Document of The World Bank

Report No: 28912

IMPLEMENTATION COMPLETION REPORT(PPFB-P3570 SCL-44480)

ON A

LOAN

IN THE AMOUNT OF US$31.5 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR A

CORPORATE RESTRUCTURING TECHNICAL ASSISTANCE PROJECT

May 7, 2004

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 5, 2004)

Currency Unit = RupiahUS$ 1 = 8,699 Rupiah

FISCAL YEARJuly 1 to June 30

ABBREVIATIONS AND ACRONYMS

ADR - Alternative Dispute ResolutionBAPEPAM - Capital Market Supervisory AgencyBI - Bank IndonesiaFSPC - Financial Sector Policy CommitteeIBRA - Indonesia Bank Restructuring AgencyICR - Implementation Completion ReportIMF - International Monetary FundINDRA - Indonesia Debt Restructuring AgencyIPR - Intellectual Property RightsJITF - Jakarta Initiative Task ForceLOI - Letter of IntentMOU - Memorandum of UnderstandingNMC - National Mediation CenterPIU - Project Implementation UnitPMR - Project Management ReportPMU - Project Management UnitPSDRT - Private Sector Debt Restructuring TeamQAG - Quality Assurance Group (of the World Bank)SME - Small and Medium EnterprisesUSAID - United States Agency for International Development

Vice President: Jemal-ud-din KassumCountry Director Andrew D. SteerSector Manager Khalid A. Mirza

Task Team Leader/Task Manager: W. Bernard Drum

INDONESIACORPORATE RESTRUCTURING TECHNICAL ASSISTANCE PROJECT

IMPLEMENTATION COMPLETION REPORT

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 76. Sustainability 97. Bank and Borrower Performance 108. Lessons Learned 139. Partner Comments 1410. Additional Information 15Annex 1. Key Performance Indicators/Log Frame Matrix 16Annex 2. Project Costs and Financing 17Annex 3. Economic Costs and Benefits 19Annex 4. Bank Inputs 20Annex 5. Ratings for Achievement of Objectives/Outputs of Components 21Annex 6. Ratings of Bank and Borrower Performance 22Annex 7. List of Supporting Documents 23Annex 8. Borrower's Evaluation Report 24

Project ID: P063732 Project Name: ID-CORPORATE RESTRUCTRGTeam Leader: W. Bernard Drum TL Unit: EASFPICR Type: Core ICR Report Date: May 11, 2004

1. Project DataName: ID-CORPORATE RESTRUCTRG L/C/TF Number: PPFB-P3570; SCL-44480

Country/Department: INDONESIA Region: East Asia and Pacific Region

Sector/subsector: General industry and trade sector (57%); Central government administration (38%); Law and justice (5%)

Theme: Regulation and competition policy (P); Other financial and private sector development (P); Macroeconomic management (S); State enterprise/bank restructuring and privatization (S); Legal institutions for a market economy (S)

KEY DATES Original Revised/ActualPCD: 10/22/1998 Effective: 07/08/1999 07/08/1999

Appraisal: 12/09/1998 MTR: 01/31/2000 06/09/2001Approval: 03/25/1999 Closing: 06/30/2001 12/31/2003

Borrower/Implementing Agency: Government of Indonesia/JAKARTA INITIATIVE TASK FORCE (JITF)Other Partners:

STAFF Current At AppraisalVice President: Jemal-ud-din Kassum Jean-Michel SeverinoCountry Director: Andrew D. Steer Dennis de TraySector Manager: Khalid A. Mirza Hoon Mok ChungTeam Leader at ICR: W. Bernard Drum Dale F. GrayICR Primary Author: W. Bernard Drum

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: U U

Project at Risk at Any Time: Yes

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

The Project was established to help Government accelerate the process of corporate restructuring. It was focused on the shorter term corporate restructuring measures needed to address the crisis which had arisen from the effects of rapid devaluations of the rupiah on corporations' ability to service their debts. Indonesian corporations had high debt to equity ratios and many had also taken unhedged foreign currency loans, even when their revenues were mainly in Indonesian rupiah. The purpose of the Project was to help Indonesia resume private sector led growth, preserve and expand employment, and increase the standard of living for all its citizens. These objectives were to be achieved by helping to restore the ability of corporations to borrow and service their debts, and improve corporate governance. Restructuring corporations would also support ongoing reforms in the banking and non-banking financial sectors. The project was focused on helping the Government implement key elements of the Jakarta Initiative. This Initiative was intended to establish a voluntary framework for corporate and debt restructuring and to remove legal, regulatory and administrative obstacles to the approval of restructuring deals agreed between debtors and creditors, to strengthen the bankruptcy system and to achieve legal reforms to improve the competitiveness and efficiency of the corporate sector.

The Project's objectives remained highly valid and unchanged throughout the implementation period. Rapid restructuring of non-performing corporate loans was an essential measure for corporations to put their relationships with their banks back on a sound footing, to obtain new finance for working capital and investment, and to resume and continue their operations which had been disrupted as a result of the crisis. The existence of a well functioning voluntary corporate debt restructuring mechanism and enabling legal and regulatory framework was in line with international best practice and proved itself over the life of the Project. The objectives to strengthen the bankruptcy system and support broader legal reforms were by their nature longer term and were therefore not completely consistent with the shorter term focus of the corporate restructuring components. However, the inclusion of these longer term objectives within the Project, while keeping the primary focus of the Project on the shorter term objectives, was justified since it was important, even while dealing with the immediate crisis, to support the first stages of the necessary longer term institutional development processes.

3.2 Revised Objective:

Not applicable

3.3 Original Components:

1. Facilitation and advisory services to support corporate restructuring; $17.2 million 2. Streamlining and strengthening regulatory, legal and administrative processes for corporate restructuring; $5.1 million 3. Training, operations and capacity building for JITF; $3 million 4. Coordination between JITF and other institutions and operations; $2.5 million 5. Implementation support, operations and capacity building for Bank Indonesia, INDRA and the Commercial Court; $3.6 million

The basic rationale for the components included in the original Project design remained relevant throughout the implementation period, despite simplifications in the institutional framework and improvements in the incentive framework for restructuring that took place in 2000. Support for facilitation services remained a critical component as did training support and capacity building for JITF. Support for streamlining the

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legal, regulatory and administrative processes also proved to be very important, especially in the early years of the Project, as did coordination between JITF and other institutions, and support for the Commercial Court. However this ICR confirms the findings in the Mid-Term Review Report, that although the basic structure of the components was appropriate, the Project was designed to support an overcomplex institutional framework. It is also clear in hindsight that the cost of assistance needed to support JITF was overestimated. The Indonesian Debt Restructuring Agency (INDRA) was closed early in the life of the Project and this sub-component was therefore no longer needed. Similarly Bank Indonesia eventually played only a minimal role in the corporate restructuring process and this sub-component therefore did not disburse. At the same time the initial estimate that large amounts of expensive international expertise would be needed to support the restructuring process proved to have been inaccurate. A small number of expatriate advisors working with well qualified local staff proved to have been enough for JITF to do its job more than adequately. These factors led to several partial loan cancellations over the life of the Project reducing the total loan amount from $31.5 million to only $7.5 million, but no changes were required to the fundamental Project design. 3.4 Revised Components:

The above changes and reductions in scope were accommodated within the existing component design so there were no formal changes to the components over the life of the Project.

3.5 Quality at Entry:

Both this ICR and a QAG Quality at Entry report of March 2000 rate the Quality at Entry of this Project as Unsatisfactory. As outlined in Section 4, JITF made very little progress in corporate restructuring during the first year of the Project's life, despite the fundamentally sound concept of an out of court mediation process to promote corporate debt restructuring. To a large extent this was not a fault of the design of the Project per se but was more a consequence of the speed at which the Project was prepared. Both Government and the Bank were under pressure to respond rapidly to the severe crisis and decisions had to be made in a very uncertain environment. But it was also due to the institutional framework that had been put in place just prior to the preparation of the Project. Important factors that should have influenced the design of the incentive and institutional framework prior to the implementation of the Project had not been given enough analysis or attention. In summary:

a complex and uncoordinated institutional framework had been set up to manage the corporate lrestructuring process. One consequence of this was the initial lack of coordination or cooperation between key institutions and slow progress in those reforms to the legal and regulatory framework necessary to accelerate corporate debt restructuring.

inadequate consideration was given to incentives for corporates and banks to enter and reach closure in ldebt restructuring negotiations. In the absence of incentives there was initially only very slow progress in corporate debt restructuring.

inadequate attention was given during Project preparation to securing the commitment of the lGovernment to the Project concept and design. This resulted during the first year of the Project's life in lack of support for JITF from Government or other institutions whose cooperation was a prerequisite for JITF to operate, and inadequate resources provided to JITF.

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4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:

After JITF's unsatisfactory start, for reasons explained in other sections of this report, corrective action was taken by the Government and the Bank in early 2000. JITF's performance in meeting its objectives then improved rapidly. By the time JITF had finished its five year mandate in December 2003, it had participated in the mediation of more than 117 individual corporate debt restructuring cases with a total value of $29.7 billion. Of this total case load, 96 cases amounting to $20.6 billion were brought to completion with memoranda of understanding signed by the negotiating parties, and of this $16.3 billion had reached legal closure. The JITF mechanism therefore played an important role in the resolution of around one third of the non-performing loans resulting from the financial crisis of 1997. This performance far surpassed initial expectations. Progress on improving the regulatory and administrative obstacles to corporate restructuring was also rapid following initiatives taken by Government with support from the Bank in early 2000 and adopted by Government in its Letter of Intent to the IMF. By early 2001, no substantial obstacles to corporate restructuring remained and an effective incentive framework was in place. The results of JITF's work are presented in detail in JITF's final report (copy on file) which was prepared in December 2003.

Taking a broader perspective on the contribution of this Project to corporate restructuring and also of efforts to restructure the banking sector, there do remain caveats. These apply not only to JITF but also to corporate restructuring implemented in Indonesia by IBRA and spontaneously outside of the JITF/IBRA framework, and also to varying extents throughout those East Asian countries that experienced the 1997/98 financial crisis. Post crisis corporate restructuring in East Asia has focused mainly on the balance sheets of affected corporations. While it can justifiably be argued that the immediate causes of the crisis were indeed the vulnerability of corporations and banks because of corporate balance sheet problems such as financing/cash flow currency mismatches, and high debt to equity ratios, the crisis exposed underlying needs for operational restructuring within corporations and it is not clear to what extent these needs have been met in the years that have elapsed since the crisis. However in assessing the outcomes of this Project, we should bear in mind the fact that such operational changes were largely the responsibility of the corporations themselves and their financiers, and in general beyond the mandate and powers of JITF which focused on the voluntary and impartial mediation of debt restructuring negotiations. It should also be borne in mind that not all JITF cases benefited from JITF's active mediation. Some of them entered the mechanism to benefit from the incentive structure, more than the mediation process. But these resolved cases can still be justifiably included a success for the overall JITF framework.

Legal and judicial reform in general have proceeded only very slowly in Indonesia. Property rights still remain difficult to enforce through the court system and sanctions on borrowers who refuse to negotiate with their lenders still remain ineffective. The consensus is that it will take many years before substantive progress is made in these areas and that "carrots" rather than "sticks" are the only effective incentives at present in Indonesia. Progress in supporting the bankruptcy process under this Project was therefore very slow, and initial expectations concerning the benefits to be achieved from this component proved to be over optimistic. Despite this the support provided by this Project to the Commercial Court did have some beneficial impact.

The overall outcome of the Project is rated as Satisfactory.

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4.2 Outputs by components:

Component 1. Facilitation and Advisory Services to Support Corporate Restructuring ($5.1 million expenditure of the original allocation of $17.2 million)

This component accounted for the largest expenditure under the Project and financed the international and local specialist consultant expertise needed to support the mediation of corporate restructuring deals. The quality of expertise hired was high. The direct outputs of this component were the deals effectively mediated. As of December 2003 JITF had participated in completed debt restructurings amounting in aggregate to $20.6 billion of which around 80 percent had reached legal closure. The remaining amount ($4.2 billion) was awaiting final closure following signing of the term sheets. Of the debts whose restructuring was supported by JITF, 50 percent were rescheduled, 26 percent subject to debt for equity conversions, 8 percent written off, 6 percent subject to debt for convertible bond conversions, 2 percent paid in cash and the remaining 2 percent restructured by other means. Although some of these cases entered the JITF framework primarily to take advantage of the incentives offered, rather than to avail themselves of JITF's mediation capacity, with total non-performing corporate loans standing at around $60 billion just after the initial shock of the crisis in 1998, JITF was clearly a major player in the resolution of the corporate debt crisis in Indonesia. In fact the total amount of debt mediated by JITF was around the same as the amount which reached late stage resolution through IBRA. Full details on the evolution of corporate indebtedness and its resolution are given in JITF's final report (on file). The outcome of this component is rated as Highly Satisfactory

Component 2. Streamlining the Regulatory, Legal and Administrative Processes for Corporate Restructuring (zero expenditure, original allocation $5.1 million)

No Project expenditures were allocated to this component since it was originally intended to work with institutions which closed soon after the Project became effective. However the regulatory enhancement work required to be done under this component was successfully completed by JITF and the costs associated with it included in expenditures under Component 3 - Support for JITF. Good progress was made in overhauling and enhancing the regulatory framework for corporate restructuring, and most of this work took place in 2000. Specifically a number of regulations were modified to provide incentives for negotiating parties to corporate debt restructuring negotiations entering the JITF process. The most important of these were provision of waivers of tax on any debt write-downs or debt for equity conversions that were part of the JITF approved restructuring plans, regulatory forbearance from Bank Indonesia if the deals resulted in domestic financial institutions exceeding the BI Legal Lending Limit, waivers of requirements and procedures from the securities regulator BAPEPAM in cases where new shares were issued as part of the restructuring deals, and temporary immunity for corporates from delisting by the Jakarta and Surabaya stock exchanges during the debt renegotiation period. Negotiating parties report that these incentives had a major beneficial impact on the outcome of negotiations that entered the JITF process. So although expenditures allocated to this component strictly speaking were zero, the outcome of the substantive activities planned and implemented under this component is rated as Highly Satisfactory

Component 3. Implementation Support and Capacity Building for JITF ($1.99 million expenditure of the original allocation of $3 million)

This component financed the development and operation of JITF's human and physical capacity to mediate debt and carry out its other functions. During the first year of JITF's existence this component hardly disbursed at all. JITF was not provided with the resources to do its job and JITF staff even remained unpaid for several months. This situation improved in late 1999 however. Since then this component has

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financed the salaries and a series of training programs for JITF personnel including the Chief Operating officer, local mediators, procurement, financial management and other administrative staff who have worked in close partnership with the international mediators who are also based in JITF. This component has also financed JITF's operating costs including public education and dissemination of JITF's activities. As a result of support from the Bank, the JITF operates a state of the art financial management system which qualified this Project as one of the few in the Bank to implement PMR based disbursements and has served as a model for other Bank projects in Indonesia. The outcome of this component is rated as Highly Satisfactory

Component 4. Coordination between the JITF and Other Institutions ($50,000 out of the original allocation of $2.5 million)

With the simplification of the institutional framework in early 2000, the need for expenditures under this component was reduced. However the simplification of the framework itself was a major output of this component. In late 1999 the lack of progress in corporate debt restructuring had prompted the new Government, the Bank and the IMF to review the design of the incentive and institutional framework, through a series of consultations with major stakeholders. One outcome of this process was the new incentives that were designed and put in place to promote debt restructuring (see component 2 above). The other important outcome was an overhaul and simplification of the institutional framework for corporate restructuring. A number of institutional measures were implemented in early 2000, aimed at improving oversight of the corporate restructuring process and coordination between the JITF and other institutions involved. The main elements of these changes were:

Creation of the Financial Sector Policy Committee (FSPC), a high level ministerial committee with lresponsibility for overseeing the activities of both IBRA and the JITF and ensuring coordination between them

referral of restructuring cases from FSPC to JITF for mediationl

adoption of time bound mediation procedures by JITFl

closing down of the Private Sector Debt Restructuring Team (PSDRT), to which JITF had previously lreported, and of the currency hedging mechanism known as the Indonesian Debt Restructuring Agency (INDRA). Both of these mechanisms had proven to be ineffective.

These changes, in addition to the incentives adopted by JITF and described earlier, proved highly successful in jump starting and sustaining the momentum of JITF's corporate debt mediation activities. The outcome of this component is rated as Highly Satisfactory

Component 5. Implementation Support and Capacity Building, BI and INDRA ($220,000 out of the original allocation of $3.5 million)

Within a year after Project start up it had become clear that BI had little role to play in corporate debt restructuring and needed no help from the Project. The institutional framework was then simplified soon after with the closure of the PSDRT and INDRA. With the closure of these institutions there was no longer a need for a second PIU for the Project. The only activity which remained to be financed under this component was support for development of the Commercial Court. Four activities in support of the Commercial Court were funded by the Project: an organization study, a jurisdiction study, preparation of intellectual property rights procedures, and mediation training for Commercial Court and Supreme Court

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judges. The first three activities resulted in concrete recommendations and action plans and helped in the preparation of the recently published Blueprint for Development of the Commercial Court. The fourth helped increase the awareness of judges of the role of mediation as an alternative dispute resolution mechanism as well as increased their skills in mediation. These activities in support of the Commercial Court, while having a positive impact, were small in relation to the needs of the Court. The outcome of this component is rated as Unsatisfactory.

4.3 Net Present Value/Economic rate of return:

Not applicable

4.4 Financial rate of return:

Not applicable

4.5 Institutional development impact:

There is no doubt that this Project supported the creation of a highly effective institution in the JITF. It has also provided a credible model for out of court voluntary mediation of corporate indebtedness that can be replicated, either in Indonesia or elsewhere. The records of this Project, JITF activities, FSPC decrees, other regulations issued and JITF mediation manuals and case studies are on the record and can be retrieved rapidly for future use should the need arise. The individuals employed by JITF now have a high degree of mediation and corporate restructuring expertise that could also be used again should the need arise.

Although the Project did finance some activities that will contribute to the future development of the Commercial Court in the medium term, the institutional development impact of the Project on the Commercial Court itself up to now remains very small.

More details on the institutional development impact of the Project are included under the section on sustainability.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

Over the period that the Project was designed and implemented the country was faced with the aftermath of the fall of the Suharto government and the rapid political changes which followed. At the same time the East Asian financial crisis had severely reduced investor confidence in the economy and had also severely impeded the functioning of the financial and corporate sectors. Corruption and poor governance in the public sector had become endemic, as had poor corporate governance and related corporate sector problems that had come to be known as "crony capitalism." Meanwhile the legal and judicial system had lost its credibility as a means of enforcing contracts or property rights. Judges were underpaid and subject to bribery to augment their incomes. The independence of the judiciary made it difficult for Government to hold the courts accountable for their actions. All of these factors combined to create an overload on a new government and overstretched public administration. Sticks were, and still are, largely ineffective and the courts could not and still cannot be relied on. This was a very difficult environment in which to resolve a severe systemic corporate and banking sector crisis.

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5.2 Factors generally subject to government control:

There were, however, a number of factors subject to government control which impacted the Project implementation and outcome. The Project suffered adversely in its first year from lack of commitment by the post-Suharto transitional government. The Project was prepared rapidly and approved by the Bank's Board in March 1999. But it was July 1999 before the routine effectiveness conditions were met, and September 1999 before formalities to enable disbursement were completed. The result was the lack of financial or operating resources provided initially to the JITF in the first nine months of its existence. The institutional framework for corporate restructuring was too complex and there were no incentives to corporates or banks to conclude restructuring deals. However all of these deficiencies were rapidly corrected early in 2000, following the appointment of the new Government in September 1999. The new Minister responsible for overseeing IBRA and the JITF was highly proactive in taking corrective action, streamlining the institutional and incentive framework and providing the resources and political support to the JITF that it had lacked up to that time. This support remained solid and unwavering throughout the remainder of the Project, until JITF closed in December 2003. Concerning the Commercial Court component, despite the independence of the judiciary, there was scope for the Ministry of Justice to have been more proactive than it was in supporting legal and judicial reform. There had been little involvement of the Steering Committee of the Commercial Court in Project preparation. In the interests of rapid processing of the loan the intention had been for this work to be done after Project implementation had begun. But later, even after the Committee did get involved there was a lack of clarity over its reporting relationship to Government, and the Committee itself was continually short of resources to support its activities.

5.3 Factors generally subject to implementing agency control:

Most of the factors impeding JITF's performance in the first year of its life were largely outside its control. Despite this, JITF's management and staff should be given credit for working hard and remaining in place despite an extremely adverse policy and operating environment over which they had little influence. Then the reforms to the institutional and incentive framework in the year 2000 were carried out with substantial advice from JITF staff and consultants. After the necessary corrective measures were taken, the pace of corporate debt restructuring through the JITF mechanism accelerated rapidly. This good performance by JITF was sustained throughout the remaining period of the Project.

5.4 Costs and financing:

This Project was designed to disburse $31.5 million in World Bank loan funds but, following a series of loan cancellations, largely achieved its objectives with a total amount disbursed of only $5.82 million to date. These substantial cost savings were due to the following factors:

an allocation was made for retroactive financing of project start up expenses but these funds were lnever used for this purpose

the initial assumption that corporate restructuring expertise could only be obtained from internationally lrecognized consulting firms, which are very expensive, proved to be incorrect. While international consulting firms did indeed help in the early phases of JITF operations, lower cost individual international and local consultants with more than adequate competence quickly replaced them and provided JITF with all the outside expertise it needed for remainder of the Project

other donors, notably USAID, provided several individual mediation specialists to JITF, reducing the l

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need to use loan funds for this purpose

the simplification of the institutional framework removed the need for assistance to support those linstitutions that closed early in the life of the Project such as INDRA and PSDRT and BI's role in the corporate restructuring process proved to be minor

the Commercial Court component did not move ahead quickly enough to disburse all the funds which lhad been allocated to it

6. Sustainability

6.1 Rationale for sustainability rating:

Sustainability of JITF operations per se was never planned. JITF, like the Indonesian Bank Restructuring Agency (IBRA) was intended to be a temporary institution that would close as soon as it had done its restructuring job. The aim of JITF was to facilitate the voluntary restructuring of the corporate debts that emerged during the crisis, while in the broader context longer term efforts were to be made to help get the financial system back to work and reduce the likelihood of future financial crises. Sustainability was to be achieved by working on banking sector reform and restructuring, broadening and deepening of the non-banking financial markets, improving corporate governance and competition, promoting SME development and improving the investment climate more generally including support for legal and judicial reform. While this agenda remains unfinished, the Government with help from the Bank Group and others has made substantial efforts and inroads in these areas over the last five years. Meanwhile the successful restructuring of the debts of Indonesian corporations as a direct result of this Project has promoted sustainability by enabling more than a hundred large corporations with thousands of employees to resume and maintain their operations. Meanwhile the JITF model for voluntary out of court mediation of corporate debt restructuring, which was developed under this Project and which has now proved itself, will provide a guide to best practice if the need should arise again in Indonesia for such a mechanism. It can also be used as a guide to best practice should similar crises arise in other countries.

The Project has also brought about an unplanned potential sustainability windfall. Through their corporate debt mediation activities JITF staff have developed credibility over the years as practitioners in alternative dispute resolution. After JITF closed in December 2003, several JITF case managers moved to a new institution known as the National Mediation Center (NMC), which has emerged from JITF's mediation activities. The NMC has begun providing support for out-of-court settlement of legal disputes before they reach the court system, which remains overloaded and challenged in many ways. A Supreme Court regulation of September 2003 now requires all commercial disputes to be first mediated prior to litigation and NMC has been appointed as one of the main providers of training for judges under this regulation. It is too early to say whether NMC will demonstrate long term viability, but up to April 2004, some 72 judges had received mediation training from NMC and NMC had already begun mediation in a number of commercial disputes and public dissemination of its mediation activities. Another sustainable benefit accruing from the Project is the development of good project management capacity within BAPEPAM, the agency which housed the Project Management Unit (PMU).

Little sustainability can be attributed to the Commercial Court component of this Project. However the studies implemented under this component did contribute to improving the Blue Print for Development of the Commercial Court and a number of judges received training in mediation with finance from the Project

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6.2 Transition arrangement to regular operations:

The closure of the JITF in December 2003 and IBRA in February 2004, marked the end of government's involvement in the post-crisis corporate restructuring process. One legacy of JITF however, the corporate debt survey, deserves to continue. This high quality survey was prepared and issued on an approximately quarterly basis by JITF over the last three years of its life. At present discussions are underway to assure the continuity of this work since it has a high value in monitoring corporate sector performance and could form part of an early warning system to help prevent future financial crises. Possible locations for this work could be Bank Indonesia, BAPEPAM, or the Ministry of Finance.

It remains to be seen whether the recommendations of the Organization Study, Jurisdiction Study, and IPR Procedures consultancy will be incorporated in future developments or activities as the functions and responsibilities of the Commercial Court are expanded. The findings and recommendations of the studies have contributed to the revision of the Blueprint, which identifies needs and specifies actions to be taken for future development of the Commercial Court. The Organization Study consisted of a Workshop with selected participants, one recommendation of which was a follow-up study to explore the issues in more detail. This was not conducted within the Project but is one of the actions planned in the new Blueprint. The IPR procedures are to be integrated with a second set of IPR procedures prepared independently by a member of the Steering Committee. The final version will be presented to the Chief Justice for formal adoption. The mediation training has provided the participating judges with understanding and skills which are expected to be utilized extensively pursuant to the Supreme Court Regulation on Court Annexed Mediation 2/2003, effective September 11, 2003, which requires all commercial disputes to first be mediated, prior to litigated disposition.

7. Bank and Borrower Performance

Bank7.1 Lending:

The Project was prepared and appraised very rapidly since both the Government and the Bank were under considerable pressure to respond to the overwhelming magnitude and severity of the crisis. As a result some key considerations in the design and preparation process were not given adequate attention. These omissions contributed to the very slow start up and poor results from JITF in its first year of operation. Although this ICR rates the quality at entry of the Project as unsatisfactory, the Bank preparation team can be given credit for proactivity, and the original concept of voluntary out of court mediation of corporate debt restructuring eventually proved to be very robust. But nevertheless, more attention could have been given at the preparation stages to getting the support of key Government and other stakeholders, to simplifying the overcomplex institutional framework for corporate restructuring, and to ensuring that an adequate incentive framework for corporate restructuring was in place. Partially as a result of the haste in preparation, the amount of loan resources required for the Project was overestimated. This is reflected in the large difference between the original Project amount and the final amount after several partial loan cancellations. Similarly there had been little time to work at the preparation stage with the Steering Committee of the Commercial Court. In the interests of rapid processing, the intention was to leave the development of this component until implementation began. However this omission paved the way for the difficulties experienced in this component later. On the positive side the preparation team did hire a full time project management and procurement specialist who was later attached full time to JITF. They also initiated the preparation of a financial management system for the Project. Both these steps were far sighted and laid the groundwork for smooth JITF operations later.

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7.2 Supervision:

All the members of the team that took over the supervision of the Project soon after appraisal were based in the field. This team deserves credit for proactivity in diagnosing the problems inherent in the corporate restructuring process and in the Project design, and in taking the steps necessary to correct them. The team took extraordinary measures to analyze and understand the problems, to prompt a reformulation and enhancement to the institutional and incentive framework and to build government and stakeholder ownership. These initiatives included convening a series of meetings in Washington and Jakarta aimed at assessing the strengths and weaknesses of the program and working with partners to come up with the necessary recommendations to enhance the process, the institutional framework and the incentive structure. This process was described at length in the Project's Mid-term review report. Throughout the implementation period of the Project the supervision team provided the advisory and logistical support needed for JITF to do its job, including technical, procurement and financial management support. Notably the Bank provided a full time Project Management Advisor who gave high quality support to JITF. These efforts are recognized in the Government's own evaluation report (Annex 8). The Bank's Lawyer and Project Management Advisor worked closely with the secretary and coordinator of the Steering Committee of the Commercial Court and met occasionally with the Steering Committee itself to provide guidance and support in preparing the activities of this component for implementation. There was also a close and effective working relationship between the IMF consultant and the Bank staff working with the Commercial Court, even if the results of the Commercial Court support component were ultimately disappointing.

7.3 Overall Bank performance:

Overall the Bank's performance can be rated as satisfactory. The shortcomings in the preparation process need to be acknowledged. But not all of the problems experienced in preparation were amenable to action from the Bank. The pervasive financial crisis and rapid changes in Government at that time had created a very difficult working environment. The supervision team quickly worked on correcting the problems and on building stakeholder support and the eventual successful outcome of the Project owes a great deal to the proactivity, constant attention and diligence of this supervision team.

Borrower7.4 Preparation:

The project was prepared soon after the crisis, during the term of the transitional administration which followed the fall of the Suharto Government. Both the borrower's evaluation report (Annex 8) and the Bank's Mid Term Review report refer to the lack of Government commitment at the preparation stage of the Project. This resulted in a lack of resources, oversight and support for JITF and a lack of buy-in to the corporate restructuring process that the JITF and other beneficiary institutions under the Project were intended to support. It also resulted in poor coordination between these institutions. There was considerable confusion during Project preparation as to who in Government would be responsible for signing contracts and approving budgets, and lack of clarity on issues such as pay scales for consultants. Government gave little attention to the preparation of the Commercial Court component of the Project although the intention was to work on this later during Project implementation.

7.5 Government implementation performance:

The problems experienced during preparation extended into the first year of implementation. With lack of support from above, Government officials were reluctant to sign contracts and approve expenditures. JITF therefore had to do its job with few resources. And no action was taken to foster cooperation between JITF

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and other institutions. This resulted in a poor level of cooperation initially between JITF and IBRA and little progress on simplifying the regulatory framework for corporate restructuring. But following the change of Government in late 1999, the new Minister responsible for JITF and IBRA gave corporate restructuring a high priority and he focused on working with local stakeholders, the Bank and the IMF on correcting the deficiencies in the corporate restructuring framework which had impeded JITF's operations. The outcome of these initiatives was the enhanced corporate restructuring framework which included the creation of the FSPC to which both IBRA and JITF reported, the closure of the redundant PSDRT and INDRA, clarity in the respective roles of IBRA and JITF, the appointment of a new Chairman and Chief Operating Officer to JITF, referrals by the FSPC of corporate restructuring cases to JITF for mediation, the adoption of time-bound mediation procedures by JITF, and the design and implementation of a comprehensive program of incentives to parties involved in restructuring negotiations through the JITF. JITF quickly received the resources it had been denied up to that point and for the first time began to deliver results. Political commitment to the enhanced corporate restructuring framework remained firm until JITF closed in December 2003. Also important was the good performance of the individuals appointed from mid-1999 onwards to the positions of Project Manager and Treasurer within BAPEPAM.

With the closing of PSDRT at the end of the first year, the JITF PIU assumed the responsibility for providing procurement, financial management, and reporting services for the Commercial Court Component. The Project Manager continued to have the responsibility for approvals related to use of Project funds and formal communication from Government to the Bank for this component as well as for the JITF Component. There was some confusion, however, regarding authority to design and approve activities for funding under the Commercial Court Component. It was clear in the amendment to the Loan Agreement that JITF had the technical responsibility for the corporate restructuring program, but it was not clear that the Steering Committee for the Commercial Court would have the responsibility for development of Commercial Court activities under the Project. As a result the Project Manager justifiably questioned the authority of the Steering Committee to request funding through the Project for their Commercial Court development activities. This, coupled with the fact that the Coordinator of the Commercial Court Component received little help from advisors in implementation of the Project, resulted in slow processing of procurement for this component. Activities for this component were thus implemented late in the Project, and some planned activities were never implemented.

Because of the late start and poor achievement in the first year of Project implementation, Government extended the life of the Project from its original closing date of June 30, 2001, to December 31, 2003.

7.6 Implementing Agency:

Despite the initial lack of support from the authorities and the initial deficiencies in the corporate restructuring framework, the JITF Chief Operating Officer and staff made great efforts during the first year of the Project's life to get the corporate restructuring program moving. As soon as support from above materialized in early 2000, their efforts began to bear fruit, as shown by the results. In frequent discussions held by the Bank task team with the negotiating parties in the JITF mediation process, both during project implementation and during the preparation of this ICR, the beneficiaries have repeatedly commented on the excellent leadership provided by the new JITF Chairman and the Chief Operating Officer, and the high quality of the JITF mediators. The consensus is that the skills of the JITF management and mediation team were a critical factor contributing to JITF's post-2000 success. Other key successes of the JITF were the preparation of quarterly corporate debt surveys which began in late 2000, and the highly successful efforts to negotiate with other Government bodies and institutions and agree on a set of incentives that were later implemented to speed up the corporate restructuring process. Project administration within JITF was very effective. Financial management and procurement functions were

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performed very well by JITF staff. The development of a comprehensive financial management/procurement system and manual that took into account Bank and Government requirements, combined with training for staff, contributed to a smooth and efficient financial management and procurement operation.

7.7 Overall Borrower performance:

The initial uncertain commitment on the part of the borrower to the corporate restructuring process was quickly transformed after the change in Government in 1999 into a proactive and steady commitment. The excellent results of the JITF can be largely attributed to the full commitment and excellent performance of the borrower from this point on. But in the case of the Commercial Court a full commitment by the borrower was never in evidence. Overall borrower performance for this Project is rated as satisfactory.

8. Lessons Learned

In Indonesia where the legal system has proven ineffective in enforcing the repayment of debt, the lwillingness of Government to step in and see to it that corporate restructuring takes place was critical. The changing performance of the JITF over the period of the Project and its ultimate success in achieving its mandate were directly related to the level of commitment shown by the Government.

The success of the JITF process has demonstrated the usefulness of alternative dispute resolution l(ADR) in Indonesia. Again this could be related to the shortcomings of the Indonesian legal system. If the Commercial Courts had done the job intended for them it is doubtful whether as many debtors and creditors would have experienced the benefits of ADR. Many debtors and creditors report that it would have been very difficult for so many parties to come to the table and reach agreement without the structured and impartial forum provided to them by the JITF mechanism.

The voluntary nature of the JITF process did not work well until an adequate incentive framework had lbeen created. In Indonesia where sanctions are difficult to implement, positive incentives or "carrots" proved much more effective than "sticks" in encouraging debtors and creditors to reach agreement.

It is important for the Government to take the lead in formulating policies and designing mechanisms lwhere fundamental changes such as those supported by this Project are planned. Political commitment needs to be demonstrated and cannot be assumed. The emergence of a "champion" on the Government side marked the turning point from failure to success for the JITF. The relatively poor performance of the Commercial Court component can be attributed largely to the absence of a high level champion not only at the outset but also throughout the implementation period.

Even, and perhaps especially, in a crisis situation, sufficient time and attention need to be given to a lrigorous project preparation process: researching, assessing options, discussing and getting full Government buy-in and designing effective project management structures, before going ahead with implementation. A lesson from this Project is that inadequate attention and time saved in Project preparation can be a false economy, even in a crisis situation, particularly where there are areas of institutional weakness. In this Project the time saved in preparation resulted in even longer delays in implementation, not only for the longer term institutional development aspects of the project but also for its crisis resolution aspects. Major efforts and time inputs were needed to resolve the problems and achieve the right mix of ingredients for success.

Field based supervision was important in this project because of the rapidly evolving crisis situation. A l

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supervision team based in World Bank headquarters could not have responded as rapidly to changing circumstances, or with the same degree of intensity as did this supervision team, which was based in the Bank's Jakarta Office.

When new institutions are being created and are untested, such as the Commercial Court and the JITF, lcare should be taken to guard against making optimistic assumptions and projections concerning their likely effectiveness and performance. Start-up problems are likely to be the norm and much effort needs to be put into designing and providing the Project implementation and management arrangements. Sufficient back up support needs to be provided to ensure that they can function effectively. This Project demonstrated both successes (JITF) and failures (Commercial Court) in terms of measures taken to ensure institutional effectiveness.

Preparation of a financial management/procurement manual at the outset of a project and training of lPIU staff in its use can help ensure smooth operations and minimize problems with procurement, payments and disbursements.

9. Partner Comments

(a) Borrower/implementing agency:DEPARTEMEN KEUANGAN REPUBLIK INDONESIA

BADAN PENGAWAS PASAR MODALPROYEK SATUAN TUGAS PRAKARSA JAKARTA

Gedung Baru Departemen Keuangan RI Lt. 3-8 Phone : (021) 3483 4688

Jalan Dr. Wahidin, Jakarta 10710 Fax : (021) 3483 4689

Ref. No.: S- 32 /PSTPJ/2004 28 April 2004

W. Bernard DrumTask Team Leader/Task ManagerWorld Bank Office, JakartaJakarta Stock Exchange BuildingJl. Jend. Sudirman Kav. 52-53Jakarta 12190

Subject: Implementation Completion Report on Corporate Restructuring Technical Assistant Project

Dear Mr. Drum:

Referring to the above subject, on behalf of the Indonesian Government, we herewith state that we have no further comments or objection to the report. In our view, the report has portrayed all activities and progress in a fair, objective, and transparent manner and therefore we accept it as it is.

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Should you need further assistance or queries please do not hesitate to contact me.

Ir. Sugianto, MAProject Manager

Cc.1. Herwidayatmo, Chairman of Capital Market Supervisory Agency,2. Bacelius Ruru, Chairman of Jakarta Initiative Task Force,3. Samuel Tobing, Chief Operating Officer of Jakarta Initiative Task Force4. Diani Sadia Wati, Director of Law and Human Right, Bappenas

(b) Cofinanciers:Not applicable

(c) Other partners (NGOs/private sector):Not applicable

10. Additional Information

Not applicable

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

Substantial increase in the number of completed corporate restructuring agreements.

JITF performance was measured based upon the dollar value of debt for which memoranda of understanding (MOU) were signed. Progress was slow in the first year of JITF's life. However after early 2000 the JITF consistently met or exceeded its MOU restructuring targets and never failed to meet targets agreed with the IMF in the Letters of Intent.

In December 2003 when the Project was completed, JITF had finalized the mediation of debt restructuring in the aggregate amount of $20.6 billion, or around one third of the total corporate loans that had become non-performing as a result of the crisis.

Rapid and simplified Government approval process to finalize restructuring deals

In early 2000 a set of "carrots and sticks" was designed and implemented to encourage debtors and creditors to move rapidly through the corporate restructuring process. The result was a rapid acceleration in deals completed, as evidenced by the regular surpassing of targets.

Coherent institutional framework to accelerate corporate restructurings, while complementing financial sector reforms.

In early 2000 the institutional framework for corporate debt restructuring was simplified and overhauled. The PSDRT and INDRA were closed. The Ministerial Financial Sector Policy Committee was created to oversee debt restructuring and ensure close coordination between IBRA and JITF. JITF's case load was assured by case referrals from the FSPC and JITF adopted a time bound mediation process. JITF and IBRA agreed on a successful formula for the allocation of cases to each.

Infrastructure to support corporate restructuring activities. Despite shortages of equipment and supplies

in the first year of its life, JITF has since had adequate resources to do its job. The Bank's procurement and financial management procedures have been followed in exemplary manner and Project Administration and Management have been excellent.

Output Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

1 End of project

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)AppraisalEstimate

Actual/Latest Estimate

Percentage of Appraisal

Component US$ million US$ millionComponent 1: Corporate Restructuring Assistance 17.20 5.11 30Component 2: Regulatory, Legal and Administrative 5.10 0.00 0Component 3: Implementation Support and Capacity Building for JITF

3.00 1.99 66

Component 4: Coordination Framework 2.50 0.05 2Component 5: Implementation Support and Capacity Building for BI and Commercial Court

3.60 0.22 6

Total Baseline Cost 31.40 7.37 Physical Contingencies 3.60

Total Project Costs 35.00 7.37Total Financing Required 35.00 7.37

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent)

Expenditure Category ICBProcurement

NCB Method

1

Other2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 0.74 0.00 0.44 0.00 1.18(0.74) (0.00) (0.28) (0.00) (1.02)

3. Services 0.00 0.00 27.77 0.00 27.77Consultants (0.00) (0.00) (25.79) (0.00) (25.79)4. Training 0.00 0.00 2.52 0.00 2.52

(0.00) (0.00) (2.52) (0.00) (2.52)5. Public Education 0.00

(0.00)0.00

(0.00)1.65

(1.65)0.00

(0.00)1.65

(1.65)6. Incremental Operating Expenses

0.00(0.00)

0.00(0.00)

1.56(0.20)

0.00(0.00)

1.56(0.20)

Total 0.74 0.00 33.94 0.00 34.68(0.74) (0.00) (30.44) (0.00) (31.18)

Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)

Expenditure Category ICBProcurement

NCB Method

1

Other2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 0.00 0.00 0.50 0.00 0.50(0.00) (0.00) (0.00) (0.00) (0.00)

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3. Services 0.00 0.00 5.10 0.00 5.10Consultants (0.00) (0.00) (4.09) (0.00) (4.09)4. Training 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)5. Public Education 0.00

(0.00)0.00

(0.00)0.02

(0.02)0.00

(0.00)0.02

(0.02)6. Incremental Operating Expenses

0.00(0.00)

0.00(0.00)

0.57(0.13)

0.00(0.00)

0.57(0.13)

Total 0.00 0.00 6.19 0.00 6.19(0.00) (0.00) (4.24) (0.00) (4.24)

1/ Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2/ Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff

of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in US$ million equivalent)

Component Appraisal Estimate Actual/Latest EstimatePercentage of Appraisal

Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF.Corporate Restructuring Assistance

15.48 1.72 4.49 0.61 29.0 35.5

Regulatory, Legal and Administrative

4.59 0.51 0.00 0.00 0.0 0.0

Implementation Support and Capacity Building for JITF

2.70 0.30 1.09 0.90 40.4 300.0

Coordination Framework 2.25 0.25 0.04 0.01 1.8 4.0Implementation Support and Capacity Building for BI and Commercial Court

3.24 0.36 0.20 0.02 6.2 5.6

Contingencies 3.24 0.36 0.0 0.0

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Annex 3. Economic Costs and Benefits

Not applicable

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/Preparation10/1998 1 Task Team Leader

2 Private Sector Development Specialists

Appraisal/Negotiation12/1998 1

1 1

Task Team LeaderProcurement SpecialistFinancial Management Specialist

02/1999 1 Lawyer

Supervision

10/17/2003 1 Task Team Leader S S1 Consultant - Project Adviser

ICR03/2004 1

11

Task Team LeaderConsultant - Project AdviserPrivate Sector Analyst

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 21 85Appraisal/Negotiation 5 20Supervision 47 250ICR 6 36Total 79 391

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

Mid Term ReportProject Status Reports JITF Final Report

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Additional Annex 8. Borrower's Evaluation Report

Republic Of Indonesia

Government’s Evaluation Report

World Bank Loan No.4448 IND

A. JITF COMPONENT

In accordance with the terms of its authorization and financing, the Jakarta Initiative Task Force (“JITF”) ceased operation as of December 31, 2003. In conjunction with the closure of its operations, the JITF has prepared and hereby submits the attached final report (the “Final Report”), covering all aspects of its operation since inception.

In addition to the executive summary contained in the Final Report, this summary has been prepared specifically to aid the World Bank with respect to ICR completion. In accordance with the guidelines submitted by the Bank, this summary highlights the findings of the Final Report with respect to three key areas: (1) assessment of project objective, design, implementation and operation, (2) evaluation of borrower’s performance, and (3) evaluation of performance by the bank.

1. Assessment of Project Objective, Design, Implementation and Operation

As discussed in the Final Report, the JITF has always been charged with the task of accelerating corporate debt restructuring in post-crisis Indonesia, through the use of mediation and regulatory facilitation. Throughout the course of the JITF’s existence, it has stuck to this mission with some degree of success. Moreover, during the course of its operation, despite periodic doubts regarding the effectiveness of mediation in the absence of a workable court system, there was general agreement amongst debtors, creditors and most commentators that this mission was justified in the face of the widespread damage caused to the Indonesian corporate sector due to the Asian financial crisis.

Although its objectives have been sound, the Final Report notes that initial project design suffered from misplaced assumptions regarding the existence of the Indonesian Commercial Court as a viable incentive to force debtors to the negotiation table, as well as the level of cooperation with respect to financial sector restructuring efforts. These misplaced assumptions led to an initial program design that lacked structure and firm incentives for participation, as well as high level coordination with overall Indonesian restructuring policy.

As discussed in greater detail in the Final Report, these deficiencies were, for the most part, remedied in early-2000, with the introduction of rule-based mediation procedures, a defined incentive and sanction program (including tax incentives for cooperative parties), and, perhaps most importantly, a ministerial-level committee (the “FSPC”) to oversee and coordinate, among other things, Indonesian corporate restructuring policy.

These year-2000 revisions lead to a turnaround in JITF performance, with [US$ 27 billion] in distressed debt being restructured through the program by the close of 2003.

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2. Evaluation of Borrower’s own Performance

Although the JITF was successful in restructuring large amounts of distressed debt, meeting all IMF Letter of Intent targets set for the program, it cannot be said that program success was unqualified. Even with the incentives provided to the JITF, there remained a significant minority of matters where nothing short of penal or confiscatory action by the government could persuade existing equity owners to part with control over their corporate assets. Despite the possibility of action by the Indonesian Attorney General’s Office as a part of the written JITF mediation procedures, and despite the fact that a number of matters were referred to the FSPC by the JITF as a result of bad behavior, no such penal action ever took place during the life of the JITF.

As a result of this inaction, it remained a fact that the JITF, throughout its life, was forced to mediate restructuring matters “at the margins,” assisting with transactions where debtor goodwill was already in existence. Nevertheless, it must be reiterated that in undertaking this function, the JITF performed exceedingly well, providing a forum (and basic transparency and predictability) against a backdrop of judicial ineffectiveness. Despite often-voiced lender frustrations regarding the JITF’s seeming inability to force the hardest debtors into agreement, the fact remains that most of the major Indonesian restructuring matters arising out of the Asian financial crisis were mediated, to a greater or lesser degree, by the JITF.

As indicated in the Final Report, there are two major lessons that can be carried from this experience. First, in circumstances where conflict arises from a systemic failure (such as was the case within the Indonesian corporate community following the Asian financial crisis), there is a clear role for alternative dispute resolution, particularly where legal institutions are not up to the task of coping with such failure. It should be reiterated that primary usefulness of the JITF during the course of its existence was as a predictable, honest forum to allow market participants to resolve their differences in the face of a dysfunctional legal system. In this respect the JITF performed its task admirably, in accordance with its original mission and vision. Hundreds of companies with thousands of employees and billions of dollars in debt took advantage of the mediation facilities offered by the JITF, thereby accelerating their return to financial health for the good of themselves, as well as the overall Indonesian economy. In many, if not most cases, these restructurings could not have been completed as fast or as easily (or arguably at all in some cases) without the forum and guidance offered by the JITF.

The second lesson to be mentioned is that, in undertaking any public sector program such as the JITF (touching on conflict resolution in the face of systemic collapse), public sector decisiveness – political will – is of paramount importance. As discussed in the Final Report, until the Government of Indonesia took the steps to manage the JITF properly, providing it with proper resources and oversight, JITF effectiveness was marginal, at best. Moreover, as outlined above, even post-2000, virtually all of the challenges facing the JITF arose from a failure to sanction uncooperative participants, a task outside the hands of the JITF and heavily dependent on political will.

3. Evaluation of the Performance of the Bank

Throughout the course of the JITF’s existence, the World Bank has proven to be a reliable and supportive partner. At no time did any JITF staff feel that the Bank ignored the program, or that it did not understand the JITF’s mission or operation. The Bank project management consultant assigned to the JITF was of great benefit to the Program, not only with respect to World Bank loan requirements, but also with respect to general operational issues. Similarly, the Bank staff member overseeing the project from the donor perspective proved to be a constructive presence, demonstrating a clear understanding of the political and

- 25 -

commercial realities of the situation facing the JITF. At no time did the JITF staff feel that they were being hectored or over-managed, nor did they feel that the program did not receive sufficient attention.

If any criticism at all can be leveled at the Bank, it is only that, in the early stages of the JITF’s existence, there was perhaps too little effort expended to socialize the need and role of the JITF with senior Indonesian government officials. This, however, is understandable, given that the program was conceived and mandated by the IMF as part of its early letter of intent negotiations, was insisted upon as a part of the Fund’s rescue package in a time of general turmoil, and was thereafter given to the Bank to manage from a funding perspective. Moreover, this early shortcoming was subsequently remedied over time, as Bank senior staff worked to bring the JITF into full operational status.

As a whole, the good that came from the JITF program is, to a large degree, owed to the efforts of the Bank.

4. Summary.

As set forth above and in the Final Report, the JITF has proven to be a worthwhile undertaking, not only because it assisted with the resolution of some US$ [27 billion] in distressed debt, but also, perhaps more importantly, because it has demonstrated the usefulness of ADR in similar situations. In the future, it is hoped that those facing crises similar to the one which struck Southeast Asia in the late 1990’s can look to the JITF and learn from its accomplishments and shortcomings. The basic lessons of the JITF -- the value of ADR in the face of systemic economic collapse, and the need for political will to back any undertaking dealing with such collapse -- are valuable in and of themselves, and should not be forgotten with the passing of the program.

B. COMERCIAL COURT COMPONENT

1. Background

The crisis triggered by the monetary collapse in the middle of 1997 had a negative impact on the national economy, and caused great hardship in business circles in the continuation of their business activities, including the fulfillment of their obligations to creditors.

One of the efforts initiated by the Government in the context of economy recovery, is dispute settlement in effective, fair, fast and transparent manner, especially those disputes related to debtors and creditors. One of the legal instruments used as the basis for the settlement of debts has been the bankruptcy regulations, including regulations concerning the moratorium on debt repayment under Law Number 4 of 1998 regarding Bankruptcy. In implementing Law Number 4 of 1998, the Government established in 1998 the Commercial Court which has functioned since the 1st of September 1998 at Central Jakarta District Court. Subsequently, after making several preparations in May 2000 the Government established additional Commercial Courts outside Jakarta, in Semarang, Surabaya, Ujung Pandang and Medan to resolve commercial problems throughout Indonesia. The Commercial Court is placed within the scope of the General Court Jurisdiction Court in the form of a special chamber.

The Commercial Court’s jurisdiction is limited to handle and to process petitions for declaration of bankruptcy and moratorium of the debt repayment. Since 2000, the jurisdiction of the Commercial Court has become wider because the Intellectual Property Right (IPR) Laws have appointed the Commercial Court as the institution that handle the Intellectual Property Right disputes. These laws include Law Number 32 of 2000 on Integrated Industrial Design, Law Number 31 of 2000 on Design Industry, Law Number 14 of 2001 on Patent, and Law Number 15 of 2001 on Trade Mark.

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In June 1998, to assist in preparation for the operating of the Commercial Court, the Government established the Steering Committee of the Commercial Court under KEP.216/KEP/6/1998. The Steering Committee of the Commercial Court consisted of representatives from various state institutions that were considered to have an interest in and a commitment to the development of the Commercial Court. These included representatives of the Supreme Court, the National Development Planning Agency, Ministry of Justice and Human Rights, and the National Law Commission. One of the main tasks of the Steering Committee of the Commercial Court is to develop education and training programs for Commercial Court judges, to monitor and supervise their implementation, and to prepare various implementing regulations for Law Number 4 of 1998 regarding Bankruptcy. In support of its discharge of these responsibilities, the Steering Committee of the Commercial Court received a loan from World Bank and developed an action plan (Blue Print) on the development of the new Indonesian Commercial Court.

The goal of this project is to make the Commercial Court a modern court, which can become a model for other courts (Supreme Court, High Courts and lower Courts). To achieve this goal, a number of short-term and long-term activities are being undertaken as follows: (1) Increased Scope of the Commercial Court Jurisdiction; (2) Human Resources Development; (3) Organization Restructuring; (4) Improved Infrastructure and Facilities; and (5) Performance Assessment.

2. List of Activities Planned to be Financed by the World Bank

There were 6 (six) activities to be funded by the World Bank, namely:1. Commercial Court Jurisdiction. The main activity was to study issues and problems associated with expanding the jurisdiction of the Commercial Court on settlement of disputes on commercial cases2. Commercial Court Procedures. The main activity, based on Intellectual Property Rights Laws, was to produce a draft Administrative Procedures Manual of the Commercial Court regarding Intellectual Property Rights (MOCCA on IPR).3. Judicial Organization. The main activity was to study issues and problems related to the development of Commercial Court organization.4. Training of Supporting Staff. The main activity was to prepare training for supporting staffs, such as Registrars, Bailiffs, Librarian, Computer/Internet Operators at the Commercial Court.5. Support for Legal Information Measures. The main activity was to develop an information system by using web approach (containing information on the Commercial Court’s decisions and annotation).6. Assessment of Asset Recovery Process Needs. The main activities were to study the Asset Recovery process needs and to assess the role and potential of Commercial Courts as a means to recover assets.

3. Outputs and Impacts

Out of six (6) activities listed above, only three (3) activities were implemented by the Steering Committee of the Commercial Court. They were:1. Commercial Court Jurisdiction. The topic of the study was “Extension of the Commercial Court Jurisdictional Competence”. The study was conducted by a research team at the Research Institute at Parahyangan Catholic University. June 2003.

Impact: This work enriched the development of Commercial Court’s Blueprint and Action Plan. 2. Commercial Court Procedures. The topic of the study was “Research on Administrative Court Procedures for the Commercial Court Concerning Intellectual Property Rights”. The study was conducted by the Center for Indonesian Law and Policy Studies (Pusat Studi Hukum dan Kebijakan - PSHK). December 2002.

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Impact: This work increased certainty concerning the administrative procedures in handling intellectual property rights cases in the Commercial Court.

3. Judicial Organization. Workshop on Judicial Organization of Commercial Court conducted by the Center for Information and Economic Law Studies (CINLES), 28-29 November 2002.

Impact: This work provided guidance for the future development of the Commercial Court’s organization.

Additional activities were carried out by The Steering Committee and funded by The World Bank but not included in the original plan

4. Mediation Techniques. Training for Commercial Court Judges. The training was conducted in Bogor, West Java, 18 – 20 November 2002

Impact: This training gave a better understanding to the Commercial Court Judges regarding mediation processes.

5. Basic Training on Mediation and Court Mediation. Training for Commercial Court Judges. The training was conducted in Semarang, Central Java, 8 – 12 September 2003.

Impact: This training gave a better understanding to the Commercial Court Judges regarding mediation processes.

4. Limitations on the Impact of the Project Support

The World Bank loan component was designed to assist the Steering Committee of the Commercial Court in developing the Commercial Court by implementing the above activities. But because of time constraints only 3 (three) of the original six activities were executed, to which was added the training of judges in mediation. However, the Steering Committee of the Commercial Court has recently shown an increasing commitment to the development of the Commercial Court. Much additional work remains to be done to establish and ensure the progress of the Commercial Court, including the preparation and publication of the Manual on Commercial Court Administration, the setting up of a Commercial Court website, the examination of Commercial Court decisions by experts on insolvency law, the recruitment of ad-hoc judges, the expansion of the Commercial Court’s jurisdiction from being confined to insolvency cases to also include intellectual property rights disputes.

5. Lessons Learned and Conclusion

The establishment of the Commercial Court made a significant contribution to reforming the judicial system in general and to establishing other special courts within the framework of the public courts, namely the Human Rights Court and in the near future, the Anticorruption Court. Based on recommendations of the study funded by the Bank under this Project, the Steering Committee of the Commercial Court has also published a more complete blueprint, namely, Blueprint and Action Plan for the Development of Commercial Court as a revision of the 2001 Blueprint. Although it was difficult to execute all of the activities under World Bank due to time constraints, on balance the World Bank loan was very beneficial in contributing to the development of the Commercial Court in Indonesia.

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