Jakarta, Indonesia
September 7, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler,

The Government of Indonesia’s new economic team is fully committed to the economic program supported by an extended arrangement from the Fund. The new team has already taken a number of initiatives to strengthen its commitment to the program, including through a more streamlined Cabinet structure. At this second program review, we have committed to additional measures that will yield further concrete results in the areas of asset recovery, bank reform, and corporate restructuring. These measures are described in the attached Supplementary MEFP, which replaces the MEFP attached to the Government’s July 31 letter.

We met all quantitative and structural performance criteria for end-June 2000. Quantitative performance criteria are now being proposed for end-October 2000 and end-December 2000 for the full set of monetary, fiscal, and external variables (Table 1). Additional structural performance criteria and benchmarks have been proposed through December 2000 (Table 2).

During the remaining period of the arrangement, we will continue to consult with the Fund as provided in our letters of January 20, 2000 and May 17, 2000, in order to assess progress in implementing the program and reach understandings on any additional measures that may be necessary. The next review of the program will be completed by mid-December 2000.

Sincerely yours,

Attachment

MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES

Government of Indonesia and Bank Indonesia

I.  Introduction

1.  The President and Vice President of Indonesia implemented a major cabinet restructuring on August 29 that significantly streamlines responsibilities and ensures greater coordination of economic policies. A new Coordinating Minister for Economic Affairs has been appointed to oversee the country’s economic program. The Government’s new economic team has recently announced its 10 Point Economic Recovery Program, which is consistent with this memorandum.

• Maintain macroeconomic stability with the support of IMF/World Bank/AsDB.
  
• Reduce unemployment by creating jobs in all regions.
  
• Improve agricultural productivity and farmer welfare.
  
• Increase non-oil export revenues, particularly in manufacturing and agro-industry.
  
• Promote domestic and foreign equity investment.
  
• Expedite banking and corporate restructuring.
  
• Accelerate privatization of state-owned enterprises.
  
• Initiate comprehensive small and medium scale enterprises (SME) development program.
  
• Ensure sustainable development of natural resources.
  
• Implement economic decentralization through an orderly and phased transition.

2.  The Government of Indonesia (GOI) has strengthened implementation of the program set out in the Memoranda of Economic and Financial Policies (MEFP) of January 20 and May 17, 2000 (Box 1). At the second review, the GOI’s main achievements are (i) intensifying asset sales and debt restructuring by the Indonesian Bank Restructuring Agency (IBRA) and the Jakarta Initiative Task Force (JITF); (ii) recapitalizing bank BNI and advancing BTN’s and BRI’s recapitalization and restructuring; and (iii) adopting a phased implementation plan for decentralization.

II.  Macroeconomic Policies

3.  The macroeconomic framework for 2000 is being maintained. Growth and price developments continue to be consistent with that framework. Although market sentiment turned unfavorable in recent months, this was mainly due to political factors and, with the installation of the new economic team, we are confident that 3–4 percent growth and the other key macroeconomic targets for 2000 can still be broadly achieved. The President and the Vice President have assured that there will be increased clarity and consistency in the implementation of the economic program, which is crucial to regaining market sentiment.

Fiscal policy

4.  Our efforts are directed toward fully implementing the FY 2000 budget, and avoiding shortfalls in key social safety net and infrastructure spending and associated foreign financing. Revenues have been more buoyant because of higher oil prices and, were they to exceed the budget target, there will be room to reduce the budget deficit while also boosting infrastructure development. All tax laws before Parliament were approved in August 2000.

5.  The GOI is concerned over the country’s high level of debt and will be examining ways, with the help of the international financial institutions, to reduce the high debt burden. Consistent with this objective, the 2001 budget will be designed in consultation with the IMF to support the goal of restoring fiscal sustainability over the medium term. To this end, the GOI is committed to reducing and restructuring subsidies, with the first adjustment under a medium-term program for petroleum prices to be implemented in October, and supported by protection for poor consumers. In addition, a decision will be taken by December 2000 on restructuring the tax status of Batam Island to enhance GOI revenues, including through implementation of a VAT; this will be done after giving sufficient time to prepare for effective implementation and to ensure that bona fide exporters are not affected.

Monetary and exchange rate policy

6.  Bank Indonesia (BI)’s base money program is being maintained. As market confidence improves and risk premia fall, BI is confident that money market interest rates could be guided down. However, progress in this direction has been delayed by the recent weakness in the exchange rate, which required a temporary increase of interest rates. Meanwhile, the program floor on net international reserves has been raised as part of prudent monetary policy to strengthen market confidence, as well as reflecting more rapid reserve accumulation earlier in the year (Table 1).

7.  The GOI is firmly committed to the exchange system underlying the financial program—to a floating exchange rate and preservation of Indonesia’s historically free capital account—as enshrined in the law on foreign exchange management that was enacted in 1999.

Financing issues

8.  The GOI is making progress toward implementing the restructuring agreement that was reached with official creditors on April 13, 2000, and an agreement has been reached with the bankers’ steering committee to restructure the government’s obligations to its commercial creditors of about US$346 million.

9.  The GOI is committed to delivering the policy framework underlying the budgetary support loans of the World Bank and the AsDB and, thereby, avoiding shortfalls in their disbursements in FY 2000.

Foreign Investment

10.  The GOI is firmly committed to increasing both domestic and foreign direct equity and portfolio investment and will be implementing a number of measures to increase these flows. As part of its effort to promote foreign investment, the Investment Board (BKPM) will be reorganized into a new institution, under the Coordinating Minister for Economic Affairs, which will focus on investment promotion rather than regulation activities. The Government has recently published a regulation narrowing the list of sectors that are closed to foreign investment.

Debt Management and Bond Market Development

11.  The Government is giving high priority to establishing sound debt management practices and developing the domestic bond market. The MoF units currently involved in debt management (including the Debt Management Unit, the Directorate of External Loans, and the Directorate of Subsidiary Loan Management) will work closely to consolidate existing debt management activities by December 2000. In addition, by the same date, the Government will submit to Parliament a draft act providing legal underpinnings for debt management, including standing authority for debt service, and authority for borrowing within the budget cycle.

12.  This framework for public debt management, as well as the plans for bond market development, will be set out in a strategy paper by the Debt Management Unit of the Ministry of Finance and Bank Indonesia. This paper will be prepared for discussion in September and published in October. Preparations are being made to begin auctioning short-term government securities in the primary market by December (subject to Parliamentary approval), with the proceeds being used to retire some of the initial issues.

III.  Fiscal Decentralization

13.  Laws No. 22/1999 and No. 25/1999 have been passed by Parliament requiring economic decentralization to be implemented in FY 2001. The GOI is committed to ensure that the decentralization process will be conducted in an orderly and staged manner to maintain the macro and fiscal balance between the central and local governments.

14.  In implementing fiscal decentralization, the GOI is determined to safeguard public service delivery, fiscal stability, and the governance of public spending, and is being assisted by advisors from the World Bank, IMF and other members of the international community.

15.  As part of the GOI’s decentralization implementation plan (Box 2), MoF will prepare a positive list of work units and activities to be transferred to each district/province and estimate the costs of the decentralized activities by the time the FY 2001 budget is submitted to Parliament. MoF will also progressively finalize regulations on: (i) transfers of civil servants, assets, and spending to the districts; (ii) fiscal transfers and shared revenues required to finance transferred functions; (iii) guidelines for local government borrowing; (iv) accountability of local governments and financial management by adherence to budget process; and (v) financial information systems drawing on GFS guidelines.

16.  In order to minimize the macroeconomic risks, a number of safeguards will be instituted including: (i) an adequate contingency provision will be included in the 2001 budget, and finalized in consultation with the IMF; (ii) specific regulations and rules will be established for regional government borrowing especially from banks, to ensure consistency with the macroeconomic framework; (iii) regulations will be established to ensure that the transferred personnel are paid from the shared and transferred revenue; and (iv) fiscal transfers to the local governments will be phased in line with the transferred functions.

17.  In implementing this complex program, the MoF will closely coordinate with the Ministry of Internal Affairs and Regional Autonomy in order to assure that the implementation of regional decentralization is carried out in an orderly and phased manner. There are four fully operational working groups under the Coordinating Team and three secretariats to advise the RAAC (regional autonomy advisory council). Local governments have elected their own local government associations to represent their views to the central government and to the RAAC.

IV.  Banking System Reforms

18.  Banking reform is being carried out by three institutions: IBRA, MoF, and BI supported by the coordinating and policy oversight role played by the FSPC.

IBRA-led Bank Restructuring

IBRA Governance

19.  The GOI has adopted a new governance framework to ensure IBRA has the independence it needs to carry out its mandate. At the center of the framework is a new governing board, clearly separated from the political process, and composed of independent professionals. The board will make its first quarterly written report to the FSPC by September 30. Attached to the Board will be an independent audit committee.

20.  The rest of IBRA’s institutional framework remains intact. However, under the new cabinet structure, IBRA will report to the Junior Minister of Economic Acceleration who, in turn, will report to the Coordinating Minister for Economic Affairs. The FSPC will set the policy guidelines and approve sale and restructuring decisions over Rp 1 trillion (book value).

21.  IBRA is continuing to improve its transparency, as envisaged in previous MEFPs. On June 30, the agency published the results of a comprehensive audit of its financial position, including those of its industrial and bank holdings, as of end-1999. This audit raised a number of accounting and other issues which IBRA will address in a time-bound action plan that will be finalized in September, after consultation with the World Bank and the IMF. IBRA’s first comprehensive annual report will be released during the third quarter.

IBRA Legal Actions

22.  The Government recognizes that the asset recovery targets require strong action be taken against all noncooperative debtors and shareholders. Toward this end, the interministerial Committee for Resolving the Cases of Recalcitrant Debtors was established on July 17. The committee will decide a coordinated strategy for all IBRA’s problem cases, including prosecutions, using IBRA’s special powers to take over debtors’ assets, and imposing administrative sanctions in coordination with the Attorney General.

23.  IBRA is undertaking a comprehensive review of its legal powers, and related legal actions are planned to be taken as follows:

• The Attorney General has commenced legal action against noncooperating shareholders from four of the 1998 BTO/closed banks (Pelita, Deka, Centris and Istimarat), who have not reached agreement with IBRA.

• Shareholders of the 1999 BTO/closed banks who fail to complete negotiations by September will be referred to the Attorney General who is committed to taking prompt legal action.

• IBRA will shortly initiate legal actions against those shareholders who have not complied with their MSAA or MRA agreements. Additional actions will be promptly taken in all cases where shareholders fail to complete their asset transfers consistent with their agreements.

• IBRA’s AMC has filed legal actions against 16 noncooperative borrowers (total debt of over Rp 6 trillion) out of about 340 companies belonging to the top 21 obligors.

IBRA Bank Restructuring Unit (BRU) Operations

24.  IBRA has announced a timetable to complete the privatization of Banks BCA and Niaga by December, and Parliamentary approval will be requested in September. IBRA also expects to sell (in cooperation with the owners) some of its shares in the private banks recapitalized with public assistance. The BRU expects to contribute about Rp 3 trillion to IBRA’s asset recovery target in FY 2000.

25.  IBRA is also advancing the reprivatization of its other BTO banks, with the aim of fully completing the process by 2001. The legal merger of Bank Danamon with eight other BTO banks was completed on July 3, allowing the operational mergers to be completed by end-October. The GOI’s intention is to prepare Bank Danamon for majority privatization in 2001. As for Bank Bali, an out-of-court settlement has been reached with the original owner, and the bank will be recapitalized in October, following a rights issue.

State Bank Restructuring

State Bank Governance

26.  The MoF is responsible for overseeing the operations of state banks. In this context, a monitoring and governance unit for the state-owned and recapitalized banks was made operational within the Ministry of Finance at end-June 2000. The key tasks of the unit are to conduct quarterly reviews of banks’ compliance with their performance contracts, including business plans and performance targets; and to strengthen their management and governance structures to ensure highly transparent operations. The unit will closely monitor data on banks’ financial activities, including detailed information on new credit commitments and loan restructuring. By end-October, the Ministry of Finance will prepare proposals for the state banks to bring their governance in line with international best practices. The Ministry of Finance will ensure that the annual audits of state-owned banks are publicly tendered to international firms.

State bank restructuring and recapitalization

27.  Bank Mandiri is implementing its business plan, closing unnecessary branches, and bringing virtually all of its assets and liabilities on-line by November 2000. The Ministry of Finance will work with Mandiri to develop by September an appropriate strategy for reducing the bank’s dependency on high-cost deposits. Meanwhile, to ensure that the bank’s new policies for credit approval and risk management are executed efficiently, Mandiri plans to engage, as soon as possible, experienced expatriate managers in senior positions and obtain institutional assistance in these areas.

28.  Bank Indonesia has conducted an on-site examination of Mandiri, with a report to be issued in September. Any necessary corrective actions will be developed by end-September in close collaboration with the Ministry of Finance. The Government remains committed to beginning the bank’s privatization in 2001, and a firm strategy for this purpose will be developed by December 2000.

29.  Bank BNI’s restructuring is also well underway. The second and final tranche of recapitalization bonds (Rp 32 trillion) was issued on July 3, after an international consulting firm verified that the bank has complied with its interim performance contract, and an international bank was engaged to assist in credit-risk management and loan workouts. A further review of the bank’s performance will take place by October 2000, following the completion of BNI’s June 2000 financial audit, after which the performance contract will be finalized.

30.  Regarding Bank BTN, a new management team was appointed in May 2000 and has prepared a business plan with its international advisors. The business plan—refocusing the bank on mortgage lending—has now been approved by the Restructuring Committee. The first tranche (70 percent of total) of its recapitalization has been completed.

BRI—SME Development Program

31.  Regarding Bank BRI, a new management team was installed on July 18, 2000, allowing its restructuring efforts to move forward. The bank’s business plan has been validated by the Restructuring Committee, an interim performance contract signed with the new management, and the first tranche of recapitalization bonds issued on July 25, for 70 percent of the bank’s recapitalization needs. The second and final tranche of recapitalization bonds should be provided by end-October, upon verification of the bank’s compliance with its interim performance contract, and implementation of a credit risk management function.

32.  BRI’s future role focuses on micro, retail, and SME businesses. A detailed business strategy, as well as a divestment plan from corporate activities, will be developed in conjunction with World Bank/IFC assistance. BRI has begun to divest its corporate loans and will transfer all corporate loans to other banks by end-2000 in order to ensure BRI’s total commitment to SME development.

Bank Indonesia

Supervisory and Regulatory Framework

33.  Implementation of Bank Indonesia’s master plan to strengthen the supervisory and regulatory framework for banks is well underway. A permanent supervisory presence has been established at each state bank. The central bank is monitoring, on a quarterly basis, all banks’ progress against their business plans, to ensure they bring their financial situation into line with prudential norms (notably the 8 percent capital adequacy requirement) by end-2001. In the event of non-compliance, prompt corrective action will be taken in accordance with recently enacted criteria.

34.  A detailed action plan to bring the supervision and regulatory framework up to international norms over the next two years will be developed with assistance from the IMF by October 2000. By the same date, the Ministry of Finance will develop a time bound plan for bringing the supervisory, regulatory and governance structures of the pension and insurance industries, finance companies and capital markets into line with international standards (with the assistance of the AsDB).

Bank Indonesia Audit

35.  The publication in early July of BI’s audited accounts for end-1999, as well as of international reserves data in line with the IMF’s SDDS, attest to the significant progress being made in improving the central bank’s accounts. The earlier BPK disclaimer on BI’s 1999 audit has been removed, and BI’s financial position at end 1999 has been clarified. BI will complete due diligence on all its subsidiaries by September and a plan for their divestment during the first quarter of 2001. BI has also submitted to BPK an interim June balance sheet. Over the coming months, BI will take further steps, including strengthening management information and internal control systems, to ensure that the reforms being implemented become firmly embedded in the governance culture of BI.

V.  Corporate Restructuring

36.  Corporate restructuring is being carried forward by two principal institutions, IBRA and the Jakarta Initiative Task Force (JITF), which report to the Junior Minister for Economic Acceleration who, in turn, reports to the Coordinating Minister for Economic Affairs. The FSPC will continue to play a coordinating and policy oversight role over these two institutions.

IBRA Asset Recovery and Restructurings

37.  IBRA’s focus is to drive asset sales and debt restructuring, return assets to the private sector quickly, and achieve budgetary collection targets. Toward this end, by end-September, IBRA’s new Board will approve a time-bound strategy for the disposition of all assets by its sunset date of end-February 2004. As part of this effort, international firms have been engaged to develop specific asset disposal strategies for all assets in the IBRA-controlled holding companies.

38.  For FY 2000, IBRA announced on July 19 a quarterly schedule of asset sales procedures and projected cash collections, consistent with the budget target of Rp 18.9 trillion. Cash collections are estimated at over Rp 4 trillion during the April-June quarter, and projected at about Rp 7 trillion during the September quarter, and about Rp 8 trillion during the final quarter of FY 2000. Any shortfalls in the third quarter will be fully recovered in the fourth quarter.

Asset Management Credits (AMC) Operations

39.  In FY 2000, the AMC aims to collect at least Rp 8.8 trillion in cash, mainly by restructuring many of its largest loans, and selling them to investors or banks, and also by outsourcing and selling smaller loans, and by collecting debt service payments. Toward this end, the AMC aims at resolving the loans of its 21 largest obligors (comprising over 340 debtors with a book value of Rp 88 trillion) by end-2000. By end-June, 35 percent of the book value of these loans had been resolved, with term sheets having been finalized for 93 debtors and legal actions initiated against 16 debtors. By October, the ratio should rise to around 70 percent of the loans.

40.  Regarding the AMC’s smaller loans: (i) all commercial loans (Rp 5-50 billion) have now been outsourced to domestic and foreign institutions, with the aim of putting the entire restructured portfolio back in the banking system by September 2001; and (ii) all retail loans (under Rp 5 billion) will be sold under open tender by December 2000.

Asset Disposal Unit (ADU) Operations

41.  The ADU aims to raise about Rp 7 trillion for FY 2000, by selling over 20 industrial and other assets, through transparent and competitive bidding procedures. These assets include automotive, chemical, consumer and real estate-related concerns, all of which were acquired by the IBRA-controlled holding companies as part of settlements with bank shareholders. In all cases, IBRA’s aim will be to sell majority control to the private sector. To ensure that the sales process goes smoothly, written commitments from the shareholders have been obtained and were publicized on July 19. International advisory firms have been engaged for virtually all enterprises scheduled for sale this year. In addition, all necessary legal actions have been taken to secure clear title over the assets to be sold.

Asset Management Investments (AMI) Operations

42.  IBRA is enhancing its control over the pledged assets and taking steps to preserve the value of the enterprises in the holding companies. A new compliance team has been established within AMI for this purpose—to monitor individual enterprises and identify specific problems. Based on recommendations of the compliance team, IBRA’s Board will adopt a corrective action program, which will be implemented during the last quarter of the year.

Jakarta Initiative Task Force

43.  The JITF’s enhanced framework for its corporate debt restructuring efforts was put in place at the last review, as described in the May 17 MEFP. The enhanced framework aims at delivering accelerated JITF-led restructurings. Between May 1 and July 15, the value of debt restructured under the JITF was $3 billion, bringing the total of restructured debt to $5 billion. Provided a favorable macroeconomic situation can be maintained, and on the basis of the measures specified in paragraphs 46 and 47, the JITF expects that an additional $3-5 billion will be restructured by end-December. The strategic objective is to restructure a total of $12 billion of debt by April 2001.

44.  Toward these ends, the JITF is building its structured mediation case load. This case load has risen from about $8 billion on May 1 to $10 billion (as of July 15); it is projected to increase to $15 billion by end-2000 (excluding restructured debt). The present case load includes referrals of eight cases by the FSPC to the JITF (with a total debt of $5.5 billion); further referrals will be made monthly. The objective is to ensure a cumulative total of at least 12 referrals by FSPC with a minimum debt value of $7.5 billion by end-October and a cumulative total of at least 17 referrals with a minimum debt of $10 billion by end-December.

45.  The JITF’s mediation schedules range from 3–6 months, depending on the complexity of the case. If the established schedule is not maintained because of debtor nonco-opera-tion, the JITF will send the case to the FSPC. The FSPC will promptly forward such non-cooperation cases to the Attorney General for initiating bankruptcy pro-ceedings and, if there is evidence of fraud, criminal investigations. Any forbearance granted by the Jakarta Stock Exchange with respect to the continued listing of a debtor will automatically be withdrawn upon a determination of noncooperation.

46.  The ability of the JITF to meet these objectives will depend on the cooperation of the debtors and creditors and, in addition, the support of other governmental agencies and institutions. Weekly meetings between the FSPC, the JITF and IBRA are helping synchronize referrals to the JITF where IBRA is a minority creditor. On June 27, the FSPC issued a decree ensuring IBRA support for JITF-led restructurings agreed by a majority of private creditors.

47.  The Government is introducing additional and time-bound incentives for JITF-led restructuring. A decree will shortly be issued, providing immediate income tax relief with respect to (i) debt forgiveness; (ii) debt to asset settlements; and (iii) debt to equity swaps. In addition, Bank Indonesia issued a decree on June 12 easing the divestment requirement for banks that hold equity in exchange for debt in the context of a restructuring. Finally, the Ministry of Finance intends to issue a decree by end- September which clarifies that, for the purpose of calculating the minimum financial ratios for regulated finance companies, certain types of subordinated debt instrument will be treated as equity.

48.  The JITF has completed its first survey to assess progress in corporate restructuring. Henceforth, such surveys will be done on a quarterly basis.

INDRA

49.  Regarding INDRA, in light of the stabilization that has been achieved, an exchange rate guarantee is no longer necessary. Accordingly, the registration period for INDRA has been terminated.

VI.  Legal Reform and Governance

50.  Progress is being made to improve the functioning of the Commercial Court. The President has appointed a new slate of ad hoc judges to the Commercial Court and the government is working with the judiciary to ensure that they are promptly assigned to pending cases before the Commercial Court. As of July 20, 2000, ad hoc judges have been assigned to 2 cases filed by IBRA. As a means of enhancing the credibility and transparency of the Commercial Court, the government will submit a new law during September that will, among other things, provide for the publication of dissenting opinions of judges sitting on the Commercial Court. In the interim, the Supreme Court has issued a regulation clarifying that ad hoc judges may issue dissenting opinions that will be published.

51.  The Government is also implementing a broader judicial reform strategy. As a result of a recently announced initiative, 70 percent of the judges sitting in Jakarta courts have been replaced as of mid-July, including a number of judges of the Commercial Court. Together with Parliament, the President is also taking measures to appoint well-regarded jurists to the Supreme Court, including a new Chief Justice. The government is also preparing amendments to the Supreme Court law designed to enhance the credibility of this important institution.

52.  Progress has been made on two key initiatives to address governance problems within the court system. First, the Joint Investigating Team (JIT)—initially focused on court corruption and including well-respected individuals from civil society—has become operational within the Attorney General’s Office, and investigations are underway. It is expected that a number of cases will be referred to the JIT by the National Ombudsman Commission, an independent body that has been established to act upon complaints from the public regarding governance problems. In addition, in consultation with Parliament, the President will soon appoint the members of the Commission for the Audit of State Officials, many of whom will be drawn from civil society. The Commission will become fully operational in September.

53.  Other steps being taken to address governance problems within the court system include the preparation of an Advocate’s Law, to be submitted to Parliament in September, that will require all court advocates to be licensed. A condition for such licenses will be adherence to a uniform code of ethics.

VII.  Public Sector Reform

Public Sector Governance

54.  Public sector transparency and governance initiatives are being carried forward in the following key areas.

55.  A law providing for the oversight and audit of private foundations has been prepared, and has been sent to Parliament. The GOI will be working closely with parliamentary leaders toward its passage by September.

56.  The GOI is making progress in identifying and integrating off-budget funds maintained by government ministries and agencies:

• The Reforestation Fund was fully transferred to a special state revenue account on July 4, and will be fully integrated in the 2001 budget.

• In response to a Presidential Decree issued in May, a number of ministries and agencies have reported the existence of off-budget funds, with a total asset value of about Rp 7.7 trillion (about US$ 860 million). BPKP will verify by September 30 for these agencies whether there has been misreporting, by surveying government accounts in the banking system. Sanctions will be developed by that date and applied on all cases of misreporting. Those agencies not reporting existence of off-budget accounts will be audited by BPKP by December 2000, and sanctions applied in cases of misreporting.

57.  The next stage of the exercise involves taking decisions about the integration of the remaining off-budget funds with the central government budget. This process will be led by the task force already established to improve treasury management and procedures, and their recommendations received by September. Any funds remaining outside the budgetary framework will be subject to regular audit by BPKP with quarterly reports to the Minister of Finance. The task force will also complete its work regarding the consolidation of the bank accounts of government agencies by the same date. On this basis, detailed recommendations for improving treasury management procedures will be implemented by December 2000. The investment funds (RDA and RDI) will be integrated with the 2001 budget, and made subject to parliamentary approval.¹ In this way, we expect to establish full consistency between monetary and fiscal data by end-2000.

58.  A number of key government agencies and enterprises are undergoing special performance audits, as envisaged in the May 17 MEFP. Thus:

• The audits of the KUT program and of the Tax Office have begun. In both cases, they will be completed during the last quarter of 2000, and corrective actions will be developed by December.

• The State Audit Board (BPKP) has begun to use the information that has become available upon the completion of the review of the off-budget funds to ensure that its audits of all public institutions (including the military) in 2000 will take account of all extra-budgetary funding. BPK has also begun examining the foundations of the military.

• The first quarterly reports on the implementation of corrective actions by the first group of public institutions undergoing special audits were published in mid-August (BULOG, PLN, Pertamina, and the Reforestation Fund). BPKP is also undertaking a special audit of budget and off-budget accounts of BULOG in 2000.

• As previously agreed, the Government is launching a second round of special audits, comprising the national airline, the national toll road company, the domestic telecommunications company, the largest public port corporations, and a state-owned plantation company. The audits will be carried out with the assistance of international experts.

Civil Service Reform

59.  The Government is beginning work on a comprehensive reform strategy for the civil service, in consultation with the World Bank. Preliminary recommendations will be developed by the inter-ministerial task force (that is being led by the Minister of State Apparatus) by September 2000, ensuring that any future wage adjustments—including any increase in October—are closely linked to civil service reform in the context of decentralization. The plan will be finalized by end-2000, and its implementation will begin in 2001 with decentralization.

SOE Reform and Privatization

60.  The GOI is committed to accelerate SOE reform through restructuring and privatization. Under the new cabinet structure, the previous Ministry for Investment and State-Owned Enterprises (SOE) has been abolished and, in its place, a new Ministerial Board is being set up to oversee the privatization of SOEs. The Ministerial Board will be under the supervision of the Coordinating Minister for Economic Affairs.

61.  Privatization and state enterprise reform are moving ahead and the Government is committed to majority divestiture on a case-by-case basis. The FY 2000 privatization program now includes a total of 19 enterprises, although a small number of the planned transactions may not be completed until early FY 2001. Included in the FY 2000 group are several enterprises that are to be totally privatized and a number of financial holding companies that will be liquidated. The process of privatizing the Soerkarno-Hatta airport concession company is already far advanced, and a number of other companies to be privatized will be announced shortly.

62.  A new medium-term SOE Reform Masterplan, prepared with technical assistance from the Asian Development Bank (AsDB), was published on June 29. The Government reaffirms its strong commitment to majority privatization of most state enterprises in the medium-term, to the early and full privatization of small and medium-sized enterprises that operate in competitive markets, and to the conduct of asset sales for enterprises that have no prospect of achieving commercial viability. New guidelines and transparent procedures for handling different types of privatization will be adopted through a Ministerial decree.

63.  The Government continues to give priority to the rapid restructuring and privatization of the telecommunications sector. The GOI plans to issue shortly regulations needed in areas including tariffs, interconnection, and universal service obligations, and to provide for the early establishment of an independent regulatory agency. The Government remains committed to transforming Telkom and Indosat into competing full-service providers, and to requiring these companies to divest their stakes in all non-core businesses. Each company will be expected to divest its holdings in at least two such businesses by end-2000, and all non-core holdings will be divested by end-2001. An inter-ministerial team on telecommunications—established on May 30—will be strengthened and will develop a detailed reform action plan for the sector by end-October.

64.  As part of a two-year restructuring program, assisted by the AsDB, 32 state enterprises have been identified to have their accounts audited by independent auditors by end-2000; this plan will be extended to a further 30 state enterprises in 2001.

65.  The Government remains strongly committed to the comprehensive legal and policy reforms for the energy sector outlined in the MEFP of January 2000. In particular, two new laws concerning Electric Power and Oil and Natural Gas will be submitted to Parliament during September. The Ministry of Mines and Energy has prepared medium term plans to phase out fuel subsidies and restore electricity tariffs to commercially viable levels.

66.  Further progress has been made toward resolving the contractual disputes with independent power producers (IPPs). Following the conclusion of several interim agreements, efforts are now focused primarily on negotiating long-term solutions for those plants that are already in commercial operation or far-advanced in construction. In parallel, the GOI is also working to negotiate agreements in respect of projects that have not reached financial closing.

67.  In agriculture the GOI is committed to increasing productivity and efficiency, and improving farmers’ welfare. In cooperation with the World Bank, the GOI is developing policies on rice and sugar, and reforming agricultural credit policies.