Country Brief

Country Overview

Indonesia has made a strong economic recovery from the 1997 financial crisis and its transition to democratic governance and decentralization continues with President Susilo Bambang Yudhoyono making important reforms on several fronts. Indonesia has graduated from the IMF program, terminated the CGI, and is projected to increase its growth rate to 6 percent in 2007. Both development spending and poverty have returned to pre-crisis levels, indeed the country has an additional US$15 billion to spend on development this year as a result of reducing fuel price subsidies and prudent fiscal management. However,  governance issues remain an impediment to progress on some fronts, increasing investment –particularly in infrastructure-is critical to Indonesia’s longer term growth prospects.

Against this background, Indonesia has, over the past two years, suffered an unprecedented series of natural disasters, including the tsunami of December 2004 in Aceh, the Nias earthquake of March 2005, the May 2006 earthquake in Yogyakarta and Central Java, and the July 2006 earthquake and tsunami in West Java. In addition, avian influenza has already claimed more Indonesian lives than in any other country.

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Historical Perspective

The World Bank has maintained an active presence in Indonesia since1967 to support broad-based economic development with an emphasis on poverty reduction. Since then, the Bank has financed 280 development projects and programs worth approximately US$25 billion, in all sectors of the economy. By the 1990s, the Bank’s annual lending to Indonesia had reached US$1 billion. Loans supporting the development of energy, industry, agriculture, and infrastructure dominated the first 20 years of lending.

Following the financial crisis in 2000, the Bank repositioned itself with a reduced level of annual lending averaging US$460 million - but with increased focus on investment in education, health, environment, social development and governance at all levels. In 2007, lending is again targeted to cross the billion dollar mark as the country continues to post strong economic growth and meets  the “high case” triggers for lending in the Country Assistance Strategy.

In addition to its lending program, the World Bank in Indonesia has one of the largest grant programs of any other country office with more than US$1 billion in 133 trust funds, the largest of which is the US$650 million Multi-Donor Fund for Reconstruction of Aceh and Nias (http://www.multidonorfund.org).

This large trust funds portfolio supports grant co-financing on projects, technical assistance, project preparation and donor coordination in areas such as education policy, trade and investment policy reforms and anti-corruption strategies. The Trust Funds include five mega programmatic ones in excess of US$10 million wich have enabled the Indonesia office to considerably expand work in areas of governance, poverty reduction, decentralization, water, health and education.

In recent years, President Yudhoyono’s push for more democracy, decentralization and the anti-corruption agenda has made governance the main theme of the World Bank’s support for achieving the growth and development goals.

A bouquet of community driven development programs stretching across 40,000 villages in the country is providing village level infrastructure, employment, capacity building and reconstruction aid while efforts to deepen institutional reforms in governance, transparency and support for local governments are mainstreamed across all sectors of Bank work in Indonesia.

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 Snapshot of Indonesia's Economy

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World Bank Assistance to Indonesia

The World Bank’s assistance to Indonesia is governed by its Country Assistance Strategy (CAS) for 2004-2008 which focuses all lending and grant activity on two areas impeding rapid poverty reduction: (i) a weak investment climate; and (ii) low quality service delivery to the poor. Both of these have a common root in governance, which is thus the underlying focus of the CAS. A third area of activity, disaster risk management, has now been added in view of the large reconstruction program the Bank is administering in disaster hit areas.

The current CAS has four business platforms for supporting the Government’s development agenda in Indonesia. These are also influenced by the massive decentralization which called for a new approach to the delivery of development assistance. 

The business platforms are: (i) the Community Driven Development (CDD) Platform; (ii) the Local Services Platform; (iii) the Public Utility Platform; and (iv) the National Lending Platform. 

Overall, during the CAS period of FY04-FY08, about 25 percent of the annual lending is expected to go for CDD programs; 40 percent for local services; 15 percent for utilities and 20 percent for the national lending platform, although some variations are likely and more funds might go for CDD vs. the local services platform.

Currently, the Bank has 26 active projects in Indonesia worth US$2.6 billion, 10 Multidonor Fund Aceh-Nias grants projects and three reconstruction projects in Java.

For more detailed information about the loan portfolio for Indonesia, you can access the Country Aggregate Reports for Indonesia. Here you will find both aggregate information and individual information on World Bank loans, credits, and grants provided to Indonesia.

Snapshot of Indonesia Grants, Lending and Technical Assistance Program (85kb pdf)

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Results Highlights

1.  Governance: This core CAS pillar gained momentum with Indonesia’s decentralization program creating a new accountability framework at all levels. Bringing control over resources closer to communities has provided new opportunities for participation and monitoring of service delivery.

Through grants such as the US$8 million Decentralization Support Facility and as a component of many of its programs including the Kecamatan Develoment Program (KDP) now active in 40,000 villages across Indonesia, the Bank is supporting capacity building and accountability initiatives at local and regional government levels across the country.

A new set of powerful independent oversight and prosecutorial institutions such as the Anti-Corruption Commission (KPK), Anti-Corruption Court, judicial and police commissions is making inroads in the ubiquitous problem of corruption. President Paul Wolfowitz used his April 2006 visit to Indonesia to visit the KPK and underline the Bank’s firm commitment to fight corruption globally. Indeed, the Indonesia office now implements an anti-corruption action plan in all its projects.

The Bank’s advisory and analytical activities program has included the measurement and monitoring of governance through a 100-district governance and decentralization survey, experiments to test impact of community participation on corruption, and tracking exercises e.g., by placing monitors in trucks to count bribe payments on key Aceh routes. Other recent work has included investment climate surveys and reforms (at national and rural levels), civil service reform, support for anti-corruption institutions (KPK and BPK), post-conflict reconciliation and reintegration, and increased access to justice for the poor.

2.  Improving the Climate for High Quality Investment and Growth: The World Bank is pursuing this objective through two avenues:

• Supporting the Government’s economic and fiscal reform agenda: Indonesia’s medium term reform agenda is supported via a series of annual Development Policy Loans which have contributed to improvements in Indonesia’s creditworthiness; reduced inefficient public expenditures; strengthened tax administration and debt management; and enhanced the competitiveness and efficiency of the financial sector; supported governance and fiduciary reforms.
   
• Through infrastructure development: Through a policy dialogue, development of a financing framework and promotion of investments in rural areas, some progress is being made in this critical area. The World Bank’s cohort of rural development and CDD programs have contributed to strengthened land administration capacity (70 teams trained) and development of a comprehensive land policy framework with over 255,000 titles issued in Java.
  
  The Reconstruction of Aceh Land Administration Project is gaining momentum with nearly 53,000 community maps submitted and over 2,600 land titles distributed. Regulatory reform enabled transfer of irrigation management to community-based water user associations with 250,000 ha of irrigated area benefiting from improved water management, and some 500,000 ha from infrastructure repairs and rehabilitation.
  
  New laws have been enacted to protect a substantial percentage of the country’s coral reef and enable fishing communities to engage in sustainable activities, reducing illegal practices by half. Adoption of enhanced crop/ livestock technologies by a third of households in some 700 villages has resulted in incomes rising 35 percent to 60 percent.

3.  Making Service Delivery Responsive to the Needs of the Poor: Since the 2001 “big bang” decentralization, some 440 local governments or kabupaten/kota were assigned responsibility for education, health and public works among other sectors and public spending in health and education at local and central levels rose. While Indonesia has made progress in reaching the Millenium Development Goals, notably in education, there is slow movement in other areas.

• Education.The Bank has supported policy reforms and piloted innovative management schemes such as: giving districts block grants for education; direct grants to schools; scholarships to poor students; community-led school rehabilitation/construction program and integration of Early Childhood Development in the Education Act.
  
  Seven basic education projects were restructured to help establish more transparent budgeting, planning, and management; and rolling out new policies on teacher management and performance.
   
• Health.  A scaled-up Bank-financed community driven (PAMSIMAS) program is addressing critical water supply and sanitation needs of the poor. Functioning water supply systems have been established in over 1,020 villages, covering over 2 million villagers. The program will be scaled up to further benefit some 5,000 communities with a population of around 12.5 million.
  
  A series of Provincial Health Projects were designed to help clarify the roles of government and build capabilities in nine provinces. A competency-based medical curriculum for primary care physicians has been prepared to be used across medical schools, and training for close to 5,000 medical students was provided.
   
• Services for the Poor. The large group of Bank-supported CDD projects in Indonesia, the largest world wide, has proved an efficient means to provide socio-economic resources to large numbers of poor and improve local services and governance. CDD programs are delivering block grants for development in 30 of Indonesia’s 33 provinces and cover close to 55 percent of Indonesia’s villages, towns and municipalities.
  
  Communities have built or rehabilitated schools, health facilities, water and sanitation systems, roads, bridges, markets and electrification systems. These projects secure high quality of infrastructure and transparency with their unique design and engagement of social and technical facilitators who know the communities well. The Government has recently announced its decision to scale up the Kecamatan Develoment Program to cover all 70,000 villages in Indonesia, making it the primary poverty alleviation program.

4.  Reconstruction and Natural Disasters: In response to the devastating tsunami and earthquake in Aceh and Nias, the Government asked the Bank to play a key role with donors in the reconstruction effort. The Multi-Donor Fund for Reconstruction of Aceh and Nias (MDF) quickly raised US$650 million in grants from 15 donors, including a US$25 million IBRD grant. After a slow start, progress in reconstruction has been quicker than expected in schooling, health care networks, replacing fishing boats and restoring farmlands.

While hundreds of victims still live in temporary shelters, 58,000 houses have now been built –  13,000 need to be built - but construction work is hampered by shortage of legal timber, skilled labor and other factors.

The MDF has proved an effective mechanism for delivering aid to target communities and currently has 17 projects worth US$492 million at different stages of implementation in Aceh and Nias.

These include housing (over 3,200 built or repaired), land titles (55,000 surveyed and over 1,800 delivered), and village level infrastructure (121 km of roads, 91 drainage systems, 19 schools, 586 bridges, 133 sanitation units, employing over 93,000 people).

Environment and forest preservation, infrastructure and technical support for the national Aceh-Nias Reconstruction and Rehabilitation Agency (BRR), are other areas of support.

Following the earthquake in Yogyakarta and Central Java, the World Bank helped produce a Damage and Loss Assessment through its network of KDP facilitators already on the ground and work has started on a CDD housing program at the request of the Government. The needs for housing, estimated at 240,000, is even larger than in Aceh. The World Bank is assisting in the construction of 7,000 houses of which 2,000 have been completed with the possibility of 25,000 more houses being built through the US$75 million Java Reconstruction Fund.

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Examples of Bank Group’s Assistance to Indonesia

Fighting Poverty via Broad-Based Community Level Programs: The Kecamatan Development and Urban Poverty Programs are the hallmark of Indonesia’s CDD interventions. World-wide, KDP is the largest Bank-financed CDD program that began in 1998. Under these programs some 38,000 Indonesian villages and cities have benefited, with 75 percent of funds going for socio-economic infrastructure and 25 percent for economic activities. Over 3 million villagers earned direct short-term employment through these interventions with some 2/3rd of the workforce from the poorest parts of the community. KDP was the only program successfully operating throughout the entire martial law period in Aceh. As part of post-tsunami support, 1,450 KDP facilitators are supervising over 11,000 volunteers in over 6,000 villages to select, design, build and monitor infrastructure. Overall, evaluations and international audits of these projects show that rates of return average some 35-50 percent; costs are less than half that spent on these works, when built through government contracting; and levels of corruption in the micro-projects are relatively low.
Replacing Regressive Fuel Subsidies with Pro-poor Expenditures: As international oil prices rose in 2005, the Government of Indonesia (GOI) took the bold and politically difficult decision on a two-pronged course of action: reduce fuel subsidies, but provide compensatory targeted assistance to poor Indonesians. GOI’s ambitious unconditional cash transfer program is the world’s largest ever cash transfer program (in coverage and total volume) and was rolled-out in record time of about two months, targeting 15.5 million poor and near-poor households (some 28 percent of the national population’ in excess of the poverty level of 16 percent). The significance of GOI’s efforts goes beyond targeted compensation to the poor, in that it also applied about US$10 billion in 2006 in budgetary savings to strategic pro-poor programs including reduction of school fees and scholarships for poor students; basic health care and health insurance for the poor; and, the provision of rural infrastructure. Having closely followed fuel subsidy policy implications over the years, the Bank was well placed to provide technical expertise on issues related to this difficult reform. GOI valued and drew on the Bank’s analysis of the impact of various scenarios on the budget, inflation, poverty, and sought advice on policy sequencing and on the reallocation. The GOI-Bank team briefed the Vice-President and Cabinet members on options and provided just-in-time support to GOI’s decision to rapidly roll-out an unconditional cash transfer program. Further support to GOI on designing a conditional cash transfer scheme is underway.
Helping Aceh and Nias Recover: This largest trust fund in the East Asia and Pacific Region (and among the largest Bank-wide), the Multi Donor Fund, offers an effective, flexible mechanism for bringing together key members of the donor community, GOI and civil society to support post-disaster recovery. Within its first year of operation, 70 percent of the total MDF grant amount or about US$492 million had been committed to projects; while some 44 percent or close to US$150 million of the active project commitments had been disbursed. Other than providing project financing, it has become a forum for coordination and policy dialogue among relevant stakeholders. Some innovative features include a governance structure (Steering Committee) that represents the interests of partners (GOI, donors, civil society, and the World Bank as the trustee), management by three co-chairs (with specialized terms of reference), use of partner agencies to appraise and supervise projects. The MDF benefits from active partner participation. An integrated approach that includes land titling, housing, infrastructure, flood control, environmental protection, and building social capital, is being employed, with a key role played by communities in reconstruction and rehabilitation. A pro-active communications strategy has helped to strengthen relationships with beneficiaries. Recently, a strategy was approved for the use of remaining funds that includes co-financing of MDF-funded projects by the BRR - an innovative approach, uncomming in developing countries.
Supporting Small and Medium Enterprises (SME) Development: The International Finance Corporation's (IFC) largest local currency facility offering to a client globally and the largest single transaction to date in Indonesia, was successfully concluded in May 2006. The IFC provided up to US$140 million equivalent in Rupiah to Bank Danamon, one of the leading SME, micro and consumer lending banks in Indonesia. The financing is expected to make available long term credit, which will enable Bank Danamon to increase the scale of its microfinance, and lending activities to SMEs, and diversify its funding base. Moreover, the IFC Program for Eastern Indonesian SME Assistance, known as IFC-PENSA, is one of the largest providers of technical assistance, capacity building and advisory support to SMEs in Indonesia. Another example of a strong partnership model, PENSA is jointly funded by IFC, and six other donor partners.

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Resources

The World Bank in Indonesia is linked to a number of decentralized offices reflecting some of the diversity of the Bank’s portfolio and the strong multi-donor activities that have been fostered over recent years. For more detailed information on the work of the World Bank in Indonesia, also visit:

Conflict and Community Development Program
Eastern Indonesia Program
Justice for the Poor
Tsunami Recovery
Women-Headed Household Program (PEKKA)

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The World Bank in Indonesia Office
Randy Salim
email: rsalim1@worldbank.org
World Bank Jakarta External Affairs Office
Jakarta Stock Exchange Building, Tower 2, 12th Floor
Tel: +(62-21) 5299-3259
Fax: +(62-21) 5299-311

Wiwiek Sonda (Ms.)
email: wsonda@worldbank.org
World Bank Indonesia Development Information Services (IDIS)
Jakarta Stock Exchange Building, Tower 2, 13th Floor
Tel: +(62-21) 5299-3146
Fax: +(62-21) 5299-3111

The Washington External Affairs Office
Mohamad Al-Arief
Tel: 202-458-5964
Fax: 202-522-3405
Email: malarief@worldbank.org

The World Bank Indonesia website:http://www.worldbank.org/id has a wide range of up-to-date information on both the World Bank's activities in Indonesia and those of the wider development community.  Recent World Bank documents are available in downloadable format.