World Bank Documentdocuments.worldbank.org/curated/en/... · October-Dec. 1997: 3,989 October 1998: 7,550 January 1998: 10,375 November 1998: 7,300 ... BNI Bank Negara Indonesia (SCB)

Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No.19491

IMPLEMENTATION COMPLETION REPORT

INDONESIA

AGRICULTURAL FINANCING PROJECT

(LOAN 3402-IND)

June 28, 1999

Rural Development and Natural Resources Sector UnitEast Asia and Pacific Region

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.

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CURRENCY EQUIVALENTSCurrency unit - Indonesian rupiah (Rp or IDR)

At appraisal (August 8, 1991)$ 1.00 = Rp 1,953; Rp 1,000 = $0.51¢

Average rates Rp for $1.001992: 2,051 March 1998: 8,3251993: 2,095 April 1998: 7,9701994: 2,160 May 1998: 10,5251995: 2,239 June 1998: 14,9001996: 2,340 July 1998: 13,000January-June 1997: 2,306 August 1998: 11,075July-Sept. 1997: 3,101 September 1998: 10,700October-Dec. 1997: 3,989 October 1998: 7,550January 1998: 10,375 November 1998: 7,300February 1998: 8,750 December 1998: 8,025

FISCAL YEARSGovernment of Indonesia: April I-March 31

(until 1999)Bank Indonesia and Participating Banks: January 1- December 31

(thereafter)

WEIGHTS AND MEASURESMetric System

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

AFP Agricultural Financing ProjectBAPPENAS State Board for National Development PlanningBI Bank Indonesia (Central Bank)FSDP Financial Sector Development ProjectGOI Government of IndonesiaMIS Management Information SystemMOF Ministry of FinanceSCB State Commercial BankPBs (at outset) Participating banksBank Exim Bank Ekspor Impor Indonesia (SCB)BAPINDO Bank Penbangunan Indonesia (SCB)BNI Bank Negara Indonesia (SCB)BDNI Bank Dagang Nasional IndonesiaBank Niaga Bank NiagaBank PANIN Pan Indonesia Bank(added after mid-term review)Bank Bali Bank BaliBank Buana Bank Buana IndonesiaBCA Bank Central AsiaBank Danamon Bank DanamonBank Tamara Bank TamaraBank Tiara Bank Tiara

Vice President : Jean-Michel Severino, EAPVPCountry Director : Mark Baird, EACIFSector Manager : Geoffrey Fox. EASRDTask Manager : William Cuddihy, EASRD

FOR OFFICIAL USE ONLY

CONTENTS

PREFACE ................................................... iiiEVALUATION SUMMARY ................................................................. ivPART I: PROJECT IMPLEMENTATION ASSESSMENT

A. Project Objectives and Description ...................................................... 1B. Achievement of Objectives ................................................................ 3C. Implementation Record and Major Factors Affecting Project ........................ 3D. Project Sustainability ................................................................... 4E. Bank Performance .................................................................. 5F. Borrower Performance .................................................................. 6G. Assessment of Outcome ................................................................... 7H. Future Operation .................................................................. 7I. Key Lessons Learned ................................................................... 7

PART II: STATISTICAL TABLES ............................................................. 9Table 1: Summary of Assessments ......................................................... 9Table 2: Related World Bank Loans/Credits .............................................. 10Table 3: Project Timetable .................................................................. 11Table 4: Loan/Credit Disbursement: Cumulative Estimated and Actual ............. 11Table 5: Key Indicators for Project Implementation ..................................... 12Table 6: Studies Included in the Project ..................................................... 13Table 7A: Project Costs ................................................................... 13Table 7B Project Financing .................................................................. 13Table 8: Economic Costs and Benefits ........................ ........................... 14Table 9: Status of Legal Covenants ......................................................... 14Table 10: Compliance with Operational Manual Statements . . 15Table 11: World Bank Resources: Staff Inputs .. 15Table 12: World Bank Resources: Missions ............................................. 16

APPENDICESAppendix 1: Completion Mission's Aide-Memoire ......................................... 17Appendix 2: Borrower's Contribution to ICR .................... ............................ 29Map: IBRD 26570

This document has a restricted distribution and may be used by recipients only in the performance of theiofficial duties. Its contents may not otherwise be disclosed without World Bank authorization

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INDONESIA

AGRICULTURAL FINANCING PROJECT

(Loan 3402-IND)

PREFACE

This is the Implementation Completion Report (ICR) for the Agricultural FinancingProject in Indonesia, for which Loan 3402-IND in the amount of $106.1 million was approvedon September 5, 1991, and made effective on March 27, 1992. The loan was closed on January26, 1999 (shortly after its original closing date of December 31, 1998), with the sum of$67.3 million disbursed. Sums of $10.8 million and $28.0 million were canceled as ofApril 18, 1998, and August 26, 1998 respectively.

The ICR was prepared by Mr. Dennis Notley (Consultant Financial Analyst) with theassistance of Mr. Unggul Suprayitno (Financial Officer) and Ms. Kowsar Parveen Chowdhury(Administrative Assistant). It was reviewed by Mr. William Cuddihy, Task Manager, GeoffreyB. Fox, Sector Manager, EASRD, and Mr. Mark Baird, Country Director for Indonesia. TheBorrower provides comments that are included in Appendix 2 to the ICR.

Preparation of this ICR is based on the findings of the Bank's implementation completionmission in February 1999 and on materials in the Bank's files for the project, in Washington andJakarta. The borrower contributed to preparation of the ICR by offering views reflected in themission's Aide Memoire (Appendix 1), and in its own evaluation of project execution(Appendix 2).

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INDONESIA

AGRICULTURAL FINANCING PROJECT (Loan 3402-IND)

Evaluation Summary

Project Objectives

1. At the time of project formulation, the World Bank saw a favorable economicenvironment. In agriculture, Government of Indonesia (GOI) would provide support services,and intervene less in pricing, marketing, production and trade. In the financial sector majorreforms in 1983 had permitted the entry of new banks, and further reforms in 1990 were tomarkedly reduce distortions created by subsidized credit. The Financial Sector DevelopmentProject (FSDP: for which Loan 3526-IND was later approved on November 12, 1992) wouldreinforce GOI's efforts to promote an efficient, stable and sound financial sector bystrengthening prudential banking regulations and Bank Indonesia (BI)'s bank supervisionsystems. Against this backdrop, the project objectives were to: (a) strengthen the capacity ofparticipating banks (PBs) to lend on a long term basis at market rates, to private small-andmedium-scale agricultural, fishery and agribusiness enterprises; (b) improve the availability ofterm credit to these enterprises during the transition period when the financial system would beadjusting to the deregulated regime; and (c) finance economic and financially viable, andenvironmentally sound investments in agriculture and agribusiness.

Implementation Experience and Results

2. The financial crisis conditions since early 1998 have affected the banking systemseverely. None of the twelve banks that participated in the Agricultural Financing Project (AFP)continue to have capital adequacy ratios above the (Basle) recommended level of 8 percent; andonly two meet the lower target of 4 percent adopted by BI in late 1998. High interest rates havepresently eliminated demand, and the capacity of PBs to undertake long term loans at marketrates. Because of this and the uncertain financial positions of the participating banks, the WorldBank Loan was not extended beyond its original closing date of December 31, 1998. In total$38.8 million, or 37 percent of the original loan of $106.1 million was canceled.

3. Investment Credit Component. The project was to finance about 350 enterpriseshaving operating assets of not more than $500,000, with a maximum subloan limit of $525,000.Most subloans-172 with an average value of $290,000 each-clearly went to the target group,and accounted for 60 percent by value of all subloans granted. The remaining subloans went to495 small farmers who were contracted to two very large shrimp schemes. This style of subloanwas discontinued as these were considered by the World Bank as not being within the intendedtarget group because it was not clear whether they were indeed farmers or scheme workers. Fourof the PBs recorded unacceptably high levels of doubtful or bad debts, but the subloans at theother banks have performed remarkably well, given the severity of the financial crisis.

4. Technical Assistance Component. Assistance to prospective subborrowers to prepareproposals was dropped from the Project at the mid-term review, as entrepreneurs were willing toemploy outside experts when needed. The BI Management Information System, MIS for termcredit, which was to include monthly reports on repayments and arrears, was not implemented,

but should have been. Assistance and training on appraisal and loan administration procedureswas judged by PBs to be effective and useful, although most PBs considered that the appraisalprocedures were unduly cumbersome and the approval process too slow.

5. World Bank Performance. The project was exhaustively debated during preparation.Issues concerning bank soundness and BI regulatory capability were well known, anddepartmental and regional management judged, in view of the forthcoming Financial SectorDevelopment Project, that the risks associated were acceptable. These substantial risks were notmentioned in the appraisal report, indeed the report stated that there were no major risks. Thesequencing of AFP prior to enhanced prudential banking regulation and enforcement by BI,occurred because AFP was considered to be an essential interim operation for the agriculturalsector. In hindsight, it is clear that a delay to enable the planned objectives of FSDP to bearfruit; an insistence on independent verification of the soundness of the participating banks; andcloser monitoring during supervision of the dependency of this project upon FSDP, would havebeen preferable.

6. AFP gave some warnings of the emerging bank crisis. A year before board presentation,the task manager reported that the participating banks were worried that delay in AFP couldaffect confidence in the financial sector. Early into implementation, the FSDP task managerraised concerns about the viability of BAPINDO, one of the participating banks. The World Bankcontinued to rely on BI to supervise the soundness of PBs, and did not ask for independentinspections. The signals did not lead to a Departmental review of the early experience instrengthening BI prudential regulation, upon which the decision to proceed with AFP had beenbased.

7. GOIIBI/PB Performance. The Indonesian participants in general fulfilled theirrespective roles under the Project, albeit with subloans not at the volume hoped for. In particularthe performance of five participating banks, in approving and supervising what have turned outto be, on the whole, viable subloans, must be highlighted. The MIS, especially repaymentperformance tracking, was not implemented.

Summary of Findings, Future Operations, and Key Lessons Learned

8. Any assessment during the continuing financial crisis must be read with caution. There ispartial confirmation of a 1997 judgement of the World Bank's sector unit that "AFP is making animportant contribution by demonstrating the financial viability of small and medium-size loansfor agricultural enterprises at market rates of interest, and the potential for the commercial banksto play an increasing role in servicing this emerging market". At the same time, it should benoted that the World Bank's views on the virtues of market interest rates are not fully reflected inIndonesian policy, or the practice of other important donors. And the present situation of veryhigh real and nominal interest rates does not provide a conducive climate for arguing the casethat the project has demonstrated that market rates are preferable to subsidized.

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9. Most subloans appears to have been remarkably resilient in the face of the high interestrates engendered by the financial crisis. Subprojects with an export focus have been protected,indeed some have clearly benefited from the massive devaluation of the rupiah. Subprojectsprocessing or transforming agricultural produce for the local market appear to be coping atpresent, although the continuance of high interest rates may affect them. The performance of fiveof the banks appears to have been satisfactory in terms of subloan quality, three banks performedless well, while the percentage of doubtful debts and those more than 90 days overdue at fourparticipating banks was unacceptably high. The lending performance outcome is therefore at bestmixed.

10. The extent to which PBs have been successfully introduced to term lending to agricultureis also mixed. The PBs and their term loan customers accept variable interest rates as a matter ofcourse, an important device for dealing with the mismatch between funds available being at shortterm, and demand for long-term loans. Most of the PBs felt strongly that the appraisalprocedures under AFP were unduly onerous, and compared them with lighter procedures underalternative schemes. Certainly the requirements for economic analysis of subprojects dealingwith commodities benefiting from artificial distortions caused difficulties, including the absenceof applicable correction factors. Requirements for environmental screening also were onerous,as the banks were not permitted to simply rely upon the Government's own processes, but wereexpected to ensure that screening was adequate. And there were mismatches between thetraining course material which assumed borrowers could provide reliable financial data, and thereality that many firms keep only rudimentary records. This posed a challenge to establishingborrower creditworthiness. While design of any future program should take heed of thesedifficulties, the strong appraisal review processes enforced under AFP may well have contributedto the success of most subloans, and should not be lightly weakened.

11. The very real demonstration of how some banks unaccustomed to lending in theagricultural and agro-industrial sectors have been able to do sound business at market interestrates, with subprojects producing a real development benefit, may be the project's mostimportant impact. It supports the case for resuming unsubsidized term lending, as the financialcrisis passes. But the longer the crisis continues, the greater the danger that this experience willbe lost, as staff change, and as institutions remain unable to make term loans. It is tempting tosee a half full glass, and rank the project marginally successful. But the fact that all theparticipating banks have capital adequacy ratios of less than 8 percent, the fact that some of thebanks performed quite poorly with unacceptably high doubtful debts giving rise to unacceptablelevels of doubtful debts at the overall project level, the shortfall in demand compared to appraisalexpectations, the high number of subloans outside the target group, and the uncertain prospectsof a sustainable impact of the experience and technical assistance, argue for judging the glasshalf empty. This ICR therefore ranks the project outcome as unsatisfactory.


INDONESIA

AGRICULTURAL FINANCING PROJECT(Loan 3402-IND)

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. PROJECT OBJECTIVES AND DESCRIPTION

1. Policy environment: The project objectives were set against a backdrop of a newenvironment for agriculture, entailing a changing role for the Government, geared more towardsproviding support services, and intervening less in pricing, marketing, direct production andtrade, while addressing the emerging conservation needs. The agriculture sector would rely onnew sources of growth through greater diversification both horizontally (products) and vertically(services, marketing and agroprocessing). This would require unlocking the full potential of theprivate sector. The availability of term credit would play an important role in tapping newsources of growth and a long-term commitment of resources. In the financial sector, majorreforms in 1983 had permitted the entry of new banks, complemented by a program to strengthenBank Indonesia's supervisory capabilities; and further reforms in 1990 were to markedly reducedistortions created by subsidized credit programs, and to foster further the development of thecapital market. The future agenda included strengthening the supporting infrastructure for thefinancial sector such as the legal framework and prudential control and supervision. Newprudential regulations including those related to capital adequacy had been put into effect, andwith the assistance of the International Monetary Fund (IMF) and the World Bank, efforts wereunder way to strengthen Bank Indonesia (BI's) supervisory functions.

2. The World Bank objectives and strategy in the financial sector and agricultural creditincluded (a) strengthening the state commercial banks (SCBs) for them to compete in the newfinancial environment; and (b) promoting a sustainable flow of commercial credit to theagricultural sector to replace the old system of subsidized directed credit. The Financial SectorDevelopment Project (for which Loan 3526-IND was later approved on November 12, 1992) wasto reinforce GOI's efforts to promote an efficient, stable and sound financial sector by (a)strengthening prudential banking regulations and BI's bank supervision systems and staff skills;(b) further developing BI's credit information system; and (c) strengthening the capital base ofSCBs to enable them to compete in the deregulated environment. While these measures wouldpermit the policy environment for resource allocation to improve and the financial system tobecome increasingly competitive and sophisticated, as a transitional measure the World Bankwould continue to support efficient delivery of credit to groups of borrowers whose access tocredit was constrained.

3. Project objectives: In support of Government's policy to eliminate subsidized credit asa means of promoting agricultural development, the primary objectives of the proposed projectwere to: (a) strengthen the capacity of participating banks (PBs) to lend on a long term basis atmarket rates, to private small- and medium-scale agricultural, fishery and agribusinessenterprises; (b) improve the availability of term credit to these enterprises during the transition

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period when the financial system is adjusting to the deregulated regime; and (c) financeeconomic and financially viable, and environmentally sound investments in the agriculture andagribusiness sectors.

4. The project components were: (a) an investment credit component to finance PBs'subloans to eligible private, small- and medium-scale investments in agriculture, livestock,fishery, forestry, and agribusiness; and (b) a technical assistance component to provide subloanappraisal advisory and Management Information System assistance to the PBs, staff training, andat the enterprise level, assistance to prospective subborrowers to prepare high quality subprojectproposals. During implementation, the number of participating banks was increased, and theobjectives of the technical assistance component adjusted.

5. Evaluation of Project Objectives. The project objectives were ambitious, andconsistent with GOI's financial reform strategies, and correctly accepted the challenge ofdemonstrating the viability of market rate lending. Sustainability was dependent upon threecritical factors external to the project: (a) the financial soundness of the participating banks; (b)the related dependency upon the success of technical assistance under the Financial SectorDevelopment Project to strengthen BI in its role of determining and enforcing BI's prudentialbanking regulations; and (c) the degree to which Government (BI/MOF)-Ministry of Finance)policies for the financial sector set out above were firmly in place. The appraisal report judgedthat there were no major risks, perceived at the time, that could inhibit the attainment of theproject objectives. However the report stated that uncertainties in credit demand and theparticipating banks' lack of familiarity with the appraisal and administration of small agriculturalsubloans, might lead to slow project implementation and loan disbursements. These risks wereto be minimized by a prudent loan amount and by the selection of participating banks with along-term interest in developing the agricultural credit market. The statement that no major riskswere involved was clearly incorrect, and in fact the external risks of bank soundness and theBI prudential regulatory function had been vigorously debated within the World Bank during

preparation. The risk paragraph should have mentioned them.

6. The decision to proceed with the project in the face of known major risks needs to beassessed taking into account the World Bank role to undertake innovative projects withchallenging objectives. The sequencing of AFP as a two-step onlending project, prior tosuccessful implementation of prudential banking regulation and enforcement by Bank Indonesia,occurred because priority was accorded to AFP as an essential interim operation for theagricultural sector. The Agriculture Division argued strongly for the need for AFP focussedupon agriculture and agro-industry, as it felt that banks would not readily undertake lending foragriculture without a specialized project. The question that may now be asked is whether thissupport to the agriculture sector was sufficiently important to proceed in the face of the knownexternal risks, or whether on the information known at the time, prudence would have dictated adelay to enable the planned objectives of the Financial Sector Development Project to bear fruit,or an insistence on independent initial and ongoing verification of the soundness of theparticipating banks. Dealing with such a question would be more appropriately handled in thecontext of a wider discussion of the experience of the financial and economic crisis in Indonesia,and as such is not addressed in this report.

7. This review also does not deal with how the risks grew into the financial crisis inIndonesia, which has severely impacted upon bank viability, the exchange rate, and interest rates,but simply notes (a) the project did not in any significant way contribute to the crisis; and (b) the

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ongoing high interest rates and bank weaknesses may, particularly if they persist, cause problemsfor project sustainability.

B. ACHIEVEMENT OF OBJECTIVES

8. None of the 12 banks that participated in AFP continue to have capital adequacy ratiosabove the Basle recommended level of 8 percent, and only two meet the lower target of 4 percentadopted by BI in late 1998. Two banks were forced to withdraw from new lending under theproject during implementation (Bapindo and Pan Indonesian Bank). Bapindo and Bank EksporImpor Indonesia are to be merged, along with two other state banks, into Bank Mandiri. BankCentral Asia, Bank Danamon and Bank Tiara have been taken over by the Government, andBank Dagang Nasional Indonesia has failed and been closed, and its affairs are being handled bythe Indonesian Bank Restructuring Agency. As a result of the uncertain situation for theparticipating banks, the loan was not extended beyond its original closing date ofDecember 31, 1998. In total $38.8 million, or 37 percent of the original loan of $106.1 millionwas canceled.

9. In contrast to the current state of the institutions involved in lending under the project,many of the enterprises receiving subloans appear to have prospered with the assistance of thesubloans.

C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT

10. Investment Credit Component. The project was to finance about 350 enterpriseshaving operating assets of not more than $500,000, with a maximum subloan limit of $525,000.A major issue arose during implementation with the World Bank considering that the granting ofloans to small shrimp farmers within very large-scale integrated developments was contrary tothe spirit and essence of the project objectives for promoting small and medium enterprises.After discussion it was agreed that small subloans associated with such very large scale projectswould no longer be supported.

11. The two large shrimp farm schemes account for 40 percent of disbursements. Theyproduce export commodities and continue to be viable at present, although under strain fromhigh interest rates. The high cost of borrowing means that planned expansion of production tomatch the large investments in factory and other infrastructure has had to be deferred. At onescheme, some rescheduling of smallholder debt consequent to technical problems which delayedproduction is required and appears feasible. At the other scheme, farmers are up to date in theirloan repayments, but the situation is not yet reflected in their accounts as the bank involved,BDNI, has closed. The Government has agreed with the owner of BDNI's parent company thatthe sub-borrower loans will be assumed by another subsidiary, PT Dipasena, which is thenucleus processing company to whom the farmers sell their produce.

12. The performance of the other subloans, which were the intended target group, has provedmore difficult to judge in the absence of statistics from a Management Information System.The ICR estimates of the overall results of investment credit component is shown in Table 5 inPart II. Subloans amounting to Rp 206 billion were accorded to 175 target group enterprises, and804 shrimp farmers. Overall, 8 percent of these subloans were bad or overdue by more than 180days, and a further 4 percent were overdue by 90-180 days. These are unacceptably high levels,but the problem was caused mainly by three state banks, and two private banks with particularlypoor lending perfornance. Two other banks also performed less than acceptably and five banks

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performed well. The mission's field visits confirmed the accuracy of reporting for thesubprojects visited, but it is difficult to extrapolate from this small sample, in view of the markeddifferences between the performances of different banks, and given the continuing high interestrates. But on the figures presented, given the severity of the financial crisis, the performance ofthe better banks is remarkably good.

13. Technical Assistance Component. The first TA subcomponent - assistance toprospective subborrowers to prepare proposals-was dropped from the Project at the mid-termreview, in the light of a Bank Indonesia study, which concluded that entrepreneurs were willingto employ outside experts when needed and that studies by inexperienced young graduates underthe subcomponent often lacked depth. In addition in the light of demand for credit, there wasbasically no need for market stimulating measures through this subcomponent.

14. The second sub-component-the BI MIS for term credit-was reported at the mid-termreview to have been installed, and training conducted, and BI had submitted a report to the Bankon subloan approvals and disbursements. The appraisal objective was that the system also coverrepayments and arrears, on a monthly basis. As many if not all subloans have no grace periodfor interest servicing, and some no grace period for principal repayments, the requirement formonitoring arrears began immediately on subloan granting. The lack of payment performancestatistics at mid-term was thus not satisfactory. Subsequent supervision missions did not followup this matter, despite queries from departmental management, and indeed only reported someglobal figures on approvals and disbursements, rather than the detailed tables which had beenappended to the earlier supervision reports. The lack of data impacts upon the quality of projectsupervision, and ICR preparation.

15. The third sub-component-assistance to the participating banks on appraisal and loanadministration procedures, and vetting subloan applications- is seen by the participating banksas successful. The banks complain however that the appraisal procedures are unduly onerousand much more so than for other lines of credit available to them. The assistance on loanadministration procedures was not seen by the appraisal advisor as extending to assistance onmonitoring repayments, an understandable view given the lack of attention by bank missions tothe MIS and its requirements for repayment information.

16. The training given under the fourth subcomponent-training participating bank staff inassessing subproject viability and risk-has generally been judged by participating banks aseffective and useful. One bank branch commented to the mission that obtaining sound financialinformation from prospective clients, as required by the methodology, was often difficult, butthey have made a special effort to check and assess the client by site visits and discussions withother knowledgeable parties. Interestingly, the same bank found that the detailed appraisalmethodology was useful rather than onerous.

D. PROJECT SUSTAINABILITY

17. As indicated earlier, both the situation of banks, and the current high level of interestrates, make if difficult to forecast an early resumption of the type of lending fostered by theProject. In any case, some questions must be raised as to the extent to which the Project wasfostering this type of lending, prior to the crisis, and thus assisting Indonesian small- andmedium-scale borrowers with limited access to formal credit. It was assumed that with theintroduction of AFP, and with aggressive marketing of the AFP product, particularly extendingAFP assistance beyond the traditional customers of the respective PBs, the PBs would be able to

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provide term-credit to small and medium scale agricultural, fishery and agribusiness enterprises.However, despite strong emphasis on this aspects by various supervision missions, personalcontacts between PBs staff and their clients remained the primary vehicle for information onAFP. At best, project sustainability is uncertain. Bank Indonesia also points out that under ACTNo.23/1999, it can no longer extend credit directly to PBs from an international institution butmust work through another institution chosen by the Ministry of Finance. Bank Indonesia willtherefore have to transfer all its project-financed loans to another institution and this may affectperformance.

E. BANK PERFORMANCE

18. World Bank Performance. The project was exhaustively debated during preparation bya department financial sector working group, and the views of specialists in the CentralOperations Department were obtained. As noted in para. 6, the issues for successfulimplementation were well known, and departmental and regional management apparentlyjudged, in view of the forthcoming Financial Sector Development Project, that the risksassociated with bank soundness and GOI regulatory capability were acceptable. The lack ofdiscussion of these as project risks in the appraisal report, and of the views of other donors on theissue of subsidized interest, were omissions that should not have occurred. Competingsubsidized interest rate schemes, both donor and GOI financed, caused some, but not major,problems during implementation. One aspect of the design which challenged supervision, wasthat with the deliberate decision that BI's role was bank supervision, and not an apex institutionfor the project, the project had in fact 13 project managers (12 participating banks, and theIndonesian Banking Institute).

19. During implementation, three major areas where the World Bank performance wasimportant can be identified. First, World Bank supervision did not initially raise concerns aboutthe granting of a group of subloans to some 540 individual shrimp farmers participating in alarge development in Lampung operating under the nucleus-smallholder model. The viability ofthe smallholder subloans depended upon the viability of the overall enterprise, and thedevelopment required careful environmental assessment. Departmental management initiallyfocussed on whether financing small farmers under the schemes were consistent with the projectobjectives, and in course, the Department satisfied itself as to the viability and environmentalissues for this and another such scheme, and agreed with Government that farmers under furthervery large integrated schemes would not be considered eligible for AFP subloans.

20. Second, warnings about the emerging bank crisis were signaled by this project. A yearbefore board presentation, Bank Duta had experienced difficulties, and the task manager reportedthat the participating banks were worried that delay in AFP could affect confidence in thefinancial sector. The task manager for the Financial Sector Development Project raised concernsabout the viability of Bapindo, one of the participating banks. It was initially decided to continueto rely on the policy agreed with Government, that BI would notify the World Bank if any bankparticipating in the project were no longer judged by BI to be sound (sehat). It was agreedshortly after that BAPINDO would withdraw from new lending. Apparently not sufficientlyquestioned were: (a) whether the agreement to rely on an initiative by BI to declare a bank nolonger sehat, rather than insisting upon an independent judgement by the World Bank orqualified auditors outside Government, continued to reasonable; and (b) whether the warningsignal should have led to a review by the Department of the early experience in strengthening the

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B3 regulatory process, upon which the decision to proceed with Agricultural Finance Project hadbeen based.

21. Third, the project's MIS, including tracking of repayments, disappeared from the Bank'sradar scheme shortly after the mid-term review. A query from departmental management aboutrepayment performance should have triggered a new focus by the task manager on the MISsystem. However, with a change of task managers, supervision concentrated on visitingsubprojects, which had earlier been neglected, in an effort to identify any problem areas whichhad not been apparent in the appraisal reports for subprojects. Both the MIS and routine projectreporting were lost sight of. This was unfortunate, as the MIS would have been a keysupervisory tool for the participating banks, for BI prudential supervisors, and for World Bankmissions.

F. BORROWER PERFORMANCE

22. GOI/BI/PB Performance. The Indonesian participants in general fulfilled theirrespective roles under the Project, albeit with subloans not at the volume and quality hoped for.In particular the performance of six participating banks, as far as the project is concerned, inapproving and supervising what have turned out to be, on the whole, viable subloans, must behighlighted. However, as with the World Bank (para. 16), it might be argued that discussion ofthe issues surrounding the large integrated shrimp farms, and later, other integrated schemes, wasinitially unduly influenced by a focus on whether the projects complied with the AFP rules forindividual smallholder participants, rather than looking at the substance of the overall situation,and assessing the overall financial and environmental risks. Nevertheless, the issues wereultimately dealt with, and additional very large integrated schemes not permitted under theProject. The MIS, especially repayment performance tracking, was not implemented. Issuesconcerning the effectiveness of Bank Indonesia prudential supervision are not dealt with in thisreview, although it may be noted that one of the AFP participating banks financed not only thefarmers associated with one of the large shrimp schemes, but also the main development, whichwas undertaken by a company within the same group. This at the time may have been inviolation of BI rules, but in any case the BI supervisory process was not effective in preventingviolation of these rules. The bank concerned has now been closed by the Government, with theinter-group lending restrictions being an issue in the closure.

23. The overall performance by the Borrower was satisfactory. An interesting point is thatbefore appraisal, BAPPENAS queried the principle of the Government incurring extent debt forpassing on to private banks. The World Bank was focused on using private banks rather thanstate banks, and the issue does not appear to have been considered for its own sake, rather acompromise of half state and half private banks was agreed. The PBs considered AFP guidelinesfor subloan appraisal too complicated and too detailed for the size of subloans. There were alsocomplaints about the inordinate delays in the disbursements of approved subloans by theMinistry of Finance. These factors, in addition to, the deviation from following the guidelines tooffer loans to small- and medium-size enterprises, created delays in disbursements. TheBorrower managed to rectify the problems of appropriate targeting during the earlier years tomake the size and beneficiaries of the subloans fully consistent with the development objectives.

24. The Borrower had also readily recognized the problem PBs and took appropriate actionsto remove the nonperforming PBs from the project. It also reduced or canceled allocations forthose PBs that had been inactive. However, shortages of trained staff in the branch offices of the

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PBs to market and process subloans (many of the staff trained earlier under the project hadmoved and/or reassigned to other jobs) and long elapsed time before the applications reach theWorld Bank approval appeared to be the key constraints to faster utilization of the AFP funds.

G. ASSESSMENT OF OUTCOME

25. Overall Assessment of Project Performance. Any assessment during the continuingfinancial crisis must be read with caution. There is partial confirmnation of a 1997 judgement ofthe World Bank's sector unit that "AFP is making an important contribution by demonstratingthe financial viability of small and medium-size loans for agricultural enterprises at market ratesof interest, and the potential for the commercial banks to play an increasing role in servicing thisemerging market." At the same time, it should be noted that the World Bank's views on thevirtues of market interest rates are not fully reflected in Indonesian policy, or the practice ofother important donors. And the present situation of very high real and nominal interest ratesdoes not provide a conducive climate for arguing the case that the project has demonstrated thatmarket rates are preferable to subsidized.

26. Most subloans appears to have been remarkably resilient in the face of the high interestrates engendered by the financial crisis. Subprojects with an export focus have been protected,indeed some have clearly benefited from the massive devaluation of the rupiah. Subprojectsprocessing or transforming agricultural produce for the local market appear to be coping atpresent, although the continuance of high interest rates may affect them. The performance of fiveof the banks appears to have been satisfactory in terms of subloan quality, three banks performedless well, while the percentage of doubtful debts and those more than ninety days overdue at fourparticipating banks was unacceptably high. The lending performance outcome is therefore at bestmixed.

H. FUTURE OPERATION

27. There are not present plans for future operation of the project, in the sense of continuedlending from the PBs' own funds, or recycled repayments. While there is not an overall systemfor collecting data on loan performance, the individual banks appear to have satisfactory systemsfor monitoring the performance of subloans, and no additional action in this respect appearsnecessary. Issues concerning BI supervision go beyond consideration of future operations arisingfrom AFP.

I. KEY LESSONS LEARNED

28. The lessons learned from this project can be grouped as those specific to the project, andmore generic lessons, some of which have already been addressed by the World Bank in recentyears. At the project specific level, matters that may need to be addressed in future similarprojects include:

* Commercial banks find it difficult to conduct economic analysis in cases where theextent of economic distortions is difficult to establish quantitatively. A project designrelying upon case by case analyses of loans in certain subsectors or involving somecommodities should be avoided if possible.

-8-

* The role of commercial banks in environmental screening of projects submitted tothem for financing would be better backed by a national code governing all theirlending activities, and not merely a required for subprojects receiving World Bankassistance;

* The degree of convergence between Government and World Bank policies, as well asthose of other donors, should not be overstated, not differences glossed over. In thecase of AFP, Government was clearly moving towards market rates, but as in manycountries, there was not a total consensus on the matter. The lesson, which may havesome relevance as Comprehensive Development Framework principles are pursued,would be that when there is a lack of full consensus, different views should bediscussed and operational issues, if any, addressed.

* The principle of a government incurring external debt for passing on to privateinterests should be specifically considered in future projects, whether in the financialsector or otherwise, including the possibility of raising finance from other sourcesavoiding the need for an effective government guarantee of private sector activities;

* Any financial sector project should review the continuing soundness of theinstitutions involved, and the performance of subloans, as critical monitoring needs tobe a centerpiece of supervision activity throughout implementation.

29. At a more generic level, messages are:

* For all Indonesia projects involving onlending of Bank loan funds to other agencies,the practice has been for the Government to assume the foreign exchange risk, andonlend in rupiah at domestic interest rates, which were assumed to cover the marketassessment of foreign exchange risk. In the light of the unforeseen massivedevaluation and its heavy cost to Government, this policy merits re-examination;

* Project require deeper and explicit risk recognition at appraisal and continuedreassessment during implementation. (While this did not happen under AFP, Bankpractice in this regard has already changed).

* Ratings of project progress, and likelihood of achieving development objectives, mayneed to more explicitly provide for rankings against appraisal objectives. AFPappears to have fallen into the normal trap that having recognized a major issue (inthis case the distortion of the target group), and ranking the project unsatisfactory, therating was too rapidly returned to satisfactory when the particular issue was resolved.But both the volume and quality of lending compared to appraisal expectations shouldhave continued to be explicitly considered before assigning a satisfactory rating to theProject, even before the crisis struck.

-9-

PART II: STATISTICAL TABLES

Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible Not.______ Applicable

Macro PoliciesSector PoliciesFinancial ObjectivesInstitutional DevelopmentPhysical Objectives i

Poverty ReductionGender IssuesOther Social ObjectivesEnvironmental ObjectivesPublic Sector Development _

Other (specify) i

| B. Project Sustainability Likely I Unlikely I Uncertain

C. Bank Performance Highly Satisfactory Deficient.______________________________ Satisfactory

IdentificationPreparation AssistanceAppraisal __

Supervision i

D. Borrower Performance Highly Satisfactory DeficientSatisfactory

PreparationImplementation i

Covenant Compliance _

Operation (if applicable)

E. Assessment of Outcomes Highly Satisfactory DeficientSatisfactory

-10-

Table 2: Related World Bank Loans/Credits

Loan/credit title Purpose Year of Statusapproval

Preceding Operations

1 Rural Credit To expand and improve the supply of term credit to 1990 CompletedProject smallholders by providing funds through the Bank

Rakyat Indonesia (BRI) for long-term lending inselected geographic areas for a range of agriculturalactivities and strengthening BRI's capacity.

2 BRI/KUPEDES To promote the development of a market-based 1987 Completedsmall Credit financially viable non-subsidized nationwide ruralProject I banking network serving credit-worthy small borrowers.

3 Export To increase productive capacity in export oriented 1988 CompletedDevelopment 2 manufacturing. By expanding number and nature of

intermediaries, including private banks for the first time,the project would enhance financial system term fundcapacity.

4 Industrial To assist restructuring existing industrial enterprises in 1989 CompletedRestructuring the engineering, pulp and paper, and textiles subsectors,Project and evaluate restructuring potential of other subsectors.

5 Small & Medium To develop the SMIE sector, by providing TA and 1989 CompletedIndustrial market rate term credit, and thus to increaseEnterprises Project manufacturing output and jobs. To develop the capacity

of the local consulting industry, and to enhance thefinancial system's capacity for analyzing and managinginvestment financing.

6 BRI/KUPEDES To promote the development of a market-based 1990 Completedsmall Credit financially viable nonsubsidized nationwide ruralProject II banking network serving creditworthy small borrowers.

Following Operation

1 Financial Sector To assist GOI in (a) strengthening prudential banking 1992 CompletedDevelopment regulations; (b) enforcing implementation byProject strengthening BI's bank supervision; and (c) promoting

I competitiveness and efficiencies of the SCBs.

-11-

Table 3: Project TimeTable

Steps in project cycle Date planned Date actual

Identification N/A March 1988

Preparation 07/17/89 11/30/89

Appraisal 10/30/89 5/l/90

Negotiations 04/16/90 06/13/1991

Board presentation 06/12/90 9/5/91

Signing N/A 11/6/91

Effectiveness 11/91 3/27/92

Mid-term review N/A 10/15/93

Project completion 6/30/98 10/31/98

Loan closing 12/31/98 1/26/99

Table 4: Loan/Credit Disbursement: Cumulative Estimated and Actual

(S Million)

FY92 FY93 FY94 FY95 FY96 FY97

Appraisal estimate 2.0 19.2 52.6 81.9 98.8 106.1

Actual 0.4 5.5 26.4 32.9 49.5 63.2

Actual as percent of 20% 29% 50% 40% 50% 60%estimate

Date of final 1/26/99disbursement

-12-

Table 5. Key Indicators for Project Implementation

The SAR did not mention key indicators as such. The following table of subloan performancehas been constructed during ICR preparation.

Subloan performance

Total exci Repaid Performing Special Atn Overdue Doubtful BadCanceled 0 days o'due <90 days 90-180 180-270 >270 days

NUMBERS

Bank Exim 20 2 7 1 2 1 7BAPINDo 7 2 1 4BNI 38 13 18 571 .7 _

BDNI 577 6 235

Bank Niaga 242 4 3

Bank PANIN 5 3 2Bank Bali 14 9 3 1 1Bank Buana 17 16 1BCA 8 8Bank Danamon 7 5 1_ 1Bank Tamara 17 17 I 1Bank Tiara 25 6 17 _

TOTALS 977 33 103 810 13 3 15

Rp Million

Bank Exim 16,740 2,989 4,729 832 1,558 960 5,672BAPINDo 6,472 2,473 _ _ 3,999BNI 25,682 16,443 6,930 2,309 _ _

BDNI 50,895 26,524 24,371

Bank Niaga 28,275 9,564 1,261 17,451

Bank PANIN 4,766 968 1,932 1,864 2Bank Bali 14,480 6,681 3,896 1,981 1,457 466Bank Buana 12,725 4,919 7,451 355BCA 5,160 1,729 3,431

Bank Danamon 7,800 2,696 3,910 1,101 93Bank Tamara 9,845 3,3241 6,521 |_ _

Bank Tiara 22,856 10,501 9,602 1 1,282 1,472

TTOTALS [ 205,696 88,810 49,662 44,110 7,712 3,699 11,704

percent byvalueBank Exim 100 percent 18 percent 28 percent 5 percent 9 percent 6 percent 34 percentBAPnr,o 100 percent 38 percent 62 percentBNI 100 percent 64 percent 27 percent 9 percent_

BDNI 100 percent 52 percent 48 percent

Bank Niaga 100 percent 34 percent 4 percent 62 percent

Bank PANIN 100 percent 20 percent 41 percent 0 percent 39 percent _

Bank Bali 100 percent 46 percent 27 percent 0 percent 14 percent 10 percent 3 percentBank Buana 100 percent 39 percent 59 percent 3 percent

BCA 100 percent 34 percent 66 percent

Bank Danamon 100 percent 35 percent 50 percent 14 percent 1 percentBank Tamara 100 percent 34 percent 66 percent

Bank Tiara 100 percent 46 percent 42 percent 6 percent 6 percent

TOTALS 100 43 24 21 4 2 6percent percent percent percent percent percent percent

-13-

Table 6: Studies Included in Project

None

Table 7A: Project Costs: $ million equivalent

Appraisal Estimate Actual

Item Local Foreign Total Local Foreign TotalCosts Costs Costs Costs

A. Investment Credit 82.5 105.0 187.5 53.0 65.2 118.2

B. Technical Assistance 2.0 0.4 2.4 0.7 0.4 1.1

84.5 105.4 189.9 53.7 65.6 119.3

Note 1: Imputed foreign exchange cost of projects estimated at 55 percent at appraisal; same rateused for ICR.

Table 7B: Project Financing: $ million


Source Local Foreign Total Local Foreign TotalCosts Costs Costs Costs

IBRD 0.7 105.4 106.1 1.7 65.6 67.3

Bank Indonesia 0.6 0.6 0 0 0

Participating Banks 26.5 26.5 16.6 16.6

Subborrowers 56.7 56.7 35.4 35.4

84.5 105.4 189.9 53.7 65.6 119.3

Note: Imputed foreign exchange cost of projects estimated at 55 percent at appraisal; same rateused for ICR.

14

Table 8: Economic Costs and Benefits

Not applicable

Table 9: Status of Legal Covenants

Section Covenant Present Original Revised Description of covenant Commentstype status fulfillment fulfillment

date date

3.01j of the 2 C Continuing Continuing BI to supervise SEHAT This covenant,Loan status of PBs and require nominally compliedAgreement remedial measures with, proved

ineffectual

2.02 of 3 NC Continuing Continuing PBs to use repayments for Not monitored, nowProject further relending tmentioned in SAR,Agreement not irrelevant

3.03 of 2 NC Continuing Continuing Original PBs to cover FX risk Not mentioned inProject SAR, nor inAgreement supervision reports,

apparently notapplied to additionalPBs.

Sched.to 11 C' Continuing Continuing Negative list of enterprisesProjectAgreement3b

3c I C Continuing Continuing ERRs required for some PBs consideredsubloans to industries ERR requirementsenjoying some protection unduly onerous.

Correction factorsnot readilyavailable.

4a 6 C Continuing Continuing Environmental impactanalysis required

6c 6 C Continuing Continuing Subprojects to satisfyIndonesian environmentalregulations

Covenant Class: Status:

2=Financial performance/revenue C=covenant complied with

3=Flow and utilization of project funds NC-not complied with

6=Environment

11 =Sectoral or cross sectoral budgetary or other resource allocation

15

Table 10: Compliance with Operational Manual Statements

The Project complied with applicable ODs.

Table 11: World Bank Resources: Staff Inputs

Stage of Project Cycle Planned Revised Actual

Weeks $ Weeks $ Weeks $

Through Appraisal 4.0 n.a. n.a. n.a. 98.4 163.8

Appraisal-Board n.a. n.a. n.a. n.a. 49.7 161.0

Negotiation through n.a. n.a. n.a. n.a. n.a. 51.1Board Approval

Supervision 40.0 149.5 n.a. n.a. 71.1 225.4

Completion n.a. n.a. n.a. n.a. 12.0 14.5

TOTAL n.a. n.a. n.a. n.a. 231.2 615.8

16

Table 12: World Bank Resources: Missions

Stage of Month/ Number of Days in Specialized Performance Rating Types ofProject Year Persons Field Staff Skills ProblemsCycle Represented

Imple- Devel-mentation opmentStatus Objectives

ThroughAppraisal

Appraisal- 5/90 3 FBoard

Board-Effective-ness

Super- 9/92 1 * F 2 2vision 5/93 2 * F 2 I

10/93imTR) I * F 2 26/94 1 * F 2 29/95 1 Brief E U S12/95 1 Full E U S7/96 2 Brief E, F S S397 1 6 E, F S S11/97 2 6 E, F S S

Comp- !/99 2 10 F U Uletion I

* Supervised from resident mission

F= Financial Specialist

E= Economist

U= Unsatisfactory

S= Satisfactory

17 Appendix IICR Aide Memoire; March 12, 1999

INDONESIA: Agricultural Financing Project (Loan 3402-IND)

Implementation Completion Report Mission: March 1-12, 1999

AIDE MEMOIRE

A World Bank mission consisting of Messrs. Dennis Notley (Consultant) and Unggul Suprayitno(RSI) undertook an implementation completion mission from March 1-12, 1999. This aide memoire wasdiscussed at a wrap-up meeting to chaired by Mr. Puspo Sungkowo, Deputy Director, Credit Department,Bank Indonesia, on March 12, 1999. The mission was very gratefulfor the courtesies extended by: (a)officials of participating banks; (b) six sub-borrowers in Lampung, Jakarta, and West Java who discussedtheir experience under the Project; (c) officials of Bank Indonesia and the Ministry of Finance; and (d)the appraisal advisor at BI who assisted the mission throughout its stay

Purpose of an Implementation Completion Report (ICR): The purpose of an ICR is to assess andconsider:

(a) the degree of achievement ofproject objectives;

(b) prospectsfor the project's sustainability;

(c) World Bank and borrower (GOI) performance;

(d) the project outcome; and

(e) the plan for the project 's future operations.

This aide-memoire contains preliminary findings and judgements which are subject to refinement andreview during the course of writing the ICR, which will be submitted in due course to the Government forcomment. In addition, the Government is asked to make its own review, which will be incorporated infull in the final ICR.

Project Objectives

1. Policy Environment: The project objectives (para 3) were set against a backdrop of a newenvironment for agriculture, entailing a changing role for the Government, geared more towardsproviding support services, and intervening less in pricing, marketing, direct production and trade, whileaddressing the emerging conservation needs. The agriculture sector would rely on new sources of growththrough greater diversification both horizontally (products) and vertically (services, marketing and agro-processing). This would require unlocking the full potential of the private sector. The availability of termcredit would play an important role in tapping new sources of growth and a long-term commitment ofresources. In the financial sector major reforms in 1983 had permitted the entry of new banks,complemented by a program to strengthen Bank Indonesia's supervisory capabilities; and further reformsin 1990 were to markedly reduce (the appraisal report incorrectly said "eliminate") distortions created bysubsidized credit programs, and to foster further the development of the capital market. The futureagenda included strengthening the supporting infrastructure for the financial sector such as the legalframework and prudential control and supervision. New prudential regulations including those related tocapital adequacy had been put into effect, and with the assistance of the IMF and the World Bank, effortswere under way to strengthen BI's supervisory functions!.

2. The World Bank objectives and strategy in the financial sector and agricultural credit included(a) strengthening the state commercial banks (SCBs) for them to compete in the new financialenvironment; and (b) promoting a sustainable flow of commercial credit to the agricultural sector toreplace the old system of subsidized directed credit. The Financial Sector Development Project (forwhich Loan 3526-IND was later approved on November 12, 1992) was to reinforce GOI's efforts to


promote an efficient, stable and sound financial sector by (a) strengthening prudential banking regulationsand BJ's bank supervision systems and staff skills; (b) further developing BI's credit information system;and (c) strengthening the capital base of SCBs to enable them to compete in the deregulated environment.While these measures would permit the policy environment for resource allocation to improve and thefinancial system to become increasingly competitive and sophisticated, as a transitional measure theWorld Bank would continue to support efficient delivery of credit to groups of borrowers whose access tocredit was constrained.

3. Project Objectives: In support of Government's policy to eliminate subsidized credit as a meansof promoting agricultural development, the primary objectives of the proposed project were to: (a)strengthen the capacity of participating banks (PBs) to lend on a long term basis at market rates, to privatesmall- and medium-scale agricultural, fishery and agribusiness enterprises; (b) improve the availability ofterm credit to these enterprises during the transition period when the financial system is adjusting to thederegulated regime; and (c) finance economic and financially viable, and environmentally soundinvestments in the agriculture and agribusiness sectors.

4. The project components were: (a) an investment credit component to finance PBs' subloans toeligible private, small- and medium-scale investments in agriculture, livestock, fishery, forestry, andagribusiness; and (b) a technical assistance component to provide subloan appraisal advisory andManagement Information System assistance to the PBs, staff training, and at the enterprise level,assistance to prospective subborrowers to prepare high quality subproject proposals. Duringimplementation, the number of participating banks was increased, and the objectives of the technicalassistance component adjusted, as indicated in Tables I and 2.


Table 1: Participating Banks

State/ Participation in other projects (see note) RemarksPrivate

At outset:

Bank Ekspor Impor State IRP, ED I &2, ADB ED2, FSDPIndonesia

Bank Negara State AllIndonesia

Bank Pembangunan State IRP, SMIE, ADB ED2 Withdrew forIndonesia (Bapindo) new subloans

from 1997

Bank Dagang Private ADB ED2Nasional Indonesia

Bank Niaga Private IRP, SMIE, ED1&2

Pan Indonesia Bank Private Withdrew fornew subloansfrom 1997

Added after mid-term review

Bank Buana Indonesia Private

Bank Bali Private

Bank Central Asia Private SMIE, ADB ED2

Bank Danamon Private ADB ED2

Bank Tamara Private

Bank Tiara Private

Note: IRP: Industrial Restructuring Project; SMIE: Small & Medium Industrial Enterprise Project, EDI&2: Export Development;ADB ED2: Asian Development Bank, FSDP: Fin. Sector Development.


Table 2: Technical Assistance Objectives/Components

(a) assistance to eligible prospective subborrowers to prepare proposals. This objective was droppedafter the mid-term review;

(b) assistance to participating banks: strengthening their portfolio management capabilities by BImaking available its MIS for small investment and permanent working capital credit programs, toreport daily on approvals, commitments and disbursements, and monthly on repayments andarrears;

(c) assistance to participating banks: to train and advise on appraisal and loan administrationprocedures, and to check the completeness and accuracy of subloan applications;

(d) to train participating bank staff in assessing subproject viability and risk, environmental impacts,and requirements for mitigating possible adverse environmental effects. The cost would be borneby the participating banks.

5. Evaluation of Project Objectives. The project objectives were ambitious, and sustainabilitydependent upon three critical factors external to the project: (a) the financial soundness of theparticipating banks; (b) the related dependency upon the success of technical assistance under theFinancial Sector Development Project to strengthen BI in its role of determining and enforcing BI'sprudential banking regulations; and (c) the degree to which Government (BI/MOF) policies for thefinancial sector set out above were firmly in place. The appraisal report judged that there were no majorrisks, perceived at the time, that could inhibit the attainment of the project objectives. However the reportstated that uncertainties in credit demand and the participating banks' lack of familiarity with theappraisal and administration of small agricultural subloans, might lead to slow project implementationand loan disbursements. These risks were to be minimized by a prudent loan amount and by the selectionof participating banks with a long-term interest in developing the agricultural credit market. The benefitsof hindsight clearly bear out the error of the statement that no major risks were involved, and in fact theexternal risks of bank soundness and the BI prudential regulatory function had been vigorously debatedwithin the World Bank during preparation. The risk paragraph should have mentioned them.

6. The decision to proceed with the project in the face of known major risks needs to be assessedtaking into account the World Bank role to undertake innovative projects with challenging objectives.The sequencing of AFP as a two-step onlending project, prior to successful implementation of prudentialbanking regulation and enforcement by Bank Indonesia, occurred because priority was accorded to AFPas an essential interim operation for the agricultural sector. The Agriculture Division argued strongly forthe need for AFP focussed upon agriculture and agro-industry, as it felt that banks would not readilyundertake lending for agriculture without a specialized project. The question that may now be asked iswhether this judgement to support the agriculture sector was sufficiently important to proceed in the faceof the known external risks, or whether on the information known at the time, prudence would havedictated a delay to enable the planned objectives of the Financial Sector Development Project to bearfruit, or an insistence on independent initial and ongoing verification of the soundness of the participatingbanks.

7. This review does not deal with how the risks grew into the financial crisis in Indonesia, which hasseverely impacted upon bank viability, the exchange rate, and interest rates, but simply notes (a) the


project did not contribute to the crisis; and (b) the ongoing high interest rates and bank weaknesses may,particularly if they persist, cause problems for project sustainability.

Implementation Experience and Results

8. At the time of writing this aide-memoire, the Government's decisions on capital restructuring ofbanks, and the closure of some banks, was awaited. When available, the results of the decisions at theyaffect the banks participating in this project will be incorporated into the ICR. At present, the situation isthat two banks were forced to withdraw from new lending under the project during implementation(Bapindo and Pan Indonesian Bank). Bapindo and Bank Ekspor Impor Indonesia are to be merged, alongwith two other state banks, into Bank Mandiri. Bank Central Asia, Bank Danamon and Bank Tiara havebeen taken over by the Government, and Bank Dagang Nasional Indonesia has failed and been closed,and its affairs are being handled by the Indonesian Bank Restructuring Agency. As a result of theuncertain situation for the participating banks, the loan was not extended beyond its original closing dateof December 31, 1998. In total $38.8 million, or 37 percent of the original loan of $106.1 million wascancelled.

9. Investment Credit Component. The project was to finance about 350 enterprises havingoperating assets of not more than $500,000, with a maximum subloan limit of $525,000. A major issuearose during implementation with the World Bank considering that the granting of loans to small shrimpfarners within very large-scale integrated developments was contrary to the spirit and essence of theproject objectives for promoting small and medium enterprises. After discussion it was agreed that smallsubloans associated with such very large scale projects would no longer be supported. The overall resultsof investment credit component is shown in Table 3.

22 Appendix I

ICR Aide Memoire; March 12, 1999

Table 3: Subloans granted

Purpose of credit No. Amount of Percent Repayment statusloans -$'000

Small farmers under 2 large 495 32,803 40% 1 scheme needs rescheduling, which isintegrated shrimp farm feasible; 1 scheme up to date, butdevelopments in Lampung administrative issue in IBRA needs to be

addressed

Other small loans 172 49,925 60% $8,200k or 16 percent are the maximumdoubtful - see Table 7.

Total 667 82,728 100%

Appraisal objective 350 131,200

Total as percent of appraisal 191% 63%

Other small loans as percent 49% 38%of appraisal

Note: Severe exchange rate fluctuations during 1998, mean that the extent of achievement against appraisal is understated, due toexchange savings realized between subloan and WB loan disbursements.

10. The two large shrimp farm schemes account for 40 percent of disbursements. They produceexport commodities and continue to be viable at present, although under strain from high interest rates.The high cost of borrowing means that planned expansion of production to match the large investments infactory and other infrastructure has had to be deferred. At one scheme, some rescheduling of smallholderdebt consequent to technical problems which delayed production is required and appears feasible. At theother scheme, farmers are up to date in their loan repayments, but the situation is not yet reflected in theiraccounts as the bank involved, BDNI, which has closed. The Government has agreed with the owner ofBDNI's parent company that the sub-borrower loans will be assumed by another subsidiary, PT Dipasenawhich is the nucleus processing company to whom the farmers sell their produce.

11. The performance of the other small loans, which were the intended target group, has proved moredifficult to judge in the absence of statistics from a Management Information System. However, themaximum percentage of doubtful loans has been calculated by comparing the original amounts of theloans in the doubtful/bad categories against the total loans granted. The resultant figure, 16 percent,overstates the extent of bad loans as far as principal repayments are concerned. Interestingly, the problemis particularly acute at only four of the ten banks who participated in the project. Four banks are currentlyrecording no doubtful debts, and two others have relatively low levels. The mission's field visitsconfirmed the accuracy of reporting for the subprojects visited, but it is difficult to extrapolate from thissmall sample, in view of the marked differences between the performances of different banks, and giventhe continuing high interest rates. But on the figures presented, given the severity of the financial crisis,the performance of the better banks is remarkably good.

12. Technical Assistance Component. The first TA sub-component - assistance to prospective sub-borrowers to prepare proposals - was dropped from the Project at the mid-term review, in the light of aBank Indonesia study, which concluded that entrepreneurs were willing to employ outside experts when


needed and that studies by inexperienced young graduates under the sub-component often lacked depth.In addition in the light of demand for credit, there was basically no need for market stimulating measuresthrough this sub-component.

13. The second sub-component - the BI MIS for tern credit - was reported at the mid-term review tohave been installed, and training conducted, and BI had submitted a report to the Bank on subloanapprovals and disbursements. The appraisal objective was that the system also cover repayments andarrears, on a monthly basis. As many if not all subloans have no grace period for interest servicing, andsome no grace period for principal repayments, the requirement for monitoring arrears began immediatelyon subloan granting. The lack of payment performance statistics at mid-term was thus not satisfactory.Subsequent supervision missions did not follow up this matter, despite queries from departmentalmanagement, and indeed only reported some global figures on approvals and disbursements, rather thanthe detailed tables which had been appended to the earlier supervision reports. The lack of data impactsupon the quality of project supervision, and ICR preparation.

14. The third sub-component - assistance to the participating banks on appraisal and loanadministration procedures, and vetting subloan applications - is seen by the participating banks assuccessful. The banks complain however that the appraisal procedures are unduly onerous and muchmore so than for other lines of credit available to them. The assistance on loan administration procedureswas not seen by the appraisal advisor as extending to assistance on monitoring repayments, anunderstandable view given the lack of attention by bank missions to the MIS and its requirements forrepayment information.

15. The training given under the fourth subcomponent - training participating bank staff in assessingsubproject viability and risk - has generally been judged by participating banks as effective and useful.One bank branch commented to the mission that obtaining sound financial information from prospectiveclients, as required by the methodology, was often difficult, but they have made a special effort to checkand assess the client by site visits and discussions with other knowledgeable parties. Interestingly, thesame bank found that the detailed appraisal methodology was useful rather than onerous.

Table 4: Loan Disbursements: Cumulative Estimated and Actual

. million

FY92 FY93 FY94 FY95 FY96 FY97 FY98 I FY99

Appraisal estimate 2.0 10.2 52.6 81.9 98.8 106.1 106.1

Actual 0.4 5.5 26.4 32.9 49.5 63.2 67.3 67.3

Actual as percent of 20% 54% 50% 40% 50% 60% 63% 63%testimate

Date of final 1/26/99disbursement:

24 Appendix 1

ICR Aide Memoire; March 12, 1999

Table 5: Project Costs: $ million equivalent


Item Local Foreign Total Local Foreign TotalCosts Costs Costs Costs

A. Investment Credit 82.5 105.0 187.5 53.0 65.2 118.2

B. Technical 2.0 0.4 2.4 0.7 0.4 1.1

Assistance

84.5 105.4 189.9 53.7 65.6 119.3

Note 1: Imputed foreign exchange cost of projects estimated at 55 percent at appraisal; same rate used for ICR.

Note 2: Actual project costs inferred from disbursements.

Table 6: Project Financing: $ million


Source Local Foreign Total Local Foreign TotalCosts Costs Costs Costs

IBRD 0.7 105.4 106.1 1.7 65.6 67.3

Bank Indonesia 0.6 0.6 0 0 0

Participating 26.5 26.5 16.6 16.6

Banks

Subborrowers 56.7 56.7 35.4 35.4

84.5 105.4 189.9 53.7 65.6 119.3

Note: Imputed foreign exchange cost of projects estimated at 55 percent at appraisal; same rate used for ICR.

25 Appendix 1ICR Aide Memoire; March 12, 1999

Table 7: Subloans by Participating Bank

State/ Subloan IBRD Overstated Percent ofPrivate amounts - disbursements highly highly

$P000 $'000 doubtful doubtful

(see note)

At outset:

Bank Ekspor Impor Indonesia State 4,856 3,885 2,371 61%

Bank Negara Indonesia State 11,360 9,088 1,359 15%

Bank Pembangunan Indonesia State 2,634 2,107 893 42%(Bapindo)

Bank Dagang Nasional Private 24,284 19,427Indonesia

Bank Niaga Private 12,299 9,839

Pan Indonesia Bank Private 2,220 1,776 671 38%

Added after mid-term review:

Bank Buana Indonesia Private 3,970 3,176

Bank Bali Private 4,728 3,782 744 20%

Bank Central Asia Private 2,129 1,703

Bank Danamon Private 2,625 2,100 121 6%

Bank Tamara Private 3,437 2,750

Bank Tiara Private 8,185 6,548 400 6%

Totals 82,727 66,182 6,559 10%

Note: Highly doubtful sums are those classified in reports to Bank Indonesia as doubtful, bad debt, or write off. Does not includeoverdues up to 6 months. As the amounts involved relate to the original loan amounts, this overstates the doubtful figure. Moreaccurate data is to be sought.

16. Key factors affecting achievement of major objectives. The principal factor affectingachievement of the project's first objective - strengthening the capacity of participating banks to lend on along term basis at market rates, to private small- and medium-scale agricultural, fishery and agribusinessenterprises - has been the severe financial crisis which has been ongoing since early 1998, arising fromwhich the continued existence of many banks is about to be determined. The principal factor affecting theavailability of term credit to these enterprises was, in the view of most participating banks, undulyonerous subproject appraisal and approval requirements. The ICR will comment on this. The principalfactor affecting the financing of economically and financially viable, and environmentally soundinvestments has been, since the crisis commenced, the very high interest rates which have dried updemand.


17. World Bank Performance. The project was exhaustively debated during preparation by adepartment financial sector working group, and the views of specialists in the Central OperationsDepartment were obtained. As noted in para. 6, the issues for successful implementation were wellknown, and departmental and regional management apparently judged, in view of the forthcomingFinancial Sector Development Project, that the risks associated with bank soundness and GOI regulatorycapability were acceptable. The lack of discussion of these as project risks in the appraisal report, and ofthe views of other donors on the issue of subsidized interest, were omissions that should not haveoccurred. Competing subsidized interest rate schemes, both donor and GOI financed, caused some, butnot major, problems during implementation. One aspect of the design which challenged supervision, wasthat with the deliberate decision that BI's role was bank supervision, and not an apex institution for theproject, the project had in fact 13 project managers (12 participating banks, and the Indonesian BankingInstitute).

18. During implementation, three major areas where the World Bank performance was important canbe identified. First, World Bank supervision did not initially raise concerns about the granting of a groupof subloans to some 540 individual shrimp farmers participating in a large development in Lampungoperating under the nucleus-smallholder model. The viability of the smallholder subloans depended uponthe viability of the overall enterprise, and the development required careful environmental assessment.Departmental management initially focussed on whether financing small farmers under the schemes wereconsistent with the project objectives, and in course, the Department satisfied itself as to the viability andenvironmental issues for this and another such scheme, and agreed with Government that farmers underfurther very large integrated schemes would not be considered eligible for AFP subloans.

19. Second, warning about the emerging bank crisis were signaled by this project. A year beforeboard presentation, Bank Duta had experienced difficulties, and the task manager reported that theparticipating banks were worried that delay in AFP could affect confidence in the financial sector. Thetask manager for the Financial Sector Development Project raised concerns about the viability ofBapindo, one of the participating banks. It was initially decided to continue to rely on the policy agreedwith Government, that BI would notify the World Bank if any bank participating in the project were nolonger judged by BI to be sound (sehat). It was agreed shortly after that Bapindo would withdraw fromnew lending. Apparently not sufficiently questioned were: (a) whether the agreement to rely on aninitiative by BI to declare a bank no longer sehat, rather than insisting upon an independent judgement bythe World Bank or qualified auditors outside Government, continued to reasonable; and (b) whether thewarning signal should have led to a review by the Department of the early experience in strengthening theBI regulatory process, upon which the decision to proceed with Agricultural Finance Project had beenbased.

20. Third, the project's MIS, including tracking of repayments, disappeared from the Bank's radarscheme shortly after the mid-term review. A query from departmental management about repaymentperformance should have triggered a new focus by the task manager on the MIS system. However, with achange of task managers, supervision concentrated on visiting subprojects, which had earlier beenneglected, in an effort to identify any problem areas which had not been apparent in the appraisal reportsfor subprojects. Both the MIS and routine project reporting were lost sight of. This was unfortunate, asthe MIS would have been a key supervisory tool for the participating banks, for BI prudential supervisors,and for World Bank missions.

21. GOBI/PB Performance. The Indonesian participants in general fulfilled their respective rolesunder the Project, albeit with subloans not at the volume hoped for. In particular the performance of sixparticipating banks, as far as the project is concerned, in approving and supervising what have turned outto be, on the whole, viable subloans, must be highlighted. However, as with the World Bank (para. 16), itmight be argued that discussion of the issues surrounding the large integrated shrimp farms, and later,


other integrated schemes, was initially unduly influenced by a focus on whether the projects compliedwith the AFP rules for individual smallholder participants, rather than looking at the substance of theoverall situation, and assessing the overall financial and environmental risks. Nevertheless, the issueswere ultimately dealt with, and additional very large integrated schemes not permitted under the Project.The MIS, especially repayment performance tracking, was not implemented. Issues concerning theeffectiveness of Bank Indonesia prudential supervision are not dealt with in this review, although it maybe noted that one of the AFP participating banks financed not only the farmers associated with one of thelarge shrimp schemes, but also the main development, which was undertaken by a company within thesame group. This at the time may have been in violation of BI rules, but in any case the BI supervisoryprocess was not effective in preventing violation of these rules. The bank concerned has now been closedby the Government, with the inter-group lending restrictions being an issue in the closure.

22. Overall Assessment of Project Performance. Any assessment during the continuing financialcrisis must be read with caution. An overall assessment will be added to the ICR once all the datareceived or to be received from the participating banks has been fully analyzed. At this stage, theevidence from reports by the participating banks, and field visits, points to partial confirmation of a 1997judgement of the World Bank's agriculture division that "we believe that AFP is making an importantcontribution by demonstrating the financial viability of small and medium-size loans for agriculturalenterprises at market rates of interest, and the potential for the commercial banks to play an increasingrole in servicing this emerging market." Most subloans appears to have been remarkably resilient in theface of the high real and nominal interest rates engendered by the financial crisis. Subprojects with anexport focus have been protected, indeed some have clearly benefited from the massive devaluation of therupiah. Subprojects processing or transforming agricultural produce for the local market appear to becoping at present, although the continuance of high interest rates may affect them. Even one innovativesubproject (in cooperation with a research institution) which unfortunately failed, nevertheless paid itsloan in full, demonstrating prudent banking collateral practice. Nonetheless, the percentage of doubtfuldebts at four participating banks was, on interim figures, unacceptably high.

23. The ICR will include a judgement as to whether the project overall was satisfactory orunsatisfactory. The very real demonstration of how some banks unaccustomed to lending in theagricultural and agro-industrial sectors have been able to do sound business at market interest rates, withsubprojects producing a real development impact, may be the project's most lasting impact. It provides apractical demonstration of the arguments for resuming unsubsidized term lending, as the financial crisispasses. A second judgement is that the project is not responsible for, nor contribute in any substantialway to the financial crisis, nor to the difficulties of any of the participating banks. Nevertheless theseexternal factors may make it difficult to rank the project overall as satisfactory.

Summary of Findings, Future Operations, and Key Lessons Learned

24. To be discussed.


Actions to be agreed in order to address issues for continued operations, and to finalize the ICR

25. The Ministry of Finance had told the mission that some participating banks were, in the currentsituation, having difficulties in meeting the required payments on the loans from MOF passing WorldBank funds to them. For example, the failed BDNI was under the control of the Indonesian BankRestructuring Agency and no payments were being made. Would the World Bank find it acceptable forthe terms or interest rates on these loans to be softened? The mission indicated that the World Bank waslikely to regard such difficulties as part of the overall situation of economic, bank viability andcapitalization which was being handled on an overall, rather than a piecemeal basis. The situation couldarise also for two-step loans to bodies outside the financial sector. The mission would find it helpful tohave an indication of the amounts by which any participating bank is in arrears on payments of principleand interest on these loans, as a factual matter to be recorded in the ICR.

26. A related matter raised by many of the participating banks was whether the interest rate on theloans they receive from the Ministry of Finance could be reduced (the PBs pay the Bank IndonesiaCertificate (SBI) rate, adjusted each July I and January 1). No change has yet been made as of January 1,1999. The mission considered that the World Bank would be reluctant to consider such a matter as aspecial case outside the overall approach to bank viability issues. To the extent that the concern is withhigh interest rates to the end-users, the banks are able to reschedule loans as they consider appropriatewithout seeking World Bank approval.

Summary of Actions needed at this time

Action By Whom Date

1. Presentation of subloan collectibility Each participating bank to send to 3/22/99status, in accordance with BI criteria, show RSI (Mr. Suprayitno)the outstanding balance for each sub-loan.

2. Preparation of the GOI ICR. BI, based on Appraisal Advisor's 3/31/99terminal report

3. Comment upon WB's draft ICR BI Within three weeks ofreceipt of WB draft ICR

4. Consideration of the experience with Mission For inclusion in ICR.Environmental requirements under the Loanand Project agreements

5. Consideration of Bappenas comments Mission For possible inclusion inupon Project prior to negotiations. ICR.

6. Provide WB with current status of MOF/BI 3/22/99repayments of MOF loans to PBs (para. 24)

7. Note on history of SBI rates, month by BI 3/22/99month during project life, and of the rates seteach six months for BOF-PB loans

29 Appendix 2Borrower's Contribution to ICR

INDONESIA: Agricultural Financing Project (IBRD Loan No. 3402-IND)Implementation Completion Report

The Agricultural Financing Project (AFP) implementation period covers theperiod March 27, 1992 to November 25, 1998. As the financial crisis, which hitIndonesia in August 1997, worsened during the beginning of 1998, the World Bankdecided to stop authorizing subloans submitted by the participating banks with effect fromApril 1998.

This report state the opinions of Bank Indonesia based on information from theparticipating banks and some of their clients, who have been granted AFP subloans.Information given by IBI and the AFP appraisal adviser related to the technicalassistance provided by AFP to the participating banks has also been taken intoconsideration. This report provides inputs to the World Bank Mission charged with thetasks of writing the final ICR for AFP.

I. Agricultural Credit Supply

Recent agriculture development: GOI agriculture policies during projectimplementation period has been to promote modem agribusiness enterprises bysupporting production of agriculture and agroindustry products of high value as well asmaintaining food self sufficiency by increasing production of staple crops. The increasedagricultural production of food and agrobased rawmaterials are processed and marketedby a wide range of modem agroindustrial firms. Marketing of processed agricultureproducts is undertaken by specialized marketing agents both for the domestic and exportmarkets.

Agricultural firms engaged in production, processing and marketing of locallyproduced rawmaterial have been able to withstand the economic crisis. Some of theagribusiness sectors, which export part of their production, have increased their rupiahincomes substantially due to the drastic devaluation of rupiah during 1998. The animalhusbandry sectors like poultry and cattle fattening enterprises have been hard hit by thecrisis as their import content is high.

Indonesia is in a favorable position to continue modernize its wide range ofagricultural and agroindustrial firms. The local business community are becomingincreasingly aware of the economic benefits and the vast potential for modemagribusiness development. When the economic and political situation stabilize moreforeign investors will also be attracted to the agribusiness sectors.

Financial sector support to agribusiness: The financial sector deregulationprocess which started in 1983, continued during 1988, 1990 and 1991 with a broad rangederegulatory reforms. The 1988 reform (PAKTO) made it easy for the commercial banksto open new branch offices as well as to establish new banks and financial firms by localinvestors and joint venture companies. The 1990 regulations (PAKJAN) aimed atreducing the supply of subsidized credit and to create conditions, which enabled the banksfinance their clients need for credit with sustainable market based interest rates.Subsidized credit continued to support small enterprises and smallholders as well as theirprimary cooperatives with limited amounts. Credit supply to medium and big enterpriseswas financed with commercial banks' funds at market rates in the range of 16 to 24


percent during the period April 1992 to June 1997. Bank regulations issued by BankIndonesia during 1991 introduced the BIS prudent banking regulations and enhanced therole of bank supervision in order to promote a sound and efficient banking system.

Credit supply to the agriculture and agro industry sectors: The outstandingcredit balance in the commercial banks increased with an annual average of 22 % duringthe four year period April 1992 to March 1997, i.e. the period before the financial crisis.The increase was partly financed with offshore funds, thereby increasing the nominalvalue of the credit balance by 60 % during the period April 1997 to December 1998,when some of the foreign exchange loans were converted to rupiah. At the start of theperiod banks were reluctant to grant credit due to a tight monetary policy regime withhigh interest rates. These policies were relaxed in 1993 with the issuing of DepositoryCertificates by money market institutions and by Bank Indonesia (SBPU and SBI).

The annual outstanding agriculture credit balance in the commercial banksincreased by 13,5 % whereas credit to the agroindustries increased by 17 %, during theperiod leading up to the crisis. Credit to agriculture and agroindustries amounted to 20 %of total outstanding bank credit three months before the crisis started, and it increased to25 % of the total outstanding credit at the end of 1998.

Table 1:Outstanding Credit Balance in the Commercial Banks at the End of the Year(Amounts in billion rupiah)Economic sector 1992 1995 March 1997 1998Total Bank Credit 134,105 253,171 326,100 523,315Agriculture Credit 12,672 18,350 21,702 44,742Food crop production 1,242 2,112 2,914 7,227Estate crop production 8,161 11,676 12,267 24,946Fishery & aquaculture 1,852 2,767 4,051 8,471Animal husbandry 653 889 1,179 1,694Forestry and logging 764 906 1,291 2,404Agro-industry Credit 22,433 40,241 44,144 85,332Food processing 3,668 6,734 8,342 12,998Palmoil processing 244 578 823 1,444Animal feed 280 572 693 1,878Textile, gannent &leather industries 9,270 17,462 17,211 31,759Woodprocessing 5,567 8,416 8,705 18,825Pulp and paper 2,750 5,232 6,942 14,015industry. 654 1,247 1,428 4,413Rubber industries I

Note: More than 50 % of the textile, garment and leather industry credit is granted tofirms processing agriculture based rawmaterials.

II. Achievement of Project Objectives

The objectives of APF were to:


I. strengthen the capacity of the participating banks to grant term credit at market ratesto private agribusiness SME,

2. improve availability of term credit to the above target enterprises during a transitionperiod, when the financial sector was adjusting to a deregulated policy regime,

3. finance economically and financially viable and environmentally soundinvestmentsin the agriculture and agribusiness sectors.

Project implementation: AFP had two components, the first one was thefinancial assistance provided by the World Bank to GOI through an investment loan of$ 105 million. The second project component was provision of technical assistance to theparticipating banks and their eligible clients.

To improve availability of term credit through AFP investment loan: Theproject was expected to finance 350 mediumsize enterprises having operating assets ofnot more than $ 500,000 with a maximum subloan limit of $ 525,000. The investmentloan was onlent by six participating banks during the period April 1992 to June 1995. Asthe selected banks were slow in disbursing subloans to their clients, six more privatebanks were selected early 1994. Their onlending agreements with Bank Indonesia becameeffective on June 1, 1995. The World Bank approved 1,569 subloans from 191 projectswith a World Bank share of USD 82,649,142. The participating banks withdrew USD68,294,211.33 or 65.04 % the AFP investment loan. Three of the approved projects werefor large-scale integrated agribusiness projects, i.e. two shrimp pond projects in Lampungwith 795 subloans and an oil-palm estate in South Sumatra with 600 subloans.

The AFP credit component made term credit available to targeted enterprises ofthe 12 selected participating banks. Only four of the PBs were able to almost fully utilizetheir allocated AFP funds. One of the PB was forced to withdraw from AFP in 1993 andanother four PBs withdrew voluntarily from AFP during 1995-1997, as they hadproblems finding clients, which were eligible for AFP financing.

Bank Indonesia considered AFP to be a slow moving project without seriousparticipation by most the selected banks. The reasons given by some of the PBs forwithdrawing from the project were as follows;a) agriculture and agribusiness lending is a new activity with few eligible clients,b) the AFP loans regulations were too complicated and too detailed for the size of the

subloans,c) the terms and conditions of the AFP were not sufficiently favorable to the banks

compared with other similar loans and offshore fund obtainable to the banks beforeJune 1997,

d) the banks have limited human resources, and they concentrated the use of their creditofficers to analyze projects with simpler loan regulations (ADB, JEXIM, KKPA etc.),

e) the loan processing and loan disbursement period was long, and the banks had tofinance their clients project with bridging loans for long periods.

The following extemal factors also contributed to the slow processing anddisbursement of AFP subloans;a) the small number of PBs during April 1992 to June 1995,b) a period without a project appraisal adviser from October 1993 to July 1994,c) the cumbersome and long-lasting loan processing procedure during the period up to

the midterm review, when many clients had to prepare project feasibility studies incooperation with local consultant, 1


d) the general conditions in the banking system, i.e.:- a tight monetary policy from 1992 to 1993,- easy access to relatively inexpensive funds from 1995 to June 1997,- the credit crunch and the negative spread, which hit the banks from the start of

1998.

To strengthen the PBs capacity by providing technical assistance had thefollowing components;a) Assistance from SMIEP TAU and BI SEPD Consultants to the PB clients wasprovided during the period April 1992 to March 1994, when this type of assistance cameto an halt based upon a decision by the World Bank with Bank Indonesia support. TheSMIEP TAU and the SMIEP SEDP consultants assisted eligible AFP enterprises to havetheir project proposals prepared as feasibility studies by private consultants. The WBproject officer considered this type assistance not to be efficient partly due to the fact thatit did not guarantee that the enterprises would be granted subloans based upon theinformation contained in the FS.b) BI shall make its MIS available to the PBs in order to strengthen their portfoliomanagement capacity and to provide monthly up-to-date statistics on the AFP loanportfolios in all PBs. Bank Indonesia's monthly credit reporting system (for SME credit)was developed during 1992. The system do not provide complete and accurateinformation, and it is now being replaced by a modem, complete, on-time computerizedcredit reporting system, which is being installed in BI Head-office and all BI branchoffices (BISAK, Bank Indonesia Sistem Administrasi Kredit). This new system complywith the requirements given by the World Bank for credit reporting on AFP.

BI engaged private consultants to develop a MIS for all the SME credit programsmanaged by BI during 1992. This MIS has been developed, and it works in accordancewith the specifications given to the consultants, i.e. it provides information on monthlyloan approvals, outstanding loan balances, monthly repayments and various types ofarrears for each of the credit programs. However, the MIS is not on-line with BI'smonthly credit reporting system. The MIS require that all the participating banks submitrequired information on a monthly basis to BI Credit Division. BI has not enforced thebanks to do so on a monthly basis, and the system has not been properly implemented.

c) Training and assistance to PB staff on loan appraisal and administrationprocedures and environmental impacts. The above assistance has been carried outpartly by SMIEP TAU, and partly by the AFP Appraisal Adviser office in cooperationwith three State Universities. IBI hosted the AFP TA units until the end of March 1996.Since April 1996 the AFP AA has working from CPMU- PUJK, Bank Indonesia.

The AFP and SMIEP TAU arranged a three day course for 50 participants frombanks, KADIN and private consultants in Medan during 1993. The AFP AA officearranged three similar programs for a total of 99 participants during 1994 in cooperationwith three State Universities. A final five day course for 28 PB staff undertaken by theAFP AA in cooperation with IBI during April 1996. In addition to the 177 participantstrained during PB staff training programs many more participants have been informnedabout AFP, whenever the AA and his staff have visited PB branch offices or met withentrepreneurs applying for AFP finance. The PB staff have been trained in identifying andappraising project proposal in line with all technical requirements relating to AFP.Information regarding environmental impact assessment and environmental regulationshave been given by qualified staff from the State Universities. The training has notcovered loan administration procedures. However, Bl has ascertained itself that each of


the PBs have complete computerized systems for loan recording, and BI has seen that thebanks' credit files and credit records for AFP are complete. The PBs seem to bereasonably satisfied with the TA provided under AFP.

To finance economically and financially viable and environmentally soundmediumsize enterprises in the agricultural and agroindustry subsectors. The most recentstatus of the outstanding AFP subloans balances in each of the PB covers the period up tothe end of 1998. Based on these figures it can be seen that around 90 % of theoutstanding credit are classified in category 1 "PASS" and category 2 "SPECIALMENTION". The remaining 10 % is largely substandard and doubtful credit with a losspotential of less than 50 % . Bearing in mind that the financial crisis has had negativeimpacts on several of the projects financed under AFP, some of the loss exposedsubloans have been granted to companies, which are marketing their products in thedomestic market. One exception are the doubtful debts reported by Bank Exim. Most ofsubloans granted by Bank Exim were for mediumsize estate enterprises, mostly oil-palmestates. Some of these companies will increase their production this year and next year,and they will hopefully be in a position to repay their debt in accordance with new,rescheduled loan repayment plans.

III. Comments on points raised in the AFC ICR Mission: March 1-12, 1999DRAFT AIDE MEMOIRE

The three risk factors mentioned in the draft aide memoire, i.e. the financialsoundness of the commercial banks, the quality of bank supervision and sound financialsector policies are relevant risk factors judged by what has happened to the banks afterthe onset of the financial crisis. Although the World Bank was aware of the Indonesianbanking sector shortcomings and the need to upgrade Bank Indonesia's bank supervisiondivision, BI maintain that it was right to launch AFP during 1992. At that time bankswere reluctant to grant credit due to the tight monetary policy regime being implemented.Bank supervision was also gradually being improved partly through the implementationof new prudent banking regulations, and partly through the technical assistance providedby the Financial Sector Development Project (IBRD Loan No. 3526-IND). The third riskfactor, GOI financial sector policies also covers the money market and financialinstitutions outside the supervision of Bank Indonesia. These policies were graduallybeing improved during the AFP implementation period. BI will not comment on howeach of the three risk factors contributed to the financial crisis, which is outside the scopeof this report. The general conditions in the banking sector were relatively stable duringthe period 1992 to 1996, even if it was clear to BI, that some of the big commercial banksexpanded their operations partly financed with foreign exchange borrowings. The risk offoreign exchange borrowings was thought to be reasonably covered by not allowingforeign liabilities to exceed foreign assets by more than 15 %. Neither Bank Indonesia northe World Bank could foresee the panic caused by withdrawal foreign funds fromIndonesia at the start of the crisis, and the drastic devaluation of Indonesian Rupiah,which at the bottom of the financial crisis reached Rp 15,000 to the dollar.

Implementation Experience and Results: The financial crisis has caused BankIndonesia to close one of the participating banks (BDNI). Four other PBs have been takenover by the Government (BCA, Danamon, Bank Tiara and Bank Tamara). Two privatebanks will be recapitalized with GOT providing 80 % of their required equity (Bank Baliand Bank Niaga). All the three participating State Comnmercial Banks will be


recapitalized, however Bapindo and Bank Exim will be merged together with two otherstate banks. Only two remaining private banks Bank Buana and Panin Bank arecategorized as A banks, meaning that their equity share exceed four percent. It is hopedthat the bank restructuring and bank recapitalization program will succeed, but this verymuch hinge upon what happens to the interest rates during the coming months. AFPsubloan disbursement and loan performance have been commented upon under Part II ofthis report and need no further comments.

The financial crisis has also affected Bank Indonesia. The House ofRepresentatives (DPR) has decided to reorganize BI's bank supervision and creditdivision. Both these division will be reorganized outside Bank Indonesia, starting nextyear. It is presumed that these structural changes will lead to more efficient organizations.Bank Indonesia agrees with draft aide memoire conclusion that the AFP did notcontribute to the crisis and that high persistent interest rates may cause problems for theproject sustainability.

The three large-scale integrated projects partly financed by AFP continue to beviable. All relevant project related assessments were made before the loans wereapproved by the World Bank. With the on-going reformation process BI has becomeaware of problems related to land ownership for oilpalm project on the island of Bangka.

Bank Indonesia has for a long period supported integrated projects financially byproviding subsidized term credit to finance the smallholder enterprises taking part in suchprojects. With assistance of the World Bank successful integrated projects should beanalyzed and guidelines for implementing integrated projects should be developed. Thedevelopment impacts of successful integrated projects are more farreaching andprolonged compared with other concepts for developing smallscale, traditionalenterprises.

Technical Assistance Component: Each of the sub-components have beencommented upon Part II of this report. Bank Indonesia appreciate the usefulness of thetechnical assistance and the procedures for appraising AFP subloans. It can be seen thatthe PBs, which have taken a serious approach towards implementing AFP have succeededin selecting and financing economic and financially viable, and environmentally soundenterprises in the agriculture and agribusiness sectors.


HISTORY OF SBI RATES AND AFP RATES FOR MOF TO PBs

No. Period SBI rates Period AFP rates(% p.a.) (% pa)

1 Jul-91 19.722 Aug-91 19.633 Sep-91 19.634 Oct-91 19.635 Nov-91 19.636 Dec-91 19.47

7 Jan-92 19.00 Semester 1/92 19.628 Feb-92 19.009 Mar-92 18.9210 Apr-92 17.5011 May-92 17.5012 Jun-92 16.5013 Jul-92 16.50 Semester 11/92 18.0514 Aug-92 15.7715 Sep-92 15.0516 Oct-92 14.6717 Nov-92 14.1918 Dec-92 13.7519 Jan-93 13.70 Semester 1/93 14.9920 Feb-93 13.2321 Mar-93 12.7522 Apr-93 13.0023 May-93 11.9524 Jun-93 10.4625 Jul-93 9.38 Semester 11/93 12.9426 Aug-93 8.0127 Sep-93 9.6728 Oct-93 11.0629 Nov-93 10.2830 Dec-93 9.6131 Jan-94 9.29 Semester 1/94 9.6732 Feb-94 9.7533 Mar-94 10.4734 Apr-94 10.5035 May-94 11.3136 Jun-94 10.8337 Jul-94 12.25 Semester 11/94 9.2038 Aug-94 12.6139 Sep-94 12.6140 Oct-94 *

41 Nov-94 *

42 Dec-94 *


43 Jan-95 Semester 1194 10.3944 Feb-95 *

45 Mar-95 *

46 Apr-95 14.6347 May-95 14.6348 Jun-95 14.6349 Jul-95 14.63 Semester Il/94 13.2150 Aug-95 14.6351 Sep-95 14.6352 Oct-95 14.2053 Nov-95 14.2054 Dec-95 14.2055 Jan-96 14.42 Semester 1/95 14.4256 Feb-96 14.4257 Mar-96 14.4258 Apr-96 14.4259 May-96 14.4260 Jun-96 14.4261 Jul-96 14.50 Semester 11/95 14.4262 Aug-96 14.5063 Sep-96 14.5064 Oct-96 14.5065 Nov-96 14.1266 Dec-96 13.7567 Jan-97 13.25 Semester 1/96 14.1268 Feb-97 12.8069 Mar-97 11.8770 Apr-97 11.6371 May-97 11.6372 Jun-97 11.2573 Jul-97 10.93 Semester 11/96 12.1674 Aug-97 16.6775 Sep-97 16.6776 Oct-97 14.5777 Nov-97 14.5778 Dec-97 14.5779 Jan-98 14.68 Semester 1/97 14.4480 Feb-98 15.1281 Mar-98 16.8882 Apr-98 21.3683 May-98 36.7084 Jun-98 44.0085 Jul-98 44.00 Semester 11/97 24.7986 Aug-98 44.0087 Sep-98 44.0088 Oct-98 49.4189 Nov-98_ 54.8390 Dec-98 42.41 Semester 1/98

) data not availabie (in credit dept) I_


S AN K IN D ON ElAL

No. t/19/11K Jakairta, 18 Juni 1999

To: Rural Dev. & 1`4t. Resources Sector Coordinator

The Wcrld Bank. Residetit Staff in Indonesia

:-SEB Tower, Jl, Jendral Sudirman Kay 52-54,

JAKARTA 12190

Alt, V;. St ink / VnqWil

Re: L,oan 3402-IND (Agricultural Financing Project),Draft Implementation Completion Report (1CR)

in reply to your leatr dated June 8, 1999 conceniing the above nientiorted, we

herewith would like to give sonie commenis, as follows:

i. 9-asically we have -lo objection regarding the contents of the ICR, including your

conclusion in ptra I Ipage -vi- that the project oiacome rtiks as itassfacto1y.

2 Based on the Act No.23/1999 of Bank Indonesia released on the 17i' of May. the

Central Bank can no longer extend credit, including two step loans (TSL) from

internaTionsl institution soturce. In this case Beank Issdonesia has to transferred all of

its TSL sctemes to another histitUtion chosen by the Government/linistry of

Finance. Plesse note that the transfer of a TSL has to be discussed by MOF and the

Icndcr. We believe that this new regulation may inmpact the Pfogram in the future. so

please. state clearly in thle ICR.

3. Another miror inforntation. need to be corrected is Bank Indonesia-s fiscal year,

Before the niew Act, the fiscal year is 1 April - 3 I March and after the new Acr is 1

January - 31 December.

With besi regards

'Yours faithfully |CREDIT DEPARTMENT

Abdul AzisDeputi Repala Urusan

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DECEMBER 1994

Documents

World Bank Documentdocuments.worldbank.org/curated/en/... · October-Dec. 1997: 3,989 October 1998: 7,550 January 1998: 10,375 November 1998: 7,300 ... BNI Bank Negara Indonesia (SCB)