Pidato CGI 2 (dalam bahasa Inggris) Forum Kwik Kian Gie Mari Kita Berdiskusi
Minister of Development Planning/Head of Bappenas
Pre-CGI Meeting in Jakarta on June 12, 2002

Ladies and Gentlem en:
In preparation of today s gathering, I was asked to say a few words on the effectiv e use of foreign aid. I subsequently
discov ered that the World Bank together with m y staff at Bappenas had already assem bled a com m ittee to prepare a
full speech. I hav e rev iewed this speech. I believ e it is a good speech, it is useful and it prov ides good accountability of
the gov ernm ents efforts in m axim ising the effectiv eness of loan disbursem ents or what is often coined as aid
disbursem ents. The speech also prov ides balanced explanations for the achiev em ents reached and the challenges
that the gov ernm ent continues to face as a result of regional decentralization and autonom y initiativ es. The speech
also clearly display s the work of those people in the field who are m uch m ore knowledgeable than I am in technical
m atters.
I would like to say thank y ou to the team who prepared the speech. In the interest of sav ing tim e, I will distribute a
hardcopy of this speech for all of y ou to read.
I m ust say , howev er, that I am still som ewhat disturbed by the use of the word aid for instrum ents that are in fact
loans. In m y speech at the CGI forum on the 8th of Nov em ber 2001 , I discussed at length the difference between
aid and loans, with all the im plications for effectiv e utilization of these instrum ents. That speech was also titled
Effectiv e Use of Foreign Aid, the sam e title that was giv en to m e for m y speech today . My basic v iews on the
effectiv e use of foreign aid and foreign loans rem ain the sam e as that of 7 m onths ago.
Therefore, rather than repeating m y self, please allow m e to spend a few m inutes to address a m uch m ore
fundam ental issue, one which has a m uch higher im pact on the effectiv eness of foreign loans, the issue of corruption.
There are essentially two m ajor driv ers for the effectiv eness of loan disbursem ents. The first one is the organizations
responsible for the loan disbursem ents along with its sy stem s, procedures and operating processes. The second driv er
is the m otiv ation, com petence and integrity of the people within the organization. It is of little use to build and
structure institutions and organizations, along with sy stem s, procedures, planning and m onitoring, if the people that
operate and work in these institutions are m orally , as they say here in Indonesia, corrupt to the bone.
As I m entioned in m y Nov em ber 8 speech, corruption in Indonesia is not only lim ited to stealing and em bezzling
m oney . The entire m ental and m oral disposition, or the way of thinking, is corrupt. Therefore, the accountabilities
m entioned in the speech that was prepared by m y team could be deem ed incom plete and perhaps ev en irrelev ant
since it doesnt address how to reduce corruption. I would m y self not dare to postulate the elim ination of corruption
entirely , which I think is practically im possible. But if we can reduce corruption significantly , we will hav e com e a
Pidato CGI 2 (dalam bahasa Inggris) Forum Kwik Kian Gie Mari Kita Berdiskusi
long way . Ev ery body talks and argues about the elim ination of corruption, including the corruptors them selv es, but
nobody has ev er proposed a com prehensiv e and practical solution that addresses the root cause of the problem , which
is how to m otiv ate or force people to shy away from corruption.
If we want to be honest with ourselv es, a concept to fight corruption is not com plex and we can learn from m any
exam ples, ev en from our nearby neighbours. Singapore has been v ery successful in eradicating corruption, and
China is already m aking serious headway s. Both places use a carrot and stick approach. In m y opinion, civ il
serv ants with positions of power and influence should be paid enough to sustain a com fortable and dignified lifesty le
in order to prev ent them from com m ercialising their positions. But if they are prov en to steal or fulfil their own self-
interest at the expense of the state and the people of Indonesia, then they should be punished sev erely . If necessary ,
prov en corruptors should be sentenced by the death penalty such as in China.
Hav ing said that, with ov er 4 m illion civ il serv ants, such a straightforward concept would not be easy to im plem ent
in Indonesia. The gov ernm ent sim ply does not hav e enough m oney to increase all their wages to a lev el that is
effectiv e to prev ent corruption. Ev en if the gov ernm ent has such m eans, it would still not be rational m ov e. This is
because ev er since the founding of the nation 57 y ears ago, the gov ernm ent has nev er perform ed any analy sis or
introspection to determ ine if such a large num ber of gov ernm ent em ploy ees are justifiable and optim al. A carrot
and stick approach would only be effectiv e if im plem ented together with com prehensiv e reform s and stream lining
of the bureaucracy and civ il serv ice.
We hav e nev er heard of audits perform ed to determ ine if the organization of gov ernm ent departm ents and units are
structured to m eet the objectiv es and goals of these departm ents and units. We often wonder if the structures of
gov ernm ent departm ents follow the strategic objectiv es of these departm ents or whether it is the other way around,
whereby strategy follows structure. In m y experience, not only is it the other way around, but drawing organization
boxes and lines hav e becom e a habit and a reflex of newly installed Ministers and Departm ent Heads. These reflexes
alm ost seem as an instant fulfilm ents to their needs to exercise newfound power.
In Indonesia, the strategy follows structure phenom ena can be seen in ev ery gov ernm ent departm ent. Ev en worse,
current policies dictate that all structures, sy stem s, procedures, com m unication protocols and controls m ust be
uniform am ong all departm ents, irrespectiv e of the v ary ing functions and objectiv es am ong different gov ernm ent
departm ents. One Minister recently m ade a rem ark on this policy with an analogy . He said that if we assum e the
structures, sy stem s and procedures of an organization to be clothing, and the objectiv es of the organization to be a
person, then the new policy dictates that ev ery one m ust wear the sam e size shirt, no m atter how skinny , fat, tall or
short the person is. How could this be possibly effectiv e?
These ty pes of issues hav e nev er been addressed sufficiently by international creditors and are not ev en stipulated in
the Letter of Intent to the IMF. This brings m e to another topic.
Lately , there has been m uch public exposure about m y v iews and wishes to end Indonesias engagem ent with the
IMF. In this forum , I would like to take the opportunity to explain m y position. I m ust first em phasize that I do not
wish to quit the IMF program m id-way , let alone state go to hell with IMF as was insinuated in the press. What I
want is that both the IMF and the Gov ernm ent of Indonesia honour the contract, which I understand is to end in
Nov em ber 2002.
Pidato CGI 2 (dalam bahasa Inggris) Forum Kwik Kian Gie Mari Kita Berdiskusi
If the Gov ernm ent decides to extend the contract for one m ore y ear, I am conv inced that the IMF will force the sale of
all banks owned by IBRA and the Gov ernm ent, ev en when these banks still hold substantial am ounts of gov ernm ent
re-capitalization bonds (recap bonds). Each tim e such a bank is sold to the priv ate sector, the banks ownership of
recap bonds, which is an obligation for the gov ernm ent to pay interest and principal, will autom atically be
transfered to priv ate hands. In m y opinion, the gov ernm ent m ust first clean up and fix these banks so that they can
operate without continuous gov ernm ent infusion. Before being sold to priv ate hands, the gov ernm ent m ust first
rem ov e the recap bonds from the banks balance sheets.
Why do I m ention this to y ou in this forum ? Because there is no point pondering about how to effectiv ely utilize the
loans from the nations that y ou represent, if we hav e to spend between 25 to 1 7 5 tim es the annual new loan
disbursem ents to serv ice the recap bonds. You can be rest assured that the day will com e when the gov ernm ent will
not be able to serv ice these recap bonds without either printing new m oney or rolling ov er principal pay m ents.
We all know that during the crisis m any banks that should hav e been closed were not closed because the Gov ernm ent
could not afford to shoulder the liquidation costs. Massiv e am ounts of cash m oney would hav e been required to pay
back depositors and to cov er sev erance pay m ents for em ploy ees. Instead, these banks were kept aliv e by large
injections of recap bonds, thereby ensuring positiv e capitalization of these bankrupt banks. The am ounts of recap
bonds injected during the re-capitalization program were m easured to achiev e a m inim um capital adequacy ratio
(CAR) of 4% at the tim e. With interest-bearing recap bonds booked as assets in their balance sheets, these re-
capitalized banks instantly becam e profitable.
The idea was to keep these banks afloat by stopping the bleeding. The program was not m eant to enrich the banks or
the m anagem ent of these banks. Instead, it was m eant to buy tim e while waiting for the econom y and the banking
sector to im prov e, which would in turn im prov e the health of these banks. One m ay ask, what is the definition of a
healthy bank? My answer is that a healthy bank is one that is capable of effectiv ely channelling deposits into loans
while earning a positiv e interest spread. Gov ernm ent re-capitalized banks can only be considered healthy once their
recap bonds hav e been redeem ed and they no longer depend on the interest incom e from the recap bonds. One way to
redeem these bonds is through accum ulation of profit into capital while returning the bonds to the gov ernm ent when
CAR lev els exceed regulatory requirem ents. Once the banks no longer contain substantial am ounts of recap bonds
and hav e norm al loan to deposit ratios, then they could be sold to the priv ate sector.
These kind of considerations were proposed by Mr. Stanley Fisher and Mr. Hubert Neiss to Mrs. Megawati in a
discussion before she becam e Vice President. Mr. Laksam ana Sukardi and I accom panied Mrs. Megawati during this
discussion. So what I am say ing today is nothing new. As a m atter of fact, I heard it directly from Mr. Stanley Fisher
him self.
But then the Gov ernm ent sold BCA with ov er Rp. 60 trillion of recap bonds in its balance sheet. BCA was already
capable of producing ov er Rp. 3 .1 trillion in net profit, but the bank was sold with a v aluation of Rp. 1 0 trillion. In
essence, the buy er gets the benefit of Rp. 60 trillion in recap bonds for pay ing only Rp. 1 0 trillion. For as long as the
bonds rem ain in the balance sheet, the gov ernm ent m ust pay approxim ately Rp. 1 0 trillion per y ear to serv ice these
bonds. The gov ernm ent gets Rp. 1 0 trillion from selling the whole bank, but m ust pay Rp. 1 0 trillion per y ear to
serv ice the debt. Meanwhile, the gov ernm ent has lost ownership of BCA, which before the sale already had a CAR of
3 4.2%. If, for exam ple, the gov ernm ent was prepared to reduce the CAR to 8% before the sale, it could hav e redeem ed
approxim ately Rp. 4.8 trillion in bonds. But such a consideration was nev er giv en any thought, and I think this is an
Pidato CGI 2 (dalam bahasa Inggris) Forum Kwik Kian Gie Mari Kita Berdiskusi
irresponsible act by the IMF.
The IMF also reneged on their prom ise to follow an agreed upon sale m ethodology . What I had agreed with Mr. Anoop
Singh was a transparent open tender process with a m inim um price. This m inim um price was supposed to be sealed
in an env elope and kept by a notary public. If none of the bids exceeded the m inim um price, then the sale would be
cancelled. But this was not done. Instead, the sale process was m essy and flawed with political lobby ing by potential
strategic partners. Mr. Hubert Neiss, who had since left the IMF and joined Deutche Bank, ended up lobby ing on
behalf of the Farralon consortium , which we all know won the bid.
Clearly , this was not what the IMF had in m ind under the direction of Messrs. Stanley Fisher, Hubert Neiss and
Anoop Singh. But now, with Ms. Ann Krueger, Mr. Horiguchi and Mr. Daniel Citrin in com m and, all IBRA banks
m ust be sold using the sam e m ethodology as the BCA sale.
Recap bonds in the banking sector today am ount to approxim ately Rp. 43 0 trillion in total. These bonds hav e
different m aturities and while waiting for them to m ature, the gov ernm ent m ust pay interest. The total interest
pay m ents before the scheduled m aturity dates of these bonds am ount to Rp. 600 trillion. If all the principals are paid
upon m aturity , then the total outlay of the gov ernm ent will be Rp. 1 ,03 0 trillion. This is the best-case scenario. But
if the gov ernm ent cannot afford to pay the principal when it is due and decides to rollov er the principal or issue new
bonds, then autom atically the interest burden will increase. For exam ple, if all the outstanding bonds were rolled
ov er once with the sam e tenor, then the obligation of the gov ernm ent to pay principal and interest will balloon to Rp.
7 ,000 trillion. By assum ing an exchange rate of Rp. 9,000, we can see that the gov ernm ents obligation to pay
principal plus interest is any where between US$ 1 1 1 billion and US$ 7 7 8 billion assum ing that all bonds are rolled-
ov er once. If they are rolled-ov er m ore than once, then the am ount will reach num bers that are alm ost
unim aginable. These figures are based on the calculation done by IBRA and were published in their bulletin titled
Analisa Ekonom i in April of this y ear.
This m orning I receiv ed a letter without nam e and address of the sender. The content is a follow up Econom ic
Rev iew bulletin by IBRA, which is prohibited by the m anagem ent to be distributed. It is dated May 2002. It said
that if we take the indexation of the bonds against inflation, the pay m ent obligation by the gov ernem nt can grow up
to Rp. 1 4.000 trillion (US $ 1 .400 billion) in the worst case scenario.
These num bers are shocking in and by them selv es. But what is ev en m ore shocking is that the IMF forces the
Indonesian gov ernm ent to sell these recap bonds to the priv ate sector without considering the long-term im plications
on the gov ernm ent budget. BCA has been sold with Rp. 60 trillion of bonds in it. Bank Niaga m ust be sold before the
end of this y ear using the sam e m ethodology as that of the BCA sale, again without first rem ov ing/reducing Rp. 9
trillion of recap bonds from Bank Niagas balance sheet. In the latest draft of the LoI, there is a list of all the banks
that m ust be sold in the sam e way , including Bank Danam on, Bank Lippo, Bank Mandiri, etc. All of these banks hold
substantial am ounts of recap bonds
I m entioned before that banks which should hav e been liquidated were not liquidated because the Gov ernm ent had
no cash to pay depositors and sev erance pay m ents of the em ploy ees. But how m uch would this hav e cost us, perhaps
hundreds of trillions of Rupiah? Yet now the Gov ernm ent is on the hook for ov er Rp. 1 ,000 trillion, but the IMF
assum es that we will hav e the m eans to pay this am ount.
Pidato CGI 2 (dalam bahasa Inggris) Forum Kwik Kian Gie Mari Kita Berdiskusi
How can the Gov ernm ent ev er be expected to pay back the loans from CGI if we hav e to pay such high interest and
principal pay m ents to serv ice the recap bonds? This is the reason I fought hard to cancel the sale of BCA, but in the
end I lost. I am now fighting again to cancel the sale of Bank Niaga. But rather than focusing all m y energy on
fighting these silly and illogical sale program s, I decided to also focus m y attention on the source of the problem ,
which is the IMF contract with the Gov ernm ent of Indonesia.
I believ e our Gov ernm ent should am icably and in a gentlem en-like m anner end the contract with the IMF when it
expires in Nov em ber this y ear. This contract was signed by then-President Soeharto and Mr. Michael Cam dessus
from the IMF. To m y knowledge, this contract was supposed to end in Nov em ber of this y ear. Of course, I was
saddened and shocked when I heard rum ours that the IMF contract is now v alid until 2003 . When I inquired to see a
copy of the signed contract, I was told by m y staff that this contract is nowhere to be found. I still wonder if I m ade a
m istake in assum ing that the contract ends in 2002 or is it possible that this contract was extended for one m ore y ear
without m y knowledge?
Giv en m y v iews and positions, does it m ean that the re-capitalized banks should nev er be sold? Of course not. These
banks m ust be sold, but only when they are already healthy , which m eans that they can operate profitably without
continuous gov ernm ent infusion. It also m eans that they will be sold to the priv ate sector after recap bonds hav e
been rem ov ed from the balance sheets of these banks. We m ust start thinking creativ ely and innov ativ ely to find a
solution to rem ov e these bonds as quickly as possible. Bappenas together with sev eral independent financial experts
hav e already started to dev elop alternativ e scenarios. I just hope that when these alternativ e solutions are com plete,
they can be accepted and executed by the relev ant gov ernm ent departm ents.
Som e people hav e warned m e about the possible consequences of not extending the contract with the IMF. Of
particular concern is the potential reaction from CGI creditor nations and from other international agencies,
specifically as it relates to the possible disruption in loan disbursem ents that Indonesia needs. But this will all depend
on y ou in this forum today . Therefore, in this opportunity , I would like to encourage y ou all not to shy away from
Indonesia ev en when we no longer work with the IMF. The engagem ent with the IMF was from the start designed to
end in January 1 5, 2001 , and then extended by President Wahid until Nov em ber 2002. Nov em ber 2002. I am
suggesting to honour the contract until com pletion and not to extend it. I dont believ e that this should be taken as a
sign of rebellion against CGI creditor nations.
I hav e concluded that Indonesia no longer needs to engage the IMF in order to m aintain and im prov e its econom ic
recov ery program s. The m oney that the IMF prov ides to Indonesia is of little benefit since it can only be used when
the reserv es of the Central Bank are com pletely depleted. But the reserv es of the Central Bank hav e been stable and
the outlook is also stable. Going forward, the program s in the Letter of Intent will also hav e little im pact. This is
because the IMF only seem s to be concerned with the m echanical im plem entation of decisions without considering
the im pact of such decisions and without considering whether these decisions hav e positiv e and lasting outcom es.
I experienced this m y self when the IMF directed m y departm ent to perform inv estigativ e audits on BULOG,
Pertam ina, PLN and the use of reforestation funds, and to publish the results to the public. When I asked about the
benefit of doing this, the IMF responded that by publishing the results we could expect som e form of social control.
Moreov er, if there is prov en fraud, the police and the office of the attorney general can be expected to take action, to
follow up with an inv estigation and to punish those that are guilty . This way , law enforcem ent will take place. I hav e
done exactly as instructed, and together with the IMF distributed the results of expensiv e inv estigativ e audits to the
Pidato CGI 2 (dalam bahasa Inggris) Forum Kwik Kian Gie Mari Kita Berdiskusi
press. But not a single word was printed, and nobody read the docum ents, not ev en the police and the attorney
generals office. But the IMF did not m ake a fuzz of this fact and ev ery thing was considered com pleted as per the LoI.
This exam ple and m any m ore gav e m e the im pression that the form ation of the LoI boils down to a m echanical cut
and paste word processing effort, by using LoIs of other countries as tem plates. If I postulate the potential that the
Bank Niaga sale is part of a conspiracy to sell the bank to predeterm ined inv estors with a financial engineering that
is v ery dam aging to the interest of IBRA, no one believ es m e. What is im portant to the IMF is that Bank Niaga gets
sold before a specific deadline, no m atter at what price and nev er m ind the fact that it still contains Rp. 9 trillion in
gov ernm ent bonds.
There are also strange behav iours am ong a group of Indonesian econom ists. In the y ear 2000, a m inister stated that
the Indonesian econom y is recov ering with a GDP growth rate of 4.8%. This m inister was m ocked and laughed at by
the new order econom ists for prov iding this assessm ent. They rem arked that the Indonesian GDP growth at the tim e
was consum er driv en, which is m eaningless and not sustainable. But then later when Alan Greenspan m entioned
that im prov em ents in the US econom y was driv en by consum er dem and, these sam e econom ists im itated Mr.
Greenspan and stated that the Indonesian econom y is also im prov ing because of consum ption. Now they are ev en
say ing that the Indonesian econom y is already on the right path. Meanwhile, statistics show that capital
expenditures are still on a downward trend. Why do they change their m ind ? If we believ e that the Indonesian
econom y is already on the right path which I agree as from 1 999 and especially in the y ear 2000, then a question
loom s large in our m inds : if we are already on the right path, then why do we need to extend the IMF program ?
In closing, I would like to sum m arize as follows:
1 . Technical argum ents on the effectiv e use of foreign loan hav e been presented in a paper prepared jointly by the
World Bank and Bappenas. This paper will be distributed to y ou as an attachm ent to the text of m y speech today .
2. I hav e not changed m y ov erall point of v iew on the effectiv eness of loans and aid. This point of v iew was presented
and distributed in the CGI forum on Nov em ber 8, 2001 .
3 . In essence, I believ e that any effort of reform by the World Bank, ADB and other international institutions will be
useless without addressing the m ain cause of the problem , nam ely the m orally and m entally corrupt predisposition
of the indiv iduals.
4. I question the logic for continuous assistance from the CGI, am ounting to additional loans of US$ 4 billion per y ear,
if the gov ernm ent is forced by the IMF to honour principal and interest pay m ents on recap bonds that am ount to a
m inim um of US$ 1 1 1 billion and god knows what am ount if we keep rolling ov er the principals.
5. I request for the IMF and the Gov ernm ent of Indonesia to honour the existing contract until the end of its term in
Nov em ber this y ear. Thereafter there will be no need for an extension giv en that the econom y is already recov ering
on the right path. If the IMF continues to dem and for the gov ernm ent to sell gov ernm ent recap banks, our
calculations show that Indonesia will be pushed into a disaster of extraordinary proportions, potentially ev en
including social disturbances if at the end of the day the Gov ernm ent cannot fulfil pay m ents of principal and/or
interest on the recap bonds. This is especially a realistic scenario if the creation of a m arket for trading bonds becom es
a reality . Hundreds of thousands of people holding these recap bonds m ay face the risk that the gov ernm ent end up
Pidato CGI 2 (dalam bahasa Inggris) Forum Kwik Kian Gie Mari Kita Berdiskusi
defaulting on these bonds.
6. It is im portant to rem ind ourselv es that during the 3 2 y ears of Soehartos rule, the gov ernm ent nev er borrowed
m oney from the people. The dev elopm ent budget was alway s funded by foreign borrowing from IGGI and CGI
countries. As I understood it, the reason for the gov ernm ent to av oid dom estic borrowing was to prev ent crowding out
the priv ate sector in utilizing public sav ings. But now that public sav ings is ev en thinner than during the Soeharto
era, the v ery sam e econom ists feel that it is allright to utilize public sav ings am ounting to thousands of trillion of
rupiahs. I find this difficult to digest and it is clearly logically indefensible.
In all, m any m ay consider m e to be nav e or ev en incom petent, but I believ e I owe it to this country to serv e m y duty
as Minister by speaking the truth and prov iding early warnings when called for.
Thank y ou.


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