Is Indonesia's debt to Norway illegitimate?

Added 17 May 2010

Norway is continuing to collect illegitimate debt from the people of Indonesia. This is the conclusion of a new report published by Eurodad member SLUG in collaboration with the International NGO Forum on Indonesian Development (INFID). The report demonstrates how Indonesia is still paying for a wave power plant that was never finished, and technology that was never transferred. 

Eurodad and its members have long campaigned for creditors to accept their share of responsibility for failed projects that, from the onset, have dubious developmental impacts. This is particularly critical in cases where such credit is extended to undemocratic regimes, bypassing citizen and democratic consent. The Eurodad Charter on responsible finance outlines the standards that any loan must comply with if it is to pass the test of responsible and democratic development financing.

 Dubious developmental impact of Norwegian loans to Indonesia

In the 1990s, Indonesia signed seven loan agreements with Norwegian companies, with a total contract value of US$198 million, mostly aimed at transferring environmental technology. At that time, the Norwegian government announced the so-called Asia-Plan to encourage investment in selected Asian countries. Indonesia, presided over by Suharto at the time, was one of the prioritised countries, and the transfer of environmentally friendly technology was one of the targeted sectors.

The Norwegian government used the mixed credits scheme as a tool to support firms willing to invest in Asia. The government provided grants from the aid budget, whilst the Norwegian export credit agency (GIEK) provided guarantees. The majority of the contract value was financed by export credits and had to be reimbursed by the Indonesian state. By December 2008, Indonesia had close to US$100 million in outstanding debt, originating from these seven projects. SLUG has investigated two of the projects and concluded that Norway must admit its responsibility for extending credits for failed projects that did not contribute to development, and act on this by cancelling the outstanding debt.

Norwegian government should act on bold promises

Collecting illegitimate debt strongly contradicts the Norwegian government’s commitments to fight illegitimate debt and promote responsible lending. The current Norwegian government declaration states that Norway will work to establish international debt workout mechanisms to deal with illegitimate debt and binding international regulations for responsible lending, and to conduct a Norwegian debt audit. SLUG claims that the questionable debts currently being repaid by Indonesia highlight the need to fulfil these promises.

In 2006 the Norwegian government made the bold decision to cancel debts on the grounds of “failed development policies”. The government admitted co-responsibility as a creditor following inadequate needs analyses and risk assessments, and cancelled the remaining export credit debts from the ship export campaign. The Norwegian government should now follow its own example and admit its share of responsibility for the failed development policies towards Indonesia in the late 1990s.

New wave of export credits following global crisis

Between August 2008 and September 2009, European governments responded to the global financial crisis by increasing the financing capacities of national Export Credit Agencies (ECAs) by an average of 35%. [1] Guarantees issued by ECAs are supposed to cover political and other non-commercial risks to the export industry and assume the role of creditor against the foreign customer in the case of repayment difficulties. To ensure repayment, the government in the recipient country is often requested to provide a guarantee to back the customer. Hence, if the customer cannot pay, the loan to the private company becomes a sovereign liability. All too often projects backed by developed countries’ export credit agencies are turned into sovereign debt, shifting the risk from private export industry in developed countries to the people of developing countries.

SLUG’s report provides two examples, illustrating how the people of Indonesia is paying for failed Norwegian technology, effectively subsidising the Norwegian export industry. Binding guidelines for export credit agencies and other lending mechanisms, as outlined in the Eurodad charter for responsible finance must be put in place to prevent new cycles of unsustainable and illegitimate debt.

For more information on export credits, see  Export Credit Debt: How ECA support to corporations indebts the world’s poor

[1] European Commission, Directorate General for Trade: Trade Finance and the Financial Crisis, May 2009