Although the Consultative Group on Indonesia (CGI) is due to meet this month to finalize discussions on the country's loan allocations from Group members for this fiscal year, Indonesia has still to reach a bilateral agreement with its biggest lender, Japan.

An Indonesian official insisted that the negotiations with Japan were ongoing and that significant progress had been made. However, Japanese sources close to the negotiations complained that Indonesia was displaying a lack of seriousness about wrapping up the talks on nine projects proposed for this fiscal year.

"The negotiations are still in progress," State Minister for National Development Planning Paskah Suzetta told The Jakarta Post on Thursday. "Japan, of course, has its own interests, while we have ours. This is what we are trying to work out."

The Japanese side, however, had a different story to tell. "Time is running out for the negotiations and Indonesia still has not stated its final position," said a Japanese official closely involved in the negotiations.

The Japanese side said that "it is not beyond the bounds of possibility that there will be no Japanese loans for Indonesia this year" if the two countries were unable to reach agreement this month given that Japan's 2005 fiscal year also ends this month. Indonesia's loans for this year would be taken from Japan's 2005 budget. Indonesia's fiscal year, meanwhile, starts in January.

Among the issues that still needed working out, Paskah said, was the Indonesian government's request to Japan for a lower loan interest rate and more flexible terms, including the use of more local content in the proposed projects.

"We are also looking into the possibility of asking for special treatment, such as debt swaps and rescheduling agreements for the loans, to help reduce our outstanding debts," he said.

Paskah admitted that questions revolving around the government's preparedness to implement a number of the proposed projects had also surfaced during the negotiations with Japan.

"Five out of the nine proposed projects are actually ready to go, but the rest are not ready yet. One project, for example, is still facing problems due to its size and substance, while in the case of another, the local administration is having difficulties providing land for the project," he said, adding that the Jakarta subway project was among those not yet ready to proceed.

Japan has proposed financing a total of nine projects as part of its loan pledges of some US$1 billion to Indonesia this year. It has also said it will speed up the disbursement of $420 million from its previous unused loan commitments.

Japan intends, however, to apply a new interest rate of 1.5 percent to some of the new loans, up from 1.3 percent previously, on the grounds that Indonesia's per capita gross domestic product (GDP) has risen sufficiently to place the country in the lower-to-middle-income bracket.

To reduce the additional financial burden on Indonesia, only three of the projects will carry the new interest rate, with the others being preferential loans carrying the lower 0.75 percent interest rate. All the projects will also retain concessional terms, such as a 30-year repayment period, 10-year grace period, and exemptions from commitment fees.

"Our interest rates are still very low compared to other lenders like the World Bank and the Asian Development Bank," a Japanese official said.

Last year, Japan committed �114.83 billion (some $1.07 billion) to help finance eight major infrastructure projects, aside from grants for tsunami-stricken Aceh province.

On the construction of the subway line from Lebak Bulus, South Jakarta, to Kota, West Jakarta, Japanese Ambassador to Indonesia, Yutaka Iimura, had previously said Japan would contribute technology and 85 percent of the cost of the project through a �85 billion loan carrying an interest rate of 0.5 percent, a 40-year repayment period and a 10-year grace period.

Paskah said the government hoped the subway project would be in the form of an "untied loan project" scheme, in which local content would be allowed to account for between 15 and 17 percent of total content, instead of a "tied loan project," in which the entire project content had to come from the creditor country, albeit at a lower interest rate.

"We do not want to relive our bitter experience in Thailand. We financed the mass rapid transportation project there, but our companies were only allowed to dig the tunnel while the rolling stock was provided by Germany's Siemens," the Japanese diplomat said.

Meanwhile, Paskah said that if the negotiations on the loans and project preparations dragged on too long, the government might have to reject the loan offers.

"If it takes too long, then we may have to resort to other means," he said, adding that the government had given itself until the end of March to decide whether it would accept the loans or not.

In an apparent attempt to up the ante with Japan, Paskah hinted that Indonesia might seek similar loans from other creditor countries, including China, a delegation from which he is due to meet this week.

"We may look into the question of seeking loans with lower interest rates and more flexible terms from China," he said. "But we will still negotiate with Japan as it is our largest creditor, accounting for some 40 percent of our annual foreign borrowings."

Selected projects proposed for Japanese financing
- Jakarta subway line
- Phase two improvements to the Tanjung Priok Port access road
- Kamojang upstream and downstream geothermal plant in West Java
- Hydro power plant in Asahan, North Sumatra
- Expansion of the Citarum power plant in West Java,
- Water processing facility and infrastructure in Semarang.