. In view ofthe growth of its operations and the growing complexity of its activities,BAPINDOTs Supervisory Board has approved revisions in the Policy Statement(Annex 2). Revisions relate to the Managed Funds provision (para. 3.12),BAPINDO-s current and debt/equity ratios (paras. 3.17 and 3.18) and itsprocurement policy (para. 5.07). The Policy Statement may not be amendedexcept in agreement with the Bank.
Procedures and Standards
2.14 Project Appraisal. BAPINDO's appraisal procedures are specified inan appraisal manual. Project appraisal is done by appraisal teams of 3-4officers led by an experienced project officer. Since such teams usuallyspecialize in specific types of industries they tend to develop subsectorexpertise over time. The main criteria used by BAPINDO in deciding whether ornot to finance a project is the feasibility of the proposed project based onits economic, technical and financial merits rather than collateral offered bythe project sponsor. Environmental factors are important considerations inproject appraisal of resource-based industries. ERRs and FRRs are routinelycalculated on all loans of $1 million and above. The quality of appraisalreports, particularly on Bank-financed projects, has continued to improve andmeet Bank-s DFC standards. Market and economic analysis, however, could befurther improved with more attention given to domestic and external demandforecasts, the conditions and prospects of specific industrial subsectors andthe effect of various policy variables on the economic rate of return ofsubprojects.
2.15 BAPINDO follows a two-tier system of appraisal procedures. Loanrequests from the borrowers are received by the branches which carry outpreliminary screening of the application. If the required documentation isfound complete, the branches appraise the project and forward their appraisalreports to the Head Office which conducts its own appraisal in a majority ofthe cases, often repeating the work done by the branches. The quality anddegree of completeness of appraisal at the branch level varies considerablydepending upon staff capability and workload at the branches. This system ofappraisal contributed to long waiting time (as much as over a year) in somebranches before processing begins on a loan application. The loan processingtime also continues to be long (over 300 days on average). Appraisal reports,particularly at the branch level, are too long. BAPINDO has recentlydelegated appraisal responsibility for smaller loans and loans in certainsectors to the branches to reduce duplication and follow-up training isplanned for branch operational staff in 1983/84. The training programsdescribed in para. 2.10 will have a strong focus on project appraisal andstress market and economic analysis as an expansion in the number of trainedstaff is the most important ingredient in improving project appraisal.Several of the advisors referred to in para. 2.17 will also assist BAPINDO inimproving this aspect of its operations. Computerizing appraisal data forfuture retrieval should also improve appraisal quality and reduce processing
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time. By December 31, 1983, BAPINDO would: (a) formulate new appraisalcriteria based on economic, financial and technical considerations; (b)further clarify the appraisal responsibilities of branches and Head Office;(c) review and revise the loan appraisal procedures to further reduce loanprocessing time; and (d) update the project appraisal manual to reflect theabove changes. In addition, BAPINDO, with assistance of the seniordevelopment banking advisor, would develop, by March 31, 1984, a system forexercising quality control of project appraisal reports.
2.16 Project Supervision. BAPINDO maintains a project supervision manualand a project monitoring system that is quite comprehensive. Once a loan isapproved, project monitoring and implementation remain the responsibility ofthe respective Credit Departments at the Head Office. After the project isimplemented, supervision responsibility is passed on to the branches, exceptfor problem projects which are monitored by the Special Debtors SupervisionDepartment at the Head Office. The Credit and Branch Supervision Departmentassists branches in project supervision. Performance of projects is monitoredby the Head Office and branches through regular reports from sponsors, phonecalls and regular visits by BAPINDO staff to the projects. However, as theportfolio grew rapidly in the last few years, supervision tasks have becomemore onerous and staff capability to provide guidance to clients in difficul-ties has been put under severe pressures. Coordination between the HeadOffice and branches in this respect has also become a problem. The need tohave a better coordinated monitoring system on project performance was felturgently needed. BAPINDO will address these problems by: (a) recruiting andassigning more experienced staff to supervise projects; (b) systematizingclients reporting procedures and forms; (c) introducing a monitoring systemfor problem projects; and (d) increasing the frequency of regular supervisionvisits by Head Office staff to the branches to improve coordination andfeedback. The timetable for implementing these plans is contained in thedetailed 1983/84 Action Program which will be monitored by the Bank.
Technical Assistance Requirements
2.17 As discussed in the foregoing paragraphs, BAPINDO-s Action Programfor 1983/84 (Annex 4) would address the most critical institutional,operational and staffing problems that now affect its overall efficiency andcould stand in the way of its future growth. In view of the variety of tasksinvolved and to simplify coordination, BAPINDO has decided to hire amanagement consulting firm to help individual operational units implement theAction Program. The management consulting firm would be expected to provide afour-man team comprising experts in personnel, human resource development andtraining (paras. 2.09-2.10); corporate planning (para. 2.11); managementinformation systems (para. 2.12); and consultancy services (para. 3.14). Inaddition, BAPINDO would engage for 24 months the services of a top-leveldevelopment banking advisor to advise the Board on general operations andcorporate strategy and assist it in supervising the implementation of the
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Action Program, particularly those aspects relating to improving projectappraisal and supervision. Detailed Terms of Reference (TORs) have beenreviewed by the Bank and are contained in the Project File and the selectionof the advisor and the consulting firm would be subject to the prior approvalof the Bank. BAPINDO has agreed to have the contracts with the advisor and amanagement consultant firm, satisfactory to the Bank, signed by September 30,1983.
III. BAPINDO'S OPERATIONS
Summary and Overview of Operations
3.01 BAPIN4DO's financial assistance for the industrial and maritimesectors, presented in Annex 5, Table 2 comprise: (a) term loans for fixedasset financing for all sizes of firms; (b) permanent working capital loansassociated with term loans; (c) loan syndications with other financialinstitutions; (d) equity investments; (e) special credit schemes designed toassist small-scale enterprises; and (f) cofinancing with and technicalassistance to RDBs. Additionally, BAPINDO administers Government funds forspecific development projects, carries out economic and research studies, andundertakes the promotion of particular projects.
3.02 BAPINDO's lending terms and priorities, like those of other statebanks, are set by the Government through BI which directs allocation ofcredit mainly through preferential interest rates and the rediscountmechanism. Unlike other state commercial banks, however, BAPINDO is the onlybank authorized by BI to make loans of over Rp 2.5 billion ($3.6 million) orwith maturities of over 10 and up to 15 years; to make long-term workingcapital loans; and to make equity contributions for the projects to qualifyfor financing under BI-s credit programs.
3.03 Since 1978, when BAPINDO was last appraised, BAPINDO's operationshave recorded an unprecedented expansion. Annual new approvals of loans andequity investments have increased from Rp 35 billion ($50 million) in 1978 toRp 559 billion ($799 million) in 1982, an average annual growth rate of 103%.Consequently, BAPINDO's loans and equity investments outstanding rose sharplyfrom Rp 120 billion ($171 million) in 1978 to Rp 578 billion ($826 million) asof December 31, 1982. As reflected in new approvals between 1978 and 1982(shown below), the structure of BAPINDO's operations has also changed as itsshare in special loans for small enterprise development and local contractorsalso increased significantly.
3.04 The bulk of the growth in annual approvals (70% in 1982), however,has come from investment loans to industry (excluding portions syndicated withother banks). Investment loans to the maritime sector for the purchase ofused and new ships have also grown, but accounted for a declining share ofBAPINDO's loan approvals due to the availability of export/suppliers creditsfrom abroad and fluctuations in demand. The maritime sector accounted forabout 12% of total term loans approved in 1978-82.
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Table 1: SUMMARY OF OPERATIONS, 1978-82(Amounts in Rp billion)
Total Operations 35.3 100.0 559.1 100.0 1,231.0 100.0 103.1
Total Disbursements 38.1 314.2 710.6 73.6
/a Including syndicated loans./b 1980/81 growth rates only.
Source: Details are given in Annex 5, Table 2.
3.05 The rapid growth of BAPINDO½s operations between 1978 and 1982 isdue to a combination of factors. The overall investment climate remainedfavorable, since the adverse effect of the worldwide recession which pre-vailed during the period was cushioned to a large extent by a relativelybuoyant, oil-based economy. While there was a declining demand for exportsworldwide, domestic demand for industrial products, supported by risingincomes in Indonesia, continued to remain strong. Government policiesprovided further impetus to demand for credit, as certain large resource-based industries (cement, forest products, petrochemicals, textiles, among
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others) were promoted under the current Third Five-Year Plan. In pursuit ofthis objective, special loans designed to promote indigenous enterprises wereimplemented beginning in 1979/80 adding to the already extensive creditprograms for priority industries.
3.06 During the period of rapid growth, BAPINDO's financial assistancehas also become more diversified and complex, requiring new skills amongBAPINDO staff and development of appropriate operational guidelines. Like allother state banks, BAPINDO participated actively in special credit schemes(Kelayakan, Kepres 14A and KIK/KMKP),/l that are aimed at promoting indigenousenterpreneurs in the small-scale enterprise sector. These special loansaccounted for 50% of total number and only 4% of loan amounts approved didring1978-81, indicating the small average size of individual subloans. BAPINDO,in addition, has expanded its assistance to RDBs since 1980 by providingtechnical assistance to 18 of 26 RDBs, with which BAPINDO had financingarrangements involving KIK/KMKP since 1973. Although these small-scaleindustry loans are expected to have a limited role in BAPINDO's totaloperations in the future, they have, on account of their number and smallsize, required large amounts of time and staff effort to process andsupervise.
3.07 Since 1976, BAPINDO has also participated in syndications of loans,either as a member or as the lead syndicator, with five state commercial banksand two nonbank financial institutions (PDFCI and IDFC) and other foreignfinancial institutions. These operations are encouraged by BI and arerequired for all special credits above Rp 500 million for investment andRp 750 million for working capital. During the period 1978-1982, BAPINDOparticipated as a member of 53 such syndicated loans, which represented about6% of BAPINDO-s total approvals during that period. BAPINDO does not plan toparticipate in any syndicated loans offered by other state banks in 1983/84.
/1 Kelayakan loans are term loans up to Rp 75 million to small indigenousentrepreneurs with easier conditions regarding collateral requirementsand capital contributions to the projects which are judged viable.Kepres 14A are short-term loans for indigenous suppliers or contractorswho require bank financing of up to Rp 200 million to fulfill ordersfrom Government agencies. KIK/KMKP are investment/working capitalloans up to Rp 15 million each, with 75% insurance against credit riskprovided by P.T. ASKRINDO.
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Characteristics of Industrial Loans
3.03 The characteristics of industrial loans committed through December1982 are given in Annex 5, Table 3. BAPINDO½s loan commitments during thisperiod show the impact of large projects, predominantly in the privatesector, on the average size, sectoral and geographic distribution of loans.
3.09 Over the last two-and-a-half years, strong Government emphasis onlarge-scale (lumpy) projects (para. 1.04) notably cement, plywood, textileand oil drilling rigs, has had a strong influence on the average size ofindividual subloans. In 1981, for example, one cement plant from the publicsector was extended a loan of Rp 72- billion ($103 million). In the firstsix months of 1982, two additional large loans for cement projects, one fromthe private sector, had been approved and a third was approved by the end ofthe year. These three loans alone amount to Rp 224 billion ($320 million),or 57% of approvals for 1982. Consequently, the average size of industrialinvestment loans increased every year from Rp 379 million ($541,000) in 1978to Rp 605 million ($864,000) in 1980 and reached Rp 3,935 million ($5.6 mil-lion) in 1982. If loans considered by BAPINDO as large (i.e., exceedingRp 3 billion each) are excluded from the calculation, the average size wouldbe Rp 438 million ($625,000) in 1980 and Rp 2,000 million ($2.9 million) in1982.
3.10 BAPINDO½s investment loans have been reasonably distributed tovarious sectors with relatively higher exposure in textiles, plywood andcement in recent years. In terms of overall regional distribution ofindustrial loans, about 65% of loan commitments continue to be concentratedin the island of Java, the main center of population. However, theconcentration changed dramatically in 1981 when Java only accounted for 32%of total commitments due to one large loan for a cement project in WestSumatra accounting for about 34% and four loans for wood processing projectsin Kalimantan accounting for about 22%. With the emphasis on resource-basedindustries, this trend is likely to continue.
3.11 Other loan characteristics have less clear correlation with thechanging size and composition of BAPINDO's projects. The average maturityof BAPINDO½s investment loans has remained around eight years, compared withabout six years for working capital loans. About 80% of the number and 52%of amount of loans committed during 1978-82 have been for expansion/modernization purposes. During the same period, industrial loans to theprivate sector accounted for over 90% of the number and 77% of amountsapproved. A sample survey of subprojects financed by BAPINDO in 1980 showsERRs of about 20% and FRRs of about 18%.
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Managed Funds
3.12 In 1977, BAPINDO set up the 'Managed Fund" mechanism for Government-sponsored priority projects which exceeded BAPINDO's investment limits or arenot covered under its normal investment criteria. The funds for such projectswere provided by the Government and BAPINDO did not assume any credit risk,simply charging a fee for handling. BAPIiNDO has, in recent years, used it tochannel Government loans from bilateral sources into a few large public sectorprojects. As the Government is shifting direct financing of a number ofpublic sector industrial projects to financing by banking institutions,BAPINDO may be entrusted with the responsibility of financing some of theseprojects whichrmay not qualify under BAPINDO's normal investment criteria. Tosafeguard its viability as a financial institution, BAPINDO has incorporatedin its Policy Statement a provision that specifies: (a) that BAPINDO willapply its normal appraisal procedures to all projects presented to it forfinancing and will accept only those projects that meet its establishedeconomic, financial and technical criteria; and (b) that BAPINDO shalladminister specially provided Government funds to such projects as an agentwithout assuming any credit risk and shall receive an adequate fee for thisservice.
Equity Investments
3.13 Details of BAPINDO's equity investments, as of December 31, 1982,are given in Annex 5, Table 4. The principal objectives of these investmentsare to strengthen the equity base of private pribumi enterprises, to increaseIndonesian share in joint-venture companies, and thus expedite the process ofindigenization of industries. BAPINDO considers most of these investments astemporary in nature and expects to sell its shares in the capital market,giving the first right of refusal to the original owners when the companiesstart to be profitable and adequate offers to buy become available. UnderBAPINDO's Policy Statement, the maximum limit for total equity investments is100% of its net worth. Until 1979, BAPINDO had made few and relatively smallequity investments, amounting each year to less than Rp 2 billion. However,with the intensification of the government policy to develop pribumienterprises, additional funding facilities from BI were made available forthat purpose,/l and BAPIND0-s equity investment approvals increased in number
/1 Loan amounts of up to 65% to 100% of the investment, interest rates of 3%to 4% p.a., maturity up to 8 years, and repayments adapted to the expectedstream of dividends.
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and size, reaching Rp 20 billion ($29 million) in 1980 and Rp 28 billion($40 million) in 1981. As of December 31, 1982, BAPINDO had approved 74equity investments in 52 companies, mostly private, amounting to a total ofRp 61.9 billion, approximately 66% of BAPINDO-s net worth, but it had onlydisbursed Rp 42 billion by that date. When its individual investment ismore than 25% of a company½s shares because of special circumstances,BAPINDO has to obtain prior approval of its Supervisory Board. Altogether,BAPINDO's investments in seven companies have exceeded this limit, repre-senting 27% of its equity portfolio as of December 31, 1982. As the equityinvestments have had relatively low yields, BAPINDO has decided to greatlyreduce the rate of growth in its equity investments in 1983-87 (para.4.02).
Regional Development Banks
3.14 In 1980, BI initiated a program to upgrade RDBs and strengthen theirterm lending capability. To implement this program, BI appointed BAPINDO toassist 15 RDBs (subsequently increased to 18 in early 1982) and IDFC toassist the five relatively more advanced RDBs. The program envisaged atwo-year implementation period ending on October 31, 1982, focussed onimproving RDBs- management and organization, accounting and reportingsystems, and staff skills in project appraisal and supervision. BI allocated$2.5 million out of the proceeds of SEDP I (Credit 785-IND) to defray thecost of the program. The detailed work programs agreed between BAPINDO andindividual RDBs were not completed as scheduled, due to lack of suitablestaff in many of the RDBs, some internal administrative problems and theinadequacy of the training programs for RDB staff. These problems have beencompounded by the uneven quality of BAPINDO's consultancy advice andinsufficient work programming. Therefore, under the proposed project, anadvisor would be hired as part of the management consultant team (para. 2.17)to assist BAPINDO-s RDB consultant group plan its work program more effec-tively, coordinate training of RDB staff and organize subcontracting ofspecialized tasks on which the group lacks the expertise, e.g., accountingsystems, MIS. This support should substantially enhance BAPINDO-s capacityto provide effective help in strengthening the RDBs.
Research and Project Promotion
3.15 To support its operations and role in industrial development,BAPINDO carries out studies including market analysis for particular sectorsor industries and disseminates the results to other Government agencies andits clients. This function has given BAPINDO an opportunity to influencethe design of projects promoted by the Government in the industrial sector.The quality of sector reports, however, has been mixed, partly due to lackof data and partly due to weak analytical framework. This aspect ofBAPINDO's developmental function needs to be further strengthened as theGovernment is planning to promote investments in key resource-basedindustries in the medium-term. BAPINDO has recognized this need and is in
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the process of increasing the number of economists in the Research Departmentand is in some cases beginning to contract some sector studies to universi-ties. BAPINDO has also strengthened its capacity to promote new types ofprojects and projects in the less industrialized parts of Indonesia. Anexpatriate Project Promotions Advisor was engaged in March 1982 and financedunder the Bank's last loan to BAPINDO (Loan 1703-IND). Since then, BAPINDO'spromotional activities as well as criteria have improved significantly,although there is still some scope for improving promotional activity at thebranch level. Under the proposed project, BAPINDO plans to further strengthenproject promotional activities in the branches, by setting and closelymonitoring lending targets for all branches and increasing the frequency ofproject promotion visits of Head Office $staff, assisted by the ProjectPromotions Advisor. This process has already been started.
Financial Position and Performance
3.16 Financial Position. BAPINDO's financial position in recent years,1978-82 (December 31) as summarized in Annex 6, Table 1 has been character-ized by rapid growth and relatively higher leverage. On the whole, BAPINDO'sfinancial position is satisfactory. During the period of rapid expansion inits operations noted in the foregoing paragraphs, BAPINDO's total assetsgrew at an average annual rate of 46%; in 1982 alone, the growth rate was ashigh as 55%. The largest contribution to asset growth came from the invest-ment loan portfolio which grew at an annual rate of 44% durinR 1978-81, and707 in the 1982. As a result, the loan and equity portfolio in total assetsincreased from 79% in 1978 to 88% in 1982. The expansion in BAPINDO's assetswas largely (over 90%) financed through borrowings made possible by the verylow debt/equity ratio of BAPINDO in 1978. Consequently, long-term debts,increased more than sevenfold from Rp 62.7 billion ($90 million) in 1978 toRp 433.0 billion ($619 million) in 1982. Bank Indonesia is the largestcreditor of BAPINDO; its share in total long-term debts increased from 37% in1978 to 56% in 1982. During the same period, resources provided by GOIincluding borrowings from pension funds placed at BAPINDO's disposal emergedas the second most important source of term funds accounting for about 24% ofall long-term debts of BAPINDO in 1982 (5% in 1978). Borrowing frominternational lending institutions (the World Bank, ADB and KfW) remains animportant source of long-term funds, but its relative share in total termborrowings declined from 41% to 17%. Between 1978 and 1982, BAPINDO's equityincreased by about 60% from Rp 63.4 billion to Rp 101.7 hillion. In additionto retained earnings (Rp 22 billion), a substantial portion of the equityincrease came through conversion of BI loans into equity (Rp 20 billion).
3.17 Between 1978 and 1982, the growth of BAPINDO's long-term debtsoutpaced that of its equity. Consequently, the long-term debt to equityratio which, from 1972 to 1978, had remained below 1.0:1 rose to 2.8:1 atthe end of 1981, and 4.3:1 by December 31, 1982. The Government proposed
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to increase the 3:1 limit prescribed in the Bank's existing Project Agreementsto 6:1 so that BAPINDO could maintain a reasonable leverage in its operations.Such an increase is justified, given the fact that BAPINDO's portfolio isbasically sound, the bulk of its long-term debt obtained from BI is on favor-able terms, its debt service cover will remain adequate, and this ratio isprudent and will not jeopardize BAPINDO's financial position. BAPINDO'srevised Policy Statement reflects this increase (Annex 2).
3.18 Of late, BAPINDO's liquidity position has deteriorated as reflectedin the current ratio decrease from 1.5 in 1978 to 1.3 as of December 31, 1982.This decline is due to BAPINDO's policy of making initial loan disbursementsout of its own resources, pending approval and release of funds by BI andother creditors, so as to avoid delays in project implementation. The revisedPolicy Statement specifies that BAPINDO's current ratio will be maintained atall times at a minimum level of 1.15:1 (para. 2.13). BAPINDO would maintainthis ratio by timing it disbursements more closely with the flow of funds fromBI and other sources.
3.19 Financial Performance. Summarized audited income statements for1978-81, and the unaudited statements for 1982, reflect all-round improvementsin BAPINDO's profitability (Annex 6, Table 2). BAPINDO's net profit increasedalmost four times, from Rp 1.1 billion in 1978 to Rp 4.1 billion in 1981, andshowed a further increase of 70% in 1982. However, the return (after tax) onaverage total assets showed much slower growth, from 0.8% in 1978 to 1.2% in1981 to 1.3% in 1982. Income from term loans, accounting for about 89% of thegross income, marginally increased from 12.8% in 1978 of average portfolio to13.8% in 1982, but because of the rising weight of low-cost loans from BI inBAPINDO's liabilities, the average cost of long-term debt declined from 10.1%in 1978 to 7.3% in 1982, resulting in an increase in gross interest spreadfrom 2.7% to 5.3%. Moreover, administrative expenses as a percentage ofaverage total assets, although still high, declined from 3.7% in 1978 to 2.7%in 1981 and further to 2.5% in 1982. Consequently, the net profit as a per-centage of net worth increased from 1.8% in 1978 to a more acceptable,although still low return of 5.0% in 1981, which further increased to 7.3% in1982. Due to the rapid expansion of BAPINDO's operations, annual provisionsfor possible losses on loans and equity investments (6% of portfolio growthaccording to BAPINDO's policy) have been maintained at a relatively high levelduring 1978-82 at about 2.6% of average total assets. Debt service cover wasadequate during the period. Despite significant improvement in recent yearsas outlined above, BAPINDO's profitability is still somewhat lower thanexpected of a development financial institution. This is due to: (a) Govern-ment imposed ceilings on BAPINDOs lending rates; (b) BAPIND0½s policy ofmaking rather liberal provisions for possible losses on portfolio; and (c) lowyield on equity investments. In this perspective, BAPINDOs financial resultsare satisfactory. However, BAPINDO's profitability is expected to continue toincrease in the future.
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Quality of Portfolio and Arrears Situation
3.20 BAPINDO's outstanding term-loan /1 portfolio totalled Rp 578.2 bil-lion as of December 31, 1982, of which 80% in amount were extended to theindustrial sector, and 20% to the maritime sector. The quality of BAPINDO'soverall portfolio, shown in Annex 6, Table 3, after showing an improvement in1979-81, has deteriorated in 1982. Loan amounts in arrears (over 3 months)rose in absolute terms from Rp 5 billion in 1981 to Rp 11.3 billion, afterreschedulings of Rp 26.8 billion. Arrears as a percentage of the long-termportfolio have increased from 1.5% in 1981 to 2.1% in 1982. Loans affected byarrears, amounting to 5.3% of term loans outstanding at the end of 1981,increased to 9.7% by Decembter 1982 (4.4% in 1980). Depressed economicconditions in Indonesia and more difficult external market conditions haveaffected adversely some firms which has contributed to the perceptible rise inarrears. Arrears were concentrated in maritime loans (4.6% of loansoutstanding), where reschedulings had also been larger than the reschedulingsof industrial loans. The collection ratio remains at about 74% in 1982 ascompared with 72% in 1981. Ten old loans which had been in arrears for sometime, amounting to Rp 6 billion or 1.8% of the term portfolio, were finallywritterr-off in 1981. Despite the increases in arrears and reschedulings whichshould be seen in the light of the presently depressed economic conditions inIndonesia, BAPINDO's portfolio can still be considered satisfactory.Moreover, provisions, which decreased in 1981 to 2.9% of the outstandingportfolio from 4.7% in 1980 due to the above mentioned heavy write-offs,increased again in 1982 to 3.7% and are adequate to cover potential bad debts.To prevent any further deterioration in its portfolio quality, BAPINDOrecently reviewed the portfolio in arrears, analyzing factors behind thearrears and recommending a variety of remedial measures includingstrengthening project supervision, financial restructuring of the affectedfirms, debt rescheduling in exceptional cases, changes in project managementpersonnel, and intensified technical assistance efforts. In light of therecommendations of this portfolio review, BAPINDO has developed and wouldimplement a specific set of monitorable actions including the maintenance of a75% collection rate which are also specified in the proposed Action Program(para. 2.03).
IV. BAPINDO'S PROSPECTS
Investment Outlook
4.01 Gross investment in Indonesia grew by 12% a year in real terms inthe latter half of the 1970s and by 1980 the share of investment in GDP hadrisen to 22%. During the late 1970s, private investment grew by 10% in realterms and accounted for 53% of aggregate investment. The investment outlookfor the 1980s is difficult to forecast, particularly in the short-run, given
/1 Excluding provisions for doubtful accounts but including accruedinterest.
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the stagnancy of oil prices and the uncertainties associated with the recentdevaluation of the Rupiah. The recent emergence of a tight foreign exchangeconstraint has significantly lowered the level of investment. While it isanticipated that most of the adjustment will be in the public investmentprogram, private investment will also have to absorb part of the impact.Recent Bank projections suggest that the growth in private investment might bereduced to about 4% in real terms and 14% a year in nominal terms for themedium-term (1983-87). Despite this anticipated slackening in the growth ofinvestment, investment demand should be more than adequate to justifyBAPINDOTs projected program of operations which is expected to grow slightlyless rapidly than the overall rate of investment. BAPINDO½s latest pipelineconsisting of almost entirely private sector- investments includes projects intextiles, chemicals, pharmaceuticals, lumber, glass, and the maritime sectors.Demand for maritime loans is expected to increase more rapidly than in thepast since the Government is accelerating development of inter-islandtransport; and the growth of special loans for small enterprises is alsoexpected to continue but at a slower pace than during the last two years, asother banking institutions are expected to play a larger role in this area.
Projected Operations
4.02 BAPINDO plans to slow down the growth of its operations in the nexttwo years. This would enable the institution to consolidate its operationsand undertake measures to improve its institutional capability. BAPINDO nowprojects total lending and equity investment approvals to grow by 12.5% p.a.in nominal or about 2.5% p.a. in real terms during 1983-87 (compared with over100% in 1978-82). No new equity investment approvals will be made in 1983 andonly Rp 2-3 billion a year are projected for the rest of the period. For thefiscal years 1983/84 and 1984/85, during which the proposed Bank loan isexpected to be committed, total commitments are estimated at Rp 687 billion($981 million) of which Rp 149 billion ($213 million), or 22%, constitutesthe foreign exchange component. BAPINDO's operational projections and under-lying assumptions appear realistic.
Resource Position and Requirements
4.03 So far, BAPINDO has completely relied on official sources for itsresource needs mainly because of the regulated interest rate regime which hasmade direct resource mobilization financially unfeasible for state banks.Details of BAPINDO-s resource position as of December 31, 1982 (Annex 6,Table 4) show that 81% of BAPINDO-s total resources have been provided,directly or indirectly, by the Government and BI. Of the long-term resourcesamounting to Rp 552 billion ($789 million) as of the end of 1982, depositsfrom Government pension fund and Government-s equity contribution to BAPINDOaccounted for 33%, borrowings from BI and other state banks 38%, and proceedsof two-step loans obtained by the Government on BAPINDO's behalf frominternational lending institutions (IDA/IBRD, ADB and KfW) accounted for 10%.As of the same date, BAPINDO-s short-term resources, amounting to Rp 92billion ($131 million), were sufficient to finance its short-term loans,reserve requirement against deposits and other current assets.
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4.04 Resource Requirements and Funding. As in the past, BAPINDO wouldcontinue to rely on Government/BI resources and the Bank loan to meet itsprojected lending operations from mid-1983 to mid-1985. During negotiations,BAPINDO, with the endorsement of Government, presented the followingfinancing plan:/l
Table 2: PROJECTED COMMITMENTS AND SOURCES OF FUNDS, 1983/84-1984/85
Weightedave. cost
Total cost Share of new funds(Rp billion) (%) (X)
Total Commitments 687.0 100 6.74
Sources of FundsMinistry of Finance 40.0 6 7.00Bank of Indonesia 335.3 49 5.00BAPINDO 171.7 25 6.68IBRD loan 140.0 20 11.00
With the above blending of funds, the weighted average cost of funds toBAPINDO for its 1983-85 lending program is estimated at 6.7% on a commitmentbasis (para. 4.07). Since the bulk of BAPINDO's term loans would beextended at 13.5% p.a. its overall spread will be about 6% which is sufficientto maintain its financial viability. /2 Furthermore, the GOI delegation gaveassurances that the Government would provide the necessary funds to supportBAPINDO's projected operations in 1983-85 and GOI would discuss with the Bankeach BAPINDO fiscal year the level, timing and manner of the financial support
/1 These projections do not take into account the effects of the recentdevaluation of the Rupiah, but BAPINDO, in consultation with GOI,has reviewed its projected lending program. The revised projections ofBAPINDO's resource requirement amount to Rp 745 billion for the period1983-85. The increase of Rp 58 billion is due to the increase in theamount of the proposed Bank loan of $200 million when expressed inRupiah equivalent based on the new exchange rate.
/2 The increase in the total size of the Rupiah lending program due tothe devaluation resulted in an increase in the financing share of theBank loan, expressed in Rupiahs, from 20% to 26% of total costs, andhas caused the weighted average cost of funds to BAPINDO to risemarginally from 6.7% to 7.1%. This would still give BAPINDO anoverall spread that is adequate to maintain its financial viability.As noted in footnote 1 on the following page, BAPINDO's profitabilityis expected to be higher than had been projected before the devaluation.
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to be provided by GOI, Bank Indonesia and other sources to BAPINDO for thefollowing fiscal year, taking into account BAPINDOTs profitability,development strategy and lending program.
4.05 As part of its efforts to mobilize additional local currency funds,BAPINDO floated its first bond issue in 1983, with a nominal value ofRp 25 billion and terms of 5 years at interest rate of 15.5% p.a. The amountwas relatively small (about 4% of BAPINDO's total resource requirements for1983-85) since BAPINDO will have to bear a negative spread given the currentinterest rate structure in Indonesia. The basic objective of the bond issueis to enable BAPINDO to start diversifying its local currency resource base,and thus acquire experience in raising its own funds, in preparation for alarger resource mobilization e&fort, if and when the Government relaxes itsinterest rate policy, making it feasible for financial institutions to borrowmore extensively from the market. Under these circumstances, BAPINDO plans toblend the funds generated from this issue with those obtained from Governmentsources at cheaper rates.
Projected Financial Position and Financial Results
4.06 Projected balance sheets for 1983-87 and selected ratios given inAnnex 7, Tables 3 and 4 show continued strengthening of BAPINDO's financialposition in the future. BAPINDO's total assets show an increase fromRp 658 billion ($940 million) in 1982 to Rp 1,515 billion ($2.2 billion) in1987. However, due to the projected slow-down in the growth of operations,the annual growth rate in assets will decline from 55% in 1982 to 24% in 1984and 6% in 1987. Loans and equity investments as a percentage of total assetsare expected to continue to increase from 88% in 1982 to 90% in 1987. As inthe past, a large portion of BAPINDO's asset growth will be financed throughadditional long-term borrowings. However, there will also be a continuedgrowth in net worth due to additional capital contributed by the Governmentand retained earnings, which would enable BAPINDO to keep its long-termdebt/equity ratio within the newly agreed limit of 6:1./1 The current ratiois also satisfactory ranging between 1.5 (1984) and 1.2 (1987).
4.07 Projected income statements for 1983-87 and selected ratios ofperformance are given in Annex 7, Tables 2 and 4./2 BAPINDO's income projec-tions are based on fairly conservative assumptions. Average income on loanportfolio is projected at 12.5% p.a. against an actual yield of 13.8% in1982. On the other hand, cost of term debt, the largest source of financing,is assumed to rise gradually from (7.3% (actual) in 1982, 7.4% in 1984 and7.9% in 1987) even though BAPINDO is most likely to continue to have access to
/1 BAPINDO would need additional equity capital of Rp 4.9 billion by 1984to maintain this ratio after the devaluation.
/2 The increase in the size of the projected loan portfolio after thedevaluation is estimated to offset the marginal decrease in BAPINDO'sspread on its lending program for 1983-85. Consequently, theprofitability in absolute terms is projected to increase slightly.
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cheaper funds from official sources. Administrative expenses are projected toincrease by about 24% in 1983 and 27% in 1984 as a result mainly of theopening of new branches, staff increases and expenses to be incurred inrespect of the technical assistance program under the project. In subsequentyears, due to the favorable impact of the proposed Action Program, thereshould be economies in BAPINDO's overheads. Therefore, the projections assumeslower annual increases in administrative expenses in 1985-87. Administrativeexpenses as a percentage of average total assets show a decline from 2.5% in1982 (actual) to 2.1% in 1983-86 and 2.2% in 1987. Adequate provisions forpossible losses have been made. Despite these conservative assumptions,BAPINDO-s presently low profitability is expected to improve substantially inthe next few years. Net profit is projected to increase from Rp 7.0 billion
9 in 1982 to Rp 11.1 billion in 1984 and Rp 24.9 billion in 1987, at an averagegrowth rate of 29% p.a. This growth in profitability is due to an expansionin portfolio and oSher income generating assets. However, net profit as apercentage of average total assets (1.0-1.7%) will remain lower than theactual ratio of 1982 (1.3%) until 1984 after which it is expected to reach1.7% by 1987. Net profit on average equity shows an increase from 7.3% in1982 to 8.5% in 1984 and 12.3% in 1987. However, BAPINDO's profitabilitywould be adversely affected if BAPINDO's portfolio quality deteriorates in away which is not presently foreseen and in this event larger provisions wouldhave to be made at the end of each year. The strengthening of BAPINDO'sappraisal and supervision capability under the Action Program reduces thelikelihood that such a trend would actually occur.
V. FEATURES OF THE PROPOSED BANK LOAN
Loan Components
5.01 The proposed Bank loan of $208.9 million (including a capitalizedfront-end fee of $0.5 million) would be made to the Government (the Borrower).The Government would onlend $203.3 million (including the correspondingfront-end fee of $0.5 million) to BAPINDO under a Subsidiary Loan Agreement,the signing of which would be a condition of loan effectiveness. BAPINDOwould use $200 million for financing (a) industrial projects, and (b) shipswhose aggregate would not exceed $60 million, or 30% of the credit component.The balance of $2.8 million would be used by BAPINDO to finance technicalassistance for two years (1983/84-1984/85) including: (a) a top level advisorand a management consulting team of four experts (para. 2.17) for 24 months atan average cost of $12,500 per man-month, totalling $1.5 million; (b) overseasstudy tours for 100 staff (para. 2.10) at a cost of $10,000 per person,totalling $1,000,000; and (c) purchase of specialized training equipment at$300,000 (para. 2.10). The portion ($5.6 million including the correspondingfront-end fee) which is not onlent to BAPINDO would be used by the Governmentfor technical assistance for sectoral policy and project studies and overseastraining of selected Government officials (para. 1.08). In addition to financingthe detailed engineering for export zones and estates, this component wouldcover the cost of policy and subsector studies, such as textiles, cement,wood-processing and steel. Other studies would be identified later; there-fore, detailed costing of this work is not yet possible. However, in view of
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the cost of other subsector studies already underway, the $5.6 millionproposal is reasonable. In view of its central decision-making role, theMinistry of Finance would be primarily responsible for administering thistechnical assistance component and designating the appropriate executingagencies and allocating the Bank and any necessary counterpart funds to therespective agencies as a budgetary contribution. The funds would be used tocover the cost of consultants, who would be recruited by the executingagencies in accordance with Bank Group Guidelines. Terms of reference and theselection of the consultants would be subject to prior approval of the Bank.A selected number of Government officials from the designated agencies mayalso avail of these funds for short-term overseas training/study tours.
Loan Features
5.02 Relending Rates. The Government will relend $203.3 million(including the front-end fee) of the proposed loan to BAPINDO at an interestrate not to exceed 11.0% p.a., thus bearing the risk on any possible interestrate fluctuation on the Bank loan. The front-end fee would be capitalized andpassed on to BAPINDO. In relending the $200 million of the loan proceeds,BAPINDO will charge interest at rates between 10.5% and 13.5% p.a. dependingon loan size (Annex 5, Table 1), but the great bulk of its subloans will bearinterest at 13.5% p.a. giving BAPINDO a spread of approximately 2.5% on Bankfunds. This spread, together with the spread on Government funds, would giveBAPINDO an overall margin of about 6% for 1983-85 which is adequate. Theinterest rate payable to the Government by BAPINDO on the proposed loan willbe specified in the Subsidiary Loan Agreement to be signed between theGovernment and BAPINDO as a condition of loan effectiveness. The Governmentwould bear the foreign exchange risk on the entire loan.
5.03 Amortization Schedule. As usual with Bank loans to DFCs, theportion of the loan proceeds that would finance the credit component of theproject would have a flexible amortization schedule conforming substantiallyto the aggregate repayment schedules of BAPINDO's subloans, the maximum termfor which would be 15 years, including two year's grace. For the repayment oftechnical assistance funds provided both for the Government and BAPINDO, theprevailing country terms of 20 years, including 5 years grace period will beapplied.
5.04 Free Limit. BAPINDO-s appraisal capability and procedures havecontinually improved under previous Bank loans as noted above. Furtherimprovement is expected under the proposed project as training in projectevaluation and streamlining of procedures are accelerated. Therefore it hasbeen agreed to raise the free limit under the proposed loan to $2.0 million($1.2 million under the previous Bank loan), with an aggregate free limit of$80 million or 40% of the loan proceeds earmarked for the credit component ofthe proposed project. With this free limit, it is estimated that 25-30subprojects accounting for about 40% of the number and 60% of the proposedloan will require Bank review prior to approval. This should be sufficientfor the purpose of effective subproject monitoring by the Bank.
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5.05 Subloan Ceilings. To ensure that the proceeds of the proposed loanwould be spread out over a relatively large number of medium- and large-scaleprojects, a ceiling of $6 million (compared with $3 million under the previousBank loan) would be set on the size of individual subloans financed out of theloan proceeds. This increase is based on the increasing size due to inflationof BAPINDO's operations and is in line with its emphasis on resource-basedindustries which would normally require large investments.
5.06 Debt/Equity Limit. To maintain BAPINDO's long-term debt/equityratio within the new limit of 6:1 (para. 3.17), the Government will have toprovide additional equity capital to BAPINDO estimated at Rp 30 billion duringthe period 1983/84 to 1985/86. The Government haseagreed to provideadditional equity by converting Rp 30 billion of BAPINDO's outstanding debt tothe Ministry of Finance into paid-in capital./l
5.07 Procurement. BAPINDO requires that all subborrowers of investmentloans obtain three price quotations from suppliers/contractors, which are thenanalyzed by project staff to ensure that goods and services obtained areprocured at competitive prices. Given the increasing size of individualcontracts to be financed under the proposed Bank loan, all individualcontracts (except those on used ships) of $5 million and above to be financedunder the Bank loan will be awarded after international competitive bidding(ICB). BAPINDO would review bid documents and subborrower's evaluationthereof and submit them to the Bank for comments. The proposal to award wouldbe subject to review and approval by the Bank. In the event that ICBprocedures were not followed for such contracts because of the need forequipment standardization or other reasons, BAPINDO would provide a fulljustification of the procurement method used in its subproject appraisalreport which would be subject to Bank approval before authorization ofdisbursement under the loan. This new procurement policy has been incorpo-rated in BAPINDOs revised Policy Statement. Consultant services and othertechnical assistance would be provided under the project in accordance withthe Bank's Guidelines for the use of consultants under World Bank loans andIDA credits. Terms of reference and the appointment of consultants would besubject to prior Bank approval. Procurement of training materials anddevices, most of which would be obtained in small quantities through localsuppliers or representatives of foreign suppliers, would be based on BAPINDO'sprocedures which provide for adequate competition and are acceptable to theBank.
5.08 Disbursement. Proceeds of the proposed loan would be disbursedagainst: (a) 100% of the foreign exchange cost of directly imported goods;(b) 60% of the invoice price of domestically procured capital goods which isequivalent to the estimated foreign exchange cost of those goods; (c) 50% of
/1 Due to the increase in the long-term liabilities of BAPINDO as a resultof the recent devaluation, BAPINDO would need additional equitycapital of Rp 4.9 billion by 1984 to maintain its long-term debt/equityratio within 6:1.
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the cost equivalent to the estimated foreign cost component of civil works;and (d) 100% of the expenditures of consultants and overseas training includedunder the project. Proceeds of the proposed loan allocated for the creditcomponent are estimated to be fully committed in two years from mid-1983.Funds allocated for technical assistance components executed by BAPINDO andthe Ministry of Finance would be committed by June 1986. Retroactive finan-cing for an amount not to exceed $400,000 would be provided for expendituresmade after March 1, 1983 on policy and feasibility studies related to exportdevelopment, in order to allow GOI to move quickly to initiate these studies.Disbursement of the loan proceeds is expected to be completed by June 30,1988. This disbursement pattern is based on BAPINDO-s experience underprevious Bank loans and roughly corresponds to the disbursement pattern of DFCloans in East Asia (Annex 7, Table 6).
Project Benefits and Risks
5.09 The proposed project would support the ongoing dialogue on specificpolicy reforms in the financial and industrial sectors, which would befacilitated by the funds for additional technical assistance for policystudies proposed under the loan. The project would deepen institution-building efforts designed to develop sound investments in the industrialsector and improve the operational efficiency of BAPINDO, a major source ofterm funds for the industrial sector. The project would also strengthen theinstitutional support for RDBs and thus contribute to the development offinancial institutions in the regions. The proposed loan is being extended toIndonesia at a time when access to foreign exchange resources for the privatesector is becoming more difficult. Based on past experience, the industrialand maritime subprojects are expected to have high financial and economicreturns and thus contribute substantially to Indonesia-s further development(para. 1.26). It is estimated that about 18,000 full-time jobs would becreated by the subprojects under the proposed loan, at an average cost per jobof $46,000. The average cost per job created is still high because ofBAPINDO-s continued support for resource-based projects. Small and mediumindustries will continue to receive substantial support from BAPINDO and otherfinancial institutions, provided under the Government KIK/KMKP program. Thereare essentially two risks associated with this project. First, BAPINDO couldresume a rapid expansion of its operations program before the completion ofthe extensive staff upgrading and institutional reforms envisaged under theproject over the next two years. Second, given the tightening budgetaryresource position, public pressure on BAPINDO to undertake large public sectorprojects could mount over the next two years and could jeopardize the qualityof its portfolio and the level of assistance provided to the private sector.The risks are minimized by the fact that the Government has endorsed BAPINDO'sDevelopment Strategy for 1983-85, which would specify the rate of growth oflending and equity investments which would be subject to the Bank's annualreview (para. 4.04) during that period. The expansion of the provisions of"Managed Funds" (para. 3.12) to include all projects sponsored by theGovernment, combined with the application of BAPINDO-s normal appraisal proce-dures for all large Government projects presented for financing should furtherhelp BAPINDO to undertake only sound investments. Therefore, the risksassociated with the project are minimal.
- 35 -
VI. AGREEMENTS REACHED AND RECOMMENDATIONS
6.01 During negotiations, assurances were obtained that:
(i) BAPINDOTs Policy Statement and Development Strategy Statementwould not be amended except in agreement with the Bank(paras. 2.03 and 2.13).
(ii) BAPINDO would appoint the senior advisor and consultants,satisfactory to the Bank, by September 30, 1983 (para. 2.17);
(iii) GOI would provide necessary funds to support BAPINDO'sprojected operations for 1983-85 and GOI would discuss withthe Bank each BAPINDO fiscal year the level, timing and mannerof the financial support to he provided by GOI, Bank Indonesiaand other sources to BAPINDO for the following fiscal year,taking into account BAPINDO's profitabilitv, developmentstrategy and lending program (para. 4.04);
(iv) GOI would make the required equity contribution to BAPINDO tomaintain BAPINDO's long-term debt/equity ratio at 6:1(para. 5.06);
(v) individual contracts (except those on used ships) of morethan $5 million to he financed by BAPINDO under the proposedloan be awarded after international competitive bidding(para. 5.07); and
(vi) GOI would allocate $5.6 million under the proposed loan todesignated executing agencies as budgetary transfers forfinancing sectoral policy studies, project preparationand training (paras. 1.08 and 5.01).
6.02 The signing of a Subsidiary Loan Agreement, acceptable to the Bank,between GOI and BAPINDO (para. 5.01) would be a condition of loaneffectiveness.
6.03 Wlith the above agreements and conditions the proposed proiect wouldbe suitable for a Bank loan of $208.9 million (including a front-end fee of$0.5 million).
- 36 -ANNEX 1Page 1 of 2
INDONESIA
BANK PEMBANGUNAN INDONESIA
Structure of Interest Rates, as of December 31, 1982(in %)
LendingProportion BI rate to
of BI rediscount finalCredits (by category and purpose) financing rate borrower
(i) Short-Term Credits
Group I : Working capital for BUUD/KUD for procure-ment and distribution of rice and maize 100 3 9
Group II 1. BIMAS/INMAS rice & secondary crops 100 3 122. BWUUD/KUD/P.N. Garam for collection and
distribution of salt and working 4 12capital for P.N. Garam 75 4 12
3. Working capital for flour mills 75 4 124. Export and exporting producers 75 4 125. Production, import and distribution of
fertilizer 75 4 126. Import and distribution of nonfood items
under foreign aid 75 4 127. Working capital for BUUD/KUD and coop-
eratives for collection and distribu-tion of agricultural products, live-stock and fish 75 4 12
8. Working capital for smallholder, agricultureand cottage handicrafts 75
9. Working capital for livestock, poultryand fisheries 75 4 12
Group III: 1. Working capital for rice mills/hullers,sugar, coconut oil, textiles, agricul-tural equipment, paper, cement, publictransportation, printing and publishing,and tourism 70 6 13.5
2. Working capital for other production 70 6 13.53. Import and distribution of controlled goods 70 6 13.54. Sugar stock financing 70 6 13.55. Domestic (including interinsular trade) 70 6 13.56. Working capital for contractors for DIP/
INPRES projects financed out of regionalgovernments' budgets and for low costhousing 70 6 13.5
Group IV Working capital for contractors for projectsother than those specified in III.6 60 6 15
Group V : Import and distribution of imported goodsnot covered in II.5, II.6 and III.3 40 6 18
Group VI : Export Credits:1. Activities classified as preshipment 60 3 62. Activities classified as postshipment 60 3 63. Strong export commodities 60 3 9
Group VII: All other short-term credits 25 6 21
- 37 -
ANNEX 1
Page 2 of 2
LendingProportion RI rate to
of BI rediscount finalCredits (by category and purpose) financing rate borro.4ev
(ii) Medium/Long-Term CreditsFixed assets financing (KIB):
Up to Rp 75 million 80 3 10.5Rp 75-200 million 75 4 12.0Rp 200-500 million 65 4 13.5Above Rp 500 million 65 4 13.5
(iii) Credits to Small-Scale EnterprisesFixed asset financing (KIK) 80 3 10.5Permanent working capital financing (KMKP) 75 4 12.0
Deposit Interest rateDeposits rate subsidy on deposits /a
Time deposits: 24 months: 4.5For the first Rp 2.5 million 15 1.5On balance exceeding Rp 2.5 million 12
12 months 96 months 6
Demand deposits: Less than Rp 1 million -Rp 1 - 50 million 1.8More than Rp 50 million 3
Call money (based on daily money market transactions) 17-18
Tabanas (National Development Savings Schemes):For the first Rp 200,000 15On balance exceeding Rp 200,000 6
Certificates of deposit: I month 3.0 - 7.53 months 3.0 - 9.56 months 4.25-10.59 months 4.7512 months 5.25-12.0
/a Since deposit rates are fixed by BI, an interest subsidy is provided to increase the spread arisingout of the 24 month deposits and the average lending rates.
AEP Projects DepartmentMarch 31, 1983
- 38 - ANNEX 2Page 1 of 3
INDONESIA
BANK PEMBANGUNAN INDONESIA
Policy Statement /1
As a Government-owned development bank, BAPINDO was established forthe following objectives:
(a) The provision of financial and nonfinancial assistance toprojects ift the following sectors: industry, tourism and,hotel, land transportation and maritime. In financing thoseprojects, BAPINDO will be continuously guided by theprinciple of equitable distribution of business opportunities,geographic distribution of development and enhancement ofthe role of the economically-disadvantaged group in theeconomy.
(b) Mobilization of funds and development of the capital markettogether with the distribution of corporate shares to thepublic.
(c) Development of the Regional Development Banks as developmentfinancial institutions for the regions.
To attain the above objectives, BAPINDO deems it is necessary to revise itsexisting corporate policy. This policy provides general guidelines in theimplementation of its mission as a development bank as stipulated in itscharter. This corporate policy consists of the following:
I. INVESTMENT POLICY
1. BAPINDO will only finance priority projects within the context ofthe national economic development. Those projects may be new or existingones which need rehabilitation, expansion or modernization.
2. BAPINDO will only finance projects that will contribute to thenational economic development by the following means: foreign exchangeearnings and savings; generation of employment opportunities; and generationof high financial and economic benefits. In order to ensure this, allprojects will be analyzed comprehensively and in depth. BAPINDO will continueto apply its normal appraisal procedures to all projects presented to it forfinancing and accept only those projects that meet its established economic,financial and technical criteria.
/1 Approved by the Board of Managing Directors and submitted to the Bank onMarch 14, 1983.
ANNEX 2Page 2 of 3
3. BAPINDO will give special considerations for projects in under-developed regions, and those that will equalize business ownership anddevelop the capital market.
4. Essentially, BAPINDO will only extend the following forms offinancing:
(a) Investment loan with or without working capital loan;
(b) Working capital loan only, to previous recipients of investmentloan; and
(c) Equity participation, within the context of indigenization andimprovement of capital structure.
5. BAPINDO will continue to finance small-scale industries.Gradually this function will be transferred to the Regional DevelopmentBanks.
6. BAPINDO will be governed by the following self-imposed limits inits financing operations:
(a) Total equity participation of BAPINDO in all its clients willnot exceed its net worth;
(b) Total equity participation of BAPINDO in any single enterprisewill neither exceed 10% of BAPINDO's net worth, nor 25% of theenterprises total equity; and
(c) Total financial assistance of BAPINDO to any single enterprise,whether loan and/or equity, will not exceed 20% of BAPINDO'snet worth.
7. Basically, BAPINDO will emphasize the project's feasibility andviability in its evaluation. However, adequate collateral will be requiredfrom the projects, in accordance with prudent banking practice.
8. BAPINDO will not maintain a controlling interest in an assistedenterprise. However, in certain cases, BAPINDO will take appropriatemeasures as necessary to safeguard its own interest and that of the nation.
9. BAPINDO will require its borrowers to purchase their capital goodsin accordance with its established procurement guidelines. In addition,individual contracts (except those on used ships) of $5.0 million and above tobe financed under the World Bank loan (BAPIND V), or other financial sourcesif it is required, will be awarded after international competitive bidding.
10. BAPINDO will also serve as an administrator of Government fundsbeing channelled to Government-sponsored projects. As a conduit of suchfunds BAPINDO will not carry any risk and will be paid a management fee. To
- 40 -ANNEX 2Page 3 of 3
facilitate this provision, BAPINDO and the Government would follow an agreedprocedure.
II. FINANCIAL POLICY
1. BAPINDO will continue to mobilize long term funds for itsoperations and will maintain a long-term DER of 6:1.
2. BAPINDO will take all necessary measures to ensure that its currentratio is at all times maintained at a minimum level of 1.15:1.
3. BAPINDO will not bear the foreign exchange and interest rate risksin all its foreign borrowings.
4. In the performance of its operations, BAPINDO shall imposeadequate fees and charges, in order to maintain the necessary reserves andstrengthen its financial condition.
III. ORGANIZATIONAL POLICY
BAPINDO will continue to develop and maintain "an effective organization"through the following:
(a) Human resource development, including the recruitment, intensivetraining, evaluation, transfer and promotion and improvement ofthe professional quality of its staff;
(b) Provision of adequate facilities, effective systems andprocedures and good working environment; and
(c) Setting up of an appropriate unit to give technical assistanceto the Regional Development Banks and BAPINDO½s borrowers,including the adoption of modern management techniques andpractices.
AEP Projects DepartmentMarch 31, 1983
- 41 -
Attachment toANNEX 2
FIFTH BAPINDO PROJECT
Procedures for Administering the Managed Funds Provisionof the Policy Statement
1. When deciding the justification for financing projects which GOIconside&rs of national importance but which are not covered under BAPINDO'snormal investment policy as specified in Article 1 of the Policy Statement,BAPINDO's President Director would call a joint meeting of the SupervisoryBoard and the Board of Managing Directors to decide on an appropriate courseof action. Among the options open to the joint meeting are:
(a) to reject the loan application on the basis of BAPINDO'sstaff evaluation and inform the project sponsors and theconcerned GOI agency accordingly;
(b) to request project sponsors to scale down, redesignthe project or propose alternative financing plan/capital structure so that the project could meetBAPINDO's normal investment criteria; and
(c) to finance the project under the Managed Fund mechanismas specified in Article I.10 of BAPINDO's Policy Statement.
2. Should the joint session decide to use Managed Funds to finance theproject in question, the primary justification for this decision and theamount and sources of financing total project costs (including self-financingby the project sponsors) will be recorded in a separate memorandum of under-standing to be signed by the President Director of BAPINDO and the twomembers of the Supervisory Board acting on behalf of the Minister of Financeand the Governor of Bank Indonesia.
AEP Projects DepartmentMarch 31, 1983
ANNEX 3- 42 - Page 1 of 3
FIFTH BAPINDO PROJECT
BANK PEMBANGUNAN INDONESIA
Development Strategy of BAPINDO, 1983-1985 /1
I. CREDIT
1. BAPINDO will focus its lending on projects in the,,followingsectors/industries:
(a) food and beverages;
(b) textile;
(c) wood and wood products, especially furnitures and rattan;
(d) paper;
(e) rubber processing;
(f) metals, especially machineries and fabrication;
(g) construction, especially oil-drilling;
(h) hotels;
(i) land transportation; and
(j) maritime.
2. BAPINDO will make effort to achieve its operations according to theprojected operations subject to government s policy. It is estimated thattotal loan approvals for 1983, 1984, and 1985 are expected to reachRp 178 billion, Rp 200 billion, and Rp 225 billion, respectively.
3. BAPINDO will increase its credit operations outside Java so thattheir proportion of the total can reach 47% in 1985. (In 1982, projectsoutside Java comprised 44%.)
4. Loan syndication will increasingly be used in the creditoperations.
/1 Approved by the Board of Managing Directors and submitted to the Bank onMarch 14, 1982.
ANNEX 3- 43 - Page 2 of 3
11. EQUITY FINANCING AND CAPITAL MARKET OPERATIONS
5. BAPINDO will continuously participate in the capitalization ofstrategic projects, with the objectives of improving their capital structureand financial condition, as well as the indigenization of enterprises.Indigenization will be achieved through the direct sale of BAPINDO's shares toindigenous groups and through the public sale of shares in the stock exchange.
6. BAPINDO will continously participate in the capital market in anactive and selective manner. Among its projected activities in this area arethe underwriting of securities, bond issuance, acting as agent and trader inthe stock market, and such other institutional activities as trusteeship.
III. FUND MOBILIZATION
7. BAPINDO will mobilize rupiah funds through additional capitalinfusion from the government, maximization of borrowings from Bank Indonesia,generation of deposits from the public and financial institutions, and bondofferings.
8. Foreign currency mobilization will be done through additionalborrowings from international financial institutions and if possible otherforeign sources, loan syndication for large projects together with foreignbanks and export credit institutions.
IV. RESEARCH ACTIVITIES IN THE INDUSTRIAL SECTOR
9. Research activities in the industrial sector will focus on thefollowing:
(b) Priority industries in the Fourth Development Plan Period,consisting of agro-based industries, basic chemicals, metals,machineries, and fabrication; and
(c) Industries that utilize local raw materials, produce importsubstitutes, expand or create employment opportunities, andthose located outside Java.
V. PROJECT PROMOTION
10. BAPINDO will actively promote and develop medium-scale projects inthe manufacturing and agro-based industries, together with the identificationand nurturing of indigenous entrepreneurs outside Java.
ANNEX 3- 44 - Page 3 of 3
VI. COOPERATION WITH REGIONAL DEVELOPMENT BANKS
11. BAPINDO will continue to cooperate with and assist the regionaldevelopment banks in terms of financial assistance for loans up to Rp 75 mil-lion per project, and technical assistance through staff training toaccelerate their institutional development.
VII. INTERNAL INSTITUTIONAL DEVELOPMENT
12. To strengthen its internal operational procedures and staff capa-bility during 1983-85 BAPINDO will implement a Program of Action relating tomanagement and organization, staff development and training, project appraisaland supervision, branch operations and technical assistance to RDBs. Toassist in implementing the Program of Action in the above areas during theperiod, BAPINDO will engage the services of a senior development bankingadvisor and a management consulting firm.
13. BAPINDO will conduct an annual review of the implementation of itsAction Program, in conjunction with the review of its operations, and suggestchanges as needed.
14. To meet the manpower needs of its operational expansion, BAPINDOwill increase its personnel in line with its volume of operations. The ratiobetween the operational and non-operational personnel will be maintained at65:35.
15. BAPINDO will improve the training of its personnel based on thetechnical and managerial requirements of its operations as a development bank.
16. In order to improve the information and communications system withinits organizational structure, as well as to utilize its human resources moreefficiently, BAPINDO will expand the process of computerization in the HeadOffice and branches.
AEP Projects DepartmentMarch 31,1983
ANNEX 4Page 1 of 4
INDONESIA
BANK PEMBANGUNAN INDONESIA
BAPINDO's Program of Action /1(1983/84)
1. Management
(a) BAPINDO will accelerate cooperation and conduct more frequent dialogueswith important external groups, such as KADIN (Chamber of Commerce),
,-the technical ministries and other financial institutions.
Based on its experiences and linkages with those groups, BAPINDO willexplore later on the possibility of setting up an AdvisoryCouncil which is most effective for BAPINDO.
(b) The Board of Directors will delegate more authority to theDepartment Heads and Branch Managers.
2. Organization
(a) BAPINDO will minimize, as much as possible, the overlapping offunctions in some units and will improve communication andcoordination among them by reviewing and redefining theirfunctions.
(b) BAPINDO will enhance the effectiveness of the existing workinggroup in the Credit and Branch Supervision Department by givingit more authority and responsibility. This will enable the groupto become a more effective partner of the branches to look aftertheir interests.
This group will also supervise the branches and monitor theirperformance for management evaluation.
The long term structure and status of this group will be deter-mined later, after a more careful organizational analysis.
(c) BAPINDO will reduce the membership of some of its existing com-mittees, as follows:
- The Credit and Equity Financing Committee has already reducedits composition from 14 to 7 core members.
- The Planning and Budgeting Committee will reduce its membersfrom 18 to only those directly concerned with planning andbudgeting.
/1 Timetable and implementation details (submitted to the Bank onDecember 17, 1982) are in the Project File.
ANNEX 4- 46 - Page 2 of 4
- The Computerization Committee which now has 19 members,will reduce its membership. 1
(d) BAPINDO will strengthen the functional linkage between theResearch and Project Promotion Department.
The Project Promotion Department will transform the macro-economic and sectoral studies of the Research Department intoproject level studies for the needs of both the Head Officeand the branches.
3. Staffing
(a) BAPINDO will improve the proportion between the operational andnon-operational staff by conducting a systematic process ofpersonnel recruitment, training and reassignment.
(b) In recruitment, BAPINDO will attract more professional staff intothe operating departments.
(c) BAPINDO will strengthen its personnel management system, byrationalizing the following:
- planning of manpower needs;
- recruitment;
- staff development and career planning;
- staff evaluation process based on productivity and efficiency;and
- personnel motivation and incentives system.
4. Training
BAPINDO will review and improve its comprehensive long-termtraining plan. This plan will be related to the personnel career plan.
To implement this plan, the in-house training capabilities ofBAPINDO will be upgraded. This will also enable BAPINDO to accelerate thetraining of personnel from the branches. This training may be integratedwith that of RDB staff.
5. Management Information System (MIS)
(a) BAPINDO will improve and streamline its information system,including its reporting forms and procedures, feedback andinternal control mechanism.
-47 - ANNEX 4Page 3 of 4
Specifically, the reports will be made shorter, more analytical,issue oriented and complemetary with each other.
(b) BAPINDO is now setting-up an integrated computerization program,which is aimed at, among others, speeding up the computerutilization in the Head Office and branches.
6. Branches
(a) BAPINDO will strengthen the integration of its existing branchesinto the overall planning, staff,development and operationalreview process.
(b) BAPINDO will not open new branches until 1984. The need for newbranches in the other regions will be reviewed after 1984.
7. Planning
BAPINDO will develop a planning process which will integrate,among others, operations, resource mobilization, manpower, training andcomputerization.
In order to implement this, the Planning Department will bestrengthened in terms of quantity and quality of staff.
8. Project Appraisal
(a) BAPINDO will review and improve the appraisal process through thefollowing:
- formulation of strict criteria for selecting projects tobe financed in 1983/84, taking into account Government'scredit lending policies and investment priorities andBAPINDO's institutional capacity.
- reducing the duplication of efforts between the Head Office andthe branches and among the Departments;
- simplifying loan application procedures;
- shortening the appraisal reports; and
- reducing the waiting time of clients.
(b) In order to reduce duplication and equalize the appraisal abilitybetween the branches and the Head Office, BAPINDO will limit theappraisal function of the branches in terms of loan size andsectors in accordance with their respective abilities.
(c) BAPINDO will set-up a group of industry specialists to facilitatethe inter-team exchange of experiences.
- 48 - ANNEX 4
Page 4 of 4
9. Supervision
(a) Project supervision will be improved with emphasis on preventivesupervision and direct counseling by using more experienced andqualified staff.
Similarly, qualified staff will be used by the Special DebtorsSupervision Department.
(b) The supervision process, including the forms and frequency of themonitoring report.s, will be simplified, streamlined andconsolidated.
(c) Coordination between the supervision activities of the HeadOffice and branches will be improved such as through more frequentvisits, guidance and feedback.
10. RDB Consulting Group
As an integral part of the overall organization of BAPINDO, theconsultancy services will be strengthened through:
(a) upgrading of the technical and professional capabilities of itsstaff;
(b) formulating more effective consulting techniques; and
(c) undertaking a phased program of RDB upgrading with the possiblehandling of some specific assignments by other institutions/consultants.
11. Utilization of Outside Consultants
In the implementation of some of the above Program of Action,BAPINDO will hire the services of appropriate and properly qualifiedconsultants in the areas of training and human resource development,corporate/strategic planning, MIS and consultancy development.
AEP Projects DepartmentDecember 22, 1982
- 49 -ANNEX 5Table 1
INDONESIA
BANK PEMBANGUNAN INDONESIA
BAPINDO's Lending Rates and Other Charges as of December 31, 1982(in %)
Interest on Loans Lending Rates
Domestic Currency LoansInvestment loans 10.5-13.5/aWorking capital loans:
Industry and maritime 13.5Export credit 6.0-9.0
Raw cotton loans 12.0Small-scale industry loans:Investment (KIK) 10.5Working capital (KMKP) 12.0
Kelayakan loans:Investment 10.5Working capital 12.5-13.5
Kepres 14 A loans:Investment 10.5-12.0Working capital 12.0-13.5
Foreign Currency Loans Interest Spread RatesIDA Credit No. 310 - IND 3.25 10.5-13.5IDA Credit No. 318 - IND 3.25; 4 9.25IBRD Loan iNo. 1054 - IND 2.5; 4 10.5-13.5IBRD Loan No. 1437 - IND 2.3; 3.8; 4 10.5-13.5IBRD Loan No. 1703 - IND 2.6; 4 10.5-13.5KFW Loan No. AL. 74 65 750 4 10.5-13.5ADB Loan No. 319 - IND 2.2; 3.7; 4 10.5-13.5Project Aid Loans 12.0
Commitment Charges (on long & medium term loans)Loans up to Rp 75 million 0.75Loans between Rp 75-200 million 0.50Loans above Rp 200 million 0.25
Penalty ChargesInvestment loans 10.5-13.5/aWorking capital loans 6.75Export credit loans 6.0-9.0
/a Depending upon size of loan.
AEP Projects DepartmentMarch 31, 1983
INDONESIA
BANK PEMBANGUNAN INDONESIA
Summary of operations, January 1, 197a-December 31, l982(Rp million)
1978 1979 1980 1931 1982In In In In Inforeign foreign foreign foreign foreignNo. Total exchange No. Total exchange No. Total exchange No. Total exchange No. Total. exchange
Summarized Balance Sheets, as of December 31, 1978 - 1982 /a(Rp million)
December 311978 1979 1980 1981 1982 /d
ASSETSCurrent Assets
Cash on hand and due from binks 6,430 9,521 9,284 7,792 20,228Due from Bank Indonesia 8,163 4,560 12,458 19,553 22,708Current maturities of portfolio 17,099 33,104 41,761 71,581 104,900Marketable securities 7,958 8,085 16,272 5,400 4,100Short-term raw cotton loans 279 150 90 24 -Accrued interest on loans 4,408 5,746 7,405 7,733 17,339Provisions for losses on interest (2,269) (4,830) (5,082) (6,009) (9,972)Other current assets 3,113 3,656 7,364 14,492 22,418
Total Current Assets 45,181 59,992 89,552 120,566 181,721
Cofinancing with RDBs 7,865 6,494 7,034 10,549 13,813
Government Loans 2,484 2,484 2,484 2,321 -
Total Loan Portfolio 117,442 170,943 231,044 373,082 574,903
Less provisions for losses (4,443) (5,269) (9,266) (10,203) (16,290)Less current maturities (17,099) (33,104) (41,761) (71,581) (104,900)Less portion of other banks and
TOTAL LIABILITIES AND EQUITY 144,754 196,938 258,185 423,929 657,720
Managed Fund /bShort-term borrowings for raw cotton 19,483 18,940 8,637 8,330 9,721Project aid fund:Foreign exchange cost 55,620 89,936 88,238 96,058 106,111Local currency cost 1,133 1,133 1,133 1,132 4,574
Interest payable 13,583 13,446 11,572 16,075
Total Managed Fund 89,821 123,455 109,580 121,595 120,406
/a Accounts for 1978-81 are audited./b Managed on behalf of Bank Indonesia and Bank Export-Import Indonesia./c Deposits from civil servants' pension funds.7_ Unaudited.
AEP Projects DepartmentMarch 31, 1983
ANNEX 6- 56 - Table 2
INDONESIA
BANK PEMBANGUNAN INDONESIA
Summarized Income Statements for the Years Ending December 31, 1978-82(Rp million)
1978 1979 1980 1981 19 8 2/a
IncomeInterest on term and working capital" loans 13,544 17,968 25,600 38,116 64,100Income from raw cotton loans 1,002 12 144 5 -Other income 2,873 2,901 5,026 6,014 8,000
Total Income 17,419 20,881 30,770 44,135 72,100
ExpensesInterest on term debt 5,507 7,024 11,305 14,799 30,800Other interest/financial expenses 1,239 865 2,052 4,206 ) 3Salaries and other personnel expenses 3,749 4,344 5,909 6,859 13,500Administrative and general expenses 1,284 1,454 1,911 2,323 1
Total Expenses 11,779 13,687 21,177 28,187 44,300
Profit before provisions and tax 5,640 7,194 9,593 15,948 27,800Provisions for losses on loans 3,569 4,758 5,558 8,536 15,100Profit before tax 2,071 2,436 4,035 7,412 12,700Income tax (45Z) 968 1,038 1,899 3,304 5,700
Income from term losn portfolio as 2 ofaverage term loan portfolio 13.8 12.4 12.4 12.5 12.5 12.5
Cost of term debt as 2 of average term debt 7. 3 7.4 7.4 7. 5 7.9 7.9Cross spread 6. 5 5. 0 5. 0 5.0 4.6 4.6Profit after tax and provisions as 2 o'average equity 7. 3 7. 3 8. 5 10.9 11.8 12.3
Book value as 2 of par value 203.4 199.7 201.3 209.8 236.3 267.4Provisions as 2 of year-end outstanding
loan and equity portfolio 3.7 4.1 4.5 5.0 5.2 4.8Debt service cover ratio 1.6:1 1.3:1 1.3:1 1.4:1 1.4:1 1.2:1
/a Excluding working capital loans.7i Including current msturities.7_ Pension fund deposits are excluded from current liabilities in calculating
this ratio sin,e they constitute term liabilities.
