INDONESIA RISING. Policy Priorities for 2010 and Beyond 53470 Modernizing Civil Service Policies and Practices Key Messages Indonesia needs to continue to modernize its civil service and build upon the impressive governance, policy, and public finance management reforms of the past decade. A number of structural, organizational and institutional policy reform issues should be addressed over the next five years, as follows: Reform the existing pay/grading scheme: Replace the current system, which is characterized by low basic pay and numerous allowances, with a single pay structure with greater transparency linking remuneration to performance, and harmonized salary levels across the public sector. Modernize the civil service pension plan: Replace the current defined benefit, pay-as-you-go system with a pre- financed defined contribution scheme. Strengthen staffing controls in order to rein in the on-going expansion of the civil service and its administrative budget implications. Allow flexible organizational design and staffing to provide for structures and staffing levels based on real operational needs rather than standardized `policy' requirements. Reform civil service HR policies to provide for a modernized, more flexible system and a professional, performance-oriented work force. spans of control, leading to unsuitable organizations. Where Indonesia Stands Now Rigid and extensively centralized human resource (HR) management policies (recruitment and selection, Indonesia's civil service is often unable to fully promotion, rotation, and training) do not support contribute to the country's rapid transition to an professional development and undermine capacity emerging middle income country. Challenges in forging building and the sustainability of sectoral reforms. professional, accountable government institutions that Lack of reliable staffing data and poor human resource deliver quality services include: management information systems make modern HR An outdated grading, pay, and allowance structure management and workforce planning difficult that is not oriented towards rewarding improved performance and providing the right incentives. Weak coordination, lack of clear roles and low capacity Furthermore, public salary levels are not harmonized characterize the agencies concerned with central across the public sector, and are often determined on an civil service management. The State Ministry for ad hoc basis Administrative Reforms (MenPAN or Menteri Negara The civil service pension scheme is grossly Pendayagunaan Aparatur Negara); National Institute of underfunded, its policies obsolete, and its entitlements Public Administration (LAN or Lembaga Administrasi too small to provide retired civil servants' financial Negara); and the National Civil Service Agency (BKN or security. Pension costs and liabilities are unmanageable Badan Kepegawaian Negara) are concerned with central and potentially unsustainable due to lax establishment civil service management, including the administration controls and the ongoing expansion of the civil service. of the detailed rules and regulations which comprise the Detailed and rigid requirements for uniform `system of national administration', although the `system' organizational structures and staffing levels result in is primarily managed by MenPAN. Due to the lack of inadequacies in staffing, fragmentation, and overly-large reforms, all three institutions are preoccupied with tasks 2 | INDONESIA RISING that should no longer be the responsibility of a central management institution including upholding outdated Policy Priorities for a Rising detailed regulations and blueprints, instead of playing the role of change agents and enablers of reform. Indonesia Actions are needed on multiple fronts to address these Budgeting for civil service continues to follow outdated challenges and issues, and to position Indonesia's civil service practices. In spite of important budget reforms the as a modern institution, responsive to the development needs number and levels of positions in organizations continue of the country. Such measures could include: to be determined administratively and outside the budget process. Despite the introduction of performance based 1. Reform the central institutional framework (program) budgeting staff budgets continue to be allocated for civil service policy making, regulation and separately from the operational or program budget in management. Reforms are necessary to address low central government institutions. This practice does not capacity, absence of inter-agency coordination, and provide incentives for streamlining of organizational and internal fragmentation such that the mandates and staffing structures, and leads to increasing staff expenditures. priorities of MenPAN, LAN and BKN are better Additionally, reallocations, such as moving staff budget suited to a diversified and decentralized civil service. resources from one institution to another that may be The 3 agencies could also benefit from improved warranted by changing priorities, cannot be easily made. understanding global best practice, cross-cutting organizational arrangements and project and change The Indonesian civil service has expanded dramatically management experience. in recent years due to the creation of new regional As the entity responsible for central civil service governments, the establishment of several new central policy making, regulatory and management authority, institutions, and a government policy that converts MenPAN should establish the broad policies, unskilled staff employed under the labor code to civil regulations and guidelines, ensure the application of servants. The number of civil servants increased from 3.6 appropriate management principles, and disseminate million in 2006 to over 4 million in 2008, an increase of good practices. It should not engage in detailed 11 percent in just two years. Costs for basic salaries and design or implementation, which should be left to allowances increased from Rp.30 trillion in 2004 to Rp.58 the concerned government ministries and agencies. trillion in 2007 (Fig. 1), and other remuneration increased LAN's research and development capacity could approximately four times to roughly Rp.20 trillion in 2007. be strengthened and cooperation processes among The associated and impact on the state's pension liabilities the institutions related to policy development are indeterminate but large. Staffing decisions are taken improved while BKN should urgently focus on the on an ad hoc basis and without appropriate budgetary and need for HR data standards and improved HR data long term impact analysis. Thus current mechanisms for management and processing. determining appropriate staffing requirements and control Establish a civil service commission (CSC) as do not work well and risk being fiscally unsustainable. required by Law 43/1999. The CSC should be tasked with responsibilities related to pay and pension determination, to improve governance and transparency in these processes and to provide for harmonization of pay levels across the public sector. Figure 1. Indonesia: Civil Service Wage Bill and Pension Costs 100 2. Reform national civil service policies to provide for a more modernized, flexible system and a Base Salary and Allowance professional, performance-oriented workforce. The 75 Piped Pension Cost Other ExpendituresImproved Sources reforms should include needed measures to modernize Total Employee Expenditure a civil service that has remained largely unchanged for over 40 years. Policy-makers should make use of 50 good practices applied elsewhere or within Indonesia including outside the civil service (e.g., well-managed state-owned enterprises, regional administrations, etc), 25 and learn from the ongoing pilots in the Ministry of Finance, Supreme Audit Agency (BPK) and the Supreme Court, to build momentum in the reform 0 2004 2005 2006 2007 program. As part of the modernization efforts: Policy Priorities for 2010 and Beyond | 3 Within the area of civil service regulation, work establishment controls as any new staff expenditure will could focus on ensuring the implementation of have to be justified and approved in the budget process. Law 43/1999 on the Civil Service and ensuring the supremacy of its principles and on assessing the its 5. Reform the civil service pay and grading structures. scope of coverage. At the same time it is important The list of possible goals for improvements to the to update Law 43/1999 and abolish the prevailing policies related to pay, grading and pensions is long. Law 8/1974 on the Civil Service. The existing Any policy change, including the ones recommended detailed secondary regulatory framework could be here, would have to be subject to cost assessments and replaced with a more flexible regulatory framework, budgetary impact analysis before introduced. Actions to allowing for different management solutions in address current weaknesses should include: different sectors/institutions, as required. A new law should be prepared to provide for Replace structural and functional positions with standardizing/harmonizing of remuneration among professionally classified technical and managerial civil service institutions. Reform the national positions. Reform policies for selection, grading system as a common platform providing recruitment, development and promotion to support reference levels for various grading schemes in this professionalization process. different sectors and larger institutions. Thus, Replace structural training with managerial, sectors and larger institutions can have different technical and vocational training focusing on skills. grading systems but ranks and remunerations will Ensure that training budgets are allocated to the be harmonized. employing institutions and departments rather than Introduce a single remuneration for civil servants the supplier of the training. based on their job, grade and performance. Introduce salary band widths at each level instead 3. Consider reducing the size of the civil service. As of exact sums. Allowances for special or temporary part of this effort, the following steps could be taken: conditions may exist but these should not be for Undertake assessment on the scope of the civil remunerating work or work-related functions. The service for improving efficiency and effectiveness. CSC should determine salary levels for the national Staffing numbers at various grade levels should grading scheme, and the structure should be be determined by operational needs and not for applicable in all sectors and institutions. symmetry and conformity. Ensure that teachers and health workers are 6. Put in place a newly defined contributory pension professionals employed and managed under scheme for those civil servants hired in 2004 and separate, sector-specific schemes, and are not later. The roles of the main institutions involved civil servants. Similarly, ensure that honorarium- (Ministry of Finance, BKN and PT Taspen) could be staff employed under the labor code benefit from reviewed to provide for a more effective management improved employment conditions, but are not of the pension scheme and related funds. In the granted civil servant status. interim, civil servants who joined before 2004 should Put in place a redundancy scheme offering be subject to the current pension plan that is managed relocation benefits to redundant civil servants by PT Taspen and MoF until there are no more retirees and early retirement to those over 50 years of age under the plan. The feasibility of eventually moving making it possible to dismiss redundant personnel to a pre-financed defined contribution scheme to in a socially acceptable way. gradually replace the current pay-as-you-go defined benefit scheme could be assessed including transitional 4. Integrate staff expenditures as part of the operational requirements. The scheme should be pre-financed program budget and make funds fungible. The through contributions from the institution/agency that size of organizations and their staffing levels should hires the staff, thus removing pension expenditures/ be determined within the budget process rather obligations from the national budget. In addition: than separately. Make staff establishment control Reform pension policies and increase pension benefits and decisions on size, including staff numbers in based on the new pay structure and basic salary. institutions, part of the budget process and remove Gradually reduce pension costs borne by the annual determination of staff expenditures from the state budget as pension costs will be accounted for administrative domain controlled by MenPAN into in the various employing institutions and not by the public expenditure management domain controlled MoF. Extra costs for early retirement will have to by the Ministry of Finance and the Cabinet through be borne by the annual state budget but could, for the yearly budget process. This would lead to improved example, be financed by an investment loan. 4 | INDONESIA RISING 7. Upgrade the Human Resource Information Strengthening the knowledge base for reform by Management, including improved human resource conducting analysis in cooperation with Indonesian data quality, standards and human resource institutions. There is a need to update and broaden the information systems are needed for better work empirical basis for government policy development force planning and management of people, payroll, related to civil service management in Indonesia. organizations and reforms. Much of the responsibility Peer-to-peer sharing and learning: Reform of the for these tasks would be with BKN. Modern HR civil service will be enhanced through the exchange Information Systems (HRIS) need to be installed of information and experiences with best practices centrally, sub-nationally and in most institutions to with peers from government institutions, state-owned provide planning support at the central level, and and private enterprises both in Indonesia and abroad. planning and management support at the institutional It will facilitate policy development and improved level for improved quality, management and processing coordination with, and the building of consensus of HR data. National standards for HR data could be among, stakeholders. developed and applied across the civil service. But the Providing technical assistance and coaching to system should allow for differences in human resources civil service management agencies and targeted line management (HRM) practices between sectors and institutions. institutions. Supporting "Leaders of the Future" by strengthening in-country training opportunities and providing focused post-graduate and non-degree scholarships How The World Bank Can Help to competitively selected staff in institutions that have shown a commitment to reform. This loan-funded component will focus on selected key institutions and Current Support be guided by institutional HR development plans. It will improve the quality of management training in The World Bank has provided advice and technical assistance to the MoF in support of the Bureaucracy Indonesia and build sustainable management capacity Reform Initiative and other modernization programs since into reforming institutions. The government has agreed 2006 through the Public Financial Management Multi to the scholarship program and the loan preparation is Donor Trust Fund. underway Future Support A World Bank program in support of civil service reform in Indonesia will add value by convening stakeholders, facilitating consensus building, and strengthening capacity for designing and implementing reform. It will include the following components: The World Bank Office Jakarta for more information, please contact: Indonesia Stock Exchange Building Tower 2, 12th floor Mr. Staffan Synnerstrom Jl. Jenderal Sudirman Kav. 52-53, Jakarta 12190, Indonesia Lead Public Sector Specialist ph. + 62 21 5299 3000 | fax. + 62 21 5299 3111 ssynnerstrom@worldbank.org http://www.worldbank.org/id Investing in Indonesia's Institutiond for Inclusive and Sustainable Development