|Project Rationale and Linkage to Country/Regional Strategy
The proposed program is the sixth and last of a series of Asian Development Bank (ADB) development policy support programs (DPSPs) for Indonesia, prepared jointly with the World Bank and the Government of Japan. Since its initiation, the DPSP series was designed to support the Government of Indonesia's medium-term reform agenda in core areas underpinned by its National Medium-Term Development Plan (RPJMN). The focus of the DPSP series has evolved since 2003, reflecting changes in the country's needs and priorities. In first four years, the emphasis was on ensuring medium-term macroeconomic stability and building the basic legal and regulatory framework for investment as well as public financial management and governance. As macroeconomic resilience improved, the government and development partners agreed to replace the macroeconomic pillar with support for reforms in public service delivery. Since 2007, the DPSP series has focused on three core policy areas: the investment climate, public financial management and governance, and poverty reduction and public service delivery. In 2009, some of the reforms envisaged during the last 5-year plan period remained unfinished. At the request of the government, the proposed DPSP-6 was included for 2010 in ADB's Indonesia country operations business plan, 2010-2012. The DPSP series has complemented implementation of other ADB programs, including the Public Expenditure Support Facility, Countercyclical Support Facility, and, Local Government Finance and Governance Reform.
The program completion reports for the first three programs under the DPSP series suggested that policy actions supported by the series have contributed significantly to improved economic management, albeit from a low base. Among other achievements, the program has helped the government devise a public debt management strategy, reorient budget savings from reduction in fuel subsidies toward priority social sectors and targeted poverty reduction programs, and expand the tax base through tax administration reforms. Under the fourth DPSP onward, reforms to improve the investment climate have led to the passage of an Investment Law, a significant reduction in business start-up time, a shorter time for value-added tax refunds, and enhanced access of small and medium-sized enterprises to finance. Reforms in public financial management and governance have improved budget formulation, execution, monitoring, and evaluation. The DPSP series has supported efforts to increase budget allocation for poverty programs, improve pro-poor planning and budgeting, and enhance community-driven development under the government's PNPM Mandiri.
While significant progress has been achieved, the government is committed to implementing further reforms in DPSP core reform areas. Recent economic growth remains below the level achieved before the Asian financial crisis. To achieve higher and more inclusive growth, a recent ADB study suggests the need to accelerate infrastructure development, improve governance and institutions, and enhance access to better education. Despite recent improvement in economic competitiveness indicators, efforts are needed to improve trade logistics and simplify business procedures. Continued efforts are needed to implement a modern public financial management (PFM) system. While significant progress has been achieved, poverty rates remain high. Poverty incidence declined to 13.3% in 2010, but rates vary widely among regions and about 40% of the population is estimated to be near poor (clustered just above the national poverty line), making them highly vulnerable to fall back into poverty. The government's new RPJMN, 2010-2014 adopted a three-pillar development strategy: pro-growth, pro-jobs, and pro-poor. The government recognizes the need to increase private investment to support its pro-jobs growth strategy. It also recognizes that continued improvement in the investment climate, governance, public service delivery, and poverty reduction are crucial to achieving its pro-poor objective. Therefore, the three core policy areas supported under the DPSP-6 are among the 11 priorities in the RPJMN, 2010-2014.