Tuesday, July 10, 2007

Regional Development

LAW No. 22 of 1999 on Regional Administration was sanctioned in the sequel of the Peoples Consultative Assembly Decree No. XV/MPR/1998. It enables extensive, concrete, and responsible implementation of regional autonomy, based on the principles of democracy, peoples participation, equality and justice, as well as the potentials and plurality in the provinces of the Unitary State of Indonesia Law No. 25 of 1999 on Financial sharing between the Provincial and Central Government was promulgated to guide the regional governments in performing their task.


Regional Development Budget

Regional development has a budget allocation of Rp 3,362.4 billion that will be directed to development activities in support of regional capacity improvement, regional development, and urban and rural settlement development. It is also for activities on community empowerment in effort of poverty alleviation and local economic development. The budget is allocated to prepare resettlement of refugees and the local population who have given up their land for refugees, economic, social and culture empowerment for transmigrants and refugees, as well as to cope with regional problems and development acceleration to the regions in eastern Indonesia

Balance Fund

Since 2001, with the initiation of regional autonomy and fiscal decentralization, the transfer of funds from the State budget to the regions are allocated in the form of balance fund. This is to ascertain the source of funding for the Regional Budget, and to reduce the difference of interregional fiscal capacity.

In fiscal year 2002, the Government made improvements in the legal regulation concerning balance fund formulation. With the increase of domestic revenue, in the year 2002, the allocation of balance fund to the regions will be Rp. 90.3 trillion.

In the previous year of 2001, the allocation of balance fund was Rp. 81.5 trillion or 5.6% to the Gross Domestic Product (GDP), consisting of Profit Sharing Fund 1.4% to GDP, Public Allocation Fund 4.1% to the GDP and Special Allocation Fund 0.05% to GDP.

The share of state revenue for regional administrations through the State Budget of the fiscal year 1999/2000 and 2000 were only revenues derived from the taxes sector namely Tax on Land and Building (PBB), and Tax on Land and Building Rights (BPHTB). Revenues from non-oil and non-gas natural resources, especially forestry and general mining have actually already been shared with the regional administrations and technical ministers through the mechanism of direct remuneration by entrepreneurs of concerned sectors.

Profit Sharing Fund

From the entire allocation of balance fund, the transfer of profit sharing fund in fiscal year 2002 was targeted at Rp. 23.2 trillion, which increased by 14.3% from the 2001 profit sharing fund. The ratio against GDP was 1.4%. Its increase resulted from taxes, an increase in taxes for about 39.5%, and profit sharing fund from natural gas and general mining natural resources about 18.4% and 19.7% respectively. On the contrary, the allocation for the non-tax profit sharing fund originating from oil and forestry natural resources decreased by 16.9% and 20.0% respectively from the 2001 allocation.

According to Law No. 25 of 1999 and Government Regulation No. 104 of 2000, the allocation from profit sharing fund of oil and gas for the regional administration was decided at 15% and 30% respectively from the revenue after taxes. In line with the promulgation of Law on Nanggroe Aceh Darussalam (NAD), the allocation of profit sharing fund from oil and gas for NAD will be added by 55% and 40% respectively, so that each allocation will reach 70% after taxes. The ratio of the profit sharing funds will be effective eight years starting from 2002. On the ninth year the ratio will change to 50% each from the revenues, after taxes.

Public Allocation Fund

According to Chapter 7 of Law No. 25 of 1999 on the Ratio of Budget between the National and Provincial Governments, the Public Allocation Fund is decided at minimally 25% from net domestic revenue, which is domestic revenue minus profit sharing fund and Special Allocation Fund, derived from reforestation funds.

The public allocation fund is made available in effort to create equal balance in the regions, with consideration that the regional governments have different revenue capacities and potential. In other words, the public allocation fund has the task to cope with the interregional horizontal balance. For better result of the efforts to create equal balance, in fiscal year 2002, the Government is evaluating the 2001 formulation of the public allocation fund. Improvement is made in the variables of fiscal needs and fiscal capacity. Regional fiscal needs include population, extent of area, population density, building material price index and poverty gap. The variable of regional fiscal potential include Gross Domestic Regional Product (PDRB) of industry and services as well as natural resources profit sharing fund, PBB, BPHTB and Personal Income Tax (PPh).

For fiscal year 2002 transferring to the public allocation fund for the regional government was projected at Rp66.3 trillion or 73.4% from total balance fund. Provincial governments will receive 10% of the amount which is Rp6.6 billion, approximately 0.4% to the GDP, while the Regency/City government will receive all of the 90% which is Rp.59.7 trillion, or 3.5% to the GDP.

(Source: Indonesia 2002, An Official Handbook, NationalInformation Agency of theRepublic of Indonesia)

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ADB Boosting Indonesia's Local Government Planning and Budgeting for Poverty Reduction


ADB will help improve the decentralized planning and budgeting process of Indonesia's local governments to reduce poverty, through a US$2.1 million technical assistance grant.

The TA, cofinanced by the United Kingdom, will help local governments develop local poverty reduction strategies that are linked to the budget process. The TA will design a capacity development program to assist at least 12 district governments in two provinces to produce local strategies that address resource planning and allocation for poverty reduction and achievement of the Millennium Development Goals.

"Local budgets are the fundamental tool for planning and managing resources in Indonesia's decentralized context," says Karin Schelzig Bloom, an ADB Poverty Reduction Specialist (Social Development). "Ensuring that budget processes are pro-poor and participatory will help boost service delivery and accelerate poverty reduction."

While local planning and pro-poor budgeting are key steps in the fight against poverty, national-level support is also required. The TA will also contribute to institutional development for poverty reduction at the central level, and will support ongoing development of a nationwide conditional cash transfer (CCT) program that will provide income support to the poor while building human capital.

CCT programs, which have been proven effective in Latin America, involve providing money to poor families contingent upon certain behavior, usually investments in human capital such as regularly sending children to school or making periodic visits to health centers. The income support provides immediate relief, while human capital investments reduce the risk of future poverty.

"This component will support the Government's efforts to cushion the impact on the poorest of the October 2005 removal of fuel subsidies and subsequent price increases," explains Ms. Schelzig Bloom.

The total cost of the TA is estimated at $2.625 million, of which the Government of the United Kingdom will provide $300,000 in cofinancing. The Government will shoulder the balance of $525,000 equivalent.

Indonesia's National Development Planning Agency (BAPPENAS) is the executing agency for the TA, which will be carried out over about 18 months beginning May 2006 under the Deputy Minister for Poverty Reduction, Labor, and SMEs (from ADB)

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Monday, July 09, 2007

Debt Swap in Brief

Debt crises of the 80s forced creditor and debtor countries to look for mechanism that can ease the burden of debtor countries. In 1985, Chile became the first country to introduce debt-equity program, i.e. mechanism to swap debt of developing countries that could not pay their foreign debts. In this program, sovereign debtor’s commercial debt from private creditor is bought by investor in secondary debt market and then converted into share investment in debtor country. Debt-equity swap has contributed to reduction of debt and increase of investment in developing countries.

Debt-swap mechanism was also applied in nonprofit sector in the form of debt-for-nature swap in Bolivia in 1987. This was followed by debt-for-developmentswap in other sectors such as child development, education, and health. Although debt-for-development and debt-for-nature swap is being replaced by debt-equity swap as the main means of debt reduction in developing countries, the nominal of their transactions remains significant in financing development.

Since it is considered as a new and innovative product, debt swap has become a standard for debt manager in developing countries for the past 20 years. More or less 50 countries has been implementing debt swap since 1985. In the first decade since its introduction, three-party debt-swap that involved conversion from commercial debt and export credit took the main stage. However, since the addition of debt swap clausal in Paris Club in 1990 bilateral debt has also become eligible for swap.

Debt belonging to multilateral institution is not included in debt swap operation because of the creditor’s status as multilateral institution. In addition, the initiative of Heavily Indebted Poor Country (HIPC) involves multilateral debt conversion de fact because debtor countries have to have a commitment to implement poverty reduction program as a prerquisite for HIPC debt relief.

Bilateral debt conversion may be applied in poor countries as long as it is related to debt conversion program. Paris Club debt swap clausal for debt rescheduling in 1990s regulates the framework of debt conversion bilaterally. The clausul regulates:

-debt reduction program for converting Official Development Assistance (ODA) to become fund for development and environmental projects. Several bilateral aid agencies have bought debt from export credit agent and commercial creditor.

-debt selling programs for converting non-concessional export credit—which is mostly debt-equity swap. In this program, the agent of creditor country—mostly export credit agency/ECA or Ministry of Finance—sells debt to potential investors for debt conversion transaction.

Non-Paris Club bilateral creditor have also sold debts for debt swap transaction, generally through ad-hoc transaction negotiated with investors or through bilateral agreement negotiated directly with the government of debtor country.

From the perspective of debtor countries, the advantages of debt swap program are:

§ Debt reduction. In general, debt conversion can be recognized from the reduction of the number of debt through discount from lower face value or redemption price.

§ Positive impact on payment balance. The positive impact of debt swap on payment balance is the decreasing amount of debt service payment in foreign currency. The implementation of debt-for-export swap can also increase export value and trade balance.

§ Investment encouragement. Debt swap can be formulated to increase investments on prioritized sectors. Debt-equity-swap is an incentive to encourage privatization or facilitate the return of capital that has been moved by its citizen to other countries.

§ Increase of fund for development programs. Mexico and Madagascar have applied debt-for-development and debt-for-nature swap by offering interesting redemption level for non-profit investors.

However, still from the point of view of debtor countries, the disadvantages are:

§ Fiscal cost of debt prepayment. If debt swap requires that payment should be made in local currency, it will take a considerable amount of fund from the budget to finance the prepayment, thus adding extra burden to the budget.

§ Inflation risk. The negative impact of debt swap is large intake of fund in local currency that can increase the level of inflation. To reduce such undesirable impact, the government can stipulate the ceiling of total fund intake in local currency.

§ Transaction cost. Debt swap transaction is complicated and requires a considerable length of time, thus necessitates some resources for negotiating, documenting, and monitoring the entire length of transaction. On certain cases, Governments may need to hire consultants to assist them throughout the process.

§ Investor corruption risk. Debtor countries should instigate close supervision to prevent ‘roundtripping’, i.e. investor transfers local currency obtained from debt conversion to other countries to get illegal profit.

§ Policy conditionality. Debt swap that takes the form of acquisition of local assets by foreign owner may result in resistance from local community due to their sense nationalism since undoubtedly the foreign owner will take full control of the said assets.

§ Investment subsidy. Debtor countries may give investment subsidy because in debt-equity swap, usually the government gives incentive to foreign investor in order to implement privatization.

The forms of debt swap, debts eligible for debt swap and the form of debt conversion are as follows:
Indonesia has also been involved in debt swap. Until recently Indonesia has received offer of debt swap from four creditor countries; Germany, Great Britain, France and Italy. The debt swap schemes offered by the four countries vary. Germany and Italy offer largely similar scheme, i.e. debt repayment through the implementation of agreed development projects. Germany has agreed upon two projects regarding elementary education quality enhancement and is considering another related to environment. Meanwhile, Italy offers development
project especially in the area hit by Tsunami like Aceh and North Sumatera. Great Britain and France offer debt swap that involves third party as investor. Debts offered to be written off are non-ODA debts that are almost similar in nature to commercial debts. The theme offered by the British is employment provision and environment conservation, while the French focuses on increasing foreign investment in Indonesia.

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Oil Subsidy Compensation Program FY 2005

Preface

In order to reduce the state budget deficit, government launched a spectacular breakthrough. President Susilo Bambang Yudhoyono through President Regulation No. 25 Year 2005, decided to raise up the domestic oil price since March 1, 2005. This policy is applied by government to reduce the oil subsidy in line with the international oil price grows up continuously.

The other reasons are : a) subsidized oil price doesn’t go to poor communities; b) the subsidy doesn’t show the scarcity of resources; c) the poor communities do aware how to fulfill their basic needs; d) to change the subsidized price into programs which helped poor communities is more rational and accepted as well.

Government do realize that this policy has a big impact such as price increasing is done. Therefore government tries to design a policy which can solve the problems overcome. The policy called Oil Subsidy Compensation Program (OSCP).

Basically, this Compensation Program is not a new policy introduced by government. This program has been applied by the previous government. However, today’s program is full of improvement based on the evaluation result in which the program will be financed by switching of the oil subsidy fund allocated before. Hopefully, this program will be enjoyed by poor societies. To realize the wish, the Compensation Program is imposed to reduce poverty through fulfilling all their basic needs in line with the National Strategy for Poverty Relief.

Policy Direction

How the compensation program can work as one of the effort to reduce poverty, a study has been designed to cover what the poor communities wish to alleviate poverty. The results are : 1) economic access : capital,job, resources; 2) education : education cost and quality; 3) infrastructure : electricity, communication, roads, water, sanitation, and irrigation; 4) rule of law : safety and low enforcement; 5) health services and disaster relief. Referring to the study result, the Compensation Program should be implemented by suitable criteria as well. The criteria’s such as : 1) feed availability; 2) access and quality of health services; 3) access and quality of education services; 4) job opportunity and business especially in micro business; 5) water and environment; 6) participation and safety; and 7) housing and sanitation.

Furthermore, how to make the compensation policy to be succeeded, it needs a qualified data and targets. Based on Bappenas’ data, Indonesian people are 17.072.346 in which about 36.146.700 or 16,65% are poor people (Susenas, BPS 2004). Based on BKKBN’s 2003 data, Poor households are about 15,92 million in which 8,38 million are pre-welfare groups and 7,54 million are welfare I group families. Data for education, the total poor students based on education level consist of : 1) elementary and middle level about 8,45 million; 2) dropout students about 2,27 million; 3)discontinued students and never schooled about 3,16 million. Meanwhile, the poor villages are about 26.737 even based on Ministry of Home Affair the amount is 40-50 thousand villages.

How the programs and criteria’s are designed excellently, if they are not supported by other factors, the goals of the programs should be hardly to achieve. The programs have to plan well, socialize informatively, implemented accurately, and supervise tightly. Thus, it needs transparence, participation, and accountability from all stakeholders. Succeeding of the programs depend on the synergism of all factors indeed.

The Compensation Program is directed to switch the price subsidy into development program that useful for poor community. Besides, the programs aim to reduce their burden’s and to give them opportunity to operate some business especially micro business.

The Compensation Programs

In 2005, the Compensation Programs decided by government consist of four divisions : education, health, cheap rice, and sub-urban infrastructure. Total fund allocated to financed this program is about IDR 16.056,4 billion. In which through State Budget FY 2005 has been allocated about IDR 7.140,3 billion and the balance about IDR 9.4180 billion is provided by State Budget Supplementary FY 2005.

Education

Education is one of important things to upgrade the human values. To fulfill the basic need of education is based on state constitution that should be adopted by government in implementing development programs. The main objective of this program is to cover all children in school aging can study well without economic problem, to provide more chance for students to continue their school until next level, to join-in children who never or not yet schooled in the elementary level, to bring in back to school children dropped-out, and to facilitate student graduated from elementary to junior high school and from junior high school to senior high
school level.

In 2005, Education Programs planned to scholars about 9.690.489 poor students, so they can study well,students dropped-out may be back to school and may continue until senior high school. The scholarship covers both direct and indirect cost, such as : fees, books, stationary, costumes, and transportation. Direct cost such as fees is transferred to school directly, so students will be free of charge. While indirect cost such as costumes, books, and transportation is paid to students. Government allocated about IDR 5.601,5 billion for this program. The Ministry of National Education and the Ministry of Religion Affair are responsible for this
program.

Health

According to community’s health in bad conditions, the main purpose of this program is providing health insurance for poor community. So they can be free-in-charge during medication. Through Poor Community Health Insurance (PCHI), Government targeted about 36,1 million people in poor community will afford this program. The fund allocated for this program about Rp2.176,7 billion. This program is managed and
responsible by the Ministry of Health.

The services offered in health program are treatment in health center, advanced treatment in health center, treatment in hospital, and advanced treatment in hospital third class.

The mechanism for this program as follow : data of poor people are collected from villages in coordination with nurses, family planning officers, and community leaders, finally they approved by the Major. For poor people who recorded as member in the insurance list when they ill and need treatment, so they are free of charge and guaranteed by PT Askes as a unit pointed by Ministry of Health to manage the insurance.

How to control the implementation of the insurance work is done by Health Office monthly. Recording and reporting are made by hospital that give services, and PT Askes sends report to Ministry of Health monthly.

Cheap Rice

Feed availability is basic need for poor communities. While the rice price is still high, so the Cheap rice program is designed to slice-up the poor to fulfill their feed sustainability. This program is applied by government as a commitment in accordance with the law.

Government will supply cheap rice in this program which can be afforded by 8.600.000 poor families group. In 2005, the budget allocated to this program is about IDR 5.438,5 billion. How to decide the poor families group is done by bottom-up process with refers to criteria and guidance of poor families. The recording starts from
villages and district, finally decided by the Major. When poor families in a village are more than the limit, so the poorest of the poor is applied. The poor families group are recorded in list will accept poor card. Through the card, they can buy the rice only IDR 1.000/kg for about 20 kg monthly.

Government pointed Perum Bulog (government enterprise) to manage and implement this program in which during the implementation Bulog collaborates with other units both in center level and local/regional level. In order to guard the distribution process, monitoring and evaluation are done tightly. Community Complaint Unit is developed in each municipal and regency to follow up every complaint about the process. Besides,
government also develop evaluation team both in center and local level to improve the mechanism process for next years.

Sub-urban Infrastructures

The main goals of Sub-urban Infrastructures Development Program are isolated poor villages which lack of infrastructures and scarce of water resources. Hopefully, this development program will provide accessibility, reduce communities spending, increase communities contribution, and grow their income through involving in any activities and job opportunities.

To guarantee that infrastructures development program is useful, so it needs to define criteria as follows :
1) to fulfill emergency infrastructure which proposed by poor society; 2) to provide services for communities especially poor groups; 3) to develop village area oriented; 4) infrastructure area is provided by society; 5) to open job opportunity to local people and to use local material; 6) to use simple or suitable technology that
can be done by it’s society; 7) the infrastructure can be managed by society; 8) to guarantee the infrastructure built functional continually; 9) not to raise negative impact to environment, social, and tradition.

Infrastructures built on this program are infrastructures that support accessibility and open isolation such as : village roads and bridges, canoes deck, and so on. The other infrastructures are small dam, land water, and irrigation built to increase feed production. The last is infrastructure for water supply.

Besides physical development, government also provides supporting activities such as : to empower communities in maintaining infrastructures, to socialize the programs, to accompany and facilitate communities during planning, implementing, and management process, to develop organization in managing problems dealing with their infrastructures.


To convince that the implementation is running well, supervising is done both internally and externally. Internal supervising is conducted by government institution (BPKP), while external supervising is conducted by NGO’s and mass media and pointed universities. Besides, monitoring team from all levels may cross-check
information in accordance with the implementation.

Total villages will be covered in this program are more than 12.000 and the cost index is about IDR 250,- million per village. Government allocated budget about IDR 3.342,1 billion and Ministry of Public Work is responsible for this program.

Direct Grant for Society

Besides four divisions compensation program above, government also allocated budget about IDR 1.182 billion for direct grant for society in which its distribution scheme is similar to Oil Compensation Program. The grant is designed to subsidize the development of simple housing, social services, revolving fund for micro business, and contraception services for family planning.

Housing

Housing is one of society basic needs that becomes problem for urban and sub-urban society. On one hand, for urban poor societies live in uncomfortable places such as : river edge and junk yard away from healthy house. On the other hand, in sub-urban it needs to provide housing that cheap and healthy. Government allocated budget for this program about IDR 400,-billion.

Housing program will build 33 rental twin blocks for 3.168 family groups. The program will take place in 16 major cities with approximate cost about IDR 196,-billion. The twin blocks will be completed by social facility, economic facility, and public facility.

Besides twin blocks, government also facilitates to provide settlement infrastructure which based on society empowerment. The activities consist of transferring revolving fund in kind of loan for material component to build or renovate house. The loan is managed by Community Empowerment Board (BKM) which can be paid off up to 3 years. Society may borrow up to 3 times after paying the loan off.

Infrastructures for housing environment such as roads, drainage, sanitation, and water supply are developed through empower local people. Revolving loan for materials is allocated about IDR 2,4 million/house, for environment about IDR 2,4 illion/house, and community companion about IDR 0,6 million/house, so total loan is about IDR 5,4 million/house.

Government pointed the Ministry of Settlement to manage this program. During implementation, the Ministry collaborates with other units both local and center level.

Social Services

Social problems are hard to solve. However, effort to alleviate social problems have to do continuously. Government allocated about IDR 250,-billion to social disabilities. The activities consist of improving social mess infrastructures, developing business group, and empowering poor and isolated communities.

Improving mess infrastructures consist of activities such as food assistant for 14.250 tenants who live in but serve under minimum standard food index IDR 10.000/person. This program will assist about IDR 4.900/person/day. For social mess ex the Ministry of Social Affair about 110 units that can’t be used comfortably will
be granted up to IDR 400 million each in 28 provinces. Grant for 2.800 units productive Business Economic improvement will be granted up to IDR 25 million in 31 provinces. While business groups for poor family will be provided to 9.000 groups. Grant for improving poor family welfare will be distributed to 16.000 families.
Finally, Isolated Community will be granted up to IDR 450 million in 12 provinces.

During implementation, social program will be handled by the Ministry of Social Affair in associate with Social Institution and other related units. Monitoring and evaluation are conducted in every 2 to 4 month to know if the social services fund transferred accurately.

Micro Business Revolving Fund

The program for Micro Business Revolving Fund is directed to improve poor groups income who involve in productive economic activities in informal sector and micro business scale.

The recipients targeted to receive this program are about 98.000 micro businessmen who came from poor family but have productive economic activities in many sectors. Cooperation runs credit activities and roles as intermediation for about 1.960 units are targeted as well. This program is located separately in 440 municipals and regents especially disadvantage areas.

Government allocates about IDR 200 million and wishes all micro businessmen get enough result. The budget will be managed by the Ministry of Cooperation and Micro Small Business in collaboration with other related institutions both center and local level.


Contraseption Services

In order to improve the Poor’s welfare, it needs to participate in family planning program. Through contraception service program, the access to family planning service including contraception medicine and tools becomes easier. Total targets for this program are to provide contraception tools about 11,8 million for fertile couples.

Providing tools and contraception medicine activities consist of : a) 13,4 million of pills (for 1 million family planning participants); b) 3,4 million injection vials (for 855,6 thousand participants); c) 99,9 thousand implant sets (for 166 thousand participant); d) 387,5 thousand IUD sets (for 387,5 thousand participants); e) 124,5
thousand gross condoms (for 20,4 thousand participants). For fertile couples who don’t want to add kids anymore, they get permanent contraception service through medical surgery. Besides, the services can be afforded such as : pills, injection, IUD, implant, and condoms available at clinics, health center, village polyclinics, nurses, and field officers.

Government allocated about IDR 100 billion to support this contraception program in 2005. National Family Planning Board is pointed to manage and apply the program in collaboration with other institutions both local and center level.

Safeguarding

How to conduct the whole programs to be succeeded, it needs quick response from all units. Through qualified safeguarding, the compensation program is hopefully running fast, smooth, transparent, and accountable.

Safeguarding activities consist of : planning coordination, socialization, monitoring and evaluation, community complaint service unit, financial audit and performance, design study, data processing, and safety.

The budget allocated to safeguarding is about IDR 132,0 billion which be managed by several institutions such as : the Coordinator Ministry of Economy, the Coordinator Ministry of People Welfare, Bappenas, BPKP, Police, Intelligence Bureau, Statistic Bureau, and others.

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The Development of Indonesia’s State Budget

As globalization render countries nearly borderless, the flow of people, investment and information freely moves from one country to another. That is also why the economic condition of a certain country is inevitably influenced by world economy, both directly and directly.

In the era of borderless world, new developments on state finance management is easily accessible over the internet and mass media. Therefore, best practices from developed countries can be studied, evaluated and applied by the developing countries, if such practices are considered beneficial.

As a result of Indonesia’s open economic system, the effort to amass budget revenue is influenced by both domestic and foreign economic condition. As the world economy was improving in the beginning of the implementation of the first long term developmnet, so was Indonesia’s ability to generate fund. In early 80’s, world economy started to show signs of the declining of primary comodity price, investment to developing countries, economic growth of several developed countries, and the free-fall of crude oil price. Domestic influence includes the economic crises, development of private sector, and the spirit of decentralization, regional autonomy, and the urgency to create clean government and good governance. Meanwhile, other
foreign influence includes the adjustments made to state budget format to comply with GFS and internationally approved practises.

This chapter will discuss the development of state budget from 1969/70 to 2005 which is grouped into changes in state budget format, composition, structure, and other policy changes. The change of format will cover the transformation from T-account to I-account. Composition change will discuss the significant role of tax revenue, and government bond (SUN) as an alternative source of revenue. Structural change will cover issues related to addition of budget share, change in balance fund, and expenditure reclassification by function.

CHANGES IN STATE BUDGET FORMAT

The fundamental changes in state budget include change in format, from T-account to I-account, the purpose of which is to increase transparency, efficiency, and effectiveness, especially in the area of budget deficit control. Fiscal Year (FY) 2005 saw further improvement in state expenditure to accomodate the transformation
from dual budget to unified budget.

The Change from T-account to I-account

State budget adopted T-account from FY 1969/1970 to FY 1999/2000. The shortcoming of this format, some may consider, is that the format does not provide clear information on deficit control and lacks transparency.

Hence the need for improvement.

Starting from FY 2000, state budget format is changed into I-account, in compliance with Government Finance Statistic . The change is meant to:

a. increase transparency in budget formulation
b. facilitate easier analysis, monitoring, and control in budget implementation and management
c. facilitate cross-country comparative analysis
d.facilitate a more transparent calculation of balance fund to be distributed by central government to local government as warranted by Law 25/1999 on Central and Local Fiscal Balance

The differences between the two formats are:

a. In T-acount the revenue and expenditure sides are separated in different column, meanwhile in I-account they are not, instead, both are put in the same column.
b. T-account reflects a balanced and dynamic budget, while I-account applies deficit/surplus budget. In T-account balanced means that both revenue and expenditure side should have the same total amount. If the expenditure is larger, the deficit is covered by financing from domestci and/or foreign sources. I-account applies deficit/surplus budget, i.e. the gap between combined amount of revenue and grants and that of expenditure. Negative gap or deficit occurs when total expenditure is larger than total revenue and grants. Positive gap or surplus is when the amount of revenues and grants exceed that of expenditure. Financing sources used to cover deficit may come from both domestic or foreign.
c. Budget expenditure is divided into that of central and local government. T-account does not show clear distinction between the composition of budget managed by central government and local government, as a result from centralized budget. On the contrary, I-account clearly shows the composition of the amount of budget managed by local governments.

The detailed transformation from T-account to I-account is as follows :

a. Reclassification of state revenue items, that includes:
i. Tax component in oil and gas revenue is reclassified into income tax revenue from oil and gas sector in domestic revenue.
ii. Other components of oil and gas revenue are reclassified into non-tax revenue item..
iii. Non-tax revenue is divided into:
• Natural resources, including; oil, natural gas, general mining, forestry and fishery.
• Revenue from governmnet’s share of State-Owned Enterprise (SOE) proceed.
• Other non-tax revenues.
b. Reclassification of expenditure items, including several transfer payments in recurrent expenditure that are prone to confusion, such as:
i. subsidy for interest on credit program
ii. interests of the bonds for national bank restructuring program
c. Separation of budget financing components that are previously included in revenue and expenditure side
i. Revenue
-Revenues from SOE provatization
-Selling of assets under national bank restructuring program
-Selling of governmnet bonds in domestic market

According to GFS, revenues from thses proceeds should be put in financing account in state budget and not be traeted as revenue

ii. Expenditure
Repayment of foreign loan principals are moved to budget financing and thus reducing revenue from new forign loans

In T-account forign loans are considered to be development revenues. Similarly, repayments of their principal are regarded as recurrent expenditure. Meanwhile, in I-account foreign loans and their repayment is considered as budget financing. This differing concepts consequently causes a change in the way foreign loans are handled. The new format considered foreigd loans as debts, thus their amount should be as small as possible since the repayment of these loans’ principal and interest will undoubtedly burden the state budget in the future.

Account Format Change in Expenditure

Starting from FY 2005, the I-account format underwent several adjustments in the expenditure side as warranted by Law 17/2003 regarding State Finance. The adjustments were made to facilitate the application of unified budget system, i.e. integrating the previously separated reccurrent expenditure and development expenditure.

One purpose of the adjustments is to increase state expenditurte management transparency and accountability through reducing duplication of strategic plan and budgeting in state expenditure and to create linkage between output and outcome to be achieved by organization budgeting. Other purpose includes complying with internationally approved classification system. See Chart II-2 for details.

The new format still separate central government expenditure from local governmnet expenditure. However, as a result of state budget format adjustment, several changes have been made in central governmnet expenditure. They are:

-with the application of unified budget, the classification of expenditure according to type no longer separate reccurrent expenditure from development expenditure.
-Classification of expenditure by organization will be done in accordance to the existing organization and will be included in Budget Law. In the previous format, classification according to organization exist only in Satuan 3 book.
-Classification of recurrent expenditure by type consists of personnel, material, interest payment, subsidy and other recurrent expenditure. The new format adds capital, grant and social aid expenditure.
-In the new format, the old development expenditure is converted and distributed into personnel, material, capital, social aid, and other expenditure.


CHANGE IN BUDGET COMPOSITION

The changes in budget composition, among others, are the increasing role of tax revenue in supporting the budget and the inclusion of government bonds (Surat Utang Negara, SUN) as one of the budget’s financing sources. From FY 1969/1970 to 1985/1986, the dominant source of budget revenue is oil and natural gas, however since FY 1985/1986 their contribution have been declining and relaced by tax revenue. During and after economic crises, governmnet debt, especially domestic debt in the form of governmnet bond that was used to finance bank restructuring program, skyrocketed. Since 2002, SUN has become an important instrument in covering budget deficit. The proportion of domestic debt used to finance loan interest and principal repayment is also increases compared to the period prior to the crisis.

The Increasing Role of Tax Revenue

From FY 1969/70 up to 1985/86 oil and natural gas revenue gave large contribution to the budget. IN FY, Indonesia reaped major profit from oli price-hike. In April 1973 Indonesian Crude Oil Price (ICP) was US$ 3.73 per barrel (see Graph II-2) and increased rapidly to US$ 11.7 per barrel by April 1974. The event is known as Indonesia’s ‘oil boom’. On the contrary, the period was dubbed ‘oil crises’ by oil-importing countries. In FY 1969/70, the beginning of Pelita I (Five Year Development I), oil and natural gas revenue amounted to IDR 65.8 billion (27% of total domestic revenue – see Graph II.2), meanwhile in FY 1974/75 the number rose to
IDR 957.2 billion (54.6% of domestic revenue). In the Pelita III (FY 1979/80 – 1983/84) oil price kept on rising and reached its peak in January 1981, which was around US$ 35.0 per barrel, so that in FY 1981/82 the share of oil and gas revenue in domestic revenue amounted to 70.6%. In Pelita IV (FY 1984/85 – 1988/1989) oil price dropped significantly due to world economic crisis and excessive supply of oil and gas in international market. Oil price nosedived from US$ 35.0 per barrel in January 1981 to US$ 10.0 per barrel in August 1986. Its impact on the budget was the rapid declining of oil and natural gas revenue. While oil and gas revenue in FY 1985/86 reached IDR 11,144.4 billion or 57.9% of total domestic revenue, in the following fiscal year the number dropped to IDR 6,337.6 billion or 39.3% of total domestic
revenue.


The positive impact of the enactment of these laws are the sharp increase of tax revenues. Tax revenue that was only IDR 4,788.3 billion or 30.1% from total domestic revenue rose to IDR 11,687.9 billion or 53.6% of total domestic revenue in FY 1988/89. Since then, tax have made larger ontribution to state budget compared
to oil and gas revenue.

In 1994, the government perfected the prevailing tax laws to increase the ignificance of tax revenue and thus strengthen Indonesia’s economy in the eve of globalization. The new laws are:

a. Law 10/1994 on Income Tax (PPh)
b. Law 11/1994 on Value Added Tax (PPN) and Luxury Good Retailing Tax (PPn-BM)
c. Law 12/1994 on Land and Building Tax (PBB)
The new tax laws did enhance tax revenue significantly. In FY 1997/98 tax revenue amounted to IDR 70,934.2 billion, a steep 59.6% increase from total tax revenue in FY 1994/95, which was IDR 44,442.1 billion.

In order to trim down deficit, the government continued to increase tax revenue. The increase is considered feasible because Indonesia still have low tax ratio. Therefore, in the year 2000, the government refined the existing tax laws into:

a. Law 17/2000 on Income Tax (PPh)
b. Law 18/2000 on Value Added Tax (PPN) and Luxury Good Retailing Tax (PPn-BM)
c. Law 19/2000 on Duties on Land and Building Transfer (BPHTB)
The Increasing Domestic Debt

During the period of FY 1969/70 to FY 1997/98, the amount of domestic debt was much smaller compared to foreign debt. Domestic debt was usually in the form of unpaid electricity, gas, water,and telephone bills of government offices from the previous year and other third party bills. Compared to repayment of foreign loans, the amount of these debts was really unsignificant.

However, since the economic crises, Indonesia’s domestic debt has grown significantly. In order to carry out restructuring programs for banks that were nearly collapsed the government implements recapitalizing and financial guarantee programs. To finance the financial guarantee program, government issued Government
Bond (Surat Utang Pemerintah, SUP) worth IDR 218,315.6 billion. Another IDR 432,075.9 billion worth of bond was also issued to finance recapitalizing program.

In 2002, the government and the Parliament enacted Law 24/2004 on Governmnet Bond to regulate the issuing of government bond be it in the form of State Treasury Bond or bonds. The purpose of government bonds is to finance budget deficit, covering short term cash shortage as a result of mismatch between revenue and expenditure cash flow in state account within one fiscal year, and to manage state debt portfolio. IN FY 2005, the government plans to issue IDR 43.0 trillion worth of Government Bonds. Meanwhile the total amount of domestic debt as if June 30th, 2005 is IDR 625.4 trillion.

So that at present the government has alternative financing to cover budget deficit from domestic sources as well as foreign.

The Increasing Amount of Repayments of Domestic Loan Interest and Principal

Prior to the economic crises Indonesia’s repayment of domestic loan interest was considerably low. However, since the issuing of Government Bond and bonds to finance bank recapitalizing and financial guarantee program, the number have been rising steeply.

The most direct impact of government bonds is the increase the load that the budget have to carry, i.e. repayment of domesctic loan interest and principal. In FY 1997/98, before the crises, domestic debt repayment was IDR 1,639.7 billion, while in FY 2001 domestic debt repayments was a stunning IDR 61,174.3 billion,

which was even larger than foreign loan repayments totaling IDR 28,395.4 billion in the same year.

In addition to reduce the burden of government bond payments that were due in 2004 to 2009, the government has conducted reprofiling to bonds owned by four SOE banks, namely Bank Mandiri, BNI (National Bank of Indonesia), BRI (People’s Bank of Indonesia), and BTN (State Saving Bank). The reprofiling is done by shifting
the fixed rate bonds’ due date from 2004-2009 to 2010-2013, and shifting variable rate bond from 2004-2009
to 2014 to 2020.

In 2002, the government and the Parliament enacted Law 24/2004 on Government Bonds that will make the role of domestic debt interest and principal repayment more significant in the future, especially if the bond issued by the government is larger than those whose date is due.

In FY 2005 total repayments of domestic debt reaches IDR 58.8 trillion which consists of IDR 39.0 trillion of interest repayment and IDR 19.8 trillion of principal repayment. Meanwhile, total foreign debt repayment is IDR 72.0 trillion which consists of IDR 25 trillion of interest repayment and IDR 47 trillion.


Debt Reschedulling and Suspension in order to Decrease Budget Load

The sharp increase in foreign loan interest and principal forces the government to seek ways to lighten the budget load by suspending or rescheduling the loan through Paris Club.

Loan suspension priority is given to projects with low-intake capability and those yet to be implemented. As an example, the goverment has cancelled several projects which were funded by IBRD and ADB loan. In 1998 and 1999, 66 IBRD funded projects was suspended, the total value of which were US$ 1,030.1 million in 1998 and US$ 556.48 million in 1999. The number of suspended projects from ADB loan was 59, the total value of which were US$ 923.29 million in 1998 and US$ 317.9 million in 1999.

In order to reschedule foreign debts, the government organizes Paris Club forum. The forum has convened three times since its establishment:

1. Paris Club I, which was held in September 1998 and attended by 16 member countries, 6 non member countries, and 9 commercial banks. The meeting resulted in the signing of US$ 4.2 billion worth of debt rescheduling agreement.
2. Paris Club II, which was held in April 2000 and attended by 17 member countries, 3 non member countries, and 3 commercial banks. The meeting resulted in the signing of US$ 5.8 billion worth of debt rescheduling agreement.
3. Paris Club I, which was held in April 2002 and resulted in the signing of US$ 5.4 billion worth of debt rescheduling agreement.

The reschedulling lessens the burden of state budget not only in the on-going fiscal year but also for the future fiscal years.

In addition, Paris Club II and Paris Club III agreements signify that the creditors are giving Indonesia the chance to decrease its foreign debt stock through debt swap program that contains elements of debt relief. Up to this moment Indonesia has received offers of debt swap programs from four creditor countries; Germany,
England, France and Italy.

In the end of 2003, the Indonesian Government decided not to extend IMF program in the form of Extended Fund Facility and chose Post Program Monitoring in its stead. The impact of the decision was the absence of Paris Club meeting to reschedule repayment of debt interest and principal to creditor countries. However,
in the aftermath of Tsunami that hit Aceh and other Asian countries, Paris Club issued policy to grant debt suspension to to countries hit by the catastrophy. The amount of suspension offered by Paris Club to the Indonesian Government is US$ 2.6 billion or IDR 24.31 trillion for one year foriagn debt repayment. The
suspension decreases Indonesian budget deficit by 0.9% from GDP. In addition, several member of Paris Club also apply 0% interest for debts included in the suspension program.

CHANGE IN STRUCTURE

Structural changes in state budget includes the transformation of Regional Development and Recurrent Fund into Balance Fund, the addition of Indonesian Bank Capital Addition, addition of Public Service Obligation (PSO) as part of subsidy, and government capital. Other change comprises expenditure reclassification by
functions.


Transformation From Regional Development Fund (DPD)
and Regional Recurrent Fund (DRD) Into Balance Fund and
Sepecial Autonomy and Equalization Fund

As reform movement swept through all area in Indonesia, changes in policies on authority delegation from central to regional government have been made. The change is instituted in Decree of People’s Consultative Assembly No. XV/1998 regarding Regional Autonomy that regulates sharing and usage of national resources
and fiscal balance between central and local government. The decree is followed by the enactment of Law No. 22/1999 on Regional Government and Law No. 25/1999 on Fiscal Balance between Central and Local
Government.

Law No. 22/1999 regulated region establishment, authority distribution, personnel and regional financial sources. Further exposition on distribution of regional financial sources was regulated in Law No. 25/1999.

Law No. 25/1999 stipulated the formula for calculating the amount of fund allocation and other regulations related to regional financial sources. The allocation for the regions was definite so that estimation of the amount of fund allocation could be calculated anually.

In 2004, both laws were considered no longer appropriate so Law No. 22/1999 was ammended by Law No. 32/2004, as so did Law No. 25/1999 by Law No. 33/2004.

The enactment of those laws changed the budget format as Autonomous Region Subsidy/Regional Recurrent Fund and Presidential Instruction Project (proyek inpres)/Regional Development Fund of the old format were transformed into Balance Fund and Special Autonomy and Adjustement Fund.

Autonomous Region Subsidy or, some might say, regional recurrent fund was used to finance the region’s recurrent expenditure, be it personnel or non-personnel. Non-personnel expenditure included operational expenditures of sub-district (kecamatan) and village (desa). Meanwhile, Proyek Inpres, which was later on
refferred as regional development fund, was intended to accelerate the achievement of evenly spread people’s wealth, thus it included aid for village development, second-tier region (district) development, first-tier region (province) development, elementary schools, health, marketplace improvement, tree-planting, and road/
bridges maintenance/building. Later on the scope of regional development fund only involved village, district/municipality, province, and Social Safety Net-Poverty Control (JPS-PK).

Balance Fund is central government fund transfer to the regions to support the implementation of their tasks.
Balance Fund consists of revenue sharing (DBH), General Allocation Fund (DAU), and Specific Allocation Fund (DAK). DBH is the region’s share of tax revenue and revenue from certain natural resources. The distribution of DBH to the ragions is based on producing region principle, i.e. part of the revenue is trasferred back to the
producing region. DBH is divided into tax and natural resources revenue sharing. Furthermore, tax revenue sharing includes income tax, land and building tax, and duties of land and building transfer while natural resources revenue sharing comprises petroleum, natural gas, general mining, forestry and fishery. DBH is
intended to reduce vertical imbalance, i.e. fiscal gap between central and regional government.

DAU is a block grant, by which it means that regional government has considerable flexibility in spending it according to the needs and aspiration of each region. Although the regions has full discretionary expenditure over DAU, DBH and regional original revenue (PAD), there are matters that non-discretionary and thus should
be prioritized, such as personnel expenditure, including central personnels that have been transferred to the regions, and other recurrent expenditure that are considered as budget priority. DAU is meant to correct horizontal imbalance, due to the fact that the regions’ ability to generate revenue varies largely. According to Law No. 33/2004 at least a quarter of domestic net income is allocated for DAU. Net income is domestic income after revenue sharing deduction. DAU allocated to every distric/municipality and province is based on a certain formula so that the DAU received is relevant to their fiscal gap condition.

The provision of DAU is intended to direct the implementation of regional authority so as to fulfill special needs that are considered as national priorities. In the beginning DAU originated from 40% of reforestation fund. Starting from 2003, aside from financing reforestation in producing regions, DAK was also given in
the form non-reforestation DAK to finance activities in the area of education, health, infrastructure, and expanded regions’ infrastructure. Since 2004 marine and fishery have been added to the areas financed by non reforestation DAK.


In 2005, regional expenditure reaches IDR 130.6 trillion that consists of IDR 31.2 of DBH, IDR 88.1 of DAU, IDR 4.1 of DAK and IDR 7.2 of special autonomy and equalization fund.

The government has also been allocating special autonomy and equalization fund since 2002. Special autonomy fund, which amounts to 2% of DAU, is allocated only for Papua as manifestation of Law No.21/2001. For FY 2005 Papua receives IDR 1.777 trillion in the form of this fund.

However, in 2004 balancing fund was replaced by equalization fund, which consists of pure and ad-hoc equalization fund. Pure equalization fund is given to the region so that the amount of DAU and pure equalization fund received by the regions will never be smaller than the previous year’s. Ad-hoc equalization is given if there are government policies that may influence certain budget item in regional expenditure, for example, the policy of awarding bonus of one-month salary to all civil servants including those in the regions.
The equalization fund is considered as aid and in FY 2005 its amount is IDR 4.7 trillion.

Subsidy

Bearing in mind the fluctuative nature of economy, government’s involvement is sometimes needed to ensure economic stability, especially the stability of basic good prices so that they are affordable by domestic market.
One way of doing so is by giving subsidy for the price of particular items that are important for people’s well being. However, the subsidy should be given within close consideration to the state’s financial capacity because subsidy is nothing more than reduction of fund reserved for development.

Initially, subsidy was only given for staple food, i.e. rice subsidy and wheat flour subsidy. The subsidy was used to fill the gap between the price of imported rice and the price set in domestic market. The purpose of this subsidy is to ensure adequate supply of rice, and that its price is affordable. Rice subsidy program was
started in FY 1973/74 and terminated in 1982/83 because since then Indonesian rice production have been able to supply its domestic need.

Meanwhile, to encourage consumption diversity so that people would not be dependent solely on rice, the government launched wheatflour import subsidy program to ensure that the flour was affordable. The program started in FY 1973/74 and was terminated in FY 1982/83 due to the increase of people’s purchasing capacity.

Petroleum fuel subsidy program was started in FY 1977/78 because as a source of energy petroleum fuel plays a significant role in supporting national economic activity and maintaining economic stability. The amount of petroleum fuel subsidy is dependent on the net amount of fuel sold in domestic market and the cost of fuel
provision which includes osts of crude oil purchasing, refining, and national distribution.


The scope of subsidy is getting larger. This is evident because in FY 2005 subsidy can be cathegorized into petroleum fuel, non-petroleum fuel and Public Service Operation (PSO). Of the three, petroleum fuel is the most costly. The expenditure for petroleum fuel subsidy is generally affected by international crude oil price,
the exchange rate of IDR to US$, domestic petroleum fuel consumption, and the policy of domestic price equalization that have been implemented gradually since 2001. Non-petroleum fuel subsidy take the form of food, electricity, program credit interest, fertilizer, seed, vehicle, and tax subsidy. FY 2004 saw the addition
of subsidy for SOE in implementing public service obligation into the budget. Prior to FY 2004, PSO aid was included in other recurrent expenditure in the budget. SOEs receiving PSO aid are PT Kereta Api Indonesia (Indonesian Railway Service), PT Pos Indonesia (Indonesian Postal Service), PT TVRI (Television of Republic of Indonesia) and Perum Bulog (Logistic Affairs Agency). The total amount of distributed subsidy for FY 2004 is IDR 26.3 trillion which consisted of IDR 14.5 trillion of petroleum fuel subsidy, IDR 11.0 of non-petroleum fuel subsidy, and IDR 0.8 of PSO aid. See Table II-6 for details.

Bank Of Indonesia Capital Addition

Starting from FY 2005, Bank of Indonesia Capital Addition is inluded as a new item under Government Bond in domestic financing. The new item is intended to contain the settlement of Liquidity Aid of Bank of Indonesia (BLBI). The settlement of BLBI is carefully engaged with close consideration to short term and long term budget
capacity and long term fiscal sustainability of Bank of Indonesia. Furthermore, repayment of government bond for BLBI settlement refers to the ratio of the capital of Bank of Indonesia to monetary obligation which is 310%. In the event that the ratio is less than 3%, the government will supply the required fund the get the ratio
back to 3%.

In Budget Draft 2005, the planned addition of the capital of Bank of Indonesia is IDR 8.7 trillion, however after the deliberation with the Parliament and Bank of Indonesia, the number is decreased to zero.

Government Capital Participation for Second Mortgage Facility (SMF)

In FY 2005 the government is planning to operate long term financing system for housing (second mortgage facility, SMF). The SMF program is intended to support government’s effort to build 225.000 plain and sanitary houses for low income communities. Initial capital for SMF is IDR 2.5 trillion, IDR 1 trillion of which comes from state budget and the rest is from a SOE, PT Jamsostek.

Within the state budget government’s capital contribution for SMF is included under domestic non-bank financing. Initially, SMF was not included in the budget proposal for FY 2005, however government’s capital participation of IDR 1 trillion was agreed upon in the deliberation with the Parliament.

Expenditure Reclassification by Organization, Function and Type, Where Formerly by Sector and Type The breaking down of expenditure by function is a reclassification of programs formerly included in the old format as sectors/subsectors. However, programs in both new and old format is incomparable due to the fact that they are different in nature.

Function/subfunction is not the basis for budget allocation as in the new format state budget allocation is based on programs proposed by ministries/agencies. Then the programs are grouped according to their function/subfunction Expenditure classification by function is merely an analysis tool used to identify functions that have been, is being and will be implemented by government in compliance to best international practises, which is Classification of the Functions of Government (COFOG). COFOG is formulated by UNDP and was adopted by GFS Manual 2001-IMF. Indonesian government, however, made an adjustment by separating religious function
from recreation, culture, and religious functions so that in state budget the classification encompasses 11 functions namely: (1) general public services, (2) defense, (3) public order and safety, (4) economic affairs, (5) environmental protection, (6) housing and community amenities, (7) health, (8) recreation and culture, (9) religion, (10) education, (11) social protection.

Budget Section Addition For Financing and New Ministry/Agency Item

The dynamics of economy, demands for good government and increasing number of ministries/agencies are the reason underlying the adjustment of the number of budget section. Recently the code number of budget section (Bagian Anggaran, BA) has reached 99, among the new additions are Foreign Loan Principal Repayment, Domestic Loan Principal Repayment, On-lending, and State Capital Participation. New budget
section codes for newly established ministries/agencies have also been added, i.e. for Nanggroe Aceh Darussalam Reconstruction and Rehabilitation (BRR-NAD) and Board of Regional Representatives (DPD).
Budget section codes are enacted to ensure a more organized, transparent, and accountable state budget.
Additionally, having their own budget section code means that ministry/agency has full authority over state financial management. See Table II-7 for new additions of budget section codes.

Currently not all of 99 budget section codes are used. Some, like for instance code number 14, 16, 17, 21, 28, 30, 31, 37, 38, 39, 45, 46, 49, 53, dan 58 are codes for ministries that no longet exist, e.g. Ministry of Information, Ministry of Industry. These codes are not written off for hystorical reasons.

OTHER CHANGES

Other changes in state budget, both in preparation and policy, are the inclusion of grants in budget document, project readiness criteria, and international obligation criteria.

Inclusion of Grants in Budget Document

Prior to 2001, forign grant management encounterd various contrains that were caused by:
-the absence of fixed mechanism and administration procedures of foreign grants;
-the fact that foreign granst were conducted through various institution, for instance National Development

Planning Agency, Ministry of External Affairs, State Secretariate, and Ministry of Finance. Some grants were even transferred directly to their beneficiaries

-the various form of grants, e.g. cash, material. services, consultation services, training, and project
preparation;

- the absence of fixed grant reporting system;

-the fact that most grants went unreported and unrecorded through budget mechanism, thus a major
accountabilty problem.

In order to control these problems Directorate General of Budget issued Circullar Letter No. SE-54/A/2001 dated April 21st, 2001 which stated that grant executive agencies/beneficiaries must report the grants they received to Ministry of Finance. The reporting would ensure more organized, transparent, and accountable foreign grant administration so that the realisation of foreign grant could be compared and held accountable to Parleament and public in general.

In the case of grants from Government of Japan (GOJ) for rehabilitation and reconstruction of Nias and Aceh, GOJ even insisted that the grants must be put into budget document. In its tender implementation, GOJ appointed Japan International Cooperation System (JICS) as procurement agent. The grant itself amounted
to US$ 139.40 million or the equivalent of IDR 1,240.66 billion. This case is indeed a sign of improvement in foreign grant administration as warranted by Circullar Letter No. SE-54/A/2001

Project Readiness Criteria

The implementation of projects funded by foreign loan usually encounters problem such as incomprehensive project preparation that includes aspects like land acquisition, project staffs appointment, evaluation and supervision system preparation, lack of coordination with related institutions, and many others. These problems causes project stagnancy even when the loan agreement has been signed and the fund disbursed.
The obvious consequence of such incidence is the inefficiency of commitment fee paid by the government.

To prevent such inefficiency, the government has enacted ‘Project Readiness Criteria’ to ensure that the project is in a state of ready for implementation before loan agreement is signed so that once the loan is effective, the project may be commenced immediately.

As an example, readiness criteria filter for Neighborhood Upgrading and Shelter Secter Project includes:

a. the availability of performance indicator for monitoring and evaluation, including baseline data.
b. the availability of commitment from regional government to participate and provide the obligatory financing and contiguous fund
c. contiguous fund of both central and regional government for the firts year has been allocated in the fiscal year in which the project supposed to commence
d. draft of Grant Agreement has been approved by central and regional government
e. the availability of land acquisition and resettlement plan.
f. the appointment of Project Management Unit and Project Implementing Unit, including the staffs.
g. the availability of the final draft of project management/manual administration (including organizational
scope and Term of Reference), procurement, financing, reporting, and audit mechanism
h. the availability of procurement proposal and request for proposal
i. financing plan has been deliberated and approved by Bappenas and Ministry of Finance
j. Fund Absorbtion plan
k. budget agreement document for loan and contiguous fund proposal for the first year has been issued
l. recommendation concerning the winner of project tender for main consultant of the first year.

Issue International Bond

In order to cover budget deficit and increase devisa reserve, the government also issues international bonds.
Until recently, the government has issued international bonds three times which were in 1996, 2004, and 2005. The value of international bonds issued in 1996 was US$ 400 million. Whereas in 2004 and 2005 the value was US$ 1 billion in each year.

The high level of interest shown by investors to Indonesian bonds issued in 2004 and 2005 indicates the increasing level of trust of the investors to Indonesian economic recovery.

The issue also implies the variety of current alternative budget financing, aside from domestic Government
Bonds and foreign loan.

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Friday, July 06, 2007

Indonesian budget process and system

The year 2005 is the first year of budget reform implementation as warranted by Law No. 17/2003 on Public Finance and Law No. 1/2004 on State Treasury. The reform includes the implementation of Unified Budget, Medium Term Expenditure Framework and Performance Budget as well the implementation of functional classification based on Government Financial Statistic (GFS).

In addition, the government needs an independent auditor to supervise the implementation of Public Finance. On the basis of that goal, Law No. 15/2004 regarding Audit of the Public Finance Management and Responsibilties has been issued.

As the reform commences, adjustments need to be made in state budget, such as the concepts and terms, the budget cycle, planning and implementation. In order to have better understanding, this chapter will discuss the budget coverage, the budget composition and classifications, the budget formulation process, implementation, and its accountability.

I. Basic Conceptions
State budget has the following functions:

• Authorization
State budget is the basis for revenue generation and expenditure implementation in one fiscal year
• Planning
State budget is the guideline for management to plan activities in one fiscal year
• Supervision
State budget is the guideline for assessing whether the governance has been implemented properly.
• Allocation
State budget should be directed to reduce the rate of unemployment and resource inefficiency, and increase economic efficiency and effectiveness.

• Distribution
State budget policies should always put justice and fairness into consideration.
• Stabilization
State budget is an instrument to maintain and endeavor the balance of economic fundamentals.



II. Laws and Regulations
The laws and regulation underlying state budget formulation are

a. Constitution of Republic of Indonesia 1945 and its Amendments;
b. Law No.17/2003 on Public Finance;
c. Law No. 1/2004 on State Treasury;
d. Law No.15/2004 on Audit of the Public Finance Management and Responsibilties;
e. Law No. 32/2004 on Regional Government;
f. Law No. 33/2004 on Fiscal Balance between Central Government and Regional Government;
g. Government Decree No. 20/2004 on Government Strategic Plan;
h. Government Decree No. 21/2004 on Formulation Work Plan and Budgetting of Line Ministry/Agency.

III. Fiscal Year (FY)
Fiscal year is the period of 12 months during which the budget is implemented. Indonesian fiscal year commences on January 1st, and ends on December 31st.

IV. Scope of State Budget
The scope of state budget is:

1. Line ministry/agency budget
a. Line Ministry Fund
The fund originates from state budget and is managed by line ministries in accordance to their main task and functions

b. Deconcentration Fund
Deconcentration fund is line ministry’s fund originating from state budget that is transferred to governor in his capacity as representative of central government. It includes all revenue generation and expenditure of line ministry in the region in order to implement deconcentration principles but exclusive of fund allocated for the expenditure of line ministry’s vertical unit in the region.

c. Assisted Task Fund
Assisted Task Fund is line ministry’s fund from state budget that is transferred to regional governments to finance the ministry’s revenue generation and expenditure in the region in order to implement assisted task principle.

2. Other than Line Ministries Budget
Other than the above, some part of state budget are allocated to: directorate general of budget


-Loan interest repayment (Budget Section 61)
-Subsidy and Transfer (Budget Section 62)
-Other Expenditure (Budget Section 69)
-Balance Fund (Budget Section 70)
-Special Autonomy Balancing Fund (Budget Section 71)
-Foreign Amortization (Budget Section 96)
-Domestic Amortization (budget Section 97)
-On-lending (Budget Section 98)
-State Capital Investment (Budget Section 99)


3. Balance Fund
Balance fund originates from state budget and is transferred to the regions to finance the regions’ needs in the implementation of decentralization. Balance fund consists of:

- Revenue sharing, i.e. transferred fund originating from tax and natural resources

-General Allocation Fund (DAU), i.e. fund from state budget, the purpose of which is to correct horizontal imbalance and to finance regional expenditures in the implementation of decentralization.

-Specific Allocation Fund (DAK) i.e. fund from state budget that is transferred to the regions to aid the financing of special activities which are the region’s responsibility and relevant to national priority.

V. Budget Classification and Composition
Budget composition for fiscal year 2005 is still based on I-account, with several adjustments both format-wise and structure-wise. They are:

-Separation between central government expenditure and regional expenditure.
-State expenditure that is subsidy or aid in nature is classified as subsidy
-Expenditure containing the term ‘other’ is classified as other expenditure.

Budget classification consist of:

1. Classification by Organization, i.e. classification according to state ministries and agencies that are established to carry out specific tasks and functions based on Constitution 1945 and the prevailing laws and regulation. Each ministry/agency is further divided into organizational units and work units (satuan kerja/satker). For fiscal year 2005, work units are grouped into:
a. Central Work Unit, i.e. work unit whose authority and responsibility lie in central office of its ministry/ agency, regardless of its location that can be both in the capital or the regions.
b. Technical Implementer Work Unit of Ministry/Agency, i.e. work unit whose authority comes from central office but the day-to-day management is done by central office’s vertical unit in the regions.
c. Special Work Unit, i.e. work unit that is established to conduct budget management activities of activities/ programs financed by budget other than the ministry/agency budget.
d. Regional Apparatus Work Unit, i.e. work unit whose authority and responsibility are transferred from ministry/agency to governor for the implementation of deconcentration tasks and to governor/head of district/major of predesignated province/district/municipality for assisted tasks.
e. Specified Non Vertical Work Unit, i.e. work unit that is not a vertical unit eventhough its authority and responsibility come from central office. This work unit is established because the aforementioned authority and responsibility cannot be delegated directly to Regional Apparatus Work Unit.
f. Temporary Work Unit, i.e. work unit that is established for only one year because the authority and responsibility of financial management cannot be delegated to work units described from point b to e.

2. Classification by Function is classification based on service functions conducted by government to public, both individually and collectively, to redistribute income and increase public wealth. This classification is enacted in 2005 to replace classification by sector.

The reasons underlying the implementation of classification by function are:

a. This type of classification facilitate stakeholder in assessing the level of success of budget implementation and the performance of a certain function.
b. Classification by function refers to Government Financial Statistic, therefore conducting cross country analysis will be easier since the practice is internationally approved.
c. Financial report that refers to GFS will satisfy policy and fiscal condition analysis needs.

Law Number 17/2003 stipulates the following functions:

a. General Public Services
General Service function includes Legislative and Executive Institutions, Financial and Fiscal affairs, Foreign Affair, Foreign Aid, Public Service, Science and Technology Research and Development, Government Loan, Regional Development. Governmnet Public Service Research and Development, and other general services.

b. Defense
Defense function includes National Defense, Defense Support, Foreign Military Aid, Defense Research and Development, and other defense-related activities.

c. Public Order and Safety
Security and order function includes Police, Disaster Control, Law Development, Trial, State Penitentiary, Public Order Research and Development, Security and Law, and other Public Order, Security and Law functions.

d. Economic Affairs
Economic function includes Commerce, Business Development, Cooperation and Small to Medium Scale Industry, Employment, Agriculture, Forestry, Fishery and Marine, Irrigation, Fuel and Energy, Mining, Industry and Construction; Transportation, Telecommunication and Information Technology, Economic Research and Development, and other economic functions.

e. Environmental Protection
Environment function includes Waste Management, Liquid Waste Management, Pollution Control, Natural Resource Conservation, Landscape Planning and Land Affairs, Environment Protection Research and Development, and other environment protection functions.

f. Housing and Community Amenities
Housing and community amenities function includes Housing Development, Settlement Community Development, Water Service Provision, Street Lighting, Housing and Settlement Research and Development, and other housing and settlement functions.

g. Health
Health function includes Medicine and Medical Supply, Individual Health Service, Public Health Service, Family Planning, Health Research and Development, and other health functions.

h. Tourism and Culture
Tourism and culture function includes Tourism and Culture Development, Youth and Sport Development, Publishing and Broadcasting Development, Culture, Youth, and Tourism Research and Development and other tourism and culture functions.

i. Religion
Religion function includes Religious Life Enhancement, Religious Harmony, Religious Research and Development and other religious services.

j. Education
Education function includes Early Education, Elementary Education, Intermediate Education, Non Formal and Informal Education, Government Official Education, Higher Education, Educational Aid Services, Religious Education, Education Research and Development, and other education functions.

k. Social Security
Social security function includes Security and Services for the Disabled and Ailed, Security and Services for Elderly Citizens, Security and Services for families of War Survivors, Social Security and Services for Children and Families, Women Empowerment, Social Information and Mentoring, Housing Aid, Social Aid and Safety, Social Security Research and Development, and other social security functions.

3. Economic Classification, i.e. classification that cathegorizes budget into 8 types of expenditures:
a. Personnel Expenditure, i.e. an amount of cash and/or goods given to civil servants as compensation for their services.
b. Material Expenditure, i.e. disposable goods and services expenditure needed to produce marketed or unmarketed goods and services.
c. Capital expenditure, i.e. expenditures aimed at establishing capital that adds to ministry/agency’s asset and inventory.
d. Interest, i.e. payment for usage of loan principle, both foreign and domestic
e. Subsidy, i.e. budget allocation given to institution/enterprise that produces, sells, exports or imports good and services that is crucial to public in order to make the price affordable.



f. Social Aid, i.e. transfer of cash or goods to public to protect them from social risks. The aid can be given directly to the citizens and/or public institution, including aid for non-gevernment organization in the area of education and religion.
g. Grant, i.e. transfer of cash and capital to foreign government or international organization.
h. Other expenditures, i.e. central government expenditures that cannot be classified into types of expenditure from poin a to g.

VI. Budgetting Approach
a. Integrated Budgetting
By integrating recurrent and development expenditures budgeting process will be more transparent, and in addition, it will make budget formulation and implementation more performance-oriented. This is necessary to ensure that recurrent investment and operational cost be considered simultaneously.

b. Budgetting in Medium Term Perspective
This approach provides comprehensive framework, affirms the linkage between planning and budgeting process, develops fiscal discipline, and strengthens public’s trust in the government by providing more efficient and optimum services. Medium term projection minimizes the uncertainty of future fund availability for financing on-going and new policies by taking into account the implications of the new policy to fiscal sustainability.

c. Performance-based Budgetting
This approach emphasizes that strategic plan and budget proposal should be based on achievement and the aim to which ministry/agency’s programs and activities should be directed in order to achieved the standardized result and output of Government Strategic Plan. In order to be efficient, budget formulation is based on unit cost per output and activity.

VI. State Budget Preparation

State budget formulation as depicted on chart 1 is as follows:

The Minister of Planning and Minister of Finance enact indicative ceiling, that is a rough estimate of ministry/ agency’s budget ceiling for every program, as a reference for strategic planning formulation.

Based on development priority and indicative ceiling line ministries formulate their strategic plan for the following fiscal year.

Meanwhile, on the second week of May, at the latest, the government submits Governmnet Strategic Plan (RKP), which is detailed manifestation of National Medium Term Strategic Plan (RPJM), along with the fundamentals of fiscal policies and macroeconomic framework for the following fiscal year to the Parliament.

-The fundamentals of fiscal policy includes principles underlying fiscal policy, fiscal policy on state revenue and grant, fiscal policy on expenditure, and fiscal policy on budget financing.

-Macroeconomic framework includes prospect of world economy, macoroeconomic policy, and state budget indicator assumptions
Afterwards, the government and the Parliament will discuss macroeconomic framework and the fundamentals of fiscal policy in budget proposal preliminary hearing, the relust of which will become reference for ministries and agencies in formulating their budget proposal.

Having received Circular Letter of Miniter of Finance regarding temporary ceiling on mid June, ministries and agencies formulate their strategic plan and budget proposal (RKA-KL), using RKP as guidelines and employing the following approaches: (a) Medium Term Ezpenditure Framework, (b) Integrated Budgetting, and

(c) Performance-based budgeting.
RKA-KL also classifies expenditures according to organization, function, program, activity and type.

The ministries and agencies goes into deliberation with related committees in the Parliament to discuss RKA-KL in Juli at the latest. The deliberated RKA-KL will be submitted to and scrutinized by the Ministry of Planning and the Ministry of Finance to analyse its accordance to RKP, Circular Letter of Ministry of Finance on Temporary Ceiling, forward estimate that was approved the previous year, and the approved unit cost standard.

Ministry of Finance will compile all the analysed RKAKL to be included in the deliberation with the Cabinet along with Financial Notes and Budget Proposal. This phase should be completed by August at the latest and State Budget Law should be enacted by the end of October.

The RKA-KL that is approved by the Parliament will be enacted as Presidential Decree on Detailed State Budget by the end of November which will subsequently used as the basis for formulating budget implementation document (DIPA) concept.

The DIPA is submitted to the Minister of Finance (c.q. Directorate General of Treasury) in its capacity as State Treasurer by the second week of December at the latest so that it can be authorized by the Minister of Finance by December 31st.

VII. Budget Implementation

Law 17/2004 has made it particularly clear that the Ministier of Finace has the authoriety and responsibility of a Chief Financial Officer in managing the state’s assets and obligations, meanwhile line Ministers and Head of Agencies are Chief Operational Officers who have the authority and are responsible over governance administration. In other words, a distinction has been made between which unit has administrative authority and which treasury authority.

Adminitrative authority includes entering into binding commitment and other measures that result in state revenue and expenditure, conducting analysis and forwarding bills to ministries/agencies in relation to the commitment realization, and issuing payment order or claim revenue as a result of budget implementation.

Minister of Finance as State General Treasurer and other officials as Acting State General Treasurer has the authority of not only state revenue and expenditure, but also to monitor them.

In the implementation of state budget, Minister/Head of Agency :

• formulates budget implementation documents;
• appoints officials:
-as Acting Budget/Goods User;
-in charge of collecting state revenue;
-to perform actions resulting in state expenditure;
-in charge of assessment and payment order;
-that will be the treasurer in issuing and receiving goods.
• issues payment order (SPM);
• has the authority to:
-assess the validity of material evidence of the claimant’s right ;
-analyse the output of prerequisite documents in goods/service provision commitment/agreement;
-conduct budget availability check;
-post expenditure;
-issue order payment based according to state budget
In his capacity as State General Treasurer, Ministry of Finance is obliged to:

• check the comprehensiveness of payment order issued by the Budget User/Acting Budget User;
• check the bill calculation as stated in payment order
• check the availability of the fund in question
• order fund disbursement as basis of state expenditure
• disallow fund disbursement issued by Budget User/Acting Budget User should it fail the predesignated requirements

IX. State Finance Accountability
Law 17?2003 states that budget implementation accountability report is submitted in the form of finance report that consists of budget realization report, balance, cash flow report, and notes on financial report that is in accordance to government accounting standard. Governmentfinancial report should be submitted on time and is consistent with government accounting standard.

The report will be audited by State Auditor Agency (BPK) and submitted to the Parliament within six months, at the latest, after the fiscal year in question ends.

Furthermore, Law 15/2004 states that in order to accomplish state finance management as warranted by Law 17/2003 and Law 1/2004, an audit conducted by the independent and autonomous State Auditor Agency as has been stipulated by article 23(e) of the 1945 Constitution is deemed necessary. In these laws, BPK has the independence and autonomy in 3 stages of auditing:

a. independence in planning stage, i.e. free to determine object to be subjected for auditing, except for matters regulated by law or special request by representative agency;

b. independence in the administering of auditing activities, i.e. free to determine the timeframe and method of auditing, including investigative methods.

c. Independence in reporting the audit result

In relation to state finance management and accountability, the auditing involves:

a. Financial audit, i.e. audit over central and local government financial report.
b. Performance audit, i.e. audit over economy, efficiency, and effectiveness aspects which is generally performed by government internal auditing apparatus for the benefit of the management;
c. Audit for special purposes, i.e. auditing conducted for special purposes, aside from financial and performance audit. This type of audit includes audit over matters related to finance and investigation. Audit report will be submitted to the Parliament and government. The report will be used by the government to make the necessary correction and adjustments. The Governmnet is given the chance to forward their response to the findings and conclusion of the report. Upon discovering criminal evidence, BPK must report it to the authority, as has been stipulated in Law 15/2004. In the effort to improve transparence and increase public participation, the Law stipulated that every audit report that has been submitted to the Parliament is declared open for public.

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