The Indonesia Public Expenditure Review (PER) 2020, prepared in collaboration between the World Bank and the Government of Indonesia. The report addresses the following questions:
The event took place from June 22 to 25, 2020. Select the tabs above to see the session videos and answers to the main from the audience for each day:
What are the opportunities for Indonesia to increase the quality of public expenditure to close the human capital and infrastructure gaps?
The Public Expenditure Review (PER) launch kicked off with the PER video and discussions main findings of the report and the need to create fiscal space for development spending, especially post-COVID.
Opening the event, Satu Kahkonen, Country Director for Indonesia and Timor Leste, World Bank noted that “Indonesia has made a remarkable advance with the past two decades, recording a robust and sustained growth, economic growth, despite external shocks, and emerged as a vibrant middle-income country.” However, she also noted that “Indonesia still faces large human capital and infrastructure gaps that impede to country's competitiveness, and its ability to create jobs and reduce poverty further all the time.”
Suahasil Nazara, the Vice Minister of Finance, in his keynote speech, also emphasizes that Indonesia and the whole world face the COVID-19 Pandemic, which poses an enormous challenge affecting social and economic life significantly, and “Coming out the Covid-19 situation, we would like to make sure that our budget can help achieve good public expenditure results.”
The presentation on the main PER findings by Ralph Van Doorn identifies several systemic constraints to improve the quality of spending to close gaps in human capital and infrastructure, and the tight fiscal space post-COVID. Thus, it is important to:
Moderated by Yongmei Zhou, Program Leader Equity, Finance & Institutions World Bank, the panel session attended by Boediastoeti Ontowirjo (Director for State Finance and Monetary Analysis, Bappenas), Masyita Crystallin (Special Advisor to the Minister of Finance on Macroeconomics and Fiscal Policy), and Helmi Arman (Chief Economist, Citibank Indonesia). Boediastoeti Ontowirjo highlighted that the COVID-19 pandemic has affected the progress of the policy development by government and also put an additional burden to state finance as the government needs to take measures against the pandemic. Masyita Crystallin confirmed the intention to implement fertilizer subsidy reform and combining social assistance programs, but also highlighting short-term data problems. Helmi Arman representing the market perspective brought up the investor appetite for Indonesia government debt, and the balance sheet risk during the pandemic.
To increase fiscal space, the presentation on improving revenue by Jaffar Al-Rikabi proposed five priority tax measures to be able to protect people, support economic growth and preserve stability. These measures can be issued today, but implemented in 2021, once the COVID-19 Pandemic is successfully contained:
The second panel session between Yon Arsal (Expert Staff on Tax Compliance, MoF), Pande Putu Oka Kusumawardani (Director Center for Tax Policy, Fiscal Policy Agency, MoF), Helmi Arman (Chief Economist, Citibank Indonesia), and moderated by Frederico Gil Sander, discussed these proposals further. While the focus is now on the recovery from the crisis, Pande Putu Oka Kusumawardani confirmed that it is also important to address the medium-term plan in tax policy and tax administration, which contains 4 areas:
Yon Arsal highlighted the importance of the organization, human resources, IT, business processes and data for tax administration reform. Helmi Arman mentioned that tax incentives are not the only way for Indonesia to improve competitiveness. What is needed is to provide certainty in the implementation of the chosen policies. An inconsistent implementation of policy choices can do damage to investor perceptions and could have played a role in the softness of the FDI inflows in recent years.
Day 1 closed with a question and answer session. Here are the key questions:
What is the World Bank’s opinion of the high budget deficits until 2022, and how to manage government debt more efficiently and sustainably during this pandemic, given that the economy is slowing down, with a sluggish recovery on revenue collection and rising debt?
The growth slowdown and the Government’s response to the pandemic is expected to lead to a period of high fiscal deficits. The World Bank recommends the Government to start preparing a package of tax reforms now, so that they can be implemented and have traction on the economy once the recovery sets in. This package should focus on widening the tax base, smart taxes to achieve health and environmental objectives and increasing compliance (see the presentation on tax reforms to increase revenue). It is important for Indonesia to maintain its hard-earned reputation for sound macroeconomic and fiscal management to retain its access to international capital markets, while making efforts to deepen its domestic financial markets to diversify its financing sources.
What is the World Bank’s suggestion on tobacco excise reform? Tobacco excise has a very large potential to support public spending on health; however, it is politically difficult to reform. How to address this issue?
Indonesia has one of the highest rates of cigarette consumption in the world. Tobacco use heavily burdens population health, undermines the quest for universal health coverage, and inflicts heavy direct and indirect economic costs. Higher tobacco taxes to increase cigarette prices contribute to reducing tobacco consumption and hence tobacco-related disease and death, while increasing public resources for development. The Indonesian government has recently raised tobacco tax rates. This strategy has brought initial gains and should be aggressively ramped up. By raising tobacco taxes toward WHO-recommended levels (at least 70 percent of retail price) and streamlining its tobacco excise tax structure, Indonesia can rapidly cut smoking rates, save many lives, and boost government revenue. See the health chapter for a further discussion on the tobacco excise and health.
The WB has undertaken several studies on this topic, including analyzing the economic impact on employment and on inequality of raising tobacco excises. For more, please read:
What are the criteria for a sustainable tax administration system in the era of digitalization and is the current tax system (policy and administration) ready to address digitalization? How to construct the future tax administration using upcoming technological waves and the digital revolution? Is there any assessment for developing countries on institutional arrangements and digital readiness?
The digitalization of economies is an increasing reality all over the world today. Governments are responding by utilizing digital technologies to digitalize their services, with a view to improving efficiency, effectiveness and transparency. Seen in this light, tax administration is a vital government service that would similarly benefit from digitalization. International experience demonstrates that making it easy for individuals and businesses to register online, electronically file their tax returns, and pay online, for example, would lower the burden of paying taxes on society, cut economic losses, reduce the costs of administering taxes, and improve overall compliance. Leveraging data from multiple sources, including land and banking data, and potentially, data from digital marketplaces, can similarly enhance compliance, facilitating services such as tax form pre-filling which can cut the time and reduce the potential for errors involved in tax form filing. Indonesia’s Directorate General of Taxes (DGT) is currently undertaking significant investments and administrative reforms as part of its efforts to digitalize. For example, procuring and installing a commercial-off-the-shelf IT solution will significantly expand DGT’s core IT capacity, enabling it to offer more streamlined and automated tax services to individuals and businesses.
4. Tax Reform
How to design a tax reform to increase tax revenue, but still maintain the ease of doing business? For example, Indonesia’s taxation in the mining sector is considered the highest in ASEAN, which is lowering its investment attractiveness. How to address this issue? To increase tax revenue, does Indonesia need to introduce a new type of tax such as a wealth tax and green taxation?
The revenue session we held discussed precisely this question: which revenue reforms can Indonesia prioritize while supporting businesses and the economic recovery as a whole? One aspect of the reforms involves investing in improving the administrative capacity of the Directorate General of Taxes, for example, in IT and human resources. This will help facilitate higher voluntary compliance through administering taxes more efficiently and effectively. Such successful administrative reforms will be transformational over the medium-to-long term but will likely take a long-time to fully implement. Thus, to complement these administrative reforms and facilitate increased tax collection, the World Bank has identified 5 tax policy measures that can be issued today, but implemented as the economy recovers from Covid-19 compliance (see the presentation on tax reforms to increase revenue):
What do you think about the tax incentives given due to COVID-19 countermeasures? Will the incentives affect fiscal space and the quality of spending?
The tax relief measures offered as part of the government’s emergency fiscal response to Covid-19 have differential impacts on tax collection. Some measures such as deferred or reduced withholding tax payments do not change the overall tax burden that businesses must pay eventually on their profits, since these withholding taxes are deductible from the overall corporate income tax (CIT) liability and/or represent an advance payment of this liability. Other measures, notably the reduction of the statutory rate of CIT, have a permanent impact, reducing tax potential overall, which limits the fiscal space for productive spending over the medium-term.
It is inevitable that government policies, particularly those taken in emergencies such as the current situation imposed by the Covid-19 pandemic, have advantages and disadvantages and will benefit some groups more than others, whether this is the intention of the policy or otherwise. Thus, to strengthen the government response to Covid-19 and support economic recovery over the medium-term, it may prove valuable for government to undertake a systematic assessment of the costs and benefits of the tax relief measures offered to-date.
How to improve the expenditure management and fiscal transfers to achieve better outcomes at the national and subnational levels?
The second day of the Public Expenditure Review launch started with the PER video.
Yongmei Zhou provided opening remarks and complimented Indonesia for its commendable progress in many aspects of public financial management over the past 20 years. However, the cross-cutting issues persist. Yongmei ended her remarks by reminding about the urgency of reform as the pandemic makes fiscal space even tighter.
This was followed by the keynote speech by Askolani, Director General Budget, who mentioned that MoF has started the next phase of budget reform to make planning and budgeting more accurate and flexible, to strengthen the implementation of performance-based budgeting, to ensure the budgeting documents will be more comprehensive and informative. This critical change will lead to “a clear logic of the activities, outputs and outcomes, synergy between units, no overlapping activities, integrated information technology, and cohesion between the president's directives, planning documents, budget document ,at both the central and local government levels.”
“…the state budget needs to improve to become more agile and flexible yet still manage prudently in order to address this sudden turmoil”
The first session about Improving Expenditure Management for Better Quality of Spending was presented by Arun Arya, Senior Public Sector Specialist of World Bank. He highlighted the well-developed planning framework that has not yet been adequately integrated with the budget planning process, thus creating challenges to meet the performance targets. One of findings in the Public Expenditure review are the large deviations between the Renstra with the line ministries' medium-term strategy. There are five priority for Public Financial Management (PFM) improvements:
In the panel session, Saiful Islam from DG Treasury (Director of Treasury System Information and Technology, Ministry of Finance), Leonard Tampubolon (Deputy Minister Development Funding, Bappenas) and Kunta Nugraha (Expert Staff for State Expenditure, MoF) responded to the recommendations. Leonard Tampubolon explained that the Government has taken steps toward spending better, one of which was to simplify and align the budget program structure with existing programs in the RPJMN. Kunta Nugraha noted that the Ministry of Finaince is trying to implement program redesign by reducing the number of programs and implementing cross-programs between line ministries, which will be the answer to the planning and budgeting issue. Saiful Islam added that the collaboration between Bappenas and Ministry of Finance can be seen in the effort to synchronize several systems such as SAKTI and KRISNA. “The collaboration between two institution is so much more than goodwill and sitting together for meetings. It does involve building the system in the background to make information exchange work.”
The session on subnational fiscal transfers began with Agung Widiadi delivering the keynote speech. He highlighted that the quality of transfers to subnational governments has improved continuously to strengthen the effectiveness and accountability. However, reforming only the subnational transfer system will not be adequate to promote better spending at the local level, but it is also important to reform the spending behavior and regional financial management.
Moving forward, Jurgen Blum explained in his presentation on intergovernmental transfers that one of key challenges is to expand access to services and to reach lagging regions. The current transfer system underfinances urban areas with high population growth, which face pressing service and infrastructure financing needs and leads to inequities within urbanizing areas. The key recommendations for central government to strengthen accountability for service delivery are:
“The intergovernmental fiscal system is just one tool in the box that central government has for improving the quality of subnational spending”
The second panel discussion included Agung Widiadi, Director of Evaluation & Information System, Mohammad Roudo, Acting Director of Regional and Ridwan Kamil, the Governor of West Java Province. Pak Ridwan raised the issue that the central government allocates transfers based on the number of government entities, not on population size. Sharing experience, he noted that in the West Java, his problem is “to manage more people with less money from the Central Government”. He also spoke about the capabilities of West Java than the other region to develop itself even the allocation is smaller than other provinces.
Day 2 closed with a question and answer session. Here are the key questions:
In the new design of budgeting system, how do you link outputs and outcomes, especially for programs that cross ministries’ boundaries?
In the PER report, we recommended the government to establish a robust intervention logic to identify more clearly the key intermediate steps in achieving “higher level” outcomes and establish measurements to monitor whether they are being achieved. Therefore, a program is only intended to achieve intermediate outcomes; not “high level” outcomes; This is because intermediate outcomes are more proximate to a ministry itself, and for which it is reasonable to hold its managers accountable (see chapter on improving expenditure management).
Fragmented performance information causes line ministries to have their own key performance indicators, thus it is hard to get data at the national level. For example, there is difference in data between Bappenas, Ministry of Finance, and SNGs (which is under Ministry of Home affairs). How to solve this data problem? How to establish synergies among line ministries, agencies, and SNGs to increase spending effectiveness, which is measured not only by macro data but also with more accurate performance information? Should the indicators be determined by Bappenas and MoF in order that performance is assessed at the national level?
There are several issues with regard to subnational data for performance evaluation:
1. Lack of harmonization between the planning, budget and performance architectures. The Plan includes outcomes and the budget includes outputs. Since the Plan and Budget follow different classification structures, outputs are not linked with outcomes. Therefore, data on outputs and outcomes is fragmented. Restructuring of the budget classification structure is required to harmonize them with the program coding structure of the Plan.
2. Lack of detailed spending data. Measuring the impact of spending on service delivery outcomes is difficult without comparable and reliable data on how much different subnational governments spend on specific programs or issues (e.g., basic education, stunting, road maintenance). The underlying problem is that the subnational budget classification and chart of accounts are based on Law no. 23 of 2014, which defines affairs of the government (Urusans), aligned with the functional classifications of the central government. However, sub-urusans are not aligned with subfunctions of the central government leading to difficulty in aggregation at the subfunction level at the national level. Subnational government’s urusans are currently not well suited for identifying how much districts spend on primary education or Puskesmas services, for example. The Government of Indonesia’s ongoing reform of the subnational chart of accounts through preparing a new Government Regulation on the Subnational Chart of Account (PP Bagan Akun Standar or BAS) is expected to address the challenges of aggregation of central and subnational data and the lack of granularity of subnational level data.
3. Reliability of independent data on service delivery outcomes at the district level. SUSENAS and other BPS-run surveys are the major available sources of independently generated data service delivery outcome data. However, these surveys are not designed primarily for accurately measuring year-on-year trends for service delivery at the district level. SUSENAS is designed to achieve sample representativeness for the entire population, not for a specific subset, such as school-aged children. This can lead to seemingly erratic trends with large measurement errors for indicators such as enrollment rates. It would be prohibitively expensive to enlarge the SUSENAS sample sufficiently for reliably tracking district year year-on-year trends for a large number of service outcome indicators. One option could be to change to sample at the margin to ensure that the representativeness can be achieved for a select group of core indicators that help enable consistent monitoring of subnational service delivery performance.
4. Quality of administrative data. Some administrative data on service delivery indicators still suffers from measurement errors, in part because quality assurance systems are only emerging. This often results in large differences with SUSENAS data, for example.
These problems with data on spending and results need to be addressed as a priority, in view of improving subnational government accountability for service delivery performance. Besides MOF and Bappenas, the concerned line ministries certainly play a central role in improving sectoral data quality (see chapter on data).
Good coordination among ministries, or between the central government with local governments is crucial for successful program implementation, but it has been hard to achieve until now. How to solve it?
We consider these coordination challenges across agencies and between levels of government a systemic constraint on the quality of spending (Section 1.4 Overview Chapter). We propose a solution by requesting the government to “improve coordination among central agencies, and between central and subnational governments to deliver better services, by improving program integration and convergence, and data sharing among key national priority programs, and by strengthening central-local coordination in policymaking, investment decision-making, and program implementation”.
To improve a coordination is easy to say but hard to realize. How to solve it? One of the solutions is to support any efforts to synchronize and harmonize PFM systems between central government and SNGs. A requirement for MoF and the Ministry of Home Affairs to work together preparing a new Government Regulation on SNGs’ charts of accounts that would be intended to consolidate both CG and SNGs financial accounts is one example. If both MOF and MoHA could be working together to establish a new CoA for SNGs that is synchronized with CG, it would be later on easier to harmonize the policies on planning, budgeting, and performance management structures among the three levels of governments (see chapter on reforming subnational fiscal transfers).
Another solution is to add a performance element to subnational transfers to better coordinate supply-side investments and ensure even capacity of service delivery. For example, in the health sector, the MoH proposed adding a performance element to determine how DAK resources are allocated to districts, presenting a unique opportunity to better coordinate supply-side investments and ensure even capacity to deliver health services. Facility accreditation could provide a useful framework/
tool for district governments to better coordinate supply-side planning and resource
allocation, and to incentivize health facilities to achieve accreditation status by making DAK transfers more needs-based and/or performance-oriented (see Health chapter).
How to synchronize development/program planning between SNGs and the central government, taking into account:
What are the boundaries for local governments to be creative in their development planning?
Indonesia is not a federal country, but it implemented decentralization within a unitary state. Regional autonomy is not meant to be fully independent from the central government, it is just to provide flexibility for each SNG to manage its own resources according to the needs, uniqueness and different characteristics of its area. Therefore, the role of central government is still dominant. Besides, almost 80 percent of the local government revenue is come from central government’s transfers.
In PER report, we mentioned that “improving the institutional arrangements for managing across levels of government is complex and challenging in any country, more so in Indonesia where there are more than 500 district governments”. Also, we stated that “many of the RPJMN outcome targets depend on inputs and outputs controlled by all levels of government, so information on inputs, outputs and outcomes is needed from all three levels of government”.
Therefore, it is important for all level governments in Indonesia to work towards the achievement of development targets in priority areas, as stated in the National Medium-Term Development Plan (RPJMN). However, there is a challenge since the RPJMN is a static (5 year) development plan, which is not updated on a rolling basis and does not reflect changes to the annual fiscal envelope. This is why many governments today use rolling planning processes, which allow for adjustment of targets in line with available resources and provide a more meaningful mechanism for monitoring performance of government agencies.
Many SNGs are dependent on government transfers. Should the central government formulate an incentive for SNG to encourage SNGs to seek other sources of income, thus lowering dependence on transfers? Related to sharing fund based on natural resources, how about the getting SNGs involved in monitoring the performance of the industries/sectors that generate revenue? Will the involvement be effective to optimize revenue?
Compared to other countries with similar levels of expenditure decentralization, subnational governments in Indonesia indeed raise relatively low own-source revenues (OSR). Increasing subnational OSR could help increase financing for service delivery and infrastructure investments. It could also help strengthen the accountability of local leaders to their citizens for improving service delivery, through the so-called “fiscal contract”. The GoI could incentivize SNGs to exert more revenue effort in particular by revising the fiscal gap formula of the DAU: a district’s fiscal capacity could be measured based on its potential, rather than actual revenues. The central government could also help SNG to improve their revenue administration. This is further discussed in the chapter on reforming fiscal transfers.
With regard to Natural Resources Revenue Sharing, the priority is to increase the transparency of the revenue base, and of the rule of revenue sharing to subnational governments. This will provide SNGs with a full understanding on the amount of revenue that they will receive.
How can a policy for block grant funding with earmarked funding achieve an optimum balance?
There is no general “rule of thumb” on the ideal balance between block grants and earmarked grants. The PER suggests that Indonesia strengthen its asymmetric approach towards decentralization. In such an approach, better performing and more capable subnational governments could receive more funding from block grants, to give them greater autonomy in deciding their spending priorities. The weaker performers, in turn, could receive more earmarked DAK, combined with tighter central supervision and support to help them achieve national priorities. This is further discussed in the chapter on reforming fiscal transfers.
7. SNG Reports
There are many types of fiscal transfers with different types of accountability. How can SNGs absorb the funding optimally and not be overwhelmed by different accountability report templates for each fiscal transfer type?
If we look at DAK as an example, one of the problems that caused multiple reporting requirements is that each line ministry established a separate IT platform for reporting, in addition to the report to MOF. MOF has implemented a noteworthy initiative to have a single reporting platform for DAK Fisik in OM-SPAN. However, OM- SPAN needs to build trust from other line ministries to prevent them from establishing their own reporting platforms. This means involving line ministries to ensure that they can get access to the data when needed and that their information needs are accommodated within OM-SPAN.
Underdeveloped regions have low capacity to develop infrastructure, not only because they have limited fiscal resources, but also because they lack skills to do so. When the central government increases the transfers, there is a possibility that the regions are unable to absorb the funds inefficiently. Hence it is crucial to work on performance based transfers, but it will take a long time to get the same understanding between the central government and regions on how the transfer should be well spent.
Also, one of the lessons learned for the COVID-19 Pandemic is that SNG do not have not enough capability in preparing for the spread of diseases to anticipate pandemic risk in the future. How can this be anticipated in fiscal transfer system?
As noted above, large differences in the capability of local governments suggest an asymmetric approach to fiscal transfer (see also Question 6 above). Less capable local governments need more support and tighter accountability. The increase of resources provided to them should hence be coupled with more technical assistance and tighter accountability, including through the establishment a performance framework. This is further discussed in the chapter on reforming fiscal transfers.
Why is the target for social assistance from APBN or APBD given equally to every SNG without considering COVID-19 spread or impact, which is very diverse between areas?
The social assistance responses through APBN have not been allocated to SNGs in terms of equal number of beneficiaries because the allocation depends on the number of poor and vulnerable households registered into DTKS. The national response has focused initially (as per March / April) more on areas that were seeing high rates of infection such as DKI Jakarta for instance, though national programs such as Sembako and PKH were also expanded to a large extent based on pre-COVID-19 poverty and vulnerability rates. Furthermore, in addition to funding through APBN, many SNGs have utilized APBD to expand coverage to reflect additional needs in their locations (e.g., greater Jakarta and West Java).
Does the recommendation to spend more on fast-growing cities impact higher urbanization and will it result in an imbalance between urban and rural development?
The objective of the recommendation is to correct the current imbalances in revenue per capita which put rapidly urbanizing region at a disadvantage. Urbanizing region need more resources to build their infrastructure (e.g. building fly over bridge is more costly than building ordinary rural road), and to manage the negative externalities (e.g., pollution, congestion). If manage well, urbanization can be beneficial for economic growth through the creation of agglomeration economies (i.e. benefits that come when firms and people locate near one another). This is discussed our flagship report on urbanization potential and challenges in Indonesia.
How to close the human capital gap to increase productivity and unleash Indonesia’s full potential?
The third day of Public Expenditure Review covered the human capital issue: education, social assistance, health and nutrition.
The day started with the PER video, followed by remarks from Frederico Gil Sander, who described that the normal after COVID is going to be about less material things, and more intellectual things so building the knowledge intensive sectors is going to be extremely important. This is becoming more urgent, as there are large human capital gaps in Indonesia that impede Indonesia’s competitiveness along with its ability to create jobs and reduce poverty over the medium term.
Different from the previous two days, the third day had 4 presentations and one panel discussion. Rythia Afkar provided a presentation on the education sector. Indonesia is one of the biggest education spenders in the world, measured as a total public expenditure. However, even when the spending on education has increased significantly, the allocation of education resources is suboptimal. Several ways to promote the quality of spending:
For the presentation on social assistance, Juul Pinxten noted that social assistance is “…not only about reinforcing equality in society, but also about making an economy more efficient, and promote human capital investment through its process”. Regarding energy subsidies, he explained that these subsidies are accessible to the whole population, and that the richer and middle class tend to consume more of them, which makes the spending inefficient compared to targeted social assistance. To improve the quality of spending on social assistance, the Government needs to:
The third presentation was about Health with Reem Hafez. The main issue in this health sector is providing universal health coverage (UHC) and financial protection for all. Indonesia has achieved a high coverage rate and the challenge now is how to achieve effective and high-quality coverage, while restoring the financial sustainability of JKN. To strengthen primary care, the health team recommends to:
The fourth presentation focused on improving nutrition to reduce stunting. Eko Pambudi stated the fact that Indonesia’s performance in stunting is worse compared to the income-level peers. While spending on nutrition is more than adequate to cover a full package intervention, there are systemic challenges that hinder the improvement in the quality of spending, affecting stunting outcomes. There is also a lack of clarity on the roles and responsibilities on funding for service delivery between levels of government. To improve the quality of spending nutrition it is recommended to:
"Tackling stunting in Indonesia may be less about spending more on stunting, but more on about efficiency in the allocation and use of resources.”
Joining the panel session, Elan Satriawan, Chief of Chief of Policy Working Group, TNP2K, highlighted the importance of the PER report during this pandemic situation and that the government should not only improve targeting of social assistance but also expand its coverage, as well as making it more dynamic. The next panelist, Kalsum Komaryani, head of health financing and health Insurance of the Ministry of Health, explained that learning from COVID-19 pandemic, the government has been triggered to reform and strengthen the health system, including the health financing sub-system. Related to JKN, she noted that it is also important in the future to refine its governance and management. The last panelist, Purwanto (DG Budget, Ministry of Finance) noted the coordination challenges between line ministries and levels of government and the urgency to reduce the operational budget to have more space for development programs in the Ministries of Health and Education.
“The issue is not just the design, not just the data, but strengthening the delivery system which is really the important element for determining the effectiveness.”
Day 3 closed with a question and answer session. Here are the key questions:
Is 5 percent of APBN for spending in health sector considered adequate, as the amount is lower compared to education spending? What is the problem with spending in health sector? Is the problem coming from the mismanagement in preventive-oriented health program?
Governments do generally spend more on education versus health. For example, all children go to school from early childhood to their teens (and Indonesia has a large target population), but not all people get sick.
While globally, several health spending targets have often been cited (e.g. 5 percent of GDP, 15 percent of government spending), they are usually not helpful for determining appropriate levels of spending at the country level. Instead, it is more useful to compare against what is fiscally feasible, and how much is needed to cover an essential benefit package – for example, one estimate suggested about US$ 110 per capita for lower middle-income countries like Indonesia. By this benchmark the GoI would have to almost double its current government health spending of US$ 56 per capita.
There are many challenges in the health sector from low revenue generation/underspending in health to issues in governance and accountability, the need to increase performance-oriented spending, and inefficiencies in service delivery especially in the hospital sector. These are described more fully in the health chapter of the report.
What is the ratio between public expenditure on PBI-JKN versus the public health intervention program? Preventive programs need a lot of attention, as focusing on curative programs would not contribute much to human development.
In 2016, primary health care accounted for 38.3 percent of government health spending, versus 53.3 percent spending on hospitals, and 7.2 percent on administration.
Strengthening primary health care and preventive programs is definitely a more cost-effective approach and should receive priority attention and allocation of resources. However, curative care also has its important role in preserving human capital, helping reduce morbidity and mortality, especially if cost-effective interventions of an appropriate quality are made available in a timely manner.
What kind of strategy could increase the revenue for BPJS-K and lower its deficit? Would cost-sharing/co-payment from the member of JKN or commercial insurance be a solution? What is the obstacle of this option?
There are several revenue raising options the GoI could pursue:
For more information, see the health chapter of the report.
BPJS TK cover a low number of informal sector workers, and it is difficult to expand their membership due to lack of financial capacity of informal workers. Do you think it is time for Indonesia to launch an unemployment benefit scheme? Can it be an effective solution for covering the informal sector?
Globally, evidence shows that few countries with persistent large informal sectors have been able to achieve universal health coverage (UHC) without significant tax-financing from the government; i.e. they have generally been able to achieve UHC only with a non-contributory scheme like PBI.
While there may be a case for launching an unemployment benefits scheme by its own merit, JKN has a different mandate of providing access to quality health care services for all.
Is the spending in education adequate to address the problems in education, the high dropout rate especially from the primary and junior secondary level to the senior secondary level. Also, is the BOS funding adequate to cover school operational cost?
One of the main concerns for students dropping out is the high Out of Pocket (OOP) resources needed to send children to school. A World Bank evaluation of BOS in 2015 found the share of a household’s budget that is required to send children to school dropped a little with the introduction of the BOS program, but that for poorer quintiles there were still costs associated with attending school. More recent calculations show that the OOP for poor households to send a child to school is IDR 2,2 million and IDR 3.4 million at junior and senior secondary levels respectively. The government provides the PIP (Program Indonesia Pintar) to cover these financial gaps. With regard to operational costs, school operational costs differ in many characteristics, such as civil servant teachers per student, number of students, support from the district, location, among others.
For more information, see:
How to make sure the spending translates into better quality? For example, how improving teacher's welfare by providing higher TPG could result in better teaching quality? How to improve the teacher certification so that it could improve teacher’s pedagogical skills?
And how to improve the effectiveness of BOS spending at the school level as the merdeka belajar policy gives flexibility for schools? Could the National Education Quality Initiative drive the necessary changes?
Currently, there is no mechanism to monitor the use of TPG funds by teachers, even though by regulation they are supposed to be used for training, etc. SNGs could introduce mechanisms to verify whether teachers are actually using TPG before disbursing additional funds for professional development.
Effectiveness of BOS can also be improved by strengthening the role of SNGs to provide more support to schools by guiding and monitoring the use of BOS funds. BOS funds can also be used to incentivize better performance in education. Existing international evidence shows that, if designed correctly, incentives can affect the performances of the actors in the education sector.
However, key elements need to be clarified for this incentive mechanism to work such as performance measures, eligibility criteria to get incentives, how and when the performance will be assessed, and what reward will be received.
Another example is the KIAT GURU program, a performance-based teacher allowance linking community-based monitoring to a government allowance for teachers working in remote areas in Indonesia, which is found to have a positive impact on student learning. This is also relevant for the National Education Quality Initiative. If it is designed correctly and directly supported by political leaders at the highest level, a national initiative for education would help to ensure that all Indonesians have access to high quality education.
Follow the link for further information on KIAT guru program.
What do you think about school feeding? School feeding can serve as a safety net for parents who cannot afford to buy lunch for their kids at school. Should it be funded by the education budget?
School feeding programs in low- and middle-income countries have been effective in improving the nutrition of the beneficiaries, as well as in boosting school enrollment and attendance rates. This program is likely best addressed according to local priorities and needs for example the program should be prioritized to target food-insecure areas. As part of social safety net, school feeding program should be integrated with other government social assistance programs that are currently implemented. A World Food Programme study on Indonesia’s school meal program estimates that every 1 US$ invested in school meals in Indonesia can result in the creation of up to 6.2 US$, including additional 0.48 year of education.
Further information can be found in:
How to integrate all social assistance programs into one single program and what do you think about the upcoming subsidy (LPG) transformation, which will be merged with Kartu Sembako?
Integration of social assistance does not necessitate all programs being integrated into one program. There are however aspects of many social assistance programs’ delivery systems (beneficiary selection via the DTKS or payment delivery via a unified payment system) that are common and that can benefit from integration, as has been done for several programs already such as PKH and Sembako. The proposed integration of the LPG subsidy under Sembako may be helpful to raise the efficiency and effectiveness of the subsidy in reaching poor and vulnerable households.
Further information can be found in our latest report: World Bank. 2020. Investing in People: Social Protection for Indonesia’s 2045 Vision
Indonesia has a problem related to its social assistance beneficiary database. How to better target and reach eligible beneficiaries? Is a dissemination strategy to minimize possible confusion in the field, and more investment needed?
The targeting accuracy of programs that use the social assistance beneficiary database, or social registry (DTKS), have shown strong performance relative to other programs such as Philippines 4P conditional cash transfer program, for instance.
The use of proxy means testing as a targeting methodology in social registries by nature is never without errors as they predict consumption based on a set of variables (household assets, dwelling characteristics, education and employment etc) that do not fully explain variance in consumption.
Overall, Indonesia’s social registry has a good foundation, although it can certainly be improved through better data updating procedures. Main areas of improvement include ensuring the data collected in the DTKS is of adequate quality, covers a large share of the population, is interoperable with other large administrative databases and uses optimal targeting methods.
How to reduce the infrastructure gap to increase sustainable growth?
The day 4 of Public Expenditure Review launch focused on improving the quality of expenditure on infrastructure starting with the PER video.
Stephan Garnier began the event by noting that Indonesia’s infrastructure gap with other countries is increasing over the time, and the importance of mobilizing private sector financing for infrastructure to complement public expenditure.
“…the heart of Indonesian demand for infrastructure: national roads, housing, water resource management, and water supply”
Giving the keynote speech, Luky Alfirman, Director General of Budget Financing and Risk Management, noted that after roads and connectivity, water, energy, ICT and transportation, PPPs are being prepared in the health and housing sectors, as sector extension has become the part of PPP business plan 2020-2024.
“The pandemic has called for huge spending instead of tightening policy and our commitment to preserving an adequate level of infrastructure spending”
The presentation on national roads was jointly presented by Thomas Herrero Diez and Elena Chesheva. National roads and expressways are strategically important to Indonesia’s productivity and competitiveness, carrying 40 percent of all traffic. However, physical output has not increased commensurately with expenditure, partially due to more spending on expensive treatments.
The presentation recommends:
Moving to the presentation on Housing, Dao Harrison spoke about the housing credit program subsidy (KPR). She considered that the KPR subsidy program is not a good program, neither for the government nor for the lower-income groups due to its cost, substandard housing, and design of the program. She concluded by saying that “the government should strive to improve the design, efficiency and effectiveness of the subsidy, and to ensure that all Indonesians, can live in home of their choice that is safe, adequate, and affordable.”
Next, the presentation on Water Resource Management by Deviariandy Setiawan started by saying that ”Indonesia faces an extraordinary water management challenge: There is a huge variation of water availability among regions with low water storage per-capita. Water resources management is essential for Indonesia’s economic growth and social development: providing food security, water security and, indirectly, employment.” Indonesia underspends on maintenance of its irrigation infrastructure, which is managed across 3 levels of government. The recommendations for water resource management are:
Finally, Irma Setiono provided the presentation on Water Supply and Sanitation. She started the presentation by stating the fact that “Indonesia is still lagging behind the other countries in region in providing access to water supply and sanitation”, and it is spending very little on water supply and sanitation. Most of the central government spending on water supply and sanitation has been largely allocated for capital infrastructure while allocation for policy development and monitoring is still very small. While it is important to increase the spending in this sector, it is also important to focus on identifying opportunities for efficiency gains and strengthened impact of the government spending, for example through improved coordination between layers of government, and change incentives to discourage the use of groundwater and limit groundwater exploitation and increase demand for piped water supply.
Moderated by Sudipto Sarkar, World Bank Practice Manager for the Water Sector, Ikhwan Hakim, Director for Transportation, Bappenas, and Herry Trisaputra Zuna joined the panel discussion, Director, DG Infrastructure Finance, Ministry of Public Works and Housing. Ikhwan Hakim highlighted the efforts in the last few years the government to link more explicitly infrastructure development and development objectives, including regional development to to reduce regional disparities. Herry Trisaputra Zuna highlighted the funding problem in all infrastructure sectors, and the need to involve the private sector.
How can GoI could encourage the private sector to prioritize asset preservation over new investment? Is there any incentive or relevant policy needed?
To promote private sector participation on asset preservation, a number of policy changes / reforms need to occur, including:
Place a minimum bid value (either a minimum dollar value or a minimum percent of the bid price) that can be bid against routine maintenance to ensure contractor is financially incentivized to undertake works.
What is the positive impact for people if highways are built involving the private sector? What measures needed to boost PPPs in Indonesia?
Strengthening the expressway network will enhance Indonesian connectivity and competitiveness which will have a direct impact on people’s well-being. Since it is not possible for public resources to finance the needed expressway expansion, it is critical to leverage more private investment. This will not only contribute to close the financing gap, but also to achieve economies of scale, stronger quality assurance systems and, most likely, improved execution performance.
In recent years, there has been some progress in using PPP schemes, but further changes/reforms should be implemented to attract private sector investment for expressway development:
This is further discussed in chapter 3 of the forthcoming Infrastructure Sector Assessment Program (InfraSAP) report.
What do you think about the overall progress of the toll roads program so far and the expansion plan for the Trans-Java toll roads network? How about the investment value and funding sources due to stretched SOE balance sheets?
While the World Bank is not involved in the implementation of the Trans Java Toll Road, we would like to point out the following.
The first phase of the Expressway Network development was completed delivering about 1,800 km of toll roads and did not require significant government contributions as the majority of these roads were in Java with quite high traffic. However, the development of subsequent phases of the Expressway Development Program (EDP) (especially in Sumatra) will require substantive additional resources, because it is likely that the revenues from these tolls would not be sufficient to cover the costs of construction, operation and maintenance.
The GoI needs to identify other potential sources of revenue within the road sector to ensure that the EDP is fiscally sustainable or allocate additional budget for EDP development. Such sources could include: (i) toll tariff optimization and rationalization; (ii) asset recycling; (iii) transit-oriented development; (iv) land value capture; (v) concession fees (from projects with excess returns); and (vi) collecting tolls from availability payment-based roads.
One of the findings of the PER National Roads Chapter was that the GoI has mostly relied on SOEs to expedite implementation of the EDP, but this may not be the most efficient strategy. This is because in numerous cases, highly leveraged SOEs require the GoI support to reach/sustain viability. Additionally, the majority of SOEs capable of taking new road concessions are already highly leveraged and may not have capacity to raise more equity or debt without more explicit GoI subsidies.
The MoF should explore mechanisms in the medium term to ensure that the support from such instruments is reliable and credible over the entire period of implementation of the EDP. The MoF, working with the MoPWH, could likewise explore options for hypothecating funds to the EDP coming from various revenue sources. One option for hypothecating revenues to the EDP is to establish a Revolving Fund.
This is further discussed in chapter 3 of the forthcoming Infrastructure Sector Assessment Program (InfraSAP) report.
As the pandemic caused a decline in people’s purchasing power of housing needs, is the stimulus policy in the housing sector by increasing the allocation of the housing budget enough to achieve the target to fulfill the basic housing needs of the community?
Given the severe impact of the COVID-19 pandemic on consumers’ purchasing power, the use of the SSB (interest-rate linked mortgage subsidy) stimulus to bolster home ownership might not meet the planned target. Home ownership is a lifetime financial commitment for most families and is likely not a priority during this period of economic uncertainty, with the exception of salaried workers with secure employment and a strong savings base. As such, pushing home ownership during the pandemic appears to go counter against the consumers priority during this period of economic uncertainty.
There are other alternative stimulus measures that the GoI might want to consider. For instance, the BSPS program can put cash in the hands of the MBR low-income households to upgrade their homes, while helping increase employment opportunities for construction workers. The rural-focused BSPS program can be improved in several ways to optimize its potential, for instance, by enabling housing micro-finance loans alongside with the GoI BSPS grant, as well as extending its footprint to the urban centers.
What is the best way to finance the 1 million houses program as it will burden the state budget? Is it with SSB, FLPP, SMF? GoI is also looking to leverage more private finance to support its housing development targets by using upcoming TAPERA program which will affect Indonesia’s expenditure structure of housing. What is World Bank’s opinion on this TAPERA program?
Beside the demand side, should Government also intervene in the housing market from supply side?
As discussed in the PER report, the GoI credit-linked subsidy programs (FLPP and SSB) need to be optimized to be more efficient and serve households most in need. A mortgage subsidy of 5 percent fixed interest rate for 20-years goes beyond the consumers affordability needs and limits competition among private sector lenders. The same budget needs to be used more efficiently to target families with the greatest need, increase the number of households serve, and innovate.
The TAPERA program is an extension of the current FLPP program and it is unlikely that TAPERA will yield the desired results that the GoI has hoped because of the challenges mentioned above.
A large-scale supply side affordable housing provisioning model like the Singapore Housing and Development Board (HDB) is an outlier and has not been effectively replicated by many governments.
To assess the quality of spending in the water sector it seems that the focus is only on the Ministry of Public Works and Housing (MoPWH). Why the relatively large budgets allocated by Ministry of the Environment and Forestry (MoEF) on watersheds are not included in the assessment?
The study focused on food security - and increase in food production - majority of which are produced in the irrigated area as presented, which is the mandate of MoPWH, both irrigation management and more water development.
Safely managed water, sanitation, and hygiene (WASH) services are an essential part of preventing and protecting human health during infectious disease outbreaks, including the current COVID-19 pandemic. Therefore, during the pandemic, water demand has been increasing due to the need to produce hand-sanitizer and disinfectant, more portable-sink provided in the public area, etc. However, the government has not seen the water supply and management as important issue to address as they have not issued any policy nor allocate more budget to improve the supply and management of WASH during the pandemic and recovery phase. What policy actions are needed to take to tackle this problem?
The Government has recognized the issue and the potential implications/impact of the pandemic to the water supply and sanitation sector. The Ministry of Home Affairs (MoHA) is preparing a guideline on how local governments should prepare their budget planning and allocation to ensure that minimum service standards for basic services (including water supply and sanitation) can still be achieved, and local water companies (PDAMs) can still continue providing services with Full Cost Recovery tariff (for sustainable operation).
The Bank has also developed a tool that could help water utilities in identifying the financial impact of the pandemic on their operation, so they could discuss and agree with their owner (in this case, local governments) on the measures that could be taken to avoid further deterioration of the utility’s capacity in providing services.
Currently, only 10 percent of the population use piped water supply. How to increase use of piped water?
The low demand is partly caused by the low trust on the quality and reliability of piped water services. This low demand means that water utilities get less revenue and water produced has been wasted/lost. This has been also disincentivized water utilities in further improving and expanding their services. Enforcing of regulations to limit the use of groundwater and developing incentives for households to use more piped water supply will increase demand which then means reducing the water loss and increase revenue for water utilities. The increase demand for good services will also put more pressure for the water utilities in providing better and more reliable services.
For sanitation, do you find that the limited availability of financing sources at the sub-national level is also an issue that leads to low spending by local governments, as almost of infrastructure built by SNG is funded through CG transfers (DAK). If so, are you also suggesting local governments to increase revenue in addition to improve their priority and capacity on sanitation?
On sanitation, the issue is more on the fact that sanitation is still a low priority sector for many LGs. And when they do spend money for the sector, only a small portion is allocated for real infrastructure and more is spent for non-physical activities (i.e. for administration, office supplies, etc.). While the topic of LG revenue is discussed in the subnational transfers chapter, in this sector, we recommend for this sector to increase the awareness about the potential benefits that LGs will get if they have good sanitation services in their cities, in addition to stronger enforcement on their responsibility to meet the minimum service standards – thus giving them incentives and motivation to invest more in the sector. Sanitation infrastructure, especially for capex-heavy facilities, will still need support from the Central Government, but at least LGs should be pushed to allocate budget for adequate operation and maintenance, which can be obtained from a wastewater charge/tariff.
10. Water Supply and Sanitation
The majority of people/households are still reluctant to pay for WSS, especially for sanitation services. As a result, subsidies are still prevalent in covering for operations and maintenance (O&M). How can CG expenditure reforms contribute to increasing public awareness of sanitation services?
Currently, CG expenditure in the sector focuses heavily on infrastructure development. There is very little funding allocation for non-structural measures, i.e. developing and implementing a robust and transparent monitoring and evaluation (M&E) framework, and a strategy for nation-wide demand creation (not only to increase public awareness but also to increase LG’s awareness). Aligned to the decentralization, some components for infrastructure development should be transferred to the LG level (as capex-heavy big infrastructure will still need CG’s investment), and CG expenditure should put more on these non-structural measures.
Monday, June 22 - Main findings of the PER; creating fiscal space for development spending
Tuesday, June 23 - Improving the performance orientation of the central government budget and subnational transfers
Wednesday, June 24 - Improving quality of expenditure on human capital: education, health, social assistance, and nutrition
Thursday, June 25 - Improving quality of expenditure on infrastructure: national roads, housing, water resource management, and water supply