87708 CONFIDENTIAL EDS2001-0043 January 30, 200 I Statement by Andrei Bugrov Date of Meeting: January 30, 2001 INDONESIA: Country Assistance Strategy We welcome the opportunity to discuss this Country Assistance Strategy for Indonesia which includes as an integral part a new strategy of the World Bank Group's support for Indonesian private sector development. I commend Staff for the preparation of these high quality documents. We would also like to express our appreciation of the informal briefing on the CAS offered to our office prior to the Board discussion. We are pleased to note that the major findings and recommendations of the recent OED Country Assistance Note have been incorporated in the new Country Assistance Strategy. Also, a comprehensive poverty report has helped sharpen the poverty focus of the CAS. The CAS and PSD Strategy have been informed by extensive consultations with Indonesian civil society organizations and private sector representatives. The new CAS comes at very difficult time for Indonesia. The country is emerging from a severe crisis and is faced with a set of extremely complex challenges on its path to economic recovery and transition to democratic society and decentralized system. The immense risks associated with this unprecedented transition are well articulated in the CAS paper. At the same time democratization and decentralization of Indonesia's political and economic system open enormous opportunities for sustainable growth and poverty reduction. In making assessment of the proposed CAS, as well as the Government's plans and actions, one should take into account this background of great opportunity and high risk. With this in mind, we feel that the World Bank Group is ready to help Indonesia develop and use the emerging opportunities on the one hand, and mitigate or avoid the involved risks on the other. We also sense the Government's increasing determination to move forward with necessary reforms. I fully agree with the poverty reduction thrust and three broad priority areas of the CAS which include growth promotion, institution building and better public services to the poor and which are closely aligned with the Government priorities. We broadly agree with the composition and scope of lending and non-lending support calibrated according to the three alternative scenarios. However, the proposed lending level, particularly under the base-case, This document has a restricted distribution and may be used by recipients only in the perfomnance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned. 2 seems too low for an effective Bank involvement. While we think that the content of the triggers is appropriate, we also hope that the proposed Bank Group's assistance program is sufficiently flexible to allow, in response to reform acceleration, a move to a high-case scenario, which would include temporary increase in Indonesia's IDA allocation. We strongly agree that analytical and advisory activities of the Bank should focus on areas of the highest country risks and greatest potential to low them. We welcome World Bank Group Private Sector Development Strategy which was distributed as a background document to the CAS discussion. The paper correctly points out that past patterns of private sector activity in Indonesia contributed heavily to both the onset and severity of its recent financial and economic crisis. I can't agree more that only by making fundamental changes in the country's business environment and practices will Indonesia achieve the broad based growth which is necessary for sustainable poverty reduction. We share the medium term vision for development of Indonesian private sector as it is outlined in the PSD Strategy paper. In this connection, I would like to highlight the importance of moving away from the dominance of protective relationships between the government and big banks and corporations to the supremacy of the principles of competition and effectiveness. We support the priorities according to which the World Bank Group's PSD interventions in Indonesia will be organized. As regards the content of the program of assistance, I would like to make the following observations. Without doubt, the post-crisis recovery in Indonesia depends very much on the success of the corporate and banking sector restructuring. So far IFC participation in this process, though quite active, has been limited to supporting problem projects in its own portfolio. At the same time we are pleased to see that IFC has commissioned a study to identify additional potential candidates among Indonesian corporations for its restructuring transactions. This initiative deserves commendation. We look forward to the results of this exercise and would welcome IFC' s new restructuring projects that could produce substantial demonstration effect. The envisaged level of IFC new operations, as stated in the CAS (para. 85), is extraordinarily high. We would certainly like to find out how those aggregate figures have been determined and what would be the main elements of IFC's investment program under its base-case and high-case scenarios. Also, since the CAS is silent about IFC's actions in a crisis situation, the possibility of which can not be entirely excluded, more details from staff in this regard would be appreciated. For many years until recently the Bank was very active in providing advice and assistance on Indonesia's SOE reform and privatization. Now the Asian Development Bank plays the lead role in this area. I wonder whether this change has occurred as a result of a joint reassessment by the two institutions of their comparative advantages in the country or it was initiated by the client due to the difference, if any, in their approaches to privatization in This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned. 3 Indonesia. In conclusion, I would like to reiterate my positive overall impression of the proposed CAS and PSD Strategy and wish World Bank staff and Indonesian authorities every success in their future cooperation. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.