Technical Assistance Report

The views expressed herein are those of the consultant and do not necessarily represent those of ADB’s members, Board of Directors, Management, or staff, and may be preliminary in nature.

Project Number: 38264 Policy and Advisory Technical Assistance (PATA) December 2009

Republic of Indonesia: Support for Local Government Finance and Governance Reform 2 (Financed by the Japan Special Fund)

CURRENCY EQUIVALENTS (as of 8 October 2009)

Currency Unit – rupiah (Rp)

Rp1.00 = $0.0001061 $1.00 = Rp9,425.00

ABBREVIATIONS

ADB – Asian Development Bank BAPPENAS – Badan Perencanaan Pembangunan Nasional

(National Development Planning Agency) DAK – dana alokasi khusus (special allocation fund) DPOD – Dewan Pertimbangan Otonomi Daerah

(Regional Autonomy Advisory Council) MOF – Ministry of Finance MOHA – Ministry of Home Affairs NSPK – Standar Nasional dan Norma-norma Fisik

(national standards and physical norms) SIKD Sistem Informasi Keuangan Daerah

(regional financial management information system) TA – technical assistance

TECHNICAL ASSISTANCE CLASSIFICATION

Type – Policy and advisory technical assistance (PATA) Targeting classification – General intervention Sector (subsector) – Public sector management (public expenditure and fiscal

management) Theme (subtheme) – Social development (human development), governance (public

administration [national, decentralized, regional]), capacity development (organizational development)

Location impact – National (medium), regional (high), rural/urban (low)

NOTE

In this report, "$" refers to US dollars.

Vice-President C. Lawrence Greenwood Jr., Operations 2 Director General A. Thapan, Southeast Asia Department (SERD) Director J. Ahmed, Director, Financial Sector, Public Management, and Trade

Division, SERD Team leader T. Niazi, Senior Public Sector Management Specialist, SERD

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.

I. INTRODUCTION

1. Strengthening decentralization policy and enhancing regional governments’ ability1 to deliver services are core elements of the Government of Indonesia’s five-year development plan. These objectives also represent a key pillar of the country operations business plan, 2009–2011, of the Asian Development Bank (ADB).2 This policy and advisory technical assistance (TA) falls under the long-standing Local Government Finance and Governance Reform Program and provides support to actions in the policy matrix for subprogram 2, which was approved by the Board in December 2008. The TA builds on several earlier TA projects under the Local Government Finance and Governance Reform Program and was anticipated in the report and recommendation of the President.3 A fact-finding mission for the TA was fielded from 5–14 August 2009, and agreement was reached with the Government on the purpose, scope, implementation arrangements, and financing of the TA. The design and monitoring framework is in Appendix 1.4

II. ISSUES

2. Since 1999, the Government has pursued major decentralization reforms through devolution of authority, functional assignments, and funding to regional governments. An estimated 40% of all public expenditures in Indonesia are now managed directly by regional governments. With ADB support, the Government has developed a medium-term, sectorwide approach for managing fiscal decentralization reform, known as the National Action Plan for Fiscal Decentralization, 2005–2009, and the soon-to-be issued longer-term strategic framework known as the Grand Strategy for Fiscal Decentralization. Various ADB loans (footnote 3) have been approved since 2005 to support decentralization efforts, which have also been accompanied by TA projects. 3. The first program loan, covering 2003–2005, was prepared and implemented with two TA projects.5 The Local Government Finance and Governance Reform Program 1 focused on legal, regulatory, and policy reforms and helped entrench those made since 1999. The expected outcome was to increase accountability in the management of regional government finances by strengthening the policy framework for decentralization. A single tranche program loan of $300 million was disbursed in late 2005 based on achievement of agreed actions over the period 2003–2005. A related project loan of $30 million—mainly to support computerization and capacity development investments in regional governments—was also approved in late 2005 and is still being implemented. 4. The Local Government Finance and Governance Reform Program 2, covering

1 The term “regional government” is used in this report to encompass both provincial and local governments. The

term “local government” encompasses both kota (city) governments and kabupaten (district) governments. 2 ADB. 2008. Country Operations Business Plan: Indonesia 2008–2011. Manila. 3 ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grant to the Republic of Indonesia for the Local Government Finance and Governance Reform (Project Loan). Manila (Loan 2193-INO, for $30 million, approved on 3 November); and ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to the Republic of Indonesia for the Local Government Finance and Governance Reform Sector Development Program. Manila (Loan 2192-INO, for $300 million, approved on 3 November).

4 The TA first appeared in the business opportunities section of ADB’s website on 7 August 2009. 5 ADB. 2004. Technical Assistance to the Republic of Indonesia for Sustaining Decentralization and Local

Governance Reforms. Manila (TA 4543-INO, for $1.125 million, approved on 10 January); and ADB. 2005. Technical Assistance to the Republic of Indonesia for Supporting an Effective Institutional Framework for Fiscal Decentralization Reforms. Manila (TA 4682-INO, for $500,000, approved on 3 November).

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2006–2011, was prepared with the support of one TA project and approved in December 2008.6 This program loan is divided into two subprograms. Subprogram 1, which covered 2006–2008 led to the drawing down of a $350 million program loan in late 2008 based on achievement of agreed actions over this period.7 The regulatory framework, including lower-level instruments, has almost been finalized, policy reform has been enhanced to remove distortions and anomalies, and central government institutions have been strengthened and are planning for regional capacity building. Subprogram 2 envisages a drawdown of similar magnitude in 2011 based on attainment of agreed actions set out in a policy matrix for 2009 to 2011. It is moving to a more mature stage of a regulatory regime following the implementation of reforms to remove identified policy bottlenecks while conducting central government institutional strengthening and regional government capacity building. Appendix 4 shows the policy matrix triggers. 5. When the Local Government Finance and Governance Reform Program 2 was approved in 2008, the Board also approved an associated TA of $1.5 million, which would begin implementation in 2009.8 The RRP also foreshadowed this TA of $1 million to support the Government in meeting actions in the subprogram 2 policy matrix through policy advice and capacity building. The policy matrix identifies the main areas for capacity building support and links the two TAs. The associated TA addresses policy related to a decentralization framework, intergovernmental fiscal system, own-source revenues, and capacity development with the following outputs: (i) develop the National Action Plan for Fiscal Decentralization, 2010–2014; (ii) create forward estimates for intergovernmental financing; (iii) improve design and monitoring of special allocation funds (DAKs); (iv) improve implementation of incentive- and sanction-linked transfers; (v) develop policy on the devolution of property tax; and (vi) conduct decentralized capacity building in public financial management. In addition to the general monitoring of attaining policy actions, the TA addresses the policy areas of the decentralization framework, regional autonomy, and capacity development with specific outputs detailed in the following section. Appendix 5 maps the capacity-building areas of the two TAs to the Local Government Finance and Governance Reform Program 2.

III. THE TECHNICAL ASSISTANCE

A. Impact and Outcome

6. The impact of the TA will be more efficient, effective, and equitable spending by regional governments. The expected outcome is strengthened capacity to attain all agreed actions under the subprogram 2 policy matrix as well as to adopt new policies. B. Methodology and Key Activities

7. The TA will be implemented with intermittent inputs over 18 months, commencing in April 2010. Although the policy matrix was already agreed to in 2008, additional support will be needed to take account of newly emerging needs and priorities of the Government, some of which may not become apparent until 2010 or 2011.

6 ADB. 2007. Technical Assistance to the Republic of Indonesia for Preparing the Second Local Government

Finance and Governance Reform Program. Manila (TA 7010-INO, for $700,000, approved on 3 December). 7 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster

and Loan to the Republic of Indonesia for the Second Local Government Finance and Governance Reform Program (Subprogram 1). Manila (Loan 2478-INO, for $350 million, approved on 4 December).

8 ADB. 2008. Technical Assistance to the Republic of Indonesia for the Local Government Finance and Governance Reform Program. Manila (TA 7184-INO, for $1.5 million, approved on 4 December).

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8. Flexibility has been built into the TA in two ways. First, the team leader and deputy team leader will work on all actions in the policy matrix, including those that are not being directly supported by activity components of either the associated TA or this TA and in relation to newly emerging priorities. Second, in line with the Government’s wishes, a significant allocation has also been made for training, studies, seminars, and conferences. Several workshops, to brainstorm findings and come to a consensus on the way forward, have been planned for each component. The five key components or outputs are as follows.

(i) Provide monitoring, coordination, and support to attain all required actions under the subprogram 2 policy matrix. An overview role in relation to the policy matrix will be assigned to the team leader and deputy team leader. The main outputs will be preparing and operationalizing a matrix monitoring and reporting system, and providing support to the Government for attaining key actions.

(ii) Strengthen approaches to coordinate fiscal decentralization policies.

Revisions to Law No. 32/2004,9 which the Government will consider in early 2010, will chart a new role for the Regional Autonomy Advisory Council (DPOD), including more independence from the Ministry of Home Affairs (MOHA).10 This component will support the National Development Planning Agency (BAPPENAS) in coordinating all stakeholders on the development of new DPOD working arrangements. Particular attention will be paid to the future role of the existing working group on fiscal decentralization. The main outputs will be policy and advisory papers on (a) Law No. 32/2004 reforms, (b) new organizational management arrangements for DPOD, and (c) assessment of DPOD system and human capacity with proposals for strengthening.

(iii) Reduce inconsistencies between sector and decentralization laws and

related inconsistencies in budgets. This component will review such legal inconsistencies in two selected ministries—to be confirmed by the Government during inception—as well as budget inconsistencies that may occur in the Ministry of Education (to be confirmed). Advice will also be provided on systemwide approaches to resolving legal and budget inconsistencies linked to proposed changes to Law No. 32/2004. The main outputs will be (a) a policy paper advising on Law No. 32/2004 changes, (b) a paper mapping legal inconsistencies for the two ministries, (c) draft national standards and physical norms for the two ministries defining assignments of functions between various government levels, (d) a policy paper on broad solutions to clarifying expenditure assignments, and (e) an analytical paper and recommendations regarding deconcentration expenditures in the Ministry of Education budget.

(iv) Support further refinement and development of the regional government

performance measurement system. This component will support ongoing work in software development, implementation kits, and training in 40 regional governments in 10 provinces in regard to regional government performance monitoring. It will refine the evaluation criteria and the number of indicators, as

9 Law 32/2004 addresses regional administration including formation and merger of regional governments,

assignment of expenditures, responsibilities of officials, the political structure and the civil service structure. 10 DPOD is currently based in MOHA and is the President’s key external advisory body on decentralization policy

matters.

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some items required by the government regulations may not be readily available in the regional governments. There is also a need to reconcile requirements of the three related—and, to some extent, overlapping—evaluation systems now operating in MOHA. It will also develop systems for processing data received at regional government levels and also for the training of regional government trainers. The main outputs will be (a) a paper reviewing the evaluation systems, (b) a paper recommending streamlining of indicators, (c) a paper reviewing capacities for storing and analyzing data, (d) policies for dissemination of performance data, and (e) practical support to train trainers.

(v) Support improved efficiency in the transmission, collation, and analysis of

financial information from regional governments. This component will support the Ministry of Finance (MOF) in speeding up the transmission and collation of regional government financial management information, including reviewing key vendors of a computerized financial management information system to develop simple applications for soft-copy submission of regional government data, and creating simpler options for regional governments to submit selected template information in soft-copy form rather than hard copies. The component will also assist in training regarding data analysis and report presentation on regional government financial performance to be made available on the MOF website and in special publications. It will also improve analytical sections of annual budget notes and the MOF annual report. The main outputs will be (a) templates for soft-copy data, (b) consultations with financial management information system vendors, (c) dissemination of information to regional governments on the use of templates, (d) staff and system assessments of a regional financial management information system (SIKD), and (e) implementing staff training and development initiatives to impact the quality of analytical work.

C. Cost and Financing

9. The total cost of the TA is estimated at $1,300,000 equivalent. ADB will provide $1,000,000, financed on a grant basis by the Japan Special Fund, funded by the Government of Japan. The ADB financing will cover consulting services, report production, and miscellaneous administrative and workshop costs. The Government will finance the remaining $300,000 equivalent to cover mainly in-kind office accommodation and support services. Detailed cost estimates and the financing plan are in Appendix 2.

D. Implementation Arrangements

10. MOF, Directorate General of Fiscal Balance, will be the Executing Agency for the TA, through the Office of the Secretary to the Directorate General. Regional government representatives, appointed under the closely-related associated TA, will ensure quality and provide advice as needed. The implementing agencies will be the Directorate of Regional Autonomy, BAPPENAS; Directorate of Regional Financial Information, MOF; Directorate of Regional Autonomy Facilitation, MOHA; and Directorate of Regional Capacity Development and Performance Evaluation, MOHA. 11. The TA will engage 15 person-months of international consultants and 54 person-months of national consultants with skills in developing capacity in a broad range of decentralization areas including policy, intergovernmental financial arrangements, policy

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coordination, consistency of decentralization and sector laws, deconcentration funding, performance monitoring systems, and collation and analysis of financial statistics. The outline terms of reference are set out in Appendix 3. Consultants will be engaged through a mix of firm and individual recruiting. The team leader and all national consultants will be recruited through a firm. Two short-term international consultants will be recruited by ADB as individuals for 4 person-months each. Consultants will be selected using a quality- and cost-based selection method (80:20) with full technical proposals, and will be engaged in accordance with ADB's Guidelines on the Use Of Consultants (2007, as amended from time to time). All assets will be procured and disposed by the consultants in accordance with ADB's Procurement Guidelines (2007, as amended from time to time). The disbursements under the TA will be done in accordance with ADB's Technical Assistance Disbursement Handbook.11 12. The TA is expected to be implemented over an 18-month period, commencing in April 2010 and completed in October 2011. The outputs will be disseminated mainly in the form of study and policy reports and policy-related seminars and workshops. The team leader will assist ADB in providing quality control and outcome evaluation. In consultation with the Government, some policy reports may be published for dissemination to a wider audience, including national and regional policy makers, academia, and development partners. 13. The Directorate General of Fiscal Balance, MOF has agreed to identify adequate furnished office accommodation for the TA team, including telephone and fax lines and internet connection facilities. In total, the TA will employ eight persons (three short-term international and five longer-term national consultants). All consultants will work intermittently, and may spend considerable time at BAPPENAS, MOF, and MOHA. Accordingly, it was agreed that office accommodation and furniture in MOF will be adequate for five persons, while BAPPENAS and MOHA will provide adequate desk space for consultants working from there intermittently.

IV. THE PRESIDENT'S DECISION

14. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $1,000,000 on a grant basis to the Government of Indonesia for Support for Local Government Finance and Governance Reform 2, and hereby reports this action to the Board.

11 ADB. 2008. Technical Assistance Disbursement Handbook. Manila.

Appendix 1

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DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets

and/or Indicators Data Sources and/or

Reporting Mechanisms Assumptions

and Risks Impact More efficient, effective, and equitable spending by regional governments

Over 60.0% citizen satisfaction with health and education services by 2011 versus 58.1% for health and 50.3% for education in 2007. Less than 15% of population categorized as poor by 2011 (from 16.6% in 2007). 1 million more households gain access to piped water from a baseline of 9.5 million in 2005.

Governance and decentralization survey Central Bureau of Statistics Central Bureau of Statistics

Assumptions Stronger bottom-up accountability with improved public financial management and reporting transparency Stronger vertical organization structures and hierarchical responsibilities Stronger accountability of regional governments to oversight and coordination agencies Increased accountability through the election process Regional civil service reforms initiated Risk Insufficient leadership and ownership in regional government to translate institutional capacity improvements into better services and reduced poverty

Outcome Strengthened capacity to attain all agreed actions under the policy matrix and to adopt new policies

All agreed policy actions and legal reforms completed by 2011.

Review of completed policy actions and legal reforms, and release of loan funds

Assumption The Government is able to demonstrate strong commitment and capacity to implement all agreed actions. Risk Many agreed actions are challenging and will test commitment and capacity.

Outputs 1. Flexible and effective

technical support to allow all policy matrix actions to be achieved.

Policy action monitoring and reporting system in place with evidence of deployment of adequate support to outstanding actions by 2011.

Regular reports of TA Regular review meetings by government working group

Assumptions Continued commitment and support of the Government Effective demand and interest exists in all IAs. Qualified and experienced consultants are available and work effectively with counterparts.

2. Organizational strengthening of DPOD

Draft revisions to Law No. 32/2004 regarding DPOD by 2011

A restructured DPOD, including organizational arrangements for coordination of fiscal decentralization policy by 2012

Policy paper on law changes

Advisory paper management and organizational restructuring

Risks Coordination with associated TA and other development partner support is not effective. Individual IAs perceive limited incentives for them in budget support financing, thus limiting motivation for cooperation.

Appendix 1

7

Design Summary Performance Targets

and/or Indicators Data Sources and/or

Reporting Mechanisms Assumptions

and Risks Start of training to

improve DPOD staff capacity by 2012

Capacity assessment and recommendations report

3. Harmonization of sector and decentralization laws and budgets

Draft revisions in Law No. 32/2004 regarding functional assignments Mapping of inconsistencies between sector laws and those on health and education completed by 2012 Comprehensive draft NSPKs prepared for ministries of health and education by 2012 Strategy analyzing education budget and recommending percentage of reduced invalid deconcentration expenditures by 2012

Policy paper Mapping paper Two sets of draft NSPKs Budget analysis paper and recommendations

4. Progression of the regional government performance management system

System needs analysis and availability of streamlined performance indicators used by 2012 System and staff capacity-building framework developed for receiving, storing, and analyzing data by 2012 Methodology for broader dissemination of regional government performance information by 2012 Conduct a train-the-trainers program by 2012

System review and streamlining of indicators paper Assessment of system and capacities completed Policies developed and agreed with Ministry of Home Affairs Strategy developed

5. Improved processing and analysis of regional government financial information

Simple methods developed for submission of soft-copy data by 2012 Strategy developed in consultations with key financial management information system vendors by 2011 Framework developed

Template finalized Recommendations developed Template finalized and

Appendix 1

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Design Summary Performance Targets

and/or Indicators Data Sources and/or

Reporting Mechanisms Assumptions

and Risks to disseminate information on new data templates to regional governments by 2012 Capacity needs and building framework completed by 2012 Staff training and development initiatives implemented for improved data analysis and reporting

tested Assessment report completed of staff and systems in the relevant Ministry of Finance subdirectorate Staff training framework completed

Activities with Milestones 1.1 Continuous policy action monitoring and reporting (months 1–18) 2.1 Draft paper on management and organizational arrangements for DPOD

discussed in a workshop prior to finalization (month 12) 2.2 Draft paper assessing DPOD capacities discussed in workshop before

finalizing (month 15) 3.1 Draft papers on mapping and NSPKs discussed in two workshops for

education and health before finalization (month 15) 3.2 Draft paper analyzing the Ministry of Education budget discussed in a

workshop prior to finalization (month 16) 4.1 Draft papers on streamlining indicators and assessment of staff and system

capacities discussed in a workshop prior to finalization (month 10) 4.2 Draft paper on strategy for broader dissemination of regional government

performance information discussed in a workshop prior to finalization (month 15)

5.1 Draft template for submission of soft-copy data discussed in a workshop

prior to finalization (month 12) 5.2 Draft needs assessment of staff and system and proposed training and

development program discussed in a workshop prior to finalization (month 16)

Inputs Japan Special Fund: $1,000,000 Government: $300,000

DPOD = Regional Autonomy Advisory Council, IA = implementing agency, NSPK = national standards and physical norms.

Appendix 2

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COST ESTIMATES AND FINANCING PLAN ($'000)

Total

Item Cost A. Asian Development Bank Financinga 1. Consultants a. Remuneration and per diem i. International consultants 345.00 ii. National consultants 285.00 b. International and local travel 50.00 c. Reports and Communications 8.00 2. Equipmentb 17.00 3. Workshops, training, seminars, and conferencesc 200.00 4. Miscellaneous administration and support costs 25.00 5. Contingencies 70.00 Subtotal (A) 1,000.00 B. Government Financing 1. Office accommodation and transport 90.00 2. Remuneration and per diem of counterpart staff 150.00 3. Contingencies 60.00 Subtotal (B) 300.00

Total 1,300.00

a Financed by the Japan Special Fund, funded by the Government of Japan. b To be further defined and agreed to during the inception phase but likely to include (i) two

desktop computers, (ii) two laptop computers, (iii) photocopier, (iv) scanner, (v) three printers, (vi) filing cabinets, (vii) networking, and (viii) miscellaneous office equipment.

c To be further defined and agreed to in the inception phase but likely to include (i) around 15 large workshops (3 for each component), and (ii) commissioning of several training courses by local universities and institutions.

Source: Asian Development Bank estimates.

10 Appendix 3

OUTLINE TERMS OF REFERENCE FOR CONSULTANTS

A. Introduction 1. This policy and advisory technical assistance (TA) falls under the long-standing Local Government Finance and Governance Reform Program and provides support to actions in the policy matrix for subprogram 2. The terms of reference for the TA, which are outlined below, require flexibility to align consultant tasks to meet the Government of Indonesia’s emerging needs for completing the agreed policy actions. The TA will require a combination of international and national experts who are have specific experience with Indonesian decentralization policies and approaches, and who have broad skills in developing human and system capacity. It is envisaged that about 15 person-months of international consulting inputs and about 54 person-months of national consulting inputs will be required. The international team leader and all national consultants will be appointed through a firm, and the international decentralization policy expert and decentralization monitoring and evaluation expert will be appointed on an individual basis. B. International Consultants (15 person-months)

1. Fiscal Decentralization Specialist and Team Leader (international, 7 person-months)

2. This consultant will have appropriate postgraduate qualifications in economics, finance, or public administration, and be experienced in the management of medium to large TA teams, preferably in Indonesia. Significant experience is required in policy aspects of fiscal and administrative decentralization, including decentralization policy, fiscal policy aspects of decentralization, intergovernmental financial arrangements, coordination of decentralization policies, consistency of decentralization and sector laws, deconcentration funding, decentralization performance monitoring systems, and collation and analysis of decentralization financial statistics. His or her main tasks and outputs to be delivered include

(i) lead, manage, and coordinate all aspects of the TA; (ii) prepare and have approved by Directorate General of Fiscal Balance, Ministry of

Finance (MOF) the executing agency and Asian Development Bank (ADB) an inception report focusing on management arrangements for achieving agreed outputs,

(iii) support other consultants in the production of all outputs and milestones, ensuring timeliness and quality;

(iv) provide quality control for all outputs and milestones; (v) ensure all TA activities are complementary to activities of the related (i.e.,

associated) TA and other related development partner activities; (vi) finalize the monitoring and reporting system, and provide regular reports to ADB,

the Directorate General of Fiscal Balance, MOF and implementing agencies (IAs) on implementation progress;

(vii) have regular discussions and workshops with the Directorate General of Fiscal Balance, MOF and IAs on implementation progress and various issues, including resolution of bottlenecks;

(viii) ensure finalization of all relevant papers and workshops; and (ix) identify, in consultation with the Directorate General of Fiscal Balance, MOF,

important policy papers for publication.

2. Decentralization Policy Expert (international, 4 person-months)

3. This consultant will have appropriate postgraduate qualifications in public policy, public

Appendix 3 11

administration, law, economics, finance, or other related decentralization disciplines. He or she will be experienced in analyzing and providing high-level advice on (i) organizational arrangements for decentralization coordination bodies such as the Regional Autonomy Advisory Council (DPOD); (ii) resolving inconsistencies between decentralization and sector laws, preferably using his or her social sector experience in health and education sectors; and (iii) restructuring of central government budgets to reduce invalid deconcentration expenditures. The consultant will provide advice, support, and supervision to the two national consultants also working on reforms related to TA outputs 2 and 3, sharing responsibility with them for delivery. His or her main tasks and outputs to be delivered for output 2 include

(i) review DPOD-related changes to Law No. 32/2004, and if amendments are not yet finalized, provide advice on the changes and facilitate policy discussion;

(ii) undertake consultations and make recommendations on future DPOD management and organizational arrangements and capacity-building needs;

(iii) provide detailed recommendations for coordinating fiscal decentralization policies (e.g., interministerial working groups and in-house professional services);

(iv) assess the capacities of the secretariat and other relevant staff members and systems, and make recommendations to strengthen administration and policy advice; and

(v) prepare all relevant papers, and conduct all workshops set out as outputs and milestones for output 2 in Appendix 1.

4. His or her main tasks and outputs to be delivered for output 3 include

(i) review functional assignment changes to Law No. 32/2004, and if amendments are not yet finalized, provide advice on changes and facilitate policy discussion;

(ii) review key laws and regulations regarding the ministries of education and health, and map inconsistencies with key decentralization laws and regulations;

(iii) support ministries of education and health to prepare national standards and physical norms (NSPK) that address inconsistencies, and define the roles of different levels of government;

(iv) prepare comprehensive draft NSPKs for the ministries of education and health as advisory inputs;

(v) collaborate with development partners supporting similar legal studies in other sectors, and develop broader generic advice on ways to address inconsistencies;

(vi) update and expand on earlier ADB work that reviewed the Ministry of Education’s budget;

(vii) provide advice on how to achieve 50% reductions to previously identified invalid deconcentration expenditures by the 2011 budget; and

(viii) prepare all relevant papers, and conduct all workshops set out as milestones and outputs for output 3 in Appendix 1.

3. Decentralization Monitoring and Evaluation Expert (international, 4

person-months)

5. This consultant will have appropriate postgraduate qualifications in economics, public finance, statistics, monitoring and evaluation, accounting, or other related disciplines. He or she will be experienced in analyzing and providing high-level advice on (i) regional government performance management systems; and (ii) central government processing and analysis of regional government financial information, including risk assessment. Experience in Indonesia in relation to such activities is preferred. The consultant will provide advice, support, and supervision to the two national consultants also working on reforms related to TA outputs 4 and 5, sharing responsibility with them for delivery. His or her main tasks and outputs to be delivered for output 4 include

(i) review all performance evaluation systems in the Ministry of Home Affairs (MOHA), and recommend the best ways to collect and analyze evaluation data at

12 Appendix 3

regional and central government levels; (ii) review existing performance indicators used, and make recommendations for

refinement, taking into account availability of data in regional governments; (iii) review staff member and system capacity for regional governments and MOHA

to receive and analyze data, and recommend improved approaches; (iv) develop approaches to dissemination of regional government performance data,

including the use of websites and other media to broaden access; (v) support MOHA to train trainers in regional governments to spread knowledge of

systems available to enhance both collection and use of data; and (vi) prepare all relevant draft and final papers, and conduct all workshops set out as

milestones and outputs for output 4 in Appendix 1.

6. His or her main tasks and outputs to be delivered for output 5 include (i) review existing hard copy approaches to submission of regional government data,

and recommend simpler templates of required information for soft copy use; (ii) facilitate consultations with vendors of financial management information

systems to regional governments, and develop standard applications supporting submission of regional financial management information system (SIKD) data in agreed soft-copy forms;

(iii) support dissemination of information to regional governments on new template requirements developed, including filling them out and submitting them in soft-copy form;

(iv) undertake system and staff capacity assessments and risk assessment in the relevant Ministry of Finance (MOF) subdirectorate;

(v) design and implement staff training and development initiatives in data analysis and analytical report presentation;

(vi) develop wider availability of analytical reports through the MOF website, special publications, and inputs to budget notes and annual reports; and

(vii) prepare all relevant draft and final papers, and conduct all workshops set out as milestones and outputs for output 5 in Appendix 1.

C. National Consultants (54 person-months)

1. Decentralization Policy Expert and Deputy Team Leader (national, 12 person-months)

7. This consultant will have appropriate postgraduate qualifications in economics, finance, or public administration and be experienced in participating in and supporting the management of medium to large TA teams. Significant experience is required in policy aspects of fiscal and administrative decentralization. This consultant will work closely with and under the supervision of the team leader. His or her main tasks and outputs to be delivered include

(i) support the leadership, management, and coordination of all aspects of the TA, including acting as team leader when the team leader is absent;

(ii) support preparation and approval of an inception report, which focuses on management arrangements for achieving required outputs;

(iii) support other consultants in producing selected outputs and milestones, contributing to timeliness and quality;

(iv) support provision of quality control over selected outputs and milestones; (v) ensure all activities are consistent with activities of the related ADB TA and all

other development partner activities; (vi) assist as directed in finalizing the monitoring and reporting system and providing

regular progress reports to ADB, the Directorate General of Fiscal Balance, MOF and IAs;

Appendix 3 13

(vii) assist in regular discussions with the Directorate General of Fiscal Balance, MOF and IAs on progress and issues, including recommending resolutions to bottlenecks; and

(viii) assist as directed in finalizing all relevant papers and workshops as set out as outputs and milestones for all outputs 1–5 in Appendix 1.

2. Expert on Coordination of Decentralization Policy (national, 8 person-

months) 8. This consultant will have appropriate postgraduate qualifications in public policy, public administration, organizational design, or other related disciplines. He or she will work on output 2 relating to the strengthening of DPOD and will be experienced in analyzing and providing high-level advice on organizational and policy development arrangements for decentralization coordination bodies such as DPOD. The consultant will work under the supervision of and support the international consultant assigned to output 2, sharing responsibility for the delivery of required outputs. His or her main tasks and outputs to be delivered include

(i) review DPOD-related changes to Law No. 32/2004, and if amendments are not yet finalized, provide advice to the changes and facilitate policy discussion;

(ii) undertake consultations and recommend new management and organizational arrangements and capacity-building needs for a newly structured DPOD;

(iii) provide detailed recommendations for coordinating fiscal decentralization policies; (iv) assess the capacities of secretariat staff members and systems, and recommend

ways to improve administration and policy advice; and (v) prepare all relevant papers, and conduct all workshops set out as outputs and

milestones for output 2 in Appendix 1.

3. Expert on Functional Assignments and Deconcentration Decentralization Policies (national, 12 person-months)

9. This consultant will have appropriate postgraduate qualifications in public policy, public administration, economics, finance, or other related decentralization disciplines. He or she will work on output 3 related to functional assignments and deconcentration policies and be experienced in analyzing and providing high-level advice on (i) resolving inconsistencies between decentralization and sector laws, preferably using his or her social sector experience in the health and education sectors; and (ii) restructuring of central government budgets to reduce invalid deconcentration expenditures. The consultant will work under the supervision of and support the international consultant assigned to output 3, sharing responsibility for the delivery of required outputs. His or her main tasks and outputs to be delivered include

(i) review functional assignment-related changes to Law No. 32/2004, and if amendments are not yet finalized, advise on changes and facilitate policy discussion;

(ii) review key laws and regulations in the ministries of education and health, and map inconsistencies with key decentralization laws and regulations, particularly Law No. 32/2004 and Government Regulation No. 38/2007;

(iii) support the ministries of education and health in preparing NSPKs that address current inconsistencies, and define the roles of different levels of government;

(iv) prepare a comprehensive series of draft NSPKs for the ministries of education and health;

(v) collaborate with development partners supporting similar legal studies in other sectors, and develop generic advice on approaches to addressing legal inconsistencies;

(vi) update and expand on earlier ADB work that reviewed the Ministry of Education’s budget;

14 Appendix 3

(vii) provide advice how previously identified invalid deconcentration expenditures in education can be reduced by at least 50% by 2011 budget; and

(viii) prepare all relevant draft and final papers, and conduct all workshops set out as outputs and milestones for output 3 in Appendix 1.

4. Decentralization Performance Monitoring and Evaluation Expert (national,

10 person-months) 10. This consultant will have appropriate postgraduate qualifications in economics, public finance, statistics, monitoring and evaluation, information technology, or other related disciplines. He or she will work on output 4 and will be experienced in developing and providing high-level analysis and advice on regional government performance management systems. The consultant will work under the supervision of and support the international consultant assigned to output 4, sharing responsibility for the delivery of required outputs. His or her main tasks and outputs to be delivered include

(i) review all performance evaluation systems in MOHA, and recommend the best ways to collect and analyze data at the regional and central government levels;

(ii) review existing performance indicators, and make recommendations for refinement, taking into account availability of data in the regional governments;

(iii) assess capacities of regional government and MOHA staff members and systems for receiving and analyzing data, and recommend improved approaches;

(iv) develop approaches to dissemination of regional government performance data, including the use of websites and other sources to broaden access in the community;

(v) support MOHA to train trainers in regional governments to spread knowledge of systems available to enhance both collection and use of data; and

(vi) prepare all relevant papers, and conduct all workshops set out as outputs and milestones for output 4 in Appendix 1.

5. Fiscal Decentralization Monitoring and Evaluation Expert (national, 12

person-months) 11. This consultant will have appropriate postgraduate qualifications in economics, public finance, statistics, monitoring and evaluation, or other related fiscal decentralization disciplines. He or she will work on output 5 and will be experienced in analyzing and providing high-level advice on central government processing and analysis of regional government financial information. This consultant and the related international consultant will share responsibility for the delivery of required outputs. His or her main tasks and outputs to be delivered include

(i) review hard-copy approaches to submission of data by regional governments, and develop simpler templates of required information to be submitted in soft-copy form;

(ii) facilitate consultations with key vendors of computerized financial management information systems to regional governments, and develop standard applications to submit soft-copy SIKD data;

(iii) support dissemination of information to regional governments on new template requirements, including filling them out and submitting them in soft-copy form;

(iv) undertake system and staff capacity assessments in the relevant subdirectorate of MOF;

(v) design and implement staff training and development initiatives in data analysis and report presentation;

(vi) support wider availability of analytical reports through the MOF website and publications, including relevant sections of budget notes and annual reports; and

(vii) prepare all relevant papers, and conduct all workshops set out as outputs and milestones for output 5 in Appendix 1.

Appendix 415

POLICY MATRIX Objective

Subprogram 1 Core Prior Actions 2006–2008

Subprogram 2 Triggers 2009–2011

Expected Results

1. Decentralization Framework and Program Management: Strengthening Management and Coordination of Fiscal Decentralization Matters Ensure continued implementation of medium- and long-term decentralization agenda.

The National Action Plan for Fiscal Decentralization, 2005–2009, updated, with options for revisions in policy actions for the medium term reviewed.

Grand strategy document finalized and used to set long-term directions for fiscal decentralization.

Consistent medium- and longer-term plans lead to improved outcomes for fiscal decentralization.

Streamline and strengthen coordination functions of relevant national government agencies.

New Directorate General of Fiscal Balance established in MOF to provide leadership in the development of fiscal and governance aspects of decentralization.

Directorate General of Fiscal Balance continues program leadership, including regular consultations with all stakeholders and transparent circulation of fiscal decentralization information on a regular basis, including a comprehensive annual report.

Improvement in coordination of decentralization matters with enhanced quantity and quality of advice to the President

2. Regional Autonomy and Local Governance: Clarifying Arrangements for Regional Administration to Improve Services and Accountability Improve policy and legal framework to rationalize number of regional governments to increase efficiency while still providing for local representation.

Government Regulation No. 6/2008 on evaluation of performance of regional governments (including in relation to new establishment and merger) passed.

Processing of applications for new regions occurs strictly in line with the new policy and regulatory regime.

Clear policies and procedures in place for considering claims for new regions

Reform decentralized civil service arrangements to enhance flexibility and to shift resources to more productive activities.

Government Regulation No. 41/2007 on regional organizational structures passed, setting guidelines for the organizational structuring of regional governments.

More productive resource allocation by regional governments leading to improved efficiency and enhanced impact from regional government outlays

Improve clarity of expenditure assignments and service responsibilities across levels of government to improve efficiency and equity of expenditures.

Government Regulation No. 38/2007 on assignment of expenditures among government tiers passed. Detailed review of inconsistencies in two pilot ministries (environment and communications) started, and draft report and legal amendments being prepared.

Framework for addressing inconsistencies finalized with implementation started.

Enhanced clarity of expenditure assignments improves capacity to have money follow function, thus improving vertical balance in the system of intergovernmental financing.

3. Intergovernmental Fiscal System: Enhancing Equalization, Predictability, and Transparency in Release of Fiscal Transfers and Shared Revenues Improve equalization and transparency of the DAU, which is the major transfer mechanism used in the Indonesian system of intergovernmental financing.

Review of options for the DAU basic allocation and links to regional wages completed, with a view to removing perverse incentives to employ excessive staff members in the regions and to free up more funds for distribution on an equalization basis. “Hold harmless” clause in DAU formulation, which favors better-off regions removed, significantly enhancing the equalization effects of the DAU with

Develop the legal basis to implement delinking of wage payments for the DAU providing an environment for flexible management of regional staffing levels without limiting access to the DAU, which will have more funds available for distribution on an equalization basis.

More rational resource allocation and improvements in horizontal equity over time through provision of additional funds for allocation on an equalization basis

16 Appendix 4

Objective

Subprogram 1 Core Prior Actions 2006–2008

Subprogram 2 Triggers 2009–2011

Expected Results

additional resources flowing to regional governments that are less well off.

Make provision for forward estimates of major transfers to enhance capacity for medium-term planning and budgeting.

Forward estimates progressively prepared and published for all major transfers and shared revenues after further empirical studies.

Improved medium-term planning and budgeting at regional levels leading to higher impact on service delivery performance

Gradually reduce levels of central government funding in relation to activities that are legally regional government responsibilities, to provide space for higher priorities.

Detailed mapping and data analysis undertaken in two pilot ministries (environment and education), with draft paper and recommendations on further reductions in incorrect allocation of funds to these central government ministries for financing related to regional government responsibilities prepared for the 2010 budget.

At least a 50% reduction in incorrect Dekon expenditure identified in the two pilot ministries studied under subprogram 1.

Improvement in resource allocation with resources freed up from the central government budget available for higher-priority regional government spending

Improve design and management of DAK funding, allowing improved targeting of investment expenditure to priority sectors in the regions.

DAK increased by 24% in 2008 budget to Rp21 trillion, mainly targeting health, education, and infrastructure sectors.

Increase in well-targeted investment expenditure in the regions supporting improved service delivery

4. Own-Source Revenues: Reducing Dependency on Fiscal Transfers by Developing More Buoyant Sources of Local Revenue Amend Law No. 34/2000 on regional taxes and charges.

Amendments to Law No. 34/2000 being considered by Parliament, including a move to a closed-list approach for regional taxes and devolution of the property tax.

More efficient tax system supports investment and growth.

Gradually devolve the property tax to the regions.

Strategy paper develops draft proposals and draft legal amendments to decentralize the property tax.

Amend laws, and begin gradual devolution of property tax, including review of the proportion of valued assessments actually charged.

Increased property tax collections

5. Regional Reserves and Debts: Strengthening Management of Regional Reserves and Debts Develop improved data systems for monitoring subnational debt.

Debt management and financial accounting system fully operational and providing useful data for a comprehensive analysis of regional debt.

Improved information on regional debt stimulates policies to eliminate regional government debt arrears.

Pursue effective restructuring of PDAM debts to improve the climate for new investment in water supply facilities.

Under the new decree into which MOF has entered, hold discussions with all 175 regional governments and PDAMs with arrears as part of ongoing technical support to facilitate participation of all PDAMs with arrears in the new restructuring scheme.

At least 85% of PDAM nonperforming debts restructured or rescheduled and paid on time in relation to new agreed arrangements.

Renewed investment and improved service delivery by PDAMs, particularly for water supply

Finalize MOF decree providing for use of DBH and DAU intercept mechanisms to repay debts and implement.

Draft MOF decree on intercept mechanisms finalized.

Increase in access of regional governments to long-term investment financing following removal of long-standing arrears constraints

Appendix 4 17

Objective

Subprogram 1 Core Prior Actions 2006–2008

Subprogram 2 Triggers 2009–2011

Expected Results

Support development of subnational bond market, including enhanced support in selected pilot locations.

MOF Decree No. 147/2006 issued to provide authority and guidelines for issuing regional government bonds.

The Government supports five pilot creditworthy regional governments to develop regional bond issues (including training, due-diligence studies, document preparation, generation of private credit ratings, and regulatory regime to deal with defaults and bankruptcies).

Increase in access of regional governments to long-term investment financing for infrastructure

6. Capacity Development, Public Financial Management, and Accountability: Developing Human and Systems Capacity and Strengthening Public Financial Management and Accountability

Develop comprehensive plan to support implementation of the newly reformed PFM regulatory regime in regional governments.

MOHA regulations nos. 13/2006 and 59/2007 and related MOF and BAPPENAS regulations issued, providing a clear framework for PFM reform. MOHA trained 100 central government and 400 regional government officials in PFM in 2007. MOF trained 1,528 regional government officials in PFM through regional universities in eight different locations in 2007. Directorate General of the Treasury, MOF, designed (in the form of a detailed draft regulation to be submitted to MENPAN) a certification system for new functional positions for key government finance officials, including those based in the regions such as the regional treasury offices throughout the country.

The Government is committed to annual growth of at least 25% in funding over the next 3 years through MOHA and MOF (compared with actual 2008 levels) to support training for human resources and systems development in regional governments, including central training materials preparation.

Improved PFM system in place, backed by a comprehensive capacity-building plan leading to better PFM, resource allocation, and accountability

Improve systems and coordination in collection and analysis of regional financial data.

Computerized SIKD designed to support rollout of new SIKD information collection and transmission systems in 171 locations to comply with regional financial reporting requirements.

Time delays in publishing consolidated regional government information progressively reduced from about 3 years to 1 year.

Improved and more timely access to regional government and nationally consolidated financial information

Continue efforts to compare and publish benchmarked performance in service delivery (and other areas) between regions.

Government Regulation No. 6/2008 passed that provides for evaluation of performance of regional governments (including service delivery).

Regional government performance measurement system developed with centralized database fully functioning in 40 regional governments.

Availability of information on service delivery performance between regions stimulates actions to improve lagging regions.

BAPPENAS = National Development Planning Agency, DAK = specific allocation fund, DAU = general allocation fund, DBH = revenue sharing, Dekon = deconcentrated expenditure, DPR = house of representatives, MENPAN = state minister of empowerment apparatus, MOF = Ministry of Finance, MOHA = Ministry of Home Affairs, PDAM = state-owned water utility company, PFM = public financial management, SIKD = regional financial management information system. Source: Asian Development Bank.

Appendix 5

18

LGFGR 2 Broad Policy Areas

1. Coordination and Planning

2. Regional Administration

3. Intergovernmental Finance

4. Own-Source Revenues

5. Regional Reserves and Debt

6. Capacity Development, PFM, Accountability

Planning for Decentralized Capacity Building

Devolving the Property Tax

1. Fiscal and Tax Matters2. Forward Estimates Development 3. DAK Design Strengthening 4. Incentives and Sanctions-Based

Transfers

Update NAPFD 2010–2014

Associated TA Components Policy and Advisory TA

Components

1. Facilitate all Policy Matrix Actions2. Strengthen DPOD's Advice to

President

Harmonize Sector & Decentralization Laws

1. Progress RG Performance Monitoring System

2. Better Processing / Analysis of Financial Data

MAPPING OF CAPACITY-BUILDING AREAS The Local Government Finance and Governance Finance Reform Program—the umbrella program for local government finance and governance reforms being pursued by the Government of Indonesia—provides a platform for identifying capacity-building needs and areas for further policy and technical work by the Asian Development Bank (ADB), development partners, and the Government. Figure A5 maps out the main program policy areas to the main components of the associated technical assistance (TA) project and policy and advisory TA. Table A5 maps the bolded actions in the program policy matrix to the components in the (i) associated TA, (ii) policy and advisory TA; and (iii) broader development partner support.

Figure A5: Technical Assistance Components Associated and Policy Advisory TA Components Mapped to LGFGR 2 Broad Policy Areas

DAK = specific allocation fund, DPOD = Regional Autonomy Advisory Council, LGFGR 2 = Local Government Finance and Governance Reform 2, NAPFD = National Action Plan for Fiscal Decentralization, PFM = Public Financial Management, RG = regional governments, TA = technical assistance. Source: ADB staff estimates.

Appendix 5

19

Table A5: Mapping Subprogram 2 Bolded Actions to Associated TA, Policy and Advisory TA Support, and Broader Development Partner Support

Subprogram 2 Triggers Summarized Version

Support by Associated

TA

Support by Policy

Advisory TA Support by Other DPs

1.1.b. Strategy for fiscal decentralization finalized and linked to National Action Plan for Fiscal Decentralization updating

a b c

1.2.a. Directorate General of Fiscal Balance, MOF continues leadership and transparent circulation of fiscal information

d a d

2.1.a. Processing for new regions in line with new Pemekarin policy and regulations

d b c

2.4.a. Implement harmonization of sector and decentralization laws d a c 3.1.a. Increase flexibility of DAU including delinking wages component a b d 3.2.b. Prepare forward estimates for all major transfers and shared

revenues a b d

3.3.a. 50% reduction in nonlegitimate deconcentration expenditure in two ministries

d b c

4.4.a. Start devolving the property tax a b d 5.2.b. Debt management financial administration system fully

operational d b d

5.3.b. 85% of PDAM nonperforming debts restructured and paying on time

d b d

5.5.a. Five pilot regional governments supported to develop bond raisings

d b c

6.2.a. Growth of at least 25% in MOHA and MOF funding for regional and central government planning for capacity building

a b c

6.3.c. Delays publishing consolidated regional government financial data reduced by 2 years

d a d

6.5.a. Regional government performance measurement system further developed

d a d

DAU = general allocation fund, DP = development partner, MOF = Ministry of Finance, MOHA = Ministry of Home Affairs, PDAM = state-owned water utility company, TA = technical assistance. a = supported by a specific Asian Development Bank TA component, b = supported by the generic TA component supporting all policy matrix actions, c = supported by other development partners though not formally as part of Asian Development Bank program, d = no donor or government support. Source: Asian Development Bank estimates.