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PROVINCIAL GOVERNANCE STRENGTHENING PROGRAMME

Aligning National-Regional Planning and Budgeting System

Fauziah Zen

PGSP ProjectGraha Mandiri Lantai 21 Jl. Imam Bonjol 61, Menteng, Jakarta Pusat 10310 Indonesia Telp : +62-21-391 7284; 391 8554 Fax : +62-21-315 3461

PGSP PAPER Series No. 9

©2013 ISBN: 978-60218353-6-4 Disclaimer: The content of this book are not the official views of BAPPENAS, UNDP, DSF, AUSAID, and other related partners of PGSP. PGSP is a capacity development project for governance developed by BAPPENAS and UNDP with the support of DSF and AUSAID.ngan dukungan DSF.

Aligning National-Regional Planning and Budgeting System iii

FOREWORD

Decentralization and regional autonomy in Indonesia give opportunity to promote democratic governance process in the part of creating good governance. Democratic governance efforts are carried out not only in the central government, but also it does in local levels for the public welfare and improve regional competitiveness. In an effort to achieve the goal of decentralization, the role of planning and budgeting to allocate public resources efficiently is very necessary. As part of the planning and budgeting reforms, the Government has issued various policy instruments; Law 17/2003 on State Finance and Law 25/2004 on National Development Planning System.

Law 25/2004 and 17/2003 mandate planning and budgeting between central and local are implemented synergistically. Planning process that began with the community solicits input through forums aspiration;Musrenbangis using 5 planning approach: participatory, top down, bottom up, technocratic and politics. Although the planning approach is comprehensive, but in the implementation level, the output of planning is not according to the goals attained yet. In terms of implementation, there are still many planning and budgeting that not reflect to the priorities and needs of the community and the region. In some areas, it is not rare to find a national priority that listed in the National Medium Term Plan Term (RPJMN) which doesn’t allocate in regional budget. Perceive those indication problems of planning and budgeting, the need for aligning national and regional planning and budgeting become real.

Based on brief situation analysis in the above-mentioned, Bappenas and UNDP through Provincial Governance Strengthening Programme (PGSP) initiate the formulation of policy paper on Aligning National-Regional Planning and Budgeting System. This policy paper is designed to provide an overview of current policy issues; identify policy options; and structured alternative recommendations through short and intense of multi-stakeholder consultation.

Conveyed gratitude to all those involved in drafting the policy paper especially to Zen Fauziah; expert consultant on regional planning and budgeting. The Policy Paper willnot be possible establish without supervision led by Drs. Wariki Sutikno, MCP(Director of Regional Autonomy Directorate) and Ms. Mellyana Frederica (National Project Manager – PGSP). Technical review support provided by the Directorate of Regional Autonomy team (Dr. Ir. Antonius Tarigan, M.Si; DaryllIchwanAkmal, SE, MA; AsepSaepudin, S.Sos, M.Si; Sudira,S.Sos; Mohammad Roudo, ST, MPP; Jayadi,S.Si., M.SE, MA, ErvanArumansyah, S.IP, AlenErmanita, S.Sos, AlfiaOktivalerina, S.SOs, Via Oktaviani, SE, AK), PGSP

Aligning National-Regional Planning and Budgeting Systemiv

technical team (Harry Seldadyo/Research Team Leader PGSP and Faisar Jihadi/Regional Planning Analyst PGSP), and facilitation support from Mr. Ary Prasutyawan, Rufita Sri Hasanah; Nyimas Aun Farhana, Dayu Monica, Rumaninge Tatumpe and PGSP staffs is valuable contribution to the policy paper. Appreciation to the representative from line ministries, local government, civil society organization and also development partners who have given their inputs during the process of formulation policy paper.

Aligning National-Regional Planning and Budgeting System v

Content

Foreword iiiContent v1. Background 12. The Sources of Unaligned Planning 23. Theoretical Support 7

Necessity of Planning 7

Planning and Budgeting Relationship 9

Coordination Among Stakeholders in Decentralized Indonesia 11

4. Analysis 125. Recommendation 16Reference 20Endnote 21

Aligning National-Regional Planning and Budgeting Systemvi

Tables

Table 1. Local Goverment Rupiah Saving and Time Deposits in Bank,

2009 - 2011 7

Table 2. The Consequences of Governor’s Dual Role 15

Aligning National-Regional Planning and Budgeting System vii

Figures

Local Goverment Rupiah Time Deposits in Bank, 2009-2012 16

Aligning National-Regional Planning and Budgeting Systemviii

Aligning National-Regional Planning and Budgeting System 1

1. Background

Since 2000, Indonesia has gone through changing governance system from centralized to decentralized system. The abrupt changes took place formally in January 2001, handing out most of governmental tasks from central to local governments. Central government retains six main areas (foreign policy, defense and security, court system, fiscal and monetary, religious affairs, and some other responsibilities at national level) while the rest is on local government handsi.

The transformation nevertheless influences the process of Planning-Budgeting-Implementation of development programs in all tiers of government. Politically-driven decentralization has affected more regional structural system rather than central government structure. At the central, the structure of cabinet was not adjusted for adopting decentralization. The reduction of central’s tasks were not followed by downsizing of line ministries and central institutions, while regional governments established their own working units to perform the new tasks. As a result, National Civil Service Body (Badan Kepegawaian Negara) has recorded 30% growth of civil servants during the period of 2003 to 2011.

The same pattern happened in regulation. The Autonomy Laws, i.e. Law 22/1999 on Regional Government and Law 25/1999 on Fiscal Balance between Central and Regional, transplanted into existing system that was not adjusted for responding decentralization. Indonesia has already applied several Laws to regulate all sectors and some hundreds supporting regulations for each sector; all were made under assumption of centralized governmental system. It was not surprising if disputes occurred especially in early years of decentralization. For instance some regions tried to occupy ports in their jurisdictions by assuming that port is not part of central’s tasks.

In Law 22/1999, Development Planning was part of central government task, while in Law 32/2004, it is part of each level of government’s tasks according to respective level of scope. The Law directs that Medium-term Regional Development Planning Document (RPJMD) should reflect Head of Regional Government’s vision, mission and programs by referring to Long-term Regional Development Planning Document (RPJPD) and Medium-term National Development Planning Document (RPJMN). Yet the gap between national and regional planning does exist in many ways, indicated by irrelevant programs between central and local and high divergence in several development indicators. The strongest and the weakest regions record wide gaps on development indicators, for example is that the highest Income per capita is IDR 61.55 million (DKI Jakarta) versus the lowest IDR 1.27 million (Yahukimo) with national average at IDR 9.22 million. The highest HDI

Aligning National-Regional Planning and Budgeting System2

belongs to Depok (79) compared to Nduga (47)ii with national average at 70. In any multi-layer government, gap in planning, budgeting, and implementation, is a constant problem. However it is a necessity that the gaps should be reduced to provide a relatively efficient and effective government. Inconsistencies in planning, budgeting, and implementation have called for improvement in coordination among central government agencies (harmonization effort), and between the central government and the local government (alignment effort). This paper will focus on alignment between central and regional even though it is inevitable to highlight related issues of harmonization.

2. The Sources of Unaligned Planning

Unaligned planning across the levels of government can be resulted from various factors, rooted in some aspects, i.e.: disharmonious regulatory framework, lacking substantive regulation, lacking willingness to reach alignment, and mismatched planning and budgeting cycle. The main Laws regulating Planning and Budgeting are Law 25/2004 on National Development Planning System (NDPS), and Law 17/2003 on State Finance. The State Finance Law was enacted in 2003, a year ahead of Law on NDPS. It is no surprise that both laws do not reflect a comprehensive view of Planning and Budgeting relationship. Furthermore, the Law 25/2004, is a Law rich in planning procedures details but lack of substantial principles. It does hold important objectives, as described in article 2.4 of Law 25/2004 that mentioned one of the objectives of Planning System Law is “to guarantee linkage and consistency between planning, budgeting, executing, and monitoring.”

Law 25/2004 regulates the process of development planning from the obligation to make Long-term National Development Planning (RPJPN) that will guide Mid-term National Development Planning (RPJMN) and RPJMN will subsequently be elaborated in annual Government Work Plan (GWP). GWP will “become a guideline for drafting National Budget” (Article 25, Law 25/2004). Other than Article 25 aforementioned, Law 25/2004 does not mention the definition of “guideline” and how far the guideline should be taken when the government drafts the Budget.

On the other hand, Article 3.4 of Law 17/2003 mentioned that “National Budget/Local Budget has functions of authorization, planning, monitoring, allocation, distribution, and stabilization.” In the elucidation, “planning function” defined “national budget becomes guideline for management to plan the activities in respective year”. Apart from this article, one cannot find other articles mention about “planning” in this Law.


On the technical aspects of drafting National Budget, Article 14 of Law 17/2003 mandates that Ministers/Heads of Agencies as Budget User should establish a “Work and Budget Plan” (WBP) for the subsequent fiscal year. WBP is constructed based on targeted work performance. This is the ground of obligation to adopt “Performance-Based Budgeting (PBB)” in budgeting process.

By elaborating those articles in Law 25/2004 and Law 17/2003, one can see that there is no clear relationship between Planning and Budgeting. Law 25/2004 mandates that GWP should become Guideline for drafting National Budget, while Law 17/2003 emphasizes that National Budget becomes Guideline for activities planned by the executives.

Work and Budget Plan as another “hub” in the relationship between Law 25/2004 and Law 17/2003, is elaborated in Government Regulation No 90/2010 on Drafting the Work and Budget Plan of Ministries. The WBP should be constructed based on (1) Work Plan (Renja), (2) Government Work Plan, and (3) Indicative Budget Ceiling.

Ministers compose their Work Plan by using performance-based approach, Medium Term Expenditure Framework, and unified budget that includes (a) policy, (b) program, and (c) activity. In the process, there will be consultative meetings held by respective Ministries, Development Planning Ministry (Bappenas), and Ministry of Finance.

Apart from not so clearly relationship between Planning and Budgeting, those regulations provide interactive methods of formulating Planning and Budgeting documents, particularly Work Plan (Renja) and Work and Budget Plan (RKA). Indicative budget ceiling is initiated by Finance Minister and consulted with respective Ministry and Bappenas. Changes in budget ceiling can happen because of interactive relationship during the process of budgeting. It implies that the process of planning should be dynamics as well, as Planning and Budgeting influence each other during the budget formulation.

On the other hand, the flow of planning from central to regional is originated from single document, namely Long-Term National Development Plan or RPJP. In the Law, RPJP acts as guideline for Medium-Term National Development Plan or RPJM, which later will be elaborated on annual Government Work Plan. RPJP also has role as reference of regional Government to establish her Long-Term Regional Development Plan or RPJP Daerah. Regions then create her Medium-Term Regional Development Plan or RPJM Daerah by using PRJP Daerah as guideline and by regarding National RPJM. The Annual Regional Government Work Plan is derived from RPJM Daerah and aligned with RKP through Musrenbang.


The process of deriving and elaborating development plan from the long-term version as mentioned previously inevitably resulted in differences in derivative products i.e. medium-term and annual documents. This, however, is natural because each level of governments must interpret and build the programs based on a visionary document combined with own plan. The more distant the stages of elaboration, the more differences across tiers can be resulted.

The Law also barely mentions the role of Governor within the context of aligning Planning and Budgeting (P&B) between national and regional levels. It only mentions that Governor as Central’s representative shall coordinate the planning process of Deconcentrated and Co-administered tasks. The Law further states that the Governor to administers (the process of) coordination, integration, synchronization, and synergy of development planning between jurisdictions. Other than these two mandates, the Law has no further explanation about the role of Governor.

The role of Governor is further elaborated in GR 19/2010 and GR 23/2011. In these GRs, the role of Governor as representative of Central Government is centered on coordinating and bridging central and local governments, while GR 23/2011 additionally emphasize on aligning Planning documents and Deconcentrated/Co-administered programs. The GRs also specify that Governor has the rights to call Mayor and Bupati for meetings, as well as the rights to give rewards and sanction to them. However the sanction system belongs to Governor is not yet defined.

Contextual Relationship with other Laws. In the opening part of the Law, it is mentioned that Law 25/2004 acknowledges the Constitution and Law 17/2003 on State Finance. Unfortunately, the Law mentions almost none of the relationship between Planning and Budgeting. Further, the Law does not say anything about Medium Term Expenditure Framework as mandated by Law 17/2003.

As for the lacking willingness to reach alignment, one who tries to measure the P&B alignment will face unclear indicators to determine the levels of alignment. To accurately judge whether the certain programs planned by central government are supported or referred by local plan, one must look at the details. Alignment can take forms of complementary program, supplementary support, similar program but working at different entities/(sub) sectors, or no program. The latest one (no program) can be regarded as alignment if the central program is already designed completely and comprehensive. Additional similar programs may end up with inefficiency because of overlapping resources used for the same program. Identifying the degree of alignment will, however, take huge efforts and devoted resources, which may result in another type of inefficiency.


Further, the government has not defined the periodization of alignment measurement. What is appropriate review period to evaluate the degree of alignment between central and regional’s programs? It is possible that certain programs across levels of government may not appear aligned during one fiscal year, but they move towards the same medium-term goals. Hence, the period of review is important.

The annual-based alignment measurement that looking at fragmented P&B can affect the degree of regional autonomy. It is an option between: 1) the national government determines rigid annual targets that should be followed by so-called “aligned regional programs” or 2) the national government sets the medium-term goals and let the regions define their ways to reach them.

On the context of mismatched P&B cycle, one can see two main problems related to interface between central and local P&B (Political cycle and central-local budget interface)and the length of P&B (Annual Budgeting).

Political cycle and central-local budget interface. Simultaneous period of planning in central and local gives no room for letting the necessary information flow as it should as well as for discussing and agreeing in the substantial matters. At the time regions plan the programs, the national government has not finalized its programs which parts of them affect regions direct and indirectly. As a result of incomplete information available to regions, regions may plan the same programs, or become unaware of national programs requiring regional support, or miss the opportunity to make a synergy. Simultaneous planning time also provides little time to communicate the programs between national and local governments. To adjust the programs, the regions usually do it in the mid-year meeting with local House.

Annual Budgeting: Annual budgeting provides almost no room to do the evaluation and use the results for the subsequent budget period. It also requires considerable time from government to conduct all the steps of planning and budgeting.

Apart from the abovementioned factors, there are some other important problems that need to be addressed to improve the situation. One of them is asymmetric information. Central programs in regions or amount of transfer to regions shall be made known by re-gional planners prior to establishing the regional plan. The unknown information may lead to unaligned P&B between central and region. The case of asymmetric information –one party knows while the other does not- also can occur on the other way around. The regions suppos-edly know best of their own needs, preference and capacity, but often the central government determine the programs for them without sufficient information on these factors.


Another concern is about the referred planning document that has so many priorities that it became unfocused. As we know that RPJMN 2010-2014 takes 11 areas of priority plus 3 other priorities. Each of priorities comprises a set of core substances. Given the re-sources and capacity, particularly the need to coordinate and work together with more than 500 regions, it apparently needs a huge effort to make these 14 areas become equally pri-oritized during 5-year of execution. On the other hand, public sector always has too many things to do beyond her capacity; therefore in advanced countries the trend is to shift the tasks that can be done better by private sector out of the government. This one of the keys to perform is to focus on specific goals during certain time.

Unaligned P&B also brings consequence of spending inefficiency. Because of unclear information between central and local, governments may spend on redundant programs or on contrary some programs may leave unattended. Even though it is not a single cause of inefficiency, some believe that inadequate coordination between central and local contrib-utes to the problems of spending efficiency. The recent data showed that transfer funds were not used efficiently, as a significant portion of them had stayed idle as deposit savings in the bank, suggesting whether local governments conducted poor planning and budgeting, or the mandated functions had not been carried out effectively. This occurs each year with increasing trend, as shown in below picture.

Source: Bank of Indonesia (2012)

The savings account of the local government usually receives a major portion of transfer funds in 1st-2nd quarter of the fiscal year. With planning and contracts for their programs already setup before it, it should take relatively short time to disburse the funds, except for

Local Goverment Rupiah Time Deposits inBank, 2009-2012 (billin IDR)

60.00050.00040.00030.00020.00010.000

Province

-

Distric/Municipality

Apr Apr Apr AprAgs Ags AgsDec Dec Dec

2009 2010 2011 2012


the cases when there are delayed transfers from the central government. Thus, local govern-ment transfer funds supposedly will reach the peak in the 1st-2nd quarter of fiscal year, and tends to decrease over time.

However, last 3-year data has shown that unspent funds being parked in the local governments’ savings accounts are relatively high in the end of fiscal year. A proof that the local governments have not been prudent in managing their fiscal is the magnitude of unspent funds saved as time deposits in banks, they are roughly third of the savings ac-count amount. In December 2011, the unspent funds in local governments’ savings and time deposits accounts (IDR accounts only, excluding foreign currency accounts) are respectively 80.4 trillion IDR and 20.6 trillion IDR. Dividing the sum of these funds by the number of regions, by average, in fiscal year 2011 a region would have 193 billion IDR sitting idle in its bank account.

Table 1. Local Government Rupiah Savings and Time Deposits in Banks, 2009-2011 (Billion Rupiah)

Source: Bank of Indonesia (2012)

The situation shows that local governments have serious problem of budget execution. Since budget execution is something deliberately planned and government is not a profit-oriented institution, then the figures indicate some failures on the planning and budgeting.

3. Theoretical Support

Necessity of Planning

One of the strongest arguments supporting the necessity of planning is the disjuncture between the individual rationality and collective rationality. While an individual might be capable to plan and decide what is best for him/herself, it might not be the best interest for

Savings Dec 2009 Dec 2010 Dec 2011Province 20,782 23,345 28,519District/Municipality 39,017 38,730 51,911Total 59,799 62,075 80,430

Time Deposits Dec 2009 Dec 2010 Dec 2011

Province 4,665 8,138 8,706District/Municipality 8,457 8,372 11,869Total 13,122 16,509 20,575Savings+ Time Deposits 72,921 78,584 101,005


community, hence decision made by a community as a whole might in certain situations be different to the sum of decisions made by individuals (Schelling, 1971). On the other hand, a capable government deemed able to provide solution by deciding what is best for a com-munity without stressing too much to altruism. According to famous Musgrave’s Trilogy (Musgrave, 1959), the government has function to: a) maintain stabilization, b) redistribute income and c) allocate resources. To do the functions efficiently and effectively, government has to have well-planned programs.

The idea of individual versus government planning is viewed within the context of country as a community consisting of individual regions. The government, for instance, should be able to look 5-10 years ahead: how the structure of demographic, economic, and influential external factors will affect the demand for infrastructures, public services, and spatial design. These elements may not be interest of individuals. This Planning is part of jobs for government to function her tasks. The questions here are on the best method of planning and whether planning should be centralized.

Debates on the ideal form/method of planning have evolved overtime; whether it should be a comprehensive where goals are predetermined by preliminary studies (rational plan-ningiii), whether it should succumb to the practicality of policy-making where goals simul-taneously respond to the political process and “good policy” is measured by the sentiment of the policy makers towards it (incrementalismiv), whether an organization should focus on its survival rather than its societal benefit (strategic planning v), and so forth. All converges that there is no one-size-fits-all policy for best planning method for all case (Christensen, 1985; Alexander, 1996). However, it may be agreed upon that if the scope is a country, then a good plan is such that contain policies best reflecting the country’s interest, regardless of how to formulate it.

Advanced western countries have no longer use national development plan as their primary tool for policy-making. However, it is still a relevant and useful instrument in emerging market economies, as well as low-to-middle-income countries. Similarly, public investment plans (PIPs), which were in vogue in the 1970s, then fell from grace as theories of economic development based on capital accumulation lost influence, are now fashionable once more.

For the case of advanced countries, planning functions and instruments have not truly disappeared; rather, they have been replaced by other processes and instruments of policy that are judged superior in terms of their flexibility and usefulness. Particularly, in the last fifty years, developed countries have developed a broad-based approach to policy analysis


and review that is based upon a medium-term expenditure framework (MTEF), program budgets, and performance evaluations. These tools combined with regular discussion by ministers, often through the cabinet mechanism, determine priorities for key sectors such as defense, education and health, social security, and other key sector policies and programs (Allen, 2011).

In addition, wide-ranging discussions of government policies, with varying degrees of openness, take place either before general elections (in countries with single party govern-ments) or immediately after elections (as part of the process of forming a coalition govern-ment). Comprehensive reviews of expenditure policies, including systematic analysis of their impact and performance, are also carried out at regular intervals in Australia, Canada, the Netherlands, New Zealand, the United Kingdom and other advanced countries. A few coun-tries (for example, New Zealand, Norway and the U.K.) have developed sophisticated tools for managing capital assets. These approaches are deemed more flexible and effective than traditional five-year development plans.

Such elaborate approaches to policy-making are not yet possible in developing coun-tries, most of which do not have comprehensive MTEFs, mechanisms for collective deci-sion-making through cabinet, or comprehensive spending reviews in place. Indonesia, as a young democratic country and has just embraced decentralization since a decade ago, is still struggling with establishment of necessary policy instrument, including regulation and institution. At the same time, political transformation gives pressures and turbulences to the process of development planning and budgeting from central to local level. Political process is now an important and inseparable part of P&B. Both Houses have significant authority to challenge government programs that may dismiss the procedures run by the administrations.

The political authority which reflecting “people demand” to some extent has increased government’s role on development planning. Additionally, the Houses have power to initi-ate, alter or reject regulation drafts including those related with P&B. P&B will be still important part of future Indonesia governmental system.

Planning and Budgeting Relationship

Planning that precedes budgeting is a logical consequence for an effective spending. The goals and/or objectives are set before identifying and allocating the resources to attain them. A correct sequence of planning-programming-budgeting, and strong link between the plan and the budget would ensure better attainment of the objectives.


Reality check, countries with limited fiscal sources often have to change or swing the sequence to meet with ceiling budget. It also happens in Indonesia as discussed in previous section, dynamic interaction takes place when indicative budget is allotted thus the execu-tive should adjust her programs. Given independently laws on Planning and Budgeting, the sequence was made merely based on compromise among decision makers.

The separation of institutions responsible for Planning and Budgeting as in Indonesia case, through Bappenas and MOF, has some advantages and disadvantages. The advan-tages include the effective use of accumulative knowledge gained by Bappenas in looking at macro planning, Bappenas coordinating role which is more neutral compared to other line ministries, and network with Bappeda (Regional Development Planning Agency). Mean-while it needs more effort to incorporate the direction of Planning and Budgeting as well as the potential conflict if budget limitation erases planned programs.

If both functions of Planning and Budgeting are under one institution, efficiency maybe improved due to less transaction costs of coordination, and the direction may become con-vergence. However, there is potential of narrow-minded planning when financial officers are responsible for the whole process. Putting planning authority in the hands of fiscal author-ity may end up with forming super body ministry and recentralized approach.

Some countries, like Mongolia, put the planning agency under the office of the prime minister, to mark its superiority above ministries such as the finance ministry, because an operation of a planning agency--without decent authority to align programs--wastes its experts and various resources it has used. With the given authority bestowed upon it, Mongolian planning agency may effectively synchronize and direct programs to meet the development goals (Allen, 2011).

A strong planning agency, however, does not necessarily mean a bigger one in terms of organization size. Likewise, the government must not put such great effort for planning pro-cess that it would sacrifice resources and time that can best be allocated for implementing the programs. As good as any plan can be, what matters more is its implementation; hence, the priority should be put on realizing the government commitments made in reasonable plans rather than pursuing a perfectly ideal plan.

In all countries, whatever the institutional arrangements for planning/budgeting may be, it is important that an effective mechanism for coordinating the budget process and the planning process be developed. The MTEF can create a useful bridge between planning and budgeting, as it has done in effect in most OECD countries, but needs to evolve from


a simple macro-fiscal framework into a comprehensive process that, in effect, replaces the annual budget. Most developing countries have not yet achieved such a state of the art.

Coordination Among Stakeholders in Decentralized Indonesia

While Indonesia’s ‘Big Bang’ decentralization has brought better political freedom, it has also brought confusion as it was conducted hastily, unplanned, in random sequence. Al-though there is no single recipe of success in sequencing decentralization, the best storyline would begin by deconcentration of public services delivery from the central government to the local governments, in order to prepare them for carrying heavier burden.vi It would then continued with stakeholders consensus on the vision and goals of the decentralization, formulation of policy design and the birth of the decentralization law and its implement-ing regulations, and ends with the implementation and the monitoring and review process (Bahl & Martinez-Vasquez, 2003).

Indonesia seems, had skipped the first part, where no deconcentration had ever oc-curred prior to the ‘Big Bang’ as a precursor, and also skipped the part of properly formu-lating and designing the grand decentralization policy. This resulted in mass confusion in the chain of command and coordination among stakeholders across layers of government, furthermore, as the central government has also never pegged any of its agency/ministry as the “champion of decentralization”.

Numerous forums, task groups, and joint regulations have been established to fill in the absence of such leading agency, each of them as a form of an ad-hoc response on a particular intergovernmental issue.vii Setting up various forums and task groups might be a short-term solution for triggering discussions and creating better coordination--in aligning and harmo-nizing the programs conducted by various stakeholders--however, it will be inevitable to eventually revisit and reform the institutional arrangements of the main stakeholders.

Current institutional setting is actually sufficient to carry out the tasks of Planning and Budgeting within decentralization framework. To make revolutionary reform will be costly since political influence and stakeholders’ resistance certainly play important part of defin-ing new direction. Current system needs some improvement that can be achieved through systemized changes. The previous section has highlighted some crucial aspects cause current problem of inefficient vertical P&B. The next section will discuss the possible ways to fix the problems and suggest policy recommendation.


4. Analysis

Ineffective P&B mechanism, as mentioned in previous section, operationalize partly because of no effective sanction system in place. However, enforcing regulation may bring cost implication as well. It is difficult to design suitable sanction system that is low cost, effective, and does not violate the principles of autonomy.

Another challenge is to harmonize sequence of planning and budgeting in order to minimize the problem of independency between planning and budgeting. As mentioned in previous section, Planning works from one side, and Budgeting works from another side, both sides to meet in the incorporating stage of Renja, RKP, and Budget Ceiling to formu-late RKA. The same process should happen at regional level, where Local Unit’s Work Plan (Renja SKPD), Local Government Work Plan (RKP Daerah), and Local Budget Ceiling meet to establish Local Unit’s RKA. The problem is Budget Ceiling is heavily influenced by amount of transfer received from National Budget as well as Renja SKPD and RKP Dae-rah are affected by National programs in respective region, especially Deconcentrated and Co-administered tasks. Thus, the information about programs and transfers that affected regional fiscal and plans, shall be available at the time when regions formulate their Local Unit’s RKA. The condition is difficult to meet since both national and local governments P&B process work at the same cycle.

There are two alternatives to minimize this problem. First, regional budget is set to have time lag from national budget period. For instance, if National fiscal year starts from January 1 and ends by December 31, then regional fiscal year spans from, let say, April 1 to March 31 next year. Setting up time lag is aimed at giving room for letting sufficient information and negotiation flows between the levels of government.

Second alternative is to adopt MTEF consistently. A bulk of development programs shall be planned and budgeted for three-year period. Thus annual process of P&B will only cover small programs and some adjustments. It will require hard work in the beginning of every three-year but after the initial year majority of resources can be devoted to execute the programs. It also givesadequate room to do proper monitoring and evaluation and then to use the evaluation results for better planning in the subsequent period.

The next challenge is to consistently adopt Performance Base Budgeting (PBB). De-spite regulation has required the government to adopt performance-based target approach in formulating RKA, almost all government units still use input based approach. The pro-grams are drawn from Plan and budget ceiling instead of from target and back tracked to


programs and allocated funds. The challenges here mostly related with competency and time required to perform the tasks.

As discussed in Section 2, one of basic problems of alignment is lacking in system to check the programs’ alignment. There is no guideline to look at the indicators of align-ment. There is also no consensus of review period if government wants to assess it. Having to deal with decentralization, where local autonomous regions have freedom to make their own development program, annual review of alignment will reduce local’s flexibility. If the measures of alignment are made on the basis of medium-term, for instance in every three year, it brings positive implication: national government should have to be consistent with his medium-term target while local government has flexibility in designing his annual tar-gets. The room for flexibility is important to give local governments discretion rights or in other words to promote decentralization, and to encourage creative and innovative local governmental system.

The last challenge is to determine the position of trade-off between guided planning and autonomy principles. Basic question as that posed in Section 3 is concerning on why we still need guided planning and how we put it in decentralization context. As presented in Section 2, unspent funds by local government are huge and increasing by time. Part of the funds comes from natural resources shared-revenue, which is very significant contributor for APBD of some regions. Resource-rich regions received natural resources shared revenue ranging from 30% to 70% of their total budget. Uneven distribution of natural resources calls for optimization of trade-off between local interest and horizontal inequality issues. Furthermore, current development stage still lacks both hard and soft infrastructures that if local governments work without direction towards national interest, the situation will not benefit the nation as a whole. Given the above situation it is clear that Indonesia still need comprehensive national development planning to set our national target. Horizontal inequality in both soft and hard facilities will bring inefficiency and hamper the effective-ness of economic activities, for example: inter-regional trade will be expensive when some regions have poor infrastructure or low capacity. The National Development Plan System will secure the nation’s objectives as unitary country.

Section 2 also discussed the regulation framework concerning the effort to strengthen the coordinating role of Governor as Central’s representative. It brings consequence to as-sign Governor to have dual role, one as central’s representative and two, as the Head of au-tonomous region. The situation gives Governor conflicting position: he is a regulator of the regions within his jurisdiction, including his own region. It also induces the biased prefer-ence towards his own benefit. If Governor should make decision regarding the jurisdictions,


he might be tempted to win the voter concentrated regions and the capital city where his administration office located.

The role also makes the resource allocation for province tends to be bigger than man-dated tasks. GR 38/2007 divides the tasks across levels of government, of which the ma-jority of provincial government tasks are to deal with coordination function. One does not want to spend much resource for administrative tasks, hence in advanced countries the government offices dealing with coordination and administration are usually slim and non-complex. Slim officehelps them to stay focus, efficient, and to give fast response.

Recent development to revitalize the role of Governor as coordinator and bridge be-tween national and local interestsis described in GR 19/2010 and GR 23/2011. To support the implementation, the three Ministers have issued a Joint Circular Letter (JCL) in No-vember 2010.

The JCLviii hinted a mutual necessity among the ministries in coordinating and moni-toring the deconcentrated/co-administered task programs in the regions. The Joint Circular Letter (JCL) specifically addressed the Governor and the Heads of Ministry/Agency on howix to conduct the implementation of Deconcentrated/Co-Administered Task Fund under coordination with National Planning Agency, Ministry of Finance, and Ministry of Home Affairs.

To date, the JCL secretariat shows less progress in strengthening the position of Gov-ernor as central’s representative. As long as the fundamental cause of current problems is not solved, then it will be difficult to solve permanently the implications. At least there are three aspects crucial in this matter; first is the political aspect where Governor elected through direct voting by the same voters who also cast the ballot for Walikota/Bupati. It brings consequence that Governor’s programs should be in line with all Walikota/Bupati’s programs, which may not be always the case.

Second, the dual role confuses the cut line of Governor’s action, either he acts as the head of local autonomous region, or as Central’s representative. It also brings unclear budget consequences, where in principle as central’s representative, he is supposed to use National Budget (APBN). Table 2 summarizes the logical consequences resulted from dual role of Governor.


Table 2. The Consequences of Governor’s Dual Role

Source: Zen (2012)

Third, domination of annual budgeting over MTEF also affects Governor’s planning and budgeting cycles so as to accommodate his coordinating role. Province should consider deconcentrated and co-administered funds allocated by the Government, the draft of APBD of regions under his jurisdiction, and his own draft of APBD (APBD Province). Annual budgeting will provides narrow room for Governor to play his role sufficiently. Conse-quently, regions will see that Province is weak and can be put aside in communication with national government.

Zen (ADB Report, 2012) discussed that to achieve its objectives, JCL Secretariat should have measurable targets including the short-term and medium-term ones, and be evalu-ated annually. On the other hand, Governor should be equipped by adequate authority to perform his tasks, particularly in the following condition: a) granting the access to budget draft and development planning documents of Local Government within her jurisdiction; b) receiving advance information on the planned deconcentrated/co-administered programs from the respective ministry/agency; and c) having adequate competency, apparatus, and instruments to implement and supervise the deconcentrated/co-administered programs.

As Head of Autonomous Region

Report to DPRD and Government (Home Affairs Minister)

Has incentive to be biased towards regional capital and urban due to the reasons:

- Voter concentration - Center of her administration

Each citizen votes for two heads of local governments: Bupati (or Mayor for the city) and Governor

Public may confuse tasks and performances of Governor vs Bupati/Mayor

Governor has her own programs and they may not be in line with Bupati/Mayor’s programs

Eligible for receiving transfer to finance provincial level public services

Limited authority to coordinate

As Representative of Central Government

Report to President (via Home Affairs Min-ister)

No incentive to favor local voters if he is not locally elected but appointed by central government

No duality for local voter

Governor focuses more on national interests and align them with districts’ programs

Does not received transfer but her activities are financed out of National Budget

Higher authority to coordinate local govern-ments within her jurisdiction


5. Recommendation

One obvious cause of unconfined relationship between Planning and Budgeting is con-tributed by independently laws on planning and on finance (including budgeting). The first best solution is when there is only one law integrating Planning and Budgeting process that maintain all consistencies within suitable time frame. One can expect that there will be no conflicting ideas within one law, thus the conceptors and legislators must come out with harmonized idea.

Unfortunately, the real world is often not the first best place; to reach the ideal condi-tion, it will take huge effort and considerable time. The more feasible way is to achieve the second best option namely to operate coordinated revision of both laws simultaneously. Close coordination between advocates of both laws i.e. Ministry of Planning (Bappenas) and Ministry of Finance is fundamental. Bappenas should be equipped with sufficient argu-ments for asking MOF to sit together to conform the different perspectives of untied ideas of planning and budgeting. The arguments shall be supported by credible and convincing academic paper(s). Policy maker should carefully consider the philosophy of having NDPS, therefore the revised Law should contain the spirit of the system including constructing achievable system without emphasizing too much on mechanism and procedures, as well as providing dispute resolution. The Law only dictates obligation if government can enforce it, otherwise obligation will not be respected. Therefore, as discussed earlier, to give a room for local innovation and discretion, alignment should be reviewed and measured not on annual basis but probably within span of three-year. The lacking indicators should be developed without being too rigid and complicated. Central government does not want to recentral-ize development plan but to keep all elements of nation walk towards the same direction. Indicators of alignment are not necessarily stated in the Law but can be put in GR to ac-commodate dynamic stages of development.

Prior to the revision of the Laws, current system still provides room for improvisa-tion that shall be responded immediately. Few important things that can be improved without waiting for Law revision are: adoption of PBB and MTEF, optimalization of Musrenbang mechanism, and design of operable Monitoring and Evaluation system centered on Governor’s role. These suggestions are related to the last factors causing unaligned P&B as discussed in Section 2 paragraph 1, i.e. non-matching planning and budgeting cycle.

Adoption of PBB and MTEF can be done in no time since the Law has instructed it, even though in practice annual budgeting may still be dominant. To initiate the application


at the regional level, central government can provide capacity building and pilot project. It will offer regions with real examples and necessary competency.

Musrenbangnas as a forum to conform RKP Daerah and RKP can play crucial role to minimize unaligned programs between national and regional. However, a slot of few days to facilitate big meeting and its sub-meetings is not sufficient to accommodate very vast and diverse differences and demand from both sides. Government can take advantages of ICT technology by providing dedicated web pages for regions to upload their documents of Musrenbang to be reviewed by respective line Ministries prior to Musrenbang dates. Therefore the process of conformity starts in pre-meeting preparation stage before physical meeting in Jakarta. With assumption that both sides are ready to implement MTEF (at least partly) there can be two types of Musrenbangnas, namely: MTEF Musrenbangnas to discuss conformity of multi-year programs, and Annual Musrenbangnas to discuss the rest of non-multi-year programs. Both meetings are conducted in different events.

As for the tasks of Monitoring and Evaluation, especially for Deconcentrated/Co-ad-ministered Programs, Governor Office will act as initial screener for proposals from regions and discuss them with respective line ministries. Monitoring of ongoing programs within his jurisdictions and evaluation of completed programs are also done by the Governor. The Governor Office should be competent to collect and maintain appropriate database of those programs, thus the report provides historical information to give comprehensive illustration and analysis of certain programs or objectives. Only by seriously taking care M&E, we can expect improved development plan over time. Minimalist M&E reports will only end up at the filing cabinet.

Governor can also perform evaluation of important programs or medium-term evalu-ation for regions under his authority. This is related with the concern of periodization of alignment review. Medium-term review will provide regions with room for innovation and to fulfill local preference demand, as long as medium-term targets are achieved. Governor does not only act as intermediary between national and local, but also as clearinghouse for regional data and program information. To be able to perform his tasks, Governor office must be set with competent staffs, sufficient equipment, but at slim size. Big government office is slow and trapped by bureaucracy problems, while lean office will be likely more responsive and staying focus.

To make Governor Office stay focus, it should not be burdened by unnecessary re-sponsibilities. The tasks that can be done by local governments do not need to be done by governor as representative of Central Government. Thus there are two important conse-


quences, namely: a) review of Governor’s tasks to delegate all decentralized tasks to local governments, and b) Governor should be appointed by the President instead of elected through popular voting in provincex. These two conditions will minimize conflicts induced by current dual role and will enhance transparency of Walikota/Bupati to his voters as well as clear performance monitoring by his voters. Local House Representatives (DPRD members) at provincial level consist of representatives from DPRD at district level (DPRD Kabupaten/Kota). Aside from cost efficiency concern, it complies with the objective: part-nership between national representative (Governor) and local interest (DPRD).

Last but not the least recommendation is to harmonize local political election with national election. Local election should be run in one year after national election for all regions. By doing all local elections at the same time, it will be much simpler because every political events raise potential conflicts (thus costly). It also prevents adventurous politi-cians to try their lucks in different regions. By choosing the local election time one-year post national election, all Heads of regions can establish regional development plan by referring to the latest RPJP or National RPJM. Hence, it will comply with national to regional plan-ning sequence.


Reference

Alexander, Ernest. Approaches to Planning: Introducing Current Planning Theories, Con-cept and Issues, second edition. Gordon and Breach.1992. Print.

Allen, Richard. “Planning and Budgeting in Developing Countries – ‘Shrinking the P’”. Public Financial Management Blog. IMF, 31 Jan. 2011. Web. 14 Oct. 2012

Bahl, Roy, and Jorge Martinez-Vasquez. “Sequencing Fiscal Decentralization”. Policy Research Working Paper Series. 3914 (2006): n. pag. Web. 10 July 2011.

Banfield, Edward C. “Note on a Conceptual Scheme,” Politics, Planning and the Public Interest, Ed. Edward C. Banfield and Martin Meyerson. Free Press.1955.

Banfield, Edward C. “Ends and means in Planning.” International Social Science Journal. 11 (1959). Web. 15 Oct 2012.

Bryson, John M., and Robert C. Einsweiler, eds.Strategic Planning: Threats and Opportu-nities for Planners. APA Planners Press. 1988. Print.

Christensen, Karen S. “Coping with Uncertainty in Planning.” Journal of the American Planning Association. 51(1985):63-73. Web. 20 Oct. 2012.

Lindblom, Charles E. “The Science of “Muddling Through”.” Public Administration Re-view.19.2 (1959):79-88. Web. 19 Oct. 2012.

Kaufman, Jerome L., and Harvey M. Jacobs. 1987. “A public planning perspective on strategic planning.” Journal of the American Planning Association. 60:41-44.

Musgrave, Richard A. The Theory of Public Finance: A Study in Public Economy.McGraw-Hill. 1959.

Schelling, Thomas C. “On the Ecology of Micromotives.” The Public Interest. 25 (1971):61-98. Web. 20 Oct. 2012.

Zen, Fauziah. “The Role of Indonesian Governor: in the Limbo of Decentralization Road”, ADB TA-7452. 2012. Print.


Endnote

iLater in Law 32/2004, the “several other areas” was eliminated.iiBPS 2010. Income proxied by Regional Gross Domestic Product in 2009 current price. iiBanfield (1955; 1959).ivLindblom (1959).vBryson and Einsweiler (1988); Kaufman and Jacobs (1987).viThis makes decentralization more feasible when the time comes, because there is already a

local experience with managing local service delivery. In particular, a deconcentrated system,

as opposed to a centralized system, can significantly facilitate the transfer of personnel

and facilities, ultimately of service delivery, from the central government to subnational

entities when the time for decentralization comes. Over the past several decades there have

been many examples of previously centralized systems facing serious obstacles to genuine

decentralization because of the resistance of public servants to move out of the nation’s

capital and their line ministries’ offices and into communities throughout the national

territory (Bahl & Martinez-Vasquez, 2003).viiTake Joint Circular Letter of Bappenas, MoHA, and MoF in 2010 on Strengthening

Governor’s Role in the context of Deconcentration and Co-administration Funds as one of

the most recent example.viiiDated 18th November 2010, 0442/M.PPN/11/2010 by the National Planning Agency,

SE-696/MK/2010 by the Minister of Finance, 120/4693/SJ by the Minister of Home

Affairs, concerning the implementation effectiveness of regional programs and activities of

the ministry/agency and the improvement of governor’s active role as the representative of

Central Government.ixSome technical advices including: Deconcentration/Co-administered Task Fund should not

require separate counterpart fund, and the work plan for its programs should be informed

to the Governors and Regents/Mayors by mid-June in the previous year, or whenever

Tentative Ceiling has been determined. In the end of December of the previous year (or

whenever Definitive Ceiling has been determined), each ministry/agency should disburse the

regulation regarding their programs and activities—altogether with the technical guidance

for the implementation of each program and activity.xException is DKI Jakarta, which Governor is elected while Walikota is appointed, and DI

Yogyakarta according to its special Law.

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