Financial markets project : final evaluation -- Indonesia

The project has effectively contributed to the development of local financial markets in the ways envisioned. Regarding capital markets, the project helped to develop new regulatory and operational infrastructure that increased market confidence and efficiency. The Capital Market Executive Board (BAPEPAM) is today a self-standing regulatory agency, separate from the stock exchange and clearing corporation. An extensive body of rules and regulations have been adopted, BAPEPAM's ability to draft and implement rules and work with market institutions has improved considerably, a new Capital Markets Law has been drafted which will strengthen BAPEPAM's enforcement capabilities, and corporate disclosure and public information are more extensive and of higher quality. Since project start-up in 1990, the stock exchange has blossomed. In the money markets, the project helped to: develop a new credit rating agency and new commercial paper regulations; introduce a new system for auctioning money market securities; strengthen Bank Indonesia's (BI) institutional capabilities; forge relations with central bankers both in the ASEAN region and globally; and design a new electronic funds transfer system. In privatization, the project helped to design privatization policies, identify Initial Public Offerings (IPO) candidates and intermediaries, assist in transaction-specific matters, and build capabilities within the Ministry of Finance Directorate of State-Owned Enterprises. In sum, financial market infrastructure, regulation, and management have improved measurably in the past few years, and achieved a new stage of development in the past two. This has contributed to the continued inflow of new market borrowers and investors, the growing ability of Indonesian firms to access offshore capital markets, and the introduction of some of the world's most sophisticated foreign investment houses to the Indonesian market. The project cannot take credit for all of this work, however; financial sector development had momentum from other sources as well. It must also be recognized that several project objectives have not been met. In capital markets, primary and secondary bond market activity is still limited; an active domestic investor base has not been developed; and retail investment is virtually nonexistent. In the money markets, interest rates are still somewhat controlled by the central bank, limiting secondary market trading of central bank certificates. Only two firms have been privatized. In most of these cases, the project could not have altered developments or could have done so only by diverting resources from activities that may have been more critical to financial market development in the longer run. The project has had indirect effects on poverty alleviation. The capital markets provide capital for economic expansion that might not be available otherwise, or only at greater cost. New, smaller (though not yet small), and more labor-intensive firms are using the capital markets today. Improved corporate disclosure has made companies more aware of the need to manage resources more effectively to achieve profits and return on investment and equity. BI continues to improve at monetary management, creating a stable environment that supports financial transactions and economic growth. Several lessons were learned about project design. (1) Long-term TA helps to focus advisors' activities and build institutional knowledge and relationships; long-term advisors must be allowed flexibility. (2) More is not always better. Project papers frequently set out quantitative measures of success, but higher numbers do not always mean "more" development. Indeed, in some cases, pushing to more outputs can have adverse effects, e.g., if an advisor, pressed to produce a large number of regulations, drafts regulations himself/herself instead of training counterparts to draft; or more regulations are produced than the local regulatory agency can implement intelligently; or more brokers are incorporated than can be supported by financial market transactions. (3) The need to build relationships and consensus among several parties often lengthens the development process; this must be recognized and accepted. (4) Project design should focus on a few major issues and the general activities that address them rather than on the details of how things are to get done. (5) Realistic budgets should be assessed before a project is begun; negotiations and adjustments during a project cause uncertainty that can stall project activities. The following lessons were learned about project implementation. (1) The utility of host country contracts should be questioned. In Indonesia, where host institutions often already possess contracting ability, the use of a host country contract may simply overlay the bureaucratic processes of USAID onto the host institution. (2) When it becomes clear that major components of a project must be dropped, there should be formal ways of reviewing the reasons for change and the consequences for the remainder of the project. (3) Major expenditure shifts within a project should be documented. (Author abstract, modified)