Transcript Sub-National Financial Management and Accountability Reforms Experience from Indonesia

Sub-National Financial Management
and Accountability Reforms
Experience from Indonesia
Asmeen Khan & Rajiv Sondhi
Presentation Roadmap
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Key features of decentralization in Indonesia
– Regulatory Developments and Framework
– Country Profile
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Defining the Country’s FM Reform Agenda
Moving from National to Sub-national levels
Some Outstanding Issues at Sub National level
The Challenges of Transition
The Bank’s approach and response
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.
Country Profile
The Story so far….
32% of overall country’s 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
Structure of Local Govt. Revenues
1999-2002
Structure of Local Governm ent Revenue
100%
90%
Percent of Total Revenue
80%
70%
Other Rev
60%
Grants
50%
Shared Rev
40%
Ow n-Source
30%
20%
10%
0%
1997
1998
1999
2001
High Dependency on IG transfers
2002
Large increase in level of expenditure
Structure of Local Governm ent Expenditure
100%
Percent of Total Expenditure
90%
80%
70%
Other
60%
Trd & Trns
50%
Oth Rt
40%
Staff
30%
20%
10%
0%
1997
1998
1999
2001
Majority of spending goes to staff
2002
Poor budget forecasting
Local Governm ent Surplus and Reserves
Deficit/Surplus
End-of-Period Reserves
14,000
12,000
Blns of Rupiah
10,000
8,000
6,000
4,000
2,000
0
1997
1998
1999
2001
2002
-2,000
Significant increase in surplus and reserves as percentage of total expenditure—
16 percent for all sub-national governments (1.2 percent of GDP);
The Country’s PFM Reform Journey
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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.
Moving Reforms to the Districts
The 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
Political Issues
•Evidence of elite capture
•Limited local information
•Some participation
in local decision making
Fiscal Transfers
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
•Formula-based DAU,
though limited equalization
•Shared taxes fluctuate
and create inequality
The Financial Management and Accountability Beehive
Some Outstanding Issues at Local Level
Public Debt
and
Asset
Management
Oversight
Planning
&
Budgeting
Regulatory
Framework
Budget
Execution
External
Audit
Accounting
Reporting
Some Outstanding Issues - Regulatory Framework
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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 –
Oversight
between MOF and Home Affairs; Regulatory
Conflicts in some regulations.
Framework
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
External
Although modernized Procurement
Audit
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
&
Regulatory
Framework
Legal architecture
- Inter Government
fiscal relations
Accounting
Reporting
Budgeting
Budget
Execution
Some Outstanding Issues – Planning and Budgeting
Five year plan lacks targets,
priorities or hard budget constraint
Public Debt
and
Asset
Management
Many bank accounts for technical
departments, not all revenue
reported
Though communities participate in
planning activities—disconnect
between plans and budgets
Some districts use different
expenditure classifications not
consistent with GFS classification difficult to account for costs.
Districts starting to use
performance based budgeting –
can’t distinguish salaries versus
goods and services
&
Budgeting
Oversight
Regulatory
Framework
Budget realization varies from 8095%, budgets amended at least
once a year, Region’s own
revenues exceed targets
Planning
Legal architecture
- Inter Government
fiscal relations
External
Audit
Accounting
Reporting
Comprehensiveness
Classification
Projection
Budget
Execution
Some Outstanding Issues – Budget Execution
Weak cash management – inefficiency
from idle funds and pilferage risks;no
cash forecasting;
Local revenues collection – arbitrary
basis for setting levies, fees, resulting in
random and nuisance taxes; no analysis
of revenue potential;poor revenue
forecasting.
Public Debt
and
Asset
Management
Regulatory
Framework
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.
&
Budgeting
Oversight
Procurement – weak capacity;collusive
practices endemic.No transparency.
Planning
Legal architecture
- Inter Government
fiscal relations
External
Audit
Comprehensiveness
Classification
Projection
Budget
Execution
Procurement
Treasury Mgmt
Internal Controls
Accounting
Reporting
Some Outstanding Issues – Accounting, Reporting
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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?
Public Debt
and
Asset
Management
Planning &
Budgeting
Oversight
Comprehensiveness
Regulatory
Framework
- Legal architecture
- Inter Government
fiscal relations
External
Audit
Accounting
Reporting
Standards
Timeliness
Reliability
Classification
Projection
Budget
Execution
Procurement
Treasury Mgmt
Internal Controls
Some Outstanding Issues – External Audit
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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.
Public Debt
and
Asset
Management
Planning &
Budgeting
Oversight
Comprehensiveness
Regulatory
Framework
- Legal architecture
- Inter Government
fiscal relations
External
Audit
Accounting
Reporting
Standards
Timeliness
Reliability
Classification
Projection
Budget
Execution
Procurement
Treasury Mgmt
Internal Controls
Some Outstanding Issues – Oversight
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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
Public Debt
and
Asset
Management
Planning &
Budgeting
Oversight
Comprehensiveness
Regulatory
Framework
- Legal architecture
- Inter Government
fiscal relations
External
Audit
Accounting
Reporting
Standards
Timeliness
Reliability
Classification
Projection
Budget
Execution
Procurement
Treasury Mgmt
Internal Controls
Some Outstanding Issues – Public Debt and Asset
Management
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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
Public Debt
and
Asset
Management
Planning &
Budgeting
Oversight
Comprehensiveness
Regulatory
Framework
- Legal architecture
- Inter Government
fiscal relations
External
Audit
Accounting
Reporting
Standards
Timeliness
Reliability
Classification
Projection
Budget
Execution
Procurement
Treasury Mgmt
Internal Controls
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 milestones;modular 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.
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)
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
Sub National Measurement Framework for
Good Financial Governance
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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
Budget
Execution
Accounting
Reporting
External
Audit
Oversight
Thank you!