Sub-National%20Financial%20Management%20and%20Accountability%20Reforms

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Sub-National Financial Management and
Accountability Reforms

• Experience from Indonesia
• Asmeen Khan Rajiv Sondhi

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Presentation Roadmap

• Key features of decentralization in Indonesia
• Regulatory Developments and Framework
• Country Profile
• Defining the Countrys FM Reform Agenda
• Moving from National to Sub-national levels
• Some Outstanding Issues at Sub National level
• The Challenges of Transition
• The Banks approach and response

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Key Features of Decentralization

• Fundamental and simultaneous transitions
  political, economic, fiscal, administrative. Far
  reaching impact.
• Big Bang Fiscal Decentralization 2001 Laws 22
  and 25 in 1999 on Decentralization and Fiscal
  relations and Law 34 on Regional Taxes in 2000
• Expenditure responsibilities for public service
  delivery decentralized to localities
• Laws revised 2004 Some political claw-back. E.g.
  Ministry of Home Affairs must approve provincial
  budgets (ex-ante)
• Raises some very fundamental issues on
  administrative capacity, fiduciary management and
  accountability.

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Country ProfileThe Story so far.

• 32 of overall countrys total budget is SN
  expenditures.
• There has been a substantial decline in overall
  development spending, despite fiscal
  consolidation at the centre.
• Development budgets remain scattered between the
  Centre (about half), provinces (14) and Local
  Govts. 440 local governments , average budget of
  32.8 million each, population of 470,000, on
  average spend 34 of budget on development
  expenditures.
• Local Govts. remain highly dependent on fiscal
  transfers from centre. IG system of fiscal
  transfers is based on equalizing grant (DAU),
  shared revenues and taxes and capital grant.
• Degree of inequality between regions and
  provinces is staggering.
• Domestic borrowing limited, foreign borrowing
  needs approval by Ministry of Finance (borrowing
  less than one half of one percent of GDP)
• Own source revenues limited but have doubled in
  past 4 years !
• Data show trend of budget surplus in local
  governments.
• Kabupaten, Kota

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Structure of Local Govt. Revenues
1999-2002
High Dependency on IG transfers
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Large increase in level of expenditure
Majority of spending goes to staff
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Poor budget forecasting
Significant increase in surplus and reserves as
percentage of total expenditure16 percent for
all sub-national governments (1.2 percent of GDP)
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The Countrys PFM Reform Journey

• Bank diagnostic work ( PER 2000, CFAA CPAR
  2001-SN FM assessment 2003) on-going policy
  dialogue.
• The National Reform Agenda gets set
• White Paper issued by Govt. 2002
• New Laws on State Finance, Treasury and Audit
  (2003, 2004). Implementing regulations being
  issued in stages.
• Budgeting reforms performance budgeting, GFS,
  Accounting Standards.
• Modernization of Ministry of Finance
• GFMRAP Project to lock in reforms, treasury
  automation
• Audit sector reform recently commenced.
• Changing practices may be a bigger challenge, as
  law enforcement is endemically weak.

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Moving Reforms to the DistrictsThe challenge is
local, as districts move centre-stage

• Administrative Issues
• Inconsistent legal framework
• Proliferation of regional governments
• Limited authority over local civil service
• PFM systems improving, gradually.
• Weak local capacity

• Fiscal Transfers
• Formula-based DAU,
• though limited equalization
• Shared taxes fluctuate
• and create inequality

• Political Issues
• Evidence of elite capture
• Limited local information
• Some participation
• in local decision making

Development Impact

• Institutional Issues
• Pressing need for institutional reforms
• to support increased responsibilities
• To improve investment climate
• To strengthen governance
• To improve service delivery
• Huge variation in regional needs,
• capacity and performance

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The Financial Management and Accountability
BeehiveSome Outstanding Issues at Local Level
Public Debt and Asset Management
Planning Budgeting
Oversight
Regulatory Framework
Budget Execution
External Audit
Accounting Reporting
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Some Outstanding Issues - Regulatory Framework

• Key National Laws on PFM passed - but many
  implementing regulations are yet to come out.
  Implementation handicapped.
• Central Regulations are PFM Regulations links
  between sectors and between plans and fiscal
  budgets not well laid out.
• Regulatory authorities unclear between MOF and
  Home Affairs Conflicts in some regulations.
• Regions not always clear on what their
  legislative authority is. Few districts have
  appropriate and comprehensive local legislation
  or institutional arrangements in place for FM
• Although modernized Procurement decree issued
  (2003), there is no procurement law.
• Law enforcement continues to be a major concern.
• Limited public consultation on draft local laws
  or budget process-though required by law

Public Debt and Asset Management
Planning Budgeting
Oversight Regulatory Framework
Regulatory Framework Legal architecture - Inter
Government fiscal relations
Budget Execution
External Audit
Accounting Reporting
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Some Outstanding Issues Planning and Budgeting
Public Debt and Asset Management

• Five year plan lacks targets, priorities or hard
  budget constraint
• Many bank accounts for technical departments, not
  all revenue reported
• Though communities participate in planning
  activitiesdisconnect between plans and budgets
• Budget realization varies from 80-95, budgets
  amended at least once a year, Regions own
  revenues exceed targets
• Some districts use different expenditure
  classifications not consistent with GFS
  classification - difficult to account for costs.
• Districts starting to use performance based
  budgeting cant distinguish salaries versus
  goods and services

Planning Budgeting Comprehensiveness Classifica
tion Projection
Oversight
Regulatory Framework Legal architecture - Inter
Government fiscal relations
Budget Execution
External Audit
Accounting Reporting
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Some Outstanding Issues Budget Execution
Public Debt and Asset Management

• Weak cash management inefficiency from idle
  funds and pilferage risksno cash forecasting
• Local revenues collection arbitrary basis for
  setting levies, fees, resulting in random and
  nuisance taxes no analysis of revenue
  potentialpoor revenue forecasting.
• Procurement weak capacitycollusive practices
  endemic.No transparency.
• Outdated administrative procedures weaken
  internal controls.
• Internal audit agencies at regional and
  provincial levels cover about 5 of budget, not
  professionally staffed, seen as punishment
  posting.
• Weaknesses in internal controls over local cash
  collections
• Multiple bank accounts, frequently not reconciled
  to accounting records.

Planning Budgeting Comprehensiveness Classifica
tion Projection
Oversight
Regulatory Framework Legal architecture - Inter
Government fiscal relations
Budget Execution Procurement Treasury
Mgmt Internal Controls
External Audit
Accounting Reporting
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Some Outstanding Issues Accounting, Reporting
Public Debt and Asset Management

• Cash basis and single entry accounting.
• Confusion over accounting standards due to
  inconsistency between MOF and Home Affairs
  guidelines
• Very weak capacity that do not allow move to
  improved accounting practices and accrual
  accounting
• Reporting restricted to Budget realization
  reports.
• Timeliness of reporting improving, now legally
  required within 4 months of year end. But
  reliability?

Planning Budgeting Comprehensiveness Classificat
ion Projection
Oversight
Regulatory Framework - Legal architecture -
Inter Government fiscal relations
Budget Execution Procurement Treasury
Mgmt Internal Controls
External Audit
Accounting Reporting Standards Timeliness Reliabi
lity
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Some Outstanding Issues External Audit
Public Debt and Asset Management

• Supreme Audit Institution (BPK) is able to cover
  only 50 of sub-national governments.
• Audit Reports not yet publicly disclosed.
• Audit mandate primarily to certify Budget
  Realization Reports of governments. Performance
  audits not yet developed.

Planning Budgeting Comprehensiveness Classificat
ion Projection
Oversight
Regulatory Framework - Legal architecture -
Inter Government fiscal relations
Budget Execution Procurement Treasury
Mgmt Internal Controls
External Audit
Accounting Reporting Standards Timeliness Reliabi
lity
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Some Outstanding Issues Oversight
Public Debt and Asset Management

• Limited capacity of Local Legislatures to review
  budgets or review performance
• Public disclosure of financial and procurement
  virtually non-existent. Budget documents
  difficult to read and accessible.
• Civil Society and slow slowly flexing their power

Planning Budgeting Comprehensiveness Classificat
ion Projection
Oversight
Regulatory Framework - Legal architecture -
Inter Government fiscal relations
Budget Execution Procurement Treasury
Mgmt Internal Controls
External Audit
Accounting Reporting Standards Timeliness Reliabi
lity
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Some Outstanding Issues Public Debt and Asset
Management
Public Debt and Asset Management

• No consolidated information on regional public
  assets
• Local Public debt requires central (MOF)
  approval.
• Municipal debt market very nascent
• Few formal records on local public debt

Planning Budgeting Comprehensiveness Classificat
ion Projection
Oversight
Regulatory Framework - Legal architecture -
Inter Government fiscal relations
Budget Execution Procurement Treasury
Mgmt Internal Controls
External Audit
Accounting Reporting Standards Timeliness Reliabi
lity
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PFM Reforms Critical Success Factors

• (i) Commitment to reform Supply side vs Demand
  side - Stimulating the demand for reforms. Role
  of civil society, media and donors. Change
  champions.
• (ii) Identification of functional reform
  priorities thinking small. Which end of cycle to
  start? Synchronizing with central reforms.
• (iii) Adequacy of the roll-out plan and the
  sequencing of reforms clearly defining
  benchmarks and milestonesmodular approach.
  Should reform of budget preparation precede or
  follow budget execution reforms?
• (iv) Adequacy of technical solution use of
  technology, aligned with institutional reforms.
  But change in business processes bigger
  challenge.
• (v) Adequacy of capacity building activities
  capacity to absorb and then sustain reforms.
• (vi) Realism of short, medium, and long-term cost
  estimates.

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How the Bank has responded in Indonesia
challenges and opportunities

• Challenge How to reorganize and work with 400
  plus SNGs with weak capacity, and unfamiliar with
  the Bank, poor fiduciary environment and
  incomplete decentralization policy framework
• Strategic organization
• Indonesia CAS FY2004-2007, cross-cutting focus on
  SNGs through multi-sector local government
  platform group-estimated lending 400-600 million
  over current CAS
• Coordinated policy advice dialogue and analysis
  through dedicated decentralization team
• Capacity Building
• Coordinated capacity building program through WBI
  and partnership with other donors (DFID, Dutch)

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Approach and Response

• Continue to consolidate National reform.
• GFMRAP APL to lock in reforms at National Level
• Sub-national Lens on Country Diagnostic Work
• Regional PER to provide sub-national component
• Cross-sectoral Reform Loans
• Series of sub-national local governance reform
  projects with reform minded districts and
  cities targeting capacity building, TA in
  procurement, FM, budget transparency and
  accountability, and improving local investment
  climate
• Sectoral projects which build in governance
  reform at local institutions (e.g. Water
  Utilities, Higher Education Institutes)
• PFM Measurement Toolkit under development

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Sub National Measurement Framework for Good
Financial Governance

• Measurement framework and toolkit under
  development
• Toolkit measure integrity of processes at each
  stage of PFM spectrum
• Design will provide Snapshot and Trajectory
  Scorecard
• PFM Toolkit will embed PFM outcomes in a wider
  sectoral context

Key Outcomes Public Service Delivery Reduced
Corruption Effective Governance Structures and
Processes
Good Financial Governance
Budget Formulation
External Audit
Oversight
Budget Execution
Accounting Reporting
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Thank you!