Report and Recommendation of the President to the Board of ... · Sistem Pelayanan Informasi dan Perizinan Investasi Secara : Elektronik (Online Investment Licensing System) TA :

Report and Recommendation of the President to the Board of Directors

Project Number: 43211 November 2010

Proposed Loan Republic of Indonesia: Sixth Development Policy Support Program

CURRENCY EQUIVALENTS (as of 10 November 2010)

Currency Unit – rupiah (Rp)

Rp1.00 = $0.00011 $1.00 = Rp8,934

ABBREVIATIONS

ADB – Asian Development Bank ASEAN – Association of Southeast Asian Nations BAPPENAS – Badan Perencanaan Pembangunan Nasional

(National Development Planning Agency) BAWASDA – Badan Pengawasan Daerah

(Regional Development Supervisory Body) BKPM – Badan Koordinasi Penanaman Modal

(Investment Coordinating Board) BLT – Bantuan Langsung Tunai (Cash Transfer Program) BPKP – Badan Pengawasan Keuangan dan Pembangunan

(Financial and Development Supervisory Board) BPN – Badan Pertanahan Nasional (National Land Authority Board) BPS – Badan Pusat Statistik (Central Bureau of Statistics) CMEA – Coordinating Ministry for Economic Affairs DGT – Directorate General of Taxation DIPA – Daftar Isian Pelaksanaan Anggaran (Approved Budget Allocations) DPL – Development Policy Loan DPSP – Development Policy Support Program GDP – gross domestic product JAMKESMAS – Jaminan Kesehatan Masyarakat (Health Insurance for the Poor) KPK – Komisi Pemberantasan Korupsi (Corruption Eradication

Commission) KPPN – Kantor Pelayanan Perbendaharaan Negara

(State Treasury Service Office) LIBOR London Interbank Offered Rate LKPP – Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah

(National Public Procurement Office) MOF – Ministry of Finance MTEF – medium-term expenditure framework NGO – Nongovernmental Organization NLB – National Logistics Blueprint NSW – national single window PBB – performance-based budgeting PEFA – Public Expenditure and Financial Accountability PFM – public financial management PINTAR – Indonesia Tax Administration Reform Project PNPM Mandiri – Program Nasional Pemberdayaan Masyarakat Mandiri

(National Community Empowerment Program) PTSP – Pelayanan Terpadu Satu Pintu (One-stop Integrated Services) RPJMN – Rencana Pembangunan Jangka Menengah Nasional

(National Medium-Term Development Plan)

SPAN – Sistem Perbendaharaan dan Anggaran Negara (Integrated Financial Management System)

SPIPISE – Sistem Pelayanan Informasi dan Perizinan Investasi Secara

Elektronik (Online Investment Licensing System) TA – technical assistance TNP2K – Tim Nasional Percepatan dan Penanggulangan Kemiskinan

(National Team Acceleration of Poverty Reduction) TSA – Treasury Single Account

NOTE

In this report, “$” refers to US dollars.

Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Country Director J.A. Nugent, Indonesia Resident Mission, SERD Team leader E. Ginting, Senior Country Economist, Indonesia Resident Mission,

SERD Team members P. Aji, Economist, Indonesia Resident Mission, SERD S. Bhandari, Senior Country Specialist, Indonesia Resident Mission,

SERD W. Kubitzky, Senior Education Specialist, SERD R. O’Sullivan, Principal Counsel, Office of the General Counsel C. Roos, Administrative Assistant, Indonesia Resident Mission, SERD Peer reviewer J. Ludwig-Maaroof, Governance and Capacity Development Specialist;

Public Management, Governance, and Participation Division; Regional and Sustainable Development Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROJECT AT A GLANCE

I. THE PROPOSAL 1

II. THE PROGRAM 1 A. Rationale 1 B. Impact and Outcome 2 C. Outputs 2 D. Program Costs and Financing 8 E. Implementation Arrangements 8

III. DUE DILIGENCE 9 A. Governance 9 B. Poverty and Social 9 C. Safeguards 9 D. Risks and Mitigating Measures 10

IV. ASSURANCE 10

V. RECOMMENDATION 10

APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14 3. Development Policy Letter 15 4. Evolution of Development Policy Support Program Policy Matrix 19

PROJECT AT A GLANCE1. Project Name: Sixth Development Policy Support Program 2. Project Number: 43211

3. Country: Indonesia 4. Department/Division: Southeast Asia DepartmentIndonesia Resident Mission

5. Sector Classification: Sectors Primary SubsectorsPublic sector management

1

Public expenditure and fiscal managementIndustry and trade

0

Trade and servicesPublic sector management

0

Economic and public affairs managementPublic administration

6. Thematic Classification: Themes Primary SubthemesEconomic growth

1

Widening access to markets and economic opportunitiesPromoting economic efficiency and enabling business environment

Governance0

Economic and financial governancePrivate sector development Private sector investment

Policy reforms

6a. Climate Change Impact:AdaptationMitigation

6b. Gender Mainstreaming:Gender equity theme

0

Effective gender mainstreaming0

Some gender benefits 1No gender elements

0

7. Targeting Classification:Targeted Intervention

General Intervention

Geographic dimensions of

inclusive growth

Millennium Development

Goals

Income poverty at household

level

1

0 0

0

8. Location Impact:RuralUrbanNational HighRegional

9. Project Risk Categorization: Complex

10. Safeguard Categorization:

Environment CInvoluntary resettlement CIndigenous peoples C

11. ADB Financing:

Sovereign/Nonsovereign Modality Source Amount ($ million)

Sovereign Program loan Ordinary capital resources 200.0

Total 200.0

12. Cofinancing:

No Cofinancing available.

13. Counterpart Financing:

No Counterpart Financing available.

14. Aid Effectiveness:

Parallel project implementation unit NoProgram-based approach Yes

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the Republic of Indonesia for the Sixth Development Policy Support Program (DPSP-6). 2. The program will support the government’s key reform priorities aimed at achieving higher and pro-poor economic growth that is sustainable over the medium term. The reform priorities include efforts to improve the investment climate, strengthen public financial management, and governance, and enhance poverty reduction and access to public service delivery. The design and monitoring framework is in Appendix 1. The development policy letter is in Appendix 3. Appendix 4 presents the policy matrix for the program.

II. THE PROGRAM

A. Rationale

3. The proposed program is the sixth and last of a series of Asian Development Bank (ADB) development policy support programs (DPSPs) for Indonesia, prepared jointly with the World Bank and the Government of Japan. Since its initiation, the DPSP series was designed to support the Government of Indonesia’s medium-term reform agenda in core areas underpinned by its National Medium-Term Development Plan (RPJMN). The focus of the DPSP series has evolved since 2003, reflecting changes in the country’s needs and priorities. In first four years, the emphasis was on ensuring medium-term macroeconomic stability and building the basic legal and regulatory framework for investment as well as public financial management and governance. As macroeconomic resilience improved, the government and development partners agreed to replace the macroeconomic pillar with support for reforms in public service delivery. Since 2007, the DPSP series has focused on three core policy areas: the investment climate, public financial management and governance, and poverty reduction and public service delivery. In 2009, some of the reforms envisaged during the last 5-year plan period remained unfinished. At the request of the government, the proposed DPSP-6 was included for 2010 in ADB’s Indonesia country operations business plan, 2010–2012. 1 The DPSP series has complemented implementation of other ADB programs, including the Public Expenditure Support Facility, Countercyclical Support Facility, and, Local Government Finance and Governance Reform.2 4. The program completion reports for the first three programs under the DPSP series suggested that policy actions supported by the series have contributed significantly to improved economic management, albeit from a low base.3 Among other achievements, the program has 1 ADB. 2010. Country Operations Business Plan: Indonesia, 2010–2012, Manila. The government agreed to ADB’s

exit from the series starting in 2011. The World Bank and the Government of Japan will extend its Development Policy Loan (DPL) support with a new cluster for 2010–2012. ADB will continue to provide support through TAs on procurement and audit in coordination with other development partners and participate in enhancing poverty reduction and access to public service delivery through the PNPM Mandiri with an infrastructure focus. ADB will also continue to support policy reforms in decentralization, climate change, capital markets development, and infrastructure.

2 ADB. 2009. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for the Public Expenditure Support Facility, Manila; ADB. 2009. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for the Countercyclical Support Facility, Manila; ADB. 2008. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for the Second Local Government Finance and Financial Governance Reform, Manila;

3 ADB. 2008. Completion Report: Indonesia Development Policy Support Program. Manila; ADB. 2009. Completion Report: Indonesia–Second Development Policy Support Program and Third Development Policy Support Program. Manila. A joint program completion report will be prepared for DPSP-4 to DPSP-6.

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helped the government devise a public debt management strategy, reorient budget savings from reduction in fuel subsidies toward priority social sectors and targeted poverty reduction programs, and expand the tax base through tax administration reforms. Under the fourth DPSP onward, reforms to improve the investment climate have led to the passage of an Investment Law, a significant reduction in business start-up time, a shorter time for value-added tax refunds, and enhanced access of small and medium-sized enterprises to finance. Reforms in public financial management and governance have improved budget formulation, execution, monitoring, and evaluation. The DPSP series has supported efforts to increase budget allocation for poverty programs, improve pro-poor planning and budgeting, and enhance community-driven development under the government’s PNPM Mandiri. 5. While significant progress has been achieved, the government is committed to implementing further reforms in DPSP core reform areas. Recent economic growth remains below the level achieved before the Asian financial crisis. To achieve higher and more inclusive growth, a recent ADB study suggests the need to accelerate infrastructure development, improve governance and institutions, and enhance access to better education.4 Despite recent improvement in economic competitiveness indicators, 5 efforts are needed to improve trade logistics and simplify business procedures. Continued efforts are needed to implement a modern public financial management (PFM) system. While significant progress has been achieved, poverty rates remain high. Poverty incidence declined to 13.3% in 2010, but rates vary widely among regions and about 40% of the population is estimated to be near poor (clustered just above the national poverty line), making them highly vulnerable to fall back into poverty. The government’s new RPJMN, 2010–2014 adopted a three-pillar development strategy: pro-growth, pro-jobs, and pro-poor. The government recognizes the need to increase private investment to support its pro-jobs growth strategy. It also recognizes that continued improvement in the investment climate, governance, public service delivery, and poverty reduction are crucial to achieving its pro-poor objective. Therefore, the three core policy areas supported under the DPSP-6 are among the 11 priorities in the RPJMN, 2010–2014. B. Impact and Outcome

6. The impact of the DPSP-6 will be to achieve higher pro-poor economic growth that is sustained over the medium term. The outcome will be improved overall economic management anchored on good governance, which will help generate more and better jobs, and contribute to sustainable poverty reduction. C. Outputs

7. The DPSP-6 supports the government’s efforts in three core reform areas: (i) improve the investment climate, (ii) strengthen public financial management and governance, and (iii) enhance poverty reduction and access to public service delivery. All 13 policy actions for the DPSP-6 identified during preparation of the DPSP-5 have been completed to a satisfactory level of reform. Five new policy actions have been added to reflect the priorities of the new government, which took office in October 2009, have been satisfactorily completed.

4 ADB. 2010. Indonesia: Critical Development Constraints. Manila. ADB supports the government’s effort to

accelerate infrastructure development through the Infrastructure Reform Sector Development Program; ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of Indonesia for the Second Infrastructure Reform Sector Development Program., Manila.

5 According to the World Economic Forum, Indonesia’s competitiveness ranking improved 10 places to 44 in 2010.

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1. Improve Investment Climate 8. Improving the investment climate continues to be a key priority in the government’s reform agenda. As outlined in the RPJMN, 2010–2014, the country will need significant investment to elevate its growth to 6%–7% in the medium term. The government at most can provide about 20% of the overall required investment (about $1.3 trillion). Hence, facilitating domestic and foreign private investment is urgently needed. The prospects for investing in Indonesia are quite promising, given its significant population and natural resources. Therefore, the RPJMN places a high priority on harmonizing policies and regulations, streamlining procedures, promoting customs and trade facilitation, and improving infrastructure and strengthening the financial sector to support a sound investment climate. Given the need to enlarge the fiscal space to support infrastructure and other poverty reduction programs, improving the performance of the tax system is a medium-term objective of the reform agenda. 9. Supported by the DPSP-6, the government implemented a number of reform initiatives to address some of those constraints by issuing a revised investment negative list, simplifying investment licensing procedures, establishing a national single window, developing a national logistics blueprint, and strengthening tax administration organization and business processes. 10. Investment negative list. While the July 2007 investment negative list was more detailed and comprehensive than previous negative lists—hence more transparent—it introduced new restrictions in key sectors such as telecommunications, health, shipping, ports, logistics, pharmaceuticals, and insurance. It also failed to clarify issues relating to how incumbent investors in these sectors would be treated (grandfather clause). In response to concerns raised by industry, Presidential Regulation No. 36/2010 to revise the investment negative list was issued on 25 May 2010. The regulation addresses investor concerns regarding the grandfather 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 commitments to the Association of Southeast Asian Nations (ASEAN), providing more liberal treatment for ASEAN companies. (Completed.) 11. Online investment licensing system. The Investment Law, 2007, stipulates that a presidential regulation on one-door integrated investment service (PTSP) shall be issued. A presidential regulation was issued on 23 June 2009 to allow ministries and central government agencies to delegate their authority to issue business licenses to the Investment Board (BKPM) and authorizes BKPM to establish a one-stop integrated services for investment licensing. BKPM issued Regulation No. 11/2009 guiding implementation of PTSP and developed an online investment licensing application system that is now accessible on the BKPM website. A pilot of the system was launched in January 2010 in Batam, and it has been implemented in Jakarta and seven cities. The government is planning to implement the system in the capital city of each province and numerous districts by December 2010. (Completed.) 12. National single window. The Coordinating Ministry for Economic Affairs (CMEA) issued Decision No. 5/2010 to form a national team for implementation of the national single window (NSW) and to appoint the Directorate General Customs as an interim operator of the NSW until 2012. A model was launched in January 2010 in five major ports throughout Indonesia, which is a major step toward reducing the time and cost for importing and exporting by allowing single submission, single processing, and single approval of import or export documents.6 In 2009, up

6 In implementing NSW, the government has received assistance from ASEAN, the Asia-Pacific Economic

Cooperation, and other development partners.

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to 36 government agencies were involved in granting permits or licenses for export or import and a large number of documents were required (48 for export and 106 for import). With the NSW, these procedures are expected to be simplified significantly. (New policy action: completed.) 13. National logistics blueprint. The government has developed a National Logistics Blueprint (NLB) and Action with three main objectives: (i) ensure the availability of strategic commodities at affordable prices, (ii) reduce logistics costs to facilitate the competitiveness of export products, and (iii) prepare the country for better market integration with ASEAN. The NLB presents a detailed program for 2010–2014, and encompasses a comprehensive action plan that will require the participation and coordination of a large number of government departments and agencies. The NLB distinguishes quick wins and an overall strategy with priority actions for the coming years. Some of the quick wins were included in the government’s 100-day program implemented since the beginning of 2010, such as the introduction of full time services in main seaports, the development of dry ports in major industrial areas, the extension of the railway into the port of Jakarta, and the expansion of Jakarta and Surabaya ports. A draft presidential decree to implement the NLB has been submitted for approval. (New policy action: completed.) 14. Tax administration reform. Continued reform in tax administration has increased registered taxpayers from 4.8 million in 2006 to 18.1 million in 2010, but the increased number has not led to larger tax collections. 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 the tax database, introducing risk-based compliance enforcement, improving professionalism and staff integrity, strengthening governance, and increasing the information and communications technology capability to support the entire tax operations. To support this effort, the Directorate General of Taxation (DGT) is planning to implement the Project for Indonesia Tax Administration Reform (PINTAR) to strengthen (i) taxpayer registration, (ii) returns and payments processing, (iii) the taxpayer and revenue accounts database, (iv) centralized document management, (v) risk-based audit and collection, and (vi) information technology infrastructure. The government initially planned to issue a contract for PINTAR in mid-2010. However, the completion of PINTAR design was slightly delayed. DGT has advertised the procurement of the PINTAR; implementation is expected to begin in early 2011 to ensure that the reform program can be completed as scheduled by early 2014. (Satisfactorily completed.)

2. Strengthen Public Financial Management and Governance

15. The government has embarked on a broad-based and ambitious reform agenda since adopting a new regulatory framework for public finance management in 2003 and 2004.7 While progress has been substantial and reforms are moving in the right direction, a long list of challenges remains. The program supports efforts to advance PFM reform focusing on a medium-term expenditure framework (MTEF) and performance-based budgeting (PBB), better cash forecasting and management, an integrated financial management information system, procurement, management of state assets, and the audit systems. 16. Budget program structure and indicative ceiling for 2011 budget. The State Finance Law, 2003, mandated three pillars of budget reform: (i) a unified budget to remove the

7 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.

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distinction between development expenditure and routine expenditure, and allow for prioritization across all kinds of expenditures in the budget; (ii) an MTEF that aims to strengthen the capability to plan and prioritize expenditures for the medium term; and (iii) PBB, which would restructure the budget according to programs and activities and associated performance indicators, and allow for results-based evaluation and budget allocation. The unified budget was implemented in the 2005 budget. PBB and the MTEF moved into an implementation phase in 2009 with the issuance of a manual prepared jointly by the Directorate General Budget and the National Development Planning Agency (BAPPENAS). The new program structure has been finalized and incorporated in the RPJMN, 2010–2014. The government issued Presidential Decree No. 5/2010 to regulate the establishment of the indicative ceilings for the 2011 budget based on the revised structure. (Completed.) 17. Cash forecasting. The Ministry of Finance issued Regulation No.192/2009 on cash forecasting. With this new regulation, the idle cash balance kept at the Treasury Single Account at the Central Bank of Indonesia is expected to be minimized and the interest investment of cash surpluses maximized. This regulation also requires spending units to submit in-year cash withdrawal plans to the State Treasury Service Office (KPPN) to periodically update the disbursement plans included in their approved budget allocations (DIPA). The spending units are required to submit their updated cash plan at least 3 days before the end of each month, or the cash cannot be withdrawn. A new information technology application has been developed to support this initiative. (Completed.) 18. Business process improvement and chart of accounts. A report covering the state budget and state treasury business process improvement was completed in September 2010. The report covers areas including (i) the budget planning and preparation process, (ii) budget enactment and budget revisions, (iii) budget execution rules, (iv) revised budget structure and chart of accounts, and (v) project and activity costing. (Completed.) 19. Database for state assets management. Law No. 1/2004 on the state treasury and its implementing government regulation No. 6/ 2006 on state or local government assets require that land belonging to the state or local governments shall be legally registered or certified under the name of the central government or respective local government. Much of the state-owned land is not yet registered or legally certified by the National Land Authority Board (BPN). In November 2009, the finance minister and head of BPN signed two joint decrees on land certification (Decree No. 186/2009 and No. 24/2009) that provide legal certainty on the ownership of state land and protecting the security of state assets. The stock-taking and appraisal process of state assets is progressing. A completion report—for all civilian state assets—was submitted the President. (Satisfactorily completed.) 20. Public procurement. The past 3 years have witnessed improvements in the public procurement environment. Presidential decree (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. This decree also paved the way for establishing the National Public Procurement Office (LKPP). A key priority of LKPP is to improve the regulatory framework for public procurement. In this effort, LKPP is taking a two-pronged strategy: the preparation of a new procurement law and the revision of Keppres No. 80/2003. LKPP has completed the academic papers on the procurement law and public consultation has started on the draft law. The preparation and enactment of a new procurement law will have to go through a lengthy process. LKPP has finalized a new Presidential Regulation No. 54/2010 to replace Keppres 80 as an interim measure, which requires the establishment of procurement service units, the use of national

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standard bidding documents, and other improvement. ADB has supported the government in this reform through technical assistance (TA, para. 28). (Completed.) 21. Internal audit. The public expenditure and financial accountability assessment of 20088 classifies the internal audit function in the country as fragmented and characterized by weak capacity. Presidential Regulation No. 60/2008 is the cornerstone for government internal control and audit systems. Through this regulation clarifies the roles and responsibilities of various players in the internal audit such as the Financial and Development Supervisory Board (BPKP), Inspectorate Generals, and local government inspectorates. However, there is still a need for a regulation to lay out in more detail the mechanisms of how those roles and responsibilities would be implemented, particularly in the planning, executing, reporting and follow up of internal audit at each level. The DPSP-6 requires submission of a draft presidential decree for approval. The draft presidential decree has been submitted to the Ministry of Finance. (Satisfactorily completed.) 22. Accrual-based accounting. Financial reports prepared on an accrual basis are more effective both for accountability and decision making. The government has made early progress in this area. A draft presidential regulation on Government Accounting Standards and implementation of accrual accounting was submitted for approval in July 2010. The target is to switch to full accrual accounting by 2015. The draft standards is expected to be issued in late 2010. (Completed.)

3. Enhance Poverty Reduction and Access to Public Service Delivery 23. The government has implemented a number of programs for social assistance and poverty reduction across all clusters in the past 5 years. These include an unconditional cash transfer program (BLT), conditional cash transfer, health insurance for the poor (JAMKESMAS) and the National Community Empowerment Program (PNPM Mandiri). ADB has supported the government in this area through the PNPM Mandiri with an infrastructure focus.9 While progress has been achieved through these programs, the government is committed to intensify policy reforms in this area to accelerate the pace of poverty reduction over the next 5 years. These reforms include institutionalizing program assessment and improved governance accountability to support overall coordination, implementation, and assessment of the programs; improving accuracy in measuring poverty and developing a national targeting system to ensure that program benefits reach the poor and vulnerable; and empowering local governments, communities, and service providers to deliver quality services as an effective approach to leverage local knowledge to identify obstacles to development while building capacity for coordinated action. 24. Governance and institutional accountability. Fragmentation and lack of coordination have limited the effectiveness of national poverty reduction programs. To address these problems, the government has reorganized the institutional arrangements in this policy area. It issued Presidential Regulation No. 15/2010 to form a national team for the Acceleration of Poverty Reduction (TNP2K), which consists of all the government agencies responsible for the planning, financing, and implementation of poverty reduction programs. The team has been established to guide and oversee the reform of poverty reduction policies and programs. Chaired by the vice president, the team will lead the coordination and oversight of all poverty 8 World Bank. 2008. Public Expenditure and Financial Assessment. Washington, DC (June, Report No. 42098 ID). 9 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the

Republic of Indonesia for the Rural Infrastructure Support to PNPM Mandiri Project. Manila; ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of Indonesia for the Rural Infrastructure Support to PNPM Mandiri Project II. Manila.

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reduction programs under all three clusters of the national poverty reduction strategy. The team will be supported by an executive secretariat responsible for preparing policies through its working groups that will act as internal think tanks to commission research, draft policies, and support improvements in program design and integration. One of the working groups will assess the effectiveness and efficiency of poverty reduction programs through monitoring and evaluation activities. The findings from both monitoring and evaluation activities will inform the decision of the national team about program mix, scale, and budget allocations. (New policy action: completed.) 25. Unified database for poor household and families. 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, which is one of the strategic objectives of the RPJMN, 2010–2014. Such a system will feature a unified database of poor households, from which implementing agencies can draw beneficiary lists for individual programs. TNP2K has issued a policy note recommending the establishment of a national unified database of poor households and families and national targeting system, including steps involved and agencies participating in the process. The program initially only required preparation of a budget submission for this initiative for 2011. (Completed.) 26. Methodology of calculating poverty line. The Central Bureau of Statistics (BPS) is revising the methodology of poverty line calculation and will expand the list of indicators from 14 to 56. This will improve the accuracy in identifying the poor and measuring poverty rates. The revision of national poverty line methodology will involve (i) completion of national poverty line simulation using the alternative measurement, and (ii) conducting internal consultation to review the new method between BPS and key government stakeholders. (New policy action: completed.) 27. Community-based poverty reduction programs. The fiduciary systems of the program have come under stress with the national expansion of the PNPM Mandiri. To ensure that the fiduciary systems remain robust, the government has developed an action plan with specific deliverables, including (i) communication of political will with zero tolerance on fraud and corruption; (ii) strengthening of systems to monitor, report, and act on fraud and corruption cases; and (iii) strengthening of capacity through the involvement of the attorney general, Bawasda (Regional Development Supervisory Body), and through the appointment of additional fiduciary staff in high-risk areas. Another specific action plan is to publish complaints, case details, and resolution status. In addition, the government has made a formal agreement between BPKP and related regional agencies to support BPKP in PNPM audits. A memorandum of understanding for audit of the PNPM in 2010 was signed by all parties in August 2010. To monitor all the corruption cases, the Ministry of Home Affairs and the Ministry of Public Works submit quarterly reports detailing the status of the cases to the national team and to the Joint Management Committee members. (New policy action: completed.)

28. Technical assistance and further ADB support. ADB has supported the implementation of policy actions under this program by providing TA to LKPP and through the State Audit Reform project supporting the audit agencies.10 Although the DPSP series will end in 2011, ADB support in the key reform areas supported by the program will continue. The 10 ADB. 2005. Technical Assistance to the Republic of Indonesia for Support for the State Audit Reform Investment.

Manila (TA 4474-INO, attached to Loan Nos.2126-INO and 2127-INO [SF]); ADB. 2007. Technical Assistance for Supporting the Use of Country Procurement Systems. Manila (TA 6317-REG); ADB. 2010. Technical Assistance to the Republic of Indonesia for Strengthening National Public Procurement Process. Manila (P43219-INO).

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government has requested further support in audit and procurement, and capacity building TA has been included in ADB 2011 pipeline. To support PFM reform at the local government level, ADB has provided capacity building TA linked to the Local Government Financial and Governance Reform Program series. The second subprogram of the Local Government Financial and Governance Reform Program cluster is scheduled for consideration by ADB’s Board of Directors in 2011. D. Program Costs and Financing

29. The loan amount is based on the strengths of the policy package, its development impact, the importance of sectors covered, investment needs, and indicative costs of reforms. The policy actions of the proposed program are derived from the government’s medium-term reform priorities as set out in the RPJMN, 2010–2014. They are crucial in achieving the government’s pro-growth, pro-jobs, and pro-poor strategy. Implementation of some policy reforms also requires investments such as the NSW, enhancing tax administration, increasing audit capacity, and simplifying investment licenses. Reduction of income and corporate tax rates introduces adjustment costs that need to be recovered through improved tax administration. With increased focus on poverty reduction, the government will also scale up spending on social assistance and poverty programs such as the PNPM Mandiri and other social assistance programs. The government’s budget financing needs for 2010 are an estimated $20.4 billion, of which programmed official external borrowing amounts to $7.7 billion. The government has requested a loan of $200 million from ADB’s ordinary capital resources to help finance the program. The loan will have a 15-year term, including a grace period of 3 years, an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year, and such other terms and conditions set forth in the draft loan agreement. The government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility based on these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. The World Bank will provide parallel cofinancing support of $600 million through its DPL-7 and the Government of Japan will provide $100 million.

E. Implementation Arrangements

30. The CMEA is the executing agency for the program, collaborating closely with the Ministry of Finance. Implementation of the DPSP-6 actions is being undertaken by a number of other ministries and agencies, including the Vice President’s Office, the National Development Planning Agency (BAPPENAS), the Investment Coordination Board, several directorates general in the Ministry of Finance, BPS, and the National Public Procurement Agency, among others. Extensive consultations were held between the development partners (ADB, the Government of Japan, and the World Bank) and the government, led by a steering committee chaired by the CMEA on formulating the policy actions. Monitoring the implementation and attainment of the DPSP policy actions is done through several mechanisms. These include monitoring committees and/or technical groups established by the government that are responsible for ensuring the implementation of policy actions as well as follow-up on progress; and regular joint government–development partner meetings to discuss interim progress in achieving agreed milestones in the reform agenda. The program period is from November 2009 to December 2010; the program loan of $200 million is to be disbursed when the government has met the conditions for loan effectiveness. The proceeds of the program loan will be disbursed in accordance with the provisions of ADB’s Simplification of Disbursement Procedures and Related Requirements for Program Loans.11 11 ADB. 1998. Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.

9

III. DUE DILIGENCE

A. Governance 31. In almost all areas of PFM, changes in the legal and regulatory architecture are largely complete and the momentum has shifted toward implementation of new PFM practices. Advances have been made in budget preparation with the introduction of the 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 past 5 years. However, challenges remain, including (i) improving internal controls in the execution of budget by spending agencies; (ii) establishing the government financial management information system, which provides information for budget management at all levels of the government; and (iii) strengthening controls in budget execution processes to fully realize the gains from reforms introduced in other areas of PFM. The government continues to prioritize PFM reforms and development partners support implementation of reforms in this area. When implemented, the reforms will contribute to reducing the level of fiduciary risk to low in the medium term. The World Bank considers Indonesia’s PFM system to be adequate to receive DPL and DPSP support. A detailed assessment of the attendant fiduciary risks with respect to this DPSP operation is accessible from the list of linked documents in Appendix 2. 32. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government of Indonesia and the CMEA. B. Poverty and Social 33. Both the improvement of the investment climate and strengthening of PFM systems are expected to have significant poverty and social benefits. The measures aimed at increasing investment (including foreign direct investment) and raising export competitiveness are designed to support a virtuous cycle of growth, job generation, and productivity gains leading to opportunities, improved livelihoods, and poverty reduction. Simplification of the business licensing procedures is expected to contribute to the growth of small and medium-sized enterprises, which can have a great impact on employment. Tax reform actions that will contribute to increased revenue collection and better fiscal management will allow the government to dedicate more resources to pro-poor programs. Improvements in budget preparation and budget execution systems are expected to lead to more efficient service delivery and will allow social programs to have a greater impact on the targeted population. The policy reforms supported under the DPSP-6 have the potential to benefit women through other initiatives on poverty reduction and service delivery in line with the government priorities, as stated in the RPJMN, 2010–2014. Improved PFM capacity will facilitate implementation of a gender-responsive budget currently being pilot tested in a number of key ministries. ADB has supported the government’s poverty program through the PNPM Mandiri. The policy actions to support improvement in implementation of PNPM Mandiri under the DPSP-6 will enhance women’s capacity in raising their voice in local development planning and processes. C. Safeguards 34. The program does not trigger ADB’s safeguard policies and is categorized C for the environment, involuntary resettlement, and indigenous peoples. The following are agreed upon, and will be incorporated in the legal agreement. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the

10

program. The government agrees to cooperate, and shall cause any and all government offices, organizations, and entities involved in implementing the program to cooperate fully with any such investigation and extend all necessary assistance, including access to all relevant books and records, as may be necessary for the satisfactory completion of any such investigation. D. Risks and Mitigating Measures

35. The program is firmly embedded in the RPJMN, 2010–2014. The assumptions underlying the program include the following: (i) domestic political and macroeconomic stability is maintained, (ii) the economy is able to withstand external economic shocks, and (iii) the government retains the reform momentum and is able to forge a consensus among relevant agencies and the public on the reform agenda. The program has three main risks (Table 1).

Table 1: Summary of Risks and Mitigating Measures Risk Mitigating Measures Unanticipated global or regional shocks may affect Indonesia’s economy

The government is undertaking measures to strengthen its monetary policy framework, expand the tax base, and strengthen public expenditure management, with the assistance of development partners including the Asian Development Bank.

Weak interagency coordination capacity

The program reduces this risk by focusing on the policy triggers that constitute high-priority, high-impact policy reforms with some meaningful degree of implementing capacity. Increasing external competition and increased public demand for a better development outcome provide an opportunity to build consensus among stakeholders on difficult policy reform issues and accelerate structural reforms to strengthen economic growth.

Capacity constraints slow the pace of policy reforms and reduce the quality of outputs

The program focuses on efforts to support the government’s own initiatives and reforms in areas where there is political will. The development partners provide ongoing technical assistance in key areas of reforms.

Source: Asian Development Bank.

IV. ASSURANCE

36. The government and the CMEA have assured ADB that implementation of the program will conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan document.

V. RECOMMENDATION

37. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $200,000,000 to the Republic of Indonesia for the Sixth Development Policy Support Program from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 15 years, including a grace period of 3 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Haruhiko Kuroda President

19 November 2010

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and Indicators with

Baselines

Data Sources and Reporting

Mechanisms Assumptions

and Risks Impact Higher pro-poor economic growth that is sustained over the medium term

Real GDP growth increased to 6.5%–7.0% in 2012 from 6% in 2010 Poverty rate decreased to 12% in 2012 from 13.3% in 2010 Corruption Perceptions Index improved (from 2.8 in 2010)

BPS BPS Transparency International

AssumptionMacroeconomic and political stability Risks Slow pace of reforms Public opposition to reforms

Outcome Improved overall economic management anchored on good governance

Increased investment to GDP ratio (from 23.4% in 2009 to 25% in 2011) Increase in the value of net foreign direct investment inflows (from $4.9 billion in 2009 to $10 billion in 2011) Increased percentage of capital expenditures disbursed in the first half of the year (from 20% in the first half of 2010 to 30% in 2011) Increased percentage of public expenditure allocated to social assistance programs (from 3.8% in 2009 to 4.0% in 2011)

BPS BI and BPS MOF MOF

AssumptionEconomy is able to withstand external or domestic shocks Risk Reversal large foreign capital inflows

Outputs 1. Improved investment climate i. Improved investment regulations ii. Improved trade facilitation iii. Improved tax administration and reduced tax burden 2. Improved public financial management and governance i. Improved results orientation of the budget process ii. Improved cash management and streamlined budget execution within the

Increased number of provincial and city level PTSP using SPIPISE (7 in September 2010 to 33 in 2011) Reduced time to start business (60 days in 2010 to 47 days in 2011) Reduced cost to export ($704 per container in 2009 to $600 in 2011) Reduced time to prepare and pay for taxes (266 hours in 2010 to 240 in 2011) Increase in PI 12 score as the new medium-term expenditure framework and performance-based budgeting prepared in 2010 for 2011 budget (from 1.5 in 2007) Increase in PEFA PI 16 score on predictability in the availability of funds for commitment of expenditure ((from 2.5 in 2007)

BKPM World Bank Doing Business report World Bank Doing Business report World Bank Doing Business report PEFA report PEFA report

AssumptionsThe government retains the reform momentum and is able to forge a consensus among relevant agencies and the public on its reform agenda Potential social tensions from policy changes are effectively contained Risks Unanticipated global or regional shocks may affect Indonesia’s economy Weak interagency coordination Capacity constraints slow the pace of policy reforms and reduce the quality of outputs

12 Appendix 1

Design Summary Performance Targets and Indicators with

Baselines

Data Sources and Reporting

Mechanisms Assumptions

and Risks central government iii. Improved public procurement iv. Improved government accounting and audit functions 3. Enhanced poverty reduction and access to public services i. Improved governance and accountability in the government’s poverty programs ii. Improved measurement and targeting of poverty programs iii. Improved accountability in community-based poverty reduction programs (PNPM)

Increase in PEFA PI 17 score on recording and management of cash balances, debt, and guarantees ((from 1.5 in 2007) Increase in the percentage of government agencies following the revised presidential decree (Perpes 54/2010) on procurement (0 in 2010 and 100% in 2011) Reduced number of line ministries receiving qualified opinions on their financial statements (26 in 2009 to 18 in 2011) Increased number of poverty programs’ impact evaluations commissioned and overseen by the national team, including using and analyzing sex-disaggregated data where appropriate Increased proportion of female-headed households that received social assistance program (57% in 2009 to 60% in 2011) Adoption and application of revised poverty measurement methodology in 2011 Reduced number of fraudulent cases (146 in 2009 to 90 in 2011) Increased number of PNPM recipients (8,500 villages in 1,094 sub-districts in 2009 to 20,950 villages in 2,359 sub-districts in 2011)

PEFA report LKPP BPK Report VP Office/ BAPPENAS VP Office and Coordinating Ministry of People’s Welfare BPS VP Office Ministry of Home Affairs

Activities with Milestones Inputs 1. Improved investment climate 1.1 a. Issue the presidential decree 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 (June 2010). 1.1 b. Issue detailed technical regulations on implementation of one-stop shop for investment (June 2010). 1.1 c. Establish an operational online investment licensing system (SPIPISE) that allows paperless approval and licensing and eliminates face-to-face contact in at least five provinces, and at least two sectors (September 2010). 1.1 d. Appoint Directorate General Customs as the temporary operator of the National Single Window. NSW import and export clearance made mandatory in five main ports (January 2010) 1.1 e. Submit to the president a draft presidential regulation on the National Logistics System (Sislognas) Development Blueprint (March 2010). 1.2 Issue invitation for bids for Indonesia Tax Reform Project procurement as an initial step in the development of business process improvements to formulate and a new integrated information system (September 2010).

ADB program loan of $200 million for DPSP-6 World Bank parallel cofinancing support of $600 million for DPL-7 Parallel cofinancing support from the Government of Japan envisaged at $100 million

Appendix 1 13

Activities with Milestones Inputs 2. Improved public financial management and governance2.1. Implement revised program structure with measurable results and targets aligned with organizational structure in the government’s medium-term plan (RPJMN) for 2010–2014, and base both indicative ceilings and budget proposals from all line ministries for the 2011 budget on the revised structure (June 2010). 2.2a. Issue new MOF regulation on cash forecasting (January 2010). 2.2b. Identify final business process improvements and final version of chart of accounts framework for the new treasury and budget system (SPAN) (September 2010). 2.3. Finalize academic papers for draft procurement law and prepare draft procurement law, ready for public consultation process (September 2010). 2.4a. Submit to the MOF a draft presidential decree regulating government internal audit systems as required by Article 58 of Government Regulation No. 60/2008 (September 2010). 2.4b. Submit to the president a draft of the government regulation on accrual-based accounting (September 2010). 3. Enhanced poverty reduction and access to public services 3.1. Establish interministerial national team for the Acceleration of Poverty Reduction by presidential decree (June 2010). 3.2a. Revise the methodology to calculate the national poverty line by (i) completing national poverty line simulations using alternative measurement methodologies; (ii) conducting internal consultations in the BPS and with key government stakeholders to identify a poverty measurement methodology for consideration; and (iii) initiate external consultations about the implications of adopting the revised methodology with universities, NGOs, and key line ministries (September 2010). 3.2b. Targeting working group under the national team to issue a policy note on steps required to establish a national unified database of poor households and families, and who should implement each step (September 2010). 3.3. Strengthen PNPM fiduciary systems as outlined in the action plan dated 16 February 2010 by having (i) actions taken to address documented fraud cases in Jawa Barat, Jawa Tengah, Sumatra Utara, Sulawesi Tengah, and Papua, and actions communicated publicly; (ii) the National Auditor Office (BPKP) in partnership with the district level Auditor General Office (Bawasda) explicitly tasked with the systematic auditing of PNPM funds; and (iii) the Ministry of Home Affairs and the Ministry of Public Works submit quarterly reports detailing the status of all known corruption cases to the national team and to the PNPM joint management committee members.

ADB = Asian Development Bank, ASEAN = Association of Southeast Asian Nations, BAPPENAS = National Development Planning Agency. BI = Bank Indonesia, BKPM = Investment Coordination Board, BLI = baseline indicator, BPK = State Audit Board, BPKP = National Development Planning Agency, BPS = Central Bureau of Statistics, DPSP = Development Policy Support Loan, DPL = Development Policy Loan, GDP = gross domestic product, KPK = Corruption Eradication Commission, LKPP = National Public Procurement Agency, MOF = Ministry of Finance, NGO = nongovernmental organization, PEFA = Public Expenditure and Financial Accountability, Perpres = presidential regulation, PNPM = National Program for Community Empowerment, PTSP = One-stop Integrated Services, RPJMN = National Medium-Term Development Plan, SPAN = Integrated Financial Management System, SPIPISE = Online Investment Licensing System, VAT = value added tax, VP = vice president. Source: ADB estimates.

Endorsed by: Approved by: _________________________ ______________________ James Nugent Kunio Senga Country Director, IRM Director General, SERD

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=43211-01-3

1. Loan Agreement 2. Sector Assessment (Summary): Public Sector Management 3. Contribution to the ADB Results Framework 4. Development Coordination 5. Country Economic Indicators 6. International Monetary Fund Assessment Letter 7. Summary Poverty Reduction and Social Strategy 8. Risk Assessment and Risk Management Plan 9. List of Ineligible Items Supplementary Documents 10. Fiduciary Risks Assessment 11. Program Results Framework 12. Revised DPSP-6 Policy Actions and Status of Compliance

http://www.adb.org/Documents/RRPs/?id=43211-01-3

Appendix 3 15

Mr. Haruhiko Kuroda

16 Appendix 3

Presid

Appendix 3 17

ent A

velopment Ban

18 Appendix 3

Man Phippines

Dear Mr. Kuroda,

EVOLUTION OF DEVELOPMENT POLICY SUPPORT PROGRAM POLICY MATRIX

Policy Area

DPL-1 Policy Actions

DPL-2/DPSP-1 Policy Actions





DPL-7/DPSP-6 Indicative

Policy Actions

DPL-7/DPSP-6 Revised Policy

Actions DPL Core Policy Area I: Macroeconomic Stability and Creditworthiness Objective: Maintain macroeconomic stability as a conduit to sustainable growth Debt management

Reduction of government debt-to-GDP ratio (2000 base) to below 60%

Develop and implement a debt management strategy

Fiscal policy and management

Issuance of international bond

Divestment of majority shares in all IBRA banks

Progress in reducing subsidies to the nonpoor

Make tax revenue administration more efficient through expansion of modern tax offices

Create an operational fiscal policy office by 2007 with capability and access to information sufficient to provide analysis of proposed tax, tariff, and financial market policies.

DPL Core Policy Area II: Improved Investment Climate Objectives: (i) Attract quality investments through a supportive business environment (ii) Strengthen and diversify the financial sector and increase equitable access to finance Financial sector stability and access

Progress in establishing a financial sector safety net (LPS 24/04, memorandums of understanding between Bank Indonesia and MOF)

Continue establishing a financial sector safety net, including implementing the first phase of the removal of the deposit guarantee and clarifying roles with respect to bank closure and emergency operations

Develop strategy to strengthen

Continue implementation of the financial sector safety net, including lowering the coverage of the deposit guarantee to Rp1 billion by September 2006 in accordance with announced schedule

Complete the reorganization of Bapepam

Issue a comprehensive SME policy package (including supporting industries) that, among others, increases access to finance and implements the Warehouse Receipts Law

Implement good corporate

Issue a government decree specifying a higher capital requirement for insurance companies

Rationalize SME and microfinance schemes across line ministries and SOEs, including issuing a presidential decree on the

Issue Ministry of Finance regulation on credit guarantee and re-guarantee companies.

Appendix 4 19

20 Appendix 4

Policy Area








Policy Actions


Actions nonbank financial institutions

Develop a medium-term action plan and effective framework to coordinate the development of SMEs

(Capital Market Supervisory Agency) and Directorate General of Financial Institutions

Submit to Parliament the Warehouse Receipts Law that establishes a system of designated warehouses providing official, centrally registered receipts for commodities stored by farmers and SMEs

governance and risk management standards, particularly in state-owned banks; and continue implementation of financial sector safety net

legal establishment of provincial credit guarantee and re-guarantee institutions

Regulatory and institutional framework for trade and investment

Effective functioning of the investment team

Progress in tax administration and customs reforms

Complete draft amendment of Law No. 34 to move from negative to positive list for regional tax items to restrict the creation of nuisance and/or economically harmful charges and levies

Propose revisions to Tax Law to allow taxpayers to delay the payment of tax assessments from disputed audits

Implement the Investment Law, its supporting regulations, and new operating procedures

Simplify or eliminate unnecessary and/or redundant business licenses, procedures, and multiple registration requirements

Improve VAT by, among other things, reducing

PEPI to coordinate the development of implementing regulations and technical guidelines for effective implementation of the Investment Law by undertaking a review of the negative list (Presidential Regulation No. 77/2007), and by mapping business licenses in key economic

Complete interministerial review and convene a minister-level plenary session to review and endorse the draft of a new regulation on the investment negative list; the regulation should update sector and investment restrictions, clarify the status of publicly listed companies, and establish foreign

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

Appendix 4 21

Policy Area








Policy Actions


Actions time for VAT refunds through the implementation of the Directorate General (Tax) regulation No. 122/2006

Issue MOF decree on tax audit procedures that

sectors, with recommendations for certain licenses to be streamlined or eliminated.

Increase the ability to monitor the investment climate by: (i) publicly posting average processing time for VAT refunds; (ii) making data available on the time

equity limits for direct investment and grandfathering.

Issue implementing regulations for the 2007 Investment Law on one-stop

Issue detailed technical regulations on implementation one-stop shops (PTSP).

Establish an operational online investment licensing system for certain key sectors.

acquisitions (New Policy Action).

Issued detailed technical regulations on implementation of PTSP.

Established an operational online investment licensing system (SPIPISE) that integrates approval and licenses between BKPM, 7 provincial government PTSPs and 4 line ministries

allows taxpayers to request details of audit findings and a review in case disputes arise after closing conference1 but before completion of audit

Roll out an NSW with online

taken to establish a company, from reserving the name to issuing the legalization decree; and (iii) designing a system to monitor and report on import clearance times—from unloading to gate-out—

shops (PTSPs), simplifying the steps required to set up a domestic or foreign company and the role of the central Government relative to provincial and local governments in

Select the national single window operator. Enable customs clearance and cargo release of all exports and imports to be processed through the Indonesia NSW nationwide.

MOF selected 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

1 Closing conference refers to the discussion between the taxpayer and the tax auditor on the audit findings before a final decision is made.

22 Appendix 4

Policy Area








Policy Actions


Actions clearance of merchandise

Enhance tariff setting through improved governance procedures, information technology, and research capability

combining data from the Port Operator and Customs.

Continue to implement the NSW, including increasing the number of participating agencies and companies. Extend the original pilot.

Issue implementing regulations for the Tax Administration Law and instructions to tax offices. Establish a system to monitor and report on response time for tax audit objections and appeals.

Continue the tariff harmonization program and implement effective and transparent operating procedures, including public disclosure

approving or licensing domestic or foreign direct investment.

Finalize a draft proposal for the operational model and governance structure of the Indonesia NSW.

Issue Directorate General (Tax) decree allowing recognition of digital signatures for individual taxpayer registration and for filing personal

Sign Project for Indonesia Tax Administration Reform core tax contract.

Perak Surabaya, Tanjung Mas Semarang and Belawan Medan).

Submitted to the President a draft Presidential Regulation on the National Logistics System (Sislognas) Development Blueprint (New Policy Action)

Issued advertisement (Invitation of Bids) for PINTAR procurement as an initial step in the development of business process improvements and a new integrated information system.

Appendix 4 23

Policy Area








Policy Actions


Actions Income tax

returns.

Issue Directorate General (Tax) decree implementing new, simplified standard formats capturing key financial indicators and annual tax returns from all types of businesses, and eliminating the need for taxpayers to submit separate financial statements.

Public–private partnerships in infrastructure

Develop a medium-term plan for infrastructure development that encourages public–private partnerships

Risk management function and public–private partnership framework is operational and legally empowered

DPL Core Policy Area III: Improved Public Financial Management and Governance Objectives: (i) Improve transparency, accountability, efficiency, and effectiveness in the use of public resources (ii) Improve the institutional framework for addressing corruption (iii) Clarify decentralization framework in regard to fiscal affairs Accountability and transparency in public financial management

Issuance of implementing regulations for State Finance Law: (i) PP20 Government Working Plan;

Issue additional implementing regulations for State Finance Law, Treasury Law, and State Audit Law

Extend the pilot for zero-balance non-salary accounts to at least 50 provincial treasury offices

Implement medium-term expenditure framework with a system of clear forward estimates for the

Make further progress toward establishing a comprehensive TSA regime, including revenue accounts.

Develop a revised program structure for RPJM 2010–14 with measurable results and targets, draft

Implement revised program structure for RPJM 2010–2014.

Indicative ceilings for 2011

(a) Implemented revised program structure with measurable results and targets aligned with

24 Appendix 4

Policy Area








Policy Actions


Actions (ii) PP21 Working Plan and Budget; (iii) PP23 Control of Aggregate State, Local and Central Budget deficit.

Organizational reform at MOF, including first steps to establish a TSA

Presidential decree on government procurement issued (Presidential Decree No. 80/2003).

TSA timetable and activity plan adopted for the consolidation of bank accounts

(KPPNs) (and 75% of transactions)

Improved fiscal reporting by timely presentation of aggregate central government financial statements for FY2005

Develop a separate unit that handles the modernization program on a full-time basis

2008 budget

Continue to consolidate core government (revenue and expenditure) bank accounts

Implement transparent accountability arrangements for central government investment funding (Rekening Dana Investasi) and regional development accounts

Launch the National Public Procurement Office and issue draft procurement law

Establish a counterpart team to implement the new automated treasury system, and begin mapping and reviewing business processes to increase readiness for system rollout in 2009. Modernize 30 KPPNs.

Enhance performance-based budgeting by initiating a review and revision of the existing program structure to increase accountability, revise the budget submission templates (for RKA-KL), draft accompanying budget preparation manuals, and draft key performance indicators for the Ministry of Finance.

All DIPAs are issued and teams assigned at the beginning of the fiscal year, by eliminating annual SK

corresponding key performance indicators for all budget holders, and finalize regulations and formats.

Implement daily sweep of revenue accounts into the TSA for all commercial banks.

Sign contract for procurement of the new Treasury and Budget system (SPAN).

Prepare a draft revised Presidential Decree No. 80/2003 to accommodate a new set of national standard bidding documents for use by all government agencies.

budget based on revised program structure.

Issue new MOF regulation on cash forecasting.

Identification and completion of final business processes improvements and chart of accounts.

Establish database for state asset information system and integrate with the Government accounting system.

Finish the background

organizational structure in the National Medium Term Development Plan (RPJM) for 2010-2014 and (b) based both indicative ceilings and budget proposals (RKA-KL) from all line ministries for the 2011 budget on the revised structure.

Issued new MoF regulation on cash forecasting.

Identified final business processes improvements (BPI) and final version of Chart of Accounts (COA) Framework.

Completed stock taking and appraisal of civilian state assets.

Finalized

Appendix 4 25

Policy Area








Policy Actions


Actions requirement (for project managers) for multi-year projects and allowing parallel processing of procurement.

Complete a midterm review to assess the application of accounting standards and accounting procedure manuals by line ministries.

Make the newly established LKPP operational by recruiting staff and allocating budget for operating costs, and revise Presidential Decree No. 80/2003 to, among other things, accommodate a new set of standard bidding documents.

studies for the new procurement law and have a first draft of the legal text.

Submission to President of presidential decree regulating Government Internal Audit Systems as required by Article 58 of Government regulation (PP) 60.

Submission of the draft Government regulations on accrual-based accounting to the President.

academic papers for draft procurement law and prepare draft procurement law, ready for public consultation process. Submitted to the MoF a Draft Presidential Regulation on Government Internal Audit Systems as required by Article 58 of Presidential Regulation No. 60/2008.

Submitted to the President a draft Government regulation on accrual-based accounting.

Decentralization framework

Implement Law No. 33/2004 by drafting government regulations. This includes the

Issue ministerial decrees for blue-book and on-granting procedures.

26 Appendix 4

Policy Area








Policy Actions


Actions redesign of MOF Decree No. 35 and reallocation of deconcentrated central government spending to the Special Allocation Fund mechanism.

Institutional framework for addressing corruption

Continuation of special audit program for SOEs.

Investigation unit is established and fully operational in the Inspectorate General. MOF vested with the necessary legal powers to investigate all MOF employees.

Pilot civil service reform through the design of a new job classification and remuneration policy for high-ranking state officials

Establish a remuneration commission or interdepartmental team to recommend pay policy and pay levels for high-level state officials

Develop a comprehensive civil service reform plan for MOF as a pilot for civil service reforms on a larger scale.

Expand civil service reform pilot to five additional agencies in 2008. Update MOF organizational road map and implement the next phase of MOF human resource management reform strategy.

DPL Policy Area IV: Enhanced Poverty Alleviation and Improved Delivery of Public Services Objectives: (i) Improve quality, coverage, and utilization of basic services, especially for the poor (ii) Make stronger progress toward achieving the Millennium Development Goals Social Protection Monitor

effectiveness and undertake independent assessment, including fiduciary aspects, of the new

Develop an enhanced assessment framework for selected service delivery programs

Institutionalize a government system for program evaluation by appointing a deputy for performance

Established an inter-ministerial National Team for the Acceleration of Poverty Reduction (National Team)

Appendix 4 27

Policy Area








Policy Actions


Actions Social protection compensation

programs funded by reallocated fuel subsidy funds (e.g., cash transfer, health, education, and village infrastructure)

evaluation within BAPPENAS, with three directors responsible for, respectively, sector evaluation, regional evaluation, and systems and reporting of development performance.

Improve effectiveness of subnational spending by issuing guidelines for pro-poor budgeting and planning for local governments

Include updating of unified household targeting database in the 2011 RKA-KL and finalize

by Presidential Regulation. (New Policy Action)

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. (New Policy Action)

Policy note issued by the TNP2K Targeting working group on steps required to establish a national unified database of poor households and families, and who should implement each step.

28 Appendix 4

Policy Area








Policy Actions


Actions institutional and financing arrangements to conduct regular updates of household targeting database.

Education Establish competency standards for teacher certification and instruments for measuring compliance with those standards

Require teachers (other than head teachers) to be assigned a minimum of 24 teaching-hours per week in order to receive the professional allowance (for certified teachers), the special area allowance (for teachers working in hardship areas), or a combination of both

Community-driven development

Permit community spending over multi-year periods, and clarify procurement procedures for national budget-funded community-driven development programs

Increase the community block grant of PNPM to maximize employment and poverty impacts

Continue to use poverty targeting in determining the size of subdistrict community block grants under PNPM, and increase the average size of the block grant for the poorest subdistricts.

Strengthened PNPM fiduciary systems as outlined in the action plan dated Feb 16, 2010 by having: i) Action taken to address documented fraud cases in Jawa Barat, Jawa Tengah, Sumatra Utara, Sulawesi Tengah

Appendix 4 29

Policy Area








Policy Actions

DPL-7/DPSP-6Revised Policy

Actions and Papua and actions are communicated publicly. ii) The BPKP (National Auditor Office) in partnership with the Bawasda (District level Auditor General Office) are explicitly tasked with the systematic auditing of PNPM Funds. (iii) The Ministry of Home Affairs and the Ministry of Public Works submit quarterly reports detailing the status of all known corruption cases to the National Team and to the Joint Management Committee members. (New Policy Action)

BAPPENAS = Badan Perencanaan Pembangunan Nasional (National Development Planning Agency); DPL = Development Policy Loan; DIPA = Daftar Isian Proyek Anggaran (spending warrant); DPSP = Development Policy Support Program; GDP = gross domestic product; KPPN = Kantor Pelayanan Perbendaharan Negara (provincial treasury office); LPS = Lembaga Penjamin Simpanan (Deposit Insurance Corporation); LKPP = Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah (National Public Procurement Agency); MOF = Ministry of Finance; NSW = national single window; PEPI = Tim Nasional Peningkatan Ekspor dan Peningkatan Investasi (National Team on Accelerating Investment and Exports); PNPM = Program Nasional Pemberdayaan Masyarakat (National Community Empowerment Program); PP = Peraturan Pemerintah (government regulation); RKA-KL = Rencana Kerja dan Anggaran Kementerian/Lembaga (ministry/institutional budget and work plan); SK = a letter of Decree; VAT = value-added tax; SMEs = small and medium-sized enterprises, SOE = state-owned enterprise; TSA = treasury single account. Note: The table shows the core policy areas that have been the focus of the entire DPL/DPSP series. From DPL-4/DPSP-3 the Government and development partners agreed to remove macroeconomic stability and creditworthiness as a core policy area, and replace it with improved delivery of public services. Source: Government of Indonesia.