FOR OFFICIAL USE ONLY - World Bank · Indonesia Country Department ... Beasiswa untuk Siswa Miskin...

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No.: 65070-ID

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

ON A PROPOSED LOAN

IN THE AMOUNT OF US$400 MILLION

TO

THE REPUBLIC OF INDONESIA

FOR A

EIGHTH DEVELOPMENT POLICY LOAN (DPL 8)

OCTOBER 20, 2011

Poverty Reduction and Economic Management Unit

Indonesia Country Department

East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official

duties. Its contents may not otherwise be disclosed without World Bank authorization.

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REPUBLIC OF INDONESIA - GOVERNMENT FISCAL YEAR

January 1 – December 31

CURRENCY EQUIVALENTS

(Exchange Rate Effective as October 19, 2011)

Currency Unit Rupiah (Rp.) US$1.00 = Rp.8,855

Vice President: Country Director:

Acting Sector Director: Lead Economist:

Task Team Leader:

James Adams Stefan G. Koeberle Ivailo V. Izvorski Shubham Chaudhuri Enrique Aldaz-Carroll

The Indonesia Eighth Development Policy Loan has been prepared by a World Bank team supervised by

Shubham Chaudhuri (Lead Economist, EASPR) and led by Enrique Aldaz-Carroll (EASPR). Members of the

team are: Enrique Blanco Armas (EASPR), Dara Lengkong (EASPR), Peter Kjaer Milne (EASPR), Ashley

Taylor (EASPR), Theo David Thomas (EASPR), Jonas Arp Fallov (EASPR), Anna I. Gueorguieva (EASPR),

Retno Sri Handini (EASPI), Soekarno Wirokartono (EASPR), Vijay Ramachandran (EASPR), Hari Purnomo

(EASPR), Imad Saleh (EAPPR), Rizal Rivai (EAPPR), Widya Wijayanti (EAPPR), Rajat Narula (EAPFM), P.S.

Srinivas (EASFP), Greg Elms (EASFP), Henry Sandee (EASPR), Natalia Cubillos Salcedo (EASPR), Stephen

Magiera (EASFP), Siti Budi Wardhani (EASFP), Sjamsu Rahardja (EASPR), Ramesh Siva (TWICT), Vivi

Alatas (EASPR), Edgar Janz (EASPR), Jon Robbert Jellema (EASPR), Claudia Rokx (EASHD), Pandu

Harimurti (EASHH), Jan Weetjens (EASIS), Yoko Doi (EASFP), Djauhari Sitorus (EASFP) and Nina Herawati

(EASPR).

The team worked closely with Hiroshi Takabayashi and Tanaka Shinichi (JICA), and Milan Zavadjil (IMF) to

coordinate policy advice.

The team worked under the overall guidance of Ivailo V. Izvorski (Acting Sector Director, EASPR) and Stefan

G. Koeberle (Country Director, EACIF).

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities DAK Dana Alokasi Khusus

(Special Allocation Funds)

ADB Asian Development Bank DAU Dana Alokasi Umum

(General Allocation Funds)

AFS Aplikasi Forecasting Satker (Forecasting Application

of Working Unit) DB Doing Business

AGO Attorney General Office DC/DRC Data Center/Disaster Recovery Center

AMDAL Analisa Mengenai Dampak Lingkungan

(Environmental Impact Assessment) DG Director General

APBN Anggaran Pendapatan dan Belanja Negara (State

Budget) DGB Directorate General of Budget

APBN-P Anggaran Pendapatan dan Belanja Negara-

Perubahan (State Budget Revision) DGT Directorate General of Taxes

ASEAN The Association of Southeast Asian Nations DIPA Daftar Isian Pelaksanaan Anggaran (Approved

Budget Allocation)

AusAID Australian Agency for International Development DMC Data Management Center

Bappenas Badan Perencanaan Pembangunan Nasional

(National Development Planning Agency) DNI

Daftar Negatif Investasi

(Investment Negative List)

BI Bank Indonesia DPL Development Policy Loan

BKPM Badan Koordinasi Penanaman Modal (Indonesia

Investment Coordinating Board) DPL-DDO

Development Policy Loan-Deferred Drawdown

Options

BLI Base-line Indicator DPE Deputy of Performance Evaluation

BLM Bantuan Langsung Masyarakat (Community Block

Grants) DPR

Dewan Perwakilan Rakyat Daerah (People‘s

Consultative Assembly)

BLT Bantuan Langsung Tunai (Cash Transfer) DRC Data Recovery Center

BOS Bantuan Operasional Sekolah

(School Operational Assistance) EITI Extractive Industries Transparency Initiative

BOS-KITA

Bantuan Operasional Sekolah (School Operational

Assistance – Knowledge Improvement for

Transparency and Accountability)

FDI Foreign Direct Investment

BPK Badan Pemeriksa Keuangan (State Audit Agency) FSSF Financial System Stability Forum

BPKP Badan Pengawasan Keuangan dan Pembangunan

(Financial and Development Audit Agency) FY Fiscal Year

BPI Business Process Improvement GDP Gross Domestic Product

BPN Badan Pertanahan Negara (Land Authority Board) GFMRAP Government Financial Management and Revenue

Administration Project

BPOM Badan Pengawas Obat dan Makanan (Agency for

Drugs and Food) GFMIS

Government Financial Management Information

System

BPS Badan Pusat Statistik (Central Bureau of Statistics) GoI Government of Indonesia

BRIC Brazil, Russia, India and China GoJ Government of Japan

BSM Beasiswa untuk Siswa Miskin (the Scholarship

program for poor students) HR Human Resources

Bulog Badan Urusan Logistik (Bureau of Logistics) HRD Human Resources Development

CAS Country Assistance Strategy HRSP Human Resources Strategic Plan

CATS Customs Advanced Trade System IBRD International Bank for Reconstruction and

Development

CC DPL Climate Change Development Policy Loan ICR Implementation Completion Report

CIDA The Canadian International Development Agency ICT Information and Communication Technology

CMC Change Management and Communication IFC International Finance Corporation

CMEA Coordinating Ministry of Economic Affairs IFMIS Integrated Financial Management Information

System

CMMI Capability Maturity Model Integration IG Inspector General

COA Chart of Accounts ILGR Initiatives for Local Government Reforms

COSO Committee of Sponsoring Organization IMF International Monetary Funds

CPI Consumer Price Index Inpres Instruksi Presiden (Presidential Instruction)

CPS Country Partnership Strategy INSW Indonesia National Single Window

CPSPR Country Partnership Strategy Progress Report IP Infrastruktur Pedesaan

(Village Infrastructure)

CRA Change Readiness Assessment IT Information Technology

CRP Conference Room Pilot ITSM Information Technology Service Management

CSA Control Self Assessment Jamkesmas Jaminan Kesehatan Masyarakat

(Health Insurance Reform Scheme)

JICA Japan International Cooperation Agency PBB Performance Based Budgeting

JPS Jaringan Pengaman Sosial (Social Safety Net) PEACH Public Expenditure Analysis and Capacity

Harmonization

Kadin Kamar Dagang dan Industri (Indonesia Chamber of

Commerce and Industry) PEFA Public Expenditure and Financial Accountability

Kanwil Kantor Wilayah (Regional Offices) Permenko Peraturan Menko (Menko‘s Regulation)

KDP Kecamatan Development Program Perpres Peraturan Presiden (Presidential Regulation)

Keppres Keputusan Presiden (Presidential Decree) PESF-DDO Public Expenditure Support Facility- Deferred

Drawdown Option

Kepmenko Keputusan Menteri Koordinator (Coordinating

Minister Decree) PFM Public Financial Management

K/LIMF Kementerian/Lembaga (Ministry/Agency) PFM-MDTF Public Financial Management-Multi Donor Trust

Funds

KMK

Keputusan Menteri Keuangan

(Decree of the Minister of Finance)Indonesia

National Police

PINTAR Project for Indonesian Tax Administration Reform

KN Kekayaan Negara (State Assets) PIU Project Implementation Unit

KPI Key Performance Indicator PK Padat Karya (Labor Intensive)

KPK Komisi Pemberantasan Korupsi (Corruption

Eradication Commission) PKH

Program Keluarga Harapan (Conditional Cash

Transfer)

KPKNL Kantor Pelayanan Kekayaan Negara dan Lelang

(State Auction Service Offices) PMD Project Management Division/Department

KPPN Kantor Pelayanan Perbendaharaan Negara (State

Treasury Services Offices) PP Peraturan Pemerintah (Government Regulation)

KUR Kredit Usaha Rakyat (People-based Small Business

Loan) PPD Public Private Dialogue

LG Local PPP Purchasing Power Parity

LKPP Lembaga Kebijakan Pengadaan Barang/Jasa

Pemerintah (National Public Procurement Office) PMK

Peraturan Menteri Keuangan (Minister of Finance

Regulation)

LPG Liquefied Petroleum Gas PNPM Program Nasional Pemberdayaan Masyarakat

(National Program for Community Empowerment)

M&E Monitoring and Evaluation POM Project Operations Manual

MDFTIC Multi Donor Facility for Trade and Investment

Climate PPATK

Pusat Pelaporan dan Analisa Transaksi Keuangan

(Financial Transaction Analysis and Reporting

Center)

MDGs Millennium Development Goals PPLS Pendataan Program Pelayanan Sosial (Social

service data collection program)

MDTF Multi Donor Trust Funds PTSP Pelayanan Terpadu Satu Pintu (One-stop Integrated

Services)

MenPAN Kementerian Pemberdayagunaan Aparatur Negara

(State Ministry of State Apparatus Reforms) Pusintek

Pusat Sistem Informasi dan Teknologi Keuangan

(Center of Information System and Technology)

MIS Management Information System

MoF Ministry of Finance RASKIN Beras Miskin (Rice for the Poor Program)

MoU Memorandum of Understanding Renja-KL Rencana Kerja Kementerian Lembaga (Line

Ministies‘ Work Plan)

MP3EI Master Plan for Acceleration and Expansion of

Indonesia‘s Economic Development RKA-K/L

Rencana Kerja dan Anggaran Kementerian/Lembaga

(Ministry/Agency Budget and Work Plan)

MTEF Medium-Term Expenditure Framework RKP Rencana Kerja Pemerintah (Government Work Plan)

MSME Micro, Small, and Medium Enterprises RPJM Rencana Pembangunan Jangka Menengah (Medium-

Term Development Plan)

Musrenbang Musyawarah Rencana Pembangunan (Multi

stakeholders consultation forum) RPJMN

Rencana Pembangunan Jangka Menengah National

(National Medium Term Development Plan)

NAFED National Agency for Export Development RTRWN Rencana Tata Ruang Wilayah Nasional (National

Spatial Plan)

NDRI Natural Disaster Risk Index SAKTI Sistem Aplikasi Keuangan Terpadu Instansi

(Integrated Agency Financial Application System)

NGO Non Governmental Organization Satker Satuan Kerja (Working Unit)

NLB National Logistics Blueprint SBI Sertifikat Bank Indonesia (Bank of Indonesia

Certificate)

NPPO National Public Procurement Office

NTM Non Tariff Measures

NTS National Targeting System

OECD Organization for Economic Co-operation and

Development

OPK Operasi Pasar Khusus (Special Market Operations)

SBUN Sub Bendahara Umum Negara (General Operation

Treasury)

SC Steering Comittee

SDLC Systems Development Life Cycle

SIMAK-BMN Sistem Manajemen Akuntansi Barang Milik Negara

(Accounting Management System for State Assets)

Sislognas Sistem Logistic Nasional (National Logistics System)

Sistranas Sistem Transpor Nasional (National Transportation

Systems)

SLA Service Level Arrangement

SME Small and Medium Enterprise

SOP Standard Operating Procedures

SPAN Sistem Perbendaharaan dan Anggaran Negara

(Integrated Financial Management System)

SPAN COTS

Sistem Perbendaharaan dan Anggaran Negara

(Integrated Financial Management System Computer

of the Shelf)

SPIPISE

Sistem Pelayanan Informasi dan Perizinan Investasi

Secara Elektronik

(Online Investment Licensing System)

SPM Surat Perintah Membayar

(Instruction for Payment)

STO Small Taxpayer Offices

TA Technical Assistance

Timnas PEPI

Peningkatan Ekspor dan Peningkatan Investasi

(National Team for the Development of Exports and

Investment)

TNP2K

Tim Nasional Percepatan Penanggulanan

Kemiskinan (National Team on Accelerating Poverty

Alleviation)

TSA Treasury Single Account

UKP4

Unit Kerja Presiden Bidang Pengawasan dan

Pengendalian Pembangunan (The Presidential

Working Unit for Supervision and Management of

Development)

ULP Unit Layanan Pengadaan

(Procurement Service Unit)

USDRP Urban Sector Development and Reform Project

VAT Value Added Tax

VP Vice President

VSL Variable Spread Loan

WAN Wide Area Network

WBG World Bank Group

REPUBLIC OF INDONESIA

EIGHTH DEVELOPMENT POLICY LOAN

TABLE OF CONTENTS

I.INTRODUCTION......................................................................................................................................................... 1

II.COUNTRY CONTEXT .............................................................................................................................................. 3

A. THE CURRENT STATE OF THE INDONESIAN ECONOMY ......................................................................................... 4 B. INDONESIA‘S ECONOMIC OUTLOOK ...................................................................................................................... 8 C. THE POLITICAL AND SOCIAL CONTEXT ............................................................................................................... 10

III. THE GOVERNMENT‘S REFORM PROGRAM AND BANK SUPPORT ...................................................... 11

A. THE GOI‘S DEVELOPMENT AGENDA .................................................................................................................... 11 B. KEY REFORM DIRECTIONS OF GOVERNMENT SYSTEMS AND INSTITUTIONS SUPPORTED BY THE DPL ........... 12

B. 1. Investment Climate and Trade Facilitation ................................................................................................... 13 B.2. Public Finance Management .......................................................................................................................... 16 B.3. Poverty Reduction .......................................................................................................................................... 18

C. OTHER REFORM STEPS TAKEN OUTSIDE BUT RELATED TO THE DPL ............................................................... 20 C. 1. Civil Service/ Bureaucracy Reform ............................................................................................................... 20 C.2. Judiciary Reform ............................................................................................................................................ 21 C.3. Improvement of the Decentralization Framework ....................................................................................... 22

IV. THE DPL PROGRAM IN INDONESIA .............................................................................................................. 23

A. LINKS TO THE 2009-2012 CPS .............................................................................................................................. 23 B. RELATIONSHIP TO OTHER BANK OPERATIONS.................................................................................................... 24 C. COLLABORATION WITH OTHER DEVELOPMENT PARTNERS AND THE IMF ....................................................... 24 D. LESSONS LEARNED ................................................................................................................................................ 26

V. THE PROPOSED OPERATION ............................................................................................................................ 27

A. THE EIGHTH DEVELOPMENT POLICY LOAN ....................................................................................................... 27 A.1. Policy Area I: Improving the Investment Climate .......................................................................................... 29 A.2. Policy Area II: Public Finance Management ................................................................................................. 34 A.3. Policy Area III: Poverty Reduction ................................................................................................................ 41

B. PARTICIPATORY PROCESSES AND CONSULTATIONS ............................................................................................ 46 C. THE FUTURE PROGRAM ........................................................................................................................................ 47

VI. OPERATIONAL AND IMPLEMENTATION ISSUES ...................................................................................... 49

A. MONITORING AND EVALUATION .......................................................................................................................... 49 A.1. Monitoring ..................................................................................................................................................... 49 A.2. Evaluation ...................................................................................................................................................... 49

B. POVERTY AND SOCIAL IMPACTS AND ENVIRONMENTAL ASPECTS ..................................................................... 50 B.2. Gender ............................................................................................................................................................ 51 B.3. Environmental ................................................................................................................................................ 51

C. FIDUCIARY ASPECTS, DISBURSEMENT AND AUDITING ........................................................................................ 52 D. RISKS .................................................................................................................................................................... 53

ANNEX 1: LETTER OF DEVELOPMENT POLICY ……………………………………………………………...56

ANNEX 2: APPLICATION OF GOOD PRACTICE PRINCIPLES ON CONDITIONALITY ………………....61

ANNEX 3: DPL PROGRAM POLICY MATRIX AND MONITORING AND RESULTS FRAMEWORK ...... 62

ANNEX 4: LOOKING BACK: RESULTS ACHIEVED IN PREVIOUS DPLS ..................................................... 76

A. Results Achieved in the first DPL series (DPLs 1 to 4) ................................................................................ 76 B. Results Achieved in the second DPL series (DPLs 5 to 6) ........................................................................... 80

C. Results Achieved in the third DPL series (DPL-7) ....................................................................................... 84 D. Results Achieved in the Development Policy Loan with Deferred Drawdown Option (DPL-DDO) ............ 87

ANNEX 5: DETAILS ON IMPLEMENTATION PROGRESS OF DPL8 PROPOSED PRIOR AND

BENCHMARK ACTIONS ........................................................................................................................................... 89

POLICY AREA 1: IMPROVING THE INVESTMENT CLIMATE ...................................................................................... 89 POLICY AREA 2: STRENGTHENING PUBLIC FINANCIAL MANAGEMENT ................................................................. 98 POLICY AREA 3: ENHANCING POVERTY ALLEVIATION AND SERVICE DELIVERY ................................................ 111

ANNEX 6: TECHNICAL ANNEX ON PUBLIC FINANCIAL MANAGEMENT ............................................... 117

ANNEX 7: ENVIRONMENTAL AND SOCIAL REVIEW .................................................................................... 136

ANNEX 8: INDONESIA – IMF ASSESSMENT LETTER ..................................................................................... 149

ANNEX 9: DEBT SUSTAINABILITY ANALYSIS ................................................................................................. 153

ANNEX 10: INDONESIA AT A GLANCE ............................................................................................................... 155

MAP

List of Figures

Figure 1: Private domestic demand has been a strong driver of growth… ........................................................ 5 Figure 2: Non-tradable sectors continue to drive growth on the production side .............................................. 5 Figure 3: Headline inflation has fallen in the first half of 2011 .......................................................................... 6 Figure 4: The recent rise and fall of volatile food prices has driven recently monthly inflation patterns ......... 6 Figure 5: Balance of payment inflows have reached record levels, driven by the financial account ................ 7 Figure 6: Indonesian equities have fallen recently after recovering from earlier losses in 2011 ...................... 7 Figure 7: 2009-2014 CPS core engagements................................................................................................... 24

List of Tables

Table 1: Indonesia's medium-term economic outlook ..................................................................................... 10 Table 2: Development Partner Contributions to DPL Operations (US$ million) ............................................ 25 Table 3: Prior Actions for the Indonesia Eighth Development Policy Loan (DPL-8)..................................... 28 Table 4: Prior Actions for DPL-8 and Indicative Actions for DPL-9 ............................................................. 47 Table 5: Critical Monitoring Activities ........................................................................................................... 49 Table 6: Sensitivity Analysis for Key Indicators of Indonesia‘s Government Debt ..................................... 154

List of Boxes

Box 1: Analytical Underpinnings for Investment Climate and Trade Reform Support .................................. 13 Box 2: Analytical Underpinnings for PFM Reform Support ........................................................................... 17 Box 3: Analytical Underpinnings for Service Delivery Reform Support ........................................................ 19

i

REPUBLIC OF INDONESIA – EIGHTH DEVELOPMENT POLICY LOAN (DPL 8) Loan Program Summary

Borrower Republic of Indonesia

Implementing

Agency Coordinating Ministry for Economic Affairs and Ministry of Finance

Financing Data

IBRD Variable Spread Loan, US$400.0 million

Operation Type A single tranche operation that is the second of a third programmatic series of three consecutive multi-

year Development Policy Loans (DPL) 7-9.

Main Policy Areas Investment Climate, Public Financial Management, Poverty Reduction and Public Service Delivery

Key Outcome

Indicators

Since 2004, the two previous DPL series (DPLs 1-4 and 5-6) have significantly helped the

Government of Indonesia (GoI) towards achieving its medium term growth and poverty reduction

objectives. This second operation of the third DPL series is expected to contribute to the achievement

of the following targeted outcomes by 2012:

Improved perception of investment climate by domestic and foreign investors, leading to

increased flow of investments (with investment to GDP ratio increasing from the 2007-2009

average of 23.2 percent to 25 percent or above in 2012, and value of FDI net inflows from the

2007-2009 average of US$7 billion to US$7.9 billion or above in 2012);

Greater integrity and more effective use and management of public funds (with percentage of total

capital expenditure disbursed by end of Q2 increased from 19 percent in 2010 up to 27 percent in

2012);

Strengthened GoI efforts to reduce poverty and vulnerability, through better informed and

evidence-based policy and program decisions (with percentage of social assistance program to

central government expenditure increasing from 3.8 percent in 2009 to higher than 4.5 percent in

2012).

Program

Development

Objective(s) and

Contribution to

CPS

The overall goal of the DPL program is to help the GoI achieve its medium-term growth and poverty

reduction objectives. The proposed DPL-8 in particular supports the GoI‘s reform efforts in:

(i) improving the investment climate through strengthened investment service institutions and

regulations, reduced tax burden and improved tax administration, enhanced trade facilitation and

promotion of exports, as well as improved connectivity;

(ii) strengthening public financial management through improved results orientation and MTEF in

the budget process, linking budget formulation to the Government‘s Financial Management

Information System (SPAN), development of a new M&E system, streamlined budget execution

and management of budget authority, improved budget and cash management within the central

government, improved provision of IT services, strengthened management of state assets, as well

as improved government accounting and audit functions; and

(iii) enhancing poverty alleviation and service delivery efforts through improved governance and

institutional accountability, improved targeting of the poor, improved household-targeted poverty

reduction programs (i.e. Jamkesmas), improved community-based poverty reduction programs

(i.e. the National Program for Community Empowerment - PNPM), and improved MSME-based

poverty reduction programs (i.e. Financial Inclusion Strategy and the People‘s Business Credit -

KUR).

In accordance with the FY09-FY12 CPS, the DPL series continues to be at the center of WBG support

in strengthening Indonesia‘s central government institutions and systems, a key cross-sectoral

engagement theme under the CPS. Underpinned by advisory and monitoring work, as well as

institutional capacity-building in collaboration with other development partners, DPLs have also

supported key reforms in the areas of private sector development and community development and

social protection.

ii

Risks and Risk

Mitigation

Changes in key government counterparts may undermine the extensive reforms pursued under

the DPL program. This risk is mitigated by the fact that most DPL reforms are driven by priorities that

were developed and articulated formally through consensus within the GoI, rather than by individual

government officials.

External factors may cause significant and rapid shifts in global financial market sentiment,

resulting in sudden, large and somewhat disruptive capital outflows. The recent volatility in domestic

financial markets has shown that Indonesia remains exposed such capital flow reversals. However,

there have been significant improvements in the Indonesian macroeconomic framework which have

translated into improved resilience to external shocks. The Government has also demonstrated a sound

track record in urgently taking precautionary and proactive measures when needed, most recently

during the 2008 global financial crisis.

Rises in domestic and international commodity prices may offset some of the benefits of growth

and divert Government attention to longer term reforms. The GoI is well aware of the risks and

challenges that lie ahead and has taken a number of precautionary and proactive measures in response.

These include the use of trade measures, as in 2008, to mitigate the impact of rising food prices; the

use of budgetary sources to expand social protection program and to intervene in stabilizing food

prices; and issuance of Presidential decree No 5/2011 to implement mitigation actions aimed at

safeguarding domestic rice production against extreme weather. In addition, the Government of

Indonesia is establishing a Fasilitas Akses Pangan (Food Access Program, FAP) that would provide a

mechanism through which international development partners might support Indonesia‘s efforts to

enhance food security and serve as a platform for coordinated dialogue with development partners.

GoI and the World Bank are in discussions about the possibility of World Bank providing financing to

support GoI efforts to improve food security. The GoI has asked that the World Bank help facilitate

the participation of other development partners in the platform.

Volatile and relatively high international oil prices create uncertainty over the Government's

energy subsidies costs, which may hamper spending on development projects. The Government‘s

decision to raise administered fuel prices in May 2008 demonstrated that, if the economic situation

warrants it, the Government is willing to make difficult decisions. The Minister of Finance has also

announced reforms to the subsidies‘ schemes for fertilizer, fuel and electricity over the period of 2010-

14, to improve the targeting of these subsidies and redirect spending to development projects. Various

policies are in place or being investigated to both reduce the supply of the most subsidized energy, and

to reduce the gap between regulated prices and the economic cost. In addition, in July 2010 the

Government increased electricity tariffs and it has indicated plans to increase electricity tariffs a

further 10 percent in April 2012.

Challenges remain in Indonesia’s PFM systems, particularly with regard to internal controls in

the execution of the budget by spending agencies. However, in recent years Indonesia has made

significant strides in the way its public finances are managed and in increasing transparency and

independent oversight. In almost all areas of PFM, changes in the legal and regulatory architecture are

now largely complete and the momentum has shifted towards implementation of new PFM practices.

Weaknesses in financial management and accountability continue to be gradually addressed through

the DPL PFM reform program, as well as the GFMRAP project and other initiatives supported by

development partners. Despite the challenges, and given the Government's progress in improving its

PFM systems, the team considers that Indonesia's PFM system is adequate to receive a DPL.

Varied institutional capacity across different implementing agencies may undermine overall

reform progress. Nevertheless, the overall commitment and ownership to reforms remains strong, and

the Coordinating Ministry for Economic Affairs has performed very well in ensuring consistent and

effective cross-ministerial coordination. The DPL program has also helped strengthen the capacity of

various institutions involved in the DPL program, which is also complemented by other World Bank

instruments, including investment projects, technical assistance and AAA.

Operation ID P122982

1

I. INTRODUCTION

1. The proposed Eighth Development Policy Loan (DPL-8) to Indonesia for US$400 million is

part of the third DPL series (DPLs 7-9) that builds on the successes of the earlier series (DPLs 1-4 and

DPLs 5-6). The first DPL series (DPLs 1-4) was implemented from 2004 to 2007, constituting a program

anchored to the FY04-08 Country Assistance Strategy (CAS). The series aimed at supporting key

Government of Indonesia (GoI) reforms during the transition from macroeconomic stabilization to the

creation of fiscal space to improve service delivery. Anchored under the FY09-FY12 Country Partnership

Strategy, the second DPL series (DPLs 5-6) was implemented from 2008 to 2009 and focused on building

on and reinforcing the reforms initiated under the first DPL series. The third DPL series (DPLs 7-9) aligned

the DPL program more closely with the longer-term development strategies and priorities of the newly

elected government in 2009 as elaborated in its medium-term development plan (RPJM 2009-14). This third

DPL series is still anchored under the FY09-FY12 Country Partnership Strategy, and continues to deepen

the reforms supported under the previous DPL series.

2. The third DPL series, and in particular the DPL-8, focuses on strengthening government

systems for improved policy implementation. This focus is aligned with that of the World Bank's

Development Policy Review (2008), as well as the Country Partnership Strategy Progress Report (CPSPR)

recently finalized. These reports note that Indonesia‘s main challenge right now is not so much the design of

appropriate policies or the raising of financing, but rather strengthening the institutions in charge of

implementing those policies so that their developmental impact is enhanced. This institutional focus cuts

across the three pillars of the DPL8 as reflected in all reforms supported by the operation, for example:

a. in the area of investment climate, a dedicated team has been established to formulate Non-

Tariff Measures (NTMs) under clear standard operating procedures, so that the Ministry

of Trade has the appropriate mechanism to ensure that NTMs are designed in a

transparent way, meet their legitimate objectives and are consistent with international trade

agreements;

b. in the area of public financial management, a fundamental change in the budget preparation

process has taken place through the development of guidelines requiring separate

treatment of baselines and new initiatives, setting the procedures to propose and

scrutinize new initiatives, and ensuring consistency between plans and budgets with the

ultimate objective of achieving better development outcomes; and

c. in the area of poverty and social services, the GoI continues its ambitious reform to improve

the implementation of anti-poverty programs by instructing all main agencies implementing

anti-poverty programs to use the same unified beneficiary database. This will increase

synergies across programs, enhance their targeting and ultimately increase their impact on the

poor.

3. Indonesia has come a long way since the 1998 economic and political crisis. Within the first five

years post-crisis, macroeconomic stability was restored and the political situation stabilized. As the hard-

earned stability was reinforced, fundamental structural reforms were initiated in several areas supporting

economic development. Indonesia has become the largest economy in Southeast Asia, with a vibrant,

pluralistic democracy. It has made significant progress in lifting of millions of people out of poverty and

improving social indicators. Economic growth has been strong and consistent, grounded on increasing

private sector investment, strong domestic consumption and generally sustainable external surpluses. It was

able to weather the recent global financial crisis relatively unscathed and is enjoying increasing investor

confidence and the benefits of recent movements in commodity prices. As a member of the G-20 and the

2

2011 Chair of ASEAN, Indonesia has also assumed an increasingly important role, both regionally and

globally.

4. The coordination and implementation of reforms continue to be imperative for accelerating

growth and enhancing the equity of growth. While Indonesia‘s near-term economic outlook remains

positive with growth of 6.4 percent expected in 2011 and 6.5 percent in 2012, near-term risks have also risen

over 2011, most recently due to the increased uncertainty in the external environment. However, the

macroeconomic situation and policy framework warrant continued support for Indonesia‘s structural and

institutional reforms through this DPL operation. Looking to the medium term, accelerating growth rates to

above 7 percent as targeted and enhancing the equity of growth will require concerted efforts towards

coordinating and implementing key reforms. The Government is fully aware that for Indonesia to realize its

potential as a competitive, inclusive, sustainable and resilient middle-income country, it has to adapt the

institutions and mechanisms that govern the functioning of the state and shape state-society interactions.

Indeed, the central challenges Indonesia faces today in realizing its development agenda are all, in one form

or another, of an institutional nature. They entail furthering Indonesia‘s yet incomplete governance transition

by improving the effectiveness of public institutions and processes through longer-term institutional and

process transformations. Even in areas where additional financing is clearly needed – for instance, from the

private sector in the case of many infrastructure sectors, or from the public sector in the case of reforms to

Indonesia‘s health system – institutional challenges need to first be sorted out for that financing to be

forthcoming and for it to be effectively deployed. Coordination and implementation of key reforms will

therefore be needed to address Indonesia‘s investment climate-related constraints on growth, to enhance the

creation of quality employment, and to ensure that the benefits of growth continue to be shared across the

population

5. The policy actions of DPLs 8 and 9 continue to be developed in alignment with the

Government‘s development priorities, as outlined in the RPJMN 2010-14. During preparation of the

previous DPL-7, a set of indicative DPL 8 and 9 policy actions were identified. However, it was envisaged

that these actions were largely indicative, given the need for ensuring flexibility and alignment with the

Government‘s development priorities. Those previous DPL 8 prior actions have been refined to ensure

consistency with GoI development efforts and new initiatives, especially those under the areas of improving

connectivity. Overall, the DPLs 8-9 policy actions continue to evolve around the following DPL reform

pillars:

i) improving the investment climate through strengthened investment service institutions and

regulations, reduced tax burden and improved tax administration, enhanced trade facilitation and

promotion of exports, as well as improved connectivity;

ii) strengthening public financial management through improved results orientation in the budget

process, linking budget formulation to the Government Financial Management Information System

(Sistem Perbendaharaan dan Anggaran Negara or SPAN), development of a new M&E system,

streamlined budget execution and management of budget authority, improved budget and cash

management within the central government, improved provision of IT services, strengthened

management of state assets, as well as improved Government accounting and audit functions; and

iii) enhancing poverty alleviation and service delivery efforts through improving governance and

institutional accountability, improving poverty measurements and targeting of the poor, improving

poverty reduction programs at the household, community and MSME levels (i.e. Jamkesmas, the

National Program for Community Empowerment - PNPM and the People‘s Business Credit - KUR).

6. DPL-8 continues to be based on the Government‘s priorities and is led by the GoI. In addition

to the continuous policy dialogue that takes place between the different Government of Indonesia

counterparts and the World Bank, a series of formal dialogues took place throughout the preparation of the

DPL-8, to formulate the supported policy actions and to assess their progress. The Government of Japan,

3

through the Japan International Cooperation Agency (JICA), which is also providing program support,

participated actively in the consultation process. Technical assistance is often provided by different

development partners in support of the policy actions identified by the GoI. DPL-8 was negotiated with the

GoI in October and submitted to the World Bank Board in November 2011. All prior actions in the policy

matrix have been completed.

7. Overall progress achieved under the DPL continues to be satisfactory. The DPL program has

established a good track record in advancing key policy and institutional reforms under the three main

pillars. These reforms have supported Indonesia‘s achievement in terms of accelerated economic growth and

poverty reduction. Supporting Indonesia‘s relatively ambitious policy reforms is at the core of the World

Bank‘s program in Indonesia.1 Over the past few years, in addition to the core DPL program, the World

Bank has also been supporting policy reforms in the infrastructure sector (through the Infrastructure DPL,

closed in FY11), the Climate Change DPL (the second operation that is currently in the World Bank‘s

pipeline), as well as the Public Expenditure Support Facility (PESF DDO), which provided critical support

to Indonesia during the previous global financial crisis. The DPL complements assistance being provided by

the World Bank through a variety of instruments (investment projects, technical assistance, and advisory

services) and it is expected that the DPL program will continue to complement reform efforts supported by

the World Bank.

II. COUNTRY CONTEXT

8. Indonesia has made remarkable progress over the past decade in terms of macroeconomic and

political stability. Output growth has been strong and consistent, averaging 5.1 percent per year over 2001

to 2010. This has been grounded on increasing private sector investment, strong domestic consumption and

generally sustainable external surpluses. International commodity demand has been supportive but the non-

tradable sectors have accounted for the majority of output growth. External imbalances have declined

rapidly as corporate and financial sector balance sheets were repaired, although financial markets remain

vulnerable to changes in international investor sentiment, as seen in the recent asset price spillovers

associated with the intensification of the Euro zone crisis and downgrade in the global growth outlook.

Increasing revenues, combined with restrained expenditures, have contributed to low fiscal deficits. In an

environment of controlled inflation and rising incomes, Indonesian citizens‘ living standards have improved

and poverty levels have fallen, although many remain close to the poverty line. In addition, as the result of a

decade of relatively successful political and institutional reforms, Indonesia in 2011 is a highly competitive,

decentralized electoral democracy. A system of checks and balances between legislative, judicial, and

executive branches is increasingly in place, with no one branch of government able to dominate, and few

institutional outcomes ‗guaranteed‘.

9. Compared with other countries in the region Indonesia was less affected by the global

economic downturn of 2008-09 and growth has since moved back to pre-crisis levels. GDP growth

declined from 6 percent in 2008 to 4.6 percent in 2009 but subsequently recovered to 6.1 percent over 2010

and 6.5 percent in the first half of 2011. The social impact of the crisis was also limited, there were few

reports of layoffs, poverty and unemployment rates continued to fall, and households‘ spending power was

supported by inflation slowing to decade lows. This relatively strong performance was supported by the

health of public and financial sector balance sheets and the strength of domestic demand, particularly private

consumption. Indonesia‘s export mix, focused on commodities, benefited from international price rises and

demand for raw materials from China and other emerging economies. Policymakers also took proactive

measures during the crisis, including a fiscal stimulus package, and supportive monetary policy.

1 The World Bank program in Indonesia is split approximately equal between program support (DPL), investment

loans and results based operations (such as BOSKITA or the ‗Local Government and Decentralization‘ programs).

4

Nevertheless, the fiscal deficit came in below target in 2009 and 2010, contributing to the downward

trajectory of government debt which has fallen to just above 25 percent of GDP, down from over 90 percent

in 2000. Indonesia‘s sovereign ratings have been upgraded to one notch below investment grade. The

improvement in creditworthiness, along with high relative yields and the levels of liquidity in some

developed economies, contributed to the strong portfolio inflows into Indonesia over 2010 and 2011 which,

as in other emerging markets, resulted in a range of challenges for macroeconomic policymakers.

10. Although ongoing developments in the global economy have contributed to rising uncertainty,

the baseline near-term outlook is for Indonesia‘s economic momentum to remain positive. The

downturn in the economic outlook for high income economies and the intensification of international

financial market turbulence related to the Euro zone debt crisis increase the downside risks around the

baseline growth forecasts of 6.4 percent for 2011 and 6.5 percent for 2012. However, Indonesia‘s solid fiscal

position, strong reserves and relatively limited direct trade exposure to the EU and US make it relatively

well-placed to deal with these challenges. Recent volatility in domestic financial markets has shown that

Indonesia remains exposed to sudden reversals in capital flows, but has also demonstrated its increased

resilience and ability to overcome temporary shocks. The adverse impact on Indonesia would be heightened

in an adverse scenario where there is a freezing-up of international finance and where major emerging

economies and commodity prices fall significantly. Although they have moderated recently, the rises in food

and oil prices seen earlier in 2011 also serve as a reminder of the ongoing related risks and challenges that

Indonesia faces from shocks to domestic and international commodity prices, as seen in early 2008. These

include the adverse impact on the poor of higher food price shocks and the impact of increased oil prices on

the fiscal and opportunity costs of spending on energy subsidies, given spending needs in areas such as

social protection, infrastructure and health.

11. Looking to the medium term, the coordination and implementation of reforms and

expenditures in key policy areas are needed if growth is to accelerate to 7 percent or beyond and if

there are to be continued improvements in social outcomes. For planned increases in fiscal expenditures

to lead to improvements in public services, Indonesia will need more effective and accountable institutions

that can translate available resources into better development outcomes. This will be particularly important

as Indonesia embarks on a period of second generation reforms to provide, for example, more sophisticated

services in infrastructure, better education, and a sustainable health system. Improvements in the investment

climate will also be necessary to support productive employment creation. In a medium-term environment in

which capital flows to emerging economies such as Indonesia are likely to continue, improvements in

infrastructure and the investment climate can help to ensure that such inflows are put to productive use and

are shifted towards more stable forms such as FDI.

A. The Current State of the Indonesian Economy

12. Indonesia‘s economic developments over the past year have been characterized by strong

domestic real sector performance but also rising risks around the economic outlook. In the first half of

2011 these risks were associated primarily with rises in domestic and international commodity prices while

more recently the focus has turned to international economic and financial developments.

13. Indonesia‘s robust growth through the first half of 2011 has been supported by robust private

demand. Year-on-year growth in the first half of 2011 was 6.5 compared with 6.1 percent in 2010 as a

whole. On a seasonally adjusted basis, quarterly growth was 1.6 percent in Q2 2011, up from 1 percent in

Q1. Private consumption continued to contribute strongly to GDP in the second quarter of 2011, while

investment growth rebounded (Figure 1). Consumption was supported by the continued high levels of

consumer sentiment and the recent declines in inflation.

5

14. Recent growth has been broad-based across sectors (Figure 2). Retail and wholesale trade and

transport and communications continue to be two of the main sectors driving growth on the production-side,

reflecting the strength of domestic consumption. Manufacturing performance over recent quarters has also

been robust, growing by 6.1 percent year-on-year in Q2 2011 (the first time in six years this has been above

6 percent). This was despite a slowdown in transport equipment and machinery production which resulted

from supply disruptions associated with the Japanese earthquake and tsunami. The recent performance of

agriculture, mining and construction has been more variable, in part reflecting the impact of weather-related

disruptions in the second half of 2010.

Figure 1: Private domestic demand has been a strong

driver of growth…

(percentage point contribution to quarter-on-quarter

seasonally adjusted growth)

Figure 2: Non-tradable sectors continue to drive

growth on the production side

(percentage point contribution to quarter-on-quarter

seasonally adjusted growth)

Sources: BPS and World Bank

Note: Contributions may not sum to GDP due to

seasonal adjustment

Sources: BPS and World Bank

15. Inflation has continued its downward trajectory over 2011 (Error! Reference source not

ound.). Sharp increases in food prices, such as for rice and chili, contributed to rising headline CPI inflation

in late 2010. With raw food price inflation reaching 16 percent year-on-year in December 2010, headline

inflation moved up to 7 percent, outside Bank Indonesia‘s target band for the year of 5 plus or minus 1

percent, and poverty basket inflation reached just over 13 percent. Rice and food prices declined over the

first two quarters of 2011 due to the harvest season and the distribution of rice imported by Bulog (State

Logistics Agency). Food price inflation came down to 5.8 percent in August 2011, while headline inflation

fell to 4.8 percent. Set against this trend, rising core inflation has contributed more to recent monthly CPI

increases (Error! Reference source not found.) and reached 5.1 percent in August due to higher gold

prices.

-4

-2

0

2

4

-4

-2

0

2

4

Jun-08 Mar-09 Dec-09 Sep-10 Jun-11

Discrepancy

Net Exports

Investment

Gov cons.

Private cons.

GDP

Percent Percent

-1

0

1

2

3

-1

0

1

2

3

Jun-08 Mar-09 Dec-09 Sep-10 Jun-11

Other (incl services)

Trade, Hotel & Restaurant

Com & trans

Manu.

Mining and Const

Agriculture

GDP

Percent Percent

6

Figure 3: Headline inflation has fallen in the first half

of 2011

(inflation year-on-year, percent)

Figure 4: The recent rise and fall of volatile food

prices has driven recently monthly inflation patterns

(contribution to monthly inflation, percent)

Sources: BPS and World Bank Sources: BPS and World Bank

16. Strong capital inflows have continued in the first half of 2011 after the record levels of 2010.

Overall balance of payment inflows in 2010 were US$ 30.3 billion, almost double the highest annual

inflows recorded since 2004, and were US$ 19.5 billion in the first half of 2011. This has been driven by net

financial account inflows which reached US$ 26 billion in 2010, five times the level in 2009, and US$ 19

billion in H1 2011 (Error! Reference source not found.). The current account surplus has been narrowing

nd fell to US$ 0.2 billion in Q2 2012, primarily reflecting the impact of profit repatriations in widening the

income deficit.

17. A recovery in foreign direct investment has further supported the balance of payment

surplus. While net portfolio inflows were the largest component of recent financial account inflows, FDI

inflows have risen strongly, moving above pre-crisis levels. The first half of 2011 saw US$ 10 billion in FDI

inflows following US$ 13.4 billion in 2010 (net direct investment inflows were US$ 5.7 billion and US$

10.7 billion respectively in H1 2011 and 2010). The ratio of FDI to GDP, while rising, remains below its

pre-Asian crisis peak and below many regional peers. Nevertheless, the positive FDI outlook is also

supported by anecdotal evidence of new investment projects and country agreements, for example, with

Japan, India, Singapore, China, South Korea and the US.

18. International reserves continued to rise, reaching US$ 124 billion at end-August 2011, double

the level at end-2009. After dropping over January, when portfolio capital outflows were seen, reserve

accumulation resumed strongly in the second quarter but moderated in the third quarter. Strong non-resident

investor portfolio inflows were seen from February through to April, although there were net outflows in

May and June and also in August following the credit downgrade of the US and rising Euro zone related-

concerns. The rupiah had been appreciating for most of 2011, but recent developments in financial markets

have placed some downward pressure on it.

19. As in other regional markets, since August Indonesia‘s financial markets have been adversely

affected by the rise in uncertainty over the outlook for the Euro zone and the US (Figure 6). The recent

turbulence follows increases in local bond yields and falls in equities at the beginning of 2011, associated in

part with rising inflationary concerns in many emerging markets, which subsequently unwound. The

increases in global risk aversion over August and September have contributed to declines in local equities

across the region. Indonesia‘s financial markets remain relatively exposed to sudden reversals in market

0

6

12

18

24

0

6

12

18

24

Jan 08 Jan 09 Jan 10 Jan 11

Poverty Basket

inflation

Headline inflation

Food inflation

Percent Percent

Core inflation

-0.6

0.0

0.6

1.2

1.8

-0.6

0.0

0.6

1.2

1.8

Jan-09 Jan-10 Jan-11

Volatile Administered Core Headline Inflation

Percent Percent

7

sentiment, as witnessed in mid September, but resilience to shocks has increased and authorities have at

their disposal a number of instruments they can use to stabilize local financial markets. Local currency

government bond yields have remained relatively stable and, as mentioned above, so has the exchange rate

against the dollar. This market turbulence follows substantial asset price gains over 2010. The domestic

authorities have announced a series of mechanisms that could be used to support local government bond

markets, including the direct purchase of bonds by Bank Indonesia and the similar use of fiscal reserves by

the Ministry of Finance, subject to parliamentary approval. These follow previous measures designed to

reduce Indonesia‘s vulnerability to short-term outflows, such as the increases in the holding period on SBI

instruments.

Figure 5: Balance of payment inflows have reached

record levels, driven by the financial account

(billions of US$)

Figure 6: Indonesian equities have fallen recently after

recovering from earlier losses in 2011

(bond yields, percent; equity index; Rp. per US$

Source: Bank Indonesia Sources: CEIC and World Bank

20. Bank Indonesia has been employing a range of policy measures to address the challenges of

capital inflows and volatility and inflationary pressures earlier in 2011. As inflation moved up gradually

in the second half of 2010, BI did not adjust the policy rate, citing the supply-side driver of the rising prices.

The potential for higher policy rates to attract further capital flows was also a complicating factor. However,

in February BI raised the policy rate by 25 basis points to 6.75 percent, aimed at holding down inflationary

expectations given rising commodity and food prices. In addition, a range of tools have been used to tighten

domestic liquidity conditions. For example, the reserve requirements on rupiah deposits increased in

November and increased in two steps for foreign currency deposits from March to June 2011. As inflation

came down, near-term market pressures for upward policy rate adjustments moderated, with BI indicating it

would allow exchange rate appreciation in line with its regional neighbors. In September, recognizing the

potential spillovers from the deterioration in the global outlook to Indonesia, Bank Indonesia reduced the

lower band of the interest rate corridor for monetary operations from 100 bps to 150 bps below the policy

rate to stimulate transactions in the domestic money market.

21. Indonesia‘s fiscal policy remains relatively conservative - the 2011 revised budget targets a

deficit of 2.1 percent of GDP following a lower-than-expected 0.6 percent of GDP deficit in 2010. The

2010 deficit was significantly lower than the revised budget deficit projection of 2.1 percent of GDP.

Revenue realization was stronger than projected (102 percent of projected tax and non-tax revenues).

Expenditure realization was 93 percent, somewhat reversing the improving trend in budget realization of

previous years but reflecting the ongoing difficulties in effectively disbursing the budget, particularly for

capital expenditures.

-8

-4

0

4

8

12

16

-8

-4

0

4

8

12

16

Jun-08 Jun-09 Jun-10 Jun-11

Net direct investment Net portfolio Net other capital

USD billion USD billion

6

7

8

9

10

60

80

100

120

140

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11

JCI equity (LHS)

IDR 000 per USD (RHS)

5-yr domestic gov. bond yield (RHS)

1 Sep 2010=100 Percent; 000 IDR per USD

8

22. The fiscal performance in 2011 to date has been driven by the impact of rising oil prices and

continuing disbursement problems. On the one hand higher energy prices have increased tax and non-tax

revenues from the oil and gas sectors (although set against this is the gradual decline in oil lifting numbers).

On the other hand higher oil prices have increased the fiscal burden, and opportunity cost, of Indonesia‘s

energy subsidies. The increase in the oil price assumption in the revised Budget to a still very conservative

US$ 95 per barrel, along with the delays in subsidy reforms, contributed to a rise in spending allocated to

energy subsidies of Rp. 60 trillion to Rp. 195 trillion. This was one of the main drivers behind the increase

in the deficit from 1.8 percent of GDP in the original 2011 Budget to 2.1 percent in the revised Budget. In

terms of the above-mentioned disbursement trends, the performance in 2011 to date remains problematic

with core spending on social, capital and materials expenditures in the first eight months of 2011 at only 31

percent of their full year revised Budget allocations. Looking towards 2012, the draft Budget released in

August targets a deficit of 1.5 percent of GDP with increases in tax revenues more than offsetting further

planned increases in capital expenditures.

23. The GoI has started to implement reforms to improve the targeting of energy subsidies but

progress on fuel subsidies has been delayed in 2011. The GoI increased electricity tariffs as of July 1,

2010 for most consumer categories. The Government is reported to be planning further increases in

electricity tariffs, starting with a 10 percent rise in April 2012. Following previous reforms in 2005 and

2008, the Government also signaled its intention to improve the targeting of fuel subsidies in 2011, and

proposed a plan to prohibit private cars from accessing subsidized gasoline. Implementation of the plan has

been delayed. The potential timing of implementation of any reforms to fuel subsidies remains unclear, with

one key consideration being the concern over their inflationary impact. The regressive nature of electricity,

fuel and to a certain extent also fertilizer subsidies, is largely undisputed. The foreseen reforms, if carefully

implemented, are therefore likely to have a limited impact on the poor and vulnerable, while the use of fiscal

resources for investments in priority development sectors - infrastructure, health, social assistance - is likely

to be beneficial to the poor.

24. After over-financing in 2010, due to the markedly lower deficit, the Government plans to use

domestic sources to cover most of its net financing needs for 2011. With the deficit coming in low, gross

financing over 2010, the majority of which was from domestic bond issuance, was Rp. 50 trillion above

financing needs. As of end-August the accumulated budget surplus for 2011 to date was Rp. 41 trillion and

net financing of Rp. 76 trillion had been raised, predominantly through tradable bond sales, against the Rp.

126 trillion revised budget full-year deficit. Over-financing from previous years has helped to build up the

Government‘s cash buffer and this source is intended to finance around Rp. 40 trillion of the 2011 revised

budget deficit. This relatively strong starting position, combined with the low and declining levels of public

debt and fiscal conservativism, are supportive of Indonesia‘s near-term financing outlook despite potential

continued market volatility.

B. Indonesia‘s Economic Outlook

25. Under the baseline scenario, the near-term economic outlook remains positive with growth of

6.4 percent expected in 2011 and 6.5 percent in 2012 (Table 1). Domestic investment strength is set to be

supported by the shift in government spending towards capital expenditures, the real impact of the recent

FDI upsurge and rising credit growth. Private consumption is expected to maintain solid growth of around 5

percent in 2011 and 2012. The growth trends in domestic non-tradable sectors will also support the outlook

for 2011. As food price shocks unwind, in the absence of further shocks or adjustments in subsidy policies,

inflation rates are expected to remain moderate over 2011. With the downward revision to the external

outlook, export growth is expected to come down, contributing to a further narrowing of the current account

surplus. Capital inflows are also projected to come off their 2010 highs.

9

26. However, near-term risks have risen over 2011, most recently due to the increased uncertainty

in the external environment. The intensification of the Euro zone debt crisis has already contributed to

greater domestic financial market turbulence and Indonesia remains vulnerable to further adverse shocks to

investor sentiment, given the high level of foreign ownership of assets such as rupiah-denominated

government securities and SBIs. Maintaining policy consistency and continuing progress on the

Government‘s reform agenda can help to limit additional domestic sources of investor uncertainty. Real

sector spillovers to Indonesia from a downturn in the EU and US are relatively limited directly but could be

more serious in a scenario where the commodity demand from major emerging economies, such as India and

China, also drops off. Risks from commodity price volatility, while more prominent in the first half of 2011,

do however remain. Although commodity prices fell over August, oil prices remain relatively high

compared with Budget assumptions and still present a risk to Indonesia‘s fiscal balances due to higher

energy subsidy spending. There is also the risk that further shocks to inflation, for example from domestic

rice prices, spill over into rising inflation expectations, general prices and wages. If there are adjustments to

domestic energy subsidies then, depending on the nature of the reform, this could also put upward pressure

on prices.

27. In summary, the macroeconomic situation and policy framework warrant continued support

for Indonesia‘s structural and institutional reforms through this DPL-8 operation. Indonesia's macro

policy framework and economic performance have shown considerable improvement over the past decade,

as has resilience to international financial shocks. The above-mentioned macro risks are around a solid

baseline economic outlook. Despite the pressures from higher energy subsidy spending, the fiscal position

remains relatively conservative. The Government‘s medium-term deficit projections in the proposed 2012

Budget foresee the deficit declining to 0.6 percent of GDP in 2014 and debt sustainability analysis indicates

a downward trend for debt-to-GDP, from already low levels, under most reasonable scenarios (see Annex

8). This strong fiscal position gives the Government flexibility to provide support in the event that the

downturn in external demand is sharper than expected. On the monetary policy side, Bank Indonesia has

indicated that it ―will adjust the interest rate response and other monetary and macroprudential policy mix to

mitigate the potential slowdown in the domestic economic performance‖ arising from external developments

without jeopardizing its inflation objectives. In the medium term, it is likely that capital inflows to emerging

economies will continue, given their higher growth and relative yields, and the challenge of managing those

flows will come back into focus. To date Bank Indonesia‘s policy response has focused on macro-prudential

measures, such as raising reserve requirements and adjusting holding periods on its certificates, and

managed appreciation, accompanied by sterilization. Structural reforms to attract increased FDI can also

help to shift these inflows into more stable and longer-term forms.

28. Looking to the medium term it is still uncertain whether Indonesia can achieve the pace or

depth of reforms needed to lift average growth rates above 7 percent and enhance the equity of

growth going forward. Coordinated government action will be needed to address Indonesia‘s infrastructure

needs, to address the investment climate-related constraints on growth, to enhance the creation of quality

employment, and to ensure that the benefits of growth continue to be shared across the population.

Developments over the past year, for example, in terms of moving forward subsidy reform and major

infrastructure projects, have prompted some concerns about the likelihood of the implementation of this

agenda, with potential downside risks to investment conditions and growth. The difficulties of reforming

energy subsidies or attracting significant private sector investment for infrastructure are good examples of

the challenges ahead to accelerate investment and growth, and through this achieving more inclusive and

higher growth as outlined in the Government‘s medium-term development plan (RPJMN 2010-14). Over a

longer horizon, these developments raise the question of whether the Government can achieve the reform

agenda outlined in its medium-term development plan towards achieving stronger and more inclusive

growth.

10

Table 1: Indonesia's medium-term

economic outlook 2009 2010 2011 (p) 2012 (p) 2013 (p) 2014 (p)

Growth

Real GDP (% change) 4.6 6.1 6.4 6.5 6.7 6.8

Real investment (% change) 3.3 8.5 9.2 9.8 10.5 10.5

Real private consumption (% change) 6.2 4.6 4.9 4.9 5.0 5.0

Real exports (% change) -9.7 14.9 14.1 9.6 10.0 10.5

Real imports (% change) -15.0 17.3 15.4 10.6 11.5 12.0

Current account balance (% of GDP) 1.9 0.8 0.3 0.0 0.0 0.0

Fiscal variables

Central government balance (% of GDP) -1.6 -0.6 -1.7 -1.51 -1.21 -0.61

Central government debt (% of GDP) 28.4 26.0 24.3 22.3 20.4 18.9

Prices

GDP deflator (% change)2 8.4 8.0 8.3 9.6 9.0 8.0

CPI inflation (%)2 4.8 5.1 5.7 6.0 5.4 5.0

Note: 1 Government draft 2012 Budget projections from 2012 to 2014.

2 Period average.

Source: BPS, Bank Indonesia, Ministry of Finance and World Bank staff projections.

C. The Political and Social Context

29. Political stability and the consolidation of democracy have continued to deepen. The beginning

of the current administration‘s second tenure saw widespread public disenchantment with weak law

enforcement and high-profile scandals involving the police and the attorney general‘s office. Yet despite

political tensions within the Parliament, the coalition structure and consensus-oriented approach of the

ministerial cabinet have been maintained. Policy-making continues to benefit from the reform-orientation

and technocratic background of several key cabinet members as well as successful leadership from the

President and Vice President.

30. Political positioning can be expected to rise in 2012. With 2012 being two years away from

parliamentary and presidential elections in April and July 2014, respectively, political tensions and

positioning can be expected to start rising again next year. This will undoubtedly give rise to distractions

that will make the Government‘s task of implementing institutional reform more challenging, particularly as

coalition members may seek to disassociate themselves from controversial reforms.

31. Progress in reforming the judicial and law-enforcement agencies continued to be slow. Recent

cases of corruption highlighted the vast challenges in reforming the judicial and law-enforcement systems in

Indonesia. These included allegations of corruption affecting political parties, investigators conspiring with

a corrupt tax auditor, senior police and Attorney General Office (AGO) personnel fabricating evidence

against two Anti-Corruption Commission (KPK) deputy-chairs, and police officials conducting suspicious

financial transactions. Although progress towards the resolution of these cases remains slow, substantial

efforts are being made through targeted engagements at the national level (e.g. through the Attorney

General's Office, the Judicial Commission, the Anti-Corruption Courts and the Anti-Corruption

Commission) and at the local grassroots level. Under the new Corruption Court law, the Special Anti

Corruption Court is now created in seven provinces under the auspices of the Supreme Court, with the plan

to replicate it in all provinces and then districts. The main challenge at the regional level will be to staff

these special courts with qualified staff. The Constitutional Court, on the other hand, has demonstrated its

strong role in resolving political disputes - which is critical particularly in the disputes laden with money

11

politics at the time of local elections. There is a strong public expectation that the rulings may reduce the

practice of election rigging in local elections. Lastly, the Law on Access to Public Information has been

passed and declared effective, and the public is hopeful that the provisions of the law will bring about more

transparent and accountable services. While the Government has demonstrated its commitment to fight

against corruption and to promote reform, the success of its strategy depends on a combination of both

strong enforcement and rigorous institutional reform. With the creation of a high profile Presidential unit

and task force, serious efforts will be needed to ensure that reforms are sustainable beyond the terms of the

ad hoc unit and task force and that recommendations made by the two are effectively applied.

32. Instances of sectarian violence against minority groups highlight the need for the Government

to strengthen efforts in upholding the law. The past year has seen an increase in the number of instances

of intolerance. These increased instances of violence highlight the need for the Government to strengthen

efforts in upholding the laws in the face of violence and intimidation by radical sectarian groups.

III. THE GOVERNMENT‘S REFORM PROGRAM AND BANK SUPPORT

A. The GoI‘s Development Agenda

33. In February 2010, the Government unveiled its medium-term development plan (RPJMN)

2010-14. The RPJMN consists of three books and lays out 11 national priorities. Book I outlines the

strategy, general policy and macroeconomic framework reflecting the vision, mission and 11 national

development priorities; Book II outlines sectoral development plans based on the Long-Term Development

Plan (2005-25) with the theme ―to strengthen the synergy across development sectors‖ in order to

accomplish the vision of Book I; and Book III outlines regional development plans by island with the theme

―strengthen the synergy between central and regional and inter-regional governments‖ to accomplish the

national development vision of Book I.

34. The RPJMN 2010-14 programs are a mix of existing and new development programs and

reform initiatives. Most programs under poverty reduction, education, and health are a continuation or

expansion of the existing development programs, such as the integrated social assistance program including

the national insurance system (Jamkesmas), scholarships for the poor and the expansion of rural community

development programs (PNPM Mandiri). New program priorities focus primarily on infrastructure

development, such as the construction of highways across the five largest islands, enhancing electricity

generation capacity and building a transportation infrastructure based on the National Transportation System

and Transportation Blueprint.

35. Through these initiatives, the poverty rate is expected to decline from the 2009 level of 14.15

percent to 8-10 percent by 2014. To achieve this, the Government plans to improve the effectiveness of

poverty reduction programs through better coordination, expand the coverage of current programs and

develop rural infrastructure.

36. With a targeted average economic growth of 6.3-6.8 percent for 2010-14, reaching 7 percent

prior to 2014, the RPJMN 2010-14 highlights the need for growth with equity and a range of cross-

cutting policies to ensure this. Private consumption is projected to grow by 5.3-5.4 percent annually, while

investment and exports are projected to rise annually by 9.1-10.8 percent and 10.7-11.6 percent,

respectively. The emphasis of the RPJMN is on a triple-track development strategy that is pro-growth, pro-

jobs and pro-poor, with particular relevance for increasing investments in infrastructure and strengthening

the pro-poor agenda.

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37. In late May 2011, the Government formally launched the Master Plan for ―Acceleration and

Expansion of Indonesia’s Economic Development 2011-2025‖ (MP3EI) as Indonesia‘s new, longer-

term strategy to become an industrialized economy. Despite the positive economic development,

Indonesia has the potential to accelerate growth given its demographic status, location and natural resources.

The Master Plan aims to boost Indonesia‘s economic growth to 7-9 percent during the coming decades. The

Master Plan recognizes that such high growth levels can only be attained by structurally transforming the

economy through substantial higher levels of investments in priority sectors and especially infrastructure,

and changing ‗business as usual‘ practices. For example, the plan highlights that Indonesia needs to double

its capacity in energy and power within the next 6 years to meet increasing demand. The new Master Plan is

based on three strategies: (i) the development of six economic corridors; (ii) the strengthening of national

connectivity; and (iii) the acceleration of technological and R&D capacity. The first strategy aims at

fostering centers of growth in each major island group by developing leading resource-based industrial

clusters. The second strategy focuses on building synergies between those centers of growth, including

international connectivity for trade and tourism. The third strategy intends to complement connectivity by

improving human resources capabilities and increasing investments in research and development. According

to the new Master Plan, these strategies will need to be supported by an improvement of Indonesia‘s

investment climate, including its trade and investment policies. Overall, the Master Plan provides a strategic

direction to frontline ministries and regional governments on how to attain high growth levels.

38. A key aspect of the Master Plan is its focus on improving connectivity, namely intra-island,

inter-island and international connections. Increasing connectivity between domestic producers and

domestic consumers in dispersed locations across Indonesia will need strong intra-island and inter-island

links. In addition, a high level of connectivity to international markets will need efficient and reliable

gateways between domestic and foreign producers and consumers. While international, inter-island and

intra-island connectivity is usually examined separately, in practice these are not independent systems, and

would need to be linked seamlessly to integrate markets within Indonesia and beyond. Therefore,

improvements should be conducted simultaneously at all three levels. However, at each level, priority

should be given to activities or programs that solve major bottlenecks and constraints. The improvement of

logistics and connectivity has been high on the GoI agenda for several years (as elaborated in previous DPL

program documents). The contribution of the Master Plan is that it addresses the identified connectivity

challenges in a more comprehensive and holistic manner, linking connectivity explicitly to regional

development plans as well as the improvement of competitiveness of the business sector through R&D and

technological capacity.

39. The Master Plan has the potential to become a transformative tool enabling the nation to

pursue pro-business and investment policies that are essential to long-term development. The Master

Plan represents a bold attempt by the Government to bring provincial and local bureaucrats, business leaders

and state-owned enterprises into one integrated national development framework. Governed through a

presidential decree, the Master Plan indicates awareness within the highest government levels on the need

for the nation to dramatically improve its economic performance, and provides an overarching framework

for ministries and regional governments‘ development programs, particularly those aimed towards

supporting industrial and infrastructure development. The Master Plan has been partly received with a

certain dose of skepticism by elements of the public, with the argument that the implementation of the plan

is less well-elaborated and it risks being a set of ideas that may never be implemented. As in all government

planning documents, the key to a successful implementation of the Master Plan will of course lie in its

execution and enforcement, which is the work that starts now.

B. Key Reform Directions of Government Systems and Institutions Supported by the DPL

40. The proposed DPL-8 continues to broadly support the Government‘s development agenda.

The overall goal of the DPL program is to help the GoI achieve its development objectives, as outlined in

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the RPJMN 2010-14. In particular, DPL-8 supports the GoI‘s reform efforts in: i) improving the investment

climate and trade facilitation, including connectivity; ii) strengthening public financial management; and iii)

enhancing poverty alleviation and service delivery efforts. This section describes the key government reform

achievements and directions under these three pillars.

B. 1. Investment Climate and Trade Facilitation

41. Improving investment climate and trade facilitation continue to be key priorities in the

Government‘s ongoing reform agenda, as outlined in the RPJMN 2010-14. The prospects for investing

in Indonesia are quite promising, given its significant population and natural resources. Yet investments

have been constrained by poor coordination between the relevant government agencies, uncertainty about

the legal and judicial frameworks, infrastructure constraints, and unclear investment policies, regulations,

and procedures. Therefore, the RPJMN places a high priority on harmonizing policies and regulations,

streamlining procedures, promoting customs and trade facilitation, as well as improving infrastructure and

strengthening the financial sector to support a sound investment climate. Improving the performance of the

tax system is also a medium-term objective of the Government‘s reform agenda. The Government‘s

medium-term plan is to further increase tax revenue from its current low level, of less than 12 percent of

GDP, to around 15 percent (closer to the non-OECD regional average).2 Given that tax policy has already

been simplified and rates are broadly in line with regional comparators, this is to be achieved through the

implementation of the next stages in the reform of tax systems and administration.

Box 1: Analytical Underpinnings for Investment Climate and Trade Reform Support Recent investment climate surveys indicate that the business perceptions of the investment climate in Indonesia

have improved since 2003 (except for infrastructure) but that the country still has a long way to go. The most recent

Doing Business survey of 2011 indicates that Indonesia slipped 6 positions to a rank of 121 from an adjusted rank of

115 in 2010 out of 183 economies in terms of the overall ease of doing business. Indonesia also received a poor

ranking, relative to other countries, in the areas of starting a business (rank 155th

), and enforcing contracts (rank 154th

).

Indonesia‘s overall DB rank of 121 is however still marginally better than 3 out of 4 of the BRIC countries, with India

at 134, Brazil at 127 and Russia at 123.

In order to stimulate investment, jobs and the creation of new companies, the Government needs to encourage a

simpler business entry. Easier start-up stimulates the creation of new companies, is correlated with higher productivity

among existing firms and facilitates the transfer of factors of production across sectors. Reducing entry costs increases

entry pressure, thereby pushing firms with lower productivity out of the market. Simpler and faster business entry

makes it easier for workers and capital to move across sectors when economies experience economic shocks. Research

shows that the most efficient economies focus on creating a single interface between Government and the entrepreneur

to take care of all necessary registrations and notifications.

In the current era of globally integrated markets expanding business and creating jobs is also dependent on

reducing time and costs in the export and import processes. Many governments have therefore provided electronic

filling of trade documents (through electronic data interchange systems), allowed shippers to declare manifests online,

reduced document requirements and moved to risk-based inspections. Electronic transmission of documents not only

speeds the clearance of goods; it often reduces the possibilities for paying bribes. But to avoid a dual electronic and

manual customs clearance process, the new system would need to be complemented by supporting legislation

authorizing electronic transactions. Another good approach is to provide a single window for obtaining different

permits and authorizations thereby reducing the time spent preparing documents. A recent study calculates the loss

from export delays at around 1 percent of trade for each extra day. For perishable agricultural products the cost is

nearly 3 percent of the volume of trade for each extra day. Another study finds that each extra signature an exporter has

to collect reduces trade by 4.2 percent.

2 The Government has more recently indicated a more ambitious medium-term target of 18 percent of GDP for tax

revenues.

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In terms of logistics, Indonesia performs worse than most of its ASEAN neighbors. Its performance is particularly

lower than its neighbors with respect to the quality of its infrastructure, the competence of its logistics service

providers and timeliness of shipments reaching their destination. As an archipelagic country, Indonesia requires an

efficient and integrated National Logistics System to improve its business competitiveness and ensure the even

distribution of strategic commodities and people‘s basic needs at affordable prices. The following factors contribute to

the high cost of logistics in Indonesia: (i) low level of access to infrastructure, with bottlenecks particularly visible at

ports; (ii) restrictive regulations that discourage competitiveness in the logistics sector; and (iii) inefficient logistics

services industry that is not able to provide high quality services at low cost.

Source: 2011 Doing Business and Draft National Logistics Blueprint.

42. The Government continues to make progress in improving the investment climate. Key

achievements have been made in strengthening the legal framework for taxation, through amendments of the

three main tax laws of Indonesia.3 These amendments have led to a better balance between taxpayer rights

and the authority of the tax administration, reduced corporate and personal income tax rates, and revised the

list of exempt and zero-rated goods and services for VAT. A comprehensive program continues to advance

the tax reform agenda further, which covers a restructuring of the Directorate General of Taxes under the

Ministry of Finance; modernization of the tax administration core processes; and strengthening the

governance and accountability frameworks. A public-private consultation process is currently being

conducted for Presidential Regulation No. 36/2010 on Indonesia‘s Investment Negative List, which is

expected to help provide greater clarity on grandfathering and capital markets provisions for foreign

investment. The Indonesia National Single Window (INSW) for trade has also established a Public-Private

consultation process that is providing feedback to the Government on the effectiveness of the INSW

implementation, and identifying issues that need further attention. Indonesia also eased business start-up by

reducing the cost for company name clearance and reservation and the time needed to reserve the name and

approve the deed of incorporation. Decrees have recently been issued to restructure and re-energize the

National Team for the Development of Exports and Investment (Timnas PEPI), which is intended to provide

an improved framework for inter-departmental coordination as well as public-private dialogue with private

sector stakeholders.

43. The local level investment climate continues to be a particular concern because of inconsistent

and often arbitrary regulations imposed by local governments. Post-decentralization, the initial reaction

of local governments was often to increase charges on local businesses and trade. Inconsistencies as well as

the sheer number of local regulations have made doing business more difficult in many places. Recently, the

central government has stepped up its efforts to streamline national and regional regulations. In May 2011,

no less than 4,000 regional regulations were abolished that were considered to be detrimental to national

economic interests and the improvement of the overall investment climate. Districts have, at times, used

their newly acquired powers to issue excessively stringent local labor regulations or target businesses with a

plethora of new local taxes, levies and fees. In fact, the costs, delays and inconvenience of business licensing

is one of the most commonly mentioned criticisms of the local investment climate. Although illegal,

restrictions in the movement of goods across district and provincial borders still exist and impose additional

costs and delay to the distribution of goods, interfere in domestic trade and undermine internal market

efficiency. Incomplete and sometimes mutually incompatible regulations and the tug-of-war between the

center and the regions on issues such as investment approval, land and the like affect the ―bankability‖ of

investments and have been a factor in the slow recovery of investment post-crisis, especially in mining.

Furthermore, any systemic reforms designed by the central government need agreement by regional

governments for effective implementation. The Government is aware of these challenges and constraints

and plans to address them as part of its medium-term reform agenda.

3 These include the passage of the amended Income Tax Law, which reduces corporate and personal rates, simplifies administration and increases

legal certainty; the passage of the Tax Procedures Law which strikes a better balance between the rights and obligations of taxpayers and the powers

of tax officials, an issue of longstanding concern to the business community; and the passage of the law recognizing electronic signatures which clears the way for multiple e-Government initiatives such as electronic registration and filing of tax returns.

15

44. Through the DPL process and Trust Funded assistance the Bank has been actively engaged in

supporting investment climate reform in Indonesia. Those instruments along with other development

partners‘ support have contributed to the successes attained by the Government in terms of: (i) development

of a new Investment Law passed by Parliament in March 2007 and development of a new investment

negative list in 2010; (ii) two major economic policy packages covering investment regulations and

institutions, customs, tax, infrastructure, finance, and SMEs; (iii) streamlining of business start-up through

simplification of the procedures for establishing limited liability companies and obtaining key business

licenses; (iv) faster approvals for foreign investors; and (v) development of the Government‘s capacity to

monitor changes in the investment climate through business surveys and enhanced data collection. There has

been additional support by the International Finance Corporation (IFC) on improving local government

investment climates through its work on one-stop shops and doing business reform, which complements

efforts under the Bank‘s Investment Climate Trust Fund to simplify business regulations at the national

level. On the tax reform front, tangible improvements have been made in the following areas: (i) taxpayer

registration; (ii) returns processing; (iii) accounts management; (iv) document management; (v) compliance

(in the areas of taxpayer audit and collections); (vi) revenue fraud investigation and handing; and (vii)

taxpayer objections and appeals.

45. The Government also continues to enhance trade facilitation. Having implemented the Indonesia

National Single Window (INSW) in five major ports throughout Indonesia4 in early 2010, the Government is

currently deepening the implementation of the INSW and has undertaken new initiatives recognizing the

need to further reduce the cost and time of imports and exports such as the introduction of 24/7 government

services in four international ports and Jakarta‘s Soekarno Hatta Airport. The Government has also

recognized the importance of a national certification scheme for domestic logistics service providers to

upgrade their skills in the new Postal Law, and separated port regulation from port operation to introduce

competition in port operation in the new Shipping Law. Overall, while some aspects of these laws remain a

challenge a promising development is the Government‘s changed approach to trade facilitation reform.

46. The Government has recognized that isolated trade facilitation actions are not as effective as a

coordinated comprehensive logistics strategy. Therefore, under the connectivity pillar of the recently

launched Master Plan, it has included plans to improve trade logistics, including investments in

infrastructure and upgrades on the quality of logistics service providers. It recognizes the need to better link

such logistics strategy with other transport reform initiatives and with regional development plans to

effectively connect the economy. Thus monitoring systems are also being developed to evaluate the

implementation of such trade logistics initiatives and follow-up on key port performance indicators, such as

import container dwell time.

47. The World Bank has been actively supporting the development of the National Logistics

Blueprint (NLB) which underlies the connectivity framework of the Master Plan, and will continue

such support through the DPL, technical assistance and/or other potential operations. The NLB sets

out a strategy and an action plan to improve Indonesia‘s logistics performance. The NLB was prepared by

an inter-departmental team, in collaboration with the private sector; wherein both the domestic and foreign

business sectors in Indonesia were consulted. The World Bank has provided support in defining the

priorities in the NLB, sharing international best practices, preparing an annual logistics report for Indonesia,

facilitating the dialogue between the Government and the private sector, and monitoring of the

implementation of the NLB. Going forward, the World Bank will continue to provide support to the

Government‘s efforts to develop the encompassing connectivity framework (the third strategy of the Master

Plan) through technical assistance and/or other potential investment operations. The connectivity framework

will encompass the Logistics Blueprint and other logistics related work plans.

4 The five main ports are: Soekarno Hatta Airport, Tanjung Priok, Tanjung Perak Surabaya, Tanjung Mas Semarang and Belawan Medan.

Altogether, these ports account for 80-90 percent of Indonesia‘s international trade volume.

16

48. Given the importance of the investment climate and trade facilitation reform agenda and the

Government‘s commitment, further support for reforms is expected through the programmatic DPL

series, the Multi-Donor Facility for Trade and Investment Climate (MDFTIC) and the Project for

Indonesian Tax Administration Reform (PINTAR). The MDFTIC, through institutional and capacity

building initiatives as well as analytical and advisory work, is expected to assist the Government in further

streamlining investment procedures and business licensing, monitor the investment climate, strengthen

Indonesia‘s logistics performance, continue with the implementation of the National Single Window, reduce

bottlenecks in port and customs clearance, strengthen the financial sector and increase access to financial

services. PINTAR will support the Government in further increasing the efficiency of taxpayer data

collection and management, improving tax administration human resource management and development,

and strengthening tax audit and collection functions while implementing a comprehensive change

management process.

B.2. Public Finance Management

49. Since adoption of a new regulatory framework in 2003/4,5 the Government has shown strong

commitment towards building a modern public financial management (PFM) system, with a broad-

based, ambitious reform agenda. The Government has been making remarkable efforts to improve

business processes and systems throughout the entire budget cycle, including audit, legislative oversight and

civil service reform. It has thereby addressed a multitude of risks related to capacity constraints, poor

infrastructure, and weak governance across the PFM institutional and stakeholder landscape. In the medium

to long term, it is expected that improvements in Indonesia‘s PFM systems will lead to more targeted and

flexible allocation of public funds to priority development needs and more efficient, transparent and

accountable disbursements. This is fundamental to improving public service delivery and achieving more

concrete development outcomes in the future.

50. The breadth and depth of PFM reform achievements over the relatively short reform period

have been impressive. The most notable include: the implementation of a Treasury Single Account (TSA);

the integration of the current and development budgets; the establishment of cash planning and forecasting

systems; the development of accounting standards to meet international standards and provide for the move

toward a ―full accrual‖ accounting framework; the completed inventory of government assets and

introduction of a state asset management information system; the establishment of a new procurement

agency; and initial steps to strengthen internal controls and internal and external audit systems. More

advanced reforms are also being introduced, including: performance-based budgeting (PBB); strengthening

monitoring and evaluation systems; a medium-term expenditure framework (MTEF); and a Government

Financial Management Information System (GFMIS).

51. While progress has been substantial and reforms are generally moving in the right direction, a

long list of challenges remains. Among others, central government budgetary systems need to be

strengthened to enhance the policy orientation of budget formulation and execution. The ongoing

implementation of the new Government Financial Management Information System, GFMIS (Sistem

Perbendaharaan dan Anggaran Negara, SPAN), is supporting the enhancement of government accounting

standards and the reengineering of the business processes in the spending agencies. More effort is also

needed for the implementation of e-government procurement by 2012, including the development of a

permanent procurement management function in implementing agencies. Progress needs to be maintained in

ensuring relevant and reliable financial reporting, including strengthening human resources in government

accounting and reporting. Modernizing the internal audit institutions and intensive training to internal audit

5 The most noteworthy laws issued include the State Finance Law No. 17/2003, the State Treasury Law No. 1/2004 and the State Financial Audit

Law No. 15/2004.

17

staff remains a priority. And last but not least, continuing efforts toward an enhanced monitoring and

evaluation system is a cornerstone for the move towards performance-based budgeting (PBB).

52. Public financial management reforms are technically complex and involve enormous amounts

of information, systems and people. The sheer size of Indonesia, the scope of its PFM systems, the number

of involved stakeholders, and the timeline and ambitious nature of the reform agenda make local PFM

reforms particularly challenging. It will continue to necessitate significant amounts of expertise,

coordination, capacity building and sequencing. However, the Government has shown sustained

commitment to complete the planned reforms, through the development of plans and annual strategies that

ensure the proper phasing and coherence of reforms. The Secretary General‘s office within the Ministry of

Finance is building its capacity to centrally monitor and ensure reform progress through the Strategy and

Management Office in the Ministry of Finance or Pushaka – Pusat Analisis dan Harmonisasi Kebijakan.

Box 2: Analytical Underpinnings for PFM Reform Support

Indonesia‘s proposed public finance reforms broadly address the findings and recommendations of recent

assessments, including those of the World Bank. Starting in 2001, the Country Financial Accountability Assessment

identified weaknesses in the country‘s accounting standards and systems as significant hurdles in the improvement of

the governance and accountability environment in the country. New accounting standards have been implemented

across the government agencies since 2003, involving the development of new accounting systems and procedures, a

move from single-entry to double-entry accounting and the adoption of a new chart of accounts.

The 2007 Public Expenditure and Financial Accountability (PEFA) assessment provided further insights about

Indonesia‘s public financial management system. It reflected not only achievements of recent years, but also identified

areas that have not been the focus of reforms to date. According to the PEFA findings, the upstream sections of the

budget process have been reformed in recent years and as a result the budget is now increasingly credible, transparent

and policy-based. External scrutiny and audit has been equally enhanced, but there is still room for further reform. In

particular, lower scores are generally dominating in the downstream sections of the budget process, and there is room

for improvement of cash management, internal control and donor practices. Initial findings from the 2011 PEFA repeat

assessment show a marked improvement in budget controls and reporting, albeit from a low base. Notably, the 2009

external audit report was the first to achieve a qualified audit opinion, as opposed to a disclaimer, with around 40

percent of ministries and agencies achieving unqualified opinions, and an ambitious target for achieving an unqualified

opinion for all of central government by 2014. In addition, there have been improvements in the coverage of fiscal

accounts, cash management, payroll and internal controls and fiscal risk management. However, it was too early to

assess the improvements with the medium-term expenditure framework and many of the reforms remain ‗work in

progress‘. In addition, the assessment highlighted the ongoing problems of weak spending outturns, particularly for

capital, which perhaps reflects the focus on tightening of controls and compliance rather than on delivery and

performance.

In the area of public procurement systems, the self-diagnostic assessment conducted by the National Public

Procurement Office (NPPO) in 2007 using the Base-Line Indicators (BLIs) tool, presented a ―snapshot‖ comparison of

the actual system against the international standards. The baseline benchmarking of Indonesia‘s procurement system

showed it scoring 62.5 percent for the ―Legislative and Regulatory Framework‖ (PILLAR I), 55 percent for the

―Institutional Framework and Management Capacity‖ (PILLAR II), 59.3 percent for the ―Procurement Operations and

Market Practices‖ (PILLAR III) and 69 percent for the ―Integrity and Transparency of the Public Procurement System‖

(PILLAR IV), in comparison with recognized international standards. Since 2007, it is expected that there will be

improvements on some of the indicators of Pillars I and II with the establishment of LKPP and several ongoing reform

activities.

53. The World Bank uses a number of instruments to support the Government‘s PFM reform

agenda. The DPL helps to reinforce the Government‘s ownership and commitment towards the achievement

of reform milestones. Through the Government Financial Management and Revenue Administration Project

(GFMRAP), the Bank has provided support to design and implement the aforementioned GFMIS, SPAN,

including project management, technical assistance for business process improvements and change

management, as well as for the SPAN turnkey solution. SPAN is expected to significantly increase the

18

timeliness, reliability and transparency of budget disbursement and reporting and, as a cross-cutting reform,

to improve the capability of managers to efficiently manage service delivery. The Public Financial

Management Multi Donor Trust Fund (PFM-MDTF) provides further resources to support critical activities

to keep the reform agenda on track. By bringing together key development partners — the European

Commission, the Governments of the Netherlands and of Switzerland, and the World Bank — the PFM-

MDTF provides a vehicle for effective and coordinated engagement that reinforces the GoI‘s PFM reform

agenda and helps achieve progress towards the reform goals. The MoF produces an Annual Strategy Note

for PFM reform, which evaluates progress and sets the upcoming reform priorities. This enables the GoI to

evaluate implementation of the reform program on an ongoing basis and adapt it accordingly (e.g. delaying

the implementation of accrual accounting from the initial 2008).

B.3. Poverty Reduction

54. Despite strong economic growth and falling poverty in the last decade, there are many

households that continue to live on the edge of poverty. The last decade in Indonesia has seen a return to

strong economic growth, and the poverty rate has fallen from 23.4 percent in 1999 to 12.5 in 2011.

Sustained economic growth contributed to this success by creating more jobs and increasing public

expenditures for health, education and infrastructure. Not seen in the falling overall poverty rate, however, is

the persisting high degree of vulnerability. In 2010, around 25 percent of the population had incomes below

1.2 times the poverty line (Rp. 250,000 per person per month) and was officially categorized as being ―near

poor.‖ The population living below 1.5 times the poverty line are only slightly better off than the near-poor

(Rp. 316,500 per person per month in 2010) and are equally vulnerable to falling back into poverty. Since

the difference between the poor and the vulnerable is small, there is a high level of churning in and out of

poverty. Some 12.6 million people who were not poor in 2009 fell into poverty in 2010. About 43 percent of

the population – roughly equal to the size of the population living below 1.5 times the poverty line – has

fallen below the official near-poor line at least once over the past three years.

55. Indonesia introduced a range of national poverty reduction programs to protect poor and

vulnerable households from destitution and shocks. In response to the East Asian financial crisis, the

government established a broad safety net (Jaringan Pengaman Sosial, JPS) and introduced large

commodity price subsidies (Operasi Pasar Khusus, OPK). The JPS consisted of temporary, short-term

programs including public works (Padat Karya, PK), scholarships and funding for health services. A second

generation of social assistance programs was then introduced following the partial removal of regressive

fuel subsidies in 2005. A portion of the savings from the subsidy cuts were reallocated to four programs:

operational aid to schools (Bantuan Operasional Sekolah, BOS), health insurance for the poor (Asuransi

Kesehatan Miskin, Askeskin), village infrastructure (Infrastruktur Pedesaan, IP) and rice for the poor (Beras

Miskin, Raskin). Later, the government also introduced a temporary unconditional cash transfer (Bantuan

Langsung Tunai, BLT) to help poor and near-poor households cope with the inflationary shock caused by

the fuel subsidy removal.

56. These programs evolved into the current range of national programs that are part of the

government‘s poverty reduction strategy. The strategy is articulated around the following three main

clusters:

Cluster I consisting of household-based social assistance programs: Jamkesmas (Jaminan

Kesehatan Masyarakat) that provides health service fee waivers: Raskin, a subsidized rice

distribution program; Beasiswa untuk Siswa Miskin (BSM), a collection of programs that provide

cash transfers for poor students; and a newly piloted conditional cash transfer program (Program

Keluarga Harapan, or PKH) that targets the poorest households with children and pregnant

mothers.

19

Cluster II is mostly covered by the National Community Empowerment Program (Program

Nasional Pemberdayaan Masyarakat Mandiri or PNPM-Mandiri), which was scaled up nationally

between 2007 and 2010, providing block grants to rural and urban sub-districts that support

community-level development projects.

Cluster III includes initiatives that aim to expand economic opportunities for low-income

households by improving access to credit for micro- and small- and medium-sized enterprises, such

as the scaling-up of the (Kredit Usaha Rakyat or KUR) program. The development of a financial

inclusion strategy for poor and vulnerable households is also part of the broader Cluster III strategy.

57. The Government is committed to accelerating the pace of poverty reduction over the

upcoming five years. Since the 2009 elections, there has been renewed commitment by the Government to

intensify policy reforms that support poverty reduction and improve the effectiveness of national poverty

reduction programs. The President has declared poverty reduction to be one of the highest development

priorities for Indonesia. The RPJMN 2010-14 aims at lowering the poverty rate to 8-10 percent by 2014.

This is to be achieved by strengthening economic growth, stimulating job creation, and deepening

investments in its poverty reduction strategy. A series of Presidential Instructions (Inpres No. 1/2010 and

Inpres No. 3/2010) were issued detailing reform priorities to help the government reach its poverty reduction

targets.

58. To improve the effectiveness of the national poverty reduction strategy, overall oversight and

coordination responsibilities have been elevated to a cabinet-level team led by the Vice President. This

newly created National Team for the Acceleration of Poverty Reduction (Tim Nasional Percepatan

Penanggulangan Kemiskinan, or TNP2K) includes all government agencies responsible for the planning,

financing and implementation of poverty reduction programs. It is responsible for implementing the main

poverty reduction strategies outlined in the RPJMN 2010-14, which include: (i) integrating the family-based

programs into the family-based social assistance system and expanding coverage for main social assistance

programs; (ii) scaling-up the PNPM Mandiri from Rp. 10.3 trillion in 2009 to Rp. 12.1 trillion in 2010; and

(iii) expanding the coverage of KUR and improving its distribution mechanism. To support these strategies,

the Government is identifying reforms that will enhance the delivery and effectiveness of its poverty

reductions programs and maximize the impact of increased funding on the most vulnerable segments of

society. These include improving governance and accountability, developing systems to more accurately

measure poverty and target poor households and regions, improving individual household-targeted social

assistance programs, improving community-based poverty reduction programs, and improving financial

inclusion for the poor and vulnerable.

Box 3: Analytical Underpinnings for Service Delivery Reform Support World Bank analytical reports, including Making the New Indonesia Work for the Poor, have found that even

though Indonesia has made progress in reducing poverty many people remain poor and vulnerable. Sustained economic

growth has helped more Indonesians escape poverty, by creating more jobs and increasing public expenditures for

health, education and infrastructure. Indeed, the poverty headcount has fallen from 16.7 percent in 2004 to 12.5 percent

in 2011. Yet despite these gains, there are still 32.5 million Indonesians who currently live below the poverty line and

about half of all households remain clustered around the national poverty line (Rp. 200,262 per month). The gap

between the poor and non-poor is also widening. The Gini coefficient, a measure of consumption inequality, has

increased from 0.32 percent in 1999 to about 0.37 percent in 2009 and regional disparities also persist with eastern

Indonesia lagging behind other parts of the country, notably Java.

The reduction in poverty rate has been slower than expected, partly because there are not enough opportunities

for poor workers to move into better jobs in the formal and non-agricultural sectors. The Bank recently completed the

Indonesia Jobs Report, a comprehensive analytical overview of the labor market over the past 20 years. The report

finds that the majority of Indonesia‘s working population of 104.5 million is concentrated in the agricultural and

informal sector. Formal employment grew at an impressive rate of 1.2 percentage points per year from 2003 until 2007.

20

Formal sector employment for the poor increased by only 0.8 percentage points and remained roughly constant for the

near-poor. Those who entered the formal sector faced dropping wages.

Household-based social assistance programs play an important role in the Government‘s strategy to

reduce poverty. The Bank has drafted an Indonesia Household Social Assistance Public Expenditure and Program

Review to provide an evidence base for program and policy reforms. The report provides three key conclusions. First,

spend better to achieve a more optimal mix of welfare-improving programs, by scaling up or institutionalizing cost-

effective programs, rationalizing those that deliver too little at too high a cost, and re-engineering programs that are

struggling to deliver benefits to those most in need, as well as improving access to services. Second, as reforms are

implemented, spend more on cost-effective programs and remaining gaps. Indonesia‘s strong fiscal position makes this

increase affordable. Finally, develop a long-term reform roadmap to establish and sustain a comprehensive social

safety net. This may involve consolidating programs under a single system and transforming agencies to accelerate

poverty reduction and protect the vulnerable.

The Bank is also finalizing an analytical report on Targeting in Indonesia. Research found that while the poorest

households are most likely to receive program benefits, many are excluded while many non-poor households

participate. Less than half of the poorest 40 percent of households receive BLT and Jamkesmas, while many non-poor

also benefit from programs, with a quarter to a fifth of total benefits going to the richest 40 percent. While over 70

percent of the poorest 40 percent receive Raskin, high population coverage levels are due to sharing the rice among

many non-poor households as well as poor, resulting in a substantial dilution in benefits to each household. The report

recommends that Indonesia develop a National Targeting System (NTS), featuring a beneficiary registry, which could

improve targeting effectiveness and ensure program satisfaction and acceptance.

59. The Bank uses a number of instruments to support the Government‘s poverty reduction goals.

Starting in 2010, a multi-donor trust fund was established to support the Government in making informed

and evidence-based decisions about poverty reduction policies and for programs, as well as to build the

analytical capacity of local universities and think tanks for research and assessing poverty-related issues.

The Bank also manages a multi donor support facility that provides technical assistance and strategic

oversight for the National Community Empowerment Program (PNPM-Mandiri). The facility helps the

Government achieve its goal of providing PNPM block grants to all 70,000 villages in the country. Grant

funding provided through the PNPM Support Facility is used to build Indonesian capacity for large-scale,

community-based poverty reduction, with the aim of making the program a sustainable operation. Capacity

building programs supported by the facility engage a broad range of partners, including central and local

governments, universities and research centers, civil society organizations and grassroots initiatives.

C. Other Reform Steps Taken Outside but Related to the DPL

60. Outside of the three main pillars of reform covered by the DPL-8, there are four major areas

of reform in which the World Bank is also involved and that are relevant to the success of this DPL

series. These four areas are civil service/bureaucracy reform, judicial reform, decentralization and the

Extractive Industries Transparency Initiative (EITI). The Government is actively addressing the challenges

of reform in these areas, with support from development partners.

C. 1. Civil Service/ Bureaucracy Reform

61. Strengthened public financial management systems, poverty alleviation programs and service

delivery will not by themselves resolve the weaknesses in the implementation of public policies and

programs. The effectiveness of government policies also depends on the implementation of civil service

reforms that target the way public institutions are structured, operate and are financed, in addition to

reforming human resource management practices and salaries. The task of civil service reform is

challenging and needs sustained efforts over a considerable time. High-level political commitment towards

reforming the civil service is gaining momentum, as evidenced by the Presidential Regulation No. 81/2010

21

on the Grand Design of Bureaucracy Reform for 2010-25, the Presidential Instruction No.1/2010, and the

State Minister for State Apparatus Reform (MenPAN) Regulation No. 20/2010 on the Road Map of

Bureaucracy Reform for 2010-14; and important steps have already been taken. In 2010, more than 10

central government institutions produced bureaucracy reform plans and received additional pay as an

incentive. In 2011, another 20 slots are available subject to those institutions meeting the initial

requirements, for which at this point 11 out of the 20 institutions have done. In addition, several reform-

minded regional governments have initiated civil service reforms related to performance-based management

and streamlined organizations, including one-stop public services, productivity improvement measures and

transparent recruitment for key positions. Further, the Ministry of Finance and State Audit Agency (BPK)

are continuing to implement comprehensive reforms and modernize their human resource management

systems, learning from international best-practices.

62. The responsibility for civil service/bureaucracy reform has been moved from agencies such as

the Ministry of Finance to the center of government. A Steering Committee, chaired by the Vice-

President and including the Ministers of Finance, Home Affairs, State Minister of State Apparatus Reform,

the three coordinating ministers, the Head of UKP4 and some other eminent people, has been tasked to set

up a national benchmark for good governance as the foundation for the national bureaucracy reform and to

develop policies, strategies, and standards for the implementation of the reform and to monitor performance.

Another important unit under the Steering Committee is the National Bureaucracy Reform Management

Team led by the MenPAN, which is tasked with, among other things, formulating policies and operational

strategies for bureaucracy reform, monitoring and evaluating progress and maintaining regular

communication with stakeholders. The day-to-day responsibility for implementation of bureaucracy reform

lies with the National Bureaucracy Reform Management Unit reporting to the National Bureaucracy Reform

Team. MenPAN has issued nine books with technical guidelines for bureaucracy reform implementation and

a tenth focusing on M&E is underway. Overall, the momentum for civil service reform is strong and it is

hoped that a new civil service law would accelerate the implementation of the reforms, if it could be passed

by the Parliament before the end of 2011.

C.2. Judiciary Reform

63. The judiciary and associated law-enforcement agencies remain among the weakest link in

Indonesia‘s governance and accountability system. Uncertainty about, and the arbitrariness of, judicial

interventions continues to be identified as one of the most serious obstacles to investment. In the initial

years following reformasi a number of independent judicial review and oversight mechanisms were

established but the momentum generated by these initiatives has not translated into substantive progress and

reform of the national legal system has slowed in recent years. There appear to be two main and inter-

related reasons for this: first is the resistance to reforms from entrenched interests in the legal system.

Second is the growth in the number of institutions with judicial and oversight powers, which has led to

contestation and confusion between institutions. In the absence of substantive systemic reform, efforts are

being made through targeted engagements at the national level with the Attorney General's Office, the

Judicial Commission, the Anti-Corruption Courts and the Anti-Corruption Commission, among others, to

identify key actors and to support incremental changes that, if successful, can be scaled up. In addition,

efforts are being made to strengthen accountability from the bottom up by nurturing demand for justice at

the local grassroots level. These efforts have led to budget increases for fee waivers and legal aid in the

religious courts, resulting in a 14-fold increase in the number of poor litigants accessing the religious courts

from 2007 to 2010. It is planned that similar changes will also be rolled out in the general courts and are

likely to be complemented by the enactment of a new law to promote the provision of legal aid, currently

under deliberation by the Parliament. With support from donors, the Government is making efforts to

enhance community legal awareness and to strengthen village level dispute resolution processes and out-of-

court mediation services in order to generate demand for better performance from justice sector institutions

at the local level. In this environment, the process of creating a normative framework at the national level

with an appropriate system of checks and balances is likely to be a long-term process, especially when

22

undertaken through trial and error, and to need substantial financial and technical support. But over the past

few years, judicial reform programs have been trying to reach court systems and prosecutorial office

systems supported by development partners and their respective bureaucracy team.

64. Efforts in the judicial reform programs that reach court systems and prosecutorial office

systems have been continuing for the past several years. The high-level Legal Mafia Task Force

established by the President also has been continuing its operations over the past two years. In early 2011

the President issued presidential instructions to expedite the justice enforcement processes over high level

legal cases. Continued arrests of some public prosecutors, judges and practicing lawyers in bribery cases

related to legal cases that they handled have raised concerns on the effectiveness of the existing judicial

reform programs. The recent proposal by the Parliament to revise the Anti-Corruption Law and the Law on

KPK may weaken and thus diminish the effectiveness of the KPK. The continuation of success stories of the

Anti-Corruption Commission (KPK) and the Financial Transaction Analysis Unit (PPATK) will also depend

on the selection processes of their leaderships since the terms of their leaderships will end at the end of

2011. The Government has started to strengthen the KPK by completing the selection process for the new

Chair of the KPK. With the new Chair elected for a four year term, the public is hopeful that the KPK will

reassert its proactive fight against corruption. Selection process for the other 4 KPK Commissioners is also

underway, with some promising figures known for personal integrity and anti corruption activism advancing

to the final stage of selection by the parliament.

C.3. Improvement of the Decentralization Framework

65. With the ‗big-bang‘ decentralization of 2001, Indonesia went from being one of the most

centralized countries in the world in administrative, fiscal and political terms, to one of the most

decentralized; but the transition is far from complete. While some surveys show an improvement in

satisfaction with local service delivery, significant challenges remain. Overlapping responsibilities without

a coordinated decentralization framework prevent effective service delivery, and sub-national government

accountability and transparency mechanisms are weak. Much central funding devolved to the sub-national

entities—at around 30 percent of budgets—is spent on personnel salaries and other administrative costs,

reducing the incentive to address civil service costs. While the Special Allocation Fund (DAK) has been

growing rapidly, the Government‘s strategy for using this important instrument is unclear. Unlike most

decentralized countries, Indonesia has not transferred significant tax power to sub-national governments,

distorting incentives and creating an unhealthy dependence on transfers from the center. While Indonesia is

in the process of decentralizing property tax, which accounts for less than 10 percent of total domestic tax,

significant challenges remain. Meanwhile, many sub-national governments misuse revenue-raising authority

in ways that constraints business development and trade, thereby compromising the investment climate.

Given the important role of sub-national governments in public investment, particularly in the infrastructure

sector where the needs are great, amending the law on sub-national government taxes and fees, as well as

reforming on-lending and on-granting regulations, is urgent. Most regions also need to improve technical

capacity to implement reforms.

66. The Bank, working with development partners, continues to support the decentralization

reform and local government agenda. Beginning in 2010, the World Bank has provided resources and

assistance through a program working with the special allocation funds (Dana Alokasi Khusus - DAK), with

an initial emphasis on improved accountability and reporting on grants to infrastructure sub-sectors within

pilot sub-national governments. The Bank also facilitates the improvement of the fiscal decentralization

framework, through programs aimed at improving the regulations both at the national and ministerial level.

There are World Bank programs working directly with sub-national governments to enhance capacity and

improve financing in districts across Indonesia, including through the Initiative for Local Government

Reform (ILGR) and the Urban Sector Development and Reform Project (USDRP). Both aimed at changing

23

governance behavior in the context of decentralized public service delivery by targeting reform minded sub-

national governments and encouraging increased accountability through citizen participation. In addition,

the Public Expenditure Analysis and Capacity Harmonization (PEACH) program collaborates with

development partners (CIDA and AusAID) to carry out Public Expenditure Reviews (PERs) designed to

better understand and improve spending decisions, and also Public Financial Management (PFM) at the sub-

national level. These PEACH-supported sub-national PERs have been completed in 10 provinces with sub-

national governments working closely with academic institutions to improve policy and analytical capacity.

C.4. Implementation of the Extractive Industries Transparency Initiative (EITI)

67. The Government has made important progress toward implementing the Extractive

Industries Transparency Initiative (EITI). The initiative is the leading global standard for oil, gas and

mining revenue transparency. It requires all extractives firms operating within each EITI country‘s

jurisdiction to report the amount of revenues they convey to the Government, and it requires Government

agencies to separately report the amount of revenues they receive from those firms. The two sets of figures

are then cross-checked by an independent party and published. Following the issuance of Presidential

Decree No. 26/2010 on the Transparency of National and Local Extractive Industry Revenues in April 2010,

Indonesia was formally admitted into EITI candidacy in October 2010. Indonesia is expected to complete

the EITI process by two years from that date. The World Bank is providing support for EITI Indonesia

implementation through the EITI Multi Donor Trust Fund. Government, industry and NGO

stakeholders have completed negotiating the scope for the first round of EITI reporting and reconciliation in

Indonesia: it has now been agreed which firms will submit templates, what revenue streams those industry

templates will contain, which government agencies will submit templates, and what revenue streams those

government templates will contain. Firms and government will soon begin to fill out templates for revenues

paid and received in calendar year 2009.

IV. THE DPL PROGRAM IN INDONESIA

A. Links to the 2009-2012 CPS

68. As highlighted in the Country Partnership Strategy Progress Report (CPSPR), the DPL series

continues to be at the center of the World Bank Group (WBG) support in strengthening Indonesia‘s

central government institutions and systems, a key cross-sectoral engagement theme under the CPS (Figure 7). The main thrust of the DPL is to strengthen governance and enhance Government effectiveness.

Indeed, the CPSPR recognizes that the DPLs have helped the Government‘s efforts to improve the

effectiveness and accountability of central government institutions and systems under the long term

objective to enhance public financial management and governance, with the ultimate goal of increasing the

development impact of priority budget expenditures. Underpinned by advisory and monitoring work, as

well as institutional capacity-building in collaboration with other development partners, DPLs have also

supported key governance and institutional reforms in the areas of private sector development, community

development and poverty alleviation. As stated in the CPS, this current generation of DPLs is expected to

build on strong relationships with the reform-minded economic ministries and continue to support the

Government in strengthening the governance and effectiveness of its institutions and systems. This includes

efforts to reduce inefficient public expenditures, strengthen tax administration, enhance the overall business

climate and strengthen poverty alleviation and service delivery.

24

Figure 7: 2009-2014 CPS core engagements

B. Relationship to Other Bank Operations

69. The World Bank is supporting the Government‘s reform agenda using mutually supportive

instruments. Through the DPL series, the World Bank supports the Government‘s ownership and

commitment towards the achievement of reform milestones. Using other technical assistance and financing

instruments the World Bank supplements that support through the necessary advisory, human and financial

capacity-building to carry out the reforms. Projects such as the GFMRAP and PINTAR, for instance,

directly reinforce changes to the underlying institutional, incentive and organizational frameworks for core

functions of the MoF and other related institutions, including fiscal-policy formulation, budgeting, treasury,

internal audit, procurement, revenue dispute resolution and legislative oversight. The broad World Bank

engagement in the education sector – through projects such as the Early Childhood Education and

Development (ECED), School Based Management (BOS), teacher training (BERMUTU) and Higher

Education (IMHERE), as well as various economic sector work and technical assistance – also complements

the DPL-supported reforms on teacher certification in the past and on the scholarship program going

forward.

70. The DPL series support to the reform of government institutions and systems directly

contributes to the effective implementation of the other investment lending operations in the country. The reform of public financial management systems will address some of the core problems faced in the

delivery of key investment in social sectors. Examples include the unpredictability in the release of funds

and budget allocation adjustments. The DPL will also complement efforts being undertaken through the

Climate Change Development Policy Loan (CC DPL), including reforms aimed at improving the investment

climate, increasing the transparency and efficiency of the Government‘s spending and strengthening inter-

governmental fiscal relations and reforms that foster accountability. Reforms in procurement systems that

are part of the core DPL series will be particularly relevant for the cross-sector DPL reform agenda.

C. Collaboration with Other Development Partners and the IMF

71. The current DPL8 is being prepared in collaboration with the Government of Japan (GoJ),

through the Japan International Cooperation Agency (JICA). The Asian Development Bank had in the

past provided parallel financing to the DPL. Harmonization around the DPL has allowed the World Bank,

the ADB and the GoJ/JICA to build upon the natural synergies and complementarities that exists across their

respective portfolios. The harmonized approach to policy-based lending through the DPL program has also

25

provided a solid foundation to deepen the harmonization agenda in Indonesia with other development

partners around this or other initiatives and programs. Non-co-financing development partners that are

strongly involved in the DPL pillars, such as AusAID and the European Commission (EC), are regularly

invited to attend the DPL meetings with an observer status to further enhance coordination of development

partner programs.

Table 2: Development Partner Contributions to DPL Operations (US$ million)

Operation World Bank Government

of Japan / JICA

Asian

Development

Bank Total

DPL 1 300 100 ─ 400 DPL 2 400 100 200 700 DPL 3 600 100 200 900 DPL 4 600 200 200 1,000 DPL5 750 100 200 1,050 DPL6 750 100 200 1,050 DPL7 600 100 200 900

DPL8 400 TBD* - TBD

Total 4,400 TBD 1,200 TBD *To be determined

72. The collaboration extends well beyond the co-financing arrangements. Japan provided US$100

million for the first three operations, the fifth, sixth and seventh, and US$200 million for the fourth. A

further contribution from the GoJ through JICA is expected for DPL-8. The Asian Development Bank

(ADB) also provided parallel financing of US$200 million for each of DPLs 2-7, but is not expected to

contribute to DPL-8. Both development partners have worked with the Bank on joint preparatory work, the

drawing up of common policy stances and reaching common agreement on the fulfillment of triggers,

monitoring progress on overall program implementation, achievement of medium-term objectives and the

selection of policy actions in collaboration with the GoI.

73. The technical contribution of the GoJ through JICA has been particularly evident in the

investment climate policy area, but has recently intensified in the public financial management area. The technical assistance and support that JICA has provided over the years to Indonesia on private-sector

development, and the on-the-ground presence of numerous experts and advisors, as well as numerous

Japanese companies, has provided a rich source of analytic information and substantive direction to the

reform agenda in the investment climate area. JICA has also provided technical assistance and support to

Bappenas on the development of a performance-based budgeting system. The DPL process has also

provided a forum and a vehicle for discussions between the GoJ/JICA and the GoI. GoJ/JICA will continue

and expand its technical assistance projects for the improvement of the tax administration, credit guarantee

system for SMEs, National Agency for Export Development (NAFED), and trade-related administration.

These activities of Japan have greatly contributed to the formulation of the DPL program in the past and are

expected to continue going forward.

74. For the Government, harmonization has been a welcome development. Feedback from

counterpart ministries points to a notable reduction in the transaction cost of policy dialogue with three of

Indonesia‘s most important development partners. Moreover, development partner harmonization around

the Government‘s own program has bolstered country ownership of the reform process and has helped

change the nature of the relationship with these development partners to one of a reliable partnership.

75. The IMF has also been closely involved with the overall operation. The IMF and the World

Bank in Indonesia consult regularly on macro and sectoral issues, and the Bank coordinates closely with the

26

Fund in its missions. In addition, the Bank, the Fund and development partners have worked closely on the

Public Financial Management (PFM) agenda. The Fund has provided advisors to the Ministry of Finance to

advise them on TSA issues and tax administration reforms, and the DPL‘s indicative triggers have been

developed in close coordination with the work of these advisors and the agreements reached between the

Government and the Fund. The DPL has thus provided a platform to push the reform agenda in these

crucial areas where both institutions are working.

76. There are synergies between the DPL and bilateral support provided by development partners

through trust funds. The Multi Donor Trust Fund funded by the European Commission, Netherlands and

Switzerland on Public Financial Management (PFM MDTF) complements the DPL policy dialogue and

helps carry forward and follow through on some of the PFM-related institutional reforms. The PFM MDTF

provides technical assistance to the ongoing World Bank GFMRAP project and contributes to tax reforms

that at the core of the World Bank PINTAR project. Another trust fund, the Multi-Donor Facility for Trade

and Investment Climate (MDFTIC) funded by the Dutch and Swiss governments, supports institutional and

capacity building initiatives as well as analytical and advisory work, aimed towards improving trade and

investment climate. The reforms aimed at improving the effectiveness of poverty alleviation programs are

being supported by a trust fund supported by Australia.

D. Lessons Learned

77. Over the course of the two previous DPL series, some important lessons have been learned. These lessons stem from the nature and evolution of the relationship between the Bank and the Government,

and also from the characteristics of the DPL program as a means of offering policy support, together with

the changing policy environment on the ground. Some of the lessons may be particular to the Indonesian

case because of the broad scope and depth of the Bank‘s engagement with the Government, and the range of

resources that the World Bank program in Indonesia has access to through trust funds.

78. Lesson 1: Strong government ownership and committed counterparts are vital for the DPL

program to help accelerate key reforms. Given their complexities and significant effects over the way the

Government works, policy reforms need to be driven by the government. Further, the pace and scope of

reforms should also be driven by the judgment and tactical sense of the key government counterparts on

whether or not those reforms are bureaucratically or politically feasible. The DPL program has been

successful in ensuring government ownership and committed government counterparts through strong

dialogue and broad engagement. In areas where policy consensus is still evolving, the pace and scope of

implementation may seem more modest than desired, but their very inclusion in the DPL-supported agenda

maintains a focus on the policy issue, prompts on-going deliberation of policy options, strengthens the

resolve of reform champions, and may eventually lead to reform breakthroughs. Indeed, the DPL is useful

not only as a financing instrument, but more as a tool for accelerating the Government‘s own critical

reforms overall.

79. Lesson 2: Constant collaboration and dialogue between the Government and the Bank

continues to be fundamental for the success of the DPL program. The Bank‘s strong field presence

continued to facilitate constant collaboration and dialogue with the Government, not only on the DPL but

also on other engagements that provide synergies with the DPL. Such collaboration and dialogue also

benefited from the involvement of key reform champions in the Government and strong Bank presence on

the ground, who were able to complete actions in the timeframe agreed upon and ensure the successful

delivery of the DPL program.

80. Lesson 3: Mapping out a reform program provides meaningful direction and substantive

results down the road, but a degree of flexibility is still needed, especially to ensure sustained

government ownership. Compared with the first series, the second DPL series was more systematic in

27

adopting a multi-year strategic frame for the program, and laying out a basic mapping of the reform program

that more specifically describes the end goals. While the initial mapping out of a detailed strategy and a

multi-year agenda under each of the various DPL reform aims allowed a more strategic consideration of

what the most critical next reform steps might be, ensuring sustained government commitment to furthering

the various reform objectives was even more critical. Indeed, institutional and policy reforms are usually

complicated and involve unpredictable undertakings. Such reforms often need to go through a trial and error

process, where there may be the occasional dead-ends that need backtracking and finding an alternate route.

Hence a degree of flexibility should be maintained, so that when the right opportunity presents itself,

reforms that had otherwise been apparently slow can be supported and advanced more rapidly.

81. Lesson 4: Continuous DPL dialogue strengthened the Government‘s knowledge base, which in

turn allowed more proactive and swift measures to be taken at a time of crisis. Establishment of the

Financial System Stability Forum (FSSF), for instance, has formed the basis for the financial sector safety

net and allowed the Government to swiftly address systemic risks in the financial system. The Government

was also able to proceed quickly in requesting for the Public Expenditure Support Facility (PESF) DPL-

DDO in FY09, which eventually helped in restoring public confidence, and in advancing other policy

reforms, particularly those under public financial management and investment climate. Had the DPL been

non-existent, the swift resolution of the financial systemic risks and quick delivery of the DPL-DDO at the

time of crisis would have been more challenging.

82. Lesson 5: The reclassification of policy actions—into prior actions and benchmarks—allowed

a more prioritized and programmatic approach. Indeed, some benchmark actions that may appear

incremental at face value are actually steps that need to be taken before more substantive reforms can take

place. Hence, the classification of actions allowed more priority and focus over the more critical, key prior

actions, while still acknowledging the Government‘s pace and broad scope of reform process. This not only

helped in ensuring a sustained government ownership, but also in mapping out a more comprehensive,

multi-year strategic frame for the program.

83. Lesson 6: DPLs are only one instrument among many that are available in a multi-faceted

engagement, and the choice of instrument should be contingent on the issue, the political context and

the institutional circumstances. This is particularly applicable in the Indonesian case because of the size

and scope of the World Bank program in Indonesia. The Bank program in Indonesia is one of the largest of

any country in terms of number of staff and overall resources. Large teams are working closely on a daily

basis with government counterparts at often very senior levels on a wide range of issues from investment

climate, trade, finance, public financial management and poverty. In this context, the DPL is not the only

instrument for supporting reform, but rather complementary to other instruments such as investment

projects, TA and AAA.

V. THE PROPOSED OPERATION

A. The Eighth Development Policy Loan

84. The proposed US$400 million Eighth Development Policy Loan is the second operation under

the third DPL series (DPLs 7-9). The previous DPL series had focused on improving the investment

climate, strengthening public financial management and enhancing service delivery and poverty alleviation

efforts. The focus on these three core areas was underpinned by the rationale that improvements in the

investment climate are critical to accelerating growth; strengthening public financial management is

essential for enhancing government effectiveness; and enhancing service delivery and poverty alleviation

28

efforts are essential if Indonesia is to bring about more broad-based improvements in welfare for its entire

people. Progress achieved under the previous DPL series in each of the three core areas has been satisfactory

overall, which warrants the continued program support through DPL-8. The DPL-8 therefore continues the

policy dialogue on, and support to, Indonesia‘s reform program in the three core areas that were the focus of

the previous DPL series, through the following prior actions.

Table 3: Prior Actions for the Indonesia Eighth Development Policy Loan (DPL-8) Reform Aim No. Prior Action

Pillar 1: Improving the Investment Climate

Policy sub-area: Enhancing trade facilitation and promoting exports

Reduce the time needed for

and cost of importing and

exporting

1. Developed standard operating procedures within the Indonesia National

Single Window (INSW) for regular private sector consultative meetings

on INSW implementation issues, and started holding the meetings

2. Developed work plans for the phased implementation of Single Sign On

procedure for two key agencies of INSW: BPOM and Customs

3. Ministry of Trade issued a Ministerial Decree (No. 709/M-

DAG/KEP/9/2011) establishing a team to formulate Non-Tariff Measures

under the Ministry of Trade, with clear standard operating procedures for

the issuance of Non-Tariff Measures

Policy sub-area: Improving Connectivity

Resolve major bottlenecks

and constraints to improve

national connectivity

4. Issued a Presidential Regulation (No. 32/2011), a Ministerial Regulation

(No. PER-06/M.EKON/08/2011) and two Ministerial Decrees (No. KEP-

35//M.EKON/08/2011 and No. KEP-36//M.EKON/08/2011) that put in

place institutional mechanisms to enhance connectivity in Indonesia

Pillar 2: Strengthening public financial management

Policy Sub-area: Strengthening budget formulation and M&E systems

Improve results

orientation and MTEF in

the budget process

5. Based Ministry/Agency Budget and Work Plans (RKA-K/L) for 2012 on

Government Regulation (No. 90/2010), as evidenced by:

1. Separate treatment of baselines and new initiatives in the budget

submission document following new guidelines on RKA-K/L

2. A manual for line ministries on formulation of new initiatives,

which enables a review of rationale and cost information

3. Consistency between Government Work Plan (RKP) and RKA-

K/L regarding performance and budget information

Policy sub-area 2.2. Strengthening budget execution systems

Improve public

procurement

6. Completed the strategy and policy for human resources development for

the procurement function in government agencies

Improve government

accounting and audit

functions

7. Issued a Presidential Instruction (No. 4/2011) on government internal audit

systems, which clarifies the roles and responsibilities in internal controls

8. Issued a Government Regulation (No. 71/2010) on accrual-based

accounting

9. Directorate General of Treasury submitted a draft regulation to the Minister

of Finance detailing accounting policies and chart of accounts

Pillar 3: Enhancing poverty alleviation and service delivery efforts

Improve poverty

measurements and

targeting of the poor

10. National Team instructed agencies implementing Cluster I poverty

programs to use the unified database.

Improve household-

targeted poverty reduction

programs (Cluster 1)

11. National Team Executive Secretariat working group submitted a policy

note on cost scenarios for health insurance for the poor (Jamkesmas) and a

proposed health management information system to the chair of the

National Team.

29

85. The eleven DPL-8 prior actions identified above were developed largely based on the

continuing DPL program dialogue with the GoI. Nine of these eleven prior actions had been indicated in

the DPL-7 program document, highlighting the continuity and programmatic approach of the DPL program

overall. In addition, the following two new prior actions are being proposed: (i) the issuance of the Perpres

and Ministerial Decree that put in place institutional mechanisms to enhance connectivity in Indonesia; and

(ii) the issuance of Government Regulation No. 71/2010 on accrual-based accounting. Given the need for

further consultation and consensus building among the key GoI stakeholders, the following two indicative

DPL8 prior actions that were presented in DPL7 are delayed: (i) the issuance of new PP and the related

MoF-regulations on budget execution as mandated by State Finance Law; and (ii) the submission of the

draft procurement law to Parliament. In both cases, the World Bank provided comments to the advanced

drafts and some of these comments are being incorporated. The delays therefore do not represent a

weakening of Government commitment towards reforms, but rather a desire by the GoI to further improve

the drafts. These two actions remain to be high priority policy actions that will continue to be pursued under

DPL9. Overall, the eleven DPL-8 prior actions are consistent with the Government‘s RPJMN 2010-14. The

World Bank has also been involved in the preparation for the actions through various technical assistance

activities.

86. The proposed prior actions represent critical policy/institutional actions towards longer term

reforms, over which the GoI has demonstrated strong ownership and commitment. It is important to

note that although some of the proposed prior actions may be perceived as process steps, they actually

represent important policy/institutional actions that have undergone an extensive consultation and consensus

building process among the key GoI stakeholders. Further, the GoI has demonstrated strong ownership and

commitment over these actions, and their very inclusion in the DPL helps ensure GoI focus on the policy

issue, the on-going deliberation of policy options, the resolve of reform champions, and the eventual reform

breakthroughs.

87. In addition to the eleven prior actions, DPL-8 also supports a set of benchmark actions. These

benchmark actions represent reform steps that need to be taken before more substantive reforms can take

place over the longer run. While prior actions represent critical policy/institutional actions agreed with the

GoI for the implementation and expected results of the DPL-supported program, thereby forming the basis

of the program; the benchmark actions, even though agreed with the GoI, do not pose any policy

conditionality and reflect the broader reform process. The distinction between prior and benchmark actions

allows more priority and focus over the more critical, key prior actions, while still acknowledging the GoI‘s

pace and broad scope of reform process. Such classification therefore helps ensure sustained GoI ownership

and commitment, and the mapping out of a comprehensive and multi-year DPL program. Details on the

individual prior and benchmark actions for DPL-8 and 9 are provided in Annex 5. The section below

provides an overview of the DPL-8, focusing on the prior actions (which are underlined) and important

benchmarks.

A.1. Policy Area I: Improving the Investment Climate

88. Gross FDI inflows in 2010 were the highest since the 1997/1998 crisis, although they remain

lower relative to GDP than pre-crisis peaks, and lower relative to many regional peers. By mid-2010,

even as global financing conditions remained constrained, a recovery in non-oil and gas investment inflows

returned FDI to near record levels. The strength of FDI has continued in the first half of 2011. However, the

ratio of FDI to GDP remains below its pre-crisis peak and below many regional peers. The positive outlook

is also supported by anecdotal evidence of new investment projects and country agreements, for example,

with Japan, India, Singapore, China, South Korea and the US. Macroeconomic stability and economic

policy certainty partially explain the investment trends but major legal and regulatory achievements, such as

reduced corporate tax rates and improved tax administration, have also played a role. Despite the progress

registered in reducing barriers to investment, Indonesia's business environment still poses many challenges

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to private investment. The current operation aims at supporting the Government in addressing some of those

constraints as follows:

Policy Sub-Area I.1. Improving the Regulatory Environment for Investment

Reform Aim: Reduce uncertainty for investors by strengthening investment service institutions and

improving investment regulations

89. Improving clarity of the Investment Negative List implementing regulations: In May 2010,

Indonesia‘s President signed a new Decree on Indonesia‘s Investment Negative list – Perpres No. 36/2010.

This Perpres is a major implementing regulation for Indonesia‘s Investment Law of 2007, and replaces

previous investment negative lists from 2007. The Perpres clarifies certain implementation issues, such as

grandfathering and mergers/acquisitions, but leaves others unresolved. Although it had been hoped that the

Perpres No. 36/2010 would resolve all uncertainties regarding implementation of Indonesia‘s Investment

Law, discussions with the private sector indicate that a number of uncertainties remain, the most important

of these is the treatment of publicly listed companies. As a result, the Investment Coordinating Board has

reviewed implementation issues surrounding the Investment Negative List and submitted recommendations

for improved implementing language to the Coordinating Ministry for Economic Affairs.

90. Regulatory Review and Policy Harmonization: In the past, ministries have passed regulations

that severely restricted investments in certain sectors. With the exception of cellular towers, Government

departments have refrained from adding new restrictions on investment since the passing of the Investment

Law. Such restrictions are only added after passing through the inter-ministerial process. Parliament, on

the other hand, has passed several sectoral laws that include new restrictions on foreign investment, or have

the potential to restrict investment pending implementing regulations. These include the laws on shipping,

mining, post, horticulture, and land protection for sustainable food. As a result, the Government plans to

review the existing policies and procedures for regulatory review of new laws, and identify options for

improving policy coordination. The National Team for Improvement of Export and Investment, Timnas

PEPI, is envisioned by September 2012 (DPL-9) as the institutional arrangement via which a legislative

regulatory review and policy harmonization process will be implemented.

91. Enhanced Public Private Dialogue: Another role planned for Timnas PEPI is the implementation

of a regular public-private dialogue (PPD) on key investment climate and trade issues. The Government is

increasingly seeing the value of stakeholder feedback on existing regulations and on proposed regulations

prior to their issuance. In addition to serving as an internal coordination mechanism within the Government

for its own policy development and improvement, Timnas PEPI is expected to serve as the Government

interface with private sector working groups on priority issues mutually agreed between the Government

and private sector stakeholders. PPD mechanisms often help provide the Government with a needed

feedback mechanism to determine if its policies are working or not and also provide a mechanism for the

private sector to rapidly communicate both problems and successes to the government. PPDs also help the

Government to prioritize those issues that need the most urgent attention, by communicating demand-driven

priorities from the private sector. To that end, the Government has issued a revised presidential decree and

ministerial decrees to strengthen and revitalize Timnas PEPI‘s roles and functions, including arrangements

for ongoing public-private consultation on trade and investments. It is expected that such PPD will help

strengthen trust and collaboration between the Government and the private sector towards a common goal of

improving the trade and investment climate.

92. Facilitating investment licensing: The 2007 Investment Law stipulates that a Presidential

Regulation on one door integrated investment service (one-stop shop, Pelayanan Terpadu Satu Pintu or

PTSP) will be issued, and also mandates that local governments be made responsible for administering

investment projects within their jurisdictions with the exception of certain types of investments that will

remain with the central government. A presidential regulation was issued in June 2009 that allows

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ministries and central government agencies to delegate their authority to issue business licenses to the

Investment Coordinating Board (BKPM) and authorizes the BKPM to establish a one-stop shop for

investment licensing. It also authorizes the BKPM to establish an online investment licensing application

(SPIPISE), which is now accessible on the BKPM website. To date, the mapping of business licenses has

been conducted for five sectors (i.e. Trade, Industry, Tourism, Agriculture and Health sectors) in the

development of the business process of SPIPISE. The system has also integrated approval and licensing

between BKPM, 33 provincial governments and 40 district/city government PTSPs. The BKPM is also

planning to develop a master data interchange for approval and licensing, which will allow an applicant‘s

data to be entered only once at initial registration, with this data automatically being accessible and

populated for each subsequent license application. Altogether, the ongoing mapping of business licenses,

their integration into the online approval system and the development of a master data interchange are

expected to increase the transparency of regulatory requirements and license issuing for investors, in

addition to decreasing the time and cost required to acquire required licenses.

Policy Sub-Area I.2. Reducing Tax Burden and Improving Tax Administration

Reform Aim: Improve human resource management in the MoF DG Tax and modernize the core tax

system

93. The first phase of tax administration reform was largely completed by end-2008. In the first

phase, DG Taxes (DGT) restructured its headquarters, moving from a ―tax type‖ to a functional organization

with a field office network targeted to specific taxpayer segments—i.e. large, medium, and small taxpayer

offices have been established in addition to one unit dealing with High Wealth Individuals that was created

in 2009. The balance of unpaid VAT refunds has declined significantly while major outreach and

simplification efforts have increased the number of registered taxpayers from a total of about 4.8 million in

2006, to around 20 million in 2011. However, the increase in the number of registered taxpayers, which are

mostly individuals and small businesses, has not automatically resulted in a significant increase in revenues

as substantial weaknesses remain. The DGT remains constrained by ineffective systems and weak human

resource management, which force it to implement an inefficient ―cookie cutter‖ model for the tax office

organization structure and prevents the creation of professional service staff, for example in tax audit.

94. The next phase of tax administration reform will continue the effort to reduce tax gaps and

introduce new systems and procedures that facilitate a taxpayer-centered approach to improve

voluntary compliance. The focus is on strengthening the self-assessment system and streamlining business

processes, improving the quality and integrity of ICT, introducing risk-based compliance enforcement and

resource allocation, modernizing human resource management, improving professionalism and staff

integrity and strengthening governance to support the entire tax operations. The DGTs‘ medium-term

reform strategy is therefore concentrated into two interrelated programmatic streams:

Lowering taxpayer compliance costs through improving the efficiency and effectiveness of the

tax administration organization and business processes. The Bank is supporting this effort through

the core tax systems development component of the PINTAR loan that will support DGT in

strengthening: (i) taxpayer registration, (ii) returns and payments processing; (iii) taxpayer and revenue

accounts database; (iv) centralized document management; (v) risk-based audit and collection; and (vi)

the information technology infrastructure. Implementation is expected to commence with the award of

the contract for the core tax system in late 2011, which will be followed by the redesign of the tax

administration business processes in 2012, to ensure that a new integrated information system can be

completed in 2014. The DGT is also preparing to issue a new regulation to improve the availability and

quality of third party data, particularly from DG Customs, which is essential to enhance tax assessment,

audit and risk management. In order to address some immediate concerns in relation to the tax gap, and

to help clarify the procedures for taxpayers, the DGT has also issued new Standard Operating

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Procedures (SOPs) to regulate tax objections and appeals, which has been major source of revenue

leakage and governance concern, and implementing regulations for Transfer Pricing; and

Modernizing human resource management, improving professionalism and staff integrity, and

strengthening governance. The DGT currently has around 33,000 employees, but lacks staff in key

areas, such as tax audit, and the organization and business rules need to be strengthened in a number of

areas to promote greater governance controls between tax functions and taxpayers. The Bank is

supporting this effort, partially through Component B of the PINTAR loan that will comprise the

development of HR management policies, training, professional certification, a new HR management

information system and strengthening governance. The DGT currently has limited flexibility to

introduce the HR and organizational reforms to support the much needed reforms, due to the rigidity of

government-wide standards. To address these constraints and modernize the institution, the DGT has

prepared a medium-term HR Strategic Plan (HRSP) along with an organization impact assessment,

which is expected to provide the foundation for both immediate HR reforms, as well as the longer-term

reforms that will likely require exemptions from the centralized rules currently controlled by the State

Ministry of State Apparatus Reform (MenPAN). To support the more immediate reforms, the DGT has,

with Bank support, recently contracted services for: (i) the development of a Knowledge Management

Strategy, Management and Implementation Roadmap to help disseminate good practices about the tax

and HR reforms throughout the organization; and (ii) the development of a Change Management

Strategy and Roadmap, which will help to promote reform and improve governance within the DGT.

Policy Sub-Area I.3. Enhancing Trade Facilitation and Promoting Exports

Reform Aim: Reduce the time needed for and cost of importing and exporting

95. Continued implementation of the Indonesia National Single Window (INSW): The

establishment of the INSW in February 2010 is a major step towards reducing the time and cost for

importing and exporting by allowing single submission, single processing and single approval of

import/export documents. It is estimated that up to 36 government agencies are involved in granting permits

or licenses for export or import with at least 48 different export documents, 106 different import documents

and 23 supporting documents. The development of the INSW is being coordinated by the Secretariat of the

INSW Team anchored in the CMEA. This is the first step towards creating the proper institutional

arrangements with all key ministries involved as stakeholders. It is important to highlight the importance of

moving the INSW from being a purely customs-operated system to one that has institutional arrangements

which enable INSW to function optimally with the active cooperation of all of its stakeholders.

96. Ultimately, a fully operational INSW is expected to benefit the private sector through more efficient

customs release and clearance of goods. In order to obtain private sector inputs on progress in the

development of the system, the INSW has instituted public-private consultations with a number of chambers

of commerce. As a result, the INSW now serves as a de facto forum for addressing trade issues with the

private sector. More importantly, private sector dialogue has resulted in the resolution of several trade

problems, including conflicts between product descriptions and harmonized system codes used by permit

issuing agencies and requirements for both hard copy and electronic inputs into the system. The

Coordinating Ministry for Economic Affairs has developed standard operating procedures within the INSW

for regular private sector consultative meetings on INSW implementation issues, and has started holding the

meetings.

97. Single-submission and sign-on are the final goals of the INSW for each of its major pillars. In this

context, single submission and sign-on mean that a trader can seek import or export clearance by submitting

all data required by each clearance agency with a single sign-on of the INSW portal. The first step towards

this ultimate goal is the establishment of Single-Sign-On. The Coordinating Ministry for Economic Affairs

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has developed work plans for the phased implementation of a single sign-on procedure for two key agencies

of the INSW: BPOM and Customs. Work has already commenced and implementation is expected to start

by end 2011.

98. Ensuring transparency and consistency in the establishment of non-tariff measures (NTMs):

NTMs, a concept broadly used to include any type of policy measure other than a tariff that affects trade,

including product labeling, have been proliferating internationally despite the recognition that they can be

very counterproductive and cause inefficiencies in trade flows. The Ministry of Trade is committed to

provide guidance on the use of such measures and has initiated the implementation of two measures since

2009. First, it has issued guidelines providing certainty in product surveillance by clarifying and establishing

a standard operating procedure to monitor product labeling. Second, as part of efforts to reform its internal

process in reviewing new non-tariff measures, the Ministry of Trade issued a Ministerial Decree (No.

709/M-DAG/KEP/9/2011) establishing a team to formulate NTMs under the Ministry of Trade, with clear

standard operating procedures for the issuance of NTMs. The internal reforms would establish a mechanism

for the ministry to review NTMs in order to ensure transparency and validity according to the policy

objectives, and consistency with international trade agreements.

Policy Sub-Area I.4. Improving Connectivity

Reform Aim: Resolve major bottlenecks and constraints to improve national connectivity

99. This is a new policy sub-area that is being introduced under the proposed DPL-8, which aims

to resolve major bottlenecks and constraints to improve national connectivity. The GOI is increasingly

aware of the importance of improving connectivity to strengthen its international connectivity and reduce

the costs of the distribution of goods throughout the archipelago. It therefore developed the new connectivity

strategy, which is one of the main pillars of the Master Plan for Acceleration and Expansion of Indonesia‘s

Economic Development (MP3EI) 2011-2025 that was recently launched by the Government. The Master

Plan mentions that in order to strengthen national connectivity, components from four different government

plans will be integrated: (i) National Logistics System (SISLOGNAS); (ii) National Transportation Systems

(SISTRANAS); (iii) Regional Development (RPJMN and RTRWN); and (iv) Information and

Communication Technology (ICT). The integration of these components would require broad participation

and coordination among various government departments and agencies, as well as the private sector. To this

end, the Government has issued a Presidential Regulation (No. 32/2011), a Ministerial Regulation (No.

PER-06/M.EKON/08/2011) and two Ministerial Decrees (No. KEP-35//M.EKON/08/2011 and No. KEP-

36//M.EKON/08/2011) that put in place institutional mechanisms to enhance connectivity in Indonesia. This

entails the establishment of inter-department teams for the coordination and implementation of different

elements of the Master Plan, involving the private sector (which is a new development for Indonesia), as

well as a secretariat to coordinate the implementation of the master plan overall. This is an important action

given that past experience has shown that shortcomings in the implementation of previous

roads/ports/logistics plans were in large part due to the lack of an appropriate institutional set-up to

coordinate efforts between the different ministries responsible and to ensure the different plans were

consistent. The establishment of teams composed of members from different ministries and private sector is

thus a crucial first step that has been taken by the Government, which is expected to result in lower logistics

costs. The next step would be to operationalise the different plans by identifying, prioritizing and

implementing the specific actions, which will include both soft and hard infrastructure actions that are key to

improve connectivity. It is envisioned that this could evolve into a future DPL, possibly focusing on

connectivity.

100. The Government has also appointed a public-private team in July 2011 that is tasked

with revising the National Logistics System Development Blueprint (NLB) and aligning its actions to

other related master plans. As one of the main elements of the connectivity strategy, the NLB has three

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main objectives: (i) ensuring the availability of strategic products at affordable prices; (ii) reducing logistics

costs to facilitate competitiveness of export products; and (iii) preparing the country for a better market

integration with ASEAN. The public-private team is tasked with revising the NLB and aligning its actions to

other related master plans (e.g. Ports, Roads, Multimodal, etc) to enhance the overall connectivity strategy.

It is envisaged that the NLB will be issued as a presidential decree and a ministerial decree once it is aligned

with the other related master plans and will include an updated and improved action plan.

A.2. Policy Area II: Public Finance Management

101. Since the adoption of a new regulatory framework in 2003 and 2004, the Government

continues to implement public financial management reforms. These efforts are part of a broader public

sector reform agenda to improve governance and enhance service delivery, with the ultimate goal of

achieving sustained economic growth and poverty alleviation. The Government‘s efforts are directed at

improving the way public finances are managed and enhancing transparency and independent oversight. To

this end, the Government has committed itself to a broad based PFM reform agenda. At the forefront of this

agenda has been the Government‘s move to performance-based budgeting (PBB) and the medium-term

expenditure framework (MTEF), as required by the 2003 State Finance Law. Likewise, the introduction of

the Government Financial Management Information System (SPAN), in 2012 aims to enhance the policy-

orientation of the budget, increase efficiency of treasury operations, improve cash management, reduce

opportunities for rent-seeking and ensure the security and credibility of financial data. Further consolidation

of the Treasury Single Account (TSA) and improvement of cash management and cash flow forecasting

under this arrangement also remain a priority, as well as improving the management of the state asset-

liability portfolio, enhancing public sector procurement, and strengthening audit and accounting functions

throughout the budget cycle.

102. Addressing the public financial management capacity constraints is critical for the

success and sustainability of the reforms. The Government is aware of these constraints and has

developed strategies to bolster its capacity in PFM, as elaborated in the Technical Annex 6 on Public

Financial Management. The strategies involve the adaptation of the reform program, as necessary, to address

capacity gaps in identified areas. For example, accrual accounting was initially envisaged to be introduced in

2008, although that date has subsequently been revised to 2015 on the basis of detailed planning work by the

public accountancy bodies, particularly the accountancy directorate (APK) in the Treasury. The current

strategy for implementation includes an extensive training component, which as noted in the DPL is

expected to start in 2013. The Government has also developed a training program and support services plan

to support the more immediate rolling out the improved business processes and IT system in relation to the

Government Financial Management System (SPAN) in 2012. The training program is being supported by

the World Bank GFMRAP project, and builds on the DPL-8 supported actions, it includes for example

extensive training for the new cash planning tool.

103. Since the previous DPL, the Government has achieved notable implementation

milestones in PFM reforms. These include:

Following the adoption of a revised program structure in the RPJMN 2010-14, and the integration of

performance indicators in planning and budget submission documents for FY2011, the

implementation of PBB and MTEF has advanced further by transforming government work plans

and budget documents into rolling multi-year documents. All line ministries and agencies have

prepared detailed forward estimates and the Government has introduced procedures to handle new

initiatives incentives based on performance;

To further support the performance orientation and simplify budget execution, new measures allow

more flexibility for spending units to manage their budgets to achieve agreed outcomes and outputs

by granting them more authority for budget virement;

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The future business processes have largely been defined for SPAN enabling the building and testing

phase to commence, with the live roll-out planned for 2012;

Further consolidation of the TSA includes daily sweeps of government revenue accounts;

An automated asset management system is close to being completed, following the stocktaking of

government assets in 2010;

The new National Public Procurement Office (LKPP) is continuing to strengthen the regulatory

framework and the human resources and capacity building for public procurement; and

Internal controls and internal audit procedures and capacity are being bolstered, while Indonesia has

embarked on the gradual move towards full accrual accounting in the public sector.

104. The reforms undertaken in the previous and ongoing DPL series have been sequenced

in a manner that provides a firm foundation for further progress. They have created the basic

foundations for the gradual introduction of PBB, an MTEF (to be trialed in 2011), and accrual accounting

(by 2015). Nevertheless, challenges continue to arise across the PFM cycle and some will continue to be

addressed through the DPL program.

Policy Sub-Area II.1. Strengthening Budget Formulation and M&E Systems

Reform Aim: Improve results orientation and MTEF in the budget process

105. The 2003 State Finance Law mandated three pillars of budget reform: (i) a unified

budget to remove the previous distinction between development expenditure and routine expenditure and

allow for prioritization across all kinds of expenditures in the budget; (ii) a medium-term expenditure

framework (MTEF), which aims at strengthening the capability to plan and prioritize expenditures for the

medium term; and (iii) performance-based budgeting (PBB) which would restructure the budget according

to programs and activities, with associated performance indicators, and allow for a results-based evaluation

and budget allocation.

106. While the unified budget was implemented in the 2005 budget, PBB and MTEF are

still in the early stages of implementation. However, notable implementation milestones have already

been achieved. Supported by DPL 6 and 7 prior actions, and following a joint circular from Ministry of

Finance and Bappenas in 2009, a revised program structure has been introduced for all line ministries and

ministry-level agencies with the RPJMN 2010-2014 and FY2011 budget. The work plans and budget

submissions for 2011 incorporate performance indicators for all programs and activities. As a first crucial

step in implementing the MTEF, work plans and budget submission documents–from plan (RKP) to Renja-

KL and budget submission (RKA-K/L)–have also been transformed into rolling multi-year documents and

line ministries and agencies have prepared detailed forward estimates for three out-years beyond the fiscal

year as required by MoF regulation from June 2010.

107. A new regulation from the Ministry of Finance further strengthens PBB and MTEF by

introducing procedures for performance evaluation. In late 2010, the Ministry of Finance finalized a

revision of the presidential regulation on the budget formulation process (PP No.90/2010). The new

regulation requires budget submissions to be formulated based on the PBB and MTEF approach and

introduces guidelines for performance evaluation based on outcome and output achievement, efficiency, and

consistency between planning, budgeting and absorption. Performance evaluation is also meant to inform

following years‘ budget allocations and to inform ―rewards and punishment‖ for line ministries, for which a

new regulation was issued in March 2011. However, the performance evaluation concept is still under

development and will need a significant concerted effort across a number of ministries to be refined over the

coming years. Among the challenges are the variable quality of performance information, the large number

of indicators and the shared responsibilities for M&E between government agencies. The initial efforts to

provide line ministries with the tools to select the most relevant performance indicators and to guide the

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wider M&E system are supported by DPL-8 and DPL-9. The SPAN system may also support the emerging

M&E agenda with a platform for the necessary financial and non-financial information.

108. The establishment of procedures for managing new initiatives implies a fundamental

change in the budget preparation process. PP No.90/2010 as detailed by Bappenas Regulation No.1/2011

sets out procedures to propose and scrutinize new initiatives in three rounds during the budget preparation

process. Essentially, the regulation fixes a budget baseline over the fiscal year and three outer years, except

for technical updates, and requires all material changes to be submitted as new initiatives. A competitive

selection process at cabinet level will decide which initiatives will be funded. The new initiative procedure

was first introduced for the preparation of indicative budget ceilings for FY2012, although there is still a

need for further socialization and capacity building. The Government pushed forward by having based

Ministry/Agency Budget and Work Plans (RKA-K/L) for 2012 on Government Regulation (No. 90/2010),

as evidenced by: (i) separate treatment of baselines and new initiatives in the budget submission document

following new guidelines on the RKA-K/L; (ii) a manual for line ministries on formulation of new

initiatives, which enables a review of rationale and cost information; and (iii) consistency between

Government Work Plan (RKP) and the RKA-K/L regarding performance and budget information.

109. Though the introduction of rolling plans and budgets, forward estimates, new

procedures on performance evaluation and new initiatives, are major implementation milestones for

PBB and MTEF reforms, considerable challenges lie ahead. The buy-in and understanding of the

ongoing PBB and MTEF reforms from all major stakeholders continues to be crucial, including Parliament.

Consultations with the Parliament took place as part of the 2011 budget cycle consultations, and PBB and

MTEF reforms have also been addressed as part of consultancies aimed at supporting the capacity of the

DPR secretariat. However, more in-depth discussions on the content of reforms are needed.

110. Throughout the next two years, the agenda for PBB and MTEF reforms will gradually

evolve. Reforms will increasingly revolve around the refinement of the performance information system

and the development of an integrated monitoring and evaluation system by 2013, as well as further

strengthening of the budget‘s MTEF dimension. The latter will focus on the separate treatment of baselines

and new initiatives, as well as linking budget ceilings to forward estimates of the previous years. The overall

concern is how to ensure that the MTEF is integrated with the annual budget cycle rather than a separate

planning exercise. This needs strong commitment from all the relevant stakeholders, intensified capacity

building at all levels, and changes to business processes and systems to ensure that the MTEF information is

publicized and used in all major aspects of the budget preparation cycle and that there is high quality and

consistency in baseline information. DPL-8 and DPL-9 will support these developments by including

actions to explain deviations of budget ceilings from forward estimates in budget documentation and on

guidelines for reviewing the efficiency of baselines.

Reform Aim: Link budget formulation to the Government Financial Management Information

System (SPAN)

111. SPAN is designed to integrate and enhance the performance of the entire budget cycle

from planning to reporting. In early 2011, the Government acquired a new budget preparation module for

SPAN (Hyperion) to provide more advanced functionality for both budget preparation and performance

recording and reporting. This should better meet the requirements stemming from the PBB reforms and

enable the automation of an end-to-end budget process. Implementation of the new budget preparation

module, including formulation of future business processes, is a priority for the coming months and year, as

reflected in completion of the design-phase (DPL-8) and piloting / roll-out (DPL-9). The Ministry of

Finance is also developing an integrated web-based front-end application (SAKTI) to be used by the large

number of individual spending units (more than 22,000), which will interface with SPAN. SAKTI will

ensure full system integration and harmonization, both at the front-end and in the wider SPAN system.

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Reform Aim: Develop a new monitoring and evaluation system

112. Efforts are underway within the MoF DG Budget and Bappenas to develop a

comprehensive Monitoring and Evaluation (M&E) system. This system should bring together

government financial data and performance information, and provide a basic framework and reference tool

for more performance-oriented budget analysis and policy making in line with the principles of PBB and

MTEF. The objective is to have a fully functioning M&E system in place for the next RPJMN. This will

require the establishment of procedures to retrieve performance data and the design of reporting as well as

ensuring that performance data is measurable and of high-quality. Performance information was for the first

time developed by all ministries for their respective programs and activities in the form of outcome and

output indicators in 2009 and implemented with both the 2010-14 RPJMN and the 2011 budget. However,

the selection of indicators and the quality of information that fits performance based planning and

budgeting, need to be further refined. The idea is to conduct an annual evaluation of the performance

information provided by line ministries to enhance their quality over time. DPL-8 and DPL-9 actions are

aimed at supporting the development of M&E guidelines for the line ministries on how to formulate and

report performance information, aligned with the RPJM. These guidelines will provide the criteria of

selection for output and outcome indicators, which will initially involve eight pilot line ministries, i.e.

Agriculture, Education, Health, Law and Human Rights, Finance, Marine and Fisheries, Planning and Public

Works.

Policy Sub-Area II.2. Strengthening Budget Execution Systems

Reform Aim: Streamline budget execution and management of budget authority

113. One of the main objectives of the PFM reform is to streamline and simplify budget

execution by providing more flexibility to spending units in implementing and managing their budgets

to achieve agreed outcomes and outputs. Following the new program restructuring instructions, issued in

2009 for implementation in the FY 2011 budget, all spending units developed their budget proposals with

performance targets. New roles and responsibilities for budget revisions are prescribed in annual Finance

Regulation (PMK) No. 49/2011, including for virement6 between items, that are intended to improve the

efficiency and effectiveness of the budget in meeting agreed performance targets under performance-based

budgeting (PBB), while maintaining appropriate levels of control. This new revision/virement regulation

still results in overly complex procedures. It defines a complicated multi-tiered approval authority and the

procedures can be further simplified and streamlined. The following are given authority to approve budget

revisions: the Parliament (DPR); the Finance Minister; DG Budget; DG Treasury; and the spending unit

itself. There is recognition that consensus is needed to clarify the roles and responsibilities of each to ensure

that the virement process can be further simplified, and sufficient authority and flexibility is given to

spending units and program managers. Also, the current practice of issuing annual regulations on budget

revision further complicates implementation, particularly with regard to the new automated SPAN. The

future budget revision process is expected to provide spending units with more certainty and flexibility in

managing their budgets to improve execution rates and to encourage a performance (output/outcome)

orientation.

Reform Aim: Improve budget and cash management within the central government

114. Implementation of the new regulation and system for cash planning/forecasting

remains challenging. In November 2009, the MoF issued a regulation (PMK No.192/2009) on cash

forecasting, which was supported by DPL 7 and a new IT application, called "Aplikasi Forecasting Satker

(AFS)", was provided to each Satker in 2010. A recent review of the implementation of the cash forecasting

regulation and the AFS by the Directorate of Cash Management concluded that compliance rates and the

6 Virement is the transfer of funds from one part of the budget to another.

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accuracy of forecasts were very low, and might be attributed to a combination of the onerous requirements

of the new procedures and the lack of sanctions imposed for noncompliance. Despite these difficulties, DG

Treasury has committed to continue the implementation of the cash plan regulation and will start to impose

sanctions for noncompliance from January 2012 (DG Treasury circular letter No. 8327/2011; September 7,

2011). In addition, DG Treasury has conducted a series of socialization, training and workshops to improve

the capacity of the spending units (initially prioritizing those whose total budget covers at least 70 percent of

the total appropriation). For September 2012 (DPL-9), the target is to implement the cash-forecasting

procedures using SPAN to enhance their timeliness and reliability.

115. The Government has maintained progress in implementing a Government Financial

Management Information System (SPAN), which is expected to be completed in 2012. The SPAN

solution is currently scheduled to be rolled out in 2012, and it will cover all the budget execution functions

at the central Treasury and 178 local Treasury offices. The establishment of a Data Center and Disaster

Recovery Center (DC/DRC) for SPAN is the most recent and visible steps in implementation. It included

defining and designing the facilities, constructing, cabling installation, and the hardware/software/net ware

installation. After some delays, the installation certificates were approved in August 2011. The MoF has

also commenced development of a new complimentary financial management application (Sistem Aplikasi

Keuangan Terpadu Instansi or SAKTI) that will be rolled out to the individual spending units (currently

scheduled for 2012) that will directly (and electronically) integrate the Satker activities with SPAN.

116. The change management and communications support for SPAN has commenced. To

support the implementation of SPAN, in September 2010 the Ministry of Finance appointed consultants for

Change Management and Communications (CMC) activities. An initial Change Readiness Assessment

(CRA) survey for SPAN highlighted staff concerns about the leadership and capacity to implement the new

system and about possible redundancies: these concerns are common for this type of project and the CMC

has started a communications and training program, which will be completed by the end of the third quarter

of FY2011, to start to address these concerns. Furthermore, one of the main initial activities of the CMC was

the appointment of ‗SPAN ambassadors‘ in each unit (300 staff including the regional Treasury offices,

Kanwil and KPPN). The SPAN ambassadors will be the main contacts and ‗champions‘ during SPAN

implementation. A CMC Strategy should be approved shortly to aid implementation.

117. The issuance of a new government regulation on budget execution has become a

priority to update and consolidate the legal basis for budget execution. The new government regulation

was previously planned to be issued under DPL-8, but given the need for further consultation and

harmonization with various ministries/agencies to ensure that the regulation adequately addresses the

budgetary spending problems, it was agreed to delay this action to DPL-9. Nevertheless, this delay does not

represent a weakening of Government commitment towards reform, the new regulation is deemed a priority

because it would provide a firmer legal basis for some lower level regulations that have been issued to help

overcome budget spending problems (e.g. Perpres No.53/2010 which regulates on the appointment of Satker

officials or Perpres No.54/2010, which allows advanced procurement), as well as clarifying the functions

and roles and responsibilities of key officials. It could also provide a firmer legal basis for using SPAN, and

the new business process improvements envisaged under SPAN as well as providing authority to the

Ministry of Finance to consolidate and report on fiscal data for the general government. With SPAN due to

be introduced in 2012, the Government plans to issue the new PP and the related MoF regulations on budget

execution by the end of 2011.

39

Reform Aim: Improve provision of IT services

118. DPL-8 also supports the establishment of Pusintek as a shared IT services unit for

MoF. The establishment and appointment of Pusat Sistem Infomasi dan Teknologi Keuangan (PUSINTEK)

as the IT shared service unit for the whole of the Ministry of Finance was reflected in PMK No.184/ 2011.

PUSINTEK is now the ICT service provider and sole operator of IT facilities, equipment, and the DC and

DRC for SPAN, which is consistent with the vision to integrate ICT within the ministry. By 2012,

PUSINTEK is expected to finalize a new strategy for ICT integration. Furthermore, PUSINTEK has

prepared a list of 27 ICT policies and standards that will be implemented in stages up to 2014, for example

on: i) the policy and standards of SDLC (Systems Development Life Cycle); ii) ITSM (Information

Technology Service Management); and iii) Information security management system.

Reform Aim: Strengthen management of state assets

119. Government assets have not been comprehensively recorded, properly organized and

fairly valued in the past. DG of Asset Management has completed the development of an automated asset

management system database (Modul Kekayaan Negara or Modul KN), which enables the Government to

monitor, record, and optimize the use of its assets across ministries and regions. The continued reform

agenda reflected in DPL-8 is to ensure connectivity of this database (Modul KN) with the Government

accounting system (SIMAK-BMN).Connecting the two databases would maintain the quality and

consistency of data recorded by those two different systems. All current acquisition of assets, work-in-

progress and inventories will be recorded through the Modul KN application software installed in the 70

state wealth and auction service offices (KPK-NL) across the country. In order to ensure the consistency and

validity of data to be used in the preparation of the government financial report, the recording of these assets

in the KPK-NL will be reconciled with the cash transactions pertaining to the acquisition/construction of

assets recorded in the KPPNs, and the liabilities recorded in the books of the Satker.

120. The full implementation of the state asset management information system database

(Modul KN) and its connection with the state asset accounting system (SIMAK-BMN) will be

important to improve the accountability of spending units in managing state assets. Once these two

applications are integrated, and the stock-taking and state assets revaluations efforts are completed, all state

assets can be registered, appraised, recorded and depreciated based on their fair value. This is expected to

support the implementation of full accrual accounting and to improve the future opinion on government

financial statements and especially the management of the government assets given by the external auditor

(BPK). In 2012, once all government assets have been properly registered, a decree will be issued to

empower the MoF to control the use of state assets. This decree will ensure the effective use of state assets

and also a more efficient budget, for example by transferring idle assets from one line ministry to another,

instead of purchasing new ones.

40

Reform Aim: Improve public procurement

121. One of the priorities of the National Public Procurement Agency (Lembaga Kebijakan

Pengadaan Barang/Jasa Pemerintah or LKPP) is to improve the regulatory framework for public

procurement, particularly in line with decentralization, to provide an overall framework for all agencies

implementing public procurement. To achieve that, LKPP has been working on two tracks: the preparation

of a new procurement law and a new presidential decree. LKPP has prepared a draft procurement law and

has carried out a public consultation process which included government agencies and international

development partners. The draft law proposes a broader scope for coverage than initially envisaged, as it

includes concessions and PPP transactions. It states some main principles and proposes to further detail

these through separate implementation decrees. The Bank has also provided comments and

recommendations on the draft, mainly concerning the need to ensure that all the main principles that will

govern public procurement in the country are clearly stated in the law, and that the draft is in line with

international standards. Given the need for further consultations with various stakeholders and adequate

buy-in, the submission of the draft law is being delayed until 2012. Nevertheless, this delay does not

represent a weakening of Government commitment towards continuing its reform efforts. The new

Presidential Decree No. 54/2010 on Public Procurement which has been effective since January 2011,

introduced many improvements, the two most important of which are the mandatory establishment of

Procurement Service Units (ULPs) by 2014 and the use of e-tendering by 2012. This will be applicable to all

implementing agencies.

122. While these developments are steps in the right direction, the public procurement

system still has significant deficiencies in its implementation aspects. There has been some progress in

the development and use of standard tools in terms of bidding documents and users manuals; and in

reducing collusion and corruption in the bidding process; as well as some improvements in compliance

mechanisms and sanction measures. However, the most significant deficiency is the absence of professional

procurement management and the weak procurement capacity in implementing agencies, especially at the

provincial and district levels. The mandatory establishment of ULPs is expected to create pressure on all

implementing agencies to comply. In order to professionalize and support the public procurement sector,

LKPP has completed the strategy and policy for human resources development for the procurement function

in government agencies. This is an important achievement, involving years of extensive consultation

between LKPP and various stakeholders, which is necessary for successful implementation. Finalization of

the human resource strategy and moving it into the implementation stage will be critical for any significant

progress in the reform of public procurement that will build on the momentum of the ongoing reforms.

Further discussion will take place, particularly with LKPP, on how the human resource strategy can be

supported under DPL-9.

Reform Aim: Improve Government accounting and audit functions

123. Weaknesses in internal control and the fragmentation in the internal audit function

pose a significant risk to reforms introduced in other areas of public financial management. The PEFA

assessment of 2008 classified the internal controls as weak and internal audit function in the country as

fragmented and characterized by weak capacity. Government Regulation No. 60/2008 adopted COSO

(Committee of Sponsoring Organization) as the control framework and broadly laid out the roles and

responsibilities among three sets of internal auditors (i.e. BPKP, IGs for line ministries and local

government inspectorates for local governments). However, there is still a need for a regulation that lays out

in more detail the mechanisms of how those roles and responsibilities would be implemented, particularly in

exercising internal controls. As a prior action, and as required by Article 58 of Government Regulation No.

60/2008, GoI has issued Presidential Instruction No. 4/2011 on government internal audit systems, which

clarifies the roles and responsibilities in internal controls. This is a critical action that signifies a key policy

41

reform consensus on the mechanisms for internal control within the Government. The next step would now

be to prepare an internal audit strategy for the country with roles and responsibility assignments and

identification of capacity building needs at various levels. DPL-9 will support formulating an internal audit

strategy for the country. The DPL-supported actions are expected to lay the basis necessary for modernizing

and enhancing auditors‘ skills to a level that is commensurate with other improvements being made under

the PFM pillar (e.g. GFMIS, SPAN and M&E). Further, given that the Government, through the issuance of

PP No. 60/2008, has adopted the COSO model as its control framework, it has adopted a strategic plan

(grand design) to implement COSO. A Control Self Assessment (CSA) manual will be prepared to enable

line ministries to implement COSO. DPL-9 will also support the completion and socialization of the CSA

manual. DPL 9 will also support development of: (i) code of ethics; (ii) audit standards; and (iii) guidelines

for peer review for the public sector internal audit profession.

124. Indonesia is moving towards accrual-based accounting. Financial reports prepared on an

accrual basis are more useful both from accountability and decision-making perspectives. The target is to

switch to full accrual accounting by 2015. The draft standards have already been prepared, and the

Government has issued a Government Regulation (No. 71/2010) on accrual-based accounting. This marks

the achievement of policy consensus among various government stakeholders on an accounting framework

that would enable the Government to better manage its finances and risks. Further, the MoF Directorate

General of Treasury has submitted a draft regulation to the Minister of Finance detailing accounting policies

and chart of accounts. This prior action marks an important achievement in terms of putting in place

comprehensive accounting policies and chart of accounts, which will ultimately be used by all Satkers

throughout the country in their financial reporting. This prior action also represents more significant

achievement than previously envisaged, wherein the original action was to issue a MoF regulation with only

a time line for development of accounting policies and chart of accounts. However, the submitted MoF

regulation is now more comprehensive, representing actual completion of accounting policies and chart of

accounts. Hence, the previously planned MoF regulation, with only a time line for development of

accounting policies and chart of accounts, is no longer necessary. DPL 9 will support the issuance of this

important MoF regulation and its socialization to all Satkers throughout the country.

A.3. Policy Area III: Poverty Reduction

125. To further accelerate the pace of poverty reduction, the Government is pursuing key

reforms of its national poverty reduction programs. The medium-term development plan 2010-14

highlights the key development priorities of the Government, including a commitment to accelerate the pace

of poverty reduction. This will be done through a series of reforms to the clustered programs in an effort to

consolidate and integrate programs, and improve their effectiveness in contributing to reducing poverty and

vulnerability. DPL-8 supports the Government‘s reform objective by improving governance and

accountability of poverty reduction programs, developing systems to more accurately measure poverty and

target poor households and regions, improving key household-targeted social assistance programs,

improving community-based poverty reduction programs, and improving financial inclusion for the poor

and vulnerable.

42

Reform Aim: Improve governance and institutional accountability

126. The National Team for the Acceleration of Poverty Reduction (National Team) was

established to govern national poverty reduction efforts. Established in 2010, the National Team has the

mandate to coordinate policy formulation and oversee implementation of national poverty alleviation

programs. The National Team is supported by a Secretariat housed in the Office of the Vice-President,

which has created six working groups that act as internal ―think-tanks‖ to commission research, draft

policies and support improvements in program design and integration, focusing on the following: Cluster 1

programs (household-based social assistance programs); Cluster 2 programs (community-based social

assistance programs); Cluster 3 programs (MSME-based social assistance programs); targeting; and

monitoring and evaluation (M&E).

127. To improve accountability and performance, the National Team‘s Secretariat is

spearheading efforts to develop an integrated M&E framework for major poverty reduction

programs. The monitoring and evaluation of programs is essential to gauge performance and provide policy

makers with the information needed to reform the current collection of poverty reduction programs. Program

monitoring and evaluation functions to date, however, are carried out sporadically by individual

implementing agencies. M&E activities are not consistently carried out across all programs and the quality

of those that have been carried out varies. As a result, the Government is highly reliant on M&E activities

that are carried out by external research institutions and development agencies. One of the objectives of the

National Team‘s Secretariat is to consolidate M&E activities, improve their quality, and ensure that policy

makers have access to up-to-date program information and evaluation findings. The M&E working group

serves as the focal point within the Government and has developed a design document for an integrated

M&E framework that will support decisions by the National Team concerning program mix, scale and

budget allocations while, at the same time, improving public accountability over the use of public resources.

The system will feature an integrated management information system (MIS) that will draw data from

program-specific MIS. A design document for the integrated MIS has been prepared and will be discussed

with implementing agencies and the M&E working group members.

Reform Aim: Improve poverty measurements and targeting of the poor

128. The establishment of a national targeting system will help to ensure that program

benefits accurately reach poor and vulnerable households. Household poverty reduction programs

currently use different targeting approaches and rely on separate recipient databases. This leads to

duplication of efforts, inconsistency in application, and dampened program impact. To address these

problems, the executive secretariat plans to establish a National Targeting System (NTS), which is one of

the strategic objectives of the RPJMN 2010-14. An NTS will create and maintain a unified targeting

database on potential beneficiaries drawn from the poorest 40 percent of the population. The unit in the

National Team Secretariat responsible for the system will work with implementing agencies to draw

beneficiary lists from a unified database, and will also provide guidance in using improved targeting

methods. With this single source of quality-controlled data, programs can improve targeting outcomes.

Moreover, programs with the same target population will have consistent beneficiary lists. This will lead to

better complementarities between programs. For instance, conditional cash transfer (PKH) beneficiaries who

receive cash transfers conditional on appropriate attendance to health facilities can also be beneficiaries of

Jamkesmas health insurance, allowing them free access to these services, which can help block the

intergenerational transmission of poverty. In addition, a unified database leads to reduced fraud, corruption

43

and duplication, as well as better facilitation of program exit strategies. Much work has already been

completed in preparing for such a National Targeting System, particularly in assessing current targeting and

identifying the best targeting methods for different objectives. However, further work remains to be done,

including the processing of household data that will feed into the future unified database.

129. A targeting division has been established in the executive secretariat of the Vice-

President‘s office to oversee the overall targeting system. The future national targeting system will be

housed in the Office of the Vice-President. It will be managed and supported by a targeting division within

the executive secretariat. The targeting division has prepared policy notes identifying the steps needed to

establish a national unified database of poor households and families, and the parties responsible for

implementing each step. The establishment of such a national unified database of poor households and

families is a major undertaking and is expected to be completed by the end of the year. One of the first steps

towards the preparation of the unified database is the collection of household-level data. To this end, the

working group prepared a survey questionnaire, data collection and standard operating procedures (SOP) for

a social assistance household survey. The data collection for the survey was completed in September 2011,

which will be followed by data processing. This data will be used to produce a list of the poorest 40 percent

of the population (PPLS11). The targeting division will also facilitate the coordination of targeting across

programs within Indonesia, such as a complaints and grievances process, fraud control, and disbursement of

benefits. This has been carried out with the assistance of a working group that will include representatives

from relevant government agencies, donor agencies and experts on targeting. The National Team has

instructed agencies implementing Cluster I poverty programs to use the unified database, the process of

which will be supported by the targeting working group. This prior action marks a key reform, not only as a

critical step towards making the national targeting system functional, but also as one of the National Team‘s

first key actions as a newly created institution to exert its authority over line ministries/agencies and ensure

better coordination and performance of GoI‘s poverty reduction programs.

130. Proposed improvements to the poverty measurement methodology will be submitted

for the consideration of the next administration. The Government has taken a series of preparation steps

towards the revision of the methodology, which were included as previous prior actions for the DPL-7. The

Central Bureau of Statistics (Badan Pusat Statistik, BPS) has completed national poverty line simulations

using the alternative measurement methodologies. The TNP2K Secretariat has also hosted a series of

consultations in BPS and key government stakeholders to identify a poverty measurement methodology for

consideration, which included universities, NGOs and key line ministries. Given the sensitivity of the debate

on poverty levels and how this is calculated, and the consensus that the current methodology is appropriate,

the Government has made a decision not to move forward with adopting a revised methodology.

Nevertheless, there has been good progress overall in this area, and the analytical work will continue, in case

the next administration feels the need to take a different decision.

44

Reform Aim: Improve household-targeted poverty reduction programs

131. The Government is committed to reforming and integrating its array of household-

based social assistance programs. To address the current fragmentation of the household programs, the

Government announced its intent to move towards developing an integrated family-based social assistance

system (RPJM 2010-14). Reforms are not only needed across programs, but also within individual programs

to improve their effectiveness. Several priority programs are the focus of current reform efforts including:

the household-based conditional cash transfer program (PKH), the health insurance scheme for the poor

(Jamkesmas) and scholarships for the poor. At the same time, much remains to be learned about the other

social assistance programs in order to support future reform agendas.

132. The design of a feasible and sustainable health insurance program for the poor

necessitates a careful study of needed reforms. Over the past five years, the Government has attempted to

enroll the entire population under the mandatory public health insurance scheme. This experience has

highlighted several major issues that will need to be addressed related to targeting, quality of care, and

financial sustainability of the program. The program would need to be designed to support the substantial

proportion of poor and near-poor households that need assistance, many of whom live in rural and remote

areas, and are self-employed people or working in the informal sector. There is little information about the

benefits package and its likely impact on the health and financial security of the uninsured. There is also

limited understanding regarding the infrastructure and human resources needed to assure effective access to

the promised benefits and the measures to ensure quality and efficiency.

133. To address these concerns, the Government has started with a review of the design and

financial sustainability of the national health insurance program for the poor (Jamkesmas). The review

is part of an overall review of safety net programs that is being carried out by the Secretariat of the National

Team, with support from development partners. In particular, the National Team Executive Secretariat

working group has submitted a policy note on cost scenarios for health insurance for the poor (Jamkesmas)

and a proposed health management information system to the chair of the National Team. This action is

critical as not only it represents a substantive review of the national health program, it also demonstrates an

important shift in the GoI‘s agencies responsible for social protection policies towards evidence-based

policy formulation, backed-up by empirical analysis and research. Once the review is completed, the

Government will assess how to scale up the program and integrate it with plans to eventually achieve

universal healthcare coverage, while maintaining financial sustainability.

134. The scholarship program for poor students (Beasiswa untuk Siswa Miskin, BSM), is a

fragmented collection of tax-financed cash transfers to current public school students from poor

households. BSM programs exist at all public schools across all levels of education and provide currently

enrolled students from poor households with an annual cash transfer in a one-lump-sum installment. The

funds are intended for use in paying education fees and other non-fee costs of attending school, such as

transportation to school and uniforms, and thereby aim to remove barriers to access to education. BSM is

actually not a unified program, but rather consists of 10 largely independent scholarship programs, with

implementation responsibilities delineated by type and level of education, and lack of a central coordinating

unit. While the program shows potential, the design and implementation of the program undermines its

effectiveness. Reforms are needed to coordinate the programs and improve their impact. A report has been

prepared by the Secretariat of the National Team on the performance of programs providing scholarships for

the poor, which will be followed up by a strategy document outlining reforms necessary to improve

problems related to targeting, fragmentation and the disbursement timing of scholarships for poor students.

45

135. At the same time the Government will examine more closely the performance of

Raskin, the subsidized rice distribution program. Raskin is the longest-serving of the permanent social

assistance programs, which aims to help households fulfill their food needs and reduce their financial burden

through the provision of subsidized rice. The program typically accounts for over half of total expenditures

on social assistance, estimated at 54 percent in 2010. There is much room for improvement in the

performance of the program. Although Bulog documents state that almost enough rice was procured in 2010

(but not in previous years), all the Raskin rice eventually available on the ground implies slightly less than

half of the promised 14 kilograms was available to eligible households. Further sharing or redistribution (at

the village level) to non-eligible households meant that targeted households only received between 3 and 4

kilograms. Given the size of the program and ongoing food security concerns, there is growing interest in

reforming the program in order to improve its ability to protect poor and vulnerable households. A report

has been prepared by the Secretariat of the National Team on the performance of Raskin, which will be

followed up by a strategy document outlining reforms necessary to improve problems related to targeting

and the amount of rice actually received by poor households.

Reform Aim: Improve community-based poverty reduction programs

136. With the national expansion of the PNPM program, the fiduciary systems that were

effective when the program was working on a smaller scale have come under stress. PNPM has robust

governance features that result in low levels of ―leakage‖, helping deliver high quality, lower-cost

infrastructure development. The PNPM‘s governance features build on twelve years of experience with

community development project implementation in the country. With the national expansion of the PNPM

program, the fiduciary systems that were effective when the program was working on a smaller scale have

come under stress. The GoI continues efforts to ensure that the fiduciary systems of PNPM remain robust,

through the dissemination of an improved web-based complaints-handling mechanism and systematic

reviews by the internal control unit in the Project Management Division (PMD) of external and internal

audit reports and issuance of quarterly reports. Beyond the fiduciary system, the Office of the Vice-President

has also identified the need to push further the consolidation of a multitude of community-driven

development (CDD) programs at the local level. This will be complemented by further analytical work to

assess how PNPM can increase its impact on the poorest households, and on the poor in the less poor areas.

Another proposal will also be prepared to clarify the role of local governments with regards to the transfer of

the community cash transfers (Bantuan Langsung Masyarakat – BLM) to communities.

Reform Aim: Improve micro, small and medium enterprises (MSME)-based poverty reduction

programs

137. The Government is developing a financial inclusion strategy that aims to provide

greater access to finance for the poor. Building an inclusive financial sector has gained growing global

recognition in international fora, such as the G20 and ASEAN, the Government is bringing to the fore the

need for dedicated development strategies coherent with the principles for innovative financial inclusion

endorsed by the G20 in 2010. The VP Office/TNP2K, Bank Indonesia, the Coordinating Ministry for

Economic Affairs (CMEA), Ministry of Finance and Bappenas jointly coordinated efforts to draft a National

Strategy for Financial Inclusion, with the technical assistance of the World Bank. The strategy aims at

providing greater access to finance for everybody, with a particular attention to those who are currently

underserved. This strategy would be part of a broader development approach aimed at fostering economic

growth and contribute to poverty reduction in Indonesia. Key features of the strategy will be to use the

banking sector as a backbone; to enhance the synergies between bank and non-bank financial institutions; to

revitalize the role of cooperatives; to promote the use of technologies and of innovative distribution channels

to reach out to a broader consumer base; to provide a wider range of financial services to target different

needs; to increase the capacity and awareness of consumers with reference to different financial products;

and to promote a supportive regulatory environment for an inclusive financial sector. The strategy relies on a

―graduating principle‖, aimed at promoting low-income poor to the group of productive poor; and in turn

46

promoting the latter out of poverty, focusing also on two cross-cutting categories, namely migrant-workers

and people living in remote areas.

138. The Government is also taking steps to strengthen the People‘s Business Credit (Kredit

Usaha Rakyat, or KUR) program. In a few short years since its establishment in 2007, KUR has grown

into one of the world‘s largest credit guarantee programs for small and micro enterprises. Since its launch,

total KUR cumulative disbursement has been Rp. 51.9 trillion (US$5.8 billion) to 5 million borrowers. The

Government commissioned an evaluation of the KUR program in 2010, which broadly found that the

program has helped in significantly increasing access to credit to MSMEs and encouraged banks to lend to

small enterprises, and especially to micro-enterprises. Yet despite these achievements, there is significant

scope for improving the effectiveness of the program through operational and policy changes. The

Government through the KUR Policy Committee has implemented a number of actions to strengthen the

KUR program. These include, for instance, the increase in number of participating banks, increase in

maximum loan size, extension of loan tenor, and increased guarantee coverage for four prioritized sectors

(agriculture, marine and fisheries, forestry and small industry). The Government is also promoting the

participation of provincial governments in the implementation of the KUR program, and a framework has

been developed to assist provincial governments in developing work plans and the necessary budget

appropriation. Going forward, an important task supported by DPL-9 will be to strengthen the process of

assessing the results and impacts of the KUR program, through the development of a framework for regular

monitoring and evaluation.

B. Participatory Processes and Consultations

139. Democratic consolidation and decentralization of authority in Indonesia have

translated into a political preference for wide buy-in and participatory, consensus-building

approaches to decision-making, not only in terms of regulatory reforms but also planning and

budgeting processes. While this is believed to have slowed or blunted some reform measures, it is believed

to mitigate against radicalism, steadily improve public participation, and contribute to more democratic,

accountable, professional and responsive governance. This commitment has been formalized and endorsed

through several regulations (e.g. Law No. 25/2004 on National Development Planning and Joint Ministerial

Decree 2006 and 2007 on Musrenbang), including those institutionalizing the creation of multi-stakeholder

consultation forums—Musrenbang (Musyawarah Rencana Pembangunan)—at all levels, concerning several

time frames. Musrenbang is the principal process for negotiating, reconciling and harmonizing differences

between the Government and non-government stakeholders, and reaching collective consensus on

development priorities, including regulatory reforms and budgets. While challenges still remain, the

instrument is being increasingly adopted at all government levels.

140. Beyond the officially recognized participatory processes, various aspects of the

reforms supported by this operation have been subject to extensive stakeholders consultations. In the

investment climate area, the private sector consultation has been ensured in the ongoing implementation of

INSW through the regular meetings that have been held, under clear standard operating procedures. The

development of the Single Sign On work plans has also benefitted from this private sector consultation

arrangement. The recently issued Connectivity Strategy as part of the Master Plan was intensively discussed,

not only within the Government through bilateral and multi-ministerial meetings but also with the

Indonesian Chamber of Commerce and Industry (Kadin) and foreign chambers. Moreover, the establishment

public-private teams as part of the institutional mechanisms for implementing the Connectivity Strategy

reflects extensive stakeholder participation. In the public financial management and poverty alleviation

areas a large number of seminars and workshops have been undertaken during the past year among different

government agencies, as well as between the administration and other key relevant stakeholders, not only to

discuss technical issues but also reach agreements on policies and reform activities. During the preparation

of DPL-8, a series of intensive policy discussions was held as part of the ongoing engagement with the core

47

economic ministries, culminating in a series of half-day meetings with key counterparts in each of the

relevant areas or sub-areas. A roadmap of milestones was then developed, which conforms to the

Government‘s own reform agenda, as laid out in the DPL program matrix in Annex 3. This program matrix

will continue to be adjusted and refined as progress continues to be assessed and discussions mature.

C. The Future Program

141. The current programmatic series of DPLs 7 to 9 represent, in most respects, a

continuation of the previous DPL program series (1st Series: 1 to 4, and 2nd Series: 5-6). Among the

DPL series‘ policy actions are ones that are intended to improve the investment climate through

strengthened investment service institutions and regulations, reduced tax burden and improved tax

administration, enhanced trade facilitation (national single window and non-tariff measures) and improved

national connectivity; other policy actions intended to enhance public financial management through

improved results orientation in the budget process, streamlined budget execution, improved cash

management, strengthened management of state assets, improved public procurement systems, and

improved government accounting and audit functions; and policy actions intended to enhance poverty

reduction and improving service delivery through improved poverty measurements and targeting of the

poor, improved governance and institutional accountability and improved poverty reduction programs

targeted at the level of household (Jamkesmas), community (National Program for Community

Empowerment or PNPM) and micro, small and medium enterprises or MSMEs (National Financial

Inclusion Strategy and the People‘s Business Credit or KUR).

142. The prior actions included this year for DPL-8, and the indicative actions included for

DPL-9 next year, reflect important strategic steps or milestones towards attaining the Government‘s

longer term reform agenda. For DPL-8, for instance, a dedicated team has been established to formulate

non-tariff measures (NTMs) under clear standard operating procedures. This provides the Ministry of Trade

with the appropriate mechanism to ensure that NTMs are designed in a transparent way, meet their

legitimate objectives (and thus are not trade barriers) and are consistent with international trade agreements.

The establishment of RKA-K/L for 2012 based on the revised PP No. 21/2004 (PP No. 90/2010) is a major

implementation milestone for PBB/MTEF reforms. And the use of the unified database by agencies

implementing Cluster 1 poverty programs will strengthen targeting methods and program outcomes. For

DPL-9, the initial implementation of single sign-on would help streamline the import and export clearance

processing, thereby reducing the time and costs associated with Indonesia‘s trading activities. The issuance

of the new PP and related MoF-regulations on budget execution would provide the legal basis for improving

GoI‘s budgetary spending performance. And the extraction of program beneficiary lists for priority Cluster 1

programs (PKH and Jamkesmas) would continue to support the National Team‘s mandate in ensuring better

coordination and performance of GoI‘s poverty reduction programs.

Table 4: Prior Actions for DPL-8 and Indicative Actions for DPL-9 Key DPL8 Prior Actions (September 2011) Key DPL9 Indicative Actions

Reform

Aim

Improve the Investment Climate

Reduce the time

needed for and

cost of

importing and

exporting

Developed standard operating procedures within the

Indonesia National Single Window (INSW) for

regular private sector consultative meetings on INSW

implementation issues, and started holding the

meetings

Developed work plans for the phased implementation

of Single Sign On procedure for two key agencies of

INSW: BPOM and Customs

Start implementation of Single Sign On for two key

agencies of INSW (i.e. BPOM and Customs)

Ministry of Trade issued a Ministerial Decree (No.

709/M-DAG/KEP/9/2011) establishing a team to

formulate Non-Tariff Measures under the Ministry of

Trade, with clear standard operating procedures for

48

the issuance of Non-Tariff Measures

Resolve major

bottlenecks and

constraints to

improve

national

connectivity

Issued a Presidential Regulation (No. 32/2011), a

Ministerial Regulation (No. PER-

06/M.EKON/08/2011) and two Ministerial Decrees

(No. KEP-35//M.EKON/08/2011 and No. KEP-

36//M.EKON/08/2011) that put in place institutional

mechanisms to enhance connectivity in Indonesia

Reform

Aim

Strengthen Public Financial Management

Improve results

orientation and

MTEF in the

budget process

Based Ministry/Agency Budget and Work Plans

(RKA-K/L) for 2012 on Government Regulation (No.

90/2010), as evidenced by:

1. Separate treatment of baselines and new

initiatives in the budget submission document

following new guidelines on RKA-K/L

2. A manual for line ministries on formulation of

new initiatives, which enables a review of

rationale and cost information

3. Consistency between Government Work Plan

(RKP) and RKA-K/L regarding performance and

budget information

Budget documentation includes explanation of

differences between proposed budget ceilings and

previous medium-term forward estimates

Develop a new

monitoring &

evaluation

system

Issue draft guidelines for an M&E framework, based

on specific performance indicators, that provide basis

for the next RPJMN and annual budgeting

Improve budget

and cash

management

within the

central

Government

Issue new PP and related MoF-regulations on budget

execution as mandated by State Finance Law

Improve public

procurement

Completed the strategy and policy for human

resources development for the procurement function

in government agencies

Draft procurement law submitted to Parliament

Improve

government

accounting and

audit functions

Issued a Presidential Instruction (No. 4/2011) on

government internal audit systems, which clarifies the

roles and responsibilities in internal controls

Development of an internal audit strategy based on

the PP 60/2008 and Presidential Instruction on

government internal audit systems

Issued a Government Regulation (No. 71/2010) on

accrual-based accounting

Directorate General of Treasury submitted a draft

regulation to the Minister of Finance detailing

accounting policies and chart of accounts

Issue MoF regulations, adjustments and socialization

of accounting policies and chart of accounts

Reform

Aim

Service Delivery

Improve poverty

measurements

and targeting of

the poor

National Team instructed agencies implementing

Cluster I poverty programs to use the unified

database.

Program beneficiary lists for priority Cluster 1

programs (PKH and Jamkesmas) are extracted from

the unified database by the TNP2K Secretariat, using

eligibility criteria from the implementing agencies

Improve

household-

targeted poverty

reduction

programs

(Cluster 1)

National Team Executive Secretariat working group

submitted a policy note on cost scenarios for health

insurance for the poor (Jamkesmas) and a proposed

health management information system to the chair of

the National Team.

The Executive Secretariat working group completes a

review of new institutional arrangements for the

delivery of Jamkesmas, taking into account actuarial

cost estimates and various scenarios for achieving

universal health insurance coverage.

49

VI. OPERATIONAL AND IMPLEMENTATION ISSUES

A. Monitoring and Evaluation

A.1. Monitoring

143. Monitoring the implementation and attainment of the DPL prior actions is done through

regular meetings between the GoI and development partners as well as the ongoing engagement with

agencies responsible for different prior actions. The GoI has established monitoring committees and/or

technical groups that are responsible for ensuring the implementation of agreed prior actions as well as

progress follow-up. In addition, the DPL benefits from regular 2-day joint development partner-Government

meetings to discuss interim progress in achieving agreed milestones in the reform agenda and future triggers

for the DPL series (in April, June and September 2011 for the preparation of DPL-8) and ongoing policy

dialogue between the GoI and World Bank teams. Table 5 below indicates the critical monitoring activities

in each policy area.

Table 5: Critical Monitoring Activities

Policy area Monitoring activities Improving the

investment climate Ongoing monitoring of the implementation of Indonesia‘s Investment

Law and subsequent regulations, including the DNI and PTSP/SPIPISE, by the

Coordinating Ministry for Economic Affairs

Ongoing monitoring of progress in the operation of the INSW, by the

Coordinating Ministry for Economic Affairs

Ongoing monitoring of investment climate and trade-related activities in

conjunction with development partners as part of regular DPL program and

analytic and advisory activities Strengthening

public financial

management

Ongoing monitoring of progress on budget disbursements and

identification of key bottlenecks by the PFM MDTF Policy Advisory Committee

Ongoing monitoring of the time profile of budget disbursement,

composition of public expenditures, and poverty and employment effects of

economic shocks as part of the regular DPL program and analytic and advisory

activities Enhancing poverty

alleviation and service

–delivery

Ongoing monitoring of the implementation of national poverty alleviation

programs by the National Team

Ongoing monitoring of poverty related activities in conjunction with

development partners as part of regular DPL program and analytic and advisory

activities

A.2. Evaluation

144. A results framework has been prepared with a number of indicators to be assessed at the end

of the current DPL programmatic series. To the extent possible, these indicators are aligned with the GoI

targets. The Bank will work closely with the Coordinating Ministry for Economic Affairs, the Ministry of

Finance and other relevant agencies to monitor and assess reform progress and impacts during the life of the

program. In addition to ongoing monitoring of activities, the Bank prepares an Implementation Completion

and Results Report (ICR) at the end of each series. The ICR, prepared in consultation with the Government

and development partners, is a Bank self-evaluation reporting tool that highlights the key achievements and

results, as well as lessons learned. The ICR for both DPLs 1-4 as well as DPLs 5-6 show the significant

progress that the Government has made in its reform efforts since 2004, as well as highlight the role that the

50

DPL has had in supporting that progress, by ensuring the alignment of support provided by development

partners with the GoI‘s own reform efforts, promoting synergies between program support and other Bank

instruments, focusing attention from both the Government and development partners on the most relevant

reforms as well as empowering key reform oriented government officials to advance the implementation of

necessary reforms. Monitoring and evaluation will also be supported by budgetary, legislative and economic

data provided by the authorities and verified in official disclosures, directives and regulations. Baseline and

updated data will be provided by the respective specialized agencies and tracked according to the

Monitoring and Results Framework included in Annex 3.

B. Poverty and Social Impacts and Environmental Aspects

B.1. Poverty

145. The DPL-8 prior actions are unlikely to have adverse impacts on the poor, while several prior

actions have the potential to deliver positive impacts on poverty over the medium term. Both the

improvement of the investment climate and strengthening of public financial management systems (policy

pillars 1 and 2) are expected to have significant, if indirect, poverty and social benefits. In particular, the

measures aimed at enhancing trade facilitation and promoting exports through continued implementation of

the Indonesia National Single Window and a more transparent process for establishing Non-Tariff

Measures, and those aimed at improving national connectivity through better institutional mechanisms for

connectivity, are designed to support a virtuous cycle of growth, employment generation and productivity

gains. Consumers, including the poor will, in principle, benefit from lower prices of goods as a result of the

greater openness and integration of the economy. With the tax reform actions the Government plans to

reduce tax gaps and introduce new systems and procedures that facilitate better compliance, thereby

contributing to increased revenue collections and generating additional fiscal resources that can be used in

economic development and poverty alleviation efforts. Improvements in public financial management will

improve the capacity of the Government to provide public goods and services, which also benefit the poor.

The transparency and quality of public spending and the provision of public services will allow social

programs to have a greater impact on targeted populations. Overall public savings through better fiscal

management will allow the GoI to dedicate more resources to pro-poor programs.

146. The policy actions under the third policy pillar aimed at enhancing poverty reduction and

strengthening service delivery have the potential to deliver positive impacts on poverty over the short

and medium term. The National Team for the Acceleration of Poverty Reduction continues to address the

issues of fragmentation and lack of coordination, to improve the effectiveness of national poverty reduction

programs. Improvements in systems for better targeting of poverty alleviation programs and measurement of

poverty are also expected to support the poor by ensuring that these programs reach the appropriate

beneficiaries and by ensuring the availability of more reliable data and information — including those that

are gender-disaggregated — which are needed to make sound policy decisions. Household-based poverty

reduction programs are being strengthened, which will improve the coverage of health insurance for all

families, including the poor, as well as that of the scholarships for poor students and the subsidized rice

program (RASKIN). PNPM-Mandiri will be scaled up while ensuring its effectiveness and sustainability.

Further, the adoption of the financial inclusion strategy and scaling up of the KUR program are expected to

improve the poor‘s access to finance. Altogether, these actions are expected to yield positive impacts to the

poor and vulnerable social groups throughout Indonesia.

51

B.2. Gender

147. As equitable development becomes a major concern for the Government, the DPL also

supports institutional and policy reform aimed towards benefiting women in poor households. The

Government has issued Inpres No.3/2010 on equitable development, which highlights issues of justice for

women and children, gender equality and women‘s empowerment. The RPJMN also outlined the importance

of increasing the role of women in development, particularly women leadership in public sector, business

community and social organizations. The DPL program in particular supports the strengthening of a PNPM-

Mandiri program, which heavily involves women during its implementation. The PNPM program places

strong emphasis on the promotion of women‘s participation in rural areas in particular, with a number of

initiatives to improve gender equity and increase women‘s participation. PNPM Rural adopted the

successful strategy to promote gender equity and women‘s empowerment of KDP, including: (i) economic

empowerment by revolving funds and microfinance programs involving women as members; (ii) political

empowerment by ensuring women‘s voices are heard during program development and planning through

establishing women‘s specific fora; and (iii) social empowerment by requiring that one of the two village

development proposals comes from a women‘s planning group.

148. Reform in the area of targeted social assistance will also benefit poor and vulnerable women. The National Targeting System (NTS) will be used to target poor households, especially vulnerable

households with certain practical and strategic gender needs such as households with pregnant women or

headed by women. The proposed NTS design and social service data collection survey (PPLS11) will

ensure that such programs can be properly targeted. Furthermore, the analytical research and field

experiments will consider the practical and strategic gender needs on targeting outcomes, such as the legal

status of female-headed households, and the gender impact of holding community meetings in the day or

evening. Hence, improving the effectiveness of targeting will directly benefit this constituency.

B.3. Environmental

149. The proposed operation is unlikely to have significant negative effects on the environment,

forests and other natural resources.7 Measures proposed by the Government to improve the investment

climate by cutting the cost and time needed to start up a business and reducing congestion in ports to import

and export goods should have minimal negative environmental effects, as long as proper environmental due

diligence is carried out in the permitting and licensing process (as mandated by Law No. 32/2009 on

Environmental Protection and Management). On the contrary, reducing congestion and improving traffic

flow would have positive effects by reducing idling time of trucks waiting for port entry, reducing

particulate and CO2 emissions. Establishing port authorities should improve oversight and correlate with

smaller risk for accidents resulting in environmental impacts. The evaluation of the 24/7 services should

include the analysis of traffic noise in case port access routes pass through residential areas. In addition, a

detailed study is being proposed to address the traffic congestion and associated problems. Business

streamlining measures should not undermine the enforcement of Indonesia‘s existent environmental

requirements, as long as efforts are made to provide clear guidance and sufficient information to all

governmental levels, investors and civil society regarding new measures to be implemented under the

investment climate policy. In addition, it will also be necessary to ensure that environmental review

requirements (AMDAL, monitoring and evaluation) are explicitly included in licensing decisions for

7 The tools consulted to perform an analysis of ―likelihood of significant effects‖ were (i) Assessing the

Environmental, Forest, and Other Natural Resource Aspects of Development Policy Lending – A World Bank Toolkit

(2008), (ii) Policy and Institutional Reforms to Support Climate Change Adaptation and Mitigation in Development

Programs – A Practical Guide and the (iii) Good Practice Note on Environmental and Natural Resource Aspects of

Development Policy Lending. Further analytical support to analyze GOI‘s capacity to mitigate identified potential

negative effects have been derived from the Indonesia Country Environmental Analysis (CEA) (WB 2009).

52

businesses that meet legal criteria. Increased support to PNPM is not only unlikely to generate negative

environmental impacts but rather to ensure adequate attention is paid to potential negative environmental

externalities because of its built in environmental review processes. Positive environmental effects from

registering state assets pave the way for transferring idle assets from one ministry to another, reducing the

need to purchase new ones. The issuance of a Presidential Decree and Ministerial Decree on the National

Logistics Blueprint which aims to improve transparency and coordination among ministries and agencies is

not likely to have negative environmental effects. The World Bank will continue to monitor and periodically

review the overall environmental performance, which is also done regularly through the CPIA process.

C. Fiduciary Aspects, Disbursement and Auditing

150. Given that public financial management (PFM) is a central policy area supported by the

DPL program, fiduciary issues are discussed at length elsewhere in this document. The detailed

description of the main PFM challenges and issues surrounding the operation is given in the technical annex

on PFM (Annex 6). In summary, significant strides have been made in recent years in the way Indonesia‘s

public finances are managed and in increasing transparency and independent oversight. In almost all areas

of PFM, changes in the legal and regulatory architecture are now largely complete and the momentum has

shifted towards implementation of new PFM practices. However, internal controls in the execution of

budget by spending agencies still need improvement; the financial management information system for

budget management at all levels of Government is not yet in place; and controls in budget execution

processes are still weak. Weaknesses in financial management and accountability continue to be gradually

addressed through the Government‘s PFM reform program. Also, key elements of the reforms are supported

by the DPL series, as well as the GFMRAP project and other initiatives supported by development partners.

Furthermore, the Government has also demonstrated increased focus on budget transparency by publishing

the annual budget in a timely manner, through the MoF website.

151. The borrower is the Republic of Indonesia and this operation is a single-tranche IBRD loan

of US$400 million. The loan will be made available upon loan effectiveness, as all policy actions supported

by the loan will have been completed prior to Board presentation. The Government has confirmed that

Indonesia will borrow this amount as a Variable Spread Loan (VSL) in US dollar currency with an annuity

repayment schedule linked to commitments.

152. The loan disbursement will follow the standard Bank procedures for Development Policy

Lending. The loan amount will be disbursed into a foreign currency account of the borrower at Bank

Indonesia that forms part of Indonesia‘s official foreign exchange reserves. The equivalent rupiah amount

will immediately be transferred to the General Operational Treasury (SBUN) account of the borrower that is

used to finance budget expenditures, as the loan is intended to be used to support the general government

budget. The borrower will provide to the Bank a written confirmation that this transfer has been completed,

and provide to the Bank any other relevant information relating to these matters that the Bank may

reasonably request. Disbursements of the loan will not be linked to any specific purchases and no

procurement requirements have to be satisfied, except that the borrower is required to comply with the

standard negative list of excluded items that may not be financed with Bank loan proceeds.

153. The foreign exchange control environment is assessed to be generally satisfactory. The

country is no longer subject to the Extended Arrangement from the IMF. Bank Indonesia (BI) was last

subject to the transitional procedures under the Fund‘s safeguards assessment policy in 2002. That

assessment recommended remedial action to address a number of vulnerabilities in the audit arrangements

of BI. The main recommendations have been implemented, including the establishment of an independent

audit committee at BI and the publication of BI‘s audited financial statements. Audited financial statements

for BI for 2010 have been reviewed and the audit report issued by the BPK contained an unqualified

opinion. Given that the foreign exchange environment does not present a significant risk, a separate annual

audit will not be needed for this operation.

53

D. Risks

154. Continued strong performance by the Government on its reform agenda and the

achievement of its medium-term objectives are subject to several risks. These can be broken down into

five categories: political risks; external vulnerabilities; increasing food prices; the risks posed by subsidies;

fiduciary and reputational risks; and institutional capacity risks.

Political risks

155. Reforms are expected to continue despite changes in key government counterparts. There

are always political tensions created by the reform efforts, yet the Government has continued its support for

reforms and sound macroeconomic management. Indeed, most DPL reforms are driven by priorities that

were developed and articulated formally through consensus within the Government, rather than by

individual government officials, thereby minimizing the risk that the departure of particular officials or

politicians may have a disproportionate impact on reform prospects. The overall reform orientation of the

cabinet remains strong, and the outcome of the elections has provided the Government with a strong and

stable mandate until 2014. Potential political and cabinet shifts in future are addressed by providing

flexibility in future policy action selection whilst focusing on achieving the overall reform objectives. The

Bank also continues to engage closely in core reform areas through other instruments (AAA and investment

lending), which will facilitate early identification and management of risks.

External vulnerabilities

156. External factors may cause significant and rapid shifts in global financial market sentiment,

resulting in sudden, large and somewhat disruptive capital outflows. In recent years, there have been

significant improvements in Indonesia‘s macroeconomic framework. This has translated into improved

resilience to external shocks. But to a certain extent, considerable risks remain, especially in the event of

global financial turmoil and uncertain global growth prospects, given Indonesia‘s open capital markets and

the limited depth of the domestic financial system. Indonesia‘s external position remains relatively sound

with a sizeable current account surplus into early 2011 and a significant increase in reserves. The

Government has also shown a strong track record in urgently taking precautionary and proactive measures

when required during the recent global financial turmoil. Further, the DPL-8 supported actions are expected

to help reduce Indonesia‘s vulnerabilities to external shocks. For example, the issuance of standard

operating procedures for the establishment of non-tariff measures (NTMs) will help prevent the rapid

increase in NTMs that took place during the 2009 in Indonesia and other countries (which worked against a

recovery of the world market). The reforms in the PFM area are expected to lead to improved budget

execution and GoI ability to use public spending to stimulate domestic demand. And the use of a unified

beneficiary database of poor households will help ensure GoI‘s social measures aimed at mitigating the

impact of shocks become more effective.

Increasing Food Prices

157. Rises in domestic and international commodity prices would bring many of the same near-

term risks and challenges that were faced in 2008. Higher food prices may offset some of the benefits of

economic growth for poverty reduction as has happened in the past. With continued global growth and

rapidly increasing demand, food prices moved upward during the second half of 2010, and although they

have slowed down in 2011, food prices are expected to remain high and volatile in the coming years. In

Indonesia, the poor are particularly vulnerable to food price shocks, in particular rice prices, given that they

spend most of their consumption resources on food. With those considerations, Indonesia was largely

successful in controlling the negative impact of the high food and energy prices on the poor in 2008, through

the cash transfer (BLT) program. The GoI is well aware of the risks and challenges that lie ahead and has

taken a number of precautionary and proactive measures in response. These include the use of trade

54

measures, as in 2008, to mitigate the impact of rising food prices, through temporary suspension of import

tariff to reduce prices of imported food. The GoI also used budgetary sources to expand social protection

programs and to intervene in stabilizing food prices, by scaling up the rice for poor program (RASKIN) and

the open market operation by the Government food agency (Bulog). Further, Presidential instruction No.

5/2011 was issued to safeguard domestic rice production against extreme weather, instructing ministries and

agencies to secure domestic rice production by implementing actions to mitigate the impact of changes in

weather pattern.

158. As part of its response to the threat of high food prices, the GoI also intends to establish a

Fasilitas Akses Pangan (Food Access Program, FAP) to provide a mechanism through which

international development partners might support Indonesia's aim to enhance food security. The

facility will provide a platform for government and development partners to meet regularly and discuss the

key obstacles to food security, how to increase synergies between existing programs, and priority areas in

need of further support. The program is focused on the three pillars of food security:

i) increasing domestic supply through agricultural revitalization

ii) keeping domestic food prices affordable, and

iii) protecting purchasing power of poor and low-income households.

The GoI is in discussions with development partners and has asked that the World Bank help facilitate the

participation of development partners in the platform. The GoI and the World Bank are also in discussions

about the possibility of World Bank providing financing to support GoI efforts to improve food security.

Subsidies

159. Volatile international oil prices, which remain relatively high, create uncertainty about the

Government‘s energy subsidies costs, hampering spending on development projects. There remain

significant subsidies on both fuel and electricity in Indonesia and, as often in previous years, their budget

allocations expanded significantly between the proposed and revised 2011 budget with upward revisions to

the oil price assumption. Increases in world oil prices not only increase the cost of subsidies but lead to a

higher spending allocation to education, which should be 20 percent of total spending, and increased

revenue sharing transfers to the regions. This in turns results in higher budget deficits (e.g. the budget deficit

for 2011 was revised from 1.8 percent of GDP to 2.1 percent). However, perhaps more importantly, fixed

fuel prices and the subsidies impose significant opportunity costs, are regressive in nature and encourage

inefficient energy usage. The Government‘s decision to raise administered fuel prices in May 2008

demonstrated that, if the economic situation warrants it, the Government is willing to make difficult

decisions. There does appear to be a general recognition that Indonesia's energy prices, overall, need to

better reflect the cost of supplying that energy. The Minister of Finance has announced reforms to the

subsidies‘ schemes for fertilizer, fuel and electricity over the period of 2010-14, to improve the targeting of

these subsidies and redirect spending to development projects. Various policies are in place or being

investigated to both reduce the supply of the most subsidized energy, and to reduce the gap between

regulated prices and the economic cost. For example, a program to shift consumers from kerosene (the most

subsidized fuel) to LPG (subsidized but by far less) in urban areas has cut kerosene consumption

dramatically since 2007. In addition, in July 2010 the Government increased electricity tariffs and it has

indicated plans to increase electricity tariffs a further 10 percent in April 2012. On fuel subsidies, progress

has been more limited. The Government signaled its intention to improve targeting starting in 2011 through

prohibiting private cars from accessing subsidized gasoline. However, implementation was delayed and

while a number of options have been under discussion, the potential nature and timing of any future reforms

is uncertain at this point.

55

Fiduciary and reputational risks

160. Despite the remaining challenges, the Government has made significant progress in

improving its PFM systems. Among the challenges that remain are the need to improve internal controls in

the execution of budget by spending agencies, to establish the Government Financial Management

Information System (GFMIS) that provides information for budget management at all levels of the

Government, and to strengthen controls in budget execution processes in order to fully realize the gains from

reforms introduced in other areas of PFM. However, as mentioned above, in recent years Indonesia has

made significant strides in the way its public finances are managed and in increasing transparency and

independent oversight. In almost all areas of PFM, changes in the legal and regulatory architecture are now

largely complete and the momentum has shifted towards implementation of new PFM practices. Advances

have been made in budget preparation with the introduction of PBB and MTEF, government accounting

standards have been formally established and are being adhered to in several respects to produce

comprehensive annual financial statements, and the external audit function has made significant progress in

the past few years. Weaknesses in financial management and accountability continue to be gradually

addressed through the DPL PFM reform program, as well as the GFMRAP project and other initiatives

supported by development partners. Annex 6 provides a detailed assessment of the attendant fiduciary risks

with respect to this DPL operation, summarizing the current state of the PFM systems, as well as ongoing

reform efforts to further enhance them. The reforms when implemented will gradually contribute to reduce

the level of fiduciary risk to low in the medium term. Despite the challenges summarized above, and given

the Government’s progress in improving its PFM systems, the team considers Indonesia’s PFM system to be

adequate to receive a DPL.

Institutional capacity

161. Varied institutional capacity across different implementing agencies may undermine overall

reform progress. The DPL-supported reforms have involved various government ministries/agencies, with

varied performance across different agencies. Nevertheless, the overall commitment and ownership to

reforms is strong, and the CMEA has performed very well in ensuring consistent and effective cross-

ministerial coordination. The DPL program has also helped strengthen various institutions across the three

DPL pillars, by improving analytical capacity and enhancing efficiency through better technology and more

reliable and transparent reporting. These efforts are also complemented by other Bank instruments,

including investment projects, technical assistance and AAA, which partly address concerns related to

institutional capacity of the agencies involved in the DPL program.

Exposure to natural disasters

162. Indonesia‘s exposure to natural disaster poses moderate risks to the long term sustainability

of the extensive DPL reform program. Indonesia is prone to natural disasters such as earthquakes and

volcanic eruptions. With about 67.4 percent of the population living in high risk areas, according to the

Natural Disaster Risk Index (NDRI), Indonesia ranks second among the countries most vulnerable to

"extreme risk". In the past, Indonesia has experienced major natural disasters that caused significant

disruptions and infrastructure damages, with localized negative economic impacts. During the past year,

these include the Mentawai tsunami and the Merapi volcanic eruption in October 2010. However, the risks

to major natural disasters have been partially mitigated by the Government‘s strong commitment to disaster

risk reduction, as manifested, among others, in the National Action Plan for Disaster Risk Reduction 2006-

10 and the Disaster Management Law No. 24/ 2007. In recognition of the Government‘s achievement, the

United Nations presented the Global Champion for Disaster Risk Reduction award to the President, during a

ceremony of the Global Platform for Disaster Risk Reduction in Geneva, Switzerland in May 2011.

56

Annex 1: Letter of Development Policy

61

Annex 2: Application of Good Practice Principles on Conditionality

Principle 1: Reinforce ownership. DPL-8 continues to support key policy and institutional reforms in line

with the government‘s priorities. Policy actions for the Investment Climate pillar are largely based on the

2007 and 2008 policy packages, or implementing decrees related to approved laws. PFM policy actions stem

from the troika of laws passed by parliament in 2003-04, namely on state finance, treasury, and audit – all of

which provide the basis for modernizing public finances. Lastly, policy reforms in service delivery to the

poor are all based on on-going efforts led by government, including the Government‘s priority to better

coordinate and to scale up anti-poverty community programs nationwide.

Principle 2: Agree up front with government and partners on a coordinated accountability framework.

The policy matrix represents an agreed framework with government and the country‘s budget support

development partners, i.e. the Bank and the Japanese government. All development partners base their

disbursement decisions on mutual consultation and on the government‘s fulfillment of the same set of

triggers. The policy matrix also sets out medium-term outcome indicators with targets to be achieved by the

end of the program. These indicators and targets were developed jointly with the government and have been

adjusted as the program has evolved.

Principle 3: Customize the accountability framework and modalities of Bank support to country

circumstances. The Bank has prepared this programmatic series in response to an explicit government

request. The policy matrix does not pretend to capture the totality of reforms being implemented, nor to raise

issues that are key to growth and poverty alleviation but that, for various reasons, may be counterproductive

if part of a high-profile program, such as the DPL. Hence, although the Bank is engaged in dialogue across a

number of sensitive policy issues, many policy actions are left outside the scope of the DPL to take into

account country circumstances and the political economy.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement. While

country ownership and the criticality of policy issues to stated objectives are the foremost criteria in

selecting DPL policy actions, the Bank and development partners also base the selection on the likelihood of

accelerating implementation where vested interests or bureaucratic hurdles could slow the pace of reform.

Other criteria include identifying strategies and plans that are critical first steps in a longer reform process.

The DPL policy matrix (Annex 3) includes a long list of benchmark actions that are key for advancing

reforms, which are not chosen as conditions for disbursement but represent steps towards future DPL prior

actions and reflects the broad scope of reforms being implemented in the three pillars.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based

financial support. Development partners agree to notional commitment amounts and policy triggers during

the prior year‘s DPL. Development partner commitments are further refined, based on government

confirmation of program lending needs by the first quarter of the calendar year. During this time,

government and development partners agree to specific criteria on assessing triggers. Given the

decentralized Bank program, discussions with government counterparts and development partners are done

on a regular basis.

62

ANNEX 3: DPL PROGRAM POLICY MATRIX AND MONITORING AND RESULTS FRAMEWORK

Annex Table 1: DPL8 PROGRAM POLICY MATRIX

(Prior actions and proposed indicative triggers for future DPLs are indicated in bold, while benchmark actions and milestones are not)

Reform aim Prior actions and benchmarks and proposed indicative triggers and milestones DPL7 (by September 2010) DPL8 (by September 2011) DPL9 (by September 2012)

Policy area 1: Improving the investment climate

Policy sub-area 1.1. Improving the regulatory environment for investment

Reduce

uncertainty for

investors by

strengthening

investment

service

institutions and

improving

investment

regulations

Issued the Presidential Regulation on the

Investment Negative List (DNI) which updates

restrictions on investment including preferential

treatment for ASEAN investors, and clarifies the

grandfather clause, the treatment of publicly listed

companies, and mergers and acquisitions.

BKPM prepared and submitted to CMEA a report which

reviews implementation of the Presidential Regulation on

DNI and provides recommendations for strengthening and

updates where necessary.

Timnas PEPI conducts regulatory review and

policy harmonization of new laws/regulations

and amendments to laws/regulations.

Issued a revised Presidential Decree and Ministerial

Decrees to strengthen and revitalize PEPI Team‘s roles and

functions, including the arrangements for ongoing public-

private consultation on trade and investments.

Operationalize regular public private dialogue

on key investment climate and trade

constraints/issues and circulate position papers

to PEPI and key stakeholders

Issued detailed technical regulations on

implementation of PTSP

Develop recommendations and implementation

plan for reforms which will reduce the time and

complexity of starting and operating a business

in Indonesia.

Mapping of business licenses used as basis for

development of business process of SPIPISE for three

priority sectors that have been agreed with the line

ministries (Trade, Industry and Tourism)

Continued implementation of SPIPISE by:

1. Mapping business licenses to develop business process

of SPIPISE for 2 additional sectors (i.e. Agriculture

and Health Sectors), and

2. Integration of approval and licenses between BKPM,

33 provinces and 40 municipal PTSPs and data

exchange between 3 sector (i.e. Trade, Tourism,

Industry) licenses

Continue implementation of SPIPISE by:

1. Mapping business licenses to develop

business process of SPIPISE for 2 additional

sectors (agreed with the line ministries); and

2. Integration of approval and licenses between

BKPM, 50 additional municipal PTSPs and

data exchange between 2 sectors approval

and licenses (i.e. Health and Agriculture)

Established an operational online investment licensing

system (SPIPISE) that integrates approval and licenses

between BKPM, seven provincial government PTSPs

and four line ministries

Develop a master data interchange for approval

and licensing

Policy sub-area 1.2. Reducing the tax burden and improving tax administration

Improve human

resources

management in

DG Tax

Establishment of the foundation for comprehensive

bureaucracy reform through formal endorsement and

publication of the medium-term DG Tax HR Strategic Plan

(HRSP.

Approval of the organizational impact assessment

for the reform of DG Taxes.

Commence initial phase of professional

certification for HR, Project Management

(CMMI) and audit functions.

Modernize core

tax system Issued advertisement (Invitation for Bids) for

PINTAR procurement as an initial step in the

Contract award is issued in the procurement

process of core tax system, which will be

63


development of business process improvements and

a new integrated information system

developed under PINTAR.

Issue Government Regulation for the

implementation of Article 35A Law 28/2007

regarding general taxation provisions and

procedures, and sign Memorandum(s) of

Understanding with key counterparts, particularly

Customs, for the sharing of third party

information.

Issued improved Standard Operating Procedures for tax

objection and appeals

Development of operational specifications and

top-level user requirements for improving

business processes and information systems for

tax intelligence and investigation.

Issued Guidance for Transfer pricing taxation.

Policy sub-area 1.3. Enhancing trade facilitation and promoting exports

Reduce the time

needed for and

cost of importing

and exporting

Selected MoF DG Customs as the temporary operator

of the National Single Window. INSW import and

export clearance made mandatory in 5 main ports

(Soekarno Hatta Airport, Tanjung Priok, Tanjung

Perak Surabaya, Tanjung Mas Semarang and Belawan

Medan)

Published service level arrangements (SLAs) and

standard operating procedures (SOPs) in the INSW

webpage for processing trade documents at all major

Government agencies participating in the INSW.


INSW for regular private sector consultative meetings

on INSW implementation issues, and started holding

the meetings

Developed work plans for the phased implementation of

Single Sign On procedure for two key agencies of

INSW: BPOM and Customs

Start implementation of Single Sign On for

two key agencies of INSW (i.e. BPOM and

Customs)

Identify options and develop recommendations

for implementation of an e-payment system

Issued quarterly INSW evaluation reports on the

webpage, including quantitative information on: (i) the

number of users; and (ii) the amount of

imports/exports processed through the INSW

Developed a system and submit reports to the CMEA,

Ministry of Finance, Ministry of Transportation and

Ministry of Trade on import container dwell time in

Tanjung Priok port, measured from ship berthing to gate-

out; and make the dwell time public

Fully integrate the TPS online and INSW Portal

for Tanjung Priok Port

Issue regulation to provide the legal basis for the

INSW portal to serve as the single authoritative

reference for all trade regulations issued by

related government agencies.

64


Established Client Coordinator system in DG Customs

to conduct help desk functions during the temporary

operation of the INSW by MoF DG Customs.

Linked the remaining import licenses and 5 export

licenses under the Ministry of Trade to the INSW

Linked remaining export licenses under MoT to INSW and

implement in 5 major ports.

Ministry of Trade issued a Ministerial Decree

establishing a team to formulate Non-Tariff Measures

under the Ministry of Trade, with clear standard

operating procedures for the issuance of Non-Tariff

Measures

Establish a clearing house in Timnas PEPI to

review new Non-Tariff Measures proposed by

other ministries

Implemented a reporting system for the 57 local trade

bureaus issuing certificate of origins to the Ministry of

Trade

Policy sub-area 1.4. Improving Connectivity

Resolve major

bottlenecks and

constraints to

improve national

connectivity

Submitted to the President a draft Presidential

Regulation on the National Logistics System

(Sislognas) Development Blueprint

Issued a Presidential Regulation, a Ministerial

Regulation and two Ministerial Decrees that put in

place institutional mechanisms to enhance connectivity

in Indonesia

Improved Port management through the following actions:

1. Starting the operation of the Customs Advanced Trade

System (CATS) in the Cikarang dry port;

2. Improving the efficiency in the port of Jakarta, as

measured by analysis of dwell time;

3. Establishment of Port Authorities in the four major

ports of Indonesia (Jakarta, Surabaya, Medan and

Makassar); and

4. Submitting a report to the Coordinating Ministry for

Economic Affairs on the evaluation of 24/7 services in

the ports of Jakarta, Semarang, Surabaya, Medan and

Makassar, to identify the main bottlenecks in running

those services efficiently and propose actions to

strengthen the 24/7 running models in the port.

Continue to improve Port and Airport

management by:

1. Establishing a Port Community led by the

Ministry of Transport in the ports of

Jakarta, and developing guidelines and/or

SOP for the 24/7 port services provision;

2. Establishing SOP for the establishment and

operation of dry ports in Indonesia;

3. Evaluating the performance of 24/7

services introduced at the Jakarta airport,

identifying bottlenecks and proposing

actions to strengthen the 24/7 running

model;

4. Publishing an inter-department set of

logistics indicators that can be used to

benchmark progress made in logistics

reform.

65


Policy area 2: Strengthening public financial management

Policy sub-area 2.1. Strengthening budget formulation and M&E systems

Improve results

orientation and

MTEF in the

budget process

(a) Implemented revised program structure with

measurable results and targets aligned with

organizational structure in the National Medium

Term Development Plan (RPJM) for 2010-2014

and (b) based both indicative ceilings and budget

proposals (RKA-K/L) from all line ministries for

the Fiscal Year 2011 budget on the revised

structure.

Based Ministry/Agency Budget and Work Plans (RKA-

K/L) for 2012 on Government Regulation (No. 90/2010),

as evidenced by:

1. Separate treatment of baselines and new initiatives

in the budget submission document following new

guidelines on RKA-K/L

2. A manual for line ministries on formulation of new

initiatives, which enables a review of rationale and

cost information


(RKP) and RKA-K/L regarding performance and

budget information

Budget documentation includes explanation of

differences between proposed budget ceilings

and previous medium-term forward estimates

Finalize the grand design for a new and

simplified costing methodology; and issue draft

guidelines for line ministries for review of

baselines and on-going policies in order to find

savings to finance new initiatives and improve

quality of spending.

Presented detailed information on MTEF/PBB reform

to Parliament in the Financial Note and hold

subsequent consultations with Parliament

Link budget

formulation to

SPAN

Issued SPAN procedures for establishing and using an

integrated data base, to serve the requirements of

Bappenas, DG Budget, line ministries and DG

Treasury, that would enable the seamless linkage of

data from the issuance of spending ceilings and

virements to payment to accounting and reporting

Finalization of a design-phase of the new budget

preparation solution for SPAN.

Complete piloting phase for new budget

preparation solution in SPAN

Develop a new

monitoring &

evaluation system

Developed an operational manual for selection of

performance indicators for performance-based planning and

budgeting with the involvement of line ministries

Issue draft guidelines for an M & E

framework, based on specific performance

indicators, that provide basis for the next

RPJMN and annual budgeting

Policy sub-area 2.2. Strengthening budget execution systems

Streamline budget

execution and

management of

budget authority

Established virement procedures (to be configured in

the CRP 3 of SPAN) to conform with MoF regulation

No.69/2010 and the guidelines on PBB

Implemented virement on the basis of the PBB guidelines

Implement virement on the basis of the PBB

guidelines through SPAN

Improve budget

and cash

management

within the central

Government

Issued new MoF regulation on cash forecasting. Review by DG Treasury of the implementation of the

regulation on cash forecasting and application software,

and recommendations on next steps; and complete capacity

building for Satkers whose total budget covers at least 70%

of total appropriation

Implement cash forecasting processes in pilot

ministries through SPAN

Improved cash forecasting by: introducing

mechanisms to improve the performance of Satker in

preparing cash forecasts and through capacity building

programs for line ministries treasurers.

66


Identified final business processes improvements

(BPI) and final version of Chart of Accounts (COA)

Framework

Establishment of Data Center/Disaster Recovery Center for

SPAN (including Establishment of Collaboration

Environment, Cablings, and WAN related to DC/DRC

milestones)

Rollout of SPAN solution for all 177 KPPNs,

with interface to Sistem Aplikasi Keuangan

Terpadu Instansi (SAKTI) for about 22,000

spending units

Change management consultancy for implementation

of SPAN commenced within MoF

Completed change management and communications

assessment phase

Implement Change Management &

Communication Strategy

Issue new PP and related MoF-regulations

on budget execution as mandated by State

Finance Law

Improve

provision of IT

services

Established an ICT Steering Committee (SC) and

appointed the Secretary General as the ICT Chief

Information Officer

Established the IT shared services unit for the whole of the

MoF (PUSINTEK) and prepare workplan with the list of

proposed 27 new policies and standards that will be

implemented before 2014

Issue the MoF Decrees on Policy and Standards

for ICT governance; and establish a new strategy

for ICT integration

Issued MoF decree on the policy and standards of use

of accounts and terms, electronic notes and internet

within the MoF

Issued MoF Decree on policy and standards on

exchange of data

Strengthen

management of

state assets

Issued joint decree between MoF and BPN on asset

certification

The state asset management information system database

(Modul KN) is fully implemented and connected with the

state asset accounting system (SIMAK-BMN)

A decree on empowering the MoF authority to

control the use of state asset issued

Completed stock taking and appraisal of civilian state

assets

Improve public

procurement

Finalized academic papers for draft procurement

law and prepared draft procurement law, ready

for public consultation process

Draft procurement law submitted to

Parliament

Completed the strategy and policy for human resources

development for the procurement function in

government agencies

Improve

government

accounting and

audit functions

Submitted to the MoF a Draft Presidential

Regulation on Government Internal Audit Systems

as required by Article 58 of Government

Regulation No. 60/2008

Issued a Presidential Instruction on government

internal audit systems, which clarifies the roles and

responsibilities in internal controls

Development of an internal audit strategy

based on the PP 60/2008 and Presidential

Instruction on government internal audit

systems

Adoption of a Grand Design for the Implementation of

National Government Internal Control Systems

Based on Government Regulation No.60/2008,

the following measures are taken:

1. BPKP completes and socializes a Control

Self Assessment (CSA) manual for the

launch of CSAs by line ministries;

2. Development of (a) code of ethics; (b) audit

standards; and (c) guidelines for peer review

Submitted to the President a draft Government

Regulation on accrual-based accounting

Issued a Government Regulation on accrual-based

accounting

67





Issue MoF regulations, adjustments and

socialization of accounting policies and chart

of accounts

Policy area 3: Enhancing poverty alleviation and service delivery efforts

Improve

governance and

institutional

accountability

Established an inter-ministerial National Team for

the Acceleration of Poverty Reduction (National

Team) by Presidential Regulation

Established an M&E working group in the executive

secretariat of the National Team, by decree from the

executive secretary.

Draft M&E integration strategy is prepared, based on

consultations with government agencies responsible for

overseeing and implementing poverty reduction programs.

M&E integration strategy and workplan

document is finalized and endorsed by M&E

working group members.

Agreements in place between TNP2K Secretariat

and key government agencies to integrate M&E

systems starting with PKH and PNPM (urban and

rural) Design document for an integrated management

information system (MIS) is prepared and submitted to the

Executive Secretariat and M&E Working Group members.

Integrated MIS established aggregating program

monitoring information.

M&E working group submits a report

formulating the design of a unified grievance and

complaint resolution system to the National

Team.

Improve poverty

measurements

and targeting of

the poor

Revised the methodology to calculate the national

poverty line by:

i) Completing national poverty line

simulations using alternative

measurement methodologies.

ii) Conducting internal consultations in BPS

and key government stakeholders to

identify a poverty measurement

methodology for consideration.

iii) Holding external consultations about the

implications of adopting the revised

methodology with universities, NGOs and

key line ministries.

Established a targeting working group in the Executive

Secretariat of the National Team, by decree from the

Executive Secretary.


Cluster I poverty programs to use the unified database.

Program beneficiary lists for priority Cluster

1 programs (PKH and Jamkesmas) are

extracted from the unified database by the

TNP2K Secretariat, using eligibility criteria

from the implementing agencies

68


Research report issued by the Targeting working

group evaluating the targeting effectiveness of current

household social assistance (Cluster I) programs.

Policy note issued by the Targeting working group on

steps required to establish a national unified database

of poor households and families, and who should

implement each step.

Finalization of survey questionnaire, data collection, and

standard operating procedures (SOP) for the

implementation of the social assistance household survey

(PPLS11).

Improve

household-

targeted poverty

reduction

programs (Cluster

1)

Executive Secretariat working group submitted a

policy note on Jamkesmas reform to the National

Team, which includes reform recommendations based

on a comprehensive program review focusing on

financial sustainability.




health management information system to the chair of

the National Team.

The Executive Secretariat working group

completes a review of new institutional

arrangements for the delivery of Jamkesmas,

taking into account actuarial cost estimates

and various scenarios for achieving universal

health insurance coverage.

A report on the performance of programs providing

scholarships for the poor is prepared by the TNP2K

Secretariat and submitted to the chair of the National Team.

A strategy document is issued by the TNP2K

Secretariat that outlines reforms to improve

problems related to the targeting, fragmentation

and disbursement timing of scholarships for poor

students.

A report on the performance of the subsidized rice program

(RASKIN) is prepared by the TNP2K Secretariat and

submitted to the chair of the National Team.


Secretariat that outlines reforms to improve

problems related to the targeting and amount of

rice actually received by poor households.

Improve

community-based

poverty reduction

programs (Cluster

2)

Strengthened PNPM fiduciary systems as outlined

in the action plan dated February 16, 2010 by:

(i) having documented and publicized major

complaints and the steps taken to address

these;

(ii) the BPKP in partnership with the

Bawasda having been explicitly tasked

with the systematic auditing of PNPM

funds; and

(iii) the Ministry of Home Affairs and the

Ministry of Public Works having

submitted quarterly reports detailing the

status of all known complaints to the

National Team and to the Joint

Management Committee members.

PNPM transition strategy: an implementation plan to

establish one single participatory planning exercise for all

actors/sectors at the village level is submitted to the

National Team, including the role of Local Government

with regard to the transfer of the BLM to communities.

Continued to strengthen PNPM fiduciary systems through:

1. Systematic reviews by the internal control unit in

PMD of audit reports and issuance of a quarterly

report to management on implementation of audit

recommendations; and

2. Improved web-based complaints handling mechanism

for PNPM.

Introduce service standards for suspension of

areas with unresolved major complaints.

Improve MSME-

based poverty Submitted the final draft of National Strategy of Financial

Inclusion to the Chair of the TNP2K.

Issue the National Strategy of Financial

Inclusion.

69


reduction

programs (Cluster

3)

Implement a quick win (pilot project to provide

conditional cash transfer (Program Keluarga

Harapan: PKH) through bank saving accounts to

beneficiaries).

An instruction letter is issued by the CMEA that

outlines a framework for KUR M&E and

selection of indicators; which provide basis for

strengthening monitoring of KUR's performances

and evaluation of its impacts (by the KUR Policy

Committee).

70

Annex Table 2: DPL Program Monitoring and Results Framework

Reform

Aim

DPL 7 Prior Actions DPL-8 Prior Actions DPL-9 Prior Actions Indicators

Baseline

Data

DPL-8

Achieveme

nt

Post

Program

Target

(2012)

Policy area 1: Improving the investment climate

Expected Outcome: Improved perception of investment climate by domestic and foreign investors, leading to

increased flow of investments

Investment

to GDP ratio

(%) /1

27.9%

(Avg 2007-

2009)

31.5 %

(Avg

quarterly

share of Q1

& Q2

2011)

25.1%

Reduce

uncertainty

for

investors

by

strengtheni

ng

investment

service

institutions

and

improving

investment

regulations

Issued the Presidential

Regulation on the Investment

Negative List which updates

restrictions on investment

including preferential treatment

for ASEAN investors, and

clarifies the grandfather clause,

the treatment of publicly listed

companies, and mergers and

acquisitions.

Value of

FDI net

inflows

(billion

US$) /2

US$7.0

billion

(Avg 2007-

2009)

US$10

billion

(Q1+Q2

2011)

US$7.9

billion

Reduce the

time

needed for

and cost of

importing

and

exporting

Submitted to the President a

draft Presidential Regulation on

the National Logistics System

(Sislognas) Development

Blueprint

Developed standard operating

procedures within the INSW for

regular private sector consultative

meetings on INSW implementation

issues, and started holding the

meetings

Number of

importers/

exporters

using the

INSW/3

3,791

(June 2010)

5,618

(Sept 2011)

4,500

Developed work plans for the

phased implementation of Single

Sign On procedure for 2 (two) key

agencies of INSW: BPOM and

Customs

Start implementation of

Single Sign On for two key

agencies of INSW (i.e. BPOM

and Customs)

Ministry of Trade issued a

Ministerial Decree establishing a

team to formulate Non-Tariff

Measures under the Ministry of

Trade, with clear standard operating

procedures for the issuance of Non-

Cost and

time to

export and

import /4

Export: 21

days;

Import: 27

days (2009)

Export: 20

days;

Import: 27

days (2011)

Export: 20

days;

Import: 26

days

71

Reform

Aim


Baseline

Data

DPL-8

Achieveme

nt

Post

Program

Target

(2012)

Tariff Measures

Issued a Presidential Regulation, a

Ministerial Regulation and two

Ministerial Decree that put in place

institutional mechanisms to enhance

connectivity in Indonesia

Modernize

core tax

system

Issued advertisement (Invitation

for Bids) for PINTAR

procurement as an initial step in

the development of business

process improvements and a

new integrated information

system

Domestic

non-oil and

gas tax

revenues to

GDP (%) /1

4.9% (Avg

2007-2009)

4.0%

(Revised

budget

APBN-P

2011)

4.91%

Policy area 2: Strengthening public finance management

Overarching Outcome: Greater integrity and more effective use and management of public funds

% of total

capital

expenditure

disbursed on

by end of Q2

/5

19% (Q2-

2010 )

16.2% (Q2-

2011, end

Q2 disb to

Revised

budget

APBN-P)

23%

72

Reform

Aim


Baseline

Data

DPL-8

Achieveme

nt

Post

Program

Target

(2012)

Improve

results

orientation

in the

budget

process

(a) Implemented revised

program structure with

measurable results and targets

aligned with organizational

structure in the National

Medium Term Development

Plan (RPJM) for 2010-2014 and

(b) based both indicative

ceilings and budget proposals

(RKA-K/L) from all line

ministries for the Fiscal Year

2011 budget on the revised

structure.

Based Ministry/Agency Budget and

Work Plans (RKA-K/L) for 2012 on

Government Regulation (No.

90/2010), as evidenced by:

1. Separate treatment of baselines

and new initiatives in the

budget submission document

following new guidelines on

RKA-K/L

2. A manual for line ministries on

formulation of new initiatives,

which enables a review of


3. Consistency between

Government Work Plan (RKP)

and RKA-K/L regarding

performance and budget

information

Budget documentation

includes explanation of

differences between proposed

budget ceilings and previous

medium-term forward

estimates

PEFA PI 12:

multi-year

perspective

in fiscal

planning,

expenditure

policy and

budgeting /6

PEFA

Score

(2007): 1.5

out of 4.0.

PEFA

Score as of

most recent

PEFA

report

(2010): 2.5

out of 4.0.

N/A

Develop a

new

monitoring

&

evaluation

system

Issue draft guidelines for an

M & E framework based, on

specific performance

indicators, that provide basis

for the next RPJMN and

annual budgeting

Improve

budget and

cash

manageme

nt within

the central

Governmen

t

Issue new PP and related

MoF-regulations on budget

execution as mandated by

State Finance Law

PEFA PI 17:

Recording

and

management

of cash

balances,

debt and

guarantees

/6

PEFA

Score

(2007):

D+

PEFA

Score as of

most recent

PEFA

report

(2010):

B+

N/A

Improve

public

procuremen

t

Finalized academic papers for

draft procurement law and

prepared draft procurement law,

ready for public consultation

process

Draft procurement law

submitted to Parliament

Completed the strategy and policy

for human resources development

for the procurement function in

government agencies

73

Reform

Aim


Baseline

Data

DPL-8

Achieveme

nt

Post

Program

Target

(2012)

Improve

government

accounting

and audit

functions

Submitted to the MoF a Draft

Presidential Regulation on

Government Internal Audit

Systems as required by Article

58 of Government Regulation

No. 60/2008

Issued a Presidential Instruction on

government internal audit systems,

which clarifies the roles and


Development of an internal

audit strategy based on the PP

60/2008 and Presidential

Instructions on government

internal audit systems

Number of

line

ministries/

agencies

receiving

unqualified

opinions on

their

financial

statements

/5

45 (2009)

52 (2010)

76

Submitted to the President a

draft Government regulation on


Issued a Government Regulation on


Directorate General of Treasury

submitted a draft regulation to the

Minister of Finance detailing

accounting policies and chart of

accounts

Issue MoF regulations,

adjustments and socialization

of accounting policies and

chart of accounts

Policy area 3: Enhancing poverty alleviation and service delivery efforts

Expected outcome: GoI efforts to reduce poverty and vulnerability are strengthened through better informed and

evidence-based policy and program decisions

% of social

assistance

program to

central

Government

expenditure

/7

3% (2009)

N/A

4.5%

Improve

governance

and

institutional

accountabilit

y

Established an inter-ministerial

National Team for the

Acceleration of Poverty

Reduction (National Team) by

Presidential Regulation

Number of

policy

papers

produced by

the National

Team /8

N/A 7

(2011)

N/A

74

Reform

Aim


Baseline

Data

DPL-8

Achieveme

nt

Post

Program

Target

(2012)

Improve

poverty

measurement

s and

targeting of

the poor

Revised the methodology to

calculate the national poverty

line by:

i) Completing national

poverty line simulations

using alternative

measurement

methodologies.

ii) Conducting internal

consultations in BPS and

key government

stakeholders to identify a

poverty measurement

methodology for

consideration.

iii) Holding external

consultations about the

implications of adopting

the revised methodology

with universities, NGOs

and key line ministries.

National Team instructed agencies

implementing Cluster I poverty

programs to use the unified

database.

Program beneficiary lists for

priority Cluster 1 programs

(PKH and Jamkesmas) are

extracted from the unified

database by the TNP2K

Secretariat, using eligibility

criteria from the

implementing agencies

Number of

line

ministries

using the

unified

database to

identify

program

beneficiaries

/8

N/A N/A 2

Improving

household-

targeted

poverty

reduction

programs

(Cluster 1)

National Team Executive Secretariat

working group submitted a policy

note on cost scenarios for health

insurance for the poor (Jamkesmas)

and a proposed health management

information system to the chair of

the National Team.

The Executive Secretariat

working group completes a

review of new institutional

arrangements for the delivery

of Jamkesmas, taking into

account actuarial cost

estimates and various

scenarios for achieving

universal health insurance

coverage

% of the

poor having

health

insurance

/11

43% N/A 48%

Improving

community-

based

poverty

reduction

programs

(Cluster II)

Strengthened PNPM fiduciary

systems as outlined in the

action plan dated February 16,

2010 by:

(i) having documented and

publicized major

complaints and the steps

taken to address these;

(ii) the BPKP in partnership

with the Bawasda having

been explicitly tasked

Number of

villages,

kecamatan

and cities

receiving

social

empowerme

nt assistance

/12

8,500

villages in

1,094 sub-

districts

45,000

villages,

6,623

kecamatan

and 494

kabupaten/

cities

(2011)

20,950

villages in

2,359 sub-

districts

75

Reform

Aim


Baseline

Data

DPL-8

Achieveme

nt

Post

Program

Target

(2012)

with the systematic

auditing of PNPM funds;

and

(iii) the Ministry of Home

Affairs and the Ministry

of Public Works having

submitted quarterly

reports detailing the

status of all known

complaints to the

National Team and to the

Joint Management

Committee members.

Indicator data source:

/1 BPS

/2 BI /3 INSW portal

/4 2010 Doing Business Survey

/5 MoF /6 PEFA Report

/7 WB staff estimates based on APBN Ministry of Finance and Ministry of Social Welfare

/8 National Team on Accelerating Poverty Alleviation /9 MoH

/10 PNPM

76

Annex 4: Looking back: Results Achieved in Previous DPLs

A. Results Achieved in the first DPL series (DPLs 1 to 4)

The first DPL series was envisioned at a time when the country was transitioning both politically

and economically. Politically the country was moving from autocratic rule to democracy while,

economically, the country‘s fundamentals were improving markedly as the impact of the Asian

crisis was left behind. In 2003, the country had successfully graduated from its post-crisis IMF

program, growth was strong and inflation down. The timing was right for the Government‘s

economic program to shift from a short-term post-crisis stabilization framework to a longer-term

strategic growth and poverty reduction agenda. It was in this context that the DPL was established

to support the Government‘s reform agenda in the key areas of: (i) sustaining macroeconomic

stability; (ii) improving the investment climate; (iii) strengthening public financial management

and governance; and later (iv) improving service delivery. Overall, 54 prior actions were enacted,

covering a wide range of sub-areas within the four pillars.

Pillar 1: Macroeconomic Stability

Overall macroeconomic fundamentals remain sound and fiscal consolidation has improved

with the expansion of the tax base and improved efficiency. Economic growth averaged a

substantive 5.6 percent in the period 2004-07, debt-to-GDP declined nearly 25 percentage points,

budget deficits have declined and high reserves provide the country with a comfortable liquidity

cushion. Increasing non-oil and gas revenues to GDP were supported by a prior action to expand

the modernization of tax offices and extend the tax base, including to small and medium-sized

taxpayers. These taxpayers are now responsible for the largest share of Indonesian taxes.

Additional reforms to improve tax analysis, by the creation of a Tax Policy Office, are expected

to generate improvements in revenue collection. Other Bank contributions under the DPL focused

on improving debt and fiscal management in order to underpin the Government‘s medium-term

economic management capabilities.

On the expenditure side, reductions in non-targeted fuel subsidies allowed greater social

spending but untargeted subsidies remain burdensome. In 2005, the Government raised fuel

prices, resulting in the decline of fuel subsidies from 4 percent of GDP in 2004 to 2.7 percent in

2007, freeing up US$10 billion a year. This amount was rolled out into cash transfers targeted to

the poor and also higher health and education expenditures. As oil prices continued to set record

highs throughout 2008, fuel subsidies rose sharply causing the Government to spend an additional

Rp. 50 trillion (US$5.4 billion or 1.2 percent of GDP) in the first part of the year. In May 2008,

the Government again increased fuel prices by almost 30 percent and accompanied this with a

widely publicized and improved cash transfer program. This move was expected to reduce energy

subsidies— which were surpassing both central Government capital and social spending—by 4

percent of GDP. Even with the increase, Indonesia still had some of the world‘s lowest fuel

prices, with 45 percent of the fuel subsidies going to the top income decile.

Rating agencies responded favorably to Indonesia‘s lower debt ratio and reform packages. In a reflection of the country‘s sounder economic footing, all three international credit agencies

have raised their credit ratings at least 3 notches since 2003. Standard and Poor‘s upgraded

Indonesia‘s credit rating from CCC+ in 2003 to BB- by 2008 while, in this same period, Moody‘s

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raised its ratings from B2 to Ba3 and Fitch raised theirs from B to BB.8 In supporting their ratings

upgrade, the agencies cited debt reduction as the primary cause, but also cited the Government‘s

commitment to broad-based reform, including changes to investment laws, customs and tax

reforms as well as fiscal reforms, especially in treasury and budget measures supported by the

DPL.

Pillar 2: Investment Climate

The DPL sought to improve the investment climate through several key entry areas, including

regulatory reform, tax, custom and trade reform, strengthening small businesses and the financial

sector. The Bank‘s contribution to the sector was also supported through an on-going dialogue

and technical assistance sponsored by a trust fund, which funded numerous technical assistance

activities to improve or help implement the prior actions.

Although initially slow to pick up

momentum, the Government has made

strides in improving the investment

environment. Although full

implementation of the investment

packages has yet to take place, the results

were encouraging — investment rates

increased from below 20 percent of GDP

in 2003 to 25 percent in 2007. In 2006, the

Government issued three economic policy

packages covering investment climate,

infrastructure and financial reform. In

2007, a comprehensive follow-up package

was issued detailing 168 specific reform

measures to be carried out. As a result,

business perceptions have improved, a

study of manufacturing firms in mid-2007

indicated improvements in VAT refunds,

tax-filing processes, informal payments

and faster import and custom clearance.

Labor issues and infrastructure have now

replaced consistency of regulation as the

key constraint to doing business. Surveys

of foreign investors also show that

perceptions of Indonesia are improving. In

Japan‘s annual JBIC survey of 600

Japanese multinational companies,

Indonesia was ranked as the eighth most

promising country for overseas business.

Box 1 also highlights some of the other

areas of improvement in the business

climate.

8 Indonesia‘s credit rating continued to improve beyond 2008. As of mid-2010, Indonesia‘s S&P rating was upgraded to BB, Moody‘s to Ba2 and Fitch to BB+.

Box 1. Indonesia in the Doing Business Indicators

from 2006-2008

Indonesia‘s overall investment climate has improved

as measured by the Doing Business rankings. In

Doing Business (DB) 2008, Indonesia ranked 123 out

of 178 countries. Between the 2007 rankings and the

2008 rankings, its overall rank rose ten spots and

Indonesia made double-digit jumps in the categories

of i) dealing with licenses, (ii) paying taxes, and (iii)

trading across borders. Between the DB 2006 and DB

2008 rankings, for which there are comparable data,

Indonesia showed significant strides in a number of

areas. In starting a business—where Indonesia ranks

among the worse globally—it has made stark

improvements. Starting costs declined from 102

percent of GNI per capita to 80 percent, and the time

taken declined from 151 days to 105 days—despite

the fact that the number of procedures remained the

same. Costs in dealing with licenses also fell from 370

percent of income per capita to 287 percent. On access

to credit, within a short time span of two years, credit

information from a public registry rose from 0.0

percent of adults to 20.5 percent—much higher than

the OECD level of 8.6 percent. This was achieved

through a requirement that all loans be registered,

including credit cards. On paying taxes, although the

number of tax payments remained the same, the time

taken to prepare and pay for taxes was halved from

576 hours to 266 hours as electronic registration and

filing were implemented. Improvements on the trade

indicators, were more normal but broader, resulting in

fewer procedures and less time—but enough for

Indonesia to rise several notches in the rankings.

There were no major negative shifts in the indicators,

but little to no improvements were made in ease of

employing workers, registering property, protecting

investors, enforcing contracts or closing a business.

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Regulatory reform has streamlined procedures and led to an improved legal framework

supportive of the investment climate. According to Doing Business 2008, the time needed to set

up a business has come down significantly from 168 days to 105 days.9 The Government has

recently streamlined procedures even further —down to 16 days which is on a par with the OECD

average of 15 days. However, implementation, especially at the sub-national level, is still needed

for it to be fully credited. Another key achievement was the passage of the Investment Law,

which clarified previously arbitrary investment rules. The law focuses on equal treatment of

foreign and domestic investments, removes the forced divestment and limited duration of foreign

investment in the old law, lengthens the time horizon to hold land, liberalizes some immigration

procedures and allows for international arbitration. Additionally, an SME policy package to

empower micro, small and medium enterprises was passed in July 2007, with a focus on their

access to finance. These packages have been supported by the business community.

Tax reform has addressed some of the key complaints from the business community.

Reforms in tax administration have halved the time for VAT refunds and, in addition, more than

Rp. 10 trillion (roughly US$1 billion) in outstanding VAT refunds have been settled. New

procedures have been set in place to issue VAT refunds to export companies within set

timeframes. Standard operational procedures for a complaint management system have also been

issued. The Government also issued a decree on tax audit procedures that allows taxpayers to

delay payment of tax assessments from disputed audits, however this only becomes effective on

disputes over 2008 and future assessments, leaving those with current disputes under the old rule.

Bold progress on trade and customs reform has been made with the piloting of Indonesia‘s

National Single Window (INSW) and paperless import clearance. The implementation of the

INSW represents one of the country‘s most important trade facilitation initiatives. Under a single

window, exporters and importers will no longer be required to apply individually to multiple

agencies, potentially reducing the current 26 days (DB 2008) it takes to import to 15 days. A pilot

is underway in Jakarta‘s main port and will be expanded to other ports in preparation for the

establishment of an ASEAN Single Window. Other trade reforms under the DPL sought to

improve the technical capacity of the tariff team in setting and evaluating tariff changes and non-

tariff barriers imposed by line ministries and others.

In strengthening the stability of the financial sector, the DPL supported the implementation

of a sounder financial safety net. At the start of the DPL series there was a need to reduce the

economic distortion and potential moral hazard caused by the existing blanket guarantee, which

had been introduced during the Asian crisis to stem bank runs. To this effect, the DPL series

supported a number of reforms including a deposit insurance scheme, institutionalization of Bank

Indonesia‘s role as lender of last resort and establishment of institutional processes and

mechanisms for resolving troubled banks. By the end of DPL 4, coverage on deposits was

reduced from a blanket guarantee in 2003 to Rp. 100 million (roughly US$10,000) by 2007.

Indonesia is one of the few countries in the world that has removed its blanket guarantee on

schedule. In October 2008, in response to the global financial crisis, Indonesia announced a

number of confidence-building measures, including a twenty-fold increase in the deposit

guarantee to Rp. 2 billion (about US$200,000).

Pillar 3: Financial Management and Anti-Corruption

To improve the efficiency, transparency and accountability of public finances, the DPL series

focused on three key areas of reform: (i) modernizing public financial management systems; (ii)

9 The Doing Business indicator of time needed to set up a business was further improved to 60 days in 2009.

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strengthening anti-corruption institutions and, later; (iii) civil service reform. The progress

achieved in this area was also strongly supported by the Bank‘s GFMRAP.

Changes in the legal and regulatory architecture are now largely complete and the focus is

on implementing a modern PFM system. Before the start of the DPL series, the Indonesian

government‘s financial operations were based on outdated laws (from 1925) that had been

updated with a series of inadequate decrees. The DPL supported various regulatory and

implementation measures needed to create the framework for a more modern PFM system,

including laws on state finances, treasury and audit laws and a presidential decree on

procurement.

Budgeting procedures have improved but execution still remains problematic. The DPL

program has helped accelerate reforms to re-engineer business processes across the budget cycle

and the national budget is now compatible with the international standard GFS classification.

Fiscal reporting is more comprehensive and timely, while elements of a medium-term

expenditure framework have been introduced, although this is not fully operational in the budget

system. The planning and reporting side of the budget process has improved but budget execution

remains weak, with about 50 percent of capital expenditure being spent in the last quarter.

Of the budgeting reforms, a key achievement under the DPL has been the implementation

of the Treasury Single Account (TSA) to improve cash management of public finances. At

the start of the DPL series, more than 18,000 commercial bank account—and other accounts not

even known to the Treasury—handled government funds. As an initial step, DPL 1 supported

addressing the regulatory deficiencies in the PFM system, including the passage of several laws

defining the regulatory framework. A reorganization of the MoF was also done to begin the

process of establishing a TSA, and to clean up the cash management issues the Government

faced. DPL 2 then supported the implementing regulations underlining these laws and adopted an

implementation plan. DPL 3 piloted the TSA to have zero-balance accounts in over 50 KPPNs.

DPL 4 extended the TSA coverage to nearly all government expenditure accounts, although there

were some timing issues, e.g. the training for local agencies to implement the TSA occurred later

than scheduled. Progress on covering revenue accounts has been more complicated, but it

continued to be supported by DPL 5 and DPL 6.

Procurement reform, although slow to take off, now has the potential to exceed original

expectations. The original prior action had aimed only at strengthening the existing National

Procurement Office; instead the Government has turned it into an independent office responsible

directly to the President. As an independent agency with adequate resources, authority and strong

political backing, it will be in a stronger position to drive public procurement reform. Because of

the lag in strengthening the NPPO, however, there was a lack of progress on other procurement

reforms, especially in developing a comprehensive national public sector procurement law. This

law is needed to address the numerous inconsistencies resulting from decentralization reforms

which have enabled various levels of government to issue their own procurement procedures.

Other deficiencies of the system include slow progress in the passage of regulations and in the

development of standard tools such as bidding documents and user manuals.

To address corruption, several institutions now exist to investigate and prosecute

corruption cases. Since 2003, numerous anti-corruption institutions have been established and

given considerable autonomy and authority, and even existing institutions have become more

active. The number of cases prosecuted has risen and high-profile corruption investigations have

been launched at every level of government and even among some SOEs. More than 100 (DPL-3)

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investigations have been approved by the President targeting mayors, governors and ministerial

level officials.

Initial steps to address civil service reform have been launched. A lack of administrative

capacity and distorted incentives in the Government bureaucracy have constrained policy

implementation as well as delivery of public services. As an initial step to reform the civil

service, the DPL supported the development of a comprehensive reform of the structure and

remuneration framework for high-ranking state officials. A task force was set up to examine the

entire compensation package with the goal of creating a more transparent, systematic and

coherent framework for pay and allowances based on a comprehensive job evaluation and pay

grading. Building on this, the MoF has developed a comprehensive civil service reform plan and

action plan for MoF, which is to be piloted before being extended to other agencies.

Pillar 4: Service Delivery

The groundwork for improving poverty targeting of basic services has been initiated. Prior

to the 2005 fuel price rise, Indonesia‘s social protection system was characterized by emergency

short-term safety net programs and price subsidies. The country‘s 3 targeted programs accounted

for less than 0.5 percent of GDP, compared with almost 4.0 percent of GDP for the untargeted

fuel subsidies, of which less than 0.2 percent of GDP went to the poorest quintile. As the fuel

price hike made available more funds for social spending, the DPL supported building capacity to

create a more evaluative institutional framework that would improve the targeting of these

released funds. The 2005 fuel hike was accompanied by a new cash transfer program to help

alleviate the impact on the poorest households—and this represented a substantial shift from the

ineffective and inefficient general subsidy program. Evaluative assessments were conducted to

improve targeting and performance of the cash transfer program, and the lessons learnt were also

incorporated into the new cash transfer program that accompanied the May 2008 fuel price

increase. The Government has undertaken significant steps to set up an effective and

comprehensive monitoring and evaluation facility, including the establishment of a unit to

undertake performance evaluations, with the intent of having the findings used as an input to the

Government‘s planning and budgeting cycle.

In addition, other prior actions have targeted specific aspects of service delivery—namely in

education, community driven development (CDD), and sub-national government services. Competency standards and certification for teachers have been formalized through a ministerial

decree, which should improve teaching quality. Communities can now carry over unspent funds

beyond the current fiscal year, a problem that had inhibited publicly-funded CDD programs.

Given the large public infrastructure investment needs, a regulatory framework has been issued so

that sub-national governments will be able to issue bonds and start addressing their infrastructure

deficit.

B. Results Achieved in the second DPL series (DPLs 5 to 6)

The second DPL series was presented at a critical juncture for Indonesia, as it was facing the

ramifications and contagion effects of the global financial turmoil in late 2008. However,

Indonesia‘s record of prudent fiscal management, previous macroeconomic performance, and

ongoing commitment to the longer term institutional reform agenda, provided the requisite

stability that warrant continued support for Indonesia‘s structural and institutional reform efforts

through the second DPL series. Anchored to the FY09-12 Country Partnership Strategy (CPS),

the second DPL series was in substantive terms a continuation of the first DPL series (DPLs 1-4),

although focusing more on the medium-term institutional and policy reforms in the three policy

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pillars: (i) investment climate; (ii) public finance management; and (iii) poverty alleviation and

service delivery. Altogether, 25 prior actions were supported under the second DPL series under

these three policy pillars.

Overall, the second DPL series has significantly helped the Government in progressing

towards achieving its medium-term growth and poverty reduction objectives. Despite the

fact that the series was terminated one year earlier,10

significant accomplishments were made in

the three policy pillars. In investment climate, the DPL helped reduce uncertainties for investors

to invest in Indonesia, by continuing to push for reforms through the revision of the investment

negative list, implementation of one-stop shops (PTSP) and rollout of the INSW. It also helped

strengthen the tax administration through key regulatory reforms aimed towards reducing

compliance costs, enhancing taxpayer services and improving the efficiency and equity of the tax

administration. In public finance management, the governance and transparency of public

spending was significantly improved, through various improvements to the budget formulation

and execution systems. These include the establishment of a comprehensive Treasury Single

Account (TSA) regime and an automated SPAN system; the initial operation of the newly

established LKPP as a national public procurement agency; and the issuance of various

regulations and trainings for improved government accounting practices. In poverty alleviation

and service delivery, the necessary groundwork for longer-term reforms has been laid by

institutionalizing a government system for program evaluation within Bappenas and initiating the

process of establishing a uniform database that will be used by various implementing agencies to

develop poverty program beneficiaries list. The following key results are particularly noteworthy.


By mid-2010, investment flows into Indonesia were already on their path to recovery after

the severe slump in 2009. FDI inflows totaled US$9.3 billion in 2008 according to Bank

Indonesia statistics, but halved in 2009 as the global financial crisis and economic downturn

limited investment flows globally. However, in 2010, FDI inflows increased substantially to over

US$13 billion, indicating their path to recovery. Evidently, firms are scaling up investments with

the global economic recovery and improved long-term financing conditions. This, together with

the Government‘s renewed focus on improving the investment climates in general, have helped

boost investment flows to Indonesia.

The Doing Business Survey 2010 indicated an improvement in Indonesia‘s overall

investment climate. As of 2009, Indonesia ranked 122 out of 183 countries, up from 129 out of

181 countries in 2008.11

In particular, double-digit jumps were made in the categories of: (i)

registering property, wherein the time to register property was slashed from 39 to 22 days, thanks

to the time limits introduced for standard procedures at the land registry; (ii) protecting investors,

with the strength of investor protection index improved from 5.7 to 6, as disclosure requirements

for related-party transactions were expanded; and (iii) starting a business, wherein Indonesia‘s

ranking improved from 171 (near the bottom ranking globally) to 161, with the number of

procedures, time and cost of starting a new business significantly reduced.12

This overall positive

development was attributed to the eased incorporation and post-incorporation processes for new

10 The second DPL series was originally envisaged to consist of three annual single tranche loans (DPLs 5 to 7). However, given the opportunity to better realign the DPL program with the new Government‘s strategies and priorities, following agreement with the

Government, and endorsement by the World Bank regional management, DPL 7 is being presented as the beginning of a new series,

thereby ending the second DPL series one year earlier than envisaged. 11 The Doing Business Surveys are advance dated by one year, hence Doing Business 2010 is based on data collected in 2009. 12 During 2008 to 2009, for starting a business, the number of procedures was reduced from 11 to 9, the number of days reduced from 76 to 60, and the cost reduced from 77.9 percent to 59.7 percent GNI per capita.

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business registration by introducing online services, eliminating certain licenses, making the

registry more efficient and cutting company deed legalization fees, publication fees, registration

fees and business license fees.

Various regulatory reforms have also been introduced to strengthen the tax administration

following the passage of the Tax Administration Law in 2007. Implementing regulations were

issued by the Directorate General of Taxes to support the Tax Administration Law‘s effort of

striking a better balance between the rights and obligations of taxpayers and the powers of tax

officials. These new regulations clarified and provided certainty in the administrative procedures

for the taxpayers to comply with the law, as well as for the tax officials to provide services to the

taxpayers. The DG Taxes has also required the tax offices to report on a quarterly basis the

average time to process taxpayer registration, VAT refunds, tax objections, exemption of

withholding tax on imports, and property tax reliefs. Furthermore, DG Tax decrees were issued to

allow for the roll-out of e-registration and e-filing for taxpayers: (i) allow recognition of digital

signatures for individual taxpayer registration and for filing personal income tax returns; and (ii)

implement new, simplified standard format for financial information.

The DPL program also helped reduce the vulnerabilities of the financial system.

Establishment of the Financial System Stability Forum (FSSF) has formed the basis for the

financial sector safety net, which called for an integrated system to supervise the financial sector

and a framework for closely monitoring financial sector stability. Through a joint decree between

the MoF, BI and LPS (the deposit insurance agency), the FSSF was established in June 2007 to

serve as a venue for coordination, cooperation and information exchange among the authorities

responsible for safeguarding financial system stability in Indonesia. Teams were also established

under the FSSF to develop a financial system crisis management protocol, scenarios for crisis

simulation exercises and early warning indicators for various sub-sectors. Indeed, the FSSF

played a crucial role during the financial system turmoil, particularly in addressing systemic risks

and taking swift actions towards resolving insolvent banks through joint policies and decisions.

At the end of the DPL series, the financial sector was in good health overall, with non-performing

loans falling from 3.2 percent in 2008 to 3 percent in mid-2010 and capital adequacy ratio

increasing from 16.76 percent to 18.06 percent during the same period.

The DPL contributed to improved MSMEs access to finance. With support from the DPL, the

Government has rationalized MSME financing schemes across line ministries and state-owned

enterprises. Regulatory reforms were also introduced, which allow for the legal establishment of

national and provincial credit guarantee and re-guarantee institutions, and clarify the legal status

of these institutions, their ownership structure, reporting mechanisms and investment options.

These positive developments contributed to the growth in proportion of MSME loans to banking

sector loans, from 50.4 percent in mid-2008 to 52.7 percent in mid 2010. This is indeed a

significant achievement, considering that a financial turmoil tends to have more adverse effects

over MSMEs in general.

Pillar 2: Public Finance Management

The second DPL series supported the establishment of a comprehensive TSA, thereby

consolidating and improving cash management of public finances. Under DPL-5, the

Treasury in cooperation with BI has implemented the daily sweep of government revenue

deposits from collecting branches of the 15 largest commercial banks and post offices into the

TSA. This is a significant improvement from the previous practice established since 1989, of

sweeping the revenue accounts twice a week. Under DPL 6, the daily sweeps were expanded to

all commercial bank branches. Ultimately, the overall consolidation minimized idle government

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cash balances and encouraged better operational cash planning by government institutions,

thereby substantially improving central government budget and cash management.

To improve the results orientation of the budget process, the Government has developed a

revised program structure for the RPJMN 2010-14, with measurable results and targets. The revised program structure marked the launch of performance-based budgeting (PBB) and

medium-term expenditure framework (MTEF) implementation by all line ministries and ministry-

level agencies, with the RPJMN 2010-14 and Renstra-KL to form the basis for the FY2011

budget preparation process. The newly revised structure was indeed incorporated in the RPJMN

2010-14, with corresponding key performance indicators, and will be used as the basis for

development of budget ceilings starting in FY2011. Implementation of the revised program

structure will continue to be supported under the third DPL series.

The second DPL series has strengthened the regulatory framework which allowed for

improved government accounting practices. Under DPL-5, two MoF regulations were issued:

(i) PMK No.171/2007 on accounting systems for line ministries emphasizing the responsibility of

ministers for recording the budget allotment in their ministries, requiring the reporting of

receivables, payables and investments in line ministries‘ financial statements and introducing new

accounting sub-systems into the treasury accounting system; and (ii) PMK No.91/2007 on the

standard chart of accounts, harmonizing the budgeting and accounting codes. In addition, over

3,185 accounting staff line ministries were trained on the changes implied by the new regulations.

Altogether, these actions laid the basis for enhancing the accountability of line ministries and

improving the quality of line ministries‘ financial statements.

The legal framework establishing Lembaga Pengembangan Kebijakan Pengadaan

Pemerintah (LKPP) or the National Public Procurement Office was enacted in 2008. DPL 5

supported the establishment of the new institution, which reports directly to the President and is

responsible for sustainable, integrated, focused and coordinated planning and development of

strategies/ policies/regulations associated with the procurement of goods/works/services using

public funds. Efforts to ensure that LKPP is fully operational continued, as supported also by the

Indonesia: Strengthening Public Procurement Program, as well as AusAID-funded technical

assistance. Throughout the DPL series, the Government also continued to improve the regulatory

framework for public procurement by advancing the revision of the Keppres No.80/2003 on

procurement, which mandated the use of national standard bidding documents to be used by all

public agencies.

The second DPL series also helped advance bureaucracy reforms within various

government agencies. Under DPL 5, such reforms were: (i) initiated in the Supreme Court and

the BPK under the aegis of the National Committee for Bureaucracy Reform chaired by

MenPAN, and monitored by the KPK; (ii) continued to be implemented within the MoF with the

introduction of new job descriptions and a new grading scheme, the allocation of all positions to

one of 27 grades, and salary increases based on an extra allowance determined by the new job

descriptions and grades; and (iii) expedited through the initial development of a new human

resources information systems in the MoF.

Pillar 3: Poverty Alleviation and Service Delivery

Under the second DPL series, the Government has institutionalized a system for program

evaluation within Bappenas. The system focused largely on sector evaluation, regional

evaluation, and systems and reporting of development performance. In this regard, a workplan

was developed and workshops held with regional governments, line ministries and other units, in

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order to reflect international best practices in establishing and mainstreaming a M&E function

within the Government bureaucracy.

The process of establishing a uniform database and improving the targeting of the poor was

launched under the second DPL series. Such process was launched by BPS through: (i)

updating the household registry data that was used for the earlier implementation of the cash

transfer program (BLT) in 2005; (ii) adopting a better PMT system to identify poor households;

and (iii) piloting experiments in 24 villages in 4 kabupaten (Muara Enim, Pontianak, Gowa and

Tangerang) in May 2008, to inform the optimal design of mechanisms to identify and target poor

households.

The DPL-5 supported the Government‘s introduction of incentives for teacher certification

and relocation to remote areas. Ministerial Decree No. 18/2007 was issued by the Ministry of

National Education, which required all teachers to deliver 24 teaching hours per week in order to

receive the professional allowance for certified teachers. In addition, teachers receiving the

special area allowance are required to fulfill the 24 teaching hour requirement. Subsequently, the

World Bank support to the Ministry of National Education towards raising the quality of public

education was continued through other programmatic initiatives, such as BOS-KITA.

The National Community Empowerment Program (PNPM-Mandiri) was scaled up in terms

of geographical coverage and size of average block grant. By end 2009, the Government‘s

flagship anti-poverty program reached all 6,400 sub-districts (kecamatan), of which around 4,500

located in rural areas. Central Government funding for the entire PNPM was increased to Rp.

10.3 trillion. The Government also introduced poverty targeting to determine the size of

community block grants so that the increased funds are allocated more effectively.

C. Results Achieved in the third DPL series (DPL-7)

DPL-7 was originally envisaged to be part of the second DPL series consisting of three annual

single tranche loans (DPLs 5-7). However, with a newly elected Government in place, it was

realized that there was a renewed opportunity to better realign the DPL program with the new

Government‘s strategies and priorities (as outlined in the 100-day action plan, the Inpres

No.1/2010 Inpres No. 3/2010 and the RPJMN 2010-14). Hence, following agreement with the

Government, and endorsement by the World Bank regional management, DPL-7 was then

represented as the beginning of a new, third DPL series (DPLs 7 to 9), thereby ending the second

DPL series one year earlier than envisaged. Although there was significant continuity between the

previous administration and the current one (and therefore the reforms being supported by the

DPL series), new priorities emerged, such as improving logistics and connectivity to enhance

competitiveness and efforts to address fragmentation and inefficiency in the implementation of

poverty alleviation government programs. These reforms were deemed to be better supported

through a new series with a 3-year time horizon that provides the necessary framework for a

continued policy dialogue, technical support and attention to ensure the necessary steps are taken

for successful implementation of reforms. A total of 10 prior actions were identified for DPL-7,

surrounding the same policy pillars, i.e. investment climate, public finance management and

poverty alleviation and service delivery. The following describes some of the initial results of the

DPL-7.

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The Government improved the legal clarity for investments and opened up some sectors to

foreign investment, through its issuance of the Presidential Regulation (Perpres No.

36/2010) on the Investment Negative List. This new regulation updates restrictions on

investment, including preferential treatment for ASEAN investors, and clarifies the grandfather

clause, the treatment of publicly listed companies, and mergers and acquisitions. Although

changes in foreign equity limits are relatively minor, as a single document containing all

restrictions on investment, the new regulation helps substantially in serving as a simple checklist

easily understood by investors, thereby enhancing transparency and removing official discretion.

The regulation also benefitted from a series of discussions with stakeholders, including the

Indonesian Chamber of Commerce and Industry (Kadin) and international business chambers.

A more effective, efficient and integrated national logistics system is being developed, to

improve the country‘s business competitiveness and ensure the even distribution of strategic

commodities and people‘s basic needs at affordable prices. This is done through the

preparation of a National Logistics (Sislognas) Development Blueprint and Action Plan that have

been included in the RPJMN 2010-14, and their submission to the President as a draft Presidential

Regulation. Implementation of the blueprint presents a detailed program for the period 2010-2014

and its implementation will require broad participation and coordination among a large number of

government departments and agencies. Hence the finalization of the blueprint and its submission

to the President represents important policy reforms and the building of consensus among

multiple GoI stakeholders towards improving the national logistics.

The tax administration continued to undergo reforms to reduce tax gaps and introduce new

systems and procedures that facilitate a taxpayer-centered approach to improve voluntary

compliance. Taxpayer compliance costs are expected to be lowered with more efficient and

effective tax administration organization and business processes, which are being pursued

through the core tax systems development component of the PINTAR loan that is supported by

the World Bank. To that end, the MoF DG Treasury has issued the advertisement (invitations for

bids) for PINTAR procurement as an initial step in the development of business process

improvements and a new integrated information system.

Pillar 2: Public Finance Management

The Government‘s new program structure was finalized and incorporated in the RPJMN

2010-14, and indicative budget ceilings for FY 2011 were based on the revised structure. To

this regard, the GoI has: (a) implemented a revised program structure with measurable results and

targets aligned with organizational structure in the Medium Term Development Plan (RPJM) for

2010-2014 and (b) based both indicative ceilings and budget proposals (RKA-K/L) from all line

ministries for the fiscal year 2011 budget on the revised structure. Another further crucial step

into the PBB direction was to base budget submission templates for the upcoming fiscal year on

the new program architecture and to submit them, together with the Government‘s Financial

Note, to Parliament. This was done in August 2010 following a new regulation and a set of

implementation guidelines prepared by DG Budget, in coordination with Bappenas, and the

socialization of guidelines to all line ministries in May and June 2010.

The regulatory framework for public procurement is being strengthened, particularly in

line with decentralization, in order to provide an overall framework for all agencies

implementing public procurement. A new procurement law was prepared by the National

Public Procurement Office (Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah or LKPP),

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wherein academic papers for a draft procurement law were finalized, the draft procurement law

prepared for a public consultation process. This is a critical reform action supported by the DPL-

7, given the need for broad consultation process and policy consensus among various GoI

stakeholders, before the draft law can undergo public consultation and submitted to the

Parliament thereafter. The enactment of the new procurement law itself may be a lengthy process,

possibly requiring at least 18-24 months, as parliamentary discussion and approval require

broader stakeholder consultation and consensus building.

The issues of fragmentation and weak capacity within the internal audit function are being

addressed, with BPKP‘s submission to the MoF of a draft Presidential Regulation on

government internal audit systems as required by Article 58 of Government Regulation No.

60/2008. This is a critical action that signifies a key policy reform consensus on the mechanisms

for internal audit within the Government, which will be followed by widespread consultations

with various stakeholders. The presidential regulation will also assign an agency with the role of

formulating the internal audit strategy for the country, hence serving as the basis for the

subsequent development of an internal audit strategy.

Indonesia has moved towards accrual-based accounting, which allows financial reports to

be more useful both from accountability and decision-making perspectives. The draft

standards have already been prepared, and a draft government regulation on accrual-based

accounting has been submitted to the President. This submission marks the achievement of policy

consensus amongst various Government stakeholders on an accounting framework that would

enable the Government to better manage its finances and risks.

Pillar 3: Poverty Alleviation and Service Delivery

The Government has established an inter-ministerial National Team for the Acceleration of

Poverty Reduction (National Team) to help guide and oversee the reform of poverty

reduction policies and programs. This is expected to address the issues of fragmentation and

lack of coordination, which have limited the effectiveness of national poverty reduction

programs. With the National Team in place, the task of monitoring and evaluating programs is

expected to be uniformly implemented, which would help resolve coordination issues and make

decisions regarding the effective use of budget allocated for poverty reduction efforts. The

National Team is also expected to strengthen coordination across ministries at the national level

and downstream with local governments and service providers, thereby strengthening the ability

of programs to provide comprehensive protection against the risks faced by the poor.

Poverty measurements and the targeting of the poor are being strengthened through the

revision of the methodology to calculate the national poverty line. This was done by: (i)

completing a national poverty line simulation using the alternative measurement methodologies;

(ii) conducting internal consultations in BPS and key government stakeholders to identify a

poverty measurement methodology for consideration; and (iii) holding external consultations

about the implications of adopting the revised methodology with universities, NGOs and key line

ministries. This is an important achievement considering the continuing debate on poverty levels

and how they are calculated, and would help in the extensive consultations to be held

subsequently to ensure consensus among key stakeholders.

The fiduciary systems of the National Program for Community Empowerment (Program

Nasional Pemberdayaan Masyarakat or PNPM) were strengthened through: (i)

documentation and publication of major complaints and the steps taken to address these; (ii)

explicit assignment of BPKP and Bawasda on the systematic auditing of PNPM funds; and (iii)

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submission by the Ministry of Home Affairs and the Ministry of Public Works of quarterly

reports detailing the status of all known complaints to the National Team and to the Joint

Management Committee members. Beyond the fiduciary system, the Office of the Vice-President

has also identified the need to push further the consolidation of a multitude of community-driven

development (CDD) programs at the local level.

D. Results Achieved in the Development Policy Loan with Deferred Drawdown Option

(DPL-DDO)

To alleviate financing constraints in the event that global liquidity conditions do not ease, the

Government requested in early 2009 the DPL-DDO as budgetary support that would have been

exercised only when certain conditions were met. The Government believed that the

announcement of such support package, backed up by a program of confidence-boosting policy

measures, would send a strong positive signal to the markets, making it more likely that Indonesia

would meet its financing needs for CY2009 from market sources. While the regular DPL series

aims to advance Indonesia's longer-term institutional reform agenda and focuses on the many

important but often incremental steps that need to be taken to realize this agenda, the DPL-DDO

supported critical stroke-of-the-pen measures implemented to deal with the crisis situation, which

helped accelerate and intensify the process that was already being supported by the regular DPL

series. The DPL-DDO supported 11 policy actions under three broad areas: (i) reassuring

financial markets and maintaining financial system stability; (ii) sustaining critical public

expenditures while maintaining budget discipline; and (iii) facilitating private investment and

supporting exports. The following key results are worth highlighting.

Pillar 1: Financial Markets and Financial System Stability

The DPL-DDO helped put in place a stronger legal framework for a Financial System

Safety Net in Indonesia, which helped stabilize the banking system during the time of crisis.

A new financial safety net government regulation was issued to clearly establish the roles,

responsibilities and procedures that govern the actions and responses of Bank Indonesia, the

Minister of Finance, and the Deposit Insurance Corporation in the event of the failure of a

financial institution. As a result, despite the financial crisis, the financial sector remained in good

health overall, with non-performing loans falling from 3.2 percent in end 2008 to 3 percent in

mid-2010 and capital adequacy ratio increasing from 16.8 percent to 18.1 percent during the same

period.

Public confidence in the banking sector was maintained with the introduction of regulatory

reforms targeted to address bank liquidity crises. The Government issued a regulation

increasing ceiling on deposit insurance from Rp. 100 million to Rp. 2 billion. The regulation also

allows the Deposit Insurance Corporation to change the amount of insured deposits in the event

that there is a risk that could reduce public confidence and endanger financial system stability.

Issuance of a BI circular letter also enabled a broadening of the types of assets that banks can use

as collateral for emergency borrowing from BI in the event of a banking crisis.

Pillar 2: Public Expenditures

A national poverty monitoring and response system was put in place to help monitor the

effects of the crisis, providing information to policy-makers on impacts of the crisis. The

system focused on collecting real-time data on employment, basic commodities, farmers‘

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livelihoods, health, education and social welfare. This information was fed to decision-makers at

the national and local levels to craft policy and programmatic responses.

Specific regulatory reforms and socialization efforts were implemented, which helped

expedite budget disbursement and enhance the Government‘s ability to rapidly direct

public expenditures to mitigate growth slowdown. Through the DPL-DDO, the Government

undertook the following actions to speed up spending in 2009: (i) Implementation of a

socialization campaign to promote advanced procurement processing, to appoint multi-year

treasury officers, and to speed up disbursements through DG Treasury; (ii) Establishment of a

―DIPA 2009 Monitoring‖ committee comprised of DG Treasury (Chair), DG Budget, Head FPO,

and Bappenas, which aims to improve budget disbursements; (iii) Issuance of a MoF regulation

with a simplified mechanism and process for carry-over of unspent 2008 budget for PNPM

(national poverty program); and (iv) Issuance of a MoF regulation outlining procedures for

simplified amending of 2009 DIPA documents and carry-over of unspent 2008 budget for

infrastructure permitting line ministries to reallocate across sub-activities under a simpler budget

(DIPA) revision mechanism without prior amendment of the budget allotment.

Pillar 3: Private Investment and Exports

The DPL-DDO helped promote transparency in the extractive industries‘ revenues. The

Government confirmed its intention to implement the Extractive Industries Revenue Initiative

(EITI), thereby providing a clear signal to the international investment community that it is

serious about oil, gas and minerals revenue transparency. The EITI is recognized as the

international standard of oil, gas and minerals transparency. It entails oil, gas and mining firms

(including state-owned) reporting revenue and production streams conveyed to the Government.

Each government agency is also expected to report separately on how much revenue it collected

from each oil, gas or mining firm. These two reports are submitted to a multi-stakeholder

Steering Group, which hires an independent reconciler to cross-check the two figures, the results

of which are then published. Ultimately, implementation of the EITI should promote greater

clarity in regulations and rules, which would lower costs and lead to increased investment.

Trade financing were eased through the opening of a re-discount window for trade finance

and creation of an Export Financing Agency, which helped undermine the slowdown in

export growth at a time of a slowing down economy. Bank Indonesia introduced a special

discount window for trade finance as an emergency response measure to assist in providing

liquidity for trade financing, thereby sending a strong signal to the market of the Government‘s

political determination towards supporting the nation‘s export-related economic activities. In

addition, Parliament passed a law establishing the Export Financing Agency to further assist in

the process of easing the provision of trade credit. The agency supported rediscount facilities for

commercial banks and extended access to trade finance for small and medium exporters that were

not being served by the commercial banking sector.

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Annex 5: Details on Implementation Progress of DPL8 Proposed Prior and Benchmark

Actions

Policy Area 1: Improving the Investment Climate

1.1.Improving the regulatory environment for investment

Reform aim: Reduce uncertainty for investors by strengthening investment service

institutions and improving investment regulations

DPL 8 (September 2011) DPL 9 (September 2012)

BKPM submitted to the Coordinating Ministry for

Economic Affairs a report reviewing implementation

of the Presidential Regulation on DNI and provides

recommendations for strengthening and updates

where necessary.

Timnas PEPI to conduct regulatory review and

policy harmonization of new laws/regulations and

amendments to laws/regulations

Issued a revised Presidential Decree and Ministerial

Decrees to strengthen and revitalize Timnas PEPI‘s

role and function, including arrangements for public-

private consultation on trade and investments.

Operationalize regular public private dialogue on

key investment climate and trade

constraints/issues and circulate position papers to

Timnas PEPI and key stakeholders

In response to concerns raised by the investor community, the GoI committed in 2008 to further

simplify the Investment Negative List (DNI) and address specific shortcomings that had led to

increased uncertainty regarding Indonesia‘s Investment Law and regulations. Following a series

of discussions with stakeholders, including the Indonesian Chamber of Commerce and Industry

(Kadin) and international business chambers, a new Presidential Regulation No. 36/2010 on the

DNI was issued in late May 2010. The new presidential regulation addresses investor concerns

regarding the grandfathering clause, the treatment of publicly listed companies, mergers and

acquisitions, and the hierarchy of regulations related to investment in Indonesia. It also opens up

a few additional sectors to all foreign investors and incorporates Indonesia‘s ASEAN

commitments, thus providing a more liberal treatment for ASEAN companies and improving the

list as a single source of information on investment in Indonesia. However, overall changes in

foreign equity limits are relatively minor and initial reviews by the legal community indicated

that further clarification of several clauses in the new DNI would be necessary. Hence, BKPM

will likely need to issue additional guidelines for implementing the DNI. To support this, BKPM

has undertaken a full review, in consultation with law firms that regularly assist investors in

interpreting the DNI, and submitted a report to the Coordinating Ministry for Economic Affairs

which provides recommendations for strengthening and updates where necessary. This report is

expected to result in revisions to the DNI.

The Government has recently issued four decrees to revitalize the National Team for

Development of Exports and Investment (Timnas PEPI), which allow it to continue carrying out

its role in supporting improvements to Indonesia‘s trade and investment climate13

. The decrees

specify the new structure of Timnas PEPI, its roles and functions as well as the institutional

arrangements (working groups and sub-working groups) for public private consultations. The

decrees specifically indicate that members of the sub-working groups will involve other parties

13

Keppres No. 28, 2010, Permenko No. 2, 2011, Kepmenko No. 12, 2011 and Kepmenko No. 13 2011.

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consisting of academics, practitioners, professional associations, experts, business associations

and non-governmental organizations. The Export and the Investment sub-working groups are

tasked with "holding meetings, seminars, discussions, and dialogues with stakeholders concerning

problems and formulating recommendations for strategic steps to address problems.‖ The key

roles and functions of Timnas PEPI include:

- Formulate general policies/steps/roadmap for export and investment enhancement;

- Study, evaluate and recommend to provide or to revoke facilities related to export and

investment enhancement;

- Study and stipulate the steps to be taken to settle issues regarding export and investment

issues;

- Deregulate, de-bureaucratize and remove red tape;

- Hold dialogues with stakeholders on key investment and trade issues;

- Integrate tourism, trade and investment promotions.

One of the emerging issues identified by the GoI is the need for improved regulatory review and

policy coordination in the development of new laws. Government departments have mostly

refrained from adding new restrictions on investment and such restrictions are only added after

undergoing an inter-ministerial review process. However, an emerging challenge has been

ensuring policy coordination with Parliament, which has passed several sector laws that include

new restrictions on foreign investment, or have the potential to restrict investment pending

implementing regulations. These include the laws on shipping, mining, post, horticulture, and

land protection for sustainable food. This is an important process for the GoI to manage more

effectively, because according to the current legal hierarchy, sector specific laws automatically

overrule or revise the DNI. Such changes to the DNI would have the potential to discourage

investment across sectors.

The Government therefore plans to review the existing policies and procedures for regulatory

review of new laws, and identify options for improving policy coordination. The Government

indicates that it plans to use Timnas PEPI to implement this enhanced regulatory review and

policy coordination function. Another planned function for Timnas PEPI is to conduct public-

private dialogues with stakeholders to identify issues, monitor progress of solutions, and prioritize

issues to be addressed.


Continued implementation of online investment license

application (SPIPISE) by:

1. Mapping business licenses to develop business process

of SPIPISE for 2 additional sectors (i.e. Agriculture and

Health), and

2. Integration of approval and licenses between BKPM, 33

provinces and 40 municipal PTSPs and data exchange

between 3 sector licenses (i.e. Trade, Tourism, Industry)

Continue implementation of SPIPISE by:

1. Mapping business licenses to develop business

process of SPIPISE for 2 additional sectors

(agreed with the line ministries; and

2. Integration of approval and licenses between

BKPM, 50 additional municipal PTSPs and data

exchange between 2 sectors approval and

licenses (i.e. Health and Agriculture)

Develop a master data interchange for approval and

licensing

Government agencies tend to create business licenses in accordance with each agency‘s authority

and responsibility, with little coordination between agencies or between levels of government

(e.g., the central government versus local governments). This results in a complex, redundant and

overlapping licensing regime from the investors‘ perspective. The 2009 Presidential Regulation

on One-Stop Integrated Services (PTSP) stipulates the establishment within a three-year period of

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a public access online database of information on investment procedures and of a single window

for investment licenses to be operated by BKPM. To that end, BKPM has developed an online

investment licensing application (SPIPISE) which is now accessible on the BKPM website. The

implementation of simplified licensing is under the authority of BKPM and will involve the

integration of sector licenses into SPIPISE. To date, the mapping of business licenses has been

conducted for five sectors (i.e. trade, industry, tourism, agriculture and health sectors) in the

development of the business process of SPIPISE.

The SPIPISE system has also integrated approval and licensing between BKPM, 33 provincial

governments and 40 local government PTSPs. Eventually, it is expected to cover all provinces

and at least 40 districts of Indonesia by 2011. DPL9 will support in 2012 the expansion of

SPIPISE to cover an expected 50 additional municipalities, and facilitate the issuance of licenses

from the ministries of Agriculture and Health. BKPM is also planning to develop a master data

interchange for approval and licensing, which will allow the applicant‘s data to be entered only

once at initial registration, with these data automatically being accessible and populated for each

subsequent license application. Successful implementation is expected to make it easier for

investors to apply for additional licenses online, and make it easier for the Government to collect

information about how many licenses have been issued and to which firms in which locations.

Altogether, the ongoing mapping of business licenses, their integration into the online approval

system and the development of a master data interchange, are expected to increase the

transparency of regulatory requirements and license issuing for investors, in addition to

decreasing the time and cost required to acquire required licenses.

1.2.Reducing the tax burden and improving tax administration

Reform aim: Improve human resources management in the MoF DG Tax


Establishment of the foundation for comprehensive

bureaucracy reform through formal endorsement

and publication of the medium-term DG Tax HR

Strategic Plan (HRSP).

Approval of the organizational impact assessment

for the reform of DG Taxes.

Commence initial phase of professional certification

for HR, Project Management (CMMI) and audit

functions.

The HR strategic plan (HRSP) for DG Tax is expected to be approved in September-2011.

The HRSP will address strategic issues affecting HR improvements and lay the foundation for

reforms to improve the effectiveness, efficiency and professionalism within the organization. The

Minister of Finance has also recognized DG Taxes as the leading agency, in this area, and the

HRSP will form the blueprint for reform in the rest of the ministry. The plan (known as the

‗blueprint‘) will also require the backing of the State Ministry of State Apparatus Reforms

(MenPAN), which currently centrally controls all organizational issues in Indonesia. To support

more comprehensive reforms they have previously exempted DGT only in specific cases, such as

allowing them to establish a PIU for PINTAR. The contract to support implementation of the

proposed HR reforms under PINTAR (Component B) is now expected to be signed in 2012,

following some restructuring. In order to support the reforms, the DGT has also developed a more

detailed organizational impact assessment, which is now expected to be approved in late 2012,

that would set out how the proposed reforms would, among other things:

Strengthen the central HR function and establish HR functions in the regional offices;

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Restructure the Small Taxpayer Offices (STOs) based on more efficient case load

management; and

Formalize professional cadres within DGT. Under current Bank supported initiatives

DGT has already commenced an initial phase of professional certifications for HR staff

and in Project Management (CMMI), which is planned to be expanded to specialized

functions such as tax audit in the future.

Reform aim: Modernize core tax system


Contract award is issued in the procurement process

of core tax system, which will be developed under

PINTAR.

Issue Government Regulation for the

implementation of Article 35A Law 28/2007

regarding general taxation provisions and

procedures, and sign Memorandum(s) of

Understanding with key counterparts, particularly

Customs, for the sharing of third party information.

Issue improved SOP for tax objection and appeals Development of operational specifications and top-

level user requirements for improving business

processes and information systems for tax

intelligence and investigation.

Despite ongoing procurement delays, PINTAR is moving into the critical implementation

phase. It will support: (i) modernization of core business processes, including information and

communication technology infrastructure and tax database management; (ii) governance and

human resource management; and (iii) project management and oversight. DGT has set up and

trained staff for a full time, dedicated Project Implementation Unit (PIU) under the Directorate of

Business Process Transformation, and has developed a Project Operations Manual (POM).

Following some delays in procurement — mainly due to the complexity of what will be a major

transformation of organization and corporate culture and practices — DGT is now in the

evaluation stage of the procurement of main ―Core‖ contract. The bidding document was

advertized in September 2010 (around nine months later than originally envisaged) and the

contracting is expected in late 2011 or early 2012 (again somewhat later than originally

envisaged). Nonetheless, complementary activities have continued with Bank and donor support,

with the DGT preparing to define new business processes and specifications, undertaking the

organizational impact assessment, PINTAR risk and change management, and the procurement of

an Owner‘s Agent to support management of the transformation.

Existing weaknesses in control elements lower the incentives for compliance and leave DGT

vulnerable to corruption. DGT has annual business and audit plans, but few documented

general or specific audit policies, poorly developed systems and procedures for risk-based audit

and staffing remains inadequate — while the number of auditors has increased from 2,300 in

2008 to around 4,500, this remains well below international standards of 20-30 percent of total

staffing and audit coverage is therefore low. While the audit capacity is being built, with new

methods being supported under PINTAR, DGT proposes to strengthen the sub-directorate of

Internal Compliance and Internal Investigation within DGT. This unit, created in early 2007, has

the responsibility for internal control, quality, internal audit and internal investigation, with

responsibility for ensuring that:

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Risks are appropriately identified and managed.

Significant financial, managerial, and operating information is accurate, reliable, and

timely.

DGT resources are used efficiently and adequately safeguarded.

DGT operations are transacted in accordance with adequate internal controls, good

business judgment, and high ethical standards.

Quality and continuous improvement are fostered in DGT internal control processes.

Investigation of detected irregularities is carried out, administrative and penal cases

appropriately prepared, and the cases follow-up in the administrative and penal tribunals.

DGT also faces major challenges in obtaining critical third-party information that is

necessary to verify tax assessments and undertake risk based audits of taxpayers. The

information is necessary to help reduce the tax gaps and to introduce risk-based tax

administration systems. Critical third-party information includes information from within the

MoF (i.e., Customs and Excise) and from outside the MoF, such as public utility companies, the

Central Bureau of Statistics (BPS) and financial institutions (i.e., business and consumer credit

information). Obtaining reliable third-party data is one of the key factors for the successful

implementation of any tax administration. Regulations are being drafted to help authorize the

routine sharing of information, and implementation will need to be supported through MOUs,

followed by implementing agreements, with specific organizations such as with DG Customs and

Bank Indonesia.

DGT is developing its management control systems, to ensure that the Objections and

Appeals functions are carried out with proper accountability, integrity, and transparency.

Taxpayers may dispute a tax assessment made by DGT and in the first instance appeal to DGT

for a review. Assessment issues may be resolved or referred to the Tax Court. However, the Tax

Court is currently overwhelmed, with a large backlog of cases, which increases the need for an

efficient and fair objections and appeals process in DGT. In response to weaknesses in the

procedures and working practices (some that were exposed during a recent high-profile

corruption case), DGT has issued new Standard Operating Procedures to clarify the procedures

for the Objections and Appeals Directorate. These included the following: (i) DG Tax circular on

peer review for the resolution of sanctions; and (ii) DG Tax circular on procedures for objection

on income tax, VAT and/or luxury goods tax.

DGT is also strengthening internal compliance and investigation functions. Tax transactions

with any indication for fraud identified during the review or data validation stages are referred to

the investigation unit. This unit has can post the transaction, with no further action, refer the

taxpayer back to the audit department, or continue with the investigation procedures. However,

the current procedures and working practices are weak and the DGT is looking to develop a new

set of Criminal Investigation and Intelligence processes (DPL-9) that will be integrated into

PINTAR

DGT is developing internationally standardized transfer pricing taxation to provide greater

clarity to enterprises operating in Indonesia and to ensure that it receives a "fair" tax share.

It is important to establish appropriate rules for valuing the contributions from assets, tangible

and intangible, services, and funds etc. transferred within organizations, including those in

different jurisdictions, for tax purposes. The regulations were unclear, which raised the possibility

of arbitrary decisions and discouraged investment, particularly foreign investment. Organizations

have indicated their concerns to DGT. This is also a concern for DGT as cross-border transactions

could be used to reduce taxable profits in their jurisdiction. The DGT therefore issued three

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guidelines in 2010: (i) Transfer Pricing (TP) Guideline; (ii) the Mutual Agreement Procedure

(MAP) Guideline; and (iii) Advance Pricing Arrangement (APA) Guideline. These guidelines

were expected to clarify the transfer pricing regulations and enforcement procedures, thereby

encouraging voluntary compliance. However, after reviewing these guidelines through a series of

discussions with the private sector and development partners, and by taking into consideration

OECD guidelines for TP, MAP and APA and also international business standards, DGT is

preparing follow-up implementing regulations.

1.3.Enhancing trade facilitation and promoting exports

Reform aim: Reduce the time needed for and cost of importing and exporting



Indonesia National Single Window (INSW) for regular

private sector consultative meetings on INSW

implementation issues, and started holding the meetings

Developed work plans for the phased implementation of

Single Sign On procedure for two key agencies of INSW:

BPOM and Customs

Start implementation of Single Sign On for

two key agencies of INSW (i.e. BPOM and

Customs)

Identify options and develop

recommendations for implementation of an e-

payment system

Developed a system and submit reports to the Coordinating

Ministry of Economic Affairs, Ministry of Finance, Ministry

of Transportation and Ministry of Trade on import container

dwell time in Tanjung Priok port, measured from ship

berthing to gate-out, and make the dwell time public

Fully integrate the TPS online and INSW

Portal for Tanjung Priok Port

Issue regulation to provide the legal basis for

the INSW portal to serve as the single

authoritative reference for all trade

regulations issued by related government

agencies.

Private Sector Consultation

The Indonesia National Single Window (INSW) was established to reduce the time and cost of

importing and exporting by allowing single submission, single processing and single approval of

import/export documents. It is estimated that up to 36 government agencies are involved in

granting permits or licenses for export or import with at least 48 different export documents, 106

different import documents and 23 supporting documents. Ultimately, a fully operational INSW

is expected to benefit the private sector through more efficient customs release and clearance of

goods. In order to obtain private sector inputs on progress in the development of the system, the

INSW has instituted discussions with a number of chambers of commerce. As a result, the INSW

now serves as a de facto forum for addressing trade issues with the private sector. More

importantly, private sector dialogue has resulted in the resolution of several trade problems,

including conflicts between product descriptions and harmonized system codes used by permit

issuing agencies and requirements for both hard copy and electronic inputs into the system. The

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INSW team has developed and published SOPs for regular private sector consultative meetings to

discuss INSW implementation issues. These meetings are held regularly.

Single- Sign-On Procedures

Single-submission and sign-on are the final goals of the INSW for each of its major pillars. In

this context, single submission and sign-on mean that a trader can seek import or export clearance

by submitting all data required by each clearance agency with a single sign-on of the INSW

portal. The initial step towards this ultimate goal is the establishment of single-sign-on. The

INSW team has developed a work plan for the phased implementation of single- sign-on for two

key agencies or pillars of the INSW namely Customs and BPOM. Work has already commenced

and implementation is expected to start by end 2011. Further, options will be identified and

recommendations developed for the implementation of an e-payment system.

Monitoring and Evaluation

The purpose of the INSW is to reduce the time and cost for customs release and clearance of

cargoes. Thus, monitoring and evaluation, including import clearance times, is a key element for

the successful development of an effective INSW. Consequently, the INSW has begun submitting

evaluation reports to the minister, including quantitative information on: (i) the number of users;

(ii) the amount of imports/exports processed through the INSW; and (iii) time for customs

clearance. A dwell time analysis for the port of Jakarta (Tanjung Priok) has been executed with

support from the World Bank and presented to the main private and public stakeholders. In

addition, the study team presented the main outcomes of the study to the Ministry of Transport,

the Coordinating Ministry for Economic Affairs and DG Customs. In general, there is agreement

that there are various policy options to reduce dwell time but that it will be most successful if a

coordinated approach is selected. This approach should also involve the private sector.

Integration of TPS online and INSW Portal

The current INSW portal serves as an integrated data exchange system between Customs and

other Government Agencies for issuance of Import and Export Clearance. Through the INSW

portal, customers (Exporters and Importers) can submit clearance/licenses request for their goods,

monitor the clearance process and obtain clearance/licenses online. The TPS (Tempat

Penimbunan Sementara) Online is an online system that integrates Customs offices and Container

Yard Terminal. The TPS online allows Customs to obtain container data from the CYT and send

the electronic customs clearance (SPPB) to the CYT. Under DPL-9, the TPS online is expected to

be fully integrated into the INSW portal, starting with the Tanjung Priok Port. This integration

will allow for, among other things, expedited cargo arrival services, faster cargo handling

processes, more transparent information on goods/containers and better supervision on the

movement of cargoes/containers.

Transparency of Trade Regulations

All regulations currently in effect are already available in the INSW website. De facto, the INSW

website is already serving as the default location for any trade related regulations. The

Government plans in 2012 to legally designate the INSW website as the single authoritative

source for all trade related regulations. No new regulations can then come into effect until they

have been published through this site.

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DPL 8 (September 2011)

Linked remaining export licenses under MoT to INSW and implement in 5 major ports.

The Ministry of Trade has linked to INSW the process of issuing export licenses for all products

requiring export clearance. The process is done on-line through Inatrade, which is the ministry's

web-based application for requesting export and import clearance. For this phase, the process can

be done through four major seaports (Tanjung Priok, Tanjung Mas, Tanjung Perak, and Belawan)

and Soekarno Hatta airport.


Ministry of Trade issued a Ministerial Decree

establishing a team to formulate Non-Tariff

Measures under the Ministry of Trade, with clear

standard operating procedures for the issuance of

Non-Tariff Measures

Establish a clearing house in Timnas PEPI to

review new Non-Tariff Measures proposed by

other ministries

The Ministry of Trade is responsible for issuing certain types of Non-Tariff Measures (NTMs),

such as import licenses and pre-inspections, and for ensuring that other NTMs imposed by other

agencies are legal under international trade agreements. The ministry has reformed its internal

process for reviewing new NTMs, specifically those that are under the ministry's purview,

through the establishment of a team to formulate NTMs under the Ministry of Trade, with clear

standard operating procedures for the issuance of NTMs. The reform puts in place better

mechanisms to review NTMs in order to ensure that they are valid policy interventions for the

stated objective, consistent with Indonesia‘s national economic interest in improving

competitiveness, and valid under international agreements. The reform involves establishing a

review mechanism in which proposals for new NTMs would undergo a regulatory impact

analysis, managed by a dedicated team.

1.4. Improving Connectivity

Reform aim: Resolve major bottlenecks and constraints within the national connectivity


Issued a Presidential Regulation, a Ministerial

Regulation and two Ministerial Decrees that put in

place institutional mechanisms to enhance

connectivity in Indonesia

Finalize implementation plan for connectivity

enhancement in Indonesia and develop

Monitoring & Evaluation framework.

Improved Port management through the following

actions:

1. Starting the operation of the Customs Advanced

Trade System (CATS) in the Cikarang dry port;

2. Improve efficiency in the port of Jakarta, as

measured by analysis of dwell time;

3. Establishment of Port Authorities in the four major

ports of Indonesia (Jakarta, Surabaya, Medan and

Makassar); and

4. Submitting a report to the Coordinating Ministry for

Economic Affairs on the evaluation of 24/7 services

in the ports of Jakarta, Semarang, Surabaya, Medan

and Makassar, to identify the main bottlenecks in

Continue to improve port and airport management

by:

1. Establishing a Port Community led by the

Ministry of Transport in the ports of Jakarta,

and developing guidelines and/or SOP for the

24/7 port services provision;

2. Establishing SOP for the establishment and

operation of dry ports in Indonesia;

3. Evaluating the performance of 24/7 services

introduced at the Jakarta airport, identifying

bottlenecks and proposing actions to

strengthen the 24/7 running model;

4. Publishing an inter-department set of logistics

indicators that can be used to benchmark

progress made in logistics reform.

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running those services efficiently and propose

actions to strengthen the 24/7 services model in the

port.

This is a new policy sub-area that is being introduced under the proposed DPL-8 and that aims to

resolve major bottlenecks and constraints to improve national connectivity. It relates with the new

connectivity strategy, which is one of the main pillars of the Master Plan for Acceleration and

Expansion of Indonesia‘s Economic Development (MP3EI) 2011-2025 that was recently

launched by the Government. To strengthen the impact of connectivity reform, the connectivity

strategy aims to integrate the four different government plans: (a) National Logistics System

(SISLOGNAS); (b) National Transportation Systems (SISTRANAS); (c) Regional Development

(RPJMN and RTRWN); and (d) Information and Communication Technology (ICT). Given the

need for broad participation and coordination among the large number of departments and

agencies involved, the Government has issued a Presidential Regulation, a Ministerial Regulation

and two Ministerial Decrees that put in place institutional mechanisms to enhance connectivity in

Indonesia. A working team for connectivity has been established that will report, together with

eight other working teams, to a Secretariat that supports a ministerial-level committee tasked with

implementing the Master Plan.

The Bank had been actively supporting the development of the National Logistics Blueprint

(NLB), which aims to improve transparency and coordination among ministries and agencies, and

help MSMEs to realize the opportunities for investments and provide national logistics service

providers with the opportunity for global-scale cooperation. However, it was recognized that the

issuance of the NLB would not be sufficient to bring about the recognized need for more

coordination among the various ministries and agencies involved, nor the integration of the NLB

with other relevant sectoral strategies, such as the multi-modal blueprint, the port master plan, the

railway master plan, the roads master plan, the economic corridor strategy, the special economic

zones and the regional development plans. The priorities and time paths of these various

blueprints and master plans are not synchronized, thereby undermining Indonesia‘s aim to reduce

logistics costs and improve competitiveness. Consequently, the Government has developed a

connectivity agenda, which aims to synchronize the various blueprints and identification of

priorities. Within the framework of this new connectivity agenda, and the need for more

coordination, the Government has established a joint public-private team that is tasked to align

the National Logistics Blueprint with others master plans and strategies.

At the same time, the Government has also identified several quick wins that are currently being

implemented and represent a DPL-8 benchmark action on improved port management. These

quick wins are in line with the Government‘s priority of reducing congestion in access roads to

ports and increasing port productivity, given that presently close to 10 percent of Indonesian

exports miss the boat due to congestion outside and within ports; thereby supporting the DPL-8

prior action aimed towards improving connectivity.

Office hours have been expanded through the introduction of 24/7 services in Indonesia‘s five

main international ports, as a common international best practice to alleviate congestion. The

Government requested the port authority, Customs offices and state banks to take the lead in

introducing and socializing the 24/7 services in the ports. This initiative was recently evaluated

with technical assistance from the Bank and the recommendations are currently being considered

for follow-up improvements. The Government also intends to evaluate and improve the running

model of 24/7 services at Jakarta‘s Soekarno Hatta airport.

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Port management (Pelindo 2 and the Port Authority) has screened stevedoring companies in the

port and renewed licenses only of the most efficient ones. Port management has also introduced a

more flexible approach to berthing and ships are allowed to berth at other terminals than

originally assigned when this helps to reduce waiting time. Management has also introduced

regular port stakeholder meetings to identify possible measures to increase efficiency. The main

terminal operator, JICT, will increase progressive container yard storage rates late 2011 to

prevent importers from using the terminal as a cheap storage facility.

The Ministry of Transport, Customs and the current port operator Pelindo II are also currently

developing a system to monitor progress made in improving the Jakarta‘s port efficiency,

including the measurement and analysis of import container dwell time. The World Bank has

supported this effort by developing a monitoring method and will be training port stakeholders to

collect and monitor dwell time data. The number of containers handled by Tanjung Priok has

increased by some 20 percent in the past 12 months. However, due to efficiency increases, this

has not resulted in an increase of dwell time.

Additionally, a first dry port was opened in the Cikarang industrial estate in mid-2011, with the

operation of a Customs Advanced Trade System (CATS). Such dry ports allow all customs

handling and related activities to be done at the factory gate, with the container subsequently

sealed and directly transported to/from the port, and put on/off board with minor additional

handling. The main challenge now will be to increase the number of containers handled by the

dry port. This will require further regulatory reform, especially by Customs and the Ministry of

Transport. In recent months, there is also growing awareness that congestion on the Jakarta toll

roads is a problem for both private car users and trucks that want to reach the port. Several

actions have been proposed and implemented on a trial and error basis. However, a final solution

for this problem has not been found yet and will call for an in-depth study.

Policy Area 2: Strengthening Public Financial Management

2.1. Strengthening budget formulation and M&E systems

Reform aim: Improve results orientation and MTEF in the budget process


Based Ministry/Agency Budget and Work Plans

(RKA-K/L) for 2012 on Government Regulation

(No. 90/2010), as evidenced by:

1. Separate treatment of baselines and new

initiatives in the budget submission document

following new guidelines on RKA-K/L

2. A manual for line ministries on formulation of

new initiatives, which enables a review of



(RKP) and RKA-K/L regarding performance

and budget information

Budget documentation includes explanation

of differences between proposed budget

ceilings and previous medium-term forward

estimates

Finalize the grand design for a new and

simplified costing methodology; and issue draft

guidelines for line ministries for review of

baselines and on-going policies in order to find

savings to finance new initiatives and improve

quality of spending.

99

With support from DPL-7, MoF and Bappenas have completed a crucial first step towards

the implementation of PBB and MTEF reform. A new program structure was adopted by line

ministries with the RPJMN 2010-14 and all 2011 planning and budgeting documents, which

aligns Government programs with organizational structure and includes both targets and key

performance indicators for all programs and activities. Establishing clearer lines of accountability

for program performance and providing a basis for evaluating program and activity performance

going forward, this new structure will ultimately help establish more results-orientation in state

budget planning and development, and ensure that expenditures will better reflect the

Government‘s policies and program priorities.

The current DPL-8 actions are targeted at ensuring continued PBB and MTEF reform

progress in the budget process for 2012 and beyond, including compliance with Government

Regulation No. 90/2010 regarding the completion of the RKA-K/L. This new PP was issued on

December 27, 2010 to replace Government Regulation No. 21/2004. Among other things, PP No.

90/2010 introduced a ―New Initiative‖ mechanism for the further development of the MTEF

framework to be able to better plan and prioritize expenditures for the medium term.

The 2011 budget process has already seen some progress regarding MTEF, as Presidential

Regulation No. 26/2010 on the Government‘s budget details included for the first time detailed

forward estimates for two out-years at the component level. These details, however, are published

after the budget has been approved by parliament. Thus far no distinction has been made between

ongoing and new programs/activities. All programs and activities have so far been re-costed on a

yearly basis. The MTEF, however, is normally associated with costing a baseline and, in the

following years, a more detailed costing of new initiatives. This distinction is to be reflected in

the budget submission formats for 2012 following the Ministry of Finance Regulation No.

93/2011 on RKA-K/L 2012. The formats contain a more detailed presentation of new initiatives

vis-à-vis on-going initiatives.

In addition to a more detailed costing, proposals for new initiatives should further provide a

more elaborate rationale, and be submitted to more thorough scrutiny and examination

than on-going programs. More concrete efforts towards implementing a separate treatment of

baselines and activities have been underway since the last quarter of 2010, when Bappenas and

DG Budget started to draft a set of guidelines for K/Ls on how new initiatives were to be

proposed, examined and fit into the MTEF preparation. These were – as envisaged also by one of

the DPL 8 triggers – finalized in January 2011 and subsequently issued through Bappenas

Ministerial Decree No.1/2011 on New Initiatives. Socialization of this new decree and the

attached guidelines to the line ministries/state agencies took place in February in preparation for

the first round of new initiatives proposals and issue of indicative ceilings for FY 2012. The

regulation calls for two more rounds of new initiative proposals to be submitted and scrutinized

before the K/L budget ceilings in July and final budget allocations in October. This is also

captured in the second DPL-8 prior action.

The DPL-8 prior action also aims at ensuring the seamless linkage and consistency across

all planning and budgeting documents, from RKP to RKA-K/L, regarding performance and

budget information. The MTEF reforms, which have turned the RKP, Renja-KL and the RKA-

K/L into multi-year rolling documents, together with the development of the integrated financial

management system (SPAN) provide a unique opportunity to ensure that the same baseline

information is used throughout the budget preparation process and stored in the same database.

Previous years have shown some inconsistencies between RKP and RKA-K/L. However, a

comparison between the Perpres on national RKP and the RKA-K/L based on the temporary

ceilings for FY2012 shows that close to 100 percent of national priority activities are the same

100

and that allocations, performance indicators and target volumes are consistent. Linked to the

MTEF is also another DPL-9 prior action aimed at strengthening the implementation of the

MTEF by including in the budget documentation an explanation of differences between the

proposed budget ceilings and previous medium-term forward estimates for that year. This

reconciliation will ensure that forward estimates start becoming a more reliable and well designed

source of information and that the MTEF is integrated with the annual budget cycle.

The Government‘s planned grand design for a new costing system, which includes different

methodologies for different types of outputs and possible adjustments to the general and

specific cost standards, has been postponed to calendar year 2012, and will be included in

DPL-9. DPL-9 will also progressively support the MTEF agenda by capturing the plans to issue

draft guidelines for line ministries to review their baselines and on-going policies. The intention

is to provide tools for line ministries to improve the efficiency of their on-going operations and

identify savings to be able to continually finance new initiatives.

Reform aim: Link budget formulation to SPAN


Finalization of a design-phase of the new budget

preparation solution for SPAN.

Complete piloting phase for budget preparation solution

in SPAN

SPAN is designed to integrate and enhance the performance of the entire budget cycle from

planning to reporting. In early 2011, the Government acquired a new budget preparation

module for SPAN (Hyperion) to provide more advanced functionality for both budget preparation

and performance recording and reporting. The DPL 8 and 9 benchmark actions support the prior

action on the Ministry/ Agency Budget and Work Plan (RKA-K/L) for 2012, as these would

enhance compliance with the requirements stemming from the PBB-reforms and enable the

automation of an end-to-end budget process. Implementation of the new budget preparation

module, including formulation of future business processes, is a priority for the coming months

and year, as reflected in completion of the design-phase (DPL-8) and piloting / roll-out (DPL-9).

The design-phase for the budget preparation solution has been finalized this year, as evidenced by

the government‘s sign-off on the technical design document. This should be followed by the

completion of the piloting phase in early 2012.

Reform aim: Develop a new monitoring & evaluation system


Developed an operational manual for selection of

performance indicators for performance-based

planning and budgeting with the involvement of

line ministries

Issue draft guidelines for an M & E framework,

based on specific performance indicators, that

provide basis for the next RPJMN and annual

budgeting

Efforts are underway in DG Budget and Bappenas to develop a comprehensive monitoring

and evaluation (M&E) system. This system should bring together Government financial data

and performance information, providing a basic framework and reference tool for more

performance-oriented budget analysis and policy-making in line with the principles of PBB and

MTEF. The objective would be to have a fully functioning M&E system in place for the next

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RPJMN. It will necessitate the establishment of procedures to retrieve performance data and the

design of reporting, as well as ensuring that performance data is measurable and of high-quality.

Performance information was for the first time developed by all ministries for their

respective programs and activities in the form of outcome and output indicators in 2009 and

implemented with both the RPJMN 2010-14 and 2011 budget. But the selection of indicators

and the quality of information for performance-based planning and budgeting, needs to be further

reviewed. The idea is to conduct a yearly evaluation exercise of the performance information

provided by line ministries to enhance their quality incrementally over time. The final M&E

guidelines for the line ministries on how to formulate and report performance information are

envisaged for 2013 (in alignment with the next RPJM schedule). Both the DPL-8 and DPL-9

actions are aimed at supporting steps currently undertaken or planned to be undertaken by the

GoI, more specifically the Deputy of Performance Evaluation (DPE) at Bappenas, towards that

end. In 2011, DPE completed a first set of guidelines for line ministries on the selection of

performance indicators for performance-based planning and budgeting. These guidelines will

provide the criteria of selection for output and outcome indicators. At the first stage, these

guidelines will involve eight pilot line ministries, which are Agriculture, Education, Health, Law

& Human Rights, Finance, Marine & Fisheries, Planning and Public Works. By September 2012

(DPL- 9), the idea is to have formulated a first draft of the aforementioned M&E guidelines, to be

finalized after subsequent review by 2013.

The formulation of both the 2011 guidelines and finally the 2013 guidelines will be informed

by findings generated through the yearly series of reporting tests that DPE is running

together with the line ministries. These tests are performed to identify difficulties and

shortcomings in the design and reporting on indicators and critical steps for further improvement

of the Government‘s M&E system.

Impact evaluation is among the many M&E tools that is being considered by the GoI. The

Deputy for Performance Evaluation (DPE) in Bappenas envisions the following three-pronged

approach towards evaluating the performance of government programs: (i) Ex-ante Cost Benefit

Analysis and Logframe Analysis, which can be used for screening government program; (ii)

Comprehensive Spending Review for budgeting; (iii) Impact evaluation for medium and long-

term government programs. In order to strengthen capacity, a multi-agency working group on

government-wide M&E is currently being set up, which could become the platform for selecting

and commissioning impact evaluations, guiding capacity building efforts within line ministries

and establishing the link between performance and budgeting. One member of the M&E working

group in particular, the Secretariat of the National Team for Accelerating Poverty Alleviation

(TNP2K), has been gaining experience in evaluating poverty programs and plans to oversee

evaluations and assessments of such priority poverty programs.

2.2. Strengthening budget execution systems

Reform aim: Streamline budget execution and management of budget authority


Implemented virement on the basis of the PBB

guidelines

Implement virement on the basis of the PBB

guidelines through SPAN

102

One of the main objectives of Indonesian PFM reform is to streamline and simplify the

budget execution process by providing more flexibility to spending units in implementing

and managing their budget in order to achieve desired outputs/outcomes. With the new

budget formulation mechanism, every spending unit is expected to develop its budget proposal

based on the performance target, and any virement (changes) to the original budget allocation will

be made only if it is intended to achieve those agreed targets. The State Finance Law No.17/2003,

article 15 (5) as the organic budget law states that ―APBN agreed by DPR must contain

comprehensive information on organizational unit, function, program, activity and types of

expenditure/ economic classification‖. Therefore, the authority of Parliament to approve the

budget is significant up to the detailed economic classification level. However, to speed up the

disbursement performance within the fiscal year, Parliament through the annual budget (APBN)

law (i.e., the Law No.10/2010 on budget for FY 2011), authorizes the Government to shift

allocations, within limits, without prior parliamentary approval.

With the new program restructuring instructions issued in 2009 (for implementation in the

FY 2011 budget), all spending units are expected to develop their budget proposals based on

the performance targets. The new roles and responsibilities for budget revision are prescribed in

the Minister of Finance Regulation (PMK) No. 49/2011 on the budget revision procedures for the

FY 2011. This new regulation contains new procedures for virement, which are intended to be

consistent with the gradual introduction of performance targets in the budget documents to

facilitate performance-based budgeting (PBB). The purpose of having this new virement

regulation is to create efficiency and effectiveness in the execution of the budget, accelerate the

achievement of state ministry/agency performance, and set clear roles and responsibilities among

the different parties who are given the authority to approve budget revision.

However, this new virement regulation is still complicated. It has a complicated level of

approval authority and of process that can be further simplified and streamlined particularly when

it comes to designing a virement procedure in the SPAN. This virement regulation sets five

parties with authority to approve budget revisions: the Parliament (DPR), Finance Minister, DG

Budget, DG Treasury and the spending unit itself. There is a need to arrive at a consensus on the

roles and responsibilities of each to ensure that the virement process is simplified, sufficient

flexibility is given to the spending unit and more authority is given for the program manager to

shift allocations. Also, the current practice is to issue annual regulations on budget revisions

while in order to implement these procedures through SPAN there is a need for some stability

(which would also help managers). The future budget virement process is expected to provide the

spending units more flexibility in managing their budgets and make them more performance

(output/outcome) oriented. The issuance of MoF Regulation No. 49/2011 on virement procedures

is in conformity with the guidelines of PBB and therefore included as a benchmark action in

DPL- 8. DPL-9 will promote implementation of these new procedures through SPAN.

Reform aim: Improve budget and cash management within the central government


Review by DG Treasury of the implementation of the

regulation on cash forecasting and application software,

and recommendations on next steps; and completed

capacity building for Satkers whose total budget covers

at least 70% of total appropriation

Implement cash forecasting processes in pilot

ministries through SPAN

103

DG Treasury has reviewed the implementation of the regulation on cash forecasting and

application software and decided on next steps. In November 2009, MoF issued Regulation

(PMK) No.192/2009 on Cash Forecasting, which was supported by DPL 7. This regulation on

cash planning has been under implementation for more than one year, though compliance by

spending units (in terms of regularly updating their cash plans) is still very limited. This may be

due to the fact that the prescribed procedures are too onerous, or it may be that the sanctions

proposed for non-implementation are not applied by DG Treasury. The IT application for cash

forecasting, called "Aplikasi Forecasting Satker (AFS)", has also already been distributed by DG

Treasury to each Satker. However, a review is needed to ensure that the existing cash planning

procedures will be consistent with the future procedures to-be processed, configured and frozen in

SPAN. A review by DG Treasury on the implementation of both the regulation on forecasting and

the application software is set as a benchmark action for DPL-8 to improve the current regulation,

follow up on this cash plan activity and identify next steps for the implementation of the cash

plan at the Satker level. As for September 2012 (DPL-9), the target will be to implement cash-

forecasting processes through SPAN. This would include the smooth integration between the

Satker application AFS and SPAN, which means that cash plan data (both expenditure and

revenue) submitted by the spending units through AFS should be automatically captured and

processed by SPAN.

At the same time, DG Treasury is conducting a series of events to socialize the

aforementioned new cash-forecasting regulation and its IT applications as part of the

capacity building programs for the spending units. As part of the responsibility to improve the

capacity of Spending Units, DG Treasury is requested to start doing capacity building and

socialization of this cash plan regulation to the Satker whose total budget covers at least 70

percent of total appropriation. The socialization of this cash plan regulation commenced in mid

2010. DG Treasury has already conducted socialization and training to the spending units at four

major locations (Medan, Surabaya, Jakarta and Makassar), which were attended by hundreds of

spending unit staff from those four locations and its surrounding areas. These four locations

already represent more than 50 percent of the total appropriation of the central government

budget. The DPL-8 benchmark action is for capacity building to be completed for Satkers whose

total budget covers at least 70 percent of total appropriations. Ideally, all Satker staff would need

to be trained as well. However, training 22,000 Satker staff throughout the archipelago is

difficult, time-consuming and costly. A realistic target for September 2011 (DPL-8) therefore is

to train staff of Satker whose total budget would cover around 70 percent of total appropriation

and particularly staff in the five biggest spending ministries, as their reliable cash plans would

have a significant impact on the management of cash by DG Treasury. Satkers that would not be

trained would mostly be those that manage smaller budgets, primarily for salary and operational

expenditure. Subsequently, in 2012 cash forecasting processes will be implemented in pilot

ministries through SPAN.


Establishment of Data Center/Disaster Recovery

Center for SPAN (including Establishment of

Collaboration Environment, Cablings, and WAN

related to DC/DRC milestones)

Rollout of SPAN solution for all 177 KPPNs, with

interface to Sistem Aplikasi Keuangan Terpadu

Instansi (SAKTI) for about 22,000 spending units

Completed change management and

communications assessment phase

Implement Change Management &

Communication Strategy

104

The Government has maintained progress in implementing a GFMIS (SPAN), which is

expected to be completed in 2012. The SPAN solution is currently scheduled to be rolled out in

2012, and it will cover all the budget execution functions at the central Treasury and 178 local

Treasury offices. The establishment of a Data Center and Disaster Recovery Center (DC/DRC)

for SPAN are the most recent and visible steps in implementation. It included defining and

designing the facilities, constructing, cabling installation, and the hardware/software/netware

installation. After some delays, the installation certificates were approved in August 2011.

While developing the SPAN solution, the MoF is also developing the new integrated

financial application for spending units, called SAKTI. At the moment, the spending units are

working with many different applications for different purposes and in the future those individual

applications will be redesigned and transformed into an integrated application called SAKTI

(Sistem Aplikasi Keuangan Terpadu Instansi). SAKTI will contain the following modules: (i)

Budget preparation; (ii) Commitments management; (iii) Treasury management; (iv) Payments;

(v) Inventory; (vi) Fixed Assets; (vii) Reporting; and (viii) System Administration. The SAKTI

application will serve as a feeder application to SPAN. The procurement process of selecting the

developer for the SAKTI application was completed in April 2011 and the contractor has been

given 8 months to complete the application. Going forward, since SAKTI will be functioning as

the front end for the SPAN, the rollout of SPAN will include an interface to the SAKTI

application.

To support the implementation of SPAN, the MoF appointed a consultant to support

Change Management and Communications (CMC) activities. There will be four major

working areas of the SPAN-CMC: (i) Change Management, which addresses strategy and plans

for managing key stakeholder groups in DGT, DGB, Bappenas, and pilot ministries and other

stakeholders that may be affected by SPAN implementation; (ii) Communications, which address

the need to manage, engage, and communicate with the MoF employees affected by the proposed

process, system and structural changes; (iii) Organization Design, which addresses the strategic

options for improving the overall operational efficiency and effective human capital utilization in

a post-SPAN implementation environment for the MoF, including addressing the resulting

relocation and retraining needs of the employees; and (iv) Training, which addresses the training

requirements of the MoF and related stakeholders‘ staff, to enable them to operate effectively in a

post-SPAN implementation scenario, including specification of certification programs based on

job role requirements of the post SPAN implementation and guidance on managing the training

service providers.

One of the main activities in communication is the appointment of SPAN ambassadors. The

reason to appoint SPAN ambassadors to ensure equal spread of communication efforts. So far,

SPAN communication is not contextualized to individual needs thus the SPAN ambassadors and

Change Agents will be needed to improve communications, develop solutions to address

individual concerns and communicate these responses to the SPAN project leaders. The selection

of SPAN ambassadors is now underway. Within DG Treasury, a SPAN ambassador will be

appointed in each unit (Directorate, Kanwil, and KPPN) while DG Budget and Pusintek will be

more centralized as they do not have offices in the regions. The SPAN ambassador in each unit

will be the main contact person for any SPAN related questions. In the case that the ambassador

might not resolve the issue or might not be able to answer the question, he/she can seek support

from the SPAN management team. The selection and appointment process of SPAN ambassadors

was completed by end of August 2011.

A Change Readiness Assessment (CRA) is part of the Assessment Phase (DPL-8) of SPAN-

CMC activities. An initial Change Readiness Assessment (CRA) survey for SPAN highlighted

105

staff concerns about the leadership and capacity to implement the new system and about possible

redundancies: these concerns are common for this type of project and the CMC has started a

communications and training program, which will be completed by the end of the third quarter of

FY2011, to start to address these concerns. The CMC is also developing a more comprehensive

Strategy for CMC, to be implemented in the coming year (DPL-9).

The main aspect of change management is developing a training program that addresses the

training requirements of the staff to operate effectively in a post-SPAN implementation

scenario. The training plan identifies the specific requirements of the stakeholder groups based

on a Training Needs Assessment. The plan includes the specific training courses, certifications

and content, target audience, duration and method of training, Key Performance Indicators

(―KPIs‖), and standards for conducting the training, feedback and improvement mechanisms. The

development of this training program design is underway and will be completed by end of third

quarter of FY 2011.

Another area of CMC is to propose a new organizational structure design that addresses

the strategic options for improving the overall operational efficiency and effectiveness for

SPAN, including the resulting relocation and retraining needs of employees. The MoF will

start by doing an assessment on current organization structure, then identifying target skills and

competencies required for various roles and stakeholders in post-SPAN, before finally developing

various options for new organizational structures for MoF in the context of SPAN

implementation, including benefits and risks of each option and identifying the suitable option to

be selected. The design phase of this new organization structure is expected to be completed by

the third quarter of 2011.


Issue new PP and related MoF-regulations on

budget execution as mandated by State Finance

Law

The Government Regulation (PP) on budget execution is the only remaining PP to be issued

to underpin the State Treasury Law of 2004 and the State Finance Law of 2003. While this

action was previously planned for DPL-8, given the need for further consultation and

harmonization with various ministries/agencies, it was agreed to delay this action to DPL-9.

Finalization and issuance of this new regulation is deemed important because the existing

implementing regulation on budget execution is based on the Presidential Decree No. 42/2002

which was issued before the State Finance Law and Treasury Law and is considered no longer

suitable given the current development of the state finance management. The regulation will

cover the detailed guidelines on the implementation of state revenue and expenditure budget. The

new regulation would provide a firmer legal basis for some lower level regulations that have been

issued to help overcome budget spending problems (e.g. Perpres No.53/2010 which regulates on

the appointment of Satker officials or Perpres No.54/2010 that allows advanced procurement) as

well as clarifying the functions and roles and responsibilities of key officials. It could also

provide a firmer legal basis for using SPAN, and the new business process improvements

envisaged under SPAN as well as providing authority to the Ministry of Finance to consolidate

and report on fiscal data for the general government.

In terms of the roles and responsibilities of the state officials who are managing the state

budget, this PP will set a different role between the line ministry as the budget user and the

Finance Minister as the state treasurer. Further, it will also regulate the role of the budget

proxy user, commitment maker, SPM reviewer, and Satker treasurer. One important article is on

106

the appointment of the Spending Unit officials who are no longer bound by the fiscal year. This

would simplify the long process of re-appointing spending unit officials every year which causes

disbursement delay at the beginning of the year.

A team established at DG Treasury has prepared the final draft ready to be circulated to

the other related directorates for comments. To finalize the government regulation, the MoF as

the initiator of the PP is currently taking an active role to develop the inter department team,

obtain the approval of the President, circulate the draft, and socialize the draft for public

(including academicians) comments. Although there is strong support from the higher level

officials in the MoF to finalize the PP as quickly as possible, the coordination needed has resulted

in some delay. In order to finalize the PP by end-2011 (as now expected), the Ministry of Justice

and the State Secretary office will conduct a final review to harmonize the draft PP with the other

existing regulations and arrange meetings with all related ministries/agencies.

Reform aim: Improve provision of IT services


Established the IT shared services unit for the whole of

the MoF (PUSINTEK) and prepare workplan with the list

of proposed 27 new policies and standards that will be

implemented before 2014

Issue the MoF Decrees on Policy and

Standards for ICT governance

During the reorganization of the Ministry of Finance in 2006, a central IT services group,

PUSINTEK was established under the Secretary General MoF. PUSINTEK is expected to

provide ICT services for all MoF Directorates General. It will eventually operate as a fully

demand-driven service provider financed through budget transfers from the client units. The MoF

has used a part of the proceeds of a grant received to support the Government Financial

Management and Revenue Administration Reform Project (GFMRAP), to develop the strategy

for placing PUSINTEK as a provider of ICT services to the MoF with a progressively more

client-oriented approach. The Strategic Plan14

has defined PUSINTEK‘s vision, mission, and

goals as a shared services provider to improve customer satisfaction, extend the types of provided

services, transform human resource management and improve financial management.

PUSINTEK is currently adopting the strategic plan to meet the emerging ICT requirements of the

MoF particularly in the context of the major ICT and business process reform projects being

undertaken by DG Treasury and DG Tax. A benchmark action for DPL-8 is the establishment of

Pusintek as a shared services unit for MoF. There is a need to clarify how and when PUSINTEK

can be fully functioning as a shared service provider for the whole of the MoF. Consistent with

the future direction set by the Finance Minister to integrate ICT within MoF, PUSINTEK will be

well placed to function as a service provider for SPAN and other MoF ICT clients.

As a target of DPL-9 (2012), PUSINTEK also aims to finalize the new strategy for ICT

integration. The adoption of the ICT strategy/blueprint recommendations as the basis for the

development of 27 ICT policies and standards will be continued in stages up to 2014. The key

recommendation in the blue print is for MoF to issue some decrees to formalize the

implementation of the 27 ICT policies and standards in various aspects, for example on: (i) the

policy and standards of SDLC (Systems Development Life Cycle); (ii) ITSM (Information

Technology Service Management); and (iii) Information security management system.

14 Delivered by Multipolar in 2009.

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Reform aim: Strengthen management of state assets


The state asset management information system database

(Modul KN) is fully implemented and connected with

the state asset accounting system (SIMAK-BMN)

A decree empowering the MoF authority to

control the use of state asset issued

The stocktaking and appraisal of state assets, which started in 2007, was completed last

year (DPL-7). However, there are internal and external constraints to continue improving this

exercise. These include: (i) insufficient number of qualified staff to perform registration and

valuation of assets; (ii) lack of proper data on assets; (iii) scattered location of assets; and (iv)

inadequate attention of top management of line ministries/agencies. In addition, many assets are

still registered and valued at Rp. 1.00, not reflecting actual value of assets and lowering total asset

balance in the central government‘s financial report. The re-evaluation of these assets requires the

availability of highly qualified staff and a common understanding on the valuation policy and

method between the auditors (BPK, BPKP and IG).

For 2011 (DPL-8), the DG of Asset Management has completed the development of an

automated asset management system database (Modul Kekayaan Negara/KN), which enables

the Government to monitor, record, and optimize the use of its assets across ministries and

regions. The continued reform agenda reflected in DPL-8 is to complete the connection of the

databases for the state asset information system (Modul KN) with the government accounting

system (SIMAK-BMN). All current acquisition of assets, work-in-progress and inventories will

be recorded through the application software installed in the 70 state wealth and auction service

offices (KPK-NL) across the country. In order to ensure a consistent and valid data to be used for

the preparation of the government financial report, the recording of these assets in the KPK-NL

will be reconciled with the cash transactions pertaining to the acquisition/ construction of assets

recorded in the KPPNs and the liabilities recorded in the books of the Satker.

The full implementation of the state asset management information system database (Modul

KN) and its integration with the state asset accounting system (SIMAK-BMN) will be

important to improve accountability of spending units in managing state assets. Once these

two applications are integrated, and the stock-taking and state assets revaluations efforts

completed, all state assets will be able to be registered, appraised, recorded and depreciated based

on their fair value. This is expected to support the implementation of full accrual accounting and

to improve the future opinion on government financial statements and especially the management

of the government assets given by the external auditor (BPK).

In 2012 and once all government assets have been properly registered, a decree will be

issued to empower the MoF to control the use of state assets (DPL-9). This decree will ensure

the effective use of state assets and also a more efficient budget, for example by transferring idle

assets from one line ministry to another, instead of purchasing new ones.

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Reform aim: Improve public procurement


Completed the strategy and policy for human

resources development for the procurement

function in Government agencies

Draft procurement law submitted to Parliament

The past few years have witnessed improvements in the public procurement environment.

Keppres No.80/2003 provided a national public procurement regulation that meets most of what

is generally regarded as accepted international practice, including basic principles: transparency,

open competition, economy and efficiency. Keppres No. 80/2003 was then replaced by Prepres

No.54/2010, which builds on the same principles and mandates further development of the public

procurement system in the country. Nevertheless, the public procurement system still has

significant deficiencies in its regulatory and, more importantly, implementation aspects. There

has been slow progress in the development of procurement regulations anchored by a law; slow

progress in the development and use of standard tools in terms of bidding documents and users

manuals; collusion and corruption practices in the bidding process, as well as significantly

inefficient compliance mechanisms and sanction measures. However, the most significant

deficiency so far has been the absence of professional procurement management and weakness in

procurement capacity in implementing agencies, especially at the provincial and district levels.

LKPP continues to work on different tracks to reform the public procurement system as described

below, some of which are supported through the DPL series.

Public Procurement Function and Capacity Building

There have been growing concerns, both by the Government and development partners over the

pace of project implementation. The absence of professional procurement management in

implementing agencies, fragmentation of procurement responsibility and weak procurement

capacity are the key impediments to improving public procurement in the country. While Keppres

No. 80/2003 required certification of all procurement committee members, the certification

process did not support the development of procurement capacity; whereas the current ad-hoc

nature of managing procurement does not allow for building sustainable knowledge within

implementing agencies. LKPP has prepared an HRD strategy to professionalize and support the

public procurement sector by developing and facilitating a formalized HRD-based capacity

building process. The main objectives of this strategy are as follow:

a) Coordinated and integrated planning for Human Resource Development;

b) Building professionalism in procurement;

c) Developing adequate facilities for public procurement training;

d) Developing effective training materials in public procurement;

e) Building an effective national network of public procurement trainers;

f) Ensuring that public officials in procurement are properly certified;

g) Undertaking initiatives to be fully responsive in the services and support given to clients;

h) Enhancing the quality of training for officials in public procurement.

These strategic objectives will generate a lot of tasks that will require significant resources. LKPP

has already issued a decree to create procurement service units at all implementing agencies by

2014. It has also started work on developing competency based training material. In summary,

although the full strategy has not been officially and publicly adopted by LKPP, the completion

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of this strategy and acting on some of its components is a move, albeit slow, towards the right

direction.

In the meantime, there are several ongoing activities, though progress remains still slow. LKPP

should focus its resources on implementation of the human resources strategy that could tackle

the challenges in this area and support the development of training institutions in universities and

the private sector. LKPP should also provide support and guidance to the ongoing pilot activities

in establishing procurement teams/units in the MoF, DGH and local governments to ensure

support and success of these pilots. Another important subject this human resources strategy

should address is the approach to strengthen the capacity of the government auditing agencies to

carry procurement audit.

Legislative and Regulatory Framework

Indonesia‘s legal framework for public sector procurement can be strengthened by anchoring it

with an overarching consolidated and comprehensive national public sector procurement law at

the highest level. Such a law would: (i) establish the fundamental principles and procedures

applicable to all public sector procurement; (ii) establish clear responsibilities for a permanent

procurement management function within implementing agencies; (iii) amend other laws that

refer to public sector procurement; and (iv) put in place the necessary legal authority in a

decentralized environment. LKPP has been working on two tracks: the preparation of a new

procurement law and a new presidential decree. LKPP has prepared a draft procurement law and

has carried out a public consultation process that included government agencies and international

development partners. The draft law proposes a broader scope for coverage which includes

concessions and PPP transactions. It states some main principles and proposes to further detail

these through separate implementation decrees. The draft law will still need to go through one

final consultation process with Bappenas before being discussed in the Cabinet. The Bank has

also provided comments and recommendations on the draft, mainly related to the need to ensure

that all the main principles that will govern public procurement in the country are clearly stated in

the law.

Submission of the draft procurement law to Parliament was previously proposed as a DPL-8 prior

action. However, LKPP and the Bank agreed it will not be possible to meet the prior action while

ensuring the adequate changes are introduced and GoI discussions completed on time. It was

therefore agreed that it would be more reasonable to delay this prior action to DPL-9. Current

Presidential Decree No.54/2010 on Public Procurement, which has been effective since January

2011, offers many improvements. These include the mandatory establishment of Procurement

Service Units (ULPs) and the use of e-tendering by 2012, which will be applicable to all


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Reform aim: Improve Government accounting and audit functions


Issued a Presidential Instruction on Government

internal audit systems, which clarifies the roles and


Development of an internal audit strategy based on

the PP 60/2008 and Presidential Instruction on

government internal audit systems

Adoption of a Grand Design for the Implementation of

National Government Internal Control Systems Based on Government Regulation No.60/2008, the

following measures are taken:

1. BPKP completes and socializes a Control Self

Assessment (CSA) manual for the launch of CSAs

by line ministries; 2. Development of (a) code of ethics; (b) audit

standards; and (c) guidelines for peer review

Government Regulation No. 60/2008 has been a cornerstone for government internal control and

audit systems. Through this regulation, the Government has adopted the Committee of

Sponsoring Organization (COSO) as its control framework and also clarified the roles and

responsibilities of various players in the internal audit arena. As required by Article 58 of

Government Regulation No. 60/2008, the Government has issued Presidential Instruction No.

4/2011 on government internal audit systems, which further clarifies the roles and lay out

mechanisms on internal controls and internal audit. Basically, the Inpres clarifies the roles and

responsibilities as follows: (i) the primary responsibility of improving the quality of

accountability rests with the head of line ministries and local governments; (ii) the internal audit

entities within the line ministries and local governments (IGs and local government inspectorates)

are entrusted with the responsibility of making an active contribution to support the management

in playing that role; (iii) in order to expedite implementation of a COSO based framework, BPKP

will provide services to improve the understanding of COSO concepts and their implementation

to line ministries and local governments. Subsequently, an internal audit strategy is expected to be

drawn in 2012 clearly laying out the vision for the future and identifying capacity development

needs.

Regarding the implementation of the government internal control system based on the COSO

model, the first step of developing a strategy for roll out to various ministries and line

departments has already been completed. BPKP is the agency mandated with the task of

facilitating this implementation and has prepared a strategy or ‗Grand Design‘ for implementation

in consultation with other stakeholders. The next step would be launching of Control Self

Assessments by the line ministries.


Issued a Government Regulation on accrual-based

accounting




Issue MoF regulations, adjustments and

socialization of accounting policies and chart

of accounts

Indonesia is moving towards the implementation of accrual-based accounting. The target is to

switch to full accrual accounting by 2015. The draft standards have already been prepared, and

the Government has issued a Government Regulation (No. 71/2010) on accrual-based accounting.

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This marks the achievement of policy consensus among various Government stakeholders on an

accounting framework that would enable the Government to better manage its finances and risks.

Further, the MoF Directorate of Treasury has submitted a draft MoF regulation to the Minister of

Finance detailing the accounting policies and chart of accounts. This prior action represents more

significant achievement that previously envisaged, wherein the original action was to issue a MoF

regulation with only a time line for development of accounting policies and chart of accounts.

However, the submitted MoF regulation is now more comprehensive, representing actual

completion of accounting policies and chart of accounts. Hence, the previously planned MoF

regulation, with only a time line for development of accounting policies and chart of accounts, is

no longer necessary. DPL 9 would support the issuance of this important MoF regulation and its

socialization.

Policy Area 3: Enhancing Poverty Alleviation and Service Delivery

Reform aim: Improve governance and institutional accountability


Draft M&E integration strategy is prepared, based on

consultations with government agencies responsible for

overseeing and implementing poverty reduction programs.

M&E integration strategy and workplan document is

finalized and endorsed by M&E working group

members.

Design document for an integrated management information

system (MIS) is prepared and submitted to the Executive

Secretariat and M&E Working Group members.

Agreements in place between TNP2K Secretariat and

key government agencies to integrate M&E systems

starting with PKH and PNPM (urban and rural)

Integrated MIS established aggregating program

monitoring information.

M&E working group submits a report formulating the

design of a unified grievance and complaint resolution

system to the National Team.

There is a growing concern on the fragmentation and the lack of coordination in the process and

implementation of the national poverty reduction programs. This fragmentation has led to several

problems that undermine the effectiveness of the national poverty reduction framework. To

address these problems, the Government has re-organized institutional arrangements in this policy

area, particularly through the establishment of a National Team for the Acceleration of Poverty

Reduction (Tim Nasional Percepatan Penaggulangan Kemiskinan, TNP2K), through Presidential

Regulation No. 15/2010. The team is supported by an Executive Secretariat, which is responsible

for drafting policies and programs, setting targets, developing a database, carrying out monitoring

and evaluation, conducting analyses and providing technical and administrative support. It is also

responsible for establishing working groups that will act as ―internal think-tanks‖ overseeing

coordination of poverty reduction clusters, a national targeting system, and a system for

monitoring and evaluation. The Executive Secretariat and its working groups play a key role in

defining policies for poverty reduction and social protection, alongside Bappenas, which will lead

a financing team that will be responsible for coordinating and planning financing for the

implementation of poverty reduction programs.

The Executive Secretariat has established a monitoring and evaluation working group that is

responsible for assessing the effectiveness and efficiency of poverty reduction programs through

monitoring and evaluation activities. A plan is being developed to institutionalize an integrated

M&E framework for major poverty reduction programs, focusing initially on the stocktaking of

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M&E designs in PNPM, Program Keluarga Harapan (PKH) and Jamkesmas. An M&E workplan

is being developed through a stocktaking of assessments that have completed to date, and the

PNPM impact evaluation study is currently underway.

The design of an integrated Management Information System (MIS) is being formulated based on

existing systems, to put in place a mechanism wherein the M&E is utilized in policy decision

making. Program performance feedback will also be collected through a unified complaint

resolution framework through which program beneficiaries can file complaints concerning the

delivery of services. The findings from both monitoring and evaluation activities will inform the

decision of the National Team about program mix, scale and budget allocations.

Overall, these M&E actions would support the National Team in its mandate of promoting better

coordination and performance of GoI‘s poverty reduction programs, thereby improving the

overall governance and institutional accountability.

Reform aim: Improve poverty measurements and targeting of the poor



Cluster I poverty programs to use the unified

database.

Program beneficiary lists for priority Cluster 1

programs (PKH and Jamkesmas) are extracted from

the unified database, using eligibility criteria from

the implementing agencies.

Finalization of survey questionnaire, data collection and

standard operating procedures (SOP) for the

implementation of the social assistance household survey

(PPLS11).

A targeting working group, under the TNP2K Secretariat and housed in the Office of the Vice-

President, has been established to design and implement a national targeting system and unified

database, as well as act as the focal point for coordinating targeting actions in Indonesia. This

team has conducted analysis of current targeting practices and optimal targeting design, and

developed plans for establishing a unified (sex-disaggregated) database and the supporting

systems needed for maintaining it within a national targeting system. An agreement would need

to be reached between the targeting working group, central planning agencies such as Bappenas,

and each of the line ministries responsible for implementing the various social assistance

programs that confirms the universal use of the planned national targeting system and unified

database as the primary basis for determining program beneficiaries. As a first step, the TNP2K

Secretariat has been meeting bilaterally with implementing agencies to inform them about the

national targeting system and the benefits that the system offers in terms of improving targeting

performance. Through the Secretariat, TNP2K has issued instructions to implementing agencies

instructing them in the use of the future unified database. It is expected that by 2012, the unified

database will be available and some implementing agencies will be able to start working with the

targeting working group to extract beneficiary lists. This process will begin with programs that

have been identified as priority Cluster I programs: PKH and Jamkesmas.

The unified database will be created using information collected through a social assistance

household survey, which will be used to compile a list of the poorest 40 percent of the population.

The survey is designed and overseen by the Targeting Working Group housed in the Secretariat

of the National Team, while the survey itself is being conducted by Statistics Indonesia (Badan

Pusat Statistik, BPS). The Working Group has prepared a survey questionnaire and standard

operating procedures for the social assistance household survey. Data collection for the survey

was completed in September 2011, which will be followed by data processing. This would

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describe the type of information that needs to be collected in order for the unified database to

support all current and future targeted programs.

Reform aim: Improve household-targeted poverty reduction programs (Cluster 1)





health management information system to the chair of the

National Team.

The Executive Secretariat working group

completes a review of new institutional

arrangements for the delivery of Jamkesmas,

taking into account actuarial cost estimates and

various scenarios for achieving universal health

insurance coverage

A report on the performance of programs providing

scholarships for the poor is prepared by the TNP2K

Secretariat and submitted to the chair of the National Team.


Secretariat that outlines reforms to improve problems

related to the targeting, fragmentation and

disbursement timing of scholarships for poor students.

A report on the performance of the subsidized rice program

(Raskin) is prepared by the TNP2K Secretariat and submitted

to the chair of the National Team.


Secretariat that outlines reforms to improve problems

related to the targeting and amount of rice actually

received by poor households.

The Government is conducting a review of the national health insurance program Jamkesmas, to

inform the broader health financing reform and policy discussion regarding the true costs,

impacts, and financial sustainability/affordability of achieving universal health insurance

coverage. More specifically, the review will: (i) establish a diagnosis of the current situation on

financing, coverage and utilization of the Jamkesmas program; (ii) assess the program‘s financial

sustainability based on the current trend; (iii) assess the program‘s impact on utilization, financial

protection, responsiveness and health gains; and (iv) provide recommendations to improve the

Jamkesmas program as a part of the broader health sector reform. This will be accomplished by

conducting analysis of the budget of the Jamkesmas program, including tracking expenditure at

the provider level, coverage and utilization analysis using household surveys, and selected

qualitative studies on membership.

Concerns have also been raised by the key stakeholders of the Jamkesmas program's financial

sustainability. Early attempts to estimate with precision the level of expenditures were hampered

by lack of detailed data. Over time, with expansion of the program, as well as increased

awareness among beneficiaries about the Jamkesmas program coverage, utilization level has

increased and is expected to increase further, which would lead to additional financing needs. In

order to assess future costs, different cost scenarios including various scenarios of contribution to

premium, with varying benefit packages and eligibility have been developed as inputs to the

policy-making debate. In addition to the development of scenarios, data management systems

would need to be improved to provide reliable data to feed into the scenario development.

The Government is also reviewing the overall scholarship program in Indonesia particularly those

that are related with the poor as part of efforts to improve the scholarship coverage. The

assessment will help the Government to improve the existing scholarship program for students

from poor households to be better targeted. This includes the BSM, scholarship program for poor

students, which is a fragmented collection of tax-financed cash transfers to current public school

students from poor households. BSM programs exist at all public schools across all levels of

education and provide currently enrolled students from poor households with an annual cash

transfer in one lump sum installment. The funds are intended for use on education fees and other

non-fee costs of attending school, such as transportation to school and uniforms, and thereby aim

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to remove barriers to access to education. BSM is actually not a unified program, but rather

consists of 10 independent programs, with implementation responsibilities delineated by type and

level of education. BSM does not have a central coordinating unit and actually consists of 10

largely independent scholarship programs. While the program shows potential, the design and

implementation of the program limits its effectiveness. Attention is needed to pursue reforms to

coordinate the programs and improve their impact.

At the same time the Government is closely examining the performance of Raskin, the subsidized

rice distribution program. Raskin is the longest-serving of the permanent social assistance

programs, which aims to help households fulfill their food needs and reduce their financial

burden through provision of subsidized rice. The program typically accounts for over half of total

expenditures on social assistance, estimated at 54 percent in 2010. There is much room for

improvement in the performance of the program. Although Bulog documents state that almost

enough rice was procured in 2010 (but not in previous years), all the Raskin rice eventually

available on the ground implies slightly less than half of the promised 14 kilograms was available

to eligible households. Further sharing or redistribution (at the village level) to strictly non-

eligible households meant that, targeted households only received between 3 and 4 kilograms.

Given the size of the program, and food security concerns, there is growing interest in reforming

the program in order to improve its ability to protect poor and vulnerable households.

Reform aim: Improve community-based poverty reduction programs (Cluster 2)


PNPM transition strategy: an implementation plan to

establish one single participatory planning exercise for

all actors/sectors at the village level is submitted to the

National Team, including the role of Local Government

with regard to the transfer of the BLM to communities

Continued to strengthen PNPM fiduciary systems

through:

1. Systematic reviews by the internal control unit in

PMD of audit reports and issuance of a quarterly

report to management on implementation of audit

recommendations; and

2. Improved web-based complaints handling

mechanism for PNPM.

Introduce service standards for suspension of

areas with unresolved major complaints.

After a decade of successful experience with community-driven development programs, the

Government created the National Program for Community Empowerment (PNPM). This poverty

alleviation program encourages local communities to participate in the development planning

process and provides financial support to communities to allow direct and transparent funding of

poverty-alleviation activities which they decide upon themselves. PNPM places strong emphasis

on the promotion of women‘s participation in rural areas in particular. PNPM has robust

governance features that result in low levels of leakage and major complaints, helping deliver

high quality, lower-cost infrastructure development. The PNPM‘s governance features build on

twelve years of experience with community development project implementation in the country.

PNPM‘s Multi-donor Trust Fund includes a window dedicated to strengthening government

agencies‘ ability to monitor and oversee PNPM. The program‘s website is one of the most robust

and transparent websites of the Government, providing information about participating villages,

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contracts and a forum for grievances, complaints and the status of their follow up. Additionally,

the Government, through the Office of the Vice President and through the national, multi-

department oversight body for PNPM, Tim Pengendali, has repeatedly made anti-corruption a top

priority for the program.

With the national expansion of the PNPM program, the fiduciary systems that were effective

when the program was working on a smaller scale have come under stress. This is illustrated by a

gradual increase in the number of complaints over the past few years. Both the percentage of total

disbursements for which complaints have been registered (less than 0.2 percent of total

disbursements) and the average size of these cases (about US$2,800 per case) remain small.

Nevertheless, the Government continues to take measures to ensure that the strain on the

fiduciary systems do not translate in an overall degradation of the robustness of PNPM's

governance. Following to the issuance of an action plan in 2010, the internal control unit in PMD

has systematically reviewed audit reports and issued a quarterly report to management on

implementation of audit recommendations, and an improved web-based complaints handling

mechanism for PNPM has been developed (the design of this web-based complaints handling

mechanism took time because the technical issues were more complex than initially envisaged).

In addition, service standards will be introduced in 2012 for suspension of areas with unresolved

major complaints.

Reform aim: Improve MSME-based poverty reduction programs (Cluster 3)


Submitted the final draft of National Strategy of

Financial Inclusion to the Chair of the TNP2K.

Issue the National Strategy of Financial Inclusion

and implement pilot project to provide conditional

cash transfer (Program Keluarga Harapan: PKH)

through bank saving accounts to beneficiaries.

An instruction letter is issued by the CMEA that

outlines a framework for KUR M&E and selection

of indicators; which provide basis for strengthening

monitoring of KUR's performances and evaluation

of its impacts (by the KUR Policy Committee).

Building an inclusive financial sector has gained growing global recognition in international fora,

like G20 and ASEAN, bringing to the fore the need for dedicated development strategies coherent

with the principles for innovative financial inclusion endorsed by the G20 in 2010. The VP

Office/TNP2K, Bank Indonesia, Coordinating Ministry for Economic Affairs (CMEA), Ministry

of Finance and Bappenas are jointly coordinating the efforts for drafting a National Strategy for

Financial Inclusion, with technical assistance of the World Bank. The strategy aims at providing

greater access to finance for everybody, with a particular attention on those who are currently

underserved. This strategy would be part of a broader development approach aimed at fostering

economic growth and contribute to poverty reduction in Indonesia. Key features of the strategy

will be to use the banking sector as backbone for the overall economy; enhance the synergies

between bank and non-bank financial institutions; revitalize the role of cooperatives; promote the

use of technologies and of innovative distribution channels to reach out for a broader consumer

base; provide a wider range of financial services to target different needs; increase the capacity

and awareness of consumers with reference to different financial products; promote a supportive

regulatory environment for an inclusive financial sector. The strategy will rely on a ―graduating

principle‖, aimed at promoting low-income poor to the group of productive poor and in turn

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promote the latter out of poverty, focusing also on two cross-cutting categories, namely migrant-

workers and people living in remote areas.

One key aspect of the National Strategy for Financial Inclusion will be to propose a roadmap,

setting clear milestones and targets for the implementation of the different initiatives in the short,

medium and long term. To this aim, the Government intends to give a clear signal of its

commitment towards the strategy through the immediate implementation of a so-called ―quick-

win initiative‖. This initiative has been identified as the distribution of conditional cash transfers

through bank accounts. In 2007 the GoI launched a conditional cash transfer program (Program

Keluarga Harapan, PKH). PKH assistance is transferred only when families obtain preventive

basic health and nutrition services, and send their children to school. The program has to date

reached around 700,000 poor households and is preparing for further expansion. Through this

―quick-win initiative‖ the GoI plans to open bank accounts for at least 350,000 households/cash

transfer beneficiaries by January 2012, thus promoting a ―savings culture‖ and enhancing access

to finance for a traditionally underserved segment of the population.

The Government is also taking steps to strengthen the People‘s Business Credit (Kredit Usaha

Rakyat, or KUR) program. In a few short years since its establishment in 2007, KUR has grown

into one of the world‘s largest credit guarantee programs for small and micro enterprises. Since

its launch, total KUR accumulative disbursement has grown to Rp. 51.9 trillion (US$ 5.8 billion)

to 5 million borrowers. The Government commissioned an evaluation of the KUR program in

2010, which found that the program had helped in significantly increasing access to credit to

MSMEs and encouraged banks to lend to small enterprises, and especially to micro-enterprises.

Yet despite these achievements, there is significant scope for improving the effectiveness of the

program through operational and policy changes. The Government through the KUR Policy

Committee has taken a number of steps to reform the KUR program. These include, for instance,

an increase in number of participating banks, increase in maximum loan size, extension of loan

tenor, and increased guarantee coverage for four prioritized sectors (agriculture, fishery and

maritime, forestry and small industry). The Government is also promoting the participation of

provincial governments in the implementation of the KUR program, and a framework has been

developed to assist provincial governments in developing work plans and the necessary budget

appropriation. Going forward, an important task is to strengthen the process of assessing results

and impacts of the KUR program, through the development of a framework for regular

monitoring and evaluation.

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Annex 6: Technical Annex on Public Financial Management

I. Background and Analytical Underpinnings

The DPL 8 operation sets out to provide general budget support to the Indonesian Government

and will be executed through the Government‘s public financial management (PFM) systems. In

order to assess the attendant fiduciary risks with respect to the proceeds of this operation, this

annex summarizes the current state of these systems as well as ongoing reform efforts to further

enhance them.

Performance of Indonesia‘s public financial management systems was comprehensively

measured in 2007, when a PEFA assessment was conducted for the first time. Results of this

assessment, as updated in 2008, then reflected a mixed picture of strengths and weaknesses. Key

strengths pertained to transparent and comprehensive budget documentation, a well defined

budget process with both executive and legislative adhering to the schedule, a budget

classification which complied with international standards and a strengthened external audit

function. The first PEFA also highlighted the sound regulatory framework that had been put in

place for almost all PFM areas, the major reorganization that had taken place at the Ministry of

Finance, the advances that had been made in budget preparation, such as instituting a unified

budget. Weaknesses, on the other hand, were identified across some dimensions of budget

execution such as financial reporting, the high variation between budgets and outturns, and

internal controls.

Initial findings from the 2011 PEFA repeat assessment show a marked improvement in budget

controls and reporting. Notably, the 2009 external audit report was the first to achieve a qualified

audit opinion, as opposed to a disclaimer, with around 40% of ministries and agencies achieving

unqualified opinions. Furthermore, the Government has publicly set an ambitious target for

achieving an unqualified audit opinion for all of central government by 2014. The new

assessment confirmed that continuing progress has been made, particularly in the area of budget

execution, with the development of a Treasury Single Account to strengthen the

comprehensiveness and control over spending and cash management. In addition, there have been

improvements in the coverage of fiscal accounts, accounting practices, payroll and internal

controls and fiscal risk management.

However, it was too still early to measure the improvements in some ongoing areas, for example:

the medium-term expenditure framework and performance orientated budgeting have only

recently been introduced and will require considerable refinement over the next few years; there

is an ongoing capacity building effort to strengthen internal and external audit; the computerized

GFMIS (SPAN) that will strengthen financial management capabilities will be rolled out in 2012;

despite the new procurement law and introduction of eprocurement and new disclosure policies

weaknesses remain; and accrual accounting is due to be introduced in 2015. In addition, the

assessment highlighted the ongoing problems of weak spending outturns, particularly for capital,

which perhaps reflects the focus on tightening of expenditure controls and compliance rather than

on delivery and performance.

Many reforms therefore remain a ‗work in progress‘. Nonetheless, both assessments acknowledge

the reform efforts of key stakeholders of the budget process, which have been ongoing since the

political transition in 1998 and especially following the PFM White Paper in 2001. The

Government continues to demonstrate its commitment to the reforms set out in the White Paper,

although the timing and sequencing is continually evolving around the main pillars of the budget

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system to reflect the variable capacity constraints and changing political/policy and economic

priorities. However the main objectives have remained the same, these include: (i) improving the

results-orientation in state budget planning and development; (ii) modernizing budget and

treasury management; (iii) strengthening monitoring and evaluation of public expenditures and

programs; (iv) improving the public procurement systems; (v) improving Government accounting

and audit functions; and, last but not least, (vi) civil service reforms to improve the quality and

performance of the workforce. We are including also reforming: (vii) debt management; (viii)

regional public financial management; as well as (xi) governance and anti-corruption.

The commentaries below draw on recent economic and sector work undertaken by the World

Bank and other development partners. Besides the aforementioned PEFA assessments, we have

taken into consideration the findings of a joint Bank-Fund mission on Strengthening Budget

Management undertaken in June 2008, the results of a previous joint Bank-Fund mission on

Budget Reform Priorities reported to Government in June 2007, the September 2008 update of

the ROSC on Fiscal Transparency in Indonesia from 2006 (IMF Country Report No. 08/298,

Selected Issues; Indonesia). Most recently, insights on latest reform progress were derived from

the EC funded evaluation the PFM Multi-Donor Trust Fund (PFM MDTF) in late 2010, the

GMFRAP support mission in 2011 and ongoing policy dialogue and advisory services that have

been provided through GFMRAP and the PFM MDTF.

II. Reform Priorities: Achievements, Challenges & the Way Ahead

1. Improving Results-Orientation in State Budget Planning and Development

As indicated in the PEFA reports, substantial advances have already been made in Indonesia‘s

budget preparation process since the passing of the Law on State Finances in 2003. The

introduction of a unified budget in 2005, which combined the previously separate recurrent and

development budgets, has had a significant impact on overall budget transparency. The 2008

budget included some important steps towards a more policy based budget by linking budget

allocations more closely with the Government work plan (RKP) — resulting for the first time in

some significant budget reallocations. In addition, the 2008 budget included for the first time

projections for major budget aggregates for two out years following the fiscal year. However, it

remained uncertain what use would be made of these projections, in particular whether they

would be used as reference in setting budget allocations in the years following the budget years.

Generally, more work needs to be done to implement Performance Based Budgeting (PBB) and

the Medium-Term Expenditure Framework (MTEF) in order to ensure that policy orientation and

fiscal sustainability would become an integral part of the Indonesian State Budget, as prescribed

by the Law on State Finances No. 17/ 2003.

The Indonesian Government has maintained a strong reform focus and continued to prioritize the

implementation of PBB and MTEF in budget preparation. It has progressed quite well in this

area: Following the issuance of a joint MoF and Bappenas manual on PBB and MTEF in June

2009 and pilot projects with six line ministries, a major breakthrough for PBB/MTEF

implementation has been the revision of the existing program structure in the Government‘s

planning and budgeting documents that was conducted throughout the second half of 2009. The

new program structure aligns Government programs with organizational structures and

establishes much clearer lines of accountability for program performance. Along with the new

program structure, line ministries have also formulated targets and indicators, which provide a

better basis for evaluating the performance of programs and activities in the coming years, thus

fulfilling a fundamental prerequisite of PBB. The new programs, targets, and indicators have been

incorporated in the RPJM for 2010-14, and implemented in the FY2011 budget.

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The 2011 budget was also the first year of implementing a detailed MTEF process. Ministries

prepared budget estimates for two years following the fiscal year (2012 and 2013) and

incorporated them into the budget documentation presented to Parliament in August (though

Parliament will not be appropriating funds beyond the fiscal year). MoF regulation No. 104/2010

concerning the completion of budget submission or RKA-KL templates for 2011, contains

detailed guidelines for preparing these forward estimates at the level of components. The

Government is aware that this is an exercise that will have to be continued going forward, and the

2012 budget process has refined the process, as described in the DPL indicators, and is

incorporating new elements, such as the definition of the baseline and new initiatives, ensuring

better linkages between planning (RKP) and budget documents (RKA-KL) and improving the use

of the rolling financial estimates.

The Government also recognizes that PBB/MTEF implementation needs to be strengthened

further. For the near term (1 year) there is an ongoing need to improve the quality of program

structures and performance indicators and to fine-tune the existing MTEF and costing system. For

the medium term (2-4 years) the focus of budget reforms should gradually shift towards (i)

developing a PBB-driven Monitoring and Evaluation (M&E) system and related concepts, such

as a concept of how performance information could impact on budget allocations in the future,

(ii) enhancing capacity to conduct a range of modern budget analytical techniques in accordance

with PBB and introducing the appropriate change management and organizational arrangements,

and (iii) strengthening the link between budget and bureaucracy reforms, in particular the link to

performance management—the MoF has introduced strategic performance management based on

the Balanced Scorecard (BSC) performance management tool for all Directorates in the Ministry.

Some BSC indicators correspond with PBB indicators, and, while still at an early stage, the link

between PBB and performance management has the potential to provide stronger managerial

incentives for successful program implementation.) A joint roadmap to address the above points

and to help plan and sequence budget and planning reforms going forward is currently being

developed by the MoF and Bappenas, with assistance from World Bank advisors.

In terms of legislative oversight, the Parliament‘s (DPR) new role in shaping the state budget and

in overseeing budget processes was institutionalized in Law No. 27/2009. According to this law,

two new arrangements were implemented by DPR with regards to budget preparation and

oversight procedures in 2009. Firstly, the former Budget Committee became the Budget Board

(Badan Anggaran) and a permanent entity of DPR responsible for the endorsement of the state

budget. Secondly, the State or Public Finance Accountability Board (Badan Akuntabilitas

Keuangan Negara) was established as a permanent entity of DPR to review audit results of state

financial reports prepared by the State Audit Agency (BPK). Although not mandated in the law,

preliminary planning has started also for the establishment of a Parliamentary Budget Office

(PBO), which is intended to provide support for the implementation of the budget function of

Parliament through providing data, information, analysis and research needed by the members of

Parliament in their discussions of the annual state budget.

On top of these new institutional arrangements, the DPR needs to continue building: (i)

independent support and research capacity to support legislative budget review; (ii) general

capacity development in budget analysis and oversight including familiarity with PBB and

MTEF; and (iii) follow-up of external audit findings to ensure that the executive is held

accountable for transparent and efficient budget execution. Capacity building of the DPR is thus

to remain an important pillar in the reform framework.

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2. Improving Budget and Treasury Management

Though significant advances have been made on the budget preparation side, in-year expenditures

continue to deviate from plan (as highlighted in the PEFA update). This spending pattern is of

concern because project implementation is disrupted by an adverse cycle, and under-spending on

capital expenditure constrains increases in infrastructure investments. However, Indonesia

remains committed to smoothing budget implementation and execution through modernization of

the treasury system.

The Government Regulation (PP) on budget execution is the only remaining PP to be issued to

underpin the State Treasury Law of 2004 and the State Finance Law of 2003. Finalization and

issuance of this new regulation is expected to be finalized by the end of 2011 (DPL9) and is

important because it would provide a firmer legal basis for recent some lower level regulations

that have been issued to help try to overcome budget spending problems (e.g. Perpres #53/2010

which regulates on the appointment of Satker officials, Perpres #54/2010 that allows advanced

procurement, or the annual virement regulation that remains complex) as well as clarifying the

functions and roles and responsibilities of key officials. It could also provide a firmer legal basis

for using the new automated treasury and budget preparation system (Sistem Perbendaharaan dan

Anggaran Negara, or SPAN) and the new business process improvements envisaged under SPAN

as well as providing authority to the Ministry of Finance to consolidate and report on fiscal data

for the general government.

SPAN is expected to be rolled out in 2012. It will replace the multitude of financial data

processing applications currently used by Government institutions. It is a cross-cutting reform

that should increase the timeliness, reliability and transparency of budget disbursement and

reporting as well as improve the capability of managers in the efficient management of public

resources. Business process improvements in the area of budget formulation, budget execution

and accounting have recently been agreed with the business users. The change management and

communication aspects related to the implementation of SPAN are now in place to support

implementation. The SPAN turnkey implementation vendor is continuing to develop the COTS

application software while the new Data Center and Data Recovery Center have been completed.

Nonetheless, challenges for the SPAN implementation remain. These include development of

business processes for managing non-financial performance data, and the strengthening of

PUSINTEK‘s capability to serve as a central ICT services provider for SPAN. The capacity

building needs for implementation activities under SPAN are also considerable, and continued

advisory services to help facilitate the implementation of PFM reforms in general, and SPAN in

particular, will be necessary. Also, there is a recognized priority for building the capacity on

accounting standards, including migration to accrual accounting and related requirements for

training of staff, and audit.

Cash management has improved significantly with the continued implementation of the Treasury

Single Account (TSA), and since 2007 the TSA for expenditure management has been made

operational in all MoF Treasury offices. The TSA system has been extended to cover revenue

collection bank accounts which are now swept daily to the TSA. The MoF and BI have already

signed an agreement providing for payment of interest on government cash balances held in the

TSA with BI. Interest is also collected on cash balances held in petty cash bank accounts of

spending units through a system of ―pooled‖ balances computed daily. However, the periodic

census of government bank accounts continues to report a number of accounts still outside the

coverage of the TSA. The Treasury is taking steps to review and incorporate most of these bank

accounts into the TSA in a phased manner.

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Cash flow forecasting has been rudimentary and the poor quality of cash forecasts is one of the

factors resulting in year-end bunching of expenditures. The accelerated draw down of

government cash balances in December perpetuates wasteful procurement practices and also

impacts monetary policy. To improve cash planning in the spending units and improve cash

forecasting data, the Treasury issued detailed regulations on cash forecasting in November 2009

and rolled out a new IT application to assist spending units in implementing the new regulations

in 2019-2011. Training and socialization for all Satker in the implementation of the new

regulations and software is on-going.

A joint WB-IMF assessment of the GoI‘s Asset and Liabilities Management (ALM) carried out in

mid-2009 indicated that the uncoordinated management of the gross asset-liability portfolio of the

Government and BI could lead to substantial risk to the overall balance sheet. A follow up

mission in late 2010 largely reiterated these conclusions and emphasized that the risks need to be

mitigated through optimization of borrowing and better reserve management.

3. Strengthening Monitoring and Evaluation of Public Expenditures and Programs

To ensure more effective development planning and policy making, an improved capacity to

analyze the efficiency of public spending is essential. Several analytical pieces have been

produced in the last few years, and efforts by Bappenas and the MoF, especially through the

IPEA initiative, to improve the quality of public spending and the delivery of public services

should be further supported. One important aspect going forward will be the development of a

central monitoring and evaluation (M&E) system that would bring together and interlink

government financial and nonfinancial performance information, and so provide a basic

framework and reference tool for more performance-oriented budget analysis and policy-making,

in line with the principles of PBB and MTEF reform.15

Efforts to develop such an M&E system are already underway, and the objective is to have a fully

functioning M&E system in place for the next RPJMN (2015-19). This will require the

establishment of procedures to retrieve performance data and the design of reporting as well as

ensuring that performance data is measurable and of high-quality. Performance information was,

as mentioned above, for the first time developed by all ministries for their respective programs

and activities in the form of outcome and output indicators in 2009 and implemented with both

the RPJMN 2010-14 and FY2011 budget. The quality of this information is being further

reviewed, and a yearly evaluation of the performance information provided by line ministries

should enhance their quality, incrementally over time. A final M&E manual for the line ministries

on how to formulate and report performance information is then, as aligned with the next RPJM

schedule, envisaged for 2013.

The Deputy of Performance Evaluation (DPE) at Bappenas is currently taking the lead on this

agenda and has just recently initiated efforts to review the new performance information and the

development of a reporting system, with one Directorate assigned particularly to the

‗development of overall monitoring evaluation systems and methods of reporting‘. (An M&E

15 Such a system would not only be crucial for PBB and MTEF reform but would also assist the Ministry of State Apparatus Reform in

evaluating the performance and accountability of government institutions, the Special Working Unit of the President (UKP4) by providing a substantive context by which to evaluate achievement of short-term (bimonthly) physical program outputs, and, the

individual line ministries in efforts to improve their programs, activities, and self-assessment of internal monitoring and evaluation

systems.

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counterpart unit at DG Budget of the Ministry of Finance is currently under planning). To this

end, DPE has developed a M&E template to collect information from all line ministries and

agencies regarding the output and outcome indicators specified in the Line Ministry Matrix in

Book II of the RPJMN 2010-14, and more particularly on: (i) budget absorption and achievement

of target indicators; (ii) quality of data sources; and (iii) recommendations regarding priorities for

future evaluations. As mentioned, the launch of this template is the first of a yearly series of

reporting tests to identify difficulties and shortcomings in the reporting on indicators and critical

steps for further improvement of the Government‘s M&E system.

Through a series of workshops the template is being piloted in four ministries — health,

education, agriculture, public works — before it will be socialized to all line ministries at a later

stage. Once the templates are completed, an outside research consulting firm will be procured to

analyze in depth the internal monitoring and evaluation systems in the individual line ministries,

probably starting the end of this year. Detailed next steps of the M&E systems assessment

exercise, including for the coming years (until 2013), will be based on these findings. One of the

more immediate steps, however, will be the revision and streamlining of the regulatory

framework on reporting. This is still fragmented, as it assigns different and, at times overlapping,

roles in monitoring and evaluation to Bappenas, the MoF and MenPAN. Ultimately, the design of

the reporting system as part of the SPAN solution will be another important issue to address.

4. Improving the Public Procurement System

The past few years have witnessed improvements in the public procurement environment.

Keppres No. 80/2003 provided a national public procurement regulation that meets most of what

is generally regarded as accepted international practice, including basic principles: transparency,

open competition, economy and efficiency. Keppres No. 80/2003 also established the basis for

sanctions, complaint-handling and requirements for certification of users. It also abolished several

weak practices such as mandatory prequalification for all types of procurement and requirements

that segregated the national market and provided preferential treatment to local

suppliers/contractors in each province/district. This decree also paved the way for establishing a

regulatory body for public procurement. Perpres No. 106/2007 was signed in December 2007

establishing an independent agency, the Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah

(LKPP) or National Public Procurement Agency , that is responsible for sustainable, integrated,

focused and coordinated planning and development of strategies/policies/regulations associated

with the procurement of goods/works/services using public funds. This institution reports

directly to the President. In addition to the chairman, who heads LKPP, and an executive

secretary, there are four departments, each headed by a deputy with responsibilities for: (i)

strategy and policy development; (ii) monitoring, evaluation and information systems; (iii) human

resources development; and (iv) legal affairs and settlement of objections.

While Keppres No. 80/2003 was a welcome development for the country, the public procurement

system still has significant deficiencies in its regulatory and, more importantly, implementation

aspects. There has been slow progress in the development of procurement regulations anchored

by a law; slow progress in the development and use of standard tools in terms of bidding

documents and users manuals; collusion and corruption practices in the bidding process; and

concerns over the efficiency of the compliant mechanisms and sanction measures are still

significant. However, the most significant deficiency is the absence of professional procurement

management and weakness in procurement capacity in implementing agencies, especially at the

provincial and district levels.

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This is supported by the findings of some analytical tools and reports such as the self-diagnostic

assessment conducted by the GoI in 2007 using the base-line indicators (BLIs) tool developed

under the World Bank and OECD Development Assistance Committee Procurement Round Table

initiative. The assessment of the BLIs presents a ―snapshot‖ comparison of the actual system

against the international standards or the ―model system‖ that the BLIs represent. Baseline bench

marking of Indonesia‘s procurement system in June 2007 showed it scoring 62.5 percent for the

Legislative and Regulatory Framework (PILLAR I), 55 percent for Institutional Framework and

Management Capacity (PILLAR II), 59.3 percent for Procurement Operations and Market

Practices (PILLAR III) and 69 percent for Integrity and Transparency of the Public Procurement

System (PILLAR IV) in comparison with recognized international standards. While the

establishment of LKPP should increase the overall score for Pillar II, the assessment indicates

that there are significant areas that need improvement. The LKPP is currently moving on two

parallel tracks to reform the public procurement system: (i) Legislative and Regulatory

Framework; and (ii) Public Procurement Function and Capacity Building.

Legislative and Regulatory Framework: Indonesia‘s legal framework for public sector

procurement can best be strengthened by anchoring it with an overarching consolidated and

comprehensive national public sector procurement law at the highest level that: (i) establishes the

fundamental principles and procedures applicable to all public sector procurement; (ii) establishes

clear responsibilities for a permanent procurement management function within implementing

agencies; and (iii) amends other laws that refer to public sector procurement and ensures that such

a law has the necessary authority in a decentralized environment. To achieve that, LKPP has been

working on two tracks: the preparation of a new procurement law and a new presidential decree.

LKPP has prepared a draft procurement law and has carried out a public consultation process

which included government agencies and international development partners. The draft law

proposes a broader scope for coverage which includes concessions and PPP transactions. It states

some main principles and proposes to further detail these through separate implementation

decrees. The Bank has also provided comments and recommendations on the draft, mainly

concerning the need to ensure that all the main principles that will govern public procurement in

the country are clearly stated in the law. Given the need for further consultations with various

stakeholders in order to formulate the important issues more carefully, the submission of the draft

law is being delayed into 2012. Nevertheless, the current Presidential decree on public

procurement No. 54/2010 has been effective since January 2011, introducing many

improvements, the two major of which are the mandatory establishment of Procurement Service

Units (ULPs) by 2014 and the use of e-tendering by 2012. This will be applicable to all


To maximize the opportunity for reform when preparing a procurement law, it is important to

take into consideration that a number of laws have been enacted since 2000 that impact, or make

reference to, public procurement. These include construction law, state finance, treasury, audit

and small-scale business. The pace of Indonesia‘s decentralization reforms has impacted public

sector procurement at all levels of government, with ministers, governors, and even mayors able

to issue decrees, regulations and instructions. The plethora of regulations is often inconsistent and

many regulations do not meet accepted international practice. Consequently the need for national

procurement policies and standards are critical.

Historically, there are no national standard bidding documents that are used regularly by all

government agencies in the country. Some implementing agencies (such as the Ministry of Public

Works) have developed standard bidding documents for their own use. NPPO (the predecessor of

LKPP) has drafted and piloted seven National Model (Standard) Bidding Documents to cover

main types of procurement. LKPP is now updating these documents and producing other samples.

The use of these documents is still not mandatory and they are being used on a pilot basis. With

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the support of a trust fund from the MDTF-PFM, LKPP is planning to review these documents to

make them consistent with the new Perpres as well as to increase harmonization with the standard

bidding documents of International Development Partners such as the World Bank, ADB and

JICA.

Public Procurement Function and Capacity Building: There has been growing concerns, both

by the Government and the Development Partners over the pace of projects implementation.

Significant delays and slow disbursement seem to occur throughout the entire PFM cycle.

Projects reported delays and difficulties in budget preparation and approval, budget execution,

and implementation/procurement. Specifically, there are concerns with the organization of the

procurement management function as well as the capacity of procurement committee members.

While Keppres No. 80/2003 required certification of all procurement committee members, the

certification process by itself did not support the development of procurement capacity; while

the current ad-hoc nature of managing procurement does not allow for building sustainable

knowledge within implementing agencies.

The LKPP has completed a human resources development (HRD) strategy to professionalize and

support the public procurement sector by developing and facilitating a competency based capacity

building process and creation of professional and dedicated cadre. The strategy identified the

following challenges which resonate with concerns raised by stakeholders: (i) Overall low

capacity among officials in handling public procurement responsibilities, in compliance with

Perpres 54 and other relevant procurement legislation adopted and used by other public agencies;

(ii) The large number of public entities that currently undertake procurement operations, and the

difficulties encountered in reaching, serving and supporting all of them; (iii) Lack of consistency

and uniformity in structures and approaches to public procurement activities; (iv) The ad hoc and

part-time nature of procurement assignments in the public service, which prevents any career

progression and retards the overall development of the field of public in procurement; (v) Lack of

geographic representativity in the availability of trainers;(vi) Current procurement training is

limited to Perpres 54, and does not include training on the broad principles and practice of

procurement, or on the other procurement laws or guidelines that adopted in other Ministries and

agencies; (vii) There is a wide range of entities involved in procurement training, but they are not

yet governed by a set of standards to preserve quality and consistency in delivery; (viii) Lack of a

rational, well considered and selective approach to the identification of officials that are ready to

undertake procurement training and take the certification exams, resulting in a high failure rate;

(ix) High cost of providing procurement training to officials over longer periods, resulting in

inadequate training period; (x) Lack of training and specialization in procurement in higher

education.

In response, the goals of LKPP HR strategy are the following:

Strategic Goal 1: Coordinated and integrated planning for Human Resource Development

Strategic Goal 2: Building professionalism in procurement

Strategic Goal 3: Developing adequate facilities for public procurement training

Strategic Goal 4: Developing effective training materials in public procurement

Strategic Goal 5: Build an effective national network of public procurement trainers

Strategic Goal 6: Ensure that public officials in procurement are properly certified

Strategic Goal 7: Undertake initiatives to be fully responsive in the services and support given to

clients

Strategic Goal 8: Enhance the quality of training for officials in public procurement

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These strategic objectives will generate lots of tasks that will require significant resources. LKPP

has already issued a decree to create procurement service units at all implementing agencies by

2014. It has also started work on developing competency based training material. In summary,

even though the full strategy has not been officially and publicly adopted by LKPP, the

completion of this strategy and acting on some of its components is a move, albeit slow, in the

right direction

In the meantime, there are several ongoing activities to improve procurement management in

implementing agencies. The Directorate General of Highways (DGH) in MoPW has established a

procurement team to support overall procurement in the DGH. MoF has already established a

procurement function with an Echelon II level manager which is a significant precedent in the

country. At the local governments‘ level, there are some ongoing activities as around nine

provincial governments and 130 local government/municipalities has already established ULPs

with varying role and function. Some of these activities have been supported by the World Bank-

funded local governments‘ projects (ILGRIP and USDRP) as well as other development partners.

So far, there are several initiatives on this area but progress is still slow. The absence of

professional procurement management in implementing agencies, fragmentation of procurement

responsibility and weak procurement capacity are the most important impediments to improving

public procurement in the country. LKPP should focus its resources on implementation of the

human resources strategy that could tackle the challenges in this area and support the

development of training institutions in universities and private sector. LKPP should also provide

support and guidance to the ongoing pilot activities in establishing procurement teams/units in

MoF, DGH and local governments to ensure support and success of these pilots. Another

important subject this human resources strategy should address is the approach to strengthen the

capacity of the Government auditing agencies to carry procurement audit.

Corruption, sanctions and independent appeals mechanism: Despite improvements in the

public procurement system, concerns remain over corrupt and collusive practices. While

addressing this requires an overall governance strategy (as addressed further below), there are

several important elements in the procurement system that can support such a strategy, for

example an independent complaints mechanism, an effective sanctions mechanism, and

improving transparency in the procurement process through the use of e-procurement.

Perpres 54/2010 requires the establishment of a complaints handling mechanism. However, this

is not set up independently but within each implementing agency. While it is imperative to

develop procedures for an independent complaints handling mechanism, LKPP should avoid

becoming the agency to which these complaints are addressed but rather develop a system and

monitor its efficiency and reliability. The sanctions mechanism is operated by each implementing

agency, in accordance with Perpres 54/2010 requirements. There is no clarity on the effectiveness

of this system, which warrants an assessment to be conducted by LKPP on the effectiveness of

the current sanctions mechanisms and possible improvements in the implementation process.

E-procurement: The Ministry of Public Works, Ministry of Communications and Information

and the City of Surabaya have all been at the forefront in the development of e-Government

Procurement (e-GP) technology. The LKPP is currently taking the lead on the implementation of

e-GP in Indonesia at a national and sub-national level. With the requirement for all procurement

to be done electronically by 2012, there has been rapid increase in the number of provinces and

local governments using e-procurement. Most recent data indicate that around 31 provincial

governments and 380 local governments have introduced e-procurement. However the volume of

procurement carried through the system and up to which phase the system is used ( i.e. bids

announcement, bids distribution, bids submission etc…) also varies by location. As for MoPW ,

their system seems to be a more comprehensive and centralized one In 2011, it has handled most

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of all planned procurement activities for 2011, with a total of 12,000 contracts and 30,000

registered bidders. The increased use of e-procurement can be a good measure to increase

transparency and efficiency in the procurement process. However, it will also be critical for

government agencies to agree on a roadmap for the development of e-GP in the country, setting

the roles of the different stakeholders, and the responsibility for ensuring minimum inter-

operability and core data standards for the various e-GP providers to comply with.

5. Improving Government Accounting and Audit Functions

Accounting and Reporting on Budget Execution

BPK has given a ‗qualified‘ opinion on government financial statements for 2010. This is the

second successive year that government annual financial statements have received a ‗qualified‘

opinion after a ‗disclaimer‘ status in the previous five years. The major qualifications in the audit

report relate to mismatch between budget classifications and the realizations, problems in assets

management and under-recording of pension funds. BPK also identified some key internal

control weaknesses in the Government‘s functioning.

There has also been an improvement in the number of line ministries receiving favorable opinions

from the external auditors. The number of line ministries with clean opinion has increased and

number of ministries with disclaimers has come down.

Capacity constraints in the line ministries are the biggest challenge. The number of trained

accountants in line ministries and sub national governments is low, and the quality of their work

needs improvement. DG Treasury has a proposal to carry out a needs assessment of accountants

in line ministries and also assess the pipeline of accountants that are coming out of universities to

draw a blue print of how the accounting capacity in the line ministries will be strengthened in the

long term. Human resource issues remain the most critical aspect of the accounting function in

the country and MOF needs to pay close attention to training and capacity building of accounting

staff throughout the country.

The annual financial statements are prepared on an accrual basis and there is a plan to move to

full accrual accounting for line ministries and sub-national governments by 2015. The accounting

standards for accrual accounting have already been prepared and a Government regulation on

these has been issued. Draft accounting policies and chart of accounts have been prepared and

under review. The pilot implementation is expected to start in 2013.

Internal Controls and Internal Audit

Key reform priorities in the area of internal control and internal audit therefore are: (a) roll out of

SPAN; (b) implementation of the COSO control framework and (c) rationalization and

strengthening of internal audit function of the GoI.

As mentioned already above, the SPAN turnkey provider has commenced work on configuring

the COTS application software and roll out is targeted for 2012. The new business processes

being configured in SPAN are expected to strengthen internal controls by introducing a formal

commitment control system in the line ministries, ensuring adherence to the budget ceilings,

reducing the time lags in processing payments and budget revisions, and maintaining electronic

trails of all modifications to source data. However, the limited capacity in the MoF and other line

ministries, and ownership of the program by the business owner are key challenges. To address

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this, the PFM team in the Bank is closely engaged in the process. In addition, a communications

and change management consultant is helping the MoF deal with human resources challenges

through the transition.

Through Government Regulation (PP) No. 60/2008, the GoI has adopted COSO as its internal

control framework. The regulation embraces the core principles of the COSO framework in a

comprehensive manner but key challenge lie in the implementation of the framework. The GoI

regulation entrusts BPKP with the role of designing the internal control implementation, by

providing guidance and training to the line ministries on COSO implementation. BPKP has

prepared an ambitious road map for COSO implementation. In FY 2009 and 2010, PP 60/2008

has been socialized to 28 Ministries/ Government Institution, 87 vertical institutions and 345 local

governments. Training has already been conducted in 16 ministries and 105 local governments.

Diagnostic assessment is also currently underway in 13 ministries and 50 local governments.

On internal audit, the quality of audit by Inspector Generals (IGs) in line ministries and in local

government inspectorates remains sub-optimal with little focus on risk-based audit. A recent

mapping process on the capacity of the government internal audit function in Indonesia based on

the Internal Audit Capability Model (IA-CM) developed by the IIA revealed that 93% (25 IGs

and 237 local government inspectorates) of the respondents (i) conducted transactional audits for

accuracy and compliance purposes only; (ii) audit plans were not prepared based on stakeholder

priorities; and (iii) audit output was based on the capacity of certain individuals

Lack of trained and skilled auditors and scale of the country with local government inspectorate

auditors in over 500 locations makes the task of reforming the internal audit function in the

country really challenging. It is important that a central agency assumes the role of coordination

of internal audit function in the country. Presidential instructions (INPRES 4) regulating

government internal audit systems as required by Article 58 of Government Regulation No. 60/

2008 have been issued. The next step is preparation of a strategy for internal audit expected in

2012. Meanwhile, some of the IGs in line ministries, including the MoF and the MPW, have

embarked on a significant modernization of their functions. The IGs of both the MoF and the

MPW have adopted a risk-based approach to internal audit and are engaged in a review of

technical skills of their staff and technical guidance available to them.

External Audit

After a peer review for BPK conducted by the Dutch Court of Auditors in 2009 pointed out that

BPK had made major strides in its mandate, capacity and practices in the last five years, BPK has

continued to maintain that momentum. There has been a significant growth in the budget, the

number of staff and the number of regional offices.16

The report also identified some areas for

improvement, mainly the need to improve the readability of audit reports and the quality of

analysis in the audit. However, the peer review concluded that BPK was on the right track and

had made major improvements in its functioning in the last five years.

BPK has prepared a new strategic plan for the 2011-15. The new strategic plan reflects both

lessons from the peer review and the vision of the new BPK Board. BPK has also prepared a

detailed implementation plan to support the execution of the strategic plan.

16 The number of BPK staff has risen from 2,854 in 2004 to 5,556 in 2009. The annual budget for FY10 is Rp 2.02 trillion compared

with Rp 234 billion in 2004.

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BPK performs financial, performance, and special purpose audits. The audits are undertaken in

accordance with State Finance Auditing Standards (SPKN) which are stipulated in BPK

regulation No.1/2007. SPKN contains professional requirements for auditors, audit quality audit

reports, and is binding on BPK and institutions that conduct state finance audits for or on behalf

of BPK. These standards are generally in line with international standards and have been applied.

BPK has bilateral arrangements with many other SAIs that have helped BPK in procuring

specialized skills in many areas. Its arrangement with NAO Australia, for instance, has helped

BPK in acquiring technical skills in the area of performance audit. The Dutch and Norwegian

SAIs are also actively supporting BPK.

BPK has been able to submit the audited financial statements within 5 months of the end of the

fiscal year for the past five years. BPK also submits interim audit reports to the Parliament every

six months.

6. Civil Service Reform

In late 2006, the Ministry of Finance initiated the Bureaucracy Reform Initiative (BRI). Through

this initiative it has focused on reforming organizational structures and standard operating

procedures (SOP), and on reforming HRM policies and practices to adhere to the established

reform objectives: (i) to create a clean, professional and accountable state apparatus; and (ii) to

create an efficient and effective bureaucracy so as to provide high quality public services.

Ministerial Decree No. 30/KMK.01/2007 outlines the reforms in detail. A key element of the BRI

has been to increase staff pay through an additional allowance, a budget allocation for which is

approved annually by Parliament.17

The BRI has led to many important outcomes in the MoF: professional quality of new staff has

improved and accountability is better enforced including strengthened work discipline; corruption

has decreased in spite of backlashes within DG Customs and within DG Tax; performance of

staff has improved and key performance indicators have been introduced at the level of Echelon 1

units including signed performance contracts for the responsible managers; and service delivery

has been simplified and speeded up within DG‘s with client relations. Below are some of the

most important achievements:

Some 8,000 SOPs have been revised to improve efficiency and to minimize direct non-

transparent interaction between MoF officials and members of the public.

Almost 20,000 job descriptions have been revised to better reflect professional requirements,

job responsibilities and complexities.

A new grading scheme has been introduced on top of the general grading scheme (17 grades)

linked to the reformed job descriptions and allocating positions to one of 27 additional

grades.

A new allowance, linked to the new additional grades, has increased take-home pay for MoF

officials considerably.

17 Note: The BRI was deemed so crucial that when approving the extra allocation for the first time in 2006, the Parliament decided to

expand the BRI to the State Audit Institution (BPK) and the Supreme Court on a pilot basis. In 2007, the National committee for Bureaucracy Reform was set up to coordinate reforms among institutions and provisions were included in Law No. 17/2007 on Long

and Mid-Term Planning mandating all 73 central government institutions to implement BRI before the end of 2011 in support of

which MenPAN has issued regulations and voluminous guidelines related to the reform process.

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Performance based management has been introduced and KPIs have been defined to the level

of echelon 1 while the cascading down to lower levels is still ongoing.

Recruitment criteria and processes have been significantly improved and today the MoF only

recruits PNS candidates that have gone through STAN.

An Assessment Centre has been created and a large network of assessors established.

A selection process for promotion based on internally announced vacancies, voluntary

applications and competitive selection based on merit has been piloted.

Competency based training is more and more replacing structural training.

Improved Human Resources Information System (HRIS) is under development.

Permanent Project Management Units have been established in DG Tax and in DG Treasury.

In April 2009, the Minister of Finance announced the second chapter of BR, with the human

capital development and information system for human resources as key priorities. In connection

with previous reforms, other issues also materialized and more areas were identified as targets for

reforms for the second chapter, such as an inherent redundancy created by overstaffing and low

quality of some staff.

More broadly, the Government has commenced the process of implementing an agency by

agency reform, guided by an overarching policy framework set out in a Grand Design for

Bureaucracy Reform (BR)for 2010–2025 along with a Road Map for 2010–2014 that were

eventually approved in December 2010. The management structure and processes governing the

reform consist of a multi-layered inter-ministerial management structure under the Vice

President‘s office. It includes a Steering Committee, the National BR Team (NBRT), the National

BR Management Unit (NBRMU), a quality control entity (QA Team) and an advisory entity

(Independent Team).

Reform proposals of ministries and agencies (K/Ls) are vetted in this system through a complex

process. The format and substance of proposals should reflect the orientation set out in the 9

guidance ‗books‘, approved in January 2011, that provide implementation guidelines for

bureaucracy reform and summarize critical aspects of the reform. As of mid-2011 16

Ministries/Institutions (K/Ls), including the MoF have been approved and have obtained

Performance Allowances (2008-2011). This removes the ‗exceptional‘ nature of these reforms in

the MoF, which required annual re-approval by the DPR.

However, while this process has formalized the substantive requirements of K/Ls for participating

in the reform program, it has two overall weaknesses. First, it does not provide a sufficient basis

for a ‗reward and punishment‘ model that would ensure the transformation of agencies. Second, it

does not address the systemic regulatory constraints that handicap reform-minded agencies from

achieving their objectives. Nonetheless, the Government are working on these constraints, and a

new civil service law has been proposed by the DPR.

It is important to continue the reform process within the MoF. In line with existing policies and

plans, and building on the progress achieved so far, the MoF is pursuing the second chapter of

reforms, which includes inter alia:

Strengthening the corporate values to support enhanced professionalism, integrity and

accountability;

Continuing the professionalization of jobs and the competence based training policy;

Professionalizing HR functions and providing opportunities for professional certification for

HR staff (for example staff in DG Taxes HR department achieved high-levels of HR

certification in 2010);

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Strengthening professional career paths and reform rotation practices to support

professionalization, capacity building and career management;

Working towards an open recruitment policy which would strengthen professionalization and

allow a greater professional mobility;

Pursuing the development of talent management system to identify and prepare future

leaders;

Decentralizing HRM activities to levels where they would be most efficiently executed

including necessary supporting restructuring;

Improving the new grading system and reform the allowance distribution;

Finalize the HRIS in combination with separate HRIS in the big DGs (DG Tax is due to start

its development in 2011); and

Prepare policies and proposals for right-sizing allowing more radical restructuring policies.

7. Debt Management

During the previous DPL series, two major initiatives in debt management were implemented: A

clear debt management strategy, which was publicly announced and a newly created DG for

Public Debt Management (DGDM), with a risk management oversight function for both domestic

and external debts. A new debt strategy for 2010-14 was published in 201018

. By 2010, the

Government debt-to-GDP ratio had declined to below 30 percent from the peak of over 90

percent in 1999, with only a minimal increase through the exchange rate volatility and stimulus

spending associated with the global financial crisis.

The positive developments in terms of debt sustainability and institutional reforms have been

replicated to a lesser extent in the Government's institutional capacity to manage public debts. In

particular, great advances have been made in 2009 and 2010 in the quality of the Government‘s

domestic and external debt reporting, with the MoF and Bank Indonesia now issuing a joint

publication, inconsistencies between official Indonesian and external sources being reconciled,

and the World Bank reviewing with a view to upgrading its rating of the quality of Indonesian

official Government and external debt statistics.

8. Reforming Regional Public Financial Management

Decentralization has provided sub-national governments with significant resources and

responsibilities. More than one-third of overall public spending is now executed by sub-national

governments. This level of expenditure requires an adequate regulatory framework, together with

sufficient PFM capacity at the sub-national level if it is to be fully effective. In order to address

this, in 2005 the central Government passed comprehensive legislation on PFM reforms at the

sub-national level, with the aim of mirroring reforms already being implemented at the center.

However, the results have been limited due to lack of technical and human resources that most

regions have to implement the reforms. For example, sub-national governments are obliged by

law to report certain fiscal and financial information to the central Government within a clear

timeframe. In reality, many sub-national governments struggle to meet their deadlines for

submission even though the number of such submissions has been decreasing.

Current budget allocation and disbursement practices contribute to fiscal discipline at the central

level but they constrain successful financial management at the local level. Allocations to

individual sub-national government units are formally issued after the passage of the central

18

See: www.dmo.or.id

http://www.dmo.or.id/

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Government budget in October prior to the fiscal year in question and commence through

derivative regulations (e.g., ministerial decrees). While this may appear to allow sufficient time

for sub-national governments to finalize their budgets, in reality budget allocations of shared non-

tax revenue (oil and gas) are frequently issued close to the beginning, or first few months, of the

fiscal year. The notional allocations are frequently underestimated by the central Government and

disbursements from the center to the regions are back-loaded towards the end of the fiscal year.

This is because the transfers in the final quarter are based on actual revenues, which are usually

higher than projected revenues.

Sub-national governments are struggling to spend their increasing budgets and have built up

reserves in recent years for three main reasons. First, sub-national governments often

underestimate their revenues due to lack of revenue-management capacity, compounded by the

under-budgeting of transfers by the central Government. Second, the issuance of budget

allocations (especially allocation for shared non-tax revenue), combined with sub-national

government‘s lack of revenue-management capacity, in particular in estimating potential own

source revenue (PAD), often resulted in low quality planning where budget projections are based

on previous year allocation. Hence, in many cases, there are significant revisions in the regional

budget adjustment (APBD Perubahan). Third, delays in the budget approval process and lack of

implementation capacity result in under-spending of budgeted programs by sub-national

governments. Fourth, sub-national governments may not have the capacity to spend the resources

at their disposal when these resources increase significantly and abruptly. This was the case with

the 64 percent increase in DAU from 2005 to 2006, which led to a significant increase in sub-

national government reserves.

Some challenges in addressing the constraints in PFM at the sub-national level include: (i)

providing timely estimates from the sectoral ministries of revenue-sharing transfers; (ii) building

the capacity of sub-national Governments to better estimate their fiscal resources and manage

accumulated reserves; and (iii) improving and streamlining the budget approval process. The

need to streamline the budget approval process in particular affects Law No. 33/2004, which

stipulates that provincial and district budgets must be approved by the Ministry of Home Affairs

and the provincial government, respectively. This process may be one factor contributing towards

lengthening the budget approval process.

In order to address the financial management issues and challenges at the sub-national level, the

central Government has implemented several reforms:

Burden-sharing policy

Introduced in 2009, this policy incorporates major subsidies, including fuel subsidies, into the

DAU pool allocation. The policy will increase the accuracy of transfer projections during the full

fiscal year, given that there is a disincentive for the central Government to under-estimate the oil

price assumption, especially in relation to regional transfers. A more rational oil price assumption

will lead to better estimates of revenue-sharing which, in turn, will help sub-national governments

to better plan their budgets.

Two actions are needed to optimize this policy. First, the central Government should establish a

system to regularly monitor quarterly revenue-sharing transfers, as stipulated in Law No.

33/2004. Second, the central Government, through the relevant agencies, needs to improve

production estimates for revenue-sharing, especially if back-loaded transfers at the end of the

fiscal year persist.

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Late budget approval sanctions

Starting from 2008, the Government has applied sanctions to improve the budget approval

process. Based on Government Regulation (PP) No. 56/2005 and MoF Decree No. 46/2006

regarding the Regional Financial Information System, provincial and district governments have to

submit their annual budgets to the MoF before 31 January of the corresponding fiscal year. Sub-

national governments that miss the deadline by at least one month will receive a warning letter to

submit their budget before 31 March. If a sub-national government has not submitted its budget

by that date, the MoF, in coordination with the MoHA, can sanction the sub-national government

by postponing the transfer of its DAU (25 percent of monthly transfers) until the budget is

submitted.

This sanction initiative has resulted in more timely budget submissions. Between 2006 and 2007,

54 percent of sub-national governments approved their budgets after March. In 2008, the year the

sanction was introduced, 87 percent of sub-national government submitted their budgets to the

MoF before March. If the Government wishes to ensure the effectiveness of this reform, the MoF

should continue to monitor sub-national government budget submissions.

The MoF can also assist sub-national governments in managing reserves and surpluses by

strengthening the regulatory framework for sub-national financial management. In doing so, the

MoF should develop guidelines for regions on the accumulation and use of reserves. These

guidelines should help sub-national governments use their reserves more effectively, for example,

by: (i) settling outstanding arrears, given that about 85 percent of sub-national governments in

arrears could clear these arrears by drawing on reserves; and (ii) where sub-national governments

have constant or increasingly high levels of reserves, using them to increase investment in public

infrastructure.

9. Governance and Anti-Corruption

The public has expressed a strong demand for more accountable government, as indicated in the

re-election of the incumbent Government for its strong anti-corruption platform. Shortly

following the reelection, the President responded by creating a special unit called UKP4

(Presidential Working Unit for Supervision and Management of Development), chaired by the

highly respected Kuntoro Mangkusubroto, to reduce bottlenecks — including governance related

issues — in management and development and to expedite delivery of government programs.

Among its priorities is the acceleration of civil service and tax reforms, and processes are already

underway to deliver on this mandate. The Law on Access to Public Information is passed and

declared effective, and the public is hopeful that the provisions of the law will bring about more

transparent and accountable services.

Under the new Corruption Court law, the Special Anti Corruption Court is now created in seven

provinces under the auspices of the Supreme Court, with the plan to replicate it in all provinces

and then districts. This is taking place despite a 2006 Constitutional Court ruling, according to

which the Special Court — previously trying cases investigated and prosecuted by the Anti-

Corruption Commission (KPK) — was considered unconstitutional since it was seen as creating a

dual criminal justice process for corruption cases. The Special Court has thereby maintained its

original composition — with ad hoc judges in the judicial panels - and will try all corruption

cases prosecuted by public prosecutors or from the KPK. This however, raises a different

concern: The Supreme Court has to recruit and train highly qualified ad hoc judges designated in

the 7 locations, and there is a fear that the lack of quality in resources may affect the credibility of

the Special Court.

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In terms of corruption investigation, the pace had been slow. Following the public row between

the Indonesian National Police (INP) and the KPK over the authority of performing some

investigatory authorities, high profile investigations have been stalled. Two KPK commissioners

were arrested by the INP for ‗abuse of power‘, and the KPK was left with a serious gap in

leadership, which drove the President to step in and appoint temporary commissioners. A

Presidential team, called ‗Team 8‘ was established to examine the case and decided that the

allegations were not substantiated. Then, at the request of the two Commissioners, the

Constitutional Court ordered the playing of a set of recordings of taped phone conversations,

which revealed that the case charged against the two Commissioners was engineered.

The Constitutional Court session, however, revealed a more profound problem: judicial

corruption. A high profile special task force (‗Judicial Mafia Eradication Task Force) was

therefore created under the President to identify issues, coordinate and recommend solutions. As

an immediate result, some corruption was uncovered within the prison authority. Some judicial

mafia practices also were uncovered in the INP and Attorney General‘s Office, and reforms are

underway for some judicial institutions, though many are questioning the effectiveness of the task

force. The KPK, with the restoration of its two commissioners, is now picking up the pace by

investigating high profile cases in the Ministry of Health and Social Affairs. Also, it arrested a

judge and a lawyer engaged in bribery. The Government also started to strengthen the KPK by

completing the selection process for the new Chair of the KPK. With the new Chair elected for a

four year term, the public is hopeful that the KPK will reassert its proactive fight against

corruption. Selection process for the other 4 KPK Commissioners is also underway, with some

promising figures known for personal integrity and anti corruption activism advancing to the final

stage of selection by the parliament.

The Constitutional Court, on the other hand, has demonstrated its strong role in resolving political

disputes — which is critical particularly in the disputes laden with money politics at the time of

local elections. There is a strong public expectation that the rulings may reduce the practice of

election rigging in local elections.

Last but not least, institutional reform increases its outreach and intensity. Taxation office reform

is in place, following the prosecution of a tax officer, and some ministries (such as Ministry of

National Education and Ministry of Public Works) are developing ways of improving institutional

accountability. Local governments have made their own initiatives and set examples for good

governance practices.

As the Government has demonstrated its commitment to fight against corruption and to promote

reform, the success of its strategy depends on a combination of both strong enforcement and

rigorous institutional reform. With the creation of a high profile Presidential unit and task force,

serious efforts have to be made to ensure that reforms are sustainable beyond the terms of the ad

hoc unit and task force and that recommendations made by the two are effectively applied.

III. Key Areas for Future Attention

In sum, for the period ahead, the following will be key areas for attention and monitoring for

Indonesian PFM:

Maintaining the coherence and momentum in PFM reforms;

Deepening the reforms of the central government budgetary systems to strengthen policy

orientation and medium term planning in budget preparation with a particular focus on

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improving the quality of performance data, fine-tuning the existing MTEF and costing system

and developing a PBB/MTEF based M&E system;

Ensuring greater integrity and more effective management of public funds through further

extension and fine-tuning of the TSA, increasing the quality of cash management, concluding

the review of the chart of accounts and related business processes and strengthening

PUSINTEK as the shared IT services provider;

Enhancing the Government‘s budget analysis capacity, primarily by developing a

consolidated M&E system that integrates financial and non-financial data in accordance with

PBB principles and streamlines and consolidates information of the complex M&E

environment;

Improving the public procurement system by developing a consistent legal framework

through anchoring it in an overarching and consolidated national procurement law that

regulates all principles and responsibilities in public procurement, by building the

procurement management function as well as the capacity of procurement committee

members based on a comprehensive human resources development strategy, and by

improving transparency in the procurement process, for example, through the development of

a national e-procurement system;

Ensuring relevant and reliable financial reporting by strengthening human resources in

government accounting and reporting, especially at the line ministry level and especially with

regards to accrual accounting;

Strengthening the internal audit function in the country by rolling out the treasury payment

system as planned, implementing the COSO framework, conducting capacity building for

government inspectorate auditors, especially with a view to risk-based audit, and identifying

an agency to assume coordination of the internal audit function;

Detailing and implementing BPK‘s strategic plan 2011-1015 for improving the quality of

external audit reports;

Continuing civil service reform in the MoF in the context of the second chapter of the

national bureaucracy reform initiative;

Implementing the new debt management strategy and maintaining the quality of debt

reporting

Addressing constraints in PFM at the sub-national level by (i) providing timely estimates

from the sectoral ministries of revenue-sharing transfers; (ii) building the capacity of sub-

national governments to better estimate their fiscal resources and manage accumulated

reserves; and (iii) improving and streamlining the budget approval process;

Developing a coherent and well-focused strategy for corruption prevention within the state

administration and ensuring its sustainability beyond the terms of the ad hoc task force.

All these reforms are being actively considered by the Government, and, as indicated further

above, implementation plans are either being developed by the Government or implementation is

already underway. The capacity to centrally monitor these and other reforms has already been

established at the Secretary-General‘s office of the MoF (PUSHAKA). However, Indonesia

would benefit from a coherent reform plan or strategy to ensure proper phasing and coordination

of PFM reforms. This would also allow for enhanced monitoring and accountability within the

GoI and thus provide additional momentum and direction to reform efforts. As an interim step,

the PFM MDTF Annual PFM Strategy Note, a document drafted yearly to guide and inform the

management and execution of activities of the PFM Multi-Donor Trust Fund, was presented by

the Minister of Finance to senior management and all donors working in this area (not just

contributing donors) at the 2011 Policy Advisory Committee. The Minister also elaborated his

plans to develop an Institutional Transformation Strategy and roadmap that would constitute a

more comprehensive and official Government strategy.

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Management of Foreign Exchange

The foreign exchange control environment is assessed to be generally satisfactory. The country is

no longer subject to the Extended Arrangement from the IMF. Bank Indonesia (BI) was last

subject to the transitional procedures under the Fund‘s safeguards assessment policy in 2002.

That assessment recommended remedial action to address a number of vulnerabilities in the audit

arrangements of BI. The main recommendations have been implemented, including the

establishment of an independent audit committee at BI and the publication of BI‘s audited

financial statements. Audited financial statements for BI for 2009 by BPK contain an unqualified

opinion.

IV. Conclusion

In recent years, Indonesia has made significant strides in the way its public finances are managed

and in increasing transparency and independent oversight. In almost all areas of PFM, changes in

the legal and regulatory architecture are now largely complete and the momentum has shifted

towards implementation of new PFM practices. Advances have been made in budget preparation

with the introduction of MTEF and PBB, government accounting standards have been formally

established and are being adhered to in several respects to produce comprehensive annual

financial statements, and the external audit function has made significant progress in the last few

years. However, internal controls in the execution of budget by spending agencies need

improvement. A Government Financial Management Information System (GFMIS) to provide

information for budget management at all levels of government is expected to be rolled out in

2012, while weak controls in budget execution processes have the potential of jeopardizing gains

from reforms introduced in other areas of PFM.

However, weaknesses in financial management and accountability continue to be gradually

addressed through the PFM reform program discussed above, and development partners are

actively engaged in this process. Also, key elements of the reforms are supported by the DPL

prior actions, as well as the GFMRAP project and other initiatives supported by development

partners. Much remains to be done, and it will take time to realize the full impact of these

reforms. But the trajectory of reform is in the right direction, and, most importantly, the

Government continues to demonstrate high commitment in completing the planned reforms. The

reforms when implemented will further reduce the level of fiduciary risks. Taking this into

consideration, the Bank assessment team does not propose putting in place any additional

fiduciary arrangements for this operation.

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Annex 7: Environmental and Social Review

A.1. Overview of Environmental Issues in Indonesia19

In 2009, the World Bank published a Country Environmental Analysis for Indonesia. The

document provides an overview understanding of environmental issues, with an emphasis on

climate change as a key cross cutting issue. The CEA also discusses costs of environmental

degradation, governance and constituency building as key challenges.

Overview. Environmental management remains a challenge for Indonesia. Over the past decade,

many aspects of environmental management and natural resource management have been

decentralized to the local level. Natural resource management and environmental quality are now

more dependent on local leadership, institutional capacity and willingness to conform to national

standards and regulations. The current picture across Indonesia is mixed, with some regions

demonstrating commitment to sustainability, while others are opting for exploitation with short-

term gains. Greater local control has had positive aspects through reputational programs, greater

political will, interagency collaboration, community empowerment, and integration of

environment in spatial planning. At the same time, decentralization has revealed obstacles to

good environmental management, including: inadequate standards and enforcement; distorted

incentives; lack of community empowerment; and insufficient local government implementation

and enforcement capacity. Also, awareness about the expected negative environmental impacts

of unmanaged and exploitative development and the mechanisms for stakeholders to hold

government agencies accountable for their performance are weak. Environmental considerations

have only been integrated weakly into planning and programming processes, especially in the

area of public investment and in regional plans for land and resource use.

Environmental Damage Costs. Inadequate environmental management and growth without

attention to environmental outcomes and costs – poses a challenge for Indonesia that hurts the

poor and the economy. Significant economic losses are also caused by other types of

environmental degradation, especially deforestation, soil depletion, and coastal/marine

degradation. Inadequate water and sanitation constitute the largest short-term cost to the

Indonesian economy, estimated at more than $6 billion in 2005 or more than 2 percent of GDP.

The health impacts of outdoor and indoor air pollution have been estimated at $4.6 billion per

year or about 1.6 percent of GNI. In total, environmental degradation costs are likely to grow in

the future and are currently on par with the average annual growth rate. These costs are

disproportionately borne by the poor who are more vulnerable, more exposed and less able to

cope with the impacts of pollution and resource degradation. Climate change has the potential to

exacerbate these impacts and costs. The economic consequences of climate change represent the

highest potential cost to Indonesia‘s economy in the long term, amounting to annual losses of

between 2.5 and 7.0 percent of GDP by the end of the century.

19 This analysis draws on the following documents: World Bank (2009). Investing in a More Sustainable

Indonesia: Country Environmental Analysis. BAPPENAS (2007) Indonesia Country Natural Resource

Environmental Analysis. Jakarta. World Bank (2007). Towards an Efficient Fuel Products Market in

Indonesia: Achieving an Equitable and Sustainable Policy. World Bank (2006), Sustaining Economic

Growth, Rural Livelihoods, and Environmental Benefits: Strategic Options for Forest Assistance in

Indonesia. Ministry of Environment (2008), State of the Environment Report. ADB (2009), Regional

Review of the Economics of Climate Change, Manila.

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Environmental Spending. Indonesia‘s spending for environmental purposes was low for the

decade prior to 2006, but has begun to increase substantially in recent years. Environmental

revenue collection has been low and natural resources have been under-valued. Fuel and

electricity subsidies enhance over-consumption, burden the budget and benefit higher income

groups, while making it difficult for renewable energy sources to compete. Legal and financial

incentive structures have not been very effective in curbing illegal logging, but recent changes in

the deforestation rate show some progress and the GOI is taking steps toward a REDD+ initiative

(see below). Policy distortions in fishing and mining have contributed to unsustainable

harvesting patterns and illegal mining activities. Conflicting sector-based regulations and national

laws, including those involving decentralization, contribute to the weak implementation.

Ministry of Environment and Ministry of Finance are now developing the capacity and tools for

wider application of environmental fiscal reform to address these distortions through the use of

taxation and pricing instruments to raise revenues, but also to provide incentives for more

sustainable behavior.

REDD+. Reducing Emissions from Deforestation and Forest Degradation (REDD+) is an

international initiative for providing incentives to developing countries for reducing GHG

emissions by lowering the rate of deforestation and degradation of forests, as well as undertaking

reforestation and sustainable forest management efforts. REDD+ is a means of generating

additional revenue from its forest sector while also making a global contribution to mitigating

greenhouse gas emissions and curbing deforestation rates. In May 2010, Indonesia agreed with

the Government of Norway on a performance-based, policy-linked initiative for accelerating

action on REDD+. A two-year moratorium for new forest licensing is one concrete outcome of

this process. The GOI is taking a range of actions to advance the REDD+ initiative and working

with a range of development partners on both policy actions and REDD+ demonstration activities

in the field. Norway, AUSAID, GIZ, UK-AID, USAID, JICA, UN Agencies and others are

contributing to REDD+ development efforts. The GOI is using the Climate Change Development

Policy Loan (CCDPL) series – in partnership with JICA, AFD, World Bank and ADB – to

prioritize policy milestones on forestry, energy, adaptation and institutional development. The

GOI is also seeking support from several multi-donor climate finance initiatives involving the

World Bank, including the Forest Carbon Partnership Facility (FCPF), the Forest Investment

Program (FIP). The GOI participates in the governance of these instruments, with representation

on the FIP and FCPF governing bodies. The World Bank provides policy and analytical support

also through its own resources, as well as from PROFOR and other bilateral support.

Environmental Constituency. In terms of public awareness and constituencies for

improvement, environmental issues are on the radar of the Indonesian population, especially

issues concerning water (pollution, floods, and droughts), urban issues (cleanliness, solid waste,

and air quality) and forests (degradation, illegal logging, and fires). The GOI has policies,

investments and programs for these public priorities, but their persistence as public concerns is

one indicator that they have not been adequately addressed. In addition, the GOI is pursuing

actions in areas (e.g., climate change, coastal and marine resources, biodiversity, clean energy,

and hazardous wastes), that are not yet fully understood or appreciated by the general public,

indicating a low level of public awareness. The large differences on the level and quality of

public participation and environmental awareness can be attributed to institutional and policy

constraints, the need for a more responsive bureaucracy that is willing to engage in a constructive

dialogue with civil society on policy and development initiatives, and ability to access funding

and information. Promoting public participation and increasing awareness – especially among

mass media, civil society organizations, the legislature, and religious organizations – are essential

for any partnership that seeks to build effective demand for environmental sustainability.

138

Environmental Laws and Sectoral Issues.

There is an impressive set of laws, policies, programs, and national as well as local institutions

that are responsible for environmental and natural resource management. In recent years, the

GOI has upgraded the legal framework for environmental management and has made

improvements in regulations, capacity, and assessments. The GOI also has important initiatives

to restrain utilities‘ pollution, reduce smoke and haze from forest and land fires, rehabilitate

forests and degraded lands, improve environmental management through the spatial planning

process, and develop environmental data and information.

Environmental Management Law. In 2009, the GOI passed Law No. 32/2009 on Environmental

Protection and Management. Under this law, the AMDAL (Analisis Mengenai Dampak

Lingkungan) process – the assessment of proposed activities with significant anticipated impact

on the environment - has become a recognized instrument to measure environmental pollution

and degradation. Under the Environment Law, both AMDALs and management and monitoring

plans are required for the awarding of the environmental permits – now as prerequisites for

development activity permits (e.g., mining, building, and industrial permits). The law placed

AMDAL in a stronger position as one of the instruments for minimizing pollution and

environmental degradation. The law requires completion of the impact assessment and

preparation of an environmental management and monitoring plan as part of the business

licensing and environmental permit process. In addition, the law also includes provisions for

licensing of AMDAL commissions, certification requirements for compilers and sanctions for

non-compliance with the process. Indonesia has decentralized responsibility for environmental

impact assessment. All 33 provincial governments and 55 percent of kabupaten/kota governments

have AMDAL commissions.

Solid Waste Management Law. In 2008, the GOI passed Law No. 18 2008 on Municipal Solid

Waste Management to heighten attention on this issue and to improve the requirements and

incentives for local governments to improve performance. Only half of Indonesia‘s solid waste is

actually collected, up to a fifth properly disposed, and less than two percent is treated (recycled or

composted). With decentralization, local governments have acquired more responsibility in

planning and implementing solid waste management programs. About 85% of small cities and

more than 50% of medium cities dispose of their waste in open dumps. The 2008 law aims to

reduce the generation of solid waste by encouraging communities to ―reduce, reuse, recycle‖, and

to improve the handling of solid waste through improved separation of types of waste and

processing prior to final treatment. The law also requires municipalities to upgrade solid waste

handling facilities, including landfills. The Ministry of Public Works also plays a role in

improving solid waste management and has issued the Strategic Plan for development of solid

waste management (road map for waste sector) to support sub-national governments to improve

the infrastructure facilities to manage municipal solid waste.

Air Pollution. As noted, air quality contributes to environmental costs through health losses. Air

pollution control has not received attention and funding at the level warranted by the very large,

and well-documented health consequences. The GOI has banned leaded fuel and announced some

steps toward reducing petroleum fuel subsidies, which will help to improve air quality. However,

efforts to manage air quality are hampered by weak enforcement capacity, the rapid growth in

vehicle use and ownership, and a lack of mass transportation options, as well as cross

jurisdictional coordination among institutions at local level. A national air quality strategy was

developed with ADB in 2006. Emissions regulations are unevenly enforced. Capacity for long-

term maintenance and calibration of air quality equipment is a major limitation of the existing

monitoring system.

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Water Pollution. Poor performance of local water utilities (PDAMs) has contributed to excessive

reliance on private wells, and excessive groundwater extraction and subsidence in parts of

Indonesia. Low rates of sewerage and sanitation coverage cause widespread contamination of

surface and groundwater. As a result, Indonesia has experienced repeated local epidemics of

gastrointestinal infections and has the highest incidence of typhoid in Asia. Economic losses

attributable to poor sanitation are conservatively estimated at 2% of GDP. To improve firms'

compliance with environmental standards, the GOI has been trying to complement command-

and-control regulations with public disclosure tools, e.g. PROPER, which has had significant

success in the firms where it has been applied. Water quality in many rivers is not regularly

monitored. In addition, where water quality is monitored and sites are monitored weekly and

daily, results are only reported monthly and/or yearly. There is no mechanism to incorporate

monitored data in a timely manner, into rehabilitation schemes.

Fisheries. The GOI passed a Fisheries Law in 2007. The President launched a 6 country Coral

Triangle Initiative (CTI) in 2008. The World Oceans Conference in Manado in 2009 focused

attention on marine and coastal issues. The GOI is implementing the Coral Reef Rehabilitation

and Management Program phase II (COREMAP II), which can be one of the key programs under

CTI. The program has the objective to help establish viable reef management systems involving

coastal communities to sustainably co-manage the use of coral reefs and associated ecosystem

resources. It is generally recognized that Indonesia's coastal and marine fishery resources are

over harvested and threatened. This can be attributed to excess fishing, due to inadequate zoning,

licensing, weak regulations and enforcement, and low awareness. Illegal fishing practices, such

as trawling, are still widely practiced.

Biodiversity and Protected Areas. Although Indonesia has a well-designed and biogeographically

representative protected area system, there are gaps, especially with coastal and freshwater

ecosystems. Some large areas of marine national parks have been gazetted or proposed in recent

years and the GOI launched the CTI. Improvements have occurred allowing for the appointment

of senior managers to head the largest national parks. New protected areas have been established

but some are still in a proposed and/or declared status due to the long process of demarcating

forest boundaries; and there are still unresolved overlapping and conflicting claims to lands

within protected areas. The Heart of Borneo, REDD+ and HCVF initiatives have gathered

significant support for increasing sustainable land use management and ecosystems protection.

The recent regulation from the Ministry of Forestry on ecosystem restoration concessions

allowing restoration of expired forestry concessions for development of ecosystem services holds

promise and is being pursued by several developers. The GOI participated in meetings,

workshops and summits related to tiger conservation in 2010 and has developed a National Tiger

Recovery Program as a part of a global effort with other Tiger Range States. There is some

tension between local governments and conservation goals under the decentralization system, as

national parks do not contribute to land taxes or local revenues. Ecotourism and payments for

environmental services do not generate sufficient revenues to offset losses in tax revenue from

resource exploitation. Park entry fees are officially set at a uniform national level and below the

price of a bottle of water. A review suggests that integrated conservation and development

projects (ICDPs) in parks and buffer zones have provided very limited development opportunities

to local communities.

Extractive Industries Transparency. In May 2010, the President signed a regulation establishing

Extractive Industries Transparency Initiative (EITI) in Indonesia (Presidential Regulation

26/2010 on Transparency of National and Local Extractive Industry Revenues). Key features

include multi-level governance and oversight to provide high-level accountability; an

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Implementing Team with public and private representatives to make operational decisions; and

industry and civil society representation. The regulation requires the central government to

specify how much oil, gas, mineral and coal revenue it has conveyed to each local government,

while each local government must specify how much it has received.

A.2 . Overview of poverty and social issues in Indonesia

This section reviews the current snapshot and trends of poverty and general welfare situation in

Indonesia over the past five to ten years period. It presents some changes in the poverty

indicators, major aspects of social development, and employment. It is conceivable that climate

change have a negative impact on poverty and social development. Shifting in cropping seasons,

shrinking of arable land, changing in the water balance will all have impacts on agricultural

productivity and farmer‘s income. Warming in the sea temperature and its impact on the reef

ecosystem will reduce marine resource productivity and put more challenge to increasing income

of the fisher folks. On the policy side, because of those potential impacts, climate change

policies, whether it is related to mitigation or adaptation, must look into their impacts on poverty

and social development.

A.2.1. Poverty Reduction

Higher levels of economic growth have not translated, to the extent hoped for, into greater

poverty reduction. Much of the population remains in poverty or vulnerable to it.

Until recently, high rates of economic growth have been slow to be reflected in poverty

reduction. Though poverty rates fell quickly from 1997-98 crisis levels, progress until recently

has been slow and higher rates of growth had not translated to faster poverty reduction. With the

exception of 2006, when the poverty rate jumped sharply in response to the increase in fuel

prices, poverty gradually declined in Indonesia after the crisis until 2007, when it had fallen

below pre-crisis levels. The rate of decline had been disappointing in the context of stronger

growth. GDP growth averaged 7 percent annually between 1990 and 1996, with a four

percentage point reduction in poverty. By contrast, between 2003 and 2007, poverty had fallen

by only one percentage point with growth averaging over 5 percent per year. However, poverty

has since fallen by over two percentage points in the last two years, to 14.2 percent by early 2009.

It remains to be seen what effect the 2008-09 global economic crisis has had.

In addition, much of the population remains vulnerable to poverty. Nearly half of

Indonesia‘s population in 2007 could reasonably be considered ―near poor‖ or poor, with per-

capita consumption levels less than a third above the national poverty line. These households are

vulnerable to myriad aggregate and idiosyncratic shocks such as food price increases or

employment and health shocks that can drive them into poverty. Although 41 percent of the poor

households escaped poverty between 2003 and 2004, over one-third of non-poor households fell

into poverty, highlighting the fluid nature of poverty and the depth of household vulnerability in

Indonesia.

An analysis of the impacts of policies to help mitigate the climate change through a series of

simulation exercises on a dynamic inter-regional Computable General Equilibrium Model has

returned the following indicative results: (1) Programs to reduce deforestation with some

compensation (i.e. REDD scheme) is likely to result in poverty reduction provided that the price

of the carbon has to be significant enough (close to US$ 20/ton) and the government distribute

the compensation income mostly to rural areas . With the pattern of business ownership

concentrated in Jakarta, the government will need to be careful with inter-regional transfer and its

141

impact in the welfare of people in the off Java rural areas; (2) the reduction of fuel subsidy is

likely to reduce poverty (as most of the subsidy is currently enjoyed by the rich) provided that the

government ensures redistribution of the proceed for the most needy through a direct targeted

subsidy; (3) the shifts toward renewable source of energy in the power generation sector will also

likely reduce subsidy possibly due to the new and expanding activities of the renewable sector.

A.2.2. Human Development Outcomes

Human development outcomes continue to be uneven despite significant increases in public

expenditures.

Indonesia‘s human development outcomes are uneven and lag others in the region. Because

of geographic and income-related disparities and differences in the quality of health, water and

sanitation and education service delivery at the local level, Indonesia‘s performance in terms of

human development outcomes has been quite uneven over the last decade. Over that period,

there has been little improvement in some indicators and, in the case of a few, there has even been

some regression. As a result Indonesia lags behind its neighbors in a number of areas and is

unlikely to achieve several of its health-related MDGs. In particular, the country has made very

little headway in reducing maternal mortality (420 per 100,000 births is high given Indonesia‘s

income level), reducing child malnutrition (which has remained at around 25 percent in the last

few years), and in addressing geographic and income-related health disparities.

National averages for health indicators mask significant geographic and income-related

inequalities within the country. In poorer provinces, such as Gorontalo and West Nusa

Tenggara, the infant and child mortality rates are four to five times higher than those in richer

provinces such as Bali and Yogyakarta. Health indicators for the poor are also far worse than

those for the rich: child mortality rates among the poorest quintile in 2003 were 3.5 times the rate

among the richest quintiles (World Bank, 2008a).

Behind the impressive increase in enrollment rates at the national level, wide regional and

systemic differences remain. Indonesia tends to lag behind other lower middle income countries

in early childhood education and higher education, with gross enrollment rates of 21 percent and

17 percent respectively. In addition, while the enrollment gap between males and females and

across income groups has been reduced – especially at the primary education level – striking

inequalities remain across income groups at the pre-school, junior secondary and senior

secondary levels. Indonesia also scores poorly and lags behind in student learning in

international assessments, indicating that the quality of education remains a concern.

Access to water supply services in Indonesia is among the lowest in the region. Provision of

piped water services is inadequate. The percentage of the urban population served by piped water

had reached 40 percent by 1997 but declined to 31 percent in 2005; the national average is only

17 percent. Access to improved water has declined from 90 percent in 1995 to 87 percent. The

environmental consequences of access through large-scale use of private unregulated wells are

high. Land subsidence, higher costs of reaching drinkable well water and proximity to septic

tanks pose high environmental and health risks. The high incidence of water-borne diseases

disproportionately affects the poor. Climate change is predicted to lead to some water shortage in

some areas and thus exacerbate the difficulty in clean water provision to the community.

Sanitation coverage in Indonesia is well below the average for South-East Asian countries,

being 55 percent compared to 67 percent in 2006. Network sewerage coverage, estimated at 1.3

percent, is one of the lowest in Asia. Sanitation coverage has increased nationwide by 9

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percentage points since 1990 but, on current trends, Indonesia will fall short of the MDG

sanitation target of 73 percent by 10 percentage points, or about 25 million people. Over 96

percent of human waste is not treated prior to disposal while the manner in which private

sanitation systems (including septic tanks) are managed and operated frequently risks

contamination of ground and surface water.

Environmental degradation contributes to high economic and social costs. High

deforestation rates contribute to decreasing water quality, soil fertility and land productivity as

well as increasing water shortages, fires and haze, health impacts, downstream siltation and

flooding. Moreover, because a fifth of Indonesians live in government-administered ―forest

zone‖ (which may lack trees), they are vulnerable to shifts in policies and land use claims, which

can result in conflicts and increasing pressure on state assets and budgets. Fisheries resources

that provide the main source of livelihood for fishing communities are also declining throughout

the country; fishing communities have nearly twice the poverty rate as the national average and

are vulnerable to loss of fisheries habitat, climate change and rising fuel prices. Indonesia‘s

environmental conditions impose significant economic costs (Bappenas, 2007). The health and

other economic costs attributable to water pollution and limited access to safe water and

sanitation are estimated to have been US$ 6.3 billion in 2006 (2 percent of GDP). The annual

costs of air pollution to the Indonesian economy have been calculated at around US$ 400 million

per year. These costs are disproportionately borne by the poor because they are more likely to be

exposed to pollution and less likely to be able to afford mitigation measures. As climate change –

without proper adaptation – will likely intensify environmental degradation in both terrestrial and

marine biomes, it will also increase the threat to food security and of vector-borne diseases.

A.2.3. Employment

Despite recent signs of progress, Indonesia lags behind its more prosperous neighbors in

producing higher value-added non-agricultural jobs.

Employment growth has failed to match population growth since the crisis and job creation

in the formal sector has been especially sluggish. Between 1999 and 2003, the percentage of

the Indonesian workforce employed in the formal sector fell from 43 percent to 35 percent. There

are signs of a recovery since then but the employment rate in the formal sector is still below what

it was prior to the crisis. The open unemployment rate, which was 8.1 percent in 2001, rose

further to 11.2 percent in 2005 before falling to 9.1 percent in 2007. This trend is mostly driven

by youth aged 15 to 24, who have consistently made up over half of the unemployed and

currently have an unemployment rate of 25 percent. Unemployment is especially high – roughly

33 percent – among young people under the age of 25 with high school and college degrees. In

addition, real median wages, after growing rapidly from 1999 to 2003, have since stagnated.

Increasing numbers of workers were pushed into agriculture after the crisis; in 2008, over

40 percent of Indonesia‘s labor force still derives its livelihood from low-productivity

activities in agriculture and related areas. During the post-crisis recovery period, increasing

numbers of workers were pushed into agriculture and by 2003, agricultural employment had

returned to 1991 levels. Most of the increase in agricultural employment came at the expense of

the service sector, a driver of pre-crisis expansion. Non-agricultural employment resumed

growing rapidly between 2003 and 2006 and agricultural employment fell to its lowest level since

1997. Despite this growth, just 30 percent of the labor force is employed in high-value added

activities in manufacturing and services. Indonesia‘s agricultural productivity has been low with

just half the average productivity of the services sector and one-eighth of the productivity of

industry. There have been no signs of productivity improvement despite the recent falling share

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of the labor force engaged in agricultural employment. In 2008, over 40 percent of Indonesia‘s

labor force still derives its livelihood from low-productivity activities in agriculture and related

areas. Indonesia is not keeping up with its neighbors in moving workers out of agriculture and

progress has stagnated. Vietnam has a high share of agricultural employment but it is falling

quickly as the country‘s share of industrial employment is increasing and will soon surpass

Indonesia. Thailand has already surpassed Indonesia and workers are continuing to move off the

farm while Malaysia‘s share of agriculture workers remains stable and very low.

In the future, the labor absorbing capacity of the agricultural sector, including fishery, is predicted

to be lower due to decreases in productivity of the biomes induced by the climate change.

Shrinking agricultural lands and degradation of coral reef system due to temperature rise will lead

to declining productivity, hence employment opportunities in these sectors. Women and female-

headed households are a higher share of Indonesia‘s poor and are more susceptible to negative

shocks from natural disasters, economic downturns, or climate induced impacts.

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Annex 7 Table 1

Environmental/Social Review of

DPL8 POLICY PROGRAM

09/23/2011

POLICY AREA 1: Improving the Investment Climate Environmental/Social Review (OP 8.60 review of ―likelihood of significant effects ‖)

No. Policy sub-area Impact20

Potential negative effects and government

mitigation capacity Potential positive impacts

1.1. Improving the regulatory environment for investment

1. BKPM prepared and submitted to Menko a report which reviews

implementation of the Presidential Regulation on DNI and provides

recommendations for strengthening and updates where necessary.

Blue No likelihood of significant negative social or

environmental effects.

2. Issued a revised Presidential Decree and Ministerial Decrees to

strengthen and revitalize PEPI Team‘s roles and functions, including the

arrangements for ongoing public-private consultation on trade and

investments.



3. Continued implementation of SPIPISE by:

1. Mapping business licenses to develop business process of SPIPISE

for 2 additional sectors (i.e. Agriculture and Health Sectors), and

2. Integration of approval and licenses between BKPM, 33 provinces

and 40 municipal PTSPs and data exchange between 3 sector (i.e.

Trade, Tourism, Industry) licenses



1.2. Reducing the tax burden and improving tax administration

4. Establishment of the foundation for comprehensive bureaucracy

reform through formal endorsement and publication of the

medium-term DG Tax HR Strategic Plan (HRSP).



Improved tax recovery and

revenue input provides more

resources for GOI development

programs.

5. Issued improved Standard Operating Procedures for tax objection

and appeals.


environmental effects. See above.

1.3. Enhancing trade facilitation and promoting exports

6. Developed standard operating procedures within the INSW

for regular private sector consultative meetings on INSW

implementation issues, and started holding the meetings.



20

Grading adapted from Assessing the Environmental, Forest, and Other Natural Resource Aspects of Development Policy Lending – A World Bank Toolkit (2008): Red – Very

Likely Negative Impact; Yellow- Potential for Negative Impact; Blue – No Impact; Green – Positive Impact.

145

7. Developed work plans for the phased implementation of

Single Sign On procedure for two key agencies of INSW:

BPOM and Customs.



8. Developed a system and submit reports to the Coordinating

Ministry of Economic Affairs, Ministry of Finance and Ministry

of Transportation on import container dwell time in Tanjung

Priok port, measured from ship berthing to gate-out; and make

the dwell time public



Improved trade should create

more jobs in the sector.

9. Linked remaining export licenses under MoT to INSW and

implement in 5 major ports.



10. Ministry of Trade issued a Ministerial Decree establishing a

team to formulate Non-Tariff Measures under the Ministry of Trade,

with clear standard operating procedures for the issuance of Non-

Tariff Measures.



1.4. Improving Connectivity

11. Issued a Presidential Regulation, a Ministerial Regulation and

two Ministerial Decrees that put in place institutional

mechanisms to enhance connectivity in Indonesia.

Blue

The issuance of a Presidential Decree and

Ministerial Decree on the National Logistics

Blueprint which aims to improve transparency and

coordination among ministries and agencies is not

likely to have negative environmental effects..

Institutional mechanisms (such

as a working team for

connectivity) and a Secretariat to

support the Master Plan should

improve coordination and better

planning and management of the

connectivity agenda as well.

12. Improved Port management through the following actions:

1. Starting the operation of the Customs Advanced Trade

System (CATS) in the Cikarang dry port;

2. Improving the efficiency in the port of Jakarta, as measured

by analysis of dwell time;

3. Establishment of Port Authorities in the four major ports of

Indonesia (Jakarta, Surabaya, Medan and Makassar); and

4. Submitted a report to the Coordinating Ministry for

Economic Affairs on the evaluation of 24/7 services in the

ports of Jakarta, Semarang, Surabaya, Medan and Makassar,

to identify the main bottlenecks in running those services

efficiently and propose actions to strengthen the 24/7 running

models in the port;

Green No negative environmental or social effects

foreseen from improving the efficiency of the ports

by introducing ―dry port‖ services or establishment

of Port Authorities.

Reducing congestion and

improving traffic flow would

have positive effects by reducing

idling time of trucks waiting for

port entry, reducing particulate

and CO2 emissions.

Establishment of Port Authorities

improves oversight and should

correlate with smaller risk for

accidents resulting in

environmental impacts (oil spills

from collisions, emptying septic

tanks in ports etc).

146

POLICY AREA 2: Strengthening public financial management (OP 8.60 review of ―likelihood of significant effects ‖)

No. Policy sub-area Impact Potential negative effects and government

mitigation capacity

Potential positive impacts

2.1. Strengthening budget formulation and M&E systems

13. Based Ministry/Agency Budget and Work Plans (RKA-K/L) for 2012

on Government Regulation (No. 90/2010) , as evidenced by:

1. Separate treatment of baselines and new initiatives in the budget

submission document following new guidelines on RKA-K/L

2. A manual for line ministries on formulation of new initiatives,

which enables a review of rationale and cost information

3. Consistency between Government Work Plan (RKP) and RKA-

KL regarding performance and budget information

Blue

No likelihood of significant negative social or


Better ability to monitor

development spending.

14. Finalization of a design-phase of the new budget preparation solution for

SPAN. Blue No likelihood of significant negative social or


See above.

15. Developed an operational manual for selection of performance indicators

for performance-based planning and budgeting with the involvement of

line ministries



See above.

2.2. Strengthening budget execution systems

16. Implemented virement on the basis of the PBB guidelines



17. Review by DG Treasury of the implementation of the regulation on cash

forecasting and application software, and recommendations on next

steps; and complete capacity building for Satkers whose total budget

covers at least 70% of total appropriation



18. Establishment of Data Center/Disaster Recovery Center for SPAN

(including Establishment of Collaboration Environment, Cablings, and

WAN related to DC/DRC milestones)



Better response capabilities of

relevant authorities.

19. Completed change management and communications assessment phase Blue No likelihood of significant negative social or


20. Established the IT shared services unit for the whole of the MoF

(PUSINTEK) and prepare workplan with the list of proposed 27 new

policies and standards that will be implemented before 2014



21. The state asset management information system database (Modul KN) is

fully implemented and integrated with the state asset accounting system

(SIMAK-BMN)

Green No likelihood for negative environmental effects.

Disposal of state assets need to be coordinated and

carried out properly.

Positive environmental effects

from registering state assets pave

the way for transferring idle

assets from one ministry to

147

another, reducing the need to

purchase new ones.

22. Completed the strategy and policy for human resources development

for the procurement function in Government agencies Blue No likelihood of significant negative social or


23. Issued a Presidential Instruction on government internal audit

systems, which clarifies the roles and responsibilities in internal

controls



24. Adoption of a Grand Design for the Implementation of National

Government Internal Control Systems Blue No likelihood of significant negative social or


25. Issued a Government Regulation on accrual-based accounting Blue No likelihood of significant negative social or


26. Directorate General of Treasury submitted a draft regulation to the

Minister of Finance detailing accounting policies and chart of

accounts



POLICY AREA 3: Enhancing poverty alleviation and service

delivery efforts (OP 8.60 review of ―likelihood of significant effects ‖)

No. Policy sub-area Impact Potential negative effects and government

mitigation capacity

Potential positive impacts

27. Draft M&E integration strategy is prepared, based on consultations with

government agencies responsible for overseeing and implementing

poverty reduction programs.

Green No likelihood of significant negative social or


Improvements in M&E of

poverty reduction programs

should lead to improvements in

their effectiveness.

28. Design document for an integrated management information system

(MIS) is prepared and submitted to the Executive Secretariat and M&E

Working Group members.







29. National Team instructed agencies implementing Cluster I poverty

programs to use the unified database. Green No likelihood of significant negative social or






30. Finalization of survey questionnaire, data collection, and standard

operating procedures (SOP) for the implementation of the social

assistance household survey (PPLS11).







31. Executive Secretariat working group submitted a policy note on cost Green No likelihood of significant negative social or Improvements in the Jamskemas

148

scenarios for health insurance for the poor (Jamkesmas) and a

proposed health management information system to the chair of the

National Team.


expected to yield positive results.

32. A report on the performance of programs providing scholarships for the

poor is prepared by the TNP2K Secretariat and submitted to the chair of

the National Team.



Programs providing scholarships

to the poor can be improved

through findings in report.

33. A report on the performance of the subsidized rice program (RASKIN) is

prepared by the TNP2K Secretariat and submitted to the chair of the

National Team.



RASKIN performance can be

improved through findings in

report.

34. PNPM transition strategy: an implementation plan to establish one single

participatory planning exercise for all actors/sectors at the village level is

submitted to the National Team, including the role of Local Government

with regard to the transfer of the BLM to communities



More transparency and reduction

of duplicate procedures

(application and reporting)

allows communities more time to

plan and implement the

programs.

35. Continued to strengthen PNPM fiduciary systems through:

1. Systematic reviews by the internal control unit in PMD of audit

reports and issuance of a quarterly report to management on

implementation of audit recommendations; and

2. Improved web-based complaints handling mechanism for PNPM.



36. Submitted the final draft of National Strategy of Financial Inclusion to

the Chair of the TNP2K. Green No likelihood of significant negative social or


Improving access to finance for

the low-income poor to enable

graduation to productive poor

and eventually out of poverty.

149

Annex 8: Indonesia – IMF Assessment Letter

153

Annex 9: Debt Sustainability Analysis

Indonesia‘s government debt as a share of GDP has fallen steadily over the past decade,

including through the recent global financial crisis. Indeed, Indonesia was the only G20

economy to record a falling debt to GDP ratio between 2008 and the end of 2009, due to its

modest deficits (with an expansion of the deficit to only 1.6 percent of GDP in 2009) and

ongoing growth (especially in nominal terms). This represents a continuation of the trends of the

past decade during which the combination of fiscal conservatism and GDP growth well above,

often negative, ex post real interest rates has contributed to a decline in public debt from around

90 percent in 2000 to almost 25 percent. These trends are expected to continue over the medium-

term. In 2011, even with the projected expansion of the deficit, mainly due to higher fiscal

spending on fuel subsidies, the debt to GDP is projected to continue to fall given nominal growth

projections and the stability of the rupiah.

Baseline projections suggest Indonesia‘s debt to GDP ratios should continue falling over

the coming half-decade. The projected fall in the debt to GDP ratio can vary with those

projected by other multilateral agencies, depending in particular on the projected growth in

Indonesia‘s GDP deflator which is used. The baseline projection in Table 6 is based on the

assumption that the GDP deflator will continue to grow faster than CPI inflation, although the

difference between the two growth rates will converge gradually. The assumed continued

stability of the nominal rupiah/US$ exchange rate over the medium-term is also supportive of

debt dynamics going forward. The fiscal deficit is assumed to widen in 2011 to around 1.7

percent before declining, in line with the near-term projections set out in the Government‘s 2012

proposed Budget. It is then assumed that the primary deficit widens towards 2016 as the

government embarks on greater infrastructure and social investment in line with its medium-term

development plans.

Indonesia‘s downward debt dynamics appear to be robust to a plausible range of

macroeconomic shocks. In shocks to underlying assumptions based on recent trends, past

shocks and past volatility, the debt projections remain on a downward path. The historical period

used to calculate these shocks includes the last ten years of data, during which there have been a

number of adverse shocks to Indonesia‘s exchange rate, for example during the recent global

crisis, although growth has been positive with relatively little variation. Even with a shock of a

10 percent of GDP increases in debt liabilities in 2012, the debt ratio comes back down to its

2011 value by 2016. However, when considering these results, it is worth noting that this debt

sustainability analysis focuses on solvency issues rather than liquidity and roll-over risks, which

may occur even if solvency is solid. As mentioned in the macro round-up Indonesia‘s near-term

financing position does appear strong given its cash reserves from previous over-financing, the

still conservative fiscal deficits and the likely continuation of strong demand for government

bonds, particularly in the baseline medium-term scenario with a resumption of robust foreign

capital inflows.

154

Table 6: Sensitivity Analysis for Key Indicators of Indonesia’s Government Debt

Projections

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

1 Public sector debt 1/ 39.8 35.2 33.0 28.4 26.0 24.3 22.3 20.4 18.9 17.8 17.1

o/w foreign-currency denominated 17.5 14.8 14.8 10.9 9.5 8.6 7.8 7.0 6.4 5.9 5.5

2 Change in public sector debt -7.9 -4.6 -2.2 -4.6 -2.3 -1.7 -2.0 -1.9 -1.5 -1.1 -0.7

3 Identified debt-creating flows (4+7+12) -8.1 -5.0 -5.0 -4.2 -3.4 -2.1 -2.0 -1.9 -1.5 -1.1 -0.7

4 Primary deficit -1.5 -0.8 -1.7 -0.1 -0.6 0.3 0.0 -0.1 0.1 0.3 0.5

5 Revenue and grants 19.1 17.9 19.8 15.1 15.5 16.1 15.6 15.8 15.9 16.1 16.2

6 Primary (noninterest) expenditure 17.6 17.2 18.1 15.1 14.8 16.4 15.6 15.7 16.0 16.4 16.7

7 Automatic debt dynamics 2/ -6.5 -4.2 -3.3 -4.1 -2.7 -2.3 -2.0 -1.9 -1.6 -1.4 -1.2

8 Contribution from interest rate/growth differential 3/ -5.7 -4.1 -5.3 -2.2 -2.2 -2.0 -2.0 -1.9 -1.6 -1.4 -1.2

9 Of which contribution from real interest rate -3.5 -2.0 -3.6 -0.9 -0.7 -0.5 -0.7 -0.6 -0.4 -0.3 -0.1

10 Of which contribution from real GDP growth -2.2 -2.1 -1.7 -1.3 -1.5 -1.4 -1.4 -1.3 -1.2 -1.2 -1.1

11 Contribution from exchange rate depreciation 4/ -0.8 0.0 2.0 -1.9 -0.4 -0.3 0.0 0.0 0.0 0.0 0.0

12 Other identified debt-creating flows -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

13 Privatization receipts (negative) -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

14 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

15 Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

16 Residual, including asset changes (2-3) 0.2 0.4 2.8 -0.4 1.0 0.3 0.0 0.0 0.0 0.0 0.0

Public sector debt-to-revenue ratio 1/ 208.2 196.3 166.3 187.4 168.1 151.0 143.1 129.5 118.7 110.8 105.5

10-Year 10-Year

Historical Standard

Key Macroeconomic and Fiscal Assumptions Average Deviation

Real GDP growth (in percent) 5.5 6.3 6.0 4.6 6.1 5.2 0.9 6.4 6.5 6.7 6.8 7.0 7.0

Average nominal interest rate on public debt (in percent) 6/ 6.0 6.0 6.4 5.7 5.6 5.7 0.7 6.4 7.0 6.7 6.3 6.0 5.6

Average real interest rate (nominal rate minus change in GDP deflator, in percent) -8.1 -5.2 -11.7 -2.6 -2.5 -5.2 4.1 -1.9 -2.6 -2.4 -1.7 -1.1 -0.4

Nominal appreciation (increase in US dollar value of local currency, in percent) 4.2 0.2 -14.0 16.5 4.7 1.1 10.3

Inflation rate (GDP deflator, in percent) 14.1 11.3 18.1 8.3 8.0 10.8 4.2 8.3 9.6 9.0 8.0 7.0 6.0

Growth of real primary spending (deflated by GDP deflator, in percent) 15.3 3.8 12.1 -13.2 4.7 4.1 13.3 17.2 1.9 6.9 8.9 9.6 9.3

Primary deficit -1.5 -0.8 -1.7 -0.1 -0.6 -1.6 1.1 0.3 0.0 -0.1 0.1 0.3 0.5

A. Alternative Scenarios

A1. Key variables are at their historical averages in 2011-2016 7/ 24.3 20.4 16.8 13.6 10.7 8.1

A2. No policy change (constant primary balance) in 2011-2016 24.3 22.7 21.1 19.7 18.5 17.4

B. Bound Tests

B1. Real interest rate is at baseline plus one standard deviations 24.3 22.7 21.2 20.0 19.2 18.7

B2. Real GDP growth is at baseline minus one-half standard deviation 24.3 22.5 20.7 19.5 18.7 18.3

B3. Primary balance is at baseline minus one-half standard deviation 24.3 22.8 21.4 20.3 19.7 19.4

B4. Combination of B1-B3 using one-quarter standard deviation shocks 24.3 22.8 21.4 20.3 19.6 19.2

B5. One time 30 percent real depreciation in 2012 8/ 24.3 27.4 25.0 23.2 21.8 20.8

B6. 10 percent of GDP increase in other debt-creating flows in 2012 24.3 32.3 29.6 27.3 25.6 24.4

1/ Government gross debt.

2/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency

denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

4/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

5/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

6/ Derived as nominal interest expenditure divided by previous period debt stock.

7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

8/ Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

II. Stress Tests for Public Debt Ratio

Actual

(In percent of GDP, unless otherwise indicated)

I. Baseline Projections

155

Annex 10: Indonesia at a Glance

Indonesia at a glance 6/10/11

East Lower

Key D evelo pment Indicato rs Asia & middle

Indonesia Pacific income

(2010)

Population, mid-year (millions) 232.6 1,944 3,811

Surface area (thousand sq. km) 1,911 16,302 31,898

Population growth (%) 1.1 0.7 1.2

Urban population (% of to tal population) 51 45 41

GNI (Atlas method, US$ billions) 600.4 6,149 8,846

GNI per capita (Atlas method, US$) 2,580 3,163 2,321

GNI per capita (PPP, international $) 3,720 6,026 4,784

GDP growth (%) 6.1 7.4 7.1

GDP per capita growth (%) 4.9 6.6 5.9

(mo st recent est imate, 2004–2010)

Poverty headcount ratio at $1.25 a day (PPP, %) 19 17 ..

Poverty headcount ratio at $2.00 a day (PPP, %) 51 39 ..

Life expectancy at birth (years) 71 72 68

Infant mortality (per 1,000 live births) 31 21 43

Child malnutrition (% of children under 5) 20 9 24

Adult literacy, male (% of ages 15 and o lder) 95 96 87

Adult literacy, female (% of ages 15 and o lder) 89 91 74

Gross primary enro llment, male (% of age group) 123 111 109

Gross primary enro llment, female (% of age group) 118 112 105

Access to an improved water source (% of population) 80 88 86

Access to improved sanitation facilities (% of population) 52 59 50

N et A id F lo ws 1980 1990 2000 2010 a

(US$ millions)

Net ODA and official aid 946 1,716 1,651 1,049

Top 3 donors (in 2008):

Australia 48 77 72 342

France 44 122 22 187

United States 117 31 174 121

Aid (% of GNI) 1.3 1.6 1.1 0.2

Aid per capita (US$) 6 10 8 5

Lo ng-T erm Eco no mic T rends

Consumer prices (annual % change) 9.5 7.7 3.7 5.1

GDP implicit deflator (annual % change) 31.0 7.7 20.4 8.0

Exchange rate (annual average, local per US$) 627.0 1,842.8 8,421.8 9,024.2

Terms of trade index (2000 = 100) .. 47 100 41

1980–90 1990–2000 2000–10

Population, mid-year (millions) 146.6 177.4 205.3 232.6 1.9 1.5 1.2

GDP (US$ millions) 78,013 114,426 165,021 711,744 6.1 4.2 5.3

Agriculture 24.0 19.4 15.6 15.3 3.6 2.0 3.5

Industry 41.7 39.1 45.9 47.0 7.3 5.2 4.1

M anufacturing 13.0 20.7 27.7 24.8 12.8 6.7 4.6

Services 34.3 41.5 38.5 34.1 6.5 4.0 6.2

Household final consumption expenditure 51.4 58.9 60.7 56.8 5.2 6.6 4.7

General gov't final consumption expenditure 10.5 8.8 6.5 9.1 4.6 0.1 8.1

Gross capital formation 24.1 30.7 22.2 32.5 7.7 -0.6 6.1

Exports o f goods and services 34.2 25.3 41.0 24.6 2.7 5.9 7.6

Imports of goods and services 20.2 23.7 30.5 23.0 1.2 5.7 8.2

Gross savings .. .. .. 31.3

Note: Figures in italics are for years other than those specified. 2010 data are preliminary. Group data are for 2009. .. indicates data are not available.

a. A id data are for 2009.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

6 4 2 0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2009

Male Female

0

10

20

30

40

50

60

70

80

90

1990 1995 2000 2009

Indonesia East Asia & Pacific

Under-5 mortality rate (per 1,000)

-20

-15

-10

-5

0

5

10

15

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

156

Indonesia

B alance o f P ayments and T rade 2000 2010

(US$ millions)

Total merchandise exports (fob) 62,124 158,074

Total merchandise imports (cif) 33,515 127,446

Net trade in goods and services 29,862 21,307

0

Current account balance 16,616 5,652

as a % of GDP 10.1 0.8

Workers' remittances and

compensation of employees (receipts) 1,190 4,858

Reserves, including gold 27,257 96,207

C entral Go vernment F inance

(% of GDP)

Current revenue (including grants) 19.7 16.0

Tax revenue 11.1 11.7

Current expenditure 15.6 11.2

T echno lo gy and Infrastructure 2000 2009

Overall surplus/deficit -2.9 -0.6

Paved roads (% of to tal) 57.1 59.1

Highest marginal tax rate (%) Fixed line and mobile phone

Individual 35 30 subscribers (per 100 people) 5 84

Corporate 30 28 High technology exports

(% of manufactured exports) 16.2 12.7

External D ebt and R eso urce F lo ws

Enviro nment

(US$ millions)

Total debt outstanding and disbursed 143,358 148,770 Agricultural land (% of land area) 25 27

Total debt service 16,625 20,794 Forest area (% of land area) 54.0 46.8

Debt relief (HIPC, M DRI) – – Terrestrial protected areas (% of land area) .. ..

Total debt (% of GDP) 86.9 20.9 Freshwater resources per capita (cu. meters) 9,575 8,987

Total debt service (% of exports) 11.2 11.0 Freshwater withdrawal (billion cubic meters) 113.3 ..

Foreign direct investment (net inflows) -4,550 4,877 CO2 emissions per capita (mt) 1.3 1.8

Portfo lio equity (net inflows) -1,021 787

GDP per unit o f energy use

(2005 PPP $ per kg of o il equivalent) 3.6 4.2

Energy use per capita (kg of o il equivalent) 757 874

Wo rld B ank Gro up po rtfo lio 2000 2009

(US$ millions)

IBRD

Total debt outstanding and disbursed 11,715 7,876

Disbursements 1,051 2,044

Principal repayments 761 1,135

Interest payments 950 249

IDA

Total debt outstanding and disbursed 714 2,234

Disbursements 59 244

P rivate Secto r D evelo pment 2000 2010 Total debt service 31 46

Time required to start a business (days) – 47 IFC (fiscal year)

Cost to start a business (% of GNI per capita) – 22.3 Total disbursed and outstanding portfo lio 880 682

Time required to register property (days) – 22 o f which IFC own account 480 602

Disbursements for IFC own account 20 160

Ranked as a major constraint to business 2000 2010 Portfo lio sales, prepayments and

(% of managers surveyed who agreed) repayments for IFC own account 43 116

Economic and regulatory policy uncertainty 48.2 ..

Corruption 41.5 .. M IGA

Gross exposure 56 50

Stock market capitalization (% of GDP) 16.3 50.6 New guarantees 0 0

Bank capital to asset ratio (%) 6.0 10.3

Note: Figures in italics are for years other than those specified. 2010 data are preliminary. 6/10/11

.. indicates data are not available. – indicates observation is not applicable.


0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2009

2000

Governance indicators, 2000 and 2009

Source: Kaufmann-Kraay-Mastruzzi, World Bank

IBRD, 7,876

IDA, 2,234

Other multi-lateral, 10,943

Bilateral, 42,272

Private, 75,530

Short-term, 18,662

Composition of total external debt, 2009

US$ millions

157

Millennium Development Goals Indonesia

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Go al 1: halve the rates fo r extreme po verty and malnutrit io n 1990 1995 2000 2009

Poverty headcount ratio at $1.25 a day (PPP, % of population) 54.3 43.4 47.7 18.7

Poverty headcount ratio at national poverty line (% of population) .. 17.5 27.1 14.2

Share of income or consumption to the poorest qunitile (%) .. .. .. 7.7

Prevalence of malnutrition (% of children under 5) 31.0 27.4 24.8 19.6

Go al 2: ensure that children are able to co mplete primary scho o ling

Primary school enro llment (net, %) 98 .. 94 94

Primary completion rate (% of relevant age group) 96 99 98 109

Secondary school enro llment (gross, %) 48 49 56 79

Youth literacy rate (% of people ages 15-24) 96 .. .. 98

Go al 3: e liminate gender disparity in educat io n and empo wer wo men

Ratio of girls to boys in primary and secondary education (%) 93 .. 96 98

Women employed in the nonagricultural sector (% of nonagricultural employment) 29 29 32 31

Proportion of seats held by women in national parliament (%) 12 13 8 18

Go al 4: reduce under-5 mo rtality by two -thirds

Under-5 mortality rate (per 1,000) 86 67 56 41

Infant mortality rate (per 1,000 live births) 56 46 40 31

M easles immunization (proportion of one-year o lds immunized, %) 58 63 72 83

Go al 5: reduce maternal mo rtality by three-fo urths

M aternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 420

B irths attended by skilled health staff (% of to tal) 32 37 64 79

Contraceptive prevalence (% of women ages 15-49) 50 55 .. 61

Go al 6: halt and begin to reverse the spread o f H IV/ A ID S and o ther majo r diseases

Prevalence of HIV (% of population ages 15-49) 0.1 0.1 0.1 0.2

Incidence of tuberculosis (per 100,000 people) 189 189 189 189

Tuberculosis case detection rate (%, all forms) 22 10 22 67

Go al 7: halve the pro po rt io n o f peo ple witho ut sustainable access to basic needs

Access to an improved water source (% of population) 72 74 77 80

Access to improved sanitation facilities (% of population) 51 51 52 52

Forest area (% of land area) 64.3 59.2 54.0 46.8

Terrestrial protected areas (% of land area) .. .. .. ..

CO2 emissions (metric tons per capita) 0.8 1.2 1.3 1.8

GDP per unit o f energy use (constant 2005 PPP $ per kg of o il equivalent) 3.6 4.0 3.6 4.2

Go al 8: develo p a glo bal partnership fo r develo pment

Telephone mainlines (per 100 people) 0.6 1.7 3.2 14.8

M obile phone subscribers (per 100 people) 0.0 0.1 1.8 69.2

Internet users (per 100 people) 0.0 0.0 0.9 8.7

Personal computers (per 100 people) 0.1 0.5 1.0 2.0

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 6/10/11


Indo nesia

0

25

50

75

100

125

2000 2005 2009

Primary net enrollment ratio

Ratio of girls to boys in primary & secondary education

Education indicators (%)

0

10

20

30

40

50

60

70

80

90

2000 2005 2009

Fixed + mobile subscribers

Internet users

ICT indicators (per 100 people)

0

25

50

75

100

1990 1995 2000 2009

Indonesia East Asia & Pacific

Measles immunization (% of 1-year olds)

Puncak JayaPuncak Jaya(5030 m)(5030 m)

ObiObi

CeramCeram

BuruBuru

SULAWESISULAWESISUMATERASUMATERA

BaliBali

KALIMANTANKALIMANTAN

RabaRaba

PematangsiantarPematangsiantar

SorongSorong

TimikaTimika

FakfakFakfakAmahaiAmahai

PaluPaluJambiJambi

MataramMataram

BandungBandungSurabayaSurabaya

SemarangSemarang

PalembangPalembang

PekanbaruPekanbaru

PalangkarayaPalangkaraya

Bandar Bandar LampungLampung

SerangSerang

PAPUAPAPUA

1919

2121

2222

2626

2929

2020

2323

2525

2424

28282727

3030

3232

3131

3333

1212

1111

1313

14141515

8

67

3

54

2

1

1616

1717 1818

1010

9

PAPU

APA

PUA

NEW

GU

INEA

NEW

GU

INEA

A U S T R A L I AA U S T R A L I A

THAILANDTHAILAND

MYANMARMYANMAR

19

21

22

26

29

20

23

25

24

2827

30

32

31

33

12

11

13

1415

8

67

3

54

2

1

16

17 18

10

9

Balikpapan

Parepare

Baubau

Tarakan

Raba

Ende

Waingapu

Pematangsiantar

Sorong

Merauke

Timika

FakfakAmahai

Palu

Ambon

Gorontalo

Jambi

Medan

Kupang

Padang

Manado

Mataram

Bandung

Kendari

Denpasar

Surabaya

Semarang

Bengkulu

Jayapura

Palembang

SamarindaPontianak

Pekanbaru

Yogyakarta

Banda Aceh

Bandjarmasin

PalangkarayaPangkalpinang

Makassar

Ternate

Bandar Lampung

Serang

Manokwari

Mamuju

Tanjungpinang

JAKARTA

PAPU

AN

EW G

UIN

EA

A U S T R A L I A

SINGAPORE

VIETNAM

THAILAND

MYANMAR

TIMOR-LESTE

BRUNEI

PHILIPPINES

MA L A Y

SI

A

CelebesSea

Java Sea BandaSea

Arafura Sea

SuluSea

PACIFIC OCEAN

I N D I A N O C E A N

PAPUA

AruIs.

KaiIs.

TanimbarIs.

Halmahera

Biak

Yapen

Morotai

Misool

Waigeo

Peleng Obi

Muna

Ceram

Buru

SULAWESI Sula Is.

Timor

FloresAlor

WetarMoa

Babar

Sumba

SumbawaLombokJAWA

NatunaBesar

Belitung

Madura

SUMATERABangka

Lingga

Nias

Siberut

Enggano

Simeulue

TalaudIs.

Bali

KALIMANTAN

Men t a w

a i I s .

Puncak Jaya(5030 m)

0°

5°

5°

10°

10°

15°

0°

5°

10°

15°

15°

10°

95° 100° 105°

115° 120° 125°

95° 100° 105° 110° 115° 120° 125°

130° 135° 140°

135° 140°

INDONESIA

NANGGROE ACEH DARUSSALAMSUMATERA UTARARIAUSUMATERA BARATJAMBIBENGKULUSUMATERA SELATANLAMPUNGBANGKA-BELITUNGBANTEND.K.I. JAKARTA

123456789

1011

PROVINCES:

1213141516171819202122

JAWA BARATJAWA TENGAHD.I. YOGYAKARTAJAWA TIMURBALINUSA TENGGARA BARATNUSA TENGGARA TIMURRIAU KEPULAUANKALIMANTAN BARATKALIMANTAN TENGAHKALIMANTAN SELATAN

KALIMANTAN TIMURSULAWESI UTARAGORONTALOSULAWESI TENGAHSULAWESI BARATSULAWESI SELATANSULAWESI TENGGARAMALUKU UTARAMALUKUPAPUA BARATPAPUA

2324252627282930313233

0 200

0 100 200 300 400 Miles

400 Kilometers

IBRD 33420R2

AU

GU

ST 2008

INDONESIASELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.

FOR OFFICIAL USE ONLY - World Bank · Indonesia Country Department ... Beasiswa untuk Siswa Miskin...

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