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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
Indonesia Public Expenditure Review 2007
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 Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
… particularly since the second “big bang” when general transfers increased
by 55 percent
Indonesia Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
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)
Indonesia Public Expenditure Review 2007
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
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
Education expenditure % of Govt spending Education expenditure as % of GDP
Indonesia Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
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)
Indonesia Public Expenditure Review 2007
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)
Indonesia Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
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%
Indonesia Public Expenditure Review 2007
… 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
Indonesia Public Expenditure Review 2007
Central government discrepancies between realization and budget expenditures decreased in 2006
Indonesia Public Expenditure Review 2007
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 Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
What is being financed with government apparatus spending?
M aterials21%
Maintenance5%
Travel5%
Investment5%
Others4%
Central3%
Province16%
District41%
Personnel60%
Indonesia Public Expenditure Review 2007
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
Indonesia Public Expenditure Review 2007
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