20471 April 2000 * INDONESIA Public Spending in a Time of Change EV~A Poverty Reduction and Economic Management Sector Unit East Asia and the Pacific Region The World Bank April2000 ACKNOWLEDGEMENTS This report has been prepared by a core team of principal authors led by Mr. Sudarshan Gooptu (World Bank) and comprising of Messrs. Bert Hofmnan (fiscal impact and sustainability, fiscal decentralization), Ashoka Mody (contingent liabilities), and Vinaya Swaroop (public expenditure management and budgetary processes). Overall guidance for the report was provided by Mr. Vikram Nehru (Lead Economiist for Indonesia, World Bank). Key written inputs were provided by Messrs./Mme. David Hawes (infrastructure), Jorge Garcia-Garcia (public expenditures on environmental sustainiability), Jacqueline Baptist (education), Fadia Saadah (health), Samnuel Lieberma (social sectors), Behdad Nowroozi (govemnment accounting and auditing systemns), and Lant Pritchett (social safety nets). Invaluable conmuents and suggestions on earlier drafts of this report were also provided by Hana Polacova Brixi, Piyush Desai (IMF), Mohanunad Farhandi, Ejaz Ghani, Richard Newfanner, Alan Ruby, Anthoiny Toft, and Jim Stevenson (IMF). The main findings of this report are on the basis of the World Bank miission that visited Indonesia between May 4-14, 1999 in Jakarta, along with ongoing sector-specific work at the World Bank Offiice in Jakarta. The mnission was joined by Messrs. Jamtes Alm, Roy Bahl, Lucky Sondalh Syahruddin, and Werry Darta Taifuir (USAID-Consultants), who provided background papers on budgetary processes at the sub-national levels of government. T'he counterpart team of the Govemnment of Indonesia is headed by Dr. Soekarmo Wirokartono (BAPPENAS), with representatives fromn the Ministries of Finance, Home Affairs, and the line ministries (at both Central and Provincial levels). Invaluable data manipulation expertise was provided by Mr. Nunu Hendrawanto, Mines. Magda Adriani and Barbara Ossowicka. Doctument processing was undertaken by Ms. Muriel Greaves. Peer Reviewers were Prof. Sri Mulyani Indrawati (Univ. of Indonesia), Messrs. Malcolmn Hohmes (PRMPS), William Allan (IMP), and Graham Scott (New Zealand). INDONESIA PUBLIC SPENDING IN A TIME OF CHANGE TABLE OF CONTENTS Pages EXECUTIVE SUMMARY ...................................................................i CHAPTER 1: PUBLIC SPENDING IN A CRISIS ................................... ..................... I Introduction .................................................................. 1 The Unavoidable Build-Up of Fiscal Pressure ................................................................... 2 Envisaged Fiscal Stimulus Did Not Materialize .................................................................. 5 Deeper in Debt .................................................................. 6 Fiscal Risks from Off-Budget Claims on Govemment are on the Rise ................................ 10 Domestic Resource Mobilization Efforts Need to be Stepped Up ........................................ 13 Policy Implications .................................................................. 16 CHAPTER 2: IMPROVING THE BUDGET ALLOCATION PROCESS ....................... 18 A Necessary Response in a Constrained Fiscal Environment ..................... ........................ 18 Reshaping the Roles of Key Budgetary Institutions ............................................................ 30 Allocating the Budget in a Democracy .................................................................. 31 Policy Implications .................................................................. 34 CHAPTER 3: MANAGING ACROSS LEVELS OF GOVERNMENT ............................ 36 The Process Has Begun .................................................................. 36 The Nature of the Decentralization in Indonesia ................................................................ 37 Budgetary Impact of Decentralization .................................................................. 39 Impact on Inter-Govemmental Relations .................................................................. 39 Issues in the Implementation of the Reforms .................................................................. 42 Decentralization Could Reinforce Civil Society Participation .............................................. 48 Policy Implications .................................................................. 50 REFERENCES .................................................................. 52 TABLES IN TEXT Table 2.1: An Illustrative Performance Budgeting Framework ............................................. 32 Table 2.2: Rights of Members of Parliament in Budgetary Matters .................................... 34 Table 3.1: Impact of the Fiscal Decentralization Law ....................................................... 38 FIGURES Figure 1.1: Govemment subsidies have increased since the crisis . . ...................................... 3 Figure 1.2: Only 73 percent of the development budget in FY98/99 was actually spent ...................................................................4 Figure 1.3: Not stimulating .................... . . . . . .5 Figure 1.4: Indonesia's fiscal developments at a glance ............................................... 7 Figure 1.5: A long way down ...................................................... 8 Figure 2.1: A changing environment comes with risks and opportunities .............................. 19 Figure 2.2: Decision tree for evaluating public programs ..................................................... 24 Figure 3.1: Indonesia is highly fiscally centralized ..................................................... 36 Figure 3.2: Increased inequality ..................................................... 40 BOXES Box 1.1 Contingent Government Liabilities: A Hidden Risk to Fiscal Stability. 9 Box 1.2: Contingent Liabilities in Malaysia ........................ 13 Box 1.3: Problems With Contingent Liability Management in the Czech Republic . 15 Box 2.1: Malaysia's Public Budget System .20 Box 2.2: Medium-Term Planning and Budgeting .23 Box 2.3: The impact of Educating Spending in Recent Years .26 Box 2.4 Fiscal Transparency in South Africa .34 ANNEXES Annex 1: Status of Implementation of Recommendat.ons of Public Expenditure Review, 1998 .55 Annex 2: A National Risk Management Framework for Contingent Liabilities .59 Annex 3: OECD Experience in Public Expenditure Management Reforms .65 STATISTICAL TABLES Table 1: Government Revenue in current Rupiah .80 Table 2: Government Expenditure in current Rupiah .81 Table 3: Fiscal Summary in current Rupiah .82 Table 4: Fiscal Summary (as % of GDP). . 83 Table 5: Investment Budget (Development Budget) in current Rupiah - By Sector . 84 Table 6: Investment Budget (Development Budget) in constant 1993/1994 Rupiah . 86 Table 7: Current Expenditures - Functional Classification in current Rupia h .88 Table 8: Current Expenditures - Functional Classification in constant 1993/1994 Rupiah 89 Table 9: Current Expenditures - Economic Classification in constant 1993/1994 Rupiah 90 Table 10: Current Expenditures - Economic Classification in constant 1993/1994 Rupiah 91 EXECUTIVE SUMMARY 1. Indonesia's new government will face costs of bank restructuring. Meanwhile, the a tight fiscal situation throughout its term. revenue base remains weak because of a The crisis sharply increased debt levels and fragile economic recovery, and a plethora of eroded government revenues, bringing to an tax exemptions and weak administration. end Indonesia's comfortable pre-crisis fiscal Fortunately, the recent recovery in position. But not only has the fiscal situation international oil prices will provide some changed, so has the entire environment for room for budgetary maneuver, but much less policymaking. Gone are the days when a few than meets the eye because higher oil prices technocrats could decide on important fiscal abroad also mean higher energy subsidies at issues and have them implemented without home. demur. Decisions on fiscal policy will now need to be subjected to the healthy rigors of 4. The report recommends a shift in democratic debate and tailored to the demands fiscal policy focus towards maintaining fiscal of a decentralizing political and government sustainability in order to ensure a durable and system. Calls for greater transparency and sustained recovery. For this, of course, less corruption must be heeded throughout primary surpluses must be generated. But government-including in the design and medium-term fiscal sustainability is at risk implementation of the government budget. from three sources: So, fiscal policy in the future will not just be a question of raising revenues and cutting (i) through macroeconomic fluctuations, wasteful spending (although both will be since inflexible spending items have gone up important). It will also require fundamental and budget is now more vulnerable to changes in the way Indonesia manages its variations in interest rates, exchange rates and public finances. inflation. Inflexible spending on debt service and civil service salaries take up a large 2i. hit s freport ide the strateg. proportion of the budget, so the remaining Tie foree restoindig sound pbi fnes,r expenditure items in the budget are squeezed. Tmhase three key fidongs OI tne report Simulations show that the budget is more emphaiasiizth unde tonmaiain in fiscal vulnerable to interest rate variability (because sustaeiablty under a constraied budgetary of its impact on servicing domestic debt) than environment and the need to improve the ecag aers adiscneune o procssesfor akin bugetay alocatons exchange rate Tisk (and itS consequences for processesetforlmakingtibudgetary s alloatis foreign debt service). The reason is that oil and budget implementation towards greater angsrenuspoieteGvnm t ,>, ., ~~and gas revenues provide the Government fiscal transparency. These are summarized with a natural hedge against exchange rate below: fluctuations. L From fiscal stimulus to fiscal (ii) through contingent liabilities, which pose sustainability. The fiscal stimulus that was fiscal risks of becoming actual liabilities envisaged in the past two years failed to . l emerge. 7he fiscal deficits for FY98/99 and suddenly, e.g. bankig sector liablities; and FY99100 have been less than planned. The key contingent liabilities include: (a) guarantees 3. Despite limited budget deficits, covering domestic banks' liabilities (excepting equity, of 3 course); (b) implied obligations to private infrastructure government debt exploded in the wake of the providers (mainly in power generation but also in toll banking crisis. As a share of GDP, it is roads); (c) obligations of minimum pension payments to expected to quadruple by the end of FY99/00 civil servants; (d) off-budget credit schemes such as compared to pre-crisis levels; the bulk of the KUT; and (e) a number of guarantee schemes to the increase is from domestic debt to cover the private sector (some of which were instituted since the crisis to restore the flow of credit). (iii) through decentralization. This process better monitoring fiscal risks that stem would be risky in itself, but the risk is from contingent liabilities. enhanced if the envisaged transfer of * Include all govemment accounts in the resources is not matched by a transfer of Government's treasury and accounting expenditure responsibilities. As a result, the system. center's deficit could rise further. Also, * Carefully plan and phase the decentralization poses a further fiscal risk decentralization process to devolve through local government borrowing (under spending obligations together with Law No. 25). If not carefully managed, local revenues. government debt may end up on central * Set up a debt management unit in the government books, as in many countries Ministry of Finance to manage domestic around the world. and foreign debt of Government. * Make an inventory of all contingent 5. The report recommends that in order liabilities to the budget, and include a to achieve fiscal sustainability over the contingency reserve in the budget to medium- term, the Government should seek a absorb shocks from contingent liabilities. combination of appropriate domestic revenue generation efforts, spending cuts, accelerated Medium-term measures privatization, more aggressive asset recovery from uncooperative loan defaulters, new * Adopt a multi-yearrollingbudgetary plan extemal finance, and to manage its contingent through a medium-term expenditure and other off-budget liabilities as part of an framework to track future budgetary overall national risk management strategy. In consequences of policy decisions, and to addition, efforts to achieve fiscal make budgets more predictable for public sustainability should be supported through spending entities. changes in budget management practices, * Create room for parliamentarv influence including more comprehensive budget over the budgetary framework early in the coverage, preparation of a medium-term budget process. budget outlook, and improved debt and risk * Adopt the IMF Code of Good Practices management. on Fiscal Transparency with a view towards: (a) enhancing clarity in the roles 6. Specifically, the following measures and responsibilities within government; are recommended in this regard: (b) promoting greater information dissemination on government activities to Short-term measures the public; (c) fostering more open- * Cut wasteful spending such as energy budget preparation, execution, and reporting; and (d) ensuring that fiscal subsidies. These subsidies-which will information is subjected to independent amount to over 2.5 percent of GDP this assurances of integrity through regular year-are still poorly targeted, and mainly publication of audits of public accounts. enjoyed by the better off. puolimit th growth of contie * Enhance domestic resource mobilization l To limit the growth of coningent efforts through a combination of measures liabilites, the Govement could consider that include: (a) reducing exemptions on budgetng guarantees and other contngent the payment of VAT and certain income liabilities. * Establish clear and credible rules for taxes; (b) limiting special economic zones regional government borrowing limits. In to truly bonded areas; and (c) improving light of Indonesia's fragile financial tax administration, and reducing markets, direct or rule-based controls are corruption. likely to be more prudent than market- * Systematically track all the government's likel tolb more p ime th met off-budget operations with a view toward . . * Expand the function of the debt BAPPENAS cut the bids down to the size management unit in the Ministry of required to fulfill the constraint on domestic Finance (see above) to include a borrowing. MOF has an elaborate system of government risk management strategy expenditure norms, which- are used to that involves three complementary scrutinize the submitted budgets. Only when elements: the draft budget is submitted to the President, some political decision-making enters the (a) mitigation of the risk at source process. Individual ministers do not defend through sound microeconomic policies their ministry budget, and appropriations are fostering efficient resource allocation and structured by sector, not by ministry or use; program. Budgetary decision-making has (b) transferring risk to third parties with focused primarily on government investment incentives to manage and ability to bear (i.e. the development budget) and less on the risk; and decisions regarding the public policy role the (c) monitoring and managing any government wants to play in any area. residual risk that cannot be mitigated or Although BAPPENAS has introduced a transferred. system for performance evaluation, this has had only limited impact on budget decision- II. Improving budget allocation. The tighter making. fiscal conditions that exist today reinforces the need to achieve the best possible 9. In this regard, the report recommends allocation of scarce resources. that the development and recurrent spending decisions need to be unified into a single 7. Clearly, budget formulation is a budget and then projected out on a three-five political process. Experience suggests that a year time horizon. In doing so, the budget participatory process involving both the appropriations could be structured by line Parliament and civil society ensures that ministry. Each line ministry would then have public spending choices are continuously to provide the rationale for public intervention evaluated. This tends to improve the quality in that activity as part of the budget of public expenditures and the efficiency of formulation process at all levels of public services. This priority could be government. addressed by facilitating adequate information flows between stakeholders and a budget 10. Specifically, the following measures process that allows for political choices are recommended in order to facilitate better, without a loss of fiscal discipline. Public more transparent budgetary allocation resources will have to be allocated efficiently decisions: to those areas that will have the maximum intended impact in terms of public service Short-term measures delivery. To this end, institutional measures Require the line ministries to provide the are recommended in the report to ensure that rationale for public intervention in that adequate audit, evaluation and feedback activity as part of the budget formulation mechanisms are in place so that the mix of process. This principle should be applied spending allocations in the budget is deemed at all levels of government. acceptable to a wider spectrum of the public. Structure budget approprations by This also will go a long way in minimizing m a the observed divergence between budget ministry, and discuss each lIne ministry budget separately in Parliament to estimates and budget outcomes. e i minister' enhance mdividual minister's 8. Indonesia's current budget process is accountability. mainly a bureaucratic process. The line * Agree with parliament on rules for ministries submit their bids, and MOF and debates and changes to the budget. . . Currently, the Fiscal Outlook document is politicians honest. It also encourages citizens discussed in Parliament at a plenary to pay their taxes, for then they know what session that is held about two months their money is buying. Greater transparency prior to the budget debate. This is an also helps communities and NGOs to monitor important step towards increasing the the quality of public spending programs. "buy-in" from parliament. This fiscal There remains the urgent need for greater outlook should provide the major budget clarity in the roles of Parliament, Ministry of aggregates and sectoral spending limits Finance, BAPPENAS and the line ministries before detailed budget preparation starts. in the budget process. A participatory process * Design earmarked grants for regions to involving both the Parliament and civil finance national priorities implemented at society ensures that public spending choices regional level. are continuously evaluated. This tends to * Design a monitoring system for regional improve the quality of public expenditures government's performance on public and the efficiency of public services. To this service delivery. end, appropriate guidelines and rules of * With a view towards achieving greater engagement between the Government and transparency, accountability and fostering Parliament in the budget formulation process anti-corruption measures, make current need to be specified. civil service remuneration transparent by including all salary elements of civil IIL. Improving budget implementation. servants in the recurrent budget. The When one turns to the implementation of the ongoing transition to the adoption of the public spending decisions, as the government IMF-GFS Classification System would rightly believes, decentralization can indeed reinforce this measure. be a powerful tool to improve public service delivery and accountability in Indonesia. But, Medium-term measures if not well managed, it risks fiscal balance at the center. . UJnify development and recurrent spending into a single budget and then 12. For fiscal decentralization to be project this budget out on a three-five successful, a strong central government is year time horizon. This measure could be needed to lead and coordinate the process, tested on a pilot basis in some especially in the short run. It must convey government agencies or spending entities clear policy, guidelines for ensuring a balance in the short term. The line ministry between revenues and expenditures at the appropriations could be ordered by the local level, a transition plan to achieve this, major programs of the ministry, and the and hard budget constraints for local budget documentation should include governments to instill fiscal discipline information on results achieved with including through clear rules on the issuance, spending, and expected results in the reporting and monitoring of guarantees. To future. this end, the report recommends measures to * Increase civil service salaries to become improve the adequacy, relevance, timeliness comparable with private sector wages. At and accessibility of government financial the same time, de-link civil service reporting and monitoring systems. In the salaries from development projects. Most medium-term, strengthening local of a civil servant's income should be in accountability is recommended through a the form of base salary, rather than larger local tax base, increased transparency, through project-related payments. and prudent access to financial markets. 11. Democracies require full disclosure of 13. There remains the urgent need for public spending information to all better coordination of the process towards stakeholders. This keeps bureaucrats and implementation of the two fiscal and iv administrative decentralization laws (Law No. * mandates, scope, degree of independence 22/1999 UU PD.and Law No. 25/1999 UW and roles of BEPEKA (the Supreme PKPD). Currently, in the Central Audit Board), BAKUN (the Govemment Government, the Ministry of Finance, the Accounting Agency), BPKP (the Department of Home Affairs and the Office of government's internal audit agency) and the State Minister of Regional Autonomy are the Inspectorate Generals (IGs, the involved in this effort, but there was a lack of internal auditors of each Ministry). clarity on who was responsible for what * Define detailed expenditure assignments aspect of this implementation process. across levels of Government. Design an Clearly, this is a complex task and may need equalization grants scheme, including attention from the highest levels in transition arrangements. Specify a government. regional borrowing framework. 14. Specifically, in the open, democratic, Medium-term measures and decentralized era that Indonesia is currently embarking on, the following * Tighten treasury management, expand measures should enhance fiscal transparency regular and timely reporting on budget and improve public service provision: implementation, independent audits of final accounts, and widely disseminate Short-term measures outcomes of those audits. * At each level of government, set up a Strengthen financial management legislative mechanism that ensures follow practices in Government by accelerating up action on audit findings. the pace of computerization in * Issue uniform accounting standards for Government. This will improve the the public sector (including SOEs and adequacy, relevance, timeliness and sub-national administrations). accessibility of government financial * Draft clear implementing regulations for reporting and monitoring systems. To sub-national borrowing (external and enhance the efficiency and effectiveness domestic). of independent audits of public accounts, there is an urgent need to clarify the v Public Spending in a Time of Change 1. PUBLIC SPENDING IN A CRISIS T he Government is facing a grim fiscal situation. The crisis has left it deeply in debt, spending has jumped, and revenues have plummeted. Some of the fiscal pressures that have emergedfrom the crisis can be attributed to thefiscal risks due to the government's contingent liabilities. These have stemmed from guarantees previously given that have been realized, and new guarantees that Government has issued in the wake of the crisis. At least some of these liabilities, which are vulnerable to interest rate, foreign exchange rate and price fluctuations, will grow in the short-term with significant potential costs. The fiscal stimulus that was envisaged in the past two years failed to emerge. As the economy recovers, Government needs to shift its focus towards maintainingfiscal sustainability in order to ensure a durable and sustained recovery. To this end, the Government should seek a combination of appropriate domestic revenue generation efforts, spending cuts, accelerated privatization, more aggressive asset recovery from uncooperative loan defaulters, new external finance, and to manage its contingent and other off-budget liabilities as part of an overall national risk management strategy. INTRODUCTION 1.1 The implications of the economic deciding where, how much, and how public crisis are being played out in an era of funds are spent include: (i) the effect of the fundamental political and social change in ongoing crisis on the trade-off between Indonesia. The crisis has fueled a growing macroeconomic stabilization and public sentiment among people to change the way expenditure policy decisions; (ii) the risks to business is done in Indonesia, both within the budget from contingent liabilities of the and outside government. And it has lowered government (e.g. from the evolving cost of the tolerance for corruption in government. bank recapitalization); (iii) the changing roles Responding to these changes poses difficult of the National Planning Agency challenges. Inaction may delay chances of a (BAPPENAS), the Ministry of Finance and rapid and sustained recovery, the line ministries in budgetary decision- making and their implementation given the 1.2 The objective of this report is to ongoing process of fiscal and administrative address key issues in public expenditure decentralization in Indonesia; and (iv) the management that are emerging under these implications of Indonesia's new democratic changing circumstances. It suggests ways of freedoms and the changing nature of redesigning the budgetary process so as to monitoring public expenditures towards ensure that public spending will have a achieving better results. In this chapter and significant impact in shielding the poor and the two that follow, these above questions are the vulnerable from the crisis in the short- addressed. The overall theme of this report run, and to provide an approach for making being-enhancing transparency in the fiscally sustainable public expenditure budgetary processes in Government and its choices, with maximum development impact, management to ensure the best possible use over the medium-term.' The fundamental of tax-payers' money. issues that need to be addressed when 1.3 This report builds on the previous Similarly, a more detailed assessment of the ongoing Bank work on Indonesia's public finances, process of Decentralization in Indonesia is currently along with ongoing work by the ADB, IMF underway jointly by the World Bank and the IMF. and several bilateral agencies on budgetary I Public Spending In A Crisis processes and decentralization in Indonesia. crisis, but they were masked as the economy For instance, an assessment of the boomed. For instance, some surveys that institutional arrangements for domestic depicted investors as bullish on the resource mobilization and tax policy in Indonesian economy, also showed concerns Indonesia is currently being conducted about mismanagement of the public sector through technical assistance from the IMF including corruption, red tape and lack of (Fiscal Affairs Department). The ADB's transparency in public sector decision- Community and Local Government Support making.2 The 1998 Public Expenditure Sector Development Project (March 1999) Review (undertaken by the World Bank) and the World Bank's Kecamatan noted that behind the impressive growth Development Project (April 1999) contain period in the country, the public sector has components that aim to streamline and indulged in favoritism and rent-seeking strengthen public expenditure management at behavior that has raised the cost of public the sub-national levels of government. services. Based on the existing evidence, one Technical assistance activities that address could argue that while public sector measures to encourage greater accountability mismanagement may not have precipitated and transparency in the use of public funds in the crisis in Indonesia, it certainly has been a the context of the ongoing process of fiscal major constraint in dealing with it. decentralization in Indonesia are being provided to the Government with support Aggregate Fiscal Situation from official bilateral agencies (such as GTZ, USAID) and the intemnational financial 1.6 The crisis has sharply reduced institutions (IFIs). revenues. Led by the decline in oil prices, THE UNAVOIDABLE BUILD-UP OF FISCAL domestic revenues excluding privatization PRESSURE fell from almost 16 percent of GDP in FY1996/97 to a projected 10.6 percent this 1.4 Like its East Asian neighbors, fiscal year. Surprisingly, income tax revenues Indonesia had demonstrated the virtue of maintained their level of about 4.5 percent of overall fiscal prudence in the pre-crisis years. GDP. The key reason for this was that the In early 1990s, the primary fiscal balance increase in interest income as a consequence (i.e. fiscal deficit net of interest payments) of tight monetary policy compensated for the was in surplus for years. The excellent record revenue loss due to the decline in corporate of sustained high economic growth and profits. In contrast, VAT revenues and continued poverty reduction neglected to import taxes dropped sharply in line with highlight the medium-term trade-off between domestic absorption. As economic recovery macroeconomic stabilization and public sets in, these taxes could rebound to their expenditure policy decisions. Indonesia's former level, although this revenue recovery successes in reducing the poverty rate (from will most likely be led by oil and gas taxes. 70 percent in 1970 to 10 percent by 1996) The upswing in oil prices since early 1999 is and achieving near universal literacy rates likely to result in higher revenues. In over the past thirty years prior to the crisis addition, inflation is expected to be lower clouded any debates about whether public than expected at the time of budget spending was efficiently achieving the preparation, and so is the exchange rate. government's strategic priorities or not. 1.5 The recent crisis has changed the 2 See D. Kaufman, G. Mehrez, and S. Schmulkler environment considerably. The fiscal (1998). "The East Asian Crisis: Was it Expected." pressures that have built up as the crisis (mimeo), World Bank. The perceptions of multinational corporate and industrial staff that unfolded has brought to the fore fundamental Indonesia has a major govemance problem has also issues about the way government resources been documented in Bardhan (1997). are being spent and what they are buying. 3 See World Bank. 1998. "Indonesia in Crisis: A These issues were present even prior to the Macroeconomic Update", (Washington D.C.: World Bank) 2 Public Spending in a Time of Change These forces will tend to add to the recovery terms of GDP from virtually nothing in of revenues. FY1996/97 to 4 percent of GDP in 1998/99. (Figure 1.1) Social safety net spending saw 1.7 Despite efforts to the contrary, an equally rapid increase to about 1.8 percent spending in terms of GDP remained at of GDP, and interest payments on external around its pre-crisis level. The main change debt rose as well, mainly under the influence was in the composition of spending, with of the real depreciation of the Rupiah. In subsidies showing the largest increase in Figure 1.1. Government subsidies have increased since the crisis... Central Government Routine Expenditures, 1994/95 - 1999/2000 Constant 1993/1994 prices (Billion Rupiah) sonno -l-z- * ' 40D50 S__ -_v0- * Subsidies -, V ~~~~~~~~~~~~~~~~~~ ~~Debt Servce O Transfer to .0 000 i ;;4 - - --- r - - ||i L - zL ~~~~~~~~~~~~~Payments irma - i ~~~~~~~~~~~~~~~~~~~~~~~~~Regiens -oooo MLterials II 1 Persennel - expendiures 1954ir95 1555/rnss 1555,r557 rOsa. 993 1599919951 Ii rsss, 0Znn i Source: Government of Indonesia. Note: 1) Preliminary actual figure 2) Revised budget Source return, other spending items had to be have to rise too, if oil prices stay at their compressed: personnel, material, transfers to current level. In addition, Government may the regions all experienced declining need to clear the arrears on its subsidy spending, while project aid barely kept up payments to SOEs that have accumulated with the 2.5 percent of GDP spent before the over the last few years4. crisis. 1.9 Alongside the increased demands on 1.8 For FY1999/2000, the costs of bank the public coffers during the crisis, the restructuring will drive up spending. implementation record has been somewhat According to current estimates these interest slower than budgetary allocations would costs on the newly issued bank restructuring suggest (Figure 1.2). The key reason for this bonds add up to some Rp. 34 trillion, was lower than expected disbursements of although the budget shows only half of that, donor funds. Now that government savings because asset recovery is subtracted from the have turned negative, these donor funds fully interest due. The recent decline in interest finance the development budget, either rates make the Rp. 34 trillion an increasingly through projects (35 percent) or through reasonable estimate. Furthermore, increases general budgetary support (65 percent). in civil service salaries and cuts in subsidies Project funding was only two-thirds of what are planned. For the latter, although was budgeted for, whereas general budget Government has eliminated some petroleum support fell short as well because of policy subsidies, others remain, and become more expensive because of the steep rise in oil prices. Moreover, electricity subsidies will 4Some Rp. 16 trillion in arrears are outstanding to Pertamina and PLN. 3 Public Spending In A Crisis Figure 1.2. Only 73 percent of the development budget in FY98/99 was actually spent... implementation slippage. The shortfalls in because a part of the development budget implementing the budget were also not goes towards paying civil servants evenly distributed. Spending by Government compensation rather than the acquisition of institutions and on national defense and capital goods._ security was more than 20 percent above budget while the categories Housing and Sectoral Composition of Expenditures Human Settlements, and Regional Development saw less than 60 percent of 1.11 The fiscal pressures that have their budget being actually realized.' resulted from the crisis have also had their toll on the spending on Indonesia's social 1.10 Savings have collapsed, sectors, and hence, on public sector ser-vice Goverment savings collapsed from 7.8 delivery in these sectors. Total realized percent of GDP in 1997/98 to 1.2 percent of public spending on education has declined GDP in 1998/99. They are expected to turn both as a share of total govenment negative in FY99/00 (i.e. dis-saving). This expenditures (7.7 percent in 1996/97 to 3.9 decline in Goverment savings accounts for percent in 1997/98) and as a share of GDP the bulk of the decline in national savings (1.4 percent in 1996/97 to 0.7 percent in from 26 to 17.7 percent of GDP. Unlike 1997/98). Similarly, realized health most countries that see a sharp decline in expenditures have suffered as well. Total Government savings, private savings public sector health spending has fallen by 8 declined as well. The decline in savings is percent in real terms in FY97/98 and a more pronounced than what the fiscal further 12 percent in FY98/99 (declines of 9 numbers (in IMF format) show, because it percent and 13 percent respectively in real excludes interest payments on the bank per capita terms). The gap between restructuring bonds of some 2.8 percent of 1.11 The_ isca_presure_tha_hav GDP. In reality, savings are even lower, 6 These are normally due to the honoraria and transportation costs that are associated with development project implementation, The office 5Besides budget finance, the military has revenues stationary and supplies related to the implementation of from its business operations, which range from exterally-funded development projects are also business to timber. Most of these businesses are financed out of the development budget and not by the brought under Foundations which are run in routine budget. cooperation with private sectors firms. Each branch of 7 Since the main focus of this report is on budgetary the military has its own foundation: Karita Eka Pasi for processes, a more detailed assessment of public the Army; Bu umyanca for the Navy; and Adi s gaya expenditures in key sectors of the Indonesian economy for the Air Force. As with the private sector, the is provided in Annex 1 elsewhere. For instance see revenues of these foundations have also been adversely Health Expenditure Review (1999), Environment affected by the crisis. Typically, these off-budget Expenditure Review (1998), Review of Social Safety revenues are used for maintenance, salary supplements Net budget as reported in President's Report for Social and military equipment purchases. Safety Net Adjustment Loan (SSNAL). 4 Public Spending in a Time of Change budgetary allocations and actual spending three-months extension of their fiscal year on health increased as well during the spending authority. This measure was also crisis (rising more than two-fold between called for as a result of the need to set up 1997/98 and 1998/99). Social safety nets appropriate entities in govemment, with that were instituted with the objective of active civil society involvement, to monitor the use of funds earmarked towards social sromthielding effectsof the poore abe grou safety net expenditures. So far no resources from the ly effects of the cirss, have also from the 1999/2000 budget have been spent grossly under-spent their budgetary on employment and income support allocations. In fact, just before the end of programs, pending improvements in targeting FY98/99 the social safety net program and financial monitoring. implementing units were granted a special Figure 1.3 Budget not stimulating enough Percent of GDP 2.00 Actual 1.00 baance 0.0 -1.00 * OActual Fiscal Deficit -3.0 A Cyclically Neutral 4.40 ElBalance Fiscal Impulse -s oo- l \ F~~~~~~~~iscal - -6 o uGet impulse -7.00 Cyclically neutral balance 96/ 97/98 98/99 9912000 ENVISAGED FISCAL STIMULUS DID NOT partly because the assumptions made in the MATERIALIZE budget on the exchange rate and interest rates were too pessimistic, so that the rupiah 1.12 With the aim towards generating a equivalent of debt service payments from the fiscal stimulus, the government's budgets in budget were lower than anticipated. (Figure the post crisis period envisaged a significant 1.3). Meanwhile, the fiscal impulse (which is increase in government expenditures relative an indicator of change in fiscal policy stance) to pre-crisis levels. The State Budget aimed is estimated to be almost zero (i.e. no budget at achieving budget targets of 7.8% of GDP stimulus) this fiscal year. This result is for FY1998/99 and 5.8% of GDP in FY1999/2000. In practice, the deficit tumed out to be substantially less than planned, just 2% of GDP last fiscal year and an estimated deficit" is defined as [Revenues/GDP] -/- 4 percent of GDP this fiscal year5. This is [Expenditures/GDP]*[Potential GDP/GDP]. Potential GDP was calculated with a Cobb-Douglas Production Fiscal impulse is the change in fiscal stance, where Function, assuming 1 percent Total Factor Productivity Fiscal impulse is the change infscal stance, where (TFP) growth (see Armstrong et. al and Sarel). the fiscal stance is the difference between actual and FY96/97 is taken as the base year, for which the fiscal cyclically adjusted deficit. The "cyclically adjusted stance is zero by definition. 5 Public Spending In A Crisis sensitive to assumptions about how potential second quarter). But withholding taxes on output growth is computed and the base year wages are also up-which is signaling the used to determine fiscal stance. possibility that wages may now be catching up with inflation. 1.13 Lower spending was the main cause of the lower than anticipated fiscal stimulus. 1.16 Meanwhile, spending this fiscal year This in tum can be attributed to three factors: is off to a modest start once again. Many (i) delays in the disbursement of foreign project offices have yet to receive their loans; (ii) delays in allocating spending authorization to spend. The fact that the authority to project and program Central Government has introduced a new implementing units in government; and (iii) system for distributing this spending the prohibition on domestic financing of the authority-in itself a laudable initiative- fiscal deficit.9 In addition, concerns about does not necessarily deal with this obstacle: how fast the govemment could increase spending authorizations are now stuck at the spending, and in particular, the governance of KPKNs, and so the regional governments are the social safety net programs, led to a slow- slow in disbursing the funds. For instance, down of actual disbursements of budgeted the Social Safety Net funds are not resources, and hence, a smaller realized fiscal disbursing at all in recent months. The deficit than was anticipated. Government is trying to address concerns from civil society and the World Bank about 1.14 The budget deficit for FY1999/2000 the possible misuse of public funds and to may again be lower than planned. Revenues ensure that appropriate safeguards are in are likely to outperform the budget estimates place before expenditure authorization are by a margin of at least 1 percentage point of issued. Increased pace of spending must be GDP because of higher oil revenues lower; undertaken without compromising on the development spending; and lower than quality of the projects and the integrity with anticipated interest spending on bank which the public funds are spent. restructuring bonds due to lower interest rate. Also, the implied elasticity of domestic (non- DEEPER IN DEBT oil) revenue growth to GDP growth in the budget is lower than historically evident. 1.17 The crisis left the Indonesian This elasticity is assumed to be almost zero Government deeply in debt. As a result, the in the budget numbers, while even in the inflexible public expenditure components crisis year 1998/99, this elasticity actually (i.e. debt service payments) have increased, reached 0.64. With improved tax thereby reducing the Government's administration, these tax revenues could budgetary room to maneuver. Total debt increase further, thereby lowering the fiscal jumped from a pre-crisis level of 24 percent deficit as well. of GDP to more than 90 percent of GDP by the end of the current fiscal year. For the first 1.15 The first quarter of FY99/00 seems time since the 1970s, the Government will to confirm these fears: higher revenues and also be in debt domestically, due to the Rp. lower spending than planned caused the 560 trillion (45 percent of GDP) in bonds it budget to be in surplus over that period. had to issue in the course of bank Revenues have rebounded due to higher oil restructuring this fiscal year. Meanwhile the prices and higher income tax revenues. The revenue base remains weak, although the latter is in part due to the high interest rates recovering oil prices are providing some that still prevailed in the first quarter of the budgetary relief. calendar year (and that are taxed in the 9The prohibition on domestic borrowing is part of the MPR instructions to the Government as well as an integral part of the IMF program. 6 Public Spending in a Time of Change Figure 1.4: Indonesia 's*fsca developments at a glance The crisis has driven the budget into deficit But Indonesia usually underbudgets its revenues .0 a Peroe nt o/ GDP Blilon~~~~~~~~~~~~~~~~~~8110 Rup/aS 2Do ~~~Revenuesi 150~~~~~~~~~~~~~~~~~~~~~~~~~~~~050 e _ ~~~~~~~~~~ ~~~~~ _w ,4~~~~~~~~~050,0 /. s. So *70ncs .. ~~~~~~~~~~~Actual . /.--. -100 409= s4ss5 80/8 00/97 57/88 98989 95/0000 80/8 8880 80.80 07/8 08/0 88/80 and sEends less than planned .keepin fscal stimulus too small. 200.0 .5 0 94195 95M 96)97 97M mm 9912000 ~~~~9484 5/0 8007 97/9 0099 880 13,11-n Rup,.h P.r ...t of GOP Budgeted Act Bu dgetedal 2DO.0/0 '. . 4/ . . \-. *o.sro00/80 *0/07 07/88 08/88 s00o 4is4 s5i96 9*OO Realizedj'-. The crisis has led debt to explode.... If effective interest rates on recapitalization bonds are low, it will tend to keep debt at sustainable levels. 7'0/ -5 00.0 .~~~~~~~~~~~~~~15 Ls utial / o I -c With market rates 200 / .205 c. -30- 04185 85/86 96/87 87/98 00/88 88/00 -s Morve SustainableAlpDet / FP94/95 FYS5/96 FY56/97 FY97/9e FY98/99 FY99/00 Debt includes bank restructuring bonds from 1999/2000 Note: the graph pictures the standard debt sustainability condition: Ad=[(i-gP(] +g)]d, +-pb, where d is debt to GDP, i is the nominal interest rate. g the nominal growth rate, and pb the primary balance as percent of .________________________________________ .GDP 7 Public Spending In A Crisis 1.18 The sharp real depreciation of the nominal interest rates and that the effective Rupiah added significantly to Indonesia's interest rate paid on government debt is far debt burden. Of the 24 percentage point of below market rates." Thus, even with small GDP increase in external debt between primary deficits-the budget deficit net of FY96/97 and FY98/99, two-thirds was interest payments-the debt to GDP ratio due to exchange rate variations, will tend to fall over time (Figure 1.5). In and only one-third to Figure 1.5: A long way down disbursements. Obviously, any (Debt to GDP) appreciation of the Rupiah will G-em-n 09D.bLUG DP help reduce the extemal debt burden as a share of GDP. If this No primary suplus is accompanied by the continued reduction in interest rates and EU.N-r,, declining inflation, Indonesia's ,, \ debt burden could be maintained With 2 perceni at fiscally sustainable levels through prudent debt 0. Pre-Cr,is Lever management practices. FY99100 FYO2,03 FYO4/05 FY07/08 FY10/11 FY13l14 1 .19 Prudent debt management, Note: The chart plots prospective debt/GDP ratios under the in a fiscally constrained assumption of gradually falling inflation and interest rates, and a rebound of growth to 5 percent in FY2001/02. environment that Indonesia finds itself in today, will require the Source: MOF, IMF data; staff estimates authorities to carefully monitor the ratio of debt to government revenues carefully over time. In reality, however, primary balances have order to track fiscal flexibility, the come down. The record surplus of 3 composition of the expenditures will also percentage point of GDP in FY97/98 have to be closely observed-specifically, withered to a mere 0.1 percentage point in the ratio of inflexible components of public FY98/99,'2 and is projected to turn slightly spending to total expenditures. One such negative in FY1999/00. Therefore, achieving component is the interest bill on the bank fiscal sustainability over a medium-term restructuring bonds that the government has horizon will, first and foremost, require issued this fiscal year. This will depend on primary surpluses. With interest payments the behavior of domestic market interest rates (at market rates) rising to some 4-5 percent of in Indonesia. Illustrative scenarios using a GDP, attaining primary surpluses that are standard macro-fiscal analytical framework comparable to pre-crisis levels would limit show that at projected rates of interest, GDP the budget deficit to less than 4 percent of growth, and primary balances, the debt-to- GDP. GDP ratio is likely to fall over time despite the rapid growth in government debt'° 1.20 The low effective interest paid over (Figure 1.4). The reason for this is that Government debt is a result of three factors: nominal growth is expected to outpace (i) the interest rate; (ii) the real appreciation of the Rupiah which reduces the Rupiah value of interest paid in foreign currency; and If one uses the crude definition of fiscal (iii) the low interest rate paid for the bank sustainability on the basis of the "fiscal rules approach" (as opposed to the more sophisticated "balance sheet approach"), debt is deemed to be sustainable if the ratio The effective interest rate is calculated as the actual of debt to GDP does not increase over the projection interest paid as a percentage of outstanding debt. horizon. On this basis, Indonesia's debt burden seems 12 This definition excludes privatization revenues, sustainable for now. which is considered as financing. 8 Public Spending in a Time of Change Box 1.1: Contingent Government Liabilities: A Hidden Risk to Fiscal Stability Recent events in Indonesia have shown that contingent liabilities can rapidly turn into actual liabilities which are immediately due-with serious fiscal implications. The extent of the materialized liabilities is typically a function of: (a) the severity of the crisis; and (b) the underlying structure of the activities most affected. All sources of fiscal risks must be addressed if governments are to avoid sudden fiscal instability and realize their long-term policy objectives. There are four types of liabilities: direct and contingent, each of which is either explicit or implicit. Direct liabilities are obligations that will arise in any event. They are predictable according to specific underlying economic and policy factors. Contingent liabilities are obligations that are triggered by a particular discrete event, which may or may not occur. They are sometimes optimistically deemed unlikely to occur at the time the obligation is assumed. The probability of contingency to occur and the magnitude of the required public outlay are exogenous (e.g., the occurrence of a natural disaster) or endogenous (e.g., implications of market institutions and of the design of government programs on moral hazard in the markets) to government policies. Explicit liabilities are specific govemment obligations dcfined by law or contract. The government is legally mandated to settle such an obligation when it becomes due. Implicit liabilities represent a moral obligation or an expeoted burden of the government not in the legal sense, but based on public expectations and political pressures. Based on these characteristics, there are four types of fiscal risk: * Direct explicit liabilities are the main subject conventional fiscal analysis. The repayment of sovereign debt, expenditures based on budgct law in the currcnt fiscal year, and expenditures in the long term for legally mandated items, such as civil service salaries and pensions, and in some countries even the overall social security system. * Direct implicit liabilities often arise as a presumed consequence of public expenditurc policies in the longer term. Given their implicit nature, these obligations are not captured in government balance sheets. Typically, they are high for demographically driven expenditures. For example, in a public pay-as-you-go scheme, future pensions constitute a direct implicit liability, the size of which reflects the expected generosity of and eligibility for a benefit, and the future demographic and economic developments. * Contingent explicit liabilities are govemment legal obligation to make a payment only if a particular event occurs. Since their fiscal cost is invisible until they are triggered, they represent a hidden subsidy, blur fiscal analysis and drain government finances in the future. Therefore, state guarantees and financing through state-guaranteed institutions, look politically more attractive than budgetary support even if they are more expensive later. In the markets, contingent govemment obligations may immediately create moral hazard, particularly if the govemment guarantees the whole rather than a part of the underlying assets, and all risks rather than selected political and/or commercial risks. State insurance schemes often cover uninsurable risks of infrequent losses that are enormous in total magnitude. Thus, rather than financing themselves from fees, they redistribute wealth and rely on government net financing. * Contingent implicit liabilities are not officially recognized until after a failure occurs. The triggering event, the value at risk, and the required size of government outlay are uncertain. In most countries, the financial system represents the most serious contingent implicit government liability. Experiences have indicated that markets expect the government to help financially far beyond its legal obligation if stability of the financial system is at risk. Fiscal authorities are often compelled also to cover the uncovered losses and obligations of the central bank, sub-national governments, state-owned and large private enterprises, budgetary and extra-budgetary agencies, and any other institutions of political significance. Contingent liabilities rise with weaknesses in the macroeconomic framework, financial sector, regulatory and supervisory systems and infornation disclosure in the markets. With private capital flows, for instance, such weaknesses elevate the risks in assets valuation, intermediation and borrowing behaviors in the markets. Source: Hana Polackova, World Bank, PREM Note, 1998 restructuring bonds. The Rp. 34 trillion in 1.21 Under current circumstances, the interest due for bank restructuring this year high levels of Government debt are here to implies an interest rate of less than 8 percent stay. Without primary surpluses on the nominally for the bank restructuring bonds budget, it will take until FY08/09 until debt and an assumed asset recovery rate of Rp. 17 is back to 60 percent of GDP-the European trillion. Union norm that has become an international 9 Public Spending In A Crisis standard for a prudent level of debt. But even 1.24 The govemment's fiscal situation is with primary surpluses similar to those of more vulnerable to interest rates than the Indonesia before the crisis, our analysis exchange rate. This is partly due to the suggests that debt will not return to its pre- significant domestic indebtedness levels and crisis level until FY2013/14. because the Government's oil revenues provide for a natural hedge on its foreign Increased vulnerability exchange denominated fiscal obligations, Oil revenues will go up in Rupiah, if the 1.22 The high levels of government debt exchange rate appreciates. But interest makes the budget more vulnerable to shocks. payments and oil subsidies more than offset Variations in interest rate, exchange rates, this effect. and inflation all affect the amount of government debt service. Specifically, FISCAL RISKS FROM OFF-BUDGET CLAIMS foreign debt is affected by variations in the ON GOVERNMENT ARE ON THE RISE exchange rate, whereas domestic debt is affected by variations in interest rates (due to 1.25 The fiscal risks from contingent the market rate linked bonds) and inflation liabilities remains high (Box 1.1) In (due to the indexed bonds). Indonesia these stem from: (1) guarantees to protect depositors in and creditors to the 1.23 The lower interest rate and the banking system, (2) sovereign guarantees stronger Rupiah this fiscal year have already that may have been given on insured credits saved the Govemment considerable amounts (through, say, OPIC in the US or MIGA) to of debt service. But the level of interest rates private infrastructure providers, for instance, in Indonesia also influences the exchange in the provision of toll roads, (3) obligations rate, and, through the demand for money, of minimum pension payments, and (4) a also the inflation rate. Illustrative scenarios number of guarantee schemes to the private that were conducted for this report using a sector (some of which were instituted since standard macro-fiscal projection model the crisis to restore the flow of credit). Of suggests that a 1 percent increase in the these, the banking sector liabilities have domestic market interest rate (in real terms), already come due, with annual costs of about all other things being equal, will increase the 7 percent of GDP over the next few years fiscal deficit by 0.3 percent of GDP due to (assuming a 15 percent interest rate on the increased share of debt service payments. recapitalization bonds), and there is some Similarly, a 1 percent increase in domestic possibility that these costs may grow before inflation (as measured by the CPI) will declining."3 In addition, future claims on translate itself into a 0.25 percentage point of public funds may be called upon due to GDP increase in the fiscal deficit. Based on implicit contingent liabilities with significant State Budget numbers for FY 1999/2000, a potential fiscal costs. In the case of Garuda ten percent depreciation in the Rupiah would Indonesia, the state-owned airline, the increase the deficit by some 0.25 percent of government has recently decided to take over GDP. On a cash flow basis, the effect of a the repayment of Garuda Indonesia's external depreciation looks better at first sight: debt totalling about US$1.8 billion for the because of the large inflows from foreign lease of 11 Boeing 737s. This will imply a borrowing, and fairly small debt repayments, fiscal cost of US$62 million a year, on the net cash flow effect on the government's average, for the next eight years.'4 Of coffers is a positive 0.2 percent of GDP for particular concern can be the off-balance every 10 percent depreciation of the Rupiah. sheet obligations of public sector Unfortunately, this positive effect is nullified, once the debt has to be repaid a similarly 13 As mentioned earlier in the chapter, this estimate is depreciated Rupiah levels. Also, for every highly sensitive to the market interest rate on bank US dollar drop in the oil price, the deficit restructuring bonds at any point in time. would rise by 0.1 percent of GDP that year. 4 Source: Newspaper article in Antara, Jakarta, September 22, 1999. 10 Public Spending in a Time of Change corporations, which ultimately are the cost." (Vieira da Cunha and Brock 1997; see obligations of the Govemment.15 The main also Caprio and Klingebiel 1997). sources of fiscal risks to the Indonesian government may emerge from the following: Power sector Banking sector 1.28 As with the banking sector, the 1.26 These liabilities are no longer present financial stress in the power sector on mates from actions undertaken before the continent. he inidenc of dposit crisis. These include concerns about excess guarantees has resulted in an involuntary cut cr geserin concems c batineaneth back of fiscal resources that can be available power generation capacity creation and the bcof fiscrtioaly rsurlicexesnthatubes aaile no unsolicited long term take-or-pay contracts for discretionary public expenditures sice no that PLN signed with some of the 26 such provision had been anticipated in the independent power producers (IPPs). budget prior to the crisis. However, contingent liabilities still exist to the extent 1.29 The crisis has aggravated PLN's debt that the level of non-performing loans turns burden. The Rupiah value of its US$ out to be larger than current estimates denominated debt obligations (which suggest or if it grows (perhaps due to the includes debt service to GOI on on-lent emergence of negative interest rate spreads in loans, gas purchases for its own plants, and the banking system). The extent of the purchases of power from IPPs) skyrocketed problem stems largely from the widespread as Rupiah depreciated. The gas purchases, structural problems in the financial sector through Pertamina, are backed by standby that predate the criiss. The banks were letters of credit on state banks, and were of exposed to significant risks on account of much greater impact initially than IPPs since large borrowings in foreign currencies. The only a few small plants were on stream when 1997 crisis severely aggravated any non- the crisis hit.16 Moreover, energy sales in performing loans and led to a quantum jump Java-Bali (80 percent of PLN's market) are in external debt liabilities. likely to remain flat. PLN's current weak financial situation implies that it will be 1.27 Indonesia's experience with the huge unable to meet all its contractual obligations. banking sector liability mirrors similar As more IPP's come on stream, PLN's fiscal problems in the other crisis countries in the . . . ' situation will come under increasing region. Though the depth of the Indonesian pressure. As such, PLN's ability to meet its difficulties is greater than that in the other obligations under the take-or-pay contracts crisis countries, it is not unique. Where could perhaps force it to defer payments on deposit insurance exists (and is extended, as ' some of ItS other continuing obligations. in Indonesia, to all creditors) and the asset base is increasingly suspect, incentives to 1.30 The resulting implications of the undertake further risky lending are high. A crisis are serious. The IPP capacity recent review concludes: "In just two or three contracted for by PLN is just coming on years excessive risk taking and rapid credit stream. During the fiscal year 1999/2000, creation can cause a banking crisis that can additional monthly payments of about $50-60 easily involve a direct fiscal cost of 8 percent million (about 0.4 percent of GDP) come of GDP and contingent debt liabilities of 40- due. These payments will continue to 50 percent of GDP. Deadweight costs of increase for the next 4-5 years as successive taxation as well as costs associated with Inc reasf th nex iver as Succe bankruptcy proceedings and the interruption IPPs get ready to deliver power. Since of new lending can easily double the fiscal virtually none of the new capacity that comes on stream will be used in the next 4-5 years, 15 While this is a serious problem in some countries, 16 Malaysia, on the other hand insulated itself from the World Bank's Public Expenditure Review in 1998 this type of adverse effect from the crisis since it has a concluded that the off-balance sheet activity in public relatively more developed domestic capital market sector corporations is not high. through which most of their IPPs were financed. 11 Public Spending In A Crisis given the high level of contracted capacity part, because of a relatively modest-sized relative to anticipated levels of demand, these pension system. In 1995 (the most recent new obligations will present a huge drain on data that is available), just 12 million the financial resources of PLN. workers (less than a fifth of the workforce of 86 employees) were enrolled in pension 1.31 PLN and the Indonesian Government plans (Leechor 1996). Of the 12 million are also exposed to risks associated with workers, 8 million were members of the legal action which, if they lose, could entail mandatory Jamsostek program and the rest significant contingent claims on them. were covered by a civil service program, referred to as Taspen. Though larger in terms Roads of employees, Jamsostek had a much smaller financial asset base. 1.32 In Indonesia, the Government's obligations for toll road projects are 1.35 Pension enrollments, however, are apparently more modest than in the power now growing without a corresponding sector. This is the case for two reasons. increase in their funding and asset base. First, many of the roads carry intra-urban Moreover, as the population grows older over traffic, which is relatively well-established the next 25 years, the issue will become more and steady. These roads, therefore, have not pressing. Enrollment in Jamsostek grew to been seriously affected by the crisis. Second, almost 14 million employees in February the Government has few explicit guarantees, 1999, faster than the growth of the labor unlike in Malaysia where default on its loans force (which in 1998 was about 100 million by the project typically requires the employees). The Government's obligations Government to pay the outstanding debt and vis-a-vis Jamsostek are not clear. The take over the project (see Box 1.2). Ministry of Manpower is responsible for enforcing the mandatory enrollment but there 1.33 However, the full extent of the are no direct financial obligations to top up obligations may be larger than is apparent. pension payments. Those contributing to the Much of the financing of the toll roads came plan do not always get the credit for their from domestic banks. The non-performance contributions and administrative expenses of the toll roads would show in the non- have been high and, as such, the rate of performing portfolio of the banks, which in compliance is low. The consequence is that turn are backed by the Government. Thus, Jamsostek has virtually no return on its there may actually be more exposure to the assets. Government from the toll road projects than is evident." 1.36 The Government's obligations to the Taspen are clearer, and though smaller in Pension liabilities enrollment, the obligations are substantial. Taspen is partially funded from the salaries 1.34 For the public pension funds these of civil service employees. Of the 8 percent are not a contingent but statutory liabilities of of salary contributed, 3.25 percent goes the government. But under a pay-as-you-go towards partially financing lump-sum system, the Government carries a contingent benefits and a defined-benefit program. The liability to the extent that it has an obligation rest, 4.75 percent of the salary, pays 22.5 to meet some minimum pension payments. percent of the pension benefits. Since the Though the immediate obligations in Government is not permitted under the Indonesia appear manageable, the long-term current law to make advance funding trends are serious. Indonesia benefits, in arrangements, the program is heavily under- funded and hence benefits are paid from the 17 It should be noted that, to the extent this is already general revenue. Taspen's assets, which have part of the overall bad debt portfolio of the troubled grown only modestly in recent years, are banks in Indonesia, it is not an additional liability for expected to decline as the benefit payments the government. 12 Public Spending in a Time of Change grow. In Rupiah terms, assets have just about they have actually gone down over the past 4 kept pace with inflation and in dollar terms, years. Box 1.2: Contingent liabilities in Malaysia The recent economic downtum has significantly increased the contingent liabilities and converted some into real liabilities for the Govemment of Malaysia. These are most important in the transport sector. Especially for the light rail projects, the Govemment World Bank estimates show that the expected costs of the contingent liabilities may be in the region of 60-80 of project costs (see discussion of expected and unexpected costs in the next section). Road projects have also suffered, but not to the same extent. Also, the vulnerability to further downturns has increased since profit margins have been cut and the probability of project default has, therefore, increased. Four reasons explain the severity of impact: First, in many cases, project revenue forecasts were optimistic. Under the due diligence process (and the absence of competitive bidding), the incentives to realistically estimate project revenues were absent. As such, the project economics appeared better than they really were. Second, government guarantees are more extensive than was perhaps necessary. In effect, the Govemment has an obligation to take over the project (and repay the outstanding debt) if the project defaults on debts due. This implies that the Government stands to become the owner of poorly performing projects. Third, guarantees provided on maintaining toll rates have come due in some instances as the raising of tolls has proved impractical in the current economic environment. Finally, the severe reduction in traffic volumes has sharply reduced cash inflows. In sum, the problems being faced by the transport sector in Malaysia are only partly due to the current economic crisis. The crisis impacted on a structure that had been rendered vulnerable by the limitations of the due diligence process and extensive guarantees that narrowed the range of risks borne by the private sector. New off-budget obligations addition, guarantee schemes to facilitate credit to small producers and exporters are 1.37 The government is exposed to under consideration. While the Central Bank additional fiscal risks due to the sovereign has limited exposure in the international guarantees that were issued after the crisis derivatives markets, it does carry some credit with a view to restoring the flow of credit risk by rediscounting of letters of credit into the economy and as a mechanism by received by exporters. While not explicitly a which external creditors could eventually guarantee, the process exposes the Central regain confidence in the ability of Indonesian Bank to the credit risks of the borrower. As banks and firms to meet their debt such, these guarantees are an example of obligations. Guarantees, for example on legitimate policy action to revive growth. inter-bank credit, have already come due in However, they carry with them the downside part. Further, the external borrowings risk that, as with past guarantees, some of rescheduled under the Frankfurt Agreement them may be called. with external private creditors carry the guarantee of the Indonesian Government. DOMESTIC RESOURCE MOBILIZATION Also available is the exchange rate guarantee EFFORTS NEED TO BE STEPPED UP scheme under the Indonesian Debt Restructuring Authority (INDRA).i In 1.38 The constrained fiscal situation that Indonesia finds itself in today (even before proper accounting of contingent liabilities is 18 The govemment has put in place a risk mitigation done in the budget policy, planning and scheme to minimize the contingent liability it may be evaluation process) reinforces the need to faced with due to this foreign exchange guarantee. find ways of financing any fiscal deficit Specifically, INDRA pays interest to the creditors in dollars at the rate of LIBOR plus margin up to 3% and through sustainable instruments-both on the (after at least 3 years) principal. Payments are made expenditure and revenue sides of the quarterly over the life of the restructured debt. The foreign exchange rate is fixed at the rate prevailing on the date the INDRA scheme was instituted with an govemment the option to use the prevailing rate at that adjustment provision in July 2000 that gives the time if it lowers the cost of the guarantee. 13 Public Spending In A Crisis government budget. In the short run, a prime First, without further fiscal policy measures, candidate for expenditure cuts is energy the capitalized surplus of revenues over subsidies. These subsidies-which will spending has turned into a large deficit- amount to over 2.5 percent of GDP this evaluated at 10 percent- interest this year-are still badly targeted, and mainly represents an asset value of over Rp. 500 enjoyed by the better off. To reduce the trillion. Furthermore, the crisis has revealed subsidies, Government must embark on a some key vulnerabilities in the government's program to progressively increase energy fiscal situation-contingent liabilities. The prices to world market level-while guarantees the Government has handed out protecting the poor with properly targeted before and during the crisis-such as the safety net arrangements. Perhaps some Central Bank's credit and exchange rate minor cuts in the development budget could guarantees-will impose an additional cost to be carefully considered. But over time, as the Government, which could be significant. tax revenues increase, better budgetary Although the Government is still assessing processes are the key to better allocation of the exact size of its contingent liabilities, it is public money. clear that the government's net worth will be impaired by them. 1.39 There is also still hope of further domestic resource mobilization possibilities 1.41 Unfortunately, arrears by the that could finance public spending. For government on subsidy payments to the instance, the Government obtained some state-owned enterprises are being used as a assets in exchange for the massive amount of cash management instrument. At times of bank restructuring bonds. Some of these fiscal difficulties, perhaps due to the slow assets are typically claims on banks that have disbursement of donor resources, arrears on already failed, and are likely to be worthless. subsidy payments have accumulated while an But some assets have been obtained from affected SOE has had to borrow from the settlements with former bank owners. With state-owned banks to meet their operating an economic recovery, these acquired assets expenses. In FY1998/1999, this was indeed could actually be sold at or close to book the case with the its subsidy payments to value. It is too early to tell what in the end Pertamina, PLN and Bulog. Over the past the net costs of the banking crisis will be, but few years, arrears to these SOEs have a start can be made by looking at the effect accumulated to the tune of Rp16 trillion. On on the Government's balance sheet. Before the one hand, this is positive news since the crisis, this balance sheet had-apart from spending and the fiscal stimulus may have Government owned enterprises and actually been larger than the budget shows. infrastructure-external debt to the tune of On the other hand, it means that the 23 percent of GDP, future revenues, and Government's debt is larger than the future spending obligations. The balance accounts show, if these arrears are to be paid was the Government's networth. off. The Government now plans to pay off these arrears in the current fiscal year. This 1.40 After the crisis, the Government had a intention of the government will significantly large amount of debt, less future revenues, add to its already tight fiscal situation. more future spending obligations, and state- owned enterprises that probably lost some of 1.42 There are also additional off-budget their value in the course of the crisis. But the items that cannot be ignored. The central Government has new assets as well: the bank has received indexed bonds from recovery potential of the assets transferred to Government to replace the liquidity support IBRA in the course of Bank restructuring. A the bank gave to commercial banks that faced rough estimate puts this at Rp. 270 trillion, or a bank run at the height of the crisis. These almost half of the value of the restructuring bonds only pay 3 percent in interest, but the bonds issued. However, there are several face value is indexed with inflation. To pay caveats which must be noted in this regard. for this, the Government may need to issue 14 Public Spending in a Time of Change new bonds. In effect, therefore, Government of new bonds, but neither is show in the finances interest payments with the issuance budget. Box 1.3: Problems With Contingent Liability Management in the Czech Republic A review of procedures and institutions in the Czech Republic is illustrative of the standards typically in place for the management of contingent liabilities. The two broad questions that require attention are: when should guarantees be issued and how should they be contained within manageable limits. Neither objective is adequately dealt with in the current policy framework for guarantees. * Absence of aframeworkfor the issuance of contingent liabilities. The law authorizing guarantees contains no guidance on when guarantees are the appropriate public policy instrument or how they should be compared to other form-s of state assistance. "This shortcoming has created an incentive for entities and spending ministries unable to secure the desired level of state assistance through the budgetary process to seek state assistance outside of the budget process through loan guarantees. The additional state assistance provided via guarantees is perceived as cost free and is not included in the overall financial support provided to a given sector." Also, "...guarantees are often extended as a result of emergency and political pressure rather than as a result of a strategic decision to support outcomes..." (World Bank 1999, pp. 10-1 1). * Guarantees are not budgeted for, nor are they subject to meaningful limits. In the absence of systematic budgeting, one way to contain contingent liabilities is to place limits on their issuance. In the Czech Republic, the sum of expected payments on guaranteed loans in a calendar year is required to be lower than 8 percent of the expected state budget revenues. This limit is too high. In Hungary, the limit is set at I percent of the face value of the guaranteed amount. Despite these criticisms, it should be noted that the Czech system is probably ahead of systems in other countries in as much as procedures are in place to document the contingent liabilities and even to categorize them according to risk categories. The payments made under guarantees called are also recorded, These are essential first steps towards a more comprehensive system. However, the absence of a framework for guarantee issuance and the lack of controls has meant an unrestricted growth, with payments on some guarantees coming due and others under high risk of default. This is the classic situation where "hidden However, without domestic financing, and deficits" are created."' foreign financing driven by donors, strict deficit targeting-although worse for the 1.43 The Government's systematic under- economy-is the better option for prediction of revenues is probably driven by Government. More external financing may the prohibition (until recently) of domestic be needed as well. financing of a fiscal deficit. True counter- cyclical policy would realistically predict 1.44 Restoring primary surpluses will not revenues, and set spending targets in line happen without policy measures. On the with structural deficit targets. Disappointing revenue side, Government must raise the tax growth would then result in a shortfall of to GDP ratio by: revenues, and larger deficits which automatically stimulate the economy.20 * Reducing VAT and income tax exemptions. Under the old Government, 19 See Kharas, Homi and Deepak Mishra (1999) several industries obtained exemption Hidden Deficits and Currency Crises, World Bank from VAT and import duties, presumably (mimeo), April 1999. Also, see Easterly William to stimulate high-tech industrialization. (1999), When is Fiscal Adjustment an Illusion?, Economic Policy Journal, April 1999. Moreover, foreign enterprises have 2u Although some of the stimulus could be off-set by received generous income tax increased private savings. However, during the crisis exemptions, which, however will do little year (FY98/99) private savings dropped as well, and to stimulate investments because of their they are projected to recover only slightly in 99/00. design. To raise revenues, Goverment 15 Public Spending In A Crisis could consider abolishing the exemptions programs could include: subsidies for on VAT for hi-tech industries, and elementary schools in poor districts and to replacing the income tax exemptions support school attendance by poor children; with investment credits. subsidies for basic curative care for the poor; and public provision of communicable * Limiting special economic zones to truly disease control. As these are likely to be bonded areas. While the usefulness of implemented during a period of fiscal special economic zones can be debates, pressure, special care will need to be taken they should only be limited to truly when targeting beneficiaries and designing bonded zones. The current proposals for the specifics of these programs. expanding the special status of BATAM Island to the whole Barelang region is 1.47 Over the medium-term, the likely to cause much leakage in tax authorities need to take appropriate measures revenues, simply because the zone is too to ensure that debt and deficits remain large to be effectively monitored by sustainable in the future, and create customs. budgetary room for much needed civil service reforms. In addition, as shown earlier * Improving tax administration. Despite in this chapter, the Government's debt some structural changes over the last few obligations are here to stay for quite a while. years, including salary increases for tax Therefore, Government needs to be prepared administrators, the performance of the to manage this debt (domestic and external) tax administration remains below par. more aggressively. On the organizational The Government could spearhead its side, international experience suggests that anti-corruption policies through the tax this requires a dedicated unit in the Ministry administration, thereby raising buoyancy of Finance where all the necessary of tax revenues at the same time. information on the country's external and domestic public and publicly guaranteed debt P-OLICY IMPLICATIONS is brought together, maintained and analyzed on an ongoing basis.2' Further in-depth 1.45 In the short run, the government analysis of Indonesia's debt burden and debt management practices has become a must shift fiscal policy from fiscal stimulus nagem ent icerative. to fiscal sustainability, by cutting wasteful necessary and urgent imperative. spending such as energy subsidies, and by 1.48 Another urgent priority of the closing loopholes in the tax system and improving tax administration. At the same government should be to look more carefully time, Goverment must embark on a budget at the potential size and impact of the off- reform program that aims at a budget that budget items m ItS fiscal operations. includes all Government resources, accounts Specifically, the management of contingent for fiscal risks, and allows for fiscal liabilities should be treated as part of an decisions that ensure fiscal sustainability overall national risk management strategy. Over the medium-rune (Annex 2 outlines the key steps in this undertaking on the basis of international 1.46 Even in the constrained fiscal experiences). Ultimately, one's task should environment that the government will be to reduce both the frequency and the continue to face in the near future, the social severity of contingencies that create stress on safety net (SSN) expenditures must remain in the national economy. An integrated risk some form or another. Contrary to initial intentions, the government has recognized 26 See Potter, Barry H., et al (1998), Indonesia: Fiscal that some of these SSN programs will need Management, Decentralization and Organization of the to be replaced by more permanent fixtures Ministry of Finance, Fiscal Affairs Department, IMF, December 1998 which also addressed this issue in the that support the poor without interfering with context of an ongoing reorganization of the Ministry of the private provision of social services. Such Finance. 16 Public Spending in a Time of Change management process should perform three principal functions: Regulatory and process changes that should be initiated now, but will take longer to * Identify the risk exposures under the implement, in order to better track contingent contingent liabilities implicitly or liabilities include: explicitly undertaken by the govemment; implement control mechanisms to * Non-budgetary control mechanisms for prevent unintended losses on those risks; contingent liabilities. These and establish systems to continually mechanisms would apply to liabilities monitor and reassess how the grandfathered during a change in government's risk exposure changes over budgetary policy, or as a permanent time. management solution if the • Measure or quantifyr those exposures to government failed to enact a change in budget against expected losses and to set the budget law. Examples of such aside reserves against unexpectedly high measures are: publishing of losses. information on government exposures, establishing credit quotas (exposure * Undertake basic measures, including limits), and earmarking of future funds economic reforms, that reduce the to cover guarantee costs. government's exposure by fundamentally In parallel, the basis for measuring reducing risks and also by transferring "most likely " fiscal cost and risks to market participants. maximum likely" fiscal costs (also In the short run, the following measures called "value at risk") of various could be undertaken in order to better guarantees could be established. This monitor and manage fiscal risks: would permit the incorporation of such costs in the budget (either the face * Creating a single cell/department within value or a proportion thereof) even the Ministry of Finance to take full before an accrual budgeting system is stock of all guarantees issued, which in place. would require recording the explicit or implied guarantees, assessing the Government's budgeting and likelihood that the Government may be monitoring of guarantees (in line with called on to make payments under these the time frame of the overall budget obligations, and the monitoring of these processes) would create the appropriate checks within the system. * Creating a list of early warning indicators that signal the likelihood of realization of guarantees (e.g., in the banking system: rate of credit growth tothe private sector and exchange rate movements; in infrastructure: demand growth in relation with existing capacity). + At the same time the Government should begin identification of the contingent liabilities that it should phase out, either because they imply significant risks or because they no longer serve a significant social or economic purpose. 17 Improving the Budget Allocation Process 2. IMPROVING THE BUDGET ALLOCATION PROCESS T he tighter fiscal situation in the post crisis period has served as a wake up call to focus ones thinking towards the task of allocating budgetary resources to better reflect national priorities in the new democratic environment. Budgetary processes must be strengthened to ensure that the scarce public funds are allocated efficiently to those areas that will have the maximum intended impact in terms of public service delivery. To this end, institutional reforms are needed to ensure adequate audit, evaluation and feedback mechanisms are in place so that the mix of spending allocations in the budget is deemed acceptable to a wider spectrum of the public. This will go a long way in minimizing the existing divergence between budget estimates and budget outcomes. A NECESSARY RESPONSE IN A CONSTRAINED FISCAL ENVIRONMENT 2.1 The buildup of fiscal pressures and institutions that are involved in the increased vulnerabilities due to fiscal risks management of Indonesia's public finances since the crisis (that was discussed in the may need change as a result. In undertaking previous chapter) has made the assessment of such budgetary reforms, governments can budgetary processes in Indonesia a necessary improve their performance at three levels: (1) imperative. Clearly, there are political maintaining macro fiscal discipline; (2) dimensions to budget decision making. It is strategic priority setting; and (3) efficient important, therefore, to support this political public service delivery.' Several donor process with adequate information. The agencies, including the World Bank, are increased demands by the Indonesian public currently assisting the government in this for more open and democratic government regard.2 Figure 2.1 shows a schematic decision-making makes it an opportune time representation of the complex changes that for the authorities to undertake budget are taking place in Indonesia today. It reforms towards enhanced transparency in highlights the forces driving the need for budgetary processes. The incentives of the changes to the institutional framework for stakeholders must be reflected in the way fiscal management in Government. It also budgetary decisions are made, funds are illustrates the nature of the linkages that any appropriated and performance monitored. budgetary reformn measures must grapple International experience from both developed with towards attaining improved results in and developing countries has shown that public service delivery. enhanced transparency in budgetary accounting, planning and allocative decision- making will go a long way towards arriving at fiscal budgets that have maximum chances of being successfully implemented with the For details involving public sector performance at the necessary "buy-in" from the citizens of the thrce levels, see the World Bank's Public Expenditure country. Management Handbook- (1998). 2Besides this review of the public sector, the World Bank did another PER in 1998. In addition a World 2.2 The crisis also provides an opportunity Bank Civil Service Review is ongoing. Among other for Indonesian policy-makers to examine and donor agencies, the IMF has been working with the identify the structural weaknesses within its govemment on a number of public sector related issues public sector and to undertake the necessary including budgetary management. The IMF currently has two resident advisors in the Ministry of Finance. budgetary reforms in an appropriate The Asian Development Bank is also going to provide sequenced manner. The roles of the key some technical assistance in this area later in early 2000. 18 Public Spending in a Time of Change Maintaining Macro Fiscal Discipline as a whole. Consequently, there is an incentive for each ministry to overstate its 2.2 Many countries-developed and budgetary need. The result is an inflated developing-have found fiscal discipline an budget, with its attendant problems of elusive goal. The benefits of an increased economic performance. One possible way to allocation to a particular ministry accrues to avoid this fiscal problem is to have a strong that ministry, while the costs-in terms of central government agency, which can higher taxes or deficits-are borne by society enforce fiscal discipline in a transparent and Figure 2.1-A changing environment comes with risks and opportunities Globalization Democratization Decentralization Fiscal Transparency & I..reasod >Icr.rd rol > 0rse. rol ol pressures Accountability c-p.ioto of, lwmoi > LagL Debt > Reduced mobil resorces CIdoaton LocalI,eioite > Dtfi~ciSI l~eemfor Volai,le -ap-L D- -> Donrte c-po- > Piriocpalln PFi--g > De-ned for DOpen -erk-lo oo-e-meol Role of Indonesia's Government Risks O pportunities .Poiitical disintegration .Better government services .Macroeconomic instability .HZighe, growth . Inequaiity . Increased competitiveness Institutional Change Changing Changing Changing Changing Changing Processes Roles4f Resp- organizations incentives Legal > poicy onsibitites > MOF ' Defieeton of Framework foeeeulatieo 1- Planning > Beppecuertt1 MPlanong >. I- rgelar 5 Lo Reporting > Budgeieng > Cebtow Meo-ine,s eulett a' tegeslaleoc t endi t oa Reoeard& oC,bl tr tM--- antin accountable manner. Transparency and sources of "hidden deficits" that are due to accountability in the budget process will, contingent liabilities of the government. however, require appropriate institutions and These are not usually incorporated in fiscal public reporting requirements. Only then can policy debates unless a broader concept of one assess the true magnitude of the fiscal deficit-the deficit of the Consolidated deficit at any point in time. Ideally, this General Government-is considered. The would include proper accounting of the ongoing endeavor of the government to adopt 19 Improving the Budget Allocation Process the IMF Government Financial Statistics the tax-payers' money appropriately. Com- (GFS) system of classification of the budget plementary to this, the IMF Code of Good items is an essential step towards influencing Fiscal Practices on Fiscal Transparency the incentives of the stakeholders to spend provides a good framework to Box 2.1. Malaysia's Public Budget System Introduced in 1989 to incorporate greater managerial flexibility and accountability, the Malaysian public expenditure management system performs on par with international best practice as exemplified in a few OECD countries. It has the following objectives and features: Main objectives: * Promote a rational allocation of resources to government programs by imposing fiscal limits upon agencies and forging a link between inputs and outputs; * Improve discipline and rationality into the budget process by explicitly quantifying a binding expenditure limit for each agency, shifting from line item budgeting to performance-based budgeting, and producing output- oriented program structures; * Improve program management by adopting of better management practices, including encouraging greater delegation of authority from Treasury to agencies and then on to line managers; and * Reorient the focus of accountability on issues of program efficiency and effectiveness, by measuring performance against predetermined targets, evaluating programs and activities according to their impact and relevance, and matching accountability and authority by holding managers accountable for performance. Main features: * The public budget is divided into two parts: the operating budget and the development budget. The Treasury, which is part of the Ministry of Finance, has the primary responsibility for preparing the operating budget. The development budget is prepared by the Economic and Planning Unit that reports to the Prime Minister's Office; * A "Generalized Approach to Expenditure Control" is adopted which enables the Treasury to tighten the controls of overall expenditure and delegates the control over details to line ministries; * An "Expenditure Target" is provided to each Ministry/Department at the start of the budget process to which existing policy budget submissions must comply; * A "Program Agreement" is signed between the Treasury and the line ministry which determines the level of performance that can be achieved for a budget year with the allocation approved; * At the end of the fiscal year, an "Exception Report" is prepared by the line ministries regarding the performance of activities which do not reach the levels specified in the program agreement; and * "Program Evaluation" takes place for each activity at least once every five years. Source: World Bank, Malaysia Public Expenditure Review, 1999. make an assessment of the existing practices not integrated. Each agency has its own and desirable budget targets (see Box 2.1) for separate system, and no consolidated report an example of a good practice in public can be produced to show the current expenditure management. Government-wide financial position3. The present system is also largely manual and 2.3 Enhanced transparency in the does not capture accounting for non- reporting of the government's financial budgetary transactions. These are accounted position also requires an appropriate for in the DG Budget accounting system. integrated government accounting system. SOEs' finances and local and This is not in place in Indonesia at this juncture. The govemment accounting system consists of a number of subsystems which are 3 BAKUN does produce, two years after the end of the fiscal year, a consolidated government financial statement for submission to DPR. 20 Public Spending in a Time of Change provisional govemment finances are also not findings. The enforcement problem, captured by the Government accounting however, extends well beyond the auditor's system. In addition, there are no uniform responsibility. It stems in large part due to accounting standards used in the public weak enforcement and ineffectiveness of the sector. The Government plans to issue them existing sanctions for violations and in the current fiscal year. There are irregularities. In this context, it is important inefficiencies in the present system that that auditors use appropriate judgment in inhibit the effective monitoring of deciding when to refer delinquency cases to govemment financial transactions. An the courts, instead of reporting them to the appropriately devised comprehensive and police for action. But monitoring and follow- integrated accounting and budgeting system up of audit recommendations should clearly can address this current shortcoming.4 be the responsibility of the auditors. 2.4 Government auditing practices in 2.6 To be consistent with international Indonesia need to be revamped as well, in best practice, one must ensure that order to strengthen the overall accountability BEPEKA's rolc as the independent audit framework and enforcement mechanisms for agency of the Government is maintained. compliance with Government regulations and Furthermore, the oversight role of the policy. In addition, there is currently a lack of Parliament over the work of BEPEKA and its clarity in the mandate, scope, independence, audit findings, and implementation of and roles of BEPEKA-the Supreme Audit BEPEKA's recommendations, should be Board, BAKUN-the Government properly defined and exercised. Furthermore, Accounting Agency (which has the any disciplinary measures and sanctions for responsibility of recording and preparing the non-compliance and violations need to be Govemment's financial reports), BPKP-the clearly defined, communicated and enforced. Govemment's intemal audit agency, and the A comprehensive review of the intemal audit Inspectorate Generals (IGs)-the internal framework, including rationalization of the auditors of their respective ministries (which roles and responsibilities of BPKP, and the have a narrower mandate than does BPKP). IGs, should be conducted. The ADB is The work of IGs at the present time is not currently supporting the efforts by the well coordinated and is not complementary authorities to clarify and strengthen roles and to the work of BPKP. There are BPKP responsibilities of BPKP. offices nationwide with the exception of three provinces. Strategic Priority Setting 2.5 Currently, the enforcement power 2.7 Although strategic priority setting in and follow-up mechanisms of both BPKP the budget process has political dimensions, and BEPEKA are poor. For instance, this process must be supported by better BEPEKA cannot adequately certify information in order to enable policy-makers govemment financial accounts since it does to make better decisions. Such information not audit tax revenues. Furthermore, due to includes: the reasons for public sector legal impediments it cannot audit state banks. involvement and the appropriate instrument, Audit findings are not made available to the competing claims on the budget, linking public and there is no systematic follow-up inputs with outputs, and findings of user mechanism to ensure implementation of audit surveys. Beyond the core public sector activities (e.g., "pure" public goods like 4The World Bank is assisting BAKUN in developing national defense, street lighting), the design the necessary computerized accounting system. This and implementation of public expenditure project is expected to provide the authorities with the priorities requires detailed assessment and ability to produce Govenmment financial reports in the careful tailoring to country circumstances. To current fiscal year. However, the issuance of uniform accounting standards for the public sector entities as a this end, appropriate determination of the whole remains to be accomplished. economic (recurrent vs. capital) and 21 Improving the Budget Allocation Process functional allocations (among and within finance part of civil servant's salary. This is sectors) of public expenditures is crucial. The less of an issue for program financing- use of IMF-GFS classification standards will which is general budget support-but could facilitate this exercise. be balked at by donors that thought they were financing projects. 2.8 In its current form, the Indonesian expenditure classification does not properly 2.10 In Indonesia, the future cost account for expenditure policies by economic implications of new policies are purpose. For example, the development insufficiently taken into account. This is in budget includes several items-honorarium part because of the weak link between to public officials, travel and other routine and development expenditures allowances-that are recurrent in nature and decision making. So, in the short run, this should ideally be reported under routine link could be strengthened by ensuring that expenditure. The existing reporting system in the MoF is also involved in reviewing the Indonesia partly responds to donor current and future costs of projects when they preferences (i.e., donors do not like to are first submitted by the line ministries to finance items in the recurrent budget) but it BAPPENAS. (The IMF has also made this ends up introducing non-transparency in the suggestion in its October 1998 report on compensation of public officials. It also has budget management in Indonesia.5) The the perverse incentive among civil servants to ideal way of properly accounting for the "invent" projects (irrespective of need) for future cost implications of current policies is possible donor financing, which in turn, to introduce a multi-year rolling budgetary increases their honoraria. planning exercise-something that Indonesia should implement over the medium-term (i.e. 2.9 A first step to reforms is to make in the next 2-3 years). This approach unifies current civil service remuneration more the capital and current accounts into a single transparent. If the Govemment adopts the budget, and then projects this budget out for IMF-GFS classification, this will be three to five years, so that the recurrent costs automatic. In fact, most information on can be evaluated alongside the country's salary supplements from the budgets is projected revenues. Many developing already available in the accounting system. countries (including Ghana and South Africa) The budget simply needs to reflect this. As and developed countries (Australia and New important as transparency is to de-link Zealand) have successfully adopted this salaries from development projects, this process. change in the expenditure classification system is a desirable objective in its own 2.11 Budgets in Indonesia are not right, since it will allow policy-makers to predictable at the level of the spending entity determine the appropriate sector and/or in government. The adoption at all levels by project specific recurrent-capital expenditure the government of a medium-term planning mix on the basis of international and budgeting process would go long way in comparisons. In turn, however, these changes making budgets more predictable (See Box will also have important implications for 2.2). This will make the eventual transition donor financing. If adopted, the suggested from the current cash management system to salary reforms would reveal a deficit on the an accrual budgeting and accounting system recurrent budget. This deficit already exists, all the more easier. but it is hidden in development budget-paid for by donor money. Thus a go-ahead on the salary reform requires that donors feel comfortable with the fact that, in reality, they 5See Indonesia: Budget Management in the Short- and Medium-Term. Fiscal Affairs Department, International Monetary Fund, October 1998. 22 Public Spending in a Time of Change Box 2.2. Medium-Term Planning and Budgeting The medium-term planning and budgetary process consists of three steps: * Macroeconomic and fiscal analysis. To emphasize macro fiscal sustainability, the budget is formulated within a three- to five-year horizon and includes macroeconomic constraints, the costs (current and capital) of ongoing policies, and room for new policies. Every year the budget is rolled over the fixed horizon. * Fiscal policy formulation. Within the aggregate fiscal constraint, the executive branch of the govemrnment decides on new policies and sectoral spending limits, and discusses those with parliament to ensure a general overall agreement. In this phase, the govermnent decides on additional revenue measures, and on which policies to drop in order to create room for new policies. It also determines the amount of general grants to devolve to local government, and local borrowing limits consistent with macro-economic stability. * Detailed budget preparation. Within the broad sectoral limits and the policy decisions made, individual line ministries prepare their budgets. The line ministry budgets, which cover both capital and recurrent costs, focus on programs rather than projects. The budget proposals are accompanied by result statements detailing what has been achieved in the past budget year(s), and what will be achieved in the coming year. The budget policy agency no longer needs to negotiate down bloated demands for funding, as line ministers need to stay within the broadly agreed limits. Instead, it focuses on the financial and economic analysis underlying the budget proposals. Process for Evaluating Public Expenditure policy-makers. The public may also be more Programs willing to accept the strategic priorities the resulting budgetary allocations indicate if the 2.12 Budgetary decision-making in budgetary process was more open. Indonesia has focussed primarily on 2.13 The authorities must continuously government investment (i.e., "the 21 h uhrte utcniuul govemmen investent (i.., "the assess whether the scarce public funds, and development budget") and less on decisions assed res siblte that they are regarding the public policy role the chargeda with, are being put toat e "best" use. government wants to play in any area (which cross cutry ex nn sugets that suc manifests itself in public investment, Cross country experience suggests that such manifents itselfin pbcnverstmnt an evaluation of resource allocation within recurrent expenditure, transfers and regulation). Once public finances are (and across) sectors proceeds by asking three recorded and reported transparently as per questions: (I) What is the rationale for public international standards and conventions, the intervention? (2) What is the right process of making strategic budgetary instrument? (3) What are the fiscal costs? decisions will clearly become easier for (see Figure 2.2). 23 Improving the Budget Allocation Process Figure 2.2. Decision Tree for Evaluating Public Programs No rationale There is a rationale (e.g., extemality in pnmary education) Outsourcing Subsidy Regulation Public provision a. What is the rationale for public 2.15 In the current budget system, line intervention? ministries submit their recurrent budget proposals to the MoF and proposals of 2.14 In Indonesia, a Constitutional development budget to BAPPENAS. For the provision mandates the government to development budget proposals, line " ..assure the supply of essential goods and ministries are required to support their services and to promote the growth of the project proposals with statements of economy." Interpreting this provision in its objectives and likely benefits, but there is no favor the govemment chose to be involved in requirement for either justification for public any activity that it liked. While in recent sector intervention or a systematic cost- years there has been a recognition that the benefit analysis of proposals. Perhaps an private sector needs to play a more important implicit justification for public intervention is role in managing the economy, the that most of these projects are already government's budget system still does not included in REPELITA. However, new incorporate any feature which requires proposals can also be added. Routinely line rationalization of the public sector ministries submit inflated budget proposals involvement in the proposed activity. knowing in advance that the budget 24 Public Spending in a Time of Change allocation process is a negotiated game market for education. The main between them and the two central agencies- benefsciary of a universsty education hS BAPPENAS and the MoF. the student himself. If as a non-poor he is unable to afford the high cost of 2.16 The government appreciates the tertiary education, it could reflect another principle of rationalization of public sector market failure in the economy, namely, a intervention and has prepared a master-plan failure of the credit market. In such a for a major privatization program that is case, there is no market mechanism for a being implemented. It is also recommended student to secure a loan to finance the that the rationalization of public sector high cost of tertiary education. intervention should be required for all new Govedrment intervention to alleviate the programs proposed in the budget. Failing credct problem iS perfectly justified (as is adequate justification, the proposed program the case in many OECD countries should not be funded.6 This kind of a including the United States). Some ishulinewould help the government to governments resort to the second discipline much the g en to rationale-redistribution-to justify their undertake much needed changes in the sbiist nvriis u nms composition of its spending. For example, subsidies to universities. But in most short- to medium-term policy changes would countries almost all the university involve things like spending more on basic subsidies accrue to the rich. In health, primary education (to improve Indonesia, research has shown that a very huality) and less on direct (untargeted) high percentages of the public subsidy to subsidies. Preventive health care and public the universities has been enjoyed by health services (vaccinations and vector those in the top dec1le of the population controls), which could be classified as pure (van de Walle, 1998). public goods, have consistently received a small portion budget. * In Malaysia, research showed that an increase in the number of public doctors 2.17 Ideally, each program in the budget, in a district had no effect on infant including both its associated current and mortality-because they were crowding cincludi pengdboitues, assocd .cutand out the private doctors-whereas capital expenditures, should be scrutinized increases in safe water and sanitation for whether there is a rationale for (involving large externalities) had a government intervention in that area. Market substantial effect (see Hammer et al, failure (externalities and/or public goods) and 1995). concern for social equity (including equal The largest item in the Indian opportunity of access for basic goods and govelrnens aicture bde Iisa services) provide the two possible rationales government's agriculture budget is a sergovices)providenthe intwoe possietion awes, afertilizer subsidy. When the fertilizer was for government intervention. However, a introduced forty years ago, there was a large number of expenditures, which appear inalei ters of thermatio in a majority of government budgets, fail this externale assoiate withe frmers' a ~~~extemalities associated with farmers' test. Some examples of these expenditures adopting the new technology. By now, and where they have appeared are: that externality has vanished, but the fertilizer subsidy lives on. Moreover, the * In education, the rationale for public beneficiaries of the subsidy are mostly provision of higher education is difficult better-off farmers. As documented in the to justify on grounds of failure in the World Bank's 1998 PER, the case of fertilizer subsidy in Indonesia appears to be no different from the Indian case. 6 At times public sector intervention could be justified for other reasons such as political stability or threat of * Some government programs can only be violence. The current electricity and petroleum justified in terms of the redistribution subsidies in Indonesia are a case in point. It is rationale. Most transfer schemes (cash important to ensure that such subsidies do not get and in-kind) fall under this category. The entrenched and are phased out in a timely fashion. 25 Improving the Budget Allocation Process Box 2.3: The impact of education spending in recent years The crisis in Indonesia has resulted in a cutting back on education spending by 12 percent during the 1997/98 fiscal year and afurther 30 percent in the next year (See Figure 1). Both development and routine budgets have been cut (in real tenns). Development spending fell by 1 1 percent in 1997/98 followed by an additional 24 percent in 1998/99. Falling development expenditures are partially due to the effect of inflation coupled with the deferral of several activities. The routine budget, which predominantly finances salaries, was also reduced by 13 percent in the first year and followed by a further 30 percent last year. Figure 1:The education budget (in real terms) has fallen.... 30%: --.- i *~' 09s 4_ -- ,____ j _ _ ' -20X --- 1) .3030' i- Figure 2:...while realized education spending remains below budgeted amounts.... Protecting Basic Education Outcomes durintg the Crisis. Basic Education services continued to be provided at a satisfactory level, despite declines in budget. Enrollments have been maintained and all teachers have remained employed, although with some eroding impact on their salaries, as has been felt by other civil servants. The falling expenditures are due, partially to the effect of inflation on salaries and partly on declines in development budget expenditures. Some spending cuts are justified (e.g. halting new construction, and overseas training) but some cuts will result in declines in the quality of service delivery (e.g. teacher training). A Crisis Program - Back to School. At the beginning of the crisis, GOI estimna Id that the dropout rate would increase substantially at the primary and junior secondary level from 3 to 5.7 percent and 3.6 to 11.5 percent or 890,000 and 640,000 children would drop out in just one year (Education Sector Strategy). To deter such a high incidence of dropout, the Back-to-School program was launched in early 1998. As shown in the table below, the result has been a slight increase or in some cases the maintenance of Gross and Net Enrollment Rates at all levels. Table 1. School enrollment has not declined after the crisis-Thanks to the "Back to School" Program YEAR 1996/97 1997/98 1998/99 GRoss Primary 112.36 113.50 114.71 Junior Secondary 69.46 69.88 68.73 Senior Secondary 37.08 38.02 37.37 NET Primary 94.87 94.06 95.0 Junior Secondary 51.36 54.43 53.17 Senior Secondary 28.88 29.99 29.38 (Source: Ministry of Education, 1999) main issue here is whether such programs In the Indian state of Andhra Pradesh, the reach their intended beneficiaries-the poor. rice subsidy scheme-ostensibly targeted for 26 Public Spending in a Time of Change the poor and needy-reaches more than 65 2.3). This is an example of the right kind percent of the population and consumes a of public sector intervention. sizeable proportion of the state's annual As emphasized in the Bank's 1998 PER, budget, leaving fewer resources for other a number of operations and activities of desirable activities such as basic health and PERTAMINA (particularly those relating road maintenance. In Jordan, a lower mniddle- to production) could be privatized and income country, the recently-abandoned cash the agency itself could play the role of an transfer program reached 76 percent of the impartial regulator. population. That it consumed 1.7 percent of GDP made it an excellent candidate for * All subsidies-electricity, fertilizers, public-sector rationalization according to food and petroleum-could be gradually these criteria, phased out and replaced, as appropriate, by targeted programs to protect the poor. At the same time it is important to plan a b. What is theright instrument? communication strategy (with the people) to enhance the chances of 2.18 Market failure and distributional success of such a reform program. consideration may provide the rationale for public sector involvement in an area, but it * The government has plans to expand does not necessarily imply that the public technical and vocational education sector should be the service provider in that facilities at the tertiary level. Given that area. If the rationale is an externality (such the benefits of such programs accrue as with primary education, for example), the mostly to the better-off students, the same objective could be achieved by a public government should charge the full costs subsidy, with the private or non- of the program from the beneficiaries. governmental sector providing the service. This is the reasoning behind various c What are thefscal costs? schemes, such as school vouchers, that seek 2.20 Among those programs where there is to improve outcomes in sectors where there a Among foserograms and where is a justification for government intervention. a rationale for public intervention, and where In the past, monopoly conditions in public provision is the appropriate infrastructure services usually justified public istrument, the government needs to decide provision. Over the years, technological which have the hlghest piority. This agan is advancements have gradually reduced the essentially a political decision, and is need for a single supplier and conditions ty'p:cally undertaken at the levels of the have been created for market competition. cabinet and parliament. Decision-makers will Thae ben matd informastrktu services, the need timely information to evaluate the Thus, in many infrastructuresris,te unavoidable tradeoffs. Although it is often right instrument for government intervention unvialtrdof.Ahugitsote has become enforcement of efficient and difficult, if not impossible, to quantify the hmatas lrecomeegulatiorcemen. ofefficientbenefits, the fiscal costs (both current and impartial regulation. future) can be quantified. The latter 2.19 Analyzing the instruments of public information can be used by policy-makers to sector intervention in Indonesia reveals the make judgements on program expansion vs. following: contraction vs. elimination (or introduction). The government lis designed an 2.21 An example of a publicly supported emergency assistance program- rural credit project in Morocco highlights the supported, among others, by the Bank- relevance of this issue. The two to provide block grants to primary and distinguishing features of the rural credit junior secondary schools in poor areas project in Morocco was that: (a) it was (as well as scholarships to needy justified on grounds of credit-market failure, students) to contain school dropouts and (b) it benefited poor rural farmers. But resulting from lost incomes. (See Box 27 Improving the Budget Allocation Process the fiscal costs of the project represented 20 inhibit proper spending towards efficient percent of the country's educational budget, public service delivery. and 160 percent of its expenditure on preventive health. This information on 2.24 The existing practiees for public opportunity cost could be quite useful to expenditure management in Indonesia do decision-makers when evaluating the difficult acknowledge the importance of evaluating tradeoffs. Moreover, such information along the performance of public sector service with the decisions made, be communicated to delivery. However, if the performance the citizens in a transparent manner. To indicators that are monitored are apply this instrument in Indonesia in the inappropriate to the objectives that are to be short-run, decision-makers could look at the achieved in terms of public service delivery, subsidy budget for electricity and petroleum, the policy choices that will emerge from the for instance, and deliberate if part of it could evaluation will be inappropriate. In this be channeled to improved the quality of regard the authorities, having realized that primary education. The medium-term past performance evaluation efforts for planning and budgeting exercise will permit development projects had been limited to policy-makers to see the total fiscal costs of monitoring actual implementation, issued a different programs, permitting a more decree in 1996 to introduce a proper systematic comparison of competing uses for performance evaluation system based on the public's resources. specific indicators. According to this decree (KEP.195/KET/12/1996) each ministry/- EfficientPublic Service Delivery institution/region shall conduct performance Efficient Public Service Delivery evaluation on its development projects and 2.22 The key to achieving efficiency in the provide a report to BAPPENAS. While there delivery of public services is to have the right is little evidence to support whether the incentives in the institutional structures. system has worked effectively or not, it does Public sector agents often face little or not seem to provide any link between a Perverse incentives for efficiency. Managers ministry's past performance and future in the public sector are rewarded in terms of budgetary allocation. When submitting their the size of their budgets, giving incentives budget proposals, line ministries (or any for cost-inefficiency. Non-transparency and other agencies) are neither required nor they inadequate accountability has often have any incentive to report their contributed to this problem. achievements-that link spending with outputs and outcomes-in the preceding 2.23 Indonesia's public health system is a year(s). In turn, budgets are allocated based case in point where the institutional and on inputs and are essentially adjusted budgetary process bottlenecks are giving rise incrementally from the previous year. In the to inefficiencies in service delivery. The absence of any clear incentives and proper public health network has over 7,100 accountability, it is not surprising that most publicly run, mostly rural, health centers and public sector studies in Indonesia have associated sub-clinics and outreach activities documented major inefficiency in public It has referral linkages to around 300 service delivery. government-owned and operated district hospitals with a standardized program for 18 2.25 In addition, the structure of the different service areas. Staff and compensation of civil servants in Indonesia is administrative expenditures absorb a such that it has created incentives of a significant share of the sectoral budget. An perverse kind. Civil service wages in general inflexible planning and budgeting system and are quite low. The base pay is calculated as a very limited opportunity to revise budgeted minimum payment simply for reporting to allocations during the fiscal year, along with work. Supplements or premium for specific a proliferation of time consuming but assignments are given based on work ineffective accountability mechanisms, undertaken, but there is no link between 28 Public Spending in a Time of Change performance and reward. Over time a system launch into performance based budgeting of informal salary supplements (some of and management in Indonesia. which are legal) has evolved. It involves Client surveys. Eliciting information income generated from charges to clients and f clientsr has proved tobean user of government services. It is alleged important way of improving efficiency that informal payments are built into most and fighting corruption. A field survey of government contracts and the money randomly selected 250 government collected is distributed according to a well- schools in Uganda showed that on established scheme. Given these average, less than 30 percent of the circumstances, it is very difficult to imagine funds intended for non-salary public how a performance-based reward can be spending actually reached schools during introduced and enforced into the Indonesian 1991-95. In Bangalore, India, the civil service unless basic civil service announcement that client surveys were reforms are carried out. Such a task will also about to be conducted led to an involve significant public resources that must improvement in service delivery. The be allocated in the fiscal budget, subject to survey response led to a restructuring of availability of resources.7 the worst graded public agency in the city and helped create a culture of 2.26 Recognizing these problems, several customer orientation. In several Eastern countries have attempted to reform the European countries (Albania, Georgia incentives in their public sectors. Some of the and Latvia) detailed corruption surveys instruments used include: have been conducted-among households, enterprise managers as well as public officials-that have helped - Performance-based budgeting. Rather policy-makers to design appropriate than evaluating public servants on the action plans to improve efficiency and size of their budgets, or making their provide better public services. budgets a function of their costs, public managers in New Zealand are given Client surveys are also currently being budgets based on a specified set of used in Indonesia monitor the outputs for which they are held government's core social safety net accountable. The manager of a school spending. With support from the World district, for instance, is given a budget Bank's Social Safety Net Adjustment and expected to have a certain number of Loan (SSNAL), the government has students complete schooling formed a team with civil society successfully. participation to implement and oversee Under the current circumstances it is its key safety net programs. The process premature to implement any kind of includes a publicity and information performance based budgeting in campaign to reach grass roots level with Indonesia, although it could be a long information about the program, its term goal that one may want to achieve. budget, beneficiaries and what they In the short run, Indonesia needs to have should receive, decision-making a more transparent and comprehensive structure, and the channel for complaints. budget as well as improved financial Similar initiatives can be taken management practices. Enhancing the elsewhere. For example, a user survey in capability of the civil service to operate a randomly selected sample of the 7,200 under "the new rules of the game" in a public health centers would provide more open and democratic environment useful information to policy-makers is more urgent before attempting to regarding the efficacy of spending in that activity. User surveys could also be carried out in public schools or for 7 The ongoing Civil Service Review by the World Bank infrastructure services (water and is examining the pay policy of the Indonesian Civil electricity). Service and the incentive structure it emanates. 29 Improving the Budget Allocation Process * Retention of user fees. In addition to the decentralized form of governance-needs fact that they become a signal of demand three key framework documents: (a) a and improve resource allocation, user statement of its long-term development fees for public services-when they can agenda (in the form of, say, a national be retained by the service provider-can development plan); (b) some form of a be an incentive for improved service medium-term budgeting framework to delivery. Sometimes, the effect can be so implement that vision (See Box 2.2); and (c) dramatic that it compensates for the a set of sectoral strategies that assign the possibly regressive effect of user fees. responsibility for sector-specific policy However, it is important to ensure that development and implementation. audited accounts of the use of such funds are maintained and are available for 2.28 In Indonesia, the role of BAPPENAS inspection by the relevant officials and to has been crucial in the budget process. It is those who make the payments. the key agency for development planning, macroeconomic analysis, development In Indonesia, a number of user fees and budget compilation, regional development, charges are currently imposed by program evaluation, and donor coordination. government agencies and retained for BAPPENAS is also involved in development their own use. This is appropriate from budget implementation and supervision. the point of view of giving the service Through its Deputies (senior technical staff) providers an incentive to improve public for Economic Affairs, Infrastructure Human service delivery. However, the Resources, and Regional and Local Affairs, accounting of these funds has not been as BAPPENAS offers unique cross-cutting transparent as international best practice expertise in Government. BAPPENAS has would suggest. Being off-budget items, been recognized for its valuable expertise in they do not go through the regular project preparation and evaluation based in scrutiny. Even before the crisis, more the Department for Finance and than 40 percent of the expenditures on Implementation Management. Its most education were from off-budget sources, important and visible documents are the including a variety of user fees and Pembangunan Jangka Panjang (PJP) with a charges. There are also a number of 25-year time horizon; the Repelita with a five user-fees in the health sector. Given that year horizon; and the annual State most of these accounts have not been Development Budget (APBN). The other key audited, it is difficult for one to say central ministry-the Ministry of Finance has whether the positive influence of been involved with the formulation of the increasing efficiency by retaining user routine budget, execution of the related fees outweighs the administrative burden transactions (in terms of making the on government of collecting them. payments) and administration of the tax system. RESHAPING THE ROLES OF KEY BUDGETARY INSTITUTIONS 2.29 Changing budgetary processes in Indonesia will require rethinking the 2.27 Any envisaged reforms in budgetary evolving roles and functions of BAPPENAS, processes to foster transparency, Ministry of Finance and the line ministries. accountability and effective public service How this is undertaken in Indonesia depends delivery will need strong institutions. This largely on tradition, culture, and the becomes all the more critical when the Constitution, with outside advisors providing budgetary reforms are being accompanied by only limited insights. However, what is clear a move towards a more fiscally and from international experience is that any administratively decentralized form of significant changes in government government. Cross-country experience has organizational structures stands the best shown that a central government-even in a 30 Public Spending in a Time of Change chance of succeeding if it is initiated at the and Accountability Act (1997) in Australia beginning of a government's term in office. are such legal instruments (see Table 2.1). In the Indonesian context, such Govemment 2.30 One possible reform process involves reorganization efforts, and the redefinition of long-term strategic planning, participatory roles, responsibilities, and accountabilities budget policy formulation and corresponding would entail a detailed review of the existing planning, budgeting and budget approval budgetary laws and regulations (such as the procedures. It adapts Indonesia's current Presidential Decree No. 44, 1993 and the processes to the forces of change, and aims "Indische Comptabiliteitswet"), (Treasury for a more transparent, accountable, Law, Staatsblad of 1925, Number 448). The performance oriented government. It is latter is currently under review by a drafting inspired by OECD experience in the last 25 committee headed by MoF. years (Annex 3), but some elements of the vision have already been introduced in ALLOCATING THE BUDGET IN A Indonesia, while others are being debated at DEMOCRACY this moment. 2.33 A critical requirement of fiscal 2.31 Undr this pproach,program transparency in the context of a democracy IS implementation becomes the responsibility of thenopprtnith fortegture a ond .cii line ministries, with service delivery being teopruiyfrlgsaue n ii increasinglytes, th srie devery bi society to assess whether govenment did what it said it would do in the budget. One government, specialized agencies, non- m government organizations, and the private measuen ofthe budget i plantati is the sector.~~~ ~ Inrae aconaiit. fln consistent with budget implementation iS the ministers for observable anmoitorale availability of independently audited actual expenditure data. The integrity of the data indicators should provide the incentives that being reported is also the foundation on foster evaluation capacity within line which the credibility of the budget rests ministries. Civil society would play a larger within the context of macro-economic role in evaluation, empowered by increased stability. access to Government documents, and by decentralization which reduces the distance 2.34 In general, the link between to policy-makers. Increasingly, policy- transpaTency and participation is not an makers would use civil society to improve automatic one: they often are prerequisites their services and achieve better results with for the other, yet neither is sufficient in government spending by conducting user isolation to reap the benefits of better surveys to solicit feedback from the public. goverment. For example, just the Within this approach, BAPPENAS could be: availability of information on tough choices (i) a strategic policy think tank; (il) a budget and tight constraints a goverment may be policy formulating agency; or (Iii) a focused facing in budgeting may give citizens a better development policy formulating agency. sense of the context in which the Whatever its role, the nature of BAPPENAS' government decisions are being made and key outputs will have to change as well. build their faith in goverment. Further, 2.32 Some OECD countries have taken the when they are given an opportunity to make .. ~meaningful input into the debates, and see opportunity to redefine their more traditional teincerns rlte the eventual budget management law in a fiscal accountability framework, spelling out roles decisions, the reforn measures will have and responsibility of each agency involved in the "buy-in" necessary to make them start the budget process. The Public Finance Act out on the right footing in the country (1989) of New Zealand, the towards greater chances of success. If, on Comptabiliteitswet (1986) of the the other hand, they are denied this Netherlands, and the Financial Management opportunity, any faith that may have been 31 Improving the Budget Allocation Process Table 2.1. An Illustrative Performance Budgeting Framework Process Contents Reports Responsibility Frequency Long term Long term view on 25 year/S year Strategic planning agency with Every 3-5 years strategic development development outlook involvement of universities, planning civil society, line ministries Policy Coaliton building; Sector Coalition agreement; Line ministries, cabinet, with After every election a formulation strategies, containing goals, Discussion papers, discussion in parliament and coalition agreement; instruments and program white papers, green with civil society Ongoing sectoral proposals papers policy formulation Policy planning Detailed analysis of programs Line Ministries' Line ministries, under guidance Annually in and policies, including cost- Corporate plans of the planning agency and the preparation for the benefit analysis, budget budget policy agency budget projections, output and outcome indicators Macroeconomic Outlook on the economy and Macroeconomic and Budget policy agency, Twice yearly, one and fiscal the budget under unchanged Fiscal Outlook endorsed by cabinet, presented fundamental review, analysis policies to parliament, widely published one update mid-year Fiscal Policy Medium -Term Policy Fiscal Policy Budget policy agency; Forward Annually, with 3 Formulation priorities, new policies, phased Statement estimates from budget budget years included out policies, Budget envelopes; manager, or line ministries general grants to local government; changes in tax policy Budget Detailed preparation of sectoral Draft Budget- Line ministries, coached by the Annually preparation and line ministry budgets including functional, budget policy agency. Budget within the parameters set in the program, economic, policy agency compiles budget fiscal policy outlook line ministry documents; President submits presentation; Budget Debate and approval by Annual budget law, Parliament. Budget policy Annually. Semi- Approval parliament with chapters for agency presents overall budget; annual revisions in each line ministry line ministies budget heads. budget will become Parliament is supported by rare. budget bureau. Parliament can change budget within agreed rules Budget Raising revenue, managing Intemal and extemal Line ministries for results; Daily, weekly, implementation cash, debt, spending money, reports on financial Treasury for financial monthly internal implkmenting programs and program implementation reports; quarterly implementation Local Govemment, NGOs, and reports to parliament; Private sector for service annual financial delivery accounts and result reports to parliament Policy Intemal and extemal evaluation Intemal: management Line ministries, with Ongoing, feeds into evaluation of policies reports to line participation of civil society annual budget ministries through user surveys, hearings, discussion Extemal: Audit involvement of academnia etc. reports, 'value for Audit Agency for extemal money analysis" evaluation Note: This table is inspired by OECD systems as they have evolved over the last 25 years. Countries such as South Africa, Malaysia, and Thailand have adapted parts of this framework to their own needs. For Indonesia, this table should be seen as a vision which could be realized by a seties of reforms in the treasury law, state administration law, civil service law, cabinet procedures, financial management regulations, etc. built by information disclosure alone can openness in the budget process through even be destroyed. In a recent survey by the measures to maximize the effectiveness of South African NGO-IDASA--respondents civil society participation in the budget. from all sectors of society in South Africa recognized the link between transparency, 2.35 Apart from being an intrinsic participation and better government (see also requirement of democratic govemments, the Box 2.4). The survey was useful in deducing creation of an open and participatory budget the country specific conditions that may be process is a worthwhile goal in and of itself. required to close the circle. The IMF Code of The provision of comprehensive, accurate, Good Practices for Fiscal Transparency timely and frequent information on a provides a benchmark to measure a country's country's economic conditions and its budget progress on transparency. It advocates greater 32 Public Spending in a Time of Change policies is also beneficial for the following budgets that threaten macroeconomic key reasons: stability. To avoid this, budgetary processes need fundamental reforms towards more * If budget information is not available, medium term planning, -budgeting and it is difficult to discuss it. performance monitoring (using budget outcomes instead of outputs). However, this * It facilitates the identification of will require institutional arrangements and weaknesses through public debate, appropriate guidelines that would enable the leading to the adoption of needed different stakeholders in this budgeting reforms to foster improved public process to determine, in a transparent programs and more efficient resource manner, whether: (a) the public expenditure use. is according to plan; (b) this expenditure is reaching the areas or beneficiaries targeted; * It goes a long way towards building and (c) this spending is achieving expected consensus on and commitment to outcomes on the basis of pre-specified social tradeoffs and increases faith in measurable indicators. government. 2.38 There remains an urgent need for * It enables legislatures and civil society greater clarity in the roles of Parliament, to hold government accountable, which Ministry of Finance, BAPPENAS and the is only feasible if one has access to line ministries in the budget process. reliable information on budget policies, Appropriate guidelines and rules of practices, expenditures and outcomes. engagement between the Govemment and Parliament in the budget formulation process * It contributes to macroeconomic and need to be finalized. fiscal stability as it prevents the build- up of a crisis in secret, giving scope 2.39 A first important step in this for making smaller adjustments collaborative budget allocation process sooner. With a clear understanding of between Parliament and the bureaucracy is to government policies investors may be ensure political "buy-in" to aggregate more likely to invest in a country and spending limits. This will tend to minimize can, therefore, facilitate investment instances where Parliament changes a budget and economic growth. submission such that fiscal sustainability is threatened. To achieve this, Government 2.36 Accountability differs from direct could consider presenting a fiscal policy control. A good audit system combined with outlook document to Parliament before the a watchful, active parliament, rather than a actual budget process takes place.9 Such a host of direct controls and regulations, will report should explain the macroeconomic and help promote accountability.' fiscal constraints that limit aggregate spending. But beyond information and 2.37 In a democratic Indonesia, the budget consent, the Government could consider process can no longer be a bureaucratic adopting those budget rules-customary in process. Involvement of Parliament and the other countries-that allow Parliament only Cabinet in the process can ensure that limited changes in the budget, or only budgetary choices better meet the aspiration changes that do not affect the fiscal deficit. of the Indonesian people. At the same time, Table 2.2 summarizes the findings of an this involvement could deteriorate in populist analysis of the budget amendment powers of parliamentarians in eighty-two countries by 9 Currently, the Fiscal Outlook document is discussed See "Controlling Corruption: A Parliamentarian's in Parliament at a plenary session that is held about two Handbook", The Parliamentary Centre (Canada), 1998. months prior to the budget debate. 33 Improving the Budget Allocation Process Warren Krafchik and Joachim Wehner ministry limits. Some countries-together (1998). with the fiscal policy outlook-present their policy priorities in a "fiscal strategy report," 2.40 Within the aggregate spending limits sometimes supplemented - by "corporate as prescribed by macroeconomic conditions plans" of individual line ministries. Within and fiscal sustainability, Cabinet could the agreed spending limits, line ministries decide early on policy priorities. These could be allowed more leeway to allocate policy priorities could then be reflected in money according to what best fits the sectoral spending limits, and individual line Government priorities already agreed on. Table 2.2. Rights of Members of Parliament in Budgetary Matters Members' rights Number of Countries May reduce and increase expenditure and revenue. 32 May reduce but not increase expenditure. 17 May reduce expenditure, but only increase it with the permission of the 4 Government. May reduce and increase expenditure if alternative provisions are made 13 elsewhere. Rights not specified in detail 15 Not applicable (Nicaragua) 1 TOTAL 82 Source: Inter-Parliamentary Union 1986: Table 38A The central ministries would increasingly objective of achieving comprehensive refrain from setting detailed expenditure coverage of fiscal operations-an endeavor norms, and focus budget discussions with the that is currently underway with the transition line ministries on: (i) whether spending towards the IMF-GFS classification and remains within the agreed limit; and (ii) reporting of government fiscal accounts-is whether the proposed spending is in line with an essential step in the right direction. In cabinet priorities and line ministry policy addition, the line ministries should be statements. required to provide the rationale for public intervention in that activity as part of the POLICY IMPLICATIONS budget formulation process. This principle should be applied at all levels of government. 2.41 The current environment of change in Indonesia provides a fertile opportunity for 2.43 In determining the role of revamping the budgetary processes in government in a particular new activity, it is Indonesia towards improving public sector recommended that a technical approach that performance in service delivery. These provides policy-makers important efforts should supplement the Government's information-such as the reason for public endeavors to deal with the unavoidable fiscal sector involvement and the appropriate pressures that have emerged due to the crisis instrument, competing claims on the and associated fiscal risks. budget-should be incorporated in the budgetary process. An appropriate 2.42 In the short run, aggregate fiscal mechanism should be available to the MoF discipline should be fostered through and other key stakeholders to assess the publication of the government's medium- validity of the cost estimates that are term vision and associated budgetary provided by the proposing entity of a choices. This could be supplemented by publicly funded activity before the project or published reconciliation of budget estimates program is approved. and actual expenditures that were incurred in the recent past. To this end, the government's 34 Public Spending in a Time of Change 2.44 Using the lessons from the ongoing tries should be forrned to start the exploratory social safety net program monitoring efforts work in this area. in Indonesia, mechanisms to evaluate performance at each level of government 2.46 To manage the process of should be introduced over the medium term. institutional change in government prudently, In a few key areas (e.g., public health the authorities could consider forming a centers, public schools, water and electricity) working group to explore options in user surveys could be carried out to gauge the government organization that would best quality of public service delivery to target match the changing environment. Such a consumer groups. This is a powerful process would: (i) identify forces of change; instrument to facilitate greater transparency (ii) redefine the core processes of and accountability in public service delivery. Government in light of the forces of change; Disseminating the results of a well-designed (iii) review comparative advantage and and executed public service delivery survey existing roles of organizations; (iv) define a can reveal if the Indonesian taxpayers are new organization structure of government, getting value for their money in that activity. matching the new roles and responsibilities with the new organizational structure; (v) 2.45 In the medium- to long-run, the identify incentives to make these processes government should introduce a multi-year work; and (vi) institutionalize the new roles, rolling budgetary planning exercise. To this responsibilities, organizations, and incentives end, a committee consisting of officials from in laws, regulations, and work arrangements. BAPPENAS, the MoF and other line minis- 35 Managing Across Levels of Government 3. MANAGING ACROSS LEVELS OF GOVERNMENT I ndonesia is making rapid moves toward decentralization. Decentralization can be a powerful tool to improve public service delivery and accountability in Indonesia. But if not well managed, it risks fiscal balance at the center. To maximize the benefit and contain the risks of the decentralization, Government should focus on implementation ensure detailed expenditure assignments, decentralize personnel, and design an equalizing grants scheme. In the medium-term, accountability at local level should be strengthened by a larger local tax base, increased transparency, and prudent access to financial markets. TILE PROCESS HAS BEGUN 3.1 Until today, fiscal authority in Indonesia concentrated central departments at provincial, has been highly centralized. Revenues of the district, and village levels, spends over 80 percent center constitute almost 90 percent of all revenues, of all government spending. The development and sub-national governments depend for almost budget is determined in an elaborate bottom-up 60 percent of their spending on central government process, in which, however, the center has grants. The central government, including de- Figure 3.1. Indonesia is Highly Fiscally Centralized Ce.nt, Ish.r. of S pend in 90 80o 7 0 8 0 450 . . . urtr 3 0 _ 30 40 50 a0 70 90 90 100 C.ntral shor. of r.v.no.s Source: IMF, GFS. the final say. This situation, which is at odds with decentralization, Law No. 22/1999 on Regional the practice in most large developing countries- Government (UU PD) and Law No. 25/1999 on the whether unitary or federal-is about to change Fiscal Balance between the Central Govemment (Figure 3.1). and the Regions (IJU PKPD). If implemented fully, these laws promise to transform 3.2 A major program of governmental intergovemmental fiscal relations in Indonesia. decentralization is underway. Two laws have been However, many details of the program have yet to approved by parliament on various aspects of 36 Public Spending in a Time of Change be worked out, and questions remain about the assembly (Dewan Perwakilan Rakyat Daerah, or ultimate goals and the process to achieve them. DPRD). In contrast, the provinces will retain a hierarchical relationship with the central 3.3 This chapter discusses three issues: (a) the government. major features of the new decentralization laws and their budgetary impact; (b) the impact of 3.6 Second, with some limited exceptions, Law decentralization on inter-governmental fiscal No. 22/1999 also makes all deconcentrated central relations, and potential issues; and (c) specific government ministries at the province and the problems related to the implementation of reforms, district the responsibility of the respective local especially as the implementation will affect public government.2 (The exceptions are for defense and service delivery and accountability of local security, foreign policies, monetary and fiscal govemments. Some of the issues that are policies, judiciary affairs, and religious affairs). highlighted here are being addressed more This change promises a major reorganization in the comprehensively in ongoing technical assistance way in which public services will be delivered in by the IMF and the World Bank. Indonesia. THE NATURE OF THE 3.7 Third, Law No. 25/1999 on the Fiscal DECENTRALIZATION IN INDONESIA Balance between the Central Government and the Regions (UU PKPD) alters the transfers received 3.4 Since the 1950s, Indonesia has been a by local governments from the central government. highly centralized but multi-tier unitary state, with The current routine transfer that is largely used to provinces and then local governments as the tiers under the central government.1 Laws No. 22/1999 2 In the current system, the central government and its and 25/1999 propose to change this in several ministries have "deconcentrated" departments called a kepala fundamental ways. kantor wilayah, or kanwil, at the provincial level; in some cases, the kanwil has a sub-branch at the district (or 3.5 First, Law No. 22/1999 on Regional subdistrict) level called a kantor departemen, or kandep. The Government (UW PD) eliminates the hierarchical province has its own planning agency (Bappeda) and various autonomous "decentralized" departments (or dinas) under its relationship between the provincial and the district own control at the provincial level, generally consisting of governments. The district governments - departments for own revenues (called a dinas pendapatan previously known as kotamadyalkabupaten and daerah, or dipenda), as well as dinas for education and now called kota/kabupaten - will become fully culture, health, public works, traffic management, agriculture, autonomous, so that their heads (the livestock, fishery, forestry, plantations, industry, social autonomou, so .welfare, labor, and tourism, all of which have central walikota/bupati) will no longer report to the government counterparts in the deconcentrated kanwils; the governor of the province. Instead, the district province may also have branch offices (called cabang dinas) heads will be responsible to the locally elected at the district level, although this is apparently not that common. Like provinces, districts have an autonomous "decentralized" department in charge of own revenues (again, For detailed discussions of intergovernmental issues in called a dipenda), and they generally have departments (or Indonesia prior to the enactment of the recent laws, see Anwar dinas) for services like health and public works, although the Shah and Zia Qureshi, Intergovernmental Fiscal Relations in range of these departments depends upon size and location of Indonesia, World Bank Discussion Paper No. 239 the district. In the new system, the deconcentrated central (Washington, D.C.: The World Bank, 1994); and Robert H. government departments at the provincial level will become Aten, "Why Increased Local Democratic Decision-making the responsibility of the province, and those at the district level Would Aid Indonesian Economic Development", USAID will be turned over to the district. Working Paper (Jakarta: December 1997). 37 Managing Across Levels of Government pay the salaries of local civil servants (the Subsidy domestic revenues and whose distribution among Daerah Otonom, or SDO) will be eliminated; also local governments will be determined by formula. eliminated will be general development transfers Law No. 25/1999 also introduces revenue sharing known as block Instruksi President, or block for provincial and district governments, assigning Inpres. These two transfers are instead combined each level of government its share of revenues into a general allocation fund whose total amount from taxes on land and buildings, the transfer of is specified as 25 percent of central government Table 3.1: Impact of the Fiscal Decentralization Law (1999/2000 Budget Data, Rupiah Billion) After Fiscal Balance Decentralizing Cona1gnvrrnmint Existing Policy Law Responsibilities Domestic revenue 142,204 142,204 142,204 Expenditure and transfer 219,604 231,518 216,540 Own Expenditure 190,337 190,337 172,294 Transfers 29,267 41,181 41,181 Resource Sharing - 3,064 3,064 Deficit 77,400 92,378 77,400 rwmiuces- Revenue and transfer 10,065 10,510 10,510 Resource shares - 613 613 Transfers 5,408 5,240 3,555 Expenditurc 10,065 10,065 10,510 DiMtriety and Inw.-r Revenue and transfer 29,205 43,618 43,618 Resource shares - 2,451 2451.46 Transfers 23,505 35,467 35,787 Expenditure 29,205 29,205 43,618 Deficit - (14,414) Sources MOF staff estirnates. land and buildings, forestry, mining, fisheries, oil, 3.8 The fiscal balance law puts considerable and gas. Other local government sources of pressure on the central budget. It requires sharing revenues (e.g., own source revenues, fees and of resource revenues with the provinces and the charges, profits from government enterprises, districts and in addition a transfer of 25 percent of borrowing) are unchanged, as are revenues from domestic revenues to sub-national government. Of specific Inpres grants used to finance development that 2.5 percentage points is for the provinces, and projects in areas like primary schools, health 22.5 percentage points for the districts. facilities, water supply, and roads.3 taxes include the hotel and restaurant tax, the entertainment tax, the advertising tax, the street lighting tax, the mineral tax, Provincial taxes consist of a tax on motor vehicles, on the and the water use tax. transfer of motor vehicles, and on motor vehicle fuel. District 38 Public Spending in a Time of Change 3.9 If this revenue decentralization is not in light of Indonesia's size and diversity, regional matched with expenditure decentralization at the governments are likely to spend much more than same time, it risks increasing the central the 25-30 percent of revenues now assigned to government deficit. In total, the fiscal balance law them. Whereas the Fiscal Balance law is specific requires the central government to devolve some about the revenues to be decentralized, the 1.2 percentage points of GDP in addition to the Regional Governance law only gives a vague transfers already given to provinces and districts indication of spending responsibilities. Moreover, (Table 3.1). At the same time, if districts equalization is defined only in the broadest of governments-the main beneficiaries of the terms. And regional borrowing arrangements the additional resources-do not receive additional achilles needed in decentralization attempts around tasks, they could waste resources on non-core the world, needs firning up with urgency. functions. Thus, Government needs to decentralize expenditure responsibilities. IMPACT ON INTER-GOVERNMENTAL RELATIONS BUDGETARY IMPACT OF DECENTRALIZATION 3.13 The new decentralization laws have the 3.10 Unequal Sharing. Resource revenue potential to increase significantly the accountability sharing will make equalization among regions of local government officials. It is through this more difficult. The resource revenues shared with accountability that the major advantage of the regions only adds up to 0.3 percent of GDP decentralization is obtained - moving government because the lucrative offshore oil and gas is closer to the people. The leaders of the local excluded, and the sub-national share in the large governments: the governor at the provincial level, Reforestation Fund is low. Moreover, the oil & gas the bupati at the kabupaten, and the mayor at the shares apply to revenues after taxes, not to the kota - will now be chosen by the respective elected corporate income tax received by central council (although not directly by the voters), government). rather than appointed from above, so that their responsibility will be directed toward their own 3.11 But only five provinces will benefit elected council and not upward to the central significantly from the law (Riau, Aceh, Irian Jaya,' government. he assignment of significant new East and Central Kalimantan). Since these expenditure responsibilities to provincial and, provinces have above average per capita income, especially, to kota/kabupaten governments has the the revenue sharing will increase inter-provincial potential to achieve the efficiency gains that come inequality (Figure 3.2). This effect can only be when governmental decisions are more responsive partially undone by equalization in general revenue to the wishes of its citizens, so that public services allocation, because no negative transfers can be are provided in amounts that correspond more given to provinces. closely to the preferences of the individuals in those jurisdictions, rather than at uniform national 3.12 Timepressure. Indonesia's new laws only levels. Other potential gains include greater allow 2 years for full implementation of revenue mobilization because citizens may be more decentralization, and the tasks ahead are massive, willing to pay local taxes to provide local public Decentralizing 1.2 percent of GDP in spending services and because local governments may be would not be a problem, if it were not for the time more familiar with, and so better able to tap, local currently imposed pressure. In fact, over time, and tax bases. 39 Managing Across Levels of Government Figure 3.2: Increased Inequality Rupiah per capita grants and resource revenues per province, and non-oil GDP per capita Transfers + Resource Share (Rp. '000 per capita) 700X 1 l0 *After Natural 0o0I a Re urce Sharing 4000 * 400 300 ) * : Before Nat.ra 200 U * * Resource Sharing 100L 0 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 Non-Oil GDP Per Capita (Rp.'000) 3.14 The two laws provide mainly for 3.15 There remains the urgent need for better . coordination of the process towards expenditure, but not revenue, decentralization. implemnation of the tof caan trative Despie theenacment f revnue harin for implementation of the two fiscal and administrative Dept th encmn ofrvneshrn.o decentralization laws (Law No. 22/1999 USU PD natural resource revenues, the laws do not give local goverments any new, meaningful, and and Law No. 25/1999 UU PKPD). Currently, in the 'lc od it e Tsa major Central Government, the Ministry of Finance, the limitation of the new laws. To establish a link Department of Home Affairs and the Office of the limittionoftene w. T e ish a lState Minister of Regional Autonomy are involved between costs incurred and services demanded by in this effort, but g y .. .. in this effort, but ~~~~~~~there is a lack of clarity on who is citizens, local governments must have the ability to responsible for what aspect of this implementation make some real choices in their use of tax ress.blearly, this implexa nday instruents (at least at the margin). It is this process. Clearly, ths s a complex task and may linkage that IS crucial: it makes the citizens aware nedaetinfo th hgeslvlsn thnkate ther is aconnctionit bkete the itaxens thata government. The laws also lack any specific details that there is a connection between the taxes that that their implementation will require. they pay and the services that they receive (at least q if there is transparency), and it establishes The Process and Goals of Decentralization accountability on the part of the local government officials. This does not require that the government 3.16 The first step in most successful control all of its revenues, only enough to change decentralizations is the development of a general on the margin the revenues it collects and also the framework within which the broad goals of the services it provides. However, even this modest reforms are articulated and agreed upon, in amount of local control is not present in the something that might be embodied in a goverment decentralization reforms. "white paper". This step seems to have been completely skipped in Indonesia. Instead, the 40 Public Spending in a Time of Change Government has moved directly to drafting there is no road map for designing all features of decentralization laws, and it is now beginning to the program: the laws, the regulations, the think about drafting the implementing regulations transition, the implementation, or the evaluation. that go with these laws. Such would seem to be the case in Indonesia. The absence of such a plan tends also to affect 3.17 There is a lot to be said for "getting on implementation: with it". But this kind of shortcut raises some important questions such as: Is the Government a) The laws defining expenditure assignment clear on what it wants to achieve with and revenue powers are being written in an decentralization? Is there widespread support uncoordinated way by two different groups within the Government for these objectives? Is the within government. Without a policy design decentralization strategy that is moving forward to guide this drafting, it is virtually certain based on a well thought-out plan, or is it more an that local governments will have more idea in its infancy with many unanswered questions expenditure responsibilities than revenue about the broad structure of roles and resources, setting the stage for a "soft budget responsibilities that will emerge? constraint" for local governments. 3.18 Countries that have decentralized b) The design of intergovernmental transfers is successfully have always issued a clear statement not being guided by clearly stated of the objectives of the reforms. In Indonesia, government objectives concerning there has been little advance preparation for equalization, the desired level of expenditure decentralization, despite the existence of a pilot control by line ministries, local government program (the "District Autonomy Pilot Program", revenue mobilization, and the like. or DAPP), which was established in 1994/1995 in which a number of local governments were given c) Without a clearly stated set of objectives and more responsibilities. Further, there seems to be priorities for the decentralization program, it only one common issue that is being addressed by will be difficult to draft the implementing the decentralization program - the need to move regulations for the various components of govemment decision-making on taxes and the program. Appropriate interactions expenditures to the provincial and the district level. between government and civil society focus It is not yet clear that this means "closer to voters", groups will be a valuable instrument for and it is also not yet clear that central government soliciting ideas and fostering citizen ministries will resist the effort to impose acceptance to the envisage reforms. regulations, mandates, and minimum standards on local government service delivery, all of which d) Similarly, the absence of a clear statement of would reduce local autonomy. It is certainly clear objectives and priorities will make it that the reforms do not extend any new significant impossible to evaluate the success for the revenue raising powers to the local governments. various components of the program or even to put in place an evaluation effort. 3.19 International experience shows there is no single best structure for fiscal decentralization. e) Indonesia's decentralization program will There are many versions, each appropriate to what grow and develop as the country changes in a country is trying to accomplish. When there is no the coming years, and a strategy for clearly articulated decentralization policy that adjusting the structure of the decentralization commands widespread support and consensus, then policy to keep up with this economic 41 Managing Across Levels of Government development will be essential. This fine 3.23 In addition, there is much uncertainty tuning must be guided by a clearly about the revenue-expenditure balance at the local articulated set of objectives and priorities. government level. Some local officials believe that there will be no problem in paying the salaries of ISSUES IN THE IMPLEMENTATION OF THE any new civil servants, in part because they RIEFORMS mistakenly believe that the SDO will continue, but there could be a problem in funding other routine 3.20 To take the next steps in a fiscal expenditures because some new departments will decentralization program, the Government of be created that do not currently exist and funds Indonesia will need to address a number of must be found for these departments, especially for important issues, most of which affect public maintenance, transportation, utilities, electricity, service delivery and accountability. The key issues papers, water, phones, and the like. Some district in this regard are the following: officials also believe. that their revenues will be lower under the new system. Others, at both the 3.21 Revenue-Expenditure Balance. There province and the district levels, estimate that may well be a mismatch between the revenues that revenues will increase substantially with the are assigned to local govemments and their turnover of the deconcentrated central government expenditure responsibilities. On the revenue side, agencies and their budgets. For example, in North the idea is to guarantee a transfer to local Sulawesi revenues and expenditures are Rp. 155.1 governments of 25 percent of domestic revenues, billion in the 1999/2000, and officials estimate that plus a share of natural resource revenues, in the revenues will increase to Rp. 1,413.9 billion in form of intergovernmental transfers. On the 2000/2001, given the estimates of their share of the expenditure side, the goal seems to be the general allocation fund, of specific grants, of decentralization of responsibility for a broad range revenue sharing, and of salaries and development of expenditure functions. There is little evidence budgets of deconcentrated agencies. Clearly, there of expenditure functions.iIIalso Thereter isenlittleespevidencees of any analysis of the expenditure budget for sub- will also be greater expenditure responsibilities, national governments implied by this assignment of and the department estimates that expenditures will fnationsand govemmenthe im cyof the 25 percent increase from Rp. 155.1 billion in 1999/2000 to functions, and of the adequacy Rp. 1,119.1 billion in the next year. On balance, then, the estimates are that revenues will exceed 3.22 It is not known how the revenue transfer expenditures by Rp. 294.8 billion. Regardless, compares to the targeted level of expenditures, however, some local officials indicated that they either at the aggregate or at the provincial level. were simply unaware as to what will happen to For example, in the 1999/2000 budget the 25 their budgets under the new decentralized system, percent allocation is projected to equal Rp. 35.6 in large part because they have no knowledge of trillion (i.e. 25 percent of Rp. 142.2 trillion) which the formulae for grant distribution. Similar is roughly double the projected regional routine uncertaity is present among central government expenditures of Rp. 19.5 trillion. Also, revenue officials. sharing is estimated at about Rp. 6-7 trillion, so that total local government transfers (aside from 3.24 Local Government Capacity to Deliver the specific allocations) are estimated at Service. The ability of provincial and local approximatelyRp. 43 trillion, governments to absorb the new expenditure responsibilities is critical to the success of decentralization as well. The broad issue here is whether provincial and district governments can 42 Public Spending in a Time of Change absorb the "back office" functions that are now absorption will take some time and will vary centralized, including personnel management, data greatly by local government. For example, one processing, procurement, and contracting, and so local government secretary estimated that the extra provide the full range of services that will become burden of these functions could be as much as Rp. their responsibility in the new system. 15 billion relative to a district budget of Rp. 111.0 billion; another local Secretary estimated that the 3.25 One view, often expressed by local district civil service would roughly double in size officials, is that they will have little difficulty in with the reforms, from 12,000 employees to 24,000 providing these services, in part because many of employees and in another district, the personnel these functions have already been largely shifted to officers said that the number of district dinas local governments. In North Sulawesi, for would increase from 11 to 21 (adding new ones in example, 20 programs funded by specific Inpres fishing, livestock, mining, forestry, land institutes, allocations have been channeled directly to district industry, manpower, education and culture, governments by the provincial Bappeda since cooperatives, and trade), with more than a doubling 1994, including programs for road, health, drinking of district civil servants. In the province of North water, primary schools, agriculture, and market- Sulawesi, there are currently 35,000 employees in place development. Other officials similarly claim deconcentrated agencies throughout the province that "it is easy to turn over an agency to a district." (relative to 45,800 provincial civil servants), and, However, another expressed view is that the funds with decentralization, most of the 35,000 necessary to provide these support services may employees in the deconcentrated agencies would not be forthcoming, even if the local skills needed become provincial or district civil servants. Also, to provide the services are present. For example, officials in professional and highly specialized the district of Minahasa participated in the District deconcentrated agencies (e.g., education, Autonomy Pilot Program (DAPP), during which manpower) worry that they often get extensive the transfer of 9 (deconcentrated) departments with central govemment assistance on matters for which 500 employees to the district occurred (manpower, the local governments have little expertise or manufacturing, trade, social, cooperatives, mining, interest. health, rural development, and registration). According to officials there, the results of the pilot 3.27 Overall, the views expressed by the were threefold: there was no problem in absorbing officials interviewed suggests that only 10 to 20 the employees, there was no problem in providing percent of the districts can absorb all of their new most of the basic services of the departments, but duties quickly. A BAPPENAS rating indicates that there were financial problems because only funds only 3 of the 27 provinces meet appropriate for routine expenditures (salaries) were transferred standards at present, especially in the quality of the to the district and no funds for development civil service. Some local government officials are expenditures were transferred. This last problem already preparing for the changes. For example, in could also arise in the decentralization program, if North Sulawesi, civil servants have been sufficient funds (aside from salary support) are not encouraged to improve their educational levels. provided; if salary support is also not provided - Currently, there are roughly 100 people in and there are very mixed views on the likelihood of BAPPEDA; 60 percent have the equivalent of a this - then additional problems will be created. B.A. or B.S. (or 4-year college) degree, 13 have an M.A./M.S. degree, and another 15 are working 3.26 The magnitude of the tasks to be on an M.A./M.S. However, this appears to be the undertaken by the civil service will be much exception. Instead, most local government officials greater in the new system, so that complete 43 Managing Across Levels of Government appear to be waiting for central government by central government employees who anticipate assistance. being absorbed into the sub-national government service. More than anything else, civil servants are 3.28 This general issue raises a number of concerned about these issues. specific questions: 3.30 By most accounts, central government civil a) Is the quality of the human capital in the servants largely will prefer to stay at the center, provincial and district governments up to rather than be transferred to the province or the the task of delivering the services to be district. However, the decentralization will transferred, or is the idea simply to absorb eventually require massive transfers to local central employees? governments perhaps as many as one-third of the 1.5 million central government civil servants, b) How will management be handled? Will according to one estimate. former central employees be brought into the provincial and local service, directly 3.31 Civil servants at all levels are largely in the under local government managers? Will dark about their future, something that has created the managerial personnel from the central much anxiety for them. Surprisingly, some government be transferred in? (though clearly not all) officials are unconcerned about salaries, believing that the central c) Are there some purely physical limits to government will continue to pay their salaries via the absorption of these functions by sub- the SDO. Officials more often expressed anxiety national governments? For example, is the about guarantees (or lack thereof) for certain provincial and local computer system up to positions, especially supervisory ones in the increased record keeping tasks departments that will be created or moved to implied? What new budget formats and district control. They noted that job rankings could accountability systems will be required be an issue. For example, one district Secretary when these new functions are absorbed has a current ranking of 2B; under the new system, into the decentralized system? What he believes that his position will require a higher provisions have been made, or need to be ranking of lB (the same as a provincial-level made? Secretary), so he may not actually be "qualified" for his position in the new system. More generally, d) Will a new legal framework and a new with new required rankings, there may not be reporting system need to be established to sufficient numbers of qualified civil servants for govem the budget decisions, personnel the various positions. Central government civil management, and the like of sub-national servants in deconcentrated agencies are also governments? Will these governments be worried about career advancement in local able to deal with the compliance costs governments, especially since they typically view involved? themselves as "specialists" whose skills may not be appreciated or understood in a local civil service; 3.29 Civil Service Issues. The civil service indeed, a district counterpart agency does not implications could be daunting, and it is not clear always exist for the deconcentrated agencies, so how far planning has gone on this set of issues. that regulations need to be written. Issues like Issues of seniority, compensation, pensions, fringe seniority (e.g., who will be the head of a benefits, and work rules were raised consistently deconcentrated department merged with a district counterpart agency), promotion (e.g., will the 44 Public Spending in a Time of Change criteria for advancement change), and transfer powers, a point raised by several local officials as (e.g., who will determine mobility) in the new a limitation on local autonomy. Central system are very hazy at present; these will be government ministries may well impose a range of determined by the district (not the central) regulations, mandates, and minimum standards on government personnel people and their evaluations, the deconcentrated agencies, features that could and, again, the district may not apply the same severely limit local autonomy and therefore local standards as currently. accountability to voters. Intergovernmental transfers may well be conditional, which will limit 3.32 In the face of these issues, some officials local government discretion. The electoral prdcess believe that central and local government is not direct; that is, the responsibility of the elected employees will be placed on the same track in a official remains directly to the party rather than to new system in order to maintain the "unity" of the the voters, and the party can select - and remove - civil service, as well as to allow the mobility of candidates on its authority. Finally, it may take civil servants across provinces and districts; in their some time before the accountability implied by free view, a unified system will require that the salaries elections actually occurs. continue to be paid by the central government. However, officials admit that this is largely 3.35 In fact, local officials have mixed views on speculation at this point, and they are awaiting the the changes in accountability. Some believe that issuance of regulations. the new laws significantly increase their autonomy, and so their accountability. They point especially 3.33 Accountability of Elected Local Officials. to local approval of budgets and local discretion on There is a widespread belief that local spending levels and composition. Central accountability will be improved by the electoral government officials generally endorse this view process. Voters will now have some say in the also, fearing that the central government may well determination of the composition of the local lose overall budgetary control but that this is the councils, and local officials often claimed that price of decentralization. "expectations are high". The new procedures for the selection of the local head should also improve 3.36 However, some officials also believe that accountability. Under the old system, the local they already have substantial autonomy in the head was selected with the heavy involvement of current system. In particular, the current the central government, so that the responsibility of formulation of the provincial development budget the local head was directed mainly upward, to the is a bottom-up procedure over which local officials central government. In contrast, under the new exert substantial influence, and local officials do system the responsibility of the local head is to the not believe that the decentralization will enhance elected council that will elect the head without (or lessen) this autonomy; the main change with approval of the central government. Finally, the new laws is that final approval for the budget there will be local approval of budgets, and this will come from the provincial assembly, rather leads to increased accountability. Many facets of than from the central government. On balance, the reform will therefore move government closer these officials believe that they will have "more to the people. room to maneuver" and "less intervention from above", but that these changes will be minor. 3.34 However, there are also some gray areas, where the new reform may not lead to as much 3.37 Finally, there are some officials who accountability to voters. There is no proposal for believe that local autonomy will be largely significant expansion of local revenue raising unaffected by the new laws. There is a strong 45 Managing Across Levels of Government possibility that central government ministries will becoming the honest broker on intergovernmental resist the transfer of their line ministries to fiscal relations. It could also resolve disputes provincial and district governments via regulations between ministries in terms of fund allocations, and mandates, tendencies that are already apparent, thereby de-politicizing intergovemmental fiscal because the ministries will lose much influence, decisions. The central government will play a resources, salaries, and the like with any transfer. major role in organizing and supporting this unit. These local officials also maintain that local autonomy will suffer from a lack of own local 3.40 With the ability of provincial and district revenues; in the words of one district Secretary, governments to borrow (with the approval of the there will be "decentralization in management" but central government), the central government will there will be "no decentralization in finance". need to develop a regulatory framework that can monitor the compliance that goes with this (e.g., 3.38 Central Government Assistance and disclosure, purpose of borrowing, eligibility, Leadership-A Necessary Imperative. Somewhat limits). The central government will need a fiscal paradoxically, successful fiscal decentralization information system to monitor the progress of requires a strong central government to lead the decentralization and to serve as the database for process. Given that the Indonesian system will research necessary to continue to fine-tune the have over 300 provincial and district local system. Many large countries with significant governments, an important issue is whether the intergovernmental fiscal programs have moved to central government has the ability to provide the develop a fiscal information system (e.g., Brazil, oversight, guidance, and leadership necessary. India, U.S., Canada, Australia). A management information system along these lines is currently 3.39 It is necessary for the central government being designed in the Ministry of Finance. The to carry out analytical work to evaluate and to role of a centralized debt management unit is monitor the decentralized fiscal system on a critical in this regard. continuous basis. This involves identifying tax effort performance, tracking local budgets, 3.41 The central government, if it imposes the evaluating any proposed alternative fiscal reforms, condition of a hard budget constraint on sub- and so on. Second, the central government must national governments, will be charged with maintain the intergovernmental transfer system. determining whether local governments are in This will involve a number of activities, like compliance. Central governments also must lay updating the basic equalization formula, and down the rules for audit. evaluating the equalization features of the grant system. In addition, if there are conditional grants, 3.42 To the extent the central government there needs to be a compliance monitoring system imposes regulations, mandates, and minimum in place and an incentive structure to assist standards (and it almost certainly will because all enforcement. Third, and related to the transfer countries in the world do this), there must be a system, one possibility is that the Indonesian system to monitor compliance with these government could create a finance commission to requirements. Examples include everything from oversee and advise on inter-governmental fiscal compensation rates for employees, to relations. This body would necessarily have to environmental regulations, to the adherence with possess a strong analytic capability, some modeling standards for school teachers, to the expenditure of support, and an ability to make the system minimum amounts. In addition, the central transparent. A finance commission could stand government may take the leadership in providing between the central and local governments, thereby technical assistance and training to local 46 Public Spending in a Time of Change governments. The more technical the training, the would if the local government had some rate more likely is the central government to lead the setting powers. training and technical assistance. 3.46 Local governments have some but limited 3.43 In any intergovernmental fiscal system autonomy on the determination of rates and bases. there will be disputes between the central and local No new taxes for local governments are currently governments, among local governments, and even under consideration at the central government. between ministries. Among the possible sources of Many local officials would like to take complete contention are the specific data used in the formula control of the land and buildings tax, something distribution, compliance with grant conditionality, that apparently was considered by the central unclear expenditure assignments, and the like. The government at one point before being abandoned. resolution of such disputes will require central Local governments can propose new taxes under government involvement. Again, a Finance some circumstances, with approval necessary at the Commission can assist in this task. Also, if the central government, and local officials are central government adopts options such as a exploring these possibilities. For example, the Financial Control Board to deal with bankruptcy, district of Bitung has a major port, and possible or if the government acts as a guarantor for local new taxes include district fees on the entry and exit borrowing, central control and monitoring will be of ships, on handling of cement, and on handling of required, as will sanctions and remedies for asphalt. defaulting local governments. 3.47 A Hard Budget Constraint for Local 3.44 All of these considerations point to the Governments. It is not clear that provision has necessity that fiscal decentralization calls for a been made for the imposition of a hard budget strengthening of the central government's ability to constraint on sub-national governments. Two lead and manage the process. A necessary conditions are necessary. First, there must be a condition for successful decentralization is to have reasonable balance between expenditure in place a strong central government unit responsibilities assigned and revenue instruments responsible for intergovernmental fiscal relations. available. Second, the local government must have This in tum raises some important questions: where some access to tax rate setting so that they can tax in government will such a unit be placed, how will their constituents to cover any shortfall. As of its information system be supported, and how will now, the balance between expenditure assignment it be staffed? and revenues has not been worked out, and, as noted above, there is no provision for significant 3.45 Revenue-raising Powers for Local local taxing power. Governments. Under the existing regulatory framework in Indonesia, no provisions have been 3.48 Local government borrowing and made for local governments to raise significant onlending arrangements from center to sub- amounts of their own revenues. This means that regional governments need to be clarified. there is presently no plan to devolve significant Currently, provincial and district governments can new taxing sources to local governments. If this is borrow for capital projects, with central not done, there will not be full accountability of government approval, and these loans often come elected officials (or ruling parties) to the voter- from regional banks. These banks are largely taxpayers. If all expenditures are financed by conduits for money from the center, are run by intergovernmental transfers, the voters will not feel local bureaucrats for the benefit of the local the pain associated with better services, as they government, and have just been recapitalized. 47 Managing Across Levels of Government Given these considerations, there is a real concern responsibilities? These questions must be at the central government that local borrowing will answered in a transition plan. grow out of control, despite the approval necessary for any such borrowing as specified in the two DECENTRALIZATION COULD REINFORCE decentralization laws. In fact, some local officials CIVIL SOCIETY PARTICIPATION stated that they believed that local loans would be assumed by the central government in the event 3.51 Decentralization strengthens citizen that the local government was unable to service the participation by bringing governments closer to the loan, something that is undoubtedly mistaken but, people they serve. Its success, however, depends if widely held, something that would also eliminate on the strength of the local government a hard budget constraint at the local level by institutionsA Empirical evidence from a sample of creating a severe "moral hazard" problem for local 80 countries has shown that citizen participation officials. and public sector accountability go hand in hand with decentralized systems of government.5 3.49 The Laws and their Implementing Indonesia's move to a fiscally decentralized system Regulations. The new decentralization laws in of government is a step in the right direction in this Indonesia are stated in very general terms, and the context. However, unless the local administrations implementing regulations which, in fact, will have sufficient powers, resources and define the structure of decentralization in Indonesia accoutaiit mecansm (such s c ns have not yet been issued. There also seems to be complait mechanisms;(aprprate prvisins some mbigity boutwho wll isue hese complaint mechanisms; appropriate provisions for some ambiguity about who will issue these recall of elected officials for negligence or implementation regulations. Some important issues misconduct; fostering independent "think tanks" that need to be specified in these implementing for critical thought and evaluation; independence regulations include: the exact assignment of of judiciary and a free press) in place, the success expenditure responsibility, especially at the of decentralization could be curtailed. Also, these provincial level; local tax authority; local user changes will take time to implement effectively. charge authority; borrowing powers; civil service regulations; and the structure of the grants system. 3.52 During the past year, Indonesia has taken significant steps towards increasing the 3.50 The need for a Transition Plan. A fiscal involvement of civil society in budget formulation decentralization program in a large and diverse and implementation matters in connection with its country as Indonesia needs a carefully thought-out Social Safety Net Program. Actions being transition plan. A major issue is the speed with undertaken on a pilot basis in Indonesia under the which a decentralization program can be World Bank's ongoing Social Safety Net implemented, even if the plan is carefully thought Adjustment Loan (SSNAL), Urban Poverty Project out to cover all of the issues described above. Even and Kecamatan Development Project provide if some governments can assume the valuable lessons regarding alternatives for responsibilities, there are concerns about the enhanced civil society involvement in the design, treatment of the remaining provincial governments. delivery, monitoring and evaluation of Will they be brought slowly into the system, with development projects. These measures could be more limited powers until they prove their ability customized on the basis of Indonesian conditions to take on the new responsibilities? What will be and their use eventually expanded to cover the the criteria for graduation to the next class of municipality? What training will their civil 4 See Heymans, Chris (1996) and Anwar Shah (1998) servants be provided to assist them in their new s SeeHuther,JeffandAnwarShah(1998). 48 Public Spending in a Time of Change entire government budget. Such measures to of the funds, free flow of information will be enhance participatory budget implementation promoted. To this end, a brief circular about the include: provision by the authorities timely and project/program may be posted in public places (in accurate information at all levels of government; pre-selected poor neighborhoods in the case of the empower local communities to monitor public Bank's Urban Poverty Project), such as markets, expenditure programs; provide for independent public thoroughfares, schools, places of worship verification of monitoring reports; establish through NGOs and religious organizations and appropriate complaint mechanisms, and make agency staff. Door-to-door information greater use of civil society as independent monitors dissemination by facilitators in targeted areas may at each stage of program delivery. also be used. In the case of the SSNAL, the BAPPEDA in each of at least 105 Districts has 3.53 To improve the scope for citizen compiled an information folder ("SSN folder") participation in the budget formulation stage, the containing the information about the social safety World Bank Urban Poverty Project utilizes a net program (such as description, program start proposed "Kelurahun Forum" whereby community dates by location, plus standard forms, groups are to identify and implement the sub- bookkeeping system and environmental and land projects that are to be financed.6 Provincial and acquisition guidelines). Each District has made local governments will select the poorest available its SSN folder to the public through Keluharans (neighborhoods) on the basis of providing public access during official government transparent and well publicized criteria. hours to said folder at a District office. The Facilitators will help with targeting and consultants certification letter shall include a list identifying (who may be consulting firms, NGOs, government each such office, (the "District Information agencies or universities) will assist the sub-project Center"). Each District has provided: (a) at least 2 process. Community groups can select their own local NGOs, 2 local media organizations and 1 facilitators and handle their payment, based on an local university with a copy of its SSN folder and output and profit sharing basis. Participation by the name and location of the relevant District local agencies is encouraged. Mechanisms also Information Center; and (b) BAPPENAS with a list need to be in place to review exogenous changes identifying such organizations. The certification that take place during the implementation of a letter shall include such lists. public project/program. Similar arrangements have been put in place in the Kecamatan Development 3.55 To improve transparency for direct Project, where a Kecamatan-level council reviews contracting, the executing agency will make public and funds village proposals (one vote per village the contract amount. For competitive bid and one vote per camat). Allocation of funds contracting, the executing agency will: (i) make within the kecamatan is determined by voting at the public the shortlist, winning contract, amount, village level. name, and members of the Board of Directors of the winning contractor; and (ii) Implementing 3.54 To promote transparency in the use of agencies at each level will make available upon public funds and to raise the awareness of the request to any person or group, at any time during rights and responsibilities of stakeholders, to work hours, without undue delay, and free of minimize corruption by local elite or beneficiaries charge, their monthly reports; lists of eligible households will be publicly available at the village 6 See World Bank Urban Poverty Project, PAD (May 1999) level. and Frida Johansen (1999), "New Indonesia Urban Poverty Project: Harnessing Cornmunity Initiative to Generate Jobs", World Bank. 49 Managing Across Levels of Government 3.56 To ensure effective participation, each gains from decentralization, items that may require publicly funded program should contain an extemal assistance. adequate specification of the complaint resolution procedure as it relates to the administrative actions 3.58 Although, Indonesia has a long way to go or sanctions against officials after preliminary in fully and effectively implementing fiscal and investigation of complaints, and referral of administrative decentralization, political sentiment complaints based on the results of preliminarv will force the govemment to move fast. This investigations of complaints to the other transition has to be managed carefully to minimize appropriate institutions with the Govemment for disruptions and uncertainties. Hence, Govemment investigation and disciplinary/judicial action. The needs to develop a broad policy strategy - a "white complaints resolution procedure should include a paper" - for its decentralization policy. This should capacity for a "rapid response" unit at the pusat to outline the key issues it must grapple with during handle serious allegations (financial this transition process. These include: misappropriation or political interference). After a complaint is filed and investigated, a public report * the minimum requirements of core staff at the detailing the results of its investigation would be central and sub-national levels of government; produced. Such a report should describe: (a) the . the core competencies of the staff; complaint, including the specific locations and * measures to ensure local accountability; social safety net programs investigated; (b) the * fiscal risks that could be borne by the composition of the investigating team; (c) the steps goverment (e.g. from sub-national borrowing undertaken during the investigation; (d) the results and/or guarantees), among others. of the investigation, including the type of infractions and the number of government officials This "white paper" would be a key ingedient of and non-government personnel involved, and; (e) the public in forming their expectations about what recommendations for corrective action for each is achievable through decentralization and in what complaint which is found to be substantiated. realistic time frame. POLICY IMPLICATIONS 3.59 The Govemment must do some basic quantitative research before there is a 3.57 In many respects, Indonesia's system of decentralization plan ready for implementation. fiscal decentralization would seem to make it an There are at least four areas where this work might outlier when compared with other country be focused: experiences. It has many of the characteristics of a country that typically chooses decentralization as a) Revenue/expenditure Balance. The plans for an economic policy: a large population and land the decentralization of revenues via the area, a diverse population, and a reasonable level intergovemmental transfer system, the of economic development. However, until now, proposed assignment of expenditures, and the Indonesia has chosen to remain a centralized state, proposals for local taxation and user charge perhaps because of a fear of civil unrest. The autonomy need to be coordinated. It is decentralization reforms that the Govemment of necessary to estimate the cost implications of Indonesia has now embarked upon have the the expenditure assignment under potential to transform intergovemmental relations. consideration, and to cost out the central However, many things must be done to achieve the mandates that will likely be imposed. Following these calculations, the revenue 50 Public Spending in a Time of Change needs can be estimated, and the feasibility of constraints effective? Do higher income the 25 percent transfer of domestic revenues places borrow more? Are budgeting practices and the likelihood of a hard budget constraint improved? A modeling and information can be considered. To do this work, a system is the basis for a rigorous quantitative simulation model needs to be developed and evaluation system. Indonesia is at the estimated. From this, the Indonesian threshold of implementing a new system. government could begin the hard work of Now is the time to build-in an evaluation making choices as regards the proper "vertical system to answer these questions. split" between different levels of government. 3.60 Finally, the Government must develop a b) Intergovernmental Transfers. Before the detailed implementation plan, accompanied by government can make decisions about the implementing regulations. There are many proper "horizontal split" of revenues among implementation issues associated with the local governments, it must have hard data on transition to a decentralized system in a country as the budgetary implications of different large and as complicated as Indonesia, including formulae for the distribution among local such things as exact expenditure assignments, governments. Armed with such quantitative revenue powers and limits, budget preparation and analyses and using simulations to reflect constraints, mandates, borrowing authority, and the different scenarios, the Government can then like. At present, there does not seem to be a begin making its decisions about the proper detailed implementation plan. It seems clear that structure of the intergovernmental transfer all local governments in Indonesia are not able to system. absorb their new responsibilities because of their very different management capabilities. However, c) Equalization versus Revenue Mobilization. it is quite easy to hide behind this issue and create The government ultimately needs to decide a self-fulfilling prophecy that leads to the how much it wants to emphasize revenue conclusion that "local governments are not able to mobilization and how much it wants to manage their own affairs". The right answer is emphasize equalization. There are many probably that there needs to be a transition in pieces to this puzzle: the grant formula, which some local governments participate fully in conditionality, borrowing versus grants, the decentralization under the new system, while expenditure assignment, mandates, local some local governments are classified as not yet taxing and user charge powers, etc. A ready for decentralized authority, but a clear set of thorough quantitative analysis of the options criteria for promotion to full status is specified in and of their implications needs to be carried detail. A series of perhaps ten case studies of local out, governments, pointed exactly at what needs to be done in these jurisdictions to develop an d) Evaluation. A major flaw in decentralization implementation program, would be quite valuable programs around the world is that there is in this context. An important part of this effort is little analysis of the degree to which the the establishment of training programs and existing program is meeting the objectives set institutes to enhance civil service capacities. for it. Does the program equalize across local governments? Does it stimulate revenue mobilization? Does it lead to different public expenditure mixes? Are hard budget 51 REFERENCES Anipa, Seth, Felix Kaluma and Elizabeth Muggeridge (1999), The MTEF in Malawi and Ghana, DFID Seminar on Best Practice in Public Expenditure Management, June 1999. Ahmad, E. et. al., Indonesia: Redesigning Intergovernmental Fiscal Relations, Fiscal Affairs Department, IMF, December 1998. Ahmad, E. et. al., Indonesia: Decentralization - Managing Risks, Fiscal Affairs Department, IMF, June 1999. Bardhan, P. (1997). "Corruption and Development: A Review of Issues", Journal of Economic Literature,Vol. XXXV, pp. 1320-1346. Blejer, Mario and Liliana Schumacher (1998). 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"Reforning Indonesia's Pension System." Policy Research Working Paper 1677. Washington D.C.: The World Bank. Lewis, Christopher and Ashoka Mody (1997). "The Management of Contingent Liabilities: A Risk Management Framework for National Governments." In Timothy Irwin, Michael Klein, Guillermo Perry, and Mateen Thobani, eds., Dealing with Public Risk in Private Infrastructure. World Bank Latin American and Caribbean Studies. Washington D.C.: The World Bank. Organization for Economic Cooperation and Development (1993). "Accounting for What?: The Value of Accriual Accounting to the Public Sector." Paris. Potter, Barry H., et. al., Indonesia: Fiscal Management, Decentralization and Organization of the Ministry of Finance, Fiscal Affairs Department, IMF, December 1998. Potter, Barry H. et. al., Indonesia: Budget Management in the Short and Medium Term, Fiscal Affairs Department, IMF, October 1998. Sahgal, Vinod (1999). 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"Implementing Accrual Accounting in Government: The New Zealand Experience." The International Federation of Accountants, Public Sector Committee, Occasional Paper 1. World Bank (1999a). "Czech Republic: Dealing with Contingent Liabilities." Europe and Central Asia Regional Office, Poverty Reduction and Economic Management Unit. Washington D.C. World Bank Urban Poverty Project, PAD (May 1999). World Bank (1999). "Indonesia: Expenditures for the Environment and for Sustainable Development." World Bank (1998). "Indonesia in Crisis: A Macroeconomic Update." World Bank (1998). "Indonesia Public Expenditure Review: The Budget, Off-Budget Items, State-Owned Enterprises." Report No. 18691 -IND. World Bank (1997). Indonesia: "Suggested Priorities for Education." World Bank (1999). Indonesia Civil Service Review, Rewards Assessment Report, March 1999. World Bank (1998). Public Expenditure Management Handbook. Washington, D.C. World Bank (1999b). "Republic of Indonesia: Second Policy Reform Support Loan." (Report No. P-7308-IND). Report of the President to the Board of Executive Directors of the World Bank, Washington D.C. 54 ANNEX I - Status of Implementation of Recommendations of Public Expenditure Review, 1998. Recommendation Remarks Revenues Short-term Improve collection IMF TA mission on Revenue Mobilization done Audit accounts of Bulog, Ongoing; results expected by August Pertamina Medium-term Audit tax collection system IMF TA mission on Revenue Mobilization done Current Expenditures Short-term Abolish in-kind rice subsidy for Not yet done, but small share of the budget civil service Medium-term Start civil service reforms World Bank assessment of civil service done Subsidies Short-term Food subsidies limited to rice Done. Phase out subsidies on energy and Large residential electricity consumers are fuel charged increased tariffs. Actual spending on subsidies was lower than planned because of lower oil price and recovering Rupiah. Arrears are however accumulating. Review food and fuel distribution Comprehensive review of Pertamina done by system Government through Boston Consultancy Group and PriceWaterhouse-Coopers. Bulog currently being audited. Medium-term Eliminate all subsidies except for Ongoing very narrowly targeted food and energy subsidies Transfers to regions Short-term Maintain the real value of current Real value more or less maintained in FY99/00. transfers From next fiscal year, transfers will increase due to the recently approved Fiscal Decentralization Law. Expand untied INPRES Done, but tied "block" grants exist. Fiscal decentralization law will provide more autonomy Run expanded job creation Done. program though existing programs Implement plan to expand local Fiscal decentralization law assigns resource and tax base real estate revenues to subnational government Medium-term Develop local fiscal autonomy Fiscal equalization law no longer requires central clearing of local budgets, and gives increased revenue assignment. Regional autonomy law gives more spending autonomy Development spending Agriculture Short-term Stop Kalimantan Rice project Stopped at the basic investment level. No further expansion planned 55 ANNEX 1- Status of Implementation of Recommendations of Public Expenditure Review, 1998. Recommendation Remarks Continue irrigation maintenance Problem identified and addressed as an and rehabilitation institutional issue under Bank's WATSAL Postpone major irrigation works No new projects initiated, but bilateral donor pressure in this area Set up water user associations Part of Bank's WATSAL; water user organizations empowered, and local level will retain water user fees Medium-term Eliminate crop planting direction Conflicting information. No official policies anymore (abolished by INPRES No 5, 1998), but at local level still perception of obligation, and guidance through irrigation practices Phase out government sponsored INPRES 18 1998 phases out support for these cooperatives cooperatives, but marketing cooperatives may threaten market operations, and some forestry concessions non-competitively allocated to cooperatives. "People's economy" initiative could to intensify government support for private cooperatives Transport Short-term Maintain critical roads Government increased allocations, but Parliament in part reversed that decision Enforce loading limits Experimental program of targeted weighing started Postpone new construction of No new projects started airports, ports Reach agreement on the private Government reviewed all toll roads and toll toll road to ensure continued roads projects operation Maintain essential rail links for Budget allocation sustained Jabotabek to supply PLN Medium-term Revise transportation plans to take Strategic Expenditure Planning exercise done account of changed circumstances under tighter budget constraints Improve road planning and Part of Strategic Expenditure Planning coordination Energy Short-term Reduce subsidies See subsidies section above Develop short-term workout Part of comprehensive review of Pertamina done programs for the financial crisis, by Government through Boston Consultancy esp. PLN Group and PriceWaterhouse-Coopers. PLN restructuring supported by ADB Assure PLN resources for Part of comprehensive review of Pertamina done maintenance by Government through Boston Consultancy Group and PriceWaterhouse-Coopers Facilitate renegotiation of critical Settlement process started. contracts for PLN (IPPs and fuel This is part of a comprehensive review of supply) Pertamina. Audit Pertamina 56 ANNEX 1 - Status of Implementation of Recommendations of Public Expenditure Review, 1998. Recommendation Remarks Medium-term Revise and implement PLN Comprehensive review of Pertamina done by privatization plan Government through Boston Consultancy Group and Pricewaterhouse-Coopers Review medium-term role of Comprehensive review of Pertamina. Includes Pertamina separating government role from Pertamina Health Short-term Emergency allocations to ensure Done supply of essential medicine Assure funds for basic staffing of Done primary health care units Direct increase in funds through Done existing programs Enhance basic public health Allocation to these programs sustained. Some service issues in disbursement Institute training programs to Assessed by government to be a medium-term enhance personnel responsiveness priority Medium-term Major review of the sector The World Bank is preparing a Strategy paper in consultation with Government. Government has established a number of teams to review medium-term strategy. Minister has announced a "New Paradigm" for health Education Short-term Implement program of Done with World Bank support supplementary block grants Implement scholarship program Done with World Bank support Continue efforts to achieve Budget allocations sustained univcrsal primary and lower secondary education Medium-term Reassess education strategy World Bank did comprehensive education sector review (Dec. 98) in consultation with Government. MOE initiated higher education strategy, and held major strategy meeting with donors and civil society in February 99 Offbudget accounts Short-term Increase accountability and Reforestation fund included in budget, but transparency allocations still intransparent. Audit ongoing, results expected in August Account for cost recovery charges Done at Kabutaten level, but not reported to center Make investment fund fully Reporting on funds improved in budget, but still transparent unclear criteria for allocation Change management of pension Private management of funds not initiated to fund date Medium-term Review structure and rational of investment funds 57 ANNEX 1 - Status of Implementation of Recommendations of Public Expenditure Review, 1998. Recommendation Remarks Increase transparency IMF TA on fiscal reporting ongoing Reform Pension Fund SOEs Adopt strategy based on Master Strategy and Master Plan adopted Plan Privatize SOEs in commercial Part of the master Plan; Privatization receipts of markets Rup 3trillion in FY98/99 Sell assets in non-core non- Telecoms bill submitted to Parliament competitive markets after defining regulatory framework Refrain from investing in major Done restructuring 58 ANNEX 2 - A NATIONAL RISK MANAGEMENT FRAMEWORK FOR CONTINGENT LIABILITIES C nontingent Liability Management implies a three-fold strategy: (a) mitigating or containing risks as a precaution; (b) measuring the extent of the liability at the time it is incurred, even though there is no cash outlay at the time, and budgeting for the liability at the time; and (c) monitoring the liabilities over their life span to take additional precautionary measures. INTRODUCTION 1. Contingent liabilities are those from a planned to a market economy or from liabilities that become due only in certain public to private ownership.' circumstances, which are often deemed unlikely to occur at the time the obligation is 3. Even when potentially valuable, assumed. These liabilities are used by contingent liabilities need to be undertaken Governments in the pursuit of several with care because they can easily reduce objectives. Governments around the world fiscal discipline and lead, eventually, to high undertake contingent liabilities to protect the budgetary costs and disruption. Discipline is banking system, to promote particular lost, in part, because those in receipt of the business activities (such as infrastructure guarantees have reduced incentives to act projects, exports, small and medium firms, diligently. Discipline is also lost because and agricultural production), to protect contingent liabilities typically are not valued pension rights, and, on occasion, to bail out for the expected payments that may occur large corporate entities that are deemed too and are sometimes not even recorded big to fail. systematically. As such, because they do not require an immediate cash payment, they 2. Contingent liabilities are undertaken become a mechanism for deferring payments for some good and other dubious reasons. into the future. While it is the case that these They are justified where they prevent future payments may never materialize systemic risk (i.e., where failure of one part because the risky events may not occur, of the economic system can cause distress in experience shows that implied and explicit other parts); where the government has a guarantees are often called and, when that social obligation to maintain economic happens, they create budgetary stress. activities and incomes above minimum thresholds; and where, absent a track record, 4. For the management of national debt, the government's regulatory commitments it is also important to note that contingent require reinforcement. At the other extreme, liabilities have a non-linear payment contingent liabilities are questionable, and schedule. For example, if the extent of have proven to be expensive, where they are government liabilities depends upon the level a substitute for fundamental economic of demand in the economy and a 10 percent reform. In an environment of poor record- drop in demand increases contingent keeping, lax regulatory regimes, and liabilities by 7 percent, then a further 10 misaligned prices, the moral hazard, to which percent drop in demand will increase contingent liabilities are inherently contingent liabilities by more than (and often susceptible, is exacerbated. In between the two extremes is a gray zone where In the Czech Republic, for example, the so-called government contingent liabilities can provide "transformnation institutions," mandated to finance the a financing mechanism for transitions, as transition to a market economy have liberal guarantee authority. See World Bank (1999). 59 significantly more than) an additional 7 With limited staff resources, federal percent. The reason for this is regulators have evolved a top-down approach straightforward. The first drop in 10 percent for conducting risk management is cushioned in part by the surpluses in the examinations of financial institutions. activity supported by the guarantee (for Regulators first examine an enterprise's example in the banking sector, the existing general categories of risk (financial, business, capital and loan loss provisions will take the operational, and event risks) then focus their first hit). However, a further drop does not scarce resources on the highest risk areas. benefit from the cushion and hence translates This process yields a risk identification into a liability for the guarantor, a liability lattice. Using a similar approach a that grows more rapidly as the shock government can assess its own risk exposures intensifies. It is for this reason that (Figure 1). The advantage of this top-down contingent liabilities can be a treacherous approach is that the government can focus policy tool if appropriate bounds are not resources on those risk categories, classes, or placed.2 risk types for which exposure is greatest. This approach economizes on scarce 5. As mentioned in Chapter 3, an resources. Intregrated Risk Management process should perform three key functions: (i) It should 8. A dedicated cell, within the Ministry identify the risk exposures due to the explicit of Finance's Public Credit Department, and implicit contingent liabilities that are should be mandated to record all explicit undertaken by government and implement guarantees that the Govemment provides, measures to mitigate losses and continually while also tracking and assessing all monitor this exposure to risk; (ii) It should contingencies that may increase the measure those risk exposures to the extent Govemment's debt. Systems of early possible and budget against expected losses warning indicators to warn of impending by setting aside some resources (with strict crisis, though imperfect, should be instituted. guidelines for their use); and (iii) It should For example, for the financial sector, the undertake basic measures to reduce the rating agency Standard and Poors' government's exposure by fundamentally recommends that rapid growth of private reducing risks and also, whenever feasible, sector debt ("lending booms") and the by transferring risks to market participants. likelihood of exchange rate depreciations are useful indicators of possible stress in the 6. Identifying and controlling the risks. financial system. By linking these indicators The govemment's exposure to loss can arise to specific areas of vulnerability in the from a wide variety of events. Attempting to financial system, as identified by the top- account for every source of exposure is not down analysis implied by the lattice in figure feasible. A systematic approach to 1, measures to take early preventive action identifying the principal risks, whether in a may be possible. In the power sector, the specific program or for the economy as a misalignment between the high level of whole, is needed to ensure that all relevant capacity developed and the falling behind of exposures can be classified. demand was unexpected: but there was also no strong incentive within PLN to be 7. One approach to risk assessment is concerned about the downside risk. It would that adopted by federal regulators of financial be the task of a specialized cell such as the institutions in the United States and Europe. one proposed to identify the high cost in the (unlikely) event of sharp slow down in demand. Natural disasters provide another 2 Non-linearlity also arises because incentives worsen example of the importance of monitoring. as the slack declines: "If the (bank's) franchise value has been eroded, even minor deteriorations in the balance sheet can encourage risk-taking strategies that may trigger the government guarantee." (Vieira da Cunha and Brock 1997) 60 Figure 1 Risk Identification Lattice ovemment rk xps I Financial risk Policy risk ' Operational risk Evet rsk Market risk Poor policy S Systemsfaflure RPoli'tical iU I - t - ~~design, X I- - , '' . Liquidity ris Poor polity ] Legatlrisk Natr.disastr i implementation ._._.___._. Credit risk In Peru, early warning indictors of El Nino 9. Budgeting and reserving for have partly been instituted with significant contingent liabilities. The next more economic gains in terms of reduced losses to sophisticated stage is the budgeting and life and property. While a scientific task reserving for contingent liabilities. The such as this would not belong in the Ministry budgeting system is not merely a matter of of Finance, it would be appropriate for the good housekeeping but should be part of a proposed cell to identify key natural strategy to create the incentives for limiting calamities as priority areas and delegate their exposure under contingent liabilities. Thus, monitoring to technical specialists-absent for example, the recording of contingent such monitoring, the government ends up liabilities is required in the Czech Republic, with the bill to deal with the havoc in the but this is clearly not sufficient when wake of a natural disaster. complementary measures to ensure that fiscal discipline are not instituted (see Box 1). Box 1: The Problems with Cash-Budgeting To see how these incentives under a cash accounting system skew decision making, consider the different ways in which the government could help finance a $100 loan to a private infrastructure provider. If the governnent provides a 10 percent loan subsidy, the cash budget cost would be $10 in year one. If, instead, the government provided the loan directly, the cash budgetary cost in year one would be $100 the full face value of the loan. If the government agreed to guarantee a loan made by a private bank, the budgetary cost of the guarantee would be zero (or negative if a guarantee fee is collected) the first year. Thus, while the economic and financial value of the three different forms of financial assistance are equal, a legislative body would favor the guarantee option. 10. The first step in the budgeting process actuarial and econometric methods have been is the measurement of contingent liabilities, used (see Lewis and Mody 1997 for a which is essentially a forward-looking summary). Gaining favor over these methods exercise. Estimates are required of the is contingent claims analysis, which probability that the guarantee will be called essentially simulates many different and the payment obligation if that happens. scenarios that may unfold in the future and But generating these forecasts of the future determines the payments that would be relies, at least in part, on past data. Various required under those different scenarios. 61 While even under contingent claims analysis, level depending on the risk aversion of the some past parameters are required to generate guarantor (as discussed below). the flow of future outcomes, the consideration of different scenarios reduces 13. Having estimated the expected and the dependence of the results on the past unexpected costs, each of these needs to be parameters. In the context of developing dealt with in its own way. Expected costs, countries, contingent claims analysis has being akin to subsidies, need to be directly been used to estimate contingent liabilities budgeted for, and thus be included in the for infrastructure projects in Colombia (see appropriations process. Unexpected costs, in Lewis and Mody 1997 for a description) and contrast, are dealt with by setting aside estimation is ongoing for Malaysian capital to deal with the extreme events. infrastructure projects. Also, models estimating value at risk are an example of 14. Budgeting for expected costs contingent claims analysis (for an application requires accrual or present value accounting, of value at risk models to estimating which, in turn, implies a medium-term multi- contingent liabilities of developing country year budget framework (see OECD 1993). In central banks, see Blejer and Schumacher contrast, most government bodies use a 1998). simple cash-based system of budgeting. Under a cash-based system of budgeting, a 11. From contingent claims analysis are govemment equates the budgetary cost of derived two basic concepts that underlie the issuing financial assistance with the cash management of contingent liabilities. These outlay created by the transaction in the are the expected costs and the unexpected current budget year. Thus when a costs of the contingent liabilities. Expected government issues a direct loan, the entire costs are the average costs (or payments face value of the loan at the date the loan is made under the guarantee) over the different issued is recorded as at budgetary cost, with scenarios modeled in the contingent claims loan repayments recorded as cash inflows in analysis. Expected costs are thus a measure subsequent years. Simple cash-based of the likely payments that will need to be buent teats the disbur sen made. As such, the expected costs are also a measure of the subsidy implied by the direct loan as a grant equal to the entire face measre f te sbsld 1mlle bythe value of the loan, with subsequent issuance of the guarantee. From a policy rayments rpe nt oftt receit point~~ ofve,teepce.otetmt a repayments representing offsetting receipts point of view, the expected cost estimate can for the government. Loan guarantee and be used to judge whether the government would be willing tosupporttheproject insurance programs are not recorded as costs would be willing to support the project in a simple cash-based budget until a claim is through an equivalent cash, up front subsidy. made at some future uncertain date. In fact, since any premium revenue from a 12. However, a guarantee is not just a y p subsidy, and hence the importance of the government insurance program is recorded second concept, namely, unexpected costs. up front in exchange for the insurance policy Under certain scenarios thepaymwhile claims are not recorded until some Under certain scenarios, the payment under uncertain date in the future, a simple cash- the guarantee can be much larger than the based budget may record an insurance expected costs. For this reason, risk analysts determine the payments likely in the most program as a net revenue ga. Ths inconsistency creates a budgetary incentive adverse circumstances. It is common, for for policymakers to raise premiums rather example, to determine the level of payments than reduce the likelihood or severity of that would be required at the 95 percentile, . 1 . ~~~~~~~claims insured. Cash-based budgeting tbus i.e., the highest payment in all but the worst five percentoftheconditions. This.estm misrepresents and masks the aggregate five percent of the conditions. This estimate epsr soitdwt ongaate n ex osure associated with loan auarantees and is referred to as the unexpected cost. The g unexpected cost could also be estimated at government insurance programs and creates the 9 pecenile r an oter cnfidnce perverse incentives for selecting one form of financing assistance over another (see Box 1). 62 15. In contrast, the use of a present value of the action at the time the transaction is system requires the recording of the expense undertaken. and appropriating against it the expected cost Box 2: The United States Federal Credit Reform Act of 1990 Prompted by the explosion of loan guarantees issued during the 1980s and a recognition of biases created by a simple cash-based system of budgeting, the United States changed the budgetary treatment of direct loans, loan guarantees, and grants in 1992. Under the new budgeting system created by the Federal Credit Reform Act of 1990, each of these forms of credit was valued using a financially equivalent metric-the expected present value of future costs. The budgetary cost of credit is defined as the present value, discounted at Treasury interest rates of comparable maturity, of the expected cash outflows from the government minus the expected cash inflows to the government. The shortfall between borrower fees, repayments, and interest and the amount needed to cover the principal of the loan and the Treasury's cost of borrowing represents a cost to the government. Likewise the difference between the fees borrowers pay to the government and the cost of guaranteed loan defaults (and/or interest subsidies) represents a cost. When agencies seek budget resources (budget authority and budget appropriations) to carry out a credit program in the budget process, they must estimate and request the full expected present value of future costs-including default, interest, and other costs-associated with loan guarantees or direct loans to be issued in the forthcoming budget year. Funding to cover the expected present value of future costs is charged against the appropriation for an agency when the direct loan or loan guarantee is issued and the govemment's commitment is extended. These costs, or subsidies, must compete for budgetary resources on the same basis as other government spending. Credit reform requires more careful record keeping than a simple cash budget. Agencies must identify loans or classes of loans by the appropriation used to fund the transaction, their maturity and date of origination, and their subsequent cash outflows and inflows. In addition, programs are required to develop risk categories based on the characteristics that determine the likelihood of default and other costs. These records are used to re-estimate the value of the subsidies provided for loans or loan guarantees, adjust ex post budgetary expenditures relative to ex ante expectations, and improve the subsidy calculations for new loans or guarantees. This tracking also helps agencies underwrite, service, and control losses on loans or guarantees. The Federal Credit Reform Act does have shortcomings, which provide useful guidance for future budgetary reforms in the United States and elsewhere. First, coverage of unexpected losses is not included as part of the cost of a program. This failure to incorporate some measure of unexpected loss represents a serious shortcoming given that most loss distributions associated with central government guarantees are asymmetrically skewed against the govenmment. Second, incentives remain to use "cheap" insurance structures to cover loan guarantees. Government insurance programs are financially equivalent to guarantee programs and should be treated in a consistent budgetary framework. Third, program agencies must make substantial investments in new information systems technology. In the United States, new investment in information systems placed a strain on many of these agencies. Governments adopting credit reform must recognize at the outset that funds need to be available for this investment. Finally, credit reform requires that agencies re-estimate the subsidy costs of their programs on a regular basis so that the government's exposure can be recalculated and appropriate funding is set aside to cover future costs. Appropriate discipline is required to ensure that agencies do not underestimate subsidy costs with the knowledge that any shortfall will be made up in someone else's watch. Under this system, then, all actions receive deficit,. since the effect on the deficit is not equivalent accounting treatment and thus the recorded until actual cash payments are choice between various forms of government disbursed from the reserve fund. Adoption of support can be made on the basis of their a present value method of guarantee intrinsic merits rather than being driven by budgeting simply forces agencies to set aside accounting conventions. Use of a present resources up front for the expected costs of value system need not affect or distort cash- the guarantee issued (see Box 2 for the recent based estimates of the government's fiscal U.S. experience where certain positive steps 63 have been taken but shortcomings incurred high political costs as a result of the remain).316. In addition to budgeting for the $130 billion in losses charged to the United full expected present value of costs from States taxpayer during the thrift crisis of the credit and insurance programs governments 1980s. need to set aside reserves against unexpected losses. Preparing for unexpected losses 17. Once a government can assess its risk prevents the political backlash associated tolerances and goals, in terms of both which with redirecting scarce public resources to risks and the level of loss it is willing to bear, cover the sudden increase in costs, obviates it can establish reserves against unexpected the need for political battles over additional losses ("risk capital") within its credit and funding, and eliminates the perception that insurance programs. To do so, however, a any sudden increase in costs represents government needs to determine include program mismanagement. Setting up whether reserves will be set based on the reserves to protect against such events can additive unexpected loss exposure of each mitigate these problems by reducing the guarantee or on a portfolio value-at-risk number of events for which the executive (VaR) approach to account for portfolio branch or administering agency needs to seek diversification, what the investment policy of additional budgetary resources to cover the reserves will be once they are established, program costs and by reducing the size of and where the reserves should reside (for a any budgetary requests that are made. more detailed discussion, see Lewis and Because the United States government did Mody 1997). not reserve against unexpected losses, it 3Learning from the experience in the United States, New Zealand has implemented a similar budgeting approach. Their program covers all contingent liability exposures (including insurance), and the govemment has published a present value budget for both contingent and non-contingent expenditure and revenue flows. (See, for example, Warren 1996.) 64 ANNEX 3: OECD EXPERIENCE IN PUBLIC EXPENDITURE MANAGEMENT REFORMS1 R ecent reforms in OECD public expenditure management reacted to rising fiscal imbalances and lagging public sector performance. The reforms have sought to improve macroeconomic and microeconomic aspects of budgeting by better linking policy, planning and budgeting within a multi-year budget framework. Hard and predictable budget constraints, and greater managerial autonomy matched with more accountability for results have been decisive for better public sector performance. The Background of OECD Reforms OECD governments spent over 40 percent of GDP on average, more than double the share of 1. Growing Governments. OECD reforms before the war (Table 1). began against a background of concern over public expenditure growth, rising deficits and 2. Disappointing Results. Much of the debt burdens, and a general disappointment growth in expenditures resulted from social with government performance. Governments security, interest on rising debt levels and from had grown rapidly after World War II, backed govemment consumption, driven by rapidly by the belief that government could solve many expanding payrolls. Some therefore concluded of the macroeconomic ills of the prewar decade, that this expenditure growth contributed little to and needed to mend many of the market's welfare (Schuknecht and Tanzi, 1996). The perceived failures. By the start of the 1980s critics argued that increasing expenditure share did not "buy" more in terms of Table 1: The Growth of Government Expenditure, 1870-1990 (percent of GDP) Later 19th Pre-World Post-World Pre-World Post-World century War I War I War II War It (about 1870)/a (about 1913)/a (about 1920)/a (about 1937)/a (1960) (1980) (1990) Austria ... ... 14.7 15.2 35.7 48.1 48.6 Belgium ... ... 21.8 30.3 58.6 54.8 Canada ... ... 13.3 18.6 28.6 38.8 46.0 France 12.6 17.0 27.6 29.0 34.6 46.1 49.8 Germany 10.0 14.8 25.0 42.4 32.4 47.9 45.1 Italy 11.9 11.1 22.5 24.5 30.1 41.9 53.2 Japan 8.8 8.3 14.8 25.4 17.5 32.0 31.7 Netherlands 9.1 9.0 13.5 19.0 33.7 55.2 54.0 Norway 3.7 8.3 13.7 ... 29.9 37.5 53.8 Spain ... 8.3 9.3 18.4 18.8 32.2 42.0 Sweden 5.7 6.3 8.1 10.4 31.0 60.1 59.1 Switzerland ... 2.7 4.6 6.1 17.2 32.8 33.5 United Kingdom 9.4 12.7 26.2 30.0 32.2 43.0 39.9 United States 3.9 1.8 7.0 8.6 27.0 31.8 33.3 Australia ... ... ... ... 21.2 31.6 34.7 Ireland ... ... ... ... 28.0 48.9 41.2 New Zealand/d ... ... ... ... 26.9 38.1 41.3 Total Average 8.3 9.1 15.4 20.7 27.9 42.6 44.8 /a Ornearestavailable year after 1870, before 1913, after 1920 and before 1937. /b 1992. /c Average; computed without Germany, Japan and Spain (all undergoing war or war preparations at this time). /d GFS data, data available for 1960 is 1970, central government data only. Source: Schuhknecht and Tanzi (1996). Adapted from: China: Managing Public Expendituresfor Better Results, World Bank, July 1998. 65 better outcomes of government policy: most of Higher spending on social security in these the economic and social indicators seem countries may also have contributed to lower unrelated to government size. However,: "Big crime rates in countries with larger Governments" perform better in income governments. distribution and containing crime (Table 2). Table 2: The Size and Composition of Government Expenditures and Government Performance Indicators in Different Country Groups Industrialized Countries Newly "Big" "Medium-sized" "Small" industrialized Governments /a Governments /b Govemments /c countries /d 1960 1990 1960 1990 1960 1990 1990 Total Expenditures (percent of GDP) 31.0 55.1 29.3 44.9 23.0 34.6 18.2 of which Health 2.6 6.6 3.0 5.9 2.3 5.2 3.3 Education 4.5 6.4 2.9 5.6 3.4 5.0 3.4 Social Security 13.5 19.5 9.6 13.9 6.2 7.9 1.0 Research and development ... 2.0 ... 1.6 ... 2.0 ... Economic and Regulatory Efficiency Indicators Real GDP growth (in percent) /e 3.2 2.6 4.0 3.3 4.6 3.3 6.2 Gross fixed capital fonnation (in percent ofGDP) 23.4 20.5 21.1 21.3 19.6 20.7 31.2 Inflation (in percent) 1.7 5.4 1.6 4.3 2.3 6.1 15.3 Unemployment rate (in percent) 2.9 6.1 4.6 9.2 2.7 4.2 2.9 Size of shadow economy (in percent of GDP) /f 4.9 11.1 3.8 8.2 3.5 6.2 ... Patents/10,000 population (inventiveness coefficient) ... 2.0 ... 2.3 ... 8.6 Social Indicators Rank in UN human developmentjg ... 11.0 ... 13.0 ... 6.0 ... Income share oflowest40percent 15.6 24.1 16.4 21.6 17.4 20.8 17.0 Illiterate population as percent of population 15+ 9.3 2.9 13.3 4.6 2.2 0.5/h 9.2 Secondary school enrollment (in percent) 55.0 93.0 51.0 99.0 61.0 89.0 81.0 Life expectancy 72.0 77.0 70.0 77.0 71.0 77.0 74.0 Infant mortality/'000 births 23.0 6.7 29.0 7.1 22.4 6.4 9.8 Prisoners/O00,000 people ... 38.0 ... 68.0 ... 154.0/i , Divorces (in percent of marriages contracted, 1987-91) ... 33.0 ... 33.0 ... 36.0 ... Emigration (in percent of total population) 0.6 0.2 0.3 0.8 0.2 0.1 0.1 /a Belgium, Italy, Netherlands, Norway, Sweden (pablic expenditure more than 50 percent of GDP in 1 990)-bAustria, Canada, France, Germany, Ireland, New Zealand, Spain (public expenditure between 40 and 50 percent of GDP in 1990). /cAustralia, Japan, Switzerland, United Kingdom, United States (public expenditure less than 40 percent of GDP in 1990)./d Chile, Hong Kong, Korea, Singapore; 1990 or nearest available year. /eAverage of preceding five yeams, 1956-60 or 1986-90.,ltost recent data available is 1978, used in 1990 column. 1g.1992. /h US only. Others below 5 percent, lJNESCO statistics for 1991. /i Excluding United States, average is 64. iData available for 1960 is 1970, data for 1990 may include 1993 in some countries. Newly industrialized countries data, only Korea is available (1993). Source: Schuhknecht and Tanzi (1996). 3. In addition, part of the increase in and reinforced the perception that government government expenditures can be explained by was incapable of delivering results. Despite the lagging productivity inherent in government earlier reforms (Box 1), at the outset of the services, which automatically increases the most recent reforms. OECD budgeting systems government's share as income rises.2 had all or most of the following characteristics: Nevertheless, the growing perception by the end of the 1970s was that government was the * Primary focus on inputs, with performance problem rather than the solution. judged largely by how closely spending matched budget appropriations. 4. Ineffective budgetary procedures. Budgetary procedures and practices in the Short-term horizon for budget decision- 1970s contributed to expanding governments, making which failed to adequately account for longer-term costs and led to biased 2 This so-called Baumol effect argues that govemment choices of policy instruments, for example 2This so-called Baumol effect argues that government between capital and current spending and would need an increasing share of GDP if productivity between sping and reg ting. increases in government services lags behind that of other between spendmg and regulatmg. sectors of the economy. 66 Box 1: Earlier Budget Reforms in the OECD Budgetary procedures had evolved from the end of the last century: * Line item budgeting established previously lacking executive control over spending by ministries and agencies. In line item budgets, expenditures are listed according to objects of expenditures or line items, and focused on expenditure control, with the mninistry of finance acting as controller. Line item budgets were not compatible with the expanding role of government. They gave no information on what the money was spent on or whether the money was used cost-efficiently or effectively. * Performance budgeting introduced measures of workload and cost of activities into the budget. This increased the focus on cost-efficiency, but still lacked effectiveness information. * Program budgeting introduced focus on tradeoffs among competing goals. While performance budgeting focused on achieving a given goal at least cost, program budgeting treated the goals themselves as variables. Program budgeting requires the budget to be organized in groups of activities towards a certain goal, a program, and in addition required effectiveness and outcome measures. Program budgeting failed to become the main budget tool in part because tradeoffs among competing goals could not be captured in the process, in part because the information required to make the tradeoffs was often not available because infornation systems did not support the budgeting technique. * Zero Based Budgeting (ZBB), introduced in the 1970s, focused on the process of budgeting rather than the contents. In a pure ZBB system, all programs are evaluated from scratch each year. This pure form has never been introduced, but many govermments have used the principles of ZBB, by requiring ministries to propose budgets with only 90 or 80 percent of the existing allocation. The failure of performance, program, and zero-based budgeting to live up to their expectations was, in OECD countries, partially due to the high degree of centralization of the budget process that went along with them. As a consequence, the central ministries became overwhelmed with the paperwork involved in annual budgeting. In developing countries that introduced these or similar budget systems, the failure to address the generally disabling environment for performance in the public sector was key to the limited success. Bottom-up approach to budgeting, which Recent reforms created strong upward pressure on expenditures. The arbitrary expenditure 5. The OECD countries have adopted cuts in budget implementation that varying degrees of reforms over recent years. followed undermined program and agency Some, such as New Zealand, the UK, and level performance. Australia, have adopted radical new approaches * Focus on distributing the fiscal increment to expenditure management and public across new spending proposals, and an administration. Others, such as Germany and extensive and detailed debate on existing Japan, have stayed much closer to the spending, but little discussion of new and traditional, strongly bureaucratic model which existing policies. once dominated budgetary management in * Few incentives for agencies to save OECD countries. These differences are not budgetary resources, because current year surprising: budgetary institutions and spending was the starting point for the organizations are deeply embedded in history annual budget haggle. and culture, and are not easily transferred from * Little clarity of purpose, task, and costs of one country to the other. Despite the policies, programs and services, and an differences, common strands in reforms exist. intertwining in a single agency of policy Most prominently among them is the focus on advice, regulation, service delivery and achieving aggregate fiscal discipline, funding funding. strategic priorities, and delivering services efficiently. Whereas earlier reforms had In sum, the budget processes in OECD addressed each of these individually, more countries created a disabling environment for recent reforms have taken a more integrated performance in the public sector. approach, and have recognized that these three levels of performance are inseparable. 67 6. The OECD reforms aimed broadly to: budget. However, some--such as the UK and France--consider SOE borrowing during budget * better link policy, planning and budgeting preparations, and report on public sector deficit by: (i) increasing the scope of the budget to and borrowing requirement. include expenditures for all government activities; (ii) adopting global budgetary 9. Many OECD countries have increased targets; (iii) introducing a multi-year budget coverage to including tax expenditures perspective to policy and budgeting; and and loan guarantees. These are reported in the (iv) focusing on strategic policy decisions budget presentation, or in mandatory regular at the center of government, while reports to parliament, such as the "subsidy delegating implementation to implementing report" in Germany which is issued every two agencies; years. New Zealand has the fullest treatment of * improve performance by: (i) enforcing hard "fiscal risks," including contingent liabilities-- budget constraints of a comprehensive claims against the government which will arise budget; (ii) creating agencies with more if a specific event occurs--and any event which focused tasks; (iii) devolving managerial if it occurred, would affect the revenues of the authority supported by better specification State.3 In some countries, including the United and measurement of performance; (iv) States there is a regulatory budget so that the improving information systems and audit; costs on the community of regulations are made and (v) introducing market mechanisms in public. the public sector. The main features of some OECD public expenditure Global budgetary targets management systems are summarized in Tables 3 an4. 10. Since the later 1970s and early 1980s most OECD countries have adopted global LINKING POLICY, PLANNING, AND budget targets in response to growing BUDGETING awareness of fiscal problems arising from lack of fiscal restraint. Many countries express The scope of the budget these targets on a multi-year time horizon. Targets are usually either ratios (of expenditure, budget balance or debt to a national aggregate 7. Offbudget operations crippled financial such as GDP); a rate of growth for spending discipline in various OECD countries in the (real or nominal); or an absolute value for a 1970. Implicit liabilities in social security target variable (such as cash limits on systems and loan guarantees for (usually) SOEs spending or the size of the deficit). Some often became explicit during economic recessions that also suppressed govemment countries, such as the Netherlands, combined deficit targets with limits on Government's revenues. Offbudget funds also undermined G 4 efficient service delivery, as agencies had share of GDP. recourse to alternate means of finance if they 11. Global targets were questioned in the ran out of budgetary funds. 1 990s because they were thought to make the 8. OECD budgets now include almost all Underpinning the New Zealand approach has been a shift expenses of government departments and their to a full accruals approach to budgeting. agencies, whatever their source of funding. 4 Actual OECD country performance in relation to targets Exceptions arise only when a law treats a has varied substantially due to fiscal shocks (e.g. German particular agency as off-budget (Chapter 3). reunification), economic recession or change in political Social security funds may be separately direction. However, fiscal balances in the OECD did improve in the decade after 1979, only to deteriorate in the managed, but they are normally included in the economic slowdown of the early 1990s[Table from budget reports, and social security policy is OECD] More recently, the European Union members included in annual budget deliberations. Most have seen marked improvements in their fiscal balances countries treat state enterprises only on a net after adoption of the Maastricht treaty. This treaty basis, reporting taxes and subsidies in the restricts membership of a single currency to countries with fiscal deficits below 3 percent of GDP. 68 budget more pro-cyclical. Concerns were also macroeconomic conditions, revenue raised that an overzealous commitment to projections, and the sustainable fiscal deficit. targets would lead to the very across-the-board The difference between sustainable spending expenditure cuts that budgetary reforms were level and the costs of ongoing projects is designed to avoid. Finally, targets often invited available for new policies. If this difference is creative bookkeeping on the part of too small, governments have to take decisions government: in the drive to meet the Maastricht to drop existing policies, to raise additional criteria several countries have performed such revenues, or to refrain from starting new tricks to reach the deficit target of 3 percent. policies. One of the most creative ones came from a government that sold a state enterprise to a state 15. The MTEF provides policymakers with bank, and counted the revenues in its budget. the information needed to make decisions on new policies that could be accommodated 12. More recent approaches such as New within the expected resource envelope. The Zealand's Financial Responsibility Act and medi.um-term estimates are linked explicitly to Australia's Budget Honesty Act define global annual budgeting so that annual budget limits targets over the medium-term, and in terms that are firmly based on the medium-term allow for the business cycle and external implications of government policy. shocks. The strength of these approaches is the transparency associated with the regular 16. Australia's experience with the MTEF publication of the medium-term fiscal shows its potential power to regain fiscal implications of the government's policies. discipline. Introduced in the early eighties, the early projections showed an unsustainable trend A medium-term approach to budgeting in expenditures to finance existing policies. These projections forced policymakers to make 13. Global targets, whatever their form, are the choices necessary to reduce expenditure translated into annual budgets via their projections down to realistic medium-term interaction with some form of baseline targets (Figure 1). The forward estimates of the estimates of the cost of government policy over costs of ongoing policy came down from an the medium-term. In OECD countries in the unsustainable 15 percent in 1994 to virtually nil 1960s and 1970s multi-year budgets were used in 1990. Unlike earlier across-the-board as planning tools, sometimes in the hands of expenditure cuts, the expenditure reductions planning agencies with no responsibility for were driven by decisions about dropping fiscal management. The total cost of the specific policies. Recently, several developing policies in the plan became the "global target," countries have adopted a MTEF, including which was rarely constrained by a realistic South Africa (Box 2). assessment of what was affordable in aggregate. The plans and targets raised expectations which Strategic policy making at the center of could rarely be met, and which lead to many of government the dysfunctional budgeting practices referred to above. 17. In a medium-term approach, the challenge for policymakers is to reconcile what 14. Beginning in the 1980s, more and more is affordable with what is required. What is OECD countries adopted a medium-term affordable comes "top down" whereas what is expenditure framework (MTEF) in some form required comes "bottom up." Policymakers or another. A MTEF distinguishes between the need to reconcile the two by considering policy medium-term costs of existing policies, and a decisions together with their spending medium-term perspective on the level of implications, rather than looking at policy and sustainable spending. The costs of ongoing spending in isolation. Budgeting must therefore policy are determined by multi-year cost become focused on policy. The MTEF gave forecasts based on a detailed breakdown of policymakers the tools to determine what expenditures for individual policies. The sustainable spending level is determined by 69 Figure 1. Australia: Budget and Forward Estimates, Cumulative Real Growth / .vs ,A'''9u -AUSS9~~~~~~ /~ ~ v ----.-' .. . / -5 1982- 191-3 1984. 1985- 1986- 1987- 198- 1989. 1990. 1991- 199f- 1993- 1994- 1995- 82 84 8a 86 37 88 9 90 91 92 93 94 95 9 6 policies were affordable. Together with better incentive to reconsider existing policies, as incentives for public sector organization to savings could be used for new policy. spend money efficiently (see below), this allowed policymakers to disengage from the 20. Evaluation. Policy discussions were day-to-day operations of government, and to supported by improved policy evaluation. The focus on policy. increasing interest in outcomes has seen a resurgence of comprehensive approaches to 18. Over the 1980s and 1990s ministers evaluation, the results of which fed into the increasingly took control over strategic decision policy discussion. Canada has had an making and, disengaged themselves from day- evaluation system in place for many years. to-day operational issues. Policymakers moved Australia has made evaluation an integral part away from the sequential policy making outside of its budgeting process. the budget process, which had been an important source of macro instability and poor 21. Australia's approach is of particular performance at the strategic and operational interest because of its attention to the incentives levels in the 1970s. Cabinets, often via a for evaluation and the associated question of powerful sub-committee of key ministers, now how to link evaluation results into the budget. focus on the tradeoffs between priority sectors In the Netherlands the reconsideration process, and programs, within the macro framework which involves annual policy reviews, has been discussed above. Governments of all OECD in place since 1981 and has played an important countries enforce--at least in principle-- role in budgetary control (Box 2). collective decisions within the executive. 22. Transparency. OECD Governments 19. Line ministries bought into the new differ on how systematic and transparent their budget processes because they gained much strategic decision making process is. Some autonomy in making the policy tradeoffs within countries prepare and publish an economic and their portfolio, as long as they stayed within social strategy which sets out medium-term their budget limits. They no longer needed to policy objectives expressed in terms of the negotiate with the Finance Ministry for desired social and economic impacts of additional funding, but could concentrate on policies, their expected fiscal costs and benefits, designing new policies. And they had an 70 Box 2: Excerptsfrom The 1997 Medium-term Budget Policy Statement in South Africa Relationship with the budget Government's spending plans for the next three years will be published in March 1998. These plans will give substance to Government's reconstruction and development commitments, within an overall level of spending that the nation can afford. These are the most important choices any government can make. The Budget must reflect Govemment's social and economic priorities, and its expenditure plans define the nature and scale of the Govemment's ambitions for the nation. What is the Budget Policy Statement? This Medium-term Budget Policy Statement sets out the policy framework for the coming budget. It describes Govemment's goals and objectives. It explains the economic environment within which those objectives are being addressed, and projects the total level of resources that will be available. The Policy Statement analyses the trade-offs and choices that the nation confronts in addressing its reconstruction and development priorities. The Medium-term Budget Policy Statement is an important step forward in the budget process. In keeping with our commitment to open, transparent and cooperative policy-making, it invites the nation to share with Govemment the important choices that must be made. The Medium-term Expenditure Framework Medium-term budgets. The key features of the new medium-term budgeting system are: * publication of three-year forward estimates on Budget Day, consistent with Government's policy priorities and * commitments; * detailed analysis of the policy implications of budget projections; * cooperative teams, composed of national and provincial treasuries and line departments, analyzing key sectors and * reporting to Cabinet and Executive Councils; * quantified, analyzed policy options presented to political office-bearers for decision; and * the publication of a Medium-term Budget Policy Statement, to enable Parliament and the institutions of civil society to * participate meaningfully in the debate. Rolling budgets The Medium-term Expenditure Framework initiates a process of rolling three-year budgets. The MTEF projections published on Budget Day will be considered again in the course of 1998, and revised according to new information and policy priorities. The three-year allocations will represent the starting point for that process, and departments will therefore have agreed spending trajectories within which to plan. Departments will be expected in future to frame their policy proposals within their three-year allocations. The introduction of resource-based planning represents a significant change in the planning environment and will initiate a major process of program reprioritization and redesign within spending departments. Public debate of plans As in previous years, Parliament will be asked to vote only on the Budget allocations for the coming year, and not on all three years of the spending projections. But the detailed three-year spending plans will provide an opportunity for Parliament, the National Economic Development and Labor Council (NEDLAC) and civil society to evaluate the Budget allocations for the year immediately ahead in the context of the medium-term evolution of Govemment's expenditure priorities. Parliament will be invited to debate the expenditure plans, and to ensure that they reflect national goals and priorities. This process therefore provides new opportunities for all stakeholders to analyz and discuss the expenditure projections, and to ensure that alternative views are fully taken into account in framing the subsequent MTEF. The MTEF and budget reform Overhaul of the budget process The publication of the Medium-term Budget Policy Statement, and the publication in March of three- year budget projections, are first steps in a wider overhaul of the budgetary process, emphasizing transparency, output-driven program budgeting and political prioritization. The MTEF provides the bridge between the technical preparation of budgets and the need to reflect political priorities in expenditure plans. A brief account of the new budget process is set out at the end of this chapter. Further steps in budget reform will be taken in 1998. These will include a transition to greater devolution of managerial autonomy, within a framework of improved incentives and greater accountability, accompanied by reforms of financial management. Provincial and local government The policy goals of Govemment will be reflected not only in the national budget, but also in the budgets of provincial and local govemment. Provincial and local govemment will receive their equitable share of nationally raised revenues as well as other transfers. However, they have the responsibility of developing their own budgets, within expenditure allocations consistent with the nation's policy priorities. The national government does not control the details of these budgets, but can influence them indirectly through agreed policies and framework legislation setting norms and standards. The introduction of three-year budgets and their consolidation into resource envelopes for the major provincial services is an important step in the evolution of the institutional framework for intergovemmental policy making and budget planning. The intergovemmental forums of the spending departments will, for the first time, have expenditure projections within which to develop and refine the norms and standards for service delivery. Role of Accounting Officers Once Parliament and provincial legislatures have approved their budget proposals, departments must adjus their expenditure to ensure that they stay within their budgets. It is the responsibility of Accounting Officers, appointed by political office-bearers, to ensure that allocations are applied to their intended purposes and spending limits are respected. This principle will be strictly enforced by the proposed Treasury Control Bill which is due to be introduced in Parliament next year, replacing the ten Exchequer Acts which govern provincial and national financial management. Source: http://wwwpolity.org.za/govdocs/policy/mediumbudget.htmI and allocation of implementation responsibility Budgets in OECD countries are widely to ministers and agencies. Others are less published--more and more often on the thorough. All, however, have some process for Internet5--and openly discussed in parliament. announcing their policy intentions and their relationship to budgets, and most use the budget 23. The role of the legislature. Decision speech. Openness and transparency in decision- processes in OECD countries are influenced by making increases the incentives for the nature of representative government. A policymakers to deliver upon their promises, or pay a political price if they fail to do so. p http://www.oecd.org/puma/mgmtresfbudgetIbudlinks.htm provides links to MOF and budget links of most OECD countries. 71 Box 3: The Netherlands Reconsideration Procedure The Reconsideration Procedure has been the main instrument of policy review in the Netherlands. It was introduced in 1981, and reviews existing policies in the public sector with the aim to develop more cost effective altematives, or to abolish the policy. Policy areas for reconsideration are decided by the Cabinet. The departments responsible for the areas of review need to come up with savings options, including one that would reduce overall funding with 20 percent. The Sectoral department can use outside reviewers in the team to develop policy alternatives. The reports are made public by means of submission to Parliament. Savings proposals are reviewed in the normal budget cycle, but reconsideration can be initiated at any point in time. The reconsideration procedure is guided by a small ministerial commission led by the prime minister, the vice premiers, and the minister of finance. MOF provides advice and administrative support for the reconsideration. system with significant distributed power such Increased autonomy as the United States emphasizes processes for negotiation between executive and legislature. 25. Managers in line ministries and Others may require mechanisms for agencies obtained increasing flexibility in using compromise because they have minority or money to achieve policy objectives. Detailed coalition executives. The degree to which central controls on line items or expenditure legislatures changes budget proposals of the norms have been replaced by more aggregate executive varies widely in the OECD. In the controls, with greater flexibility at local level to US, Congress makes many significant changes, achieve agreed objectives within more global whereas in the UK Parliament invariably expenditure allocations. To this end, many approves what the government proposes, OECD countries relaxed rules of virement and because the proposal is that of the ruling carryover. The medium-term approach to majority. However, legislatures take an budgeting gave line agencies greater increasingly active role in budgetary policy. predictability of funding, which allowed better planning and allocation by public sector IMPROVING INCENTIVES FOR PERFORMANCE managers. At the same time, aggregate spending limits were strictly enforced by 24. The focus on strategic decisions at the improved treasury management systems. center of government went hand in hand with major, and sometimes radical, reforms in the 26. Output budgeting Most OECD incentive structure for public sector units, governments still define budgets and control in broadly aiming at increased accountability for terms of line items or programs. In contrast, performance. The reforms granted more New Zealand and the United Kingdom seek to autonomy to government agencies and hold organizations accountable for results in managers in implementing policies, clarified terms of the outputs they produce. While these roles and responsibilities of organizations and countries acknowledge that outcomes are government employees, specified the required central, they reason that it is not possible to performance, and improved monitored of this hold agencies accountable for ultimate impacts, performance. because many other factors affect these outcomes, most of them outside the agency's control. 72 Box 4: Outcomes, Outputs, Programs, Inputs Increased performance orientation required improved performance definition and measurement. Performance has various dimensions, the usefulness of which depends on their purpose. For policies, and therefore for policy-making budget units outcomes are the most relevant indicators; for service delivery units outputs are usually more appropriate. Outcomes indicate the ultimate goals of Government strategies and policies. For example, education policies could aim for higher productivity and income for people; health policies could aim for higher life expectancy. However, productivity of people and life expectancy of people depends on much more than education and'health policies alone. Policy research can narrow down what effect these policies have on the outcomes, but often not eliminate uncertainty on policy outcomes. The term program is used to describe all the policies which a government has put in place to achieve a desired outcome. Outputs specify the operational results of departments or other agents of government. For example, education could target 9 year compulsory education, and health policies could aim for full immunization of 5 year olds. These indicators are more specific, they often requires quality standards to link the outputs with outcomes. A quality standard for education could be the percentage literacy and numeracy of 12 year olds; and for immunization the range of diseases inoculated for. Significant policy outcomes may be the product of several outputs together with direct budgetary payments and other policy measures such as regulation. Input indicators show resources used in achieving outputs and outcomes. Traditionally, government accounts only registered cash outlays, but increasingly full costs are measured by including accrual elements in the government's accounting system. Other input indicators relate to actions taken to achieve certain goals such as the purchase of textbooks, the construction of hospitals, and the hiring of teachers and doctors. 27. New Zealand went furthest in this 28. Other countries without an output- approach, and abolished input budgeting based budget, have aspects of performance altogether, to be replaced by output budgets and measurement in their accountability regimes. appropriation estimates. Within the limits of In Australia, resources are allocated by the appropriations approved by parliament, programs. Budget proposals for programs departmental managers have much freedom to include a variety of performance indicators allocate resources the best way possible to which establish efficiency and effectiveness. achieve the budgeted outputs. Box 5: Examples of output definitions and costs in New Zealand Provider: Police Output title Custodial services Description Provision of jailing services at police stations and courts for people under arrest or the subject of court orders. It includes escorting services to convey remand and sentenced prisoners to penal institutions Costs $NZ 15,503,000 Provider The Treasury Output Title Policy Advice: Taxation Output Provision of advice on tax policy, including advice on international taxation, personal Description taxation, indirect taxes, business taxation, tax systems, and compliance Costs International Tax NZ$ 1,286,000 Personal tax NZ$ 562,000 Indirect tax NZ$ 201,000 gusiness tax NZ$ 2,171,000 Tax system NZ$ 468,000 Ministerial services NZ$ 271,000 Source.-Purchase agreements between the Ministry of Police and the Commissioner of Police and the Minster of Finance and the Treasury; Quoted in Scott (1996). These indicators are regularly reported on, and (Box 5). By 1999, every agency is required to evaluated at regular intervals according to the craft detailed agency performance plans, and evaluation plan. The United States' integrating these plans into their operational Government Performance and Results Act, and budgetary procedures. The Chief Financial passed in 1993, requires that 5 year strategic Officer Act requires that each agency is plans-linked to measurable outcomes-be externally audited on effectiveness and developed by all federal programs by end 1997 efficiency. 73 Box.6: Key provisions of the Government Performance and Result Act of 1993 Agencies must submit to Congress, OMB, and President: Strategic Plans that cover at least five years and updated at least every three years. First Plan due by September 30, 1997. Requirements: * include a mission statement * include general goals and objectives * describe how goals and objectives are to be achieved * describe how the general goals relate to annual performance goals * identify key extemal factors that could affect performance * describe program evaluation Annual performance plans, first plan due to Congress at the FY99 budget request. Requirements: * establish objective, quantifiable performance goals; * describe operational processes and resources needed to achieve the goals * establish performance indicators * provide a basis for comparing program results to performance goals * describe the means to be used to verify and validate results Annual performance report, first report due to by March 31, 2000. Requirements * describe the performance indicators, actual results, and how they compare to perfonnance goals * review the success in achieving the perfonnance goals and, if needed, explain why they have not been met, and what should be done * describe any waiver of administrative requirement [an exception from legal requirements on an agency granted by Congress] and their effectiveness * include summary evaluation findings * show results for the preceding year Source. hlttp.//www.npr.govt 29. Measuring Performance. The slow performance agreements with managers of progress in developing reliable and monitorable certain well defined activities has been in place outcome indicators confirms the inherent for many years. Denmark has been difficulties in this area (Box 6). Moreover, implementing multi-year agreements linking measuring performance requires not only budgets and performance. measuring outputs, but also costs. Cost information collected on an output basis 31. However, several countries which have requires revising the chart of accounts, revising experimented with detailed goal-setting for reporting formats and (ideally) adopting accrual agencies have stopped short of setting accounting. Accrual accounting monitors the individual goals in terms of outputs or full cost of government activities, in contrast to performance, often because this does not fit the traditional cash accounting which registers well with the country's culture, or because the only expenditures, but neglects depreciation, internal organizational culture is bureaucratic changes in asset position, and accrued rather than managerial6 expenditures. 32. Some countries moved away from the 30. Personnel management. Countries strict limits on personnel numbers and salaries.. such as New Zealand and the UK have In the UK and Australia, for instance, extended performance contracting beyond the departmental personnel limits have been organizational level, and contract performance replaced by overall limits on running costs. At directly with the permanent secretary or chief the same time, civil service career planning and executive. In France, a program for concluding 6 See for example PUMA I 995c pp 176-179 74 training was enhanced for current and future 36. Privatization. Over the last two managers. decades, many services that were traditionally provided by the public sector were privatized in RE-DESIGNING ORGANIZATIONS OECD countries. This trend started with utilities, but has expanded to infrastructure and 33. Organizational reforms in some OECD telecommunication services as well. Besides a countries have emphasized separation of general backlash against government, the functions into different organizations. These privatization was driven by changes in reforms promoted clarity and consistency of technology that allowed for private provision, mission, and removed conflicts of interest, such and by the development of more sophisticated as a conflict between responsibility for the financial markets that could better finance provision of service and the provision of policy large, complex, and long term projects. advice on the same service. Examples of these organizational reforms include: 37. Competition. The most direct external incentive is to expose government activities * Sweden, in common with other Nordic directly to competition. Differences among countries, has long separated Ministries OECD countries' reform strategies are perhaps from agencies with specific purposes. greatest when it comes to developing * The United Kingdom in its Next Steps competition. Some countries have placed program has so far moved nearly two-thirds systematic introduction of market elements at of the civil service into Executive Agencies the heart of their reforms. Other countries are charged with specific delivery functions. still studying the extent to which they want to * New Zealand has restructured most core use them. Besides corporatizing or privatizing government departments to separate policy market activities, OECD countries have used a from operations, purchaser from provider, range of devices to create or simulate markets regulator from operator and inspection from for more core government activities. These delivery. include funder-provider models such as used in * The development of Canada's Special the UK and New Zealand for health services or Operating Agencies, on the other hand, has in New Zealand also for science activities and been a limited initiative affecting only a some education; or voucher systems such as few of the government's delivery functions. employed in New Zealand and the United • Similarly, in France there has been limited States for low-income housing assistance. use of special administrative agencies outside the basic framework of the 38. OECD countries have subjected Ministries. internal services to market disciplines by introducing user charging for internally 34. OECD experience suggest that provided services or exposing internal services reorganizing government can yield large to competition. In New Zealand most central efficiency and effectiveness gains, by services monopolies have been eliminated, and establishing clear purpose and task; explicit the users of these services are funded directly performance expectations; the authority to rather than funding the service. Most other perform the task and pursue the purpose; and countries however still retain a range of internal which are accountable for the use of the service monopolies. authority provided. 39. Contracting out. PUMA reports that experience in the US and the UK with contracting out indicates substantial savings, but experience with contracting out relatively 35r Improvements in te i simple activities suggests several essential for performance were reinforced by increased conditions for achieving real benefits, notably: market incentives for the public sector. 7 PUMA 1995c p 45 75 * the existence of a competitive market countries. Several countries (Belgium, amongst suppliers; Italy and Canada) have instituted specific * open, verifiable procurement procedures; public declarations of departmental and standards of service. Others are considering * solid skills in contract management. them. In France, a report9 currently before Ministers speaks of "putting citizens at the 40. These pre-conditions set practical limits center of public service." to contracting out more complex activities in * Benchmarking--comparing the performance some countries; at least in the shorter term. of an organization with similar ones And, as is the case for all market-type elsewhere, or in the private sector--has been mechanisms, it is evident that potential used as a tool to increase competitive improvements in performance can be dissipated pressures on public sector organizations. if implementation issues are not given sufficient * User funding. Rather than funding the attention.8 public sector organization, its users can be funded. Vouchers are used in some 41. The case for contracting out is strongest countries' education system, funding the where the good or service required can be school which parents choose for their specified with a fair amount of precision., children, rather than the school directly. A requires little specific capital to produce, and national health insurance scheme that has a strong and competitive private market. allows choice of provider works in similar Examples are computers, transport, cleaning ways. services, building maintenance, minor capital works, printing and stationery and office 44. The emphasis on responsiveness to accommodation. Some of these conditions may citizens needs to be reconciled with formal also apply to services such as legal advice and organizational accountability upwards. Setting consultancy. Efficient choice between internal standards of service implies that departments and external provision also requires the will be accountable forachieving them. This in organization's accounting systems to provide turn logically implies that budgetary decisions the necessary cost information to set internal will take account of the outputs to which prices. departments are committed. Further, a balance has to be achieved between client 42. The United States has been focusing responsiveness and client capture. The public efforts on improving service delivery at central service is not seen to be directly accountable to level through its National Performance Review, its clients. Accountability to the public is aggressively led by Vice President Gore. The indirect through the govemment and the NPR has led to a dramatic reform in Parliament."' procurement rules with much greater priority THE CHANGING ROLE OF THE BUDGET being given to value for money. OFFICE"1 43. Competition surrogates. Where 45. The role of the budget office in OECD services are not contestable, as in the case of countries has changed significantly over the most core government services countries have recent reforms. The traditional role of the experimented with competition surrogates. budget office (usually MOF, although some Such tools are designed to increase OECD countries have budget offices separate responsiveness of the public sector from the treasury function) was to function as a organization, and include: central command and control post, specifying the items of expenditure, negotiating budget * Service standards. The Citizens' Charter introduced by the United Kingdom has attracted widespread interest in other pGovemmentofFrance 1995 PUMA 1995c p 61 This section draws heavily from Allan Schick, Ahe changing role of the budget office, OECD Document No. GD(97)109, Paris 'OECD 1995 p 49 1997. 76 proposals with line ministries to control overall CONCLUSIONS expenditures, monitoring compliance with regulation, and ensuring that inputs were used 48. The OECD experience suggest that key as agreed in the budget. elements of a performing public sector include: (i) hard budget constraints based on a multi- 46. This role has changed in those year perspective on the budget, and enforced by countries that have undergone significant internalized discipline of budgetary units (ii) reforms. Managing the budget process is still results oriented institutional arrangements for the central role, but the way this role is operated decision making, resource allocation, differs from the traditional role. budgeting, personnel management; and (iii) organizations which have clarity of purpose and * MOF is usually in charge of the multiyear task, clearly specified performance forecasts: it either makes them itself (as in expectations, authority to perform the task and Australia) or manages the process by which commensurate accountability mechanisms. line ministries make the forecasts. In the latter case, MOF provides the key 49. Reforms are still ongoing, and some economic data driving the multiyear countries have only just begun. It is therefore forecasts, and guides ministries how to too early to tell whether the reforms have been assemble the forecasts. successful. However, the growth of government * MOF usually manages the process of slowed in most OECD countries, and was even strategic policy choice. This no longer reversed in some. Deficits improved throughout implies making allocation decisions during the eighties, in particular in the forerunners of budget negotiations. Rather it means reforms, New Zealand and Australia, although a facilitating the process by which line relapse occurred in the recession of the early ministries make trade-offs within the 1990s. The USA, in part due to an unusually overall expenditure limit. MOF usually long upswing in the economy, the large deficits sets guidelines and procedures by which of the 1980s have been eliminated altogether. line ministries propose new policies and But perhaps the most significant result of public review existing policies. sector reforms is a reassessment of the role of e MOF's role in budget implementation has the state. At the end of the 1970, government become one of monitoring and informing was seen as the problem rather than the rather than control. Aggregate spending solution. Now, the emerging consensus is that limits are still rigorously enforced, but line the state has a significant role to play in the ministries have gained significant leeway in economy, and that capable states can do more detailed spending decisions. In return, and with better results. MOF's task is to ensure that resources are productively used. To this purpose, MOF has taken the lead in revising budgeting, accounting and reporting formats to match new concepts of performance, and to ensure that this information is regularly reported. 47. MOF in several OECD countries has taken a leading role in the public expenditure management reforms. However, reforms have only worked in countries in which a broad commitment to reforms existed. 77 Table 3: Public Expenditure Management in OECD countries Linking Policy, Planning, and Budgeting Australia | France Germany Japan { New Zealand Unites Kingdom United States Strategic Goals/ Commitment to zero budget Medium-tenot targets in the Financial Planning Council Reduction in bonds issue Move toward suiplus in Expenditure growth lower than Balantced budget by 2002 Global Budget deficit over the business "lois d'orieitation' can set expenditure limits, to below 5 percent of adjusted financial balance; GDP growth. Targets cycle. regular publications of Maastricltt criteria Currently: Maastricht expenditures reduce expenditures to GDP. fiscal outlook. criteria Targets ilt Fiscal ___________________________ ~~~~~~~~~~~Responsibility act Multi-annual Forward estimates (budget Experimental 3 year rolling Five year rolling-plans No formal system of multi- Three year projections of Budgetary policy set within Office of Management and budgeting year and three outer years) plans, annexed to the developed by MOF on year estimates. Medium- "baseline." based on Medium-tenm Financial Strategy, Budget makes five year central to budget process. budget documents basis of Financial Planning term projections included previous year's numbers and with key focus on bonrowing projection, but no operational Council agreement, which in Budget Documettt Government decisions; requirement. Presented in Budget sigiiificance. coordinates policy with issued to lite ministries at Documents. New Control Total subnational Laender; the start of the budget drives multi-year expenditures. included in the budget process. Included in the documents, but no legal or budget bill. Outer year operational statuis projections beconie baselinc. Salient Features of Cabinet determines overall Prime minister sets sectoral Ministries submit proposals Centrally managed by the Output budgetiitg. Budget Budget made within limit of Budget cycle divided in Budget Process expenditure limit. and organizational to MOF within limits set in Finance ministry, Budget based on baseline esinmate control figures, Treasury invites administrative and Expenditure review expenditure limits based on budget circular. Office; Line ministries that includes policy "position papers" front congressional cycle. comnuittee(ERC) coiisiders MOF's intemal projectiolns. Submissions reviewed by submit proposals to MOF decisions. Ministers make departments, incluiding. spending Admnitistration prepares on policy changes, based on Budget proposals should in MOF at various levels and on basis of a cabinct decisions oii output increases that need to be matched basis of OMB guidelines. policy proposals and savings principle not exceed limits, in the Cabinet which approved circular, and purchases rather than witlt savings proposals. On basis Expenditures divided in options. ERC sets sector but Ministries msay appeal submits to Parliament. negotiate with MOF. spending. Spending of position papers, Cabinet decides mandatory and discretionary, ceilings for individual to Prime Minister. Two rounds of review in MOF sends proposal to ministries prepare guidelines for budget Cabinet the latter subject to legal limits ministries. Ministries Parliament. spending ministries, appropriation estimates consiittee reviews ministerial oii the deficit. President prepare sector budgets followed by new based on Cabinet output proposals, and proposes allocation submits proposal to Congress, Prograni management negotiations. Cabinet decisions. of control figures. Cabinet which, after a complex process, focuses on programs as the decides. approves. approves the budget basis for resource allocation Budget Year, July I-June 30; Preparation Janiuary 1-December 31 January 1-December 31 April I-March 31. July 1-June 31 April I -March 31 October 1-September 30 Budget Calendar January-June Preparation January- Preparation starts 13 Preparation starts in April Process starts July of Budget process starts April of Budget process starts 17 December of previous year months in advance of previous budget year previous year previous year months in advance. Expenditure ERC has resiews available No formal procedure. Ad hoc reviews of existitng Efficiency and Annual budget cycle main "efficiency scrutinies" to lower Evaluation of existing Review called for in previous budget Court des Comptes (audit policies. Biannual report effectiveness reviews in vehicle. Ad hoc reviews of costs; budget process forces to programs included in round. All programs office) performs analysis. on subsidies; budget process. Sunset specific areas propose savings; Ad hoc reviews ministerial budget requests. evaluated over a 5-year cycle legislation provides of major policy areas OMB and CBO reviews of automatic review specific areas Powers ofMinistry Responsible for economic, As in Australia, but with Responsible for fiscal MOF responsible for As in Australia, but with As in Australia; recently sorne Office of Management and of Finance or fiscal and monetary policy. more detailed expenditure policy. Drafts and budgetary policy, tax more emphasis on monetary policy responsibilities Budget and Treasury have Treasury in Budget Manages the three year control proposes the budget; administration, banking scrutinizing budget proposals delegated to Bank of England responsibilities similar to Preparation forward projections drafts evaluates and reviews supervision, Fiscal and adriinistranion Australia. and proposes the budget; govemment progTmas and investment and loan evaluates and reviews expenditure proposals; in program. government programs and charge of financial expenditure proposals; in administration charge of financial administration Role ofParliament No power to propose new No power to propose Unlimited powers to come Both houses of the Diet No power to come up widi No powers to come up with new Unlintited powers to come up policies; may amend the spending. Parliantent may up with new proposals or can make amendments and new proposal. Executives' sending proposals. taxes atid with new proposals and to executives' proposal without raise expenditures if others propose amendments to the additions to expenditures proposals may be amended spending may be reduced, but not amend executive proposals increasing the tax burden, are cut. executives' proposal proposed without raisitig the tax increased. may refuse approval of burden. budget Table 4: Public Expenditure Management in OECD countries Incentives for Performance Australia France Germany Japan New Zealand Unites Kingdom United States Performance Expected Outcomes and line item budgets. line item budgets line item budgets Output budgets, strategic plan, Output Budgets, Legislative requirement for Specification associated outputs included in Ministry and Centers of business plan strategic plan, agency budget documents. Responsibility Contracts performance report Budgetingfor Ministries/agencies receive not available Unified personnel system for Total Staff Number Law Allocations for outputs to be Personnel costs controlled by Total federal employment Operational siitgle running cost allocation, central and local govemrnent. detem-ines maximum produced. Chief executives of running cost system. Pay controlled; limits on number expenditures which is forTmula driven, and Number of posts approved in overall staff. Cabinet ministries, agencies have authority increases in principle of senior staff. requires efficiency dividend. budget. actual number order and budget to hire and fire. Limits set on chief financed from efficiency No personnel limits on determined by appropriation, determines staff numbers executive salaries gains. ministries and agencies. but reserves can finance staff for ministries. Ministry of Possibility to shift resources up to approved number. Finance involved in salary between personnel and running budget preparation cost, and between program. Expenditure MOF controls aggregate cash MOF issues warraiits, Approval by the Ministry of Quarterly commitment and Departmental accounts in a Warrant issued by the Warrant issued by the Control limits; expenditure controls and checks in principle Finance is required before disbursement plans commercial bank. Treasury clears Minister ofFinance. The treasury. Office of responsibility of line ministry all expenditures, disbursement; commitments approved by MOF . the accounts every night, treasury, and chief financial management and budget, of agency; MOF provides through Inspecteur de can be blocked if a certain Government consolidated consolidates balances at the Crown officers in agencies, treasury, and heads of accounting services; Single Finances. Recently has percentage of appipriation is account in Bank of Japan; Account in the central bank. The ministries responsible for department responsible for treasury account. Virement is devolved some spent; MOF and heads of sub-accounts for line law gives the Ministry of Finance expenditure control.. Single expenditire control. Single possible between subheads and authority.; single agencies responsible for ministrics. Virement or treasury a possibility to require treasury account; paymaster treasury account; Tax and within running costs, however, treasury account at expenditure control , Single within one item with any information, which is used as a accounts for ministries. loan accounts in commercial this is not regulated by the law. central bank, treasury account encompassing approval of MOF. Among base for a warrant system. Transfer Virement between subheads banks, on call for treasury. Carryover up to 6 percent of encompassing regional regional accounts. Virement items with Parliamentary allowed up to 5 percent from is possible but needs approval The law has no provision for running costs; capital accounts. possible within the same approval. output to output, if no other transfer by the treasury. The Treasury virement and carryover. expenditure may be carried Virement is possible chapter, and between salaries Carryover automatic, if to the same appropriation has been has no power to authorize _-.1 over, however, this is not within a limit of tO and wages Must be approved expenditures approved as made during the year and the total virement between votes or to regulated by the law percent of the by the MOF. Investment "continues expenditures," amount is unaltered. Spending meet additional expenditure appropriated amounit. expenditure and expenditure If liability already accrued, authority lapses at the end of the with virement. Carryover for No provision for from earmarked revenue may or expenses already year or as specified in the capital expenditure s, and for carryover be carried over approved, with MOF appropriations act; no authority meeting expenditures approval. over five years. chargeable to that year. Budget accounting Cash with accrual elements. cash cash cash Accrual, Generally Accepted Modified cash, moving to cash based, with some and reporting Comuprehensive budget Accounting Principles accrual accrual documents and agency annual reports Audit Financial and performance Inspecteur des Finances Bundesfinanzhofperforms Boars of Audit oversees Controller and Auditor General National Audit Office does General Accounting Office audits by the Australian intemal audiL Court des financial and efficiency audits, audits and reports to focuses on financial audit control financial and efficiency performs audits, reports t Natonal Audit Office, Comptes extemal audit, and reports to parliament. Cabinet which passes on system audit. Regular performance audits. Reports published, congress. At state and local reporting to Parliament reported to Parliament relies on pre-audits by auditors repotL to Diet. GeneTal audits. reports to parliament and reported to parliament level, most audits performed in administration Execuitive Bureau does the by private firmi. actual auditing. Key organizational Cut in # of ministries from 28 deconcentration to N/A. No new agencies unless an Separation of implementing "Next Step" agencies Privatization, deregulation, reforms to 18 in 1987 regional authorities old one is abolished agencies from ministries Privatization Privatization Market-type increased user charging; key Public service charter N/A. N/A. Contract-based chief executive, Contract based chief benchmarking; contracting instruments agencies have published client state secretary; contracting out executives, Citizen's charter; out charters contracting out Main legislationl Financial Management N/A. N/A. N/A. State services Act Public Finance White papers: Financial Chief Financial Officer Act; documents for Improvement Program Act (1989)Financial responsibility Management Initiative Next Govenment Performance Public Sector act (1994) Steps; Initiative; Citizen's and Resuit Act Reforms Charter Sources. OECD 1993, 1995, Garamfalvi and Allan, 1997, World Bank, STATISTICAL TABLES Table 1: INDONESIA - GOVERNMENT REVENUE (in billion Rupiah, GOI format) Indonesian Fiscal year: 1994/1995 1995S1996 1996/97 1997/1998 1998/1999 1999/2000 Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget provision Budget Budget Revision Mar'99 24r2/9 A. Domestic Revenues 58,952 63,418 66,199 71,340 79,829 87,630 88,061 112,275 149,302 152,809 138,380 142,204 1.Oil Revenues 12,851 13.537 13,276 16,055 14,120 20,137 14,871 30,559 49,711 41,254 20,965 20,965 1.CrudeOil 9,504 10,004 9,812 11,964 10,316 14,783 10,688 22.264 32,909 25,829 12,443 12,443 2. Gas 3,347 3,533 3,463 4,091 3,805 5,355 4,183 8,295 16,803 15.425 8,522 8,522 II. Non-Oil Revenues 46,101 52,881 52,923 55,285 65,708 67.493 73,189 81,717 99,591 111,556 117,415 121,239 1. Income tax 18,843 16,764 19,239 21,012 23,708 27,062 29,118 34,388 25,846 49,714 40,626 40,626 2. Salestax (VAT) 13,239 16,545 16,655 18.519 21,788 20,351 24,601 25,199 28,940 28,386 34,697 34,597 3. Import duties 3,443 3,900 3,543 3,029 3,451 2,579 3,322 2,999 5,495 2.218 2,950 2,950 4. Excises 2,623 3,153 3,299 3,593 4,033 4,263 4,436 5,101 7,756 7,974 9,360 10,160 5. Export tax 16 131 44 186 160 81 100 129 943 4,582 2,595 2,595 6. Propertytaxes 1,629 1,647 1.923 1,894 2,277 2,413 2,505 2,641 3,411 3,163 3,247 3,247 7. Other taxes 1/ 282 302 319 453 570 591 633 478 540 462 565 565 00 8. Non Tax Receipts (excl. privn) 3,507 6,433 6,425 6.111 7,202 10,153 8,226 10,782 11,660 11,871 10,375 13,499 a. PE Transfers (Dividend) 1,550 1,322 1,695 1,604 1,872 2,650 1,925 2.341 4,000 3,524 4,000 4,000 oiw Natural Resources 0 0 0 0 0 0 0 0 912 na 956 1,896 b. Other Non-Tax Revenues 1,957 5,111 4,730 4,508 5,330 7,503 6,301 8,442 7,660 8,347 6.375 9,499 i. Immigration (embassies abroad) 0 13 0 24 0 31 18 42 20 82 0 34 ii. Education 262 283 57 50 56 58 61 69 95 95 118 6 iii. Salesofgoods 0 48 0 55 0 56 33 66 38 94 0 38 iv. Services 1,167 1,878 425 741 512 1,364 616 1.593 842 1,238 n.a. 786 v. Attomeyandcourt 0 29 0 34 0 33 18 30 20 32 0 17 vi . Refund Revenues 449 2.461 502 887 1,148 1,368 1.652 1,819 2,828 1,802 n.a. 1,421 vii. Transferfrom Investment 60 400 1,500 2,132 2,154 2,562 2,200 3,555 1.472 2,826 3,111 3,111 viii. Self Financing (incl. Reforestation F 0 0 2,246 583 1.460 2,031 1,703 1,267 2,346 2,264 3,146 4,086 9. Pfivatization 0 0 0 0 0 0 0 0 15,000 3,185 13,000 13,000 10. Proceeds from petroleum sales 2,519 2,006 1,475 488 2,519 0 249 0 0 0 0 0 B. Development Revenues 10,012 9,838 11,759 9,009 10,012 11,900 13,026 14,386 114,586 62,320 77,400 77,400 i. Program aid 0 0 0 0 0 0 0 0 74,045 36,403 47,400 4,7.400 ADB 0 0 0 0 0 0 0 0 26,580 14,705 7,500 7,500 IBRD 0 0 0 0 0 0 0 0 21,264 12,680 7,500 7,500 OECF (Japan) 0 0 0 0 0 0 0 0 19.776 5,678 9,900 9,900 Others 0 0 0 0 0 0 0 0 6,425 3,340 22,500 22,500 of which Miyazawa Bank Restr. 0 0 0 0 0 0 0 0 0 0 11,250 11,250 Miyazawa Bank Restr. 0 0 0 0 0 0 0 0 0 0 11,250 11,250 II. Projectaid 10,012 9,838 11,759 9,009 10,012 11,900 13,026 14,386 40,541 25,917 30,000 30,000 TOTAL REVENUES 68,964 76,256 77,958 80,349 89,841 99,530 101,087 126,661 263,889 215,130 215,780 219,604 Source: World Bank Table 2: INDONESIA - GOVERNMENT EXPENDITURE (in billion Rupiah, GOI fornat) ledonesiau Fisal year 1994/1995 | 19i5196 | 1996197 1997/198 | 1998/1998 1uscoe Budget Actual Budget Actual Budget Actual BuLdget Adual Budget Auawnup nn Mar'95 Budget 24rAs A. Routine Eupeedithres 42,351 50,539 54,416 57.310 56,114 62.551 62,159 89,610 171,204 147,717 134,556 137,156 1. Petseeel Expendtaree 13.011 12,596 15,347 13,001 18,281 14,455 21,192 17.269 24.781 24,480 32,037 33,569 1. Wages & SalarIes 10,456 10,181 12.416 11.048 14,763 13,005 17,048 13,699 19,120 19,089 25,293 29,825 2. Rim allowance 1,039 973 1,140 733 1,194 768 1,310 796 1,972 1,606 2.087 2,097 3 FoodAlo-ance 783 756 835 560 1,122 101 1,234 1.174 1,494 1,837 2,107 2,107 4. Otser 392 390 511 370 710 480 1,010 671 1,155 1,162 1.490 1.490 a. Extemal 341 317 445 290 492 103 591 939 1,150 937 1,060 1,060 I. Material Epedit.er. 3,791 4,319 4,745 5,175 6,589 8,109 8.895 8,999 11,425 11,058 11,039 11,039 1. Domestic 3,526 4,101 4,457 4,876 6,258 7,825 8,478 8,242 10,060 10,054 10,007 10,007 2 Extemal 225 218 289 300 332 204 417 757 1,3bS 1.004 1,032 1,032 Ill. Transers to Rogion 7,035 7,272 8,409 8,227 10.012 9,358 11,536 11,061 13,289 14.194 18,430 19,498 I Persen-el Eupenses 6,653 6,919 7,932 7,807 9.496 8,874 10.968 10,520 12,606 13,512 17,629 18,697 2. Nanr-prsonnel Eupenses 430 354 477 415 516 484 560 041 863 992 801 601 IV. Debt Service 17,969 24.873 25,390 28,964 20,227 27.491 19,571 31,112 66,236 55.798 44,611 44,811 1. Damestic 317 104 319 1,620 291 4,589 334 1,628 1.940 220 350 380 2. Euteral 17,602 24,796 25.071 27,364 19,936 22,902 19,237 29,490 64,296 55,578 44,431 44,431 a. Pncipal 10,521 18,298 17,896 20,489 12,119 13,000 11.99 12.750 33,262 31,4a4 23,905 23,905 b. Interest 7.131 6,470 7,175 6,875 7,820 9,902 7,541 16,730 31,035 24,094 20,526 20,026 V. Other Ependitures V. Other Expendituree 525 1,480 524 1,923 1,005 3,149 965 21,169 55,473 42,197 28,239 28,239 OO 1. Petnoleum subsidies 0 607 0 0 0 1,416 0 9,914 27,534 27,155 9,936 9,986 2. OtherSubsidis and Espenditures 525 793 524 1,923 1,005 1,733 965 11,354 27,939 15,002 18,253 18,253 a. Eldctcity subsidy 0 0 0 0 0 0 0 0 8,473 4,530 7,201 7,201 b. Subsidy In BULOG 0 0 0 0 0 0 0 10,599 15,798 7,657 6,838 6,838 ofwhichinterestsubsidyflrBULOG 0 0 0 0 0 0 0 0 1,968 1,348 744 744 c. Medine subsidy 0 0 0 0 0 0 0 0 982 588 143 143 d. Othersubs,dies 0 0 0 0 0 0 0 0 130 27 153 153 e. Other operWdeurs 525 793 524 1,923 1,005 1,733 965 756 2,745 2,002 3,919 3,919 B. Development Expenditures 27,348 30,692 30,734 298781 34,503 35,952 32,929 38.359 92,683 67,969 93,649 82,448 1. Rupiah Flnancrio 17,336 20.854 18.975 19,772 22,089 24,052 25,902 23.973 52,142 41.952 53,648 52,448 a. OevopmysenlPnanam 16,709 18,592 19,230 18,192 21,183 21,028 24,925 21,926 28,203 26.040 30,652 30,152 Departmerl/Govtnts0 9,356 10,568 10,285 10,221 11,955 11,190 13,950 11,160 13,494 12,482 12,923 12,758 oAw. Secial Salety Not Ptgnm 0 0 0 0 526 0 2,200 0 9.332 8,5d6 e.. 2,910 ii. Def/6nc 589 671 625 759 798 999 935 902 903 922 1,294 1,264 ii TransfertuRegioss(INPRES) 5,340 5,670 5,570 5,488 6,369 6,472 7,631 7,512 10,757 9,789 13,562 13,227 o/rw SocIal Salety NetProsram 0 0 0 0 0 137 0 6,947 1,809 3,458 2,733 iW Other Program 1,492 1,683 1.750 1,724 2,072 2,396 2,279 2,352 3,049 2,847 2,902 2,902 b. Othe0 s 568 2,262 744 1,580 906 3,024 1.077 2,048 23,939 15,912 22,997 22,297 i.SocialSaufetyNe 0 0 0 0 0 0 0 0 1,702 1,624 0 0 ii. Intemest Subsidies 0 0 0 0 0 0 0 0 3.958 1.186 3.701 3,701 iiL Bonk Restrotudrg Cost 0 0 0 0 0 0 0 0 15,000 10,000 18,000 17,000 iv FerilierCosts 175 815 143 143 137 186 137 709 2,125 2,125 0 0 v.OtherDenelnptenl Enprnditurs 393 1,447 601 1,437 769 2,938 763 1,340 1,154 997 1,296 1,596 o/wSSN 0 0 0 0 0 0 0 0 15 46 0 0 offwhid a eodbf 5s89 671 724 759 999 1,126 1.086 1,022 220 319 0 0 2. Pjeoctaid 10,012 9,938 11,759 9,009 12,414 11,900 13,026 14,396 40,541 25,917 30,000 30.000 InestmentPnjerts 9,447 9,231 11,060 8,174 11,780 11,337 12,385 13,484 39,541 24.542 28,976 28,976 Ammed Forms 560 607 593 835 633 563 641 901 1,000 1,375 1,024 1,024 TOTAL EXPENDITURES 69,699 01,231 85,149 86,091 90,616 98.513 101,0S7 127,9d9 203,887 215,586 218,204 219,604 S-urre etud Sn-k Table3: INDONESIA- FISCALSUMMARY (in trillion Rupiah, Bank format) Indonesian Fiscal year: 1994/1995 199511996 1996/97 1997/1998 1F 99g6/19 I 9P20"0 Actual Budget Budget ABudget udget Actual Budget Actual Budget Actual Bude proson B Ma(992429 Total Revenue & Grants 56.4 64.4 64.7 70.9 77.3 87.6 87.8 112.3 134.3 149.6 125.4 129.2 1.Tax Revenue 52.9 58.0 58.3 64.7 70.1 77.5 79.6 101.5 122.6 137.8 115.0 115.7 OivLNG taxes 12.9 13.5 13.3 16.1 14.1 20.1 14.9 30.6 49.7 41.3 21.0 21.0 Non-oil taxes 40.1 44.4 45.0 48.7 56.0 67.3 64.7 70.9 72.9 96.5 94.0 94.7 2. Non-tax revefnues (exci. pnvatization proceeds) 3.5 6.4 6.4 6.1 7.2 10.2 8.2 10.8 11.7 11.9 10.4 13.5 3. Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TotalExpenditureand Not Lending 59.2 62.9 67.1 65.6 78.5 85.5 89.2 115.2 228.9 182.5 194.3 195.7 1. Current Expenditures 32.6 33.7 37.3 37.8 44.8 50.3 51.2 78.5 160.0 130.9 133.4 13.0 a. Personnel Expenditures 13.0 12.6 19.3 13.0 18.3 14.5 21.2 17.3 24.8 24.5 32.0 33.6 b. Material Expenditures 3.8 4.3 4.7 5.2 6.6 8.1 8.9 9.0 11.4 11.1 11.0 11.0 c.TransferstoRegions 7.1 7.3 8.4 8.2 10.0 9.4 11.5 11.1 13.3 14.2 16.4 19.5 d. Domesticdebtservice 0.3 0.1 0.3 1.6 0.3 4.6 0.3 1.6 1.9 0.2 0.4 0.4 e. Extemanl sterest 7.1 6.5 7.2 6.9 7.8 9.9 7.5 16.7 31.0 24.1 20.5 20.5 f. Total subsidies (incl. lnterst subsidies) 0.2 1.5 0.1 0.1 0.1 1.6 0.1 21.1 58.6 43.5 28.0 28.0 g. Other current expenditures 1.1 1.4 1.1 2.8 1.0 2.3 1.6 1.7 3.7 3.4 4.9 4.9 h. Bank Restructuring (net) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 15.0 10.0 18.0 17.0 00 2. Capital Expenditures Ic-nudWr B.nk betasal) 26.6 29.3 29.8 27.8 33.7 35.2 38.0 36.7 68.9 51.6 60.9 60.7 CurrentSavings 23.9 30.7 27.5 33.1 32.5 37.3 36.6 33.8 -25.7 18.7 -8.0 -5.8 Overall Balance exdt. Bank Rwtruedt- ng Costs -2.7 1.5 -2.4 5.3 -1.2 2.1 -1.4 -2.9 -79.6 .22.0 -60.9 49.5 Bank Restructurlng Costs (gross) 0.o 0.0 . 0.0 0.0 0.0 0.0 0.0 0.0 10.0 10.0 34.0 33.0 Bank Restructuring Costs (net) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 15.0 10.0 18.0 17.0 Recoveryof Bank Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -6.0 16.0 Privatization Proceeds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 15.0 3.2 13.0 13.0 Overalt Budget Balance (Incl. Bank restructuring cost) -2.7 1.5 -2.4 5.3 -1.2 2.1 -1.4 -2.9 -94.6 -32.9 -68.9 -66.5 off budget operation end stutsticstadiscrepancies 0.0 0.0 0.0 0.0 0.0 0.0 0,0 0.0 0O( 10.6 0.0 0.0 Fiscal defcit (including off-budget operation & tat. disc.) -2.7 1.5 -2.4 5.3 -1.2 2.1 -1.4 -2.9 -94.6 -22.3 -68.9 -66.5 Financing 4.3 -1.5 3.3 -5.3 1.8 -3.5 2.0 3.6 96.4 23.9 82.5 62.5 1. Extrmal (net) .0.5 -8.5 -61 -11.5 -2.1 -1.1 1.3 1.6 81.3 30.8 53.5 53.5 Disbursements 10.0 9.8 11.8 9.0 10.0 11. 13.0 14.4 114.6 62.3 77.4 77.4 Amorftizatoss -10.5 -18.3 -17.9 -20.5 -12.1 -13.0 -11.7 -12.8 -33.3 -31.5 -23.9 -23.9 2. Domestic (net financial drawdown) 4.8 6.9 9.4 6.2 3.9 -2.4 0.7 1.9 0.1 -10.1 0.0 0.0 3. Prinvatizatinn 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 15.0 3.2 13.0 13.0 4. Recovery of Bank Assets 0.0 0.0 0.0 0.0 0.0 0.0 5.0 0.0 0.0 0.0 16.0 16.0 Unidentified Financing 1.6 -0.1 0.9 -0.1 0.6 -1.4 0.6 0.6 1.8 -8.9 13.6 16.0 Source: Worid Bank Table 4: INDONESIA - FISCAL SUMMARY (as percentage of GDP, Bank format) Indonesian Fiscal year: 1994/1995 1995/1996 1996/97 1997/1998 1998/1999 1999/2000 PActual Budget Budget Actual Budget Actual Budget Actual Budget Actual Budget posin Budget Revision Revenue & Grants exc. Privatization 14.1 16.1 13.8 15.1 14.0 15.8 12.6 16.3 12.7 14.8 10.2 10.6 i. Tax Revenue 13.2 14.5 12.4 13.8 12.7 14.0 11.4 14.7 11.6 13.6 9.4 9.5 Oil/LNG taxes 3.2 3.4 2.8 3.4 2.6 3.6 2.1 4.4 4.7 4.1 1.7 1.7 Non-oil taxes 10.0 11.1 9.6 10.3 10.1 10.4 9.3 10.3 6.9 9.5 7.7 7.7 2. Non-tax revenues 0.9 1.6 1.4 1.3 1.3 1.8 1.2 1.6 1.1 1.2 0.8 1.1 3. Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Expenditures 14.8 15.7 14.3 13.9 14.2 15.5 12.8 16.7 21.7 18.0 15.9 16.0 1. Cu-entEtxpenditures 8.1 8.4 7.9 8.0 8.1 9.1 7.3 11.4 15.2 12.9 10.9 11.0 a. Personnel Expenditures 3.2 3.1 3.3 2.8 3.3 2.6 3.0 2.5 2.3 2.4 2.6 2.7 b. Material Expenditures 0.9 1.1 1.0 1.1 1.2 1.5 1.3 1.3 1.1 1.1 0.9 0.9 c. Transfers to Regions 1.8 1.& 1.8 1.7 1.8 1.7 1.7 1.6 1.3 1.4 1.5 1.6 d. Intemal debt service 0.1 0.0 0.1 0.3 0.1 0.8 0.0 0.2 0.2 0.0 0.0 0.0 e. Extemal interest 1.8 1.6 1.5 1.5 1.4 1.8 1.1 2.4 2.9 2.4 1.7 1.7 f. Total subsidies 0.0 0.4 0.0 0.0 0.0 0.3 0.0 3.1 5.6 4.3 2.3 2.3 00 g. Other current expenditures 0.3 0.3 0.2 0.6 0.3 0.4 0.2 0.2 0.4 0.3 0.4 0.4 h. Bank Restnucturing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 1.0 1.5 1.4 2. Developrnent Expenditures 6.6 7.3 6.3 5.9 6.1 6.4 5.4 5.3 6.5 5.1 5.0 5.0 Current Savings 6.0 7.7 5.8 7.0 5.9 6.7 5.2 4.9 -2.4 1.8 -0.7 .0.5 Overal balance before privatiration proceed -0.7 0.4 -0.5 1.1 40.2 0.4 4.2 -0.4 -7.5 -2.3 4.2 -4.0 and bank restnucturing cost Bank Restructuring Costs (gross) 0.0 0.0 0.0 0.0 8.0 0.0 0.0 0.0 1A 1.0 2.8 2.7 Bank Restructuring Costs (net) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 1.0 1.5 1.4 Recovery of Bank Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.3 1.3 Privatlzatlon Proceeds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.3 1.1 1.1 Overall Budget Balance (Incl. Bank restructuring cost 40.7 0.4 -0.5 1.1 .0.2 0.4 .0.2 O4A -9.0 43.2 .5.6 .5.4 off budget operation and statistical discrepancies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 0.0 Fiscal deficit (including off-budget operation & stat. d -0.7 04 .0.5 1.1 40.2 0.4 -0.2 -.4 -9.0 *2.2 -5.6 -5.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Financing 1.1 -0.4 0.7 -1.1 0.3 -0.6 0.3 0.5 9.1 2.4 6.7 6.7 1. External (net) 40.1 -2.1 -1.3 -2.4 -0.4 -0.2 02 0.2 7.7 3.0 4.4 4.4 DisBursements 2.5 2.5 2.5 1.9 1.8 2.2 1.9 2.1 10.9 6.1 6.3 6.3 Amortizaions -2.6 -4.6 -3.8 -4.4 -2.2 -2.4 -1.7 -1.9 -3.2 .3.1 .2.0 -2.0 2. Domestic (net inancial drawdown) 1.2 1.7 2.0 1.3 0.7 .0.4 0.1 0.3 0.0 -1.0 0.0 0.0 3. Privatization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.3 1.1 1.1 4. Recovery of Bank Assels 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 00 1.3 1.3 UnidentifIed Financing 0.4 0.0 0.2 0.0 0.1 -0.3 0.1 0.1 0.2 -0.9 1.1 1.3 Table 5: Investment Budget (Development Budget) in billions of Rupiah - By Sector 119411g95 | 11951996 / _ 196/1997 1_117/1S198 19951W9 19s6200m No Category Pban Actual Plan Acr.l Pln Actual Plan Actul | Plan Prelindmry Actual Plan Abs % Abs % Abs % Abs % Abs % Abs % Abs % Abs # Abs % Abs # Abs % I INDWSTRY 450.5 1.6 565.2 1.6 497.3 1.6 *05.4 2.6 506.6 1.5 1,133.3 3.2 589.7 1.5 468.7 1.2 788.2 0.9 512.8 0.8 629.2 0.8 Own Resources 143.8 223.6 173.6 619.5 207.8 1,004.6 24580 391.2 147.8 224.7 239.1 Foreign Resources 306.7 341.6 323.7 185.9 298.8 128.7 344.8 77.5 640.4 288.2 390.1 2 AGRICULTURE AND FORESTRY 989.6 .6 1.657.5 5.4 1,103.8 3.6 891.0 3.1 1,294.4 3.8 1,308.3 3.6 1,513.0 3.9 1,837.2 4.8 7,484.6 8.1 S,840.0 8.6 4,613.3 5.6 Own Resources 662.4 1,351.2 666.5 676.8 823.3 1.027.5 966.8 1,422.9 5,450.1 4,886.2 3,290.1 Foreign Resources 327.3 306.3 437.3 214.2 471.1 280.8 546.2 414.2 2,034.5 953.8 1,323.1 3 WATER RESOURCES 1,687.0 6.2 1,632.1 8.3 2,042.1 6.6 1,897.0 8.6 2317. 6.7 2,101.6 5.8 2,616.1 6.7 2,138.9 5.6 4,774.7 5.2 4,025.3 5.9 3,466.2 4.2 Own Resurces 809.4 999.5 874.2 1,115.4 1,239.8 1,246.8 1,472.6 1,139.2 1,254.9 1,241.1 1,404.7 Foreign Resources 877.6 932.6 1,167.9 781.6 1 ,077.6 854.8 1,143.6 999.7 3.519.8 2,784.1 2,061.8 4 MANPOW,ER 146.5 0.5 109.0 0.4 170.6 0.6 139.3 0.5 187.1 0.5 197.1 0.5 269.4 0.7 250.5 0.7 1,304.9 1.4 1,170.7 1.7 1,202.1 1.5 Own Resource 119.4 104.8 132.8 121.8 1603 135.6 197.9 153.2 1,118.7 1,012.4 1,123.5 Foreign Resources 27.1 4.2 37.8 17.7 26.8 61.5 71.5 97.2 186.2 158.3 78.5 TRADE. DEVELOP1MENT OF BUSINESS ENTERPRISES. FINANCE AND COOPERATIVES 736.3 2.7 1.439.6 4.7 533.7 1.7 912.4 3.2 40i.S 1.2 1,680.7 4.7 549.9 1.4 1,380.2 3.6 16.687J6 18.0 11,570.9 17.0 19,035.6 23.1 Own Resources 144.8 1,138.8 153.7 605.3 181.8 1,286.8 226.2 633.6 15,811.0 10,984.9 18,741.9 Forign Resources 591.5 300.8 380.0 307.1 219.6 393.9 323.7 746.6 876.6 5e6.1 293.7 TRANSPORT, METEOROLOGY & GEOPHYSICS 5,225.5 19.1 5.656J8 18.4 5,897.9 19.2 5,382.6 18.7 6,771.2 19.6 S,655A 15.7 6,849.9 17.6 *,847.4 17.9 9,642.8 10.4 7,366.8 10.6 6,426.6 10.2 Own Resources 3,600.6 3,920.4 3,822.2 3,678.4 4,228.5 4,020.5 4,687.9 . 3,962.6 3,412.0 3,042.3 2,630.8 Foreign Resources 1,619.0 1,736.4 2,075.7 1,704.2 2,542.7 1,635.0 2,162.0 2,894.7 6,230.6 4,324.5 5,795.8 7 MINING AND ENERGY 3,581.8 13.1 4,407.3 14.4 3,8S4.8 12.7 3.111.5 10.8 4,101.5 11.9 3,252.0 9.0 4,423.0 11.4 4,808.0 12.5 7,059.5 7.6 5,875.7 8.7 6,807.7 8.0 Cwn Resources 803.7 1,432.3 871.5 825.0 939.4 883.6 1,081.0 1,066.5 763.3 707 7 774.0 Forign Reources 2,778.1 2,975.0 3,023.3 2,286.5 3,162.2 2,368.4 3,342.0 3,741.5 6,276.1 5,166.1 5,833.6 TOURISM, POSTS AND TELECOMIMUNICATIONS 721.9 2.8 973.3 3.2 1,005.8 3.3 458.2 1.6 1,043.2 3.0 870.9 1.6 962.7 2.5 84.3 2.3 1.161.0 1.3 1,389.8 2.0 918.1 1.1 Own Resources 69.5 299.9 78.1 6a.9 94.7 81.9 107.5 78.7 75.9 59.0 829 Foeign Resources 652.4 673.4 927.7 389.3 948.5 488.9 855.2 785.6 1,105.1 1,330.7 835.2 9REGIONAL DEVELOPMENT AND TRANSUIGRATION 5,5042 20.1 5,461.2 17.8 6.139.2 19.9 6,187.5 21.5 6,509.1 18.9 7,156.4 19.9 7,184.1 18.4 7.136.8 18.6 19,061.6 20.6 11,321.3 16.7 14,545.9 17.6 Own Resourcs 5,119.5 5,222.5 5,815.4 5,747.3 6,222.6 6,568.5 6,881.9 6,619.6 9,926.4 8,831.3 11,005.8 Foreign Resources 384.7 238.7 523.8 440.2 286.5 597.9 282.2 517,2 9,185.2 2,490.1 3,540.1 10 ENVIRONMENT AND SPATIAL 452.3 1.7 419.7 1.4 517.3 1.7 439.0 1.5 615.6 1.8 564.5 1.6 685.8 1.8 645.5 1.7 780.0 0.8 641.7 0.9 932.7 1.1 Own Reources 243.3 252.3 277.2 256.5 322.4 321.7 420.8 354.0 330.3 272.3 579.2 Foreign Resources 209.0 167.4 240.1 182.5 293.2 242.8 265.0 291.5 449.7 369.5 353.8 EDUCATION. CULTURE, 8EUEF IN 11 ALUMGHTY GOD, YOUTH AND SPORTS 3,061.1 11.2 2.488A 9.7 3,359.2 10.9 3,130.3 10.9 3.970.8 11.5 3,849.2 10.7 4,876.9 12.0 4,268.1 11.1 8,387.6 9.0 6,150.4 9.1 8,381.3 10.2 OwnResources 2,358.8 2,409.0 2,608.0 2,450.9 3,057.4 2.960.1 3,735.4 3,223.1 4,845.1 4,381.0 4,818.7 ForeIgn Resources 702.52 579.4 751.2 679.4 913.2 89.1 941.6 1,045.0 3,522.51 1,789.4 3,562.6 Table 5: Investment Budget (Development Budget) in billions of Rupiah - By Sector 1994/1995 1995/1996 199611997 199711998 199811999 199912000 No Category Plan Actual Plan Actual Plan Actual Plan Actual Plan PrllinInary Achul Plan Abs % Abs % Abs % Abs % AbS % Abs % Abs % Abs X Abs % Abs % Abs % 12 POPULATION 290.2 1.1 299.8 0.9 300.3 1.0 285.6 0.9 328.0 1.0 332.7 0.9 690.9 1.9 348.2 0.9 582.3 0.9 593.7 0.9 594.3 0.7 Own Resources 244.8 221.5 262.5 234.3 277.9 313 2 634.8 343.1 242.7 205.3 244.1 ForIgn Resources 45.5 48.3 47.8 31.3 50.1 19.5 56.1 5.1 339.6 388.6 350.3 SOCtAL WELFARE, HEALTH. ROLE IS OF WOMEN, CHILDREN AND ADOLESCENT 1,031.0 3.8 997.2 3.2 1,051.9 3.4 987.1 3.4 1,324.9 4.0 1,277.9 3.9 2,097.2 5.4 1,703.1 4.4 4,204.8 4.5 3,550.3 5.2 4,780.9 5.8 Own Resources 816.6 839.4 880.2 825.3 1,090.5 1,012.6 1,527.6 1,414.1 2,691.0 2285.6 2,908.1 Foreign Resources 214.4 147.8 191.6 161.8 274.5 265.0 569.6 289.1 1,613.8 1,270.7 1,878.8 14 HOUSING AND HUMAN SETTLEMENTS 98.9 3.2 1,103.4 3.8 1,102.1 3.8 1,037.9 3.6 1,325.6 3.8 1,386.9 3. 1,533.8 3.9 1,333.4 3.8 5,615.2 9.1 2,885.9 3.8 3,218.4 3.9 Own R"eources 469.4 614.3 514.1 489.1 596.3 852.1 671.3 577.0 3,615.4 1,324.5 1,713.3 Foreign Resources 416.6 489.1 568.0 568.5 729.2 813.7 862.5 756.4 1,999.7 1241.4 1.505.1 15 RELIGION 121.9 0.4 1959. 0.5 193.3 0.6 238.4 0.8 253.7 0.7 28.0 0.8 304.0 0.8 213.3 0.6 475.9 0.6 327.9 0.5 927.4 0.8 Own Resources 112.3 159.2 139.0 194.1 177.9 207.2 226.2 182.4 255.7 233.9 312.7 Foreign Resoumes 9.5 6.4 43.7 44.3 75.7 74.8 77.8 31.0 220.2 93.7 314.7 18 SCIENCE AND TECHNOLOGY 529.8 1.9 394.1 1.3 711.2 2.3 431.6 1.5 805.8 2.3 554.8 1.5 881.9 2.3 876.9 2.3 1,144.0 1.2 922.5 1.4 N90.5 1.1 Own Resources 423.7 368.2 500.6 396.5 606.8 516.3 701.4 575.2 462.9 450.8 568.1 Forign Resources 106.1 36.0 210.6 36.1 198.8 38.6 180.4 301.7 681.2 471.6 332.4 00 17 LAW 111.4 0.4 90.8 0.3 138.7 0.5 117.3 0.4 172.9 0.5 150.8 6.4 195.0 0.5 153.3 0.4 187.0 0.2 137.0 0.2 230.1 0.3 OwnResources 101.4 90.6 130.8 117.2 159.9 148.9 193.6 150.8 153.0 136.8 220.8 Foreign Resources 9.9 0.2 7.9 0.1 13.1 2.0 1.4 2.5 14.0 0.2 9.3 18 GOV'T APPARATUS AND SUPERVISION 557.0 2.0 567.0 1.8 tu84.4 2.2 624.0 2.2 919.6 2.4 83 .8 2.3 911.0 2.3 857.9 2.2 788.8 0.8 948.6 1.4 900.9 1.1 Own Rtources 468.7 417.9 543.5 528.5 663.0 626.1 689.2 571.3 431.2 360.7 428.4 Foreign Resources 98.3 149.1 120.9 95.5 155.5 210.7 221.7 286.6 355.6 585.9 472.5 POUTICS, INTERNATIONAL 19 RELATIONS, INFORMATION, COMMUNICATIONS AND MASS MEDIA 157.3 0.6 219.2 0.7 152.7 0.5 130.5 0.5 183.2 0.5 184.3 0.5 289.1 0.7 308.4 0.8 421.8 0.5 339.6 0.5 154.0 0.2 Own Resources 78.7. 123.3 85.9 82.2 140.0 148.5 148.7 118.8 111.8 91.9 109.5 Foreign Resources 78.8 956.9 66.8 48.5 43.2 35.9 137.4 189.6 310.0 247.7 44.5 20 NATIONAL DEFENCE AND SECURITY 1,154.9 4.2 1,278.0 4.2 1,317.3 4.3 1,594.1 5.s 1,531.8 4.4 3,496.9 9.7 1,727.5 4.4 1,918.7 5.0 2,122.9 2.3 2,614.8 3.9 2,277.4 2.8 Own Resources 589.3 671.4 724.1 759.0 898.7 998.9 1,085.2 995.7 1,122.8 1,239.7 1,253.0 Foreign Resources 565.3 606.6 563.2 835.1 633.1 2,498.0 641.4 923.0 1,000.0 1,375.2 1,024.4 TOTAL 27,397.9 100.0 30,685.2 100.0 30,73.5 100 2,7 00.0 38,927.9 100.0 38,358.7 100.0 92,t83.0 100.0 97,868.3 100.0 62,448.6 100.0 OwnRoursf 17,380.0 92.5 20,950.2 67.9 19,024.5 81.8 19,771.8 68.7 22,089.1 64.0 24,051.3 68.9 25,901.9 6.5 23,973.1 Q.5 62,142.1 5.3 41,951.9 61.9 52,448.8 63.6 I Foreign Resources 10,011.9 36.5 9,83.0 32.1 11,756.9 38.2 9,008.8 31.3 12,413.6 3280 11,900.1 32.1 13,028.0 33.5 14,385.6 37.5 40,540.9 43.7 25,917.3 38.2 30,000.0 38.4 Source: Wodd Bank Table 6: Investment Budget (Development Budget) - By Sector (in billions of Rupiah) - Constant - Base Price 1993/1994 199411996 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 GDP Deflator 1.08 1.18 1.29 1.61 2.76 3.31 No Category Plan Actual Plan Actual Plan Actual Plan Actual Plan Preliminary Actual Plan Abs Abs Abs Abs Abs Abs Abs Abs Abs Abs Abs % I INDUSTRY 417.1 523.3 421.4 682.5 392.7 878.6 366.3 291.1 285.1 185.5 190.0 0.8 Own Resources 133.1 207.0 147.1 525.0 161.1 778.8 152.1 243.0 53.5 81.3 72.2 Foreign Resources 284.0 316.3 274.3 157.5 231.6 99.8 214.2 48.1 231.6 104.2 117.8 2 AGRICULTURE AND FORESTRY 916.3 1,534.7 935.4 755.1 1,003.4 1,014.2 939.7 1,141.1 2,707.0 2,112.2 1,392.9 5.6 Own Resources 613.3 1,251.1 564.8 573.6 638.2 796.5 600.5 883.8 1,971.2 1,767.2 993.4 Foreign Resources 303.0 283.6 370.6 181.5 365.2 217.7 339.3 257.3 735.8 345.0 399.5 3 WATER RESOURCES 1,562.0 1,789.0 1,730.6 1,607.6 1,796.4 1,629.2 1,624.9 1,328.5 1,726.9 1,456.8 1,046.6 4.2 Own Resources 749.4 925.5 740.8 945.3 961.1 966.5 914.6 707.6 453.9 448.9 424.1 Foreign Resources 812.6 863.5 989.7 662.4 835.3 662.7 710.3 620.9 1,273.0 1,007.0 622.5 4 MANPOWER 135.6 100.9 144.6 118.1 145.0 152.8 167.3 155.6 472.0 423.4 362.9 1.5 Own Resources 110.6 97.1 112.5 103.1 124.2 105.1 122.9 95.2 404.6 366.2 339.2 Foreign Resources 25.1 3.9 32.0 15.0 20.8 47.7 44.4 60.4 67.3 57.2 23.7 TRADE, DEVELOPMENT OF BUSINESS 5 ENTERPRISES, FINANCE AND COOPERATIVES 681.7 1,333.0 452.3 773.2 311.2 1,302.9 341.6 857.3 6,035.6 4,185.0 5,747.5 23.1 Own Resources 134.1 1,054.4 130.3 513.0 140.9 997.5 140.5 393.5 5,718.5 3,973.0 5,658.8 Foreign Resources 547.6 278.5 322.0 260.3 170.3 305.4 201.1 463.7 317.0 212.0 88.7 oo 6 TRANSPORT, METEOROLOGY & GEOPHYSICS 4,838.4 5,237.8 4,998.3 4,561.5 5,249.0 4,384.1 4,254.6 4,253.0 3,487.5 2,664.4 2,544.3 10.2 0O Own Resources 3,339.4 3,630.0 3,239.2 3,117.3 3,277.9 3,116.6 2,911.7 2,461.3 1,234.0 1,100.3 794.3 Foreign Resources 1,499.0 1,607.8 1,759.1 1,444.2 1,971.1 1,267.4 1,342.8 1,791.8 2,253.5 1,564.1 1,749.9 7 MINING AND ENERGY 3,316.5 4,080.8 3,300.7 2,636.9 3,179.5 2,520.9 2,747.2 2,986.3 2,553.3 2,125.1 1,995.1 8.0 Own Resources 744.2 1,326.2 738.6 699.2 728.2 685.0 671.4 662.4 283.3 255.9 233.7 Foreign Resources 2,572.3 2,754.6 2,562.1 1,937.7 2,451.3 1,836.0 2,075.8 2,323.9 2,269.9 1,869.2 1,761.4 8 TOURISM, POSTS AND TELECOMMUNICATIONS 668.4 901.2 852.4 388.3 808.7 442.5 597.9 536.8 427.2 502.6 277.2 1.1 Own Resources 64.4 277.7 66.2 58.4 73.4 63.5 66.8 48.9 27.5 21.3 25.0 Foreign Resources 604.0 623.5 786.2 329.9 735.3 379.0 531.2 487.9 399.7 481.3 252.2 9 REGIONAL DEVELOPMENT AND TRANSMIGRATION 5,096.5 5,056.7 5,202.7 5,243.6 5,045.8 5,547.6 4,449.7 4,432.8 6,905.0 4,094.7 4,391.9 17.6 Own Resources 4,740.3 4,835.6 4,758.8 4,870.6 4,823.7 5,084.1 4,274.4 4,111.6 3,590.2 3,194.1 3,323.0 Foreign Resources 356.2 221.0 443.9 373.1 222.1 463.5 175.3 321.2 3,314.9 900.6 1,068.9 10 ENVIRONMENT AND SPATIAL 418.8 388.6 438.4 372.0 477.2 437.6 425.9 400.9 282.1 232.1 281.6 1.1 Own Resources 225.3 233.6 234.9 217.4 249.9 249.4 261.3. 219.9 119.5 98.5 174.9 Foreign Resources 193.5 155.0 203.5 154.7 227.3 188.2 164.6 181.0 162.6 133.6 106.8 11 EDUCATION, CULTURE, BELIEF IN ALMIGHTY GOD, 2,834.4 2,767.0 2,846.8 2,652.8 3,078.0 2,983.9 2,904.9 2,651.0 3,026.4 2,224.5 2,530.6 10.2 Own Resources 2,183.9 2,230.6 2,210.2 2,077.0 2,370.1 2,294.7 2,320.1 2,001.9 1,752.4 1,577.3 1,454.9 Foreign Resources 650.5 536.5 636.6 575.8 707.9 689.2 584.8 649.1 1,274.0 647.2 1,075.7 12 POPULATION 268.7 249.8 254.5 225.1 254.3 257.9 429.2 216.2 210.6 214.7 179.4 0.7 Own Resources 226.6 205.1 214.0 198.6 215.4 242.8 394.3 213.1 87.8 74.2 73.7 Foreign Resources 42.1 44.7 40.5 26.5 38.9 15.1 34.8 3.2 122.8 140.5 105.8 13 SOCIAL WELFARE, HEALTH, ROLE OF WOMEN, CHI 954.7 914.0 891.4 836.5 1,058.1 990.4 1,302.6 1,057.8 1,520.8 1,286.2 1,445.3 5.8 Own Resources 756.1 777.2 729.0 699.4 845.3 785.0 948.8 878.3 937.1 826.6 878.0 Foreign Resources 198.6 136.8 162.4 137.1 212.8 205.4 353.8 179.5 583.7 459.6 567.3 14 HOUSING AND HUMAN SETTLEMENTS 822.2 1,021.7 934.0 879.3 1,027.6 1,058.8 952.6 828.2 2,030.9 928.0 971.8 3.9 _ Own Resources 434.6 568.8 435.7 397.5 462.3 428.0 416.9 358.4 1,307.6 479.1 517.3 Table 6: Investment Budget (Development Budget) - By Sector (in billions of Rupiah) - Constant - Base Price 1993/1994 1994/1995 1995/1996 199611997 1997/1998 1998/1999 1999/2000 GDP Deflator 1.08 1.18 1.29 1.61 2.76 3.31 No Category Plan Actual Plan Actual Plan Actual Plan Actual Plan Preliminary Actual Plan Abs Abs Abs Abs Abs Abs Abs Abs Abs Abs Abs % Foreign Resources 387.6 452.9 498.3 481.8 565.3 630.8 535.7 469.8 723.3 449.0 454.4 15 RELIGION 112.8 153.3 155.3 202.0 196.6 218.6 188.8 132.5 172.1 118.5 189.4 0.8 Own Resources 104.0 147.4 118.3 164.5 137.9 160.6 140.5 113.3 92.5 84.6 94.4 Foreign Resources 8.8 5.9 37.0 37.5 58.7 58.0 48.3 19.2 79.7 33.9 95.0 16 SCIENCE AND TECHNOLOGY 490.6 364.9 602.7 365.8 624.5 430.1 547.7 544.7 413.8 333.6 271.9 1.1 Own Resources 392.3 331.6 424.2 336.0 470.4 400.2 435.7 357.3 167.4 163.1 171.5 Foreign Resources 98.2 33.3 178.5 29.7 154.1 29.9 112.0 187.4 246.4 170.6 100.4 17 LAW 103.1 84.0 117.5 99.4 134.0 116.9 121.1 95.2 60.4 49.5 69.5 0.3 Own Resources 93.9 83.9 110.8 99.3 123.9 115.4 120.3 93.7 55.3 49.5 66.7 Foreign Resources 9.2 0.2 6.7 0.1 10.1 1.5 0.9 1.5 5.1 0.1 2.8 18 GOV'T APPARATUS AND SUPERVISION 515.7 525.0 563.0 528.8 634.6 648.7 565.8 532.8 284.6 342.4 272.0 1.1 Own Resources 434.0 387.0 460.6 447.9 514.0 485.4 428.1 354.9 156.0 130.5 129.3 Foreign Resources 81.7 138.0 102.4 80.9 120.6 163.3 137.7 178.0 128.6 211.9 142.7 POLITICS, INTERNATIONAL RELATIONS, INFORMATION, COMMUNICATIONS AND MASS 19 MEDIA 145.7 203.0 129.4 110.7 142.0 142.9 177.7 191.6 152.5 122.8 46.5 0.2 Own Resources 72.9 114.2 72.8 69.6 108.5 115.1 92.4 73.8 40.4 33.2 33.1 Foreign Resources 72.8 88.8 56.6 41.1 33.5 27.8 85.3 117.8 112.1 89.6 13.4 20 NATIONAL DEFENCE AND SECURITY 1,069.1 1,183.4 1,116.3 1,350.9 1,187.5 2,710.8 1,073.0 1,191.7 767.8 945.7 687.6 2.8 Own Resources 545.6 621.7 613.6 643.2 696.7 774.3 674.7 618.4 406.1 448.4 378.3 Foreign Resources 523.4 561.7 502.7 707.7 490.8 1,936.5 398.4 573.3 361.7 497.4 309.3 TOTAL 25,368.4 28,412.2 26,087.7 24,390.3 26,746.3 27,869.3 24,178.8 23,825.3 33,521.4 24,546.8 24,893.9 100.0 Own Resources 16.098,1 19,305.7 16,0122.5 16,755.7 17, 123.3 18,644.4 16,088.1 14,890.1 18,858.7 15,173.1 15,835.9 63.6 Foreign Resources 9,270.3 9,106.5 9,965.2 7,634.6 9,623.0 9,224.9 8,090.7 8,935.1 14,662.8 9,373.7 9,058.0 36.4 Source: World Bank Table 7: Current Expenditures - Functional Classification (in millions of Rupiah) Category 1994/1995 1) 1995/1996 1) 1996/1997 1) 1997/1998 1) 1998/1999 2) 1 99/2000 3) Abs % Abs % Abs % Abs % Abs % Abs % 1. Industry 45,823 0.1 48,488 0.1 54,467 0.1 71,131 0.1 98,696 0.1 108,135 0.1 2. Agriculture 91,449 0.2 104,157 0.2 125,072 0.2 174,028 0.2 * 234,875 0.2 265,884 0.2 3. Forestry 965,587 2.2 74,729 0.1 344,807 0.6 155,811 0.2 494,896 0.3 478,043 0.3 4. Water Resources 21,925 0.05 23,583 0.0 26,227 0.04 30,678 0.03 42,685 0.03 50,074 0.04 5. Transport 169,066 0.4 186,748 0.4 254,604 0.4 259,295 0.3 298,816 0.2 319,922 0.2 6. Urban 9,845 0.02 10,714 0.0 6,420 0.01 16,667 0.02 25,347 0.02 27,804 0.02 7. Land Use (Env. & Spatial) 130,249 0.3 150,590 0.3 179,961 0.3 209,091 0.2 252,871 0.2 424,764 0.3 8. Health 554,198 1.3 643,682 1.3 757,109 1.2 918,074 1.0 1,084,233 0.7 1,269,591 0.9 9. Education & Training 2,697,323 6.1 3,102,57b 6.2 3,692,139 5.9 4,508,563 5.0 5,013,777 3.4 6,045,226 4.4 10. Manpower 90,946 0.2 103,936 0.2 117,411 0.2 172,096 0.2 302,817 0.2 391,589 0.3 11. Regional Development 260,372 0.6 126,511 0.3 165,802 0.3 177,439 0.2 220,857 0.1 251,441 0.2 12. Transfer to Regions 7,272,400 16.5 8,226,600 16.3 9,357,500 15.0 11,060,500 12.3 14,194,183 9.6 19,497,600 14.2 13. Mining & Energy 81,781 0.2 103,371 0.2 114,430 0.2 159,092 0.2 292,476 0.2 341,303 0.2 14. Tourism & Posts 18,470 0.04 20,634 0.04 48,529 0.08 30,000 0.03 60,205 0.04 127,590 0.09 15. Science & Technology 230,298 0.5 260,385 0.5 307,344 0.5 350,937 0.4 435,358 0.3 498,473 0.4 16.Trade, Finance & Supports 3,641,432 8.3 4,134,570 8.2 4,659,427 7.4 5,925,099 6.6 7,461,049 5.1 12,176,992 8.9 for SME 17. National Defence 3,896,471 8.8 4,469,865 8.9 5,249,734 8.4 6,280,223 7.0 8,432,394 5.7 9,909,685 7.2 18. Government Apparatus 1,974,446 4.5 2,303,622 4.6 3,809,081 6.1 3,483,574 3.9 6,010,420 4.1 6,423,756 4.7 & Supervision 19. Politics, Information 800,590 1.8 923,091 1.8 1,099,508 1.8 1,465,035 1.6 2,439,381 1.7 2,710,592 2.0 Mass Media 20. Religion 777,271 1.8 863,299 1.7 995,693 1.6 1,164,336 1.3 1,443,346 1.0 1,741,627 1.3 21. Others5/ 456,914 1.0 521,959 1.0 550,683 0.9 697,139 0.8 893,789 0.6 1,045,608 0.8 Sub Total 24,186.856 54.9 26,403,106 52.4 31.915.949 51.0 37.308808 41.6 49.732,470 33.7 64,105,700 46.7 22. Debt Service Payments 18,402,500 41.8 22,108,600 43.8 27,491,200 43.9 31,112,304 34.7 55,797,503 37.8 44,810,900 32.7 24. Petroleum Subsidies 686,800 1.6 0 - 1,416,100 2.3 9,814,300 11.0 27,185,015 18.4 9,985,800 7.3 25. Bulog and Other Exp.4/ 792,900 1.8 1,923,300 3.8 1,732,600 2.8 11,374,389 12.7 15,002,163 10.2 18,253,100 13.3 TOTAL 44A069.056 100.0 50.435,006 100.0 62,555.849 100.0 89.609.,00 100.0 147.717,151 100.0 137.155.500 100.0 Of whih: Personnel Expenditures Wages & Salaries 8,959,361 20.3 9,220,115 18.3 13,004,500 20.8 12,256,141 13.7 17,685,216 12.0 22,695,569 16.5 Suppletnent (rice) 973,200 2.2 733,500 1.5 767,700 1.2 787,900 0.9 1,606,165 1.1 2,087,100 1.5 Materials 4,318,900 9.8 5,175,100 10.3 8,108,500 13.0 8,999,300 10.0 11,057,956 7.5 11,039,000 8.0 Pensions 2,662,939 6.0 3,047,785 6.0 683,000 1.1 4,204,967 4.7 5,188,950 3.5 8,786,431 6.4 'Nts I) PAN= act"at (audited) - State Budget Realmatiot approved by parliament 2) Prelimina-y Actas]; 3) Revised Budget; 4/ Other Routine Expenditares includes General ElectiOn Expenses; Giro Post; Free Pono (Eebas Porto); Inspection of P0e-Shiptnent; National Sport Comedian (Koni); Rice Maimtmance (Bulog); State Railways Co. (Perumka) and others. 5/ Other sectors include Meteorology, Geophysics, Search and Resce; and Law Source: World Bank 88 Table 8: Current Expenditures - Functional Classification (in millions of Rupiab) - Constant - 1993 price Category 1994/1995 1) 195/1996 1) 1996/1997 1) 1997/1998 1) 1998/1999 2) 1999/2000 3) GDP DefiatS, AbS 1 AS ADS 1.6 ADS 3.1 AD 3. 1. Industry 42,429 0.1 41,092 0.1 42,223 0.1 44,181 0.079 35,759 0.1 32,669 0.1 2. Agriculture 84,675 0.2 88,269 0.2 96,955 0.2 108,092 0.194 85,100 0.2 80,327 0.2 3. Forestry 894,062 2.2 63,330 0.1 267,293 0.6 96,777 0.174 179,310 0.3 144,424 0.3 4. Water Resources 20,301 0.05 19,985 0.0 20,331 0.04 19,055 0.034 15,465 0.03 15,128 0.04 5. Transport 156,543 0.38 158,261 0.4 197,367 0.41 161,053 0.289 108,267 0.20 96,653 0.23 6. Urban 9,116 0.02 9,080 0.0 4,977 0.01 10,352 0.019 9,184 0.02 8,400 0.02 7. Land Use (Env. & Spatial) 120,601 0.30 127,619 0.3 139,505 0.29 129,870 0.233 91,620 0.17 128,328 0.31 8. Health 513,146 1.3 545,493 1.3 586,906 1.2 570,232 1.0 392,838 0.7 383,562 0.9 9. Education & Training 2,497,522 6.1 2,629,297 6.2 2,862,123 5.9 2,800,350 5.0 1,816,586 3.4 1,826,352 4.4 10. Manpower 84,209 0.2 88,081 0.2 91,016 0.2 106,892 0.2 109,716 0.2 118,305 0.3 l1.Regional Development 241,085 0.6 107,213 0.3 128,529 0.3 110,210 0.2 80,021 0.1 75,964 0.2 12. Transfer to Regions 6,733,704 16.5 6,971,695 16.3 7,253,876 15.0 6,869,876 12.3 5,142,820 9.6 5,890,514 14.2 13. Mining & Energy 75,723 0.2 87,603 0.2 88,706 0.2 98,815 0.2 105,970 0.2 103,113 0.2 14. Tourism & Posts 17,102 0.04 17,486 0.04 37,620 0.08 18,634 0.03 21,813 0.04 38,547 0.09 15. Science & Technology 213,239 0.5 220,665 0.5 238,251 0.5 217,974 0.4 157,738 0.3 150,596 0.4 16.Trade, Finance & Supports 3,371,696 8.3 3,503,873 8.2 3,611,959 7.4 3,680,186 6.6 2,703,278 5.1 3,678,850 8.9 for SME 17. National Defence 3,607,843 8.8 3,788,021 8.9 4,069,561 8.4 3,900,760 7.0 3,055,215 5.7 2,993,863 7.2 18. Government Apparatus 1,128,191 4.5 1,952,222 4.6 2,952,776 6.1 2,163,711 3.9 2,177,688 4.1 1,940,712 4.7 & Supervision 19. Politics, Information 741,287 1.8 782,281 1.1 852,332 1.8 909,959 1.6 S83,834 1.7 818,910 2.0 Mass Media 20. Religion 719,695 1.8 731,610 1.7 771,855 1.6 723,190 1.3 522,951 1.0 526,171 1.3 21. OthersS/ 423,069 1.0 442,338 1.0 426,886 0.9 433,005 0.8 323,837 0.6 315,894 0.1 Sub Total 22,395.237 54.9 22,375.514 52.4 24,741,046 51.0 23.173.173 41.6 18.019.011 33.7 19.367.281 46.7 22. Debt Service Payments 17,039,352 41.8 18.736,102 43.8 21,311,008 43.9 19,324,412 34.7 20,216,487 37.8 13,538,036 32.7 24. Petroleum Subsidies 635,926 1.6 0 - 1,097,752 2.3 6,095,839 11.0 9,849,643 18.4 3,016,151 7.3 25. BulogandOtherExp.4/ 734,167 1.8 1,629,915 3.8 1,343,101 2.8 7,064,838 12.7 5,435,566 10.2 5,514,532 13.3 TOTAL 40,804.681 100.0 42.741,531 100.0 48,492,906 100.0 55.658,261 100.0 53.520.707 100.0 41,436.707 100.0 Of which: Personnel Expenditures Wages & Salaries 1,295,705 20.3 7,813,657 18.3 10,081,068 20.8 7,612,510 13.7 6,407,687 12.0 6,856,667 16.5 Supplement (rice) 901,111 2.2 621,610 1.5 595,116 1.2 489,379 0.9 581,944 1.1 630,544 1.5 Materials 3,998,981 9.8 4,385,678 10.3 6,285,659 13.0 5,589,627 10.0 4,006,506 7.5 3,335,045 8.0 Pensions 2,465,684 6.0 2,582,868 6.0 529,457 1.1 2,611,781 4.7 1,880,054 3.5 2,654,511 6.4 Notes: I) PAN= acrut (aedited) - Stet Budget Reulititsd appreved by pslisent; 2) Peeliminiry Actu l; 3) Revised Budset; 4/ Other Routire Expendit-es icIudes G-eert Elecion Expenses; Gim Pest; Free Pseeo (Bebas Porto); Inspection of Pee-Shipmert; Nationsl Spoet Conmiete (Koni); Rise Maintenunme (Buing); stte Railw-ys Co. (Penank.) and othee. 5/ Odter tecto.s include Mvteoelogy, Geophysics, Sesch nd Rescue; nd Luw Ser.: Woeld Bank 89 Table 9: Current Expenditures - Economic Classification (in millions of Rupiah) Category 14/195 1) 199S1996 1) 1996/1997 1) 1997/1998 1) 1998/1999 2) 1999/2000 3) A_ /% -m m- -e Ab %_ADS AbS % AD TOTAL 44,069.000 100.0 50.435.000 100.0 62.561.100 100.0 89,609.800 100.0 147.7i7.151 10.0 1370 155500 100.0 Ordinary Expenditnres 24,186,800 54.9 26,403,100 52.4 31,921,200 51.0 37,308,808 41.6 49,732,470 33.7 64,105,700 46.7 Personnel Expenditures 12,595,500 28.6 13,001,400 25.8 14,455,200 23.1 17,249,008 19.2 24,480,331 16.6 33,569,100 24.5 Wages& Salaries 0,959,361 20.3 9,220,115 18.3 10,153,007 16.2 12,256,141 13.7 17,685,216 12.0 22,695,569 16.5 Supplement (rice) 973,200 2.2 733,500 1.5 767,700 1.2 787,900 0.9 1,606,165 1.1 2,007,100 1.5 Pensions 2,662,939 6.0 3,047,785 6.0 3,534,493 5.6 4,204.967 4.7 5.1SS,950 3.5 0,786,431 6.4 Materials 4,318,900 9.0 5,175,100 10.3 8,100,500 13.0 8,999,300 10.0 11,057,956 7.5 11,039,000 8.0 Transfer to Regions 7,272,400 16.5 8,226,600 16.3 9,357,500 15.0 11,060,500 10.9 14,194,103 9.6 19.497,600 14.2 Personnel 6,910,100 15.7 7,807,200 15.5 8,073,000 14.2 10,519,800 11.7 13,512,155 9.1 18,696,800 13.6 Non-Personnel 354,300 0.0 419,400 0.8 403,700 0.0 540,700 0.6 682,028 0.5 800,800 0.6 Other 19,8S2,200 45.1 24,031,900 47.6 30,639,900 49.0 52,300,993 50.4 97,904,681 66.3 73,049,800 53.3 DebtServicePaytnents 18,402,500 41.8 22,108,600 43.8 27,491,200 43.9 31,112,304 35.7 55,797,503 55.2 44,810,900 552 Petroleam Subsidies 606,000 1.6 0 - 1,416,000 2.3 9,014,300 11.3 27,185,015 S. 1 9,985,800 5.1 BulogandOthserExp.4/ 792,900 1.8 1,923,300 3.8 1,732,620 2.8 11,374,389 13.0 15,002,163 8.9 18,253,100 8.9 NOe 1) PAN= scual (audited) - Stale Budget ReAlimine app-odby pslismet; 2) Peliinvy ActWal; 3) Rrised Badgot; 4/ Oth,rRouti. Exp-dita-m issladm Cenera El adas Bapessec; Giro Post; Fax Poata (Beb6 Po.r); faporio ofPre.-Ships,aat Nan.onal Spar Cort unin (KCo-i); Ri.e Maintece (Btog); State Rail.ys Ca. (Psemka) ad othlss- So-rr: WorldOnk 90 Table 10: Current Expenditures - Economic Classification (in millions of Rupiah) - Constant - 1993/1994 Price Category 1994/1995 1) 1995/1996 1) 1996/1997 1) 1997/1998 1) 1998/1999 2) 1999/2000 3) GDP Deflator 1.0a 1.18 1.29 1.61 2.76 3.31 Abs N Abs % Abs % Abs % Abs % Abs % TOTAL 40.804,630 100.0 42.741,525 100.9 48A496,977 100.0 55.658.261 100.0 53.520.707 100.0 41.A36.707 100.0 Of which: Ordinary Expenditures 22,395,185 54.9 22,375,508 52.4 24,745,116 51.0 23,173,173 41.6 18,019,011 33.7 19,367,281 46.7 PersonnelExpenditures 11,662500 28.6 11,018.136 25.8 11,205,581 23.1 10,713,669 19.2 8,869,685 16.6 10,141,722 24.5 Wages & Salaries 8,295,705 20.3 7,813,657 18.3 7,870,548 16.2 7,612,510 13.7 6,407,687 12.0 6,856,667 16.5 Supplernent(rice) 901,111 2.2 621,610 1.5 595,116 1.2 489,379 0.9 581,944 1.1 630,544 1.5 Pensions 2,465,684 6.0 2,582,868 6.0 2,739,917 5.6 2,611,781 4.7 1,880,054 3.5 2,654,511 6.4 Materials 3,991,981 9.8 4,385,678 10.3 6,285,659 13.0 5,589,627 10.0 4,006,506 7.5 3,335,045 1.0 Transfer to Regions 6,733,704 16.5 6,971,695 16.3 7,253,876 15.0 6,869,876 12.3 5,142,820 9.6 5,890,514 14.2 Personnel 6,405,648 15.7 6,616,271 15.5 6,878,915 14.2 6,534,037 11.7 4,895,708 9.1 5,648,580 13.6 Non-Personnel 328,056 0.8 355,424 0.8 374,961 0.8 335,839 0.6 247,112 0.5 241,934 0.6 Other 11,409,444 45.1 20,366,017 47.6 23,751,860 49.0 32,485,089 58.4 35,501,696 66.3 22,069,426 53.3 Debt Service Payments 17,039,352 41.8 18,736,102 43.8 21,311,008 43.9 19,324,412 35.7 20,216,487 37.8 13,538,036 32.7 Petroleum Subsidies 635,926 1.6 0 . 1,097,736 2.3 6,095,839 11.3 9,849,643 18.4 3,016,858 7.3 Bulog and Other Exp.4/ 734,167 1.8 1,629,915 3.8 1,343,116 2.8 7,064,838 13.0 5,435,566 10.2 5,514,532 13.3 Notw 1) PAN= a*thu (audited) - State Badget Realinaion apprved by parlianest; 2) Preifnimuy AtAll; 3) esised ladget; 4/ Othe- Rouiee Eapendittoes includes Genral Electioc Expense,; G(ien Pest; F.re Pane (Bebas Pote); Inspection of Pre-Shipet; National Sport Connitte (Kni); Rice Maintenace (Bulog); Stae Railways Co. (Pensa) and othen. Seance: Wordlank 91 THE WORLD BANK 1818 H Street, NW Washington, DC 20433 Tel: (202) 458-1876 Fax: (302) 522-155711560 E-mail: BooksOworldbank.org Cover Photo Urban Landscape -Jakarta, Indonesia 1993 K Curt Carnemark