When we started this project we believed that … … regional governments have limited resources...

When we started this project we believed When we started this project we believed that …that …

… regional governments have limited resources which are distributed unevenly.

… Indonesia needs more resources for education, health and infrastructure.

… Indonesia has a poor fiscal position and relies heavily on revenues from oil and gas.

Indonesia Public Expenditure Review 2007

The results of The results of Spending for Spending for DevelopmentDevelopment

The sectoral composition of expenditures has changed substantially since 2001: education is the big winner, infrastructure one of the losers.

Regional governments, particularly the poorest and most remote, are the main beneficiaries of Indonesia’s increasing fiscal space.

The macroeconomic paradigm has changed: Indonesia has a lot of fiscal space.

The macroeconomic paradigm The macroeconomic paradigm has changed: Indonesia now has changed: Indonesia now has a lot of has a lot of fiscal spacefiscal space


0%

2%

4%

6%

8%

10%

12%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

DistrictProvinceCenter

Budget

Fiscal Space is increasing and has stood at over 10% of GDP since 2006

Fiscal Space as % of GDP


Indonesia experienced the most rapid debt reduction in East Asia

China

China

Indonesia

Indonesia

South Korea South Korea

Malaysia

Malaysia

Philippines

Philippines

Thailand

Thailand

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006

Pe

rce

nta

ge

of

GD

P


High oil prices are not the main cause of additional revenues

0

50

100

150

200

250

300

350

400

450

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2,006 2007*

tril

lio

n R

p. in

co

nst

an

t 2

00

0 p

rice

s

Total Central Gov. Exp.& Transfers to RegionsTotal Central Gov. RevenuesNon-oil and gas Central Gov. RevenuesOil and gas Central Gov. RevenuesExpenditures excluding interest payments

Regional governments, Regional governments, particularly the poorest and particularly the poorest and most remote, are the main most remote, are the main beneficiaries of Indonesia’s beneficiaries of Indonesia’s increasing fiscal spaceincreasing fiscal space


The fiscal fundamentals have changed since decentralization: Transfers dominate central

spending

-

20

40

60

80

100

120

140

160

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* 2007**

Co

nst

an

t 2

00

0 p

rice

s, R

p. tr

illio

n

Interest Payments SubsidiesTransfers to Region Central Development Expenditures

Crisis Decentralization Extra US$ 15 billion to spend


The poor regions are the main beneficiaries of Indonesia’s transfer system …

0

1

2

3

4

5

6

Ban ten

J awa Barat

J awa T imur

J aw a T enga h

La mp ung

D IYo gya

k ar ta

Sumatra

U tara

NusaT en

gga ra

Barat

Sumater

a SelatanBa l i

Su lawesi S

e latan

NusaT en

gga ra

T imu r

Kal iman

tan Ba ra

t

Ka l iman

tan Se latan

Sumatra

Barat

J ambi

Sulaw esi U

taraG oro

n taloBen

gku lu

Kepu lau

a n R iau

Sulaw esi T en

ga h

Su lawesi T en

gga ra

Kepulau

a n Bang k a Be litu

ngR ia u

N angg ro

e A cehDaru

s salam

Ma lu

ku

Malu

kuU tara

Kal iman

tan T en

ga h

Ka l iman

tan T im

urPap ua

Pap uaBara

t

inm

illio

nR

p

Ow n Source Revenue per Capita Natural Resource Shared Revenue per Capita

Shared Tax Revenue per Capita DAU 2006 per Capita

Dana Otsus 2006 pe


… particularly since the second “big bang” when general transfers increased

by 55 percent


The challenge now is to ensure that sub-national governments spend their resources

effectively

Province

Kabupaten/Kota

0

25

50

75

100Ja

n.

Fe

b.

Ma

r.

Ap

r.

Ma

y.

Jun

. Ju

l.

Au

g.

Se

p.

Oc

t.

No

v.

De

c.

Jan

. F

eb

. M

ar.

A

pr.

M

ay.

Ju

n.

Jul.

A

ug

. S

ep

. O

ct.

N

ov.

D

ec.

Ja

n.

Fe

b.

Ma

r.

Ap

r.

Ma

y.

Jun

. Ju

l.

Au

g.

Se

p.

Oc

t.

No

v.

De

c.

Jan

. F

eb

. M

ar.

A

pr.

M

ay.

Ju

n.

Jul.

A

ug

. S

ep

. O

ct.

N

ov.

D

ec.

Ja

n.

Fe

b.

Ma

r.

Ap

r.

2003 2004 2005 2006 2007

Tril

lion

Rp

.

Districts

Provinces

The sectoral composition of The sectoral composition of expenditures has changed expenditures has changed substantially since 2001: substantially since 2001: education is the big winner, education is the big winner, infrastructure one of the infrastructure one of the loserslosers


Education is Indonesia’s number one spending item,

followed by subsidies and government apparatus

0%

5%

10%

15%

20%

25%

30%

2001 2002 2003 2004 2005 2006* 2007**

% o

f T

otal

Exp

endi

ture

s

Agriculture Education Health Nat. Defense Infrastructure Gov. Apparatus & Superv.Subsidies Interest Payments


Education: Spending is on the rise and enrollment has increased

Source: Susenas (1995-2005).

0

10

20

30

40

50

60

70

80

90

100

1995 1996 1997 1998 2000 2002 2004 2005

Net Primary level Net Junior secondary levelNet Senior secondary level Gross Junior secondary levelGross Senior secondary level

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2001 2002 2003 2004 2005 2006* 2007**

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Real National Education Expenditures National Education Expenditures (% of GDP)


Education: with about 17 percent of the budget, Indonesia is close to other

developing nations

% o

f to

tal b

udge

t

0

5

10

15

20

25

30

Uruguay

India

Par

aguay

Lao

PDR

Colom

bia

Russ

ian

Feder

atio

n

Leban

on

Indones

ia20

04

Argen

tina

Bangla

desh

Korea,

Rep,

Indones

ia20

06

Philippin

es

Camer

oon

Bolivia

Beliz

e

SouthAfri

ca

Costa

Rica

Chile

Aze

rbai

jan

Kenya

HongKong, C

hina

Thaila

nd

Mal

ay

si

a

Education expenditure % of Govt spending Education expenditure as % of GDP

0

5

10

15

20

25

30

Uruguay

India

Par

aguay

Lao

PDR

Colom

bia

Russ

ian

Feder

atio

n

Leban

on

Indones

ia20

04

Argen

tina

Bangla

desh

Korea,

Rep,

Indones

ia20

06

Philippin

es

Camer

oon

Bolivia

Beliz

e

SouthAfri

ca

Costa

Rica

Chile

Aze

rbai

jan

Kenya

HongKong, C

hina

Thaila

nd

Mal

ay

si

a


0

5

10

15

20

25

30

Uruguay

India

Par

aguay

Lao

PDR

Colom

bia

Russ

ian

Feder

atio

n

Leban

on

Indones

ia20

04

Argen

tina

Bangla

desh

Korea,

Rep,

Indones

ia20

06

Philippin

es

Camer

oon

Bolivia

Beliz

e

SouthAfri

ca

Costa

Rica

Chile

Aze

rbai

jan

Kenya

HongKong, C

hina

Thaila

nd

Mal

ay

si

a



Health: Starting from a low base, expenditures are increasing

-

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Tr.

Rp

. co

nst

ant

2001

pri

ces

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

% o

f G

DP

Real National Health Exp. National Health Expenditures as % of GDP


Health: Although increasing, expenditures and outcomes are low by international

comparison

0.73 0.94

3.23.8

4.3

5.9

3.83.3

6.9

13.634.6

28.7

10.2

18.2

0

2

4

6

8

10

12

14

16

Indonesia 2004 Indonesia 2006 Philippines Thailand Malaysia

% H

ealt

h S

pen

din

g/G

DP

0

5

10

15

20

25

30

35

40

Infa

nt

Mo

rtal

ity

Rat

e

Total health expenditure as % GDP

National government health expenditure as % total government expenditure

Infant Mortality Rate (per 1000 live births)


Infrastructure: Indonesia is lagging behind

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Electrification ratio

Access to sanitation

Access to clean water

Road Network

Countries with lower rank Indonesia Countries with higher rank

(12 countries)

(12 countries)

(11 countries)

(11 countries)


Infrastructure investment never fully recovered from the crisis

0

1

2

3

4

5

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% o

f G

DP

Private Govt. SOEs Total Gov + Private


Subsidies are still high …

Personnel11%

Capital7%

Social Assistance5%

Transfers to Regions

30%

Materials6%

Interest Peyments

11%

Others6%

Fuel Subsidies15%

Other Subsidies2%

Subsidies24%

Electricity Subsidies

7%


… and poorly targeted

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1Poorest

2 3 4 5 6 7 8 9 10Richest

6600VA2200VA1300VA900VA450VA

Rp.trillion

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1 2 3 4 5 6 7 8 9 10Total Consumption Decile

Tr.

Rp

.

Out-of-pocket gasoline, kerosene. and diesel Subsidy Gasoline, Kerosne, Diesel

NNext 10 years:ext 10 years: Making the Making the Most of Indonesia’s New Most of Indonesia’s New

OpportunitiesOpportunities Finishing “first generation” reforms Finishing “first generation” reforms from a position of strength, particularly from a position of strength, particularly in improving basic infrastructure and in improving basic infrastructure and removing subsidiesremoving subsidies

Ensuring that “second generation” Ensuring that “second generation” reforms increase access to junior and reforms increase access to junior and secondary education and improve secondary education and improve service quality in education and healthservice quality in education and health

Shift fromShift from large and discrete structural large and discrete structural measures towards institutional reforms measures towards institutional reforms

AnnexesAnnexes

High impact reformsHigh impact reforms

7. Further strengthen the capacity and regional presence of BPK,and consolidate the functions of the internal audit agencies.

6. Establish a Medium-Term Expenditure Framework and allow the authorization of multi-year budget appropriations.

Impact on budget processes

5. Reallocate electricity subsidies (all but 450VA) towards connections to expand the electricity network.

4. Reduce fuel subsidies and redirect to pro-poor spending/ subsidies.

Fiscal impact

3. Allocate teachers based on the number of students with a weighting for smaller schools

2. Adjust the definition of the”20 percent mandate”to include teacher salaries and combine central and regional government spending

1. Remove coverage of civil service salaries from the DAU

Impact on service delivery and personnel management

7. Further strengthen the capacity and regional presence of BPK,and consolidate the functions of the internal audit agencies.

6. Establish a Medium-Term Expenditure Framework and allow the authorization of multi-year budget appropriations.

Impact on budget processes

5. Reallocate electricity subsidies (all but 450VA) towards connections to expand the electricity network.

4. Reduce fuel subsidies and redirect to pro-poor spending/ subsidies.

Fiscal impact

3. Allocate teachers based on the number of students with a weighting for smaller schools

2. Adjust the definition of the”20 percent mandate”to include teacher salaries and combine central and regional government spending

1. Remove coverage of civil service salaries from the DAU

Impact on service delivery and personnel management


Central government discrepancies between realization and budget expenditures decreased in 2006


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Monthly 06 Monthly 05 Monthly 01-04

Cumulative 06 Cumulative 05 Cumulative 01-04

PFM in transition:


Indonesia is very diverse across districts

IndicatorStrongest

districtWeakest district

Average

Standard Deviation

Mexico Zambia

GRDP Per Capita (USD) 33,759 208 1055 2104 6500 491

Poverty rate (%) 3 51 18 10 20 73

Adult literacy rate (%) 99 21 91 9 90 68

Secondary Gross Enrollment Rate (%)

125 9 82 15 109 26

Life expectancy (years) 73.7 57.5 66.3 3.1 75 38

Development Indicators range from developed-country-standards to entrenched

poverty


Gov. apparatus and (not well targeted) subsidies are still a quarter of the total budget

0%

5%

10%

15%

20%

25%

30%

35%

40%

2001 2002 2003 2004 2005 2006* 2007**

%of

Tot

alN

at.E

xped

nit

ures

Gov. Apparatus,& Superv.

Subsidies

Education

Infrastructure

Trade,BusinessDev. & Finance

Nat. Defense &Security

Health

Agriculture


What is being financed with government apparatus spending?

M aterials21%

Maintenance5%

Travel5%

Investment5%

Others4%

Central3%

Province16%

District41%

Personnel60%


Sub-National Governments (Province + Districts)

Education: the current definition of the 20% rule is unrealistic

0%

20%

40%

60%

1 2 3 4

SalariesOther RoutineCapital Spending

Additional required to reach 20% excluding

salaries

Excluding Salaries

Education Routine and development

spending

Overal education share if mandate is

fulfilled=

Others

Additional required to reach 20%

Salaries

-

5

10

15

20

25

1

% o

f cen

tra

l exp

en

ditu

res

Central Government


Subsidies: the rich benefit from the fuel and residential electricity subsidies

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1Poorest

2 3 4 5 6 7 8 9 10Richest

6600VA2200VA1300VA900VA450VA

Rp.trillion

When we started this project we believed that … … regional governments have limited resources...

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Transcript of When we started this project we believed that … … regional governments have limited resources...