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Down to Earth IFIs Update

No 24, February 2002


World Bank Group and US Support Enron's Indonesian Operations

The now-bankrupt Enron Corporation obtained major assistance from the US government and multilateral lending agencies for its global operations, including in Indonesia. Enron owned the East Java Power Project, which was supposed to build a 500MW natural gas-fired power plant in Pasuruan, East Java. The project, worth USD 593 million, was cancelled by the Indonesian government prior to its construction phase due to the financial crisis. The project was insured by the World Bank's Multilateral Investment Guarantee (MIGA), which provided USD 15 million political risk guarantee. Enron received USD 15 million when the project was cancelled.

The Power Purchase Agreement (PPA) that Enron signed with former President Soeharto's administration was set 30% higher than the market rate. Enron won the project without undergoing a competitive bidding process as it should have. PLN, the state power company, was pressured to sign the PPA by Soeharto. Despite the difficulties that Indonesia experienced after the crisis, the Clinton administration pushed Indonesia hard to honor all business agreements signed during Suharto era. The Clinton administration said that to do otherwise would be to undermine the sanctity of contract. When Indonesia initially refused to repay MIGA in full for the USD 15 million MIGA had paid Enron, MIGA refused to provide insurance to Indonesia. This sanction was not lifted until 2001when Indonesia finally agreed to make the full repayment. (See also Factsheet 16 on MIGA)
(Source: latimes.com, January 29, 2002.)


IMF Approves Release of USD 341 Million to Indonesia. No New Letter of Intent in 2002.

The IMF Board of Directors has approved a loan instalment of USD 341 million to Indonesia and has agreed to extend its USD 4.5 billion loan facility by one year to the end of 2003. Indonesia currently has USD 3.2 billion available under the three-year loan arrangement that was due to expire at the end of 2002. The IMF agreed to extend the deadline in order to provide time for the reforms envisaged in the IMF program to take hold.

In the meantime, the Fund assured that there would be no new Letter of Intent (LoI) signed in 2002, as the one signed in December 2001 already included the economic reform program for 2002. IMF representative in Jakarta, David Nellor, however said that amendments to the current LoI were possible. He further said that the quarterly reviews will assess the government's performance in implementing the LoI and affect the quarterly disbursements.
(Sources: Detikcom, January 22, 2002; Dow Jones Newswire, January 28, 2002.)


IMF Supports the Central Bank's Policy to Lower Interest Rate and Allow Inflation to Rise

The IMF Senior Advisor for the Asia Pacific Department, Daniel Citrin, expressed the Fund's support for the Indonesian Central Bank's policy of lowering interest rates and allowing inflationary pressures to rise. Citrin is heading the Fund's mission to review the country's adherence to the Letter of Intent (LoI). The Central Bank lowered the interest rate from 17 percent to 16 percent in early February 2002, while hoping to contain inflation at between 9 and 10 percent this year.

The Central Bank was highly criticised for hurting investment growth due to its high interest rate policies. However, it had to do so as excess liquidity from the money market had to be absorbed and thus pressure on the Rupiah could decrease and inflation fall. Unchecked inflation growth can hurt consumer spending, which is now the only economic driving force.

However, there has been concern that the Central Bank may not meet the inflation target, as inflation was already running at 1.9 percent in January 2002 and prices are still creeping up. The biggest contributors to last month's inflation rate were increases in fuel prices, power, and telephone charges. All of these increases are conditions imposed by the IMF and other international donor agencies. February's inflation is estimated at between 1.5 to 2 percent because of the impact of the floods and disruptions in the supply of goods.

Proponents of the policy to lower interest rates say that the policy would also ease the state budget burden, as a large amount of government bond coupon rates are tied to the Central Bank's rates. With the country's economy close to bankruptcy, Indonesia does not have much choice but to ease the budget burden and hope that investment and production can pick up and thus help the economy to recover. In this way, the proponents say, this policy will benefit the country overall, including the poor. However, a stable political situation and law enforcement may be as important to economic recovery as low interest rates.
(Business Times, February 8, 2002)


Alternative Conference on Indonesian Debt Planned for April 2002

The International NGO Forum on Indonesian Development (INFID) is preparing an alternative conference on Indonesia's debt to take place on the occasion of the Paris Club meeting on Indonesia in April 2002. A preparatory meeting is planned for February 21, 2002 at the INFID European Liaison Office in Brussels.
For further information, contact Dr. Klaus H. Schreiner, INFID European Liaison Officer at khs@infid.ngonet.be
(Source: invitation by Dr. Schreiner, by email. Visit the INFID website at www.infid.ngonet.be)


Loan Disbursement Awaits the Approval of Money-Laundering Bill

Minister of Justice and Human Rights, Yusril Ihza Mahendra urged the House of Representatives (DPR) to speed up deliberation of the Money-Laundering Bill, as it is a condition for the disbursement of much-awaited loans from the ADB and CGI, amounting to USD 600 million and USD 3.14 billion respectively. The Bill was submitted to the DPR in January 2002. Responding to the demand, the legislators pledged to finish deliberating the Bill by March 25, 2002.

The Bill is 34 pages long and mainly sets out measures to control attempts to conceal and hide funds coming from illegal sources. People violating this law will face five to fifteen years in jail or fines of between Rp. 5 to 15 billion (USD 500,000 to 1,500,000 approximately).
(The Jakarta Post, February 6, 2002)


OPIC Provides Loans for New Indonesia Oil and Natural Gas Projects

The US government's Overseas Private Investment Corporation (OPIC) will provide loans of USD 350 million for two offshore oil and natural gas projects in Indonesia.

The projects, owned by UNOCAL, the US-based multinational, and Pertamina, the Indonesian state oil and gas company, will develop the West Seno offshore crude oil and natural gas fields in the Makassar Straits off East Kalimantan. West Seno I will feature construction of a deep-water production platform, a floating processing unit, two 60-kilometre oil and gas pipelines from the platform to an existing terminal, and drilling of more than 20 production wells. OPIC is providing a USD 300 million loan for this project. West Seno II will involve construction of a second deep-water drilling platform and the drilling of an additional 20+ production wells. The second project will receive USD 50 million loan from OPIC and will share processing and transportation infrastructure with the first.

The projects will generate an estimated USD 200 million in procurement in Indonesia and about USD 66 million in procurement in the US.

(Source: Office of International Information Programs, U.S. Department of State, February 6, 2000)
For DTE's reports on Unocal's dispute with local communities at its East Kalimantan operation see DTE 48 and DTE 47


United States Pledges Flood Relief Fund

The United States pledged USD 170,000 in flood relief funds to Indonesia as the worst flooding in six years inundated about one third of the capital, Jakarta. Indonesia has heavy monsoon rains in January and February. This year's floods inundated residential areas and business districts, major roads, and public facilities. The water depth was anywhere between 50 centimetres and 3 meters, forcing hundreds of thousands people leave their homes and creating traffic problems and food shortages. The death toll stood at around 25.

The Jakarta governor has argued that the floods are due to extreme weather that occurs every five years. Environmentalists, however, say that the current rainy season is not worse than normal. They blame years of bad planning and corruption that has allowed ordinary people as well as developers to build upon green areas. Greater Jakarta areas have for years received loans and grants for flood-control related projects and activities from various bilateral and multilateral donors.
(Sources: Bloomberg News, February 1, 2002; The Jakarta Post, February 2, 2002; Reuters, February 2, 2002)


U.S. Refuses to Increase Foreign Aid for Poor Countries

While European nations, the United Nations, and the World Bank are drumming up support for wealthy nations to increase their aid by USD 50 billion annually—double the current level—the United States is rejecting the proposal, contending that poor countries should make better use of the assistance they now receive. The Bush administration has raised concerns that in recent decades tens of billions of dollars in aid for developing countries has produced disappointing results. The US insists that poor nations should do more to adopt sound economic policies and reduce corruption while donors should focus on more effective aid projects before committing increasing amounts of aid.

This position has been expressed by U.S. officials in the run up to the UN Summit on Global Poverty to be held in Monterrey, Mexico, in March 2002. The meeting is being called to find new ways of helping poor countries reduce poverty. The US's position is seen as blocking an international drive led by the United Kingdom to increase aid for the world's poorest countries in the wake of last year's terrorist attacks.

The US is also calling for improvements in the use of foreign aid, rather than increases, in the ongoing negotiations over the replenishment of the World Bank soft-lending window, the International Development Association (IDA). The Bush administration has said it would be willing to increase aid to poor countries if there is evidence that the aid is actually bringing progress in areas such as education, trade, and the environment.

The Bush administration will recommend that USD 850 million in aid to poor countries be contributed to the World Bank's IDA and that it be increased to USD 950 million, then USD 1.05 million in the next two years, if the Bank develops indexes that demonstrate that its aid is productive. The US claims that the idea of performance benchmarks is well received by other nations. The World Bank depends on new replenishments to maintain the IDA fund, which charges zero interest and has a long-term repayment period, available to poor countries.
(Sources: The New York Times, January 13 and 29, 2002. The Guardian [UK], January 23, 2002)


IMF Economic Package Spurs Deforestation in Indonesia

Despite declarations of intent to protect Indonesia's tropical forests, World Bank and IMF policies have encouraged speculative investment in the forest sector and increased timber harvesting by debt-ridden Indonesian pulp and paper companies. This view was expressed by the World Wildlife Fund (WWF) and the Center for International Forestry Research (CIFOR) in Washington, DC in late October 2001.

Indonesia received an emergency financial package after the country was hit by the Asian financial crisis and committed itself to a set of conditions put forth by the World Bank and IMF, including ones designed to reform Indonesia's timber concession system and to raise efficiency levels in Indonesia's timber and wood-processing industries.

Bank and Fund officials acknowledged that some things could have been done better but disagreed with the WWF and CIFOR conclusion. Jim Douglas of the Bank's Rural Development Department said that the conclusion lacks context and does not seem to be aware of the Bank's long-term approach in the forestry sector. He further said that structural adjustment measures are largely transitional measures with the intention that the country will follow these up. Michael Keen, head of the IMF's Environmental Unit, says that while the Fund recognises that macroeconomic policies can have environmental impacts, the institution does not pretend to be an expert in forestry management issues. He points out some IMF success in dealing with problems in Indonesia's forestry sector, such as the dismantling of some of the corrupt linkages within Indonesian conglomerates that are involved in both the forestry and banking sectors.
(Sources: Inter Press Service, October 26, 2001. CIFOR website: http://www.cifor.cgiar.org/)


This IFI update is published by Down to Earth, the International Campaign for Ecological Justice in Indonesia.

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