Anticipating P4R?Innovative operations in support of a rising Indonesia

Mae Chu ChangLead Education Specialist and Indonesia Human Development Country Sector CoordinatorChris HobanIndonesia Operations ManagerShubham ChaudhuriIndonesia Lead Economist

March 01, 2011Emerging Indonesia Seminar SeriesWorld Bank, Washington, DC

OutlineWhat we’ll be talking about Three innovative operations that have defined the first two years of the

CPS

A quick overview of the three operations

Public Expenditure Support Facility--DPL-DDO (with a difference)

Strengthening fiscal transfers using an output-based approach: the Local Government and Decentralization Project (DAK-refinancing)—SIL

Strengthening school-based management: BOS-KITA--SIL

What made these operations innovative:

From the perspective of Indonesia’s development agenda

From the perspective of the World Bank

Mainstreaming these sorts of operations

What will it take

Indonesia Public Expenditure Support FacilityA DPL-DDO with a difference What it was

Development Policy Loan (DPL) with Deferred Drawdown Option (DDO) in the amount of USD2 billion approved by the World Bank’s Board on March 3, 2009

Genesis in the aftermath of Lehman Brothers’ collapse and the turmoil in global

financial markets in the last quarter of 2008, concern that Indonesia would have difficult meeting its gross financing needs (about USD 23 billion) from market sources in 2009

Aim to ensure that Indonesia would be able to sustain critical public expenditures

and maintain the momentum on structural and institutional reforms even if adverse global financial market conditions limit Indonesia’s ability to meet its gross financing needs from market sources

Indonesia Public Expenditure Support FacilityA DPL-DDO with a difference Implementation

loan was prepared, appraised, and negotiated in a period of 4 months starting early October 2008

government also requested the Bank’s assistance in facilitating additional financing from other bilateral and multilateral sources, which the Bank was able to do, resulting in commitments of an additional USD 3.5 billion from the Governments of Japan and Australia and the ADB.

A set of confidence-boosting policy measures aimed at:

reassuring financial markets and maintaining financial system stability

sustaining critical public expenditures while maintaining budget discipline and

facilitating private investment and supporting exports

Key feature:

Structured as CONTINGENT budget support that would be available ONLY if Indonesia were unable to meet financing needs from market sources

STATE BTight liquidity conditions and

access to finance restricted but macroeconomic situation

otherwise stable

STATE ALiquidity conditions in markets

eased, access to finance available at reasonable cost,

macroeconomic situation stable

STATE CTight liquidity conditions, no access to

finance, imminent or ongoing BOP crisis, macroec situation unstable

GoI should be able to no need for drawdown

GoI unable to meet financing targets, possible drawdown of DPL-DDO

GoI unable to meet financing targets and needs BOP support, no disbursement possible of DPL-DDO

Aims of the Indonesia PESF (DPL-DDO):

By reassuring markets on GoI’s ability to meet its financing needs, raise the probability of state A

Provide back-up financing in case state B is realized

The PESF (DPL-DDO) was NOT intended to, and could not, given its limited size and the World Bank’s mandate, provide BOP support

Indonesia Public Expenditure Support FacilityThe basic idea Three potential scenarios Indonesia faced in 2009

Indonesia Public Expenditure Support FacilityWhat made it innovative Timing

timing of the PESF, the fact that it was conceptualized as a precautionary step and put together rapidly enough for it to be in place before Indonesia was in a crisis, enabled the PESF to play an useful preventive role

the announcement of a contingent support package, backed up by a program of confidence-boosting policy measures sent a strong positive signal to the markets, making it more likely that Indonesia would be able to meet its financing needs for CY2009 from market sources

Market commentary in the lead-up to the Board’s approval of the loan and subsequently suggests that the PESF did contribute to boosting market confidence in Indonesia’s creditworthiness. Indonesia was able, in early March, to raise USD 3 billion in global capital markets—the largest issuance by an emerging market since September 2008

The contingent market-oriented design of the PESF the fact that Indonesia would only draw down the facility in the event that

market conditions deteriorated and it was unable to meet its financing needs from market sources—was perhaps its most innovative feature and in effect made it a new financial instrument

The contingent nature of the PESF provided LEVERAGE, helping the GoI mobilize more resources from the market than might have been realized if the facility had been disbursed immediately

Local Government & Decentralization Project (DAK)

$ 220 million over four years

Pilot in five provinces

Specific Investment Loan: Output-Based Disbursement triggered by achievement of results

Focus on local infrastructure (roads, irrigation, water & sanitation)

Incentives for compliance

Since decentralization, substantial increases in funds to provincial & districts

Local Govts now manage 40% of total public expenditures & 50% of public investments.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -

200

400

600

800

1,000

0%

10%

20%

30%

40%

50%

16%

19% 20%

27%

37%

40%

35%

33%35%

40%

35%37%

Central Govt (excluding transfers) Provincial Govt (excluding transfer to Kab/Kota)

Kabupaten/Kota Govt % SNG to All (including transfers)

Trends of Central, Province & District Spending

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Context: Resources shifted to LGs

9

DAK Engagement Approach

Lack of transparency and accountability

Inadequate and cumbersome reporting

Weak monitoring and evaluation

Very little verification

BANK DUNIA │THE WORLD BANK

Strengthen Country Institutions

Target large set of LGs

Improve LG internal controls

Work through existing transfer system

Project Development Objectives (DO)and Results Framework (RF)

PDO:

Improve the accountability and reporting of the central government’s Specific Purpose Grants (DAK) for the infrastructure sectors.

RF: Improve financial & technical reporting

RF: Output verification of projects financed by DAK funds

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Output Eligibility Criteria for Reimbursement

Physical Realization of

Outputs

• Construction Completion Certificates.

• Compliance with Technical Specifications of Technical Guidelines

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Compliance with National Procurement Regulations

• National Regulations

require competitive

procedures in hiring

of contractors.

Compliance with

Environmental & Social

Safeguards:

• Indicators listed in the

Project Operations

Manual.

• Minister Issue

Supplement to Public

Works Technical

Guidelines.

Results focused• Reward Performance with grants

• Reimburse eligible outputs based on standard costs

Strengthen Government Systems• Central government ownership & control

• Strengthen oversight by internal audit & public works

Strengthen LG Internal Controls

Web-based Monitoring and Reporting Systems

Next phase:• Scale up to more Provinces

• Promote improved accountability downwards

• Improve efficiency and effectiveness of expenditures

Key Features of DAK Program

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Indonesia – Education Statistics

Population : 230 million Islands: 16,000 plus

Education Total number of students: 50 million Total number of teachers: 3 million Total number of schools: 258,000

Primary Completion Rate: 99% Secondary Net Enrollment rate: 72.1% (2009) Tertiary Gross Enrollment rate : 26.6% (2008) Primary Age Children Out of School: 686,000

Public Education Expenditure : 3.8% of GDP or 20 % of Gov. Spending Average Teacher Salary, Primary: US$ 2,012 per annum

BOS

Bantuan Operasional Sekolah (BOS) or School Grants Program

Launched in 2005 by Government of Indonesia using savings from a reduction in fuel subsidies

BOS aims to:

Strengthen school based management through provision of discretionary block grants to schools for school operations

Reduce school fees, eliminate school fees for the poor

Increase enrollment, especially for the poor.

Coverage: All (over 200,000) public/private, religious and non religious, primary and junior secondary schools, 41.3 million students

BOS

Capitation Grant (per student basis) $ 44 per student per year (primary) $ 63 per student per year (junior secondary)

Largest non-salary education Finance program of the GoI Edu. Budget: US$ 20 billion/annum (2010) BOS Spending: US$ 2 billion/annum (2010)

Implementation: MoNE and MoRA

Innovation in BOS (Gov. of Indonesia)

1. BOS is a transformational concept

BOS transitioned the education system towards an improved SBM system

2. Changes who controls school spending: From central Government to local school + involving beneficiaries for greater accountability and less corruption.

3. Per-student formula = alignment of needs of school with provisions.

4. Responsibility for the schools shifts from the Education Ministry to the schools.

BOS-KITA (Our – BOS)

A program SIL by the World Bank to support the Government of Indonesia’s BOS program

Provided $ 600 million in 2008 and additional financing of $ 500 million in 2010 to the BOS (approx 20% of the total, re-financing GOI funds)

Dutch Grant: $ 20 million in 2008, AusAID Grant: $ 20 million in 2011

Is governed by the BOS operational manual which meets Bank standards

Innovation in BOS-KITA (World Bank)

1. Support ongoing Government program = authorities and local communities have sense of ownership.

2. Government welcomed Bank’s reorientation towards blending Bank financing more smoothly and directly into support of successful, ongoing government programs.

3. Not a traditional SIL. No NOLs, no procurement.

4. Independent monitoring of spending, plus local community involvement.

5. Parallel grant financing managed by the Bank for technical assistance, information campaign:

Bank’s ability to respond quickly to most pressing issues with analytical work to complement loan.

Before BOS After BOS

Before After

No or little money for schools

• All schools receive funds based on per capita formula• Funds delivered in full amounts to all schools every quarter• Household spending on books has halved since pre-BOS.

No planning at school level

School development plans linked to use of funds required

No sharing of information with stakeholders at school level

Schools now displaying expenditures publicly

No functional school committees

• All schools have school committees• Over 85% of schools report on BOS fund usage to school committees

Before BOS After BOS

Before After

Inputs provided by district governments expensive. Costs 40% higher than now

• Schools manage inputs• 97% of funds are used properly

No or little oversight • Nearly 70% of all schools surveyed were monitored by either Central, Provincial or District BOS Management teams. • Complaint handling at all levels of government.

JSec NER for poorest: 52% JSec NER for poorest: 59%

Low parental involvement in school performance

• School Committee must have parent members• More parents aware of BOS and therefore responsibilities of school

What makes these operations innovativeFrom Indonesia’s perspective DDO

Respond to a key need identified by government

Bring in other international partners who could not have joined without Bank leadership

Programmatic instruments

Support key government services already being delivered

Strengthen existing government procedures

No need for the very unpopular Bank no-objection letters

No more micro-management of individual transactions by the Bank which detract from developmental objectives

Key feature is strong monitoring of expenditures & outcomes

Build on Bank’s reputation for ensuring good budget utilization

DAK

Includes substantial procurement using NCB & post review

Payment based on agreed costing of outputs

What makes these operations innovativeFrom The Bank’s perspective

DDO

Conditional use of DDO based on government’s objective

Influence markets without disbursement

Enabled by very strong policy engagement under trust funds

Programmatic instruments

Capacity building based on services already being delivered rather than adopting outside practices

Operating procedures all based on government nation-wide guidance

Helping to change the “rules of the game” through enhancement to the Operations Manuals—a small change leading to major impact, e.g. BOS reaches 250,000 schools

Parallel technical assistance and analytical support through grant trust funds

Shift from disbursing against inputs to disbursing against output

Substantial procurement using NCB & post review

Mainstreaming these sorts of innovationsWhat will it take Relax the Bank’s procurement guidelines for programmatic assistance

focus on outcomes & value for money rather than transaction process steps

Recognize the development value of bringing better transparency & accountability to existing programs

Programs need to be ‘good enough’ with will & potential to improve

Bank’s ‘trademark’ is effective government spending

Governments also need to appreciate loan assistance for programs rather than identifiable projects