Indonesia

Letter of Intent and Supplementary Memorandum of Economic and Financial Policies, September 7, 2000

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.

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.

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.

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.

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.

Letter of Intent and Memorandum on Economic and Financial Policies, July 31, 2000

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.

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. It remains our intention 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.

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 the privatization of PT Pupuk Kaltim, PT Indofarma and PT Sucofindo will be formally launched in August.

The government continues to give priority to the rapid restructuring and privatization of the telecommunications sector. By August, we plan to issue implementing regulations for the 1999 Telecommunication Law, as well as a new tariff policy, network inter-connection rules, model operator licenses, and a charter for the planned regulatory agency. The government remains committed to transforming Telkom and Indosat into competing full-service providers and having these companies divest their stakes in all noncore businesses. Each company will divest its holdings in at least two such businesses by end-2000, and all noncore holdings will be divested by end-2001. An inter-ministerial team on telecommunications-established on May 30-will prepare a detailed action plan by September to guide the development of the sector.

End-December 2000
· Complete the privatization of banks Niaga and BCA.

Letter of Intent and Memorandum of Economic and Financial Policies, May 17, 2000

We have launched an IPO for Bank BCA and expect to sell up to 30 percent of IBRA's share in Bank BCA during May. It remains our objective to achieve majority privatization of Bank BCA during 2000 through seeking a strategic partner or private placement. Niaga will be the next BTO bank to be recapitalized in May. The strategy for its privatization will be finalized during the second half of the year. We expect to complete the resolution strategy of Bank Bali as soon as the current legal hurdles are overcome.

Danamon will serve as a platform bank for resolving the eight remaining BTOs; their legal merger with Danamon will be completed during the second quarter of 2000, and the operational mergers concluded by end-September. On this basis, Danamon will be provided with about Rp 30 trillion in recapitalization bonds, in step with the legal merger, and after approval by Parliament. The bank will be prepared for majority privatization in 2001.

The masterplan accords very high priority to moving ahead quickly with privatization of the telecommunications sector. Toward this end, we remain firmly committed to transforming the telecommunication sector into a fully competitive business environment. In preparing for their privatization, Telkom and Indosat will rationalize their holdings in other telecommunications enterprises and divest stakes in non-core businesses during 2000. In parallel, the government will, by June 2000, and in consultation with the World Bank, finalize the implementing Government Regulations for the 1999 Telecommunications Laws and complete the other related actions listed in the January 2000 Letter of Intent. To ensure effective coordination, we will establish an inter-ministerial team, headed by the Deputy Minister of Restructuring and Privatization to guide and oversee the sector's restructuring and privatization. This team will be responsible for preparing a detailed and comprehensive action plan by June 2000.

Letter of Intent, January 20, 2000

At the same time, Bank Mandiri is taking decisive actions to improve its operational performance in line with operational and financial targets specified in the interim investment and management performance agreement signed on December 28, 1999. Efforts are underway to improve services by hiring additional line managers, and outsourcing the information technology system at headquarters. To improve financial management, the bank has established special teams to secure full information on the bank's daily cash flow, and to complete the reconciliation of interbranch items inherited from its component banks by February 29, 2000. To improve transparency, the bank is publicizing the terms and conditions of all its loan restructuring deals.

We intend to achieve majority privatization of BCA in 2000. Toward this end, we intend to launch BCA's initial public offering of shares in March 2000; as a first step, a filing will be made with BAPEPAM by-end January.

Based on these reviews, and with the assistance of the AsDB, the government has prepared a soundly based privatization program for FY 2000, designed to yield Rp 5.9 trillion. The program will focus on enterprises-including small enterprises-operating in competitive markets where there is no compelling case for public ownership. The government is also preparing a liquidation plan for loss-making and heavily indebted enterprises that have no prospect of achieving commercial viability. This plan will be completed by end-March 2000 and fully implemented during FY 2000.

Among the larger enterprises, the two publicly listed telecommunications enterprises, PT Telkom and PT Indosat, are strong candidates for further rapid privatization. Toward this end, as well as to promote private investment in the sector, we will (i) adopt a new tariff policy (by March 2000) and adopt new network interconnection rules; (ii) finalize the implementing regulations for the new Telecommunications law (by June 2000); (iii) finalize modern, new licenses for major operators, and (iv) establish an agency to provide transparent and predictable regulation. By end-2000, the government will also strive to reduce Telekom's and Indosat's extensive cross-ownership in the sector, and to secure a mutually acceptable resolution of the issues concerning the revenue-sharing contracts between PT Telkom and its private partners (KSOs). This resolution will be consistent with the new Telecommunications Law, and promote competition by enabling both Telkom and Indosat to evolve into competing full service providers.

For sugar we will pursue a policy of restructuring the domestic industry by consolidating the number of sugar factories on Java and promoting private sector-led investment off-Java in new capacity. To achieve this, by end-January, we will replace the decree (expiring end-December 1999), that limits imports to selected traders, with a 25 percent tariff to be phased down over 3 years and, at the same time, open sugar trade to all general importers. We also are committed to closing a minimum of four sugar factories once the crushing season is completed in 2000. By June 2000, we will prepare, in consultation with the World Bank, a plan to consolidate the rest of the Java-based sugar industry; the plan will include detailed and time-bound factory restructuring, privatization or closure plans, as well as budget costs and implementation mechanisms. Firms implementing their restructuring plans according to schedule will be provided with adequate budgetary resources to subsidize operations and closing costs for a limited period. We also reiterate our commitment to farmers being free to make their own crop choices.

Structural Performance Criteria and Benchmarks:
End-March 2000: Launch the share offer for BCA bank.

Letter of Intent and Supplementary Memorandum of Economic and Financial Policies, July 22, 1999

Bank Mandiri has established the following key restructuring targets:
· Compared with the 26,500 employees of the four component banks, Bank Mandiri's staff requirement has been assessed at 14,500. Of those made redundant, about 6,000 staff will be covered by the voluntary severance scheme, by July 31, with the remainder being placed in temporary contracts and phased into the severance scheme by December 2001. The top management of Bank Mandiri has already been changed.
· In parallel, almost one third of the total number of branches (210) will be closed over the next two years, with half of these closures achieved by end 1999, and many branches significantly downsized.
Considerable progress has been made in recent months in implementing the programmed privatization effort for 1999/2000. Next on the agenda is the privatization of a large palm plantation and gold/nickel companies, followed by regional airport and container concession companies, and fertilizer, steel, and additional plantation companies. We have reaffirmed the reliance in all cases on competitive and transparent bidding procedures. The program already contains the commitment to conduct independent audits to international standards on all enterprises scheduled for privatization. The Ministry of State Enterprises is committed to (I) privatizing the majority of state enterprises in line with the privatization master plan; (ii) improving the efficiency and governance of those that will temporarily remain in state hands in preparation for privatization; and (iii) preserving budgetary control. The authorities will examine, with help from the World Bank and the Asian Development Bank, the most effective ways of achieving these aims.

End-December 1999
C Launch initial public offering of shares in BCA during last quarter of 1999.

Letter of Intent and Supplementary Memorandum of Economic and Financial Policies, May 14, 1999

Privatization receipts for 1999/2000 already amount to about $800 million, following the sale of 51 percent interest in the Jakarta port, 49 percent interest in the Surabaya port, a 10 percent share in the domestic telecommunication company, and an additional 5 percent share in a food processing corporation. The sales of shares in the international telecommunication company has been delayed to July 1999 pending passage of the new telecommunication law. We are revising the bid structures on a large palm plantation and gold/nickel companies to improve their valuation and expect to complete their privatization by September 1999. Additional companies to be privatized this year include the Bali airport concession company, container port concession companies outside Java, a fertilizer plant, a steel company, additional plantations, and several other small enterprises. The overall profitability of the state-owned enterprise sector increased substantially in 1998/99 as a result of efforts to cut costs, strengthen efficiency, and promote restructuring, which should facilitate privatization. There is no legal limit to foreign ownership in state-owned companies unless strategic or national security interests are involved.

We are making progress with the restructuring program for the state electricity corporation (PLN) that is designed to strengthen its financial viability and prepare for its privatization over the medium term. The strategy provides for PLN's reorganization within the context of a rapid transition to a competitive retail electricity market on Java-Bali, as well as for fundamental changes in the role of the government including tariff and subsidy policies, an expanded role for the private sector, and legal and regulatory changes to facilitate these reforms. The AsDB has provided a program loan in support of the power sector restructuring policy. The World Bank and AsDB are also financing technical assistance to support the implementation of the reform program.

Letter of Intent and Supplementary Memorandum of Economic and Financial Policies, March 16, 1999

16. The privatization program has fallen behind schedule this year, principally because market conditions remain unfavorable. We have so far concluded two transactions totaling close to $200 million in the current fiscal year, through the sale of shares in a cement producer and a food processing company. We have made intensive efforts to divest, by end-March 1999, majority interests in a Jakarta container terminal concession company, and minority interests in the Jakarta airport concession company, the largest palm plantation company in Indonesia, and further shares in international telecommunication and mining companies, consistent with the target of $1 billion for the year. The key to this is the sale of further shares in the international telecommunication concern. However, delays have been experienced because policies concerning future market structure, cross-ownership, and regulation still need to be decided and the operator license finalized; this is planned for completion in the next 1-2 months.
The privatization program for 1999/2000 is based on the recently published Master Plan which outlines the program and processes for the divestiture of all of the present 150 state enterprises over the medium term, except for a specified short list. Targeted receipts from privatization are the equivalent of $1.5 billion or 1 percent of GDP in the next fiscal year. The list of individual enterprises gives priority to those originally planned for privatization this fiscal year. In total, it is intended to sell stakes in 11 enterprises including toll roads, the Bali airport, ports, the domestic telecommunication concern, fertilizer and cement producers, a steel company, and plantations, in addition to privatizing several small enterprises.

Structural Performance Criteria and Benchmarks, March-September 1999
End-March 1999: Complete divestiture of at least two state enterprises

Letter of Intent and Supplementary Memorandum of Economic and Financial Policies, November 13, 1998

The privatization program for the current fiscal year is broadly proceeding as envisaged in the MEFP of October 19, although some further slippages into the next fiscal year are still possible. As before, we are focusing on selling, by end-March 1999, majority interests in the Jakarta container port, as well as minority interests in Jakarta airport operations, the largest palm oil plantation in Indonesia, and the international telecommunication enterprise. To support the sale of the international telecommunication concern, we intend to introduce into Parliament by end-December a new telecommunications law covering all aspects of regulation and competition. Care will be taken to ensure that contract design and bidding procedures follow international best practice and that complete transparency is maintained throughout the privatization process. We are committed to divest at least two state enterprises by end-February 1999.

The masterplan for the restructuring and privatization of all state enterprises over the medium term, has been adopted and publicly released. The masterplan also provides for the review of the regulatory framework in the key privatized sectors. Except for a specified short list, the program calls for all of the present 150 state enterprises to be divested over the next decade. Details of companies to be privatized during 1999-2001 are included in the plan, focusing on hotels, trading, construction, mining, and civil engineering firms, and fertilizer producers. In the meantime, enterprise efficiency will be improved through greater management autonomy, enhanced competition, hard budget constraints, and the phased elimination of preferential access to bank credit (by end-March 2000). Companies to be restructured during this period for later privatization include the state electricity corporation and the national airline.

Structural Performance Criteria and Benchmarks:
End-March 1999: Complete divestiture of a total of at least four state enterprises

Strucutral Policy Commitments: 2001: Prepare State-Owned Banks for Privitization
March 31, 1999: Divest 12 listed and unlisted enterprises announced for privitization in 1998/1999.

Letter of Intent and Supplementary Memorandum of Economic and Financial Policies, October 19, 1998

The government has completed the preparation of its masterplan for the reform of state-owned enterprises, which sets out the objectives and framework for restructuring and privatization, and outlines an action plan for each individual enterprise. The objective of the state enterprise restructuring and privatization is to enable these underperforming enterprises to improve their efficiency, profitability, and service delivery, and thereby lay the foundation for growth, as well as to strengthen the public finances and broaden ownership. It is proposed to privatize all but a few selected enterprises within the next decade, starting with an aggressive sales plan for the coming three years. The Ministry of State-Owned Enterprises intends to publish this document in October.

However, the implementation of plans in the current fiscal year for the divestment of shares in seven non-listed state enterprises and the sale of additional shares in five listed enterprises is running behind schedule mainly due to weak domestic and external market conditions. The divestment of an additional 14 percent of shares in the listed PT Semen Gresik was completed in mid-October. We started in October the marketing process to potential strategic investors of shares in the international telecommunication concern, interests in port and airport companies, and the largest palm oil plantation in Indonesia. Extensive preparatory work has been undertaken in each of these projects, although the precise timing of their sale will depend on the evolution of market conditions. Progress with additional divestiture of state-owned enterprises has been slower than planned, and some will probably slip into the next fiscal year. This includes the sale of additional shares in the domestic telecommunications concern and three mining companies.

Structural Policy Commitments:
Divest seven enterprises announced for privatization in April 1998 that are presently unlisted. March 31, 1999 Under preparation

Initiate sales of additional shares in listed state enterprises, including at a minimum, the domestic and international telecommunication corporations September 30, 1998 In progress

Memorandum of Economic and Financial Policies, April 10, 1998

Sales are planned within the present fiscal year of additional shares in some of the six state enterprises that are already listed on the stock exchange and are operating in a competitive environment, including PT Telkom (domestic telecommunications), PT Indosat (International telecommunications) and PT Semen Gresik (cement production). This divestment plan will be announced before April 24, 1998.

A target of seven new enterprises are to be identified for privatization in fiscal year 1998/99 and the list will be announced before April 24, 1998. This could include enterprises in plantations, infrastructure, mining and manufacturing, including PT Pelindo II (ports infrastructure and management), PT Perkebunan Nusantara IV (palm oil plantation) and PT Jasa Marga (toll roads). A list of five additional enterprises is to be identified and prepared for listing by June 30, 1998.