Regions and Countries

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p. 5 of 33 BACK | NEXT I. Current Development Trends and Issues A. Political Setting B. Economic Growth C. Poverty D. Governance and Institutional Capacity E. Private Sector F. Gender Assessment G. Environment H. Regional Cooperation I. Development Constraints II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2006-2009 (Draft for Consultation): Indonesia : I. Current Development Trends and Issues

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D. Governance and Institutional Capacity

16. Indonesia is a constitutional democracy that held successful parliamentary and presidential elections in 2004 and successful elections of regional heads in 2005. However, it is still far from having an administration and a judiciary ruled by law and a market economy based on open competition. Indonesian public institutions are generally not performing well. One main problem is the legacy of the New Order regime, which can be characterized in brief as underfunded institutions, inadequately skilled workforce, and institutionalized corruption.

17. The civil service has low motivation, is lowly paid, and is lacking in skills, a serious constraint to the efforts of the Government’s¹⁴ efforts to deliver higher quality economic growth. Few local government officials are equipped to exercise the demanding and complex responsibilities they now face in providing local services with limited resources and in many cases a low base of human resources. Budgetary under-funding of state institutions is a cause for serious performance problems and a major cause for corruption. Indonesian public institutions have larger expenditure obligations than their received budgets cover. Most public institutions finance a significant proportion of their operations from revenues that are not registered in the budget. The police, courts, auditors, national and regional government agencies and even schools are not able to operate on their formal budgets alone, which leads to seeking off-budget sources, in particular through rent-seeking. As a result of these various constraints, the Government’s capacity to prepare projects well, and to coordinate project preparation and implementation among the various agencies is not well developed. Similarly, internal Government coordination on policy development and policy implementation require considerable strengthening.

18. Public expenditure management and proper institutional functioning are particularly important to combat corruption. In this respect, Law 17/2003 on State Finance constitutes an important development. The law consolidates a budget previously split into routine and development parts and envisages performance-based evaluation of budgetary outcomes. It also stipulates new financial reporting standards in accordance with future, new public sector accounting standards. In a comparable fashion, Law 1/2004 on State Treasury strengthens that aspect of government operations: stipulating provisions on budget management and financial planning, debt and property management, and stipulating a consolidated Treasury Single Account for the whole of government administration. In addition, it has clear provisions that are designed to deter fraud, mismanagement or corruption leading to financial losses for the state. Thus, Indonesia has in place a strong legal framework for public expenditure management on all levels of the State in accordance with good international practice, but full implementation of the new standards and procedures will take several years.

19. Since 1999 a number of laws have been enacted, including Law 28/1999 on Clean Environment, Law 31/1999 on Eradicating Criminal Acts of Corruption, Law 15/2002 on Eradicating Money Laundering, and Law 30/2002 on the Establishment of the Commission for Eradication of Corruption (KPK). Important institutional developments have occurred, with a range of state auxiliary bodies established with mandates that contribute to the fight against corruption. These bodies include the KPK; the National Ombudsman Commission; the National Law Commission; and the Commission for the Eradication of Money Laundering (PPTAK). Fighting corruption has a prominent place in the reform agenda of the Government and the President himself has confirmed many times that it is his first priority. While comprehensive anticorruption legislation has been in place for several years, it is only during 2005 that it has begun to be seriously enforced. President Yudhoyono’s focus on fighting corruption in combination with the success of KPK has brought a new climate into Indonesia. Corruption is no longer tolerated but investigated and prosecuted to an extent previously never seen.

20. Following decentralization, local service delivery and attainment of a number of MDG targets is the responsibility of local governments. The governance assessment¹⁵ shows that the speed and complexity of decentralization in Indonesia has created considerable gaps and inconsistencies in the policy framework.¹⁶ Since the decentralization laws took effect, the number of local governments has increased substantially, to 33 provinces and 440 districts as of end-2005. Under the Law 32/2004 on local government the number of obligatory functions is 16 but there is a lack of clarity on division of responsibilities. The major funding source for local governments is the General Allocation Funds (DAU), a block grant determined by a formula and not by expenditure needs. Some local governments also get revenues through a mechanism for sharing of revenues from natural resources. Consolidation of the decentralization policy is needed, with a focus on strengthening fiscal relations whilst improving the accountability of local governments for service delivery, improving the human and institutional capacity of local government entities to deliver high quality and responsive services, and civil service reform.

21. Accountability mechanisms designed in Law 22/1999 on Regional Autonomy were weak. Law 32/2004 has significantly improved the conditions for accountability of regional governments, direct election of regional heads being the most important improvement. Previously, regional parliaments’ had the power to impeach executive heads based on their accountability reports. This mechanism was mainly used to seek rents and under Law 32/2004 regional parliaments no longer have this power. Sanctions against a non-performing regional head may now be too weak. The obligation for regional heads to report to the public may strengthen accountability but what the obligation implies has yet to be defined by secondary legislation. New planning and budgeting procedures will improve accountability and so will Minimum Service Standards, although it may take a long time before they are operational. The new accounting standards to be introduced under Law 17/2003 on State Finance will definitely strengthen accountability but it will take time before they will have the desired impact. All in all, while Law 32/2004 intends to strengthen accountability and financial accountability as defined under Law 17/2003 will be dramatically improved, it will take some time before these laws will have their full impact.

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