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Document of The World Bank
FOR OFFICIAL USE ONLY
Report No.: 57111-ID
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT
FOR A PROPOSED
SEVENTH DEVELOPMENT POLICY LOAN (DPL 7)
IN THE AMOUNT OF US$600 MILLION
TO THE REPUBLIC OF INDONESIA
OCTOBER 21, 2010
Poverty Reduction and Economic Management Unit East Asia and Pacific Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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REPUBLIC OF INDONESIA - GOVERNMENT FISCAL YEAR
January 1 – December 31
CURRENCY EQUIVALENTS
(Exchange Rate Effective as October 2010) Currency Unit Rupiah (IDR)
US$1.00 = Rp.8,923
ABBREVIATIONS AND ACRONYMS
AAA Analytical and Advisory Activities KL Kementerian Lembaga (Line Ministries) ADB Asian Development Bank KM Knowledge Management
AFS Aplikasi Forecasting Satker KMK Keputusan Menteri Keuangan (Decree of the Minister of Finance)
AGO Attorney General Office KN Kekayaan Negara (State Assets) ALM Assets and Liability Management KPI Key Performance Indicators
AMDAL Analisa Mengenai Dampak Lingkungan (Environmental Impact Assessment)
KPK Komisi Pemberantasan Korupsi (Corruption Eradication Commission)
APBD Anggaran Pendapatan dan Belanja Daerah (Sub-national budget)
KPKNL Kantor Pelayanan Kekayaan Negara dan Lelang (State Auction Service Offices)
APBN Anggaran Pendapatan dan Belanja Negara (State Budget)
KPPN Kantor Pelayanan Perbendaharaan Negara (State Treasury Services Offices)
ASEAN The Association of Southeast Asian Nations KUR Kredit Usaha Rakyat (People-based small business loan)
AusAID Australian Agency for International Development LG Local Government
BaKTI Bursa Pengetahuan Kawasan Timur Indonesia (Eastern Indonesia Knowledge Exchange)
LIBOR London Interbank Offered Rate
BAPPENAS Badan Perencanaan Pembangunan Nasional (National Development Planning Agency)
LKPP Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (National Public Procurement Office)
BAWASDA Badan Pengawas Daerah (Supervisory Board) LPG Liquefied Petroleum Gas BI Bank Indonesia LPI Logistic Performance Index
BKPM Badan Koordinasi Penanaman Modal (Indonesia Investment Coordinating Board)
LPS Lembaga Penjamin Simpanan (Deposit Insurance Corporation)
BLI Base-line Indicator M&E Monitoring and Evaluation
BLM Bantuan LangsungMasyarakat (cash transfer to community)
MDFTIC Multi Donor Facility for Trade and Investment Climate
BLT Bantuan Langsung Tunai (cash transfer) MDGs Millennium Development Goals
BOS Bantuan Operasional Sekolah (School Operational Assistance)
MDRI Multilateral Debt Relief Initiative
BOS-KITA Bantuan Operasional Sekolah (School Operational Assistance – Knowledge Improvement for Transparency and Accountability)
MDTF Multi Donor Trust Funds
BPK Badan Pemeriksa Keuangan (Supreme Audit Agency)
MenPAN Kementerian Pemberdayagunaan Aparatur Negara (State Ministry of Administrative Reforms)
BPKP Badan Pengawasan Keuangan dan Pembangunan (Financial and Development Supervisory Board)
MIS Management Information System
BPI Business Process Improvment MoF Ministry of Finance BPN Badan Pertanahan Negara (Land Authority Board) MoHA Ministry of Home Affairs BPS Badan Pusat Statistik (Central Bureau of Statistics) MTEF Medium-Term Expenditure Framework BRI Bureaucracy Reform Initiative MSME Micro, Small, and Medium Enterprises
BSC Balanced Score Card Musrenbang Musyawarah Rencana Pembangunan (Multi stakeholders consultation forum)
CATS Customs Advanced Trade System MW Mega Watt CAS Country Assistance Strategy NAFED National Agency for Export Development CC DPL Climate Change Development Policy Loan NGO Non Governmental Organization
CDD Community Driven Development NLB National Logistics Blueprint
CMC Change Management and Communication NPPKP Nomor Pengukuhan Pengusaha Kena Pajak (VAT collector number)
CMEA Coordinating Ministry of Economic Affairs NPPO National Public Procurement Office
CMMI Capability Maturity Model Integration NPWP Nomor Pokok Wajib Pajak (Tax Payer Identification Registration Number)
CO Certificate of Origin NTM Non Tariff Measures COA Chart of Accounts NTS National Targeting System COSO Committee of Sponsoring Organization ODA Official Development Assistance
CPI Consumer Price Index OECD Organization for Economic Co-operation and Development
CPIA Country Policy and Institutional Assessment PAD Pendapatan Asli Daerah (Own Source Revenue of sub-national government)
CPS Country Partnership Strategy PBB Performance Based Budgeting CRP Conference Room Pilot PBO Parliamentary Budget Office CSA Control Self Assessment PD Partai Demokrat (Democratic Party) CY Calendar Year PEFA Public Expenditure and Financial Accountability DAK Dana Alokasi Khusus (Special Allocation Funds) PEMDA Pemerintah Daerah (Local Government Entity)
DAU Dana Alokasi Umum (General Allocation Funds) PEPI Peningkatan Ekspor dan Peningkatan Investasi (National Team for the Development of Exports and Investment)
DB Doing Business PER Public Expenditure Review
DG Director General PEACH Public Expenditure Analysis and Capacity Harmonization
DGH Directorate General of Highways PESF-DDO Public Expenditure Support Facility- Deferred Drawdown Option
DGT Director General Taxes PFM Public Financial Management
DIPA Daftar Isian Pelaksanaan Anggaran (Approved Budget Allocation)
PFM-MDTF Public Financial Management-Multi Donor Trust Funds
DKI Daerah Khusus Ibukota (Capital Special Region) PIN Public Information Notices DMC Data Management Center PINTAR Project for Indonesian Tax Administration Reform DNI Daftar Negatif Investasi (Investment Negative List) PIU Project Implementation Unit
DPL Development Policy Loan PKH Program Keluarga Harapan (Conditional Cash Transfer)
DPR Dewan Perwakilan Rakyat Daerah (People’s Consultative Assembly)
PP Peraturan Pemerintah (Government Regulation)
DRC Data Recovery Center PPP Purchasing Power Parity
DSF Decentralization Support Facility PLN Perusahaan Listrik Negara (State Electricity Company)
DTT Directorate of Treasury and Transformation PMK Peraturan Menteri Keuangan (Minister of Finance Regulation)
EITI Extractive Industries Transparency Initiative PNPM Program Nasional Pemberdayaan Masyarakat (National Program for Community Empowerment)
FDI Foreign Direct Investment PNS Pegawai Negeri Sipil (Civil Servants) FPO Fiscal Policy Office POM Project Operation Manual
FSAP Financial Sector Assessment Program PPATK Pusat Pelaporan dan Analisa Transaksi Keuangan (Financial Transaction Analysis and Reporting Center)
FSSF Financial System Stability Forum PPLS Pendataan Program Pelayanan Sosial (Social service data collection program)
FY Fiscal Year PTSP Pelayanan Terpadu Satu Pintu (One-stop Integrated Services)
GDP Gross Domestic Product Pusintek Pusat Sistem Informasi dan Teknologi Keuangan (Center of Information System and Technology)
GFMRAP Government Financial Management and Revenue Administration Project
RASKIN Beras Miskin (Rice for the Poor Program)
GFMIS Government Financial Management Information System
Renja-KL Rencana Kerja Kementerian Lembaga (Line Ministies’ Work Plan)
GFS Government Finance Statistics RKA-KL Rencana Kerja dan Anggaran Kementerian/Lembaga (Ministry/Institutional Budget and Work Plan)
GNI Gross National Income RKP Rencana Kerja Pemerintah (Government Work Plan)
GoI Government of Indonesia ROSC Report on the Observance of Standards and Codes
GoJ Government of Japan RPJM Rencana Pembangunan Jangka Menegah (Medium-Term Development Plan)
HIPC Heavily Indebted Poor Countries RPJMN Rencana Pembangunan Jangka Menengah National (National Medium Term Development Plan)
HR Human Resources SAI Supreme Audit Institution HRD Human Resources Development Satker Satuan Kerja (Working Unit)
HRIS Human Resources Information Services SBI Sertifikat Bank Indonesia (Bank of Indonesia Certificate)
HRSP Human Resources Strategic Plan SBUN Sub Bendahara Umum Negara (General Operation Treasury)
IBRD International Bank for Reconstruction and Development
SC Steering Comittee
ICR Implementation Completion Report SIMAK-BMNSistem Manajemen Akuntansi Barang Milik Negara (Accounting Management System for State Assets)
ICT Information and Communication Technology Sislognas Sistem Logistic Nasional (National Logistics System)
IDA International Development Association SLA Service Level Arrangement IDPL Infrastructure Development Policy Loan SME Small Medium Enterprise IFC International Finance Corporation SOE State-owned Enterprise
IFMIS Integrated Financial Management Information System
SOP Standard Operating Procedures
IG Inspector General SPAN Sistem Perbendaharaan dan Anggaran Negara (Integrated Financial Management System)
ILGR Initiatives for Local Government Reforms SPIP Sistem Pengendalian Intern Pemerintah (Government Internal Control System)
ILGRIP Initiatives for Local Governance Reform Projects SPIPISE Sistem Pelayanan Informasi dan Perizinan Investasi Secara Elektronik (Online Investment Licensing System)
IMF International Monetary Funds STAN Sekolah Tinggi Akuntansi Negara (Indonesia State College of Accounting)
INP Indonesia National Police STO Small Taxpayer Offices
INPRES Instruksi Presiden (Presidential Instruction) TNP2K Tim Nasional Percepatan Penanggulanan Kemiskinan (National Team on Accelerating Poverty Alleviation)
INSW Indonesia National Single Window TSA Treasury Single Account IT Information Technology UAT User Acceptance Test
ItKab Inspectorate Kabupaten (District Inspectorate) UKP4
Unit Kerja Presiden Bidang Pengawasan dan Pengendalian Pembangunan (The Presidential Working Unit for Supervision and Management of Development)
JAMKESMAS Jaminan Kesehatan Masyarakat (Health Insurance Reform Scheme)
ULP Unit Layanan Pengadaan (Procurement Service Unit)
JBIC Japan Bank for International Cooperation UPP Urban Poverty Project JICA Japan International Cooperation Agency USDRP Urban Sector Development and Reform Project
KADIN Kamar Dagang dan Industri (Indonesia Chamber of Commerce and Industry)
VAT Value Added Tax
Kanwil Kantor Wilayah (Regional Offices) VP Vice President KDP Kecamatan Development Program VSL Variable Spread Loan
Keppres Keputusan President (Presidential Decree) WBG World Bank Group
Vice President:Country Director:
Sector Director: Lead Economist:
Task Team Leader:
James AdamsStefan G. Koeberle Vikram Nehru Shubham Chaudhuri Enrique Blanco Armas
REPUBLIC OF INDONESIA
PROPOSED SEVENTH DEVELOPMENT POLICY LOAN
TABLE OF CONTENTS
I. INTRODUCTION ........................................................................................................................................................ 1 II. COUNTRY CONTEXT ............................................................................................................................................... 3
A. INDONESIA IN 2010 ................................................................................................................................................... 3 B. THE STATE OF THE INDONESIAN ECONOMY IN MID 2010 .......................................................................................... 4 C. INDONESIA’S ECONOMIC OUTLOOK .......................................................................................................................... 7 D. THE NEW GOVERNMENT AND THE POLITICAL OUTLOOK .......................................................................................... 9
III. THE GOVERNMENT’S REFORM PROGRAM AND BANK SUPPORT ............................................................. 10 A. KEY REFORM DIRECTIONS OF GOVERNMENT SYSTEMS AND INSTITUTIONS SUPPORTED BY THE DPL .................... 12
A. 1. Investment Climate and Trade Facilitation ................................................................................................... 12 A.2. Public Finance Management .......................................................................................................................... 15 A.3. Poverty Reduction ........................................................................................................................................... 17
B. THE REFORM AGENDA GOING FORWARD ............................................................................................................... 19 B. 1. Civil Service/ Bureaucracy Reform ............................................................................................................... 19 B.2. Judiciary Reform ............................................................................................................................................ 20 B.3. Improvement of the Decentralization Framework .......................................................................................... 20
IV. THE DPL PROGRAM IN INDONESIA .................................................................................................................. 21 A. LINKS TO THE 2009-2012 COUNTRY PARTNERSHIP STRATEGY (CPS) .................................................................... 21 B. RELATIONSHIP TO OTHER BANK OPERATIONS ........................................................................................................ 21 C. COLLABORATION WITH OTHER DEVELOPMENT PARTNERS AND THE IMF .............................................................. 22 D. LESSONS LEARNED ................................................................................................................................................. 24
V. THE PROPOSED OPERATION ................................................................................................................................ 25 A. OTHER REFORM STEPS TAKEN OUTSIDE BUT RELATED TO THE DPL FRAMEWORK ................................................ 25 B. THE SEVENTH DEVELOPMENT POLICY LOAN .......................................................................................................... 26
B.1. Policy Area I: Improving the Investment Climate .......................................................................................... 30 B.2. Policy Area II: Strengthening Public Finance Management .......................................................................... 34 B.3. Policy Area III: Enhancing poverty alleviation and service delivery efforts .................................................. 39
C. PARTICIPATORY PROCESSES AND CONSULTATIONS ................................................................................................ 42 D. THE FUTURE PROGRAM .......................................................................................................................................... 42
VI. OPERATIONAL AND IMPLEMENTATION ISSUES ........................................................................................... 46 A. MONITORING AND EVALUATION ............................................................................................................................. 46
A.1. Monitoring ..................................................................................................................................................... 46 A.2. Evaluation ....................................................................................................................................................... 47
B. POVERTY, SOCIAL, GENDER AND ENVIRONMENTAL IMPACTS ................................................................................ 47 B.1. Poverty and Social .......................................................................................................................................... 47 B.2. Gender ............................................................................................................................................................ 48 B.3. Environmental ................................................................................................................................................ 48
C. FIDUCIARY ASPECTS, DISBURSEMENT AND AUDITING ............................................................................................ 49 D. RISKS ..................................................................................................................................................................... 50
ANNEXES ANNEX 1: LETTER OF DEVELOPMENT POLICY.................................................................................................... 53 ANNEX 2: APPLICATION OF GOOD PRACTICE PRINCIPLES ON CONDITIONALITY .................................... 58 ANNEX 3: DPL PROGRAM POLICY MATRIX AND MONITORING AND RESULTS FRAMEWORK ............... 59 ANNEX 4: LOOKING BACK: RESULTS ACHIEVED IN PREVIOUS OPERATIONS ............................................ 72
A. Results Achieved in the first DPL series (DPLs 1 to 4) ..................................................................................... 72 B. Results Achieved in the second DPL series (DPLs 5 to 6) ................................................................................. 76 C. Results Achieved in the Development Policy Loan with Deferred Drawdown Option (DPL-DDO) ................. 79
ANNEX 5: DETAILS ON DPL 7-9 PRIOR ACTIONS, TRIGGERS AND BENCHMARKS ..................................... 82 POLICY AREA 1: IMPROVING THE INVESTMENT CLIMATE ............................................................................................ 82 POLICY AREA 2: STRENGTHENING PUBLIC FINANCIAL MANAGEMENT ....................................................................... 91 POLICY AREA 3: ENHANCING POVERTY ALLEVIATION AND SERVICE DELIVERY ...................................................... 102
ANNEX 6: TECHNICAL ANNEX ON PUBLIC FINANCIAL MANAGEMENT (PFM) ......................................... 107 ANNEX 7: INDONESIA – IMF ASSESSMENT LETTER ......................................................................................... 124 ANNEX 8: DEBT SUSTAINABILITY ANALYSIS ................................................................................................... 128 ANNEX 9: INDONESIA AT A GLANCE ................................................................................................................... 131
FIGURES Figure 1: GDP growth slowed only moderately in 2009 and was supported by private domestic demand in the first half of 2010 ........................................................................................................................................................................ 4 Figure 2: The recent spike in monthly inflation was driven by volatile and administered items while core inflation steadily recovered to historical averages ........................................................................................................................... 4 Figure 3 Financial markets’ perceptions of Indonesian financial assets has strengthened markedlysince early 2009 ...... 5 Figure 4 After a brief deficit during the peak of the financial crisis, the balance of payments returned to surplus in 2009 and was supported by significant portfolio inflows into the first half of 2010 ......................................................... 5 Figure 5: 2009-2014 CPS core engagements ................................................................................................................... 21
TABLES Table 1: Indonesia's medium-term economic outlook ....................................................................................................... 9 Table 2: Development partner contributions to DPL operations (US$ million) .............................................................. 22 Table 3: Prior Actions for the Indonesia Seventh Development Policy Loan ................................................................. 29 Table 4: Prior Actions for DPL 7 and Indicative Triggers for DPL 8 and 9 .................................................................... 43 Table 5: Critical Monitoring Activities ........................................................................................................................... 46
BOXES Box 1: Analytical underpinnings for investment climate and trade reform support ........................................................ 13 Box 2: Analytical underpinnings for PFM reform support .............................................................................................. 16 Box 3: Analytical Underpinnings for Service Delivery Reform Support ........................................................................ 18
The Indonesia Seventh Development Policy Loan has been prepared by a World Bank team supervised by Shubham Chaudhuri (Lead Economist, EASPR) and led by Enrique Blanco Armas (EASPR). The members of the team are: Dara Lengkong (EASPR), Cut Dian Agustina (EASPR), Peter Kjaer Milne (EASPR), Ashley Taylor (EASPR), Timothy Bulman (EASPR), William Wallace (EACIF), Theo David Thomas (EASPR), Christina Schmalhofer (EASPR), Jonas Arp Fallov (EASPR), Vijay Ramachandran (EASPR), Hari Purnomo (EASPR), Imad Saleh (EAPPR), Rajat Narula (EAPFM), Soekarno Wirokartono (EASPR), Staffan Synnerstrom (EASPR), P.S. Srinivas (EASFP), Enrique Aldaz-Carroll (EASPR), Henry Sandee (EASPR), Stephen Magiera (EASFP), Siti Budi Wardhani (EASFP), Sjamsu Rahardja (EASFP), Vivi Alatas (EASPR), Edgar Janz (EASPR), Claudia Rokx (EASHD), Pandu Harimurti (EASHD), Jan Weetjens (EASIS), Nina Herawati (EASPR), Lynn Yeargin (EASPR). The team worked closely with Sharad Bhandari and Edimon Ginting (both Asian Development Bank), Shigenori Ogawa and Hiroshi Takabayashi (both Japan International Cooperation Agency), and Milan Zavadjil (IMF) to coordinate policy advice. The team worked under the overall guidance of Vikram Nehru (Sector Director, EASPR), Linda Van Gelder (Sector Manager, EASPR) and Stefan G. Koeberle (Country Director, EACIF).
REPUBLIC OF INDONESIA – SEVENTH DEVELOPMENT POLICY LOAN (DPL 7)
Loan and Program Summary
Borrower Republic of Indonesia
Implementing Agency
Coordinating Ministry of Economic Affairs and Ministry of Finance
Financing Data
IBRD Variable Spread Loan, US$600.0 million
Operation Type A single tranche operation that is the first of a third programmatic series of three consecutive multi-year Development Policy Loans (DPL). This operation is the beginning of DPL Series 7-9.
Main Policy Areas Investment Climate, Public Financial Management, Poverty Reduction and Public Service Delivery
Key Outcome Indicators
Since 2004, the two previous DPL series (DPLs 1-4 and 5-6) have significantly helped the Government of Indonesia towards achieving its medium term growth and poverty reduction objectives. This third DPL series is expected to contribute to the achievement of the following targeted outcomes by 2012:
Improved perception of investment climate by domestic and foreign investors, leading to increased flow of investments (with investment to GDP ratio increasing from the 2007-2009 average of 23.2 percent to 25 percent in 2012, and value of FDI net inflows from the 2007-2009 average of US$7 billion to US$7.9 billion in 2012);
Greater integrity and more effective use and management of public funds (with percentage of total capital expenditure disbursed on by end of Q2 increased from 19 percent in 2010 to 27 percent in 2012);
Strengthened the Government of Indonesia’s (GoI) efforts to reduce poverty and vulnerability, through better informed and evidence-based policy and program decisions (with percentage of social assistance program to central Government expenditure increasing from 3.8 percent in 2009 to 4.5 percent in 2012).
Program Development Objective(s) and Contribution to CPS
The overall goal of the DPL program is to help GoI achieve its medium-term growth and poverty reduction objectives. The proposed DPL 7 in particular supports the GoI’s reform efforts in: (i) improving the investment climate through strengthened investment service institutions and
regulations (revised investment negative list and simplified investment licensing procedures), enhanced logistics and trade facilitation (national single window, non tariff measures and national logistics blueprint), as well as reduced tax burden and improved tax administration (knowledge management strategy, PINTAR, tax intelligence and investigation, tax objection and appeals, and transfer pricing taxation);
(ii) strengthening public financial management through improved results orientation in the budget process, linking budget formulation to SPAN, development of a new M&E system, streamlined budget execution, improved budget and cash management, improved provision of IT services, strengthened management of state assets, improved public procurement systems, as well as improved Government accounting and audit functions; and
(iii) enhancing poverty alleviation and service delivery efforts through improved governance and institutional accountability, improved poverty measurements and targeting of the poor, improved household-targeted poverty reduction programs, i.e. Jamkesmas, and improved community-based poverty reduction programs, i.e. the National Program for Community Empowerment (PNPM).
In accordance with the 2009-2012 Country Partnership Strategy (CPS) for Indonesia, the DPL series shall continue to be at the center of WBG support in strengthening Indonesia’s central government institutions and systems, a key cross-sectoral engagement theme under the CPS. The CPS recognizes
that the DPLs have helped the Government’s efforts to reduce inefficient public expenditures, strengthen tax administration and debt management, enhance the competitiveness of the financial sector and implement governance and fiduciary reforms. Underpinned by a large AAA program co-financed by development partners, DPLs have also supported key reforms to improve the business climate and service delivery. According to the CPS, the DPLs will continue to build on strong relationships with the reform-minded economic ministries and continue to support the central Government in strengthening effectiveness of its systems. This includes efforts to reduce inefficient public expenditures, strengthen tax administration, enhance the overall business climate and strengthen poverty alleviation and service delivery. The Government of Japan and the Asian Development Bank have provided parallel financing for previous DPL operations and are likely to do so for DPL 7, ADB in the amount of US$200 million and JICA in the amount of US$100 million.
Risks and Risk Mitigation
Changes in key Government counterparts may undermine the extensive reforms pursued under the DPL program. Most DPL reforms are driven by priorities that were developed and articulated formally through consensus within the Government, rather than by individual Government officials; thereby minimizing the risks that departure of particular officials or politicians have a disproportionate impact on reform prospects. External factors may cause significant and rapid shifts in global financial market sentiment, resulting in sudden, large and somewhat disruptive capital outflows. In recent years, there have been significant improvements in Indonesian macroeconomic framework which have translated into improved resilience to external shocks. The Government has also shown track record in urgently taking precautionary and proactive measures when it needs to during the recent global financial turmoil, which suggests that the impact of turbulence in international markets will be limited.
Volatile and relatively high international oil prices create uncertainty about the Government's energy subsidies costs, which may hamper spending on development projects. The Government’s decision to raise administered fuel prices in May 2008 demonstrated that, if the economic situation warrants it, the Government is willing to make difficult decisions. In July 2010 the Government also increased electricity tariffs. Further increases in electricity and fuel prices, plus better targeting of subsidies, are likely next year. The Minister of Finance announced reforms to the subsidies’ schemes for fertilizer, fuel and electricity over the next 3 to 5 years, to improve the targeting of these subsidies and redirect spending to development projects.
Challenges remain in Indonesia’s PFM systems, particularly with regards to internal controls in the execution of budget by spending agencies. However, in recent years Indonesia has made significant strides in the way its public finances are managed and in increasing transparency and independent oversight. In almost all areas of PFM, changes in the legal and regulatory architecture are now largely complete and the momentum has shifted towards implementation of new PFM practices. Weaknesses in financial management and accountability continue to be gradually addressed through the DPL PFM reform program, as well as the GFMRAP project and other initiatives supported by development partners. Despite the challenges, and given the Government's progress in improving its PFM systems, the team considers that Indonesia's PFM system is adequate to receive a DPL.
Varied institutional capacity across different implementing agencies may undermine overall reform progress. However, the overall commitment and ownership to reforms is strong, and the Coordinating Ministry of Economic Affairs has performed very well in ensuring consistent and effective cross-ministerial coordination. The DPL program has helped strengthen the capacity of various institutions involved in the DPL program, which is also complemented by other Bank instruments, including investment projects, technical assistance and AAA.
Operation ID P117874
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IBRD PROGRAM DOCUMENT FOR A PROPOSED SEVENTH DEVELOPMENT POLICY LOAN
TO THE REPUBLIC OF INDONESIA
I. INTRODUCTION 1. The proposed Seventh Development Policy Loan (DPL 7) to Indonesia for US$600 million is being presented to the Board as the beginning of a new, third series of annual single-tranche DPLs 7 to 9. The first four DPLs, from 2004 to 2007, constituted a program anchored to the FY04-FY08 Country Assistance Strategy (CAS). Subsequently, during 2008 to 2009, DPLs 5 to 6 were the second series of core program support to the Government of Indonesia (GoI), anchored under the FY09-FY12 Country Partnership Strategy. DPL 7 was previously envisaged to be the last in this second series. However, with the new Government in place, there is a renewed opportunity to better align the DPL program with the new Government’s development strategies and priorities. Therefore, DPL 7 now represents the first of a new, third series of annual single-tranche loans (DPLs 7 to 9), although still anchored under the FY09-FY12 Country Partnership Strategy. 2. Proven to be quite resilient during the 2008-09 global economic downturn, Indonesia’s economy continues to build momentum towards achieving stronger and more inclusive growth. Growth slowed sharply but remained positive in the fourth quarter of 2008, at the depths of the global economic downturn. By mid-2009 Indonesia’s economy had recovered to pre-crisis averages, and the economy grew by 4.5 percent in 2009, making it one of the fastest growing economies in the G20. This growth was mostly supported by robust domestic demand and, later in the year, improving economic conditions abroad. Indonesia’s economy is expected to accelerate to 6 percent growth in 2010, possibly increasing to above 7 percent by mid-decade, largely due to accelerating domestic demand and external competitiveness, while accounting for the greater uncertainty surrounding the global economic outlook. The overall positive economic outlook provides a robust foundation for stronger and more inclusive growth, provided that the necessary institutional reforms continue to take place. 3. The newly elected Government has embarked on a robust and comprehensive reform agenda. The underlying prospects for accelerating economic growth are promising despite tensions in the coalition since the inauguration of the new Government. Shortly after taking office, the new Government issued the 100-day action plan, Presidential Instructions (Inpres) No.1/2010 and No.3/2010, and the Medium-Term Development Plan (RPJMN) 2010-2014, which altogether form a comprehensive reform agenda, with specific outputs, target dates and responsible authorities. Progress in the reform agenda continues to be on track, despite tensions in the coalition and political pressures against some of these reforms. The new Minister of Finance has a demonstrated track record for professionalism within the state banking sector. Reforms are expected to continue under the guidance of the new Minister of Finance, which could yield the path for accelerating Indonesia’s growth.
4. The policy actions of DPLs 7 to 9 are being developed in alignment with the new Government’s development priorities, as outlined in the 100-day action plan, the Inpres No.1/2010 Inpres No. 3/2010 and the RPJMN 2010-2014. During preparation of the previous DPL 6, a set of indicative DPL 7 policy actions were identified. However, it was envisaged that these actions be largely indicative, given that the new Government was to take office in October 2010. With a new Government in place, it was important to align the support being provided to new emerging priorities and a similar time frame for reforms with the one used by GoI. Hence, as discussed with the new Government, a new DPL series was started, previous DPL 7 policy actions were refined, and new DPL 8 and 9 policy actions were formulated, in alignment with the new Government’s development priorities as outlined under its 100-day action plan, Inpres No.1/2010, Inpres No.3/2010 and RPJMN 2010-2014, especially those under the areas
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of governance reform, poverty reduction, and investment and business climate. Overall, the DPLs 7-9 policy actions evolve around the following DPL reform pillars:
(a) Improving the investment climate through issuance of a revised investment negative list,
simplifying investment licensing procedures, establishing a national single window, development of a national logistics blueprint, strengthening the tax administration organization and business processes, as well as modernizing human resource management within the MoF DG Tax;
(b) Strengthening public financial management through improving the results orientation in the budget process, linking budget formulation to an integrated financial management information system (SPAN), development of a new M&E system, streamlining budget execution and management of budget authority, strengthening the management of state assets, improving public procurement systems, as well as strengthening government accounting and audit functions; and
(c) Enhancing poverty alleviation and service delivery efforts through strengthening governance and institutional accountability over the Government’s poverty alleviation programs, improving the methodologies for poverty measurements and targeting of the poor, and improving poverty reduction programs at the household and community level, i.e. Jamkesmas and the National Program for Community Empowerment (PNPM Mandiri).
5. With the renewed Government commitment to accelerate the pace of its poverty alleviation efforts over the next five years, the third DPL series’ policy area of poverty alleviation and service delivery has been expanded. The poverty alleviation reform aims in DPL 6 had previously focused primarily on a limited set of policy actions related to poverty measurement, targeting and national community development grants. Upon its election, the new administration declared poverty alleviation as its highest development priority, with the RPJMN 2010-2014 aiming to lower the poverty rate to 8-10 percent by 2014. The Government is committed to reach this goal by strengthening economic growth and job creation, as well as intensifying policy reforms in the area of poverty alleviation. This move has driven an expansion in the number of poverty alleviation and service delivery policy actions and benchmarks included in DPLs 7 to 9. 6. DPL 7 is based on the Government of Indonesia’s priorities and led by the Government of Indonesia. In addition to the continuous policy dialogue between the different GoI counterparts and the World Bank, a series of larger meetings that were attended by all stakeholders took place in order to formulate the supported policy actions and to assess their progress. The Asian Development Bank and the Japan International Cooperation Agency/ Government of Japan, which are also providing program support, participated actively in the consultation process. Technical assistance is often provided by different development partners in support of the policy actions identified by the Government of Indonesia. DPL 7 was negotiated with the GoI on October 13th 2010 and is scheduled to be discussed by the World Bank Board in mid-November 2010. All of the DPL 7 prior actions have already been completed prior to negotiations and Board review. 7. DPL 7 continues to complement critical reform efforts that need to be reinforced and maintained in other areas, including those under the PESF-DDO, the Infrastructure DPL and the Climate Change DPL. Approved by the Board in early March 2009, the PESF-DDO had supported various actions to mitigate any potentially adverse impacts of a growth slowdown during the 2008-09 global economic crisis. The DPL 7 supports the Government’s efforts to reinforce and maintain the momentum on the PESF’s extraordinary precautionary measures, many of which will have a limited time span unless they are embedded as part of the central government systemic processes and institutions for formulating and implementing policies. Further, the significant history of the DPL support has provided the basis for economic growth and poverty reduction, which facilitated the development of the
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Infrastructure DPL (IDPL) series and Climate Change DPL (CC DPL). Aiming to increase the amount and effectiveness of infrastructure spending, IDPLs 1 to 3 were approved from 2007 to 2009, whereas IDPL 4 is being prepared in parallel with DPL 7. Providing recognition of Indonesia’s bold and progressive actions on climate change and as an incentive for continued progress, the CC DPL was approved in May 2010.
II. COUNTRY CONTEXT
A. Indonesia in 2010 8. Indonesia has made remarkable progress over the past decade in terms of macroeconomic and political stability. Macroeconomic performance since the late 1990s has seen consistent output growth and rapid decline in external imbalances. Increasing tax revenues have contributed to the decline in the fiscal deficit. Increased growth has been grounded on increasing private sector investments, sustained domestic consumption and generally sustainable external surpluses. In an environment of controlled inflation and rising incomes, Indonesian citizens’ living standards have improved and poverty levels have fallen, although many remain close to the poverty line. In addition, as the result of a decade of relatively successful political and institutional reforms, Indonesia in 2010 is a highly competitive, decentralized electoral democracy. Governments at national, provincial, district and city levels are elected in free and fair contests, with an incumbent loss rate of about 40 percent (one of the highest of any competitive democracy). A system of checks and balances between legislative, judicial, and executive branches is increasingly in place, with no one branch of government able to dominate, and few institutional outcomes ‘guaranteed’. Where power was once radically concentrated around the presidency, it is now shared with the legislature; and where power was once concentrated in Jakarta, it is now shared among 500 or so city, district and provincial governments. 9. Indonesia was less affected by the global economic downturn of 2008-09, and by the first half of 2010 the economy’s growth patterns had normalized. Growth slowed sharply but remained positive in the fourth quarter of 2008, at the depths of the global downturn, then incrementally recovered through 2009. The economy then expanded by 4.5 percent over 2009 as a whole and is projected to grow by 6 percent in 2010. The social impact of the crisis was also limited with few reports of layoffs, and poverty and unemployment rates continuing to fall, while households’ spending power was supported by inflation slowing to decade-lows, although various food supply disruptions lifted inflation back towards the previous decade’s averages into mid-2010. Through the crisis, public finances remained in good health, with a nominal deficit in 2008 widening to a smaller-than-projected 1.6 percent of GDP in 2009 and a similar or even smaller deficit likely in 2010. Public debt levels continued to decline, ending 2009 at just below 30 percent of GDP. International ratings agencies recognized the robustness of Indonesia’s economy and strength of its public financial management, upgrading their ratings of Indonesia’s sovereign debt in 2009 and early 2010, in one case to just below investment grade. The relative strength of Indonesia’s economy has attracted surges of volatile portfolio inflows, challenging macroeconomic policymakers. 10. The outlook is for Indonesia’s economic momentum to continue to build, with growth rising to 6 percent in 2010, a little higher in 2011 and with scope for growth to average 7 percent by mid-decade despite the weaker global outlook. These growth rates suggest ongoing progress in poverty reduction, although this may be slowed if the surge in food prices in mid-2010 leads to a lasting return to the previous decade’s inflation rates. In the period 2010-14, budget expenditure is expected to increase by more than 30 percent in real terms compared to 2005-2009 period (about US$500 billion in 2008 prices) creating significant opportunities to improve public services. In order to seize these opportunities, Indonesia will need more effective and accountable institutions that can translate available resources into
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better development outcomes. This will be particularly important as Indonesia embarks on a period of second generation reforms to provide, for example, more sophisticated services in infrastructure, better education, and a sustainable health system. But this projection of rising growth rates and improving social outcomes are contingent on the Government aggressively progressing in this agenda.
B. The State of the Indonesian Economy in mid 2010
11. Indonesia’s economy continued to consolidate its recovery from the global economic and financial crisis in the first half of 2010. The economy grew by 6.2 percent over the year to June 2010, making it one of the fastest growing economies in the G20. By June 2010, quarterly growth rates were higher than the previous decade’s average growth and yearly growth had returned to pre-crisis levels. Growth in the first half of 2010 was supported by robust private demand. The domestic economy continued to outpace growth abroad leading to a muted contribution from the external sector. Growth among Indonesia’s major trading partners had begun to steady following solid increases in the second half of 2009. Domestically, solid consumer confidence, moderate inflation for most of the first half of the year and favorable financial market conditions supported demand.
12. Indonesia’s economic growth has been driven by private demand. Private consumption was supported in the first half of 2010 from high consumer confidence and relatively low and stable inflation for most of the first half of the year. Private investment in 2010 has also begun to recover. Meanwhile, net exports subtracted from growth in the first half of 2010 as the domestic economy grew stronger than economies abroad. Government consumption subtracted significantly from growth in the first half of 2010 as a result of slow disbursements and the unwinding of the fiscal stimulus. On the production side, the domestically-focused tertiary sector (communications, transport) contributed most significantly to growth, and anecdotal reports suggest that some subsectors had reached capacity constraints by mid-2010. Manufacturing accelerated at the end of 2009 and into 2010, although continued to lag the rest of the economy. Agricultural output was affected by unusual weather patterns and, for some sectors, smaller crop area, through the first half of 2010.
Figure 1: GDP growth slowed only moderately in 2009 and was supported by private domestic demand
in the first half of 2010
Figure 2: The recent spike in monthly inflation was driven by volatile and administered items while core
inflation steadily recovered to historical averages (monthly breakdown of inflation outcomes)
Source: BPS. Sources: BPS and World Bank.
13. Trade volumes continued to grow in the first half of 2010, although at a slower pace than in late 2009. Higher volumes and higher commodity prices saw trade values also increase over the period.
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12Net exportsStocks and discrepancyInvestmentGovernmentPrivate Consumption expenditure
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Feb-09 Aug-09 Feb-10 Aug-10
VolatileAdministeredCoreHeadline Inflation
Per cent Per cent
5
However, the trade balance narrowed as imports grew more strongly than exports. In the June quarter the current account surplus narrowed to US$1.8 billion, from a peak of US$3.6 billion in Q4. The faster expansion in imports is due to relatively stronger growth in domestic demand compared with external demand, combined with the stronger Rupiah making imports relatively cheaper. The current account surplus narrowed over the period, as the income deficit remained flat while the trade surplus narrowed.
14. After weakening sharply during the peak of the global financial crisis in late 2008, Indonesia’s financial markets recovered well and have out-performed since March 2009, apart from a brief correction due to renewed global risk aversion in May 2010. In August 2010, the Rupiah appreciated to Rp 8,930/US$, a three year-high, and a long way from the low of Rp 12,500/US$ during the peak of the financial turbulence in November 2008. The real effective appreciation of the currency has been even stronger (over 28 percent since March 2009). Government debt markets have followed a similar pattern, weakening drastically in late 2008 and early 2009 before recovering to historically strong levels by early 2010. The spread on Indonesian sovereign US$ debt fell below global emerging market averages for the first time in almost five years in mid-2009. Meanwhile, yields on 5-year Rupiah bonds were at record lows by early 2010, although still several percentage points above the yields on other ASEAN nations’ local currency sovereign debt. Large flows of liquid foreign capital into Indonesian financial assets have driven much of this strengthening. Net foreign capital inflows into Indonesia have amounted to US$11 billion year-to-date, despite US$5.7 billion of net capital outflows in May caused by global turbulence, which weakened financial markets that month, but only momentarily.
15. Foreign reserves have more than recovered from the crisis, as Bank Indonesia allowed the balance of payments surplus to widen and worked to slow and smooth the Rupiah’s appreciation. The balance of payments surplus, reflecting the current account surplus and significant portfolio inflows, saw Indonesia’s foreign reserves rise to US$81.3 billion at the end of August 2010, US$20 billion above the pre-crisis peak of July 2008 and US$30 billion more than their nadir in early 2009. 16. In addition to these factors, a recovery in foreign direct investment has further supported the balance of payment surplus. The Government’s electricity generation crash construction program has attracted much of this additional investment. US$4.9 billion was invested in Indonesia in the first half of 2010, as much as all of 2009. With the portfolio inflows and ongoing current account surpluses this lifted the balance of payment surplus to US$12.0 billion in the first half of 2010, near the total for 2009.
Figure 3: Financial markets’ perceptions of Indonesian financial assets has strengthened markedly since early 2009
(basis points)
Figure 4: After a brief deficit during the peak of the financial crisis, the balance of payments returned to surplus in 2009 and was
supported by significant portfolio inflows into the first half of 2010 (billions of US$ and percent of GDP)
± Reserves at August 30 2010. Sources: BI, BPS and World Bank staff calculations
± Reserves at August 30 2010. Sources: BI, BPS and World Bank staff calculations
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Jan-05 Feb-06 Apr-07 May-08 Jun-09 Aug-10
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Indonesian Spreads Less Global EMBI Average (RHS)
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-8
-4
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8
2005 2006 2007 2008 2009 2010
Errors & omissionsCapital + financial account (LHS)Current account (LHS)
% USD bnReserves
(RHS) ‡
0
6
17. BI has held the stance of monetary policy since it ended its easing cycle in late 2009, and with improving economic conditions and confidence lending has accelerated. Bank Indonesia cut its policy interest rate 300 bps from December 2008 to August 2009, and held it at that level to September 2010, relying instead on the gradually appreciating exchange rate to dampen inflationary pressures and adjustments in reserves ratio requirements to encourage lending. Commercial banks lowered their lending rates by less than the policy rate, with average lending rates remaining above 14 percent into mid 2010 but cut deposit rates more aggressively, creating the widest interest margins in the region. This did not reflect weakness in the banking sector. Shorter-term secondary market interest rates have tracked significantly below the policy rate. Earnings of major banks and various aggregate indicators such as capital adequacy and return on assets suggest the sector overall remains robust and has been little affected by the crisis or the rapid credit growth to mid-2008. In December 2009, commercial banks’ non-performing loan ratios fell to 3.3 percent and remained near that level through to mid 2010, well below the 2007 and 2006 averages of 5.6 percent and 8.0 percent respectively. The robustness of the banking sector is driven by the top 15 commercial banks, which account for 80 percent of total assets, with indicators for the remainder of the banking sector less robust. After being anemic through 2009, lending growth accelerated towards more typical levels by mid-2010, led first by Indonesia’s relatively under-developed consumer lending market, and broadening into a recovery in new working capital and investment loans by June.
18. Inflation, after slowing to a decade low in 2009, started accelerating in mid 2010 as consumer prices were impacted by negative food supply shocks. Headline inflation accelerated sharply in June and July 2010 due to an unusually wet ‘dry’ season impacting first various spice and later rice prices. Most increases are expected to be temporary and unwind following the Idul Fitri holiday period in September 2010. Seasonal demand pressures surrounding the month of Ramadan coupled with administered price increases in recent months, including electricity tariffs and vehicle registration, led to a sharp acceleration in prices with the headline inflation rate at 6.4 percent in August — the highest in 16 months. Core inflation, generally unaffected by this volatility, continued to gradually pick up and by August 2010 was at 4.2 percent. BI has not increased interest rates in response to higher-than-expected inflation, but it has soaked up liquidity from the market through increased reserve requirements that will enter into effect in November 2010.
19. The Government’s budget deficit in 2009 was lower than expected, at 1.6 percent of GDP. Revenues in 2009 were 2.5 percent weaker than in 2008, reflecting the cuts in tax rates under the Government’s stimulus package (e.g. the corporate income tax rate was cut from 30 percent to 28 percent), slower nominal GDP growth, and the lower value of imports and exports with the decline in trade flows and commodity prices. Revenues recovered in the final months of the year, due to a significant pick-up in collections from gas non-tax revenues, as well as increased efforts by the tax office to improve compliance of both firms and individuals. Line ministries’ spending continued to improve in 2009, and reached 95 percent of budget overall. Less was spent on fuel subsidies and interest payments than had been budgeted, a result of low oil prices and a stronger Rupiah, respectively. Although spending on core programs improved, overall disbursements are still skewed towards the end of fiscal year. Reforms in the budget cycle (e.g. improved procurement processes, and new scope for budget carry-over) contributed to the higher budget realization than in previous years. The bulk of the Government’s 1.4 percent of GDP stimulus package was delivered as tax cuts, largely disbursed instantly, while 96 percent of the stimulus spending (mostly for small-scale infrastructure) was disbursed by the end of the year.
20. Parliament approved a revised 2010 budget deficit of 2.1 percent of GDP, from an initial projection of 1.6 percent, and the Government is proposing a 2011 deficit of 1.7 percent of GDP. The 2010 budget includes a small fiscal stimulus package, smaller than 2009’s at Rp 36.3 trillion or 0.6 percent of GDP, and also mostly made up of tax cuts (including a lowering of the corporate tax rate to
7
from 28 percent to 25 percent). The upwards revision to the deficit largely reflects a higher projected oil price (US$77 per barrel from US$65 per barrel in the earlier budget), which resulted in higher energy subsidy costs and the central Government’s revenue sharing obligations with sub-national governments. The larger deficit also funds some of the incoming administration’s new programmatic spending priorities and can be easily financed from the Government’s 2009 surplus. However due to a slowing in disbursement rates and stronger-than-expected revenues , on July 26th, 2010, the Minister of Finance announced that the budget deficit may actually be 1.5 percent of GDP, which is closer to the World Bank’s current projection of around 1.0 percent of GDP. Regardless, the Government has enjoyed improved access to commercial debt markets in 2010, filling over half of its 2010 bond issuance target by early June, at sharply lower yields and longer maturities than a year earlier. The Government announced its 2011 budget proposal in mid-August, which projects a deficit of 1.7 percent of GDP. This was presented to the Parliament in mid-September. The proposal includes a significant increase in capital spending for infrastructure, signaling the Government’s efforts to address long-standing infrastructure bottlenecks affecting the country. 21. The Government increased tariffs as of July 1, 2010 for most consumer categories, ranging from no increase for the low income users to 18 percent for the higher use categories, with an intended weighted average of 10 percent overall. The adjustment in the tariff schedule is expected to reduce the electricity subsidy, provided that electricity supply costs do not rise by a greater amount. In addition, given the distribution of the tariff adjustment across income categories, subsidy targeting is expected to improve, as the higher tariff increase was applied to higher end consumers with poorer residential customers in the 900 VA and below range seeing no change in their bills. PLN projects the share of PSO for the poorer residential customers to rise from 42 to 53 percent while the share for Industry and Business falls from 37 to 24 percent for 2010. The tariff adjustment is also accompanied by an effort to simplify the complex array of special tariffs mechanisms in order to provide more uniform pricing to customers of the same voltage category. Further increases in electricity tariffs have been proposed for 2011 and 2012 with the aim of generating additional budgetary savings and improving the financial footing of the energy sector. 22. The recent growth performance contributed to declining poverty levels in 2010. The absolute number of urban poor and rural poor fell below 11.5 million and 20 million (respectively) for the first time since 2004. This meant year-on-year declines in urban and rural poverty rates of approximately 0.85 and 0.80 percentage points (respectively). The overall poverty rate declined to 13.3 percent, from 14.2 percent a year earlier. The poverty rate is expected to continue to decline over the next year. Although overall economic growth is expected to be strong, growth in the agriculture sector, where many of the poor are employed, is projected at 3.6 percent. More importantly, the annual increase in the cost of living for the poor is expected to be 7.8 percent, nearly 3 percentage points higher than non-food non-fuel inflation. Such increases in the prices of goods and services consumed by the poor dampen the poverty-reducing effects of growth with preliminary estimates projecting a fall in the poverty rate to 12.75 percent by March 2011. In terms of recent labor market developments, in May 2010, BPS reported that the labor force had grown by 2.2 million people in the six months to February 2010, reaching 116 million, of whom 107 million were working, resulting in an open unemployment rate of 7.4 percent, down from 7.9 percent in August 2009 and 8.1 percent in February 2009. Employment in the agricultural sector actually fell by 0.5 percent and in the transportation sector by 2.2 percent.
C. Indonesia’s Economic Outlook
23. The outlook for Indonesia’s economy remains solid, with the major uncertainty being Indonesia’s potential to raise growth rates to or above 7 percent by mid-decade. Indonesia’s economy is expected to grow by 6.0 percent in 2010, increasing to around 6.2 percent in 2011. Growth
8
will be supported by increased domestic demand offsetting stabilized or declining net exports. Private consumption is expected to gradually accelerate, growing by around 5.2 percent in 2010 and 5.3 percent in 2011. Sectors focused on domestic demand (transport, communications, various consumer and business services) are likely to continue to perform better than those more externally oriented (manufacturing and resource-related), although the latter offer greater scope for upside surprises as the investment climate improves. Investment is also expected to accelerate in 2010, stimulated by increasing commodity prices, stronger credit growth and some return of foreign direct investment. After 2009’s strong performance, government consumption is likely to grow more slowly than the overall economy in 2010 before recovering in 2011, although core and developmental government programs are likely to increase their share of overall spending. The overall macroeconomic situation and policy framework, as well as prospects for both growth and continued prudent fiscal policy, warrant continued support for Indonesia’s structural and institutional reforms through DPL 7.
24. Indonesia’s relatively high and rising investment ratios, robust domestic demand and improvements in the investment climate including through infrastructure projects are projected to support faster growth in the face of the uncertain and possibly weaker external outlook. Trade growth is expected to remain broad-based. Imports are expected to recover faster than exports, as the domestic economy grows more quickly than Indonesia’s export destinations; and production to meet the ongoing recovery in non-commodity exports requires more imported inputs, leading to a narrowing of the trade surplus. Combined with a widening in the income deficit due to increased profit repatriation by oil and gas companies, the current account surplus is expected to narrow in 2010, before moving into deficit in 2011. Nevertheless, the balance of payments surplus is expected to remain high in 2010, as strong portfolio capital and direct investment inflows more than offset the narrowing in current account surplus. The surplus is expected to narrow in 2011 as the current account moves into deficit, while capital inflows remain firm. The annual inflation rate for 2010 is likely to be around 5.1 percent as prices accelerate in the latter half of the year, as the pass-through from the stronger exchange rate into retail prices completes, global commodity prices remain robust, and domestic demand continues to strengthen. Into 2011, inflation rates are likely to further rise to 6.4 percent, given the recovery in new lending and acceleration in the money base experienced since late 2009, and possible increases of other administered energy prices (particularly retail gasoline). The longer-term outlook is highly dependent on the conduct of policy by Bank Indonesia, although it is committed to limiting inflation to around 5 percent and ensuring that levels adjustments in key regulated prices (notably energy) do not translate into persistently higher inflation.
25. While near-term risks to the outlook remain significant, it is still uncertain whether Indonesia can achieve the pace of reform required to lift average growth rates above 7 percent. Developments in Q2 2010 highlight the near-term risks to Indonesia’s economic outlook posed by volatile capital flows and uncertain trading partner growth. In addition, political developments since late 2009, in particular the parliamentary inquiry on the bailout of Bank Century and its outcome, have raised some questions about the timing and depth of future reforms and improvements in conditions for investors and firms, with potential downside risks to investment conditions and growth, although it is unclear whether these developments have significantly impacted financial market investors’ perceptions. Over a longer horizon, these developments raise the question of whether the Government can achieve the reform agenda outlined in its newly released medium-term development plan (RPJMN 2010-2014) towards achieving stronger and more inclusive growth.
9
Table 1: Indonesia's medium-term economic outlook
Source: BPS, BI and World Bank historical data, World Bank staff projections.
D. The New Government and the Political Outlook
26. The 2009 legislative election allowed the Democrat Party (PD) to triple its share of seats in Parliament, and the subsequent presidential election provided outright victory to the incumbent President. The continuing, and in the case of PD rapidly growing, appeal of mainstream largely secular-nationalist parties, accounting for fully 75 percent of the vote, is an important highlight. Subsequently, in the presidential election in July 2009, the incumbent President Yudhoyono won an outright victory in the first round. With close to 61 percent of the vote, the President easily surpassed the 50 percent threshold rendering a second round of voting unnecessary. The President campaigned mainly on a platform of continuing past policies and governing approaches, which resounded positively with the electorate.
27. The President named his second United Development Cabinet in October 2009, which seems likely to prove more effective than its predecessor. The cabinet includes representatives from most of Indonesia’s regions and ethnic groups, as well as several political parties. At the time of the inauguration of the new administration, President Yudhoyono pledged to boost economic growth, continue to fight corruption and strive to uphold the rule of law. Key cabinet members such as the Ministers of Finance and Trade, together with the heads of state development planning (Bappenas) and the investment coordination board (BKPM) are technocratic figures and as such, there exists ample scope for reform.
28. Developments in several other key areas bode well for continued reform momentum. The establishment of a new Presidential Delivery Unit (UKP4) increases the likelihood of effective implementation of ministerial programs. In addition, the unit has also been tasked with pushing for judicial reforms, a task that it seems to address with both energy and success. Having achieved the bulk of the Government’s first 100-day action plan, the President signed an ambitious Presidential Instruction
2008 2009 2010 2011 2012 2013 2014Key macro variables (%)
GDP growth 6.1 4.5 6.0 6.2 6.7 7.0 7.2Private consumption 5.3 4.9 5.2 5.3 5.3 5.3 5.3Gross fixed capital formation 11.9 3.3 8.3 9.2 8.7 9.2 10.0Exports of goods and services 9.5 -9.7 11.5 11.0 8.5 9.7 10.7Imports of goods and services 10.0 -15.0 12.0 11.6 7.5 9.2 11.3
Trade balance (US$ bn) 9.9 21.0 13.9 10.5 12.0 10.0 8.0Balance of payments (US$ bn) -1.9 12.5 19.0 8.8 4.0 2.0 2.0CPI inflation 9.8 4.8 5.1 6.4 5.9 5.0 5.0Poverty basket inflation 11.6 5.8 6.9 7.6 5.9 5.0 5.0GDP deflator growth 18.2 8.5 8.8 12.2 9.2 9.0 9.0
State Budget (% GDP)State Revenues 19.8 15.5 15.7 15.8 15.9 15.9 15.9State Expenditures 19.9 17.0 16.6 18.0 18.4 18.1 17.8Budget balance -0.1 -1.6 -0.9 -1.7 -2.5 -2.2 -1.9Gross financing need 1.6 2.9 3.4 3.7 3.9 3.6 3.4Public debt 29.2 28.6 27.0 26.3 25.5 24.7 24.0
Key assumptionsExchange Rate (Rp/US$) 9757 10356 9091 9000 9000 9000 9000Major trading partner growth (%) 2.1 -0.9 6.5 4.3 4.3 4.3 4.3Interest rate of SBI 3 month (%) 8.7 7.1 6.5 6.5 6.5 6.5 6.5Crude-Oil Price (US$/Barrel) 94.0 61.6 77.5 77.0 79.0 80.0 81.0
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(Inpres) No.1/2010 on Accelerating Development, which contains a list of policy outputs, together with timelines for completion and assignment of ministers responsible, thereby helping to sustain reform momentum by giving a clear agenda for the rest of 2010. Concerns regarding the momentum of the anti-corruption agenda surfaced over a struggle between the independent Anti-Corruption Commission (KPK) and the national police. The resolution of the struggle in favor of the KPK largely restored the public’s trust in the Government’s anti-corruption agenda. 29. Reforms are expected to continue under the guidance of the new Minister of Finance. Following resignation of former Minister of Finance after several months of pressure from parties in Parliament over the rescue of Bank Century in late 2008, the President appointed the former Bank Mandiri President Director as the new Minister of Finance in May 2010. The former minister’s resignation highlighted the political tensions created by the reform efforts. The appointment of the new minister signals the Government’s continued support for reforms and sound macroeconomic management.
III. THE GOVERNMENT’S REFORM PROGRAM AND BANK SUPPORT
30. Since the 1998 Asian financial crisis, Indonesia has come a long way in reinforcing economic stability and initiating structural reforms. Within the first five years after the crisis, overall stability was restored on both the macroeconomic and political front. Lacking the finances to undertake many needed investments, at that time the Government’s initial focus was on fiscal consolidation and putting in place the basic legislative framework for the new Indonesian political setting. On the economic front, the focus was on restructuring the banking sector, which had collapsed as a result of the crisis, and on restoring the fiscal position of the Government. By the end of the first five years post-crisis, macroeconomic stability had been restored and the political arena has been stabilized. Thereafter, to prepare for the end of its IMF program, the Government issued a White Paper in September 2003 that outlined plans for macroeconomic and fiscal consolidation and a series of structural reforms to restore confidence in the Indonesian economy and boost investment. These plans were broadly maintained by the Government led by President S.B. Yudhoyono who came to power in late 2004, with the plans incorporated into the Medium-Term Development Plan RPJMN 2004-2009. Indeed, the history of fiscal prudence then provided the Government with the fiscal space needed to meet Indonesia’s rising development challenges.
31. Upon taking office, the new Government moved rapidly to announce its first 100-day action plan in early November 2009. The action plan included 15 priority program areas, 45 detailed programs and 131 specific action plans. The 15 priority areas were a mixture of reformist initiatives and conventional policy goals. In descending order of priority, these included ‘combating legal mafias’, ‘revitalizing the defense industry’, ‘combating terrorism’, ‘electricity’, ‘increasing food production’, ‘production of fertilizer and sugar’, ‘land-use and spatial planning’, ‘infrastructure development’, and also included ‘climate change and the environment’. Responsibility for monitoring progress rested with the head of the new Presidential Delivery Unit (UKP4). Although the 100-day action plan was relatively un-ambitious in terms of economic or institutional reforms, it appears to have been more successful than its predecessor in 2005, with the head of UKP4 declaring that the Government had achieved 93 percent of its targets by February 2010. It included some significant changes on land administration, including a revision of rules on spatial planning of forest-use permits and improvements in land-title databases and resolution of land title claims, together with a regulation on the administration of neglected or under-used land. In also included a regulation on improved procedures for government procurement.
32. This was followed by Presidential Instructions on Accelerating Development in 2010 (Inpres No.1/2010) and on Equitable Development (Inpres No.3/2010). After achieving the bulk of its targets in the first 100-day action plan, on February 19th 2010 the President issued Inpres No.1/2010, which
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provides an agenda for the remainder of the calendar year. Citing specific outputs, target dates and responsible authorities, the Inpres pertains to policies in 14 areas with a host of bills and regulations to be brought forth by the end of the year. Several of the targets in the Inpres are important for the reform agenda. These include the draft Land Law aimed at synchronizing existing land laws, together with the refining of labor regulations in order to synchronize labor policies with the investment climate. Also important is the focus on bureaucratic reform and management, with a ‘grand design’ for bureaucratic reform by the end of the year, the restructuring of state enterprises, including PLN and Pertamina, and the setting-up of electronic procurement services for 100 state entities. Subsequently, the President issued on April 21 2010, Inpres No.3/2010, which covers three development programs focused on poverty alleviation, improving access to justice for all and the achievement of the millennium development goals. These programs include specific actions to be completed in 2010 and 2011.
33. Also in February 2010, the Government unveiled its Medium-Term Development Plan (RPJMN) 2010-2014. The new RPJMN consists of three books and lays out 11 national priorities. Book I outlines the strategy, general policy and macroeconomic framework reflecting the vision, mission and 11 national development priorities; Book II outlines sectoral development plans based on the Long-Term Development Plan (2005-25) with the theme “to strengthen the synergy across development sectors” in order to accomplish the vision of Book I; and Book III outlines regional development plans by island with the theme “strengthen the synergy between central and regional and inter-regional governments” to accomplish the national development vision of Book I. The 11 national development priorities articulated in Book I are: (i) bureaucracy and governance reform; (ii) education; (iii) health; (iv) poverty reduction; (v) food security; (iv) infrastructure; (vii) investment and business climate; (viii) energy; (ix) environment and disaster management; (x) least developed, frontier, outer, and post-conflict areas; and (xi) culture, creativity, and technological innovation.
34. The RPJMN 2010-2014 programs are a mix of existing and new development programs and reform initiatives. Most programs under poverty reduction, education, and health are a continuation or expansion of the existing development programs, such as the integrated social assistance program including the national insurance system (Jamkesmas), scholarships for the poor, cash transfers (BLT), assistance for poor households (PKH), School Operational Assistance (BOS), and the expansion of rural community development programs (PNPM Mandiri). Some new program priorities include constructing 19,000 km of highway across the five largest islands, enhancing electricity generation capacity by 3,000 MW per annum, building a transportation infrastructure based on the National Transportation System and Transportation Blueprint, introducing a single identity number to be applied by 2011, reducing the number of least developed areas by 50 districts by 2014, developing a national logistic system, and implementing an electronic investment license and information system. These new priorities reflect the Government’s focus on infrastructure for the next five years.
35. Through these initiatives, the poverty rate is expected to decline from the current 2009 level of 14.15 percent to 8-10 percent by 2014. To achieve this, the Government plans to improve the effectiveness of poverty reduction programs by integrating coordination of social/poverty reduction programs into the Vice-President’s office, expanding the coverage of current programs and developing rural infrastructure. Meanwhile, the Government expects to improve access to, and quality of, education by providing scholarships to the poor, implementing teacher key performance indicators, balancing teacher-pupil ratios and achieving national education standards by 2013. In the health sector life expectancy is expected to increase to 72 years and malnutrition to decline to below 15 percent by 2014.
36. With a targeted average economic growth of 6.3-6.8 percent for 2010-14, reaching 7 percent prior to 2014, the RPJMN 2010-2014 highlights the need for growth with equity and a range of cross-cutting policies to ensure that development is both sustainable and inclusive. Private consumption is projected to grow by 5.3-5.4 percent annually, while investment and exports are projected
12
to rise annually by 9.1-10.8 percent and 10.7-11.6 percent, respectively. The emphasis of the RPJMN is on a strategy that is pro-growth, pro-jobs and pro-poor, with particular relevance for increasing investments in infrastructure and strengthening the pro-poor agenda.
A. Key Reform Directions of Government Systems and Institutions Supported by the DPL
37. The new DPL series continues to support the Government’s development agenda. The overall goal of the DPL program is to help the Government of Indonesia (GoI) achieve its medium-term growth and poverty reduction objectives, as outlined in the RPJMN 2010-2014. DPL 7 in particular supports the GoI’s reform efforts in: (i) improving the investment climate; (ii) strengthening public financial management; and (iii) enhancing poverty alleviation and service delivery efforts. This section describes the key government reform achievements and directions under these three pillars.
A. 1. Investment Climate and Trade Facilitation
38. Improving investment climate and trade facilitation continues to be a key priority in the Government’s reform agenda, as outlined in the Medium-Term Development Plan, RPJMN 2010-2014. The prospects for investing in Indonesia are quite promising, given its significant population and natural resources. Yet investments have been constrained by poor coordination between the relevant government agencies, uncertainty about the legal and judicial frameworks, infrastructure constraints, and unclear investment policies, regulations, and procedures. Therefore, the RPJMN places a high priority on harmonizing policies and regulations, streamlining procedures, promoting customs and trade facilitation, as well as improving infrastructure and strengthening the financial sector to support a sound investment climate. Improving the performance of the tax system is also a medium-term objective of the Government’s reform agenda. The Government’s medium-term plan is to further increase tax revenue from their current levels, of less than 12 percent of GDP, to around 15 percent (closer to the non-OECD regional average). This is to be achieved through the implementation of the next stages in the reform of tax systems and administration.
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Box 1: Analytical Underpinnings for Investment Climate and Trade Reform Support Recent investment climate surveys indicate that the business perceptions of the investment climate in Indonesia
have improved since 2003 (except for infrastructure) but that the country still has a long way to go. The most recent Doing Business survey of 2010 confirms that. Indonesia was ranked 122nd out of 183 countries in terms of the overall ease of doing business, with very poor performance, relative to other countries, in the areas of starting a business (rank 161st), employing workers (rank 149th) and enforcing contracts (rank 146th).
In order to stimulate investment, the creation of new companies and jobs the Government needs to encourage
simpler business entry. Easier start-up stimulates the creation of new companies, is correlated with higher productivity among existing firms and facilitates the transfer of factors of production across sectors. Reducing entry costs increases entry pressure, thereby pushing firms with lower productivity out of the market. Simpler and faster business entry makes it easier for workers and capital to move across sectors when economies experience economic shocks. Research shows that the most efficient economies focus on creating a single interface between Government and the entrepreneur to take care of all necessary registrations and notifications.
In the current era of globally integrated markets expanding business and creating jobs is also dependent on
reducing time and costs in the export and import processes. Many economies have worked to introduce practices that enable them to reach those objectives by providing electronic filling of trade documents (through electronic data interchange systems), allowing shippers to declare manifests online, reducing document requirements and using risk-based inspections. Electronic transmission of documents not only speeds the clearance of goods; it often reduces the possibilities for paying bribes. But to avoid a dual electronic and manual customs clearance process, the new system must be complemented by supporting legislation authorizing electronic transactions. Another good approach is to provide a single window for obtaining different permits and authorizations thereby reducing the time spent preparing documents. A recent study calculates the loss from export delays at around 1 percent of trade for each extra trade day. For perishable agricultural products the cost is nearly 3 percent of the volume of trade for each day’s delay. Another study finds that each extra signature an exporter has to collect reduces trade by 4.2 percent.
In terms of logistics, Indonesia’s performance is worse compared with most of its ASEAN neighbors. Its
performance is particularly lower than its neighbors with respect to the quality of its infrastructure, the competence of its logistics service providers and timeliness of shipments reaching their destination. As an archipelagic country, Indonesia requires an effective and efficient, integrated National Logistics System to improve its business competitiveness and ensure the even distribution of strategic commodities and people’s basic needs at affordable prices. The main role of a logistics system is to ensure the effective and efficient smooth movement of goods reflected by competitive logistics costs and satisfactory services. This will improve the competitiveness of businesses and contribute to an improved quality of services provided.
Source: 2010 Doing Business, Draft National Logistics Blueprint.
39. The Government continues to make progress in improving the investment climate. Key achievements have been made in strengthening the legal framework for taxation, through amendments of the three main tax laws of Indonesia.1 These amendments led to a better balance between taxpayer rights and the authority of the tax administration, reduced corporate and personal income tax rates, and a revised list of exempt and zero-rated goods and services for VAT. A comprehensive program continues to advance the tax reform agenda further, which covers a restructuring of the Directorate General of Taxes under the Ministry of Finance; modernization of the tax administration core processes; and strengthening the governance and accountability frameworks. A new Presidential Regulation No. 36/2010 on Indonesia’s Investment Negative List has also been issued, which is expected to help provide greater certainty to investors and open up a few additional sectors to foreign investment.
1 These include the passage of the amended Income Tax Law, which reduces corporate and personal rates, simplifies administration and increases legal certainty; the passage of the Tax Procedures Law which strikes a better balance between the rights and obligations of taxpayers and the powers of tax officials, an issue of longstanding concern to the business community; and the passage of the law recognizing electronic signatures which clears the way for multiple e-Government initiatives such as electronic registration and filing of tax returns.
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40. The Government also continues to enhance trade facilitation. A national single window model was launched in 2010 in five major ports throughout Indonesia,2 which is expected to reduce the time and cost for importing and exporting. The new Postal Law recognizes the importance of a national certification scheme for domestic logistics service providers to upgrade their skills. The new Shipping law separates port regulation from port operation and in principle introduces competition in port operation. Overall, while some aspects of these laws remain a challenge, a promising development is the Government’s changed approach to trade facilitation reform. The Government has recognized that isolated trade facilitation actions are not as effective as a coordinated comprehensive logistics strategy that includes improvements in infrastructure and upgrades of the quality of logistics service providers. It also recognizes the need to link such a logistics strategy with other transport reform initiatives and with regional development plans to effectively connect the economy.
41. The local level investment climate continues to be a particular concern because of inconsistent and often arbitrary regulation imposed by local governments. Post-decentralization, the initial reaction of local governments was often to increase charges on local businesses and trade. Inconsistencies as well as the sheer number of local regulations have made doing business more difficult in many places. Districts have, at times, used their newly acquired powers to issue excessively stringent local labor regulations or target businesses with a plethora of new local taxes, levies and fees. In fact, the costs, delays and inconvenience of business licensing is one of the most commonly mentioned criticisms of the local investment climate. Although illegal, restrictions in the movement of goods across district and provincial borders still exist and impose additional costs and delay to the distribution of goods, interfere in domestic trade and undermine internal market efficiency. Incomplete and sometimes mutually incompatible regulations and the tug-of-war between the center and the regions on issues such as investment approval, land and the like affect the “bankability” of investments and have been a factor in the slow recovery of investment post-crisis, especially in mining. The Government is aware of these constraints and plans to address them as part of its medium-term reform agenda.
42. Through the DPL process and Trust Funded assistance the Bank has been actively engaged in supporting investment climate reform in Indonesia. Those instruments along with other development partners’ support have contributed to the successes attained by the Government in terms of: (i) development of a new Investment Law passed by Parliament in March 2007; (ii) two major economic policy packages covering investment regulations and institutions, customs, tax, infrastructure, finance, and SMEs; (iii) streamlining of business start-up through simplification of the procedures for establishing limited liability companies and obtaining key business licenses; (iv) faster approvals for foreign investors; and (v) development of the Government’s capacity to monitor changes in the investment climate through business surveys and enhanced data collection. There has been additional support by the International Finance Corporation (IFC) on improving local government investment climates through its Municipal Simplification Program, which complements efforts under the Bank’s Investment Climate Trust Fund to simplify business regulations at the national level. On the tax reform front, tangible improvements are: (i) taxpayer registration; (ii) returns processing; (iii) accounts management; (iv) document management; (v) compliance (in the areas of taxpayer audit and collections); (vi) revenue fraud investigation and handing; and (vii) taxpayer objections and appeals.
43. Given the importance of the investment climate and trade facilitation reform agenda and Government’s commitment, further support to reforms is expected through the programmatic DPL series, the Multi-Donor Facility for Trade and Investment Climate (MDFTIC) and the recently established Project for Indonesian Tax Administration Reform (PINTAR). The MDFTIC, through institutional and capacity building initiatives as well as analytical and advisory work, is expected to assist
2 The five main ports are: Soekarno Hatta Airport, Tanjung Priok, Tanjung Perak Surabaya, Tanjung Mas Semarang and Belawan Medan. Altogether, these ports account for 80-90 percent of Indonesia’s international trade volume.
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the Government in further streamlining investment procedures and business licensing, monitor the investment climate, strengthen Indonesia’s logistics performance, continue with the implementation of the National Single Window, reduce bottlenecks in port and customs clearance, strengthen the financial sector and increase access to financial services. PINTAR, whose implementation is expected to start in 2011, will support the Government in further increasing the efficiency of taxpayer data collection and management, improving tax administration human resource management and development, and strengthening tax audit and collection functions while implementing a change management process including an internal and external communications strategy.
A.2. Public Finance Management
44. Since adoption of a new regulatory framework in 2003/4,3 the Government has shown strong commitment towards building a modernized, state of the art public financial management system, and to this end has embarked on a broad-based and ambitious PFM reform agenda. The Government has been undertaking remarkable efforts to improve business processes and systems throughout the entire budget cycle, including audit, legislative oversight and civil service reform. It has thereby addressed a multitude of risks related to capacity constraints, poor infrastructure, and weak governance across the PFM institutional and stakeholder landscape. In the medium to long term, it is expected that improvements in Indonesia’s PFM systems will lead to more targeted and flexible allocation of public funds to development priority needs and more efficient, transparent and accountable disbursements. This is fundamental to improving public service delivery and achieving more concrete development outcomes in the future.
45. The breadth and depth of PFM reform achievements over the relatively short reform period have been remarkable. The most notable ones include the introduction of a performance-based budgeting; procurement of an integrated financial management information system (IFMIS); the staged implementation of a Treasury Single Account (TSA); the establishment of cash forecasting capacity in the Treasury; the development of accounting standards to provide for a “cash towards accrual” accounting framework; the on-going inventory of government assets; the establishment of a new procurement agency; and first improvements of internal controls and internal and external audit systems.
46. While progress has been substantial and reforms are generally moving in the right direction, a long list of challenges remains. Among others, reforms of central Government budgetary systems to ensure policy orientation in budget formulation and execution need to be deepened. The TSA and automation of the Treasury payments system need to be further fine-tuned. With the ongoing implementation of the new Treasury system, the implementation of government accounting standards needs to be extended, and the underlying business processes at spending agencies need to be reengineered. A roadmap would need to be developed for the establishment of e-Government procurement in the country and so would a human resources strategy, which should address the challenges in procurement reforms such as the development of a permanent procurement management function in implementing agencies. Relevant and reliable financial reporting needs to be further ensured, and human resources in government accounting and reporting should be strengthened. The internal audit function in the country should also be strengthened by modernizing the internal audit institutions and by providing intensive training to internal audit staff. And last but not least, the Government’s monitoring and evaluation capacity could be enhanced by putting in place an integrated, performance-based M&E system.
3 The most noteworthy laws issued include the State Finance Law No. 17/2003, the State Treasury Law No. 1/2004 and the State Financial Audit Law No. 15/2004.
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47. Public financial management reforms are technically complex and involve enormous amounts of data sets, systems and people. The sheer size of Indonesia, the scope of its PFM systems, the number of involved stakeholders, and the timeline and ambitious nature of its envisaged reform agenda make local PFM reforms a particularly challenging undertaking. It will continue to require significant amounts of expertise, coordination, capacity building and sequencing. However, the Government has shown continued commitment to complete the planned reforms, through the development of plans and annual strategies that ensure the proper phasing and coherence of reforms. The Secretary General’s office within the Ministry of Finance is building its capacity to centrally monitor and ensure reform progress through the strategy and management office in the Ministry of Finance or Pushaka – Pusat Analisis dan Harmonisasi Kebijakan. Box 2: Analytical Underpinnings for PFM Reform Support
Indonesia’s proposed public finance reforms broadly address the findings and recommendations of recent assessments, including those of the World Bank. Starting in 2001, the Country Financial Accountability Assessment identified weaknesses in the country’s accounting standards and systems as significant hurdles in the improvement of the governance and accountability environment in the country. New accounting standards have been implemented across the Government agencies since 2003, involving the development of new accounting systems and procedures, a move from single entry to double-entry accounting and the adoption of a new chart of accounts.
The June 2008 Public Expenditure and Financial Accountability (PEFA) assessment provided further insights
about Indonesia’s public financial management system. It reflected not only achievements of recent years, but also identified areas that have not been the focus of reforms to date. According to the PEFA findings, the upstream sections of the budget process have been reformed in recent years and as the result the budget is now increasingly credible, transparent and policy-based. External scrutiny and audit has been equally enhanced, but there is still room for reform. In particular, lower scores are generally dominating in the downstream sections of the budget process, and there is room for improvement of cash management, internal control and donor practices. A new PEFA is planned for late 2010, which will provide an assessment of progress in Indonesia’s public financial management system and to what extent the reforms of the past few years have been successful in improving these systems.
In the area of public procurement systems, the self-diagnostic assessment conducted by the National Public
Procurement Office (NPPO) in 2007 using the Base-Line Indicators (BLIs) tool, presented a “snapshot” comparison of the actual system against the international standards. Baseline benchmarking of Indonesia’s procurement system showed it scoring 62.5 percent for the Legislative and Regulatory Framework (PILLAR I), 55 percent for Institutional Framework and Management Capacity (PILLAR II), 59.3 percent for Procurement Operations and Market Practices (PILLAR III) and 69 percent for Integrity and Transparency of the Public Procurement System (PILLAR IV) in comparison with recognized international standards.
48. The World Bank uses a number of instruments to support the Government’s PFM reform agenda. The Bank is using the DPL as a financing instrument to help reinforce the Government’s ownership and commitment towards the achievement of reform milestones. Through the Government Financial Management and Revenue Administration Project (GFMRAP), the Bank has provided support to design and implement the aforementioned IFMIS solution, SPAN. GFMRAP has been supporting the preparations for SPAN through provision of training and socialization activities on the technical and functional aspects of the system. It includes advisory assistance on project management and funding for an independent verification and validation team. Under the restructured GFMRAP, funding is being provided for technical assistance for business process improvements and change management, as well as for the contract cost of the SPAN turnkey solution. Implementation of the automated SPAN system is expected to significantly increase the timeliness, reliability and transparency of budget disbursement and reporting and, as a cross-cutting reform, to improve the capability of managers to efficiently manage service delivery. The Public Financial Management - Multi Donor Trust Funds (PFM-MDTF) provides further resources to support critical activities in order to keep the reform agenda on track. By bringing together key development partners — the European Commission, the Governments of the Netherlands
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and of Switzerland, and the World Bank — the PFM-MDTF provides a vehicle for effective and coordinated engagement that reinforces the GoI’s PFM reform agenda and helps achieve progress towards the reform goals.
A.3. Poverty Reduction
49. Indonesia’s progress in lowering poverty has been supported by the introduction of a range of national poverty reduction programs. Since the 2004 national elections, the poverty headcount has fallen from 16.7 percent to 13.3 percent in 2010. Sustained economic growth contributed to this success by creating more jobs and increasing public expenditures for health, education and infrastructure. The expansion of national poverty reduction programs, however, also made an important contribution. In 2005, the Government shifted resources from regressive subsidies to poverty reduction programs that targeted poor- and near-poor households, which was further reflected through the re-launch of an unconditional cash transfer program (Bantuan Langsung Tunai, or BLT) in 2008-09 to mitigate the inflationary impact caused by an additional fuel price adjustment in mid-2008. The Government also began piloting other types of social assistance programs, such as a conditional cash transfer program (Program Keluarga Harapan, or PKH), which provides grants to households conditional on school attendance and the use of public health facilities. Health insurance, which was first provided for the poor through Askeskin (Asuransi Kesehatan untuk Keluarga Miskin) in 2005 as one of the social assistance programs to compensate the poor from fuel subsidy reductions, was then extended to also include the near-poor under the successor program that was re-named as Jamkesmas (Jaminan Kesehatan Masyarakat). The Government also scaled-up the National Community Empowerment Program (Program Nasional Pemberdayaan Masyarakat Mandiri or PNPM-Mandiri) between 2007 and 2009 by providing block grants to rural and urban sub-districts that support community-level development projects.
50. The Government now intends to accelerate the pace of poverty reduction over the upcoming five years. Since the 2009 elections, there has been renewed commitment by the Government to intensify policy reforms that support poverty reduction and improve the effectiveness of national poverty reduction programs. The President has declared poverty reduction to be one of the highest development priorities for Indonesia. The Medium-Term Development Plan 2010-2014 (Rencana Pembangunan Jangka Menengah Nasional, RPJMN) highlights the Government’s aim to lower the poverty rate to 8-10 percent by 2014. The President’s triple-track development strategy (pro-growth, pro-jobs and pro-poor) will reduce poverty by strengthening economic growth, stimulating job creation, and deepening investments in its poverty reduction strategy. The strategy is articulated around three main clusters that are divided into: Cluster I, family-based social assistance programs; Cluster II, community empowerment programs; and Cluster III, expanding economic opportunities for low-income households.
51. To improve the effectiveness of the national poverty reduction strategy, overall oversight and coordination responsibilities have been elevated to a cabinet-level team. The Government has taken its first step to implement the national poverty reduction programs across all clusters by elevating the overall oversight and coordination to a newly created National Team for the Acceleration of Poverty Reduction (Tim Nasional Percepatan Penanggulangan Kemiskinan, or TNP2K). The Vice-President will chair the National Team, which will include all government agencies responsible for the planning, financing and implementation of poverty reduction programs. It will be responsible for implementing the main poverty reduction strategies outlined in the RPJMN 2010-2014, which include: i) integrating the family-based programs into the family-based social assistance system and expanding it to improve the coverage of poor and vulnerable households, covering the improvement of health security coverage for all families, including the poor, and an increase in the number of scholarships for poor students at all education level; ii) scaling-up the PNPM Mandiri from Rp 10.3 trillion in 2009 to Rp 12.1 trillion in 2010; and iii) expanding the coverage of Kredit Usaha Rakyat (KUR), a program to increase access to
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credit for micro, small and medium enterprises, and improving its distribution mechanism. To support these strategies, several critical reforms are, and will continue to be pursued by the Government to enhance the delivery and effectiveness of poverty programs and maximize the impact of increased funding on the most vulnerable segments of society. These include institutionalizing program assessment and improved governance accountability, developing good systems to measure poverty and target poor households and regions, and empowering local governments, communities and service providers to deliver quality services.
Box 3: Analytical Underpinnings for Service Delivery Reform Support
World Bank analytical reports, including Making the New Indonesia Work for the Poor, have found that even though Indonesia has made progress in reducing poverty many people remain poor and vulnerable. Sustained economic growth has helped more Indonesians escape poverty by creating more jobs and increasing public expenditures for health, education and infrastructure. Indeed, the poverty headcount has fallen from 16.7 percent in 2004 to 13.3 percent in 2010. Yet despite these gains, there are still 32.5 million Indonesians who currently live below the poverty line and approximately half of all households remain clustered around the national poverty line (Rp 200,262 per month). The gap between the poor and non-poor is also widening. The Gini coefficient, a measure of consumption inequality, has increased from 0.32 percent in 1999 to about 0.37 percent in 2009 and regional disparities also persist with eastern Indonesia lagging behind other parts of the country, notably Java.
The reduction in poverty rate has been slower than expected, partly because there are not enough opportunities for poor workers to move into better jobs in the formal and non-agricultural sectors. The Bank recently completed the Indonesia Jobs Report, a comprehensive analytical overview of the labor market over the past 20 years. The report finds that the majority of Indonesia’s working population of 104.5 million is concentrated in the agricultural and informal sector. Formal employment grew at an impressive rate of 1.2 percentage points per year from 2003 until 2007. Formal sector employment for the poor increased by only 0.8 percentage points and remained roughly constant for the near-poor. Those who entered the formal sector faced dropping wages.
National social assistance programs targeting households and communities play an important role in the Government’s strategy to reduce poverty. The Bank is carrying out analysis in preparation for two forthcoming reports: Social Assistance Program and Expenditure Report and Targeting in Indonesia. The analysis confirms that current household-based poverty reduction programs experience targeting deficiencies, with a large proportion of the poor excluded while non-poor are included in the programs. While Raskin is received by 70 percent to 80 percent of the first three deciles, 40 percent to 69 percent of the fourth to eighth deciles also participate, and even 28 percent of the ninth decile, indicating a costly inclusion error. By contrast, Askeskin and Jamkesmas have low usage by target households, with 22 percent to 42 percent of the first decile using the program, falling to 19 percent to 33 percent by the third decile. However, usage by richer households, while significant, is low relative to Raskin. The coverage of the BLT cash transfer in 2005-06 for the first three deciles ranged from 40 percent to 57 percent, also lower than Raskin, but with considerably lower inclusion of non-target deciles, at 5 percent to 36 percent. BLT has higher inclusion errors amongst the less wealthy non-poor (deciles 4 to 7), and lower inclusion errors among the richest two deciles.
52. The Bank uses a number of instruments to support the Government’s poverty reduction goals. Starting in 2010, a multi donor trust fund initially supported by AusAid was established to support the Government in making informed and evidence-based decisions about poverty reduction policies and programs, as well as to build the analytical capacity of local universities and think tanks for research and assessing poverty-related issues. This will be achieved by: (i) providing poverty analytics and building analytical capacity to inform poverty and social protection policies, programs and strategies; (ii) supporting the Government in the design, implementation and evaluation of key poverty and social protection programs; and (iii) improving the quality and accessibility of data required for poverty analysis and policymaking. Since 2005, the Bank has also been using the DPL series to establish the Government’s ownership and commitment towards reform milestones. DPL 7 will support reform objectives to enhance the institutional and governance accountability and improve targeting and delivery
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of poverty programs at community and household level. The Bank has also provided financing (initially through the KDP and UPP projects) to promote collective action in addressing community level problems through PNPM, the Government’s flagship poverty program. Other Bank support includes co-financing the Government’s School Operational Assistance (BOS) aimed at improving management systems of education resources or the comprehensive review of the health sector with an in-depth assessment of its performance.
53. The Bank also manages a multi donor support facility that provides technical assistance and strategic oversight for the National Community Empowerment Program (PNPM-Mandiri). The facility pools together grants provided by the Governments of Australia, Denmark, the Netherlands, and the United Kingdom to help the Government of Indonesia achieve its goal of providing PNPM block grants to all 70,000 villages in the country, at a cost of US$1 billion a year. Grant funding provided through the PNPM Support Facility is used to build Indonesian capacity for large-scale poverty reduction, with the aim of making the program a sustainable operation. Capacity building programs supported by the facility engage a broad range of partners, including national and local governments, universities and research centers, civil society organizations and grassroots initiatives. Facility programs for renewable energy help make PNPM-Mandiri environmentally sustainable, and place a special emphasis on innovative ways to ensure that PNPM-Mandiri reaches out to disadvantaged groups across Indonesia.
B. The Reform Agenda Going Forward
54. Outside of the three main pillars of reform covered by the DPL 7, there are three major areas of reform in which the World Bank is also involved and are relevant to the success of this DPL series. These areas are civil service/bureaucracy reform, judicial reform and improving the framework for decentralization. The Government is actively addressing the challenges of reform in these areas, with support from development partners.
B. 1. Civil Service/ Bureaucracy Reform
55. The effectiveness of public policies and programs depends heavily on the implementation of civil service reform that target the way public institutions are structured, operate and are financed, as well as human resource management practices and salaries. The task of civil service reform is indeed challenging and requires sustained efforts over a considerable time. High-level political commitment towards reforming the civil service is gaining momentum, as evidenced by the prominent feature of civil service reforms within the Inpres No.1/2010 and RPJMN 2010-2014, and important steps have already been taken. Several reform-minded regional governments have initiated civil service reforms related to performance-based management and streamlined organizations, including one-stop public services, productivity improvement measures and transparent recruitment for key positions. In addition, the Ministry of Finance is continuing the implementation of its comprehensive concept of civil service reform.
56. With the new arrangements, the responsibility for civil service/bureaucracy reform has been moved from the Ministry of Finance to the center of government. A Steering Committee, chaired by the Vice-President and including the Ministers of Finance, Administrative Reforms (MenPAN) and Home Affairs, the three coordinating ministers and the Head of UKP4, has been tasked to strategically lead and monitor the implementation of the civil service reform. MenPAN has drafted a new Grand Design and Roadmap for civil service reform aiming for finalized civil service reform plans in all central institutions by the end of 2011 and continuing in regional governments from 2014 to 2025. Following a high-level meeting chaired by the President in Bali in early May, MenPAN is now revising in cooperation with UKP4 the Grand Design and the Roadmap before these can be issued as presidential
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regulations. Overall, the momentum for continued and widely rolled-out civil service reform is strong, although the Grand Design and Roadmap are still to be officially issued.
B.2. Judiciary Reform
57. While progress in judicial reform has been slow, the new Government has recently taken some actions to address the weak judiciary and associated law-enforcement agencies. Despite the establishment of independent judicial review and oversight mechanisms, progress in reforming the national legal system thus far has been slow. Uncertainty about, and the arbitrariness of, judicial interventions continues to be identified as one of the most serious obstacles to investment. This is largely due to the resistance to reforms from entrenched interests within the legal system, and the contestation between the increased number of institutions with judicial and oversight powers. However, a series of high-level scandals exposing apparent collusion between senior officials in the country’s law enforcement agencies and a ‘legal mafia’ has recently increased the pressure for judicial reform. As a result of scandals affecting senior members of the national police and the Attorney General’s Office during the past year, the President announced that his first priority in his new Government’s 100-day action plan would be ‘combating legal mafias’. He also established a high-level Legal Mafia Task Force, which has demonstrated strong determination and a potential for forging effective inter-agency cooperation towards judicial reform agencies, in particular between the Anti-Corruption Commission (KPK), the Financial Transaction Analysis Unit (PPATK) and the Judicial Commission. These latest developments bode well for significant progress in judicial reform during the life of this Government. B.3. Improvement of the Decentralization Framework 58. Working with development partners, the Bank continues to support the decentralization reform extensively. With the ‘big-bang’ decentralization of 2001, Indonesia has transitioned from one of the most centralized countries in the world, to one of the most decentralized. However, the transition is far from complete, and significant challenges remain, particularly in the absence of a consistent decentralization framework. The Bank-administered Decentralization Support Facility (DSF) provides resources and coordination for stakeholder support for central level agencies and local governments around analysis and critical capacity building. This support to the DSF is designed to improve the environment within which local governments operate. Since 2010, the Bank has also provided resources and assistance through a program working with the special assistance grants (DAK), with an initial emphasis on improved accountability and reporting on grants to infrastructure sub-sectors within pilot local governments (LG). The Bank is also working directly with local governments to enhance capacity and improve financing in districts throughout Indonesia, through the Initiative for Local Government Reform (ILGR) and the Urban Sector Development and Reform Project (USDRP). Both aimed at changing governance behavior in the context of decentralized public service delivery by targeting reform minded local governments and encourage increased accountability through citizen participation. In addition, the Public Expenditure Analysis and Capacity Harmonization (PEACH) program carries out regional Public Expenditure Reviews designed to better understand and improve spending decisions. Regional PERs have been completed in 10 provinces with local governments working closely with academic institutions to improve policy and analytical capacity. The Bank also continues to be actively involved with BaKTI (previously supported under the Decentralization Support Facility), in its engagement with stakeholders in eastern Indonesia. Most recently, in line with the Government commitment through the Climate Change DPL, the Bank is preparing to assist the Government with a review of fiscal transfer framework as it relates to forest management and reduced emissions, with the longer-term goal of establishing a system that reduces deforestation and reinforces best practice.
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IV. THE DPL PROGRAM IN INDONESIA
A. Links to the 2009-2012 Country Partnership Strategy (CPS)
59. The 2009-2012 CPS proposed that the DPL series continue to be at the center of the World Bank Group (WBG) support in strengthening Indonesia’s central Government institutions and systems, a key cross-sectoral engagement theme under the CPS. The CPS identified five thematic areas of engagement that are expected to form the core of the partnership strategy, along with two sets of cross cutting engagements to strengthen central and local government institutions and systems (Figure 5). The CPS recognizes that the DPLs have helped the Government’s efforts to reduce inefficient public expenditures, strengthen tax administration and debt management, enhance the competitiveness of the financial sector and implement governance and fiduciary reforms. Underpinned by a large AAA program co-financed by development partners, DPLs have also supported key reforms to improve the business climate and service delivery. Indeed, the analytical underpinnings provide comprehensive analysis and knowledge that supports the GOI’s reform agenda, which feed into the ongoing DPL dialogue between the Bank and GOI. According to the CPS, the next generation of DPLs will build on strong relationships with the reform-minded economic ministries and continue to support the central Government in strengthening effectiveness of its systems. This includes efforts to reduce inefficient public expenditures, strengthen tax administration, enhance the overall business climate and strengthen poverty alleviation and service delivery.
Figure 5: 2009-2014 CPS core engagements
B. Relationship To Other Bank Operations
60. Various other Bank instruments also supplement the DPL support to the Government’s reform agenda. Supplementing the DPL reform objectives, other Bank technical assistance and financing instruments also support the necessary advisory, human and financial capacity to carry out the reforms. Projects such as the GFMRAP and PINTAR, explained in the previous chapter, directly reinforce changes to the underlying institutional, incentive and organizational frameworks for core functions of the MoF and other related institutions, including fiscal-policy formulation, budgeting, treasury, internal audit, procurement, revenue dispute resolution and legislative oversight. The Bank also
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works on gender and women empowerment, in line with the Government priorities as in the Inpres No.3/2010 and RPJMN 2010-2014, through other initiatives on poverty reduction and service delivery. These include the PEKKA (Female Headed Household) program that helps enhance leadership and develop entrepreneurship capacity of women heads of household; and the PNPM program that enhances women capacity in raising their voice in local development planning and processes (Musrenbang).
61. At the same time, the DPL series’ support to the reform of government institutions and systems also contributes directly to the effective implementation of the other investment lending operations in the country. While DPLs 1-4 had focused on macroeconomic stability and DPLs 5-6 on medium term institutional reforms, the new series of DPLs 7-9 deepens and advances those reforms in the three core areas that were the focus of the previous DPL series, in alignment with the priorities identified by the new Government. The reform of public financial management systems in particular should address some of the core problems faced in the delivery of key investment in social sectors. Examples include the unpredictability in the release of funds and budget allocation adjustments. The DPL will also complement efforts being undertaken through the Infrastructure Development Policy Loan series (IDPL) and Climate Change Development Policy Loan (CC DPL), including reforms aimed at improving the investment climate, increasing the transparency and efficiency of the Government’s spending and strengthening inter-governmental fiscal relations and reforms that foster accountability. Reforms in procurement systems which are part of the core DPL series, will be particularly relevant for the cross-sector DPL reform agenda.
C. Collaboration with Other Development Partners and the IMF
62. The current DPL series has been prepared in collaboration with two of Indonesia’s largest development partners, the Asian Development Bank (ADB) and the Government of Japan. Harmonization around the DPL has allowed the World Bank, the ADB and the Government of Japan to build upon the natural synergies and complementarities that exists across their respective portfolios. The harmonized approach to policy-based lending through the DPL program has also provided a solid foundation to deepen the harmonization agenda in Indonesia with other development partners around this or other initiatives and programs.
Table 2: Development Partner Parallel Financing to DPL Operations (US$ million)
Operation World Bank Government of Japan
Asian Development
BankTotal
DPL 1 300 100 ─ 400DPL 2 400 100 200 700DPL 3 600 100 200 900DPL 4 600 200 200 1,000DPL5 750 100 200 1,050DPL6 750 100 200 1,050DPL7 600 100 200 900Total 4,000 800 1,200 6,000
63. The Government of Japan and the ADB have provided considerable parallel financing support to the DPL program but the collaboration extends well beyond such parallel financing arrangements. Japan provided US$100 million for the first three operations, the fifth and the sixth, and US$200 million for the fourth. Further financing from the Government of Japan (GoJ), through the Japan International Cooperation Agency (JICA), is expected for DPL 7. At the request of the Government, the ADB also provided parallel financing of US$200 million for each of DPLs 2-6. The ADB is expected to
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contribute once again to the DPL 7. Both development partners have worked with the Bank, in collaboration with the Government, on joint preparatory work, the drawing up of common policy stances and reaching common agreement on the fulfillment of prior actions, monitoring progress on overall program implementation, achievement of medium-term objectives and the selection of prior actions for DPL 7.
64. The contribution of the GoJ/JICA has been particularly evident in the investment climate policy area, but has recently also started in the public financial management area. The technical assistance and support that JICA has provided over the years to Indonesia on private-sector development, and the on-the-ground presence of numerous experts and advisors, as well as numerous Japanese companies, have provided a rich source of analytical information and substantive direction to the reform agenda in the investment climate area. Recently, JICA has also started to provide technical assistance and support to Bappenas on the development of a performance-based budgeting system. In many cases these inputs have been directly reflected in the DPL program matrix. The DPL process has also provided a forum and a vehicle for discussions between the GoJ/JICA and the GoI. GoJ/JICA will continue and expand its technical assistance projects for the improvement of the tax administration, credit guarantee system for SMEs, National Agency for Export Development (NAFED), and the state asset management system. These activities of GoJ/JICA are expected to provide further inputs for the current and future operations of the DPL program.
65. The ADB has engaged in policy dialogue in all areas of the DPL. ADB has adopted a dual-track approach to ensure that the high-level macroeconomic and governance reforms supported through the policy dialogue of the DPL series complement, and are reinforced by, ADB’s sector programs. Underpinning the policy dialogue has been a series of advisory technical assistance that the Government has drawn upon. ADB’s support for policy reforms is structured through: (i) participation in the DPLs to strengthen the macroeconomic and fiscal framework while addressing crosscutting concerns; and (ii) sector-specific policy interventions in the areas of infrastructure, financial deepening, local government finance, and poverty reduction. ADB’s active participation in the policy discussions in all areas of the DPL and the parallel policy dialogue on sector reforms have helped in setting the overall macroeconomic framework for sector-level reforms supported by ADB. Its engagement in these policy discussions and its strength in the areas of infrastructure, financial sector, decentralization, and poverty reduction have helped to avoid duplication of effort and improved the monitoring, as well as the quality, of the prior actions.
66. For the Government, harmonization has been a welcome development. Feedback from counterpart ministries points to a notable reduction in the transaction cost of policy dialogue with three of Indonesia’s most important donors. Moreover, donor harmonization around the Government’s own program has bolstered country ownership of the reform process and has helped change the nature of the relationship with these donors to one of a reliable partnership.
67. The IMF has also been closely involved with the overall operation. The IMF and the World Bank in Indonesia consult regularly on macro and sectoral issues, and the Bank coordinates closely with the Fund in its missions. In addition, the Bank, the Fund and development partners have worked closely on the Public Financial Management (PFM) agenda. The Fund has provided advisors to the Ministry of Finance to advise them on TSA issues and tax administration reforms, and the DPL prior actions and benchmarks have been developed in close coordination with the work of these advisors and the agreements reached between the Fund and the Government. The DPL has thus provided a platform to push the reform agenda in these crucial areas where both institutions are working.
68. The DPL program is also benefiting from synergies with donor-funded trust funds. The Multi Donor Trust Fund funded by the European Commission, Netherlands and Switzerland on Public
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Financial Management (PFM MDTF) complements the DPL policy dialogue and helps carry forward and follow through on some of the PFM-related institutional reforms supported by the DPL. The PFM MDTF provides technical assistance to the ongoing World Bank GFMRAP project and contributes to tax reforms that at the core of the World Bank PINTAR project. Another Trust Fund, the Multi-Donor Facility for Trade and Investment Climate (MDFTIC) funded by the Netherlands, supports institutional and capacity-building initiatives as well as analytical and advisory work, aimed towards improving trade and investment climate.
D. Lessons Learned
69. Over the course of the two previous DPL series, several important lessons have been learned, as outlined in the respective Implementation Completion and Results (ICR) reports. These lessons stem from the nature and evolution of the relationship between the Bank and the Government, and also from the characteristics of the DPL program as a means of offering policy support, together with the changing policy environment on the ground. Some of the lessons may be particular to the Indonesian case because of the broad scope and depth of the Bank’s engagement with the Government, and the range of resources that the World Bank program in Indonesia has access to through trust funds. 70. Lesson 1: Strong Government ownership and committed counterparts are vital for the DPL program to help accelerate key reforms. Given their complexities and significant effects over the way the Government works, policy reforms should be driven, rather than accepted, by the Government. Further, the pace and scope of reforms should also be driven by the judgment and tactical sense of the key Government counterparts on whether or not those reforms are bureaucratically or politically feasible. The DPL program has been successful in ensuring Government ownership and committed Government counterparts through strong dialogue and broad engagement. In areas where policy consensus is still evolving, the pace and scope of implementation may seem more modest than desired, but their very inclusion in the DPL-supported agenda maintains a focus on the policy issue, prompts on-going deliberation of policy options, strengthens the resolve of reform champions, and may eventually lead to reform breakthroughs. Indeed, the DPL is useful not only as a financing instrument, but more as a tool for accelerating the Government’s own critical reforms overall. 71. Lesson 2: Constant collaboration and dialogue between the Government and the Bank continues to be fundamental for the success of the DPL program. The Bank’s strong field presence continued to facilitate constant collaboration and dialogue with the Government, not only on the DPL but also on other engagements that provide synergies with the DPL. Such collaboration and dialogue also benefited from the involvement of key reform champions, both within the Government and the Bank, who were able to complete actions in the timeframe agreed upon and ensure the successful delivery of the DPL program.
72. Lesson 3: Mapping out a reform program provides meaningful direction and substantive results down the road, but a degree of flexibility is still needed, especially to ensure sustained Government ownership. Compared with the first, the second DPL series was more systematic in adopting a multi-year strategic frame for the program, and laying out a basic mapping of the reform program that more specifically describes the end goals. While the initial mapping out of a detailed strategy and a multi-year agenda under each of the various DPL reform aims allowed a more strategic consideration of what the most critical next reform steps might be, ensuring sustained government commitment to furthering the various reform objectives was even more critical. Indeed, institutional and policy reforms are usually complicated and involve unpredictable undertakings. Such reforms often need to go through a trial and error process, where there may be the occasional dead-ends that require backtracking and finding an alternate route. Hence a degree of flexibility should be maintained, so that
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when the right opportunity presents itself, reforms that had otherwise been apparently slow can be supported and advanced more rapidly. 73. Lesson 4: Continuous DPL dialogue strengthened the Government’s knowledge base, which in turn allowed more proactive and swift measures to be taken at a time of crisis. The continued policy dialogue under the DPL has strengthened the knowledge base and allowed the Government to move proactively and take precautionary measures at the time of crisis. Establishment of the Financial System Stability Forum (FSSF), for instance, has formed the basis for the financial sector safety net and allowed the Government to swiftly address systemic risks in the financial system. The Government was also able to proceed quickly in requesting for the DDO-DPL, which eventually helped in restoring public confidence, and in advancing other policy reforms, particularly those under public financial management and investment climate. Had the DPL been non-existent, the swift resolution of the financial systemic risks and quick delivery of the DDO-DPL at the time of crisis would not have been possible.
74. Lesson 5: The reclassification of policy actions — into prior actions and benchmarks — allowed a more prioritized and programmatic approach. While DPL 5 is very much a continuation of the first DPL series’ medium-term institutional efforts, the indicative DPL 5 triggers identified at the preparation of DPL 4 were reassessed, then reclassified into legally binding prior actions and benchmark actions that signify progress towards longer-term reforms. Indeed, some benchmark actions that may appear incremental at face value are actually steps that need to be taken before more substantive reforms can take place. Hence, the reclassification of actions allowed more priority and focus over the more critical, key prior actions, while still acknowledging the Government’s pace and scope of reform process. This not only helped in ensuring a sustained Government ownership, but also in mapping out a more comprehensive, multi-year strategic frame for the program.
75. Lesson 6: DPLs are only one instrument among many that are available in a multi-faceted engagement, and the choice of instrument should be contingent on the issue, the political context and the institutional circumstances. This is particularly applicable in the Indonesian case because of the size and scope of the World Bank program in Indonesia. The Bank program in Indonesia is one of the largest of any country in terms of number of staff and overall resources. Large teams are working closely on a daily basis with government counterparts at often very senior levels on a wide range of issues from public financial management and trade and investment, finance, public expenditures and poverty. In this context, the DPL is not the only instrument for supporting reform, but rather complementary to other instruments such as investment projects, TA and AAA.
V. THE PROPOSED OPERATION
A. Other Reform Steps Taken Outside but Related to the DPL Framework
76. The Indonesia Public Expenditure Support Facility (PESF) in the form of a US$2 billion single tranche DPL with a Deferred Drawdown Option (DDO), which was approved in March 2009, had advanced and expedited policy actions that were envisioned as part of the regular DPL series.4 However, it does not replace the regular DPL series with its focus on advancing Indonesia's longer-term institutional reform agenda. While the regular DPL series focuses on the many important but often incremental steps that need to be taken to realize the long-term institutional reform agenda, the PESF supported critical urgent measures that were implemented to deal with the 2008-09 global financial crisis, but also, where relevant, helped accelerate and intensify the process that was already being supported by
4 The Bank has committed US$2 billion, the Government of Japan US$1.5 billion, and the Government of Australia and the ADB have each pledged US$1 billion.
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the regular DPL series. For instance, in reassuring financial markets and maintaining financial system stability, the Government issued new regulations5 that put in place a stronger legal framework for the Financial System Safety Net operation in Indonesia, which was previously envisaged to be achieved through the regular DPL series. In sustaining critical public expenditures while maintaining budget discipline, specific provisions were included in the 2009 budget law to sustain, and if necessary increase, critical public expenditures in the event of a pronounced growth slowdown. Specific regulatory measures and socialization efforts were also implemented to expedite budget disbursements and enhance the Government’s ability to rapidly direct public expenditures to mitigate any adverse impacts of a growth slowdown. In facilitating private investment and supporting exports, steps were taken towards initiating Indonesia’s application to the Extractive Industries Transparency Initiative (EITI), opening of a re-discount window for trade finance through Bank Indonesia and creation of an Export Financing Agency. Currently, the Government is still considering whether it will extend the contingent financing provided by the DDO DPL, in light of continued volatility in global financial markets and economic uncertainty.
77. Important steps were taken by the Government towards implementing the EITI6 in particular. A Coordinating Team for Preparation and Readiness for Extractive Industries Revenue Transparency was appointed in March 2009. A Presidential Decree No. 26/2010 was issued in April 2010 on EITI implementation. This regulation requires firms to report the amount of revenues conveyed to the Government, and the government agencies at the central, provincial and district levels to report the amounts of such revenues received. Industry and government reports will be submitted to a multi-stakeholder team, and crosschecked by a reconciler hired by the team. The results of the reconciliation will be made public. The EITI Implementation Team was established in July 2010, and an EITI work plan was approved by the Implementation Team in September 2010, thereby allowing Indonesia to seek formal entrance into EITI candidacy. The Coordinating Minister of Economic Affairs has submitted a request to the EITI International Board seeking formal candidacy and is awaiting a response following the next Board meeting on 19 October 2010. Entry into candidacy is a very significant milestone in the adoption and implementation of EITI and a clear statement of commitment on the part of Government towards improving transparency and good governance in the extractive industries.
78. Indonesia’s progress in the core DPL policy areas has extended to other areas outside of the DPL or PESF. Since November 2008, important reform steps, including the recent passage of a new Public Service Law and the issuance of new regulation supporting the improvement of the e-registration tax system, have been taken. The new Public Service Law, passed by Parliament in June 2009, marked an important step towards civil service reform, as it provides a clear blueprint for the Government to pursue civil service reform. A new regulation has also been issued to improve the e-registration tax system. The DG Tax Regulation No. 24/PJ/2009 concerning the registration procedure for a taxpayer identification registration number (NPWP) and/or VAT collector number (NPPKP) and data changes for the taxpayer and/or VAT collector using the e-registration system has made NPWP and NPPKP registration possible online, with a faster approval process.
B. The Seventh Development Policy Loan
79. The proposed US$600 million Seventh Development Policy Loan marks the beginning of a new, third programmatic series of three policy loans. DPL 7 was originally envisaged to be part of the
5 These regulations include: (i) a financial safety net regulation that establishes the roles, responsibilities and procedures that govern the actions and responses of Bank Indonesia, the Ministry of Finance, and the Deposit Insurance Corporation in the event of the failure of a financial institution; and (ii)a government regulation that increases the ceiling on deposit insurance from Rp 100 million to Rp 2 billion and allows it to be moved to blanket guarantee as needed; (iii) a government regulation that enables a broadening of the types of assets that banks can use as collateral for emergency borrowing from BI in the event of banking crisis. 6 The leading global standard for oil, gas and mineral revenue transparency which requires all extractive firms operating within the EITI country’s jurisdiction to report the amount of revenues they convey to the Government and Government agencies to separately report the amount of revenues they receive from those firms, and the two sets of figures to be cross-checked by an independent entity and the results to be published.
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second DPL series consisting of three annual single tranche loans (DPLs 5-7). However, with the newly elected Government in place, it was realized that there is a renewed opportunity to better realign the DPL program with the new Government’s strategies and priorities. Hence, following agreement with the Government, and endorsement by the World Bank regional management, DPL 7 now represents the beginning of a new, third DPL series (DPLs 7 to 9), thereby ending the second DPL series one year earlier than envisaged7. Although there is significant continuity between the previous government and this one (and therefore the reforms being supported by the DPL series), new priorities have emerged, such as improving logistics and connectivity to enhance competitiveness and efforts to address fragmentation and inefficiency in the implementation of poverty alleviation government programs. These reforms are better supported through a new series with a 3-year time horizon that provides the necessary framework for a continued policy dialogue, technical support and attention to ensure the necessary steps are taken for successful implementation of reforms.
80. The DPL 7 continues to support the Government in strengthening the business environment, enhancing the efficiency of public finance systems and service delivery. Both DPL1-4 and DPL5-6 achieved significant results in supporting the Government’s reform agenda (see Annex 4). The first DPL series (DPLs 1-4) supported Indonesia’s reform efforts as the country emerged from the post-crisis IMF program, focusing on macroeconomic stability and the transition from a short-term post-crisis stabilization framework to a longer-term strategic growth and poverty reduction agenda, and creating the necessary fiscal space to address Indonesia’s development needs. The DPL series also supported efforts to implement Indonesia’s ambitious PFM reforms, initiated with the issuance of State Finance Law No. 17/2003, the State Treasury Law No. 1/2004 and the State Financial Audit No. 15/2004. The second DPL series (DPLs 5-6) was finalized as the country was facing the ramifications and contagion effects of the global financial turmoil in late 2008. Building on the results achieved by the previous series, and influenced by developments around the world, the second DPL series supported Indonesia’s efforts to improve the investment climate through increased clarity for foreign investments and efforts to streamline business licensing procedures. The series also supported reforms in the public finance management system to enhance the results orientation of the budget through the development of a revised program structure. In the poverty alleviation and services delivery pillar, efforts to improve the targeting of poverty programs started. DPL 7 will continue the policy dialogue on, and support to, Indonesia’s reform program in the three core areas that were the focus of the previous DPL series: improving the investment climate, strengthening public financial management, and enhancing service delivery and poverty alleviation efforts. Improvements in the investment climate are critical to accelerating growth; strengthening public financial management is essential for enhancing government effectiveness in a decentralized Indonesia, while enhancing service delivery and poverty alleviation efforts is essential if Indonesia is to bring about more broad-based improvements in welfare for its entire people. Many of the reforms supported in this new series build upon reforms initiated in the previous series, often deepening the reach of the reforms being implemented, significantly changing the way in which government conducts business.
81. The DPL 7 prior actions are well aligned with the new Government’s strategies and priorities. The Government has clearly articulated its new strategies and reform priorities, as outlined in the RPJMN 2010-2014, Inpres No. 1/2010, Inpres No.3/2010 and the 100-day action plan. The DPL-supported prior actions are well aligned with the thrust of these new strategies and priorities. For instance, in investment climate, the national logistics blueprint is in line with the new emerging Government priority of strengthening the national connectivity for regional development and inclusive growth. Implementation of the PTSP and the online SPIPISE system are also featured as prominent priorities for
7 An Implementation Completion and Results (ICR) Report has been prepared, covering DPLs 5 and 6. Findings of the report, including the results achieved by DPLs 5 and 6, are summarized in Annex 4 of this program document. Lessons from implementation of the DPLs 5 and 6 have been incorporated in the dialogue with the Government during the preparation of DPL 7.
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simplifying investment procedures. In public finance management, the new performance-based budgeting system, stronger control and compliance measures over the Government finances, and preparation of the draft procurement law, are well in line with the aim of strengthening the Government’s bureaucratic systems and procedures. And the poverty alleviation and service delivery pillar overall has been expanded to include actions that are embedded within the work program of the National Team for the Acceleration of Poverty Reduction, which was recently established under the Vice-President’s office and mandated with the oversight of all the Government’s poverty reduction programs.
82. The Government has indicated strong commitment towards delivering the underlying policy and institutional reforms, by putting in place a robust monitoring and evaluation system. The newly established Presidential unit UKP4 in particular has demonstrated the necessary energy and vigor in continuously monitoring and evaluating the performance of line ministries towards delivering their targeted reform outputs as listed in the RPJMN 2010-2014, Inpres No. 1/2010, Inpres No.3/2010 and the 100-day action plan.
83. The DPL 7 prior actions reflect a better understanding about the implementation of the reform agenda, the identification of the new Government’s priority areas, re-engagement of reform champions and anticipated accomplishments. While some actions became more specific or better defined since they were initially identified at the beginning of the previous series (DPL 5), such as the benchmark action aimed at strengthening the management of state assets or the follow-up actions to the signing of the SPAN contract, others have been eliminated because they are no longer immediate priorities in the reform roadmap (e.g. extension of large taxpayer offices) or because of legal impediments (e.g. proposing to Parliament standing orders to facilitate delegation of budget authority to program managers would require changes in the law). The new series also supports reforms in which new or previous reform champions are showing a strong interest to be part of the DPL program and indicating a clear roadmap of actions that will be implemented over the next years (e.g. actions to improve budget and cash management within the central Government, to improve accounting and audit functions or the provision of IT services).
84. Continuity of the DPL program as a whole is maintained, as the DPL 7 prior actions
continue to advance those reforms that were initiated in the previous DPL series. Indeed, the indicative triggers identified at DPL 6 were used as the basis for formulating the ten DPL 7 prior actions, though with some modifications as proposed by the Government to reflect actual progress on the ground (either faster or slower) and to ensure better alignment with the RPJMN 2010-2014, Inpres No.1/2010, Inpres No.3/2010 and 100-day action plan. Further, the prior actions still consistently support the reform aims established in the previous DPL series. The process of identifying indicative triggers for DPLs 8 and 9 has also advanced, and through discussions with key counterparts in each of the relevant areas or sub-areas a roadmap of milestones was developed, which conforms to the Government’s own reform agenda. In these discussions, the DPL program aims to apply international Good Practice Principles on Conditionality. These indicative triggers for DPLs 8 and 9 will form the basis for judgment on whether or not sufficient progress has been made to go forward with the subsequent DPL operation.
85. In addition to the ten prior actions, DPL 7 also acknowledges and supports a set benchmark actions that reflect further measures undertaken by the GOI as part of its overall reform program. Indeed, these benchmark actions not only form important elements of the GOI’s broad reform agenda, but they are often interlinked with the prior actions and constitute steps that need to be taken before more substantive reforms can take place further down the road. Hence, the DPL support of both legally-binding prior actions and non legally binding benchmarks allows more priority and focus over the more critical prior actions, while still acknowledging the Government’s overall pace and scope of reforms. This not only helped in ensuring sustained Government ownership, but also in mapping out a more
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comprehensive, multi-year strategic frame for the program. Details on the prior actions, triggers and benchmarks for DPLs 7 to 9 are provided in Annex 5. Table 3: Prior Actions for the Indonesia Seventh Development Policy Loan
Reform Aim No. Prior Actions Agreed Upon and Implemented by GOI Prior to Presentation of the Loan to the Executive Board
Pillar 1: Improving the Investment Climate Policy sub-area: Improving the regulatory environment for investment
Reduce uncertainty for investors by strengthening investment service institutions and improving investment regulations
1. Issued the Presidential Regulation on the Investment Negative List which updates restrictions on investment including preferential treatment for ASEAN investors, and clarifies the grandfather clause, the treatment of publicly listed companies, and mergers and acquisitions. (PerPres No. 36/2010)
Policy sub-area: Improving logistics, enhancing trade facilitation and promoting exports Reduce the time needed for and cost of importing and exporting
2. Submitted to the President a draft Presidential Regulation on the National Logistics System (Sislognas) Development Blueprint. (Letter No. S-82/SES.M.EKON/03/2010)
Policy sub-area: Reducing the tax burden and improving tax administration Modernize core tax system 3. Issued advertisement (Invitation for Bids) for PINTAR procurement as an initial
step in the development of business process improvements and a new integrated information system. (September 15, 2010 Jakarta Post newspaper)
Pillar 2: Strengthening public finance management Policy sub-area: Strengthening budget formulation and M&E systems
Improve results orientation and MTEF in the budget process
4. (a) Implemented revised program structure with measurable results and targets aligned with organizational structure in the National Medium Term Development Plan (RPJM) for 2010-2014 and (b) based both indicative ceilings and budget proposals (RKA-KL) from all line ministries for the Fiscal Year 2011 budget on the revised structure.
Policy sub-area: Strengthening budget execution systems Improve public procurement 5. Finalized academic papers for draft procurement law and prepared draft
procurement law, ready for public consultation process.
Improve Government accounting and audit functions
6. Submitted to the MoF a Draft Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/2008. (Letter No. R. 760/K/SU/2010)
7. Submitted to the President a draft Government Regulation on accrual-based accounting. (Letter No. S-370/MK.05/2010)
Pillar 3: Enhancing poverty alleviation and service delivery efforts Improve governance and institutional accountability
8. Established an inter-ministerial National Team for the Acceleration of Poverty Reduction (National Team) by Presidential Regulation. (PerPres No. 15/2010)
Improve poverty measurements and targeting of the poor
9. Revised the methodology to calculate the national poverty line by: i) Completing national poverty line simulations using alternative measurement
methodologies. (Letter No.04300.082) ii) Conducting internal consultations in BPS and key government stakeholders to
identify a poverty measurement methodology for consideration. (Minutes of internal BPS meeting on August 20, 2010).
iii) Holding external consultations about the implications of adopting the revised methodology with universities, NGOs and key line ministries. (Letter No.B-059/Setwapres/D-3/TNP2K/09/2010)
Improve community-based poverty reduction programs (Cluster II)
10. Strengthened PNPM fiduciary systems as outlined in the action plan dated February 16, 2010 by: (i) having documented and publicized major complaints and the steps taken to
address these (on local newspapers and PNPM website); (ii) the BPKP in partnership with the Bawasda having been explicitly tasked with
the systematic auditing of PNPM funds (MOU No.414.2/3826/PMD); and (iii) the Ministry of Home Affairs and the Ministry of Public Works having
submitted quarterly reports detailing the status of all known complaints to the National Team and to the Joint Management Committee members. (Letter No.414.2/2832/PMD)
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B.1. Policy Area I: Improving the Investment Climate
86. After achieving record foreign direct investment (FDI) inflows in 2008, the global financial crisis and economic turmoil severely reduced flows into Indonesia in 2009, in line with global trends, with flows recovering in mid-2010. FDI inflows totaled US$9.3 billion in 2008 according to Bank Indonesia statistics, but halved in 2009 as the global financial crisis and economic downturn limited investment flows globally. However, by mid-2010, even as global financing conditions remained constrained, a recovery in non-oil and gas investment inflows returned FDI to near record levels. Macroeconomic stability and economic policy certainty partially explain the investment trends but major legal and regulatory achievements, such as reduced corporate tax rates and improved tax administration, have also played a role. Nevertheless, despite the progress registered in reducing barriers to investment, Indonesia's business environment still poses many challenges to private investment. The current operation aims at supporting the Government in addressing some of those constraints as follows:
Policy Sub-Area I.1. Improving the Regulatory Environment for Investment Reform Aim: Reduce uncertainty for investors by strengthening investment service institutions and improving investment regulations
87. Investment negative list: While the July 2007 investment negative list (DNI) was more detailed and comprehensive than previous negative lists, and hence more transparent, it introduced new restrictions in key sectors such as telecommunications, health, shipping, ports, logistics, pharmaceuticals and insurance. It also failed to clarify issues relating to how incumbent investors in these sectors would be treated — the so-called grandfathering clause. In response to concerns raised by the industry, the GoI committed in 2008 to further simplifying the list and addressing specific shortcomings that had led to uncertainty regarding Indonesia’s investment law. Following a series of discussions with stakeholders, including the Indonesian Chamber of Commerce and Industry (Kadin) and international business chambers, the GoI, as a prior action, issued the Presidential Regulation (PerPres No. 36/2010) on the Investment Negative List which updates restrictions on investment including preferential treatment for ASEAN investors, and clarifies the grandfather clause, the treatment of publicly listed companies, and mergers and acquisitions. As a single document containing all restrictions on investment, the regulation has improved legal clarity and opened up some sectors to foreign investment. However, overall, changes in foreign equity limits are relatively minor and the benefits of the newly issued DNI mainly surround the legal clarity provided.
88. Investment licensing: The 2007 Investment Law stipulates that a Presidential Regulation on one door integrated investment service (one-stop shop or PTSP) will be issued, and also mandates that local governments be made responsible for administering investment projects within their jurisdictions with the exception of certain types of investments that will remain with the central Government. A Presidential Regulation was issued in June 2009 that allows ministries and central Government agencies to delegate their authority to issue business licenses to the Investment Coordinating Board (BKPM) and authorizes BKPM to establish a one-stop shop for investment licensing. It also authorizes BKPM to establish an electronic information and licensing service. Three ministries — Tourism, Industry and Trade — have agreed to transfer licensing authority to BKPM. BKPM has also issued new regulations on service standards for the implementation of one-stop shops at the regional level. Finally, it has developed an online investment licensing application (SPIPISE), which is now accessible on the BKPM website, and launched a pilot of the system in January 2010 in Batam. To date, the system has integrated approval and
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licensing between BKPM, seven provincial government PTSPs and four line ministries.8 The GoI is planning to implement the system in the capital city of each province and numerous districts by end 2010, in accordance with the Inpres No 1/2010.
Policy Sub-Area I.2. Improving Logistics, Enhancing Trade Facilitation and Promoting Exports Reform Aim: Reduce the time needed for and cost of importing and exporting 89. National Logistics Blueprint: The Government has finalized a National Logistics (Sislognas) Development Blueprint and Action Plan that have been included in the National Medium Term Development Plan (RPJMN) 2010-2014. The GoI, as a prior action, submitted to the President a draft Presidential Regulation on the National Logistics System (Sislognas) Development Blueprint. The National Logistics System Development Blueprint (NLB) has three main objectives: (i) ensure the availability of strategic products at affordable prices; (ii) reduce logistics costs to facilitate competitiveness of export products; and (iii) prepare the country for a better market integration with ASEAN. The NLB presents a detailed program for the period 2010-2014 and encompasses a comprehensive action plan. Its preparation and implementation will require broad participation and coordination among a large number of government departments and agencies. The NLB distinguishes quick wins and an overall strategy with priority actions for the coming years. Some of the quick wins were included in the Government’s 100-day program released in the beginning of 2010. These quick wins include the introduction of 24/7 services in main sea ports, the development of dry ports in major industrial areas, the extension of the railway into the port of Jakarta, and expansion of the Jakarta and Surabaya ports. On all these fronts, decisions have been taken and action programs are underway. For instance, 24/7 services have been launched in five main ports, the dry port of Cikarang has been established, and the expansion of Tanjung Priok has been approved. A draft Presidential Regulation on the NLB was submitted to the President in April 2010 and is now undergoing cabinet level discussions. The World Bank had expected the NLB to be issued in mid 2010, but the need to synchronize it better with other related sectoral strategies being developed has somewhat delayed the issuance of the blueprint. Nevertheless, finalization of the NLB and its submission to the President represents important policy reforms and the building of consensus among multiple GOI stakeholders towards improving the national logistics.
90. In addition to the NLB, various other blueprints and master plans have been recently developed which support connectivity reform. These include the multi-modal blueprint, the port master plan, the railway master plan, the economic corridor approach, the special economic zones and the regional development plans. As such, the Government realized the need to coordinate and synchronize the various blueprints and master plans by developing an overall, encompassing connectivity strategy. A team led by the Vice-President’s Office has established a Steering Committee, Guidance Team and Technical Committee to prepare the overarching connectivity framework, synchronize action plans and identify priority actions. The approval of the draft Presidential Regulation on the NLB has therefore been deferred until the different action plans have been synchronized.
91. National Single Window: The establishment of the Indonesia National Single Window (INSW) is a major step towards reducing the time and cost for importing and exporting by allowing single submission, single processing and single approval of import/export documents. It is estimated that up to 36 government agencies are involved in granting permits or licenses for export or import with at least 48 different export documents, 106 different import documents and 23 supporting documents. The INSW team had submitted a draft proposal to the Coordinating Minister of Economic Affairs in August 2009,
8 The seven provinces are: South Sumatra, West Java, East Java, NTB, DKI Jakarta, Bali and Lampung. The four line ministries are: Ministries of Justice and Human Rights, Manpower and Transmigration, Trade, and Finance.
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with options and recommendations on the establishment of an independent INSW agency. However, the Government has since decided to delay the establishment of such new INSW entity in order to assess the proposal further, and has appointed the DG Customs as the temporary operator of the INSW until 2012. In the meantime, the development of the INSW will continue to be coordinated by the Secretariat of National Preparatory Team for INSW. This is an acceptable first step in the process of creating an independent INSW body with its own budget and with all key ministries involved as stakeholders. It is important to highlight the importance of moving the INSW from being a purely customs-operated system to one that is an independent body, thereby enabling the INSW to function optimally with active cooperation of all of its stakeholders.
92. Since monitoring and evaluation is a key element for the development of an effective INSW, regular evaluation reports on number of users, amount of imports/exports processed through the INSW, and time for customs clearance, have been submitted by the INSW Team to the Coordinating Minister of Economic Affairs. Most of the 18 related line ministries have also issued service-level arrangements and standard operating procedures for processing trade documents through the INSW. However, this will not complete the reform. It will still be necessary to reform back office procedures and business processes in each participating agency, to improve the IT systems and to strengthen the INSW help-desk functions that are being supported by the DG Customs help-desk.
93. Certificates of origin: A transparent system for issuing Certificates of Origin (CO) has become an important determinant for Indonesia’s export competitiveness. The purpose of a CO is to authenticate the country of origin from where the merchandise is being shipped. With the proliferation of preferential trade measures and preferential trade agreements, the CO is the key determinant for eligibility of merchandise to obtain preferential tariffs. For Indonesia, having a credible CO for textile and clothing products will help the country access EU and US markets and prevent exports from being identified as a transshipment from other countries. Prior to the decentralization, CO were issued by the Ministry of Trade and its representative offices in the regions. However, post-decentralization the Ministry of Trade no longer maintains local representative offices and the issuance of CO has been taken over by local trade bureaus under local governments. The Ministry of Trade has established a reporting mechanism in the 57 local trade bureaus issuing certificates of origins, which would enable the ministry to support Indonesian exporters in benefiting more from trade integration and responding to allegations of transshipment.
94. Non-tariff measures and product labeling: Non-tariff measures, a concept broadly used to include any type of policy measure other than a tariff that affects trade, including product labeling, have been proliferating internationally despite the recognition that they can be very counterproductive and cause inefficiencies in trade flows. The Ministry of Trade is committed to provide guidance on the use of such measures and has initiated the implementation of two measures since 2009. First, it has issued guidelines providing certainty in product surveillance by clarifying and establishing a standard operating procedure to monitor product labeling. Second, the ministry plans to reform its internal process in reviewing new non-tariff measures, specifically those that are under the ministry’s purview and not those that are introduced by other agencies. By 2011, the ministry expects to reform its internal procedure on issuing non-tariff measures. While the Ministry of Trade is responsible for issuing certain types of non-tariff measures, such as import licenses and pre-inspections, it is also responsible for ensuring that other non-tariff measures imposed by other agencies are legal under international trade agreements. The internal reforms would establish a mechanism for the ministry to review NTMs in order to ensure their validity according to the policy objectives and to ensure their consistency with international trade agreements.
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Policy Sub-Area I.3. Reducing Tax Burden and Improving Tax Administration Reform Aim: Improve human resources management in the DG Tax and modernize the core tax system
95. The first phase of tax administration reform was largely completed by end-2008. In the first phase DG Taxes (DGT) restructured its headquarters, moving from a “tax type” to a functional organization with a field office network targeted to specific taxpayer segments — i.e. large, medium, and small taxpayer offices have been established in addition to one unit dealing with High Wealth Individuals that was created in 2009. The balance of unpaid VAT refunds has declined significantly while major outreach and simplification efforts have increased the number of registered taxpayers from a total of about 4.8 million in 2006, to more than 18 million by May 2010. However, the increase in the number of registered taxpayers, which are mostly individuals and small businesses, has not automatically resulted in a significant increase in revenues as substantial tax gaps and systemic weaknesses remain. The DGT remains constrained by ineffective systems and by existing laws and regulations, particularly with regard to human resource management, which force it to implement an inefficient “cookie cutter” model for the tax office organization structure and prevents the creation of professional service staff, for example in tax audit and human resource management.
96. The next phase of tax administration reform will continue the effort to reduce tax gaps and introduce new systems and procedures that facilitate a taxpayer-centered approach to improve voluntary compliance. The focus is on strengthening the self-assessment system and streamlining business processes, improving the quality and integrity of the tax database, introducing risk-based compliance enforcement and resource allocation, modernizing human resource management, improving professionalism and staff integrity, strengthening governance, and increasing the ICT capability to support the entire tax operations. The DGT’s medium-term reform strategy is therefore concentrated into two interrelated programmatic streams:
Lowering taxpayer compliance costs through improving the efficiency and effectiveness of
the tax administration organization and business processes. The Bank is supporting this effort through the Core Tax Systems Development Component of the PINTAR loan that will support DGT in strengthening: (i) taxpayer registration, (ii) returns and payments processing; (iii) taxpayer and revenue accounts database; (iv) centralized document management; (v) risk-based audit and collection; and (vi) the information technology infrastructure. Implementation is expected to commence in early 2011 to ensure that the reform program can be completed by early 2014. As a prior action, DGT has issued the advertisement (invitations for bids) for PINTAR procurement as an initial step in the development of business process improvements and a new integrated information system. In order to address some immediate concerns in relation to the tax gap, and to help clarify the procedures for taxpayers, the DGT has issued guidance for transfer pricing taxation and will be issuing new Standard Operating Procedures (SOPs) for tax objections and appeals; and
Modernizing human resource management, improving professionalism and staff integrity, and strengthening governance. The Bank is supporting this effort, partially through Component B of the PINTAR loan that will comprise the development of HR management policies, training, professional certification, a new HR management information system and strengthening governance. While DGT currently has limited flexibility to introduce the much needed reforms, due to the rigidity of government-wide standards, the scope for improvements, even under the existing framework, has not been articulated. The DGT is currently in the final stages of developing a medium-term HR Strategic Plan (HRSP), which is expected to provide the foundation for both immediate HR reforms, as well as the longer-term reforms that will require
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exemptions from the centralized rules currently controlled by the State Ministry of State Apparatus (MenPAN). One of the immediate reforms is the development of a Knowledge Management Strategy and Implementation Roadmap to help disseminate good practices about the tax and HR reforms throughout the organization (DGT currently has around 33,000 employees spread throughout Indonesia).
B.2. Policy Area II: Strengthening Public Finance Management
97. Since the adoption of a new regulatory framework in 2003 and 2004, the Government continues to implement public financial management reforms. These efforts are part of a broader public sector reform agenda to improve governance and enhance service delivery, with the ultimate goal of achieving sustained economic growth and poverty alleviation. More particularly, the Government’s efforts are directed at improving the way in which public finances are managed and increasing the transparency and independent oversight thereof. To this end, the Government has committed itself to a broad based PFM reform agenda. At the forefront of this agenda has been the Government’s move to performance-based budgeting (PBB) and the Medium-Term Expenditure Framework (MTEF), as required by the 2003 State Finance Law. Likewise, the Government continues to push for reforms through the introduction of SPAN, the Integrated Financial Management System, with the primary aim to increase timeliness, reliability and transparency of budget disbursements and reporting. Further consolidation of the treasury single account (TSA) and improvement of cash management and cash flow forecasting under this arrangement also remain a priority, as well as improving the management of state asset-liability portfolio, enhancing public sector procurement, and strengthening audit and accounting functions throughout the budget cycle.
98. During the past year, the Government made substantial progress in key PFM reform areas. PBB/MTEF reform has progressed significantly with the establishment of a revised program and activity structure, as well as performance indicators for all ministries/state agencies. The latter were implemented within the new RPJMN 2010-2014 and will also form the basis for the FY 2011 budget formulation process. To further support performance orientation and, at the same time, simplify budget execution processes, the Government has undertaken measures to allow more flexibility to spending units in implementing and managing their budgets to achieve agreed outcomes and outputs by granting them more authority for budget virement. Further, the Government continued to show strong commitment in preparing for the implementation of SPAN, which is scheduled to move to Conference Room Pilot 3 Phase in October 2010, followed by a configuration of the new system. Further consolidation of the TSA has shown considerable developments as daily sweeps of government revenue accounts have been fully implemented. An automated asset management system is close to being completed, and the stocktaking and appraisal of Government assets has been completed. The public procurement environment continues to change, with the National Public Procurement Office (LKPP) heightening efforts to improve the national regulatory framework for public procurement and developing a human resources and capacity building strategy for the procurement function in government agencies. Government Regulation No. 60/2008 on Internal Controls defines more clearly the roles and responsibilities of the different players in internal audit, and Indonesia has embarked on the initiative to move towards full accrual accounting. Indeed, the reforms undertaken in previous and ongoing DPL series have been sequenced in a manner that provides a firm foundation for further progress in the PFM area, particularly in creating the basic foundation for the gradual introduction of an MTEF, which is expected to undergo a trial exercise in 2011. Nevertheless, new challenges continue to arise across the public financial management cycle, including budget formulation, execution, reporting and auditing. Some of these will continue to be, and have been, addressed through the DPL program.
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Policy Sub-Area II.1. Strengthening Budget Formulation and M&E Systems Reform Aim: Improve results orientation and MTEF in the budget process 99. The 2003 State Finance Law mandated three pillars of budget reform: (i) a unified budget to remove the previous distinction between development expenditure and routine expenditure and allow for prioritization across all kinds of expenditures in the budget; (ii) a Medium-Term Expenditure Framework (MTEF), which aims at strengthening the capability to plan and prioritize expenditures for the medium term; and (iii) performance-based budgeting (PBB) which would restructure the budget according to programs and activities and associated performance indicators, and allow for a results-based evaluation and budget allocation.
100. While the unified budget was implemented in the 2005 budget, PBB and MTEF are still in the making. However, 2009 saw substantial developments in these reform areas, and the work on PBB and MTEF has moved into an implementation phase. This has been supported by DPL 6 and 7 prior actions. In June 2009, a manual on MTEF and PBB was prepared jointly by DG Budget and Bappenas, which provides guidance and information to line ministries on: (i) restructuring of the budget following new definitions of programs and activities, and establishing new and clearer lines of accountability among management levels; (ii) preparation of the PBB, including the formulation of key performance indicators; (iii) implementation of the rolling budget and planning framework (MTEF); and (iv) new formats for submission of work plans and budget documents. The manual was followed by a joint circular in July 2009, mandating that restructured program and activities following the PBB/MTEF guidelines be implemented by all line ministries and ministry-level agencies, with the RPJMN 2010-2014 and Renstra-KL to form the basis for the FY2011 budget preparation process. The manual was subsequently socialized to all 76 central government agencies through a set of workshops.
101. The Government’s new program structure has already been finalized and incorporated in the RPJMN 2010-2014, and indicative budget ceilings for FY 2011 have been based on the revised structure. As a prior action, the GoI has (a) Implemented a revised program structure with measurable results and targets aligned with organizational structure in the National Medium Term Development Plan (RPJM) for 2010-2014 and (b) based both indicative ceilings and budget proposals (RKA-KL) from all line ministries for the Fiscal Year 2011 budget on the revised structure. One further crucial step into the PBB direction — and also included in the DPL 7 policy matrix — was to base budget submission templates for the upcoming fiscal year on the new program architecture and to submit them, together with the Government’s Financial Note, to Parliament. This was done in August 2010 following a new regulation and a set of implementation guidelines prepared by DG Budget, in coordination with Bappenas, and the socialization of guidelines to all line ministries in May and June 2010.
. 102. The Parliament’s buy-in and understanding of the ongoing PBB/MTEF reforms remains crucial, wherein its task in appropriating the annual budget will shift from scrutinizing line-items to assessing allocations for activity outputs. While consultations with the Parliament took place as part of the budget cycle consultations, more in-depth discussions on the content of reforms need to be intensified. To that end, the Financial Note to the Parliament presented detailed information on PBB/MTEF reform for consultations, a benchmark action specified for DPL 7.
103. The completion of Parliament consultations and the submission of new budget templates, signify a major step towards the achievement of long-term PBB/MTEF reform goals. However, more challenges lie ahead. Throughout the next two years, these reforms will start to increasingly revolve around refinement of the performance information system and the development of an integrated monitoring and evaluation system by 2013, as well as further strengthening of the budget’s MTEF
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dimension. The latter will look especially into the separate treatment of baselines and new initiatives as well as linking budget ceilings to forward estimates of the previous years, but also into mechanisms to include explanations on deviations of budget ceilings from forward estimates in the budget documentation process.
Reform Aim: Link budget formulation to SPAN
104. SPAN is meant to cover not only transactions on the budget execution side, but the entire budget cycle from budget planning to reporting. A budget formulation application will therefore be part of the SPAN solution. Discussions are ongoing on the choice of such a module. Once a decision has been made, the challenge will lie in integrating the data on the budget formulation and budget execution side, respectively. Clarification will especially be needed on the design of the business procedures that define how these two databases will be interlinked and inform each other in the future. As configuration will start with Conference Room Pilot (CRP) 3, DPL 7 is supporting the development and final approval of technical procedures for configuration by September 2010.
Policy Sub-Area II.2. Strengthening Budget Execution Systems Reform Aim: Streamline budget execution and management of budget authority
105. Increasing flexibility in budget implementation. One of the main objectives of the Indonesian PFM reform is to streamline and simplify the budget execution process by providing more flexibility to the spending units in implementing and managing their budgets in order to achieve outcomes and outputs in accordance with the agreed policies and plans. With the new program restructuring instructions issued in 2009 (for implementation in the FY2011 budget), all spending unit are expected to develop their budget proposals based on the performance targets. Any virement (changes) to the original budget allocations can be made only if these do not adversely affect agreed targets. In March 2010, the Minister of Finance issued a new regulation No. 69/2010 on the procedures to do budget revision for the FY2010. This new regulation contains new procedures for virement, which are intended to be consistent with the gradual introduction of performance targets in the budget documents to facilitate performance-based budgeting (PBB).
106. However, the structure of the FY2010 budget is still line-item based. DG Budget is currently preparing a draft concept paper on the future virement procedures to make them consistent with the full implementation of PBB. These procedures are to be used for budget virement starting in FY2011. The future budget virement process is expected to provide the spending units more flexibility in managing their budgets and make them more performance (output/outcome) oriented. The concept of the future virement process is part of the 26 academic papers currently being prepared by the MoF. The detailed concept of future virement should be agreed and finalized before end of August 2010, which will be used as an input for configuring the SPAN application at CRP 3 stage. The establishment of virement procedures is in conformity with the MoF Regulation No. 69/2010 on budget virement and the guidelines of PBB are therefore included as a benchmark action in DPL 7. DPL 8 will promote implementation of these new procedures, and DPL 9 will subsequently promote their review by the internal auditors (BPKP/IG) in order to determine whether the increased budget flexibility given to the spending units is being used effectively and efficiently.
Reform Aim: Improve budget and cash management within the central government
107. There has been significant progress in the further consolidation of the Treasury Single Account (TSA) with the implementation of: (i) the daily sweep of all revenue accounts into the TSA; and (ii) the virtual pooling of all imprest/expenditure accounts maintained in the spending units for purposes
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of computing the daily cash balances of the Government. The TSA reform, coupled with the MoF-BI MOU that requires BI to pay interest on cash balances in the TSA, has provided incentives for spending units to optimize government cash balances in BI. The interest earned on government cash balances during 2009 was Rp 3 trillion.
108. MoF is also committed to continue the reform process by improving cash forecasting. In November 2009, MoF issued a regulation (PMK192) on cash forecasting, which is supported by DPL 7. With the implementation of this new regulation, the idle cash balance kept at the TSA by BI is expected to be minimized, instances of cash shortages avoided, and the interest investment of cash surpluses maximized. This regulation requires spending units to submit in-year cash withdrawal/receipt plans to the State Treasury Service Office (Kantor Pelayanan Perbendaharaan Negara, or KPPNs) to periodically update the disbursement plans included in their Approved Budget Allocations (Daftar Isian Pelaksanaan Anggaran, or DIPA). The spending units are required to submit their updated daily, weekly, and monthly cash plan at least three days before end of each month failing which the cash cannot be withdrawn. DPL 7 also support DG Treasury’s efforts to develop a new IT application called “Aplikasi Forecasting Satker (AFS)” to support this initiative. Once finalized and running, the application will enable submission of cash plans through soft copy, email or text-messaging devises. A DPL 8 benchmark action will help follow up on this activity and identify next steps in its regard, stipulating a review by DG Treasury of the implementation of both the regulation on forecasting and the application software. For DPL 9, a target will be to implement cash-forecasting processes in pilot ministries through SPAN.
109. At the same time, DG Treasury is conducting a series of events to socialize the aforementioned new cash-forecasting regulation and its IT applications as part of the capacity building programs for the spending units. The KPPN/Kanwil will also conduct an intensive coaching clinic, assistance, and consultation to the spending units on the detail steps on how to prepare the activity schedule and estimated cash requirement to comply with the new regulation. These training and coaching sessions are expected to increase the spending units’ understanding on: (i) the details of each activity in their RKA-KL/DIPA; (ii) the difference between contractual and non-contractual activity; and (iii) development of a more accurate project implementation schedule and its term of payment.
Reform Aim: Improve provision of IT services
110. SPAN preparations and improvement of provision of IT services. With regards to the SPAN implementation process, challenges continue in project implementation and putting in place the enabling environment and preconditions. The latter involves the revision of the chart of accounts, integrating budget and treasury business processes, developing a change management strategy and ensuring the provision of an appropriate IT infrastructure. Synchronization of the many activities and consultant teams working on different aspects of the new Treasury system is also an issue, especially in view of the tight project time schedule. Stronger coordination and buy-in among and by the various SPAN stakeholders, and also the higher management level, are therefore crucial. The new DPL series aims to address a range of these issues under DPLs 7 to 9.
Reform Aim: Strengthen management of state assets
111. Government assets have not been comprehensively recorded, properly organized and fairly valued in the past. An integrated and automated asset management system, which enables the Government to optimize the use of its assets across ministries and regions, is being implemented. Stocktaking and appraisal of state assets started in 2007 and has recently been completed. Another important milestone was already achieved with the issuance of MoF Decree No. 102/2009, which requires Satkers, KPKNLs and KPPNs to reconcile their data on government assets.
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112. Subsequently, the reform agenda will be pursued further with the establishment of the database for the state asset information system and its integration with the Government accounting system (SIMAK-BMN). All current acquisition of assets, work-in-progress and inventories will be recorded through the application software installed in the 70 state wealth and auction service offices (KPK-NL) across the country. The recording of these assets in the KPK-NL will be reconciled with the cash transactions pertaining to the acquisition/ construction of assets recorded in the KPPNs and the liabilities recorded in the books of the Satker. In November 2009, the Minister of Finance and the Head of the National Land Authority Board (BPN) signed a joint decree No. 186/2009 and No. 24/2009 on the land certification. The objectives of the certification are to provide legal certainty on the ownership of the state lands, to orderly administer the land registration, and to protect the security of the assets. The certification will be made on the land that has not yet been certified and/or the land that has been certified but is not under the name of the Government of the Republic of Indonesia, but the state ministry/agency. As required by this regulation, the MoF will be responsible for: (i) securing the original document of land title ownerships or certificates; (ii) collecting and updating the data of state land assets; (iii) coordinating with BPN on certification of the un-registered land assets; and (iv) allocating the state budget for the cost of certification. Reform Aim: Improve public procurement 113. One of LKPP’s (Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah) or National Public Procurement Office’s priorities is to improve the regulatory framework for public procurement, particularly in line with decentralization, as it provides an overall framework for all agencies implementing public procurement. To achieve that, LKPP has been working on two tracks: the preparation of a new procurement law and the revision of Presidential Decree (Keppres) No.80/2003. As a prior action, LKPP has finalized academic papers for a draft procurement law and prepared the draft procurement law, which is ready for a public consultation process. The academic papers provide the basis, justification and needs for the procurement law. Subsequently, LKPP has drafted the law, which became ready for public consultation at the end of August 2010. This is a critical reform action supported by the DPL 7, given the need for broad consultation process and policy consensus among various GOI stakeholders, before the draft law can undergo public consultation and submitted to the Parliament thereafter. The enactment of the new procurement law itself may be a lengthy process, possibly requiring at least 18-24 months, as parliamentary discussion and approval require broader stakeholder consultation and consensus building. As an interim measure, LKPP has therefore formulated a new Perpres to replace Keppres 80. The main reason for this revision was to improve the current Keppres by including references to the establishment of Procurement Service Units (ULPs) by 2012, the use of national standard bidding documents, as well as other improvements. The Perpres was submitted to the President’s office and issued in August 2010. 114. While these developments are steps in the right direction, the public procurement system still has significant deficiencies in its implementation aspects. There has been slow progress in the development and use of standard tools in terms of bidding documents and users manuals; in reducing collusion and corruption in the bidding process, as well as inefficient compliance mechanisms and sanction measures. However, the most significant deficiency is the absence of professional procurement management and the weak procurement capacity in implementing agencies, especially at the provincial and district levels. LKPP has issued a decree to create procurement service units at all implementing agencies and is in the process of preparing a draft HRD strategy to professionalize and support the public procurement sector. Finalization of the human resource strategy and moving into implementation stage will be critical for any significant progress in the reform of public procurement.
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Reform Aim: Improve government accounting and audit functions
115. Weaknesses in internal control pose a significant risk to reforms introduced in other areas of public financial management. The PEFA assessment of 2008 classified the internal audit function in the country as fragmented and characterized by weak capacity. There was a diffusion of roles and responsibilities amongst various internal audit agencies. While an earlier Government Regulation No. 60/2008 broadly laid out the roles and responsibilities amongst three sets of internal auditors (i.e. BPKP, IGs for line ministries and local government inspectorates for local governments), there is still a need for a regulation that lays out in more detail the mechanisms of how those roles and responsibilities would be implemented, particularly in the planning, executing, reporting and follow up of internal audit at each level. As a prior action, BPKP has submitted to the MoF a draft Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/2008. This is a critical action that signifies a key policy reform consensus on the mechanisms for internal audit within the Government, which will be followed by widespread consultations with various stakeholders. The Presidential regulation will also assign an agency with the role of formulating the internal audit strategy for the country, hence serving as the basis for the subsequent development of an internal audit strategy. DPL 8 supports the issuance of the Presidential regulation after widespread consultations with various stakeholders and DPL 9 supports formulating an internal audit strategy for the country. Further, given that the Government, through issuance of PP No. 60/2008, has adopted the COSO model as its control framework; it will also need to prepare a strategic plan (grand design) to implement COSO, to be followed by implementation of COSO in line ministries. DPLs 8 and 9 will support these follow-on actions. 116. Indonesia is moving towards accrual-based accounting. Financial reports prepared on an accrual basis are more useful both from accountability and decision-making perspectives. The target is to switch to full accrual accounting by 2015. The draft standards have already been prepared. As a prior action, GoI has submitted to the President a draft Government Regulation on accrual-based accounting. This submission marks the achievement of policy consensus amongst various Government stakeholders on an accounting framework that would enable the Government to better manage its finances and risks. DPLs 8 supports the transition to accrual accounting through the development of a time plan by MoF and executing various actions required for the transition to accrual accounting and DPL 9 would support completion of business processes, accounting policies and chart of accounts.
B.3. Policy Area III: Enhancing poverty alleviation and service delivery efforts
117. To further accelerate the pace of poverty reduction, the Government is pursuing key reforms of its national poverty reduction programs. These reforms include institutionalizing program assessment and improved governance accountability to support overall coordination, implementation, and assessment of the programs; improving the accuracy in measuring poverty and developing a national targeting system to ensure that program benefits reach the poor and vulnerable; and empowering local governments, communities and service providers to deliver quality services as an effective approach to leverage local knowledge to identify obstacles to development while building capacity for coordinated action. DPL 7 will support the Government’s reform objective by improving the governance and institutional accountability, enhancing poverty measurements and targeting of the poor, improving household targeted poverty reduction programs, and improving community based poverty reduction programs.
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Reform Aim: Improve governance and institutional accountability
118. A National Team has been established to guide and oversee the reform of poverty reduction policies and programs. Fragmentation and lack of coordination has limited the effectiveness of national poverty reduction programs. Poverty reduction programs are planned and implemented separately by an array of line agencies. This fragmentation has led to several problems that undermine the effectiveness of the national poverty reduction framework. First, the task of monitoring and evaluating programs is not uniformly implemented, thus making it difficult to resolve coordination issues and to make decisions regarding the effective use of budget allocated for poverty reduction efforts. Second, weak coordination across ministries at the national level and downstream with local governments and service providers, limits the ability of programs to provide comprehensive protection against the risks faced by the poor. To address these problems, and as a prior action, the Government has established an inter-ministerial National Team for the Acceleration of Poverty Reduction (National Team) by Presidential Regulation (PerPres No. 15/2010). By formally establishing the National Team through a presidential decree, the newly established body will be provided with the authority to carry out its mandated role, coordinating and evaluating the implementation of poverty alleviation programs by other ministries.
119. The establishment of an executive secretariat will provide policy inputs for the National Team to make informed, evidence-based decisions. The secretariat will provide inputs through a range of working groups that will act as internal “think tanks” to commission research, draft policies, and support improvements in program design and integration. One of these working groups, yet to be established, will focus on improving monitoring, evaluation and accountability functions in the poverty sector. The findings from both monitoring and evaluation activities will inform the decision of the National Team about program mix, scale and budget allocations while, at the same time, improving public accountability over the use of public resources.
Reform Aim: Improve poverty measurements and targeting of the poor
120. Reforms in the area of targeting will ensure that poverty programs benefit the neediest families and regions. Household poverty reduction programs currently use different targeting approaches and rely on separate recipient databases. This leads to duplication of efforts, inconsistency in application, and dampened program impact. To address these problems, the executive secretariat plans to establish a national targeting system, which is one of the strategic objectives of the RPJMN 2010-2014. Such a system will feature a unified database of poor households, from which implementing agencies can draw beneficiary lists for individual programs.
121. The unified database depends on accurate methods to measure household poverty. The Central Bureau of Statistics (BPS) is currently in the process of revising the methodology and will expand the list of indicators from 14 to 56. This will improve the accuracy in identifying the poor and measuring poverty rates. As a prior action, GoI has revised the methodology to calculate the national poverty line by: (i) completing a national poverty line simulation using the alternative measurement methodologies; (ii) conducting internal consultations in BPS and key government stakeholders to identify a poverty measurement methodology for consideration; and (iii) holding external consultations about the implications of adopting the revised methodology with universities, NGOs and key line ministries. Given the charged debate on poverty levels and how this is calculated, a revised methodology (and possibly poverty level) needs to be accompanied with extensive consultations to ensure consensus among key stakeholders.
122. A targeting division will be established in the executive secretariat of the Vice-President’s office to oversee the overall targeting system. The future national targeting system will be housed in the Office of the Vice-President. It will be managed and supported by a targeting division within the
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executive secretariat, which will provide the resources to develop the unified database. The targeting division will prepare a policy note on steps required to establish a national unified database of poor households and families, the parties responsible for implementing each step. It will also facilitate the coordination of targeting across programs within Indonesia, such as a complaints and grievances process, fraud control, and disbursement of benefits. This will be carried out with the assistance of a working group that will include representatives from relevant government agencies, donor agencies and experts on targeting.
Reform Aim: Improve household-targeted poverty reduction programs
123. Providing health insurance for the poor requires studying reforms towards a feasible and sustainable program. Over the past five years, the Government has attempted to enroll the entire population under the mandatory public health insurance scheme. This experience has highlighted several major issues that will need to be addressed related to targeting, quality of care, and financial sustainability of the program. The program must be designed to support the substantial proportion of poor and near-poor households that require assistance, many of whom live in rural and remote areas, and are self-employed people or working in the informal sector. There is little information about the benefits package and its likely impact on the health and financial security of the uninsured. There is also limited understanding regarding the infrastructure and human resources needed to assure effective access to the promised benefits and the measures to ensure quality and efficiency. To address these concerns, the Government will start with a review of the design and financial sustainability of the national health insurance program, i.e. Jamkesmas. The review is part of an overall review of the social security and safety net programs coordinated by the Coordinating Ministry of People’s Welfare and for which a new Social Assistance Commission has been established. Once the review is completed, the Government will assess how to scale up the programs, eventually achieve universal coverage, while maintaining financial sustainability. In particular, a policy note will be prepared by the executive secretariat on Jamkesmas cost scenarios and health management information system. In addition to the review of Jamkesmas, the Government is also currently considering to improve the targeting of existing scholarship program for students from poor households. A review and assessment of the overall scholarship programs for the poor will be conducted as part of efforts to improve the scholarship coverage.
Reform Aim: Improve community-based poverty reduction programs
124. With the national expansion of the PNPM program, the fiduciary systems that were effective when the program was working on a smaller scale have come under stress. PNPM has robust governance features that result in low levels of “leakage”, fraud, and corruption, helping deliver high quality, lower-cost infrastructure development. The PNPM’s governance features build on twelve years of experience with community development project implementation in the country. With the national expansion of the PNPM program, the fiduciary systems that were effective when the program was working on a smaller scale have come under stress. This is illustrated by a gradual increase in the number of complaints over the last few years, although these have remained small in scale and close to zero as a percentage of total disbursements. Nevertheless, the Government decided to take measures to ensure that the strain on the fiduciary systems would not translate in an overall degradation of the robustness of PNPM's governance. The GoI has articulated an action plan to ensure that the fiduciary systems of PNPM, one of GoI main programs for poverty alleviation, remain robust. The action plan includes specific deliverables with regards to communication of political will with zero-level tolerance on fraud and corruption; strengthening of the systems to monitor, report, and act on complaints; and strengthening of the auditor capacity and appointment of additional fiduciary staff in high risk areas. As a prior action, the GoI has strengthened PNPM fiduciary systems as outlined in the action plan dated February 16, 2010, by: (i) having documented and publicized major complaints and the steps taken to address these; (ii) having BPKP and Bawasda explicitly tasked with the systematic auditing of PNPM
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funds; and (iii) having the Ministry of Home Affairs and the Ministry of Public Works submit quarterly reports detailing the status of all known complaints to the National Team and to the Joint Management Committee members. Beyond the fiduciary system, the Office of the Vice-President has also identified the need to push further the consolidation of a multitude of community-driven development (CDD) programs at the local level. This will be complemented by preparation of a proposal to assess the allocation mechanism of the block grant and how PNPM can best reach the poor in the less poor areas. Another proposal will also be prepared to clarify the role of local governments with regards to the transfer of the block grant to the communities.
C. Participatory Processes and Consultations
125. Democratic consolidation and decentralization of authority in Indonesia have translated into a political preference for wide buy-in and participatory, consensus-building approaches to decision-making, not only in terms of regulatory reforms but also planning and budgeting processes. While this is believed to have slowed or blunted some reform measures, it is believed to mitigate against radicalism, steadily improve public participation, and contribute to more democratic, accountable, professional and responsive governance. This commitment has been formalized and endorsed through several regulations (e.g. Law No. 25/2004 on National Development Planning and Joint Ministerial Decree 2006 and 2007 on Musrenbang), including those institutionalizing the creation of multi-stakeholder consultation forums — Musrenbang (Musyawarah Rencana Pembangunan) — at all levels, concerning several time frames. Musrenbang is the principal process for negotiating, reconciling and harmonizing differences between the Government and non-government stakeholders, and reaching collective consensus on development priorities, including regulatory reforms and budgets. While challenges still remain, the instrument is being increasingly adopted at all government levels.
126. Beyond the officially recognized participatory processes, various aspects of the reforms supported by this operation have been subject to extensive specific stakeholders consultations. In the investment climate area, the draft presidential regulation on the investment negative list was intensively discussed, not only within the Government through bilateral and multi-ministerial meetings but also with the Indonesian Chamber of Commerce and Industry (Kadin) and foreign chambers; the one-stop shop regulation was also discussed through a series of meetings between the Ministry of Trade, the Coordinating Ministry of Economic Affairs and the relevant sectors including Kadin; and a decision on the Indonesian National Single Window operational model has required, and will continue to require, hard discussions among the various government agencies involved. In the public financial management and poverty alleviation areas a large number of seminars and workshops have been undertaken during the past year among different government agencies, as well as between the administration and other key relevant stakeholders, not only to discuss technical issues but also reach agreements on policies and reform activities. The importance of participatory processes became very clear, for example, in the revision of Keppres No. 80/2003, which required wide consultation among government and non-government agencies, and the revision of the poverty measurement methodology. Such participatory processes are critical to ensure ownership and implementation of the new policy and methodology.
D. The Future Program
127. The policy focus of the new programmatic, third DPL series as a whole (DPLs 7 to 9) is closely aligned with the Government’s current reform priorities as presented in the 100-day action plan, Inpres No. 1/2010, Inpres No.3/2010 and RPJMN 2010-2014. Through discussions over the past six months as part of the ongoing engagement with the core economic ministries, a roadmap of milestones was developed that conforms to the Government’s own reform agenda. The ideas that emerged from these strategy sessions are laid out in the DPL program matrix in Annex 3, but will be adjusted and refined as
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progress continues to be assessed and discussions mature. The matrix includes the prior actions of DPL 7 and triggers for DPLs 8 and 9. For each year of the program, the matrix also details a number of benchmark actions or milestones that represent important components or prerequisites in the reform process. It should be noted that those actions for DPL 8 and 9 are indicative and will be discussed with the Government further in the subsequent months.
128. The third DPL series represents, in most respects, a continuation of the previous DPL program series (first DPL series 1 to 4, and second DPL series 5 to 6). Among the policy actions proposed are ones that are intended to improve the investment climate through strengthened investment service institutions and regulations (revised investment negative list, simplified investment licensing procedures), enhanced trade facilitation (national single window and national logistics blueprint), as well as a reduced tax burden and improved tax administration; to enhance public financial management through improved results orientation in the budget process, streamlined budget execution and improved cash management, strengthened management of state assets, improved public procurement systems, as well as improved government accounting and audit functions; to enhance poverty reduction and improving service delivery through improved poverty measurements and targeting of the poor, improved governance and institutional accountability and improved household- targeted poverty reduction programs, i.e. Jamkesmas and National Program for Community Empowerment (PNPM-Mandiri).
129. The mapping out of the reform program for the entire DPL series provides meaningful direction and substantive results down the road, but a degree of flexibility needs to be maintained, especially to ensure sustained Government ownership. Table 4 provides a basic mapping of the third DPL series reform program. It does not provide the complete policy actions that would be supported throughout the series and the actions identified under reform aim vary, a reflection of how well some reforms are already formulated, while others still need additional technical work and further discussions with the Government. The initial mapping out of a multi-year agenda allows a more strategic consideration of what the most critical next reform steps might be and provides the basis for judgment on whether or not sufficient progress has been made to go forward with the subsequent DPL operation. A total of 10 prior actions have been identified for DPL 7, whereas 10 and 8 triggers have been identified for DPLs 8 and 9, respectively. The DPL supports policy actions that are relatively complex in nature, since they often involve institutional changes and transformation of government business processes. This means that the overall direction of the reform and the outcomes are relatively well established, while the steps needed to implement the reforms and achieve the desired outcomes may somewhat change along the way.
Table 4: Prior Actions for DPL 7 and Indicative Triggers for DPL 8 and 9 Reform Aim DPL7 Prior Actions
(September 2010) Indicative DPL 8 Triggers
(September 2011) Indicative DPL 9 Triggers
(September 2012) Pillar 1: Improving the Investment Climate
Reduce uncertainty for investors by strengthening investment service institutions and improving investment regulations
Issued the Presidential Regulation on the Investment Negative List which updates restrictions on investment including preferential treatment for ASEAN investors, and clarifies the grandfather clause, the treatment of publicly listed companies, and mergers and acquisitions.
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Reform Aim DPL7 Prior Actions (September 2010)
Indicative DPL 8 Triggers (September 2011)
Indicative DPL 9 Triggers (September 2012)
Reduce the time needed for and cost of importing and exporting
Develop standard operating procedures within the INSW for regular private sector consultative meetings on INSW implementation issues
Develop work plans for the phased implementation of single-submission/sign-on procedures for two key agencies of the INSW (permit issuing agencies, e-payment or Inaport).
Submitted to the President a draft Presidential Regulation on the National Logistics System (Sislognas) Development Blueprint
Modernize core tax system
Issued advertisement (Invitation for Bids) for PINTAR procurement as an initial step in the development of business process improvements and a new integrated information system
Approval of detailed design of new Core Tax system, developed under PINTAR
Pillar 2: Strengthening public finance management Improve results orientation and MTEF in the budget process
(a) Implemented revised program structure with measurable results and targets aligned with organizational structure in the National Medium Term Development Plan (RPJM) for 2010-2014 and (b) based both indicative ceilings and budget proposals (RKA-KL) from all line ministries for the Fiscal Year 2011 budget on the revised structure.
RKA/KL for 2012 based on revised PP 21, as evidenced by: 1. A new and simplified costing methodology with separate treatment of baselines and new initiatives 2. A manual to line ministries on formulation of new initiatives, which enables a review of rationale and cost information Consistency between RKP and RKA-KL regarding performance and budget information)
Budget documentation includes explanation of differences between proposed budget ceilings and previous medium-term forward estimates
Develop a new monitoring & evaluation system
Issue draft guidelines for an M & E framework based, on specific performance indicators, that provide basis for the next RPJMN and annual budgeting
Improve budget and cash management within the central Government
Issue new PP and related MoF-regulations on budget execution as mandated by State Finance Law
Completion of user acceptance tests and completion of final systems documentation
Improve public procurement
Finalized academic papers for draft procurement law and prepared draft procurement law, ready for public consultation process
Draft procurement law submitted to Parliament
Adopt the strategy and policy for human resources development for the procurement function in government agencies
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Reform Aim DPL7 Prior Actions (September 2010)
Indicative DPL 8 Triggers (September 2011)
Indicative DPL 9 Triggers (September 2012)
Improve Government accounting and audit functions
Submitted to the MoF a Draft Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/2008
Issuance of Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/2008
Development of an internal audit strategy based on the Presidential Regulation on Government Internal Audit Systems
Submitted to the President a draft Government Regulation on accrual-based accounting
Issue MoF regulation detailing framework of accrual-based accounting system, including a time frame for development of business processes, accounting policies and chart of accounts
Completion of business processes, accounting policies and chart of accounts for accrual accounting.
Pillar 3: Enhancing poverty alleviation and service delivery efforts Improve governance and institutional accountability
Established an inter-ministerial National Team for the Acceleration of Poverty Reduction (National Team) by Presidential Regulation
Improve poverty measurements and targeting of the poor
Revised the methodology to calculate the national poverty line by: i) Completing national poverty line
simulations using alternative measurement methodologies.
ii) Conducting internal consultations in BPS and key government stakeholders to identify a poverty measurement methodology for consideration.
iii) Holding external consultations about the implications of adopting the revised methodology with universities, NGOs and key line ministries.
National Team instructs agencies implementing Cluster I poverty programs to use the unified database.
Program beneficiary lists are extracted from unified database by the Targeting working group, using eligibility criteria from implementing agencies
Improve household- targeted poverty reduction programs (Cluster 1)
Executive secretariat working group submits a policy note on Jamkesmas cost scenarios and a proposed health management information system to the National Team.
The Executive Secretariat working group completes a review of new institutional arrangements for the delivery of Jamkesmas, taking into account actuarial cost estimates and various scenarios for achieving universal health insurance coverage,
Improve community-based poverty reduction programs (Cluster II)
Strengthened PNPM fiduciary systems as outlined in the action plan dated February 16, 2010 by: (i) having documented and
publicized major complaints the steps taken to address these;
(ii) the BPKP in partnership with the Bawasda having been explicitly tasked with the systematic auditing of PNPM funds; and
(iii) the Ministry of Home Affairs and the Ministry of Public Works having submitted quarterly reports detailing the status of all known complaints
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Reform Aim DPL7 Prior Actions (September 2010)
Indicative DPL 8 Triggers (September 2011)
Indicative DPL 9 Triggers (September 2012)
to the National Team and to the Joint Management Committee members.
VI. OPERATIONAL AND IMPLEMENTATION ISSUES
A. Monitoring and Evaluation
A.1. Monitoring
130. Monitoring the implementation and attainment of the DPL prior actions is done through several mechanisms. These include the Government’s establishment of monitoring committees and/or technical groups that are responsible for ensuring the implementation of agreed prior actions as well as progress follow-up; regular 2-day joint donor-Government meetings to discuss interim progress in achieving agreed milestones in the reform agenda and future triggers for the DPL series (in March, May and July 2010 for the preparation of DPL 7); and ongoing policy dialogue between the GoI and World Bank teams. Table 5 below indicates the critical monitoring activities in each policy area.
Table 5: Critical Monitoring Activities
Policy area Monitoring activitiesImproving the
investment climate Ongoing monitoring of progress in implementing the new Investment Law
and subsequent regulations, including the DNI and PTSP, by the Coordinating Ministry of Economic Affairs
Ongoing monitoring of progress in the operation of the INSW, by the Coordinating Ministry of Economic Affairs
Ongoing monitoring of investment climate and trade-related activities in conjunction with development partners as part of regular DPL program and analytic and advisory activities
Strengthening public financial management
Ongoing monitoring of progress on budget disbursements and identification of key bottlenecks by the recently established PFM MDTF Policy Advisory Committee
Ongoing monitoring of the time profile of budget disbursement, composition of public expenditures, and poverty and employment effects of economic shocks as part of the regular DPL program and analytic and advisory activities
Enhancing poverty alleviation and service -delivery
Ongoing monitoring of the implementation of national poverty alleviation programs by the National Team
Ongoing monitoring of poverty related activities in conjunction with development partners as part of regular DPL program and analytic and advisory activities
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A.2. Evaluation
131. A results framework has been prepared with a number of indicators to be assessed at the end of the current DPL programmatic series. The Bank will work closely with the Coordinating Ministry of Economic Affairs, the Ministry of Finance and other relevant agencies to monitor and assess reform progress and impacts during the life of the program. In addition to ongoing monitoring of activities, the Bank prepares an Implementation Completion and Results Report (ICR) at the end of each series. The ICR, prepared in consultation with the Government and development partners -- is a Bank self-evaluation reporting tool that highlights the key achievements and results, as well as lessons learned. The ICR for both DPLs 1-4 as well as DPLs 5-6 show the significant progress that the Government of Indonesia has made in its reform efforts since 2004, as well as highlight the role that the DPL has had in supporting that progress, by ensuring the alignment of support provided by development partners with GoI own reform efforts, promoting synergies between program support and other Bank instruments, focusing attention from both the Government and development partners on the most relevant reforms as well as empowering key reform oriented government officials to advance the implementation of necessary reforms. Monitoring and evaluation will also be supported by budgetary, legislative and economic data provided by the authorities and verified in official disclosures, directives and regulations. Baseline and updated data will be provided by the respective specialized agencies and tracked according to the Monitoring and Results Framework included in Annex 3.
B. Poverty, Social, Gender and Environmental Impacts
B.1. Poverty and Social
132. The DPL 7 prior actions are unlikely to harm the poor, while several prior actions have the potential to deliver positive impacts on poverty over the medium term. Both the improvement of the investment climate and strengthening of public financial management systems (policy pillars 1 and 2) are expected to have significant, if indirect, poverty and social benefits. The measures aimed at increasing investment, including foreign direct investment (FDI), and raising export competitiveness, such as the revision of the investment negative list, the simplification of business procedures or the implementation of the National Single Window, are designed to support a virtuous cycle of growth, employment generation and productivity gains. Consumers, including the poor will, in principle, benefit from lower prices of goods as a result of the greater openness of the economy. With the tax reform actions the Government plans to reduce tax gaps and introduce new systems and procedures that facilitate better compliance, thereby contributing to increased revenue collections and generating additional fiscal resources that can be used in economic development and poverty alleviation efforts. Improvements in public financial management will improve the capacity of the Government of Indonesia to provide public goods and services, which also benefit the poor. The transparency and quality of public spending and the provision of public services will allow social programs to have a greater impact on targeted populations. Overall public savings through better fiscal management will allow the GoI to dedicate more resources to pro-poor programs.
133. The policy actions under the third policy pillar aimed at enhancing poverty reduction and strengthening service delivery have the potential to deliver positive impacts on poverty over the short and medium term. Establishment of the National Team for the Acceleration of Poverty Reduction will address the issues of fragmentation and lack of coordination, which have limited the effectiveness of national poverty reduction programs thus far. Improvements in systems for better targeting of poverty
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alleviation programs and measurement of poverty are also expected to support the poor by ensuring that these programs reach the appropriate beneficiaries and by ensuring the availability of more reliable data and information — including those that are gender-disaggregated — which are required to make sound policy decisions. Household-based poverty reduction programs are being strengthened, which will improve the coverage of health insurance for all families, including the poor, and increase the number of scholarships for poor students at all education levels. Further, PNPM-Mandiri will be scaled up while ensuring its effectiveness and sustainability. Together, these actions are expected to yield positive impacts to the poor and vulnerable social groups throughout Indonesia.
B.2. Gender
134. As equitable development becomes a major concern for the Government, the DPL also supports institutional and policy reform aimed towards benefiting women in poor households. The Government has issued Inpres No.3/2010 on equitable development, which highlights issues of justice for women and children, gender equality and women’s empowerment. The RPJMN also outlined the importance of increasing the role of women in development, particularly women leadership in public sector, business community and social organizations. The DPL program in particular supports the strengthening of a PNPM-Mandiri program, which heavily involves women during its implementation. The PNPM program places strong emphasis on the promotion of women’s participation in rural areas in particular, with a number of initiatives to improve gender equity and increase women’s participation. PNPM Rural adopted the successful strategy to promote gender equity and women’s empowerment of KDP, including: (i) economic empowerment by revolving funds and microfinance programs involving women as members; (ii) political empowerment by ensuring women’s voices are heard during program development and planning through establishing women’s specific forum; and (iii) social empowerment by requiring one of the two village development proposals must come from women’s planning group.
135. Reform in the area of targeted social assistance will also benefit the poor and vulnerable females. The National Targeting System (NTS) will be used to target poor households, especially vulnerable households with certain practical and strategic gender needs such as households with pregnant women or headed by women. The proposed NTS design and social service data collection survey (PPLS11) will ensure that such programs can be properly targeted. Furthermore, the analytical research and field experiments will consider the practical and strategic gender needs on targeting outcomes, such as the legal status of female-headed households, and the gender impact of holding community meetings in the day or evening. Hence, improving the effectiveness of targeting will directly benefit this constituency.
B.3. Environmental
136. The proposed operation is unlikely to have significant positive or negative effects on the environment, forests and other natural resources. Measures proposed by the Government to improve the investment climate by cutting the cost and time needed to start up a business and to import and export goods should have no negative environmental effects, as long as proper environmental due diligence is carried out in the permitting and licensing process (as mandated by Law No. 32/2009 on Environmental Protection and Management). Business streamlining measures should not undermine the enforcement of Indonesia’s existent environmental requirements, as long as efforts are made to provide clear guidance and sufficient information to all governmental levels, investors and civil society regarding new measures to be implemented under the investment climate policy. In addition, it will also be necessary to ensure that environmental review requirements (AMDAL, monitoring and evaluation) are explicitly included in licensing decisions for businesses that meet legal criteria. Increased support to PNPM is not only unlikely to generate negative environmental impacts but rather to ensure adequate attention is paid to potential negative environmental externalities because of its built in environmental review processes.
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137. Actions towards improving the investment climate are expected to reduce uncertainties surrounding the environmental requirements in investments. The negative investment list in particular will not relax or undermine any environmental rules or licensing requirements, but rather reduce uncertainty, improve transparency and improve governance for potential investors. The issue of “grandfathering” refers to the ownership/equity requirements for foreign investors and does not confer or condone any environmental laxness to firms prior to a certain date. The negative investment list provides legal clarity for future investments, and there could be stronger rationale for enforcing the existing environmental impact assessment and compliance rules, within the context of improved rule of law, regulatory certainty and accountability within Indonesia’s bureaucracy system in general.
138. There is increasing recognition that environmental challenges are indeed interlinked with issues of governance, decentralization, rule-of-law, incentives, investment, transparency, and access to information (as well as attitude, awareness, education, constituency, etc.). Environmental and natural resource discourse is only now starting to target the origins of upstream policy that affect downstream outcomes and practices. The Climate Change DPL series is working to promote positive change through recognizing such progress on climate change policy, which will also in many cases be identical to policy aiming at better financial management, accountability, transparency and sustainable economic growth. Gradually, the DPL (and IDPL) process is taking on policy challenges more directly related to environment and natural resource issues and could be used in the future to address other fundamental policy issues that affect environmental performance and outcomes. Environmental and natural resource management will be enhanced if underlying policy issues related to efficient and sustainable production, consumption, transportation, and resource extraction (forests and energy) are improved. DPL policy actions related to efficiency, investment and transparency contribute to an overall climate of reform in basic policies. The Climate Change DPL will continue to provide more direct support for the environmental and specifically the climate change agenda.
C. Fiduciary Aspects, Disbursement and Auditing
139. Given that public financial management (PFM) is a central policy area supported by the DPL program, fiduciary issues are discussed at length elsewhere in this document. The detailed description of the main PFM challenges and issues surrounding the operation is given in the technical annex on PFM (Annex 6). In summary, significant strides have been made in recent years in the way Indonesia’s public finances are managed and in increasing transparency and independent oversight. In almost all areas of PFM, changes in the legal and regulatory architecture are now largely complete and the momentum has shifted towards implementation of new PFM practices. However, internal controls in the execution of budget by spending agencies still need improvement; the financial management information system for budget management at all levels of Government is not yet in place; and controls in budget execution processes are still weak. Weaknesses in financial management and accountability continue to be gradually addressed through the Government’s PFM reform program. Also, key elements of the reforms are supported by the DPL series, as well as the GFMRAP project and other initiatives supported by development partners.
140. The borrower is the Republic of Indonesia and this operation is a single-tranche IBRD loan of US$600 million. The loan will be made available upon loan effectiveness, as all policy actions supported by the loan/credit will have been completed prior to Board presentation. The Government has confirmed that Indonesia will borrow this amount as a Variable Spread Loan (VSL) in US dollar currency with an annuity repayment schedule linked to commitments.
141. The loan disbursement will follow the standard Bank procedures for Development Policy Lending. The loan amount will be disbursed into a foreign currency account of the borrower at Bank
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Indonesia that forms part of Indonesia’s official foreign exchange reserves. The equivalent Rupiah amount will immediately be transferred to the General Operational Treasury (SBUN) account of the borrower that is used to finance budget expenditures, as the loan is intended to be used to support the general government budget. The borrower will provide to the Bank a written confirmation that this transfer has been completed, and provide to the Bank any other relevant information relating to these matters that the Bank may reasonably request. Disbursements of the loan will not be linked to any specific purchases and no procurement requirements have to be satisfied, except that the borrower is required to comply with the standard negative list of excluded items that may not be financed with Bank loan proceeds.
142. The foreign exchange control environment is assessed to be generally satisfactory. The country is no longer subject to the Extended Arrangement from the IMF. Bank Indonesia (BI) was last subject to the transitional procedures under the Fund’s safeguards assessment policy in 2002. That assessment recommended remedial action to address a number of vulnerabilities in the audit arrangements of BI. The main recommendations have been implemented, including the establishment of an independent audit committee at BI and the publication of BI’s audited financial statements. Audited financial statements for BI for 2009 have been reviewed and the audit report issued by the BPK contained an unqualified opinion. Given that the foreign exchange environment does not present a significant risk, a separate annual audit will not be required for this operation.
D. Risks
143. Continued strong performance by the Government on its reform agenda and the achievement of its medium-term objectives are subject to several risks. These can be broken down into five categories: political risks; external vulnerabilities; the risks posed by subsidies; fiduciary and reputational risks; and institutional capacity risks.
Political risks
144. Reforms are expected to continue under the guidance of the new Minister of Finance. Following the resignation of former Minister of Finance after several months of pressure from parties in Parliament over the rescue of Bank Century in late 2008, the President appointed the former Bank Mandiri President Director as the new Minister of Finance in May 2010. The former minister’s resignation highlighted the political tensions created by the reform efforts. The appointment of the new minister signals the Government’s continued support for reforms and sound macroeconomic management. Moreover, most DPL reforms are driven by priorities that were developed and articulated formally through consensus within the Government, rather than by individual government officials, thereby minimizing the risks that the departure of particular officials or politicians has a disproportionate impact on reform prospects. The overall reform orientation of the cabinet remains strong, and the outcome of the elections has provided the Government with a strong and stable mandate until 2014. Potential political and cabinet shifts in future are addressed by providing flexibility in future trigger selection whilst focusing on achieving the overall reform objectives. The Bank continues to engage closely in core reform areas through other instruments (AAA and investment lending), which will facilitate early identification and management of risks.
External vulnerabilities
145. External factors may cause significant and rapid shifts in global financial market sentiment, resulting in sudden, large and somewhat disruptive capital outflows. In recent years, there have been significant improvements in Indonesian macroeconomic framework. This has translated into improved resilience to external shocks. But to a certain extent, considerable risks remain, especially in the event of
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global financial turmoil and uncertain global growth prospects, given Indonesia’s open capital markets and the limited depth of the domestic financial system. Indonesia’s external position remains relatively sound with a sizeable current account surplus into early 2010, and lower short-term external debt exposure than in mid-2008. The Government has also shown a strong track record in urgently taking precautionary and proactive measures when required during the recent global financial turmoil, which suggests that the impact of turbulence in international markets will be limited.
Subsidies 146. Volatile and relatively high international oil prices create uncertainty about the Government’s energy subsidies costs, which may hamper spending on development projects. There remain significant subsidies on both fuel and electricity in Indonesia, and their budget allocations expanded significantly between the proposed and revised 2010 budget with upward revisions to the oil price assumption. At present levels, marginal changes in world prices are approximately budget neutral but fixed fuel prices and the subsidies they create represent a threat to fiscal sustainability in the longer term (not to mention their opportunity cost, regressive nature and the inefficiencies they encourage). The Government’s decision to raise administered fuel prices in May 2008 demonstrated that, if the economic situation warrants it, the Government is willing to make difficult decisions. Meanwhile, there appears to be general recognition that Indonesia's energy prices, overall, need to better reflect the cost of supplying that energy. The Minister of Finance has announced reforms to the subsidies’ schemes for fertilizer, fuel and electricity over the next 3 to 5 years, to improve the targeting of these subsidies and redirect spending to development projects. Various policies are in place or being investigated to both reduce the supply of the most subsidized energy, and to reduce the gap between regulated prices and the economic cost. For example, a program to shift consumers from kerosene (the most subsidized fuel) to LPG (subsidized but by far less) in urban areas has cut kerosene consumption dramatically since 2007. In July 2010 the Government increased electricity tariffs, an early step to achieve the RPJMN 2010-2014 goal of cutting energy subsidies to negligible levels by 2014. Further increases in electricity and fuel prices, plus better targeting of subsidies, are likely in 2011. Finally, since 2009 the regions have started to share the cost of fuel subsidies, thereby reducing their impact on the central Government's finances through the remainder of 2010 and into 2011.
Fiduciary and reputational risks
147. Despite the remaining challenges, the Government has made significant progress in improving its PFM systems. Among the challenges that remain are the need to improve internal controls in the execution of budget by spending agencies, to establish the Government Financial Management Information System (GFMIS) that provides information for budget management at all levels of the Government , and to strengthen controls in budget execution processes in order to fully realize the gains from reforms introduced in other areas of PFM. However, as mentioned above, in recent years Indonesia has made significant strides in the way its public finances are managed and in increasing transparency and independent oversight. In almost all areas of PFM, changes in the legal and regulatory architecture are now largely complete and the momentum has shifted towards implementation of new PFM practices. Advances have been made in budget preparation with the introduction of MTEF and PBB, government accounting standards have been formally established and are being adhered to in several respects to produce comprehensive annual financial statements, and the external audit function has made significant progress in the past few years. Weaknesses in financial management and accountability continue to be gradually addressed through the DPL PFM reform program, as well as the GFMRAP project and other initiatives supported by development partners. Annex 6 provides a detailed assessment of the attendant fiduciary risks with respect to this DPL operation, summarizing the current state of the PFM systems, as well as ongoing reform efforts to further enhance them. The reforms when implemented will gradually contribute to reduce the level of fiduciary risk to low in the medium term. Despite the challenges
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summarized above, and given the Government's progress in improving its PFM systems, the team considers Indonesia's PFM system to be adequate to receive a DPL. Institutional capacity
148. Varied institutional capacity across different implementing agencies may undermine overall reform progress. The DPL-supported reforms have involved various government ministries/agencies, with varied performance across different agencies. Nevertheless, the overall commitment and ownership to reforms is strong, and the CMEA has performed very well in ensuring consistent and effective cross-ministerial coordination. The DPL program has also helped strengthen various institutions across the three DPL pillars, by improving analytical capacity and enhancing efficiency through better technology and more reliable and transparent reporting. These efforts are also complemented by other Bank instruments, including investment projects, technical assistance and AAA, which partly address concerns related to institutional capacity of the agencies involved in the DPL program. Exposure to natural disasters 149. Indonesia’s exposure to natural disaster may undermine the long term sustainability of the extensive DPL reform program. Indonesia is prone to natural disasters such as earthquakes and volcanic eruptions. With approximately 67.4 percent of the population living in high risk areas, according to the new Natural Disaster Risk Index (NDRI) Indonesia ranks second among the countries most vulnerable to "extreme risk". In the past, Indonesia has experienced major natural disasters that caused significant disruptions and infrastructure damages, with localized negative economic impacts. However, such risks are partially mitigated by the GOI’s strong commitment to disaster risk reduction, as manifested, among others, in the National Action Plan for Disaster Risk Reduction 2006-2010 and the Disaster Management Law No 24, enacted in 2007.
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Annex 1: Letter of Development Policy
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Annex 2: Application of Good Practice Principles on Conditionality
Principle 1: Reinforce ownership. DPL 7 continues to support key policy and institutional reforms in line with the Government’s priorities. Policy actions for the Investment Climate pillar are largely based on the 2007 and 2008 policy packages, or implementing decrees related to approved laws. PFM policy actions stem from the troika of laws passed by Parliament in 2003-04, namely on state finance, treasury, and audit — all of which provide the basis for modernizing public finances. Similarly, the procurement policy action is borne out of the 2003 presidential decree. Lastly, policy reforms in service delivery to the poor are all based on on-going efforts led by the Government, including its priority to better coordinate and to scale up anti-poverty community programs nationwide. Principle 2: Agree up front with the Government and partners on a coordinated accountability framework. The policy matrix represents an agreed framework with government and the country’s budget support donors, i.e. the Bank, the ADB and the Japanese Government. All development partners base their disbursement decisions on mutual consultation and on the Government’s fulfillment of the same set of prior actions. The policy matrix also sets out medium-term outcome indicators with targets to be achieved by the end of the program. These indicators and targets were developed jointly with the Government and have been adjusted as the program has evolved. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances. The Bank has prepared this programmatic series in response to an explicit government request. The policy matrix does not pretend to capture the totality of reforms being implemented, nor to raise issues that are key to growth and poverty alleviation but that, for various reasons, may be counterproductive if part of a high-profile program, such as the DPL. Hence, although the Bank is engaged in dialogue across a number of sensitive policy issues, many policy actions are left outside the scope of the DPL to take into account country circumstances and the political economy. Principle 4: Choose only actions critical for achieving results as conditions for disbursement. While country ownership and the criticality of policy issues to stated objectives are the foremost criteria in selecting DPL policy actions, the Bank and development partners also base the selection on the likelihood of accelerating implementation where vested interests or bureaucratic hurdles could slow the pace of reform. Other criteria include identifying strategies and plans that are critical first steps in a longer reform process. The DPL policy matrix (Annex 3) includes a list of benchmark actions that are key for advancing reforms, which are not chosen as conditions for disbursement but represent steps towards future DPL triggers. Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support. Development partners agree to notional commitment amounts and triggers during the prior year’s DPL. Donor commitments are further refined, based on government confirmation of program lending needs by the first quarter of the calendar year. During this time, government and development partners agree to specific criteria on assessing triggers. Given the decentralized Bank program, discussions with government counterparts and development partners are done on a regular basis.
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ANNEX 3: DPL PROGRAM POLICY MATRIX AND MONITORING AND RESULTS FRAMEWORK
Annex Table 1: DPL7 PROGRAM POLICY MATRIX
(Prior actions and proposed indicative triggers for future DPLs are indicated in bold, while benchmark actions and milestones are not)
Reform aim
Prior actions and benchmarks and proposed indicative triggers and milestonesDPL7 (by September 2010) DPL8 (by September 2011) DPL9 (by September 2012)
Policy area 1: Improving the investment climate Policy sub-area 1.1. Improving the regulatory environment for investment
Reduce uncertainty for investors by strengthening investment service institutions and improving investment regulations
Issued the Presidential Regulation on the Investment Negative List which updates restrictions on investment including preferential treatment for ASEAN investors, and clarifies the grandfather clause, the treatment of publicly listed companies, and mergers and acquisitions.
Prepare and submit to Menko a report which reviews implementation of the Presidential Regulation on DNI and provides recommendations for improvement and updates where necessary.
Issue a revised Presidential Decree to strengthen and revitalize PEPI Team’s roles and functions, outlining the institutional arrangements for ongoing public-private consultation on investments.
Issued detailed technical regulations on implementation of PTSP
Monitor and evaluate the implementation and effectiveness of PTSP
Established an operational online investment licensing system (SPIPISE) that integrates approval and licenses between BKPM, seven provincial government PTSPs and four line ministries
Continue to establish an integrated online approval and licensing system within 3 sectors, involving BKPM, 33 provincial & 40 municipal government PTSPs and 16 line ministries
Continue to establish an integrated online approval and licensing system within 5 additional sectors, involving BKPM and 50 additional municipal government PTSPs.
Mapping of business licenses used as basis for development of business process of SPIPISE for three priority sectors that have been agreed with the line ministries (Trade, Industry and Tourism)
Mapping of business licenses used as basis for development of business process of SPIPISE for 5 additional sectors agreed with the line ministries
Policy sub-area 1.2. Improving logistics, enhancing trade facilitation and promoting exports Reduce the time needed for and cost of importing and exporting
Selected MOF DG Customs as the temporary operator of the National Single Window. INSW import and export clearance made mandatory in 5 main ports (Soekarno Hatta Airport, Tanjung Priok, Tanjung Perak Surabaya, Tanjung Mas Semarang and Belawan Medan)
Published service level arrangements (SLAs) and standard operating procedures (SOPs) in the INSW webpage for processing trade documents at all major Government agencies participating in the INSW.
Develop standard operating procedures within the INSW for regular private sector consultative meetings on INSW implementation issues
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Reform aim
Prior actions and benchmarks and proposed indicative triggers and milestonesDPL7 (by September 2010) DPL8 (by September 2011) DPL9 (by September 2012)
Develop work plans for the phased implementation of single-submission/sign-on procedures for two key agencies of the INSW (permit issuing agencies, e-payment or Inaport).
Issued quarterly INSW evaluation reports on the webpage, including quantitative information on: (i) the number of users; and (ii) the amount of imports/exports processed through the INSW
Develop a system and submit reports to the Coordinating Ministry of Economic Affairs, Ministry of Finance and Ministry of Transportation on import container dwell time in Tanjung Priok port, measured from ship berthing to gate-out, including the time required for each major sub-step in the import clearance process; and make the reports public
Established Client Coordinator system in DG Customs to conduct help desk functions during the temporary operation of the INSW by MOF DG Customs.
Linked the remaining import licenses and 5 export licenses under the Ministry of Trade to the INSW
Link remaining export licenses under MoT to INSW and implement in 5 major ports.
Ministry of Trade issues a Ministerial decree outlining the SOP for the introduction of Non-Tariff Measures under the Ministry of Trade.
Implemented a reporting system for the 57 local trade bureaus issuing certificate of origins to the Ministry of Trade
Submitted to the President a draft Presidential Regulation on the National Logistics System (Sislognas) Development Blueprint
Evaluate 24/7 services in the ports of Jakarta, Semarang, Surabaya, Medan and Makassar, to identify the main bottlenecks in running those services efficiently and propose actions to strengthen the 24/7 running models in the port
Assessment of regulations that contribute to high logistics costs, e.g. quarantine controls in case of domestic shipping, customs checks in case of transshipments and certification of origin in case of exports
Start operation of the Customs Advanced Trade System (CATS) in the Cikarang dry port Start with plans to expand capacity and increase efficiency at the Jakarta port of Tanjung Priok and make a decision on the building of new port capacity in the greater Jakarta area beyond 2020.
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Reform aim
Prior actions and benchmarks and proposed indicative triggers and milestonesDPL7 (by September 2010) DPL8 (by September 2011) DPL9 (by September 2012)
Policy sub-area 1.3. Reducing the tax burden and improving tax administration Improve human resources management in DG Tax
Negotiate contract for Consultancy Services for the Development of Knowledge Management Strategy, Analysis and Implementation Roadmap for DG Tax, which will develop Knowledge Management Strategy, Analysis Document and Implementation Roadmap
Establishment of the foundation for comprehensive bureaucracy reform through formal endorsement and publication of the medium-term DG Tax HR Strategic Plan (HRSP).
Commence initial phase of professional certification for HR, Project Management (CMMI) and audit functions.
Sign contract for implementation of support for HR reform (Component B of PINTAR).
Re-organization plan for DG Tax approved by Minister of Finance. This would include: – The establishment of HR functions in the Regional
Offices; – Restructuring of the Small Taxpayer Offices (STOs);
and – Plan to introduce professional certification for HR,
Project Management (CMMI), and Audit functions.
Modernize core tax system
Issued advertisement (Invitation for Bids) for PINTAR procurement as an initial step in the development of business process improvements and a new integrated information system
Approval of prototype specifications for new Core Tax system, as developed under PINTAR.
Approval of detailed design of new Core Tax system, developed under PINTAR
Issue Government Regulation for the implementation of Article 35A Law 28/2007 regarding General Taxation Provisions and Procedures and the signing of a Memorandum(s) of Understanding with key counterparts, particularly Customs, on the sharing of third party information required for taxes related risk management, assessment and audit.
Negotiate contract for Consultancy Services for Criminal Investigations which will develop operational specifications, user requirements and a bidding document as an initial step in improving business processes and information systems for tax intellegence and investigation
Issue improved Standard Operating Procedures for tax objection and appeals
Issued Guidance for Transfer pricing taxation.
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Reform aim
Prior actions and benchmarks and proposed indicative triggers and milestonesDPL7 (by September 2010) DPL8 (by September 2011) DPL9 (by September 2012)
Policy area 2: Strengthening public financial management Policy sub-area 2.1. Strengthening budget formulation and M&E systems
Improve results orientation and MTEF in the budget process
(a) Implemented revised program structure with measurable results and targets aligned with organizational structure in the National Medium Term Development Plan (RPJM) for 2010-2014 and (b) based both indicative ceilings and budget proposals (RKA-KL) from all line ministries for the Fiscal Year 2011 budget on the revised structure.
RKA/KL for 2012 based on revised PP 21, as evidenced by: 3. A new and simplified costing methodology with separate treatment of baselines and new initiatives 4. A manual to line ministries on formulation of new initiatives, which enables a review of rationale and cost information 5. Consistency between RKP and RKA-KL regarding performance and budget information)
Budget documentation includes explanation of differences between proposed budget ceilings and previous medium-term forward estimates
Presented detailed information on MTEF/PBB reform to Parliament in the Financial Note and hold subsequent consultations with Parliament
Link budget formulation to SPAN
Issued SPAN procedures for establishing and using an integrated data base, to serve the requirements of BAPPENAS, DG Budget, line ministries and DG Treasury, that would enable the seamless linkage of data from the issuance of spending ceilings and virements to payment to accounting and reporting
Develop a new monitoring & evaluation system
Publish findings of review of the performance indicators and performance information systems from the case study of M&E template completed by selected “pilot” line ministries
Issue draft guidelines for an M & E framework based, on specific performance indicators, that provide basis for the next RPJMN and annual budgeting
Policy sub-area 2.2. Strengthening budget execution systems Streamline budget execution and management of budget authority
Established virement procedures (to be configured in the CRP 3 of SPAN) to conform with MOF regulation No.69/2010 and the guidelines on PBB
Implement virement on the basis of the PBB guidelines
Review the working of the virement procedures by BPKP/IG
Improve budget and cash management within the central Government
Issued new MoF regulation on cash forecasting. Review by DG Treasury of the implementation of the regulation on cash forecasting and application software and recommendations on next steps
Implement cash forecasting processes in pilot ministries through SPAN
Improved cash forecasting by: introducing mechanisms to improve the performance of Satker in preparing cash forecasts and through capacity building programs for line ministries treasurers.
Capacity building has been completed for Satker whose total budget covers at least 70% of total appropriation
Issue implementing regulation on coordination of revenue projections report requested to be submitted by revenue collecting agencies, including line ministries
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Reform aim
Prior actions and benchmarks and proposed indicative triggers and milestonesDPL7 (by September 2010) DPL8 (by September 2011) DPL9 (by September 2012)
Identified final business processes improvements (BPI) and final version of Chart of Accounts (COA) Framework
Roll out of SPAN on a pilot basis and establishment of Data Management Center (DMC) and Data Recovery Center (DRC).
Completion of user acceptance tests and completion of final systems documentation
Change management consultancy for implementation of SPAN commenced within MoF
Establish a comprehensive change management and communications program which includes workshops and training courses, as well as training materials
Issue new PP and related MoF-regulations on budget execution as mandated by State Finance Law
Improve provision of IT services
Established an ICT Steering Committee (SC) and appointed the Secretary General as the ICT Chief Information Officer
MOF Decree adopting ICT Blueprint issued Completion of Issue of the main MOF Decrees on Policy and Standards for ICT governance.
Issued MOF decree on the policy and standards of use of accounts and terms, electronic notes and internet within the MOF
Establishment of Pusintek as a shared services unit for MOF
Finalization of Organizational Plan for the establishment of the MOF ICT Center as an Echelon 1 unit.
Issued MOF Decree on policy and standards on exchange of data
Strengthen management of state assets
Issued joint decree between MOF and BPN on asset certification
The state asset management information system database (Modul KN) fully Implemented and integrated with the state asset accounting system (SIMAK-BMN)
A decree on empowering the MOF authority to control the use of state asset issued
Completed stock taking and appraisal of civilian state assets
Improve public procurement
Finalized academic papers for draft procurement law and prepared draft procurement law, ready for public consultation process
Draft procurement law submitted to Parliament
Adopt the strategy and policy for Human Resources development for the procurement function in Government agencies
Improve Government accounting and audit functions
Submitted to the MoF a Draft Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/2008
Issuance of Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/2008
Development of an internal audit strategy based on the Presidential Regulation on Government Internal Audit Systems
Adoption of a Grand Design for the Implementation of National Government Internal Control Systems (Government Regulation No.60/2008)
BPKP completes and socializes a Control Self Assessment (CSA) manual for the launch of CSAs by line ministries
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Reform aim
Prior actions and benchmarks and proposed indicative triggers and milestonesDPL7 (by September 2010) DPL8 (by September 2011) DPL9 (by September 2012)
MOF awards mandate for Government Internal Audit profession (as per Articles 52, 53, and 55 of Government Regulation No.60/2008)
Submitted to the President a draft Government Regulation on accrual-based accounting
Issue MoF regulation detailing framework of accrual-based accounting system, including a time frame for development of business processes, accounting policies and chart of accounts
Completion of business processes, accounting policies and chart of accounts for accrual accounting.
Policy area 3: Enhancing poverty alleviation and service delivery efforts Improve governance and institutional accountability
Established an inter-ministerial National Team for the Acceleration of Poverty Reduction (National Team) by Presidential Regulation
Established an M&E working group in the executive secretariat of the National Team, by decree from the executive secretary.
M&E working group submits a plan to the National Team for institutionalizing an integrated M&E framework for major poverty reduction programs.
Findings from the evaluation commissioned by the M&E working group submitted to the National Team.
M&E working group submits an evaluation workplan to the National Team and regularly reports on progress. M&E working group submits a report formulating the design of a centralized MIS to the National Team.
Centralized MIS established aggregating program monitoring information.
Conduct a review of international and in-country grievance and complaint resolution models, with options for systems and institutional arrangements.
M&E working group submits a report formulating the design of a unified grievance and complaint resolution system to the National Team.
Improve poverty measurements and targeting of the poor
Revised the methodology to calculate the national poverty line by: i) Completing national poverty line simulations
using alternative measurement methodologies. ii) Conducting internal consultations in BPS and
key government stakeholders to identify a poverty measurement methodology for consideration.
iii) Holding external consultations about the implications of adopting the revised methodology with universities, NGOs and key line ministries.
National Team Secretariat submits policy note with options for methodological revisions to the National Team.
National Team endorses the proposed poverty measurement methodology and institutional arrangements.
Socialization strategy for the revised poverty measurement methodology is prepared.
National workshop and press conference are held to socialize the endorsed poverty measurement methodology.
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Reform aim
Prior actions and benchmarks and proposed indicative triggers and milestonesDPL7 (by September 2010) DPL8 (by September 2011) DPL9 (by September 2012)
Established a targeting working group in the Executive Secretariat of the National Team, by decree from the Executive Secretary.
National Team instructs agencies implementing Cluster I poverty programs to use the unified database.
Program beneficiary lists are extracted from unified database by the Targeting working group, using eligibility criteria from implementing agencies
Research report issued by the Targeting working group evaluating the targeting effectiveness of current household social assistance (Cluster I) programs.
Policy note issued by the Targeting working group on steps required to establish a national unified database of poor households and families, and who should implement each step.
Finalization of survey design and data collection procedures for unified database.
Technical team established in BPS that will be responsible for creating the Poverty Map.
Improve household- targeted poverty reduction programs (Cluster 1)
Executive Secretariat working group submitted a policy note on Jamkesmas reform to the National Team, which includes reform recommendations based on a comprehensive program review focusing on financial sustainability.
Executive Secretariat working group submits a policy note on Jamkesmas cost scenarios and a proposed health management information system to the National Team.
The Executive Secretariat working group completes a review of new institutional arrangements for the delivery of Jamkesmas, taking into account actuarial cost estimates and various scenarios for achieving universal health insurance coverage.
Review and assessment of programs providing scholarships for the poor is issued by the TNP2K Cluster I Working Group.
Improve community-based poverty reduction programs (Cluster 2)
Strengthened PNPM fiduciary systems as outlined in the action plan dated February 16, 2010 by: (i) having documented and publicized major
complaints and the steps taken to address these;
(ii) the BPKP in partnership with the Bawasda having been explicitly tasked with the systematic auditing of PNPM funds; and
(iii) the Ministry of Home Affairs and the Ministry of Public Works having submitted quarterly reports detailing the status of all known complaints to the National Team and to the Joint Management Committee members.
PNPM transition strategy: an implementation plan to establish one single participatory planning exercise for all actors/sectors at the village level is adopted by the National Team.
The Generasi pilot is expanded to cover 284 kecamatan.
CDD targeting: clear allocation mechanisms for the BLM (Bantuan Langsung Masyarakat) are adopted by the National Team. These mechanisms benefit poor areas; and poor people in less poor areas.
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Reform aim
Prior actions and benchmarks and proposed indicative triggers and milestonesDPL7 (by September 2010) DPL8 (by September 2011) DPL9 (by September 2012)
Control Team (Tim Pengendali) to submit to the National Team a proposal for clarifying the role of Local Government with regard to the transfer of the BLM to communities
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Annex Table 2: DPL Program Monitoring and Results Framework Reform Aim DPL 7 Prior Actions DPL-8 Prior Actions DPL-9 Prior Actions Indicators
Baseline
Data Post
Program Target (2012)
CPS: Achieve higher economic growth levels
GDP growth (%) /1
5.6% (Avg 2007-2009)
6.7%
CPS: Reduce the percentage of people living below the national poverty line % people living below the national poverty line /2
13.3% (mid 2010)
12.4%
Policy area 1: Improving the investment climate
Expected Outcome: Improved perception of investment climate by domestic and foreign investors, leading to increased flow of investments
Investment to GDP ratio (%) /2
23.2% (Avg 2007-2009)
25.1%
Value of FDI net inflows (billion US$) /1
US$7.0 billion (Avg 2007-2009)
US$7.9 billion
Reduce uncertainty for investors by strengthening investment service institutions and improving investment regulations
Issued the Presidential Regulation on the Investment Negative List which updates restrictions on investment including preferential treatment for ASEAN investors, and clarifies the grandfather clause, the treatment of publicly listed companies, and mergers and acquisitions.
Start-up time for new businesses (days) /3
60 days (2009)
50 days
Number of procedures to start a business /3
9 procedures (2009)
8 procedures
Number of provincial and district/city level PTSP using SPIPISE /4
7 provinces (Sept 2010)
33 provinces and 150
districts/cities
Reduce the time needed for and cost of importing and exporting
Submitted to the President a draft Presidential Regulation on the National Logistics System (Sislognas) Development Blueprint
Year-on year growth in value of non-oil exports /2
7.7% (Avg 2007-2009)
9.24%
Develop standard operating procedures within the INSW for regular private sector consultative meetings on INSW implementation issues
Number of importers/ exporters using the INSW/5
3,791 (June 2010)
4,500
Develop work plans for the phased implementation of single-
Cost and time to export and
Export: $704 per container
Export: $500 per container
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Reform Aim DPL 7 Prior Actions DPL-8 Prior Actions DPL-9 Prior Actions Indicators
Baseline Data
Post Program Target (2012)
submission/sign-on procedures for two key agencies of the INSW (permit issuing agencies, e-payment or Inaport).
import /3 and 21 days; Import: $660 per container and 27 days (2009)
and 21 days; Import: $545 per container and 24 days
Modernize core tax system
Issued advertisement (Invitation for Bids) for PINTAR procurement as an initial step in the development of business process improvements and a new integrated information system
Approval of detailed design of new Core Tax system, developed under PINTAR
Domestic non-oil and gas tax revenues to GDP (%) /2
4.9% (Avg 2007-2009)
4.91%
Number of tax payments made per year /3
51 (2009) 46
Time to prepare and pay for taxes /3
266 hours per year (2009)
240 hours per year
Policy area 2: Strengthening public finance management
Overarching Outcome: Greater integrity and more effective use and management of public funds
% of total capital expenditure disbursed on by end of Q2 /6
19% (Q2-2010 )
27%
Improve results orientation in the budget process
(a) Implemented revised program structure with measurable results and targets aligned with organizational structure in the National Medium Term Development Plan (RPJM) for 2010-2014 and (b) based both indicative ceilings and budget proposals (RKA-KL) from all line ministries for the Fiscal Year 2011 budget on the revised structure.
RKA/KL for 2012 based on revised PP 21, as evidenced by: 1. A new and simplified costing methodology with separate treatment of baselines and new initiatives 2. A manual to line ministries on formulation of new initiatives, which enables a review of rationale and cost information 3. Consistency between RKP and RKA-KL regarding performance and budget information)
Budget documentation includes explanation of differences between proposed budget ceilings and previous medium-term forward estimates
PEFA PI 12: multi-year perspective in fiscal planning, expenditure policy and budgeting /7
PEFA Score as of most recent PEFA report (2007): 1.5 out of 4.0.
N/A
Develop a new monitoring & evaluation system
Issue draft guidelines for an M & E framework based, on specific performance indicators, that provide basis for the next RPJMN and annual budgeting
M&E tool and guidelines prepared, which will feed into future PBB
N/A N/A
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Reform Aim DPL 7 Prior Actions DPL-8 Prior Actions DPL-9 Prior Actions Indicators
Baseline Data
Post Program Target (2012)
implementation /6
Improve budget and cash management within the central Government
Issue new PP and related MoF-regulations on budget execution as mandated by State Finance Law
% deviation between the quarterly cash plans and actual cash flows /6
Goods and services expenditures: 129%; Capital expenditures, 43% (Q4-2009)
40%
Completion of user acceptance tests and completion of final systems documentation
Number of line ministries receiving qualified opinions on their financial statements /6
26 (2009) 18
Improve public procurement
Finalized academic papers for draft procurement law and prepared draft procurement law, ready for public consultation process
Draft procurement law submitted to Parliament
% government agencies following Presidential Decree on procurement /8
N/A. Revised Presidential decree on public procurement was just issued in August 2010.
100%
Adopt the strategy and policy for Human Resources development for the procurement function in Government agencies
Improve Government accounting and audit functions
Submitted to the MoF a Draft Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/2008
Issuance of Presidential Regulation on Government Internal Audit Systems as required by article 58 of Government Regulation No. 60/2008
Development of an internal audit strategy based on the Presidential Regulation on Government Internal Audit Systems
Training program developed and initiated for implementation of internal audit systems and accrual-based accounting system /6
N/A. N/A
Submitted to the President a draft Government regulation on accrual-based accounting
Issue MoF regulation detailing framework of accrual-based accounting system, including a time frame for development of business processes, accounting policies and chart of accounts
Completion of business processes, accounting policies and chart of accounts for accrual accounting.
Policy area 3: Enhancing poverty alleviation and service delivery efforts
Expected outcome: GoI efforts to reduce poverty and vulnerability are strengthened through better informed and evidence-based policy and program decisions
% of social assistance program to
3.8% (2009)
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Reform Aim DPL 7 Prior Actions DPL-8 Prior Actions DPL-9 Prior Actions Indicators
Baseline Data
Post Program Target (2012)
central Government expenditure /9
4.5%
Proportion of female head households that received social assistance program /2
57% (2009)
60%
Improve governance and institutional accountability
Established an inter-ministerial National Team for the Acceleration of Poverty Reduction (National Team) by Presidential Regulation
Number of policy papers produced by the National Team /10
N/A N/A
Number of poverty programs impact evaluations commissioned and overseen by the National Team /10
N/A N/A
Improve poverty measurements and targeting of the poor
Revised the methodology to calculate the national poverty line by: i) Completing national poverty line
simulations using alternative measurement methodologies.
ii) Conducting internal consultations in BPS and key government stakeholders to identify a poverty measurement methodology for consideration.
iii) Holding external consultations about the implications of adopting the revised methodology with universities, NGOs and key line ministries.
National Team instructs agencies implementing Cluster I poverty programs to use the unified database.
Program beneficiary lists are extracted from unified database by the Targeting working group, using eligibility criteria from implementing agencies
Number of line ministries using the unified database to identify program beneficiaries /10
N/A 9
Improving household- targeted poverty
Executive Secretariat working group submits a policy note on Jamkesmas cost scenarios and a proposed health management information system to
The Executive Secretariat working group completes a review of new institutional arrangements for the delivery of Jamkesmas, taking into
% of the poor having health insurance /11
43% 48%
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Reform Aim DPL 7 Prior Actions DPL-8 Prior Actions DPL-9 Prior Actions Indicators
Baseline Data
Post Program Target (2012)
reduction programs (Cluster 1)
the National Team.
account actuarial cost estimates and various scenarios for achieving universal health insurance coverage
Improving community-based poverty reduction programs (Cluster II)
Strengthened PNPM fiduciary systems as outlined in the action plan dated February 16, 2010 by: (i) having documented and publicized
major complaints and the steps taken to address these;
(ii) the BPKP in partnership with the Bawasda having been explicitly tasked with the systematic auditing of PNPM funds; and
(iii) the Ministry of Home Affairs and the Ministry of Public Works having submitted quarterly reports detailing the status of all known complaints to the National Team and to the Joint Management Committee members.
Number of villages, kecamatan and cities receiving social empowerment assistance /12
8,500 villages in 1,094 sub-districts
20,950 villages in 2,359 sub-
districts
Indicator data source: /1 BI /2 BPS /3 2010 Doing Business Survey /4 BKPM /5 INSW portal /6 MoF /7 PEFA Report /8 LKPP /9 WB staff estimates based on APBN Ministry of Finance and Ministry of Social Welfare /10 National Team on Accelerating Poverty Alleviation /11 MoH /12 PNPM
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Annex 4: Looking back: Results Achieved in Previous Operations
A. Results Achieved in the first DPL series (DPLs 1 to 4)
The first DPL series was envisioned at a time when the country was transitioning both politically and economically. Politically the country was moving from autocratic rule to democracy while, economically, the country’s fundamentals were improving markedly as the impact of the Asian crisis was left behind. In 2003, the country had successfully graduated from its post-crisis IMF program, growth was strong and inflation down. The timing was right for the Government’s economic program to shift from a short-term post-crisis stabilization framework to a longer-term strategic growth and poverty reduction agenda. It was in this context that the DPL was established to support the Government’s reform agenda in the key areas of: (i) sustaining macroeconomic stability; (ii) improving the investment climate; (iii) strengthening public financial management and governance; and later (iv) improving service delivery. Overall, 54 prior actions were enacted, covering a wide range of sub-areas within the four pillars. Pillar 1: Macroeconomic Stability Overall macroeconomic fundamentals remain sound and fiscal consolidation has improved with the expansion of the tax base and improved efficiency. Economic growth averaged a substantive 5.6 percent in the period 2004-07, debt-to-GDP declined nearly 25 percentage points, budget deficits have declined and high reserves provide the country with a comfortable liquidity cushion. Increasing non-oil and gas revenues to GDP were supported by a prior action to expand the modernization of tax offices and extend the tax base, including to small and medium-sized taxpayers. These taxpayers are now responsible for the largest share of Indonesian taxes. Additional reforms to improve tax analysis, by the creation of a Tax Policy Office, are expected to generate improvements in revenue collection. Other Bank contributions under the DPL focused on improving debt and fiscal management in order to underpin the Government’s medium-term economic management capabilities. On the expenditure side, reductions in non-targeted fuel subsidies allowed greater social spending but untargeted subsidies remain burdensome. In 2005, the Government raised fuel prices, resulting in the decline of fuel subsidies from 4 percent of GDP in 2004 to 2.7 percent in 2007, freeing up US$10 billion a year. This amount was rolled out into cash transfers targeted to the poor and also higher health and education expenditures. As oil prices continued to set record highs throughout 2008, fuel subsidies rose sharply causing the Government to spend an additional Rp 50 trillion (US$5.4 billion or 1.2 percent of GDP) in the first part of the year. In May 2008, the Government again increased fuel prices by almost 30 percent and accompanied this with a widely publicized and improved cash transfer program. This move was expected to reduce energy subsidies — which were surpassing both central Government capital and social spending — by 4 percent of GDP. Even with the increase, Indonesia still had some of the world’s lowest fuel prices, with 45 percent of the fuel subsidies going to the top income decile.
Rating agencies responded favorably to Indonesia’s lower debt ratio and reform packages. In a reflection of the country’s sounder economic footing, all three international credit agencies have raised their credit ratings at least 3 notches since 2003. Standard and Poor’s upgraded Indonesia’s credit rating from CCC+ in 2003 to BB- by 2008 while, in this same period, Moody’s raised its ratings from B2 to Ba3 and Fitch raised theirs from B to BB.9 In supporting their ratings upgrade, the agencies cited debt reduction as the primary cause, but also cited the Government’s commitment to broad-based reform, including changes to investment laws, customs and tax reforms as well as fiscal reforms, especially in treasury and budget -—measures supported by the DPL. 9 Indonesia’s credit rating continued to improve beyond 2008. As of mid-2010, Indonesia’s S&P rating was upgraded to BB, Moody’s to Ba2 and Fitch to BB+.
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Pillar 2: Investment Climate The DPL sought to improve the investment climate through several key entry areas, including regulatory reform, tax, custom and trade reform, strengthening small businesses and the financial sector. The Bank’s contribution to the sector was also supported through an on-going dialogue and technical assistance sponsored by a trust fund, which funded numerous technical assistance activities to improve or help implement the prior actions. Although initially slow to pick up momentum, the Government has made strides in improving the investment environment. Although full implementation of the investment packages has yet to take place, initial signs are encouraging — investment rates have risen from below 20 percent of GDP in 2003 to 25 percent in 2007. In 2006, the Government issued three economic policy packages covering investment climate, infrastructure and financial reform. In 2007, a comprehensive follow-up package was issued detailing 168 specific reform measures to be carried out. As a result, business perceptions have improved, a study of manufacturing firms in mid-2007 indicated improvements in VAT refunds, tax-filing processes, informal payments and faster import and custom clearance. Labor issues and infrastructure have now replaced consistency of regulation as the key constraint to doing business. Surveys of foreign investors also show that perceptions of Indonesia are improving. In Japan’s annual JBIC survey of 600 Japanese multinational companies, Indonesia was ranked as the eighth most promising country for overseas business. Box 1 also highlights some of the other areas of improvement in the business climate. Regulatory reform has streamlined procedures and led to an improved legal framework supportive of the investment climate. According to Doing Business 2008, the time needed to set up a business has come down significantly from 168 days to 105 days.10 The Government has recently streamlined procedures even further — down to 16 days which is on a par with the OECD average of 15 days. However, implementation, especially at the sub-national level, is still needed for it to be fully credited. Another key achievement was the passage of the Investment Law, which clarified previously arbitrary investment rules. The law focuses on equal treatment of foreign and domestic investments, removes the forced divestment and limited duration of foreign investment in the old law, lengthens the time horizon to hold land, liberalizes some immigration procedures and allows for international arbitration. Additionally, an SME policy package to empower micro, 10 The Doing Business indicator of time needed to set up a business was further improved to 60 days in 2009.
Box 1. Indonesia in the Doing Business Indicators from 2006-2008 Indonesia’s overall investment climate has improved as measured by the Doing Business rankings. In Doing Business (DB) 2008, Indonesia ranked 123 out of 178 countries. Between the 2007 rankings and the 2008 rankings, its overall rank rose ten spots and Indonesia made double-digit jumps in the categories of i) dealing with licenses, (ii) paying taxes, and (iii) trading across borders. Between the DB 2006 and DB 2008 rankings, for which there are comparable data, Indonesia showed significant strides in a number of areas. In starting a business — where Indonesia ranks among the worse globally — it has made stark improvements. Starting costs declined from 102 percent of GNI per capita to 80 percent, and the time taken declined from 151 days to 105 days — despite the fact that the number of procedures remained the same. Costs in dealing with licenses also fell from 370 percent of income per capita to 287 percent. On access to credit, within a short time span of two years, credit information from a public registry rose from 0.0 percent of adults to 20.5 percent — much higher than the OECD level of 8.6 percent. This was achieved through a requirement that all loans be registered, including credit cards. On paying taxes, although the number of tax payments remained the same, the time taken to prepare and pay for taxes was halved from 576 hours to 266 hours as electronic registration and filing were implemented. Improvements on the trade indicators, were more normal but broader, resulting in fewer procedures and less time - but enough for Indonesia to rise several notches in the rankings. There were no major negative shifts in the indicators, but little to no improvements were made in ease of employing workers, registering property, protecting investors, enforcing contracts or closing a business.
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small and medium enterprises was passed in July 2007, with a focus on their access to finance. These packages have been supported by the business community. Tax reform has addressed some of the key complaints from the business community. Reforms in tax administration have halved the time for VAT refunds and, in addition, more than Rp 10 trillion (roughly US$1 billion) in outstanding VAT refunds have been settled. New procedures have been set in place to issue VAT refunds to export companies within set timeframes. Standard operational procedures for a complaint management system have also been issued. The Government also issued a decree on tax audit procedures that allows taxpayers to delay payment of tax assessments from disputed audits, however this only becomes effective on disputes over 2008 and future assessments, leaving those with current disputes under the old rule. Bold progress on trade and customs reform has been made with the piloting of Indonesia’s National Single Window (INSW) and paperless import clearance. The implementation of the INSW represents one of the country’s most important trade facilitation initiatives. Under a single window, exporters and importers will no longer be required to apply individually to multiple agencies, potentially reducing the current 26 days (DB 2008) it takes to import to 15 days. A pilot is underway in Jakarta’s main port and will be expanded to other ports in preparation for the establishment of an ASEAN Single Window. Other trade reforms under the DPL sought to improve the technical capacity of the tariff team in setting and evaluating tariff changes and non-tariff barriers imposed by line ministries and others. In strengthening the stability of the financial sector, the DPL supported the implementation of a sounder financial safety net. At the start of the DPL series there was a need to reduce the economic distortion and potential moral hazard caused by the existing blanket guarantee, which had been introduced during the Asian crisis to stem bank runs. To this effect, the DPL series supported a number of reforms including a deposit insurance scheme, institutionalization of Bank Indonesia’s role as lender of last resort and establishment of institutional processes and mechanisms for resolving troubled banks. By the end of DPL 4, coverage on deposits was reduced from a blanket guarantee in 2003 to Rp 100 million (roughly US$10,000) by 2007. Indonesia is one of the few countries in the world that has removed its blanket guarantee on schedule. In October 2008, in response to the global financial crisis, Indonesia announced a number of confidence-building measures, including a twenty-fold increase in the deposit guarantee to Rp 2 billion (about US$200,000). Pillar 3: Financial Management and Anti-Corruption To improve the efficiency, transparency and accountability of public finances, the DPL series focused on three key areas of reform: (i) modernizing public financial management systems; (ii) strengthening anti-corruption institutions and, later; (iii) civil service reform. The progress achieved in this area was also strongly supported by the Bank’s GFMRAP. Changes in the legal and regulatory architecture are now largely complete and the focus is on implementing a modern PFM system. Before the start of the DPL series, the Indonesian government’s financial operations were based on outdated laws (from 1925) that had been updated with a series of inadequate decrees. The DPL supported various regulatory and implementation measures needed to create the framework for a more modern PFM system, including laws on state finances, treasury and audit laws and a presidential decree on procurement. Budgeting procedures have improved but execution still remains problematic. The DPL program has helped accelerate reforms to re-engineer business processes across the budget cycle and the national budget is now compatible with the international standard GFS classification. Fiscal reporting is more comprehensive and timely, while elements of a Medium-Term Expenditure Framework have been introduced, although this is not fully operational in the budget system. The planning and reporting side of
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the budget process has improved but budget execution remains weak, with about 50 percent of capital expenditure being spent in the last quarter. Of the budgeting reforms, a key achievement under the DPL has been the implementation of the Treasury Single Account (TSA) to improve cash management of public finances. At the start of the DPL series, more than 18,000 commercial bank account — and other accounts not even known to the Treasury — handled government funds. As an initial step, DPL 1 supported addressing the regulatory deficiencies in the PFM system, including the passage of several laws defining the regulatory framework. A reorganization of the MoF was also done to begin the process of establishing a TSA, and to clean up the cash management issues the Government faced. DPL 2 then supported the implementing regulations underlining these laws and adopted an implementation plan. DPL 3 piloted the TSA to have zero-balance accounts in over 50 KPPNs. DPL 4 extended the TSA coverage to nearly all government expenditure accounts, although there were some timing issues, e.g. the training for local agencies to implement the TSA occurred later than scheduled. Progress on covering revenue accounts has been more complicated, but it continued to be supported by DPL 5 and DPL 6. Procurement reform, although slow to take off, now has the potential to exceed original expectations. The original prior action had aimed only at strengthening the existing National Procurement Office; instead the Government has turned it into an independent office responsible directly to the President. As an independent agency with adequate resources, authority and strong political backing, it will be in a stronger position to drive public procurement reform. Because of the lag in strengthening the NPPO, however, there was a lack of progress on other procurement reforms, especially in developing a comprehensive national public sector procurement law. This law is needed to address the numerous inconsistencies resulting from decentralization reforms which have enabled various levels of government to issue their own procurement procedures. Other deficiencies of the system include slow progress in the passage of regulations and in the development of standard tools such as bidding documents and user manuals. To address corruption, several institutions now exist to investigate and prosecute corruption cases. Since 2003, numerous anti-corruption institutions have been established and given considerable autonomy and authority, and even existing institutions have become more active. The number of cases prosecuted has risen and high-profile corruption investigations have been launched at every level of government and even among some SOEs. More than 100 (DPL 3) investigations have been approved by the President targeting mayors, governors and ministerial level officials. Initial steps to address civil service reform have been launched. A lack of administrative capacity and distorted incentives in the Government bureaucracy have constrained policy implementation as well as delivery of public services. As an initial step to reform the civil service, the DPL supported the development of a comprehensive reform of the structure and remuneration framework for high-ranking state officials. A task force was set up to examine the entire compensation package with the goal of creating a more transparent, systematic and coherent framework for pay and allowances based on a comprehensive job evaluation and pay grading. Building on this, the MoF has developed a comprehensive civil service reform plan and action plan for MoF, which is to be piloted before being extended to other agencies. Pillar 4: Service Delivery The groundwork for improving poverty targeting of basic services has been initiated. Prior to the 2005 fuel price rise, Indonesia’s social protection system was characterized by emergency short-term safety net programs and price subsidies. The country’s 3 targeted programs accounted for less than 0.5 percent of GDP, compared with almost 4.0 percent of GDP for the untargeted fuel subsidies, of which less than 0.2 percent of GDP went to the poorest quintile. As the fuel price hike made available more funds for social spending, the DPL supported building capacity to create a more evaluative institutional framework that would improve the targeting of these released funds. The 2005 fuel hike was accompanied by a new cash
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transfer program to help alleviate the impact on the poorest households — and this represented a substantial shift from the ineffective and inefficient general subsidy program. Evaluative assessments were conducted to improve targeting and performance of the cash transfer program, and the lessons learnt were also incorporated into the new cash transfer program that accompanied the May 2008 fuel price increase. The Government has undertaken significant steps to set up an effective and comprehensive monitoring and evaluation facility, including the establishment of a unit to undertake performance evaluations, with the intent of having the findings used as an input to the Government’s planning and budgeting cycle. In addition, other prior actions have targeted specific aspects of service delivery — namely in education, community driven development (CDD), and sub-national government services. Competency standards and certification for teachers have been formalized through a ministerial decree, which should improve teaching quality. Communities can now carry over unspent funds beyond the current fiscal year, a problem that had inhibited publicly-funded CDD programs. Given the large public infrastructure investment needs, a regulatory framework has been issued so that sub-national governments will be able to issue bonds and start addressing their infrastructure deficit.
B. Results Achieved in the second DPL series (DPLs 5 to 6)
The second DPL series was presented at a critical juncture for Indonesia, as it was facing the ramifications and contagion effects of the global financial turmoil in late 2008. However, Indonesia’s record of prudent fiscal management, previous macroeconomic performance, and ongoing commitment to the longer term institutional reform agenda, provided the requisite stability that warrant continued support for Indonesia’s structural and institutional reform efforts through the second DPL series. Anchored to the FY09-12 Country Partnership Strategy (CPS), the second DPL series was in substantive terms a continuation of the first DPL series (DPLs 1 to 4), although focusing more on the medium-term institutional and policy reforms in the three policy pillars: (i) investment climate; (ii) public finance management; and (iii) poverty alleviation and service delivery. Altogether, 25 prior actions were supported under the second DPL series under these three policy pillars. Overall, the second DPL series has significantly helped the Government in progressing towards achieving its medium-term growth and poverty reduction objectives. Despite the fact that the series was terminated one year earlier,11 significant accomplishments were made in the three policy pillars. In investment climate, the DPL helped reduce uncertainties for investors to invest in Indonesia, by continuing to push for reforms through the revision of the investment negative list, implementation of one-stop shops (PTSP) and rollout of the INSW. It also helped strengthen the tax administration through key regulatory reforms aimed towards reducing compliance costs, enhancing taxpayer services and improving the efficiency and equity of the tax administration. In public finance management, the governance and transparency of public spending was significantly improved, through various improvements to the budget formulation and execution systems. These include the establishment of a comprehensive Treasury Single Account (TSA) regime and an automated SPAN system; the initial operation of the newly established LKPP as a national public procurement agency; and the issuance of various regulations and trainings for improved government accounting practices. In poverty alleviation and service delivery, the necessary groundwork for longer-term reforms has been laid by institutionalizing a government system for program evaluation within Bappenas and initiating the process of establishing a uniform database that will be used by various implementing agencies to develop poverty program beneficiaries list. The following key results are particularly noteworthy. 11 The second DPL series was originally envisaged to consist of three annual single tranche loans (DPLs 5 to 7). However, given the opportunity to better realign the DPL program with the new Government’s strategies and priorities, following agreement with the Government, and endorsement by the World Bank regional management, DPL 7 is being presented as the beginning of a new series, thereby ending the second DPL series one year earlier than envisaged.
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Pillar 1: Investment Climate By mid-2010, investment flows into Indonesia were already on their path to recovery after the severe slump in 2009. FDI inflows totaled US$9.3 billion in 2008 according to Bank Indonesia statistics, but halved in 2009 as the global financial crisis and economic downturn limited investment flows globally. However, by mid 2010, FDI inflows increased substantially to US$4.9 billion or about half of the peak investments in 2008, indicating their path to recovery. Evidently, firms are scaling up investments with the global economic recovery and improved long-term financing conditions. This, together with the Government’s renewed focus on improving the investment climates in general, have helped boost investment flows to Indonesia. The Doing Business Survey 2010 indicated an improvement in Indonesia’s overall investment climate. As of 2009, Indonesia ranked 122 out of 183 countries, up from 129 out of 181 countries in 2008.12 In particular, double-digit jumps were made in the categories of: (i) registering property, wherein the time to register property was slashed from 39 to 22 days, thanks to the time limits introduced for standard procedures at the land registry; (ii) protecting investors, with the strength of investor protection index improved from 5.7 to 6, as disclosure requirements for related-party transactions were expanded; and (iii) starting a business, wherein Indonesia’s ranking improved from 171 (near the bottom ranking globally) to 161, with the number of procedures, time and cost of starting a new business significantly reduced.13 This overall positive development was attributed to the eased incorporation and post-incorporation processes for new business registration by introducing online services, eliminating certain licenses, making the registry more efficient and cutting company deed legalization fees, publication fees, registration fees and business license fees.
Various regulatory reforms have also been introduced to strengthen the tax administration following the passage of the Tax Administration Law in 2007. Implementing regulations were issued by the Directorate General of Taxes to support the Tax Administration Law’s effort of striking a better balance between the rights and obligations of taxpayers and the powers of tax officials. These new regulations clarified and provided certainty in the administrative procedures for the taxpayers to comply with the law, as well as for the tax officials to provide services to the taxpayers. The DG Taxes has also required the tax offices to report on a quarterly basis the average time to process taxpayer registration, VAT refunds, tax objections, exemption of withholding tax on imports, and property tax reliefs. Furthermore, DG Tax decrees were issued to allow for the roll-out of e-registration and e-filing for taxpayers: (i) allow recognition of digital signatures for individual taxpayer registration and for filing personal income tax returns; and (ii) implement new, simplified standard format for financial information.
The DPL program also helped reduce the vulnerabilities of the financial system. Establishment of the Financial System Stability Forum (FSSF) has formed the basis for the financial sector safety net, which called for an integrated system to supervise the financial sector and a framework for closely monitoring financial sector stability. Through a joint decree between the MoF, BI and LPS (the deposit insurance agency), the FSSF was established in June 2007 to serve as a venue for coordination, cooperation and information exchange among the authorities responsible for safeguarding financial system stability in Indonesia. Teams were also established under the FSSF to develop a financial system crisis management protocol, scenarios for crisis simulation exercises and early warning indicators for various sub-sectors. Indeed, the FSSF played a crucial role during the financial system turmoil, particularly in addressing systemic risks and taking swift actions towards resolving insolvent banks through joint policies and decisions. At the end of the DPL series, the financial sector was in good health overall, with non-performing 12 The Doing Business Surveys are advance dated by one year, hence Doing Business 2010 is based on data collected in 2009. 13 During 2008 to 2009, for starting a business, the number of procedures was reduced from 11 to 9, the number of days reduced from 76 to 60, and the cost reduced from 77.9 percent to 59.7 percent GNI per capita.
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loans falling from 3.2 percent in 2008 to 3 percent in mid-2010 and capital adequacy ratio increasing from 16.76 percent to 18.06 percent during the same period.
The DPL contributed to improved MSMEs access to finance. With support from the DPL, the Government has rationalized MSME financing schemes across line ministries and state-owned enterprises. Regulatory reforms were also introduced, which allow for the legal establishment of national and provincial credit guarantee and re-guarantee institutions, and clarify the legal status of these institutions, their ownership structure, reporting mechanisms and investment options. These positive developments contributed to the growth in proportion of MSME loans to banking sector loans, from 50.4 percent in mid-2008 to 52.7 percent in mid 2010. This is indeed a significant achievement, considering that a financial turmoil tends to have more adverse effects over MSMEs in general. Pillar 2: Public Finance Management The second DPL series supported the establishment of a comprehensive TSA, thereby consolidating and improving cash management of public finances. Under DPL-5, the Treasury in cooperation with BI has implemented the daily sweep of government revenue deposits from collecting branches of the 15 largest commercial banks and post offices into the TSA. This is a significant improvement from the previous practice established since 1989, of sweeping the revenue accounts twice a week. Under DPL 6, the daily sweeps were expanded to all commercial bank branches. Ultimately, the overall consolidation minimized idle government cash balances and encouraged better operational cash planning by government institutions, thereby substantially improving central government budget and cash management. To improve the results orientation of the budget process, the Government has developed a revised program structure for the RPJMN 2010-2014, with measurable results and targets. The revised program structure marked the launch of performance-based budgeting (PBB) and medium-term expenditure framework (MTEF) implementation by all line ministries and ministry-level agencies, with the RPJMN 2010-2014 and Renstra-KL to form the basis for the FY2011 budget preparation process. The newly revised structure was indeed incorporated in the RPJMN 2010-2014, with corresponding key performance indicators, and will be used as the basis for development of budget ceilings starting in FY2011. Implementation of the revised program structure will continue to be supported under the third DPL series. The second DPL series has strengthened the regulatory framework which allowed for improved government accounting practices. Under DPL 5, two MoF regulations were issued: (i) PMK171/2007 on accounting systems for line ministries emphasizing the responsibility of ministers for recording the budget allotment in their ministries, requiring the reporting of receivables, payables and investments in line ministries’ financial statements and introducing new accounting sub-systems into the treasury accounting system; and (ii) PMK91/2007 on the standard chart of accounts, harmonizing the budgeting and accounting codes. In addition, over 3,185 accounting staff line ministries were trained on the changes implied by the new regulations. Altogether, these actions laid the basis for enhancing the accountability of line ministries and improving the quality of line ministries’ financial statements. The legal framework establishing Lembaga Pengembangan Kebijakan Pengadaan Pemerintah (LKPP) or the National Public Procurement Office was enacted in 2008. DPL 5 supported the establishment of the new institution, which reports directly to the President and is responsible for sustainable, integrated, focused and coordinated planning and development of strategies/ policies/regulations associated with the procurement of goods/works/services using public funds. Efforts to ensure that LKPP is fully operational continued, as supported also by the Indonesia: Strengthening Public Procurement Program, as well as AusAID-funded technical assistance. Throughout the DPL series, the Government also continued to improve the regulatory framework for public procurement by advancing the revision of the Keppres No.80/2003 on procurement, which mandated the use of national standard bidding documents to be used by all public agencies.
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The second DPL series also helped advance bureaucracy reforms within various government agencies. Under DPL 5, such reforms were: (i) initiated in the Supreme Court and the BPK under the aegis of the National Committee for Bureaucracy Reform chaired by MenPAN, and monitored by the KPK; (ii) continued to be implemented within the MoF with the introduction of new job descriptions and a new grading scheme, the allocation of all positions to one of 27 grades, and salary increases based on an extra allowance determined by the new job descriptions and grades; and (iii) expedited through the initial development of a new human resources information systems in the MoF. Pillar 3: Poverty Alleviation and Service Delivery Under the second DPL series, the Government has institutionalized a system for program evaluation within Bappenas. The system focused largely on sector evaluation, regional evaluation, and systems and reporting of development performance. In this regard, a workplan was developed and workshops held with regional governments, line ministries and other units, in order to reflect international best practices in establishing and mainstreaming a M&E function within the Government bureaucracy. The process of establishing a uniform database and improving the targeting of the poor was launched under the second DPL series. Such process was launched by BPS through: (i) updating the household registry data that was used for the earlier implementation of the cash transfer program (BLT) in 2005; (ii) adopting a better PMT system to identify poor households; and (iii) piloting experiments in 24 villages in 4 kabupaten (Muara Enim, Pontianak, Gowa and Tangerang) in May 2008, to inform the optimal design of mechanisms to identify and target poor households. The DPL-5 supported the Government’s introduction of incentives for teacher certification and relocation to remote areas. A ministerial decree No. 18/2007 was issued by the Ministry of National Education, which required all teachers to deliver 24 teaching hours per week in order to receive the professional allowance for certified teachers. In addition, teachers receiving the special area allowance are required to fulfill the 24 teaching hour requirement. Subsequently, the World Bank support to the Ministry of National Education towards raising the quality of public education was continued through other programmatic initiatives, such as BOS-KITA. The National Community Empowerment Program (PNPM-Mandiri) was scaled up in terms of geographical coverage and size of average block grant. By end 2009, the Government’s flagship anti-poverty program reached all 6,400 sub-districts (kecamatan), of which around 4,500 located in rural areas. Central Government funding for the entire PNPM was increased to Rp 10.3 trillion. The Government also introduced poverty targeting to determine the size of community block grants so that the increased funds are allocated more effectively.
C. Results Achieved in the Development Policy Loan with Deferred Drawdown Option (DPL-DDO)
To alleviate financing constraints in the event that global liquidity conditions do not ease, the Government requested in early 2009 the DPL-DDO as budgetary support that will be exercised only when certain conditions are met. The Government believes that the announcement of such support package, backed up by a program of confidence-boosting policy measures, would send a strong positive signal to the markets, making it more likely that Indonesia would meet its financing needs for CY2009 from market sources. While the regular DPL series aims to advance Indonesia's longer-term institutional reform agenda and focuses on the many important but often incremental steps that need to be taken to realize this agenda, the DPL-DDO supported critical stroke-of-the-pen measures that are being implemented to deal with the crisis situation, and helped accelerate and intensify the process that was already being supported by the regular DPL series. The DPL-DDO supported 11 policy actions under three broad areas: (i) reassuring financial
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markets and maintaining financial system stability; (ii) sustaining critical public expenditures while maintaining budget discipline; and (iii) facilitating private investment and supporting exports. The following key results are worth highlighting.
Pillar 1: Financial Markets and Financial System Stability
The DPL-DDO helped put in place a stronger legal framework for a Financial System Safety Net in Indonesia, which helped stabilize the banking system during the time of crisis. A new financial safety net government regulation was issued to clearly establish the roles, responsibilities and procedures that govern the actions and responses of Bank Indonesia, the Minister of Finance, and the Deposit Insurance Corporation in the event of the failure of a financial institution. As a result, despite the financial crisis, the financial sector remained in good health overall, with non-performing loans falling from 3.2 percent in end 2008 to 3 percent in mid-2010 and capital adequacy ratio increasing from 16.8 percent to 18.1 percent during the same period.
Public confidence in the banking sector was maintained with the introduction of regulatory reforms targeted to address bank liquidity crises. The Government issued a regulation increasing ceiling on deposit insurance from Rp 100 million to Rp 2 billion. The regulation also allows the Deposit Insurance Corporation to change the amount of insured deposits in the event that there is a risk that could reduce public confidence and endanger financial system stability. Issuance of a BI circular letter also enabled a broadening of the types of assets that banks can use as collateral for emergency borrowing from BI in the event of a banking crisis.
Pillar 2: Public Expenditures
A national poverty monitoring and response system was put in place to help monitor the effects of the crisis as it rolls out and provide information to policy-makers on impacts over the course of the next one to two years. The system focused on collecting real-time data on employment, basic commodities, farmers’ livelihoods, health, education and social welfare. This information was fed to decision-makers at the national and local levels to craft policy and programmatic responses. Specific regulatory reforms and socialization efforts were implemented, which helped expedite budget disbursement and enhance the Government’s ability to rapidly direct public expenditures to mitigate growth slowdown. Through the DPL-DDO, the Government undertook the following actions to speed up spending in 2009: (i) Implementation of a socialization campaign to promote advanced procurement processing, to appoint multi-year treasury officers, and to speed up disbursements through DG Treasury; (ii) Establishment of a “DIPA 2009 Monitoring” committee comprised of DG Treasury (Chair), DG Budget, Head FPO, and Bappenas, which aims to improve budget disbursements; (iii) Issuance of a MoF regulation with a simplified mechanism and process for carry-over of unspent 2008 budget for PNPM (national poverty program); and (iv) Issuance of a MoF regulation outlining procedures for simplified amending of 2009 DIPA documents and carry-over of unspent 2008 budget for infrastructure permitting line ministries to reallocate across sub-activities under a simpler budget (DIPA) revision mechanism without prior amendment of the budget allotment.
Pillar 3: Private Investment and Exports
The DPL-DDO helped promote transparency in the extractive industries’ revenues. The Government confirmed its intention to implement the Extractive Industries Revenue Initiative (EITI), thereby providing a clear signal to the international investment community that it is serious about oil, gas and minerals revenue transparency. The EITI is recognized as the international standard of oil, gas and minerals transparency. It entails oil, gas and mining firms (including state-owned) reporting revenue and production streams conveyed to the Government. Each government agency is also expected to report separately on how much
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revenue it collected from each oil, gas or mining firm. These two reports are submitted to a multi-stakeholder Steering Group, which hires an independent reconciler to cross-check the two figures, the results of which are then published. Ultimately, implementation of the EITI should promote greater clarity in regulations and rules, which would lower costs and lead to increased investment.
Trade financing were eased through the opening of a re-discount window for trade finance and creation of an Export Financing Agency, which helped undermine the slowdown in export growth at a time of a slowing down economy. Bank Indonesia introduced a special discount window for trade finance as an emergency response measure to assist in providing liquidity for trade financing, thereby sending a strong signal to the market of the Government’s political determination towards supporting the nation’s export-related economic activities. In addition, Parliament passed a law establishing the Export Financing Agency to further assist in the process of easing the provision of trade credit. The agency supported rediscount facilities for commercial banks and extended access to trade finance for small and medium exporters that were not being served by the commercial banking sector.
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Annex 5: Details on DPL 7-9 Prior Actions, Triggers and Benchmarks
Policy Area 1: Improving the Investment Climate
1.1. Improving the regulatory environment for investment
Reform aim: Reduce uncertainty for investors by strengthening investment service institutions and improving investment regulations
DPL 7 (September 2010) DPL 8 (September 2011)Issued the Presidential Regulation on the Investment Negative List which updates restrictions on investment including preferential treatment for ASEAN investors, and clarifies the grandfather clause, the treatment of publicly listed companies, and mergers and acquisitions.
Prepare and submit to Menko a report which reviews implementation of the Presidential Regulation on DNI and provides recommendations for improvement and updates where necessary. Issue a revised Presidential Decree to strengthen and revitalize PEPI Team’s roles and functions, outlining the institutional arrangements for ongoing public-private consultation on investments.
Indonesia had issued a new investment negative list in July 2007 as Presidential Regulation No. 77/2007. This revision, the first since 2001, was required by the 2007 Investment Law which states that all business activities are open to investment except those stated to be closed or restricted in a Presidential Regulation. The structure of the 2007 investment negative list was different from previous lists. Previously, the negative list had been a simple document of 3-5 pages showing a small number of restrictions, which is not comprehensive. Government ministries and agencies were free to make up their own restrictions on an ad hoc basis. Such restrictions were often poorly documented, contradictory, lacked a clear legal basis, and could be applied on a case-by-case basis, allowing wide discretion by Government officials. For example, prior to 2007 the investment negative lists did not mention courier services, and no law or regulation explicitly prohibited majority foreign ownership of courier companies between 2003 and 2007. But in practice, license applications from the big four courier companies (UPS, Fedex, TNT and DHL) were rejected and they were forced to operate through domestic agents or as minority shareholders, even though the Investment Board’s 2004 manual published in English and Indonesian clearly states that this sector is open to 95 percent foreign investment. The 2007 Investment Law attempted to solve such problems by creating a single authoritative list issued as a Presidential Regulation with sufficient detail to serve as a simple checklist easily understood by investors, thereby enhancing transparency and removing official discretion. The result was a much longer list running to 56 pages, showing a total of 338 restricted activities. In part, the new list simply acknowledged pre-existing practice within ministries and agencies. However, for some sectors — including telecommunications, healthcare, shipping, ports, logistics, pharmaceuticals and insurance — the list became more restrictive than existing regulations. In response to concerns raised by the industry, the GoI committed in 2008 to further simplify the list and address specific shortcomings that had led to increased uncertainty regarding Indonesia’s Investment Law and regulations. Following a series of discussion with stakeholders, including the Indonesian Chamber of Commerce and Industry (Kadin) and international business chambers, a new Presidential Regulation No. 36/2010 on the DNI was issued on May 25th 2010. The new Presidential Regulation addresses investor concerns regarding the grandfather clause, the treatment of publicly listed companies, mergers and acquisitions, and the hierarchy of regulations related to investment in Indonesia. It also opens up a few additional sectors to all foreign investors and incorporates Indonesia’s ASEAN commitments, thus providing more liberal treatment for ASEAN companies and improving the list as a single source of information on investment in Indonesia. However, overall changes in foreign equity limits are relatively minor and initial reviews by the legal community indicate that further clarification of many clauses in the new Perpres will be necessary. For this reason, one option being considered by BKPM is to issue additional
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guidelines for implementing the Perpres. During the next year, a full review will be necessary, including revisions to the list of restrictions contained in the DNI. A revised list will in any case be necessary because of Indonesia’s new commitments in ASEAN. It is envisioned that the review will to provided to the Coordinating Minister of Economic Affairs and result in a revised Investment Negative List. The Government also plans to issue a new Keppres to revitalize Timnas PEPI, which will allow it to continue in its role in supporting Indonesia’s investment climate.
DPL 7 (September 2010) DPL 8 (September 2011) Issued detailed technical regulations on implementation of PTSP
Monitor and evaluate the implementation and effectiveness of PTSP
The 2007 Investment Law stipulates that a Presidential Regulation on one-door integrated investment service (one-stop shops or PTSP) will be issued, and also mandates that local governments be made responsible for administering investment projects within their jurisdictions with the exception of certain types of investments that will remain with the central government. Following discussion of a series of drafts, the Presidential Regulation was finally issued on June 23rd 2009. The regulation allows ministries and central government agencies to delegate their authority to issue business licenses to BKPM and authorizes BKPM to establish a one-stop shop for investment licensing. It also authorizes BKPM to establish an electronic information and licensing service. At the local government level, the regulation requires that business licensing authority be transferred to local one-stop shops and it empowers BKPM to monitor the implementation and performance of local government one-stop shops. Since the technical skills to assess license applications lie with the ministries and agencies that regulate each sector, not with BKPM, the challenge going forward will be to reach agreement on which licenses can be transferred to the one-stop shop. In order to facilitate the implementation of one-stop shops, the head of BKPM has issued three regulations (Peraturan Kepala/Perka BKPM) that are to be applied at national, provincial and district levels: (i) Regulation No. 11/2009 that provides for procedures, supervision and reporting of the PTSP; (ii) Regulation No. 12/2009 that provides for guidelines and procedure for investing in Indonesia; and (iii) Regulation No. 13/2009 that provides guidelines and procedures for monitoring the implementation of one-stop shops. These regulations basically provide standards for the one-stop-shop facilities and services, with BKPM acting as the supervisor. In order to ensure the quality of the implementation of PTSP, and as part of the implementation of the Regulation No.13/2009, BKPM will monitor and evaluate the performance of the PTSP using a set of key performance indicators. This monitoring report will be submitted by BKPM to the Presidential Working Unit for Supervision and Management of Development (UKP4), in accordance with Inpres No.1/ 2010. Any PTSP that fails to meet the key performance indicators is expected to surrender their licensing authority to BKPM.
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012)Established an operational online investment licensing system (SPIPISE) that integrates approval and licenses between BKPM, seven provincial government PTSPs and four line ministries
Continue to establish an integrated online approval and licensing system within three sectors, involving BKPM, 33 provincial and 40 municipal government PTSPs and 16 line ministries
Continue to establish an integrated online approval and licensing system within five additional sectors, involving BKPM and 50 additional municipal government PTSPs.
Establishment of a public access online database of information on investment procedures and of a single window for investment licenses, operated by BKPM, is also stipulated in the 2009 Presidential Regulation on PTSP. The regulation provides a three-year period to develop the new system. In this regard, BKPM has developed an online investment licensing application (SPIPISE) which is now accessible on the BKPM
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website. The GOI launched a pilot project on January 15, 2010 in Batam. For 2010, the online system will be implemented in at least 7 provinces. Currently, SPIPISE only covers BKPM licenses, and BKPM is in the process of integrating technical business licensing procedures of other ministries and local government. In 2010 BKPM has inquired commitments from three sector ministries (Industry, Trade and Tourism) to transfer licensing authority to PTSP and is in the process of implementing the commitments. The establishment of SPIPISE will continue within the next two years. Eventually, it is expected to cover all provinces and at least 40 districts of Indonesia by 2011, in accordance with the Inpres No.1/2010,and to integrate business licenses from Ministries of Trade, Industry and Tourism. The expansion of SPIPISE in 2012 is expected to cover 50 additional municipalities and 5 other sectors.
DPL 7 (September 2010) DPL 8 (September 2011) Mapping of business licenses used as basis for development of business process of SPIPISE for three priority sectors that have been agreed with the line ministries (Trade, Industry and Tourism)
Mapping of business licenses used as basis for development of business process of SPIPISE for five additional sectors agreed with the line ministries
Government agencies tend to create business licenses in accordance with each agencies authority and responsibility, with little coordination between agencies or between levels of Government (e.g., the central Government versus local Governments). This results in a complex, redundant and overlapping licensing regime from the investors’ perspective. The implementation of simplified licensing is under the authority of BKPM and will involve the integration of sector licenses into SPIPISE. The implementation of SPIPISE and integration of technical business licenses require a mapping of the business licenses. Currently, BPKM has reached agreement with the ministries of Industry, Trade and Tourism to integrate these three sectors into SPIPISE in 2011 and expects to expand the agreement to 5 additional sectors within 2011. 1.2. Improving logistics, enhancing trade facilitation and promoting exports Reform aim: Reduce the time needed for and cost of importing and exporting
DPL 7 (September 2010) DPL 8 (September 2011) Selected MOF DG Customs as the temporary operator of the National Single Window. INSW import and export clearance made mandatory in 5 main ports (Soekarno Hatta Airport, Tanjung Priok, Tanjung Perak Surabaya, Tanjung Mas Semarang and Belawan Medan)
The Indonesia National Single Window (INSW) is being established to reduce the time and cost for importing and exporting by allowing single submission, single processing and single approval of import/export documents. At present, it is estimated that up to 36 government agencies are involved in granting permits or licenses for export or import with at least 48 different export documents, 106 different import documents and 23 supporting documents. After the coordination ministerial meeting headed by the Coordinating Minister of Economic Affairs, it was decided that the Government will delay the establishment of a new entity for INSW. In the meantime, DG Customs has been temporarily appointed to operate the INSW until 2012. Coordination will continue under the Secretariat of the National Preparatory Team for INSW. Since the INSW involves a large number of government agencies, it will be necessary eventually to establish a separate independent body, with its own budget, to manage policy and certain types of coordination issues. Actual operation of the INSW will be transferred to a newly established entity in, for example, a public-private sector partnership. Currently, the INSW for import customs clearance has been implemented in five major ports in Indonesia: Tanjung Priok, Tanjung Perak, Tanjung Mas, Belawan seaports and Soekarno-Hatta airport; whereas the
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INSW for export clearance has been implemented in four major ports: Tanjung Priok, Tanjung Perak, Tanjung Mas and Belawan seaports. The INSW for export clearance at Soekarno-Hatta Airport will be launched in late September 2010. The GoI decided that INSW will only be implemented in the five major ports, which handle almost 90 percent of the country’s international trade activities, as it would not be cost-effective to implement the INSW in the rest of the small ports throughout Indonesia.
DPL 7 (September 2010) DPL 8 (September 2011) Published service level arrangements (SLAs) and standard operating procedures (SOPs) in the INSW webpage for processing trade documents at all major Government agencies participating in the INSW.
Develop standard operating procedures within the INSW for regular private sector consultative meetings on INSW implementation issues
Develop work plans for the phased implementation of single-submission/sign-on procedures for two key agencies of the INSW (permit issuing agencies, e-payment or Inaport).
Issued quarterly INSW evaluation reports on the webpage, including quantitative information on: (i) the number of users; and (ii) the amount of imports/exports processed through the INSW
Develop a system and submit reports to the Coordinating Ministry of Economic Affairs, MoF and MoT on import container dwell time in Tanjung Priok port, measured from ship berthing to gate-out, including the time required for each major sub-step in the import clearance process; and make the reports public
Established Client Coordinator system in DG Customs to conduct help desk functions during the temporary operation of the INSW by DG Customs.
Linked the remaining import licenses and five export licenses under the Ministry of Trade to the INSW
Link remaining export licenses under MoT to INSW and implement in five major ports.
SLAs and SOPs Service level arrangements (SLAs) and standard operating procedures (SOPs) help to ensure fast service and minimize misunderstandings in processing trade documents. Most of the major permit agencies involved with the INSW have now developed SLAs and SOPs, which are now available on the INSW website. These SLAs and SOPs will likely be improved as the INSW develops. Eventually, an SLA covering the entire import and export processes will also be required. Monitoring and Evaluation The purpose of the INSW is to reduce the time and cost for customs release and clearance of cargoes. Thus, monitoring and evaluation, including import clearance times, is a key element for the successful development of an effective INSW. Consequently, the INSW has begun submitting evaluation reports to the minister, including quantitative information on: (i) the number of users; (ii) the amount of imports/exports processed through the INSW; and (iii) time for customs clearance. The INSW team is also planning on posting this information on the INSW webpage starting this year. By 2011, a reporting system to the Coordinating Ministry of Economic Affairs, Ministry of Finance and Ministry of Transportation with broader measures on container dwell time in Tanjung Priok will be developed, implemented and made available to the public. Help Desk The INSW also indirectly maintains a help desk through the Client Coordinator system in DG Customs, which is the temporary INSW operator.
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Private Sector Consultation Ultimately, a fully operational INSW will benefit the private sector through more efficient customs release and clearance of goods. In order to obtain private sector inputs on progress in developing the system, the INSW has instituted discussions with a number of chambers of commerce. As a result, the INSW now serves as a de facto forum for addressing customs-related trade issues with the private sector. More importantly, private sector dialogue has resulted in the resolution of several trade problems, including conflicts between product descriptions and harmonized system codes used by permit issuing agencies and requirements for both hard copy and electronic inputs into the system. In 2011 the INSW team will develop SPOs for regular private sector consultative meetings to discuss INSW implementation issues. A flyer outlining the consultative process has already been developed and is now in use by the INSW Secretariat. Single-Submission/ Sign-On Procedures Single-submission and sign-on are the final goals of the INSW for each of its major pillars. In this context, single submission and sign-on mean that a trader can seek import or export clearance by submitting all data required by each clearance agency with a single sign-on of the INSW portal. In 2011 the INSW team will develop work plans for the phased implementation of single-submission/sign-on for two key agencies or pillars of the INSW (permit issuing agencies, e-payment or Inaport). The work plans would set the stage for the subsequent development of the INSW. The plans would, for example, address some of the legal problems that hinder the transfer of information between agencies and slow the development of single submission, single sign-on.
September 2010 Benchmark Action September 2011 Indicative Action Ministry of Trade issues a Ministerial decree specifying internal
SOP on the introduction of non-tariff measures under the MoT.
The Ministry of Trade is responsible for issuing certain types of non-tariff measures (NTMs), such as import licenses and pre-inspections, and for ensuring that other non-tariff measures imposed by other agencies are legal under international trade agreements. By 2011, the Ministry plans to reform its internal process in reviewing new NTMs, specifically those that are under the Ministry's purview. The reform would put in place better mechanisms to review NTMs in order to ensure that they are valid policy intervention for the stated objective, consistent with Indonesia’s national economic interest in improving competitiveness, and valid under international agreements. The reform would involve establishing a review mechanism in which proposals for new NTMs would undergo a regulatory impact analysis, which will be managed by a dedicated team.
DPL 7 (September 2010) DPL 8 (September 2011) Implemented a reporting system for the 57 local trade bureaus issuing certificate of origins to the Ministry of Trade
By September 2010, the Ministry of Trade expects to establish a weekly reporting mechanism in all local trade bureaus issuing Certificates of Origin (CO). Currently, there are 85 local bureaus issuing CO and 28 of them have been connected with the Ministry through an on-line system. The remaining 57 have been given the necessary electronic application for sending the reports. Out of these, 37 have sent regular reports using that electronic application. For the remaining 20, because of low transaction volume, the reporting will be done as needed. Data exchange has been done between Indonesia and Malaysia, and eventually with other ASEAN countries. Support in software was provided by USAID. Although the remaining 57 local bureaus represent less than 20 percent of CO issued in Indonesia, the report would provide more information to the authority on whether Indonesian exporters have made use of preferential access from bilateral or regional
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trade agreements. Information on CO would also help the Ministry of Trade to better respond to allegations of transshipment of Indonesian exports.
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012)Submitted to the President a draft Presidential Regulation on the National Logistics System (Sislognas) Development Blueprint
Evaluate 24/7 services in the ports of Jakarta, Semarang, Surabaya, Medan and Makassar, to identify the main bottlenecks in running those services efficiently and propose actions to strengthen the 24/7 running models in the port
Assessment of regulations that contribute to high logistics costs, e.g. quarantine controls in case of domestic shipping, customs checks in case of transshipments, and certification of origin in case of exports
Start operation of the Customs Advanced Trade System (CATS) in the Cikarang dry port
Start with plans to expand capacity and increase efficiency at the Jakarta port of Tanjung Priok and make a decision on the building of new port capacity in the greater Jakarta area beyond 2020.
One of the main goals of the National Logistics Blueprint is to improve transparency and coordination among ministries and agencies, and to help medium, small and micro enterprises realize the opportunities for investments and provide national logistics service providers with the opportunity for global-scale cooperation. However, it has been increasingly recognized that the issuance of the Logistics Blueprint may not be sufficient to bring about the recognized need for more coordination among the various ministries and agencies involved, given that many other blueprints and master plans have been recently issued which also support connectivity reform. These include the multi-modal blueprint, the port master plan, the railway master plan, the economic corridor approach, the special economic zones and the regional development plans. Presently, the priorities and time paths of these various blueprints and master plans are not synchronized, thereby undermining Indonesia’s aim to reduce logistics costs and improve competitiveness. Consequently, the Government has been actively drafting an overall framework, a connectivity agenda, which aims at synchronization of the various blueprints and identification of priorities. As a result, the need to synchronize the logistics blueprint with the rest of the connectivity agenda has somewhat delayed the issuance of this blueprint. The work on such encompassing connectivity strategy was formalized through the recent establishment of a ministerial-level Steering Committee, Guidance Team and Working Team. The overall supervision of the working team is the responsibility of the Guidance Team consisting of vice-minister level officials of Trade, Transport, CMEA, Bappenas and Public Works ministries. Significant progress has already been made in the development of the Logistics Blueprint in particular. An inter-departmental team has prepared a Logistics Blueprint, which was submitted to the President in April 2010 and is now undergoing cabinet level discussions before final issuance. The Logistics Blueprint sets out a strategy and an action plan to improve Indonesia’s logistics performance. The Logistics Blueprint was prepared in collaboration with the private sector; wherein both the domestic and foreign business sectors in Indonesia were consulted. The World Bank has provided support in defining the priorities in the logistics action plan, sharing international best practices, preparing an annual logistics report for Indonesia, facilitating the dialogue between the Government and the private sector, and monitoring of the implementation of the logistics action plan. Going forward, the World Bank will also support the formation of the logistics team that will be tasked to start implementing the Logistics Blueprint . The World Bank has and will continue to provide support to the Government’s efforts to develop an encompassing connectivity framework, with active participation in the working group’s discussions. The Government has also identified several quick wins which are currently being implemented and will be supported under DPL-8. These quick wins are in line with the Government’s priority of reducing congestion
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in access roads to ports and increasing port productivity, given that presently, close to 10 percent of Indonesian exports miss the boat due to congestion outside and within ports. The expansion of office hours by offering 24/7 services has been introduced in Indonesia’s main ports, which is common in most international ports throughout the world. The Government has requested the port authority, Customs offices and state banks to take the lead in introducing and socializing the importance of 24/7 services in the ports. A first dry port will also be opened in the Cikarang industrial estate in 2010, with the operation of a Customs Advanced Trade System (CATS). Such dry port allows all customs-handling and related activities to be done at the factory gate, with the container subsequently sealed and directly transported to the port, and put on board of a ship with minor additional handling. Recently, the Government and State-Owned Enterprise Pelindo II have also reached agreement on an upgrading plan for the port of Jakarta. The plan includes expansion of terminals, improvement of cranes, strengthening port management and a range of measures that will support efficiency improvements. The Government has also acknowledged the urgent need to develop a new port with adequate capacity to serve the greater Jakarta area beyond 2020 and a decision to this effect will be made soon. The Inpres No.5/2008 and the Logistics Blueprint call for regulatory reforms that address the high logistics costs, in order to improve the performance of Indonesian logistics, which is being supported under DPL-9. An example of needed reform concerns the current absence of a proper legal framework for third party logistic service providers. At present, such providers require a range of licenses and have to set up several companies, which drive up their costs. Indeed, the importance of regulatory reforms in the logistics sector was recognized in Inpres No.5/2008 and has therefore been included in the logistics action plan. 1.3.Reducing the tax burden and improving tax administration Reform aim: Improve human resources management in the MoF DG Tax
DPL 8 (September 2011) DPL 9 (September 2012) Negotiate contract for Consultancy Services for the Development of Knowledge Management Strategy, Analysis and Implementation Roadmap for DG Tax, which will develop Knowledge Management Strategy, Analysis Document and Implementation Roadmap
Establishment of the foundation for comprehensive bureaucracy reform through formal endorsement and publication of the medium-term DG Tax HR Strategic Plan (HRSP).
Commence initial phase of professional certification for HR, Project Management (CMMI) and audit functions.
Sign contract for implementation of support for HR reform (Component B of PINTAR).
Re-organization plan for DG Tax approved by Minister of Finance. This would include: – The establishment of HR functions in the Regional Offices; – Restructuring of the Small Taxpayer Offices (STOs); and – Plan to introduce professional certification for HR, Project
Management (CMMI), and Audit functions.
MoF DG Tax (DGT) has been implementing an impressive range of reforms in recent years, but a more systematic approach is needed to incorporate good practices and lessons learned. In order to learn from good practices and the past reform experience, and to incorporate those lessons into future planned reforms, the DGT has prioritized the adoption of Knowledge Management (KM) concepts as one of its key strategic actions — DGT defines this as an organization consciously gathering and organizing, sharing and analyzing its knowledge in terms of resources, documents and skills. For some Directorates/functions, including audit and taxpayers services, DGT considers the adoption of KM concepts a high priority to enhance productivity and effectiveness in its daily operations. The proposed consultancy services will assist DGT in developing a Knowledge Management Strategy, undertaking some analysis and
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Implementation Roadmap. The KM analysis document will cover all high level technical requirements, organization, and processes to implement KM best practices in DGT. The consultancy will last for around four months and is expected to be negotiated in late 2010 with much of the implementation to be supported under PINTAR. The HR strategic plan for DGT, which is expected to be approved by the end of 2010, will address strategic issues affecting HR improvements in the future and lay the foundation for reforms to improve the effectiveness, efficiency and professionalism within the organization. The plan is also required to engage the backing of the State Ministry of Administrative Reforms (MenPAN), which currently centrally controls all organizational issues in Indonesia, to support more comprehensive reforms (they have previously exempted DGT only in specific cases, such as allowing them to establish a PIU). The contract to support implementation of the proposed HR reforms under PINTAR (Component B) is expected to be signed in early 2011, which should support the development and implementation of a more detailed re-organization plan for DGT. The plan would include:
The strengthening of the central HR function and the establishment of HR functions in the regional offices;
The restructuring of the Small Taxpayer Offices (STOs) based on more efficient case load management; and
The formalization of professional cadres within DGT. Under current World Bank supported initiatives DGT has already commenced an initial phase of professional certifications for HR staff and in Project Management (CMMI), which is planned to be expanded to specialized functions such as tax audit.
Reform aim: Modernize core tax system
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012)Issued advertisement (Invitation for Bids) for PINTAR procurement as an initial step in the development of business process improvements and a new integrated information system
Approval of prototype specifications for new Core Tax system, as developed under PINTAR.
Approval of detailed design of new Core Tax system, developed under PINTAR
Issue Government Regulation for the implementation of Article 35A Law No. 28/2007 regarding General Taxation Provisions and Procedures and the signing of a Memorandum(s) of Understanding with key counterparts, particularly Customs, on the sharing of third party information required for taxes related risk management, assessment and audit.
PINTAR is moving into the critical implementation phase. It will support: (i) modernization of core business processes, including information and communication technology infrastructure and tax database management; (ii) governance and human resource management; and (iii) project management and oversight. DGT has set up and trained staff for a full time, dedicated Project Implementation Unit (PIU) under the Directorate of Business Process Transformation, and has developed a Project Operations Manual (POM). Following some delays — mainly due to the complexity of what will be a major transformation of organization and corporate culture and practices — DGT is now in the final stage of the preparation of the bidding documents with detailed requirements and specifications to implement PINTAR Core (i.e. point (i) above). The World Bank is working closely with DGT senior management and the PIU to strengthen project management capacity and facilitate the procurement process and the main “Core” contract was advertized in September 2010 (around nine months later than originally envisaged). Nonetheless, complementary activities have continued with Bank and donor support, including the process to recruit
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change management consultants to support the PIU during the transition period, until the “Owner’s Agent” and main contractor are in place in 2011. The first stage of the reforms, once the contractors are in place, will be for DGT to redefine new business processes and specifications and its change management reforms. Going forward, DGT also faces major challenges in obtaining critical third-party information that is necessary to verify tax assessments and undertake risk based audits of taxpayers. The information is necessary to help reduce the tax gaps and to introduce risk-based tax administration systems. Critical third-party information includes information from within the MoF (i.e., Customs and Excise) and from outside the MoF, such as public utility companies, the Central Bureau of Statistics (BPS) and financial institutions (i.e., business and consumer credit information). Obtaining reliable third-party data is one of the key factors for the successful implementation of PINTAR.
DPL 8 (September 2011)Negotiate contract for Consultancy Services for Criminal Investigations which will develop operational specifications, user requirements and a bidding document as an initial step in improving business processes and information systems for tax intellegence and investigation
Issue improved Standard Operating Procedures for tax objection and appeals
Existing weaknesses in control elements lower the incentives for compliance and leave DGT vulnerable to corruption. DGT has annual business and audit plans, but few documented general or specific audit policies, poorly developed systems and procedures for risk-based audit and staffing remains inadequate — while the number of auditors has increased from 2,300 in 2008 to 4,200 in 2010 (13 percent of total resources) this remains well below international standards of 20-30 percent of total staffing and audit coverage is therefore low. While the audit capacity is being built, with new methods being supported under PINTAR, DGT proposes to strengthen the sub-directorate of Internal Compliance and Internal Investigation within DGT. This unit, created in early 2007, has the responsibility for internal control, quality, internal audit and internal investigation, with responsibility for ensuring that:
Risks are appropriately identified and managed. Significant financial, managerial, and operating information is accurate, reliable, and timely. DGT resources are used efficiently and adequately safeguarded. DGT operations are transacted in accordance with adequate internal controls, good business
judgment, and high ethical standards. Quality and continuous improvement are fostered in DGT internal control processes. Investigation of detected irregularities is carried out, administrative and penal cases appropriately
prepared, and the cases follow-up in the administrative and penal tribunals.
DGT is developing its management control systems, to ensure that internal compliance and investigation’s functions are carried out with proper accountability, integrity, and transparency. Tax transactions with any indication for fraud identified during the review or data validation stages are referred to the investigation unit for further review. The investigation unit has options to post the transaction, with no further action, refer the taxpayer back to the audit department, or continue with the investigation procedures. However, the current procedures and working practices are weak and the DGT, with support from the Bank administered Multi-Donor Trust Fund (MDTF) and own funding, is looking to develop a future concept for operations and new set of Criminal Investigation and Intelligence processes (this will also be coordinated with reforms in the Objections and Appeals Directorate and integrated into PINTAR). The contract is expected to be negotiated in mid 2011. Similarly, new Standard Operating Procedures are being produced for the Objections and Appeals Directorate in order to address weaknesses that have been exposed during recent high-profile corruption cases involving DGT staff.
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DPL 7 (September 2010)
Issued Guidance for Transfer pricing taxation
DGT is developing new transfer pricing guidelines to provide greater clarity to enterprises operating in Indonesia and to ensure that it receives a "fair" tax share. It is important to establish appropriate rules for valuing the contributions from assets, tangible and intangible, services, and funds etc. transferred within organizations, including those in different jurisdictions, for tax purposes. Currently, the regulations are unclear, which raises the possibility of arbitrary decisions and discourages investment, particularly foreign investment. Organizations have indicated their concerns to DGT. This is also a concern for DGT as cross-border transactions could be used to reduce taxable profits in their jurisdiction. The DGT has therefore issued new guidelines in September 2010, to clarify the transfer pricing regulations and enforcement procedures, to encourage voluntary compliance.
Policy Area 2: Strengthening Public Financial Management
2.1. Strengthening budget formulation and M&E systems Reform aim: Improve results orientation and MTEF in the budget process
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012) (a) Implemented revised program structure with measurable results and targets aligned with organizational structure in the National Medium Term Development Plan (RPJM) for 2010-2014 and (b) based both indicative ceilings and budget proposals (RKA-KL) from all line ministries for the Fiscal Year 2011 budget on the revised structure.
RKA/KL for 2012 based on revised PP 21, as evidenced by: 1. A new and simplified costing methodology with separate treatment of baselines and new initiatives 2. A manual to line ministries on formulation of new initiatives, which enables a review of rationale and cost information 3. Consistency between RKP and RKA-KL regarding performance and budget information)
Budget documentation includes explanation of differences between proposed budget ceilings and previous medium-term forward estimates
Presented detailed information on MTEF/PBB reform to Parliament in the Financial Note and hold subsequent consultations with Parliament
To improve results orientation in the budget process — as mandated in Indonesia’s fairly new regulatory framework on PFM and especially Law No. 17/2007 on State Finance, the MoF and Bappenas took a critical first step towards PBB/MTEF reform by signing and circulating a ministerial joint decree that required all ministries and ministry-level agencies to revise the program and activity structures used in planning and budget documents. The new program structure includes measurable targets and performance indicators and establishes clearer lines of accountability for performance, just as activities related to policy priorities are to become more clearly identifiable. It is expected that the performance information in planning and budget documents will enable the Government to better track and monitor outputs and outcomes associated with public expenditure in order to promote higher efficiency and effectiveness of public spending. The new structure is already being implemented with the Government’s RPJMN 2010-2014 and will be implemented in the FY2011 budget as well. As evident from above, DPL 7 has been supporting these reform targets and, so far, reform progress has been well on track. On July 14th 2009, the MoF and Bappenas officially launched the PBB/MTEF joint manual which, among other things, provided guidance to line ministries on the preparation of the revised program and activity structures. Through a series of workshops, the new concepts were further socialized, and the new structures and key performance indicators were completed for all budget holders by December 2009, in time for both their inclusion in the RPJMN 2010-
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2014 (Keppres 5/2010) and to form the basis for establishing the indicative ceilings for the FY2011 budget (Keppres 29/2010). Subsequently, the new RKA-KL formats and applications were developed in accordance with PBB/MTEF principles based on a RKA-KL implementation manual with detailed user instructions for the ministries/state agencies, which was presented to them through an intensive workshop series organized by the DG Budget in May and June 2010. The FY2011 budget submission templates (RKA-KL) were completed by all ministries/state agencies following a June MoF circular regarding the temporary ceilings (No. 294/ 2010) and submitted to Parliament together with the Government’s Financial Note on August 16th 2010. The Financial Note contains a detailed description of the PBB/MTEF reform design. Upon submission of the financial note, in-depth discussions on the content of these reforms are expected to take place between Parliament and the Government. This is important as buy-in and understanding of Parliament regarding ongoing PBB/MTEF reforms remains crucial for successful reform implementation, wherein its task in appropriating the annual budget will shift from assessing line-items to allocations for activity outputs. Consultations with the Parliament have been taking place as part of the usual budget cycle consultations (such as when the indicative ceilings were formulated in April 2010 or when the new RKP was discussed), but no consultations have so far been held on reform implications. A DPL 7 benchmark action was included to that end. DPL 8 actions in the PBB/MTEF area will be targeted at ensuring continued reform progress with the 2012 budget, including compliance with the revised Government Regulation No. 21 concerning the formulation of the performance-based budget. DG Budget has been working on the revision of this PP for the past few months and will conclude this process shortly in order to reflect the evolving dynamics of the reform agenda. It will be particularly important to ensure that a new and simplified costing methodology and system will be developed, which is better aligned with the MTEF framework by treating baselines and new initiatives separately and ensuring consistency with the plans to introduce indexation (adjustments for forecasted changes in input prices). Also, a new costing methodology and system should support the need to develop modern budget analytical techniques for the review of efficiency of government operations. A second crucial point for 2011 will be the development of guidelines to line ministries on how to formulate new initiatives such as new outputs or changed targets. Joint work in Bappenas and DG Budget has begun to finalize a manual on new initiatives and on possible revisions of the Government procedures concerning the review and scrutiny of new initiatives in the budget and planning process. Thirdly, it will be important to establish a seamless linkage and ensure consistency between development plans (RKPs) and budget proposals (RKA-KLs) regarding performance and budget information. Last but not least, a first DPL 9 action is included to strengthen further the implementation of a Medium-Term Expenditure Framework, and enforcing it by requesting all K/L to include in their budget documentation an explanation of potential differences between their proposed budget ceilings and previous medium term forward estimates. Reform aim: Develop a new monitoring & evaluation system
DPL 8 (September 2011) DPL 9 (September 2012) Publish findings of review of the performance indicators and performance information systems from the case study of the M&E template completed by selected pilot line ministries
Issue draft guidelines for an M & E framework based on specific performance indicators that provide basis for the next RPJMN and annual budgeting
Going forward, attention will increasingly shift towards the development of an integrated, performance-based monitoring and evaluation (M&E) system so as to close the cycle of PBB/MTEF reform. The system is expected to be in place for the next Medium-Term Development Plan (RPJM 2015-2019). Various steps
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will be necessary to this end, most importantly, the continued evaluation of ongoing reforms (DPL 8), on which the new system will be based, and, among others, the formulation of an M&E manual for budget users, a draft of which shall be ready by 2013 (DPL 9). Reform aim: Link budget formulation to SPAN
DPL 7 (September 2010) Issued SPAN procedures for establishing and using an integrated data base, to serve the requirements of Bappenas, DG Budget, line ministries and DG Treasury, that would enable the seamless linkage of data from the issuance of spending ceilings and virement to payment to accounting and reporting
The Government is implementing an integrated financial management system, SPAN, which is expected to go live in 2013. SPAN is meant to cover not only transactions on the budget execution side, but to capture and integrate data of the entire budget cycle from budget planning to reporting. A budget formulation application will therefore have to be part of the SPAN solution, and currently discussions are about to be concluded on the choice of such a module. While this decision still needs to be formalized, the next important step down the reform path will be to prepare the procedures allowing for the integration of data from the budget formulation and budget execution side respectively. DG Budget and Bappenas are collaborating separately to merge the databases used for RKA-KL and Renja-KL and so the procedures should cover how these data are interfaced or integrated with SPAN. Clarification is especially needed on the design of the business procedures that will define how these databases will be interlinked in the future. Questions also remain regarding the timing and level of detail of data that would flow from the budget formulation module and how virement on the budget execution side would feed back again into the budget module. As configuration will start following the Conference Room Pilot (CRP) 3, which is scheduled for October 2010, DPL 7 is supporting the development and final issuance of procedures for configuration by September 2010. The latter will be done by means of a formal endorsement by the SPAN team. 2.2. Strengthening budget execution systems Reform aim: Streamline budget execution and management of budget authority
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012)Established virement procedures (to be configured in the CRP 3 of SPAN) to conform with MoF Regulation No.69/2010 and the guidelines on PBB
Implement virement on the basis of the PBB guidelines
Review the working of the virement procedures by BPKP/IG
One of the main objectives of Indonesian PFM reform is to streamline and simplify the budget execution process by providing more flexibility to spending units in implementing and managing their budget in order to achieve a desired outcome/output in accordance with the agreed plan. With the new budget formulation mechanism, every spending unit is expected to develop its budget proposal based on the performance target, and any virement (changes) to the original budget allocation shall be made only if it is intended to achieve those agreed targets. Law No. 17/2004 on State Finances (Organic Budget Law) gives Parliament power to approve the budget by organization, function, program, activity and type of expenditure. However, during the budget implementation in every fiscal year, Parliament through the annual budget (APBN) law, authorizes Government to do certain budget shifts between budget items without prior parliamentary approval, for example to shift: (i) expenditure budget between organization units within a budget unit; (ii) activities within
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a program to the extent that the shifting shall be an optimized result; and (iii) types of expenditures within an activity. The authority given to Government for budget virement is usually spelled out in detail in MoF regulations. In March 2010, the Minister of Finance issued its latest regulation, No. 69/2010, on the procedures for budget revision for budget year 2010. This regulation contains new procedures for budget virement, following the introduction of performance targets in the budget document (PBB). However, the 2010 budget is still using a line item budget approach, so this regulation is not yet fully compliant with the guidelines on PBB. The DG Budget is therefore drafting a concept paper on the future virement procedures for the period from FY 2011 onwards. The future budget virement process will further increase the authority of the spending units and will be more performance (output/outcome) oriented. The new concept of future virement processes will be part of the 26 new academic papers that are currently being prepared jointly by the MoF (DG Budget) and the Business Process Improvement consultant for the SPAN project. These will have to be agreed and finalized before the end of September 2010 as part of the consultant’s report on Future State Development (in line with DPL 7). The latter will be a crucial input for configuring the SPAN application in the Conference Room Pilot (CRP) 3 stage, which is due at end of 2010. As stated above, the new virement procedures will be fully implemented from FY 2011 onwards (DPL 8). One year after implementation of the new virement procedures, a review is expected to be conducted by the internal auditors (BPKP/IG) to assess whether the increased authority given to the spending units regarding budget virement is used effectively and efficiently for the achievement of targets (DPL 9).
Reform aim: Improve budget and cash management within the central government
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012) Issued new MoF regulation on cash forecasting
Review by DGT of the implementation of the regulation and application software and recommendation on next steps
Implement cash forecasting processes in pilot ministries through SPAN
Improved cash forecasting by: introducing mechanisms to improve the performance of Satker in preparing cash forecasts and through capacity building programs for line ministries treasurers.
Capacity building has been completed for Satker whose total budget covers at least 70% of total appropriation
Issue implementing regulation on coordination of revenue projections reports requested to be submitted by revenue collecting agencies, including line ministries
An MoF regulation on cash forecasting was issued with PMK No. 192/PMK.05/2009 on November 23rd 2009 and DG Treasury Decree No 3/2010 on 27 January 2010. While the latter regulates daily forecasting of Satker revenue and expenditure (DPL 7), the former is aimed at minimizing idle cash balances kept at the Treasury Single Account at Bank Indonesia, limiting cash shortages, and also maximizing gains when investing cash surpluses. At present, the MoF lacks accurate information on the amount of cash to be received and/or disbursed during a given period of the fiscal year. As a consequence, the MoF has tended to retain high amounts of idle cash to anticipate ad-hoc payment requests of spending units. PMK No.192 now requires spending units to submit cash withdrawal/receipt plans in a more accurate fashion, both in terms of the requested amount and time schedule, than was the case with information formerly available in the DIPA documents submitted to the treasury offices (KPPN/Kanwil). Following PMK No.192, spending units now need to submit updated daily, weekly, and monthly cash plans, at least three days before the end of each month. Otherwise, cash will no longer be able to be withdrawn. Further, requests for disbursements by spending units can no longer exceed the allocated monthly plan as such
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payments cannot be made anymore. Similarly, should spending units spend less than their allocated monthly amount, they will have to carry forward these unspent amounts and ensure the increase in their cash requirement plan for the following months is well documented. Regarding the introduction of new mechanisms to improve the performance in both preparing and submitting cash forecasts, DG Treasury has been developing a new IT application called “Aplikasi Forecasting Satker (AFS)” as a medium for spending units to quickly create and then submit their cash plans to the KPPN/Kanwil through either soft copy, email or SMS devices (Treasury decree No. Per-03/PB/2010). DG Treasury has just started to conduct a series of socialization activities on the new cash forecasting regulation and the related IT application from August 2010 onwards as part of the capacity building program for spending units indicated in the DPL benchmark action. The KPPN/Kanwil will also conduct an intensive coaching clinic, and provide assistance and consultation to the spending units on the detailed steps of preparing an activity schedule and estimating cash requirements in compliance with the new regulation. These training and coaching sessions are expected to increase spending units’ understanding on: (i) the implications a given activity in their RKA-KL/DIPA would have on their cash management; (ii) the difference between contractual and non-contractual activity and managing and monitoring especially contractual activities with third parties for forecasting purposes; and (iii) ways to develop a more accurate project implementation schedule and its term of payment (see DPL 7). Ideally, all Satker staff must be trained as well. However, training 22,000 Satker staff throughout the archipelago is difficult, time-consuming and costly. A realistic target for September 2011 (DPL 8) therefore is to train staff of Satker whose total budget would cover around 70 percent of total appropriation (minimum) and staff of especially those that are under located the five biggest spending ministries, as their reliable cash plans would have a significant impact on the management of cash by DG Treasury. Satker that would not be trained would mostly be Satker that manage smaller budgets, primarily for salary and operational expenditure. A year after issuance of the cash plan regulation and introduction of the IT application, DG Treasury is expected to conduct a review of both their implementation, including recommendations on next steps (DPL 8). The review is aimed to assess whether the regulation has been able to improve cash plan management as would be reflected by a reduction in the percentage of deviation of actual cash flows from spending units’ cash plans. The software application used by the spending units to submit their cash plan should also be reviewed to understand whether this software application is user friendly, reliable and able to meet expectations. As the most difficult area in cash forecasting is on the revenue side, another important action in this field and to be achieved by September 2011 is envisaged to be the issuance of an implementing regulation on coordination in preparing revenue projections reports (DPL 8). As for September 2012 (DPL 9), a first round of implementing the new cash forecasting processes in selected pilots ministries through SPAN should have been conducted. This would include the smooth integration between the Satker application AFS and SPAN, which means that cash plan data (both expenditure and revenue) submitted by the spending units through AFS should be automatically captured and processed by SPAN.
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DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012)
Identified final business processes improvements (BPI) and final version of Chart of Accounts (CoA) Framework
Roll out of SPAN on a pilot basis and establishment of the Data Management Center (DMC) and Data Recovery Center (DRC)
Completion of user acceptance tests and completion of final systems documentation
Change management consultancy for implementation of SPAN commenced within MoF
Establish a comprehensive change management and communications program which includes workshops and training courses, as well as training materials
Issue new PP and related MoF-regulations on budget execution as mandated by State Finance Law
Preparations for the SPAN project are continuing. Despite delays in the identification and depiction of business process improvements (BPI) necessary for the configuration of SPAN, including the finalization of the new Chart of Accounts (CoA) framework, MOF has shown determination to have this work completed by September 2010 (DPL 7), when the Turnkey IT contractor (LG CNS) will have to start configuring the new processes into the Oracle application. ECORYS has been receiving intensified support from full time counterpart teams in the Directorate of Treasury Transformation (DTT), and the teams are currently in the process of finalizing the future state vision for 26 business processes. The next step will constitute a round of discussion with business owners from related directorates to receive clearance for the draft BPI concept. For this purpose and in light of the time pressure, another team consisting of staff from Treasury directorates has been assigned to review and finalize the concept. On the budget side, DG Budget has a more informal arrangement for coordinating on this matter, but is equally aware of the deadline. The finalization of the CoA framework requires close coordination among agencies not only within MOF, but also with Bappenas and line ministries. The Objective is to finalize the CoA framework this year, while detailed contents shall be developed further in the following year to better capture the MoF’s move towards full accrual accounting. By end of the third quarter of 2011 and according to the SPAN schedule, the roll out of SPAN on a pilot basis and establishment of the Data Management Center (DMC) and Data Recovery Center (DRC) must have been completed (DPL 8). There are five ministries selected as the pilot for SPAN, namely: Ministries of Agriculture, Education, Finance, Health and Public Works. Those five are selected based on the large amount of the state budget they managed. Meanwhile, the establishment of DMC and DRC is part of the IT infrastructure development work. The work is started from defining and designing the facility, constructing, cabling installation, WAN installation, up to the hard ware/software/net ware installation of DMC and DRC. These two centers will be established at the PUSINTEK office site. Further, as planned in the SPAN contract document, the completion of user acceptance tests (UAT) and of final systems documentation should be made by the third quarter of 2012 so that SPAN can go live and fully implemented at the beginning of FY 2013 (DPL 9). Ideally, the migration from the current legacy system to SPAN should be made at the beginning of the fiscal year to avoid confusion of having two parallel systems during one fiscal year. The schedule of UAT completion should be followed closely, otherwise the implementation of SPAN could be delayed by one fiscal year.
With regards to the Change Management and Communication (CMC) consultancy, it constitutes, other than the BPI consultant and IT Turnkey contractor, one of the three pillars critical for the successful implementation of SPAN. The consultant will assist the MoF in implementing the SPAN solution by undertaking supporting organizational and personnel change management and communication activities and tasks and/or advising the MoF on these matters, as required for the preparation of and during the SPAN implementation period. Ultimately, the consultant will be responsible for assisting the MoF in the
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implementation of these activities within DG Treasury, DG Budget, PUSINTEK and also the pilot line ministries. In more detail, the work of the CMC consultants will include: (i) providing the MoF with training on methods, principles, and standards of change management; (ii) preparing a comprehensive communications strategy in support of institutional change management and assisting the MoF to implement this strategy; (iii) preparing a comprehensive work plan for change management and communications that supports the work plan of the SPAN contractor for configuration, testing, implementation and rollout of the COTS solution; (iv) identifying key implementation and change management risks, developing an appropriate risk mitigation plan, and implementing risk mitigation actions; and (v) conducting trainings for MoF staff assigned to execute CMC activities as well as orientation for training service providers. The procurement process for this CMC consultant was completed in August 2010, and team members are expected to start their work in September 2010. Last but not least, the State Finance Law No. 17/2003 mandated the Government to issue a new Government Regulation (PP) and related MoF-regulations on budget execution. Once the future business processes of both DG Budget and DG Treasury have been prepared, this PP is expected to be used by MoF as the legal basis for their implementation (DPL 8).
Reform aim: Improve provision of IT services
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012) Established an ICT Steering Committee and appointed the Secretary General as the ICT Chief Information Officer (CIO)
MoF Decree adopting ICT Blueprint14 issued
Completion of Issue of the main MoF Decrees on Policy and Standards for ICT governance.
Issued MOF decree on the policy and standards of use of accounts and terms, electronic notes and internet within MoF (KMK512/KMK01/2009)
Establishment of PUSINTEK as a shared services unit for the MoF
Finalization of Organizational Plan for the establishment of the MoF ICT Center as an Echelon 1 unit.
Issued MOF Decree on policy and standards on exchange of data (KMK 274/KMK.01/2009 During the reorganization of the Ministry of Finance in 2006, a central IT services group, PUSINTEK was established under the Secretary General MoF. PUSINTEK is expected to provide ICT services for all MoF Directorates General. It will eventually operate as a fully demand-driven service provider financed through budget transfers from the client units. The MoF has used a part of the proceeds of a grant received to support the Government Financial Management and Revenue Administration Reform Project (GFMRAP), to develop the policy and strategy for placing PUSINTEK as a provider of ICT services to the MoF with a progressively more client-oriented approach. The Strategic Plan15 has defined PUSINTEK’s vision, mission, and goals as shared services provider to improve customer satisfaction, extend the types of provided services, transform human resources management and improve financial management. PUSINTEK is currently preparing to implement the strategic plan which will enable it to meet the emerging ICT requirements of the MoF particularly in the context of the major ICT and business process reform projects being undertaken by DG Treasury and DG Tax (DPLs 8 and 9). The ICT steering committee has been established through KMK No. 178/2010 (DPL 7). The ICT Steering Committee chaired by the Secretary General as the ICT Chief Information Officer (CIO) of MOF is a crucial component of the improvement of ICT Governance at the MoF. Regarding the above mentioned MoF decrees (DPL 7), the ICT strategy provides also for the issuance of decrees prescribing 28 ICT standards and 14 ICT Blueprint will include Standards, Policies and Procedures for ICT Infrastructure Architecture, Data Architecture, Software Architecture, Software Platform Standards, ICT Sourcing Options and ICT Staffing and Skills. 15 Delivered by Multipolar in 2009.
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policies up to 2014. Of these, the most critical one for the on-going SPAN, PINTAR and e-procurement16 projects is the decree on the policy and standards of the use of accounts and terms, electronic notes and internet within the MoF. The latter was already issued as KMK 512/KMK01 in 2009. Another MoF decree, that stipulates data exchange between 4 units (Treasury, Budget, Debt Management and Fiscal Policy) with PUSINTEK as data custodian has also been issued (PMK 274/2010) (DPL 7), and socialization of the new policies has started. It is expected that by 2011 (DPL 8) the organizational arrangement for PUSINTEK as a miniature shared services provider for seven units within the MoF will have been defined and its establishment be reflected in a ministerial regulation. As mentioned above, preparations are already ongoing. What remains to be clarified is how and when PUSINTEK will be assigned the role of a shared services provider for the whole of the MoF. The process of issuing ICT standards and policies will continue during 2012 and PUSINTEK plans to complete issuance of all the main standards by the third quarter of 2012 (DPL 9). The finalization of Organizational Plan for the establishment of the MoF ICT Center as an Echelon 1 unit is also expected to be achieved by the third quarter of 2012. With these reforms PUSINTEK will be well placed to function as a service provider for SPAN and other MoF ICT clients. Reform aim: Strengthen management of state assets
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012) Issued joint decree between MOF and BPN on asset certification
The state asset management information system database (Modul KN) is fully implemented and integrated with the state asset accounting system (SIMAK-BMN)
A decree empowering the MoF authority to control the use of state asset issued
Completed stock taking and appraisal of civilian state assets Law No. 1/2004 on state treasury and its implementing Government Regulation No. 6/2006 on state or local government assets require that land properties belonging to the state/local governments shall be legally registered or certified under the name of the central Government or respective local governments. Much of the state owned land is not yet registered or legally certified by the national land authority board (BPN), implying that the Government has no legal certainty for its usage. In addition, some of the unregistered land is occupied by unintended parties, incurring significant costs when re-obtaining ownership, including through long and lengthy legal proceedings at court. In correspondence with the first of the DPL 7 prior actions, the Minister of Finance and the Head of the National Land Authority Board (BPN) have already signed two joint decrees on land certification in November 2009, decrese No. 186/2009 and No. 24/2009. Objective of the therein mandated certification is to provide legal certainty on the ownership of state land, to orderly administer land registration, and to protect the security of state assets. Certification shall be issued for land that has not yet been certified and/or land that has been certified but is not under the name of the Government of the Republic of Indonesia, but under the name of the line ministry/agency17. As required by these regulations, the MoF will be responsible for: (i) securing the original documents of land title ownership; (ii) collecting and updating the data of state 16 The current system is considered an e-tendering system within the industry norms. However, since all GOI agencies use the term of e-procurement , the document maintains this reference to avoid confusion on the terminology. 17 Where land is registered under the name of the line ministry/agency, it is difficult for the Government to make use of such land efficiently as procedures of transferring land assets between ministries are complicated. Some ministries, for instance, have excessive idle land assets yet are reluctant to release their ownership title. Other ministries would have to buy or rent such land with high cost, were they to use it. Under the new regulation state ministries/agencies will be holding a “user title” only but not ownership.
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land assets; (iii) coordinating with BPN on certification of the un-registered land assets; and (iv) providing parts of the state budget for the cost of certification. Regarding the stock-taking and appraisal of state assets, the Supreme Audit Agency (BPK) has repeatedly stated in their report that one of the main reasons for the central government financial report always having received a disclaimer opinion since 2004 was the lack of credible and reliable asset data. The process of stock taking and appraisal of state assets, which is the responsibility of the DG of State Asset Management, is therefore a critical activity. Stocktaking and appraisal of state assets, which started in 2007, is completed. However, there are internal and external constraints to the finalization of this exercise. These include: (i) insufficient number of qualified staff to perform registration and valuation of assets; (ii) lack of proper data on assets; (iii) scattered location of assets; and (iv) inadequate attention of top management of line ministries/agencies. In addition, many assets are still registered and valued at Rp 1.00, not reflecting actual value of assets and lowering total asset balance in the central Government’s financial report. The re-evaluation of these assets requires the availability of highly qualified staff and a common understanding on the valuation policy and method between the auditors (BPK, BPKP and IG). A completion report –for all civilian state assets - is expected to be finalized by September 2010 and be submitted by DG State Asset Management to the Minister of Finance and the President. For 2011 (DPL 8), the DG of Asset Management has set a plan to fully implement the state asset management information system database (Modul KN) and to integrate the same with the state asset accounting system (SIMAK-BMN). The integration of these two application modules will be important to improve accountability of spending units in managing state assets. Once these two applications are integrated, and the stock taking and state assets revaluations efforts completed, all state assets will be able to be registered, appraised, recorded and depreciated based on their fair value. This is expected to improve the future opinion on government financial statements and especially the management of the Government assets given by the external auditor (BPK). In 2012 and once all Government assets have been properly registered, a decree must be issued to empower the MoF in its authority to control the use of state assets (DPL 9). This decree will ensure the effective use of state assets and also a more efficient budget, for example by transferring idle assets from one line ministry to another, instead of purchasing new ones. Reform aim: Improve public procurement
DPL 7 (September 2010) DPL 8 (September 2011) Finalized academic papers for draft procurement law and prepared draft procurement law, ready for public consultation process
Draft procurement law submitted to Parliament Adopt strategy and policy for human resources development for the procurement function in Government agencies
The past few years have witnessed improvements in the public procurement environment. Keppres No. 80/2003 provided a national public procurement regulation that meets most of what is generally regarded as accepted international practice, including basic principles: transparency, open competition, economy and efficiency. This decree also paved the way for establishing a regulatory body for public procurement. Perpres No. 106/2007 was signed in December 2007 establishing an independent agency, the Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (LKPP) or National Public Procurement Agency that is responsible for sustainable, integrated, focused and coordinated planning and development of strategies/policies/regulations associated with procurement using public funds. This institution reports directly to the President.
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While Keppres No. 80/2003 is a welcome development for the country, the public procurement system still has significant deficiencies in its regulatory and, more importantly, implementation aspects. There has been slow progress in the development of procurement regulations anchored by a law; slow progress in the development and use of standard tools in terms of bidding documents and users manuals; collusion and corruption practices in the bidding process, as well as significantly inefficient compliant mechanisms and sanction measures. However, the most significant deficiency is the absence of professional procurement management and weakness in procurement capacity in implementing agencies, especially at the provincial and district levels.
LKPP is currently moving on parallel tracks to reform the public procurement system as described below. Both these tracks are supported through DPLs 7 and 8.
Legislative and Regulatory Framework: Indonesia’s legal framework for public sector procurement can be strengthened by anchoring it with an overarching consolidated and comprehensive national public sector procurement law at the highest level. Such law would: (i) establish the fundamental principles and procedures applicable to all public sector procurement; (ii) establish clear responsibilities for a permanent procurement management function within implementing agencies; (iii) amend other laws that refer to public sector procurement; and (iv) put in place the necessary legal authority in a decentralized environment. LKPP has been working on two tracks: preparation of a new procurement law and the revision of Keppres No. 80/2003 in the form of a new Perpres. LKPP has prepared the academic papers on the procurement law and already produced the first draft of the law ready for consultation purposes, as stipulated by the DPL 7 prior action. However, the actual preparation and enactment of a new procurement law may be a lengthy process that would take at least 18 months (thus due for DPL 8) due to the requirement of it being discussed and approved in Parliament. This will require a significant stakeholder consultation process and consensus building. As an interim measure, LKPP has therefore finalized a new Perpres to replace Keppres No. 80/2003. The main reason for this revision was to improve the current Keppres so as to include references to the establishment of Procurement Service Units (ULPs) by 2012, the use of national standard bidding documents, as well as other improvements. This new Perpres was issued in August 2010 and will be effective starting in January 2011. Public Procurement Function and Capacity Building: There have been growing concerns, both by the Government and the development partners over the pace of projects implementation. Significant delays and slow disbursement seem to occur across the entire PFM cycle. The absence of professional procurement management in implementing agencies, fragmentation of procurement responsibility and weak procurement capacity are the most important impediments to improving public procurement in the country. While Keppres No. 80/2003 requires certification of all procurement committee members, the current certification process does not support the development of procurement capacity; whereas the current ad-hoc nature of managing procurement does not allow for building sustainable knowledge within implementing agencies.
LKPP has prepared a draft HRD strategy to professionalize and support the public procurement sector by developing and facilitating a formalized HRD based capacity building process that incorporates: (i) professionalization of the public procurement sector, which includes developing career paths for procurement professionals; (ii) determination of required competencies to carry different functions of procurement; (iii) learning and training programs; and (iv) certification/ accreditation.
LKPP has issued a decree to create procurement service units at all implementing agencies. While there has been progress on the conceptual stage and some implementation activities, this is quite a big agenda that will require work on several areas in parallel in order to achieve the objectives of the strategy. There is need for further assessments and support on the areas of professional development and career paths of procurement staff, support and advice in the formation and practices of ULPs, design and development of a curricula for the core of learning that will lead to the development of professional practice of public sector procurement, as well as a strategy for access to training provision.
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LKPP has agreed to focus its resources on finalization of the human resources strategy that could tackle the challenges in this area and support the development of training institutions in universities and private sector. LKPP would also provide support and guidance to the ongoing pilot activities in establishing procurement teams/units in the MoF, DGH and local governments to ensure support and success of these pilots. Another important subject this human resources strategy should address is the approach to strengthen the capacity of the Government auditing agencies to carry procurement audit. The strategy is expected to be adopted by September 2011 (DPL 8).
Reform aim: Improve Government accounting and audit functions
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012) Submitted to the MoF a Draft Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/2008
Issuance of Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/2008
Development of an internal audit strategy based on the Presidential Regulation on Government Internal Audit Systems
Adoption of a Grand Design for the Implementation of National Government Internal Control Systems (Government Regulation No.60/2008)
BPKP completes and socializes a Control Self Assessment (CSA) manual for the launch of CSAs by line ministries
MOF awards mandate for Government Internal Audit profession (as per Articles 52, 53, and 55 of Government Regulation No.60/2008)
Government Regulation No. 60/2008 has been a cornerstone for Government internal control and audit systems. Through this regulation, the Government has adopted the COSO model as its control framework and also clarified the roles and responsibilities of various players in the internal audit arena. The Presidential Regulation as required by article 58 of Government Regulation No. 60/2008 is expected to further clarify the roles and lay out mechanisms (for planning, executing, reporting and following up) through which the different internal auditors with respect to BPKP (Financial and Development Supervisory Board), IGs and local government inspectorates will exercise their mandate. It is expected to be submitted to the MoF by September 2010 and issued by the President in September 2011. Subsequently, by assigning an agency with the role of formulating the internal audit strategy for the country, the regulation will become the basis for development of an internal audit strategy in 2012. Regarding the implementation of the Government internal control system based on the COSO model, the first step will be to develop a strategy for roll out to various ministries and line departments. BPKP is the agency mandated with the task of facilitating this implementation and it needs to develop the strategy or ‘Grand Design’ by 2011 after consultations with all the stakeholders, to be followed by the launching of Control Self Assessments by the line ministries in 2012. MOF would also award the mandate to regulate the Government internal audit profession. Currently, no institution within the country has that mandate. The intention is to award one institution with the mandate to coordinate the internal audit functions in the country - in terms of writing and updating audit standards, audit manuals, providing training etc. This action is closely related to the development of an internal audit strategy for the country.
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012) Submitted to the President a draft Government Regulation on accrual-based accounting
Issue MoF regulation detailing framework of accrual-based accounting system, including a time frame for development of business processes, accounting policies and chart of accounts
Completion of business processes, accounting policies and chart of accounts for accrual accounting.
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Indonesia is moving towards the implementation of accrual-based accounting. The target is to switch to full accrual accounting by 2015. The draft standards for accrual accounting have already been prepared, are currently with the State Secretariat, and are likely to be issued in September 2010 by the President. The logical next step would be to develop and adopt a detailed plan for implementation including a time frame for developing business processes, accounting policies and chart of accounts. The business processes, accounting policies and the chart of accounts would need to be in place by 2012, so that the training on the standards and pilot implementation of accrual accounting could start in 2013.
Policy Area 3: Enhancing Poverty Alleviation and Service Delivery Reform aim: Improve governance and institutional accountability
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012)Established an inter-ministerial National Team for the Acceleration of Poverty Reduction by Presidential Regulation.
Established an M&E working group in the Executive Secretariat of Office of the VP, by decree from the National Team.
M&E working group submits a plan to the National Team for institutionalizing and integrated M&E framework for major poverty reduction programs.
Findings from the evaluation commissioned by the M&E working group submitted to the National Team.
M&E working group submits an evaluation work plan to the National Team and regularly reports on progress
M&E working group submits a report formulating the design of a centralized MIS to the National Team
Centralized MIS established aggregating program monitoring information.
Conduct a review of international and in-country grievance and complaint resolution models, with options for systems and institutional arrangement.
M&E working group submits a report formulating the design of a unified grievance and complaint resolution system to the National Team.
There is a growing concern on the fragmentation and the lack of coordination in the process and implementation of the national poverty reduction programs. This fragmentation has led to several problems that undermine the effectiveness of the national poverty reduction framework. To address these problems, the Government has re-organized institutional arrangements in this policy area. A Presidential Regulation (No. 15/2010) established a National Team for the Acceleration of Poverty Reduction (Tim Nasional Percepatan Penaggulangan Kemiskinan, TNP2K). The team is supported by an Executive Secretariat, which is responsible for drafting policies and programs, setting targets, developing a database, carrying out monitoring and evaluation, conducting analyses and providing technical and administrative support. It will also be responsible for establishing working groups that will act as “internal think tanks” overseeing coordination of poverty reduction clusters, a national targeting system, and a system for monitoring and evaluation. The Executive Secretariat and its working groups will play a key role in defining policies for poverty reduction and social protection, alongside Bappenas, which will lead a financing team that will be responsible for coordinating and planning financing for the implementation of poverty reduction programs. The executive secretariat will establish a monitoring and evaluation working group that will be responsible for assessing the effectiveness and efficiency of poverty reduction programs through monitoring and evaluation activities. Program performance feedback will also be collected through a unified complaint resolution framework through which program beneficiaries can file complaints concerning the delivery of services. The findings from both monitoring and evaluation activities will inform the decision of the
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National Team about program mix, scale and budget allocations. The working group will be supported by an M&E division in the executive secretariat that will oversee and support working group activities. Reform aim: Improve poverty measurements and targeting of the poor
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012)Revised the methodology to calculate the national poverty line by: i) Completing national poverty line
simulations using alternative measurement methodologies.
ii) Conducting internal consultations in BPS and key government stakeholders to identify a poverty measurement methodology for consideration.
iii) Holding external consultations about the implications of adopting the revised methodology with universities, NGOs and key line ministries.
National Team Secretariat submits policy note with options for methodological revisions to the National Team
National Team endorses the proposed poverty measurement methodology and institutional arrangements.
Socialization strategy for the revised poverty measurement methodology is prepared.
National workshop and press conference are held to socialize the endorsed poverty measurement methodology.
Established a targeting working group in the Executive Secretariat of the National Team, by decree from the Executive Secretariat.
National Team instructs agencies implementing Cluster I poverty program to use the unified database.
Program beneficiary lists are extracted from unified database by the Targeting working group, using eligibility criteria from implementing agencies
Research report issued by the Targeting working group evaluating the targeting effectiveness of current household social assistance (Cluster I) programs.
Policy note issued by the targeting working group on steps required to establish a national unified database of poor households and families, and who should implement each step
Finalization of survey design and data collection procedures for unified database.
Technical team established in BPS that will be responsible for creating the Poverty Map.
Accurate information about poverty conditions across the country is needed to be able to make good policy decisions and allocate resources effectively. The Central Bureau of Statistics (BPS) is currently in the process of revising the methodology and will expand the list of indicators from 14 to 56. This will improve the accuracy in identifying the poor and measuring poverty rates. BPS has completed the simulation of national poverty line using alternative measurement methodology in August 2010. This has been followed by internal consultation with key government stakeholders and preliminary external consultation with universities, NGOs, and key line ministries in September 2010. The consultation is critical to provide the rationale for revision, methodological changes, as well as the implications of the new methodology, which all need to be well documented, disseminated, and socialized, both before and after the changes are implemented. A targeting division, including full-time technical experts, is required to provide the resources and skills to design and implement a national targeting system and unified database, as well as act as the focal point for coordinating targeting actions in Indonesia. This team would conduct analyses of current targeting practices and optimal targeting design, and develop plans for establishing a unified database and the supporting systems required for maintaining it within a national targeting system. They would also initiate dialogue with line ministries to ensure that the unified database contained the required information to assist targeting for each program, as well as to achieve buy-in. To support the development of the database, a report, which outlines the key steps required to establish a national unified database of poor households and families, and
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who are the main agents and agencies responsible for implementing them, is being prepared. This report will serve as a work plan for developing the database. A comprehensive evaluation needs to be conducted of current targeting practices for each of the major targeted social assistance programs. Such an evaluation will document how each program is currently targeted, assess how accurately this is done, and review the nature of those who are incorrectly excluded and included in the program. It will also examine the current state of poverty mapping in Indonesia. Such an evaluation will serve as a starting point for dialogue with line ministries on the need to improve targeting, as well as a baseline against which future improvements in targeting can be measured. A technical team needs to be established within BPS which will be responsible for developing updated poverty maps for all of Indonesia from the Census 2010 currently being fielded. These maps will be very important in the targeting design for both Cluster I and Cluster II programs, as they facilitate the use of geographic targeting below the district level. However, these take time and expertise to develop, and creating a technical team to do this is an important step. An agreement must be reached between the targeting division, central planning agencies such as Bappenas, and each of the line ministries responsible for implementing the various social assistance programs (such as the Ministry of Health), which confirms the universal use of the planned national targeting system and unified database as the primary basis for determining program beneficiaries. The agreement could also include the need for input from line ministries on the nature of information required from the database to support specific program targeting requirements. Such an agreement could be in the form of a MoU, or a legal regulation. The detailed survey design and data collection procedures for the unified database need to be finalized. This would describe the type of information that needs to be collected in order for the unified database to support all current and future targeted programs by identifying a wide range of potential beneficiaries, the criteria for which will vary by program. It would also detail the data collection procedures that should be used at different times and in different areas to optimize coverage of the database while remaining practical to implement. Reform aim: Improve household-targeted poverty reduction programs (Cluster 1)
DPL 7 (September 2010) DPL 8 (September 2011) DPL 9 (September 2012)Executive secretariat working group submitted a policy note on Jamkesmas reform to the National Team, which includes reform recommendations based on a comprehensive program review focusing on financial sustainability.
Executive Secretariat working group submits a policy note on Jamkesmas cost scenarios and a proposed health management information system to the National Team.
The Executive Secretariat working group completes a review of new institutional arrangements for the delivery of Jamkesmas, taking into account actuarial cost estimates and various scenarios for achieving universal health insurance coverage
Review and assessment of programs providing scholarships for the poor is issued by the TNP2K Cluster I Working Group.
The Government will conduct a review of the national health insurance program Jamkesmas, to inform the broader health financing reform and policy discussion regarding the true costs, impacts, and financial sustainability/affordability of achieving universal health insurance coverage. More specifically, the review will: (i) establish diagnosis of the current situation on financing, coverage and utilization of the Jamkesmas program; (ii) assess the program’s financial sustainability based on the current trend; (iii) assess the program’s impact on utilization, financial protection, responsiveness and health gains; and (iv) provide recommendations to improve the Jamkesmas program as a part of the broader health sector reform. This will be accomplished by conducting analysis of the budget of the Jamkesmas program, including tracking
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expenditure at the provider level, coverage and utilization analysis using household surveys, and selected qualitative studies on membership. Concerns have also been raised by the key stakeholders of the Jamkesmas program's financial sustainability. Early attempts to estimate with precision the level of expenditures were hampered by lack of detailed data. Over time, with expansion of the program as well as increased awareness among beneficiaries about the Jamkesmas program coverage, utilization level has increased and is expected to increase further, which would lead to additional financing needs. In order to assess future costs, different cost scenarios including various scenarios of contribution to premium, with varying benefit packages and eligibility will be developed as inputs to the policy making debate. In addition to the development of scenarios, data management systems must be improved to provide reliable data to feed into the scenario development. The Government also plans to assess and review the overall scholarship program in Indonesia particularly those that are related with the poor as part of efforts to improve the scholarship coverage. The assessment will help the Government to improve the existing scholarship program for students from poor households to be better targeted. Reform aim: Improve community-based poverty reduction programs (Cluster 2)
DPL 7 (September 2010) DPL 8 (September 2011) Strengthened PNPM fiduciary systems as outlined in the action plan dated February 16, 2010 by: (i) having documented and publicized major complaints
and the steps taken to address these; (ii) the BPKP in partnership with the Bawasda having
been explicitly tasked with the systematic auditing of PNPM funds; and
(iii) the Ministry of Home Affairs and the Ministry of Public Works having submitted quarterly reports detailing the status of all known complaints to the National Team and to the Joint Management Committee members
PNPM transition strategy: an implementation plan to establish one single participatory planning exercise for all actors/sectors at the village level is adopted by the National Team.
Generasi pilot is expanded to cover 284 kecamatan.
CDD targeting: clear allocation mechanisms for the BLM (Bantuan Langsung Masyarakat) are adopted by the National Team. These mechanisms benefit poor areas; and poor people in less poor areas. Control Team (tim pengendali) to submit to the National Team a proposal for clarifying the role of local government with regard to the transfer of the BLM to communities.
After a decade of successful experience with community-driven development programs, the Government of Indonesia created the National Program for Community Empowerment (PNPM). This poverty alleviation program encourages local communities to participate in the development planning process and provides financial support to communities to allow direct and transparent funding of poverty-alleviation activities which they decide upon themselves. PNPM has robust governance features that result in low levels of “leakage”, fraud, and corruption, helping deliver high quality, lower-cost infrastructure development. The PNPM’s governance features build on twelve years of experience with community development project implementation in the country. PNPM’s Multi-donor Trust Fund includes a window dedicated to strengthening government agencies’ ability to monitor and oversee PNPM and a window to involve civil society and NGOs in the oversight. The program’s website is one of the most robust and transparent websites of the Government, providing information about participating villages, contracts and a forum for grievances, complaints and the status of their follow up. Additionally, the Government’s national, multi-department oversight body for PNPM, Tim Pengendali, has repeatedly made anti-corruption a top priority for the program. As a result, the national audit agency found in 2008 there was non-compliance of less than one percent of total disbursements in 2008. With the national expansion of the PNPM program, the fiduciary systems that were effective when the program was working on a smaller scale have come under stress. This is illustrated by a gradual increase in
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the number of complaints over the last few years. Both the percentage of total disbursements for which complaints have been registered (less than 0.2 percent of total disbursements) and the average size of these cases (about US$2,800 per case) remain small. Nevertheless, the Government decided to take measures to ensure that the strain on the fiduciary systems would not translate in an overall degradation of the robustness of PNPM's governance. In light of this, the Government has articulated an action plan to ensure that the PNPM fiduciary systems remain robust. The action plan includes the following specific deliverables: (a) communication of political will with zero-level tolerance on fraud and corruption; (b) strengthening of systems to monitor, report, and act on complaints; and (c) strengthening of capacity through involvement of the Attorney General and Bawasda (local district inspectors) and through appointment of additional fiduciary staff in all. On the specific implementation of the action plan, the publication of details and the status of reported cases has been done in local newspaper and appears as well in the program website. The publication of complaints/cases will be done monthly. In terms of strengthening the capacity of fiduciary staff in auditing, the Government has made a formal agreement between the Financial and Development Supervisory Board (BPKP), Inspectorate General, and PMD, for Inspectorate Kabupaten (ItKab) to support BPKP in PNPM audits. PMD has committed funds to pay for the training of trainers in Jakarta and the training of ItKab auditors in the provinces. A MoU for the audit of PNPM FY2010 has been signed by all parties in August 2010. To monitor all the corruption cases, the Ministries of Home Affairs and Public Works will submit quarterly reports detailing the status of the cases to the National Team and to the Joint Management Committee members. One of the priorities identified by the Office of the Vice-President is to aggressively push for further consolidation of a multitude of CDD programs at the local level. A proposal is currently under preparation to support this effort with: (a) an assessment of existing budget allocations and implementation arrangements; (b) an analysis of core design principles of various CDD programs; and (c) an analysis of the implementation arrangements at the local level. The result of this work would be a transition strategy with specific action steps towards consolidation of CDD programs at the local level. The interaction between CDD and sector service delivery will be improved. This work will build on the Generasi pilot whereby the principles of conditional cash transfers (CCT) are applied to communities to improve specific health and education MDG and will comprise two different activities: first, a broad discussion of the second phase of impact evaluation data of the Generasi pilot, and second, a “learning by doing” exercise whereby the social capital created through the PNPM will be tapped into to improve Early Childhood Education. The result of this work would be a set of policy and design recommendations with regard to expansion of the Generasi pilot, and an assessment of the comparative advantage of various stakeholders (communities, Dinas, etc.). Currently, the Government is considering to discontinue block grants to communities in less poor kecamatan who have participated in the program for three years. To inform the design of future phases of the program, it is important to have a better understanding of how the program can best reach the poor in less poor areas. As part of the broader efforts to strengthen targeting, a proposal is under preparation to assess how PNPM can best reach poor in the less poor areas as well as to develop a clear allocation mechanism of the block grant for this process. Another proposal will also be prepared to clarify the role of local government on the transfer of block grant to the communities.
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Annex 6: Technical Annex on Public Financial Management (PFM)
I. Background and Analytical Underpinnings
The DPL 7 operation sets out to provide general budget support to the Indonesian Government and will be executed through the Government’s public financial management (PFM) systems. In order to assess the attendant fiduciary risks with respect to the proceeds of this operation, this annex summarizes the current state of these systems as well as ongoing reform efforts to further enhance them. Performance of Indonesia’s public financial management systems was last comprehensively measured in 2007, when a PEFA assessment was conducted for the first time in the country. Results of this assessment, as updated in 2008, then reflected a mixed picture with strengths and weaknesses. Key strengths pertained to transparent and comprehensive budget documentation, a well defined budget process with both executive and legislative adhering to the schedule, a budget classification which complied with international standards and a strengthened external audit function. Weaknesses, on the other hand, were identified across some dimensions of budget execution such as financial reporting and internal controls. However, the assessment acknowledged the concerted reform efforts among key stakeholders of the budget process ever since the political transition in 1998 and especially the PFM White Paper in 2001. It highlighted the sound regulatory framework that had been put in place for almost all PFM areas, the major reorganization that had taken place at the Ministry of Finance, the advances that had been made in budget preparation such as instituting a unified budget, and, even in the area of budget execution, the good progress that had been achieved in the development of a Treasury Single Account to strengthen cash management. All these efforts were said to have contributed to relatively strong PFM systems in some areas and left one optimistic about others. The Government’s commitment to reform continued to be strong also in the past three years, and the reform agenda has been evolving continuously around all pillars of the budget system — most recently under a newly elected Government and an even more recently appointed new Minister of Finance. Its main objectives have thereby remained the same. They are commonly described as: (i) improving results-orientation in state budget planning and development; (ii) improving budget and treasury management; (iii) strengthening monitoring and evaluation of public expenditures and programs; (iv) improving the public procurement systems; (v) improving Government accounting and audit functions; and, last but not least, (vi) civil service to improve the quality and performance of the workforce. We are including also reforming: (vii) debt management; and (viii) regional public financial management; as well as (xi) governance and anti-corruption. To what extent more recent efforts have impacted on actual PFM systems quality will be evaluated soon in a PEFA repeat assessment, currently envisaged for late 2010. But the below descriptions of ongoing reform activities might be indicative for the direction developments have taken, and Indonesia’s successful mastering of the recent economic crisis surely tells us that it must have been the right one. The commentaries below draw on recent economic and sector work undertaken by the World Bank and other development partners. Besides the aforementioned PEFA assessment, we have taken into consideration the findings of a joint Bank-Fund mission on Strengthening Budget Management undertaken in June 2008, the results of a previous joint Bank-Fund mission on Budget Reform Priorities reported to Government in June 2007 and the September 2008 update of the ROSC on Fiscal Transparency in Indonesia from 2006 (IMF Country Report No. 08/298, Selected Issues; Indonesia). Most importantly, however, insights on latest reform progress were derived from the ongoing policy dialogue and advisory services that have been provided through GFMRAP and the associated PFM Multi-Donor Trust Fund. In addition, GMFRAP supervision missions took stock of reform progress in 2009 and 2010.
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II. Reform Priorities: Achievements, Challenges & the Way Ahead
1. Improving Results-Orientation in State Budget Planning and Development As indicated in the 2008 PEFA report, substantial advances have already been made in Indonesia’s budget preparation process since the passing of the Law on State Finances in 2003. The introduction of a unified budget in 2005, which combined the previously separate recurrent and development budgets, has had a significant impact on overall budget transparency. The 2008 budget included some important steps towards a more policy based budget by linking budget allocations more closely with the Government work plan (RKP) — resulting for the first time in some significant budget reallocations. In addition, the 2008 budget included for the first time projections for major budget aggregates for two out years following the fiscal year. However, it remained uncertain what use would be made of these projections, in particular whether they would be used as reference in setting budget allocations in the years following the budget years. Generally, the PEFA report indicated that more work needed to be done to implement Performance Based Budgeting (PBB) and a Medium-Term Expenditure Framework (MTEF) in order to ensure that policy orientation and fiscal sustainability would become an integral part of the Indonesian State Budget, as prescribed by the Law on State Finances No. 17/ 2003. Ever since the PEFA report, the Indonesian Government has maintained a strong reform focus and continued to prioritize the implementation of PBB and MTEF in budget preparation. It has progressed quite well in this area: Following the issuance of a joint MoF and Bappenas manual on PBB and MTEF in June 2009 and pilot projects with six line ministries, a major breakthrough for PBB/MTEF implementation has been the revision of the existing program structure in the Government’s planning and budgeting documents that was conducted throughout the second half of 2009. The new program structure aligns Government programs with organizational structures and establishes much clearer lines of accountability for program performance. Along with the new program structure, line ministries have also formulated targets and indicators, which provide a better basis for evaluating the performance of programs and activities in the coming years, thus fulfilling a fundamental prerequisite of PBB. The new programs, targets, and indicators have been incorporated in the RPJM for 2010-14, and are currently being implemented in the FY2011 budget. The 2011-budget is also the first year of implementing a detailed MTEF. Ministries have prepared budget estimates for two years following the fiscal year (2012 and 2013) and incorporated them into the budget documentation presented to Parliament in August (though Parliament will not be appropriating funds beyond the fiscal year). MoF regulation No. 104/2010 concerning the completion of budget submission or RKA-KL templates for 2011, contains detailed guidelines for preparing these forward estimates at the level of components. In May and June 2010, a number of workshops for all line ministries were conducted to socialize these new concepts, templates and the changes to the RKA-KL application. The Government is aware that this is an exercise that will have to be continued going forward, such as for the 2012 budget. The Government also recognizes that PBB/MTEF implementation needs to be strengthened further. For the near term (1 year) there is a need to improve the quality of program structures and performance indicators and to fine-tune the existing MTEF and costing system. For the medium term (2-4 years) the focus of budget reforms should gradually shift towards (i) developing a PBB-driven Monitoring and Evaluation (M&E) system and related concepts (see also point 2), such as a concept of how performance information could impact on budget allocations in the future, (ii) enhancing capacity to conduct a range of modern budget analytical techniques in accordance with PBB and introducing the appropriate change management and organizational arrangements, and (iii) strengthening the link between budget and bureaucracy reforms, in particular the link to performance management. (The MoF has introduced strategic performance management based on the Balanced Scorecard (BSC) performance management tool for all Directorates in the Ministry. Some BSC indicators correspond with PBB indicators, and, while still at an early stage, the link between PBB and performance management has the potential to provide stronger managerial incentives
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for successful program implementation.) A joint roadmap to address the above points and to help plan and sequence budget and planning reforms going forward is currently being developed by the MOF and Bappenas, with assistance from World Bank advisors. In terms of legislative oversight, the Parliament’s (DPR) new role in shaping the state budget and in overseeing budget processes was institutionalized in Law No. 27/2009. According to this law, two new arrangements were implemented by DPR with regards to budget preparation and oversight procedures in 2009. Firstly, the former Budget Committee became the Budget Board (Badan Anggaran) and a permanent entity of DPR responsible for the endorsement of the state budget. Secondly, the State or Public Finance Accountability Board (Badan Akuntabilitas Keuangan Negara) was established as a permanent entity of DPR to review audit results of state financial reports prepared by the State Audit Agency (BPK). Although not mandated in the law, preliminary planning started also for the establishment of a Parliamentary Budget Office (PBO), which is intended to provide support for the implementation of the budget function of Parliament through providing data, information, analysis and research needed by the members of Parliament in their discussions of the annual state budget. On top of these new institutional arrangements, DPR now needs to continue building: (i) independent support and research capacity to support legislative budget review; (ii) general capacity development in budget analysis and oversight including familiarity with PBB and MTEF; and (iii) follow-up of external audit findings to ensure that the executive is held accountable for transparent and efficient budget execution. Capacity building of DPR is thus to remain an important pillar in the reform framework.
2. Improving Budget and Treasury Management Though significant advances have been made on the budget preparation side, in-year expenditures continue to deviate from plan. This spending pattern is of concern because project implementation is disrupted by an adverse cycle, and under-spending on capital expenditure constrains increases in infrastructure investments. However, Indonesia remains committed to smoothing budget implementation and execution through modernization of the treasury system. Most of the regulations to support the implementation of the State Treasury Law of 2004 have been implemented while others are being finalized. The design and implementation of an automated treasury payment and budget preparation system (Sistem Perbendaharaan dan Anggaran Negara, or SPAN) is in hand. SPAN, as a cross-cutting reform, will increase the timeliness, reliability and transparency of budget disbursement and reporting as well as improve the capability of managers in the efficient management of public resources. Business process improvements in the area of budget formulation and budget execution have started and are expected to be completed within the next 4 months. The change management and communication aspects related to the implementation of SPAN will be addressed from the last quarter of 2010 till the completion of the pilot phase. The SPAN turnkey implementation vendor has commenced the configuration of the COTS application software and commenced work on site preparation for installation of servers and Data Recovery Centre. The Treasury Transformation Directorate, which will focus on SPAN implementation, is working closely with the Business Process Consultants and the SPAN turnkey provider to define and configure the future treasury processes. The SPAN project is being closely monitored by a special advisor to the Finance Minister through weekly meetings, and, emerging issues and risks dealt with in a timely manner. Ministerial decrees establishing a project governance system for SPAN have been implemented. SPAN is projected to become operational in the central treasury beginning 2011, and then rolled out to the KPPNs and pilot line ministries starting 2012. It will then replace the multitude of financial data processing applications currently used by Government institutions. Latest challenges for the MoF in the SPAN implementation process include a review and reformulating of the chart of accounts, development of business processes for reporting non-financial performance data, and
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the strengthening of PUSINTEK’s capability to serve as a central ICT services provider for SPAN. The capacity building needs for both preparatory and implementation activities under SPAN will thus be considerable, and continued advisory services to facilitate the implementation of treasury reforms in general, and SPAN in particular, will be necessary. Also, there is a recognized priority for building the capacity on accounting standards, including migration to accrual accounting and related requirements for training of staff. Cash management has improved significantly with the continued implementation of the Treasury Single Account (TSA), and since 2007 the TSA for expenditure management has been made operational in all MoF Treasury offices. The TSA system has been extended to cover revenue collection bank accounts which are now swept daily to the TSA. The MoF and BI have already signed an agreement providing for payment of interest on government cash balances held in the TSA with BI. Interest is also collected on cash balances held in petty cash bank accounts of spending units through a system of “pooled” balances computed daily. However, the periodic census of government bank accounts continues to report a number of accounts still outside the coverage of the TSA. The Treasury is taking steps to review and incorporate most of these bank accounts into the TSA in a phased manner. Cash flow forecasting has been rudimentary and the poor quality of cash forecasts is one of the factors resulting in year-end bunching of expenditures. The accelerated draw down of government cash balances in December perpetuates wasteful procurement practices and also impacts monetary policy. To improve cash planning in the spending units and improve cash forecasting data, the Treasury issued detailed regulations on cash forecasting in November 2009. The Treasury has also developed and rolled out application software to assist spending units in implementing the new regulations. Training and socialization for all Satker in the implementation of the new regulations and software is on-going. A joint WB-IMF assessment of the GoI’s Asset and Liabilities Management (ALM) carried out in mid-2009 indicated that the uncoordinated management of the gross asset-liability portfolio of the Government and BI could lead to substantial risk to the overall balance sheet. The risks need to be mitigated through optimization of borrowing and better reserve management.
3. Strengthening Monitoring and Evaluation of Public Expenditures and Programs
To ensure more effective development planning and policy making, an improved capacity to analyze the efficiency of public spending is essential. Several analytical pieces have been produced in the last few years, and efforts by Bappenas and the MoF, especially through the IPEA initiative, to improve the quality of public spending and the delivery of public services should be further supported. One important aspect going forward will thereby be the development of an underlying monitoring and evaluation (M&E) system that would bring together and interlink government financial data and performance information, and so provide a basic framework and reference tool for more performance-oriented budget analysis and policy-making, in line with the principles of PBB and MTEF reform.18 Efforts to develop such an M&E system are already underway, and the objective is to have a fully functioning M&E system in place for the next RPJMN. This will require the establishment of procedures to retrieve performance data and the design of reporting as well as ensuring that performance data is measurable and of high-quality. Performance information was, as mentioned above, for the first time developed by all ministries for their respective programs and activities in the form of outcome and output indicators in 2009 and implemented with both the RPJMN 2010-2014 and FY2011 budget. Quality of this information needs to be further reviewed, and the idea is to conduct a yearly evaluation exercise of the 18 Such a system would not only be crucial for PBB and MTEF reform but would also assist the Ministry of State Apparatus Reform in evaluating the
performance and accountability of government institutions, the Special Working Unit of the President (UKP4) by providing a substantive context by which to evaluate achievement of short-term (bimonthly) physical program outputs, and, the individual line ministries in efforts to improve their programs, activities, and self-assessment of internal monitoring and evaluation systems.
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performance information provided by line ministries to enhance their quality incrementally over time. A final M&E manual for the line ministries on how to formulate and report performance information is then, as aligned with the next RPJM schedule, envisaged for 2013. The Deputy of Performance Evaluation (DPE) at Bappenas is currently taking the lead on this agenda and has just recently initiated efforts to review the new performance information and the development of a reporting system, with one Directorate assigned particularly to the ‘development of overall monitoring evaluation systems and methods of reporting’. (An M&E counterpart unit at DG Budget of the Ministry of Finance is currently under planning). To this end, DPE has developed a M&E template to collect information from all line ministries and agencies regarding the output and outcome indicators specified in the Line Ministry Matrix in Book II of the RPJMN 2010-2014, and more particularly on: (i) budget absorption and achievement of target indicators; (ii) quality of data sources; and (iii) recommendations regarding priorities for future evaluations. As mentioned, the launch of this template is the first of a yearly series of reporting tests to identify difficulties and shortcomings in the reporting on indicators and critical steps for further improvement of the Government’s M&E system. Through a series of workshops the template will be piloted to in six ministries — health, education, agriculture, public works, planning and budgeting — before it will be socialized to all line ministries at a later stage. Once the templates are completed, an outside research consulting firm will be procured to analyze in depth the internal monitoring and evaluation systems in the individual line ministries, probably starting the end of this year. Detailed next steps of the M&E systems assessment exercise, including for the coming years (until 2013), will be based on these findings. One of the more immediate steps, however, will be the revision and streamlining of the regulatory framework on reporting. This is still fragmented, as it assigns different and, at times overlapping, roles in monitoring and evaluation to Bappenas, the MoF and MenPAN. Ultimately, the design of the reporting system as part of the SPAN solution will be another important issue to address.
4. Improving the Public Procurement System The past few years have witnessed improvements in the public procurement environment. Keppres No. 80/2003 provided a national public procurement regulation that meets most of what is generally regarded as accepted international practice, including basic principles: transparency, open competition, economy and efficiency. This decree also paved the way for establishing a regulatory body for public procurement. With the introduction of Keppres No. 80/2003, a previous certification (“pre-qualification”) process for suppliers/ providers of goods and services was, in most instances, abandoned by the Government. Keppres No. 80/2003 also established the basis for sanctions, complaint-handling and requirements for certification of users. Perpres No. 106/2007 was signed in December 2007 establishing an independent agency, the Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (LKPP) or National Public Procurement Agency , that is responsible for sustainable, integrated, focused and coordinated planning and development of strategies/policies/regulations associated with the procurement of goods/works/services using public funds. This institution reports directly to the President. In addition to the chairman, who heads LKPP, and an executive secretary, there are four departments, each headed by a deputy with responsibilities for: (i) strategy and policy development; (ii) monitoring, evaluation and information systems; (iii) human resources development; and (iv) legal affairs and settlement of objections. While Keppres No. 80/2003 was a welcome development for the country, the public procurement system still has significant deficiencies in its regulatory and, more importantly, implementation aspects. There has been slow progress in the development of procurement regulations anchored by a law; slow progress in the development and use of standard tools in terms of bidding documents and users manuals; collusion and corruption practices in the bidding process; and concerns over the efficiency of the compliant mechanisms and sanction measures are still significant. However, the most significant deficiency is the absence of
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professional procurement management and weakness in procurement capacity in implementing agencies, especially at the provincial and district levels.
This is supported by the findings of some analytical tools and reports such as the self-diagnostic assessment conducted by the GoI in 2007 using the base-line indicators (BLIs) tool developed under the World Bank and OECD Development Assistance Committee Procurement Round Table initiative. The assessment of the BLIs presents a “snapshot” comparison of the actual system against the international standards or the “model system” that the BLIs represent. Baseline bench marking of Indonesia’s procurement system in June 2007 showed it scoring 62.5 percent for the Legislative and Regulatory Framework (PILLAR I), 55 percent for Institutional Framework and Management Capacity (PILLAR II), 59.3 percent for Procurement Operations and Market Practices (PILLAR III) and 69 percent for Integrity and Transparency of the Public Procurement System (PILLAR IV) in comparison with recognized international standards. While the establishment of LKPP should increase the overall score for Pillar II, the assessment indicates that there are significant areas that need improvement.
The LKPP is currently moving on parallel tracks to reform the public procurement system as follows:
Legislative and Regulatory Framework: Indonesia’s legal framework for public sector procurement can best be strengthened by anchoring it with an overarching consolidated and comprehensive national public sector procurement law at the highest level that: (i) establishes the fundamental principles and procedures applicable to all public sector procurement; (ii) establishes clear responsibilities for a permanent procurement management function within implementing agencies; and (iii) amends other laws that refer to public sector procurement and ensures that such a law has the necessary authority in a decentralized environment. LKPP is currently working on two tracks: the preparation of a new procurement law and the revision of Keppres 80 to be issued under a new Perpres. The LKPP has prepared the academic papers on the procurement law and has produced the first draft of the law. The preparation and enactment of a new procurement law may be a lengthy process that would take at least 18-24 months due to the requirement of it being discussed and approved in Parliament, which will require significant stakeholders consultation process and consensus building. As an interim measure, LKPP has finalized a new Perpres to replace Keppres 80. The main reason for this revision is to improve the current Keppres such as including references to the establishment of Procurement Service Units (ULPs) by 2012 and use of national standard bidding documents as well as other improvements. This new Perpres has been submitted to the President office and is in the final round of consultation and is targeted to be issued in third quarter of 2010 and to be effective starting January 2011.
Currently, there are no national standard bidding documents that are used regularly by all government agencies in the country. Some implementing agencies (such as the Ministry of Public Works) have developed standard bidding documents for their own use. NPPO (the predecessor of LKPP), has drafted seven National Model (Standard) Bidding Documents: (1) An Explanatory Guide; (2) Goods with Pre-qualification; (3) Goods with Post-qualification; (4) Works with Pre-qualification; (5) Works with Post-qualification; (6) Other Services with Pre-qualification; (7) Other Services with Post-qualification; and (8) Consulting Services, that are now available in a draft form. The use of these documents is still not mandatory and they are being used on a pilot basis. With the support of a trust fund from the MDTF-PFM, LKPP is planning to review these documents to make them consistent with the new Perpres as well as to increase harmonization with the standard bidding documents of International Development Partners such as the World Bank, ADB and JICA.
The approach of LKPP towards preparing a procurement law and reviewing Keppres No. 80/2003 is reasonable and will ensure phased progress within the Government’s agenda and the working mechanisms between the different agencies (LKPP, ministries, Parliament etc.). To maximize the opportunity for reform when preparing a procurement law, it is important to take into consideration that a number of laws have been enacted since 2000 that impact, or make reference to, public procurement. These include construction
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law, state finance, treasury, audit and small-scale business. The pace of Indonesia’s decentralization reforms has impacted public sector procurement at all levels of government, with ministers, governors, and even mayors able to issue decrees, regulations and instructions. The plethora of regulations is often inconsistent and many regulations do not meet accepted international practice. Consequently the need for national procurement policies and standards are critical. Public Procurement Function and Capacity Building: There has been growing concerns, both by the Government and the Development Partners over the pace of projects implementation. Significant delays and slow disbursement seem to occur throughout the entire PFM cycle. Projects reported delays and difficulties in budget preparation and approval, budget execution, and implementation/procurement. Specifically, there are concerns with the organization of the procurement management function as well as the capacity of procurement committee members. While Keppres No. 80/2003 requires certification of all procurement committee members, the current certification process does not support the development of procurement capacity while the current ad-hoc nature of managing procurement does not allow for building sustainable knowledge within implementing agencies.
The LKPP has prepared a draft human resources development (HRD) strategy to professionalize and support the public procurement sector by developing and facilitating a competency based capacity building process that incorporates: (i) professionalization of the public procurement sector which includes developing career paths for procurement professionals; (ii) determination of required competencies to carry different functions of procurement; (iii) learning and training programs; and (iv) certification accreditation
LKPP has issued a decree to create procurement service units at all implementing agencies. It has also commissioned a competency assessment survey to determine the required competencies for procurement professionals. While there has been progress on the conceptual stage and some implementation activities, this is quite a big agenda that will require work on several areas in parallel in order to achieve the objectives of the strategy. There is need for further assessments and support on the areas of professional development and career paths of procurement staff, support and advice in the formation and practices of ULPs, design and development of curricula for the core of learning that will lead to the development of professional practice of public sector procurement as well as a strategy for access to training provision.
In the meantime, there are several ongoing activities to improve procurement management in implementing agencies. The Directorate General of Highways (DGH) in MoPW has established a procurement team to support overall procurement in the DGH. MoF has already established a procurement function with an Echelon II level manager which is a significant precedent in the country. At the local governments’ level, there are some ongoing activities which some are supported by the Bank Funded local governments’ projects (ILGRIP and USDRP).
So far, there are several initiatives on this area but progress is still very slow. The absence of professional procurement management in implementing agencies, fragmentation of procurement responsibility and weak procurement capacity are the most important impediments to improving public procurement in the country. LKPP should focus its resources on finalization of the human resources strategy that could tackle the challenges in this area and support the development of training institutions in universities and private sector. LKPP should also provide support and guidance to the ongoing pilot activities in establishing procurement teams/units in MoF, DGH and local governments to ensure support and success of these pilots. Another important subject this human resources strategy should address is the approach to strengthen the capacity of the Government auditing agencies to carry procurement audit.
Corruption, sanctions and independent appeals mechanism: Despite improvements in the public procurement system, concerns remain over corrupt and collusive practices. While addressing this requires an overall governance strategy (as addressed further below), there are several important elements in the procurement system that can support such a strategy, for example an independent complaints mechanism, an effective sanctions mechanism, and improving transparency in the procurement process through the use of e-procurement.
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Keppres No. 80/2003 requires the establishment of a complaints handling mechanism. However, this is not set up independently but within each implementing agency. LKPP has yet to finalize its strategy to approach complaints handling. While it is imperative to develop procedures for an independent complaints handling mechanism, LKPP should avoid becoming the agency to which these complaints are addressed but rather develop a system and monitor its efficiency and reliability. The sanctions mechanism is operated by each implementing agency, in accordance with Keppres No. 80/2003 requirements. There is no clarity on the effectiveness of this system, which warrants an assessment to be conducted by LKPP on the effectiveness of the current sanctions mechanisms and possible improvements in the implementation process.
E-procurement: The Ministry of Public Works, Ministry of Communications and Information and the City of Surabaya have all been at the forefront in the development of e-Government Procurement (e-GP) technology. The LKPP is currently taking the lead on the implementation of e-GP in Indonesia at a national and sub-national level. The semi e-procurement system in MoPW has handled around 60 percent of all planned procurement activities for 2010, with a total of 6,500 contracts and a total value of US$1.5 billion. The Minster of Public Work has recently issued a decree requiring the use of semi e-procurement in all MoPW procurement in 23 provinces and the use of e-procurement plus (allowing electronic submission of bids) in ten provinces in Java, Riau, South Kalimantan, Bali, and Gorontalo. To date, agencies have been constrained in allowing submission of only electronic bids on-line due to the existing regulations. The interpretation of the current legislation on public procurement requires the submission of a hard copy in addition to electronic submission for final verification. In practice, the lowest three bidders still have to submit hard copies. This will require verification of the hard copy with the electronic submission leading to possibilities of errors and delays, which is not a good practice and does not qualify the system as a full e-procurement. To address this, LKPP is in the process of preparing a Presidential decree organizing e-procurement and expects that it will be issued within a year. Once effective, agencies can then use the full e-procurement with only electronic submission of bids. It will also be critical for government agencies to agree on a roadmap for the development of e-GP in the country, setting the roles of the different stakeholders, and the responsibility for ensuring minimum inter-operability and core data standards for the various e-GP providers to comply with.
5. Improving Government Accounting and Audit Functions
Accounting and Reporting on Budget Execution
BPK has given a ‘qualified’ opinion on government financial statements for 2009. This is the first time that government annual financial statements have come out of a ‘disclaimer’ status in the last five years. In the past, even though the aggregate Government Annual Financial Statements have been prepared in a timely manner, they continued to receive a ‘disclaimer’ audit opinion from the external auditors. The major qualifications in the audit report relate to mismatch between budget classifications and the realizations, problems in assets management and under-recording of pension funds. BPK also identified some key internal control weaknesses in the Government’s functioning. However, there has also been an improvement in the number of line ministries receiving favorable opinions from the external auditors. The number of line ministries with clean opinion has increased from 16 in 2007 to 34 in 2008 to 45 in 2009. The number of ministries with disclaimers has come down from 33 in 2007 to 18 in 2008 to 8 in 2009.19 Capacity constraints in the line ministries are the biggest challenge. The number of trained accountants in line ministries and sub national governments is low, and the quality of their work needs improvement. DG Treasury has an ambitious training program in place — with 15,600 ministry staff trained between 2007 and 2009. But this is only a short term solution and in the long term, there is a need for sustained and continuous training of staff from line ministries. There is an Education and Training Unit 19 Of the 79 line ministries, 45 received an unqualified opinion, 26 qualified and 8 disclaimer and adverse.
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within the MoF which is considering a plan for working with regional universities to institute such a program. However, the plans are at an early stage at this point. The annual financial statements are prepared on an accrual basis and there is a plan to move to full accrual accounting for line ministries and sub-national governments by 2015. The accounting standards for accrual accounting have already been drafted and are currently undergoing a review process. The next step would be to issue a regulation detailing a framework of the system including a sequenced time frame for development of business processes, accounting policies and chart of accounts. The business processes, accounting policies and chart of accounts are expected to be completed by 2012 to start pilot implementation in 2013. In June 2010, the MoF and the Bank jointly organized an international workshop on accrual accounting to invite experts from other countries to share experiences and shape the implementation plan in Indonesia. One of the issues that was highlighted in the workshop was the need to focus on human resources issues in the switch over to accrual accounting and the MoF would need to play close attention to training and capacity building of accounting staff throughout the country.
Internal Controls and Internal Audit The PEFA assessment of 2007/8 classified weaknesses in control execution as a significant risk to reforms introduced in other areas of PFM. The internal audit function in the country was classified as fragmented and characterized by weak capacity. Key reform priorities in the area of internal control and internal audit therefore are: (a) roll out of SPAN; (b) implementation of the COSO control framework and (c) rationalization and strengthening of internal audit function of the GoI. As mentioned already above, the SPAN turnkey provider has commenced work on configuring the COTS application software and roll out is targeted for 2013. The new business processes being configured in SPAN are expected to strengthen internal controls by introducing a formal commitment control system in the line ministries, ensuring adherence to the budget ceilings, reducing the time lags in processing payments and budget revisions, and maintaining electronic trails of all modifications to source data. However, the limited capacity in the MoF and other line ministries, and ownership of the program by the business owner are key challenges. To address this, the PFM team in the Bank is closely engaged in the process. In addition, a business process review is underway and change management consultants are expected to be on board at the end of September 2010 to help DG Treasury deal with human resources issues through the transition. Through Government Regulation (PP) No. 60/2008, the GoI has adopted COSO as its internal control framework. The regulation embraces the core principles of the COSO framework in a comprehensive manner but key challenge lie in the implementation of the framework. The GoI regulation entrusts BPKP with the role of designing the internal control implementation, by providing guidance and training to the line ministries on COSO implementation. In June 2009, BPKP and the MoF, with assistance from the Bank, organized COSO workshops for management and auditors to socialize concepts and implementation experiences related to COSO. Also, BPKP is in the process of preparing an ambitious strategic plan for COSO implementation which may start through some pilots in line ministries. It thereby receives support from the Bank through some grant funds. The limited capacity at BPKP in implementing major reforms and limited interest from the management of line ministries remain significant challenges. However, implementation of COSO is currently only at planning stage, and implementation on a pilot basis may begin only in 2011. On internal audit, the quality of audit by Inspector Generals (IGs) in line ministries and in local government inspectorates remains sub-optimal with little focus on risk-based audit. Lack of trained and skilled auditors and scale of the country with local government inspectorate auditors in over 500 locations makes the task of
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reforming the internal audit function in the country really challenging. It is important that a central agency assumes the role of coordination of internal audit function in the country. A Presidential decree regulating Government Internal Audit Systems as required by Article 58 of Government Regulation No. 60/ 2008 that is currently being drafted by BPKP is expected to address this issue. However, the decree has to undergo an elaborate consultation process and is expected to be issued only in 2011. Meanwhile, some of the IGs in line ministries, including the MoF and the MPW, have embarked on a significant modernization of their functions. The IGs of both the MoF and the MPW have adopted a risk-based approach to internal audit and are engaged in a review of technical skills of their staff and technical guidance available to them.
External Audit A peer review for BPK that was conducted by the Dutch Court of Auditors in 2009 came out largely positive. According to this review, BPK had made major strides in its mandate, capacity and practices in the last five years. The Dutch Court of Auditors commended BPK on improving the quality assurance system in the institution, on its effective communications strategy, comprehensive standards and guidelines for auditors, and a well defined code of conduct. The report noted the significant growth in the budget, the number of staff and the number of regional offices.20 The report also identified some areas for improvement, mainly the need to improve the readability of audit reports and the quality of analysis in the audit. However, the peer review concluded that BPK was on the right track and had made major improvements in its functioning in the last five years. A new BPK Board took office last year. BPK is now starting to work on a new strategic plan for the 2011-15 period. The new strategic plan would reflect both lessons from the peer review and the vision of the new Board. The Bank is supporting the preparation of the new strategic plan, which will be supported by a detailed implementation plan through grant assistance. BPK has bilateral arrangements with many other SAIs that have helped BPK in procuring specialized skills in many areas. Its arrangement with NAO Australia, for instance, has helped BPK in acquiring technical skills in the area of performance audit. The Dutch and Norwegian SAIs are also actively supporting BPK. BPK has been able to submit the audited financial statements within 5 months of the end of the fiscal year for the past five years. BPK also submits interim audit reports to the Parliament every six months.
6. Civil Service Reform In late 2006, the Ministry of Finance initiated the Bureaucracy Reform Initiative (BRI). Through this initiative it has focused on reforming organizational structures and standard operating procedures (SOP), and on reforming HRM policies and practices to adhere to the established reform objectives: (i) to create a clean, professional and accountable state apparatus; and (ii) to create an efficient and effective bureaucracy so as to provide high quality public services. Ministerial Decree No. 30/KMK.01/2007 outlines the reforms in detail. A key element of the BRI has been to increase staff pay through an additional allowance, a budget allocation for which is approved annually by Parliament.21 The BRI has led to many important outcomes in the MoF: professional quality of new staff has improved and accountability is better enforced including strengthened work discipline; corruption has decreased in spite of backlashes within DG Customs and within DG Tax; performance of staff has improved and key 20 The number of BPK staff has risen from 2,854 in 2004 to 5,556 in 2009. The annual budget for FY10 is Rp 2.02 trillion compared with Rp 234
billion in 2004. 21 Note: The BRI was deemed so crucial that when approving the extra allocation for the first time in 2006, the Parliament decided to expand the BRI to the State Audit Institution (BPK) and the Supreme Court on a pilot basis. In 2007, the National committee for Bureaucracy Reform was set up to coordinate reforms among institutions and provisions were included in Law No. 17/2007 on Long and Mid-Term Planning mandating all 73 central government institutions to implement BRI before the end of 2011 in support of which MenPAN has issued regulations and voluminous guidelines related to the reform process.
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performance indicators have been introduced at the level of Echelon 1 units including signed performance contracts for the responsible managers; and service delivery has been simplified and speeded up within DG’s with client relations. Below are some of the most important achievements: Some 8,000 SOPs have been revised to improve efficiency and to minimize direct non-transparent
interaction between MoF officials and members of the public.
Almost 20,000 job descriptions have been revised to better reflect professional requirements, job responsibilities and complexities.
A new grading scheme has been introduced on top of the general grading scheme (17 grades) linked to the reformed job descriptions and allocating positions to one of 27 additional grades.
A new allowance, linked to the new additional grades, has increased take-home pay for MoF officials considerably.
Performance based management has been introduced and KPIs have been defined to the level of echelon 1 while the cascading down to lower levels is still ongoing.
Recruitment criteria and processes have been significantly improved and today the MoF only recruits PNS candidates that have gone through STAN.
An Assessment Centre has been created and a large network of assessors established. • A selection process for promotion based on internally announced vacancies, voluntary applications
and competitive selection based on merit has been piloted. • Competency based training is more and more replacing ―structuralǁ training • Improved Human Resources Information System (HRIS) is under development • Permanent Project Management Units have been established in DG Tax and in DG Treasury
In April 2009, the Minister of Finance announced the second chapter of BR, with the human capital development and information system for human resources as key priorities. In connection with previous reforms, other issues also materialized and more areas were identified as targets for reforms for the second chapter, such as an inherent redundancy created by overstaffing and low quality of some staff. In the same year, the Bureaucracy Reform was defined by the new Government as the number one priority among 11 reform priorities. As part of the 100 days program, MenPAN was assigned to develop a new Grand Design and Roadmap for Bureaucracy Reform, which is intended to replace the previous concept but should largely build on the BRI as designed by the Ministry of Finance. However, the Grand Design is expected to include some important changes of the old concept; the most important ones related to sequencing and quality assurance of reform outcomes. In May 2010, a national Steering Committee chaired by the Vice-President and including the Ministers of Finance, Administrative Reforms (MenPAN), and Home Affairs, the three Coordinating Ministers, the Head of UKP4 and some eminent persons was formally established. With this new structure in place, the policy making responsibility for and monitoring of implementation of continued bureaucracy reform has moved from the MoF, where it was invented and initiated, to the center of government, where the responsibility has to be for reforms to have national impact. However, it is important to continue the reform process within the MoF. In line with existing policies and plans, and building on the progress achieved so far, the MoF should pursue the second chapter of reforms, which would include inter alia:
Strengthen the corporate values or introduce new corporate values, as necessary, to support enhanced
professionalism, integrity and accountability;
Continue the professionalization of jobs and the competence based training policy;
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Professionalize all HR functions and provide opportunities for professional certification for HR staff;
Require and provide opportunities for professional certification for other professions, where relevant;
Strengthen professional career paths and reform rotation practices to support professionalization, capacity building and career management;
Work towards an open recruitment policy which would strengthen professionalization and allow a greater professional mobility;
Pursue the development of talent management system to identify and prepare future leaders;
Decentralize HRM activities to levels where they would be most efficiently executed including necessary supporting restructuring;
Improve the new grading system and reform the allowance distribution;
Finalize the HRIS in combination with separate HRIS in the big DGs;
Prepare policies and proposals for right-sizing allowing more radical restructuring policies; and
Pursue the analysis related to a possible establishment of one or several agencies under the MoF.
7. Debt Management During the previous DPL series, two major initiatives in debt management were implemented: A clear debt management strategy which was publicly announced and a newly created DG for Public Debt Management (DGDM), with a risk management oversight function for both domestic and external debts. By 2010, the Government had also successfully reduced its debt-to-GDP ratio to approximately below 30 percent from the peak of over 90 percent in 1999, with only a minimal increase through the exchange rate volatility and stimulus spending associated with the global financial crisis. The positive developments in terms of debt sustainability and institutional reforms have been replicated to a lesser extent in the Government's institutional capacity to manage public debts. In particular, great advances have been made in 2009 and 2010 in the quality of the Government’s domestic and external debt reporting, with the MoF and Bank Indonesia now issuing a joint publication, inconsistencies between official Indonesian and external sources being reconciled, and the World Bank reviewing with a view to upgrading its rating of the quality of Indonesian official Government and external debt statistics.
8. Reforming Regional Public Financial Management Decentralization has provided sub-national governments with significant resources and responsibilities. More than one-third of overall public spending is now executed by sub-national governments. This level of expenditure requires an adequate regulatory framework, together with sufficient PFM capacity at the sub-national level if it is to be fully effective. In order to address this, in 2005 the central Government passed comprehensive legislation on PFM reforms at the sub-national level, with the aim of mirroring reforms already being implemented at the center. However, the results have been limited due to lack of technical and human resources that most regions have to implement the reforms. For example, sub-national governments are obliged by law to report certain fiscal and financial information to the central Government within a clear timeframe. In reality, many sub-national governments struggle to meet their deadlines for submission even though the number of such submissions has been decreasing. Current budget allocation and disbursement practices contribute to fiscal discipline at the central level but they constrain successful financial management at the local level. Allocations to individual sub-national government units are formally issued after the passage of the central Government budget in October prior to the fiscal year in question and commence through derivative regulations (e.g., ministerial decrees). While this may appear to allow sufficient time for sub-national governments to finalize their budgets, in reality budget allocations of shared non-tax revenue (oil and gas) are frequently issued close to the beginning, or first few months, of the fiscal year. The notional allocations are frequently underestimated by the central
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Government and disbursements from the center to the regions are back-loaded towards the end of the fiscal year. This is because the transfers in the final quarter are based on actual revenues, which are usually higher than projected revenues.
Sub-national governments are struggling to spend their increasing budgets and have built up reserves in recent years for three main reasons. First, sub-national governments often underestimate their revenues due to lack of revenue-management capacity, compounded by the under-budgeting of transfers by the central Government. Second, the issuance of budget allocations (especially allocation for shared non-tax revenue), combined with sub-national government’s lack of revenue-management capacity, in particular in estimating potential own source revenue (PAD), often resulted in low quality planning where budget projections are based on previous year allocation. Hence, in many cases, there are significant revisions in the regional budget adjustment (APBD Perubahan). Third, delays in the budget approval process and lack of implementation capacity result in under-spending of budgeted programs by sub-national governments. Fourth, sub-national governments may not have the capacity to spend the resources at their disposal when these resources increase significantly and abruptly. This was the case with the 64 percent increase in DAU from 2005 to 2006, which led to a significant increase in sub-national government reserves.
Some challenges in addressing the constraints in PFM at the sub-national level include: (i) providing timely estimates from the sectoral ministries of revenue-sharing transfers; (ii) building the capacity of sub-national Governments to better estimate their fiscal resources and manage accumulated reserves; and (iii) improving and streamlining the budget approval process. The need to streamline the budget approval process in particular affects Law No. 33/2004, which stipulates that provincial and district budgets must be approved by the Ministry of Home Affairs and the provincial government, respectively. This process may be one factor contributing towards lengthening the budget approval process.
In order to address the financial management issues and challenges at the sub-national level, the central Government has implemented several reforms:
‘Burden-sharing policy’
Introduced in 2009, this policy incorporates major subsidies, including fuel subsidies, into the DAU pool allocation. The policy will increase the accuracy of transfer projections during the full fiscal year, given that there is a disincentive for the central Government to under-estimate the oil price assumption, especially in relation to regional transfers. A more rational oil price assumption will lead to better estimates of revenue-sharing which, in turn, will help sub-national governments to better plan their budgets.
Two actions are needed to optimize this policy. First, the central Government should establish a system to regularly monitor quarterly revenue-sharing transfers, as stipulated in Law No. 33/2004. Second, the central Government, through the relevant agencies, needs to improve production estimates for revenue-sharing, especially if back-loaded transfers at the end of the fiscal year persist.
Late budget approval sanctions
Starting from 2008, the Government has applied sanctions to improve the budget approval process. Based on Government Regulation (PP) No. 56/2005 and MoF Decree No. 46/2006 regarding the Regional Financial Information System, provincial and district governments have to submit their annual budgets to the MoF before 31 January of the corresponding fiscal year. Sub-national governments that miss the deadline by at least one month will receive a warning letter to submit their budget before 31 March. If a sub-national government has not submitted its budget by that date, the MoF, in coordination with the MoHA, can sanction the sub-national government by postponing the transfer of its DAU (25 percent of monthly transfers) until the budget is submitted.
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This sanction initiative has resulted in more timely budget submissions. Between 2006 and 2007, 54 percent of sub-national governments approved their budgets after March. In 2008, the year the sanction was introduced, 87 percent of sub-national government submitted their budgets to the MoF before March. If the Government wishes to ensure the effectiveness of this reform, the MoF should continue to monitor sub-national government budget submissions.
The MoF can also assist sub-national governments in managing reserves and surpluses by strengthening the regulatory framework for sub-national financial management. In doing so, the MoF should develop guidelines for regions on the accumulation and use of reserves. These guidelines should help sub-national governments use their reserves more effectively, for example, by: (i) settling outstanding arrears, given that about 85 percent of sub-national governments in arrears could clear these arrears by drawing on reserves; and (ii) where sub-national governments have constant or increasingly high levels of reserves, using them to increase investment in public infrastructure.
9. Governance and Anti-Corruption The public has expressed a strong demand for more accountable government, as indicated in the re-election of the incumbent Government for its strong anti-corruption platform. Shortly following the reelection, the President responded by creating a special unit called UKP4 (Presidential Working Unit for Supervision and Management of Development), chaired by the highly respected Kuntoro Mangkusubroto, to reduce bottlenecks — including governance related issues — in management and development and to expedite delivery of government programs. Among its priorities is the acceleration of civil service and tax reforms, and processes are already underway to deliver on this mandate. The Law on Access to Public Information is passed and declared effective, and the public is hopeful that the provisions of the law will bring about more transparent and accountable services. Under the new Corruption Court law, the Special Anti Corruption Court is now created in seven provinces under the auspices of the Supreme Court, with the plan to replicate it in all provinces and then districts. This is taking place despite a 2006 Constitutional Court ruling, according to which the Special Court — previously trying cases investigated and prosecuted by the Anti-Corruption Commission (KPK) — was considered unconstitutional since it was seen as creating a dual criminal justice process for corruption cases. The Special Court has thereby maintained its original composition — with ad hoc judges in the judicial panels - and will try all corruption cases prosecuted by public prosecutors or from the KPK. This however, raises a different concern: The Supreme Court has to recruit and train highly qualified ad hoc judges designated in the 7 locations, and there is a fear that the lack of quality in resources may affect the credibility of the Special Court. In terms of corruption investigation, the pace had been slow. Following the public row between the Indonesian National Police (INP) and the KPK over the authority of performing some investigatory authorities, high profile investigations have been stalled. Two KPK commissioners were arrested by the INP for ‘abuse of power’, and the KPK was left with a serious gap in leadership, which drove the President to step in and appoint temporary commissioners. A Presidential team, called ‘Team 8’ was established to examine the case and decided that the allegations were not substantiated. Then, at the request of the two Commissioners, the Constitutional Court ordered the playing of a set of recordings of taped phone conversations, which revealed that the case charged against the two Commissioners was engineered. The Constitutional Court session, however, revealed a more profound problem: judicial corruption. A high profile special task force (‘Judicial Mafia Eradication Task Force) was therefore created under the President to identify issues, coordinate and recommend solutions. As an immediate result, some corruption was uncovered within the prison authority. Some judicial mafia practices also were uncovered in the INP and Attorney General’s Office, and reforms are underway for some judicial institutions, though many are questioning the effectiveness of the task force. The KPK, with the restoration of its two commissioners, is
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now picking up the pace by investigating high profile cases in the Ministry of Health and Social Affairs. Also, it arrested a judge and a lawyer engaged in bribery. The Government also started to strengthen the KPK by starting the selection process for the new Chair of the KPK. From a total of 287 applicants, 7 candidates made it through the final stage, and some of the names are promising — among them are the former Chief of Constitutional Court and former Chair of the Judicial Commission. The Selection Committee will make a final selection of two candidates to be submitted by the President to Parliament. With the new Chair elected, the public is hopeful that the KPK will reassert its proactive fight against corruption. The Constitutional Court, on the other hand, has demonstrated its strong role in resolving political disputes — which is critical particularly in the disputes laden with money politics at the time of local elections. There is a strong public expectation that the rulings may reduce the practice of election rigging in local elections. Last but not least, institutional reform increases its outreach and intensity. Taxation office reform is in place, following the prosecution of a tax officer, and some ministries (such as Ministry of National Education and Ministry of Public Works) are developing ways of improving institutional accountability. Local governments have made their own initiatives and set examples for good governance practices. As the Government has demonstrated its commitment to fight against corruption and to promote reform, the success of its strategy depends on a combination of both strong enforcement and rigorous institutional reform. With the creation of a high profile Presidential unit and task force, serious efforts have to be made to ensure that reforms are sustainable beyond the terms of the ad hoc unit and task force and that recommendations made by the two are effectively applied.
III. Key Areas for Future Attention In sum, for the period ahead, the following will be key areas for attention and monitoring for Indonesian PFM: Ensuring coherence and momentum in PFM reform Deepening the reforms of the central government budgetary systems to ensure policy orientation and
medium term planning in budget preparation with a particular focus on improving the quality of performance data, fine-tuning the existing MTEF and costing system and developing a PBB/MTEF based M&E system
Ensuring greater integrity and more effective management of public funds through further extension and fine-tuning of the TSA, increasing the quality of cash forecasting procedures as well as automation of the treasury payments system, including the review of the chart of accounts and related business processes and strengthening PUSINTEK as the shared IT services provider
Enhancing the Government’s budget analysis capacity, primarily by developing a consolidated M&E system that integrates financial and non-financial data in accordance with PBB principles and streamlines and consolidates information of the complex M&E environment
Improving the public procurement system by developing a consistent legal framework through anchoring it in an overarching and consolidated national procurement law that regulates all principles and responsibilities in public procurement, by building the procurement management function as well as the capacity of procurement committee members based on a comprehensive human resources development strategy, and by improving transparency in the procurement process, for example, through the development of a national e-procurement system
Ensuring relevant and reliable financial reporting by strengthening human resources in government accounting and reporting, especially at the line ministry level and especially with regards to accrual accounting
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Strengthening the internal audit function in the country by rolling out the treasury payment system as planned, implementing the COSO framework, conducting capacity building for government inspectorate auditors, especially with a view to risk-based audit, and identifying an agency to assume coordination of the internal audit function
Detailing and implementing BPK’s strategic plan 2011-1015 for improving the quality of external audit reports
Continuing civil service reform in the MoF in the context of the second chapter of the national bureaucracy reform initiative
Keeping up the debt management strategy and the advances in the quality of debt reporting Addressing constraints in PFM at the sub-national level by (i) providing timely estimates from the
sectoral ministries of revenue-sharing transfers; (ii) building the capacity of sub-national governments to better estimate their fiscal resources and manage accumulated reserves; and (iii) improving and streamlining the budget approval process
Developing a coherent and well-focused strategy for corruption prevention within the state administration and ensuring its sustainability beyond the terms of the ad hoc task force
All these reforms are being actively considered by the Government, and, as indicated further above, implementation plans are either being developed by the Government or implementation is already underway. The capacity to centrally monitor these and other reforms has already been established at the Secretary-General’s office of the MoF (PUSHAKA). However, Indonesia would benefit from a coherent reform plan or strategy to ensure proper phasing and coordination of PFM reforms. This would also allow for enhanced monitoring and accountability within the GoI and thus provide additional momentum and direction to reform efforts. To this end, it is currently being discussed at the MoF whether the PFM MDTF Annual PFM Strategy Note, currently a document drafted yearly to guide and inform the management and execution of activities of the PFM Multi-Donor Trust Fund, into a more elaborate and official Government strategy.
Management of Foreign Exchange The foreign exchange control environment is assessed to be generally satisfactory. The country is no longer subject to the Extended Arrangement from the IMF. Bank Indonesia (BI) was last subject to the transitional procedures under the Fund’s safeguards assessment policy in 2002. That assessment recommended remedial action to address a number of vulnerabilities in the audit arrangements of BI. The main recommendations have been implemented, including the establishment of an independent audit committee at BI and the publication of BI’s audited financial statements. Audited financial statements for BI for 2009 by BPK contain an unqualified opinion.
IV. Conclusion
In recent years, Indonesia has made significant strides in the way its public finances are managed and in increasing transparency and independent oversight. In almost all areas of PFM, changes in the legal and regulatory architecture are now largely complete and the momentum has shifted towards implementation of new PFM practices. Advances have been made in budget preparation with the introduction of MTEF and PBB, government accounting standards have been formally established and are being adhered to in several respects to produce comprehensive annual financial statements, and the external audit function has made significant progress in the last few years. However, internal controls in the execution of budget by spending agencies need improvement. A Government Financial Management Information System (GFMIS) to provide information for budget management at all levels of government is not yet in place, and weak controls in budget execution processes have the potential of jeopardizing gains from reforms introduced in other areas of PFM.
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However, weaknesses in financial management and accountability continue to be gradually addressed through the PFM reform program discussed above, and development partners are actively engaged in this process. Also, key elements of the reforms are supported by the DPL prior actions, as well as the GFMRAP project and other initiatives supported by development partners. Much remains to be done, and it will take time to realize the full impact of these reforms. But the trajectory of reform is in the right direction, and, most importantly, the Government continues to demonstrate high commitment in completing the planned reforms. The reforms when implemented will further reduce the level of fiduciary risks. Taking this into consideration, the Bank assessment team does not propose putting in place any additional fiduciary arrangements for this operation.
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Annex 7: Indonesia – IMF Assessment Letter
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Annex 8: Debt Sustainability Analysis Indonesia’s public debt as a share of GDP has fallen steadily over this decade, including through the recent global financial crisis. Indonesia was the only G20 economy to record a falling debt to GDP ratio between 2008 and the end of 2009, due to its modest deficits and ongoing growth (especially in nominal terms), which are expected to continue over the medium-term. Public debt ended 2009 below 30 percent of GDP and is likely to fall to around 25 percent in 2011 given baseline nominal growth and government deficit projections and assuming the Rupiah retains its strong appreciation since late 2009. Baseline projections suggest Indonesia’s debt to GDP ratios should continue falling over the coming half-decade, while other ratios are likely to be more stable. The projected fall in the debt to GDP ratio is more rapid than those projected by some other multilateral agencies, largely due to the higher projected growth in Indonesia’s GDP deflator used in these projections. This projection is based on the assumption that the GDP deflator will continue to grow significantly faster than CPI inflation, although the difference is expected to be not as great as was experienced in the second half of the 2000s. Second, the Rupiah/US$ exchange rate is held near-constant in nominal terms through to 2012 before being held constant in real terms thereafter, reflecting market economists’ expectations and indications from Bank Indonesia and other regional central banks on their exchange rate policy. Only partially offsetting these factors is an assumption that the primary budget deficit widens in the second quarter of the decade as the Government embarks on greater infrastructure and social investment in line with its announced medium-term development plan and following the delays in disbursement in 2010 and, possibly, 2011. Indonesia’s debt stock appears to be robust to a plausible range of macroeconomic shocks. The debt sustainability framework subjects these baseline projections to moderately probable shocks in key indicators of the sustainability of the stock of debt and of debt servicing requirements. These shocks are to factors such as the exchange rate, export receipts, and government revenues. Under all shocks, based on recent trends, past shocks and past volatility, both the stock and servicing obligations remain well within the standard thresholds for a country with macroeconomic and fiscal policy of a quality similar to Indonesia. The historical period used to calculate these shocks includes the volatility of both the recent global crisis and Indonesia’s much greater crisis in the late 1990s.
Policy-Based Debt Burden Thresholds under the Debt Sustainability Framework
Indonesia’s Country Policy and Institutional Assessment (CPIA) rating
3.86
Present value of debt in percent of: Exports 200 GDP 50 Revenue 300 Debt service in percent of: Exports 25 Revenue 35
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Indicators of Indonesian Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2010-18
1/ The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds to a Combination shock; in c. to a Exports shock; in d. to a Combination shock; in e. to a Exports shock and in picture f. to a Combination shock 2/ Revenues are defined inclusive of grants. Sources: BI, BPS, Ministry of Finance, World Bank staff estimates and projections.
Indicators of Indonesian Public Debt under Alternative Scenarios,
2010-2018
0
5
10
15
20
25
30
35
40
2010 2012 2014 2016 2018
Baseline
Historical scenario
Most extreme shock 1/
Threshold
f.Debt service-to-revenue ratio
-11.0
-10.0
-9.0
-8.0
-7.0
-6.0
-5.0
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2010 2012 2014 2016 2018
Rate of Debt Accumulation
Grant-equivalent financing (% of GDP)
Grant element of new borrowing (% right scale)
a . Debt
-20
-10
0
10
20
30
40
50
60
2010 2012 2014 2016 2018
b.PV of debt-to GDP
100
-50
0
50
100
150
200
250
2010 2012 2014 2016 2018
c.PV of debt-to-exports ratio
-150
-100
-50
0
50
100
150
200
250
300
350
2010 2012 2014 2016 2018
d.PV of debt-to-revenue ratio
0
5
0
5
0
5
0
2010 2012 2014 2016 2018
e.Debt service-to-exports ratio
0
50
100
150
200
250
300
2010 2011 2012 2013 2014 2015 2016 2017 2018
PV of Debt-to-Revenue Ratio 2/
0
5
10
15
20
25
30
35
40
2010 2011 2012 2013 2014 2015 2016 2017 2018
BaselineFix Primary BalanceMost extreme shock Non-debt flows
PV of Debt-to-GDP Ratio
-10
-5
0
5
10
15
20
25
30
35
40
2010 2011 2012 2013 2014 2015 2016 2017 2018
Debt Service-to-Revenue Ratio 2/
130
Sensitivity Analysis for Key Indicators of Indonesia’s Public Debt, 2009-2018
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Baseline 34.5 35.2 34.3 33.0 31.0 28.6 25.8 23.8 21 18
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages 34.5 34.8 33.9 32.8 30.7 28.2 25.1 23.2 20 17A2. Primary balance is unchanged from 2009 34.5 36.1 36.3 36.0 34.9 33.3 31.1 30.1 28 26A3. Permanently lower GDP growth 1/ 34.5 35.5 34.8 33.9 32.3 30.5 28.1 26.7 24 22
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2010-2011 34.5 36.3 37.1 36.5 35.1 33.4 31.1 29.7 27 25B2. Primary balance is at historical average minus one standard deviations in 2010-2011 34.5 35.6 35.4 34.1 32.0 29.7 26.8 24.7 21 19B3. Combination of B1-B2 using one half standard deviation shocks 34.5 35.6 35.6 34.8 33.2 31.3 28.9 27.2 24 22B4. One-time 30 percent real depreciation in 2010 34.5 45.3 44.0 42.5 40.2 37.7 34.7 32.7 29 27B5. 10 percent of GDP increase in other debt-creating flows in 2010 34.5 44.8 43.7 42.1 39.8 37.1 34.0 31.7 28 25
Baseline 218 222 213 201 186 169 152 140 121 104
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages 218 220 210 200 184 167 147 136 118 101A2. Primary balance is unchanged from 2009 218 228 225 219 209 197 183 177 164 153A3. Permanently lower GDP growth 1/ 218 224 216 207 194 180 165 157 141 127
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2010-2011 218 229 230 223 211 197 183 174 158 144B2. Primary balance is at historical average minus one standard deviations in 2010-2011 218 225 219 208 192 175 157 145 126 109B3. Combination of B1-B2 using one half standard deviation shocks 218 225 221 212 199 185 169 160 143 128B4. One-time 30 percent real depreciation in 2010 218 286 273 259 241 223 204 192 173 155B5. 10 percent of GDP increase in other debt-creating flows in 2010 218 283 271 257 239 219 200 186 166 147
Baseline 32.4 33.2 35.3 35.0 34.6 32.9 32.1 29.1 27 24
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages 32.4 33.4 35.6 33.6 34.6 31.8 31.8 27.6 26 24A2. Primary balance is unchanged from 2009 32.4 33.2 35.6 38.4 39.5 39.1 39.2 36.6 35 34A3. Permanently lower GDP growth 1/ 32.4 33.4 35.6 35.8 35.9 34.8 34.7 32.5 31 29
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2010-2011 32.4 33.9 37.2 38.2 39.5 38.6 38.9 36.4 35 32B2. Primary balance is at historical average minus one standard deviations in 2010-2011 32.4 33.2 35.4 36.7 37.3 34.1 33.8 30.0 28 25B3. Combination of B1-B2 using one half standard deviation shocks 32.4 33.7 36.4 35.8 36.8 35.9 35.9 33.5 32 29B4. One-time 30 percent real depreciation in 2010 32.4 36.1 43.5 44.8 47.9 47.5 49.1 46.6 45 42B5. 10 percent of GDP increase in other debt-creating flows in 2010 32.4 33.2 39.5 68.6 39.9 51.9 37.4 40.9 32 32
Sources: BI, Ministry of Finance, World Bank staff estimates and projections.1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the length of the projection period.2/ Revenues are defined inclusive of grants.
PV of Debt-to-GDP Ratio
Projections
PV of Debt-to-Revenue Ratio 2/
Debt Service-to-Revenue Ratio 2/
131
Annex 9: Indonesia at a Glance
Indonesia at a glance 4/12/10
East LowerKey Development Indicators Asia & middle
Indonesia Pacific income(2009)
Population, mid-year (millions) 230.9 1,931 3,702Surface area (thousand sq. km) 1,905 16,299 32,309Population growth (%) 1.2 0.8 1.2Urban population (% of total population) 50 44 41
GNI (Atlas method, US$ billions) 513.4 5,080 7,692GNI per capita (Atlas method, US$) 2,230 2,631 2,078GNI per capita (PPP, international $) 3,830 5,399 4,592
GDP growth (%) 4.5 8.0 7.6GDP per capita growth (%) 3.3 7.2 6.3
(most recent estimate, 2003–2009)
Poverty headcount ratio at $1.25 a day (PPP, %) 17 17 ..Poverty headcount ratio at $2.00 a day (PPP, %) 50 39 ..Life expectancy at birth (years) 71 72 68Infant mortality (per 1,000 live births) 25 22 46Child malnutrition (% of children under 5) 24 13 26
Adult literacy, male (% of ages 15 and older) 95 96 88Adult literacy, female (% of ages 15 and older) 89 90 77Gross primary enrollment, male (% of age group) 116 112 112Gross primary enrollment, female (% of age group) 112 110 106
Access to an improved water source (% of population) 80 87 86Access to improved sanitation facilities (% of population) 52 66 52
Net Aid Flows 1980 1990 2000 2009 a
(US$ millions)Net ODA and official aid 941 1,716 1,654 796Top 3 donors (in 2007): Australia 48 77 72 335 United States 117 31 174 117 United Kingdom 18 22 34 70
Aid (% of GNI) 1.3 1.6 1.1 0.2Aid per capita (US$) 6 10 8 4
Long-T erm Economic T rends
Consumer prices (annual % change) 9.5 7.5 3.7 4.8GDP implicit deflator (annual % change) 31.0 7.7 20.4 8.4
Exchange rate (annual average, local per US$) 627.0 1,842.8 8,421.8 10,390.0Terms of trade index (2000 = 100) .. 301 100 191
1980–90 1990–2000 2000–09
Population, mid-year (millions) 148.3 178.2 206.3 230.9 1.8 1.5 1.3GDP (US$ millions) 78,013 114,426 165,021 540,274 6.1 4.2 5.3
Agriculture 24.0 19.4 15.6 15.3 3.6 2.0 3.4Industry 41.7 39.1 45.9 47.6 7.3 5.2 4.1 Manufacturing 13.0 20.7 27.7 26.4 12.8 6.7 4.7Services 34.3 41.5 38.5 34.1 6.5 4.0 8.0
Household final consumption expenditure 51.4 58.9 60.7 56.6 5.2 6.6 4.7General gov't final consumption expenditure 10.5 8.8 6.5 9.6 4.6 0.1 8.2Gross capital formation 24.1 30.7 22.2 31.0 7.7 -0.6 5.9
Exports of goods and services 34.2 25.3 41.0 24.1 2.7 5.9 7.8Imports of goods and services 20.2 23.7 30.5 21.3 1.2 5.7 8.6Gross savings .. .. .. ..
Note: Figures in italics are for years other than those specified. 2009 data are preliminary. Group data are through 2008. .. indicates data are not available.a. Aid data are for 2007.
Development Economics, Development Data Group (DECDG).
(average annual growth %)
(% of GDP)
6 4 2 0 2 4 6
0-4
15-19
30-34
45-49
60-64
75-79
percent of total population
Age distribution, 2008
Male Female
0
10
20
30
40
50
60
70
80
90
100
1990 1995 2000 2007
Indonesia East Asia & Pacific
Under-5 mortality rate (per 1,000)
-20
-15
-10
-5
0
5
10
15
95 05
GDP GDP per capita
Growth of GDP and GDP per capita (%)
132
Indonesia
Balance of Payments and T rade 2000 2009
(US$ millions)Total merchandise exports (fob) 62,124 119,513Total merchandise imports (cif) 36,196 92,787Net trade in goods and services 29,862 21,042
Current account balance 16,616 10,582 as a % of GDP 10.1 2.0
Workers' remittances and compensation of employees (receipts) 1,190 6,795
Reserves, including gold 27,257 66,104
Central Government Finance
(% of GDP)Current revenue (including grants) 19.7 15.5 Tax revenue 11.1 11.4Current expenditure 15.6 10.2
Technology and Infrastructure 2000 2008Overall surplus/deficit -1.8 -1.6
Paved roads (% of total) 57.1 55.4Highest marginal tax rate (%) Fixed line and mobile phone Individual 35 35 subscribers (per 100 people) 5 75 Corporate 30 30 High technology exports
(% of manufactured exports) 16.2 10.8
External Debt and Resource FlowsEnvironment
(US$ millions)Total debt outstanding and disbursed 143,358 148,454 Agricultural land (% of land area) 25 26Total debt service 16,625 20,817 Forest area (% of land area) 54.0 48.8Debt relief (HIPC, MDRI) – – Nationally protected areas (% of land area) .. 11.2
Total debt (% of GDP) 86.9 27.5 Freshwater resources per capita (cu. meters) 13,398 12,578Total debt service (% of exports) 11.2 14.1 Freshwater withdrawal (billion cubic meters) 82.8 ..
Foreign direct investment (net inflows) .. .. CO2 emissions per capita (mt) 1.4 1.9Portfolio equity (net inflows) .. ..
GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 3.7 4.2
Energy use per capita (kg of oil equivalent) 734 803
W orld Bank Group portfolio 2000 2008
(US$ millions)
IBRD Total debt outstanding and disbursed 11,715 6,968 Disbursements 1,051 1,398 Principal repayments 761 1,252 Interest payments 950 370
IDA Total debt outstanding and disbursed 714 2,006 Disbursements 59 494
Private Sector Development 2000 2008 Total debt service 31 40
Time required to start a business (days) – 76 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 77.9 Total disbursed and outstanding portfolio 880 664Time required to register property (days) – 39 of which IFC own account 480 650
Disbursements for IFC own account 20 208Ranked as a major constraint to business 2000 2008 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 43 79 Economic and regulatory policy uncertainty .. 48.2 Corruption .. 41.5 MIGA
Gross exposure 56 50Stock market capitalization (% of GDP) 16.3 19.3 New guarantees 0 0Bank capital to asset ratio (%) 6.0 10.0
Note: Figures in italics are for years other than those specified. 2008 data are preliminary. 4/12/10.. indicates data are not available. – indicates observation is not applicable.
Development Economics, Development Data Group (DECDG).
0 25 50 75 100
Control of corruption
Rule of law
Regulatory quality
Political stability
Voice and accountability
Country's percentile rank (0-100)higher values imply better ratings
2008
2000
Governance indicators, 2000 and 2008
Source: Kaufmann-Kraay-Mastruzzi, World Bank
IBRD, 7,876 IDA, 2,234
Other multi-lateral, 24,381
Bilateral, 33,713Private, 53,685
Short-term, 26,565
Composition of total external debt, 2009
US$ millions
133
Millennium Development Goals Indonesia
With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)
Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2008 Poverty headcount ratio at $1.25 a day (PPP, % of population) .. .. .. .. Poverty headcount ratio at national poverty line (% of population) .. 17.5 27.1 16.7 Share of income or consumption to the poorest qunitile (%) .. .. .. 7.1 Prevalence of malnutrition (% of children under 5) 31.0 27.4 24.8 24.4
Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 96 .. 93 95 Primary completion rate (% of relevant age group) 94 96 95 105 Secondary school enrollment (gross, %) 47 48 55 73 Youth literacy rate (% of people ages 15-24) 96 .. .. 97
Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 93 .. 96 98 Women employed in the nonagricultural sector (% of nonagricultural employment) 29 29 32 29 Proportion of seats held by women in national parliament (%) 12 13 8 12
Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 91 66 48 31 Infant mortality rate (per 1,000 live births) 60 48 36 25 Measles immunization (proportion of one-year olds immunized, %) 58 63 72 80
Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 420 Births attended by skilled health staff (% of total) 32 37 64 72 Contraceptive prevalence (% of women ages 15-49) 50 55 .. 61
Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) .. .. 0.1 0.2 Incidence of tuberculosis (per 100,000 people) 343 304 270 228 Tuberculosis cases detected under DOTS (%) .. 1 20 68
Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 72 74 77 80 Access to improved sanitation facilities (% of population) 51 51 52 52 Forest area (% of total land area) 64.3 59.2 54.0 48.8 Nationally protected areas (% of total land area) .. .. .. 11.2 CO2 emissions (metric tons per capita) 0.8 1.2 1.4 1.9 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 3.6 4.1 3.7 4.2
Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 0.6 1.7 3.2 13.3 Mobile phone subscribers (per 100 people) 0.0 0.1 1.8 61.6 Internet users (per 100 people) 0.0 0.0 0.9 11.1 Personal computers (per 100 people) 0.1 0.5 1.0 2.0
Note: Figures in italics are for years other than those specified. .. indicates data are not available. 4/12/10
Development Economics, Development Data Group (DECDG).
Indonesia
0
25
50
75
100
125
2000 2002 2004 2006 2008
Primary net enrollment ratio
Ratio of girls to boys in primary & secondary education
Education indicators (%)
0
10
20
30
40
50
60
70
80
2000 2002 2004 2006 2008
Fixed + mobile subscribers Internet users
ICT indicators (per 100 people)
0
25
50
75
100
1990 1995 2000 2007
Indonesia East Asia & Pacific
Measles immunization (% of 1-year olds)
Puncak JayaPuncak Jaya(5030 m)(5030 m)
ObiObi
CeramCeram
BuruBuru
SULAWESISULAWESISUMATERASUMATERA
BaliBali
KALIMANTANKALIMANTAN
RabaRaba
PematangsiantarPematangsiantar
SorongSorong
TimikaTimika
FakfakFakfakAmahaiAmahai
PaluPaluJambiJambi
MataramMataram
BandungBandungSurabayaSurabaya
SemarangSemarang
PalembangPalembang
PekanbaruPekanbaru
PalangkarayaPalangkaraya
Bandar Bandar LampungLampung
SerangSerang
PAPUAPAPUA
1919
2121
2222
2626
2929
2020
2323
2525
2424
28282727
3030
3232
3131
3333
1212
1111
1313
14141515
8
67
3
54
2
1
1616
1717 1818
1010
9
PAPU
APA
PUA
NEW
GU
INEA
NEW
GU
INEA
A U S T R A L I AA U S T R A L I A
THAILANDTHAILAND
MYANMARMYANMAR
19
21
22
26
29
20
23
25
24
2827
30
32
31
33
12
11
13
1415
8
67
3
54
2
1
16
17 18
10
9
Balikpapan
Parepare
Baubau
Tarakan
Raba
Ende
Waingapu
Pematangsiantar
Sorong
Merauke
Timika
FakfakAmahai
Palu
Ambon
Gorontalo
Jambi
Medan
Kupang
Padang
Manado
Mataram
Bandung
Kendari
Denpasar
Surabaya
Semarang
Bengkulu
Jayapura
Palembang
SamarindaPontianak
Pekanbaru
Yogyakarta
Banda Aceh
Bandjarmasin
PalangkarayaPangkalpinang
Makassar
Ternate
Bandar Lampung
Serang
Manokwari
Mamuju
Tanjungpinang
JAKARTA
PAPU
AN
EW G
UIN
EA
A U S T R A L I A
SINGAPORE
VIETNAM
THAILAND
MYANMAR
TIMOR-LESTE
BRUNEI
PHILIPPINES
MA L A Y
SI
A
CelebesSea
Java Sea BandaSea
Arafura Sea
SuluSea
PACIFIC OCEAN
I N D I A N O C E A N
PAPUA
AruIs.
KaiIs.
TanimbarIs.
Halmahera
Biak
Yapen
Morotai
Misool
Waigeo
Peleng Obi
Muna
Ceram
Buru
SULAWESI Sula Is.
Timor
FloresAlor
WetarMoa
Babar
Sumba
SumbawaLombokJAWA
NatunaBesar
Belitung
Madura
SUMATERABangka
Lingga
Nias
Siberut
Enggano
Simeulue
TalaudIs.
Bali
KALIMANTAN
Men t a w
a i I s .
Puncak Jaya(5030 m)
0°
5°
5°
10°
10°
15°
0°
5°
10°
15°
15°
10°
95° 100° 105°
115° 120° 125°
95° 100° 105° 110° 115° 120° 125°
130° 135° 140°
135° 140°
INDONESIA
NANGGROE ACEH DARUSSALAMSUMATERA UTARARIAUSUMATERA BARATJAMBIBENGKULUSUMATERA SELATANLAMPUNGBANGKA-BELITUNGBANTEND.K.I. JAKARTA
123456789
1011
PROVINCES:
1213141516171819202122
JAWA BARATJAWA TENGAHD.I. YOGYAKARTAJAWA TIMURBALINUSA TENGGARA BARATNUSA TENGGARA TIMURRIAU KEPULAUANKALIMANTAN BARATKALIMANTAN TENGAHKALIMANTAN SELATAN
KALIMANTAN TIMURSULAWESI UTARAGORONTALOSULAWESI TENGAHSULAWESI BARATSULAWESI SELATANSULAWESI TENGGARAMALUKU UTARAMALUKUPAPUA BARATPAPUA
2324252627282930313233
0 200
0 100 200 300 400 Miles
400 Kilometers
IBRD 33420R2
AU
GU
ST 2008
INDONESIASELECTED CITIES AND TOWNS
PROVINCE CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
PROVINCE BOUNDARIES
INTERNATIONAL BOUNDARIES
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.